<PAGE>   1

                                                                    EXHIBIT 10.4

                                    GUARANTY

                  This Guaranty made and entered into as of September 20, 2000
(this "Guaranty"), by and between El Paso Energy Corporation, a Delaware
corporation ("Guarantor"), and Cedar Brakes I, L.L.C., a Delaware limited
liability company ("Buyer").

                              W I T N E S S E T H :

                  WHEREAS, Buyer will purchase from Newark Bay Cogeneration
Partnership L.P. ("NBCP") a power purchase agreement originally entered into
between Public Service Electric and Gas Company ("PSE&G") and NBCP and Buyer has
entered into an agreement with PSE&G to amend and restate such power purchase
agreement (as so amended and restated, the "Amended and Restated PPA");

                  WHEREAS, El Paso Merchant Energy L.P. ("EPM"), a wholly-owned
indirect subsidiary of the Guarantor, and Buyer desire to enter into a Power
Services Agreement (the "Power Services Agreement") and an Administrative
Service Agreement (the "Administrative Services Agreement") each dated as of the
date of this Guaranty, pursuant to which EPM has agreed to sell and deliver to
Buyer capacity and energy sufficient to enable Buyer to meet its obligations
under the Amended and Restated PPA and to perform all of Buyer's administrative
and managerial functions; and

                  WHEREAS, Guarantor has determined that EPM's financial and
performance obligations pursuant to the Power Services Agreement and the
Administrative Services Agreement are beneficial to Guarantor and Guarantor
desires to guarantee such obligations.

                  NOW, THEREFORE, in consideration of the premises and in order
to induce Buyer to enter into the Power Services Agreement and the
Administrative Services Agreement, Guarantor does hereby agree as follows:

                  1. Guarantor hereby irrevocably and unconditionally guarantees
         to Buyer the punctual performance by EPM of all its obligations under
         the Power Services Agreement and the Administrative Services Agreement
         (collectively the "Obligations"). Performance by Guarantor of the
         Obligations hereunder shall be made in full irrespective of (but
         without prejudice to the rights otherwise of Guarantor with respect to)
         any claim, set-off or other right that Guarantor may have at any time
         against Buyer, EPM, or any other person or entity, whether in
         connection herewith or with any unrelated transaction.

                  2. The Guaranty is a primary obligation of Guarantor and shall
         be construed as an irrevocable, unconditional, absolute and continuing
         guaranty of the full and punctual performance of all of the Obligations
         and not of their collectibility only, irrespective of (i) the validity
         or enforceability of the Power Services Guaranty or the Administrative
         Services Guaranty or any other agreement or instrument relating
         thereto, (ii) any


<PAGE>   2

         amplification, alteration, amendment, variation, supplement, renewal
         or replacement of the provisions of the Power Services Guaranty or the
         Administrative Services Guaranty or (iii) any other circumstances
         which might otherwise constitute a legal or equitable discharge or
         defense of a guarantor. This Guaranty shall remain in full force and
         effect until all Obligations of EPM have been performed.

                  3. Guarantor hereby irrevocably waives diligence, promptness,
         presentment, demand for payment or performance, protest, notice of
         protest, notice of non-performance or non-payment, notice of
         acceptance, notice of dishonor and any other notice with respect to any
         of the Obligations and this Guaranty, and covenants that the
         obligations of Guarantor under this Guaranty will not be discharged
         except by complete and final performance of all Obligations. All
         payments that Guarantor is required to make under this Guaranty shall
         be without any set-off, counterclaim or condition. The obligations of
         Guarantor shall not be affected by any change of ownership of EPM or
         the insolvency, bankruptcy or any other change in the legal status of
         EPM. In the event that the performance of EPM's Obligations are stayed
         or performance is delayed or deferred upon the insolvency, bankruptcy,
         reorganization or other proceeding involving EPM, all obligations of
         Guarantor shall remain in full force and effect and shall become
         immediately due to the extent that EPM would have otherwise been
         required to perform the Obligations absent the stay, delay or deferral
         in the enforceability of such Obligations. Guarantor hereby waives any
         legal or equitable defenses arising out of the insolvency, bankruptcy
         or other legal disability of EPM.

                  4. This Guaranty constitutes the entire agreement, and
         supersedes all prior written agreements and understandings, and all
         oral agreements, between the parties with respect to the subject matter
         hereof and may be executed simultaneously in several counterparts, each
         of which shall be deemed an original, and all of which together shall
         constitute one and the same instrument.

                  5. The invalidity or unenforceability of any one or more
         phrases, sentences, clauses or Sections in this Guaranty shall not
         affect the validity or enforceability of the remaining portions of this
         Guaranty or any part thereof.

                  6. Guarantor represents and warrants to Buyer that (a) it has
         the legal right to execute and deliver this Guaranty and to perform its
         obligations hereunder, (b) this Guaranty and the performance of
         Guarantor's obligations hereunder have been duly authorized by
         Guarantor and constitute legal, valid and binding obligations of
         Guarantor enforceable against Guarantor in accordance with their terms
         and (c) neither the execution and delivery by Guarantor of this
         Guaranty, nor the consummation of the transactions herein contemplated,
         nor compliance with the provisions hereof will violate any law, rule,
         regulations, order, writ, judgment, injunction, decree or award binding
         on Guarantor or the provisions of any indenture, instrument or
         agreement to which Guarantor or Guarantor's property is bound, or
         conflict with or constitute a default thereunder, or result in the
         creation or imposition of any lien in, of or on the property of
         Guarantor pursuant to the terms of any such indenture, instrument or
         agreement.

                                       2

<PAGE>   3

                  7. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
         ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO
         PRINCIPLES OF CONFLICTS OF LAWS. GUARANTOR HEREBY IRREVOCABLY WAIVES
         ALL RIGHT TO TRIAL BY JURY IN ANY ACTION PROCEEDING OR COUNTERCLAIM
         (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
         RELATING TO THIS AGREEMENT OR THE ACTIONS OF THE GUARANTOR OR BUYER IN
         THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.
         Guarantor, by its execution hereof, hereby submits to the non-exclusive
         jurisdiction of the courts of the State of New York, in connection with
         any action or proceeding relating to this Guaranty and hereby consents
         to service of process or other summons in any such action or proceeding
         brought by Buyer against it in any such court by means of registered
         mail to the last known address of Guarantor. Nothing herein, however,
         shall prevent service of process by any other means permitted by law or
         the bringing of any such action or proceeding in any other
         jurisdiction.

                  8. This Guaranty shall remain in full force and effect or
         shall be reinstated (as the case may be) if at any time any payment by
         EPM, in whole or in part, is rescinded or must otherwise be returned by
         Buyer upon the insolvency, bankruptcy or reorganization of EPM, or
         otherwise, all as though that payment had not been made.

                  9. Notwithstanding any payment or payments made by Guarantor
         hereunder or any set-off or application of funds of Guarantor by Buyer,
         until all of the Obligations are performed or paid in full, Guarantor
         shall not (i) exercise any right of subrogation or indemnity, or
         similar right or remedy, against EPM or any of its assets or property
         in respect of any amount paid by the Guarantor under this Guaranty or
         (ii) file a proof of claim in competition with Buyer for any amount
         owing to the Guarantor by EPM on any account whatsoever in the event of
         the bankruptcy, insolvency or liquidation of EPM.

                  10. The rights and remedies set forth in the Power Services
         Agreement, the Administrative Services Agreement and this Guaranty are
         in addition to and not exclusive of any rights and remedies available
         to Buyer by law in respect of this Guaranty. If any amount payable by
         Guarantor under this Guaranty is not paid when due, Buyer may, without
         notice or demand of any kind, set-off and apply such amount against any
         indebtedness of Buyer to Guarantor then due and payable (including,
         without limitation, principal, interest, indemnity or reimbursement for
         losses) whether under any loan or credit agreement, note, interest rate
         or currency exchange agreement, or otherwise, and such set-off and
         application shall satisfy the obligations hereunder of Guarantor to
         Buyer to the extent such amount is so set-off and applied. Buyer shall
         be entitled to apply any amount received by it from any source,
         including Guarantor, in respect of EPM's Obligations to the discharge
         of those obligations in such order as Buyer may from time to time elect
         in its sole discretion.

                  11. Guarantor shall pay or reimburse Buyer on demand for all
         reasonable costs and expenses (including fees and expenses of counsel)
         incurred in connection with the enforcement of Buyer's rights under
         this Guaranty.

                                       3

<PAGE>   4

                  12. All amendments, waivers and modifications of or to any
         provision of this Guaranty and any consent to departure by Guarantor
         from the terms hereof shall be in writing and signed and delivered by
         Buyer and, in the case of any such amendment or modification, by
         Guarantor, and shall not otherwise be effective. Any such waiver or
         consent shall be effective only in the specific instance and for the
         purpose for which it is given.

                  13. This Guaranty shall be binding on Guarantor and its
         successors and assigns. However, Guarantor shall not transfer any of
         its obligations hereunder without the prior written consent of Buyer
         and any purported transfer without that consent shall be void.
         Guarantor hereby expressly agrees that Buyer may assign all of its
         rights hereunder without Guarantor's approval to (i) transfer, pledge,
         encumber or assign this Guaranty or the accounts, revenues or proceeds
         hereof in connection with any financing or other financial arrangements
         or (ii) transfer or assign this Guaranty to any affiliate or to any
         person or entity succeeding to all or substantially all of the assets
         of Buyer. This Guaranty shall inure to the benefit of Buyer and its
         successors and assigns.

                  14. Any notice, request, demand, or statement which either
         Guarantor or Buyer may desire to give the other shall be in writing and
         shall be considered as duly delivered when mailed by certified mail or
         delivered against receipt by messenger or overnight courier addressed
         to said party as follows:

         (a)      If to Guarantor:

                  El Paso Energy Corporation
                  1001 Louisiana St.
                  Houston, TX 77002         Attention: General Counsel

                  With electronic mail copies to:

                  Sullivant@epenergy.com



         (b)      If to Buyer:

                  El Paso Merchant Energy L.P.
                  1001 Louisiana St.
                  Houston, TX 77002         Attention: General Counsel


                  With electronic mail copies to:

                  Regulskik@epenergy.com



                                       4


<PAGE>   5

                  IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be
executed in its name and behalf.


                                            EL PASO ENERGY CORPORATION




                                            By:    /s/ H. Brent Austin
                                                   -----------------------------
                                            Name:  H. Brent Austin
                                            Title: Executive Vice President and
                                                     Chief Financial Officer


                                            AGREED AND ACCEPTED BY
                                            CEDAR BRAKES I, L.L.C.


                                            By:  CEDAR BRAKES I, L.L.C.

                                            By:    /s/ John L. Harrison
                                                   -----------------------------
                                            Name:  John L. Harrison
                                            Title: Vice President






                                       5