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                                                                (EXECUTION COPY)


                               SECURITY AGREEMENT

         THIS SECURITY AGREEMENT (this "Security Agreement"), dated as of
December 29, 2003, made by NEG OPERATING LLC, a Delaware limited liability
company (the "Grantor"), in favor of BANK OF TEXAS, N.A., as Collateral Agent
(together with its successor(s) and assign(s) thereto, the "Collateral Agent")
for the Lender Parties (as defined below).

                                   WITNESSETH:

         WHEREAS, pursuant to a Credit Agreement dated as of December 29, 2003
(together with all amendments, supplements, restatements and other
modifications, if any, from time to time thereafter made thereto, the "Credit
Agreement"), among the Grantor, the Administrative Agent, Bank of Texas, N.A.,
and The Bank of Nova Scotia, as Co-Agents, Bank of Texas, N.A., as Collateral
Agent, and the Issuers and the Lenders from time to time parties thereto, the
Issuers and the Lenders have extended credit to the Borrower by way of Loans
and Letters of Credit;

         WHEREAS, the Borrower and its Subsidiaries have entered into and/or may
enter into certain Hedging Agreements with certain Lender Parties, pursuant to
the terms of the Credit Agreement;

         WHEREAS, as a condition precedent to the making or extension of the
initial Loans and Letters of Credit under the Credit Agreement and to the
extension of financial accommodations under the Hedging Agreements referred to
above, the Grantor is required to execute and deliver this Security Agreement;

         WHEREAS, the Grantor has duly authorized the execution, delivery and
performance of this Security Agreement.

         NOW THEREFORE, for good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, and in order to induce the Lenders
to make Loans (including the initial Loans) to, and to participate in Letters of
Credit for the benefit of, and to induce the Issuers to issue the Letters of
Credit (including the initial Letter of Credit) for the benefit of the Borrower
pursuant to the Credit Agreement and to induce certain Lender Parties to extend
financial accommodations pursuant to the Hedging Agreements, the Grantor agrees,
for the benefit of each Lender Party, as follows:

                                    ARTICLE I
                                   DEFINITIONS

         SECTION 1.1 Certain Terms. The following terms (whether or not
underscored) when used in this Security Agreement, including its preamble and
recitals, shall have the following meanings (such definitions to be equally
applicable to the singular and plural forms thereof):


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         "Collateral" is defined in Section 2.1.

         "Collateral Account" is defined in Section 4.1.2(b).

         "Collateral Agent" is defined in the preamble.

         "Credit Agreement" is defined in the first recital.

         "Equipment" is defined in clause (a) of Section 2.1.

         "Grantor" is defined in the preamble.

         "Indemnified Parties" is defined in Section 6.2(a).

         "Inventory" is defined in clause (b) of Section 2.1.

         "Issuer" and "Issuers" are defined in the first recital.

         "Lender" is defined in the first recital.

         "Lender Party" means, as the context may require, any Lender, any
Agent, any Issuer and any Affiliate of any Agent, any Issuer or any Lender, or
other Person that is a party to a Hedging Agreement and is a Lender or an
Affiliate thereof (but only during such time that such Person is a Lender or an
Affiliate of a Lender), and each of their respective successors, transferees and
assigns.

         "Obligors" means, collectively, the Grantor, the Borrower or any other
Person (other than any Agent, Issuer or Lender) obligated under any Loan
Document, including their permitted successors and assigns, and "Obligor" means
any one of them.

         "Receivables" is defined in clause (c) of Section 2.1.

         "Related Contracts" is defined in clause (c) of Section 2.1.

         "Secured Obligations" is defined in Section 2.2.

         "Security Agreement" is defined in the preamble.

         "U.C.C." means the Uniform Commercial Code, as in effect in the State
of New York, as the same may be amended from time to time.

         SECTION 1.2 Credit Agreement Definitions. Unless otherwise defined
herein or the context otherwise requires, capitalized terms used in this
Security Agreement, including its preamble and recitals, have the meanings
provided in the Credit Agreement.

         SECTION 1.3 U.C.C. Definitions. Unless otherwise defined herein or the
context otherwise requires, capitalized terms for which meanings are provided in
the U.C.C. are used in this Security Agreement, including its preamble and
recitals, with such meanings.


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                                   ARTICLE II
                                SECURITY INTEREST

         SECTION 2.1 Grant of Security Interest. The Grantor hereby pledges,
hypothecates, assigns, charges, mortgages, delivers and transfers to the
Collateral Agent for it benefit and the ratable benefit of each of the Lender
Parties, and hereby grants to the Collateral Agent for its benefit and the
ratable benefit of each of the Lender Parties, a continuing security interest in
all of the Grantor's right, title and interest, whether now existing or
hereafter arising or acquired, in and to the following property (the
"Collateral"):

                  (a) all equipment of the Grantor used in connection with or
         relating to the Oil and Gas Properties, including without limitation,
         all machinery, apparatus, installation facilities and other tangible
         personal property used in connection with or relating to the Oil and
         Gas Business, and all parts thereof and all accessions, additions,
         attachments, improvements, substitutions, replacements and proceeds
         thereto and therefor (any and all of the foregoing being the
         "Equipment");

                  (b) all inventory of the Grantor held in connection with or
         relating to the Oil and Gas Properties, wherever located, including (i)
         all oil, gas, or other hydrocarbons and all products and substances
         derived therefrom, all raw materials and work in process therefor,
         finished goods thereof, and materials used or consumed in the
         manufacture or production thereof, (ii) all goods held in connection
         with or relating to the Oil and Gas Business in which the Grantor has
         an interest in mass or a joint or other interest or right of any kind
         (including goods in which the Grantor has an interest or right as
         consignee), and (iii) all goods which are returned to or repossessed by
         the Grantor and which are held or to be used in connection with or
         relating to the Oil and Gas Business, and all accessions thereto,
         products thereof and documents therefor (any and all such inventory,
         materials, goods, accessions, products and documents being the
         "Inventory");

                  (c) to the extent arising out of or in connection with the Oil
         and Gas Business: all accounts, money, payment intangibles, deposit
         accounts (including the Collateral Accounts and all amounts on deposit
         therein and all cash equivalent investments carried therein and all
         proceeds thereof), contracts, contract rights, all rights constituting
         a right to the payment of money, chattel paper, documents, documents of
         title, instruments, letters of credit, letter-of-credit rights and
         general intangibles of the Grantor, whether or not earned by
         performance, including all moneys due or to become due in repayment of
         any loans or advances, and all rights of the Grantor now or hereafter
         existing in and to all security agreements, guaranties, leases,
         agreements and other contracts securing or otherwise relating to any
         such accounts, money, payment intangibles, deposit accounts, contracts,
         contract rights, rights to the payment of money, chattel paper,
         documents, documents of title, instruments, letters of credit,
         letter-of-credit rights and general intangibles (any and all such
         accounts, money, payment intangibles, deposit accounts, contracts,
         contract rights, rights to the payment of money, chattel paper,
         documents, documents of title, instruments, letters of credit,
         letter-of-credit rights and general intangibles being the
         "Receivables", and any and all such security agreements, guaranties,
         leases, agreements and other contracts being the "Related Contracts");



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                  (d) all books, correspondence, credit files, records,
         invoices, tapes, cards, computer runs, writings, data bases,
         information, paper and documents and other property relating to, used
         or useful in connection with, evidencing, embodying, incorporating or
         referring to, any of the foregoing in this Section 2.1;

                  (e) all Governmental Approvals necessary in the conduct of the
         Oil and Gas Business, including any permits, to the extent a security
         interest may be granted therein; provided that any Governmental
         Approval that by its terms or by operation of law would be void,
         voidable, terminable or revocable if mortgaged, pledged or assigned
         hereunder is expressly excepted and excluded from the Liens and terms
         of this Security Agreement, including the grant of security interest in
         this Section 2.1;

                  (f) all of the Grantor's other property and rights of every
         kind and description and interests therein, including without
         limitation, all "Fixtures" and "Proceeds" as such terms are defined in
         the U.C.C; and

                  (g) all accessions, substitutions, replacements, products,
         offspring, rents, issues, profits, returns, income and proceeds of and
         from any and all of the foregoing Collateral (including proceeds which
         constitute property of the types described in clauses (a), (b), (c),
         (d), (e) and (f), and proceeds deposited from time to time in any lock
         boxes of the Grantor, and, to the extent not otherwise included, all
         payments under insurance (whether or not the Collateral Agent is the
         loss payee thereof), or any condemnation award, indemnity, warranty or
         guaranty, payable by reason of loss or damage to or otherwise with
         respect to any of the foregoing Collateral).

         SECTION 2.2 Security for Obligations. This Security Agreement secures
the indefeasible payment in full and performance of all Obligations now or
hereafter existing under the Credit Agreement and each other Loan Document,
whether for principal, interest, costs, fees, expenses or otherwise, and all
other obligations of the Grantor and each other Obligor to any Lender Party, now
or hereafter owing, howsoever created, arising or evidenced, whether direct or
indirect, primary or secondary, fixed or absolute or contingent, joint or
several, or now or hereinafter existing or due or to become due, and all
obligations of the Grantor now or hereafter existing under this Security
Agreement and each other Loan Document to which it is or may become a party (all
such Obligations and other obligations of the Grantor and each other Obligor
being the "Secured Obligations").

         SECTION 2.3 Continuing Security Interest. This Security Agreement shall
create a continuing security interest in the Collateral and shall: (a) remain in
full force and effect until indefeasible payment in full in cash of all Secured
Obligations and the termination or expiration of all Commitments and all other
commitments of the Lender Parties to the Grantor and the other Obligors pursuant
to any Loan Document and the termination or expiration of all Letters of Credit;
(b) be binding upon the Grantor and its successors, transferees and assigns; and
(c) inure, together with the rights and remedies of the Collateral Agent
hereunder, to the benefit of the Collateral Agent and of the other Lender
Parties and their respective successors, transferees, and assigns. Without
limiting the generality of the foregoing clause (c), any Lender may assign or
otherwise transfer (in whole or in part) any Loan held by it as provided in
Section 10.12 of the


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Credit Agreement and any Lender Party may assign or otherwise transfer (in whole
or in part) its interest pursuant to any Hedging Agreement, and any successor or
assignee thereof shall thereupon become vested with all the rights and benefits
in respect thereof granted to such Lender Party under any Loan Document
(including this Security Agreement), or otherwise, subject, however, to any
contrary provisions in such assignment or transfer, and as applicable to the
provisions of Section 10.12 and Article IX of the Credit Agreement, and, with
respect to the Hedging Agreements, the limitation on rights in collateral
pursuant to the Security Documents. Upon the indefeasible payment in full in
cash of all Secured Obligations and the termination or expiration of all
Commitments and any other commitments of any Lender Party to the Borrower or any
other Obligor and the termination or expiration of all Letters of Credit, the
security interest granted herein shall terminate and all rights to the
Collateral shall revert to the Grantor. Upon any such payment and termination or
expiration, the Collateral Agent will, at the Grantor's sole expense, execute
and deliver to the Grantor such documents as the Grantor shall reasonably
request to evidence such termination and shall deliver to Grantor any Collateral
in the Collateral Agent's possession.

         SECTION 2.4 Grantor Remains Liable. Anything herein to the contrary
notwithstanding (a) the Grantor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein, and shall
perform all of its duties and obligations under such contracts and agreements,
to the same extent as if this Security Agreement had not been executed; (b) the
exercise by the Collateral Agent of any of its rights hereunder shall not
release the Grantor from any of its duties or obligations under any contracts
and agreements included in the Collateral; and (c) neither the Collateral Agent
nor any other Lender Party shall have any obligation or liability under any such
contracts or agreements included in the Collateral by reason of this Security
Agreement, nor shall the Collateral Agent or any other Lender Party be obligated
to perform any of the obligations or duties of the Grantor thereunder or to take
any action to collect or enforce any claim for payment assigned hereunder.

         SECTION 2.5 Security Interest Absolute. All rights of the Collateral
Agent and the other Lender Parties and the security interests granted to the
Collateral Agent and the other Lender Parties hereunder, and all obligations of
the Grantor hereunder, shall be absolute and unconditional, irrespective of (a)
any lack of validity or enforceability of the Credit Agreement or any other Loan
Document; (b) the failure of any Lender Party (i) to assert any claim or demand
or to enforce any right or remedy against any other Obligor or any other Person
under the provisions of the Credit Agreement or any other Loan Document or
otherwise or (ii) to exercise any right or remedy against any other guarantor
of, or collateral securing, any Secured Obligations; (c) any change in the time,
manner or place of payment of, or in any other term of, all or any of the
Secured Obligations or any other extension, compromise or renewal of any Secured
Obligation; (d) any reduction, limitation, impairment or termination of any
Secured Obligations for any reason, including any claim of waiver, release,
surrender, alteration or compromise, and shall not be subject to (and the
Grantor hereby waives any right to or claim of) any defense or setoff,
counterclaim, recoupment or termination whatsoever by reason of the invalidity,
illegality, nongenuineness, irregularity, compromise, unenforceability of, or
any other event or occurrence affecting, any Secured Obligations; (e) any
amendment to, rescission, waiver, or other modification of, or any consent to
departure from, any of the terms of the Credit Agreement or any other Loan
Document; (f) any addition, exchange, release, surrender or non-


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perfection of any collateral (including the Collateral), or any amendment to or
waiver or release of or addition to or consent to departure from any guaranty,
for any of the Secured Obligations; or (g) any other circumstances which might
otherwise constitute a defense available to, or a legal or equitable discharge
of, any other Obligor, any surety or any guarantor.

                                   ARTICLE III
                         REPRESENTATIONS AND WARRANTIES

         SECTION 3.1 Representations and Warranties. The Grantor represents and
warrants unto each Lender Party as set forth in this Article III.

         SECTION 3.1.1 Location of Collateral, etc. All of the Equipment and
Inventory of the Grantor are located at the places specified in Item A and Item
B, respectively, of Schedule I hereto. None of the Equipment and Inventory has,
within the four months preceding the date of this Security Agreement, been
located at any place other than the in the States of Texas, Oklahoma, Louisiana
and Arkansas. The place of business of the Grantor or, if the Grantor has more
than one place of business, the chief executive office of the Grantor and the
office where the Grantor keeps its records concerning the Receivables, and all
originals of all chattel paper which evidence Receivables, is located at 4925
Greenville Avenue Dallas, Texas 75206. The Grantor has not been known by any
legal name different from the one set forth on the signature page hereto, nor
has the Grantor been the subject of any merger or other corporate
reorganization. None of the Receivables is evidenced by a promissory note or
other instrument (other than a promissory note or instrument that has been
delivered to the Collateral Agent, with appropriate endorsements). The Grantor
is not a party to any Federal, state or local government contract.

         SECTION 3.1.2 Ownership, No Liens, Validity, etc. The Grantor owns the
Collateral free and clear of any Lien, security interest, charge or encumbrance
except for the security interest created by this Security Agreement and except
as permitted by the Credit Agreement. No effective financing statement or other
instrument similar in effect covering all or any part of the Collateral is on
file in any recording office, except such as may have been filed in favor of the
Collateral Agent relating to this Security Agreement and except for any filings
permitted by Section 7.2.3 of the Credit Agreement. This Security Agreement
creates a valid security interest in the Collateral, securing the payment of the
Secured Obligations, and, except for the proper filing of a Uniform Commercial
Code Financing Statement with the Secretary of State of the State of Delaware,
all filings and other actions necessary to perfect and protect such security
interest have been duly taken and, except for Liens permitted pursuant to
Section 7.2.3(c), (d), (e), (f) and (h) of the Credit Agreement, such security
interest shall be a first priority security interest. No real property owned by
the Pledgor is encumbered by a Lien except such real property as is encumbered
by a Lien in favor of the Collateral Agent for the benefit of the Lender
Parties.

         SECTION 3.1.3 Possession and Control. The Grantor has exclusive
possession and control of the Equipment and Inventory.


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         SECTION 3.1.4 Negotiable Documents, Instruments and Chattel Paper. The
Grantor has, contemporaneously herewith, delivered to the Collateral Agent
possession of all originals of all negotiable documents and instruments and
chattel paper referred to in Section 2.1(c) which are currently owned or held by
the Grantor (duly endorsed in blank, if requested by the Collateral Agent).

         SECTION 3.1.5 [Reserved].

         SECTION 3.1.6 State of Organization, Formation or Incorporation; Name.
(a) The first paragraph of this Security Agreement lists the true legal name of
the Grantor as registered in the jurisdiction in which the Grantor is
organized, formed or incorporated; (b) the Grantor's state of incorporation,
formation or organization, its organization identification number as designated
by the state of its incorporation, formation or organization, and its principal
place of business (or, if it has more than one place of business, its chief
executive office) are as set forth on Schedule II to this Security Agreement
delivered by the Grantor; and (c) the Grantor is not now and has not been known
by any trade name.

         SECTION 3.1.7 Authorization, Approval, Etc. No authorization, approval
or other action by, and no notice to or filing with, any governmental authority
or regulatory body or any other Person is required either (a) for the grant by
the Grantor of the security interest granted hereby or for the execution,
delivery and performance of this Security Agreement by the Grantor; or (b) for
the perfection of or the exercise by the Collateral Agent of its rights and
remedies hereunder.

         SECTION 3.1.8 Compliance with Laws. The Grantor is in compliance with
the requirements of all applicable laws (including, without limitation, the
provisions of the Fair Labor Standards Act), rules, regulations and orders of
every governmental authority, the noncompliance of which might materially
adversely affect the business, properties, assets, operations or condition
(financial or otherwise) of the Grantor or the Grantor and its Subsidiaries
(taken as whole) or the value of the Collateral or the worth of the Collateral
as collateral security.

         SECTION 3.1.9 Reaffirmation of Representations and Warranties in Credit
Agreement. All representations and warranties made by the Grantor regarding the
Grantor and its Subsidiaries set forth in the Credit Agreement are true and
correct in all respects as of the date hereof as if such representations and
warranties were incorporated herein in their entirety and made by the Grantor.

                                   ARTICLE IV
                                    COVENANTS

         SECTION 4.1 Certain Covenants. The Grantor covenants and agrees that,
so long as any portion of the Secured Obligations shall remain unpaid or any
Lender shall have any outstanding Commitment or any Lender Party shall have
outstanding any other commitment to any Obligor under any Loan Document or any
Letter of Credit shall remain outstanding, the Grantor will, unless all of the
Required Lenders shall otherwise consent in writing, perform the obligations set
forth in this Section 4.1.


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         SECTION 4.1.1 As to Equipment and Inventory. The Grantor hereby agrees
that it shall:

                  (a) keep all of the Equipment and Inventory (other than
         Inventory sold in the ordinary course of business) at the places
         therefor specified in Section 3.1.1 or, upon thirty (30) days' prior
         written notice to the Collateral Agent, at such other places in a
         jurisdiction within the United States of America where all
         representations and warranties set forth in Article III shall be true
         and correct, and all action required pursuant to the first sentence of
         Section 4.1.8 shall have been taken with respect to the Equipment and
         Inventory;

                  (b) cause the Equipment to be maintained and preserved in the
         same condition, repair and working order as when new, ordinary wear and
         tear excepted, and in accordance with any manufacturer's manual; and
         forthwith, or in the case of any loss or damage to any of the
         Equipment, as quickly as practicable after the occurrence thereof, make
         or cause to be made all repairs, replacements, and other improvements
         in connection therewith which are necessary or prudent to such end; and
         promptly furnish to the Collateral Agent upon request therefor, a
         statement respecting any loss or damage to any of the Equipment; and

                  (c) pay promptly when due all property and other taxes,
         assessments and governmental charges or levies imposed upon, and all
         claims (including claims for labor, materials and supplies) against,
         the Equipment and Inventory, except to the extent the validity thereof
         is being contested in good faith by appropriate proceedings and for
         which adequate reserves in accordance with GAAP have been set aside.

         SECTION 4.1.2 As to Receivables.

                  (a) The Grantor shall (i) keep its place(s) of business and
         chief executive office and the office(s) where it keeps its records
         concerning the Receivables, located at the address set forth in Section
         3.1.1, or, upon thirty (30) days' prior written notice to the
         Collateral Agent, at such other locations in a jurisdiction where all
         actions required by the first sentence of Section 4.1.8 shall have been
         taken with respect to the Receivables; (ii) hold and preserve such
         records; and (iv) and permit representatives of the Collateral Agent at
         any time during normal business hours to inspect and make abstracts
         from such records.

                  (b) Upon written notice by the Collateral Agent to the Grantor
         pursuant to this Section 4.1.2(b) during the occurrence and continuance
         of any Event of Default under the Credit Agreement, all proceeds of
         Collateral received by the Grantor during such Event of Default shall
         be delivered in kind to the Collateral Agent for deposit to a deposit
         account of the Grantor maintained with the Collateral Agent and all
         deposit accounts and bank accounts of the Grantor not then maintained
         at the Collateral Agent and all amounts on deposit therein or cash
         equivalent investments carried therein will be transferred to one or
         more deposit or bank accounts of the Grantor maintained at the
         Collateral Agent (any deposit or bank accounts of the Grantor
         maintained at the Collateral Agent,


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         including any such deposit or bank accounts, herein a "Collateral
         Account"). With respect to any such foregoing proceeds, (i) the Grantor
         shall not commingle any such proceeds, and shall hold separate and
         apart from all other property, all such proceeds in express trust for
         the benefit of the Lender Parties until delivery thereof is made to the
         Collateral Agent, (ii) no funds, other than proceeds of Collateral,
         will be deposited in any Collateral Account designated for the purpose
         of holding such proceeds, and (iii) the Collateral Agent agrees that it
         shall not give the notice referred to in this Section 4.1.2(b) unless
         it believes, acting reasonably, that an Event of Default under the
         Credit Agreement shall have occurred and be continuing.

                  (c) The Collateral Agent shall have the right to apply any
         amount in any Collateral Account to the payment of any Secured
         Obligations which are due and payable. Subject to the rights of the
         Collateral Agent, the Grantor shall have the right, with respect to and
         to the extent of collected funds in the Collateral Account, as long as
         no Event of Default has occurred and is continuing, to require the
         Collateral Agent (i) to invest the amounts on deposit thereon in cash
         equivalent investments provided that, in the case of certificated
         securities, the Collateral Agent shall retain possession thereof as
         Collateral and, in the case of uncertificated securities, the
         Collateral Agent may take such actions, including registration of such
         securities in its name, as it shall determine is necessary to perfect
         its security interest therein, and (ii) to close such Collateral
         Account.

         SECTION 4.1.3 As to Collateral.

                  (a) Until such time as the Collateral Agent shall have
         notified the Grantor of the revocation of such power and authority, the
         Grantor (i) may in the ordinary course of its business, at its own
         expense, sell, lease or furnish under the contracts of service any of
         the Inventory normally held by the Grantor for such purpose, and use
         and consume, in the ordinary course of its business, any raw materials,
         work in process or materials normally held by the Grantor for such
         purpose, (ii) will, at its own expense, endeavor to collect, as and
         when due, all amounts due with respect to any of the Collateral,
         including the taking of such action with respect to such collection as
         the Collateral Agent may reasonably request or, in the absence of such
         request, as the Grantor may deem advisable, and (iii) may grant, in the
         ordinary course of business, to any party obligated on any of the
         Collateral, any rebate, refund or allowance to which such party may be
         lawfully entitled, and may accept, in connection therewith, the return
         of goods, the sale or lease of which shall have given rise to such
         Collateral; provided, however, that such power and authority granted in
         the preceding sentence shall not be revoked prior to the occurrence of
         an Event of Default. The Collateral Agent however, at any time, whether
         before or after any revocation of such power and authority or the
         maturity of any of the Secured Obligations, notify any parties
         obligated on any of the Collateral to make payment to the Collateral
         Agent for deposit to the Collateral Account of any amounts due or to
         become due thereunder and enforce collection of any of the Collateral
         by suit or otherwise and surrender, release, or exchange all or any
         part thereof, or compromise or extend or renew for any period (whether
         or not longer than the original period) any indebtedness thereunder or
         evidenced thereby. The Grantor will, at its own expense, notify any
         parties


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         obligated on any of the Collateral to make payment to the Collateral
         Agent for deposit to the Collateral Account of any amounts due or to
         become due thereunder.

                  (b) The Collateral Agent is authorized to endorse, in the name
         of the Grantor, any item, howsoever received by the Collateral Agent,
         representing any payment on or other proceeds of any of the Collateral.

         SECTION 4.1.4 [Reserved].

         SECTION 4.1.5 [Reserved].

         SECTION 4.1.6 Insurance. In furtherance of Section 7.1.4 of the Credit
Agreement and not in limitation thereof, the Grantor will maintain or cause to
be maintained with financially sound and reputable insurance companies insurance
with respect to the Collateral (including Equipment and Inventory) in such
amounts (with no greater risk retention) and against such risks as are
customarily maintained by companies of established repute engaged in the same or
similar businesses operating in the same or similar locations and will, upon the
reasonable request of the Collateral Agent, furnish a certificate. from a
reputable insurance broker setting forth the nature and extent of all insurance
maintained by the Grantor in accordance with this Section 4.1.6. Without
limiting the foregoing, the Grantor further agrees as follows: (a) each policy
for property casualty insurance shall show the Collateral Agent as sole loss
payee and each policy for business interruption casualty insurance shall show
the Collateral Agent as co-loss payee; (b) each policy for liability insurance
shall show the Agents, the Issuer and the Lenders as additional insureds; (c)
each insurance policy shall provide that at least thirty (30) days' prior
written notice of cancellation or of lapse shall be given to the Collateral
Agent by the insured; (d) the Grantor shall, if so requested by the Collateral
Agent, deliver to the Collateral Agent a copy of each insurance policy; and (e)
until the Obligations have been repaid in full, all Commitments have been
terminated and all Letters of Credit have expired or terminated, if a Collateral
Account exists, all payments in respect of property insurance shall be deposited
to the Collateral Account and if there shall be no Collateral Account shall be
applied in accordance with the Loan Documents.

         SECTION 4.1.7 Transfers and Other Liens. The Grantor shall not: (a)
sell, assign (by operation of law or otherwise) or otherwise dispose of any of
the Collateral, except as permitted by the Credit Agreement (provided, that the
Grantor may use or dispose of cash in the ordinary course of business for
purposes permitted by the Credit Agreement subject to, after the occurrence of
an Event of Default, the rights and remedies of the Collateral Agent and the
Lender Parties granted pursuant to this Security Agreement including, without
limitation, the right of the Collateral Agent to require all deposit and bank
accounts of the Grantor and cash carried therein to be deposited into one or
more Collateral Accounts maintained at the Collateral Agent); or (b) create or
suffer to exist any Lien or other charge or encumbrance upon or with respect to
any of the Collateral to secure Indebtedness of any Person or entity, except for
the security interest created by this Security Agreement and except for Liens
and other charges or encumbrances permitted by the Credit Agreement.


                                       10
<PAGE>


         SECTION 4.1.8 Further Assurances, etc. The Grantor agrees that, from
time to time at its own expense, the Grantor will promptly execute and deliver
all further instruments and documents, and take all further action, that may be
necessary or prudent, or that the Collateral Agent may reasonably request, in
order to perfect, preserve and protect any security interest granted or
purported to be granted hereby or to enable the Collateral Agent to exercise and
enforce its rights and remedies hereunder with respect to any Collateral.
Without limiting the generality of the foregoing, the Grantor will: (a) at the
request of the Collateral Agent during an Event of Default, mark conspicuously
each chattel paper included in the Receivables and each Related Contract and, at
the request of the Collateral Agent, each of its records pertaining to the
Collateral with a legend, in form and substance satisfactory to the Collateral
Agent, indicating that such document, chattel paper, Related Contract or
Collateral is subject to the security interest granted hereby; (b) if any
Receivable shall be evidenced by a promissory note or other instrument,
negotiable document or chattel paper, deliver and pledge to the Collateral Agent
hereunder such promissory note, instrument, negotiable document or chattel paper
duly endorsed or accompanied by duly executed instruments of transfer or
assignment, all in form and substance satisfactory to the Collateral Agent; (c)
file such financing or continuation statements, or amendments thereto, and such
other instruments or notices (including without limitation, any assignment of
claim form under or pursuant to the federal assignment of claims statute, 31
U.S.C. Section 3726, any successor or amended version thereof or any regulation
promulgated under or pursuant to any version thereof), as may be necessary or
prudent, or as the Collateral Agent may reasonably request, in order to perfect
and preserve the security interests and other rights granted or purported to be
granted hereby; (d) furnish to the Collateral Agent, from time to time at the
Collateral Agent's reasonable request, statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as the Collateral Agent may reasonably request, all in
reasonable detail; (e) warrant and defend the right and title herein granted to
the Collateral Agent in and to the Collateral (and all right, title and interest
represented by the Collateral) against the claims and demands of all Persons
whomsoever; and (e) upon the acquisition after the date hereof by the Grantor of
any Collateral, with respect to which the security interest granted hereunder is
not perfected automatically upon such acquisition, take such actions with
respect to such Collateral or any part thereof as required by the Loan
Documents. With respect to the foregoing and the grant of the security interest
hereunder, the Grantor hereby authorizes the Collateral Agent to file one or
more financing or continuation statements, and amendments thereto, relative to
all or any part of the Collateral without the signature of the Grantor where
permitted by law.

         SECTION 4.1.9 Performance of Covenants in Loan Documents. The Grantor
will perform, comply with, observe and fulfill, and will cause each of its
Subsidiaries to perform, comply with, observe and fulfill, each of the
covenants, agreements and obligations contained in the Credit Agreement and the
other Loan Documents pertaining to or otherwise applicable to the Grantor or any
of its Subsidiaries.

         SECTION 4.1.10 State of Incorporation, Formation or Organization. The
Grantor shall not change its state of incorporation, formation or organization
or its name, identity or corporate structure unless the Grantor shall have (a)
given the Collateral Agent at least thirty (30) days' prior notice of such
change and taken all actions required by the first sentence of Section 4.1.8,
(b) obtained the consent of the requisite Lender Parties, if such consent is so
required by


                                       11
<PAGE>


the Loan Documents, and (c) taken all actions necessary or as requested by the
Collateral Agent to ensure that the Liens on the Collateral granted in favor of
the Collateral Agent for the benefit of the Lender Parties remain perfected,
first-priority Liens subject only to permitted Liens.

         SECTION 4.1.11 Filings. The Grantor hereby authorizes the Collateral
Agent to file U.C.C. financing statements with respect to the Collateral, and to
file U.C.C. financing statements, and continuations and amendments thereto, and
other similar documents with respect to the Collateral without its signature (to
the extent permitted by applicable law).

                                    ARTICLE V
                              THE COLLATERAL AGENT

         SECTION 5.1 Collateral Agent Appointed Attorney-in-Fact. The Grantor
hereby irrevocably appoints the Collateral Agent as the Grantor's
attorney-in-fact, with full authority in the place and stead of the Grantor and
in the name of the Grantor or otherwise, from time to time in the Collateral
Agent's discretion, to take any action and to execute any instrument which the
Collateral Agent may deem necessary or advisable to accomplish the purposes of
this Security Agreement, including, without limitation: (a) to ask, demand,
collect, sue for, recover, compromise, receive and give acquittance and receipts
for moneys due and to become due under or in respect of any of the Collateral;
(b) to receive, endorse, and collect any drafts or other instruments, documents
and chattel paper in connection with clause (a) above; (c) to file any claims or
take any action or institute, any, proceedings which the Collateral Agent may
deem necessary or advisable for the collection of any of the Collateral or
otherwise to enforce the rights of the Collateral Agent with respect to any of
the Collateral; and (d) to perform the affirmative obligations of the Grantor
hereunder (including all obligations of the Grantor pursuant to Section 4.1.8).
The Grantor hereby acknowledges, consents and agrees that the power of attorney
granted pursuant to this Section 5.1 is irrevocable and coupled with an
interest.

         SECTION 5.2 Collateral Agent May Perform. If the Grantor fails to
perform any agreement contained herein, then the Collateral Agent may itself
perform, or cause performance of, such agreement, and the reasonable expenses of
the Collateral Agent incurred in connection therewith shall be payable by the
Grantor pursuant to Section 6.2, and the Collateral Agent may from time to time
take any other action which the Collateral Agent reasonably deems necessary for
the maintenance, preservation or protection of any of the Collateral or of its
security interest therein.

         SECTION 5.3 Collateral Agent Has No Duty. In addition to, and not in
limitation of, Section 2.4, the powers conferred on the Collateral Agent
hereunder are solely to protect its interest (on behalf of the Lender Parties)
in the Collateral and shall not impose any duty on it to exercise any such
powers. Except for the exercise of reasonable care over any Collateral in its
possession and the accounting for moneys actually received by it hereunder, the
Collateral Agent shall have no duty as to any Collateral or as to the taking of
any necessary steps to preserve rights against prior parties or any other rights
pertaining to any Collateral.

         SECTION 5.4 Reasonable Care. The Collateral Agent is required to
exercise reasonable care in the custody and preservation of any of the
Collateral in its possession;


                                       12
<PAGE>
provided, however, the Collateral Agent shall be deemed to have exercised
reasonable care in the custody and preservation of any of the Collateral if it
takes such action for that purpose as the Grantor reasonably requests in writing
at times other than upon the occurrence and during the continuation of any Event
of Default, but failure of the Collateral Agent to comply with any such request
at any time shall not in itself be deemed a failure to exercise reasonable care.

                                   ARTICLE VI
                                    REMEDIES

         SECTION 6.1 Certain Remedies. If any Event of Default shall have
occurred and be continuing:

                  (a) The Collateral Agent may exercise in respect of the
         Collateral, in addition to other rights and remedies provided for
         herein or otherwise available to it, all the rights and remedies of a
         secured party on default under the U.C.C. (whether or not the U.C.C.
         applies to the affected Collateral) and also may (i) require the
         Grantor to, and the Grantor hereby agrees that it will, at its expense
         and upon request of the Collateral Agent forthwith, assemble all or
         part of the Collateral as directed by the Collateral Agent and make it
         available to the Collateral Agent at a place to be designated by the
         Collateral Agent which is reasonably convenient to both parties and
         (ii) without notice except as specified below, sell the Collateral or
         any part thereof in one or more parcels at public or private sale, at
         any of the Collateral Agent's offices or elsewhere, for cash, on credit
         or for future delivery, and upon such other terms as the Collateral
         Agent may deem commercially reasonable. The Grantor agrees that, to the
         extent notice of sale shall be required by law, at least ten (10) days'
         prior notice to the Grantor of the time and place of any public sale or
         the time after which any private sale is to be made shall constitute
         reasonable notification. The Collateral Agent shall not be obligated to
         make any sale of Collateral regardless of notice of sale having been
         given. The Collateral Agent may adjourn any public or private sale from
         time to time by announcement at the time and place fixed therefor, and
         such sale may, without further notice, be made at the time and place to
         which it was so adjourned.

                  (b) All cash proceeds received by the Collateral Agent in
         respect of any sale of, collection from, or other realization upon, all
         or any part of the Collateral shall be applied as follows:

                           (i) First, to the payment of the costs and expenses
                  of such sale, collection from, or other realization upon, all
                  or any part of the Collateral, and reasonable compensation to
                  the Collateral Agent, its agents and attorneys, and of all
                  expenses and liabilities incurred and advances made by the
                  Collateral Agent in connection therewith;

                           (ii) Second, to the payment of all expenses of Lender
                  Parties that the Grantor or the Borrower is obligated to pay
                  pursuant to this Security Agreement or any other Loan
                  Document;


                                       13
<PAGE>
                           (iii) Third, to the payment ratably of the sum of (i)
                  amounts due for principal and interest on all Loans then
                  outstanding, (ii) amounts due with respect to the Letters of
                  Credit, and (iii) amounts owed as the Hedging Obligations to
                  any Lender or any Affiliate of a Lender, without preference
                  or priority of the indebtedness owing to one Lender (or
                  Affiliate) over another, or of Loans or Letters of Credit over
                  Hedging Obligations, or of principal over interest; and

                           (iv) Fourth, after payment in full in cash of all of
                  the Obligations, and the termination of all Commitments and
                  all other commitments by all Lenders to the Borrower and the
                  other Obligors, and the termination or expiration of all
                  Letters of Credit, to the payment of the surplus of such cash
                  or cash proceeds, if any, to the Grantor, or to whomsoever
                  may be lawfully entitled to receive the same, or as a court of
                  competent jurisdiction may direct.

         SECTION 6.2 Indemnity and Expenses.

                  (a) Without limiting the generality of the provisions of
         Section 10.4 of the Credit Agreement, the Grantor agrees to indemnify
         the Collateral Agent, each other Lender Party and each of their
         respective officers, directors, employees and agents (the "Indemnified
         Parties") from and against any and all claims, losses and liabilities
         arising out of or resulting from this Security Agreement or any other
         Loan Document (including, without limitation, enforcement of this
         Security Agreement), except claims, losses or liabilities resulting
         from any Indemnified Party's gross negligence or willful misconduct;
         PROVIDED, HOWEVER, THAT IT IS THE INTENTION OF THE PARTIES HERETO THAT
         EACH INDEMNIFIED PARTY BE INDEMNIFIED IN THE CASE OF ITS OWN NEGLIGENCE
         (OTHER THAN GROSS NEGLIGENCE), REGARDLESS OF WHETHER SUCH NEGLIGENCE IS
         SOLE OR CONTRIBUTORY, ACTIVE OR PASSIVE, IMPUTED, JOINT OR TECHNICAL.
         If and to the extent that the foregoing undertaking may be
         unenforceable for any reason, the Grantor hereby agrees to make the
         maximum contribution to the payment and satisfaction of each of the
         foregoing which is permissible under applicable law.

                  (b) The Grantor will upon demand pay to the Collateral Agent
         and any local counsel the amount of any and all reasonable expenses,
         including the reasonable fees and disbursements of its counsel and of
         any experts and agents, which the Collateral Agent and any local
         counsel may incur in connection herewith, including without limitation
         in connection with (i) the administration of this Security Agreement,
         the Credit Agreement and each other Loan Document, (ii) the custody,
         preservation, use or operation of, or the sale of, collection from, or
         other realization upon, any of the Collateral, (iii) the exercise or
         enforcement of any of the rights of the Collateral Agent and any local
         counsel or any of the Lender Parties hereunder or (iv) the failure by
         the Grantor to perform or observe any of the provisions hereof.

         SECTION 6.3 Warranties. The Collateral Agent may sell the Collateral
without giving any warranties or representations as to the Collateral. The
Collateral Agent may disclaim


                                       14
<PAGE>


any warranties of title or the like. This procedure will not be considered to
adversely affect the commercial reasonableness of any sale of the Collateral.

                                   ARTICLE VII
                            MISCELLANEOUS PROVISIONS

         SECTION 7.1 Loan Document. This Security Agreement is a Loan Document
executed pursuant to the Credit Agreement and shall (unless otherwise expressly
indicated herein) be construed, administered and applied in accordance with the
terms and provisions thereof.

         SECTION 7.2 Amendments; etc. No amendment to or waiver of any provision
of this Security Agreement nor consent to any departure by the Grantor herefrom,
shall in any event be effective unless the same shall be in writing and signed
by the Collateral Agent and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given.

         SECTION 7.3 Notices. All notices and other communications provided to
any party hereto under this Security Agreement shall be in writing or by
facsimile and addressed, delivered or transmitted to such party at its address
or facsimile number set forth below its signature hereto or at such other
address or facsimile number as may be designated by such party in a notice to
the other parties. Any notice, if mailed and properly addressed with postage
prepaid or if properly addressed and sent by pre-paid courier service, shall be
deemed given when received; any notice, if transmitted by facsimile, shall be
deemed given when transmitted and a receipt, demonstrating successful
transmission, is received by the sender. Delivery by telecopier of an executed
counterpart of any amendment or waiver of any provision of this Security
Agreement shall be effective as delivery of an original executed counterpart
hereof.

         SECTION 7.4 Headings. The various headings of this Security Agreement
are inserted for convenience only and shall not affect the meaning or
interpretation of this Security Agreement or any provisions hereof.

         SECTION 7.5 Severability of Provisions. Any provision of this Security
Agreement which is prohibited, inoperative, invalid or unenforceable
in any jurisdiction shall, as to such provision and such jurisdiction, be
ineffective to the extent of such prohibition, non-operation, invalidity or
unenforceability without invalidating the remaining provisions of this Security
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction.

         SECTION 7.6 Execution in Counterparts, Effectiveness, etc. This
Security Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one agreement, and any of the parties hereto may
execute this Agreement by signing any such counterpart. This Security Agreement
shall become effective when counterparts hereof executed on behalf of the
Grantor and the Collateral Agent shall have been received by the Collateral
Agent.

         SECTION 7.7 Collateral Agent: Exculpation. By accepting the benefits of
this Security Agreement, each Lender Party hereby appoints Bank of Texas, N.A.
as its collateral


                                       15
<PAGE>


agent under and for purposes of this Security Agreement and each other Security
Document. Each Lender Party authorizes Bank of Texas, N.A. to act on behalf of
such Lender Party under this Security Agreement and each other Security
Document, to exercise such powers hereunder and thereunder as are specifically
delegated to or required of the Collateral Agent by the terms hereof, together
with such powers as may be reasonably incidental thereto. Without limiting the
provisions of Article IX of the Credit Agreement, neither the Collateral Agent
nor the directors, officers, employees or agents thereof shall be liable to any
Lender Party (and each Lender Party will hold the Collateral Agent harmless) for
any action taken or omitted to be taken by it under this Security Agreement or
any other Security Document, or in connection herewith or therewith, except for
the willful misconduct or gross negligence of the Collateral Agent, or
responsible for any recitals or warranties herein or therein, or for the
effectiveness, enforceability, validity or due execution of this Security
Agreement or any other Security Document, or for the creation, perfection or
priority of any Liens purported to be created by this Security Agreement, or the
validity, genuineness, enforceability, existence, value or sufficiency of any
collateral security, or to make any inquiry respecting the performance by the
Grantor of its obligations hereunder.

         SECTION 7.8 CHOICE OF LAW. THIS SECURITY AGREEMENT SHALL BE DEEMED TO
BE A CONTRACT MADE UNDER AND GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF
RELATING TO CONFLICT OF LAW, EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL
OBLIGATIONS LAW), EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OR
PRIORITY OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT
OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER
THAN THE STATE OF NEW YORK.

         SECTION 7.9 FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS SECURITY
AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE PARTIES HERETO
SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW
YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW
YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY
COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE COLLATERAL AGENT'S OPTION,
IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE
FOUND. EACH PARTY HERETO HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH
LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE FOUND BY ANY JUDGMENT
RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. EACH PARTY HERETO FURTHER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY


                                       16
<PAGE>


REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE
STATE OF NEW YORK. EACH OF THE PARTIES HERETO HEREBY EXPRESSLY AND IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE
OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN
ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE GRANTOR HAS OR
HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY
LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT,
ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS
PROPERTY, THE GRANTOR HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY WITH RESPECT TO
ITS OBLIGATIONS UNDER THIS SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS.

         SECTION 7.10 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL
BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS SECURITY AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH
PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B)
ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER
INTO THIS SECURITY AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION.

         SECTION 7.11 NO ORAL AGREEMENTS. THIS WRITTEN SECURITY AGREEMENT AND
THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.

         THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

         SECTION 7.12 Filing as a Financing Statement. At the option of the
Collateral Agent, this Security Agreement, or a carbon, photographic or other
reproduction of this Security Agreement or of any Uniform Commercial Code
financing statement, continuations and amendments thereto, covering all of the
Collateral or any portion thereof shall be sufficient as a Uniform Commercial
Code financing statement and may be filed as such without the signature of the
Grantor where and to the full extent permitted by applicable law.


                                       17
<PAGE>

         SECTION 7.13 Non-Recourse to Officers and Directors. This Security
Agreement is fully recourse to the Grantor. Notwithstanding anything to the
contrary contained in this Security Agreement or in any other Loan Document, no
recourse under or upon any Secured Obligation, representation, warranty or
covenant shall be had against any of the officers, directors, employees, agents
or representatives of the Grantor; provided, however, that nothing in this
Section 7.13 shall be deemed to constitute a waiver of any Secured Obligation
evidenced or secured by, or contained in, this Security Agreement or any other
Loan Document, or affect in any way the validity or enforceability of this
Security Agreement or any other Loan Document.

                      [SIGNATURES BEGIN ON FOLLOWING PAGE]







                                       18
<PAGE>


         IN WITNESS WHEREOF, each party hereto has caused this Security
Agreement to be duly executed and delivered by its officer thereunto duly
authorized as of the date first above written.

                           GRANTOR:

                           NEG OPERATING LLC

                           By:  NEG Holding LLC, sole member

                                By:  Gascon Partners, managing member

                                     By:  Cigas Corp., managing general partner

                                          By: /s/ PHILIP D. DEVLIN
                                              ----------------------------------
                                          Name:    Philip D. Devlin
                                          Title:   Attorney-in-Fact

                                          1400 One Energy Square
                                          4925 Greenville Avenue
                                          Dallas, TX 75206
                                          Attention:   Mr. Randall D. Cooley
                                          Telephone No.: (214) 692-9211
                                          Facsimile No.: (214) 692-9310
                                          E-Mail:  rcooley@negx.com



                      NEG Operating LLC Security Agreement
                                       S-1

<PAGE>


                                           COLLATERAL AGENT:

                                           BANK OF TEXAS, N.A.

                                           By: /s/ TIMOTHY EDWARD MERRELL
                                               ---------------------------------
                                           Name: Timothy Edward Merrell
                                           Title: Senior Vice President

                                           5956 Sherry Lane, Suite 1100
                                           Dallas, TX 75225
                                           Attention: Mr. Tim Merrell
                                           Telephone No.: (214) 987-8873
                                           Facsimile No.: (214)987-8866
                                           E-Mail: tmerrell@mail.bokf.com



                      NEG Operating LLC Security Agreement
                                       S-2