Operating Agreement of Hardy Storage Company, LLC Dated as of November 12, 2004

Exhibit 10.3

Operating Agreement

of
Hardy Storage Company, LLC

Dated as of November 12, 2004

The Membership Interests represented by this Agreement have been acquired for investment and were issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), or under the securities laws of any state. Membership Interests may not be sold, pledged, hypothecated, or otherwise transferred at any time except (i) in accordance with the restrictions contained in this Agreement, as amended from time to time, and (ii) pursuant to an effective registration statement or exemption from registration under the Securities Act and any applicable state securities laws.

1

Operating Agreement
of
Hardy Storage Company, LLC

Table of Contents

1. DEFINITIONS AND CONSTRUCTION.

1.1 Definitions
1.2 Construction.

2. FORMATION AND PURPOSE OF THE COMPANY.

3. MEMBERSHIP; DISPOSITION OF INTERESTS.

4. COVENANTS, REPRESENTATIONS AND WARRANTIES; INFORMATION.

5. CAPITAL CONTRIBUTIONS.

5.1 Pre-Execution Date Expenditures.
5.2 Required Capital Contributions.
5.3 Failure of a Member Other than Operator’s Affiliate to Make Required Capital Contributions.

6. ALLOCATIONS AND DISTRIBUTIONS.

7. MANAGEMENT.

8. OPERATION OF THE FACILITIES.

8.1 Operator.

9. INDEMNIFICATION.

10. TAXES.

11. BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS.

12. INSPECTION.

12.1 Inspection of Facilities and Records.

13. BANKRUPTCY OF A MEMBER.

13.1 Bankrupt Members.

14. DISSOLUTION, LIQUIDATION, AND TERMINATION.

15. GENERAL PROVISIONS.

Appendix A – Articles of Organization
Appendix B – Sharing Ratios
Appendix C – Description of Initial Facilities
Appendix D – Pre-Execution Date Expenditures
Appendix E – Phase I Capital Budget
Appendix F – Phase II Capital Budget
Appendix G – Phase III Capital Budget
Appendix H – CO&M Agreement

Appendix I – Corporation Documents

2 This Operating Agreement (“Agreement”) of Hardy Storage Company, LLC, a West Virginia limited liability company (“Company”), is executed and agreed to by the Members (as defined below) as of November 12, 2004.

1. DEFINITIONS AND CONSTRUCTION.

The terms defined in this Section 1 shall, for all purposes of this Agreement, have the meanings set forth below:

1.1 Definitions

1.1.6. “Agreement” is defined in the Preamble.

The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Treasury Regulations. In the event the Management Committee shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with such Treasury Regulations, the Management Committee may make such modification, provided that it is not likely to have a material effect on the amounts distributed to any Person pursuant to Section 14 hereof upon the dissolution of the Company.

1.1.18. “Columbia Hardy” means Columbia Hardy Corporation, a Delaware corporation.

1.1.19. “Company” is defined in the preamble to this Agreement.

1.1.28. “Execution Date” means November 12, 2004.

provided that an adjustment pursuant to clauses (i) and (ii) above shall be made only if the Management Committee reasonably determines that such adjustment is necessary to reflect the relative economic interests of the Members in the Company;

1.1.40. “Initial Members” has the meaning set forth in Section 3.1.

1.1.42. “Loan” means any loan made by a Member to the Company.

1.1.43. “Losses” has the meaning set forth in Section 1.1.70.

1.2 Construction. Whenever the context requires, the gender of all words used in this Agreement includes the masculine, feminine and neuter. All references to Sections refer to sections of this Agreement (unless the context clearly indicates otherwise), and all references to Appendices are to Appendices attached to this Agreement, each of which is made a part hereof for all purposes.

2. FORMATION AND PURPOSE OF THE COMPANY.

2.1 Formation. The Company has been organized as a West Virginia limited liability company by the filing of the Articles of Organization pursuant to the Act with the West Virginia Secretary of State.

2.2 Name. The name of the Company is “Hardy Storage Company, LLC.”

2.3 Registered Office, Registered Agent. The registered agent and office shall be as set forth in the Articles of Organization or as subsequently designated by the Company, subject to the requirements of the Act.

2.4 Offices. The principal offices of the Company shall be at such place as the Members may from time to time determine. Notice of any change in such offices shall be given to each Member by the Management Committee. The Company may have such other offices as the Members may designate from time to time.

2.5 Purposes. The purposes of the Company shall be to plan, design, develop, construct, own, lease and provide for the operation and maintenance of the Facilities and conduct such business activities that are necessary or incidental in connection therewith.

2.6 Foreign Qualification. To the extent required by law, the Members shall cause the Company to qualify to transact business in any jurisdictions in which such qualification may be required. At the request of the Management Committee, each Member shall execute, acknowledge, swear to, and deliver all certificates and other instruments conforming with this Agreement that are necessary or appropriate to qualify, continue, and terminate the Company as a foreign limited liability company in all such jurisdictions.

2.7 Term. The Company commenced on March 12, 2004 and shall continue in existence until the latest date on which the Company is to dissolve as may be provided in the Articles of Organization or until such earlier date as the Company may be dissolved as provided in this Agreement.

2.8 No State Law Partnership. The Members intend that (a) the Company shall not be a partnership (including, without limitation, a limited partnership) or joint venture other than for federal or state income tax purposes, (b) no Member or Manager shall be a partner or joint venturer of any other Member or Manager as a result of this Agreement for any purposes other than federal and state tax purposes, and (c) this Agreement shall not be construed to suggest otherwise.

3. MEMBERSHIP; DISPOSITION OF INTERESTS.

3.1 Initial Members. The initial Members of the Company are Columbia Hardy and Piedmont Hardy.

3.2 Restrictions on the Disposition of an Interest.

3.2.3. Transfers Generally.

3.2.4. Transfers by Member Transferees.

3.3 Additional Members. Any Person who receives a Membership Interest pursuant to Section 3.2.2, 3.2.3, or 3.2.4 shall be admitted to the Company as a Member upon consummation of such transfer. Except as set forth in the previous sentence, no Person shall be admitted to the Company as a Member, and Membership Interests shall not be created or issued for such purpose, unless such admission is approved by the Supermajority Vote of all then existing Members and is followed by compliance with Section 3.2.6. Any admission shall become effective only after the new Member has executed and delivered to the other Members a document including the new Member’s notice address, its agreement to be bound by this Agreement and its representation and warranty that the representations and warranties in Section 4.4 are true and correct with respect to the new Member.

3.4 Limit on Encumbrances. Except as may be required by the lenders in connection with the Financing Commitment, each Member shall be prohibited from pledging, granting a security interest in, or otherwise encumbering its Membership Interest or granting any option or contingent right of purchase with respect thereto, whether in whole or in part, without the prior written approval of the Members by Supermajority Vote.

4. COVENANTS, REPRESENTATIONS AND WARRANTIES; INFORMATION.

4.1 Commitment to Construct the Facilities.

In any case in which Columbia Hardy’s initial vote under this Section 4.1.2 would require it to purchase the Membership Interest of Piedmont Hardy, Columbia Hardy shall have the right within seven (7) days following the initial vote to change its vote to agree with the vote of Piedmont Hardy. In any case in which Piedmont Hardy’s initial vote under this Section 4.1.2 would require it to surrender its Membership Interest to Columbia Hardy, Piedmont Hardy shall have the right within seven (7) days following the initial vote to change its vote to agree with the vote of Columbia Hardy. In the event Columbia Hardy shall be obligated under (iv) or (viii) of this Section 4.1.2 or elects under (iii) or (vii) of this Section 4.1.2 to purchase the Membership Interest of Piedmont Hardy, then as of the date of the vote which resulted in the event, Columbia Hardy will be deemed to have succeeded to all of the rights of Piedmont Hardy under this Agreement, other than the right to pro rata payments upon a dissolution prior to the In-Service Date, and Columbia Hardy will have the obligation to purchase Piedmont Hardy’s Membership Interest for the purchase price specified, which purchase price will be paid at closing. Closing on such purchase shall occur, if and only if the In-Service Date occurs, and will take place on the date and at the location mutually agreed, but in no event more than twenty-one (21) calendar days after the In-Service Date. In the event Columbia Hardy shall be obligated under (xiii) of this Section 4.1.2 to purchase the Membership Interest of Piedmont Hardy, then as of the date of the vote which resulted in the event, Columbia Hardy will be deemed to have succeeded to all of the rights of Piedmont Hardy under this Agreement and Columbia Hardy will have the obligation to purchase Piedmont Hardy’s Membership Interest for the purchase price specified, which purchase price will be paid at closing. Closing on such purchase shall occur on the date and at the location mutually agreed, but in no event more than one year after the date of the vote which resulted in Columbia Hardy’s obligation to purchase Piedmont Hardy’s Membership Interest. At any closing under this Section 4.1.2, in addition to the purchase price payable by Columbia Hardy, Columbia Hardy will also pay Piedmont Hardy interest on the purchase price from the date of the vote to the date of payment at a rate equal to the prime rate (as the same may change from time to time) of Wachovia Bank, N.A. (or its successor). At any closing under this Section 4.1.2, Piedmont Hardy will deliver to Columbia Hardy its Membership Interest free and clear of all liens. Upon the occurrence of a final vote which requires Columbia Hardy to purchase Piedmont Hardy’s Membership Interest under this Section 4.1.2, then, as of the date of such final vote, Columbia Hardy’s Sharing Ratio will be adjusted to include Piedmont Hardy’s Sharing Ratio for all purposes other than a dissolution that occurs before the In-Service Date and a new Appendix B shall be provided to the Members. Columbia Hardy’s obligation under this provision to buy Piedmont Hardy’s Membership Interest will be considered a capital contribution obligation of Columbia Hardy for purposes of that certain Equity Contribution Agreement of even date herewith between the Parents of the Initial Members.

4.2 Development of a Modification.

4.3 Commitment to Construct a Modification.

4.4 General Representations and Warranties. Each Member hereby represents and warrants to the Company and to each other Member that as of the date of its admission as a Member:

4.5 Regulatory Status. Each Member acknowledges that the Company will be a “natural gas company” under the Natural Gas Act and that the Company will be subject to all applicable laws, rules, regulations and orders of any regulatory authority having jurisdiction.

4.6 Governmental Applications. Each Member agrees to support the Company in securing the Necessary Regulatory Approvals, including, without limitation, preparing, filing and prosecuting the FERC Application.

4.7 Information.

4.8 Liability to Third Parties. No Member or Manager shall be liable for the debts, obligations or liabilities of the Company by reason of being a Member or Manager or both, and does not become so liable by participating, in whatever capacity, in the management or control of the business of the Company.

4.9 Withdrawal. A Member does not have the right or power to unilaterally withdraw from the Company.

4.10 Lack of Authority. Except as otherwise specifically provided herein, no Member or Manager has the authority or power to act for or on behalf of the Company, to do any act that would be binding on the Company, or to incur any expenditures on behalf of the Company.

4.11 Reasonable and Necessary Efforts. Each Member shall devote such efforts as shall be reasonable and necessary to develop and promote the business of the Company, taking into account its respective Sharing Ratio, resources and expertise.

4.12 No Personal Gain to Members. The credit and the assets of the Company shall be used solely for the benefit of the Company and shall not be used to further the personal gain of any Member. No asset of the Company shall be transferred or encumbered for, or in payment of, any individual obligation of a Member.

5. CAPITAL CONTRIBUTIONS.

5.1 Pre-Execution Date Expenditures.

5.2 Required Capital Contributions.

(b) The Members hereby agree and obligate themselves to fund the Phase II Capital Budget. On the first day of each month during each Fiscal Year covered by the Phase II Capital Budget, each Member shall make a Capital Contribution equal to (x) its Sharing Ratio times (y) the total amount that is anticipated to be expended through the end of that month, provided that such amount is not more than 110% of the amount that was expected to be expended under the Phase II Capital Budget through such date, after giving credit for any prior Capital Contributions made under this Section 5.2.1(b). All amounts received by the Company during a quarter pursuant to this Section 5.2.1(b), whether received prior to, on or after the first day of that quarter, shall be credited to the respective Member’s Capital Account as of the first day of that quarter.

(c) If the Initial Members agree to fund the Phase III Capital Budget pursuant to Section 4.1.2, then, on the first day of each month during each Fiscal Year covered by the Phase III Capital Budget, each Member shall make a Capital Contribution equal to (x) its Sharing Ratio times (y) the total amount that is anticipated to be expended through the end of that month, provided that such amount is not more than 110% of the amount that was expected to be expended under the Phase III Capital Budget through such date, after giving credit for any prior Capital Contributions made under this Section 5.2.1(c). All amounts received by the Company in a quarter pursuant to this Section 5.2.1(c), whether received prior to, on or after the first day of that quarter, shall be credited to the respective Member’s Capital Account as of the first day of that quarter.

(d) With respect to any Capital Contributions not provided for in Sections 5.2.1(a), (b) or (c), the Members by Supermajority Vote shall issue or cause to be issued a written request to each Member for the making of Capital Contributions at such times and in such amounts as the Members shall so approve. All amounts received by the Company pursuant to this Section 5.2.1(d), whether received prior to, on or after the date specified in Section 5.2.2(d), shall be credited to the respective Member’s Capital Account as of such specified date.

(e) All amounts received from a Member after the date specified in this Section 5.2 shall be accompanied by interest on such overdue amounts (and the default shall not be cured unless such interest is also received by the Company), which interest shall be payable to the Company and shall accrue from and after such specified date at the Default Rate. Any such interest paid with respect to a Capital Contribution shall be credited to the respective Capital Accounts of the Members, on a pro rata basis in proportion to their respective Sharing Ratios as of the date such payment is made to the Company after giving effect to the payment of that Capital Contribution with respect to which such interest accrued.

5.3 Failure of a Member Other than Operator’s Affiliate to Make Required Capital Contributions. If one or more Members other than the Operator’s Affiliate becomes a Capital Defaulting Member, the Company, the Operator or any Capital Non-Defaulting Member shall be entitled to give written notice of default to the Capital Defaulting Members, with a copy to all Capital Non-Defaulting Members. If there are any Capital Defaulting Members other than the Operator’s Affiliate who do not pay all amounts due within ten (10) calendar days after such notice is given, the Operator (who shall be deemed to have authority from the Management Committee) shall be entitled to take any of the following actions (separately or in combination, to the extent that combination of actions is not inconsistent):

5.4 Failure of the Affiliate of Operator to Make a Required Capital Contribution. If an Affiliate of the Operator becomes a Capital Defaulting Member, any Capital Non-Defaulting Member shall be entitled to give written notice of default to the Capital Defaulting Members, with a copy to all Capital Non-Defaulting Members. If there are any Capital Defaulting Members in addition to the Affiliate of the Operator, the Capital Non-Defaulting Members may take any of the actions permitted under Section 5.3 with respect to the Capital Defaulting Members who are not Affiliates of the Operator. In addition, if the Operator’s Affiliate does not pay all amounts due within ten (10) calendar days after such notice is given, the Capital Non-Defaulting Members shall be entitled to take any of the following actions (separately or in combination, to the extent that combination of actions is not inconsistent) with respect to the Capital Defaulting Member that is an Affiliate of the Operator:

5.5 Loans.

5.6 Voluntary Contributions. No Member shall be required or permitted to make any Capital Contributions or Loans to the Company except pursuant to this Section 5.

5.7 Return of Contributions. A Member is not entitled to the return of any part of its Capital Contributions or to be paid interest in respect of either its Capital Account or its Capital Contributions. An unreturned Capital Contribution is not a liability of the Company or of any Member. A Member is not required to contribute or to lend any cash or property to the Company to enable the Company to return a Member’s Capital Contributions.

5.8 Capital Accounts. A Capital Account shall be established and maintained for each Member in accordance with the Code and the Treasury Regulations. A Member that has more than one Membership Interest shall have a single Capital Account that reflects all of its Membership Interests, regardless of any class of Membership Interests owned by that Member and regardless of the time or manner in which those Membership Interests were acquired.

6. ALLOCATIONS AND DISTRIBUTIONS.

6.1 Allocations of Profits and Losses.

6.2 Tax Allocations.

6.2.2. Special Rules.

6.3 Withholding. The Company is authorized to withhold from distributions to a Member, or with respect to allocations to a Member, and to pay over to a federal, state or local government, any amounts required to be withheld pursuant to the Code, or any provisions of any other federal, state or local law. Any amounts so withheld shall be treated as having been distributed to such Member pursuant to this Section 6 for all purposes of this Agreement, and shall be offset against the current or next amounts otherwise distributable to such Member.

6.4 Distributions.

7. MANAGEMENT.

7.1 Voting by Members and Management Committee.

(e) Collecting sums due the Company;

(i) Obtaining insurance for the Company;

(k) Establishing a corporate seal for the Company;

(m) Investing funds of the Company;

(d) Electing to dissolve the Company;

(f) Approving any matter pursuant to Section 3.3;

(g) Approving any matter pursuant to Section 5.1.2;

(v) Changing the name of the Company;

7.2 Removal, Resignation and Replacement of Managers. Each Member, in its sole discretion, may at any time and for any reason remove or replace any Manager (including an alternate) appointed by it. Each Manager shall hold office for the term for which he or she is appointed and thereafter until his or her successor shall have been appointed and qualified, or until his or her earlier death, resignation or removal. A Manager may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of its receipt by the remaining Managers. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. Upon the resignation of a Manager, the Member appointing that Manager shall have the right to designate another Manager. Managers need not be residents of West Virginia.

7.3 Meetings by the Management Committee. The Management Committee shall meet at least quarterly. Special meetings of the Management Committee may be called from time to time by any Manager, and the Manager who does so shall be responsible for the agenda and minutes of such meeting. Except as otherwise provided in this Agreement, or as waived in writing by the Managers, each Manager shall be given at least ten (10) calendar days prior written notice of any meeting of the Management Committee. Such notice shall contain the time and place of such meeting, along with an agenda of items to be discussed and/or voted on at such meeting. A quorum shall consist of Managers or their alternates representing at least two (2) Members and a majority of the Sharing Ratios of the Members.

7.4 Action by Written Consent or Telephone Conference. Any action permitted or required by the Act, the Articles of Organization or this Agreement to be taken at a meeting of the Members or the Management Committee may be taken without a meeting if a consent in writing, setting forth the action to be taken, is signed by all the Members or the Managers, as the case may be. Such consent shall have the same force and effect as a unanimous consent at a meeting and may be stated as such in any document or instrument filed with the Secretary of State of West Virginia, and the execution of such consent shall constitute attendance or presence in person at a meeting of the Members or Management Committee, as the case may be. Subject to the requirements of the Act, the Articles of Organization or this Agreement for notice of meetings, unless otherwise restricted by the Articles of Organization, Members or the Management Committee, may participate in and hold a meeting of the Members or Management Committee, as the case may be, by means of a conference telephone or similar communications equipment by means of which all Persons participating in the meeting can hear each other, and participation in such meeting shall constitute attendance and presence at such meeting, except where a Person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

7.5 Compensation. A Manager shall receive no compensation for services rendered to the Company in that capacity. Officers and agents of the Company shall receive such compensation as approved by the Management Committee.

7.6 Operating Budgets. The Management Committee shall cause the Operator, under the CO&M Agreement, to annually prepare an Operating Budget. In the event that a subsequent Operating Budget is not approved in its entirety, any approved line items of such Operating Budget shall go into effect, all other line items shall be deemed to be increased by the lesser of the percentage that is agreed upon by the Management Committee or three percent (3%) from the level specified in the prior Operating Budget, with the exception of Capital Contributions which shall not automatically increase, and such prior Operating Budget, as so adjusted pursuant to the terms of this sentence, shall be effective until the end of the Fiscal Year to which it applies.

7.7 Financing Committee. Within 30 days after the execution of this Agreement, each Initial Member shall designate a representative to serve on the Financing Committee. The Financing Committee shall arrange for the Financing Commitment and present it to the Management Committee for consideration. Within thirty (30) days after the presentation of the proposed Financing Commitment, the Management Committee shall vote on whether to accept or reject it.

7.8 Conflicts of Interest. Except as otherwise provided in this Agreement, each Member at any time and from time to time may engage in and possess interests in other business ventures of any and every type and description, independently or with others, including business ventures in competition with the Company, with no obligation to offer to the Company or any other Member the right to participate therein. The Company may enter into the CO&M Agreement and, in addition, may transact business with any Member or Affiliate thereof provided that without the approval of the Management Committee the aggregate cost to the Company of such business transaction shall not exceed $100,000 annually.

8. OPERATION OF THE FACILITIES.

8.1 Operator. The Company intends to enter into a CO&M Agreement with the Operator in the form attached hereto as Appendix H. The Members may, at any time, upon a Supermajority Vote, agree to an amendment to the CO&M Agreement provided that the Operator concurs therewith. In the event that such CO&M Agreement is terminated pursuant to the terms thereof or the Operator ceases to serve as Operator in accordance with the terms of the CO&M Agreement, Piedmont Hardy, if it is still a Member, may designate its Affiliate the successor Operator. If neither Columbia Hardy or its Affiliate, nor Piedmont Hardy or its Affiliate is still a Member, the Members may, upon a Supermajority Vote, appoint a successor Operator. Any successor Operator selected pursuant to this Agreement shall execute and be bound by an agreement substantially in the form of the CO&M Agreement existing immediately prior to such execution.

9. INDEMNIFICATION.

9.1 Right to Indemnification. Subject to the limitations and conditions as provided in Section 9, each person who was or is made a party or is threatened to be made a party to or is involved in any Proceeding, or any appeal in such a Proceeding or any inquiry or investigation that could lead to such a Proceeding, by reason of the fact that he or she, or a Person of whom he or she is legal Manager, is or was a Manager of the Company or while Manager of the Company is or was serving at the request of the Company as a Manager, director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic limited liability company, corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise shall be indemnified by the Company to the fullest extent permitted by the Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment) against judgments, penalties (including excise and similar taxes and punitive damages), fines, settlements and reasonable expenses (including, without limitation, attorneys’ fees) actually incurred by such Person in connection with such Proceeding, and indemnification under Section 9 shall continue as to a Person who has ceased to serve in the capacity which initially entitled such Person to indemnity hereunder. The rights granted pursuant to Section 9 shall be deemed contract rights and no amendment, modification or repeal of Section 9 shall have the effect of limiting or denying any such rights with respect to actions taken or Proceedings arising prior to any such amendment, modification or repeal. It is expressly acknowledged that the indemnification provided in Section 9 could involve indemnification for negligence or under theories of strict liability.

9.2 Advance Payment. The right to indemnification conferred in Section 9 shall include the right to be paid or reimbursed by the Company the reasonable expenses incurred by a Person of the type entitled to be indemnified under Section 9.1 who was, is or is threatened to be made a named defendant or respondent in a Proceeding in advance of the final disposition of the Proceeding and without any determination as to the Person’s ultimate entitlement to indemnification, provided that the payment of such expenses incurred by any such Person in advance of the final disposition of a Proceeding shall be made only upon delivery to the Company of a written affirmation by such Person of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification under Section 9 and a written undertaking, by or on behalf of such Person, to repay all amounts so advanced if it shall ultimately be determined that such indemnified Person is not entitled to be indemnified under Section 9 or otherwise.

9.3 Indemnification of Agents. The Company, by adoption of a resolution of the Management Committee, may indemnify and advance expenses to an agent of the Company to the same extent and subject to the same conditions under which it may indemnify and advance expenses to Managers under Section 9; and, the Company may indemnify and advance expenses to Persons who are not or were not Managers or agents of the Company but who are or were serving at the request of the Company as a Manager, director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic limited liability company, corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise against any liability asserted against him or her and incurred by him or her in such a capacity or arising out of his or her status as such a Person to the same extent that it may indemnify and advance expenses to Managers under Section 9.

9.4 Indemnification by the Members. To the fullest extent permitted by law, each Member shall indemnify the Company, each Manager and each other Member and hold them harmless from and against all losses, costs, liabilities, damages, and expenses (including, without limitation, costs of suits and attorney’s fees) they may incur on account of any breach by that Member of this Agreement.

9.5 Appearance as a Witness. Notwithstanding any other provisions of Section 9, upon approval by the Members, the Company shall pay or reimburse expenses incurred by a Member in connection with that Member or Member’s Manager or other employee’s appearance as a witness or other participation in a Proceeding at a time when that Member or Member’s Manager is not a named defendant or respondent in the Proceeding.

9.6 Nonexclusivity of Rights. The right to indemnification and the advancement and payment of expenses conferred in Section 9 shall not be exclusive of any other right which a Manager or other Person indemnified pursuant to Section 9.3 may have or hereafter acquired under any law (common or statutory), provision of the Articles of Organization or this Agreement, other agreements, votes of Members or otherwise.

9.7 Insurance. Unless the Members otherwise determine by Supermajority Vote, each Member shall maintain its own insurance for the benefit of any Member or any Manager acting in his or her capacity as a Member or Manager, and the Company shall not be required to obtain any such insurance for the benefit of any Member or any Manager acting in his or her capacity as a Member or Manager.

9.8 Member Notification. To the extent required by law, any indemnification of or advance of expenses to a Manager in accordance with Section 9 shall be reported in writing to the Members with or before the notice or waiver of notice of the next Members’ meeting or with or before the next submission to Members of a consent to action without a meeting and, in any case, within the 12 month period immediately following the date of the indemnification or advance.

9.9 Savings Clause. If Section 9 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify and hold harmless each Manager or any other Person indemnified pursuant to Section 9 as to costs, charges and expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceedings, whether civil, criminal, administrative or investigative, to the full extent permitted by any applicable portion of Section 9 that shall not have been invalidated and to the full extent permitted by applicable law.

10. TAXES.

10.1 Tax Returns. The Tax Matters Partner shall supervise the preparation and filing of all tax and information returns which the Company may be required to file and shall, on behalf of the Company, make such tax elections and determinations as are reasonably necessary, appropriate or desirable and consistent with Section 10.4. Each Member shall furnish to the Company all pertinent information that is in the possession of such Member and is necessary to enable such returns to be prepared and filed. Copies of the tax returns, together with any schedules or other information that each Member may require in connection with preparation of such Member’s own tax affairs, shall be furnished to the Members within ninety (90) calendar days after the end of each Fiscal Year. The Company shall bear the costs of preparing, filing and distributing any tax returns.

10.2 Tax Status. Unless the Initial Members vote pursuant to Section 4.1.1 to file the FERC Application as an entity taxed as a partnership, then by no later than March 15, 2005, the Members agree that they will reform the Company as a corporation and adopt and execute the corporate documents attached as Appendix I to this Agreement.

10.3 Tax Matters. The Tax Matters Partner shall provide each Member with prompt notice of the initiation of all tax examinations or proceedings, shall thereafter promptly provide copies of all written information issued by or delivered to Governmental Authorities in connection with any such examinations or proceedings, and shall further provide each Member with prompt, reasonable, and continuous opportunity to review and provide comment with respect to the subject matter of each such examination or proceedings. Each Member agrees to cooperate fully with the Tax Matters Partner and to do or refrain from doing any and all things reasonably required by the Tax Matters Partner to conduct such proceedings. Subject to the terms hereof, the Tax Matters Partner shall not have the right to settle any audit or examination without first consulting with and receiving approval of a majority of the Members.

10.4 Tax Elections.

The Company shall make the following elections on the appropriate tax returns for income tax purposes:

11. BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS.

11.1 Maintenance of Books and Records. The Company shall maintain the following accurate and complete records at the Principal Office or at such other locations as may be provided by the Members:

(f) books and records of the Company; and

The Company shall delegate responsibility for maintaining such records to the Operator pursuant to the CO&M Agreement.

11.2 Accounting Basis. Books and records of the Company shall be maintained on an accrual accounting basis, and (except for federal and state income tax purposes) the Company’s net profit or net loss shall be determined on the basis of the Fiscal Year and in accordance with GAAP consistently applied.

11.3 Financial Reports. The Management Committee shall cause the following financial statements to be prepared, in each case in accordance with GAAP consistently applied on a consolidated and consolidating (i.e., by line of business) basis, but unaudited except in the case of the reports called for in Section 11.3(d), and shall cause to be delivered to each Person who was a Member during the applicable period described below:

11.4 Fiscal Year. The Fiscal Year of the Company shall end on December 31 unless otherwise required by the Code or approved by a Supermajority Vote of the Members.

11.5 Record of Capital Accounts. The Company shall maintain a record of each Member’s Capital Account in accordance with Section 5.8.

11.6 Other Notices. The Company shall notify each Member in writing of any of the following immediately upon learning of the occurrence thereof, describing the same and, if applicable, the steps being taken by the Company with respect thereto:

11.7 Governmental Reports. The Operator shall prepare and file, or cause to be prepared and filed, all reports prescribed or required by the FERC or any other Governmental Authority having jurisdiction over the Company.

11.8 Cost of Preparing and Distributing Reports. The Company shall bear the costs of (1) preparing and distributing the tax returns described in Section 10.1 and any reports required or permitted in Sections 11.3 and 11.7, and (2) legal, accounting, and other fees and expenses reasonably incurred by the Tax Matters Partner.

11.9 Accounts. The Management Committee shall cause to be established and maintained one or more separate bank and investment accounts and arrangements for Company funds in the Company’s name with financial institutions and firms that the Management Committee determines. The Company’s funds may not be commingled with the funds of any Member.

11.10 Annual Field Performance Review. Not later than June 15 of each year, the Operator shall prepare and deliver to each Member a report on the Facilities’ performance during the prior injection and withdrawal seasons.

11.11 Annual Stored Natural Gas Inventory Integrity Analysis. Not later than March 15 of each year, the Operator shall prepare and deliver to each Member a report and analysis of the results of the Facilities’ semi-annual shut-in pressure tests. The Operator shall include in the analysis an evaluation of the integrity of the stored natural gas inventory.

12. INSPECTION.

12.1 Inspection of Facilities and Records. Subject to the provisions of Section 4.7, each Member shall have the right at all reasonable times during usual business hours upon providing reasonable notice to the Operator to inspect the Facilities and other properties of the Company and to audit, examine and make copies of the books of account and other records of the Company. Such right may be exercised through any agent or employee of such Member designated in writing by it or by an independent public accountant, engineer, attorney or other consultant so designated. The Member making the request shall bear all reasonable costs and expenses incurred by such Member, the Company or the Operator in connection with any inspection, examination or audit made on such Member’s behalf.

13. BANKRUPTCY OF A MEMBER.

13.1 Bankrupt Members. If any Member takes or becomes subject to any of the actions described in Section 31B-6-601(7) of the Act, that Person ceases to be a Member of the Company. The successor in interest to that Person holds that Person’s Membership Interest in the capacity of a non-Member with none of the rights and powers of a Member except the right to such Person’s Profits, Losses and Distributions.

14. DISSOLUTION, LIQUIDATION, AND TERMINATION.

14.1 Dissolution. The Company shall dissolve and its affairs shall be wound up on the first to occur of the following:

(a) the unanimous written consent of the Members;

(b) the time, if any, specified in the Articles of Organization;

(c) under the circumstances specified in Section 4.1.2;

(d) pursuant to Section 7.1.4(d); and

14.2 Liquidation and Termination. On dissolution of the Company, the Members shall act as liquidator or may appoint one or more Members as liquidator. The liquidator shall proceed diligently to wind up the affairs of the Company and make final distributions as provided herein and in the Act. The costs of liquidation shall be borne as a Company expense. Until final distribution, the liquidator shall continue to operate the Company properties with all of the power and authority of the Members. The steps to be accomplished by the liquidator are as follows:

The distribution of cash and/or property to a Member in accordance with the provisions of this Section 14.2 constitutes a complete return to the Member of its Capital Contributions and a complete distribution to the Member of its Membership Interest and all the Company’s property and constitutes a compromise to which all Members have consented. To the extent that a Member returns funds to the Company, it has no claim against any other Member for those funds.

14.3 Deficit Capital Accounts. Notwithstanding anything to the contrary contained in this Agreement, and notwithstanding any custom or rule of law to the contrary, to the extent that the deficit, if any, in the Capital Account of any Member results from or is attributable to deductions and Losses of the Company (including non-cash items such as depreciation), or distributions of money pursuant to this Agreement to all Members in proportion to their respective Sharing Ratios, upon dissolution of the Company such Members shall not be obligated to contribute such amount to the Company to bring the balance of such Member’s Capital Account to zero.

14.4 Articles of Termination. On completion of the distribution of Company assets as provided herein, the Company is terminated, and the Company will file articles of termination with the West Virginia Secretary of State as permitted by Section 31B-8-805 of the Act, cancel any other filing made pursuant to Sections 2.3 or 2.6, and take such other actions as may be necessary to terminate the Company.

15. GENERAL PROVISIONS.

15.1 Offset. Whenever the Company is to pay any sum to any Member, any amounts that Member owes the Company may be deducted from that sum before payment.

15.2 Notices. Except as expressly set forth to the contrary in this Agreement, all notices, requests, or consents provided for or permitted to be given under this Agreement must be in writing. Notices and other communications will be deemed to have been given (a) on the date when delivered by hand or by means of electronic transmission (and followed by electronic confirmation of receipt), (b) on the date after the day when deposited for delivery with a nationally recognized air courier, or (c) on the third Business Day after being deposited in the United States mail, postage prepaid return receipt requested. All notices, requests, and consents to be sent to a Member must be sent to or made at the addresses given for that Member on the signature pages of this Agreement, or such other address as that Member may specify by notice to the other Members. Any notice, request, or consent to the Company must be given to the Management Committee at the address designated by the Company pursuant to Section 2.4. Whenever any notice is required to be given by law, the Articles of Organization or this Agreement, a written waiver thereof, signed by the Person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice.

15.3 Entire Agreement. This Agreement constitutes the entire agreement of the Members and their Affiliates relating to the Company and supersedes all prior contracts or agreements with respect to the Company, whether oral or written.

15.4 Effect of Waiver or Consent. A waiver or consent, express or implied, to or of any breach or default by any Person in the performance by that Person of its obligations with respect to the Company is not a consent or waiver to or of any other breach or default in the performance by that Person of the same or any other obligations of that Person with respect to the Company. Failure on the part of a Person to complain of any act of any Person or to declare any Person in default with respect to the Company, irrespective of how long that failure continues, does not constitute a waiver by that Person of its rights with respect to that default until the applicable statute-of-limitations period has run.

15.5 Amendment or Modification. This Agreement may be amended or modified from time to time only by a written instrument adopted by at least a Supermajority Vote of the Members, provided that no amendment or modification having a material affect on the rights or obligations of a Member shall be adopted without the written consent of such Member. No amendment or modification of this Agreement shall be deemed to exist as the result of any oral statement, action, waiver or delay by a Member or group of Members on any occasion(s).

15.6 Binding Effect. Subject to the restrictions on Dispositions set forth in this Agreement, this Agreement is binding on and inures to the benefit of the Members and their respective heirs, legal Managers, successors and assigns.

15.7 Specific Performance and Injunctive Relief. The parties acknowledge and agree that any breach or violation of this Agreement has the potential to cause irreparable and continuing harm that cannot be adequately cured or remedied by monetary damages alone. In recognition of the foregoing, the parties hereby agree that the remedies for breach or violation of this Agreement shall include, without limitation, the remedies of specific performance and injunctive relief. In any action, suit or other proceeding involving the enforcement of this Agreement, each party hereby waives all rights to claim or assert that monetary damages alone constitute a sufficient remedy, or that specific performance or injunctive relief should be denied. Each party agrees that the preceding waiver is irrevocable and unconditional, and shall have the broadest possible scope and application.

15.8 Governing Law; Severability. THIS AGREEMENT IS GOVERNED BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF WEST VIRGINIA, EXCLUDING ANY CONFLICTS-OF-LAW RULE OR PRINCIPLE THAT MIGHT REFER THE GOVERNANCE OR THE CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF ANOTHER JURISDICTION. In the event of a direct conflict between the provisions of this Agreement and (a) any provision of the Articles of Organization, or (b) any mandatory provision of the Act, the applicable provision of the Articles of Organization or the Act shall control. If any provision of this Agreement or the application thereof to any Person or circumstance is held invalid or unenforceable to any extent, the remainder of this Agreement and the application of that provision to other Persons or circumstances is not affected thereby and that provision shall be enforced to the greatest extent permitted by law.

15.9 No Third Party Beneficiaries. Except for the right of Persons to seek indemnification under Section 9 of this Agreement, nothing in this Agreement shall provide any benefit to any third party or entitle any third party to any claim, cause of action, remedy or right of any kind, it being the intent of the Members that this Agreement shall not be construed as a third party beneficiary contract.

15.10 Creditors.

None of the provisions of this Agreement shall be for the benefit of or shall be enforceable by any Person in its capacity as a creditor of the Company.

15.11 Further Assurances. In connection with this Agreement and the transactions contemplated hereby, each Member shall execute and deliver any additional documents and instruments and perform any additional acts that may be necessary or appropriate to effectuate and perform the provisions of this Agreement and those transactions.

15.12 Notice to Members of Provisions of this Agreement. By executing this Agreement, each Member acknowledges that it has actual notice of (a) all of the provisions of this Agreement, including, without limitation, the restrictions on the transfer or Disposition of Membership Interests set forth in Section 3 and (b) all of the provisions of the Articles of Organization. Each Member hereby agrees that this Agreement constitutes adequate notice of all such provisions, and each Member hereby waives any requirement that any further notice thereunder be given.

15.13 Press Releases. Prior to the filing of the FERC Application, without first obtaining the agreement of the other Members by Supermajority Vote, no Member shall make any press release or public statement about the Company, the business of the Company, the transactions or operations contemplated hereby, unless legal counsel for such Member determines that such statement is required by law. At any time subsequent to the filing of the FERC Application, no Member may make a press release or public statement disclosing Confidential Information without first obtaining the agreement of the Company unless legal counsel for such Member determines that such statement is required by applicable law, in which event, such Member may issue a statement to the extent legally required; provided, however, prior to the In-Service Date, the disclosing Member shall give the other Members the opportunity to review a copy of such statement and consult with such Member prior to the release thereof.

15.14 Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all signing parties had signed the same document. All counterparts shall be construed together and constitute the same instrument.

15.15 Repurchase Rights under Section 4.1.2 (xiii).

If Columbia Hardy should purchase the Membership Interest of Piedmont Hardy pursuant to the provisions of Section 4.1.2 (xiii) and at any time within twelve (12) months of any such purchase, Columbia Hardy should make a decision to construct the Facilities, it will take the following action: notify Piedmont Hardy in writing of its intent to construct the Facilities. Such notice shall provide the terms and conditions upon which Columbia Hardy proposes to construct the Facilities, including, without limitations, (a) a Phase II Capital Budget, (b) a Phase III Capital Budget, (c) a reasonably detailed construction schedule, (d) a schedule showing all significant regulatory filings and estimated decision dates, and (e) a list of persons who have executed a precedent agreement or service agreement or otherwise indicated their intent to purchase services from the Facilities. Within sixty (60) days after receipt of such notice, Piedmont Hardy shall have the right to repurchase from Columbia Hardy the Membership Interest previously sold to Columbia Hardy. Such repurchase shall be on the same terms and conditions as were applicable to the purchase of Piedmont Hardy’s Membership Interest by Columbia Hardy, except that the purchase price will be 90% of the Capital Account of the Membership Interest being purchased as of the date of the closing on that purchase by Piedmont Hardy. Upon the completion of such repurchase, the repurchased Membership Interest shall entitle Piedmont Hardy to the same Sharing Ratio as existed before the purchase by Columbia Hardy of Piedmont Hardy’s Membership Interest.

IN WITNESS WHEREOF, the Members have executed this Agreement as of the date first set forth above.

MEMBERS:

Columbia Hardy Corporation

By: /s/Glen L. Kettering

Address: 12801 Fair Lakes Parkway

Fairfax, VA 22033

Piedmont Hardy Storage Company, LLC

By: /s/Kevin M. O’Hara

Address: Piedmont Natural Gas Company

P.O. Box 33068

Charlotte, NC 28233

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