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                                 LOAN AGREEMENT



                                     between

                      INDIANA DEVELOPMENT FINANCE AUTHORITY


                                       and

                                PSI ENERGY, INC.


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

                                   $54,025,000

                      Indiana Development Finance Authority
                             Environmental Refunding

                  Revenue Bonds, Series 2000A and Series 2000B
                           (PSI Energy, Inc. Project)
                         -------------------------------



                                      Dated

                                      as of


                                   May 1, 2000


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<PAGE>



                                TABLE OF CONTENTS

                                                                            Page

ARTICLE I        DEFINITIONS...................................................2

Section 1.1.     Use of Defined Terms..........................................2
Section 1.2.     Definitions...................................................2
Section 1.3.     Interpretation................................................7
Section 1.4.     Captions and Headings.........................................7

ARTICLE II       REPRESENTATIONS...............................................8

Section 2.1.     Representations of the Issuer.................................8
Section 2.2.     No Warranty by Issuer of Condition or
                 Suitability of the Project....................................8
Section 2.3.     Representations and Covenants of the Company..................8

ARTICLE III      COMPLETION OF THE PROJECT; ISSUANCE OF THE BONDS.............13

Section 3.1.     Acquisition, Construction and Installation...................13
Section 3.2.     Project Description..........................................13
Section 3.3.     Issuance of the Bonds; Application of Proceeds...............13
Section 3.4.     Investment of Fund Moneys....................................14
Section 3.5.     Rebate Fund..................................................14

ARTICLE IV       LOAN BY ISSUER; LOAN PAYMENTS; ADDITIONAL PAYMENTS;
                 MUNICIPAL BOND INSURANCE POLICY; AND LIQUIDITY
                 FACILITY.....................................................16

Section 4.1.     Loan Repayment...............................................16
Section 4.2.     Additional Payments..........................................16
Section 4.3.     Place of Payments............................................17
Section 4.4.     Obligations Unconditional....................................17
Section 4.5.     Assignment of Revenues and Agreement.........................17
Section 4.6.     Municipal Bond Insurance Policy; Liquidity Facility;
                 Cancellation.................................................17
Section 4.7.     Company's Option to Elect Rate Period; Changes in
                 Auction Date and Length of Auction Periods...................18
Section 4.8.     Company's Obligation to Purchase Bonds.......................18




                                        i


<PAGE>



ARTICLE V        ADDITIONAL AGREEMENTS AND COVENANTS..........................19

Section 5.1.     Right of Inspection..........................................19
Section 5.2.     Maintenance..................................................19
Section 5.3.     Removal of Portions of the Project Facilities................19
Section 5.4.     Operation of Project Facilities..............................19
Section 5.5.     Insurance....................................................20
Section 5.6.     Workers' Compensation Coverage...............................20
Section 5.7.     Damage; Destruction and Eminent Domain.......................20
Section 5.8.     Company to Maintain its Corporate Existence;
                 Conditions Under Which Exceptions Permitted..................20
Section 5.9.     Indemnification..............................................21
Section 5.10.    Company Not to Adversely Affect Exclusion of Interest on
                 Bonds From Gross Income For Federal Income Tax Purposes......22
Section 5.11.    Use of Project Facilities....................................22
Section 5.12.    Assignment by Company........................................22
Section 5.13.    The Depository Trust Company Letter of Representation........23

ARTICLE VI       REDEMPTION...................................................24

Section 6.1.     Optional Redemption..........................................24
Section 6.2.     Extraordinary Optional Redemption............................24
Section 6.3.     Mandatory Redemption.........................................26
Section 6.4.     Notice of Redemption.........................................26
Section 6.5.     Actions by Issuer............................................26

ARTICLE VII      EVENTS OF DEFAULT AND REMEDIES...............................27

Section 7.1.     Events of Default............................................27
Section 7.2.     Remedies on Default..........................................28
Section 7.3.     No Remedy Exclusive..........................................29
Section 7.4.     Agreement to Pay Attorneys' Fees and Expenses................29
Section 7.5.     No Waiver....................................................29
Section 7.6.     Notice of Default............................................29





                                       ii


<PAGE>



ARTICLE VIII     MISCELLANEOUS................................................30

Section 8.1.     Term of Agreement............................................30
Section 8.2.     Amounts Remaining in Funds...................................30
Section 8.3.     Notices......................................................30
Section 8.4.     Extent of Covenants of the Issuer; No Personal Liability.....30
Section 8.5.     Binding Effect...............................................31
Section 8.6.     Amendments and Supplements...................................31
Section 8.7.     Execution Counterparts.......................................31
Section 8.8.     Severability.................................................31
Section 8.9.     Governing Law................................................31

EXHIBIT A        Project......................................................34




                                       iii


<PAGE>



                                 LOAN AGREEMENT


     THIS LOAN  AGREEMENT is made and entered into as of May 1, 2000 between the
INDIANA DEVELOPMENT FINANCE AUTHORITY (the "Issuer"),  a separate body corporate
and politic  organized and existing under the laws of the State of Indiana,  and
PSI  ENERGY,  INC.  (the  "Company"),  a public  utility  and  corporation  duly
organized  and  validly  existing  under  the  laws  of the  State  of  Indiana.
Capitalized terms used in the following  recitals are used as defined in Article
I of this Agreement.

     Pursuant  to  Indiana  Code,  Title  4,  Article  4,  Chapters  10.9 and 11
(collectively,  the "Act"), the Issuer has determined to issue, sell and deliver
the Bonds, and to lend the proceeds derived from the sale thereof to the Company
to assist in the refunding of the Refunded Bonds as defined below.  The Refunded
Bonds were  issued to provide  funds to make a loan to the  Company to assist in
the  financing  or  refinancing  of its  portion of the costs of the  Project as
defined below.

     The  Company and the Issuer  each have full right and lawful  authority  to
enter into this  Agreement and to perform and observe the  provisions  hereof on
their respective parts to be performed and observed.

     NOW   THEREFORE,   in   consideration   of  the  premises  and  the  mutual
representations and agreements hereinafter contained, the Issuer and the Company
agree as  follows  (provided  that any  obligation  of the  Issuer  or the State
created by or arising out of this  Agreement  shall never  constitute  a general
debt of the Issuer or the State or give rise to any  pecuniary  liability of the
Issuer or the State but shall be payable solely out of Revenues):



                                      - 1 -

<PAGE>



                                    ARTICLE I

                                   DEFINITIONS

     SECTION  1.1.  USE OF DEFINED  TERMS.  In  addition  to the words and terms
defined  elsewhere in this  Agreement,  the Indenture or by reference to another
document,  the words and terms set forth in Section  1.2  hereof  shall have the
meanings set forth therein unless the context or use clearly  indicates  another
meaning or intent.  Such  definitions  shall be equally  applicable  to both the
singular and plural forms of any of the words and terms defined therein.

     SECTION 1.2. DEFINITIONS. As used herein:
                  -----------

     "Additional  Payments" means the amounts required to be paid by the Company
pursuant to the provisions of Section 4.2 hereof.

     "Administration  Expenses" means the compensation (which compensation shall
not be  greater  than that  typically  charged  in  similar  circumstances)  and
reimbursement of reasonable  expenses and advances  payable to the Trustee,  the
Registrar,  the Remarketing  Agent,  the  Broker-Dealer,  the Auction Agent, any
Paying Agent and any Authenticating Agent.

     "Agreement" means this Loan Agreement, as amended or supplemented from time
to time.

     "Engineer"  means an engineer  (who may be an  employee of the  Company) or
engineering  firm qualified to practice the profession of engineering  under the
laws of the State and who or which is acceptable to the Trustee.

     "EPA" means the Department of Environmental Management of the State and any
successor body, agency, commission or department.

     "Event of Default" means any of the events described as an Event of Default
in Section 7.1 hereof.

     "Force Majeure" means any of the following:

          (i) acts of God; strikes,  lockouts or other industrial  disturbances;
     acts of public enemies;  orders or restraints of any kind of the government
     of  the  United  States  of  America  or of  the  State  or  any  of  their
     departments, agencies, political subdivisions or officials, or any civil or
     military authority;  insurrections;  civil disturbances;  riots; epidemics;
     landslides;  lightning;  earthquakes; fires; hurricanes;  tornados; storms;
     droughts;  floods; arrests; restraint of government and people; explosions;
     breakage, nuclear accidents or other malfunction or accident to facilities,
     machinery,  transmission  pipes or canals;  partial or entire  failure of a
     utility  serving the Project;  shortages of labor,  materials,  supplies or
     transportation; or

          (ii) any  cause,  circumstance  or event  not  reasonably  within  the
     control of the Company.

     "Generating Stations" means collectively the Gibson Generating Station, the
Noblesville  Generating Station,  the Cayuga Generating Station, the Edwardsport
Generating  Station,  the  Gallagher  Generating  Station  and the Wabash  River
Generating Station and "Generating Station" means any one of such separately.

     "Indenture"  means the Trust  Indenture,  dated as of the same date as this
Agreement,  between the Issuer and the Trustee,  as amended or supplemented from
time to time.

     "Insurance  Agreement" means the Insurance Agreement,  dated as of the same
date as this Agreement,  between the Company and Ambac Assurance Corporation, as
amended or supplemented from time to time.

     "Interest  Rate for  Advances"  means the interest rate per year payable on
the Bonds.

     "Loan" means the loan by the Issuer to the Company of the proceeds received
from the sale of the Bonds.

     "Loan  Payment  Date" means any date on which any Bond Service  Charges are
due and payable.

     "Loan  Payments"  means the  amounts  required to be paid by the Company in
repayment of the Loan pursuant to Section 4.1 hereof.

     "1954 Code" means the Internal Revenue Code of 1954 as amended from time to
time through the date of enactment of the Code.  References to the 1954 Code and
Sections of the 1954 Code include  relevant  applicable  regulations  (including
temporary  regulations)  and proposed  regulations  thereunder and any successor
provisions to those Sections, regulations or proposed regulations.

     "Notice Address" means:

(a)  As to the Issuer:         Indiana Development Finance Authority
                               One North Capitol, Suite 320
                               Indianapolis, Indiana  46204
                               Attention:  Executive Director

(b)  As to the Company:        PSI Energy, Inc.
                               139 East Fourth Street
                               Cincinnati, Ohio  45202
                               Attention:  Treasurer

(c)  As to the Trustee:        Fifth Third Bank, Indiana
                               Fifth Third Center
                               38 Fountain Square
                               Cincinnati, Ohio  45263
                               Attention:  Corporate Trust Administration

or such additional or different address,  notice of which is given under Section
8.3 hereof.

     "Original  Bonds" means,  collectively,  the Series 1982 Bonds,  the Series
1990 Refunded Bonds and the Series 1993 Bonds.

     "Person" or words importing persons mean firms, associations,  partnerships
(including  without  limitation,  general  and  limited  partnerships),  limited
liability entities, joint ventures,  societies,  estates, trusts,  corporations,
public or governmental bodies, other legal entities and natural persons.

     "Pollution Control Facility" or "Pollution Control  Facilities" means those
facilities  which are pollution  control  facilities as defined in Section 24 of
Chapter 10.9 of the Act and those facilities  described in Section  103(b)(4)(F)
of the Internal  Revenue Code of 1954, as amended,  and the final,  proposed and
temporary regulations promulgated thereunder and other administrative  authority
in effect.

     "Prior  Bonds"  means the  Original  Bonds and the  Series  1990  Princeton
Refunded Bonds.

     "Project"  or  "Project  Facilities"  means the real,  personal or real and
personal property, including undivided or other interests therein, identified in
the Project Description, financed with the proceeds of the Original Bonds.

     "Project  Description"  means  collectively  the description of the Project
Facilities originally financed with the proceeds of the Original Bonds, attached
hereto as Exhibit A.

     "Project  Purposes" means the purposes of Pollution  Control  Facilities as
described in the Act and as particularly described in Exhibit A hereto.

     "Project Site" means with respect to the various components of the Project,
certain  pollution  control,  solid waste disposal and sewage  facilities of the
Company at its following  facilities:  (a) the Cayuga Generating Station,  State
Road 63, Cayuga,  Vermillion  County,  Indiana;  (b) the Edwardsport  Generating
Station,  State Road 67, Edwardsport,  Knox County,  Indiana;  (c) the Gallagher
Generating Station,  Jackson Street, New Albany, Floyd County,  Indiana; (d) the
Gibson  Generating  Station,  Highway 64 West, Gibson County,  Indiana;  (e) the
Noblesville  Generating Station, 21225 Riverwood Avenue,  Noblesville,  Hamilton
County, Indiana; and (f) the Wabash River Generating Station, Bolton Road, Terre
Haute, Vigo County, Indiana.

     "Refunded Bonds" means, collectively, the Series 1990 Princeton
Refunded  Bonds,  the Series 1990 Refunded  Bonds and the Series 1993A  Refunded
Bonds.

     "Refunded Bonds Indenture" means,  collectively,  the Trust Indenture dated
as of March 15, 1990 between the City of  Princeton,  Indiana,  and INB National
Bank (as predecessor to Bank One Trust Company, NA, the Trust Indenture dated as
of March 15, 1990  between the Indiana  Employment  Development  Commission,  as
predecessor  to the Issuer,  and INB National  Bank, as  predecessor to Bank One
Trust Company,  NA and the Trust Indenture dated as of February 15, 1993 between
the  Issuer  and Bank One,  Indianapolis,  NA as  predecessor  to Bank One Trust
Company, NA.

     "Refunded Bonds Loan  Agreement"  means,  collectively,  the Loan Agreement
dated as of March 15,  1990  between the City of  Princeton,  Indiana and Public
Service  Company of Indiana,  Inc.,  as  predecessor  to the  Company,  the Loan
Agreement dated as of March 15, 1990 between the Indiana Employment  Development
Commission, as predecessor to the Issuer, and Public Service Company of Indiana,
Inc., as predecessor to the Company and the Loan Agreement  dated as of February
15, 1993, between the Issuer and the Company.

     "Refunded Bonds Trustee" means Bank One Trust Company,  NA (as successor to
Bank One,  Indianapolis,  National  Association),  as trustee under the Refunded
Bonds Indenture.

     "Revenues" means (a) the Loan Payments, (b) all other moneys received or to
be received by the Issuer (excluding any fees paid to the Issuer) or the Trustee
in respect of repayment of the Loan,  including without  limitation,  all moneys
and  investments  in the  Bond  Fund,  (c) any  moneys  and  investments  in the
Refunding  Fund,  and (d) all  income  and  profit  from the  investment  of the
foregoing moneys. The term "Revenues" does not include any moneys or investments
in the Rebate Fund or the Bond Purchase Fund.

     "Series 1982 Bonds" means the City of Princeton,  Indiana 12-3/8% Pollution
Control Revenue Bonds,  1982 Series A (Public  Service Company of Indiana,  Inc.
Project C), in the aggregate principal amount of $10,000,000.

     "Series  1982  Indenture"  means the Trust  Indenture  dated  April 1, 1982
between the City of Princeton,  Indiana and the American  Fletcher National Bank
and Trust Company,  as predecessor  to Bank One,  Indianapolis,  NA and Bank One
Trust Company, NA.

     "Series 1982 Loan Agreement"  means the Loan Agreement dated as of April 1,
1982  between  the City of  Princeton,  Indiana  and Public  Service  Company of
Indiana, Inc., as predecessor to PSI Energy, Inc.

     "Series 1990 Princeton Refunded Bonds" means the City of Princeton, Indiana
7-3/8% Pollution  Control  Refunding  Revenue Bonds, 1990 Series (Public Service
Company of Indiana,  Inc.  Project C), issued and  outstanding  in the aggregate
principal amount of $10,000,000.

     "Series  1990  Refunded  Bonds"  means the Indiana  Employment  Development
Commission  7-1/2%  Environmental  Revenue  Bonds,  Series 1990 (Public  Service
Company of Indiana,  Inc.),  issued and  outstanding in the aggregate  principal
amount of $14,250,000.

     "Series  1993 Bonds"  means,  collectively,  the Series 1993A Bonds and the
Series 1993B Bonds.

     "Series 1993A Bonds" means the Indiana  Development Finance Authority 5.60%
Environmental  Revenue  Bonds,  Series 1993A (PSI Energy,  Inc.),  issued in the
aggregate  principal  amount of  $30,000,000  and currently  outstanding  in the
aggregate principal amount of $29,795,000.

     "Series 1993A  Refunded  Bonds" means the Series 1993A Bonds to be refunded
by the Series 2000A Refunding Bonds in the aggregate amount of $29,775,000.

     "Series 1993B Bonds" means the Indiana Development Finance Authority 5 3/4%
Environmental  Revenue  Bonds,  Series 1993B (PSI Energy,  Inc.),  issued in the
aggregate principal amount of $50,000,000.

     "Series  2000A  Refunding  Bonds"  means the  Indiana  Development  Finance
Authority  Environmental Refunding Revenue Bonds, Series 2000A (PSI Energy, Inc.
Project), in the aggregate principal amount of $44,025,000.

     "Series  2000B  Refunding  Bonds"  means the  Indiana  Development  Finance
Authority  Environmental Refunding Revenue Bonds, Series 2000B (PSI Energy, Inc.
Project), in the aggregate principal amount of $10,000,000.

     "Sewage Facility" or "Sewage  Facilities" means those facilities defined as
pollution control  facilities in Section 24 of Chapter 10.9 of the Act and those
facilities described in Section 142(a)(5) of the Code.

     "Solid Waste Disposal Facility" or "Solid Waste Disposal  Facilities" means
those  facilities  defined  as  pollution  control  facilities  in Section 24 of
Chapter 10.9 of the Act and those facilities  described in Section  142(a)(6) of
the Code.

     "State" means the State of Indiana.

     "Trustee" means Fifth Third Bank, Indiana located in Indianapolis, Indiana,
a corporation  duly organized and validly  existing under the laws of the State,
until a successor  Trustee  shall have become  such  pursuant to the  applicable
provisions of the Indenture,  and thereafter  "Trustee" shall mean the successor
Trustee.  "Principal  Office" of the Trustee shall mean the principal  corporate
trust office of the  Trustee,  which office at the date of issuance of the Bonds
is located at its Notice Address.

     "Unassigned Issuer Rights" means all of the rights of the Issuer to receive
Additional  Payments under Section 4.2 hereof, to inspection pursuant to Section
5.1 hereof,  to be held harmless and indemnified under Section 5.9 hereof, to be
reimbursed for attorney's fees and expenses under Section 7.4 hereof and to give
or withhold  consent to  amendments,  changes,  modifications,  alterations  and
termination of this Agreement  under Section 8.6 hereof and its right to enforce
such rights.

     SECTION 1.3.  INTERPRETATION.  Any  reference  herein to the State,  to the
Issuer or to any member or  officer of either  includes  entities  or  officials
succeeding to their respective functions, duties or responsibilities pursuant to
or by operation of law or lawfully performing their functions.

     Any reference to a section or provision of the Constitution of the State or
the Act, or to a section,  provision or chapter of the Indiana  Code,  or to any
statute of the United States of America,  includes  that  section,  provision or
chapter as amended, modified,  revised,  supplemented or superseded from time to
time;  provided,  that  no  amendment,  modification,  revision,  supplement  or
superseding  section,  provision or chapter shall be applicable solely by reason
of this  provision,  if it constitutes in any way an impairment of the rights or
obligations of the Issuer, the State, the Holders,  the Trustee,  the Registrar,
the Auction Agent, an Authenticating Agent, a Paying Agent, Ambac Assurance, the
Remarketing  Agent,  or the Company under this  Agreement,  the Indenture or the
Bonds.

     Unless the context indicates otherwise, words importing the singular number
include  the  plural  number,  and vice  versa;  the terms  "hereof",  "hereby",
"herein",  "hereto",  "hereunder" and similar terms refer to this Agreement; and
the term "hereafter"  means after, and the term "heretofore"  means before,  the
date of delivery of the Bonds. Words of any gender include the correlative words
of the other genders, unless the sense indicates otherwise.

     SECTION  1.4.  CAPTIONS  AND  HEADINGS.  The  captions and headings in this
Agreement  are used solely for  convenience  of reference  and in no way define,
limit or describe the scope or intent of any  Articles,  Sections,  subsections,
paragraphs or subparagraphs or clauses hereof.

                               (End of Article I)

<PAGE>



                                   ARTICLE II

                                 REPRESENTATIONS

     SECTION II.1.  REPRESENTATIONS  OF THE ISSUER.  The Issuer represents that:
(a) it is a body corporate and politic duly organized and validly existing under
the laws of the State; (b) it has duly accomplished all conditions  necessary to
be  accomplished  by it prior to the  issuance and delivery of the Bonds and the
execution  and delivery of this  Agreement and the  Indenture;  (c) it is not in
violation of or in conflict  with any  provisions of the laws of the State which
would  impair  its  ability  to  carry  out its  obligations  contained  in this
Agreement or the Indenture;  (d) it is empowered to enter into the  transactions
contemplated by this Agreement and the Indenture; (e) it has duly authorized the
execution,  delivery and performance of this Agreement and the Indenture; (f) it
will do all things in its power in order to maintain its existence or assure the
assumption  of its  obligations  under this  Agreement  and the Indenture by any
successor municipal  corporation;  and (g) following reasonable notice, a public
hearing was held on April 18, 2000 with  respect to the issuance of the Bonds as
required by Section 147(f) of the Code.

     SECTION II.2. NO WARRANTY BY ISSUER OF CONDITION OR SUITABILITY OF THE
PROJECT.  The Issuer makes no  warranty,  either  express or implied,  as to the
suitability or utilization of the Project for the Project Purposes, or as to the
condition of the Project  Facilities or that the Project  Facilities are or will
be suitable for the Company's purposes or needs.

     SECTION II.3.  REPRESENTATIONS  AND  COVENANTS OF THE COMPANY.  The Company
represents that:

     (a) The Company  has been duly  incorporated  and is validly  existing as a
corporation under the laws of the State, with power and authority (corporate and
other) to own its  properties  and conduct its business,  to execute and deliver
this Agreement and to perform its obligations under this Agreement.

     (b) This Agreement has been duly authorized,  executed and delivered by the
Company and this Agreement constitutes a valid and legally binding obligation of
the  Company,   enforceable  in  accordance  with  its  terms,  subject,  as  to
enforcement, to bankruptcy, insolvency, reorganization and other laws of general
applicability  relating to or affecting  creditors' rights and to general equity
principles.

     (c)  The  execution,  delivery  and  performance  by the  Company  of  this
Agreement and the consummation of the transactions  contemplated hereby will not
violate any provision of law or regulation  applicable to the Company, or of any
writ or decree of any court or governmental  instrumentality,  or of the Amended
Articles of Consolidation,  as amended, or the By-laws of the Company, or of any
mortgage,  indenture,  contract,  agreement  or other  undertaking  to which the
Company is a party or which  purports to be binding upon the Company or upon any
of its assets.

     (d) The Project  constitutes and will constitute either land or property of
a character  subject to the allowance for depreciation for purposes of the Code,
and all  expenditures for the cost of constructing the Project have been charged
to a capital  account for  federal  income tax  purposes  (or would have been so
charged either with or but for a proper election to deduct such amounts).

     (e) No other  bonds are being  sold for or on behalf of the  Company or any
related person thereto at substantially the same time (within less than 15 days)
pursuant  to a common  plan of  financing  and which are  payable  from the same
source of funds determined without regard to guarantees from unrelated parties.

     (f) No portion of the Project had been acquired and placed in operation
at  substantially  the level for  which it was  designed  for more than one year
prior to the date of delivery of the Original  Bonds series which  financed such
portion of the Project.

     (g) The weighted  average maturity of the Series 2000A Refunding Bonds does
not  exceed  120%  of  the  average  economic  life  of the  Project  Facilities
originally  financed  by the Series 1990  Refunded  Bonds and the portion of the
Series 1993 Bonds allocable to the Series 1993A Refunded Bonds.

     (h) The weighted  average maturity of the Series 2000B Refunding Bonds does
not  exceed  120%  of  the  average  economic  life  of the  Project  Facilities
originally financed by the Series 1982 Bonds.

     (i) The portions of the Project (i) which are Pollution Control  Facilities
were designed to meet or exceed applicable federal, state and local requirements
then in effect for the control of air  pollution  and have been and will be used
to abate or control  air  pollution  or  contamination  by  removing,  altering,
disposing  of or  storing  pollutants,  contaminants,  wastes  or heat,  and the
Pollution Control  Facilities  components of the Project as designed  constitute
"air  pollution  control  facilities"  or  facilities  functionally  related  or
subordinate thereto within the meaning of Section 103(b)(4)(F) of the 1954 Code,
and the final,  temporary and proposed  regulations  promulgated  thereunder and
other  administrative  authority in effect;  (ii) which are Solid Waste Disposal
Facilities  have been and will be used for the collection,  storage,  treatment,
utilization,  processing or final disposal of solid waste and constitute  "solid
waste disposal  facilities"  within the meaning of Section 142(a)(6) of the Code
and the regulations  applicable  thereto;  and (iii) which are Sewage Facilities
have  been and will be used for the  collection  and  treatment  of  sewage  and
constitute  "sewage  facilities"  within the meaning of Section 142(a)(5) of the
Code and the regulations applicable thereto.

     (j) The Project has been and will be used wholly to control  pollution  and
dispose of solid waste and sewage and was  designed for no  significant  purpose
other than  pollution  control and  disposal of solid waste and sewage,  and the
Project was not designed to result in an increase in production or capacity,  in
a material  extension of the useful life of the  Generating  Stations or, in the
case of the portions of the Project which are Pollution Control  Facilities,  in
the recovery of by-products of any substantial value.

     (k)  Substantially  all (at least 90%) of the  proceeds  of the Series 1982
Bonds was used to provide Pollution Control  Facilities and Solid Waste Disposal
Facilities.

     (l)  Substantially all (at least 95%) of the proceeds of each of the Series
1990 Refunded  Bonds and the Series 1993 Bonds was used to provide  "Solid Waste
Disposal Facilities" and "Sewage Facilities".

     (m) Acquisition, construction and installation or the incurrence of Cost of
Construction  (as defined in the Series 1982 Loan  Agreement for the Series 1982
Bonds)  for the  Pollution  Control  Facilities  portion  of the  Project or any
separate  facility  thereof  was not  commenced  prior  to the  adoption  of the
resolution  of the  City  of  Princeton,  Indiana,  on  October  16,  1978;  and
acquisition,  construction  and  installation  or  the  incurrence  of  Cost  of
Construction  for the Solid  Waste  Disposal  Facilities  and Sewage  Facilities
portion of the Project or any separate  facility thereof was not commenced prior
to the adoption of the applicable  resolution of the Issuer on April 18, 1988 or
February 15, 1993.

     (n) The entire proceeds of each of the Original Bonds series were spent for
the Project  Facilities  financed  pursuant to the  respective  Series 1982 Loan
Agreement and Refunded Bonds Loan Agreement for each Original Bonds series or to
pay costs of issuance of the  Original  Bonds.  The proceeds of the Bonds (other
than any  accrued  interest  thereon)  will be used  exclusively  to refund  the
Refunded  Bonds;  any investment  earnings on such proceeds of the Bonds will be
used to pay principal,  premium or interest on the Refunded  Bonds;  and none of
the  proceeds  of the Bonds will be used to pay for any costs of issuance of the
Bonds.  The  principal  amount  of the Bonds  does not  exceed  the  outstanding
principal  amount of the Refunded Bonds.  The proceeds of the Bonds will be used
to retire the  Refunded  Bonds not later than 90 days after the date of issuance
of the Bonds.

     (o) It has caused the Project to be  substantially  completed.  The Project
constitutes  Pollution  Control  Facilities under the Act and is consistent with
the  purposes of the Act.  The Project is being,  and the Company will cause the
Project to be,  operated  and  maintained  in such  manner to  conform  with all
applicable  zoning,  planning,  building,  environmental  and  other  applicable
governmental regulations and all permits, variances and orders issued or granted
pursuant  thereto,  including  the  permit-to-install  for  the  Project,  which
permits,  variances and orders have not been  withdrawn or otherwise  suspended,
and to be consistent with the Act.

     (p) It has used or  operated  or has  caused  to be used or  operated,  and
presently  intends to use or operate or cause to be used or operated the Project
Facilities in a manner  consistent  with the Project  Purposes until the date on
which the Bonds  have been  fully  paid and knows of no reason  why the  Project
Facilities  will not be so  operated.  The  Company  does not  intend to sell or
otherwise dispose of the Project or any portion thereof.

     (q) None of the  proceeds  of each of the Prior  Bonds was used and none of
the proceeds of the Bonds will be used to provide any airplane,  skybox or other
private  luxury box, or health club  facility,  any facility  primarily used for
gambling or any store the  principal  business of which is the sale of alcoholic
beverages for consumption off premises.

     (r) Less than 25% of the  proceeds  of each of the Prior  Bonds was used to
acquire  land or any  interest  therein,  and none of such  proceeds was used to
provide land which was used for farming purposes.

     (s) None of the  proceeds  of each of the Prior  Bonds was used to  acquire
existing  property or any interest therein unless the first use of such property
was by the Company and was pursuant to and followed such acquisition.

     (t) At no time will any funds  constituting  gross proceeds of the Bonds be
used in a manner as would  constitute  failure of compliance with Section 148 of
the Code.

     (u) The  Prior  Bonds  were  not,  and the  Bonds  will not be,  "federally
guaranteed" within the meaning of Section 149(b) of the Code.

     (v) It is not anticipated that as of the date hereof, there will be created
any  "replacement  proceeds",  within the meaning of Section  1.148-1(c)  of the
Treasury Regulations,  with respect to the Bonds; however, in the event that any
such replacement proceeds are deemed to have been created,  such amounts will be
invested in compliance with Section 148 of the Code.

     (w) On the date of issuance and  delivery of each of the Prior  Bonds,  the
Company  reasonably  expected  that at  least  85% of the  respective  spendable
proceeds  of  each of the  Prior  Bonds  would  be  expended  to  carry  out the
respective  governmental  purpose  of each such issue  within the 3-year  period
beginning  on the issue date of such issue and the Company  reasonably  expected
that the proceeds of each of the Prior Bonds would be spent in  accordance  with
the  spending  requirements  of Section  149(g)(2)  of the Code.  The  spendable
proceeds of each of the Prior Bonds have been fully  expended  prior to the date
of issuance of the Bonds.  The  proceeds of each of the Prior Bonds  series were
not invested in nonpurpose  investments having a substantially  guaranteed yield
for four years or more.

     (x) The  information  furnished  by the  Company  and used by the issuer in
preparing the certifications and statements  pursuant to Sections 148 and 149(e)
of the Code or their  statutory  predecessors  with respect to each of the Prior
Bonds was accurate and complete as of the respective  date of issuance  thereof,
and the information furnished by the Company and used by the Issuer in preparing
the  certification  pursuant  to Section  148 of the Code and in  preparing  the
information  statement  pursuant to Section 149(e) of the Code, both referred to
in the Bond Resolution, will be accurate and complete as of the date of issuance
of the Bonds.

     (y) The Project Facilities do not include any office except for offices (i)
located on the  Project  Site and (ii) not more than a de minimis  amount of the
functions to be performed  at which is not  directly  related to the  day-to-day
operations of the Project Facilities.

                               (End of Article II)



<PAGE>



                                   ARTICLE III

                COMPLETION OF THE PROJECT; ISSUANCE OF THE BONDS

     SECTION III.1.  ACQUISITION,  CONSTRUCTION  AND  INSTALLATION.  The Company
represents that it has caused the Project Facilities to be acquired, constructed
and installed on the respective Project Sites,  substantially in accordance with
the Project Description and in conformance with all applicable zoning, planning,
building and other similar  regulations of all governmental  authorities  having
jurisdiction  over the Project and all permits,  variances  and orders issued in
respect of the Project by EPA,  and that the  proceeds  derived  from the Series
1982 Bonds and Refunded Bonds,  including any investment thereof,  were expended
in accordance  with the respective  Series 1982  Indenture or respective  Series
1982 Loan  Agreement or Refunded  Bonds  Indenture  and the Refunded  Bonds Loan
Agreement.

     SECTION III.2. PROJECT DESCRIPTION.  The Project Description may be changed
from time to time by, or with the consent of, the Company provided that any such
change shall also be filed with the Issuer and  provided  further that no change
in the Project  Description  shall materially change the function of the Project
Facilities unless the Trustee shall have received (i) an Engineer's  certificate
that such changes will not impair the  significance  or character of the Project
Facilities as Pollution Control Facilities,  Solid Waste Disposal Facilities and
Sewage  Facilities and (ii) an Opinion of Bond Counsel or ruling of the Internal
Revenue Service to the effect that such amendment will not adversely  affect the
exclusion  of  interest on the Bonds from gross  income for  federal  income tax
purposes.

     SECTION III.3.  ISSUANCE OF THE BONDS;  APPLICATION OF PROCEEDS. To provide
funds to make the Loan to the Company to assist the Company in the  refunding of
the  Refunded  Bonds,  the Issuer will issue,  sell and deliver the Bonds to the
Original  Purchaser.  The Bonds will be issued  pursuant to the Indenture in the
aggregate principal amount, will bear interest,  will mature and will be subject
to redemption as set forth therein.  The Company  hereby  approves the terms and
conditions of the Indenture and the Bonds,  and the terms and  conditions  under
which the Bonds will be issued, sold and delivered.

     The Company  hereby  requests  that the Issuer  notify the  Refunded  Bonds
Trustee  (unless the Refunded  Bonds Trustee has already  received such notice),
pursuant to the Refunded Bonds Indenture,  that the entire outstanding principal
amount of the Refunded Bonds is to be redeemed  pursuant to the following chart,
plus accrued interest to that redemption date.

        REFUNDED BONDS                 REDEMPTION DATE          REDEMPTION PRICE

    Series 1990 Princeton               June 19, 2000                 102%
    Refunded Bonds
    Series 1990 Refunded Bonds          June 19, 2000                 102%
    Series 1993A Refunded Bonds         June 19, 2000                 102%


     The proceeds  from the sale of the Bonds (other than any accrued  interest)
shall be loaned to the Company to assist the Company in  refunding  the Refunded
Bonds in order to  reduce  the  interest  cost  payable  by the  Company;  those
proceeds shall be deposited in the Refunding Fund. On the applicable  redemption
date,  all moneys on deposit in the  Refunding  Fund shall be  disbursed  by the
Trustee as provided  in Section  5.02 of the  Indenture  to the  Refunded  Bonds
Trustee for deposit in the Bond Fund created in the Refunded Bonds Indenture and
applied by the  Refunded  Bonds  Trustee  to the  payment  of  principal  of and
interest on the Refunded Bonds on their  redemption  date. The Company shall pay
to the Refunded  Bonds Trustee prior to the date of redemption of such series of
Refunded  Bonds such  additional  amounts as shall be required to pay in full on
such date the entire  amount of  principal  of,  premium and interest due on the
Refunded Bonds.

     Pending disbursement pursuant to this Section, the proceeds so deposited in
the  Refunding  Fund,  together  with any  investment  earnings  thereon,  shall
constitute a part of the Revenues  assigned by the Issuer to the Trustee for the
payment of Bond Service Charges.  Any accrued interest shall be deposited in the
Bond Fund.

     SECTION III.4. INVESTMENT OF FUND MONEYS. At the oral (confirmed promptly
in writing) or written  request of the  Company,  any moneys held as part of the
Bond Fund, the Refunding Fund or the Rebate Fund shall be invested or reinvested
by the  Trustee in Eligible  Investments;  provided,  that such moneys  shall be
invested or reinvested by the Trustee only in Eligible  Investments  which shall
mature,  or which shall be subject to  redemption  by the holder  thereof at the
option of such holder, not later than the date upon which the moneys so invested
are  needed to make  payments  from  those  Funds.  The Issuer (to the extent it
retained or retains direction or control) and the Company each hereby represents
that the investment and reinvestment and the use of the proceeds of the Refunded
Bonds were restricted in such manner and to such extent as was necessary so that
the Refunded Bonds would not constitute arbitrage bonds under Section 148 of the
Code  or its  statutory  predecessor  and  each  hereby  covenants  that it will
restrict that  investment  and  reinvestment  and the use of the proceeds of the
Bonds in such manner and to such extent, if any, as may be necessary so that the
Bonds will not constitute arbitrage bonds under Section 148 of the Code.

     The  Company  shall  provide the Issuer  with,  and the Issuer may base its
certificate  and  statement,  each as  authorized by the Bond  Resolution,  on a
certificate of an appropriate officer, employee or agent of or consultant to the
Company for inclusion in the  transcript of proceedings  for the Bonds,  setting
forth the reasonable  expectations of the Company on the date of delivery of and
payment for the Bonds  regarding the amount and use of the proceeds of the Bonds
and the facts,  estimates  and  circumstances  on which those  expectations  are
based.

     SECTION III.5.  REBATE FUND. To the extent  required by Section 5.08 of the
Indenture,  within five days after the end of the fifth Bond Year (as defined in
the Indenture) and every fifth Bond Year thereafter,  and within five days after
payment in full of all outstanding Bonds, the Company shall calculate the amount
of Excess Earnings (as defined in the Indenture) as of the end of that Bond Year
or the date of such payment and shall notify the Trustee of that amount.  If the
amount then on deposit in the Rebate Fund  created  under the  Indenture is less
than the amount of Excess  Earnings  (computed by taking into account the amount
or amounts,  if any,  previously  paid to the United States  pursuant to Section
5.08 of the Indenture and this  Section),  the Company  shall,  within five days
after the date of the aforesaid  calculation,  pay to the Trustee for deposit in
the Rebate  Fund an amount  sufficient  to cause the  Rebate  Fund to contain an
amount equal to the Excess Earnings.  The obligation of the Company to make such
payments shall remain in effect and be binding upon the Company  notwithstanding
the release and  discharge of the  Indenture.  The Company shall obtain and keep
such records of the  computations  made pursuant to this Section as are required
under Section 148(f) of the Code.

                              (End of Article III)




                                   ARTICLE IV

                         LOAN BY ISSUER; LOAN PAYMENTS;
                  ADDITIONAL PAYMENTS; MUNICIPAL BOND INSURANCE
                          POLICY AND LIQUIDITY FACILITY

     SECTION IV.1. LOAN REPAYMENT. Upon the terms and conditions of this
Agreement,  the Issuer  agrees to make the Loan to the Company.  The proceeds of
the Loan shall be deposited with the Trustee pursuant to Section 3.3 hereof.  In
consideration  of and in repayment of the Loan,  the Company shall make, as Loan
Payments,  to the  Trustee  for  the  account  of  the  Issuer,  payments  which
correspond,  as to time, and are equal in amount as of the Loan Payment Date, to
the  corresponding  Bond Service Charges payable on the Bonds. All Loan Payments
received by the  Trustee  shall be held and  disbursed  in  accordance  with the
provisions of the Indenture and this Agreement for application to the payment of
Bond Service Charges.

     The  Company  shall be  entitled  to a  credit  against  the Loan  Payments
required to be made on any Loan  Payment  Date to the extent that the balance of
the Bond Fund is then in excess of amounts required (a) for the payment of Bonds
theretofore  matured or theretofore  called for redemption,  or to be called for
redemption  pursuant to Section  6.1 hereof (b) for the payment of interest  for
which  checks or drafts  have been  drawn and  mailed by the  Trustee  or Paying
Agent,  and (c) to be deposited in the Bond Fund by the  Indenture for use other
than for the payment of Bond Service Charges due on that Loan Payment Date.

     Except for such interest of the Company as may hereafter  arise pursuant to
Section 8.2 hereof or Sections  5.06 or 5.07 of the  Indenture,  the Company and
the Issuer each acknowledge  that neither the Company,  the State nor the Issuer
has any  interest  in the Bond Fund or the Bond  Purchase  Fund,  and any moneys
deposited  therein  shall be in the  custody of and held by the Trustee in trust
for the benefit of the Holders.

     SECTION IV.2. ADDITIONAL PAYMENTS.  The Company shall pay to the Issuer, as
Additional Payments hereunder,  any and all costs and expenses incurred or to be
paid by the Issuer in connection  with the issuance and delivery of the Bonds or
otherwise  related to actions  taken by the Issuer  under this  Agreement or the
Indenture.

     The  Company  shall pay the  Administration  Expenses to the  Trustee,  the
Registrar,  the Remarketing  Agent,  the Auction Agent,  and any Paying Agent or
Authenticating Agent, as appropriate, as Additional Payments hereunder.

     The Company  may,  without  creating a default  hereunder,  contest in good
faith the  reasonableness  of any such cost or expense incurred or to be paid by
the Issuer and any Administration Expenses claimed to be due to the Trustee, the
Registrar,  the Auction Agent,  the Remarketing  Agent,  any Paying Agent or any
Authenticating Agent.

     In the event the Company should fail to pay any Loan  Payments,  Additional
Payments or  Administration  Expenses  when due,  the  payment in default  shall
continue as an  obligation of the Company until the amount in default shall have
been fully paid together with interest  thereon during the default period at the
Interest Rate for Advances.

     SECTION IV.3. PLACE OF PAYMENTS. The Company shall make all Loan
Payments  directly to the Trustee at its Principal Office.  Additional  Payments
shall be made directly to the person or entity to whom or to which they are due.

     SECTION IV.4. OBLIGATIONS UNCONDITIONAL.  The obligations of the Company to
make Loan Payments, Additional Payments and any payments required of the Company
under Section 5.08 of the Indenture shall be absolute and unconditional, and the
Company  shall make such  payments  without  abatement,  diminution or deduction
regardless  of  any  cause  or  circumstances   whatsoever  including,   without
limitation,  any defense, set-off,  recoupment or counterclaim which the Company
may  have or  assert  against  the  Issuer,  the  Trustee,  the  Registrar,  the
Remarketing Agent, the Auction Agent, the Paying Agent or any other Person.

     SECTION IV.5.  ASSIGNMENT OF REVENUES AND AGREEMENT.  To secure the payment
of Bond Service Charges, the Issuer shall, by the Indenture,  (a) absolutely and
irrevocably  assign to the Trustee,  its  successors  in trust and its and their
assigns  forever,  all of the Issuer's  rights and remedies under this Agreement
(except for the Unassigned Issuer Rights),  and (b) grant a security interest to
the Trustee,  its successors in trust and its and their assigns forever,  in all
of its rights to and interest in the Revenues including, without limitation, all
Loan Payments and other  amounts  receivable by or on behalf of the Issuer under
the Agreement in respect of repayment of the Loan. The Company hereby agrees and
consents to those assignments and that grant of a security interest.

     SECTION  IV.6.   MUNICIPAL  BOND  INSURANCE  POLICY;   LIQUIDITY  FACILITY;
CANCELLATION.

     (a) The Company  agrees to provide for the payment of the  principal of and
interest  on the Bonds by causing  the  Municipal  Bond  Insurance  Policy to be
delivered to the Trustee on the date of the delivery of the Bonds.

     (b) The Company may provide for the delivery of a Liquidity Facility.

     (c) The Company may cancel any  Liquidity  Facility  then in effect at such
time and direct the Trustee in writing to surrender such  Liquidity  Facility to
the  Liquidity  Facility  Issuer by which it was issued in  accordance  with the
Indenture;  provided,  that no such  cancellation  shall become effective and no
such surrender shall take place until all Bonds subject to purchase  pursuant to
Section  4.07(d) of the  Indenture  have been so purchased or redeemed  with the
proceeds of such Liquidity Facility.


     SECTION  IV.7.  COMPANY'S  OPTION TO ELECT RATE PERIOD;  CHANGES IN AUCTION
DATE AND  LENGTH OF AUCTION  PERIODS.  The  Company  shall  have,  and is hereby
granted, the option to elect to convert on any Conversion Date the interest rate
borne by the Bonds to another Variable Rate or return to the Auction Rate, to be
effective  for a Rate  Period  pursuant to the  provisions  of Article II of the
Indenture and subject to the terms and conditions set forth therein. The Company
also shall have the  option to direct  the  change of Auction  Dates  and/or the
length of Auction Rate Periods in  accordance  with the  Indenture.  To exercise
such  options,  the  Company  shall  give the  written  notice  required  by the
Indenture.

     SECTION IV.8.  COMPANY'S  OBLIGATION TO PURCHASE BONDS.  The Company hereby
agrees to pay or cause to be paid to the  Trustee  or the  Paying  Agent,  on or
before  each  day on which  Bonds  may be or are  required  to be  tendered  for
purchase,  amounts  equal to the amounts to be paid by the Trustee or the Paying
Agent with respect to the Bonds  tendered for purchase on such dates pursuant to
Article IV of the  Indenture;  provided,  however,  that the  obligation  of the
Company  to make any such  payment  under this  Section  shall be reduced by the
amount  of  (A)  moneys  paid  by  the  Remarketing  Agent  as  proceeds  of the
remarketing of such Bonds by the Remarketing  Agent,  (B) moneys drawn under any
Liquidity Facility,  for the purpose of paying such purchase price and (C) other
moneys made available by the Company, as set forth in Section 4.08(b)(ii) of the
Indenture.

                               (End of Article IV)



                                    ARTICLE V

                       ADDITIONAL AGREEMENTS AND COVENANTS

     SECTION V.1.  RIGHT OF  INSPECTION.  The Company  agrees  that,  subject to
reasonable security and safety regulations and to reasonable  requirements as to
notice,  the Issuer and the  Trustee and their or any of their  respective  duly
authorized agents shall have the right at all reasonable times to enter upon the
Project Site to examine and inspect the Projects.

     SECTION V.2.  MAINTENANCE.  The Company  shall use its best efforts to keep
and maintain the Project Facilities, including all appurtenances thereto and any
personal  property  therein  or  thereon,  in good  repair  and  good  operating
condition so that the Project  Facilities will continue to constitute  Pollution
Control Facilities,  Sewage Facilities or Solid Waste Disposal  Facilities,  for
the purposes of the operation thereof as required by Section 5.4 hereof.

     So  long  as such  shall  not be in  violation  of the  Act or  impair  the
character of the Project  Facilities  as Pollution  Control  Facilities,  Sewage
Facilities or Solid Waste Disposal  Facilities,  and provided there is continued
compliance with applicable laws and regulations of governmental  entities having
jurisdiction  thereof,  the Company  shall have the right to remodel the Project
Facilities or make additions,  modifications and improvements thereto, from time
to time as it,  in its  discretion,  may deem to be  desirable  for its uses and
purposes,   the  cost  of  which   remodeling,   additions,   modifications  and
improvements  shall be paid by the Company and the same shall, when made, become
a part of the Project Facilities.

     SECTION  V.3.  REMOVAL OF PORTIONS OF THE PROJECT  FACILITIES.  The Company
shall not be under any  obligation to renew,  repair or replace any  inadequate,
obsolete,  worn out,  unsuitable,  undesirable  or  unnecessary  portions of the
Project Facilities,  except that, subject to Section 5.4 hereof, it will use its
best  efforts to ensure the  continued  character of the Project  Facilities  as
Pollution  Control  Facilities,   Sewage  Facilities  or  Solid  Waste  Disposal
Facilities.  The  Company  shall have the right from time to time to  substitute
personal  property or  fixtures  for any  portions  of the  Project  Facilities,
provided that the personal  property or fixtures so substituted shall not impair
the character of the Project Facilities as Pollution Control Facilities,  Sewage
Facilities or Solid Waste Disposal Facilities.  Any such substituted property or
fixtures shall,  when so substituted,  become a part of the Project  Facilities.
The  Company  shall  also have the right to remove any  portion  of the  Project
Facilities,  without  substitution  therefor;  provided,  that the Company shall
deliver to the  Trustee a  certificate  signed by an  Engineer  describing  said
portion of the Project  Facilities and stating that the removal of such property
or fixtures will not impair the character of the Project Facilities as Pollution
Control Facilities, Sewage Facilities or Solid Waste Disposal Facilities.

     SECTION V.4. OPERATION OF PROJECT FACILITIES.  The Company will, subject to
its obligations and rights to maintain, repair or remove portions of the Project
Facilities,  as provided in Sections 5.2 and 5.3 hereof, use its best efforts to
continue  operation of the Project  Facilities so long as and to the extent that
operation thereof is required to comply with laws or regulations of governmental
entities  having  jurisdiction  thereof or unless the Issuer shall have approved
the  discontinuance  of such operation (which approval shall not be unreasonably
withheld).  The  Company  agrees  that it will,  within  the  design  capacities
thereof,  use its best efforts to operate and maintain the Project Facilities in
accordance with all applicable,  valid and enforceable  rules and regulations of
governmental  entities having jurisdiction thereof;  provided,  that the Company
reserves the right to contest in good faith any such laws or regulations.

     Nothing in this  Agreement  shall  prevent or restrict the Company,  in its
sole  discretion,   at  any  time,  from   discontinuing  or  suspending  either
permanently or temporarily  its use of any facility of the Company served by the
Project  Facilities  and in the event such  discontinuance  or suspension  shall
render  unnecessary  the  continued  operation  of the Project  Facilities,  the
Company  shall  have the  right to  discontinue  the  operation  of the  Project
Facilities during the period of any such discontinuance or suspension.

     SECTION V.5.  INSURANCE.  The Company shall cause the Project Facilities to
be kept insured  against fire or other  casualty to the extent that  property of
similar  character  is usually so insured by  companies  similarly  situated and
operating  like  properties,  to a  reasonable  amount  by  reputable  insurance
companies or, in lieu of or  supplementing  such  insurance in whole or in part,
adopt  some other  method or plan of  protection  against  loss by fire or other
casualty  at least  equal in  protection  to the  method  or plan of  protection
against  loss by fire or other  casualty of  companies  similarly  situated  and
operating  properties  subject to similar or greater fire or other hazards or on
which  properties an equal or higher  primary fire or other  casualty  insurance
rate has been set by reputable insurance companies.

     SECTION V.6. WORKERS'  COMPENSATION  COVERAGE.  Throughout the term of this
Agreement,  the Company  shall  comply,  or cause  compliance,  with  applicable
workers' compensation laws of the State.

     SECTION V.7. DAMAGE; DESTRUCTION AND EMINENT DOMAIN. If, during the term of
this  Agreement,  the Project  Facilities or any portion thereof is destroyed or
damaged  in whole  or in part by fire or other  casualty,  or title  to,  or the
temporary use of, the Project  Facilities or any portion thereof shall have been
taken by the  exercise of the power of eminent  domain,  the Company  (unless it
shall have exercised its option to prepay the Loan Payments  pursuant to Section
6.2 hereof) shall promptly repair, rebuild or restore the portion of the Project
Facilities  so damaged,  destroyed or taken with such changes,  alterations  and
modifications (including the substitution and addition of other property) as may
be necessary or desirable  for the  administration  and operation of the Project
Facilities as Pollution  Control  Facilities,  Sewage  Facilities or Solid Waste
Disposal Facilities and as shall not impair the character or significance of the
Project Facilities as furthering the purposes of the Act.

     SECTION V.8. COMPANY TO MAINTAIN ITS CORPORATE EXISTENCE;  CONDITIONS UNDER
WHICH  EXCEPTIONS  PERMITTED.  The Company agrees that,  during the term of this
Agreement,  it will  maintain  its  corporate  existence,  will not  dissolve or
otherwise  dispose  of all or  substantially  all of its  assets  and  will  not
consolidate  with or merge into another  corporation or permit one or more other
corporations  to  consolidate  with or merge into it;  provided that the Company
may, without violating its agreement contained in this Section, consolidate with
or merge into another  corporation,  or permit one or more other corporations to
consolidate  with or merge  into it, or sell or  otherwise  transfer  to another
corporation all or substantially all of its assets as an entirety and thereafter
dissolve,  provided the surviving,  resulting or transferee corporation,  as the
case may be (if other than the Company), is a corporation organized and existing
under the laws of one of the states of the United States, and assumes in writing
all  of  the  obligations  of  the  Company  herein,  and,  if  not  an  Indiana
corporation, is qualified to do business in the State.

     If  consolidation,  merger or sale or other transfer is made as provided in
this Section,  the  provisions of this Section shall  continue in full force and
effect and no further  consolidation,  merger or sale or other transfer shall be
made except in compliance with the provisions of this Section.

     SECTION V.9. INDEMNIFICATION.  The Company releases the Issuer from, agrees
that the Issuer shall not be liable for, and indemnifies the Issuer against, all
liabilities,  claims,  costs and expenses  imposed upon or asserted  against the
Issuer on account  of: (a) any loss or damage to  property or injury to or death
of or  loss  by any  person  that  may be  occasioned  by any  cause  whatsoever
pertaining to the  construction,  maintenance,  operation and use of the Project
Facilities;  (b)  any  breach  or  default  on the  part of the  Company  in the
performance  of any covenant or agreement of the Company under this Agreement or
any related document,  or arising from any act or failure to act by the Company,
or any of its agents,  contractors,  servants,  employees or licensees;  (c) the
authorization,  issuance  and  sale  of the  Bonds,  and  the  provision  of any
information  furnished in connection therewith concerning the Project Facilities
or the Company (including,  without limitation, any information furnished by the
Company for inclusion in any certifications made by the Issuer under Section 3.4
hereof or for  inclusion  in, or as a basis for  preparation  of,  the Form 8038
information statement to be filed by the Issuer); and (d) any claim or action or
proceeding  with  respect  to the  matters  set forth in (a),  (b) and (c) above
brought thereon.

     The  Company  agrees to  indemnify  the  Trustee,  the  Paying  Agent,  the
Remarketing  Agent,  the Auction  Agent,  and the  Registrar  (each  hereinafter
referred to in this section as an  "indemnified  party") for and to hold each of
them  harmless  against all  liabilities,  claims,  costs and expenses  incurred
without  negligence or willful  misconduct on the part of the indemnified party,
on account of any action taken or omitted to be taken by the  indemnified  party
in accordance  with the terms of this  Agreement,  the Bonds or the Indenture or
any action taken at the request of or with the consent of the Company, including
the costs and expenses of the indemnified  party in defending itself against any
such claim,  action or  proceeding  brought in  connection  with the exercise or
performance  of any of its powers or duties under this  Agreement,  the Bonds or
the Indenture.

     In case any action or  proceeding  is brought  against  the  Issuer,  or an
indemnified  party in respect of which  indemnity may be sought  hereunder,  the
party seeking indemnity  promptly shall give notice of that action or proceeding
to the  Company,  and the Company  upon  receipt of that  notice  shall have the
obligation  and the right to assume the  defense  of the  action or  proceeding;
provided,  that  failure of a party to give that  notice  shall not  relieve the
Company  from any of its  obligations  under this  Section  unless that  failure
prejudices  the defense of the action or proceeding  by the Company.  At its own
expense, an indemnified party may employ separate counsel and participate in the
defense; provided,  however, where it is ethically inappropriate for one firm to
represent  the  interests  of the  Issuer,  and any other  indemnified  party or
parties,  the Company shall pay the Issuer's legal  expenses in connection  with
the Issuer's retention of separate counsel.  The Company shall not be liable for
any settlement made without its consent.

     The  indemnification  set forth above is intended to and shall  include the
indemnification of all affected officials,  directors, officers and employees of
the Issuer,  the Trustee,  the Paying Agent, the Remarketing  Agent, the Auction
Agent, and the Registrar,  respectively. That indemnification is intended to and
shall  be  enforceable  by the  Issuer,  the  Trustee,  the  Paying  Agent,  the
Remarketing Agent and the Registrar,  respectively, to the full extent permitted
by law.

     SECTION  V.10.  COMPANY NOT TO  ADVERSELY  AFFECT  EXCLUSION OF INTEREST ON
BONDS FROM GROSS  INCOME FOR FEDERAL  INCOME TAX  PURPOSES.  The Company  hereby
covenants and represents that it has taken and caused to be taken and shall take
and cause to be taken all actions that may be required of it for the interest on
the Bonds to be and remain  excluded  from the gross  income of the  Holders for
federal income tax purposes,  and that it has not taken or permitted to be taken
on its behalf, and covenants that it will not take, or permit to be taken on its
behalf,  any action which, if taken, would adversely affect that exclusion under
the provisions of the Code.

     SECTION V.11. USE OF PROJECT FACILITIES. The Issuer agrees that it will not
take any  action,  or cause any action to be taken on its behalf,  to  interfere
with the Company's  ownership  interest in the Project or to prevent the Company
from having  possession,  custody,  use and  enjoyment of the Project other than
pursuant to Article VII of this Agreement or Article VII of the Indenture.

     SECTION V.12. ASSIGNMENT BY COMPANY. Notwithstanding any other provision of
this Loan  Agreement,  this Agreement may be assigned in whole or in part by the
Company and the  Project  may be sold or  conveyed  by the  Company  without the
necessity of obtaining the consent of either the Issuer or the Trustee, subject,
however, to each of the following conditions:

     (a) The Company must provide the Trustee and the Remarketing  Agent with an
Opinion of Bond  Counsel  that such  action  will not affect  the  exclusion  of
interest on the Bonds for federal income tax purposes.

     (b) Ambac Assurance must provide to the Trustee its written consent to such
action.

     (c) The Company shall,  within 30 days after execution thereof,  furnish or
cause to be furnished to the Issuer and the Trustee a true and complete  copy of
each such assignment together with any instrument of assumption.

     (d) Any assignment from the Company shall not materially impair fulfillment
of the Project Purposes to be accomplished by operation of the Project as herein
provided.

     SECTION V.13. THE DEPOSITORY  TRUST COMPANY LETTER OF  REPRESENTATION.  The
Company  agrees  that it shall  cause the  Trustee  on  behalf of the  Issuer to
fulfill the  obligations  set forth in the  Depository  Trust Company  Letter of
Representation for the Bonds.

                               (End of Article V)




                                   ARTICLE VI

                                   REDEMPTION

     SECTION VI.1. OPTIONAL REDEMPTION.  Provided no Event of Default shall have
occurred and be  subsisting,  at any time and from time to time, the Company may
deliver  moneys to the  Trustee  in  addition  to Loan  Payments  or  Additional
Payments  required  to be made and  direct  the  Trustee  to use the  moneys  so
delivered for the purpose of calling Bonds for optional redemption in accordance
with  the  applicable   provisions  of  the  Indenture  providing  for  optional
redemption at the redemption price stated in the Indenture.  Pending application
for those  purposes,  any moneys so delivered  shall be held by the Trustee in a
special  account in the Bond Fund and delivery of those moneys shall not, except
as set forth in Section 4.1 hereof,  operate to abate or postpone  Loan Payments
or Additional  Payments  otherwise becoming due or to alter or suspend any other
obligations of the Company under this Agreement.

     SECTION V1.2.  EXTRAORDINARY  OPTIONAL REDEMPTION.  The Company shall have,
subject to the  conditions  hereinafter  imposed,  the option during a Term Rate
Period to direct the redemption of the Bonds in whole upon the occurrence of the
event  described  below in paragraph (c) and in part upon the  occurrence of the
other events described below in accordance with the applicable provisions of the
Indenture.  In the event that any of the events described below affect less than
all of the Project Facilities and the Generating  Stations which they serve, the
Bonds may be redeemed in an amount equal to the outstanding  principal amount of
the  Bonds  multiplied  by the  allocable  percentage  figure  for each  Project
Facility,  to-wit: 50.5% for Unit 4 of the Gibson Generating Station,  19.0% for
Unit 2 of  the  Gibson  Generating  Station,  18.5%  for  Unit  5 of the  Gibson
Generating  Station,  8.5% for Wabash  River  Generating  Station,  1.5% for the
Noblesville  Generating  Station,  1.0% for the Edwardsport  Generating Station,
1.0% for the Cayuga Generating  Station,  and 0.0% for the Gallagher  Generating
Station.

     (a) One or more of the Project Facilities or the Generating  Stations which
they serve shall have been  damaged or destroyed to such an extent that (1) such
Project Facilities or such Generating  Stations cannot reasonably be expected to
be restored, within a period of six consecutive months, to the condition thereof
immediately  preceding  such  damage  or  destruction  or  (2)  the  Company  is
reasonably  expected  to be  prevented  from  carrying  on its  normal  use  and
operation of such Project Facilities or such Generating Stations for a period of
six consecutive months.

     (b) Title to, or the temporary use of, all or a significant  part of one or
more of the Project Facilities or the Generating Stations which they serve shall
have been taken  under the  exercise  of the power of eminent  domain to such an
extent (1) that such  Project  Facilities  or such  Generating  Stations  cannot
reasonably be expected to be restored within a period of six consecutive  months
to a condition of usefulness  comparable to that existing prior to the taking or
(2) the Company is  reasonably  expected to be  prevented  from  carrying on its
normal use and operation of such Project Facilities or such Generating  Stations
for a period of six consecutive months.

     (c) As a result  of any  changes  in the  Constitution  of the  State,  the
Constitution  of the United States of America or any state or federal laws or as
a result of legislative or  administrative  action (whether state or federal) or
by final decree,  judgment or order of any court or administrative body (whether
state or federal) entered after any contest thereof by the Issuer or the Company
in good  faith,  this  Agreement  shall have  become  void or  unenforceable  or
impossible  of  performance  in  accordance  with the intent and  purpose of the
parties as expressed in this Agreement.

     (d) Unreasonable  burdens or excessive  liabilities shall have been imposed
upon the  Issuer  or the  Company  with  respect  to one or more of the  Project
Facilities or the Generating Stations which they serve or the operation thereof,
including,  without  limitation,  the  imposition of federal,  state or other ad
valorem,  property,  income or other  taxes  other than ad valorem  taxes at the
rates  presently  levied upon privately owned property used for the same general
purpose as such Project Facilities or such Generating Stations.

     (e)  Changes  in the  economic  availability  of raw  materials,  operating
supplies,  energy sources or supplies or facilities (including,  but not limited
to,  facilities in connection with the disposal of industrial  wastes) necessary
for the  operation of one or more of the Project  Facilities  or the  Generating
Stations  which they serve for the Project  Purposes occur or  technological  or
other changes occur which the Company cannot reasonably  overcome or control and
which in the Company's  reasonable  judgment  render such Project  Facilities or
such Generating Stations uneconomic or obsolete for the Project Purposes.

     (f) Any court or  administrative  body  shall  enter a  judgment,  order or
decree, or shall take administrative action,  requiring the Company to cease all
or any substantial  part of its operations  served by one or more of the Project
Facilities or the  Generating  Stations which they serve to such extent that the
Company is or will be prevented  from carrying on its normal  operations at such
Project  Facilities or such Generating  Stations for a period of six consecutive
months.

     (g) The  termination  by the Company of operations at any of the Generating
Stations which are served by any of the Project Facilities.

     The amount payable by the Company in the event of its exercise of the
option granted in this Section shall be the sum of the following:

          (i) An amount of money which, when added to the moneys and investments
     held to the credit of the Bond Fund,  will be  sufficient  pursuant  to the
     provisions of the Indenture to pay, at 100% of the principal amount thereof
     plus accrued  interest to the redemption  date, and discharge,  all or such
     portion of  Outstanding  Bonds to be  redeemed on the  earliest  applicable
     redemption date, that amount to be paid to the Trustee, plus


          (ii) An amount of money equal to the Additional  Payments  relating to
     those Bonds accrued and to accrue until actual final payment and redemption
     of those Bonds,  that amount or applicable  portions  thereof to be paid to
     the Trustee or to the Persons to whom those Additional Payments are or will
     be due.

     The requirement of (ii) above with respect to Additional Payments to accrue
may be met if provisions satisfactory to the Trustee and the Issuer are made for
paying those amounts as they accrue.

     The  rights and  options  granted to the  Company  in this  Section  may be
exercised  whether or not the Company is in default  hereunder;  provided,  that
such default will not relieve the Company from  performing  those  actions which
are necessary to exercise any such right or option granted hereunder.

     SECTION  VI.3.  MANDATORY  REDEMPTION.  The  Company  shall  deliver to the
Trustee the moneys needed to redeem the Bonds in  accordance  with any mandatory
redemption  provisions  relating thereto as may be set forth in Sections 4.01(b)
of the Indenture.

     SECTION VI.4. NOTICE OF REDEMPTION.  In order to exercise an option granted
in, or to  consummate  a  redemption  required  by, this Article VI, the Company
shall,  within 180 days  following  the event  authorizing  the exercise of such
option,  or at any time during the continuation of the condition  referred to in
paragraphs  (c), (d) or (e) of Section 6.2 hereof,  or at any time that optional
redemption of the Bonds is permitted  under the Indenture as provided in Section
6.1 hereof, or promptly upon the occurrence of a Determination of Taxability (as
defined in the  Indenture),  give  written  notice to the Issuer and the Trustee
that it is exercising its option to direct the redemption of Bonds,  or that the
redemption  thereof is required by Section  4.01(b) of the  Indenture due to the
occurrence of a Determination  of Taxability,  as the case may be, in accordance
with the Agreement  and the  Indenture,  and shall  specify  therein the date on
which such redemption is to be made,  which date shall not be more than 180 days
from the date  such  notice is  mailed.  The  Company  shall  make  arrangements
satisfactory  to the Trustee for the giving of the required notice of redemption
to the Holders of the Bonds, in which arrangements the Issuer shall cooperate.

     SECTION  VI.5.  ACTIONS BY  ISSUER.  At the  request of the  Company or the
Trustee,  the Issuer  shall take all steps  required of it under the  applicable
provisions  of the  Indenture or the Bonds to effect the  redemption of all or a
portion of the Bonds pursuant to this Article VI.

                               (End of Article VI)





                                   ARTICLE VII

                         EVENTS OF DEFAULT AND REMEDIES

     SECTION VII.1.  EVENTS OF DEFAULT.  Each of the following shall be an Event
of Default:

     (a) The  occurrence  of an event of default as defined in Section 7.01 (a),
(b), or (c) of the Indenture;

     (b) The Company shall fail to observe and perform any other agreement, term
or condition  contained in this Agreement,  other than such failure as will have
resulted in an event of default  described in (a) above and the  continuation of
that failure for a period of 90 days after notice  thereof shall have been given
to the Company by the Issuer or the  Trustee,  or for such longer  period as the
Issuer and the Trustee may agree to in writing; provided, that failure shall not
constitute an Event of Default so long as the Company institutes curative action
within the applicable  period and  diligently  pursues that action to completion
within 150 days after the expiration of initial cure period as determined above,
or within  such  longer  period as the  Issuer and the  Trustee  may agree to in
writing; and

     (c) The receipt by the Trustee of written notice from Ambac  Assurance that
an  event  of  default  has  occurred  and is  continuing  under  the  Insurance
Agreement; and

     (d)
          (i) By decree of a court of competent  jurisdiction  the Company shall
     be  adjudicated a bankrupt,  or an order shall be made approving a petition
     or answer filed seeking reorganization or readjustment of the Company under
     the federal bankruptcy laws or other law or statute of the United States of
     America  or of the state of  incorporation  of the  Company or of any other
     state, or, by order of such a court, a trustee in bankruptcy, a receiver or
     receivers shall be appointed of all or substantially all of the property of
     the Company,  and any such decree or order shall have continued unstayed on
     appeal or otherwise and in effect for a period of sixty (60) days; or

          (ii) The Company  shall file a petition  in  voluntary  bankruptcy  or
     shall make an  assignment  for the benefit of creditors or shall consent to
     the  appointment  of a  receiver  or  receivers  of all or any  part of its
     property,  or shall file a petition seeking  reorganization or readjustment
     under the  Federal  bankruptcy  laws or other law or  statute of the United
     States of America or any state  thereof,  or shall file a petition  to take
     advantage of any debtors' act.

     Notwithstanding the foregoing,  if, by reason of Force Majeure, the Company
is unable to perform or observe any  agreement,  term or condition  hereof which
would give rise to an Event of Default under subsection (b) hereof,  the Company
shall  not be  deemed in  default  during  the  continuance  of such  inability.
However, the Company shall promptly give notice to the Trustee and the Issuer of
the  existence  of an event of Force  Majeure and shall use its best  efforts to
remove the effects  thereof;  provided  that the  settlement of strikes or other
industrial disturbances shall be entirely within its discretion.

     The  exercise  of  remedies  hereunder  shall be subject to any  applicable
limitations of federal  bankruptcy law affecting or precluding that  declaration
or exercise  during the pendency of or  immediately  following  any  bankruptcy,
liquidation or reorganization proceedings.

     SECTION VII.2. REMEDIES ON DEFAULT. Whenever an Event of Default shall have
happened and be subsisting,  either or both of the following  remedial steps may
be taken:

     (a) The Issuer or the Trustee may have access to, inspect, examine and make
copies of the books, records,  accounts and financial data of the Company, only,
however, insofar as they pertain to the Project; or

     (b) The Issuer or the  Trustee  may pursue all  remedies  now or  hereafter
existing at law or in equity to recover all amounts, including all Loan Payments
and Additional Payments and under Section 4.8 hereof the purchase price of Bonds
tendered  for  purchase,  then due and  thereafter  to  become  due  under  this
Agreement,  or to enforce the performance and observance of any other obligation
or agreement of the Company under this Agreement.

     Notwithstanding  the  foregoing,  the Issuer shall not be obligated to take
any step which in its opinion  will or might cause it to expend time or money or
otherwise  incur  liability  unless and until a satisfactory  indemnity bond has
been  furnished  to the Issuer at no cost or expense to the Issuer.  Any amounts
collected as Loan  Payments or applicable to Loan Payments and any other amounts
which would be applicable to payment of Bond Service Charges collected  pursuant
to action taken under this Section  shall be paid into the Bond Fund and applied
in accordance with the provisions of the Indenture or, if the outstanding  Bonds
have  been  paid  and  discharged  in  accordance  with  the  provisions  of the
Indenture,  shall be paid as  provided  in  Section  5.07 of the  Indenture  for
transfers of remaining amounts in the Bond Fund.

     The provisions of this Section are subject to the further  limitation  that
the rescission and annulment by the Trustee of its  declaration  that all of the
Bonds are  immediately  due and payable also shall  constitute a rescission  and
annulment of any  corresponding  declaration made pursuant to this Section and a
rescission  and annulment of the  consequences  of that  declaration  and of the
Event of Default with respect to which that declaration has been made,  provided
that no such  rescission and annulment  shall extend to or affect any subsequent
or other default or impair any right consequent thereon.

     SECTION VII.3. NO REMEDY EXCLUSIVE. No remedy conferred upon or reserved to
the Issuer or the Trustee by this  Agreement  is intended to be exclusive of any
other  available  remedy or  remedies,  but each and every such remedy  shall be
cumulative  and shall be in  addition  to every  other  remedy  given under this
Agreement,  or now or  hereafter  existing at law,  in equity or by statute.  No
delay or omission to exercise any right or power accruing upon any default shall
impair that right or power or shall be construed to be a waiver thereof, but any
such  right or power may be  exercised  from time to time and as often as may be
deemed expedient.  In order to entitle the Issuer or the Trustee to exercise any
remedy  reserved to it in this  Article,  it shall not be  necessary to give any
notice,  other than any notice required by law or for which express provision is
made herein.

     SECTION VII.4.  AGREEMENT TO PAY ATTORNEYS' FEES AND EXPENSES.  If an Event
of Default  should occur and the Issuer or the Trustee  should  incur  expenses,
including  attorneys' fees, in connection with the enforcement of this Agreement
or the collection of sums due hereunder,  the Company shall be required,  to the
extent permitted by law, to reimburse the Issuer and the Trustee, as applicable,
for the expenses so incurred upon demand.

     SECTION VII.5. NO WAIVER. No failure by the Issuer or the Trustee to insist
upon the  strict  performance  by the  Company  of any  provision  hereof  shall
constitute a waiver of their right to strict  performance  and no express waiver
shall be deemed to apply to any other existing or subsequent right to remedy the
failure by the Company to observe or comply with any provision hereof.

     SECTION VII.6. NOTICE OF DEFAULT. The Company shall notify the Trustee
and Ambac  Assurance  immediately  if it becomes aware of the  occurrence of any
Event of Default  hereunder or of any fact,  condition or event which,  with the
giving of notice or passage of time or both, would become an Event of Default.

                              (End of Article VII)



                                  ARTICLE VIII

                                  MISCELLANEOUS

     SECTION  VIII.1.  TERM OF AGREEMENT.  This Agreement shall be and remain in
full force and effect  from the date of  delivery  of the Bonds to the  Original
Purchaser until such time as (i) all of the Bonds shall have been fully paid (or
provision made for such payment) and the Indenture has been released pursuant to
Section 9.01  thereof and (ii) all other sums payable by the Company  under this
Agreement  shall have been  paid;  provided,  however,  the  obligations  of the
Company under Sections 4.2 and 5.9 hereof shall survive any  termination of this
Agreement.

     SECTION VIII.2.  AMOUNTS  REMAINING IN FUNDS.  Any amounts in the Bond Fund
remaining  unclaimed  by the  Holders of Bonds for four years after the due date
thereof  (whether  at stated  maturity,  by  redemption,  upon  acceleration  or
otherwise), at the option of the Company, shall be deemed to belong to and shall
be paid, subject to Section 5.06 of the Indenture, at the written request of the
Company,  to the Company by the Trustee.  With respect to that  principal of and
any premium and interest on the Bonds to be paid from moneys paid to the Company
pursuant to the preceding  sentence,  the Holders of the Bonds entitled to those
moneys  shall  look  solely to the  Company  for the  payment  of those  moneys.
Further,  any amounts  remaining in the Bond Fund and any other special funds or
accounts created under this Agreement or the Indenture,  except the Rebate Fund,
after all of the Bonds  shall be deemed to have been paid and  discharged  under
the provisions of the Indenture and all other amounts  required to be paid under
this Agreement and the Indenture have been paid, shall be paid to the Company to
the extent that those  moneys are in excess of the amounts  necessary  to effect
the payment and discharge of the Outstanding Bonds.

     SECTION  VIII.3.  NOTICES.  All  notices,  certificates,  requests or other
communications  hereunder shall be in writing, except as provided in Section 3.4
hereof,  and shall be deemed to be sufficiently  given when mailed by registered
or certified mail,  postage  prepaid,  and addressed to the  appropriate  Notice
Address.  A  duplicate  copy of  each  notice,  certificate,  request  or  other
communication given hereunder to the Issuer, the Company, Ambac Assurance or the
Trustee  shall also be given to the  others.  The  Company,  the  Issuer,  Ambac
Assurance and the Trustee, by notice given hereunder,  may designate any further
or different  addresses to which subsequent notices,  certificates,  requests or
other communications shall be sent.

     SECTION VIII.4.  EXTENT OF COVENANTS OF THE ISSUER; NO PERSONAL  LIABILITY.
All  covenants,  obligations  and  agreements  of the Issuer  contained  in this
Agreement  or the  Indenture  shall be effective  to the extent  authorized  and
permitted by applicable law. No such covenant,  obligation or agreement shall be
deemed to be a  covenant,  obligation  or  agreement  of any  present  or future
member,  officer,  agent or  employee  of the Issuer in other than his  official
capacity,  and neither the members of the Issuer nor any official  executing the
Bonds  shall be liable  personally  on the Bonds or be subject  to any  personal
liability or  accountability  by reason of the issuance  thereof or by reason of
the  covenants,  obligations  or  agreements  of the  Issuer  contained  in this
Agreement or in the Indenture.

     SECTION VIII.5.  BINDING EFFECT.  This Agreement shall inure to the benefit
of and shall be  binding  in  accordance  with its terms  upon the  Issuer,  the
Company and their respective permitted successors and assigns provided that this
Agreement may not be assigned by the Company (except as permitted under Sections
5.8 or 5.12  hereof)  and may not be  assigned  by the Issuer  except to (i) the
Trustee pursuant to the Indenture or as otherwise may be necessary to enforce or
secure payment of Bond Service Charges or (ii) any successor  public body to the
Issuer.

     SECTION VIII.6.  AMENDMENTS AND SUPPLEMENTS.  Except as otherwise expressly
provided in this Agreement or the  Indenture,  subsequent to the issuance of the
Bonds and prior to all  conditions  provided for in the Indenture for release of
the Indenture  having been met, this Agreement may not be  effectively  amended,
changed,  modified,  altered or terminated by the parties hereto except with the
consents  required by, and in accordance  with,  the provisions of Article XI of
the Indenture, as applicable.

     SECTION VIII.7.  EXECUTION COUNTERPARTS.  This Agreement may be executed in
any number of  counterparts,  each of which shall be regarded as an original and
all of which shall constitute but one and the same instrument.

     SECTION VIII.8.  SEVERABILITY.  If any provision of this Agreement,  or any
covenant,  obligation or agreement  contained herein is determined by a judicial
or administrative  authority to be invalid or unenforceable,  that determination
shall not affect any other provision, covenant, obligation or agreement, each of
which shall be construed and enforced as if the invalid or unenforceable portion
were not contained herein. That invalidity or unenforceability  shall not affect
any  valid  and  enforceable  application  thereof,  and  each  such  provision,
covenant,  obligation or agreement  shall be deemed to be effective,  operative,
made,  entered  into or taken in the manner and to the full extent  permitted by
law.

     SECTION  VIII.9.  GOVERNING  LAW.  This  Agreement  shall be deemed to be a
contract made under the laws of the State and for all purposes shall be governed
by and construed in accordance with the laws of the State.

                              (End of Article VIII)




     IN WITNESS  WHEREOF,  the Issuer and the Company have caused this Agreement
to be duly executed in their respective  names, all as of the date  hereinbefore
written.

                                               INDIANA DEVELOPMENT FINANCE
                                               AUTHORITY

                                               By: ----------------------------
                                                    William  H. King, Chairman

Attest:



---------------------------------------------------------
Courtney R. Tobin, Executive Director





                                               PSI ENERGY, INC.



                                               By: -----------------------------
                                                        Assistant Treasurer







                                    EXHIBIT A

                                     PROJECT
                                     -------

                      SERIES 1990 PRINCETON REFUNDED BONDS
                               (Series 1982 Bonds)

Facility 1 - Flue gas  desulfurization  and  sludge  fixation  system for Gibson
             Generating Station, Unit #5.

Facility 2 - Electrostatic precipitator for Gibson Generating Station, Unit #5.

Facility 3 - Off-road  solid waste  transport  /disposal site  improvements  for
             Gibson Generating Station, Unit #5.


                           SERIES 1990 REFUNDED BONDS

Facility 1 - Improvements and modifications for Edwardsport  Generating  Station
             ash disposal facilities.

Facility 2 - Sewage lift station for Edwardsport Generating Station.

Facility 3 - Improvements and modifications for Noblesville  Generating  Station
             ash disposal facilities.

Facility 4 - Replacement of sewage  treatment  plant at Wabash River  Generating
             Station.

Facility 5 - Discrete  portions of  demineralizer  for Wabash  River  Generating
             Station dedicated exclusively to regeneration of resin beds.

Facility 6 - Improvements and modifications for Wabash River Generating  Station
             ash disposal facilities.

Facility 7 - Sewage treatment plant for Gallagher Generating Station.

Facility 8 - Improvements and modifications for Gallagher Generating Station ash
             disposal facilities.

Facility 9 - Improvements and modifications  for Cayuga  Generating  Station ash
             disposal facilities.

Facility 10 - Improvements and modifications  for Gibson Generating  Station ash
              disposal facilities.

Facility 11 - Improvements and modifications  for Gibson Generating  Station ash
              disposal facilities.




                           SERIES 1993A REFUNDED BONDS

Facility 3 - Improvements and modifications for Wabash River Generating  Station
             and disposal system.

Facility 5 - Discrete  portions  of  demineralizer  for  Gallagher  Generating
             Station.

Facility 6 - Improvements and modifications  for Gibson  Generating  Station ash
             collection and disposal system.

Facility 7 - Sludge  stabilization  and  disposal  system for Gibson  Generating
             Station, Unit #4.

Facility 8 - Integrated control system for Gibson Generating Station.