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                               FINANCING AGREEMENT

                                 By and Between

                           LONG ISLAND POWER AUTHORITY

                                       and

                             LIPA ACQUISITION CORP.

                             Dated as of May 1, 1998

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                                TABLE OF CONTENTS
                                                                            Page
                                                                            ----
                                    ARTICLE I

                                   DEFINITIONS

Section 1.1.      Definitions................................................  1

Section 1.2.      Agreement with Bondholders.................................  3

                                   ARTICLE II

                      AGREEMENTS AS TO SYSTEM AND REVENUES

Section 2.1.      Agreement to Finance Acquisition of System and Cost of 
                    System Improvements......................................  3

Section 2.2.      Obligation to Make Payments to Authority; Grant of 
                    Revenues and Certain Other Security
                  to Authority...............................................  3

Section 2.3.      Powers as to Grant, Conveyance and Transfer and as to 
                    Revenues of the System...................................  5

Section 2.4.      Powers as to System and Collection of Revenues.............  5

Section 2.5.      State not Liable with Respect to Note......................  5

                                   ARTICLE III

                                TRANSFER OF FUNDS

Section 3.1.      Application of Bond Proceeds to Pay Costs..................  6

Section 3.2.      Payment From Construction Fund.............................  6

                                   ARTICLE IV

                       DEPOSIT AND APPLICATION OF REVENUES

Section 4.1.      Revenue Fund...............................................  6

Section 4.2.      Subsidiary General Fund....................................  6

Section 4.3.      Application of Revenues After Event of Default.............  7

Section 4.4.      Amounts Remaining..........................................  7


                                      (i)
                               
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                                TABLE OF CONTENTS
                                  (continued)
                                                                            Page
                                                                            ----
                                    ARTICLE V

              REPRESENTATIONS AND WARRANTIES; CONSENT TO ASSIGNMENT

Section 5.1.      Representations and Warranties.............................  7

Section 5.2.      Consent to Assignment......................................  7

Section 5.3.      Incorporation By Reference.................................  8

                                   ARTICLE VI

                                    COVENANTS

Section 6.1.      Rate Covenant..............................................  8

Section 6.2.      Compliance with Report as to System Condition..............  8

Section 6.3.      Operation and Maintenance..................................  9

Section 6.4.      Annual Subsidiary Budget...................................  9

Section 6.5.      Compliance with Agreements; Tax Exemption.................. 10

Section 6.6.      Compliance with Resolution................................. 10

Section 6.7.      Enforcement of Rules and Regulations....................... 10

Section 6.8.      Books, Records and Accounts................................ 10

Section 6.9.      Liens...................................................... 11

Section 6.10.     Compliance with Law........................................ 11

Section 6.11.     Insurance.................................................. 11

Section 6.12.     Covenant Regarding Additional System Agreements............ 11

Section 6.13.     Limitations on Operating Expenses and Costs of Major 
                    Renewals and Replacements................................ 12

Section 6.14.     Maintenance of Existence................................... 12

Section 6.15.     Disposition of Property.................................... 12

Section 6.16.     Competitive Facilities..................................... 13

Section 6.17.     Payment of Lawful Charges.................................. 13

Section 6.18.     Further Assurances......................................... 13

Section 6.19.     No Additional G&R Bonds.................................... 13

Section 6.20.     Tax Rulings................................................ 14


                                      (ii)
<PAGE>

                                TABLE OF CONTENTS
                                  (continued)
                                                                            Page
                                                                            ----
                                   ARTICLE VII

                             AGREEMENT OF THE STATE

Section 7.1.      Agreement of the State..................................... 14

                                  ARTICLE VIII

                         EVENTS OF DEFAULT AND REMEDIES

Section 8.1.      Events of Default.......................................... 14

Section 8.2.      Remedies .................................................. 15

Section 8.3.      Remedies Not Exclusive..................................... 15

                                   ARTICLE IX

                                   TERMINATION

Section 9.1.      Termination................................................ 16

                                    ARTICLE X

                           AMENDMENTS TO THE AGREEMENT

Section 10.1.     Amendments to Agreement; Consents.......................... 16

Section 10.2.     Consent of Trustee......................................... 16

                                   ARTICLE XI

                             INDEMNITY OF AUTHORITY

Section 11.1.     Indemnity by Subsidiary.................................... 17

                                   ARTICLE XII

                                  MISCELLANEOUS

Section 12.1.     Conflicts.................................................. 17


                                     (iii)
<PAGE>

                                TABLE OF CONTENTS
                                  (continued)
                                                                            Page
                                                                            ----
Section 12.2.     Assignment................................................. 17

Section 12.3.     No Waiver.................................................. 18

Section 12.4.     Notices ................................................... 18

Section 12.5.     Separability............................................... 18

Section 12.6.     Headings .................................................. 18

Section 12.7.     Governing Law.............................................. 18

Section 12.8.     Payments on Saturdays, Sundays and Holidays................ 18

Section 12.9.     Obligation for Payment Absolute............................ 18

Section 12.10.    Counterparts............................................... 18

Section 12.11.    Date of Agreement.......................................... 19

Exhibit A -Schedule of Outstanding Subsidiary Unsecured Debt.................A-1

Exhibit B -Form of Disbursement Request......................................B-1

Exhibit C -Form of Subsidiary Note...........................................C-1


                                      (iv)
<PAGE>

                               FINANCING AGREEMENT

      FINANCING  AGREEMENT,  dated as of May 1, 1998,  by and  between  the LONG
ISLAND POWER AUTHORITY (the "Authority"),  a corporate municipal instrumentality
of the State of New York (the  "State"),  and the LIPA  ACQUISITION  CORP.  (the
"Subsidiary"),  a New York business corporation and a wholly-owned subsidiary of
the Authority.

      The parties hereto mutually agree as follows:

                                    ARTICLE I

                                   DEFINITIONS

      Section 1.1. Definitions. Capitalized terms used and not otherwise defined
herein shall have the  respective  meanings  accorded  such terms in the General
Bond  Resolution.  The terms set forth in this  Section  shall have the meanings
ascribed to them for all purposes of this Financing Agreement unless the context
clearly requires otherwise.  Words in the singular shall include the plural, and
words in the plural shall include the singular, where the context so requires.

      "Annual Subsidiary Budget" shall mean the annual budget of the Subsidiary,
as amended or supplemented,  adopted or in effect for a particular  Fiscal Year,
as provided in Section 6.4.

      "Authority  Obligations"  shall  mean,  collectively,  all Bonds and other
bonds,  notes or other  evidences  of  indebtedness  for money  borrowed  of the
Authority,  Parity  Reimbursement  Obligations,  Parity Contract Obligations and
Subordinated  Indebtedness,  but shall not  include  debt of the  Authority  not
secured by the Trust Estate.

      "Debenture  Indentures"  shall mean the Indenture  dated as of November 1,
1986,  between  LILCO  and The  Connecticut  Bank and  Trust  Company,  National
Association, as amended and supplemented, and the Indenture dated as of November
1, 1992, between LILCO and Chemical Bank, as amended and supplemented.

      "Disbursement  Request"  shall  mean  the  written  request  signed  by an
Authorized  Representative of the Subsidiary and required to be delivered to the
Authority  pursuant  to  Section  3.2  hereof to effect  disbursements  from the
Construction Fund, in substantially the form set forth in Exhibit B hereto.

      "Financing Agreement" shall mean this Financing Agreement, dated as of May
1, 1998, by and between the Authority and the  Subsidiary,  as from time to time
hereafter  amended or supplemented in accordance with the provisions  hereof and
of the Resolution.

      "Fiscal Year" shall mean the twelve-month  period  commencing on January 1
of each year; provided, however, that the Authority and the Subsidiary may, from
time to time,  mutually agree on a different  twelve-month  period as the Fiscal
Year,  in which case January 1, 

<PAGE>

when used herein with  reference to Fiscal Year,  shall be construed to mean the
first day of the first calendar month of such different Fiscal Year.

      "G&R  Bonds"  shall  mean  any  bonds  authenticated  and  delivered,  and
outstanding from time to time, under the G&R Indenture.

      "G&R Indenture" shall mean the General and Refunding Indenture dated as of
June  1,  1975  between  LILCO  and  Manufacturers  Hanover  Trust  Company,  as
supplemented and amended.

      "LILCO"  shall  mean  the  Long  Island  Lighting  Company,   a  New  York
corporation.

      "Note" shall mean the promissory note or notes of the Subsidiary delivered
in accordance with Section 2.1 hereof.

      "Outstanding Subsidiary Unsecured Debt" shall mean any indebtedness of the
Subsidiary  outstanding  as  of  the  date  on  which  the  merger  and  related
transactions  between the  Authority and LILCO  provided for by the  Acquisition
Agreement are completed, as more particularly described in Exhibit A hereto.

      "Property  Tax  Settlement"  shall mean the  agreement by the Authority to
finance a program of rebates and credits to System  customers  in respect of the
amounts otherwise payable by Suffolk County,  the Town of Brookhaven and certain
other  municipalities  within Suffolk County as refunds of taxes and payments in
lieu of taxes relating to the Shoreham Nuclear Power Plant.

      "Reimbursement  Agreement" shall mean that certain Reimbursement Agreement
entered into by the Authority,  dated as of May 1, 1998, in connection  with the
Authority's  issuance of its Electric System  Subordinated  Revenue Bonds,  1998
Series 1, 2, 3, 4, 5 and 6.

      "Resolution" shall mean, collectively,  the bond resolution adopted by the
Authority on May 13, 1998, authorizing,  among other things, the issuance of the
Bonds from time to time (together with all supplemental resolutions thereto, and
other resolutions contemplated thereby, the "General Bond Resolution") and, with
respect  to other  bonds,  notes  or  other  evidences  of  indebtedness  of the
Authority,  any other resolution,  trust indenture or similar document,  in each
case as the same is amended or supplemented pursuant to the terms thereof.

      "Subsidiary"  initially shall mean LIPA Acquisition  Corp. and,  following
the  merger of LIPA  Acquisition  Corp.  into  LILCO,  shall  mean  LILCO as the
surviving  corporation  following  such merger,  and any  successor  thereto and
assignee thereof permitted hereunder.

      "Subsidiary Debentures" shall mean any "Bonds" as defined in the Debenture
Indentures.

      "Subsidiary  General  Fund"  shall  mean  the  special  fund by that  name
established  by the  Subsidiary  and held by a bank,  trust  company  or banking
association  designated by the Subsidiary to act as a depository for the general
funds of the Subsidiary.


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<PAGE>

      "System Manager" initially means, collectively,  MarketSpan TD Management,
LLC as Manager under the Management  Services  Agreement and  MarketSpan  Energy
Management,  LLC as Energy  Manager  under the  Energy  Manager  Agreement,  and
thereafter means any person, company or entity who signs an agreement to operate
some or all of System or System-related activities on behalf of the Subsidiary.

      "Transferee  Promissory Notes" shall mean the Promissory Notes (as defined
in the Acquisition Agreement) of the Transferee  Subsidiaries (as defined in the
Acquisition Agreement).

      Section 1.2.  Agreement with  Bondholders.  Subject in all respects to the
provisions of Article X hereof, the Authority and the Subsidiary agree that this
Agreement is executed in part to induce the purchase or entering  into by others
of  Authority  Obligations  issued or  entered  into from time to time,  and all
representations,   warranties,   covenants  and  agreements  contained  in  this
Financing  Agreement  are  declared  to be for the  benefit  of the  holders  of
Authority Obligations or other parties thereto.

                                   ARTICLE II

                      AGREEMENTS AS TO SYSTEM AND REVENUES

      Section 2.1. Agreement to Finance Acquisition of System and Cost of System
Improvement.  The  Authority  agrees  to  finance  (i)  the  acquisition  of all
outstanding  LILCO common stock in accordance  with the  Acquisition  Agreement,
(ii) the payment of a portion of the redemption price of certain preferred stock
of LILCO in accordance  with the Acquisition  Agreement,  (iii) the Property Tax
Settlement,  (iv) the retirement of certain  outstanding  debt of LILCO, (v) the
purchase of certain  interest rate hedges  entered into in  anticipation  of the
issuance  of the  Acquisition  Debt,  and (vi)  capital  expenditures  and other
purposes  of the  initial  Series of  Bonds,  and,  thereafter,  to use its best
efforts  to  finance  all or a part of the Cost of System  Improvements,  by the
issuance  of  Authority  Obligations  from time to time in  accordance  with the
Resolution, in each case unless and to the extent funded from other sources. The
Authority and the Subsidiary  agree that the issuance of Authority  Obligations,
including  the  issuance of Authority  Obligations  for the purpose of refunding
Authority  Obligations  or Outstanding  Subsidiary  Unsecured Debt in accordance
with this Section 2. 1 and the Resolution,  shall be deemed to constitute a loan
to the  Subsidiary.  The  obligation of the Subsidiary to repay such loan and to
make  payments in  accordance  with  Section  2.2(a)  shall be  evidenced by the
delivery  of the Note,  which  shall be  substantially  in the form of Exhibit C
hereto.

      Section 2.2.  Obligation to Make Payments to Authority;  Grant of Revenues
and Certain Other Security to Authority. (a) On or before one business day prior
to each due date for the payment of the principal of and  redemption  price,  if
any, or interest  on, or other  payments  required  under,  or with  respect to,
Authority Obligations,  until the same shall have been paid in full or provision
for the  payment  thereof in full shall  have been made in  accordance  with the
Resolution  or any other  document  entered into by the  Authority in connection
therewith,  or the provisions thereof,  the Subsidiary shall make or cause to be
made payments to the Authority in an amount which, when added to any moneys then
on deposit under the Resolution


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<PAGE>

and  available  therefor,  including  any  dividends  theretofore  paid  to  the
Authority and held thereunder,  shall be equal to the amount payable on such due
date with respect to the Authority  Obligations,  as provided in the Resolution,
including  amounts due for the  payment of the  principal  of and  sinking  fund
installments  and  premium,  if any, and  interest on the Bonds,  which  payment
obligations are evidenced by the Note. In addition,  the Subsidiary shall pay or
cause to be paid to the  Authority,  as and when the same shall  become due, all
other amounts due and payable by it under the Resolution and all other documents
entered into by the  Authority in  connection  with the  Authority  Obligations,
together with interest thereon at the then applicable rate. The principal amount
from time to time due and owing  under the Note and the  scheduled  amortization
thereof and related interest rates (or the method of determining the same) shall
be evidenced by the periodic  delivery to the  Subsidiary of a certificate of an
Authorized Representative of the Authority setting forth the same.

      Outstanding  Subsidiary  Unsecured  Debt shall be paid  pursuant to and in
accordance  with the Resolution and the  respective  resolutions,  indentures or
similar instruments authorizing and providing for the issuance thereof.

      (b) In  consideration  of the promises  and  agreements  of the  Authority
contained  herein and in  consideration  of the issuance or entering into of the
Authority  Obligations and application of the proceeds  thereof for the purposes
specified  in Section 2.1 hereof,  and in order to assure a source of payment of
and security  for the Note and all amounts  payable by the  Authority  under the
Resolution  or any other  document  entered into by the  Authority in connection
with  Authority  Obligations,   including  without  limitation  the  Bonds,  the
Subordinated  Indebtedness,  Required Deposits,  deposits in respect of the Rate
Stabilization  Fund and such other  payments as are to be made from  Revenues in
accordance with the Resolution, the Subsidiary hereby gives, grants, conveys and
transfers to the  Authority  all of its right,  title and interest in and to the
Revenues and the  Transferee  Promissory  Notes,  including all of its rights to
collect and receive the same,  subject only to the  provisions of this Financing
Agreement and the Resolution  permitting the  application  thereof for or to the
purposes  and on the terms and  conditions  herein and  therein  set forth,  and
pledges and grants a security  interest in the same to the Authority and to each
Trustee  under the  Resolution  for the  benefit  of the  holders  of  Authority
Obligations.

      (c) In  consideration  of the promises  and  agreements  of the  Authority
contained  herein and in  consideration  of the issuance or entering into of the
Authority  Obligations and application of the proceeds  thereof for the purposes
specified in Section 2. 1 hereof,  and in order to assure a source of payment of
and security for the payment  obligations  of the Authority  hereunder and under
the Note,  the Subsidiary  hereby further  pledges and assigns to the Authority,
and grants to the  Authority  a  security  interest  in, the System  Agreements,
subject  however to the right and  obligation of the  Subsidiary to exercise its
rights and to carry out its  obligations  and  duties  thereunder,  and  further
subject to the terms of this Financing  Agreement and the Resolution,  the right
and obligation to enforce or realize upon its rights and interests in the System
Agreements.  

      (d) The pledges of subsections (b) and (c) shall be valid and binding from
the time  when it is made,  and the  liens of such  pledges  shall be valid  and
binding as against all parties  having  claims of any kind in tort,  contract or
otherwise  against the  Subsidiary,  


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<PAGE>

irrespective of whether such parties have notice thereof.  The Revenues,  moneys
and proceeds received by the Subsidiary shall immediately be subject to the lien
of such pledges without any physical delivery or further act.

      Section  2.3.  Powers  as to  Grant,  Conveyance  and  Transfer  and as to
Revenues of the System.  (a) The Subsidiary is and will be authorized  under the
Act and all applicable laws to grant,  convey and transfer the Revenues,  and to
pledge and assign the System  Agreements and other moneys,  securities and funds
and the rights under contracts purported to be granted, conveyed and transferred
by this Financing  Agreement,  in the manner and to the extent  provided in this
Financing Agreement and the Resolution.  The Revenues, the System Agreements and
other moneys,  securities  and funds and the rights under  contracts so granted,
conveyed,  pledged and transferred are and will be free and clear of any pledge,
lien,  charge or  encumbrance  thereon or with respect  thereto  prior to, or of
equal rank with,  the pledge  created or authorized by the  Resolution,  and all
corporate  action  on the part of the  Subsidiary  to that end has been duly and
validly taken.  The Subsidiary  shall at all times,  to the extent  permitted by
law,  defend,  preserve  and  protect  the  pledge of the  Revenues,  the System
Agreements  and other  moneys,  securities  and funds and the  rights  under the
contracts pledged under this Financing  Agreement and the Resolution and all the
rights of the Authority and the Bondholders  under this Financing  Agreement and
the Resolution against all claims and demands of all persons whomsoever.

      (b) Subject to the provisions of Section 6.15 hereof, upon consummation of
the merger of LIPA  Acquisition  Corp. with and into LILCO,  the Subsidiary will
be, and so long as any  Authority  Obligations  remain  outstanding  will at all
times continue to be, the owner of the System. Accordingly,  all acts and things
required to be done or  performed by the  Subsidiary  with respect to the System
hereunder  shall be deemed to be acts and things which the Subsidiary will cause
to be done or performed by the  Subsidiary or any person acting on behalf of the
Subsidiary.

      (c) The  Subsidiary  shall,  so long as any Authority  Obligations  remain
outstanding,  perform all acts and duties  required to be  performed  by it with
respect  to the  System  Agreements,  and shall not  permit  any  rescission  or
termination  or  amendment  thereof,  or  otherwise  take any action under or in
connection with either, not expressly  provided for by the terms thereof,  which
will in any manner  impair or  adversely  affect  the  rights of the  Subsidiary
thereunder,  or the rights or security of the holders of or parties to Authority
Obligations under the provisions thereof or of the Resolution, and any action by
the  Subsidiary in violation of this  covenant  shall be null and void as to the
Subsidiary.  

      Section 2.4.  Powers as to System and  Collection of Revenues.  So long as
any Authority Obligations remain outstanding, the Subsidiary shall have or shall
use its best  efforts to obtain  good right and lawful  authority  to  maintain,
operate and improve the System;  to impose and collect such fees,  rates,  rents
and charges for the use or services of the System as are  established  from time
to time by the Authority in accordance  with the  Resolution and the Act; and to
demand and collect all  Revenues  becoming  due to it for the use or services of
the System.

      Section  2.5.  State not Liable with  Respect to Note.  The Note and other
obligations  of the Subsidiary  under this Agreement  shall not be a debt of the
State or of any


                                       5
<PAGE>

municipality,  and  neither  the  State  nor any  municipality  shall be  liable
thereon.  Neither the credit,  the revenues nor the taxing power of the State or
of any  municipality  shall be, or shall be deemed to be, pledged to the payment
of the Note or other obligations of the Subsidiary.

                                  ARTICLE III

                                TRANSFER OF FUNDS

      Section 3.1.  Application  of Bond Proceeds to Pay Costs.  The proceeds of
the issuance of Bonds shall be deposited by the Authority in accordance with the
provisions of the Resolution and the applicable  provisions of the  Supplemental
Resolution  authorizing  such Bonds,  and the proceeds of other bonds,  notes or
other  evidences of indebtedness of the Authority shall be deposited and applied
in accordance with the provisions of the resolution,  trust indenture or similar
document authorizing and providing therefor; provided, however, that the portion
of proceeds which is to be used to pay the Costs of System Improvements shall be
held only in the Construction Fund unless the Authority and the Subsidiary shall
otherwise agree.

      Section 3.2.  Payment From  Construction  Fund.  The Costs incurred by the
Subsidiary  with  respect  to  System  Improvements  shall be  evidenced  to the
Authority  by a  certificate  signed  by an  Authorized  Representative  of  the
Subsidiary.  Each such certificate shall contain the information  required to be
set forth in a  Disbursement  Request.  Upon  receipt  of such  certificate  the
Authority shall pay or cause to be paid to the person  entitled  thereto amounts
sufficient  to pay all such  certified  Costs.  Neither  the  Authority  nor the
Trustee  shall  be  required  to  provide  funds  to pay  the  Costs  of  System
Improvements  from any source other than the Construction Fund and no such funds
shall be required to be paid to the  Subsidiary  by the Authority or the Trustee
in excess of the amounts set aside therefor in the Construction Fund.

                                   ARTICLE IV

                       DEPOSIT AND APPLICATION OF REVENUES

      Section 4.1. Revenue Fund. All Revenues,  as promptly as practicable after
receipt  thereof by or on behalf of the  Subsidiary,  shall be  deposited by the
Subsidiary or by any System Manager into the Revenue Fund.  Without limiting the
generality of the foregoing,  the Subsidiary shall take such actions as it shall
determine  necessary and  appropriate  to assure that the Manager  complies with
Section 4.9(D) of the Management  Services Agreement and that the Energy Manager
complies with Section  6.2.2 of the Energy  Management  Agreement.  All Revenues
held by or for the  Subsidiary  shall  be  deemed  to be held in  trust  for the
Authority pending their deposit into the Revenue Fund.

      Section  4.2.  Subsidiary  General  Fund.  There shall be deposited in the
Subsidiary  General  Fund  all  amounts  received  by the  Subsidiary  from  the
Authority or the Trustee  pursuant to the  Resolution  for the purpose of paying
Subsidiary  Expenses and any necessary  and proper  renewals,  replacements  and
extensions to the System or, as provided in Section 6.17, PILOTs. All amounts in
the Subsidiary General Fund shall be held in trust by the Subsidiary and applied
only as provided herein, in the Act or in the Resolution. Amounts on


                                       6
<PAGE>

deposit in the Subsidiary General Fund shall be applied by the Subsidiary solely
for the payment of Subsidiary  Expenses,  or any such renewals,  replacements or
extensions, or PILOTs.

      Section  4.3.   Application  of  Revenues  After  Event  of  Default.  The
Subsidiary  covenants  that  if  an  "Event  of  Default",  as  defined  in  the
Resolution,  shall occur, the Subsidiary,  upon demand of the Trustee, shall pay
over or cause to be paid over to the Trustee all moneys and securities then held
by the Subsidiary or by any System  Manager in the Subsidiary  General Fund, and
thereafter,   as  promptly  as  practical,  the  Revenues,  for  application  in
accordance with Section 1003 of the General Bond Resolution.

      Section  4.4.  Amounts  Remaining.  Any  amounts  received  or held by the
Authority or the Trustee  pursuant to the  provisions of the  Resolution or this
Financing  Agreement after all Authority  Obligations  have been paid in full or
are  no  longer  outstanding  pursuant  to  the  provisions  thereof  and of the
Resolution,  and after  payment of all other  obligations  and  expenses  of the
Authority or provision  for payment  thereof in full has been made in accordance
with  the  provisions  thereof  and of the  Resolution,  shall  be  paid  to the
Subsidiary.

                                   ARTICLE V

                         REPRESENTATIONS AND WARRANTIES;
                              CONSENT TO ASSIGNMENT

      Section 5.1.  Representations  and  Warranties.  The Subsidiary  makes the
following  representations  and warranties as the basis for the  undertakings on
its part herein contained:

            (a) It is a New York business corporation duly organized and validly
      existing under the laws of the State, and has full power and authority:

                  (i) to own the  System  and to carry out its  purposes  in the
            manner proposed to be conducted pursuant to this Agreement; and

                  (ii) to execute,  deliver and perform,  and observe all of the
            terms and  provisions  of, this  Financing  Agreement and all System
            Agreements in effect as of the date hereof.

            (b) The execution,  delivery and  performance of this Agreement have
      been  duly  authorized  by  all  necessary  action  on  the  part  of  the
      Subsidiary.

            (c) The Subsidiary has duly and lawfully adopted,  and there are now
      in force and effect, by-laws relating to the Subsidiary.

      Section 5.2.  Consent of Assignment.  The lien on the Revenues  created by
and  pursuant  to the  Resolution  and the Act is made  for the  benefit  of the
Authority and holders of and parties to Authority  Obligations.  The  Subsidiary
hereby  consents to the  assignment by the Authority to the  Bondholders  of the
benefits  and rights of the  Authority  provided  by this  Financing  Agreement,
including,  without  limitation,  the lien  upon  the  Revenues  created  by and
pursuant to this Financing Agreement,  the Resolution and the Act and the pledge
and agreement 


                                       7
<PAGE>

of the State included herein pursuant to Section 1020-o of the Act and set forth
in  Section  7.1  hereof,  to the  extent  set  forth in or  pursuant  to, or as
permitted by, the Resolution.

      Section 5.3. Incorporation By Reference.  The Subsidiary hereby makes with
respect to itself each and every  representation  and warranty made with respect
to the Subsidiary by the Authority in Article IV of the Reimbursement Agreement.

                                   ARTICLE VI

                                    COVENANTS

      Section 6.1. Rate Covenant.  (a) The  Subsidiary and the Authority  hereby
covenant and agree that fees, rates,  rents,  charges and surcharges for the use
of, or services  furnished,  rendered or made  available by, the System shall be
established by the Authority in accordance  with the Resolution and the Act such
that such fees, rates, rents, charges and surcharges shall be adequate, together
with any other  available  funds,  to provide for,  among other things,  (i) the
timely payment of the Principal  Installments of and interest on all Bonds,  the
principal  of and  interest  on any other  Authority  Obligations  payable  from
Revenues,  and the  principal  of and  interest  on the  Outstanding  Subsidiary
Unsecured Debt, (ii) the proper  operation and maintenance of the System,  (iii)
all other payments  required for the System not otherwise  provided for and (iv)
all  other  payments   required  pursuant  to  this  Agreement  and  any  System
Agreements.

      (b) If the  periodic  review of System  fees,  rates,  rents,  charges and
surcharges  conducted  by the  Authority in  accordance  with Section 701 of the
General Bond Resolution,  or the report prepared  pursuant to Section 702 of the
General Bond Resolution,  indicates that such rates,  fees,  rents,  charges and
surcharges are, or will be, insufficient to meet the requirements of Section 701
of  the  General  Bond  Resolution,  the  Subsidiary,  in  accordance  with  the
directions, if any, of the Authority,  shall promptly take and diligently pursue
all necessary  actions within its  reasonable  control to cure or avoid any such
deficiency.

      (c) Except to the extent  required by law, the Subsidiary will not furnish
or supply or cause to be furnished  or supplied  any product,  use or service of
the  System  free of charge  (or at a nominal  charge)  to any  person,  firm or
corporation, public or private unless and to the extent the Authority shall have
determined  that other  adequate  consideration  has been or is  expected  to be
received by the Subsidiary in connection therewith,  and the Subsidiary will use
reasonable efforts to enforce or cause to be enforced the payment of any and all
amounts owing to the Subsidiary for use of the System in accordance with Section
6.7 hereof.

      (d) Nothing contained in this Financing Agreement shall be deemed to limit
or restrict the right or obligation of the Authority or the Subsidiary to comply
with any  covenant  relating  to rates to be charged for the use of, or services
provided  by,  the  System  which may be made with the  holders of or parties to
Authority Obligations in accordance with the Act.

      Section  6.2.  Compliance  with  Report  as to System  Condition.  (a) The
Subsidiary  covenants that if any report prepared in accordance with Section 702
of the General Bond Resolution shall set forth that the properties of the System
have not been maintained in


                                       8
<PAGE>

good repair and sound  operating  condition,  it will restore the  properties or
cause the properties to be restored to good repair and sound operating condition
as promptly as practicable.

      (b)  The  Subsidiary  further  covenants  that  (i)  the  Authority,   the
Consulting Engineer, if any, and the Rate Consultant, if any, shall at all times
have free access to all  properties of the System and every part thereof for the
purposes of inspection and examination, and (ii) its books, records and accounts
may be  examined  by the  Authority,  such  Consulting  Engineer  and such  Rate
Consultant at all reasonable times.

      Section 6.3.  Operation and Maintenance.  The Subsidiary  hereby covenants
that it shall, at all times:

            (a) In accordance with the advice and  recommendations  set forth in
      the reports  prepared from time to time in accordance  with Section 702 of
      the General Bond  Resolution,  operate the System  properly and in a sound
      and  economical  manner and shall  maintain,  preserve,  and keep the same
      preserved  and kept  with the  appurtenances  and  every  part and  parcel
      thereof, in good repair, working order and condition,  and shall from time
      to time make,  or cause to be made,  all  necessary  and  proper  repairs,
      replacements,  renewals and  extensions so that at all times the operation
      of the System may be  properly  and  advantageously  conducted;  provided,
      however,  that nothing  herein  contained  shall require the Subsidiary to
      operate,  maintain,  preserve,  repair,  replace, renew or reconstruct any
      part of the  System  if,  in the case of any part of the  System  having a
      market  value of greater  than $1  million,  there shall be filed with the
      Subsidiary,  the Authority and the Trustee a certificate  of an Authorized
      Representative  of the  Subsidiary  stating  that  in the  opinion  of the
      Subsidiary  abandonment  of  operation of such part of the System will not
      adversely  affect the operation of the System or impair the ability of the
      Subsidiary  and the Authority to comply with the provisions of Section 6.1
      hereof and Section 701 of the General Bond Resolution;

            (b) enforce the rules and regulations governing the operations,  use
      and services of the System established from time to time by the Subsidiary
      or the Authority; and

            (c) observe and perform all of the terms and conditions contained in
      the Act, and comply with all valid acts,  rules,  regulations,  orders and
      directions of any legislative,  executive, administrative or judicial body
      having competent  jurisdiction of the Subsidiary or the System;  provided,
      however,  that the failure of the  Subsidiary  to comply with the covenant
      contained in this  subsection  (c) for any period  shall not  constitute a
      default on its part so long as the Subsidiary (i) is taking reasonable and
      timely  steps to achieve  compliance  and (ii) the  Subsidiary  shall have
      delivered  to the  Trustee  and  to  the  Authority  a  Certificate  of an
      Authorized Representative of Subsidiary which (1) sets forth in reasonable
      detail the facts and circumstances  attendant to such non-compliance,  (2)
      sets forth the steps being taken by the Subsidiary to achieve  compliance,
      (3) sets  forth  the  estimated  date on which the  Subsidiary  will be in
      compliance  and  (4)  states  that  in  the  opinion  of  such  Authorized
      Representative  such  noncompliance  during the period  described will not
      adversely  affect the operation of the System or the amount of Revenues to
      be derived therefrom.

      Section  6.4.  Annual  Subsidiary  Budget.  Not less than thirty (30) days
prior to the beginning of each Fiscal Year commencing with Fiscal Year 1999, the
Subsidiary shall file


                                       9
<PAGE>

with the Authority and the Trustee an Annual  Subsidiary  Budget for the ensuing
Fiscal Year which shall set forth in reasonable  detail the estimated  Revenues,
Subsidiary Expenses and renewals, replacements and extensions for the System for
such year.  Such Annual  Subsidiary  Budget  also may set forth such  additional
material as the Subsidiary may determine or the Authority shall request.  At the
end of each quarter,  the Subsidiary  shall review its estimates for such Fiscal
Year,  and in the event such  estimates  do not  substantially  correspond  with
actual Revenues or Subsidiary  Expenses,  or if there are at any time during any
such Fiscal Year  extraordinary  receipts  or  payments  of unusual  costs,  the
Subsidiary shall prepare an amended Annual  Subsidiary  Budget for the remainder
of the then current Fiscal Year.  The  Subsidiary  also may at any time adopt an
amended  Annual  Subsidiary  Budget for the remainder of the then current Fiscal
Year.

      Section 6.5. Compliance with Agreements; Tax Exemption. (a) The Subsidiary
hereby  covenants  with the  Authority  that it shall  take all such  actions or
refrain from taking all such  actions,  as the case may be, so as to comply with
the terms and provisions of this  Financing  Agreement and the  Resolution.  The
Authority  hereby  covenants  with the  Subsidiary  that it shall  take all such
actions or refrain  from taking any such  actions,  as the case may be, so as to
comply  with the terms  and  provisions  of the  Resolution  and this  Financing
Agreement.

      (b) The Subsidiary  hereby  covenants  with the Authority,  so long as any
Bonds or other Authority  Obligations,  issued with the intent that the interest
thereon not be included in gross income for Federal  income tax purposes,  shall
be  outstanding,  that it will not take any action,  or fail to take any action,
which,  if taken or not taken,  as the case may be, would  adversely  affect the
tax-exempt  status of the interest  payable on any such Bonds or other Authority
Obligations.

      Section 6.6.  Compliance with  Resolution.  The Subsidiary  shall take all
such actions and refrain from taking all such  actions,  as the case may be, and
otherwise  shall  operate the System as shall ensure their  compliance,  and the
compliance of the Authority, with the terms and provisions of the Resolution, or
any  other  agreement  entered  into by the  Authority  in  connection  with the
financing or operation of the System and which shall, by its terms,  directly or
indirectly apply to the Subsidiary.

      Section 6.7.  Enforcement of Rules and  Regulations.  The Subsidiary shall
enforce  or cause any System  Manager  of the  System to  enforce  the rules and
regulations  providing for discontinuance of or disconnection from the provision
of electric  service,  for  non-payment of fees,  rates,  rents or other charges
imposed by the Authority and the Subsidiary,  provided that such  discontinuance
or  disconnection  shall not be carried out except in the manner and upon notice
consistent with Section 1020-cc of the Act as in effect on the date hereof.

      Section  6.8.  Books,  Records  and  Accounts.  (a)  If the  Authority  so
requests,  the Subsidiary shall provide to the Authority such reports concerning
the System as may be required by the Authority.

      (b) Each of the  Authority  and the  Subsidiary  shall keep or cause to be
kept,  proper books of record and account in which complete and correct  entries
shall be made of all transactions relating to their corporate purposes under the
Act and this Agreement.


                                       10
<PAGE>

      Section 6.9. Liens. Until all Authority Obligations have been paid in full
or provision  has been made  therefor in  accordance  with the  Resolution,  the
Subsidiary  shall not create,  and, except to the extent permitted under Section
6.17 hereof and to the extent it has the power to do so,  shall not permit to be
created,  any lien upon or pledge of the System, any real or personal properties
comprising any part of the System, or the Trust Estate including but not limited
to the Revenues,  except the lien and pledge  thereon  created by this Financing
Agreement, the Resolution, and the Act.

      Section 6.10. Compliance with Law. The Authority and the Subsidiary hereby
covenant  and agree each for itself that it will  observe and perform all of the
terms and conditions contained in the Act, and comply with all valid laws, acts,
rules,  regulations,  orders  and  directions  of  any  legislative,  executive,
administrative or judicial body having competent  jurisdiction over its property
or affairs.

      Section 6.11.  Insurance.  (a) The Subsidiary  shall maintain or cause the
System Manager to maintain with responsible  insurers all insurance required and
reasonably obtainable in the amounts and of the types customarily  maintained by
electric  utilities  consistent with prudent utility practice,  to indemnify for
loss of or  damage to the  System,  and  against  public  and other  liabilities
relating to the operations of the Subsidiary and the System.

      (b) The  Subsidiary  shall also  maintain  or cause to be  maintained  any
additional or other insurance which is required by the System Agreements.

      (c) Any  insurance  required to be  maintained by this Section shall be in
the form of policies or contracts for  insurance  with insurers of good standing
qualified to do business in the State and shall be payable to the Authority, the
Subsidiary, or the Trustee, as their interests may appear.

      (d) Any insurance  procured and maintained by the  Subsidiary  pursuant to
this Section,  including any blanket  insurance policy,  may include  reasonable
deductibles.

      (e) No  provision  of this  Section  shall be  construed  to prohibit  the
Subsidiary  from  self-insuring  against  any risk at the  recommendation  of an
insurance consultant chosen by or acceptable to an Authorized  Representative of
the Subsidiary;  provided,  however,  that the Subsidiary shall provide adequate
funding  of  such  self-insurance  if and  to the  extent  recommended  by  such
insurance consultant.

      (f) The Subsidiary  shall file with the Trustee  annually a Certificate of
an Authorized  Representative of the Subsidiary  setting forth (i) a description
in  reasonable   detail  of  the  insurance  then  in  effect  pursuant  to  the
requirements  of this  Section  and  that the  Subsidiary  has  complied  in all
respects with the  requirements  of this Section,  and (ii) whether  during such
year any portion of the System  having a book value  greater than $2 million has
been damaged or destroyed and, if so, the amount of insurance  proceeds covering
such loss or damage and  specifying  the  Subsidiary's  reasonable and necessary
costs of reconstruction or replacement thereof.

      Section  6.12.  Convenant  Regarding  Additional  System  Agreements.  Any
additional System Agreement  executed by the Subsidiary shall contain such terms
and conditions


                                       11
<PAGE>

as will enable the Subsidiary to retain such overall  supervision and control of
the  business,  design,  operating,  management,  transportation,   maintenance,
planning and research and development functions of the System as may be required
by law, this Financing Agreement or the Resolution.

      Section  6.13.  Limitations  on  Operating  Expenses  and  Costs  of Major
Renewals and  Replacements.  The Subsidiary  shall not incur or allow any System
Manager to incur Operating Expenses or costs of major renewals, replacements and
extensions  for the System in any year in excess of the reasonable and necessary
amount of such Operating Expenses or costs, respectively,  and, except as may be
necessary  to  respond to  emergency  conditions  and to assure  the  continuing
operation  of the System,  shall not expend or cause to be  expended  any amount
from the Subsidiary General Fund for Operating Expenses or from the Construction
Fund for costs of major renewals, replacements and extensions for the System for
such year in excess of the respective  amounts  provided  therefor in the Annual
Subsidiary Budget as originally adopted or as amended.

      Section  6.14.  Maintenance  of  Existence.  (A)  Except  as set  forth in
Sections 6.14(B) and (C) hereof, the Subsidiary covenants and agrees that during
the  term of this  Financing  Agreement  it will  maintain  its  existence  as a
corporation,  will continue to be a corporation  either organized under the laws
of or duly qualified to do business in the State, will not dissolve or otherwise
dispose of all or substantially  all of its assets and will not consolidate with
or merge into one or more other entities or permit one or more other entities to
consolidate with or merge into it.

      (B) The Company may, however,  without violating the agreements  contained
in this Section,  consolidate  with or merge into one or more other  entities or
permit one or more other entities to consolidate  with or merge into it, or sell
or otherwise  transfer to one or more other entities all or substantially all of
its assets as an entirety  and  thereafter  liquidate  or  dissolve,  if (a) the
Subsidiary is the surviving, resulting or transferee entity, or (b) in the event
the Subsidiary is not the surviving, resulting or transferee entity, such entity
(i) is solvent,  and either  organized under the laws of or duly qualified to do
business subject to service or process in the State, (ii) assumes in writing all
of the obligations of the Subsidiary herein and (iii) is either the Authority or
is wholly owned by the  Authority,  and (c), in either event,  the Trustee shall
have been furnished (1) an Opinion of Bond Counsel to the effect that under then
existing  statutes and court  decisions,  such  consolidation,  merger,  sale or
transfer does not adversely  affect the exclusion of interest on any obligations
of the Authority then  outstanding  the interest on which is excluded from gross
income for federal income tax purposes,  and (2) written  confirmation from each
Rating Agency to the effect that such  consolidation,  merger, sale or transfer,
in and of  itself,  will not  result in a  withdrawal,  suspension  or  downward
revision of the rating assigned by such Rating Agency to the Bonds.

      (C) Nothing in Section  6.14(B)  hereof  shall  restrict the merger of the
Subsidiary  with and into LILCO on the date of issuance of the initial Series of
Bonds with the effect that LILCO shall become the successor Subsidiary hereunder
and under the Note.

      Section  6.15.  Disposition  of Property.  The  Subsidiary  may,  with the
approval  of the  Authority,  dispose of  properties  if such  disposal,  in the
judgment of the Subsidiary, (i) is


                                       12
<PAGE>

desirable in the conduct of its  business,  (ii) is not  disadvantageous  in any
material  respect to the  Holders of  Authority  Obligations  and (iii) does not
materially  impair the ability of Authority  and the  Subsidiary  to comply with
Section 6. 1 of this Agreement and Section 701 of the General Bond Resolution.

      Section 6.16. Competitive  Facilities.  The Subsidiary shall not hereafter
construct, acquire, or operate, any plants, structures, facilities or properties
which will provide  electric  service in the Service Area (as defined in the Act
as in effect on the date hereof) unless the same are a part of the System.

      Section 6.17.  Payment of Lawful Charges.  (A) The Subsidiary shall pay or
cause  to be paid,  to the  extent  not paid by the  Authority,  all  taxes  and
assessments or other municipal or governmental  charges,  if any, and all PILOTs
to the extent not paid by the Authority,  lawfully levied or assessed upon or in
respect of the System,  or upon any part thereof or upon the Revenues,  when the
same shall  become  due,  and shall  duly  observe  and  comply in all  material
respects with all valid requirements of any municipal or governmental  authority
relative to any part of the System, and shall not create or suffer to be created
any lien or charge  upon the  System or any part  thereof  or upon the  Revenues
therefrom,  except the pledge and lien created  hereby and by the Resolution for
the payment of the principal and redemption  price of and interest on, and other
payments under, Authority  Obligations.  The Subsidiary shall pay or cause to be
discharged,  or will make adequate  provision to satisfy and  discharge,  within
sixty (60) days after the same shall  accrue,  all lawful claims and demands for
labor,  materials,  supplies or other  objects  which,  if unpaid,  might by law
become a lien upon the  System or any part  thereof or the  Revenues  therefrom;
provided,  however,  that nothing  contained in this Section  shall  require the
Subsidiary to pay or cause to be  discharged,  or make  provision  for, any such
tax,  assessment,  lien or charge, or any PILOTs so long as the validity thereof
shall be  contested  in good faith and by  appropriate  legal  proceedings.  The
Subsidiary  may  elect to pay any such tax,  assessment  or other  municipal  or
governmental charges in such installments and over such period of time as may be
allowed by the appropriate governmental agencies.

      (B) Nothing in  subsection  (A) of this Section 6.17 shall be construed to
prevent the  Subsidiary or the Authority  from entering into  agreements to make
PILOTs.

      Section 6.18. Further  Assurances.  The Subsidiary from time to time shall
make, do,  execute,  adopt,  acknowledge and deliver and take all and every such
further  acts,  deeds,  conveyances,  assignments,  resolutions,  transfers  and
assurances as may be necessary or desirable for the better assuring,  conveying,
granting,  assigning,  confirming  and  effecting  the rights  assigned  and the
Revenues  pledged or  perfecting  the lien of this  Financing  Agreement and the
Resolution.

      Section 6.19. No Additional G&R Bonds.  The  Subsidiary  covenants that it
will  not  further  amend  or  supplement  the G&R  Indenture  or the  Debenture
Indentures,  or take any other action,  to allow the issuance of any  additional
G&R Bonds or any  additional  Subsidiary  Debentures  other than bonds issued in
lieu of or  substitution  therefor in accordance  with the G&R Indenture and the
Debenture Indentures.  The Subsidiary agrees to take such further actions as may
be required to close the G&R Indenture and the Debenture Indentures against the


                                       13
<PAGE>

authentication  and  delivery on initial  issuance of  additional  G&R Bonds and
Subsidiary Debentures, respectively.

      Section 6.20. Tax Rulings.  The Subsidiary  shall not do or omit to do any
act that would result in (i) the  revocation  of the rulings that were issued by
the Internal  Revenue Service to the Authority,  dated March 4, 1998, and (ii) a
resultant material federal income tax liability.

                                  ARTICLE VII

                             AGREEMENT OF THE STATE

      Section 7.1.  Agreement of the State. In accordance with Section 1020-o of
the Act, the Authority,  as agent for the State, does hereby pledge to and agree
with the holders of any obligations  issued under the Act and the parties to any
contracts with the Authority  thereunder  that the State will not limit or alter
the rights thereby vested in the Authority until such obligations  together with
the interest  thereon are fully met and  discharged  and/or such  contracts  are
fully  performed on the part of the  Authority,  provided  that  nothing  herein
contained  shall  preclude  such  limitation  or alteration if and when adequate
provision  shall  be  made  by law for the  protection  of the  holders  of such
obligations  of the  Authority,  or those  entering into such contracts with the
Authority.

                                  ARTICLE VIII

                         EVENTS OF DEFAULT AND REMEDIES

      Section 8.1. Events of Default. An "event of default" shall mean, whenever
used in this Financing Agreement,  the occurrence and continuation of any one or
more of the following events:

            (a) failure by the Subsidiary to make any payment when due under the
      Note or  required to be made to the  Authority  pursuant to Section 2.2 of
      this Financing Agreement;

            (b) failure by the  Subsidiary  to remit or cause to be remitted the
      Revenues, or any portion thereof, promptly upon receipt by the Subsidiary,
      for deposit in the Revenue Fund;

            (c)  failure of the  Subsidiary  to observe  any  covenant,  term or
      condition  of this  Agreement,  other than as referred to in clause (a) or
      (b) of this  Section;  provided,  however,  that such  failure  shall have
      continued for a period of sixty (60) days after written notice, specifying
      such  failure  and  requesting  that  it be  remedied,  is  given  to  the
      Subsidiary by the Authority,  unless the Authority  shall agree in writing
      to an  extension  of such  time  prior  to its  expiration,  and  provided
      further,  that if the  failure  stated in the  notice  cannot be  remedied
      within  the  applicable  period,  the  Authority  shall  not  unreasonably
      withhold its consent to an extension of such time if corrective action has
      been instituted by the Subsidiary,  as the case may be, within such period
      and is being diligently pursued;

            (d) if the Subsidiary (1) files a petition  seeking a composition of
      its  indebtedness  under the Federal  bankruptcy  laws, or under any other
      applicable law or statute of


                                       14
<PAGE>

      the  United  States  of  America  or of the  State;  (2)  consents  to the
      appointment  or taking  possession  by a receiver,  liquidator,  assignee,
      custodian,   trustee,  sequestrator  or  other  similar  official  of  the
      Subsidiary  or any  substantial  portion  of its  property;  (3) makes any
      assignment  for the  benefit  of  creditors;  (4)  admits in  writing  its
      inability  to pay its debts  generally  as they  become  due; or (5) takes
      action in furtherance of any of the foregoing;

            (e) if (1) a decree or order for relief is entered by a court having
      jurisdiction  of the  Subsidiary  adjudging  the  Subsidiary a bankrupt or
      insolvent   or   approving   as   properly   filed  a   petition   seeking
      reorganization,  arrangement,  adjustment or composition in respect of the
      Subsidiary in an involuntary  case under the Federal  bankruptcy  laws, or
      under any other  applicable law or statute of the United States of America
      or of the State; (2) a receiver, liquidator, assignee, custodian, trustee,
      sequestrator  or  other  similar  official  of  the  Subsidiary  or of any
      substantial portion of its property is appointed; or (3) the winding up or
      liquidation  of its  affairs is ordered  and the  continuance  of any such
      decree  or  order  unstayed  and in  effect  for a period  of  sixty  (60)
      consecutive days; or

            (f) the  respective  provisions  of the Act  pursuant  to which  the
      Resolution has been adopted or Authority  Obligations  have been issued or
      entered into, including,  without limitation, those provisions pursuant to
      which  the  lien  upon the  Revenues  has been  created  pursuant  to this
      Financing  Agreement and the Resolution and those  provisions  authorizing
      the  establishment  of the  Subsidiary,  shall be materially and adversely
      limited,  altered  or  impaired  by any  legislative  action or any formal
      judgment  or the  terms,  conditions  and  security  provided  under  this
      Financing Agreement, the Authority Obligations and the Resolution shall be
      materially and adversely  limited,  altered or impaired by any legislative
      action or any final judgment.

      Section 8.2.  Remedies.  Whenever any event of default shall have occurred
and be  continuing,  and written  notice of the event of default,  if  required,
shall have been given to the  Subsidiary  by the Authority or by the Trustee and
the event of  default  shall not have been  cured  within  the  period  provided
therefor,  the Authority  and the Trustee may take whatever  action at law or in
equity may appear necessary or desirable to collect the payments then due and as
they  thereafter  become due, and the Authority and the Trustee,  so long as any
Bonds are  outstanding,  may take whatever action at law or in equity may appear
necessary or desirable to enforce  performance and observance of any obligation,
agreement or covenant of the Subsidiary under this Financing Agreement.

      Section 8.3.  Remedies Not  Exclusive.  (a) Subject to the  provisions  of
Sections  8.1 and 8.2 hereof,  the  remedies  conferred  upon or reserved to the
Authority in respect of any event of default are not intended to be exclusive of
any other available remedy or remedies,  but each and every such remedy shall be
cumulative  and shall be in  addition  to every  other  remedy  given under this
Agreement or now or hereafter existing at law or in equity or by statute.

      (b) No delay or omission to exercise any right or power  accruing upon any
default  shall  impair  any such  right or power or shall be  construed  to be a
waiver thereof,  but any such right and power may be exercised from time to time
and as often as may be deemed  expedient.  In order to entitle the  Authority to
exercise any remedy reserved to it in this Article, it 


                                       15
<PAGE>

shall not be  necessary  to give any  notice,  other than such  notice as may be
expressly required herein.

                                   ARTICLE IX

                                   TERMINATION

      Section 9.1.  Termination.  This Financing Agreement shall terminate,  and
the covenants and other  obligations  contained  herein shall be discharged  and
satisfied,  when (i)  payment  of all  Authority  Obligations  has been  made or
provided for in accordance with the Resolution (or such other resolution,  trust
indenture or similar document  securing such  indebtedness)  and (ii) either all
payments  required  hereunder  have been  made in full,  or  provision  for such
payments  satisfactory  to the  Authority  and the  Trustee has been made or the
Authority  pays or assumes  all  liabilities,  obligations,  duties,  rights and
powers of the Subsidiary hereunder.

                                   ARTICLE X

                           AMENDMENTS TO THE AGREEMENT

      Section 10.1. Amendments to Agreement; Consents. (a) No amendment, waiver,
consent or  extension  of the time for  performance  of or under this  Financing
Agreement  shall be  effective  unless it is in  writing,  signed by each of the
parties hereto and, to the extent  required by the  Resolution,  consented to in
writing by the Trustee.

      (b) Except as hereinafter expressly provided, the parties hereto may enter
into  any  amendment,  change  or  modification  of  this  Financing  Agreement;
provided,  however,  the parties  hereto shall not enter into or consent to, any
amendment,  change or modification of the provisions of this Agreement,  without
first  obtaining  the  consent  of  the  holders  of  or  parties  to  Authority
Obligations  in  accordance  with and to the extent  provided by the  provisions
thereof and of the Resolution,  if such amendment,  modification or change would
materially  adversely  affect the rights of such holders or parties by modifying
or revoking the provisions of this Financing  Agreement with respect to: (i) the
obligations of the Subsidiary under Article II, III, IV and VI hereof;  (ii) the
grant of  Revenues  to the  Authority;  (iii) the pledge and  assignment  of the
System  Agreements;  (iv) the  deposit or  application  of the  Revenues  in the
Revenue Fund; (v) the consent to assignment by the Authority; (vi) the agreement
of the State;  (vii) events of default and remedies;  (viii)  termination;  (ix)
amendments to this Agreement;  (x) the controlling  effect of the Resolution and
the  Authority  Obligations;  (xi)  severability  of invalid  provisions;  (xii)
governing law; or (xiii) the effective date of this Financing Agreement.

      Section 10.2. Consent of Trustee.  In consenting to any amendment referred
to in  Section  10. 1 the  Trustee  shall be fully  protected  in  relying on an
opinion of Bond  Counsel,  reasonably  satisfactory  to the  Trustee,  that such
amendment is authorized or permitted by the terms of this Financing Agreement.


                                       16
<PAGE>

                                   ARTICLE XI

                             INDEMNITY OF AUTHORITY

      Section 11.1. Indemnity by Subsidiary. To the extent permitted by law, the
Subsidiary  hereby  releases  and  agrees to hold  harmless  and  indemnify  the
Authority and its trustees,  officers,  officials, agents and employees from and
against  all,  and  agrees  that  the  Authority  and  its  trustees,  officers,
officials,  agents and employees  shall not be liable for any, (i)  liabilities,
suits, actions,  claims, demands,  damages,  losses, expenses and costs of every
kind and nature resulting from any action taken in accordance with, or permitted
hereby,  or the  Resolution,  or arising  from or incurred by the  Authority  by
reason of its  incurrence  of  Authority  Obligations  pursuant  hereto  and the
Resolution,  or (ii) loss or damage to property or any injury to or death of any
or all persons that may be occasioned by any cause whatsoever  pertaining to the
System  arising by reason of or in connection  with the presence on, in or about
the  premises  of the System of any  person;  including  in each  case,  without
limiting the generality of the foregoing,  causes of action and attorneys'  fees
and other expenses incurred in defending any suits or actions which may arise as
a result of any of the foregoing  and  including  any loss,  damage or liability
which may arise as a result of the negligence  (but excluding any loss,  damages
or  liability  which  may arise as a result  of the  gross  negligence,  willful
misconduct, or intentional misrepresentation) of any party so indemnified by the
Subsidiary, and to deliver at the request of an Authorized Representative of the
Authority any further  instrument or  instruments in form  satisfactory  to such
Authorized  Representative  as to such  provisions  of this  Section;  provided,
however, that the indemnity provided in this sentence shall be effective only to
the extent of any loss or liability  that may be  sustained by the  Authority or
another  party so  indemnified  by the  Subsidiary  in  excess  of net  proceeds
received from any insurance carried with respect to such loss or liability;  and
provided further that the Authority and the Subsidiary shall each provide waiver
of rights of subrogation  against the other in any insurance  coverage  obtained
relating to the System.

                                  ARTICLE XII

                                  MISCELLANEOUS

      Section 12.1. Conflicts. The provisions of this Financing Agreement are in
no way intended to, nor shall such provisions, change or in any manner alter the
terms of the Resolution,  or the security,  rights or remedies of the Trustee or
the holders or owners of Authority  Obligations.  In the event any  provision of
this  Financing  Agreement  conflicts  at any time,  or in any manner,  with the
provisions of the Resolution or any Authority Obligations, the provisions of the
Resolution  or  Authority   Obligation  shall  be  controlling  and  conflicting
provisions of this Financing Agreement shall be disregarded.

      Section 12.2.  Assignment.  The Authority has, pursuant to the Resolution,
pledged and assigned to the Trustee  certain of its rights and  interests in and
to this  Financing  Agreement  including,  without  limitation,  its  rights and
interests in and to all amounts  payable to the Authority  hereunder as security
for the payment of the principal of, premium,  if any, and interest on the Bonds
and other Authority  Obligations.  The Subsidiary hereby consents to such pledge
and  assignment  and to the  enforcement  of such  rights and  interests  by the
Trustee.


                                       17
<PAGE>

      Section  12.3.  No  Waiver.  No  failure  to  exercise,  and no  delay  in
exercising by the parties hereto, any right, power or privilege  hereunder shall
operate as a waiver  thereof;  nor shall any single or partial  exercise  of any
right,  power or  privilege  hereunder  preclude  any other or further  exercise
thereof,  or the  exercise  of any  right,  power or  privilege.  The rights and
remedies  herein  provided  are  cumulative  and not  exclusive of any rights or
remedies provided by law.

      Section  12.4.  Notices.  All notices,  requests and other  communications
under this  Agreement  shall be deemed to have been duly given if in writing and
delivered  personally  or by certified  mail (a) to the  Subsidiary at 333 Earle
Ovington Boulevard,  Suite 403, Uniondale,  New York 11553, attention:  Chairman
(with a copy to the attention of General  Counsel at the same address);  and (b)
to the Authority at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York
11553,  attention:  Chairman (with a copy to the attention of General Counsel at
the same  address),  or such other address as, the Subsidiary and the Authority,
as the case may be, shall hereafter designate by notice in writing.

      Section  12.5.  Separability.  In the  event  that  any one or more of the
provisions  contained  in  this  Agreement  is  or  are  invalid,  irregular  or
unenforceable in any respect, the validity, regularity and enforceability of the
remaining  provisions  contained in this Agreement  shall be in no way affected,
prejudiced or disturbed thereby.

      Section 12.6.  Headings.  The descriptive headings of the several articles
of this Agreement are inserted in this Financing  Agreement for convenience only
and shall not be deemed to affect  the  meaning  or  construction  of any of the
provisions hereof.

      Section 12.7.  Governing Law. This Financing  Agreement  shall be governed
by, and  construed in  accordance  with,  the internal  laws of the State of New
York, without regard to conflicts of laws principles.

      Section  12.8.  Payments on Saturdays,  Sundays and Holidays.  In any case
where the date of any payment required to be made under this Financing Agreement
shall be a Saturday  or a Sunday or shall be, at the place  designated  for such
payment,  a legal holiday or a day on which banking  institutions are authorized
by law to close,  then such payment  shall not be made on such date but shall be
made on the  next  preceding  business  day not a  Saturday,  Sunday  or a legal
holiday or a day upon which banking institutions are authorized by law to close.

      Section 12.9.  Obligation  for Payment  Absolute.  Anything  herein to the
contrary  notwithstanding,  the  Subsidiary  agrees that its  obligation to make
payments  hereunder  and  under  the Note  shall be  absolute,  irrevocable  and
unconditional  and shall not be subject to any defense  (other than  payment) or
any right of set-off,  counterclaim  or  recoupment  for any reason,  including,
without  limitation,  any  failure  by  the  Authority  to  perform  any  of its
obligations hereunder.

      Section 12.10.  Counterparts.  This Financing 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.


                                       18
<PAGE>

      Section 12.11.  Date of Agreement.  The date of this  Financing  Agreement
shall be for identification purposes only. This Financing Agreement shall become
effective  upon the  delivery  of the  initial  issue of  bonds,  notes or other
obligations of the Authority to the original purchasers thereof.

      IN WITNESS WHEREOF,  the Authority has caused this Financing  Agreement to
be  executed  in its name by its  Chairman  and the  Subsidiary  has caused this
Financing  Agreement to be executed in its name by its  Chairman,  all as of the
date first above written.

                                         LONG ISLAND POWER AUTHORITY

                                         By:  /s/ Richard M. Kessel
                                              -----------------------------
                                               Chairman

                                         LIPA ACQUISITION CORP.

                                         By:  /s/ Richard M. Kessel
                                              -----------------------------
                                               Chairman


                                       19
<PAGE>

                                    Exhibit A

                Schedule of Outstanding Subsidiary Unsecured Debt

                                   Debentures

                         Amount                                       Redemption
Maturity                 ($000)        Rate           Callable On      Price(l)
--------                 ------        ----           -----------      --------
 1/15/00             $   36,000       7.300%               NC             NA
 7/15/01                145,000       6.250                NC             NA
 3/15/03                150,000       7.050                NC             NA
 3/01/04                 59,000       7.000                NC             NA
 6/01/05                200,000       7.125                NC             NA
 3/01/07                142,000       7.500           3/01/98         103.54%
 7/15/19                420,000       8.900           7/15/98         105.94
 11/01/22               451,000       9.000           11/l/02         104.19
                     ----------                                    
                     $1,603,000                                    
                     ==========                                    
                                                                   
7/15/99(2)           $  397,000       7.300%               NC             NA
3/15/23(2)              270,000       8.200         3/15/2003            104%
                     ----------                                    
                     $  667,000                                    
                     ----------                                    
                     $2,270,000                                    
                     ==========                                    
                                                                  
----------
NC = Non-callable
NA = Not applicable
(1)  Declining upon later redemption date.
(2)  Subject to BL Holding Corp. exchange offer.


                                      A-1

<PAGE>

                           NYSERDA Financing Notes(1)

                     Amount              
                  Outstanding                                        Redemption
    Maturity        ($000)            Rate         Callable On         Price
    --------        ------          --------       -----------          -----
    12/01/06       $  2,000          7.500%        At any time           100%
    12/01/06         27,375          7.500         At any time           100
    12/01/09         19,100          7.800         At any time           100
    10/01/12         17,200          8.250         At any time           100
    3/01/16         150,000          Variable             AIPD           100
    9/01/19          50,000          7.150             6/15/02           102
    9/01/19          50,000          7.150             6/15/02           102
    6/01/20         100,000          7.150             6/15/02           102
    12/01/20        100,000          7.150             6/15/02           102
    2/01/22          50,000          7.150             6/15/02           102
    2/01/22          50,000          7.150             6/15/02           102
    8/01/22          50,000          6.900             1/21/03           102
    8/01/22          50,000          6.900             1/21/03           102
    11/01/23         50,000          Variable             AIPD           100
    11/01/23         50,000          Variable             AIPD           100
    10/01/24         50,000          Variable             AIPD           100
    8/01/25          50,000          Variable             AIPD           100
                   --------
                   $915,675
                   ========
-------------
NYSERDA = New York State Energy Research and Development Authority
AIPD = Any Interest Payment Date
(1)   NYSERDA  Financing  Notes,  Series  1997A,  due 12/01/27 in the  principal
      amount  of  $24,880,000  and  bearing  variable  interest  rates are to be
      transferred to BL Holding Corp. or one of its subsidiaries.


                                      A-2
<PAGE>

                                    Exhibit B

                          Form of Disbursement Request

                               STATEMENT NO._____

           REQUESTING DISBURSEMENT OF FUNDS FROM THE CONSTRUCTION FUND

      Pursuant to Section 3.2 of the Financing Agreement dated as of May 1, 1998
by and between Long Island  Power  Authority  and LIPA  Acquisition  Corp.  (the
"Financing Agreement"),  the undersigned Authorized Representative (a defined in
the Resolution) of the Subsidiary  hereby requests the Authority to pay or cause
to be paid to the Subsidiary or to the person(s) listed on the Schedule attached
hereto out of the moneys on deposit in the Construction  Fund (as defined in the
Resolution)  the  aggregate  sum of  $_________  to  pay  such  person(s)  or to
reimburse the  Subsidiary,  as indicated on such  Schedule,  for Costs of System
Improvements.

      In connection with the foregoing, the undersigned hereby certifies that:

            (a) Each item for  which  disbursement  is  requested  hereunder  is
      properly payable out of the Construction Fund in accordance with the terms
      and  conditions of the Financing  Agreement and the Resolution and none of
      such items has formed the basis for any disbursement  heretofore made from
      the Construction Fund; and

            (b) This Disbursement Request and all attachments hereto,  including
      the Schedule  attached hereto,  shall constitute full warrant,  protection
      and authority to the Authority for its actions taken pursuant hereto.

      Capitalized  terms used herein and not  otherwise  defined  shall have the
respective meanings accorded such terms in the Financing Agreement.

This _____ day of ________________, _____.


                                                     ___________________________
                                                     Authorized Representative


                                      B-1
<PAGE>

                  DISBURSEMENT SCHEDULE TO STATEMENT NO.____
REQUESTING DISBURSEMENT OF FUNDS FROM CONSTRUCTION FUND

    Name and Address          
        of Payee                  Amount               Description of Cost
        --------                  ------               -------------------


                                      B-2
<PAGE>

                                    Exhibit C

                             Form of Subsidiary Note

                             LIPA ACQUISITION CORP.
                            FINANCING AGREEMENT NOTE

      FOR VALUE RECEIVED,  the undersigned  LIPA  Acquisition  Corp., a New York
business corporation (the "Subsidiary"),  hereby promises to pay to the order of
the Long Island Power Authority,  a corporate  municipal  instrumentality of the
State of New York (the "Authority"), on or before one business day prior to each
due date for the payment of the principal of and  redemption  price,  if any, or
interest on, or other payments required under, Authority Obligations (as defined
in the Financing Agreement  hereinafter  referred to), until the same shall have
been paid in full or provision  for the payment  thereof in full shall have been
made in accordance  with the Resolution (as defined in the Financing  Agreement)
or the provisions thereof, payments in an amount which, when added to any moneys
then on deposit  under the  Resolution  and  available  therefor,  including any
dividends theretofore paid to the Authority and held thereunder,  shall be equal
to the amount payable on such due date with respect to the Authority Obligations
as  provided  in the  Resolution,  including  amounts due for the payment of the
principal of and sinking fund installments and premium,  if any, and interest on
the Bonds.  In  addition,  the  Subsidiary  shall pay or cause to be paid to the
Authority,  as and when the same shall  become  due,  all other  amounts due and
payable by the Authority  under the Resolution and all other  documents  entered
into by the Authority in connection  with the  Authority  Obligations,  together
with interest thereon at the then applicable rate, and any other amounts payable
by the Authority from Revenues in accordance with the Resolution.

      In order to assure a source of payment of and security  for this Note,  in
accordance with, and as more particularly set forth in, the Financing Agreement,
the Subsidiary has given, granted, conveyed and transferred to the Authority all
of its right, title and interest in and to the Revenues and certain other assets
and interests.  The  Subsidiary  hereby agrees that the Authority may apply such
Revenues  and any  amounts  received by the  Authority  in respect of such other
assets and interests to the payment hereof in accordance with the Resolution.

      This Note is issued pursuant to Section 2.2 of the Financing  Agreement by
and  between  the  Authority  and the  Subsidiary,  dated as of May 1, 1998,  as
amended and supplemented (the "Financing Agreement").

      The  principal  amount  from  time to time due and  owing  hereunder,  the
scheduled  amortization  thereof  and related  interest  rates (or the method of
determining  the  same)  shall be  evidenced  by the  periodic  delivery  to the
Subsidiary of a certificate  of an  Authorized  Representative  of the Authority
setting  forth the  same.  Payments  shall be made at such  time or times,  such
office or offices and in such manner as shall be specified by the Authority.

      During the occurrence  and  continuance of any Event of Default as defined
in the Financing  Agreement,  the Authority (or any permitted assignee under the
Financing  Agreement) may exercise any of the remedies provided in the Financing
Agreement.


                                      C-1

<PAGE>

      THIS  NOTE  SHALL  NOT  BE A  DEBT  OF  THE  STATE  OF  NEW  YORK  OR  ANY
MUNICIPALITY,  AND NEITHER THE STATE OF NEW YORK NOR ANY  MUNICIPALITY  SHALL BE
LIABLE  THEREON.  NEITHER THE CREDIT,  THE REVENUES NOR THE TAXING POWERS OF THE
STATE OF NEW YORK OR ANY  MUNICIPALITY  SHALL  BE,  OR  SHALL BE  DEEMED  TO BE,
PLEDGED TO THE PAYMENT OF THIS NOTE.

      No recourse  shall be had for the  payment of this Note,  or for any claim
based on this  Note or on the  Financing  Agreement,  against  any  director  or
officer of the Subsidiary.

      This Note shall be governed by, and construed in accordance with, the laws
of the State of New York.

      IN  WITNESS  WHEREOF,  the  Subsidiary  has  caused  this  Note to be duly
executed and its corporate seal to be affixed hereto.

DATED as of:  May 28, 1998

                                             LIPA ACQUISITION CORP.

                                             By_________________________
                                                        Chairman

(SEAL)

Attest:

______________________________
          Secretary


                                      C-2