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                        NEW YORK STATE ENERGY RESEARCH

                           AND DEVELOPMENT AUTHORITY


                                      AND


                         LONG ISLAND LIGHTING COMPANY





                            PARTICIPATION AGREEMENT





                         Dated as of December 1, 1997




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                                - relating to -
                       Electric Facilities Revenue Bonds
             (Long Island Lighting Company Project), 1997 Series A

                              
<PAGE>


                                                                         1.


            This PARTICIPATION AGREEMENT,  dated as of December 1, 1997, between
NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT  AUTHORITY,  a body corporate and
politic,  constituting a public benefit  corporation,  established  and existing
under and by virtue of the laws of the State of New York (the "Authority"),  and
LONG ISLAND  LIGHTING  COMPANY,  a corporation  duly  organized and existing and
qualified to do business as a public  utility under the laws of the State of New
York (the "Company"),

                             W I T N E S S E T H :

            WHEREAS,  pursuant to a special act of the  Legislature of the State
of New York (Title 9 of Article 8 of the Public  Authorities Law of New York, as
from time to time  amended  and  supplemented,  herein  called the  "Act"),  the
Authority has been established, as a body corporate and politic,  constituting a
public benefit corporation; and

            WHEREAS, pursuant to the Act, the Authority is empowered to contract
with any power company to participate in the  construction of facilities for the
furnishing  of  electricity  to the extent  required  by the public  interest in
development,  health, recreation,  safety, conservation of natural resources and
aesthetics; and

            WHEREAS,  pursuant to the Act, the Authority has also been empowered
to extend  credit and make loans from bond and note  proceeds  to any person for
the  construction,  acquisition and installation of, or for the reimbursement to
any person for costs in connection with, any special energy project,  including,
but not limited to, any land, works, system, building or other improvement,  and
all real and  personal  properties  of any nature or any interest in any of them
which are suitable for or related to the furnishing, generation or production of
energy; and

            WHEREAS,  the Authority is also  authorized  under the Act to borrow
money and issue its negotiable bonds and notes to provide  sufficient moneys for
achieving its corporate purposes; and

            WHEREAS,  the  Authority is also  authorized  under the Act to enter
into any contracts and to execute all  instruments  necessary or convenient  for
the  exercise  of its  corporate  powers and the  fulfillment  of its  corporate
purposes; and

            WHEREAS,  the Company is a public utility corporation doing business
in the State of New York and operates power plants in the State of New York; and

            WHEREAS, the Company has requested that the Authority participate in
financing the acquisition,  construction and installation of certain  facilities
for the  furnishing of electric  energy within the Company's  service area (such
facilities for the furnishing of electric energy being  hereinafter  referred to
as the "Project") and, as part of such  participation,  that the Authority issue
bonds pursuant to the Act to provide funds to finance the cost to the Company of
the Project and the  expenses  incurred in  connection  with the  authorization,
issuance and sale of such bonds; and


            WHEREAS,  the  Authority,  pursuant to Resolution  No. 903,  adopted
December 17, 1997, has determined to issue its Electric Facilities Revenue Bonds
(Long Island Lighting Company Project), bearing the series designation set forth
on the first page of this  Participation  Agreement  in an  aggregate  principal
amount of $24,880,000  (the "Bonds"),  for the purpose of financing a portion of
such costs and  expenses,  all such Bonds to be issued  under and  secured by an
Indenture of Trust  relating to the Bonds dated as of December 1, 1997,  between
the Authority and The Chase Manhattan Bank, as Trustee (the "Indenture");

            NOW, THEREFORE,  for and in consideration of the premises and of the
mutual  covenants and agreements  hereinafter  set forth, it is hereby agreed by
and between the parties as follows:


                              

<PAGE>


                                                                        


                                   ARTICLE I

              DEFINITIONS; RULES OF CONSTRUCTION; EFFECTIVE DATE
                    AND DURATION OF PARTICIPATION AGREEMENT

     Section 1.01.  DEFINITIONS.  The terms used in this Participation Agreement
which are  defined in Section  1.01 of the  Indenture  shall have the  meanings,
respectively,  herein,  which such terms are given in said  Section  1.01 of the
Indenture.

     Section 1.02. RULES OF CONSTRUCTION.  Unless the context clearly  indicates
to the contrary,  the  following  rules shall apply to the  construction  of the
Participation Agreement:

          (a) Words  importing  the  singular  number  shall  include the plural
     number and vice versa;

          (b) All  references  herein to  particular  articles or  sections  are
     references to articles or sections of the Participation Agreement;

          (c) The  captions and headings  herein are solely for  convenience  of
     reference and shall not  constitute a part of the  Participation  Agreement
     nor shall they affect its meaning, construction or effect;

            (d) The terms "hereby," "hereof,"  "hereto,"  "herein,"  "hereunder"
      and any similar terms, as used in the  Participation  Agreement,  refer to
      the  Participation  Agreement in its  entirety  and not to the  particular
      article or section of the  Participation  Agreement  in which they appear,
      and the term  "hereafter"  means after,  and the term  "heretofore"  means
      before, the date of the Participation Agreement; and

            (e) In the event that there is any conflict  between the  provisions
      of the Participation Agreement and those of the Indenture,  the provisions
      of the Indenture shall govern the disposition of such conflict.

            Section 1.03. EFFECTIVE DATE OF PARTICIPATION AGREEMENT; DURATION OF
PARTICIPATION  AGREEMENT.  This  Participation  Agreement shall become effective
upon its  execution and  delivery,  and shall  continue in full force and effect
until the principal  of, and premium,  if any, and interest on, the Company Note
and Bonds have been fully paid (or  provision for their payment has been made in
accordance  with the  provisions  of the  Indenture)  and all sums to which  the
Authority or the Trustee are entitled hereunder have been fully paid.

<PAGE>

                                  ARTICLE II

                                REPRESENTATIONS

            Section 2.01.  REPRESENTATIONS AND WARRANTIES BY THE AUTHORITY.  The
Authority represents and warrants as follows:

          (a) The  Authority is a body  corporate  and politic,  constituting  a
     public benefit corporation,  established and existing under the laws of the
     State of New York;

          (b) The  Authority has full power and authority to execute and deliver
     this  Participation   Agreement,  the  Indenture  and  the  Tax  Regulatory
     Agreement  and to  consummate  the  transactions  contemplated  hereby  and
     thereby and to perform its obligations hereunder and thereunder;

          (c) The Authority is not in default under any of the provisions of the
     laws of the State of New York  which  would  affect  its  existence  or its
     powers referred to in the preceding paragraph (b);

          (d)  The  Authority  has  determined  that  its  participation  in the
     financing of the Project, as contemplated by this Participation  Agreement,
     is in the public interest;

          (e) The  Authority has duly  authorized  the execution and delivery of
     this  Participation   Agreement,  the  Indenture  and  the  Tax  Regulatory
     Agreement and the execution and delivery of the other documents  incidental
     to  this  transaction,  and all  necessary  authorizations  therefor  or in
     connection  with  the  performance  by the  Authority  of  its  obligations
     hereunder  or  thereunder  have  been  obtained  and are in full  force and
     effect; and

          (f) The execution and delivery by the Authority of this  Participation
     Agreement,   the  Indenture  and  the  Tax  Regulatory  Agreement  and  the
     consummation of the transactions  herein or therein  contemplated  will not
     violate  any  indenture,  mortgage,  loan  agreement  or other  contract or
     instrument to which the Authority is a party or by which it is bound, or to
     the  best  of the  Authority's  knowledge,  any  judgment,  decree,  order,
     statute, rule or regulation applicable to the Authority.

            Section 2.02.  REPRESENTATIONS  AND  WARRANTIES BY THE COMPANY.  The
Company represents and warrants as follows:

<PAGE>


          (a)  The  Company  is a  corporation  duly  incorporated  and in  good
     standing  under the laws of the State of New York,  is duly  qualified  and
     authorized  to engage in business  as a public  utility in the State of New
     York,  has power to enter  into,  execute and  deliver  this  Participation
     Agreement,  the Tax  Regulatory  Agreement  and the Company  Note by proper
     corporate  action and has duly  authorized the execution and delivery by it
     of this  Participation  Agreement,  the Tax  Regulatory  Agreement  and the
     Company Note;

          (b) The  execution  and delivery by the Company of this  Participation
     Agreement,  the Tax  Regulatory  Agreement  and the  Company  Note  and the
     consummation of the transactions  herein  contemplated do not conflict with
     or constitute a breach of or a default under the Company's  Certificate  of
     Incorporation,  By-Laws or any indenture, mortgage, loan agreement or other
     contract  or  instrument  to which the Company is a party or by which it is
     bound,  or to the best of the Company's  knowledge,  any judgment,  decree,
     order, statute, rule or regulation applicable to the Company;

          (c) This Participation Agreement, the Tax Regulatory Agreement and the
     Company  Note  constitute  valid and  legally  binding  obligations  of the
     Company,   enforceable   against  the  Company  in  accordance  with  their
     respective  terms,  except as  enforcement  may be  limited  by  applicable
     bankruptcy, insolvency, moratorium,  reorganization or other laws, judicial
     decisions or principles of equity  relating to or affecting the enforcement
     of creditors' rights or contractual obligations generally;

          (d) The  execution  and delivery by the Company of this  Participation
     Agreement  and the Company Note in the manner and for the  purposes  herein
     set forth  have  been duly  authorized  by an order of the  Public  Service
     Commission of the State of New York;

          (e) No additional authorizations for or approvals of the execution and
     delivery by the Company of this Participation Agreement, the Tax Regulatory
     Agreement  and the  Company  Note need be obtained by the Company or if any
     such authorization or approval is necessary it has been obtained; and

          (f) The representations of the Company set forth in the Tax Regulatory
     Agreement  are hereby  incorporated  by reference as though fully set forth
     herein.


                           
<PAGE>


                                  ARTICLE III

                         CONSTRUCTION OF THE PROJECT;
                               ISSUANCE OF BONDS

            Section  3.01.  CONSTRUCTION  OF THE  PROJECT.  1. The Company  will
construct and complete or cause  construction and completion of the Project with
reasonable  dispatch and in  accordance  with the Company's  construction  plans
therefor.  The Project  shall belong to and be the  property of the Company.  In
order to effectuate the purposes of this  Participation  Agreement,  the Company
will do or cause to be done all things  requisite or proper for the construction
of the Project and the  fulfillment of the obligations of the Company under this
Participation Agreement.

            2.   Notwithstanding  any  other  provision  of  this  Participation
Agreement  to the  contrary,  the Company  shall not be required to complete the
construction  of any  component  of the Project with respect to which funds have
not been disbursed from the Project Fund if in the Company's  business  judgment
it is not necessary or advisable to do so, provided that failure to complete the
construction of such component will not affect the character or intended purpose
of any other  component of such Project and provided  further that the estimated
Cost of  Construction  of the  components of the Project yet to be completed (as
estimated  by the  Company  at the  time  it  determines  not  to  complete  any
component)  is at least equal to the amount of moneys  remaining  in the Project
Fund.

            Notwithstanding any other provision of this Participation  Agreement
to the contrary,  the Company shall not be required to complete the construction
of any component of the Project if in the Company's  business judgment it is not
necessary  or  advisable  to do so and the Company  shall have  delivered to the
Authority an opinion of Bond Counsel to the effect that failure to complete such
component of such Project will not  adversely  affect the  qualification  of any
other  component of such Project for  financing  under the Act or the  exclusion
from gross income for Federal income tax purposes of interest on the Bonds.

            Section 3.02. SALE OF BONDS AND DEPOSIT OF PROCEEDS; LIABILITY UNDER
BONDS.  1. In order to  provide  funds for  payment  of a portion of the Cost of
Construction  of the Project,  the Authority,  as soon as practicable  after the
execution of this Participation Agreement will issue, sell and deliver the Bonds
to the  initial  purchasers  thereof,  all  pursuant  to and as  provided in the
Purchase  Contract for the Bonds among the Authority,  the Company,  J.P. Morgan
Securities  Inc.,  Lehman  Brothers  Inc.,  Merrill Lynch & Co., and M.R. Beal &
Company  and will  deposit  the  proceeds  of such  sale of the  Bonds  with the
Trustee, as follows:  (i) in the Bond Fund, a sum equal to the accrued interest,
if any, paid by the initial purchasers of the Bonds and (ii) in the Construction
Account of the Project  Fund,  the balance of the  proceeds  received  from such
sale.

<PAGE>



            2. The Bonds shall not be general obligations of the Authority,  and
shall not constitute an indebtedness  of, or a charge against the general credit
of, the Authority or give rise to any pecuniary liability of the Authority.  The
liability  of the  Authority  under the Bonds shall be  enforceable  only to the
extent provided in the Indenture, and the Bonds shall be payable solely from the
Company  Note  Payments,  funds  drawn  under the Letter of Credit and any other
funds held by the Trustee  under the  Indenture  and available for such payment.
The Bonds  shall  not be a debt of the  State of New York,  and the State of New
York shall not be liable thereon.

            Section  3.03.  DISBURSEMENTS  FROM PROJECT FUND AND REBATE FUND. 1.
The Authority has, in the Indenture, authorized and directed the Trustee to make
payments from the Project Fund, in accordance with and subject to the provisions
of Section 5.03 of the Indenture, to pay the Cost of Construction of the Project
upon receipt from time to time of requisitions  signed by an Authorized  Company
Representative,  stating with respect to each payment to be made for the Project
the information required by Section 5.03 of the Indenture.

            The Company  will cause such  requisitions  to be  submitted  to the
Trustee  as may be  necessary  to effect  payments  out of the  Project  Fund in
accordance with the provisions of the Indenture.  Concurrently with the delivery
by the Company of each  requisition to the Trustee,  the Company will deliver to
the  Authority  a copy of such  requisition  and any  attachments  thereto.  The
Authority  and the Trustee may rely on the  Company as to the  completeness  and
accuracy of all statements in such  requisition,  and the Company will indemnify
and save harmless the  Authority and the Trustee from any liability  incurred in
connection  with  any  requisition  so  delivered  and the  payment  of funds in
reliance thereon.

            2. All moneys  remaining in the Project  Fund after the  certificate
referred to in Section 5.05 of the Indenture is furnished  shall, at the written
direction of an Authorized Company Representative, be applied in accordance with
Section 5.06 of the Indenture.

            Section 3.04. REVISION OF CONSTRUCTION PLANS. The Company may revise
the  construction  plans  for the  Project  at any time  and from  time to time;
provided,  however,  that no such revision shall be made prior to the Completion
Date with respect to such Project  which would  render the  description  of such
Project  inaccurate  in any  material  respect,  except in  accordance  with the
following procedure:

            (a) Prior to any such  revision  the  Company  shall  deliver to the
      Trustee and the  Authority  (1) a  certificate  of an  Authorized  Company
      Representative, setting forth the text of the change in the description of
      such Project which would be necessary to reflect  accurately  the proposed
      revision in plans and specifications, and certifying that, notwithstanding
      such  revision,  such Project will still be designed to serve the purposes
      which  would  have been  served by such  Project  in the  absence  of such

<PAGE>


      revision,  and (2) an opinion of Bond Counsel  that such  revision of such
      Project  description  and the  expenditure of moneys from the Project Fund
      under the provisions of the Indenture to pay the Cost of  Construction  of
      such Project in accordance  with the revised  description  of such Project
      will not  impair  the  exclusion  of  interest  on any of the  Bonds  then
      outstanding from gross income for Federal income tax purposes.

            (b) Ten (10) days after the receipt by the Authority and the Trustee
      of the  certificate and opinion  referred to in paragraph (a) above,  such
      Project  description  shall be deemed amended to include such revision for
      all purposes of this Participation  Agreement and the Indenture.  Upon the
      request of either  party or the  Trustee,  the  Authority  and the Company
      shall enter into an appropriate instrument reflecting such amendment.

            Section  3.05.  CERTIFICATION  OF  COMPLETION  OF PROJECT.  When the
Project  has  been  completed  (except  for  components  that  the  Company  has
determined not to complete in accordance  with Section 3.01),  the Company shall
promptly deliver to the Trustee and the Authority a certificate of an Authorized
Company  Representative  to the effect that, as of a specified date, the Project
has been completed  (except as aforesaid).  Such  certificate  shall specify the
components  of the  Project,  if any, the  completion  of which has been excused
pursuant to Section 3.01.  The  certificate  delivered  pursuant to this Section
3.05 shall also contain an appropriate  direction to the Trustee with respect to
any amount in the Project Fund which is to be retained or thereupon  disposed of
as provided  in Section  5.06 of the  Indenture.  The Trustee may rely as to the
accuracy and completeness of all statements in such certificate.

            Notwithstanding  the foregoing,  such certificate shall be given and
may state that it is given without prejudice to any rights against third parties
which exist at the date thereof or which may subsequently come into being.

            Section  3.06.  PAYMENT OF COST OF  CONSTRUCTION  OF THE  PROJECT IN
EVENT  PROJECT  FUND  INADEQUATE.  If the moneys in the Project  Fund  available
therefor shall not be sufficient to pay the Cost of  Construction of the Project
in full  (whether due to investment  losses or  otherwise),  the Company  shall,
subject to the provisions of Section 3.01, complete the Project and pay (whether
through  financing or  otherwise)  all that portion of the Cost of  Construction
thereof in excess of the moneys  available  therefor  in the Project  Fund.  The
Authority does not make any warranty, either express or implied, that the moneys
which will be paid into the Project Fund will be  sufficient  to pay the Cost of
Construction of the Project. If the Company shall pay any portion of the Cost of
Construction of the Project  pursuant to the provisions of this Section,  except
to the  extent  it may  submit  requisitions  pursuant  to  Section  5.03 of the
Indenture,  it shall not be  entitled  to any  reimbursement  therefor  from the
Authority,  the  Trustee  or the  owners  of any of the  Bonds,  nor shall it be
entitled to any  diminution in or  postponement  of the payments  required to be
paid by the Company  pursuant  to this  Participation  Agreement  or the Company
Note.

<PAGE>


            Section 3.07 NO INTEREST IN PROJECT CONFERRED. Neither the Authority
nor the Trustee  shall be  entitled to any  interest in the Project by reason of
the advance of Bond proceeds pursuant to this Participation Agreement.

            Section 3.08 OPERATION,  MAINTENANCE  AND REPAIR.  The Authority and
the Company  recognize that the Project will constitute  integrated  portions of
the electric energy and production  facilities of the Company and that it is not
feasible to administer the Project separately from such facilities.  The Company
shall operate the Project (with such changes,  improvements  or additions as the
Company may deem desirable) as part of such facilities for the joint useful life
of the Project and such  facilities and shall maintain and repair the Project in
conformity  with the Company's  normal  maintenance and repair programs for such
facilities  provided  that the  Company  shall have no  obligation  to  operate,
maintain  or  repair  any  element  or  item  of  the  Project  the   operation,
maintenance,  or repair of which becomes  uneconomic  to the Company  because of
damage or  destruction  or  obsolescence  (including  physical,  functional  and
economic  obsolescence),  or change in government standards and regulations,  or
the  termination of the operation of the facilities to which the element or item
of the Project is an adjunct;  and  provided  further  that,  in any event,  the
Company is proceeding in good faith to maintain the  availability of the Project
for use as an authorized project under the Act.

            Section 3.09 INVESTMENT OF MONEYS IN FUNDS UNDER THE INDENTURE.  Any
moneys held as a part of any fund created under the Indenture  shall be invested
or  reinvested by the Trustee as provided in Article VII of the  Indenture.  Any
such  investment  shall be consistent  with the provisions of the Tax Regulatory
Agreement.

            Section 3.10  AGREEMENT  NOT TO EXERCISE  OPTION TO CONVERT TO FIXED
RATE ABSENT SPECIFIED RATING. The Company agrees not to direct that a Fixed Rate
become effective pursuant to Section 2.04(b) of the Indenture unless the Company
shall have  delivered to the Authority  evidence  satisfactory  to the Authority
that upon  conversion  to a Fixed Rate the Bonds are  expected to be rated in at
least the third highest rating  category of Moody's or S&P (currently "A" in the
case of Moody's and "A" in the case of S&P).

            Section 3.11 SECURITIES  DEPOSITORY.  The Company  acknowledges that
the Authority and the Trustee, at the request of the Company,  have arranged for
the initial deposit of the Bonds with The Depository Trust Company ("DTC") which
will act as  Securities  Depository  in order to  effectuate  a  book-entry-only
system  and  that  this  system  may  be  discontinued   or,  if   discontinued,
reinstituted (with DTC or another Securities  Depository) in accordance with the
Indenture. The Company agrees to take all actions necessary, and to refrain from
taking  actions  contrary  to  the  effectuation  of  a  book-entry-only  system
established  pursuant to the Indenture and any arrangements among the Authority,
the Trustee and any Securities  Depository.  The Authority  shall not enter into
any  written  agreements  with  a  Securities  Depository  without  receipt  and
acceptance of such agreements by the Company.

<PAGE>

                                  ARTICLE IV

                  COMPANY NOTE AND PAYMENTS; LETTER OF CREDIT

            Section 4.01  EXECUTION AND DELIVERY OF COMPANY NOTE TO TRUSTEE.  1.
Concurrently  with  the  authentication  by  the  Trustee  and  delivery  by the
Authority of the Bonds and in order to evidence the obligation of the Company to
the  Authority to repay the advance of the proceeds of the Bonds,  the Authority
hereby  directs the  Company,  and the  Company  hereby  agrees,  to execute and
deliver to the  Trustee  its  Company  Note and to duly and  punctually  pay the
principal of,  premium,  if any, and interest on, the Company Note at the place,
the  times  and in the  manner  provided  therein.  The  Company  Note  shall be
substantially in the form attached hereto as EXHIBIT C.

            2. The  obligation  of the Company to make any payment of  principal
of, and  premium,  if any,  and  interest  on, the Company  Note shall be deemed
satisfied and discharged to the extent of the corresponding  payment made by the
Bank under the Letter of Credit.

            Section 4.02  REDEMPTION OF BONDS.  Whenever Bonds are redeemable in
whole or in part, the Authority will redeem the same at the written direction of
an Authorized  Company  Representative  given in accordance with Section 8.01 of
the Indenture.

            Section 4.03  OBLIGATION  FOR PAYMENT  ABSOLUTE;  DEFICIENCIES.  The
Company  agrees  that its  obligation  to make the  Company  Note  Payments  and
payments  under  Section  4.11 at the times and in the  amounts  provided in the
Company Note and this Participation Agreement 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,  the  unenforceability  (because  of  judicial  decision or
otherwise) or the  impossibility of performance of the Company Note obligations,
or any breach by the Authority of any  obligation to the Company,  whether under
this Participation  Agreement or otherwise,  or inaccuracy of any representation
by the  Authority to the Company  under this  Participation  Agreement or in any
other  instrument,  or any  indebtedness  or  liability at any time owing to the
Company  by the  Authority,  or any  failure to  complete  the  Project,  or the
destruction by fire or other casualty of the Project or any portion thereof,  or
the taking of title  thereto or the use thereof by the  exercise of the power of
eminent  domain.  If for any reason Company Note  Payments,  together with other
moneys held by the Trustee and then available for such purpose (including moneys
paid by the Bank under the Letter of Credit),  would not be  sufficient  to make
the  corresponding  payments of principal of, and premium,  if any, and interest
on, the Bonds when such  payments  are due,  the  Company  will pay the  amounts
required  from time to time to make up any such  deficiency.  If for any  reason
payments under Section 4.11,  together with other moneys held by the Trustee and
the Tender Agent and then available for such purpose  (including  moneys paid by

<PAGE>


the Bank  under the  Letter of  Credit),  would  not be  sufficient  to make the
corresponding payments of the purchase price of the Bonds when such payments are
due, the Company will pay the amounts  required from time to time to make up any
such deficiency.

            Section 4.04 ADMINISTRATION FEES; EXPENSES,  ETC. In order to defray
a  portion  of  the  expenses  incurred  by  the  Authority  in  conducting  and
administering  its programs for the acquisition  and  construction of facilities
for the furnishing of  electricity,  special energy projects and the development
of advanced  technologies,  the Company  shall pay to the  Authority  an initial
Administration  Fee in the amount of $62,200 on the date of the  delivery of the
Bonds to the initial purchasers thereof and an annual  Administration Fee in the
amount of $3,250 on December 1 of each year commencing  December 1, 1998,  until
the Bonds are no longer outstanding.  In addition,  the Company shall pay to the
State of New York with respect to the Bonds a bond issuance charge in the amount
of  $87,080  on the date of  authentication  and  delivery  of the  Bonds to the
initial purchasers.

            In addition to such  Administration  Fees,  the Company  will pay or
reimburse  the  Authority  upon  its  request  for  all   reasonable   expenses,
disbursements and advances incurred or made by the Authority (including printing
costs and the reasonable  fees,  expenses and  disbursements  of its counsel and
bond counsel) in connection with the Participation Agreement, the Indenture, the
Tax  Regulatory  Agreement  or any  transaction  or  event  contemplated  by the
Participation Agreement, the Tax Regulatory Agreement or the Indenture.

            Section 4.05  COMPENSATION  OF TRUSTEE,  PAYING  AGENT,  REMARKETING
AGENTS, INDEXING AGENT AND TENDER AGENT. The Company agrees:

          (1)  to  pay to the  Trustee  from  time  to  time  upon  its  request
     reasonable  compensation  for all  services  rendered by it in any capacity
     under  the  Indenture  (which  compensation  shall  not be  limited  by any
     provision of law in regard to the  compensation  of a trustee of an express
     trust);

          (2) except as so otherwise expressly provided herein, to reimburse the
     Trustee upon its request for all  reasonable  expenses,  disbursements  and
     advances incurred by it in any capacity under the Indenture  (including the
     reasonable  compensation  and the expenses and  disbursements of its agents
     and counsel),  except any such expense,  disbursement  or advance as may be
     attributable to its negligence or bad faith;

          (3) to pay to the  Paying  Agent  from time to time upon its  request,
     reasonable  compensation  for all  services  rendered by it as Paying Agent
     under the Indenture and reimburse it for its reasonable  expenses  incurred
     under the Indenture  (including  reasonable  compensation  and expenses and
     disbursements of its agents and counsel), except any such expense as may be
     attributable to its negligence or bad faith; and


<PAGE>


          (4) to pay to  the  Remarketing  Agents,  the  Tender  Agent  and  the
     Indexing  Agent  their  reasonable  fees and  expenses as and when the same
     become due, except any such expense as may be attributable to such person's
     negligence or bad faith.

            Section  4.06  PROJECT  NOT  SECURITY  FOR  BONDS.  It is  expressly
recognized by the parties hereto that neither the Project nor any other property
of the Company will constitute any part of the security for the Bonds.

            Section 4.07 PAYMENT OF TAXES AND ASSESSMENTS;  NO LIENS OR CHARGES.
The  Company  will (a) pay,  when the same  shall  become  due,  all  taxes  and
assessments,  including  income,  profits,  property or excise taxes, if any, or
other  municipal or  governmental  charges,  imposed,  levied or assessed by the
Federal, state or any municipal government upon the Authority,  the Tender Agent
or the Trustee in respect of any payments  (other than payments made pursuant to
Sections  4.04  and  4.05)  made or to be made  pursuant  to this  Participation
Agreement  or the  Company  Note and (b) pay or cause to be  discharged,  within
sixty (60) days after the same shall  accrue,  any lien or charge  upon any such
payment made or to be made under this Participation Agreement, PROVIDED that the
Company  shall not be required to pay any such tax or  assessment so long as (i)
the Company at its expense contests,  by appropriate legal proceedings conducted
in good faith and with due diligence, the amount, validity or application of any
such tax,  assessment or charge,  (ii) such proceedings shall have the effect of
suspending the collection thereof from the Authority, the Trustee and the Tender
Agent, and (iii) the Company shall indemnify and hold the Authority, the Trustee
and the  Tender  Agent  harmless  from  any  losses,  costs,  charges,  expenses
(including  reasonable   attorneys'  fees  and  disbursements),   judgments  and
liabilities  arising  in  respect  of such tax,  assessment  or  charge  and the
nonpayment thereof.

            Section 4.08  INDEMNIFICATION OF AUTHORITY,  TRUSTEE,  TENDER AGENT,
PAYING  AGENT,  REMARKETING  AGENTS AND INDEXING  AGENT.  Any  obligation of the
Authority created by or arising out of this  Participation  Agreement shall be a
limited  obligation  of the  Authority,  payable  solely from the  Company  Note
Payments,  any payments by the Company under Section 4.11, funds drawn under the
Letter of Credit and any other funds held by the Trustee under the Indenture and
available for such payment,  and shall not  constitute an  indebtedness  of or a
charge  against the general  credit of the Authority and shall not constitute or
give rise to any  pecuniary  liability of the  Authority;  nevertheless,  if the
Authority  shall  incur any such  pecuniary  liability,  then in such  event the
Company shall indemnify and hold the Authority  harmless by reason thereof.  The
Company releases the Authority,  the Trustee,  the Paying Agent, the Remarketing
Agents, the Tender Agent and the Indexing Agent from, agrees that the Authority,
the Trustee,  the Remarketing Agents, the Tender Agent, the Paying Agent and the
Indexing  Agent shall not be liable for,  and agrees to  indemnify  and hold the
Authority,  the Trustee,  the Paying Agent, the Remarketing  Agents,  the Tender
Agent and the Indexing Agent harmless from, any liability for any loss or damage
to property or any injury to or death of any person  that may be  occasioned  by
any cause whatsoever arising out of the construction or operation of the Project
or the  financing  thereof.  The  Company  agrees  to  indemnify  and  hold  the
Authority,  its members,  officers and employees, the Trustee, the Tender Agent,
the  Remarketing  Agents,  the Paying Agent and the Indexing Agent harmless from

<PAGE>


any losses, costs,  charges,  expenses (including reasonable attorneys' fees and
disbursements),  judgments and  liabilities  incurred by it or them, as the case
may be, in  connection  with any claims  made,  any action,  suit or  proceeding
instituted or threatened,  in connection with the  transactions  contemplated by
this  Participation  Agreement  or the  Indenture so long as, in the case of the
Authority, its members,  officers and employees, it or they, as the case may be,
have  acted in good  faith to carry out the  transactions  contemplated  by this
Participation Agreement, the Remarketing Agreement or the Indenture and, except,
in the case of the Trustee,  the Tender Agent, the Paying Agent and the Indexing
Agent,  the Trustee's,  the Tender Agent's,  the Paying Agent's and the Indexing
Agent's willful misconduct or negligence.

            Section 4.09 COMPANY TO PAY ATTORNEYS'  FEES AND  DISBURSEMENTS.  If
the Company  shall default  under any of the  provisions  of this  Participation
Agreement  and the  Authority  or the  Trustee  or both  of  them  shall  employ
attorneys or incur other  expenses for the collection of payments due under this
Participation  Agreement or for the  enforcement of performance or observance of
any  obligation  or  agreement  on the  part of the  Company  contained  in this
Participation  Agreement,  the Company  will on demand  therefor  reimburse  the
reasonable  fees of such attorneys and such other  reasonable  disbursements  so
incurred.

            Section 4.10 NO ABATEMENT OF ADMINISTRATION  FEES AND OTHER CHARGES.
It is understood and agreed that so long as any Bonds are outstanding  under the
Indenture,  Administration  Fees and  other  charges  payable  to the  Authority
pursuant to this  Participation  Agreement  shall  continue to be payable at the
times and in the amounts herein  specified,  whether or not the Project,  or any
portion thereof,  shall have been destroyed by fire or other casualty,  or title
thereto or the use thereof shall have been taken by the exercise of the power of
eminent domain, and that there shall be no abatement of any such  Administration
Fees and other charges by reason thereof.

            Section  4.11.  PAYMENT TO TENDER  AGENT.  The Company shall pay, or
cause to be paid,  to the Tender Agent  amounts  equal to the amounts to be paid
pursuant  to Section  2.05 of the  Indenture  in respect of Bonds  tendered  for
purchase  or deemed to be so tendered  pursuant to the terms of Section  2.05 of
the Indenture, such amounts to be paid by the Company to the Tender Agent on the
dates such  payments  pursuant to Section 2.05 of the  Indenture are to be made;
PROVIDED,  however,  that the obligation of the Company to make any such payment
shall be reduced by the amount of any moneys  available  for such payment  under
clauses (i) through  (iii) of Section  2.05(h) of the  Indenture  and  PROVIDED,
further,  that the  obligation  of the Company to make any such payment shall be
deemed satisfied and discharged to the extent of the corresponding  payment made
by the Bank under the Letter of Credit.


<PAGE>


            Section 4.12. THE LETTER OF CREDIT.  At all times on or prior to the
Fixed Rate  Conversion  Date  except  during any period  when all the Bonds then
outstanding  are held by or for the account of the  Company,  a Letter of Credit
meeting the  requirements  of this  Section  4.12 shall be in effect and, in the
event that an  Alternate  Credit  Facility is to replace an  expiring  Letter of
Credit,  the requirements of Section 6.07 of the Indenture will be fulfilled.  A
Letter of Credit shall be an obligation of a bank or banks, insurance company or
companies,  other financial  institution or institutions,  or any combination of
the  foregoing,  entitling  the Trustee to draw up to (a) an amount equal to the
principal  amount of the Bonds then  outstanding to pay (i) the principal of the
Bonds when due, or (ii) the portion of the Purchase Price of Bonds corresponding
to  principal,  plus (b) an amount  equal to 210 days'  accrued  interest on the
Bonds then outstanding  computed at the maximum rate specified in such Letter of
Credit,  which shall in no event exceed fifteen percent (15%), on the basis of a
360-day year. A Letter of Credit shall expire on the earliest  occurrence of (1)
its stated expiration date, which shall be no earlier than one (1) day after the
next  succeeding  Optional Tender Date or Purchase Date not less than six months
from its effective date, (2) when all available amounts have been drawn, (3) the
second  business day following the effective  date of the Fixed Rate  Conversion
Date, (4) on the effective date of any Alternate  Credit  Facility that replaces
the then effective Letter of Credit, (5) the earliest date on which no Bonds are
outstanding and (6) twelve (12) days after the Trustee  receives notice from the
Bank that it is  terminating  the Letter of Credit and  directing the Trustee to
cause a mandatory tender and purchase of or to accelerate the Bonds. A Letter of
Credit  shall  provide that when there is a drawing to pay interest on scheduled
payment  dates,  if the Trustee  does not receive  from the Bank by the close of
business  on a day  specified  therein,  which shall not be later than the tenth
(10th) day following such a drawing in respect of interest,  notice by telephone
confirmed  in writing  (or by other  means  acceptable  to the  Trustee  and the
Authority) that the amount  available to be drawn has not been reinstated by the
amount of the drawing for interest  (except on principal of a Bond being paid or
purchased and cancelled), the amount available to be drawn will automatically be
reinstated by the amount of the drawing on such specified day.



                              

<PAGE>


                                   ARTICLE V

                               SPECIAL COVENANTS

            Section  5.01.  NO  WARRANTY  AS  TO  SUITABILITY  OF  PROJECT.  The
Authority makes no warranty,  either express or implied,  with respect to actual
or designed  capacity of the Project,  as to the  suitability of the Project for
the purposes specified in this Participation  Agreement,  as to the condition of
the Project,  or as to the suitability of the Project for the Company's purposes
or needs.

            Section 5.02.  AUTHORITY'S  RIGHTS TO INSPECT  PROJECT AND PLANS AND
SPECIFICATIONS.  The Authority  shall have the right at all reasonable  times to
examine and inspect the Project  and, to the extent  reasonably  available,  the
plans  and  specifications  therefor  and such  other  information  and  records
relating  to the  Project  as may  be  reasonably  necessary  to  establish  the
qualification  of the Project for financing  under the Act and  compliance  with
this Participation Agreement.

            Section  5.03.  COMPANY  CONSENT  TO  AMENDMENT  OF  INDENTURE.  The
Authority  shall not enter into any indenture  supplemental  to or amendatory of
the  Indenture  without  the prior  consent  of the  Company as  evidenced  by a
certificate in writing signed by an Authorized Company Representative.

            Section 5.04.  TAX  COVENANT.  Notwithstanding  any other  provision
hereof,  the Company  covenants and agrees that it will not take or authorize or
permit any action to be taken with  respect to the  Project,  or the proceeds of
Bonds, including any amounts treated as proceeds of the Bonds for any purpose of
Section  103 of the Code,  which  will  result in the loss of the  exclusion  of
interest on the Bonds from gross income for Federal  income tax  purposes  under
Section 103 of the Code  (except  for any Bond during any period  while any such
Bond is held by a person  referred  to in  Section  147(a)  of the  Code).  This
provision  shall  control  in case of  conflict  or  ambiguity  with  any  other
provision of this Participation  Agreement.  In furtherance of such covenant and
agreement,  the Authority  and the Company have entered into the Tax  Regulatory
Agreement and the Company  hereby agrees to comply with the  provisions  thereof
insofar as the Tax Regulatory Agreement relates to the Bonds.

            Section  5.05.  COMPANY  AGREES TO  PERFORM  OBLIGATIONS  IMPOSED BY
INDENTURE.  The Company agrees to perform such obligations as may be required of
it by the provisions of the Indenture.

            Section  5.06.  MAINTENANCE  OF OFFICE OR  AGENCY  OF  COMPANY.  The
Company will at all times keep in Hicksville,  New York, or another  location in
the State of New York an office or agency where notices and demands with respect
to the Company Note and this  Participation  Agreement may be served,  and will,
from time to time,  give written  notice to the Trustee and the Authority of the
location of such office or agency; and, in case the Company shall fail so to do,
notices  may be served and demands  may be made at the  principal  office of the
Trustee.

<PAGE>



            Section 5.07. FURTHER  ASSURANCES.  The Company will make,  execute,
acknowledge  and  deliver,  or  cause  to be made,  executed,  acknowledged  and
delivered,  to the  Trustee  any and  all  such  further  acts,  instruments  or
assurances as may be reasonably  required for effectuating the intention of this
Participation Agreement and the Company Note.

            Section 5.08.  PAYMENT OF TAXES AND OTHER CHARGES.  The Company will
promptly  pay and  discharge,  or cause to be paid and  discharged,  as the same
become due and  payable,  any and all taxes,  rates,  levies,  assessments,  and
governmental  liens,  claims and other charges at any time  lawfully  imposed or
accruing  upon or against the Company or upon or against its  properties  or any
part thereof, or upon the income derived therefrom or from the operations of the
Company, provided that the Company shall not be required to pay or discharge, or
cause  to  be  paid  or  discharged,  any  such  obligation,  tax,  rate,  levy,
assessment,  lien,  claim  or  other  charge  so long as in  good  faith  and by
appropriate legal proceedings the validity thereof shall be contested.

            Section 5.09.  MAINTENANCE  OF  PROPERTIES.  The Company will at all
times make or cause to be made such  expenditures  for repairs,  maintenance and
renewals, or otherwise, as shall be necessary to maintain its properties in good
repair,  working  order and  condition as an operating  system or systems to the
extent necessary to meet the Company's  obligations under the Public Service Law
of the State of New York and the  Participation  Agreement;  provided,  however,
that  nothing  herein  contained  shall be construed to prevent the Company from
ceasing to operate any of its plants or any other property,  if, in the judgment
of the  Company,  it is  advisable  not to  operate  the same and the  operation
thereof shall not be essential to the maintenance and continued operation of the
rest of the operating  system or systems,  and the security  under the Indenture
afforded  by  the  Company  Note  will  not  be  substantially  impaired  by the
termination  of such  operation.  It is  understood  that the Company has agreed
pursuant to a settlement  with the State of New York,  approved by the Company's
shareholders  on June 28,  1989,  not to  operate  the  Shoreham  Nuclear  Power
Station.

            Section 5.10.  INSURANCE.  The Company will keep or cause to be kept
such  parts of its  properties  as,  in the  opinion  of an  Authorized  Company
Representative  (as  defined  in the  Indenture  and  who  shall  be a  licensed
professional  engineer),  are of an insurable  nature,  insured  against loss or
damage by fire or other  casualties,  the risk of which is  customarily  insured
against by companies  similarly  situated and operating like properties,  to the
extent that property of similar character is customarily insured against by such
companies,  either (a) by  reputable  insurers or (b) in whole or in part in the
form of  reserves  or of one or more  insurance  funds  created by the  Company,
whether  alone or with other  corporations,  provided that the plan of each such
insurance fund shall have been or shall be approved by the Board of Directors of
the Company.

<PAGE>


            Section 5.11.  PROPER BOOKS OF RECORD AND ACCOUNT.  The Company will
at all times keep or cause to be kept  proper  books of record and  account,  in
which full,  true and correct entry will be made of all  dealings,  business and
affairs of the  Company,  including  proper and  complete  entries to capital or
property accounts covering property worn out,  obsolete,  abandoned or sold, all
in  accordance  with the  requirements  of any system of  accounting  or keeping
accounts  or  the  rules,  regulations  or  orders  prescribed  by a  regulatory
commission  with  jurisdiction  over the rates of the Company  giving rise to at
least fifty-one  percent (51%) of the Company's gross revenues,  or if there are
no such  requirements or rules,  regulations or orders,  then in compliance with
generally accepted accounting principles.

            Section 5.12.  CERTIFICATES  AS TO DEFAULTS.  The Company shall file
with the Trustee, on or before April 30 of each year, a certificate signed by an
Authorized Company Representative (as defined in the Indenture) stating that, to
the best of his  knowledge,  information  and  belief,  the  Company  has  kept,
observed,  performed  and  fulfilled  each and  every one of its  covenants  and
obligations  contained in this  Participation  Agreement and in the Company Note
and, to the best of his knowledge,  information and belief, there does not exist
at the  date  of  such  certificate  any  default  by  the  Company  under  this
Participation  Agreement or any event of default hereunder or other event which,
with  notice or the lapse of time  specified  in Section  6.01,  or both,  would
become an event of default or, if any such  default or event of default or other
event shall so exist, specifying the same and the nature and status thereof.

            Section 5.13. COMPANY NOT TO PERMIT HINDRANCE OR DELAY OF PAYMENT OF
COMPANY NOTE. The Company will not  voluntarily  do, suffer or permit any act or
thing intended to hinder or delay the payment of the  indebtedness  evidenced by
the Company Note.

            Section 5.14. CORPORATE EXISTENCE,  CONSOLIDATION, MERGER OR SALE OF
ASSETS. The Company will maintain its corporate existence,  will not consolidate
with or permit itself to be merged into any other  corporation or  corporations,
or sell,  transfer  or  otherwise  dispose  of all or  substantially  all of its
properties  and assets,  except in the manner and upon the terms and  conditions
set forth in this Section 5.14.

            Nothing contained in this Participation Agreement shall prevent (and
this  Participation  Agreement shall be construed as permitting and authorizing)
any  lawful  consolidation  or  merger  of the  Company  with or into any  other
corporation  or  corporations  lawfully  authorized  to acquire  and operate the
properties of the Company,  or a series of consolidations  or mergers,  in which
the Company or its successor or successors  shall be a party, or any sale of all


<PAGE>

or  substantially  all  the  properties  of  the  Company  as an  entirety  to a
corporation  lawfully  authorized to acquire and operate the same; provided that
except as provided by Section 5.17  hereof,  upon any  consolidation,  merger or
sale, the corporation  formed by such  consolidation,  or into which such merger
may be made, or making such purchase shall execute and deliver to the Trustee an
instrument,  in form satisfactory to the Trustee, whereby such corporation shall
effectually  assume  the due and  punctual  payment  of the  principal  of,  and
premium,  if any, and  interest on, the Company Note  according to its tenor and
the due and punctual  performance and observance of all covenants and agreements
to be performed by the Company pursuant to this Participation Agreement, the Tax
Regulatory Agreement and the Company Note.

            Every such successor  corporation  shall possess,  and may exercise,
from time to time, each and every right and power  hereunder of the Company,  in
its name or otherwise; and any act, proceeding, resolution or certificate by any
of the terms of this Participation  Agreement,  the Tax Regulatory Agreement and
the Company Note  required or provided to be done,  taken and performed or made,
executed or  verified  by any board or officer of the  Company  shall and may be
done,  taken and  performed  or made,  executed or verified  with like force and
effect by the corresponding board or officer of any such successor corporation.

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

            Section 5.15. FINANCIAL STATEMENTS OF COMPANY. The Company agrees to
furnish the Trustee with a copy of its annual  report to  stockholders  for each
year, beginning with the year 1997, on or before March 31 of the subsequent year
or as soon thereafter as it is reasonably available.  The Company further agrees
to furnish to the Trustee, and to any owner of the Bonds if requested in writing
by such  owner,  all  financial  statements  which it sends to its  shareholders
generally.

            Section 5.16.  COMPLIANCE WITH LAWS. The Company agrees to comply in
all material respects with all applicable laws, rules and regulations and orders
of any governmental authority,  non-compliance with which would adversely affect
the  Company's  ability to perform its  obligations  hereunder  or under the Tax
Regulatory  Agreement or the Company Note,  except laws,  rules,  regulations or
orders being contested in good faith or laws,  rules,  regulations or orders for
which the Company has applied for variances or exceptions.

            Section  5.17  TRANSFER OF PROJECT AND  PARTICIPATION  AGREEMENT  TO
AFFILIATE.  The parties  acknowledge  that the Company has filed an  application
with the Federal  Energy  Regulatory  Commission  seeking,  among other  things,

<PAGE>


approval of the transfer of the Company's electric transmission and distribution
system to the Long Island Power  Authority  ("LIPA") in  connection  with LIPA's
acquisition  of the  stock of the  Company.  The  Company  currently  plans,  in
connection with such transfer,  to transfer its non-nuclear  electric generation
assets  (with the  exception  of power  supply  contracts),  its gas  assets and
certain other assets and liabilities to affiliates of the Holding Company formed
in connection with the transactions  contemplated  between the Company,  KeySpan
Energy  Corporation and the Long Island Power  Authority.  The entity  acquiring
such non-nuclear  electric  generation assets is hereinafter  referred to as the
"Generation Affiliate".

            If, as part of such  transfer  of  non-nuclear  electric  generation
assets,  the  Project  is  transferred  to the  Generation  Affiliate,  then the
Generation  Affiliate  shall assume the  obligations of the Company  pursuant to
this Participation Agreement, the Company Note, the Tax Regulatory Agreement and
all other  obligations  of the Company  relating to the Bonds.  On or after such
time of transfer,  the Company, upon satisfaction of the conditions set forth in
the  final  sentence  of this  paragraph,  shall be  released  from any  further
obligations pursuant to this Participation  Agreement, the Company Note, the Tax
Regulatory  Agreement  and the Bonds.  Upon  transfer  of  non-nuclear  electric
generation assets to the Generation Affiliate, the Generation Affiliate shall:

          1) execute and deliver to the Trustee and the Authority an instrument,
          in form  satisfactory  to the Trustee and the  Authority,  whereby the
          Generation  Affiliate  shall  effectually  assume the due and punctual
          payment of the principal of, and premium, if any, and interest on, the
          Company  Note  according  to  its  tenor  and  the  due  and  punctual
          performance  and  observance  of all  covenants  and  agreements to be
          performed by the Company pursuant to this Participation Agreement, the
          Tax Regulatory Agreement and the Company Note,

          2) provide  for the  delivery to the  Authority  and the Trustee of an
          opinion  of Bond  Counsel to the effect  that such  assumption  by the
          Generation  Affiliate  and  such  release  of  the  Company  will  not
          adversely  affect the  exclusion  of  interest on the Bonds from gross
          income for federal income tax purposes,

          3) deliver to the  Authority  and the Trustee an opinion of counsel to
          the  Generation  Affiliate  to the effect that the  assumption  of the
          performance  and  observance of all covenants and agreements set forth
          in 1) above  have  been  duly and  validly  authorized,  executed  and
          delivered  by the  Generation  Affiliate  and that  the  Participation
          Agreement,  Company Note and Tax Regulatory Agreement constitute valid
          and binding agreements of the Generation Affiliate and are enforceable
          against the Generation Affiliate in accordance with their terms and

          4) deliver such other  documents,  instruments and certificates as the
          Authority the Trustee may  reasonably  require in connection  with the
          transfer of the Project and the assumption by the Generation Affiliate
          of the  obligations  of the  Company  pursuant  to this  Participation
          Agreement,  the Company  Note,  the Tax  RegulAgreement  and all other
          obligations of the Company relating to the Bonds

<PAGE>



            Thereafter,  the Generation Affiliate shall constitute the "Company"
for all  purposes of this  Participation  Agreement  the Company  Note,  the Tax
Regulatory  Agreement and the Bonds and shall  possess,  and may exercise,  from
time to time,  each and every right and power  hereunder of the Company,  in its
name or otherwise; and any act, proceeding,  resolution or certificate by any of
the terms of this Participation  Agreement, and Tax Regulatory Agreement and the
Company  Note  required  or provided to be done,  taken and  performed  or made,
executed or  verified  by any board or officer of the  Company  shall and may be
done,  taken and  performed  or made,  executed or verified  with like force and
effect by the corresponding board or officer of the Generation  Affiliate or any
body or individual performing a similar function.

                              

<PAGE>


                                                                        


                                  ARTICLE VI

                         DEFAULTS BY COMPANY; REMEDIES

            Section 6.01. EVENTS OF DEFAULT;  ACCELERATION.  In case one or more
of the following events of default shall have occurred and be continuing:

            (a) failure by the Company to pay when due any amount required to be
paid under this  Participation  Agreement  or the Company  Note,  which  failure
causes a default in the payment when due of the interest on any of the Bonds and
continuance of such default for five (5) days; or

            (b) failure by the Company to pay when due any amount required to be
paid under this  Participation  Agreement  or the Company  Note,  which  failure
causes a default in the payment  when due of the  principal  of, or premium,  if
any, on any of the Bonds; or

            (c) failure by the Company to pay when due any amount required to be
paid under Section 4.11,  which failure causes a default in the payment when due
of any amount payable  pursuant to Section 2.05 of the Indenture and continuance
of such default for five (5) days; or

            (d)  failure on the part of the  Company to duly  observe or perform
any other of the covenants or agreements on the part of the Company contained in
this  Participation  Agreement (other than failure to pay amounts required to be
paid under Sections 4.04, 4.05, 4.08, 4.09 or 4.10) or in the Company Note for a
period  of  ninety  (90) days  after  the date on which  written  notice of such
failure,  requiring the Company to remedy the same, shall have been given to the
Company by the Authority or the Trustee; or

            (e)  an Act of Bankruptcy relating to the Company; or

            (f) the  occurrence  and  continuance  of an "event of  default"  as
defined in the Company Indenture;

          then,  and in any such event,  the Trustee,  may, and upon the written
          request  of the  owners  of at  least  twenty-five  percent  (25%)  in
          aggregate  principal  amount of the Bonds then  outstanding  shall, by
          notice in writing to the Company and provided that the default has not
          theretofore been cured, declare the Company Note to be due and payable
          immediately,  and upon any such  declaration the same shall become and
          shall be  immediately  due and  payable,  anything  contained  in this
          Participation  Agreement  or in  the  Company  Note  to  the  contrary

<PAGE>


          notwithstanding.  Any amounts  collected  by the  Trustee  pursuant to
          action taken under this  Section  6.01 shall be applied in  accordance
          with the Indenture.  In addition,  if at any time the principal of the
          Bonds shall have been  declared to be due and payable by  acceleration
          pursuant  to the  terms  of the  Indenture,  the  Company  Note  shall
          thereupon  become and be immediately due and payable,  subject to such
          declaration  with  respect to the Bonds  being  annulled  pursuant  to
          Section 10.01 of the Indenture.

            The right or obligation of the Trustee to make any such  declaration
as aforesaid,  however,  is subject to the condition  that if, at any time after
declaration,  but before all the Bonds shall have  matured by their  terms,  the
principal  of,  premium,  if any,  and interest on, the Company Note which shall
have become due and payable  otherwise than by such  declaration,  and all other
sums payable  hereunder,  except the  principal of, and interest on, the Company
Note which  shall have become due and  payable by such  declaration,  shall have
been paid or provision satisfactory to the Trustee shall have been made for such
payment,  and the  reasonable  expenses  of the Trustee and of the owners of the
Bonds  shall  have  been  paid,  including  reasonable  attorneys'  fees paid or
incurred, and all defaults hereunder and under the Bonds or under the Indenture,
except as to the payment of principal  and  interest  due and payable  solely by
reason of such declaration, shall be made good or be secured to the satisfaction
of the Trustee or provision  deemed by the Trustee to be adequate  shall be made
therefor,  then and in every  such case the owners of a  majority  in  aggregate
principal  amount  of the  Bonds  then  outstanding,  by  written  notice to the
Authority  and to the  Trustee,  may  rescind  such  declaration  and annul such
default in its entirety, or, if the Trustee shall have acted in the absence of a
written request of the owners of at least twenty-five percent (25%) in aggregate
principal  amount of the  outstanding  Bonds,  and if there  shall not have been
theretofore  delivered to the Trustee  written  direction to the contrary by the
owners of at least  twenty-five  percent (25%) in aggregate  principal amount of
the outstanding  Bonds,  then any such declaration shall IPSO FACTO be deemed to
be  rescinded  and any such  default  and its  consequences  shall IPSO FACTO be
deemed to be annulled,  but no such  rescission and annulment shall extend to or
affect any subsequent default or impair or exhaust any right or power consequent
thereon.

            In case the Trustee shall have  proceeded to enforce any right under
this Participation Agreement or the Company Note and such proceedings shall have
been  discontinued  or  abandoned  for any reason or shall have been  determined
adversely to the Trustee, then and in every such case the Company, the Authority
and the Trustee  shall be restored  respectively  to their former  positions and
rights  hereunder,  and all  rights,  remedies  and powers of the  Company,  the
Authority and the Trustee shall continue as though no such  proceedings had been
taken.
            Section 6.02.  CERTAIN  EVENTS OF DEFAULT;  AUTHORITY OR TRUSTEE MAY
TAKE CERTAIN  ACTIONS.  In case the Company shall have failed to comply with its
obligations  under Article III or under Sections 4.04, 4.08, 4.09, 4.10 or 5.16,
which event shall have continued for a period of ninety (90) days after the date
on which  written  notice of such  failure,  requiring the Company to remedy the
same, shall have been given to the Company by the Authority or the Trustee,  the
Authority  or the  Trustee may take  whatever  action at law or in equity as may
appear  necessary or  desirable  to enforce  performance  or  observance  of any

<PAGE>


obligations or agreements of the Company under said Article or Sections. In case
the Company shall have failed to comply with its obligations under Section 4.05,
which event shall have continued for a period of ninety (90) days after the date
on which  written  notice of such  failure,  requiring the Company to remedy the
same, shall have been given to the Company by the Trustee,  the Trustee may take
whatever action at law or in equity as may appear  necessary or desirable to the
Trustee to enforce performance or observance of any obligations or agreements of
the Company under said section.

            Section 6.03. JUDICIAL  PROCEEDINGS BY TRUSTEE.  Upon the occurrence
and  continuance of an event of default (as defined in Section 6.01) the Trustee
may, and upon the written request of the owners of at least twenty-five  percent
(25%) in aggregate principal amount of the Bonds then outstanding and receipt by
the Trustee of  indemnity  satisfactory  to it shall,  institute  any actions or
proceedings  at law or in equity for the  collection of any amounts then due and
unpaid on the Company  Note,  and may prosecute any such action or proceeding to
judgment  or final  decree,  and may  collect in the manner  provided by law the
moneys adjudged or decreed to be payable.


                           

<PAGE>


                                                                        


                                  ARTICLE VII

                                 MISCELLANEOUS

            Section 7.01.  DISPOSITION  OF AMOUNTS  AFTER PAYMENT OF BONDS.  Any
amounts determined by the Trustee to be remaining in the funds created under the
Indenture  after payment in full, or provision for payment in full, of principal
of, and premium,  if any, and interest on, all of the Bonds,  in accordance with
the  provisions  of the  Indenture,  and  payment of all the fees,  charges  and
expenses of the Authority,  the Trustee,  the Tender Agent,  the Indexing Agent,
the Remarketing Agents and the Paying Agent in accordance with the Indenture and
this  Participation  Agreement and any amounts required to be paid to the United
States of America pursuant to the Tax Regulatory Agreement, shall be paid to the
Bank;  provided,  however,  that on or after the Fixed Rate  Conversion Date and
solely with respect to moneys not resulting  from a draw on the Letter of Credit
and not constituting remarketing proceeds, such amounts that would be payable to
the Bank  pursuant to this Section 7.01 shall be paid to the Company if the Bank
has been paid in full under the Reimbursement Agreement.

            Section 7.02. NOTICES. All notices, certificates,  requests or other
communications between the Authority, the Company and the Trustee required to be
given  under this  Participation  Agreement  or under the  Indenture  (except as
otherwise  provided  therein)  shall be  sufficiently  given and shall be deemed
given when delivered or mailed by first class mail,  postage prepaid,  addressed
as follows if to the Authority,  at Corporate Plaza West, 286 Washington  Avenue
Extension,  Albany, New York 12203, Attention:  President; if to the Company, at
175 East Old Country Road, Hicksville, New York 11801, Attention: Vice President
and Treasurer;  and if to the Trustee,  at 450 West 33rd Street, 15th Floor, New
York, New York 10001 Attention:  Corporate Trustee Administration Department and
if to the  Tender  Agent,  Remarketing  Agents  or  the  Indexing  Agent  to the
addresses  set forth for such  persons  in  Section  16.05 of the  Indenture.  A
duplicate copy of each notice, certificate, request or other communication given
hereunder to the  Authority,  the Company or the Trustee  shall also be given to
the others.  The  Company,  the  Authority  and the Trustee may, by notice given
hereunder,  designate  any further or different  addresses  to which  subsequent
notices, certificates, requests or other communications shall be sent.

            Section 7.03. SUCCESSORS AND ASSIGNS.  This Participation  Agreement
shall  inure to the  benefit of and shall be  binding  upon the  Authority,  the
Company, the Trustee, the Bank and their respective successors and assigns.

            Section 7.04. REFERENCES TO THE BANK. After establishment of a Fixed
Rate for the Bonds and upon  receipt by the Trustee of notice from the Bank that
all amounts payable to the Bank with respect to draws under the Letter of Credit
have been received,  all references in this Participation  Agreement to the Bank
shall be ineffective.

<PAGE>


            Section   7.05.   AMENDMENT   OF   PARTICIPATION   AGREEMENT.   This
Participation  Agreement  may not be amended  except by an instrument in writing
signed by the parties  and, if such  amendment  occurs after the issuance of the
Bonds,  upon  compliance  with the  provisions  of Sections 4.01 and 4.02 of the
Indenture.

            Section 7.06.  ASSIGNMENT BY AUTHORITY.  The Authority  shall assign
its rights under and interest in this Participation Agreement (except the rights
and interest of the Authority under Article III and Sections 4.04,  4.08,  4.09,
4.10 and 5.16 and insofar as the  obligations  of the Company under Section 4.07
relate to taxes and assessments  imposed upon the Authority and not the Trustee,
Section 4.07 thereof), subject to the provisions of this Participation Agreement
relating to the amendment thereof, to the Trustee pursuant to the Indenture,  as
security for payment of the principal of, and premium,  if any, and interest on,
the Bonds.  In addition,  the Trustee shall have the same power as the Authority
to enforce  from time to time the rights of the  Authority  set forth in Article
III and Section 5.16, subject to the provisions of this Participation  Agreement
relating to the amendment  hereof.  Except as provided in this Section 7.06, the
Authority will not sell,  assign,  transfer,  convey or otherwise dispose of its
interest in this  Participation  Agreement during the term of this Participation
Agreement.

            Section  7.07.   PARTICIPATION   AGREEMENT   SUPERSEDES   ANY  PRIOR
AGREEMENTS.  This Participation  Agreement supersedes any other prior agreements
or  understandings,  written or oral,  between the parties  with  respect to the
transactions contemplated hereby.

            Section  7.08.  COUNTERPARTS.  This  Participation  Agreement may be
executed  in any  number of  counterparts,  each of which when so  executed  and
delivered shall be an original,  but such counterparts shall together constitute
but one and the same Participation Agreement.

            Section 7.09.  SEVERABILITY.  If any clause, provision or section of
this  Participation  Agreement is held illegal,  invalid or unenforceable by any
court or administrative  body, such  Participation  Agreement shall be construed
and enforced as if such illegal or invalid or unenforceable clause, provision or
section had not been  contained  in this  Participation  Agreement.  In case any
agreement or obligation contained in this Participation  Agreement shall be held
to be in violation of law, then such agreement or obligation  shall be deemed to
be the agreement or obligation of the Authority or the Company,  as the case may
be, to the full extent permitted by law.

<PAGE>



            SECTION  7.10.  NEW YORK LAW TO GOVERN.  THE LAW OF THE STATE OF NEW
YORK SHALL GOVERN THE CONSTRUCTION OF THIS PARTICIPATION AGREEMENT.

            IN  WITNESS   WHEREOF,   the   parties   hereto   have  caused  this
Participation Agreement to be duly executed as of the day and year first written
above.

                                          NEW YORK STATE ENERGY
                                           RESEARCH AND DEVELOPMENT
                                            AUTHORITY



                                        By /s/ F. William Valentino, Jr.
                                        --------------------------------
(SEAL)                                               President

ATTEST:


/s/ Howard A. Jack
------------------
Vice President and Secretary

                                         LONG ISLAND LIGHTING COMPANY



                                         By /s/ Theodore A. Babcock
                                           --------------------------
(SEAL)                                   Vice President and Treasurer

ATTEST:


/s/ Stephen W. McCaffrey
------------------------
Of Counsel

<PAGE>



                                   EXHIBIT A


                     (To Participation Agreement dated as
                    of December 1, 1997, between New York
                    State Energy Research and Development
                 Authority and Long Island Lighting Company)


                      DESCRIPTION OF ELECTRIC FACILITIES



            The Project will consist of the following facilities which are to be
acquired,  constructed  and installed by the Company (as such term is defined in
the Participation Agreement):

1.    Production Facilities;

2.    Certain Common Facilities.

            All such  facilities are as further  described in the Tax Regulatory
Agreement  between the  Authority  and the Company dated the date of the initial
delivery of the Bonds.

            The Project shall also include (i) such  instrumentation,  controls,
structures and all other facilities,  equipment,  devices and the like necessary
to  support  the  facilities   herein   described,   (ii)  such  necessary  land
improvements,  and (iii) subject to Section 3.04 of the Participation Agreement,
such additional or substituted  facilities for the furnishing of electric energy
which,  because of changes in technology,  environmental  standard,  cost or the
like, the Company determines shall be added or substituted for said facilities.


                             
                                     A-1

<PAGE>



                                   EXHIBIT B


                     (To Participation Agreement dated as
                    of December 1, 1997, between New York
                    State Energy Research and Development
                 Authority and Long Island Lighting Company)


                        DESCRIPTION OF OTHER FACILITIES



            Any portion of the  Electric  Facilities  described  in Exhibit A as
shall have been  placed in  service  more than one year prior to the date of the
original issuance and delivery of the Bonds.


                             
                                     B-1

<PAGE>



                                   EXHIBIT C





                   (To Participation Agreement dated as of
                      December 1, 1997, between New York
                    State Energy Research and Development
                 Authority and Long Island Lighting Company)


                         LONG ISLAND LIGHTING COMPANY

                                 $24,880,000

                               PROMISSORY NOTE
                                     FOR
                      ELECTRIC FACILITIES REVENUE BONDS
            (LONG ISLAND LIGHTING COMPANY PROJECT), 1997 SERIES A


            Long  Island   Lighting   Company  (the   "Company"),   a  New  York
corporation,  for value received, hereby promises to pay, on or before the dates
set forth below,  the amounts set forth below,  to The Chase Manhattan Bank, New
York,  New York,  as trustee or its  successor  or  successors  as trustee  (the
"Trustee") under the Indenture of Trust relating to the  above-referenced  Bonds
dated as of December 1, 1997,  between the New York State  Energy  Research  and
Development   Authority  (the  "Authority"),   a  body  corporate  and  politic,
constituting a public benefit corporation, established and existing under and by
virtue of the laws of the State of New York, and the Trustee.  Such Indenture of
Trust, as it may be amended or supplemented  from time to time, is herein called
the  "Indenture."  Unless  otherwise  defined  herein,  the  terms  used in this
promissory  note (the  "Company  Note") which are defined in Section 1.01 of the
Indenture  shall have the  meanings,  respectively,  herein which such terms are
given in said Section 1.01 of the Indenture.

            This Company Note is issued pursuant to the Participation  Agreement
in order to evidence the obligation of the Company to the Authority to repay the
advance of the  proceeds  of the Bonds.  In  accordance  with the  Participation
Agreement,  the Authority has  authorized and directed the Company to issue this
Company  Note payable to the order of the Trustee as security for the payment of
principal  of,  premium,  if any,  and  interest  on, the Bonds.  The rights and
interest of the Authority under the  Participation  Agreement (except the rights
and interest of the Authority  under Article III and Sections 4.04,  4.08,  4.09
and 4.10 and 5.16 thereof and insofar as the  obligations  of the Company  under

<PAGE>


Section 4.07 relate to taxes and assessments  imposed upon the Authority and not
the  Trustee,   Section  4.07  thereof),   subject  to  the  provisions  of  the
Participation Agreement relating to the amendment thereof, have been assigned to
the Trustee  pursuant to the Indenture.  In addition,  the Authority has granted
the Trustee  the same power as the  Authority  to enforce  from time to time the
rights of the Authority set forth in said Article III and Section 5.16,  subject
to the  provisions  of the  Participation  Agreement  relating to the  amendment
thereof.  All of the  terms,  conditions  and  provisions  of the  Participation
Agreement are, by this reference  thereto,  incorporated  herein as part of this
Company Note.

This  Company  Note shall be  payable  as to  principal,  premium,  if any,  and
interest as follows:

      (a)   On   or   before   each   Interest    Payment    Date,    commencing
      __________________,  a sum which together with other moneys then available
      for such  purpose  in the Bond Fund will  enable  the  Trustee  to pay the
      interest on the Bonds coming due on such date;

      (b)  On or  before  any  redemption  date  for  the  Bonds  (other  than a
      redemption  date pursuant to Section 8.05 of the  Indenture),  a sum which
      together  with other  moneys then  available  for such purpose in the Bond
      Fund will enable the Trustee to pay the principal of, premium, if any, and
      interest on the Bonds which are to be redeemed on such date; and

      (c) On or before  _______________,  a sum which together with other moneys
      then  available  for such purpose in the Bond Fund will enable the Trustee
      to pay the outstanding principal amount of the Bonds;

provided  that,  if the Bonds  are  redeemed  pursuant  to  Section  8.05 of the
Indenture,  the amounts that would  otherwise  have been payable on this Company
Note if not for such  redemption,  shall continue to be payable at the times and
in the amounts  set forth  above as if such  redemption  had not  occurred;  and
provided further that if the Bonds are redeemed  pursuant to Section 8.05 of the
Indenture the Company shall have the right at any time thereafter to prepay this
Company  Note by paying the amount due on this  Company Note at the time of such
prepayment  together with unpaid  interest  accrued  thereon to the date of such
prepayment.

            The  obligation  of the Company to make any payment of principal of,
and  premium,  if any,  and  interest  on,  this  Company  Note  shall be deemed
satisfied and discharged to the extent of the corresponding  payment made by the
Bank under the Letter of Credit.

            All payments of principal of, and premium,  if any, and interest on,
this Company Note shall be made in immediately available funds to the Trustee at
its corporate trust office, 450 West 33rd Street, 15th Floor, New York, New York
10001,  Attention:  Corporate  Trust  Administration  Department,  Wire Transfer
Number:  9102758100, or to such different address or wire transfer number as the
Trustee may from time to time designate, on or before
each date on which such principal,  premium,  if any, or interest is due in such
coin or currency of the United States of America as at the time of payment shall
be legal tender for the payment of public and private debts.

            The Company has agreed in the  Participation  Agreement  that if for
any reason Company Note Payments, together with other moneys held by the Trustee
and then available for such purpose (including moneys paid by the Bank under the
<PAGE>


Letter of Credit), would not be sufficient to make the corresponding payments of
principal of, and premium, if any, and interest on, the Bonds when such payments
are due, the Company will pay the amounts  required from time to time to make up
any such deficiency.

            In the event that payment has been made in respect of the  principal
of and premium, if any, and interest on, all of the Bonds, or provision therefor
has been made in accordance with Article XIV of the Indenture, then this Company
Note shall be deemed  paid in full and shall be  cancelled  and  returned to the
Company; provided that this Company Note shall not be deemed paid in full if the
Bonds are redeemed pursuant to Section 8.05 of the Indenture.

            No reference herein to the Participation  Agreement shall impair the
obligation  of the Company to pay the  principal  of and  premium,  if any,  and
interest on this  Company  Note at the time and place and in the amounts  herein
prescribed,  which obligation is absolute,  irrevocable and unconditional and is
not  subject  to any  defense  (other  than  payment)  or any right of  set-off,
counterclaim or recoupment for any reason,  including,  without limitation,  any
breach by the  Authority of any  obligation  to the Company,  whether  under the
Participation Agreement or otherwise, or inaccuracy of any representation by the
Authority to the Company under the Participation  Agreement, or any indebtedness
or liability at any time owing to the Company by the Authority or any failure to
complete the Project or the destruction by fire or other casualty of the Project
or any portion thereof, or the taking of title thereto or the use thereof by the
exercise of the power of eminent domain.

            In case of an event of default  (as  defined in Section  6.01 of the
Participation  Agreement),  the principal of and interest to the date of payment
of this Company Note may be declared  immediately due and payable as provided in
the Participation  Agreement.  In addition,  if at any time the principal of the
Bonds shall have been declared to be due and payable by acceleration pursuant to
the terms of the  Indenture,  this  Company Note shall  thereupon  become and be
immediately  due and payable,  subject to such  declaration  with respect to the
Bonds being annulled pursuant to Section 10.01 of the Indenture.

            This  Company  Note may not be amended  except by an  instrument  in
writing signed by the Company, by the Authority and by the Trustee, on behalf of
the owners of the Bonds, in the manner and subject to the conditions provided in
Section 4.03 of the Indenture.

            This Company Note may not be  transferred  by the Trustee  except to
effect an assignment  to a successor  Trustee under the Indenture or pursuant to
Section 8.05 of the Indenture.

            THIS COMPANY NOTE SHALL BE GOVERNED BY AND  CONSTRUED IN  ACCORDANCE
WITH THE LAW OF THE STATE OF NEW YORK.

            Presentment,  demand,  protest  and  notice of  dishonor  are hereby
expressly waived.


<PAGE>

            IN WITNESS  WHEREOF,  the Company has caused this Company Note to be
duly executed and delivered as of December 30, 1997.

                                   LONG ISLAND LIGHTING COMPANY


                                   By: /s/ Theodore A. Babcock
                                   ---------------------------
                                   Vice President and Treasurer
(SEAL)


ATTEST:


/s/ Stephen W. McCaffrey
------------------------
Of Counsel



                             
                                     C-1

<PAGE>


                               TABLE OF CONTENTS
                                                                          PAGE


                                   ARTICLE I

              DEFINITIONS; RULES OF CONSTRUCTION; EFFECTIVE DATE
                    AND DURATION OF PARTICIPATION AGREEMENT

Section 1.01.   Definitions................................................  3
Section 1.02.   Rules of Construction......................................  3
Section 1.03.   Effective Date of
                Participation Agreement;
                  Duration of Participation Agreement......................  3


                                  ARTICLE II

                                REPRESENTATIONS

Section 2.01.   Representations and
                Warranties by the
                Authority..................................................  4
Section 2.02.   Representations and
                Warranties by the
                Company....................................................  4


                                  ARTICLE III

                         CONSTRUCTION OF THE PROJECT;
                               ISSUANCE OF BONDS

Section 3.01.   Construction of the
                Project....................................................  6
Section 3.02.   Sale of Bonds and Deposit
                of Proceeds; Liability
                  Under Bonds..............................................  6
Section 3.03.   Disbursements from
                Project Fund and Rebate
                  Fund.....................................................  7
Section 3.04.   Revision of Construction
                Plans......................................................  7
Section 3.05.   Certification of
                Completion of Project......................................  8
Section 3.06.   Payment of Cost of
                Construction of the
                Project in
                  Event Project Fund Inadequate............................  8
Section 3.07.   No Interest in Project
                Conferred..................................................  9
Section 3.08.   Operation, Maintenance
                and Repair.................................................  9
Section 3.09.   Investment of Moneys in
                Funds Under the
                  Indenture................................................  9
Section 3.10.   Agreement not to Exercise
                Option to Convert to
                  Fixed Rate Absent Specified Rating.......................  9
Section 3.11.   Securities Depository......................................  9

<PAGE>


                                  ARTICLE IV

                  COMPANY NOTE AND PAYMENTS; LETTER OF CREDIT

Section 4.01.   Execution and Delivery of
                Company Note to
                  Trustee.................................................. 10
Section 4.02.   Redemption of Bonds........................................ 10
Section 4.03.   Obligation for Payment
                Absolute; Deficiencies..................................... 10
Section 4.04.   Administration Fees;
                Expenses, Etc.............................................. 11
Section 4.05.   Compensation of Trustee,
                Paying Agent,
                  Remarketing Agents, Indexing Agent and Tender
Agent...................................................................... 11
Section 4.06.   Project Not Security for
                Bonds...................................................... 12
Section 4.07.   Payment of Taxes and
                Assessments; No Liens or
                  Charges.................................................. 12
Section 4.08.   Indemnification of
                Authority, Trustee,
                Tender
                  Agent, Paying Agent, Remarketing Agents and
Indexing Agent............................................................. 12
Section 4.09.   Company to Pay Attorneys'
                Fees and
                  Disbursements............................................ 13
Section 4.10.   No Abatement of
                Administration Fees and
                Other
                  Charges.................................................. 13
Section 4.11.   Payment to Tender Agent.................................... 13
Section 4.12.   The Letter of Credit....................................... 13

                                   ARTICLE V

                               SPECIAL COVENANTS

Section 5.01.   No Warranty as to
                Suitability of Project..................................... 15
Section 5.02.   Authority's Rights to
                Inspect Project and Plans
                  and Specifications....................................... 15
Section 5.03.   Company Consent to
                Amendment of Indenture..................................... 15
Section 5.04.   Tax Covenant............................................... 15
Section 5.05.   Company Agrees to Perform
                Obligations Imposed
                  by Indenture............................................. 15
Section 5.06.   Maintenance of Office or
                Agency of Company.......................................... 15
Section 5.07.   Further Assurances......................................... 16

<PAGE>


Section 5.08.   Payment of Taxes and
                Other Charges.............................................. 16
Section 5.09.   Maintenance of
                Properties................................................. 16
Section 5.10.   Insurance.................................................. 16
Section 5.11.   Proper Books of Record
                and Account................................................ 17
Section 5.12.   Certificates as to
                Defaults................................................... 17
Section 5.13.   Company Not to Permit
                Hindrance or Delay of
                  Payment of Company Note.................................. 17
Section 5.14.   Corporate Existence,
                Consolidation, Merger or
                  Sale of Assets........................................... 17
Section 5.15.   Financial Statements of
                Company.................................................... 18
Section 5.16.   Compliance with Laws....................................... 18
Section 5.17.   Transfer of Project and Participation
Agreement to Affiliate......................................................18


                                  ARTICLE VI

                         DEFAULTS BY COMPANY; REMEDIES

Section 6.01.   Events of Default;
                Acceleration............................................... 21
Section 6.02.   Certain Events of
                Default; Authority or Trustee
                  May Take Certain Actions................................. 22
Section 6.03.   Judicial Proceedings by
                Trustee.................................................... 23


                                  ARTICLE VII

                                 MISCELLANEOUS

Section 7.01.   Disposition of Amounts
                After Payment of Bonds..................................... 24
Section 7.02.   Notices.................................................... 24
Section 7.03.   Successors and Assigns..................................... 24
Section 7.04.   References to the Bank..................................... 24
Section 7.05.   Amendment of
                Participation Agreement.................................... 25
Section 7.06.   Assignment by Authority.................................... 25
Section 7.07.   Participation Agreement
                Supersedes Any Prior
                  Agreements............................................... 25
Section 7.08.   Counterparts............................................... 25
Section 7.09.   Severability............................................... 25
SECTION 7.10.   NEW YORK LAW TO GOVERN..................................... 26
EXHIBIT A..................................................................A-1
EXHIBIT B..................................................................B-1
EXHIBIT C..................................................................C-1



                                    (i)
    

<PAGE>