Document:

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                                                                     EXHIBIT 4.2

                           Form of Rights Agreement

                               PG&E CORPORATION

                                      and

                         MELLON INVESTOR SERVICES LLC

                                 Rights Agent

                               Rights Agreement

                         Dated as of December 22, 2000
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                               TABLE OF CONTENTS
                               -----------------

<TABLE>
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                                                                            Page
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<S>                                                                         <C>
SECTION 1. Certain Definitions...........................................    1

SECTION 2. Appointment of Rights Agent...................................    5

SECTION 3. Issue of Rights Certificates..................................    5

SECTION 4. Form of Rights Certificates...................................    7

SECTION 5. Countersignature and Registration.............................    8

SECTION 6. Transfer, Split Up, Combination and Exchange of Rights
           Certificates; Mutilated, Destroyed, Lost or Stolen Rights
           Certificates..................................................    8

SECTION 7. Exercise of Rights; Purchase Price; Expiration Date
           of Rights.....................................................    9

SECTION 8. Cancellation and Destruction of Rights Certificates...........   11

SECTION 9. Reservation and Availability of Capital Stock.................   11

SECTION 10. Preferred Stock Record Date..................................   12

SECTION 11. Adjustment of Purchase Price, Number and Kind of Shares
            or Number of Rights..........................................   13

SECTION 12. Certificate of Adjusted Purchase Price or Number of Shares...   21

SECTION 13. Consolidation, Merger or Sale or Transfer of Assets or
            Earning Power................................................   21

SECTION 14. Fractional Rights and Fractional Shares......................   24

SECTION 15. Rights of Action.............................................   25

SECTION 16. Agreement of Rights Holders..................................   25

SECTION 17. Rights Certificate Holder Not Deemed a Shareholder...........   26

SECTION 18. Concerning the Rights Agent..................................   26

SECTION 19. Merger or Consolidation or Change of Name of Rights Agent....   27

SECTION 20. Duties of Rights Agent.......................................   27

SECTION 21. Change of Rights Agent.......................................   30

SECTION 22. Issuance of New Rights Certificates..........................   31

SECTION 23. Redemption and Termination...................................   31
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<TABLE>
<S>                                                                         <C>
SECTION 24. Notice of Certain Events......................................  32

SECTION 25. Notices.......................................................  32

SECTION 26. Supplements and Amendments....................................  33

SECTION 27. Successors....................................................  34

SECTION 28. Determinations and Actions by the Board of Directors, etc.....  34

SECTION 29. Benefits of this Agreement....................................  34

SECTION 30. Severability..................................................  35

SECTION 31. Governing Law.................................................  35

SECTION 32. Counterparts..................................................  35

SECTION 33. Descriptive Headings..........................................  35

SECTION 34. Exchange......................................................  35
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                                      ii
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                               RIGHTS AGREEMENT

       RIGHTS AGREEMENT, dated as of December 22, 2000 (this "Agreement"),
between PG&E CORPORATION, a California corporation (the "Company"), and MELLON
INVESTOR SERVICES LLC, a New Jersey limited liability company (the "Rights
Agent").

       WHEREAS, effective December 20, 2000 (the "Rights Dividend Declaration
Date"), the Board of Directors of the Company authorized and declared a
distribution of one Right (each, a "Right") for each share of Common Stock, no
par value per share, of the Company (the "Company Common Stock") outstanding at
the Close of Business (as defined below) on January 2, 2001 (the "Record Date"),
and has authorized the issuance of one Right (as such number may hereinafter be
adjusted pursuant hereto) for each share of Company Common Stock issued between
the Record Date and, except as otherwise provided in Section 22, the
Distribution Date, each Right initially representing the right to purchase upon
the terms and subject to the conditions hereinafter set forth one Unit (as
defined below) of Series A Preferred Stock (as defined below);

       WHEREAS, the Company desires to set forth certain terms and conditions
governing the Rights; and

       WHEREAS, the Company desires to appoint the Rights Agent to act as rights
agent hereunder, in accordance with the terms and conditions hereof;

       NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:

       SECTION 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:

       (a) "Acquiring Person" shall mean any Person who or which, alone or
   together with all Affiliates and Associates of such Person, shall be the
   Beneficial Owner of 15% or more of the shares of Company Common Stock then
   outstanding, but shall not include (i) the Company, any Subsidiary of the
   Company, any employee benefit plan maintained by the Company or any of its
   Subsidiaries or any trustee or fiduciary with respect to such plan acting in
   such capacity or (ii) any such Person who has become and is such a Beneficial
   Owner solely because (A) of a change in the aggregate number of shares of the
   Company Common Stock since the last date on which such Person acquired
   Beneficial Ownership of any shares of the Company Common Stock or (B) it
   acquired such Beneficial Ownership in the good faith belief that such
   acquisition would not (1) cause such Beneficial Ownership to be equal to or
   exceed 15% of the shares of the Company Common Stock then outstanding and
   such Person relied in good faith in computing the percentage of its
   Beneficial Ownership on publicly filed reports or documents of the Company
   that are inaccurate or out-of-date or (2) otherwise cause a Distribution Date
   or the adjustment provided for in Section 11(a)(iii) to occur.
   Notwithstanding clause (ii)(B) of the prior sentence, if any Person that is
   not an Acquiring Person due to such clause (ii)(B) does not reduce its
   percentage of Beneficial Ownership of the Company Common Stock to less than
   15% by the Close of Business on
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   the fifth Business Day after notice from the Company (the date on which such
   notice is first mailed or sent or delivered being the first day) that such
   person's Beneficial Ownership of the Company Common Stock is equal to or
   exceeds 15%, such Person shall, at the end of such five Business Day period,
   become an Acquiring Person (and such clause (ii)(B) shall no longer apply to
   such Person). For purposes of this definition, the determination whether any
   Person acted in "good faith" shall be conclusively determined by the Board of
   Directors of the Company, acting by a vote of those directors of the Company
   whose approval would be required to redeem the Rights under Section 23
   hereof.

       (b) "Adjustment Shares" has the meaning set forth in Section 11(a)(iii).

       (c) "Adjustment Spread" has the meaning set forth in Section 34(a)(ii).

       (d) "Affiliate" and "Associate" shall have the respective meanings
   ascribed to such terms in Rule 12b-2 of the Exchange Act Regulations as in
   effect on the date of this Agreement.

       (e) "Agreement" has the meaning set forth in the preamble to this
   Agreement.

       (f) A Person shall be deemed the "Beneficial Owner" of, and shall be
   deemed to "beneficially own", and shall be deemed to have "Beneficial
   Ownership" of, any securities:

             (i)   of which such Person or any of such Person's Affiliates or
       Associates is considered to be a "beneficial owner" under Rule 13d-3 of
       the Exchange Act Regulations as in effect on the date of this Agreement;
       provided, however, that a Person shall not be deemed the "Beneficial
       Owner" of, or to "beneficially own", or to have "Beneficial Ownership"
       of, any securities under this subparagraph (i) as a result of an
       agreement, arrangement or understanding to vote such securities if such
       agreement, arrangement or understanding (A) arises solely from a
       revocable proxy given in response to a proxy or consent solicitation made
       pursuant to, and in accordance with, the applicable provisions of the
       Exchange Act and the Exchange Act Regulations, and (B) is not reportable
       by such Person on Schedule 13D under the Exchange Act (or any comparable
       or successor report);

             (ii)  that are beneficially owned, directly or indirectly, by any
       other Person (or any Affiliate or Associate of such other Person) with
       which such Person (or any of such Person's Affiliates or Associates) has
       any agreement, arrangement or understanding (whether or not in writing),
       for the purpose of acquiring, holding, voting (except pursuant to a
       revocable proxy as described in the proviso to subparagraph (i) of this
       paragraph (f)) or disposing of such securities; or

             (iii) that such Person or any of such Person's Affiliates or
       Associates, directly or indirectly, has the right to acquire (whether
       such right is exercisable immediately or only after the passage of time
       or upon the satisfaction of

                                       2
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       conditions) pursuant to any agreement, arrangement or understanding
       (whether or not in writing) or upon the exercise of conversion rights,
       exchange rights, rights, warrants or options, or otherwise;

   provided, however, that under this paragraph (f) a Person shall not be deemed
   the "Beneficial Owner" of, or to "beneficially own", or to have "Beneficial
   Ownership" of, (A) securities tendered pursuant to a tender or exchange offer
   made in accordance with Exchange Act Regulations by such Person or any of
   such Person's Affiliates or Associates until such tendered securities are
   accepted for purchase or exchange, (B) securities that may be issued upon
   exercise of Rights at any time prior to the occurrence of a Triggering Event
   or (C) securities that may be issued upon exercise of Rights from and after
   the occurrence of a Triggering Event, which Rights were acquired by such
   Person or any of such Person's Affiliates or Associates prior to the
   Distribution Date or pursuant to Section 3(c) or Section 22 or pursuant to
   Section 11(i) in connection with an adjustment made with respect to any such
   Rights.

       (g) "Business Day" shall mean any day other than a Saturday, Sunday or a
   day on which banking institutions in the State of California or the State of
   New Jersey are authorized or obligated by law or executive order to close.

       (h) "Close of Business" on any given date shall mean 5:00 p.m.,
   California time, on such date; provided, however, that if such date is not a
   Business Day it shall mean 5:00 p.m., California time, on the next succeeding
   Business Day.

       (i) "Common Stock" of any Person other than the Company shall mean the
   capital stock of such Person with the greatest voting power, or, if such
   Person shall have no capital stock, the equity securities or other equity
   interest having power to control or direct the management of such Person.

       (j) "Company" has the meaning set forth in the preamble to this
   Agreement.

       (k) "Company Common Stock" has the meaning set forth in the recitals to
   this Agreement.

       (l) "Current Value" has the meaning set forth in Section 11(a)(iv).

       (m) "Depositary Agent" has the meaning set forth in Section 7(c).

       (n) "Distribution Date" has the meaning set forth in Section 3(a).

       (o) "Equivalent Preferred Stock" has the meaning set forth in Section
   11(b).

       (p) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
   amended.

       (q) "Exchange Act Regulations" shall mean the General Rules and
   Regulations promulgated under the Exchange Act.

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       (r)  "Expiration Date" has the meaning set forth in Section 7(a).

       (s)  "Final Expiration Date" has the meaning set forth in Section 7(a).

       (t)  "Person" shall mean any individual, partnership, limited liability
   company, firm, corporation, joint venture, association, trust, unincorporated
   organization or other entity, as well as any syndicate or group deemed to be
   a person under Section 14(d)(2) of the Exchange Act.

       (u)  "Preferred Stock" shall mean the Series A Preferred Stock, par value
   $100 per share, of the Company having the voting powers, designation,
   preferences and relative, participating, optional or other special rights and
   qualifications, limitations and restrictions described in the Certificate of
   Determination set forth as Exhibit C hereto.

       (v)  "Preferred Stock Equivalents" has the meaning set forth in Section
   11(a)(iv).

       (w)  "Principal Party" has the meaning set forth in Section 13(b).

       (x)  "Purchase Price" has the meaning set forth in Section 7(b).

       (y)  "Record Date" has the meaning set forth in the recitals to this
   Agreement.

       (z)  "Redemption Price" has the meaning set forth in Section 23(a).

       (aa) "Registered Common Stock" has the meaning set forth in Section
   13(b)(ii).

       (bb) "Registration Date" has the meaning set forth in Section 9(c).

       (cc) "Registration Statement" has the meaning set forth in Section 9(c).

       (dd) "Right" has the meaning set forth in the recitals to this Agreement.

       (ee) "Rights Agent" has the meaning set forth in the preamble to this
   Agreement.

       (ff) "Rights Certificates" has the meaning set forth in Section 3(a).

       (gg) "Rights Dividend Declaration Date" has the meaning set forth in the
   recitals to this Agreement.

       (hh) "Section 11(a)(iii) Event" has the meaning set forth in Section
   11(a)(iii).

       (ii) "Section 11(a)(iv) Trigger Date" has the meaning set forth in
   Section 11(a)(iv).

       (jj) "Section 13 Event" has the meaning set forth in Section 13(a).

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       (kk) "Section 34(a)(i) Exchange Ratio" has the meaning set forth in
   Section 34(a)(i).

       (ll) "Section 34(a)(ii) Exchange Ratio" has the meaning set forth in
   Section 34(a)(ii).

       (mm) "Securities Act" shall mean the Securities Act of 1933, as amended.

       (nn) "Spread" has the meaning set forth in Section 11(a)(iv).

       (oo) "Stock Acquisition Date" shall mean the first date of public
   announcement (including, without limitation, the filing of any report
   pursuant to Section 13(d) of the Exchange Act) by the Company or an Acquiring
   Person that an Acquiring Person has become such.

       (pp) "Subsidiary" of any Person shall mean any corporation or other
   Person of which a majority of the voting power of the voting equity
   securities or equity interest is beneficially owned, directly or indirectly,
   by such Person, or otherwise controlled by such Person.

       (qq) "Summary of Rights" has the meaning set forth in Section 3(b).

       (rr) "Trading Day" has the meaning set forth in Section 11(d)(i).

       (ss) "Triggering Event" shall mean any Section 11(a)(iii) Event or any
   Section 13 Event.

       (tt) "Unit" has the meaning set forth in Section 7(b).

       SECTION 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. With
the consent of the Rights Agent, the Company may from time to time appoint such
Co-Rights Agents as it may deem necessary or desirable. The Rights Agent shall
have no duty to supervise, and in no event shall be liable for, the acts or
omissions of any such co-Rights Agent.

       SECTION 3. Issue of Rights Certificates. (a) Until the earlier of (i) the
Close of Business on the tenth day after the Stock Acquisition Date and (ii) the
Close of Business on the tenth Business Day (or such later date as may be
determined by action of the Company's Board of Directors prior to such time as
any Person becomes an Acquiring Person, and of which the Company will give the
Rights Agent prompt written notice) after the date that a tender or exchange
offer by any Person (other than the Company, any Subsidiary of the Company, any
employee benefit plan maintained by the Company or any of its Subsidiaries or
any trustee or fiduciary with respect to such plan acting in such capacity) is
first published or sent or given within the meaning of Rule 14d-4(a) of the
Exchange Act Regulations or any successor rule, if upon consummation thereof
such Person would be the Beneficial Owner of 15% or more of the shares of
Company Common Stock then outstanding (the earlier of (i) and (ii) above being
the "Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of paragraph (b)

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of this Section 3) by the certificates for shares of Company Common Stock
registered in the names of the holders of shares of Company Common Stock as of
and subsequent to the Record Date (which certificates for shares of Company
Common Stock shall be deemed also to be certificates for Rights) and not by
separate certificates, and (y) the Rights will be transferable only in
connection with the transfer of the underlying shares of Company Common Stock
(including a transfer to the Company). As soon as practicable after the
Distribution Date, the Company shall promptly notify in writing the Rights Agent
of the occurrence of the Distribution Date and, if the Rights Agent is no
longer the Company's transfer agent, provide the Rights Agent with the names and
addresses of all record holders of Commmon shares (together with all other
necessary information), and the Rights Agent will send by first-class, insured,
postage prepaid mail, to each record holder of shares of Company Common Stock as
of the Close of Business on the Distribution Date, at the address of such holder
shown on the records of the Company, one or more rights certificates, in
substantially the form attached hereto as Exhibit A (the "Rights Certificates"),
evidencing one Right for each share of Company Common Stock so held, subject to
adjustment as provided herein. In the event that an adjustment in the number of
Rights per share of Company Common Stock has been made pursuant to Section
11(p), at the time of distribution of the Rights Certificates, the Company may
make the necessary and appropriate rounding adjustments (in accordance with
Section 14(a)) so that Rights Certificates evidencing only whole numbers of
Rights are distributed and cash is paid in lieu of any fractional Rights. As of
and after the Distribution Date, the Rights will be evidenced solely by such
Rights Certificates.

       (b) As promptly as practicable following the Record Date, the Company
will send a copy of a Summary of Rights to Purchase Preferred Stock, in a form
that may be appended to certificates that evidence shares of Company Common
Stock, in substantially the form attached hereto as Exhibit B (the "Summary of
Rights"), by first-class, postage prepaid mail, to each record holder of shares
of Company Common Stock as of the Close of Business on the Record Date, at the
address of such holder shown on the records of the Company.

       (c) Rights shall, without any further action, be issued in respect of all
shares of Company Common Stock that are issued (including any shares of Company
Common Stock held in treasury) after the Record Date but prior to the earlier of
the Distribution Date and the Expiration Date. Certificates evidencing such
shares of Company Common Stock issued after the Record Date shall bear the
following legend or such similar legend as the Company may deem appropriate and
as is not inconsistent with the provisions of this Agreement:

       "This certificate also evidences and entitles the holder hereof to
   certain Rights as set forth in the Rights Agreement, dated as of December 22,
   2000 (the "Rights Agreement"), between PG&E Corporation (the "Company") and
   Mellon Investor Services LLC (the "Rights Agent"), the terms of which are
   hereby incorporated herein by reference and a copy of which is on file at the
   office of the Rights Agent designated for such purpose. Under certain
   circumstances, as set forth in the Rights Agreement, such Rights will be
   evidenced by separate certificates and will no longer be evidenced by this
   certificate. The Company will mail to the holder of this certificate a copy
   of the Rights Agreement, as in effect on the date of mailing, without charge
   promptly after receipt of a written request therefor. Under certain
   circumstances set forth in the Rights Agreement, Rights issued to, or held
   by, any Person who is, was or becomes an Acquiring Person or any Affiliate or
   Associate thereof (as such terms are defined in the Rights

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   Agreement), whether currently held by or on behalf of such Person or by any
   subsequent holder, may become null and void."

       With respect to certificates evidencing shares of Company Common Stock
(whether or not such certificates include the foregoing legend or have appended
to them the Summary of Rights), until the earlier of the Distribution Date and
the Expiration Date, the Rights associated with the shares of Company Common
Stock evidenced by such certificates shall be evidenced by such certificates
alone and registered holders of the shares of Company Common Stock shall also be
the registered holders of the associated Rights, and the transfer of any of such
certificates shall also constitute the transfer of the Rights associated with
the shares of Company Common Stock evidenced by such certificates.

       SECTION 4. Form of Rights Certificates. (a) The Rights Certificates (and
the forms of election to purchase, assignment and certificate to be printed on
the reverse thereof) shall each be substantially in the form attached hereto as
Exhibit A and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Company may deem
appropriate (which do not affect the duties or responsibilities of the Rights
Agent) and as are not inconsistent with the provisions of this Agreement, or as
may be required to comply with any applicable law or any rule or regulation
thereunder or with any rule or regulation of any stock exchange on which the
Rights may from time to time be listed or to conform to usage. Subject to the
provisions of Section 11 and Section 22, the Rights Certificates, whenever
distributed, shall be dated as of the Record Date and on their face shall
entitle the holders thereof to purchase such number of Units of Preferred Stock
as shall be set forth therein at the price set forth therein, but the amount and
type of securities, cash or other assets that may be acquired upon the exercise
of each Right and the Purchase Price thereof shall be subject to adjustment as
provided herein.

       (b) Any Rights Certificate issued pursuant hereto that evidences Rights
beneficially owned by: (i) an Acquiring Person or any Associate or Affiliate of
an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) that becomes a transferee after the Acquiring Person
becomes such, or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) that becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and that receives such Rights pursuant to
either (A) a transfer (whether or not for consideration) from the Acquiring
Person (or any such Associate or Affiliate) to holders of equity interests in
such Acquiring Person (or such Associate or Affiliate) or to any Person with
whom such Acquiring Person (or such Associate or Affiliate) has any continuing
agreement, arrangement or understanding regarding either the transferred Rights,
shares of Company Common Stock or the Company or (B) a transfer that a majority
of the Company's Board of Directors has determined to be part of a plan,
arrangement or understanding that has as a primary purpose or effect the
avoidance of Section 7(e), shall, upon the written direction of a majority of
the Company's Board of Directors, contain (to the extent the Rights Agent has
notice thereof and to the extent feasible) the following legend or such similar
legend as the Company may deem appropriate and as is not inconsistent with the
provisions of this Agreement:

       "The Rights evidenced by this Rights Certificate are or were beneficially
   owned by a Person who was or became an Acquiring Person or an Affiliate or

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   Associate of an Acquiring Person (as such terms are defined in the Rights
   Agreement). Accordingly, this Rights Certificate and the Rights evidenced
   hereby may become null and void in the circumstances specified in Section
   7(e) of such Agreement."

       SECTION 5. Countersignature and Registration. (a) Rights Certificates
shall be executed on behalf of the Company by its Chairman of the Board, the
President or any of its Senior Vice Presidents, under its corporate seal
reproduced thereon attested by its Secretary or one of its Assistant
Secretaries. The signature of any one or more of these officers on the Rights
Certificates may be manual or facsimile. Rights Certificates bearing the manual
or facsimile signatures of the individuals who were at any time the proper
officers of the Company shall bind the Company, notwithstanding that such
individuals or any of them have ceased to hold such offices prior to the
countersignature of such Rights Certificates or did not hold such offices at the
date of such Rights Certificates. No Rights Certificate shall be entitled to any
benefit under this Agreement or be valid for any purpose unless there appears on
such Rights Certificate a countersignature duly executed by the Rights Agent by
manual signature of an authorized signatory, and such countersignature upon any
Rights Certificate shall be conclusive evidence, and the only evidence, that
such Rights Certificate has been duly countersigned as required hereunder. In
case any officer of the Company who shall have signed any of the Rights
Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Rights Certificates on behalf of the Company had not
ceased to be such officer of the Company.

       (b) Following the Distribution Date and receipt by the Rights Agent of
the written notice referred to in Section 3(a), the Rights Agent will keep or
cause to be kept, at its office designated for surrender of Rights Certificates
upon exercise or transfer, books for registration and transfer of the Rights
Certificates issued hereunder. Such books shall show the name and address of
each holder of the Rights Certificates, the number of Rights evidenced on its
face by each Rights Certificate and the date of each Rights Certificate.

       SECTION 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates. (a)
Subject to the provisions of Sections 4(b), 7(e) and 14, at any time after the
Close of Business on the Distribution Date, and at or prior to the Close of
Business on the Expiration Date, any Rights Certificate or Certificates may be
transferred, split up, combined or exchanged for another Rights Certificate or
Certificates, entitling the registered holder to purchase a like number of Units
of Preferred Stock (or, following a Triggering Event, other securities, cash or
other assets, as the case may be) as the Rights Certificate or Certificates
surrendered then entitled such holder to purchase. Any registered holder
desiring to transfer, split up, combine or exchange any Rights Certificate or
Certificates shall make such request in writing delivered to the Rights Agent,
and shall surrender the Rights Certificate or Certificates to be transferred,
split up, combined or exchanged at the office of the Rights Agent designated for
such purpose. Neither the Rights Agent nor the Company shall be obligated to
take any action whatsoever with respect to the transfer of any such surrendered
Rights Certificate until the registered holder shall have properly completed and
executed the certificate set forth in the form of assignment on the reverse side
of

                                       8
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such Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) of the Rights
evidenced by such Rights Certificate or Affiliates or Associates thereof as the
Company or the Rights Agent shall reasonably request; whereupon the Rights Agent
shall, subject to the provisions of Sections 4(b), 7(e) and 14, countersign and
deliver to the Person entitled thereto a Rights Certificate or Rights
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Rights Certificates. The Rights Agent shall have no duty or obligation under
this Section 6 or any other similar provision of this Agreement unless and until
it is satisfied that all such taxes and/or governmental charges have been paid.

       (b) If a Rights Certificate shall be mutilated, destroyed, lost or
stolen, upon request by the registered holder of the Rights evidenced thereby
and upon payment to the Company and the Rights Agent of all reasonable expenses
incident thereto, there shall be issued, in exchange for and upon cancellation
of the mutilated Rights Certificate, or in substitution for the lost, stolen or
destroyed Rights Certificate, a new Rights Certificate, in substantially the
form of the prior Rights Certificate, of like tenor and evidencing the
equivalent number of Rights, but, in the case of loss, theft or destruction,
only upon receipt of evidence satisfactory to the Company and the Rights Agent
of such loss, theft or destruction of such Rights Certificate and, if requested
by the Company or the Rights Agent, indemnity also satisfactory to it.

       SECTION 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) Prior to the earlier of (i) the Close of Business on the tenth anniversary
hereof (the "Final Expiration Date") and (ii) the time at which the Rights are
redeemed as provided in Section 23 (the earlier of (i) and (ii) being the
"Expiration Date"), the registered holder of any Rights Certificate may, subject
to the provisions of Sections 7(e) and 9(c), exercise the Rights evidenced
thereby in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly executed, to the Rights Agent
at the office of the Rights Agent designated for such purpose, together with
payment of the aggregate Purchase Price (as hereinafter defined) for the number
of Units of Preferred Stock (or, following a Triggering Event, other securities,
cash or other assets, as the case may be) for which such surrendered Rights are
then exercisable.

       (b) The purchase price for each one one-hundredth of a share (each such
one one-hundredth of a share being a "Unit") of Preferred Stock upon exercise of
Rights shall be $95, subject to adjustment from time to time as provided in
Sections 11 and 13(a) (such purchase price, as so adjusted, being the "Purchase
Price"), and shall be payable in accordance with paragraph (c) below.

       (c) As promptly as practicable following the occurrence of the
Distribution Date, the Company shall deposit with a Person in good standing
organized under the laws of the United States or any State of the United States,
that is authorized under such laws to exercise shareholder services business,
corporate trust or stock transfer powers and is subject to supervision or
examination by federal or state authority (such institution being the
"Depositary Agent"), certificates evidencing the shares of Preferred Stock that
may be acquired upon exercise of the Rights and shall cause such Depositary
Agent to enter into an agreement pursuant to which the Depositary Agent shall
issue receipts evidencing interests in the shares of Preferred Stock so

                                       9
<PAGE>

deposited. Upon receipt of written notice that the Distribution Date has
occurred and receipt of a Rights Certificate evidencing exercisable Rights, with
the form of election to purchase and the certificate duly executed, accompanied
by payment, with respect to each Right so exercised, of the Purchase Price for
the Units of Preferred Stock (or, following a Triggering Event, other
securities, cash or other assets, as the case may be) to be purchased thereby as
set forth below and an amount equal to any applicable tax or governmental charge
or evidence satisfactory to the Company of payment of such tax or governmental
charge, the Rights Agent shall, subject to Section 20(k), thereupon promptly (i)
requisition from the Depositary Agent depositary receipts or certificates
evidencing such number of Units of Preferred Stock as are to be purchased and
the Company will direct the Depositary Agent to comply with such request, (ii)
requisition from the Company the amount of cash, if any, to be paid in lieu of
fractional shares in accordance with Section 14, (iii) after receipt of such
depositary receipts or certificates, cause the same to be delivered to or upon
the order of the registered holder of such Rights Certificate, registered in
such name or names as may be designated by such holder, and (iv) after receipt
thereof, deliver such cash, if any, to or upon the order of the registered
holder of such Rights Certificate. In the event that the Company is obligated to
issue Company Common Stock, other securities of the Company, pay cash and/or
distribute other property pursuant to Section 11(a), the Company will make all
arrangements necessary so that such Company Common Stock, other securities, cash
and/or other property are available for distribution by the Rights Agent, if and
when necessary to comply with this Agreement. Subject to Section 34, the payment
of the Purchase Price (as such amount may be reduced pursuant to Section
11(a)(iv)) may be made in cash or by certified or bank check payable to the
order of the Company, or by wire transfer of immediately available funds to the
account of the Company (provided that notice of such wire transfer shall be
given by the holder of the related Right to the Rights Agent).

       (d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing the Rights remaining unexercised shall be issued by the Rights Agent
and delivered to, or upon the order of, the registered holder of such Rights
Certificate, registered in such name or names as may be designated by such
holder, subject to the provisions of Section 14 hereof.

       (e) Notwithstanding anything in this Agreement to the contrary, from and
after the first occurrence of any Section 11(a)(iii) Event or Section 13 Event,
any Rights beneficially owned by (i) an Acquiring Person or an Associate or
Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) that becomes a transferee after the
Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) that becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and that receives such
Rights pursuant to either (A) a transfer (whether or not for consideration) from
the Acquiring Person (or any such Associate or Affiliate) to holders of equity
interests in such Acquiring Person (or such Associate or Affiliate) or to any
Person with whom such Acquiring Person (or such Associate or Affiliate) has any
continuing agreement, arrangement or understanding regarding the transferred
Rights, shares of Company Common Stock or the Company or (B) a transfer that a
majority of the Company's Board of Directors has determined to be part of a
plan, arrangement or understanding that has as a primary purpose or effect the
avoidance of this Section 7(e), shall be null and void without any further
action, and no holder of such Rights shall have any rights whatsoever with
respect to such Rights, whether under any provision of this Agreement or
otherwise. The

                                      10
<PAGE>

Company shall use all reasonable efforts to ensure that the provisions of this
Section 7(e) and Section 4(b) are complied with, but neither the Company nor the
Rights Agent shall have any liability to any holder of Rights or any other
Person as a result of the Company's failure to make any determination under this
Section 7(e) or Section 4(b) with respect to an Acquiring Person or its
Affiliates, Associates or transferees.

       (f) Notwithstanding anything in this Agreement or any Rights Certificate
to the contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported exercise by such registered holder unless such registered holder
shall have (i) properly completed and executed the certificate following the
form of election to purchase set forth on the reverse side of the Rights
Certificate surrendered for such exercise and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) of
the Rights evidenced by such Rights Certificate or Affiliates or Associates
thereof as the Company shall request.

       SECTION 8. Cancellation and Destruction of Rights Certificates. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
this Agreement. The Company shall deliver to the Rights Agent for cancellation
and retirement, and the Rights Agent shall so cancel and retire, any Rights
Certificates acquired by the Company otherwise than upon the exercise thereof.
The Rights Agent shall deliver all cancelled Rights Certificates to the Company,
or shall, at the written request of the Company, destroy such cancelled Rights
Certificates, and in such case shall deliver a certificate of destruction
thereof to the Company.

       SECTION 9. Reservation and Availability of Capital Stock. (a) The Company
shall at all times prior to the Expiration Date cause to be reserved and kept
available, out of its authorized and unissued shares of Preferred Stock, the
number of shares of Preferred Stock that, as provided in this Agreement, will be
sufficient to permit the exercise in full of all outstanding Rights. Upon the
occurrence of any events resulting in an increase in the aggregate number of
shares of Preferred Stock (or other equity securities of the Company) issuable
upon exercise of all outstanding Rights above the number then reserved, the
Company shall make appropriate increases in the number of shares so reserved.

       (b) If the shares of Preferred Stock to be issued and delivered upon the
exercise of the Rights may be listed on any national securities exchange, the
Company shall during the period from the Distribution Date through the
Expiration Date use its best efforts to cause all securities reserved for such
issuance to be listed on such exchange upon official notice of issuance upon
such exercise.

       (c) The Company shall use its best efforts (i) as soon as practicable
following the occurrence of a Section 11(a)(iii) Event and a determination by
the Company in accordance with Section 11(a)(iv) of the consideration to be
delivered by the Company upon exercise of the Rights or, if so required by law,
as soon as practicable following the Distribution Date (such date being the
"Registration Date"), to file a registration statement on an appropriate form
under the

                                      11
<PAGE>

Securities Act with respect to the securities that may be acquired upon exercise
of the Rights (the "Registration Statement"), (ii) to cause the Registration
Statement to become effective as soon as practicable after such filing, (iii) to
cause the Registration Statement to continue to be effective (and to include a
prospectus complying with the requirements of the Securities Act) until the
earlier of (A) the date as of which the Rights are no longer exercisable for the
securities covered by the Registration Statement and (B) the Expiration Date and
(iv) to take as soon as practicable following the Registration Date such action
as may be required to ensure that any acquisition of securities upon exercise of
the Rights complies with any applicable state securities or "blue sky" laws. If
the Registration Statement does not become effective prior to the Close of
Business on the 45th Business Day following the occurrence of a Section
11(a)(iii) Event, the Company shall, unless otherwise determined by a majority
of the Company's Board of Directors, on the 46th Business Day following the
occurrence of such Section 11(a)(iii) Event, be obligated to exercise the option
described in Section 34 and shall promptly notify the Rights Agent in writing of
such exercise.

       (d) The Company shall take such action as may be necessary to ensure that
all shares of Preferred Stock (and, following the occurrence of a Triggering
Event, any other securities that may be delivered upon exercise of Rights) shall
be, at the time of delivery of the certificates or depositary receipts for such
securities, duly and validly authorized and issued and fully paid and non-
assessable.

       (e) The Company shall pay any tax or governmental charge imposed in
connection with the issuance or delivery of the Rights Certificates or upon the
exercise of Rights; provided, however, that the Company shall not be required to
pay any such tax imposed in connection with the issuance or delivery of Units of
Preferred Stock, or any certificates or depositary receipts for such Units of
Preferred Stock (or, following the occurrence of a Triggering Event, any other
securities, cash or assets, as the case may be) to any Person other than the
registered holder of the Rights Certificates evidencing the Rights surrendered
for exercise. The Company shall not be required to issue or deliver any
certificates or depositary receipts for Units of Preferred Stock (or, following
the occurrence of a Triggering Event, any other securities, cash or assets, as
the case may be) to, or in a name other than that of, the registered holder of
the Rights Certificate upon the exercise of any Rights evidenced thereby until
any such tax or governmental charge shall have been paid (any such tax or
governmental charge being payable by the holder of such Rights Certificate at
the time of surrender) or until it has been established to the Company's
satisfaction that no such tax or governmental charge is due.

       SECTION 10. Preferred Stock Record Date. Each Person in whose name any
certificate or depositary receipt for Units of Preferred Stock (or, following
the occurrence of a Triggering Event, other securities) is issued upon the
exercise of Rights shall for all purposes be deemed to have become the holder of
record of the Units of Preferred Stock (or, following the occurrence of a
Triggering Event, other securities) evidenced thereby on, and such certificate
or depositary receipt shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and any applicable taxes or governmental charges) was made; provided, however,
that if the date of such surrender and payment is a date upon which the
Preferred Stock (or, following the occurrence of a Triggering Event, other
securities) transfer books of the Company are closed, such Person shall be
deemed

                                      12
<PAGE>

to have become the record holder of such securities on, and such certificate or
depositary receipt shall be dated, the next succeeding Business Day on which the
Preferred Stock (or, following the occurrence of a Triggering Event, other
securities) transfer books of the Company are open; and further provided,
however, that if delivery of Units of Preferred Stock is delayed as a result of
a failure to register such Units of Preferred Stock pursuant to Section 9(c),
such Persons shall be deemed to have become the record holders of such Units of
Preferred Stock only when such Units first become deliverable. Prior to the
exercise of the Rights evidenced thereby, the holder of a Rights Certificate
shall not be entitled to any rights of a shareholder of the Company with respect
to securities for which the Rights shall be exercisable, including, without
limitation, the right to vote, to receive dividends or other distributions or to
exercise any preemptive rights, and shall not be entitled to receive any notice
of any proceedings of the Company, except as provided herein.

       SECTION 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number and kind of securities covered
by each Right and the number of Rights outstanding are subject to adjustment
from time to time as provided in this Section 11.

       (a) (i)  In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Stock payable in shares
of Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C) combine
the outstanding Preferred Stock into a smaller number of shares or (D) issue any
shares of its capital stock in a reclassification of the Preferred Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing or surviving corporation), except
as otherwise provided in this Section 11(a), the Purchase Price in effect at the
time of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification, and the number and kind of shares
of Preferred Stock or capital stock, as the case may be, issuable on such date
upon exercise of the Rights, shall be proportionately adjusted so that the
holder of any Right exercised after such time shall be entitled to receive, upon
payment of the Purchase Price then in effect, the aggregate number and kind of
shares of Preferred Stock or capital stock, as the case may be, which, if such
Right had been exercised immediately prior to such date, such holder would have
owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination or reclassification. If an event occurs that
would require an adjustment under both this Section 11(a)(i) and Section
11(a)(iii), the adjustment provided for in this Section 11(a)(i) shall be in
addition to, and shall be made prior to, any adjustment required pursuant to
Section 11(a)(iii).

           (ii) Upon the declaration of a dividend in connection with any spin-
off or other similar transaction effected by the Company (whether occurring
before or after a Distribution Date), the Purchase Price in effect at the time
of the record date therefor, and the number and kind of shares of Preferred
Stock or capital stock, as the case may be, issuable at such time upon exercise
of the Rights, may be adjusted by action of a majority of the Company's Board of
Directors, after receiving advice from a nationally recognized investment
banking firm, in a manner that reflects the impact on the Company Common Stock
of such spin-off or other similar transaction. If an event occurs that the
Company's Board of Directors determines would require an adjustment under both
this Section 11(a)(ii) and Section 11(a)(iii), the adjustment

                                      13
<PAGE>

provided for in this Section 11(a)(ii) shall be in addition to, and shall be
made prior to, any adjustment required pursuant to Section 11(a)(iii).

       (iii) In the event:

       (A) any Acquiring Person or any Associate or Affiliate of any Acquiring
   Person, at any time after the date of this Agreement, directly or indirectly,
   shall (1) merge into the Company or otherwise combine with the Company and
   the Company shall be the continuing or surviving corporation of such merger
   or combination and Company Common Stock shall remain outstanding and
   unchanged, (2) in one transaction or a series of transactions, transfer any
   assets to the Company or to any of its Subsidiaries in exchange (in whole or
   in part) for shares of Company Common Stock, for other equity securities of
   the Company or any such Subsidiary, or for securities exercisable for or
   convertible into shares of equity securities of the Company or any of its
   Subsidiaries (whether Company Common Stock or otherwise) or otherwise obtain
   from the Company or any of its Subsidiaries, with or without consideration,
   any additional shares of such equity securities or securities exercisable for
   or convertible into such equity securities (other than pursuant to a pro rata
   distribution to all holders of Company Common Stock), (3) sell, purchase,
   lease, exchange, mortgage, pledge, transfer or otherwise acquire or dispose
   of, in one transaction or a series of transactions, to, from or with the
   Company or any of its Subsidiaries or any employee benefit plan maintained by
   the Company or any of its Subsidiaries or any trustee or fiduciary with
   respect to such plan acting in such capacity, assets (including securities)
   on terms and conditions less favorable to the Company or such Subsidiary or
   plan than those that could have been obtained in arm's-length negotiations
   with an unaffiliated third party, other than pursuant to a transaction set
   forth in Section 13(a), (4) sell, purchase, lease, exchange, mortgage,
   pledge, transfer or otherwise acquire or dispose of, in one transaction or a
   series of transactions, to, from or with the Company or any of the Company's
   Subsidiaries or any employee benefit plan maintained by the Company or any of
   its Subsidiaries or any trustee or fiduciary with respect to such plan acting
   in such capacity (other than transactions, if any, consistent with those
   engaged in, as of the date hereof, by the Company and such Acquiring Person
   or such Associate or Affiliate), assets (including securities) having an
   aggregate fair market value of more than $5,000,000, other than pursuant to a
   transaction set forth in Section 13(a), (5) sell, purchase, lease, exchange,
   mortgage, pledge, transfer or otherwise acquire or dispose of, in one
   transaction or a series of transactions, to, from or with the Company or any
   of its Subsidiaries or any employee benefit plan maintained by the Company or
   any of its Subsidiaries or any trustee or fiduciary with respect to such plan
   acting in such capacity, any material trademark or material service mark,
   other than pursuant to a transaction set forth in Section 13(a), (6) receive,
   or any designee, agent or representative of such Acquiring Person or any
   Affiliate or Associate of such Acquiring Person shall receive, any
   compensation from the Company or any of its Subsidiaries other than
   compensation for full-time employment as a regular employee at rates in
   accordance with the Company's (or its Subsidiaries') past practices, or (7)
   receive the benefit, directly or indirectly (except proportionately as a
   holder of Company Common Stock or as required by law or governmental
   regulation), of any loans, advances, guarantees, pledges or other financial
   assistance or any tax credits or other tax advantage provided by the Company
   or any of its Subsidiaries or any employee benefit plan

                                      14
<PAGE>

   maintained by the Company or any of its Subsidiaries or any trustee or
   fiduciary with respect to such plan acting in such capacity; or

       (B)  any Person shall become an Acquiring Person, unless the event
   causing such Person to become an Acquiring Person is a transaction set forth
   in Section 13(a); or

       (C)  during such time as there is an Acquiring Person, there shall be any
   reclassification of securities (including any reverse stock split), or
   recapitalization of the Company, or any merger or consolidation of the
   Company with any of its Subsidiaries or any other transaction or series of
   transactions involving the Company or any of its Subsidiaries, other than a
   transaction or transactions to which the provisions of Section 13(a) apply
   (whether or not with or into or otherwise involving an Acquiring Person),
   which has the effect, directly or indirectly, of increasing by more than 1%
   the proportionate share of the outstanding shares of any class of equity
   securities of the Company or any of its Subsidiaries that is directly or
   indirectly beneficially owned by any Acquiring Person or any Associate or
   Affiliate of any Acquiring Person;

then, immediately upon the date of the occurrence of an event described in
Section 11(a)(iii)(A), (B) or (C) (a "Section 11(a)(iii) Event"), proper
provision shall be made so that each holder of a Right (except as provided below
and in Section 7(e)) shall thereafter have the right to receive, upon exercise
thereof at the then-current Purchase Price in accordance with the terms of this
Agreement, in lieu of the number of Units of Preferred Stock for which a Right
was exercisable immediately prior to the first occurrence of a Section
11(a)(iii) Event, such number of Units of Preferred Stock as shall equal the
result obtained by (x) multiplying the then-current Purchase Price by the then
number of Units of Preferred Stock for which a Right was exercisable immediately
prior to the first occurrence of a Section 11(a)(iii) Event (such product
thereafter being, for all purposes of this Agreement other than Section 13, the
"Purchase Price"), and (y) dividing that product by 50% of the then-current
market price (determined pursuant to Section 11(d)) per Unit of Preferred Stock
on the date of such first occurrence (such Units of Preferred Stock being the
"Adjustment Shares").

       (iv) In the event that the number of shares of Preferred Stock that are
authorized by the Company's Articles of Incorporation but not outstanding or
reserved for issuance for purposes other than upon exercise of the Rights is not
sufficient to permit the exercise in full of the Rights in accordance with the
foregoing subparagraph (iii) of this Section 11(a), the Company, by the vote of
a majority of the Company's Board of Directors, shall: (A) determine the excess
of (1) the value of the Adjustment Shares issuable upon the exercise of a Right
(the "Current Value") over (2) the Purchase Price (such excess being the
"Spread"), and (B) with respect to each Right, make adequate provision to
substitute for such Adjustment Shares, upon payment of the applicable Purchase
Price, (1) cash, (2) a reduction in the Purchase Price, (3) Company Common Stock
or other equity securities of the Company (including, without limitation,
shares, or units of shares, of preferred stock (such other shares being
"Preferred Stock Equivalents")), (4) debt securities of the Company, (5) other
assets or (6) any combination of the foregoing, having an aggregate value equal
to the Current Value, where such aggregate value has been determined by a
majority of the Company's Board of Directors, after receiving advice from a
nationally recognized investment banking firm; provided, however, that if the
Company shall not have made adequate provision to deliver value

                                      15
<PAGE>

pursuant to clause (B) above within thirty days following the later of (x) the
first occurrence of a Section 11(a)(iii) Event and (y) the date on which the
Company's right of redemption pursuant to Section 23(a) expires (the later of
(x) and (y) being referred to herein as the "Section 11(a)(iv) Trigger Date"),
then the Company shall be obligated to deliver, upon the surrender for exercise
of a Right and without requiring payment of the Purchase Price, Units of
Preferred Stock (to the extent available) and then, if necessary, cash, which
Units of Preferred Stock and/or cash shall have an aggregate value equal to the
Spread. To the extent that the Company determines that some action need be taken
pursuant to the first sentence of this Section 11(a)(iv), the Company shall
provide, subject to Section 7(e), that such action shall apply uniformly to all
outstanding Rights. For purposes of this Section 11(a)(iv), the value of a Unit
of Preferred Stock shall be the current market price (as determined pursuant to
Section 11(d)) per Unit of Preferred Stock on the Section 11(a)(iv) Trigger Date
and the value of any preferred stock equivalent shall be deemed to have the same
value as the Preferred Stock on such date.

       (b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Stock entitling them to
subscribe for or purchase (for a period expiring within forty-five calendar days
after such record date) shares of Preferred Stock (or shares having
substantially the same rights, privileges and preferences as shares of Preferred
Stock ("Equivalent Preferred Stock")) or securities convertible into Preferred
Stock or Equivalent Preferred Stock at a price per share of Preferred Stock or
per share of Equivalent Preferred Stock (or having a conversion price per share,
if a security convertible into Preferred Stock or Equivalent Preferred Stock)
less than the current market price (as determined pursuant to Section 11(d)) per
share of Preferred Stock on such record date, the Purchase Price to be in effect
after such record date shall be determined by multiplying the Purchase Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the sum of the number of shares of Preferred Stock outstanding on
such record date plus the number of shares of Preferred Stock which the
aggregate offering price of the total number of shares of Preferred Stock and/or
Equivalent Preferred Stock so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such current market price, and the denominator of which shall be the number
of shares of Preferred Stock outstanding on such record date plus the number of
additional shares of Preferred Stock and/or Equivalent Preferred Stock to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible). In case such subscription price may
be paid by delivery of consideration part or all of which may be in a form other
than cash, the value of such consideration shall be as determined in good faith
by a majority of the Company's Board of Directors, whose determination shall be
described in a statement filed with the Rights Agent and shall be binding on the
Rights Agent and the holders of the Rights. Shares of Preferred Stock owned by
or held for the account of the Company or any Subsidiary shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall be
made successively whenever such a record date is fixed, and in the event that
such rights or warrants are not so issued, the Purchase Price shall be adjusted
to be the Purchase Price that would then be in effect if such record date had
not been fixed.

       (c) In case the Company shall fix a record date for a distribution to all
holders of shares of Preferred Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the continuing
corporation) of evidences of indebtedness, cash (other than a regular quarterly
cash dividend out of the earnings or retained

                                      16
<PAGE>

earnings of the Company), assets (other than a dividend payable in shares of
Preferred Stock, but including any dividend payable in stock other than
Preferred Stock) or subscription rights or warrants (excluding those referred to
in Section 11(b)), the Purchase Price to be in effect after such record date
shall be determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of which shall be the
current market price (as determined pursuant to Section 11(d)) per share of
Preferred Stock on such record date less the fair market value (as determined in
good faith by a majority of the Company's Board of Directors, whose
determination shall be described in a statement filed with the Rights Agent and
shall be binding on the Rights Agent and the holder of the Rights) of the cash,
assets or evidences of indebtedness so to be distributed or of such subscription
rights or warrants distributable in respect of a share of Preferred Stock and
the denominator of which shall be such current market price (as determined
pursuant to Section 11(d)) per share of Preferred Stock. Such adjustments shall
be made successively whenever such a record date is fixed, and in the event that
such distribution is not so made, the Purchase Price shall be adjusted to be the
Purchase Price that would have been in effect if such record date had not been
fixed.

       (d) (i)  For the purpose of any computation hereunder, the "current
market price" per share of Company Common Stock or Common Stock on any date
shall be deemed to be the average of the daily closing prices per share of such
shares for the ten consecutive Trading Days immediately prior to, but not
including, such date; provided, however, if prior to the expiration of such
requisite ten Trading Day period the issuer announces either (A) a dividend or
distribution on such shares payable in such shares or securities convertible
into such shares (other than the Rights) or (B) any subdivision, combination or
reclassification of such shares, then, following the ex-dividend date for such
dividend or the record date for such subdivision, as the case may be, the
"current market price" shall be properly adjusted to take into account such
event. The closing price for each day shall be, if the shares are listed and
admitted to trading on a national securities exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which such shares are
listed or admitted to trading or, if such shares are not listed or admitted to
trading on any national securities exchange, the last quoted price or, if not so
quoted, the average of the high bid and low asked prices in the over-the-counter
market, as reported by The Nasdaq Stock Market Consolidated Quotations Service
or such other system then in use, or, if on any such date such shares are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in such shares
selected by a majority of the Company's Board of Directors. If, on any such date
no market maker is making a market in such shares, the fair value of such shares
on such date as determined in good faith by a majority of the Company's Board of
Directors shall be used. If such shares are not publicly held or not so listed
or traded, "current market price" per share shall mean the fair value per share
as determined in good faith by a majority of the Company's Board of Directors,
whose determination shall be described in a statement filed with the Rights
Agent and shall be conclusive for all purposes. The term "Trading Day" shall
mean, if such shares are listed or admitted to trading on any national
securities exchange, a day on which the principal national securities exchange
on which such shares are listed or admitted to trading is open for the
transaction of business or, if such shares are not so listed or admitted, a
Business Day.

           (ii) For the purpose of any computation hereunder, the "current
market price" per share of Preferred Stock shall be determined in the same
manner as set forth above for

                                      17
<PAGE>

Company Common Stock in clause (i) of this Section 11(d) (other than the fourth
sentence thereof). If the current market price per share of Preferred Stock
cannot be determined in the manner provided above or if the Preferred Stock is
not publicly held or listed or traded in a manner described in clause (i) of
this Section 11(d), the "current market price" per share of Preferred Stock
shall be conclusively deemed to be an amount equal to 100 (as such amount may be
appropriately adjusted for such events as stock splits, stock dividends and
recapitalizations with respect to Company Common Stock occurring after the date
of this Agreement) multiplied by the current market price per share of Company
Common Stock. If neither Company Common Stock nor Preferred Stock is publicly
held or so listed or traded, "current market price" per share of the Preferred
Stock shall mean the fair value per share as determined in good faith by a
majority of the Company's Board of Directors, whose determination shall be
described in a statement filed with the Rights Agent and shall be binding on the
Rights Agent and the holders of the Rights. For all purposes of this Agreement,
the "current market price" of a Unit of Preferred Stock shall be equal to the
"current market price" of one share of Preferred Stock divided by 100.

       (e) Anything herein to the contrary notwithstanding, no adjustment in the
Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Purchase Price; provided, however,
that any adjustments which by reason of this Section 11(e) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest one-hundredth of a share of Company Common Stock or
Common Stock or other share or ten-thousandth of a share of Preferred Stock, as
the case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction that mandates such
adjustment and (ii) the Expiration Date.

       (f) If, as a result of an adjustment made pursuant to Section 11(a)(iii)
or 13(a), the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock other than Preferred Stock, thereafter the
number of such other shares so receivable upon exercise of any Right and the
Purchase Price thereof shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Stock contained in Sections 11(a), (b), (c), (d), (e),
(g), (h), (i), (j), (k), (l) and (m), and the provisions of Sections 7, 9, 10,
13 and 14 with respect to the Preferred Stock shall apply on like terms to any
such other shares.

       (g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of Units of Preferred Stock
(or other securities or amount of cash or combination thereof) that may be
acquired from time to time hereunder upon exercise of the Rights, all subject to
further adjustment as provided herein.

       (h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of Units of Preferred
Stock (calculated to the nearest one ten-thousandth of a Unit)

                                      18
<PAGE>

obtained by (i) multiplying (x) the number of Units of Preferred Stock covered
by a Right immediately prior to this adjustment by (y) the Purchase Price in
effect immediately prior to such adjustment of the Purchase Price and (ii)
dividing the product so obtained by the Purchase Price in effect immediately
after such adjustment of the Purchase Price.

       (i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in lieu of any adjustment in the
number of Units of Preferred Stock that may be acquired upon the exercise of a
Right. Each of the Rights outstanding after the adjustment in the number of
Rights shall be exercisable for the number of Units of Preferred Stock for which
a Right was exercisable immediately prior to such adjustment. Each Right held of
record prior to such adjustment of the number of Rights shall become that number
of Rights (calculated to the nearest ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement (with prompt written notice
thereof to the Rights Agent) of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date on which
the Purchase Price is adjusted or any day thereafter, but, if the Rights
Certificates have been issued, shall be at least ten days later than the date of
such public announcement. If Rights Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i), the Company
shall, as promptly as practicable, cause to be distributed to holders of record
of Rights Certificates on such record date Rights Certificates evidencing,
subject to Section 14, the additional Rights to which such holders shall be
entitled as a result of such adjustment, or, at the option of the Company, shall
cause to be distributed to such holders of record in substitution and
replacement for the Rights Certificates held by such holders prior to the date
of adjustment, and upon surrender thereof, if required by the Company, new
Rights Certificates evidencing all the Rights to which such holders shall be
entitled after such adjustment. Rights Certificates to be so distributed shall
be issued, executed and countersigned in the manner provided for herein (and may
bear, at the option of the Company, the adjusted Purchase Price) and shall be
registered in the names of the holders of record of Rights Certificates on the
record date specified in the public announcement.

       (j) Irrespective of any adjustment or change in the Purchase Price or the
number of Units of Preferred Stock issuable upon the exercise of the Rights, the
Rights Certificates theretofore and thereafter issued may continue to express
the Purchase Price per Unit and the number of Units of Preferred Stock that were
expressed in the Initial Rights Certificates issued hereunder without prejudice
to any such adjustment or change.

       (k) Before taking any action that would cause an adjustment reducing the
Purchase Price below the then-par value of the number of Units of Preferred
Stock issuable upon exercise of the Rights, the Company shall take any corporate
action that may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue such fully paid and non-assessable number
of Units of Preferred Stock at such adjusted Purchase Price.

       (l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer (and shall promptly notify the Rights
Agent of any such election) until the

                                      19
<PAGE>

occurrence of such event the issuance to the holder of any Right exercised after
such record date of that number of Units of Preferred Stock and shares of other
capital stock or securities of the Company, if any, issuable upon such exercise
over and above the number of Units of Preferred Stock and shares of other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares (fractional or otherwise) or securities upon the occurrence of the event
requiring such adjustment.

       (m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in their good faith judgment a majority of the Company's Board
of Directors shall determine to be advisable in order that any (i) consolidation
or subdivision of the Preferred Stock, (ii) issuance wholly for cash of any
shares of Preferred Stock at less than the current market price, (iii) issuance
wholly for cash or shares of Preferred Stock or securities that by their terms
are convertible into or exchangeable for shares of Preferred Stock, (iv) stock
dividends or (v) issuance of rights, options or warrants referred to in this
Section 11, hereafter made by the Company to holders of its Preferred Stock,
shall not be taxable to such holders or shall reduce the taxes payable by such
holders.

       (n) The Company shall not, at any time after the Distribution Date, (i)
consolidate with any other Person (other than a Subsidiary of the Company in a
transaction that complies with Section 11(o)), (ii) merge with or into any other
Person (other than a Subsidiary of the Company in a transaction that complies
with Section 11(o)), or (iii) sell or transfer (or permit any Subsidiary to sell
or transfer), in one transaction, or a series of transactions, assets or earning
power aggregating more than 50% of the assets or earning power of the Company
and its Subsidiaries (taken as a whole) to any other Person or Persons (other
than the Company and/or any of its Subsidiaries in one or more transactions each
of which complies with Section 11(o) and other than in connection with any
public offering of the capital stock of any of the Company's subsidiaries or any
spin-off or other similar transaction), if (x) at the time of or immediately
after such consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect that would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger or sale, the Person that constitutes, or would
constitute, the "Principal Party" for purposes of Section 13(a) shall have
distributed or otherwise transferred to its shareholders or other Persons
holding an equity interest in such Person Rights previously owned by such Person
or any of its Affiliates and Associates; provided, however, that this Section
11(n) shall not affect the ability of any Subsidiary of the Company to
consolidate with, merge with or into, or sell or transfer assets or earning
power to, any other Subsidiary of the Company.

       (o) After the Distribution Date, the Company shall not, except as
permitted by Section 23 or Section 26, take (or permit any Subsidiary to take)
any action if at the time such action is taken it is reasonably foreseeable that
such action will diminish substantially or otherwise eliminate the benefits
intended to be afforded by the Rights.

                                      20
<PAGE>

       (p) Anything in this Agreement to the contrary notwithstanding, in the
event that the Company shall at any time after the Rights Dividend Declaration
Date and prior to the Distribution Date (i) declare a dividend on the
outstanding shares of Company Common Stock payable in shares of Company Common
Stock, (ii) subdivide the outstanding shares of Company Common Stock, (iii)
combine the outstanding shares of Company Common Stock into a smaller number of
shares, or (iv) issue any shares of its capital stock in a reclassification of
Company Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation), the number of Rights associated with each share of Company Common
Stock then outstanding, or issued or delivered thereafter but prior to the
Distribution Date, shall be proportionately adjusted so that the number of
Rights thereafter associated with each share of Company Common Stock following
any such event shall equal the result obtained by multiplying the number of
Rights associated with each share of Company Common Stock immediately prior to
such event by a fraction the numerator of which shall be the total number of
shares of Company Common Stock outstanding immediately prior to the occurrence
of the event and the denominator of which shall be the total number of shares of
Company Common Stock outstanding immediately following the occurrence of such
event.

       SECTION 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or Section 13, the
Company shall (a) promptly prepare a certificate setting forth such adjustment
and a brief statement of the facts and computations accounting for such
adjustment, (b) promptly file with the Rights Agent, and with each transfer
agent for the Preferred Stock and the Company Common Stock, a copy of such
certificate, and (c) mail a brief summary thereof to each holder of a Rights
Certificate (or, if prior to the Distribution Date, to each holder of a
certificate evidencing shares of Company Common Stock) in accordance with
Section 25. The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment therein contained, and shall have no duty with
respect to and shall not be deemed to have knowledge of any such adjustment
unless and until it shall have received such certificate.

       SECTION 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power. (a) In the event that, following the Stock Acquisition Date,
directly or indirectly, either (x) the Company shall consolidate with, or merge
with and into, any other Person (other than a Subsidiary of the Company in a
transaction that complies with Section 11(o)), and the Company shall not be the
continuing or surviving corporation of such consolidation or merger, (y) any
Person (other than a Subsidiary of the Company in a transaction that complies
with Section 11(o)) shall consolidate with, or merge with or into, the Company,
and the Company shall be the continuing or surviving corporation of such
consolidation or merger and, in connection with such consolidation or merger,
all or part of the outstanding shares of Company Common Stock shall be converted
into or exchanged for stock or other securities of any other Person or cash or
any other property, or (z) the Company shall sell or otherwise transfer (or one
or more of its Subsidiaries shall sell or otherwise transfer) to any Person or
Persons (other than the Company or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o) and other than in
connection with any public offering of the capital stock of any of the Company's
subsidiaries or any spin-off or other similar transaction), in one or more
transactions, assets or earning power aggregating more than 50% of the assets or
earning power of the Company and its Subsidiaries, taken as a whole (any such
event described in clause (x),

                                      21
<PAGE>

(y) or (z) being a "Section 13 Event"), then, and in each such case, proper
provision shall be made so that: (i) each holder of a Right, except as provided
in Section 7(e), shall thereafter have the right to receive, upon the exercise
thereof at the then-current Purchase Price, such number of validly authorized
and issued, fully paid and non-assessable shares of Common Stock of the
Principal Party, which shares shall not be subject to any liens, encumbrances,
rights of first refusal, transfer restrictions or other adverse claims, as shall
be equal to the result obtained by (1) multiplying the then-current Purchase
Price by the number of Units of Preferred Stock for which a Right is exercisable
immediately prior to the first occurrence of a Section 13 Event (or, if a
Section 11(a)(iii) Event has occurred prior to the first occurrence of a Section
13 Event, multiplying the number of such Units for which a Right would be
exercisable hereunder but for the occurrence of such Section 11(a)(iii) Event by
the Purchase Price that would be in effect hereunder but for such first
occurrence) and (2) dividing that product (which, following the first occurrence
of a Section 13 Event, shall be the "Purchase Price" for all purposes of this
Agreement) by 50% of the current market price (determined pursuant to Section
11(d)) per share of the Common Stock of such Principal Party on the date of
consummation of such Section 13 Event; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such Section 13 Event,
all the obligations and duties of the Company pursuant to this Agreement; (iii)
the term "Company" shall, for all purposes of this Agreement, thereafter be
deemed to refer to such Principal Party, it being specifically intended that the
provisions of Section 11 shall apply only to such Principal Party following the
first occurrence of a Section 13 Event; (iv) such Principal Party shall take
such steps (including, but not limited to, the reservation of a sufficient
number of shares of its Common Stock) in connection with the consummation of any
such transaction as may be necessary to ensure that the provisions of this
Agreement shall thereafter be applicable to its shares of Common Stock
thereafter deliverable upon the exercise of the Rights; and (v) the provisions
of Section 11(a)(iii) shall be of no further effect following the first
occurrence of any Section 13 Event.

       (b)  "Principal Party" shall mean:

       (i)  in the case of any transaction described in clause (x) or (y) of the
   first sentence of Section 13(a), (A) the Person that is the issuer of any
   securities into which shares of Company Common Stock are converted in such
   merger or consolidation, or, if there is more than one such issuer, the
   issuer of Common Stock that has the highest aggregate current market price
   (determined pursuant to Section 11(d)) and (B) if no securities are so
   issued, the Person that is the other party to such merger or consolidation,
   or, if there is more than one such Person, the Person the Common Stock of
   which has the highest aggregate current market price (determined pursuant to
   Section 11(d)); and

       (ii) in the case of any transaction described in clause (z) of the first
   sentence of Section 13(a), the Person that is the party receiving the largest
   portion of the assets or earning power transferred pursuant to such
   transaction or transactions, or, if each Person that is a party to such
   transaction or transactions receives the same portion of the assets or
   earning power transferred pursuant to such transaction or transactions or if
   the Person receiving the largest portion of the assets or earning power
   cannot be determined, whichever Person the Common Stock of which has the
   highest aggregate current market price (determined pursuant to Section
   11(d)); provided, however, that in any such case, (1) if the Common Stock of
   such Person is not at such time and has not been

                                      22
<PAGE>

   continuously over the preceding twelve-month period registered under Section
   12 of the Exchange Act ("Registered Common Stock"), or such Person is not a
   corporation, and such Person is a direct or indirect Subsidiary of another
   Person that has Registered Common Stock outstanding, "Principal Party" shall
   refer to such other Person; (2) if the Common Stock of such Person is not
   Registered Common Stock or such Person is not a corporation, and such Person
   is a direct or indirect Subsidiary of another Person but is not a direct or
   indirect Subsidiary of another Person that has Registered Common Stock
   outstanding, "Principal Party" shall refer to the ultimate parent entity of
   such first-mentioned Person; (3) if the Common Stock of such Person is not
   Registered Common Stock or such Person is not a corporation, and such Person
   is directly or indirectly controlled by more than one Person, and one or more
   of such other Persons has Registered Common Stock outstanding, "Principal
   Party" shall refer to whichever of such other Persons is the issuer of the
   Registered Common Stock having the highest aggregate current market price
   (determined pursuant to Section 11(d)); and (4) if the Common Stock of such
   Person is not Registered Common Stock or such Person is not a corporation,
   and such Person is directly or indirectly controlled by more than one Person,
   and none of such other Persons have Registered Common Stock outstanding,
   "Principal Party" shall refer to whichever ultimate parent entity is the
   corporation having the greatest shareholders' equity or, if no such ultimate
   parent entity is a corporation, shall refer to whichever ultimate parent
   entity is the entity having the greatest net assets.

       (c)  The Company shall not consummate any such consolidation, merger,
sale or transfer unless the Principal Party shall have a sufficient number of
authorized shares of its Common Stock that have not been issued or reserved for
issuance to permit the exercise in full of the Rights in accordance with this
Section 13, and unless prior thereto the Company and such Principal Party shall
have executed and delivered to the Rights Agent a supplemental agreement
providing for the terms set forth in paragraphs (a) and (b) of this Section 13
and further providing that the Principal Party will:

       (i)  (A) file on an appropriate form, as soon as practicable following
   the execution of such agreement, a registration statement under the
   Securities Act with respect to the Common Stock that may be acquired upon
   exercise of the Rights, (B) cause such registration statement to remain
   effective (and to include a prospectus complying with the requirements of the
   Securities Act) until the Expiration Date, and (C) as soon as practicable
   following the execution of such agreement take such action as may be required
   to ensure that any acquisition of such Common Stock upon the exercise of the
   Rights complies with any applicable state securities or "blue sky" laws; and

       (ii) deliver to holders of the Rights historical financial statements for
   the Principal Party and each of its Affiliates that comply in all respects
   with the requirements for registration on Form 10 under the Exchange Act.

       (d)  In case the Principal Party that is to be a party to a transaction
referred to in this Section 13 has a provision in any of its authorized
securities or in its Articles of Incorporation or By-laws or other instrument
governing its corporate affairs, which provision would have the effect of (i)
causing such Principal Party to issue, in connection with, or as a consequence
of, the consummation of a transaction referred to in this Section 13, shares of

                                      23
<PAGE>

Common Stock of such Principal Party at less than the then-current market price
per share (determined pursuant to Section 11(d)) or securities exercisable for,
or convertible into, Common Stock of such Principal Party at less than such
then-current market price (other than to holders of Rights pursuant to this
Section 13) or (ii) providing for any special payment, tax or similar provisions
in connection with the issuance of the Common Stock of such Principal Party
pursuant to the provisions of this Section 13, then, in such event, the Company
shall not consummate any such transaction unless prior thereto the Company and
such Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing that the provision in question of such
Principal Party shall have been cancelled, waived or amended, or that the
authorized securities shall be redeemed, so that the applicable provision will
have no effect in connection with, or as a consequence of, the consummation of
the proposed transaction.

       (e) The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers. In the event that a
Section 13 Event shall occur at any time after the occurrence of a Section
11(a)(iii) Event, the Rights that have not theretofore been exercised shall
thereafter become exercisable in the manner described in Section 13(a).

       SECTION 14. Fractional Rights and Fractional Shares. (a) The Company
shall not be required to issue fractions of Rights or to distribute Rights
Certificates that evidence fractional Rights. In lieu of such fractional Rights,
there shall be paid to the Persons to which such fractional Rights would
otherwise be issuable, an amount in cash equal to such fraction of the market
value of a whole Right. For purposes of this Section 14(a), the market value of
a whole Right shall be the closing price of the Rights for the Trading Day
immediately prior to the date on which such fractional Rights would have been
otherwise issuable. The closing price of the Rights for any day shall be, if the
Rights are listed or admitted to trading on a national securities exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading or, if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by The Nasdaq Stock Market Consolidated
Quotations Service or such other system then in use or, if on any such date the
Rights are not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the Rights selected by a majority of the Company's Board of Directors. If on any
such date no such market maker is making a market in the Rights, the fair value
of the Rights on such date as determined in good faith by a majority of the
Company's Board of Directors shall be used and such determination shall be
described in a statement filed with the Rights Agent and shall be conclusive for
all purposes.

       (b) The Company shall not be required to issue fractions of shares of
Preferred Stock (other than fractions that are integral multiples of one one-
hundredth of a share of Preferred Stock) upon exercise of the Rights or to
distribute certificates that evidence such fractional shares of Preferred Stock
(other than fractions that are integral multiples of one one-hundredth of a
share of Preferred Stock). In lieu of such fractional shares of Preferred Stock
that are not integral multiples of one one-hundredth of a share, the Company may
pay to the registered holders of Rights Certificates at the time such Rights are
exercised as herein provided

                                      24
<PAGE>

an amount in cash equal to the same fraction of the then-current market price of
a share of Preferred Stock on the day of exercise, determined in accordance with
Section 11(d).

       (c) The holder of a Right by the acceptance of such Right expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right, except as permitted by this Section 14.

       (d) Whenever a payment for fractional Rights or fractional shares is to
be made by the Rights Agent, the Company shall (i) promptly prepare and deliver
to the Rights Agent a certificate setting forth the prices and/or formulas
utilized in calculating such payments, and (ii) provide sufficient monies to the
Rights Agent in the form of fully collected funds to make such payments. The
Rights Agent shall be fully protected in relying upon such a certificate and
shall have no duty with respect to, and shall not be deemed to have knowledge of
any payment for fractional Rights or fractional shares under any Section of this
Agreement relating to the payment of fractional Rights or fractional shares
unless and until the Rights Agent shall have received such a certificate and
sufficient monies.

       SECTION 15. Rights of Action. All rights of action in respect of this
Agreement, other than rights of action vested in the Rights Agent pursuant to
Section 18 and Section 20 hereof, are vested in the respective registered
holders of the Rights Certificates (and, prior to the Distribution Date, the
registered holders of certificates evidencing shares of Company Common Stock);
and any registered holder of a Rights Certificate (or, prior to the Distribution
Date, of a certificate evidencing shares of Company Common Stock), without the
consent of the Rights Agent or of the holder of any other Rights Certificate
(or, prior to the Distribution Date, of a certificate evidencing shares of
Company Common Stock), may, on such registered holder's own behalf and for such
registered holder's own benefit, enforce, and may institute and maintain any
suit, action or proceeding against the Company or any other Person to enforce,
or otherwise act in respect of, such registered holder's right to exercise the
Rights evidenced by such Rights Certificate in the manner provided in such
Rights Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and shall be entitled to specific performance of the
obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.

       SECTION 16. Agreement of Rights Holders. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that:

       (a) prior to the Distribution Date, the Rights will be transferable only
   in connection with the transfer of Company Common Stock;

       (b) after the Distribution Date, the Rights Certificates are transferable
   only on the registry books of the Rights Agent if surrendered at the office
   of the Rights Agent designated for such purposes, duly endorsed or
   accompanied by a proper instrument of transfer and with the appropriate forms
   and certificates duly executed;

                                      25
<PAGE>

          (c) subject to Section 6(a) and Section 7(f), the Company and
     the Rights Agent may deem and treat the Person in whose name a Rights
     Certificate (or, prior to the Distribution Date, the associated Company
     Common Stock certificate) is registered as the absolute owner thereof
     and of the Rights evidenced thereby (notwithstanding any notations of
     ownership or writing on the Rights Certificates or the associated
     Company Common Stock certificate made by anyone other than the Company
     or the Rights Agent) for all purposes whatsoever, and neither the
     Company nor the Rights Agent, subject to the last sentence of Section
     7(e), shall be affected by any notice to the contrary; and

          (d) notwithstanding anything in this Agreement to the
     contrary, neither the Company nor the Rights Agent shall have any
     liability to any holder of a Right or any other Person as a result of
     its inability to perform any of its obligations under this Agreement by
     reason of any preliminary or permanent injunction or other order,
     decree, judgment or ruling (whether interlocutory or final) issued by a
     court of competent jurisdiction or by a governmental, regulatory or
     administrative agency or commission, or any statute, rule, regulation
     or executive order promulgated or enacted by any governmental
     authority, prohibiting or otherwise restraining performance of such
     obligation; provided, however, the Company must use its best efforts to
     have any such order, decree, judgment or ruling lifted or otherwise
     overturned as promptly as practicable.

          SECTION 17. Rights Certificate Holder Not Deemed a Shareholder. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the number of shares of
Preferred Stock or any other securities of the Company that may at any time be
issuable on the exercise of the Rights evidenced thereby, nor shall anything
contained herein or in any Rights Certificate be construed to confer upon the
holder of any Rights Certificate, as such, any of the rights of a shareholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action, or, except as provided in Section 24, to
receive notice of meetings or other actions affecting shareholders, or to
receive dividends or subscription rights, or otherwise.

          SECTION 18. Concerning the Rights Agent. (a) The Company agrees to pay
to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses, including reasonable fees and disbursements of its counsel, incurred
in connection with the preparation, delivery, execution, administration and
amendment of this Agreement and the exercise and performance of its duties
hereunder. The Company shall indemnify the Rights Agent for, and hold it
harmless against, any loss, liability, damage, judgment, fine, penalty, claim,
demand, settlement, cost or expense, incurred without gross negligence, bad
faith or willful misconduct (each as finally determined by a court of competent
jurisdiction) on the part of the Rights Agent, for any action taken, suffered or
omitted by the Rights Agent in connection with the acceptance and administration
of this Agreement or the exercise and performance of its duties hereunder,
including, without limitation, the costs and expenses of defending against any
claim of liability hereunder. The indemnity provided herein shall survive the
termination of this Agreement, the termination and the expiration of the Rights,
and the resignation or removal of the Rights Agent. The costs and expenses
incurred in enforcing this right of indemnification shall be paid by the
Company.

                                       26
<PAGE>

     (b)  The Rights Agent shall be protected and shall incur no liability for
or in respect of any action taken, suffered or omitted by it in connection with
the acceptance and administration of this Agreement in reliance upon any Rights
Certificate or certificate or depositary receipt for Preferred Stock or for
other securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement or other paper or document believed by it to be genuine
and to have been signed, executed and, where necessary, verified or acknowledged
by the proper Person or Persons. The Rights Agent shall not be deemed to have
any duty or notice unless and until the Company has provided the Rights Agent
with written notice.

     SECTION 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any Person into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any Person resulting from any
merger or consolidation to which the Rights Agent or any successor Rights Agent
shall be a party, or any Person succeeding to the corporate trust or shareholder
services business of the Rights Agent or any successor Rights Agent, shall be
the successor to the Rights Agent under this Agreement without the execution or
filing of any document or any further act on the part of any of the parties
hereto; provided that such Person would be eligible for appointment as a
successor Rights Agent under the provisions of Section 21. In case at the time
such successor Rights Agent shall succeed to the agency created by this
Agreement, any of the Rights Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of a
predecessor Rights Agent and deliver such Rights Certificates so countersigned;
and in case at that time any of the Rights Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Rights
Certificates either in the name of the predecessor or in the name of the
successor Rights Agent; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.

     (b)  In case at any time the name of the Rights Agent shall be changed and
at such time any of the Rights Certificates shall have been countersigned but
not delivered, the Rights Agent may adopt the countersignature under its prior
name and deliver Rights Certificates so countersigned; and in case at that time
any of the Rights Certificates shall not have been countersigned, the Rights
Agent may countersign such Rights Certificates either in its prior name or in
its changed name; and in all such cases such Rights Certificates shall have the
full force provided in the Rights Certificates and in this Agreement.

       SECTION 20. Duties of Rights Agent. The Rights Agent only
undertakes the duties and obligations expressly imposed by this Agreement (and
no implied duties or obligations) upon the following terms and conditions, by
all of which the Company and the holders of Rights Certificates, by their
acceptance thereof, shall be bound:

     (a)  The Rights Agent may consult with legal counsel (who may be legal
   counsel for the Company), and the advice or opinion of such counsel shall be
   full and complete authorization and protection to the Rights Agent, and the
   Rights Agent shall incur no liability for or in respect of any action taken,
   suffered or omitted by it in good faith and in accordance with such advice or
   opinion.

                                       27
<PAGE>

       (b) Whenever in the performance of its duties under this Agreement the
   Rights Agent shall deem it necessary or desirable that any fact or matter
   (including, without limitation, the identity of any Acquiring Person and the
   determination of "current market price") be proved or established by the
   Company prior to taking, suffering or omitting any action hereunder, such
   fact or matter (unless other evidence in respect thereof be specified herein)
   may be deemed to be conclusively proved and established by a certificate
   signed by the Chairman of the Board, the President, any Vice President, the
   Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary
   of the Company and delivered to the Rights Agent and such certificate shall
   be full authorization and protection to the Rights Agent, and the Rights
   Agent shall incur no liability for or in respect of any action taken,
   suffered or omitted by it under the provisions of this Agreement in reliance
   upon such certificate.

       (c) The Rights Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct (each as finally determined by a
court of competent jurisdiction). Anything in this Agreement to the contrary
notwithstanding, in no event shall the Rights Agent be liable for special,
indirect, incidental or consequential loss or damage of any kind whatsoever
(including, without limitation, loss profits), even if the Rights Agent has been
advised of the possibility of such loss or damage.

       (d) The Rights Agent shall not be liable for or by reason of
   any of the statements of fact or recitals contained in this Agreement
   or in the Rights Certificates or be required to verify the same (except
   as to its countersignature on such Rights Certificates), but all such
   statements and recitals are and shall be deemed to have been made by
   the Company only.

       (e) The Rights Agent shall not have any liability for or be under any
   responsibility for the validity of this Agreement or the execution and
   delivery hereof (except the due execution and delivery hereof by the Rights
   Agent) or for the validity or execution of any Rights Certificate (except its
   countersignature thereof); nor shall it be responsible for any breach by the
   Company of any covenant or failure by the Company to satisfy conditions
   contained in this Agreement or in any Rights Certificate; nor shall it be
   responsible for any adjustment required under the provisions of Section 11 or
   Section 13 or for the manner, method or amount of any such adjustment or the
   ascertaining of the existence of facts that would require any such adjustment
   (except with respect to the exercise of Rights evidenced by Rights
   Certificates after receipt by the Rights Agent of the certificate describing
   any such adjustment contemplated by Section 12); nor shall it by any act
   hereunder be deemed to make any representation or warranty as to the
   authorization or reservation of any shares of Preferred Stock or any other
   securities to be issued pursuant to this Agreement or any Rights Certificate
   or as to whether any shares of Preferred Stock or any other securities will,
   when so issued, be validly authorized and issued, fully paid and non-
   assessable.

       (f) The Company shall perform, execute, acknowledge and deliver or cause
   to be performed, executed, acknowledged and delivered all such further acts,
   instruments and assurances as may reasonably be required by the Rights Agent
   for the performance by the Rights Agent of its duties under this Agreement.

                                       28
<PAGE>

       (g) The Rights Agent is hereby authorized and directed to accept
   instructions with respect to the performance of its duties hereunder from the
   Chairman of the Board, the President, any Vice President, the Secretary, any
   Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company,
   and to apply to such officers for advice or instructions in connection with
   its duties, and such instructions shall be full authorization and protection
   to the Rights Agent, and the Rights Agent shall incur no liability for or in
   respect of any action taken, suffered or omitted to be taken by it in good
   faith in accordance with the advice or instructions of any such officer. The
   Rights Agent shall be fully protected and authorized in relying upon the most
   recent instructions received by any such officer. Any application by the
   Rights Agent for written instructions from the Company may, at the option of
   the Rights Agent, set forth in writing any action proposed to be taken,
   suffered or omitted by the Rights Agent under this Rights Agreement and the
   date on and/or after which such action shall be taken, suffered or such
   omission shall be effective. The Rights Agent shall not be liable for any
   action taken or suffered by, or omission of, the Rights Agent in accordance
   with a proposal included in any such application on or after the date
   specified in such application (which date shall not be less than five
   Business Days after the date any such officer of the Company actually
   receives such application, unless any such officer shall have consented in
   writing to an earlier date) unless, prior to taking or suffering any such
   action (or the effective date in the case of an omission), the Rights Agent
   shall have received written instructions in response to such application
   specifying the action to be taken, suffered or omitted.

       (h) The Rights Agent and any shareholder, affiliate, director, officer or
   employee of the Rights Agent may buy, sell or deal in any of the Rights or
   other securities of the Company or become pecuniarily interested in any
   transaction in which the Company may be interested, or contract with or lend
   money to the Company or otherwise act as fully and freely as though it were
   not Rights Agent under this Agreement. Nothing herein shall preclude the
   Rights Agent from acting in any other capacity for the Company or for any
   other Person.

       (i) The Rights Agent may execute and exercise any of the rights or powers
   hereby vested in it or perform any duty hereunder either itself or by or
   through its attorneys or agents, and the Rights Agent shall not be answerable
   or accountable for any act, default, neglect, or misconduct of any such
   attorneys or agents or for any loss to the Company or any other Person
   resulting from any such act, default, neglect or misconduct, absent gross
   negligence, bad faith or willful misconduct (each as finally determined by a
   court of competent jurisdiction) in the selection and continued employment
   thereof.

       (j) No provision of this Agreement shall require the Rights Agent to
   expend or risk its own funds or otherwise incur any financial liability in
   the performance of any of its duties or in the exercise of its rights
   hereunder if the Rights Agent shall have reasonable grounds for believing
   that repayment of such funds or adequate indemnification against such risk or
   liability is not reasonably assured to it.

       (k) If, with respect to any Rights Certificate surrendered to the Rights
   Agent for exercise or transfer, the certificate attached to the form of
   assignment or form of election to purchase, as the case may be, has either
   not been properly completed, not

                                       29
<PAGE>

   signed or indicates an affirmative response to clause 1 and/or 2 thereof, the
   Rights Agent shall not take any further action with respect to such requested
   exercise or transfer without first consulting with the Company. If such
   certificate has been properly completed and signed and shows a negative
   response to clauses 1 and 2 of such certificate, unless previously instructed
   otherwise in writing by the Company, the Rights Agent may assume without
   further inquiry that the Rights Certificate is not owned by a Person
   described in Section 4(b) or Section 7(e) and shall not be charged with any
   knowledge to the contrary.

       SECTION 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty days' prior notice in writing mailed to the Company, and to each
transfer agent of the Preferred Stock and the Company Common Stock, by
registered or certified mail, and to the holders of the Rights Certificates (or
certificates for the Company Common Stock prior to the Distribution Date) by
first-class mail. The Company may remove the Rights Agent or any successor
Rights Agent upon thirty days' prior notice in writing, mailed to the Rights
Agent or successor Rights Agent, as the case may be, and to each transfer agent
of the Preferred Stock and the Company Common Stock, by registered or certified
mail, and to the holders of the Rights Certificates (or certificates for the
Company Common Stock prior to the Distribution Date) by first-class mail. If the
Rights Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Rights Agent. If the
Company shall fail to make such appointment within a period of thirty days after
giving notice of such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Rights Agent or by
the holder of a Rights Certificate or, prior to the Distribution Date, the
holder of a certificate for the Company Common Stock (who shall, with such
notice, submit such holder's Rights Certificate or certificate for Company
Common Stock, as the case may be, for inspection by the Company), then any
registered holder of any Rights Certificate or, prior to the Distribution Date,
the holder of a certificate for the Company Common Stock may apply to any court
of competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be (a) a Person organized and doing business under the laws of the United
States or any state of the United States in good standing, shall be authorized
to do business in the State of California, shall be authorized under such laws
to conduct the shareholder services business, exercise corporate trust or stock
transfer powers, shall be subject to supervision or examination by federal or
state authorities and shall have at the time of its appointment as Rights Agent
a combined capital and surplus of at least $50,000,000 or (b) an Affiliate of a
Person described in clause (a). After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
the predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Preferred Stock and the Company Common Stock, and mail a notice thereof in
writing to the registered holders of the Rights Certificates (or certificates
for the Company Common Stock prior to the Distribution Date). Failure to give
any notice provided for

                                       30
<PAGE>

in this Section 21, however, or any defect therein, shall not affect the
legality or validity of the resignation or removal of the Rights Agent or the
appointment of the successor Rights Agent.

       SECTION 22. Issuance of New Rights Certificates. Notwithstanding any of
the provisions of this Agreement or the Rights to the contrary, the Company may,
at its option, issue new Rights Certificates evidencing Rights in such form as
may be approved by a majority of the Company's Board of Directors to reflect any
adjustment or change made in accordance with the provisions of this Agreement in
the Purchase Price or the number or kind or class of shares or other securities
or property that may be acquired upon exercise of the Rights. In addition, in
connection with the issuance or sale of shares of Company Common Stock following
the Distribution Date and prior to the Expiration Date, the Company (a) shall,
with respect to shares of Company Common Stock so issued or sold pursuant to the
exercise of stock options or under any employee plan or arrangement, or upon the
exercise, conversion or exchange of securities hereinafter issued by the
Company, and (b) may, in any other case, if deemed necessary or appropriate by a
majority of the Company's Board of Directors, issue Rights Certificates
evidencing the appropriate number of Rights in connection with such issuance or
sale; provided, however, that (i) no such Rights Certificate shall be issued if,
and to the extent that, the Company shall be advised by counsel that such
issuance would create a significant risk of material adverse tax consequences to
the Company or the Person to whom such Rights Certificate would be issued and
(ii) no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.

       SECTION 23. Redemption and Termination. (a) Subject to Section
28, the Company may, at its option, by action of a majority of the Company's
Board of Directors, at any time prior to the earlier of (i) the Close of
Business on the tenth Day following the Stock Acquisition Date or (ii) the Final
Expiration Date, redeem all but not less than all of the then-outstanding Rights
at a redemption price of $.01 per Right, as such amount may be appropriately
adjusted to reflect any spin-off or other similar transaction or any stock
split, stock dividend or similar transaction occurring after the date hereof
(such redemption price being the "Redemption Price"), and the Company may, at
its option, by action of a majority of the Company's Board of Directors, pay the
Redemption Price either in shares of Company Common Stock (based on the current
market price, determined in accordance with Section 11(d), of the shares of
Company Common Stock at the time of redemption) or cash. Subject to the
foregoing, the redemption of the Rights may be made effective at such time, on
such basis and with such conditions as the Board of Directors in its sole
discretion may establish.

       (b) Immediately upon the action of a majority of the Company's
Board of Directors ordering the redemption of the Rights, evidence of which
shall be filed with the Rights Agent, and without any further action and without
any notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price for
each Right so held. Promptly after the action of a majority of the Company's
Board of Directors ordering the redemption of the Rights, the Company shall give
prompt written notice of such redemption to the Rights Agent and the holders of
the then-outstanding Rights by mailing such notice to all such holders at each
holder's last address as it appears upon the registry books of the Rights Agent
or, prior to the Distribution Date, on the registry books of the transfer agent
for Company Common Stock. Any notice that is mailed in the manner herein
provided shall be

                                       31
<PAGE>

deemed given, whether or not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the Redemption Price
will be made.

       SECTION 24. Notice of Certain Events. (a) In case the Company
shall propose, at any time after the Distribution Date, (i) to pay any dividend
payable in stock of any class to the holders of Preferred Stock or to make any
other distribution to the holders of Preferred Stock (other than a regular
quarterly cash dividend out of earnings or retained earnings of the Company),
(ii) to offer to the holders of Preferred Stock rights or warrants to subscribe
for or to purchase any additional shares of Preferred Stock or shares of stock
of any class or any other securities, rights or options, (iii) to effect any
reclassification of the Preferred Stock (other than a reclassification involving
only the subdivision of outstanding shares of Preferred Stock), (iv) to effect
any consolidation or merger into or with any other Person (other than a
Subsidiary of the Company in a transaction that complies with Section 11(o)
other than in connection with any public offering of the capital stock of any of
the Company's subsidiaries or any spin-off or other similar transaction), or to
effect any sale or other transfer (or to permit one or more of its Subsidiaries
to effect any sale or other transfer), in one or more transactions, of more than
50% of the assets or earning power of the Company and its Subsidiaries (taken as
a whole) to any other Person or Persons (other than the Company and/or any of
its Subsidiaries in one or more transactions each of which complies with Section
11(o)) or (v) to effect the liquidation, dissolution or winding up of the
Company, then, in each such case, the Company shall give to the Rights Agent and
to each holder of a Rights Certificate (or, prior to the Distribution Date, to
each holder of certificates for Company Common Stock), to the extent feasible
and in accordance with Section 25, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend, distribution of
rights or warrants, or the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution or winding up is to take place
and the date of participation therein by the holders of the shares of Preferred
Stock, if any such date is to be fixed, and such notice shall be so given in the
case of any action covered by clause (i) or (ii) above at least 20 days prior to
the record date for determining holders of the shares of Preferred Stock for
purposes of such action, and in the case of any such other action, at least 20
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the shares of Preferred Stock, whichever
shall be the earlier; provided, however, no such notice shall be required
pursuant to this Section 24 if any Subsidiary of the Company effects a
consolidation or merger with or into, or effects a sale or other transfer of
assets or earning power to, any other Subsidiary of the Company.

       (b) In case any of the events set forth in Section 11(a)(iii)
shall occur, then, in any such case, the Company shall as soon as practicable
thereafter give to the Rights Agent and to each holder of a Rights Certificate,
to the extent feasible and in accordance with Section 25, a notice of the
occurrence of such event, which shall specify the event and the consequences of
the event to holders of Rights under Section 11(a)(iii).

       SECTION 25. Notices. All notices and other communications
provided for hereunder shall, unless otherwise stated herein, be in writing and
mailed or sent or delivered (including by facsimile transmission), if to the
Company, at its address at:

       PG&E Corporation
       One Market, Spear Tower

                                       32
<PAGE>

       Suite 2400
       San Francisco, CA  94105
       Attention:  Corporate Secretary
       Telecopy No.:  (415) 267-7257

       with a copy to:

       PG&E Corporation
       One Market, Spear Tower
       Suite 2400
       San Francisco, CA  94105
       Attention:  Bruce Worthington, Esq.
                   Senior Vice President and General Counsel
       Telecopy No.:  (415) 267-7257

and if to the Rights Agent, at its address at:

       Mellon Investor Services LLC
       235 Montgomery Street, 23rd Floor
       San Francisco, CA  94104
       Attention:  Relationship Manager
       Telecopy No.:  (415) 743-1423

       with a copy to:

       Mellon Investor Services LLC
       85 Challenger Road
       Ridgefield Park, NJ  07660
       Attention:  General Counsel

Notices or demands authorized or required by this Agreement to be given or made
by the Company or the Rights Agent to the holder of any Rights Certificate (or,
if prior to the Distribution Date, to the holder of certificates evidencing
shares of Company Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the transfer agent for the Company
Common Stock.

       SECTION 26. Supplements and Amendments. Prior to the Distribution Date
and subject to the penultimate sentence of this Section 26, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend any provision
of this Agreement without the approval of any holders of certificates evidencing
shares of Company Common Stock. From and after the Distribution Date and subject
to the penultimate sentence of this Section 26, the Company and the Rights Agent
shall, if the Company so directs, supplement or amend this Agreement without the
approval of any holders of Rights Certificates as contemplated by

                                       33
<PAGE>

Section 11(a)(ii) or in order (a) to cure any ambiguity, (b) to correct or
supplement any provision contained herein that may be defective or inconsistent
with any other provisions herein, (c) to shorten or lengthen any time period
hereunder or (d) to change or supplement the provisions hereunder in any manner
which the Company may deem necessary or desirable and which shall not adversely
affect the interests of the holders of Rights Certificates (other than an
Acquiring Person or an Affiliate or Associate of an Acquiring Person); provided,
however, that this Agreement may not be supplemented or amended to lengthen,
pursuant to clause (c) of this sentence, (i) subject to Section 30, a time
period relating to when the Rights may be redeemed at such time as the Rights
are not then redeemable or (ii) any other time period unless such lengthening is
for the purpose of protecting, enhancing or clarifying the rights of, and/or the
benefits to, the holders of Rights. Upon the delivery of a certificate from an
appropriate officer of the Company or, so long as any Person is an Acquiring
Person hereunder, from the majority of the Company's Board of Directors, that
states that the proposed supplement or amendment is in compliance with the terms
of this Section 26, the Rights Agent shall execute such supplement or amendment.
Prior to the Distribution Date, the interests of the holders of Rights shall be
deemed coincident with the interests of the holders of Company Common Stock.

     SECTION 27.    Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.

     SECTION 28.    Determinations and Actions by the Board of Directors, etc.
For all purposes of this Agreement, any calculation of the number of shares of
Company Common Stock outstanding at any particular time, including for purposes
of determining the particular percentage of such outstanding shares of Company
Common Stock of which any Person is the Beneficial Owner, shall be made in
accordance with the last sentence of Rule 13d-3(d)(1)(i) of the Exchange Act
Regulations as in effect on the date hereof. Except as otherwise specifically
provided herein, the Board of Directors of the Company shall have the exclusive
power and authority to administer this Agreement and to exercise all rights and
powers specifically granted to the Board of Directors of the Company or to the
Company, or as may be necessary or advisable in the administration of this
Agreement, including, without limitation, the right and power (i) to interpret
the provisions of this Agreement and (ii) to make all determinations deemed
necessary or advisable for the administration of this Agreement. All such
actions, calculations, interpretations and determinations (including, for
purposes of clause (y) below, all omissions with respect to the foregoing) that
are done or made by the Board of Directors in good faith shall (x) be final,
conclusive and binding on the Company, the Rights Agent, the holders of the
Rights and all other parties, and (y) not subject the Board of Directors of the
Company or any member thereof to any liability to the holders of the Rights. The
Rights Agent shall always be entitled to assume that the Company's Board of
Directors acted in good faith and shall be protected and incur no liability in
reliance theron.

     SECTION 29.    Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of shares of Company Common Stock) any
legal or equitable right, remedy or claim under this Agreement. This Agreement
shall be for the sole and exclusive benefit of the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of shares of Company Common Stock).

                                       34
<PAGE>

     SECTION 30.    Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and a majority of the
Company's Board of Directors determines in its good faith judgment that severing
the invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement and the Rights shall not then be redeemable, the right
of redemption set forth in Section 23 shall be reinstated and shall not expire
until the Close of Business on the tenth Business Day following the date of such
determination by a majority of the Company's Board of Directors.

     SECTION 31.    Governing Law. This Agreement, each Right and each Rights
Certificate issued hereunder shall be governed by, and construed in accordance
with, the laws of the State of California; provided, however, that all
provisions regarding the rights, duties and obligations of the Rights Agent
shall be governed by and construed in accordance with the laws of the State of
New York applicable to contracts made and to be performed entirely within such
State.

     SECTION 32.    Counterparts. This Agreement may be executed (including by
facsimile) in one or more counterparts, and by the different parties hereto in
separate counterparts, each of which when executed shall be deemed to be an
original, but all of which taken together shall constitute one and the same
instrument.

     SECTION 33.    Descriptive Headings. The headings contained in this
Agreement are for descriptive purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.

     SECTION 34.    Exchange. (a) (i) The Company may, at its option, at any
time after any person becomes an Acquiring Person, upon resolution adopted by a
majority of the Company's Board of Directors, exchange all or part of the then
outstanding and exercisable Rights (which shall not include Rights that have
become null and void pursuant Section 7(e)) for Units of Preferred Stock at an
exchange ratio of one Unit of Preferred Stock per Right, appropriately adjusted
to reflect any stock split, stock dividend or similar transaction occurring
after the date hereof (such exchange ratio being hereinafter referred to as the
"Section 34(a)(i) Exchange Ratio"). Notwithstanding the foregoing, the Company
may not effect such exchange at any time after any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan maintained by
the Company or any of its Subsidiaries, or any trustee or fiduciary with respect
to such plan acting in such capacity), together with all Affiliates and
Associates of such Person, becomes the Beneficial Owner of 50% or more of the
shares of Company Common Stock then outstanding.

     (ii)      The Company may, at its option, at any time after any person
becomes an Acquiring Person, upon resolution adopted by a majority of the
Company's Board of Directors, exchange all or part of the then outstanding and
exercisable Rights (which shall not include Rights that have become void
pursuant to Section 7(e)) for Units of Preferred Stock at an

                                       35
<PAGE>

exchange ratio specified in the following sentence, as appropriately adjusted to
reflect any stock split, stock dividend or similar transaction occurring after
the date hereof. Subject to such adjustment, each Right may be exchanged for
that number of Units of Preferred Stock obtained by dividing the Adjustment
Spread (as defined below) by the then-current market price (determined pursuant
to Section 11(d)) per Unit of Preferred Stock on the earlier of (i) the date on
which any Person becomes an Acquiring Person and (ii) the date on which a tender
or exchange offer by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan maintained by the Company or any of its
Subsidiaries or any trustee or fiduciary with respect to such plan acting in
such capacity) is first published or sent or given within the meaning of Rule
14d-4(a) of the Exchange Act Regulations or any successor rule, if upon
consummation thereof such Person would be the Beneficial Owner of 15% or more of
the shares of Company Common Stock then outstanding (such exchange ratio being
the "Section 34(a)(ii) Exchange Ratio"). The "Adjustment Spread" shall equal (x)
the aggregate market price on the date of such event of the number of Adjustment
Shares determined pursuant to Section 11(a)(iii), minus (y) the Purchase Price.
Notwithstanding the foregoing, the Company may not effect such exchange at any
time after any Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan maintained by the Company or any of its Subsidiaries,
or any trustee or fiduciary with respect to such plan acting in such capacity),
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of 50% or more of the shares of the Company Common Stock then
outstanding.

     Notwithstanding anything contained in this Section 34(a) to the contrary,
the Company may not exchange any Rights pursuant to this Section 34(a) unless at
the time of the action of the Board of Directors of the Company approving such
exchange.

     (b)       Immediately upon the action of a majority of the Company's Board
of Directors ordering the exchange of any Rights pursuant to Section 34(a) and
without any further action and without any notice, the right to exercise such
Rights shall terminate and the only right thereafter of a holder of such Rights
shall be to receive that number of Units of Preferred Stock equal to the number
of such Rights held by such holder multiplied by the Section 34(a)(i) Exchange
Ratio or Section 34(a)(ii) Exchange Ratio, as the case may be. The Company shall
promptly notify the Rights Agent in writing of such exchange and shall promptly
give public notice of any such exchange; provided, however, that the failure to
give, or any defect in, such notice shall not affect the validity of such
exchange. The Company promptly shall mail a notice of any such exchange to all
of the holders of such Rights at their last addresses as they appear upon the
registry books of the Rights Agent. Any notice that is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange shall state the method by which the
exchange of Units of Preferred Stock for Rights will be effected and, in the
event of any partial exchange, the number of Rights that will be exchanged. Any
partial exchange shall be effected pro rata based on the number of Rights (other
than Rights that have become null and void pursuant to Section 7(e)) held by
each holder of Rights.

     (c)       In the event that the number of shares of Preferred Stock that
are authorized by the Company's Articles of Incorporation but not outstanding or
reserved for issuance for purposes other than upon exercise of the Rights are
not sufficient to permit any exchange of Rights as contemplated in accordance
with this Section 34, the Company shall take

                                       36
<PAGE>

all such action as may be necessary to authorize additional shares of Preferred
Stock for issuance upon exchange of the Rights or make adequate provision to
substitute (1) cash, (2) Company Common Stock or other equity securities of the
Company, (3) debt securities of the Company, (4) other assets or (5) any
combination of the foregoing, having an aggregate value equal to the Adjustment
Spread, where such aggregate value has been determined by a majority of the
Company's Board of Directors.

     (d)       The Company shall not be required to issue fractions of Units of
Preferred Stock or to distribute certificates that evidence fractional Units. In
lieu of fractional Units, the Company may pay to the registered holders of
Rights Certificates at the time such Rights are exchanged as herein provided an
amount in cash equal to the same fraction of the current market price
(determined pursuant to Section 11(d)) of one Unit of Preferred Stock.

                                       37
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on their behalf as of the date first above written.

                                        PG&E CORPORATION

                                        By /s/ Robert D. Glynn, Jr.
                                           ------------------------------
                                           Name: Robert D. Glynn, Jr.
                                           Title: Chairman of the Board

Countersigned:

MELLON INVESTOR SERVICES LLC

By /s/ Joseph Thatcher
   ------------------------------
   Name: Joseph Thatcher
   Title: Assistant Vice President
<PAGE>

                                   EXHIBIT A

                          FORM OF RIGHTS CERTIFICATE

                                                                       EXHIBIT A
                                                                       ---------

Certificate No.                                                          Rights
              ------                                               ------

NOT EXERCISABLE AFTER THE EXPIRATION DATE (AS DEFINED IN THE RIGHTS AGREEMENT
REFERRED TO BELOW). THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY, ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES (SPECIFIED IN THE RIGHTS AGREEMENT), RIGHTS BENEFICIALLY OWNED BY
ACQUIRING PERSONS (AS DEFINED IN THE RIGHTS AGREEMENT) OR ANY SUBSEQUENT HOLDER
OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS
CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH
TERMS ARE DEFINED IN THE RIGHTS AGREEMENT REFERRED TO BELOW). ACCORDINGLY, THIS
RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN
THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF THE RIGHTS AGREEMENT.]*

                              RIGHTS CERTIFICATE
                              ------------------

                               PG&E CORPORATION

     This certifies that, or registered assigns, is the registered
holder of the number of Rights set forth above, each of which entitles the
registered holder thereof, subject to the terms and conditions of the Rights
Agreement dated as of December 22, 2000 (the "Rights Agreement"; terms
defined therein are used herein with the same meaning unless otherwise defined
herein) between PG&E Corporation, a California corporation (the "Company"), and
Mellon Investor Services L.L.C., a New Jersey limited liability company, as
Rights Agent (which term shall include any successor Rights Agent under the
Rights Agreement), to purchase from the Company at any time after the
Distribution Date and prior to the Expiration Date at the office of the Rights
Agent, one one-hundredth of a fully paid and non-assessable share of Series A
Preferred Stock, par value $100 per share (the "Preferred Stock"), of the
Company at the Purchase Price initially of $95 per one one-hundredth share (each
such one one-hundredth of a share being a "Unit") of Preferred Stock, upon
presentation and surrender of this Rights Certificate with the Election to
Purchase and related certificate duly executed. The number of Rights evidenced
by this Rights Certificate (and the number of Units which may be purchased upon
exercise thereof) set forth above, and the Purchase Price per Unit set forth
above shall be subject to adjustment in certain events as provided in the Rights
Agreement.

     Upon the occurrence of a Section 11(a)(iii) Event or Section 13
Event, if the Rights evidenced by this Rights Certificate are beneficially owned
by an Acquiring Person or an Affiliate or Associate of any such Acquiring Person
or, under certain circumstances described in

--------
*     The portion of the legend in brackets shall be inserted only if applicable
      and shall replace the preceding sentence.
<PAGE>

                                       2

the Rights Agreement, a transferee of any such Acquiring Person, Associate or
Affiliate, such Rights shall become null and void and no holder hereof shall
have any right with respect to such Rights from and after the occurrence of such
Section 11(a)(iii) Event or Section 13 Event.

     In certain circumstances described in the Rights Agreement, the Rights
evidenced hereby may entitle the registered holder thereof to purchase capital
stock of an entity other than the Company or to receive common stock, cash or
other assets, all as provided in the Rights Agreement.

     This Rights Certificate is subject to all of the terms and conditions of
the Rights Agreement, which terms and conditions are hereby incorporated herein
by reference and made a part hereof and to which Rights Agreement reference is
hereby made for a full description of the rights, limitations of rights,
obligations, duties and immunities hereunder of the Rights Agent, the Company
and the holders of the Rights Certificates. Copies of the Rights Agreement are
on file at the principal office of the Company and are available from the
Company upon written request.

     This Rights Certificate, with or without other Rights Certificates, upon
surrender at the office of the Rights Agent designated for such purpose, may be
exchanged for another Rights Certificate or Rights Certificates of like tenor
and date evidencing an aggregate number of Rights equal to the aggregate number
of Rights evidenced by the Rights Certificate or Rights Certificates
surrendered. If this Rights Certificate shall be exercised in part, the
registered holder shall be entitled to receive, upon surrender hereof, another
Rights Certificate or Rights Certificates for the number of whole Rights not
exercised.

     Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate may be redeemed by the Company under certain circumstances at
its option at a redemption price of $.01 per Right, payable at the Company's
option in cash or in common stock of the Company, subject to adjustment in
certain events as provided in the Rights Agreement.

     No fractional shares of Preferred Stock will be issued upon the exercise of
any Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-hundredth of a share of Preferred Stock), but in lieu
thereof a cash payment will be made, as provided in the Rights Agreement.

     No holder of this Rights Certificate, as such, shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of Preferred Stock or
of any other securities which may at any time be issuable upon the exercise
hereof, nor shall anything contained in the Rights Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
shareholder of the Company or any right to vote for the election of directors or
upon any matter submitted to shareholders at any meeting thereof, or to give or
withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting shareholders (except as provided in the Rights
Agreement), or to receive dividends or subscription rights, or otherwise, until
the Rights evidenced by this Rights Certificate shall have been exercised as
provided in the Rights Agreement.
<PAGE>

                                       3

     This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.

     WITNESS the facsimile signature of the proper officers of the Company and
its corporate seal. Dated as of, -----------------  ---- ---------.

ATTEST:                                         PG&E CORPORATION

By ____________________                         By _______________________
   Name:                                           Name:
   Title:                                          Title:

Countersigned:

MELLON INVESTOR SERVICES L.L.C.,
as Rights Agent

By ____________________
   Name:
   Title:
<PAGE>

                  Form of Reverse Side of Rights Certificate

                              FORM OF ASSIGNMENT
                              ------------------

                  (To be executed by the registered holder if
                      such holder desires to transfer the
                              Rights Certificate)

FOR VALUE RECEIVED ____________________________________________________
                         (Please print name of registered holder)

hereby sells, assigns and transfers unto

___________________________________________________________________________
                 (Please print name and address of transferee)

this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint __________________, Attorney,
to transfer the within Rights Certificate on the books of the within-named
Company, with full power of substitution.

Dated:______________________ ___, ________

                                               _______________________________
                                               Signature

Signature Guaranteed:
<PAGE>

                                  CERTIFICATE

     The undersigned hereby certifies by checking the appropriate boxes
     that:

     (1) this Rights Certificate [_] is [_] is not being sold, assigned
and transferred by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Acquiring Person (as such terms are
defined pursuant to the Rights Agreement); and

     (2) after due inquiry and to the best knowledge of the undersigned,
it [_] did [_] did not acquire the Rights evidenced by this Rights Certificate
from any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.

Dated:____________________,  ____  _______      ________________________________
                                                Signature

Signature Guaranteed:

        ______________________________________________________________

                                    NOTICE
                                    ------

     The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.

     In the event the certification set forth above is not completed, the
Company will deem the beneficial owner of the Rights evidenced by this Rights
Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as
defined in the Rights Agreement) and, in the case of an Assignment, will affix a
legend to that effect on any Rights Certificates issued in exchange for this
Rights Certificate.
<PAGE>

                         FORM OF ELECTION TO PURCHASE
                         ----------------------------

                   (To be executed if the registered holder
                    desires to exercise Rights represented
                          by the Rights Certificate)

To:  PG&E CORPORATION

         The undersigned hereby irrevocably elects to exercise Rights
represented by this Rights Certificate to purchase the Units of Preferred
Stock issuable upon the exercise of the Rights (or such other securities
of the Company or of any other person or other property which may be
issuable upon the exercise of the Rights) and requests that certificates
for such Units be issued in the name of and delivered to:

--------------------------------------------------------------------------
(Please print name and address)
--------------------------------------------------------------------------

Please insert social security
or other identifying number:  ____________________________

     If such number of Rights shall not be all the Rights evidenced by
this Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:

--------------------------------------------------------------------------
(Please print name and address)
--------------------------------------------------------------------------

Please insert social security
or other identifying number:  ____________________________

Dated: ____________________ ____, ________

                                                ________________________
                                                Signature

Signature Guaranteed:
<PAGE>

                                  CERTIFICATE
                                  -----------

     The undersigned hereby certifies by checking the appropriate boxes
     that:

     (1) the Rights evidenced by this Rights Certificate [ ] are [ ] are
not beneficially owned by an Acquiring Person or an Affiliate or an Associate
thereof (as defined in the Rights Agreement); and

     (2) after due inquiry and to the best knowledge of the undersigned,
the undersigned [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any person who is, was or subsequently became an Acquiring
Person or an Affiliate or Associate thereof.

Dated: ____________________ ____, ________     _________________________________
                                               Signature

Signature Guaranteed:

      ______________________________________________________________

                                    NOTICE
                                    ------

     The signature in the foregoing Election to Purchase and Certificate
must conform to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.

     In the event the certification set forth above is not completed, the
Company will deem the beneficial owner of the Rights evidenced by this Rights
Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as
defined in the Rights Agreement) and, in the case of an Assignment, will affix a
legend to that effect on any Rights Certificates issued in exchange for this
Rights Certificate.
<PAGE>

                                                                       EXHIBIT B
                                                                       ---------

                         SUMMARY OF RIGHTS TO PURCHASE
                                PREFERRED STOCK

          On December 20, 2000, the Board of Directors of PG&E Corporation (the
"Corporation") declared a distribution of one Right for each outstanding share
 -----------
of Common Stock, no par value, of the Corporation (the "Corporation Common
                                                        ------------------
Stock"), to shareholders of record at the close of business on January 2, 2001
-----
(the "Record Date") and for each share of Corporation Common Stock issued by the
      -----------
Corporation thereafter and prior to the Distribution Date.  Each Right entitles
the registered holder, subject to the terms of the Rights Agreement (as defined
below), to purchase from the Corporation one one-hundredth of a share (a "Unit")
                                                                          ----
of Series A Preferred Stock, par value $100 per share (the "Preferred Stock"),
                                                            ---------------
at a Purchase Price of $95 per Unit, subject to adjustment.  The Purchase Price
is payable in cash or by certified or bank check payable to the order of the
Corporation or by wire transfer to the account of the Corporation (provided a
notice of such wire transfer is given by the holder of the related Right to the
Rights Agent).  The description and terms of the Rights are set forth in a
Rights Agreement between the Corporation and Mellon Investor Services LLC, a New
Jersey limited liability company, as Rights Agent (the "Rights Agreement").
                                                        ----------------

          Copies of the Rights Agreement and the form of Certificate of
Determination for the Preferred Stock have been filed with the Securities and
Exchange Commission as exhibits to a Registration Statement on Form 8-A dated
December 22, 2000 (the "Form 8-A").  Copies of the Rights Agreement and the
                        --------
Certificate of Determination are available free of charge from the Corporation.
This summary description of the Rights and the Preferred Stock does not purport
to be complete and is qualified in its entirety by reference to all the
provisions of the Rights Agreement and the Certificate of Determination,
including the definitions therein of certain terms, which Rights Agreement and
Certificate of Determination are incorporated herein by reference.

The Rights Agreement
--------------------

          Initially, the Rights will attach to all certificates representing
shares of outstanding Corporation Common Stock, and no separate Rights
Certificates will be distributed.  The Rights will separate from the Corporation
Common Stock and the "Distribution Date" will occur upon the earlier of (i) 10
                      -----------------
days following a public announcement (the date of such announcement being the
"Stock Acquisition Date") that a person or group of affiliated or associated
 ----------------------
persons (other than the Corporation, any subsidiary of the Corporation or any
employee benefit plan of the Corporation or such subsidiary) (an "Acquiring
                                                                  ---------
Person") has acquired, obtained the right to acquire, or otherwise obtained
------
beneficial ownership of 15% or more of the then-outstanding shares of
Corporation Common Stock, and (ii) 10 business days (or such later date as may
be determined by action of the Board of Directors prior to such time as any
person becomes an Acquiring Person) following the commencement of a tender offer
or exchange offer that would result in a person or group beneficially owning 15%
or more of the then-outstanding shares of Corporation Common Stock.  Until the
Distribution Date, (i) the Rights will be evidenced by Corporation Common Stock
certificates and will be transferred with and only with such Corporation Common
Stock certificates, (ii) new Corporation Common Stock certificates issued after
the Record Date will contain a notation incorporating the Rights Agreement by
reference and (iii) the surrender for transfer of any certificates representing
outstanding Corporation Common Stock will also constitute the transfer of the
Rights associated with the Corporation Common Stock represented by such
certificates.

          The Rights are not exercisable until the Distribution Date and will
expire at the close of business on the tenth anniversary of the Rights
Agreement, unless earlier redeemed by the Corporation as described below.

          As soon as practicable after the Distribution Date, Rights
Certificates will be mailed to holders of record of Corporation Common Stock as
of the close of business on the Distribution Date and, thereafter, the separate
Rights Certificates alone will represent the Rights.
<PAGE>

          In the event that (i) the Corporation is the surviving corporation in
a merger with an Acquiring Person and shares of Corporation Common Stock shall
remain outstanding, (ii) a Person becomes an Acquiring Person, (iii) an
Acquiring Person engages in one or more "self-dealing" transactions as set forth
in the Rights Agreement, or (iv) during such time as there is an Acquiring
Person, an event occurs which results in such Acquiring Person's ownership
interest being increased by more than 1% (e.g., by means of a recapitalization)
(each such event being a "Section 11(a)(iii) Event"), then, in each such case,
                          ------------------------
each holder of a Right will thereafter have the right to receive, upon exercise,
Units of Preferred Stock (or, in certain circumstances, Corporation Common
Stock, cash, property or other securities of the Corporation) having a value
equal to two times the exercise price of the Right.  The exercise price is the
Purchase Price multiplied by the number of Units of Preferred Stock issuable
upon exercise of a Right prior to the events described in this paragraph.
Notwithstanding any of the foregoing, following the occurrence of any of the
events set forth in this paragraph, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring Person will be null and void.

          In the event that, at any time following the Stock Acquisition Date,
(i) the Corporation is acquired in a merger (other than a merger described in
the preceding paragraph) or other business combination and the Corporation is
not the surviving corporation, (ii) any Person consolidates or merges with the
Corporation and all or part of the Corporation Common Stock is converted or
exchanged for securities, cash or property of any other Person or (iii) 50% or
more of the Corporation's assets or earning power is sold or transferred, each
holder of a Right (except Rights which previously have been voided as described
above) shall thereafter have the right to receive, upon exercise, common stock
of the ultimate parent of the Acquiring Person having a value equal to two times
the exercise price of the Right.

          The Purchase Price payable, and the number of Units of Preferred Stock
issuable, upon exercise of the Rights are subject to adjustment from time to
time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Preferred Stock, (ii) if
holders of the Preferred Stock are granted certain rights or warrants to
subscribe for Preferred Stock or convertible securities at less than the current
market price of the Preferred Stock, or (iii) upon the distribution to the
holders of the Preferred Stock of evidences of indebtedness, cash or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).

          With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price.  The Corporation is not required to issue fractional Units.  In lieu
thereof, an adjustment in cash may be made based on the market price of the
Preferred Stock prior to the date of exercise.

          At any time prior to the earlier of (i) ten business days following
the Stock Acquisition Date or (ii) the Final Expiration Date, a majority of the
Corporation's Board of Directors may redeem the Rights in whole, but not in
part, at a price of $.01 per Right (subject to adjustment in certain events)
(the "Redemption Price"), payable, at the election of such majority of the
      ----------------
Corporation's Board of Directors, in cash or shares of Corporation Common Stock.
Immediately upon the action of a majority of the Corporation's Board of
Directors ordering the redemption of the Rights, the Rights will terminate and
the only remaining right of the holders of Rights will be to receive the
Redemption Price.

          The Board of Directors, at its option, may exchange each Right for (i)
one Unit of Preferred Stock or (ii) such number of Units of Preferred Stock as
will equal (x) the difference between the aggregate market price of the number
of Units of Preferred Stock to be received upon a Section 11(a)(iii) Event and
the purchase price set forth in the Rights Agreement, divided by (y) the market
price per Unit of Preferred Stock upon a Section 11(a)(iii) Event.

          Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Corporation, including, without limitation, the
right to vote or to receive dividends.  While the distribution of the Rights
will not be taxable to shareholders or to the Corporation, shareholders may,
depending upon the circumstances, recognize taxable income in the event that the
Rights become exercisable for Units of Preferred Stock (or other consideration).
<PAGE>

          Any of the provisions of the Rights Agreement may be amended without
the approval of the holders of Corporation Common Stock at any time prior to the
Distribution Date.  After the Distribution Date, the provisions of the Rights
Agreement may be amended in order to cure any ambiguity, defect or
inconsistency, to make changes which do not adversely affect the interests of
the holders of Rights (excluding the interests of any Acquiring Person), or to
shorten or lengthen any time period under the Rights Agreement; provided,
however, that no amendment to adjust the time period governing redemption shall
be made at such time as the Rights are not redeemable.

Description of Preferred Stock
------------------------------

          The Units of Preferred Stock that may be acquired upon exercise of the
Rights will be nonredeemable and subordinate to any other shares of preferred
stock that may be issued by the Corporation.

          Each Unit of Preferred Stock will have a minimum preferential
quarterly dividend of $.01 per Unit or any higher per share dividend declared on
the Corporation Common Stock.

          In the event of liquidation, the holder of a Unit of Preferred Stock
will receive a preferred liquidation payment equal to the greater of $1.00 per
Unit or the per share amount paid in respect of a share of Corporation Common
Stock.

          Each Unit of Preferred Stock will have one vote, voting together with
the Corporation Common Stock.  The holders of Units of Preferred Stock, voting
as a separate class, shall be entitled to elect two directors if dividends on
the Preferred Stock are in arrears for six fiscal quarters.

          In the event of any merger, consolidation or other transaction in
which shares of Corporation Common Stock are exchanged, each Unit of Preferred
Stock will be entitled to receive the per share amount paid in respect of each
share of Corporation Common Stock.

          The rights of holders of the Preferred Stock to dividends, liquidation
and voting, and in the event of mergers and consolidations, are protected by
customary antidilution provisions.

          Because of the nature of the Preferred Stock's dividend, liquidation
and voting rights, the economic value of one Unit of Preferred Stock that may be
acquired upon the exercise of each Right is expected to approximate the economic
value of one share of Corporation Common Stock.
<PAGE>

                                                                       EXHIBIT C
                                                                       ---------

                  CERTIFICATE OF DETERMINATION OF PREFERENCES

                       --------------------------------

                        Pursuant to Section 401 of the
                      California General Corporation Law

                       --------------------------------

ROBERT D. GLYNN, JR. and LESLIE H. EVERETT certify that:

          1.  They are the Chairman of the Board, Chief Executive Officer, and
President, and the Vice President and Corporate Secretary, respectively, of PG&E
Corporation, a California corporation.

          2.  Pursuant to authority conferred upon the Board of Directors of the
Corporation by its Restated Articles of Incorporation (the "Articles"), and,
                                                            --------
pursuant to the provisions of Section 401 of the California General Corporation
Law, said Board of Directors, at a duly called meeting held on December 20,
2000, at which a quorum was present and acted throughout, adopted the following
resolutions, which resolutions remain in full force and effect on the date
hereof creating a series of 5,000,000 shares of Preferred Stock having a par
value of $100 per share, designated as Series A Preferred Stock (the "Series A
                                                                      --------
Preferred Stock") out of the class of 85,000,000 shares of preferred stock (the
---------------
"Preferred Stock"):
 ---------------

          RESOLVED, that pursuant to the authority vested in the Board of
Directors in accordance with the provisions of the Articles, the Board of
Directors does hereby create, authorize and provide for the issuance of the
Series A Preferred Stock having the voting powers, designation, relative,
participating, optional and other special rights, preferences and
qualifications, limitations and restrictions thereof that are set forth as
follows:

          Section 1.  Designation and Amount.  The shares of such series shall
                      ----------------------
be designated as "Series A Preferred Stock" and the number of shares
constituting such series shall be 5,000,000.

          Section 2.  Dividends and Distributions.  (A)  Subject to the prior
                      ---------------------------
and superior rights of the holders of any shares of any other series of
Preferred Stock or any other shares of preferred stock of the Corporation
ranking prior and superior to the shares of Series A Preferred Stock with
respect to dividends, each holder of one one-hundredth (1/100) of a share (a
"Unit") of Series A Preferred Stock shall be entitled to receive, when, as and
 ----
if declared by the Board of Directors out of funds legally available for that
purpose, (i) quarterly dividends payable in cash on the last day of March, June,
September and December in each year (each such date being a "Quarterly Dividend
                                                             ------------------
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
------------
the first issuance of such Unit of Series A Preferred Stock, in an amount per
Unit (rounded to the nearest cent) equal to the greater of (a) $.01 or (b)
subject to the provision for adjustment hereinafter set forth, the aggregate per
share amount of all cash dividends declared on shares of the Common Stock since
the immediately preceding Quarterly Dividend Payment Date, or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of a Unit of
Series A Preferred Stock, and (ii) subject to the provision for adjustment
hereinafter set forth, quarterly distributions (payable in kind) on each
Quarterly Dividend Payment Date in an amount per Unit equal to the aggregate per
share amount of all non-cash dividends or other distributions (other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock, by reclassification or otherwise) declared on shares of
Common Stock since the immediately preceding Quarterly Dividend Payment Date, or
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of a Unit of Series A Preferred Stock.  In the event that the
Corporation shall at any time after December 20, 2000 (the "Rights Declaration
                                                            ------------------
Date") (i) declare any dividend on outstanding shares of Common Stock payable in
----
shares of Common Stock, (ii) subdivide outstanding shares of Common Stock or
(iii) combine outstanding shares of Common Stock into a smaller number of
shares, then in each such case the amount to which the holder of a Unit of
Series A Preferred Stock was entitled immediately prior to such event pursuant
to the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which shall be the number of shares of Common Stock
that are outstanding immediately after such event and the denominator of which
<PAGE>

shall be the number of shares of Common Stock that were outstanding immediately
prior to such event.

          (B) The Corporation shall declare a dividend or distribution on Units
of Series A Preferred Stock as provided in paragraph (A) above immediately after
it declares a dividend or distribution on the shares of Common Stock (other than
a dividend payable in shares of Common Stock); provided, however, that, in the
                                               --------  -------
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $.01 per Unit on the
Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.

          (C) Dividends shall begin to accrue and shall be cumulative on each
outstanding Unit of Series A Preferred Stock from the Quarterly Dividend Payment
Date next preceding the date of issuance of such Unit of Series A Preferred
Stock, unless the date of issuance of such Unit is prior to the record date for
the first Quarterly Dividend Payment Date, in which case, dividends on such Unit
shall begin to accrue from the date of issuance of such Unit, or unless the date
of issuance is a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of Units of Series A Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue and
be cumulative from such Quarterly Dividend Payment Date.  Accrued but unpaid
dividends shall not bear interest. Dividends paid on Units of Series A Preferred
Stock in an amount less than the aggregate amount of all such dividends at the
time accrued and payable on such Units shall be allocated pro rata on a Unit-by-
Unit basis among all Units of Series A Preferred Stock at the time outstanding.
The Board of Directors may fix a record date for the determination of holders of
Units of Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be no more than 30 days
prior to the date fixed for the payment thereof.

          Section 3.  Voting Rights.  The holders of Units of Series A Preferred
                      -------------
Stock shall have the following voting rights:

          (A) Subject to the provision for adjustment hereinafter set forth,
each Unit of Series A Preferred Stock shall entitle the holder thereof to one
vote on all ma tters submitted for a vote of the shareholders of the
Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on outstanding shares of Common Stock
payable in shares of Common Stock, (ii) subdivide outstanding shares of Common
Stock or (iii) combine the outstanding shares of Common Stock into a smaller
number of shares, then in each such case the number of votes per Unit to which
holders of Units of Series A Preferred Stock were entitled immediately prior to
such event shall be adjusted by multiplying such number by a fraction the
numerator of which shall be the number of shares of Common Stock outstanding
immediately after such event and the denominator of which shall be the number of
shares of Common Stock that were outstanding immediately prior to such event.

          (B) Except as otherwise provided herein or by law, the holders of
Units of Series A Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all matters submitted to a vote of
shareholders of the Corporation.

          (C) (i)  If, at any time, dividends on any Units of Series A Preferred
Stock shall be in arrears in an amount equal to six quarterly dividends thereon,
then during the period (a "default period") from the occurrence of such event
                           --------------
until such time as all accrued and unpaid dividends for all previous quarterly
dividend periods and for the current quarterly dividend period on all Units of
Series A Preferred Stock then outstanding shall have been declared and paid or
set apart for payment, all holders of Units of Series A Preferred Stock, voting
separately as a class, shall have the right to elect two Directors.

              (ii) During any default period, such voting rights of the holders
of Units of Series A Preferred Stock may be exercised initially at a special
meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any
annual meeting of shareholders, and thereafter at annual meetings of
shareholders, provided that such voting rights may not be exercised at any
meeting unless one-third of the outstanding Units of Preferred Stock shall be
present at such meeting in person or by proxy. The absence of a quorum of the
holders of Common Stock shall not affect the exercise by the holders of Units of
Series A Preferred Stock of such rights. At any meeting at which the holders of
Units of Series A Preferred Stock shall exercise such voting rights initially
during an existing default period, they
<PAGE>

shall have the right, voting separately as a class, to elect Directors to fill
up to two vacancies in the Board of Directors, if any such vacancies may then
exist, or, if such right is exercised at an annual meeting, to elect two
Directors. After the holders of Units of Series A Preferred Stock shall have
exercised their right to elect Directors during any default period, the number
of Directors shall not be increased or decreased except as approved by a vote of
the holders of Units of Series A Preferred Stock as herein provided or pursuant
to the rights of any equity securities ranking senior to the Series A Preferred
Stock.

          (iii)  Unless the holders of Series A Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any shareholder or shareholders
owning in the aggregate not less than 10% of the total number of the Units of
Series A Preferred Stock outstanding may request, the calling of a special
meeting of the holders of Units of Series A Preferred Stock, which meeting shall
thereupon be called by the Secretary of the Corporation. Notice of such meeting
and of any annual meeting at which holders of Units of Series A Preferred Stock
are entitled to vote pursuant to this paragraph (C)(iii) shall be given to each
holder of record of Units of Series A Preferred Stock by mailing a copy of such
notice to him at his last address as the same appears on the books of the
Corporation. Such meeting shall be called for a time not earlier than 20 days
and not later then 60 days after such order or request, or, in default of the
calling of such meeting within 60 days after such order or request, such meeting
may be called on similar notice by any shareholder or shareholders owning in the
aggregate not less than 10% of the total number of outstanding Units of Series A
Preferred Stock. Notwithstanding the provisions of this paragraph (C)(iii), no
such special meeting shall be called during the 60 days immediately preceding
the date fixed for the next annual meeting of the shareholders.

          (iv)   During any default period, the holders of shares of Common
Stock and Units of Series A Preferred Stock, and other classes or series of
stock of the Corporation, if applicable, shall continue to be entitled to elect
all the Directors until holders of the Units of Series A Preferred Stock shall
have exercised their right to elect, voting as a separate class, two Directors,
after the exercise of which right (x) the Directors so elected by the holders of
Units of Series A Preferred Stock shall continue in office until their
successors shall have been elected by such holders or until the expiration of
the default period, and (y) any vacancy in the Board of Directors may (except as
provided in paragraph (C)(ii) of this Section 3) be filled by vote of a majority
of the remaining Directors theretofore elected by the holders of the class of
capital stock which elected the Director whose office shall have become vacant.
References in this paragraph (C) to Directors elected by the holders of a
particular class of capital stock shall include Directors elected by such
Directors to fill vacancies as provided in clause (y) of the foregoing sentence.

          (v)    Immediately upon the expiration of a default period, (x) the
right of the holders of Units of Series A Preferred Stock as a separate class to
elect Directors shall cease, (y) the term of any Directors elected by the
holders of Units of Series A Preferred Stock as a separate class shall
terminate, and (z) the number of Directors shall be such number as may be
provided for in the Articles or Bylaws of the Company (the "Bylaws").  Any
                                                            ------
vacancies in the Board of Directors effected by the provisions of clauses (y)
and (z) in the preceding sentence may be filled by a majority of the remaining
Directors.

          (vi)   The provisions of this paragraph (C) shall govern the election
of Directors by holders of Units of Preferred Stock during any default period
notwithstanding any provisions of the Articles or the Bylaws to the contrary.

          (D)    Except as set forth herein, holders of Units of Series A
Preferred Stock shall have no special voting rights and their consents shall not
be required (except to the extent they are entitled to vote with holders of
shares of Common Stock as set forth herein) for taking any corporate action.

          Section 4.  Certain Restrictions.  (A)  Whenever quarterly dividends
                      --------------------
or other dividends or distributions payable on Units of Series A Preferred Stock
as provided in Section 2 are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on outstanding
Units of Series A Preferred Stock shall have been paid in full, the Corporation
shall not:

          (i)  declare or pay dividends on, make any other distributions on, or
     redeem or purchase or otherwise acquire for consideration any shares of
     junior stock;
<PAGE>

          (ii)   declare or pay dividends on or make any other distributions on
     any shares of parity stock, except dividends paid ratably on Units of
     Series A Preferred Stock and shares of all such parity stock on which
     dividends are payable or in arrears in proportion to the total amounts to
     which the holders of such Units and all such shares are then entitled;

          (iii)  redeem or purchase or otherwise acquire for consideration
     shares of any parity stock, provided, however, that the Corporation may at
                                 --------  -------
     any time redeem, purchase or otherwise acquire shares of any such parity
     stock in exchange for shares of any junior stock;

          (iv)   purchase or otherwise acquire for consideration any Units of
     Series A Preferred Stock, except in accordance with a purchase offer made
     in writing or by publication (as determined by the Board of Directors) to
     all holders of such Units.

          (B)    The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.

          Section 5.  Reacquired Shares.  Any Units of Series A Preferred Stock
                      -----------------
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof.  All such
Units shall, upon their cancellation, become authorized but unissued Units of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.

          Section 6.  Liquidation, Dissolution or Winding Up.  (A)  Upon any
                      --------------------------------------
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (i) to the holders of shares of
junior stock unless the holders of Units of Series A Preferred Stock shall have
received, subject to adjustment as hereinafter provided in paragraph (B), the
greater of either (a) $1.00 per Unit plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not earned or declared, up until
the date of such payment, or (b) the amount equal to the aggregate per share
amount to be distributed to holders of shares of Common Stock, or (ii) to the
holders of shares of parity stock, unless simultaneously therewith distributions
are made ratably on Units of Series A Preferred Stock and all other shares of
such parity stock in proportion to the total amounts to which the holders of
Units of Series A Preferred Stock are entitled under clause (i)(a) of this
sentence and to which the holders of shares of such parity stock are entitled,
in each case upon such liquidation, dissolution or winding up.

          (B)    In the event the Corporation shall, at any time after the
Rights Declaration Date, (i) declare any dividend on outstanding shares of
Common Stock payable in shares of Common Stock, (ii) subdivide outstanding
shares of Common Stock, or (iii) combine outstanding shares of Common Stock into
a smaller number of shares, then in each such case the aggregate amount to which
holders of Units of Series A Preferred Stock were entitled immediately prior to
such event pursuant to clause (i)(b) of paragraph (A) of this Section 6 shall be
adjusted by multiplying such amount by a fraction the numerator of which shall
be the number of shares of Common Stock that are outstanding immediately after
such event and the denominator of which shall be the number of shares of Common
Stock that were outstanding immediately prior to such event.

          Section 7.  Consolidation, Merger, etc.  In case the Corporation shall
                      --------------------------
enter into any consolidation, merger, combination or other transaction in which
the shares of common stock are exchanged for or converted into other stock or
securities, cash and/or any other property, then in any such case Units of
Series A Preferred Stock shall at the same time be similarly exchanged for or
converted into an amount per Unit (subject to the provision for adjustment
hereinafter set forth) equal to the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is converted or exchanged.  In the event
the Corporation shall at any time after the Rights Declaration Date (i) declare
any dividend on outstanding shares of Common Stock payable in shares of Common
Stock, (ii) subdivide outstanding shares of Common Stock, or (iii) combine
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the immediately preceding
<PAGE>

sentence with respect to the exchange or conversion of Units of Series A
Preferred Stock shall be adjusted by multiplying such amount by a fraction the
numerator of which shall be the number of shares of Common Stock that are
outstanding immediately after such event and the denominator of which shall be
the number of shares of Common Stock that were outstanding immediately prior to
such event.

          Section 8.   Redemption.  The Units of Series A Preferred Stock shall
                       ----------
not be redeemable.

          Section 9.   Ranking.  The Units of Series A Preferred Stock shall
                       -------
rank junior to all other series of the Preferred Stock and to any other class of
preferred stock that hereafter may be issued by the Corporation as to the
payment of dividends and the distribution of assets, unless the terms of any
such series or class shall provide otherwise.

          Section 10.  Amendment.  The Articles, including, without limitation,
                       ---------
this resolution, shall not hereafter be amended, either directly or indirectly,
or through merger or consolidation with any other corporation or corporations in
any manner that would alter or change the powers, preferences or special rights
of the Series A Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of a majority or more of the outstanding Units
of Series A Preferred Stock, voting separately as a class.

          Section 11.  Fractional Shares.  The Series A Preferred Stock may be
                       -----------------
issued in Units or other fractions of a share, which Units or fractions shall
entitle the holder, in proportion to such holder's fractional shares, to
exercise voting rights, receive dividends, participate in distributions and to
have the benefit of all other rights of holders of Series A Preferred Stock.

          Section 12.  Certain Definitions.  As used herein with respect to the
                       -------------------
Series A Preferred Stock, the following terms shall have the following meanings:

          (A) The term "Common Stock" shall mean the class of stock designated
                        ------------
as the common stock, no par value per share, of the Corporation at the date
hereof or any other class of stock resulting from successive changes or
reclassification of such common stock.

          (B) The term "junior stock" (i) as used in Section 4 shall mean the
                        ------------
Common Stock and any other class or series of capital stock of the Corporation
hereafter authorized or issued over which the Series A Preferred Stock has
preference or priority as to the payment of dividends and (ii) as used in
Section 6 shall mean the Common Stock and any other class or series of capital
stock of the Corporation over which the Series A Preferred Stock has preference
or priority in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.

          (C) The term "parity stock" (i) as used in Section 4, shall mean any
                        ------------
class or series of stock of the Corporation hereafter authorized or issued
ranking pari passu with the Series A Preferred Stock as to the payment of
        ---- -----
dividends and (ii) as used in Section 6, shall mean any class or series of
capital stock ranking pari passu with the Series A Preferred Stock in the
                      ---- -----
distribution of assets upon any liquidation, dissolution or winding up of the
Corporation.

          3.  The number of shares constituting the Series A Preferred Stock is
5,000,000.

          4.  None of the Series A Preferred Stock has been issued.
<PAGE>

          We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this Certificate are true and
correct of our own knowledge.

Date:  December 22, 2000

                              _______________________________
                              Robert D. Glynn, Jr.
                              Chairman of the Board,
                              Chief Executive Officer, and President

                              _______________________________
                              Leslie H. Everett
                              Vice President and
                              Corporate Secretary<PAGE>

                                                                    EXHIBIT 10.2

      ==================================================================

                                CREDIT AGREEMENT

                                     among

                                PG&E CORPORATION
                                  as Borrower,

                           the LENDERS party hereto,

                      GENERAL ELECTRIC CAPITAL CORPORATION
                                as Co-Arranger,

                          LEHMAN COMMERCIAL PAPER INC.
                            as Administrative Agent

                                      and

                              LEHMAN BROTHERS INC.

                       as Lead Arranger and Book Manager

                    _______________________________________

                           Dated as of March 1, 2001

                    _______________________________________

      ==================================================================
<PAGE>

                               TABLE OF CONTENTS
                               -----------------
<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
SECTION 1.  DEFINITIONS AND RULES OF INTERPRETATION...................       1

        1.1  Defined Terms............................................       1
        1.2  Rules of Interpretation..................................       1
        1.3  Accounting Principles....................................       1

SECTION 2.  AMOUNTS AND TERMS OF CREDIT FACILITY......................       1

        2.1  The Commitment...........................................       1
        2.2  Notice of Borrowing......................................       2
        2.3  Disbursement of Funds....................................       2
        2.4  Notes....................................................       2
        2.5  Interest.................................................       2
        2.6  Interest Periods.........................................       3
        2.7  Increased Costs, Illegality, etc.........................       5
        2.8  Compensation.............................................       6
        2.9  Extension of Maturity Date ..............................       7

SECTION 3.  PREPAYMENTS; PAYMENTS; TAXES..............................       7

        3.1  Voluntary Prepayments....................................       7
        3.2  Mandatory Repayments.....................................       7
        3.3  Method and Place of Payment..............................       9
        3.4  Net Payments.............................................      10
        3.5  Allocation...............................................      12
        3.6  Fee......................................................      12
        3.7  Application of Payments; Sharing.........................      12

SECTION 4.  CONDITIONS PRECEDENT......................................      13

        4.1  Conditions to Closing....................................      13

SECTION 5.  REPRESENTATIONS, WARRANTIES AND AGREEMENTS................      18

        5.1  Standing.................................................      19
        5.2  Requisite Authority; Etc.................................      19
        5.3  No Conflict..............................................      19
        5.4  Consents.................................................      19
        5.5  Compliance with Law......................................      20
        5.6  Litigation Claims........................................      20
        5.7  Contracts and Commitments................................      20
        5.8  Liens....................................................      21
        5.9  Insurance................................................      21
</TABLE>
<PAGE>

<TABLE>
<S>                                                                                        <C>
        5.10  Capitalization and Ownership................................................  21
        5.11  Financial Statements; Absence of Certain Changes............................  22
        5.12  Taxes.......................................................................  23
        5.13  Disclosure..................................................................  24
        5.14  Environmental Matters.......................................................  24
        5.15  Brokers' or Finders' Fees...................................................  24
        5.16  Certain Regulatory Matters..................................................  24
        5.17  Transactions With Affiliates................................................  26
        5.18  Use of Proceeds.............................................................  26
        5.19  Compliance with ERISA.......................................................  26
        5.20  Investment Company Act......................................................  27
        5.21  Regulation..................................................................  27
        5.22  Security Documents..........................................................  27
        5.23  Certain Scheduled Projects..................................................  27
        5.24  Environmental Matters.......................................................  28
        5.25  Intellectual Property.......................................................  28
        5.26  No Default..................................................................  29
        5.27  Single-Purpose Entity.......................................................  29
        5.28  Trust Indenture Act.........................................................  29
        5.29  [OMITTED]...................................................................  29
        5.30  Ratings Letter..............................................................  29
        5.31  Certain Indebtedness........................................................  29

SECTION 6.  AFFIRMATIVE COVENANTS.........................................................  30

        6.1   Information Covenants.......................................................  30
        6.2   Books, Records and Inspections..............................................  33
        6.3   Maintenance of Property; Insurance..........................................  33
        6.4   Corporate Franchises........................................................  34
        6.5   Compliance with Statutes, etc...............................................  34
        6.6   Compliance with Environmental Laws..........................................  34
        6.7   ERISA.......................................................................  35
        6.8   End of Fiscal Years; Fiscal Quarters........................................  36
        6.9   Payment of Taxes............................................................  36
        6.10  [OMITTED....................................................................  36
        6.11  Performance of Obligations..................................................  37
        6.12  Use of Proceeds.............................................................  37
        6.13  Regulatory Compliance.......................................................  37
        6.14  Financial Covenants.........................................................  37
        6.15  Charter Documents...........................................................  37
        6.16  Further Assurances; etc.....................................................  37
        6.17  Tax Refund..................................................................  38

SECTION 7.  NEGATIVE COVENANTS............................................................  38

        7.1  Liens........................................................................  38
        7.2  Consolidation, Merger, Purchase or Sale of Assets, etc.......................  40
</TABLE>

                                      ii
<PAGE>

<TABLE>
<S>                                                                                           <C>
        7.3    Dividends....................................................................  41
        7.4    Indebtedness.................................................................  41
        7.5    Advances, Investments and Loans..............................................  42
        7.6    Transactions with Affiliates.................................................  43
        7.7    Capital Expenditures.........................................................  43
        7.8    Limitations on Liens on Collateral; Modifications of Certain Indebtedness;
                 Modifications of Certificate of Incorporation, By-Laws and Certain Other
                 Agreements, etc............................................................  43
        7.9    Limitation on Issuance of Capital Stock......................................  44
        7.10   Business.....................................................................  45
        7.11   Regulatory Compliance........................................................  45

SECTION 8.      EVENTS OF DEFAULT AND REMEDIES..............................................  45

        8.1    Events of Default............................................................  45
        8.2    Acceleration.................................................................  48
        8.3    Other Remedies...............................................................  48

SECTION 9.      MISCELLANEOUS...............................................................  48

        9.1    Costs and Expenses...........................................................  48
        9.2    Indemnity....................................................................  49
        9.3    Notices......................................................................  51
        9.4    Benefit of Agreement.........................................................  51
        9.5    No Waiver; Remedies Cumulative...............................................  51
        9.6    No Third Party Beneficiaries.................................................  52
        9.7    Reinstatement................................................................  52
        9.8    No Immunity..................................................................  52
        9.9    Counterparts.................................................................  52
        9.10   Amendment or Waiver..........................................................  52
        9.11   Assignments, Participations, etc.............................................  53
        9.12   Survival.....................................................................  55
        9.13   WAIVER OF JURY TRIAL.........................................................  55
        9.14   Right of Set-off.............................................................  55
        9.15   Severability.................................................................  55
        9.16   Governing Law; Submission to Jurisdiction....................................  56
        9.17   Waiver by Borrower...........................................................  57
        9.18   Recourse.....................................................................  57
        9.19   Complete Agreement...........................................................  57
        9.20   Publicity....................................................................  57
        9.21   Effectiveness................................................................  57
        9.22   Certain Representations and Warranties.......................................  57
        9.23   Confidentiality..............................................................  57
</TABLE>

                                     iii
<PAGE>

<TABLE>
<S>                                                                                         <C>
SECTION 10.   THE ADMINISTRATIVE AGENT; THE LEAD ARRANGER, THE CO-
              ARRANGER AND THE BOOK MANAGER.................................................58

        10.1   Appointment..................................................................58
        10.2   Nature of Duties.............................................................58
        10.3   Lack of Reliance on the Agent................................................58
        10.4   Certain Rights of the Administrative Agent...................................59
        10.5   Reliance.....................................................................59
        10.6   Indemnification..............................................................59
        10.7   The Administrative Agent in its Individual Capacity..........................60
        10.8   Holders......................................................................60
        10.9   Resignation by the Administrative Agent......................................60
        10.10  The Lead Arranger, Co-Arranger and Book Manager..............................61
</TABLE>

                                      iv
<PAGE>

APPENDICES:
----------

        Appendix A           Defined Terms and Rules of Interpretation

EXHIBITS:
--------

        Exhibit A            Form of Notice of Borrowing
        Exhibit B            Form of Note
        Exhibit C            Form of Section 3.4(b)(ii) Certificate
        Exhibit D            Form of Process Agent Letter

SCHEDULES:
---------

        Schedule 3.5         Allocation - Investment Unit
        Schedule 4.1(k)      SEC Filings
        Schedule 5.6         Litigation
        Schedule 5.7         Covered Contracts
        Schedule 5.8         Liens
        Schedule 5.9         Insurance
        Schedule 5.10(e)     Warrants, etc.
        Schedule 5.10(f)     Ownership
        Schedule 5.14        Environmental Matters
        Schedule 5.15        Brokers
        Schedule 5.16(e)     Regulated Entities
        Schedule 5.17        Transactions with Affiliates
        Schedule 5.19        ERISA
        Schedule 5.23        Scheduled Projects
        Schedule 7.1         Certain Liens
        Schedule 9.3         Notices

ANNEXES
-------

        Annex A              Section 13 of the LLC Agreement

                                       v
<PAGE>

          CREDIT AGREEMENT (this "Agreement"), dated as of March 1, 2001, among
                                  ---------
PG&E Corporation, a California corporation, as the Borrower, the Lenders party
hereto, General Electric Capital Corporation, a New York corporation, as Co-
Arranger, Lehman Commercial Paper Inc., a New York corporation, as
Administrative Agent, and Lehman Brothers Inc., a Delaware corporation, as Lead
Arranger and Book Manager.

                              W I T N E S S E T H:
                              -------------------

          WHEREAS, the Lenders party hereto are willing to provide the credit
facility described herein upon the terms and conditions herein set forth;

          NOW, THEREFORE, in consideration of the premises and mutual agreements
hereinafter contained, the parties hereto agree as follows:

          SECTION 1.  DEFINITIONS AND RULES OF INTERPRETATION.
                      ---------------------------------------

          1.1  Defined Terms.  Except as otherwise expressly provided herein,
               -------------
capitalized terms used in this Agreement and its Schedules and Exhibits shall
have the respective meanings assigned to such terms in Appendix A hereto.

          1.2  Rules of Interpretation.  Except as otherwise expressly provided
               -----------------------
herein, the rules of interpretation set forth in Appendix A hereto shall apply
to this Agreement.

          1.3  Accounting Principles.  Except as otherwise provided in this
               ---------------------
Agreement, all computations and determinations as to financial matters, and all
financial statements to be delivered under this Agreement shall be made or
prepared in accordance with U.S. GAAP (including principles of consolidation
where appropriate) applied on a consistent basis (except to the extent approved
or required by the independent public accountants certifying such statements and
disclosed therein).

          SECTION 2.  AMOUNTS AND TERMS OF CREDIT FACILITY.
                      ------------------------------------

          2.1  The Commitment.  (a)  Subject to and upon the terms and
               --------------
conditions set forth herein, each Lender agrees to make a term loan to the
Borrower, which term loans (i) shall be incurred pursuant to a single drawing on
the Closing Date, (ii) shall be denominated in Dollars, (iii) shall be incurred
and maintained as Eurodollar Loans, except as otherwise specifically provided in
Section 2.7(b), (iv) shall be made on the Closing Date in an aggregate principal
amount which (x) in the case of the Tranche A Loan, equals the Tranche A
Commitment and (y) in the case of the Tranche B Loan, equals the Tranche B
Commitment, and (v) shall mature on the earlier of (A) the date of a Spin-Off of
NEG, Inc. and (B) the Date Certain.

          (b) If the Closing Date has not occurred on or prior to March 30,
2001, then, in such event, the Lenders shall have no further obligations or
liabilities under any of the Financing Documents and the Financing Documents
shall have no further force or effect with respect to the Lenders, but the
Borrower's obligation to pay the Commitment Fees and other costs, fees and
<PAGE>

expenses as provided herein and to indemnify the other parties to the Financing
Documents shall not be terminated, modified or diminished in any respect.

          (c) The Loans are available only on the terms and conditions specified
hereunder, and once repaid, in whole or in part, at maturity or by prepayment,
may not be reborrowed in whole or in part.

          2.2  Notice of Borrowing.  The Borrower shall give the Lenders prior
               -------------------
notice of the Eurodollar Loan to be incurred hereunder, provided that any such
                                                        --------
notice shall be deemed to have been given on a certain day only if given before
1:00 P.M. (New York time) on such day.  Such notice (the "Notice of Borrowing")
                                                          -------------------
shall be irrevocable and shall be in writing, or by telephone promptly confirmed
in writing, in the form of Exhibit A, appropriately completed to specify:  (i)
the aggregate principal amount of the Loans to be incurred on the Closing Date
(which shall be a Business Day), (ii) the Selected Interest Period for the
period beginning on the Closing Date pursuant to Section 2.6(b), and (iii) the
account information for disbursement of the Loans.

          2.3  Disbursement of Funds.  No later than 1:00 P.M. (New York time)
               ---------------------
on the Closing Date, each Lender will make available such Lender's pro rata
                                                                   --- ----
share of the amount of Borrowing requested to be made on such date.  All such
amounts will be made available in Dollars and in immediately available funds and
disbursed in accordance with the provisions of the Escrow Agreement.

          2.4  Notes.  (a)  The Borrower's obligation to pay the principal of,
               -----
and interest on, any Loan made by a Lender shall be evidenced by a promissory
note duly executed and delivered by the Borrower substantially in the form of
Exhibit B, with blanks appropriately completed in conformity herewith (each, a
"Note").
 ----

          (b) The Note issued to a Lender shall (i) be executed by the Borrower,
(ii) be payable to such Lender or its Assignee and be dated the Closing Date
(or, if issued after the Closing Date, be dated the date of issuance thereof),
(iii) be in a stated principal amount equal to the Loan made by, or assigned to,
such Lender, as the case may be, and be payable in the outstanding principal
amount of the Loan evidenced thereby, (iv) mature on the earlier of (A) the date
of a Spin-Off of NEG, Inc. and (B) the Date Certain, (v) bear interest as
provided in the appropriate clause of Section 2.5 in respect of a Base Rate Loan
(if converted pursuant to Section 2.7(b)) or a Eurodollar Loan, as the case may
be, evidenced thereby, (vi) be subject to voluntary prepayment as provided in
Section 3.1, and mandatory repayment as provided in Section 3.2, and (vii) be
entitled to the benefits of this Agreement and the other Financing Documents.

          (c) Each Lender will note on its internal records the amount of the
Loan made by it and each payment in respect thereof and will prior to any
transfer of its Note endorse on the reverse side thereof the outstanding
principal amount of the Loan evidenced thereby.  Failure to make any such
notation or any error in such notation shall not affect the Borrower's
obligations in respect of such Loan.

          2.5  Interest.  (a)  The Borrower agrees to pay interest in respect of
               --------
the unpaid principal amount of any Base Rate Loan from the date of conversion
thereof pursuant to Section

                                      -2-
<PAGE>

2.7(b) until the maturity thereof (whether by acceleration or otherwise) at a
rate per annum which shall be equal to the sum of the Applicable Margin plus the
Base Rate each as in effect from time to time.

          (b) The Borrower agrees to pay interest in respect of the unpaid
principal amount of each Eurodollar Loan from the date of Borrowing thereof
until the earlier of (i) the maturity thereof (whether by acceleration or
otherwise) and (ii) the conversion of such Eurodollar Loan to a Base Rate Loan
pursuant to Section 2.7(b) at a rate per annum which shall, during each Interest
Period applicable thereto, be equal to the sum of the Applicable Margin as in
effect from time to time during such Interest Period plus the Eurodollar Rate
for such Interest Period.

          (c) Overdue principal and, to the extent permitted by law, overdue
interest in respect of each Loan and any other overdue amount payable by the
Borrower shall, in each case, bear interest at a rate per annum equal to the
rate which is 2% in excess of the rate then borne by such Loan.  Interest which
accrues under this Section 2.5(c) shall be payable on demand.

          (d) Accrued (and theretofore unpaid) interest shall be payable (i) in
respect of each Base Rate Loan, (x) quarterly in arrears on each Quarterly Date,
(y) on the date of any repayment or prepayment in full of the outstanding
principal amount of such Base Rate Loan, and (z) at maturity (whether by
acceleration or otherwise) and, after such maturity, on demand, and (ii) in
respect of each Eurodollar Loan, (x) on the last day of each Interest Period
applicable thereto and, in the case of an Interest Period in excess of three
months, on each date occurring at three month intervals after the first day of
such Interest Period, and (y) on the date of any repayment or prepayment (on the
amount repaid or prepaid), at maturity (whether by acceleration or otherwise)
and, after such maturity, on demand; provided that the first interest payment
                                     --------
shall be due and payable in advance on the Closing Date in an amount equal to
the Interest Prepaid Amount and the first Interest Period shall be a one year
period (the "First Interest Period").

          (e) Upon each Interest Determination Date with respect to any
Eurodollar Loan, the Administrative Agent shall determine the Eurodollar Rate
for the relevant Interest Period applicable to such Eurodollar Loan and shall
promptly notify the Borrower thereof.  Each such determination shall, absent
manifest error, be final and conclusive and binding on all parties hereto.

          2.6  Interest Periods.  (a)  At the time the Borrower gives the Notice
               ----------------
of Borrowing or prior to 1:00 P.M. (New York time) on the third Business Day
prior to the expiration of an Interest Period applicable to a Eurodollar Loan
(in the case of any subsequent Interest Period), the Borrower shall have the
right to elect the interest period (each an "Interest Period") applicable to
                                             ---------------
such Eurodollar Loan, which Interest Period shall, at the option of the
Borrower, be a one, two, three or six-month period; provided that (in each
                                                    --------
case):

          (i)  the initial Interest Period for any Eurodollar Loan shall
     commence on the date of Borrowing of such Eurodollar Loan and each Interest
     Period occurring thereafter in respect of such Eurodollar Loan shall
     commence on the day on which the next preceding Interest Period applicable
     thereto expires;

                                      -3-
<PAGE>

           (ii)  if any Interest Period for a Eurodollar Loan begins on a day
     for which there is no numerically corresponding day in the calendar month
     at the end of such Interest Period, such Interest Period shall end on the
     last Business Day of such calendar month;

           (iii) if any Interest Period for a Eurodollar Loan would otherwise
     expire on a day which is not a Business Day, such Interest Period shall
     expire on the next succeeding Business Day; provided, however, that if any
                                                 --------  -------
     Interest Period for such Eurodollar Loan would otherwise expire on a day
     which is not a Business Day but is a day of the month after which no
     further Business Day occurs in such month, such Interest Period shall
     expire on the next preceding Business Day;

           (iv)  no Interest Period may be selected at any time when a Default
     or an Event of Default is then in existence; and

           (v)   no Interest Period in respect of any Borrowing of any
     Eurodollar Loan shall be selected which extends beyond the Date Certain.

          If upon the expiration of any Interest Period applicable to any
Eurodollar Loan, the Borrower has failed to elect, or is not permitted to elect,
a new Interest Period to be applicable to such Eurodollar Loan as provided
above, the Borrower shall be deemed to have elected a one-month Interest Period
effective as of the expiration date of such current Interest Period.

          (b) During the First Interest Period, the Borrower shall have the
right, at the times indicated and following the procedure set forth in Section
2.6(a), to deliver notice to the Administrative Agent to indicate Interest
Periods of one, two, three or six months (each such Interest Period, with
respect to any Eurodollar Loan, a "Selected Interest Period") for purposes of
                                   ------------------------
comparing the interest rates.  The Administrative Agent shall determine the
Eurodollar Rate for each such Selected Interest Period applicable to a
Eurodollar Loan and the amount of accrued interest (such amount, the "Selected
                                                                      --------
Interest Amount") which would be payable in respect of such Eurodollar Loan for
---------------
each such Selected Interest Period, which determination shall, absent manifest
error, be final, conclusive and binding on all parties hereto.  On the date
which is the earlier of the date of prepayment of all the Loans by the Borrower
pursuant to the terms hereof and the first anniversary of the Closing Date (x)
the Borrower shall pay to the Administrative Agent the amount by which the sum
of the aggregate Selected Interest Amounts (discounted to present value as of
the Closing Date using a discount factor of 4.25%) plus any amounts due and
payable under Section 2.8 with respect to a Selected Interest Period exceeds the
Interest Prepaid Amount or (y) each Lender shall credit to the Borrower the
amount by which the Interest Prepaid Amount with respect to the Loan of such
Lender exceeds the sum of the aggregate Selected Interest Amounts (discounted to
present value as of the Closing Date using a discount factor of 4.25%) with
respect to the Loan of such Lender plus any amounts due and payable to such
Lender under Section 2.8 or otherwise under this Agreement.  In no event shall a
Selected Interest Period extend beyond the last day of the First Interest
Period.

          2.7  Increased Costs, Illegality, etc.  (a)  In the event that a
               ---------------------------------
Lender shall have determined (which determination shall, absent manifest error,
be final and conclusive and binding upon all parties hereto):

                                      -4-
<PAGE>

           (i)   on any Interest Determination Date that, by reason of any
     changes arising after the date of this Agreement affecting the interbank
     Eurodollar market, adequate and fair means do not exist for ascertaining
     the applicable interest rate on the basis provided for in the definition of
     Eurodollar Rate; or

           (ii)  at any time, that such Lender shall incur increased costs or
     reductions in the amounts received or receivable hereunder with respect to
     any Eurodollar Loan of such Lender because of (x) any change since the
     Closing Date in any applicable law or governmental rule, regulation, order,
     guideline or request (whether or not having the force of law) or in the
     interpretation or administration thereof and including the introduction of
     any new law or governmental rule, regulation, order, guideline or request,
     such as, for example, but not limited to:  (A) a change in the basis of
     taxation of payment to such Lender of the principal of or interest on such
     Lender's Loan or Note or any other amounts payable to such Lender hereunder
     (except for changes in the rate of tax on, or determined by reference to,
     the net income or net profits of such Lender pursuant to the laws of the
     jurisdiction in which it is doing business, organized or in which its
     principal office or applicable lending office is located or any subdivision
     thereof or therein) or (B) a change in official reserve requirements, but,
     in all events, excluding reserves required under Regulation D to the extent
     included in the computation of the Eurodollar Rate and/or (y) other
     circumstances (other than with respect to taxes) arising since the Closing
     Date affecting such Lender (or its Source), the interbank Eurodollar market
     or the position of such Lender in such market; or

           (iii) at any time, that the making or continuance of any Eurodollar
     Loan has been made (x) unlawful by any law or governmental rule, regulation
     or order, (y) impossible by compliance by such Lender in good faith with
     any governmental request (whether or not having force of law) or (z)
     impracticable as a result of a contingency occurring after the Closing Date
     which materially and adversely affects the interbank Eurodollar market;

then, and in any such event, such Lender shall promptly give notice (by
telephone promptly confirmed in writing) to the Borrower of such determination.
Thereafter (x) in the case of clause (i) above, Eurodollar Loans shall no longer
be available until such time as such Lender notifies the Borrower that the
circumstances giving rise to such notice by the Lender no longer exist, (y) in
the case of clause (ii) above, the Borrower agrees to pay to such Lender, upon
such Lender's written request therefor, such additional amounts (in the form of
an increased rate of, or a different method of calculating, interest or
otherwise as such Lender in its sole discretion shall determine) as shall be
required to compensate such Lender for such increased costs or reductions in
amounts received or receivable hereunder (a written notice as to the additional
amounts owed to such Lender, showing in reasonable detail the basis for the
calculation thereof, submitted to the Borrower by such Lender shall, absent
manifest error, be final and conclusive and binding on all the parties hereto)
and (z) in the case of clause (iii) above, the Borrower shall take one of the
actions specified in Section 2.7(b) as promptly as possible and, in any event,
within the time period required by Law.

           Each Lender, at the sole cost and expense of the Borrower (including,
but not limited to, such Lender's internal costs for use of its personnel and
resources), will use its reason-

                                      -5-
<PAGE>

able efforts to minimize taxes indemnifiable by the Borrower under this Section
2.7(a), including by complying with reasonable requests by the Borrower to do or
to refrain from doing any act (including the execution of any certificates or
similar documents required to establish an exemption or relief from any tax), if
such efforts or any such compliance is, in the good faith discretion of such
Lender, of a purely ministerial nature and has no adverse impact on such Lender
or any Affiliate or on the business or operations of the foregoing (unless such
adverse impact is one of a nature and quality such that it is subject to
indemnification and the Borrower has indemnified such Lender against such
adverse impact in a manner satisfactory to such Lender determined in its sole
discretion). The Borrower shall indemnify such Lender for any taxes that may be
imposed on it as a consequence of such compliance.

          (b) At any time that any Eurodollar Loan is affected by the
circumstances described in Section 2.7(a)(i) or (ii), the Borrower may, and in
the case of a Eurodollar Loan affected by the circumstances described in Section
2.7(a)(iii), the Borrower shall, upon at least three Business Days' written
notice to such Lender, require the affected Lender to convert such Eurodollar
Loan into a Base Rate Loan.

          (c) If a Lender determines that after the Closing Date the
introduction of or any change in any applicable law or governmental rule,
regulation, order, guideline, directive or request (whether or not having the
force of law) concerning capital adequacy, or any change in interpretation or
administration thereof by the NAIC or any governmental authority, central bank
or comparable agency, will have the effect of increasing the amount of capital
required or expected to be maintained by such Lender (or its Source) or any
corporation controlling such Lender based on the existence of such Lender's
Commitment hereunder or its obligations hereunder, then the Borrower agrees to
pay to such Lender, upon its written demand therefor, such additional amounts as
shall be required to compensate such Lender or such other corporation for the
increased cost to such Lender or such other corporation or the reduction in the
rate of return to such Lender or such other corporation as a result of such
increase of capital.  In determining such additional amounts, each Lender will
act reasonably and in good faith and will use averaging and attribution methods
which are reasonable, provided that such Lender's determination of compensation
                      --------
owing under this Section 2.7(c) shall, absent manifest error, be final and
conclusive and binding on all the parties hereto.  Such Lender, upon determining
that any additional amounts will be payable pursuant to this Section 2.7(c),
will give prompt written notice thereof to the Borrower, which notice shall show
in reasonable detail the basis for calculation of such additional amounts.

          2.8  Compensation.  The Borrower agrees to compensate each Lender,
               ------------
upon its written request (which request shall set forth in reasonable detail the
basis for requesting such compensation), for all losses, expenses and
liabilities (including, without limitation, any loss, expense or liability
incurred by reason of the liquidation or reemployment of deposits or other funds
required by such Lender to fund its Eurodollar Loan but excluding loss of
anticipated profits) which such Lender may sustain:  (i) if any prepayment or
repayment (including any prepayment or repayment made pursuant to Section 3.1,
Section 3.2 or as a result of an acceleration of the Loans pursuant to Section
8.2) or conversion of any Eurodollar Loan is made on a date other than the last
day of the Interest Period (or during the First Interest Period, any Selected
Interest Period) applicable thereto; or (ii) as a consequence of (x) any other
default by the

                                      -6-
<PAGE>

Borrower to repay such Eurodollar Loan when required by the terms of this
Agreement or any Note held by such Lender or (y) any election made pursuant to
Section 2.7(b).

          2.9  Extension of Maturity Date   The Borrower may by notice to the
               --------------------------
Administrative Agent and the holders of the Loans not later than thirty (30)
days prior to the Initial Date Certain or the Extended Date Certain occurring
six months after the Initial Date Certain (if the maturity date of the Loans was
extended on the Initial Date Certain to such Extended Date Certain), and upon
payment of the Extension Fees relating to such extension pursuant to the Fee
Letter and the Lehman Fee Letter, extend the maturity date of the Loans to the
earlier of (i) the date of a Spin-Off of NEG, Inc. and (ii) the Extended Date
Certain, but in no event shall the Date Certain be beyond the third anniversary
of the Closing Date; provided, that there shall be no extension of the maturity
                     --------
date of the Loans if on the date of such extension, (a) a Default or an Event of
Default shall be continuing or (b) the aggregate outstanding principal amount of
the Loans at such time shall be more than $692,000,000.

          SECTION 3.  Prepayments; Payments; Taxes.
                      ----------------------------

          3.1  Voluntary Prepayments.  The Borrower shall have the right to
               ---------------------
prepay the Tranche A Loan and the Tranche B Loan, on a pro rata basis, without
                                                       --- ----
premium or penalty, in whole or in part at any time and from time to time on the
following terms and conditions:  the Borrower shall give each Lender prior to
12:00 Noon (New York time) (x) at least one Business Day's prior written notice
(or telephonic notice promptly confirmed in writing) of its intent to prepay a
Base Rate Loan and (y) at least three Business Days' prior written notice (or
telephonic notice promptly confirmed in writing) of its intent to prepay a
Eurodollar Loan, which notice (in each case) shall specify the amount of such
prepayment which shall be in an aggregate principal amount of at least
$10,000,000, and minimum increments of $1,000,000 in excess thereof.

          3.2  Mandatory Repayments.  (a)  The principal amount of each Loan, to
               --------------------
the extent then outstanding, shall be repaid at its maturity (whether by
acceleration or otherwise).

          (b) In addition to any other mandatory repayments pursuant to this
Section 3.2, on each date on or after the Closing Date upon which LLC, NEG, Inc.
or any NEG Subsidiary receives any cash proceeds from any incurrence by LLC,
NEG, Inc. or any NEG Subsidiary of Indebtedness for borrowed money, an amount
equal to 100% of the Net Debt Proceeds of the respective incurrence of
Indebtedness shall be applied on such date in accordance with the requirements
of Section 3.2(h); provided that such Net Debt Proceeds shall not be required to
                   --------
be so applied to the extent such Net Debt Proceeds are (i) retained as cash or
Cash Equivalents by LLC, NEG, Inc. or any NEG Subsidiary or (ii) applied to
repay Indebtedness for borrowed money of NEG, Inc. or any NEG Subsidiary or
(iii) reinvested in the business of NEG, Inc. or any NEG Subsidiary within the
scope of business as described by the Business Plan; provided, further, that if
                                                     --------  -------
a Default or Event of Default shall have occurred and be continuing, such
reinvestment may only be made to the extent specified in Part II of the Business
Plan.

          (c) In addition to any other mandatory repayments pursuant to this
Section 3.2, on each date on or after the Closing Date upon which LLC, NEG, Inc.
or any NEG Subsidiary receives any cash proceeds from any sale or issuance of
its equity (other than cash

                                      -7-
<PAGE>

proceeds received as part of an IPO which shall be applied pursuant to clause
(d) below) an amount equal to 100% of the Net Equity Proceeds of such sale or
issuance of equity, whether common or preferred, shall be applied on such date
in accordance with the requirements of Section 3.2(h); provided that such Net
                                                       --------
Equity Proceeds shall not be required to be so applied to the extent such Net
Equity Proceeds are (i) retained as cash or Cash Equivalents by LLC, NEG, Inc.
or the NEG Subsidiaries or (ii) applied to repay Indebtedness for borrowed money
of NEG, Inc. or any NEG Subsidiary or (iii) reinvested in the business of NEG,
Inc. or any NEG Subsidiary within the scope of business as described by the
Business Plan; provided, further, that if a Default or Event of Default shall
               --------  -------
have occurred and be continuing, such reinvestment may only be made to the
extent specified in Part II of the Business Plan.

          (d) In addition to any other mandatory repayments required pursuant to
this Section 3.2, on the date of an IPO upon which the Borrower, LLC or NEG,
Inc. receives any proceeds from such IPO, (i) so long as no Default or Event of
Default shall have occurred and be continuing (both before and after giving
effect to such IPO), an amount sufficient to reduce the outstanding principal
amount of the Loans to no more than $500,000,000, or (ii) if a Default or an
Event of Default shall have occurred and be continuing (either before or after
giving effect to such IPO), then (A) in the event such Default or Event of
Default may be cured by the payment of money, an aggregate amount sufficient to
cure such Default or Event of Default and to reduce the aggregate outstanding
principal amount of the Loans to no more than $500,000,000, or (B) in the event
such Default or Event of Default is not subject to cure by the payment of money,
an amount equal to the greater of (x) the amount specified in clause (i) above
or (y) 100% of such proceeds, in each case shall be applied on such date in
accordance with the requirements of Section 3.2(h).

          (e) In addition to any other mandatory repayments pursuant to this
Section 3.2, on each date on or after the Closing Date upon which  LLC, NEG,
Inc. or any NEG Subsidiary receives any cash proceeds from any Asset Sale by
LLC, NEG, Inc. or any NEG Subsidiary, an amount equal to 100% of the Net Sale
Proceeds therefrom shall be applied in accordance with the requirements of
Section 3.2(h); provided that such Net Sale Proceeds shall not be required to be
                --------
so applied to the extent such Net Sale Proceeds are (i) retained as cash or Cash
Equivalents by LLC, NEG, Inc. or the NEG Subsidiaries or (ii) applied to repay
Indebtedness for borrowed money of NEG, Inc. or any NEG Subsidiary or (iii)
reinvested in the business of NEG, Inc. or any NEG Subsidiary within the scope
of business as described by the Business Plan; provided, further, that if a
                                               --------  -------
Default or Event of Default shall have occurred and be continuing, such
reinvestment may only be made to the extent specified in Part II of the Business
Plan.

          (f) In addition to any other mandatory repayments pursuant to this
Section 3.2, on each date on or after the Closing Date upon which LLC, NEG, Inc.
or any NEG Subsidiary receives any cash proceeds from any Recovery Event, an
amount equal to 100% of the Net Insurance Proceeds from such Recovery Event
shall be applied in accordance with the requirements of Section 3.2(h); provided
                                                                        --------
that such Net Insurance Proceeds shall not be required to be so applied to the
extent such Net Insurance Proceeds are (i) applied to repay Indebtedness for
borrowed money of NEG, Inc. or any NEG Subsidiary or (ii) reinvested in the
business of NEG, Inc. or any NEG Subsidiary within the scope of business as
described by the Business Plan within eighteen (18) months of the Recovery
Event; provided, further, that if a Default or Event
       --------  -------

                                      -8-
<PAGE>

of Default shall have occurred and be continuing, such reinvestment may only be
made to the extent specified in Part II of the Business Plan.

          (g) In addition to any other mandatory repayments pursuant to this
Section 3.2, on each date on or after the Closing Date upon which the Borrower
receives a distribution, Dividend or payment of any sort from LLC (other than
the proceeds of an IPO which shall be applied pursuant to clause (d) above and
issuance of the note from NEG, Inc. to LLC or the Borrower or from LLC to the
Borrower, solely in connection with the IPO (but not payments thereunder)), an
amount equal to 100% of such proceeds (net of any amount thereof used to
reimburse the Borrower for (i) any expense related to any income or franchise
Taxes of NEG, Inc. or any NEG Subsidiary (computed as if NEG, Inc. and each of
its Subsidiaries filed a consolidated federal income Tax return and state
consolidated or combined income or franchise Tax returns, where applicable,
separate from the Borrower, PG&E Utility and Subsidiaries of PG&E Utility, for
all taxable periods), (ii) any expenses then due and payable under the Expense
Sharing Agreement or (iii) any amount then due and payable under the note from
NEG, Inc. and payable to LLC or the Borrower solely in connection with the IPO)
shall be applied in accordance with the requirements of Section 3.2(h).

          (h) Each amount required to be applied pursuant to this Section 3.2(h)
shall be first paid to the Lenders ratably according to the respective
outstanding principal amounts of Loans held by the Lenders and shall be applied
by each Lender to payment of any amount owing to such Lender under Section 2.8,
then to payment of any interest then due and payable to such Lender, and then to
reduce ratably the remaining principal balance of the Loans of such Lender.

          (i) In addition to any other mandatory repayments pursuant to this
Section 3.2, all the then outstanding Loans shall be repaid in full on the
earlier of (x) the date of a Spin-Off of NEG, Inc. and (y) the Date Certain.

          (j) The application of any proceeds received by LLC to be applied for
mandatory repayment under Sections 3.2(b), (c), (e) and (f) shall be subject to
Compliance by LLC with the requirements for Distribution under Section 13 of the
LLC Agreement.

          (k) Nothing in this Section 3.2 shall limit any other rights or
remedies a Lender may have under Article 8 of this Agreement or under applicable
law in connection with any Event of Default.

          3.3  Method and Place of Payment.  Except as otherwise specifically
               ---------------------------
provided herein, all payments under this Agreement and under any Note shall be
made to the Administrative Agent for the account of the Lenders entitled thereto
not later than 12:00 Noon (New York time) on the date when due and shall be made
in Dollars in immediately available funds at the Payment Office or pursuant to
such other instruction as the Administrative Agent shall designate to the
Borrower in writing.  Except as otherwise provided herein, whenever any payment
to be made hereunder or under any Note shall be stated to be due on a day which
is not a Business Day, the due date thereof shall be extended to the next
succeeding Business Day and, with respect to payments of principal, interest
shall be payable at the applicable rate during such extension.

                                      -9-
<PAGE>

          3.4  Net Payments.  (a)  All payments made by the Borrower to the
               ------------
Administrative Agent or any Lender hereunder and under any Note will be made
without setoff, counterclaim or other defense.  Except as provided in Section
3.4(b), all such payments will be made free and clear of, and without deduction
or withholding for, any present or future taxes, levies, imposts, duties, fees,
assessments or other charges of whatever nature now or hereafter imposed by any
jurisdiction or by any political subdivision or taxing authority thereof or
therein with respect to such payments (but excluding, except as provided in the
second succeeding sentence, any tax imposed on or measured by the net income or
net profits of a Lender pursuant to the laws of the jurisdiction in which it is
doing business, organized or the jurisdiction in which the principal office or
applicable lending office of such Lender is located or any subdivision thereof
or therein) and all interest, penalties or similar liabilities with respect to
such non-excluded taxes, levies, imposts, duties, fees, assessments or other
charges (all such non-excluded taxes, levies, imposts, duties, fees, assessments
or other charges being referred to collectively as "Taxes").  If any Taxes are
                                                    -----
so levied or imposed, the Borrower agrees to pay the full amount of such Taxes,
and such additional amounts as may be necessary so that every payment of all
amounts due under this Agreement or under any Note, after withholding or
deduction for or on account of any Taxes, will not be less than the amount
provided for herein or in such Note.  If any amounts are payable in respect of
Taxes pursuant to the preceding sentence, the Borrower agrees to reimburse each
Lender, upon the written request of such Lender, for taxes imposed on or
measured by the net income or net profits of such Lender pursuant to the laws of
the jurisdiction in which such Lender is doing business, organized or in which
the principal office or applicable lending office of such Lender is located or
under the laws of any political subdivision or taxing authority of any such
jurisdiction in which such Lender is doing business, organized or in which the
principal office or applicable lending office of such Lender is located and for
any withholding of taxes as such Lender shall reasonably determine are payable
by, or withheld from, such Lender, in respect of such amounts so paid to or on
behalf of such Lender pursuant to the preceding sentence and in respect of any
amounts paid to or on behalf of such Lender pursuant to this sentence.  The
Borrower will furnish to such Lender within 45 days after the date the payment
of any Taxes is due pursuant to applicable law certified copies of tax receipts
evidencing such payment by such Borrower.  The Borrower agrees to indemnify and
hold harmless each Lender, and reimburse such Lender upon its written request,
for the amount of any Taxes so levied or imposed and paid by such Lender.

          (b) Any Lender that is not a United States person (as such term is
defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes
agrees to deliver to the Administrative Agent and the Borrower on or prior to
the Closing Date or, in the case of a Lender that is an assignee or transferee
of an interest under this Agreement pursuant to Section 9.11(a) (unless such
Assignee was already a Lender hereunder immediately prior to such assignment in
which case such assignee shall reaffirm its ability to deliver the forms set
forth below in clause (i) or (ii), as applicable), on the date of the assignment
to such Assignee, (i) two accurate and complete original signed copies of
Internal Revenue Service Form W-8ECI or Form W-8BEN (with respect to a complete
exemption under an income tax treaty) (or successor forms) certifying to such
Lender's entitlement as of such date to a complete exemption from United States
withholding tax with respect to payments to be made under this Agreement and
under any Note, or (ii) if any such Lender is not a "bank" within the meaning of
Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue
Service Form W-8ECI or

                                      -10-
<PAGE>

Form W-8BEN (with respect to a complete exemption under an income tax treaty)
(or any successor forms) pursuant to clause (i) above, (x) a certificate
substantially in the form of Exhibit C (any such certificate, a "Section
3.4(b)(ii) Certificate") and (y) two accurate and complete original signed
copies of Internal Revenue Service Form W-8BEN (with respect to the portfolio
interest exemption) (or successor form) certifying to such Lender's entitlement
as of such date to a complete exemption from United States withholding tax with
respect to payments of interest to be made under this Agreement and under any
Note. In addition, each such Lender agrees that from time to time after the
Closing Date, when a lapse in time or change in circumstances renders the
previous certification obsolete or inaccurate in any material respect, such
Lender will deliver to the Administrative Agent and the Borrower two new
accurate and complete original signed copies of Internal Revenue Service Form W-
8ECI, Form W-8BEN (with respect to the benefits of any income tax treaty), or
Form W-8BEN (with respect to the portfolio interest exemption) and a Section
3.4(b)(ii) Certificate, as the case may be, and such other forms as may be
required in order to confirm or establish the entitlement of such Lender to a
continued exemption from or reduction in United States withholding tax with
respect to payments under this Agreement and any Note, or such Lender shall
immediately notify the Administrative Agent and the Borrower of its inability to
deliver any such Form or Certificate, in which case such Lender shall not be
required to deliver any such Form or Certificate pursuant to this Section
3.4(b). Notwithstanding anything to the contrary contained in Section 3.4(a) and
the immediately succeeding sentence, (x) the Borrower shall be entitled, to the
extent it is required to do so by law, to deduct or withhold income or similar
taxes imposed by the United States (or any political subdivision or taxing
authority thereof or therein) from interest, fees or other amounts payable
hereunder for the account of any Lender which is not a United States person (as
such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income
tax purposes to the extent that such Lender has not provided to the
Administrative Agent and the Borrower U.S. Internal Revenue Service Forms that
establish a complete exemption from such deduction or withholding and (y) the
Borrower shall not be obligated pursuant to Section 3.4(a) to gross-up payments
to be made to a Lender in respect of income or similar taxes imposed by the
United States if (I) such Lender has not provided to the Administrative Agent
and the Borrower the Internal Revenue Service Forms required to be provided to
the Administrative Agent and the Borrower pursuant to this Section 3.4(b) or
(II) in the case of a payment, other than interest, to a Lender described in
clause (ii) above, to the extent that such Forms do not establish a complete
exemption from withholding of such taxes. Notwithstanding anything to the
contrary contained in the preceding sentence or elsewhere in this Section 3.4,
the Borrower agrees to pay any additional amounts and to indemnify each Lender
in the manner set forth in Section 3.4(a) (without regard to the identity of the
jurisdiction requiring the deduction or withholding) in respect of any amounts
deducted or withheld by it as described in the immediately preceding sentence as
a result of any changes that are effective after the Closing Date in any
applicable law, treaty, governmental rule, regulation, guideline or order, or in
the interpretation thereof, relating to the deducting or withholding of such
Taxes. The sole consequence of any Lender failing to comply with the requirement
to deliver the Internal Revenue Service Forms or the Section 3.4(b)(ii)
Certificate shall be that the Borrower shall not be obligated pursuant to
Section 3.4(a) to gross-up payments to be made to such Lender in respect of any
resulting U.S. income or similar taxes.

                                      -11-
<PAGE>

          (c) Any Lender that is (i) an Assignee pursuant to Section 9.11(a) and
(ii) not a United States person (as such term is defined in Section 7701(a)(30)
of the Code) for U.S. Federal income tax purposes will certify to the Borrower
on or prior to the date of the assignment to such Lender that payments to such
Lender hereunder and under any Note are, as of the date of such assignment, not
subject to any withholding tax imposed by any taxing jurisdiction located
outside of the United States.

          (d) Each Lender, at the sole cost and expense of the Borrower
(including, but not limited to, the Lender's internal costs for use of its
personnel and resources), will use its reasonable efforts to minimize taxes
indemnifiable by the Borrower under this Section 3.4, including by complying
with reasonable requests by the Borrower to do or to refrain from doing any act
(including the execution of any certificates or similar documents required to
establish an exemption or relief from any tax), if such efforts or any such
compliance is, in the good faith discretion of such Lender, of a purely
ministerial nature and has no adverse impact on such Lender or any Affiliate or
on the business or operations of the foregoing (unless such adverse impact is
one of a nature and quality such that it is subject to indemnification and the
Borrower has indemnified such Lender against such adverse impact in a manner
satisfactory to such Lender determined in its sole discretion).  The Borrower
shall indemnify such Lender for any taxes that may be imposed on it as a
consequence of such compliance.  No Lender shall be required to disclose any tax
return or filing or any related information it deems confidential and all
positions taken by each Lender in any tax return, filing or proceeding shall be
within the sole control of such Lender.

          3.5  Allocation.  The parties agree that the Notes issued by the
               ----------
Borrower under this Agreement and the Options issued by LLC under the Option
Agreement, will for federal tax purposes, be treated as an "investment unit" as
such term is defined under Section 1273(c)(2) of the Code and the parties agree
that the consideration paid by each Lender for its Note and Option shall be
allocated as set forth on Schedule 3.5.

          3.6  Fee.  The Borrower shall pay to (a) the Tranche A Lender the
               ---
Commitment Fee payable to it pursuant to the terms of the Fee Letter and (b) the
Tranche B Lender the Commitment Fee payable to it pursuant to the Lehman Fee
Letter.

          3.7  Application of Payments; Sharing.
               --------------------------------

          (a) Subject to the provisions of this Section 3.7, the Administrative
Agent agrees that promptly after its receipt of each payment from or on behalf
of the Borrower in respect of any Obligations of the Borrower hereunder, it
shall promptly distribute such payment to the Lenders pro rata based upon their
                                                      --- ----
respective shares, if any, of the Obligations with respect to which such payment
was received.

          (b) Each of the Lenders agrees that, if it should receive any amount
hereunder (whether by voluntary payment, by realization upon security, by the
exercise of the right of setoff or banker's lien, by counterclaim or cross
action, by the enforcement of any right under the Financing Documents, or
otherwise), which, in any such case, is in excess of its ratable share of
payments on account of the Obligations obtained by all Lenders, then such Lender
receiving such excess payment shall purchase for cash without recourse or
warranty from the other Lenders an

                                      -12-
<PAGE>

interest in the Obligations of the Borrower to such Lenders in such amount as
shall result in a proportional participation by all the Lenders in such amount;
provided, however, that if all or any portion of such excess amount is
--------  -------
thereafter recovered from such Lender, such purchase shall be rescinded and the
purchase price restored to the extent of such recovery, but without interest.

          SECTION 4.  CONDITIONS PRECEDENT.
                      --------------------

          4.1  Conditions to Closing.  The obligation of any Lender to make its
               ---------------------
Loan shall be subject to the conditions precedent that such Lender shall have
received, or shall have waived receipt of, the following, each of which shall be
in form and substance satisfactory to such Lender, and that the other conditions
set forth below shall have been satisfied or waived by such Lender:

          (a) Financing Documents.  Each of the Financing Documents (including
              -------------------
the LLC Pledge Agreement, the Stock Pledge Agreement and the Option Agreement)
shall have been duly authorized, executed and delivered by each party thereto.
Such Lender shall have received an original of each Financing Document executed
by all parties thereto.

          (b) Notes.  The Borrower shall have duly authorized, executed and
              -----
delivered a Note for the account of such Lender.  Each Note shall be
appropriately completed with the name of the payee, the maximum principal amount
thereof and the date of issuance (which shall be the Closing Date) inserted
therein.

          (c) Charter Documents.  Such Lender shall have received the following
              -----------------
documents, each certified as indicated below:

          (i) a copy of the Charter Documents of the Borrower, LLC, NEG, Inc.,
     the Significant Subsidiaries and the Specified Subsidiaries, as in effect
     on the Closing Date, certified by the Secretary of State of the State of
     such Person's organization, as applicable, and a certificate, where
     available, as to the good standing of and payment of franchise taxes by the
     Borrower, LLC, NEG, Inc., the Significant Subsidiaries and the Specified
     Subsidiaries from the Secretary of State of the State of such Person's
     organization, dated as of a date no earlier than 5 days prior to the
     Closing Date;

          (ii) a certificate of an Authorized Officer of each of the Borrower,
     LLC and NEG, Inc., dated the Closing Date, certifying (A) that attached
     thereto is a true and complete copy of the Charter Documents of such
     Person, as in effect at all times from the date on which the resolutions
     referred to in clause (B) below were adopted to and including the date of
     such certificate, (B) that attached thereto is a true and complete copy of
     resolutions duly adopted by the board of directors (or other equivalent
     body) or evidence of all corporate, partnership or limited liability
     company action, as the case may be, of such Person, authorizing the
     execution, delivery and performance of the Financing Documents to which
     such Person is or is intended to be a party, and that such resolutions have
     not been modified, rescinded or amended and are in full force and effect,
     and (C) as to the name, incumbency and specimen signature of each officer
     of such Person executing the Financing Documents to which such Person is
     intended to be a party and each other document to be delivered by such
     Person from time to time in connection therewith; and

                                      -13-
<PAGE>

          (iii)  a certificate of another Authorized Officer of each of the
     Borrower, LLC and NEG, Inc., as to the name, incumbency and specimen
     signature of the Authorized Officer of such Person that signed the
     certificate referred to in clause (ii) above.

          (d) Filings, Registrations, Recordings; Other Perfection Actions.  (i)
              ------------------------------------------------------------
On or prior to the Closing Date, such Lender shall have received certified
copies of Requests for Information or Copies (Form UCC-11), or equivalent
reports, each of a recent date listing all effective financing statements that
name the Borrower, LLC or NEG, Inc., as debtor, together with copies of such
financing statements.

          (ii) Any document required to be filed, registered, notarized or
recorded in order to create and perfect the security interest of the Collateral
Agent under the Security Documents as a first priority Lien shall have been
properly filed, registered, notarized or recorded in each office in each
jurisdiction in which such filings, registrations, notarizations and
recordations are required, and any other action required in the judgment of any
Lender to perfect such security interest as such first priority Lien shall have
been effected, and such Lender shall have received acknowledgment copies or
other evidence satisfactory to it that all necessary filing, notarization,
recording and other fees and all taxes and expenses related to such filings,
notarizations, registrations and recordings have been paid in full.

          (iii)  The Collateral Agent shall have received the stock certificates
representing 100% of the capital stock of NEG, Inc., together with related
appropriate stock powers, duly executed in blank.

          (iv) The Collateral Agent shall have received the certificates
representing 100% of the Pledged Interest of the Borrower being pledged pursuant
to the LLC Pledge Agreement, together with related powers, duly executed in
blank.

          (e) Borrower's Certificate.  Such Lender shall have received an
              ----------------------
original counterpart of a certificate of an Authorized Officer of the Borrower,
dated the Closing Date, to the effect that:  (i) the representations and
warranties of the Borrower contained in Section 5 hereof and the representations
and warranties of the Borrower contained in each of the other Financing
Documents to which the Borrower is a party are true and correct in all material
respects (or in the event any such representation or warranty shall be qualified
by a "Material Adverse Effect" or a materiality threshold, in all respects) on
and as of the Closing Date (or, if stated to have been made solely as of an
earlier date, were true and correct as of such earlier date), (ii) all covenants
required to be performed by the Borrower contained in any Financing Document to
which it is a party prior to the Closing Date have been performed in all
material respects, (iii) all Financing Documents are in full force and effect
under the terms and conditions set forth in such Financing Documents, and (iv)
no Default or Event of Default has occurred and is continuing.

          (f) Other Officer Certificates.  (i)  Such Lender shall have received
              --------------------------
a certificate signed by an Authorized Officer of LLC, dated the Closing Date, to
the effect that (i) the representations and warranties of LLC set forth in each
of the Financing Documents to which it is a party are true and correct in all
material respects (or in the event any such representation or warranty shall be
qualified by a "Material Adverse Effect" or a materiality threshold, in all
respects)

                                      -14-
<PAGE>

on and as of such date as if made on and as of the Closing Date (or, if stated
to have been made solely as of an earlier date, were true and correct as of such
earlier date) and (ii) all covenants required to be performed by LLC contained
in any Financing Document to which it is a party prior to the Closing Date have
been performed in all material respects.

          (ii) Such Lender shall have received a certificate signed by an
Authorized Officer of NEG, Inc., dated the Closing Date, to the effect that (i)
the representations and warranties of NEG, Inc. set forth in each of the
Financing Documents to which it is a party are true and correct in all material
respects (or in the event any such representation or warranty shall be qualified
by a "Material Adverse Effect" or a materiality threshold, in all respects) on
and as of such date as if made on and as of such date (or, if stated to have
been made solely as of an earlier date, were true and correct as of such earlier
date) and on and as of the Closing Date, and (ii) all covenants required to be
performed by NEG, Inc. contained in any Financing Document to which it is a
party prior to the Closing Date have been performed in all material respects.

          (g) Financial Information, etc.  (i)  Such Lender shall have received
              --------------------------
copies of the most recent audited and unaudited (x) consolidated financial
statements from each of the Borrower and NEG, Inc. and (y) financial statements
or information from each of the FI Subsidiaries, in each case, in form and
substance satisfactory to such Lender together with a certificate from the Chief
Financial Officer or other Authorized Officer of such Person, dated the Closing
Date, to the effect that, to the best of such officer's knowledge, (A) such
financial statements or information are true, complete and correct in all
material respects and (B) there has been no material adverse change in the
condition (financial or otherwise), results of operations, business, Properties,
liabilities, management or prospects of such Person since the date of the most
recent financial statements or information of such Person; provided that for
                                                           --------
purposes of this clause (g), defaults or events of default in respect of the
Indebtedness of the Borrower which is to be Refinanced by the proceeds of the
Loan or other defaults or events of default with respect to the Borrower which
are described in the SEC Filings by the Borrower since December 31, 2000 but
prior to the Closing Date, and any Utility Event shall not be deemed a Material
Adverse Change to such Person.

          (ii) Such Lender shall have received such other financial, business
and other information regarding any other Subsidiary of the Borrower as such
Lender shall have reasonably requested.

          (h) Process Agent.  Such Lender shall have received a copy of a letter
              -------------
from CT Corporation System accepting its appointment as process agent in New
York for the Borrower, LLC and NEG, Inc., in substantially the form of Exhibit D
hereto.

          (i) Legal Opinions.  Such Lender shall have received original
              --------------
counterparts of the legal opinions of counsel to the Borrower, LLC and NEG,
Inc., which legal opinions shall be dated the Closing Date, addressed to such
Lender, and in form, scope and substance satisfactory to such Lender.

          (j) Due Diligence.  Such Lender shall have (i) completed its due
              -------------
diligence investigation of the organization and capital structure of the
Borrower and its Subsidiaries and all

                                      -15-
<PAGE>

documents and instruments relating thereto, and other matters related to or in
connection with the transactions contemplated hereby, in scope, and with
results, satisfactory to such Lender in all respects, and (ii) been given such
access to the management, records, books of account, contracts, concessions, and
other documents relating to the business, regulatory framework and Property of
the Borrower and its Subsidiaries as such Lender shall have reasonably
requested.

          (k) Material Adverse Change.  Since December 31, 2000, and except as
              -----------------------
disclosed in the SEC Filings by the Borrower since December 31, 2000 but prior
to the Closing Date, there shall not have occurred and be continuing any
Material Adverse Change of the Borrower or of LLC, NEG, Inc. and the Significant
Subsidiaries, taken as a whole; provided that for purposes of this clause (k),
                                --------
defaults or events of default in respect of the Indebtedness of the Borrower
which is to be Refinanced by the proceeds of the Loan and a Utility Event shall
not be deemed a Material Adverse Change to the Borrower.

          (l) Fees; Interest; Expenses.  Such Lender shall have received the
              ------------------------
Commitment Fee pursuant to the Fee Letter or the Lehman Fee Letter, as the case
may be, and all other fees, costs and charges due and owing under the Financing
Documents on or prior to the Closing Date and shall have received its pro rata
                                                                      --- ----
share of the Interest Prepaid Amount required to be paid pursuant to Section
2.5. The Collateral Agent shall have received the CA Fee for payment of its
services as Collateral Agent under the Financing Documents. Such Lender shall
have received payment of all out-of-pocket expenses payable by the Borrower to
such Lender pursuant to Section 9.1 (including reasonable fees and expenses and
disbursements of legal counsel).

          (m) Notice of Borrowing.  Such Lender shall have received a Notice of
              -------------------
Borrowing pursuant to and in compliance with Section 2.

          (n) Governmental Approvals, etc.  (i) All Governmental Approvals and
              ----------------------------
consents or approvals from any third party which under applicable Law or any
agreement, contract or document are required to be obtained by the Borrower or
its Subsidiaries with respect to the transactions contemplated by the Financing
Documents prior to the Closing Date shall have been duly obtained and shall be
final, non-appealable and in full force and effect; (ii) there shall have been
no change in any applicable Law, and no issuance of any order, writ, injunction
or decree of any Governmental Authority or arbitral tribunal, which, in either
such case, could reasonably be expected to have a Material Adverse Effect; and
(iii) there shall have been no proposed change in or modification of any
applicable Law which could reasonably be expected to be enacted and which if
enacted could reasonably be expected to have a Material Adverse Effect.

          (o) Material Adverse Effect.  There shall exist no circumstance, event
              -----------------------
or condition which has had or could reasonably be expected to have a Material
Adverse Effect.

          (p) Litigation.  No legal or arbitral proceedings or investigations,
              ----------
or any proceedings by or before any Governmental Authority or any Person, shall
be pending or threatened against the transactions contemplated by the Financing
Documents or any document executed in connection therewith which, if adversely
determined, could reasonably be expected to have a Material Adverse Effect, and
no other legal or arbitral proceedings or investigations, or any pro

                                      -16-
<PAGE>

ceedings by or before any Governmental Authority or any Person, shall be pending
in respect of the Borrower, LLC, NEG, Inc. or the Significant Subsidiaries
which, if adversely determined, could reasonably be expected to result in a
Material Adverse Change to the Borrower, or a Material Adverse Change to LLC,
NEG, Inc. and the Significant Subsidiaries, taken as a whole.

          (q) Solvency Certificate.  On or before the Closing Date, the Borrower
              --------------------
shall cause to be delivered to such Lender a solvency certificate from the Chief
Financial Officer of the Borrower in form, scope and substance satisfactory to
such Lender, dated the Closing Date, setting forth the conclusion that, after
giving effect to the transaction contemplated by the Financing Documents and the
incurrence of all the financings contemplated herein, the Borrower (on a stand-
alone basis), the Borrower and its Subsidiaries (on a consolidated basis) and
LLC (on a stand-alone basis), in each case, are not insolvent and will not be
rendered insolvent by the indebtedness incurred in connection therewith, and
will not be left with unreasonably small capital with which to engage in its or
their businesses and will not have incurred debts beyond its or their ability to
pay debts as they mature and become due.

          (r) No Breach.  Immediately prior to and after giving effect to the
              ---------
transactions contemplated by the Financing Documents, except as disclosed in
Part E of the Disclosure Letter, there shall exist no default or event of
default under any material agreement or contract to which the Borrower, LLC,
NEG, Inc. or any Significant Subsidiary is a party which would result in a
Material Adverse Change to the Borrower, or a Material Adverse Change to LLC,
NEG, Inc. and the Significant Subsidiaries, taken as a whole.

          (s) Refinancing; Existing Indebtedness.  (i)  On the Closing Date (but
              ----------------------------------
concurrently with the consummation of the transactions contemplated by the
Financing Documents), all Indebtedness to be Refinanced shall have been repaid
in full in the manner set forth in Part C of the Disclosure Letter by the
Borrower by applying  thereto the proceeds of the Loans, and all commitments in
respect thereof shall have been terminated and all Liens and guaranties in
connection therewith shall have been terminated (and all appropriate releases,
termination statements or other instruments of assignment with respect thereto
shall have been obtained) to the reasonable satisfaction of such Lender.
Without limiting the foregoing, there shall have been delivered to such Lender
(x) proper termination statements (Form UCC-3 or the appropriate equivalent) for
filing under the UCC of each jurisdiction where a financing statement (Form UCC-
1 or the appropriate equivalent) was filed with respect to the Borrower or any
of its Subsidiaries in connection with the security interest created with
respect to the Indebtedness to be Refinanced and the documentation related
thereto and (y) terminations of all mortgages, leasehold mortgages and deeds of
trust created with respect to property of the Borrower or any of its
Subsidiaries, in each case, to secure the obligations under the Indebtedness to
be Refinanced, all of which shall be in form and substance satisfactory to such
Lender.

          (ii) On the Closing Date and after giving effect to the transactions
contemplated by the Financing Documents, the Borrower and LLC shall have no
Indebtedness or preferred stock outstanding other than the Loan and certain
other indebtedness existing on the Closing Date acceptable to such Lender as
listed on Part B of the Disclosure Letter.  On and as of the Closing Date, all
of the existing Indebtedness under the Existing Indebtedness Agreements shall
remain outstanding after giving effect to the transactions contemplated hereby
without any

                                      -17-
<PAGE>

default or event of default existing thereunder or arising as a result of the
transaction contemplated hereby (except to the extent amended or waived by the
parties thereto on terms and conditions reasonably satisfactory to such Lender).

          (iii)  On the Closing Date, such Lender shall have received evidence
in form and substance reasonably satisfactory to such Lender that the matters
set forth in this Section 4.1(s) have been satisfied.

          (t)  [OMITTED].
                -------

          (u) Finality of FERC Orders.  FERC shall have (i) issued final binding
              -----------------------
orders not subject to rehearing in Docket Nos. EC01-49-000 and EC01-41-000, and
(ii) denied all motions to intervene, requests for rehearing, requests to vacate
or any other relief requested in pleadings other than those by LLC or any member
of NEG Group which were filed subsequent to the FERC orders in Docket Nos. EC01-
49-000 and EC01-41-000.

          (v) Letter.  Such Lender shall have received a copy of letters
              ------
addressed to the Borrower from third parties, confirming the amount and type of
Indebtedness of the Borrower with respect to items B and C of Part A(IV) of the
Disclosure Letter to be Refinanced hereunder.

          (w) Business Plan.  Such Lender shall have received a true and
              -------------
complete copy of the Business Plan, certified by an Authorized Officer of each
of the Borrower, LLC and NEG, Inc.

          (x) Disclosure Letter.  Such Lender shall have received the Disclosure
              -----------------
Letter.

          (y) Proceedings.  All corporate and other proceedings, and all Charter
              -----------
Documents, other documents, instruments and other legal matters in connection
with the transactions contemplated hereby and the other Financing Documents
shall be satisfactory in form and substance to such Lender and such Lender shall
have received such other documents, certificates and instruments relating to the
Financing Documents or the transactions contemplated thereby as it shall have
reasonably requested, in each case, in form and substance satisfactory to it.

          SECTION 5.  REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
                      ------------------------------------------

          In order to induce the Administrative Agent and each Lender to enter
into this Agreement, and to induce each Lender to make its Loan, the Borrower
makes the following representations, warranties and agreements as of the date
hereof, all of which shall survive the execution and delivery of this Agreement
and the Notes and the making and continuance of the Loans:

          5.1  Standing.  (a)  Each of the Borrower, LLC, NEG, Inc. and each
               --------
Significant Subsidiary (collectively, the "Covered Parties") is a corporation,
limited partnership or limited liability company duly formed, validly existing
and in good standing under the laws of its jurisdiction of organization and has
the requisite power and authority to own, lease and operate its Properties and
to carry on its business as now being conducted.

                                      -18-
<PAGE>

          (b) Each Covered Party is duly qualified or licensed to do business as
a foreign entity and is in good standing in each jurisdiction in which the use
and ownership of its Property or the conduct of its business requires such
license or qualification, except where the failure to be so qualified or
licensed would not have a Material Adverse Effect.

          5.2  Requisite Authority; Etc.  Each Covered Party has all requisite
               -------------------------
power and authority to enter into the Financing Documents to which it is a
party.  All necessary action on the part of each Covered Party has been taken to
authorize the execution and delivery of the Financing Documents to which it is a
party, the performance of its obligations under such Financing Documents and the
consummation of the transactions contemplated hereby and thereby.  Each of the
Financing Documents has been duly and validly executed and delivered by each
Covered Party that is a party thereto, and constitutes valid and binding
agreements of each such Covered Party, enforceable in accordance with their
respective terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general application relating to or affecting creditors' rights
generally and to general principles of equity (regardless of whether such
enforceability is considered in an proceeding in equity or at law).

          5.3  No Conflict.  Neither the execution and delivery of the Financing
               -----------
Documents nor the consummation of the transactions contemplated by such
Financing Documents nor compliance by any Covered Party with any of the
provisions of such Financing Documents to which it is a party will (i) violate
or conflict with any provision of the charter, certificate of formation, by-laws
or limited liability company agreement or other governing documents of such
Covered Party, or any Law, judgment, order, writ, decree or injunction
applicable to such Covered Party, or (ii) except as set forth in Part F of the
Disclosure Letter, violate, or conflict with, or result in a breach of any
provision of, or constitute a default (or any event which, with or without due
notice or lapse of time, or both, would constitute a default) under, or result
in the termination of, accelerate the performance required by, or, except for
the Liens created by the Financing Documents, result in the creation of any Lien
upon any of the Properties or assets of such Covered Party, under any contract,
note, bond, mortgage, indenture, deed of trust, license, lease, agreement,
permit or other instrument or obligation of which such Covered Party is a party
or by which it or any of its assets are bound.

          5.4  Consents.  (a)  No permit, application, notice, transfer,
               --------
consent, approval, order, qualification, waiver from or authorization of, or
declaration, filing or registration with, any Governmental Authority or any
third party is currently required to be made or obtained by any Covered Party or
any of its Subsidiaries in connection with (i) the execution, delivery and
performance of the Financing Documents or the consummation of the transactions
contemplated by such Financing Documents, (ii) the grant by the Borrower or LLC,
or the perfection and maintenance, of the Liens contemplated by the Financing
Documents (including the first priority nature thereof) or (iii) the exercise by
any party to the Financing Documents of any of its rights under any such
Financing Document or any remedies pursuant to the Financing Documents, other
than with respect to the exercise by any Holder of its right to convert the
Option to Option Shares under the Option Agreement which may require filing
under the HSR Act or with FERC or the exercise of the foreclosure rights with
respect to the stock of NEG, Inc. or the LLC Interests which may require filing
with FERC and certain state regulatory agencies.

                                      -19-
<PAGE>

          (b) No right of first refusal, preemptive right, right of first offer
or other similar rights to acquire (each a "Preferential Right") are required to
                                            ------------------
be complied with by any Covered Party or any of its Subsidiaries in connection
with the execution, delivery or performance of the Financing Documents or the
consummation of the transactions contemplated by the Financing Documents.

          5.5  Compliance with Law.  Each of the Borrower and each member of the
               -------------------
NEG Group and each Scheduled Project has been and on the Closing Date is in
compliance in all material respects with all Laws, Governmental Approvals,
orders, writs, injunctions or decrees or its Charter Documents applicable to or
otherwise concerning such Person and such Scheduled Project.

          5.6  Litigation Claims.  Except as set forth on Schedule 5.6, there
               -----------------
are no legal or arbitral proceedings or investigations, or any proceedings by or
before any Governmental Authority or any Person, pending or threatened against
the transactions contemplated by the Financing Documents or any document
executed in connection therewith which could reasonably be expected to have a
Material Adverse Effect, and there are no other legal or arbitral proceedings or
investigations, or any proceedings by or before any Governmental Authority or
any Person pending against the Borrower, LLC, NEG, Inc. or the Significant
Subsidiaries which could reasonably be expected to result in a Material Adverse
Change to the Borrower, or a Material Adverse Change to LLC, NEG, Inc. and the
Significant Subsidiaries, taken as a whole.

          5.7  Contracts and Commitments.  (a)  Schedule 5.7 reflects a complete
               -------------------------
and accurate list of all material contracts, agreements or letters of intent or
written understandings (including all amendments and supplements thereto)
entered into by any Covered Party (collectively, the "Covered Contracts") (it
being understood that any contract, agreement or letter of intent or written
understanding (i) entered in the ordinary course of business of the Covered
Parties, or (ii) with respect to Indebtedness of any such Covered Party that is
non-recourse to such Covered Party, or (iii) requiring aggregate payments of
less than $10,000,000 or (iv) with a fixed term of less than three hundred and
sixty-four (364) days shall not be deemed to be a "material" contract, agreement
or letter of intent or written understanding).

          (b) Except as otherwise set forth on Part E of the Disclosure Letter,
(i) each of the Covered Contracts is a valid and binding obligation of the
Covered Party which is a party thereto and enforceable by the Covered Parties
(as applicable) in accordance with its terms, except as enforcement may be
limited by bankruptcy, insolvency, reorganization or similar laws or equitable
principles relating to creditors' rights generally; (ii) none of the Covered
Parties party to any Covered Contract is in default or alleged to be in default
under any Covered Contract, and no other asserted or, to the best knowledge of
the Borrower, LLC and NEG, Inc., unasserted claim or dispute under any Covered
Contract exists; and (iv) to the best knowledge of the Borrower, there exists no
event, condition or occurrence that, after notice or lapse of time, or both,
would constitute such a default, claim or dispute by the Covered Parties or, to
the best knowledge of the Borrower, any other party to any such Covered
Contract.

                                      -20-
<PAGE>

          5.8  Liens.  Except as set forth on Schedule 5.8, none of the
               -----
Properties of the Borrower, LLC or NEG, Inc. are subject to any Lien, other than
the Liens created by this Agreement and the Security Documents.

          5.9  Insurance.  All insurance policies and fidelity bonds relating to
               ---------
the Covered Parties and their Properties, including summary descriptions and the
termination dates thereof, in force as of the date of this Agreement are set
forth on Schedule 5.9.  The insurance coverage provided by such policies will
not terminate or lapse as a result of the transactions contemplated by this
Agreement or the other Financing Documents.  Except as set forth on Schedule
5.9, all such insurance policies and fidelity bonds are in the name of the
Borrower, LLC, NEG, Inc. or a NEG Subsidiary (as indicated on Schedule 5.9).
None of the Covered Parties or, to the best knowledge of the Borrower, any other
party to any such policy or bond is in breach, violation or default (including
with respect to the payment of premiums or the giving of notices), and, to the
best knowledge of the Borrower, no event has occurred that, with notice or the
lapse of time or both, could constitute such a breach, violation or default by
the Covered Parties or any other party, or permit termination, modification or
acceleration, under such policy or bond, except where any such breach,
violation, default, termination, modification or acceleration could not
reasonably be expected to have a Material Adverse Effect.

          5.10  Capitalization and Ownership.  (a)  As of the Closing Date, the
                ----------------------------
Borrower and Energy NEG Corp. are the sole members of LLC, with the Borrower
owning all of the Class A membership interests of the LLC, which entitle the
Borrower to 100% of the economic interest in LLC, and Energy NEG Corp. owning
all of the Class B membership interests of LLC, which entitle Energy NEG Corp.
to vote solely on certain bankruptcy matters of LLC as provided for in the LLC
Agreement.  The Borrower is (and at all times prior to the Closing Date from and
after January 12, 2001, was) the owner of 100% of the Class A membership
interests in LLC and is (and at all times prior to the Closing Date from and
after January 12, 2001, was) the indirect owner (through the Limited Liability
Company Interests) of 100% of NEG, Inc. and the NEG Subsidiaries.

          (b) LLC is (and at all times prior to the Closing Date from and after
January 12, 2001,was) the sole direct owner of all of the outstanding Capital
Stock of NEG, Inc., free and clear of all Liens and adverse claims, other than
the Liens in favor of the Collateral Agent created by the Security Documents.

          (c) NEG, Inc. is (and at all times prior to the Closing Date from and
after January 1, 1999, was) the ultimate sole parent other than companies owning
NEG, Inc. directly or indirectly, of all Significant Subsidiaries and other NEG
Subsidiaries.

          (d)  (i)  All of the Limited Liability Company Interests have been
duly authorized and, at the Closing Date, are and will be validly issued, free
and clear of all Liens and adverse claims, other than the Liens in favor of the
Collateral Agent created by the Security Documents.

          (ii) All shares of the Capital Stock of NEG, Inc. have been duly
authorized and, at the Closing Date, are and will be validly issued and fully
paid and nonassessable and are

                                      -21-
<PAGE>

owned by LLC, free and clear of all Liens and adverse claims, other than the
Liens in favor of the Collateral Agent created by the Security Documents.

          (e) Except as set forth in Schedule 5.10(e), no Person other than a
member of the NEG Group owns (i) any outstanding option, warrant, purchase
right, subscription right, conversion right, exchange right or other contract,
commitment, arrangement or understanding relating to the issuance by or purchase
from the Borrower of its LLC Interests, LLC, NEG, Inc. or any Significant
Subsidiary of its Equity Interests (as defined below), or (ii) any outstanding
stock appreciation, phantom stock, profit participation or similar rights with
respect to LLC, NEG, Inc. or any Significant Subsidiary, and there are no voting
trusts, proxies or other agreements or understandings with respect to the voting
of LLC Interests or Equity Interests to which the Borrower, LLC, NEG, Inc. or
any Significant Subsidiary is party.

          (f) Schedule 5.10(f) sets forth for each of the Borrower, LLC, NEG,
Inc. and the NEG Subsidiaries a complete and accurate listing of (i) its name
and jurisdiction of organization, (ii) its form of organization and (iii) the
percentage (and, where applicable, the amount) of capital stock, partnership
interests (general and limited), membership interests or other equity interests
("Equity Interests") held directly or indirectly by the Borrower.

          5.11  Financial Statements; Absence of Certain Changes. (a) Prior to
                ------------------------------------------------
the execution of this Agreement, the Borrower has delivered to the
Administrative Agent and each Lender the following financial statements, each of
which has been certified by the Chief Financial Officer of the relevant Person
specified below:

          (i) (x) the audited consolidated financial statements of the Borrower
     as at December 31, 1999, and (y) the unaudited consolidated financial
     statements of the Borrower as at June 30, 2000 and September 30, 2000, and
     the unaudited consolidating balance sheet and income statement of the
     Borrower as at November 30, 2000, which statement has been prepared on a
     management basis and does not include accompanying notes;

          (ii) (x) the audited financial statements of each of the FI
     Subsidiaries as at December 31, 1999, and (y) the unaudited financial
     statements of each of the FI Subsidiaries as at June 30, 2000 and September
     30, 2000, and the unaudited draft financial statements of each such FI
     Subsidiary as at December 31, 2000;

          (iii)  the unaudited consolidated balance sheet and income statements
     of NEG, Inc. as at December 31, 1999 and the estimated unaudited financial
     statements of NEG, Inc. as at December 31, 2000.

Any audited financial statements (the "Audited Financial Statements") described
in this Section 5.11(a) (complete with any appropriate footnote disclosures)
present fairly the financial position of the relevant Person as at December 31,
1999, and were prepared in accordance with GAAP, consistently applied.  Any
unaudited financial statements (the "Unaudited Financial Statements") described
in this Section 5.11(a) present fairly the financial position of the relevant
Person as at

                                      -22-
<PAGE>

such dates. Such Audited Financial Statements and Unaudited Financial Statements
have been prepared from the books of account and financial records of the
relevant Person.

     (b)  Since December 31, 2000 and except as disclosed in the SEC Filings by
the Borrower since December 31, 2000 but prior to the Closing Date, the Borrower
and all members of the NEG Group have conducted their business only in the
ordinary course of business, and there has not been (i) any event or development
that could, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect or (ii) any damage, destruction or loss, whether or not
covered by insurance, that could, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect. Except as set forth in the
Audited Financial Statements or otherwise disclosed in writing to each Lender in
the Disclosure Letter or incurred in the ordinary course of business, none of
the Covered Parties or any other NEG Subsidiary has any outstanding claims,
liabilities or indebtedness, contingent or otherwise.

     5.12 Taxes. (a) Each of the Covered Parties and its Subsidiaries has filed
          -----
or caused to be filed with the appropriate taxing authorities all material
federal, state and local tax returns ("Returns") which are required to be filed
by or with respect to each such Covered Party, its Subsidiaries, or any assets
thereof. The Returns accurately reflect (or will accurately reflect) all
liabilities for Taxes of each such Covered Party or Subsidiary for the periods
covered thereby in all material respects. All material Taxes due by or with
respect to each such Covered Party or Subsidiary, or any assets thereof, whether
or not shown on any Return, have been or will be timely paid in full on or prior
to the Closing Date or accrued and provided for on the books and records of each
such Person, as applicable, in accordance with GAAP. There is no dispute or
claim concerning any liability for Taxes of each of the Covered Parties, its
Subsidiaries, or any assets thereof that has been claimed or raised by any
Governmental Authority, except for disputes or claims for Taxes that have been
provided for on the books and records of each such Person, as applicable, in
accordance with GAAP. No Return of any of the Covered Parties, their
Subsidiaries, or the affiliated group of the Borrower is currently, or has been,
the subject of an audit by any taxing authority and no notice of such an audit
has been received, except for audits with respect to Taxes that have been
provided for on the books and records of each such Covered Party and its
Subsidiaries, as applicable, in accordance with GAAP. None of the Covered
Parties or any of their Subsidiaries have waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency, except with respect to Taxes that have been provided
for on the books and records of each such Covered Party and its Subsidiaries, as
applicable, in accordance with GAAP.

     (b)  All material Taxes which a Covered Party or any of its Subsidiaries is
(or was) required by Law to withhold or collect with respect to any payments
made in connection with its Property have been duly withheld or collected, and
have been timely paid over to the appropriate authorities to the extent due and
payable.

     5.13 Disclosure. All documents, reports or other written information
          ----------
pertaining to the Covered Parties or its Affiliates that have been furnished to
the Lenders by or on behalf of the Covered Parties, taken as a whole, are true
and correct in all material respects and do not contain any untrue statement of
a material fact or omit to state any material fact necessary to make the
statements contained therein not misleading. There is no fact, event or
circumstance

                                      -23-
<PAGE>

that has not been disclosed to the Lenders in writing, the existence of which
could reasonably be expected to have a Material Adverse Effect or a Material
Adverse Change of NEG, Inc. and the NEG Subsidiaries, taken as a whole.

     5.14 Environmental Matters. Except as set forth in Schedule 5.14, (a) each
          ---------------------
of the Borrower and the members of the NEG Group is in compliance in all
material respects with all applicable Environmental Laws, (b) there is no
Environmental Claim outstanding or pending against the Borrower or any member of
the NEG Group or, to the best knowledge of the Borrower, threatened against the
Borrower or any member of the NEG Group, which, individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect or to
result in a Material Adverse Change to NEG, Inc. and the NEG Subsidiaries, taken
as a whole, and (c) to the best knowledge of the Borrower, LLC and NEG, Inc.,
none of the Covered Parties or other NEG Subsidiary has made any past or present
releases, emissions, discharges or disposals of any Hazardous Material in
violation of any Environmental Laws or that would give rise to any liability
which, individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect or a Material Adverse Change to NEG, Inc. and the NEG
Subsidiaries, taken as a whole.

     5.15 Brokers' or Finders' Fees. Except as set forth in Schedule 5.15 (as to
          -------------------------
which the Borrower is solely responsible for the payment of any such investment
banker's, brokers' or finders' fee or other commission or similar fee), no
agent, broker, investment banker, Person or firm acting on behalf of the Covered
Parties or any of their Affiliates or under the authority of the Borrower or any
of its Affiliates is or will be entitled to any brokers' or finders' fee or any
other commission or similar fee directly or indirectly from any of the parties
hereto in connection with any of the transactions contemplated hereby.

     5.16 Certain Regulatory Matters. (a) Neither Borrower nor any Subsidiary of
          --------------------------
Borrower is a "registered holding company" or a "subsidiary company" or an
"affiliate" of a "registered holding company" or a company which is required to
be registered as a "holding company" as such terms are defined under PUHCA.

     (b)  Each member of the NEG Group that owns assets subject to the
jurisdiction of FERC pursuant to the FPA or sells power at wholesale in the
United States is and at all relevant times has been either: (i) a QF; (ii)
certified by FERC as an EWG, has been granted by FERC the waivers from
regulation under the FPA typically granted to EWGs with market rate authority,
and has been granted by FERC market rate authority without qualifications,
conditions or restrictions other than those typically imposed on utility
affiliates; or (iii) a power marketer which owns no physical assets used for the
generation, transmission or distribution of electric energy as such terms are
used in PUHCA, has been granted by FERC the waivers from regulation under the
FPA typically granted to power marketers, and has been granted by FERC market
rate authority without qualifications, conditions or restrictions other than
those typically imposed on utility affiliates. The applications and additional
information submitted in connection with the certifications for QF status,
applications for EWG certification, applications for power marketer status, and
applications for market rate authority were accurate and complete in all
material respects when made and, as amended or supplemented from time-to-time,
remained at all relevant times and currently remain accurate and complete in all
respects affecting the eligibility for QF

                                      -24-
<PAGE>

status, EWG status, power marketer status, or market rate authority as
applicable, and each such FERC authorization or certification is in full force
and effect.

     (c)  Each member of the NEG Group (other than a QF during the period during
which it was a QF) that owns assets subject to the jurisdiction of FERC pursuant
to the FPA or sells power at wholesale in the United States has charged rates or
provided services only pursuant to either: (i) one or more rate schedules on
file with FERC; or (ii) market rate contracts in compliance with such entity's
market rate authority from FERC. Each QF during the period it was a QF has sold
power only in a manner consistent with its status as a QF.

     (d)  Each member of the NEG Group which owns natural gas assets, sells
natural gas or provides services subject to the jurisdiction of FERC pursuant to
the Natural Gas Act, as amended, or the Natural Gas Policy Act of 1978, as
amended, (i) has a rate schedule on file with FERC; (ii) has charged rates and
provided services only pursuant to such filed rates; and (iii) has complied and
complies in all material respects with the requirements of FERC orders
applicable to such member of the NEG Group.

     (e)  No member of the NEG Group is subject to Utility Regulation other than
as set forth in Schedule 5.16(e).

     (f)  Neither the Borrower nor LLC directly owns any assets subject to the
jurisdiction of FERC pursuant to the FPA.

     (g)  Except with respect to material licenses issued for the Brayton Point
and Salem Harbor Stations for monitoring equipment used to measure coal supply,
no member of the NEG Group is subject to regulation under the Atomic Energy Act
of 1954.

     (h)  The Borrower and each of its Subsidiaries is in material compliance
with all orders of the CPUC applicable to it, including without limitation, the
conditions set forth in the orders setting forth the conditions for the creation
of the Borrower and any subsequent CPUC proceedings, Pacific Gas and Electric
                                                     ------------------------
Company, 69 CPUC2nd 167 (Nov. 6, 1996), Pacific Gas and Electric Company, 194
-------                                 --------------------------------
PUR4th 1 (April 22, 1999), and all other CPUC orders purporting to apply to the
Borrower or its Subsidiaries regardless of whether the CPUC had jurisdiction.

     (i)  The Borrower and each of its Subsidiaries subject to Utility
Regulations is in material compliance with the requirements of Utility
Regulation applicable to it.

     (j)  None of the Borrower or any member of the NEG Group is subject to any
statute or regulation which would prohibit or require approval of the
transactions contemplated under this Agreement and the other Financing
Documents, including any Utility Regulation.

     5.17 Transactions With Affiliates. Except as set forth on Schedule 5.17,
          ----------------------------
neither the Borrower nor any of its Subsidiaries is a party to any material
contract (i) with PGE Utility on the one hand and Borrower or any member of the
NEG Group on the other, or (ii) with the Borrower on the one hand and any member
of the NEG Group on the other.

                                      -25-
<PAGE>

     5.18 Use of Proceeds. The proceeds of the Loans will be used for the
          ---------------
Refinancing in accordance with the provisions of this Agreement. The Borrower is
not engaged principally, or as one of its important activities, in the business
of extending credit for the purpose, whether immediate, incidental or ultimate,
of buying or carrying Margin Stock and no part of the proceeds of the Loans will
be used to purchase or carry any Margin Stock. Neither the making of the Loans
nor the use of the proceeds thereof will violate or be inconsistent with the
provisions of Regulation U or Regulation X.

     5.19 Compliance with ERISA. (i) Schedule 5.19 sets forth each Plan; each
          ---------------------
Plan (and each related trust, insurance contract or fund) is in substantial
compliance with its terms and with all applicable laws, including without
limitation ERISA and the Code; each Plan (and each related trust, if any) which
is intended to be qualified under Section 401(a) of the Code has received a
determination letter from the Internal Revenue Service to the effect that it
meets the requirements of Sections 401(a) and 501(a) of the Code; no Reportable
Event has occurred; no Plan which is a multiemployer plan (as defined in Section
4001(a)(3) of ERISA) is insolvent or in reorganization; no Plan has an Unfunded
Current Liability; no Plan which is subject to Section 412 of the Code or
Section 302 of ERISA has an accumulated funding deficiency, within the meaning
of such sections of the Code or ERISA, or has applied for or received a waiver
of an accumulated funding deficiency or an extension of any amortization period,
within the meaning of Section 412 of the Code or Section 303 or 304 of ERISA;
all contributions required to be made with respect to a Plan have been timely
made; neither the Borrower nor any Subsidiary of the Borrower nor any ERISA
Affiliate has incurred any material liability (including any indirect,
contingent or secondary liability) to or on account of a Plan pursuant to
Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of
ERISA or Section 401(a)(29), 4971 or 4975 of the Code or expects to incur any
such liability under any of the foregoing sections with respect to any Plan; no
condition exists which presents a material risk to the Borrower or any
Subsidiary of the Borrower or any ERISA Affiliate of incurring a liability to or
on account of a Plan pursuant to the foregoing provisions of ERISA and the Code;
no proceedings have been instituted to terminate or appoint a trustee to
administer any Plan which is subject to Title IV of ERISA; no action, suit,
proceeding, hearing, audit or investigation with respect to the administration,
operation or the investment of assets of any Plan (other than routine claims for
benefits) is pending, expected or threatened; using actuarial assumptions and
computation methods consistent with Part 1 of subtitle E of Title IV of ERISA,
the aggregate liabilities of the Borrower and its Subsidiaries and its ERISA
Affiliates to all Plans which are multiemployer plans (as defined in Section
4001(a)(3) of ERISA) in the event of a complete withdrawal therefrom, as of the
close of the most recent fiscal year of each such Plan ended prior to the date
of the most recent Credit Event, would not exceed $100,000; each group health
plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code)
which covers or has covered employees or former employees of the Borrower, any
Subsidiary of the Borrower, or any ERISA Affiliate has at all times been
operated in compliance with the provisions of Part 6 of subtitle B of Title I of
ERISA and Section 4980B of the Code; no lien imposed under the Code or ERISA on
the assets of the Borrower or any Subsidiary of the Borrower or any ERISA
Affiliate exists or is likely to arise on account of any Plan; and the Borrower
and its Subsidiaries may cease contributions to or terminate any employee
benefit plan maintained by any of them without incurring any material liability.

                                      -26-
<PAGE>

     (ii) Each Foreign Pension Plan has been maintained in substantial
compliance with its terms and with the requirements of any and all applicable
laws, statutes, rules, regulations and orders and has been maintained, where
required, in good standing with applicable regulatory authorities. All
contributions required to be made with respect to a Foreign Pension Plan have
been timely made. Neither the Borrower nor any of its Subsidiaries has incurred
any obligation in connection with the termination of, or withdrawal from, any
Foreign Pension Plan. The present value of the accrued benefit liabilities
(whether or not vested) under each Foreign Pension Plan, determined as of the
end of the Borrower's most recently ended fiscal year on the basis of actuarial
assumptions, each of which is reasonable, did not exceed the current value of
the assets of such Foreign Pension Plan allocable to such benefit liabilities.

     5.20 Investment Company Act. The Borrower is not an "investment company,"
          ----------------------
or an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act of
1940, as amended. Neither the making of any Loan, nor the application of the
proceeds or repayment thereof by the Borrower, nor the consummation of the other
transactions contemplated hereby will violate any provisions of such Act or any
rule, regulation or order of the SEC thereunder.

     5.21 Regulation.  Solely by virtue of the execution, delivery and
          ----------
performance of, or the consummation of the transactions contemplated by the
Financing Documents (including, without limitation, the assignment of or
transfer into any trust, or any realization or foreclosure upon, any of the LLC
Interests pledged under the LLC Pledge Agreement or any of the collateral
pledged under the Stock Pledge Agreement, or the exercise of any right under the
Option Agreement), neither any Holder nor any Lender shall be or become subject
to regulation (i) as a "holding company," or an "affiliate" of a "holding
company" or a "subsidiary company" of a "holding company," within the meaning of
the Public Utility Holding Company Act of 1935, (ii) under the Federal Power Act
of 1920, or (iii) as a "public utility" or "public service corporation" or the
equivalent under the applicable Law of any Governmental Authority, except with
respect to the exercise of the foreclosure rights with respect to the stock of
NEG, Inc. or the LLC Interests which may require filing with FERC and certain
state regulatory agencies.

     5.22 Security Documents. The provisions of the Security Documents are
          ------------------
effective to create, in favor of the Collateral Agent, for the benefit of the
Lenders, legal, valid and enforceable Liens on or in all of the collateral
intended to be covered thereby, and all necessary recordings and filings have
been made in all necessary public offices and all other necessary and
appropriate action has been taken so that the Liens created by each Security
Document constitute perfected Liens on or in the collateral intended to be
covered thereby, prior and superior to all other Liens, and all necessary
consents to the creation, effectiveness, priority and perfection of each such
Lien have been obtained. No mortgage or financing statement or other instrument
or recordation covering all or any part of the collateral is on file in any
recording office, except such as may have been filed in favor of the Collateral
Agent, for the benefit of the Lenders.

     5.23 Certain Scheduled Projects. Schedule 5.23 sets forth a complete list
          --------------------------
of all projects owned directly or indirectly by the Borrower, LLC, NEG, Inc. and
the NEG Subsidiaries ("Scheduled Projects") and a summary of material
                       ------------------
information with respect thereto, including the name, location, capacity and
classification of each Scheduled Project as a QF, EWG or otherwise,

                                      -27-
<PAGE>

the equity structure, and the amount of Indebtedness, with respect to each
Scheduled Project and such other information requested by the Lenders.

     5.24 Environmental Matters. (a) The Borrower, LLC, NEG, Inc. and the NEG
          ---------------------
Subsidiaries have complied and are now complying in all material respects with
(i) all Environmental Laws applicable to the Scheduled Projects and (ii) the
requirements of any Governmental Approvals issued under such Environmental Laws
with respect to the Scheduled Projects.

     (b)  Except as set forth in Schedule 5.14, there are no facts,
circumstances, conditions or occurrences regarding any of the Scheduled Projects
that (i) to the best knowledge of the Borrower, could reasonably be anticipated
to form the basis of an Environmental Claim against such Scheduled Project, the
Borrower, LLC, NEG, Inc. or any NEG Subsidiary or, to the best knowledge of the
Borrower, or any other Person occupying or conducting operations on or about
such Scheduled Project which if adversely determined could reasonably be
expected to have a Material Adverse Effect or a Material Adverse Change to NEG,
Inc. and the NEG Subsidiaries, taken as a whole, (ii) could reasonably be
anticipated to cause such Scheduled Project to be subject to any material
restrictions on its ownership, occupancy, use or transferability under any
Environmental Law or (iii) could be reasonably anticipated to require the filing
or recording of any material notice, registration, permit or disclosure document
under any Environmental Law.

     (c)  Except as set forth in Schedule 5.14, there are no past, pending, or,
to the best knowledge of the Borrower, threatened, Environmental Claims against
the Borrower, LLC, NEG, Inc., or any of the Scheduled Projects, which if
adversely determined could reasonably be expected to have a Material Adverse
Effect or a Material Adverse Change to NEG, Inc. and the NEG Subsidiaries, taken
as a whole.

     (d)  Hazardous Materials have not at any time been generated, used,
treated, recycled, stored on, or transported to or from, or Released, deposited
or disposed of on all or any portion of any Scheduled Project other than in
compliance at all times with all applicable Environmental Laws, except to the
extent such non-compliance, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect or a Material Adverse
Change to NEG, Inc., and the NEG Subsidiaries, taken as a whole.

     (e)  There are not now and, to the best knowledge of the Borrower, never
have been any underground storage tanks located on the Scheduled Projects and
there is no asbestos contained in, forming part of, or contaminating, any part
of the Scheduled Projects, and no polychlorinated biphenyls (PCBs) are used,
stored, located at or contaminate any part of the Scheduled Projects, the
existence of which, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect or a Material Adverse Change to NEG,
Inc. and the NEG Subsidiaries, taken as a whole.

     5.25 Intellectual Property. Each of the Covered Parties owns or has the
          ---------------------
right to use all patents, trademarks, permits, service marks, trade names,
copyrights, franchises, formulas, licenses and other rights with respect
thereto, and has obtained assignment of all licenses and other rights of
whatsoever nature necessary for the operation of its business as currently
contem-

                                      -28-
<PAGE>

plated without any conflict with the rights of others. To the best knowledge of
the Borrower, no product, process, method, substance, part or other material
sold or employed or presently contemplated to be sold by or employed by any of
the Covered Parties in connection with its business infringes or will infringe
any patent, trademark, permit, service mark, trade name, copyright, franchise,
formula, license or other intellectual property right.

     5.26 No Default. No Default or Event of Default has occurred and is
          ----------
continuing.

     5.27 Single-Purpose Entity. LLC has not engaged in any business other than
          ---------------------
the ownership of 100% of the capital stock of NEG, Inc. LLC has established
offices at 7500 Old Georgetown Road, Bethesda, MD 20814-6161, and does not have
a place of business at any other location. LLC has no Indebtedness and no
significant assets other than the common stock of NEG, Inc.

     5.28 Trust Indenture Act. The offering, issuance, sale and delivery of the
          -------------------
Notes under the circumstances contemplated by this Agreement and the other
Financing Documents will not require this Agreement to be qualified under the
Trust Indenture Act of 1939, as amended.

     5.29 [OMITTED]

     5.30 Ratings Letter. Since January 19, 2001, none of NEG, Inc. or any
          --------------
Significant Subsidiary has knowledge of or received any notice of a downgrade of
the credit rating of its long-term senior unsecured indebtedness or its being
placed on "credit watch" by Moody's or Standard & Poor's.

     5.31 Certain Indebtedness. Part A of the Disclosure Letter sets forth a
          --------------------
true and complete list of all Indebtedness of the Borrower and the amount
thereof immediately prior to the Closing Date. Part B of the Disclosure Letter
sets forth a true and complete list of all agreements with respect to the
Indebtedness of the Borrower and the amount thereof existing on the Closing Date
which, subject to Section 7.4, is to remain outstanding after the Closing Date
(the "Existing Indebtedness Agreements"). Except as set forth on Part B, C and D
      --------------------------------
of the Disclosure Letter, all Indebtedness of the Borrower will be Refinanced
and repaid in full as at the Closing Date and all commitments in respect thereof
and all Liens and guaranties in connection therewith are terminated, and no
Person shall have any claim against the Borrower and the Borrower shall have no
further obligations with respect thereto. NEG, Inc. has made all reasonable
efforts to offer to repay, refinance or otherwise release the obligations of the
Borrower under such Indebtedness listed on Clauses I, II and III of Part B of
the Disclosure Letter, including the obligations of the Borrower under the
Equity Infusion Agreement and the Trading Contracts. Except as set forth in Part
B of the Disclosure Letter, none of the obligations of the Borrower under the
Existing Indebtedness Agreements are due and payable as of the Closing Date, and
there has been no demand on the Borrower, and the Borrower is not currently
liable, for any payment under such Existing Indebtedness Agreements.

                                      -29-
<PAGE>

     SECTION 6.  AFFIRMATIVE COVENANTS.
                 ---------------------

     The Borrower hereby covenants and agrees that in the case of the covenants
described below on and after the Closing Date and until the Loans and the Notes
together with interest, fees and all other Obligations incurred hereunder and
thereunder are paid in full (other than any indemnity, not then due and payable,
which by its terms shall survive such termination and payment):

          6.1  Information Covenants. The Borrower will, or will cause the
               ---------------------
Covered Parties to, furnish to each Lender:

          (a)  Quarterly Financial Statements. Within 45 days after the close of
               ------------------------------
     the first three quarterly accounting periods in each fiscal year of the
     relevant Person specified below, (i) the consolidated and consolidating
     balance sheets of each of (x) the Borrower and its consolidated
     subsidiaries, (y) NEG, Inc. and its consolidated subsidiaries, and (ii) the
     condensed consolidated balance sheets of the Significant Subsidiaries and
     their consolidated subsidiaries, as at the end of such quarterly accounting
     period and the related consolidated and consolidating statements of income
     and cash flows, in each case for such quarterly accounting period and for
     the elapsed portion of the fiscal year ended with the last day of such
     quarterly accounting period, and in each case, setting forth comparative
     figures for the related periods in the prior fiscal year, all of which
     shall be certified by the Chief Financial Officer of the relevant Person,
     subject to normal year-end audit adjustments.

          (b)  Annual Financial Statements.  Within 90 days after the close of
               ---------------------------
     each fiscal year commencing with the fiscal year 2001, and within 110 days
     after the close of the fiscal year 2000, of the relevant Person specified
     below, (i) the consolidated balance sheets of each of (x) the Borrower and
     its consolidated subsidiaries, (y) NEG, Inc. and its consolidated
     subsidiaries, and (ii) the balance sheets of each of the FI Subsidiaries as
     at the end of such fiscal year and in each case, the related statements of
     income and retained earnings and of cash flows for such fiscal year,
     consolidated or otherwise, as applicable, setting forth comparative figures
     for the preceding fiscal year and in the case of all such balance sheets
     certified by Deloitte & Touche LLP, or such other independent certified
     public accountants of recognized national standing reasonably acceptable to
     the Lenders, together with a report of such accounting firm stating that in
     the course of its regular audit of the financial statements of any of (A)
     the Borrower and its consolidated subsidiaries, or (B) NEG, Inc. or any of
     its consolidated subsidiaries or (C) any of the FI Subsidiaries, as the
     case may be, which audit was conducted in accordance with generally
     accepted auditing standards, such accounting firm obtained no knowledge of
     any Default or Event of Default which has occurred and is continuing or, if
     in the opinion of such accounting firm such a Default or Event of Default
     has occurred and is continuing, a statement as to the nature thereof, and
     (iii) management's discussion and analysis of the Borrower of the important
     operational and financial developments during such fiscal year.

                                      -30-
<PAGE>

          (c)  Management Letters.  Promptly after the receipt thereof by the
               ------------------
     Borrower or any of its Subsidiaries, a copy of any "management letter"
     received by any such Person from its certified public accountants and the
     management's responses thereto.

          (d)  [OMITTED]
                -------

          (e)  Officer's Certificates.  At the time of the delivery of the
               ----------------------
     financial statements provided for in Section 6.1(a) and (b), a certificate
     of the Chairman of the Board, the President or Chief Financial Officer of
     the Borrower to the effect that, to the best of such officer's knowledge,
     no Default or Event of Default has occurred and is continuing or, if any
     Default or Event of Default has occurred and is continuing, specifying the
     nature and extent thereof.

          (f)  Notice of Default or Litigation, etc.  Promptly, and in any event
               ------------------------------------
     within three (3) Business Days after an officer of the Borrower or any
     other Covered Party obtains knowledge thereof, notice of (i) the occurrence
     of any event which constitutes a Default or Event of Default, (ii) any
     litigation or governmental investigation or proceeding pending or
     threatened (x) against the Borrower or any of its Subsidiaries which would
     reasonably be expected to have a Material Adverse Effect or result in a
     Material Adverse Change to LLC, NEG, Inc. and the Significant Subsidiaries,
     taken as a whole, (y) with respect to any Indebtedness in excess of
     $10,000,000 of the Borrower or any of its Subsidiaries or (z) with respect
     to any Financing Document, (iii) downgrade of the credit rating of the
     long-term senior unsecured indebtedness of the Borrower or any other
     Covered Party or "negative watch" by Moody's or Standard & Poor's, and (iv)
     demand for satisfaction of any guaranty or other Contingent Obligations of
     the Borrower or any other Covered Party.

          (g)  Other Reports and Filings.  Promptly, copies of all financial
               -------------------------
     information, proxy materials and other information and reports, if any,
     which the Borrower or any of its Subsidiaries shall receive from FERC, CPUC
     or SEC or file with FERC, CPUC or SEC, which could reasonably be expected
     to have a Material Adverse Effect or result in a Material Adverse Change to
     LLC, NEG, Inc. and the Significant Subsidiaries, taken as a whole, or
     deliver to holders of its material Indebtedness pursuant to the terms of
     the documentation governing such Indebtedness (or any trustee, agent or
     other representative therefor) and holders of their capital stock in their
     capacity as such.

          (h)  Environmental Matters.  Promptly upon, and in any event within
               ---------------------
     thirty (30) days after, an officer of the Borrower or any other Covered
     Party obtains knowledge thereof, notice of one or more of the following
     environmental matters which occurs after the Closing Date, unless such
     environmental matters would not, individually or when aggregated with all
     other such environmental matters, be reasonably expected to have a Material
     Adverse Effect or result in a Material Adverse Change to LLC, NEG, Inc. and
     the Significant Subsidiaries, taken as a whole:

                                      -31-
<PAGE>

               (i)    any Environmental Claim pending or threatened in writing
          against the Borrower or any of its Subsidiaries or any Real Estate
          owned or operated or occupied by the Borrower or any of its
          Subsidiaries;

               (ii)   any condition or occurrence on or arising from any Real
          Estate owned or operated or occupied by the Borrower or any of its
          Subsidiaries that (a) results in noncompliance by the Borrower or any
          of its Subsidiaries with any applicable Environmental Law or (b) would
          reasonably be expected to form the basis of an Environmental Claim
          against the Borrower or any of its Subsidiaries or any such Real
          Estate;

               (iii)  any condition or occurrence on any Real Estate owned or
          operated or occupied by the Borrower or any of its Subsidiaries that
          would reasonably be expected to cause such Real Estate to be subject
          to any restrictions on the ownership, occupancy, use or
          transferability by the Borrower or any of its Subsidiaries of such
          Real Estate under any Environmental Law; and

               (iv)   the taking of any removal or remedial action in response
          to the actual or alleged presence of any Hazardous Material on any
          Real Estate owned or operated or occupied by the Borrower or any of
          its Subsidiaries as required by any Environmental Law or any
          governmental or other administrative agency; provided that in any
                                                       --------
          event the Borrower shall deliver to each Lender all material notices
          received by it or any of its Subsidiaries from any government or
          governmental agency under, or pursuant to, CERCLA.

     All such notices shall describe in reasonable detail the nature of the
     claim, investigation, condition, occurrence or removal or remedial action
     and the Borrower's or such Subsidiary's response thereto. In addition, the
     Borrower will provide each Lender, from time to time, with copies of
     periodic environmental audit and associated final closeout reports audited
     by the environmental management system of any member of the NEG Group and
     annual environmental compliance report prepared by any member of the NEG
     Group, and copies of all material communications with any government or
     governmental agency and all material communications with any Person
     relating to any Environmental Claim as to which notice is required to be
     given pursuant to this Section 6.1(h), and such detailed reports of any
     such Environmental Claim as to which notice is required, as may reasonably
     be requested by any Lender.

          (i)  [OMITTED]
                -------

          (j)  Intercompany Transaction. From time to time, such information or
               ------------------------
     document with respect to any commitment, memorandum of understanding or
     agreement, whether in writing or not, with respect to material transactions
     between (i) any of the Borrower and any member of the NEG Group or (ii)
     between or among any of the Borrower and any member of the NEG Group, on
     one hand and PGE Utility and any of its Subsidiaries, on the other hand.

                                      -32-
<PAGE>

          (k)  Certain Other Information.  Concurrently therewith, any financial
               -------------------------
     information provided by NEG, Inc. to its lenders, noteholders or
     bondholders  pursuant to the terms of the credit agreement, loan agreement
     or other equivalent instrument.

          (l)  Quarterly Meetings with Lender.  At the request of the
               ------------------------------
     Administrative Agent, within 50 days after the close of each fiscal quarter
     the Borrower shall hold a meeting at a reasonable time and place selected
     by the Borrower and acceptable to each Lender at which meeting shall be
     reviewed the financial results of the previous fiscal quarter and the
     financial condition of the Borrower and its Subsidiaries and the budgets
     presented for the current fiscal quarter of the Borrower and its
     Subsidiaries.

          (m)  Cash Reserve Certificate.  At the time of delivery of the
               ------------------------
     quarterly financial statements pursuant to clause (a) above, a certificate
     of an officer of the Borrower certifying that it is in compliance with
     Section 6.18 and setting forth in reasonable detail the calculation and the
     amount of cash and Cash Equivalents held by the Borrower with respect to
     such compliance at such time.

          (n)  Other Information.  From time to time, such other information or
               -----------------
     documents (financial or otherwise) with respect to the Borrower or its
     Subsidiaries as the Administrative Agent or any Lender may reasonably
     request in writing.

          6.2  Books, Records and Inspections.  The Borrower will, and will
               ------------------------------
cause all members of the NEG Group to, keep proper books of record and account
in which are made full, true and correct entries in conformity with generally
accepted accounting principles and all requirements of law.  The Borrower will,
and will cause the other Covered Parties to, permit officers and designated
representatives of any Lender to visit and inspect, during regular business
hours and under guidance of officers of the Borrower, any of the properties of
the Borrower and the other Covered Parties in whomsoever's possession, and to
examine the books of account of the Borrower and the other Covered Parties and
discuss the affairs (including environmental matters), finances and accounts of
the Borrower and the other Covered Parties with, and be advised as to the same
by, its and their officers and independent accountants, all upon reasonable
advance notice and at such reasonable times and intervals and to such reasonable
extent as such Lender may request, provided, that so long as no Default or Event
                                   --------
of Default has occurred and is continuing, the Borrower shall have the right to
participate in any discussions of the Lender with any independent accountants of
the Borrower.

          6.3  Maintenance of Property; Insurance.  The Borrower will, and will
               ----------------------------------
cause all members of the NEG Group to, (i) keep all material properties and
equipment used in its business in good working order and condition (ordinary
wear and tear and loss or damage by casualty or condemnation excepted), (ii)
maintain in full force and effect  insurance with reputable and solvent
insurance carriers on all its property in at least such amounts, against at
least such risks and with such deductibles or self-insured retentions as is
consistent and in accordance with industry practice and (iii) furnish to each
Lender, upon written request, full information as to the insurance carried.  In
addition to the requirements to the immediately preceding sentence, the Borrower
will at all time cause insurance of the types described in Schedule 5.9 to be
maintained with no less scope of coverage or greater deductibles as are
described in Schedule 5.9 unless Borrower can

                                      -33-
<PAGE>

show that such insurance is no longer available to the Borrower at a
commercially reasonable cost. Such insurance shall include physical damage
insurance on all real and personal property (whether now or hereafter acquired)
on an all risk basis and business interruption insurance.

          6.4  Corporate Franchises.  The Borrower will, and will cause all
               --------------------
members of the NEG Group, to do or cause to be done, all things necessary to
preserve and keep in full force and effect its existence and its material
rights, franchises, licenses and patents used in its business.

          6.5  Compliance with Statutes, etc.  The Borrower will, and will cause
               -----------------------------
all members of the NEG Group to, comply with all applicable Law, in respect of
the conduct of its business and the ownership of its Property, except such
noncompliances as could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect or result in a Material Adverse
Change to LLC, NEG, Inc. and the Significant  Subsidiaries, taken as a whole.

          6.6  Compliance with Environmental Laws.  (a)  The Borrower will
               ----------------------------------
comply, and will cause all members of the NEG Group to comply, in all material
respects with all Environmental Laws applicable to the operation of its business
or to the ownership or use of Real Estate now or hereafter owned or operated by
the Borrower and the other Covered Parties, will within a reasonable time period
pay or cause to be paid all costs and expenses incurred in connection with such
compliance (except to the extent being contested in good faith), and will
undertake all reasonable efforts to keep or cause to be kept all such Real
Estate free and clear of any Liens imposed pursuant to such Environmental Laws,
except such noncompliances as could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect or a Material Adverse
Change of LLC, NEG, Inc. and the Significant  Subsidiaries, taken as a whole.
The Borrower will not and will cause the other Covered Parties not to generate,
use, treat, store, release or dispose of, or permit the generation, use,
treatment, storage, release or disposal of Hazardous Materials on any Real
Estate now or hereafter owned or operated or occupied by the Borrower or any of
the other Covered Parties, or transport or permit the transportation of
Hazardous Materials to or from any such Real Estate except in compliance with
all applicable Environmental Laws (except such noncompliances as could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect or result in a Material Adverse Change to LLC, NEG, Inc. and the
Significant  Subsidiaries, taken as a whole) and reasonably required in
connection with the operation, use and maintenance of any such Real Estate or
otherwise in connection with their businesses.

          (b)  At the written request of any Lender upon a reasonable belief by
such Lender that the Borrower or any of its Subsidiaries has breached any
representation or covenant contained herein relating to environmental matters,
which request shall specify in reasonable detail the basis therefor, the
Borrower will provide, at the Borrower's sole cost and expense, an environmental
audit, reasonable in scope, concerning the subject matter of such representation
or covenant and any Real Estate now or hereafter owned, operated or occupied by
the Borrower or any of its Subsidiaries, prepared by an environmental consulting
firm reasonably acceptable to such Lender, indicating (if relevant to such
breach) the presence or absence of Hazardous Materials and the potential cost of
any removal or remedial action in connection with any Hazardous Materials on
such Real Estate; provided, that such request may be made only if (i) there has
                  --------
occurred and is continuing a Default, (ii) such Lender reasonably believes that
the

                                      -34-
<PAGE>

Borrower or any such Real Estate is not in compliance with Environmental Law and
such circumstances would reasonably be expected to have a Material Adverse
Effect or result in a Material Adverse Change to LLC, NEG, Inc. and the
Significant Subsidiaries, taken as a whole, or (iii) circumstances exist that
reasonably could be expected to form the basis of a material Environmental Claim
against the Borrower or any of its Subsidiaries or any such Real Estate. If the
Borrower fails to provide the same within a reasonable period, not to exceed 90
days, after such request was made, a Lender may order the same, and the Borrower
shall grant and hereby grants to such Lender and its agents access to such Real
Estate and specifically grants such Lender an irrevocable non-exclusive license,
subject to the rights of tenants, to undertake such an assessment, all at the
Borrower's expense.

          6.7  ERISA.  As soon as possible and, in any event, within ten (10)
               -----
days after the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate
knows or has reason to know of the occurrence of any of the following, the
Borrower will deliver to each Lender a certificate of the Chief Financial
Officer of the Borrower setting forth the full details as to such occurrence and
the action, if any, that the Borrower, such Subsidiary or such ERISA Affiliate
is required or proposes to take, together with any notices required or proposed
to be given or filed by such Borrower, such Subsidiary, the Plan administrator
or such ERISA Affiliate to or with the PBGC or any other government agency, or a
Plan participant and any notices received by such Borrower, such Subsidiary or
ERISA Affiliate from the PBGC or any other government agency, or a Plan
participant with respect thereto:  that a Reportable Event has occurred (except
to the extent that the Borrower has previously delivered to each Lender a
certificate and notices (if any) concerning such event pursuant to the next
clause hereof); that a contributing sponsor (as defined in Section 4001(a)(13)
of ERISA) of a Plan subject to Title IV of ERISA is subject to the advance
reporting requirement of PBGC Regulation Section 4043.61 (without regard to
subparagraph (b)(1) thereof), and an event described in subsection .62, .63,
 .64, .65, .66, .67 or .68 of PBGC Regulation Section 4043 is reasonably expected
to occur with respect to such Plan within the following 30 days; that an
accumulated funding deficiency, within the meaning of Section 412 of the Code or
Section 302 of ERISA, has been incurred or an application may be or has been
made for a waiver or modification of the minimum funding standard (including any
required installment payments) or an extension of any amortization period under
Section 412 of the Code or Section 303 or 304 of ERISA with respect to a Plan;
that any contribution required to be made with respect to a Plan or Foreign
Pension Plan has not been timely made; that a Plan has been or may be
terminated, reorganized, partitioned or declared insolvent under Title IV of
ERISA; that a Plan has an Unfunded Current Liability; that proceedings may be or
have been instituted to terminate or appoint a trustee to administer a Plan
which is subject to Title IV of ERISA; that a proceeding has been instituted
pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan;
that the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate will or
may incur any liability (including any indirect, contingent, or secondary
liability) to or on account of the termination of or withdrawal from a Plan
under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or with
respect to a Plan under Section 401(a)(29), 4971, 4975 or 4980 of the Code or
Section 409, 502(i) or 502(l) of ERISA or with respect to a group health plan
(as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) under
Section 4980B of the Code; or that the Borrower or any Subsidiary of the
Borrower may incur any material liability pursuant to any employee welfare
benefit plan (as defined in Section 3(1) of ERISA) that provides

                                      -35-
<PAGE>

benefits to retired employees or other former employees (other than as required
by Section 601 of ERISA) or any Plan or any Foreign Pension Plan. The Borrower
will deliver to each Lender copies of any records, documents or other
information that must be furnished to the PBGC with respect to any Plan pursuant
to Section 4010 of ERISA. Upon the reasonable request of the Required Waiver
Lenders, the Borrower will also deliver to each Lender a complete copy of the
annual report (on Internal Revenue Service Form 5500-series) of each Plan
(including, to the extent required, the related financial and actuarial
statements and opinions and other supporting statements, certifications,
schedules and information) required to be filed with the Internal Revenue
Service. In addition to any certificates or notices delivered to each Lender
pursuant to the first sentence hereof, copies of annual reports and any records,
documents or other information required to be furnished to the PBGC or any other
government agency, and any material notices received by the Borrower, any
Subsidiary of the Borrower or any ERISA Affiliate with respect to any Plan or
Foreign Pension Plan shall be delivered to each Lender no later than ten (10)
days after the date such annual report has been filed with the Internal Revenue
Service or such records, documents and/or information has been furnished to the
PBGC or any other government agency or such notice has been received by the
Borrower, the Subsidiary or the ERISA Affiliate, as applicable. The Borrower and
each of its applicable Subsidiaries shall ensure that all Foreign Pension Plans
administered by it or into which it makes payments obtains or retains (as
applicable) registered status under and as required by applicable law and is
administered in a timely manner in all respects in compliance with all
applicable laws except where the failure to do any of the foregoing would not be
reasonably likely to result in a material adverse effect upon the business,
operations, condition (financial or otherwise) or prospects of the Borrower or
any Subsidiary of the Borrower.

          6.8  End of Fiscal Years; Fiscal Quarters.  The Borrower shall cause
               ------------------------------------
(i) each of its, and each of the other Covered Party's, fiscal years to end on
December 31 and (ii) its fiscal quarters to end on March 31, June 30, September
30 and December 31.

          6.9  Payment of Taxes.  The Borrower (a) will pay and discharge, and
               ----------------
will cause each of its Subsidiaries to pay and discharge, all material federal
and state income and franchise taxes imposed upon it or upon its income or
profits, or upon any properties belonging to it, prior to the date on which
penalties attach thereto, and all lawful claims for sums related thereto that
have become due and payable which, if unpaid, might become a Lien not otherwise
permitted hereunder, and (b) will pay and discharge, and will cause each
Subsidiary to pay and discharge, all other material taxes, assessments and
governmental charges or levies imposed upon it or upon its income or profits, or
upon any properties belonging to it, prior to the date on which penalties attach
thereto, and all lawful claims for sums that have become due and payable which,
if unpaid, might become a Lien not otherwise permitted hereunder, provided that
                                                                  --------
neither the Borrower nor any of its Subsidiaries shall be required to pay any
such tax, assessment, charge, levy or claim which is being contested in good
faith and by proper proceedings if it has maintained adequate reserves with
respect thereto in accordance with GAAP, and provided, further, that this
                                             --------  -------
section 6.9 shall not apply with respect to any taxes of PG&E Utility or any
Subsidiary of PG&E Utility for which Borrower has no liability under applicable
law.

          6.10 [OMITTED]
                -------

                                      -36-
<PAGE>

          6.11  Performance of Obligations.  The Borrower will, and will cause
                --------------------------
each member of the NEG Group to, perform all of its obligations under the terms
of each mortgage, indenture, security agreement, loan agreement or credit
agreement and each other material agreement, contract or instrument by which it
is bound, except such non-performances as could not, either individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect or
result in a Material Adverse Change to LLC, NEG, Inc. and the NEG Subsidiaries
taken as a whole.

          6.12  Use of Proceeds.  The Borrower will use the proceeds of the
                ---------------
Loans only as provided in Section 4.1(s).

          6.13  Regulatory Compliance.  Borrower will take all actions and cause
                ---------------------
its Subsidiaries to take all actions reasonably required to comply in all
material respects with applicable Utility Regulations and each order issued
pursuant thereto; provided that, the foregoing shall not prevent Borrower or a
                  --------
Subsidiary from challenging the validity or effect of any Utility Regulation or
order in any proceeding provided the manner of such challenge could not
reasonably be expected to cause a Material Adverse Effect.

          6.14  Financial Covenants.  (a)  The long-term unsecured debt
                -------------------
obligations of NEG, Inc. shall be rated at least BBB- by Standard & Poor's or
Baa3 by Moody's.

          (b)   The ratio of the Fair Market Value of NEG, Inc. to the aggregate
amount of principal then outstanding under the Loan (the "Required FMV Ratio")
                                                          ------------------
shall be at least 2:1.  The Required FMV Ratio may be determined in accordance
with the procedure set forth in the succeeding paragraph at any time at the
request and expense of the requesting Lender by delivering a notice to the
Borrower no more frequently than once per fiscal quarter of the Borrower.

          For purposes hereof, the "Fair Market Value" of NEG, Inc. shall mean
the price at which a willing buyer would buy and a willing seller would sell the
Pledged Interests having full knowledge of the facts, and assuming each party
acts on an arm's-length basis with the expectation of concluding the purchase or
sale within a reasonable time, which determination shall be made by an Approved
Appraiser selected by the Tranche A Lender and the Tranche B Lender (the
"Appraiser").  The Borrower will cooperate and deliver such document and provide
 ---------
such information as may be reasonably requested by the Tranche A Lender, the
Tranche B Lender or the Appraiser with respect to the determination of the
Required FMV Ratio.

          6.15  Charter Documents.  The Borrower will, and will cause LLC and
                -----------------
the other Specified Subsidiaries to, comply with their respective Charter
Documents in all material respects.

          6.16  Further Assurances; etc.  The Borrower will, and will cause the
                -----------------------
other Covered Parties, at the expense of the Borrower, make, execute, endorse,
acknowledge, file and/or deliver to each Lender from time to time such
confirmatory assignments, conveyances, financing statements, transfer
endorsements, powers of attorney, certificates, reports, and other assurances or
instruments and take such further steps as are necessary or desirable in order
to carry out the intent, purpose, provisions of this Agreement and the other
Financing Document, including any assignment or syndication by any Lender of its
Loan.  Furthermore, the Borrower

                                      -37-
<PAGE>

will deliver to each Lender such opinions of counsel and other related documents
as may be reasonably requested by any Lender to assure itself that this Section
6.16 has been complied with.

          6.17  Tax Refund.  The Borrower shall upon receipt of the tax refund
                ----------
for the fiscal year 2000 use such refund in the manner set forth in Part G of
the Disclosure Letter.

          6.18  Cash Reserve.  The Borrower shall at all times commencing after
                ------------
the first anniversary of the Closing Date and until the Loans are repaid in full
own cash or Cash Equivalents in its name in an amount no less than 15% of the
total principal amount of Loans then outstanding, free and clear of all Liens .

          SECTION 7.  NEGATIVE COVENANTS.
                      ------------------

          The Borrower covenants and agrees that on and after the Closing Date
and until the Loans and the Notes, together with interest, fees and all other
obligations incurred hereunder and thereunder, are paid in full (other than any
indemnity, not then due and payable, which by its terms shall survive such
termination and payment):

          7.1   Liens.  The Borrower will not, and will not permit any of the
                -----
other Covered Parties to, create, incur, assume or suffer to exist any Lien upon
or with respect to any Property or assets (real or personal, tangible or
intangible) of the Borrower or any of the other Covered Parties, whether now
owned or hereafter acquired, or sell any such Property or assets subject to an
understanding or agreement, contingent or otherwise, to repurchase such Property
or assets (including sales of accounts receivable with recourse to the Borrower
or any of the other Covered Parties), or assign any right to receive income or
permit the filing of any financing statement under the UCC or any other similar
notice of Lien under any similar recording or notice statute; provided that the
                                                              --------
provisions of this Section 7.1 shall not prevent the creation, incurrence,
assumption or existence of the following (Liens described below are herein
referred to as "Permitted Liens"):
                ---------------

           (i)  inchoate Liens for taxes, assessments or governmental charges or
     levies not yet due and payable or Liens for taxes, assessments or
     governmental charges or levies being contested in good faith and by
     appropriate proceedings for which adequate reserves have been established
     in accordance with generally accepted accounting principles in the United
     States;

           (ii) Liens in respect of Property or assets of the Covered Parties
     imposed by law, which arise or were incurred in the ordinary course of
     business and do not secure Indebtedness for borrowed money, such as
     carriers', workmen's, repairmen's, warehousemen's, materialmen's and
     mechanics' liens, collecting bank's liens, charge back rights of depository
     banks for uncollected items and other similar Liens arising or incurred in
     the ordinary course of business, and (x) which do not in the aggregate
     materially detract from the value of the property or assets of the Borrower
     or the other Covered Parties and do not materially impair the use thereof
     in the operation of the business of the Borrower or the other Covered
     Parties or (y) which are being contested in good faith by appropriate
     proceedings, which proceedings (or orders entered in connection with such
     proceedings)

                                      -38-
<PAGE>

     have the effect of preventing the forfeiture or sale of the property or
     assets subject to any such Lien;

          (iii)   Subject to Section 7.4(ii), Liens in existence on the Closing
     Date which are listed, and the Property subject thereto described, in
     Schedule 7.1;

          (iv)    Liens created pursuant to this Agreement and the Security
     Documents;

          (v)     licenses, leases or subleases granted to other Persons in the
     ordinary course of business not materially interfering with the conduct of
     the business of the Borrower and the other Covered Parties, taken as a
     whole;

          (vi)    easements, rights-of-way, restrictions (including zoning
     restrictions), covenants, encroachments, protrusions and other similar
     charges or encumbrances, and minor title deficiencies, in each case whether
     now or hereafter in existence, not securing Indebtedness and not materially
     interfering with the conduct of the business of the Borrower and the other
     Covered Parties, taken as a whole;

          (vii)   statutory, contractual and common law landlords' liens under
     leases or subleases permitted by this Agreement;

          (viii)  Liens (other than any Lien imposed by ERISA) (x) incurred or
     deposits made in the ordinary course of business in connection with
     workers' compensation, unemployment insurance and other types of social
     security, (y) to secure the performance of tenders, statutory obligations
     (other than excise taxes), surety, stay, customs and appeal bonds,
     statutory bonds, bids, leases, government contracts, trade contracts,
     performance and return of money bonds and other similar obligations
     (exclusive of obligations for the payment of borrowed money) or (z) arising
     by virtue of deposits made in the ordinary course of business to secure
     liability for premiums to insurance carriers, provided that the aggregate
                                                   --------
     amount of deposits at any time pursuant to sub-clauses (y) and (z) shall
     not exceed $25,000,000 in the aggregate;

          (ix)    any interest or title of a lessor, sublessor, licensee or
     licensor under any lease or license agreement permitted by this Agreement;

          (x)     attachment or judgment Liens in an aggregate amount
     outstanding at any one time not in excess of the amount of $1,000,000;

           (xi)   attachment or judgment Liens paid or fully covered by
     insurance which are not outstanding for more than sixty (60) days;

          (xii)  Liens arising from precautionary Uniform Commercial Code
     financing statement filings with respect to operating leases or consignment
     arrangements entered into by the Borrower or any of the other Covered
     Parties in the ordinary course of business; and

                                      -39-
<PAGE>

          (xiii) other than by LLC, any Lien attendant to transactions
     described by the Business Plan.

          7.2  Consolidation, Merger, Purchase or Sale of Assets, etc.  The
               -------------------------------------------------------
Borrower will not, and will not permit any member of the NEG Group to, wind up,
liquidate or dissolve its affairs or enter into any transaction of merger or
consolidation, or convey, sell, lease or otherwise dispose of (or agree to do
any of the foregoing at any future time) all or any part of its Property or
assets, or enter into any sale-leaseback transactions, or purchase or otherwise
acquire (in one or a series of related transactions) any part of the Property or
assets (other than purchases or other acquisitions of inventory in the ordinary
course of business) of any Person (or agree to do any of the foregoing at any
future time), except to the extent attendant to transactions described by the
Business Plan and except that:

          (i)    any NEG Subsidiary may in the ordinary course of business,
     sell, lease or otherwise dispose of any assets which, in the reasonable
     judgment of such Person, are obsolete, worn out or otherwise no longer
     useful in the conduct of such Person's business;

          (ii)   each of the Borrower and any member of the NEG Group may lease
     (as lessee) real or personal property in the ordinary course of business
     (so long as any such lease does not create a Capital Lease Obligation);

          (iii)  any NEG Subsidiary may make sales or transfers of inventory,
     energy and related products in the ordinary course of business and
     consistent with past practices;

          (iv)   any NEG Subsidiary may sell or discount, in each case without
     recourse and in the ordinary course of business, overdue accounts
     receivable arising in the ordinary course of business, but only in
     connection with the compromise or collection thereof consistent with
     customary industry practice (and not as part of any bulk sale);

          (v)    each of the Borrower and any member of the NEG Group may
     license or sublicense software, trademarks and other intellectual property
     in the ordinary course of business which do not materially interfere with
     the business of the Borrower, LLC, NEG, Inc. and the NEG Subsidiaries,
     taken as a whole;

          (vi)   each of the Borrower, LLC, NEG, Inc. or any NEG Subsidiary may
     transfer assets or lease to or acquire or lease assets from the Borrower,
     LLC, NEG, Inc. or any other NEG Subsidiary and LLC, NEG, Inc. or any NEG
     Subsidiary may be merged into LLC, NEG, Inc. or any other NEG Subsidiary;

          (vii)  any NEG Subsidiary may sell or otherwise dispose of additional
     assets, provided that (x) each such sale or disposition shall be for an
             --------
     amount at least equal to the fair market value thereof (as determined in
     good faith by the senior management of such Person), (y) each such sale
     (other than any like-kind exchange) results in consideration at least 75%
     of which shall be in the form of cash (for such purpose, taking into
     account the amount of cash, the principal amount of any promissory notes
     and the fair market value, as determined in good faith by the senior
     management of the Borrower, of any other

                                      -40-
<PAGE>

     consideration), and (z) the Net Sale Proceeds therefrom shall be applied
     pursuant to Section 3.2;

          (viii) subject to Section 3.2(f), each of the Borrower and any
     member of the NEG Group may make transfers of any proceeds of insurance
     resulting from any casualty or condemnation of property or assets; and

          (ix)   the Borrower may sell or otherwise dispose of any assets other
     than assets owned by any member of the NEG Group.

          7.3  Dividends.  The Borrower will not, and will not permit any of the
               ---------
other Covered Parties to, authorize, declare or pay any Dividends (other than
the Dividend being Refinanced hereunder), except that any Subsidiary of the
Borrower may pay cash Dividends to the Borrower or to LLC, NEG, Inc. or any NEG
Subsidiary and NEG, Inc. may distribute a note to LLC or the Borrower, and LLC
may distribute any such note to the Borrower, solely in connection with the IPO
or LLC may authorize, declare and pay Dividends to the Borrower in connection
with a Spin-Off of NEG, Inc.

          7.4  Indebtedness.  The Borrower will not, and will not permit any
               ------------
member of the NEG Group to, contract, create, incur, assume or suffer to exist
any Indebtedness, except:

          (i)    Indebtedness incurred pursuant to this Agreement and the other
     Financing Documents;

          (ii)   Existing Indebtedness outstanding on the Closing Date and
     listed on Schedule 5.23 or with respect to the Borrower, Part B (I) and
     (II) of the Disclosure Letter and with respect to the Covered Parties
     (other than the Borrower), Part B (III) of the Disclosure Letter (as
     reduced by any repayments of principal thereof), without giving effect to
     any subsequent extension, renewal or refinancing thereof; provided that no
                                                               --------
     later than four (4) months from the Closing Date, the obligations of the
     Borrower under the Equity Infusion Agreements shall be fully released and
     terminated and no Person shall have any claim against the Borrower and the
     Borrower shall have no further obligations with respect thereto, and the
     Contingent Obligations of the Borrower to the Trading Counterparties under
     the Trading Contracts shall not exceed $50,000,000 in the aggregate and the
     amount of such Indebtedness shall not be extended, renewed or refinanced;

          (iii)  Indebtedness resulting from the endorsement of negotiable
     instruments in the ordinary course of business;

          (iv)   Indebtedness among Borrower or any member of the NEG Group
     (other than LLC) and any other NEG Subsidiary from intercompany transfers
     of assets made in the ordinary course of business or to the extent
     permitted under Sections 7.2 and 7.5;

          (v)    Indebtedness of a Covered Party (other than LLC) secured by
     Liens permitted under Sections 7.1(i), (ii), (vii) and (viii);

          (vi)   in the case of the Borrower, Specified Rated Indebtedness; and

                                      -41-
<PAGE>

          (vii)   in the case of any member of the NEG Group (other than LLC),
     to the extent described by the Business Plan.

          7.5  Advances, Investments and Loans.  The Borrower will not, and will
               -------------------------------
not permit any member of the NEG Group to, directly or indirectly, lend money or
credit or make advances to any other Person, or purchase or acquire any stock,
obligations or securities of, or any other interest in, or make any capital
contribution to, any other Person, or purchase or own a futures contract or
otherwise become liable for the purchase or sale of currency or other
commodities at a future date in the nature of a futures contract, or hold any
cash or Cash Equivalents (each of the foregoing an "Investment" and,
                                                    ----------
collectively, "Investments"), except that the following shall be permitted:
               -----------

           (i)    the Borrower and the other Covered Parties may acquire and
     hold accounts receivables owing to any of them, if created or acquired in
     the ordinary course of business and payable or dischargeable in accordance
     with customary trade terms of the Borrower or such other Covered Parties;

           (ii)   the Borrower and the other Covered Parties may acquire and
     hold cash and Cash Equivalents;

           (iii)  the Borrower and the other Covered Parties may acquire and own
     investments (including debt obligations) received in connection with the
     bankruptcy or reorganization of suppliers and customers and in good faith
     settlement of delinquent obligations of, and other disputes with, customers
     and suppliers arising in the ordinary course of business;

           (iv)   any Investment by a Covered Party (other than LLC) to the
     extent described by the Business Plan;

           (v)    any Investment by the Borrower in PGE Utility if the Borrower
     reasonably determines that such Investment is required by applicable Law;

           (vi)   any Investment by the Borrower in PGE Utility if the Borrower
     reasonably determines that such Investment is required by the Holding
     Company Conditions;

           (vii)  loans and advances by the Covered Parties (other than LLC) to
     their respective directors, officers and employees in a principal amount
     not exceeding the amount of $100,000, on an individual basis, and
     $1,000,000, on an aggregate basis, at any one time outstanding;

           (viii) any NEG Subsidiary and NEG, Inc. may distribute a note to LLC
     or the Borrower, and LLC may distribute any such note to the Borrower,
     solely in connection with the IPO;

           (ix)   any Investment made by any of LLC, NEG, Inc. or any NEG
     Subsidiary pursuant to Section 3.2(b)(iii), 3.2(c)(iii), 3.2(e)(iii) or
     3.2(f)(ii);

                                      -42-
<PAGE>

           (x)  any Investment made by the Borrower or any member of the NEG
     Group in a wholly-owned Subsidiary; and

           (xi) in addition to the Investments permitted by clauses (i)-(x)
     above, the Borrower may make other Investments for operations of the
     Borrower or its Subsidiaries not otherwise related to PGE Utility or any of
     its Subsidiaries in an amount not to exceed $15,000,000 in the aggregate
     for the period commencing March 1, 2001 and ending December 31, 2001, and
     $10,000,000 in the aggregate for any subsequent fiscal year.

Notwithstanding anything provided herein or in the Business Plan to the
contrary, no investment may be made by the Borrower or any member of the NEG
Group in the nuclear generation business.

          7.6  Transactions with Affiliates.  Except as disclosed on Schedule
               ----------------------------
5.17, the Borrower will not, and will not permit any member of the NEG Group and
any other NEG Subsidiaries to, enter into any transaction or series of related
transactions with any Affiliate of the Borrower or any of its Subsidiaries,
other than (a) in the ordinary course of business and on terms and conditions
substantially as favorable to the Borrower or such Subsidiary as would
reasonably be obtained by the Borrower or such Subsidiary at that time in a
comparable arm's-length transaction with a Person other than an Affiliate,
except for provision of cash, credit or other financial assistance or support by
the Borrower or any member of the NEG Group to PGE Utility or any of its
Subsidiaries (unless such assistance or support is made to the extent provided
in the Business Plan), (b) as reasonably determined by the Borrower that such
transaction is required by applicable Law or the Holding Company Conditions, (c)
among the Borrower and the other Covered Parties and any other NEG Subsidiaries
and among the NEG Group, (d) any other transactions with Affiliates provided at
cost where the difference between the arms-length price and cost is less than
$5,000,000 in the aggregate, (e) the payment of reasonable and customary fees
and reimbursements of expenses payable to directors of any member of the NEG
Group or (f) the employment arrangements with respect to the procurement of
services of directors, officers and employees of any member of the NEG Group in
the ordinary course of business and payment of reasonable and customary fees in
connection therewith.

          7.7  Capital Expenditures.  The Borrower will not, and will not permit
               --------------------
any member of the NEG Group to, make any Capital Expenditures, except to the
extent (a) the Borrower reasonably determines that such Capital Expenditures by
the Borrower in PGE Utility is required by applicable Law, (b) the Borrower
reasonably determines that such Capital Expenditures by the Borrower in PGE
Utility is required by the Holding Company Conditions, (c) that such Capital
Expenditures are made by a Covered Party (other than LLC) attendant to
transactions described by the Business Plan, (d) related to Investment made by
any of LLC, NEG, Inc. or any NEG Subsidiary pursuant to Section 3.2(b)(iii),
3.2(c)(iii), 3.2(e) (iii) or 3.2(f)(ii) or (e) provided in the cash-flow
forecast of the Borrower attached to the solvency certificate of the Borrower
delivered on the Closing Date.

          7.8  Limitations on Liens on Collateral; Modifications of Certain
               ------------------------------------------------------------
Indebtedness; Modifications of Certificate of Incorporation, By-Laws and Certain
--------------------------------------------------------------------------------
Other Agreements, etc.  (a)
----------------------

                                      -43-
<PAGE>

The Borrower will not, and will not permit any of the Covered Parties and the
Specified Subsidiaries to:

          (i)   create or suffer to exist any Lien on any of the Collateral;

          (ii)  amend or modify, or permit the amendment or modification of, any
     provision of any Existing Indebtedness Agreements which could reasonably be
     expected to have a Material Adverse Effect or result in a Material Adverse
     Change to LLC, NEG, Inc. and the NEG Subsidiaries, taken as a whole;

          (iii) except as provided in the Business Plan with respect to the IPO
     or the Spin-Off of NEG, Inc., (w) except to the extent it would not cause
     an adverse effect on any Lender, amend, modify or change any material
     provision of its certificate or articles of incorporation (including,
     without limitation, by the filing or modification of any certificate or
     articles of designation), certificate of formation, limited liability
     company agreement or by-laws (or the equivalent organizational documents),
     as applicable, or (x) amend, modify or change any agreement entered into by
     it with respect to its capital stock or other equity interests (including
     any shareholders' agreement), or (y) enter into any new agreement with
     respect to its capital stock or other equity interests or (z) amend the
     Business Plan;

          (iv)  terminate, cancel or suspend any license, contract or material
     franchise agreements which would result in a Material Adverse Effect or a
     Material Adverse Change to LLC, NEG, Inc. and the NEG Subsidiaries, taken
     as a whole; or

          (v)  create any Subsidiary of the Borrower which will be a direct or
     indirect parent of LLC or create any Subsidiary of LLC which will be a
     direct or indirect parent of NEG, Inc. or create any Subsidiary of NEG,
     Inc. which would own, directly or indirectly, all or substantially all of
     the assets or shares of the NEG Subsidiaries.

          7.9  Limitation on Issuance of Capital Stock.  (a)  Except as
               ---------------------------------------
otherwise permitted by Sections 7.3 and 7.5 or to the extent attendant to
transactions described by the Business Plan, the Borrower will not permit any of
the Covered Parties (other than the Borrower) to issue (i) any participating
preferred stock or other participating preferred equity interests or preferred
stock or other preferred equity interests convertible to common stock or common
equity interest or (ii) any redeemable common stock or other redeemable common
equity interest other than common stock or other redeemable common equity
interest that is redeemable at the sole option of the Borrower or such Covered
Party, as the case may be.

          (b)  Except as otherwise permitted by Sections 7.3 and 7.5, the
Borrower will not permit any of the Covered Parties (other than the Borrower) to
issue any capital stock or other equity interests (including by way of sales of
treasury stock) or any options (other than the Option) or warrants to purchase,
or securities convertible into, capital stock or other equity interests, except
(other than LLC) (i) for transfers and replacements of then outstanding shares
of capital stock or other equity interests, (ii) for stock splits, stock
dividends and issuances which do not decrease the percentage ownership of any of
the Covered Parties in any class of the capital stock or other equity interests
of such other Covered Parties, (iii) pursuant to employee stock

                                      -44-
<PAGE>

option plans, (iv) to the extent the Borrower reasonably determines that such
issuance is required by applicable Law, or (v) to the extent attendant to
transactions described by the Business Plan.

          7.10 Business.  The Borrower will not, and will not permit any of the
               --------
other Covered Parties to, engage in any business other than the current
businesses engaged in by the Borrower and the other Covered Parties as of the
date hereof or to the extent within the scope of business described by the
Business Plan.

          7.11 Regulatory Compliance.  The Borrower will not take any actions or
               ---------------------
allow any of its Subsidiaries to take any action which would materially violate
any applicable Utility Regulations or order issued pursuant thereto; provided
                                                                     --------
that, the foregoing shall not prevent the Borrower or a Subsidiary from
----
challenging the validity or effect of any Utility Regulation or order in any
proceeding provided the manner of such challenge could not reasonably be
expected to cause a Material Adverse Effect.  The Borrower will not take any
actions or allow any of its Subsidiaries to take any actions that would prevent
Borrower from reaffirming the representations of Sections 5.16(b), (c), (d), (e)
and (g) as of any date prior to repayment of the Loans in full.

          SECTION 8.  EVENTS OF DEFAULT AND REMEDIES.
                      ------------------------------

          8.1  Events of Default.  The occurrence of any of the following events
               -----------------
or circumstances shall constitute an "Event of Default" hereunder:
                                      ----------------

          (a)  The Borrower shall (i) default in the payment when due of any
     principal of any Loan or any Note or (ii) default, and such default shall
     continue unremedied for three or more Business Days, in the payment when
     due of any interest on any Loan or Note or any fees or any other amounts
     owing hereunder or under any other Financing Document; or

          (b)  Any representation, warranty or statement made or deemed made by
     the Borrower or any other Covered Party herein or in any other Financing
     Document or in the Disclosure Letter or in any certificate delivered to the
     Administrative Agent or any Lender pursuant hereto or thereto shall prove
     to be untrue in any material respect on the date as of which made or deemed
     made; or

          (c)  The Borrower or any of the other Covered Parties shall (i)
     default in the due performance or observance by it of any term, covenant or
     agreement contained in Section 6 (other than Sections 6.1 and 6.2) or
     Section 7; provided, however that a Default under Section 6.14(b) shall not
     constitute an Event of Default hereunder unless such Default shall continue
     unremedied for sixty (60) days and the Appraiser, at the Required
     Acceleration Lenders' request, again reaffirms that the Required FMV Ratio
     is below 2:1 after such sixty (60) day period or (ii) except as set forth
     in clause (iii) and Section 8.1(g), default in the due performance or
     observance by it of any other term, covenant or agreement contained in this
     Agreement or in any other Financing Document (other than those set forth in
     clauses (a) and (b) of this Section 8.1) and such default shall continue
     unremedied for a period of 30 days after written notice thereof to the
     defaulting party by

                                      -45-
<PAGE>

     any Lender or (iii) default in the due performance or observance by it of
     any term, covenant or agreement contained in the Option Agreement; or

          (d)  (i)  Any of the Covered Parties shall default in any payment of
     any Indebtedness when due, or (ii) any of the Covered Parties shall default
     in the observance or performance of any agreement or condition relating to
     any Indebtedness or any other event or condition shall occur or exist, the
     effect of which event or condition is to cause, or permit the holder or
     holders of such Indebtedness to cause any such Indebtedness to become due
     prior to its stated maturity, or (iii) any Indebtedness of any of the
     Covered Parties shall be declared to be (or shall become) due and payable,
     or required to be prepaid other than by regularly scheduled prepayment,
     prior to the stated maturity thereof, provided it shall not be a Default or
                                           --------
     an Event of Default under this clause (d) unless the aggregate principal
     amount of all Indebtedness as described in preceding subclauses (i), (ii)
     and (iii) is at least $100,000,000; or

          (e)  The Borrower or any of the other Covered Parties shall commence a
     voluntary case concerning itself under Title 11 of the United States Code
     entitled "Bankruptcy," as now or hereafter in effect, or any successor
     thereto (the "Bankruptcy Code"); or an involuntary case is commenced
                   ---------------
     against the Borrower or any of the other Covered Parties, and the petition
     is not controverted within 10 days, or is not dismissed within 45 days,
     after commencement of the case; or a custodian (as defined in the
     Bankruptcy Code) is appointed for, or takes charge of, all or substantially
     all of the property of the Borrower or any of the other Covered Parties; or
     the Borrower or any of the other Covered Parties commences any other
     proceeding under any reorganization, arrangement, adjustment of debt,
     relief of debtors, dissolution, insolvency or liquidation or similar law of
     any jurisdiction whether now or hereafter in effect relating to the
     Borrower or any of the other Covered Parties; or there is commenced against
     the Borrower or any of the other Covered Parties any such proceeding which
     remains undismissed for a period of 60 days; or the Borrower or any of the
     other Covered Parties is adjudicated insolvent or bankrupt; or any order of
     relief or other order approving any such case or proceeding is entered; or
     the Borrower or any of the other Covered Parties suffers any appointment of
     any custodian or the like for it or any substantial part of its property to
     continue undischarged or unstayed for a period of 45 days; or the Borrower
     or any of the other Covered Parties makes a general assignment for the
     benefit of creditors; or any corporate, limited liability company or
     similar action is taken by the Borrower or any of the other Covered Parties
     for the purpose of effecting any of the foregoing; or

          (f)  (i) Any Plan shall fail to satisfy the minimum funding standard
     required for any plan year or part thereof under Section 412 of the Code or
     Section 302 of ERISA or a waiver of such standard or extension of any
     amortization period is sought or granted under Section 412 of the Code or
     Section 303 or 304 of ERISA, a Reportable Event shall have occurred, a
     contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Plan
     subject to Title IV of ERISA shall be subject to the advance reporting
     requirement of PBGC Regulation Section 4043.61 (without regard to
     subparagraph (b)(1) thereof) and an event described in subsection .62, .63,
     .64, .65, .66, .67 or .68 of PBGC Regulation Section 4043 shall be
     reasonably expected to occur with respect to such Plan within the

                                      -46-
<PAGE>

     following 30 days, any Plan which is subject to Title IV of ERISA shall
     have had or is likely to have a trustee appointed to administer such Plan,
     any Plan which is subject to Title IV of ERISA is, shall have been or is
     likely to be terminated or to be the subject of termination proceedings
     under ERISA, any Plan shall have an Unfunded Current Liability, a
     contribution required to be made with respect to a Plan or a Foreign
     Pension Plan has not been timely made, the Borrower or any Subsidiary of
     the Borrower or any ERISA Affiliate has incurred or is likely to incur any
     liability to or on account of a Plan under Section 409, 502(i), 502(l),
     515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section
     401(a)(29), 4971 or 4975 of the Code or on account of a group health plan
     (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code)
     under Section 4980B of the Code, or the Borrower or any Subsidiary of the
     Borrower has incurred or is likely to incur liabilities pursuant to one or
     more employee welfare benefit plans (as defined in Section 3(1) of ERISA)
     that provide benefits to retired employees or other former employees (other
     than as required by Section 601 of ERISA) or Plans or Foreign Pension
     Plans, a "default" within the meaning of Section 4219(c)(5) of ERISA shall
     occur with respect to any Plan, any applicable law, rule or regulation is
     adopted, changed or interpreted, or the interpretation or administration
     thereof is changed, in each case after the date hereof, by any governmental
     authority or agency or by any court (a "Change in Law"), or, as a result of
     a Change in Law, an event occurs following a Change in Law, with respect to
       -------------
     or otherwise affecting any Plan; (ii) there shall result from any such
     event or events the imposition of a lien, the granting of a security
     interest, or a liability or a material risk of incurring a liability; and
     (iii) such lien, security interest or liability, either individually and/or
     in the aggregate, has had, or could reasonably be expected to have, a
     Material Adverse Effect; or

          (g)  Any of the Security Documents or the Option Agreement shall cease
     to be in full force and effect, or shall cease to give the Collateral Agent
     and each Lender or the Holders the Liens, rights, powers and privileges
     purported to be created thereby (including, without limitation, a perfected
     security interest in, and Lien on, all of the Collateral, in favor of the
     Collateral Agent and each Lender, superior to and prior to the rights of
     all third Persons and subject to no other Liens), or any Covered Party
     shall default in the due performance or observance of any term, covenant or
     agreement on its part to be performed or observed pursuant to any Security
     Document and such default shall continue beyond the period of grace, if
     any, specifically applicable thereto pursuant to the terms of such Security
     Document; or

          (h)  One or more judgments or decrees shall be entered against the
     Borrower or any other Covered Party involving in the aggregate for the
     Borrower and the other Covered Parties a liability (not paid or fully
     covered by a reputable and solvent insurance company) of $100,000,000 or
     more and such judgments and decrees either shall be final and non-
     appealable or shall not be vacated, discharged or stayed or bonded pending
     appeal for any period of 60 consecutive days; or

          (i)  Any final and non-appealable order shall be issued by FERC, CPUC
     or other Governmental Authority that could reasonably be expected to have a
     Material

                                      -47-
<PAGE>

     Adverse Effect or result in a Material Adverse Change to the Borrower, LLC,
     or NEG, Inc. and the Significant Subsidiaries, taken as a whole; or

          (j)  The Required FMV Ratio is below 1.25:1 on any date, unless,
     within five (5) Business days after such date, the Required Acceleration
     Lenders shall have determined and shall have advised the Administrative
     Agent that, there shall not be an acceleration of the Loans and other
     amounts owing under the Financing Documents.

          8.2  Acceleration.  (a)  If an Event of Default specified in Section
               ------------
8.1(e) with respect to the Borrower or 8.1(j) shall occur, automatically the
Loans (with accrued interest thereon) and all other amounts owing under the
Financing Documents shall immediately become due and payable.

          (b)  If any Event of Default (other than an Event of Default referred
to in Section 8.1(e) or 8.1(j)) shall occur, then the Administrative Agent
(acting upon the instructions of the Required Acceleration Lenders) may by
notice to the Borrower either declare the Loans, all accrued and unpaid interest
thereon and all other amounts owing to the Lenders under the Financing Documents
to be due and payable, whereupon the same shall become immediately due and
payable.

          (c)  Except as expressly provided above in this Section 8.2,
presentment, demand, protest and all other notices and other formalities of any
kind are hereby expressly waived by the Borrower.

          8.3  Other Remedies.  Upon the occurrence and during the continuation
               --------------
of an Event of Default, the Administrative Agent (acting upon the instructions
of the Required Acceleration Lenders) may exercise any or all rights and
remedies at law or in equity (in any combination or order that the
Administrative Agent may elect), including without limitation or prejudice to
any Lender's other rights and remedies, any and all rights and remedies
available under any of the Financing Documents; provided that any Lender may
                                                --------
exercise any or all rights and remedies at law or in equity as provided
hereunder upon the occurrence and during the continuation of an Event of Default
described in Section 8.1(a) or 8.1(e) above.

          SECTION 9.  MISCELLANEOUS.
                      -------------

          9.1  Costs and Expenses.  The Borrower shall, whether or not the
               ------------------
transactions contemplated hereby are consummated and whether or not any of the
following are incurred before or after the Closing Date, pay, within five
Business Days after demand, all reasonable costs and expenses (including
reasonable fees and expenses of counsel and consultants) of the Administrative
Agent, the Lead Arranger, the Co-Arranger, the Book Manager, each Lender, the
Collateral Agent and each Holder in connection with the preparation, issuance,
delivery, filing, recording and administration of this Agreement, the other
Financing Documents, and any other documents which may be delivered in
connection herewith or therewith, including, without limitation, (a) any and all
amounts which the Administrative Agent, each Lender, the Collateral Agent and
each Holder has paid relative to curing any Event of Default resulting from the
acts or omissions of the Borrower under this Agreement or any other Financing
Document, (b) the

                                      -48-
<PAGE>

exercise, enforcement or attempted exercise, enforcement of, or the
investigation or preservation of any rights or remedies under, this Agreement or
any other Financing Document, or (c) any amendment, waiver or consent with
respect to any provision contained in this Agreement or any other Financing
Document. In addition, the Borrower shall pay any and all stamp and other taxes
and fees payable or determined to be payable in connection with the execution,
delivery, filing and recording of this Agreement or any other Financing
Document, or any other document which may be delivered in connection with this
Agreement, and agrees to save the Administrative Agent, the Lead Arranger, the
Co-Arranger, the Book Manager, each Lender, the Collateral Agent and each Holder
harmless from and against any and all liabilities with respect to or resulting
from any delay in paying or omission to pay such taxes and fees.

          9.2  Indemnity.  Whether or not the transactions contemplated hereby
               ---------
are consummated:

          (a)  The Borrower shall pay, indemnify, and hold each of the
Administrative Agent, the Lead Arranger, the Co-Arranger, the Book Manager, each
Lender, the Collateral Agent and each Holder and each of their respective
officers, directors, employees, counsel, agents and attorneys-in-fact and
Affiliates (each, an "Indemnified Person") harmless from and against any and all
                      ------------------
liabilities, obligations, losses, damages, penalties, claims, actions,
judgments, suits, costs, charges, expenses or disbursements (including
reasonable legal fees and expenses and reasonable fees and expenses of
consultants) of any kind or nature whatsoever which may at any time (including
at any time following repayment of the Loan or the termination, resignation or
replacement of any Administrative Agent, Lead Arranger, Co-Arranger, Book
Manager, Lender, Collateral Agent or Holder) be imposed on, incurred by or
asserted against any such Person in any way relating to or arising out of this
Agreement or any other Financing Document, including the Security Documents and
any other document or instrument contemplated by or referred to herein or
therein, or the transactions contemplated hereby and thereby, or any action
taken or omitted by any such Person under or in connection with any of the
foregoing, including with respect to the exercise by the Administrative Agent,
the Lead Arranger, the Co-Arranger, the Book Manager, any Lender, the Collateral
Agent and any Holder of any of its respective rights or remedies under any of
the Financing Documents, and any investigation, litigation or proceeding
(including any bankruptcy, insolvency, reorganization or other similar
proceeding or appellate proceeding) related to this Agreement or any other
Financing Document or the Loan, or the use of the proceeds thereof, whether or
not any Indemnified Person is a party thereto (all the foregoing, collectively,
the "Indemnified Liabilities"); provided, that the Borrower shall have no
     -----------------------    --------
obligation hereunder to any Indemnified Person with respect to Indemnified
Liabilities arising from the gross negligence or willful misconduct of such
Indemnified Person.

          (b)  Environmental Indemnity.
               -----------------------

          (i)  Without in any way limiting the generality of the other
     provisions contained in this Section 9.2, the Borrower agrees to defend,
     protect, indemnify, save and hold harmless each Indemnified Person, whether
     as beneficiary of any of the Security Documents, as a mortgagee in
     possession, or as successor-in-interest to the Borrower by foreclosure deed
     or deed in lieu of foreclosure, or otherwise, from and against any and all
     liabilities, obligations, losses, damages (including foreseeable and
     unforeseeable conse-

                                      -49-
<PAGE>

     quential damages and punitive claims), penalties, fees, claims, actions,
     judgments, suits, costs, disbursements (including, without limitation,
     reasonable legal fees and expenses and consultants' fees and disbursements)
     and expenses (collectively, "Losses") of any kind or nature whatsoever that
                                  ------
     may at any time be incurred by, imposed on, asserted or awarded against any
     such Indemnified Person directly or indirectly based on, or arising out of
     or resulting from, (A) the actual or alleged presence of Hazardous
     Materials on, in, under or affecting all or any portion of any Property of
     the Borrower or any member of the NEG Group whether or not the same
     originates or emanates from any such Property or any property adjoining or
     adjacent to any such Property or from properties at which any Hazardous
     Materials generated, stored or handled by the Borrower were Released or
     disposed of, (B) any Environmental Claim relating to any such Property or
     (C) the exercise of any Secured Party's rights under any of the provisions
     of the Security Documents (the "Indemnified Matters"), whether any of the
                                     -------------------
     Indemnified Matters arise before or after foreclosure of any of the
     security interests or other taking of title to all or any portion of the
     Collateral by the Collateral Agent or any Lender, including, without
     limitation, (x) the costs of removal of any and all Hazardous Materials
     from all or any portion of any such Property or any property adjoining or
     adjacent to any such Property, (y) additional costs required to take
     reasonable precautions to protect against the Release of Hazardous
     Materials on, in, under or affecting any such Property into the air, any
     body of water, any other public domain or any surrounding areas, and (z)
     costs incurred to comply, in connection with all or any portion of any such
     Property or any surrounding areas, with all applicable Environmental Laws
     with respect to Hazardous Materials, except to the extent that any such
     Indemnified Matter arises from the gross negligence or willful misconduct
     of such Indemnified Person.

          (ii) In no event shall any site visit, observation, or testing by any
     Indemnified Person (or any representative of any such Person) be deemed to
     be a representation or warranty that Hazardous Materials are or are not
     present in, on, or under, any Property of the Borrower or any member of the
     NEG Group, or that there has been or shall be compliance with any
     Environmental Law.  Neither the Borrower nor any other Person is entitled
     to rely on any site visit, observation, or testing by any Indemnified
     Person.  No Indemnified Person owes any duty of care to protect the
     Borrower or any other Person against, or to inform the Borrower or any
     other Person of, any Hazardous Materials or any other adverse condition
     affecting any such Property.  No Indemnified Person shall be obligated to
     disclose to the Borrower or any other Person any report or findings made as
     a result of, or in connection with, any site visit, observation, or testing
     by any Indemnified Person.

          (c)  Survival; Defense.  The obligations in this Section 9.2 shall
               -----------------
survive payment of the Loans and all other obligations hereunder.  At the
election of any Indemnified Person, the Borrower's indemnification obligations
under this Section 9.2 shall include the obligation to defend such Indemnified
Person using legal counsel satisfactory to such Indemnified Person, at the sole
cost and expense of the Borrower.  All amounts owing under this Section 9.2
shall be paid within 30 days after demand.

                                      -50-
<PAGE>

          (d)  Contribution. To the extent that any undertaking in the preceding
               ------------
paragraphs of this Section 9.2 may be unenforceable because it is violative of
any law or public policy, the Borrower will contribute the maximum portion that
it is permitted to pay and satisfy under applicable Law to the payment and
satisfaction of such undertaking.

          (e)  Settlement.  So long as the Borrower is in compliance with its
               ----------
obligations under this Section 9.2, the Borrower shall not be liable to any
Indemnified Person under this Section 9.2 for any settlement made by such
Indemnified Person without the Borrower's consent.

          9.3  Notices.  (a)  All notices, requests and other communications
               -------
provided for hereunder shall be in writing (including, unless the context
expressly otherwise provides, by facsimile transmission, provided that any
                                                         --------
matter transmitted by the Borrower by facsimile (i) shall be immediately
confirmed by a telephone call to the recipient at the number specified on
Schedule 9.3, and (ii) shall be followed promptly by a hard copy original
thereof by express courier) and faxed or delivered, to the address or facsimile
number specified for notices on Schedule 9.3 or to such other address as shall
be designated by such party in a written notice to the other parties hereto.

          (b)  All such notices, requests and communications (i) sent by express
courier will be effective upon delivery to or refusal to accept delivery by the
addressee, and (ii) transmitted by facsimile will be effective when sent and
facsimile confirmation received; except that all notices and other
communications to the Administrative Agent or any Lender shall not be effective
until actually received.

          (c)  The Borrower acknowledges and agrees that any agreement of the
Administrative Agent or any Lender to receive certain notices by telephone and
facsimile is solely for the convenience and at the request of the Borrower.  The
Administrative Agent and each Lender shall be entitled to rely on the authority
of any Person purporting to be a Person authorized by the Borrower to give such
notice and the Administrative Agent and each Lender shall not have any liability
to the Borrower or other Person on account of any action taken or not taken by
any of the Administrative Agent or such Lender in reliance upon such telephonic
or facsimile notice.

          9.4  Benefit of Agreement.  This Agreement shall be binding upon and
               --------------------
inure to the benefit of and be enforceable by the respective successors and
permitted assigns of the parties hereto.  The Borrower may not assign or
otherwise transfer any of its rights under this Agreement or any of the other
Financing Documents.

          9.5  No Waiver; Remedies Cumulative.  No failure or delay on the part
               ------------------------------
of the Administrative Agent or any Lender or the holder of any Note in
exercising any right, power or privilege hereunder or under any other Financing
Document and no course of dealing between the Borrower and the Administrative
Agent or any Lender or the holder of any Note shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, power or privilege
hereunder or under any other Financing Document preclude any other or further
exercise thereof or the exercise of any other right, power or privilege
hereunder or thereunder.  No notice to or demand on the Borrower in any case
shall entitle the Borrower to any other or further notice or demand in

                                      -51-
<PAGE>

similar or other circumstances or constitute a waiver of the rights of the
Administrative Agent or any Lender or the holder of any Note to take any other
or further action in any circumstances without notice or demand. All remedies,
either under this Agreement or any other Financing Document or pursuant to any
applicable Law or otherwise afforded to the Administrative Agent or any Lender
shall be cumulative and not alternative.

          9.6  No Third Party Beneficiaries.  The agreement of any Lender to
               ----------------------------
make extensions of credit to the Borrower on the terms and conditions set forth
in this Agreement and the other Financing Documents is solely for the benefit of
the Borrower, and no other Person shall have any rights hereunder against such
Lender with respect to the Loans, the proceeds thereof or otherwise.

          9.7  Reinstatement.  To the extent that the Administrative Agent or
               -------------
any Lender receives any payment by or on behalf of the Borrower, which payment
or any part thereof is subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to the Borrower or to its
estate, trustee, receiver, custodian or any other party under any Bankruptcy Law
or otherwise, then to the extent of the amount so required to be repaid, the
obligation or part thereof which has been paid, reduced or satisfied by the
amount so repaid shall be reinstated by the amount so repaid and shall be
included within the Obligations as of the date such initial payment, reduction
or satisfaction occurred.

          9.8  No Immunity.  To the extent that the Borrower may be entitled, in
               -----------
any jurisdiction in which judicial proceedings may at any time be commenced with
respect to this Agreement or any other Financing Document, to claim for itself
or its revenues, assets or Properties any immunity from suit, the jurisdiction
of any court, attachment prior to judgment, attachment in aid of execution of
judgment, set-off, execution of a judgment or any other legal process, and to
the extent that in any such jurisdiction there may be attributed to such Person
such an immunity (whether or not claimed), the Borrower hereby irrevocably
agrees not to claim and hereby irrevocably waives such immunity to the fullest
extent permitted by the Law of the applicable jurisdiction.

          9.9  Counterparts.  This Agreement may be executed in any number of
               ------------
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered by facsimile or otherwise shall be an
original, but all of which shall together constitute one and the same
instrument.

          9.10 Amendment or Waiver.  (a)  No provision of this Agreement or any
               -------------------
other Financing Document may be amended, supplemented, modified or waived,
except by a written instrument signed by the Required Waiver Lenders and the
Borrower and each Covered Party that is a party thereto, and, to the extent that
its rights or obligations may be affected thereby, the Administrative Agent.
Notwithstanding the foregoing provisions, no such waiver and no such amendment,
supplement or modification shall (i) increase or extend the Commitment of any
Lender (it being understood that waivers or modifications after the Closing Date
of covenants, Defaults or Events of Default shall not constitute a change in the
terms of any Commitment of any Lender), without the prior written consent of
such Lender, (ii) postpone or delay any date fixed by this Agreement or any
other Financing Document for any payment of principal, interest, fees or

                                      -52-
<PAGE>

other amounts due to any Lender hereunder or under any other Financing Document
(it being understood that waivers or modifications after the Closing Date of
covenants, Defaults or Events of Default shall not constitute a postponement or
delay in any date fixed by this Agreement or any other Financing Document for
any payment of principal, interest, fees or other amounts due to any Lender
hereunder or under any other Financing Document), without the prior written
consent of such Lender, (iii) reduce the principal of, or the rate of interest
specified in any Financing Document on, any Loan of any Lender, without the
prior written consent of such Lender, (iv) release all or substantially all of
the Collateral except as shall be otherwise provided in any Security Document or
other Financing Document or consent to the assignment or transfer by the
Borrower of any of its respective obligations under this Agreement or any other
Financing Document, without the prior written consent of each Lender, (v) amend,
modify or waive any provision of this Section 9.10 or Section 9.1 or 9.2,
without the prior written consent of each Lender, or (vi) reduce the percentage
specified in or otherwise amend the definition of Required Waiver Lenders or
Required Acceleration Lenders, without the prior written consent of each Lender.

          (b)   Any waiver and any amendment, supplement or modification made or
entered into in accordance with Section 9.10(a) shall be binding upon the
Borrower, the Administrative Agent, the Lenders and their successors and
assigns.

          9.11  Assignments, Participations, etc.  (a)  Each Lender may, without
                ---------------------------------
the consent of the Borrower, but with prior notice to the Administrative Agent,
sell or assign any part of the Loan of such Lender and the other rights and
obligations of such Lender to any Person or any assignee thereof (an "Assignee")
unless the sale or assignment of the Loan and such other rights and obligations
of such Lender would reasonably put the business of the Borrower at a
competitive disadvantage, then such sale or assignment shall require the consent
of the Borrower. The assigning Lender and the Assignee shall enter into an
assignment agreement, in form and substance satisfactory to the Administrative
Agent (an "Assignment and Acceptance"), with respect to the sale or assignment
           -------------------------
of the Loan to be assigned and, subject to paragraphs (e) and (f) of this
Section 9.11, upon execution and delivery of such Assignment and Acceptance, (i)
the Assignee thereunder shall be a party hereto and, to the extent that rights
and obligations hereunder have been assigned to it pursuant to such Assignment
and Acceptance, shall have the rights and obligations of a Lender hereunder and
under the other Financing Documents, and this Agreement shall be deemed to be
amended to the extent, but only to the extent, necessary to effect the addition
of the Assignee, and any reference to the assigning Lender hereunder or under
the other Financing Documents shall thereafter refer to such Lender and to the
Assignee to the extent of their respective interests, and (ii) the assigning
Lender shall, to the extent that rights and obligations hereunder and under the
other Financing Documents have been assigned by it pursuant to such assignment
agreement, relinquish its rights and be released from its obligations under the
Financing Documents.

          (b)   Each Lender may sell participations to one or more banks or
other entities (other than the Borrower or any of its Affiliates) in or to all
or a portion of its rights and obligations under this Agreement and such
Lender's Note; provided, however, that (i) such Lender's obligations under this
               --------  -------
Agreement shall remain unchanged, (ii) such Lender shall remain solely
responsible to the other parties hereto for the performance of such obligations,
(iii) such Lender

                                      -53-
<PAGE>

shall remain the holder of any such Note for all purposes of this Agreement,
(iv) the Borrower and the other Lenders shall continue to deal solely and
directly with such Lender in connection with such Lender's rights and
obligations under this Agreement and (v) no participant under any such
participation shall have any right to approve any amendment or waiver of any
provision of this Agreement or any Note, or any consent to any departure by the
Borrower therefrom, except to the extent that such amendment, waiver or consent
would reduce the principal of, or interest on, the Note or any fees or other
amounts payable hereunder, or release of all or substantially all of the
Collateral, in each case to the extent subject to such participation, or
postpone any date fixed for any payment of principal of, or interest on, the
Notes or any fees or other amounts payable hereunder, in each case to the extent
subject to such participation.

          (c)  A Lender may, in connection with any assignment or participation
or proposed assignment or participation pursuant to this Section 9.11, disclose
to the assignee or participant or proposed assignee or participant, any
information relating to the Borrower furnished to such Lender by or on behalf of
the Borrower; provided, that prior to any such disclosure, the assignee or
              --------
participant or proposed assignee or participant shall agree to preserve the
confidentiality of any confidential information relating to the Borrower
received by it from such Lender.

          (d)  Notwithstanding any other provision contained in this Agreement
or any other Financing Document to the contrary, any Lender may assign all or
any portion of the Loan held by it as collateral security, provided that any
                                                           --------
payment in respect of such assigned Loan or Note made by the Borrower to or for
the account of the assigning or pledging Lender in accordance with the terms of
this Agreement shall satisfy the Borrower's obligations hereunder in respect to
such assigned Loan or Note to the extent of such payment. No such assignment
shall release the assigning Lender from its obligations hereunder.

          (e)  The Borrower hereby designates the Administrative Agent to serve
as the Borrower's agent, solely for purposes of this Section 9.11, to maintain a
register (the "Register") on which it will record the Loans made by each of the
Lenders and each repayment in respect of the principal amount of the Loans of
each Lender.  Failure to make any such recordation, or any error in such
recordation shall not affect the Borrower's obligations in respect of such
Loans.  With respect to any Lender, the transfer of the rights to the principal
of, and interest on, any Loan shall not be effective until such transfer is
recorded on the Register maintained by the Administrative Agent with respect to
ownership of such Loans and prior to such recordation all amounts owing to the
transferor with respect to such Loans shall remain owing to the transferor.  The
registration of assignment or transfer of all or part of any Loans shall be
recorded by the Administrative Agent on the Register only upon the acceptance by
the Administrative Agent of a properly executed and delivered Assignment and
Acceptance pursuant to Section 9.11(a).  The Borrower agrees to indemnify the
Administrative Agent from and against any and all losses, claims, damages and
liabilities of whatsoever nature which may be imposed on, asserted against or
incurred by the Administrative Agent in performing its duties under this Section
9.11(e).

          (f)  Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an Assignee (and, in any case where the consent of the
Borrower is required by this Section, by the Borrower) together with payment to
the Administrative Agent of a registration and processing fee of $3,500, the
Administrative Agent shall (i) promptly accept such

                                      -54-
<PAGE>

Assignment and Acceptance and (ii) on the effective date determined pursuant
thereto record the information contained therein in the Register and give notice
of such acceptance and recordation to the Borrower. On or prior to such
effective date, the Borrower, at its own expense, upon request, shall execute
and deliver to the Administrative Agent (in exchange for the Note of the
assigning Lender) a new Note to the order of such Assignee in an amount equal to
the Loan acquired by it pursuant to such Assignment and Acceptance and, if such
assigning Lender has retained a Loan, a new Note to the order of such assigning
Lender in an amount equal to the Loan retained by it hereunder.

          9.12  Survival.  All indemnities set forth herein, including, without
                --------
limitation, Section 9.2, shall survive the execution and delivery of this
Agreement and the Notes and the making and repayment of the Loans.  In addition,
each representation and warranty made or deemed to be made pursuant hereto shall
survive the making of such representation and warranty, and no Lender shall be
deemed to have waived, by reason of making any extension of credit, any Default
or Event of Default which may arise by reason of such representation or warranty
proving to have been false or misleading, notwithstanding that such Lender may
have had notice or knowledge or reason to believe that such representation or
warranty was false or misleading at the time such extension of credit was made.

          9.13  WAIVER OF JURY TRIAL.  EACH OF THE PARTIES HERETO HEREBY
                --------------------
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT ANY OF THEM MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF,
UNDER OR IN CONNECTION WITH, THIS AGREEMENT, THE NOTES OR ANY OTHER FINANCING
DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY RELATING HERETO OR THERETO.  THIS
PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDERS TO ENTER INTO THIS AGREEMENT.

          9.14  Right of Set-off.  In addition to any rights now or hereafter
                ----------------
granted under applicable Law or otherwise, and not by way of limitation of any
such rights, upon the occurrence of an Event of Default, each Lender is hereby
authorized at any time or from time to time, without presentment, demand,
protest or other notice of any kind to the Borrower or to any other Person, any
such notice being hereby expressly waived, to set off and to appropriate and
apply any and all deposits (general or special) and any other Indebtedness at
any time held or owing by such Lender (including without limitation by branches
and agencies of such Lender wherever located), to or for the credit or the
account of the Borrower against and on account of the Obligations or liabilities
of the Borrower to such Lender under this Agreement or any of the other
Financing Documents, including all claims of any nature or description arising
out of or connected with this Agreement or any other Financing Document,
irrespective of whether such Lender shall have made any demand hereunder and
although said Obligations, liabilities or claims, or any of them, shall be
contingent or unmatured.

          9.15  Severability.  Any provision hereof which is prohibited or
                ------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or

                                      -55-
<PAGE>

unenforceability without invalidating the remaining provisions hereof and
without affecting the validity or enforceability of any provision in any other
jurisdiction.

          9.16  Governing Law; Submission to Jurisdiction.  (a)  THIS AGREEMENT
                -----------------------------------------
AND EACH OF THE OTHER FINANCING DOCUMENTS (UNLESS SUCH DOCUMENT EXPRESSLY STATES
OTHERWISE THEREIN) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF
(OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).

          (b)  The Borrower hereby submits to the nonexclusive jurisdiction of
the United States District Court for the Southern District of New York and of
any New York State court sitting in New York City for the purposes of all legal
proceedings arising out of or relating to this Agreement, any other Financing
Document or the transactions contemplated hereby or thereby. The Borrower hereby
irrevocably waives, to the fullest extent permitted by applicable Law, any
objection which it may now or hereafter have to the laying of the venue of any
such proceeding brought in such a court and any claim that any such proceeding
brought in such a court has been brought in an inconvenient forum. The Borrower
hereby irrevocably appoints CT Corporation System (the "Process Agent"), with
                                                        -------------
an office on the date hereof at 111 Eighth Avenue, New York, New York 10011, as
its agent to receive on its behalf and on behalf of its Property, service of
copies of the summons and complaint and any other process that may be served in
any such action or proceeding. Service upon the Process Agent shall be deemed to
be personal service on the Borrower and shall be legal and binding upon the
Borrower for all purposes notwithstanding any failure to mail copies of such
legal process to the Borrower, or any failure on the part of the Borrower to
receive the same. Nothing herein shall affect the right to serve process in any
other manner permitted by applicable Law or any right to bring legal action or
proceedings in any other competent jurisdiction, including judicial or non-
judicial foreclosure of real property interests which are part of the
Collateral. The Borrower further agrees that the aforesaid courts of the State
of New York and of the United States of America for the Southern District of New
York shall have exclusive jurisdiction with respect to any claim or counterclaim
of the Borrower based upon the assertion that the rate of interest charged by or
under this Agreement or under the other Financing Documents is usurious. To the
extent permitted by applicable Law, the Borrower further irrevocably agrees to
the service of process of any of the aforementioned courts in any suit, action
or proceeding by the mailing of copies thereof by certified mail, postage
prepaid, return receipt requested, to the Borrower at the address referenced in
Section 9.3, such service to be effective upon the date indicated on the postal
receipt returned from the Borrower.

          (c)  The Borrower agrees that it will at all times continuously
maintain an agent to receive service of process in the State of New York on
behalf of itself and its Properties, and, in the event that for any reason the
agent mentioned above shall not serve as agent for the Borrower to receive
service of process in the State of New York on its behalf, the Borrower shall
promptly appoint a successor satisfactory to the Administrative Agent so to
serve, advise the Administrative Agent thereof, and deliver to the
Administrative Agent evidence in writing of the successor agent's acceptance of
such appointment. The foregoing provisions constitute, among other things, a
special arrangement for service among the parties to this Agreement for the
purposes of 28 U.S.C. (S) 1608.

                                      -56-
<PAGE>

          9.17  Waiver by Borrower.  The Borrower waives any claim it may now or
                ------------------
hereafter have against the Administrative Agent, the Collateral Agent, any
Lender and any Holder for any consequential, exemplary or punitive damage under
or in connection with or relating to this Agreement or any of the Financing
Documents.

          9.18  Recourse.  This Agreement is made with full recourse to the
                --------
Borrower and pursuant to and upon all the representations, warranties, covenants
and agreements on the part of the Borrower contained herein and in the other
Financing Documents to which the Borrower is a party and otherwise in writing in
connection herewith and therewith.

          9.19  Complete Agreement.   THIS AGREEMENT, THE OTHER FINANCING
                ------------------
DOCUMENTS, THE FEE LETTER AND THE LEHMAN FEE LETTER REPRESENT THE FINAL AND
COMPLETE AGREEMENT OF THE PARTIES HERETO AND THERETO WITH RESPECT TO THE LOANS,
AND ALL PRIOR NEGOTIATIONS, REPRESENTATIONS, UNDERSTANDINGS, WRITINGS AND
STATEMENTS OF ANY NATURE WITH RESPECT TO THE LOANS ARE HEREBY SUPERSEDED IN
THEIR ENTIRETY BY THE TERMS OF THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS.

          9.20  Publicity.  Except as otherwise required by law, none of the
                ---------
parties hereto shall issue any press release relating to, connected with or
arising out of this Agreement and the other Financing Documents or the matters
contained herein or therein, without obtaining the prior approval of each other
party hereto to the contents and the manner of presentation and publication
thereof.  No references to any party hereto shall be made by any party hereto in
any public statement without its consent except as otherwise required by Law.

          9.21  Effectiveness.  This Agreement and the other Financing Documents
                -------------
shall be effective as of the Effective Date.

          9.22  Certain Representations and Warranties.  Each of the Tranche A
                --------------------------------------
Lender and the Tranche B Lender by reason of its business or financial
experience, has the capacity to protect its own interests (within the meaning of
Section 25102(f)(2) of the California Corporations Code) in connection with the
transactions contemplated by the Financing Documents.

          9.23  Confidentiality.  Each Lender agrees to keep confidential in
                ---------------
accordance with such Lender's customary practices (and in any event in
compliance with applicable law respecting material non-public information) all
information obtained by it pursuant hereto and the other Financing Documents
identified as confidential in writing at the time of delivery and agrees that it
will only use such information in connection with the transactions contemplated
by this Agreement and the other Financing Documents and not disclose any of such
information other than (a) to such Lender's employees, representatives,
directors, attorneys, auditors, agents, professional advisors, trustees or
indirect contractual counterparty in swap agreements or such contractual
counterparty's professional advisor (so long as such contractual counterparty or
professional advisor to such contractual counterparty agrees to be bound by the
provision of this Section 9.23 or is bound by a confidentiality agreement
containing substantially equivalent provisions), (b) to the extent such
information presently is or hereafter becomes available to such

                                      -57-
<PAGE>

Lender on a non-confidential basis from any source or such information that is
in the public domain at the time of disclosure, (c) to the extent disclosure is
required by law (including applicable securities laws), regulations, subpoena or
judicial order or process (provided that notice of such requirement or order
                           --------
shall be promptly furnished to the Borrower unless such notice is legally
prohibited) or requested or required by bank, securities, insurance or
investment company regulations or auditors or any administrative body or
commission (including the Securities Valuation Office of the National
Association of Insurance Commissioners) to whose jurisdiction such Lender may be
subject, (d) to any rating agency to the extent required in connection with any
rating to be assigned to such Lender, (e) to Assignees or prospective Assignees
or participants or prospective participants who agree to be bound by the
provisions of this Section 9.23 or who are subject to confidentiality agreements
containing substantially equivalent provisions, (f) to the extent required in
connection with any litigation between any party hereto or thereto and any
Lender with respect to the Loans or this Agreement and the other Financing
Documents or (g) with the Borrower's prior written consent. The agreements in
this Section 9.23 shall survive repayment of the Loans and all other amounts
payable hereunder.

          SECTION 10.   THE ADMINISTRATIVE AGENT; THE LEAD ARRANGER, THE CO-
                        ---------------------------------------------------
ARRANGER AND THE BOOK MANAGER.
-----------------------------

          10.1  Appointment.  Lehman Commercial Paper Inc. shall be the
                -----------
Administrative Agent and shall act as specified herein and in the other
Financing Documents.  Each Lender hereby irrevocably authorizes, and the holder
of any Note by the acceptance of such Note shall be deemed irrevocably to
authorize, the Administrative Agent to take such action on its behalf under the
provisions of this Agreement, the other Financing Documents and any other
instruments and agreements referred to herein or therein and to exercise such
powers and to perform such duties hereunder and thereunder as are specifically
delegated to or required of the Administrative Agent by the terms hereof and
thereof and such other powers as are reasonably incidental thereto.  The
Administrative Agent may perform any of its duties hereunder by or through its
officers, directors, agents or employees.

          10.2  Nature of Duties.  The Administrative Agent shall have no duties
                ----------------
or responsibilities except those expressly set forth in this Agreement and the
Security Documents.  Neither the Administrative Agent nor any of its officers,
directors, agents or employees shall be liable for any action taken or omitted
by it or them hereunder or under any other Financing Document or in connection
herewith or therewith, unless caused by its or their gross negligence or willful
misconduct.  The duties of the Administrative Agent shall be mechanical and
administrative in nature; the Administrative Agent shall not have by reason of
this Agreement or any other Financing Document, or by reason of the use of the
term "agent" with reference to the Administrative Agent, a fiduciary
relationship in respect of any Lender or the holder of any Note; and nothing in
this Agreement or any other Financing Document, expressed or implied, is
intended to or shall be so construed as to impose upon the Administrative Agent
any obligations in respect of this Agreement or any other Financing Document
except as expressly set forth herein.

          10.3  Lack of Reliance on the Administrative Agent.  Independently and
                --------------------------------------------
without reliance upon the Administrative Agent, each Lender and each holder of
any Note, to the extent it

                                      -58-
<PAGE>

deems appropriate, has made and shall continue to make (i) its own independent
investigation of the financial condition and affairs of the Borrower in
connection with the making and the continuance of the Loans and the taking or
not taking of any action in connection herewith and (ii) its own appraisal of
the creditworthiness of the Borrower, except as expressly provided in this
Agreement, the Administrative Agent shall have no duty or responsibility, either
initially or on a continuing basis, to provide any Lender or the holder of any
Note with any credit or other information with respect thereto, whether coming
into its possession before the making of the Loans or at any time or times
thereafter. The Administrative Agent shall not be responsible to any Lender or
the holder of any Note for any recitals, statements, information,
representations or warranties herein or in any document, certificate or other
writing delivered in connection herewith or for the execution, effectiveness,
genuineness, validity, enforceability, perfection, collectibility, priority or
sufficiency of this Agreement or any other Financing Document or the financial
condition of the Borrower or be required to make any inquiry concerning either
the performance or observance of any of the terms, provisions or conditions of
this Agreement or any other Financing Document, or the financial condition of
the Borrower or the existence or possible existence of any Default or Event of
Default.

          10.4  Certain Rights of the Administrative Agent.  If the
                ------------------------------------------
Administrative Agent shall request instructions from the Required Waiver Lenders
or Required Acceleration Lenders, as the case may be, with respect to any act or
action (including failure to act) in connection with this Agreement or any other
Financing Document, the Administrative Agent shall be entitled to refrain from
such act or taking such action unless and until the Administrative Agent shall
have received instructions from the Required Waiver Lenders or Required
Acceleration Lenders, as the case may be, and the Administrative Agent shall not
incur liability to any Person by reason of so refraining. Without limiting the
foregoing, no Lender or the holder of any Note shall have any right of action
whatsoever against the Administrative Agent as a result of the Administrative
Agent acting or refraining from acting hereunder or under any other Financing
Document in accordance with the instructions of the Required Waiver Lenders or
Required Acceleration Lenders, as the case may be.

          10.5  Reliance.  The Administrative Agent shall be entitled to rely,
                --------
and shall be fully protected in relying, upon any note, writing, resolution,
notice, statement, certificate, telex, teletype or telecopier message,
cablegram, radiogram, order or other document or telephone message signed, sent
or made by any Person that the Administrative Agent believed to be the proper
Person, and, with respect to all legal matters pertaining to this Agreement and
any other Financing Document its duties hereunder and thereunder, upon advice of
counsel selected by it.

          10.6  Indemnification.  To the extent the Administrative Agent is not
                ---------------
reimbursed and indemnified by the Borrower, each Lender will reimburse and
indemnify the Administrative Agent, in proportion to its respective Loan, for
and against any and all liabilities, obligations, losses, damages, penalties,
claims, actions, judgments, suits, costs, expenses or disbursements of
whatsoever kind or nature which may be imposed on, asserted against or incurred
by the Administrative Agent in performing its duties hereunder or under any
other Financing Document, or in any way relating to or arising out of this
Agreement or any other Financing Document; provided, however, that no Lender
shall be liable for any portion of such liabilities, obligations,

                                      -59-
<PAGE>

losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from the Administrative Agent's gross negligence or
willful misconduct.

          10.7   The Administrative Agent in its Individual Capacity.  With
                 ---------------------------------------------------
respect to its obligation to make Loans under this Agreement, and with respect
to any Loan held by it or made by it, the Administrative Agent shall have the
rights and powers specified herein for a "Lender" and may exercise the same
rights and powers as though it were not performing the duties specified herein;
and the term "Lender," "Required Waiver Lenders", "Required Acceleration
Lenders", "holder of Note" or any similar terms shall, unless the context
clearly otherwise indicates, include the Administrative Agent in its individual
capacity. The Administrative Agent may accept deposits from, lend money to, and
generally engage in any kind of banking, trust or other business with the
Borrower or any Affiliate of the Borrower as if it were not performing the
duties specified herein, and may accept fees and other consideration from the
Borrower for services in connection with this Agreement and otherwise without
having to account for the same to the Lenders.

          10.8   Holders.  The Administrative Agent may deem and treat the payee
                 -------
of any Note as the owner thereof for all purposes hereof unless and until a
written notice of the assignment, transfer or endorsement thereof, as the case
may be, shall have been filed with the Administrative Agent.  Any request,
authority or consent of any Person who, at the time of making such request or
giving such authority or consent, is the holder of any Note shall be conclusive
and binding on any subsequent holder, transferee, assignee or indorsee, as the
case may be, of such Note or of any Note or Notes issued in exchange therefor.

          10.9   Resignation by the Administrative Agent.  (a)  The
                 ---------------------------------------
Administrative Agent may resign from the performance of all its functions and
duties hereunder and/or under the other Financing Documents at any time by
giving 15 Business Days' prior written notice to the Borrower and each Lender.
Such resignation shall take effect upon the appointment of a successor
Administrative Agent pursuant to clauses (b) and (c) below or as otherwise
provided below.

          (b)    Upon any such notice of resignation, the Required Waiver
Lenders shall appoint a successor Administrative Agent hereunder or thereunder
who shall be a commercial bank, trust company or other financial institution
which is a Lender and which (unless an Event of Default shall be continuing)
shall be subject to the reasonable approval of the Borrower.

          (c)    If a successor Administrative Agent shall not have been so
appointed within such 15 Business Day period, the Administrative Agent, with the
consent of the Borrower, may then appoint a successor Administrative Agent who
shall serve as Administrative Agent hereunder or thereunder until such time, if
any, as the Required Waiver Lenders appoint a successor Administrative Agent as
provided above.

          (d)    If no successor Administrative Agent has been appointed
pursuant to clause (b) or (c) above by the 20th Business Day after the date such
notice of resignation was given by the Administrative Agent, the Administrative
Agent's resignation shall become effective and the Required Waiver Lenders shall
thereafter perform all the duties of the Administrative

                                      -60-
<PAGE>

Agent hereunder and/or under any other Financing Document until such time, if
any, as the Required Waiver Lenders appoint a successor Administrative Agent as
provided above.

          10.10  The Lead Arranger, Co-Arranger and Book Manager.  None of the
                 -----------------------------------------------
Lead Arranger, the Co-Arranger and the Book Manager, in such respective
capacities, shall have any duties or responsibilities under this Agreement or
any other Financing Document, nor shall any of such Persons, in such respective
capacities, have any obligations or liabilities hereunder or under any other
Financing Document.

                  *                    *                    *

                                      -61-
<PAGE>

          IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.

                                 PG&E CORPORATION

                                 By:   /s/ [ILLEGIBLE]^^
                                     ------------------------------------
                                     Name:
                                     Title:
<PAGE>

                                 GENERAL ELECTRIC CAPITAL
                                  CORPORATION, as a Lender and
                                  Co-Arranger

                                 By:  /s/ Mark T Mellana
                                     ------------------------------------
                                     Name:  Mark T Mellana
                                     Title: Attorney-in-fact
<PAGE>

                                 LEHMAN COMMERCIAL PAPER INC., as
                                  a Lender and Administrative Agent

                                 By:  /s/ G. Andrew Keith
                                     ------------------------------------
                                 Name:  G. Andrew Keith
                                 Title: Authorized Signatory
<PAGE>

                                 LEHMAN BROTHERS INC., as Lead Arranger
                                  and Book Manager

                                 By:  /s/ G. Andrew Keith
                                     ------------------------------------
                                 Name:  G. Andrew Keith
                                 Title: Authorized Signatory

                                        G. Andrew Keith
                                        Senior Vice President
<PAGE>

                                                                      APPENDIX A
                                                                              to
                                                                Credit Agreement
                                                                ----------------

                   DEFINED TERMS AND RULES OF INTERPRETATION
                   -----------------------------------------

          1.   Defined Terms.
               -------------

          "Affiliate" shall mean, with respect to any Person, (a) any other
           ---------
Person that is directly or indirectly Controlled by, under common Control with
or Controls such Person; (b) any other Person owning beneficially or Controlling
five percent or more of the Voting Stock of such Person; or (c) any officer,
director or partner of such Person, except with respect to any officer or
director of the Borrower.

          "Administrative Agent" shall mean Lehman Commercial Paper Inc., acting
           --------------------
in its capacity as agent for the Lenders pursuant to the Credit Agreement, and
any successor in such capacity.

          "Applicable Margin" shall mean (a) as to the Base Rate Loan, (i)
           -----------------
during the period commencing on the Closing Date to but excluding the date
eighteen (18) months from the Closing Date, 2.50% per annum and (ii) during the
period commencing on the date eighteen (18) months from the Closing Date and
thereafter, 4.00% per annum, and (b) as to the Eurodollar Loan, (i) during the
period commencing on the Closing Date to but excluding the date eighteen (18)
months from the Closing Date, 2.50% and (ii) during the period commencing the
date eighteen (18) months from the Closing Date and thereafter, 4.00%.

          "Appraiser" shall have the meaning provided in Section 6.14 of the
           ---------
Credit Agreement.

          "Approved Appraiser" shall mean any independent nationally recognized
           ------------------
investment bank experienced in the valuation of equity interests of a company
similar to NEG, Inc. as may be reasonably proposed by the Borrower at the
request of any Lender; provided that the Borrower shall always propose at least
                       --------
two alternate investment banks.

          "Asset Sale" shall mean any sale, transfer or other disposition of any
           ----------
Property of the Borrower and any member of the NEG Group.

          "Assignee" shall have the meaning provided in Section 9.11 of the
           --------
Credit Agreement.

          "Audited Financial Statements" shall have the meaning provided in
           ----------------------------
Section 5.11 of the Credit Agreement.

          "Authorized Officer" shall mean (i) with respect to any Person that is
           ------------------
a corporation or a limited liability company, the Chairman, President, any Vice
President or Secretary of such Person and (ii) with respect to any Person that
is a partnership, the President, any Vice President or Secretary (or Assistant
Secretary) of a general partner or managing partner of such Person and
<PAGE>

                                                                      Appendix A
                                                                          Page 2

in each case whose name appears on a certificate of incumbency of such Person
delivered in accordance with the Credit Agreement, as such certificate may be
amended from time to time.

          "Bankruptcy Code" shall have the meaning provided in Section 8.1(e) of
           ---------------
the Credit Agreement.

          "Bankruptcy Law" shall mean the Bankruptcy Code and any other Law of
           --------------
any jurisdiction relating to bankruptcy, insolvency, liquidation,
reorganization, moratorium, winding-up or composition or readjustment of debts
or any similar Law.

          "Base Rate", for any day, shall mean the rate per annum equal to the
           ---------
higher of (a) the Federal Funds Rate for such day plus one-half of one percent
(.5%) and (b) the Prime Rate for such day.  Any changes in the Base Rate due to
a change in the Prime Rate or the Federal Funds Rate shall be effective on the
effective date of such change in the Prime Rate or Federal Funds Rate.

          "Base Rate Loans" shall mean the Loans or any portion thereof which
           ---------------
bears interest based upon the Base Rate.

          "Book Manager" shall mean Lehman Brothers Inc., a Delaware
           ------------
corporation.

          "Borrower" shall mean PG&E Corporation, a California corporation.
           --------

          "Borrowing" shall mean the borrowing of Loans of one Type from a
           ---------
Lender on a given date, provided that Base Rate Loans incurred pursuant to
                        --------
Section 2.7(b) shall be considered part of the related Borrowing of Eurodollar
Loans.

          "Business Day" shall mean (i) for all purposes other than as covered
           ------------
by clause (ii) below, any day except Saturday, Sunday and any day which shall be
in New York City, a legal holiday or a day on which banking institutions are
authorized or required by law or other government action to close in such city,
and (ii) with respect to all notices and determinations in connection with, and
payments of principal and interest on, any Eurodollar Loan, any day which is a
Business Day described in clause (i) above and which is also a day for trading
by and between banks in the London interbank eurodollar market.

          "Business Plan" shall mean the certified copy of the business plan of
           -------------
NEG, Inc., dated the Closing Date, as delivered to the Lenders.

          "CA Fee" shall mean the fees and expenses of the Collateral Agent set
           ------
forth in the Schedule of Fees with the Collateral Agent dated the Closing Date.

          "Capital Expenditure" shall mean, with respect to any Person, all
           -------------------
expenditures by such Person which should be capitalized in accordance with
generally accepted accounting principles, including all such expenditures with
respect to fixed or capital assets (including, without limitation, expenditures
for maintenance and repairs which should be capitalized in accordance with
generally accepted accounting principles) and the amount of Capital Lease
Obligations incurred by such Person.
<PAGE>

                                                                      Appendix A
                                                                          Page 3

          "Capital Lease Obligations" shall mean, for any Person, the
           -------------------------
obligations of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) real or personal Property which
obligations are required to be classified and accounted for as a capital lease
on a balance sheet of such Person under U.S. GAAP (including Statement of
Financial Accounting Standards No. 13 of the Financial Accounting Standards
Board ("Statement No. 13")) and, for purposes of the Credit Agreement, the
amount of such obligations shall be the capitalized amount thereof, determined
in accordance with U.S. GAAP (including such Statement No. 13).

          "Capital Stock" shall mean, with respect to any Person, any and all
           -------------
shares, interests, participations and/or rights in or other equivalents (however
designated, whether voting or nonvoting, ordinary or preferred) in the equity or
capital of such Person, now or hereafter outstanding, and any and all rights,
warrants or options exchangeable for or convertible into any thereof.

          "Cash Equivalents" shall mean, as to any Person, (i) securities issued
           ----------------
or directly and fully guaranteed or insured by the United States or any agency
or instrumentality thereof (provided that the full faith and credit of the
                            --------
United States is pledged in support thereof) having maturities of not more than
one year from the date of acquisition, (ii) time deposits and certificates of
deposit of any commercial bank having, or which is the principal banking
subsidiary of a bank holding company organized under the laws of the United
States, any State thereof or the District of Columbia having capital, surplus
and undivided profits aggregating in excess of $200,000,000, with maturities of
not more than one year from the date of acquisition by such Person, (iii)
repurchase obligations with a term of not more than 90 days for underlying
securities of the types described in clause (i) above entered into with any bank
meeting the qualifications specified in clause (ii) above, (iv) commercial paper
issued by any Person incorporated in the United States rated at least A-1 or the
equivalent thereof by Standard & Poor's or at least P-1 or the equivalent
thereof by Moody's and in each case maturing not more than one year after the
date of acquisition by such Person, and (v) investments in money market funds
substantially all of whose assets are comprised of securities of the types
described in clauses (i) through (iv) above.

          "CERCLA" shall mean the Comprehensive Environmental Response,
           ------
Compensation, and Liability Act of 1980, as the same may be amended from time to
time, 42 U.S.C. (S) 9601 et seq.
                         -- ----

          "Charter Documents" shall mean, with respect to any Person, (i) the
           -----------------
articles of incorporation or other similar organizational document of such
Person, (ii) the by-laws or other similar document of such Person, (iii) any
certificate of designation or instrument relating to the rights of preferred
shareholders or other holders of Capital Stock of such Person and (iv) any
shareholder rights agreement or other similar agreement.

          "Closing Date" shall mean the date upon which the conditions precedent
           ------------
set forth in Section 4.1 of the Credit Agreement have been satisfied (or waived
by all the Lenders).

          "Co-Arranger" shall mean General Electric Capital Corporation, a New
           -----------
York corporation.
<PAGE>

                                                                      Appendix A
                                                                          Page 4

          "Code" shall mean the Internal Revenue Code of 1986, as amended from
           ----
time to time, and the regulations promulgated and rulings issued thereunder.
Section references to the Code are to the Code as in effect at the date of the
Credit Agreement and any subsequent provisions of the Code, amendatory thereof,
supplemental thereto or substituted therefor.

          "Collateral" shall mean all Property that, in accordance with the
           ----------
terms of the Security Documents, is intended to be subject to any Lien in favor
of the Collateral Agent, for the benefit of each Lender.

          "Collateral Agent" shall mean Bankers Trust Company, acting as
           ----------------
collateral agent for the benefit of the Lenders.

          "Commitment" shall mean individually or collectively, as the context
           ----------
may require, the Tranche A Commitment or the Tranche B Commitment.

          "Commitment Fees" shall mean (i) the fee payable to the Tranche A
           ---------------
Lender pursuant to the Fee Letter and (ii) the commitment fees payable to the
Tranche B Lender pursuant to the Lehman Fee Letter.

          "Compliance" shall have the meaning provided in Section 13 of the LLC
           ----------
Agreement, attached hereto as Annex A.

          "Contingent Obligation" shall mean, as to any Person, any obligation
           ---------------------
of such Person guaranteeing or intending to guarantee any Indebtedness, leases,
dividends or other obligations ("primary obligations") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(a) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (b) to advance or supply funds (i) for the
purchase or payment of any such primary obligation or (ii) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, (c) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation or (d) otherwise to assure or hold harmless the owner of
such primary obligation against loss in respect thereof.  The amount of any
Contingent Obligation shall be deemed to be an amount equal to the aggregate
current exposure pursuant to each applicable agreement net of the fair market
value of any posted collateral thereunder.

          "Control" shall mean possession, directly or indirectly, of the power
           -------
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of partnership interests or voting securities, by
contract or otherwise.

          "Covered Contracts" shall have the meaning provided in Section 5.7 of
           -----------------
the Credit Agreement.

          "Covered Parties" shall have the meaning provided in Section 5.1 of
           ---------------
the Credit Agreement.
<PAGE>

                                                                      Appendix A
                                                                          Page 5

          "CPUC" shall mean the California Public Utilities Commission or its
           ----
successor.

          "Credit Agreement" shall mean the Credit Agreement, dated as of March
           ----------------
1, 2001 among the Borrower, the Lenders party thereto, General Electric Capital
Corporation, as Co-Arranger, Lehman Commercial Paper Inc., as Administrative
Agent and Lehman Brothers Inc., as Lead Arranger and Book Manager, as amended,
modified or supplemented from time to time.

          "Date Certain" shall mean the Initial Date Certain, as such date may
           ------------
be extended pursuant to Section 2.9 of the Credit Agreement.

          "Default" shall mean any event or circumstance which with notice or
           -------
lapse of time or both would become an Event of Default.

          "Dividend" shall mean, with respect to any Person, that such Person
           --------
has declared or paid a dividend, distribution or returned any equity capital to
its stockholders, partners or members or authorized or made any other
distribution, payment or delivery of property (other than common equity of such
Person) or cash to its stockholders, partners or members as such, or redeemed,
retired, purchased or otherwise acquired, directly or indirectly, for a
consideration any shares of any class of its capital stock or any partnership or
membership interests outstanding on or after the Closing Date (or any options or
warrants issued by such Person with respect to its capital stock or other equity
interests), or set aside any funds for any of the foregoing purposes, or shall
have permitted any of its Subsidiaries to purchase or otherwise acquire for a
consideration any shares of any class of the capital stock or any partnership or
membership interests of such Person outstanding on or after the Closing Date (or
any options or warrants issued by such Person with respect to its capital stock
or other equity interests).  Without limiting the foregoing, "Dividends" with
respect to any Person shall also include all payments made or required to be
made by such Person with respect to any stock appreciation rights, plans, equity
incentive or achievement plans or any similar plans or setting aside of any
funds for the foregoing purposes.

          "Disclosure Letter" shall mean the letter from the Borrower, addressed
           -----------------
to the Administrative Agent and the Lenders, dated the Closing Date, with
respect to certain disclosure of the Borrower.

          "Distribution" shall have the meaning provided in Section 13 of the
           ------------
LLC Agreement, attached hereto as Annex A.

          "Dollars" and the sign "$" shall each mean freely transferable, lawful
           -------                -
money of the United States.

          "Effective Date" shall mean March 1, 2001.
           --------------

          "Environmental Claim" shall mean, with respect to any Person, (i) any
           -------------------
notice, claim, administrative, regulatory or judicial or equitable action, suit,
Lien, judgment or demand by any other Person or (ii) any other written
communication by any Governmental Authority, in either case alleging or
asserting such Person's liability for investigatory costs, cleanup costs,
consultants' fees, governmental response costs, damages to natural resources
(including, without limitation, wetlands, wildlife, aquatic and terrestrial
species and vegetation) or other Property,
<PAGE>

                                                                      Appendix A
                                                                          Page 6

property damages, personal injuries, fines or penalties arising out of, based on
or resulting from (x) the presence, or Release into the environment, of any
Hazardous Material at any location, whether or not owned by such Person or (y)
circumstances forming the basis of any violation, or alleged violation, of any
Environmental Law or Governmental Approval issued under any Environmental Law.

          "Environmental Laws" shall mean any and all Laws, now or hereafter in
           ------------------
effect, and any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent decree or judgment, relating to the
environment, human health or safety, or to emissions, discharges, releases or
threatened releases of pollutants, contaminants, chemicals, or toxic or
hazardous substances or wastes into the environment including, without
limitation, ambient air, surface water, groundwater, or land, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, chemicals, or
toxic or hazardous substances or wastes.

          "Equity Infusion Agreements" shall mean the agreements identified as
           --------------------------
such on Part B of the Disclosure Letter.

          "Equity Interest" shall have the meaning provided in Section 5.10(f)
           ---------------
of the Credit Agreement.

          "ERISA" shall mean the Employee Retirement Income Security Act of
           -----
1974, as amended from time to time, and the regulations promulgated and rulings
issued thereunder.  Section references to ERISA are to ERISA, as in effect at
the date of the Credit Agreement and any subsequent provisions of ERISA,
amendatory thereof, supplemental thereto or substituted therefor.

          "ERISA Affiliate" shall mean each person (as defined in Section 3(9)
           ---------------
of ERISA) which together with the Borrower or a Subsidiary of the Borrower would
be deemed to be a "single employer" (i) within the meaning of Section
414(b),(c),(m) or (o) of the Code or (ii) as a result of the Borrower or a
Subsidiary of the Borrower being or having been a general partner of such
person.

          "Escrow Agreement" shall mean the Escrow Agreement, dated as of March
           ----------------
1, 2001, among the Borrower, the Lenders party thereto and Bankers Trust
Company, as escrow agent, setting forth the payment and account information in
connection with the Refinancing of the Indebtedness of the Borrower.

          "Eurodollar Loan" shall mean any Loan or any portion thereof which
           ---------------
bears interest based on the Eurodollar Rate.

          "Eurodollar Rate" shall mean, with respect to each Interest Period in
           ---------------
respect of a Eurodollar Loan, the rate per annum (rounded upwards, if necessary,
to the nearest 1/1000 of 1%) determined by the Administrative Agent to be equal
to the quotient obtained by dividing (a) the Eurorate for such Eurodollar Loan
for such Interest Period by (b) 1 minus the Reserve Requirement for such
Eurodollar Loan for such Interest Period.
<PAGE>

                                                                      Appendix A
                                                                          Page 7

          As used herein, "Eurorate" shall mean, with respect to each Interest
Period in respect of a Eurodollar Loan, as determined by the Administrative
Agent, the rate per annum (rounded upwards, if necessary, to the nearest 1/1000
of 1%) appearing on Telerate Page 3750 (or any successor page) as the London
interbank offered rate for deposits in Dollars at approximately 11:00 a.m.
(London time) two Business Days prior to the first day of such Interest Period
for a term comparable to such Interest Period.  If for any reason such rate is
not available, the term "Eurorate" shall mean, for any Eurodollar Loan for any
                         --------
Interest Period therefor, the rate per annum (rounded upwards, if necessary, to
the nearest 1/1000 of 1%) appearing on Reuters Screen LIBO Page as the London
interbank offered rate for deposits in Dollars at approximately 11:00 a.m.
(London time) two Business Days prior to the first day of such Interest Period
for a term comparable to such Interest Period; provided, however, if more than
                                               --------  -------
one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be
the arithmetic mean of all such rates (rounded upwards, if necessary, to the
nearest 1/1000 of 1%).

          "Event of Default" shall have the meaning provided in Section 8.1 of
           ----------------
the Credit Agreement.

          "EWG" shall mean an "exempt wholesale generator" as defined under
           ---
PUHCA.

          "Existing Indebtedness Agreements" shall have the meaning provided in
           --------------------------------
Section 5.31 of the Credit Agreement.

          "Expense Sharing Agreement" shall mean each of the agreements entitled
           -------------------------
"Continuing Services Agreement" listed and marked with "*" on Schedule 5.17.

          "Extended Date Certain" shall mean each of (i) the date which is six
           ---------------------
months after the Initial Date Certain or (ii) the date which is twelve months
after the Initial Date Certain.

          "Extension Fee" shall have the meaning set forth in the Fee Letter or
           -------------
the Lehman Fee Letter.

          "Federal Funds Rate" shall mean, for any day, the rate per annum
           ------------------
(rounded upwards, if necessary, to the nearest 1/1000 of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Business Day
next succeeding such day; provided, that (i) if the day for which such rate is
                          --------
to be determined is not a Business Day, the Federal Funds Rate for such day
shall be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day and (ii) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be the average
rate charged to the Administrative Agent (in its individual capacity) on such
day on such transactions as determined by the Administrative Agent.

          "Fee Letter" shall mean the Fee Letter dated March 1, 2001 between the
           ----------
Borrower and the Tranche A Lender.

          "FERC" shall mean the Federal Energy Regulatory Commission or its
           ----
successor.
<PAGE>

                                                                      Appendix A
                                                                          Page 8

          "FI Subsidiaries" shall mean any of PG&E Energy Trading Holdings
           ---------------
Corp., a California corporation, PG&E Gas Transmission, Northwest Corporation, a
California corporation and PG&E Generating Company LLC, a Delaware limited
liability company.

          "Financing Documents" shall mean, collectively, the Credit Agreement,
           -------------------
the Note, the Fee Letter, the Lehman Fee Letter, the Escrow Agreement, the
Security Documents and the Option Agreement.

          "First Interest Period" shall have the meaning provided in Section
           ---------------------
2.5(d).

          "Foreign Pension Plan" shall mean any plan, fund (including, without
           --------------------
limitation, any superannuation fund) or other similar program established or
maintained outside the United States of America by the Borrower or any one or
more of its Subsidiaries primarily for the benefit of employees of the Borrower
or such Subsidiaries residing outside the United States of America, which plan,
fund or other similar program provides, or results in, retirement income, a
deferral of income in contemplation of retirement or payments to be made upon
termination of employment, and which plan is not subject to ERISA or the Code.

          "FPA" shall mean the Federal Power Act, as amended, and the rules and
           ---
regulations promulgated thereunder.

          "Governmental Approval" shall mean any authorization, consent,
           ---------------------
approval, license, ruling, permit, tariff, rate, certification, exemption,
filing, variance, claim, order, judgment, decree, publication, notice to,
declaration of or with, or registration by or with, any Governmental Authority.

          "Governmental Authority" shall mean any government, governmental
           ----------------------
department, commission, board, bureau, agency, regulatory authority,
instrumentality, judicial or administrative body, domestic or foreign, federal,
state or local having jurisdiction over the matter or matters in question.

          "Hazardous Material" shall mean any substance that is regulated or
           ------------------
could lead to liability under any Environmental Law, including, but not limited
to, any petroleum or petroleum product, asbestos in any form that is or could
become friable, transformers or other equipment that contain dielectric fluid
containing levels of polychlorinated biphenyls (PCB's), hazardous waste,
hazardous material, hazardous substance, toxic substance, contaminant or
pollutant, as defined or regulated as such under, any applicable Environmental
Law.

          "Hedging Agreement" means any agreement in respect of any interest
           -----------------
rate swap transaction, basis swap, forward rate transaction, commodity swap,
commodity option, equity or equity index swap, equity or equity index option,
bond option, interest rate option, foreign exchange transaction, cap
transaction, floor transaction, collar transaction, currency swap transaction,
cross-currency rate swap transaction, currency option or any other similar
transaction (including any option with respect to any of the foregoing
transactions) or any combination of the foregoing transactions entered into by
the Borrower.

          "Holder" shall have the meaning provided in the Option Agreement.
           ------
<PAGE>

                                                                      Appendix A
                                                                          Page 9

          "Holding Company Conditions" shall mean the conditions set forth by
           --------------------------
the CPUC in Decision 96-11-017 or Decision 99-04-068 and any decision of the
CPUC which imposes a requirement or condition on the Borrower affecting the
Borrower's relationship with PGE Utility.

          "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
           -------
of 1976.

          "Indebtedness" of any Person shall mean (i) all indebtedness of such
           ------------
Person for borrowed money, (ii) the deferred purchase price of assets or
services which in accordance with U.S. GAAP would be shown on the liability side
of the balance sheet of such Person, (iii) the face amount of all letters of
credit issued for the account of such Person and, without duplication, all
drafts drawn thereunder, (iv) all Indebtedness of a second Person secured by any
Lien on any Property owned by such first Person, whether or not such
Indebtedness has been assumed, (v) all Capital Lease Obligations of such Person,
(vi) all obligations of such Person to pay a specified purchase price for goods
or services whether or not delivered or accepted, i.e., take-or-pay and similar
                                                  ----
obligations, (vii) all net obligations of such Person under Hedging Agreements
and (viii) all Contingent Obligations of such Person; provided that Indebtedness
                                                      --------
shall not include trade payables arising in the ordinary course of business so
long as such trade payables are payable within 90 days of the date the
respective goods are delivered or the respective services are rendered and are
not overdue.

          "Indemnified Liabilities" shall have the meaning provided in Section
           -----------------------
9.2(a) of the Credit Agreement.

          "Indemnified Matters" shall have the meaning provided in Section
           -------------------
9.2(b) of the Credit Agreement.

          "Indemnified Person" shall have the meaning provided in Section 9.2 of
           ------------------
the Credit Agreement.

          "Initial Date Certain" shall mean the second anniversary of the
           --------------------
Closing Date.

          "Insurance Proceeds" shall mean all amounts payable to the Borrower or
           ------------------
the Collateral Agent in respect of any insurance required to be maintained (or
caused to be maintained) by the Borrower pursuant to Section 5.9 of the Credit
Agreement (other than general liability insurance, delayed completion insurance
and business interruption insurance), regardless of whether such payments are
received from any insurer or from either EPC Contractor pursuant to the EPC
Contracts or otherwise.

          "Interest Determination Date" shall mean, with respect to any
           ---------------------------
Eurodollar Loan, the second Business Day prior to the commencement of any
Interest Period relating to such Eurodollar Loan.

          "Interest Period" shall have the meaning provided in Section 2.6 of
           ---------------
the Credit Agreement.
<PAGE>

                                                                      Appendix A
                                                                         Page 10

          "Interest Prepaid Amount" shall mean $73,500,000, which is the total
           -----------------------
amount of interest payable on the Loans based on a one-year Eurodollar Rate as
of the Closing Date discounted to present value as of the Closing Date using a
discount rate of 4.25%.

          "Investment" in any Person shall mean, without duplication: (a) the
           ----------
acquisition (whether for cash, securities, other Property, services or
otherwise) or holding of capital stock, bonds, notes, debentures, partnership or
other ownership interests or other securities of such Person, or any agreement
to make any such acquisition or to make any capital contribution to such Person;
or (b) the making of any deposit with, or advance, loan or other extension of
credit to, such Person.

          "Investments" shall have the meaning provided in Section 7.5 of the
           -----------
Credit Agreement.

          "IPO" shall mean the sale, in an initial underwritten offering,
           ---
registered under the Securities Act, of shares of NEG, Inc.'s common stock,
where after such offering, the common stock sold in such offering is traded on
the Nasdaq National Market or a national securities exchange.

          "Law" shall mean, with respect to any Person (i) any statute, law,
           ---
regulation, ordinance, rule, judgment, order, decree, permit, concession, grant,
franchise, license, agreement or other governmental restriction or any
interpretation or administration of any of the foregoing by any Governmental
Authority (including, without limitation, Governmental Approvals) applicable to
such Person and (ii) any directive, guideline, policy, requirement or any
similar form of decision of or determination by any Governmental Authority which
is binding on such Person, in each case, whether now or hereafter in effect
(including, without limitation, in each case, any Environmental Law).

          "Lead Arranger" shall mean Lehman Brothers Inc., a Delaware
           -------------
corporation.

          "Lehman Fee Letter" shall mean the Lehman Fee Letter dated March 1,
           -----------------
2001 among the Borrower, Lehman Brothers Inc. and Lehman Commercial Paper Inc.

          "Lender" shall mean, individually or collectively, as the context may
           ------
require, the Tranche A Lender or the Tranche B Lender and any Assignee thereof
pursuant to Section 9.11 of the Credit Agreement.

          "Lien" shall mean, with respect to any Property of any Person,  any
           ----
mortgage, lien, deed of trust, hypothecation, fiduciary transfer of title,
assignment by way of security, lien, pledge, charge, lease, sale and lease-back
arrangement, easement, servitude, trust arrangement, or security interest or
encumbrance of any kind in respect of such Property, or any preferential
arrangement having the practical effect of constituting a security interest with
respect to the payment of any obligation with, or from the proceeds of, any
Property of any kind (and a Person shall be deemed to own subject to a Lien any
Property that it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such Property).
<PAGE>

                                                                      Appendix A
                                                                         Page 11

          "Limited Liability Company Interest" shall have the meaning provided
           ----------------------------------
in the LLC Pledge Agreement.

          "LLC" shall mean PG&E National Energy Group, LLC, a Delaware limited
           ---
liability company.

          "LLC Agreement" shall mean the Amended and Restated Limited Liability
           -------------
Company Agreement dated as of March 1, 2001 of PG&E National Energy Group LLC.

          "LLC Interests" shall mean, as to LLC, any and all shares of the
           -------------
profits and losses of such Person, any and all rights to receive distributions
of such Person's assets, and any and all rights, benefits or privileges
pertaining to any of the foregoing, including, without limitation, voting rights
and the right to participate in management.

          "LLC Pledge Agreement" shall mean the LLC Pledge Agreement dated as of
           --------------------
March 1, 2001, among the Borrower, as pledgor, NEG, Inc., as issuer, the Lenders
and Bankers Trust Company, as pledgee, as Collateral Agent for the benefit of
the Lenders, as amended, modified or supplemented from time to time.

          "Loan" shall mean each of the Tranche A Loan and the Tranche B Loan,
           ----
and shall also mean, where the context requires, any portion of any such loan
held by a Lender or subject to a particular Interest Period or interest rate
option.

          "Losses" shall have the meaning provided in Section 9.2(b) of the
           ------
Credit Agreement.

          "Margin Stock" shall mean margin stock within the meaning of
           ------------
Regulation U and Regulation X.

          "Material Adverse Change" shall mean, with respect to any Person, a
           -----------------------
material adverse change in the condition (financial or otherwise), results of
operations, business, Properties, liabilities, management or prospects of such
Person.

          "Material Adverse Effect" shall mean a material adverse effect on (i)
           -----------------------
the condition (financial or otherwise), results of operations, business,
Properties, liabilities, management or prospects of the Borrower, (ii) the
ability of the Borrower, LLC or NEG, Inc. to timely perform any of its
obligations under any of the Financing Documents to which it is a party, (iii)
the legality, validity or enforceability of any material provision of any
Financing Document, (iv) the rights and remedies of the Collateral Agent, the
Administrative Agent, any Holder or any Lender under any of the Financing
Documents or (v) the security interests provided under the Security Documents or
the value thereof; provided that a Utility Event or defaults on Indebtedness to
                   --------
be Refinanced as of the Closing Date and other events of default described in
the SEC Filings of the Borrower since December 31, 2000 but prior to the Closing
Date, shall not constitute a Material Adverse Effect.

          "Material Agreements" shall have the meaning provided in Section
           -------------------
4.1(g)(iii) of the Credit Agreement.
<PAGE>

                                                                      Appendix A
                                                                         Page 12

          "Moody's" shall mean Moody's Investors Service, Inc.
           -------

          "NAIC" shall mean the National Association of Insurance Commissioners.
           ----

          "NEG Group" means LLC and each of its subsidiaries and each
           ----------
corporation, company or partnership in which any of the foregoing own a
Controlling equity interest.

          "NEG, Inc." shall mean PG&E National Energy Group, Inc., a Delaware
           ---------
corporation.

          "NEG Subsidiary" shall mean, as the context may require, any or all
           --------------
Subsidiaries of NEG, Inc.

          "Net Debt Proceeds" shall mean, with respect to any incurrence of
           -----------------
Indebtedness for borrowed money, the cash proceeds received by any Person (net
of any tax, underwriting discounts and commissions and reasonable costs paid by
such Person associated therewith) from the respective incurrence of such
Indebtedness for borrowed money.

          "Net Equity Proceeds" shall mean, with respect to each issuance or
           -------------------
sale of any equity by any Person or any capital contribution to such Person, the
cash proceeds received by any Person (net of any tax, underwriting discounts and
commissions and reasonable costs paid by such Person associated therewith) from
the respective sale or issuance of its equity or from the respective capital
contribution.

          "Net Insurance Proceeds" shall mean, with respect to any Recovery
           ----------------------
Event, the cash proceeds received by any Person (net of reasonable costs and
taxes paid by such Person associated therewith) in connection with such Recovery
Event.

          "Net IPO Proceeds" shall  mean, with respect to the IPO, the cash
           ----------------
proceeds received by the respective Person from such IPO (net of underwriting
discounts and commissions and other reasonable costs paid by such Person
associated therewith).

          "Net Sale Proceeds" shall mean, for any Asset Sale, the gross cash
           -----------------
proceeds (including any cash received by way of deferred payment pursuant to a
promissory note, receivable or otherwise, but only as and when received)
received by any Person from such sale of assets (net of the fees and commissions
and other reasonable costs paid by such Person associated therewith) relating to
the assets sold.

          "Note" shall have the meaning provided in Section 2.4 of the Credit
           ----
Agreement.

          "Notice of Borrowing" shall have the meaning provided in Section 2.2
           -------------------
of the Credit Agreement.

          "Obligations" shall mean, collectively, (i) all loans, advances,
           -----------
debts, liabilities, and obligations, howsoever arising, owed by the Borrower
under a Financing Document or otherwise to the Administrative Agent or any
Lender of every kind and description (whether or not evidenced by any note or
instrument and whether or not for the payment of money), direct or
<PAGE>

                                                                      Appendix A
                                                                         Page 13

indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, including all interest, fees, charges, expenses, attorneys'
fees and consultants' fees chargeable to the Borrower; (ii) any and all sums
advanced by the Collateral Agent, the Administrative Agent or any Lender in
order to preserve the Collateral; and (iii) the reasonable expenses of retaking,
holding, preparing for sale or lease, selling or otherwise disposing of or
realizing on the Collateral, or of any exercise by the Collateral Agent, the
Administrative Agent or any Lender of its rights under the Security Documents,
together with reasonable attorneys' fees and court costs.

          "Officer's Certificate" shall mean an officer's certificate signed by
           ---------------------
an Authorized Officer of the Borrower.

          "Option" shall have the meaning provided in the Option Agreement.
           ------

          "Option Agreement" shall mean the Option Agreement dated as of March
           ----------------
1, 2001 among LLC, NEG, Inc., GPSF-F Inc., a Delaware corporation and LB I Group
Inc., a Delaware corporation.

          "Option Shares" shall have the meaning provided in the Option
           -------------
Agreement.

          "Payment Office" shall mean the office specified from time to time by
           --------------
the Administrative Agent as its payment office by notices to the Borrower and
the Lenders.

          "PBGC" shall mean the Pension Benefit Guaranty Corporation established
           ----
pursuant to Section 4002 of ERISA, or any successor thereto.

          "Permitted Lien" shall have the meaning provided in Section 7.1 of the
           --------------
Credit Agreement.

          "Person" shall mean any individual, corporation, limited liability
           ------
company, company, voluntary association, partnership, joint venture, trust, or
other enterprises or unincorporated organization or government (or any agency,
instrumentality or political subdivision thereof).

          "PGE Utility" shall mean Pacific Gas and Electric Company, a
           -----------
California corporation.

          "Plan" shall mean any pension plan as defined in Section 3(2) of
           ----
ERISA, which is maintained or contributed to by (or to which there is an
obligation to contribute of) the Borrower or a Subsidiary of the Borrower or an
ERISA Affiliate, and each such plan for the five-year period immediately
following the latest date on which the Borrower, or a Subsidiary of the Borrower
or an Affiliate maintained, contributed to or had an obligation to contribute to
such plan.

          "Pledged Interest" shall mean the Limited Liability Company Interests
           ----------------
pledged under the LLC Pledge Agreement.

          "Preferential Rights" shall have the meaning provided in Section
           -------------------
5.4(b) of the Credit Agreement.
<PAGE>

                                                                      Appendix A
                                                                         Page 14

          "Prime Rate" shall mean the per annum rate of interest established
           ----------
from time to time by Bankers Trust Company as its prime rate, which rate may not
be the lowest rate of interest charged by Bankers Trust Company to its
customers.

          "Process Agent" shall have the meaning provided in Section 9.16(b) of
           -------------
the Credit Agreement.

          "Property" shall mean any property or asset of any kind whatsoever,
           --------
whether real, personal or mixed and whether tangible or intangible, and any
right or interest therein.

          "PUHCA" shall mean the Public Utility Holding Company Act of 1935, as
           -----
amended, and rules and regulations promulgated thereunder.

          "QF" shall mean a "qualifying cogeneration facility" or a "qualifying
           --
small power production facility" as defined under the Public Utility Regulatory
Policies Act of 1978, as amended.

          "Quarterly Dates" shall mean the last Business Day of each of March,
           ---------------
June, September and December.

          "Real Estate" shall mean, with respect to any Person, all real estate
           -----------
assets, real property interests, including all easements, rights of way, feehold
interests, leasehold interests and any options with respect to any of the
foregoing, owned by such Person.

          "Recovery Event" shall mean the receipt by any Person of any cash
           --------------
insurance proceeds or condemnation awards payable (i) by reason of theft, loss,
physical destruction, damage, taking or any other similar event with respect to
any Property or assets of such Person or (ii) under any policy of insurance,
except in the case of the Borrower, excluding such proceeds or awards
attributable to PGE Utility or any Subsidiary of PGE Utility.

          "Refinance" or "Refinancing" shall mean the refinancing of the
           ---------      -----------
Indebtedness of the Borrower as set forth on Part A of the Disclosure Letter in
accordance with the requirements of Section 4.1(s) of the Credit Agreement.

          "Register" shall have the meaning provided in Section 9.11(e) of the
           --------
Credit Agreement.

          "Regulation D" shall mean Regulation D of the Board of Governors of
           ------------
the Federal Reserve system (or any successor).

          "Regulation U" shall mean Regulation U of the Board of Governors of
           ------------
the Federal Reserve system (or any successor).

          "Regulation X" shall mean Regulation X of the Board of Governors of
           ------------
the Federal Reserve system (or any successor).
<PAGE>

                                                                      Appendix A
                                                                         Page 15

          "Release" shall mean any spilling, leaking, pumping, pouring,
           -------
emitting, emptying, discharging, injecting, escaping, leaching, dumping, or
disposing into the environment (including the abandonment or discarding of
barrels, containers, and other closed receptacles containing any Hazardous
Material, but excluding (i) emissions from the engine exhaust of a motor vehicle
and (ii) the normal application of fertilizer).

          "Reportable Event" shall mean an event described in Section 4043(c) of
           ----------------
ERISA with respect to a Plan that is subject to Title IV of ERISA other than
those events as to which the 30-day notice period is waived under subsection
 .22, .23, .25, .27 or .28 of PBGC Regulation Section 4043.

          "Required Acceleration Lenders" shall mean, at any time, the holders
           -----------------------------
of at least 66 2/3% in principal amount of the Loans then outstanding.

          "Required FMV Ratio" shall have the meaning provided in Section 6.14
           ------------------
of the Credit Agreement.

          "Required Waiver Lenders" shall mean, at any time, at least two
           -----------------------
Lenders which (a) are not Affiliates of each other and (b) together hold, in the
aggregate, more than 66 2/3% in principal amount of the Loans then outstanding.

          "Reserve Requirement" shall mean, at any time, the maximum rate at
           -------------------
which reserves (including, without limitation, any marginal, special,
supplemental, or emergency reserves) are required to be maintained under
regulations issued from time to time by the Board of Governors of the Federal
Reserve System (or any successor) by member banks of the Federal Reserve System
against "Eurocurrency liabilities" (as such term is used in Regulation D).
Without limiting the effect of the foregoing, the Reserve Requirement shall
reflect any other reserves required to be maintained by such member banks with
respect to (i) any category of liabilities which includes deposits by reference
to which the Eurodollar Rate is to be determined, or (ii) any category of
extensions of credit or other assets which include Eurodollar Loans.  The
Eurodollar Rate shall be adjusted automatically on and as of the effective date
of any change in the Reserve Requirement.

          "Return" shall have the meaning provided in Section 5.12 of the Credit
           ------
Agreement.

          "Scheduled Project" shall have the meaning provided in Section 5.23 of
           -----------------
the Credit Agreement.

          "SEC" shall mean the Securities and Exchange Commission.
           ---

          "SEC Filings" shall mean the filings listed on Schedule 4.1(k).
           -----------

          "Securities Act" shall mean the Securities Act of 1933, as amended,
           --------------
and the rules and regulations promulgated by the SEC thereunder.

          "Security Documents" shall mean, collectively, the LLC Pledge
           ------------------
Agreement, the Stock Pledge Agreement and all Uniform Commercial Code financing
statements and other
<PAGE>

                                                                      Appendix A
                                                                         Page 16

filings, recordings or regulations required by the Credit Agreement or the LLC
Pledge Agreement or the Stock Pledge Agreement to be filed or made in respect of
any such Security Document.

          "Selected Interest Amount" shall have the meaning provided in Section
           ------------------------
2.6(b).

          "Selected Interest Period" shall have the meaning provided in Section
           ------------------------
2.6(b).

          "Significant Subsidiaries" shall mean any of PG&E Gas Transmission,
           ------------------------
Northwest Corporation, a California corporation, PG&E Energy Trading Holdings
Corporation, a California corporation, PG&E Generating Company, LLC, a Delaware
limited liability company and USGen New England, Inc., a Delaware corporation.

          "Source" of a Lender shall mean the source from which such Lender is
           ------
obtaining funds in connection with the funding or maintenance of its Eurodollar
Loan.

          "Specified Rated Indebtedness" shall mean any long-term unsecured
           ----------------------------
Indebtedness for borrowed money which (a) has a credit rating of no less than
BBB- by Standard & Poor's or Baa3 by Moody's, and (b) a maturity date no earlier
than the Date Certain and (c) such Indebtedness may not be accelerated or
prepaid prior to a repayment and satisfaction in full of all Obligations of the
Borrower under the Credit Agreement and the other Financing Documents.

          "Specified Subsidiaries" shall mean any of GTN Holdings LLC, a
           ----------------------
Delaware limited liability company and PG&E Energy Trading Holdings, LLC, a
Delaware limited liability company.

          "Spin-Off" of NEG, Inc. shall mean a spin-off, divestiture,
           --------
reorganization or other form of  restructuring that results in NEG, Inc. no
longer being a Subsidiary of LLC or the Borrower.

          "Standard & Poor's" shall mean Standard & Poor's Ratings Services, a
           -----------------
division of The McGraw-Hill Companies, Inc.

          "Stock Pledge Agreement" shall mean the Stock Pledge Agreement dated
           ----------------------
as of March 1, 2001, among the Borrower, the Lenders party thereto and Bankers
Trust Company, as pledgee, as Collateral Agent for the Lenders, as amended,
modified or supplemented from time to time.

          "Subsidiary" shall mean, for any Person, any corporation, partnership
           ----------
or other entity of which at least a majority of the securities or other
ownership interests having by the terms thereof ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
of such corporation, partnership or other entity (irrespective of whether or not
at the time securities or other ownership interests of any other class or
classes of such corporation, partnership or other entity shall have or might
have voting power by reason of the happening of any contingency) is at the time
directly or indirectly owned or controlled by such Person or one or more
Subsidiaries of such Person or by such Person and one or more Subsidiaries of
such Person.
<PAGE>

                                                                      Appendix A
                                                                         Page 17

          "Tax" shall have the meaning provided in Section 3.4 of the Credit
           ---
Agreement.

          "Trading Contracts" shall mean the agreements identified as such on
           -----------------
Part A of the Disclosure Letter.

          "Trading Counterparties" shall mean parties to the Trading Contracts
           ----------------------
identified as such on Part B of the Disclosure Letter.

          "Tranche A Commitment" shall mean $600,000,000.
           --------------------

          "Tranche A Lender" shall mean General Electric Capital Corporation, a
           ----------------
New York corporation.

          "Tranche A Loan" shall mean the Loan provided by the Tranche A Lender
           --------------
on the Closing Date.

          "Tranche B Commitment" shall mean $400,000,000.
           --------------------

          "Tranche B Lender" shall mean Lehman Commercial Paper Inc., a New York
           ----------------
corporation.

          "Tranche B Loan" shall mean the Loan provided by the Tranche B Lender
           --------------
on the Closing Date.

          "Type" shall mean the type of Loan determined with regard to the
           ----
interest option applicable thereto, i.e., whether a Base Rate Loan or a
Eurodollar Loan.

          "U.S. GAAP" shall mean generally accepted accounting principles and
           ---------
practices as in effect from time to time in the United States.

          "Unaudited Financial Statements" shall have the meaning provided in
           ------------------------------
Section 5.11 of the Credit Agreement.

          "Unfunded Current Liability" of any Plan shall mean the amount, if
           --------------------------
any, by which the value of the accumulated plan benefits under the Plan
determined on a plan termination basis in accordance with actuarial assumptions
at such time consistent with those prescribed by the PBGC for purposes of
Section 4044 of ERISA, exceeds the fair market value of all plan assets
allocable to such liabilities under Title IV of ERISA (excluding any accrued but
unpaid contributions).

          "United States" and "U.S." shall each mean the United States of
           -------------       ----
America.

          "Utility Event" shall mean any event, fact or circumstance which
           -------------
relates solely to and affects solely PGE Utility (including any voluntary filing
for bankruptcy or dissolution concerning PGE Utility or its Subsidiaries under
the Bankruptcy Code).

          "Utility Regulation" means any law, regulation or rule of the Federal
           ------------------
government, any state, or any agency or political subdivision of the foregoing
which is applicable to an entity
<PAGE>

                                                                      Appendix A
                                                                         Page 18

by virtue of (i) such entity's ownership or operation of assets used for the
generation, transmission, distribution or sale of electric energy, (ii) such
entity's transportation of natural or manufactured gas, gasoline, oil, or
similar fuels, steam, chilled water or other products resulting in regulation
similar to that imposed on the foregoing, (iii) such entity's engaging in the
sale or provision of electric energy, natural gas or similar fuels, steam,
water, chilled water, or telephone or other public utility services; provided
                                                                     --------
that, such term shall not include laws, regulations or rules of general
applicability with respect to protection of the environment, hazardous waste, or
public health or safety.

          "Voting Stock", with respect to any Person, shall mean Capital Stock
           ------------
the holders of which are ordinarily, in the absence of contingencies, entitled
to vote for the election of directors (or persons performing similar functions)
of such Person, even if the right so to vote has been suspended by the happening
of a contingency.

          2.   Rules of Interpretation.  In each Financing Document, unless
               -----------------------
otherwise indicated:

          (a)  each reference to, and the definition of, any document (including
     any Financing Document) shall be deemed to refer to such document as it may
     be amended, supplemented, revised or modified from time to time in
     accordance with its terms and, to the extent applicable, the terms of the
     Credit Agreement;

          (b)  each reference to a Law or Governmental Approval shall be deemed
     to refer to such Law or Governmental Approval as the same may be amended,
     supplemented or otherwise modified from time to time;

          (c)  any reference to a Person in any capacity includes a reference to
     its permitted successors and assigns in such capacity and, in the case of
     any Governmental Authority, any Person succeeding to any of its functions
     and capacities;

          (d)  references to days shall refer to calendar days unless Business
     Days are specified; references to weeks, months or years shall be to
     calendar weeks, months or years, respectively;

          (e)  all references to a "Section," "Appendix," "Annex," "Schedule" or
     "Exhibit" are to a Section of such Financing Document or to an Appendix,
     Annex, Schedule or Exhibit attached thereto;

          (f)  the table of contents and Section headings and other captions
     therein are for the purpose of reference only and do not affect the
     interpretation of such Financing Document;

          (g)  defined terms in the singular shall include the plural and vice
     versa, and the masculine, feminine or neuter gender shall include all
     genders;
<PAGE>

                                                                      Appendix A
                                                                         Page 19

          (h)  the words "hereof", "herein" and "hereunder", and words of
     similar import, when used in any Financing Document, shall refer to such
     Financing Document as a whole and not to any particular provision of such
     Financing Document;

          (i)  the words "include," "includes" and "including" are deemed to be
     followed by the phrase "without limitation";

          (j)  where the terms of any Financing Document require that the
     approval, opinion, consent or other input of any Secured Party be obtained,
     such requirement shall be deemed satisfied only where the requisite
     approval, opinion, consent or other input is given by or on behalf of the
     relevant party in writing;

          (k)  where the terms of any Financing Document require or permit any
     action to be taken by the Collateral Agent, such action shall be taken
     strictly in accordance with the applicable provisions of the relevant
     Financing Documents;

          (l)  whenever the phrase "material compliance" is used, it shall be
     interpreted to mean that either the entity is in full compliance with the
     requirement or that any failure of the entity to be in compliance in all
     respects with the requirement could not reasonably be expected alone or
     together will all other such failures and all of the facts and
     circumstances to have a Material Adverse Effect; and

          (m)  all reference to "knowledge" of a Person shall mean the knowledge
     or actual awareness of such Person of the subject matter in question after
     due inquiry and investigation and "knowledge" of the Borrower shall mean
     and include knowledge of the other Covered Parties.
<PAGE>

                                                                       EXHIBIT A
                                                                       ---------

                          FORM OF NOTICE OF BORROWING

                                                                          [DATE]

[Address of Administrative Agent/Lender]
 --------------------------------------

          Attention:  __________________________

Gentlemen:

          The undersigned, PG&E Corporation, refers to the Credit Agreement,
dated as of March __, 2001 (as amended from time to time, the "Credit
Agreement," the terms defined therein being used herein as therein defined),
among the undersigned, the Lenders, [and you, as Administrative Agent for the
Lenders,] and hereby gives you notice, irrevocably, pursuant to Section 2.2 of
the Credit Agreement, that the undersigned hereby requests a Borrowing under the
Credit Agreement, and in that connection sets forth below the information
relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.2
of the Credit Agreement:

          (i)    The Business Day of the Proposed Borrowing is March __, 2001.

          (ii)   The aggregate principal amount of the Proposed Borrowing is
[________].

          (iii)  The Proposed Borrowing is to consist of a Eurodollar Loan.

          (iv)   The initial Interest Period for the Proposed Borrowing is
[_________].

          The undersigned hereby certifies that the following statements are
true on the date hereof, and will be true on the date of the Proposed Borrowing:

          (A)    the representations and warranties contained in Section 5 of
the Credit Agreement are correct, before and after giving effect to the Proposed
Borrowing and to the application of the proceeds thereof, as though made on and
as of such date; and

          (B)    no Default or Event of Default has occurred and is continuing,
or would result from such Proposed Borrowing or from the application of the
proceeds thereof.

                              Very truly yours,

                              PG&E Corporation

                              By_____________________________
                                 Title:
<PAGE>

                                                                       EXHIBIT B
                                                                       ---------

                                 FORM OF NOTE

                    THIS NOTE MAY NOT BE ASSIGNED EXCEPT IN
             ACCORDANCE WITH SECTION 9.11 OF THE CREDIT AGREEMENT

 $ _____________                                              New York, New York
                                                                  March __, 2001

          FOR VALUE RECEIVED, PG&E CORPORATION, a corporation organized and
existing under the laws of California (the "Borrower"), hereby promises to pay
to the order of [_____________________] (the "Lender") or its registered
assigns, in lawful money of the United States of America in immediately
available funds, at the Payment Office (as defined in the Agreement described
below) on the earlier of (a) the date of a Spin-Off of NEG, Inc. and (b) the
Date Certain, the principal sum of __________________ United States dollars or,
if less, the unpaid principal amount of all Loans (as defined in the Agreement)
made by the Lender pursuant to the Agreement.

          The Borrower promises also to pay interest on the unpaid principal
amount of the Loans in like money at said office from the date such Loans are
made until paid at the rates and at the times provided in the Agreement.

          This Note is one of the Notes referred to in the Credit Agreement,
dated as of March [__], 2001, among the Borrower, the Lenders party thereto,
General Electric Capital Corporation, as Co-Arranger, Lehman Commercial Paper
Inc., as Administrative Agent and Lehman Brothers Inc., as Lead Arranger and
Book Manager (as amended and as from time to time in effect, the "Agreement")
and is entitled to the benefits thereof. Capitalized terms used herein and not
defined shall have the meanings set forth in Appendix A to the Agreement. This
Note is secured by the Security Documents (as defined in the Agreement). As
provided in the Agreement, this Note is subject to voluntary and mandatory
prepayment, in whole or in part.

          In case an Event of Default (as defined in the Agreement) shall occur
and be continuing, the principal of and accrued interest on this Note may be
declared to be due and payable in the manner and with the effect provided in the
Agreement.

          The Borrower hereby waives presentment, demand, protest or notice of
any kind in connection with this Note.
<PAGE>

          THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAW OF THE STATE OF NEW YORK.

                              PG&E Corporation

                              By_____________________________
                                Name:
                                Title:

                                     (ii)
<PAGE>

                                                                       EXHIBIT C
                                                                       ---------

                        Section 3.4(b)(ii) Certificate
                        ------------------------------

          Reference is hereby made to the Credit Agreement, dated as of March 1,
2001, among PG&E Corporation, a California corporation, as the Borrower, General
Electric Capital Corporation, a New York corporation, as a Lender and Co-
Arranger, Lehman Commercial Paper Inc., as a Lender and Administrative Agent and
Lehman Brothers Inc., as Lead Arranger and Book Manager (the "Credit
Agreement"). Pursuant to the provisions of Section 3.4(b)(ii) of the Credit
Agreement, the undersigned hereby certifies that it is not a "bank" as such term
is used in Section 881(c)(3)(A) of the Internal Revenue Code of 1986, as
amended.

                                    [NAME OF LENDER]

                                    By__________________________________
                                      Name:
                                      Title:
<PAGE>

                                                                       EXHIBIT D
                                                                       ---------

CT CORPORATION SYSTEM

                                                                   March 1, 2001

PG&E Corporation
One Market
Spear Street Tower, Suite 2400
San Francisco, CA 94105
Attention: Vice President and Corporate Secretary

PG&E National Energy Group, LLC
One Market
Spear Street Tower, Suite 2400
San Francisco, CA 94105
Attention: Secretary

PG&E National Energy Group, Inc.
One Market
Spear Street Tower, Suite 2400
San Francisco, CA 94105
Attention: Secretary

General Electric Capital Corporation
120 Long Ridge Road
Stamford, CT 06927

Lehman Commercial Paper Inc.
Three World Financial Center
200 Vesey Street
New York, NY 10285

Lehman Brothers Inc.
Three World Financial Center
200 Vesey Street
New York, NY 10285

Ladies and Gentlemen:

          Reference is made to the Credit Agreement, dated as of March 1, 2001
(the "Credit Agreement"), among PG&E Corporation, a California ("PG&E Corp."),
General Electric Capital Corporation, Lehman Commercial Paper Inc. and Lehman
Brothers Inc. Unless otherwise defined herein, terms defined in the Credit
Agreement are used herein as therein defined.

          Pursuant to Section 9.16(b) of the Credit Agreement and the other
Financing Documents, PG&E Corp., PG&E National Energy Group, LLC and PG&E
National Energy Group, Inc. have appointed CT Corporation System (with an office
on the date hereof at 111 Eighth Avenue, New York, New York 10011, U.S.A.) as
their agent in their name, place and stead to accept process on their behalf of
all writs, process and summonses in any action, suit or proceeding brought in
the State of New York arising out of or relating to the Credit Agreement, any
other Financing Documents or the transactions contemplated thereby.

     1350 Treat Boulevard, Suite 100
     Walnut Creek, CA 94596
     Tel. 800 874 5258
     Fax 925 287 9801

     A CCH LEGAL INFORMATION SERVICES COMPANY
<PAGE>

CT CORPORATION SYSTEM

          The undersigned hereby accepts each such appointment as agent and
agrees with you that (a) the undersigned will maintain an office in New York
City until such time as a successor agent shall be appointed by irrevocable
powers of attorney in form and substance acceptable to you and your counsel, and
such successor agent shall have delivered a letter to you accepting its
appointment, (b) the undersigned will perform its duties as agent in accordance
with the Credit Agreement and this letter, and (c) the undersigned will forward
forthwith copies of any writs, process or summonses which the undersigned
receives in connection with its appointment as agent to PG&E Corp., PG&E
National Energy Group, LLC and PG&E National Energy Group, Inc. at the following
addresses (or at such other address of which PG&E Corp., PG&E National Energy
Group, LLC and PG&E National Energy Group, Inc. shall hereafter notify us):

          PG&E Corporation
          One Market
          Spear Street Tower, Suite 2400
          San Francisco, CA 94105
          Attention: Leslie H. Everett, Vice President
                       and Corporate Secretary
          Fax: (415) 267-7260
          Phone: (415) 267-7010

          PG&E National Energy Group, LLC
          One Market
          Spear Street Tower, Suite 2400
          San Francisco, CA 94105
          Attention: Leslie H. Everett, Secretary
          Fax: (415) 267-7260
          Phone: (415) 267-7010

          PG&E National Energy Group, Inc.
          One Market
          Spear Street Tower, Suite 2400
          San Francisco, CA 94105
          Attention: Leslie H. Everett, Secretary
          Fax: (415) 267-7260
          Phone: (415) 267-7010

          This acceptance and agreement shall be binding upon the undersigned
and all successors of the undersigned.

                                        Very truly yours,

                                        CT CORPORATION SYSTEM

                                        By:  /s/ Naseem A. Conde
                                             -------------------------------
                                             Name:   Naseem A. Conde
                                             Title:  Special Asst. Secy.

     1350 Treat Boulevard, Suite 100
     Walnut Creek, CA 94596
     Tel. 800 874 5258
     Fax 925 287 9801

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