<PAGE>   1

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


              THIRD AMENDED AND RESTATED SECURITY DEPOSIT AGREEMENT

                          dated as of February 11, 1998


                                      among


                        JAMES RIVER COGENERATION COMPANY


                           COGENTRIX OF VIRGINIA, INC.


                                 CREDIT LYONNAIS
                as Grantee for the Benefit of the Secured Parties
                               and as Issuing Bank


                                       and


                           FIRST UNION NATIONAL BANK,
                                as Security Agent



                   ------------------------------------------
                              Cogeneration Facility
                               Hopewell, Virginia
                   ------------------------------------------



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

<PAGE>   2

                                TABLE OF CONTENTS
                                                                          Page
                                                                          ----

                                   ARTICLE I

               Definitions................................................. 3

                                   ARTICLE II

               Appointment of Security Agent;
               Establishment of Accounts .................................. 6
SECTION 2.1    Appointment of Security Agent............................... 6
SECTION 2.2    Creation of Accounts........................................ 6

                                  ARTICLE III

               Deposits into Accounts...................................... 7
SECTION 3.1    Security Interest; Deposit of Revenues and
               Special Payments............................................ 7
SECTION 3.2    Books of Account............................................ 7
SECTION 3.3    Deposits Irrevocable........................................ 8
SECTION 3.4    Indemnity Agreements........................................ 8

                                   ARTICLE IV

               Payments from Accounts...................................... 8
SECTION 4.1    Revenue Account -- Weekly Payments.......................... 8
SECTION 4.2    Revenue Account -- Monthly Payments......................... 8
SECTION 4.3    Revenue Account -- Quarterly Payments....................... 10
SECTION 4.4    Senior Debt Service Account................................. 11
SECTION 4.5    Distributions from the Debt Protection Security Account..... 11
SECTION 4.6    Debt Protection Account..................................... 12
SECTION 4.7    Special Payment Account..................................... 13
SECTION 4.8    Property Tax Account........................................ 13
SECTION 4.9    ............................................................ 14
SECTION 4.10   Transfers Following Events of Default Acceleration.......... 14
SECTION 4.11   Transfers from Accounts on the Effective Date............... 14

                                   ARTICLE V

               Investment.................................................. 16

                                   ARTICLE VI

               Security Agent.............................................. 16
SECTION 6.1    Rights, Duties, Etc......................................... 16
SECTION 6.2    Resignation or Removal...................................... 17

                                  ARTICLE VII

               Determinations.............................................. 18


                                      -i-

<PAGE>   3

                           TABLE OF CONTENTS (Cont'd)

                                                                          Page
                                                                          ----

SECTION 7.1    Value....................................................... 18
SECTION 7.2    Other Determinations........................................ 18
SECTION 7.3    Available Cash.............................................. 18

                                  ARTICLE VIII

               Miscellaneous............................................... 19
SECTION 8.1    Fees and Indemnification of Security Agent.................. 19
SECTION 8.2    Termination, Etc............................................ 19
SECTION 8.3    Severability................................................ 19
SECTION 8.4    Counterparts................................................ 20
SECTION 8.5    Amendments.................................................. 20
SECTION 8.6    Applicable Law.............................................. 20
SECTION 8.7    Notices..................................................... 20
SECTION 8.8    Limitations on Recourse..................................... 20
SECTION 8.9    Benefit of Agreement........................................ 22



                                      -ii-

<PAGE>   4



                  THIRD AMENDED AND RESTATED SECURITY DEPOSIT AGREEMENT, dated
as of February 11, 1998, among JAMES RIVER COGENERATION COMPANY, a North
Carolina general partnership (the "Partnership"); COGENTRIX OF VIRGINIA, INC., a
Virginia corporation ("Cogentrix Virginia"); CREDIT LYONNAIS, as grantee (in
such capacity, the "Grantee") for the benefit of the Secured Parties referred to
below and as issuer of the Debt Service Letter of Credit as defined in the
Reimbursement Agreement referred to below (in such capacity, the "Issuing
Bank"); and FIRST UNION NATIONAL BANK, a national banking association, as agent
for the Grantee under this Agreement (the "Security Agent").


                              W I T N E S S E T H :


                  WHEREAS, the Partnership owns and operates a cogeneration
facility having a gross nameplate rating of 110 megawatts located in Hopewell,
Virginia (the "Facility"); and

                  WHEREAS, the acquisition, construction and equipping of the
Facility has been financed by credit facilities made available pursuant to an
Application for Letter of Credit and Reimbursement Agreement dated as of
December 1, 1986, as amended by First Amendment dated as of February 20, 1987,
among Cogentrix Virginia, Bank Paribas, New York Branch, as issuing bank (in
such capacity, the "Original Issuing Bank"), certain banks (the "Original
Banks") and Banque Paribas, New York Branch, as agent (in such capacity, the
"Original Agent"), and as further amended by an Assumption and Modification
Agreement dated as of October 1, 1987 among the Partnership, Cogentrix Virginia,
the Original Issuing Bank, the Original Banks and the Original Agent (herein
called the "Original Reimbursement Agreement"); and

                  WHEREAS, pursuant to the provisions of the Original
Reimbursement Agreement, Cogentrix Virginia, the Grantee, NCNB National Bank of
North Carolina (the "Original Security Agent"), Cogentrix, Inc., a North
Carolina corporation, and Combustion Engineering, Inc., a Delaware corporation,
entered into a Security Deposit Agreement dated as of December 31, 1986, as
amended by Modification Agreement dated as of October 1, 1987 among said parties
and the Partnership (herein called the "Original Security Deposit Agreement");
and

                  WHEREAS, the parties to the Original Reimbursement Agreement
amended and restated such agreement pursuant to the Amended and Restated
Application for Letter of Credit and Reimbursement Agreement dated as of
September 1, 1988, among the Partnership, the Original Issuing Bank, the Banks
(as defined therein) and the Original Agent, and such parties subsequently
amended and restated such Amended and Restated Application for Letter of Credit
and

<PAGE>   5
                                                                               2



Reimbursement Agreement pursuant to the Second Amended and Restated
Application for Letter of Credit and Reimbursement Agreement, dated as of July
1, 1996, among the Partnership, (as defined therein) and the Original Agent
(such Second Amended and Restated Application for Letter of Credit and
Reimbursement Agreement herein called the "Existing Reimbursement Agreement");
and

                  WHEREAS, the Partnership, Cogentrix Virginia, the Grantee and
the Original Security Agent amended and restated the Original Security Deposit
Agreement pursuant to the Amended and Restated Security Deposit Agreement, dated
as of September 1, 1988, and such parties subsequently amended and restated such
Amended and Restated Security Deposit Agreement pursuant to the Second Amended
and Restated Security Deposit Agreement, dated as of July 1, 1996 (such Second
Amended and Restated Security Deposit Agreement herein called the "Existing
Security Deposit Agreement"); and

                  WHEREAS, the Original Agent desires to resign as agent for the
banks under the Existing Reimbursement Agreement and as grantee under the
Existing Security Deposit Agreement and Credit Lyonnais has agreed to accept
such positions; and

                  WHEREAS, the parties to the Existing Reimbursement Agreement
have agreed to amend and restate the Existing Reimbursement Agreement in its
entirety pursuant to a Third Amended and Restated Application for Letter of
Credit and Reimbursement Agreement, dated as of February 11, 1998 (herein, as
amended, supplemented or otherwise modified from time to time, called the
"Reimbursement Agreement"), among the Partnership, the banks identified as
"Banks" on the signature pages thereof (the "Banks") and Credit Lyonnais as the
Issuing Bank and as the agent for the Banks and the Issuing Bank (in such
capacity, the "Agent"); and

                  WHEREAS, it is a condition to the Reimbursement Agreement's
becoming effective that the Existing Security Deposit Agreement shall be amended
and restated in its entirety to read as hereinafter set forth; and

                  WHEREAS, First Union National Bank has agreed to continue to
act as agent for the Grantee pursuant to the terms of this Agreement; and

                  NOW, THEREFORE, in consideration of the premises and of other
good and valuable consideration, receipt of which is hereby acknowledged, the
parties hereto hereby agree that on the Effective Date (as hereinafter defined)
the Existing Security Deposit Agreement shall be amended and restated in its
entirety to read as follows:

<PAGE>   6
                                                                               3


                                    ARTICLE I

                                   Definitions

                  Unless the context shall otherwise require, the capitalized
terms used herein (and not otherwise defined herein) shall have the meanings
assigned to them in the Reimbursement Agreement (such definitions to be equally
applicable to the singular and plural forms of the terms defined).

                  In addition, the following terms when used herein shall have
the following meanings:

                  "Accounts" shall mean the Revenue Account, the Senior Debt
         Service Account, the Debt Protection Account, the Special Payment
         Account, the Property Tax Account and the Insurance Proceeds Account.

                  "Agreement", "hereto", "hereof", "hereunder" and words of
         similar import shall mean this Third Amended and Restated Security
         Deposit Agreement, as the same may from time to time be amended,
         supplemented or otherwise modified in accordance with the provisions
         hereof.

                  "Debt Protection Account" shall mean the special account
         designated by that name established by the Security Agent pursuant to
         Section 2.2 of the Existing Security Deposit Agreement, and continued
         to be maintained by the Security Agent pursuant to this Agreement.

                  "Distribution Certificate" shall mean a certificate signed by
         the Treasurer of the Partnership and countersigned by the Grantee
         certifying that, as of a Partnership Distribution Date, all conditions
         have been satisfied under Section 8.3 of the Reimbursement Agreement
         for the Partnership to make Restricted Payments.

                  "Effective Date" shall mean the date designated as the
         "Effective Date" in a written notice delivered by the Grantee to the
         Security Agent.

                  "Insurance Proceeds Account" shall mean the special account
         designated by that name established by the Security Agent pursuant to
         Section 2.2(b) hereof.

                  "Lenders" shall mean the Grantee and the Secured Parties.

                  "Monthly Distribution Date" the seventh day of each calendar
         month unless such day is not a Business Day, in which case the Business
         Day next succeeding such seventh day of such calendar month.

                  "Partnership Distribution Date" shall mean the first Business
         Day to occur after each date on which the Security Agent makes the
         transfers from the Revenue Account required


<PAGE>   7
                                                                               4


         by Section 4.3 hereof.

                  "Permitted Investments" shall mean (a) marketable direct
         obligations of the United States of America, (b) marketable obligations
         directly and fully guaranteed as to interest and principal by the
         United States of America, (c) demand deposits with the Security Agent,
         and time deposits, certificates of deposit and banker's acceptances
         issued by (i) the Agent or (ii) any member bank of the Federal Reserve
         System which is organized under the laws of the United States of
         America or any state thereof or any United States branch of a foreign
         bank, in each case whose long-term debt securities are rated "A" or
         better by Standard & Poor's Corporation and "A2" or better by Moody's
         Investors Service, Inc., (d) commercial paper or tax exempt obligations
         given the highest rating by Moody's Investors Service, Inc. and
         Standard & Poor's Corporation, (e) obligations of the Agent or any bank
         described in clause (c) above, in respect of the repurchase of
         obligations of the type as described in clauses (a) and (b) hereof,
         provided that such repurchase obligations shall be fully secured by
         obligations of the type described in said clauses (a) and (b) and the
         possession of such obligations shall be transferred to, and segregated
         from other obligations owned by, the Agent or any such bank, (f)
         instruments rated "AAA" by Standard & Poor's Corporation and "Aaa" by
         Moody's Investors Service, Inc. issued by investment companies and
         having a maturity of 180 days or less, (g) eurodollar certificates of
         deposit issued by the Agent or any bank described in clause (c) above,
         and (h) marketable securities rated not less than "A-1" by Standard &
         Poor's Corporation or not less than "Prime-1" by Moody's Investors
         Service, Inc. In no event shall any cash in the Accounts be invested in
         any obligation, certificate of deposit, acceptance, commercial paper or
         instrument which by its terms matures (A) more than 180 days after the
         date of investment, unless the Agent or a bank meeting the requirements
         of clause (c) above shall have agreed to repurchase such obligation,
         certificate of deposit, acceptance, commercial paper or instrument at
         its purchase price plus earned interest within no more than 180 days
         after its purchase hereunder or (B) after the next Installment Payment
         Date.

                  "Property Tax Account" shall mean the special account
         designated by that name established by the Security Agent pursuant to
         Section 2.2(b) hereof.

                  "Quarterly Distribution Date" shall mean the earlier of (i)
         the date which is one month after each Installment Payment Date and
         (ii) the date after each Installment Payment Date on which the
         Partnership delivers the certificate required by Section 7.15 of the
         Reimbursement Agreement.

                  "Revenue Account" shall mean the special account designated by
         that name established by the Security Agent


<PAGE>   8
                                                                               5


         pursuant to Section 2.2 of the Existing Security Deposit Agreement, and
         continued to be maintained by the Security Agent pursuant to this
         Agreement.

                  "Revenues" shall mean all revenues and payments at any time
         received by the Partnership (other than (i) the proceeds of Loans made
         under the Reimbursement Agreement, (ii) Special Payments and (iii) any
         proceeds payable into the Insurance Proceeds Account pursuant to
         Section 4.12 hereof), including (without limitation) (a) all payments
         received by the Partnership under the Power Purchase Agreement and the
         Steam Purchase Agreement, (b) all other payments received by the
         Partnership from the sale of electricity or steam or by-products
         produced by the Facility, (c) all proceeds of any business interruption
         insurance or contingent business interruption insurance, (d) all
         payments received by the Partnership pursuant to any Swap, (e) the net
         cash proceeds of any sale transfer or other disposition of any asset by
         the Partnership whether or not permitted by Section 8.1 or 14.6 of the
         Reimbursement Agreement, (f) all payments received under all other
         Project Documents, (g) all payments received by the Partnership in
         respect of property tax refunds and (h) the proceeds of all Junior
         Working Capital Loans.

                  "Secured Obligations" shall mean the Senior Debt.

                  "Secured Parties" shall mean the Banks, the Agent, the Issuing
         Bank and any Swap Counterparties.

                  "Senior Debt" shall mean all Obligations of the Partnership to
         the Secured Parties or any of them.

                  "Senior Debt Service Account" shall mean the special account
         designated by that name established by the Security Agent pursuant to
         Section 2.2 of the Existing Security Deposit Agreement, and continued
         to be maintained by the Security Agent pursuant to this Agreement.

                  "Special Payment Account" shall mean the special account
         designated by that name established by the Security Agent pursuant to
         Section 2.2 of the Existing Security Deposit Agreement, and continued
         to be maintained by the Security Agent pursuant to this Agreement.

                  "Special Payments" shall mean the proceeds of all payments of
         damages made by Pontiki or MAPCO Coal, Inc. to the Partnership pursuant
         to Section 9.06 of the Coal Sales Agreement.

                  "Value" shall have the meaning ascribed thereto in Section 7.1
         hereof.

                  "Weekly Distribution Date" shall have the meaning ascribed
         thereto in Section 4.1 hereof.

<PAGE>   9
                                                                               6


                                   ARTICLE II

                         Appointment of Security Agent;
                            Establishment of Accounts

                  SECTION 2.1 Appointment of Security Agent. First Union
National Bank is hereby appointed by the Partnership and the Grantee as security
agent hereunder, and the Security Agent hereby agrees to act as such and to
accept all cash, payments, other amounts and Permitted Investments to be
delivered to or held by the Security Agent pursuant to the terms of this
Agreement. The Security Agent shall hold and safeguard the Accounts (and the
cash, instruments and securities on deposit therein) during the term of this
Agreement and shall treat the cash, instruments and securities in the Accounts
as funds, instruments and securities pledged by the Partnership to the Lenders
to be held by the Security Agent, as agent of the Lenders, in trust in
accordance with the provisions hereof.

                  SECTION 2.2 Creation of Accounts. (a) The Security Agent has
heretofore established and is maintaining the following four special, segregated
and irrevocable cash collateral accounts which shall be maintained at all times
until the termination of this Agreement:

                  (1)      Revenue Account
                  (2)      Senior Debt Service Account
                  (3)      Debt Protection Account
                  (4)      Special Payment Account

                  (b) The Security Agent shall establish on the Effective Date
the following two additional special, segregated and irrevocable cash collateral
accounts which shall be maintained at all times until the termination of this
Agreement:

                  (1)      Insurance Proceeds Account
                  (2)      Property Tax Account


                  (c) All moneys, investments and securities at any time on
deposit in any of the Accounts shall constitute trust funds to be held in the
custody of the Security Agent for the purposes and on the terms set forth in
this Agreement.

                  (d) On the Effective Date after the transfers contemplated by
Section 4.11 hereof shall have been made, the Security Agent shall close and
thereafter shall not be required to maintain the Excess Generation Reserve
Accounts (as defined in the Existing Security Deposit Agreement).

<PAGE>   10
                                                                               7


                                   ARTICLE III

                             Deposits into Accounts

                  SECTION 3.1 Security Interest; Deposit of Revenues and
Special Payments. (a) In order to secure the performance by the Partnership of
all of its covenants, agreements and obligations under the Project Documents and
the payment by the Partnership of all Secured Obligations, this Agreement is
intended to create, and the Partnership hereby pledges to, and creates in favor
of the Grantee for the equal and ratable benefit of the Secured Parties a
security interest in and to, the Accounts, all cash, investments and securities
at any time on deposit in the Accounts, all present and future accounts (as
defined in the North Carolina Uniform Commercial Code) of the Partnership, all
other rights of the Partnership to receive the payment of money including
(without limitation) all moneys due and to become due to the Partnership under
the Power Purchase Agreement and the Steam Purchase Agreement and any other
contract of the Partnership for the sale of electricity or steam or by-products
produced by the Facility and all moneys due and to become due to the Partnership
under the Construction Contract, and all proceeds of any of the foregoing. For
the purpose of perfecting the security interest of the Lenders in and to the
Accounts and all cash, investments and securities at any time on deposit in the
Accounts, the Security Agent shall be deemed to be the agent of the Grantee.

                  (b) The Partnership shall instruct each Person from whom it
receives any Revenues to pay such Revenues directly to the Security Agent for
deposit in the Revenue Account, and if for any reason the Partnership shall
receive any Revenues it shall deliver such Revenues in the exact form received
(but with the Partnership's endorsement, if necessary) to the Security Agent for
deposit in the Revenue Account not later than the third Business Day after the
Partnership's receipt thereof. The Security Agent shall have the right to
collect all Revenues directly from the Persons owing the same. All Revenues
received by the Security Agent shall be deposited in the Revenue Account (except
as otherwise permitted by Section 3.4 hereof).

                  (c) The Partnership shall have no rights or powers with
respect to the Accounts or any of the cash or investments therein except the
Partnership shall have the right to (i) direct investments as provided in
Article V hereof and (ii) have the cash in the Accounts applied in accordance
with the terms hereof.

                  SECTION 3.2 Books of Account. The Security Agent shall
maintain books of account for the Partnership on a cash basis and record therein
all revenues and expenses of the Partnership of which the Security Agent has
knowledge and all distributions from the Accounts hereunder.

                  SECTION 3.3 Deposits Irrevocable. Any deposit made into any
Account hereunder shall be irrevocable and the amount of such deposit and any
instrument or security held in such Account


<PAGE>   11
                                                                               8


hereunder and all interest thereon shall be held in trust by the Security Agent
and applied solely as provided herein.

                  SECTION 3.4 Indemnity Agreements. The Security Agent shall
deposit all payments received pursuant to either of the Indemnity Agreements as
directed by the Grantee which directions shall be in accordance with Section
3.01 of such Indemnity Agreement.


                                   ARTICLE IV

                             Payments from Accounts

                  SECTION 4.1 Revenue Account -- Weekly Payments. On the last
Business Day in each week (a "Weekly Distribution Date"), the Security Agent
shall distribute, from the cash available in the Revenue Account (after making
any distributions then required by Section 4.4 hereof), the following amounts in
the following order of priority:

                  (a) first, to the Partnership for the benefit of the Persons
         entitled thereto and in the respective amounts as specified in writing
         by the Partnership (provided that the payments for coal purchased and
         for the transportation costs of coal shall be paid by the Security
         Agent directly to the Persons entitled thereto), an amount equal to the
         Cash Operating Costs then due and owing by the Partnership for the
         preceding week (other than payments in respect of real and personal
         property taxes); provided that, upon the request of the Grantee the
         Partnership shall, at the time of requesting any amount to be paid
         pursuant to this clause "first", submit to the Grantee copies of
         invoices or other evidence of the expense to be paid;

                  (b) second, to the Grantee, an amount (as certified to the
         Security Agent by the Grantee) equal to the amount then due and owing
         to any Lender pursuant to Section 5 or Section 3A.10 of the
         Reimbursement Agreement; and

                  (c) third, to the Grantee, an amount (as certified to the
         Security Agent by the Grantee) equal to any Administration Fee that is
         then due and payable to the Agent.

                  SECTION 4.2 Revenue Account -- Monthly Payments. On each
Monthly Distribution Date, the Security Agent shall distribute, from the cash
available in the Revenue Account (after making any distribution then required by
Section 4.1), the following amounts in the following order of priority:

                  (a) first, to the Property Tax Account, an amount equal to
         one-twelfth of the real and personal property taxes becoming due and
         payable within the next succeeding 12 months (based on estimates of
         such taxes and the increase in the Value of the Property Tax Account
         that will occur during


<PAGE>   12
                                                                               9


         such 12 months, in each case made in good faith to the best of the
         Partnership's knowledge), as certified to the Security Agent by the
         Partnership;

                  (b) second, (on a pro rata basis if there are insufficient
         funds to make the transfers contemplated by subclauses (i) and (ii) of
         this clause "second") (i) to the Senior Debt Service Account, an amount
         (as certified to the Security Agent by the Grantee) equal to:

                           (a) (x) the interest on all outstanding Loans accrued
                  and unpaid during the one-month period ended on such Monthly
                  Distribution Date (together with any deficiency in the
                  accumulation of such amount during any preceding period or
                  periods) plus (y) an amount equal to the amount then due and
                  payable by the Partnership with respect to the Swaps (together
                  with any deficiency in the accumulation of such amount during
                  any preceding period or periods ); plus

                           (b) if any such interest on outstanding Loans or
                  amount payable with respect to the Swaps is due and payable on
                  a date that is on or before the next succeeding Monthly
                  Distribution Date, an amount equal to the excess of (1) all
                  such interest on outstanding Loans and other amounts payable
                  with respect to the Swaps which will be due and payable on
                  such date over (2) the amount then on deposit in the Senior
                  Debt Service Account for the purpose of paying such interest
                  on outstanding Loans and such amounts payable with respect to
                  the Swaps including any amounts then deposited pursuant to
                  clause (a) above; and

                           (ii) to the Issuing Bank, an amount (as certified to
         the Security Agent by the Issuing Bank) equal to the Debt Service
         Letter of Credit Fee then due and payable;

                  (c) third, (on a pro rata basis if there are insufficient
         funds to make the transfers contemplated by subclauses (i) and (ii) of
         this clause "third") (i) to the Senior Debt Service Account, an amount
         (as certified to the Security Agent by the Grantee) equal to:

                           (a) one-third of the principal amount of the Term
                  Loans which is due and payable on such Monthly Distribution
                  Date or, if no such amount is due and payable on such date,
                  one-third of the principal amount of the Term Loans which is
                  due and payable on the next succeeding Installment Payment
                  Date (together with any deficiency in the accumulation of such
                  amount during any preceding month or months since the last
                  Installment Payment Date); less

                           (b) any increase in the Value of the Senior Debt
                  Service Account which occurred during such month as a result
                  of earnings on the amounts on deposit therein; and

<PAGE>   13
                                                                              10


                           (ii) to the Issuing Bank, an amount (as certified to
         the Security Agent by the Issuing Bank) equal to the Debt Service
         Letter of Credit Loans then due and payable; and

                  (d) fourth, to the Grantee, an amount (as certified to the
         Security Agent by the Grantee) equal to the aggregate amount of Senior
         Debt that is then due and payable to any Lender under the Project
         Documents, other than amounts (a) in respect of the principal of or
         interest on the Loans, (b) in respect of any Administration Fee or any
         Debt Service Letter of Credit Fee or (c) pursuant to Section 5 or
         Section 3A.10 of the Reimbursement Agreement.

                  SECTION 4.3 Revenue Account -- Quarterly Payments. On each
Quarterly Distribution Date the Security Agent shall distribute, from the cash
available in the Revenue Account (after making any distributions then required
by Section 4.1 or 4.2), an amount (as certified to the Security Agent by the
Grantee) equal to the sum of (a) Available Project Cash Flow of the Partnership
for the three-month period ended on the immediately preceding Installment
Payment Date (or, with respect to the first Quarterly Distribution Date to occur
after the Effective Date, the period commencing on the Effective Date and ending
on the Installment Payment Date immediately preceding such Quarterly
Distribution Date) and (b) the aggregate amount of Revenues (other than Project
Revenues) deposited in the Revenue Account during such period, in the following
order of priority:

                      (i) first, to the Issuing Bank, an amount (as certified to
         the Security Agent by the Issuing Bank) equal to the outstanding
         principal amount of all Debt Service Letter of Credit Loans; and

                     (ii) second, to the Debt Protection Account, an amount (as
         certified to the Security Agent by the Grantee) equal to the remainder
         of such Available Project Cash Flow and Revenues.

; provided, that for purposes of determining the amount to be transferred from
the Revenue Account by the Security Agent pursuant to this Section 4.3 on the
Quarterly Distribution Date next succeeding the Effective Date, there shall be
added to the sum of (a) and (b) above an amount (as certified to the Security
Agent by the Grantee) equal to the cash on deposit in the Accounts on the
Effective Date after the transfers pursuant to Section 4.11 hereof have been
made.

                  SECTION 4.4 Senior Debt Service Account. (a) On each date on
which any interest on or principal of the Senior Debt becomes due and payable
pursuant to the Reimbursement Agreement or the Notes, the Security Agent shall
distribute to the Grantee, from the cash available in the Senior Debt Service
Account, an amount equal to such interest or principal then due and payable, as
specified in writing by the Grantee, for


<PAGE>   14
                                                                              11


application by the Grantee in accordance with the provisions of the
Reimbursement Agreement. Any interest on or principal of the Senior Debt which
is not paid when due because of insufficient cash available in the Senior Debt
Service Account or otherwise shall continue to be due, shall accrue interest
from the date due to the date paid at the rate provided for in the Reimbursement
Agreement, and shall be payable as an expense pursuant to Section 4.1 hereof.

                  (b) In the event that, on any date on which a payment of
interest on or principal or other amount (including any, Administration Fee or
Debt Service Letter of Credit Fee or any amount payable with respect to any
Swap) in respect of the Senior Debt becomes due and payable pursuant to the
Reimbursement Agreement, the Notes or any of the Security Documents, there shall
be insufficient cash available in the Senior Debt Service Account, and the Debt
Protection Account to make such payment, the Security Agent shall immediately so
notify the Grantee and the Grantee shall make a drawing under the Debt Service
Letter of Credit in an amount equal to the lesser of the amount available to be
drawn upon under the Debt Service Letter of Credit and the amount required to
make such payment of interest or principal or other amount in full, and apply
the proceeds of such drawing to such payment.

                  (c) If at any time the amount on deposit in the Senior Debt
Service Account shall exceed the then outstanding amount of the Senior Debt
together with both the interest anticipated to accrue thereon and the, Debt
Service Letter of Credit Fees and Administration Fees anticipated to be due and
payable until the date scheduled for the payment in full of the Senior Debt (as
determined in good faith by the Partnership or, if the Grantee shall disagree
with the Partnership's determination, by the Grantee), the Security Agent shall,
upon receipt of a certificate signed by the Treasurer of the Partnership (and
countersigned by the Grantee), certifying as to the amount of such excess in the
Senior Debt Service Account and stating that no Default or Event of Default has
occurred and is continuing, transfer such excess amount from the Senior Debt
Service Account to the Debt Protection Account.

                  SECTION 4.5 Distributions from the Debt Protection Account.
To the extent that at any time the cash then

<PAGE>   15
                                                                              12


available in the Revenue Account is insufficient (i) to pay the Cash Operating
Costs then due, or (ii) to pay principal and interest and any other amount then
due and payable in respect of the Senior Debt, after giving effect to transfers
from the Senior Debt Service Account pursuant to Section 4.4 hereof, or (iii) to
deposit into the Senior Debt Service Account the amount required to be deposited
therein pursuant to Section 4.2 hereof, or (iv) to transfer to the Issuing Bank
the outstanding principal amount of the Debt Service Letter of Credit Loans in
accordance with Section 4.3 hereof or (v) to transfer any amounts then due and
owing to any Swap Counterparty with respect to any Swap in accordance with
Section 4.2 hereof, the Security Agent shall immediately so notify the Grantee
and obtain the cash necessary to make such payment, deposits and transfers (in
accordance with a certificate of the Grantee) from the cash available in the
Debt Protection Account.

                  SECTION 4.6 Debt Protection Account. On each Partnership
Distribution Date, the Security Agent shall distribute, from the cash available
in the Debt Protection Account (after giving effect to any deposit in the Debt
Protection Account made on such date pursuant to Section 4.3 hereof), the
following amounts in the following order of priority, all as specified in a
certificate of the Treasurer of the Partnership, approved in writing by the
Grantee:

                  (i) first, upon receipt of a certificate of the Grantee
         certifying that a mandatory prepayment of the Term Loans is required to
         be made by the Partnership on such Partnership Distribution Date
         pursuant to Section 3.3(b)(ii) of the Reimbursement Agreement, to the
         Grantee for application to such mandatory prepayment, all amounts then
         on deposit in the Debt Protection Account;

                  (ii) second, if the Partnership shall have delivered to the
         Security Agent a Distribution Certificate (countersigned by the
         Grantee), to the Partnership an amount (as certified to the Security
         Agent by the Partnership and the Grantee) equal to the regional and
         central support costs allocated to the Project;

                  (iii) third, if the Partnership shall have delivered to the
         Security Agent a Distribution Certificate (countersigned by the
         Grantee), to Cogentrix Virginia, an amount (as certified to the
         Security Agent by the Partnership and the Grantee) equal to the
         Overhead Fee then due and payable (or previously due but unpaid plus
         interest thereon as provided in the Operation and Maintenance
         Agreement) by the Partnership to Cogentrix Virginia;

                  (iv) fourth, if the Partnership shall have delivered to the
         Security Agent a Distribution Certificate (countersigned by the
         Grantee), to Cogentrix Virginia, an amount (as certified to the
         Security Agent by the Partnership and the Grantee) equal to the
         Incentive Compensation Fee, if any, which is then due and payable (or
         previously due but unpaid


<PAGE>   16
                                                                              13


         plus interest thereon as provided in the Operation and Maintenance
         Agreement) by the Partnership to Cogentrix Virginia;

                  (v) fifth, if the Partnership shall have delivered to the
         Security Agent a Distribution Certificate (countersigned by the
         Grantee), to the obligors in respect of Junior Working Capital Loans,
         an amount (as certified to the Security Agent by the Partnership and
         the Grantee) equal to the principal of and interest on and other
         amounts then due and owing in respect of Junior Working Capital Loans;
         and

                  (vi) sixth, if the Partnership shall have delivered to the
         Security Agent a Distribution Certificate (countersigned by the
         Grantee), to the Partnership, an amount equal to the remainder of the
         cash available in the Debt Protection Account on such Partnership
         Distribution Date.

                  If the Partnership has not delivered a Distribution
Certificate on any Partnership Distribution Date, the Partnership may deliver
such certificate on any Business Day thereafter that is prior to the next
succeeding Partnership Distribution Date and the Security Agent shall, on the
first Business Day after such delivery, transfer from the Debt Protection
Account in accordance with clauses "second" through "sixth" above, an amount
equal to the lesser of (a) the cash then available in the Debt Protection
Account and (b) the cash that was available in the Debt Protection Account on
the immediately preceding Partnership Distribution Date.

                  SECTION 4.7 Special Payment Account. All Special Payments
deposited in the Special Payment Account after the Effective Date shall be
distributed from time to time by the Security Agent to the Grantee, upon receipt
by the Security Agent of a written request therefor from the Grantee, and shall
be applied to the prepayment of the Term Loans as provided in Section
3.3(b)(iii) of the Reimbursement Agreement.

                  SECTION 4.8 Property Tax Account. On each date on which any
real or personal property taxes are due and payable by the Partnership, the
Security Agent shall transfer to the governmental authority or authorities
referred to below, from the cash available in the Property Tax Account, an
amount equal to such taxes, provided that the Security Agent shall have received
a certificate signed by the Treasurer of the Partnership, specifying the amount
or amounts of such taxes and the governmental authority or authorities to which
such taxes are payable. Any such taxes not paid when due because of insufficient
cash available in the Property Tax Account shall be payable as a Cash Operating
Cost pursuant to clause "first" of Section 4.1. If any amount shall remain on
deposit in the Property Tax Account immediately after making any transfer from
said Account pursuant to the first sentence of this Section 4.8, the Security
Agent shall transfer such remaining amount to the Revenue Account.

<PAGE>   17
                                                                              14


                  SECTION 4.9  [intentionally omitted]

                  SECTION 4.10 Transfers Following Events of Default
Acceleration. (a) Upon receipt by the Security Agent of written notice from the
Grantee stating that an Event of Default under the Reimbursement Agreement has
occurred and is continuing, the Security Agent shall thereafter transfer cash
from the Revenue Account pursuant to clause "first" of Section 4.1 hereof and/or
clause "first" of Section 4.2 hereof only after receiving the prior written
consent of the Grantee until notified in writing by the Grantee that such Event
of Default has been waived by the Secured Parties or cured. Such notice shall be
given by the Grantee promptly following any such waiver or cure.

                  (b) If the Grantee shall at any time notify the Security Agent
in writing that an Event of Default under the Reimbursement Agreement has
occurred and is continuing and that as a result thereof the entire outstanding
principal amount of the Loans has become due and payable, then the Security
Agent shall, if requested by the Grantee, promptly withdraw the cash and
investments on deposit in the Accounts to the extent necessary to pay in full
the Senior Debt (as certified to the Security Agent by the Grantee) and deliver
the same to the Grantee, to be applied forthwith to the payment of the Senior
Debt. The Grantee agrees that it shall not request the Security Agent to make
any withdrawal contemplated by the preceding sentence unless the entire
outstanding principal amount of the Loans has become due and payable as a result
of an Event of Default under the Reimbursement Agreement.

                  SECTION 4.11 Transfers from Accounts on the Effective Date.
On the Effective Date, the Security Agent shall distribute to the Partnership
all of the cash available on such date in the Accounts (other than the Revenue
Account) as defined in the Existing Security Deposit Agreement.

                  SECTION 4.12 Insurance Proceeds Account. (a) The Partnership
and the Grantee shall deposit in the Insurance Proceeds Account all payments
received by the Partnership or the Agent from any insurer pursuant to any
insurance against loss or damage to the Project, or to any other insurable
Collateral, maintained by the Partnership pursuant to Section 7.3 of the
Reimbursement Agreement. The Partnership and the Grantee shall also deposit in
the Insurance Proceeds Account the proceeds of any condemnation, requisition or
other governmental taking of any portion of the Project received by it.

                  (b) All moneys and securities at any time on deposit in the
Insurance Proceeds Account, including all interest or other income earned with
respect thereto, are herein called the "Insurance Proceeds Deposits".

                  (c) The Insurance Proceeds Deposits shall be accumulated in
the Insurance Proceeds Account and held therein until paid to or upon the order
of the Partnership as provided in paragraph (d) of this Section 4.12, or paid to
the Grantee as


<PAGE>   18
                                                                              15


provided in paragraph (e) or (f) of this Section 4.12, or returned to the
Partnership as provided in Section 8.2 hereof.

                  (d) Subject to the provisions of paragraphs (e) and (f) of
this Section 4.12, moneys on deposit in the Insurance Proceeds Account shall be
paid over to or upon the order of the Partnership to reimburse it for, or to
pay, the cost of renewing, repairing, rebuilding or otherwise replacing the
damaged or destroyed or condemned property in respect of which such moneys were
received, upon the receipt by the Security Agent of a certificate of the
Treasurer of the Partnership, countersigned by the Grantee, (i) describing in
reasonable detail the work done and materials purchased by way of the renewal,
repair, rebuilding or other replacement of the damaged or destroyed or condemned
property, (ii) stating the specific amount requested to be paid over to or upon
the order of the Partnership, that such amount is requested to reimburse the
Partnership for, or to pay, the cost of such renewal, repair, rebuilding or
other replacement and that such amount, together with amounts remaining in the
Insurance Proceeds Account for such purpose and other funds of the Partnership
available for such purpose, are sufficient to pay in full the cost of such
renewal, repair, rebuilding or other replacement, and (iii) stating that no
Default or Event of Default has occurred and is continuing.

                  (e) If the Grantee shall at any time notify the Security Agent
in writing that an Event of Loss has occurred, the Security Agent shall to the
extent requested in such writing promptly withdraw the Insurance Proceeds
Deposits from the Insurance Proceeds Account and deliver the same to the
Grantee, for application by the Grantee to the payment of the Obligations in
such order as the Secured Parties may determine.

                  (f) If the Grantee shall at any time notify the Security Agent
in writing that an Event of Default under the Reimbursement Agreement has
occurred and is continuing, then the Security Agent shall, if and to the extent
requested in such writing by the Grantee, promptly withdraw the Insurance
Proceeds Deposits from the Insurance Proceeds Account and deliver the same to
the Grantee, to be held by the Grantee and applied to the payment of the
Obligations as they become due in such order as the Secured Parties may
determine.

                                    ARTICLE V

                                   Investment

                  Any cash held by the Security Agent in any Account shall be
invested by the Security Agent from time to time as directed in writing by the
Partnership (unless the Grantee shall have notified the Security Agent that an
Event of Default shall have occurred and is continuing and that the Security
Agent's authority to invest and reinvest at the written direction of the
Partnership is suspended) in Permitted Investments. Any income or gain realized
as a result of any such investment shall be held


<PAGE>   19
                                                                              16


as part of the applicable Account and reinvested as provided herein. The
Security Agent shall have no liability for any loss resulting from any such
investment other than by reason of its wilful misconduct or gross negligence.
Any such investment may be sold (without regard to maturity date) by the
Security Agent whenever necessary to make any distribution required by this
Agreement.


                                   ARTICLE VI

                                 Security Agent

                  SECTION 6.1 Rights, Duties, Etc. The acceptance by the
Security Agent of its duties hereunder is subject to the following terms and
conditions which the parties to this Agreement hereby agree shall govern and
control with respect to the Security Agent's rights, duties, liabilities and
immunities:

                  (a) it shall act hereunder as an agent only and shall not be
         responsible or liable in any manner whatever for the sufficiency,
         correctness, genuineness or validity of any funds or securities
         deposited with or held by it;

                  (b) it shall be protected in acting upon any written notice,
         certificate, instruction, request or other paper or document, as to the
         due execution thereof and the validity and effectiveness of the
         provisions thereof and as to the truth of any information therein
         contained, which the Security Agent in good faith believes to be
         genuine;

                  (c) it shall not be liable for any error of judgment or for
         any act done or step taken or omitted except in the case of its gross
         negligence, wilful misconduct or bad faith;

                  (d) it may consult with and obtain advice from counsel in the
         event of any dispute or question as to the construction of any
         provision hereof;

                  (e) it shall have no duties as Security Agent except those
         which are expressly set forth herein and in any modification or
         amendment hereof; provided, however, that no such modification or
         amendment hereof shall affect its duties unless it shall have given its
         prior written consent thereto;

                  (f) it may execute or perform any duties hereunder either
         directly or through agents or attorneys;

                  (g) it may engage or be interested in any financial or other
         transactions with any party hereto and may act on, or as depositary,
         trustee or agent for, any committee or body of holders of obligations
         of such Persons as freely as if it were not Security Agent hereunder;
         and

<PAGE>   20
                                                                              17


                  (h) it shall not be obligated to take any action which in its
         reasonable judgment would involve it in expense or liability unless it
         has been furnished with reasonable indemnity (it being understood and
         agreed that the general indemnity of the Partnership will constitute a
         reasonable indemnity).

                  SECTION 6.2 Resignation or Removal. (a) The Security Agent
may at any time resign by giving notice to each other party to this Agreement,
such resignation to be effective upon the appointment of a successor Security
Agent as hereinafter provided.

                  (b) The Partnership (with the written approval of the Grantee)
or the Grantee may remove the Security Agent at any time by giving notice to
each other party to this Agreement, such removal to be effective upon the
appointment of a successor Security Agent as hereinafter provided.

                  (c) In the event of any resignation or removal of the Security
Agent, a successor Security Agent, which shall be a bank or trust company
organized under the laws of the United States of America or of the State of New
York or North Carolina, having its principal corporate trust office in New York
or North Carolina and a capital and surplus of not less than $100,000,000, shall
be appointed by the Grantee, subject to the approval of the Partnership (which
approval shall not be unreasonably withheld). If a successor Security Agent
shall not have been appointed and accepted its appointment as Security Agent
hereunder within 45 days after such notice of resignation of the Security Agent
or such notice of removal of the Security Agent, the Security Agent or the
Grantee may apply to any court of competent jurisdiction to appoint a successor
Security Agent to act until such time, if any, as a successor Security Agent
shall have accepted its appointment as above provided. Any successor Security
Agent so appointed by such court shall immediately and without further act be
superseded by any successor Security Agent appointed by the Grantee with the
approval of the Partnership as above provided. Any such successor Security Agent
shall deliver to each party to this Agreement a written instrument accepting
such appointment hereunder and thereupon such successor Security Agent shall
succeed to all the rights and duties of the Security Agent hereunder and shall
be entitled to receive the Accounts from the predecessor Security Agent.


                                   ARTICLE VII

                                 Determinations

                  SECTION 7.1 Value. Cash and Permitted Investments on deposit
from time to time in the Accounts shall be valued by the Security Agent as
follows:

                  (a) cash shall be valued at the face amount thereof; and



<PAGE>   21
                                                                              18


                  (b) Permitted Investments shall be valued at the lesser of the
         face amount thereof and the purchase price thereof.

                  The term "Value" shall mean, with respect to any Account, the
aggregate value of the cash and Permitted Investments then on deposit in such
Account, valued in accordance with the provisions of this Section 7.1.

                  SECTION 7.2 Other Determinations. The Partnership, the
Grantee and the Security Agent shall establish procedures pursuant to which the
Security Agent may conclusively determine, for purposes of this Agreement, the
amounts from time to time to be distributed or paid by the Security Agent from
cash available in the Accounts. In the event of any dispute as to any such
amount, the Security Agent is authorized and directed to retain in its
possession without liability to anyone all or any part of the cash available in
the Accounts until such dispute shall have been settled by mutual agreement of
the Partnership and the Grantee or by a final order, decree or judgment of a
Federal or State court of competent jurisdiction located in the State of North
Carolina or the State of New York, and time for an appeal has expired and no
appeal has been perfected, but the Security Agent shall be under no duty
whatsoever to institute or defend any such proceedings.

                  SECTION 7.3 Available Cash. In determining the amount of
available cash in any Account at any time, in addition to any cash then on
deposit in such Account, the Security Agent shall treat as available cash the
amount which the Security Agent would have received on such day if the Security
Agent had liquidated all the Permitted Investments (at then prevailing market
prices) then on deposit in such Account. The Security Agent will use its best
efforts to sell Permitted Investments such that actual cash is available on each
date on which each distribution is to be made pursuant to this Agreement so that
the Security Agent can make such distribution in cash on such date.

<PAGE>   22
                                                                              19


                                  ARTICLE VIII

                                  Miscellaneous

                  SECTION 8.1 Fees and Indemnification of Security Agent. The
Partnership and Cogentrix Virginia jointly and severally agree to pay such fees
as the Security Agent charges as compensation for its services under this
Agreement. In addition, the Partnership and Cogentrix Virginia hereby jointly
and severally assume liability for and agree to indemnify, protect, save and
keep harmless the Security Agent and its respective successors, assigns, agents
and servants, from and against any and all claims, liabilities, obligations,
losses, damages, penalties, costs and expenses that may be imposed on, incurred
by, or asserted against, at any time, the Security Agent (whether or not also
indemnified against by the Partnership or any other Person under any contract or
instrument) and in any way relating to or arising out of the execution and
delivery of this Agreement, the establishment of the Accounts, the acceptance of
deposits, the purchase or sale of Permitted Investments, the retention of cash
and Permitted Investments or the proceeds thereof and any payment, transfer or
other application of cash or Permitted Investments by the Security Agent in
accordance with the provisions of this Agreement, or as may arise by reason of
any act, omission or error of the Security Agent made in good faith in the
conduct of its duties; except that neither the Partnership nor Cogentrix
Virginia shall be required to indemnify, protect, save and keep harmless the
Security Agent against its own gross negligence, active or passive, or wilful
misconduct. The indemnities contained in this Section 8.1 shall survive the
termination of this Agreement.

                  SECTION 8.2 Termination, Etc. The provisions of Article III
with respect to the Accounts shall terminate on the date on which all Secured
Obligations shall have been paid in full and the Reimbursement Agreement shall
have been terminated. Promptly after such termination (x) any Permitted
Investments in the Accounts shall be liquidated, (y) a reconciliation shall be
made of the distributions made from the Accounts and any necessary adjustments
to the balances of the Accounts as a result of such reconciliation shall be made
and (z) the moneys in the Accounts (after giving effect to such liquidation and
such adjustments) shall be distributed to the Partnership. Any taxes payable as
a result of any distribution from any Account pursuant to this Section 8.2 shall
be paid by the Partnership from the moneys distributed to the Partnership
pursuant to this Section 8.2 or otherwise and shall not be treated as an expense
of the Facility for purposes of any Project Document.

                  SECTION 8.3 Severability. If any one or more of the
covenants or agreements provided in this Agreement on the part of the parties
hereto to be performed should be determined by a court of competent jurisdiction
to be contrary to law, such covenant or agreement shall be deemed and construed
to be severable from the remaining covenants and agreements herein contained and
shall in no way affect the validity of the


<PAGE>   23
                                                                              20


remaining provisions of this Agreement.

                  SECTION 8.4 Counterparts. This Agreement may be executed in
several counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.

                  SECTION 8.5 Amendments. This Agreement may not be modified
or amended without the prior written consent of each of the parties hereto.

                  SECTION 8.6 Applicable Law. This Agreement shall in all
respects be governed by, and construed in accordance with, the laws of the State
of North Carolina applicable to agreements made and to be performed entirely in
such State, including all matters of construction, validity and performance.

                  SECTION 8.7 Notices. Unless otherwise specifically provided
herein, all notices, consents, directions, approvals, instructions, requests and
other communications required or permitted by the terms hereof to be given to
any Person shall be in writing and shall become effective, if mailed, five
Business Days after being deposited in the United States mail, proper postage
for first-class mail affixed thereto or, if delivered by hand or courier service
or in the form of a telex, telecopy or telegram, when received, and shall be
directed to the address or telex or telecopy number of such Person designated
pursuant to the Reimbursement Agreement, or in the case of the Security Agent,
to First Union National Bank, 230 South Tryon Street, Charlotte, North Carolina
28288-1179, Attention: Corporate Trust Department, or such other address or
telex or telecopy number as may be specified from time to time by any such
Person.

                  SECTION 8.8 Limitations on Recourse. Notwithstanding
anything contained in this Agreement or in any other document, certificate or
instrument executed by any Affiliated Obligor, the Grantee and the Security
Agent (collectively, the "Bank Parties") agree that, except as hereinafter set
forth, their rights in respect of all of the obligations and liabilities of the
Partnership to the Bank Parties or any of them now or in the future existing
under or in connection with this Agreement (the "Security Deposit Obligations")
shall be limited to satisfaction out of, and enforcement against, (i) with
respect to the Grantee, the Collateral and (ii) with respect to the Security
Agent, the Accounts. The Collateral and Accounts are hereinafter referred to as
the "Limited Recourse Collateral." The Bank Parties also hereby acknowledge and
agree that, except for the Affiliated Obligors, no other Person (including, but
not limited to, Edison International, Southern California Edison Company, The
Mission Group, EME, Cogentrix Energy,


<PAGE>   24
                                                                              21


Delaware Holdings, CHC or the Parent, or any present or future officer,
employee, servant, controlling Person, manager, agent, authorized representative
(including any member of the Partnership's Management Committee) or stockholder
of Edison International, Southern California Edison Company, The Mission Group,
EME, Cogentrix Energy, Delaware Holdings, CHC or the Parent) (collectively, the
"Non-Recourse Persons") shall have any liability to all or any of the Bank
Parties (such liability, including such as may arise by operation of law, being
hereby expressly waived) for the payment of any sums now or hereafter owing by
the Partnership under this Agreement or any other Project Document or for the
performance of any of the obligations of the Affiliated Obligors contained
herein or therein or shall otherwise be liable or responsible with respect
thereto, except as hereinafter set forth. Accordingly, dividends or other
distributions made by a Partner to its shareholders (other than dividends or
other distributions made by Cogentrix Virginia to the Parent) shall not be
deemed to be Limited Recourse Collateral in which the Bank Parties have any
security or other interest. If any Default or Event of Default shall occur or if
any claim of the Bank Parties against the Partnership or alleged liability to
the Bank Parties of any Affiliated Obligor shall be asserted under this
Agreement or any other Project Document, the Bank Parties agree that, except as
hereinafter set forth, they shall not have the right to proceed directly or
indirectly against the Non-Recourse Persons or against their respective
properties and assets (other than the Limited Recourse Collateral) for the
satisfaction of any Security Deposit Obligations or of any such claim or
liability or for any deficiency judgment (except to the extent enforceable out
of the Limited Recourse Collateral to which a Bank Party is entitled) in respect
of the Security Deposit Obligations or any such claim or liability. In
furtherance of this Agreement, each Bank Party hereby covenants severally and
not for any other Bank Party that, in the event of a proceeding under Title 11
of the United States Code in which the Partnership or any Partner is a debtor,
it shall elect to have its claims against the Partnership or any Partner treated
as fully secured pursuant to 11 U.S.C. Section 1111(b)(2). Notwithstanding any
of the foregoing, it is expressly understood and agreed, however, that nothing
contained in this Section 8.8 shall in any manner or any way (i) constitute or
be deemed to be a release of the Senior Debt or impair the enforceability of the
liens and security interests and possessory rights created by or arising from
this Agreement, the Reimbursement Agreement and the other Project Documents, or,
except as provided in the preceding sentence, restrict the remedies available to
the Bank Parties to realize upon the Limited Recourse Collateral, or (ii) affect
or diminish any obligation, covenant or agreement of any Non-Recourse Person
under, or any right or benefit of the Partnership or the Bank Parties under, any
Project Document or any other instrument or (iii) without derogating from the
meaning of Limited Recourse Collateral, affect or diminish any rights of any
Person against any other Person arising from misappropriation or misapplication
of any funds or for such other Person's gross negligence or willful misconduct.
The foregoing acknowledgments, agreements and waivers shall survive the
termination of this Agreement and shall be enforceable by any Non-Recourse
Person.

                  SECTION 8.9 Benefit of Agreement. This Agreement shall
inure to the benefit of, and be enforceable by, the parties hereto and their
respective successors and permitted assigns.

<PAGE>   25
                                                                              22



                  IN WITNESS WHEREOF, the parties hereto have each caused this
Third Amended and Restated Security Deposit Agreement to be duly executed by
their duly authorized officers, all as of the day and year first above written.

                                     JAMES RIVER COGENERATION COMPANY

                                     By:   Cogentrix of Virginia, Inc., a
                                           General Partner



                                     By:   /s/ Elizabeth L. Rippetoe
                                           ----------------------------------
                                           Title:
                                                  ---------------------------

                                     By:   Capistrano Cogeneration Company, a
                                           General Partner



                                     By:   /s/ Deborah L. Gronvold
                                           ----------------------------------
                                           Title:
                                                  ---------------------------

                                     COGENTRIX OF VIRGINIA, INC.



                                     By:   /s/ Elizabeth L. Rippetoe
                                           ----------------------------------
                                           Title:
                                                  ---------------------------

                                     CREDIT LYONNAIS, as Grantee for the
                                     benefit of the Secured Parties



                                     By:   /s/ James F. Guidera
                                           ----------------------------------
                                           Title:
                                                  ---------------------------



                                     FIRST UNION NATIONAL BANK, as
                                     Security Agent



                                     By:   /s/ S. Schwartz
                                           ----------------------------------
                                           Title: Assistant Vice President
                                                  ---------------------------