<SUBMISSION>
<ACCESSION-NUMBER>0001021408-02-008800
<TYPE>8-K
<PUBLIC-DOCUMENT-COUNT>11
<PERIOD>20020626
<ITEMS>5
<ITEMS>7
<FILING-DATE>20020626
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>PG&E CORP
<CIK>0001004980
<ASSIGNED-SIC>4931
<IRS-NUMBER>943234914
<STATE-OF-INCORPORATION>CA
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
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<FORM-TYPE>8-K
<ACT>34
<FILE-NUMBER>001-12609
<FILM-NUMBER>02687024
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<BUSINESS-ADDRESS>
<STREET1>ONE MARKET SPEAR TOWER
<STREET2>SUITE 2400
<CITY>SAN FRANCISCO
<STATE>CA
<ZIP>94105
<PHONE>4152677000
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>ONE MARKET SPEAR TOWER
<STREET2>SUITE 2400
<CITY>SAN FRANCISCO
<STATE>CA
<ZIP>94105
</MAIL-ADDRESS>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>PG&E PARENT CO INC
<DATE-CHANGED>19951214
</FORMER-COMPANY>
</FILER>
<DOCUMENT>
<TYPE>8-K
<SEQUENCE>1
<FILENAME>d8k.txt
<DESCRIPTION>FORM 8-K
<TEXT>
<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 8-K

                                 CURRENT REPORT
                     PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934



                          Date of Report: June 26 2002




                                PG&E Corporation
              -----------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)



               California                 1-12609             94-3234914
     --------------------------------------------------------------------------
     (State or other Jurisdiction       (Commission          (IRS Employer
         of Incorporation)              File Number)        Identification No.)




                                PG&E Corporation
                       One Market, Spear Tower, Suite 2400
                         San Francisco, California 94105
               --------------------------------------------------
               (Address of principal executive offices) (Zip Code)


                                 (415) 267-7000
               ---------------------------------------------------
              (Registrant's telephone number, including area code)

<PAGE>

Item 5. Other Events

     As previously disclosed, in November 2001 and March 2002, PG&E Corporation
amended its March 1, 2001 Credit Agreement (as amended, the "Old Credit
Agreement") with General Electric Capital Corporation ("GECC") and Lehman
Commercial Paper Inc. ("LCPI") and their assignees (collectively, the "Existing
Lenders"). The amendments provided PG&E Corporation the option to extend the
original $1 billion aggregate term loan credit facility for two one-year periods
so that the maturity date could be extended until as late as March 2, 2006,
contingent upon PG&E Corporation making a principal repayment of $308 million by
June 3, 2002. On June 3, 2002, PG&E Corporation made the principal repayment of
$308 million, utilizing current working capital and reducing the principal
balance outstanding under the Old Credit Agreement to $692 million.

     On June 25, 2002, PG&E Corporation entered into an Amended and Restated
Credit Agreement (the "New Credit Agreement") with GECC (the "Tranche A Lender")
and LCPI, and the lenders party thereto (collectively, the "Tranche B Lenders")
which amended and restated the Old Credit Agreement. The New Credit Agreement
provides for loans in two tranches. The Tranche A has a principal amount of $600
million (the "Tranche A Loan"), representing the $692 million outstanding under
the Old Credit Agreement less $92 million that has been converted to a Tranche B
Loan. The Tranche B consists of the $92 million converted loan plus $328 million
of new borrowings, for a total of $400 million (the "Tranche B Loan"). The
Tranche A Loan will continue to have the same maturity date and extension
provisions as the Old Credit Agreement. The Tranche B loan will mature on the
earlier of (1) September 2, 2006, or (2) the date of any spin-off of the shares
of PG&E National Energy Group, Inc. ("NEG, Inc."), by its indirect parent, PG&E
Corporation. The Tranche A Loan and the Tranche B Loan are collectively referred
to as the "Loans."

     The Tranche A Loan continues to be secured by a first priority lien on (1)
PG&E Corporation's equity interest in PG&E National Energy Group, LLC, a
Delaware limited liability company ("NEG LLC"and together with its direct and
indirect subsidiaries, the "NEG Group"), (2) NEG LLC's equity interest in NEG,
Inc., and (3) certain cash interest reserves. The Tranche B Loan is secured by a
second priority lien on the equity interests in NEG LLC and NEG, Inc. and by a
first priority lien on certain other cash interest reserves. In addition, the
Tranche B Loan is subordinated to the Tranche A Loan.

     PG&E Corporation issued to the lenders warrants to purchase approximately
2.4 million shares of common stock of PG&E Corporation at an exercise price of
$0.01 per share ("Warrants").

     As previously disclosed, in connection with the Old Credit Agreement,
affiliates of the Existing Lenders received an option to purchase 3 percent of
the shares of NEG, Inc., determined on a fully diluted basis, at an exercise
price of $1.00. The option may be exercised at any time until 45 days after the
full repayment of the Tranche A Loan. In addition, under the Old Credit
Agreement, PG&E Corporation's exercise of each of its one-year extensions of the
loan was

<PAGE>

conditioned upon NEG LLC granting affiliates of the Existing Lenders an
additional option to purchase one percent of the common stock of NEG, Inc.,
determined on a fully-diluted basis, at an exercise price of $1.00 per share. As
a result of the New Credit Agreement, the one percent has been reduced to
approximately .87 percent of the common stock of NEG, Inc. (reflecting the
reduction in the principal amount of the Tranche A Loan to $600 from the $692
million in loans outstanding under the Old Credit Agreement). The option may be
exercised at any time from the relevant extension date until 45 days after full
repayment or maturity of the Tranche A Loan.

     NEG LLC has the right to call the option after repayment of the Tranche A
Loan in full at a cash purchase price equal to the fair market value of the
underlying shares, or, at the election of NEG LLC if an initial public offering
of the shares of NEG, Inc. ("IPO") has occurred, by delivering the underlying
shares. If an IPO has not occurred prior to repayment of the Tranche A Loan in
full, the holders of the option have the right to require NEG LLC or PG&E
Corporation to repurchase the option at a purchase price equal to the fair
market value of the underlying shares (the "Put Price"), which right is
exercisable at any time after the earlier of full repayment of the Tranche A
Loan or 45 days before expiration of the option. In addition to the grant of the
additional option, PG&E Corporation must pay a fee of 3 percent of the
then-outstanding balance of the Tranche A Loan as a condition for PG&E
Corporation's exercise of each of the one-year extensions.

     The New Credit Agreement contains certain limitations on the ability of
PG&E Corporation and certain of its subsidiaries to grant liens, consolidate,
merge, purchase or sell assets, declare or pay dividends, incur indebtedness or
make advances, loans and investments. However, the New Credit Agreement does not
limit (1) PG&E Corporation's ability to spin-off its subsidiary, Pacific Gas and
Electric Company (the "Utility"), substantially in accordance with the Utility's
plan of reorganization proposed in the Utility's bankruptcy case pending in the
U.S. Bankruptcy Court for the Northern District of California, (2) the ability
of the members of the NEG Group to grant liens, purchase or sell assets, make
investments and incur indebtedness in accordance with NEG, Inc.'s business plan,
or (3) PG&E Corporation's ability to make investments in the Utility to the
extent required by law or regulatory requirements.

     The New Credit Agreement also generally requires mandatory prepayments of
the Loans with the net cash proceeds from incurrence of indebtedness, issuance
or sale of equity and sales of assets, the receipt of condemnation or insurance
proceeds, and distributions or dividends paid to PG&E Corporation; provided
however, that (1) PG&E Corporation may make investments in the Utility with cash
proceeds from equity sales or issuances to the extent required by law or
regulatory requirements, (2) the NEG Group may use such proceeds, or hold such
proceeds in cash, to purchase assets or make investments in accordance with NEG
Inc.'s business plan, except that proceeds of an IPO must be used to the extent
required to repay the Tranche A Loan. Any mandatory prepayments of the Loans
will be applied first to the principal amount of the Tranche A Loan, and after
the Tranche A Loan is paid in full, to the principal amount of the Tranche B
Loan.

     The New Credit Agreement also requires PG&E Corporation to maintain an
interest reserve account for each of the Tranche A Loan and the Tranche B Loans
in an amount equal to one year's interest.

<PAGE>

     A breach of any covenants would entitle the lenders to declare the Loans to
be due and payable. The covenants include requirements that (1) NEG, Inc.'s
unsecured long term debt have a credit rating of at least BBB - by Standard &
Poor's or Baa3 by Moody's Investors Service, Inc., (2) the ratio of fair market
value of NEG, Inc. to the aggregate amount of principal then outstanding under
the Loans be not less than 2 to 1, and (3) PG&E Corporation maintain cash or
cash equivalents (including amounts held in the interest reserves) of either 15
percent or 10 percent (depending upon when applicable) of the total principal
amount of the Loans outstanding plus the principal amount of the Notes (as
described below).

     Concurrent with the refinancing described above, on June 25, 2002, PG&E
Corporation issued $280 million aggregate principal amount of 7.50% Convertible
Subordinated Notes due June 30, 2007 ("Notes"), in a private offering. The Notes
are unsecured and are subordinate to the Loans. PG&E Corporation will pay
interest on the Notes semi-annually at a rate of 7.50 percent per year. PG&E
Corporation has the right, subject to certain limitations, to pay interest by
issuing additional Notes in lieu of paying cash. The New Credit Agreement
prohibits PG&E Corporation from paying interest on the Notes (1) for 240 days
after receipt by the Note trustee of notice delivered by the administrative
agent or the Tranche A Lender stating that a default that would permit
acceleration has occurred under the New Credit Agreement or (2) if, after such
interest payment, PG&E Corporation's cash and cash equivalents are less than 20
percent of the total principal amount of the Loans outstanding plus the
principal amount of the Notes, or 15 percent of such amount upon any extension
of the Loans.

     In addition to interest, if PG&E Corporation pays cash dividends to holders
of its common stock, Note holders are entitled to receive cash equal to the
dividends that would have been paid with respect to the number of shares that
the holder would be entitled to receive if the Notes had been converted on the
dividend record date. The Notes may be converted by the holders into shares of
PG&E Corporation's common stock at a conversion price equal to 119 percent of
the volume-weighted average price of the common stock of PG&E Corporation over a
43-day period beginning three days after the closing of the transaction. The
conversion price is subject to adjustment under certain circumstances, including
upon consummation of any spin off transaction of the Utility as proposed in its
plan of reorganization or a spin off of the shares of NEG, Inc.

     Following a Change of Control of PG&E Corporation, as such term is defined
in the Note indenture, a Note holder has the right to require PG&E Corporation
to repurchase the Note holder's Notes for cash at a price equal to 100 percent
of the principal amount of the Notes to be repurchased, plus any accrued and
unpaid interest.

     PG&E Corporation has agreed to provide, following consummation of a plan of
reorganization of the Utility, registration rights in connection with the shares
issuable upon conversion of the Notes and exercise of the Warrants.

     The net proceeds of the Loans and the Note issuance will be used to fund
corporate working capital, repay certain indebtedness, and fund two interest
reserve accounts.

<PAGE>

Item 7. Financial Statements, Pro Forma Financial Information, and Exhibits

Exhibit No.    Description of Exhibit

99.1           Indenture, dated as of June 25, 2002, between PG&E Corporation
               and U.S. Bank, N.A., as Trustee.

99.2           Purchase Agreement, dated as of June 25, 2002, between PG&E
               Corporation and Lehman Brothers Inc., Jackson Investment Fund
               Ltd., Citadel Credit Trading Ltd. and Citadel Equity Fund Ltd.,
               as the Purchasers.

99.3           Equity Registration Rights Agreement, dated as of June 25, 2002,
               between PG&E Corporation, as Issuer, and LB I Group Inc. and each
               other entity named as the signature pages thereto, as Initial
               Holders.

99.4           Amended and Restated Credit Agreement, dated as of June 25, 2002,
               among PG&E Corporation, as Borrower, the Lenders party thereto,
               Lehman Commercial Paper Inc., as Administrative Agent and Lehman
               Brothers Inc., as Lead Arranger and Book Manager.

99.5           Amended and Restated LLC Pledge Agreement, dated as of June 25,
               2002, by and among PG&E Corporation, as Pledgor, PG&E National
               Energy Group, LLC, as Issuer, Lehman Commercial Paper Inc., as
               Administrative Agent and Deutsche Bank Trust Company Americas, as
               Collateral Agent for the benefit of the Lenders as Pledgee.

99.6           Amended and Restated Stock Pledge Agreement, dated as of June 25,
               2002 by and among PG&E National Energy Group, LLC, as Pledgor,
               PG&E National Energy Group, Inc., as Issuer and Lehman Commercial
               Paper Inc., as Administrative Agent and Deutsche Bank Trust
               Company Americas, as Collateral Agent for the benefit of the
               Lenders as Pledgee.

99.7           Amended and Restated Option Agreement, dated as of June 25, 2002,
               by and among PG&E National Energy Group, Inc., PG&E Corporation,
               as Borrower, PG&E National Energy Group LLC and GPSF-F Inc. and
               LB I Group Inc., as the Initial Holders and each entity named on
               the signature pages thereto as the Subsequent Holders.

99.8           Intercreditor and Subordination Agreement, dated as of June 25,
               2002.

99.9           Warrant Agreement, dated as of June 25, 2002, by and among PG&E
               Corporation, LB I Group Inc. and each other entity named on the
               signature pages thereto.

<PAGE>

99.10          Resale Registration Rights Agreement, dated as of June 25, 2002,
               between PG&E Corporation as Issuer and the Purchasers identified
               on the signature pages thereto.

<PAGE>

                                    SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.

                                               PG&E CORPORATION

                                               By: /s/ LINDA CHENG

                                                   __________________________
                                                       LINDA Y.H. CHENG
                                               Corporate Secretary

Dated: June 26, 2002

<PAGE>

                                  EXHIBIT INDEX

Exhibit No.    Description of Exhibit

99.1           Indenture, dated as of June 25, 2002, between PG&E Corporation
               and U.S. Bank, N.A., as Trustee.

99.2           Purchase Agreement, dated as of June 25, 2002, between PG&E
               Corporation and Lehman Brothers Inc., Jackson Investment Fund
               Ltd., Citadel Credit Trading Ltd. and Citadel Equity Fund Ltd.,
               as the Purchasers.

99.3           Equity Registration Rights Agreement, dated as of June 25, 2002,
               between PG&E Corporation, as Issuer, and LB I Group Inc. and each
               other entity named as the signature pages thereto, as Initial
               Holders.

99.4           Amended and Restated Credit Agreement, dated as of June 25, 2002,
               among PG&E Corporation, as Borrower, the Lenders party thereto,
               Lehman Commercial Paper Inc., as Administrative Agent and Lehman
               Brothers Inc., as Lead Arranger and Book Manager.

99.5           Amended and Restated LLC Pledge Agreement, dated as of June 25,
               2002, by and among PG&E Corporation, as Pledgor, PG&E National
               Energy Group, LLC, as Issuer, Lehman Commercial Paper Inc., as
               Administrative Agent and Deutsche Bank Trust Company Americas, as
               Collateral Agent for the benefit of the Lenders as Pledgee.

99.6           Amended and Restated Stock Pledge Agreement, dated as of June 25,
               2002 by and among PG&E National Energy Group, LLC, as Pledgor,
               PG&E National Energy Group, Inc., as Issuer and Lehman Commercial
               Paper Inc., as Administrative Agent and Deutsche Bank Trust
               Company Americas, as Collateral Agent for the benefit of the
               Lenders as Pledgee.

99.7           Amended and Restated Option Agreement, dated as of June 25, 2002,
               by and among PG&E National Energy Group, Inc., PG&E Corporation,
               as Borrower, PG&E National Energy Group LLC and GPSF-F Inc. and
               LB I Group Inc., as the Initial Holders and each entity named on
               the signature pages thereto as the Subsequent Holders.

99.8           Intercreditor and Subordination Agreement, dated as of June 25,
               2002.

99.9           Warrant Agreement, dated as of June 25, 2002, by and among PG&E
               Corporation, LB I Group Inc. and each other entity named on the
               signature pages thereto.

<PAGE>

99.10    Resale Registration Rights Agreement, dated as of June 25, 2002,
         between PG&E Corporation as Issuer and the Purchasers identified on the
         signature pages thereto.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>3
<FILENAME>dex991.txt
<DESCRIPTION>INDENTURE DATED JUNE 25, 2002
<TEXT>
<PAGE>





                                PG&E CORPORATION

                  7.50% Convertible Subordinated Notes due 2007

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

                                    INDENTURE

                            Dated as of June 25, 2002

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



                                 U.S. BANK, N.A.

                                     TRUSTEE

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

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                         Page
                                                                                         ----
<S>                                                                                      <C>
ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE

     Section 1.1 Definitions ..........................................................    1
     Section 1.2 Other Definitions ....................................................   12
     Section 1.3 Incorporation by Reference of Trust Indenture Act ....................   13
     Section 1.4 Rules of Construction ................................................   14
     Section 1.5 Acts of Holders ......................................................   14

ARTICLE II THE SECURITIES

     Section 2.1 Form and Dating ......................................................   15
     Section 2.2 Execution and Authentication .........................................   16
     Section 2.3 Registrar, Paying Agent and Conversion Agent .........................   17
     Section 2.4 Paying Agent to Hold Money and Securities in Trust ...................   17
     Section 2.5 Securityholder Lists .................................................   17
     Section 2.6 Transfer and Exchange ................................................   18
     Section 2.7 Replacement Securities ...............................................   19
     Section 2.8 Outstanding Securities; Determination of Holder's Action .............   20
     Section 2.9 Temporary Securities .................................................   20
     Section 2.10 Cancellation ........................................................   21
     Section 2.11 Persons Deemed Owners ...............................................   21
     Section 2.12 Special Transfer Provisions .........................................   21
     Section 2.13 CUSIP Numbers .......................................................   26
     Section 2.14 PIK Securities ......................................................   26

ARTICLE III REPURCHASE UPON CHANGE OF CONTROL

     Section 3.1 Purchase of Securities at Option of the Holder upon Change of
                   Control ............................................................   26
     Section 3.2 Effect of Change of Control Purchase Notice; Withdrawal ..............   31
     Section 3.3 Deposit of Change of Control Purchase Price ..........................   32
     Section 3.4 Securities Purchased in Part .........................................   32
     Section 3.5 Covenant to Comply With Securities Laws Upon Purchase of
                   Securities .........................................................   32
     Section 3.6 Repayment to the Company .............................................   33

ARTICLE IV COVENANTS

     Section 4.1 Payment of Securities ................................................   33
     Section 4.2 SEC and Other Reports ................................................   33
     Section 4.3 Compliance Certificate ...............................................   33
     Section 4.4 Further Instruments and Acts .........................................   34
     Section 4.5 Maintenance of Office or Agency ......................................   34
     Section 4.6 Delivery of Certain Information ......................................   34
</TABLE>

<PAGE>

                                                                               2

<TABLE>
    <S>                                                                                  <C>
     Section 4.7 Restriction on Incurrence of Indebtedness ............................   34
     Section 4.8 Restriction on Spin-Offs .............................................   36
     Section 4.9 Pass-Through Dividends ...............................................   36
     Section 4.10 144A Securities Determination .......................................   36

ARTICLE V SUBORDINATION

     Section 5.1 Agreement of Subordination ...........................................   37
     Section 5.2 Payments To Holders ..................................................   37
     Section 5.3 Subrogation Of Securities ............................................   40
     Section 5.4 Authorization To Effect Subordination ................................   41
     Section 5.5 Notice To Trustee ....................................................   41
     Section 5.6 Trustee's Relation To Senior Debt ....................................   42
     Section 5.7 No Impairment Of Subordination .......................................   42
     Section 5.8 Certain Conversions Deemed Payment ...................................   42
     Section 5.9 Article Applicable To Paying Agents ..................................   43
     Section 5.10 Senior Debt Entitled To Rely ........................................   43
     Section 5.11 Continuing Offer ....................................................   43
     Section 5.12 Authorization of the Initial Tranche A Lender to File Claims, etc. ..   43
     Section 5.13 Section 5.13 Limitation on Remedies. ................................   44

ARTICLE VI SUCCESSOR CORPORATION

     Section 6.1 When Company May Merge or Transfer Assets ............................   44

ARTICLE VII DEFAULTS AND REMEDIES

     Section 7.1 Events of Default ....................................................   45
     Section 7.2 Acceleration .........................................................   47
     Section 7.3 Other Remedies .......................................................   48
     Section 7.4 Waiver of Past Defaults ..............................................   48
     Section 7.5 Control by Majority ..................................................   48
     Section 7.6 Limitation on Suits ..................................................   48
     Section 7.7 Rights of Holders to Receive Payment .................................   49
     Section 7.8 Collection Suit by Trustee ...........................................   49
     Section 7.9 Trustee May File Proofs of Claim .....................................   49
     Section 7.10 Priorities ..........................................................   50
     Section 7.11 Undertaking for Costs ...............................................   50
     Section 7.12 Waiver of Stay, Extension or Usury Laws .............................   50

ARTICLE VIII TRUSTEE

     Section 8.1 Duties of Trustee ....................................................   51
     Section 8.2 Rights of Trustee ....................................................   52
     Section 8.3 Individual Rights of Trustee .........................................   53
     Section 8.4 Trustee's Disclaimer .................................................   53
     Section 8.5 Notice of Defaults ...................................................   53
     Section 8.6 Reports by Trustee to Holders ........................................   54
</TABLE>

<PAGE>

                                                                               3

<TABLE>
<S>                                                                                      <C>
     Section 8.7 Compensation and Indemnity ...........................................   54
     Section 8.8 Replacement of Trustee ...............................................   55
     Section 8.9 Successor Trustee by Merger ..........................................   55
     Section 8.10 Eligibility; Disqualification .......................................   55
     Section 8.11 Preferential Collection of Claims Against Company ...................   56

ARTICLE IX DISCHARGE OF INDENTURE

     Section 9.1 Discharge of Liability on Securities .................................   56
     Section 9.2 Repayment to the Company .............................................   56

ARTICLE X AMENDMENTS

     Section 10.1 Without Consent of Holders ..........................................   56
     Section 10.2 With Consent of Holders .............................................   57
     Section 10.3 Compliance with Trust Indenture Act .................................   58
     Section 10.4 Revocation and Effect of Consents, Waivers and Actions ..............   58
     Section 10.5 Notation on or Exchange of Securities ...............................   58
     Section 10.6 Trustee to Sign Supplemental Indentures .............................   58
     Section 10.7 Effect of Supplemental Indentures ...................................   58

ARTICLE XI CONVERSIONS

     Section 11.1 Conversion Privilege ................................................   59
     Section 11.2 Conversion Procedure; Conversion Price; Fractional Shares ...........   60
     Section 11.3 Adjustment of Conversion Price ......................................   61
     Section 11.4 Consolidation or Merger of the Company ..............................   70
     Section 11.5 Notice of Adjustment ................................................   71
     Section 11.6 Notice in Certain Events ............................................   72
     Section 11.7 Company To Reserve Stock: Registration; Listing .....................   72
     Section 11.8 Taxes on Conversion .................................................   73
     Section 11.9 Conversion After Record Date ........................................   73
     Section 11.10 Conversion Price ...................................................   74
     Section 11.11 Company Determination Final ........................................   74
     Section 11.12 Responsibility of Trustee for Conversion Provisions ................   74
     Section 11.13 Unconditional Right of Holders to Convert ..........................   75
     Section 11.14 Failure to Deliver Shares ..........................................   75
     Section 11.15 Common Stock Restricted Securities Legends .........................   75

ARTICLE XII MISCELLANEOUS

     Section 12.1 Trust Indenture Act Controls ........................................   76
     Section 12.2 Notices .............................................................   76
     Section 12.3 Communication by Holders with Other Holders .........................   77
     Section 12.4 Certificate and Opinion as to Conditions Precedent ..................   77
     Section 12.5 Statements Required in Certificate or Opinion .......................   77
     Section 12.6 Separability Clause .................................................   78
     Section 12.7 Rules by Trustee, Paying Agent, Conversion Agent and Registrar ......   78
</TABLE>

<PAGE>

                                                                               4

<TABLE>
   <S>                                                                    <C>
     Section 12.8 GOVERNING LAW .......................................    78
     Section 12.9 No Recourse Against Others ..........................    78
     Section 12.10 Successors .........................................    78
     Section 12.11 Multiple Originals .................................    78
</TABLE>


EXHIBIT A    Form of Global Security

EXHIBIT B    Form of 144A Global Security

EXHIBIT C    Form of Certificated Security

EXHIBIT D    Transfer Certificate

EXHIBIT E    Institutional Accredited Investor Letter

EXHIBIT F    Exchange Certificate

EXHIBIT G    Common Stock Restricted Securities Legend

<PAGE>


     INDENTURE, dated as of June 25, 2002, between PG&E CORPORATION, a
California corporation ("Company"), and U.S. BANK, N.A., a national banking
association, as trustee ("Trustee").

     Each party agrees as follows for the benefit of the other party and for the
equal and ratable benefit of the Holders (as defined below) of the Company's
7.50% Convertible Subordinated Notes due 2007:

                                   ARTICLE I

                   DEFINITIONS AND INCORPORATION BY REFERENCE

     Section 1.1 Definitions.

     "144A Global Security" means a permanent Global Security in the form of the
Security attached hereto as Exhibit B, and that is deposited with and registered
in the name of the Depositary, representing Securities that may be sold in
reliance on Rule 144A.

     "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct or cause the direction of the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.

     "Applicable Procedures" means, with respect to any transfer or transaction
involving a Global Security or beneficial interest therein, the rules and
procedures of the Depositary for such Security, in each case to the extent
applicable to such transaction and as in effect from time to time.

     "Bankruptcy Code" means Title 11 of the United States Code entitled
"Bankruptcy", as now or hereafter in effect, or any successor thereto.

     "Board of Directors" means either the board of directors of the Company or
any duly authorized committee of such board.

     "Board Resolution" means a resolution of the Board of Directors.

     "Business Day" means a day other than a Saturday or Sunday or any day on
which banking institutions in the City of New York or the City of San Francisco
are authorized or obligated by law or regulation to close.

     "Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.

<PAGE>

                                                                               2

     "Capital Stock" means, with respect to any Person, any and all shares,
interests, membership interests, rights to purchase, warrants, options,
participations or other equivalents of or interests in (however designated) the
equity of such Person, whether now outstanding or issued after the date hereof,
including without limitation, all common stock and preferred stock.

     "Cash Dividends" means any and all cash dividends and distributions,
whether periodic, special, extraordinary, non-recurring or other, on the Common
Stock, as declared by the Company's Board of Directors from time to time.

     "Certificated Securities" means Securities that are in the form of the
Securities attached hereto as Exhibit C.

     "Closing Date" shall mean the date hereof.

     "Closing Price" means, for any security as of any date, the last closing
trade price for such security on the principal United States securities market
on which such security is traded (which is currently the New York Stock Exchange
with respect to the Common Stock) as reported by Bloomberg Financial Markets (or
any successor thereto, "Bloomberg"), or, if such exchange begins to operate on
an extended hours basis and does not designate the closing bid price or the
closing trade price, as the case may be, then the last bid price or last trade
price, respectively, of such security prior to 4:00:00 p.m. Eastern Time as
reported by Bloomberg, or, if such exchange is not the principal securities
exchange or trading market for such security, the last trade price of such
security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last trade price of such security in the over-the-counter market
on the electronic bulletin board for such security as reported by Bloomberg, or,
if no last trade price is reported for such security by Bloomberg, the average
of the highest bid prices and the lowest ask prices of any market makers for
such security as reported in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Price cannot be calculated for a security on a particular
date on any of the foregoing bases, the Closing Price of such security on such
date shall be the fair market value as mutually determined by the Company and
the Majority Holders.

     "Common Stock" shall mean the Common Stock, no par value, of the Company
existing on the date of this Indenture or any other shares of Capital Stock of
the Company into which such Common Stock shall be reclassified or changed.

     "Company" means the party named as the "Company" in the first Section of
this Indenture until a successor replaces it pursuant to the applicable
provisions of this Indenture and, thereafter, shall mean such successor. The
foregoing sentence shall likewise apply to any subsequent such successor or
successors.

     "Company Request" or "Company Order" means a written request or order
signed in the name of the Company by any two Officers.

     "Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus (i)
an amount equal to any extraordinary loss plus any net loss realized by such
Person or any of its Subsidiaries in connection with an asset sale or
disposition of securities other than in the ordinary course of

<PAGE>

                                                                               3

business consistent with past practices (to the extent such losses were deducted
in computing such Consolidated Net Income), plus (ii) provision for taxes based
on income or profits of such Person and its Subsidiaries for such period, to the
extent that such provision for taxes was deducted in computing such Consolidated
Net Income, plus (iii) the consolidated interest expense of such Person and its
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance costs
and original issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other fees
and charges incurred in respect of letter of credit or bankers' acceptance
financings, the net of the effect of all payments made or received (if any)
pursuant to Hedging Obligations) and any other Fixed Charge, to the extent that
any such expense or other Fixed Charge was deducted in computing such
Consolidated Net Income, plus (iv) depreciation and amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
expenses (excluding any such non-cash expense to the extent that it represents
an accrual of or reserve for cash expenses in any future period or amortization
of a prepaid cash expense that was paid in a prior period) of such Person and
its Subsidiaries for such period to the extent that such depreciation and
amortization were deducted in computing such Consolidated Net Income, minus (v)
non-cash items increasing such Consolidated Net Income for such period (other
than items that were accrued in the ordinary course of business), in each case,
on a consolidated basis and determined in accordance with GAAP. Notwithstanding
the foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of the
Company shall be added to Consolidated Net Income to compute Consolidated Cash
Flow of the Company only to the extent (i.e. in the same proportion) that the
Net Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person.

     "Consolidated Lease Obligation" means, with respect to any Person, for any
period, the aggregate rental obligations of such Person and its consolidated
Subsidiaries determined on a consolidated basis in accordance with GAAP payable
in respect of such period under leases of real and personal property (net of
sublease income).

     "Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Subsidiaries
(for such period, on a consolidated basis, determined in accordance with GAAP);
provided that (i) the Net Income (but not loss) of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends, or distributions paid in
cash to the specified Person or a Subsidiary of that Person, (ii) the Net Income
of any Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions, or the making of loans or other
advances, by that Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval (that has not
been obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its stockholders, (iii)
the Net Income of any Person acquired in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded, and (iv) the
cumulative effect of a change in accounting principles shall be excluded.

<PAGE>

                                                                               4

     "Conversion Date" means, with respect to any Holder, the date on which such
Holder has satisfied all the requirements to convert its Securities pursuant to
Section 11.2.

     "Conversion Price" means that price initially determined by the Company
pursuant to Section 11.10, as set forth in a notice in writing to the Trustee
delivered pursuant to Section 11.1(b), as adjusted from time to time in
accordance with the terms of Section 11.3 hereto.

     "Convertible Securities" shall mean evidences of indebtedness, shares of
capital stock or other securities which are or may be at any time convertible
into or exchangeable or exercisable for shares of Common Stock, other than the
Securities. The term "Convertible Security" shall mean one of the Convertible
Securities.

     "Corporate Trust Office" means the principal office of the Trustee at which
at any time its corporate trust business shall be administered, which office at
the date hereof is located at One California Street, Suite 2550, San Francisco,
California, 94111 Attention: Corporate Trust Services, or such other address as
the Trustee may designate from time to time by notice to the Holders and the
Company, or the principal corporate trust office of any successor Trustee (or
such other address as a successor Trustee may designate from time to time by
notice to the Holders and the Company).

     "Credit Agreement" means the Amended and Restated Credit Agreement, dated
as of the date hereof, among the Company, the Lenders party thereto, Lehman
Commercial Paper Inc., as Administrative Agent, and Lehman Brothers Inc., as
Lead Arranger and Book Manager, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.

     "Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Credit Agreement) or commercial
paper facilities with banks or other institutional lenders providing for
revolving credit loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.

     "Default" means an event which is, or after notice or lapse of time or both
would be, an Event of Default.

     "Designated Asset Amount" means properties and assets having a fair market
value which is greater than 55% of the fair market value of the total assets of
the Company and its Subsidiaries taken as a whole (as determined by a Qualified
Appraiser).

     "Designated Senior Debt" means (i) any Obligations under the Financing
Documents (as each term is defined in the Credit Agreement) and (ii) the
Company's Senior Debt which, at the date of determination, has an aggregate
amount outstanding of, or under which, at the date of determination, the holders
thereof are committed to lend (including through the provision of letters of
credit) up to, at least $150 million and is designated by the Company as
"Designated Senior Debt" for purposes of this Indenture.

<PAGE>

                                                                               5

     "Dividend" shall mean any dividend (including Cash Dividend) or other
distribution on the Capital Stock of any Person whether in the form of cash,
evidences of Indebtedness, or any other assets, properties or securities (other
than shares of such Capital Stock) or any options, warrants or other rights to
subscribe for or purchase any of the foregoing.

     "Ex-Dividend Time" means, with respect to any issuance or distribution on
shares of Common Stock, the first date on which the shares of Common Stock trade
regular way on the principal securities market on which the shares of Common
Stock are then traded without the right to receive such issuance or
distribution.

     "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     "Existing Indebtedness" means Indebtedness of the Company in existence on
the Issue Date excluding Indebtedness incurred under the Credit Agreement, but
including, without limitation, the Option Debt.

     "Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
specified Person or any of its Subsidiaries incurs, assumes, Guarantees, repays,
repurchases or redeems any Indebtedness (other than revolving credit borrowings
under any Credit Facility) subsequent to the commencement of the period for
which the Fixed Charge Coverage Ratio is being calculated but on or prior to the
date on which the event for which the calculation of the Fixed Charge Coverage
Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio
shall be calculated giving pro forma effect to such incurrence, assumption,
Guarantee, repayment, repurchase or redemption of Indebtedness as if the same
had occurred at the beginning of the applicable four-quarter reference period.
In addition, for purposes of making the computation referred to above, (i)
acquisitions that have been made by the specified Person or any of its
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the definition
of Consolidated Net Income, (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the obligations
giving rise to such Fixed Charges will not be obligations reflected on a balance
sheet, as determined in accordance with GAAP, of the referent Person or any of
its Subsidiaries following the Calculation Date.

     "Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred in
respect of

<PAGE>

                                                                               6

letter of credit or bankers' acceptance financings, and net payments (if any)
pursuant to Hedging Obligations), (ii) the consolidated interest of such Person
and its Subsidiaries that was capitalized during such period, (iii) any interest
expense on Indebtedness of another Person that is guaranteed by such Person or
one of its Subsidiaries or secured by a Lien on assets of such Person or one of
its Subsidiaries (whether or not such Guarantee or Lien is called upon), in each
case, on a consolidated basis and in accordance with GAAP, (iv) the interest
component of Consolidated Lease Obligations, as determined in accordance with
the rules of the Securities and Exchange Commission applicable to the
computation of the ratio of earnings to fixed charges, and (v) the product of
(a) all dividend payments, whether or not in cash, on any series of preferred
stock of such Person or any of its Subsidiaries, other than dividend payments on
equity interests payable solely in equity interests of the Company, times (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP. Notwithstanding the foregoing, to the extent that the
Net Income of any Subsidiary is excluded from any calculation of "Consolidated
Net Income" pursuant to clause (ii) of such definition, then the interest
expenses of such Subsidiary shall be similarly excluded from any calculation of
amounts in clauses (i), (ii), (iii) (but only to the extent that any interest
expense covered by such clause (iii) is guaranteed by such Subsidiary), (iv) and
(v) of this definition of "Fixed Charges".

     "GAAP" means generally accepted accounting principles in the United States
of America in effect from time to time.

     "Global Securities" means Securities that are registered in the register of
Securities in the name of a Depositary or a nominee thereof that either (a) are
required to bear the Legend required by Section 2.6, which Securities will be in
the form of a 144A Global Security or (b) are not required to bear the Legend
required by Section 2.6, which Securities will be in the form of the Securities
attached hereto as Exhibit A.

     "Hedging Obligations" means, with respect to any Person, the net payment
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements in the ordinary course of business and pursuant to
past practices designed to protect such Person against fluctuations in commodity
prices, interest rates or currency exchange rates.

     "Holder" or "Securityholder" means a person in whose name a Security is
registered on the Registrar's books.

     "Indebtedness" of any Person means any indebtedness, whether or not
contingent, (i) in respect of borrowed money, (ii) evidenced by bonds, notes,
debentures or similar instruments, (iii) letters of credit (or reimbursement
agreements in respect thereof), (iv) banker's acceptances, (v) representing
Capital Lease Obligations, (vi) the balance deferred and unpaid of the purchase
price of any property except any such balance that constitutes an accrued
expense or trade payable, (vii) representing any Hedging Obligation, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet prepared
in accordance with GAAP, as well as all Indebtedness of others secured by a Lien
on any asset of such Person (whether or not such Indebtedness is

<PAGE>

                                                                               7

assumed by such Person) and, to the extent not otherwise included, the Guarantee
by such Person of any Indebtedness of any other Person. The amount of any
indebtedness outstanding as of any date shall be (i) the accreted value thereof,
in the case of any Indebtedness that does not require current payments of
interest, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.

     "Indenture" means this Indenture, as amended or supplemented from time to
time in accordance with the terms hereof.

     "Intercreditor Agreement" means the Intercreditor and Subordination
Agreement, dated as of the date hereof, among Lehman Commercial Paper Inc., as
Administrative Agent, the Tranche A Lenders party to the Credit Agreement from
time to time, the Tranche B Lenders party to the Credit Agreement from time to
time, the Holders party to the Warrant Agreement (as defined in the Credit
Agreement) from time to time and Deutsche Bank Trust Company Americas, a
Collateral Agent.

     "Interest Payment Dates" shall mean each June 30 and December 31,
commencing on December 31, 2002.

     "Investment Grade" shall mean with respect to the Reference Debt of any
Person, a credit rating of "BBB-" or better from Standard & Poor's Ratings
Services (or any successor thereto) or "Baa3" from Moody's Investor Service,
Inc. (or any successor thereto).

     "Issue Date" of any Security means the date on which the Security was
originally issued or deemed issued as set forth on the face of the Security.

     "Liquidated Damages" shall mean, collectively, the Registration Default
Liquidated Damages and the Share Liquidated Damages.

     "Majority Holders" shall mean the Holders of more than a 50% of the
principal amount of the Securities at the time outstanding.

     "Net Assets" shall mean the difference between assets and liabilities
determined in the manner contemplated elsewhere in the Indenture.

     "Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however, (i) any
gain or loss, together with any related provision for taxes on such gain or
loss, realized in connection with (a) any asset sale other than in the ordinary
course of business consistent with past practices (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries, in
each case, other than in the ordinary course of business consistent with past
practices and (ii) any extraordinary gain or loss, together with any related
provision for taxes on such extraordinary gain or loss.

     "NYSE" means The New York Stock Exchange, Inc.

<PAGE>

                                                                               8

     "Officer" means the Chairman of the Board, the Vice Chairman, the Chief
Executive Officer, the President, any Executive Vice President, any Senior Vice
President, any Vice President, the Treasurer, the Controller, or the Secretary
or any Assistant Treasurer or Assistant Secretary of the Company.

     "Officers' Certificate" means a written certificate containing the
information specified in Sections 12.4 and 12.5, signed in the name of the
Company by any two Officers (other than Vice Presidents that are not Senior Vice
Presidents or Executive Vice Presidents), and delivered to the Trustee. An
Officers' Certificate given pursuant to Section 4.3 shall be signed by the Chief
Executive Officer, Chief Financial Officer, Chief Accounting Officer, Treasurer
or Controller of the Company but need not contain the information specified in
Sections 12.4 and 12.5.

     "Opinion of Counsel" means a written opinion containing the information
specified in Sections 12.4 and 12.5, from legal counsel who is reasonably
acceptable to the Trustee. The counsel may be an employee of, or counsel to, the
Company or the Trustee.

     "Option Agreement" means the Amended and Restated Option Agreement, dated
as of the date hereof, by and among the Company, PG&E National Energy Group,
Inc., PG&E National Energy Group, LLC, and the Holders party thereto, as amended
from time to time.

     "Option Debt" means any present or future obligations of the Company under
the Option Agreement pursuant to the terms and conditions of the Option
Agreement as of the date hereof.

     "Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries (other than intercompany
Indebtedness); provided that (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued and unpaid
interest on, any Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus the amount of reasonable fees, commissions and other
expenses incurred in connection therewith); (ii) such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Securities, such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and is subordinated in right of payment to, the Securities on terms at
least as favorable to the Holders of Securities as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.

     "Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof.

<PAGE>

                                                                               9

     "PG&E" means Pacific Gas and Electric Company, a California corporation.

     "PIK Securities" shall have the meaning specified in Section 1 of the
Security.

     "POR Spin-Co" means the business or businesses which are distributed in a
Spin-Off to the shareholders of the Company in connection with a confirmed plan
of reorganization of PG&E under Chapter 11 of the Bankruptcy Code; provided that
the fair market value of the total Net Assets of POR Spin-Co is not more than
65% of the fair market value of the Company's total consolidated Net Assets at
the time of the Spin-Off of POR Spin-Co (in each case, as determined by a
Qualified Appraiser within 120 days prior to the date of such Spin-Off).

     "Pricing Period" means a fixed 43 Trading Day period beginning on and
including the third Trading Day after the Closing Date, subject to adjustment as
set forth herein.

     "Purchase Agreement" means the Purchase Agreement, dated as of the date
hereof, among Lehman Brothers Inc., Jackson Investment Fund Ltd., Citadel Credit
Trading Ltd. and Citadel Equity Fund Ltd.

     "QIB" means a Qualified Institutional Buyer as defined in Rule 144A of the
Securities Act.

     "Qualified Appraiser" means an investment banking or other appraisal firm
of national standing as reasonably selected by the Company. For any selection of
a Qualified Appraiser under this Indenture, the Company shall propose three
Persons meeting the criteria set forth in the preceding sentence (the
"candidates") and shall provide the Holders written notice setting forth the
identity of the candidates. Upon receipt of such notice, the Majority Holders
shall have 30 days to select the Qualified Appraiser from among the candidates
by providing written notice of such selection to the Company. If the Company has
not received such written notice within such 30-day period, the Company shall
select the Qualified Appraiser from among the candidates.

     "Reference Debt" shall mean with respect to any Person, the long-term
unsecured Indebtedness of such Person not benefiting from any guarantee, support
agreement or other credit enhancement.

     "Registration Default Liquidated Damages" shall have the meaning ascribed
to such term in the Registration Rights Agreement.

     "Registration Rights Agreement" means the Resale Registration Rights
Agreement, dated as of the date hereof, between the Company, Jackson Investment
Fund Ltd., Citadel Credit Trading Ltd. and Citadel Equity Fund Ltd., as amended
from time to time.

     "Representative" shall mean, with respect to any Designated Senior Debt, a
trustee or other authorized representative under any agreement or other
instrument pursuant to which such Designated Senior Debt was issued. For the
purposes of this definition, "Representative" shall also include the Initial
Tranche A Lender (as such term is defined in the Credit Agreement).

<PAGE>

                                                                              10

     "Responsible Officer" shall mean any officer within the corporate trust
department of the Trustee, including any vice president, assistant vice
president, assistant treasurer, trust officer or any other officer of the
Trustee who customarily performs functions similar to those performed by the
persons who at the time shall be such officers, respectively, or to whom any
corporate trust matter is referred because of such person's knowledge of and
familiarity with the particular subject and who shall have direct responsibility
for the administration of this Indenture.

     "Restricted Security" means a Security required to bear the restrictive
legend set forth in the form of Security set forth in Exhibits A and B of this
Indenture.

     "Rule 144" means Rule 144 under the Securities Act (or any successor
provision), as it may be amended from time to time.

     "Rule 144A" means Rule 144A under the Securities Act (or any successor
provision), as it may be amended from time to time.

     "SEC" means the Securities and Exchange Commission.

     "Securities" means any of the Company's 7.50% Convertible Subordinated
Notes due 2007, as amended or supplemented from time to time, issued under this
Indenture. The term "Securities" shall include any PIK Securities issued under
this Indenture.

     "Securities Act" means the Securities Act of 1933, as amended.

     "Securityholder" or "Holder" means a person in whose name a Security is
registered on the Registrar's books.

     "Senior Debt" means:

     (i) the principal of, premium, if any, interest (including all interest
accruing subsequent to the commencement of any bankruptcy or similar proceeding,
whether or not a claim for post-petition interest is allowable as a claim in any
such proceeding), and rent payable on or termination payments with respect to or
in connection with, and all fees, costs, expenses and other amounts accrued or
due on or in connection with, Indebtedness of the Company, whether outstanding
on the date of this Indenture or subsequently created, incurred, assumed,
guaranteed or in effect guaranteed by the Company; and

     (ii) all deferrals, renewals, extensions or refundings of, or amendments,
modifications or supplements to, the foregoing;

unless in the case of any particular Indebtedness, the instrument creating or
evidencing such Indebtedness or the assumption or guarantee thereof expressly
provides that the Indebtedness shall not be senior in right of payment to the
Securities or expressly provides that such Indebtedness is equal with or junior
to the Securities. "Senior Debt" shall also include any claims of the holders of
Senior Debt with respect to any judgment ordered by a court in any action
brought at law or in equity (such as an action brought for recession,
restitution, or unjust enrichment) against the Company or any Credit Party (as
defined in the Credit Agreement) in

<PAGE>

                                                                              11

lieu, in whole or in part, of an action to enforce the obligations of the
Company or any Credit Party under the Financing Documents (as defined in the
Credit Agreement). For the avoidance of doubt, the Option Debt shall be deemed
to be Senior Debt. However, the term "Senior Debt" will not include: (i) the
Indebtedness owed by the Company to any Subsidiary, (ii) any liability for
federal, state, local or other taxes owed or owing by the Company, (iii) any
trade payables; (iv) any Indebtedness that is convertible into or exchangeable
for Common Stock; (v) any Indebtedness that is not permitted pursuant to Section
4.7 of this Agreement and (vi) the Securities.

     "Significant Subsidiary" shall have the meaning ascribed to such term in
Rule 405 of the Securities Act.

     "Stated Maturity", when used with respect to any Security, means June 30,
2007.

     "Subsidiary" means any Person of which at least a majority of the
outstanding Voting Stock shall at the time directly or indirectly be owned or
controlled by the Company or by one or more Subsidiaries or by the Company and
one or more Subsidiaries.

     "TIA" means the Trust Indenture Act of 1939 as in effect on the date of
this Indenture, provided, however, that in the event the TIA is amended after
such date, TIA means, to the extent required by any such amendment, the TIA as
so amended.

     "Trading Day" means a day during which trading in securities generally
occurs on the NYSE or, if the Common Stock is not listed on the NYSE, on the
principal other national or regional securities exchange on which the Common
Stock then is listed or, if the Common Stock is not listed on a national or
regional securities exchange, on the National Association of Securities Dealers
Automated Quotation System or, if the Common Stock is not quoted on the National
Association of Securities Dealers Automated Quotation System, on the principal
other market on which the Common Stock is then traded; provided, however, that,
for the purposes of Section 11.10 only, "Trading Day" shall not include any day
(an "excluded day") during which trading in the Common Stock is suspended for
more than three hours between 9:30 am. (New York time) and 4:00 p.m. (New York
time), provided, further, however, that, after the 75th calendar day following
the Closing Date, the Majority Holders may waive the application of the
preceding proviso and designate any excluded day as a "Trading Day" (and such
excluded day shall thereafter be deemed a Trading Day) by providing written
notice of such waiver to the Company within three Business Days of any such
excluded day.

     "Trustee" means the party named as the "Trustee" in the first paragraph of
this Indenture until a successor replaces it pursuant to the applicable
provisions of this Indenture and, thereafter, shall mean such successor. The
foregoing sentence shall likewise apply to any subsequent such successor or
successors.

     "Voting Stock" of a Person means Capital Stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
to elect, or the general power to appoint, at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time Capital Stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).

<PAGE>

                                                                              12

     "VWAP" means, for any security as of any date, the dollar-weighted average
price for such security on the principal United States securities exchange on
which such security is traded (which is currently the New York Stock Exchange
with respect to the Common Stock) during the period beginning at 9:30 a.m. (New
York time) (or such other time as such exchange publicly announces is the
official open of trading), and ending at 4:00 p.m. (New York time) (or such
other time as such exchange publicly announces is the official close of trading)
as reported by Bloomberg Financial Markets (or any successor thereto,
"Bloomberg") through its "Volume at Price" functions and ignoring any block
trade (which for purposes of this definition means any transfer of more than
100,000 shares (subject to adjustment to reflect stock dividends, stock splits,
stock combinations or other similar transactions after the date of this
Indenture) of such security pursuant to an individual transaction), or, if the
foregoing does not apply, the dollar weighted average price of such security in
the over-the-counter market on the electronic bulletin board for such security
during the period beginning at 9:30 a.m. (New York time) (or such other time as
such exchange publicly announces is the official open of trading), and ending at
4:00 p.m. (New York time) (or such other time as such exchange publicly
announces is the official close of trading) as reported by Bloomberg and
ignoring any block trade (which for purposes of this definition means any
transfer of more than 100,000 shares (subject to adjustment to reflect stock
dividends, stock splits, stock combinations or other similar transactions after
the date of this Indenture) of such security pursuant to an individual
transaction), or if no dollar weighted average price is reported for such
security by Bloomberg for such hours, the average of the highest closing bid
price and lowest closing ask price of any of the market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the
VWAP cannot be calculated for such security on such date on any of the foregoing
bases, the VWAP of such security on such date shall be the fair market value as
mutually determined by the Company and the Holders of the Securities
representing a majority of the aggregate principal amount of the Securities then
outstanding.

     Section 1.2 Other Definitions
<TABLE>
<CAPTION>

     Term Section:                                               Defined in:
     <S>                                                         <C>
     "Agent Members"............................................   2.12(e)
     "beneficial owner".........................................   3.1(a)
     "Change of Control"........................................   3.1(a)
     "Change of Control Notice".................................   3.1(b)
     "Change of Control Purchase Date"..........................   3.1(a)
     "Change of Control Purchase Notice"........................   3.1(c)
     "Change of Control Purchase Price".........................   3.1(a)
     "Common Stock Record Date".................................   11.3(f)
     "Common Stock Restricted Securities Legend"................   11.14
     "Continuing Director"......................................   3.1(a)
     "Conversion Agent".........................................   2.3
     "Conversion Limitations"...................................   11.1(c)
     "Current Market Value".....................................   11.3(f)
     "Depositary"...............................................   2.1(b)
     "Designated Senior Debt"...................................   5.2
     "Event of Default".........................................   7.1
</TABLE>

<PAGE>

                                                                              13

<TABLE>
<CAPTION>

     Term Section                             Defined in:
     <S>                                      <C>
     "Excess Amount"........................  11.3(e)
     "Excess Shares"........................  11.1(d)
     "Exchange Act".........................  2.12(e)
     "Expiration Time"......................  11.3(e)
     "Fair Market Value"....................  11.3(f)
     "4.9% Limitation"......................  11.1(c)
     "Legal Holiday"........................  12.8
     "Legend"...............................  2.6(f)
     "Non-Electing Share"...................  11.4
     "Notice of Default"....................  7.1
     "Pass-Through Dividend"................  4.9
     "Paying Agent".........................  2.3
     "Payment Blockage Notice"..............  5.2
     "Permitted Indebtedness"...............  4.7
     "Pricing Period".......................  1.1
     "Reference Period".....................  11.3(d)
     "Registrar"............................  2.3
     "Rule 144A Information"................  4.6
     "Share Delivery Default"...............  11.15
     "Share Liquidated Damages".............  11.15
     "Shareholder Limitation"...............  11.1(c)
     "Spin-Co"..............................  3.11
     "Spin-Off".............................  11.3(d)
     "Spun-Off Value".......................  3.1(a)(1)(iv)
     "Standstill Period"....................  5.13(a)
     "Third Parties"........................  11.1(d)
     "Trigger Event"........................  11.3(d)
</TABLE>

     Section 1.3 Incorporation by Reference of Trust Indenture Act. Whenever
this Indenture refers to a provision of the TIA, the provision is incorporated
by reference in and made a part of this Indenture. The following TIA terms used
in this Indenture have the following meanings:

     "Commission" means the SEC.

     "indenture securities" means the Securities.

     "indenture security holder" means a Securityholder.

     "indenture to be qualified" means this Indenture.

     "indenture trustee" or "institutional trustee" means the Trustee.

     "obligor" on the indenture securities means the Company.

<PAGE>

                                                                              14

     All other TIA terms used in this Indenture that are not defined herein and
that are defined by the TIA, defined by TIA reference to another statute or
defined by SEC rule have the meanings assigned to them by such definitions.

     Section 1.4 Rules of Construction. Unless the context otherwise requires:

     (1) a term has the meaning assigned to it;

     (2) an accounting term not otherwise defined has the meaning assigned to it
in accordance with generally accepted accounting principles as in effect from
time to time;

     (3) "or" is not exclusive;

     (4) "including" means including, without limitation; and

     (5) words in the singular include the plural, and words in the plural
include the singular.

     Section 1.5 Acts of Holders. (a) Any request, demand, authorization,
direction, notice, consent, waiver or other action provided by this Indenture to
be given or taken by Holders may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Holders in person or
by an agent duly appointed in writing; and, except as herein otherwise expressly
provided, such action shall become effective when such instrument or instruments
are delivered to the Trustee and, where it is hereby expressly required, to the
Company, as described in Section 12.2. Such instrument or instruments (and the
action embodied therein and evidenced thereby) are herein sometimes referred to
as the "Act" of Holders signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent shall
be sufficient for any purpose of this Indenture and conclusive in favor of the
Trustee and the Company, if made in the manner provided in this Section.

     (b) The fact and date of the execution by any Person of any such instrument
or writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to such officer the execution thereof. Where such
execution is by a signer acting in a capacity other than such signer's
individual capacity, such certificate or affidavit shall also constitute
sufficient proof of such signer's authority. The fact and date of the execution
of any such instrument or writing, or the authority of the Person executing the
same, may also be proved in any other manner which the Trustee deems sufficient.

     (c) The principal amount and serial number of any Security and the
ownership of Securities shall be proved by the Registrar.

     (d) Any request, demand, authorization, direction, notice, consent, waiver
or other Act of the Holder of any Security shall bind every future Holder of the
same Security and the Holder of every Security issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the

<PAGE>

                                                                              15

Trustee or the Company in reliance thereon, whether or not notation of such
action is made upon such Security.

     (e) If the Company shall solicit from the Holders any request, demand,
authorization, direction, notice, consent, waiver or other Act, the Company may,
at its option, by or pursuant to a Board Resolution, fix in advance a record
date for the determination of Holders entitled to give such request, demand,
authorization, direction, notice, consent, waiver or other Act, but the Company
shall have no obligation to do so. If such a record date is fixed, such request,
demand, authorization, direction, notice, consent, waiver or other Act may be
given before or after such record date, but only the Holders of record at the
close of business on such record date shall be deemed to be Holders for the
purposes of determining whether Holders of the requisite proportion of
outstanding Securities have authorized or agreed or consented to such request,
demand, authorization, direction, notice, consent, waiver or other Act, and for
that purpose the outstanding Securities shall be computed as of such record
date; provided that no such authorization, agreement or consent by the Holders
on such record date shall be deemed effective unless it shall become effective
pursuant to the provisions of this Indenture not later than six months after the
record date.

                                   ARTICLE II

                                 THE SECURITIES

     Section 2.1 Form and Dating. The Securities and the Trustee's certificate
of authentication shall be substantially in the form of Exhibits A, B and C,
which are a part of this Indenture. The Securities may have such other
notations, legends or endorsements required by law, stock exchange rule or usage
(provided that any such notation, legend or endorsement required by usage is in
a form acceptable to the Company). The Company shall provide any such other
notations, legends or endorsements to the Trustee in writing. Each Security
shall be dated the date of its authentication.

     (a) Certificated Securities. The Securities shall initially be issued as
Certificated Securities.

     (b) 144A Global Securities. If, (i) pursuant to the terms of the
Securities, the Conversion Price shall equal an amount such that the Securities
meet the requirements of Rule 144A(d)(3)(i), and (ii) the Securities have been
accepted for clearance and settlement through the facilities of DTC, Holders
shall have the right, subject to Section 2.12(a)(iv), to exchange their
Certificated Securities for interests in a 144A Global Security, which shall be
deposited with the Trustee at its Corporate Trust Office, as custodian for the
Depositary (as defined below) and registered in the name of DTC or the nominee
thereof (DTC, or any successor thereto, and any such nominee being hereinafter
referred to as the "Depositary"), duly executed by the Company and authenticated
by the Trustee as hereinafter provided. The aggregate principal amount of the
144A Global Securities may from time to time be increased or decreased by
adjustments made on the records of the Trustee, the Registrar and the Depositary
as hereinafter provided.

     (c) Global Securities in General. Each Global Security shall represent such
of the outstanding Securities as shall be specified therein and each shall
provide that it shall



<PAGE>

                                                                              16

represent the aggregate amount of outstanding Securities from time to time
endorsed thereon and that the aggregate amount of outstanding Securities
represented thereby may from time to time be reduced or increased, as
appropriate, to reflect exchanges, repurchases and conversions.

                  Any adjustment of the aggregate principal amount of a Global
Security to reflect the amount of any increase or decrease in the amount of
outstanding Securities represented thereby shall be made by the Trustee in
accordance with instructions given by the Holder thereof as required by Section
2.12 hereof and shall be made on the records of the Trustee, the Registrar and
the Depositary.

                  (d) Book-Entry Provisions. This Section 2.1(d) shall apply
only to Global Securities deposited with or on behalf of the Depositary.

                  If the Securities are accepted for clearance and settlement
through the facilities of DTC, the Company shall execute and the Trustee shall,
in accordance with this Section 2.1(d), authenticate and deliver one or more
Global Securities that (a) shall be registered in the name of the Depositary,
(b) shall be delivered by the Trustee to the Depositary or pursuant to the
Depositary's instructions and (c) shall be substantially in the form of Exhibit
A or Exhibit B attached hereto.

                  Section 2.2 Execution and Authentication. The Securities shall
be executed on behalf of the Company by any Officer. The signature of the
Officer on the Securities may be manual or facsimile.

                  Securities bearing the manual or facsimile signatures of
individuals who were at the time of the execution of the Securities Officers
shall bind the Company, notwithstanding that such individuals or any of them
have ceased to hold such offices prior to the authentication and delivery of
such Securities or did not hold such offices at the date of authentication of
such Securities.

                  No Security shall be entitled to any benefit under this
Indenture or be valid or obligatory for any purpose unless there appears on such
Security a certificate of authentication substantially in the form provided for
herein duly executed by the Trustee by manual signature of an authorized
signatory, and such certificate upon any Security shall be conclusive evidence,
and the only evidence, that such Security has been duly authenticated and
delivered hereunder.

                  The Trustee shall authenticate and deliver the Securities for
original issue in an aggregate principal amount of up to $280,000,000 upon one
or more Company Orders without any further action by the Company (other than as
contemplated in Section 12.4 and Section 12.5 hereof). Notwithstanding the
foregoing, the aggregate principal amount of the Securities due at the Stated
Maturity thereof permitted to be outstanding at any time may exceed the amount
set forth in the foregoing sentence only by an amount sufficient to permit
payments of interest or Liquidated Damages in PIK Securities as provided for in
the Securities.

                  The Securities shall be issued only in registered form without
coupons and only in denominations of $1,000 of principal amount and any integral
multiple of $1,000; provided, however that PIK Securities may be in
denominations of $1.00 of principal amount and any integral multiple of $1.00.

<PAGE>

                                                                              17

                  Section 2.3 Registrar, Paying Agent and Conversion Agent. The
Company shall maintain an office or agency where Securities may be presented for
registration of transfer or for exchange ("Registrar"), an office or agency
where Securities may be presented for purchase or payment ("Paying Agent") and
an office or agency where Securities may be presented for conversion
("Conversion Agent"). The Registrar shall keep a register of the Securities and
of their transfer and exchange. The Company may have one or more co-registrars,
one or more additional paying agents and one or more additional conversion
agents. The term Paying Agent includes any additional paying agent, including
any named pursuant to Section 4.5. The term Conversion Agent includes any
additional conversion agent, including any named pursuant to Section 4.5.

                  The Company shall enter into an appropriate agency agreement
with any Registrar, Paying Agent, Conversion Agent or co-registrar (in each
case, if such Registrar, agent or co-registrar is a Person other than the
Trustee). The agreement shall implement the provisions of this Indenture that
relate to such agent. The Company shall notify the Trustee of the name and
address of any such agent. If the Company fails to maintain a Registrar, Paying
Agent or Conversion Agent, the Trustee shall act as such and shall be entitled
to appropriate compensation therefor pursuant to Section 8.7. The Company or any
Subsidiary or an Affiliate of either of them may not act as Paying Agent,
Registrar, Conversion Agent or co-registrar under this Indenture.

                  The Company initially appoints the Trustee as Registrar,
Conversion Agent and Paying Agent in connection with the Securities.

                  Section 2.4 Paying Agent to Hold Money and Securities in
Trust. Except as otherwise provided herein, on or prior to each due date of
payments in respect of any Security, the Company shall deposit with the Paying
Agent a sum of money (in immediately available funds if deposited on the due
date) sufficient to make such payments when so becoming due. The Company shall
require each Paying Agent (other than the Trustee) to agree in writing that the
Paying Agent shall hold in trust for the benefit of Securityholders or the
Trustee all money held by the Paying Agent for the making of payments in respect
of the Securities and shall notify the Trustee of any default by the Company in
making any such payment. At any time during the continuance of any such default,
the Paying Agent shall, upon the written request of the Trustee, forthwith pay
to the Trustee all money so held in trust. The Company at any time may require a
Paying Agent to pay all money held by it to the Trustee and to account for any
funds and Common Stock disbursed by it. Upon doing so, the Paying Agent shall
have no further liability for the money.

                  Section 2.5 Securityholder Lists. If the Trustee is not the
Registrar, the Company shall cause to be furnished to the Trustee at least
semi-annually on January 1 and July 1 all information in the possession or
control of the Company as to the names and addresses of the Securityholders
dated within 15 days of the date on which the list is furnished and at such
other times as the Trustee may request in writing a list in such form and as of
such date as the Trustee may reasonably require of the names and addresses of
Securityholders. The Trustee shall preserve in as current a form as is
reasonably practicable all information received from the Company as to the names
and addresses of Securityholders.

<PAGE>

                                                                              18

                  Section 2.6 Transfer and Exchange. (a) Subject to Section 2.12
hereof, upon surrender for registration of transfer of any Security, together
with a written instrument of transfer satisfactory to the Registrar duly
executed by the Securityholder or such Securityholder's attorney duly authorized
in writing, at the office or agency of the Company designated as Registrar or
co-registrar pursuant to Section 2.3, the Company shall execute, and the Trustee
shall authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Securities of any authorized denomination or
denominations, of a like aggregate principal amount. The Company shall not
charge a service charge for any registration of transfer or exchange, but the
Company may require payment of a sum sufficient to pay all taxes, assessments or
other governmental charges that may be imposed in connection with the transfer
or exchange of the Securities from the Securityholder requesting such transfer
or exchange.

                  At the option of the Holder, Securities may be exchanged for
other Securities of any authorized denomination or denominations, of a like
aggregate principal amount upon surrender of the Securities to be exchanged,
together with a written instrument of exchange satisfactory to the Registrar
duly executed by the Securityholder or such Securityholder's attorney duly
authorized in writing, at such office or agency. Whenever any Securities are so
surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Securities which the Holder making the exchange is
entitled to receive.

                  The Company shall not be required to make, and the Registrar
need not register, transfers or exchanges of any Securities in respect of which
a Change of Control Purchase Notice has been given and not withdrawn by the
Holder thereof in accordance with the terms of this Indenture.

                  (b) Notwithstanding any provision to the contrary herein, so
long as a Global Security remains outstanding and is held by or on behalf of the
Depositary, transfers of a Global Security, in whole or in part, shall be made
only in accordance with Section 2.12 and this Section 2.6(b). Transfers of a
Global Security shall be limited to transfers of such Global Security in whole
or in part, to the Depositary, to nominees of the Depositary or to a successor
of the Depositary or such successor's nominee.

                  (c) Successive registrations and registrations of transfers
and exchanges as aforesaid may be made from time to time as desired, and each
such registration shall be noted on the register for the Securities.

                  (d) Any Registrar appointed pursuant to Section 2.3 hereof
shall provide to the Trustee such information as the Trustee may reasonably
require in connection with the delivery by such Registrar of Securities upon
transfer or exchange of Securities.

                  (e) No Registrar shall be required to make registrations of
transfer or exchange of Securities during any periods designated in the text of
the Securities or in this Indenture as periods during which such registration of
transfers and exchanges need not be made.

                  (f) If Securities are issued upon the transfer, exchange or
replacement of Securities subject to restrictions on transfer and bearing the
legends set forth on the forms of

<PAGE>

                                                                              19

Security attached hereto as Exhibits B and C setting forth such restrictions
(collectively, the "Legend"), or if a request is made to remove the Legend on a
Security, the Securities so issued shall bear the Legend, or the Legend shall
not be removed, as the case may be, unless there is delivered to the Company and
the Registrar the evidence required pursuant to the Legend and pursuant to
Section 2.12. Upon (i) provision of such satisfactory evidence or (ii)
notification by the Company to the Trustee and Registrar of the sale of such
Security pursuant to a registration statement that is effective at the time of
such sale, the Trustee, at the written direction of the Company, shall
authenticate and deliver a Security that does not bear the Legend. If the Legend
is removed from the face of a Security and the Security is subsequently held by
the Company or an Affiliate of the Company, the Legend shall be reinstated.

                  (g) Notwithstanding the provisions of Section 2.6(f) above or
Sections 2.12(b) and (c) below, a pledge or other hypothecation of any Security
to a bank or other financial institution that is either an accredited investor
or a QIB, in connection with any bona fide margin agreement or other loan or
financing arrangement shall not be deemed to constitute a "transfer" for
purposes of this Indenture. Any foreclosure or other disposition of any
Securities so pledged or otherwise hypothecated by such bank or other financial
institution shall constitute a "transfer" for all purposes hereunder and shall
be made only in accordance with the applicable provisions hereof.

                  Section 2.7 Replacement Securities. If (a) any mutilated
Security is surrendered to the Trustee, or (b) the Company and the Trustee
receive evidence to their satisfaction of the destruction, loss or theft of any
Security, and there is delivered to the Company and the Trustee such security or
indemnity as may be required by them to save each of them harmless, then, in the
absence of notice to the Company or the Trustee that such Security has been
acquired by a bona fide purchaser, the Company shall execute and upon its
written request the Trustee shall authenticate and deliver, in exchange for any
such mutilated Security or in lieu of any such destroyed, lost or stolen
Security, a new Security of like tenor and principal amount, bearing a
certificate number not contemporaneously outstanding.

                  In case any such mutilated, destroyed, lost or stolen Security
has become or is about to become due and payable, or is about to be purchased by
the Company pursuant to Article 3 hereof, the Company in its discretion may,
instead of issuing a new Security, pay or purchase such Security, as the case
may be.

                  Upon the issuance of any new Securities under this Section
2.7, the Company may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.

                  Every new Security issued pursuant to this Section 2.7 in lieu
of any mutilated, destroyed, lost or stolen Security shall constitute an
original additional contractual obligation of the Company, whether or not the
destroyed, lost or stolen Security shall be at any time enforceable by anyone,
and shall be entitled to all benefits of this Indenture equally and
proportionately with any and all other Securities duly issued hereunder.

<PAGE>

                                                                              20

                  The provisions of this Section 2.7 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Securities.

                  Section 2.8 Outstanding Securities; Determination of Holder's
Action. Securities outstanding at any time are all the Securities authenticated
by the Trustee except for those cancelled by it, those paid pursuant to Section
2.7, those delivered to it for cancellation and those described in this Section
2.8 as not outstanding. A Security does not cease to be outstanding because the
Company or an Affiliate thereof holds the Security; provided, however, that in
determining whether the Holders of the requisite principal amount of Securities
have given or concurred in any request, demand, authorization, direction,
notice, consent, waiver, or other Act hereunder, Securities owned by the Company
or any other obligor upon the Securities or any Affiliate of the Company or such
other obligor shall be disregarded and deemed not to be outstanding, except
that, in determining whether the Trustee shall be protected in relying upon any
such request, demand, authorization, direction, notice, consent, waiver or other
Act, only Securities which a Responsible Officer knows are so owned shall be so
disregarded. Subject to the foregoing, only Securities outstanding at the time
of such determination shall be considered in any such determination (including,
without limitation, determinations pursuant to Articles 7 and 10).

                  If a Security is replaced pursuant to Section 2.7, it ceases
to be outstanding unless the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.

                  If the Paying Agent holds, in accordance with this Indenture,
on the Business Day following a Change of Control Purchase Date, or on Stated
Maturity, money sufficient to pay Securities payable on that date, then
immediately after such Change of Control Purchase Date or Stated Maturity, as
the case may be, such Securities shall cease to be outstanding and interest,
including Liquidated Damages and Pass-Through Dividends, if any, on such
Securities shall cease to accrue.

                  If a Security is converted in accordance with Article 11, then
from and after the time of conversion on the date of conversion, such Security
shall cease to be outstanding and interest, including Liquidated Damages and
Pass-Through Dividends, if any, shall cease to accrue on such Security.

                  Section 2.9 Temporary Securities. Pending the preparation of
definitive Securities, the Company may execute, and upon Company Order the
Trustee shall authenticate and deliver, temporary Securities which are printed,
lithographed, typewritten, mimeographed or otherwise produced, in any authorized
denomination, substantially of the tenor of the definitive Securities in lieu of
which they are issued and with such appropriate insertions, omissions,
substitutions and other variations as the officers executing such Securities may
determine, as conclusively evidenced by their execution of such Securities.

                  If temporary Securities are issued, the Company will cause
definitive Securities to be prepared without unreasonable delay. After the
preparation of definitive Securities, the temporary Securities shall be
exchangeable for definitive Securities upon surrender of the

<PAGE>

                                                                              21

temporary Securities at the office or agency of the Company designated for such
purpose pursuant to Section 2.3, without charge to the Holder. Upon surrender
for cancellation of any one or more temporary Securities, the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor a
like principal amount of definitive Securities of authorized denominations.
Until so exchanged the temporary Securities shall in all respects be entitled to
the same benefits under this Indenture as definitive Securities.

                  Section 2.10 Cancellation. All Securities surrendered for
payment, purchased by the Company pursuant to Article 3, conversion or
registration of transfer or exchange shall, if surrendered to any person other
than the Trustee, be delivered to the Trustee and shall be promptly cancelled by
it. The Company may at any time deliver to the Trustee for cancellation any
Securities previously authenticated and delivered hereunder which the Company
may have acquired in any manner whatsoever, and all Securities so delivered
shall be promptly cancelled by the Trustee. The Company may not issue new
Securities to replace Securities it has repurchased, paid for or delivered to
the Trustee for cancellation, or that any Holder has converted pursuant to
Article 11. No Securities shall be authenticated in lieu of or in exchange for
any Securities cancelled as provided in this Section, except as expressly
permitted by this Indenture. All cancelled Securities held by the Trustee shall
be disposed of by the Trustee in accordance with the Trustee's customary
procedure.

                  Section 2.11 Persons Deemed Owners. Prior to due presentment
of a Security for registration of transfer, the Company, the Trustee and any
agent of the Company or the Trustee may treat the person in whose name such
Security is registered as the owner of such Security for the purpose of
receiving payment of principal of the Security or the payment of any Change of
Control Purchase Price in respect thereof, and interest thereon, for the purpose
of conversion and for all other purposes whatsoever, whether or not such
Security be overdue, and neither the Company, the Trustee nor any agent of the
Company or the Trustee shall be affected by notice to the contrary.

                  Section 2.12 Special Transfer Provisions. (a) Notwithstanding
any other provisions of this Indenture or the Securities, (A) transfers of a
Global Security, in whole or in part, shall be made only in accordance with
Section 2.6 and Section 2.12(a)(i), (B) transfers of a beneficial interest in a
Global Security for a Certificated Security shall comply with Section 2.6,
Section 2.12(a)(ii) below and Section 2.12(e)(1) below, and (C) transfers of a
Certificated Security shall comply with Section 2.6 and Sections 2.12(a)(iii)
and (iv) below.

                         (i)   Transfer of Global Security. A Global Security
         may not be transferred, in whole or in part, to any person other than
         the Depositary or a nominee or any successor thereof, and no such
         transfer to any such other person may be registered; provided that this
         clause (i) shall not prohibit any transfer of a Security that is issued
         in exchange for a Global Security but is not itself a Global Security.
         No transfer of a Security to any person shall be effective under this
         Indenture or the Securities unless and until such Security has been
         registered in the name of such person. Nothing in this Section
         2.12(a)(i) shall prohibit or render ineffective any transfer of a
         beneficial interest in a Global Security effected in accordance with
         the other provisions of this Section 2.12(a).

<PAGE>

                                                                              22

                         (ii)  Restrictions on Transfer of a Beneficial Interest
         in a Global Security for a Certificated Security. A beneficial interest
         in a Global Security may not be exchanged for a Certificated Security
         except upon satisfaction of the requirements set forth below and in
         Section 2.12(e)(1) below. Upon receipt by the Trustee of a transfer of
         a beneficial interest in a Global Security in accordance with
         Applicable Procedures for a Certificated Security in the form
         satisfactory to the Trustee, together with:

                         (A) so long as the Securities are Restricted
                         Securities, certification in the form set forth in
                         Exhibit D;

                         (B) written instructions to the Trustee to make, or
                         direct the Registrar to make, an adjustment on its
                         books and records with respect to such Global Security
                         to reflect a decrease in the aggregate principal amount
                         of the Securities represented by the Global Security,
                         such instructions to contain information regarding the
                         Depositary account to be credited with such decrease;
                         and

                         (C) if the Company so requests, an opinion of counsel
                         or other evidence reasonably satisfactory to it as to
                         the compliance with the restrictions set forth in the
                         Legend,

then the Trustee shall cause, or direct the Registrar to cause, in accordance
with the standing instructions and procedures existing between the Depositary
and the Registrar, the aggregate principal amount of the Securities represented
by the Global Security to be decreased by the aggregate principal amount of the
Certificated Security to be issued, shall issue such Certificated Security and
shall debit or cause to be debited to the account of the person specified in
such instructions a beneficial interest in the Global Security equal to the
principal amount of the Certificated Security so issued.

                         (iii) Transfer and Exchange of Certificated Securities.
         When Certificated Securities are presented to the Registrar with a
         request:

                  (y)    to register the transfer of such Certificated
Securities; or

                  (z)    to exchange such Certificated Securities for an equal
principal amount of Certificated Securities of other authorized denominations,

the Registrar shall register the transfer or make the exchange as requested if
its reasonable requirements for such transaction are met; provided, however,
that the Certificated Securities surrendered for transfer or exchange:

                  (1)    shall be duly endorsed or accompanied by a written
                         instrument of transfer in form reasonably satisfactory
                         to the Company and the Registrar, duly executed by the
                         Holder thereof or his attorney duly authorized in
                         writing; and

                  (2)    so long as such Securities are Restricted Securities,
                         such Securities are being transferred or exchanged
                         pursuant to an effective registration

<PAGE>

                                                                              23

                         statement under the Securities Act or pursuant to
                         clause (A), (B) or (C) below, and are accompanied by
                         the following additional information and documents, as
                         applicable:

                         (A) if such Certificated Securities are being delivered
                         to the Registrar by a Holder for registration in the
                         name of such Holder, without transfer, a certification
                         from such Holder to that effect; or

                         (B) if such Certificated Securities are being
                         transferred to the Company, a certification to that
                         effect; or

                         (C) if such Certificated Securities are being
                         transferred pursuant to an exemption from registration,
                         (i) a certification to that effect (in the form set
                         forth in Exhibit D, if applicable) and (ii) if the
                         Company so requests, an opinion of counsel or other
                         evidence reasonably satisfactory to it as to the
                         compliance with the restrictions set forth in the
                         Legend.

                         (iv)  Restrictions on Transfer of a Certificated
         Security for a Beneficial Interest in a Global Security. A Certificated
         Security may not be exchanged for a beneficial interest in a Global
         Security except upon satisfaction of the requirements set forth below.

                  Upon receipt by the Trustee of a Certificated Security, duly
endorsed or accompanied by appropriate instruments of transfer, in form
satisfactory to the Trustee, together with:

                  (I)  so long as the Securities are Restricted Securities,
                  certification, in the form set forth in Exhibit F, that either
                  (x) the Holder of such Certificated Security is a QIB and is
                  exchanging its Certificated Security for an interest in the
                  Global Security pursuant to Section 2.1(b) or (y) the
                  Securities represented by such Certificated Security are being
                  transferred in compliance with Rule 144A; and

                  (II) written instructions directing the Trustee to make, or to
                  direct the Registrar to make, an adjustment on its books and
                  records with respect to such Global Security to reflect an
                  increase in the aggregate principal amount of the Securities
                  represented by the Global Security, such instructions to
                  contain information regarding the Depositary account to be
                  credited with such increase, then the Trustee shall cancel
                  such Certificated Security and cause, or direct the Registrar
                  to cause, in accordance with the standing instructions and
                  procedures existing between the Depositary and the Registrar,
                  the aggregate principal amount of Securities represented by
                  the Global Security to be increased by the aggregate principal
                  amount of the Certificated Security to be exchanged, and shall
                  credit or cause to be credited to the account of the person

<PAGE>

                                                                              24

                  specified in such instructions a beneficial interest in the
                  Global Security equal to the principal amount of the
                  Certificated Security so cancelled. If no Global Securities
                  are then outstanding, the Company shall issue and the Trustee
                  shall authenticate, upon written order of the Company in the
                  form of an Officers' Certificate, a new Global Security in the
                  appropriate principal amount.

                  (b) Subject to the succeeding Section (c), every Security
shall be subject to the restrictions on transfer provided in the Legend
including the delivery of an opinion of counsel, if so provided. Whenever any
Restricted Security is presented or surrendered for registration of transfer or
for exchange for a Security registered in a name other than that of the Holder,
such Security must be accompanied by a certificate in substantially the form set
forth in Exhibit D, dated the date of such surrender and signed by the Holder of
such Security, as to compliance with such restrictions on transfer. The
Registrar shall not be required to accept for such registration of transfer or
exchange any Security not so accompanied by a properly completed certificate.

                  (c) The restrictions imposed by the Legend upon the
transferability of any Security shall cease and terminate when such Security has
been sold pursuant to an effective registration statement under the Securities
Act or transferred in compliance with Rule 144 or, if earlier, upon the
expiration of the holding period applicable to sales thereof under Rule 144(k).
Any Security as to which such restrictions on transfer shall have expired in
accordance with their terms or shall have terminated may, upon a surrender of
such Security for exchange to the Registrar in accordance with the provisions of
this Section 2.12 (accompanied, in the event that such restrictions on transfer
have terminated by reason of a transfer in compliance with Rule 144, by an
opinion of counsel having substantial experience in practice under the
Securities Act and otherwise reasonably acceptable to the Company, addressed to
the Company and in form acceptable to the Company, to the effect that the
transfer of such Security has been made in compliance with Rule 144), be
exchanged for a new Security, of like tenor and aggregate principal amount,
which shall not bear the restrictive Legend. The Company shall inform the
Trustee of the effective date of any registration statement registering the
Securities under the Securities Act. The Trustee shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
aforementioned opinion of counsel or registration statement.

                  (d) As used in the preceding two paragraphs of this Section
2.12, the term "transfer" encompasses any sale, transfer, loan or other
disposition of any Security; but subject to the provisions of Section 2.6(g)
above.

                  (e) The provisions of clauses (1), (2), (3) and (4) below
shall apply only to Global Securities:

                  (1) Notwithstanding any other provisions of this Indenture or
                      the Securities, a Global Security shall not be exchanged
                      in whole or in part for a Security registered in the name
                      of any person other than the Depositary or one or more
                      nominees thereof, provided that a Global Security may be
                      exchanged for Securities registered in the names of any
                      person designated by the

<PAGE>

                                                                              25

                      Depositary in the event that (i) the Depositary has
                      notified the Company that it is unwilling or unable to
                      continue as Depositary for such Global Security or such
                      Depositary has ceased to be a "clearing agency" registered
                      under the Exchange Act, and a successor Depositary is not
                      appointed by the Company within 90 days or (ii) an Event
                      of Default has occurred and is continuing with respect to
                      the Securities. Any Global Security exchanged pursuant to
                      clause (i) above shall be so exchanged in whole and not in
                      part, and any Global Security exchanged pursuant to clause
                      (ii) above may be exchanged in whole or from time to time
                      in part as directed by the Depositary. Any Security issued
                      in exchange for a Global Security or any portion thereof
                      shall be a Global Security; provided that any such
                      Security so issued that is registered in the name of a
                      person other than the Depositary or a nominee thereof
                      shall not be a Global Security.

                  (2) Securities issued in exchange for a Global Security or any
                      portion thereof shall be issued in definitive, fully
                      registered form, without interest coupons, shall have an
                      aggregate principal amount equal to that of such Global
                      Security or portion thereof to be so exchanged, shall be
                      registered in such names and be in such authorized
                      denominations as the Depositary shall designate and shall
                      bear the applicable legends provided for herein. Any
                      Global Security to be exchanged in whole shall be
                      surrendered by the Depositary to the Trustee, as
                      Registrar. With regard to any Global Security to be
                      exchanged in part, either such Global Security shall be so
                      surrendered for exchange or, if the Trustee is acting as
                      custodian for the Depositary or its nominee with respect
                      to such Global Security, the principal amount thereof
                      shall be reduced, by an amount equal to the portion
                      thereof to be so exchanged, by means of an appropriate
                      adjustment made on the records of the Trustee. Upon any
                      such surrender or adjustment, the Trustee shall
                      authenticate and deliver the Security issuable on such
                      exchange to or upon the order of the Depositary or an
                      authorized representative thereof.

                  (3) Subject to the provisions of clause (5) below, the
                      registered Holder may grant proxies and otherwise
                      authorize any person, including Agent Members (as defined
                      below) and persons that may hold interests through Agent
                      Members, to take any action which a holder is entitled to
                      take under this Indenture or the Securities.

                  (4) In the event of the occurrence of any of the events
                      specified in clause (1) above, the Company will promptly
                      make available to the Trustee a reasonable supply of
                      Certificated Securities in definitive, fully registered
                      form, without interest coupons.

                  (5) Neither any members of, or participants in, the Depositary
                      (collectively, the "Agent Members") nor any other persons
                      on whose behalf Agent Members may act shall have any
                      rights under this Indenture with respect

<PAGE>

                                                                              26

                      to any Global Security registered in the name of the
                      Depositary or any nominee thereof, or under any such
                      Global Security, and the Depositary or such nominee, as
                      the case may be, may be treated by the Company, the
                      Trustee and any agent of the Company or the Trustee as the
                      absolute owner and holder of such Global Security for all
                      purposes whatsoever. Notwithstanding the foregoing,
                      nothing herein shall prevent the Company, the Trustee or
                      any agent of the Company or the Trustee from giving effect
                      to any written certification, proxy or other authorization
                      furnished by the Depositary or such nominee, as the case
                      may be, or impair, as between the Depositary, its Agent
                      Members and any other person on whose behalf an Agent
                      Member may act, the operation of customary practices of
                      such Persons governing the exercise of the rights of a
                      holder of any Security.

          Section 2.13 CUSIP Numbers. The Company may issue the Securities with
one or more "CUSIP" numbers (if then generally in use), and, if so, the Trustee
shall use "CUSIP" numbers in notices of redemption as a convenience to Holders;
provided that any such notice may state that no representation is made as to the
correctness of such numbers either as printed on the Securities or as contained
in any notice of a redemption and that reliance may be placed only on the other
identification numbers printed on the Securities, and any such redemption shall
not be affected by any defect in or omission of such numbers. The Company will
promptly notify the Trustee of any change in the CUSIP numbers.

          Section 2.14 PIK Securities. Pursuant to the terms of the Securities,
the Company may pay interest or Liquidated Damages in the form of PIK
Securities. If the Conversion Price is of an amount such that the Securities
initially issued under this Indenture meet the requirements of Rule
144A(d)(3)(i), but if the Company does not receive satisfactory evidence that
any PIK Securities issued under this Indenture in respect of any interest or
Liquidated Damages payment will meet the requirements of Rule 144A(d)(3)(i) and
as a result of the failure of such PIK Securities to meet such requirements,
such PIK Securities would not be transferable under Rule 144A, the Company shall
issue such PIK Securities in a new series under this Indenture, with terms and
provisions identical in all respects to all other Securities issued under this
Indenture, provided that such series of PIK Securities shall have a separate
CUSIP number.

                                  ARTICLE III

                        REPURCHASE UPON CHANGE OF CONTROL

          Section 3.1 Purchase of Securities at Option of the Holder upon
Change of Control. (a) (1) In the event that a Change of Control shall occur,
each Holder shall have the right, at the Holder's option, to require the Company
to repurchase, and upon the exercise of such right the Company shall repurchase,
all of such Holder's Securities, or any portion of the principal amount thereof
that is equal to any integral multiple of $1,000 (or any integral multiple of
$1.00 in the case of a PIK Security) (provided that no single Security may be
repurchased in part unless the portion of the principal amount of such Security
to be outstanding after such repurchase is equal to an integral multiple of
$1,000 (or any integral multiple of $1.00 in the case of a PIK Security)), on
the date specified in the Change of Control Notice given pursuant to

<PAGE>

                                                                              27

Section 3.1(b) in connection with such Change of Control (the "Change of Control
Purchase Date") that is no earlier than 30 days nor later than 60 days after the
date of such notice at a purchase price specified in Section 5 of the
Securities, (the "Change of Control Purchase Price") subject to satisfaction by
or on behalf of the Holder of the requirements set forth in Section 3.1(c). In
the event that the Company fails to deliver a Change of Control Notice on or
prior to the 30th day after the occurrence of a Change of Control, then the
Company shall be deemed to have delivered a Change of Control Notice on such
30th day and shall be deemed to have specified a Change of Control Date of the
60th day after the occurrence of such Change of Control.

                  A "Change of Control" will be deemed to have occurred at such
time after the Securities are originally issued when any of the following events
shall occur:

                         (i)   the acquisition by any person, including any
         syndicate or group deemed to be a "person" under Section 13(d)(3) of
         the Exchange Act, of beneficial ownership, directly or indirectly,
         through a purchase, merger or other acquisition transaction or series
         of purchases, mergers or other acquisition transactions, of shares of
         the Capital Stock of the Company entitling that person to exercise 50%
         or more of the total voting power of all shares of the Capital Stock of
         the Company entitled to vote generally in elections of directors, other
         than any acquisition by the Company, any of its Subsidiaries or any of
         its employee benefit plans (except that any of those persons shall be
         deemed to have beneficial ownership of all securities it has the right
         to acquire, whether the right is currently exercisable or is
         exercisable only upon the occurrence of a subsequent condition);

                         (ii)  the first day on which a majority of the members
         of the board of directors of the Company does not consist of Continuing
         Directors; provided that any such change in board membership occurring
         in connection with a Spin-Off of the POR Spin-Co, shall not be deemed
         to constitute a Change of Control hereunder;

                         (iii) if the Company engages in one or more Spin-Offs,
         which together with all other Spin-Offs engaged in by the Company since
         the date of this Indenture involves the distribution to the Company's
         shareholders, in the aggregate, of one or more Subsidiaries subject to
         a Spin-Off (a "Spin-Co") having total Net Assets with a fair market
         value of more than 55% of the fair market value of the Company's total
         consolidated Net Assets at the time of the first Spin-Off occurring
         after the date of this Indenture (in each case, as determined by a
         Qualified Appraiser within 120 days prior to the date of any such
         Spin-Off); provided, however, that no such event shall be deemed to
         constitute a Change of Control hereunder if it occurs prior to the time
         that the Obligations (as defined in the Credit Agreement) (unless
         pursuant to the terms of the Credit Agreement, the Company is permitted
         to repurchase any Securities tendered following the occurrence of any
         Change of Control in accordance with the provisions of Article III
         hereof, including a Spin-Off described in this clause (iii)), have been
         repaid in full; and provided, further that in no event shall a Spin-Off
         of the POR Spin-Co, in and of itself, be deemed to constitute a Change
         of Control hereunder if such Spin-Off is the first Spin-Off occurring
         after the date of this Indenture;

<PAGE>

                                                                              28

                         (iv)  the sale, lease, transfer, conveyance or other
         disposition (other than by way of merger or consolidation), in one or a
         series of related transactions, of assets of the Company and its
         Subsidiaries which, together with the aggregate fair market value of
         all Capital Stock distributed in all prior Spin-Offs engaged in by the
         Company since the date of this Indenture other than the POR Spin-Off
         ("Spun-Off Value"), have an aggregate fair market value which is
         greater than 50% of the sum of the fair market value of the total
         assets of the Company and its Subsidiaries taken as a whole (as
         determined by a Qualified Appraiser) at the time of such disposition,
         plus the Spun-Off Value, to any "person" (as such term is used in
         Section 13(d)(3) of the Exchange Act); or

                         (v)   the Company consolidates or merges with or into
         any other person or any merger of another person into the Company,
         other than: (A) any transaction: (1) that does not result in any
         reclassification, conversion, exchange or cancellation of outstanding
         shares of the Company's Capital Stock and (2) pursuant to which the
         holders of 50% or more of the total voting power of the Company's
         Capital Stock entitled to vote generally in elections of directors
         immediately prior to the transaction, taken as a whole, have the
         entitlement to exercise, directly or indirectly, 50% or more of the
         total voting power of all shares of Capital Stock entitled to vote
         generally in elections of directors of the continuing or surviving
         Person immediately after giving effect to such issuance; or (B) any
         merger primarily for the purpose of changing the Company's jurisdiction
         of incorporation and resulting in a reclassification, conversion or
         exchange of outstanding shares of Common Stock, if at all, solely into
         shares of common stock of the surviving entity.

                  A "Continuing Director" shall mean, as of any date of
determination, any member of the Board of Directors who:

                         (i)   was a member of the Board of Directors of the
         Company on the date of this Indenture; or

                         (ii)  was nominated for election or elected to the
         Board of Directors with the approval of a majority of the Continuing
         Directors who were members of the Board of Directors at the time of the
         new director's nomination or election.

(2)      Notwithstanding the provisions of Section 3.1(a)(1), the Company shall
         not be required to purchase the Securities of the Holders upon a Change
         of Control pursuant to this Section 3.1 if:

                  (i)    the arithmetic average of the VWAP per share of Common
                         Stock for any five Trading Days within (1) the period
                         of 10 consecutive Trading Days ending immediately after
                         the later of the Change of Control or the public
                         announcement of the Change of Control, in the case of a
                         Change of Control under clause (i) or (ii) of the
                         definition of "Change of Control" above, or (2) the
                         period of 10 consecutive Trading Days ending
                         immediately before the Change of Control, in the case
                         of a Change of Control under clause (iii), (iv) or (v)
                         of the definition of "Change of Control" above, equals
                         or exceeds 110% of the Conversion Price of the

<PAGE>

                                                                              29

                         Securities in effect on each of those five trading days
                         (provided that the shares of Common Stock issuable upon
                         conversion of all outstanding Securities are available
                         for resale under Rule 144 or pursuant to an effective
                         and available resale registration statement under the
                         Securities Act); or

                  (ii)   at least 90% of the consideration in the transaction or
                         transactions (other than cash payments for fractional
                         shares and cash payments made in respect of dissenters'
                         appraisal rights) constituting a Change of Control
                         under clause (iv) or (v) of the definition of "Change
                         of Control" consists of shares of common stock traded
                         or to be traded immediately following a Change of
                         Control on the New York Stock Exchange, American Stock
                         Exchange or the Nasdaq National Market, and, as a
                         result of the transaction or transactions, the
                         Securities become convertible into that common stock
                         (and any rights attached thereto).

For the purposes of this Section 3.1, (x) whether a person is a "beneficial
owner" shall be determined in accordance with Rule 13d-3 under the Exchange Act
and (y) the term "person" includes any syndicate or group that would be deemed
to be a "person" under Section 13(d)(3) of the Exchange Act.

                  (b)    Not earlier than the date the Company provides to the
Lenders (as such term is defined in the Credit Agreement) the Change of Control
Offer to Repay Notice (as such term is defined in the Credit Agreement) pursuant
to Section 3.8 of the Credit Agreement, but in no event later than 30 days after
the occurrence of a Change of Control, the Company shall mail a written notice
(a "Change of Control Notice") of the Change of Control by first class mail to
the Trustee and to each Holder (and to beneficial owners as required by
applicable law). The Change of Control Notice shall include a form of Change of
Control Purchase Notice to be completed by the Holder and shall state:

                  (1)    briefly, the events causing a Change of Control and the
                         date of such Change of Control;

                  (2)    the date by which the Change of Control Purchase Notice
                         pursuant to this Section 3.1 must be delivered to the
                         Paying Agent in order for a Holder to exercise the
                         repurchase rights;

                  (3)    the Change of Control Purchase Date;

                  (4)    the Change of Control Purchase Price;

                  (5)    the name and address of the Paying Agent and the
                         Conversion Agent;

                  (6)    the Conversion Price and any adjustments thereto;

                  (7)    that the Securities as to which a Change of Control
                         Purchase Notice has been given may be converted if they
                         are otherwise convertible pursuant to

<PAGE>

                                                                              30

                         Article 11 hereof only if the Change of Control
                         Purchase Notice has been withdrawn in accordance with
                         the terms of this Indenture;

                  (8)    that the Securities must be surrendered to the Paying
                         Agent to collect payment;

                  (9)    that the Change of Control Purchase Price for any
                         Security as to which a Change of Control Purchase
                         Notice has been duly given and not withdrawn will be
                         paid promptly following the later of the Change of
                         Control Purchase Date and the time of surrender of such
                         Security as described in (8);

                  (10)   briefly, the procedures the Holder must follow to
                         exercise rights under this Section 3.1;

                  (11)   briefly, the conversion rights of the Securities;

                  (12)   the procedures for withdrawing a Change of Control
                         Purchase Notice;

                  (13)   that, unless the Company defaults in making payment of
                         such Change of Control Purchase Price, interest, if
                         any, on Securities surrendered for purchase by the
                         Company will cease to accrue on and after the Change of
                         Control Purchase Date; and

                  (14)   the CUSIP number(s) of the Securities.

                  (c)    A Holder may exercise its rights specified in Section
3.1(a) upon delivery of a written notice of purchase (a "Change of Control
Purchase Notice") to the Paying Agent at any time on or prior to the close of
business on the second Business Day preceding the Change of Control Purchase
Date (unless the Company shall specify a later date), specifying:

                  (1)    the certificate number of the Security which the Holder
                         will deliver to be purchased or the appropriate
                         depositary procedures if Certificated Securities have
                         not been issued;

                  (2)    the portion of the principal amount of the Security
                         which the Holder will deliver to be purchased, which
                         portion must be $1,000 or an integral multiple of
                         $1,000 (or in the case of any PIK Security, which
                         portion must be $1.00 or an integral multiple of
                         $1.00); and

                  (3)    that such Security shall be purchased pursuant to the
                         terms and conditions specified in Section 5 of the
                         Securities and in this Indenture.

                  The delivery of such Security to the Paying Agent with the
Change of Control Purchase Notice (together with all necessary endorsements) at
the offices of the Paying Agent shall be a condition to the receipt by the
Holder of the Change of Control Purchase Price therefor; provided, however, that
such Change of Control Purchase Price shall be so paid pursuant to this Section
3.1 and Section 3.2 only if the Security so delivered to the Paying Agent

<PAGE>

                                                                              31

shall conform in all material respects to the description thereof set forth in
the related Change of Control Purchase Notice.

                  The Company shall purchase from the Holder thereof, pursuant
to this Section 3.1 and Section 3.2, a portion of a Security if the principal
amount of such portion is $1,000 or an integral multiple of $1,000 (or in the
case of any PIK Security, which portion must be $1.00 or an integral multiple of
$1.00). Provisions of this Indenture that apply to the purchase of all of a
Security also apply to the purchase of such portion of such Security.

                  Any purchase by the Company contemplated pursuant to the
provisions of this Section 3.1 and Section 3.2 shall be consummated by the
delivery of the consideration to be received by the Holder on the Change of
Control Purchase Date.

                  Notwithstanding anything herein to the contrary, any Holder
delivering to the Paying Agent the Change of Control Purchase Notice
contemplated by this Section 3.1(c) shall have the right to withdraw such Change
of Control Purchase Notice at any time prior to the close of business on the
last Business Day immediately preceding the Change of Control Purchase Date by
delivery of a written notice of withdrawal to the Paying Agent in accordance
with Section 3.2.

                  The Paying Agent shall promptly notify the Company of the
receipt by it of any Change of Control Purchase Notice or written withdrawal
thereof.

                  (d) The Trustee and the Paying Agent shall be under no
obligation to ascertain the occurrence of a Change of Control or to give notice
with respect thereto. The Trustee and the Paying Agent may conclusively assume,
in the absence of written notice to the contrary from the Company or an order
from a court of competent jurisdiction, that no Change of Control has occurred.

                  Section 3.2 Effect of Change of Control Purchase Notice;
Withdrawal. Upon receipt by the Paying Agent of the Change of Control Purchase
Notice specified in Section 3.1(c), the Holder of the Security in respect of
which such Change of Control Purchase Notice was given shall (unless such Change
of Control Purchase Notice is withdrawn as specified in the following two
paragraphs) thereafter be entitled to receive solely the Change of Control
Purchase Price with respect to such Security. Such Change of Control Purchase
Price shall be paid to such Holder, subject to the receipt of funds by the
Paying Agent, promptly following the later of (x) the Change of Control Purchase
Date with respect to such Security (provided the conditions in Section 3.1(c)
have been satisfied) and (y) the time of delivery of such Security to the Paying
Agent by the Holder thereof in the manner required by Section 3.1(c). Securities
in respect of which a Change of Control Purchase Notice has been given by the
Holder thereof may not be converted pursuant to Article 11 hereof on or after
the date of the delivery of such Change of Control Purchase Notice unless such
Change of Control Purchase Notice has first been validly withdrawn as specified
in the following two paragraphs.

                  A Change of Control Purchase Notice may be withdrawn by means
of a written notice of withdrawal delivered to the office of the Paying Agent in
accordance with the Change

<PAGE>

                                                                              32

of Control Purchase Notice, at any time prior to the close of business on the
close of business on the Business Day immediately preceding the Change of
Control Purchase Date, specifying:

                  (1)    the certificate number, if any, of the Security in
                         respect of which such notice of withdrawal is being
                         submitted,

                  (2)    the principal amount of the Security with respect to
                         which such notice of withdrawal is being submitted, and

                  (3)    the principal amount, if any, of such Security which
                         remains subject to the original Change of Control
                         Purchase Notice, and which has been or will be
                         delivered for purchase by the Company.

                  There shall be no purchase of any Securities pursuant to
Section 3.1 if there has occurred (prior to, on or after, as the case may be,
the giving, by the Holders of such Securities, of the required Change of Control
Purchase Notice) and is continuing an Event of Default (other than a default in
the payment of the Change of Control Purchase Price with respect to such
Securities), unless waived by all of the Holders. The Paying Agent will promptly
return to the respective Holders thereof any Securities (x) with respect to
which a Change of Control Purchase Notice has been withdrawn in compliance with
this Indenture, or (y) held by it during the continuance of an Event of Default
(other than a default in the payment of the Change of Control Purchase Price
with respect to such Securities) in which case, upon such return, the Change of
Control Purchase Notice with respect thereto shall be deemed to have been
withdrawn.

                  Section 3.3 Deposit of Change of Control Purchase Price. Prior
to 12:00 Noon. (local time in The City of New York) on the Business Day
immediately preceding the Change of Control Purchase Date, the Company shall
deposit with the Trustee or with the Paying Agent (or, if the Company or a
Subsidiary or an Affiliate of either of them is acting as the Paying Agent,
shall segregate and hold in trust as provided in Section 2.4) an amount of cash
(in immediately available funds if deposited on such Business Day) sufficient to
pay the aggregate Change of Control Purchase Price of all the Securities or
portions thereof which are to be purchased as of the Change of Control Purchase
Date.

                  Section 3.4 Securities Purchased in Part. Any Certificated
Security which is to be purchased only in part shall be surrendered at the
office of the Paying Agent (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or such Holder's
attorney duly authorized in writing) and the Company shall execute and the
Trustee shall authenticate and deliver to the Holder of such Security, without
service charge, a new Security or Securities, of any authorized denomination as
requested by such Holder in aggregate principal amount equal to, and in exchange
for, the portion of the principal amount of the Security so surrendered which is
not purchased.

                  Section 3.5 Covenant to Comply With Securities Laws Upon
Purchase of Securities. When complying with the provisions of Section 3.1 hereof
(provided that such offer or purchase constitutes an "issuer tender offer" for
purposes of Rule 13e-4 (which term, as used herein, includes any successor
provision thereto) under the Exchange Act at the time of such

<PAGE>

                                                                              33

offer or purchase), and subject to any exemptions available under applicable
law, the Company shall (i) comply with Rule 13e-4 and Rule 14e-1 (or any
successor provision) under the Exchange Act, (ii) file the related Schedule TO
(or any successor schedule, form or report) under the Exchange Act, and (iii)
otherwise comply with all Federal and state securities laws so as to permit the
rights and obligations under Section 3.1 to be exercised in the time and in the
manner specified in Section 3.1.

           Section 3.6 Repayment to the Company. The Trustee and the Paying
Agent shall return to the Company any cash that remains unclaimed as provided in
Section 12 of the Securities, together with interest or dividends, if any,
thereon (subject to the provisions of Section 8.1(f)), held by them for the
payment of the Change of Control Purchase Price; provided, however, that to the
extent that the aggregate amount of cash deposited by the Company pursuant to
Section 3.3 exceeds the aggregate Change of Control Purchase Price of the
Securities or portions thereof which the Company is obligated to purchase as of
the Change of Control Purchase Date, then, unless otherwise agreed in writing
with the Company, promptly after the Business Day following the Change of
Control Purchase Date, the Trustee shall return any such excess to the Company
together with interest thereon (subject to the provisions of Section 8.1(f)).

                                   ARTICLE IV

                                    COVENANTS

           Section 4.1 Payment of Securities. The Company shall promptly make
all payments in respect of the Securities on the dates and in the manner
provided in the Securities or pursuant to this Indenture. Any amounts of cash to
be given to the Trustee or Paying Agent shall be deposited with the Trustee or
Paying Agent by Noon, New York City time, by the Company. Principal amount plus
accrued interest, if any, including the Change of Control Purchase Price,
Liquidated Damages, Pass-Through Dividends and cash interest, if any, shall be
considered paid on the applicable date due if on such date the Trustee or the
Paying Agent holds, in accordance with this Indenture, cash sufficient to pay
all such amounts then due.

           Section 4.2 SEC and Other Reports. The Company shall file with the
Trustee, within 15 days after it files such annual and quarterly reports,
information, documents and other reports with the SEC, copies of its annual
report and of the information, documents and other reports (or copies of such
portions of any of the foregoing as the SEC may by rules and regulations
prescribe) which the Company is required to file with the SEC pursuant to
Section 13 or 15(d) of the Exchange Act. The Company also shall comply with the
other provisions of TIA Section 314(a). Delivery of such reports, information
and documents to the Trustee is for informational purposes only and the
Trustee's receipt of such shall not constitute constructive notice of any
information contained therein or determinable from information contained
therein, including the Company's compliance with any of its covenants hereunder
(as to which the Trustee is entitled to rely conclusively on Officers'
Certificates).

           Section 4.3 Compliance Certificate. The Company shall deliver to the
Trustee within 120 days after the end of each fiscal year of the Company
(beginning with the fiscal year ending on December 31, 2002) an Officers'
Certificate which complies with the requirements of the TIA, stating whether or
not to the knowledge of the signers thereof, the Company is in

<PAGE>

                                                                              34

default in the performance and observance of any of the terms, provisions and
conditions of this Indenture (without regard to any period of grace or
requirement of notice provided hereunder) and if the Company shall be in
default, specifying all such defaults and the nature and status thereof of which
they may have knowledge.

           Section 4.4 Further Instruments and Acts. Upon request of the
Trustee, the Company will execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purposes of this Indenture.

           Section 4.5 Maintenance of Office or Agency. The Company will
maintain an office or agency of the Trustee, Registrar, Paying Agent and
Conversion Agent where Securities may be presented or surrendered for payment,
where Securities may be surrendered for registration of transfer, exchange,
purchase or conversion and where notices and demands to or upon the Company in
respect of the Securities and this Indenture may be served. The office of U.S.
Bank, N.A., One California Street, Suite 2550, San Francisco, CA 94111
(Attention: Corporate Trust Services), shall initially be such office or agency
for all of the aforesaid purposes. The Company shall give prompt written notice
to the Trustee of the location, and of any change in the location, of any such
office or agency (other than a change in the location of the office of the
Trustee). If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
address of the Trustee set forth in Section 12.2.

           The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations.

           Section 4.6 Delivery of Certain Information. At any time when the
Company is not subject to Section 13 or 15(d) of the Exchange Act, upon the
request of a Holder or any beneficial owner of Securities or holder or
beneficial owner of shares of Common Stock issued upon conversion thereof, the
Company will promptly furnish or cause to be furnished Rule 144A Information (as
defined below) and any reports required to be filed by it under the Exchange Act
or the Securities Act or otherwise pursuant to Section 7 of the Registration
Rights Agreement, to such Holder or any beneficial owner of Securities or holder
or beneficial owner of shares of Common Stock, or to a prospective purchaser of
any such security designated by any such holder, as the case may be, to the
extent required to permit compliance by such Holder or holder with Rule 144A
under the Securities Act in connection with the resale of any such security.
"Rule 144A Information" shall be such information as is specified pursuant to
Rule 144A(d)(4) under the Securities Act. Whether a person is a beneficial owner
shall be determined by the Company to the Company's reasonable satisfaction.

           Section 4.7 Restriction on Incurrence of Indebtedness. The Company
will not, directly or indirectly, create, incur, issue, assume, guarantee or
otherwise become directly or indirectly liable, contingently or otherwise, with
respect to (collectively, "incur") any Indebtedness; provided, however, that the
Company may incur Indebtedness if the Company's Fixed Charge Coverage Ratio for
the Company's most recently ended four full fiscal quarters for which financial
statements are required to be furnished pursuant to Section 4.6 immediately

<PAGE>

                                                                              35

preceding the date on which such additional Indebtedness is incurred would have
been at least 2.0 to 1.0, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred at the beginning of such four-quarter period; provided,
further, that, if following the date of this Indenture, the Company's Reference
Debt is rated Investment Grade, then beginning on the date of such rating, the
covenant set forth in this Section 4.7 shall cease and be of no further effect.

           The provisions of the first paragraph of this covenant shall not
apply to the incurrence of any of the following items of Indebtedness
(collectively, "Permitted Debt") so long as no Default has occurred and is
continuing or would be caused thereby:

           (i)    the incurrence by the Company of additional Indebtedness under
      one or more Credit Facilities in an amount not to exceed $1.2 billion
      outstanding at any time (plus the amount of any pay-in-kind payments with
      respect thereto and any such Indebtedness required to finance Option
      Debt);

           (ii)   the incurrence by the Company of the Existing Indebtedness;

           (iii)  the incurrence by the Company of Indebtedness represented by
      the Securities (and any PIK Securities);

           (iv)   the incurrence by the Company of Indebtedness represented by
      Capital Lease Obligations, mortgage financings or purchase money
      obligations, in each case incurred for the purpose of financing all or any
      part of the purchase price or cost of construction or improvement of
      property, plant or equipment used in the business of the Company, in an
      aggregate principal amount, including all Permitted Refinancing
      Indebtedness incurred to refund, refinance or replace Indebtedness
      incurred pursuant to this clause (iv), not to exceed $35 million at any
      time outstanding;

           (v)    the incurrence by the Company of Permitted Refinancing
      Indebtedness in exchange for, or the net proceeds of which are used to
      refund, refinance or replace Indebtedness (other than intercompany
      Indebtedness) that was incurred under the first paragraph of this covenant
      or clauses (i), (ii) or (iv) of this paragraph;

           (vi)   the incurrence by the Company of intercompany Indebtedness
      between the Company and any of its Subsidiaries; provided that such
      Indebtedness shall be expressly subordinated to, and subject in right of
      payment to the prior payment in full in cash of, all amounts under the
      Securities to the same extent as the Securities are subordinated in right
      of payment to Senior Debt hereunder;

           (vii)  the incurrence by the Company of Hedging Obligations that are
      incurred in the normal course of business and consistent with past
      business practices for the purpose of fixing or hedging currency,
      commodity or interest rate risk (including with respect to any floating
      rate Indebtedness that is permitted by the terms of the Indenture to be
      outstanding in connection with the conduct of their respective
      businesses);

           (viii) the incurrence of Indebtedness solely in respect of bankers'
      acceptances, letters of credit, surety or performance bonds, all in the
      ordinary course of business; and

<PAGE>

                                                                              36

           (ix)  the incurrence by the Company of additional Indebtedness in an
      aggregate principal amount (or accreted value, as applicable) at any time
      outstanding, including all Permitted Refinancing Indebtedness incurred to
      refund, refinance or replace any other Indebtedness incurred pursuant to
      this clause (ix), not to exceed $35 million.

           For purposes of determining compliance with this covenant, in the
event that an item of proposed Indebtedness meets the criteria of more than one
of the categories of Permitted Debt described in clauses (i) through (ix) above
as of the date of incurrence thereof or is entitled to be incurred pursuant to
the first paragraph of this covenant as of the date of incurrence thereof, the
Company shall, in its sole discretion, classify (or later reclassify in whole or
in part, in its sole discretion) such item of Indebtedness in any manner that
complies with this covenant. Accrual of interest, the accretion of accreted
value and the payment of interest in the form of additional Indebtedness will
not be deemed to be an incurrence of Indebtedness for purposes of this covenant.

           For the avoidance of doubt, this Section 4.7 shall not apply to the
incurrence of any Indebtedness by any Subsidiary of the Company.

           Section 4.8 Restriction on Spin-Offs. Prior to the repayment in full
of all Obligations (as defined in the Credit Agreement) and other Senior Debt
(unless pursuant to the terms of the Credit Agreement, if applicable, and the
instruments governing any such other Senior Debt, the Company is permitted to
repurchase any Securities tendered following the occurrence of a Change of
Control in accordance with the provisions of Article III hereof, the Company
shall not effect one or more Spin-Offs in which it disposes, in the aggregate,
of one or more Spin-Cos having total Net Assets with a fair market value of more
than 55% of the fair market value of Company's total consolidated Net Assets at
the time of the first Spin-Off occurring after the date of this Indenture (in
each case as determined by a Qualified Appraiser within 120 days prior to any
such Spin-Off); provided, however, that in no event shall a Spin-Off of the POR
Spin-Co, in and of itself, be deemed to be a violation of the provisions of this
Section 4.8 if such Spin-Off is the first Spin-Off occurring after the date of
this Indenture.

           Section 4.9 Pass-Through Dividends. Subject to the record date
provisions described below, the Company shall pay to each Holder, an amount per
Security, in cash, equal to the Cash Dividends, if any, paid by the Company per
share of Common Stock multiplied by the principal amount of such Security
divided by the Conversion Price in effect on the record date for such payment (a
"Pass-Through Dividend"). Pass-Through Dividends, if any, will be payable on the
payment date of each such Pass-Through Dividend to Holders as of the record date
for determination of the stockholders entitled to receive each such Pass-Through
Dividend.

           Section 4.10 144A Securities Determination. Within five Business Days
following the Pricing Period, the Company shall provide to the Trustee and the
Securityholders a determination of whether the Securities meet the requirements
of Rule 144A(d)(3)(i) and (ii) of Rule 144A. Within five Business Days following
the issuance of each PIK Security, the Company shall provide to the Trustee and
the Securityholders a determination of whether such PIK Security meets the
requirements of Rule 144A(d)(3)(i) and (ii) of Rule 144A. The Trustee and the
Securityholders shall be entitled to rely on any and all such determinations for
purposes of transfer or sale of the securities.

<PAGE>

                                                                              37

                                   ARTICLE V

                                  SUBORDINATION

           Section 5.1 Agreement of Subordination. The Company covenants and
agrees, and each Holder of Securities issued hereunder by its acceptance thereof
likewise covenants and agrees, that all Securities shall be issued subject to
the provisions of this Article 5; and each Person holding any Security, whether
upon original issue or upon transfer, assignment or exchange thereof, accepts
and agrees to be bound by such provisions.

           The payment of the principal of and interest (including the payment
of the Change of Control Purchase Price and Liquidated Damages, if any, but
excluding Pass-Through Dividends, if any) on all Securities issued hereunder
shall, to the extent and in the manner hereinafter set forth, be subordinated
and subject in right of payment to the prior payment in full in cash or payment
satisfactory to the holders of Senior Debt of all Senior Debt, whether
outstanding at the date of this Indenture or thereafter incurred.

           No provision of this Article 5 shall prevent the occurrence of any
Default or Event of Default hereunder.

           Section 5.2 Payments To Holders. No payment shall be made with
respect to the principal of or interest (including the payment of the Change of
Control Purchase Price and Liquidated Damages, if any, but excluding
Pass-Through Dividends, if any) on the Securities, except payments and
distributions made by the Trustee as permitted by Section 5.5, if:

                (i)  a default in the payment of principal, premium, interest,
      rent or other payment obligations due on any Senior Debt (including any
      failure by the Company to pay any amounts required to be paid under
      Section 3.8 of the Credit Agreement) occurs and is continuing (or, in the
      case of Senior Debt for which there is a period of grace, in the event of
      such a default that continues beyond the period of grace, if any,
      specified in the instrument or lease evidencing such Senior Debt), unless
      and until such default shall have been cured or waived or shall have
      ceased to exist; or

                (ii) a default, other than a payment default, on any Designated
      Senior Debt occurs and is continuing that permits holders of such
      Designated Senior Debt to accelerate its maturity (or, in the case of a
      lease constituting Designated Senior Debt, that permits the landlord under
      such lease either to terminate the lease or to require the Company to make
      an irrevocable offer to terminate the lease following an event of default
      thereunder) and the Trustee receives a notice of the default (a "Payment
      Blockage Notice") from a Representative or holder of Designated Senior
      Debt or the Company.

           Subject to the provisions of Section 5.5, if the Trustee receives any
Payment Blockage Notice pursuant to clause (ii) above, no subsequent Payment
Blockage Notice shall be effective for purposes of this Section unless and until
(a) at least 420 days shall have elapsed since the initial effectiveness of the
immediately prior Payment Blockage Notice; and (b) all scheduled payments on the
Securities that have come due have been paid in full in cash. No nonpayment
default that existed or was continuing on the date of delivery of any Payment

<PAGE>

                                                                              38

Blockage Notice to the Trustee (unless such default was waived, cured or
otherwise ceased to exist and thereafter subsequently reoccurred) shall be, or
be made, the basis for a subsequent Payment Blockage Notice.

           The Company may and shall resume payments on and distributions in
respect of the Securities upon the earlier of:

           (a) in the case of a default referred to in clause (i) above, the
date upon which the default is cured or waived or ceases to exist, or

           (b) in the case of a default referred to in clause (ii) above, the
earlier of (A) the date on which such default is cured or waived or ceases to
exist or (B) 240 days after the date on which the applicable Payment Blockage
Notice is received by the Trustee, if the maturity of such Designated Senior
Debt has not been accelerated, unless this Article 5 otherwise prohibits the
payment or distribution at the time of such payment or distribution; provided,
that if such Designated Senior Debt has been accelerated (or, in the case of a
Capital Lease Obligation constituting Designated Senior Debt, if as a result of
such default the landlord under such Capital Lease Obligation has given the
Company notice of its intention to terminate such Capital Lease Obligation or to
require the Company to make an irrevocable offer to terminate the Capital Lease
Obligation following an event of default thereunder), the Company shall make no
payments on or distributions in respect of the Securities until such Designated
Senior Debt has been paid in full in cash or other payment satisfactory to the
holders of that Designated Senior Debt or such acceleration (or terminated, in
the case of a lease constituting Designated Senior Debt) has been cured or
waived.

           Upon any payment by the Company, or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any dissolution or winding-up or liquidation or reorganization of
the Company (whether voluntary or involuntary) or in bankruptcy, insolvency,
receivership or similar proceedings, all amounts due or to become due upon all
Senior Debt shall first be paid in full in cash, or other payments satisfactory
to the holders of Senior Debt, before any payment is made on account of the
principal of or interest (including the payment of the Change of Control
Purchase Price and Liquidated Damages, if any, but excluding Pass-Through
Dividends, if any) on the Securities (except payments made pursuant to Article 9
from monies deposited with the Trustee pursuant thereto prior to commencement of
proceedings for such dissolution, winding-up, liquidation or reorganization, so
long as such payments are not prohibited by Section 547 of the Bankruptcy Code);
and upon any such dissolution or winding-up or liquidation or reorganization of
the Company or bankruptcy, insolvency, receivership or other proceeding, any
payment by the Company, or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to which the Holders of the
Securities or the Trustee would be entitled, except for the provision of this
Article 5, shall (except as aforesaid) be paid by the Company or by any
receiver, trustee in bankruptcy, liquidating trustee, agent or other Person
making such payment or distribution, or by the Holders of the Securities or by
the Trustee under this Indenture if received by them or it, directly to the
holders of Senior Debt (pro rata to such holders on the basis of the respective
amounts of Senior Debt held by such holders, or as otherwise required by law or
a court order) or their representative or representatives, or to the trustee or
trustees under any indenture pursuant to which any instruments evidencing any
Senior Debt may have been

<PAGE>

                                                                              39

issued, as their respective interests may appear, to the extent necessary to pay
all Senior Debt in full in cash, or other payment satisfactory to the holders of
Senior Debt, after giving effect to any concurrent payment or distribution to or
for the holders of Senior Debt, before any payment or distribution is made to
the Holders of the Securities or to the Trustee.

           For purposes of this Article 5, the words, "cash, property or
securities" shall not be deemed to include shares of Capital Stock of the
Company as reorganized or readjusted, or securities of the Company or any other
corporation provided for by a plan of reorganization or readjustment, the terms
of which are not substantially better for the holders thereof than the terms of
the Securities and the payment of which is subordinated, at least to the extent
provided in this Article 5 with respect to the Securities, to the payment of all
Senior Debt which may at the time be outstanding; provided that (i) the Senior
Debt is (A) assumed without modification and without alteration of the legal,
equitable and contractual rights of holders of the Senior Debt by the new
corporation, if any, resulting from any reorganization or readjustment, or (B)
the legal, equitable and contractual rights of the holders of the Senior Debt
are reinstated in accordance with Section 1124 of the Bankruptcy Code, or (ii)
the legal, equitable and contractual rights of the holders of the Senior Debt
under this Article V are not, without the consent of such holders, altered by
such reorganization or readjustment. The consolidation of the Company with, or
the merger of the Company into, another corporation or the liquidation or
dissolution of the Company following the conveyance, transfer or lease of its
property as an entirety, or substantially as an entirety, to another corporation
upon the terms and conditions provided for in Article 6 shall not be deemed a
dissolution, winding-up, liquidation or reorganization for the purposes of this
Section 5.2 if such other corporation shall, as a part of such consolidation,
merger, conveyance, transfer or lease, comply with the conditions stated in
Article 6.

           In the event of the acceleration of the Securities because of an
Event of Default, no payment or distribution shall be made to the Trustee or any
Holder of Securities in respect of the principal of or interest (including the
payment of the Change of Control Purchase Price and Liquidated Damages, if any,
but excluding Pass-Through Dividends, if any) on the Securities by the Company,
except payments and distributions made by the Trustee as permitted by Section
5.5, until all Senior Debt has been paid in full in cash or other payment
satisfactory to the holders of Senior Debt or such acceleration is rescinded in
accordance with the terms of this Indenture. If payment of the Securities is
accelerated because of an Event of Default, the Company shall notify, within one
Business Day, the holders of Senior Debt of such acceleration.

           In the event that, notwithstanding the foregoing provisions, any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities (including, without limitation, by way
of setoff or otherwise), prohibited by the foregoing, shall be received by the
Trustee or the Holders of the Securities before all Senior Debt is paid in full,
in cash or other payment satisfactory to the holders of Senior Debt, or
provision is made for such payment thereof in accordance with its terms in cash
or other payment satisfactory to the holders of Senior Debt, such payment or
distribution shall be held in trust for the benefit of and shall be paid over or
delivered to the holders of Senior Debt or their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any Senior Debt may have been issued, as their
respective interests may appear, as calculated by the Company, for application
to the payment of all Senior Debt remaining unpaid to the extent necessary to
pay all Senior Debt in full, in cash or other payment

<PAGE>

                                                                              40

satisfactory to the holders of Senior Debt, after giving effect to any
concurrent payment or distribution to or for the holders of such Senior Debt.

           Nothing in this Section 5.2 shall apply to claims of, or payments to,
the Trustee under or pursuant to Article 8. This Section 5.2 shall be subject to
the further provisions of Section 5.5.

           Section 5.3 Subrogation Of Securities

           Subject to the payment in full, in cash or other payment satisfactory
to the holders of Senior Debt of all Senior Debt, the rights of the Holders of
the Securities shall be subrogated to the extent of the payments or
distributions made to the holders of such Senior Debt pursuant to the provisions
of this Article 5 (equally and ratably with the holders of all indebtedness of
the Company which by its express terms is subordinated to other indebtedness of
the Company to substantially the same extent as the Securities are subordinated
and is entitled to like rights of subrogation) to the rights of the holders of
Senior Debt to receive payments or distributions of cash, property or securities
of the Company applicable to the Senior Debt until the principal of and interest
(including additional amounts, if any) on the Senior Debt shall be paid in full
in cash or other payment satisfactory to the holders of the Securities; and, for
the purposes of such subrogation, no payments or distributions to the holders of
the Senior Debt of any cash, property or securities to which the Holders of the
Securities or the Trustee would be entitled except for the provisions of this
Article 5, and no payment over pursuant to the provisions of this Article 5, to
or for the benefit of the holders of Senior Debt by Holders of the Securities or
the Trustee, shall, as between the Company, its creditors other than holders of
Senior Debt, and the Holders of the Securities, be deemed to be a payment by the
Company to or on account of the Senior Debt; and no payments or distributions of
cash, property or securities to or for the benefit of the Holders of the
Securities pursuant to the subrogation provisions of this Article 5, which would
otherwise have been paid to the holders of Senior Debt shall be deemed to be a
payment by the Company to or for the account of the Securities. It is understood
that the provisions of this Article 5 are and are intended solely for the
purposes of defining the relative rights of the Holders of the Securities, on
the one hand, and the holders of the Senior Debt, on the other hand.

           Nothing contained in this Article 5 or elsewhere in this Indenture or
in the Securities is intended to or shall impair, as among the Company, its
creditors other than the holders of Senior Debt, and the Holders of the
Securities, the obligation of the Company, which is absolute and unconditional,
to pay to the Holders of the Securities the principal of and interest (including
the payment of the Change of Control Purchase Price, Liquidated Damages and
Pass-Through Dividends, if any) on the Securities as and when the same shall
become due and payable in accordance with their terms, or is intended to or
shall affect the relative rights of the Holders of the Securities and creditors
of the Company other than the holders of the Senior Debt, nor shall anything
herein or therein prevent the Trustee or the Holder of any Security from
exercising all remedies otherwise permitted by applicable law upon default under
this Indenture, subject to the rights, if any, under this Article 5 of the
holders of Senior Debt in respect of cash, property or securities of the Company
received upon the exercise of any such remedy.

           Upon any payment or distribution of assets of the Company referred to
in this Article 5, the Trustee, subject to the provisions of Article 8, and the
Holders of the Securities

<PAGE>

                                                                              41

shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction in which such bankruptcy, dissolution, winding-up,
liquidation or reorganization proceedings are pending, or a certificate of the
receiver, trustee in bankruptcy, liquidating trustee, agent or other person
making such payment or distribution, delivered to the Trustee or to the Holders
of the Securities, for the purpose of ascertaining the persons entitled to
participate in such distribution, the holders of the Senior Debt and other
indebtedness of the Company, the amount thereof or payable thereon and all other
facts pertinent thereto or to this Article 5.

           Section 5.4 Authorization To Effect Subordination. Each Holder of a
Security by the Holder's acceptance thereof authorizes and directs the Trustee
on the Holder's behalf to take such action as may be necessary or appropriate to
effectuate the subordination as provided in this Article 5 and appoints the
Trustee to act as the Holder's attorney-in-fact for any and all such purposes.

           Section 5.5 Notice To Trustee. The Company shall give prompt written
notice in the form of an Officers' Certificate to a Responsible Officer and to
any Paying Agent of any fact known to the Company which would prohibit the
making of any payment of monies to or by the Trustee or any Paying Agent in
respect of the Securities pursuant to the provisions of this Article 5.
Notwithstanding the provisions of this Article 5 or any other provision of this
Indenture, the Trustee shall not be charged with knowledge of the existence of
any facts which would prohibit the making of any payment of monies to or by the
Trustee in respect of the Securities pursuant to the provisions of this Article
5, unless and until a Responsible Officer shall have received written notice
thereof at the Corporate Trust Office from the Company (in the form of an
Officers' Certificate) or a Representative or a holder or holders of Senior Debt
or from any trustee thereof; and before the receipt of any such written notice,
the Trustee, subject to the provisions of Article 8, shall be entitled in all
respects to assume that no such facts exist; provided that if on a date not less
than one Business Day prior to the date upon which by the terms hereof any such
monies may become payable for any purpose (including, without limitation, the
payment of the principal of, or premium, if any, or interest on any Security)
the Trustee shall not have received, with respect to such monies, the notice
provided for in this Section 5.5, then, anything herein contained to the
contrary notwithstanding, the Trustee shall have full power and authority to
receive such monies and to apply the same to the purpose for which they were
received, and shall not be affected by any notice to the contrary which may be
received by it on or after such prior date. Notwithstanding anything in this
Article 5 to the contrary, nothing shall prevent any payment by the Trustee to
the Holders of monies deposited with it pursuant to Article 8, and any such
payment shall not be subject to the provisions of Article 5.

           The Trustee, subject to the provisions of Article 8, shall be
entitled to rely on the delivery to it of a written notice by a Representative
or a person representing himself to be a holder of Senior Debt (or a trustee on
behalf of such holder) to establish that such notice has been given by a
Representative or a holder of Senior Debt or a trustee on behalf of any such
holder or holders. In the event that the Trustee determines in good faith that
further evidence is required with respect to the right of any person as a holder
of Senior Debt to participate in any payment or distribution pursuant to this
Article 5, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Debt held by
such Person, the extent to which such Person is entitled to participate in such
payment or

<PAGE>

                                                                              42

distribution and any other facts pertinent to the rights of such Person under
this Article 5, and if such evidence is not furnished the Trustee may defer any
payment to such Person pending judicial determination as to the right of such
Person to receive such payment.

           Section 5.6 Trustee's Relation To Senior Debt. The Trustee in its
individual capacity shall be entitled to all the rights set forth in this
Article 5 in respect of any Senior Debt at any time held by it, to the same
extent as any other holder of Senior Debt, and nothing in Article 8 or elsewhere
in this Indenture shall deprive the Trustee of any of its rights as such holder.

           With respect to the holders of Senior Debt, the Trustee undertakes to
perform or to observe only such of its covenants and obligations as are
specifically set forth in this Article 5, and no implied covenants or
obligations with respect to the holders of Senior Debt shall be read into this
Indenture against the Trustee. The Trustee shall not be deemed to owe any
fiduciary duty to the holders of Senior Debt and, subject to the provisions of
Article 8, the Trustee shall not be liable to any holder of Senior Debt if it
shall pay over or deliver to Holders of Securities, the Company or any other
person money or assets to which any holder of Senior Debt shall be entitled by
virtue of this Article 5 or otherwise.

           Section 5.7 No Impairment Of Subordination.

           (a) No right of any present or future holder of any Senior Debt to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
noncompliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof which any such holder may have or
otherwise be charged with.

           (b) Without the limiting the generality of subsection (a) of this
Section 5.7, the holders of Senior Debt may, at any time and from time to time,
without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Holders of the Securities
and without impairing or releasing the subordination provided in this Article V
or the obligations hereunder of the Holders of the Securities to the holders of
Senior Debt, do any one or more of the following: (1) change the manner, place
or terms of payment or extend the time of payment of, or renew or alter, Senior
Debt or any instrument evidencing the same or any agreement under which Senior
Debt is outstanding; (2) sell, exchange, release or otherwise deal with any
property pledged, mortgaged or otherwise securing Senior Debt; (3) release any
person liable in any manner for the collection or payment of Senior Debt; and
(4) exercise or refrain from exercising any rights against the Company and any
other person; provided that in no event shall any such actions limit the right
of the Holders of the Securities to take any action to accelerate the maturity
of the Securities pursuant to Article VII hereof or to pursue any rights or
remedies hereunder or under applicable laws if the taking of such action does
not otherwise violate the terms of the Indenture.

           Section 5.8 Certain Conversions Deemed Payment. For the purposes of
this Article 5 only, (1) neither the issuance and delivery of junior securities
upon conversion of Securities in accordance with Article 11, the payment of
interest in the form of PIK Securities

<PAGE>

                                                                              43

nor the payment of Pass-Through Dividends shall be deemed to constitute a
payment or distribution on account of the principal of or interest on Securities
or on account of the purchase or other acquisition of Securities, and (2) the
payment, issuance or delivery of cash (except in satisfaction of fractional
shares pursuant to Section 11.2), property or securities (other than junior
securities) upon conversion of a Security shall be deemed to constitute payment
on account of the principal of such Security. For the purposes of this Section
5.8, the term "junior securities" means (a) shares of any stock of any class of
the Company, or (b) securities of the Company which are subordinated in right of
payment to all Senior Debt which may be outstanding at the time of issuance or
delivery of such securities to substantially the same extent as, or to a greater
extent than, the Securities are so subordinated as provided in this Article.
Nothing contained in this Article 5 or elsewhere in this Indenture or in the
Securities is intended to or shall impair the right, which is absolute and
unconditional, of the Holder of any Security to convert such Security in
accordance with Article 11.

           Section 5.9 Article Applicable To Paying Agents. If at any time any
Paying Agent other than the Trustee shall have been appointed by the Company and
be then acting hereunder, the term "Trustee" as used in this Article shall
(unless the context otherwise requires) be construed as extending to and
including such Paying Agent within its meaning as fully for all intents and
purposes as if such Paying Agent were named in this Article in addition to or in
place of the Trustee.

           Section 5.10 Senior Debt Entitled To Rely. The holders of Senior Debt
(including, without limitation, Designated Senior Debt) shall have the right to
rely upon this Article 5, and no amendment or modification of the provisions
contained herein shall diminish the rights of such holders unless such holders
shall have agreed in writing thereto.

           Section 5.11 Continuing Offer. This Article V shall constitute a
continuing offer to all persons who, in reliance upon such provisions, become
holders of, or continue to hold Senior Debt; and such provisions are made for
the benefit of the holders of Senior Debt; and such holders are made obligees
hereunder and they or each of them individually or through their representative
may enforce such provisions.

           Section 5.12 Authorization of the Initial Tranche A Lender to File
Claims, etc. In the event that (i) a bankruptcy proceeding shall be commenced by
or against the Company and (ii) on or before the date which is ten Business Days
before the last date upon which the Trustee is required to file a proof of claim
in such bankruptcy proceeding the Trustee (if the claims of the Holders have not
been scheduled by the Company in its filing as undisputed) has not filed a proof
of claim in respect of the Securities, then, in such event, each Holder hereby
irrevocably authorizes and empowers (without imposing any obligation on) the
Initial Tranche A Lender (as defined in the Intercreditor Agreement) under the
circumstances set forth in Section 2.2 of the Intercreditor Agreement to file
such proof of claim in respect of the Securities owing to the Holders. The
proceeds of all such claims shall be applied as required by the provisions of
the Indenture. Each Holder hereby authorizes the Trustee to irrevocably appoint
the Initial Tranche A Lender as its attorney-in-fact and to execute and deliver
to the Initial Tranche A Lender all such further instruments confirming the
foregoing appointment and authorization, and all such proofs of claim and other
instruments, and to take all such other action as may be reasonably requested by
the Initial Tranche A Lender in order to enable the Initial Tranche A Lender to,

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                                                                              44

enforce all claims upon or in respect of the Securities owing to the Holders.
Any such Lender shall deliver copies of claims or instruments to the Trustee
with instructions for the Trustee to deliver the same to each Holder. In the
event that the Tranche A Loans and the other Senior Obligations (each as defined
in the Intercreditor Agreement) then due and payable have been repaid in full,
the Administrative Agent (as defined in the Credit Agreement) shall have the
rights of the Initial Tranche A Lender hereunder.

           Section 5.13 Section 5.13 Limitation on Remedies.

           (a) During any Standstill Period, except as expressly permitted by
and subject to the terms of this Indenture, the Holders shall have no right to
(i) take any action or institute any proceedings to collect or enforce the
payment of any of the principal of or interest (including the payment of the
Change of Control Purchase Price and Liquidated Damages, if any, but excluding
Pass-Through Dividends, if any) or other payment obligation of the Company in
respect of the Securities under the Indenture or the Purchase Agreement, (ii)
commence, prosecute or participate in any administrative, legal or equitable
action against the Company relating to the Securities (it being understood that
the Holders of the Securities may participate in any such action in which any
Lender (as defined in the Credit Agreement) or its representative is
participating (and not commenced by the Holders of the Securities in such
capacity) to the extent necessary to maintain their claims to, and to preserve
their rights in respect of, the Securities), (iii) commence or join in the
commencement of a proceeding under any bankruptcy, insolvency, liquidation,
reorganization or other similar law in their capacity as Holders of Securities
(it being understood that the Holders of the Securities may participate in any
such proceeding not commenced by the Holders of the Securities in such capacity
to the extent necessary to maintain their claims to, and to preserve their
rights in respect of, the Securities), or (iv) direct the Trustee to do any of
the foregoing. As used herein, "Standstill Period" shall mean any period during
which payment of principal of or interest (including the payment of the Change
of Control Purchase Price and Liquidated Damages, if any, but excluding
Pass-Through Dividends, if any) on the Securities is not permitted pursuant to
the first paragraph of Section 5.2 as a result of a default under the Credit
Agreement, provided, however, that in no event shall such period exceed 240
days.

           (b) If any Holder, in violation of the provisions herein set forth,
shall commence, prosecute or participate in any suit, action, case or proceeding
against the Company, any Lender may, at the expense of the Holders, intervene
and interpose as a defense or plea the provisions set forth herein, and such
Lender shall, in any event, be entitled to restrain the enforcement of the
payment provisions of the Securities in its own name in the same suit, action,
case or proceeding or in any independent suit, action, case or proceeding.

                                   ARTICLE VI

                              SUCCESSOR CORPORATION

           Section 6.1 When Company May Merge or Transfer Assets. The Company
shall not consolidate with or merge with or into any other Person or convey,
transfer, sell, lease or otherwise dispose of the Designated Asset Amount of its
properties and assets to any Person, unless:

<PAGE>

                                                                              45

     (a) either (1) the Company shall be the continuing corporation or (2) the
Person (if other than the Company) formed by such consolidation or into which
the Company is merged or the Person which acquires by conveyance, transfer or
lease the Designated Asset Amount of the properties and assets of the Company
(i) shall be organized and validly existing under the laws of the United States
or any State thereof or the District of Columbia and (ii) shall expressly
assume, by an indenture supplemental hereto, executed and delivered to the
Trustee, in form reasonably satisfactory to the Trustee, all of the obligations
of the Company under the Securities and this Indenture;

     (b) immediately after giving effect to such transaction, no Event of
Default, and no event that, after notice or lapse of time or both, would become
an Event of Default, shall have occurred and be continuing; and

     (c) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease and, if a supplemental indenture is
required in connection with such transaction, such supplemental indenture,
comply with this Article 6 and that all conditions precedent herein provided for
relating to such transaction have been satisfied.

     (d) The successor Person formed by such consolidation or into which the
Company is merged or the successor Person to which such conveyance, transfer or
lease is made shall succeed to, and be substituted for, and may exercise every
right and power of, the Company under this Indenture with the same effect as if
such successor had been named as the Company herein; and thereafter, except in
the case of a lease and obligations the Company may have under a supplemental
indenture, the Company shall be discharged from all obligations and covenants
under this Indenture and the Securities. Subject to Section 10.6, the Company,
the Trustee and the successor Person shall enter into a supplemental indenture
to evidence the succession and substitution of such successor Person and such
discharge and release of the Company.

                                  ARTICLE VII

                              DEFAULTS AND REMEDIES

     Section 7.1 Events of Default. So long as any Securities are outstanding,
each of the following shall be an "Event of Default":

     (1) the Company defaults in the payment of the principal amount on any
Security when the same becomes due and payable at its Stated Maturity, whether
or not prohibited by the provisions of Article 5;

     (2) the Company defaults in its obligation to repurchase any Security, or
any portion thereof, upon the exercise by the Holder of such Holder's right to
require the Company to purchase such Securities pursuant to and in accordance
with Section 3.1 hereof, whether or not prohibited by the provisions of Article
5;

     (3) the Company defaults in the payment of any accrued and unpaid interest,
including the payment of any Liquidated Damages or Pass-Through Dividends on any
Security,

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                                                                              46

or any other amount due on any Securities, in each case when due and payable,
and continuance of such default for a period of 30 days, whether or not
prohibited by the provisions of Article 5;

     (4) the Company fails to comply with any of its agreements or covenants in
the Securities or this Indenture (other than those referred to in clause (1)
through (3) above) and such failure continues for a period of 60 consecutive
days after receipt by the Company of a Notice of Default;

     (5) a default under any indebtedness for money borrowed by the Company or
any Significant Subsidiary in an aggregate outstanding principal amount of $150
million or more, for a period of 30 days after written notice of default is
given to the Company by the Trustee or to the Company and the Trustee by Holders
of not less than 25% in aggregate principal amount of the Securities then
outstanding, which default results in the acceleration of such indebtedness,
unless such acceleration is waived, cured, rescinded or annulled or unless such
indebtedness is discharged; it being understood, however, for the avoidance of
doubt that to the extent that any Indebtedness of PG&E has been accelerated and
is subject to the Pacific Gas and Electric Company Bankruptcy, Case No. 01 30923
DM, such acceleration shall not be deemed to constitute a default or event of
default hereunder;

     (6) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any of its Subsidiaries
that is a Significant Subsidiary, in an involuntary case or proceeding under the
Bankruptcy Code or any other applicable bankruptcy, insolvency, reorganization
or other similar law or (ii) a decree or order adjudging the Company or any of
its Subsidiaries that is a Significant Subsidiary, as bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company or any of its
Subsidiaries that is a Significant Subsidiary, under the Bankruptcy Code or any
other applicable law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and the continuance of any such decree or order for relief or any
such other decree or order unstayed and in effect for a period of 60 consecutive
days; it being understood, however, for the avoidance of doubt that the Pacific
Gas and Electric Company Bankruptcy, Case No. 01 30923 DM, shall not be deemed
to constitute a default or event of default hereunder; or

     (7) the commencement by the Company or any of its Subsidiaries that is a
Significant Subsidiary, of a voluntary case or proceeding under the Bankruptcy
Code or any other applicable bankruptcy, insolvency, reorganization or other
similar law or of any other case or proceeding to be adjudicated a bankrupt or
insolvent, or the consent by the Company or any of its Subsidiaries that is a
Significant Subsidiary, to the entry of a decree or order for relief in respect
of the Company or any of its Subsidiaries that is a Significant Subsidiary, in
an involuntary case or proceeding under the Bankruptcy Code or any other
applicable bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against the
Company, or the filing by the Company or any of its Subsidiaries that is a
Significant Subsidiary, of a petition or answer or consent seeking
reorganization or relief under any applicable law, or the consent by the Company
to the filing of such petition or to the appointment of or the taking possession
by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of any substantial part of its property, or

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                                                                              47

the making by the Company or any of its Subsidiaries that is a Significant
Subsidiary, of an assignment for the benefit of creditors, or the admission by
the Company or any of its Subsidiaries that is a Significant Subsidiary, in
writing of its inability to pay its debts generally as they become due; it being
understood, however, for the avoidance of doubt that the Pacific Gas and
Electric Company Bankruptcy, Case No. 01 30923 DM, shall not be deemed to
constitute a default or event of default hereunder.

     A Default under clause (4) above is not an Event of Default until the
Trustee notifies the Company, or the Holders of at least 25% in aggregate
principal amount of the Securities at the time outstanding notify the Company
and the Trustee, of the Default and the Company does not cure such Default (and
such Default is not waived) within the time specified in clause (4) above after
receipt of such notice. Any such notice must specify the Default, demand that it
be remedied and state that such notice is a "Notice of Default."

     The Trustee shall, within 90 days of the occurrence of a Default, give to
the Holders of the Securities notice of all uncured Defaults known to it and
written notice of any event which with the giving of notice or the lapse of
time, or both, would become an Event of Default, its status and what action the
Company is taking or proposes to take with respect thereto; provided, however,
the Trustee shall be protected in withholding such notice if it, in good faith,
determines that the withholding of such notice is in the best interest of such
Holders, except in the case of a Default under clauses (1), (2), (3) or (4)
above.

     Section 7.2 Acceleration. If an Event of Default (other than an Event of
Default specified in Section 7.1(6) or (7) with respect to the Company) occurs
and is continuing, the Trustee by notice to the Company, or the Holders of at
least 25% in aggregate principal amount of the Securities at the time
outstanding by notice to the Company and the Trustee, may declare the principal
amount plus accrued and unpaid interest, including any Liquidated Damages or
Pass-Through Dividends, if any, on all the Securities to be immediately due and
payable. The Trustee shall deliver a copy of any such notice to the
Administrative Agent (as defined in the Credit Agreement) under the Credit
Agreement and to the Initial Tranche A Lender (as defined in the Intercreditor
Agreement), but the Trustee's failure to deliver a copy of any such notice to
the Administrative Agent or the Initial Tranche A Lender shall not impair or
affect the validity of such notice and the Trustee will have no liability to the
Administrative Agent or the Initial Tranche A Lender with respect thereto. Upon
such a declaration, such accelerated amount shall be due and payable
immediately. If an Event of Default specified in Section 7.1(6) or (7) occurs
(with respect to the Company) and is continuing, the principal amount plus
accrued and unpaid interest, including any Liquidated Damages or Pass-Through
Dividends, if any, on all the Securities shall become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Securityholders. The Holders of a majority in aggregate principal amount of the
Securities at the time outstanding, by notice to the Trustee (and without notice
to any other Securityholder) may rescind an acceleration and its consequences if
the rescission would not conflict with any judgment or decree and if all
existing Events of Default have been cured or waived except nonpayment of the
principal amount plus accrued and unpaid interest, including any Liquidated
Damages or Pass-Through Dividends, if any, that have become due solely as a
result of acceleration and if all amounts due to the Trustee under Section 8.7
have been paid. No such rescission shall affect any subsequent Default or impair
any right consequent thereto.

<PAGE>

                                                                              48

     Section 7.3 Other Remedies. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of the principal amount plus accrued and unpaid interest, including Change of
Control Purchase Price, Liquidated Damages or Pass-Through Dividends, if any, on
the Securities or to enforce the performance of any provision of the Securities
or this Indenture.

     The Trustee may maintain a proceeding even if the Trustee does not possess
any of the Securities or does not produce any of the Securities in the
proceeding. A delay or omission by the Trustee or any Securityholder in
exercising any right or remedy accruing upon an Event of Default shall not
impair the right or remedy or constitute a waiver of, or acquiescence in, the
Event of Default. No remedy is exclusive of any other remedy. All available
remedies are cumulative.

     Section 7.4 Waiver of Past Defaults. The Holders of a majority in aggregate
principal amount of the Securities at the time outstanding, by notice to the
Trustee (and without notice to any other Securityholder), may waive an existing
Default and its consequences except (i) an Event of Default described in Section
7.1(1), 7.1(2) or 7.1(3), (ii) a Default in respect of a provision that under
Section 10.2 cannot be amended without the consent of each Securityholder
affected or (iii) a Default which constitutes a failure to convert any Security
in accordance with the terms of Article 11. When a Default is waived, it is
deemed cured, but no such waiver shall extend to any subsequent or other Default
or impair any consequent right. This Section 7.4 shall be in lieu of Section
316(a)(1)(B) of the TIA and such Section 316(a)(1)(B) is hereby expressly
excluded from this Indenture, as permitted by the TIA.

     Section 7.5 Control by Majority. The Holders of a majority in aggregate
principal amount of the Securities at the time outstanding may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or of exercising any trust or power conferred on the Trustee. However,
the Trustee may refuse to follow any direction that conflicts with law or this
Indenture or that the Trustee determines in good faith is unduly prejudicial to
the rights of other Securityholders or would involve the Trustee in personal
liability unless the Trustee is offered indemnity satisfactory to it. This
Section 7.5 shall be in lieu of Section 316(a)(1)(A) of the TIA and such Section
316(a)(1)(A) is hereby expressly excluded from this Indenture, as permitted by
the TIA.

     Section 7.6 Limitation on Suits. A Securityholder may not pursue any remedy
with respect to this Indenture or the Securities unless:

     (1)  the Holder gives to the Trustee written notice stating that an Event
          of Default is continuing;

     (2)  the Holders of at least 25% in aggregate principal amount of the
          Securities at the time outstanding make a written request to the
          Trustee to pursue the remedy;

     (3)  the Trustee does not comply with the request within 60 days after
          receipt of such notice, request and offer of security or indemnity;
          and

<PAGE>

                                                                              49

     (4)  the Holders of a majority in aggregate principal amount of the
          Securities at the time outstanding do not give the Trustee a direction
          inconsistent with the request during such 60-day period.

     A Securityholder may not use this Indenture to prejudice the rights of any
other Securityholder or to obtain a preference or priority over any other
Securityholder.

     Section 7.7 Rights of Holders to Receive Payment. The right of any Holder
to receive payment of the principal amount, the Change of Control Purchase
Price, Pass-Through Dividends, Liquidated Damages or interest in respect of the
Securities held by such Holder, on or after the respective due dates expressed
in the Securities, and to convert the Securities in accordance with Article 11,
or, except as provided in Section 5.13, to bring suit for the enforcement of any
such payment on or after such respective dates or the right to convert, shall
not be impaired or affected adversely without the consent of such Holder.

     Section 7.8 Collection Suit by Trustee. If an Event of Default described in
Section 7.1(1), (2), (3) or (4) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company for the whole amount owing with respect to the Securities and the
amounts provided for in Section 8.7.

     Section 7.9 Trustee May File Proofs of Claim. In case of the pendency of
any receivership, insolvency, liquidation, bankruptcy, reorganization,
arrangement, adjustment, composition or other judicial proceeding relative to
the Company or any other obligor upon the Securities or the property of the
Company or of such other obligor or their creditors, the Trustee (irrespective
of whether the principal amount, Change of Control Purchase Price, Pass-Through
Dividends, Liquidated Damages or interest in respect of the Securities shall
then be due and payable as therein expressed or by declaration or otherwise and
irrespective of whether the Trustee shall have made any demand on the Company
for the payment of any such amount) shall be entitled and empowered, by
intervention in such proceeding or otherwise,

     (a) to file and prove a claim for the whole amount of the principal amount,
Change of Control Purchase Price, Pass-Through Dividends, Liquidated Damages or
interest and to file such other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee (including any claim for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel or any other amounts due the Trustee under
Section 8.7) and of the Holders allowed in such judicial proceeding, and

     (b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any custodian,
receiver, assignee, trustee, liquidator, sequestrator or similar official in any
such judicial proceeding is hereby authorized by each Holder to make such
payments to the Trustee and, in the event that the Trustee shall consent to the
making of such payments directly to the Holders, to pay the Trustee any amount
due it for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 8.7.

     Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement,

<PAGE>

                                                                              50

adjustment or composition affecting the Securities or the rights of any Holder
thereof, or to authorize the Trustee to vote in respect of the claim of any
Holder in any such proceeding.

     Section 7.10 Priorities. If the Trustee collects any money pursuant to this
Article 7, it shall pay out the money in the following order:

     FIRST: to the Trustee for amounts due under Section 8.7;

     SECOND: to Securityholders for amounts due and unpaid on the Securities for
the principal amount, Change of Control Purchase Price, Pass-Through Dividends,
Liquidated Damages or interest, or any other amount due and owing on the
Securities or to the Holders from the Company, as the case may be, ratably,
without preference or priority of any kind, according to such amounts due and
payable on the Securities; and

     THIRD: the balance, if any, to the Company.

     The Trustee may fix a record date and payment date for any payment to
Securityholders pursuant to this Section 7.10. At least 15 days before such
record date, the Trustee shall mail to each Securityholder and the Company a
notice that states the record date, the payment date and the amount to be paid.

     Section 7.11 Undertaking for Costs. In any suit for the enforcement of any
right or remedy under this Indenture or in any suit against the Trustee for any
action taken or omitted by it as Trustee, a court in its discretion may require
the filing by any party litigant (other than the Trustee) in the suit of an
undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees and expenses,
against any party litigant in the suit, having due regard to the merits and good
faith of the claims or defenses made by the party litigant. This Section 7.11
does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section
8.7 or a suit by Holders of more than 10% in aggregate principal amount of the
Securities at the time outstanding. This Section 7.11 shall be in lieu of
Section 315(e) of the TIA and such Section 315(e) is hereby expressly excluded
from this Indenture, as permitted by the TIA.

     Section 7.12 Waiver of Stay, Extension or Usury Laws. The Company covenants
(to the extent that it may lawfully do so) that it will not at any time insist
upon, or plead, or in any manner whatsoever claim or take the benefit or
advantage of, any stay or extension law or any usury or other law wherever
enacted, now or at any time hereafter in force, which would prohibit or forgive
the Company from paying all or any portion of the principal amount or Change of
Control Purchase Price in respect of Securities, Pass-Through Dividends,
Liquidated Damages or any interest on such amounts, as contemplated herein, or
which may affect the covenants or the performance of this Indenture; and the
Company (to the extent that it may lawfully do so) hereby expressly waives all
benefit or advantage of any such law, and covenants that it will not hinder,
delay or impede the execution of any power herein granted to the Trustee, but
will suffer and permit the execution of every such power as though no such law
had been enacted.

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                                                                              51

                                  ARTICLE VIII

                                     TRUSTEE

     Section 8.1 Duties of Trustee. (a) If an Event of Default has occurred and
is continuing, the Trustee shall exercise the rights and powers vested in it by
this Indenture and use the same degree of care and skill in its exercise as a
prudent person would exercise or use under the circumstances in the conduct of
such person's own affairs.

     (b) Except during the continuance of an Event of Default:

     (1)  the Trustee need perform only those duties that are specifically set
          forth in this Indenture and no others; and

     (2)  in the absence of bad faith on its part, the Trustee may conclusively
          rely, as to the truth of the statements and the correctness of the
          opinions expressed therein, upon certificates or opinions furnished to
          the Trustee conforming to the requirements of this Indenture, but in
          the case of any such certificates or opinions which by any provision
          hereof are specifically required to be furnished to the Trustee, the
          Trustee shall examine the certificates and opinions to determine
          whether or not they conform to the requirements of this Indenture, but
          need not confirm or investigate the accuracy of mathematical
          calculations or other facts stated therein. This Section 8.1(b) shall
          be in lieu of Section 315(a) of the TIA and such Section 315(a) is
          hereby expressly excluded from this Indenture, as permitted by the
          TIA.

     (c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act or its own willful misconduct, except
that:

     (1)  this Section (c) does not limit the effect of Section (b) of this
          Section 8.1;

     (2)  the Trustee shall not be liable for any error of judgment made in good
          faith by a Responsible Officer unless it is proved that the Trustee
          was negligent in ascertaining the pertinent facts; and

     (3)  the Trustee shall not be liable with respect to any action it takes or
          omits to take in good faith in accordance with a direction received by
          it pursuant to Section 7.5.

Subparagraphs (c)(1), (2) and (3) shall be in lieu of Sections 315(d)(1),
315(d)(2) and 315(d)(3) of the TIA and such Sections 315(d)(1), 315(d)(2) and
315(d)(3) are hereby expressly excluded from this Indenture, as permitted by the
TIA.

     (d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c), (e) and (f) of this Section 8.1.

<PAGE>

                                                                              52

     (e) Subject to Section 8.1(c), the Trustee may refuse to perform any duty
or exercise any right or power or extend or risk its own funds or otherwise
incur any financial liability unless it receives indemnity satisfactory to it
against any loss, liability or expense.

     (f) Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee (acting in
any capacity hereunder) shall be under no liability for interest on any money
received by it hereunder unless otherwise agreed in writing with the Company.

     Section 8.2 Rights of Trustee. Subject to its duties and responsibilities
under the TIA,

     (a) the Trustee may conclusively rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document believed by it
to be genuine and to have been signed or presented by the proper party or
parties;

     (b) whenever in the administration of this Indenture the Trustee shall deem
it desirable that a matter be proved or established prior to taking, suffering
or omitting any action hereunder, the Trustee (unless other evidence be herein
specifically prescribed) may, in the absence of bad faith on its part,
conclusively rely upon an Officers' Certificate;

     (c) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder;

     (d) the Trustee shall not be liable for any action taken, suffered, or
omitted to be taken by it in good faith which it believes to be authorized or
within its rights or powers conferred under this Indenture;

     (e) subject to Section 8.1(c), the Trustee may consult with counsel
selected by it and any advice or Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken or suffered or
omitted by it hereunder in good faith and in accordance with such advice or
Opinion of Counsel;

     (f) the Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request, order or direction of
any of the Holders, pursuant to the provisions of this Indenture, unless such
Holders shall have offered to the Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which may be incurred therein or
thereby;

     (g) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any Board
Resolution;

     (h) the Trustee shall not be bound to make any investigation into the facts
or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice,

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                                                                              53

request, direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters as it may
see fit, and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises
of the Company, personally or by agent or attorney at the sole cost of the
Company and shall incur no liability or additional liability of any kind by
reason of such inquiry or investigation;

     (i) the Trustee shall not be deemed to have notice of any Default or Event
of Default unless a Responsible Officer has actual knowledge thereof or unless
written notice of any event which is in fact such a default is received by the
Trustee at the Corporate Trust Office of the Trustee, and such notice references
the Securities and this Indenture;

     (j) the rights, privileges, protections, immunities and benefits given to
the Trustee, including, without limitation, its right to be indemnified, are
extended to, and shall be enforceable by, the Trustee in each of its capacities
hereunder, and to each agent, custodian and other person employed to act
hereunder; and

     (k) the Trustee may request that the Company deliver an Officers'
Certificate setting forth the names of individuals and/or titles of officers
authorized at such time to take specified actions pursuant to this Indenture,
which Officers' Certificate may be signed by any person authorized to sign an
Officers' Certificate, including any person specified as so authorized in any
such certificate previously delivered and not superseded.

     Section 8.3 Individual Rights of Trustee. The Trustee in its individual or
any other capacity may become the owner or pledgee of Securities and may
otherwise deal with the Company or its Affiliates with the same rights it would
have if it were not Trustee. Any Paying Agent, Registrar, Conversion Agent or
co-registrar may do the same with like rights. However, the Trustee must comply
with Sections 8.10 and 8.11.

     Section 8.4 Trustee's Disclaimer. The Trustee makes no representation as to
the validity or adequacy of this Indenture or the Securities, it shall not be
accountable for the Company's use or application of the proceeds from the
Securities, it shall not be responsible for any statement in the registration
statement for the Securities under the Securities Act or in any offering
document for the Securities, the Indenture or the Securities (other than its
certificate of authentication), or the determination as to which beneficial
owners are entitled to receive any notices hereunder.

     Section 8.5 Notice of Defaults. If a Default occurs and if it is known to
the Trustee, the Trustee shall give to each Securityholder notice of the Default
within 90 days after it occurs or, if later, within 15 days after it is known to
the Trustee, unless such Default shall have been cured or waived before the
giving of such notice. Notwithstanding the preceding sentence, except in the
case of a Default described in Section 7.1(1), (2), (3) or (4), the Trustee may
withhold the notice if and so long as a committee of Responsible Officers in
good faith determines that withholding the notice is in the interest of the
Securityholders. The preceding sentence shall be in lieu of the proviso to
Section 315(b) of the TIA and such proviso is hereby expressly excluded from
this Indenture, as permitted by the TIA. The Trustee shall not be

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                                                                              54

deemed to have knowledge of a Default unless a Responsible Officer has received
written notice of such Default, which notice specifically references this
Indenture and the Securities.

     Section 8.6 Reports by Trustee to Holders. Within 60 days after each May 15
beginning with the May 15 following the date of this Indenture, the Trustee
shall mail to each Securityholder and such others in compliance with TIA Section
313(a) a brief report dated as of such May 15 that complies with TIA Section
313(a), if required by such Section 313(a). The Trustee also shall comply with
TIA Section 313(b).

     A copy of each report at the time of its mailing to Securityholders shall
be filed with the SEC and each securities exchange, if any, on which the
Securities are listed. The Company agrees to notify the Trustee promptly
whenever the Securities become listed on any securities exchange and of any
delisting thereof.

     Section 8.7 Compensation and Indemnity. The Company agrees:

     (a) to pay to the Trustee from time to time such compensation as the
Company and the Trustee shall from time to time agree in writing for all
services rendered by it hereunder (which compensation shall not be limited (to
the extent permitted by law) by any provision of law in regard to the
compensation of a trustee of an express trust);

     (b) to reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any provision of this Indenture (including the reasonable compensation and the
expenses, advances and disbursements of its agents and counsel), except any such
expense, disbursement or advance as may be attributable to its negligence or bad
faith; and

     (c) to indemnify the Trustee or any predecessor Trustee and their agents
for, and to hold them harmless against, any loss, damage, claim, liability, cost
or expense (including attorney's fees and expenses, and taxes (other than taxes
based upon, measured by or determined by the income of the Trustee)) incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of this trust, including the costs and
expenses of defending itself against any claim (whether asserted by the Company
or any Holder or any other Person) or liability in connection with the exercise
or performance of any of its powers or duties hereunder.

     To secure the Company's payment obligations in this Section 8.7, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee, except amounts held in trust to pay the principal
amount, Change of Control Purchase Price, Liquidated Damages, Pass-Through
Dividends or interest, as the case may be, on particular Securities.

     The Company's payment obligations pursuant to this Section 8.7 shall
survive the discharge of this Indenture and the resignation or removal of the
Trustee. When the Trustee incurs expenses after the occurrence of a Default
specified in Section 7.1(6) or (7), the expenses including the reasonable
charges and expenses of its counsel, are intended to constitute expenses of
administration under any bankruptcy law.

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                                                                              55

     Section 8.8 Replacement of Trustee. The Trustee may resign by so notifying
the Company; provided, however, no such resignation shall be effective until a
successor Trustee has accepted its appointment pursuant to this Section 8.8. The
Holders of a majority in aggregate principal amount of the Securities at the
time outstanding may remove the Trustee by so notifying the Trustee and the
Company. The Company shall remove the Trustee if:

     (1) the Trustee fails to comply with Section 8.10;

     (2) the Trustee is adjudged bankrupt or insolvent;

     (3) a receiver or public officer takes charge of the Trustee or its
         property; or

     (4) the Trustee otherwise becomes incapable of acting.

     If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Company shall promptly appoint, by resolution of
its Board of Directors, a successor Trustee.

     A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company satisfactory in form and substance to
the retiring Trustee and the Company. Thereupon the resignation or removal of
the retiring Trustee shall become effective, and the successor Trustee shall
have all the rights, powers and duties of the Trustee under this Indenture. The
successor Trustee shall mail a notice of its succession to Securityholders. The
retiring Trustee shall promptly transfer all property held by it as Trustee to
the successor Trustee, subject to the lien provided for in Section 8.7.

     If a successor Trustee does not take office within 30 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of a majority in aggregate principal amount of the Securities at the
time outstanding may petition any court of competent jurisdiction at the expense
of the Company for the appointment of a successor Trustee.

     If the Trustee fails to comply with Section 8.10, any Securityholder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.

     Section 8.9 Successor Trustee by Merger. If the Trustee consolidates with,
merges or converts into, or transfers all or substantially all its corporate
trust business or assets to, another corporation, the resulting, surviving or
transferee corporation without any further act shall be the successor Trustee.

     Section 8.10 Eligibility; Disqualification. The Trustee shall at all times
satisfy the requirements of TIA Sections 310(a)(1) and (5) and 310(b). The
Trustee (or its parent holding company) shall have a combined capital and
surplus of at least $50,000,000 as set forth in its most recent published annual
report of condition. Nothing herein contained shall prevent the Trustee from
filing with the Commission the application referred to in the penultimate
paragraph of TIA Section 310(b).

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                                                                              56

     Section 8.11 Preferential Collection of Claims Against Company. The Trustee
shall comply with TIA Section 311(a), excluding any creditor relationship listed
in TIA Section 311(b). A Trustee who has resigned or been removed shall be
subject to TIA Section 311(a) to the extent indicated therein.

                                   ARTICLE IX

                             DISCHARGE OF INDENTURE

     Section 9.1 Discharge of Liability on Securities. If, after all Obligations
(as defined in the Credit Agreement) under the Credit Agreement have been fully
repaid, (i) the Company delivers to the Trustee all outstanding Securities
(other than Securities replaced or repaid pursuant to Section 2.7) for
cancellation or (ii) all outstanding Securities shall become due and payable
within one year, and, in each case, the Company deposits with the Trustee cash
sufficient to pay all amounts due and owing on all outstanding Securities (other
than Securities replaced pursuant to Section 2.7), and if in each case the
Company pays all other sums payable hereunder by the Company or otherwise
payable to the Holders in relation thereto, then this Indenture shall, subject
to Section 8.7, cease to be of further effect. The Trustee shall join in the
execution of a document prepared by the Company acknowledging satisfaction and
discharge of this Indenture on demand of the Company accompanied by an Officers'
Certificate and Opinion of Counsel and at the cost and expense of the Company.

     Section 9.2 Repayment to the Company. The Trustee and the Paying Agent
shall return to the Company upon written request any money or securities held by
them for the payment of any amount with respect to the Securities that remains
unclaimed for two years, subject to applicable unclaimed property law. After
return to the Company, Holders entitled to the money or securities must look to
the Company for payment as general creditors unless an applicable abandoned
property law designates another person and the Trustee and the Paying Agent
shall have no further liability to the Securityholders with respect to such
money or securities for that period commencing after the return thereof.

                                   ARTICLE X

                                   AMENDMENTS

     Section 10.1 Without Consent of Holders. The Company and the Trustee may
amend this Indenture or the Securities without the consent of any Securityholder
to:

     (a)  add to the covenants of the Company for the benefit of the Holders of
          Securities;

     (b)  surrender any right or power herein conferred upon the Company;

     (c)  provide for conversion rights of Holders of Securities if any
          reclassification or change of the Common Stock or any consolidation,
          merger or sale of all or substantially all of the Company's assets
          occurs;

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                                                                              57

     (d) provide for the assumption of the Company's obligations to the Holders
of Securities in the case of a merger, consolidation, conveyance, transfer or
lease pursuant to Article 6 hereof;

     (e) reduce the Conversion Price; provided, however, that such reduction in
the Conversion Price shall not adversely affect the interests of the Holders of
Securities (after taking into account tax and other consequences of such
reduction);

     (f) comply with the requirements of the SEC in order to effect or maintain
the qualification of this Indenture under the TIA;

     (g) cure any ambiguity, to correct or supplement any provision herein which
may be inconsistent with any other provision herein or which is otherwise
defective; provided, however, that such action pursuant to this clause (g) does
not, in the good faith opinion of the Board of Directors of the Company (as
evidenced by a Board Resolution), adversely affect the interests of the Holders
of Securities in any material respect; and

     (h) add or modify any other provisions herein with respect to matters or
questions arising hereunder which the Company and the Trustee may deem necessary
or desirable and that will not, in the good faith opinion of the Board of
Directors of the Company (as evidenced by a Board Resolution), adversely affect
the interests of the Holders of Securities.

     Section 10.2 With Consent of Holders. Except as provided below in this
Section 10.2, this Indenture or the Securities may be amended, modified or
supplemented, and noncompliance in any particular instance with any provision of
this Indenture or the Securities may be waived, in each case with the written
consent of the Holders of at least a majority of the principal amount of the
Securities at the time outstanding.

     Without the written consent or the affirmative vote of each Holder of
Securities affected thereby, an amendment or waiver under this Section 10.2 may
not:

     (a) change the maturity of the principal amount of, or the date any
installment of interest, including the payment of Liquidated Damages, is due on,
any Security;

     (b) reduce the principal amount of, or interest, including the payment of
Liquidated Damages payable on, or the Change of Control Purchase Price of, any
Security;

     (c) change the currency of any amount owed or owing under the Security or
any interest thereon from U.S. Dollars;

     (d) impair the right of any Holder to institute suit for the enforcement of
any payment or with respect to, or conversion of, any Security;

     (e) adversely affect, following the occurrence of a Change of Control, the
repurchase right of the Holders of the Securities as provided in Article III or
the right of the Holders of the Securities to convert any Security as provided
in Article XI;

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                                                                              58

     (f) modify any of the provisions of this Section 10.2, or reduce the
principal amount of outstanding Securities required to waive a default, except
to provide that certain other provisions of this Indenture cannot be modified or
waived without the consent of the Holder of each outstanding Security affected
thereby; or

     (g) reduce the percentage of the principal amount of the outstanding
Securities the consent of whose Holders is required for any such supplemental
indenture or the consent of whose Holders is required for any waiver provided
for in this Indenture.

     It shall not be necessary for the consent of the Holders under this Section
10.2 to approve the particular form of any proposed amendment, but it shall be
sufficient if such consent approves the substance thereof.

     After an amendment under this Section 10.2 becomes effective, the Company
shall mail to each Holder a notice briefly describing the amendment.

     Section 10.3 Compliance with Trust Indenture Act. Every supplemental
indenture executed pursuant to this Article shall comply with the TIA.

     Section 10.4 Revocation and Effect of Consents, Waivers and Actions. Until
an amendment, waiver or other action by Holders becomes effective, a consent
thereto by a Holder of a Security hereunder is a continuing consent by the
Holder and every subsequent Holder of that Security or portion of the Security
that evidences the same obligation as the consenting Holder's Security, even if
notation of the consent, waiver or action is not made on the Security. However,
any such Holder or subsequent Holder may revoke the consent, waiver or action as
to such Holder's Security or portion of the Security if the Trustee receives the
notice of revocation before the date the amendment, waiver or action becomes
effective. After an amendment, waiver or action becomes effective, it shall bind
every Securityholder.

     Section 10.5 Notation on or Exchange of Securities. Securities
authenticated and delivered after the execution of any supplemental indenture
pursuant to this Article may, and shall if required by the Trustee, bear a
notation in form approved by the Trustee as to any matter provided for in such
supplemental indenture. If the Company shall so determine, new Securities so
modified as to conform, in the opinion of the Trustee and the Board of
Directors, to any such supplemental indenture may be prepared and executed by
the Company and authenticated and delivered by the Trustee in exchange for
outstanding Securities.

     Section 10.6 Trustee to Sign Supplemental Indentures. The Trustee shall
sign any supplemental indenture authorized pursuant to this Article 10 if the
amendment contained therein does not adversely affect the rights, duties,
liabilities or immunities of the Trustee. If it does, the Trustee may, but need
not, sign such supplemental indenture. In signing such supplemental indenture
the Trustee shall receive, and (subject to the provisions of Section 8.1) shall
be fully protected in relying upon, an Officers' Certificate and an Opinion of
Counsel stating that such amendment is authorized or permitted by this
Indenture.

     Section 10.7 Effect of Supplemental Indentures. Upon the execution of any
supplemental indenture under this Article, this Indenture shall be modified in
accordance therewith, and such supplemental indenture shall form a part of this
Indenture for all purposes;

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                                                                              59

and every Holder of Securities theretofore or thereafter authenticated and
delivered hereunder shall be bound thereby.

                                   ARTICLE XI

                                   CONVERSIONS

     Section 11.1 Conversion Privilege. (a) Subject to and upon compliance with
the provisions of this Article 11, a Holder of a Security shall have the right,
at such Holder's option, to convert all or any portion (if the portion to be
converted is $1,000 or an integral multiple of $1,000, provided that, in the
case of any PIK Securities, the portion to be converted may be $1.00 or an
integral multiple of $1.00) of such Security into shares of Common Stock at the
Conversion Price in effect on the date of conversion, at any time prior to the
close of business on the Business Day prior to the Stated Maturity of the
Securities.

     (b) The Company shall, one Business Day following the Pricing Period,
provide to the Trustee the computation of the Conversion Price, which
determination shall be made in accordance with Section 11.10 and Section 11.11.
Upon receipt of the Company's calculation of the Conversion Price, the Trustee,
in the name and at the expense of the Company, shall notify the Holders of such
Conversion Price.

     (c) No Holder may convert any Security to the extent that, immediately
following any such conversion and upon receipt of any shares of Common Stock
issuable upon such conversion, such Holder would either (i) become or be
included in any person, including any syndicate or group deemed to be a "person"
under Section 13(d)(3) of the Exchange Act, that is the single largest holder of
voting power represented by the Company's capital stock (or otherwise become the
single largest holder of the Common Stock) (the "Shareholder Limitation") or
(ii) beneficially own or be included in any "person" that beneficially owns in
excess of 4.9% of the voting power represented by the Company's capital stock
(or otherwise beneficially own in excess of 4.9% of the outstanding Common
Stock) (the "4.9% Limitation") after, in either case, giving effect to such
conversion (the Shareholder Limitation and the 4.9% Limitation are collectively
referred to herein as the "Conversion Limitations"). The determinations of the
number of shares that (i) constitute 4.9% of the outstanding Common Stock or
voting power and (ii) are held by the largest holder will be made in reliance
upon the information contained in publicly available filings made with the SEC
unless the Company is aware that such information is incorrect and made the
correct information public and disclosed such information to the Holders at the
time of any such proposed conversion. In order to facilitate compliance with the
foregoing, each Holder will be required to make a representation that it and its
Affiliates will comply with the Conversion Limitations immediately after
converting any Security and receipt of any shares of Common Stock issuable upon
such conversion.

     (d) Notwithstanding the Shareholder Limitation, however, a Holder may
convert Securities that would otherwise cause such Holder to hold shares of
Common Stock in excess of the Shareholder Limitation if, as to such excess
number of shares of Common Stock (the "Excess Shares"), such Holder (i)
irrevocably covenants to the Company to sell such Excess Shares within 10 days
after the date of conversion and (ii) confirms that it has, on or prior to such

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                                                                              60

conversion date, entered into a binding arrangement to sell the Excess
Shares within 10 days after such conversion date either (a) in a regular way
transaction on a national securities exchange (or the principal market where the
shares of Common Stock are then traded) or (b) to one or more persons that are
not "affiliates" (used herein as defined in Rule 144 promulgated under the
Securities Act) of such Holder ("Third Parties"), each of whom represents for
the benefit of the Company that, upon purchase of the applicable Excess Shares,
such Third Party, together with its affiliates, will not be the beneficial owner
of a number of shares of Common Stock in excess of the Shareholder Limitation.
In addition, such Holder, by converting its Securities, shall be deemed to agree
to vote the applicable Excess Shares only in accordance with the recommendations
of the Board of Directors of the Company or any Third Party that has agreed to
purchase such shares, if any record date for a vote of the Common Stock is
established for any day between the conversion date and the consummation of the
sale of the applicable Excess Shares. The Shareholder Limitation will cease to
have any force and effect upon consummation of the Spin-Off of POR Spin-Co, if,
on the date that is 14 days after delivery to the Company of a request by the
Majority Holders to such effect (which request may be given no more than once
during any 180-day period), the Company shall not have delivered a certificate
to the Holders stating that the removal of the Shareholder Limitation would, in
the good faith judgment of the Company, not be consistent with the applicable
regulatory or other legal requirements.

     For the purposes of Section 11.1(c) and (d), (x) whether a person is a
"beneficial owner" shall be determined in accordance with Rule 13d-3 under the
Exchange Act and (y) the term "person" includes any syndicate or group that
would be deemed to be a "person" under Section 13(d)(3) of the Exchange Act.

     Section 11.2 Conversion Procedure; Conversion Price; Fractional Shares. (a)
Each Security shall be convertible at the office of the Conversion Agent into
fully paid and nonassessable shares (calculated to the nearest 1/100th of a
share) of Common Stock on the Conversion Date. The Security will be converted
into shares of Common Stock at the Conversion Price therefor. No payment or
adjustment shall be made in respect of dividends on the Common Stock or accrued
interest on a converted Security, except as described in Section 11.9 hereof.
The Company shall not issue any fraction of a share of Common Stock in
connection with any conversion of Securities, but instead shall, subject to
Section 11.3(h) hereof, make a cash payment (calculated to the nearest cent)
equal to such fraction multiplied by the Closing Price of the Common Stock on
the last Trading Day prior to the date of conversion. Notwithstanding the
foregoing, a Security in respect of which a Holder has delivered a Change of
Control Purchase Notice exercising such Holder's option to require the Company
to repurchase such Security may be converted only if such notice of exercise is
withdrawn in accordance with the Section 3.8 hereof.

     (b) Before any Holder of a Security shall be entitled to convert the same
into Common Stock, such Holder shall, in the case of Global Securities, comply
with the procedures of the Depositary in effect at that time, and in the case of
Certificated Securities, surrender such Securities, duly endorsed to the Company
or in blank, at the office of the Conversion Agent, and shall give written
notice to the Company at said office or place that such Holder elects to convert
the same and shall state in writing therein the principal amount of Securities
to be converted and

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                                                                              61

the name or names (with addresses) in which such Holder wishes the certificate
or certificates for Common Stock to be issued.

     Before any such conversion, a Holder also shall pay all funds required, if
any, relating to interest on the Securities, as provided in Section 11.9, and
all taxes or duties, if any, as provided in Section 11.8.

     If more than one Security shall be surrendered for conversion at one time
by the same Holder, the number of full shares of Common Stock which shall be
deliverable upon conversion shall be computed on the basis of the aggregate
principal amount of the Securities (or specified portions thereof to the extent
permitted thereby) so surrendered. Subject to the next succeeding sentence, the
Company will, as soon as practicable thereafter, issue and deliver at said
office or place to such Holder of a Security, or to such Holder's nominee or
nominees, certificates for the number of full shares of Common Stock to which
such Holder shall be entitled as aforesaid, together with cash in lieu of any
fraction of a share to which such Holder would otherwise be entitled. The
Company shall not be required to deliver certificates for shares of Common Stock
while the stock transfer books for such stock or the security register are duly
closed for any purpose, but certificates for shares of Common Stock shall be
issued and delivered as soon as practicable after the opening of such books or
security register.

     (c) A Security shall be deemed to have been converted as of the close of
business on the date of the surrender of such Securities for conversion as
provided above, and the person or persons entitled to receive the Common Stock
issuable upon such conversion shall be treated for all purposes as the record
Holder or Holders of such Common Stock as of the close of business on such date.

     (d) In case any Security shall be surrendered for partial conversion, the
Company shall execute and the Trustee shall authenticate and deliver to or upon
the written order of the Holder of the Security so surrendered, without charge
to such Holder (subject to the provisions of Section 11.8 hereof), a new
Security or Securities in authorized denominations in an aggregate principal
amount equal to the unconverted portion of the surrendered Securities.

     Section 11.3 Adjustment of Conversion Price. The Conversion Price shall be
adjusted from time to time as follows:

     (a) In case the Company shall, at any time or from time to time while any
of the Securities are outstanding, pay a dividend or make a distribution in
shares of Common Stock to all holders of its outstanding shares of Common Stock,
then the Conversion Price in effect at the opening of business on the date
following the Common Stock Record Date fixed for the determination of
stockholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such Conversion Price by a fraction:

     (1)  the numerator of which shall be the number of shares of Common Stock
          outstanding at the close of business on the Common Stock Record Date
          fixed for such determination; and

     (2)  the denominator of which shall be the sum of such number of shares and
          the total number of shares constituting such dividend or other
          distribution.

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                                                                              62

     Such reduction shall become effective immediately after the opening of
business on the day following the Common Stock Record Date fixed for such
determination. If any dividend or distribution of the type described in this
Section 11.3(a) is declared but not so paid or made, the Conversion Price shall
again be adjusted to the Conversion Price which would then be in effect if such
dividend or distribution had not been declared.

     (b) In case the Company shall, at any time or from time to time while any
of the Securities are outstanding, subdivide its outstanding shares of Common
Stock into a greater number of shares of Common Stock, then the Conversion Price
in effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately reduced, and
conversely, in case the Company shall, at any time or from time to time while
any of the Securities are outstanding, combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock, then the Conversion Price
in effect at the opening of business on the day following the day upon which
such combination becomes effective shall be proportionately increased.

     Such reduction or increase, as the case may be, shall become effective
immediately after the opening of business on the day following the day upon
which such subdivision or combination becomes effective.

     (c) In case the Company shall, at any time or from time to time while any
of the Securities are outstanding, issue rights or warrants (other than any
rights or warrants referred to in Section 11.3(d)) to all holders of its shares
of Common Stock entitling them to subscribe for or purchase shares of Common
Stock (or securities convertible into shares of Common Stock) at a price per
share (or having a conversion price per share) less than the Current Market
Value of the Common Stock on the Business Day immediately preceding the date of
the announcement of such issuance (treating the conversion price per share of
the securities convertible into Common Stock as equal to (x) the sum of (i) the
price for a unit of the security convertible into Common Stock and (ii) any
additional consideration initially payable upon the conversion of such security
into Common Stock divided by (y) the number of shares of Common Stock initially
underlying such convertible security), then the Conversion Price shall be
adjusted so that the same shall equal the price determined by multiplying the
Conversion Price in effect at the opening of business on the date after such
date of announcement by a fraction:

     (1)  the numerator of which shall be the number of shares of Common Stock
          outstanding on the close of business on the date of announcement, plus
          the number of shares or securities which the aggregate offering price
          of the total number of shares or securities so offered for
          subscription or purchase (or the aggregate conversion price of the
          convertible securities so offered) would purchase at such Current
          Market Value of the Common Stock; and

     (2)  the denominator of which shall be the number of shares of Common Stock
          outstanding at the close of business on the date of announcement, plus
          the total number of additional shares of Common Stock so offered for
          subscription or purchase (or into which the convertible securities so
          offered are convertible).

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                                                                              63

     Such adjustment shall become effective immediately after the opening of
business on the day following the date of announcement of such issuance. To the
extent that shares of Common Stock (or securities convertible into shares of
Common Stock) are not delivered pursuant to such rights or warrants, upon the
expiration or termination of such rights or warrants, the Conversion Price shall
be readjusted to the Conversion Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants been made on the
basis of the delivery of only the number of shares of Common Stock (or
securities convertible into shares of Common Stock) actually delivered. In the
event that such rights or warrants are not so issued, the Conversion Price shall
again be adjusted to be the Conversion Price which would then be in effect if
the date fixed for the determination of stockholders entitled to receive such
rights or warrants had not been fixed. In determining whether any rights or
warrants entitle the holders to subscribe for or purchase shares of Common Stock
at less than such Current Market Value of the Common Stock, and in determining
the aggregate offering price of such shares of Common Stock, there shall be
taken into account any consideration received for such rights or warrants, the
value of such consideration if other than cash, to be determined in good faith
by the Board of Directors.

     (d) In case the Company shall, at any time or from time to time while any
of the Securities are outstanding, by dividend or otherwise, distribute to all
holders of its shares of Common Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the continuing
corporation and the Common Stock is not changed or exchanged), cash, shares of
its capital stock (other than any dividends or distributions to which Section
11.3(a) applies), evidences of its Indebtedness or other assets, including
securities, but excluding (i) any rights or warrants referred to in Section
11.3(c), (ii) dividends or distributions of stock, securities or other property
or assets (including cash) in connection with a reclassification, change,
merger, consolidation, statutory share exchange, combination, sale or conveyance
to which Section 11.4 applies, (iii) Cash Dividends and other distributions paid
exclusively in cash and (iv) any Spin-Off as contemplated below (such capital
stock, evidence of its indebtedness, cash, other assets or securities being
distributed hereinafter in this Section 11.3(d) called the "distributed
assets"), then, in each such case, subject to the third and fourth succeeding
paragraphs and the last Section of this Section 11.3(d), the Conversion Price
shall be reduced so that the same shall be equal to the price determined by
multiplying the Conversion Price in effect immediately prior to the close of
business on the Common Stock Record Date with respect to such distribution by a
fraction:

     (1)  the numerator of which shall be the Current Market Value of the Common
          Stock, less the Fair Market Value on such date of the portion of the
          distributed assets so distributed applicable to one share of Common
          Stock (determined on the basis of the number of shares of Common Stock
          outstanding on the record date) (determined as provided in Section
          11.3(g)) on such date; and

     (2)  the denominator of which shall be such Current Market Value.

Such reduction shall become effective immediately prior to the opening of
business on the day following the Common Stock Record Date for such
distribution. In the event that such dividend or distribution is not so paid or
made, the Conversion Price shall again be adjusted to be the

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                                                                              64

Conversion Price which would then be in effect if such dividend or distribution
had not been declared.

     If the Board of Directors determines the Fair Market Value of any
distribution for purposes of this Section 11.3(d) by reference to the actual or
when issued trading market for any distributed assets comprising all or part of
such distribution, it must in doing so consider the prices in such market over
the same period (the "Reference Period") used in computing the Current Market
Value pursuant to Section 11.3(g) to the extent possible, unless the Board of
Directors determines in good faith that determining the Fair Market Value during
the Reference Period would not be in the best interest of the Holders.

     In the event any such distribution consists of shares of Capital Stock of,
or similar equity interests in, one or more of the Company's Subsidiaries (a
"Spin-Off"), the Conversion Price shall be adjusted in accordance with the
following formula:
                                     P
                       C' =  C  x  -----
                                   P + U

     Where:

     C' = the adjusted Conversion Price.

     C  = the then current Conversion Price.

     P  = the arithmetic average of the VWAP of the Common Stock of the
          Company over the Trading Period.

     U  = the arithmetic average of the VWAP of the Common Stock of the
          applicable Spin-Co over the Trading Period.

     Trading Period = the 20 consecutive Trading Days commencing on and
                      including the tenth Trading Day of the Common Stock after
                      the effectiveness of such Spin-Off.

     The adjustment shall be made successively whenever any such Spin-Off is
made and shall become effective immediately after such Spin-Off.

     Rights or warrants distributed by the Company to all holders of its shares
of Common Stock entitling them to subscribe for or purchase shares of the
Company's Capital Stock (either initially or under certain circumstances), which
rights or warrants, until the occurrence of a specified event or events
("Trigger Event"), (i) are deemed to be transferred with such shares of Common
Stock, (ii) are not exercisable and (iii) are also issued in respect of future
issuances of shares of Common Stock shall be deemed not to have been distributed
for purposes of this Section 11.3(d) (and no adjustment to the Conversion Price
under this Section 11.3(d) will be required) until the occurrence of the
earliest Trigger Event. If such right or warrant is subject to subsequent
events, upon the occurrence of which such right or warrant shall become
exercisable to purchase different distributed assets, evidences of indebtedness
or other assets, or entitle the holder to purchase a different number or amount
of the foregoing or to purchase any

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                                                                              65

of the foregoing at a different purchase price, then the occurrence of each such
event shall be deemed to be the date of issuance and record date with respect to
a new right or warrant (and a termination or expiration of the existing right or
warrant without exercise by the holder thereof). In addition, in the event of
any distribution (or deemed distribution) of rights or warrants, or any Trigger
Event or other event (of the type described in the preceding sentence) with
respect thereto, that resulted in an adjustment to the Conversion Price under
this Section 11.3(d):

     (1)  in the case of any such rights or warrants which shall all have been
          redeemed or repurchased without exercise by any holders thereof, the
          Conversion Price shall be readjusted upon such final redemption or
          repurchase to give effect to such distribution or Trigger Event, as
          the case may be, as though it were a cash distribution, equal to the
          per share redemption or repurchase price received by a holder of
          shares of Common Stock with respect to such rights or warrants
          (assuming such holder had retained such rights or warrants), made to
          all holders of shares of Common Stock as of the date of such
          redemption or repurchase; and

     (2)  in the case of such rights or warrants which shall have expired or
          been terminated without exercise, the Conversion Price shall be
          readjusted as if such rights and warrants had never been issued.

     For purposes of this Section 11.3(d) and Sections 11.3(a), 11.3(b) and
11.3(c), any dividend or distribution to which this Section 11.3(d) is
applicable that also includes (i) shares of Common Stock, (ii) a subdivision or
combination of shares of Common Stock to which Section 11.3(b) applies or (iii)
rights or warrants to subscribe for or purchase shares of Common Stock to which
Section 11.3(c) applies (or any combination thereof), shall be deemed instead to
be:

     (1)  a dividend or distribution of the evidences of indebtedness, assets,
          shares of capital stock, rights or warrants, other than such shares of
          Common Stock, such subdivision or combination or such rights or
          warrants to which Sections 11.3(a), 11.3(b) and 11.3(c) apply,
          respectively (and any Conversion Price reduction required by this
          Section 11.3(d) with respect to such dividend or distribution shall
          then be made), immediately followed by

     (2)  a dividend or distribution of such shares of Common Stock, such
          subdivision or combination or such rights or warrants (and any further
          Conversion Price reduction required by Sections 11.3(a), 11.3(b) and
          11.3(c) with respect to such dividend or distribution shall then be
          made), except:

          (A)  the Common Stock Record Date of such dividend or distribution
               shall be substituted as (i) "the date fixed for the determination
               of stockholders entitled to receive such dividend or other
               distribution," "Common Stock Record Date fixed for such
               determinations" and "Common Stock Record Date" within the meaning
               of Section 11.3(a), (ii) "the day upon which such subdivision
               becomes effective" and "the day upon which such combination
               becomes effective" within the meaning of Section 11.3(b), and
               (iii) as "the date fixed for the determination of stockholders
               entitled to receive such rights or warrants," "the Common Stock

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                                                                              66

               Record Date fixed for the determination of the stockholders
               entitled to receive such rights or warrants" and such "Common
               Stock Record Date" within the meaning of Section 11.3(c); and

          (B)  any shares of Common Stock included in such dividend or
               distribution shall not be deemed "outstanding at the close of
               business on the date fixed for such determination" within the
               meaning of Section 11.3(a) and any reduction or increase in the
               number of shares of Common Stock resulting from such subdivision
               or combination shall be disregarded in connection with such
               dividend or distribution.

     In the event of any distribution referred to in this Section 11.3(d) in
which (1) the Fair Market Value of such distribution applicable to one share of
Common Stock (determined as provided above) equals or exceeds the average of the
Closing Prices of the Common Stock over the ten consecutive Trading Day period
ending on the Common Stock Record Date for such distribution or (2) the average
of the Closing Prices of the Common Stock over the ten consecutive Trading Day
period ending on the Common Stock Record Date for such distribution exceeds the
Fair Market Value of such distribution by less than $1.00, then, in each such
case, in lieu of an adjustment to the Conversion Price, adequate provision shall
be made so that each Holder shall have the right to receive upon conversion of a
Security, in addition to shares of Common Stock, the kind and amount of such
distribution such Holder would have received had such Holder converted such
Security immediately prior to the Common Stock Record Date for determining the
shareholders entitled to receive the distribution.

     In the event of any distribution referred to in Section 11.3(c) or 11.3(d),
where, in the case of a distribution described in Section 11.3(d), the Fair
Market Value of such distribution per share of Common Stock exceeds 10% of the
Closing Price of a share of Common Stock on the Business Day immediately
preceding the declaration date for such distribution, then, if such distribution
would also trigger a conversion right under Section 11.1(b) or the Securities
are otherwise convertible pursuant to this Article 11, the Company will be
required to give notice to the Holders of Securities at least 20 days prior to
the Ex-Dividend Time for the distribution and, upon the giving of notice, the
Securities may be surrendered for conversion at any time on and after the date
that the Company gives notice to the Holders of such conversion right, until the
close of business on the Business Day prior to the Ex-Dividend Time or the
Company announces that such distribution will not take place. No adjustment to
the Conversion Price or the ability of a Holder of a Security to convert will be
made if the Holder will otherwise participate in such distribution without
conversion.

     (e) In case a tender or exchange offer made by the Company or any of its
Subsidiaries for all or any portion of the shares of Common Stock shall expire
and such tender offer (as amended upon the expiration thereof) shall require the
payment to stockholders (based on the acceptance (up to any maximum specified in
the terms of the tender offer) of shares tendered) of an aggregate consideration
having a Fair Market Value that, combined together with the aggregate amount of
the cash, plus the Fair Market Value, as of the expiration of such tender or
exchange offer, of consideration payable in respect of any other tender offers,
by the Company or any of its Subsidiaries for all or any portion of the shares
of Common Stock expiring within the 12 months preceding the expiration of such
tender offer and in respect of

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                                                                              67

which no adjustment pursuant to this Section 11.3(e) has been made, exceeds 10%
of the product of the Current Market Value of the Common Stock as of the last
time (the "Expiration Time") tenders could have been made pursuant to such
tender or exchange offer (as it may be amended), times the number of shares of
Common Stock outstanding (including any tendered shares) on the Expiration Time
(such excess, the "Excess Amount"), then, and in each such case, immediately
prior to the opening of business on the day after the date of the Expiration
Time, the Conversion Price shall be adjusted so that the same shall equal the
price determined by multiplying the Conversion Price in effect immediately prior
to the close of business on the date of the Expiration Time by a fraction:

     (1)  the numerator of which shall be (x) the product of (i) the number of
          shares of Common Stock outstanding (including any tendered shares) at
          the Expiration Time and (ii) the Current Market Value of the Common
          Stock at the Expiration Time, less (y) the Excess Amount; and

     (2)  the denominator shall be the product of the number of shares of Common
          Stock outstanding (including any tendered shares) at the Expiration
          Time and the Current Market Value of the Common Stock at the
          Expiration Time.

     Such reduction (if any) shall become effective immediately prior to the
opening of business on the day following the Expiration Time. In the event that
the Company is obligated to purchase shares pursuant to any such tender or
exchange offer, but the Company is permanently prevented by applicable law from
effecting any such purchases or all or a portion of such purchases are
rescinded, the Conversion Price shall again be adjusted to be the Conversion
Price which would then be in effect if such (or such portion of the) tender
offer had not been made. If the application of this Section 11.3(e) to any
tender offer would result in an increase in the Conversion Price, no adjustment
shall be made for such tender offer under this Section 11.3(e).

     Pursuant to rights issued under the Company's preferred share purchase
rights plan, if holders of the Securities exercising the right of conversion
attaching after the date the rights separate from the underlying Common Stock
are not entitled to receive the rights that would otherwise be attributable to
the shares of Common Stock received upon conversion, the Conversion Price will
be adjusted as though the rights were being distributed to holders of Common
Stock on the date of such separation. If such an adjustment is made and the
rights are later redeemed, invalidated or terminated, then a corresponding
reversing adjustment will be made to the conversion price on an equitable basis.

     (f) For purposes of this Article 11, the following terms shall have the
meanings indicated:

     "Common Stock Record Date" shall mean, with respect to any dividend,
distribution or other transaction or event in which the holders of shares of
Common Stock have the right to receive any cash, securities or other property or
in which the shares of Common Stock (or other applicable security) is exchanged
for or converted into any combination of cash, securities or other property, the
date fixed for determination of stockholders entitled to receive such cash,
securities or other property (whether such date is fixed by the Board of
Directors or by statute, contract or otherwise).

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                                                                              68

     "Current Market Value" on any date means the average of the daily Closing
Prices per share of Common Stock for the ten consecutive Trading Days
immediately prior to such date; provided, however, that if:

     (1)  the "ex" date (as hereinafter defined) for any event (other than the
          issuance or distribution requiring such computation) that requires an
          adjustment to the Conversion Price pursuant to Section 11.3(a), (b),
          (c), (d) or (e) occurs during such ten consecutive Trading Days, the
          Closing Price for each Trading Day prior to the "ex" date for such
          other event shall be adjusted by multiplying such Closing Price by the
          same fraction by which the Conversion Price is required to be
          multiplied as a result of such other event;

     (2)  the "ex" date for any event (other than the issuance or distribution
          requiring such computation) that requires an adjustment to the
          Conversion Price pursuant to Section 11.3(a), (b), (c), (d) or (e)
          occurs on or after the "ex" date for the issuance or distribution
          requiring such computation and prior to the day in question, the
          Closing Price for each Trading Day on and after the "ex" date for such
          other event shall be adjusted by multiplying such Closing Price by the
          reciprocal of the fraction by which the Conversion Price is required
          to be multiplied as a result of such other event; and

     (3)  the "ex" date for the issuance or distribution requiring such
          computation is prior to the day in question, after taking into account
          any adjustment required pursuant to clause (1) or (2) of this proviso,
          the Closing Price for each Trading Day on or after such "ex" date
          shall be adjusted by adding thereto the amount of any cash and the
          Fair Market Value of the evidences of Indebtedness, shares of capital
          stock or assets being distributed applicable to one share of Common
          Stock as of the close of business on the day before such "ex" date.

For purposes of any computation under Section 11.3(e), if the "ex" date for any
event (other than the tender offer requiring such computation) that requires an
adjustment to the Conversion Price pursuant to Section 11.3(a), (b), (c), (d) or
(e) occurs on or after the Expiration Time for the tender or exchange offer
requiring such computation and prior to the day in question, the Closing Price
for each Trading Day on and after the "ex" date for such other event shall be
adjusted by dividing such Closing Price by the reciprocal of the fraction by
which the Conversion Price is so required to be adjusted as a result of such
other event. For purposes of this paragraph, the term "ex" date, when used:

     (1)  with respect to any issuance or distribution, means the first date on
          which the shares of Common Stock trade regular way on the relevant
          exchange or in the relevant market from which the Closing Price was
          obtained without the right to receive such issuance or distribution;

     (2)  with respect to any subdivision or combination of shares of Common
          Stock, means the first date on which the shares of Common Stock trade
          regular way on such exchange or in such market after the time at which
          such subdivision or combination becomes effective; and

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                                                                              69

     (3) with respect to any tender or exchange offer, means the first date on
which the shares of Common Stock trade regular way on such exchange or in such
market after the Expiration Time of such offer.

Notwithstanding the foregoing, whenever successive adjustments to the Conversion
Price are called for pursuant to this Section 11.3, such adjustments shall be
made to the Current Market Value as may be necessary or appropriate to
effectuate the intent of this Section 11.3 and to avoid unjust or inequitable
results as determined in good faith by the Board of Directors.

     "Fair Market Value" shall mean the amount that a willing buyer would pay a
willing seller in an arm's length transaction (as determined in good faith by
the Board of Directors, whose determination shall be conclusive absent manifest
error).

     (g) The Company shall be entitled to make such additional reductions in the
Conversion Price, in addition to those required by Sections 11.3(a), (b), (c),
(d) and (e), as shall be necessary in order that any dividend or distribution of
Common Stock, any subdivision, reclassification or combination of shares of
Common Stock or any issuance of rights or warrants referred to above shall not
be taxable to the holders of Common Stock for United States Federal income tax
purposes.

     (h) To the extent permitted by applicable law, the Company may, from time
to time, reduce the Conversion Price by any amount for any period of time, if
such period is at least 20 days and the reduction is irrevocable during the
period. Whenever the Conversion Price is reduced pursuant to the preceding
sentence, the Company shall mail to the Trustee and each Holder at the address
of such Holder as it appears in the register of the Securities maintained by the
Registrar, at least 15 days prior to the date the reduced Conversion Price takes
effect, a notice of the reduction stating the reduced Conversion Price and the
period during which it will be in effect.

     (i) In any case in which this Section 11.3 shall require that any
adjustment be made effective as of or retroactively immediately following a
Common Stock Record Date, the Company may elect to defer (but only for five
Trading Days following the filing of the statement referred to in Section 11.5)
issuing to the Holder of any Securities converted after such Common Stock Record
Date the shares of Common Stock issuable upon such conversion over and above the
shares of Common Stock issuable upon such conversion on the basis of the
Conversion Price prior to 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 upon the occurrence of the
event requiring such adjustment.

     (j) All calculations under this Section 11.3 shall be made to the nearest
cent or one-hundredth of a share, with one-half cent and 0.005 of a share,
respectively, being rounded upward. Notwithstanding any other provision of this
Section 11.3, the Company shall not be required to make any adjustment of the
Conversion Price unless such adjustment would require an increase or decrease of
at least 1% of such price. Any lesser adjustment shall be carried forward and
shall be made at the time of and together with the next subsequent adjustment
which, together with any adjustment or adjustments so carried forward, shall
amount to an

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                                                                              70

increase or decrease of at least 1% in such price. Any adjustments under this
Section 11.3 shall be made successively whenever an event requiring such an
adjustment occurs.

     (k) In the event that at any time, as a result of an adjustment made
pursuant to this Section 11.3, the Holder of any Securities thereafter
surrendered for conversion shall become entitled to receive any shares of stock
of the Company other than shares of Common Stock into which the Securities
originally were convertible, the Conversion Price of such other shares so
receivable upon conversion of any such Security 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 Common Stock contained in subparagraphs (a)
through (k) of this Section 11.3, and the provision of Sections 11.1, 11.2 and
11.4 through 11.9 with respect to the Common Stock shall apply on like or
similar terms to any such other shares and the determination of the Board of
Directors as to any such adjustment shall be conclusive.

     (l) No adjustment shall be made pursuant to this Section 11.3(i) if the
effect thereof would be to reduce the Conversion Price below the par value (if
any) of the Common Stock or (ii) if the Holders of the Securities otherwise
participate in the transaction that would otherwise give rise to an adjustment
pursuant to this Section 11.3; provided that such participation is on terms that
include the effect of such adjustment. The Company will take no action to
increase the par value of the Common Stock.

     Section 11.4 Consolidation or Merger of the Company.

     If any of the following events occurs, namely:

     (1)  any reclassification or change of the outstanding Common Stock (other
          than a change in par value, or from par value to no par value, or from
          no par value to par value, or as a result of a subdivision or
          combination);

     (2)  any merger, consolidation, statutory share exchange or combination of
          the Company with another corporation as a result of which holders of
          Common Stock shall be entitled to receive stock, securities or other
          property or assets (including cash) with respect to or in exchange for
          such Common Stock; or

     (3)  any sale or conveyance of the properties and assets of the Company as,
          or substantially as, an entirety to any other corporation as a result
          of which holders of Common Stock shall be entitled to receive stock,
          securities or other property or assets (including cash) with respect
          to or in exchange for such Common Stock;

the Company or the successor or purchasing corporation, as the case may be,
shall execute with the Trustee a supplemental indenture (which shall comply with
the Trust Indenture Act as in force at the date of execution of such
supplemental indenture, if such supplemental indenture is then required to so
comply) providing that such Securities shall be convertible into the kind and
amount of shares of stock and other securities or property or assets (including
cash) which such Holder would have been entitled to receive upon such
reclassification, change, merger, consolidation, statutory share exchange,
combination, sale or conveyance had such Securities been converted into Common
Stock immediately prior to such reclassification, change, merger, consolidation,
statutory share exchange, combination, sale or conveyance assuming such holder

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                                                                              71

of Common Stock did not exercise its rights of election, if any, as to the kind
or amount of securities, cash or other property receivable upon such merger,
consolidation, statutory share exchange, sale or conveyance (provided, that if
the kind or amount of securities, cash or other property receivable upon such
merger, consolidation, statutory share exchange, sale or conveyance is not the
same for each share of Common Stock in respect of which such rights of election
shall not have been exercised ("Non-Electing Share"), then for the purposes of
this Section 11.4, the kind and amount of securities, cash or other property
receivable upon such merger, consolidation, statutory share exchange, sale or
conveyance for each Non-Electing Share shall be deemed to be the kind and amount
so receivable per share by a plurality of the Non-Electing Shares). Such
supplemental indenture shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Article
11. If, in the case of any such reclassification, change, merger, consolidation,
statutory share exchange, combination, sale or conveyance, the stock or other
securities and assets receivable thereupon by a holder of Common Stock includes
shares of stock or other securities and assets of a corporation other than the
successor or purchasing corporation, as the case may be, in such
reclassification, change, merger, consolidation, statutory share exchange,
combination, sale or conveyance, then such supplemental indenture shall also be
executed by such other corporation and shall contain such additional provisions
to protect the interests of the Holders of the Securities as the Board of
Directors shall reasonably consider necessary by reason of the foregoing,
including to the extent practicable the provisions providing for the conversion
rights set forth in this Article 11.

     The Company shall cause notice of the execution of such supplemental
indenture to be mailed to each Holder, at the address of such Holder as it
appears on the register of the Securities maintained by the Registrar, within 20
days after execution thereof. Failure to deliver such notice shall not affect
the legality or validity of such supplemental indenture.

     The above provisions of this Section 11.4 shall similarly apply to
successive reclassifications, mergers, consolidations, statutory share
exchanges, combinations, sales and conveyances.

     If this Section 11.4 applies to any event or occurrence, Section 11.3 shall
not apply.

     Section 11.5 Notice of Adjustment.

     Whenever an adjustment in the Conversion Price with respect to the
Securities is required:

     (1)  the Company shall forthwith place on file with the Trustee and any
          Conversion Agent for such securities a certificate of the Treasurer of
          the Company, stating the adjusted Conversion Price determined as
          provided herein and setting forth in reasonable detail such facts as
          shall be necessary to show the reason for and the manner of computing
          such adjustment; and

     (2)  a notice stating that the Conversion Price has been adjusted and
          setting forth the adjusted Conversion Price shall forthwith be given
          by the Company or, at the Company's request, by the Trustee in the
          name and at the expense of the Company, to

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                                                                              72

          each Holder in the manner provided in Section 12.2. Any notice so
          given shall be conclusively presumed to have been duly given, whether
          or not the Holder receives such notice.

     Section 11.6 Notice in Certain Events.

     In case:

     (1)  of a consolidation or merger to which the Company is a party and for
          which approval of any stockholders of the Company is required, or of
          the sale or conveyance to another Person or entity or group of Persons
          or entities acting in concert as a partnership, limited partnership,
          syndicate or other group (within the meaning of Rule 13d-3 under the
          Securities Exchange Act of 1934, as amended) of all or substantially
          all of the property and assets of the Company; or

     (2)  of the voluntary or involuntary dissolution, liquidation or winding up
          of the Company; or

     (3)  of any action triggering an adjustment of the Conversion Price
          referred to in clauses (x) or (y) below;

then, in each case, the Company shall cause to be filed with the Trustee and the
Conversion Agent, and shall cause to be given, to the Holders of the Securities
in the manner provided in Section 12.2, at least 15 days prior to the applicable
date hereinafter specified, a notice stating (x) the date on which a record is
to be taken for the purpose of any distribution or grant of rights or warrants
triggering an adjustment to the Conversion Price pursuant to this Article 11,
or, if a record is not to be taken, the date as of which the holders of record
of Common Stock entitled to such distribution, rights or warrants are to be
determined, or (y) the date on which any reclassification, consolidation,
merger, sale, conveyance, dissolution, liquidation or winding up triggering an
adjustment to the Conversion Price pursuant to this Article 11 is expected to
become effective, and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reclassification, consolidation, merger
sale, conveyance, dissolution, liquidation or winding up.

     Failure to give such notice or any defect therein shall not affect the
legality or validity of the proceedings described in clause (1), (2) or (3) of
this Section 11.6.

     Section 11.7 Company To Reserve Stock: Registration; Listing.

     (a) The Company shall, in accordance with the laws of the State of
California, at all times reserve and keep available, free from preemptive
rights, out of its authorized but unissued shares of Common Stock, for the
purpose of effecting the conversion of the Securities, such number of its duly
authorized shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all Securities then outstanding into such Common Stock
at any time (assuming that, at the time of the computation of such number of
shares or securities, all such Securities would be held by a single Holder);
provided, however, that nothing contained herein shall preclude the Company from
satisfying its obligations in respect of the conversion of

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                                                                              73

the Securities by delivery of purchased shares of Common Stock which are then
held in the treasury of the Company. The Company covenants that all shares of
Common Stock which may be issued upon conversion of Securities will upon issue
be fully paid and nonassessable and free from all liens and charges and, except
as provided in Section 11.8, taxes with respect to the issue thereof.

     (b) If any shares of Common Stock which would be issuable upon conversion
of Securities hereunder require registration with or approval of any
governmental authority before such shares or securities may be issued upon such
conversion, the Company will in good faith and as expeditiously as possible
endeavor to cause such shares or securities to be duly registered or approved,
as the case may be. The Company further covenants that so long as the Common
Stock shall be listed on the New York Stock Exchange, the Company will, if
permitted by the rules of such exchange, list and keep listed all Common Stock
issuable upon conversion of the Securities, and the Company will endeavor to
list the shares of Common Stock required to be delivered upon conversion of the
Securities prior to such delivery upon any other national securities exchange
upon which the outstanding Common Stock is listed at the time of such delivery.

     Section 11.8 Taxes on Conversion.

     The issue of stock certificates on conversion of Securities shall be made
without charge to the converting Holder for any documentary, stamp or similar
issue or transfer taxes in respect of the issue thereof, and the Company shall
pay any and all documentary, stamp or similar issue or transfer taxes that may
be payable in respect of the issue or delivery of shares of Common Stock on
conversion of Securities pursuant hereto. The Company shall not, however, be
required to pay any such tax which may be payable in respect of any transfer
involved in the issue or delivery of shares of Common Stock or the portion, if
any, of the Securities which are not so converted in a name other than that in
which the Securities so converted were registered, and no such issue or delivery
shall be made unless and until the Person requesting such issue has paid to the
Company the amount of such tax or has established to the satisfaction of the
Company that such tax has been paid.

     Section 11.9 Conversion After Record Date.

     Except as provided below and in the proviso to this paragraph, if any
Securities are surrendered for conversion on any day other than an Interest
Payment Date, the Holder of such Securities shall not be entitled to receive any
interest that has accrued on such Securities since the prior Interest Payment
Date; provided, however that if any Securities are surrendered for conversion
within five Business Days prior to the Stated Maturity of the Securities, then
the Holder thereof shall be entitled to receive any interest that has accrued on
such Securities since the prior Interest Payment Date until the date of Stated
Maturity. By delivery to the Holder of the number of shares of Common Stock or
other consideration issuable upon conversion in accordance with this Article 11,
any accrued and unpaid interest on such Securities will be deemed to have been
paid in full.

     Except as otherwise set forth in the proviso to the preceding paragraph of
this Section 11.9, if any Securities are surrendered for conversion subsequent
to the record date

<PAGE>

                                                                              74

preceding an Interest Payment Date but on or prior to such Interest Payment
Date, the Holder of such Securities at the close of business on such record date
shall receive the interest payable on such Securities on such Interest Payment
Date notwithstanding the conversion thereof. Securities surrendered for
conversion during the period from the close of business on any record date
preceding any Interest Payment Date to the opening of business on such Interest
Payment Date shall be accompanied by payment by Holders, for the account of the
Company, in New York Clearing House funds or other funds of an amount equal to
the interest payable on such Interest Payment Date on the Securities being
surrendered for conversion. Except as provided in this Section 11.9, no
adjustments in respect of payments of interest on Securities surrendered for
conversion or any dividends or distributions or interest on the Common Stock
issued upon conversion shall be made upon the conversion of any Securities.

     Section 11.10 Conversion Price.

     The initial Conversion Price shall be computed by the Company and equal
that amount (rounded to four decimal places) arrived at by multiplying 119% by
the arithmetic average of the VWAP per share of Common Stock for each Trading
Day during the Pricing Period. In addition, should any event(s) occur during the
Pricing Period that would have resulted in an adjustment to the Conversion Price
pursuant to the provisions of Section 11 had the Conversion Price been
calculated as of such date, then the Company shall adjust the initial Conversion
Price calculated in accordance with the foregoing sentence to fairly reflect any
and all such adjustments as would be required by Section 11 (assuming for such
purposes that the Conversion Price on any day during the Pricing Period is equal
to 119% of the arithmetic average of the VWAP per share of Common Stock for each
Trading Day during the Pricing Period immediately preceding such date). The
Company shall maintain the listing of the Common Stock on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market such that
there will be at least 43 Trading Days during the first 75 calendar days
following the Closing Date.

     Section 11.11 Company Determination Final.

     Any determination that the Company or the Board of Directors must make
pursuant to this Article 11 shall be conclusive if made in good faith and in
accordance with the provisions of this Article, absent manifest error, and set
forth in a Board Resolution.

     Section 11.12 Responsibility of Trustee for Conversion Provisions.

     The Trustee has no duty to determine when an adjustment under this Article
XI should be made, how it should be made or what it should be. The Trustee has
no duty to determine whether a supplemental indenture under Section 11.4 need be
entered into or whether any provisions of any supplemental indenture are
correct. The Trustee makes no representation as to the validity or value of any
securities or assets issued upon conversion of Securities. The Trustee shall not
be responsible for any failure of the Company to comply with this Article 11.
Each Conversion Agent other than the Company shall have the same protection
under this Section 11.12 as the Trustee.

<PAGE>

                                                                              75

     The rights, privileges, protections, immunities and benefits given to the
Trustee under the Indenture including, without limitation, its rights to be
indemnified, are extended to, and shall be enforceable by, the Trustee in each
of its capacities hereunder, and each Paying Agent or Conversion Agent acting
hereunder.

     Section 11.13 Unconditional Right of Holders to Convert.

     Notwithstanding any other provision in this Indenture, the Holder of any
Security shall have the right, which is absolute and unconditional, to convert
its Security in accordance with this Article 11 and to bring an action for the
enforcement of any such right to convert, and such rights shall not be impaired
or affected without the consent of such Holder.

     Section 11.14 Failure to Deliver Shares.

     If, for any reason whatsoever, the Company shall fail to, or is otherwise
unable to, deliver any shares of Common Stock to any Holder upon the proper
conversion of such Holder's Securities in accordance with the terms of this
Indenture (a "Share Delivery Default"), the Company shall pay liquidated damages
(the "Share Liquidated Damages") on all Securities, in amount equal to 0.50% per
annum of the principal amount outstanding on the Securities from the date
following such Share Delivery Default. All accrued Liquidated Damages shall be
paid either (i) in cash, by wire transfer of immediately available funds or by
federal funds check or (ii) in PIK Securities, in each case on the next interest
payment date or, if earlier, the Maturity Date. Following the cure of each such
Share Delivery Default with respect to each such Holder's Securities, the
accrual of Liquidated Damages with respect to the Securities will cease.

     Section 11.15 Common Stock Restricted Securities Legends.

     Unless such Common Stock has been sold pursuant to a registration statement
that has been declared effective under the Securities Act or is eligible for
resale pursuant to Rule 144(k), each stock certificate representing Common Stock
issued upon conversion of the Securities will bear the legend set forth on
Exhibit G hereto (the "Common Stock Restricted Securities Legend"). The Common
Stock Restricted Securities Legend may be removed from any stock certificate
representing shares of the Common Stock issued upon conversion of any Security
if there is delivered to the Company such evidence required by the Common Stock
Restricted Securities Legend. Upon provision of such satisfactory evidence, at
the written direction of the Company, the transfer agent for the Common Stock
shall authenticate and deliver in exchange for the stock certificate or stock
certificates representing such shares of Common Stock bearing such legend, one
or more new stock certificates representing a like aggregate number of shares of
Common Stock that do not bear such legend. If the Common Stock Restricted
Securities Legend has been removed from a stock certificate representing shares
of the Common Stock issued upon conversion of any Security as provided above, no
other stock certificates representing shares of the Common Stock issued upon
conversion of such Security shall bear such legend, unless the Company has
reasonable cause to believe that such shares of Common Stock are "restricted
securities" within the meaning of Rule 144.

<PAGE>

                                                                              76

                                  ARTICLE XII

                                  MISCELLANEOUS

     Section 12.1 Trust Indenture Act Controls. If any provision of this
Indenture limits, qualifies, or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control.

     Section 12.2 Notices. Any request, demand, authorization, notice, waiver,
consent or communication shall be in writing and delivered in person or mailed
by first-class mail, postage prepaid, addressed as follows or transmitted by
facsimile transmission (confirmed by guaranteed overnight courier) to the
following facsimile numbers:

     if to the Company:

     PG&E Corporation
     One Market, Spear Tower
     Suite 2400
     San Francisco, California  94105
     Attention:  Assistant Treasurer
     Facsimile:  (415) 267-7625
     Telephone:  (415) 267-7052

     with a copy to:

     PG&E Corporation
     One Market, Spear Tower

     Suite 2400
     San Francisco, California 94105
     Attention: Chief Counsel, Corporate Law Department
     Facsimile:  (415) 817-8225
     Telephone:  (415) 817-8200

     if to the Trustee:

     U.S. Bank, N.A.
     One California Street,
     Suite 2550
     Attention:  Corporate Trust Services
     Facsimile:  (415) 273-4591
     Telephone:  (415) 273-4514

     The Company or the Trustee by notice given to the other in the manner
provided above may designate additional or different addresses for subsequent
notices or communications.

     Any notice or communication given to a Securityholder shall be mailed to
the Securityholder, by first-class mail, postage prepaid, at the
Securityholder's address as it appears

<PAGE>

                                                                              77

on the registration books of the Registrar and shall be sufficiently given if so
mailed within the time prescribed.

          Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not received by the addressee.

          If the Company mails a notice or communication to the Securityholders,
it shall mail a copy to the Trustee and each Registrar, Paying Agent, Conversion
Agent or co-registrar.

          Section 12.3 Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA Section 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Trustee shall comply with TIA Section 312(b) relating to
Securityholder communications. The Company, the Trustee, the Registrar, the
Paying Agent, the Conversion Agent and anyone else shall have the protection of
TIA Section 312(c).

          Section 12.4 Certificate and Opinion as to Conditions Precedent. Upon
any request or application by the Company to the Trustee to take any action
under this Indenture, the Company shall furnish to the Trustee:

     (1)  an Officers' Certificate stating that, in the opinion of the signers,
all conditions precedent, if any, provided for in this Indenture relating to the
proposed action have been complied with; or

     (2)  an Opinion of Counsel stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.

          Section 12.5 Statements Required in Certificate or Opinion. Each
Officers' Certificate or Opinion of Counsel with respect to compliance with a
covenant or condition provided for in this Indenture shall include:

     (1)  a statement that each person making such Officers' Certificate or
Opinion of Counsel has read such covenant or condition;

     (2)  a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such Officers'
Certificate or Opinion of Counsel are based;

     (3)  a statement that, in the opinion of each such person, he has made such
examination or investigation as is reasonably necessary to enable such person to
express an informed opinion as to whether or not such covenant or condition has
been complied with; and

     (4)  a statement that, in the opinion of such person, such covenant or
condition has been complied with.

<PAGE>

                                                                              78

          Section 12.6  Separability Clause. In case any provision in this
Indenture or in the Securities shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.

          Section 12.7  Rules by Trustee, Paying Agent, Conversion Agent and
Registrar. The Trustee may make reasonable rules for action by or a meeting of
Securityholders. The Registrar, the Conversion Agent and the Paying Agent may
make reasonable rules for their functions.

          Section 12.8  GOVERNING LAW. THIS INDENTURE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

          Section 12.9  No Recourse Against Others. A director, officer,
employee or stockholder, as such, of the Company shall not have any liability
for any obligations of the Company under the Securities or this Indenture or for
any claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Security, each Securityholder shall waive and release
all such liability. The waiver and release shall be part of the consideration
for the issue of the Securities.

          Section 12.10 Successors. All agreements of the Company in this
Indenture and the Securities shall bind its successor. All agreements of the
Trustee in this Indenture shall bind its successor.

          Section 12.11 Multiple Originals. The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement. One signed copy is enough to prove this
Indenture.

                            [Signature Pages Follow]

<PAGE>

                                                                              79

          IN WITNESS WHEREOF, the undersigned, being duly authorized, have
executed this Indenture on behalf of the respective parties hereto as of the
date first above written.

                                         PG&E CORPORATION



                                           By: _________________________________
                                               Name:
                                               Title:



                                           U.S. BANK, N.A.. as Trustee


                                           By:__________________________________
                                               Name:
                                               Title:

<PAGE>

                                    EXHIBIT A

                        [FORM OF FACE OF GLOBAL SECURITY]

UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS TO NOMINEES OF
THE DEPOSITORY TRUST COMPANY, OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S
NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE TWO OF
THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.

<PAGE>

                                PG&E CORPORATION

                  7.50% Convertible Subordinated Notes due 2007

No.                                           CUSIP:
Issue Date:  ______, 200_                     Principal Amount:  $______________

     PG&E CORPORATION, a California corporation, promises to pay to Cede & Co.
or registered assigns, the principal amount of _____________________ dollars
($__________) on June 30, 2007.

     Interest Payment Dates: June 30 and December 31, commencing December 31,
2002.

     Record Dates: June 15 and December 15.

     Reference is hereby made to the further provisions of this Security set
forth on the reverse side of this Security, which further provisions shall for
all purposes have the same effect as if set forth at this place.

     IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.

Dated:  _____, 200_                         PG&E CORPORATION


                                           By:__________________________________

                                           Title:_______________________________


TRUSTEE'S CERTIFICATE OF AUTHENTICATION

U.S. BANK, N.A.,
as Trustee, certifies that this is one
of the Securities referred to in the
within-mentioned Indenture.



By__________________________________
         Authorized Signatory

Dated:  _______ __, 200_

                                      A-2

<PAGE>

                      [FORM OF REVERSE OF GLOBAL SECURITY]

                  7.50% Convertible Subordinated Notes due 2007

     This Security is one of a duly authorized issue of 7.50% Convertible
Subordinated Notes due 2007 (the "Securities") of PG&E Corporation, a California
corporation (including any successor corporation under the Indenture hereinafter
referred to, the "Company"), issued under an Indenture, dated as of June 25,
2002 (together with any supplemental indenture thereto, the "Indenture"),
between the Company and U.S. Bank, N.A., as trustee (the "Trustee"). The terms
of the Security include those stated in the Indenture, those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended ("TIA"),
and those set forth in this Security. This Security is subject to all such
terms, and Holders are referred to the Indenture and the TIA for a statement of
all such terms. To the extent permitted by applicable law, in the event of any
inconsistency between the terms of this Security and the terms of the Indenture,
the terms of the Indenture shall control. Capitalized terms used but not defined
herein have the meanings assigned to them in the Indenture referred to below
unless otherwise indicated.

1.   Interest

     The Company promises to pay interest on the principal amount of the
Securities at the interest rate of 7.50% (the "Interest Rate") from the date of
issuance until repayment in full at June 30, 2007, or until an earlier
repurchase. The Company will pay Interest on this Security semi-annually in
arrears on June 30 and December 31 of each year (each, an "Interest Payment
Date"), commencing December 31, 2002.

     The Securities shall bear interest from June 25, 2002 until the principal
amount thereof is paid or made available for payment, or until such date on
which the Securities are converted or purchased as provided herein at a rate of
7.50% per annum.

     Interest on the Securities shall be computed (i) for any full semi-annual
period for which a particular Interest Rate is applicable, on the basis of a
360-day year of twelve 30-day months and (ii) for any period for which a
particular Interest Rate is applicable for less than a full semiannual period
for which Interest is calculated, on the basis of a 30-day month and, for such
periods of less than a month, the actual number of days elapsed over a 30-day
month.

     The Company shall have the right, at any time and from time to time, during
the term of the Securities, to make payments of interest on any Interest Payment
Date prior to the Maturity Date or to make payments on any accrued Liquidated
Damages by issuing additional 7.50% Convertible Preferred Notes due 2007 (the
"PIK Securities"), on not less than 30 days (and not more than 45 days) notice
to the Trustee and notice to the Holders (the "PIK Notice") prior to each such
Interest Payment Date; provided that on the Maturity Date the Company shall be
required to pay all accrued and unpaid interest on the Securities, and any
outstanding Liquidated Damages, in cash, and no PIK Notice shall be given with
respect to such last interest payment date. The PIK Securities shall be issued
under the Indenture and, except to the extent set forth in Section 2.14 of the
Indenture, shall in all respects be identical to the originally issued
Securities.

                                      A-3

<PAGE>

     No PIK Securities may be issued in denominations of less than $1.00 of
principal amount (and such PIK Securities must be issued in integral multiples
of $1.00) and no fractional PIK Securities may be issued in lieu of cash
interest pursuant to the fourth paragraph of this Section 1 and the Company
shall, instead, pay a cash adjustment in the same manner as provided in the
Indenture with respect to the conversion of Securities in shares of Common
Stock.

     If this Security is repurchased by the Company on a date that is after the
record date and prior to the corresponding Interest Payment Date, interest and
additional amounts, if any, accrued and unpaid hereon to but not including the
applicable Change of Control Purchase Date, as the case may be, will be paid to
the same Holder to whom the Company pays the principal of this Security.

     A Holder of any Security at the close of business on a record date will be
entitled to receive interest (including Liquidated Damages, if any) on such
Security on the corresponding Interest Payment Date. Interest on Securities
converted after a record date but prior to the corresponding Interest Payment
Date (other than any Security whose maturity is prior to such Interest Payment
Date) will be paid to the Holder of the Securities on the record date but, upon
conversion, the Holder must pay the Company the interest, Liquidated Damages and
Pass-Through Dividends, if any, which have accrued and will be paid on such
Interest Payment Date upon receipt of such amounts from the Company.

     If the principal amount hereof or any portion of such principal amount or
any interest, including the payment of Liquidated Damages and Pass-Through
Dividends, if any, on any Security is not paid when due (whether upon
acceleration pursuant to Section 7.2 of the Indenture, upon the date set for
payment of the Change of Control Purchase Price pursuant to Section 5 hereof or
upon the Stated Maturity of this Security), then in each such case the overdue
amount shall, to the extent permitted by law, bear interest at 1% over the then
currently applicable rate, compounded semi-annually, which interest shall accrue
from the date on which such overdue amount was originally due to the date of
payment of such amount, including interest thereon, has been made or duly
provided for. All such interest shall be payable on demand.

     Subject to the record date provisions described in the Indenture, the
Company shall pay to each Holder an amount per Security equal to the Cash
Dividends, if any, paid by the Company per share of Common Stock multiplied by
the principal amount of such Security divided by the Conversion Price in effect
on the record date for such payment. Pass-Through Dividends, if any, will be
payable on the payment date of each such Pass-Through Dividend to Holders as of
the record date for determination of the stockholders entitled to receive each
such Pass-Through Dividend.

2.   Method of Payment.

     Except as provided below, interest and Liquidated Damages will be paid (i)
on the Global Securities to DTC in immediately available funds, (ii) to the
person in whose name Securities are registered at the close of business on the
record date, (a) on any Certificated Securities having an aggregate principal
amount of $5,000,000 or less, by check mailed to the Holders of such Securities;
(b) on any Securities having an aggregate principal amount of more than
$5,000,000,

                                      A-4

<PAGE>

by wire transfer in immediately available funds at the election of the Holders
of those Securities; and (c) in the case of interest or Liquidated Damages
payable in kind, by deposit or delivery of PIK Securities.

     At Stated Maturity the Company will pay principal and interest in cash on
Securities at the Company's office for payment, which initially will be the
Corporate Trust Office of the Trustee.

     Subject to the terms and conditions of the Indenture, the Company will make
payments in cash in respect of the Change of Control Purchase Price and amounts
payable at Stated Maturity to Holders who surrender Securities to the Paying
Agent to collect such payments in respect of the Securities. The Company will
pay cash amounts in money of the United States that at the time of payment is
legal tender for payment of public and private debts. However, the Company may
make such cash payments by check payable in such money.

3.   Paying Agent, Conversion Agent and Registrar.

     Initially, U.S. Bank, N.A. (the "Trustee") will act as Paying Agent,
Conversion Agent and Registrar. The Company may appoint and change any of the
Paying Agent, Conversion Agent or Registrar without notice, other than notice to
the Trustee. Neither the Company nor any of its Subsidiaries nor any of their
Affiliates may act as Paying Agent, Conversion Agent or Registrar.

4.   Indenture.

     This Security is one of a duly authorized issue of Securities of the
Company designated as its 7.50% Convertible Subordinated Notes due 2007, issued
under the Indenture. The terms of this Security include those stated in the
Indenture and those required by or made part of the Indenture by reference to
the Trust Indenture Act of 1939, as amended, as in effect on the date of the
Indenture. This Security is subject to all such terms, and the Holder of this
Note is referred to the Indenture and said Act for a statement of them.

     The Securities are general unsecured subordinated obligations of the
Company limited to $280,000,000. Notwithstanding the foregoing, the aggregate
principal amount of the Securities aggregate principal amount permitted to be
outstanding at any time may exceed the amount set forth in the foregoing
sentence only by an amount sufficient to permit payments of interest or
Liquidated Damages in PIK Securities as provided for in the Indenture.

5.   Purchase By the Company at the Option of the Holder.

     At the option of the Holder by provision of a Change of Control Purchase
Notice and subject to the terms and conditions of the Indenture, the Company
shall become obligated to offer to purchase the Securities held by such Holder
(or any portion of the principal amount hereof that is at least an integral
multiple of $1,000 (or in the case of any PIK Security, at least an integral
multiple of $1), provided that the portion of the principal amount of the
Security to be outstanding after such purchase is at least equal to $1,000 (or,
in the case of a PIK Security, at least $1) within 30 days after the occurrence
of a Change of Control of the Company for a Change of Control Purchase Price
equal to the principal amount plus accrued and unpaid interest,

                                      A-5

<PAGE>

including any Liquidated Damages and Pass-Through Dividends, if any, payable
with respect to such Security on the Change of Control Purchase Date. The Change
of Control Purchase Date shall be no earlier than 30 days nor later than 60 days
after the delivery of the notice described in the preceding sentence. The Change
of Control Purchase Price shall be paid in cash.

     Holders have the right to withdraw any Change of Control Purchase Notice,
as the case may be, by delivering to the Paying Agent a written notice of
withdrawal in accordance with the provisions of the Indenture.

     If cash sufficient to pay the Change of Control Purchase Price of all
Securities or portions thereof to be purchased as of the Change of Control
Purchase Date is deposited with the Paying Agent, on the Business Day following
the Change of Control Purchase Date, interest will cease to accrue on such
Securities (or portions thereof) (including Liquidated Damages and Pass-Through
Dividends, if any) immediately after such Change of Control Purchase Date, and
the Holder thereof shall have no other rights as such other than the right to
receive the Change of Control Purchase Price upon surrender of such Security.

6.   Conversion.

     (a)  Subject to and in compliance with the provisions of the Indenture, a
Holder shall have the right, at such Holder's option, to convert all or any
portion, if the portion to be converted is $1,000 or an integral multiple $1,000
(or, in the case of a PIK Security, the portion to be converted may be $1.00 or
an integral multiple of $1.00), of such security into fully paid and
nonassessable shares of Common Stock at the Conversion Price in effect on the
Conversion Date.

     (b)  No Holder may convert any Security to the extent that, immediately
following any such conversion and upon receipt of any shares of Common Stock
issuable upon such conversion, such Holder would either (i) become or be
included in any person, including any syndicate or group deemed to be a "person"
under Section 13(d)(3) of the Exchange Act, that is the single largest holder of
voting power represented by the Company's capital stock (or otherwise become the
single largest holder of the Common Stock) (the "Shareholder Limitation") or
(ii) beneficially own or be included in any "person" that beneficially owns in
excess of 4.9% of the voting power represented by the Company's capital stock
(or otherwise beneficially own in excess of 4.9% of the outstanding Common
Stock) (the "4.9% Limitation") after, in either case, giving effect to such
conversion (the Shareholder Limitation and the 4.9% Limitation are collectively
referred to herein as the "Conversion Limitations"). The determinations of the
number of shares that (i) constitute 4.9% of the outstanding Common Stock or
voting power and (ii) are held by the largest holder will be made in reliance
upon the information contained in publicly available filings made with the SEC
unless the Company is aware that such information is incorrect and has made the
correct information public and disclosed such information to the Holders at the
time of any such proposed conversion. In order to facilitate compliance with the
foregoing, each Holder will be required to make a representation that it and its
Affiliates will comply with the Conversion Limitations immediately after
converting any Security and receipt of any shares of Common Stock issuable upon
such conversion.

                                      A-6

<PAGE>

     (c)  Notwithstanding the Shareholder Limitation, however, a Holder may
convert Securities that would otherwise cause such Holder to hold shares of
Common Stock in excess of the Shareholder Limitation if, as to such excess
number of shares of Common Stock, (the "Excess Shares"), such Holder (i)
irrevocably covenants to the Company to sell such Excess Shares within 10 days
after the date of conversion and (ii) confirms that it has, on or prior to such
conversion date, entered into a binding arrangement to sell the Excess Shares
within 10 days after such conversion date either (a) in a regular way
transaction on a national securities exchange (or the principal market where the
shares of Common Stock are then traded) or (b) to one or more persons that are
not "affiliates" (used herein as defined in Rule 144 promulgated under the
Securities Act) of such Holder ("Third Parties"), each of whom represents for
the benefit of the company that, upon purchase of the applicable Excess Shares,
such Third Party, together with its affiliates, will not be the beneficial owner
of a number of shares of Common Stock in excess of the Shareholder Limitation.
In addition, such Holder, by converting its securities, shall be deemed to agree
to vote the applicable Excess Shares only in accordance with the recommendations
of the Board of Directors of the Company or any Third Party that has agreed to
purchase such shares, if any record date for a vote of the Common Stock is
established for any day between the conversion date and the consummation of the
sale of the applicable Excess Shares. The Shareholder Limitation will cease to
have any force and effect upon consummation of a Spin-Off of POR Spin-Co, if, on
the date that is 14 days after delivery to the Company of a request by the
Majority Holders to such effect (which request may be given no more than once
during any 180-day period), the Company shall not have delivered a certificate
to the Holders stating that the removal of the Shareholder Limitation would, in
the good faith judgment of the Company, not be consistent with the applicable
regulatory or other legal requirements.

     A Security in respect of which a Holder has delivered a Change of Control
Purchase Notice, exercising the option of such Holder to require the Company to
purchase such Security, may be converted only if such Change of Control Purchase
Notice is withdrawn in accordance with the terms of the Indenture.

     The initial Conversion Price shall be computed by the Company and equal
that amount (rounded to four decimal places) arrived at by multiplying 119% by
the arithmetic average of the Volume Weighted Average Price or "VWAP" (as
defined in the Indenture) per share of Common Stock for a fixed 43 Trading Day
period beginning on and including the third Trading Day after the Closing Date,
subject to adjustment in certain events described in the Indenture.

     To surrender a Security for conversion, a Holder must (1) complete and
manually sign the conversion notice below (or complete and manually sign a
facsimile of such notice) and deliver such notice to the Conversion Agent, (2)
surrender the Security to the Conversion Agent, (3) furnish appropriate
endorsements and transfer documents and (4) pay any transfer or similar tax, if
required.

     No fractional shares of Common Stock shall be issued upon conversion of any
Security. Instead of any fractional share of Common Stock that would otherwise
be issued upon conversion of such Security, the Company shall pay a cash
adjustment as provided in the Indenture.

                                      A-7

<PAGE>

     If the Company (i) is a party to a consolidation, merger or binding share
exchange, (ii) reclassifies the Common Stock or (iii) conveys, transfers or
leases its properties and assets substantially as an entirety to any Person, the
right to convert a Security into shares of Common Stock may be changed into a
right to convert it into securities, cash or other assets of the Company or such
other Person, in each case in accordance with the Indenture.

7.   Subordination of Securities.

     The indebtedness evidenced by the Securities is, to the extent and in the
manner provided in Article 5 of the Indenture, expressly subordinate and subject
in right of payment to the prior payment in full of all Senior Debt of the
Company, as defined in the Indenture, whether outstanding at the date of the
Indenture or thereafter incurred, and this Security is issued subject to the
provisions of the Indenture with respect to such subordination. Each Holder of
this Security, by accepting the same, agrees to and shall be bound by such
provisions and authorizes the Trustee on its behalf to take such action as may
be necessary or appropriate to effectuate the subordination so provided and
appoints the Trustee his or her attorney-in-fact for such purpose.

     No reference herein to the Indenture and no provision of this Security or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and interest (including the
Change of Control Purchase Price, Liquidated Damages or Pass-Through Dividends,
if any) on this Security at the place, at the respective times, at the rate and
in the coin or currency herein prescribed.

8.   Denominations; Transfer; Exchange.

     The Securities are in fully registered form, without coupons, in
denominations of $1,000 of principal amount and integral multiples of $1,000 (or
in the case of PIK Securities, denominations of $1.00 of principal amount and
integral multiples of $1.00). A Holder may register, transfer or exchange of
Securities in accordance with the Indenture. The Registrar may require a Holder,
among other things, to furnish appropriate endorsements, legal opinions and
transfer documents and to pay any taxes and fees required by law or permitted by
the Indenture. The Registrar need not transfer or exchange any Securities in
respect of which a Change of Control Purchase Notice has been given and not
withdrawn.

9.   Persons Deemed Owners.

     The registered Holder of this Security shall be treated as the owner of
this Security for all purposes.

10.  Unclaimed Money or Securities.

     The Trustee and the Paying Agent shall pay to the Company upon written
request any money held by them for the payment of any amount with respect to the
Securities that remains unclaimed for two years after the date upon which such
payment shall have been due. After payment to the Company, Holders entitled to
the money or securities must look to the Company for payment as general
creditors unless an applicable abandoned property law designates another person
after the date upon which such payment shall have become due.

                                      A-8

<PAGE>

11.  Amendment; Waiver.

     Subject to certain exceptions set forth in the Indenture, (i) the Indenture
or the Securities may be amended with the written consent of the Holders of at
least a majority in aggregate principal amount of the outstanding Securities and
(ii) certain Defaults may be waived with the written consent of the Holders of a
majority in aggregate principal amount of the outstanding Securities. The
Indenture and the Securities may also be amended by the Company and the Trustee,
without the consent of any Holder, in certain circumstances set forth in the
Indenture; provided, that certain provisions of the Indenture and the Securities
may not be amended without the consent of each affected Holder.

12.  Defaults and Remedies.

     If any Event of Default with respect to the Securities shall occur and be
continuing, the principal of all the Securities may be declared due and payable
in the manner and with the effect provided in the Indenture.

13.  Trustee Dealings with the Company.

     Subject to certain limitations imposed by the TIA, the Trustee under the
Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.

14.  No Recourse Against Others.

     A director, officer, employee or shareholder, as such, of the Company shall
not have any liability for any obligations of the Company under the Securities
or the Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Security, each Securityholder
waives and releases all such liability. The waiver and release are part of the
consideration for the issue of the Securities.

15.  Authentication.

     This Security shall not be valid until an authorized signatory of the
Trustee manually signs the Trustee's Certificate of Authentication on the other
side of this Security.

16.  Abbreviations.

     Customary abbreviations may be used in the name of a Securityholder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with right of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).

                                      A-9

<PAGE>

17.   GOVERNING LAW.

      THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN THE INDENTURE AND THIS
SECURITY.

18.   Requests for Copies.

      The Company will furnish to any Securityholder upon written request and
without charge a copy of the Indenture and, if requested, a copy of this
Security in larger type. Requests may be made to:

      PG&E CORPORATION
      One Market, Spear Tower
      Suite 2400
      San Francisco, California 94105
      Attention: Assistant Treasurer
      Facsimile: (415) 267-7625
      Telephone: (415) 267-7052

      with a copy to:

      PG&E Corporation
      One Market, Spear Tower
      Suite 2400
      San Francisco, California 94105
      Attention: Chief Counsel--Corporate
      Facsimile: (415) 817-8225
      Telephone: (415) 817-8200


19.   Registration Rights.

      The Holders of the Securities are entitled to the benefits of the Resale
Registration Rights Agreement, dated as of June 25, 2002, between the Company
and the purchasers identified on the signature pages thereto, including the
receipt of Shelf Liquidated Damages upon a Registration Default (as defined in
such agreement).

                                      A-10

<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
ASSIGNMENT FORM                                       CONVERSION NOTICE
--------------------------------------------------------------------------------------------------
<S>                                                   <C>
To assign this Security, fill in the form below:      To convert this Security into Common Stock
                                                      of the Company, check the box [   ].
--------------------------------------------------------------------------------------------------
I or we assign and transfer this Security to          To convert only part of this Security,
______________________________                        state the principal amount to be converted
______________________________                        (which must be $1,000 or an integral
(Insert assignee's soc. sec. or tax ID no.)           multiple of $1,000 or in the case of any
______________________________                        PIK Security $1.00 or an integral multiple
______________________________                        of $1.00):
______________________________
(Print or type assignee's name, address and zip       If you want the stock certificate made out
code)                                                 in another person's name fill in the form
                                                      below:
and irrevocably appoint                               ________________________________
                                                      ________________________________
____________________ agent to transfer this
Security on the books of the Company. The             (Insert the other person's soc. sec. tax
agent may substitute another to act for him.          ID no.)

                                                      ________________________________
                                                      ________________________________
                                                      ________________________________
                                                      ________________________________
                                                      ________________________________
                                                      (Print or type other person's name,
                                                      address and zip code)

                                                      The undersigned, on behalf of itself and
                                                      its affiliates, hereby represents to the
                                                      Company that upon and immediately after
                                                      the conversion of Securities into shares
                                                      of Common Stock, it and its affiliates
                                                      are and will be in compliance with the
                                                      Conversion Limitations applicable to
                                                      such Securities pursuant to paragraph 6
                                                      of this Security.
--------------------------------------------------------------------------------------------------
</TABLE>


Date:  __________ Your Signature:  _________________________________________

____________________________________________________________________________
   (Sign exactly as your name appears on the other side of this Security)

                                      A-11

<PAGE>

Signature Guaranteed


______________________________________
Participant in a Recognized Signature
Guarantee Medallion Program




By:___________________________________
          Authorized Signatory

                                      A-12

<PAGE>

             SCHEDULE OF INCREASES AND DECREASES OF GLOBAL SECURITY

    Initial Principal Amount of Global Security: ____________($___________).

________________________________________________________________________________
Date      Amount of          Amount of         Principal            Notation by
          Increase in        Decrease in       Amount of            Registrar or
          Principal          Principal         Global Security      Security
          Amount of          Amount of         After Increase or    Custodian
          Global Security    Global Security   Decrease
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

                                      A-13

<PAGE>

                                    EXHIBIT B

                     [FORM OF FACE OF 144A GLOBAL SECURITY]

THE SECURITY EVIDENCED BY THIS CERTIFICATE AND ANY SHARES OF COMMON STOCK
ISSUABLE UPON THE CONVERSION OF THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED EXCEPT AS
SET FORTH IN THE FOLLOWING SENTENCE. BY ACQUISITION HEREOF, THE HOLDER:

(1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE
144A UNDER THE SECURITIES ACT (A "QIB"); OR (B) IT IS AN INSTITUTIONAL
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF
REGULATION D UNDER THE SECURITIES ACT) (AN "IAI");

(2) AGREES THAT IT WILL NOT, (I) WITHIN THE TIME PERIOD REFERRED TO UNDER RULE
144(k) (TAKING INTO ACCOUNT THE PROVISIONS OF RULE 144(d) UNDER THE SECURITIES
ACT, IF APPLICABLE) UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE
TRANSFER OF THIS SECURITY, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A)
TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A QIB PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QIB IN COMPLIANCE WITH RULE 144A UNDER THE
SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION
FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE),
(E) TO AN IAI THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED
LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
REGISTRATION OF TRANSFER OF THIS SECURITY (THE FORM OF WHICH LETTER CAN BE
OBTAINED FROM THE TRUSTEE) AND AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY
THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT OR (F) PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND, IN EACH CASE,
IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, OR (II) AFTER THE TIME
PERIOD REFERRED TO UNDER RULE 144(k) (TAKING INTO ACCOUNT THE PROVISIONS OF RULE
144(d) UNDER THE SECURITIES ACT, IF APPLICABLE) UNDER THE SECURITIES ACT AS IN
EFFECT ON THE DATE OF THE TRANSFER OF THIS SECURITY, PROVIDE A REPRESENTATION TO
THE COMPANY THAT IT HAS HELD THE SECURITY EVIDENCED BY THIS CERTIFICATE FOR A
PERIOD OF TWO YEARS AND IS NOT AN AFFILIATE (AS SUCH TERM IS DEFINED IN RULE 144
UNDER THE SECURITIES ACT);

(3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY OR AN
INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS
LEGEND;

(4) AGREES THAT IT WILL, IN CONNECTION  WITH ANY TRANSFER OF THIS SECURITY OR
ANY INTEREST HEREIN WITHIN THE TIME PERIOD REFERRED TO IN

<PAGE>

CLAUSE 2(I) OF THIS LEGEND, COMPLETE AND DELIVER A TRANSFER CERTIFICATE, THE
FORM OF WHICH IS AVAILABLE FROM THE TRUSTEE TO THE TRUSTEE. AS USED HEREIN, THE
TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE
MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE
INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY
TRANSFER OF THIS SECURITY IN VIOLATION OF THE FOREGOING RESTRICTIONS.

The foregoing legend may be removed from this Security on satisfaction of the
conditions specified in the Indenture.

                                      A-2

<PAGE>

                                PG&E CORPORATION

                  7.50% Convertible Subordinated Notes due 2007

         No.                                                 CUSIP:
         Issue Date:               , 200                     Principal Amount: $



         PG&E CORPORATION, a California corporation, promises to pay to CEDE &
CO. or registered assigns, the principal amount of _________________ dollars
($     ) on June 30, 2007.

         Interest Payment Dates: June 30 and December 31, commencing December
31, 2002.

         Record Dates:   June 15 and December 15.

         Reference is hereby made to the further provisions of this Security set
forth on the reverse side of this Security, which further provisions shall for
all purposes have the same effect as if set forth at this place.

         IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.

Dated: ___________, 200___                           PG&E CORPORATION


                                                     By: _______________________
                                                          Title:



TRUSTEE'S CERTIFICATE OF  AUTHENTICATION

U.S. BANK, N.A.,
as Trustee, certifies that this
is one of the Securities referred
to in the within-mentioned Indenture.


By  ________________________
     Authorized Signatory

Dated:             , 200

                                      A-3

<PAGE>

      [FORM OF REVERSE OF 144A GLOBAL SECURITY IS IDENTICAL TO EXHIBIT A]

<PAGE>

                                    EXHIBIT C

                     [FORM OF FACE OF CERTIFICATED SECURITY]

THE SECURITY EVIDENCED BY THIS CERTIFICATE AND ANY SHARES OF COMMON STOCK
ISSUABLE UPON THE CONVERSION OF THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED EXCEPT AS
SET FORTH IN THE FOLLOWING SENTENCE. BY ACQUISITION HEREOF, THE HOLDER:

(1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE
144A UNDER THE SECURITIES ACT (A "QIB"); OR (B) IT IS AN INSTITUTIONAL
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF
REGULATION D UNDER THE SECURITIES ACT) (AN "IAI");

(2) AGREES THAT IT WILL NOT, (I) WITHIN THE TIME PERIOD REFERRED TO UNDER RULE
144(k) (TAKING INTO ACCOUNT THE PROVISIONS OF RULE 144(d) UNDER THE SECURITIES
ACT, IF APPLICABLE) UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE
TRANSFER OF THIS SECURITY, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A)
TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A QIB PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QIB IN COMPLIANCE WITH RULE 144A UNDER THE
SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION
FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE),
(E) TO AN IAI THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED
LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
REGISTRATION OF TRANSFER OF THIS SECURITY (THE FORM OF WHICH LETTER CAN BE
OBTAINED FROM THE TRUSTEE) AND AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY
THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT OR (F) PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND, IN EACH CASE,
IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, OR (II) AFTER THE TIME
PERIOD REFERRED TO UNDER RULE 144(k) (TAKING INTO ACCOUNT THE PROVISIONS OF RULE
144(d) UNDER THE SECURITIES ACT, IF APPLICABLE) UNDER THE SECURITIES ACT AS IN
EFFECT ON THE DATE OF THE TRANSFER OF THIS SECURITY, PROVIDE A REPRESENTATION TO
THE COMPANY THAT IT HAS HELD THE SECURITY EVIDENCED BY THIS CERTIFICATE FOR A
PERIOD OF TWO YEARS AND IS NOT AN AFFILIATE (AS SUCH TERM IS DEFINED IN RULE 144
UNDER THE SECURITIES ACT);

(3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY OR AN
INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS
LEGEND;

(4) AGREES THAT IT WILL, IN CONNECTION WITH ANY TRANSFER OF THIS SECURITY OR
ANY INTEREST HEREIN WITHIN THE TIME PERIOD REFERRED TO IN

<PAGE>

CLAUSE 2(I) OF THIS LEGEND, COMPLETE AND DELIVER A TRANSFER CERTIFICATE, THE
FORM OF WHICH IS AVAILABLE FROM THE TRUSTEE TO THE TRUSTEE. AS USED HEREIN, THE
TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE
MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE
INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY
TRANSFER OF THIS SECURITY IN VIOLATION OF THE FOREGOING RESTRICTIONS.

The foregoing legend may be removed from this Security on satisfaction of the
conditions specified in the Indenture.

                                      B-2

<PAGE>

                                PG&E CORPORATION

                  7.50% Convertible Subordinated Notes due 2007


         No.                                      [CUSIP:]
         Issue Date:           , 200              Principal Amount: $



         PG&E CORPORATION, a California corporation, promises to pay to
___________________ or registered assigns, the principal amount of
_________________ dollars ($          ) on June 30, 2007.

         Interest Payment Dates: June 30 and December 31, commencing December
31, 2002.

         Record Dates:  June 15 and December 15.

         Reference is hereby made to the further provisions of this Security set
forth on the reverse side of this Security, which further provisions shall for
all purposes have the same effect as if set forth at this place.

         IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.


Dated: ___________, 200___              PG&E CORPORATION


                                        By: _____________________
                                            Title:



TRUSTEE'S CERTIFICATE OF  AUTHENTICATION

U.S. BANK, N.A.,
as Trustee, certifies that this
is one of the Securities referred
to in the within-mentioned Indenture.


By __________________________________
       Authorized Signatory

Dated:             , 200

                                      B-3

<PAGE>

      [FORM OF REVERSE OF CERTIFICATED SECURITY IS IDENTICAL TO EXHIBIT A]

<PAGE>

                                                                       EXHIBIT D

                                PG&E Corporation
                  7.50% Convertible Subordinated Notes due 2007

                              Transfer Certificate

         In connection with any transfer of any of the Securities within the
period prior to the expiration of the holding period applicable to the sales
thereof under Rule 144(k) under the Securities Act of 1933, as amended (the
"Securities Act") (or any successor provision), the undersigned registered owner
of this Security hereby certifies with respect to $____________ principal amount
of the above-captioned Securities presented or surrendered on the date hereof
(the "Surrendered Securities") for registration of transfer, or for exchange or
conversion where the securities issuable upon such exchange or conversion are to
be registered in a name other than that of the undersigned registered owner
(each such transaction being a "transfer"), that such transfer complies with the
restrictive legend set forth on the face of the Surrendered Securities for the
reason checked below:

         [_] A transfer of the Surrendered Securities is made to PG&E
             Corporation (the "Company") or any of its subsidiaries;

         [_] The transfer of the Surrendered Securities complies with Rule 144A
             under the Securities Act;

         [_] The transfer of the Surrendered Securities is pursuant to an
             effective registration statement under the Securities Act;

         [_] The transfer of the Surrendered Securities is being effected to an
             Institutional Accredited Investor and pursuant to an exemption from
             the registration requirements of the Securities Act other than Rule
             144A, Rule 144 or Rule 904, and the transferor hereby further
             certifies that it has not engaged in any general solicitation
             within the meaning of Regulation D under the Securities Act and the
             transfer complies with the transfer restrictions applicable to
             beneficial interests in a Restricted Security under the Indenture
             and the requirements of the exemption claimed, which certification
             is supported by (1) a certificate executed by the transferee in the
             form of Exhibit E to the Indenture and (2) an opinion of counsel
             provided by the transferor or the transferee (a copy of which the
             transferor has attached to this certification), to the effect that
             such transfer is in compliance with the Securities Act; or

         [_] The transfer of the Surrendered Securities is pursuant to another
             available exemption from the registration requirement of the
             Securities Act;

and unless the box below is checked, the undersigned confirms that, to the
undersigned's knowledge, such Securities are not being transferred to an
"affiliate" of the Company as defined in Rule 144 under the Securities Act (an
"Affiliate"). Capitalized terms used but not defined herein have the meanings
set forth in the Indenture.

<PAGE>

         [_] The transferee is an Affiliate of the Company.

DATE:                               __________________________________
                                    Signature(s)

         (If the registered owner is a corporation, partnership or fiduciary,
the title of the person signing on behalf of such registered owner must be
stated.)



Signature Guaranteed




_______________________________________
Participant in a Recognized Signature

                                      C-2

<PAGE>

                                                                       EXHIBIT E

                            FORM OF CERTIFICATE FROM
                   ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR

PG&E Corporation
One Market, Spear Tower
Suite 2400
San Francisco, California  94105
Attn:  _________________


[Registrar address block]

         Re:  7.50% Convertible Subordinated Notes due 2007

                  Reference is hereby made to the Indenture, dated as of June
__, 2002 (the "Indenture"), between PG&E Corporation, as issuer (the "Company"),
and U.S. Bank, N.A., as trustee. Capitalized terms used but not defined herein
shall have the meanings given to them in the Indenture.

                  In connection with our proposed purchase of $____________
aggregate principal amount of:

                  (a) [_]  a beneficial interest in a Global Security, or

                  (b) [_]  a Certificated Security,

                  we confirm that:

                  1.       We understand that any subsequent transfer of the
Securities or any interest therein is subject to certain restrictions and
conditions set forth in the Indenture and the undersigned agrees to be bound by,
and not to resell or otherwise transfer the Securities or any interest therein
except in compliance with, such restrictions and conditions and the Securities
Act of 1933, as amended (the "Securities Act").

                  2.       We understand that the offer and sale of the
Securities have not been registered under the Securities Act, and that the
Securities and any interest therein may not be offered or sold except as
permitted in the following sentence. We agree, on our own behalf and on behalf
of any accounts for which we are acting as hereinafter stated, that if we should
sell the Securities or any interest therein, we will do so only (A) to the
Company or any subsidiary thereof, (B) in accordance with Rule 144A under the
Securities Act to a "qualified institutional buyer" (as defined therein), (C) to
an institutional "accredited investor" (as defined below) that, prior to such
transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to
you and to the Company a signed letter substantially in the form of this letter
and an opinion of legal counsel in form reasonably acceptable to the Company to
the effect that such transfer is in compliance with

<PAGE>

the Securities Act, (D) outside the United States in accordance with Rule 904 of
Regulation S under the Securities Act, (E) pursuant to the provisions of Rule
144(k) under the Securities Act or (F) pursuant to an effective registration
statement under the Securities Act, and we further agree to provide to any
Person purchasing the Certificated Security or beneficial interest in a Global
Security from us in a transaction meeting the requirements of clauses (A)
through (E) of this paragraph a notice advising such purchaser that resales
thereof are restricted as stated herein.

         3. We understand that, on any proposed resale of the Securities or
beneficial interest therein, we will be required to furnish to you and the
Company such certifications, legal opinions and other information as you and the
Company may reasonably require to confirm that the proposed sale complies with
the foregoing restrictions. We further understand that the Securities purchased
by us will bear a legend to the foregoing effect.

         4. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have
such knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of our investment in the Securities, and we
and any accounts for which we are acting are each able to bear the economic risk
of our or its investment.

         5. We are acquiring the Securities or beneficial interest therein
purchased by us for our own account or for one or more accounts (each of which
is an institutional "accredited investor") as to each of which we exercise sole
investment discretion.

         You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby.

                                       _________________________________________
                                         [Insert Name of Accredited Investor]


                                       By:______________________________________
                                          Name:
                                          Title:

Dated:__________________________





                                      D-2

<PAGE>

                                                                       EXHIBIT F

                                PG&E Corporation
                  7.50% Convertible Subordinate Notes due 2007

                              Exchange Certificate

         In connection with the exchange of a Certificated Security for an
interest in a Global Security pursuant to Section 2.12(a)(iv) of the Indenture
representing $____________ principal amount of the above-captioned Securities
presented or surrendered on the date hereof (the "Surrendered Securities"), the
undersigned registered owner of this Security hereby certifies that either:

         [_]      the undersigned is a "qualified institutional buyer" as
                  defined in Rule 144A under the Securities Act of 1933, as
                  amended (the "Securities Act"); or

         [_]      The Surrendered Securities are being transferred and such
                  transfer complies with Rule 144A under the Securities Act and
                  unless the box below is checked, the undersigned confirms
                  that, to the undersigned's knowledge, such Securities are not
                  being transferred to an "affiliate" of the Company as defined
                  in Rule 144 under the Securities Act (an "Affiliate").

         [_]       The transferee is an Affiliate of the Company.

DATE:                               __________________________________
                                    Signature(s)

         (If the registered owner is a corporation, partnership or fiduciary,
the title of the person signing on behalf of such registered owner must be
stated.)

Signature Guaranteed

____________________________________________
Participant in a Recognized Signature

                                      E-2

<PAGE>

                                                                       EXHIBIT G

                    COMMON STOCK RESTRICTED SECURITIES LEGEND

THE SECURITY EVIDENCED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD EXCEPT AS SET FORTH IN THE
FOLLOWING SENTENCE. BY ACQUISITION HEREOF, THE HOLDER:

(1) IT WILL NOT RESELL OR OTHERWISE TRANSFER THE SECURITY EXCEPT: (A) TO THE
COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT TO AN INSTITUTIONAL ACCREDITED INVESTOR
(AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) (IN
CONNECTION WITH ANY SUCH TRANSFER, IT WILL FURNISH TO THE TRANSFER AGENT FOR THE
COMMON STOCK, A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND WARRANTIES
RELATING TO THE RESTRICTIONS ON TRANSFER OF THE SECURITY EVIDENCED HEREBY (THE
FORM OF WHICH LETTER CAN BE OBTAINED FROM SUCH TRANSFER AGENT) AND AN OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE
SECURITIES ACT), (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY
RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (D) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND, IN EACH CASE, IN ACCORDANCE
WITH APPLICABLE STATE SECURITIES LAWS; AND

(D) IT WILL DELIVER TO EACH PERSON TO WHOM THE COMMON STOCK EVIDENCED HEREBY IS
TRANSFERRED (OTHER THAN A TRANSFER PURSUANT TO A CLAUSE 1(D) ABOVE) A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.

THIS LEGEND WILL BE REMOVED UPON THE DATE THAT IS THE LATER OF TWO YEARS AFTER
THE DATE SUCH SECURITY WAS LAST HELD BY AN AFFILIATE OF THE COMPANY AND TWO
YEARS AFTER THE ORIGINAL ISSUANCE OF THE SECURITY UPON THE CONVERSION OF WHICH
THE COMMON STOCK EVIDENCED HEREBY WAS ISSUED,

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>4
<FILENAME>dex992.txt
<DESCRIPTION>PURCHASE AGREEMENT DATED JUNE 25, 2002
<TEXT>
<PAGE>

                                                                    EXHIBIT 99.2

                                                                  EXECUTION COPY

                     $280,000,000 Aggregate Principal Amount

                                PG&E CORPORATION

                  7.50% CONVERTIBLE SUBORDINATED NOTES DUE 2007

                               PURCHASE AGREEMENT

                                                                   June 25, 2002
Lehman Brothers Inc.
745 Seventh Avenue
New York, NY 10019

Jackson Investment Fund Ltd.
c/o Citadel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606

Citadel Credit Trading Ltd.
c/o Citadel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606

Citadel Equity Fund Ltd.
c/o Citadel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606

Ladies and Gentlemen:

         PG&E Corporation, a California corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell
$280,000,000 aggregate principal amount of its 7.50% Convertible Subordinated
Notes, in the respective principal amounts set forth in Schedule 1 hereto
(together with any PIK Securities (as defined in the Indenture) that may be
issued thereon, the "Securities"), to Lehman Brothers Inc., Jackson Investment
Fund Ltd., Citadel Credit Trading Ltd. and Citadel Equity Fund Ltd. (each
individually, a "Purchaser" and collectively, the "Purchasers"). This is to
confirm the agreement between the Company and the Purchasers concerning the
offer, issue and sale of the Securities.

         The Securities will be offered and sold to the Purchasers without being
registered under the Securities Act of 1933, as amended, and the rules and
regulations of the Securities and Exchange Commission (the "Commission")
thereunder (collectively, the "Securities Act"), in reliance upon an exemption
therefrom. It is understood by the parties hereto that if the

<PAGE>

conversion price of the Securities meets the requirements of Rule 144A(d)(3)(i)
promulgated under the Securities Act, the Securities will be eligible to be
resold pursuant to Rule 144A.

         The Securities will be issued pursuant to an indenture (the
"Indenture"), the form of which is contained in Annex A hereof, dated as of the
date hereof (the "Closing Date"), between the Company and U.S. Bank, N.A., as
Trustee (the "Trustee"). The Securities will be convertible into shares of
common stock, no par value (the "Common Stock"), of the Company (such shares,
the "Conversion Shares") on the terms, and subject to the conditions, set forth
in the Indenture.

         Holders of the Securities (including the Purchasers and their
respective transferees) will be entitled to the benefits of a Resale
Registration Rights Agreement, dated as of the Closing Date, between the Company
and the Purchasers (the "Registration Rights Agreement"), the form of which is
contained in Annex B hereof, pursuant to which the Company will agree, among
other things, to use its best efforts to file with the Commission a shelf
registration statement pursuant to Rule 415 under the Securities Act (the
"Registration Statement") covering the resale of the Conversion Shares, and to
use its best efforts to cause the Registration Statement to be declared
effective within the time periods specified therein.

         This Agreement, the Indenture, the Securities and the Registration
Rights Agreement are referred to herein collectively as the "Transaction
Documents".

             1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants to and agrees with, each of the Purchasers
acquiring Securities hereunder that, as of the date hereof:

                   (a) The documents filed by the Company with the Commission
         since December 31, 2001 under the Securities Exchange Act of 1934, as
         amended, and the rules and regulations of the Commission thereunder
         (collectively, the "Exchange Act"), when they were filed with the
         Commission, conformed in all material respects to the requirements of
         the Exchange Act and none of such documents (collectively, the
         "Exchange Act Documents") contained any untrue statement of a material
         fact or omitted to state any material fact required to be stated
         therein or necessary in order to make the statements therein, in light
         of the circumstances under which they were made, not misleading.

                   (b) The Company and each of PG&E National Energy Group, LLC,
         a Delaware limited liability company, PG&E National Energy Group, Inc.,
         a Delaware corporation, 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, USGen New England, Inc., a Delaware
         corporation, GTN Holdings LLC, a Delaware limited liability company and
         PG&E Energy Trading Holdings, LLC, a Delaware limited liability company
         (each a "Subsidiary" and, collectively, the "Subsidiaries"), have been
         duly organized and are validly existing as corporations or limited
         liability companies, as the case may be, in good standing under the
         laws of their respective jurisdictions of organization, are duly
         qualified to do business and are in good standing as foreign
         corporations or limited liability companies, as the case may be, in
         each jurisdiction in which their respective

                                       2

<PAGE>

         ownership or lease of property or the conduct of their respective
         businesses requires such qualification, and have all power and
         authority necessary to own, lease or hold their respective properties
         and to conduct the businesses in which they are engaged, except, in
         each case, where the failure to be so qualified or in good standing
         would not result in a material adverse effect on the business,
         financial condition or results of operations of the Company and its
         subsidiaries taken as a whole or on the authority or the ability of the
         Company to perform its obligations under the Transaction Documents (a
         "Material Adverse Effect").

                   (c) Immediately prior to the transactions contemplated hereby
         and by the Amended and Restated Credit Agreement, dated as of the date
         hereof (the "Credit Agreement"), among the Company, Lehman Commercial
         Paper Inc. ("LCPI") and the other lenders party thereto and the Warrant
         Agreement, dated as of the date hereof, by and between the Company, LB
         I Group Inc. and each other entity signatory thereto (the "Warrant
         Agreement"), the authorized, issued and outstanding capital stock of
         the Company is as set forth in the Exchange Act Documents (except with
         respect to (i) changes occurring in the ordinary course of business and
         (ii) changes in outstanding Common Stock resulting from transactions
         relating to employee benefit plans or dividend reinvestment, stock
         option, stock award and stock purchase plans), and all of the issued
         shares of capital stock of the Company have been duly and validly
         authorized and issued, are fully paid and non-assessable; and all of
         the issued shares of capital stock of each Subsidiary have been duly
         and validly authorized and issued and are fully paid and non-assessable
         and (except for directors' qualifying shares and as disclosed in the
         Exchange Act Documents) are owned directly or indirectly by the
         Company, free and clear of all material liens, encumbrances, equities,
         claims or adverse interests (collectively, "Liens") of any nature.

                   (d) Except as set forth in the Exchange Act Documents, there
         are no legal or governmental proceedings pending to which the Company
         or any of the Subsidiaries is a party or of which any property or
         assets of the Company or any of the Subsidiaries is subject which, if
         determined adversely to the Company or any of the Subsidiaries, might
         have a Material Adverse Effect and, to the best of the Company's
         knowledge, no such proceedings are threatened by any governmental
         authority or other entity.

                   (e) Except as set forth in the Exchange Act Documents and
         except with respect to the rights contained in the Registration Rights
         Agreement and the Equity Registration Rights Agreement, dated as of
         June 25, 2002, among the Company, LB I Group Inc. and each other entity
         signatory thereto (the "Equity Registration Rights Agreement"), there
         are no contracts, agreements or other documents between the Company and
         any person granting such person the right to require the Company to
         file a registration statement under the Securities Act with respect to
         any securities of the Company owned or to be owned, directly or
         indirectly, by such person.

                   (f) Except as set forth in the Exchange Act Documents,
         neither the Company nor any of the Subsidiaries (i) is in violation of
         its charter or by-laws, (ii) is in default, and no event has occurred
         which, with notice or lapse of time or both, would

                                       3

<PAGE>

         constitute such a default, in the due performance or observance of any
         term, covenant or condition contained in any indenture, mortgage, deed
         of trust, loan agreement or other agreement or instrument to which it
         is a party or by which it is bound or to which any of its properties or
         assets is subject, or (iii) is in violation of any law, ordinance,
         governmental rule, regulation or court decree to which it or its
         property or assets may be subject or has failed to obtain any license,
         permit, certificate, franchise or other governmental authorization or
         permit necessary to the ownership of its property or to the conduct of
         its business, except, in the case of clauses (ii) and (iii) for any
         such defaults, violations or failures which would not result in a
         Material Adverse Effect.

                   (g) Except as set forth in the Exchange Act Documents,
         neither the Company nor any of the Subsidiaries has sustained, since
         the date of the latest audited financial statements included in the
         Exchange Act Documents, any loss or interference with its business from
         fire, explosion, flood or other calamity, whether or not covered by
         insurance, or from any labor dispute or court or governmental action,
         order or decree, except for any such loss or interference which would
         not result in a Material Adverse Effect.

                   (h) Except as set forth in the Exchange Act Documents, since
         the date of the latest audited financial statements included in the
         Exchange Act Documents, there has not been any material adverse change
         in or affecting the general affairs, management, consolidated financial
         position, stockholders' equity, results of operations, business or
         prospects of the Company and its subsidiaries taken as a whole.

                   (i) (A) the financial statements (including the related notes
         and supporting schedules) included in the Exchange Act Documents
         present fairly the financial condition, results of operations and
         changes in financial position of the Company and its subsidiaries on
         the basis stated therein at the respective dates or for the respective
         periods to which they apply, (B) such statements and related schedules
         and notes have been prepared in accordance with generally accepted
         accounting principles consistently applied throughout the periods
         involved, (C) the supporting schedules, if any, included in the
         Exchange Act Documents present fairly in accordance with generally
         accepted accounting principles the information required to be stated
         therein, and (D) the other financial information and data set forth in
         the Exchange Act Documents are, in all material respects, accurately
         presented and prepared on a basis consistent with such financial
         statements (including the related notes and supporting schedules) and
         the books and records of the Company.

                   (j) Except as set forth in the Exchange Act Documents, each
         of the Company and the Subsidiaries has such permits, licenses,
         consents, exemptions, franchises, authorizations and other approvals
         (each, an "Authorization") of, and has made all filings with and
         notices to, all governmental or regulatory authorities and
         self-regulatory organizations and all courts and other tribunals,
         including, without limitation, under any ordinance, rule, regulation,
         order, judgment, decree or permit, as are necessary to own, lease,
         license and operate its respective properties and to conduct its
         business, except where the failure to have any such Authorization or to
         make any such filing or notice would not have a Material Adverse Effect
         (each such Authorization, a

                                       4

<PAGE>

         "Material Authorization"); each Material Authorization is valid and in
         full force and effect and each of the Company and the Subsidiaries is
         in compliance with all the terms and conditions thereof and with the
         rules and regulations of the authorities and governing bodies having
         jurisdiction with respect thereto; and no event has occurred
         (including, without limitation, the receipt of any notice from any
         authority or governing body) which allows or, after notice or lapse of
         time or both, would allow, revocation, suspension or termination of any
         such Material Authorization or results or, after notice or lapse of
         time or both, would result in any other impairment of the rights of the
         holder of any such Material Authorization.

                   (k) Except as set forth in the Exchange Act Documents, the
         Company and each of the Subsidiaries has filed all federal, state and
         local income and franchise tax returns required to be filed through the
         date hereof and has paid all taxes (including withholding taxes,
         penalties and interest, assessments, fees and other charges) due
         thereon, other than those being contested in good faith and for which
         adequate reserves have been taken or which if not filed would not
         result in a Material Adverse Effect; and no tax deficiency has been
         determined adversely to the Company or any of the Subsidiaries which
         has had (nor does the Company have any knowledge of any tax deficiency
         which, if determined adversely to the Company or any of its
         subsidiaries, might have) a Material Adverse Effect or for which
         adequate reserves have not been provided.

                   (l) Except as set forth in the Exchange Act Documents, the
         Company and the Subsidiaries are in compliance with any and all
         applicable foreign, federal, state and local laws and regulations
         relating to the protection of human health and safety, the environment
         or hazardous or toxic substances or wastes, pollutants or contaminants,
         except where failure to so comply would not have, individually or in
         the aggregate, a Material Adverse Effect.

                   (m) The Company has all necessary power and authority to
         execute and deliver this Agreement and perform its obligations
         hereunder; and this Agreement and the transactions contemplated hereby
         have been duly authorized by the Company; assuming due authorization,
         execution and delivery by the Purchasers, this Agreement constitutes a
         legally valid and binding agreement of the Company, enforceable against
         the Company in accordance with its terms, subject to the effects of
         bankruptcy, insolvency, fraudulent conveyance, reorganization,
         moratorium and other similar laws relating to or affecting creditors'
         rights generally.

                   (n) The Company has all necessary power and authority to
         execute and deliver the Indenture and perform its obligations
         thereunder; the Indenture has been duly authorized by the Company and,
         upon the effectiveness of the Registration Statement, will be qualified
         under the Trust Indenture Act of 1939, as amended, and the rules and
         regulations of the Commission thereunder (collectively, the "Trust
         Indenture Act"); and, assuming due authorization, execution and
         delivery of the Indenture by the Trustee, it will constitute a legally
         valid and binding agreement of the Company, enforceable against the
         Company in accordance with its terms, subject to the effects of
         bankruptcy,

                                       5

<PAGE>

         insolvency, fraudulent conveyance, reorganization, moratorium and other
         similar laws relating to or affecting creditors' rights generally.

                   (o) The Company has all necessary power and authority to
         execute, issue and deliver the Securities and perform its obligations
         thereunder; the Securities have been duly authorized by the Company
         and, assuming due authentication of the Securities by the Trustee, such
         Securities will constitute legally valid and binding obligations of the
         Company entitled to the benefits of the Indenture, enforceable against
         the Company in accordance with their terms, subject to the effects of
         bankruptcy, insolvency, fraudulent conveyance, reorganization,
         moratorium and other similar laws relating to or affecting creditors'
         rights generally.

                   (p) The Company has all necessary power and authority to
         issue and deliver the Conversion Shares; the Conversion Shares have
         been duly and validly authorized and reserved for issuance upon
         conversion of the Securities and are free of preemptive rights; and all
         Conversion Shares, when issued and delivered upon such conversion in
         accordance with the terms of the Indenture, will be duly and validly
         authorized and issued, fully paid and nonassessable and will be free
         and clear of any liens, encumbrances, equities, claims or adverse
         interests.

                   (q) The Company has all necessary power and authority to
         execute and deliver the Registration Rights Agreement and perform its
         obligations thereunder; the Registration Rights Agreement and the
         transactions contemplated thereby have been duly authorized by the
         Company and, assuming due authorization, execution and delivery by the
         Purchasers, it will be a legally valid and binding agreement of the
         Company, enforceable against the Company in accordance with its terms,
         except as the enforceability thereof may be limited by bankruptcy,
         insolvency, fraudulent conveyance, reorganization, moratorium and other
         similar laws relating to or affecting creditors' rights generally.

                   (r) The execution, delivery and performance by the Company of
         the Transaction Documents (other than the Securities), the issuance of
         the Securities and the Conversion Shares, if at all, the compliance by
         the Company with all the provisions hereof and thereof and the
         consummation of the transactions contemplated hereby and thereby
         (assuming, in each case, the compliance by the other parties thereto)
         will not (i) conflict with or result in a breach or violation of any of
         the terms or provisions of, or constitute a default under (or with
         notice or the lapse of time or both, would constitute a default under),
         any indenture, mortgage, deed of trust, loan agreement, lease or other
         agreement or instrument to which the Company or any of the Subsidiaries
         is a party or by which the Company or any of the Subsidiaries is bound
         or to which any of the property or assets of the Company or any of the
         Subsidiaries is subject, (ii) result in any violation of the provisions
         of the charter or by-laws of the Company or any of the Subsidiaries,
         (iii) result in any violation of any statute or any order, rule or
         regulation of any court or governmental agency or body having
         jurisdiction over the Company or any of the Subsidiaries or any of
         their properties or assets, (iv) result in the imposition or creation
         of (or the obligation to create or impose) a Lien under any agreement
         or instrument to which the Company or any of the Subsidiaries is a
         party or by which the Company or any of the

                                       6

<PAGE>

         Subsidiaries or their respective properties or assets is bound, or (v)
         result in the suspension, termination or revocation of any Material
         Authorization of the Company or any of the Subsidiaries or any other
         impairment of the rights of the holder of any such Material
         Authorization.

                   (s) Except (i) with respect to the transactions contemplated
         by the Registration Rights Agreement as may be required under the
         Securities Act, (ii) the qualification of the Indenture under the Trust
         Indenture Act, (iii) as required by the state securities or "blue sky"
         laws, (iv) for such consents, approvals, authorizations, orders,
         filings or registrations which have been obtained or made and (v) with
         respect to the matters covered by clause (v) of this Section 1, no
         consent, approval, authorization or order of, or filing or registration
         with, any court or governmental agency or governmental body is required
         for the execution, delivery and performance of the Transaction
         Documents (other than the Securities) by the Company, the issuance of
         the Securities and the Conversion Shares, if at all, and the
         consummation of the transactions contemplated hereby and thereby.

                   (t) Neither the Company nor any subsidiary is or, as of the
         Closing Date, after giving effect to the issuance of the Securities and
         the application of the net proceeds therefrom, will be an "investment
         company" as defined, and subject to regulation, under the Investment
         Company Act of 1940, as amended, and the rules and regulations of the
         Commission thereunder (collectively, the "Investment Company Act").

                   (u) Except as disclosed in the Exchange Act Documents and,
         subject to the terms and conditions of the transactions contemplated by
         the Transaction Documents and, with respect to clauses (i) and (ii)
         only, the Credit Agreement, the Warrant Agreement and the Equity
         Registration Rights Agreement, (i) there are no outstanding securities
         convertible into or exchangeable for, or warrants, options or rights
         issued by the Company to purchase, any shares of the capital stock of
         the Company, (ii) there are no statutory, contractual, preemptive or
         other rights to subscribe for or to purchase any Common Stock and (iii)
         there are no restrictions upon transfer of the Common Stock pursuant to
         the Company's articles of incorporation or bylaws.

                   (v) Assuming the accuracy of the representations and
         warranties of the Purchasers contained in Section 6 and their
         compliance with the agreements set forth therein, it is not necessary
         to register the Securities or the Conversion Shares under the
         Securities Act or to qualify the Indenture under the Trust Indenture
         Act in connection with the issuance and sale of the Securities to the
         Purchasers on the date hereof and the conversion of the Securities into
         Conversion Shares in the manner contemplated by the Indenture.

                   (w) Provided that the Conversion Price (as defined in the
         Indenture) of the Securities meets the requirements set forth in Rule
         144A(d)(3)(i) as of the date of the issuance of such Securities, no
         securities of the same class (within the meaning of Rule 144A(d)(3)
         under the Securities Act) as the Securities are listed on any national
         securities exchange registered under Section 6 of the Exchange Act or
         quoted on an automated inter-dealer quotation system.

                                       7

<PAGE>

                   (x)  None of the Securities have been registered under
         Section 12 of the Exchange Act.

                   (y)  None of the Company or any of its Affiliates (as defined
         in Rule 501(b) of Regulation D of, the Securities Act ("Regulation D"),
         an "Affiliate"), has, directly or through an agent, engaged in any form
         of general solicitation or general advertising in connection with the
         offering of the Securities or the Conversion Shares (as those terms are
         used in Regulation D) under the Securities Act or in any manner
         involving a public offering within the meaning of Section 4(2) of the
         Securities Act; and the Company has not entered into any contractual
         arrangement with respect to the distribution of the Securities or the
         Conversion Shares, except for this Agreement, the Registration Rights
         Agreement and the Company will not enter into any such arrangement. The
         Company has retained Lehman Brothers Inc. and no other party with
         respect to the placement of the Securities and the Conversion Shares.

                   (z)  None of the Company or any of its affiliates has,
         directly or through any agent, sold, offered for sale, solicited offers
         to buy or otherwise negotiated in respect of, any "security" (as
         defined in the Securities Act) which is or will be integrated with the
         sale of the Securities or the Conversion Shares in a manner that would
         require the registration under the Securities Act of the Securities or
         the Conversion Shares.

                   (aa) The Company has not sold or issued any shares of Common
         Stock, any security convertible into shares of Common Stock, or any
         security of the same class as the Securities during the six-month
         period preceding the date of the Exchange Act Documents, including any
         sales pursuant to Rule 144A under, or Regulation D or Regulation S of
         the Securities Act, other than shares issued pursuant to employee
         benefit plans, qualified stock options plans or other employee
         compensation plans or pursuant to outstanding options, rights or
         warrants.

                   (bb) Neither the Company, nor to its knowledge, any of its
         affiliates, has taken, directly or indirectly, any action designed to
         cause or result in, or which has constituted or which might reasonably
         be expected to constitute, the stabilization or manipulation of the
         price of the Securities or Common Stock to facilitate the sale or
         resale of such the Securities.

                   (cc) As of the date hereof, the Existing Indebtedness (as
         defined in the Indenture) of the Company consists of approximately $98
         million of Indebtedness (as defined in the Indenture) represented by
         inter-company notes and the Option Debt (as defined in the Indenture).

         Each certificate signed by any officer of the Company and delivered to
a Purchaser or counsel to such Purchaser shall be deemed to be a representation
and warranty by the Company to such Purchaser as to the matters covered thereby.

                                       8

<PAGE>

         2. Purchase, Sale and Delivery of Securities. Subject to the terms and
conditions and in reliance upon the representations and warranties herein set
forth, the Company agrees to sell to each Purchaser, severally and not jointly,
and each Purchaser agrees to purchase from the Company, severally and not
jointly, at a purchase price of 100% of the principal amount thereof (the
"Purchase Price"), the aggregate principal amount of Securities set forth in
Schedule I opposite the name of each such Purchaser. The closing shall occur at
the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New
York 10017, at 10:00 a.m., New York City time, on the Closing Date. Delivery of
the Securities by the Company shall be made to each Purchaser against payment of
the Purchase Price by the applicable Purchaser; and payment for the Securities
by each Purchaser shall be made against delivery to the applicable Purchaser of
the Securities as set forth below and effected either by wire transfer of
immediately available funds to an account with a bank in The City of New York,
the account number and the ABA number for such bank to be provided by the
Company to each Purchaser in advance of the Closing Date, or by such other
manner of payment as may be agreed by the Company and the Purchasers.

         3. Further Agreements of the Company. The Company agrees:

                   (a) Promptly from time to time, to take such action as any
         Purchaser may reasonably request, to qualify the Securities and the
         Conversion Shares for offering and sale under the securities laws of
         such jurisdictions as any Purchaser may request and to comply with such
         laws so as to permit the continuance of sales and dealings therein in
         such jurisdictions for as long as may be necessary to complete the
         resale of the Securities; provided that, in connection therewith, the
         Company shall not be required to qualify as a foreign corporation or to
         file a general consent to service of process in any jurisdiction;

                   (b) To use its best efforts to have the Conversion Shares
         approved by the New York Stock Exchange Inc. ("NYSE"), and each other
         exchange on which the Common Stock is listed, if any, for listing prior
         to the earlier of (i) one year after the Closing Date and (ii) the
         effectiveness of the Registration Statement;

                   (c) If either (i) the Conversion Price (as defined in the
         Indenture) of the Securities meets the requirements of Rule
         144A(d)(3)(i) or (ii) the Securities have been registered under the
         Registration Statement, to use its best efforts to cause the Securities
         to be accepted for clearance and settlement through the facilities of
         DTC;

                   (d) If the Conversion Price of the Securities is an amount
         such that the Securities comply with Rule 144A(d)(3)(i), for so long as
         any of the Securities are "restricted securities" within the meaning of
         Rule 144(a)(3) under the Securities Act, to provide to any holder of
         the Securities or to any prospective purchaser of the Securities
         designated by any holder, upon request of such holder or prospective
         purchaser, information required to be provided by Rule 144A(d)(4) of
         the Securities Act if, at the time of such request, the Company is not
         subject to the reporting requirements under Section 13 or 15(d) of the
         Exchange Act;

                   (e) To ensure that each of the Securities and the Conversion
         Shares will bear, to the extent applicable, the legend required by the
         Indenture;

                                       9

<PAGE>

                   (f) Not to, and will cause its respective affiliates not to,
         sell, offer for sale or solicit offers to buy or otherwise negotiate in
         respect of any "security" (as defined in the Securities Act) in a
         transaction that could be integrated with the sale of the Securities in
         a manner that would require the registration under the Securities Act
         of the Securities;

                   (g) No later than 8:15 a.m. New York time on the first
         business day after the Closing, to file a Current Report on Form 8-K
         (the "8-K Filing") with the Commission reporting the closing of the
         sale of the Securities hereunder and the transactions contemplated by
         the Credit Agreement (the "Reported Transactions"). The disclosure
         contained in the 8-K Filing will be as, and to the extent, deemed by
         the Company to be required by applicable law, but will include all
         terms of the Reported Transactions that the Company deems to be
         material information to purchasers and sellers of the publicly traded
         Common Stock under the federal securities laws. Such Current Report on
         Form 8-K shall include this Agreement, the Indenture and the
         Registration Rights Agreement and the Credit Agreement, the Warrant
         Agreement, the Equity Registration Rights Agreement, the Option
         Agreement (as defined in the Credit Agreement), the LLC Pledge
         Agreement (as defined in the Credit Agreement) and the Stock Pledge
         Agreement (as defined in the Credit Agreement).

                   (h) The Company will use the proceeds from the sale of the
         Securities and the loans under the Credit Agreement for working
         capital, conversion of $92 million from Tranche A Loans to Tranche B
         Loans under, and as defined in, the Credit Agreement, repayment of
         indebtedness and transaction expenses;

                   (i) The Company 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
         the Company 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. For purposes of this Section 3(i), "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 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; and

                   (j) The Company will not register the Securities pursuant to
         Section 12 of the Exchange Act, unless it is required pursuant to the
         requirements of the Exchange Act to do so as a result of the number of
         holders of the Securities.

                                       10

<PAGE>

               4. Expenses. The Company agrees to pay the following expenses,
whether or not the transactions contemplated by this Agreement are consummated
or this Agreement is terminated:

                   (a) the costs incident to the authorization, issuance, sale
         and delivery of the Securities and the Conversion Shares, if
         applicable, and any taxes payable in that connection;

                   (b) the costs of producing and distributing the Transaction
         Documents;

                   (c) any applicable listing or other fees and expenses in
         connection with the application for inclusion of the Conversion Shares
         on the NYSE and any other exchange on which the Common Stock is listed,
         if any;

                   (d) the fees and expenses of qualifying the Securities and
         the Conversion Shares under the securities laws of any jurisdiction as
         provided in Section 3(a) and, if requested, of preparing, printing and
         distributing a U.S. Blue Sky memorandum;

                   (e) the fees and expenses (including fees and disbursements
         of counsel, if applicable) of Company, its accountants, the Trustee and
         the costs and charges of any registrar, transfer agent, paying agent or
         conversion agent under the Indenture; and

                   (f) all other costs and expenses incident to the performance
         of the obligations of the Company under this Agreement.

Except as provided in this Section 4 and in Section 7, the Purchasers shall pay
their own costs and expenses, and any transfer taxes on the Securities that they
may sell.

               5. Conditions of each Purchaser's Obligations. The obligations of
each Purchaser acquiring Securities hereunder are subject to the accuracy, of
the representations and warranties of the Company contained herein, to the
performance by the Company of its obligations hereunder, and to each of the
following additional terms and conditions:

                   (a) Latham & Watkins, counsel to the Company, shall have
         furnished to each Purchaser who is acquiring Securities hereunder one
         or more written opinions addressed to each such Purchaser and dated the
         Closing Date, in form and substance reasonably satisfactory to each
         such Purchaser addressing such matters as are agreed upon with such
         counsel.

                   (b) Weil Gotshal & Manges, special counsel to the Company,
         shall have furnished to each Purchaser who is acquiring Securities
         hereunder one or more written opinions addressed to each such Purchaser
         and dated the Closing Date, in form and substance reasonably
         satisfactory to each such Purchaser addressing such matters as are
         agreed upon with such counsel.

                   (c) Orrick Herrington & Sutcliffe, special counsel to the
         Company, shall have furnished to each Purchaser who is acquiring
         Securities hereunder one or more

                                       11

<PAGE>

    written opinions and memoranda addressed to each such Purchaser and dated
    the Closing Date, in form and substance reasonably satisfactory to each such
    Purchaser addressing such matters as are agreed upon with such counsel.

         (d) Bruce R. Worthington, Esq., Senior Vice President and General
    Counsel of the Company shall have furnished to each Purchaser who is
    acquiring Securities hereunder his written opinion addressed to each such
    Purchaser and dated the Closing Date, in form and substance reasonably
    satisfactory to each such Purchaser.

         (e) The Company shall have furnished to each Purchaser who is acquiring
    Securities hereunder a certificate, dated the Closing Date, of an authorized
    officer of the Company, in form and substance reasonably satisfactory to
    each such Purchaser, stating that the representations, warranties and
    agreements of the Company in Section 1 of this Agreement are true and
    correct as of the date hereof and as of the Closing Date; and the Company
    has complied in all respects with all its agreements contained herein to be
    performed prior to or on the Closing Date.

         (f) The Indenture (in form and substance reasonably satisfactory to
    each Purchaser who is acquiring Securities hereunder) shall have been duly
    executed and delivered by the Company and the Trustee (and a copy thereof
    shall have been delivered to each Purchaser who is acquiring Securities
    hereunder), and the Securities shall have been duly executed and delivered
    by the Company and duly authenticated by the Trustee.

         (g) The Company shall have executed and delivered to each Purchaser who
    is acquiring Securities hereunder the Registration Rights Agreement (in form
    and substance satisfactory to each such Purchaser), and the Registration
    Rights Agreement shall be in full force and effect.

         (h) The transactions contemplated by the Credit Agreement shall have
    closed and evidence thereof shall have been delivered to each Purchaser who
    is acquiring Securities hereunder.

         (i) The Company shall have delivered to each Purchaser who is acquiring
    Securities hereunder a certificate evidencing the incorporation and good
    standing of the Company and each Subsidiary in such corporation's state of
    incorporation issued by the Secretary of State of such state of
    incorporation as of a date within ten days of the Closing Date.

         (j) The Company shall have delivered to each Purchaser who is acquiring
    Securities hereunder a certified copy of the Company's Articles of
    Incorporation as certified by the Secretary of State of the State of
    California within ten days of the Closing Date.

         (k) The Company shall have delivered to each Purchaser who is acquiring
    Securities hereunder a certificate, executed by the Secretary of the
    Company, dated as of the Closing Date, as to (i) the resolutions authorizing
    the transactions

                                       12

<PAGE>

            contemplated hereby adopted by the Company's board of directors,
            (ii) the Company's Articles of Incorporation and (iii) the Company's
            Bylaws, each as in effect at the Closing.

            The Company shall have furnished to each Purchaser who is acquiring
Securities hereunder such further information, certificates and documents as
each such Purchaser or its Counsel may reasonably request to evidence compliance
with the conditions set forth in this Section 5. All opinions, letters, evidence
and certificates mentioned above or elsewhere in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in form and
substance reasonably satisfactory to counsel to each Purchaser who is acquiring
Securities hereunder.

            6. Representations, Warranties and Agreements of the Purchasers.
Each Purchaser, represents and warrants to, and agrees with, the Company,
severally and not jointly and with respect to only itself (except with respect
to the representation and warranty set forth in Section 6(f) which shall only be
made by Lehman Brothers Inc.), as follows:

                   (a) Such Purchaser is knowledgeable, sophisticated and
         experienced in business and financial matters and qualifies as an
         "accredited investor" as defined in Rule 501(a) of Regulation D and as
         a "qualified institutional buyer" as defined in Rule 144A under the
         Securities Act.

                   (b) Such Purchaser has been afforded access to information
         about the Company and the financial condition, results of operations,
         business, property, management and prospects of the Company sufficient
         to enable it to evaluate its investment in the Securities. Such
         Purchaser and its advisors, if any, have been afforded the opportunity
         to ask questions of the Company. Such Purchaser has sought such
         accounting, legal and tax advice as it has considered necessary to make
         an informed investment decision with respect to its acquisition of the
         Securities. Neither such access or questions nor any other due
         diligence investigations conduction by such Purchaser or its advisors,
         if any, or representatives shall modify, amend or affect such
         Purchaser's right to rely on the Company's representations, warranties
         and agreements contained in this Agreement, the Indenture, the
         Registration Rights Agreement and the Securities.

                   (c) Such Purchaser understands that its investment in the
         Securities involves a high degree of risk. Such Purchaser is able to
         bear the economic risk of its investment in the Securities and is
         presently able to afford the complete loss of such investment.

                   (d) Such Purchaser is acquiring the Securities solely for its
         own account and not as a nominee or agent for any other person and not
         with a view to any distribution thereof that violates the Securities
         Act or the securities laws of any State of the United States or any
         applicable jurisdiction; provided, however, that by making the
         representations herein, such Purchaser does not agree to hold any of
         the Securities for any minimum or other specific term and reserves the
         right to dispose of the Securities at any time in accordance with or
         pursuant to a registration statement or an exemption under the
         Securities Act.

                                       13

<PAGE>

                   (e) Lehman Brothers Inc. has not offered or sold the
         Securities by means of any form of general solicitation or general
         advertising within the meaning of Rule 502(c) of Regulation D,
         including (i) any advertisement, article, notice or other communication
         published in any newspaper, magazine or similar medium or broadcast
         over television or radio, or (ii) any seminar or meeting whose
         attendees have been invited by any general solicitation or general
         advertising in the United States.

                   (f) Such Purchaser has all necessary power and authority to
         execute and deliver this Agreement and perform its obligations
         hereunder; and this Agreement and the transactions contemplated hereby
         have been duly authorized by such Purchaser; assuming due
         authorization, execution and delivery by the Company, this Agreement
         constitutes a legally valid and binding agreement of such Purchaser,
         enforceable against such Purchaser in accordance with its terms,
         subject to the effects of bankruptcy, insolvency, fraudulent
         conveyance, reorganization, moratorium and other similar laws relating
         to or affecting creditors' rights generally.

                   (g) Such Purchaser is a resident of that jurisdiction
         specified in its address for notices set forth below the signature of
         such Purchaser where it appears on the signature page(s) of this
         Agreement.

                   (h) Such Purchaser is not acquiring the Securities with
         assets of any "employee benefit plan" (within the meaning of Section
         3(3) of the Employee Retirement Income Security Act of 1974, as amended
         ("ERISA")) that is subject to Title I of ERISA or Section 4975 of the
         Internal Revenue Code of 1986, as amended.

                   (i) Assuming the capitalization of the Company set forth in
         its most recent report filed under the Exchange Act, such Purchaser,
         together with its "affiliates" (as defined in Rule 144 promulgated
         under the Securities Act), is the beneficial owner (as defined in Rule
         13d-3 promulgated under the Exchange Act) of not more than 4.9% of the
         outstanding shares of Common Stock immediately after the purchase of
         the Securities hereunder.

         The Company and, for purposes of the opinions to be delivered to you
pursuant to Section 5 hereof, counsel to the Company, General Counsel to the
Company and counsel to the Purchasers, will rely upon the accuracy and truth of
the foregoing representations as to factual matters and agreements and each
Purchaser hereby consents to such reliance.

                                       14

<PAGE>

            7. Conditions of the Company's Obligations. The obligations of the
Company to each of the Purchasers hereunder are subject to the accuracy, of the
representations and warranties of such Purchaser contained herein, to the
performance by such Purchaser of its obligations hereunder, the delivery by such
Purchaser of the Purchase Price in consideration of the Securities being
purchased by such Purchaser and to the closing with respect to such Purchaser of
the transactions contemplated by the Credit Agreement.

            8. Indemnification.

                   (a) The Company shall indemnify and hold harmless each
         Purchaser who is acquiring Securities hereunder, its officers and
         employees and each person, if any, who controls such Purchaser within
         the meaning of the Securities Act, from and against any loss, claim,
         damage or liability, joint or several, or any action in respect thereof
         (including, but not limited to, any loss, claim, damage, liability or
         action relating to purchases and sales of the Securities)
         ("Liabilities"), to which such Purchaser, officer, employee or
         controlling person may become subject, insofar as such Liability arises
         out of, or is based upon, any breach of any representation or warranty
         made by it in this Agreement, and shall reimburse such Purchaser and
         each such officer, employee or controlling person promptly upon demand
         for any legal or other expenses reasonably incurred by such Purchaser,
         officer, employee or controlling person in connection with
         investigating or defending or preparing to defend against any such
         Liability as such expenses are incurred. The foregoing indemnity
         agreement is in addition to any liability which the Company may
         otherwise have to such Purchaser or to any officer, employee or
         controlling person of such Purchaser.

                   (b) Promptly after receipt by a Purchaser who is acquiring
         Securities hereunder under this Section 8 of notice of any claim or the
         commencement of any action, such Purchaser shall, if a claim in respect
         thereof is to be made against the Company under this Section 8, notify
         the Company in writing of the claim or the commencement of that action;
         provided, however, that the failure to notify the Company shall not
         relieve it from any liability which it may have under this Section 8
         except to the extent it has been materially prejudiced by such failure
         and, provided, further, that the failure to notify the Company shall
         not relieve it from any liability which it may have to such Purchaser
         otherwise than under this Section 8. If any such claim or action shall
         be brought against such Purchaser, and it shall notify the Company
         thereof, the Company shall be entitled to participate therein and, to
         the extent that it wishes, jointly with any other similarly notified
         indemnifying party, to assume the defense thereof with counsel
         satisfactory to such Purchaser. After notice from the Company to such
         Purchaser of its election to assume the defense of such claim or
         action, the Company shall not be liable to such Purchaser under this
         Section 8 for any legal or other expenses subsequently incurred by such
         Purchaser in connection with the defense thereof other than reasonable
         costs of investigation; provided, however, that such Purchaser shall
         have the right to employ separate counsel to represent jointly such
         Purchaser and its respective officers, employees and controlling
         persons who may be subject to liability arising out of any claim in
         respect of which indemnity may be sought by such Purchaser against the
         Company under this Section 8 if, in the reasonable judgment of such
         Purchaser it is advisable for such Purchaser and such officers,
         employees and controlling persons to be jointly represented

                                       15

<PAGE>

         by separate counsel, and in that event the fees and expenses of such
         separate counsel shall be paid by the Company. No indemnifying party
         shall, (i) without the prior written consent of the indemnified parties
         (which consent shall not be unreasonably withheld), settle or
         compromise or consent to the entry of any judgment with respect to any
         pending or threatened claim, action, suit or proceeding in respect of
         which indemnification or contribution may be sought hereunder (whether
         or not the indemnified parties are actual or potential parties to such
         claim or action) unless such settlement, compromise or consent includes
         an unconditional release of each indemnified party from all liability
         arising out of such claim, action, suit or proceeding, or (ii) be
         liable for any settlement of any such action effected without its
         written consent (which consent shall not be unreasonably withheld), but
         if settled with its written consent or if there be a final judgment of
         the plaintiff in any such action, the Company agrees to indemnify and
         hold harmless any indemnified party from and against any loss or
         liability by reason of such settlement or judgment.

                   (c) To the extent that the undertaking in this Section 8 by
         the Company may be unenforceable for any reason, the Company shall make
         the maximum contribution to the payment and satisfaction of the
         Purchasers who are acquiring Securities hereunder which is permissible
         under applicable law.

            9. Notices, Etc. All statements, requests, notices and agreements
hereunder shall be in writing, , shall be delivered or sent by mail, telex or
facsimile transmission:

                   (a) if to the Company to PG&E Corporation, One Market, Spear
         Tower, Suite 2400, San Francisco, California 94105, Attention:
         Assistant Treasurer (Fax: 415-267-7265, Telephone: 415-267-7052), with
         copies to PG&E Corporation, One Market, Spear Tower, Suite 2400, San
         Francisco, California 94105, Attention: Chief Counsel - Corporate (Fax:
         415-817-8225, Telephone 415-817-8200) and Latham & Watkins, 633 West
         5/th/ Street, Los Angeles, California 90071, Attention: Tom Sadler,
         Esq. (Fax: 213-891-8763, Telephone: 213-891-8116); and

                   (b) if to a Purchaser, to the address for such Purchaser set
         forth below such Purchaser's signature on the signature page(s) hereof.

                                       16

<PAGE>

            10. Persons Entitled to Benefit of Agreement. This Agreement will
inure to the benefit of and be binding upon the Purchasers, the Company and
their respective successors and, with respect to the Purchasers, their Permitted
Assigns. This Agreement and the terms and provisions hereof are for the sole
benefit of only those persons, except that the representations, warranties,
indemnities and agreements of the Company contained in this Agreement will also
be deemed to be for the benefit of the officers and employees of each Purchaser
and the person or persons, if any, who control such Purchaser within the meaning
of Section 15 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the persons referred to in
this Section 10, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein. For the purposes of
this Section 10, a "Permitted Assign" means: (i) a Purchaser, (ii) an
"affiliate" of a Purchaser that is a holder of Securities, (iii) any entity
which has the same investment advisor or manager or trading advisor or manager
as any of the Persons described in the immediately preceding clauses and (iv) a
pledgee (or a transferee of such pledgee) in connection with a bona fide margin
account or other loan or financing arrangement secured by the Securities. For
the purposes of this Section 10, the term "affiliate" means, with respect to any
Person, another Person, directly or indirectly, with (A) controls that Person,
(B) is controlled by that Person or (C) is under common control with that
Person. "Control" or "controls" for the purposes of this Section 10 means that
Person has the power, directly or indirectly, to conduct or govern the policies
of another Person.

            11. Survival. The respective indemnities, representations,
warranties and agreements of the Company and the Purchasers contained in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, will survive the delivery of and payment for the Securities;
provided, however, that the representations and warranties contained in Section
1 paragraphs (d), (g), (h), (j), (k) and (l) shall expire on the second
anniversary of the date of this Agreement and will remain in full force and
effect, regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of any of them or any person controlling any
of them.

            12. Definition of the Term "Business Day". For purposes of this
Agreement, "business day" means any day other than a Saturday or a Sunday or any
other day on which banking institutions in the City of New York or the City of
San Francisco are authorized or obligated by law or regulation to close.

            13. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York.

            14. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument; provided that a facsimile
signature shall be considered due execution and shall be binding upon the
signatory thereto with the same force and effect as if the signature were an
original, not a facsimile signature.

            15. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.

                                       17

<PAGE>

            16. Amendment and Waiver. This Agreement may not be amended,
modified or supplemented, and waivers or consents to or departures from the
provisions hereof, may not be given, without the written agreement of (i) the
Company and (ii) the Purchasers and their respective successors and Permitted
Assigns holding a majority of the then outstanding Securities held by the
Purchasers or their respective successors and Permitted Assigns or, in the event
that no such persons hold any Securities, then all of the Purchasers or their
respective successors and Permitted Assigns.

                            [Signature pages follow]

                                       18

<PAGE>

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

                                           Very truly yours,

                                           PG&E CORPORATION

                                           By: _______________________________
                                               Name:
                                               Title:





                                      S-1

<PAGE>

Accepted and agreed by:

Lehman Brothers Inc.



By:_______________________
   Name:
   Title:


Address for notices:

745 Seventh Avenue
New York, NY 10019
Attention: Joseph Savage, Managing Director
Facsimile: (646) 758-4058

with a copy to:

Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Andrew R. Keller, Esq.
Facsimile: 212-455-2502





                                      S-2

<PAGE>

Jackson Investment Fund Ltd.


By: _______________________
    Name:
    Title:



Address for notices:

c/o Citadel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606
Attention: Bradford Couri and
           Kenneth A. Simpler
Facsimile: (312) 368-1348

with a copy to:

Katten Muchin Zavis Rosenman
525 West Monroe Street,
Suite 1600
Chicago, Illinois 60661
Attention: Robert Brantman, Esq.
Facsimile: 312-902-1061
Telephone: 312-902-5200






                                      S-3

<PAGE>

Citadel Credit Trading Ltd.


By: _______________________
    Name:
    Title:



Address for notices:

c/o Citadel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606
Attention: Bradford Couri and
           Kenneth A. Simpler
Facsimile: (312) 368-1348

with a copy to:

Katten Muchin Zavis Rosenman
525 West Monroe Street,
Suite 1600
Chicago, Illinois 60661
Attention: Robert Brantman, Esq.
Facsimile: 312-902-1061
Telephone: 312-902-5200






                                      S-4

<PAGE>

Citadel Equity Fund Ltd.


By: _______________________
    Name:
    Title:



Address for notices:

c/o Citadel Investment Group, L.L.C.
225 West Washington Street
Chicago, Illinois 60606
Attention: Bradford Couri and
           Kenneth A. Simpler
Facsimile: (312) 368-1348



with a copy to:

Katten Muchin Zavis Rosenman
525 West Monroe Street,
Suite 1600
Chicago, Illinois 60661
Attention: Robert Brantman, Esq.
Facsimile: 312-902-1061
Telephone: 312-902-5200





                                      S-5

<PAGE>

                                                                      SCHEDULE I

--------------------------------------------------------------------------------
                Name of Purchaser               Principal Amount of 7.50%
                                                Convertible Subordinated
                                                         Notes

--------------------------------------------------------------------------------
Lehman Brothers Inc.                                 $       0.00
--------------------------------------------------------------------------------
Jackson Investment Fund Ltd.                         $ 29,000,000
--------------------------------------------------------------------------------
Citadel Credit Trading Ltd.                          $ 15,000,000
--------------------------------------------------------------------------------
Citadel Equity Fund Ltd.                             $236,000,000
--------------------------------------------------------------------------------
Total                                                $280,000,000
--------------------------------------------------------------------------------





<PAGE>

                                                                         ANNEX A

                               [FORM OF INDENTURE]

                                       A-1

<PAGE>

                                                                         ANNEX B

                     [FORM OF REGISTRATION RIGHTS AGREEMENT]




                                      A-1

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.3
<SEQUENCE>5
<FILENAME>dex993.txt
<DESCRIPTION>EQUITY REGISTRATION RIGHTS AGREEMENT JUNE 25, 2002
<TEXT>
<PAGE>

                                                                    EXHIBIT 99.3

                                                                  EXECUTION COPY

                      Equity Registration Rights Agreement

                                     between

                                PG&E Corporation

                                       and

                                 LB I Group Inc.

                                       and

                             Each Other Entity Named
                          On the Signature Pages Hereof

                            Dated as of June 25, 2002

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
 1.    Definitions .....................................................      1

 2.    Shelf Registration ..............................................      4

 3.    Liquidated Damages. .............................................      5

 4.    Piggy-Back Registration Rights ..................................      6

 5.    Underwriting Procedures .........................................      7

 6.    Registration Procedures. ........................................      8

 7.    Registration Expenses. ..........................................     15

 8.    Indemnification and Contribution ................................     15

 9.    Rule 144 ........................................................     19

10.    Participation in Underwritten Registrations. ....................     19

11.    Purchase By Issuer. .............................................     19

12.    Miscellaneous. ..................................................     19
</TABLE>


<PAGE>

           Equity Registration Rights Agreement, dated as of June 25, 2002,
between PG&E Corporation, a California corporation (together with any successor
entity, herein referred to as the "Issuer"), and LB I Group Inc. and each other
entity named on the signature pages hereof (the "Initial Holders").

           Pursuant to the Warrant Agreement, dated the date hereof (the
"Warrant Agreement"), between the Issuer and the Initial Holders and, in order
to induce the Initial Lender (as defined in the Warrant Agreement) to enter into
the Amended and Restated Credit Agreement, dated as of the date hereof (the
"Credit Agreement"), between the Issuer, the Initial Lender and the other
lenders party thereto, Lehman Commercial Paper Inc., as Administrative Agent and
Lehman Brothers Inc., as Lead Arranger and Book Manager as amended, restated,
modified, renewed, refunded, replaced or refinanced in whole or in part from
time to time, the Issuer has agreed to the registration rights set forth in this
Agreement. The execution of this Agreement is a condition to Closing (as defined
in the Credit Agreement) under the Credit Agreement.

           The parties hereby agree as follows:

           1.  Definitions. As used in this Agreement, the following capitalized
terms shall have the following meanings:

           Agreement: This Equity Registration Rights Agreement, as amended,
      modified or otherwise supplemented from time to time in accordance with
      the terms hereof.

           Bankruptcy Code: Title 11 of the United States Code entitled
      "Bankruptcy", as now or hereafter in effect, or any successor thereto.

           Blue Sky Application: As defined in Section 8(a) hereof.

           broker-dealer: Any broker or dealer registered under the Exchange
      Act.

           Business Day: A day other than a Saturday or Sunday or any day on
      which banking institutions in The City of New York or The City of San
      Francisco are authorized or obligated by law or regulation to close.

           Closing Date: The date of this Agreement.

           Commission: Securities and Exchange Commission.

           Common Stock: The common stock, no par value, of the Issuer.

           Common Stock Equivalent: Any Convertible Security or warrant, option
      or other right to subscribe for or purchase any shares of Common Stock or
      any Convertible Security, other than a Warrant.

           Convertible Securities: Evidences of indebtedness, shares of capital
      stock or other securities which are or may be at any time convertible into
      or exchangeable for shares of Common Stock.

<PAGE>

                                                                               2

           Credit Agreement: As defined in the recitals hereto.

           Effectiveness Period: As defined in Section 2(a)(iii) hereof.

           Effectiveness Target Date: As defined in Section 2(a)(ii) hereof.

           Exchange Act: Securities Exchange Act of 1934, as amended, and the
      rules and regulations of the Commission promulgated thereunder.

           Holder: A Person who owns, beneficially or otherwise, Transfer
      Restricted Securities.

           Indemnified Holder: As defined in Section 8(a) hereof.

           Initial Holders: As defined in the preamble hereto.

           Issuer: As defined in the preamble hereto.

           Liquidated Damages: As defined in Section 3(a) hereof.

           Other Holders: As defined in Section 5(a) hereof.

           NASD: National Association of Securities Dealers, Inc.

           Person: Any individual, corporation, limited liability company,
      partnership, joint venture, association, joint-stock company, trust,
      unincorporated organization, or government or any agency or political
      subdivision thereof.

           PG&E: Pacific Gas and Electric Company, a California corporation.

           Piggy-Back Registration: As defined in Section 4(a) hereof.

           Piggy-Back Registration Offer: As defined in Section 4(a) hereof.

           Prospectus: The prospectus included in a Shelf Registration
      Statement, as amended or supplemented by any prospectus supplement and by
      all other amendments thereto, including post-effective amendments, and all
      material incorporated by reference into such Prospectus.

           Questionnaire: As defined in Section 2(b) hereof.

           Questionnaire Deadline: As defined in Section 2(b) hereof.

           Registration Default: As defined in Section 3(a) hereof.

           Registration Trigger Date: As defined in Section 2(a)(i) hereof.

           Required Holders: Holders holding at least a 40% interest in the
      Warrants or the Warrant Shares.

<PAGE>

                                                                               3

           Securities Act: Securities Act of 1933, as amended, and the rules and
      regulations of the Commission promulgated thereunder.

           Shelf Registration Statement: As defined in Section 2(a)(i) hereof.

           Suspension Notice: As defined in Section 6(c) hereof.

           Suspension Period: As defined in Section 6(b)(i) hereof.

           Transfer Restricted Securities: Each (i) Warrant Share (whether or
      not the Warrants have been exercised) and (ii) any other securities issued
      or issuable with respect to any Warrant Share by way of stock dividend or
      stock split or in connection with a combination of shares,
      recapitalization, merger, consolidation or other reorganization or
      otherwise, until the earlier of:

               (i)   the date on which such Warrant Share or other security has
           been registered under the Securities Act on a registration statement
           which has been declared effective by the Commission and disposed of
           in accordance with such registration statement;

               (ii)  the date on which such Warrant Share or other security (A)
           has been transferred in compliance with Rule 144 under the Securities
           Act or (B) may be sold or transferred by a person who is not an
           affiliate of the Issuer pursuant to Rule 144(k) under the Securities
           Act (or any other similar provision then in force) without regard to
           any volume or manner of sale restrictions thereunder; or

               (iii) the date on which such Warrant Share or other security
           ceases to be outstanding (whether as a result of repurchase and
           cancellation, conversion or otherwise).

           Underwritten Registration or Underwritten Offering: A registration in
      which securities of the Issuer are sold to an underwriter for reoffering
      to the public.

           VWAP: means, for any security as of any date, the dollar-weighted
      average price for such security on the principal United States securities
      exchange on which such security is traded (which is currently the New York
      Stock Exchange with respect to the Common Stock) during the period
      beginning at 9:30 a.m. (New York time) (or such other time as such
      exchange publicly announces is the official open of trading), and ending
      at 4:00 p.m. (New York time) (or such other time as such exchange publicly
      announces is the official close of trading) as reported by Bloomberg
      Financial Markets (or any successor thereto, "Bloomberg") through its
      "Volume at Price" functions, or, if the foregoing does not apply, the
      dollar weighted average price of such security in the over-the-counter
      market on the electronic bulletin board for such security during the
      period beginning at 9:30 a.m. (New York time) (or such other time as such
      exchange publicly announces is the official open of trading), and ending
      at 4:00 p.m. (New York time) (or such other time as such exchange publicly
      announces is the official close of trading) as reported by Bloomberg, or
      if no dollar weighted average price is reported for such security by
      Bloomberg for such hours, the average of the highest closing bid price and

<PAGE>

                                                                               4

      lowest closing ask price of any of the market makers for such security as
      reported in the "pink sheets" by the National Quotation Bureau, Inc. If
      the VWAP cannot be calculated for such security on such date on any of the
      foregoing bases, the VWAP of such security on such date shall be the fair
      market value as mutually determined by the Company and the Holders of the
      Securities representing a majority of the aggregate principal amount of
      the Securities outstanding. All such determinations to be appropriately
      adjusted for any stock dividend, stock split, stock combination or other
      similar transaction during such period.

           Warrant Agreement: As defined in the recitals hereto.

           Warrants: Warrants to purchase Common Stock of the Company issued in
      accordance with the Warrant Agreement.

           Warrant Shares: The shares of Common Stock issuable to the Holders of
      Warrants upon the exercise of any Warrant, together with any other
      securities that may in the future become issuable upon exercising the
      Warrants.

           2.  Shelf Registration. (a) The Issuer shall use its best efforts
           to:

               (i)   not later than the date that is 90 days after the date (the
           "Registration Trigger Date") of the consummation of a "plan of
           reorganization" under the Bankruptcy Code with respect to PG&E, cause
           to be filed a registration statement pursuant to Rule 415 under the
           Securities Act (together with any amendments thereto, the "Shelf
           Registration Statement"), which Shelf Registration Statement shall
           provide for resales of all Transfer Restricted Securities held by
           Holders that have provided the information required pursuant to the
           terms of Section 2(b) hereof;

               (ii)  cause the Shelf Registration Statement to be declared
           effective by the Commission not later than 180 days after the
           Registration Trigger Date (the "Effectiveness Target Date"); and

               (iii) keep the Shelf Registration Statement continuously
           effective, supplemented and amended as required by the provisions of
           Section 6(b) hereof to the extent necessary to ensure that (A) it is
           available for resales by the Holders of Transfer Restricted
           Securities entitled to the benefit of this Agreement and (B) conforms
           with the requirements of this Agreement and the Securities Act for a
           period (the "Effectiveness Period") of:

                     (1) two years following the date of original issuance of
               the Warrants; or

                     (2) such shorter period that will terminate when (x) all of
               the Holders of Transfer Restricted Securities are able to sell
               all Transfer Restricted Securities immediately without
               restriction pursuant to Rule 144(k) under the Securities Act or
               any successor rule thereto, (y) all Transfer Restricted
               Securities have ceased to be outstanding (whether as a

<PAGE>

                                                                               5

                 result of repurchase and cancellation, conversion or otherwise)
                 or (z) all Transfer Restricted Securities have been registered
                 under the Shelf Registration Statement and have been sold in
                 accordance therewith.

             (b) No Holder of Transfer Restricted Securities shall be permitted
to include any of its Transfer Restricted Securities in the Shelf Registration
Statement pursuant to this Agreement unless such Holder completes a Selling
Securityholder Notice and Questionnaire, substantially in the form attached
hereto as Exhibit A (with such amendments or modifications as the Issuer may
deem necessary to reflect the circumstances of the proposed registration) (the
"Questionnaire"), and delivers it to the Issuer prior to or on the 15th Business
Day after such Holder's receipt of the Questionnaire by the Issuer in writing
(such deadline, the "Questionnaire Deadline"). Prior to such time, each Holder
may complete the Questionnaire and deliver it to the Issuer prior to such
request and, as a result, shall be entitled to have its Transfer Restricted
Securities included in the initial Shelf Registration Statement filed with the
Commission. In addition, upon receipt of one or more written requests for
additional information from the Issuer, each Holder who intends to be named as a
selling securityholder in the Shelf Registration Statement shall furnish to the
Issuer in writing, within 15 Business Days after such Holder's receipt of such
request, such additional information regarding such Holder and the proposed
distribution by such Holder of its Transfer Restricted Securities, in connection
with the Shelf Registration Statement or Prospectus or Preliminary Prospectus
included therein and in any application to be filed with or under state
securities law, as the Issuer may reasonably request. No Holder of Transfer
Restricted Securities shall be entitled to Liquidated Damages pursuant to
Section 3 hereof unless such Holder shall have provided all such reasonably
requested information prior to or on the Questionnaire Deadline. Each Holder
whose Transfer Restricted Securities are being registered pursuant to the Shelf
Registration Statement agrees to furnish promptly to the Issuer all information
required to be disclosed in order to make information previously furnished to
the Issuer by such Holder not materially misleading.

             3.  Liquidated Damages.

             (a)    If:

                    (i)  the Shelf Registration Statement has not been declared
             effective by the Commission on or prior to the Effectiveness Target
             Date; or

                    (ii) except as provided in Section 6(b)(i) hereof, the Shelf
             Registration Statement is filed and declared effective but, during
             the Effectiveness Period, shall thereafter cease to be effective or
             fail to be usable for its intended purpose without there being
             filed with the Commission within ten Business Days a post-effective
             amendment to the Shelf Registration Statement, a supplement to the
             Prospectus or a report filed pursuant to Section 13(a), 13(c), 14
             or 15(d) of the Exchange Act that cures such failure and, in the
             case of a post-effective amendment, is itself immediately declared
             effective;

             (each such event referred to in foregoing clauses (i) and (ii), a
"Registration Default"), the Issuer hereby agrees, subject to Section 2(b), to
pay liquidated damages ("Liquidated Dmages") with respect to the Transfer
Restricted Securities on a monthly basis in

<PAGE>

                                                                               6

an amount such that, each Warrant shall evidence the right to receive upon
payment of the Exercise Price that number of shares of Common Stock (calculated
to the nearest ten millionth) obtained from the following formula:

                  N' = N  x  1.005

                  Where:

                  N' = the adjusted number of Warrant Shares issuable upon the
                  exercise of a Warrant by payment of the Exercise Price (as
                  defined in the Warrant Agreement).

                  N = the number of Warrant Shares previously issuable upon the
                  exercise of a Warrant by payment of the Exercise Price prior
                  to adjustment.

                  To the extent that any Warrants have been previously exercised
and Warrant Shares (to the extent that such Warrant Shares are Transfer
Restricted Securities) have been issued to a Holder upon such exercise, the
Holder of such Warrant Shares shall be entitled to receive additional Warrants
Shares in an amount equal to the product of (i) the number of Warrant Shares
held by such Holder at the beginning of each month upon which liquidated damages
shall be payable and (ii) 0.005.

                  The adjustments made pursuant to this Section shall be made on
a monthly basis beginning on and including the day following the Registration
Default to but excluding the day on which the Registration Default has been
cured. Following the cure of all Registration Defaults relating to any
particular Transfer Restricted Security, the accrual of Liquidated Damages with
respect to such Transfer Restricted Security will cease; provided, however,
that, in any event, Liquidated Damages shall cease to accrue on the last day of
the Effectiveness Period. Except as provided in 8, no Holder of Transfer
Restricted Securities shall be entitled to any damages for a Registration
Default beyond the Liquidated Damages provided for herein.

                  The Liquidated Damages set forth above shall be the exclusive
monetary remedy available to the Holders of Transfer Restricted Securities for
such Registration Default.

                  4. Piggy-Back Registration Rights

                  (a) If the Issuer at any time proposes to file a registration
statement under the Securities Act with respect to any Underwritten Offering by
the Issuer for its own account or for the account of holders of any Common
Stock, Convertible Securities or Common Stock Equivalent to be offered for cash
(other than on Form S-4 or S-8) ("Other Holders") then the Issuer shall in each
case give written notice (a "Piggy-Back Registration Offer") of such proposed
filing to the Holders at least 20 days before the anticipated filing date, and
such notice shall offer such Holders the opportunity to include Transfer
Restricted Securities held by them in such registration statement (a "Piggy-Back
Registration") pursuant to the provisions set forth below. In such event the
right of any Holder to registration pursuant to this Section 4(a), may be
conditioned upon such Holder's participation in such underwriting and of the
inclusion of such Holder's Transfer Restricted Securities in the underwriting to
the extent provided herein. If any such Holder desires to have Transfer
Restricted Securities registered and included in such Underwritten Offering
under this Section 4(a) such Holder shall so notify the Issuer in writing

<PAGE>

                                                                               7

within ten days after the receipt by such Holder of the written notice
provided for in the preceding sentence (which notification shall set forth the
amount of Transfer Restricted Securities for which registration is requested),
and the Issuer will use its best efforts to cause all such Transfer Restricted
Securities to be registered under the Securities Act to the extent required to
permit the disposition in such Underwritten Offering; provided, however, that if
the managing underwriter or underwriters of such offering, as selected by the
Issuer, shall advise the Issuer in writing that in its or their opinion the
total amount or kind of securities that the Holders, the Issuer and any other
Persons or entities intend to include in such offering exceeds the amount that
can be sold in such offering without an adverse effect on the price, timing or
distribution of the securities offered by the Issuer, the Issuer shall be
required to include in such registration only the amount of Transfer Restricted
Securities and securities of other persons or entities, if any, that the
managing underwriter or underwriters determine, in its or their sole discretion,
can be sold without an adverse effect on the price, timing or distribution of
the securities offered. In such event, (x) in cases initially involving the
registration for sale of securities for the Issuer's own account, securities
shall be registered in such offering in the following order of priority: (i)
first, the securities which the Issuer proposes to register and (ii) second, the
securities which may have been requested to be included in such registration
pursuant to this Agreement and the securities of other Persons entitled to
exercise "piggy-back" registration rights pursuant to contractual commitments of
the Issuer (pro rata based on the amount of securities sought to be registered
by such Persons) (y) in cases initially involving the registration for sale of
securities for the account of any Other Holders, securities shall be registered
in such offering in the following order of priority: (i) first, the securities
which such Other Holders propose to register, (ii) second, the securities which
may have been requested to be included in such registration pursuant to this
Agreement and the securities of other Persons entitled to exercise "piggy-back"
registration rights pursuant to contractual commitments of the Issuer (pro rata
based on the amount of securities sought to be registered by such Persons) and
(iii) third, the securities which Issuer proposes to register.

                  (b)  At any time prior to the date of printing preliminary
prospectuses in connection with an Underwritten Offering under Section 4(a), a
Holder that previously requested Piggy-Back Registration thereof may withdraw
all or part of its Transfer Restricted Securities from such offering by
providing notice to such effect to the Issuer.

                  5.   Underwriting Procedures

                  (a)  If the Required Holders so request in writing (a
"Registration Request"), the Issuer shall effect pursuant to the Shelf
Registration Statement an Underwritten Offering by giving written notice (an
"Underwritten Offering Notice") of the proposed Underwritten Offering to all
Holders within 15 calendar days after receipt of a valid Registration Request.
Such notice shall offer the Holders the opportunity to include in such
Underwritten Offering such amount of Transfer Restricted Securities as each
Holder may request. The Issuer shall include in such Underwritten Offering all
Transfer Restricted Securities for which the Issuer has received written
requests for inclusion within 15 calendar days after delivery of the
Underwritten Offering Notice, subject to Section 5(b).

                  (b)  The Issuer shall cause the managing underwriter or
underwriters of a proposed Underwritten Offering to permit the Holders that have
requested Transfer Restricted

<PAGE>

                                                                               8

Securities to be included in an Underwritten Offering undertaken pursuant to
Section 5(a) above to include all such Transfer Restricted Securities on the
same terms and conditions as all other Transfer Restricted Securities to be
included. Notwithstanding the foregoing, if the managing underwriter or
underwriters of such Underwritten Offering advises the Issuer and the selling
Holders that the total amount of Transfer Restricted Securities that such
Holders propose to include in such Underwritten Offering is such as to
materially and adversely affect the success of such Underwritten Offering, then
the Issuer shall include in such Underwritten Offering up to the full amount of
Transfer Restricted Securities requested to be included in such Underwritten
Offering by the Holders (allocated pro rata among the Holders on the basis of
the amount of Transfer Restricted Securities initially requested to be included
therein by each such Holder) so that the total amount of Transfer Restricted
Securities to be included in such Underwritten Offering is the full amount that,
in the written opinion of such managing underwriter or underwriters, can be sold
without materially and adversely affecting the success of such Underwritten
Offering.

                  (c)  Any Transfer Restricted Securities may be withdrawn from
a proposed Underwritten Offering at any time before the execution and delivery
by such Holder of the underwriting agreement relating to such Underwritten
Offering.

                  (d)  The managing underwriter or underwriters of the
Underwritten Offering relating thereto shall be selected by the Required Holders
whose Transfer Restricted Securities are included in such offering, subject to
the approval of the Issuer.

                  6.   Registration Procedures.

                  (a)  In connection with the Shelf Registration Statement, the
Issuer shall comply with all the provisions of Section 6(b) hereof and shall use
its best efforts to effect such registration to permit the sale of the Transfer
Restricted Securities being sold in accordance with the intended method or
methods of distribution thereof, and pursuant thereto, shall as expeditiously as
possible prepare and file with the Commission a Shelf Registration Statement
relating to the registration on any appropriate form under the Securities Act.

                  (b)  In connection with the Shelf Registration Statement and
any Prospectus required by this Agreement to permit the sale or resale of
Transfer Restricted Securities, the Issuer shall:

                       (ii) subject to any notice by the Issuer in accordance
                  with this Section 6(b) of the existence of any fact or event
                  of the kind described in Section 6(b)(iii)(D), use its best
                  efforts to keep the Shelf Registration Statement continuously
                  effective during the Effectiveness Period; upon the occurrence
                  of any event that would cause the Shelf Registration Statement
                  or the Prospectus contained therein (A) to contain a material
                  misstatement or omission or (B) not be effective and usable
                  for resale of Transfer Restricted Securities during the
                  Effectiveness Period, the Issuer shall file promptly an
                  appropriate amendment to the Shelf Registration Statement, a
                  supplement to the Prospectus or a report filed with the
                  Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of
                  the Exchange Act, in the case of clause (A), correcting any
                  such misstatement or

<PAGE>

                                                                               9

               omission, and, in the case of either clause (A) or (B), use its
               best efforts to cause such amendment to be declared effective and
               the Shelf Registration Statement and the related Prospectus to
               become usable for their intended purposes as soon as practicable
               thereafter. Notwithstanding the foregoing, the Issuer may suspend
               the effectiveness of the Shelf Registration Statement by written
               notice to the Holders for a period (each such period, a
               "Suspension Period"); provided that the Company shall promptly
               notify the Holders in writing of the date the Suspension Period
               will begin and the expected duration of such period; and provided
               further, that no Suspension Period shall exceed 45 consecutive
               days and all such Suspension Periods shall not exceed an
               aggregate of 90 days within any consecutive twelve-month period
               if:

                                    (x) an event occurs and is continuing as a
                           result of which the Shelf Registration Statement
                           would, in the Issuer's reasonable judgment, contain
                           an untrue statement of a material fact or omit to
                           state a material fact required to be stated therein
                           or necessary to make the statements therein not
                           misleading; and

                                    (y) the Issuer reasonably determines that
                           the disclosure of such event at such time would have
                           a material adverse effect on the business of the
                           Issuer (and its subsidiaries, if any, taken as a
                           whole);

               Notwithstanding the foregoing, in the event that any Holder has,
               prior to the receipt of notice of the commencement of a
               Suspension Period, entered into a binding contract to sell any
               Warrant Shares pursuant to the Shelf Registration Statement, and
               in accordance with the plan of distribution therein, the Issuer
               agrees not to prevent its transfer agent from delivering such
               Warrant to the purchaser thereof in accordance with the
               applicable requirements of the Warrant Agreement. The Issuer
               shall use its commercially reasonable efforts to provide any
               information reasonably requested by the transfer agent in
               connection with any such sale.

                           (ii)     Prepare and file with the Commission such
               amendments (including post-effective amendments) and supplements
               to the Shelf Registration Statement as may be necessary to keep
               the Shelf Registration Statement continuously effective during
               the Effectiveness Period; cause the Prospectus to be supplemented
               by any required Prospectus supplement, and as so supplemented to
               be filed pursuant to Rule 424 (or any similar provisions then in
               force) under the Securities Act, and to comply fully with the
               applicable provisions of Rules 424 and 430A under the Securities
               Act in a timely manner; and comply with the provisions of the
               Securities Act and the Exchange Act with respect to the
               disposition of all securities covered by the Shelf Registration
               Statement during the applicable period in accordance with the
               intended method or methods of distribution by the sellers thereof
               set forth in the Shelf Registration Statement as so amended or in
               such Prospectus as so supplemented.







<PAGE>

                                                                              10

               (iii) Advise the underwriter(s), if any, and selling Holders
          promptly (but in any event within five Business Days) and, if
          requested by such Persons, to confirm such advice in writing:

                     (A) when the Prospectus or any Prospectus supplement or
               post-effective amendment has been filed, and, with respect to the
               Shelf Registration Statement or any post-effective amendment
               thereto, when the same has become effective,

                     (B) of any request by the Commission for amendments to the
               Shelf Registration Statement or amendments or supplements to the
               Prospectus or for additional information relating thereto,

                     (C) of the issuance by the Commission of any stop order
               suspending the effectiveness of the Shelf Registration Statement
               under the Securities Act or any notification with respect to the
               suspension by any state securities commission of the
               qualification or exemption from qualification of any of the
               Transfer Restricted Securities for offering or sale in any
               jurisdiction, or the initiation or threatening of any proceeding
               for any of the preceding purposes, or

                     (D) of the existence of any fact or the happening of any
               event (the nature of which need not be disclosed), during the
               Effectiveness Period, that makes any statement of a material fact
               made in the Shelf Registration Statement, the Prospectus, any
               amendment or supplement thereto, or any document incorporated by
               reference therein untrue, or that requires the making of any
               additions to or changes in the Shelf Registration Statement or
               the Prospectus in order to make the statements therein not
               misleading, and that in the case of a Prospectus, it will not
               contain any untrue statement of a material fact or omit to state
               any material fact necessary to make the statements therein, in
               light of the circumstances under which they were made, not
               misleading.

          Each Holder of Warrants, by accepting the same, agrees to hold any
          communication from the Company pursuant to this Section 6(b)(iii) in
          confidence.

          If at any time the Commission shall issue any stop order suspending
          the effectiveness of the Shelf Registration Statement, or any state
          securities commission or other regulatory authority shall issue an
          order suspending the qualification or exemption from qualification of
          the Transfer Restricted Securities under state securities or Blue Sky
          laws, the Issuer shall use its best efforts to obtain the withdrawal
          or lifting of such order at the earliest possible time and will
          provide to the Purchasers and each Holder who is named in the Shelf
          Registration Statement prompt notice of the withdrawal of any such
          order.

<PAGE>

                                                                              11

                    (iv) Furnish to each of the selling Holders and each of the
               underwriter(s), if any, before filing with the Commission, one
               copy of the Shelf Registration Statement and copies of any
               Prospectus included therein or any amendments or supplements to
               the Shelf Registration Statement or Prospectus (other than
               documents incorporated by reference after the initial filing of
               the Shelf Registration Statement), which documents will be
               subject to the review of such Holders and underwriter(s), if any,
               for a period of at least ten Business Days (in the case of the
               Shelf Registration Statement and the initial Prospectus contained
               therein) and two Business Days (in the case of any amendment or
               supplement thereto), and the Issuer will not file the Shelf
               Registration Statement or initial Prospectus or any amendment or
               supplement to the Shelf Registration Statement or Prospectus
               (other than documents incorporated by reference) to which a
               selling Holder of Transfer Restricted Securities covered by the
               Shelf Registration Statement or the underwriter(s), if any, shall
               reasonably object within ten Business Days prior to the filing of
               the Shelf Registration Statement and Prospectus and within two
               Business Days prior to the filing of any amendment or supplement
               thereto. A selling Holder or underwriter, if any, shall be deemed
               to have reasonably objected to such filing only if the Shelf
               Registration Statement, amendment, Prospectus or supplement, as
               applicable, as proposed to be filed, contains a material
               misstatement or omission with respect to the information
               concerning such Holder or its intended plan of distribution with
               respect to the Transfer Restricted Securities.

                    (v)  Make available at reasonable times for inspection by
               one or more representatives of the selling Holders, designated in
               writing by the Required Holders whose Transfer Restricted
               Securities are included in the Shelf Registration Statement, any
               underwriter participating in any distribution pursuant to the
               Shelf Registration Statement, and any attorney or accountant
               retained by such selling Holders or any of the underwriter(s),
               all financial and other records, pertinent corporate documents
               and properties of the Issuer as shall be reasonably necessary to
               enable them to exercise any applicable due diligence
               responsibilities, and cause the Issuer's officers, directors,
               managers and employees to supply all information reasonably
               requested by any such representative or representatives of the
               selling Holders, underwriter, attorney or accountant in
               connection with the Shelf Registration Statement after the filing
               thereof and before its effectiveness, provided, however, that any
               information designated by the Issuer as confidential at the time
               of delivery of such information shall be kept confidential by the
               recipient thereof.

                    (vi) If reasonably requested by any selling Holders or the
               underwriter(s), if any, promptly incorporate in the Shelf
               Registration Statement or Prospectus, pursuant to a supplement or
               post-effective amendment if necessary, such information as such
               selling Holders and underwriter(s), if any, may reasonably
               request to have included therein, including, without limitation:
               (1) information relating to the "Plan of Distribution" of the
               Transfer Restricted Securities, (2) information with respect the
               number of Transfer Restricted Securities being sold to such
               underwriter(s), (3) the purchase price being paid

<PAGE>

                                                                              12

                    therefor and (4) any other terms of the offering of the
                    Transfer Restricted Securities to be sold in such offering;
                    provided, however, that with respect to any information
                    requested for inclusion by a selling Holder, this clause
                    (vi) shall apply only to such information that relates to
                    the Transfer Restricted Securities to be sold by such
                    selling Holder; and make all required filings of such
                    Prospectus supplement or post-effective amendment as soon as
                    reasonably practicable after the Issuer is notified of the
                    matters to be incorporated in such Prospectus supplement or
                    post-effective amendment.

                         (vii)  Deliver to each selling Holder and each of the
                    underwriter(s), if any, without charge, upon the
                    effectiveness of the Shelf Registration Statement, as many
                    copies of the Prospectus (including each preliminary
                    prospectus) and any amendment or supplement thereto as such
                    Persons reasonably may request; subject to any notice by the
                    Issuer in accordance with this Section 6(b) of the existence
                    of any fact or event of the kind described in Section
                    6(b)(iii) (D), the Issuer hereby consents to the use of the
                    Prospectus and any amendment or supplement thereto by each
                    of the selling Holders and each of the underwriter(s), if
                    any, in connection with the offering and the sale of the
                    Transfer Restricted Securities covered by the Prospectus or
                    any amendment or supplement thereto.

                         (viii) The Issuer shall:

                         (A)    upon request, furnish to each selling Holder and
                    each underwriter in the case of an underwritten registration
                    where an underwriting agreement is entered into, if any, in
                    such substance and scope as they may reasonably request and
                    as are customarily made by issuers to underwriters in
                    primary underwritten offerings for selling security holders,
                    upon the date of closing of any sale of Transfer Restricted
                    Securities in an Underwritten Registration:

                                (1) opinions, each dated the date of such
                         closing, of counsel to the Issuer covering such of the
                         matters as are customarily covered in legal opinions to
                         underwriters in connection with underwritten offerings
                         of securities; and

                                (2) customary comfort letters, dated the date of
                         such closing, from the Issuer's independent accountants
                         (and from any other accountants whose report is
                         contained or incorporated by reference in the Shelf
                         Registration Statement) in the customary form and
                         covering matters of the type customarily covered in
                         comfort letters to underwriters in connection with
                         underwritten offerings of securities;

                         (B)    set forth in full in the underwriting agreement,
                    if any, indemnification provisions and procedures which
                    provide rights no less protective than those set forth in
                    Section 6 hereof with respect to all parties to be
                    indemnified by the Issuer; and

<PAGE>

                                                                              13

                         (C)   deliver such other documents and certificates as
                    may be reasonably requested by such parties to evidence
                    compliance with clause (A) above and with any customary
                    conditions contained in the underwriting agreement or other
                    agreement entered into by the selling Holders pursuant to
                    this clause (ix).

                         (ix)  Before any public offering of Transfer Restricted
                    Securities, cooperate with the selling Holders, the
                    underwriter(s), if any, and their respective counsel in
                    connection with the registration and qualification of the
                    Transfer Restricted Securities for offer and sale under the
                    securities or Blue Sky laws of such jurisdictions in the
                    United States as the selling Holders or underwriter(s), if
                    any, may reasonably request, use best efforts to keep each
                    such registration or qualification (or exemption therefrom)
                    effective during the Effectiveness Period and do any and all
                    other acts or things necessary or advisable to enable the
                    disposition in such jurisdictions of the Transfer Restricted
                    Securities covered by the Shelf Registration Statement;
                    provided, however, that the Issuer shall not be required (A)
                    to register or qualify as a foreign corporation or a dealer
                    of securities where it is not now so qualified or to take
                    any action that would subject it to the service of process
                    in any jurisdiction where it is not now so subject or (B) to
                    subject itself to taxation in any such jurisdiction if it is
                    not now so subject.

                         (x)   Cooperate with the selling Holders and the
                    underwriter(s), if any, to facilitate the timely preparation
                    and delivery of certificates representing Transfer
                    Restricted Securities to be sold and not bearing any
                    restrictive legends (unless required by applicable
                    securities laws); and enable such Transfer Restricted
                    Securities to be in such denominations and registered in
                    such names as the Holders or the underwriter(s), if any, may
                    request at least two Business Days before any sale of
                    Transfer Restricted Securities made by such selling Holders
                    or underwriter(s).

                         (xi)  Use its best efforts to cause the Transfer
                    Restricted Securities covered by the Shelf Registration
                    Statement to be registered with or approved by such other
                    U.S. governmental agencies or authorities as may be
                    necessary to enable the selling Holders or the
                    underwriter(s), if any, to consummate the disposition of
                    such Transfer Restricted Securities pursuant to the Shelf
                    Registration Statement.

                         (xii) Subject to Section 6(b)(i) hereof, if any fact or
                    event contemplated by Section 6(b)(iii)(D) hereof shall
                    exist or have occurred, use its best efforts to prepare a
                    supplement or post-effective amendment to the Shelf
                    Registration Statement or related Prospectus or any document
                    incorporated therein by reference or file any other required
                    document so that, as thereafter delivered to any purchasers
                    of Transfer Restricted Securities, the Prospectus will not
                    contain an untrue statement of a material fact or omit to
                    state any material fact required to be stated therein or
                    necessary to make the statements therein, in light of the
                    circumstances in which they were made, not misleading.

<PAGE>

                                                                              14

               (xiii)  Provide CUSIP numbers for all Transfer Restricted
          Securities not later than the effective date of the Shelf Registration
          Statement and provide the transfer agent with printed certificates for
          the Transfer Restricted Securities that are in a form eligible for
          deposit with The Depository Trust Company.

               (xiv)   Cooperate and assist in any filings required to be made
          with the NASD and in the performance of any due diligence
          investigation by any underwriter that is required to be retained in
          accordance with the rules and regulations of the NASD.

               (xv)    Otherwise use its best efforts to comply with all
          applicable rules and regulations of the Commission and all reporting
          requirements under the Exchange Act.

               (xvi)   Cause all Transfer Restricted Securities covered by the
          Shelf Registration Statement to be listed or quoted, as the case may
          be, on each securities exchange or automated quotation system on which
          similar securities issued by the Issuer are then listed or quoted and
          if not so listed, to be listed on the NASD automated quotation system.

               (xvii)  Provide to each Holder upon written request each document
          filed with the Commission pursuant to the requirements of Section 13
          and Section 15 of the Exchange Act after the effective date of the
          Shelf Registration Statement.

               (xviii) If reasonably requested by the underwriters, make
          appropriate officers of the Issuer available to the underwriters for
          meetings with prospective purchasers of the Transfer Restricted
          Securities and prepare and present to potential investors customary
          "road show" or marketing materials in a manner consistent with other
          new issuances of other securities similar to the Transfer Restricted
          Securities; but in no event more than once in any 12 month period.

          (c)  Each Holder agrees by acquisition of a Transfer Restricted
Security that, upon receipt of any notice (a "Suspension Notice") from the
Issuer of the existence of any fact of the kind described in Section
6(b)(iii)(D) hereof, such Holder will, and will use its reasonable best efforts
to cause any underwriter(s) in an Underwritten Offering to, forthwith
discontinue disposition of Transfer Restricted Securities pursuant to the Shelf
Registration Statement until:

               (i)  such Holder has received copies of the supplemented or
          amended Prospectus contemplated by Section 6(b)(xii) hereof; or

               (ii) such Holder is advised in writing by the Issuer that the use
          of the Prospectus may be resumed, and has received copies of any
          additional or supplemental filings that are incorporated by reference
          in the Prospectus.

If so directed by the Issuer, each Holder will deliver to the Issuer (at the
Issuer's expense) all copies, other than permanent file copies then in such
Holder's possession, of the Prospectus covering such Transfer Restricted
Securities that was current at the time of receipt of such notice of suspension.

<PAGE>

                                                                              15

          7.   Registration Expenses. All expenses incident to the Issuer's
performance of or compliance with this Agreement shall be borne by the Issuer
regardless of whether a Shelf Registration Statement becomes effective,
including, without limitation:

               (i)   all registration and filing fees and expenses (including
          filings made by the Purchasers or Holders with the NASD);

               (ii)  all fees and expenses of compliance with federal securities
          and state Blue Sky or securities laws;

               (iii) all expenses of printing (including printing of
          Prospectuses and certificates for the Warrant Shares) and the Issuer's
          expenses for messenger and delivery services and telephone;

               (iv)  all fees and disbursements of counsel to the Issuer and,
          subject to Section 5(b) below, the Holders of Transfer Restricted
          Securities;

               (v)   all application and filing fees in connection with listing
          (or authorizing for quotation) the Common Stock on a national
          securities exchange or automated quotation system pursuant to the
          requirements hereof; and

               (vi)  all fees and disbursements of independent certified public
          accountants of the Issuer (including the expenses of any special audit
          and comfort letters required by or incident to such performance).

          The Issuer shall bear its internal expenses (including, without
limitation, all salaries and expenses of its officers and employees performing
legal, accounting or other duties), the expenses of any annual audit and the
fees and expenses of any Person, including special experts, retained by the
Issuer.

          (b)  In connection with the Shelf Registration Statement required by
this Agreement, including any amendment or supplement thereto, and any other
documents delivered to any Holders, the Issuer shall reimburse the Purchasers
and the Holders of Transfer Restricted Securities being registered pursuant to
the Shelf Registration Statement, as applicable, for the reasonable fees and
disbursements not to exceed $50,000, of not more than one counsel, which shall
be such counsel as may be chosen by a Majority of Holders for whose benefit the
Shelf Registration Statement is being prepared.

          8.   Indemnification and Contribution. The Issuer shall indemnify and
hold harmless each Holder, such Holder's officers, directors and employees and
each person, if any, who controls such Holder within the meaning of the
Securities Act (each, an "Indemnified Holder"), from and against any loss,
claim, damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to resales of the Transfer Restricted Securities) ("Liabilities"), to
which such Indemnified Holder may become subject, insofar as any such loss,
claim, damage, liability or action arises out of, or is based upon:

<PAGE>
                                                                              16

          (i)  any untrue statement or alleged untrue statement of a material
     fact contained in (A) the Shelf Registration Statement or Prospectus or any
     amendment or supplement thereto or (B) any blue sky application or other
     document or any amendment or supplement thereto prepared or executed by the
     Issuer (or based upon written information furnished by or on behalf of the
     Issuer expressly for use in such blue sky application or other document or
     amendment on supplement) filed in any jurisdiction specifically for the
     purpose of qualifying any or all of the Transfer Restricted Securities
     under the securities law of any state or other jurisdiction (such
     application or document being hereinafter called a "Blue Sky Application");
     or

          (ii) the omission or alleged omission to state therein any material
     fact required to be stated therein or necessary to make the statements
     therein, in the light of the circumstances under which they were made, not
     misleading,

and shall reimburse each Indemnified Holder promptly upon demand for any legal
or other expenses reasonably incurred by such Indemnified Holder in connection
with investigating or defending or preparing to defend against any such
Liability as such expenses are incurred; provided, however, that the Issuer
shall not be liable to a Holder in any such case to the extent that any such
Liability arises out of, or is based upon, any untrue statement or alleged
untrue statement or omission or alleged omission made in the Shelf Registration
Statement or Prospectus or amendment or supplement thereto or Blue Sky
Application in reliance upon and in conformity with written information
furnished to the Issuer by such Holder specifically for use therein; and
provided, further, however, that the Issuer shall not be liable to the
underwriter for any Holder or, in the case of any non-underwritten offering, to
any Holder or its related Indemnified Holder to the extent that (A) such
Liability arises out of or is based upon an untrue statement or omission made in
any preliminary prospectus if (i) such underwriter or Holder, as applicable,
failed to send or deliver a copy of the final prospectus with or prior to the
delivery of written confirmation of the sale by such Holder to the Person
asserting the claim from which such Liabilities arise, to the extent such
underwriter or Holder, as applicable, was required to send and deliver such
final prospectus, and (ii) the final prospectus would have corrected such untrue
statement or such omission; or (B) such Liability arises out of or is based upon
an untrue statement or omission in any such prospectus if (x) such untrue
statement or omission is corrected in an amendment or supplement to such
prospectus, and (y) having previously been furnished by or on behalf of the
Issuer with copies of such prospectus as so amended or supplemented, such
underwriter or Holder, as applicable, thereafter fails to deliver such
prospectus as so amended or supplemented prior to or concurrently with the sale
of a Security to the Person asserting the claim from which such Liability
arises. The foregoing indemnity agreement is in addition to any liability which
the Issuer may otherwise have to any Indemnified Holder. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Holder and shall survive the transfer of the Transfer Restricted
Securities by such Holder.

          (b)  Each Holder, severally and not jointly, shall indemnify and hold
harmless the Issuer, its officers, directors and employees and each person, if
any, who controls the Issuer within the meaning of the Securities Act, from and
against any Liability, in respect thereof, to which the Issuer or any such
officer, director, employee or controlling person may become

<PAGE>

                                                                              17

subject, insofar as any such loss, claim, damage or liability or action arises
out of, or is based upon:

            (i)  any untrue statement or alleged untrue statement of any
         material fact contained in the Shelf Registration Statement or
         Prospectus or any amendment or supplement thereto or any Blue Sky
         Application; or

            (ii) the omission or the alleged omission to state therein any
         material fact required to be stated therein or necessary to make the
         statements therein, in light of the circumstances under which they were
         made, not misleading,

but in each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Issuer by or on behalf of
such Holder (or its related Indemnified Holder) specifically for use therein,
and shall reimburse the Issuer and any such director, officer, employee or
controlling person promptly upon demand for any legal or other expenses
reasonably incurred by the Issuer or any such director, officer, employee or
controlling person in connection with investigating or defending or preparing to
defend against any such Liability as such expenses are incurred. The foregoing
indemnity agreement is in addition to any liability which any Holder may
otherwise have to the Issuer or any of its directors, officers, employees or
controlling persons and any such director, officer, employee or controlling
person. Notwithstanding anything to the contrary contained herein, no Holder
shall be liable under this Section 8(b) for any amount in excess of the net
proceeds to such Holder as a result of the sale of Transfer Restricted
Securities pursuant to the Shelf Registration Statement or Prospectus.

            (c) Promptly after receipt by an indemnified party under this
Section 8 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, provided, further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that a
Majority of Holders shall have the right to employ a single counsel to represent
jointly a Majority of Holders and their respective officers, employees and
controlling persons who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by a Majority of Holders against the
Issuer or any of its directors, officers, employees or controlling persons under
this Section 8; and, provided, further, that if a Majority of Holders shall have
reasonably concluded that there may be one or more legal defenses available to
them

<PAGE>

                                                                              18

and their respective officers, employees and controlling persons that are
different from or additional to those available to the Issuer and its officers,
directors, employees and controlling persons, the fees and expenses of a single
separate counsel shall be paid by the Issuer. No indemnifying party shall:

            (i)   without the prior written consent of the indemnified parties
         (which consent shall not be unreasonably withheld) settle or compromise
         or consent to the entry of any judgment with respect to any pending or
         threatened claim, action, suit or proceeding in respect of which
         indemnification or contribution may be sought hereunder (whether or not
         the indemnified parties are actual or potential parties to such claim
         or action) unless such settlement, compromise or consent includes an
         unconditional release of each indemnified party from all liability
         arising out of such claim, action, suit or proceeding, or

            (ii)  be liable for any settlement of any such action effected
         without its written consent (which consent shall not be unreasonably
         withheld), but if settled with its written consent or if there be a
         final judgment for the plaintiff in any such action, the indemnifying
         party agrees to indemnify and hold harmless any indemnified party from
         and against any loss or liability by reason of such settlement or
         judgment.

            (d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable or insufficient to hold harmless an indemnified party
under Section 8(a) or 8(b) in respect of any Liability referred to therein, then
the indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such Liability in such proportion as is appropriate to reflect fault of such
Person and the indemnifying party, as well as other relevant equitable concerns.
The relative fault of the parties shall be determined by reference to whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Issuer on the one hand or the Holders on the other, the intent of the parties
and their relative knowledge, access to information and opportunity to correct
or prevent such statement or omission. The Issuer and each Holder agree that it
would not be just and equitable if the amount of contribution pursuant to this
Section 8(d) were determined by pro rata allocation or by any other method of
allocation that does not take into account the equitable considerations referred
to in the first sentence of this paragraph (d). The amount paid or payable by an
indemnified party as a result of the Liability referred to above in this Section
8 shall be deemed to include, for purposes of this Section 8, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending or preparing to defend any such action or claim.
Notwithstanding the provisions of this Section 8, no Holder shall be required to
contribute any amount in excess of the amount by which the total price at which
the Transfer Restricted Securities purchased by it were resold exceeds the
amount of any damages which such Holder has otherwise been required to pay by
reason of any untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The Holders'
obligations to contribute as provided in this Section 8(d) are several and not
joint.

<PAGE>

                                                                              19

            9.   Rule 144. The Issuer shall file the reports required to be
filed by it under the Securities Act and the Exchange Act in a timely manner
and, if at any time the Issuer is not required to file such reports, it will,
upon written request of any Holder of Transfer Restricted Securities, make
publicly available other information so long as necessary to permit sales of
their securities pursuant to Rules 144. The Issuer covenants that it will take
such further action as any Holder of Transfer Restricted Securities may
reasonably request, all to the extent required from time to time to enable such
Holder to sell such Transfer Restricted Securities without registration under
the Securities Act within the limitation of the exemptions provided by Rules
144. The Issuer will provide a copy of this Agreement to prospective purchasers
of Transfer Restricted Securities identified to the Issuer by any purchasers
upon request by any Purchaser. Upon the request of any Holder of Transfer
Restricted Securities, the Issuer shall deliver to such Holder a written
statement as to whether it has complied with such requirements. Notwithstanding
the foregoing, nothing in this Section 9 shall be deemed to require the Issuer
to register any of its securities pursuant to the Exchange Act.

            10.  Participation in Underwritten Registrations. No Holder may
participate in any Underwritten Registration hereunder unless such Holder:

            (i)  agrees to sell such Holder's Transfer Restricted Securities on
         the basis provided in any underwriting arrangements approved by the
         Persons entitled hereunder to approve such arrangements; and

            (ii) completes and executes all reasonable questionnaires, powers
         of attorney, indemnities, underwriting agreements, lock-up letters and
         other documents required under the terms of such underwriting
         arrangements.

            11.  Purchase By Issuer. Neither the Issuer nor any of its
affiliates (as defined in Rule 144) shall resell any Warrants purchased by such
Person to any other Person other than to the Issuer or any of its affiliates.

            12.  Miscellaneous.

            (a)  Remedies. The Issuer acknowledges and agrees that any failure
by the Issuer to comply with its obligations under Section 2 hereof may result
in material irreparable injury to the Purchasers or the Holders for which there
is no adequate remedy at law, that it will not be possible to measure damages
for such injuries precisely and that, in the event of any such failure, the
Purchasers or any Holder may obtain such relief as may be required to
specifically enforce the Issuer's obligations under Section 2 hereof. The Issuer
further agrees to waive the defense in any action for specific performance that
a remedy at law would be adequate.

            (b)  Adjustments Affecting Transfer Restricted Securities. The
Issuer shall not, directly or indirectly, take any action with respect to the
Transfer Restricted Securities as a class that would adversely affect the
ability of the Holders of Transfer Restricted Securities to include such
Transfer Restricted Securities in a registration undertaken pursuant to this
Agreement.

            (c)  No Inconsistent Agreements. The Issuer will not, on or after
the date of this Agreement, enter into any agreement with respect to its
securities that is inconsistent with

<PAGE>

                                                                              20

the rights granted to the Holders in this Agreement or otherwise conflicts with
the provisions hereof. In addition, the Issuer shall not grant to any of its
security holders (other than the Holders of Transfer Restricted Securities in
such capacity) the right to include any of its securities in the Shelf
Registration Statement provided for in this Agreement other than the Transfer
Restricted Securities. The Issuer has not previously entered into any agreement
(which has not expired or been terminated) granting any registration rights with
respect to its securities to any Person which rights conflict with the
provisions hereof. Notwithstanding the provisions of this Section 12(c), the
Holders agree that the Resale Registration Rights Agreement between the Issuer
and the purchasers identified on the signature pages thereto, dated as of the
date hereof, is not inconsistent with or otherwise in conflict with the
provisions hereof and that the provisions of Section 4 hereof shall not apply to
any registrations undertaken pursuant to the provisions thereof.

            (d)   Amendments and Waivers. This Agreement may not be amended,
modified or supplemented, and waivers or consents to or departures from the
provisions hereof may not be given, unless the Issuer has obtained the written
consent of a Majority of Holders.

            (e)   Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, facsimile
transmission, or air courier guaranteeing overnight delivery:

                  (i) if to a Holder, at the last address provided by such
                  Holder to the Company (in the case of Holders of Warrants) or
                  the transfer agent of the Common Stock (in the case of Holders
                  of Warrant Shares) and

                  (ii)     if to the Issuer:

                           PG&E Corporation
                           One Market, Spear Tower
                           Suite 2400
                           San Francisco, California  94105
                           Attention: Assistant Treasurer
                           Facsimile: (415) 267-7265
                           Telephone: (415) 267-7052

                           With copies to:

                           PG&E Corporation
                           One Market, Spear Tower
                           Suite 2400
                           San Francisco, California  94105
                           Attention: Chief Counsel - Corporate
                           Facsimile: (415) 817-8225
                           Telephone: (415) 817-8200

<PAGE>

                                                                              21

                                    and

                                    Latham & Watkins
                                    633 West Fifth Street
                                    Suite 4000
                                    Los Angeles, California  90071
                                    Attention: Tom Sadler
                                    Facsimile: (213) 891-8763
                                    Telephone: (213) 485-1234

                  All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
Business Days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt acknowledged, if transmitted by
facsimile; and on the next Business Day, if timely delivered to an air courier
guaranteeing overnight delivery.

                  (f) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders of Transfer Restricted Securities; provided,
however, that (i) this Agreement shall not inure to the benefit of or be binding
upon a successor or assign of a Holder unless and to the extent such successor
or assign acquired Transfer Restricted Securities from such Holder in compliance
with any restrictions on transfer applicable thereto and (ii) nothing contained
herein shall be deemed to permit any assignment, transfer or other disposition
of Transfer Restricted Securities in violation of the terms of the Warrant
Agreement. If any transferee of any Holder shall acquire Transfer Restricted
Securities, in any manner, whether by operation of law or otherwise, such
Transfer Restricted Securities shall be held subject to all of the terms of this
Agreement, and by taking and holding such Transfer Restricted Securities such
person shall be conclusively deemed to have agreed to be bound by and to perform
all of the terms and provisions of this Agreement. The Issuer hereby agrees to
extend the benefits of this Agreement to subsequent Holders of Transfer
Restricted Securities who execute a counterpart signature page hereto.

                  (g) Counterparts. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement; provided that a facsimile
signature shall be considered due execution and shall be binding upon the
signatory thereto with the same force and effect as if the signature were an
original, not a facsimile signature.

                  (h) Securities Held by the Issuer or Its Affiliates. Whenever
the consent or approval of Holders of a specified percentage of Transfer
Restricted Securities is required hereunder, Transfer Restricted Securities held
by the Issuer or its "affiliates" (as such term is defined in Rule 405 under the
Securities Act) (other than the Purchasers or subsequent Holder of Transfer
Restricted Securities if such subsequent Holders are deemed to be affiliates
solely by reason of their holdings of such Transfer Restricted Securities) shall
not be counted in determining whether such consent or approval was given by the
Holders of such required percentage.

<PAGE>

                                                                              22

                  (i) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.

                  (j) Governing Law. This Agreement shall be governed by, and
construed in accordance with, the law of the State of New York.

                  (k) Severability. If any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be affected or impaired or
invalidated thereby.

                  (l) Entire Agreement. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein and the registration rights
granted by the Issuer with respect to the Transfer Restricted Securities. There
are no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein with respect to the registration rights granted by
the Issuer with respect to the Transfer Restricted Securities. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.



                            [signature pages follow]

<PAGE>

                 In Witness Whereof, the parties have executed this Agreement as
of the date first written above.

                                           PG&E CORPORATION



                                           By______________________________
                                             Name:
                                             Title:

<PAGE>

                                                LB I GROUP INC.



                                                By______________________________
                                                  Name:
                                                  Title:

<PAGE>

                                                OAK HILL SECURITIES FUND, L.P.



                                                By______________________________
                                                  Name:
                                                  Title:

<PAGE>

                                               DK ACQUISITION PARTNERS, L.P.



                                               By______________________________
                                                 Title:
                                                 Name:

<PAGE>

                                              HBK MASTER FUND L.P.



                                              By______________________________
                                                Name:
                                                Title:

<PAGE>

                                                TINICUM PARTNERS, L.P.



                                                By______________________________
                                                  Name:
                                                  Title:

<PAGE>

                                          FARALLON CAPITAL PARTNERS, L.P.



                                          By______________________________
                                            Name:
                                            Title:

<PAGE>

                                          FARALLON CAPITAL INSTITUTIONAL
                                          PARTNERS, L.P.



                                          By______________________________
                                            Name:
                                            Title:

<PAGE>

                                          FARALLON CAPITAL INSTITUTIONAL
                                          PARTNERS II, L.P.



                                          By______________________________
                                            Name:
                                            Title:

<PAGE>

                                          FARALLON CAPITAL INSTITUTIONAL
                                          PARTNERS III, L.P.



                                          By______________________________
                                            Name:
                                            Title:

<PAGE>

                                                                       EXHIBIT A

                                PG&E CORPORATION

FORM OF SELLING SECURITYHOLDER NOTICE AND QUESTIONNAIRE

         Beneficial owners that do not complete this Questionnaire within 20
Business Days of receipt hereof and deliver it to the Issuer as provided below
will not be named as selling securityholders in the prospectus and therefor will
not be permitted to sell any Transfer Restricted Securities pursuant to the
Shelf Registration Statement.

         The undersigned beneficial holder of warrants (the "Warrants") issued
by of PG&E Corporation, a California corporation (the "Issuer") pursuant to that
certain Warrant Agreement, dated as of June 25, 2002, between the Company and
Initial Holders (as defined therein), or shares of common stock, no par value
per share, issuable upon exercise of any Warrant (the "Warrant Shares" and
together with any other securities issued or issuable with respect to any
Warrant Share by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise, the "Transfer Restricted Securities") of the Issuer
understands that the Issuer has filed, or intends to file, with the Securities
and Exchange Commission (the "Commission") a registration statement (the "Shelf
Registration Statement"), for the registration and resale under Rule 415 of the
Securities Act of 1933, as amended (the "Securities Act"), of the Transfer
Restricted Securities in accordance with the terms of the Equity Registration
Rights Agreement, dated as of June 25, 2002 (the "Registration Rights
Agreement") between the Issuer and the other Initial Holders identified on the
signature pages thereto. A copy of the Registration Rights Agreement is
available from the Issuer upon request at the address set forth below. All
capitalized terms not otherwise defined herein have the meaning ascribed thereto
in the Registration Rights Agreement.

         Each beneficial owner of Transfer Restricted Securities is entitled to
the benefits of the Registration Rights Agreement. In order to sell or otherwise
dispose of any Transfer Restricted Securities pursuant to the Shelf Registration
Statement, a beneficial owner of Transfer Restricted Securities generally will
be required to be named as a selling securityholder in the related Prospectus,
deliver a Prospectus to purchasers of Transfer Restricted Securities and be
bound by those provisions of the Registration Rights Agreement applicable to
such beneficial owner (including certain indemnification provisions, as
described below).

         Certain legal consequences arise from being named as a selling
securityholder in the Shelf Registration Statement and the related Prospectus.
Accordingly, holders and beneficial owners of Transfer Restricted Securities are
advised to consult their own securities law counsel regarding the consequences
of being named or not being named as a selling securityholder in the Shelf
Registration Statement and the related Prospectus.

                                     NOTICE

         The undersigned beneficial owner (the "Selling Securityholder") of
Transfer Restricted Securities hereby gives notice to the Issuer of its
intention to sell or otherwise dispose of

                                      A-1

<PAGE>

Transfer Restricted Securities beneficially owned by it and listed below in Item
3 (unless otherwise specified under Item 3) pursuant to the Shelf Registration
Statement. The undersigned, by signing and returning this Questionnaire,
understands that it will be bound by the terms and conditions of this
Questionnaire and the Registration Rights Agreement.

         Pursuant to the Registration Rights Agreement and subject to the terms
thereof, the undersigned has agreed to indemnify and hold harmless the Issuer,
the Issuer's directors, the Issuer's officers who sign the Shelf Registration
Statement and each person, if any, who controls the Issuer within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act, from
and against certain losses set forth therein arising in connection with
statements concerning the undersigned made in the Shelf Registration Statement
or the related Prospectus in reliance upon the information provided in this
Questionnaire.

         The undersigned hereby provides the following information to the Issuer
and represents and warrants that such information is accurate and complete:

                                  QUESTIONNAIRE

2.       Information Regarding Selling Securityholder

         (a)   Full legal name of Selling Securityholder: ______________________

         (b)   Full legal name of registered holder (if not the same as (a)
               above) through which Transfer Restricted Securities listed in
               Item (3) below are held:
               _________________________________________________________________

         (c)   Full legal name of DTC participant (if applicable and if not the
               same as (b) above) through which Transfer Restricted Securities
               listed in Item (3) are held: ____________________________________

3.       Address for Notices to Selling Securityholders

         Telephone: ____________________________

         Fax: __________________________________

         Contact Person: _______________________

4.       Beneficial Ownership of Transfer Restricted Securities

         (a)   Type of Transfer Restricted Securities beneficially owned, and
               number of Warrant Shares beneficially owned: ____________________


         (b)   CUSIP No(s). of such Transfer Restricted Securities beneficially
               owned: _________________________________________________________

                                      A-2

<PAGE>

5.       Beneficial Ownership of the Issuer's Securities Owned by the Selling
         Securityholder

         Except as set forth below in this Item (4), the undersigned is not the
beneficial or registered owner of any securities of the Issuer other than the
Transfer Restricted Securities listed above in Item (3) ("Other Securities").

         (a)    Type and amount of Other Securities beneficially owned by the
                Selling Securityholder:

         (b)    CUSIP No(s). of such Other Securities beneficially owned:

                ________________________________________________________________

6.       Relationship with the Issuer

         Except as set forth below, neither the undersigned nor any of its
affiliates, officers, directors or principal equity holders (5% or more) has
held any position or office or has had any other material relationship with the
Issuer (or its predecessors or affiliates) during the past three years.

         State any exceptions here: ____________________________________________

7.       Plan of Distribution

         Except as set forth below, the undersigned (including its donees or
pledgees) intends to distribute the Transfer Restricted Securities listed above
in Item (3) pursuant to the Shelf Registration Statement only as follows (if at
all). Such Transfer Restricted Securities may be sold from time to time directly
by the undersigned or, alternatively, through underwriters, broker-dealers or
agents. If the Transfer Restricted Securities are sold through underwriters or
broker-dealers, the Selling Securityholder will be responsible for underwriting
discounts or commissions or agent's commissions. Such Transfer Restricted
Securities may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of sale, at varying prices determined at
the time of sale, or at negotiated prices. Such sales may be effected in
transactions (which may involve crosses or block transactions):

                (i)   on any national securities exchange or quotation service
         on which the Transfer Restricted Securities may be listed or quoted at
         the time of sale;

                (ii)  in the over-the-counter market;

                (iii) in transactions otherwise than on such exchanges or
         services or in the over-the-counter market; or

                (iv)  through the writing of options, whether such options are
         listed on an options exchange or otherwise;

                (v)   ordinary brokers' transactions;

                                      A-3

<PAGE>

         (vi)   purchases by brokers, dealers or underwriters as principal and
         resale by these purchasers for their own accounts pursuant to this
         prospectus;

         (vii)  "at the market," to or through market makers, or into an
         existing market for our common stock;

         (viii) in other ways not involving market makers or established trading
         markets, including direct sales to purchasers or sales effected through
         agents;

         (ix)   through transactions in swaps or other derivatives (whether
         exchange-listed or otherwise); or

         (x)    to cover short sales.

         In connection with sales of the Transfer Restricted Securities or
otherwise, the undersigned may enter into hedging transactions with
broker-dealers, which may in turn engage in short sales of the Transfer
Restricted Securities and deliver Transfer Restricted Securities to close out
such short positions, or loan or pledge Transfer Restricted Securities to
broker-dealers that in turn may sell such securities.

         State any exceptions here: ____________________________________________

         _______________________________________________________________________

         Note: In no event will such method(s) of distribution take the form of
an underwritten offering of the Transfer Restricted Securities without the prior
agreement of the Issuer.

8.       Instructions for Delivery of Questionnaire

         Please return the completed and executed Questionnaire to PG&E
Corporation at:

                               PG&E Corporation
                               One Market, Spear Tower
                               Suite 2400
                               San Francisco, California  94105
                               Attention: Assistant Treasurer

9.       Acknowledgments

         The undersigned acknowledges that it understands its obligation to
comply with the provisions of the Exchange Act and the rules and regulations
promulgated thereunder relating to stock manipulation, particularly Regulation M
thereunder (or any successor rules or regulations), in connection with any
offering of Transfer Restricted Securities pursuant to the Shelf Registration
Statement. The undersigned agrees that neither it nor any person acting on its
behalf will engage in any transaction in violation of such provisions.

         The Selling Securityholder hereby acknowledges its obligations under
the Registration Rights Agreement to indemnify and hold harmless certain persons
as set forth therein. Pursuant

                                      A-4

<PAGE>

to the Registration Rights Agreement, the Issuer has agreed under certain
circumstances to indemnify the Selling Securityholders against certain
liabilities.

         In accordance with the undersigned's obligation under the Registration
Rights Agreement to provide such information as may be required by law for
inclusion in the Shelf Registration Statement, the undersigned agrees to
promptly notify the Issuer of any inaccuracies or changes in the information
provided herein that may occur subsequent to the date hereof at any time while
the Shelf Registration Statement remains effective. All notices hereunder and
pursuant to the Registration Rights Agreement shall be made in writing at the
address set forth above.

         By signing below, the undersigned consents to the disclosure of the
information contained herein in its answers to items (1) through (7) above and
the inclusion of such information in the Shelf Registration Statement and the
related Prospectus. The undersigned understands that such information will be
relied upon by the Issuer in connection with the preparation or amendment of the
Shelf Registration Statement and the related Prospectus.

         IN WITNESS WHEREOF, the undersigned, by authority duly given, has
caused this Questionnaire to be executed and delivered either in person or by
its duly authorized agent.

                                         Beneficial Owner



                                         By:________________________________
                                            Name:
                                            Title:
                                            Date:

                                      A-5

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.4
<SEQUENCE>6
<FILENAME>dex994.txt
<DESCRIPTION>AMENDED AND RESTATED CREDIT AGREEMENT
<TEXT>
<PAGE>

                                                                  EXECUTION COPY


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


                                 $1,020,000,000

                      AMENDED AND RESTATED CREDIT AGREEMENT

                                      among

                                PG&E CORPORATION
                                  as Borrower,

                            the LENDERS party hereto,

                          LEHMAN COMMERCIAL PAPER INC.
                             as Administrative Agent

                                       and

                              LEHMAN BROTHERS INC.
                        as Lead Arranger and Book Manager

                     _______________________________________

                            Dated as of June 25, 2002

                     _______________________________________



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

<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 ...........................................      2

     2.1   Existing Loans; the New Tranche B Commitment .....................................      2
     2.2   Notice of Borrowing ..............................................................      2
     2.3   Disbursement of Funds ............................................................      3
     2.4   Notes ............................................................................      3
     2.5   Interest .........................................................................      3
     2.6   Interest Periods .................................................................      5
     2.7   Increased Costs, Illegality, etc. ................................................      5
     2.8   Compensation .....................................................................      7
     2.9   Extension of Maturity Date .......................................................      7
     2.10  Conversion of Put Option Purchase Price to Tranche A Loan ........................      8

SECTION 3.   PREPAYMENTS; PAYMENTS; TAXES ...................................................      9

     3.1   Voluntary Prepayments ............................................................      9
     3.2   Mandatory Repayments .............................................................      9
     3.3   Method and Place of Payment ......................................................     13
     3.4   Net Payments .....................................................................     13
     3.5   Allocation .......................................................................     15
     3.6   [OMITTED] ........................................................................     15
     3.7   Application of Payments; Sharing .................................................     15
     3.8   Change of Control ................................................................     16

SECTION 4.   CONDITIONS PRECEDENT ...........................................................     16

     4.1   Conditions to Closing ............................................................     16

SECTION 5.   REPRESENTATIONS, WARRANTIES AND AGREEMENTS .....................................     21

     5.1   Standing .........................................................................     21
     5.2   Requisite Authority; Etc  ........................................................     22
     5.3   No Conflict ......................................................................     22
     5.4   Consents .........................................................................     22
     5.5   Compliance with Law ..............................................................     23
     5.6   Litigation Claims ................................................................     23
     5.7   Contracts and Commitments ........................................................     23
     5.8   Liens ............................................................................     24
</TABLE>

                                      (i)

<PAGE>

<TABLE>
<S>                                                                                                     <C>
     5.9   Insurance ...........................................................................        24
     5.10  Capitalization and Ownership ........................................................        24
     5.11  Financial Statements; Absence of Certain Changes ....................................        25
     5.12  Taxes ...............................................................................        26
     5.13  Disclosure ..........................................................................        26
     5.14  Environmental Matters ...............................................................        27
     5.15  Brokers' or Finders' Fees ...........................................................        27
     5.16  Certain Regulatory Matters .........................................................         27
     5.17  Transactions With Affiliates ........................................................        29
     5.18  Use of Proceeds .....................................................................        29
     5.19  Compliance with ERISA ...............................................................        29
     5.20  Investment Company Act ..............................................................        30
     5.21  Regulation ..........................................................................        30
     5.22  Security Documents ..................................................................        30
     5.23  Certain Scheduled Projects ..........................................................        31
     5.24  Environmental Matters ...............................................................        31
     5.25  Intellectual Property ...............................................................        32
     5.26  No Default ..........................................................................        32
     5.27  Single-Purpose Entity ...............................................................        32
     5.28  Trust Indenture Act .................................................................        32
     5.29  Existing Indebtedness ...............................................................        32
     5.30  Ratings Letter ......................................................................        32

SECTION 6.   AFFIRMATIVE COVENANTS ............................................................         32

     6.1   Information Covenants ..............................................................         33
     6.2   Books, Records and Inspections .....................................................         36
     6.3   Maintenance of Property; Insurance .................................................         36
     6.4   Corporate Franchises ...............................................................         36
     6.5   Compliance with Statutes, etc. .....................................................         36
     6.6   Compliance with Environmental Laws .................................................         36
     6.7   ERISA ..............................................................................         37
     6.8   End of Fiscal Years; Fiscal Quarters ...............................................         39
     6.9   Payment of Taxes ...................................................................         39
     6.10  [OMITTED]. .........................................................................         39
     6.11  Performance of Obligations .........................................................         39
     6.12  Use of Proceeds ....................................................................         39
     6.13  Regulatory Compliance ..............................................................         39
     6.14  Financial Covenant .................................................................         39
     6.15  Charter Documents ..................................................................         40
     6.16  Further Assurances; etc. ...........................................................         40
     6.17  Delisting ..........................................................................         40

SECTION 7.   TRANCHE A NEGATIVE COVENANTS .....................................................         40

     7.1   Liens ..............................................................................         40
     7.2   Consolidation, Merger, Purchase or Sale of Assets, etc. ............................         42
</TABLE>

                                      (ii)

<PAGE>

<TABLE>
<S>                                                                                                          <C>
     7.3   Dividends .................................................................................       43
     7.4   Indebtedness ..............................................................................       43
     7.5   Advances, Investments and Loans ...........................................................       44
     7.6   Transactions with Affiliates ..............................................................       46
     7.7   Capital Expenditures ......................................................................       46
     7.8   Limitations on Liens on Collateral; Modifications of Certain Indebtedness;
             Modifications of Certificate of Incorporation, By-Laws and Certain Other
             Agreements, etc. ........................................................................       46
     7.9   Limitation on Issuance of Capital Stock ...................................................       47
     7.10  Business ..................................................................................       47
     7.11  Regulatory Compliance .....................................................................       48
     7.12  [OMITTED] .................................................................................       48
     7.13  Limitation on Optional Payments and Modifications of Convertible Notes ....................       48
     7.14  Cash Reserve; Interest Reserve Amounts ....................................................       48
     7.15  Plan of Reorganization ....................................................................       49
     7.16  FMV Ratio .................................................................................       49

SECTION 7A.  TRANCHE B NEGATIVE COVENANTS ............................................................       49

     7A.1. Liens .....................................................................................       49
     7A.2. Consolidation, Merger, Purchase or Sale of Assets, etc. ...................................       51
     7A.3. Dividends .................................................................................       52
     7A.4. Indebtedness ..............................................................................       53
     7A.5. Advances, Investments and Loans ...........................................................       54
     7A.6. Transactions with Affiliates ..............................................................       55
     7A.7. Capital Expenditures ......................................................................       55
     7A.8. Limitations on Liens on Collateral; Modifications of Certain
             Indebtedness; Modifications of Certificate of Incorporation, By-Laws
             and Certain Other Agreements, etc. ......................................................       56
     7A.9. Limitation on Issuance of Capital Stock ...................................................       56
     7A.10.Business ..................................................................................       57
     7A.11.Regulatory Compliance .....................................................................       57
     7A.12.[OMITTED] .................................................................................       57
     7A.13.Limitation on Optional Payments and Modifications of Convertible Notes ....................       57
     7A.14.Interest Reserve Account ..................................................................       57
     7A.15.Plan of Reorganization ....................................................................       58
     7A.16.FMV Ratio .................................................................................       58

SECTION 8.   TRANCHE A EVENTS OF DEFAULT AND REMEDIES ................................................       58

     8.1   Events of Default .........................................................................       58
     8.2   Acceleration ..............................................................................       61
     8.3   Other Remedies ............................................................................       61

SECTION 8A.  TRANCHE B EVENTS OF DEFAULT AND REMEDIES ................................................       62

     8A.1. Events of Default .........................................................................       62
</TABLE>

                                     (iii)

<PAGE>

<TABLE>
<S>                                                                                                   <C>
     8A.2.  Acceleration .........................................................................    65
     8A.3.  Other Remedies .......................................................................    65

SECTION 9.   MISCELLANEOUS .......................................................................    65

     9.1    Costs and Expenses ...................................................................    65
     9.2    Indemnity ............................................................................    66
     9.3    Notices ..............................................................................    68
     9.4    Benefit of Agreement .................................................................    68
     9.5    No Waiver; Remedies Cumulative .......................................................    68
     9.6    No Third Party Beneficiaries .........................................................    69
     9.7    Reinstatement ........................................................................    69
     9.8    No Immunity ..........................................................................    69
     9.9    Counterparts .........................................................................    69
     9.10   Amendment or Waiver ..................................................................    69
     9.11   Assignments, Participations, etc. ....................................................    71
     9.12   Survival .............................................................................    72
     9.13   WAIVER OF JURY TRIAL .................................................................    73
     9.14   Right of Set-off .....................................................................    73
     9.15   Severability .........................................................................    73
     9.16   Governing Law; Submission to Jurisdiction ............................................    73
     9.17   Waiver by Borrower ...................................................................    74
     9.18   Recourse .............................................................................    74
     9.19   Complete Agreement ...................................................................    75
     9.20   Publicity ............................................................................    75
     9.21   Effectiveness ........................................................................    75
     9.22   Certain Representations and Warranties ...............................................    75
     9.23   Confidentiality ......................................................................    75
     9.24   Release of Liens for NEG Equity Sale .................................................    76
     9.25   Delivery of Lender Addendum ..........................................................    76
     9.26   Determination of Fair Market Value ...................................................    76
     9.27   Intercreditor Agreement ..............................................................    76
     9.28   Special Exculpation ..................................................................    76

SECTION 10.  THE ADMINISTRATIVE AGENT; THE LEAD ARRANGER AND THE BOOK MANAGER ...................     77

     10.1   Appointment ..........................................................................    77
     10.2   Nature of Duties .....................................................................    77
     10.3   Lack of Reliance on the Administrative Agent .........................................    77
     10.4   Certain Rights of the Administrative Agent ...........................................    78
     10.5   Reliance .............................................................................    78
     10.6   Indemnification ......................................................................    78
     10.7   The Administrative Agent in its Individual Capacity ..................................    78
     10.8   Holders ..............................................................................    79
     10.9   Resignation or Replacement of the Administrative Agent ...............................    79
     10.10  The Lead Arranger and Book Manager ..................................................     79
</TABLE>

                                      (iv)

<PAGE>

<TABLE>

<S>                                                                                                   <C>
     10.11   Direction to Administrative Agent and Collateral Agent ...............................   80
</TABLE>

                                      (v)

<PAGE>

<TABLE>
<CAPTION>
APPENDICES:

<S>                                  <C>
         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
         Exhibit E-1                Form of Change of Control Offer to Repay Notice
         Exhibit E-2                Form of Response to Change of Control Offer to Repay Notice

SCHEDULES:

         Schedule A                 Form of Lender Addendum
         Schedule B                 SEC Filings
         Schedule 3.5               Allocation - Investment Unit
         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' or Finders' Fees
         Schedule 5.16(e)           Regulated Entities
         Schedule 5.17              Transactions with Affiliates
         Schedule 5.19              ERISA Plans
         Schedule 5.23              Scheduled Projects
         Schedule 7.1               Certain Liens
         Schedule 9.3               Notices

ANNEXES

         Annex A                    Section 13 of the LLC Agreement
         Annex B                    Description of Utility Spin-Off
</TABLE>

                                      (vi)

<PAGE>

                  AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement"),
dated as of June 25, 2002, among PG&E Corporation, a California corporation, as
the Borrower, the Lenders party hereto, 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 Borrower is a party to the Credit Agreement,
dated as of March 1, 2001 (as amended, supplemented or otherwise modified from
time to time, the "Existing Credit Agreement"), with the lenders party thereto,
Lehman Commercial Paper Inc., as Administrative Agent, and others, pursuant to
which such lenders made the Tranche A Loan (as defined in the Existing Credit
Agreement, the "Existing Tranche A Loan") and the Tranche B Loan (as defined in
the Existing Credit Agreement, the "Existing Tranche B Loan");

                  WHEREAS, the parties hereto wish to amend and restate the
Existing Credit Agreement in its entirety to modify certain of the terms
applicable to the Existing Tranche A Loan, to reflect the repayment of the
Existing Tranche B Loan and to provide for the making of an additional Tranche B
Loan to the Borrower; and

                  WHEREAS, (i) the Existing Credit Agreement is being amended
and restated pursuant to this Agreement, (ii) certain indebtedness under the
Existing Credit Agreement, as amended and restated in connection with this
Agreement, will be continued under this Agreement and (iii) all obligations of
the Covered Parties under the Financing Documents (as such terms are defined
herein) and all liens and security interests created under the Financing
Documents will be continued, amended and restated as provided herein and therein
and will not be cancelled or discharged;

                  NOW, THEREFORE, in consideration of the premises and the
mutual agreements hereinafter contained, the parties hereto agree that, upon the
Closing Date, the Existing Credit Agreement shall be amended and restated in its
entirety 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).

<PAGE>

                                                                               2

                   SECTION 2. AMOUNTS AND TERMS OF CREDIT FACILITY.

                   2.1 Existing Loans; the New Tranche B Commitment. (a) Subject
to and upon the terms and conditions set forth herein, on the Closing Date, (i)
the $600,000,000 portion of the Existing Tranche A Loan held by GECC shall be
continued hereunder as the Tranche A Loan, which shall mature on the earlier of
(x) the date of a Spin-Off of NEG, Inc. and (y) the Date Certain, (ii) the
remaining $92,000,000 portion of the Existing Tranche A Loan not held by GECC
shall be automatically converted into, and become a part of, the Tranche B Loan
with the identical terms of the Tranche B Loan made pursuant to clause (iii)
below, and (iii) each New Tranche B Lender shall make a term loan to the
Borrower, and/or continue to hold or acquire a portion of the $92,000,000 amount
of the Tranche A Loan converted to a Tranche B Loan pursuant to the foregoing
clause (ii), in an aggregate amount not to exceed the amount of the New Tranche
B Commitment of such Lender, which term loans made pursuant to this clause (iii)
(A) shall be incurred pursuant to a single drawing on the Closing Date, (B)
shall be denominated in Dollars, (C) shall be incurred and maintained as
Eurodollar Loans, except as otherwise specifically provided in Section 2.7(b),
(D) shall be made on the Closing Date in an aggregate principal amount which
equals the aggregate New Tranche B Commitments, and (E) shall mature on the
earlier of (x) the date of a Spin-Off of NEG, Inc. and (y) the Tranche B
Maturity Date. For the avoidance of doubt, after giving effect to the
continuation and the conversion described above and the making of the Tranche B
Loan on the Closing Date, the aggregate principal amount of the Tranche A Loan
and the Tranche B Loan outstanding on the Closing Date shall be $600,000,000 and
$420,000,000, respectively.

                   (b) If the Closing Date has not occurred on or prior to June
26, 2002, then, in such event, (i) except as set forth in clause (ii) below, 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
costs, fees and expenses as provided herein and to indemnify the other parties
to the Financing Documents shall not be terminated, modified or diminished in
any respect, and (ii) the Existing Credit Agreement and the other Existing
Financing Documents shall remain in full force and effect, and no modification
thereof shall have been made pursuant hereto.

                   (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
Administrative Agent prior notice of the Tranche B 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
Tranche B Loan to be incurred, and the date selected to be the Closing Date
(which shall be a Business Day), (ii) the Interest Period applicable thereto,
and (iii) the account information for disbursement of the Loans. The
Administrative Agent shall promptly advise the Tranche B Lenders of the contents
of such Notice of Borrowing.

<PAGE>

                                                                               3

                   2.3 Disbursement of Funds. No later than 1:00 P.M. (New York
time) on the Closing Date, each New Tranche B 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 to the Borrower as directed by the Borrower.

                   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"). On the Closing Date, to the extent requested by any Lender,
the existing promissory note held by such Lender shall be exchanged for a new
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
or continued 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,
in the case of the Tranche A Loan, on the earlier of (A) the date of a Spin-Off
of NEG, Inc. and (B) the Date Certain and, in the case of the Tranche B Loan, on
the earlier of (A) the date of a Spin-Off of NEG, Inc. and (B) the Tranche B
Maturity Date, (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 2.7(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 or
conversion 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.

<PAGE>

                                                                               4

                   (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 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 (each such date upon which
interest shall be payable, an "Interest Payment Date").

                   (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.

                   (f) (i) Upon each Interest Payment Date in respect of the
          Tranche A Loan, if the Borrower does not on such Interest Payment Date
          pay the amount of interest payable on such Interest Payment Date in
          respect of the Tranche A Loan, the amount of such interest shall be
          withdrawn from the Tranche A Interest Reserve Account and applied to
          pay such interest. The Tranche A Lenders hereby authorize and direct
          the Collateral Agent to request such withdrawal under the Tranche A
          Interest Reserve Account Control Agreement and to pay such interest.

                   (ii) Upon each Interest Payment Date in respect of the
          Tranche B Loan, if the Borrower does not on such Interest Payment Date
          pay the amount of interest payable on such Interest Payment Date in
          respect of the Tranche B Loan, the amount of such interest shall be
          withdrawn from the Tranche B Interest Reserve Account and applied to
          pay such interest. The Tranche B Lenders hereby authorize and direct
          the Collateral Agent to request such withdrawal under the Tranche B
          Interest Reserve Account Control Agreement and to pay such interest.

                   (g)  Upon each Interest Payment Date in respect of any
portion of the Tranche B Loan, in addition to the interest payable in cash as
described above, the principal amount of such portion will be increased by a
pay-in-kind interest amount calculated on the principal amount of such portion
at the rate per annum of 4.00% for the period from the immediately preceding
Interest Payment Date with respect to such portion (or from the Closing Date in
the case of the first such calculation) to the current Interest Payment Date,
and such increased principal amount of the Tranche B Loan shall thereafter bear
interest (both cash-pay and pay-in-kind) at the same rates as the original
principal amount of the Tranche B Loan.

<PAGE>

                                                                               5

                   (h)   For the avoidance of doubt, no interest payment may be
made in respect of the Tranche B Loan (other than the pay-in-kind interest
provided for in clause (g) above) unless and until any interest then due and
payable in respect of the Tranche A Loan shall have been paid in full, and in
any event any such payment of interest in respect of the Tranche B Loan shall be
subject to the terms of the Intercreditor Agreement.

                   2.6   Interest Periods. 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 or conversion 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;

                   (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, in the case
          of the Tranche A Loan, or the Tranche B Maturity Date, in the case of
          the Tranche B Loan.

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.

                   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):

                   (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

<PAGE>

                                                                               6

          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 reasonable 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

<PAGE>

                                                                               7

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
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, Section 3.8 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 applicable thereto; or (ii) as a
consequence of (x) any other default by the 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. (a) The Borrower may by
notice to the Administrative Agent and the Tranche A Lender not later than
thirty (30) days prior to March 2,





<PAGE>

                                                                               8

2003 or September 2, 2003 (if the maturity date of the Tranche A Loan was
extended to September 2, 2003), and upon payment of the Extension Fees relating
to such extension, extend the maturity date of the Tranche A Loan to the earlier
of (i) the date of a Spin-Off of NEG, Inc. and (ii) September 2, 2003 or March
2, 2004, as set forth in the Borrower's notice, but in no event shall the Date
Certain with respect to the Tranche A Loan be beyond March 2, 2004, unless
further extended pursuant to Section 2.9(b) below; provided, that there shall be
no extension of the maturity date of the Tranche A Loan pursuant to this Section
2.9(a) if on the date of such extension, a Default or an Event of Default shall
be continuing.

                   (b) The Borrower may by notice to the Administrative Agent
and the Tranche A Lender not later than thirty (30) days prior to March 2, 2004
and March 2, 2005 (if the maturity date of the Tranche A Loan was extended to
March 2, 2005), and upon payment of the Extension Fees relating to such
extension, extend the maturity date of the Tranche A Loan to the earlier of (i)
the date of a Spin-Off of NEG, Inc. and (ii) March 2, 2005 or March 2, 2006,
respectively, but in no event shall the Date Certain with respect to the Tranche
A Loan be beyond March 2, 2006; provided, that there shall be no extension of
the maturity date of the Tranche A Loan pursuant to this paragraph (b) if (i) on
the date of such extension, a Default or an Event of Default shall be continuing
or (ii) on the date of such extension (x) the amount of cash or Cash Equivalents
owned by the Borrower in its own name, free and clear of all Liens, plus the
aggregate amount on deposit in the Interest Reserve Accounts, is less than 15%
of the total principal amount of Loans then outstanding, and (y) the Borrower
has not prepaid the Extension Interest Prepayment Amount.

                   (c) Any extension of the maturity date of the Tranche A Loan
made pursuant to this Section 2.9 shall become effective on the maturity date in
effect immediately prior to giving effect to such extension.

                   2.10 Conversion of Put Option Purchase Price to Tranche A
Loan. (a) In the event that, pursuant to Article VI of the Option Agreement, any
Holder exercises its right to put any Option of such Holder to a Purchasing
Party on any Put Repurchase Date (as defined in the Option Agreement) prior to
the Additional Extended Date Certain, the Put Option Purchase Price (as defined
in the Option Agreement) with respect to such put shall be determined in
accordance with the Option Agreement, and, as provided in Section 6.04 of the
Option Agreement, the amount of such Put Option Purchase Price shall be paid in
immediately available funds or, at the Borrower's option, shall be deemed to
constitute a Tranche A Loan made by such Holder, or its Affiliate Lender, on
such Put Repurchase Date in a principal amount equal to the amount of such Put
Option Purchase Price.

                   (b) In the event that, pursuant to Section 2.01(b) of the
Option Agreement, the Holders may be entitled to receive an Additional Option
(as defined in the Option Agreement) to purchase from LLC in excess of one
percent (1.0%) of the total common equity of NEG, Inc. computed on a Fully
Diluted Basis (as defined in the Option Agreement) (such excess only, the
"Excess Additional Option Percentage"), at Borrower's option, (i) LLC may grant
such Additional Option with respect to the Excess Additional Option Percentage
in accordance with the terms of Section 2.01(b) of the Option Agreement, or (ii)
the amount of the Put Option Purchase Price (as defined in the Option Agreement)
with respect to such Excess Additional Option Percentage shall be determined in
accordance with Section 2.01(b) of the Option

<PAGE>

                                                                               9

Agreement, and, as provided therein, the amount of such Put Option Purchase
Price with respect to such Excess Additional Option Percentage (x) shall be paid
in immediately available funds or, at Borrower's option, (y) shall be deemed to
constitute a Tranche A Loan made by such Lender on such Put Repurchase Date in a
principal amount equal to the amount of such Put Option Purchase Price with
respect to such Excess Additional Option Percentage.

                   (c) Any Tranche A Loan arising pursuant to Section 2.10(a) or
(b) shall be subject to the terms and conditions of this Agreement applicable to
the Tranche A Loan and shall be evidenced by a Note in a principal amount equal
to the applicable Put Option Purchase Price, which Note the Borrower shall duly
execute and deliver to such Lender on the applicable Put Repurchase Date.

                   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, 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 affected 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; provided
that, the Tranche B Loan may not be prepaid until after payment in full of the
Tranche A Loan, all other amounts payable to the Tranche A Lender under the
Credit Agreement and all amounts payable to each Holder under the Option
Agreement in respect of any Put Notice (as defined in the Option Agreement)
theretofore delivered by such Holder. Each prepayment of the Tranche B Loan made
pursuant to this Section 3.1 on or prior to the second anniversary of the
Closing Date shall be accompanied by payment of a prepayment fee equal to (i) if
such prepayment is made on or prior to the first anniversary of the Closing
Date, 2% of the principal amount prepaid and (ii) if such prepayment is made
after the first anniversary of the Closing Date and on or prior to the second
anniversary of the Closing Date, 1% of the principal amount prepaid.

                   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 the
Borrower, LLC, NEG, Inc. or any NEG Subsidiary receives any cash proceeds from
any incurrence by the Borrower, LLC, NEG, Inc. or any NEG Subsidiary of
Indebtedness for borrowed money, an amount equal to 100% of the Net Debt
Proceeds of such incurrence shall be applied on such date in accordance with the
requirements of Section 3.2(h); provided that (A) up to $5,000,000 of such Net
Debt Proceeds from any incurrence by the Borrower of Indebtedness under Section
7.4(ix) or Section 7A.4(ix) need not be so applied; (B) such Net Debt Proceeds
from any incurrence by LLC, NEG, Inc. or any NEG Subsidiary of Indebtedness for
borrowed money incurred while no Default or Event of Default has occurred and is
continuing shall not be required to be so applied to the extent such

<PAGE>

                                                                              10

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; and (C) the Net Debt Proceeds
from the incurrence of the Convertible Notes need not be so applied.

                   (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 the
Borrower, LLC, NEG, Inc. or any NEG Subsidiary receives any cash proceeds from
any sale or issuance of its equity, including any preferred stock and any
instrument that has both equity-like and debt-like components (other than cash
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 shall be applied on such date in accordance with the
requirements of Section 3.2(h); provided, that (A) any such Net Equity Proceeds
received from the sale or issuance of equity of the Borrower shall not be
required to be applied to repay the Loans (i) to the extent that such Net Equity
Proceeds are invested by the Borrower in PGE Utility or the Reorganization
Subsidiaries to the extent permitted by clauses (v) and (vi) of Sections 7.5 and
7A.5 or as otherwise permitted by this Agreement, (ii) to the extent that such
Net Equity Proceeds are held by the Borrower as cash or Cash Equivalents and
thereafter used solely to prepay the Loans in accordance with the requirements
of Section 3.2(h) or to make investments in PGE Utility to the extent permitted
by clauses (v) and (vi) of Sections 7.5 and 7A.5 or as otherwise permitted by
this Agreement, or (iii) to the extent that the Net Equity Proceeds arose in
conjunction with the sale by the Borrower (directly or through any of its
Subsidiaries) of the Borrower's common stock to the trustee for the PG&E
Corporation Retirement Savings Plan, stock option and other equity based
incentives under the PG&E Corporation Long Term Incentive Program and the
Dividend Reinvestment Plan or the trustee of the PGE Utility Savings Fund Plan
and (B) any such Net Equity Proceeds received from the sale or issuance of
equity of LLC, NEG, Inc. or any NEG Subsidiary shall not be required to be
applied to repay the Loans to the extent that such Net Equity Proceeds (i) are
retained as cash or Cash Equivalents by LLC, NEG, Inc. or the NEG Subsidiaries,
(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 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 Net Equity Proceeds from such IPO, such Net Equity
Proceeds shall be applied on such date, in accordance with the requirements of
Section 3.2(h), to prepay the Loans to the extent required to cause the
aggregate outstanding principal amount of the Loans not to exceed the lesser of
(i) $400,000,000 and (ii) an amount equal to 50% of the Market Value of the
common stock of NEG, Inc. held by the Collateral Agent as Collateral, after
giving effect to such IPO and such repayment of the Loans. For purposes of this
paragraph, the "Market Value" of the common stock of NEG, Inc. held by the
Collateral Agent as Collateral shall be deemed to be equal to the product of (x)
the percentage of the common stock of NEG, Inc. held by the Collateral Agent as

<PAGE>

                                                                              11

Collateral after giving effect to the IPO, multiplied by (y) a fraction, the
numerator of which is the aggregate gross cash proceeds of such IPO, and the
denominator of which is the percentage (expressed as a decimal) of the shares of
common stock of NEG, Inc. sold to the public in such IPO.

                   (e) In addition to any other mandatory repayments pursuant to
this Section 3.2, (A) on each date on or after the Closing Date upon which the
Borrower, LLC, NEG, Inc. or any NEG Subsidiary receives any cash proceeds from
any Asset Sale by the Borrower, 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 Net Sale Proceeds from
any Asset Sale consummated, at any time when no Default or Event of Default has
occurred and is continuing, by LLC, NEG, Inc. or any NEG Subsidiary 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; and (B) on each date after the date of the Utility
Spin-Off on which the Borrower or any Reorganization Subsidiary receives any
cash proceeds from any Asset Sale by the Borrower or any Reorganization
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).

                   (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 the
Borrower, 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; (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 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; (iii) in respect of Recovery
Events for one or more Subsidiaries of the Borrower and arise from insurance
programs maintained by the Borrower for such Subsidiaries to the extent that
such Net Insurance Proceeds are made available to such Subsidiaries; or (iv)
utilized to repair the damages which resulted in such Net Insurance Proceeds or
are reinvested in assets similar to the assets with respect to which such Net
Insurance Proceeds were received.

                   (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 any principal repayment in respect of borrowed money owing to
the Borrower by any member of the NEG Group or a distribution or Dividend of any
sort from LLC, PGE Utility or any Reorganization Subsidiary (other than (x) the
proceeds of an IPO which shall be applied pursuant to clause (d) above, (y)
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) and
(z) distribution

<PAGE>

                                                                              12

to the Borrower of shares of Reorganization Subsidiaries or the shares or
related preferred stock purchase rights of PGE Utility in connection with the
Utility Spin-Off), 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, PGE Utility and Subsidiaries of PGE
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 each Tranche A Lender ratably according
to the respective outstanding principal amounts of the Tranche A Loan held by
such Tranche A Lender and shall be applied by each such Tranche A Lender to
payment of any amount owing to such Tranche A Lender under Section 2.8, then to
payment of any interest then due and payable to such Tranche A Lender on account
of the Tranche A Loan, then to reduce the remaining principal balance of the
Tranche A Loan of such Tranche A Lender, then to repayment of all other amounts
payable to such Tranche A Lender under the Credit Agreement, and then to
repayment of all amounts payable to each Holder under the Option Agreement in
respect of any Put Notice (as defined in the Option Agreement) theretofore
delivered by such Holder, and, second, paid to each Tranche B Lender ratably
according to the respective outstanding principal amounts of the Tranche B Loan
held by such Tranche B Lender and shall be applied by each such Tranche B Lender
to payment of any amount owing to such Tranche B Lender under Section 2.8, then
to payment of any interest then due and payable to such Tranche B Lender on
account of the Tranche B Loan, and then to reduce the remaining principal
balance of the Tranche B Loan of such Tranche B Lender.

                   (i) Each prepayment of the Tranche B Loan made pursuant to
Sections 3.2(b) through (g) above on or prior to the second anniversary of the
Closing Date shall be accompanied by payment of a prepayment fee equal to (i) if
such prepayment is made on or prior to the first anniversary of the Closing
Date, 2% of the principal amount prepaid and (ii) if such prepayment is made
after the first anniversary of the Closing Date and on or prior to the second
anniversary of the Closing Date, 1% of the principal amount prepaid.

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

                   (k) 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.

<PAGE>

                                                                              13

                   (l) Nothing in this Section 3.2 shall limit any other rights
or remedies a Lender may have under Sections 8 and 8A 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.

                   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.

<PAGE>

                                                                              14

                   (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 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) but subject to 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

<PAGE>

                                                                              15

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.

                   (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 and the Warrants, as
applicable, issued by the Borrower under the Option Agreement and the Warrant
Agreement, as applicable, 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 Options and Warrants, as applicable, shall be allocated as set forth on
Schedule 3.5.

                   3.6 [OMITTED].

                   3.7 Application of Payments; Sharing. (a) Subject to the
provisions of the Intercreditor Agreement and 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

<PAGE>

                                                                              16

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, except to the extent
that this Agreement provides for payments to be allocated to particular Lenders
or to Lenders holding a particular Loan, 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 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.

                   3.8 Change of Control. Upon a Change of Control, the Borrower
shall prepare and provide to each Lender a notice (each, a "Change of Control
Offer to Repay Notice"), which shall be in the form of Exhibit E-1, and shall
include an offer (the "Change of Control Offer to Repay") to prepay on the date
(each, a "Change of Control Offer Settlement Date") that is ten (10) Business
Days after the date of the Change of Control Offer to Repay Notice, such
Lender's Loan, together with a prepayment fee (the "Change of Control Prepayment
Fee") for the Tranche B Lender equal to 1% of the aggregate principal amount of
such Tranche B Lender's Tranche B Loan, and each Lender wishing to accept the
Change of Control Offer to Repay shall reply, in the form of Exhibit E-2 and
indicating whether such offer is accepted or rejected in whole or in part (and
if so, to what extent) by the close of business on the Business Day preceding
the Change of Control Offer Settlement Date, failing which such offer will be
considered to have been accepted in whole by such Lender and such repayment will
be made by the Borrower to such Lender in respect of such Change of Control. On
the Change of Control Offer Settlement Date, the Borrower shall pay to those
Lenders who have accepted the Change of Control Offer to Repay the aggregate
amount necessary to prepay that portion of the outstanding Loans, together with
(for the Tranche B Lenders) the Change of Control Prepayment Fee, in respect of
which such Lenders have accepted the Change of Control Offer to Repay in
accordance with this Section 3.8. Notwithstanding the foregoing, no payment
shall be made to the Tranche B Lenders on the Change of Control Offer Settlement
Date pursuant to this Section 3.8 unless and until the Tranche A Loan of, and
the other Senior Obligations that are then due and payable owing to, those
Tranche A Lenders that shall have accepted the Change of Control Offer to Repay
have been paid in full.

                   SECTION 4. CONDITIONS PRECEDENT.

                   4.1 Conditions to Closing. The obligation of any Lender to
make or continue its Loan, and the occurrence of the Closing Date, shall be
subject to the conditions precedent that such Lender shall have received, or
shall have waived receipt of, the following (in the case of documents described
below to be delivered to such Lender), each of which shall be in form and

<PAGE>

                                                                              17

substance satisfactory to such Lender, and that the other conditions set forth
below shall have been satisfied or waived in accordance with this Agreement:

                   (a)   Financing Documents. Each of the Financing Documents
(including the LLC Pledge Agreement, the Stock Pledge Agreement, the Option
Agreement, the Warrant Agreement, the Reserve Account Control Agreements and the
Intercreditor 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 five (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

                   (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

<PAGE>

                                                                              18

financing statements that name the Borrower, LLC or NEG, Inc., as debtor,
together with copies of such financing statements.

                   (i)   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.

                   (ii)  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.

                   (iii) 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 (after giving effect to the transactions
contemplated hereby) 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) 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.

<PAGE>

                                                                              19

                   (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, Chief Accounting Officer, Treasurer 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.

                   (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.

                   (iii) Such Lender shall have received the Business Plan.

                   (h)   Process Agent. Such Lender shall have received a copy
of a letter from Corporation Service Company 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; such
legal opinions shall cover substantially the same matters as were covered by the
legal opinions delivered on behalf of the Borrower on the Initial Closing Date,
and, in addition, shall cover matters relating to the Warrant Agreement, the
Warrants issued thereunder and the Interest Reserve Account Control Agreements.

                   (j)   Material Adverse Change. Since December 31, 2001, and
except as disclosed in the SEC Filings by the Borrower or NEG, Inc. since
December 31, 2001 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.

                   (K)   Fees; Expenses. Lehman Commercial Paper Inc. shall have
received the fees payable to it pursuant to the Lehman Fee Letter, GECC shall
have received the fees payable to it



<PAGE>

                                                                              20

pursuant to the GECC Fee Letter, and all other fees, costs and charges due and
owing to any Person under the Financing Documents on or prior to the Closing
Date shall have been received by such Person. The Collateral Agent shall have
received the CA Fee for payment of its services as Collateral Agent under the
Financing Documents. GECC and the Administrative Agent shall have received
payment of all out-of-pocket expenses payable by the Borrower to such Person
(including, in its capacity as a Lender as well as an agent) pursuant to Section
9.1 (including reasonable fees and expenses and disbursements of legal counsel).

                   (l) Interest. (i) The Borrower shall have deposited in the
Tranche A Interest Reserve Account an amount estimated to be sufficient to pay
interest on the Tranche A Loan for the one-year period after the Closing Date
and (ii) the Borrower shall have deposited in the Tranche B Interest Reserve
Account an amount estimated to be sufficient to pay interest on the Tranche B
Loan for the one-year period after the Closing Date. In each case, interest
payable on each Loan for the one-year period following the Closing Date shall be
estimated using the twelve-month Eurodollar Rate in effect on the date which is
two Business Days prior to the Closing Date, plus 4.00%.

                   (m) Warrants. The Borrower shall have issued the Warrants as
required by the Lehman Fee Letter.

                   (n) Notice of Borrowing. The Administrative Agent shall have
received a Notice of Borrowing pursuant to and in compliance with Section 2.2.

                   (o) 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.

                   (p) 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. Except as set forth on Schedule 5.6, 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 proceedings 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. Notwithstanding the foregoing, there shall

<PAGE>

                                                                              21

exist no legal or arbitral proceedings or investigations, or any proceedings by
or before any Governmental Authority or any Person, pending or threatened,
which, if adversely determined, could reasonably be expected to have a material
adverse effect on (i) the legality, validity or enforceability of any material
provision of any Financing Document, (ii) the rights and remedies of the
Collateral Agent, the Administrative Agent, any Holder or any Lender under any
of the Financing Documents or (iii) the security interests provided under the
Security Documents.

         (r) 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 or Treasurer 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.

         (s) 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.

         (t) Disclosure Letter. Such Lender shall have received the Disclosure
Letter.

         (u) 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 or continue 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

<PAGE>

                                                                              22

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.

         (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 or the exercise of Warrants by any
holder thereof which , in

<PAGE>

                                                                              23

each case, 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.

         (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, if adversely determined, 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, 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. Notwithstanding the foregoing, there are no legal or arbitral
proceedings or investigations, or any proceedings by or before any Governmental
Authority or any Person, pending or threatened, which, if adversely determined,
could reasonably be expected to have a material adverse effect on (i) the
legality, validity or enforceability of any material provision of any Financing
Document, (ii) the rights and remedies of the Collateral Agent, the
Administrative Agent, any Holder or any Lender under any of the Financing
Documents or (iii) the security interests provided under the Security Documents.

         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

<PAGE>

                                                                              24

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.

         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.

<PAGE>

                                                                              25

         (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 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) and as provided under the
Option Agreement and the Warrant Agreement, 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, Chief Accounting
Officer or Treasurer of the relevant Person specified below:

         (i)   (x) the audited consolidated financial statements of the Borrower
    as at December 31, 2001 and (y) the unaudited consolidated financial
    statements of the Borrower as at March 31, 2002;

         (ii)  (x) the audited financial statements of each of the FI
    Subsidiaries as at December 31, 2001 and (y) the unaudited financial
    statements of each of the FI Subsidiaries as at March 31, 2002; and

         (iii) (x) the unaudited consolidated balance sheet and income
    statements of NEG, Inc. as at December 31, 2001 and (y) the unaudited
    consolidated financial statements of NEG, Inc. as at March 31, 2002.

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,
2001, and were prepared in accordance with U.S. GAAP, consistently applied. Any
unaudited financial statements (the "Unaudited Financial

<PAGE>

                                                                              26

Statements") described in this Section 5.11(a) present fairly the financial
position of the relevant Person as at such dates and were prepared on a
management basis without accompanying notes. 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, 2001 and except as disclosed in the SEC
Filings by the Borrower or NEG, Inc. since December 31, 2001 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 U.S. 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 U.S. 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 U.S. 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 U.S. 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

<PAGE>

                                                                              27

make the statements contained therein not misleading. There is no fact, event or
circumstance 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

<PAGE>

                                                                              28

affecting the eligibility for QF 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, in each case, except such
noncompliances with ongoing ministerial FERC filing requirements previously
disclosed in writing to Lenders and other noncompliances which, in each case,
could not reasonably be expected to affect the status of any member(s) of the
NEG Group as an EWG or power marketer or have a Material Adverse Effect or
result in a Material Adverse Change to NEG, Inc. or any of the NEG Subsidiaries.
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.

<PAGE>

                                                                              29

         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.

         5.18 Use of Proceeds. The proceeds of the Existing Tranche A Loan and
the Existing Tranche B Loan were used for the purposes set forth in the Existing
Credit Agreement. The proceeds of the Tranche B Loan to be made on the Closing
Date by the New Tranche B Lenders will be used to fund the Tranche A Interest
Reserve Account and the Tranche B Interest Reserve Account and for general
corporate purposes of the Borrower and its Subsidiaries. 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. (a) 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 (other than the commencement of the bankruptcy proceeding in 2001 by PGE
Utility) 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

<PAGE>

                                                                              30

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.

         (b)  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

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                                                                              31

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, and the
equity structure, 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

<PAGE>

                                                                              32

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
contemplated 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 Existing Indebtedness. Part A 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 in Part A 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.

         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 (with negative implications)" by Moody's or Standard &
Poor's.

         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):

<PAGE>

                                                                              33

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

         (a) Quarterly Financial Statements. Within 60 days after the close of
the first three quarterly accounting periods in each fiscal year of the relevant
Person specified below, (i) the consolidated balance sheets of each of (x) the
Borrower and its consolidated subsidiaries and (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 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, Chief Accounting Officer or Treasurer of the relevant
Person, subject to normal year-end audit adjustments.

         (b) Annual Financial Statements. Within 120 days after the close of
each fiscal year of the relevant Person specified below, (i) the consolidated
balance sheets of each of (x) the Borrower and its consolidated subsidiaries and
(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.

         (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) Officer's Certificates. At the time of the delivery of the
financial statements provided for in Sections 6.1(a) and (b), a certificate of
the Chairman of the Board, the President or Chief Financial Officer or Treasurer
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.

         (e) [OMITTED].

<PAGE>

                                                                              34

         (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 or a "Default" or "Event
of Default" under the Convertible Notes Indenture, (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) demand for satisfaction of
any guaranty or other Contingent Obligations of the Borrower or any other
Covered Party, and (iv) any downgrade of the credit rating of the long-term
senior unsecured indebtedness of the Borrower or any other Covered Party or
"credit watch (with negative implications)" by Moody's or Standard & Poor's.

         (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:

         (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

<PAGE>

                                                                              35

         (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.

         (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 7.14(a) 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.

<PAGE>

                                                                              36

         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, (a) 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), (b)
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 (c) 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 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

<PAGE>

                                                                              37

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 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 or
Treasurer 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

<PAGE>

                                                                              38

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 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,

<PAGE>

                                                                              39

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 U.S. GAAP, and provided, further, that this
Section 6.9 shall not apply with respect to any taxes of PGE Utility or any
Subsidiary of PGE Utility for which Borrower has no liability under applicable
law.

         6.10 [OMITTED].

         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 5.18.

         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 Covenant. The long-term unsecured debt obligations of
NEG, Inc. shall be rated at least BBB- by Standard & Poor's or Baa3 by Moody's.




<PAGE>

                                                                              40

         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 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  Delisting. The Borrower will maintain the listing of its common
stock on the New York Stock Exchange, the American Stock Exchange or the Nasdaq
National Market such that there will be at least 43 Trading Days during the
first 75 calendar days following the Closing Date.

         SECTION 7. TRANCHE A 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,

<PAGE>

                                                                              41

         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) 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
         Initial 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) and other Indebtedness permitted under Section
         7.4(ix) 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;

<PAGE>

                                                                              42

               (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;

               (xiii) other than by LLC, any Lien attendant to transactions
         described in Part I of the Business Plan; and

               (xiv)  Liens on assets of the Borrower to secure Hedging
         Agreements entered into in the ordinary course of business by the
         Borrower hedging the interest rate fluctuations in respect of interest
         payable on the Loan.

               The Borrower will not create, incur, assume or suffer to exist
any Lien upon the Capital Stock of PGE Utility or any Reorganization Subsidiary.

               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, spin-off 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 (including, without limitation, the Capital Stock of, or any
substantial part of the assets of, any Reorganization Subsidiary or any member
of the NEG Group), 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 (other than Capital Lease Obligations permitted under
         Section 7.4));

               (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);

               (y)    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

<PAGE>

                                                                              43

         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
         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 (A) assets owned by, or the Capital Stock of, any
         member of the NEG Group and (B) the Capital Stock of PGE Utility or the
         Capital Stock of, or any substantial part of the assets of, any
         Reorganization Subsidiary.

                      For avoidance of doubt, nothing in this Section shall
prohibit the Borrower from consummating the Utility Spin-Off, the NEG Equity
Transactions or any plan of reorganization permitted by Section 7.15.

                      7.3    Dividends. The Borrower will not, and will not
permit any of the other Covered Parties to, authorize, declare or pay any
Dividends, except that (i) any Subsidiary of the Borrower may pay cash Dividends
to the Borrower or to LLC, NEG, Inc. or any NEG Subsidiary, (ii) 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 and (iii) NEG, Inc. may pay
cash Dividends to any New Investor to the extent that Dividends are paid pro
rata to the Borrower and such New Investor in accordance with their respective
equity interests in NEG, Inc. The Borrower will not, directly or indirectly,
spin-off or transfer to its shareholders, or to the shareholders of any parent
of the Borrower, the Capital Stock of, or any substantial part of the assets of,
any Reorganization Subsidiary or any member of the NEG Group.

                      Nothing in this Section shall prohibit (i) the Borrower or
LLC from performing in full its obligations under Article VI of the Option
Agreement or (ii) the Borrower from consummating the Utility Spin-Off or the NEG
Equity Transactions.

                      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:

<PAGE>

                                                                              44

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

               (ii)   existing Indebtedness outstanding on the Initial Closing
         Date and listed, with respect to the Borrower, on Part A of the
         Disclosure Letter and, with respect to the Covered Parties (other than
         the Borrower), Part B of the Disclosure Letter (as reduced by any
         repayments of principal thereof), without giving effect to any
         subsequent extension, renewal or refinancing thereof;

               (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;
         provided that, after giving effect to the incurrence of such
         Indebtedness, the Tranche A Loan, and the other Senior Obligations that
         are then due and payable, shall have been paid in full;

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

               (viii) Hedging Agreements entered into in the ordinary course of
         business by the Borrower hedging the interest rate fluctuations in
         respect of interest payable on the Loan;

               (ix)   other Indebtedness, provided that the aggregate amount of
         such other Indebtedness together with deposits permitted under
         sub-clauses (y) and (z) of Section 7.1(viii) shall not exceed the
         amount set forth in Section 7.1(viii); and

               (x)    Indebtedness of the Borrower in respect of the Convertible
         Notes in an aggregate principal amount not to exceed $280,000,000.

               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; provided that, other than in the case of clauses (v) and
         (vi) below, no Default or Event of Default shall have occurred and be
         continuing or would result therefrom:

<PAGE>

                                                                              45

               (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)(B)(iii),
         3.2(e)(A)(iii) or 3.2(f)(ii);

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

               (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
         $10,000,000 in the aggregate for any fiscal year; and

               (xii)  any Investment in a Hedging Agreement entered into by the
         Borrower hedging the interest rate fluctuations in respect of interest
         payable on the Loan.

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

<PAGE>

                                                                              46

generation business and (B) the Borrower may consummate the Utility Spin-Off and
the NEG Equity Transactions.

         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, (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, (g) the consummation of the Utility Spin-Off and the NEG
Equity Transactions, or (h) transactions expressly permitted under Section 7.3
or Section 7.5.

         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)(B)(iii), 3.2(e)(A)(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. 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;

<PAGE>

                                                                              47

         (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)   except as a part of the NEG Equity Transactions, 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, and except
as a part of the NEG Equity Transactions, 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 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.

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                                                                              48

         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.

         7.12 [OMITTED].

         7.13 Limitation on Optional Payments and Modifications of Convertible
Notes. The Borrower will not (a) make or offer to make any optional or voluntary
payment, prepayment, repurchase or redemption of, or otherwise voluntarily or
optionally defease, the Convertible Notes, or segregate funds for any such
payment, prepayment, repurchase, redemption or defeasance, (b) amend, modify or
otherwise change, or consent or agree to any amendment, modification, waiver or
other change to, any of the terms of the Convertible Notes or the Convertible
Notes Indenture (other than any such amendment, modification, waiver or other
change which (i) would extend the maturity or reduce the amount of any payment
of principal thereof, reduce the rate or extend the date for payment of interest
thereon or relax any covenant or other restriction applicable to the Borrower or
any of its Subsidiaries and (ii) does not involve the payment of a consent fee),
(c) designate any Indebtedness (other than the Obligations) as "Designated
Senior Debt" for the purposes of the Convertible Notes Indenture or (d) make any
cash payment in respect of interest on the Convertible Notes (i) during any
Convertible Notes Blockage Period or (ii) at any time when, after giving effect
to such interest payment, the aggregate amount of cash and Cash Equivalents held
by the Borrower in its own name (including, without limitation, any cash and
Cash Equivalents held in any Interest Reserve Account) would be less than an
amount that is 5 percentage points greater than the amount required from time to
time under Section 7.14(a).

         7.14 Cash Reserve; Interest Reserve Amounts. (a) The Borrower will not
(i) at any time commencing on March 2, 2002 and until and including the earlier
of (x) repayment in full of the Loans and (y) (A) March 2, 2003 or (B) if the
Date Certain to occur on March 2, 2003 is extended, March 2, 2004, permit the
aggregate amount of cash and Cash Equivalents held by it in its own name
(including, without limitation, any cash and Cash Equivalents held in any
Interest Reserve Account) to be an amount less than 15% of the then-outstanding
aggregate principal amount of the Loans and the Convertible Notes and (ii) at
any time after the extension of the Date Certain pursuant to Section 2.9(b) and
until the Loans are repaid in full, permit the aggregate amount of cash and Cash
Equivalents held by it in its own name (including, without limitation, any cash
and Cash Equivalents held in any Interest Reserve Account) to be an amount less
than 10% of the then-outstanding aggregate principal amount of the Loans and the
Convertible Notes.

         (b)  The Borrower will not permit the aggregate amount of cash and Cash
Equivalents held in (i) the Tranche A Interest Reserve Account on any Interest
Payment Date in respect of the Tranche A Loan, or any Interest Payment Date in
respect of the Tranche B Loan

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                                                                              49

that occurs more than 30 days after the immediately preceding Interest Payment
Date in respect of the Tranche A Loan, to be less than the amount of interest
payable on the Tranche A Loan during the one-year period following such Interest
Payment Date or (ii) the Tranche B Interest Reserve Account on any Interest
Payment Date to be less than the amount of interest payable on the Tranche B
Loan during the one-year period following such Interest Payment Date (such
interest amount, in each case, to be estimated using a rate per annum equal to
the twelve-month Eurodollar Rate in effect two Business Days prior to such
Interest Payment Date, plus 4.00%).

         7.15 Plan of Reorganization. The Borrower will not propose or consent
to a plan of reorganization in respect of PGE Utility that provides for a
spin-off or any distribution, transfer or disposal of assets other than one
which is substantially consistent with Annex B; provided, that this Section 7.15
shall not prohibit the Borrower from proposing or consenting to any plan of
reorganization in respect of PGE Utility that does not involve a spin-off by, or
any distribution, transfer or disposal of assets of, the Borrower or any of its
Subsidiaries (other than any spin-off or distribution, transfer or disposal of
assets by any Person that receives fair value for the assets so disposed); and
provided, further, that, immediately prior to, and upon consummation of, any
transaction pursuant to any such plan of reorganization, no Default or Event of
Default shall have occurred or be continuing. For avoidance of doubt, any
transaction or series of transactions involving the disposition of any
Reorganization Subsidiary or any assets that would constitute a Reorganization
Subsidiary and the subsequent spin-off of PGE Utility along with the proceeds of
such disposition would not be substantially consistent with Annex B and would be
prohibited by this Section.

         7.16 FMV Ratio. The Borrower will not permit the ratio of the Fair
Market Value of NEG, Inc. to the aggregate amount of principal then outstanding
under the Loans (the "Required FMV Ratio") to be less than 2.00:1. The Required
FMV Ratio may be determined in accordance with the procedure set forth in
Section 9.26 at any time at the request of the Majority Tranche A Lenders (or,
at any time after the Tranche A Loan, and the other Senior Obligations that are
then due and payable, have been paid in full, the Majority Tranche B Lenders)
(at the expense of each such requesting Lender, ratably based upon the amount of
the Loans held by such Lender) by delivering a notice to the Borrower no more
frequently than once per fiscal quarter of the Borrower.

         SECTION 7A. TRANCHE B NEGATIVE COVENANTS.

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

         7A.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

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                                                                              50

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 7A.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) have the effect
         of preventing the forfeiture or sale of the property or assets subject
         to any such Lien;

                  (iii)  subject to Section 7A.4(ii), Liens in existence on the
         Initial 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,

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                                                                              51

         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) and other Indebtedness permitted under Section 7A.4(ix)
         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;

                  (xiii) other than by LLC, any Lien attendant to transactions
         described in Part I of the Business Plan; and

                  (xiv)  Liens on assets of the Borrower to secure Hedging
         Agreements entered into in the ordinary course of business by the
         Borrower hedging the interest rate fluctuations in respect of interest
         payable on the Loan.

                  The Borrower will not create, incur, assume or suffer to exist
         any Lien upon the Capital Stock of PGE Utility or any Reorganization
         Subsidiary.

                  7A.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, spin-off 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 (including, without limitation, the Capital Stock, or any
substantial part of the assets of, any Reorganization Subsidiary or any member
of the NEG Group), 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;

<PAGE>

                                                                              52

                  (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 (other than Capital Lease Obligations permitted under
         Section 7A.4));

                  (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
         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 (A) assets owned by, or the Capital Stock of, any
         member of the NEG Group and (B) the Capital Stock of PGE Utility or the
         Capital Stock of, or any substantial part of the assets of, any
         Reorganization Subsidiary.

                  For avoidance of doubt, nothing in this Section shall prohibit
the Borrower from consummating the Utility Spin-Off, the NEG Equity Transactions
or any plan of reorganization permitted by Section 7A.15.

                  7A.3.  Dividends. The Borrower will not, and will not permit
any of the other Covered Parties to, authorize, declare or pay any Dividends,
except that (i) any Subsidiary of the

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                                                                              53

Borrower may pay cash Dividends to the Borrower or to LLC, NEG, Inc. or any NEG
Subsidiary, (ii) 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
and (iii) NEG, Inc. may pay cash Dividends to any New Investor to the extent
that Dividends are paid pro rata to the Borrower and such New Investor in
accordance with their respective equity interests in NEG, Inc. The Borrower will
not, directly or indirectly, spin-off or transfer to its shareholders, or to the
shareholders of any parent of the Borrower, the Capital Stock of, or any
substantial part of the assets of, any Reorganization Subsidiary or any member
of the NEG Group.

                  Nothing in this Section shall prohibit (i) the Borrower or LLC
from performing in full its obligations under Article VI of the Option Agreement
or (ii) the Borrower from consummating the Utility Spin-Off or the NEG Equity
Transactions.

                  7A.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 Initial
         Closing Date and listed, with respect to the Borrower, on Part A of the
         Disclosure Letter and, with respect to the Covered Parties (other than
         the Borrower), Part B of the Disclosure Letter (as reduced by any
         repayments of principal thereof), without giving effect to any
         subsequent extension, renewal or refinancing thereof;

                  (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 7A.2 and 7A.5;

                  (v)    Indebtedness of a Covered Party (other than LLC)
         secured by Liens permitted under Sections 7A.1(i), (ii), (vii) and
         (viii);

                  (vi)   in the case of the Borrower, Specified Rated
         Indebtedness; provided that, after giving effect to the incurrence of
         such Indebtedness, the Tranche A Loan, and the other Senior Obligations
         that are then due and payable, shall have been paid in full;

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

                  (viii) Hedging Agreements entered into in the ordinary course
         of business by the Borrower hedging the interest rate fluctuations in
         respect of interest payable on the Loan;

                  (ix)   other Indebtedness, provided that the aggregate amount
         of such other Indebtedness together with deposits permitted under
         sub-clauses (y) and (z) of Section 7A.1(viii) shall not exceed the
         amount set forth in Section 7A.1(viii); and

<PAGE>

                                                                              54

                  (x)    Indebtedness of the Borrower in respect of the
         Convertible Notes in an aggregate principal amount not to exceed
         $280,000,000.

                  7A.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;
provided that, other than in the case of clauses (v) and (vi) below, no Default
or Event of Default shall have occurred and be continuing or would result
therefrom:

                  (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)  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)(B)(iii),
         3.2(e)(A)(iii) or 3.2(f)(ii);

<PAGE>

                                                                              55

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

                  (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
         $10,000,000 in the aggregate for any fiscal year; and

                  (xii)  any Investment in a Hedging Agreement entered into by
         the Borrower hedging the interest rate fluctuations in respect of
         interest payable on the Loan.

Notwithstanding anything provided herein or in the Business Plan to the
contrary, (A) no investment may be made by the Borrower or any member of the NEG
Group in the nuclear generation business and (B) the Borrower may consummate the
Utility Spin-Off and the NEG Equity Transactions.

                  7A.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, (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, (g) the consummation of the Utility Spin-Off and the NEG
Equity Transactions, or (h) transactions expressly permitted under Section 7A.3
or Section 7A.5.

                  7A.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)(B)(iii), 3.2(e)(A)(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.

<PAGE>

                                                                              56

                  7A.8. Limitations on Liens on Collateral; Modifications of
Certain Indebtedness; Modifications of Certificate of Incorporation, By-Laws and
Certain Other Agreements, etc. 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)   except as a part of the NEG Equity Transactions, 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.

                  7A.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,
and except as a part of the NEG Equity Transactions, 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

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                                                                              57

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 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.

                  7A.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.

                  7A.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.

                  7A.12. [OMITTED].

                  7A.13. Limitation on Optional Payments and Modifications of
Convertible Notes. The Borrower will not (a) make or offer to make any optional
or voluntary payment, prepayment, repurchase or redemption of, or otherwise
voluntarily or optionally defease, the Convertible Notes, or segregate funds for
any such payment, prepayment, repurchase, redemption or defeasance, (b) amend,
modify or otherwise change, or consent or agree to any amendment, modification,
waiver or other change to, any of the terms of the Convertible Notes or the
Convertible Notes Indenture (other than any such amendment, modification, waiver
or other change which (i) would extend the maturity or reduce the amount of any
payment of principal thereof, reduce the rate or extend the date for payment of
interest thereon or relax any covenant or other restriction applicable to the
Borrower or any of its Subsidiaries and (ii) does not involve the payment of a
consent fee), (c) designate any Indebtedness (other than the Obligations) as
"Designated Senior Debt" for the purposes of the Convertible Notes Indenture or
(d) make any cash payment in respect of interest on the Convertible Notes (i)
during any Convertible Notes Blockage Period or (ii) at any time when, after
giving effect to such interest payment, the aggregate amount of cash and Cash
Equivalents held by the Borrower in its own name (including, without limitation,
any cash and Cash Equivalents held in any Interest Reserve Account) would be
less than an amount that is 5 percentage points greater than the amount required
from time to time under Section 7.14(a).

                  7A.14. Interest Reserve Account. The Borrower will not permit
the aggregate amount of cash and Cash Equivalents held in the Tranche B Interest
Reserve Account on any Interest Payment Date to be less than the amount of
interest on the Tranche B Loan during the one-year period following such
Interest Payment Date (such interest amount to be estimated

<PAGE>

                                                                              58

using a rate per annum equal to the twelve-month Eurodollar Rate in effect two
Business Days prior to such Interest Payment Date, plus 4.00%).

                  7A.15. Plan of Reorganization. The Borrower will not propose
or consent to a plan of reorganization in respect of PGE Utility that provides
for a spin-off or any distribution, transfer or disposal of assets other than
one which is substantially consistent with Annex B; provided, that this Section
7A.15 shall not prohibit the Borrower from proposing or consenting to any plan
of reorganization in respect of PGE Utility that does not involve a spin-off by,
or any distribution, transfer or disposal of assets of, the Borrower or any of
its Subsidiaries (other than any spin-off or distribution, transfer or disposal
of assets by any Person that receives fair value for the assets so disposed);
and provided, further, that, immediately prior to, and upon consummation of, any
transaction pursuant to any such plan of reorganization, no Default or Event of
Default shall have occurred or be continuing. For avoidance of doubt, any
transaction or series of transactions involving the disposition of any
Reorganization Subsidiary or any assets that would constitute a Reorganization
Subsidiary and the subsequent spin-off of PGE Utility along with the proceeds of
such disposition would not be substantially consistent with Annex B and would be
prohibited by this Section.

                  7A.16 FMV Ratio. The Borrower will not permit the Required FMV
Ratio to be less than 1.75:1. The Required FMV Ratio may be determined in
accordance with the procedure set forth in Section 9.26 at any time at the
request of the Majority Tranche B Lenders (at the expense of each such
requesting Tranche B Lender, ratably based upon the amount of the Tranche B Loan
held by such Tranche B Lender) by delivering a notice to the Borrower no more
frequently than once per fiscal quarter of the Borrower.

                  SECTION 8. TRANCHE A EVENTS OF DEFAULT AND REMEDIES.

                  8.1 Events of Default. The occurrence of any of the following
events or circumstances shall constitute a "Tranche A Event of Default" (or, at
any time after the Tranche A Loan, and the other Senior Obligations that are
then due and payable, have been paid in full, a "Tranche B Event of Default")
hereunder:

                  (a) The Borrower shall (i) default in the payment when due of
any principal of any Tranche A Loan (or, at any time after the Tranche A Loan,
and the other Senior Obligations that are then due and payable, have been paid
in full, any Tranche B Loan) or any related 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

<PAGE>

                                                                              59

(other than Sections 6.1 and 6.2) or Section 7; provided, however that a Default
under Section 7.16 shall not constitute an Event of Default hereunder unless
such Default shall continue unremedied for sixty (60) days and the Appraiser, at
the Majority Tranche A Lenders' (or, at any time after the Tranche A Loan, and
the other Senior Obligations that are then due and payable, have been paid in
full, the Majority Tranche B Lenders') request, again reaffirms that the
Required FMV Ratio is below 2.00:1 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 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

<PAGE>

                                                                              60

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 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 shall cease to be in full
force and effect, or shall cease to give the Collateral Agent and each Lender,
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

<PAGE>

                                                                              61

                  (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 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; or

                  (k) The Option Agreement shall cease to be in full force and
effect or shall cease to give the Holders the rights, powers and privileges
purported to be created thereby; or

                  (l) The Convertible Notes shall cease, for any reason, to be
validly subordinated to the Obligations as provided in the Convertible Notes
Indenture, or the Borrower, any of its Subsidiaries, the trustee under the
Convertible Notes Indenture or any holder of $70,000,000 or more of the
Convertible Notes shall so assert in writing and such assertion shall not have
been withdrawn, rescinded or otherwise retracted in writing within 15 days
thereof; or

                  (m) The Tranche B Loan shall cease, for any reason, to be
validly subordinated to the Senior Obligations as provided in the Intercreditor
Agreement, or the Borrower, any of its Subsidiaries or any holder of
$105,000,000 or more of the Tranche B Loan shall so assert in writing and such
assertion shall not have been withdrawn, rescinded or otherwise retracted in
writing within 15 days thereof.

                  8.2 Acceleration. (a) If an Event of Default specified in
Section 8.1(e) with respect to the Borrower shall occur, automatically the
Tranche A Loan (or, at any time after the Tranche A Loan, and the other Senior
Obligations that are then due and payable, have been paid in full, the Tranche B
Loan) (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) with respect to the Borrower) shall occur, then
the Administrative Agent (acting upon the instructions of the Majority Tranche A
Lenders (or, at any time after the Tranche A Loan, and the other Senior
Obligations that are then due and payable, have been paid in full, the Majority
Tranche B Lenders)) may by notice to the Borrower declare the Tranche A Loan
(or, at any time after the Tranche A Loan, and the other Senior Obligations that
are then due and payable, have been paid in full, the Tranche B Loan), all
accrued and unpaid interest thereon and all other amounts owing to the Tranche A
Lender (or, at any time after the Tranche A Loan, and the other Senior
Obligations that are then due and payable, have been paid in full, the Tranche B
Lender) 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 Majority Tranche A Lenders (or, at any time after the
Tranche A Loan, and the other Senior Obligations that are then due and payable,
have been paid in full, the Majority Tranche B Lenders)) may exercise any

<PAGE>

                                                                              62

or all rights and remedies at law or in equity (in any combination or order that
the Administrative Agent (acting upon the instructions of the Majority Tranche A
Lenders (or, at any time after the Tranche A Loan, and the other Senior
Obligations that are then due and payable, have been paid in full, the Majority
Tranche B Lenders)) may elect), including without limitation or prejudice to any
Tranche A Lender's (or, at any time after the Tranche A Loan, and the other
Senior Obligations that are then due and payable, have been paid in full, any
Tranche B Lender's) other rights and remedies, any and all rights and remedies
available under any of the Financing Documents; provided that any Tranche A
Lender (or, at any time after the Tranche A Loan, and the other Senior
Obligations that are then due and payable, have been paid in full, any Tranche B
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 8A.  TRANCHE B EVENTS OF DEFAULT AND REMEDIES.

                  8A.1. Events of Default. The occurrence of any of the
following events or circumstances at any time prior to the repayment in full of
the Tranche A Loan shall constitute a "Tranche B Event of Default" hereunder:

                  (a) The Borrower shall (i) default in the payment when due of
any principal of any Tranche B Loan or any related 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 7A
(other than Section 7A.14); provided, however that a Default under Section 7A.16
shall not constitute an Event of Default hereunder unless such Default shall
continue unremedied for sixty (60) days and the Appraiser, at the request of the
Majority Tranche A Lenders or the Majority Tranche B Lenders, again reaffirms
that the Required FMV Ratio is below 1.75:1 after such sixty (60) day period or
(ii) except as set forth in clauses (iii) and (iv) and Section 8A.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 8A.1) and such
default shall continue unremedied for a period of 40 days after written notice
thereof to the defaulting party by 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 the Warrant Agreement or (iv) fail to make the required
deposits in the Tranche B Interest Reserve Account after the Closing Date in
accordance with Section 7A.14 and the amount on deposit in the Tranche B
Interest Reserve

<PAGE>

                                                                              63

Account is equal to or less than the amount of interest estimated, in the manner
described in Section 7A.14, to be payable on the Tranche B Loan for the next
nine-month period; 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 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

<PAGE>

                                                                              64

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 shall cease to be in full
force and effect, or shall cease to give the Collateral Agent and each Lender
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 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; or

                  (k) The Option Agreement or the Warrant Agreement shall cease
to be in full force and effect or shall cease to give the Holders or the holders
of Warrants, as the case may be, the rights, powers and privileges purported to
be created thereby; or

<PAGE>

                                                                              65

                  (l) The Convertible Notes shall cease, for any reason, to be
validly subordinated to the Obligations as provided in the Convertible Notes
Indenture, or the Borrower, any of its Subsidiaries, the trustee under the
Convertible Notes Indenture or any holder of $70,000,000 or more of the
Convertible Notes shall so assert in writing and such assertion shall not have
been withdrawn, rescinded or otherwise retracted in writing within 15 days
thereof.

                  8A.2. Acceleration. (a) If an Event of Default specified in
Section 8A.1(e) with respect to the Borrower shall occur, automatically the
Tranche B Loan (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 8A.1(e) with respect to the Borrower) shall occur, then
the Administrative Agent (acting upon the instructions of the Majority Tranche B
Lenders) may by notice to the Borrower declare the Tranche B Loan, all accrued
and unpaid interest thereon and all other amounts owing to the Tranche B Lender
under the Financing Documents to be due and payable, whereupon the same shall
become immediately due and payable. Upon the delivery of any such notice to the
Borrower, the Administrative Agent shall contemporaneously notify the Tranche A
Lenders thereof, provided that the failure to give such notice shall not affect
the rights and remedies of the Administrative Agent or the Tranche B Lenders
against the Borrower or any of its Subsidiaries.

                  (c) Except as expressly provided above in this Section 8A.2,
presentment, demand, protest and all other notices and other formalities of any
kind are hereby expressly waived by the Borrower.

                  8A.3. Other Remedies. Upon the occurrence and during the
continuation of an Event of Default, the Administrative Agent (acting upon the
instructions of the Majority Tranche B Lenders) may exercise any or all rights
and remedies at law or in equity (in any combination or order that the
Administrative Agent (acting upon the instructions of the Majority Tranche B
Lenders) may elect), including without limitation or prejudice to any Tranche B
Lender's other rights and remedies, any and all rights and remedies available
under any of the Financing Documents; provided that any Tranche B 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 8A.1(a) or 8A.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 (5)
Business Days after demand, all reasonable costs and expenses (including
reasonable fees and expenses of counsel and consultants) of the Administrative
Agent (in its capacity as such and in its capacity as a Lender), the Lead
Arranger, the Book Manager, each Lender (in the case of clause (b) below only),
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)

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any and all amounts which the Administrative Agent, each Lender (in the case of
clause (b) below only), 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 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 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 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, 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 (including, without limitation, any losses
incurred by any Lender as a result of any misrepresentation by the Borrower or
any of its Subsidiaries hereunder or under any other Financing Document or any
failure by any Covered Party to perform any of its obligations hereunder or
under any other Financing Document), 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 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,

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                                                                              67

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
consequential 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.

             (i)  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.

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                                                                              68

        (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.

        (f) No Indemnity for Intercreditor Agreement Disputes. Notwithstanding
anything to the contrary in this Agreement, the Borrower shall not be required
under any circumstances to indemnify any Lender or agent, or otherwise be
required to reimburse any Lender or agent, for any Losses resulting solely from
disputes between or among Lenders with respect to the Intercreditor Agreement.

        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

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                                                                              69

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 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) Except as provided in paragraph (b) of
this Section, no provision of this Agreement or any other Financing Document may
be amended, supplemented, modified or waived, except by a written instrument
signed by each of the Majority Tranche A Lenders and the Majority Tranche B
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

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                                                                              70

waiver and no such amendment, supplement or modification shall (i) increase or
extend the New Tranche B 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 an increase or extension of any New Tranche B
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 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, (vi) reduce the percentage specified in or otherwise amend the
definition of Required Waiver Lenders or Majority Tranche A Lenders or Majority
Tranche B Lenders, without the prior written consent of each Lender, (vii)
change, amend or modify the principal amount of, or rate of interest on, or the
maturity of, any Tranche A Loan, without the prior written consent of the
Majority Tranche B Lenders, (viii) change, amend or modify the principal amount
of, or rate of interest on, or the maturity of, any Tranche B Loan, without the
prior written consent of the Majority Tranche A Lenders, or (ix) amend, modify
or waive any provision of Section 10, without the prior written consent of the
Administrative Agent.

        (b) Notwithstanding anything to the contrary above, (i) at any time
prior to the repayment in full of the Tranche A Loan, Sections 7 (other than
Section 7.14) and 8 (but not Section 7A or 8A) may be amended, supplemented,
modified or waived with the consent of the Majority Tranche A Lenders, without
the consent of any Tranche B Lender (provided that (x) unless consented to by
the Majority Tranche B Lenders, no such amendment, supplement, modification or
waiver shall add additional covenants or events of default or make existing
covenants or events of default more restrictive on the Borrower and its
Subsidiaries and (y) at the time of repayment in full of the Tranche A Loan and
of the other Senior Obligations then due and payable, all such amendments,
supplements, modifications and waivers effected after the Closing Date shall
automatically cease to be in effect unless consented to by the Majority Tranche
B Lenders), and (ii) Sections 7A (other than Section 7A.14) and 8A (but not
Section 7 or 8) may be amended, supplemented, modified or waived with the
consent of the Majority Tranche B Lenders, without the consent of any Tranche A
Lender (provided that, unless consented to by the Majority Tranche A Lenders, no
such amendment, supplement, modification or waiver shall add additional
covenants or events of default or make existing covenants or events of default
more restrictive on the Borrower and its Subsidiaries).

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

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                                                                              71

           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
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.

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                                                                              72

           (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 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. (a) 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.

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                                                                              73

           (b)  Notwithstanding the execution and delivery of this Agreement,
all representations and warranties of the Borrower under the Existing Credit
Agreement and the other Financing Documents (as defined in the Existing Credit
Agreement) and all obligations of the Borrower under Sections 9.1 and 9.2 of the
Existing Credit Agreement and other payment obligations of the Borrower under
Sections 2.5, 2.7, 2.8, 3.2(a) and 3.4 of the Existing Credit Agreement and
other liabilities of the Borrower for breach of representations and warranties
or covenants under the Existing Credit Agreement and the other Financing
Documents (as defined in the Existing Credit Agreement) accrued as of the
Closing Date shall not terminate and shall survive the execution and delivery of
this Agreement and the other Financing Documents (as defined herein).

           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 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).

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                                                                              74

           (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 Corporation Service Company (the "Process Agent"),
with an office on the date hereof at 1177 Avenue of the Americas, 17/th/ Floor,
New York, New York 10036-2721, 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.

           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.

<PAGE>

           9.19 Complete Agreement. THIS AGREEMENT AND THE OTHER FINANCING
DOCUMENTS 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 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

<PAGE>

                                                                              76

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.

           9.24 Release of Liens for NEG Equity Sale. Concurrently with the
consummation of the NEG Equity Sale, the Lenders agree to cause the Collateral
Agent (at the expense of the Borrower) to release the security interest held by
the Collateral Agent, pursuant to the Stock Pledge Agreement, in the shares of
common stock of NEG, Inc. being sold in the NEG Equity Sale.

           9.25 Delivery of Lender Addendum. Each Tranche B Lender becoming a
party hereto on the Closing Date shall become a party hereto by delivery to the
Administrative Agent a Lender Addendum duly executed by such Tranche B Lender,
the Borrower and the Administrative Agent.

           9.26 Determination of Fair Market Value. 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 (i)
the Majority Tranche A Lenders in consultation with the Administrative Agent (in
the case of a determination made at the request of the Majority Tranche A
Lenders pursuant to Section 7.16) or (ii) the Majority Tranche B Lenders in
consultation with the Tranche A Lenders (in the case of a determination made at
the request of the Majority Tranche B Lenders pursuant to Section 7A.16) (the
"Appraiser"). The Borrower will cooperate and deliver such document and provide
such information as may be reasonably requested by the Majority Tranche A
Lenders, the Majority Tranche B Lenders, the Administrative Agent or the
Appraiser with respect to the determination of the Required FMV Ratio.

           9.27 Intercreditor Agreement. Notwithstanding anything provided
herein to the contrary, the terms and provisions of the Intercreditor Agreement
shall govern the relationship between the Tranche A Lender and the Tranche B
Lender with respect to the rights, remedies and obligations of the Lenders under
this Agreement and the other Financing Documents, including, without limitation,
the subordination in payment of the Tranche B Loan and the limitation on the
exercise of remedies by the Tranche B Lender under the Financing Documents.

           9.28 Special Exculpation. NO CLAIM MAY BE MADE BY THE BORROWER OR ANY
OTHER PERSON AGAINST THE COLLATERAL AGENT OR ANY LENDER OR THE AFFILIATES,
DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS OR AGENTS OF ANY OF THEM FOR ANY
SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM FOR
BREACH OF CONTRACT OR ANY OTHER THEORY OF LIABILITY ARISING OUT OF OR RELATING
TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY, OR ANY ACT,
OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH AND THE BORROWER HEREBY
WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR ANY SUCH

<PAGE>

                                                                              77

DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST
IN ITS FAVOR.

           SECTION 10. THE ADMINISTRATIVE AGENT; THE LEAD 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 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

<PAGE>

                                                                              78

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 the Majority Tranche A Lenders or the Majority Tranche B 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 the Majority Tranche A Lenders
or the Majority Tranche B 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 the Majority Tranche A Lenders or the Majority Tranche B
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, 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", "Majority Tranche A Lenders",
"Majority Tranche B 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.

<PAGE>

                                                                              79

           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 or Replacement of 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 (c) and (d) below or as otherwise
provided below.

           (b)  The Administrative Agent may be replaced at the written request
of the Required Waiver Lenders at any time by such Lenders giving 15 Business
Days' prior written notice to the Administrative Agent. Such replacement shall
take effect upon the appointment of a successor Administrative Agent pursuant to
clauses (c) and (d) below or as otherwise provided below.

           (c)  Upon any such notice of resignation or replacement, as the case
may be, 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 shall be subject to the
reasonable approval of the Borrower (unless an Event of Default shall be
continuing) and the Majority Tranche A Lenders and the Majority Tranche B
Lenders.

           (d)  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.

           (e)  If no successor Administrative Agent has been appointed pursuant
to clause (c) or (d) above by the 20th Business Day after the date such notice
of resignation or replacement was given by the Administrative Agent or the
Required Waiver Lenders, as the case may be, the Administrative Agent's
resignation or replacement shall become effective and the Required Waiver
Lenders shall thereafter perform all the duties of the Administrative 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 and Book Manager. Neither the Lead Arranger
nor the Book Manager, in such respective capacity, 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.

<PAGE>

                                                                              80

           10.11 Direction to Administrative Agent and Collateral Agent. Each of
the Lenders authorizes and directs the Administrative Agent and the Collateral
Agent to execute and deliver the Intercreditor Agreement and the Security
Documents and to perform their respective obligations thereunder. Each Lender
agrees that it is bound by the provisions in the Security Documents and the
Intercreditor Agreement relating to the Lenders to the same extent as if such
Lender were a party thereto, including, without limitation, any provisions of
the Security Documents requiring the Lenders to indemnify the Collateral Agent.
The Administrative Agent and the Collateral Agent are express third-party
beneficiaries of this Section.

                   *                *               *

<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:________________________________________
                                        Name:
                                        Title:


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

                                     By:________________________________________
                                        Name:
                                        Title:


                                     LEHMAN BROTHERS INC., as Lead Arranger
                                     and Book Manager

                                     By:________________________________________
                                        Name:
                                        Title:

<PAGE>

                                        GENERAL ELECTRIC CAPITAL
                                        CORPORATION, as a Lender


                                        By:_____________________________________
                                           Name:
                                           Title:

<PAGE>

                                                                      Appendix A

                    DEFINED TERMS AND RULES OF INTERPRETATION

           1. Defined Terms.

           "Additional Extended Date Certain" shall mean each of (i) March 2,
2005, and (ii) March 2, 2006.

           "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.

           "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.

           "Applicable Margin" shall mean (a) with respect to the Tranche A
Loan, (i) as to the Base Rate Loan, (x) during the period commencing on the
Initial Closing Date to but excluding the date eighteen (18) months from the
Initial Closing Date, 2.50% per annum and (y) during the period commencing on
the date eighteen (18) months from the Initial Closing Date and thereafter,
4.00% per annum, and (ii) as to the Eurodollar Loan, (x) during the period
commencing on the Initial Closing Date to but excluding the date eighteen (18)
months from the Initial Closing Date, 2.50% per annum and (y) during the period
commencing the date eighteen (18) months from the Initial Closing Date and
thereafter, 4.00% per annum; and (b) with respect to the Tranche B Loan, (i) as
to the Base Rate Loan, 3.00% per annum, and (ii) as to the Eurodollar Loan,
4.00% per annum.

           "Appraiser" shall have the meaning provided in Section 9.26 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 the Majority Tranche A Lenders or the Majority Tranche B Lenders;
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 (including, without limitation, after the
consummation of the Utility Spin-Off, the Capital Stock of, or any assets
(taking into account all prior asset sales) having an aggregate book value in
excess of $75,000,000 of, any Reorganization Subsidiary) and any member of the
NEG Group.

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

<PAGE>

                                                                               2

           "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, Treasurer or Secretary of such Person and (ii) with respect to
any Person that is a partnership, the President, any Vice President, Treasurer
or Secretary (or Assistant Secretary) of a general partner or managing partner
of such Person and 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)
and Section 8A.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., as amended and restated as of 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 Initial
Closing Date.

<PAGE>

                                                                               3

           "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.

           "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, demand deposits,
certificates of deposit and other deposits 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.

           "Change of Control" shall mean any of the following: (i) any "person"
or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), shall become, or obtain
rights (whether by means or warrants, options or otherwise) to become, the
"beneficial owner" (as defined in Rules 13(d)-3 and 13(d)-5

<PAGE>

                                                                               4

under the Exchange Act), directly or indirectly, of more than 25% of the
outstanding common stock of the Borrower; (ii) the board of directors of the
Borrower shall cease to consist of a majority of Continuing Directors; or (iii)
a Specified Change of Control shall occur.

                  "Change of Control Offer to Repay" shall have the meaning
provided in Section 3.8 of the Credit Agreement.

                  "Change of Control Offer to Repay Notice" shall have the
meaning provided in Section 3.8 of the Credit Agreement.

                  "Change of Control Offer Settlement Date" shall have the
meaning provided in Section 3.8 of the Credit Agreement.

                  "Change of Control Prepayment Fee" shall have the meaning
provided in Section 3.8 of the Credit Agreement.

                  "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).

                  "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 Deutsche Bank Trust Company
Americas, acting as collateral agent for the benefit of the Lenders.

                  "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

<PAGE>

                                                                               5

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.

                  "Continuing Directors" shall mean the directors of the
Borrower on the Closing Date and each other director, if, in each case, such
other director's nomination for election to the board of directors of the
Borrower is recommended by at least 66-2/3% of the then Continuing Directors.

                  "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.

                  "Convertible Notes" shall mean the 7.50% Convertible
Subordinated Notes due 2007 of the Borrower issued on the Closing Date pursuant
to the Convertible Notes Indenture.

                  "Convertible Notes Blockage Period" shall mean the period
commencing the date the Administrative Agent or the Tranche A Lender has
delivered a notice to the trustee under the Convertible Notes Indenture stating
that an Event of Default exists hereunder, and terminating on the earlier of (A)
the date on which such Event of Default is cured or waived in accordance with
the Credit Agreement and (B) the date which is 240 days after the date of the
receipt by the trustee of the default notice with respect thereto.

                  "Convertible Notes Indenture" shall mean the Indenture entered
into by the Borrower in connection with the issuance of the Convertible Notes,
together with all instruments and other agreements entered into by the Borrower
in connection therewith.

                  "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.

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

                  "Credit Agreement" shall mean the Amended and Restated Credit
Agreement, dated as of June 25, 2002, among the Borrower, the Lenders party
thereto, Lehman Commercial Paper Inc., as Administrative Agent and Lehman
Brothers Inc., as Lead Arranger and Book Manager.

                  "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.

<PAGE>

                                                                               6

                  "Disclosure Letter" shall mean the letter from the Borrower,
addressed to the Administrative Agent and the Lenders, dated as of June 25,
2002, 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.

                  "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 (including,
without limitation, any "spin-off" of assets or Capital Stock held by such
Person to the shareholder or partners or members of such Person or any parent of
such Person), 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 (i) 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 and (ii) all
"Pass-Through Dividends" made pursuant to, and as defined in, the Convertibles
Notes Indenture.

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

                  "Effective Date" shall mean June 25, 2002.

                  "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, 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

<PAGE>

                                                                               7

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 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.

                  "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.

                  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 mean a Tranche A Event of Default or
a Tranche B Event of Default.

                  "EWG" shall mean an "exempt wholesale generator" as defined
under PUHCA.

<PAGE>

                                                                               8

                  "Excess Additional Option Percentage" shall have the meaning
provided in Section 2.10(b).

                  "Existing Credit Agreement" shall have the meaning provided in
the recitals hereto.

                  "Existing Financing Documents" shall mean the Financing
Documents (as defined in the Existing Credit Agreement).

                  "Existing Indebtedness Agreements" shall have the meaning
provided in Section 5.29 of the Credit Agreement.

                  "Existing Tranche A Loan" shall have the meaning provided in
the recitals hereto.

                  "Existing Tranche B Loan" shall have the meaning provided in
the recitals hereto.

                  "Expense Sharing Agreement" shall mean each of the agreements
entitled "Continuing Services Agreement" listed and marked with "*" on Schedule
5.17.

                  "Extension Fee" shall have the meaning set forth in the
Extension Fee Letter.

                  "Extension Fee Letter" shall mean the Extension Fee Letter
dated June 25, 2002 among the Borrower, Lehman Commercial Paper Inc., GECC and
Wilmington Trust Company.

                  "Extension Interest Prepayment Amount" shall mean with respect
to an extension of the maturity date granted pursuant to Section 2.9(b) of the
Credit Agreement the amount that is the total amount of interest payable on the
Loans during such extension period based on a one-year Eurodollar Rate as of the
first date of such extension discounted to present value as of such date using a
discount rate of 4.25%.

                  "Fair Market Value" shall have the meaning provided in Section
9.26 of the Credit Agreement.

                  "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.

                  "FERC" shall mean the Federal Energy Regulatory Commission or
its successor.

<PAGE>

                                                                               9

                  "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 Notes, the Extension Fee Letter, the Lehman Fee Letter, the GECC
Fee Letter, the Security Documents, the Intercreditor Agreement, the Warrant
Agreement and the Option Agreement.

                  "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.

                   "GECC" shall mean General Electric Capital Corporation, a
Delaware corporation.

                  "GECC Fee Letter" shall mean the Tranche A Letter Agreement
dated June 25, 2002 between the Borrower and GECC.

                  "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

<PAGE>

                                                                              10

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.

                  "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 (a) 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 and (b) obligations with respect to the PG&E Corporation
Supplemental Retirement Savings Plan, the PG&E Corporation Management Retention
Program, the PG&E Corporation Senior Management Incentive Program, the PG&E
Corporation Long-Term Incentive Program, the PG&E Corporation Short-Term
Incentive Program, the Supplemental Executive Retirement Plan, the
Postretirement Medical Plan, the Post Retirement Life Insurance Plan and the
PG&E Corporation Deferred Compensation Plan for Non-Employee Directors, which
obligations as of the Closing Date do not exceed $90,000,000 in the aggregate,
as such obligations may accrue in the ordinary course of business pursuant to
the terms of such Plans (as amended in the ordinary course of business and
consistent with past practice), as may be adjusted in accordance with U.S. GAAP.

                  "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(a) of the Credit Agreement.

                  "Initial Closing Date" shall mean March 1, 2001.

<PAGE>

                                                                              11

                  "Initial Date Certain" shall mean the second anniversary of
the Initial 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.

                  "Intercreditor Agreement" shall mean the Intercreditor and
Subordination Agreement, dated as of June 25, 2002, among the Administrative
Agent, the Collateral Agent, the Lenders and the holders party to the Warrant
Agreement.

                  "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 Payment Date" shall have the meaning provided in
Section 2.5(d) of the Credit Agreement.

                  "Interest Period" shall have the meaning provided in Section
2.6 of the Credit Agreement.

                  "Interest Reserve Accounts" shall mean the collective
reference to the Tranche A Interest Reserve Account and the Tranche B Interest
Reserve Account.

                  "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 Sections 7.5
and 7A.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

<PAGE>

                                                                              12

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 Fee Letter dated June 13,
2002 among the Borrower, Lehman Brothers Inc. and Lehman Commercial Paper Inc.

                  "Lender" shall mean, individually or collectively, as the
context may require, a Tranche A Lender, a Tranche B Lender and any Assignee
thereof pursuant to Section 9.11 of the Credit Agreement.

                  "Lender Addendum" shall mean, with respect to each Tranche B
Lender becoming, or continuing as, a Tranche B Lender on the Closing Date, a
Lender Addendum, substantially in the form of Schedule A, to be executed and
delivered by such Lender pursuant to Section 9.25 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).

                  "Limited Liability Company Interest" shall have the meaning
provided in the LLC Pledge Agreement.

                  "LLC" shall mean individually and collectively PG&E National
Energy Group, LLC, a Delaware limited liability company, and the New LLC.

                  "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 Amended and Restated LLC
Pledge Agreement, dated as of June 25, 2002, among the Borrower, as pledgor,
LLC, as issuer, the Administrative Agent and Deutsche Bank Trust Company
Americas, as pledgee, as Collateral Agent for the benefit of the Lenders.

<PAGE>

                                                                              13

                  "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.

                  "Majority Tranche A Lenders" shall mean, at any time, the
holders of more than 50% in principal amount of the Tranche A Loan then
outstanding.

                  "Majority Tranche B Lenders" shall mean, at any time, the
holders of more than 50% in principal amount of the Tranche B Loan then
outstanding.

                  "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.

                  "Moody's" shall mean Moody's Investors Service, Inc.

                  "NAIC" shall mean the National Association of Insurance
Commissioners.

                  "NEG Equity Sale" shall mean the sale of up to 20% of the
outstanding equity of NEG, Inc., substantially in the manner described in the
NEG Equity Sale Letter with such changes in the transactions described therein
as may hereafter occur; provided that no such changes will be made that will
adversely affect the Lenders' security interest in the Collateral or the rights
of the Holders under the Option Agreement (other than the effect of the release
of up to 20% of the outstanding equity of NEG, Inc. to be released by the
Lenders pursuant to the terms hereof in connection with any NEG Equity Sale).

                  "NEG Equity Sale Letter" shall mean the letter from the
Borrower addressed to the Administrative Agent and the Lenders dated November
19, 2001, describing the terms of a potential sale of no more than 20% of the
outstanding equity of NEG, Inc. and certain other actions related thereto.

                  "NEG Equity Transactions" shall mean, collectively, (a) the
creation of a wholly-owned Subsidiary of NEG, Inc. (the "New LLC"), (b) the
transfer to the New LLC of up to 200

<PAGE>

                                                                              14

shares of the common stock of NEG, Inc., provided, that, prior to such transfer,
the New LLC becomes a party to the Stock Pledge Agreement on the same terms as
those applicable to the pledgor thereunder on the Closing Date, and (c) the NEG
Equity Sale; provided, further, that the Borrower shall give five (5) Business
Days' prior written notice to the Lenders of the NEG Equity Transactions.

                  "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 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.

                  "New Investor" shall mean any purchaser of shares of the
outstanding equity of NEG, Inc. in connection with the NEG Equity Sale, and
their successors and assigns.

                  "New LLC" shall have the meaning provided in the definition of
"NEG Equity Transactions" in Appendix A to the Credit Agreement.

                  "New Tranche B Commitment" shall mean as to any New Tranche B
Lender, the obligation of such Lender, if any, to make a Tranche B Loan to the
Borrower in a principal amount not to exceed the amount set forth in the Lender
Addendum executed and delivered by such New Tranche B Lender pursuant to Section
9.25. The original aggregate amount of the New Tranche B Commitments is
$420,000,000.

<PAGE>

                                                                              15

                  "New Tranche B Lender" shall mean any holder of a New Tranche
B Commitment.

                  "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 to the Administrative Agent or any Lender or
its Affiliates 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
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 Amended and Restated Option
Agreement, dated as of June 25, 2002, among the Borrower, LLC, NEG, Inc., GPSF-F
Inc., a Delaware corporation, LB I Group Inc., a Delaware corporation, and each
other entity holding Options on the Closing Date.

                  "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 Sections
7.1 and 7A.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.

<PAGE>

                                                                              16

                  "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.

                  "Prime Rate" shall mean the per annum rate of interest
established from time to time by Deutsche Bank Trust Company Americas as its
prime rate, which rate may not be the lowest rate of interest charged by
Deutsche Bank Trust Company Americas 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 or any
Reorganization Subsidiary.

                  "Register" shall have the meaning provided in Section 9.11(e)
of the Credit Agreement.

<PAGE>

                                                                              17

                  "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).

                  "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).

                  "Reorganization Subsidiary" shall mean any of Gen, ETrans,
GTrans and Newco (as such capitalized terms are defined in Annex B), and any
successor or replacement of any such entity and any entity holding any
substantial part of the assets contemplated by Annex B to be held by any such
entity, in each case, after giving effect to the transactions described in Annex
B.

                  "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 FMV Ratio" shall have the meaning provided in
Section 7.16 of the Credit Agreement.

                  "Required Waiver Lenders" shall mean, at any time, the holders
of more than 50% in principal amount of the Loans then outstanding.

                  "Reserve Account Control Agreements" shall mean, collectively,
the Tranche A Interest Reserve Account Control Agreement and the Tranche B
Interest Reserve Account Control Agreement.

                  "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.

<PAGE>

                                                                              18

                  "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 of the Borrower and NEG,
Inc. listed on Schedule B.

                  "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, the Reserve Account Control Agreements
and all Uniform Commercial Code financing statements and other 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.

                  "Senior Obligations" shall have the meaning provided in the
Intercreditor Agreement.

                  "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 Change of Control" shall mean a "Change of Control"
(or any other defined term having a similar purpose) as defined in the
Convertible Notes Indenture.

                  "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, (b) a maturity date no
earlier than 180 days after the Tranche B Maturity Date and (c) does not
constitute "Senior Obligations" for purposes of the Intercreditor Agreement.

                  "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.





<PAGE>

                                                                              19

                  "Standard & Poor's" shall mean Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc.

                  "Stock Pledge Agreement" shall mean the Amended and Restated
Stock Pledge Agreement, dated as of June 25, 2002, among LLC, as pledgor, NEG,
Inc., as issuer, the Administrative Agent and Deutsche Bank Trust Company
Americas, as pledgee, as Collateral Agent for the benefit of the Lenders.

                  "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.

                  "Tax" shall have the meaning provided in Section 3.4 of the
Credit Agreement.

                  "Trading Day" shall mean a day during which trading in
securities generally occurs on the New York Stock Exchange or, if the Borrower's
common stock is not listed on the New York Stock Exchange, on the principal
other national or regional securities exchange on which the Borrower's common
stock then is listed or, if the Borrower's common stock is not listed on a
national or regional securities exchange, on the National Association of
Securities Dealers Automated Quotation System or, if the Borrower's common stock
is not quoted on the National Association of Securities Dealers Automated
Quotation System, on the principal other market on which the Borrower's common
stock is then traded.

                  "Tranche A Event of Default" shall have the meaning provided
in Section 8.1 of the Credit Agreement.

                  "Tranche A Interest Reserve Account" shall the mean the
collateral account, account no. 34214, maintained with the Collateral Agent for
the purposes of paying interest on the Tranche A Loan.

                  "Tranche A Interest Reserve Account Control Agreement" shall
mean the Tranche A Interest Reserve Account Security and Control Agreement,
dated as of June 25, 2002, among the Borrower, the Collateral Agent and the bank
party thereto, with respect to the Tranche A Interest Reserve Account.

                  "Tranche A Lender" shall be the collective reference to (i)
General Electric Capital Corporation, a New York corporation, and (ii) any other
holder of the Tranche A Loan (including, without limitation, any Lender which
becomes a holder of the Tranche A Loan pursuant to Section 2.10).

                  "Tranche A Loan" shall mean the Loan continued by the Tranche
A Lender on the Closing Date.

<PAGE>

                                                                              20

                  "Tranche B Event of Default" shall have the meaning provided
in Sections 8.1 and 8A.1 of the Credit Agreement.

                  "Tranche B Interest Reserve Account" shall the mean the
collateral account, account no. 34213, maintained with the Collateral Agent for
the purposes of paying interest on the Tranche B Loan.

                  "Tranche B Interest Reserve Account Control Agreement" shall
mean the Tranche B Interest Reserve Account Security and Control Agreement,
dated as of June 25, 2002, among the Borrower, the Collateral Agent and the bank
party thereto, with respect to the Tranche B Interest Reserve Account.

                  "Tranche B Lender" shall be the collective reference to (i)
Lehman Commercial Paper Inc., a New York corporation, and (ii) any other holder
of the Tranche B Loan or the New Tranche B Commitment.

                  "Tranche B Loan" shall be the collective reference to (i) the
Loan converted into the Tranche B Loan pursuant to Section 2.1 of the Credit
Agreement on the Closing Date and (ii) the Loan provided by the New Tranche B
Lenders on the Closing Date.

                  "Tranche B Maturity Date" shall mean September 2, 2006.

                  "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.

                  "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.

                  "U.S. GAAP" shall mean generally accepted accounting
principles and practices as in effect from time to time in the United States.

                  "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 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

<PAGE>

                                                                              21

rules of general applicability with respect to protection of the environment,
hazardous waste, or public health or safety.

                  "Utility Spin-Off" shall mean individually and collectively,
any transfers, Investments, Indebtedness, Dividends, and other transactions to
the extent substantially consistent with the transactions described in the
attached Annex B (which summarizes the material provisions of the filed Plan of
Reorganization, dated April 19, 2002, proposed by PGE Utility in connection with
its bankruptcy proceeding) and undertaken pursuant to a confirmed plan of
reorganization of PGE Utility under Chapter 11 of the Bankruptcy Code.

                  "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.

                  "Warrant" shall have the meaning provided in the Warrant
Agreement.

                  "Warrant Agreement" shall mean the Warrant Agreement, dated as
of June 25, 2002, among the Borrower and the holders party thereto, together
with all instruments and other agreements (including, without limitation, the
related Equity Registration Rights Agreement) entered into by the Borrower in
connection therewith.

                  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; if any calendar
         day is not a Business Day, then performances required on such calendar
         day shall be deferred to the next Business Day;

                  (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;





<PAGE>

                                                                              22

                  (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;

                  (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.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.5
<SEQUENCE>7
<FILENAME>dex995.txt
<DESCRIPTION>AMENDED AND RESTATED LLC PLEDGE AGREEMENT
<TEXT>
<PAGE>

                                                                  EXECUTION COPY











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



                    AMENDED AND RESTATED LLC PLEDGE AGREEMENT

                                  by and among

                                PG&E CORPORATION,
                                   as Pledgor

                        PG&E NATIONAL ENERGY GROUP, LLC,
                                    as Issuer

                          LEHMAN COMMERCIAL PAPER INC.,
                             as Administrative Agent

                                       and

                      DEUTSCHE BANK TRUST COMPANY AMERICAS,

                               as Collateral Agent
                   for the benefit of the Lenders, as Pledgee

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

                            Dated as of June 25, 2002

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



<PAGE>

                              LLC PLEDGE AGREEMENT

                  AMENDED AND RESTATED LLC PLEDGE AGREEMENT (as amended,
modified or supplemented from time to time, this "Agreement"), dated as of June
25, 2002, among PG&E CORPORATION, a corporation organized and existing under the
laws of the State of California (the "Pledgor"), PG&E NATIONAL ENERGY GROUP,
LLC, a limited liability company organized and existing under the laws of the
State of Delaware (the "Issuer"), LEHMAN COMMERCIAL PAPER INC., a corporation
organized and existing under the laws of the State of New York, as
Administrative Agent for the lenders (the "Lenders") from time to time parties
to the Credit Agreement described below and DEUTSCHE BANK TRUST COMPANY AMERICAS
(the "Pledgee"), as Collateral Agent for the benefit of the Lenders.

                              W I T N E S S E T H :

         WHEREAS, the Pledgor is a party to the Credit Agreement, dated as of
March 1, 2001 (as amended, the "Existing Credit Agreement"), with the lenders
parties thereto, Lehman Commercial Paper Inc., as Administrative Agent, and
others, pursuant to which such lenders made the Tranche A Loan (as defined in
the Existing Credit Agreement, the "Existing Tranche A Loan") and the Tranche B
Loan (as defined in the Existing Credit Agreement, the "Existing Tranche B
Loan");

         WHEREAS, pursuant to the Amended and Restated Credit Agreement, dated
as of the date hereof (as amended, supplemented or otherwise modified from time
to time, the "Credit Agreement"), among the Pledgor, the Lenders parties
thereto, the Administrative Agent and others, the Existing Credit Agreement is
being amended and restated in its entirety to modify certain of the terms
applicable to the Existing Tranche A Loan, to reflect the repayment of the
Existing Tranche B Loan and to provide for the making of an additional Tranche B
Loan to the Pledgor;

         WHEREAS, the Pledgor, as Class A Member, owns one hundred percent
(100%) of the issued and outstanding limited liability company interests of the
Issuer;

         WHEREAS, the Pledgor, the Issuer, the Administrative Agent, the
Pledgee, acting as Collateral Agent for the Lenders, and others, are parties to
the LLC Pledge Agreement, dated as of March 1, 2001 (the "Existing LLC Pledge
Agreement"); and

         WHEREAS, it is a condition precedent to the obligation of the Lenders
to agree to amend and restate the Existing Credit Agreement and to make an
additional Tranche B Loan to the Pledgor that the Existing LLC Pledge Agreement
shall have been amended and restated as provided herein;

         NOW, THEREFORE, in consideration of the foregoing premises and to
induce the Administrative Agent and the Lenders to enter into the Credit
Agreement, the Pledgor hereby agrees with the Administrative Agent, for the
benefit of the Lenders, to amend and restate the Existing LLC Pledge Agreement
to read in its entirety as follows:

<PAGE>

         1.    SECURITY FOR OBLIGATIONS. This Agreement is made by the Pledgor
for the benefit of the Pledgee, acting as Collateral Agent for the benefit of
the Lenders (as more particularly described in Sections 3.1 and 3.2) to secure:

         (i)   the full and prompt payment when due (whether at the stated
    maturity, by acceleration or otherwise) of all Obligations of the Pledgor
    and the Issuer under the Credit Agreement and the other Financing Documents
    and the obligations of the Issuer and the Pledgor under the Option
    Agreement, whether direct or indirect, absolute or contingent, due or to
    become due, now existing or hereafter arising and howsoever evidenced, and
    the due performance and compliance by the Pledgor and the Issuer with the
    terms thereof;

         (ii)  any and all sums advanced by the Pledgee or any Lender in order
    to preserve the Collateral or preserve its security interest in the
    Collateral (as defined below); and

         (iii) in the event of any proceeding for the collection or enforcement
    of any indebtedness, obligations, or liabilities referred to in clauses (i)
    and (ii) above, the reasonable expenses of retaking, holding, preparing for
    sale or lease, selling or otherwise disposing or realizing on the
    Collateral, or of any exercise by the Pledgee of its rights hereunder with
    respect thereto, together with reasonable attorneys' fees and court costs
    related thereto,

all such obligations, liabilities, sums and expenses set forth in clauses (i)
through (iii) of this Section 1, whether now existing or hereafter arising, that
are (x) owing to the Tranche A Lenders, being herein called the "Tranche A
Secured Obligations", and (y) owing to the Tranche B Lenders, being herein
called the "Tranche B Secured Obligations" (collectively, the "Secured
Obligations").

         2.    DEFINITIONS. (a) Unless otherwise defined herein, all capitalized
terms used herein and defined in Appendix A to the Credit Agreement shall be
used herein as therein defined and the principles of construction set forth in
Appendix A to the Credit Agreement shall apply to this Agreement.

         (b)   In addition, the following capitalized terms used herein shall
    have the definitions specified below:

         "Agreement" has the meaning set forth in the first paragraph hereof.

         "Collateral" has the meaning set forth in Section 3.1 hereof.

         "Credit Agreement" has the meaning set forth in the second recital
    hereto.

         "Existing Credit Agreement" has the meaning set forth in the first
    recital hereto.

         "Existing LLC Pledge Agreement" has the meaning set forth in fourth
    recital hereto.

                                       2

<PAGE>

         "Existing Tranche A Loan" has the meaning set forth in the first
    recital hereto.

         "Existing Tranche B Loan" has the meaning set forth in the first
    recital hereto.

         "Issuer" has the meaning set forth in the first paragraph hereof.

         "Lenders" has the meaning set forth in the first paragraph hereof.

         "Limited Liability Company Agreement" means the Amended and Restated
    Limited Liability Company Agreement of the Issuer, dated as of March 1,
    2001, as amended, modified or supplemented from time to time and including
    any agreement which replaces such Limited Liability Company Agreement.

         "Limited Liability Company Assets" means all shares of capital stock,
    interests, rights, participations and/or rights in or other equivalents
    (however designated, whether voting or nonvoting), at any time owned in NEG,
    Inc. or any other company.

         "Limited Liability Company Interests" means the entire limited
    liability company membership interest at any time owned by the Pledgor in
    the Issuer.

         "Pledgee" has the meaning set forth in the first paragraph hereof.

         "Pledgor" has the meaning set forth in the first paragraph hereof.

         "Proceeds" has the meaning given such term in the UCC.

         "Process Agent" has the meaning set forth in Section 24 hereof.

         "Secured Obligations" has the meaning set forth in Section 1 hereof.

         "Securities Act" means the Securities Act of 1933, as amended and as in
    effect from time to time.

         "Tranche A Secured Obligations" has the meaning set forth in Section 1
    hereof.

         "Tranche B Secured Obligations" has the meaning set forth in Section 1
    hereof.

         "Transition Date" means the date upon which the Senior Obligations (as
    defined in the Intercreditor Agreement) shall have been indefeasibly paid in
    full in cash.

         "UCC" means the Uniform Commercial Code as in effect in the State of
    New York, the State of Delaware and the State of Maryland, as applicable,
    from time to time.

                                       3

<PAGE>

         3. PLEDGE OF LIMITED LIABILITY COMPANY INTERESTS, ETC.

         3.1 Pledge. (a) The Pledgor hereby confirms that pursuant to the
Existing LLC Pledge Agreement the Pledgor transferred, pledged and assigned to
the Pledgee, and granted to the Pledgee a first priority security interest in,
all of the right, title and interest of the Pledgor in and to the following,
whether now existing or hereafter from time to time acquired by the Pledgor
(collectively, the "Collateral"); and the Pledgor does hereby repeat and
confirm, on and as of the date hereof, such transfer, pledge, assignment and
grant of a first priority security interest:

             (i) all Limited Liability Company Interests and all of the
         Pledgor's right, title and interest in the Issuer, including, without
         limitation:

                 (A) all the capital thereof and the Pledgor's interest in all
             profits, losses, Limited Liability Company Assets and other
             distributions to which the Pledgor shall at any time be entitled in
             respect of such Limited Liability Company Interests;

                 (B) all other payments due or to become due to the Pledgor in
             respect of such Limited Liability Company Interests, whether under
             the Limited Liability Company Agreement or otherwise, whether as
             contractual obligations, damages, insurance proceeds or otherwise;

                 (C) all of the Pledgor's claims, rights, powers, privileges,
             authority, options, security interests, liens and remedies, if any,
             under the Limited Liability Company Agreement or otherwise, or at
             law or otherwise in respect of Limited Liability Company Interests;

                 (D) all of the Pledgor's rights under the Limited Liability
             Company Agreement or at law or otherwise to exercise and enforce
             every right, power, remedy, authority, option and privilege of the
             Pledgor relating to such Limited Liability Company Interests,
             including any power to terminate, cancel or modify the Limited
             Liability Company Agreement, if any, to execute any instruments and
             to take any and all other action on behalf of and in the name of
             the Pledgor in respect of such Limited Liability Company Interests
             and the Issuer, to make determinations, to exercise any election
             (including, but not limited to, election of remedies) or option or
             to give or receive any notice, consent, amendment, waiver or
             approval, together with full power and authority to demand,
             receive, enforce, collect or give receipt for any of the foregoing
             or to file any claims and to take any action in connection with any
             of the foregoing; and

                 (E) all other property hereafter delivered in substitution for
             any of the foregoing, all certificates and instruments representing
             or evidencing such other property and all cash, securities,
             interest, dividends, distributions rights and other property at any
             time and from time to time

                                       4

<PAGE>

              received, receivable or otherwise distributed in respect of or in
              exchange for any or all thereof;

              (ii)  to the extent that the Pledgor shall at any time have any
         right, title or interest therein, all shares of Capital Stock of NEG,
         Inc.; and

              (iii) all Proceeds of any and all of the foregoing.

The foregoing transfer, pledge, assignment and grant of a first priority
security interest is made to secure the prompt and complete payment and
performance when due of all Tranche A Secured Obligations.

         (b)  The Pledgor does hereby transfer, pledge and assign to the
Pledgee, and does hereby grant to the Pledgee a second priority security
interest in, all of the right, title and interest of the Pledgor in all
Collateral whether now existing or hereafter acquired by the Pledgor. The
foregoing transfer, pledge, assignment and grant of a second priority security
interest is made to secure the prompt and complete payment and performance when
due of the Tranche B Secured Obligations.

         (c)  The security interest granted in Section 3.1(a) shall be senior in
priority to the security interest granted in Section 3.1(b).

         3.2  Separate Security Interests. The security interests created
pursuant to each of Section 3.1(a) and 3.1(b) are separate and distinct security
interests in the Collateral.

         3.3  Procedures. (a) To the extent that the Pledgor at any time or from
time to time owns, acquires or obtains any right, title or interest in any
Collateral, such Collateral shall automatically (and without the taking of any
action by the Pledgor) be pledged pursuant to Section 3.1 of this Agreement and,
in addition thereto, the Pledgor shall (to the extent provided below) take the
following actions as set forth below (as promptly as practicable and, in any
event, within 10 days after it obtains such Collateral) for the benefit of the
Pledgee:

         (i)  if such Collateral is Limited Liability Company Interest evidenced
    by a certificate, the Pledgor shall deliver such certificate to the Pledgee,
    indorsed to the Pledgee or indorsed in blank or together with duly executed
    stock powers; and

         (ii) if such Collateral is Limited Liability Company Interest not
    represented by a certificate, the Pledgor shall take all actions required to
    perfect the security interest of the Pledgee therein under applicable Law,
    including, without limitation, causing the Issuer to duly authorize and
    execute, and deliver to the Pledgee, an agreement for the benefit of the
    Pledgee substantially in the form of Annex C hereto (appropriately completed
    to the reasonable satisfaction of the Pledgee and with such modifications,
    if any, as shall be, in the case of modifications requested by the Pledgee,
    reasonably satisfactory to the Pledgor or the Issuer and, in the case of
    modifications requested by the Pledgor, reasonably satisfactory to the
    Pledgee or the Issuer) pursuant to which the Issuer agrees to comply with
    any and all instructions originated by the Pledgee without further

                                       5

<PAGE>

    consent by the registered owner and not to comply with instructions
    regarding such Limited Liability Company Interest originated by any other
    Person other than a court of competent jurisdiction; and

         (b) In addition to the actions required to be taken pursuant to Section
3.3(a) hereof, the Pledgor shall from time to time, at the sole expense of the
Pledgor, cause appropriate financing statements (on Form UCC-1 or other
appropriate form) under the Uniform Commercial Code as in effect in the various
relevant States, in form covering all Collateral hereunder (with the form of
such financing statements to be satisfactory to the Pledgee), to be filed in the
relevant filing offices so that at all times the Pledgee has a security interest
in all Collateral which is perfected by the filing of such financing statements
(in each case to the maximum extent perfection by filing may be obtained under
the laws of any relevant State).

         3.4 Subsequently Acquired Collateral. If the Pledgor shall acquire (by
purchase, dividend or similar distribution or otherwise) any additional
Collateral at any time or from time to time after the date hereof, such
Collateral shall automatically (and without any further action being required to
be taken) be subject to the pledge and security interests created pursuant to
Section 3.1 hereof and, furthermore, the Pledgor will promptly thereafter take
(or cause to be taken) all action with respect to such Collateral in accordance
with the procedures set forth in Section 3.3 hereof, and will promptly
thereafter deliver to the Pledgee (i) a certificate executed by a principal
executive officer of the Pledgor describing such Collateral and certifying that
the same has been duly pledged in favor of the Pledgee (for the benefit of the
Secured Parties) hereunder and (ii) supplements to Annexes A and B hereto as are
reasonably necessary to cause such annexes to be complete and accurate at such
time.

         3.5 Transfer Taxes. Each pledge of Collateral under Section 3.1 hereof
shall be accompanied by any transfer tax stamps required in connection with the
pledge of such Collateral.

         3.6 Certain Representations and Warranties Regarding the Collateral.
The Pledgor represents and warrants that on the date hereof (i) the Limited
Liability Company Interests held by the Pledgor consist of the number and type
of interests described in Annex A hereto; (ii) each such Limited Liability
Company Interest constitutes that percentage of the issued and outstanding
equity interest of the Issuer as is set forth in Annex A hereto; (iii) the
Pledgor has complied with the respective procedure set forth in Sections 3.3(a)
and (b) hereof with respect to each item of Collateral hereunder; and (iv) the
Limited Liability Company Interests pledged hereunder constitute 100% of the
economic interest in the Issuer.

         4.  APPOINTMENT OF SUB-AGENTS; ENDORSEMENTS, ETC. If and to the extent
necessary to enable the Pledgee to perfect its security interest in any of the
Collateral or to exercise any of its remedies hereunder, the Pledgee shall have
the right to appoint one or more sub-agents for the purpose of retaining
physical possession of the Collateral, which may be held in the name of the
Pledgor, endorsed or assigned in blank or in favor of the Pledgee or any nominee
or nominees of the Pledgee or a sub-agent appointed by the Pledgee.

                                       6

<PAGE>

         5.    VOTING, ETC., WHILE NO EVENT OF DEFAULT. Unless and until there
shall have occurred and be continuing an Event of Default, the Pledgor shall be
entitled to exercise any and all voting and other consensual rights pertaining
to the Collateral owned by it, and to give consents, waivers or ratifications in
respect thereof; provided, that, in each case, no vote shall be cast or any
consent, waiver or ratification given or any action taken or omitted to be taken
which would violate or be inconsistent with any of the terms of this Agreement
or any other Financing Document, or which would have the effect of impairing the
value of the Collateral or any part thereof or the position or interests of the
Pledgee in the Collateral. All such rights of the Pledgor to vote and to give
consents, waivers and ratifications shall cease in case an Event of Default has
occurred and is continuing, and Section 7 hereof shall become applicable, and
the Pledgee shall without further notice or consent be admitted and become a
member of the Issuer.

         6.    DIVIDENDS AND OTHER DISTRIBUTIONS. All cash dividends, cash
distributions, cash Proceeds and other cash amounts payable in respect of the
Collateral (other than proceeds of any foreclosure in respect of the Collateral
pursuant to Section 7 hereof, which proceeds shall be distributed and applied as
provided in Section 9 hereof) consisting of the Limited Liability Company
Interests shall be paid to the Pledgee, to be applied, at the instruction of the
Majority Tranche A Lenders (or, after the Transition Date, the Majority Tranche
B Lenders), to the payment and repayment of the Loans pursuant to Section 3.2 of
the Credit Agreement and the relevant provisions of the Intercreditor Agreement.
The Pledgee shall also be entitled to receive directly, and to retain as part of
the Collateral:

         (i)   all other or additional limited liability company interests,
    Limited Liability Company Assets or other property (including, but not
    limited to, cash dividends other than as set forth above) paid or
    distributed by way of dividend or otherwise in respect of the Collateral;

         (ii)  all other or additional limited liability company interests or
    other property paid or distributed in respect of the Collateral by way of
    split, spin-off, split-up, reclassification, combination or similar
    rearrangement; and

         (iii) all other or additional limited liability company interests,
    Limited Liability Company Assets or other property (including, but not
    limited to, cash) which may be paid in respect of the Collateral by reason
    of any consolidation, merger, exchange, conveyance of assets, liquidation or
    similar reorganization.

         Nothing contained in this Section 6 shall limit or restrict in any way
the Pledgee's right to have pledged to it proceeds of the Collateral in any form
in accordance with Section 3 of this Agreement. All dividends, distributions or
other payments which are received by the Pledgor contrary to the provisions of
this Section 6 and Section 7 hereof shall be received in trust for the benefit
of the Pledgee, shall be segregated from other property or funds of the Pledgor
and shall be forthwith paid over to the Pledgee as Collateral in the same form
as so received (with any necessary endorsement).

                                       7

<PAGE>

         7.    REMEDIES IN CASE OF DEFAULT OR EVENT OF DEFAULT. Subject to the
Credit Agreement, if there shall have occurred and be continuing an Event of
Default, the Pledgee shall be entitled to exercise all of the rights, powers and
remedies (whether vested in it by this Agreement, any other Financing Document
or by law) for the protection and enforcement of its rights in respect of the
Collateral, and the Pledgee shall be entitled to exercise all the rights and
remedies of a secured party under the Uniform Commercial Code as in effect in
any relevant jurisdiction and also shall be entitled, without limitation, to
exercise the following rights:

         (i)   to receive all amounts payable in respect of the Collateral;

         (ii)  subject to the terms of the Limited Liability Company Agreement,
    to become a member of the Issuer without the consent of the Issuer or any
    member of the Issuer and to transfer all or any part of the Collateral into
    the Pledgee's name or the name of its nominee or nominees;

         (iii) to vote all or any part of the Collateral (whether or not
    transferred into the name of the Pledgee) and give all consents, waivers and
    ratifications in respect of the Collateral and otherwise act with respect
    thereto as though it were the outright owner thereof (the Pledgor hereby
    irrevocably constituting and appointing the Pledgee the proxy and
    attorney-in-fact of the Pledgor, with full power of substitution to do so)
    and to exercise any and all of the rights or powers of the Pledgor in its
    capacity as a member of the Issuer or otherwise under the Limited Liability
    Company Agreement;

         (iv)  at any time and from time to time to sell, assign and deliver, or
    grant options to purchase, all or any part of the Collateral, or any
    interest therein, at any public or private sale, without demand of
    performance, advertisement or notice of intention to sell or of the time or
    place of sale or adjournment thereof or to redeem or otherwise (all of which
    are hereby waived by the Pledgor to the extent permitted by applicable Law),
    for cash, on credit or for other property, for immediate or future delivery
    without any assumption of credit risk, and for such price or prices and on
    such terms as the Pledgee in its absolute discretion may determine, in each
    case, to the extent permitted by applicable Law. The Pledgee shall not be
    obligated to make any such sale of Collateral regardless of whether any
    notice of sale has theretofore been given. The Pledgor hereby waives and
    releases to the fullest extent permitted by law any right or equity of
    redemption with respect to the Collateral, whether before or after sale
    hereunder (other than the right to pay the Secured Obligations in full), and
    all rights, if any, of marshalling the Collateral and any other security for
    the Secured Obligations or otherwise. At any such sale, to the extent
    permitted by applicable Law, the Pledgee may bid for and purchase all or any
    part of the Collateral so sold free from any such right or equity of
    redemption. The Pledgee shall not be liable for failure to collect or
    realize upon any or all of the Collateral or for any delay in so doing nor
    shall any of them be under any obligation to take any action whatsoever with
    regard thereto; and

         (v)   to set-off any and all Collateral against any and all Secured
    Obligations and to apply such Collateral to the payment of any and all
    Secured Obligations.

                                       8

<PAGE>

         If, pursuant to applicable Law, prior notice of any of the foregoing
actions is required to be given to the Pledgee, the Pledgee hereby acknowledges
that the minimum time required by such applicable Law, or if no minimum is
specified, ten (10) days, shall be deemed a reasonable notice period.

         8.  REMEDIES, ETC., CUMULATIVE. Each and every right, power and remedy
of the Pledgee provided for in this Agreement or in any other Financing
Document, or now or hereafter existing at law or in equity or by statute shall
be cumulative and concurrent and shall be in addition to every other such right,
power or remedy. The exercise or beginning of the exercise by the Pledgee of any
one or more of the rights, powers or remedies provided for in this Agreement or
any other Financing Document or now or hereafter existing at law or in equity or
by statute or otherwise shall not preclude the simultaneous or later exercise by
the Pledgee of all such other rights, powers or remedies, and no failure or
delay on the part of the Pledgee to exercise any such right, power or remedy
shall operate as a waiver thereof. No notice to or demand on the Pledgor in any
case shall entitle it to any other or further notice or demand in similar or
other circumstances or constitute a waiver of any of the rights of the Pledgee
to any other or further action in any circumstances without notice or demand.

         9.  APPLICATION OF PROCEEDS (a) All monies collected by the Pledgee
upon any sale or other disposition of the Collateral pursuant to the terms of
this Agreement, together with all other monies received by the Pledgee
hereunder, shall be applied at the written instruction of the Majority Tranche A
Lenders (or, after the Transition Date, the Majority Tranche B Lenders) for
satisfaction of the Secured Obligations in the order provided in the Credit
Agreement and the Intercreditor Agreement.

         (b) It is understood and agreed that the Pledgor shall remain liable to
the extent of any deficiency between the amount of the proceeds of the
Collateral hereunder and the aggregate amount of the Secured Obligations.

         10. PURCHASERS OF COLLATERAL. Upon any sale of the Collateral by the
Pledgee hereunder (whether by virtue of the power of sale herein granted,
pursuant to judicial process or otherwise), the receipt given by the Pledgee or
the officer making the sale shall be a sufficient discharge to the purchaser or
purchasers of the Collateral so sold, and such purchaser or purchasers shall not
be obligated to see to the application of any part of the purchase money paid
over to the Pledgee or such officer or be answerable in any way for the
misapplication or nonapplication thereof.

         INDEMNITY. The Pledgor agrees (i) to indemnify and hold harmless the
Pledgee and its successors, assigns, employees, officers, directors, agents and
affiliates (individually an "Indemnitee," and collectively the "Indemnitees")
from and against any and all claims, demands, losses, judgments and liabilities
(including liabilities for penalties) of whatsoever kind or nature, and (ii) to
reimburse each Indemnitee for all reasonable costs and expenses, including
reasonable attorneys' fees, in each case growing out of or resulting from this
Agreement or the exercise by any Indemnitee of any right or remedy granted to it
hereunder or under any other Financing Document (but excluding any claims,
demands, losses, judgments and liabilities or expenses to the extent incurred by
reason of gross negligence or willful misconduct

                                       9

<PAGE>

of such Indemnitee (as determined by a court of competent jurisdiction in a
final and non-appealable decision)). In no event shall the Pledgee be liable, in
the absence of gross negligence or willful misconduct on its part or on the part
of any of its nominees or sub-agents, for any matter or thing in connection with
this Agreement other than to account for monies actually received by it in
accordance with the terms hereof. If and to the extent that the obligations of
the Pledgor under this Section 11 are unenforceable for any reason, the Pledgor
hereby agrees to make the maximum contribution to the payment and satisfaction
of such obligations which is permissible under applicable Law. The provisions of
this Section 11 shall survive the termination of this Agreement and the
resignation or removal of any Indemnitee.

         12. PLEDGEE NOT A LIMITED LIABILITY COMPANY MEMBER. (a) Nothing herein
shall be construed to make the Pledgee liable as a member of the Issuer or the
Pledgor and the Pledgee by virtue of this Agreement or otherwise (except as
referred to in the following sentence) shall not have any of the duties,
obligations or liabilities of a member of the Issuer or the Pledgor. The parties
hereto expressly agree that, unless the Pledgee shall become the absolute owner
of Collateral pursuant hereto, this Agreement shall not be construed as creating
a partnership or joint venture among the Pledgee, the Pledgor and/or any other
Person.

         (b) Except as provided in the last sentence of paragraph (a) of this
Section 12, the Pledgee, by accepting this Agreement, did not intend to become a
member of the Issuer or the Pledgor or otherwise be deemed to be a co-venturer
with respect to the Pledgor, the Issuer and/or any other Person either before or
after an Event of Default shall have occurred. The Pledgee shall have only those
powers set forth herein and the Pledgee shall assume none of the duties,
obligations or liabilities of a member of the Issuer or the Pledgor except as
provided in the last sentence of paragraph (a) of this Section 12.

         (c) The Pledgee shall not be obligated to perform or discharge any
obligation of the Pledgor as a result of the pledge hereby effected.

         (d) The acceptance by the Pledgee of this Agreement, with all the
rights, powers, privileges and authority so created, shall not at any time or in
any event obligate the Pledgee to appear in or defend any action or proceeding
relating to the Collateral to which it is not a party, or to take any action
hereunder or thereunder, or to expend any money or incur any expenses or perform
or discharge any obligation, duty or liability under the Collateral.

         13. FURTHER ASSURANCES; POWER-OF-ATTORNEY. (e) At any time and from
time to time, upon the written request of the Pledgee, and at the sole expense
of the Pledgor, the Pledgor will promptly and duly execute and deliver any and
all such further instruments and documents and take such further action as the
Pledgee reasonably may deem appropriate in order to perfect and preserve the
Pledgee's security interest in the Collateral and in order for the Pledgee to
obtain the full benefits of this Agreement and of the rights and powers herein
granted, including, without limitation, the filing of any financing or
continuation statements under the Uniform Commercial Code in effect in any
jurisdiction and the filing of any other equivalent or similar statement or
document under any other applicable Law with any other applicable Governmental
Authority with respect to the security interests granted hereby. The Pledgor
also hereby authorizes the Pledgee to file any such financing or continuation
statement

                                       10

<PAGE>

without the signature of the Pledgor to the extent permitted by applicable Law.
If any amount payable under or in connection with any of the Collateral shall be
or become evidenced by any promissory note or other instrument, such note or
instrument shall be immediately delivered to the Pledgee and pledged to the
Pledgee hereunder, duly endorsed, to the extent necessary, to the Pledgee.

         The Pledgor shall not change its name, identity, principal place of
business or place of organization in any manner unless the Pledgor shall have
given the Pledgee at least sixty (60) days' prior written notice thereof and
shall have taken, at the Pledgor's sole expense, all action necessary or
reasonably requested by the Pledgee in order to continue the perfection and
priority of the security interests in the Collateral intended to be created by
this Agreement.

         (a)   The Pledgor hereby appoints the Pledgee, such Pledgor's
attorney-in-fact, with full authority in the place and stead of the Pledgor and
in the name of the Pledgor or otherwise, to act from time to time, solely after
the occurrence and during the continuance of an Event of Default and subject to
the Credit Agreement, in the Pledgee's reasonable discretion to take any action
and to execute any instrument which the Pledgee may deem reasonably necessary or
advisable to accomplish the purposes of this Agreement.

         14.   [OMITTED]

         15.   TRANSFER BY THE PLEDGOR. The Pledgor will not sell or otherwise
dispose of, grant any option with respect to, or mortgage, pledge or otherwise
encumber any of the Collateral or any interest therein (except as may be
permitted in accordance with the terms of the Financing Documents).

         16.   REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGOR. (a) The
Pledgor represents, warrants and covenants that:

         (i)   it is the legal, beneficial and record owner of, and has good and
    marketable title to, all Collateral consisting of Limited Liability Company
    Interests and it has all rights in the Collateral necessary for the security
    interest purported to be created hereunder to attach (subject, in each case,
    to no pledge, lien, security interest, charge, option or other encumbrance
    whatsoever, except the liens and security interests created by this
    Agreement);

         (ii)  it has full power, authority and legal right to pledge all the
    Collateral pledged by it pursuant to this Agreement;

         (iii) this Agreement has been duly authorized, executed and delivered
    by the Pledgor and constitutes a legal, valid and binding obligation of the
    Pledgor enforceable against the Pledgor in accordance with its terms, except
    to the extent that the enforceability hereof may be limited by applicable
    bankruptcy, insolvency, reorganization, moratorium or other similar laws
    generally affecting creditors' rights and by equitable principles
    (regardless of whether enforcement is sought in equity or at law);

                                       11

<PAGE>

         (iv)  except to the extent already obtained or made, no consent of any
    other party (including, without limitation, any stockholder, partner, member
    or creditor of the Pledgor or the Issuer) and no consent, license, permit,
    approval or authorization of, exemption by, notice or report to, or
    registration, filing or declaration with, any Governmental Authority is
    required to be obtained by the Pledgor in connection with (a) the execution,
    delivery or performance of this Agreement, (b) the validity or
    enforceability of this Agreement, (c) the perfection or enforceability of
    the Pledgee's security interest in the Collateral or (d) except for
    compliance with or as may be required by applicable securities laws, the
    exercise by the Pledgee of any of its rights or remedies provided herein;

         (v)   the execution, delivery and performance of this Agreement will
         not violate any provision of any applicable Law or regulation or of any
    order, judgment, writ, award or decree of any court, arbitrator or
    Governmental Authority, domestic or foreign, applicable to the Pledgor, or
    of the certificate of incorporation, operating agreement, limited liability
    company agreement, partnership agreement or by-laws of the Pledgor or of any
    securities or other interests issued by the Pledgor or the Issuer, or of any
    mortgage, deed of trust, indenture, lease, loan agreement, credit agreement
    or other material contract, agreement or instrument or undertaking to which
    the Pledgor or the Issuer is a party or by which any of its assets may be
    bound and will not result in the creation or imposition of (or the
    obligation to create or impose) any lien or encumbrance on any of the assets
    of the Pledgor or the Issuer except as contemplated by this Agreement;

         (vi)  all of the Collateral consisting of Limited Liability Company
    Interests has been duly and validly issued and acquired, is fully paid and
    non-assessable and is subject to no options to purchase or similar rights;
    and

         (vii) the pledge and collateral assignment to the Pledgee of the
    Collateral consisting of Limited Liability Company Interests, together with
    continued possession by the Pledgee of any certificates, instruments,
    documents or other writings evidencing the Limited Liability Company
    Interests and/or the making of relevant filings or recordings and/or any
    other action required to be taken in accordance with Section 3.3 (all of
    which have been made or taken, as the case may be), creates in favor of the
    Pledgee a valid and perfected first priority security interest in such
    Collateral, and the proceeds thereof, in each case, for the benefit of the
    holders of the Tranche A Secured Obligations and a valid and perfected
    second priority security interest in such Collateral and the proceeds
    thereof, in each case for the benefit of the holders of the Tranche B
    Secured Obligations, subject to no prior Lien or encumbrance (other than any
    Permitted Lien that is non-consensual lien arising by operation of law, and
    the Option Agreement) or to any agreement purporting to grant to any third
    party a Lien or encumbrance (other than any Permitted Lien that is
    non-consensual lien arising by operation of law) on the property or assets
    of the Pledgor which would include the Limited Liability Company Interests
    and the Pledgee is entitled to all the rights, priorities and benefits
    afforded by the Uniform Commercial Code or other relevant law as enacted in
    any relevant jurisdiction to perfected security interests in respect of such
    Collateral.

                                       12

<PAGE>

         (b) The Pledgor covenants and agrees that it will defend the Pledgee's
right, title and security interest in and to the Collateral and the proceeds
thereof against the claims and demands of all persons whomsoever; and the
Pledgor covenants and agrees that it will have like title to and right to pledge
any other property at any time hereafter pledged to the Pledgee as Collateral
hereunder and will likewise defend the right thereto and security interest
therein of the Pledgee.

         17. CHIEF EXECUTIVE OFFICE; RECORDS. The chief executive office of the
Pledgor is located at the address specified in Annex B hereto. The Pledgor will
not move its chief executive office except to such new location as the Pledgor
may establish in accordance with the last sentence of this Section 17. The
originals of all documents in the possession of the Pledgor evidencing all
Collateral, including but not limited to all Limited Liability Company
Interests, and the only original books of account and records of the Pledgor
relating thereto are, and will continue to be, kept at such chief executive
office as specified in Annex B hereto, or at such new locations as the Pledgor
may establish in accordance with the last sentence of this Section 17; provided
that all certificates representing the Limited Liability Company Interests shall
be delivered to and to be held by the Pledgee. All Limited Liability Company
Interests (other than any certificates evidencing such Limited Liability Company
Interests) are, and will continue to be, maintained at, and controlled and
directed (including, without limitation, for general accounting purposes) from,
such chief executive office as specified in Annex B hereto, or such new
locations as the Pledgor may establish in accordance with the last sentence of
this Section 17. The Pledgor shall not establish a new location for its chief
executive office or change its jurisdiction of organization until (i) it shall
have given to the Pledgee not less than sixty (60) days' prior written notice of
its intention so to do, clearly describing such new location and providing such
other information in connection therewith as the Pledgee may reasonably request
and (ii) with respect to such new location, it shall have taken all action
necessary or reasonably requested by the Pledgee to maintain the security
interest of the Collateral Agent in the Collateral intended to be granted hereby
at all times fully perfected and in full force and effect. Promptly after
establishing a new location for its chief executive office in accordance with
the immediately preceding sentence, the Pledgor shall deliver to the Pledgee a
supplement to Annex B hereto so as to cause such Annex B hereto to be complete
and accurate.

         18. PLEDGOR'S OBLIGATIONS ABSOLUTE, ETC. The obligations of the Pledgor
under this Agreement shall be absolute and unconditional and shall remain in
full force and effect without regard to, and shall not be released, suspended,
discharged, terminated or otherwise affected by, any circumstance or occurrence
whatsoever (except as provided under Section 20), including, without limitation:
(i) any renewal, extension, amendment or modification of or addition or
supplement to or deletion from any Financing Document or any other instrument or
agreement referred to therein, or any assignment or transfer of any thereof;
(ii) any waiver, consent, extension, indulgence or other action or inaction
under or in respect of any such agreement or instrument including, without
limitation, this Agreement; (iii) any furnishing of any additional security to
the Pledgee or its assignee or any acceptance thereof or any release of any
security by the Pledgee or its assignee (except as provided under Section 20);
(iv) any limitation on any party's liability or obligations under any such
instrument or agreement or any invalidity or unenforceability, in whole or in
part, of any such instrument or agreement or any term thereof; or (v) any
bankruptcy, insolvency, reorganization, composition, adjustment, dissolution,
liquidation

                                       13

<PAGE>

or other like proceeding relating to the Pledgor or the Issuer, or any action
taken with respect to this Agreement by any trustee or receiver, or by any
court, in any such proceeding, whether or not the Pledgor shall have notice or
knowledge of any of the foregoing.

         19. REGISTRATION, ETC. (a) If there shall have occurred and be
continuing an Event of Default, then upon receipt by the Pledgor from the
Pledgee of a written request or requests that the Pledgor cause any
registration, qualification or compliance under any Federal or state securities
law or laws to be effected with respect to all or any part of the Collateral
consisting of Limited Liability Company Interests, the Pledgor as soon as
practicable and at its expense will cause such registration to be effected (and
be kept effective) and will cause such qualification and compliance to be
declared effected (and be kept effective) as may be so requested if such
registration, qualification or compliance is necessary to permit or facilitate
the sale and distribution of such Collateral, including, without limitation,
registration under the Securities Act, as then in effect (or any similar statute
then in effect), appropriate qualifications under applicable blue sky or other
state securities laws and appropriate compliance with any other government
requirements, provided, that the Pledgee shall furnish to the Pledgor such
information regarding the Pledgee as the Pledgor may reasonably request in
writing and as shall be required in connection with any such registration,
qualification or compliance. The Pledgor will cause the Pledgee to be kept
advised in writing as to the progress of each such registration, qualification
or compliance and as to the completion thereof, will furnish to the Pledgee such
number of prospectuses, offering circulars or other documents incident thereto
as the Pledgee from time to time may reasonably request, and will indemnify the
Pledgee and all others participating in the distribution of such Collateral
against all claims, losses, damages and liabilities caused by any untrue
statement (or alleged untrue statement) of a material fact contained therein (or
in any related registration statement, notification or the like) or by any
omission (or alleged omission) to state therein (or in any related registration
statement, notification or the like) a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as the same may have been caused by an untrue statement or omission
based upon information furnished in writing to the Pledgor by the Pledgee
expressly for use therein.

         (b) If at any time when the Pledgee shall determine to exercise its
right to sell all or any part of the Collateral consisting of Limited Liability
Company Interests pursuant to Section 7 hereof, and the Collateral or the part
thereof to be sold shall not, for any reason whatsoever, be effectively
registered under the Securities Act, as then in effect, the Pledgee may sell
such Collateral or part thereof, as the case may be, by private sale in such
manner and under such circumstances as the Pledgee may deem necessary or
reasonably advisable in order that such sale may legally be effected without
such registration. Without limiting the generality of the foregoing, in any
event the Pledgee (i) may proceed to make such private sale notwithstanding that
a registration statement for the purpose of registering such Collateral or part
thereof shall have been filed under such Securities Act, (ii) may approach and
negotiate with a single possible purchaser to effect such sale, and (iii) may
restrict such sale to a purchaser who will represent and agree that such
purchaser is purchasing for its own account, for investment, and not with a view
to the distribution or sale of such Collateral or part thereof. In the event of
any such sale, the Pledgee shall incur no responsibility or liability, except to
the extent incurred by reason of its gross negligence, bad faith or willful
misconduct, for selling all or any part of the Collateral at a

                                       14

<PAGE>

price which the Pledgee, in its sole and absolute discretion, deems reasonable
under the circumstances, notwithstanding the possibility that a substantially
higher price might have been realized if the sale were deferred until after
registration as aforesaid.

         20. TERMINATION; RELEASE. (a) After payment in full of the Secured
Obligations and termination of the Credit Agreement, this Agreement and the
security interest created hereby shall terminate (provided that all indemnities
set forth herein including, without limitation, in Section 11 hereof shall
survive any such termination), and the Pledgee, at the request and expense of
the Pledgor, will execute and deliver to the Pledgor a proper instrument or
instruments acknowledging the satisfaction and termination of this Agreement,
and will duly assign, transfer and deliver to the Pledgor (without recourse and
without any representation or warranty) such of the Collateral as has not
theretofore been sold or otherwise applied or released pursuant to this
Agreement, together with any monies at the time held by the Pledgee or any of
its sub-agents hereunder.

         (b) At any time that the Pledgor desires that the Pledgee assign,
transfer and deliver Collateral (and releases therefor) as provided in Section
20(a) hereof, it shall deliver to the Pledgee a certificate signed by a
principal executive officer of the Pledgor stating that the release of the
respective Collateral is permitted pursuant to such Section 20(a).

         21. NOTICES, ETC. All notices, requests, demands or other
communications hereunder shall be made in the manner and with the effect
provided in Section 9.3 of the Credit Agreement at the addresses provided below
or at such other address as shall have been furnished in writing by the relevant
Person to the party required to give notice hereunder:

         (a) If to the Pledgor, at:

             PG&E Corporation
             One Market, Spear Tower, Suite 2400
             San Francisco, CA 94105
             Attention:  Chief Counsel
             Tel: (415) 817-8201
             Fax: (415) 817-8225

         (b) If to the Pledgee, at:

             Deutsche Bank Trust Company Americas
             Corporate Trust and Agency Services
             100 Plaza One, MS: 0603
             Jersey City, NJ 07311
             Attention:  Carmina Bitar Day
             Tel: (201) 593-6832
             Fax: (201) 593-6420

                                       15

<PAGE>

             with a copy to the Administrative Agent at:

             Lehman Commercial Paper Inc.
             745 Seventh Avenue
             New York, New York 10019
             Attention: Frank Turner/Rich Divito
             Tel: (212) 526-2696/(212) 526-2425
             Fax: (646) 758-1986/(646) 758-4618

         22. WAIVER; AMENDMENT. None of the terms and conditions of this
Agreement may be changed, waived, modified or varied in any manner whatsoever
unless in writing duly signed by the Pledgor and the Pledgee.

         23. MISCELLANEOUS. This Agreement shall be binding upon the parties
hereto and their respective successors and assigns and shall inure to the
benefit of and be enforceable by each of the parties hereto and its successors
and assigns, provided that the Pledgor may not assign any of its rights or
obligations under this Agreement without the prior consent of the Pledgee. The
headings in this Agreement are for purposes of reference only and shall not
limit or define the meaning hereof. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which shall
constitute one instrument. In the event that any provision of this Agreement
shall prove to be invalid or unenforceable, such provision shall be deemed to be
severable from the other provisions of this Agreement which shall remain binding
on all parties hereto.

         24. GOVERNING LAW; SUBMISSION TO JURISDICTION. (a) THIS AGREEMENT,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE AND MATTERS
RELATING TO THE CREATION, VALIDITY, ENFORCEMENT OR PRIORITY OF THE SECURITY
INTERESTS CREATED BY THIS AGREEMENT, SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS RULES THEREOF (OTHER THAN
SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW), EXCEPT AS MAY BE
REQUIRED BY OTHER MANDATORY PROVISIONS OF LAW.

         (b) The Pledgor 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 or the transactions
contemplated hereby. The Pledgor 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 Pledgor hereby irrevocably appoints Corporation
Service Company the "Process Agent"), with an office on the date hereof at 1177
Avenue of the Americas, 17th Floor, New York, NY 10036, 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 Pledgor and shall be legal

                                       16

<PAGE>

and binding upon the Pledgor for all purposes notwithstanding any failure to
mail copies of such (b) legal process to the Pledgor, or any failure on the part
of the Pledgor to receive the same. Nothing herein shall affect the right of the
Pledgee to serve process in any other manner permitted by applicable Law or any
right of the Pledgee to bring legal action or proceedings in any other competent
jurisdiction. The Pledgor 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 Pledgor based upon the assertion that the rate of interest charged in
respect of any of the Secured Obligations under any Financing Document is
usurious. To the extent permitted by applicable Law, the Pledgor 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 Pledgor at the address
referenced in Section 21.

         (c) The Pledgor 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 Pledgor to receive service of
process in the State of New York on its behalf, the Pledgor shall promptly
appoint a successor satisfactory to the Pledgee so to serve, advise the Pledgee
thereof, and deliver to the Pledgee 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.

         (d) To the extent the Pledgor may, in any action or proceeding arising
out of or relating to this Agreement, be entitled under any applicable Law to
require or claim that the Pledgee post security for costs or take similar
action, the Pledgor hereby irrevocably waives and agrees not to claim the
benefit of such entitlement.

         25. 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, 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 SECURED PARTIES TO
ENTER INTO THE CREDIT AGREEMENT AND THE OTHER FINANCING DOCUMENTS.

         26. WAIVER. The Pledgor waives any claim it may now or hereafter have
against the Pledgee or any Lender for any consequential, exemplary or positive
damages or in connection with relating to this Agreement or the other Financing
Documents.

         27. ACKNOWLEDGMENT AND AGREEMENT OF ISSUER. The Issuer agrees and
acknowledges the pledge by the Pledgor of the Limited Liability Company
Interests hereunder. The Issuer represents and warrants that on the date hereof
(i) the Limited Liability Company Interests consist of the number and type of
interests described in Annex A hereto; (ii) each such Limited Liability Company
Interest constitutes that percentage of the issued and

                                       17

<PAGE>

outstanding equity interest of the Issuer as is set forth in Annex A hereto;
(iii) all of the Limited Liability Company Interests have been duly authorized
and, at the Closing Date, are and will be validly issued, fully paid and
nonassessable, free and clear of all Liens and adverse claims, other than the
Liens in favor of the Pledgee created hereby; (iv) the pledge by the Pledgor of,
and the granting of a security interest in, the Limited Liability Company
Interests to the Pledgee, does not violate the charter, by-laws, Limited
Liability Company Agreement or any other agreement governing the Issuer or the
Limited Liability Company Interests, (v) all Limited Liability Company Interests
are represented by Certificate No. 1 registered in the name of the Pledgor and
(vi) the Issuer has duly noted the pledge of the Limited Liability Company
Interests to the Pledgee on its books and records. The Issuer further covenants
and agrees that, unless otherwise notified by the Pledgee, (a) the Issuer shall
deliver all certificates representing additional Limited Liability Company
Interests to the Pledgee, (b) no additional class of limited liability company
interest of the Issuer shall be created after the date hereof, (c) all
distributions in respect of the Collateral consisting of the Limited Liability
Company Interests shall be held by the Pledgee and applied pursuant to Section 6
and (d) subject to the terms of the Limited Liability Company Agreement, the
Pledgee or its assignee shall be entitled to become a member of the Issuer
without the consent of the Issuer or any member of the Issuer and to transfer
all or any part of the Collateral into the Pledgee's name or the name of its
nominee or assignee.

         28. THIRD PARTY BENEFICIARIES. The parties hereto agree that the
provisions hereof are for the benefit of the Collateral Agent and the Lenders
and that the Collateral Agent and the Lenders shall be third party beneficiaries
of this Agreement.

                                       18

<PAGE>

         IN WITNESS WHEREOF, the Pledgor and the Pledgee have caused this
Agreement to be executed by their duly elected officers duly authorized as of
the date first above written.

                                           PLEDGOR

                                           PG&E CORPORATION,


                                           By________________________________
                                             Name:
                                             Title:

                                           ADMINISTRATIVE AGENT

                                           LEHMAN COMMERCIAL PAPER INC.

                                           By________________________________
                                             Name:
                                             Title:

                                           PLEDGEE

                                           DEUTSCHE BANK TRUST COMPANY
                                           AMERICAS, as Collateral Agent for the
                                           benefit of the Lenders

                                           By________________________________
                                             Name:
                                             Title:

                                           ISSUER

                                           PG&E NATIONAL ENERGY GROUP, LLC



                                           By_______________________________
                                             Name:
                                             Title:

                                       19

<PAGE>

                                                                         ANNEX A
                                                                              to
                                                            LLC PLEDGE AGREEMENT

                   LIST OF LIMITED LIABILITY COMPANY INTERESTS

           Name of                      Type of
   Limited Liability Company            Interest               Percentage Owned
   -------------------------  ---------------------------      ----------------
        PG&E NATIONAL         Limited liability company              100%
      ENERGY GROUP, LLC       membership interests, other
                              than the Class B Units

<PAGE>

                                                                         ANNEX B
                                                                              to
                                                            LLC PLEDGE AGREEMENT

                             CHIEF EXECUTIVE OFFICE

                                PG&E Corporation
                       One Market, Spear Tower, Suite 2400
                             San Francisco, CA 94105

<PAGE>

                                                                         ANNEX C
                                                                              to
                                                            LLC PLEDGE AGREEMENT




         Form of Agreement Regarding Limited Liability Company Interests



                  AGREEMENT (as amended, modified or supplemented from time to
time, this "Agreement"), dated as of June 25, 2002, among PG&E CORPORATION (the
"Pledgor"), DEUTSCHE BANK TRUST COMPANY AMERICAS (the "Pledgee"), as Collateral
Agent for the benefit of the Lenders, and PG&E National Energy Group, LLC, as
the issuer of the Limited Liability Company Interests (as defined below) (the
"Issuer").

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

                  WHEREAS, the Pledgor, the Lenders and the Pledgee have entered
into the Amended and Restated LLC Pledge Agreement, dated as of June 25, 2002
(as amended, restated, modified or supplemented from time to time, the "LLC
Pledge Agreement"), under which, among other things, in order to secure the
payment of the Secured Obligations (as defined in the LLC Pledge Agreement), the
Pledgor will pledge to the Pledgee, and grant a security interest in favor of
the Pledgee in, all of the right, title and interest of the Pledgor in and to
any and all Limited Liability Company Interests (as defined in the LLC Pledge
Agreement); and

                  WHEREAS, the Pledgor desires the Issuer to enter into this
Agreement in order to perfect the security interest of the Pledgee under the LLC
Pledge Agreement in the Limited Liability Company Interests, to vest in the
Pledgee control of the Limited Liability Company Interests and to provide for
the rights of the parties under this Agreement;

                  NOW, THEREFORE, in consideration of the premises and the
mutual promises and agreements contained herein, and for other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:

                  1. The Pledgor hereby irrevocably authorizes and directs the
Issuer, and the Issuer hereby agrees to comply with any and all instructions and
orders originated by the Pledgee (and its successors and assigns) regarding any
and all of the Limited Liability Company Interests without the further consent
by the registered owner (including the Pledgor), and not to comply with any
instructions or orders regarding any or all of the Limited Liability Company
Interests originated by any person or entity other than the Pledgee (and its
successors and assigns) or a court of competent jurisdiction.

                  2. The Issuer hereby certifies that (i) no notice of any
security interest, lien or other encumbrance or claim affecting the Limited
Liability Company Interests (other than the security interest of the Pledgee)
has been received by it, and (ii) the security interest of the

<PAGE>

Pledgee in the Limited Liability Company Interests has been registered in the
books and records of the Issuer.

                  3. The Issuer hereby represents and warrants that (i) the
pledge by the Pledgor of, and the granting by the Pledgor of a security interest
in, the Limited Liability Company Interests to the Pledgee, does not violate the
charter, by-laws, Limited Liability Company Agreement (as defined in the LLC
Pledge Agreement) or any other agreement governing the Issuer or the Limited
Liability Company Interests, and (ii) the Limited Liability Company Interests
are fully paid and nonassessable, and (iii) it has not entered into and will not
enter into any control agreement other than this Agreement with respect to the
Limited Liability Company Interests.

                  4. All notices, statements of accounts, reports, prospectuses,
financial statements and other communications to be sent to the Pledgor by the
Issuer in respect of the Issuer will also be sent to the Pledgee at the
following address:

                     Deutsche Bank Trust Company Americas
                     Corporate Trust and Agency Services
                     100 Plaza One, MS: 0603
                     Jersey City, NJ 07311
                     Attention:  Carmina Bitar Day
                     Tel: (201) 593-6832
                     Fax: (201) 593-6420

                     with a copy to the Administrative Agent at:

                     Lehman Commercial Paper Inc.
                     745 Seventh Avenue
                     New York, New York 10019
                     Attention: Frank Turner/Rich Divito
                     Tel: (212) 526-2696/(212) 526-2425
                     Fax: (646) 758-1986/(646) 758-4618

                  5. Until the Pledgee shall have delivered written notice to
the Issuer that all of the Secured Obligations have been paid in full, the
Issuer will send any and all redemptions, distributions, interest or other
payments in respect of the Limited Liability Company Interests from the Issuer
for the account of the Pledgee only by wire transfers to the following address:

                           ________________________________
                           ________________________________
                           ________________________________
                           ABA No.: _______________________
                           Account in the Name of: ________
                           Account No.:  __________________

                                       2


<PAGE>

                  6.   Except as expressly provided otherwise in Sections 4 and
5, all notices provided for hereunder shall be in writing and in the English
language (including, unless the context expressly otherwise provides, by
facsimile transmission, provided that any matter transmitted by facsimile (i)
shall immediately be confirmed by a telephone call to the recipient at the
number specified below, or to such other number as shall be designated by such
party in a written notice to the other parties hereto 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 below or to such other
address or facsimile number as shall be designated by such party in a written
notice to the other parties hereto. All such notices (i) sent by express courier
will be effective upon receipt by the addressee and (ii) transmitted by
facsimile will be effective when sent and facsimile confirmation received,
except that all notices to the Pledgee shall not be effective until actually
received. The Pledgor and the Issuer acknowledge and agree that any agreement of
the Pledgee to receive notices by telephone and facsimile is solely for the
convenience and at the request of the Pledgor or the Issuer, as the case may be.
The Pledgee shall be entitled to rely on the authority of any Person purporting
to be a Person authorized by the Pledgor or the Issuer, as the case may be, to
give such notice and the Pledgee shall not have any liability to the Pledgor or
the Issuer or any other Person on account of any action taken or not taken by
the Pledgee in reliance upon such telephonic or facsimile notice. All notices
shall be addressed as follows:

                  (a)  if to the Pledgor, at:

                       PG&E Corporation
                       One Market, Spear Tower, Suite 2400
                       San Francisco, CA 94105
                       Attention:  Chief Counsel
                       Tel: (415) 817-8201
                       Fax: (415) 817-8225

                  (b)  if to the Pledgee, at:

                       Deutsche Bank Trust Company Americas
                       Corporate Trust and Agency Services
                       100 Plaza One, MS: 0603
                       Jersey City, NJ 07311
                       Attention:  Carmina Bitar Day
                       Tel: (201) 593-6832
                       Fax: (201) 593-6420

                       with a copy to the Administrative Agent at:

                       Lehman Commercial Paper Inc.
                       745 Seventh Avenue
                       New York, New York 10019
                       Attention: Frank Turner/Rich Divito
                       Tel: (212) 526-2696/(212) 526-2425
                       Fax: (646) 758-1986/(646) 758-4618

                                        3


<PAGE>

                  (c)  if to the Issuer, at:

                       PG&E National Energy Group, LLC
                       7500 Old Georgetown Road
                       Bethesda, MD 20814-6161
                       Attention:  General Counsel
                       Tel.: (301) 280-6815
                       Fax.: (301) 280-6319

                  7.   The Issuer hereby acknowledges to the provisions of the
LLC Pledge Agreement and the rights of the Pledgee thereunder, including without
limitation the rights of the Pledgee to receive and retain as part of the
Collateral pursuant to Section 6 of the LLC Pledge Agreement any Limited
Liability Company Assets that may be distributed on account of the Limited
Liability Interest to Pledgor.

                  8.   This Agreement shall be binding upon the successors and
assigns of the Pledgor and the Issuer and shall inure to the benefit of and be
enforceable by the Pledgee and its successors and assigns. This Agreement may be
executed in any number of counterparts, each of which shall be an original, but
all of which shall constitute one instrument. In the event that any provision of
this Agreement shall prove to be invalid or unenforceable, such provision shall
be deemed to be severable from the other provisions of this Agreement which
shall remain binding on all parties hereto. None of the terms and conditions of
this Agreement may be changed, waived, modified or varied in the manner
whatsoever except in writing signed by the Pledgee, the Issuer and the Pledgor.

                  9.   This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to its
principles of conflict of laws (other than Section 5-1401 of the New York
General Obligations Law), except as may be required by other mandatory
provisions of law.

                  IN WITNESS WHEREOF, the Pledgor, the Pledgee and the Issuer
have caused this Agreement to be executed by their duly elected officers duly
authorized as of the date first above written.

                                                PLEDGOR

                                                PG&E CORPORATION

                                                By_____________________________
                                                  Name:
                                                  Title:

                                        4




<PAGE>

                                          PLEDGEE

                                          DEUTSCHE BANK TRUST COMPANY
                                          AMERICAS, as Collateral Agent for the
                                          benefit of the Lenders

                                          By_________________________________
                                            Name:
                                            Title:

                                          ISSUER

                                          PG&E NATIONAL ENERGY GROUP, LLC,

                                          By_________________________________
                                            Name:
                                            Title:

                                       5




</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.6
<SEQUENCE>8
<FILENAME>dex996.txt
<DESCRIPTION>AMENDED AND RESTATED STOCK PLEDGE AGREEMENT
<TEXT>
<PAGE>

                                                                  EXECUTION COPY











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

                   AMENDED AND RESTATED STOCK PLEDGE AGREEMENT

                                  by and among

                        PG&E NATIONAL ENERGY GROUP, LLC,

                                   as Pledgor

                        PG&E NATIONAL ENERGY GROUP, INC.

                                    as Issuer

                                       And

                          LEHMAN COMMERCIAL PAPER INC.,

                             as Administrative Agent

                                       and

                      DEUTSCHE BANK TRUST COMPANY AMERICAS,

                               as Collateral Agent

                   for the benefit of the Lenders, as Pledgee

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

                            Dated as of June 25, 2002

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

<PAGE>

                                PLEDGE AGREEMENT

     AMENDED AND RESTATED STOCK PLEDGE AGREEMENT (as amended, modified or
supplemented from time to time, this "Agreement"), dated as of June 25, 2002,
among PG&E NATIONAL ENERGY GROUP, LLC, a limited liability company organized and
existing under the laws of the State of Delaware (the "Pledgor"), PG&E NATIONAL
ENERGY GROUP, INC., a Delaware corporation, as Issuer (the "Issuer"), LEHMAN
COMMERCIAL PAPER INC., a corporation organized and existing under the laws of
the State of New York, as Administrative Agent for the lenders (the "Lenders")
from time to time parties to the Credit Agreement described below and DEUTSCHE
BANK TRUST COMPANY AMERICAS (the "Pledgee"), as Collateral Agent for the benefit
of the Lenders.

                              W I T N E S S E T H :

     WHEREAS, PG&E Corporation, a corporation organized and existing under the
laws of the State of California ("PG&E"), is a party to the Credit Agreement,
dated as of March 1, 2001 (as amended, the "Existing Credit Agreement"), with
the lenders parties thereto, Lehman Commercial Paper Inc., as Administrative
Agent, and others, pursuant to which such lenders made the Tranche A Loan (as
defined in the Existing Credit Agreement, the "Existing Tranche A Loan") and the
Tranche B Loan (as defined in the Existing Credit Agreement, the "Existing
Tranche B Loan");

     WHEREAS, pursuant to the Amended and Restated Credit Agreement, dated as of
the date hereof (as amended, supplemented or otherwise modified from time to
time, the "Credit Agreement"), among PG&E, the Lenders parties thereto, the
Administrative Agent and others, the Existing Credit Agreement is being amended
and restated in its entirety to modify certain of the terms applicable to the
Existing Tranche A Loan, to reflect the repayment of the Existing Tranche B Loan
and to provide for the making of an additional Tranche B Loan to PG&E;

     WHEREAS, the Pledgor owns one hundred percent (100%) of the issued and
outstanding common stock of the Issuer;

     WHEREAS, the Pledgor, the Issuer, the Administrative Agent, the Pledgee,
acting as Collateral Agent for the Lenders, and others, are parties to the Stock
Pledge Agreement, dated as of March 1, 2001 (the "Existing Stock Pledge
Agreement"); and

     WHEREAS, it is a condition precedent to the obligation of the Lenders to
agree to amend and restate the Existing Credit Agreement and to make an
additional Tranche B Loan to PG&E that the Existing Stock Pledge Agreement shall
have been amended and restated as provided herein;

     NOW, THEREFORE, in consideration of the foregoing premises and to induce
the Administrative Agent and the Lenders to enter into the Credit Agreement, the
Pledgor hereby agrees with the Administrative Agent, for the benefit of the
Lenders, to amend and restate the Existing Stock Pledge Agreement to read in its
entirety as follows:

<PAGE>

     1. SECURITY FOR OBLIGATIONS. This Agreement is made by the Pledgor for the
benefit of the Pledgee, acting as Collateral Agent for the benefit of the
Lenders (as more particularly described in Sections 3.1 and 3.2) to secure:

          (i) the full and prompt payment when due (whether at the stated
     maturity, by acceleration or otherwise) of all Obligations of PG&E and the
     Pledor under the Credit Agreement and the other Financing Documents and the
     obligations of PG&E and the Pledgor under the Option Agreement, whether
     direct or indirect, absolute or contingent, due or to become due, now
     existing or hereafter arising and howsoever evidenced, and the due
     performance and compliance by PG&E and the Pledgor with the terms thereof;

          (ii) any and all sums advanced by the Pledgee or any Lender in order
     to preserve the Collateral or preserve its security interest in the
     Collateral (as defined below) and

          (iii) in the event of any proceeding for the collection or enforcement
     of any indebtedness, obligations, or liabilities referred to in clauses (i)
     and (ii) above, the reasonable expenses of retaking, holding, preparing for
     sale or lease, selling or otherwise disposing or realizing on the
     Collateral, or of any exercise by the Pledgee of its rights hereunder with
     respect thereto, together with reasonable attorneys' fees and court costs
     related thereto,

all such obligations, liabilities, sums and expenses set forth in clauses (i)
through (iii) of this Section 1, whether now existing or hereafter arising, that
are (x) owing to the Tranche A Lenders, being herein called the "Tranche A
Secured Obligations", and (y) owing to the Tranche B Lenders, being herein
called the "Tranche B Secured Obligations" (collectively, the "Secured
Obligations").

     2. DEFINITIONS. (a) Unless otherwise defined herein, all capitalized terms
used herein and defined in Appendix A to the Credit Agreement shall be used
herein as therein defined and the principles of construction set forth in
Appendix A to the Credit Agreement shall apply to this Agreement.

     (b) In addition, the following capitalized terms used herein shall have the
definitions specified below:

          "Agreement" has the meaning set forth in the first paragraph hereof.

          "Collateral" has the meaning set forth in Section 3.1 hereof.

          "Credit Agreement" has the meaning set forth in the second recital
     hereto.

          "Existing Credit Agreement" has the meaning set forth in the first
     recital hereto.

          "Existing Stock Pledge Agreement" has the meaning set forth in fourth
     recital hereto.

<PAGE>

          "Existing Tranche A Loan" has the meaning set forth in the first
     recital hereto.

          "Existing Tranche B Loan" has the meaning set forth in the first
     recital hereto.

          "Holder" has the meaning set forth in the Option Agreement.

          "Issuer" has the meaning set forth in the first paragraph hereof.

          "Lenders" has the meaning set forth in the first paragraph hereof.

          "PG&E" has the meaning set forth in the first recital hereof.

          "Pledged Stock" means the shares of Capital Stock of the Issuer set
     forth on Annex A hereto, together with all other shares of Capital Stock of
     the Issuer at any time issued to, or otherwise held by, the Pledgor.

          "Pledgee" has the meaning set forth in the first paragraph hereof.

          "Pledgor" has the meaning set forth in the first paragraph hereof.

          "Proceeds" has the meaning given such term in the UCC.

          "Process Agent" has the meaning set forth in Section 24 hereof.

          "Secured Obligations" has the meaning set forth in Section 1 hereof.

          "Securities Act" means the Securities Act of 1933, as amended and as
     in effect from time to time.

          "Tranche A Secured Obligations" has the meaning set forth in Section 1
     hereof.

          "Tranche B Secured Obligations" has the meaning set forth in Section 1
     hereof.

          "Transition Date" means the date upon which the Senior Obligations (as
     defined in the Intercreditor Agreement) shall have been indefeasibly paid
     in full in cash.

          "UCC" means the Uniform Commercial Code as in effect in the State of
     New York from time to time.

     3. PLEDGE OF PLEDGED STOCK, ETC.

     3.1 Pledge. (a) The Pledgor hereby confirms that pursuant to the Existing
Stock Pledge Agreement the Pledgor transferred, pledged and assigned to the
Pledgee, and granted to the Pledgee a first priority security interest in, all
of the right, title and interest of the Pledgor in and to the following, whether
now existing or hereafter from time to time acquired by the Pledgor
(collectively, the "Collateral"); and the Pledgor does hereby repeat and
confirm, on and as of the date hereof, such transfer, pledge, assignment and
grant of a first priority security interest:

<PAGE>

          (i) the Pledged Stock;

          (ii) all other property hereafter delivered in substitution for any of
     the Pledged Stock, all certificates and instruments representing or
     evidencing such other property and all cash, securities, interest,
     dividends, distributions rights and other property at any time and from
     time to time received, receivable or otherwise distributed in respect of or
     in exchange for any or all thereof; and

          (iii) all Proceeds of any and all of the foregoing;

The foregoing transfer, pledge, assignment and grant of a first priority
security interest is made to secure the prompt and complete payment and
performance when due of all Tranche A Secured Obligations.

     (b) The Pledgor does hereby transfer, pledge and assign to the Pledgee, and
does hereby grant to the Pledgee a second priority security interest in, all of
the right, title and interest of the Pledgor in all Collateral, whether now
existing or hereafter acquired by the Pledgor.

The foregoing transfer, pledge, assignment and grant of a second priority
security interest is made to secure the prompt and complete payment and
performance when due of the Tranche B Secured Obligations.

     (c) The security interest granted in Section 3.1(a) shall be senior in
priority to the security interest granted in Section 3.1(b).

     3.2 Separate Security Interests. The security interests created pursuant to
each of Section 3.1(a) and 3.1(b)are separate and distinct security interests in
the Collateral.

     3.3. Procedures. (a) To the extent that the Pledgor at any time or from
time to time owns, acquires or obtains any right, title or interest in any
Collateral, such Collateral shall automatically (and without the taking of any
action by the Pledgor) be pledged pursuant to Section 3.1 of this Agreement and,
in addition thereto, the Pledgor shall (as promptly as practicable and, in any
event, within 10 days after it obtains such Collateral) deliver to the Pledgee
any stock certificates evidencing such Collateral, duly endorsed in blank, and
take such other actions as the Pledgee shall reasonably request to perfect the
Pledgee's security interest in such Collateral.

     (b) In addition to the actions required to be taken pursuant to Section
3.3(a) hereof, the Pledgor shall from time to time, at the sole expense of the
Pledgor, cause appropriate financing statements (on Form UCC-1 or other
appropriate form) under the Uniform Commercial Code as in effect in the various
relevant States, in form covering all Collateral hereunder (with the form of
such financing statements to be satisfactory to the Pledgee), to be filed in the
relevant filing offices so that at all times the Pledgee has a security interest
in all Collateral which is perfected by the filing of such financing statements
(in each case to the maximum extent perfection by filing may be obtained under
the laws of any relevant State).

<PAGE>

     3.4 Subsequently Acquired Collateral. If the Pledgor shall acquire (by
purchase, dividend or similar distribution or otherwise) any additional
Collateral at any time or from time to time after the date hereof, such
Collateral shall automatically (and without any further action being required to
be taken) be subject to the pledge and security interests created pursuant to
Section 3.1 hereof and, furthermore, the Pledgor will promptly thereafter take
(or cause to be taken) all action with respect to such Collateral in accordance
with the procedures set forth in Section 3.3 hereof, and will promptly
thereafter deliver to the Pledgee (i) a certificate executed by a principal
executive officer of the Pledgor describing such Collateral and certifying that
the same has been duly pledged in favor of the Pledgee (for the benefit of the
Secured Parties) hereunder and (ii) supplements to Annexes A and B hereto as are
reasonably necessary to cause such annexes to be complete and accurate at such
time.

     3.5 Transfer Taxes. Each pledge of Collateral under Section 3.1 hereof
shall be accompanied by any transfer tax stamps required in connection with the
pledge of such Collateral.

     3.6 Certain Representations and Warranties Regarding the Collateral. The
Pledgor represents and warrants that on the date hereof (i) the Pledged Stock
consists of the number and type of shares described in Annex A hereto; (ii) the
Pledged Stock constitutes that percentage of the issued and outstanding common
stock of the Issuer as is set forth in Annex A hereto; and (iii) the Pledgor has
complied with the respective procedure set forth in Sections 3.3(a) and (b)
hereof with respect to each item of Collateral hereunder.

     4. APPOINTMENT OF SUB-AGENTS; ENDORSEMENTS, ETC. If and to the extent
necessary to enable the Pledgee to perfect its security interest in any of the
Collateral or to exercise any of its remedies hereunder, the Pledgee shall have
the right to appoint one or more sub-agents for the purpose of retaining
physical possession of the Collateral, which may be held in the name of the
Pledgor, endorsed or assigned in blank or in favor of the Pledgee or any nominee
or nominees of the Pledgee or a sub-agent appointed by the Pledgee.

     5. VOTING, ETC., WHILE NO EVENT OF DEFAULT. Unless and until there shall
have occurred and be continuing an Event of Default, the Pledgor shall be
entitled to exercise any and all voting and other consensual rights pertaining
to the Collateral owned by it, and to give consents, waivers or ratifications in
respect thereof; provided, that, in each case, no vote shall be cast or any
consent, waiver or ratification given or any action taken or omitted to be taken
which would violate or be inconsistent with any of the terms of this Agreement
or any other Financing Document, or which would have the effect of impairing the
value of the Collateral or any part thereof or the position or interests of the
Pledgee in the Collateral. All such rights of the Pledgor to vote and to give
consents, waivers and ratifications shall cease in case an Event of Default has
occurred and is continuing, and Section 7 hereof shall become applicable, and
the Pledgee shall without further notice or consent be admitted and become a
shareholder of the Issuer.

     6. DIVIDENDS AND OTHER DISTRIBUTIONS. All cash dividends, cash
distributions, cash Proceeds and other cash amounts payable in respect of the
Collateral (other than proceeds of any foreclosure in respect of the Collateral
pursuant to Section 7 hereof, which

<PAGE>

proceeds shall be distributed and applied as provided in Section 9 hereof)
shall be distributed to PG&E to the extent permitted by the LLC Agreement to be
paid to the Pledgee, to be applied, at the instruction of the Majority Tranche A
Lenders (or, after the Transition Date, the Majority Tranche B Lenders), to the
payment and repayment of the Loans pursuant to Section 3.2 of the Credit
Agreement and the relevant provisions of the Intercreditor Agreement. The
Pledgee shall also be entitled to receive directly, and to retain as part of the
Collateral:

          (i) all other or additional capital stock or other property
     (including, but not limited to, cash dividends other than as set forth
     above) paid or distributed by way of dividend or otherwise in respect of
     the Collateral;

          (ii) all other or additional capital stock or other property paid or
     distributed in respect of the Collateral by way of split, spin-off,
     split-up, reclassification, combination or similar rearrangement; and

          (iii) all other or additional capital stock or other property
     (including, but not limited to, cash) which may be paid in respect of the
     Collateral by reason of any consolidation, merger, exchange, conveyance of
     assets, liquidation or similar reorganization.

     Nothing contained in this Section 6 shall limit or restrict in any way the
Pledgee's right to have pledged to it proceeds of the Collateral in any form in
accordance with Section 3 of this Agreement. All dividends, distributions or
other payments which are received by the Pledgor contrary to the provisions of
this Section 6 and Section 7 hereof shall be received in trust for the benefit
of the Pledgee, shall be segregated from other property or funds of the Pledgor
and shall be forthwith paid over to the Pledgee as Collateral in the same form
as so received (with any necessary endorsement).

     7. REMEDIES IN CASE OF DEFAULT OR EVENT OF DEFAULT. Subject to the Credit
Agreement, if there shall have occurred and be continuing an Event of Default,
the Pledgee shall be entitled to exercise all of the rights, powers and remedies
(whether vested in it by this Agreement, any other Financing Document or by law)
for the protection and enforcement of its rights in respect of the Collateral,
and the Pledgee shall be entitled to exercise all the rights and remedies of a
secured party under the Uniform Commercial Code as in effect in any relevant
jurisdiction and also shall be entitled, without limitation, to exercise the
following rights:

          (i) to receive all amounts payable in respect of the Collateral;

          (ii) to transfer all or any part of the Collateral into the Pledgee's
     name or the name of its nominee or nominees;

          (iii) to vote all or any part of the Collateral (whether or not
     transferred into the name of the Pledgee) and give all consents, waivers
     and ratifications in respect of the Collateral and otherwise act with
     respect thereto as though it were the outright owner thereof (the Pledgor
     hereby irrevocably constituting and appointing the Pledgee the proxy

<PAGE>

          and attorney-in-fact of the Pledgor, with full power of substitution
          to do so) and to exercise any and all of the rights or powers of the
          Pledgor in its capacity as a stockholder of the Issuer;

               (iv) at any time and from time to time to sell, assign and
          deliver, or grant options to purchase, all or any part of the
          Collateral, or any interest therein, at any public or private sale,
          without demand of performance, advertisement or notice of intention to
          sell or of the time or place of sale or adjournment thereof or to
          redeem or otherwise (all of which are hereby waived by the Pledgor to
          the extent permitted by applicable Law), for cash, on credit or for
          other property, for immediate or future delivery without any
          assumption of credit risk, and for such price or prices and on such
          terms as the Pledgee in its absolute discretion may determine, in each
          case, to the extent permitted by applicable Law. The Pledgee shall not
          be obligated to make any such sale of Collateral regardless of whether
          any notice of sale has theretofore been given. The Pledgor hereby
          waives and releases to the fullest extent permitted by law any right
          or equity of redemption with respect to the Collateral, whether before
          or after sale hereunder (other than the right to pay the Secured
          Obligations in full), and all rights, if any, of marshalling the
          Collateral and any other security for the Secured Obligations or
          otherwise. At any such sale, to the extent permitted by applicable
          Law, the Pledgee may bid for and purchase all or any part of the
          Collateral so sold free from any such right or equity of redemption.
          The Pledgee shall not be liable for failure to collect or realize upon
          any or all of the Collateral or for any delay in so doing nor shall
          any of them be under any obligation to take any action whatsoever with
          regard thereto; and

               (v) to set-off any and all Collateral against any and all Secured
          Obligations and to apply such Collateral to the payment of any and all
          Secured Obligations.

     If, pursuant to applicable Law, prior notice of any of the foregoing
actions is required to be given to the Pledgee, the Pledgee hereby acknowledges
that the minimum time required by such applicable Law, or if no minimum is
specified, ten (10) days, shall be deemed a reasonable notice period.

     8. REMEDIES, ETC., CUMULATIVE. Each and every right, power and remedy of
the Pledgee provided for in this Agreement or in any other Financing Document,
or now or hereafter existing at law or in equity or by statute shall be
cumulative and concurrent and shall be in addition to every other such right,
power or remedy. The exercise or beginning of the exercise by the Pledgee of any
one or more of the rights, powers or remedies provided for in this Agreement or
any other Financing Document or now or hereafter existing at law or in equity or
by statute or otherwise shall not preclude the simultaneous or later exercise by
the Pledgee of all such other rights, powers or remedies, and no failure or
delay on the part of the Pledgee to exercise any such right, power or remedy
shall operate as a waiver thereof. No notice to or demand on the Pledgor in any
case shall entitle it to any other or further notice or demand in similar or
other circumstances or constitute a waiver of any of the rights of the Pledgee
to any other or further action in any circumstances without notice or demand.

<PAGE>

     9. APPLICATION OF PROCEEDS. All monies collected by the Pledgee upon any
sale or other disposition of the Collateral pursuant to the terms of this
Agreement, together with all other monies received by the Pledgee hereunder,
shall be applied at the written instruction of the Majority Tranche A Lenders
(or, after the Transition Date, the Majority Tranche B Lenders) for satisfaction
of the Secured Obligations in the order provided in the Credit Agreement and the
Intercreditor Agreement.

     10. PURCHASERS OF COLLATERAL. Upon any sale of the Collateral by the
Pledgee hereunder (whether by virtue of the power of sale herein granted,
pursuant to judicial process or otherwise), the receipt given by the Pledgee or
the officer making the sale shall be a sufficient discharge to the purchaser or
purchasers of the Collateral so sold, and such purchaser or purchasers shall not
be obligated to see to the application of any part of the purchase money paid
over to the Pledgee or such officer or be answerable in any way for the
misapplication or nonapplication thereof.

     11. [OMITTED]

     12. CERTAIN LIMITATIONS (a) The Pledgee shall not be obligated to perform
or discharge any obligation of the Pledgor as a result of the pledge hereby
effected.

     (b) The acceptance by the Pledgee of this Agreement, with all the rights,
powers, privileges and authority so created, shall not at any time or in any
event obligate the Pledgee to appear in or defend any action or proceeding
relating to the Collateral to which it is not a party, or to take any action
hereunder or thereunder, or to expend any money or incur any expenses or perform
or discharge any obligation, duty or liability under the Collateral.

     13. FURTHER ASSURANCES; POWER-OF-ATTORNEY. (a) At any time and from time to
time, upon the written request of the Pledgee, and at the sole expense of the
Pledgor, the Pledgor will promptly and duly execute and deliver any and all such
further instruments and documents and take such further action as the Pledgee
reasonably may deem appropriate in order to perfect and preserve the Pledgee's
security interest in the Collateral and in order for the Pledgee to obtain the
full benefits of this Agreement and of the rights and powers herein granted,
including, without limitation, the filing of any financing or continuation
statements under the Uniform Commercial Code in effect in any jurisdiction and
the filing of any other equivalent or similar statement or document under any
other applicable Law with any other applicable Governmental Authority with
respect to the security interests granted hereby. The Pledgor also hereby
authorizes the Pledgee to file any such financing or continuation statement
without the signature of the Pledgor to the extent permitted by applicable Law.
If any amount payable under or in connection with any of the Collateral shall be
or become evidenced by any promissory note or other instrument, such note or
instrument shall be immediately delivered to the Pledgee and pledged to the
Pledgee hereunder, duly endorsed, to the extent necessary, to the Pledgee.

     The Pledgor shall not change its name, identity, principal place of
business or place of organization in any manner unless the Pledgor shall have
given the Pledgee at least sixty (60) days' prior written notice thereof and
shall have taken, at the Pledgor's sole expense, all

<PAGE>

action necessary or reasonably requested by the Pledgee in order to continue the
perfection and priority of the security interests in the Collateral intended to
be created by this Agreement.

     (b) The Pledgor hereby appoints the Pledgee, such Pledgor's
attorney-in-fact, with full authority in the place and stead of the Pledgor and
in the name of the Pledgor or otherwise, to act from time to time, solely after
the occurrence and during the continuance of an Event of Default and subject to
the Credit Agreement, in the Pledgee's reasonable discretion to take any action
and to execute any instrument which the Pledgee may deem reasonably necessary or
advisable to accomplish the purposes of this Agreement.

     14. [OMITTED]

     15. TRANSFER BY THE PLEDGOR. The Pledgor will not sell or otherwise dispose
of, grant any option with respect to, or mortgage, pledge or otherwise encumber
any of the Collateral or any interest therein (except as may be permitted in
accordance with the terms of the Financing Documents).

     16. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGOR. (a) The
Pledgor represents, warrants and covenants that:

          (i) it is the legal, beneficial and record owner of, and has good and
     marketable title to, all Collateral consisting of Pledged Stock and it has
     all rights in the Collateral necessary for the security interest purported
     to be created hereunder to attach (subject, in each case, to no pledge,
     lien, security interest, charge, option or other encumbrance whatsoever,
     except the liens and security interests created by this Agreement);

          (ii) it has full power, authority and legal right to pledge all the
     Collateral pledged by it pursuant to this Agreement;

          (iii) this Agreement has been duly authorized, executed and delivered
     by the Pledgor and constitutes a legal, valid and binding obligation of the
     Pledgor enforceable against the Pledgor in accordance with its terms,
     except to the extent that the enforceability hereof may be limited by
     applicable bankruptcy, insolvency, reorganization, moratorium or other
     similar laws generally affecting creditors' rights and by equitable
     principles (regardless of whether enforcement is sought in equity or at
     law);

          (iv) except to the extent already obtained or made, no consent of any
     other party (including, without limitation, any stockholder, partner,
     member or creditor of the Pledgor or the Issuer) and no consent, license,
     permit, approval or authorization of, exemption by, notice or report to, or
     registration, filing or declaration with, any Governmental Authority is
     required to be obtained by the Pledgor in connection with (a) the
     execution, delivery or performance of this Agreement, (b) the validity or
     enforceability of this Agreement, (c) the perfection or enforceability of
     the Pledgee's security interest in the Collateral or (d) except for
     compliance with or as may be required

<PAGE>

          by applicable securities laws, the exercise by the Pledgee of any of
          its rights or remedies provided herein;

               (v) the execution, delivery and performance of this Agreement
          will not violate any provision of any applicable Law or regulation or
          of any order, judgment, writ, award or decree of any court, arbitrator
          or Governmental Authority, domestic or foreign, applicable to the
          Pledgor, or of the certificate of incorporation, operating agreement,
          limited liability company agreement, partnership agreement or by-laws
          of the Pledgor or of any securities or other interests issued by the
          Pledgor or the Issuer, or of any mortgage, deed of trust, indenture,
          lease, loan agreement, credit agreement or other material contract,
          agreement or instrument or undertaking to which the Pledgor or the
          Issuer is a party or by which any of its assets may be bound and will
          not result in the creation or imposition of (or the obligation to
          create or impose) any lien or encumbrance on any of the assets of the
          Pledgor or the Issuer except as contemplated by this Agreement;

               (vi) all of the Collateral consisting of Pledged Stock has been
          duly and validly issued and acquired, is fully paid and non-assessable
          and is subject to no options to purchase or similar rights (other than
          pursuant to the Option Agreement); and

               (vii) the pledge and collateral assignment to the Pledgee of the
          Collateral consisting of Pledged Stock, together with continued
          possession by the Pledgee of any certificates, instruments, documents
          or other writings evidencing the Pledged Stock and/or the making of
          relevant filings or recordings and/or any other action required to be
          taken in accordance with Section 3.3 (all of which have been made or
          taken, as the case may be), creates in favor of the Pledgee a valid
          and perfected first priority security interest in such Collateral, and
          the proceeds thereof, in each case, for the benefit of the holders of
          the Tranche A Secured Obligations and a valid and perfected second
          priority security interest in such Collateral and the proceeds
          thereof, in each case for the benefit of the holders of the Tranche B
          Secured Obligations, subject to no prior Lien or encumbrance (other
          than any Permitted Lien that is a non-consensual lien arising by
          operation of law, and the Option Agreement) or to any agreement
          purporting to grant to any third party a Lien or encumbrance (other
          than any Permitted Lien that is a non-consensual lien arising by
          operation of law) on the property or assets of the Pledgor which would
          include the Pledged Stock and the Pledgee is entitled to all the
          rights, priorities and benefits afforded by the Uniform Commercial
          Code or other relevant law as enacted in any relevant jurisdiction to
          perfected security interests in respect of such Collateral.

     (b) The Pledgor covenants and agrees that it will defend the Pledgee's
right, title and security interest in and to the Collateral and the proceeds
thereof against the claims and demands of all persons whomsoever; and the
Pledgor covenants and agrees that it will have like title to and right to pledge
any other property at any time hereafter pledged to the Pledgee as Collateral
hereunder and will likewise defend the right thereto and security interest
therein of the Pledgee.

     17. CHIEF EXECUTIVE OFFICE; RECORDS. The chief executive office of the
Pledgor is located at the address specified in Annex B hereto. The Pledgor will
not move its



<PAGE>

chief executive office except to such new location as the Pledgor may establish
in accordance with the last sentence of this Section 17. The originals of all
documents in the possession of the Pledgor evidencing all Collateral and the
only original books of account and records of the Pledgor relating thereto are,
and will continue to be, kept at such chief executive office as specified in
Annex B hereto, or at such new locations as the Pledgor may establish in
accordance with the last sentence of this Section 17. The Pledgor shall not
establish a new location for its chief executive office or change its
jurisdiction of organization until (i) it shall have given to the Pledgee not
less than sixty (60) days' prior written notice of its intention so to do,
clearly describing such new location and providing such other information in
connection therewith as the Pledgee may reasonably request and (ii) with respect
to such new location, it shall have taken all action necessary or reasonably
requested by the Pledgee to maintain the security interest of the Collateral
Agent in the Collateral intended to be granted hereby at all times fully
perfected and in full force and effect. Promptly after establishing a new
location for its chief executive office in accordance with the immediately
preceding sentence, the Pledgor shall deliver to the Pledgee a supplement to
Annex B hereto so as to cause such Annex B hereto to be complete and accurate.

     18. PLEDGOR'S OBLIGATIONS ABSOLUTE, ETC. The obligations of the Pledgor
under this Agreement shall be absolute and unconditional and shall remain in
full force and effect without regard to, and shall not be released, suspended,
discharged, terminated or otherwise affected by, any circumstance or occurrence
whatsoever (except as provided under Section 20), including, without limitation:
(i) any renewal, extension, amendment or modification of or addition or
supplement to or deletion from any Financing Document or any other instrument or
agreement referred to therein, or any assignment or transfer of any thereof;
(ii) any waiver, consent, extension, indulgence or other action or inaction
under or in respect of any such agreement or instrument including, without
limitation, this Agreement; (iii) any furnishing of any additional security to
the Pledgee or its assignee or any acceptance thereof or any release of any
security by the Pledgee or its assignee (except as provided under Section 20);
(iv) any limitation on any party's liability or obligations under any such
instrument or agreement or any invalidity or unenforceability, in whole or in
part, of any such instrument or agreement or any term thereof; or (v) any
bankruptcy, insolvency, reorganization, composition, adjustment, dissolution,
liquidation or other like proceeding relating to the Pledgor or the Issuer, or
any action taken with respect to this Agreement by any trustee or receiver, or
by any court, in any such proceeding, whether or not the Pledgor shall have
notice or knowledge of any of the foregoing.

     19. REGISTRATION, ETC. (a) If there shall have occurred and be continuing
an Event of Default, then upon receipt by the Pledgor from the Pledgee of a
written request or requests that the Pledgor cause any registration,
qualification or compliance under any Federal or state securities law or laws to
be effected with respect to all or any part of the Collateral consisting of
Pledged Stock, the Pledgor as soon as practicable and at its expense will cause
such registration to be effected (and be kept effective) and will cause such
qualification and compliance to be declared effected (and be kept effective) as
may be so requested if such registration, qualification or compliance is
necessary to permit or facilitate the sale and distribution of such Collateral,
including, without limitation, registration under the Securities Act, as then in
effect (or any similar statute then in effect), appropriate qualifications under
applicable blue sky or other state securities laws and appropriate compliance
with any other

<PAGE>

government requirements, provided, that the Pledgee shall furnish to the Pledgor
such information regarding the Pledgee as the Pledgor may reasonably request in
writing and as shall be required in connection with any such registration,
qualification or compliance. The Pledgor will cause the Pledgee to be kept
advised in writing as to the progress of each such registration, qualification
or compliance and as to the completion thereof, will furnish to the Pledgee such
number of prospectuses, offering circulars or other documents incident thereto
as the Pledgee from time to time may reasonably request, and will indemnify the
Pledgee and all others participating in the distribution of such Collateral
against all claims, losses, damages and liabilities caused by any untrue
statement (or alleged untrue statement) of a material fact contained therein (or
in any related registration statement, notification or the like) or by any
omission (or alleged omission) to state therein (or in any related registration
statement, notification or the like) a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as the same may have been caused by an untrue statement or omission
based upon information furnished in writing to the Pledgor by the Pledgee
expressly for use therein.

     (b) If at any time when the Pledgee shall determine to exercise its right
to sell all or any part of the Collateral consisting of Pledged Stock pursuant
to Section 7 hereof, and the Collateral or the part thereof to be sold shall
not, for any reason whatsoever, be effectively registered under the Securities
Act, as then in effect, the Pledgee may sell such Collateral or part thereof, as
the case may be, by private sale in such manner and under such circumstances as
the Pledgee may deem necessary or reasonably advisable in order that such sale
may legally be effected without such registration. Without limiting the
generality of the foregoing, in any event the Pledgee (i) may proceed to make
such private sale notwithstanding that a registration statement for the purpose
of registering such Collateral or part thereof shall have been filed under such
Securities Act, (ii) may approach and negotiate with a single possible purchaser
to effect such sale, and (iii) may restrict such sale to a purchaser who will
represent and agree that such purchaser is purchasing for its own account, for
investment, and not with a view to the distribution or sale of such Collateral
or part thereof. In the event of any such sale, the Pledgee shall incur no
responsibility or liability, except to the extent incurred by reason of its
gross negligence, bad faith or willful misconduct, for selling all or any part
of the Collateral at a price which the Pledgee, in its sole and absolute
discretion, deems reasonable under the circumstances, notwithstanding the
possibility that a substantially higher price might have been realized if the
sale were deferred until after registration as aforesaid.

     20. TERMINATION; RELEASE. (a) After payment in full of the Secured
Obligations and termination of the Credit Agreement, this Agreement and the
security interest created hereby shall terminate, and the Pledgee, at the
request and expense of the Pledgor, will execute and deliver to the Pledgor a
proper instrument or instruments acknowledging the satisfaction and termination
of this Agreement, and will duly assign, transfer and deliver to the Pledgor
(without recourse and without any representation or warranty) such of the
Collateral as has not theretofore been sold or otherwise applied or released
pursuant to this Agreement, together with any monies at the time held by the
Pledgee or any of its sub-agents hereunder.

     (b) At any time that the Pledgor desires that the Pledgee assign, transfer
and deliver Collateral (and releases therefor) as provided in Section 20(a)
hereof, it shall deliver to


<PAGE>

the Pledgee a certificate signed by a principal executive officer of the Pledgor
stating that the release of the respective Collateral is permitted pursuant to
such Section 20(a).

     (c) Upon the direction of the Administrative Agent, the Collateral Agent
will release shares of the Pledged Stock in connection with (i) the NEG Equity
Transactions to the extent provided in the Credit Agreement or (ii) any exercise
of the rights of the Holders under the Option Agreement.

     21. NOTICES, ETC. All notices, requests, demands or other communications
hereunder shall be made in the manner and with the effect provided in Section
9.3 of the Credit Agreement at the addresses provided below or at such other
address as shall have been furnished in writing by the relevant Person to the
party required to give notice hereunder:

     (a) If to the Pledgor, at:

         PG&E National Energy Group, LLC
         7500 Old Georgetown Road
         Bethesda, MD 20814-6161
         Attention: General Counsel
         Tel.: (301) 280-6815
         Fax.: (301) 280-6319

     (b) If to the Pledgee, at:

         Deutsche Bank Trust Company Americas
         Corporate Trust and Agency Services
         100 Plaza One, MS: 0603
         Jersey City, NJ 07311
         Attention:  Carmina Bitar Day
         Tel: (201) 593-6832
         Fax: (201) 593-6420

         with a copy to the Administrative Agent at:

         Lehman Commercial Paper Inc.
         745 Seventh Avenue
         New York, New York 10019
         Attention:  Frank Turner/Rich Divito
         Tel: (212) 526-2696/(212) 526-2425
         Fax: (646) 758-1986/(646) 758-4618

     (c) If to the Issuer, at:

         PG&E National Energy Group, Inc.
         7500 Old Georgetown Road
         Bethesda, MD 20814-6161
         Attention:  General Counsel

<PAGE>


         Tel: (301) 280-6815
         Fax: (301) 280-6319

     22. WAIVER; AMENDMENT. None of the terms and conditions of this Agreement
may be changed, waived, modified or varied in any manner whatsoever unless in
writing duly signed by the Pledgor and the Pledgee.

     23. MISCELLANEOUS. This Agreement shall be binding upon the parties hereto
and their respective successors and assigns and shall inure to the benefit of
and be enforceable by each of the parties hereto and its successors and assigns,
provided that the Pledgor may not assign any of its rights or obligations under
this Agreement without the prior consent of the Pledgee. The headings in this
Agreement are for purposes of reference only and shall not limit or define the
meaning hereof. This Agreement may be executed in any number of counterparts,
each of which shall be an original, but all of which shall constitute one
instrument. In the event that any provision of this Agreement shall prove to be
invalid or unenforceable, such provision shall be deemed to be severable from
the other provisions of this Agreement which shall remain binding on all parties
hereto.

     24. GOVERNING LAW; SUBMISSION TO JURISDICTION. (a) THIS AGREEMENT,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE AND MATTERS
RELATING TO THE CREATION, VALIDITY, ENFORCEMENT OR PRIORITY OF THE SECURITY
INTERESTS CREATED BY THIS AGREEMENT, SHALL BE GOVERNED BY THE LAWS OF THE STATE
OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS RULES THEREOF (OTHER THAN
SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW), EXCEPT AS MAY BE
REQUIRED BY OTHER MANDATORY PROVISIONS OF LAW.

     (b) The Pledgor 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 or the transactions
contemplated hereby. The Pledgor 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 Pledgor hereby irrevocably appoints Corporation
Service Company (the "Process Agent"), with an office on the date hereof at 1177
Avenue of the Americas, 17th Floor, New York, NY 10036, 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 Pledgor and shall be legal and binding upon the Pledgor for all
purposes notwithstanding any failure to mail copies of such legal process to the
Pledgor, or any failure on the part of the Pledgor to receive the same. Nothing
herein shall affect the right of the Pledgee to serve process in any other
manner permitted by applicable Law or any right of the Pledgee to bring legal
action or proceedings in any other competent jurisdiction. The Pledgor 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 Pledgor based upon

<PAGE>


the assertion that the rate of interest charged in respect of any of the Secured
Obligations under any Financing Document is usurious. To the extent permitted by
applicable Law, the Pledgor 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 Pledgor at the address referenced in Section 21.

     (c) The Pledgor 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 Pledgor to receive service of process in
the State of New York on its behalf, the Pledgor shall promptly appoint a
successor satisfactory to the Pledgee so to serve, advise the Pledgee thereof,
and deliver to the Pledgee 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. ss. 1608.

     (d) To the extent the Pledgor may, in any action or proceeding arising out
of or relating to this Agreement, be entitled under any applicable Law to
require or claim that the Pledgee post security for costs or take similar
action, the Pledgor hereby irrevocably waives and agrees not to claim the
benefit of such entitlement.

     25. 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, 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 SECURED PARTIES TO
ENTER INTO THE CREDIT AGREEMENT AND THE OTHER FINANCING DOCUMENTS.

     26. WAIVER. The Pledgor waives any claim it may now or hereafter have
against the Pledgee or any Lender for any consequential, exemplary or positive
damages or in connection with relating to this Agreement or the other Financing
Documents.

     27. ACKNOWLEDGMENT AND AGREEMENT OF ISSUER. The Issuer agrees and
acknowledges the pledge by the Pledgor of the Pledged Stock hereunder. The
Issuer represents and warrants that on the date hereof (i) the common stock of
the Issuer is described in Annex A hereto; (ii) the Pledged Stock constitutes
100% of the issued and outstanding common stock of the Issuer, as is set forth
in Annex A hereto; (iii) all of the shares of the Pledged Stock have been duly
issued, are fully paid and non-assessable and are free and clear of all Liens
and adverse claims, other than the Liens in favor of the Pledgee created hereby
and the Option Agreement; (iv) the pledge by the Pledgor of, and the granting of
a security interest in, the Pledged Stock, does not violate the charter, by-laws
or any other agreement governing the Issuer, (v) the Pledged Stock is
represented by the stock certificate described in Annex A hereto, (vi) the
Issuer has duly noted the pledge of the Pledged Stock to the Pledgee on its
stock ledger. The

<PAGE>

Issuer further covenants and agrees that, unless otherwise notified by the
Pledgee, (a) the Issuer shall deliver all certificates representing additional
shares of common stock of the Issuer to the Pledgee, (b) no additional class of
Capital Stock of the Issuer shall be created after the date hereof and (c) all
distributions in respect of the Collateral consisting of Pledged Stock shall be
held by the Pledgee and applied pursuant to Section 6.

     28. THIRD PARTY BENEFICIARIES. The parties hereto agree that the provisions
hereof are for the benefit of the Collateral Agent and the Lenders and that the
Collateral Agent and the Lenders shall be third party beneficiaries of this
Agreement.



<PAGE>

     IN WITNESS WHEREOF, the Pledgor, the Pledgee and the Issuer have caused
this Agreement to be executed by their duly elected officers duly authorized as
of the date first above written.

                         PLEDGOR

                         PG&E NATIONAL ENERGY GROUP, LLC


                         By__________________________________
                         Name:
                         Title:


                         ADMINISTRATIVE AGENT

                         LEHMAN COMMERCIAL PAPER INC., as Administrative Agent


                         By__________________________________
                         Name:
                         Title:



                         PLEDGEE

                         DEUTSCHE BANK TRUST COMPANY AMERICAS, as Collateral
                         Agent for the benefit of the Lenders


                         By__________________________________
                         Name:
                         Title:






<PAGE>

                                  ISSUER

                                  PG&E NATIONAL ENERGY GROUP, INC.


                                  By__________________________________
                                  Name:
                                  Title:







<PAGE>




                                                                         ANNEX A
                                                                              to
                                                                PLEDGE AGREEMENT
<TABLE>
<CAPTION>


                                                     LIST OF PLEDGED STOCK


           Name of                          Type of            Number of
           Issuer                           Interest             Shares           Certificate No.       Percentage Owned
------------------------------------      ------------         -----------        ---------------       ----------------
<S>                                       <C>                  <C>                <C>                   <C>
PG&E National Energy Group, Inc., a       Common Stock            1,000                  3                    100%
Delaware corporation
</TABLE>





<PAGE>

                                                                         ANNEX B
                                                                              to
                                                                PLEDGE AGREEMENT




                             CHIEF EXECUTIVE OFFICE

                           PG&E National Energy Group, LLC
                           7500 Old Georgetown Road
                           Bethesda, MD 20814-6161
                           Attention:  General Counsel
                           Tel: (301) 280-6815
                           Fax: (301) 280-6319




</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.7
<SEQUENCE>9
<FILENAME>dex997.txt
<DESCRIPTION>AMENDED AND RESTATED OPTION AGREEMENT
<TEXT>
<PAGE>

                                                                  EXECUTION COPY

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


                      AMENDED AND RESTATED OPTION AGREEMENT

                                  By and Among

                        PG&E NATIONAL ENERGY GROUP, INC.,

                                PG&E CORPORATION,

                        PG&E NATIONAL ENERGY GROUP, LLC,

                                       and

                                   THE HOLDERS

                           __________________________

                            Dated as of June 25, 2002

                           __________________________



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

<PAGE>

                                Table of Contents

<TABLE>
<CAPTION>
                                                                                    Page
<S>                                                                                 <C>
ARTICLE I Definitions............................................................     1
     SECTION 1.01. Definitions...................................................     1

ARTICLE II Grant of the Option...................................................     9
     SECTION 2.01. Grant and Authorization of the Option.........................     9

ARTICLE III Representations, Warranties and Covenants............................    10
     SECTION 3.01. Representations, Warranties and Covenants of LLC..............    10
     SECTION 3.02. Representations, Warranties and Covenants of the Company......    12
     SECTION 3.03. Representations, Warranties and Covenants of the Initial
                    Holders......................................................    15

ARTICLE IV Exercise Terms........................................................    15
     SECTION 4.01. Exercise Price................................................    15
     SECTION 4.02. Exercise Amounts..............................................    15
     SECTION 4.03. Manner of Exercise............................................    16
     SECTION 4.04. Transfer of Option Shares.....................................    16
     SECTION 4.05. Fractional Option Shares......................................    17
     SECTION 4.06. Reservation of Option Shares..................................    17
     SECTION 4.07. Compliance with Law...........................................    17

ARTICLE V Transfer Restrictions..................................................    17
     SECTION 5.01. Restrictions on Transfers of Option and Option Shares.........    17
     SECTION 5.02. Notation......................................................    18

ARTICLE VI Holders' Put Rights...................................................    18
     SECTION 6.01. Granting of Put; Put Option Purchase Price....................    18
     SECTION 6.02. Put Notice....................................................    18
     SECTION 6.03. Purchasing Party Notices......................................    19
     SECTION 6.04. Obligation to Purchase the Option.............................    19

ARTICLE VII Special Right of Call................................................    19
     SECTION 7.01. Granting of Call; Price.......................................    19
     SECTION 7.02. Call Notice. The Call Notice shall:...........................    19
     SECTION 7.03. Obligation to Call............................................    20

ARTICLE VIII Registration, Drag-Along, Tag-Along and Preemptive Rights...........    20
</TABLE>

                                       i

<PAGE>

<TABLE>
<S>                                                                                  <C>
     SECTION 8.01.  Drag-Along...................................................    20
     SECTION 8.02.  Tag-Along....................................................    21
     SECTION 8.03.  Expenses of Sale.............................................    21

ARTICLE IX Registration Rights...................................................    21
     SECTION 9.01.  Piggy-Back and Shelf Registration Rights.....................    21
     SECTION 9.02.  Demand Registration..........................................    23
     SECTION 9.03.  Hold-Back Agreements; Restrictions on Public Sale by
                    Holders......................................................    25
     SECTION 9.04.  Registration Procedures......................................    25
     SECTION 9.05.  Registration Expenses........................................    29
     SECTION 9.06.  Indemnification..............................................    29

ARTICLE X Miscellaneous..........................................................    32
     SECTION 10.01. SEC Reports and other Financial Information..................    32
     SECTION 10.02. Persons Benefiting...........................................    32
     SECTION 10.03. Amendments and Waivers.......................................    32
     SECTION 10.04. Notices......................................................    33
     SECTION 10.05. Governing Law; Waiver of Jury Trial; Submission of
                    Jurisdiction.................................................    35
     SECTION 10.06. Successors and Assigns.......................................    36
     SECTION 10.07. Severability.................................................    36
     SECTION 10.08. Entire Agreement.............................................    36
     SECTION 10.09. Counterparts.................................................    36
     SECTION 10.10. Headings.....................................................    36
     SECTION 10.11. Publicity....................................................    36
     SECTION 10.12. Restricted Transactions......................................    36
     SECTION 10.13. Rule 144/145.................................................    37
     SECTION 10.14. Remedies.....................................................    37
     SECTION 10.15. Acknowledgment...............................................    37
     SECTION 10.16. Waiver.......................................................    37
     SECTION 10.17. Register.....................................................    37
     SECTION 10.18. Intercreditor Agreement......................................    38
</TABLE>

     Annex 1   Gross Up Analysis for Options Granted on Each Extension Date
     Annex 2   Put Option Purchase Price (Original Option of GPSF)
     Annex 3   Percentage of Options Held by Each Holder on the Closing Date

                                       ii

<PAGE>


                  AMENDED AND RESTATED OPTION AGREEMENT, dated as of June 25,
2002, by and among PG&E National Energy Group, Inc., a Delaware corporation (the
"Company"), PG&E Corporation, a California corporation (the "Borrower"), PG&E
National Energy Group, LLC, a Delaware limited liability company (the "LLC"),
GPSF-F Inc., a Delaware corporation ("GPSF"), and LB I Group Inc., a Delaware
corporation ("LBI"), (each, an "Initial Holder", and together the "Initial
Holders") and each entity named on the signature pages hereof as a "Subsequent
Holder" (each, a "Subsequent Holder").

                              W I T N E S S E T H:

                  WHEREAS, General Electric Capital Corporation and Lehman
Commercial Paper Inc. (the "Initial Lenders") provided certain credit facilities
to the Borrower on the terms and conditions set forth in the Credit Agreement,
dated as of March 1, 2001, among the Borrower, the lenders from time to time
parties thereto and others (as amended, the "Existing Credit Agreement");

                  WHEREAS, pursuant to the Amended and Restated Credit
Agreement, dated as of the date hereof (as amended, supplemented or otherwise
modified from time to time, the "Credit Agreement"), among the Borrower, the
lenders from time to time parties thereto (the "Lenders") and others, the
Existing Credit Agreement is being amended and restated in its entirety to
modify certain of its terms and to provide additional loans to the Borrower;

                  WHEREAS, LLC owns 1,000 shares of the Common Stock of the
Company, which shares represent 100% of the outstanding Common Stock of the
Company;

                  WHEREAS, the Company, the Borrower, LLC, and the Holders are
parties to the Option Agreement, dated as of March 1, 2001 (the "Existing Option
Agreement");

                  WHEREAS, pursuant to the Existing Option Agreement, on the
Initial Closing Date, LLC granted the Original Option described herein to the
Initial Holders; and

                  WHEREAS, it is a condition precedent to the obligation of the
Lenders to agree to modify certain terms of, and to provide additional loans
under, the Existing Credit Agreement that the Existing Option Agreement shall
have been amended and restated as provided herein;

                  NOW, THEREFORE, intending to be legally bound, each party
hereto agrees as follows for the benefit of the other parties and for the equal
and ratable benefit of the Holders of the Option:

                                   ARTICLE I

                                  Definitions

                  SECTION 1.01. Definitions. Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to such terms in the
Credit Agreement and the principles of construction set forth in Appendix A to
the Credit Agreement shall apply to this Agreement.

                  "Additional Option" shall have the meaning provided in Section
2.01(b) hereof.

<PAGE>

                                                                               2

                  "Advice" shall have the meaning set forth in Section 9.04
hereof.

                  "Agreement" shall mean this Amended and Restated Option
Agreement, as the same may be amended, modified or supplemented from time to
time.

                  "Approved Sale" shall have the meaning set forth in Section
8.01 hereof.

                  "Assignee" shall have the meaning set forth in Section 5.01
hereof.

                  "Board" shall mean the "Board of Control" of LLC or the board
of directors of the Company, as the case may be, or any committee thereof duly
authorized to act on behalf of such "Board of Control" or board of directors.

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

                  "Business Day" shall mean any day except Saturday, Sunday and
any day that shall be a legal holiday or a day on which banking institutions in
the State of New York generally are authorized or required by law or other
government action to close.

                  "Call" shall mean the call right of the LLC pursuant to
Article VII hereof.

                  "Call Notice" shall have the meaning set forth in Section 7.01
hereof.

                  "Call Option Purchase Price" shall mean, with respect to the
right of LLC to purchase any Option pursuant to any Call Notice delivered under
Article VII hereof, for which the consideration includes (i) at any time prior
to the closing date of the IPO, the Current Market Price of an Option Share as
of the Call Repurchase Date multiplied by the Option Share Number in effect on
the date of delivery of the Call Notice ("Call Price") and (ii) after the
closing date of the IPO, at the election of LLC, (x) the delivery of a number of
shares of Common Stock of the Company equal to the Option Share Number in effect
on the Call Repurchase Date or (y) the Call Price.

                  "Call Repurchase Date" shall have the meaning set forth in
Section 7.02 hereof.

                  "Common 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) in the common equity of such
Person, now or hereafter outstanding, and any and all rights, warrants or
options exchangeable for or convertible into any thereof.

                  "Common Stock Equivalent" shall mean any Convertible Security
or warrant, option or other right to subscribe for or purchase any shares of
Common Stock or any Convertible Security, other than an Option.

                  "Company" shall have the meaning set forth in the first
paragraph of this Agreement, and its successors and assigns.

                  "Convertible Securities" shall mean evidences of indebtedness,
shares of capital stock or other securities which are or may be at any time
convertible into or exchangeable for

<PAGE>

                                                                               3

shares of Common Stock. The term "Convertible Security" shall mean one of the
Convertible Securities.

                  "Credit Agreement" shall have the meaning set forth in the
second recital of this Agreement.

                  "Current Market Price" of an Option Share shall mean, except
as hereinafter provided, the average of the daily market prices for the Common
Stock of the Company for the twenty (20) consecutive trading days preceding such
date. The market price for each such day shall be the last sale price on such
day as reported on the New York Stock Exchange consolidated tape, or, if such
Common Stock of the Company is not listed on the New York Stock Exchange, or
reported on such consolidated tape, then the last sale price on such day on the
principal domestic stock exchange on which such Common Stock of the Company is
then listed or admitted to trading, or, if no sale takes place on such day on
such exchange, the average of the closing bid and asked prices on such day as
officially quoted on such exchange, or, if such Common Stock of the Company is
not then listed or admitted to trading on any domestic stock exchange but is
quoted on the Nasdaq Stock Market's National Market, then the Current Market
Price for each such trading day shall be the last sale price on such day as
quoted on the Nasdaq Stock Market's National Market, or, if no sale takes place
on such day or if such Common Stock of the Company is neither listed or admitted
to trading on any domestic stock exchange nor quoted on such day on the Nasdaq
Stock Markets National Market, then the Current Market Price for each such
trading day shall be the average of the reported closing bid and asked price
quotations on such day in the over-the-counter market, as reported by the Nasdaq
Stock Market, or, if not so reported, as furnished by the National Quotation
Bureau, Inc., or, if such firm at the time is not engaged in the business of
reporting such prices, as furnished by any similar firm then engaged in such
business as selected by LLC or the Company, or, if there is no such firm, as
furnished by any member of the National Association of Securities Dealers, Inc.
selected by LLC or the Company with the written approval of a Majority in
Interest of Evaluating Holders.

                  If at any time the Common Stock of the Company is not listed
on any domestic exchange or quoted in the domestic over-the-counter market, the
Current Market Price of an Option Share shall be the fair market value per share
of the Common Stock of the Company as determined by a panel of two independent
appraisers (together, the "Independent Appraisers") who shall be independent
investment banks experienced in the evaluation of the value of securities of a
corporation of a type similar to the Company (one to be selected by the relevant
Purchasing Party, and the other by the relevant Holder or a Majority in Interest
of Evaluating Holders, as applicable), which determination shall not take into
account any discount attributable to the minority status of the Option and/or
Option Shares, or any other minority interest, or the illiquidity of the Option
and/or Option Shares.

                  In the event the Independent Appraisers are unable to agree
upon the Current Market Price within ten (10) days of their selection, then the
two Independent Appraisers shall select a third independent appraiser who shall
be an independent investment bank experienced in the evaluation of the value of
securities of a corporation of a type similar to the Company to determine the
Current Market Price within fifteen (15) days of its selection. A determination
by the Independent Appraiser of the Current Market Price shall be final and
binding upon the Borrower, LLC, the Company and the Holders.

<PAGE>

                                                                               4

                  The relevant Purchasing Party shall pay the fees and expenses
of the independent appraiser it appoints. The relevant Holder or Evaluating
Holders, as applicable, shall pay the fees and expenses of the independent
appraiser it, or they, appoint; provided that, when applicable, such fees and
expenses shall be divided pro rata among the Evaluating Holders in proportion to
their respective ownership interests in the securities being evaluated.

                  Should a third independent appraiser be appointed, each of the
relevant Purchasing Party and the relevant Holder (or Evaluating Holders, where
applicable) shall pay fifty percent (50%) of the expense associated with such
appointment. Where applicable, the portion of the fees and expenses payable by
the Evaluating Holders shall be divided pro rata among such Evaluating Holders
in proportion to their respective ownership interests in the securities being
evaluated.

                  "Date Certain" shall have the meaning set forth in the Credit
Agreement.

                  "Demand" shall have the meaning set forth in Section 9.02(a)
hereof.

                  "Demand Registration" shall have the meaning set forth in
Section 9.02(a) hereof.

                  "Demand Registration Statement" shall have the meaning set
forth in Section 9.02(b) hereof.

                  "Dividend" shall mean any dividend or other distribution on
Common Stock whether in the form of money, evidences of the Company's
indebtedness, or any other properties or securities (other than shares of Common
Stock) or any options, warrants or other rights to subscribe for or to purchase
any of the foregoing.

                  "Evaluating Holders" shall mean, at any time and from time to
time, the Holders of the securities whose Current Market Price is being
ascertained at such time.

                  "Excess Additional Option Percentage" shall have the meaning
provided in Section 2.01(b) hereof.

                  "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the SEC promulgated pursuant
thereto.

                  "Exercise Price" shall have the meaning set forth in Section
4.01 hereof.

                  "Existing Credit Agreement" shall have the meaning set forth
in the first recital of this Agreement.

                  "Existing Option Agreement" shall have the meaning set forth
in the fifth recital of this Agreement.

                  "Extension Date" shall mean the first day of any period for
which the maturity of the Tranche A Loan has been extended, which period shall
expire on an Additional Extended Date Certain.

<PAGE>

                                                                               5

           "Extension Fee Loan" shall have the meaning provided in Section
2.01(b) hereof.

           "Full Repayment Date" shall mean the date of repayment in full of the
Tranche A Loan.

           "Fully Diluted Basis" shall mean, with respect to the Common Stock,
at any date as of which the number of shares thereof is to be determined, a
calculation based on all shares of Common Stock outstanding at such date and all
shares of Common Stock issuable pursuant to Convertible Securities or Common
Stock Equivalents, outstanding on such date together with any Option Shares
issuable pursuant to any Option.

           "Governmental Authority" shall mean any federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, or any court, in each case whether of the United States of
America or foreign.

           "GPSF" shall have the meaning set forth in the first paragraph of
this Agreement.

           "Holder" shall mean for purposes of the Original Option, the Initial
Holders and the Subsequent Holders, or for purposes of the Additional Option,
the Tranche A Lenders and the Assignees, designees or transferees of the Option
or any portion thereof or any Option Shares and/or Registrable Securities.

           "HSR Act" shall have the meaning set forth in Section 3.01(f) hereof.

           "Indemnified Party" shall have the meaning set forth in Section
9.06(c) hereof.

           "Indemnifying Party" shall have the meaning set forth in Section
9.06(c) hereof.

           "Independent Third Party" shall have the meaning set forth in Section
8.01 hereof.

           "Initial Holders" shall have the meaning set forth in the preamble of
this Agreement.

           "Initial Lenders" shall have the meaning set forth in the first
recital of this Agreement.

           "IPO" shall mean the sale, in the initial underwritten offering,
registered under the Securities Act, of shares of the Company'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.

           "LBI" shall have the meaning set forth in the first paragraph of this
Agreement.

           "Lenders" shall have the meaning set forth in the preamble of this
Agreement.

           "LLC" shall have the meaning set forth in the first paragraph of this
Agreement, and shall for purposes of Article III include the New LLC, and their
respective successors and assigns.

<PAGE>

                                                                               6

           "Losses" shall have the meaning set forth in Section 9.06(a) hereof.

           "Majority Holders" shall mean the Holders of at least a 30% interest
in the Option or the Option Shares.

           "Majority in Interest of Evaluating Holders" shall mean, at any time
and from time to time, the Holders of at least a 51% interest in the Option
Shares whose Current Market Price is being ascertained at such time.

           "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 any event, circumstance or
condition which is reasonably likely to (A) have a material adverse effect on
the business, condition (financial or otherwise), results of operations,
properties, assets, liabilities or prospects of LLC, (B) materially and
adversely affect the ability of LLC or the Company to perform its obligations
under this Agreement or (C) materially and adversely affect the rights and
remedies of the Holders under this Agreement.

           "Option" shall mean collectively the Original Option and the
Additional Option.

           "Option Agreement" shall mean this Agreement.

           "Option Share Number" shall mean, at any time, the aggregate number
of Option Shares which may at such time be purchased upon exercise of the
Option, after giving effect to all prior adjustments to such number made or
required to be made under the terms of this Agreement.

           "Option Shares" shall mean all the shares of Common Stock of the
Company issuable or issued upon the exercise of the Option, or all the shares of
Common Stock of the Company, if any, deliverable upon the exercise by LLC of its
call right pursuant to Article VII hereof.

           "Original Option" shall have the meaning provided in Section 2.01(a)
hereof.

           "Person" means an individual, partnership, corporation, limited
liability company, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof.

           "Piggy-Back Registration" shall have the meaning set forth in Section
9.01(a) hereof.

           "Piggy-Back Registration Offer" shall have the meaning set forth in
Section 9.01(a) hereof.

           "Preferred Stock" shall mean, with respect to any Person, any capital
stock issued by such Person which has a preference over such Person's Common
Stock.

<PAGE>

                                                                               7

           "Proceeding" shall mean an action, claim, suit or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.

           "Prospectus" shall mean the Prospectus included in any Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated pursuant to the
Securities Act), as amended or supplemented by an prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by a Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.

           "Purchasing Party" shall mean either LLC or the Borrower, as
applicable.

           "Put Effective Date" shall mean (i) with respect to the Original
Option, the earlier of the Full Repayment Date and, at each Holder's election,
(x) the Initial Date Certain, as such date may be extended pursuant to Section
2.9(a) of the Credit Agreement or (y) any Additional Extended Date Certain, if
the Initial Date Certain has been extended pursuant to Section 2.9(b) of the
Credit Agreement, and (ii) with respect to the Additional Option, the earlier of
the Full Repayment Date and the Date Certain.

           "Put Notice" shall have the meaning set forth in Section 6.01 hereof.

           "Put Option Price Loan" shall have the meaning provided in Section
6.04 hereof.

           "Put Option Purchase Price" shall mean (a) subject to clause (b)
below, with respect to the exercise of any option to sell any Option pursuant to
any Put Notice delivered in accordance with Article VI hereof by any Holder of
an Option, the Current Market Price of an Option Share as of the Put Repurchase
Date multiplied by the Option Share Number in effect on the date of delivery of
the Put Notice and (b) with respect to the exercise of any option to sell any
Option pursuant to any Put Notice delivered in accordance with Section 6.01(b)
hereof by GPSF, the higher of (i) the Current Market Price of any Option Share
as of the Put Repurchase Date multiplied by the Option Share Number in effect on
the date of delivery of the Put Notice and (ii) the sum of the (x) the
applicable deemed Put Option Price of the Option Share in respect of the
Original Option of GPSF as set forth on Annex 2 hereto corresponding to the
relevant Put Repurchase Date within the period set forth in such Annex plus (y)
the Current Market Price of any Option Share in respect of the Additional
Option, if applicable, as of the Put Repurchase Date multiplied by the Option
Share Number in respect thereof in effect on the date of delivery of the Put
Notice; provided, however, that during the time that no Junior Obligee (as
defined in the Intercreditor Agreement) is continuing to exercise the rights and
remedies under the Financing Documents to foreclose on the Collateral, this
clause (b) shall not apply.

           "Put Repurchase Date" shall mean, with respect to the exercise of any
put option pursuant to Article VI hereof, a date designated by the Purchasing
Party which is not earlier than ten (10) days, or more than thirty (30) days,
after the date of receipt by the Purchasing Party of the Put Notice; provided,
however, if the exercise of any put option pursuant to Article VI hereof

<PAGE>

                                                                               8

           is in connection with the refinancing in full of the Credit
Agreement, then the Put Repurchase Date shall be the earlier of (i) the date of
such refinancing or (ii) such thirty (30) day period; provided, further, that in
the event the Current Market Price shall not have been finally determined on any
date that otherwise would have been a Put Repurchase Date, then the Put
Repurchase Date shall be extended to the fifth Business Day following the date
of such final determination of the Current Market Price.

           "Register" shall have the meaning set forth in Section 10.17 hereof.

           "Registrable Securities" shall mean any of (i) the Option Shares
(whether or not the related Option has been exercised), (ii) any other
securities issued or issuable with respect to any Option Shares by way of stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise,
until, in the case of any such Option Share or security, (A) it has been
registered effectively pursuant to the Securities Act and disposed of in
accordance with a Registration Statement covering it, (B) it ceases to be
outstanding or (C) it has been sold or otherwise transferred pursuant to Rule
144 or could be sold or otherwise transferred under Rule 144(k) under the
Securities Act and is not subject to any restrictive legend or stop transfer
order and (iii) any of the shares received pursuant to Section 7.01.

           "Registration Expenses" shall have the meaning set forth in Section
9.05 hereof.

           "Registration Statement" shall mean any registration statement
contemplated by Section 9.01 or Section 9.02 hereof, including the Prospectus,
amendments and supplements to such registration statement or Prospectus,
including pre- and post-effective amendments, all exhibits thereto, and all
material incorporated by reference or deemed to be incorporated by reference in
such registration statement.

           "Rule 144 Transaction" shall mean a transfer of Common Stock (a)
complying with Rule 144 under the Securities Act as such rule or a successor
thereto is in effect on the date of such transfer (but not including a sale
other than pursuant to a "brokers transaction" as defined in clauses (i) and
(ii) of paragraph (g) of Rule 144 as in effect on the date hereof) and (b)
occurring at a time when the Common Stock or Preferred Stock is registered
pursuant to Section 12 of the Exchange Act.

           "Sale Notice" shall have the meaning set forth in Section 8.01
hereof.

           "Section 9.04(iii) Notice" shall have the meaning set forth in
Section 9.04 hereof.

           "Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations promulgated by the SEC thereunder.

           "Shelf Registration" shall have the meaning set forth in Section
9.01(c) hereof.

           "Special Counsel" shall mean any special counsel to the Holders, for
which Holders of Registrable Securities will be reimbursed pursuant to Section
9.04 hereof.

<PAGE>

                                                                               9

           "Subsequent Holder" shall have the meaning set forth in the preamble
of this Agreement.

           "Tag-Along Notice" shall have the meaning set forth in Section 8.02
hereof.

           "Transfer Agent" shall have the meaning set forth in Section 4.04
hereof.

           "Underwritten Offering" shall mean a registration in connection with
which securities of the Company are sold to an underwriter for reoffering to the
public pursuant to an effective registration statement.

                                   ARTICLE II

                               Grant of the Option

           SECTION 2.01. Grant and Authorization of the Option. (a) In
consideration of the making of the loans by the Initial Lenders to the Borrower
under the Existing Credit Agreement as a condition to the lending of the loans
thereunder, LLC granted to the Initial Holders on the Initial Closing Date, an
unconditional, irrevocable option (the "Original Option") to purchase from LLC
subject to the terms hereof, up to three percent (3.0%) of the total common
equity of the Company computed on a Fully Diluted Basis, which Option may be
exercised as provided in Article IV.

           (b) In consideration of the extension by the Tranche A Lenders of the
maturity date of the Tranche A Loan under Section 2.9(b) of the Credit Agreement
and as a condition to such extension of the maturity date thereunder, effective
on each Extension Date and only if such Extension Date occurs, LLC hereby grants
to the Holders (to be allocated among the Holders as described in the last
paragraph of this Section 2.01(b)), an unconditional, irrevocable option
(collectively, the "Additional Option") to purchase from LLC a percentage of the
total common equity of the Company outstanding on such Extension Date, computed
on a Fully Diluted Basis, as determined pursuant to Section 4.02(b) of this
Agreement, which Additional Option may be exercised as provided in Article IV
hereof; provided that to the extent that such percentage exceeds one percent
(1.0%) for each Additional Option (such excess only, the "Excess Additional
Option Percentage"), then, at the Borrower's option, (i) the Holders may receive
such Additional Option with respect to the Excess Additional Option Percentage,
or (ii) the Borrower may pay on such Extension Date to such Holders an amount
equal to the Put Option Purchase Price with respect to such Excess Additional
Option Percentage; provided, further, that the Borrower shall exercise its
option referred to in the foregoing proviso equally and on a non-discriminatory
basis with respect to all Holders entitled to a portion of such Excess
Additional Option Percentage.

           Such Put Option Purchase Price may, at the Borrower's option, (x) be
paid in immediately available funds, or (y) be deemed to constitute a Tranche A
Loan made on such Put Repurchase Date in a principal amount equal to the amount
of such Put Option Purchase Price and all in accordance with the terms of
Section 2.10(c) of the Credit Agreement (the "Extension Fee Loan"); provided,
that the Borrower shall exercise its option referred to in this sentence equally
and on a non-discriminatory basis with respect to all Holders entitled to a
portion of such

<PAGE>

                                                                              10

Put Option Purchase Price. For purposes of determining the Put Option Purchase
Price, the date immediately preceding the date on which the grant of the
Additional Option with respect to the Excess Additional Option Percentage would,
but for clause (ii) of the preceding paragraph, become effective shall be deemed
to be the date of delivery of a Put Notice with respect to such Excess
Additional Option Percentage and the Put Repurchase Date with respect to such
Excess Additional Option Percentage).

           The Additional Option granted on such Extension Date shall be
distributed among the Holders based on the respective aggregate principal amount
of Tranche A Loans (other than Extension Fee Loans and Put Option Price Loans)
held by such Holders or their respective affiliates on such Extension Date;
provided, however, that any Excess Additional Option Percentage determined for
any Extension Date shall be distributed among the Holders pro rata based upon
the respective aggregate principal amount of Extension Fee Loans and Put Option
Price Loans held by such Holders or their respective affiliates on such
Extension Date (which amount shall include the most recently extended Put Option
Price Loan plus the aggregate principal amount of any Extension Fee Loan made
prior to such Extension Date).

                                  ARTICLE III

                    Representations, Warranties and Covenants

           SECTION 3.01. Representations, Warranties and Covenants of LLC. LLC
represents and warrants to, and agrees with, the Holders as follows:

           (a) It is a limited liability company duly organized, validly
existing and in good standing under the laws of the state of Delaware.

           (b) It has the corporate power and authority (i) to execute, deliver
and perform its obligations under this Agreement, (ii) to grant the Option,
(iii) to transfer the Option Shares transferable upon due exercise or call of
the Option, and (iv) to cause the Company to have the Transfer Agent record the
transfer of the Option Shares transferable upon due exercise or call of the
Option.

           (c) 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 the Company free and clear of all Liens and adverse claim, other than
the Liens in favor of the Collateral Agent created by the Security Documents,
and indirectly owns the equity of the Company's Subsidiaries, or a portion
thereof, as applicable.

           (d) This Agreement has been duly executed and delivered by LLC and
constitutes the legal, valid and binding obligation of LLC, enforceable against
LLC in accordance with its terms. The Option has been duly granted to the
Initial Holders and constitutes, the legal, valid and binding obligation of LLC,
enforceable against the LLC in accordance with its terms except that (A) the
enforcement thereof may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (ii) general principles of equity
and (B) any

<PAGE>

                                                                              11

rights to indemnity or contribution thereunder may be limited by federal and
state securities laws and public policy considerations.

           (e) Except as set forth in Part F of the Disclosure Letter, each of
(i) the execution, delivery and performance of this Agreement by LLC and the
Company, (ii) the offering, grant, and delivery of the Option and the Option
Shares transferable upon the exercise of the Option or the Call, and (iii) the
fulfillment of and compliance with the terms and provisions of this Agreement
(A) have been duly authorized by all requisite corporate and, if necessary,
member or stockholder action of LLC and the Company and (B) will not (1)
conflict with, violate or constitute a default under (x) any provision of the
certificate of formation, operating agreement or certificate of incorporation,
by-laws or other constitutive documents of LLC or the Company, (y) any law,
statute, rule or regulation or any order of any Governmental Authority
applicable to LLC, the Company or any of their subsidiaries or either of their
respective properties or (z) any provision of any indenture or other material
agreement or other material instrument to which LLC, the Company or any of their
subsidiaries are a party or by which they or any of their respective properties
are or may be bound, (2) be in conflict with, result in a breach of or
constitute (alone or with notice or lapse of time or both) a default under, or
give rise to any right to accelerate or to require the prepayment, repurchase or
redemption of any obligation under, any such indenture, agreement or other
instrument or (3) result in the creation or imposition of any Lien upon or with
respect to any property or assets now owned or hereafter acquired by LLC, the
Company or any of their subsidiaries.

           (f) No action, consent, waiver, authorization or approval of,
registration or filing with or any other action by any Governmental Authority or
any nongovernmental Person (including, without limitation, any creditor, partner
or shareholder of LLC or the Company, and any consent, approval, authorization,
declaration or filing or the expiration of any waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act")) is or will be
required in connection with (i) the execution, delivery and performance of this
Agreement by LLC or the Company, (ii) the grant of the Option and the transfer
of the Option Shares pursuant to the exercise of the Option in accordance with
this Agreement, other than with respect to (A) the exercise by any Holder of its
right to convert the Option to Option Shares under this Agreement, or (B) the
delivery by LLC of Option Shares pursuant to its call right under Article VII of
this Agreement, which may require filing(s) under the HSR Act and (iii) the
performance by LLC or the Company of its obligations under this Agreement, or as
a condition to the legality, validity or enforceability of this Agreement or the
consummation of the transactions contemplated thereby, other than such
authorizations and approvals as have already been obtained and are in full force
and effect.

           (g) Except as set forth in Section 5.6 of the Credit Agreement, there
are not any judicial, administrative, arbitral or other actions, suits or
proceedings at law or in equity or by or before any Governmental Authority now
pending or, to the knowledge of LLC, threatened against or affecting LLC or any
business, property, prospects or rights of LLC (i) that involve this Agreement
or the transactions contemplated thereby or (ii) which if adversely determined,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect or result in a Material Adverse Change to the Company
and the Significant Subsidiaries, taken as a whole.

<PAGE>

                                                                              12

           (h) Subject to the accuracy of the Initial Holders' representations
set forth in Section 3.03 and, in the case of an Option transfer, compliance
with Section 5.01(b), the grant of the Option and the offering, sale and
delivery of the Option and the Option Shares under the circumstances
contemplated by this Agreement constitute exempt transactions under the
registration provisions of the Securities Act, and do not require the
registration of the Option or the Option Shares under the Securities Act.

           (i) The Option Shares, when transferred and delivered against payment
of the Exercise Price therefor, will be duly authorized, validly issued, fully
paid and nonassessable, and subject to no Liens in respect of the issuance
thereof.

           (j) LLC will not amend its Charter Document or enter into any
agreement inconsistent with this Agreement or that would make the LLC or the
Company unable to comply with the terms of this Agreement.

           (k) At all times on or after the date of delivery of a Call Notice,
LLC shall promptly notify each Holder of any contemplated transaction, including
the entering into any agreement, letter of intent, commitment or memorandum of
understanding, whether binding or not, which could reasonably be expected to
have a material impact upon the value of the Common Stock of the Company, unless
such Holder has previously requested the LLC not to deliver such notice to such
Holder (upon which request the LLC shall be entitled to rely) ; provided,
however, (i) such information may not be used by such Holder in a manner which
would result in a violation of Section 10(b) of the Exchange Act, and the rules
promulgated thereunder, and (ii) each Holder shall keep such information
confidential, unless (A) LLC or the Company informs it that such information is
no longer confidential, which LLC or the Company shall do promptly upon the
information ceasing to be of a confidential nature, (B) such information becomes
generally available to the public (other than as a result of a breach of this
provision by the Holder), (C) the Holder is requested or required by a
Governmental Authority or in connection with a legal proceeding or pursuant to
legal process or otherwise required by law to disclose such information;
provided that (i) the Holder shall notify LLC prior to making any such
disclosure and (ii) the Holder shall not disclose any information solely for the
purpose of relieving itself of its obligations under Section 3.01(k)(i) hereof,
(D) such information was available to the Holder on a non-confidential basis
from a source (other than the Company, LLC or their representatives) that, to
the Holder's knowledge, is not and was not prohibited from disclosing such
information to the Holder by a contractual, legal or fiduciary obligation or (E)
such information is disclosed by any Holder to an independent appraiser in
connection with the determination of the Current Market Price of any Option
Shares; provided, however, that such independent appraiser agrees in writing to
keep such information confidential.

           (l) LLC owns 1,000 shares of the Common Stock of the Company, which
shares represent 100% of the outstanding Common Stock of the Company. Such
shares of Common Stock are free and clear of all Liens and adverse claims, other
than the Liens in favor of the Collateral Agent created by the Financing
Documents.

           SECTION 3.02. Representations, Warranties and Covenants of the
Company. The Company represents, warrants and covenants to, and agrees with, the
Holders as follows:

<PAGE>

                                                                              13

           (a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the state of Delaware.

           (b) The Company has the corporate power and authority (i) to execute,
deliver and perform its obligations under this Agreement and (ii) to cause its
Transfer Agent to record the transfer of Common Stock upon due exercise of the
Option.

           (c) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except that (A)
the enforcement thereof may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (ii) general principles of equity
and (B) any rights to indemnity or contribution hereunder may be limited by
federal and state securities laws and public policy considerations.

           (d) Each of (i) the execution, delivery and performance of this
Agreement by the Company and (ii) the fulfillment of and compliance with the
terms and provisions of this Agreement (A) have been duly authorized by all
requisite corporate and, if necessary, stockholder action of the Company and (B)
will not (1) conflict with, violate or constitute a default under (x) any
provision of the certificate of incorporation, by-laws or other constitutive
documents of the Company, (y) any law, statute, rule or regulation or any order
of any Governmental Authority applicable to, the Company or any of its
subsidiaries or its properties or (z) any provision of any indenture or other
material agreement or other material instrument to which, the Company or any of
its subsidiaries are a party or by which they or any of their respective
properties are or may be bound, (2) be in conflict with, result in a breach of
or constitute (alone or with notice or lapse of time or both) a default under,
or give rise to any right to accelerate or to require the prepayment, repurchase
or redemption of any obligation under, any such indenture, agreement or other
instrument or (3) result in the creation or imposition of any Lien upon or with
respect to any property or assets now owned or hereafter acquired by the Company
or any of its subsidiaries.

           (e) No action, consent, waiver, authorization or approval of,
registration or filing with or any other action by any Governmental Authority or
any nongovernmental Person (including, without limitation, any creditor, partner
or shareholder of the Company, and any consent, approval, authorization,
declaration or filing or the expiration of any waiting period under the HSR), is
or will be required in connection with (i) the execution, delivery and
performance of this Agreement by the Company, (ii) the transfer of the Common
Stock pursuant to the exercise of the Option in accordance with this Agreement,
other than with respect to (A) the exercise by any Holder of its right to
convert the Option to Option Shares under this Agreement, or (B) the delivery by
LLC of Option Shares pursuant to its call right under Article VII of this
Agreement, which may require filing(s) under the HSR Act and (iii) the
performance by the Company of its obligations under this Agreement, or as a
condition to the legality, validity or enforceability of this Agreement or the
consummation of the transactions contemplated hereby, other than such
authorizations and approvals as have already been obtained and are in full force
and effect.

<PAGE>

                                                                              14

           (f) Except as set forth in Section 5.6 of the Credit Agreement, there
are not any judicial, administrative, arbitral or other actions, suits or
proceedings at law or in equity or by or before any Governmental Authority now
pending or, to the knowledge of the Company, threatened against or affecting the
Company or any business, property, prospects or rights of the Company (i) that
involve this Agreement or the transactions contemplated thereby or (ii) which if
adversely determined, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect or result in a Material Adverse
Change to the Company and the Significant Subsidiaries, taken as a whole.

           (g) The Option Shares, when transferred and delivered against payment
of the Exercise Price therefor, will be duly authorized, validly issued, fully
paid and non-assessable, and subject to no Liens.

           (h) The Company will not amend its Charter Document or enter into any
agreement inconsistent with this Agreement or that would make the Company unable
to comply with the terms of this Agreement.

           (i) At all times on or after the date of delivery of a Call Notice,
the Company shall promptly notify each Holder of any contemplated transaction,
including the entering into any agreement, letter of intent, commitment or
memorandum of understanding, whether binding or not, which could reasonably be
expected to have a material impact upon the value of the Common Stock of the
Company, unless such Holder has previously requested the Company not to deliver
such notice to it (upon which request the Company shall be entitled to rely);
provided, however, (i) such information may not be used by such Holder in a
manner which would result in a violation of Section 10(b) of the Exchange Act,
and the rules promulgated thereunder, and (ii) each Holder shall keep such
information confidential, unless (A) LLC or the Company informs it that such
information is no longer confidential, which LLC or the Company shall do
promptly upon the information ceasing to be of a confidential nature, (B) such
information becomes generally available to the public (other than as a result of
a breach of this provision by the Holder), (C) the Holder is requested or
required by a governmental authority or in connection with a legal proceeding or
pursuant to legal process or otherwise required by law to disclose such
information; provided that (i) the Holder shall notify LLC prior to making any
such disclosure and (ii) the Holder shall not disclose any information solely
for the purpose of relieving itself of its obligations under Section 3.02(i)(i)
hereof, (D) such information was available to the Holder on a non-confidential
basis from a source (other than the Company, LLC or their representatives) that,
to the Holder's knowledge, is not and was not prohibited from disclosing such
information to the Holder by a contractual, legal or fiduciary obligation, or
(E) such information is disclosed by any Holder to an independent appraiser in
connection with the determination of the Current Market Value of any Option
Shares; provided, however, that such independent appraiser agrees in writing to
keep such information confidential.

           (j) Immediately prior to the Closing, the Company's authorized
capital stock consists of 1,000 shares of Common Stock of which 1,000 shares are
validly issued and outstanding. Such 1,000 shares of Common Stock will be
validly issued and outstanding as of the Closing Date, free and clear of all
Liens and adverse claims, other than the Liens in favor of the Collateral Agent
created by the Financing Documents.

<PAGE>

                                                                              15

           SECTION 3.03. Representations, Warranties and Covenants of the
Initial Holders. Each Initial Holder represents and warrants to, and agree with,
the Company, the Borrower and LLC that the Option and Option Shares are being
acquired by such Initial Holder for its own account and not with a view to or
for sale in connection with any distribution thereof that would violate the
registration provisions of the Securities Act or the applicable state securities
laws of any state, and each Initial Holder will not distribute the Option and
Option Shares in violation of the registration provisions of the Securities Act
or the applicable securities laws of any state.

                                   ARTICLE IV

                                 Exercise Terms

           SECTION 4.01. Exercise Price. The Option shall entitle the Holders
thereof, subject to adjustment pursuant to the terms of this Agreement, to
purchase shares of Common Stock of the Company at an exercise price (the
"Exercise Price") of $1.00 for the percentage of the total shares of such Common
Stock set forth in Section 4.02. LLC shall, at all times that the Option or any
portion thereof remains outstanding, maintain a Register indicating the Holders'
respective ownership interests in the Option, as more fully set forth in Section
10.17 hereof.

           SECTION 4.02. Exercise Amounts. (a) (i) Subject to the terms and
conditions set forth herein, the percentage (and no more than the percentage
indicated) of the total shares of Common Stock of the Company on a Fully Diluted
Basis as to which the pro rata portion of the Original Option held by a Holder
may be exercised in the aggregate shall be the corresponding pro rata portion of
3%. On the Closing Date, the pro rata portion of the Option held by each Holder
is set forth on Annex 3.

           (b) The percentage of the total shares of Common Stock of the Company
on a Diluted Basis as to which the ratable portion (such ratable portion to be
determined as provided in the last sentence of Section 2.01(b)of this Agreement)
of the aggregate Additional Option held by a Holder under Section 2.01(b) hereof
shall be fixed on the date such Additional Option becomes effective under
Section 2.01(b) of this Agreement and shall be equal to the sum of the
following, expressed as a percentage:

               (i)    (0.8671%); plus

               (ii)   B - A; plus
                      -----
                        A

               (iii)  in the event that (1) the Borrower elects the option
                      described in clause (y) of the second paragraph of Section
                      2.01(b) hereof and (2) the calculation described in clause
                      (ii) above results in a positive number,

                                       X;
                                       -
                                       A

<PAGE>

                                                                              16

                          Where:    A = $600,000,000

                                    B = the aggregate outstanding principal
                               amount of Tranche A Loans on such date (other
                               than any Extension Fee Loan made on such date);
                               and

                                    X = an amount equal to the product of (i)
                               0.8671% multiplied by (ii) the percentage
                               determined pursuant to Section 4.02(b)(ii) hereof
                               multiplied by (iii) the Fair Market Value (as
                               defined in Section 9.26 of the Credit Agreement)
                               of the Company as of such date;

                   provided, that the sum of the percentages determined pursuant
           to clauses (i), (ii) and (iii) above shall in no event be less than
           0.75%. For purposes of illustration an example of the calculation of
           such percentage is attached hereto as Annex 1.

           (c) At any time, and from time to time, when the number of Option
Shares into which the Option of a Holder is convertible into is calculated
pursuant to this Section 4.02, the Company shall provide a certificate (which
shall be signed by its chief executive, chief financial officer or treasurer),
setting forth a detailed explanation of how the Option Share Number was
calculated.

           SECTION 4.03. Manner of Exercise. An Option may be exercised upon
notice and payment to LLC of the Exercise Price for the Option Shares being
purchased upon such exercise.

           The pro rata portion of the Option held by any Holder shall be
exercisable at the election of such Holder either in full or in part at any time
from and after the date hereof, or from time to time after the date hereof, but
in no event more than 45 days following the Date Certain; provided, that the
45-day period referred to above in this sentence shall not be deemed to commence
until (A) the Full Repayment Date has occurred and (B) the LLC has given notice
to the Holders that such Date Certain and Full Repayment Date have occurred.

           SECTION 4.04. Transfer of Option Shares. Upon the payment of the
Exercise Price, LLC shall transfer and the Company shall cause its transfer
agent for the Common Stock, which may be the Company (the "Transfer Agent"), to
deliver with all reasonable dispatch to or upon the written order of the
respective Holder and in such name or names as such Holder may designate, a
certificate or certificates for the number of full Option Shares so purchased
upon the exercise of such Option. Such certificate or certificates shall be
deemed to have been issued and any Person so designated to be named therein
shall be deemed to have become a Holder of record of such Option Shares as of
the date of the payment of the Exercise Price.

           LLC and the Company shall keep copies of this Agreement and any
notices given or received hereunder available for inspection by the Holders
during normal business hours at its offices at the address set forth in Section
10.04 hereof.

<PAGE>

                                                                              17

          SECTION 4.05. Fractional Option Shares. Until the closing date of the
IPO, LLC shall be required to transfer fractional Option Shares on the exercise
of the Option. On or after the closing date of the IPO, if any fraction of an
Option Share would, except for the provisions of this Section 4.05, be issuable
on the exercise of the Option (or specified portion thereof), the number of
shares to be transferred will be rounded up to the nearest whole number.

          SECTION 4.06. Reservation of Option Shares. LLC shall at all times
keep reserved out of the Common Stock it owns, a number of shares of Common
Stock free and clear of all liens, other than the Liens created by the Financing
Documents, sufficient to provide for (i) the exercise of the Option and (ii) the
transfer of all Option Shares transferable upon the exercise of the Option. LLC
and the Company will keep a copy of this Agreement on file with the Transfer
Agent. All Option Shares which may be transferred to the respective Holder upon
exercise of the Option shall, upon transfer and payment of the Exercise Price
pursuant to Section 4.04 hereof, be fully paid, nonassessable, free of
preemptive rights and free from all taxes, Liens, charges and security interests
with respect to the issue thereof. LLC or the Company will supply the Transfer
Agent with duly executed stock certificates for such purpose.

          SECTION 4.07. Compliance with Law. If any shares of Common Stock
required to be reserved for purposes of exercise of the Option require, under
any Federal or state law or applicable governing rule or regulation of any
national securities exchange, registration with or approval of any Governmental
Authority or listing on any such national securities exchange before such shares
may be transferred upon exercise, LLC and the Company will in good faith and as
expeditiously as possible endeavor also to cause such shares to be duly
registered, approved or listed on the relevant national securities exchange, as
the case may be. LLC and the Company will take all such action as may be
necessary or appropriate in order that LLC may validly and legally transfer
fully paid and nonassessable Option Shares on the exercise of the Option from
time to time outstanding.

                                   ARTICLE V

                             Transfer Restrictions

          SECTION 5.01. Restrictions on Transfers of Option and Option Shares.
The following restrictions on transfer shall apply to the Option and Option
Shares:

          (a) No Holder or transferee thereof shall sell, transfer or convey in
any manner whatsoever any Option or Option Shares except in accordance with the
terms and provisions of this Agreement.

          (b) Each Holder may, without the consent of the Borrower, sell or
assign any part of the Option or Option Shares and the other rights and
obligations of such Holder to any Person or any assignee thereof (an "Assignee")
unless the sale or assignment of the Option or Option Shares and such other
rights and obligations of such Holder to such Person would reasonably put the
business of the Borrower at a competitive disadvantage, in which case such sale
or assignment shall require the consent of the Borrower; provided, however, that
such consent shall not be required if the Option or Option Shares are sold
pursuant to a public

<PAGE>

                                                                              18

distribution of such Option or Option Shares. The Assignee shall agree to be
bound by the terms of this Agreement and such Option and shall provide:

                  (i)   if such Option or Option Shares are being transferred to
         a qualified institutional buyer (as defined in Rule 144A under the
         Securities Act) in accordance with Rule 144A under the Securities Act
         or pursuant to an exemption from registration in accordance with Rule
         144 under the Securities Act or Regulation S under the Securities Act
         or pursuant to an effective registration statement under the Securities
         Act, a certification to that effect and, with respect to transfers
         pursuant to Rule 144 or Regulation S, an opinion of counsel reasonably
         acceptable to the Company to the effect that such transfer does not
         require registration under the Securities Act; or

                  (ii)  if such Option or Option Shares are being transferred in
         reliance on another exemption from the registration requirements of the
         Securities Act, a certification to that effect and an opinion of
         counsel reasonably acceptable to the Company to the effect that such
         transfer does not require registration under the Securities Act,

         and effective immediately upon such transfer or assignment, the
         Assignee shall be deemed a Holder and shall have the rights and
         obligation of a Holder pursuant to this Agreement.

                  (c)   Notwithstanding any other provision contained in this
Agreement or any other Financing Document to the contrary, any Holder may assign
all or any portion of the Option or Option Shares held by it as collateral
security.

                  SECTION 5.02. Notation. A notation will be made in the
appropriate transfer records of the Company or the LLC, as applicable, with
respect to any such transfer of the Option and Option Shares referred to in this
Agreement.

                                   ARTICLE VI

                               Holders' Put Rights

                  SECTION 6.01. Granting of Put; Put Option Purchase Price.
Subject to the limitations set forth herein, (a) provided that the Company shall
not have consummated an IPO prior to the Put Effective Date, at any time or from
time to time, after the Put Effective Date until 45 days thereafter, any Holder,
and (b) at any time or from time to time, after any Junior Obligee (as defined
in the Intercreditor Agreement) shall have commenced to exercise the rights and
remedies under the Financing Documents to foreclose on the Collateral pursuant
to the Intercreditor Agreement, GPSF, upon written notice to a Purchasing Party
(a "Put Notice"), shall be entitled to sell and such Purchasing Party shall be
obligated to purchase from such Holder, all of the Option held by any such
Holder at the Put Option Purchase Price; provided, that the 45-day period
referred to in clause (a) above in this sentence shall not be deemed to commence
until the LLC has given notice to the Holders that such Put Effective Date has
occurred.

                  SECTION 6.02. Put Notice. Each Put Notice delivered pursuant
to Section 6.01 hereof shall specify:

<PAGE>

                                                                              19

          (a)   the name of the Holder of the Option delivering such Put Notice;

          (b)   that such Holder is exercising its Option, pursuant to this
Article VI, and the percentage of the Option held by such Holder that is being
exercised thereunder.

          SECTION 6.03. Purchasing Party Notices.(a) The Purchasing Party,
within ten (10) days of receipt of each such Put Notice, shall deliver to each
Holder other than a Holder that has delivered a Put Notice, a notice (i)
specifying the respective Put Repurchase Date and (ii) stating the percentage
(determined on a Fully-Diluted Basis) of the Option which is and will be held by
each such Holder both before and after the Put Repurchase Date, respectively
(assuming no other Holder elects to sell all or any portion of the Option held
by such Holder) (the "LLC Notice").

          (b)   The Purchasing Party, within two (2) days of the final
determination of the Put Option Purchase Price, shall deliver to the Holder or
Holders exercising its or their put option pursuant to this Article VI a notice
containing a detailed calculation of the Put Option Purchase Price with respect
to the Option which is to be so repurchased from such Holder.

          SECTION 6.04. Obligation to Purchase the Option. The Purchasing Party
shall be obligated to purchase all of such Holder's Option which is the subject
of such Put Notice, and shall pay on the Put Repurchase Date with respect to
such Put Notice the Put Option Purchase Price in immediately available funds or,
at the Purchasing Party's option, the Put Option Purchase Price shall be deemed
to constitute a Tranche A Loan made on such Put Repurchase Date in a principal
amount equal to the amount of such Put Option Purchase Price and all in
accordance with the terms of Section 2.10(b) of the Credit Agreement (the "Put
Option Price Loan"); provided, that the Put Option Purchase Price in respect to
any Put Repurchase Date occurring on or after the Full Repayment Date shall be
paid in cash. The Company shall use its best efforts to cause the Put Option
Purchase Price to be determined as promptly as practicable after the receipt of
a Put Notice, and in any event by the date which is 45 days after the receipt of
such Put Notice.

                                  ARTICLE VII

                              Special Right of Call

          SECTION 7.01. Granting of Call; Price. Provided that all principal,
interest, accrued fees, and any other amounts due and payable under the
Financing Documents shall have been paid in full, at any time thereafter, LLC
may give not less than 60 days, prior irrevocable written notice to all (but not
less than all) Holders of the Option (a "Call Notice") to repurchase all, but
not less than all, of the unexercised Option then held by such Holders, at the
Call Option Purchase Price.

          SECTION 7.02. Call Notice.  The Call Notice shall:

          (a)   state that LLC intends to purchase the unexercised Option,
pursuant to this Article VII, from the Holders;

<PAGE>

                                                                              20

          (b)  specify the date, which shall be no earlier than 60 days from the
date of delivery of the Call Notice, on which LLC will repurchase the Option of
the Holders (the "Call Repurchase Date");

          (c)  contain a reasonably detailed calculation of the Call Option
Purchase Price and the Current Market Price with respect to the Option Shares;
and

          (d)  set forth any information required to be disclosed under Section
3.01(k) hereof.

          SECTION 7.03. Obligation to Call. The Call Notice having been so given
to each Holder and each Holder having not exercised its Option within thirty
(30) days after receiving such Call Notice, LLC shall be obligated to purchase
the Option specified in the Call Notice with respect to each Holder, and shall
pay the Call Option Purchase Price, payable to each Holder in immediately
available funds, if applicable, on the Call Repurchase Date.

                                  ARTICLE VIII

            Registration, Drag-Along, Tag-Along and Preemptive Rights

          SECTION 8.01. Drag-Along. If, prior to the closing date of the IPO,
LLC or the Company shall propose to sell or convey 75% or more of its shares of
the Company's Common Stock and Convertible Securities (calculated on an
as-converted basis), or any interest therein, to an Independent Third Party
(including, without limitation, a sale of the Company by merger, consolidation,
sale of all or substantially all of its assets, sale of all of the Company's
outstanding Common Stock and Convertible Securities or otherwise) (the "Approved
Sale"), LLC or the Company shall give prompt written notice (the "Sale Notice")
to the Holders setting forth the terms and conditions of the proposed transfer,
including the identity of the Independent Third Party, the number of shares of
the Company's Common Stock and Convertible Securities to be transferred, the per
share price to be paid for the shares of the Company's Common Stock and
Convertible Securities to be transferred and the type and nature of the
consideration to be received therefor. By so indicating in the Sale Notice, LLC
shall be entitled to require the Holders to sell to the Independent Third Party
in the same transaction their portion of the Option and Option Shares, on the
same terms and conditions set forth in the Sale Notice; provided, however, that
the provisions of this Section 8.01 shall not apply to the sale or conveyance of
any Common Stock of the Company pledged by LLC pursuant to the terms of the
Stock Pledge Agreement until such time as such Common Stock is no longer pledged
thereunder. Without limitation as to the foregoing, the Holders will consent to
and raise no objections against the Approved Sale. If the Approved Sale is
structured as a merger or consolidation, each Holder shall waive any dissenters
rights, appraisal rights or similar rights in connection with such merger or
consolidation. The Holders will take all necessary and desirable actions in
connection with the consummation of any Approved Sale. For purposes of this
Section 8.01, an "Independent Third Party" is any Person who, prior to such
sale, does not own in excess of 5% of the Company's Common Stock and Convertible
Securities in the aggregate on a Fully Diluted Basis, who is not controlling,
controlled by or under common control with any such 5% owner of the Company's
Common Stock and Convertible Securities in the aggregate and who is not the

<PAGE>

                                                                              21

spouse, ancestor or descendant (by birth or adoption) of any such 5% owner of
the Company's Common Stock and Convertible Securities in the aggregate.

         SECTION 8.02. Tag-Along. If, prior to the closing date of the IPO, LLC
or the Company shall propose to sell or convey 75% or more of its shares of the
Company's Common Stock or Convertible Securities (calculated on an as-converted
basis) to an Independent Third Party, LLC shall provide each Holder with written
notice (the "Tag-Along Notice") setting forth the terms and conditions of the
proposed transfer, including the identity of the Independent Third Party, the
number of shares of the Company's Common Stock and/or Convertible Securities to
be transferred, the per share price to be paid for the shares of the Company's
Common Stock and/or Convertible Securities to be transferred and the type and
nature of the consideration to be received therefor. Each Holder, by written
notice to LLC delivered within 10 days after the date of such Tag-Along Notice,
shall be entitled to require LLC to include in the proposed sale to the
Independent Third Party in the same transaction all of its Option and Option
Shares (or, if LLC is selling less than all of the Company's Common Stock it
owns, a percentage of each such Holder's Option and Option Shares equivalent to
the percentage of the Company's Common Stock and Convertible Securities and
rights to acquire shares of the Company's Common Stock and Convertible
Securities to be sold by LLC or the Company), on the same terms and conditions
set forth in the Tag-Along Notice; provided, however, that the provisions of
this Section 8.02 shall not apply to the sale or conveyance of any Common Stock
of the Company pledged by LLC pursuant to the terms of the Stock Pledge
Agreement until such time as such Common Stock is no longer pledged thereunder.
All fractional shares resulting from the calculation contained in the prior
sentence will be rounded to the nearest whole share. LLC shall use its
reasonable best efforts to obtain the agreement of the prospective transferee(s)
to the participation of the Holders in any contemplated transfer and LLC shall
not transfer any of its shares to the prospective transferee(s) if the
prospective transferee(s) declines to allow participation of the Holders.
Following their compliance with the foregoing, LLC and any Holders who have
elected to participate in the contemplated transfer may, within 90 days after
the expiration of the 10-day period referenced above, transfer all of the shares
specified in the Tag-Along Notice to the transferee(s) specified in the
Tag-Along Notice at a price not less than the price per share specified in the
Tag-Along Notice and on other terms no less favorable to the transferors in any
material respect than the terms specified in the Tag-Along Notice.

         SECTION 8.03. Expenses of Sale. As between the Holders and the Company,
the Company will pay the costs of any sale of the Option and Option Shares
pursuant to a sale pursuant to Section 8.01 or 8.02 of this Agreement to the
extent that such costs are incurred for the benefit of all holders of Common
Stock and rights to acquire Common Stock and are not otherwise paid by the
acquiring party. Costs incurred by the Holders on their own behalf will not be
considered costs of the transaction hereunder.

                                   ARTICLE IX

                               Registration Rights

         SECTION 9.01. Piggy-Back and Shelf Registration Rights. (a) If the
Company at any time in connection with, or after the consummation of, the IPO
proposes to file a registration statement under the Securities Act with respect
to any Underwritten Offering by the

<PAGE>

                                                                              22

Company for its own account or for the account of holders of any Common Stock,
Convertible Securities or Common Stock Equivalent to be offered for cash (other
than on Form S-4 or S-8) then the Company shall in each case give written notice
of such proposed filing to the Holders at least twenty (20) days before the
anticipated filing date, and such notice shall offer (a "Piggy-Back Registration
Offer") such Holders the opportunity to include all of the Registrable
Securities held by them in such registration statement (a "Piggy-Back
Registration"). In such event (x) the right of any Holder to registration
pursuant to this Section 9.01(a) may be conditioned upon such Holder's
participation in such underwriting and of the inclusion such Holder's
Registrable Securities in the underwriting to the extent provided herein and (y)
in cases initially involving the registration for sale of securities for the
account of a holder or holders exercising rights similar to those of the Holders
set forth in Section 9.02 of this Agreement, securities shall be registered in
such offering in the order of priority set forth in Section 9.02 hereof. If any
such Holder desires to have Registrable Securities registered and included in
such Underwritten Offering under this Section 9.01(a) such Holder shall so
notify the Company in writing within ten (10) days after the receipt by such
Holder of the written notice provided for in the preceding sentence (which
notification shall set forth the amount of Registrable Securities for which
registration is requested), and the Company will use its reasonable best efforts
to cause all such Registrable Securities to be registered under the Securities
Act to the extent requisite to permit the disposition in such Underwritten
Offering; provided, however, that if the managing underwriter or underwriters of
such offering, as selected by the Company, shall advise the Company in writing
that in its or their opinion the total amount or kind of securities that the
Holders, the Company and any other Persons or entities intend to include in such
offering exceeds the amount that can be sold in such offering without an adverse
effect on the price, timing or distribution of the securities offered by the
Company, the Company shall be required to include in such registration only the
amount of Registrable Securities and securities of other persons or entities, if
any, that the managing underwriter or underwriters determine, in its or their
sole discretion, can be sold without an adverse effect on the price, timing or
distribution of the securities offered. In such event, in cases initially
involving the registration for sale of securities for the Company's own account,
securities shall be registered in such offering in the following order of
priority: (i) first, the securities which the Company proposes to register, (ii)
second, the securities which may have been requested to be included in such
registration pursuant to this Agreement (pro rata based on the amount of
securities sought to be registered by such Persons) and (iii) third, the
securities of other Persons entitled to exercise "piggy-back" registration
rights pursuant to contractual commitments of the Company.

         (b) At any time prior to the date of printing preliminary prospectuses
in connection with an Underwritten Offering under Section 9.01(a) hereof, a
Holder that previously requested Piggy-Back Registration thereof may withdraw
all or part of its Registrable Securities from such offering by providing notice
to such effect to the Company.

         (c) (i) Within forty-five (45) days after delivery of a written notice
by Holders of more than 50% of the Registrable Securities which notice may be
delivered at any time after the date on which the Company becomes eligible to
prepare and file a shelf registration statement (the "Shelf Registration") on
Form S-3 (or such successor form to Form S-3 as the Company may at the time be
eligible to use), the Company shall file a registration statement for the
registration of securities under the Securities Act providing for the sale from
time to time by the Holders of all of their Registrable Securities then
outstanding, and all

<PAGE>

                                                                              23

Registrable Securities issuable thereafter. The Company may include in the Shelf
Registration shares of Common Stock sold for the account of the Company, but no
other person. For the avoidance of doubt, it is hereby acknowledged and agreed
by all parties hereto that a request for a Shelf Registration pursuant to this
Section 9.01(c) shall not constitute a Demand for a Demand Registration and for
all purposes of this Agreement, a Shelf Registration shall not be counted in the
tabulation of the number of Demand Registrations under Section 9.02 hereof.

         (ii) The registration rights of the Holders pursuant to this Section
    9.01(c) and the ability to offer and sell Registrable Securities pursuant to
    a Shelf Registration are subject to the following conditions and
    limitations, and each of the Holders agrees with the Company that (i) if the
    Company determines in its good faith judgment, at any time prior to or
    during the effectiveness of the filing of a Shelf Registration pursuant to
    this Section 9.01(c)(ii), that the Company possesses material non-public
    information relating to a pending or imminent event or announcement or is
    engaged in confidential negotiations or other confidential business
    activities (including, but not limited to, information related to any
    pending or proposed consolidation, merger, reorganization, recapitalization
    or other similar transaction and any pending discussions related thereto),
    upon written notice of such determination by the Company delivered to the
    Holders, the rights of each of the Holders to publicly offer, publicly sell
    or publicly distribute any Registrable Securities pursuant to such Shelf
    Registration or to require the Company to take action with respect to the
    registration or sale of any Registrable Securities pursuant to such Shelf
    Registration (including any action contemplated by Section 9.04 hereof) will
    be suspended until the date upon which the Company notifies the Holders in
    writing that suspension of such rights for the grounds set forth in this
    Section 9.01(c)(ii) is no longer necessary; provided, however, the Company
    shall not be permitted to suspend the rights of the Holders pursuant to this
    Section 9.01(c)(ii) for more than an aggregate of ninety (90) days within
    any twelve-month period; provided, further, that no one suspension shall
    last more than sixty (60) days.

         SECTION 9.02. Demand Registration.

         (a) Demand Registration Rights. At any time and from time to time after
the consummation of the IPO, the Majority Holders may make a written request to
the Company (each a "Demand") for registration with the SEC under and in
accordance with the provisions of the Securities Act of all or part of their
Registrable Securities (each a "Demand Registration").

         Within ten (10) days after receipt of a Demand, the Company will send
to all of the other Holders written notice (the "Notice") of such Demand and,
subject to the conditions set forth in the following paragraph, the Company will
include in the Demand Registration all Registrable Securities of such other
Holders with respect to which the Company has received written requests for
inclusion therein within ten (10) days after receipt by the applicable Holder of
the Notice. Any Demand made pursuant to this Section 9.02(a) shall specify the
aggregate amount of the Registrable Securities to be registered and shall also
specify the intended methods of disposition thereof.

         The Company will use its reasonable best efforts to cause all such
Registrable Securities to be registered under the Securities Act to the extent
requisite to permit the

<PAGE>

                                                                              24

disposition in such Demand Registration; provided, however, that if the managing
underwriter or underwriters of such offering, as selected by the Company, shall
advise the Company in writing that in its or their opinion the total amount or
kind of securities that the Holders, the Company and any other Persons or
entities intend to include in such offering exceeds the amount that can be sold
in such offering without an adverse effect on the price, timing or distribution
of the securities offered by the Holders, the Company shall be required to
include in such registration only the amount of Registrable Securities and
securities of the Company and such other persons or entities, if any, that the
managing underwriter or underwriters determine, in its or their sole discretion,
can be sold without an adverse effect on the price, timing or distribution of
the securities offered. In such event, securities shall be registered in such
offering in the following order of priority: (i) first, the securities which
have been requested to be included in such registration pursuant to this Section
9.02(a) and pursuant to "piggy back" registration rights pursuant to contractual
commitments of the Company (pro rata based on the amount of the securities
sought to be registered by the Holders and such other persons exercising "piggy
back" registration rights), and (ii) second, any securities which the Company
proposes to register.

         (b) Effective Registration and Expenses. The Company agrees to use its
reasonable best efforts to file as soon as reasonably practicable (but in any
event within thirty (30) days), after any such Demand a registration statement
in respect of the Demand Registration (a "Demand Registration Statement"). The
Company agrees to use its reasonable best efforts to have such Demand
Registration Statement declared effective as soon as practicable after such
filing, but in any event, no later than ninety (90) days after filing of the
registration statement.

         The Company agrees, if necessary, to supplement or amend any Demand
Registration Statement, as required by the registration form utilized by the
Company or by the instructions applicable to such registration form or by the
Securities Act or as reasonably requested (which request shall result in the
filing of a supplement or amendment subject to approval thereof by the Company,
which approval shall not be unreasonably withheld) by the Holders included in
the Demand Registration Statement, and the Company agrees to furnish to the
Holders copies of any such supplement or amendment prior to its being used
and/or filed with the SEC.

         (c) Number of Demand Registrations. The Holders shall be entitled to
four (4) Demand Registrations. The Company shall not be deemed to have effected
a Demand Registration (i) unless and until the Demand Registration Statement is
declared effective and remains effective for a period of at least one hundred
and eighty (180) days or until all the securities registered pursuant thereto
have been sold, whichever is the first to occur; (ii) if, after the Registration
Statement has become effective, it is interfered with by any stop order,
injunction or other order or requirement of the SEC or other governmental agency
or court for any reason not attributable to the Holders, unless all stop orders,
injunctions and orders shall have been lifted or rescinded, all requirements
shall have been satisfied or waived, and the registration statement has
thereafter become effective again; (iii) if the customary conditions to closing
specified in the underwriting agreement, if any, entered into in connection with
such registration are not satisfied or waived, other than by reason of a failure
on the part of any Holder; or (iv) if the Holders initiating the Demand
Registration were unable to sell all of the securities they requested be
included in such Demand Registration.

<PAGE>

                                                                              25

         (d)  Selection of Underwriters and Counsel. The Company shall select
the lead managing underwriter in connection with a Demand Registration, subject
to the approval of the Holders initiating the Demand Registration, which
approval shall not be unreasonably withheld.

         SECTION 9.03. Hold-Back Agreements; Restrictions on Public Sale by
Holders. The registration rights of the Holders pursuant to this Agreement and
the ability to offer and sell Registrable Securities pursuant to a Registration
Statement are subject to the following conditions and limitations, and each of
the Holders agrees with the Company that:

         (i)  If the Company determines in its good faith judgment, at any time
    prior to the filing of a Registration Statement pursuant to Section 9.02
    hereof, that the Company possesses material non-public information relating
    to a pending or imminent event or announcement or is engaged in confidential
    negotiations or other confidential business activities (including, but not
    limited to, information related to any pending or proposed consolidation,
    merger, reorganization, recapitalization or other similar transaction and
    any pending discussions related thereto), upon written notice of such
    determination by the Company delivered prior to the filing of a Registration
    Statement pursuant to Section 9.02 hereof, the rights of each of the Holders
    to publicly offer, publicly sell or publicly distribute any Registrable
    Securities pursuant to such Registration Statement or to require the Company
    to take action with respect to the registration or sale of any Registrable
    Securities pursuant to such Registration Statement (including any action
    contemplated by Section 9.04 hereof) will be suspended until the date upon
    which the Company notifies the Holders in writing that suspension of such
    rights for the grounds set forth in this Section 9.03 is no longer
    necessary; provided, however, the Company shall not be permitted to suspend
    the rights of the Holders pursuant to this Section 9.03(i) for more than an
    aggregate of ninety (90) days within any twelve-month period; provided,
    further, that no one suspension shall last more than sixty (60) days. If the
    Company shall so postpone the filing of a Demand Registration Statement, the
    Majority Holders shall have the right to withdraw the request for
    registration by giving the Company written notice within twenty (20) days
    after receipt of the notice of postponement (and, in the event of such
    withdrawal, such request shall not be counted as the one Demand Registration
    to which the Holders are entitled pursuant to Section 9.02(c) hereof).

         (ii) In the case of the registration of any underwritten primary
    offering of capital stock of the Company, each Holder agrees, in connection
    with such Underwritten Offering, to enter into an underwriting agreement
    containing such terms and covenants customary for such Underwritten
    Offerings, including, but not limited to, representations of such Holders in
    accordance with Section 9.04 of this Agreement; provided that nothing in
    this Section 9.03 shall require any Holder to provide any indemnification or
    contribution obligations inconsistent with Section 9.06 hereof.

         SECTION 9.04. Registration Procedures. In connection with the Company's
registration obligations pursuant to Section 9.01 and Section 9.02 hereof, the
Company will:

         (i)  prepare and file with the SEC as expeditiously as possible (but in
    any event within thirty (30) days after a Demand Request) a Registration
    Statement on the

<PAGE>

                                                                              26

    appropriate form available for the sale of such Registrable Securities and
    use its reasonable best efforts to cause such Registration Statement to
    become effective and remain effective until all Registrable Securities
    covered by such Registration Statement have been sold but in no event longer
    than 180 days from the effectiveness of such Registration Statement;

         (ii)  prepare and file with the SEC such amendments, including
    post-effective amendments, to a Registration Statement as may be necessary
    to keep such Registration Statement continuously effective until all
    Registrable Securities covered by such Registration Statement have been sold
    in accordance with the intended methods of disposition by the seller or
    sellers thereof set forth in such Registration Statement; cause the related
    Prospectus to be supplemented by any required Prospectus supplement, and as
    so supplemented to be filed pursuant to Rule 424 (or any similar provisions
    then in force) under the Securities Act; and comply in all material respects
    with the provisions of the Securities Act and the Exchange Act with respect
    to the disposition of all securities covered by such Registration Statement
    during such period in accordance with the intended methods of disposition by
    the sellers thereof set forth in such Registration Statement as so amended
    or in such Prospectus as so supplemented;

         (iii) notify the Holders of Registrable Securities to be sold and their
    Special Counsel, if any, immediately (a) when a Registration Statement or
    any post-effective amendment thereto has become effective, (b) of any
    request by the SEC or any other Federal or state governmental authority for
    amendments or supplements to a Registration Statement or Prospectus or for
    additional information, (c) of the issuance by the SEC of any stop order
    suspending the effectiveness of a Registration Statement covering any or all
    of the Registrable Securities or the initiation of any proceedings for that
    purpose, (d) if at any time any of the representations and warranties of the
    Company contained in any agreement (including any underwriting agreement)
    contemplated hereby cease to be true and correct in all material respects,
    (e) of the receipt by the Company of any notification with respect to the
    suspension of the qualification or exemption from qualification of any of
    the Registrable Securities for sale in any jurisdiction, or the initiation
    or threatening of any proceeding for such purpose, and (f) of the happening
    of any event that makes any statement made in a Registration Statement or
    Prospectus or any document incorporated or deemed to be incorporated therein
    by reference untrue in any material respect or that requires the making of
    any changes in a Registration Statement, Prospectus or documents so that, in
    the case of a Registration Statement, it will not contain any untrue
    statement of a material fact or omit to state any material fact required to
    be stated therein or necessary to make the statements therein, not
    misleading, and that in the case of a Prospectus, it will not contain any
    untrue statement of a material fact or omit to state any material fact
    necessary to make the statements therein, in light of the circumstances
    under which they were made, not misleading;

         (iv)  furnish to each Holder and their Special Counsel, if any, without
    charge, at least one executed copy of each Registration Statement and each
    amendment thereto, including financial statements and schedules, all
    documents incorporated or deemed to be incorporated therein by reference,
    and all exhibits (other than exhibits to documents incorporated by reference
    into such Registration Statement) to the extent requested by

<PAGE>

                                                                              27

    such person (including those previously furnished or incorporated by
    reference) as soon as practicable after the filing of such documents with
    the SEC;

         (v)    deliver to each Holder and their Special Counsel, if any,
    without charge, as many copies of the Prospectus or Prospectuses (including
    each form of prospectus and preliminary prospectus) and each amendment or
    supplement thereto as such persons reasonably request in order to facilitate
    the disposition of the Registrable Securities owned by such persons; and the
    Company hereby consents to the use of such Prospectus and each amendment or
    supplement thereto by each of the selling Holders and the underwriters, if
    any, in connection with the offering and sale of the Registrable Securities
    covered by such Prospectus and any amendment or supplement thereto;

         (vi)   in connection with any public offering of Registrable Securities
    pursuant to a Registration Statement, use its reasonable best efforts to
    register or qualify such Registrable Securities for offer and sale under the
    securities or Blue Sky laws of such jurisdictions within the United States
    as any Holder or managing underwriter reasonably requests in writing; use
    its reasonable best efforts to keep each such registration or qualification
    (or exemption therefrom) effective during the period such Registration
    Statement is required to be kept effective and do any and all other acts or
    things in the opinion of the Company necessary or advisable to enable the
    disposition in such jurisdictions of the Registrable Securities covered by
    such Registration Statement; provided, however, that the Company shall not
    be required to qualify generally to do business in any jurisdiction where it
    is not then so qualified or to take any action that would subject it to
    general service of process in any such jurisdiction where it is not then so
    subject or subject the Company to any tax in any such jurisdiction where it
    is not then so subject;

         (vii)  upon the occurrence of any event contemplated by Section
    9.04(iii)(f) hereof, prepare and furnish promptly to each Holder of
    Registrable Securities to be sold a number of copies of a supplement or
    amendment, including a post-effective amendment, to a Registration Statement
    or a supplement to the related Prospectus or any document incorporated or
    deemed to be incorporated therein by reference, and file any other required
    document so that, as thereafter delivered to the purchasers of such
    Registrable Securities such Prospectus will not contain an untrue statement
    of a material fact or omit to state a material fact necessary to make the
    statements therein, in light of the circumstances under which they were
    made, not misleading;

         (viii) use its reasonable best efforts to cause all Registrable
    Securities relating to such Registration Statement to be listed on each
    securities exchange, if any, on which similar securities issued by the
    Company are then listed and if not so listed, to be listed on the NASD
    automated quotation system;

         (ix)   obtain an opinion from the Company's counsel and a "cold
    comfort" letter or letters from the Company's independent public accountants
    in customary form and covering such matters as are customarily covered by
    such opinions and "cold comfort" letters delivered to underwriters in
    underwritten public offerings, which opinion and letter shall be reasonably
    satisfactory to the underwriter (or to each Holder in the event there is

<PAGE>

                                                                              28

    no underwriter participating in the offering), and furnish to each Holder
    participating in the offering and to each underwriter, a copy of such
    opinion and letter addressed to such Holder or underwriter;

         (x)   use its reasonable best efforts to promptly obtain the
    withdrawal of any order suspending the effectiveness of the registration
    statement;

         (xi)  provide a transfer agent and registrar for all such Registrable
    Securities no later than the effective date of such registration statement;
    and

         (xii) make its employees and personnel available and otherwise provide
    reasonable assistance to the underwriters (taking into account the needs of
    the Company's business and the requirements of the marketing process
    including, without limitation, the participation by such employees and
    personnel in "road shows") in the marketing of Registrable Securities in any
    Underwritten Offering.

         The Company may require each seller of Registrable Securities to
furnish to the Company such information regarding the distribution of such
Registrable Securities as is required by law to be disclosed by such seller in a
Registration Statement and the Company may exclude from such registration the
Registrable Securities of any seller who unreasonably fails to furnish such
information within a reasonable time after receiving such request.

         Each Holder agrees by acquisition of its Registrable Securities that,
upon receipt of any written notice from the Company of the happening of any
event of the kind described in Section 9.04(iii)(b), 9.04(iii)(c), 9.04(iii)(d),
9.04(iii)(e) or 9.04(iii)(f) hereof (such notice, a "Section 9.04(iii) Notice"),
such Holder will forthwith discontinue disposition of such Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Holder's receipt of the copies of the supplemented
Prospectus and/or amended Registration Statement contemplated by Section
9.04(vii) hereof, or until it is advised in writing (the "Advice") by the
Company that the use of the applicable Prospectus may be resumed, and, in either
case, has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement. In the event the Company provides the Holders a Section
9.04 (iii) Notice and does not provide Advice or a supplemented Prospectus
thereof, then the Majority Holders initiating a Demand Registration shall have
the right to withdraw the registration to which the Section 9.04(iii) Notice
relates by giving the Company written notice within ten days after receipt of
the Section 9.04(iii) Notice (and, in the event of such withdrawal, such
registration shall not be counted as the Demand Registration to which the
Holders are entitled pursuant to Section 9.02(c) hereof).

         In connection with any underwriting agreement to be entered into by any
Holder with respect to any registration pursuant to Section 9.01 or 9.02 hereof,
(i) such Holder shall not be required to make any representations or warranties
to, or agreements with, the Company or any underwriter other than
representations, warranties or agreements as are customarily given by selling
Holders of securities regarding such Holder, such Holder's ownership of and
title to its Registrable Securities to be included in such offering, (ii) the
liability of such Holder to the Company, any underwriter or other person under
such underwriting agreement shall be limited to

<PAGE>

                                                                              29

liability arising from misstatements or omissions contained in any information
furnished in writing by such Holder expressly for use in the Registration
Statement relating to such offering and will be limited to an amount equal to
the net proceeds such Holder derives from such registration, and (iii) the
requirements of any lock-up provisions in the underwriting agreement shall be
limited to one hundred and eighty (180) days in the case of an IPO, and ninety
(90) days for each offering registered pursuant to the Exchange Act or the
Securities Act subsequent to the IPO.

                  SECTION 9.05. Registration Expenses. All fees and expenses
incident to the performance of or compliance with a Piggyback Registration,
Demand Registration or a Shelf Registration (the "Registration Expenses") shall
be borne by the Company whether or not a Registration Statement is filed or
becomes effective and whether or not any Registrable Securities are sold
pursuant to a Registration Statement. The fees and expenses referred to in the
foregoing sentence shall include, without limitation, (i) all registration and
filing fees (including, without limitation, fees and expenses (A) with respect
to filings required to be made with the National Association of Securities
Dealers, Inc. and (B) in compliance with state securities or Blue Sky laws
(including, without limitation, fees and disbursements of counsel for the
Company in connection with Blue Sky qualifications of the Registrable Securities
and determination of the eligibility of the Registrable Securities for
investment under the laws of such jurisdictions as the managing underwriter or
underwriters, if any, or the Holder initiating a Demand Registration or Shelf
Registration may designate)), (ii) printing expenses, (iii) messenger, telephone
and delivery expenses, (iv) transfer agent and listing fees, (v) fees and
disbursements of counsel for the Company and one Special Counsel for the
Holders, (vi) fees and disbursements of all independent certified public
accountants for the Company (including, without limitation, the expenses of any
special audit and "cold comfort" letters required by or incident to such
performance), (vii) Securities Act liability insurance, if the Company so
desires such insurance, (viii) fees and expenses payable to a Qualified
Independent Underwriter (as such term is defined in Rule 2720 of the National
Association of Securities Dealers, Inc.'s By-Laws), if required and (ix) fees
and expenses of all other persons retained by the Company; provided that the
discounts and commissions of any underwriter or underwriters will be borne by
the selling Holders included in a Registration Statement in the relative
proportion to the number of Registrable Securities of each such Holder included
in any Registration Statement. Notwithstanding the foregoing, the Company shall
in all events be responsible for its internal expenses (including, without
limitation, all salaries and expenses of its officers and employees).

                  SECTION 9.06. Indemnification.

                  (a) Indemnification by the Company. The Company shall
indemnify and hold harmless each Holder, the officers, directors, agents and
employees of each of them, and each person who controls any such Holder (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) and the directors, officers, agents and employees of such controlling
persons, to the fullest extent lawful, from and against any and all losses,
claims, damages and liabilities (collectively, "Losses"), arising out of or
based upon (i) any untrue or alleged untrue statement of a material fact
contained in a Registration Statement under which Registrable Securities held by
such Holder were registered under the Securities Act or offered for sale, in any
preliminary prospectus (if used prior to the effective date of such Registration
Statement) or in any Prospectus or any form of prospectus or in any amendment or
supplement

<PAGE>

                                                                              30

thereto (if used during the period the Company is required to keep the
Registration Statement effective), in each case on the effective date of such
Registration Statement or post-effective amendment, or the date of such
Prospectus, including any preliminary prospectus, or supplement, (ii) any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein (in the case of any Prospectus or form
of prospectus or supplement thereto, necessary to make the statements therein in
the light of the circumstances under which they were made) not misleading, and
(iii) any violation or alleged violation by the Company of either of the
Securities Act or the Exchange Act, or any rule or regulation promulgated
thereunder, or any state securities law, and will reimburse, as incurred, each
such indemnified party for any reasonable legal or other out-of-pocket expenses
reasonably incurred by them in connection with investigating or defending
against or appearing as a third party witness in connection with any such Losses
or action or threatened action in respect thereof; provided, however, that the
Company will not be liable in any such case to the extent, but only to the
extent, that any such Losses arise out of or are based upon any untrue statement
or alleged untrue statement or omission or alleged omission made in such
Registration Statement, preliminary prospectus, Prospectus, form of prospectus
or any amendment or supplement thereto, in reliance upon and in conformity with
information regarding such Holder furnished in writing to the Company by or on
behalf of such Holder expressly for use therein.

                  (b) Indemnification by a Holder. In connection with a
Registration Statement in which a Holder is participating, such Holder shall
furnish to the Company in writing such information as is required by law to be
disclosed by such seller in a Registration Statement and agrees to indemnify and
hold harmless the Company, its directors, officers, agents and employees, each
person who controls the Company (within the meaning of Section 15 of the
Securities Act and Section 20 of the Exchange Act), and the directors, officers,
agents and employees of such controlling persons, to the fullest extent lawful,
from and against all Losses arising solely out of or based solely upon any
untrue statement or alleged untrue statement of a material fact contained in a
Registration Statement, any Prospectus, or any form of prospectus or amendment
or supplement thereto, or arising solely out of or based solely upon any
omission of a material fact required to be stated therein or necessary to make
the statements therein not misleading to the extent, but only to the extent,
that such untrue statement or omission is contained in any information so
furnished in writing by such Holder to the Company expressly for use therein. In
no event shall the liability of any selling Holder hereunder be greater in
amount than the dollar amount of the net proceeds received by such Holder upon
the sale of the Registrable Securities giving rise to such indemnification
obligation.

                  (c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall so notify the
person from whom indemnity is sought (the "Indemnifying Party") in writing, and
the Indemnifying Party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the Indemnified Party and the
payment of all fees and expenses incurred in connection with defense thereof;
provided that the failure of any Indemnified Party to give such notice shall not
relieve the Indemnifying Party of its obligations pursuant to this Agreement,
except to the extent that it shall be finally determined by a court of competent
jurisdiction (which determination is not subject to appeal or further review)
that such failure to give notice shall have actually prejudiced the Indemnifying
Party.

<PAGE>

                                                                              31

                  Any such Indemnified Party shall have the right to employ
separate counsel in any such action, claim or proceeding and to participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party
has agreed to pay such fees and expenses; or (2) the Indemnifying Party shall
have failed promptly (but in any event, no later than 10 days after the
Indemnified Party provides notice to the Indemnifying Party of its failure to do
so) to assume the defense of such action, claim or proceeding and to employ
counsel reasonably satisfactory to such Indemnified Party in any such action,
claim or proceeding; or (3) the named parties to any such action, claim or
proceeding (including any impleaded parties) include both such Indemnified Party
and the Indemnifying Party, and such Indemnified Party shall (x) reasonably
conclude that one or more legal defenses are available to it that are not
available to the Indemnified Party or (y) have been advised by counsel that a
conflict of interest is likely to exist if the same counsel were to represent
such Indemnified Party and the Indemnifying Party (in which case, if such
Indemnified Party notifies the Indemnifying Party in writing that it elects to
employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the Indemnifying Party), it being
understood, however, that, the Indemnifying Party shall not, in connection with
any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel) at
any time for all Indemnified Parties (other than counsel for which the
Indemnifying Party has agreed to pay under clause (1) above), which firm shall
be designated in writing by the Indemnified Parties. The Indemnifying Party
shall not be liable for any settlement of any such Proceeding effected without
its consent, which consent shall not be unreasonably withheld. No Indemnifying
Party shall, without the prior written consent of the Indemnified Party, effect
any settlement of any pending proceeding in respect of which any Indemnified
Party is a party and is entitled to indemnity hereunder unless such settlement
relates solely to the payment of money damages and (x) includes a full
unconditional release of such Indemnified Party from all liabilities on claims
that are the subject matter of such proceeding and (y) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of the Indemnified Party.

                  All fees and expenses of the Indemnified Party (including fees
and expenses to the extent incurred in connection with investigating or
preparing to defend such action or proceeding) for which the indemnifying party
is responsible pursuant to this Section 9.06(c) shall be paid to the Indemnified
Party, as incurred, within ten Business Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that an
Indemnified Party is not entitled to indemnification hereunder; provided that
the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder).

                  (d) Contribution. If indemnification under Section 9.06(a) or
9.06(b) hereof is unavailable or insufficient to cover losses of an Indemnified
Party, then each applicable Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in

<PAGE>

                                                                              32

connection with the actions, statements or omissions that resulted in such
Losses as well as any other relevant equitable considerations. The relative
fault of such Indemnifying Party and Indemnified Party shall be determined by
reference to, among other things, whether any action in question, including any
untrue or alleged untrue statement of a material fact or omission or alleged
omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 9.06(c) hereof, any legal or other fees
or expenses incurred by such party in connection with any investigation or
Proceeding.

                  The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 9.06(d) were determined by
pro rata allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 9.06(d), an
Indemnifying Party that is a Holder shall not be required to contribute any
amount in excess of the amount by which the net proceeds actually received by
such Indemnifying Party from the sale of the Registrable Securities subject to
the Proceeding exceeds the amount of any damages that such Indemnifying Party
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.

                                   ARTICLE X

                                  Miscellaneous

                  SECTION 10.01. SEC Reports and other Financial Information.
LLC shall provide the Holders, within fifteen (15) days after the Company files
same with the SEC, copies of the Company's annual report and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the SEC may by rules and regulations prescribe) which the Company is required
to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act.
Notwithstanding that the Company may not be required to remain subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall, subsequent to its IPO, continue to file such annual reports and
information, documents and other reports with the SEC and LLC shall provide the
Holders with such annual reports and such information, documents and other
reports as the Company provides to the holders of its Common Stock or other
securities.

                  SECTION 10.02. Persons Benefiting. Nothing in this Agreement
is intended or shall be construed to confer upon any Person other than LLC, the
Company and the Holders any right, remedy or claim under or by reason of this
Agreement or any part hereof.

                  SECTION 10.03. Amendments and Waivers. The provisions of this
Agreement, including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be granted except by the written agreement of all the
parties hereto (or their transferees).

<PAGE>

                                                                              33

             SECTION 10.04. 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 LLC or the Company by facsimile (i) shall be
immediately confirmed by a telephone call to the recipient at the number
specified on the applicable signature page hereof 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 the
applicable signature page hereof 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 any Holder shall not be effective until actually received.

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

             (d) If the notice or communication shall be in writing, then such
notice or communication shall be delivered to the following addresses:

             if to LLC:

               PG&E National Energy Group, LLC
               7500 Old Georgetown Road
               Bethesda, MD 20814-6161
               Attention:  General Counsel
               Tel.: (301) 280-6815
               Fax.: (301) 280-6319

             if to the Company:

               PG&E National Energy Group, Inc.
               7500 Old Georgetown Road
               Bethesda, MD 20814-6161
               Attention:  General Counsel
               Tel.: (301) 280-6815
               Fax.: (301) 280-6310









<PAGE>

                                                                              34

                  with a copy to:

                      Weil, Gotshal & Manges, LLP
                      100 Crescent Court, Suite 1300
                      Dallas, TX  75201
                      Attention:  Glenn D. West
                      Tel.: (214) 746-7700
                      Fax.: (214) 746-7777

                  if to GPSF:

                      c/o General Electric Capital Corporation
                      201 High Ridge Road
                      Stamford, CT 06927
                      Attention: General Counsel - Structured Finance Group
                      Telephone: (203) 357-6823
                      Facsimile: (203) 357-6632

                  with copies to:

                      GE Capital Services Structured Finance Group, Inc.
                      120 Long Ridge Road
                      Stamford, Connecticut 06927
                      Attention:  Manager of Portfolio - Energy Group

                      and,

                      GE Capital Services Structured Finance Group, Inc.
                      120 Long Ridge Road
                      Stamford, Connecticut 06927
                      Attention:  Manager - Legal Administration

                  if to LBI:

                      c/o Lehman Commercial Paper Inc.
                      745 Seventh Avenue
                      New York, NY 10019
                      Attention:  Frank Turner/Rich Divito
                      Telephone:  (212) 526-2696/(212) 526-2425
                      Facsimile:  (646) 758-1986/(646) 758-4618

                  Each party hereto by notice to the other parties may designate
additional or different addresses for subsequent notices or communications.

                  Failure to mail a notice or communication to a Holder or any
defect in it shall not affect its sufficiency with respect to any other Holders.
If a notice or communication is mailed in the manner provided above, it is duty
given, whether or not the addressee receives it.

<PAGE>

                                                                              35

             SECTION 10.05. Governing Law; Waiver of Jury Trial; Submission of
Jurisdiction. (a) THE LAWS 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) SHALL GOVERN THE CONSTRUCTION, INTERPRETATION AND
ENFORCEABILITY OF THIS AGREEMENT AND ANY DISPUTE, CASE OR CONTROVERSY ARISING IN
OR UNDER OR RELATED TO OR CONNECTED WITH THIS AGREEMENT OR THE RELATIONSHIP
BETWEEN OR AMONG THE PARTIES HERETO, WHETHER SOUNDING IN TORT, CONTRACT OR OTHER
LEGAL OR EQUITABLE RELIEF.

             (b) EACH OF LLC, THE COMPANY, THE BORROWER AND THE HOLDERS CONSENTS
AND AGREES TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT SITTING IN THE
COUNTY OF NEW YORK, STATE OF NEW YORK, AND WAIVES ANY OBJECTION BASED ON VENUE
OR FORUM NON CONVENIENS WITH RESPECT TO ANY ACTION INSTITUTED THEREIN, AND
AGREES THAT, EXCEPT WITH THE WRITTEN CONSENT OF THE HOLDERS, ANY DISPUTE
CONCERNING THE CONDUCT OF ANY PARTY IN CONNECTION WITH THIS AGREEMENT OR
OTHERWISE SHALL BE HEARD ONLY IN THE COURTS DESCRIBED ABOVE.

             (c) EACH OF LLC, THE COMPANY, THE BORROWER AND THE HOLDERS HEREBY
WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL
SUCH SERVICE OF PROCESS MAY BE MADE BY HAND DELIVERY TO EACH SUCH PERSON AT ITS
ADDRESS SET FORTH ABOVE OR, AT THE OPTION OF A HOLDER, BY SERVICE UPON
CORPORATION SERVICE COMPANY, WHICH EACH OF LLC, THE COMPANY AND THE BORROWER
IRREVOCABLY APPOINTS AS SUCH PERSON'S AGENT FOR THE PURPOSE OF ACCEPTING SERVICE
OF PROCESS WITHIN THE STATE OF NEW YORK. LLC, THE COMPANY AND THE BORROWER
HEREBY CONSENTS TO SERVICE OF PROCESS AS AFORESAID.

             (d) NOTHING IN THIS SECTION 10.05 SHALL AFFECT THE RIGHT OF THE
HOLDERS TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT
THE RIGHT OF THE HOLDERS TO BRING ANY ACTION OR PROCEEDING AGAINST LLC, THE
BORROWER OR THE COMPANY OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.

             (e) EACH OF LLC, THE COMPANY, THE BORROWER AND THE HOLDERS HEREBY
WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION (i) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR (ii) IN ANY WAY
CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR
ANY OF THEM IN RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS
RELATED HERETO, IN EACH CASE, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER SOUNDING IN

<PAGE>

                                                                              36

CONTRACT OR TORT OR OTHERWISE. EACH OF LLC, THE BORROWER, THE COMPANY, AND THE
HOLDERS HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE
OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY MAY
FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR
RIGHT TO TRIAL BY JURY.

             SECTION 10.06. Successors and Assigns. All agreements of each of
the parties hereto in this Agreement shall inure to the benefit and be binding
upon their respective successors and permitted assigns. None of LLC, the
Borrower or the Company may assign its rights or obligations hereunder without
the prior written consent of each of the Holders.

             SECTION 10.07. 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 unenforceability without
invalidating the remaining provisions hereof and without affecting the validity
or enforceability of any provision in any other jurisdiction.

             SECTION 10.08. Entire Agreement. This Agreement represents the
final and complete agreement of the parties hereto, and all prior negotiations,
representations, understandings, writings and statements of any nature are
hereby superseded in their entirety by the terms of this Agreement. There are no
restrictions, agreements, warranties or undertakings other than those set forth
or referred to herein, including with respect to the registration rights granted
by the Company with respect to the Option Shares.

             SECTION 10.09. 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 shall be an original,
but all of which shall together constitute one and the same instrument.

             SECTION 10.10. Headings. The headings of the Articles and Sections
of this Agreement have been inserted for convenience of reference only, are not
intended to be considered a part hereof and shall not modify or restrict any of
the terms or provisions hereof.

             SECTION 10.11. Publicity. Except as otherwise required by law, none
of the parties hereto shall issue any press release or make any other public
statement, in each case relating to, connected with or arising out of this
Agreement or the matters contained herein or therein, without obtaining the
prior approval of the Initial Holders and the Company to the contents and the
manner of presentation and publication thereof. No references to the Initial
Holders shall be made in any public statement without the Initial Holders'
consent.

             SECTION 10.12. Restricted Transactions. Except as provided by the
Financing Documents, LLC and the Company will not, and will not permit any of
their Subsidiaries to, enter into any transaction or series of related
transaction, whether or not in the ordinary course of business, with any
Affiliate of the Company, the Borrower or LLC or any of their Subsidiaries,
which would adversely affect any of the right or benefit of the Holders with
respect to the

<PAGE>

                                                                              37

exercise of the Option or is intended to frustrate or defraud the Holders of
their ability to exercise the option hereunder.

             SECTION 10.13. Rule 144/145. The Company agrees to timely file the
reports required to be filed by it under the Securities Act or the Exchange Act
and, after consummation of the IPO, to take such further action as any Holder
may reasonably request, all to the extent required from time to time to enable
such Holder to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (A) Rule 144
and Rule 145 under the Securities Act, as such Rules may be amended from time to
time, or (B) any similar rule or regulation hereafter adopted by the SEC. Upon
the request of any Holder after consummation of the IPO, LLC will deliver to
such Holder a written statement as to whether the Company has complied with such
requirements.

             SECTION 10.14. Remedies. In the event of a breach by LLC, the
Company, the Borrower or a Holder of any of their obligations under this
Agreement, each Holder, LLC, the Borrower or the Company, as the case may be, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Agreement. LLC, the Company, the Borrower and each Holder agree that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of any of the provisions of this Agreement and hereby
further agrees that, in the event of any action for specific performance in
respect of such breach, it shall waive the defense that a remedy at law would be
adequate. The remedies provided herein are cumulative and not exclusive of any
remedies provided by law.

             SECTION 10.15. Acknowledgment. The parties hereto acknowledge,
accept and ratify the allocations provided for in Section 3.5 of the Credit
Agreement.

             SECTION 10.16. Waiver. LLC and the Company waive any claim they may
have against any Holder for any consequential, exemplary or punitive damage now
or hereafter under or in connection with or relating to this Agreement or any
other Financing Document.

             SECTION 10.17. Register. LLC hereby agrees to maintain a register
(the "Register") on which it will record the proportionate ownership percentages
of the Holders of the Option from time to time. With respect to any Holder, the
transfer of the Option of such Holder and the rights pursuant to such Option
shall not be effective until such transfer is recorded on the Register
maintained by the LLC with respect to ownership of such Option and prior to such
recordation all rights of the transferor with respect to such Option shall
remain the transferor's. The registration of assignment or transfer of all or
part of any Holder's Option shall be recorded promptly by LLC only upon the
receipt by LLC of a properly executed and delivered assignment and assumption
agreement pursuant to, and all other documents and instruments required under,
Section 5.01(b) hereof. Upon the request of any Holder, LLC shall at any time
and from time to time provide the requesting Holder, at no cost, a list of all
of the Holders of the Option and their respective ownership percentages. For the
avoidance of doubt, it is hereby acknowledged and agreed by all parties hereto
that the Register initially recorded that on the Initial Closing Date GPSF
acquired 60% of the Option, and that LBI Group Inc. acquired 40% of the Option;
subsequent to the Initial Closing Date 50% of the Option initially acquired by
LBI Group Inc.

<PAGE>

                                                                              38

was transferred pursuant to this Agreement to the Subsequent Holders, in
proportions set forth in the Register as of the Closing Date.

             SECTION 10.18. Intercreditor Agreement. Nothwithstanding anything
provided herein to the contrary, the terms and provisions of the Intercreditor
Agreement shall govern the relationship among the Holders with respect to the
rights, remedies and obligations of the Holders under this Option Agreement.

<PAGE>

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

                                              PG&E NATIONAL ENERGY GROUP, INC.



                                              By: _____________________________
                                                   Name:
                                                   Title:



                                              PG&E CORPORATION



                                              By: _____________________________
                                                   Name:
                                                   Title:



                                              PG&E NATIONAL ENERGY GROUP, LLC



                                              By: _____________________________
                                                   Name:
                                                   Title:


                                              INITIAL HOLDERS:
                                              ---------------


                                              LB I GROUP INC.



                                              By: _____________________________
                                                   Name:
                                                   Title:

<PAGE>

                                      GPSF-F INC.



                                      By: ________________________________
                                           Name:
                                           Title:


                                      SUBSEQUENT HOLDERS:

                                      FARALLON CAPITAL PARTNERS, L.P.,
                                      as a Subsequent Holder



                                      By:_________________________________
                                           Name:
                                           Title:



                                      FARALLON CAPITAL INSTITUTIONAL
                                      PARTNERS, L.P., as a Subsequent Holder



                                      By:_________________________________
                                           Name:
                                           Title:



                                      FARALLON CAPITAL INSTITUTIONAL
                                      PARTNERS II, L.P., as a Subsequent Holder



                                      By:_________________________________
                                           Name:
                                           Title:


                                      FARALLON CAPITAL INSTITUTIONAL
                                      PARTNERS III, L.P., as a Subsequent Holder



                                      By:_________________________________
                                           Name:
                                           Title:







<PAGE>

                                    TINICUM PARTNERS, L.P., as a Subsequent
                                    Holder



                                    By:_________________________________________
                                       Name:
                                       Title:

                                    FARALLON CAPITAL OFFSHORE INVESTORS, INC.,
                                    as a Subsequent Holder



                                    By:_________________________________________
                                       Name:
                                       Title:

<PAGE>

                                                                         Annex 1
                                                                  [See Attached]

<PAGE>

                                                                         Annex 2

               PUT OPTION PURCHASE PRICE (ORIGINAL OPTION OF GPSF)

<TABLE>
<CAPTION>
                                                                                Put Option Price of Original
                   Period Beginning              Up To But Excluding                    Option of GPSF
<S>                      <C>                             <C>                               <C>
                     May 2, 2002                    June 2, 2002                           $18,750,000

                     June 2, 2002                   July 2, 2002                           $20,000,000

                     July 2, 2002                  August 2, 2002                          $21,250,000

                    August 2, 2002                September 2, 2002                        $22,500,000

                  September 2, 2002                October 2, 2002                         $23,750,000

                   October 2, 2002                November 2, 2002                         $25,000,000

                   November 2, 2002               December 2, 2002                         $26,250,000

                   December 2, 2002                January 2, 2003                         $27,500,000

                   January 2, 2003                February 2, 2003                         $28,750,000

                   February 2, 2003                 March 2, 2003                          $30,000,000

                    March 2, 2003                   April 2, 2003                          $31,250,000

                    April 2, 2003                    May 2, 2003                           $32,500,000

                     May 2, 2003                    June 2, 2003                           $33,750,000

                     June 2, 2003                   July 2, 2003                           $35,000,000

                     July 2, 2003                  August 2, 2003                          $36,250,000

                    August 2, 2003                September 2, 2003                        $37,500,000

                  September 1, 2003                October 2, 2003                         $38,750,000

                   October 2, 2003                November 2, 2003                         $40,000,000

                   November 2, 2003               December 2, 2003                         $41,250,000

                   December 2, 2003                January 2, 2004                         $42,500,000

                   January 2, 2004                February 2, 2004                         $43,750,000

                             February 2, 2004 and thereafter                               $45,000,000
</TABLE>

<PAGE>

                                                                         Annex 3

<TABLE>
<CAPTION>
                                           Holder                                  Pro Rata Portion

<S>                                                                                       <C>
                 GPSF-F                                                                   60%
                 LBI Group Inc.                                                           20%
                 Farallon Capital Partners, L.P.                                      25% of 20%
                 Farallon Capital Institutional Partners, L.P.                        23% of 20%
                 Farallon Capital Institutional Partners II, L.P.                      5% of 20%
                 Farallon Capital Institutional Partners III, L.P.                     5% of 20%
                 Tinicum Partners, L.P.                                                1% of 20%
                 Farallon Capital Offshore Investors, Inc.                            41% of 20%
</TABLE>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.8
<SEQUENCE>10
<FILENAME>dex998.txt
<DESCRIPTION>INTERCREDITOR AND SUBORDINATION AGREEMENT
<TEXT>
<PAGE>

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


                    INTERCREDITOR AND SUBORDINATION AGREEMENT


                            Dated as of June 25, 2002


                                      Among


              THE ADMINISTRATIVE AGENT UNDER THE CREDIT AGREEMENT,

              THE TRANCHE A LENDERS PARTY TO THE CREDIT AGREEMENT,

              THE TRANCHE B LENDERS PARTY TO THE CREDIT AGREEMENT,

                   THE HOLDERS PARTY TO THE WARRANT AGREEMENT,

                                       and

                              THE COLLATERAL AGENT


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

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                         Page
                                                                                                         ----

<S>                                                                                                      <C>
SECTION 1. DEFINITIONS. ................................................................................    1

     1.1   Certain Defined Terms .......................................................................    1

SECTION 2. SUBORDINATION OF JUNIOR OBLIGATIONS. ........................................................    3

     2.1   Subordination to Senior Obligations .........................................................    3
     2.2   Payment Over of Proceeds Upon Dissolution, etc ..............................................    4
     2.3   Authorization of the Initial Tranche A Lender to File Claims, etc ...........................    5
     2.4   No Payment; etc .............................................................................    5
     2.5   Limitation on Remedies ......................................................................    7
     2.6   Provisions Solely to Define Relative Rights .................................................    8
     2.7   No Waiver of Subordination Provisions .......................................................    8
     2.8   Legend on Tranche B Notes and Warrants ......................................................    9
     2.9   Further Instruments and Documents ...........................................................    9
     2.10  Transfer of Junior Obligations Subject to this Agreement ....................................    9
     2.11  Subrogation .................................................................................   10

SECTION 3. COLLATERAL AGENT. ...........................................................................   10

     3.1   Appointment .................................................................................   10
     3.2   Exculpatory Provisions ......................................................................   11
     3.3   Reliance by Collateral Agent ................................................................   11
     3.4   Notice of Default ...........................................................................   11
     3.5   Indemnification .............................................................................   12
     3.6   Successor Collateral Agent ..................................................................   12
     3.7   Miscellaneous ...............................................................................   13

SECTION 4. MISCELLANEOUS. ..............................................................................   13

     4.1   Severability ................................................................................   13
     4.2   Notices .....................................................................................   13
     4.3   Successors and Assigns ......................................................................   14
     4.4   Counterparts ................................................................................   14
     4.5   Special Exculpation .........................................................................   14
     4.6   Governing Law ...............................................................................   14
     4.7   Waiver of Jury Trial ........................................................................   14
     4.8   No Impairments of Other Rights of Secured Parties and no Rights or Obligations of the
           Company .....................................................................................   14
     4.9   Amendment; Waiver ...........................................................................   15
     4.10  Headings; Table of Contents, etc ............................................................   15
     4.11  Conflicts With Other Security Documents .....................................................   15
     4.12  Marshaling ..................................................................................   15
     4.13  Waiver of Rights ............................................................................   15
     4.14  Continuation of Subordination; Termination of Agreement .....................................   15
</TABLE>

                                      (i)

<PAGE>

<TABLE>
<CAPTION>
                                                                                            Page
                                                                                            ----
      <S>                                                                                   <C>
      4.15   Specific Performance.......................................................      15
</TABLE>

                                      (ii)

<PAGE>

           INTERCREDITOR AND SUBORDINATION AGREEMENT, dated as of June 25, 2002,
among (i) LEHMAN COMMERCIAL PAPER INC., as Administrative Agent (the
"Administrative Agent") under the Credit Agreement (as defined herein), (ii) the
Tranche A Lenders party to the Credit Agreement from time to time (the "Tranche
A Lenders"), (iii) the Tranche B Lenders party to the Credit Agreement from time
to time (the "Tranche B Lenders"), (iv) the Holders party to the Warrant
Agreement from time to time (the "Tranche B Holders") and (v) DEUTSCHE BANK
TRUST COMPANY AMERICAS, as Collateral Agent (the "Collateral Agent") for the
benefit of the Lenders.

                               W I T N E S S E T H

           WHEREAS, PG&E Corporation (the "Company"), the Tranche A Lenders, and
certain of the Tranche B Lenders are parties to that certain Credit Agreement,
dated as of March 1, 2001, as amended (the "Existing Credit Agreement");

           WHEREAS, on the date hereof the Existing Credit Agreement is being
amended and restated in its entirety by the Amended and Restated Credit
Agreement, dated as of June 25, 2002 (as amended, supplemented or otherwise
modified from time to time, the "Credit Agreement"), among the Company, the
Lenders from time to time parties thereto, the Administrative Agent and others;

           WHEREAS, the obligations of the Credit Parties under the Financing
Documents (such term and other capitalized terms used herein being used with the
definitions given to such terms in Section 1.1) are secured as set forth in the
Security Documents; and

           WHEREAS, the parties hereto desire to enter into this Agreement to
set forth their mutual understanding with respect to the exercise of certain
rights, remedies and options by the respective parties hereto under the
above-described documents, and the priority of their respective security
interests created by the Security Documents;

           NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the
parties hereto hereby agree as follows:

           SECTION 1. DEFINITIONS.

           1.1 Certain Defined Terms. (a) Unless otherwise defined herein, all
capitalized terms used herein and defined in Appendix A to the Credit Agreement
shall be used herein as therein defined and the principles of construction set
forth in Appendix A to the Credit Agreement shall apply to this Agreement.

           (b) In addition, the following capitalized terms used herein shall
have the definitions specified below:

           "Agreement" shall mean this Intercreditor and Subordination
Agreement, as amended, supplemented or otherwise modified from time to time.

<PAGE>

           "Credit Parties" shall mean the Company, NEG, Inc. and LLC,
collectively.

           "Default Notice" shall mean a written notice delivered by the Initial
Tranche A Lender to the Administrative Agent stating that (i) a Tranche A
Default for non-payment of principal, interest or any other amounts under the
Financing Documents with respect to the Tranche A Loan has occurred or (ii) an
Event of Default has occurred.

           "Event of Default" shall mean a Tranche A Event of Default and/or a
Tranche B Event of Default.

           "Initial Tranche A Lender" shall mean General Electric Capital
Corporation, a Delaware corporation.

           "Junior Obligations" shall mean, on any date, collectively, (i) all
obligations of the Company and the other Credit Parties in respect of principal
of, and interest on (including, without limitation, interest accruing after the
filing of a petition initiating any proceeding under the Bankruptcy Code,
whether or not allowed as a claim in such proceeding) the Tranche B Loan, (ii)
all payment obligations of the Company and the other Credit Parties in respect
of the Warrant Agreement to the Tranche B Holders, (iii) all other obligations
of the Company and the other Credit Parties owing to the Tranche B Lenders under
or relating to the Financing Documents (other than the Option Agreement) in
respect of fees, premiums, indemnities, reimbursement of fees, expenses or other
amounts, and (iv) any debt which is incurred in compliance with the terms and
conditions of this Agreement and the Credit Agreement for the purpose of
refinancing, restructuring, extending or renewing the obligations of one or more
of the Credit Parties in respect of the Tranche B Loan; provided, that
obligations of the Credit Parties to the Tranche B Lenders or any affiliate
thereof, and their respective successors and assigns, under the Option Agreement
shall not constitute Junior Obligations.

           "Junior Obligees" shall mean the holders of the Junior Obligations.

           "Payment Blockage Period" has the meaning provided in Section 2.4(b).

           "Put Option Purchase Price" has the meaning provided in the Option
Agreement.

           "Reorganization Securities" shall mean shares of stock of the
Borrower as reorganized or readjusted, or securities of the Borrower or any
other corporation provided for by a plan of reorganization or readjustment with
respect to the Borrower, the terms of which are not substantially better for the
holders thereof than the terms of the Junior Obligations and the payment of
which is subordinated, at least to the extent provided in this Agreement with
respect to the Junior Obligations, to the payment in full of all Senior
Obligations which may at the time be outstanding; provided that (i) the Senior
Obligations are (A) assumed without modification and without alteration of the
legal, equitable and contractual rights of the holders of the Senior Obligations
by the new corporation, if any, resulting from any such reorganization or
readjustment, or (B) the legal, equitable and contractual rights of the holders
of Senior Obligations, are reinstated in accordance with Section 1124 of the
United States Bankruptcy Code, or (ii) the legal, equitable and contractual
rights of the holders of Senior Obligations under the Financing Documents and
this Agreement are not, without the consent of such holders, altered by such
reorganization or readjustment.

                                      -2-

<PAGE>

           "Senior Obligations" shall mean, on any date, collectively, (i) all
obligations of the Company and the other Credit Parties in respect of principal
of, and interest on (including, without limitation, interest accruing after the
filing of a petition initiating any proceeding under the Bankruptcy Code,
whether or not allowed as a claim in such proceeding) the Tranche A Loan, (ii)
all other obligations of the Company and the other Credit Parties due and owing
to the Tranche A Lenders or GPSF-F Inc. (or its successors and assigns) under or
relating to the Financing Documents in respect of fees, premiums, indemnities,
reimbursement of fees, expenses or other amounts, (iii) any debt which is
incurred in compliance with the terms and conditions of this Agreement and the
Credit Agreement for the purpose of refinancing, restructuring, extending or
renewing the obligations of one or more of the Credit Parties in respect of the
Tranche A Loan, (iv) the obligations of the Credit Parties to purchase any
shares covered by a Put Notice (as defined in the Option Agreement) delivered by
any Holder, or any of its successors and assigns, at the Put Option Purchase
Price, prior to such date pursuant to the terms of the Option Agreement and (v)
any claims of the Senior Obligees with respect to any judgment ordered by a
court in any action brought at law or in equity (such as an action brought for
recession, restitution, or unjust enrichment) against the Borrower on any Credit
Party in lieu, in whole or in part, of an action to enforce the obligations of
the Borrower or any Credit Party under the Financing Documents.

           For the avoidance of doubt, "Specified Rated Indebtedness" does not
constitute "Senior Obligations" for purposes of this Agreement.

           "Senior Obligees" shall mean the holders of the Senior Obligations.

           "Tranche A Default" shall mean any event or circumstance which with
notice or lapse of time or both would become a Tranche A Event of Default.

           "Tranche A Event of Default" shall have the meaning set forth in the
Credit Agreement.

           "Tranche B Event of Default" shall have the meaning set forth in the
Credit Agreement.

           "Transition Date" shall mean the date upon which the Senior
Obligations shall have been indefeasibly paid in full in cash.

           "Warrants" shall have the meaning provided in the Warrant Agreement.

           SECTION 2. SUBORDINATION OF JUNIOR OBLIGATIONS.

           2.1 Subordination to Senior Obligations. Each Junior Obligee and each
holder of a Junior Obligation by its acceptance thereof, on behalf of itself and
its successors and assigns, hereby covenants and agrees, that (a) to the extent
and in the manner set forth in this Section 2, the Junior Obligations are hereby
expressly made subordinate and junior in right of payment to the indefeasible
payment in full in cash of all of the Senior Obligations, and (b) the security
interests held for the benefit of the Senior Obligations in any Collateral rank
and will rank superior and prior to the security interests held for the benefit
of the Junior Obligations, irrespective of any statement to the contrary in any
Financing Document or any other agreement,

                                      -3-

<PAGE>

the time or order or method of attachment or perfection of Liens, the time or
order of filing of financing statements, or the giving or failure to give notice
of the acquisition or expected acquisition of purchase money or other security
interests. The provisions of this Section 2 shall constitute a continuing offer
to all Persons who, in reliance upon such provisions, become holders of, or
continue to hold, Senior Obligations, and such provisions are made for the
benefit of the holders of Senior Obligations, and such holders are hereby made
obligees hereunder to the same extent as if they were parties to this Agreement,
and they and/or each of them may proceed to enforce such provisions.

           2.2  Payment Over of Proceeds Upon Dissolution, etc. In the event (a)
of any insolvency or bankruptcy case or proceeding, or any receivership,
reorganization or other similar case or proceeding in connection therewith,
relative to the Company or any of the other Credit Parties, or to any such
Credit Party's assets, (b) of any total or partial liquidation, dissolution or
other winding up of the Company or any other Credit Party, whether voluntary or
involuntary and whether or not involving insolvency or bankruptcy, (c) of any
assignment for the benefit of creditors or any other marshaling of assets and
liabilities of the Company or any other Credit Party, in each case whether
voluntary or involuntary or (d) the Senior Obligations, or any part thereof,
shall mature or be declared due and payable prior to the stated maturity date
thereof upon the occurrence of any Event of Default, then and in any such event:

           (i)  the Senior Obligees shall first be entitled to receive
      indefeasible payment in full in cash of all amounts due in respect of the
      Put Option Price after delivery by a Holder of the Put Notice (as such
      payment obligation is more fully described in clause (iv) of the
      definition of "Senior Obligations" in Section 1.1) and all other amounts
      due or to become due in respect of the other Senior Obligations
      (including, without limitation, all amounts (including, without
      limitation, any prepayments) in respect of the Senior Obligations, whether
      due in the ordinary course or by reason of acceleration or otherwise)
      before the Junior Obligees are entitled to receive any payment (in cash,
      property or securities (other than the Tranche B Interest Reserve Account
      and any proceeds thereof, Reorganization Securities and the pay-in-kind
      interest due and payable from time to time under Section 2.5(g) of the
      Credit Agreement) or by set-off or otherwise), directly or indirectly, on
      account of any principal, interest, premium or other amount on or in
      respect of the Junior Obligations or as a redemption, retirement,
      purchase, defeasance, prepayment or acquisition of any Junior Obligations;

           (ii) any payment by, or distribution of assets of any Credit Party of
      any kind or character (in cash, property or securities (other than the
      Tranche B Interest Reserve Account and any proceeds thereof,
      Reorganization Securities and the pay-in-kind interest due and payable
      from time to time under Section 2.5(g) of the Credit Agreement) or by
      set-off or otherwise), to which any Junior Obligee would be entitled but
      for the provisions of this Section 2, shall be paid by the liquidating
      trustee or agent or other Person making such payment or distribution
      (whether a trustee in bankruptcy, a receiver, custodian or liquidating
      trustee or otherwise) directly to the Initial Tranche A Lender, for
      application to payment of all Senior Obligations (including, without
      limitation, all amounts (including, without limitation, any prepayments)
      in respect of Senior Obligations, whether due in the ordinary course or by
      reason of acceleration), to the extent necessary to indefeasibly pay in
      full in cash all Senior Obligations remaining

                                      -4-

<PAGE>

      unpaid, after giving effect to any concurrent payment or distribution
      directly to the Senior Obligees; and

           (iii) notwithstanding the foregoing provisions of this Section 2.2,
      after any of the events described in clauses (a) through (d) of this
      Section 2.2, in the event that any payment or distribution of assets of
      any Credit Party of any kind or character (in cash, property or securities
      (other than the Tranche B Interest Reserve Account and any proceeds
      thereof, Reorganization Securities and the pay-in-kind interest due and
      payable from time to time under Section 2.5(g) of the Credit Agreement) or
      by set-off or otherwise), shall be received by any Junior Obligee,
      directly or indirectly, whether on account of any principal, interest,
      premium or other amount on or in respect of the Junior Obligations or as a
      redemption, retirement, purchase, defeasance, prepayment or acquisition of
      any Junior Obligations or otherwise, before all Senior Obligations are
      indefeasibly paid in full in cash, such payment or distribution shall be
      received and held in trust for the benefit of, and shall be immediately
      paid over to, the Initial Tranche A Lender, for application to payment of
      all Senior Obligations, to the extent necessary to indefeasibly pay in
      full in cash all Senior Obligations (including, without limitation, all
      amounts (including, without limitation, any prepayments) in respect of
      Senior Obligations, whether due in the ordinary course or by reason of
      acceleration) remaining unpaid, after giving effect to any concurrent
      payment or distribution directly to the Senior Obligees.


           2.3 Authorization of the Initial Tranche A Lender to File Claims,
etc. Subject to the rights of the Junior Obligees provided in Section 2.5, in
the event that (i) a bankruptcy proceeding shall be commenced by or against the
Borrower and (ii) on or before the date which is ten Business Days before the
last date upon which the Junior Obligees are required to file a proof of claim
in such bankruptcy proceeding any Junior Obligee (the claims of which have not
been scheduled by the Borrower in its filing as undisputed) does not file a
proof of claim in respect of the Junior Obligations owing to such Junior Obligee
(any Junior Obligee, the claims of which have not been scheduled by the Borrower
in its filing as undisputed, and which has failed to so file such proof of
claim, a "Defaulting Junior Obligee"), then, in such event, such Defaulting
Junior Obligee hereby irrevocably authorizes and empowers (without imposing any
obligation on) the Initial Tranche A Lender under the circumstances set forth in
Section 2.2 to file such proof of claim in respect of the Junior Obligations
owing to such Defaulting Junior Obligee. The proceeds of all such claims shall
be applied as required by the provisions of this Agreement. Each Defaulting
Junior Obligee hereby irrevocably appoints the Initial Tranche A Lender as
attorney-in-fact and shall execute and deliver to the Initial Tranche A Lender
all such further instruments confirming the foregoing appointment and
authorization, and all such proofs of claim and other instruments, and shall
take all such other action as may be reasonably requested by the Initial Tranche
A Lender in order to enable the Initial Tranche A Lender to, subject to the
rights of such Defaulting Junior Obligee provided in Section 2.5, enforce all
claims upon or in respect of the Junior Obligations owing to such Defaulting
Junior Obligee.

           2.4 No Payment; etc. (a) So long as any Senior Obligations shall
remain outstanding and shall not have been indefeasibly paid in full in cash, no
payment (in cash, property or securities (whether or not such securities are
subordinated) or by set-off or otherwise) shall be made or agreed to be made by
the Company (and the Company will not permit any other

                                       -5-

<PAGE>

Credit Party to make, or agree to make, any payment), directly or indirectly, on
account of any amounts (including, without limitation, any prepayments) in
respect of the Junior Obligations or as a redemption, retirement, purchase,
defeasance, prepayment or acquisition of any Junior Obligations, except as
expressly permitted by this Agreement and the other Financing Documents. Except
as otherwise provided in Section 2.5(c) below, the Senior Obligees shall have
the right in their sole discretion to exercise or direct the Collateral Agent to
exercise any remedies against the Collateral (other than the Tranche B Interest
Reserve Account and any proceeds thereof) at any time following a Tranche A
Event of Default and to control all decisions with respect to the timing on
waiver of exercise of remedies under the Financing Documents, including any
remedies against the Collateral (other than the Tranche B Interest Reserve
Account and any proceeds thereof).

           (b) Notwithstanding the provisions of the preceding paragraph to the
contrary, (i) except during the Payment Blockage Period, the Company may
continue to make payment of interest on any Junior Obligation when due and
payable pursuant to the Credit Agreement, (ii) whether or not a Payment Blockage
Period is then in effect, the Company may (x) continue to make payment of
interest, but solely from proceeds of the Tranche B Interest Reserve Account, on
any Junior Obligations when due and payable pursuant to the Credit Agreement,
(y) continue to make payment of pay-in-kind interest when due and payable
pursuant to the Credit Agreement and (z) make payments to the Junior Obligees
under Section 3.8 of the Credit Agreement if any Tranche A Lender shall not have
accepted the Change of Control Offer to Repay. As used herein, "Payment Blockage
Period" shall mean the period commencing the date the Initial Tranche A Lender
has delivered a Default Notice to the Administrative Agent and during which
period payments in respect of the Junior Obligations are not permitted to be
retained by the Junior Obligees pursuant to Section 2 of this Agreement;
provided that (i) any Payment Blockage Period arising from an Event of Default
(other than a payment or bankruptcy Event of Default) by the Company under
Section 8 of the Credit Agreement shall terminate on the earlier of (A) the date
on which such Event of Default is cured or waived in accordance with the Credit
Agreement and (B) the date which is 179 days after the date of the receipt by
the Administrative Agent of the Default Notice with respect thereto, (ii) no
more than one Default Notice may be delivered to initiate a Payment Blockage
Period during any consecutive 365-day period, (iii) the Initial Tranche A Lender
agrees not to deliver a Default Notice to block payment of amounts payable by
the Company to the Junior Obligees under Section 3.8 of the Credit Agreement if
any Tranche A Lender shall not have accepted the Change of Control Offer to
Repay and (iv) any Payment Blockage Period arising from a payment Event of
Default shall terminate on the date on which such Event of Default is cured or
waived by the Tranche A Lenders in accordance with the Credit Agreement.

           (c) In the event that, notwithstanding the foregoing provisions of
Section 2.4(a), any payment prohibited by said Section shall be received by any
Junior Obligee, such payment shall be held in trust for the benefit of, and
shall be paid over to, the Initial Tranche A Lender, for application pursuant to
the provisions of the Credit Agreement and this Agreement. Any payment or
distribution that is so paid over to the Initial Tranche A Lender and applied to
the Senior Obligations shall not be deemed to have been a payment on account of,
and shall not reduce the amount of, the Junior Obligations.

                                      -6-

<PAGE>

           2.5 Limitation on Remedies. (a)(I) So long as any Senior Obligation
shall remain outstanding or during any Payment Blockage Period, except as
expressly permitted by and subject to the terms of this Agreement (including,
without limitation, Section 2.5(a)(II) below), the Junior Obligees shall have no
right to (i) except to the extent not prohibited by clause (II) of this Section
2.5(a), commence, prosecute or participate in any administrative, legal or
equitable action against any of the Credit Parties relating to any Junior
Obligations (it being understood that the holders of the Junior Obligations may
participate in any such action in which the Tranche A Lender or its
representative is participating (and not commenced by the holders of the Junior
Obligations in such capacity) to the extent necessary to maintain their claims
to, and to preserve their rights in respect of, the Junior Obligations), (ii)
commence or join in the commencement of a proceeding under any bankruptcy,
insolvency, liquidation, reorganization or other similar law in its capacity as
a holder of Junior Obligations (it being understood that the holders of the
Junior Obligations may participate in any such proceeding not commenced by the
holders of the Junior Obligations in such capacity to the extent necessary to
maintain their claims to, and to preserve their rights in respect of, the Junior
Obligations), or (iii) direct the Administrative Agent or the Collateral Agent
to do any of the foregoing and (II) during any Payment Blockage Period, except
as expressly permitted by and subject to the terms of this Agreement (including,
without limitation, Section 2.5(c) below), the Junior Obligees shall have no
right to (i) take any action or institute any proceedings to collect or enforce
the payment of any of the Junior Obligations (other than the Tranche B Interest
Reserve Account and any proceeds thereof), (ii) take any action under the
Financing Documents or otherwise to foreclose or sell or otherwise realize upon
any Collateral (other than the Tranche B Interest Reserve Account and any
proceeds thereof) or enforce any of the Financing Documents or to exercise any
right, remedy or power in respect of the Junior Obligations under any of the
Financing Documents or otherwise available to it under applicable law, or (iii)
direct the Administrative Agent or the Collateral Agent to do any of the
foregoing.

           (b) If any Junior Obligee, in violation of the provisions herein set
forth, shall commence, prosecute or participate in any suit, action, case or
proceeding against any Credit Party, any Senior Obligee may at the expense of
the Junior Obligees, intervene and interpose as a defense or plea the provisions
set forth herein, and such Senior Obligee shall, in any event, be entitled to
restrain the enforcement of the payment provisions of the Junior Obligations in
its own name in the same suit, action, case or proceeding or in any independent
suit, action, case or proceeding.

           (c) In the event of the occurrence and continuance of a Tranche B
Event of Default, the Junior Obligees, pursuant to the terms of this Agreement,
shall not exercise any of their remedies against any Credit Party or the
Collateral under the Financing Documents unless the Junior Obligees shall have
first delivered to the Senior Obligees a notice of such Tranche B Event of
Default together with reasonable detail describing the nature of such Tranche B
Event of Default and the Senior Obligees shall have a period of 180 days after
the receipt of such notice to, at its option, elect to cure such Tranche B Event
of Default. After the expiration of such 180 day period, if the Tranche B Event
of Default shall not have been cured or waived in accordance with the Credit
Agreement, the Junior Obligees may (i) exercise their rights and remedies under
the Financing Documents (other than to foreclose on the Collateral) and/or (ii)
foreclose on the Collateral pursuant to the terms of the Security Documents;
provided that the Junior Obligees may not foreclose on any Collateral unless
either (x) the Junior Obligees shall have delivered

                                      -7-

<PAGE>

evidence reasonably satisfactory to the Senior Obligees of binding written
commitment(s) from creditworthy purchaser(s) committing to purchase the
Collateral in cash or equivalent consideration, subject only to customary
closing conditions precedent, such that the net proceeds of the foreclosure of
the Collateral shall be sufficient to indefeasibly pay and satisfy the Senior
Obligations in full or (y) the Senior Obligees shall have consented thereto in
writing.

           Upon satisfaction of either of the conditions set forth in Section
2.5(c)(iii), the Senior Obligees agree to direct the Collateral Agent to follow
the instructions of the Tranche B Lenders with respect to the exercise of the
rights and remedies under the Financing Documents to foreclose on the
Collateral, subject to the other terms of this Agreement and the other Financing
Documents, including, without limitation, the order of priority in the
application of proceeds with respect thereto as set forth herein or therein.

           (d) If the Senior Obligees shall elect to cure any Tranche B Event of
Default as contemplated in Section 2.5(c) above, the Senior Obligees shall be
subrogated to the rights of the Junior Obligees to receive payments or
distribution of assets of the Credit Parties made on the Junior Obligations so
satisfied or to bring any claim or action against the Credit Parties with
respect thereto.

           (e) In the event that (i) an Event of Default has occurred and is
continuing under the Credit Agreement and (ii) the Senior Obligee has not
delivered a Payment Blockage Notice to the Trustee under, and in each case as
defined in, the Convertible Notes Indenture, nothing in this Agreement shall
prohibit the Junior Obligee or the Administrative Agent from delivering such a
Payment Blockage Notice.

           2.6 Provisions Solely to Define Relative Rights. Nothing contained in
this Agreement is intended to or shall impair, as among the Credit Parties, the
Senior Obligees, and the Junior Obligees, the obligations of the Credit Parties,
which are absolute and unconditional, to pay the Senior Obligees and the Junior
Obligees, as and when the same shall become due and payable in accordance with
the terms of the Financing Documents, the principal of, interest on and other
amounts due with respect to the Senior Obligations and the Junior Obligations,
or affect the relative rights of the Senior Obligees and the Junior Obligees
vis-a-vis other creditors of the Credit Parties.

           2.7 No Waiver of Subordination Provisions. (a) The provisions
contained in this Section 2, the subordination effected thereby, and the rights
of the Senior Obligees shall not be affected by, (i) any amendment of, or
addition or supplement to, any Financing Document or any instrument or agreement
relating thereto or to the Senior Obligations, (ii) any exercise or non-exercise
of any right, power or remedy under or in respect of any Financing Document or
the Collateral or any instrument or agreement relating thereto or to the Senior
Obligations, (iii) any waiver, consent, release, indulgence, extension, renewal,
modification, delay, nonperfection or other action, inaction or omission in
respect of any Financing Document or the Collateral or any instrument or
agreement relating thereto or to the Senior Obligations, (iv) any deferral,
extension, renewal, modification, refinancing or refunding of the Senior
Obligations, or (v) any merger or consolidation of any Credit Party into or with
another Person or any sale, lease or transfer of any or all of the assets of any
Credit Party to any other Person.

                                      -8-

<PAGE>

                  (b)  The obligations of the Junior Obligees under these
subordination provisions shall continue to be effective, or be reinstated, as
the case may be, if at any time any payment in respect of any Senior Obligation,
or any other payment to any holder of any Senior Obligation in its capacity as
such, is rescinded or must otherwise be restored or returned by the holder of
such Senior Obligation upon the occurrence of any proceeding under any
bankruptcy, insolvency, liquidation, reorganization or other similar law, or
upon or as a result of the appointment of a receiver, intervenor or conservator
of, or trustee or similar officer for, any Credit Party or any substantial part
of its property, or otherwise, all as though such payment had not been made.

                  2.8  Legend on Tranche B Notes and Warrants. (a) Each Tranche
B Note shall contain the following legend conspicuously noted on the face
thereof: "THIS PROMISSORY NOTE IS SUBJECT TO THE SUBORDINATION AND OTHER
PROVISIONS SET FORTH IN THE INTERCREDITOR AND SUBORDINATION AGREEMENT DATED AS
OF JUNE 25, 2002 AMONG THE ADMINISTRATIVE AGENT, THE TRANCHE A LENDERS PARTY
THERETO, THE TRANCHE B LENDERS PARTY THERETO, THE HOLDERS PARTY THERETO, AND THE
COLLATERAL AGENT, AND THE HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF,
SHALL BE BOUND BY THE TERMS OF SUCH INTERCREDITOR AND SUBORDINATION AGREEMENT,
AS THE SAME MAY BE AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO
TIME", and shall specifically state that a copy of this Agreement is on file
with the Collateral Agent and is available for inspection at the Collateral
Agent's offices.

                  (b)  Each Warrant shall contain the following legend
conspicuously noted on the face thereof: "THIS WARRANT IS SUBJECT TO THE
SUBORDINATION AND OTHER PROVISIONS SET FORTH IN THE INTERCREDITOR AND
SUBORDINATION AGREEMENT DATED AS OF JUNE 25, 2002 AMONG THE ADMINISTRATIVE
AGENT, THE TRANCHE A LENDERS PARTY THERETO, THE TRANCHE B LENDERS PARTY THERETO,
THE HOLDERS PARTY THERETO AND THE COLLATERAL AGENT, AND THE HOLDER OF THIS
INSTRUMENT, BY ITS ACCEPTANCE HEREOF, SHALL BE BOUND BY THE TERMS OF SUCH
INTERCREDITOR AND SUBORDINATION AGREEMENT, AS THE SAME MAY BE AMENDED,
SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO TIME", and shall specifically
state that a copy of this Agreement is on file with the Collateral Agent and is
available for inspection at the Collateral Agent's offices.

                  2.9  Further Instruments and Documents. Each Junior Obligee
agrees that, from time to time, it will execute and deliver all further
instruments and documents, and take all further actions, that are necessary or
that any Senior Obligee may reasonably request, in order to effectuate the
subordination provisions contained in this Section 2 and to enforce the Senior
Obligees' rights and remedies hereunder with respect to such subordination
provisions.

                  2.10 Transfer of Junior Obligations Subject to this Agreement.
The Junior Obligees shall require each transferee or assignee of all or part of
the Junior Obligations to agree in writing that such transferee or assignee and
such Junior Obligations are subject to the provisions of this Agreement.

                                      -9-

<PAGE>

                  2.11 Subrogation. (a) The Junior Obligees hereby waive all
rights of subrogation to the claims of any of the Senior Obligees against any
Credit Party, and waive all rights of recourse to any security for any Senior
Obligations, until such time as all Senior Obligations shall have been
indefeasibly paid in full in cash pursuant to the terms and provisions thereof;
provided, that if any payment to any Senior Obligee is rescinded as a result of
a legal proceeding or otherwise, the subrogation of Junior Obligees as provided
herein shall likewise be rescinded until all of the Senior Obligations are
indefeasibly paid in full in cash.

                  (b)  Subject to the indefeasible payment in full of the Senior
Obligations in cash pursuant to the terms and provisions thereof, the Junior
Obligees shall be subrogated to the extent of the payments or distributions made
to the Senior Obligees pursuant to the provisions of this Agreement to the
rights of the Senior Obligees to receive payments or distributions applicable to
the Senior Obligations until the Junior Obligations shall be paid in full; and,
for the purposes of such subrogation, no payments or distributions to the Senior
Obligees of any cash, property or securities to which the Junior Obligees would
be entitled except for the provisions of this Agreement, and no payment over
pursuant to the provisions of this Agreement, to or for the benefit of the
holders of Senior Obligations, shall, as between the Borrower, its creditors
other than the Senior Obligees, and the Junior Obligees, be deemed to be a
payment by the Borrower to or on account of the Senior Obligations; and no
payments or distributions of cash, property or securities to or for the benefit
of the Junior Obligees pursuant to the subrogation provisions of this Agreement,
which would otherwise have been paid to the Senior Obligees shall be deemed to
be a payment by the Borrower to or for the account of the Senior Obligees. It is
understood that the provisions of this Section 2 are and are intended solely for
the purposes of defining the relative rights of the Junior Obligees, on the one
hand, and the Senior Obligees, on the other hand.

                  SECTION 3. COLLATERAL AGENT.

                  3.1  Appointment. Each Lender hereby appoints, designates and
authorizes the Collateral Agent to take such action on its behalf under the
provisions of this Agreement and each Security Document and to exercise such
powers and perform such duties as are expressly delegated to it by the terms of
this Agreement or any Security Document, together with such powers as are
reasonably incidental thereto. Each Lender authorizes the Collateral Agent to
execute, deliver and perform each of the Security Documents and such Lender
agrees to be bound by all of the agreements of the Collateral Agent contained in
the Security Documents. Notwithstanding any provision to the contrary contained
elsewhere in this Agreement or in any other Financing Document, the Collateral
Agent shall not have any duties or responsibilities except those expressly set
forth herein and in the Security Documents, and the Collateral Agent does not
have or shall not be deemed to have any fiduciary relationship with any Lender,
and no implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any Financing Document or
otherwise exist against the Collateral Agent. Without limiting the generality of
the foregoing sentence, the use of the term "Collateral Agent," in this
Agreement with reference to the Collateral Agent is not intended to connote any
fiduciary or other implied (or express) obligations arising under agency
doctrine of any applicable Law. Instead, such term is used merely as a matter of
market custom, and is intended to create or reflect only a relationship between
independent contracting parties.

                                      -10-

<PAGE>

                  3.2  Exculpatory Provisions. Neither the Collateral Agent nor
any of its officers, directors, employees or agents shall (i) be liable for any
action taken or omitted to be taken by it under or in connection with this
Agreement or any other Financing Document or the transactions contemplated
hereby (except for its own gross negligence or willful misconduct), or (ii) be
responsible in any manner to any of the Lenders or any other Person for any
recital, statement, representation or warranty made by any Covered Party or any
Affiliate of any Covered Party, or any officer thereof, contained in this
Agreement or in any other Financing Document, or in any certificate, report,
statement or other document referred to or provided for in, or received by the
Collateral Agent under or in connection with, this Agreement or any other
Financing Document, or for the value of or title to any Collateral, or the
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement or any other Financing Document, or for any failure of any Covered
Party or any other party to any Financing Document to perform its obligations
hereunder or thereunder. The Collateral Agent shall not be under any obligation
to any Lender to ascertain or to inquire as to the observance or performance of
any of the agreements contained in, or conditions of, this Agreement or any
other Financing Document, or to inspect the books or records of any Covered
Party or any Affiliate of any Covered Party. Anything in this Agreement to the
contrary notwithstanding, in no event shall the Collateral Agent be liable for
special, indirect or consequential loss or damage of any kind whatsoever
(including but not limited to loss of profits).

                  3.3  Reliance by Collateral Agent. The Collateral Agent shall
be entitled to rely conclusively, and shall be fully protected in so relying,
upon any writing, resolution, notice, consent, certificate, affidavit, letter,
telegram, facsimile, telex or telephone message, statement or other document or
conversation believed by it to be genuine and correct and to have been signed,
sent or made by the proper Person or Persons, and upon advice and statements of
legal counsel, independent accountants and other experts selected by the
Collateral Agent. The Collateral Agent shall be fully justified in failing or
refusing to take any action under this Agreement or any other Financing Document
(i) if such action would, in the opinion of the Collateral Agent (upon
consultation with counsel), be contrary to applicable Law or the terms of any
Financing Document, (ii) if such action is not specifically provided for in the
Financing Documents, and it shall not have received such written advice or
concurrence of (A) with respect to each Security Document other than the Tranche
B Interest Reserve Account Control Agreement, the Majority Tranche A Lenders
(or, after the Transition Date, the Majority Tranche B Lenders) or (B) with
respect to the Tranche B Interest Reserve Account Control Agreement, the
Majority Tranche B Lenders, in each case as the Collateral Agent deems
appropriate, (iii) unless, if it so requests, such Collateral Agent shall first
be indemnified to its satisfaction by the Lenders against any and all liability
and expense which may be incurred by it by reason of taking or continuing to
take any such action. The Collateral Agent shall in all cases be fully protected
in acting, or in refraining from acting, under this Agreement and the Security
Documents in accordance with a written request or written consent of (A) with
respect to each Security Document other than the Tranche B Interest Reserve
Account Control Agreement, the Majority Tranche A Lenders (or, after the
Transition Date, the Majority Tranche B Lenders) or (B) with respect to the
Tranche B Interest Reserve Account Control Agreement, the Majority Tranche B
Lenders, and such request and any action taken or failure to act pursuant
thereto shall be binding upon all of the Lenders.

                  3.4  Notice of Default. The Collateral Agent shall not be
deemed to have knowledge or notice of the occurrence of any Default or Event of
Default unless the Collateral

                                      -11-

<PAGE>

Agent shall have received written notice from a Lender or the Borrower referring
to the Credit Agreement, describing such Default or Event of Default and stating
that such notice is a "Notice of Default". If the Collateral Agent receives any
such notice of the occurrence of a Default or an Event of Default, it shall give
notice thereof to the Administrative Agent and the Lenders. The Collateral Agent
shall take such action with respect to such Default or Event of Default as may
be requested in writing by (A) with respect to each Security Document other than
the Tranche B Interest Reserve Account Control Agreement, the Majority Tranche A
Lenders (or, after the Transition Date, the Majority Tranche B Lenders) or (B)
with respect to the Tranche B Interest Reserve Account Control Agreement, the
Majority Tranche B Lenders; provided, however, that unless and until the
Collateral Agent has received any such request, the Collateral Agent may (but
shall not be obligated to) take such action, or refrain from taking such action,
with respect to such Default or Event of Default under the Security Documents as
it shall deem advisable or in the best interest of the Lenders.

                  3.5  Indemnification. Whether or not the transactions
contemplated hereby are consummated, the Lenders shall indemnify upon demand the
Collateral Agent, its officers, directors, employees, counsel, agents and
attorneys in fact ("Agent Related Person") (to the extent not reimbursed by or
on behalf of any Covered Party within 90 days of the Collateral Agent's request
to the Borrower for payment and without limiting the obligation of the Covered
Parties to do so), pro rata in accordance with the aggregate principal amount of
the Loans held by such Lenders (as determined by the Administrative Agent), from
and against any and all Indemnified Liabilities; provided, however, that no
Lender shall be liable for the payment to the Collateral Agent or the Agent
Related Persons of any portion of such Indemnified Liabilities resulting solely
from such Person's gross negligence or willful misconduct. Without limitation of
the foregoing, each Lender shall reimburse the Collateral Agent upon demand as
provided above of any costs or out-of-pocket expenses incurred by such
Collateral Agent or Agent Related Person (to the extent not reimbursed by or on
behalf of the Covered Parties within 90 days of the Collateral Agent's request
to the Borrower for payment and without limiting the obligation of the Covered
Parties to do so) in connection with the preparation, execution, delivery,
administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement or any document contemplated by
or referred to herein, pro rata in accordance with the aggregate principal
amount of the Loans held by such Lenders (as determined by the Administrative
Agent). The provisions of this section shall survive termination of this
Agreement or earlier resignation or removal of the Collateral Agent.

                  Notwithstanding anything herein to the contrary, the
Collateral Agent shall be entitled to set off from any Collateral or proceeds
thereof any amounts due and owing to it pursuant to this Section 3.5 solely to
the extent such amounts are not paid by any Covered Party or the Lenders as
provided herein and in the Financing Documents and such amounts remain unpaid by
the Lenders for a period of thirty days after demand therefor.

                  3.6  Successor Collateral Agent. Subject to the appointment
and acceptance of a successor as provided below, the Collateral Agent may resign
at any time by giving notice thereof to the Lenders and the Borrower, and the
Collateral Agent may be removed at any time with or without cause by the
Required Waiver Lenders upon thirty (30) days prior written notice. Upon any
such resignation or removal, the Required Waiver Lenders shall have the right to

                                      -12-

<PAGE>

appoint a successor to the Collateral Agent. If no successor Collateral Agent
shall have been appointed by the Required Waiver Lenders, and shall have
accepted such appointment within 30 days after the resigning Collateral Agent's
giving of notice of resignation or the giving of any notice of removal of such
Collateral Agent, then the resigning Collateral Agent or Collateral Agent being
removed, as the case may be, may at the Borrower's expense, appoint a successor
to such Collateral Agent. If the Collateral Agent shall resign or be removed
pursuant to the foregoing provisions, upon the acceptance of appointment by a
successor Collateral Agent hereunder, the former Collateral Agent shall deliver
all Collateral then in its possession to the successor Collateral Agent. Upon
the acceptance of its appointment as a successor Collateral Agent hereunder,
such successor Collateral Agent shall thereupon succeed to and become vested
with all the rights, powers, privileges and duties of such resigning or removed
Collateral Agent, and such resigning Collateral Agent or removed Collateral
Agent shall be discharged from its duties and obligations hereunder and under
the other Financing Documents.

                  3.7 Miscellaneous. (a) None of the provisions of this
Agreement or any other Financing Document shall require the Collateral Agent to
expend or risk its own funds or otherwise to incur any liability, financial or
otherwise, in the performance of any of its duties hereunder, or in the exercise
of any of its rights or powers if it shall have reasonable grounds for believing
that repayment of such funds or indemnity satisfactory to it against such risk
or liability is not assured to it.

                  (b) The Collateral Agent may execute any of the trusts or
powers hereunder or perform any duties hereunder or under any Security Document
either directly or by or through agents, attorneys, custodians or nominees
appointed with due care, and shall not be responsible for any willful misconduct
or negligence on the part of any agent, attorney, custodian or nominee so
appointed.

                  (c) Any corporation into which the Collateral Agent may be
merged or converted or with which it may be consolidated, or any corporation
resulting from any merger, conversion or consolidation to which the Collateral
Agent shall be a party, or any corporation succeeding to the business of the
Collateral Agent shall be the successor of the Collateral Agent hereunder
without the execution or filing of any paper with any party hereto or any
further act on the part of any of the parties hereto except where an instrument
of transfer or assignment is required by law to effect such succession, anything
herein to the contrary notwithstanding.

                  SECTION 4. MISCELLANEOUS.

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

                  4.2 Notices. All notices, requests, demands or other
communications hereunder shall be made in the manner and with the effect
provided in Section 9.3 of the Credit Agreement at the addresses provided
therein (and to the Collateral Agent, at the address set forth below its
signature block hereto) or at such other address as shall have been furnished in
writing by the relevant Person to the party required to give notice hereunder.

                                      -13-

<PAGE>

                  4.3 Successors and Assigns. Whenever in this Agreement any of
the parties hereto is named or referred to, the successors and assigns of such
party shall be deemed to be included and all covenants, promises and agreements
in this Agreement by or on behalf of the respective parties hereto shall bind
and inure to the benefit of the respective successors and permitted assigns of
such parties, whether so expressed or not. Nothing in this Agreement, express or
implied, is intended or shall be construed to confer upon, or to give to, any
Person other than the parties hereto and their respective successors and
permitted assigns and Persons for whom the parties hereto are acting as agents
or representatives, any right, remedy or claim under or by reason of this
Agreement or any covenant, condition or stipulation hereof; and the covenants,
stipulations and agreements contained in this Agreement are and shall be for the
sole and exclusive benefit of the parties hereto and their respective successors
and permitted assigns and Persons for whom the parties hereto are acting as
agents or representatives.

                  4.4 Counterparts. This Agreement may be executed in any number
of counterparts, each executed counterpart constituting an original but all
counterparts together constituting only one instrument.

                  4.5 Special Exculpation. NO CLAIM MAY BE MADE BY THE COMPANY
OR ANY OTHER PERSON AGAINST THE COLLATERAL AGENT OR ANY LENDER OR THE
AFFILIATES, DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS OR AGENTS OF ANY OF THEM
FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES IN RESPECT OF ANY
CLAIM FOR BREACH OF CONTRACT OR ANY OTHER THEORY OF LIABILITY ARISING OUT OF OR
RELATING TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY, OR
ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH AND THE COMPANY
HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR ANY SUCH
DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST
IN ITS FAVOR.

                  4.6 Governing Law. THIS AGREEMENT 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).

                  4.7 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 OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY RELATING
HERETO.

                  4.8 No Impairments of Other Rights of Secured Parties and no
Rights or Obligations of the Company. Nothing in this Agreement is intended or
shall be construed to impair,

                                      -14-

<PAGE>

diminish or otherwise adversely affect any other rights the Lenders may have or
may obtain against the Company or any other Credit Party.

                  4.9  Amendment; Waiver. No amendment or waiver of any
provision of this Agreement shall be effective unless the same shall be in
writing and signed by the parties hereto and any such waiver or amendment shall
be effective only in the specific instance and for the specific purpose for
which given. No delay on the part of any Person in the exercise of any right,
power or remedy shall operate as a waiver thereof, nor shall any single or
partial waiver by such Person of any right, power or remedy preclude any further
exercise thereof, or the exercise of any other right, power or remedy.

                  4.10 Headings; Table of Contents, etc. Headings herein and the
table of contents hereof are for convenience only and shall not be relied upon
in interpreting or enforcing this Agreement.

                  4.11 Conflicts With Other Security Documents. In the event of
any conflict between the terms of this Agreement and the other Financing
Documents, the provisions of this Agreement shall control.

                  4.12 Marshaling. The Junior Obligees hereby waive, to the
fullest extent permitted by applicable law, any rights they may have under
applicable law to assert the doctrine of marshaling or otherwise to require any
Senior Obligee to marshal any Property of any Credit Party for the benefit of
any Lender.

                  4.13 Waiver of Rights. Each Junior Obligee hereby waives, to
the fullest extent permitted by applicable law, any rights it may have to enjoin
or otherwise obtain a judicial or administrative order preventing any Senior
Obligee from taking, or refraining from taking, any action with respect to all
or any part of the Collateral that is permitted under this Agreement.

                  4.14 Continuation of Subordination; Termination of Agreement.
This Agreement shall in all respects be a continuing agreement and shall remain
in full force and effect until Senior Obligees shall have received indefeasible
payment in full in cash of all Senior Obligations pursuant to the respective
terms and provisions of the Financing Documents; provided, that this Agreement
shall continue to be effective or be reinstated, as the case may be, (i) if at
any time any payment of any Senior Obligations is rescinded, avoided or must
otherwise be returned by any Tranche A Lender upon the insolvency, bankruptcy or
reorganization of any Credit Party, all as though such payment had not been
made, and (ii) irrespective of any invalidity, unenforceability or illegality of
the Senior Obligations, any part thereof or any of the transactions contemplated
by the Financing Documents, and (iii) shall also apply with respect to any
judgment ordered by a court in any action brought at law or in equity (such as
an action brought for rescission, restitution, or unjust enrichment) against the
Borrower or any other Credit Party in lieu, in whole or in part, of an action to
enforce the obligations of the Borrower or any Credit Party under the Financing
Documents.

                  4.15 Specific Performance. Each party hereto agrees that as
between the Senior Obligees and the Junior Obligees, such parties may demand
specific performance of the provisions of this Agreement, at any time the Senior
Obligees or the Junior Obligees, as the case

                                      -15-

<PAGE>

may be, shall have failed to comply with any term or provision hereof. The
Lenders hereby irrevocably waive any defense based on the adequacy of a remedy
at law that might be asserted as a bar to such remedy of specific performance.

                                      -16-

<PAGE>

                  IN WITNESS WHEREOF, the parties hereto, by their officers duly
authorized, have caused this Intercreditor and Subordination Agreement to be
duly executed and delivered as of the date first above written.



                                      LEHMAN COMMERCIAL PAPER INC.,
                                      as Administrative Agent


                                      By:_____________________________________
                                         Title:

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.9
<SEQUENCE>11
<FILENAME>dex999.txt
<DESCRIPTION>WARRANT AGREEMENT
<TEXT>
<PAGE>

                                                                  EXECUTION COPY

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



                                WARRANT AGREEMENT

                                  By and Among

                                PG&E CORPORATION

                                       and

                                 LB I GROUP INC.

                                       and

                             EACH OTHER ENTITY NAMED
                          ON THE SIGNATURE PAGES HEREOF

                           __________________________


                            Dated as of June 25, 2002

                           __________________________



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

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                              <C>
ARTICLE I Definitions ......................................................................................     1

     SECTION 1.01.    Definitions ..........................................................................     1

ARTICLE II Warrant Certificates ............................................................................     5

     SECTION 2.01.    Form of Warrant Certificates. ........................................................     5
     SECTION 2.02.    Execution and Delivery of Warrant Certificates. ......................................     6
     SECTION 2.03.    Loss or Mutilation  ..................................................................     6

ARTICLE III Representations, Warranties and Covenants ......................................................     7

     SECTION 3.01.    Representations Warranties and Covenants of the Company ..............................     7
     SECTION 3.02.    Representations Warranties and Covenants of the Initial Holders ......................     9
     SECTION 3.03.    Payments of Cash Dividends ...........................................................    10

ARTICLE IV Exercise Terms ..................................................................................    11

     SECTION 4.01.    Terms of Warrants; Exercise of Warrants ..............................................    11
     SECTION 4.02.    Adjustment of Exercise Price and Number of Warrant Shares Issuable. ..................    12
     SECTION 4.03.    Manner of Exercise. ..................................................................    19
     SECTION 4.04.    Transfer of Warrants and Warrant Shares ..............................................    19
     SECTION 4.05.    Fractional Warrant Shares ............................................................    20
     SECTION 4.06.    Reservation of Warrant Shares ........................................................    20
     SECTION 4.07.    Compliance with Law ..................................................................    20
     SECTION 4.08.    Payment of Taxes .....................................................................    20
     SECTION 4.09.    Failure to Deliver Shares ............................................................    20

ARTICLE V Transfer Restrictions ............................................................................    21

     SECTION 5.01.    Restrictions on Transfers of the Warrants and the Warrant Shares .....................    21
     SECTION 5.02.    Notation; Removal of Legend ..........................................................    22
     SECTION 5.03.    Surrender of Warrant Certificates. ...................................................    22

ARTICLE VI Miscellaneous ...................................................................................    22

     SECTION 6.01.    SEC Reports and other Financial Information ..........................................    22
     SECTION 6.02.    Persons Benefiting ...................................................................    23
     SECTION 6.03.    Amendments and Waivers ...............................................................    23
     SECTION 6.04.    Notices  .............................................................................    23
</TABLE>

                                       i

<PAGE>

<TABLE>
<CAPTION>
                                                                                                                Page
                                                                                                                ----

<S>                                                                                                              <C>
     SECTION 6.05.    Governing Law; Waiver of Jury Trial; Submission of Jurisdiction ........................   24
     SECTION 6.06.    Successors and Assigns .................................................................   25
     SECTION 6.07.    Severability ...........................................................................   25
     SECTION 6.08.    Entire Agreement .......................................................................   25
     SECTION 6.09.    Counterparts ...........................................................................   26
     SECTION 6.10.    Headings ...............................................................................   26
     SECTION 6.11.    Remedies ...............................................................................   26
     SECTION 6.12.    Waiver .................................................................................   26
     SECTION 6.13.    Register ...............................................................................   26


Exhibit A         Form of Warrant Certificate
Exhibit B         Form of Transfer Restriction Legend
Exhibit C         Form of Accredited Investor Certificate
                   Transferee Letter of Representation
</TABLE>

                                       ii

<PAGE>

           WARRANT AGREEMENT, dated as of June 25, 2002, by and among PG&E
Corporation, a California corporation (the "Company"), LB I Group Inc., a
Delaware corporation, and each other entity named on the signature pages hereof
(each, an "Initial Holder" and collectively, the "Initial Holders").

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

           WHEREAS, the Company and the Initial Lender (as defined below) are
parties to the Credit Agreement (as defined below);

           WHEREAS, as a condition to the effectiveness of the Credit Agreement,
the Company desires to issue to each Initial Holder the warrants reflected on
the schedules attached hereto for each such Initial Holder (each, a "Warrant",
which term shall include warrants issued upon transfer, division, combination
of, or in substitution for, any Warrant) which will, subject to adjustment as
provided herein, entitle the Holders thereof to purchase shares of common stock,
no par value (the "Common Stock"), of the Company on the terms described herein
(the Common Stock issuable upon exercise of the Warrants being referred to
herein as the "Warrant Shares");

           WHEREAS, in order to induce the Initial Lender to enter into the
Credit Agreement, the Company has agreed to provide to the Initial Holders,
among other things, the Warrants and the registration rights for the Warrant
Shares as set forth in the Equity Registration Rights Agreement, dated as of the
date hereof (the "Registration Rights Agreement"), among the Company and the
Initial Holders;

           NOW, THEREFORE, intending to be legally bound, each party hereto
agrees as follows for the benefit of the other parties and for the equal and
ratable benefit of the Holders of the Warrants:

                                   ARTICLE I

                                   Definitions

           SECTION 1.01. Definitions. Capitalized terms used but not otherwise
defined herein shall have the meanings ascribed to such terms in the Credit
Agreement and the principles of construction set forth in Appendix A to the
Credit Agreement shall apply to this Agreement.

           "Agreement" shall mean this Warrant Agreement, as the same may be
amended, modified or supplemented from time to time.

           "Assignee" shall have the meaning set forth in Section 5.01(b)
hereof.

           "Board" shall mean the board of directors of the Company or any
committee thereof duly authorized to act on behalf of such board of directors.

           "Business Day" shall mean any day other than a Saturday or Sunday or
any day on which banking institutions in the City of New York or the City of San
Francisco are authorized or obligated by law or regulation to close.

<PAGE>

                                                                               2

           "Cash Dividends" means periodic, special, extraordinary or
non-recurring cash dividends on the Company's Common Stock as declared by the
Company's Board of Directors.

           "Cashless Exercise" shall have the meaning set forth in Section 4.01
hereof.

           "Common Stock" shall have the meaning set forth in the second recital
hereof.

           "Company" shall have the meaning set forth in the first paragraph
hereof, and its successors and assigns.

           "Credit Agreement" shall mean the Amended and Restated Credit
Agreement, dated as of the date hereof, among the Company, the Initial Lender
and the other Lenders party thereto, Lehman Commercial Paper Inc., as
Administrative Agent and Lehman Brothers Inc., as Lead Arranger and Book
Manager, as such agreement may be subsequently amended from time to time
pursuant to the provisions thereof.

           "Current Market Price" of a Warrant Share as of any date shall mean,
except as hereinafter provided, the average of the daily market prices for the
Common Stock of the Company for the 20 consecutive trading days preceding such
date. The market price for each such day shall be the last sale price on such
day as reported on the New York Stock Exchange consolidated tape, or, if such
Common Stock of the Company is not listed on the New York Stock Exchange, or
reported on such consolidated tape, then the last sale price on such day on the
principal domestic stock exchange on which such Common Stock of the Company is
then listed or admitted to trading, or, if no sale takes place on such day on
such exchange, the average of the closing bid and asked prices on such day as
officially quoted on such exchange, or, if such Common Stock of the Company is
not then listed or admitted to trading on any domestic stock exchange but is
quoted on the Nasdaq Stock Market's National Market, then the Current Market
Price for each such trading day shall be the last sale price on such day as
quoted on the Nasdaq Stock Market's National Market, or, if no sale takes place
on such day or if such Common Stock of the Company is neither listed or admitted
to trading on any domestic stock exchange nor quoted on such day on the Nasdaq
Stock Market's National Market, then the Current Market Price for each such
trading day shall be the average of the reported closing bid and asked price
quotations on such day in the over-the-counter market, as reported by the Nasdaq
Stock Market, or, if not so reported, as furnished by the National Quotation
Bureau, Inc., or, if such firm at the time is not engaged in the business of
reporting such prices, as furnished by any similar firm then engaged in such
business as selected by the Company, or, if there is no such firm, as furnished
by any member of the National Association of Securities Dealers, Inc. selected
by the Company with the written approval of a Majority in Interest of Evaluating
Holders.

           If at any time the Common Stock of the Company is not listed on any
domestic exchange or quoted in the domestic over-the-counter market or not
registered under the Exchange Act, the Current Market Price of a Warrant Share
shall be the fair market value per share of the Common Stock of the Company as
determined by a panel of independent appraisers (the "Appraisers") who shall be
investment banks experienced in the evaluation of the value of securities of a
corporation of a type similar to the Company. Initially, such panel shall be
comprised of two Appraisers, one selected by the Company and one selected by the
relevant Holder or a Majority in Interest of Evaluating Holders, as applicable.
In making such

<PAGE>

                                                                               3

determination, the Appraisers shall not take into account any discount
attributable to the minority status of the Warrants and/or Warrant Shares, or
any other minority interest, or the illiquidity of the Warrants and/or Warrant
Shares.

           In the event the Appraisers are unable to agree upon the Current
Market Price within 10 days of their selection, then the two Appraisers shall
select a third independent Appraiser who shall be an investment bank experienced
in the evaluation of the value of securities of a corporation of a type similar
to the Company to determine the Current Market Price within 15 days of its
selection. A determination by such third Appraiser of the Current Market Price
shall be final and binding upon the Company and the Holders.

           The Company shall pay the fees and expenses of the Appraiser it
appoints. The relevant Holder or Evaluating Holders, as applicable, shall pay
the fees and expenses of the Appraiser it, or they, appoint; provided that, when
applicable, such fees and expenses shall be divided pro rata among the
Evaluating Holders in proportion to their respective ownership interests in the
securities being evaluated.

           Should a third Appraiser be appointed, each of the Company and the
relevant Holder (or Evaluating Holders, where applicable) shall pay 50% of the
expense associated with such appointment. Where applicable, the portion of the
fees and expenses payable by the Evaluating Holders shall be divided pro rata
among such Evaluating Holders in proportion to their respective ownership
interests in the securities being evaluated.

           "Dividend" shall mean any dividend (including Cash Dividends) or
other distribution on the Common Stock whether in the form of cash, evidences of
the Company's indebtedness, or any other assets, properties or securities (other
than shares of Common Stock) or any options, warrants or other rights to
subscribe for or to purchase any of the foregoing.

           "Evaluating Holders" shall mean, at any time and from time to time,
the Holders of the securities whose Current Market Price is being ascertained at
such time.

           "Excess Shares" shall have the meaning set forth in Section 4.01
hereof.

           "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC promulgated pursuant
thereunder.

           "Exercise Limitations" shall have the meaning set forth in Section
4.01 hereof.

           "Exercise Price" shall have the meaning set forth in Section 4.01
hereof.

           "Expiration Date" shall have the meaning set forth in Section 4.01
hereof.

           "4.9% Limitation" shall have the meaning set forth in Section 4.01
hereof.

           "Governmental Authority" shall mean any federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, or any court, in each case whether of or within the United
States of America or foreign.

<PAGE>

                                                                               4

           "Holder" shall mean the Initial Holders and any Assignee, designee or
transferee of the Warrants or any portion thereof or any Warrant Shares.

           "Initial Holders" shall have the meaning set forth in the first
paragraph hereof.

           "Initial Lender" shall mean Lehman Commercial Paper Inc.

           "Majority in Interest of Evaluating Holders" shall mean, at any time
and from time to time, the Holders of more than a 50% interest in the Warrant
Shares whose Current Market Price is being ascertained at such time.

           "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 or liabilities of such Person.

           "Material Adverse Effect" shall mean any event, circumstance or
condition which is reasonably likely to (A) have a material adverse effect on
the condition (financial or otherwise), results of operations, business,
Properties, or liabilities of the Company, as the case may be, (B) materially
and adversely affect the ability of the Company, as the case may be, to perform
its obligations under this Agreement or (C) materially and adversely affect the
rights and remedies of the Holders under this Agreement.

           "Person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof

           "Preferred Stock" shall mean, with respect to any Person, any capital
stock issued by such Person which has a preference over such Person's Common
Stock.

           "Proceeding" shall mean an action, claim, suit or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.

           "Registration Rights Agreement" shall have the meaning set forth in
the third recital hereof, as the same may be amended, modified or supplemented
from time to time.

           "Register" shall have the meaning set forth in Section 6.13 hereof.

           "Required Holders" shall mean the Holders of at least a 40% interest
in the Warrants or the Warrant Shares.

           "Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations promulgated by the SEC thereunder.

           "Share Delivery Default" shall have the meaning set forth in Section
4.09 hereof.

           "Shareholder Limitation" shall have the meaning set forth in Section
4.01 hereof.

<PAGE>

                                                                               5

           "13D Person" shall mean any "person" as such term is defined in
Section 13(d)(3) of the Exchange Act.

           "Transfer Agent" shall have the meaning set forth in Section 4.04
hereof.

           "VWAP" shall mean, for any security as of any date, the
dollar-weighted average price for such security on the principal United States
securities exchange on which such security is traded (which is currently the New
York Stock Exchange with respect to the Common Stock) during the period
beginning at 9:30 a.m. (New York time) (or such other time as such exchange
publicly announces is the official open of trading), and ending at 4:00 p.m.
(New York time) (or such other time as such exchange publicly announces is the
official close of trading) as reported by Bloomberg Financial Markets (or any
successor thereto, "Bloomberg") through its "Volume at Price" functions, or, if
the foregoing does not apply, the dollar weighted average price of such security
in the over-the counter-market on the electronic bulletin board for such
security during the period beginning at 9:30 a.m. (New York time) (or such other
time as such exchange publicly announces is the official open of trading), and
ending at 4:00 p.m. (New York time) (or such other time as such exchange
publicly announces is the official close of trading) as reported by Bloomberg,
or if no dollar weighted average price is reported for such security by
Bloomberg for such hours, the average of the highest closing bid price and
lowest closing ask price of any of the market makers for such security as
reported in the "pink sheets" by the National Quotation Bureau, Inc. If the VWAP
cannot be calculated for such security on such date on any of the foregoing
bases, the VWAP of such security on such date shall be the fair market value as
mutually determined by the Company and the Holders of the Securities
representing a majority of the aggregate principal amount of the Securities
outstanding. All such determinations to be appropriately adjusted for any stock
dividend, stock split, stock combination or other similar transaction during
such period.

           "Warrants" shall have the meaning set forth in the second recital
hereof.

           "Warrant Agreement" shall mean this Agreement.

           "Warrant Certificates" shall have the meaning set forth in Section
2.01 hereof.

           "Warrant Number" shall have the meaning set forth in Section 4.02
hereof.

           "Warrant Shares" shall have the meaning set forth in the second
recital hereof.

                                   ARTICLE II

                              Warrant Certificates

           SECTION 2.01. Form of Warrant Certificates. Certificates representing
the Warrants (the "Warrant Certificates") shall be in registered form only and
substantially in the form attached hereto as Exhibit A. The Warrant Certificates
shall be dated the date of their issuance and signed by the Company and shall
have such insertions as are appropriate or required or permitted by this
Agreement and may have such letters, numbers or other marks of identification
and such legends and endorsements typed, stamped, printed, lithographed or
engraved thereon as the Company may deem appropriate and as are not inconsistent
with the

<PAGE>

                                                                               6

provisions of this Agreement, or as may be required to comply with any law or
with any rule or regulation pursuant thereto, or to conform to usage.

           The terms and provisions contained in the form of Warrant Certificate
annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a
part of this Agreement.

           The definitive Warrant Certificates shall be typed, printed,
lithographed or engraved or produced by any combination of these methods, all as
determined by the officers of the Company executing such Warrant Certificates,
as evidenced by such officers' execution of such Warrant Certificates.

           Pending the preparation of definitive Warrant Certificates, temporary
Warrant Certificates may be issued, which may be printed, lithographed,
typewritten, mimeographed or otherwise produced, and which will be substantially
of the tenor of the definitive Warrant Certificates in lieu of which they are
issued.

           If temporary Warrant Certificates are issued, the Company will cause
definitive Warrant Certificates to be prepared without unreasonable delay. After
the preparation of definitive Warrant Certificates, the temporary Warrant
Certificates shall be exchangeable for definitive Warrant Certificates upon
surrender of the temporary Warrant Certificates to the Company, without charge
to the Holder. Until so exchanged the temporary Warrant Certificates shall in
all respects be entitled to the same benefits under this Agreement as definitive
Warrant Certificates.

           SECTION 2.02. Execution and Delivery of Warrant Certificates. Warrant
Certificates each evidencing the number of Warrants reflected on the schedules
attached hereto to be issued to each Initial Holder shall be executed on the
date hereof by the Company and delivered to each Initial Holder. In respect of
the Tranche B Loans, the Company shall issue an aggregate number of Warrants
equal to 10% of the commitment amount of such Tranche B Loans, divided by the
average of the VWAP of the Common Stock on the New York Stock Exchange for each
of the five trading days prior to the Closing Date

           The Warrant Certificates shall be executed manually on behalf of the
Company by its Chief Executive Officer, President, any Senior Vice President or
any Vice President. In case any officer of the Company whose signature shall
have been placed upon any of the Warrant Certificates shall cease to be such
officer of the Company before the issuance and delivery thereof, such Warrant
Certificates may, nevertheless, be issued and delivered with the same force and
effect as though such person had not ceased to be such officer of the Company.

           SECTION 2.03. Loss or Mutilation. In case any of the Warrant
Certificates shall be mutilated, lost, stolen or destroyed, the Company, at its
expense, shall issue, execute and deliver to the Holder of the lost, stolen,
destroyed or mutilated Warrant Certificate, in exchange for or in lieu thereof,
a new Warrant Certificate of the same tenor and for a like aggregate number of
Warrants, but only upon receipt of evidence satisfactory to the Company of such
loss, theft, mutilation or destruction of such Warrant Certificate and
indemnity, if requested, also reasonably satisfactory to the Company; provided,
however, that if the owner of the same is the Initial Holders or any affiliate
thereof or an institutional lender or investor, its own agreement of

<PAGE>

                                                                               7

indemnity shall be deemed to be satisfactory. Every new Warrant Certificate
executed and delivered pursuant to this Section 2.03 in lieu of any lost,
stolen, mutilated or destroyed Warrant Certificate shall constitute a
contractual obligation of the Company, whether or not the allegedly lost, stolen
or destroyed Warrant Certificates shall be at any time enforceable by anyone,
and shall be entitled to the benefits of this Agreement equally and
proportionately with any and all other Warrant Certificates duly executed and
delivered hereunder. The provisions of this Section 2.03 are exclusive and shall
preclude (to the extent lawful) all other rights or remedies with respect to the
replacement of mutilated, lost, stolen, or destroyed Warrant Certificates.

                                  ARTICLE III

                    Representations, Warranties and Covenants

           SECTION 3.01. Representations Warranties and Covenants of the
Company. The Company represents and warrants to, and agrees with, the Holders as
follows:

           (a) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the state of California.

           (b) The Company has the corporate power and authority (i) to execute,
deliver and perform its obligations under this Agreement and the Registration
Rights Agreement, (ii) to issue and deliver the Warrants, (iii) to issue and
deliver the Warrant Shares upon the due exercise of any Warrant, and (iv) to
cause the Transfer Agent to record the issuance of the Warrant Shares issuable
upon due exercise of any Warrant.

           (c) This Agreement and the Registration Rights Agreement have been
duly executed and delivered by the Company and, assuming the due authorization,
execution and delivery by the Initial Holders, each of this Agreement and the
Registration Rights Agreement constitutes a legally valid and binding agreement
of the Company, enforceable against the Company in accordance with its terms,
subject to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether considered in
a proceeding in equity or at law) and an implied covenant of good faith and fair
dealing, and except with respect to any rights of indemnification and
contribution hereunder, where enforcement hereof may be limited by federal or
state securities laws, the policies underlying such laws and public policy
considerations.

           (d) The Warrants have been duly authorized and issued by the Company
and constitute legally valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing, and except with respect
to any rights of indemnification and contribution hereunder, where enforcement
hereof may be limited by federal or state securities laws, the policies
underlying such laws and public policy considerations.

<PAGE>

                                                                               8

           (e) Each of (i) the execution, delivery and performance of this
Agreement and the Registration Rights Agreement by the Company, (ii) the
offering, issuance and delivery of the Warrants and the Warrant Shares issuable
upon the exercise of any Warrant, and (iii) the fulfillment of and compliance
with the terms and provisions of this Agreement (A) have been duly authorized by
all requisite corporate and, if necessary, stockholder action of the Company and
(B) will not (1) conflict with, violate or constitute a default under (x) any
provision of the articles of incorporation, by-laws or other constitutive
documents of the Company, (y) any law, statute, rule or regulation or any order
of any Governmental Authority applicable to the Company or any of its
subsidiaries or properties or (z) any provision of any indenture or other
material agreement or other material instrument to which the Company or any of
its subsidiaries are a party or by which they or any of their respective
properties are or may be bound, (2) be in conflict with, result in a breach of
or constitute (alone or with notice or lapse of time or both) a default under,
or give rise to any right to accelerate or to require the prepayment, repurchase
or redemption of any obligation under, any such indenture, agreement or other
instrument or (3) result in the creation or imposition of any Lien upon or with
respect to any property or assets now owned or hereafter acquired by the Company
or any of its subsidiaries, except, in each case, where any such conflict,
creation or imposition would not result in a Material Adverse Effect.

           (f) No action, consent, waiver, authorization or approval of,
registration or filing with or any other action by any Governmental Authority or
any nongovernmental Person (including, without limitation, any creditor, partner
or shareholder of the Company) is or will be required in connection with (i) the
execution, delivery and performance of this Agreement and the Registration
Rights Agreement by the Company, other than with respect to any filings required
to be made pursuant to the Registration Rights Agreement, (ii) the issuance and
delivery of the Warrants and the Warrant Shares issuable upon the exercise of
any Warrant in accordance with this Agreement, other than with respect to any
filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 that may
be required upon the exercise by any Holder of any Warrants, and (iii) the
performance by the Company of its obligations under this Agreement and the
Registration Rights Agreement, other than with respect to any filings required
to be made pursuant to the Registration Rights Agreement, or as a condition to
the legality, validity or enforceability of this Agreement or the Registration
Rights Agreement or the consummation of the transactions contemplated hereby,
other than such authorizations and approvals as have already been obtained and
are in full force and effect.

           (g) Except as set forth on Schedule 5.6 to the Credit Agreement,
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 this Agreement or the Registration
Rights Agreement 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 Company, LLC, NEG, Inc. or the Significant Subsidiaries which could
reasonably be expected to result in a Material Adverse Change to the Company, or
a Material Adverse Change to LLC, NEG, Inc. and the Significant Subsidiaries,
taken as a whole. There are no legal or arbitral proceedings or investigations,
or any proceedings by or before any Governmental Authority or any Person,
pending or threatened which could reasonably be

<PAGE>

                                                                               9

expected to have a Material Adverse Effect (other than under clauses (i) and
(ii) of the definition thereof).

           (h) Subject to the accuracy of the Initial Holders' representations
set forth in Section 3.02 and, in the case of a transfer of a Warrant or Warrant
Shares, compliance with Article V, the issuance of the Warrants and the
offering, sale and delivery of the Warrants and the Warrant Shares under the
circumstances contemplated by this Agreement constitute exempt transactions
under the registration provisions of the Securities Act, and do not require the
registration of the Warrants or the Warrant Shares under the Securities Act.

           (i) The Warrant Shares, when issued and delivered against payment of
the Exercise Price therefor, will be duly authorized, validly issued, fully paid
and nonassessable, and subject to no Liens, taxes, security interests or adverse
claims created by the Company, and such Warrant Shares will not be subject to
the preemptive or similar rights of any securityholder of the Company.

           (j) The Company will not amend its Charter Document or enter into any
agreement inconsistent with this Agreement or that would make the Company unable
to comply with the terms of this Agreement.

           (k) As of the date hereof, the Company's authorized capital stock
consists of 800,000,000 shares of Common Stock and 85,000,000 shares of
preferred stock including 5,000,000 shares designated as Series A Preferred
Stock. As of 8:00 a.m. (Eastern Standard Time) on the date hereof, 390,696,920
shares of Common Stock were validly issued and outstanding and no shares of
preferred stock were issued and outstanding. Such 390,696,920 shares of Common
Stock have been validly issued, fully paid and non-assessable.

           (l) The Company will take no action to increase the par value of the
Common Stock.

           SECTION 3.02. Representations Warranties and Covenants of the Initial
Holders. Each Initial Holder represents and warrants to, and agrees with, the
Company, severally and not jointly, as follows:

           (a) Such Initial Holder is a knowledgeable, sophisticated and
experienced in business and financial matters and qualifies as an "accredited
investor" as defined in Rule 501(a) of Regulation D and as a "qualified
institutional buyer" as defined in Rule 144A under the Securities Act.

           (b) Such Initial Holder is knowledgeable regarding the Company and
has been afforded access to information about the Company and the financial
condition, results of operations, business, property, management and prospects
of the Company sufficient to enable it to evaluate its investment in the
Warrants and the Warrant Shares. Such Initial Holder and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Such Initial
Holder has sought such accounting, legal and tax advice as it has considered
necessary to make an informed investment decision with respect to its
acquisition of the Warrants and the Warrant Shares.

<PAGE>

                                                                              10

           (c) Such Initial Holder understands that its investment in the
Warrants and the Warrant Shares involves a high degree of risk. Such Initial
Holder is able to bear the economic risk of its investment in the Warrants and
the Warrant Shares and is presently able to afford the complete loss of such
investment.

           (d) Such Initial Holder is acquiring the Warrants and the Warrant
Shares solely for its own account and not as a nominee or agent for any other
person and not with a view to any distribution thereof in a transaction that
would violate the Securities Act or the securities laws of any State of the
United States or any applicable jurisdiction.

           (e) Such Initial Holder has not and will not offer or sell the
Warrants and the Warrant Shares by means of any form of general solicitation or
general advertising within the meaning of Rule 502(c) of Regulation D, including
(i) any advertisement, article, notice or other communication published in any
newspaper, magazine or similar medium or broadcast over television or radio, or
(ii) any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising in the United States.

           (f) Such Initial Holder is a resident of that jurisdiction specified
in its address for notices set forth in the schedules to this Agreement, or, if
different from such address, such other jurisdiction specified in the schedules
to this Agreement.

           (g) Such Holder is not acquiring the Warrants with assets of any
"employee benefit plan" (within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) that is subject to
Title I of ERISA or Section 4975 of the Internal Revenue Code of 1986, as
amended.

           (h) Assuming the capitalization of the Company set forth in its most
recent report filed under the Exchange Act, such Initial Holder, together with
its "affiliates" (as defined in Rule 144 promulgated under the Securities Act),
is the beneficial owner (as defined in Rule 13d-3 promulgated under the Exchange
Act) of not more than 4.9% of the outstanding shares of Common Stock immediately
after the purchase of the Warrants.

           The Company and, for purposes of the opinions to be delivered
pursuant to the Credit Agreement, counsel to the Company, General Counsel to the
Company and counsel to the Initial Holders, will rely upon the accuracy and
truth of the foregoing representations and agreements and the Initial Holders
hereby consent to such reliance.

           SECTION 3.03. Payments of Cash Dividends. Subject to the record date
provisions described below, the Company shall pay to each holder of Warrants an
amount per Warrant equal to the amount of all Cash Dividends, if any, which
would have been paid by the Company with respect to each share of Common Stock
then issuable upon the exercise of such Warrant if it had been exercised on the
record date for the payment of the cash dividend. Cash Dividends, if any, will
be payable on the payment date of each such Cash Dividend to Holders as of the
record date for determination of the stockholders entitled to receive such Cash
Dividend.

<PAGE>

                                                                              11

                                   ARTICLE IV

                                 Exercise Terms

           SECTION 4.01. Terms of Warrants; Exercise of Warrants. The initial
exercise price per share at which Warrant Shares shall be issuable upon the
exercise of a Warrant (the "Exercise Price") shall be equal to $0.01 per share
of Common Stock. Each Warrant shall entitle the Holder thereof, subject to and
upon compliance with the provisions of this Agreement, to purchase from the
Company one share of Common Stock, subject to adjustment pursuant to the terms
of this Agreement.

           Subject to the terms of this Agreement, each Holder shall have the
right, which may be exercised commencing on the date hereof and shall continue
until 5:00 p.m., New York City time on the later of (i) September 2, 2006 and
(ii) to the extent that any Transfer Restricted Securities (as defined in the
Registration Rights Agreement) remain outstanding on September 6, 2006, ten
Business Days after the effective date of a registration statement under the
Securities Act with respect to the Warrant Shares issuable upon the exercise of
the Warrants, but no later than September 2, 2007 (the "Expiration Date"), to
receive from the Company the number of fully paid and nonassessable Warrant
Shares which the Holder may at the time be entitled to receive on exercise of
the Warrants and payment of the Exercise Price then in effect for such Warrant
Shares. In the alternative, each Holder may exercise its right to receive
Warrant Shares on a net basis (a "Cashless Exercise"), such that, without the
exchange of any funds, the holder receives that number of Warrant Shares
otherwise issuable (or payable) upon exercise of the Warrants less that number
of Warrant Shares having an aggregate Current Market Price at the time of
exercise equal to the aggregate Exercise Price that would otherwise have been
paid by the Holder of the Warrant Shares. If the Warrants are not exercised
prior to 5:00 p.m., New York City time, on the Expiration Date, they shall
become void and all rights thereunder and all rights in respect thereof under
this Agreement shall cease as of such time. No adjustments as to Dividends will
be made upon exercise of the Warrants.

           The Holders will only be able to exercise their Warrants (i) by means
of a cashless exercise or (ii) if any registration statement under the
Securities Act relating to the Warrant Shares is effective or the exercise of
such Warrants is exempt from the registration requirements of the Securities Act
and such securities are qualified for sale or exempt from qualification under
the applicable securities laws of the states or other jurisdictions in which
such Holders reside.

           No Holder may exercise any Warrant to the extent that, immediately
following such exercise and upon receipt of any Warrant Shares issuable upon
such exercise, such Holder would either (i) become or be included in any 13D
Person that is the single largest holder of voting power represented by the
Company's capital stock (or otherwise become the single largest holder of the
Common Stock) (the "Shareholder Limitation"), or (ii) beneficially own (as such
term is defined in Section 13(d)(3) of the Exchange Act) or be included in any
13D Person that beneficially owns in excess of 4.9% of the voting power
represented by the Company's capital stock (or otherwise beneficially own in
excess of 4.9% of the outstanding Common Stock) (the "4.9% Limitation") after,
in either case, giving effect to such exercise (the Shareholder Limitation and
the 4.9% Limitation are collectively referred to herein as the "Exercise

<PAGE>

                                                                              12

Limitations"). The determinations of the number of shares that (i) constitute
4.9% of the outstanding Common Stock or voting power and (ii) are held by the
largest holder will be made in reliance upon the information contained in
publicly available filings made with the SEC unless the Company is aware that
such information is incorrect and has made the correct information public, to
the extent material, and disclosed such information to the Holders at the time
of any such proposed exercise. In order to facilitate compliance with the
foregoing, each Holder will be required to make a representation that it and its
affiliates will comply with the Exercise Limitations immediately after the
exercise of any Warrant and receipt of any shares of Common Stock issuable upon
such exercise.

           Notwithstanding the Exercise Limitation, however, a Holder may
exercise any Warrant that would otherwise cause such Holder to hold Warrant
Shares in excess of the Exercise Limitations if, as to such excess number of
Warrant Shares (the "Excess Shares"), such Holder (i) irrevocably covenants to
the Company to sell such Excess Shares within 10 days after the date of exercise
and (ii) confirms that it has, on or prior to such exercise date, entered into a
binding arrangement to sell the Excess Shares within 10 days after such exercise
date either (a) in a regular way transaction on a national securities exchange
(or the principal market where shares of Common Stock are then traded) or (b) to
one or more persons that are not "affiliates" (used herein as defined in Rule
144 promulgated under the Securities Act) of such Holder ("Third Parties"), each
of whom represents for the benefit of the Company that, upon purchase of the
applicable Excess Shares, such Third Party, together with its affiliates, will
not be the beneficial owner of a number of shares of Common Stock in excess of
the Exercise Limitations. In addition, such Holder shall agree to vote the
applicable Excess Shares only in accordance with the recommendations of the
Board of Directors of the Company or any Third Party that has agreed to purchase
such shares, if any record date for a vote of the Common Stock is established
for any day between the exercise date and the consummation of the sale of the
applicable Excess Shares. The Exercise Limitations will cease to have any force
and effect upon consummation of the Utility Spin-Off, if, on the date that is 14
days after delivery to the Company of a request by the Required Holders to such
effect (which request may be given no more than once during any 180-day period),
the Company shall not have delivered a certificate to the Holders stating that
the removal of the Exercise Limitations would, in the good faith judgment of the
Company, not be consistent with applicable regulatory or other legal
requirements.

           SECTION 4.02. Adjustment of Exercise Price and Number of Warrant
Shares Issuable. The number of Warrant Shares issuable upon the exercise of each
Warrant (the "Warrant Number") is subject to adjustment from time to time upon
the occurrence of the events enumerated in this Section 4.02; provided that no
adjustment shall be made pursuant to this Section 4.02 which shall have the
effect of decreasing the Warrant Number (except pursuant to Section 4.02(a)(3))
or increasing the Exercise Price (except pursuant to Section 4.02(a)(3)). For
purposes of this Section 4.02, "Common Stock" means shares now or hereafter
authorized of any class of common stock of the Company and any other stock of
the Company, however designated, that has the right (subject to any prior rights
of any class or series of preferred stock) to participate in any distribution of
the assets or earnings of the Company without limit as to per share amount.

           (a) Adjustment for Change in Capital Stock.

<PAGE>

                                                                              13

           If the Company:

                (1) pays a dividend or makes a distribution on its Common Stock
      in shares of its Common Stock;

                (2) subdivides its outstanding shares of Common Stock into a
      greater number of shares;

                (3) combines its outstanding shares of Common Stock into a
      smaller number;

                (4) makes a distribution on its Common Stock in shares of its
      capital stock other than Common Stock; or

                (5) issues by reclassification of its Common Stock any shares of
      its capital stock,

then Warrant Number immediately prior to such action shall be proportionately
adjusted so that the Holder of any Warrant thereafter exercised shall receive
the aggregate number and kind of shares of capital stock of the Company which
such Holder would have owned immediately following such action if such Warrant
had been exercised immediately prior to such action.

           The adjustment shall become effective immediately after the record
date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, combination or reclassification.

           If after an adjustment a Holder upon exercise of a Warrant may
receive shares of two or more classes of capital stock of the Company, the
Company shall reasonably determine the allocation of the adjusted Exercise Price
between the classes of capital stock. After such allocation, the exercise
privilege and the number of shares of each such class of capital stock shall
thereafter be subject to adjustment on terms comparable to those applicable to
Common Stock in this Section 4.02.

           Such adjustment shall be made successively whenever any event listed
above shall occur.

           (b) Adjustment for Rights Issue. If the Company distributes any
rights, warrants or options to all holders of its Common Stock entitling them
for a period expiring within 60 days after the record date mentioned below to
purchase shares of Common Stock at a price per share less than the Current
Market Price per share on that record date, the Warrant Number shall be adjusted
in accordance with the formula:

                               O + A
                               -----
                    N' = N  x  O +  A x P
                                   -------
                                      M

where:

<PAGE>

                                                                              14

                N' = the adjusted Warrant Number.

                N =  the current Warrant Number.

                O =  the number of shares of Common Stock outstanding on the
                     record date.

                A =  the number of additional shares of Common Stock offered.

                P =  the purchase price per share of the additional shares.

                M =  the Current Market Price per share of Common Stock on the
                     record date.

                The adjustment shall be made successively whenever any such
rights, warrants or options are issued and shall become effective immediately
after the record date for the determination of stockholders entitled to receive
the rights, warrants or options. If at the end of the period during which such
rights, warrants or options are exercisable, not all rights, warrants or options
shall have been exercised, the Warrant Number shall be immediately readjusted to
what it would have been if "A" in the above formula had been the number of
shares actually issued.

                (c) Adjustment for Other Distributions. Except with respect to
any distribution provided for in Section 4.02(d), if the Company distributes to
all holders of its Common Stock any of its assets (other than Cash Dividends) or
debt securities or any rights, options or warrants to purchase debt securities,
assets (other than Cash Dividends) or other securities of the Company, the
Warrant Number shall be adjusted in accordance with the formula:

                                       M
                     N'  =  N  x   ---------
                                    M  -  F

                where:

                N' = the adjusted Warrant Number.

                N  = the current Warrant Number.

                M  = the Current Market Price per share of Common Stock on the
                     record date mentioned below.

                F  = the fair market value on the record date of the assets,
                     securities, rights or warrants distributable to one share
                     of Common Stock. The Board of the Company shall reasonably
                     and in good faith determine the fair market value.3

                The adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of stockholders entitled to receive the distribution.

<PAGE>

                                                                              15

           This subsection (c) does not apply to rights, warrants or options
referred to in subsection (b) of this Section 4.02 or any assets distributed
pursuant to subsection (d) of this Section 4.02. If any adjustment is made
pursuant to this subsection (c) as a result of the issuance of rights, warrants
or options and at the end of the period during which any such rights, warrants
or options are exercisable, not all such rights, warrants or options shall have
been exercised, the Warrants shall be immediately readjusted as if "F" in the
above formula was the fair market value on the record date of the indebtedness
or assets actually distributed upon exercise of such rights, warrants or options
divided by the number of shares of Common Stock outstanding on the record date.
Notwithstanding anything to the contrary contained in this subsection (c), if "M
- F" in the above formula is less than $1.00 (or is a negative number) then in
lieu of the adjustment otherwise required by this subsection (c), the Company
shall distribute to each Holder of a Warrant, the evidences of indebtedness,
assets, rights, warrants or options (or the proceeds thereof) which would have
been distributed to such Holder had such Warrant been exercised immediately
prior to the record date for such distribution.

           (d) Adjustments for Spin-Offs. Upon consummation of any distribution
consisting of shares of Capital Stock of, or similar equity interests in, one or
more of the Company's Subsidiaries (a "Spin-Off"), including, without
limitation, the consummation of the Utility Spin-Off or a Spin-Off of NEG, Inc.,
the Warrant Number shall be adjusted in accordance with the following formula:

                                    P + U
                       N' = N  x   -------
                                      P

                Where:

                N' = the adjusted Warrant Number.

                N =  the then current Warrant Number.

                P =  the arithmetic average of the VWAP of the Common Stock of
                     the reorganized Company over the Trading Period.

                U =  the arithmetic average of the VWAP of the Common Stock of
                     the Subsidiary which was subject to the Spin-Off over the
                     Trading Period.

                Trading Period = the 20 consecutive trading days commencing on
                     and including the 20th day of trading of the Common Stock
                     after the effectiveness of such Spin-Off.

                    (1)   The adjustment shall be made successively whenever any
     such Spin-Off is made and shall become effective immediately after such
     Spin-Off.

           (e) Other Adjustments. The Warrant Shares are subject to further
adjustment in the manner set forth in Section 4.09 and Section 3 of the
Registration Rights Agreement.

           (f) When De Minimis Adjustment May Be Deferred. No adjustment in the
Warrant Number need be made unless the adjustment would require an increase or
decrease of at

<PAGE>

                                                                              16

least 1% in the Warrant Number. Any adjustments that are not made shall be
carried forward and taken into account in any subsequent adjustment.

                All calculations under this Section 4.02 shall be made to the
nearest 1/1000/th/ cent or to the nearest 1/10 millionth of a share, as the case
may be.

                (g) When No Adjustment Required. No adjustment need be made for
a transaction referred to in subsections (b), (c) or (d) of this Section 4.02 if
the Holders are to participate, without requiring the Warrants to be exercised,
in the transaction on a basis and with notice that the Board of the Company
reasonably determine to be fair and appropriate in light of the basis and notice
on which holders of Common Stock participate in the transaction.

                To the extent the Warrants become convertible into cash, no
adjustment need be made thereafter as to the amount of cash into which the
Warrants are exercisable. Interest will not accrue on the cash.

                (h) Notices to Holders. Upon any adjustment of the Warrant
Number pursuant to this Section 4.02, the Company shall promptly thereafter, and
in any event within ten days, (i) provide a certificate executed by the Chief
Financial Officer, the Treasurer, any Assistant Treasurer, Controller or any
Assistant Controller of the Company setting forth the Warrant Number and the
Exercise Price after such adjustment and setting forth in reasonable detail the
method of calculation and the facts upon which such calculations are based and
(ii) cause to be given to each of the Holders at its address appearing on the
Register written notice of such adjustments by first-class mail, postage
prepaid. Where appropriate, such notice may be given in advance and included as
a part of the notice required to be mailed under the other provisions of this
Section 4.02(h). The Holders shall be fully protected in relying on any such
certificate and on any adjustment therein contained and shall not be deemed to
have knowledge of such adjustment unless and until it shall have received such
certificate.

                In case:

                (1) the Company shall authorize the issuance to all holders of
shares of Common Stock of rights, options or warrants to subscribe for or
purchase shares of Common Stock or of any other subscription rights or warrants;
or

                (2) the Company shall authorize the distribution to all holders
of shares of Common Stock of evidences of its indebtedness or assets (other than
Cash Dividends or Dividends payable in shares of Common Stock or distributions
referred to in subsection (a) of this Section 4.02); or

                (3) of any consolidation or merger to which the Company is a
party and for which approval of any shareholders of the Company is required, or
of the conveyance or transfer of the properties and assets of the Company
substantially as an entirety, or of any reclassification or change of Common
Stock issuable upon exercise of the Warrants (other than as a result of a
subdivision or combination), or a tender offer or exchange offer for shares of
Common Stock; or

                (4) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or

<PAGE>

                                                                              17

                (5) the Company proposes to take any action (other than actions
of the character described in Section 4.02(a) hereof) which would require an
adjustment of the Warrant Number pursuant to this Section 4.02,

then the Company shall cause to be given to each Holder at its address appearing
on the Register, at least 20 calendar days (or 10 calendar days in any case
specified in clauses (1) or (2) above) prior to the applicable record date
hereinafter specified, or promptly in the case of events for which there is no
record date, by first-class mail, postage prepaid, a written notice stating (i)
the date as of which the holders of record of shares of Common Stock to be
entitled to receive any such rights, options, warrants or distribution are to be
determined, or (ii) the date on which any such consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up is expected to
become effective or consummated, and the date as of which it is expected that
holders of record of shares of Common Stock shall be entitled to exchange such
shares for securities or other property, if any, deliverable upon such
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up. The failure to give the notice required by this
Section 4.02(h) or any defect therein shall not affect the legality or validity
of any distribution, right, option, warrant, consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding up, or the vote upon any action.

                (i) Voluntary Increase. The Company from time to time may
increase the Warrant Number by any amount for any period of time (including,
without limitation, permanently) if such period is at least 20 days.

                Whenever the Warrant Number is increased, the Company shall mail
to the Holders a notice of the increase. The Company shall mail the notice at
least 15 days before the date the reduced Warrant Number takes effect. The
notice shall state the increased Warrant Number and the period it will be in
effect.

                An increase of the Warrant Number does not change or adjust the
Warrant Number otherwise in effect for purposes of subsections (a), (b), (c) and
(d) of this Section 4.02.

                (j) Notice of Certain Transactions.

                If:

                     (1) the Company takes any action that would require an
           adjustment in the Warrant Number pursuant to subsections (a), (b),
           (c) and (d) of this Section 4.02 and if the Company does not arrange
           for the Holders to participate pursuant to subsection (g) of this
           Section 4.02;

                     (2) the Company takes any action that would require a
           supplemental Warrant Agreement pursuant to subsection (k) of this
           Section 4.02; or

                     (3) there is a liquidation or dissolution of the Company,

the Company shall, if not already provided pursuant to Section 4.02(h) above,
mail to the Holders a notice stating the proposed record date for a dividend or
distribution or the proposed effective date of a subdivision, combination,
reclassification, consolidation, merger, transfer,

<PAGE>

                                                                              18

lease, liquidation or dissolution. The Company shall mail the notice at least 15
days before such date. Failure to mail the notice or any defect in it shall not
affect the validity of the transaction.

                (k) Reorganization of Company. If the Company consolidates or
merges with or into any person, upon consummation of such transaction, the
Warrants shall automatically become exercisable for the kind and amount of
securities, cash or other assets which the Holder would have owned immediately
after such consolidation or merger if such Holder had exercised the Warrant
immediately before the effective date of the transaction. Concurrently with the
consummation of any such transaction, the corporation formed by or surviving any
such consolidation or merger if other than the Company shall enter into a
supplemental Agreement so providing and further providing for adjustments which
shall be as nearly equivalent as may be practical to the adjustments provided
for in this Section. The successor Company shall mail to Holders a notice
describing the supplemental Agreement.

                If the issuer of securities deliverable upon exercise of the
Warrants under the supplemental Agreement is an affiliate of the formed or
surviving, corporation, that issuer shall join in the supplemental Agreement.

                If this subsection (k) applies, subsections (a), (b), (c) and
(d) of this Section 4.02 do not apply.

                (l) When Issuance or Payment May Be Deferred. In any case in
which this Section 4.02 shall require that an adjustment in the Warrant Number
be made effective as of a record date for a specified event, the Company may
elect to defer until the occurrence of such event (i) issuing to the Holder of
any Warrant that is exercised after such record date the Warrant Shares and
other capital stock of the Company, if any, issuable upon such exercise over and
above the Warrant Shares and other capital stock of the Company, if any,
issuable upon such exercise on the basis of the Warrant Number prior to any
adjustment and (ii) paying to such holder any amount in cash in lieu of a
fractional share pursuant to Section 4.05 hereof, 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 Warrant Shares, other
capital stock and cash upon the occurrence of the event requiring such
adjustment.

                (m) Adjustment in Exercise Price. Upon each event that provides
for an adjustment of the Warrant Number pursuant to this Section 4.02, Section
4.09 and Section 3 of the Registration Rights Agreement, each Warrant
outstanding prior to making the adjustment shall thereafter evidence the right
to receive that number of shares of Common Stock (calculated to the nearest ten
millionth) equal to the adjusted Warrant Number at an Exercise Price per share
of Common Stock obtained from the following formula:

                                    N
                         E' = E  x ---
                                    N'

                where:

                N' =  the adjusted Warrant Number.

<PAGE>

                                                                              19

                N =    the Warrant Number prior to adjustment.

                E' =   the adjusted Exercise Price per share of Common Stock.

                E =    the Exercise Price per share of Common Stock. prior to
                       adjustment.

                (n) Form of Warrants. (i) Irrespective of any adjustments in the
Warrant Number or the number or kind of shares issuable upon the exercise of the
Warrants, the Warrants theretofore or thereafter issued may continue to express
the same price and number and kind of shares as are stated in the Warrants
initially issuable pursuant to this Agreement.

                (ii)   The form of Warrant Certificate need not be changed
                because of any adjustment made pursuant to this Section 4.02,
                and Warrant Certificates issued after such adjustment may state
                the same Warrant Number and the same number of shares of Common
                Stock issuable upon exercise of the Warrants as are stated in
                the Warrant Certificates initially issued pursuant to this
                Agreement. The Company, however, may at any time in its sole
                discretion make any change in the form of Warrant Certificate
                that they may deem appropriate to give effect to such
                adjustments and that does not affect the substance of the
                Warrant Certificate, and any Warrant Certificate thereafter
                issued, whether in exchange or substitution for an outstanding
                Warrant Certificate or otherwise, may be in the form as so
                changed.

                SECTION 4.03. Manner of Exercise. (1) The Warrants may be
exercised upon (i) surrender to the Company of the related Warrant Certificate,
together with the form of election attached thereto to purchase Common Stock on
the reverse thereof duly filled in and signed by the Holder thereof and (ii)
payment to the Company of the Exercise Price for the Warrant Shares being
purchased upon such exercise.

                (a) Payment of the aggregate Exercise Price shall be made (i) in
cash or by certified or official bank check payable to the order of the Company
in New York Clearing House Funds, (ii) in the manner provided in the second
paragraph of Section 4.01.

                (b) Subject to the limitations set forth in the third paragraph
of Section 4.01, the Warrants shall be exercisable at the election of such
Holder either in full or in part at any time or from time to time, but in no
event later than the Expiration Date.

                SECTION 4.04. Transfer of Warrants and Warrant Shares. Upon the
surrender of the Warrant Certificates and the payment of the Exercise Price, the
Company shall issue, and shall cause its transfer agent for the Common Stock,
which may be the Company (the "Transfer Agent"), to deliver with all reasonable
dispatch to or upon the written order of the respective Holder and in such name
or names as such Holder may designate, a certificate or certificates for the
number of full Warrant Shares so purchased upon the exercise of such Warrants
together with cash as provided in Section 4.05. Such certificate or certificates
shall be deemed to have been issued and any Person so designated to be named
therein shall be deemed to have become a Holder of record of such Warrant Shares
as of the date of the payment of the Exercise Price. To the extent required by
Section 5.02(b), the Company shall, and shall cause the Transfer Agent to,
comply with the requirements of such Section.

<PAGE>

                                                                              20

                  The Company shall keep copies of this Agreement and any
notices given or received hereunder available for inspection by the Holders
during normal business hours at their respective offices at the addresses set
forth in Section 7.04 hereof.

                  SECTION 4.05. Fractional Warrant Shares. The Company shall not
be required to issue fractional Warrant Shares on the exercise of the Warrants.
If more than one Warrant shall be presented for exercise in full at the same
time by the same Holder, the number of full Warrant Shares which shall be issued
upon the exercise thereof shall be computed on the basis of the aggregate number
of Warrant Shares issuable upon exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section
4.05, be issuable on the exercise of any Warrant (or specified portion thereof),
the Company shall pay an amount in cash equal to the Current Market Price per
Warrant Share on the day immediately preceding the date the Warrant is presented
for exercise, multiplied by such fraction, computed to the nearest whole cent.

                  SECTION 4.06. Reservation of Warrant Shares. The Company will
at all times reserve and keep available, free from preemptive or similar rights,
out of the aggregate of its authorized but unissued Common Stock or its
authorized and issued Common Stock held in its treasury, for the purpose of
enabling it to satisfy any obligation to transfer Warrant Shares upon exercise
of each Warrant, the maximum number of shares of Common Stock which may then be
deliverable upon the exercise of all outstanding Warrants. The Holders shall
have no duty to verify availability of such shares set aside by the Company.

                  The Company will keep a copy of this Agreement on file with
the Transfer Agent and with every subsequent transfer agent for any shares of
the Company's Common Stock issuable upon the exercise of the Warrants. The
Company will supply such Transfer Agent with duly executed stock certificates
required to honor the Warrants upon exercise thereof in accordance with the
terms of this Agreement and the Company will provide or otherwise make available
any cash which may be payable as provided in Section 4.05 hereof. The Company
will furnish such Transfer Agent a copy of all notices of adjustments and
certificates related thereto.

                  SECTION 4.07. Compliance with Law. If any shares of Common
Stock required to be reserved for purposes of exercise of the Warrants require,
under any Federal or state law or applicable governing rule or regulation of any
national securities exchange, registration with or approval of any Governmental
Authority or listing on any such national securities exchange before such shares
may be purchased upon exercise, the Company will in good faith and as
expeditiously as possible endeavor also to cause such shares to be duly
registered, approved or listed on the relevant national securities exchange, as
the case may be.

                  SECTION 4.08. Payment of Taxes. Except as set forth in Section
6.13, the Company will pay all documentary stamp taxes attributable to the
issuance of Warrant Shares upon the exercise of any Warrant.

                  SECTION 4.09. Failure to Deliver Shares. If, for any reason
whatsoever, the Company shall fail to, or is otherwise unable to, deliver any
Warrant Shares to any Holder upon the exercise of such Holder's Warrants (a
"Share Delivery Default"), the Company hereby agrees to pay liquidated damages
to the Holders on a monthly basis in an amount such that, each

<PAGE>

                                                                              21

Warrant outstanding shall evidence the right to receive upon payment of the
Exercise Price that number of shares of Common Stock (calculated to the nearest
ten millionth) obtained from the following formula:

                            N' = N  x  1.005

                  Where:

                  N' = the adjusted number of Warrant Shares issuable upon the
                        exercise of a Warrant by payment of the Exercise Price.

                  N  = the number of Warrant Shares previously issuable upon
                        the exercise of a Warrant by payment of the Exercise
                        Price prior to adjustment.

The adjustment made pursuant to this Section shall be made on a monthly basis
beginning on and including the day following the Share Delivery Default to but
excluding the day on which the Share Delivery Default has been cured. Following
the cure of each such Share Delivery Default with respect to such Warrants and
Warrant Shares, the accrual of liquidated damages with respect to such Warrants
and Warrant Shares will cease.

                                   ARTICLE V

                              Transfer Restrictions

                  SECTION 5.01. Restrictions on Transfers of the Warrants and
the Warrant Shares. The following restrictions on transfer shall apply to the
Warrants and Warrant Shares:

                  (a) No Holder or transferee thereof shall sell, transfer or
         convey in any manner whatsoever any Warrant or Warrant Shares except in
         accordance with the terms and provisions of this Agreement.

                  (b) Each Holder may, without the consent of the Company, sell
         or assign any Warrants or Warrant Shares and the other rights and
         obligations of such Holder to any Person or any assignee thereof (an
         "Assignee"). The Assignee shall agree to be bound by the terms of this
         Agreement and such Warrants and shall provide:

                      (i) if such Warrants or Warrant Shares are being
                  transferred pursuant to an exemption from registration in
                  accordance with Rule 144 under the Securities Act or
                  Regulation S under the Securities Act or, in the case of the
                  Warrant Shares, pursuant to an effective registration
                  statement under the Securities Act, a certification to that
                  effect (in the form set forth on the reverse of the Warrant
                  Certificate) and, in the case of a transfer pursuant to Rule
                  144, an opinion of counsel reasonably acceptable to the
                  Company to the effect that such transfer does not require
                  registration under the Securities Act or any other evidence
                  reasonably satisfactory to the Company as to the compliance
                  with the legend set forth in Exhibit B; or

<PAGE>

                                                                              22

                      (ii) if such Warrants or Warrant Shares are being
                  transferred in reliance on another exemption from the
                  registration requirements of the Securities Act, a
                  certification to that effect (in the form set forth on the
                  reverse of the Warrant Certificate), an opinion of counsel
                  reasonably acceptable to the Company to the effect that such
                  transfer does not require registration under the Securities
                  Act and a representation letter from the transferee in the
                  form of Exhibit C hereto,

and effective immediately upon such transfer or assignment, the Assignee shall
be deemed a Holder and shall have the rights and obligation of a Holder pursuant
to this Agreement.

                  (c) Notwithstanding any other provision contained in this
         Agreement to the contrary, any Holder may assign all or any portion of
         the Warrants or Warrant Shares held by it as collateral security.

                  SECTION 5.02. Notation; Removal of Legend. (a) A notation will
be made in the appropriate transfer records of the Company with respect to any
such transfer of the Warrants and Warrant Shares referred to in this Agreement.

                  (b) If any Warrant or Warrant Shares are being transferred
pursuant to an exemption from registration in accordance with Rule 144 under the
Securities Act, the Company shall, or shall cause the Transfer Agent to, remove
from any Warrant Certificate or other certificate representing the Warrant
Shares, the transfer restriction legend set forth in Exhibit B hereto or any
other legend or markings which in any way purport to restrict the
transferability of the Warrants or the Warrant Shares.

                  SECTION 5.03. Surrender of Warrant Certificates. Any Warrant
Certificate surrendered for registration of transfer, exchange or exercise of
the Warrants represented thereby shall, if surrendered to the Company, be
promptly canceled by the Company and shall not be reissued by the Company and,
except as provided in this Article V or in Article III hereof in case of the
exercise of less than all the Warrants represented thereby or in case of a
mutilated Warrant Certificate or in the case of a transfer, no Warrant
Certificate shall be issued hereunder in lieu thereof. The Company shall dispose
of such canceled Warrant Certificates in any manner as the Company may so
desire.

                                   ARTICLE VI

                                  Miscellaneous

                  SECTION 6.01. SEC Reports and other Financial Information. The
Company shall provide the Holders, within 15 days after the Company files the
same with the SEC, copies of the Company's annual report and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the SEC may by rules and regulations prescribe) which the Company is required
to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act,
provided that if any such information, documents or reports are filed with the
SEC and available to Holders through EDGAR, then no such information, documents
or other reports need be provided. Notwithstanding that the Company may not be
required to remain subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act, until such time

<PAGE>

                                                                              23

as there are no Warrants or Warrant Shares which constitute Transfer Restricted
Securities (as defined in the Registration Rights Agreement), the Company shall
continue to file such annual reports and information, documents and other
reports with the SEC, if such continue to be accepted by the SEC, and the
Company shall provide the Holders with such annual reports and such information,
documents and other reports as the Company provides to the holders of its Common
Stock or other securities.

                  SECTION 6.02. Persons Benefiting. Nothing in this Agreement is
intended or shall be construed to confer upon any Person other than the Company
and the Holders any right, remedy or claim under or by reason of this Agreement
or any part hereof.

                  SECTION 6.03. Amendments and Waivers. The provisions of this
Agreement, including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be granted except by the written agreement of the
Company and the holders of a majority of the Warrants then outstanding.

                  SECTION 6.04. Notices. 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 Company by facsimile (i) shall be immediately
confirmed by a telephone call to the recipient at the number specified on the
applicable signature page hereof, 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 the applicable signature page
hereof or to such other address as shall be designated by such party in a
written notice to the other parties hereto.

                  (a) 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 any Holder shall not be effective until actually received.

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

                  (c) If the notice or communication shall be in writing, then
such notice or communication shall be delivered (i) to the Company at the
address set forth below in this Section 6.04(c) (or to such other address or
addresses as the Company may notify the Holders in accordance with this Section
6.04), (ii) to any Initial Holder at the address or addresses set forth on the
schedules attached hereto (or to such other address or addresses as such Initial
Holder may notify the Company in accordance with this Section 6.04) and (iii) to
any other Holders at the address or addresses provided by such Holder to the
Company in accordance with this Section 6.04 upon becoming a Holder (or to such
other address or addresses as such Initial Holder may notify the Company in
accordance with this Section 6.04):

<PAGE>

                                                                              24

                  The Company:

                           PG&E Corporation
                           One Market, Spear Tower
                           Suite 2400
                           San Francisco, California  94105
                           Attention: Assistant Treasurer
                           Facsimile: (415) 267-7265
                           Telephone: (415) 267-7052

                  with copies to:

                           PG&E Corporation
                           One Market, Spear Tower
                           Suite 2400
                           San Francisco, California 94105
                           Attention: Chief Counsel - Corporate
                           Facsimile: (415) 817-8225
                           Telephone: (415) 817-8200

                           and

                           Latham & Watkins
                           633 West Fifth Street
                           Suite 4000
                           Los Angeles, California 90071
                           Attention: Tom Sadler, Esq.
                           Facsimile: (213) 891-8763

                  Each party hereto by notice to the other parties may designate
additional or different addresses for subsequent notices or communications.

                  (d) Failure to mail a notice or communication to a Holder or
any defect in it shall not affect its sufficiency with respect to any other
Holders. If a notice or communication is mailed in the manner provided above, it
is duty given, whether or not the addressee receives it.

                  SECTION 6.05. Governing Law; Waiver of Jury Trial; Submission
of Jurisdiction. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

                  (a) EACH OF THE COMPANY AND THE HOLDERS CONSENTS AND AGREES TO
THE JURISDICTION OF ANY STATE OR FEDERAL COURT SITTING IN THE COUNTY OF NEW
YORK, STATE OF NEW YORK, AND WAIVES ANY OBJECTION BASED ON VENUE OR FORUM NON
CONVENIENS WITH RESPECT TO ANY ACTION INSTITUTED THEREIN, AND AGREES THAT,
EXCEPT WITH THE WRITTEN CONSENT OF THE HOLDERS, ANY DISPUTE CONCERNING THE

<PAGE>

                                                                              25

CONDUCT OF ANY PARTY IN CONNECTION WITH THIS AGREEMENT OR OTHERWISE SHALL BE
HEARD ONLY IN THE COURTS DESCRIBED ABOVE.

                  (b) EACH OF THE COMPANY AND THE HOLDERS HEREBY WAIVES PERSONAL
SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF
PROCESS MAY BE MADE BY HAND DELIVERY TO EACH SUCH PERSON AT ITS ADDRESS SET
FORTH ABOVE OR, AT THE OPTION OF A HOLDER, BY SERVICE UPON CT CORPORATION
SYSTEM, WHICH THE COMPANY IRREVOCABLY APPOINTS AS SUCH PERSON'S AGENT FOR THE
PURPOSE OF ACCEPTING SERVICE OF PROCESS WITHIN THE STATE OF NEW YORK. THE
COMPANY HEREBY CONSENTS TO SERVICE OF PROCESS AS AFORESAID.

                  (c) NOTHING IN THIS SECTION 6.05 SHALL AFFECT THE RIGHT OF THE
HOLDERS TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT
THE RIGHT OF THE HOLDERS TO BRING ANY ACTION OR PROCEEDING AGAINST THE COMPANY
OR THEIR PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.

                  (d) EACH THE COMPANY AND THE HOLDERS HEREBY WAIVES ANY RIGHT
TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING
UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR
DELIVERED IN CONNECTION HEREWITH OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM IN RESPECT TO
THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR
DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO, IN EACH
CASE, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE. EACH OF THE COMPANY AND THE HOLDERS HEREBY AGREE
AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE
DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY PARTY MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF
THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

                  SECTION 6.06. Successors and Assigns. All agreements of each
of the parties hereto in this Agreement shall inure to the benefit and be
binding upon their respective successors and permitted assigns. The Company may
not assign its rights or obligations hereunder without the prior written consent
of each of the Holders.

                  SECTION 6.07. 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 unenforceability without
invalidating the remaining provisions hereof and without affecting the validity
or enforceability of any provision in any other jurisdiction.

                  SECTION 6.08. Entire Agreement. This Agreement represents the
final and complete agreement of the parties hereto, and all prior negotiations,
representations,

<PAGE>

                                                                              26

understandings, writings and statements of any nature are hereby superseded in
their entirety by the terms of this Agreement. There are no restrictions,
agreements, warranties or undertakings other than those set forth or referred to
herein, including with respect to the registration rights granted by the Company
with respect to the Warrant Shares.

                  SECTION 6.09. 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 shall be an original,
but all of which shall together constitute one and the same instrument.

                  SECTION 6.10. Headings. The headings of the Articles and
Sections of this Agreement have been inserted for convenience of reference only,
are not intended to be considered a part hereof and shall not modify or restrict
any of the terms or provisions hereof.

                  SECTION 6.11. Remedies. In the event of a breach by the
Company or a Holder of any of their obligations under this Agreement, each
Holder or the Company, as the case may be, in addition to being entitled to
exercise all rights provided herein or granted by law, including recovery of
damages, will be entitled to specific performance of its rights under this
Agreement. The Company and each Holder agree that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of any
of the provisions of this Agreement and hereby further agrees that, in the event
of any action for specific performance in respect of such breach, it shall waive
the defense that a remedy at law would be adequate. The remedies provided herein
are cumulative and not exclusive of any remedies provided by law.

                  SECTION 6.12. Waiver. The Company waives any claim it may have
against any Holder for any consequential, exemplary or punitive damage now or
hereafter under or in connection with or relating to this Agreement or any other
Financing Document.

                  SECTION 6.13. Register. The Company hereby agrees to maintain
a register (the "Register") on which it will record the number of Warrants held
by each Holder from time to time. With respect to any Holder, the transfer,
exchange or exercise of any Warrants of such Holder and the rights pursuant to
such Warrant shall not be effective until such transfer, exchange or exercise is
recorded on the Register maintained by the Company with respect to ownership of
such Warrants and any Warrant Certificate representing such Warrants is
surrendered to the Company for recordation of such transfer, exchange or
exercise and prior to such recordation all rights of the transferor with respect
to such Warrants shall remain the transferor's. The registration of assignment
or transfer of all or part of any Holder's Warrants shall be recorded promptly
by the Company only upon the receipt by the Company of a properly executed and
delivered assignment and assumption agreement pursuant to, and all other
documents and instruments required under, Section 5.01(b). Upon the request of
any Holder, the Company shall at any time and from time to time provide the
requesting Holder, at no cost, a list of all of the Holders of the Warrants. To
permit registrations of transfers and exchanges, the Company shall make
available a sufficient number of executed Warrant Certificates to effect such
registrations of transfers and exchanges. No service charge shall be made to the
Holder for any registration of transfer or exchange of Warrants, but the Company
may require from the transferring or exchanging Holder payment of a sum
sufficient to cover any transfer tax or similar governmental charge payable upon
exchanges pursuant to Section 2.03 and exchanges in

<PAGE>

                                                                              27

respect of portions of Warrants not exercised and the Company may deduct such
taxes from any payment of money to be made and such transfer or exchange shall
not be consummated (if such taxes are not deducted in full) unless or until the
Holder shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.

                            [signature pages follow]

<PAGE>

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

                                PG&E CORPORATION


                                By:_______________________________
                                Name:
                                Title:

<PAGE>

                                LB I GROUP INC.


                                By:__________________________
                                   Name:
                                   Title:

<PAGE>

                                                 FARALLON CAPITAL PARTNERS, L.P.


                                                 By:____________________________
                                                    Name:
                                                    Title:

<PAGE>

                                                 FARALLON CAPITAL INSTITUTIONAL
                                                 PARTNERS, L.P.


                                                 By:____________________________
                                                    Name:
                                                    Title:

<PAGE>

                                                 FARALLON CAPITAL INSTITUTIONAL
                                                 PARTNERS II, L.P.


                                                 By:____________________________
                                                    Name:
                                                    Title:

<PAGE>

                                                 FARALLON CAPITAL INSTITUTIONAL
                                                 PARTNERS III, L.P.


                                                 By:____________________________
                                                    Name:
                                                    Title:

<PAGE>

                                                 TINICUM PARTNERS, L.P.


                                                  By: __________________________
                                                      Name:
                                                      Title:

<PAGE>

                                                 DK ACQUISITION PARTNERS, L.P.


                                                 By:____________________________
                                                    Name:
                                                    Title:

<PAGE>

                                                 HBK MASTER FUND, L.P.


                                                 By: ___________________________
                                                     Name:
                                                     Title:

<PAGE>

                                                 OAK HILL SECURITIES FUND, L.P.


                                                 By:____________________________
                                                    Name:
                                                    Title:

<PAGE>

                                                                    EXHIBIT A TO
                                                               WARRANT AGREEMENT

No. [ ]       Certificate for [ ] Warrants

                      WARRANTS TO PURCHASE COMMON STOCK OF
                                PG&E CORPORATION

THIS WARRANT IS SUBJECT TO THE SUBORDINATION AND OTHER PROVISIONS SET FORTH IN
THE INTERCREDITOR AND SUBORDINATION AGREEMENT DATED AS OF JUNE 25, 2002 AMONG
THE ADMINISTRATIVE AGENT, THE TRANCHE A LENDERS PARTY THERETO, THE TRANCHE B
LENDERS PARTY THERETO, THE HOLDERS PARTY THERETO, AND THE COLLATERAL AGENT, AND
THE HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, SHALL BE BOUND BY THE
TERMS OF SUCH INTERCREDITOR AND SUBORDINATION AGREEMENT, AS THE SAME MAY BE
AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED FROM TIME TO TIME. A COPY OF THE
INTERCREDITOR AND SUBORDINATION AGREEMENT REFERENCED IN THIS LEGEND IS ON FILE
WITH THE COLLATERAL AGENT AND IS AVAILABLE FOR INSPECTION AT THE COLLATERAL
AGENT'S OFFICES AT DEUTSCHE BANK TRUST COMPANY AMERICAS, 100 PLAZA ONE, MS:
0603, JERSEY CITY, NJ 07311.

                  THIS CERTIFIES THAT [         ], or its registered assigns, is
the registered holder of the number of Warrants set forth above (the
"Warrants"). Each Warrant entitles the holder thereof (the "Holder"), at its
option and subject to the provisions contained herein and in the Warrant
Agreement referred to below, to purchase from PG&E CORPORATION, a California
corporation ("the Company"), one share of Common Stock, no par value (the
"Common Stock"), of the Company, at the per share Exercise Price of $0.01 (the
"Exercise Price"). Each Warrant shall terminate and become void as of 5:00 p.m.,
New York City time, on the later of (i) September 2, 2006 and (ii) to the extent
that any Transfer Restricted Securities (as defined in the Equity Registration
Rights Agreement, dated as of June 25, 2002, among the Company, LB I Group Inc.
and each other entity named on the signature pages thereof (the "Registration
Rights Agreement"), remain outstanding on September 6, 2006 and ten Business
Days after the effective date of a registration statement under the Securities
Act with respect to the Warrant Shares issuable upon the exercise of the
Warrants, but no later than September 2, 2007 (the "Expiration Date"). The
number of Warrant Shares issuable upon exercise of each Warrant (the "Warrant
Number") and the Exercise Price per share shall be subject to adjustment from
time to time upon the occurrence of certain events enumerated in the Warrant
Agreement.

                  This Warrant Certificate is issued under and in accordance
with the Warrant Agreement, dated as of June 25, 2002 (the "Warrant Agreement"),
by and among the Company and each entity named on the signature pages thereof
(each, an "Initial Holder" and collectively, the "Initial Holders"), and is
subject to the terms and provisions contained in the Warrant Agreement, to all
of which terms and provisions the Holder of the Warrants evidenced by this
Warrant Certificate consents by acceptance hereof. The Warrant Agreement is
hereby

<PAGE>

incorporated herein by reference and made a part hereof. Reference is hereby
made to the Warrant Agreement for a full statement of the respective rights,
limitations of rights, duties and obligations of the Company and the Holders of
the Warrants. Capitalized terms used but not defined herein shall have the
meanings ascribed thereto in the Warrant Agreement.

                  The Warrants will initially be delivered by the Company to the
Initial Holder on June 25, 2002.

                  Subject to the terms of the Warrant Agreement, the Warrants
may be exercised in whole or in part by presentation and surrender of this
Warrant Certificate with the Election to Purchase attached hereto duly executed
and with the simultaneous payment of the Exercise Price in cash or check to the
Company (for its account) at the office of the Company designated for such
purpose. Notwithstanding the foregoing, Warrants may also be exercised without
exchange of funds pursuant to the net exercise ("Cashless Exercise") provisions
of Section 4.01 of the Warrant Agreement.

                  As provided in the Warrant Agreement and subject to the terms
and conditions therein set forth, the Warrants shall be exercisable at any time
and from time to time on any Business Day on or after June 25, 2002 but no later
than 5:00 p.m., New York City time on the Expiration Date; provided, however,
that Holders of Warrants will only be able to exercise their Warrants (i) by
means of a Cashless Exercise or (ii) if any Registration Statement under the
Securities Act relating to the Warrant Shares is effective or the exercise of
such Warrants is exempt from the registration requirements of the Securities Act
of 1933 and such securities are qualified for sale or exempt from qualification
under the applicable securities laws of the states or other jurisdictions in
which such Holders reside; provided, further, however, that no Warrant shall be
exercisable after the Expiration Date.

                  No Holder may exercise any Warrant to the extent that,
immediately following such exercise and upon receipt of any Warrant Shares
issuable upon such exercise, such Holder would either (i) become or be included
in any 13D Person that is the single largest holder of voting power represented
by the Company's capital stock (or otherwise become the single largest holder of
the Common Stock) (the "Shareholder Limitation"), or (ii) beneficially own (as
such term is defined in Section 13(d)(3) of the Exchange Act) or be included in
any 13D Person that beneficially owns in excess of 4.9% of the voting power
represented by the Company's capital stock (or otherwise beneficially own in
excess of 4.9% of the outstanding Common Stock) (the "4.9% Limitation") after,
in either case, giving effect to such exercise (the Shareholder Limitation and
the 4.9% Limitation are collectively referred to herein as the "Exercise
Limitations"). The determinations of the number of shares that (i) constitute
4.9% of the outstanding Common Stock or voting power and (ii) are held by the
largest holder will be made in reliance upon the information contained in
publicly available filings made with the SEC unless the Company is aware that
such information is incorrect and has made the correct information public, to
the extent material, and disclosed such information to the Holders at the time
of any such proposed exercise. In order to facilitate compliance with the
foregoing, each Holder will be required to make a representation that it and its
affiliates will comply with the Exercise Limitations immediately after the
exercise of any Warrant and receipt of any shares of Common Stock issuable upon
such exercise.

                                       2

<PAGE>

                  Notwithstanding the Exercise Limitation, however, a Holder may
exercise any Warrant that would otherwise cause such Holder to hold Warrant
Shares in excess of the Exercise Limitations if, as to such excess number of
Warrant Shares (the "Excess Shares"), such Holder (i) irrevocably covenants to
the Company to sell such Excess Shares within 10 days after the date of exercise
and (ii) confirms that it has, on or prior to such exercise date, entered into a
binding arrangement to sell the Excess Shares within 10 days after such exercise
date either (a) in a regular way transaction on a national securities exchange
(or the principal market where shares of Common Stock are then traded) or (b) to
one or more persons that are not "affiliates" (used herein as defined in Rule
144 promulgated under the Securities Act) of such Holder ("Third Parties"), each
of whom represents for the benefit of the Company that, upon purchase of the
applicable Excess Shares, such Third Party, together with its affiliates, will
not be the beneficial owner of a number of shares of Common Stock in excess of
the Exercise Limitations. In addition, such Holder shall agree to vote the
applicable Excess Shares only in accordance with the recommendations of the
Board of Directors of the Company or any Third Party that has agreed to purchase
such shares, if any record date for a vote of the Common Stock is established
for any day between the exercise date and the consummation of the sale of the
applicable Excess Shares. The Exercise Limitations will cease to have any force
and effect upon consummation of the Utility Spin-Off, if, on the date that is 14
days after delivery to the Company of a request by the Required Holders to such
effect (which request may be given no more than once during any 180-day period),
the Company shall not have delivered a certificate to the Holders stating that
the removal of the Exercise Limitations would, in the good faith judgment of the
Company, not be consistent with applicable regulatory or other legal
requirements.

                  The Holders are entitled to certain registration rights with
respect to the Warrant Shares. Said registration rights are set forth in full in
the Registration Rights Agreement.

                  The Warrant Agreement provides that the number of Warrant
Shares and the Exercise Price may, subject to certain conditions, be adjusted.
No fractional Warrant Shares will be issued upon the exercise of the Warrants,
but the Company shall pay an amount in cash equal to the Current Market Value
per Warrant Share on the day immediately preceding the date the Warrant is
presented for exercise, multiplied by the fraction of a Warrant Share that would
be issuable on the exercise of any Warrant.

                  The Company may require from the transferring or exchanging
Holder payment of a sum sufficient to cover any transfer tax or similar
governmental charge payable upon exchanges pursuant to Section 2.03 of the
Warrant Agreement and exchanges in respect of portions of Warrants not exercised
and the Company may deduct such taxes from any payment of money to be made and
such transfer or exchange shall not be consummated (if such taxes are not
deducted in full) unless or until the Holder shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.

                  Upon any exercise of the Warrants for less than all of the
Warrants represented by this Warrant Certificate, there shall be issued to the
Holder hereof a new Warrant Certificate representing those Warrants which were
not exercised. This Warrant Certificate may be exchanged at the office of the
Company by presenting this Warrant Certificate properly endorsed with a request
to exchange this Warrant Certificate for other Warrant Certificates evidencing
an

                                       3

<PAGE>

equal number of Warrants. All shares of Common Stock issuable by the Holders
upon the exercise of the Warrants shall be duly and validly issued and fully
paid and non-assessable.

                  The holder in whose name this Warrant Certificate is
registered may be deemed and treated by the Company as the absolute owner of the
Warrants evidenced by this Warrant Certificate for all purposes whatsoever and
the Company shall not be affected by notice to the contrary.

                  The Warrants do not entitle any Holder hereof to any of the
rights of a stockholder of the Company.

                  THE TERMS AND CONDITIONS OF THIS WARRANT SHALL BE GOVERNED BY,
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.

                            [Signature page follows]

                                       4

<PAGE>

                  This Warrant Certificate shall not be valid or obligatory for
any purpose until it shall have been signed by the Company.



PG&E CORPORATION



By: ________________________________
    Name:
    Title:

                                       5




<PAGE>

                   FORM OF ELECTION TO PURCHASE WARRANT SHARES
                 (to be executed only upon exercise of Warrants)

                                PG&E CORPORATION

                  The undersigned hereby irrevocably elects to exercise
______________ Warrants to acquire from PG&E Corporation (the "Company") shares
of Common Stock, no par value (the "Common Stock"), of the Company, at an
Exercise Price per share of Common Stock of $0.01 and otherwise on the terms and
conditions specified in the within Warrant Certificate and the Warrant Agreement
therein referred to, surrenders this Warrant Certificate and all right, title
and interest therein to PG&E Corporation and directs that the shares of Common
Stock deliverable upon the exercise of such Warrants be registered or placed in
the name and at the address specified below and delivered thereto.
Notwithstanding the foregoing, the undersigned may elect to exercise the
Warrants without the exchange of funds pursuant to the net exercise provisions
of Section 4.01 of the Warrant Agreement if the box set forth below opposite
"Cashless Exercise" is checked. If such election is not made, payment of the
Exercise Price by check must accompany this election.




Cashless Exercise:[_]

Date:


____________________________________________________________________________/1/
(Signature of Owner)


(Street Address)


(City) (State) (Zip Code)

Signature Guaranteed by:

Securities and/or check to be issued to:

Please insert social security or identifying number:

         Name:

         Street Address:

____________________________
                  /1/    The signature must correspond with the name as written
upon the face of the within Warrant Certificate in every particular, without
alteration or enlargement or any change whatever, and must be guaranteed by a
national bank or trust company or by a member firm of any national securities
exchange.





<PAGE>

         City, State and Zip Code:

                  A new Warrant Certificate evidencing any unexercised Warrants
evidenced by the within Warrant Certificate is to be issued to:

         Please insert social security or identifying number:

         Name:

         Street Address:

         City, State and Zip Code:

                  In connection with any transfer of any of the Warrants
evidenced by this certificate occurring prior to the expiration of the period
referred to in Rule 144(k) under the Securities Act after the later of June 25,
2002 and the last date, if any, on which such Warrants were owned by the Company
or any Affiliate of the Company, the undersigned certifies that such Warrants
are being transferred in accordance with its terms:

CHECK ONE BOX BELOW

         (1)      [_]     to the Company; or

         (2)      [_]     pursuant to an effective registration statement under
                          the Securities Act of 1933; or

         (3)      [_]     pursuant to Rule 144 under the Securities Act of 1933;
                          or

         (4)      [_]     outside the United States in accordance with Rule 904
                          of Regulation S under the Securities Act of 1933; or

         (5)      [_]     pursuant to another available exemption from
                          registration provided under the Securities Act of
                          1933.

                  Unless one of the boxes is checked, the Company will refuse to
register any of the Warrants evidenced by this certificate in the name of any
person other than the registered holder thereof; provided, however, that if box
(3) or (5) is checked, the Company may require, prior to registering any such
transfer of the Warrants, such legal opinions, additional certifications and
other information as the Company has reasonably requested to confirm that such
transfer is being made pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act of 1933, such as
the exemption provided by Rule 144 under such Act.

<PAGE>

                  The undersigned, on behalf of itself and its affiliates,
hereby represents to the Company that upon and after the exercise of the
Warrants pursuant to this certificate into shares of Common Stock, it and its
affiliates are and will be in compliance with the Exercise Limitations
applicable to such Warrants pursuant to paragraphs 6 and 7 of the warrant
certificate.

                                                    ____________________________
                                                    Signature



Signature Guarantee:

______________________________                      ____________________________
Signature must be guaranteed                        Signature

____________________________________________________________________________






<PAGE>

                                                                       EXHIBIT B
                                                        TO THE WARRANT AGREEMENT


                       FORM OF TRANSFER RESTRICTION LEGEND

THIS SECURITY (OR ITS PREDECESSOR) AND THE WARRANT SHARES TO BE ISSUED UPON ITS
EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY
INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION
OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION AS
SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE HOLDER REPRESENTS THAT (1) IT IS
AN INSTITUTIONAL "ACCREDITED INVESTOR" OR NOT A "U.S. PERSON" (AS DEFINED IN
RULE 902 OF THE SECURITIES ACT) AND (2) AGREES TO OFFER, SELL OR OTHERWISE
TRANSFER SUCH SECURITY PRIOR TO THE DATE WHICH IS TWO YEARS AFTER THE LATER OF
THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
THIS SECURITY) ONLY (A) TO THE COMPANY OR ANY OF THEIR SUBSIDIARIES, (B)
PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF
REGULATION S UNDER THE SECURITIES ACT OR (D) PURSUANT TO RULE 144 OR ANOTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

<PAGE>

                                                                    EXHIBIT C TO
                                                               WARRANT AGREEMENT

                    FORM OF ACCREDITED INVESTOR CERTIFICATE
                       TRANSFEREE LETTER OF REPRESENTATION


PG&E Corporation
One Market, Spear Tower
Suite 2400
San Francisco, California  94105
Attention: Assistant Treasurer

Ladies and Gentlemen:

                  In connection with our proposed purchase of [       ] Warrants
(the "Warrants") entitling the holders thereof to purchase shares of common
stock, no par value, of PG&E Corporation, a California corporation (the
"Company"), we confirm that:

                  1. We are (a) an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities
Act of 1933, as amended (the "Securities Act")), purchasing for our own account
or for the account of such an institutional "accredited investor" as to which we
exercise sole investment discretion, and we have such knowledge and experience
in financial and business matters as to be capable of evaluating the merits and
risks of our investment in the Warrants, and we and any account for which we are
acting are each able to bear the economic risk of our or its investment or (b) a
non "U.S. person" (as defined in Rule 902 of the Securities Act).

                  2. We understand and acknowledge that the Warrants have not
been registered under the Securities Act or any other applicable securities law,
and that the Warrants may not be offered or sold except as permitted in the
following sentence. We agree, on our own behalf and on behalf of any account for
which we are acting, that if we should sell any Warrants within the time period
referred to in Rule 144(k) of the Securities Act, we will do so only (A) to the
Company or any subsidiary thereof, (B) to an institutional "accredited investor"
(as defined above) that, prior to such transfer, furnishes to the Company under
the Warrant Agreement, dated as of June 25, 2002, governing the Warrants a
signed letter containing certain representations and agreements relating to the
restrictions on transfer of the Warrants (the form of which letter can be
obtained from either the Company) and an opinion of counsel acceptable to the
Company that such transfer is in compliance with the Securities Act, (C) outside
the United States in accordance with Rule 904 of Regulation S under the
Securities Act, (D) pursuant to the exemption from registration provided by Rule
144 under the Securities Act (if available) or (E) pursuant to an effective
registration statement under the Securities Act, and we further agree to provide
to any person purchasing any of the Warrants from us a notice advising such
purchaser that resales of the Warrants are restricted as stated herein.

                  3. We understand that, on any proposed resale of any Warrants,
we will be required to furnish to the Company such certifications, legal
opinions and other information as



<PAGE>

the Company may reasonably require to confirm that the proposed sale complies
with the foregoing restrictions. We further understand that the Warrants
purchased by us will bear a legend to the foregoing effect.

                  4. We are acquiring the Warrants for investment purposes and
not with a view to distribution thereof or with any present intention of
offering or selling any Warrants, except as permitted above; provided that the
disposition of our property and property of any accounts for which we are acting
as fiduciary will remain at all times within our control.

                  You and the Company are entitled to rely upon this letter and
you are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceeding or official inquiry
with respect to the matters covered hereby.

                  THIS LETTER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.

                                          Very truly yours,

                                          (Name of Purchaser)


                                          By: _____________________________
                                               Name:
                                               Title:


                                          Date: ___________________________









                  Upon transfer, the Warrants would be registered in the name of
the new beneficial owner as follows:

By: ______________________________

Date: _____________________________

Taxpayer ID number: _______________

                                       2

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.10
<SEQUENCE>12
<FILENAME>dex9910.txt
<DESCRIPTION>RESALE REGISTRATION RIGHTS AGREEMENT
<TEXT>
<PAGE>

                                                                  EXECUTION COPY

                      Resale Registration Rights Agreement

                                     between

                                PG&E Corporation

                                       and

                            The Purchasers Identified
                          On The Signature Pages Hereto





                            Dated as of June 25, 2002

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                 Page
                                                                                 ----

<S>                                                                               <C>
1.       Definitions ..........................................................   1

2.       Shelf Registration ...................................................   5

3.       Registration Failure Liquidated Damages  .............................   8

4.       Registration Procedures  .............................................   9

5.       Registration Expenses  ...............................................  16

6.       Indemnification and Contribution ...................................... 16

7.       Rules 144 and 144A .................................................... 20

8.       Participation in Underwritten Registrations ........................... 20

9.       Selection of Underwriters ............................................. 20

10.      Miscellaneous ......................................................... 21
</TABLE>

<PAGE>


                  Resale Registration Rights Agreement, dated as of June 25,
2002, between PG&E Corporation, a California corporation (together with any
successor entity, herein referred to as the "Issuer"), and the purchasers
identified on the signature pages hereto (individually, a "Purchaser" and
collectively, the "Purchasers").

                  Pursuant to the Purchase Agreement, dated the date hereof,
between the Issuer and the Purchasers (the "Purchase Agreement"), the Purchasers
have agreed to purchase from the Issuer $280,000,000 aggregate principal amount
of the Issuer's 7.50% Convertible Subordinated Notes due 2007 (together with any
PIK Securities or other securities that may be issued thereon, the
"Securities"). The Securities are convertible into Conversion Shares (as defined
below) on the terms, and subject to the conditions, set forth in the Indenture
(as defined herein). To induce the Purchasers to purchase the Securities, the
Issuer has agreed to provide the registration rights set forth in this Agreement
pursuant to the Purchase Agreement.

                  The parties hereby agree as follows:

                  1. Definitions. As used in this Agreement, the following
capitalized terms shall have the following meanings:

                  Agreement: This Resale Registration Rights Agreement, as
         amended, modified or otherwise supplemented from time to time in
         accordance with the terms hereof.

                  Applicable Amount: With respect to (i) each Security on any
         day, the principal amount of the Security on such day and (ii) each
         Conversion Share, the principal amount of the related Security from
         which said share was converted.

                  Bankruptcy Code: Title 11 of the United States Code entitled
         "Bankruptcy", as now or hereafter in effect, or any successor thereto.

                  Blue Sky Application:  As defined in Section 6(a)(i) hereof.

                  broker-dealer: Any broker or dealer registered under the
         Exchange Act.

                  Business Day: A day other than a Saturday or Sunday or any day
         on which banking institutions in The City of New York or The City of
         San Francisco are authorized or obligated by law or regulation to
         close.

                  Closing Date: The date of this Agreement.

                  Commission: Securities and Exchange Commission.

                  Common Stock: The common stock, no par value, of the Issuer,
         existing on the date of this agreement, or any other shares of capital
         stock of the issuer into which such Common Stock shall be reclassified
         or changed.

                  Conversion Shares: The shares of Common Stock issued or
         issuable upon conversion of the Securities, including, for the
         avoidance of doubt, upon the conversion of any PIK Securities.

<PAGE>

                                                                               2

                  Damages Payment Date:  Each interest Payment Date. For
         purposes of this Agreement, if no Securities are outstanding, "Damages
         Payment Date" shall mean each June 30 and December 31.

                  Effectiveness Period:  As defined in Section 2(b)(iii) hereof.

                  Effectiveness Target Date:  As defined in Section 2(b)(ii)
         hereof.

                  Exchange Act: Securities Exchange Act of 1934, as amended, and
         the rules and regulations of the Commission promulgated thereunder.

                  Holder: A Person who owns, beneficially or otherwise, Transfer
         Restricted Securities.

                  Indemnified Holder:  As defined in Section 6(a) hereof.

                  Indenture: The Indenture, dated the date hereof, between the
         Issuer and the Trustee, pursuant to which the Securities are to be
         issued, as such Indenture is amended, modified or supplemented from
         time to time in accordance with the terms thereof.

                  Initial Effectiveness Period: As defined in Section 2(a)(iii)
         hereof.

                  Initial Effectiveness Target Date: As defined in Section 2(a)
         (ii) hereof.

                  Initial Registration Trigger Date: As defined in Section 2(a)
         (i) hereof.

                  Initial Shelf Registration Statement: As defined in Section 2
         (a)(i) hereof.

                  Interest Payment Date: As defined in the Indenture.

                  Issuer: As defined in the preamble hereto.

                  Majority of Holders: Holders holding more than 50% of the
         aggregate principal amount of Securities outstanding at the time of
         determination; provided that, for purpose of this definition, a holder
         of Conversion Shares which constitute Transfer Restricted Securities
         shall be deemed to hold an aggregate principal amount of Securities (in
         addition to the principal amount of Securities held by such holder)
         equal to the product of (x) the number of such Conversion Shares then
         held by such holder and (y) the prevailing Conversion Price (as defined
         in the Indenture) at the time of conversion.

                  NASD:  National Association of Securities Dealers, Inc.

                  PIK Securities: As defined in the Indenture, including all
         Conversion Shares issued or issuable with respect thereto.

                  Person: Any individual, corporation, limited liability
         company, partnership, joint venture, association, joint-stock company,
         trust, unincorporated organization, or government or any agency or
         political subdivision thereof.

<PAGE>

                                                                               3

                  PG&E:  Pacific Gas and Electric Company, a California
         corporation.

                  Prospectus: The prospectus included in a Shelf Registration
         Statement, as amended or supplemented by any prospectus supplement and
         by all other amendments thereto, including post-effective amendments,
         and all material incorporated by reference into such Prospectus.

                  Purchase Agreement:  As defined in the preamble hereto.

                  Purchasers:  As defined in the preamble hereto.

                  Questionnaire:  As defined in Section 2(c) hereof.

                  Questionnaire Deadline:  As defined in Section 2(c) hereof.

                  Record Holder: With respect to any Damages Payment Date, each
         Person who is a Holder on the record date with respect to the Interest
         Payment Date on which such Damages Payment Date shall occur. In the
         case of a Holder of Conversion Shares, "Record Holder" shall mean each
         Person who is a Holder of Conversion Shares which constitutes Transfer
         Restricted Securities on the 15/th/ day preceding the relevant Damages
         Payment Date.

                  Registration Default: As defined in Section 3(a) hereof.

                  Registration Failure Liquidated Damages: As defined in Section
         3(a) hereof.

                  Registration Trigger Date: As defined in Section 2(a)(i)
         hereof.

                  Securities: As defined in the preamble hereto.

                  Securities Act: Securities Act of 1933, as amended, and the
         rules and regulations of the Commission promulgated thereunder.

                  Shelf Registration Statement:  As defined in Section 2(b)(i)
         hereof.

                  Shelf Termination Election: Any election by the Issuer to
         terminate the effectiveness of any Shelf Registration Statement.

                  Subject PIK Security: (i) Any PIK Security at the time it is
         originally issued under the Indenture; and (ii) in connection with any
         Shelf Termination Election, all PIK Securities outstanding at the date
         thereof.

                  Subsequent Effectiveness Period: As defined in Section 2(b)
         (iii) hereof.

                  Subsequent Effectiveness Target Date: As defined in Section 2
         (b)(ii) hereof.

                  Subsequent Registration Trigger Date: As defined in Section 2
         (b)(i) hereof.

                  Subsequent Shelf Registration Statement: As defined in Section
         2(b)(i) hereof.

<PAGE>

                                                                               4

                  Suspension Notice:  As defined in Section 4(c) hereof.

                  Suspension Period:  As defined in Section 4(b)(i) hereof.

                  Transfer Conditions: With respect to any Subject PIK Security
         issued under the Indenture, means the delivery by the Issuer to the
         Trustee and each Holder of such Subject PIK Security of (a) an
         Officer's Certificate confirming that (i) such Subject PIK Security is
         not required to bear the restricted securities legend provided for in
         the Indenture and (ii) that such Subject PIK Security may be sold or
         transferred by a person who is not an affiliate of the Issuer pursuant
         to Rule 144(k) under the Securities Act (or any other similar provision
         then in force), or is otherwise freely transferable, without regard to
         any volume or manner of sale restrictions and (b) an Opinion of Counsel
         (as defined in the Indenture), which shall be an opinion of outside
         counsel, which confirms such conclusion and states that the holders of
         the Subject PIK Securities are entitled to rely on such opinion or, if
         such an Opinion of Counsel was previously delivered, a confirmation
         from such counsel that there is no change in the opinion previously
         delivered.

                  Transfer Restricted Securities: Each (a) Conversion Share and
         (b) any other securities issued or issuable with respect to such
         Conversion Share by way of stock dividend or stock split or in
         connection with a combination of shares, recapitalization, merger,
         consolidation or other reorganization or otherwise, until the earlier
         of:

                         (i)   the date on which such Conversion Share or other
                  security has been registered under the Securities Act on a
                  registration statement which has been declared effective by
                  the Commission and disposed of in accordance with such
                  registration statement;

                        (ii)   the date on which such Conversion Share or other
                  security (A) has been transferred in compliance with Rule 144
                  under the Securities Act or (B) may be sold or transferred by
                  a person who is not an affiliate of the Issuer pursuant to
                  Rule 144(k) under the Securities Act (or any other similar
                  provision then in force) without regard to any volume or
                  manner of sale restrictions thereunder; provided, however,
                  that, in the case of Conversion Shares issuable upon
                  conversion of any PIK Securities, the Transfer Conditions have
                  been satisfied or the date as of which this determination is
                  made is at least two years after the issue date of such PIK
                  Security; or

                       (iii)   the date on which, following the issuance of such
                  Conversion Share upon conversion of Securities, such
                  Conversion Share or other security ceases to be outstanding
                  (whether as a result of repurchase and cancellation,
                  conversion or otherwise).

                  Trustee:  U.S. Bank, N.A., as trustee under the Indenture, and
         any subsequent trustee thereunder.

                  Underwritten Registration or Underwritten Offering: A
         registration in which securities of the Issuer are sold to an
         underwriter for reoffering to the public.

<PAGE>

                                                                               5

                  VWAP: For any security as of any date, the dollar-weighted
         average price for such security on the principal United States
         securities exchange on which such security is traded (which is
         currently the New York Stock Exchange with respect to the Common Stock)
         during the period beginning at 9:30 a.m. (New York time) (or such other
         time as such exchange publicly announces is the official open of
         trading), and ending at 4:00 p.m. (New York time) (or such other time
         as such exchange publicly announces is the official close of trading)
         as reported by Bloomberg Financial Markets (or any successor thereto,
         "Bloomberg") through its "Volume at Price" functions and ignoring any
         block trade (which for purposes of this definition means any transfer
         of more than 100,000 shares (subject to adjustment to reflect stock
         dividends, stock splits, stock combinations or other similar
         transactions after the date of this Agreement) of such security
         pursuant to an individual transaction), or, if the foregoing does not
         apply, the dollar weighted average price of such security in the
         over-the-counter market on the electronic bulletin board for such
         security during the period beginning at 9:30 a.m. (New York time) (or
         such other time as such exchange publicly announces is the official
         open of trading), and ending at 4:00 p.m. (New York time) (or such
         other time as such exchange publicly announces is the official close of
         trading) as reported by Bloomberg and ignoring any block trade (which
         for purposes of this definition means any transfer of more than 100,000
         shares (subject to adjustment to reflect stock dividends, stock splits,
         stock combinations or other similar transactions after the date of this
         Agreement) of such security pursuant to an individual transaction), or
         if no dollar weighted average price is reported for such security by
         Bloomberg for such hours, the average of the highest closing bid price
         and lowest closing ask price of any of the market makers for such
         security as reported in the "pink sheets" by the National Quotation
         Bureau, Inc. If the VWAP cannot be calculated for such security on such
         date on any of the foregoing bases, the VWAP of such security on such
         date shall be the fair market value as mutually determined by the
         Company and a Majority of Holders.

                  2.       Shelf Registration. (a) The Issuer shall:

                               (i)   use its best efforts to not later than the
                  date that is 90 days after the date of the consummation of a
                  "plan of reorganization" under the Bankruptcy Code with
                  respect to PG&E (the "Initial Registration Trigger Date"),
                  cause to be filed a registration statement pursuant to Rule
                  415 under the Securities Act (together with any amendments
                  thereto, the "Initial Shelf Registration Statement"), which
                  Initial Shelf Registration Statement shall provide for resales
                  of all Transfer Restricted Securities held by, or issuable to,
                  the Holders (or which may be issued to the Holders at any time
                  upon conversion of any PIK Securities, as reasonably
                  determined by the Issuer) that have provided the information
                  required pursuant to the terms of Section 2(c) hereof;

                               (ii)  use its best efforts to cause the Initial
                  Shelf Registration Statement to be declared effective by the
                  Commission not later than 180 days after the Registration
                  Trigger Date (the "Initial Effectiveness Target Date"); and

                               (iii) after such Initial Shelf Registration
                  Statement has been declared effective, keep the Initial Shelf
                  Registration Statement continuously effective,

<PAGE>

                                                                               6

                  supplemented and amended as required by the provisions of
                  Section 4(b) hereof to the extent necessary to ensure that (A)
                  it is available for resales by the Holders of Transfer
                  Restricted Securities entitled to the benefit of this
                  Agreement and (B) conforms with the requirements of this
                  Agreement and the Securities Act for a period (the "Initial
                  Effectiveness Period") ending on the earlier of:

                                (1)  June 25, 2004, or, if any PIK Securities
                           have been issued prior to such date, the earlier of
                           (A) the second anniversary of the most recent date on
                           which any such PIK Securities were authenticated by
                           the Trustee pursuant to the Indenture and (B) the
                           date on which the Transfer Conditions are satisfied;
                           or

                                (2)  such shorter period that will terminate
                           when (x) all of the Holders of Transfer Restricted
                           Securities are able to sell all Transfer Restricted
                           Securities immediately without restriction pursuant
                           to Rule 144(k) under the Securities Act or any
                           successor rule thereto; provided, however, that, in
                           the case of Conversion Shares issued or issuable upon
                           conversion of any PIK Securities, the Transfer
                           Conditions have been satisfied or the date as of
                           which this determination is made is at least two
                           years after the issue date of such PIK Security, (y)
                           all Securities and Transfer Restricted Securities
                           have ceased to be outstanding (whether as a result of
                           repurchase and cancellation, conversion or otherwise)
                           or (z) all Transfer Restricted Securities have been
                           registered under the Initial Shelf Registration
                           Statement and have been sold in accordance therewith.

                  (b)      Following the expiration of the Initial Effectiveness
Period, the Issuer may make a Shelf Termination Election by delivering written
notice thereof and, evidence of the satisfaction of the Transfer Conditions to
each Holder of Securities or Transfer Restricted Securities. In the event,
however, that, following the expiration of the Initial Effectiveness Period and
the making of such Shelf Termination Election, the Issuer issues any PIK
Securities and the Transfer Conditions have not been satisfied with respect to
any such issuance then the Issuer shall:

                           (i)  use its best efforts to file, not later than 20
                  days after the date on which such PIK Securities are issued
                  (the "Subsequent Registration Trigger Date" and, together with
                  the Initial Registration Trigger Date, a "Registration Trigger
                  Date") cause to be filed a registration statement pursuant to
                  Rule 415 under the Securities Act (together with any
                  amendments thereto, the "Subsequent Shelf Registration
                  Statement" and, together with the Initial Shelf Registration
                  Statement, a "Shelf Registration Statement") which Subsequent
                  Shelf Registration Statement shall provide for resales of all
                  Transfer Restricted Securities held by Holders (or which may
                  be issued to the Holders at any time upon conversion of any
                  PIK Securities) that have provided the information required
                  pursuant to the terms of Section 2(c) hereof;

                           (ii) use its best efforts to cause the Subsequent
                  Shelf Registration Statement to be declared effective by the
                  Commission not later than 60 days after

<PAGE>

                                                                               7

                  the Subsequent Registration Trigger Date (the "Subsequent
                  Effectiveness Target Date" and, together with the Initial
                  Effectiveness Target Date, the "Effectiveness Target Date");
                  and

                           (iii) after such Subsequent Shelf Registration
                  Statement has been declared effective, keep the Subsequent
                  Shelf Registration Statement continuously effective,
                  supplemented and amended as required by the provisions of
                  Section 4(b) hereof to the extent necessary to ensure that (A)
                  it is available for resales by the Holders of Transfer
                  Restricted Securities entitled to the benefit of this
                  Agreement and (B) conforms with the requirements of this
                  Agreement and the Securities Act for a period (the "Subsequent
                  Effectiveness Period" and, together with the Initial
                  Effectiveness Period, the "Effectiveness Period") ending on
                  the earlier of:

                                  (1) the earlier of (A) the second anniversary
                          of the most recent date on which any such PIK
                          Securities were authenticated by the Trustee pursuant
                          to the Indenture and (B) the date on which the
                          Transfer Conditions are satisfied; or

                                  (2) such shorter period that will terminate
                          when (x) all of the Holders of Transfer Restricted
                          Securities are able to sell all Transfer Restricted
                          Securities immediately without restriction pursuant to
                          Rule 144(k) under the Securities Act or any successor
                          rule thereto; provided, however, that, in the case of
                          any Conversion Shares issued or issuable upon
                          conversion of any PIK Securities, the Transfer
                          Conditions have been satisfied or the date as of which
                          this determination is made is at least two years after
                          the issue date of such PIK Security, (y) when no
                          Securities or Transfer Restricted Securities remain
                          outstanding (whether as a result of repurchase and
                          cancellation, conversion or otherwise) or (z) all
                          Transfer Restricted Securities have been registered
                          under the Subsequent Shelf Registration Statement and
                          have been sold in accordance therewith.

                  (c)      No Holder of Transfer Restricted Securities shall be
permitted to include any of its Transfer Restricted Securities in any Shelf
Registration Statement pursuant to this Agreement unless such Holder completes a
Selling Securityholder Notice and Questionnaire, substantially in the form
attached hereto as Exhibit A (as the same may be amended or modified from time
to time to reasonably reflect changes in applicable law) (the "Questionnaire"),
and delivers it to the Issuer prior to or on the 15th Business Day after such
Holder's receipt of the Questionnaire from the Issuer (each such deadline, a
"Questionnaire Deadline"). Prior to such time, each Holder may complete the
Questionnaire and deliver it to the Issuer prior to such request and, as a
result, shall be entitled to have its Transfer Restricted Securities included in
the applicable Shelf Registration Statement filed with the Commission. In
addition, upon receipt of one or more written requests for additional
information from the Issuer, each Holder who intends to be named as a selling
securityholder in the applicable Shelf Registration Statement shall furnish to
the Issuer in writing, within 15 Business Days after such Holder's receipt of
such request, such additional information regarding such Holder and the proposed
distribution by such Holder of its Transfer Restricted Securities, in connection
with the Shelf Registration Statement

<PAGE>

                                                                               8

or Prospectus or Preliminary Prospectus included therein and in any application
to be filed with or under state securities law, as the Issuer may reasonably
request. No Holder of Transfer Restricted Securities shall be entitled to
Registration Failure Liquidated Damages pursuant to Section 3 hereof unless such
Holder shall have provided such reasonably requested information prior to or on
the applicable Questionnaire Deadline. Each Holder whose Transfer Restricted
Securities are being registered pursuant to a Shelf Registration Statement
agrees to furnish promptly to the Issuer all information required to be
disclosed in order to make information previously furnished to the Issuer by
such Holder not materially misleading.

                  3.       Registration Failure Liquidated Damages.

                  (a)      If:

                           (i)  any Shelf Registration Statement has not been
                  declared effective by the Commission on or prior to the
                  applicable Effectiveness Target Date; or

                           (ii) except as provided in Section 4(b)(i) hereof,
                  any Shelf Registration Statement is filed and declared
                  effective but, during the applicable Effectiveness Period,
                  shall thereafter cease to be effective or fail to be usable
                  for its intended purpose without there being filed with the
                  Commission within ten Business Days a post-effective amendment
                  to such Shelf Registration Statement, a supplement to the
                  Prospectus or a report pursuant to Section 13(a), 13(c), 14 or
                  15(d) of the Exchange Act that cures such failure and, in the
                  case of a post-effective amendment, is itself immediately
                  declared effective;

 (each such event referred to in foregoing clauses (i) and (ii), a "Registration
Default"), the Issuer hereby agrees, subject to Section 2(c), to pay liquidated
damages ("Registration Failure Liquidated Damages") with respect to the Transfer
Restricted Securities from and including the day following the Registration
Default to but excluding the day on which the Registration Default has been
cured, accruing at a rate:

                           (A)  in respect of the Securities, to each holder of
                  Securities, equal to 0.50% per annum of the Applicable Amount
                  of the Securities; and

                           (B)  in respect of any Conversion Shares, to each
                  holder of Conversion Shares, equal to 0.50% per annum of the
                  Applicable Amount of the Conversion Shares.

                  (b)      All accrued Registration Failure Liquidated Damages
shall be paid in arrears to Record Holders by the Issuer on each Damages Payment
Date (i) by wire transfer of immediately available funds or by federal funds
check or (ii) in PIK Securities. Following the cure of all Registration Defaults
relating to any particular Security or Conversion Share, the accrual of
Registration Failure Liquidated Damages with respect to such Security or
Conversion Share will cease. The Issuer agrees to deliver all notices,
certificates and other documents contemplated by the Indenture in connection
with the payment of Registration Failure Liquidated Damages.

<PAGE>

                                                                               9

          All obligations of the Issuer set forth in this Section 3 that are
outstanding with respect to any Transfer Restricted Security at the time such
security ceases to be a Transfer Restricted Security shall survive until such
time as all such obligations with respect to such Transfer Restricted Security
shall have been satisfied in full; provided, however, that the Registration
Failure Liquidated Damages shall cease to accrue on the last day of the
Effectiveness Period.

                  The Registration Failure Liquidated Damages set forth above
shall be the exclusive monetary remedy available to the Holders of Transfer
Restricted Securities for such Registration Default; provide, however, that the
Holders of Transfer Restricted Securities shall be entitled to any remedy
          (including, without limitation, monetary damages) which the Holders
may have at
law or in equity in the event that the Issuer engages in conduct which either is
grossly negligent or intentionally malfeasant; provided, further, however, that
in no event shall the Issuer's filing and prosecution in good faith of a Shelf
Registration Statement in accordance with the terms of this Agreement and advice
of a firm of qualified securities counsel be considered as grossly negligent or
intentionally malfeasant for purposes of this Agreement

          4. Registration Procedures.

          (a)  In connection with any Shelf Registration Statement, the Issuer
shall comply with all the provisions of Section 4(b) hereof and shall use its
best efforts to effect such registration to permit the sale of the Transfer
Restricted Securities being sold in accordance with the intended method or
methods of distribution thereof, and pursuant thereto, shall as expeditiously as
possible prepare and file with the Commission a Shelf Registration Statement
relating to the registration on any appropriate form under the Securities Act.

          (b)  In connection with any Shelf Registration Statement and any
Prospectus required by this Agreement to permit the sale or resale of Transfer
Restricted Securities, the Issuer shall:

               (i) subject to any notice by the Issuer in accordance with this
          Section 4(b) of the existence of any fact or event of the kind
          described in Section 4(b)(iii)(D), use its best efforts to keep the
          Shelf Registration Statement continuously effective during the
          Effectiveness Period; upon the occurrence of any event that would
          cause such Shelf Registration Statement or the Prospectus contained
          therein (A) to contain a material misstatement or omission or (B) not
          be effective and usable for resale of Transfer Restricted Securities
          during the Effectiveness Period, the Issuer shall file promptly an
          appropriate amendment to such Shelf Registration Statement, a
          supplement to the Prospectus or a report filed with the Commission
          pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, in
          the case of clause (A), correcting any such misstatement or omission,
          and, in the case of either clause (A) or (B), use its best efforts to
          cause such amendment to be declared effective and such Shelf
          Registration Statement and the related Prospectus to become usable for
          their intended purposes as soon as practicable thereafter.
          Notwithstanding the foregoing, the Issuer may suspend the
          effectiveness of any Shelf Registration Statement by written notice
          (which notice shall not contain any material nonpublic information) to
          the Holders for a period

<PAGE>

                                                                              10

          (each such period, a "Suspension Period"); provided that the Company
          shall promptly notify the Holders in writing (which notice shall not
          contain any material non-public information) of the date the
          Suspension Period will begin and the expected duration of such period;
          and provided, further, that no Suspension Period shall exceed 45
          consecutive days and all such Suspension Periods shall not exceed an
          aggregate of 90 days within any consecutive twelve-month period if:

                     (x) an event occurs and is continuing as a result of which
               such Shelf Registration Statement would, in the Issuer's
               reasonable judgment, contain an untrue statement of a material
               fact or omit to state a material fact required to be stated
               therein or necessary to make the statements therein not
               misleading; and

                     (y) the Issuer reasonably determines that the disclosure of
               such event at such time would have a material adverse effect on
               the business of the Issuer (and its subsidiaries, if any, taken
               as a whole);

          Notwithstanding the foregoing, in the event that any Holder has, prior
          to the receipt of notice of the commencement of a Suspension Period,
          entered into a binding contract to sell any Conversion Shares pursuant
          to a Shelf Registration Statement, and in accordance with the plan of
          distribution therein, the Issuer agrees not to prevent its transfer
          agent from delivering such Conversion Shares to the purchaser thereof
          without any restrictive legend and otherwise in accordance with the
          applicable requirements of the Indenture. The Issuer shall use its
          commercially reasonable efforts to provide any documents, opinions or
          other information reasonably requested by the transfer agent in
          connection with any such sale.

               (ii)  Prepare and file with the Commission such amendments
          (including post-effective amendments) and supplements to such Shelf
          Registration Statement as may be necessary to keep such Shelf
          Registration Statement continuously effective during the Effectiveness
          Period; cause the Prospectus to be supplemented by any required
          Prospectus supplement, and as so supplemented to be filed pursuant to
          Rule 424 (or any similar provisions then in force) under the
          Securities Act, and to comply fully with the applicable provisions of
          Rules 424 and 430A under the Securities Act in a timely manner; and
          comply with the provisions of the Securities Act and the Exchange Act
          with respect to the disposition of all securities covered by such
          Shelf Registration Statement during the applicable period in
          accordance with the intended method or methods of distribution by the
          sellers thereof set forth in such Shelf Registration Statement as so
          amended or in such Prospectus as so supplemented.

               (iii) Advise the underwriter(s), if any, and selling Holders
          promptly (but in any event within five Business Days) and, if
          requested by such Persons, to confirm such advice in writing
          (provided, however, that in no event shall such advice contain any
          material non-public information):

<PAGE>

                                                                              11

                    (A) when the Prospectus or any Prospectus supplement or
               post-effective amendment has been filed, and, with respect to any
               Shelf Registration Statement or any post-effective amendment
               thereto, when the same has become effective,

                    (B) of any request by the Commission for amendments to any
               Shelf Registration Statement or amendments or supplements to the
               Prospectus or for additional information relating thereto,

                    (C) of the issuance by the Commission of any stop order
               suspending the effectiveness of any Shelf Registration Statement
               under the Securities Act or any notification with respect to the
               suspension by any state securities commission of the
               qualification or exemption from qualification of any of the
               Transfer Restricted Securities for offering or sale in any
               jurisdiction, or the initiation or threatening of any proceeding
               for any of the preceding purposes, or

                    (D) of the existence of any fact or the happening of any
               event (the nature of which need not be disclosed) during the
               Effectiveness Period, that makes any statement of a material fact
               made in any Shelf Registration Statement, the Prospectus, any
               amendment or supplement thereto, or any document incorporated by
               reference therein untrue, or that requires the making of any
               additions to or changes in any Shelf Registration Statement or
               the Prospectus in order to make the statements therein not
               misleading, and that in the case of a Prospectus, it will not
               contain any untrue statement of a material fact or omit to state
               any material fact necessary to make the statements therein, in
               light of the circumstances under which they were made, not
               misleading.

          Each Holder of Securities, by accepting the same, agrees to hold any
          communication from the Company pursuant to this Section 4(b)(iii) in
          confidence.

          If at any time the Commission shall issue any stop order suspending
          the effectiveness of any Shelf Registration Statement, or any state
          securities commission or other regulatory authority shall issue an
          order suspending the qualification or exemption from qualification of
          the Transfer Restricted Securities under state securities or Blue Sky
          laws, the Issuer shall use its best efforts to obtain the withdrawal
          or lifting of such order at the earliest possible time and will
          provide to the Purchasers and each Holder who is named in such Shelf
          Registration Statement prompt notice of the withdrawal of any such
          order (provided that in no event shall such notice contain any
          material non-public information).

               (iv) Furnish to each of the selling Holders and each of the
          underwriter(s), if any, before filing with the Commission, one copy of
          any Shelf Registration Statement and copies of any Prospectus included
          therein or any

<PAGE>

                                                                              12

          amendments or supplements to such Shelf Registration Statement or
          Prospectus (other than documents incorporated by reference after the
          initial filing of such Shelf Registration Statement), which documents
          will be subject to the review of such Holders and underwriter(s), if
          any, for a period of at least ten Business Days (in the case of a
          Shelf Registration Statement and the initial Prospectus contained
          therein) and two Business Days (in the case of any amendment or
          supplement thereto), and the Issuer will not file such Shelf
          Registration Statement or initial Prospectus or any amendment or
          supplement to the Shelf Registration Statement or Prospectus (other
          than documents incorporated by reference) to which a selling Holder of
          Transfer Restricted Securities covered by the Shelf Registration
          Statement or the underwriter(s), if any, shall reasonably object
          within ten Business Days prior to the filing of such Shelf
          Registration Statement and Prospectus and within two Business Days
          prior to the filing of any amendment or supplement thereto. A selling
          Holder or underwriter, if any, shall be deemed to have reasonably
          objected to such filing only if a Shelf Registration Statement,
          amendment, Prospectus or supplement, as applicable, as proposed to be
          filed, contains a material misstatement or omission with respect to
          the information concerning such Holder or its intended plan of
          distribution with respect to the Transfer Restricted Securities.

               (v)   Make available at reasonable times for inspection by one or
          more representatives of the selling Holders, designated in writing by
          a Majority of Holders whose Transfer Restricted Securities are
          included in a Shelf Registration Statement, any underwriter
          participating in any distribution pursuant to such Shelf Registration
          Statement, and any attorney or accountant retained by such selling
          Holders or any of the underwriter(s), all financial and other records,
          pertinent corporate documents and properties of the Issuer as shall be
          reasonably necessary to enable them to exercise any applicable due
          diligence responsibilities, and cause the Issuer's officers,
          directors, managers and employees to supply all information reasonably
          requested by any such representative or representatives of the selling
          Holders, underwriter, attorney or accountant in connection with the
          Shelf Registration Statement after the filing thereof and before its
          effectiveness, provided, however, that any information designated by
          the Issuer as confidential at the time of delivery of such information
          shall be kept confidential by the recipient thereof; provided,
          further, that in no event shall the Issuer be required to furnish any
          material nonpublic information pursuant to this subsection (v).

               (vi)  If reasonably requested by any selling Holders or the
          underwriter(s), if any, promptly incorporate in a Shelf Registration
          Statement or Prospectus, pursuant to a supplement or post-effective
          amendment if necessary, such information as such selling Holders and
          underwriter(s), if any, may reasonably request to have included
          therein, including, without limitation: (1) information relating to
          the "Plan of Distribution" of the Transfer Restricted Securities, (2)
          information with respect to the number of shares of Common Stock being
          sold to such underwriter(s), (3) the purchase price being paid
          therefor and (4) any other terms of the offering of the Transfer
          Restricted Securities to be sold in such offering; provided, however,
          that with respect to any information

<PAGE>

                                                                              13

          requested for inclusion by a selling Holder, this clause (vi) shall
          apply only to such information that relates to the Transfer Restricted
          Securities to be sold by such selling Holder; and make all required
          filings of such Prospectus supplement or post-effective amendment as
          soon as reasonably practicable after the Issuer is notified of the
          matters to be incorporated in such Prospectus supplement or
          post-effective amendment.

               (vii)  Deliver to each selling Holder and each of the
          underwriter(s), if any, without charge, upon the effectiveness of any
          Shelf Registration Statement, as many copies of the Prospectus
          (including each preliminary prospectus) and any amendment or
          supplement thereto as such Persons reasonably may request; subject to
          any notice by the Issuer in accordance with this Section 4(b) of the
          existence of any fact or event of the kind described in Section
          4(b)(iii) (D), the Issuer hereby consents to the use of the Prospectus
          and any amendment or supplement thereto by each of the selling Holders
          and each of the underwriter(s), if any, in connection with the
          offering and the sale of the Transfer Restricted Securities covered by
          the Prospectus or any amendment or supplement thereto.

               (viii) The Issuer shall:

               (A)    upon request, furnish to each selling Holder and each
          underwriter in the case of an underwritten registration where an
          underwriting agreement is entered into, if any, in such substance and
          scope as they may reasonably request and as are customarily made by
          issuers to underwriters in primary underwritten offerings for selling
          security holders, upon the date of closing of any sale of Transfer
          Restricted Securities in an Underwritten Registration:

                      (1) opinions, each dated the date of such closing, of
               counsel to the Issuer covering such of the matters as are
               customarily covered in legal opinions to underwriters in
               connection with underwritten offerings of securities; and

                      (2) customary comfort letters, dated the date of such
               closing, from the Issuer's independent accountants (and from any
               other accountants whose report is contained or incorporated by
               reference in the Shelf Registration Statement) in the customary
               form and covering matters of the type customarily covered in
               comfort letters to underwriters in connection with underwritten
               offerings of securities;

               (B)    set forth in full in the underwriting agreement, if any,
          indemnification provisions and procedures which provide rights no less
          protective than those set forth in Section 6 hereof with respect to
          all parties to be indemnified by the Issuer; and

               (C) deliver such other documents and certificates as may be
          reasonably requested by such parties to evidence compliance with
          clause (A) above and with

<PAGE>

                                                                              14

           any customary conditions contained in the underwriting agreement or
           other agreement entered into by the selling Holders pursuant to this
           clause (ix).

               (ix)   Before any public offering of Transfer Restricted
           Securities, cooperate with the selling Holders, the underwriter(s),
           if any, and their respective counsel in connection with the
           registration and qualification of the Transfer Restricted Securities
           for offer and sale under the securities or Blue Sky laws of such
           jurisdictions in the United States as the selling Holders or
           underwriter(s), if any, may reasonably request, use best efforts to
           keep each such registration or qualification (or exemption therefrom)
           effective during the Effectiveness Period and do any and all other
           acts or things necessary or advisable to enable the disposition in
           such jurisdictions of the Transfer Restricted Securities covered by a
           Shelf Registration Statement; provided, however, that the Issuer
           shall not be required (A) to register or qualify as a foreign
           corporation or a dealer of securities where it is not now so
           qualified or to take any action that would subject it to the service
           of process in any jurisdiction where it is not now so subject or (B)
           to subject itself to taxation in any such jurisdiction if it is not
           now so subject.

               (x)    Cooperate with the selling Holders and the underwriter(s),
           if any, to facilitate the timely preparation and delivery of
           certificates representing Transfer Restricted Securities to be sold
           and not bearing any restrictive legends (unless required by
           applicable securities laws); and enable such Transfer Restricted
           Securities to be in such denominations and registered in such names
           as the Holders or the underwriter(s), if any, may request at least
           two Business Days before any sale of Transfer Restricted Securities
           made by such selling Holders or underwriter(s).

               (xi)   Use its best efforts to cause the Transfer Restricted
           Securities covered by a Shelf Registration Statement to be registered
           with or approved by such other U.S. governmental agencies or
           authorities as may be necessary to enable the selling Holders or the
           underwriter(s), if any, to consummate the disposition of such
           Transfer Restricted Securities pursuant to such Shelf Registration
           Statement.

               (xii)  Subject to Section 4(b)(i) hereof, if any fact or event
           contemplated by Section 4(b)(iii)(D) hereof shall exist or have
           occurred, use its best efforts to prepare a supplement or
           post-effective amendment to a Shelf Registration Statement or related
           Prospectus or any document incorporated therein by reference or file
           any other required document so that, as thereafter delivered to any
           purchasers of Transfer Restricted Securities, the Prospectus will not
           contain an untrue statement of a material fact or omit to state any
           material fact required to be stated therein or necessary to make the
           statements therein, in light of the circumstances in which they were
           made, not misleading.

               (xiii) [Reserved]

<PAGE>

                                                                              15

               (xiv)   Cooperate and assist in any filings required to be made
           with the NASD and in the performance of any due diligence
           investigation by any underwriter that is required to be retained in
           accordance with the rules and regulations of the NASD.

               (xv)    Otherwise use its best efforts to comply with all
           applicable rules and regulations of the Commission and all reporting
           requirements under the Exchange Act.

               (xvi)   Cause all Transfer Restricted Securities covered by any
           Shelf Registration Statement to be listed or quoted, as the case may
           be, on each securities exchange or automated quotation system on
           which similar securities issued by the Issuer are then listed or
           quoted and, if not so listed, to be listed on the NASD automated
           quotation system.

               (xvii)  Provide to each Holder upon written request each document
           filed with the Commission pursuant to the requirements of Section 13
           and Section 15 of the Exchange Act after the effective date of the
           applicable Shelf Registration Statement.

               (xviii) If reasonably requested by the underwriters, make
           appropriate officers of the Issuer available to the underwriters for
           meetings with prospective purchasers of the Transfer Restricted
           Securities and prepare and present to potential investors customary
           "road show" or marketing materials in a manner consistent with other
           new issuances of other securities similar to the Transfer Restricted
           Securities; but in no event more than once in any 12 month period.

           (c) Each Holder agrees by acquisition of a Transfer Restricted
Security that, upon receipt of any notice (a "Suspension Notice") (which notice
shall not contain any material nonpublic information) from the Issuer of the
existence of any fact of the kind described in Section 4(b)(iii)(D) hereof, such
Holder will, and will use its reasonable best efforts to cause any
underwriter(s) in an Underwritten Offering to, forthwith discontinue disposition
of Transfer Restricted Securities pursuant to any Shelf Registration Statement
until:

               (i)     such Holder has received copies of the supplemented or
           amended Prospectus contemplated by Section 4(b)(xii) hereof; or

               (ii)    such Holder is advised in writing by the Issuer that the
           use of the Prospectus may be resumed, and has received copies of any
           additional or supplemental filings that are incorporated by reference
           in the Prospectus.

If so directed by the Issuer, each Holder will deliver to the Issuer (at the
Issuer's expense) all copies, other than permanent file copies then in such
Holder's possession, of the Prospectus covering such Transfer Restricted
Securities that was current at the time of receipt of such notice of suspension.

<PAGE>

                                                                              16

           5. Registration Expenses. All expenses incident to the Issuer's
performance of or compliance with this Agreement shall be borne by the Issuer
regardless of whether a Shelf Registration Statement becomes effective,
including, without limitation:

               (i)   all registration and filing fees and expenses (including
           filings made by the Purchasers or Holders with the NASD);

               (ii)  all fees and expenses of compliance with federal securities
           and state Blue Sky or securities laws;

               (iii) all expenses of printing (including printing of
           Prospectuses and certificates for the Conversion Shares) and the
           Issuer's expenses for messenger and delivery services and telephone;

               (iv)  all fees and disbursements of counsel to the Issuer and,
           subject to Section 5(b) below, the Holders of Transfer Restricted
           Securities;

               (v)   all application and filing fees in connection with listing
           (or authorizing for quotation) the Common Stock on a national
           securities exchange or automated quotation system pursuant to the
           requirements hereof; and

               (vi)  all fees and disbursements of independent certified public
           accountants of the Issuer (including the expenses of any special
           audit and comfort letters required by or incident to such
           performance).

           The Issuer shall bear its internal expenses (including, without
limitation, all salaries and expenses of its officers and employees performing
legal, accounting or other duties), the expenses of any annual audit and the
fees and expenses of any Person, including special experts, retained by the
Issuer.

           (b) In connection with any Shelf Registration Statement required by
this Agreement, including any amendment or supplement thereto, and any other
documents delivered to any Holders, the Issuer shall reimburse the Purchasers
and the Holders of Transfer Restricted Securities being registered pursuant to
each such Shelf Registration Statement, as applicable, for the reasonable fees
and disbursements not to exceed $10,000, of not more than one counsel, which
shall be such counsel as may be chosen by a Majority of Holders for whose
benefit the Shelf Registration Statement is being prepared.

           6. Indemnification and Contribution.

           (a) The Issuer shall indemnify and hold harmless each Holder, such
Holder's officers, directors and employees and each person, if any, who controls
such Holder within the meaning of the Securities Act (each, an "Indemnified
Holder"), from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof (including, but not limited to, any
loss, claim, damage, liability or action relating to resales of the Transfer
Restricted Securities) ("Liabilities"), to which such Indemnified Holder may
become subject, insofar as any such Liability arises out of, or is based upon:

<PAGE>

                                                                              17

           (i)  any untrue statement or alleged untrue statement of a material
      fact contained in (A) any Shelf Registration Statement or Prospectus or
      any amendment or supplement thereto or (B) any blue sky application or
      other document or any amendment or supplement thereto prepared or executed
      by the Issuer (or based upon written information furnished by or on behalf
      of the Issuer expressly for use in such blue sky application or other
      document or amendment on supplement) filed in any jurisdiction
      specifically for the purpose of qualifying any or all of the Transfer
      Restricted Securities under the securities law of any state or other
      jurisdiction (such application or document being hereinafter called a
      "Blue Sky Application"); or

           (ii) the omission or alleged omission to state therein any material
      fact required to be stated therein or necessary to make the statements
      therein, in the light of the circumstances under which they were made, not
      misleading,

and shall reimburse each Indemnified Holder promptly upon demand for any legal
or other expenses reasonably incurred by such Indemnified Holder in connection
with investigating or defending or preparing to defend against any such
Liability as such expenses are incurred; provided, however, that the Issuer
shall not be liable to any Holder in any such case to the extent that any such
Liability arises out of, or is based upon, any untrue statement or alleged
untrue statement or omission or alleged omission made in a Shelf Registration
Statement or Prospectus or amendment or supplement thereto or Blue Sky
Application in reliance upon and in conformity with written information
furnished to the Issuer by or on behalf of such Holder or its related
Indemnified Holder specifically for use in such Shelf Registration Statement or
Prospectus and provided, further, however, that the Issuer shall not be liable
to the underwriter for any Holder or, in the case of any non-underwritten
offering, to any Holder or its related Indemnified Holder to the extent that (A)
such Liability arises out of or is based upon an untrue statement or omission
made in any preliminary prospectus if (i) such underwriter or Holder, as
applicable, failed to send or deliver a copy of the final prospectus with or
prior to the delivery of written confirmation of the sale by such Holder to the
Person asserting the claim from which such Liabilities arise, to the extent such
underwriter or Holder, as applicable, was required to send and deliver such
final prospectus, and (ii) the final prospectus would have corrected such untrue
statement or such omission; or (B) such Liability arises out of or is based upon
an untrue statement or omission in any such prospectus if (x) such untrue
statement or omission is corrected in an amendment or supplement to such
prospectus, and (y) having previously been furnished by or on behalf of the
Issuer with copies of such prospectus as so amended or supplemented, such
underwriter or Holder, as applicable, thereafter fails to deliver such
prospectus as so amended or supplemented prior to or concurrently with the sale
of a Security to the Person asserting the claim from which such Liability
arises. The foregoing indemnity agreement is in addition to any liability which
the Issuer may otherwise have to any Indemnified Holder. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Holder and shall survive the transfer of the Transfer Restricted
Securities by such Holder.

           (b)  Each Holder, severally and not jointly, shall indemnify and hold
harmless the Issuer, its officers, directors and employees and each person, if
any, who controls the Issuer within the meaning of the Securities Act, from and
against any Liability, joint or several, in

<PAGE>

                                                                              18

respect thereof, to which the Issuer or any such officer, director, employee or
controlling person may become subject, insofar as any such Liability arises out
of, or is based upon:

           (i)  any untrue statement or alleged untrue statement of any material
      fact contained in any Shelf Registration Statement or Prospectus or any
      amendment or supplement thereto or any Blue Sky Application; or

           (ii) the omission or the alleged omission to state therein any
      material fact required to be stated therein or necessary to make the
      statements therein, in light of the circumstances under which they were
      made, not misleading,

but in each case only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Issuer by or on behalf of
such Holder (or its related Indemnified Holder) specifically for use therein,
and shall reimburse the Issuer and any such director, officer, employee or
controlling person promptly upon demand for any legal or other expenses
reasonably incurred by the Issuer or any such director, officer, employee or
controlling person in connection with investigating or defending or preparing to
defend against any such Liability as such expenses are incurred. The foregoing
indemnity agreement is in addition to any liability which any Holder may
otherwise have to the Issuer or any of its directors, officers, employees or
controlling persons and any such director, officer, employee or controlling
person. Notwithstanding anything to the contrary contained herein, no Holder
shall be liable under this Section 6(b) for any amount in excess of the net
proceeds to such Holder as a result of the sale of Transfer Restricted
Securities pursuant to the applicable Shelf Registration Statement or
Prospectus.

           (c)  Promptly after receipt by an indemnified party under this
Section 6 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 6, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 6 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 6.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 6 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that a
Majority of Holders shall have the right to employ a single counsel to represent
jointly a Majority of Holders and their respective officers, employees and
controlling persons who may be subject to liability arising out of any claim in
respect of which indemnity may be sought by a Majority of Holders against the
Issuer or any of its directors, officers, employees or controlling persons under
this Section 6; and, provided further, that if a Majority of Holders shall

<PAGE>

                                                                              19

have reasonably concluded that there may be one or more legal defenses available
to them and their respective officers, employees and controlling persons that
are different from or additional to those available to the Issuer and its
officers, directors, employees and controlling persons, the fees and expenses of
a single separate counsel shall be paid by the Issuer. No indemnifying party
shall:

           (i)  without the prior written consent of the indemnified parties
     (which consent shall not be unreasonably withheld) settle or compromise or
     consent to the entry of any judgment with respect to any pending or
     threatened claim, action, suit or proceeding in respect of which
     indemnification or contribution may be sought hereunder (whether or not the
     indemnified parties are actual or potential parties to such claim or
     action) unless such settlement, compromise or consent includes an
     unconditional release of each indemnified party from all liability arising
     out of such claim, action, suit or proceeding, or

           (ii) be liable for any settlement of any such action effected without
     its written consent (which consent shall not be unreasonably withheld), but
     if settled with its written consent or if there be a final judgment for the
     plaintiff in any such action, the indemnifying party agrees to indemnify
     and hold harmless any indemnified party from and against any loss or
     liability by reason of such settlement or judgment.

           (d)  If the indemnification provided for in this Section 6 shall for
any reason be unavailable or insufficient to hold harmless an indemnified party
under Section 6(a) or 6(b) in respect of any Liability referred to therein, each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such Liability:

           (i)  in such proportion as is appropriate to reflect the relative
     benefits received by the Issuer from the offering and sale of the Transfer
     Restricted Securities on the one hand and a Holder with respect to the sale
     by such Holder of the Transfer Restricted Securities on the other, or

           (ii) if the allocation provided by clause (6)(d)(i) is not permitted
     by applicable law, in such proportion as is appropriate to reflect not only
     the relative benefits referred to in clause 6(d)(i) but also the relative
     fault of the Issuer on the one hand and the Holders on the other in
     connection with the statements or omissions or alleged statements or
     alleged omissions that resulted in such Liability, as well as any other
     relevant equitable considerations.

The relative benefits received by the Issuer on the one hand and a Holder on the
other with respect to such offering and such sale shall be deemed to be in the
same proportion as the total net proceeds from the offering of the Securities
purchased under the Purchase Agreement (before deducting expenses) received by
the Issuer on the one hand, bear to the total proceeds received by such Holder
with respect to its sale of Transfer Restricted Securities on the other. The
relative fault of the parties shall be determined by reference to whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Issuer
on the one hand or the Holders on the other, the intent of the parties and their
relative knowledge, access to information and opportunity to

<PAGE>

                                                                              20

correct or prevent such statement or omission. The Issuer and each Holder agree
that it would not be just and equitable if the amount of contribution pursuant
to this Section 6(d) were determined by pro rata allocation or by any other
method of allocation that does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid or payable by an indemnified party as a result of the Liability
referred to above in this Section 6 shall be deemed to include, for purposes of
this Section 6, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending or preparing to
defend any such action or claim. Notwithstanding the provisions of this Section
6, no Holder shall be required to contribute any amount in excess of the amount
by which the total price at which the Transfer Restricted Securities purchased
by it were resold exceeds the amount of any damages which such Holder has
otherwise been required to pay by reason of any untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Holders' obligations to contribute as provided
in this Section 6(d) are several and not joint.

           7.  Rules 144 and 144A. The Issuer shall file the reports required
to be filed by it under the Securities Act and the Exchange Act in a timely
manner and, if at any time the Issuer is not required to file such reports, it
will, upon written request of any Holder of Transfer Restricted Securities, make
publicly available other information so long as necessary to permit sales of
their securities pursuant to Rules 144 and 144A, if the Conversion Price meets
the requirements of Rule 144A(d)(3)(i). The Issuer covenants that it will take
such further action as any Holder of Transfer Restricted Securities may
reasonably request, all to the extent required from time to time to enable such
Holder to sell such Transfer Restricted Securities without registration under
the Securities Act within the limitation of the exemptions provided by Rules 144
and 144A, if the Conversion Price meets the requirements of Rule 144A(d)(3)(i),
(including the requirements of Rule 144A(d)(4)). The Issuer will provide a copy
of this Agreement to prospective purchasers of Transfer Restricted Securities
identified to the Issuer upon request by any Purchaser. Upon the request of any
Holder of Transfer Restricted Securities, the Issuer shall deliver to such
Holder a written statement as to whether it has complied with such requirements.
Notwithstanding the foregoing, nothing in this Section 7 shall be deemed to
require the Issuer to register any of its securities pursuant to the Exchange
Act.

           8.  Participation in Underwritten Registrations. No Holder may
participate in any Underwritten Registration hereunder unless such Holder:

           (i)  agrees to sell such Holder's Transfer Restricted Securities on
     the basis provided in any underwriting arrangements approved by the Persons
     entitled hereunder to approve such arrangements; and

           (ii) completes and executes all reasonable questionnaires, powers of
     attorney, indemnities, underwriting agreements, lock-up letters and other
     documents required under the terms of such underwriting arrangements.

           9.  Selection of Underwriters. The Holders of Transfer Restricted
Securities covered by a Shelf Registration Statement who desire to do so may
sell such Transfer Restricted

<PAGE>

                                                                              21

Securities in an Underwritten Offering if approved by the Issuer. In any such
Underwritten Offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by the Issuer;
provided that such investment bankers and managers must be reasonably
satisfactory to the Majority of Holders whose Transfer Restricted Securities are
included in such offering.

           10. Miscellaneous.

           (a)  Remedies. The Issuer acknowledges and agrees that any failure by
the Issuer to comply with its obligations under Section 2 hereof may result in
material irreparable injury to the Purchasers or the Holders for which there is
no adequate remedy at law, that it will not be possible to measure damages for
such injuries precisely and that, in the event of any such failure, the
Purchasers or any Holder may obtain such relief as may be required to
specifically enforce the Issuer's obligations under Section 2 hereof. The Issuer
further agrees to waive the defense in any action for specific performance that
a remedy at law would be adequate.

           (b)  Adjustments Affecting Transfer Restricted Securities. The Issuer
shall not, directly or indirectly, take any action with respect to the Transfer
Restricted Securities as a class that would adversely affect the ability of the
Holders of Transfer Restricted Securities to include such Transfer Restricted
Securities in a registration undertaken pursuant to this Agreement.

           (c)  No Inconsistent Agreements. The Issuer will not, on or after the
date of this Agreement, enter into any agreement with respect to its securities
that is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. In addition, the Issuer shall
not grant to any of its security holders (other than the Holders of Transfer
Restricted Securities in such capacity) the right to include any of its
securities in any Shelf Registration Statement provided for in this Agreement
other than the Transfer Restricted Securities. The Issuer has not previously
entered into any agreement (which has not expired or been terminated) granting
any registration rights with respect to its securities to any Person which
rights conflict with the provisions hereof.

           (d)  Amendments and Waivers. This Agreement may not be amended,
modified or supplemented, and waivers or consents to or departures from the
provisions hereof may not be given, unless the Issuer has obtained the written
consent of a Majority of Holders.

           (e)  Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, facsimile
transmission, or air courier guaranteeing overnight delivery:

                (i)  If to a Purchaser, at the address for such Purchaser set
           forth below such Purchaser's signature on the signature page(s)
           hereof;

                (ii) if to a Holder who is not otherwise a Purchaser, at the

           address set forth on the counterpart signature page to this Agreement
           provided by such Holder pursuant to Section 10(f) below and

<PAGE>

                                                                              22
           (iii)   if to the Issuer:

                   PG&E Corporation
                   One Market, Spear Tower
                   Suite 2400
                   San Francisco, California 94105
                   Attention: Assistant Treasurer
                   Facsimile: (415) 267-7265
                   Telephone: (415) 267-7052

                   With copies to:

                   PG&E Corporation
                   One Market, Spear Tower
                   Suite 2400
                   San Francisco, California 94105
                   Attention: Chief Counsel - Corporate
                   Facsimile: (415) 817-8225
                   Telephone: (415) 817-8200

                   and

                   Latham & Watkins
                   633 West Fifth Street
                   Suite 4000
                   Los Angeles, California 90071
                   Attention:  Tom Sadler
                   Facsimile: (213) 891-8763
                   Telephone: (213) 485-1234

           All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if transmitted by
facsimile; and on the next Business Day, if timely delivered to an air courier
guaranteeing overnight delivery.

           (f)  Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders of Transfer Restricted Securities; provided,
however, that (i) this Agreement shall not inure to the benefit of or be binding
upon a successor or assign of a Holder unless and to the extent such successor
or assign is a Permitted Assign (as defined in the Purchase Agreement) or
acquired Transfer Restricted Securities from such Holder in compliance with any
restrictions on transfer applicable thereto and (ii) nothing contained herein
shall be deemed to permit any assignment, transfer or other disposition of
Transfer Restricted Securities in violation of the terms of the Purchase
Agreement or the Indenture. If any transferee of any Holder shall acquire
Transfer Restricted Securities, in any manner, whether by operation of law or
otherwise, such Transfer Restricted Securities shall

<PAGE>

                                                                              23

be held subject to all of the terms of this Agreement, and by taking and holding
such Transfer Restricted Securities such person shall be conclusively deemed to
have agreed to be bound by and to perform all of the terms and provisions of
this Agreement. The Issuer hereby agrees to extend the benefits of this
Agreement to subsequent Holders of Transfer Restricted Securities who execute a
counterpart signature page hereto.

           (g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement; provided that a facsimile
signature shall be considered due execution and shall be binding upon the
signatory thereto with the same force and effect as if the signature were an
original, not a facsimile signature.

           (h) Securities Held by the Issuer or Its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Transfer Restricted
Securities is required hereunder, Transfer Restricted Securities held by the
Issuer or its "affiliates" (as such term is defined in Rule 405 under the
Securities Act) (other than the Purchasers or subsequent Holder of Transfer
Restricted Securities if such subsequent Holders are deemed to be affiliates
solely by reason of their holdings of such Transfer Restricted Securities) shall
not be counted in determining whether such consent or approval was given by the
Holders of such required percentage.

           (i) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

           (j) Governing Law. This Agreement shall be governed by, and construed
in accordance with, the law of the State of New York.

           (k) Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired or invalidated
thereby.

           (l) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein and the registration rights granted by the
Issuer with respect to the Transfer Restricted Securities. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein with respect to the registration rights granted by the
Issuer with respect to the Transfer Restricted Securities. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.

                            [Signature pages follow]

<PAGE>

           In Witness Whereof, the parties have executed this Agreement as of
the date first written above.


                                        PG&E CORPORATION



                                        By: _____________________________
                                            Name:
                                            Title:

<PAGE>

                                Jackson Investment Fund Ltd.

                                By:_____________________________
                                   Name:
                                   Title:

                                Address for notices:

                                c/o Citadel Investment Group, L.L.C.
                                225 West Washington Street
                                Chicago, Illinois 60606
                                Attention: Bradford Couri and
                                           Kenneth A. Simpler
                                Facsimile: (312) 368-1348

                                with a copy to:

                                Katten Muchin Zavis Rosenman
                                525 West Monroe Street,
                                Suite 1600
                                Chicago, Illinois 60661
                                Attention: Robert Brantman, Esq.
                                Facsimile: 312-902-1061
                                Telephone: 312-902-5200

<PAGE>

                          Citadel Credit Trading Ltd.

                          By:_____________________________
                             Name:
                             Title:

                          Address for notices:
                          c/o Citadel Investment Group, L.L.C.
                          225 West Washington Street
                          Chicago, Illinois 60606
                          Attention: Bradford Couri and
                                     Kenneth A. Simpler
                          Facsimile: (312) 368-1348

                          with a copy to:

                          Katten Muchin Zavis Rosenman
                          525 West Monroe Street,
                          Suite 1600
                          Chicago, Illinois 60661
                          Attention: Robert Brantman, Esq.
                          Facsimile: 312-902-1061
                          Telephone: 312-902-5200

<PAGE>

                            Citadel Equity Fund Ltd.

                            By:_____________________________
                               Name:
                               Title:

                            Address for notices:

                            c/o Citadel Investment Group, L.L.C.
                            225 West Washington Street
                            Chicago, Illinois 60606
                            Attention: Bradford Couri and
                                       Kenneth A. Simpler
                            Facsimile: (312) 368-1348

                            with a copy to:

                            Katten Muchin Zavis Rosenman
                            525 West Monroe Street,
                            Suite 1600
                            Chicago, Illinois 60661
                            Attention: Robert Brantman, Esq.
                            Facsimile: 312-902-1061
                            Telephone: 312-902-5200

<PAGE>

                                                                       EXHIBIT A

                                PG&E CORPORATION

             FORM OF SELLING SECURITYHOLDER NOTICE AND QUESTIONNAIRE

         Beneficial owners that do not complete this Questionnaire within 20
Business Days of receipt hereof and deliver it to the Issuer as provided below
will not be named as selling securityholders in the prospectus and therefor will
not be permitted to sell any Transfer Restricted Securities pursuant to the
Shelf Registration Statement.

         The undersigned beneficial holder of 7.50% Convertible Subordinated
Notes due 2007 (together with any PIK Securities or other securities that may be
issued thereon, the "Securities") of PG&E Corporation, a California corporation
(the "Issuer"), or shares of common stock, no par value per share, issuable upon
conversion of the Securities (the "Conversion Shares" and together with the
Securities, the "Transfer Restricted Securities") of the Issuer understands that
the Issuer has filed, or intends to file, with the Securities and Exchange
Commission (the "Commission") a registration statement (the "Shelf Registration
Statement"), for the registration and resale under Rule 415 of the Securities
Act of 1933, as amended (the "Securities Act"), of the Transfer Restricted
Securities in accordance with the terms of the Resale Registration Rights
Agreement, dated as of June 25, 2002 (the "Registration Rights Agreement")
between the Issuer and the Purchasers named therein. A copy of the Registration
Rights Agreement is available from the Issuer upon request at the address set
forth below. All capitalized terms not otherwise defined herein have the meaning
ascribed thereto in the Registration Rights Agreement.

         Each beneficial owner of Transfer Restricted Securities is entitled to
the benefits of the Registration Rights Agreement. In order to sell or otherwise
dispose of any Transfer Restricted Securities pursuant to the Shelf Registration
Statement, a beneficial owner of Transfer Restricted Securities generally will
be required to be named as a selling securityholder in the related Prospectus,
deliver a Prospectus to purchasers of Transfer Restricted Securities and be
bound by those provisions of the Registration Rights Agreement applicable to
such beneficial owner (including certain indemnification provisions, as
described below).

         Certain legal consequences arise from being named as a selling
securityholder in the Shelf Registration Statement and the related Prospectus.
Accordingly, holders and beneficial owners of Transfer Restricted Securities are
advised to consult their own securities law counsel regarding the consequences
of being named or not being named as a selling securityholder in the Shelf
Registration Statement and the related Prospectus.

                                     NOTICE

         The undersigned beneficial owner (the "Selling Securityholder") of
Transfer Restricted Securities hereby gives notice to the Issuer of its
intention to sell or otherwise dispose of Transfer Restricted Securities
beneficially owned by it and listed below in Item 3 (unless otherwise specified
under Item 3) pursuant to the Shelf Registration Statement. The

                                      A-1

<PAGE>

undersigned, by signing and returning this Questionnaire, understands that it
will be bound by the terms and conditions of this Questionnaire and the
Registration Rights Agreement.

         Pursuant to the Registration Rights Agreement and subject to the terms
thereof, the undersigned has agreed to indemnify and hold harmless the Issuer,
the Issuer's directors, the Issuer's officers who sign the Shelf Registration
Statement and each person, if any, who controls the Issuer within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act, from
and against certain losses set forth therein arising in connection with
statements concerning the undersigned made in the Shelf Registration Statement
or the related Prospectus in reliance upon the information provided in this
Questionnaire.

         The undersigned hereby provides the following information to the Issuer
and represents and warrants that such information is accurate and complete:

                                  QUESTIONNAIRE

2.       Information Regarding Selling Securityholder

         (a)       Full legal name of Selling Securityholder: __________________

         (b)       Full legal name of registered holder (if not the same as (a)
                   above) through which Transfer Restricted Securities listed in
                   Item (3) below are held:
                   __________________________________________________________

         (c)       Full legal name of DTC participant (if applicable and if not
                   the same as (b) above) through which Transfer Restricted
                   Securities listed in Item (3) are held:
                   __________________________________________________

3.       Address for Notices to Selling Securityholders

         Telephone:  ____________________________

         Fax:  _________________________________

         Contact Person:  ________________________

4.       Beneficial Ownership of Transfer Restricted Securities

         (a)       Type of Transfer Restricted Securities beneficially owned,
                   and principal amount of Securities or number of Conversion
                   Shares, as the case may be, beneficially owned: _____________
                   __________________________________

         (b)       CUSIP No(s). of such Transfer Restricted Securities
                   beneficially owned: _________________________________________

                                      A-2









<PAGE>

5.       Beneficial Ownership of the Issuer's Securities Owned by the Selling
         Securityholder

         Except as set forth below in this Item (4), the undersigned is not the
beneficial or registered owner of any securities of the Issuer other than the
Transfer Restricted Securities listed above in Item (3) ("Other Securities").

         (a)   Type and amount of Other Securities beneficially owned by the
               Selling Securityholder: _________________________________________

         (b)   CUSIP No(s). of such Other Securities beneficially owned:

               _________________________________________________________________

6.       Relationship with the Issuer

         Except as set forth below, neither the undersigned nor any of its
affiliates, officers, directors or principal equity holders (5% or more) has
held any position or office or has had any other material relationship with the
Issuer (or its predecessors or affiliates) during the past three years.

         State any exceptions here: ____________________________________________

7.       Plan of Distribution

         Except as set forth below, the undersigned (including its donees or
pledgees) intends to distribute the Transfer Restricted Securities listed above
in Item (3) pursuant to the Shelf Registration Statement only as follows (if at
all). Such Transfer Restricted Securities may be sold from time to time directly
by the undersigned or, alternatively, through underwriters, broker-dealers or
agents. If the Transfer Restricted Securities are sold through underwriters or
broker-dealers, the Selling Securityholder will be responsible for underwriting
discounts or commissions or agent's commissions. Such Transfer Restricted
Securities may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of sale, at varying prices determined at
the time of sale, or at negotiated prices. Such sales may be effected in
transactions (which may involve crosses or block transactions):

                (i) on any national securities exchange or quotation service on
         which the Transfer Restricted Securities may be listed or quoted at the
         time of sale;

                (ii) in the over-the-counter market;

                (iii) in transactions otherwise than on such exchanges or
         services or in the over-the-counter market; or

                (iv)  through the writing of options, whether such options are
         listed on an options exchange or otherwise;

                (v)   ordinary brokers' transactions;

                                      A-3





<PAGE>

                (vi)   purchases by brokers, dealers or underwriters as
         principal and resale by these purchasers for their own accounts
         pursuant to this prospectus;

                (vii)  "at the market," to or through market makers, or into an
         existing market for our common stock;

                (viii) in other ways not involving market makers or established
         trading markets, including direct sales to purchasers or sales effected
         through agents;

                (ix)   through transactions in swaps or other derivatives (
         whether exchange-listed or otherwise); or

                (x)    to cover short sales.

         In connection with sales of the Transfer Restricted Securities or
otherwise, the undersigned may enter into hedging transactions with
broker-dealers, which may in turn engage in short sales of the Transfer
Restricted Securities and deliver Transfer Restricted Securities to close out
such short positions, or loan or pledge Transfer Restricted Securities to
broker-dealers that in turn may sell such securities.

         State any exceptions here:  ___________________________________________

         _______________________________________________________________________


         Note: In no event will such method(s) of distribution take the form of
an underwritten offering of the Transfer Restricted Securities without the prior
agreement of the Issuer.

8.       Instructions for Delivery of Questionnaire

         Please return the completed and executed Questionnaire to PG&E
Corporation at:

                                   PG&E Corporation
                                   One Market, Spear Tower
                                   Suite 2400
                                   San Francisco, CA  94105
                                   Attention: Assistant Treasurer

9.       Acknowledgments

         By signing below, the undersigned consents to the disclosure of the
information contained herein in its answers to items (1) through (7) above and
the inclusion of such information in the Shelf Registration Statement and the
related Prospectus. The undersigned understands that such information will be
relied upon by the Issuer in connection with the preparation or amendment of the
Shelf Registration Statement and the related Prospectus.

                                      A-4

<PAGE>

         IN WITNESS WHEREOF, the undersigned, by authority duly given, has
caused this Questionnaire to be executed and delivered either in person or by
its duly authorized agent.

                                           Beneficial Owner

                                           By: ________________________________
                                               Name:
                                               Title:
                                               Date:

                                      A-5

</TEXT>
</DOCUMENT>
</SUBMISSION>
