Document:

<PAGE>

                                                                    Exhibit 10.8

October 31, 2001

Mr. Robert F. Harrington
Commercial Manager, Elwood Energy
Peoples Energy Corporation
150 North Michigan Avenue, Suite 3900
Chicago, Illinois 60601

RE: Letter Agreement Modifying Elwood Energy LLC's Gas Transportation and
Balancing Agreement

Dear Mr. Harrington:

This Letter Agreement modifies several provisions within the Gas Transportation
and Balancing Agreement ("Agreement") and related Exhibits, dated May 1, 2001,
between Northern Illinois Gas Company d/b/a Nicor Gas Company ("Company") and
Elwood Energy LLC, Elwood Energy II, LLC and Elwood Energy III, LLC (referred
collectively as "Elwood Energy" or "Customer").  Capitalized terms used but not
defined herein shall have the meaning ascribed such terms in the Agreement.

1.   Forecast Burn Communication

     For the Non-Summer Months only, Customer, or its authorized agent, shall be
     allowed to notify Company of a change to Customer's 7:00 A.M. Forecast Burn
     and Company shall accept such change provided that;

     A.  Customer has fulfilled its initial obligation to notify Company, on or
         before 7:00 A.M. CCT on the Business Day prior to the beginning of each
         Gas Day, of Customer's Forecast Burn for the following Gas Day(s)
         expressed as its hourly and daily forecasted use of gas.

     B.  Customer, or its authorized agent, communicates such change in hourly
         and daily Forecast Burn to Company on or before 9:15 A.M. CCT on the
         Business Day prior to the beginning of each Gas Day.

     C.  Customer's communicated change to the 7:00 A.M. hourly and daily
         Forecast Burn shall be limited solely to changes in Customer's
         forecasted burn for Customer's combustion turbine units 5, 6, 7 and 8.

     D.  Customer's communicated change to the 7:00 A.M. Forecast Burn shall be
         limited solely to upward adjustments from Customer's initial forecast
         for units 5, 6, 7 and 8.

     E.  Customer's communicated change to the 7:00 A.M. Forecast Burn shall not
         exceed, in representative gas quantities, the increase in electrical
         dispatch by Customer for units 5, 6, 7 and 8 at 9:00 A.M. CCT versus
         the electrical dispatch at 7:00 A.M. CCT.

     F.  Customer's communicated change to the 7:00 A.M. Forecast Burn shall not
         exceed 1,264,000 therms per day or 79,000 therms per hour above the
         original 7:00 A.M. Forecast Burn.
<PAGE>

Mr. Robert F. Harrington
Page 2

     G.  Any change to the 7:00 A.M. Forecast Burn, communicated by Customer or
         its authorized agent to Company in accordance with the above shall be
         binding on Customer in determining any applicable Forecast Variance
         charge.

2.   Minimum Maximum Daily Nomination

     A.  For the Non-Summer Months only, in conjunction with a properly
         communicated and Company accepted change to Customer's 7:00 A.M.
         Forecast Burn, Customer, or its authorized agent, may notify Company of
         any corresponding and desired change in Customer's requested range of
         gas deliverability for the Gas Day(s), both in aggregate and by
         individual pipeline, provided such requested change in gas
         deliverability is received by Company on or before 9:15 A.M. CCT on the
         Business Day prior to the Gas Day.

     B.  In the event there is a properly communicated and Company accepted
         change to Customer's 7:00 A.M. Forecast Burn by Company, Company shall
         have the ability to redetermine Customer's Minimum Maximum Daily
         Nomination (MMDN), as determined by Company and communicated to
         Customer, on or before 8:00 A.M. CCT. Any such corresponding
         redetermination in MMDN quantities by Company shall be communicated to
         Customer on or before 9:45 A.M. CCT on the Business Day prior to the
         Gas Day(s).

     C.  Company's ability to redetermine Customer's 8:00 A.M. MMDN quantities
         shall only exist when there is a properly communicated and Company
         accepted change to Customer's 7:00 A.M. Forecast Burn. Revisions to
         MMDN quantities by Company may only be in an upward direction.

     D.  Company's right to redetermine Customer's 8:00 A.M. MMDN quantities
         shall not exceed the applicable and corresponding changes in hourly and
         daily Forecast Burn as submitted by Customer in a properly communicated
         and Company accepted change to Customer's 7:00 A.M. Forecast Burn.
         Customer agrees to abide by any such changes in MMDN quantities invoked
         by Company.

3.   Nominations

     A.  For the Non-Summer Months only, in conjunction with a properly
         communicated change to Customer's 7:00 A.M. Forecast Burn, Customer, or
         its authorized agent, shall notify Company by 10:30 A.M. CCT of the
         quantity of gas to be delivered by individual pipelines and in total
         and electronically nominated to Company on or before 11:30 A.M. CCT,
         within any revised MMDN quantities, if applicable, for the next Gas
         Day(s).

     B.  Nominations by Customer, or its authorized agent, will be accepted by
         Company if received electronically by Company no later than 11:30 A.M.
         CCT on the Business Day prior to the Gas Day.

     C.  For the Gas Days of Sunday and Monday and where in conjunction with a
         properly communicated and Company accepted change to Customer's 7:00
         A.M. Forecast Burn and any subsequent revision to Customer's MMDN
         quantities, Customer shall be permitted to change its daily nomination
         on applicable interstate pipelines, and such nomination changes will be
         accepted by Company, if submitted by Customer or its authorized agent,
         and communicated to Company's Gas Control via facsimile no later than
         11:30 A.M. CCT on the calendar day prior to the Gas
<PAGE>

Mr. Robert F. Harrington
Page 3

         Day, provided that such nomination change is mutually agreeable between
         Company and Customer.

4.   Term

     A.  This Letter Agreement shall be effective for an eight (8) month term
         beginning on October 1, 2001 and ending May 31, 2002 (Non-Summer
         Months), inclusive of the beginning and ending dates. This Letter
         Agreement may be extended for an additional Non-Summer Month period(s)
         by mutual agreement between Company and Customer.

     B.  Unless otherwise agreed upon, the terms of this Letter Agreement shall
         not be applicable on Critical Days declared by Company or Peoples Gas
         Light and Coke Company or on Gas Days when the Company forecasts
         Effective Degree Days to be greater than or equal to sixty (60)
         Effective Degree Days.

     This Letter Agreement shall be considered as an Amendment to the Gas
     Transportation and Balancing Agreement and related Exhibits, dated May 1,
     2001, between Company and Customer, and in full compliance with Section 36,
     as set forth in the Agreement. In the event of any conflict between this
     Letter Agreement and the Agreement or any Exhibits to the Agreement
     including the Communications Protocol, this Letter Agreement shall apply.
     Unless detailed above, no other provisions of the Agreement shall be
     considered modified.

     If the above is acceptable to you, please indicate by executing the Letter
     Agreement in the space provided below.

     Sincerely,

     /s/ Theodore J. Lenart
     Theodore J. Lenart
     Assistant Vice President, Supply Ventures

     Agreed to and Accepted by:

     By:       /s/ Tony Belcher
            -------------------------

     Print:    Tony Belcher
            -------------------------

     Title:    General Manager
            -------------------------

     Date:     12-11-01
            -------------------------<PAGE>

                                                                    Exhibit 10.9

                          ELWOOD GENERATION FACILITY

           AMENDED AND RESTATED OPERATION AND MAINTENANCE AGREEMENT

     This AMENDED AND RESTATED OPERATION AND MAINTENANCE AGREEMENT (the
"Agreement") is made and entered into as of October 1, 2001 by and between
ELWOOD ENERGY LLC, a Delaware limited liability company ("Owner"), and DOMINION
ELWOOD SERVICES COMPANY, INC., a Virginia corporation ("Operator").

                                    RECITALS

     WHEREAS, Owner and Operator entered into an Operation and Maintenance
Agreement, dated as of June 18, 1999 (the "Original Agreement"), whereby Owner
retained the Services (as defined herein) of Operator for the operation and
maintenance of Units 1 through 4 of the Facility (as defined herein), and
Operator agreed to perform the Services upon the terms and conditions set forth
in the Original Agreement;

     WHEREAS, Operator entered into additional Operation and Maintenance
Agreements with Elwood Energy II, LLC and Elwood Energy III, LLC, each dated
March 23, 2001 (the "Merged Agreements"), governing the operation and
maintenance of Units 5 and 6 and Units 7 through 9 of the Facility,
respectively;

     WHEREAS, Elwood II and Elwood III have since merged with and into Owner,
making Owner the owner of Units 5 through 9 of the Facility and a party to the
Merged Agreements; and

     WHEREAS, Owner and Operator desire to restate the Original Agreement in its
entirety as set forth herein, and to enter into this Agreement for the purpose
of governing the operation and maintenance of all of Units 1 through 9 of the
Facility by Operator from and after the Effective Date (as defined herein).

     NOW THEREFORE, in consideration of the mutual covenants, undertakings and
conditions set forth below, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree to amend, restate, and replace in its
entirety the Original Agreement, as follows:

                                   ARTICLE 1
                                   AGREEMENT

     Section 1.1  AGREEMENT. This Agreement consists of the general terms and
                  ----------
conditions set forth herein, as well as the following appendices hereto, which
are incorporated herein and made part hereof:

                                       1
<PAGE>

     Appendix A - Scope of Services

     Appendix B - Compensation

     Appendix C - Communication Protocols

If the terms and conditions of Articles 1 through 15 of this Agreement conflict,
vary or are inconsistent with any portion of Appendices A, B or C hereto, the
terms of Articles 1 through 15 of this Agreement shall control and be given
priority, and all items in such Appendices shall be subject to the terms of
Articles 1 through 15 hereof.  This Agreement (including the Appendices)
contains the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior negotiations, undertakings and
agreements, whether oral or written, between the parties with respect to the
subject matter hereof.  Neither party will be bound by nor deemed to have made
any representations, warranties, commitments or undertakings with respect to the
subject matter hereof, except those contained herein.

     Section 1.2  RELATIONSHIP OF THE PARTIES.  Operator has been retained by
                  ----------------------------
Owner as an independent contractor to operate, maintain and manage the Facility
on behalf of Owner in accordance with the Project Agreements. Owner has
delegated to Operator overall responsibility for operating, maintaining and
managing the Facility to ensure that the Facility is available to produce
electric energy for sale by Owner and meets all requirements under the Project
Agreements. Neither Operator nor any of its employees, subcontractors or agents
shall be deemed to be an employee, partner, joint venturer or holder of any
position as agent of Owner, except to the extent that this Agreement expressly
grants Operator the authority to act on behalf of Owner. To the extent necessary
to fulfill the requirements of 18 C.F.R. (S)365.3(a)(1)(iii), Operator shall be
considered Owner's agent.

     Section 1.3  REPRESENTATIVES.  Each of Owner and Operator shall designate a
                  ----------------
primary representative and secondary representative (each, a "Designated
Representative") to act on its behalf in overseeing the performance of this
Agreement. Owner and Operator may change their respective Designated
Representatives upon written notice to the other party. Designated
Representatives shall be the primary means for communication and all other
interactions between Owner and Operator that are required under the terms and
conditions of this Agreement. The secondary Designated Representative shall act
in the absence of the primary Designated Representative. Designated
Representatives shall have the power and authority to bind their respective
principals under the terms of this Agreement, with any required internal
corporate approvals with respect to such authority being the responsibility of
each representative to obtain from his or her principal.

                                   ARTICLE 2
                                  DEFINITIONS

     Section 2.1  Definitions.  Unless otherwise required by the context in
                  ------------
which any defined term appears, the following defined terms shall have the
meanings specified in this Article 2.

                                       2
<PAGE>

     "Administrative Procedures Manual" has the meaning set forth in Section
      --------------------------------
5.1.

     "Affiliate" means, when used with respect to any Person, any Person or
      ---------
entity controlling, controlled by or under common control with such Person.  For
the purposes of this definition, the term "controlling" (and, with correlative
meanings, the terms "controlled by" and "under common control with") shall mean
the possession of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting securities
or by contract or agency or otherwise.

     "Agreement" means this Amended and Restated Operation and Maintenance
      ---------
Agreement, including the Appendices hereto, as the same may be amended or
supplemented by the parties from time to time.

     "Annual Budget" has the meaning set forth in Section 5.2(a).
      -------------

     "Annual Facility Operating Plan" has the meaning set forth in Section 5.2.
      ------------------------------

     "Annual Operating Fee" means an annual operating fee paid to Operator
      --------------------
during each Contract Year as set forth in Section 7.3.

     "Arbitration Notice" has the meaning set forth in Section 14.1.
      ------------------

     "Bankruptcy" means a situation in which (i) a party shall file a voluntary
      ----------
petition in bankruptcy or shall be adjudicated as bankrupt or insolvent, or
shall file any petition or answer or consent seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief for itself under the present or future applicable federal, state or other
statute or law relative to bankruptcy, insolvency, or other relief for debtors,
or shall seek or consent to or acquiesce in the appointment of any trustee,
receiver, conservator or liquidator of such party or of all or any substantial
part of its properties (the term "acquiesce" as used in this definition includes
the failure to file a petition or motion to vacate or discharge any order,
judgment or decree within thirty (30) days after entry of such order, judgment
or decree); (ii) a court of competent jurisdiction shall enter an order,
judgment or decree approving a petition filed against any party seeking a
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under the present or any future federal bankruptcy act, or any
other present or future applicable federal, state or local statute or law
relating to bankruptcy, insolvency, or other relief for debtors, and such party
shall acquiesce and such decree shall remain unvacated and unstayed for an
aggregate of sixty (60) days (whether or not consecutive) from the date of entry
thereof, or a trustee, receiver, conservator or liquidator of such party shall
be appointed with the consent or acquiescence of such party and such appointment
shall remain unvacated and unstayed for an aggregate of sixty (60) days whether
or not consecutive; (iii) a party shall admit in writing its inability to pay
its debts as they mature; (iv) a party shall give notice to any Person of
insolvency or pending insolvency, or suspension or pending suspension of
operations; or (v) a party shall make an assignment for the benefit of creditors
or take any other similar action for the protection or benefit of creditors.

                                       3
<PAGE>

     "Base Index" means the GDP-IPD published for the calendar quarter
      ----------
immediately prior to the Effective Date.

     "Business Day" means any day other than a Saturday, Sunday or other day on
      ------------
which commercial banks are authorized or required to close in Illinois.

     "ComEd" means Commonwealth Edison Company, an Illinois corporation.
      -----

     "Common Facilities Agreement" means that certain Common Facilities
      ---------------------------
Agreement dated April 16, 1999 between Peoples Energy Resources Corp., as
assignee of The Peoples Gas Light and Coke Company, and Elwood Energy LLC, as
the same may be amended, modified and supplemented from time to time.

     "Contract Year" means: (i) for the first Contract Year, that period from
      -------------
the Effective Date to and including December 31 of such year; and (ii) for each
Contract Year thereafter, the calendar year.

     "Dispute" has the meaning set forth in Section 14.1.
      -------

     "Easements" means any easements, licenses or other agreements for the use
      ---------
of real property granted to or by Owner for the benefit of any real property
connected or related to the Facility.

     "Effective Date" means the date of this Agreement as set forth in the first
      --------------
paragraph of this Agreement.

     "Elwood LLC Operating Agreement" means the Amended and Restated Operating
      ------------------------------
Agreement of Elwood Energy LLC, dated as of August 3, 2001, between Peoples
Elwood LLC, Dominion Elwood, Inc. and any Persons subsequently admitted as
members in accordance with the terms thereof.

     "Environmental Claim" means any and all suits, sanctions, liabilities,
      -------------------
legal proceedings, claims, demands, losses, costs and expenses of whatever kind
or character, including, without limitation, attorneys' fees, civil fines or
penalties or other expenses incurred, assessed or sustained by or against Owner
or Operator as a result of or in connection with environmental matters pursuant
to Section 10.2 hereof.

     "Environmental Law" means any and all federal, state and municipal permits,
      -----------------
codes, ordinances, laws, rules and regulations and judgments, decrees,
injunctions, writs or orders of any court, arbitrator, governmental agency or
authority relating to actual or potential effect on human health, safety or the
environment of the activities in, at or around the Facility contemplated by this
Agreement, including, but not limited to, (i) emission, discharges, spills,
releases or threatened releases of pollutants, contaminants, Hazardous
Materials, or hazardous or toxic materials or wastes onto land or into ambient
air, surface water, ground water, wetlands or septic systems; (ii) the use,
treatment, storage, disposal, handling or containment of Hazardous

                                       4
<PAGE>

Materials or hazardous and/or toxic wastes, material products or by-products (or
of equipment or apparatus containing Hazardous Materials); or (iii) pollution.

     "EPC Contracts" means each of (i) the Agreement for Engineering,
      -------------
Procurement, Construction & Installation Services for the Facility, dated as of
July 23, 1998, between General Electric Company and Owner; (ii) the Agreement
for Engineering, Procurement, Construction & Installation Services for the
Elwood Generation Facility Phase II Units 3 & 4, dated as of September 25, 1998,
between General Electric Company and Owner; (iii) the Agreement for Engineering,
Design, Procurement, Construction & Installation Services for the Facility Units
5 & 6, dated as of July 31, 2000 between General Electric Company and Owner;
(iv) the Agreement for Engineering, Design, Procurement, Construction &
Installation Services for the Facility Units 7 & 8, dated as of July 31, 2000
between General Electric Company and Owner; (v) the Agreement for Engineering,
Design, Procurement, Construction & Installation Services for the Facility Unit
9, dated as of September 20, 2000 between General Electric Company and Owner;
and (vi) any other agreement entered into by Owner or its Affiliates for
engineering, design, procurement, construction or installation of power
generating facilities and related assets located at or near the Facility.

     "Facility" means the nominally 1350 megawatt ("MW") simple cycle peaking
      --------
power generating facility and related assets, together with up to 2500 MW of
additional combined cycle and simple cycle power generating facilities and
related assets, to be constructed on certain real property in Elwood, Illinois.

     "Financing Document" means any of the agreements, instruments or other
      ------------------
documents between Owner and Lender(s) pursuant to which financing or refinancing
will be provided for the Facility.

     "First Party" has the meaning set forth in Section 14.2.
      -----------

     "Five Year Budget" has the meaning set forth in Section 5.2(d).
      ----------------

     "Force Majeure Event" means an event, condition or circumstance beyond the
      -------------------
reasonable control of, and not due to the fault or negligence of, the party
affected, and which could not have been avoided by due diligence and use of
reasonable efforts, which prevents the performance by such affected party of its
obligations hereunder; provided, that a "Force Majeure Event" shall not be
                       --------
deemed to have occurred or to be continuing unless:  (i) the affected party
shall give the other party written notice describing the particulars of each
event as soon as is reasonably practicable, (ii) the suspension of performance
is of no greater scope and of no longer duration than is reasonably required by
such event, (iii) no obligations of the affected party which arose before such
event are excused as a result of such event, and (iv) the affected party uses
all reasonable efforts to prevent, overcome and/or mitigate the effects of such
event.  Subject to the foregoing, "Force Majeure Event" shall include, as to
Operator, a shortage of fuel of appropriate quality or quantity (despite
operation by Operator in conformance with the Fuel Supply Agreements), and as to
either party, explosion and fire (in either case to the extent not attributable
to the negligence of the affected party), flood, earthquake, storm or other
natural calamity or act of God, strike or

                                       5
<PAGE>

other labor dispute, war, insurrection or riot, actions or failures to act by
governmental entities or officials, failure to obtain governmental permits or
approvals (despite timely application therefor and due diligence) and changes in
laws, rules, regulations, orders or ordinances affecting operation of the
Facility not pending on the Effective Date hereof.

     "Fuel Supply Agreements" means any and all agreements entered into by Owner
      ----------------------
for the balancing, delivery, management and supply of fuel for the Facility,
including, without limitation, that certain Gas Transportation and Balancing
Agreement, dated as of May 1, 2001, between Owner and Northern Illinois Gas
Company d/b/a Nicor Gas Company, and that certain Fuel Supply and Management
Agreement, dated as of May 1, 2001 between Owner and Cinergy Marketing &
Trading, LLC.

     "GDP-IPD" means the final Gross Domestic Product Implicit Price Deflator
      -------
Index published for each quarter by the United States Department of Commerce,
or, if such index is discontinued, such other comparable replacement index as
the parties designate.

     "Hazardous Material(s)" means any and all "hazardous substances,"
      ---------------------
"hazardous wastes," "hazardous materials," "toxic substances," "waste,"
"pollutant" or "contaminant" as any such terms may be defined in any
Environmental Law, or the regulations promulgated thereunder, or case law
interpreting the same, or any other pollutant, material or substance that is
regulated under any Environmental Law or that may be the subject of liability
for costs of response or remediation under any Environmental Law.

     "Interconnection Agreements" means the three Interconnection Agreements,
      --------------------------
dated as of April 23, 1999, January 4, 2001 and January 4, 2001, respectively,
between ComEd and Owner, as the same may be amended, supplemented or modified
from time to time.

     "Laws" means (i) all applicable federal, state and local laws, treaties,
      ----
ordinances, codes, rules and regulations, judgments, decrees, injunctions, writs
and orders or directives of any court, arbitrator or governmental agency or
authority, (ii) all Environmental Laws, and (iii) all permits, licenses,
governmental standards, approved plans, agreements, filings, authorizations,
approvals, easements or rights of way required by or entered into with any
federal, state or local governmental department, commission, board, bureau,
agency or other governmental authority, which are applicable to the Facility or
its operations, including those pertaining to employment, health and safety.

     "Lender(s)" means (i) any Person that, from time to time, has made loans to
      ---------
Owner, its successors or permitted assigns for the financing or refinancing of
the Facility or any part thereof or which are secured by the Facility or any
part thereof, (ii) the holder(s) of indebtedness evidencing any such loans,
(iii) any Person acting on behalf of such holders to which any holders' rights
under any Financing Documents have been transferred, any trustee on behalf of
any such holders, or (iv) any Person who purchases the Facility in connection
with a sale-leaseback or other lease arrangement in which Owner is the lessee of
the Facility pursuant to a net lease.

     "Notices" has the meaning set forth in Section 15.8.
      -------

                                       6
<PAGE>

     "Operating Manuals" means the operating data, design drawings,
      -----------------
specifications, vendors' manuals, warranty requirements, procedures (including
those for maintenance of the Facility and environmental and safety compliance),
and similar materials with respect to the Facility.

     "Operator" means Dominion Elwood Services Company, Inc., a Virginia
      --------
corporation.

     "Operator Indemnified Party" has the meaning set forth in Section 10.1(b).
      --------------------------

     "Owner" means Elwood Energy LLC, a Delaware limited liability company.
      -----

     "Owner Indemnified Party" has the meaning set forth in Section 10.1(a).
      -----------------------

     "Owner's Customer" means any purchaser of the capacity associated with
      ----------------
and/or electric energy generated from the Facility, including, without
limitation, purchasers under any Power Sales Agreement.

     "Person" means any individual, partnership, corporation, limited liability
      ------
company, association, business, trust, government or political subdivision
thereof, governmental agency or other entity.

     "Power Sales Agreement" means any agreement pursuant to which Owner agrees
      ---------------------
to provide electric energy and/or capacity to a third party and the third party
agrees to purchase such electric energy and/or capacity from Owner.

     "Premises Agreement" means (i) that certain Ground Lease, dated as of
      ------------------
September 30, 1998 (the "Ground Lease"), between The Peoples Gas Light and Coke
Company and Owner, as the same may be amended, supplemented or modified from
time to time, pursuant to which Owner leases a portion of the Facility site and
(ii) upon execution thereof, the Purchase and Sale Agreement, as referred to in
Article 17 of the Ground Lease.

     "Project Agreements" means the material agreements relating to the
      ------------------
Facility, including any Power Sales Agreement, any Fuel Supply Agreement, any
EPC Contract, any Interconnection Agreement, the Common Facilities Agreement,
any Premises Agreement, the Easements, the Elwood LLC Operating Agreement, the
Financing Documents, this Agreement and all other permits and licenses required
for the operation, maintenance and management of the Facility.

     "Provisional Acceptance Date" means either July 18, 1999 for Units 1
      ---------------------------
through 4 of the Facility, May 9, 2001 for Units 5 and 6 of the Facility or May
7, 2001 for Units 7 through 9 of the Facility, as applicable.

     "Prudent Utility Practice" means any of the practices, methods, and acts
      ------------------------
required or approved by the System Operator or engaged in or approved by a
significant portion of the electric utility industry in the geographic region
covered by the Mid-America Interconnected Network during the relevant time
period, or any of the practices, methods and acts which, in the exercise of
reasonable judgment in light of the facts known or that reasonably should have
been

                                       7
<PAGE>

known at the time a decision was made, could have been expected to accomplish
the desired result at a reasonable cost consistent with good business practices,
reliability, safety and expedition. Prudent Utility Practice is not intended to
be limited to the optimum practice, method, or act, to the exclusion of all
others, but rather is a spectrum of possible practices, methods or acts
generally accepted in the geographic region covered by the Mid-America
Interconnected Network.

     "Reference Index" means, for any Contract Year, the GDP-IPD published for
      ---------------
the calendar quarter immediately prior to the first day of such Contract Year.

     "Reference Rate" means the rate published in the Money Rates table of The
      --------------                                                       ---
Wall Street Journal, from time to time, as the "prime rate", plus 1%.
-------------------

     "Reimbursable Costs" has the meaning set forth in Section 7.2.
      -------------------

     "Renewal Date" has the meaning set forth in Section 8.1.
      ------------

     "Second Party" has the meaning set forth in Section 14.2.
      ------------

     "Section" means a section or paragraph of this Agreement, unless
      -------
specifically stated otherwise.

     "Services" has the meaning set forth in Article 3.1.
      --------

     "System Operator" means any Person that is responsible as system operator
      ---------------
for the transmission system to which the Facility is connected.

                                   ARTICLE 3
                                   SERVICES

     Section 3.1  SCOPE OF SERVICES.  Operator shall operate, maintain and
                  ------------------
manage the Facility and, in connection therewith, shall perform the duties set
forth herein (including, without limitation, the duties set forth in Sections
4.2 and 15.16) and in Appendix A (collectively, the "Services"). The Parties may
amend, modify or expand the scope of the Services at any time (including,
without limitation, if the Facility is converted to or incorporates combined
cycle operations) upon the written consent of the Parties to such amendment,
modification or expansion of the Services. From and after the Effective Date,
Operator shall have primary responsibility and control in connection with
performance of the Services.

     Section 3.2  STANDARDS FOR PERFORMANCE OF THE SERVICES.  Operator shall
                  ------------------------------------------
perform the Services required under this Agreement, including those set forth in
Appendix A, in a prudent, reasonable, and efficient manner and in accordance
with (i) Operating Manuals, the Administrative Procedures Manual and applicable
vendor warranties, (ii) the applicable Annual Facility Operating Plan and Annual
Budget, (iii) all applicable Laws, (iv) Prudent Utility Practices, (v) the
Project Agreements, (vi) the requirements of any System Operator, and (vii) all
insurance policies specified in Article 9 of this Agreement. Operator shall use
all reasonable

                                       8
<PAGE>

efforts to optimize the useful life of the Facility and to minimize Reimbursable
Costs and Facility outages or other unavailability.

    Section 3.3  OPERATOR'S PERSONNEL STANDARDS.  Operator shall provide and
                 -------------------------------
make available as reasonably necessary all labor and professional, supervisory
and managerial personnel as are required to perform the Services. Such personnel
shall be qualified to perform the duties to which they are assigned and shall
meet the requirements for Facility personnel under the Project Agreements. All
individuals employed by Operator to perform the Services shall be employees of
Operator, and their working hours, rates of compensation and all other matters
relating to their employment shall be determined solely by Operator (subject to
Owner's approval rights with respect to the Annual Budget), and Operator shall
retain sole responsibility with respect to labor matters in connection with
performance of the Services. With respect to hiring personnel and employment
policies, Operator shall comply with all applicable Laws and shall exercise
control over labor relations in a reasonable manner consistent with the intent
and purpose of this Agreement. Notwithstanding the foregoing, Operator
acknowledges and agrees that without Owner's approval, Operator has no authority
to enter into any contracts with respect to labor matters that purport to bind
or otherwise obligate Owner.

     Section 3.4  COMPLIANCE.  Operator shall comply with all Laws applicable to
                  -----------
the operation, maintenance and management of the Facility and the performance of
the Services. Operator shall apply for and obtain, and Owner shall assist
Operator in applying for and obtaining, all necessary permits, licenses and
approvals (and renewals of the same) required to allow Operator to do business
or perform the Services in the jurisdictions where the Services are to be
performed. Operator shall provide reasonably necessary assistance to Owner to
secure all permits, licenses and approvals (and renewals of the same), which
Owner is required to obtain from or file with any governmental agency regarding
the Facility including those relating to water and sewer use, chemical and other
waste (including Hazardous Materials) storage, disposal, testing and safety and
to file such reports, notices, and other communications.

     Section 3.5  OPERATING RECORDS AND REPORTS.  Operator shall maintain at the
                  ------------------------------
Facility operating logs, records and reports documenting the operation and
maintenance of the Facility, all in form and substance sufficient to meet
Owner's reporting requirements under the Project Agreements, and shall maintain
current revisions of drawings, specifications, lists, clarifications and other
materials related to operation and maintenance of the Facility provided to
Operator by Owner and vendors. Operator shall provide Owner reasonably necessary
assistance in connection with Owner's compliance with reporting requirements
under the Project Agreements, applicable Laws or any other agreement to which
Owner is a party relating to the Facility. Such assistance shall include
providing reports, records, logs and other information which Owner may
reasonably request as to the Facility or its operation.

     Section 3.6  NO LIENS OR ENCUMBRANCES.  Operator shall keep and maintain
                  -------------------------
the Facility free and clear of all liens and encumbrances resulting from any
action of Operator or work done at the request of Operator, except for such
liens or encumbrances resulting directly from nonpayment of any amounts due and
owing to Operator from Owner under this Agreement.

                                       9
<PAGE>

     Section 3.7  NO ACTION.  Except where such action is expressly permitted by
                  ----------
this Agreement, Operator shall not take any action that would cause a default
under any Project Agreement.

     Section 3.8  EMERGENCY ACTION.  If an emergency affecting the safety or
                  -----------------
protection of natural Persons or endangering the Facility or property located at
or near the Facility occurs, Operator shall promptly notify Owner and take all
necessary action to attempt to prevent or mitigate any such threatened damage,
injury or loss, provided, however, that Operator shall make reasonable efforts
to minimize any cost associated with such remedial action.

     Section 3.9  ACTION IN EXTRAORDINARY CIRCUMSTANCES.  If (A) an unplanned
                  --------------------------------------
outage of the Facility or major Facility equipment occurs or Operator reasonably
believes that such occurrence is imminent, and (B) Operator has made reasonable,
but unsuccessful, efforts to notify and communicate with Owner regarding such
occurrence or imminent occurrence in accordance with Appendix C, then Operator
shall take all necessary action to attempt to prevent or mitigate such unplanned
outage of the Facility or major Facility equipment, provided, however, that
Operator (i) shall make reasonable efforts to minimize any cost associated with
such remedial action, (ii) shall continue to attempt to notify and communicate
with Owner regarding the occurrence and the remedial action and (iii) shall not
expend more than an aggregate of five hundred thousand dollars ($500,000) per
Contract Year for any such remedial actions.

                                  ARTICLE 4
                            OWNER RESPONSIBILITIES

     Section 4.1  INFORMATION.  Owner shall provide Operator with all vendor
                  ------------
manuals, spare parts lists, Facility data books and drawings which are provided
to Owner pursuant to any Project Agreement or by any contractor responsible for
construction, installation, repair or maintenance of the Facility or any portion
thereof. Subject to the standards of performance set forth in Section 3.2,
Operator shall be entitled to rely upon such information in performance of the
Services. Owner shall also provide Operator with copies of all Project
Agreements and any amendments thereto and any other documents which define the
Facility's operating requirements.

     Section 4.2  TEARDOWN AND OVERHAUL OF MAJOR EQUIPMENT AND CAPITAL
                  ----------------------------------------------------
IMPROVEMENTS.  The cost of all major equipment teardowns and overhauls and all
-------------
capital improvements shall be the responsibility of Owner. Operator shall
promptly notify Owner in writing of any such teardowns and overhauls of major
equipment or capital improvements that Operator believes are necessary or
advisable together with a proposed schedule for completing such repairs or
improvements. To the extent reasonably possible, the cost of all major equipment
teardowns and overhauls and all capital improvements shall be incorporated into
the applicable Annual Budget. If such costs have been incorporated into an
approved Annual Budget or if Owner has otherwise consented in writing to
reimburse Operator for the costs of such major equipment teardowns and overhauls
or capital improvements, Operator shall schedule, coordinate, contract and
oversee the performance of such activities and

                                       10
<PAGE>

shall be responsible for monitoring and enforcing compliance by the contractor
performing such work, including taking such steps, short of litigation, to
enforce any warranties granted to Owner by such contractor in accordance with
Section 15.16 of this Agreement.

     Section 4.3  ANNUAL BUDGET AND FACILITY OPERATING PLAN.  In accordance with
                  ------------------------------------------
Section 5.2, Owner shall be responsible for approval of the Annual Budget, the
Annual Facility Operating Plan and the Five Year Budget.

                                   ARTICLE 5
                        PROCEDURES, PLANS AND REPORTING

     Section 5.1  ADMINISTRATIVE PROCEDURES MANUAL.  The parties have approved
                  ---------------------------------
an administrative procedures manual including procedures for (i) organization
and reporting, (ii) correspondence and review, (iii) procurement and
contracting, and (iv) accounting, bookkeeping and record-keeping (the
"Administrative Procedures Manual"). The Administrative Procedures Manual shall
remain in effect for the term of this Agreement, subject to such revision and
amendment as may be proposed by either party and consented to by the other party
in writing.

     Section 5.2  ANNUAL FACILITY OPERATING PLAN AND BUDGET.
                  ------------------------------------------

            (a)  Adoption.  At least ninety (90) days before the first day of
                 ---------
     each Contract Year, Operator shall prepare and submit to Owner a proposed
     annual budget for such Contract Year, established on a monthly basis, which
     shall include a separate operating budget and capital budget and shall set
     forth, in detail acceptable to Owner, anticipated operations, repairs and
     capital improvements, routine maintenance and overhaul schedules,
     procurement (including equipment acquisitions and spare parts and
     consumable inventories (excluding fuel) indicating a breakdown of capital
     items and expense items), staffing, personnel and labor activities
     (including unit rates for labor and holidays to be observed),
     administrative activities, and other work proposed to be undertaken by
     Operator, together with an itemized estimate, in detail acceptable to
     Owner, of all Reimbursable Costs to be incurred in connection therewith.
     Such proposed annual budget shall be accompanied by a proposed annual
     operating plan setting forth the underlying assumptions and implementation
     plans in connection with the proposed annual budget. Any actions to be
     performed by Operator under the proposed annual operating plan shall be
     consistent with Operator's obligations set forth in this Agreement. If
     requested by Operator, Owner shall provide Operator any cost information in
     Owner's possession from previous Contract Years applicable to items in the
     proposed annual budget. Owner shall review Operator's proposed annual
     budget and annual operating plan within thirty (30) days following receipt
     thereof, and may, by written request, require changes, additions, deletions
     and modifications thereto. Owner and Operator will then meet and use their
     reasonable commercial efforts to agree upon a final budget and plan (the
     "Annual Budget" and "Annual Facility Operating Plan", respectively), which
     shall be approved in writing by both parties. Except to the extent that the
     terms of Sections 3.8 and 3.9 permit Operator to take actions which are
     outside the final Annual

                                       11
<PAGE>

     Budget without the consent of Owner, the final Annual Budget and Annual
     Facility Operating Plan shall remain in effect throughout the applicable
     Contract Year, subject to revisions and amendments proposed by either party
     and consented to in writing by the other party.

            (b)  Changes.  Operator shall notify Owner as soon as reasonably
                 --------
     possible of any significant deviations or discrepancies from the
     projections contained in the Annual Budget or Annual Facility Operating
     Plan.

            (c)  Failure to Adopt.  If, by the first day of any Contract Year
                 -----------------
     after the first Contract Year, the parties are unable to reach agreement
     concerning any item or portion of the Annual Budget for such Contract Year,
     then the amount(s) of such item or portion of the Annual Budget for such
     Contract Year shall be equal to one hundred five percent (105%) of the
     amounts for the corresponding item or portion of the Annual Budget for the
     preceding Contract Year.

            (d)  Five Year Budget.  In addition to proposing and adopting Annual
                 -----------------
     Budgets and Annual Facility Operating Plans as provided for above, at least
     sixty (60) days before the first day of each Contract Year, Operator shall
     prepare and submit to Owner a proposed budget for the next five (5)
     Contract Years or the remaining term of the Agreement, established on an
     annual basis, which shall include a separate operating budget and capital
     budget and shall set forth, in detail reasonably acceptable to Owner,
     anticipated operations, repairs and capital improvements, routine
     maintenance and overhaul schedules, procurement (including equipment
     acquisitions and spare parts and consumable inventories (excluding fuel)
     indicating a breakdown of capital items and expense items), staffing,
     personnel and labor activities (including unit rates for labor and holidays
     to be observed), administrative activities, and other work proposed to be
     undertaken by Operator, together with an estimate, in detail reasonably
     acceptable to Owner, of all Reimbursable Costs to be incurred in connection
     therewith, accompanied by the underlying assumptions and implementation
     plans in connection with the proposed five-year budget. Owner shall review
     Operator's proposed five year budget within thirty (30) days following
     receipt thereof, and may, by written request, require changes, additions,
     deletions and modifications thereto. Owner and Operator will then meet and
     use their reasonable commercial efforts to agree upon a final five-year
     budget (the "Five Year Budget"), which shall be approved in writing by both
     Parties. If a final Five Year Budget shall not be approved by both parties
     in its entirety, the five year budget submitted by Operator, with Owner's
     final suggested changes, additions, deletions and modifications thereto,
     shall serve as the Five Year Budget. The Five Year Budget shall be used
     only for planning and comparison purposes, and shall not constrain Operator
     in its actions or expenditures; provided, however, that Operator shall be
     required to conform in its operations to the Annual Budget and Annual
     Facility Operating Plan as provided in this Agreement.

     Section 5.3  OPERATING DATA AND RECORDS.  Operator shall monitor and record
                  ---------------------------
all operating data and information which (i) Owner must report to any Person
under any

                                       12
<PAGE>

Project Agreement, (ii) Owner must report to any government agency or other
Person under any applicable Laws and (iii) Owner reasonably requests. Operator
shall report such operating data and information to Owner (A) within fifteen
(15) Business Days following the last day of the respective billing periods
established in connection with each Project Agreement, (B) as required by Owner
to support monthly invoicing under the Project Agreements, and (C) upon request
at any time by Owner, within fifteen (15) Business Days following such request.
Such operating data shall include information from operating logs, meter and
gauge readings and maintenance records.

     Section 5.4  ACCOUNTS AND REPORTS.  Operator shall cooperate with Owner in
                  ---------------------
complying with the reporting requirements set forth in the Project Agreements
and shall, from and after the Effective Date, furnish or cause to be furnished
to Owner the following reports concerning the Facility operations and the
Services:

            (a)  Monthly Reports.  Within ten (10) Business Days following the
                 ----------------
     last day of each calendar month, Operator shall submit: (i) a progress
     report, in detail acceptable to Owner, covering all activities during such
     month with respect to operations and maintenance (including information
     regarding amount of electric energy generated, hours of operation, fuel
     consumed, heat rate, availability, outages, accidents and emergencies),
     capital improvements, labor relations and other significant matters and
     Services, which report shall include a comparison of such items to
     corresponding values for the preceding month and Contract Year and a
     listing of any significant operating problems along with immediately
     planned remedial actions and a brief summary of major activities planned
     for the next reporting period and (ii) a statement setting forth all
     Reimbursable Costs paid or incurred in such month, which statement shall
     itemize, in detail acceptable to Owner, the computation of such
     Reimbursable Costs and shall state whether or not the Facility operations
     have conformed to the applicable Annual Facility Operating Plan and Annual
     Budget during such reporting period and if not, the extent and reasons for
     such deviation and any remedial action therefor.

            (b)  Annual Reports.  As soon as available, and in any event within
                 ---------------
     sixty (60) days after the end of each Contract Year, Operator shall submit
     an annual report describing, in detail substantially similar to that
     contained in the monthly reports referred to in Section 5.4(a), all of the
     Facility activities for such Contract Year and presenting a comparison of
     such Facility activities with the goals set forth in the Annual Facility
     Operating Plan and Annual Budget for such Contract Year and with those
     achieved during the preceding Contract Year, if any, and an explanation of
     any substantial deviations. Within thirty (30) days after submission of
     each annual report, Operator shall meet with Owner to review and discuss
     the report and any other aspects of Facility operations that Owner may wish
     to discuss.

            (c)  Litigation: Permit Lapses.  Upon obtaining knowledge thereof,
                 --------------------------
     Operator shall submit prompt written notice to Owner of: (i) any event of
     default under any of the Project Agreements; (ii) any litigation, claims,
     disputes or actions, threatened or filed, concerning the Facility or the
     Services; (iii) any refusal or threatened refusal to grant,

                                       13
<PAGE>

     renew or extend, or any action pending or threatened that might affect the
     granting, renewal or extension of, any license, permit, warranty, approval,
     authorization or consent relating to the Facility or the Services; and (iv)
     any dispute with any governmental authority relating to the Facility or the
     Services.

            (d)  Other Information.  Operator shall promptly submit to Owner any
                 ------------------
     material information concerning new or significant aspects of the
     Facility's activities and, upon Owner's request, shall promptly submit any
     other information concerning the Facility or the Services.

     Section 5.5  COMMUNICATION OF CERTAIN EVENTS.  Operator shall communicate
                  --------------------------------
certain events to Owner and third parties in accordance with the communication
protocols set forth in Appendix C hereto.

                                  ARTICLE 6
                           LIMITATIONS ON AUTHORITY

     Section 6.1  GENERAL LIMITATIONS.  Notwithstanding any provision in this
                  --------------------
Agreement to the contrary, unless previously approved by Owner in writing or
through Owner's approval of the Annual Budget, neither Operator nor any
employee, representative, contractor or other agent of Operator, shall:

            (a)  Disposition of Assets.  Sell, lease, pledge, mortgage, convey,
                 ----------------------
     or make any license, exchange or other transfer or disposition of any
     property or assets of Owner, including any property or assets purchased by
     Operator hereunder the cost of which is a Reimbursable Cost;

            (b)  Contract.  Make, enter into, execute, amend, modify or
                 ---------
     supplement any contract or agreement (i) on behalf of, in the name of, or
     purporting to bind Owner or (ii) that prohibits or otherwise restricts
     Operator's right to assign such contract or agreement to Owner at any time;

            (c)  Expenditures.  Make or consent or agree to make any expenditure
                 -------------
     for equipment, materials, assets or other items which would be a
     Reimbursable Cost, except in conformity with the Annual Budget; provided,
     however, that solely in connection with actions taken by Operator pursuant
     to Sections 3.8 and 3.9, Operator may, without prior approval from Owner,
     make limited expenditures outside the Annual Budget in accordance with
     Sections 3.8 and 3.9;

            (d)  Other Actions.  Take or agree to take any other action that
                 --------------
     materially varies from the applicable Annual Facility Operating Plan,
     Annual Budget or the requirements of any Project Agreement;

            (e)  Lawsuits and Settlements.  Settle, compromise, assign, pledge,
                 -------------------------
     transfer, release or consent to the compromise, assignment, pledge,
     transfer or release of, any claim, suit, debt, demand or judgment against
     or due by, Owner or Operator, the cost of

                                       14
<PAGE>

     which, in the case of Operator, would be a Reimbursable Cost hereunder, or
     submit any such claim, dispute or controversy to arbitration or judicial
     process, or stipulate in respect thereof to a judgment, or consent to do
     the same;

            (f)  Liens.  Create, incur or assume any lien upon the Facility;
                 ------

            (g)  Transactions on Behalf of Others.  Engage in any other
                 ---------------------------------
     transaction on behalf of Owner or any other Person not expressly authorized
     by this Agreement or that violates applicable Laws, this Agreement or any
     Project Agreement; or

            (h)  Agreements.  Enter into any agreement to do any of the
                 -----------
foregoing.

     Section 6.2  EXECUTION OF DOCUMENTS.  Any agreement, contract, notice or
                  -----------------------
other document that is expressly permitted hereunder (or under written approval
of Owner) to be executed by Operator shall be executed by the authorized
representative of Operator or, subject to prior written notice to Owner, by such
other representative of Operator who is authorized and empowered by Operator to
execute such documents.

                                   ARTICLE 7
                           COMPENSATION AND PAYMENT

     Section 7.1  PAYMENTS.  As compensation to Operator for performance of the
                  ---------
Services hereunder, Owner shall pay Operator the Annual Operating Fee (or a pro
rata portion thereof in the case of a Contract Year of less than 12 months),
and, at Owner's option, shall (i) reimburse Operator, in the manner and at the
times specified in this Article 7 and in Appendix B, as the same may be modified
from time to time, for all Reimbursable Costs or (ii) pay such Reimbursable
Costs directly to applicable third parties.

     Section 7.2  REIMBURSABLE COSTS.  Subject to (i) Owner's approval of such
                  -------------------
costs through approval of the Annual Budget, (ii) written approval of such costs
by Owner or (iii) costs incurred by Operator in accordance with Sections 3.8,
3.9 and 6.1(c), except for such costs which are caused by the gross negligence
or willful misconduct of Operator. Owner shall reimburse Operator for all costs
incurred by Operator in performing the Services, including the costs set forth
in Appendix B (collectively, the "Reimbursable Costs"). Subject to Owner's right
to modify the provisions of this Section 7.2 from time to time upon the
reasonable request of the Lenders, Owner shall pay Reimbursable Costs as
follows:

            (a)  Terms of Payments.  In order to facilitate disbursements for
                 ------------------
     Reimbursable Costs, Owner will advance to Operator on a mutually agreeable
     basis, such funds as may be required for Operator to make all payments as
     they become due in accordance with the Annual Budget. Not less than fifteen
     (15) days prior to the first day of each calendar month during the term of
     this Agreement, Operator shall submit to Owner an estimate of funds
     required for such month, which estimate shall be in accordance with the
     Annual Budget. Owner shall pay to Operator the amount of such estimate in a
     timely manner prior to the time such funds are required by Operator. Such
     advances shall be deposited in a separate account in Operator's name, as
     agent for Owner, in a bank or banks

                                       15
<PAGE>

     approved by Owner, subject to withdrawal by Operator solely for the purpose
     of making required payments. In connection therewith, within fifteen (15)
     days of the end of each month, Operator shall submit to Owner a statement
     of receipts and disbursements, in detail satisfactory to Owner, together
     with supporting documentation as set forth in Section 5.4(a).

          Reimbursement of any cost related to the Services shall not be
     construed as Owner's approval or acceptance of the Services.  No such
     Reimbursable Costs shall be incurred by Operator unless they are incurred
     in accordance with the applicable Annual Budget, as amended pursuant to
     Section 5.2, or are permitted by Sections 3.8, 3.9 and 6.1(c).  If, at any
     time during the performance of the Services, Operator becomes aware that
     Reimbursable Costs exceed or will exceed the amount provided therefor in
     the Annual Budget, as the same may have been amended pursuant to Section
     5.2, by 5% or more, Operator shall use all reasonable efforts to notify
     Owner within ten (10) days of such budget overrun and shall not, without
     Owner's approval to amend such Annual Budget or authorization to make such
     expenditure, perform any further Services that will result in or increase
     such budget overrun, except as provided in Sections 3.8, 3.9 and 6.1(c).

          Owner's refusal to promptly authorize expenditures in excess of the
     Annual Budget will relieve Operator of only those duties or obligations
     under the terms or conditions of this Agreement that can not be performed
     without the money provided by the expenditures which Owner refuses to
     approve.

          It is understood and agreed between the parties that any expenditures
     made by Operator in excess of the Annual Budget which are required to
     comply with any Law applicable to the Services or the Facility, shall be
     approved and reimbursed by Owner.  In all cases, Operator shall use its
     reasonable commercial efforts to mitigate any adverse impact resulting from
     Owner's refusal to authorize expenditures in excess of the Annual Budget.

          (b)  Adjustments and Conditions.  Notwithstanding the payment of any
               ---------------------------
     amount pursuant to the foregoing provisions, Owner shall remain entitled to
     conduct a subsequent audit and review of all Reimbursable Costs incurred
     and paid by Owner hereunder, together with any supporting documentation in
     accordance with the provisions of Section 5.4(a), for a period of two (2)
     years from and after the close of the applicable Contract Year. If,
     pursuant to such audit and review, it is determined that any amount(s)
     previously paid by Owner to Operator did not constitute a Reimbursable
     Cost, Owner may recover such amount(s) from Operator, plus interest at the
     Reference Rate calculated from and after the date that such audit
     commences, or Owner may deduct or cause to be deducted such amount from any
     payment that thereafter may become due to Operator .

     Section 7.3  ANNUAL OPERATING FEE.  For the first Contract Year and each
                  ---------------------
subsequent Contract Year, Owner shall pay to Operator the sum of fifty-four
thousand one hundred sixty-six dollars and sixty-seven cents ($54,166.67) per
month of the Contract Year, for

                                       16
<PAGE>

an annual fee of six hundred fifty thousand dollars ($650,000) (the "Annual
Operating Fee"). Beginning on the first day of the second Contract Year and on
the first day of each Contract Year thereafter, the Annual Operating Fee (and
the corresponding monthly operating fee) shall be adjusted to reflect changes in
the GDP-IPD, as follows: the Annual Operating Fee set forth in this Section 7.3,
multiplied by (ii) a fraction, the numerator of which is the Reference Index and
the denominator of which is the Base Index.

     Section 7.4  CONSENT.  Operator shall obtain Owner's prior written approval
                  --------
before incurring any expense hereunder which is not included in the Annual
Budget or otherwise permitted by Section 6.1(c).

     Section 7.5  BILLING AND PAYMENT.  Within fifteen (15) days following the
                  --------------------
end of each month, Operator shall submit the receipts and disbursements showing
Reimbursable Costs for such month in accordance with Subsection 7.2(a). Within
fifteen (15) days after receipt of any such invoice, Owner shall:

          (a) Pay Operator the sum specified in such invoice, less (i) any
     amounts previously deposited with Operator relating to such invoice, and
     (ii) any portion of such invoice amount that Owner disputes in good faith
     or is permitted to defer under this Agreement; and

          (b) With respect to any disputed portion of such invoice, provide
     Operator with a written statement explaining, in reasonable detail, the
     basis for such dispute.  The parties shall attempt to resolve any such
     disputed portion in accordance with Article 14.

     Section 7.6  INTEREST.  Any amount owed to either party under this
                  ---------
Agreement by the other party which remains unpaid more than thirty (30) days
after the date such amount is due and payable shall begin to accrue interest at
the Reference Rate commencing on the thirty-first (31st) day after such due
date.

                                   ARTICLE 8
                             TERM AND TERMINATION

     Section 8.1  TERM.  The term of this Agreement shall be from and including
                  -----
the Effective Date to and including the termination date of the Elwood LLC
Operating Agreement (the "Renewal Date"). This Agreement shall be subject to
extension for additional five (5) year periods from the Renewal Date, upon
mutual agreement of the parties hereto. Notwithstanding the foregoing, this
Agreement is subject to earlier termination pursuant to Sections 8.2, 8.3, 8.4
or 8.5.

     Section 8.2  IMMEDIATE TERMINATION BY OWNER.  Subject to the terms of any
                  -------------------------------
Financing Documents, Owner may terminate this Agreement immediately (i) upon the
Bankruptcy of Operator or (ii) upon the occurrence of a Force Majeure Event that
is not remedied within one hundred twenty (120) days of its initial occurrence.
If the Agreement is terminated by Owner pursuant to Section 8.2(i) or (ii),
Operator shall be compensated for all Reimbursable Costs incurred by Operator to
and including the date of termination. In addition, if

                                       17
<PAGE>

the Agreement is terminated by Owner pursuant to Section 8.2(ii), Operator shall
be paid all unpaid Annual Operating Fees to and including the date of
termination.

     Section 8.3  TERMINATION UPON NOTICE BY OWNER.  Subject to the terms of any
                  ---------------------------------
Financing Documents, Owner may terminate this Agreement upon ten (10) days prior
written notice to Operator in the event (i) that Operator violates, or consents
to a violation of, any Laws applicable to the Services or the Facility, which
violation has or may have a material adverse effect on the maintenance or
operation of the Facility or Owner's interest therein and Operator does not cure
such violation within thirty (30) days from the date such violation or consent
to violation is known (or, if not curable within thirty (30) days, within such
period of time as is reasonably necessary to accomplish such cure, but in no
event greater than ninety (90) days, provided that Operator diligently commences
and continues to pursue such cure to completion within such period and
reimburses and indemnifies Owner for all costs, fees, expenses and liabilities
related to such violation); or (ii) of a material breach by Operator in the
performance of the Services in accordance with the requirements of this
Agreement, if Operator does not cure such breach within thirty (30) days from
the date of receipt of a notice from Owner demanding such cure (or, if not
curable within thirty (30) days within such period of time as is reasonably
necessary to accomplish such cure, but in no event greater than ninety (90)
days, provided that Operator diligently commences and continues to pursue such
cure to completion within such period and reimburses and indemnifies Owner for
all costs, fees, expenses and liabilities related to such breach). If the
Agreement is terminated by Owner pursuant to this Section 8.3, Operator shall be
compensated for all Reimbursable Costs incurred by Operator and all unpaid
Annual Operating Fees to and including the date of termination.

     Section 8.4  OTHER TERMINATION UPON NOTICE BY OWNER.  Subject to the terms
                  ---------------------------------------
of any Financing Documents, Owner may terminate this Agreement with two (2)
months prior written notice to Operator, upon the occurrence of (a) a sale or
transfer by Owner of its rights in the Facility or a sale or transfer of all or
substantially all of the assets of or membership interests in Owner, (b)
Operator's Reimbursable Costs for Services exceeding 110% of the approved Annual
Budget with respect to Reimbursable Costs, for any two (2) consecutive full
Contract Years during the term of this Agreement, provided, however, that such
overruns are the fault of, or due to the negligent operation of the Facility by,
Operator, (c) a determination by Owner that, for any reason, it no longer
intends to continue operation of the Facility or (d) a determination by Owner,
at any time after the Renewal Date, that it desires to terminate the Agreement.
If the Agreement is terminated by Owner pursuant to this Section 8.4, Operator
shall be compensated for all Reimbursable Costs incurred by Operator and all
unpaid Annual Operating Fees to and including the date of such termination under
this Section 8.4.

     Section 8.5  TERMINATION BY OWNER WITHOUT CAUSE.  In addition to its rights
                  -----------------------------------
set forth in this Article 8, subject to the terms of any Financing Documents,
Owner reserves the right to terminate this Agreement without cause upon ninety
(90) days notice in writing to Operator. If the Agreement is terminated by Owner
pursuant to this Section 8.5, Operator shall be compensated for all Reimbursable
Costs incurred by Operator and all unpaid Annual Operating Fees to and including
the date of such termination under this Section 8.5. Such payments, together
with the termination payment set forth in Section 8.8, shall be

                                       18
<PAGE>

Operator's sole remedy in respect of such termination and shall be made by Owner
within thirty (30) days of receipt of a final invoice from Operator computed on
the foregoing basis.

     Section 8.6  TERMINATION BY OPERATOR.  Subject to the terms of any
                  ------------------------
Financing Documents, Operator may terminate this Agreement for cause upon
fifteen (15) days prior written notice to Owner in the event of: (i) Owner's
Bankruptcy; or (ii) Owner's failure to perform in a timely manner any material
obligation required to be performed by Owner hereunder and such failure is not
cured by or on behalf of Owner within thirty (30) days of Owner's receipt of a
notice from Operator demanding such cure (or, if not curable within thirty (30)
days within such period of time as is reasonably necessary to accomplish such
cure, but in no event greater than ninety (90) days, provided that Owner
diligently commences and continues to pursue such cure to completion within such
period.

     Section 8.7  FACILITY CONDITION AT END OF TERM.  Upon expiration or
                  ----------------------------------
termination of this Agreement, Operator shall remove its personnel from the
Facility. Operator shall leave the Facility in as good condition as it was on
the Effective Date, normal wear and tear and casualty excepted, and with the on-
hand supply of spare parts and consumables and any other operating items as were
provided by Owner to Operator as of the Effective Date, or such modified supply
thereof as has been approved by Owner (and shall be reimbursed for all
unreimbursed Reimbursable Costs incurred in connection therewith). All special
tools, improvements, inventory of supplies, spare parts, safety equipment,
Operating Manuals and Administrative Procedures Manuals, operating logs, records
and documents maintained by Operator pursuant to Section 3.5 (in each case, as
provided to or obtained or provided by Operator during the term of this
Agreement) and any other items furnished on a Reimbursable Cost basis under this
Agreement will be left at the Facility and will become or remain the property of
Owner without additional charge. Owner shall also have the right, in its sole
discretion, to directly assume and become liable for any contracts or
obligations that Operator may have undertaken with third parties in connection
with the Services. Operator shall execute all documents and take all other
reasonable steps requested by Owner that may be required to assign to and vest
in Owner all rights, benefits, interests and title in connection with such
contracts or obligations; provided, however, that Owner shall indemnify and hold
harmless Operator for all liabilities arising out of events and obligations
thereunder arising after the date of any such assumption. Operator shall use
commercially reasonable efforts to cooperate with Owner or a succeeding operator
to assure that the operation, maintenance and management of the Facility are not
disrupted.

     Section 8.8  TERMINATION PAYMENT.  In the event of a termination of this
                  --------------------
Agreement pursuant to Sections 8.2 (ii), 8.4 (a), 8.4 (c), 8.4 (d) or 8.5,
Operator shall be entitled, in addition to all other amounts due hereunder as of
the date of termination, to a demobilization and cancellation payment equal to
the total of all relocation and severance costs incurred with respect to
Operator's employees and all costs Operator is at such time contractually or
legally obligated to pay to its employees, or which are incurred with the prior
written approval of Owner. Severance costs for each of Operator's employees
shall equal two (2) weeks of normal forty (40) hour/week pay for each year such
employee has worked for Operator at the Facility.

                                       19
<PAGE>

     Subject to Owner's right to conduct a subsequent audit and review pursuant
to Section 8.8(a), such amounts shall be due and payable by Owner within thirty
(30) days of Operator's submission of an invoice therefor, which invoice shall
include a statement of all such costs and expenses in the form and with the
substantiation required by Section 7.2(a).  Owner shall pay any and all legal
costs incurred by Operator to collect payments under this Section 8.8.

     In the event of a termination of this Agreement by Owner other than
pursuant to Sections 8.2 (ii), 8.4(a), 8.4(c), 8.4(d) or 8.5, Operator shall
indemnify Owner against, and Owner shall be entitled to recover from Operator,
any damages, fines or penalties, or direct damages Owner suffers or incurs in
connection with, or related to, such termination by Owner, including the costs
of mobilizing and training a successor operator, provided, however, that the
aggregate amount of Operator's indemnity obligation under this Section 8.8 shall
in no event exceed the Annual Operating Fee, or portion thereof, previously paid
to Operator for the Contract Year in which the termination occurs.

            (a)   Audit.  Notwithstanding payment of any amount pursuant to this
                  ------
     Section 8.8, Owner shall remain entitled to conduct a subsequent audit and
     review of all costs incurred and paid by Owner pursuant to this Section
     8.8, together with any supporting documentation requested by Owner, for a
     period of two (2) years from and after the date of such payment. If,
     pursuant to such audit and review, it is determined that any amount(s)
     previously paid to Operator did not constitute, in whole or in part, a
     reimbursable item pursuant to this Section 8.8, Owner may recover such
     amount(s) from Operator plus interest at the Reference Rate calculated from
     and after the date such audit commences, or Owner may deduct or cause to be
     deducted such amount(s) from any payment that may be due to Operator.

                                   ARTICLE 9
                                   INSURANCE

     Section 9.1  COVERAGE.
                  ---------

            (a)   Obligation to Obtain.  Owner and Operator shall obtain and
                  ---------------------
     maintain the insurance set forth in Sections 9.1(b) and 9.1(c). Such
     insurance may be maintained under individual or blanket insurance policies.

            (b)   Operator Coverage.  Operator shall maintain from and after the
                  ------------------
     Effective Date the insurance described below with insurance companies
     acceptable to Owner and with limits and coverage provisions not less than
     the limits and coverage provisions set forth below:

                  (i)  General Liability Insurance: Liability insurance on an
          occurrence basis against claims for personal injury (including bodily
          injury and death) and property damage. Such insurance shall provide
          products, completed operations, blanket contractual, explosion,
          collapse and underground, broad form property damage coverage,
          personal injury insurance and hostile fire liability with a $1,000,000
          minimum limit per occurrence for combined bodily injury and

                                       20
<PAGE>

          property damage provided that policy aggregates, if any, shall apply
          separately to claims occurring with respect to the Facility.

                  (ii)   Automobile Liability Insurance: Automobile liability
          insurance against claims for personal injury (including bodily injury
          and death) or property damage arising out of the use of all owned,
          leased, non-owned and hired motor vehicles, including loading and
          unloading, with $1,000,000 minimum limit per occurrence for combined
          bodily injury and property damage and containing appropriate no-fault
          insurance provisions where applicable.

                  (iii)  Workers' Compensation Insurance: Workers' compensation
          insurance as required by applicable state laws, including employers
          liability insurance for all employees of Operator with a $1,000,000
          minimum limit per accident.

                  (iv)   Excess Liability Insurance: Excess liability insurance
          on an occurrence basis covering claims in excess of the underlying
          insurance described in the foregoing subsections (i), (ii) and (iii),
          with a $35,000,000 minimum limit per occurrence provided that
          aggregate limits of liability, if any, shall apply separately to
          claims occurring with respect to the Facility.

     The amounts of insurance required in the foregoing subsections (i), (ii),
(iii) and (iv) may be satisfied by Operator purchasing coverage in the amounts
specified or by any combination thereof, so long as the total amount of
insurance meets the requirements specified above. Upon mutual agreement of the
Owner, Operator may provide equivalent self-insurance in lieu of the
requirements set forth in this Section.

                  (v)    [RESERVED.]

                  (vi)   All policies of liability insurance to be maintained by
          Operator shall provide for waivers of subrogation in favor of Owner,
          the Lenders and such other persons as may be required by the Project
          Agreements. These policies shall include the following:

                         (A) To provide a severability of interests or cross
               liability clause;

                         (B) To provide that the insurance shall be primary and
               not excess to or contributing with any insurance or self-
               insurance maintained by Owner or the Lenders; and

                         (C) To name Owner, any of its Affiliates, the Lenders
               and their respective officers, agents (and such other Persons as
               may be required by the Project Agreements) as additional insureds
               in Sections 9.1(b)(i), (ii), (iv) and (v) only.

                                       21
<PAGE>

     All policies of insurance required to be maintained pursuant to Section 9.1
shall include a provision so that they cannot be canceled or coverage reduced
thereunder in a manner which affects the interests of Owner, without sixty (60)
days prior written notice to Owner, except for termination for non-payment of
premium which shall require ten (10) days prior written notice to Owner.  Owner
has the option in placing the coverages listed above and naming the Operator as
an additional insured.

          (c)  Owner Coverage.  Owner shall maintain from and after the
               ---------------
     Effective Date the insurance described below and with limits and coverage
     provisions not less than the limits and coverage provisions set forth
     below:

               (i) Liability Insurance: Liability insurance on an occurrence
          basis against claims for personal injury (including bodily injury and
          death) and property damage.  Such insurance shall provide products,
          completed operations, blanket contractual, explosion, collapse and
          underground, broad form property damage coverage, personal injury
          insurance and hostile fire liability with a thirty six million dollar
          ($36,000,000) minimum limit per occurrence for combined bodily injury
          and property damage provided that policy aggregates, if any, shall
          apply separately to claims occurring with respect to the Facility.
          Owner may provide adequate self-insurance in lieu of the requirements
          set forth in this Section.

          (d)  Cost.  All costs incurred by Operator with respect to payment of
               -----
any deductible relating to the insurance coverage set forth in this Section 9.1
(except as set forth in Section 9.3 or Section 10.1(a)) or any losses in excess
of insurance coverage and (except as set forth in Section 10.1(a)) shall be
deemed Reimbursable Costs.

     Section 9.2  CERTIFICATES.  On or before the date on which insurance must
                  -------------
be provided hereunder, each party shall furnish certificates of insurance to the
other party evidencing the insurance required of such party pursuant to this
Agreement. Each party shall cooperate with the other to ensure collection from
insurers for any loss under any such policy.

     Section 9.3  PAYMENT OF DEDUCTIBLE AMOUNTS.  Notwithstanding which party
                  ------------------------------
hereto shall have purchased, or been responsible for the purchase of, any
insurance in respect of the Facility or otherwise referred to in this Agreement,
Operator shall promptly pay to Owner any deductible amount related to any claim
against or other cost to Owner covered under any such insurance policy which
arose due to the gross negligence of Operator.

                                  ARTICLE 10
                        INDEMNIFICATION AND LIABILITIES

     Section 10.1  INDEMNIFICATION.
                   ----------------

          (a)  Indemnification by Operator.  Operator shall indemnify, defend
               ----------------------------
     and hold harmless Owner, the members thereof, and their respective
     officers, directors, employees, agents, Affiliates and representatives (the
     "Owner Indemnified Parties"), from and against any and all suits,
     sanctions, actions, liabilities, legal proceedings, claims, fines

                                       22
<PAGE>

     and penalties (to the extent reimbursement therefor is not prohibited by
     law), demands, losses, costs and expenses of whatever kind or character,
     including attorneys' fees and expenses, for injury to or death of persons
     or loss of or damage to property arising out of or in any way connected
     with, but only to the extent of, any gross negligence, fraud or willful
     misconduct on or after the Effective Date of Operator or anyone acting on
     Operator's behalf or under its instructions, including suppliers,
     subcontractors, and vendors, their subcontractors and subvendors, and the
     employees and agents of any of the foregoing in connection with this
     Agreement and Operator's obligations thereunder. Any costs or expenses
     incurred by Operator pursuant to its indemnity obligations under this
     Section 10.1(a), including the cost of deductibles with respect to the
     insurance maintained by Operator or Owner pursuant to Article 9 or losses
     in excess of such insurance coverage, shall not constitute a Reimbursable
     Cost under this Agreement.

            (b)  Indemnification by Owner.  Owner shall indemnify, defend and
                 -------------------------
     hold harmless Operator, its officers, directors, employees, agents,
     Affiliates and representatives (the "Operator Indemnified Parties") from
     and against any and all suits, sanctions, actions, liabilities, legal
     proceedings, claims, fines and penalties (to the extent reimbursement
     therefor is not prohibited by law), demands, losses, costs and expenses of
     whatever kind or character, including attorneys' fees and expenses, for
     injury to or death of persons or loss of or damage to property arising out
     of or in any connected with, but only to the extent of, any gross
     negligence, fraud or willful misconduct on or after the Effective Date of
     Owner or anyone acting on Owner's behalf or under its instructions (other
     than Operator and its suppliers, subcontractors, venders, and their
     subcontractors and vendors and any employee or agent of the foregoing),
     including suppliers, subcontractors, and vendors, their subcontractors and
     subvendors, and the employees and agents of any of the foregoing in
     connection with this Agreement and Owner's obligations thereunder.

     Section 10.2  ENVIRONMENTAL LIABILITY.
                   ------------------------

            (a)  Operator Liability.  In no event shall Operator be responsible
                 -------------------
     for present or future Environmental Claims directly or indirectly related
     to or arising out of the actual or alleged existence, generation, use,
     collection, handling, treatment, storage, transportation, recovery,
     removal, discharge or disposal of Hazardous Materials at the Facility
     and/or adjacent areas, arising from the period prior to the applicable
     Provisional Acceptance Date, except to the extent such materials are
     generated, used, collected, handled, treated, stored, transported,
     recovered, removed, discharged or disposed of by Operator in a grossly
     negligent manner. Without limiting the foregoing, Owner shall defend,
     indemnify and hold Operator and its Affiliates performing on behalf of
     Operator under this Agreement harmless against, and shall reimburse
     Operator for such Environmental Claims, except to the extent such
     Environmental Claims arise from Operator's grossly negligent or intentional
     acts.

            (b)  Owner Liability.  In no event shall Owner be responsible for
                 ----------------
     present or future Environmental Claims directly related to or arising out
     of the actual or alleged

                                       23
<PAGE>

     existence, generation, use, collection, treatment, storage, transportation,
     recovery, removal, discharge or disposal of Hazardous Materials at the
     Facility and/or adjacent areas arising out of the grossly negligent or
     intentional acts of Operator or any of its officials, representatives,
     agents, or employees, and Operator shall defend, indemnify and hold Owner
     harmless against, and shall reimburse Owner for such Environmental Claims;
     provided, however, that nothing contained herein shall be construed as
     requiring Operator to take any corrective action with respect to any
     Hazardous Materials in existence prior to the date of this Agreement unless
     directed to do so by a governmental authority or by Owner in order to
     comply with any applicable Environmental Laws, in which case the corrective
     actions so undertaken shall be deemed an Environmental Claim pursuant to
     Section 10.2(a) hereof.

            (c)  Governmental Actions.  If compliance at the Facility with any
                 ---------------------
     applicable Environmental Laws is required during the term of this
     Agreement, Owner with Operator's assistance shall be responsible for
     preparing and filing with the appropriate governmental authority any
     notices, applications, plans, submissions or other materials and
     information necessary for such compliance; provided that the costs of any
     outside consultants, sampling and remedial work shall be deemed an
     Environmental Claim, which costs shall be borne by either Owner or Operator
     in accordance with Sections 10.2(a) and 10.2(b) hereof; provided, however,
     that such consulting or sampling costs that are incorporated into the
     Annual Budget or are otherwise agreed upon in writing by Owner shall be
     Reimbursable Costs hereunder. Any compliance action taken by Operator
     pursuant to any such Law shall be performed only after consultation with
     Owner. Costs and expenses associated with any such compliance action shall
     only be incurred by Operator with Owner's prior written consent, unless a
     governmental authority requires Operator to incur such costs and expenses
     prior to obtaining such written consent.

                                  ARTICLE 11
                           LIMITATIONS OF LIABILITY

     Section 11.1  LIMITATIONS OF LIABILITY.
                   -------------------------

            (a)  Consequential Damages.  Notwithstanding any provision in this
                 ----------------------
     Agreement to the contrary, Operator and Owner each agree not to assert
     against the other any claim, demand or suit for consequential, incidental,
     indirect or special damages arising from any aspect of the performance or
     nonperformance of the other party or any third-party engaged by such other
     party under this Agreement, and each party hereto waives any such claim,
     demand or suit against the other in connection with this Agreement.

            (b)  Damages Limited to Annual Operating Fee.  Notwithstanding any
                 ----------------------------------------
     provision in this Agreement to the contrary, the aggregate liability of
     Operator (except for those claims that are subject to the provisions of
     Section 10.1(a) or covered by the insurance set forth in Article 9, and
     then only to the extent such claims are actually

                                       24
<PAGE>

     covered thereby, after giving effect to any deductibles, exclusions,
     limits, or self-insured retentions thereunder) with respect to claims of
     Owner arising out of the performance or nonperformance of the Services or
     any other work or obligations set forth under this Agreement, whether based
     on contract, indemnity, tort (including negligence), strict liability or
     otherwise, shall in no event exceed, during any Contract Year, the Annual
     Operating Fee payable to Operator during such Contract Year plus the amount
     necessary to satisfy Operator's indemnification responsibilities under
     Article 10.

            (c)  Personal Liability Limited.  Notwithstanding any provision in
                 ---------------------------
     this Agreement to the contrary, Operator and Owner each understand and
     agree that there shall be absolutely no personal liability on the part of
     any of the members, partners, officers, employees, directors, agents,
     authorized representatives or Affiliates of Owner or Operator for the
     payment of any amounts due hereunder, or performance of any obligations
     hereunder. Operator shall look solely to the assets of Owner for the
     satisfaction of each and every remedy of Operator in the event of any
     breach by Owner and Owner shall look solely to the assets of Operator for
     the satisfaction of each and every remedy of Owner in the event of any
     breach by Operator. In furtherance of the foregoing, Owner agrees with
     respect to Operator and Operator agrees with respect to Owner, that it
     shall neither seek or obtain nor be entitled to seek or obtain, any
     deficiency or other judgment against Owner or Operator, as the case may be,
     for any action or inaction on the part of any of its respective members,
     partners, officers, employees, directors, agents, authorized
     representatives or Affiliates.

            (d)  Survival. The parties further agree that the waivers and
                 ---------
     disclaimers of liability, indemnities, releases from liability, and
     limitations on liability expressed in this Agreement shall survive
     termination or expiration of this Agreement, and shall apply at all times
     (unless otherwise expressly indicated), whether in contract, equity, tort
     or otherwise, regardless of fault, negligence, strict liability, or breach
     of warranty of the party indemnified, released or whose liabilities are
     limited, and shall extend to the members, partners, principals, officers,
     employees, controlling persons, executives, directors, agents, authorized
     representatives and Affiliates of such party.

            (e)  Exclusivity.  The provisions of this Agreement constitute
                 ------------
     Operator's and Owner's exclusive liability, respectively, to each other,
     and Operator's and Owner's exclusive remedy, respectively, with respect to
     the Services to be performed hereunder and Owner hereby releases Operator
     and its Affiliates performing Services hereunder, and Operator hereby
     releases Owner and its Affiliates performing its obligations hereunder,
     from any further liability whether arising in contract, tort (including
     negligence), strict liability, or otherwise.

                                  ARTICLE 12
                                CONFIDENTIALITY

     Section 12.1  OPERATOR.  Operator agrees to hold in confidence for a period
                   ---------
of five (5) years from the date of disclosure, any information supplied to
Operator by Owner or its

                                       25
<PAGE>

members, partners, officers, employees, directors, agents, authorized
representatives or Affiliates. Operator further agrees, to the extent requested
by the supplier of such information, to require its subcontractors, vendors,
suppliers and employees to enter into appropriate nondisclosure agreements
relative to such information, prior to the receipt thereof.

     Section 12.2  OWNER.  Owner agrees to hold in confidence for a period of
                   ------
five (5) years from the date of disclosure, any information supplied to Owner by
Operator or its members, partners, officers, employees, directors, agents,
authorized representatives or Affiliates, provided that Owner may disclose such
information requested by Lenders (including their agents and advisors) as long
as such Lenders enter into appropriate nondisclosure agreements. Owner further
agrees, to the extent requested by the supplier of such information, to require
its members and contractors to enter into such appropriate nondisclosure
agreements relative to such information, prior to their receipt thereof.

     Section 12.3  EXCEPTIONS.  The provisions of this Article shall not apply
                   -----------
to information within any one of the following categories or any combination
thereof:

          (a) Information that was in the public domain prior to the receiving
     party's receipt thereof or that subsequently becomes part of the public
     domain by publication or otherwise, other than as a result of disclosure by
     the receiving party or any of its representatives; or,

          (b) Information that the receiving party can show was in its
     possession prior to receipt thereof from the disclosing party; or

          (c) Information received by a party from a third party having no
     obligation of secrecy with respect thereof.

     No information obtained or prepared by a receiving party or any of its
representatives regarding the other party shall be deemed to be in the public
domain or in the prior possession of the receiving party or its representatives
unless it is specifically included in more general information that is in the
public domain or in the prior possession of any of the foregoing.

     Section 12.4  REQUIRED DISCLOSURE.  In the event that a receiving party or
                   --------------------
any of its respective representatives is requested or required by applicable
law, regulation or legal process to disclose any of the information that is
otherwise required to remain confidential pursuant to this Article 12, the
receiving party will notify the other party, as well as its legal counsel,
promptly in writing so that the other party may seek a protective order or other
appropriate remedy, or, in the other party's sole discretion, waive compliance
with the terms of this Agreement. The receiving party agrees not to, and agrees
that none of its respective representatives will, oppose any action by the other
party to obtain a protective order or other appropriate remedy. In the event
that no such protective order or other remedy is obtained, or that the other
party waives compliance with the terms of this Agreement, the receiving party
and its respective representatives will furnish only that portion of the
information which the receiving party is advised by its outside counsel is
legally required and the receiving party will exercise its reasonable best
efforts to obtain reliable outside assurance that confidential treatment will be

                                       26
<PAGE>

accorded such information. This Agreement does not alter the rights of either
party to object to the Laws or proceedings requiring the disclosure.

                                  ARTICLE 13
                           TITLE, DOCUMENTS AND DATA

     Section 13.1  MATERIALS AND EQUIPMENT.   Title to all materials, equipment,
                   ------------------------
tools, supplies, consumables, spare parts and other items purchased or obtained
by Operator on a Reimbursable Cost basis hereunder shall pass immediately to and
vest in Owner upon the passage of title from the vendor or supplier thereof,
provided, however, that such transfer of title shall in no way affect Operator's
obligations as set forth in this Agreement.

     Section 13.2  DOCUMENTS.  All materials and documents prepared or developed
                   ----------
by Operator, its employees, representatives or contractors in connection with
the Facility or performance of the Services, including all manuals, data,
drawings, plans, specifications, reports and accounts, shall become Owner's
property when prepared, and Operator, its agents, employees, representatives, or
contractors shall not use such materials and documents for any purpose other
than performance of the Services, without Owner's prior written approval. All
such materials and documents, together with any materials and documents
furnished to Operator, its agents, employees, representatives, or contractors by
Owner, shall be delivered to Owner upon expiration or termination of this
Agreement and before final payment is made to Operator.

     Section 13.3  REVIEW BY OWNER.
                   ----------------
    All materials and documents referred to in Section 13.2 hereof shall be
available for review by Owner or Lenders (including their agents or advisors) at
all reasonable times during development and promptly upon completion.  All such
materials and documents required to be submitted for approval by Owner shall be
prepared and processed in accordance with the requirements and specifications
set forth in the Administrative Procedures Manual.  However, Owner's approval of
materials and documents submitted by Operator shall not relieve Operator of its
responsibility for the correctness thereof or of its obligation to meet all
requirements of this Agreement.

     Section 13.4  PROPRIETARY INFORMATION.  Where materials or documents
                   ------------------------
prepared or developed by Operator or its agents, employees, representatives or
contractors contain proprietary or technical information, systems, techniques,
or know-how previously known to, or acquired from third parties by, Operator,
its agents, employees, representatives, or contractors, Operator, its agents,
employees, representatives, and contractors shall have unrestricted rights to
use or dispose of such information, systems, techniques, or know-how as they see
fit, provided, however, that Owner shall have the right to the same to the
extent necessary for operation or maintenance of the Facility.

                                   ARTICLE 14
                          DISPUTE RESOLUTION; REMEDIES

     Section 14.1  SENIOR MANAGEMENT.  If during the term of this Agreement any
                   ------------------
issue, dispute or controversy ("Dispute") arises hereunder, then the designated
representatives of Owner and Operator shall promptly confer and exert their best
efforts in good faith to reach a

                                       27
<PAGE>

reasonable and equitable resolution of such Dispute. If such representatives are
unable to resolve such Dispute within five (5) Business Days, the Dispute shall
be referred within two (2) Business Days of the lapse of the aforementioned five
(5) Business Day period to the responsible senior management of each party for
resolution. Neither party shall seek any other means of resolving any Dispute
arising in connection with this Agreement until both parties' responsible senior
management have had at least five (5) Business Days to resolve the Dispute
following referral of the Dispute to such responsible senior management. Each
party shall have the right to join in any such proceeding any other party or
entity having an interest therein. If the parties are unable to resolve the
Dispute in accordance with the foregoing procedure, either party may then, at
any time, deliver notice to the other party of its intent to submit the Dispute
to arbitration, which notice shall include the specific issues concerning the
Dispute which must be resolved (the "Arbitration Notice").

     Section 14.2  DESIGNATION OF ARBITRATORS.  At any time following the 30th
                   ---------------------------
day after delivery of an Arbitration Notice, either party (for purposes of this
Article 14, the "First Party") may give notice to the other party (for purposes
of this Article 14, the "Second Party") that it has designated an arbitrator.
Within twenty (20) days of the delivery of the aforesaid notice of designation,
the Second Party shall be required to designate a second arbitrator and to
notify the First Party of such designation. Within twenty (20) days of the
designation of the second arbitrator, the two designated arbitrators shall meet
and shall jointly designate a third arbitrator who shall be neutral and
impartial. Arbitrators shall be qualified by education and experience in the
subject matter of the Dispute and issues to be arbitrated. The arbitrator
designated by the party-appointed arbitrators shall be the Chairman of the
arbitration panel. The award rendered by the arbitrators shall be in writing and
shall set forth in reasonable detail the facts of the Dispute, the decision of
the arbitrators and their reasons therefor and shall apportion the costs of the
arbitration. The award rendered in any arbitration hereunder shall be final and
binding upon the parties and judgment thereon may be entered in any court having
jurisdiction for its enforcement. During the pendency of any arbitration,
Operator shall continue to perform its obligations hereunder.

     Section 14.3  FAILURE TO DESIGNATE ARBITRATOR.  If for any reason (i) the
                   --------------------------------
Second Party shall fail timely to designate an arbitrator after notice of
designation is delivered by the First Party, (ii) the two party-appointed
arbitrators fail timely to designate a third arbitrator, or (iii) the third
arbitrator shall fail for any reason to serve, such arbitrator(s) shall be
designated by the American Arbitration Association upon the demand of either
party.

     Section 14.4  VENUE.  All proceedings before the arbitrators shall be held
                   ------
at such place as Owner and Operator may agree. Failing such agreement, they
shall be held in Chicago, Illinois.

     Section 14.5  APPLICABLE ARBITRATION RULES.  The parties agree that any
                   -----------------------------
Dispute being resolved by arbitration hereunder shall be determined pursuant to
the provisions set forth herein and pursuant to the applicable commercial
arbitration rules of the American Arbitration Association then in effect insofar
as such rules are not inconsistent with the provisions set forth herein.

                                       28
<PAGE>

     Section 14.6  LIMITED AUTHORITY.  The authority of the arbitrators shall be
                   ------------------
limited to the specific Dispute and related issue(s) in controversy as
designated by the parties.

                                   ARTICLE 15
                            MISCELLANEOUS PROVISIONS

     Section 15.1  ASSIGNMENT.  Except as set forth in this Section 15.1,
                   -----------
neither party may assign its rights or obligations under this Agreement without
the prior written consent of the other party hereto, except that this Agreement
may be assigned without such consent (i) by Owner to any successor of Owner, to
a Person acquiring all or substantially all of the Facility, to a wholly-owned
subsidiary of Owner, to a Lender or any purchaser of the Facility upon the
exercise of remedies by a Lender, and (ii) by Operator to an Affiliate (provided
that Operator first provides to Owner reasonable assurances that such Affiliate
is capable of performing the obligations of Operator under this Agreement).
Notwithstanding the foregoing, Operator hereby consents to the assignment by
Owner of a security interest in this Agreement to its Lenders. Operator further
agrees to execute documentation to evidence such consent reasonably required by
the Lenders typical for project finance (including an opinion of its counsel in
typical form regarding such consent and this Agreement). Operator recognizes
that such consent may grant certain rights to such Lenders, which shall be fully
developed and described in the consent documents, including but not limited to
(i) this Agreement shall not be amended or terminated (except for termination
pursuant to the terms of this Agreement) without the consent of Lenders, (ii)
the Lenders shall be given notice of, and a reasonable time period at least
sixty (60) days beyond that granted to Owner, to cure any Owner breach or
default of this Agreement, (iii) if a Lender forecloses, takes a deed in lieu or
otherwise exercises its remedies pursuant to any security documents, that
Operator shall, at Lenders' request and provided that any breach by Owner has
been cured (to the extent any such breaches can be cured by the payment of
money), continue to perform all of its obligations hereunder, and Lender or its
nominee may perform in the place of Owner, and may assign this Agreement to
another party in place of Owner, and enforce all of Owner's rights hereunder,
(iv) that Lender(s) shall have no liability under this Agreement except during
the period of such Lender(s)' ownership and/or operation of the Facility, (v)
that Operator shall accept performance in accordance with this Agreement by
Lender(s) or its (their) nominee, (vi) that Operator shall make all payments to
an account designated by Lender(s), and (vii) that Operator shall make
representations and warranties to Lender(s) as Lender(s) may reasonably request
with regard to (A) Operator's corporate existence, (B) Operator's corporate
authority to execute, deliver, and perform this Agreement, (C) the binding
nature of this Agreement on Operator, (D) receipt of regulatory approvals (if
any) by Operator with respect to its performance under this Agreement, and (E)
whether any defaults by Owner are known by Operator then to exist under this
Agreement.

     Section 15.2  ACCESS.
                   -------

          (a)  Owner. Owner, Lenders and their respective agents and
               ------
     representatives shall have access at all times to the Facility and any
     documents, materials and records and accounts relating to Facility
     operations for purposes of inspection and review. Upon the request of
     Owner, Lender or their respective agents and representatives, Operator
     shall

                                       29
<PAGE>

     make available to such Persons and provide them with access to any
     operating data and all operating logs.

          (b)  Cooperation.  During any such inspection or review of the
               ------------
     Facility, each of Owner, Lender and their respective agents and
     representatives shall use its reasonable commercial efforts to cause
     authorized visitors to comply with Operator's safety and security
     procedures and to conduct such inspection and review in a manner which
     causes minimal interference with Operator's activities. Operator agrees to
     cooperate fully with Owner, Lender and their respective agents and
     representatives in providing requested information and documentation for
     the support of any financial or legal transactions associated with the
     Facility.

     Section 15.3  NOT FOR BENEFIT OF THIRD PARTIES.  This Agreement and each
                   ---------------------------------
and every provision hereof and thereof is for the exclusive benefit of the
parties hereto and not for the benefit of any third party; provided that the
provisions hereof are also for the benefit of the Lenders (i) to the extent such
provisions require the consent, approval or satisfaction of, or the payment to
or for the benefit of the Lenders, or (ii) as provided in Article 15.1 or in any
assignment of Owner's rights hereunder to the Lenders to secure Owner's
obligations under any applicable Financing Document or any Consent to Assignment
referred to in Article 15.1 requiring the consent, approval or satisfaction of
the Lenders is also for the benefit of the Lenders.

     Section 15.4  FORCE MAJEURE.  If either Owner or Operator is rendered
                   --------------
wholly or partially unable to perform its obligations under this Agreement
(other than payment obligations) due to a Force Majeure Event, the party
affected by such Force Majeure Event shall be excused from whatever performance
is impaired by such Force Majeure Event, provided that the affected party shall
promptly, upon learning of such Force Majeure Event and ascertaining that it
will affect its performance hereunder, give notice to the other party stating
the nature of the Force Majeure Event, its anticipated duration and any action
being taken to avoid or minimize its effect. The burden of proof shall be on the
party asserting excuse from performance due to a Force Majeure Event.

          (a)  Scope.  The suspension of performance shall be of no greater
               ------
     scope and no longer duration than that which is necessary. The excused
     party shall use its reasonable commercial efforts to remedy its inability
     to perform. No obligations of either party which arose before the
     occurrence causing the suspension of performance and which could and should
     have been fully performed before such occurrence shall be excused as a
     result of such occurrence.

     Section 15.5  AMENDMENTS. No amendments or modifications of this Agreement
                   -----------
shall be valid unless evidenced in writing and signed by duly authorized
representatives of both parties.

                                       30
<PAGE>

     Section 15.6  SURVIVAL.  Notwithstanding any provisions herein to the
                   ---------
contrary, the obligations set forth in Articles 7, 10, 12 and 14, and the
limitations of liabilities set forth in Article 11, shall survive in full force
despite the expiration or termination of this Agreement.

     Section 15.7  NO WAIVER.  It is understood and agreed that any delay,
                   ----------
waiver or omission by Owner or Operator to exercise any right or power arising
from any breach or default by the other party with respect to any of the terms,
provisions, or covenants of this Agreement shall not be construed to be a waiver
by Owner or Operator of any subsequent breach or default of the same or other
terms, provisions or covenants on the part of Owner or Operator.

     Section 15.8  NOTICES. All notices, requests, consents, demands and other
                   --------
communications (collectively "Notices") required or permitted to be given under
this Agreement shall be in writing and shall be given to each party at its
address or fax number set forth in this Section 15.8 or at such other address or
fax number as such party may hereafter specify for the purpose by notice to the
other party and shall be either delivered personally or sent by fax or telegraph
or registered or certified mail, return receipt requested, postage prepaid, or
by a nationally recognized overnight courier service. A notice shall be deemed
to have been given (i) when transmitted if given by fax or telegraph, provided
the transmittal is confirmed or (ii) upon receipt by the intended recipient, if
given by any other means. Notices shall be sent to the following addresses:

     To Operator:

          DOMINION ELWOOD SERVICES COMPANY, INC.
          5000 Dominion Boulevard
          Glen Allen, Virginia 23060
          Attention: Tony Belcher
          Tel:  (804) 273-3269
          Fax: (804) 273-2303

     To Owner:

          ELWOOD ENERGY LLC
          c/o Peoples Energy Resources Corp.
          150 North Michigan Avenue
          Suite 3900
          Chicago, Illinois 60601
          Attention:  Robert Harrington
          Tel:  (312) 762-1616
          Fax: (312) 762-1635

     Section 15.9  FINES AND PENALTIES.  If during the term of this Agreement
                   --------------------
any governmental or regulatory authority or agency assesses any fines or
penalties against Operator or Owner arising from Operator's failure to operate
and maintain the Facility in accordance with applicable Laws without Owner's
prior written consent, such fines and penalties shall, subject to

                                       31
<PAGE>

the limitations set forth in Article 11, be the sole responsibility of Operator
and shall not be deemed a Reimbursable Cost.

     Section 15.10  REPRESENTATIONS AND WARRANTIES.  Each party represents and
                    -------------------------------
warrants to the other party that:

          (a) such party has the full power and authority to execute, deliver
     and perform this Agreement and to carry out the transactions contemplated
     hereby;

          (b) the execution and delivery of this Agreement by such party and the
     carrying out by such party of the transactions contemplated hereby have
     been duly authorized by all requisite corporate or limited liability
     company action, and this Agreement has been duly executed and delivered by
     such party and constitutes the legal, valid and binding obligation of such
     party, enforceable against it in accordance with the terms hereof, subject
     to limitations imposed by bankruptcy, insolvency, reorganization,
     moratorium or other similar laws relating to or affecting the enforcement
     of creditors' rights generally and general principles of equity;

          (c) to the best of such party's knowledge, no authorization, consent,
     approval or order, or notice to or registration, qualification, declaration
     or filing with, any governmental authority, is required for the execution,
     delivery and performance by such party of this Agreement or the carrying
     out by such party of the transactions contemplated hereby, other than
     regulatory and similar approvals needed with respect to the construction
     and operation of the Facility;

          (d) to the best of such party's knowledge, none of the execution,
     delivery and performance by such party of this Agreement, the compliance
     with the terms and provisions hereof, and the carrying out of the
     transactions contemplated hereby, materially conflicts or will conflict
     with or result in a material breach or violation of any of the terms,
     conditions, or provisions of any law, governmental rule or regulation or
     organizational document, as amended, or bylaws, as amended, of such party
     or any applicable order, writ, injunction, judgment or decree of any court
     or governmental authority against such party or by which it or any of its
     properties is bound, or any loan agreement, indenture, mortgage, bond,
     note, resolution, contract or other agreement or instrument to which such
     party is a party or by which it or any of its properties is bound, or
     constitutes or will constitute a default thereunder or will result in the
     imposition of any third party lien upon any of its properties; and

          (e) there are no legal  proceedings, arbitrations, administrative
     actions or other proceedings by or before any governmental or regulatory
     authority or agency, now pending or, to the knowledge of such party,
     threatened against such party or any of its subsidiaries that if adversely
     determined, could reasonably be expected to have a material adverse effect
     on such party's ability to perform its obligations under this Agreement.

     Section 15.11  COUNTERPARTS.  The parties may execute this Agreement in
                    -------------
counterparts, which shall, in the aggregate, when signed by both parties
constitute one and the

                                       32
<PAGE>

same instrument. Thereafter, each counterpart shall be deemed an original
instrument as against any party who has signed it.

     Section 15.12  GOVERNING LAW.  This Agreement is executed and intended to
                    --------------
be performed in the State of Illinois and the laws of that state, without regard
to its conflicts of laws rules, shall govern its construction, interpretation
and effect.

     Section 15.13  PARTIAL INVALIDITY.  If any term, provision, covenant or
                    -------------------
condition of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the rest of this Agreement shall remain in full
force and effect and in no way be affected, impaired or invalidated.

     Section 15.14  CAPTIONS.  Titles or captions of Sections contained in this
                    ---------
Agreement are inserted only as a matter of convenience and for reference, and in
no way define, limit, extend, describe or otherwise affect the scope or meaning
of this Agreement or the intent of any provision hereof.

     Section 15.15  DOLLAR AMOUNTS.  All amounts of money in this Agreement are
                    ---------------
denominated in United States of America dollars.

     Section 15.16  VENDOR'S WARRANTIES.  For Owner's benefit, Operator shall
                    --------------------
obtain from sellers of equipment, material, or services (other than the
Services), warranties against defects in materials and workmanship to the extent
such warranties are reasonably obtainable, and, to the extent of any such
warranties actually obtained, Owner releases Operator from any further liability
arising in respect of such equipment, material or services (other than the
Services) to the extent such liability is covered by any such warranty. Operator
itself shall not be liable for any such warranties, or for any defects or damage
caused by such equipment, material or services (other than the Services). Upon
Owner's request, Operator agrees to take such steps as are necessary, short of
litigation, to enforce said warranties. Each such warranty shall be enforceable
by Owner for Owner's benefit or assignable by Operator to Owner without any
further action or consent by or on the part of any third party. Unless otherwise
requested, Operator shall administer such warranties and immediately notify
Owner of any defects discovered or suspected that may be covered by such
warranties. When requested, Operator shall assign any such warranty to Owner and
assist Owner with the administration and enforcement of such warranty, or, if
such warranty is not assignable to Owner, assist Owner with the administration
and enforcement of such warranty.

     Section 15.17  ATTORNEYS' FEES.  If any action or proceeding, including any
                    ----------------
arbitration proceeding pursuant to Article 14, is brought by either party to
remedy a breach of this Agreement or to enforce any of its provisions, the
prevailing party shall be entitled to, in addition to any other relief granted
in such action or proceeding, reasonable attorneys' fees, disbursements and
court costs.

     Section 15.18  USAGE.  This Agreement shall be governed by the following
                    ------
rules of usage: (i) a reference in this Agreement to a Person includes, unless
the context otherwise requires, such Person's permitted assignees; (ii) a
reference in this Agreement to a Law, license,

                                       33
<PAGE>

or permit includes any amendment, modification or replacement to such Law,
license or permit; (iii) accounting terms used in this Agreement shall have the
meanings assigned to them by United States generally accepted accounting
principles; (iv) a reference in this Agreement to an article, section, exhibit,
schedule or appendix is to an article, section, exhibit, schedule or appendix of
this Agreement unless otherwise stated; (v) a reference in this Agreement to any
document, instrument or agreement shall be deemed to include all appendices,
exhibits, schedules and other attachments thereto and all documents, instruments
or agreements issued or executed in substitution thereof, and shall mean such
document, instrument or agreement, or replacement thereof, as amended, modified
and supplemented from time to time in accordance with its terns and as the same
is in effect at any given time; (vi) unless otherwise specified, the words
"hereof", "herein", and "hereunder" and words or similar import when used in
this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement; and (vii) the words "include" and
"including" and words of similar import used in this Agreement are not limiting
and shall be construed to be followed by the words "without limitation", whether
or not they are in fact followed by such words.

     Section 15.19  EFFECTIVE DATE.  This Agreement shall govern the rights and
                    ---------------
obligations of the parties from and after the Effective Date. Except as
otherwise provided herein, all rights and obligations of Owner and Operator
under the Original Agreement and/or the Merged Agreements relating to periods
prior to the Effective Date, shall be governed by the Original Agreement or the
appropriate Merged Agreement, as applicable.

     Section 15.20  TERMINATION OF MERGED AGREEMENTS.  Except as set forth in
                    ---------------------------------
Section 15.19 hereof, Owner and Operator hereby terminate the Merged Agreements
through the mutual agreement of the parties. All rights and obligations of Owner
and Operator relating to Units 5 through 9 of the Facility from and after the
Effective Date shall be as set forth in this Agreement.

                 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]

                                       34
<PAGE>

     IN WITNESS WHEREOF, the parties have executed this Agreement through their
duly authorized officers as of the date set forth in the preamble to this
Agreement.

                         ELWOOD ENERGY LLC

                         By: /s/ Tony Belcher
                            ------------------------------------
                         Name:  Tony Belcher
                         Title: General Manager

                         DOMINION ELWOOD SERVICES COMPANY, INC.

                         By: /s/ James W. Braswell
                            -------------------------------------
                         Name:    James W. Braswell
                         Title:   Vice President

                                       35
<PAGE>

                                  APPENDIX A
                               SCOPE OF SERVICES
                               -----------------

OPERATOR SHALL PERFORM EACH OF THE SERVICES LISTED IN THIS APPENDIX A IN
ACCORDANCE WITH THE STANDARDS REQUIRED UNDER SECTION 3.2 OF THE AGREEMENT

I.   In addition to those responsibilities described in Articles 1 through 15 of
     the Agreement, Operator shall be responsible for the implementation of the
     following programs, standards and procedures which shall require approval
     of Owner and which shall be included in the "Services".

     A.   The administrative program for establishing specific operating goals
          for each functional Facility area, for managing resources to minimize
          personnel turnover, and for qualifying personnel, to operate and
          maintain the Facility (including the basis for qualification of
          personnel).

     B.   The program for communicating and cooperating with Owner and
          governmental agencies.

     C.   The Facility management standards for conduct of operations, Facility
          safety, conduct of maintenance, housekeeping, material condition, and
          records management.

     D.   The program for preparing supporting documentation, meter readings and
          information necessary to accurately prepare, justify and support
          monthly invoices in accordance with the terms and conditions of the
          Project Agreements.

     E.   Developing the procedures used to operate the Facility as well as
          monitoring, evaluating, and proposing revisions to such procedures.

     F.   The Facility operations and monitoring program which provides the
          requirements for:

          1.   Monitoring of Facility Performance
          2.   Monthly Facility Performance Calculations and Report
          3.   Monthly Fuel Consumption Calculations and Report
          4.   Facility Permitting and Environmental Reporting
          5.   Shift Routines / Operating Practices
          6.   Control of Equipment
          7.   Facility Chemistry Control and Water Treatment
          8.   Training Programs
          9.   Operator Qualifications

                                      A-1
<PAGE>

     10.  Operating Procedures
     11.  Status of Major Equipment

G.   The maintenance program which provides the requirements for:

     1.   Maintenance Planning
     2.   Maintenance Procedures
     3.   Preventive Maintenance
     4.   Predictive Maintenance
     5.   Maintenance Training

H.   The materials management program which provides the requirements for:

     1.   Procuring Materials and Tools
     2.   Inventory Levels and Control
     3.   Renewal of Inventories

I.   The diagnostic testing program for maintaining the Facility and Facility
     equipment, including both system and component level testing.

J.   The housekeeping / cleanliness program which provides the requirements for:

     1.   Hazardous Material Control
     2.   General Facility Cleanliness
     3.   Equipment Condition Inspections
     4.   Hazardous Waste Program

K.   The problem assessment program which provides the procedure for determining
     the cause(s) of operational or equipment failures and preventing future
     failures through recommended improvements, including justification for such
     recommendations (i.e., basis of recommendation and economic analysis).

L.   The records management program for maintaining the traceability and
     documentation of Facility performance.

M.   The Facility safety program which provides the requirements for
     establishing:

     1.   Safety Monitoring
     2.   Accident Prevention Program
     3.   Accident Reporting

N.   Monthly and yearly reporting systems of Facility performance to Owner.

O.   The security program for maintaining the security of the Facility and
     surrounding area.

                                      A-2
<PAGE>

II.  Specific Requirements

     Operator's scope of Services is based on the Facility design as described
     in the EPC Contracts, the Facility Operating Manuals, vendor manuals and
     design drawings.  Operator will prepare Annual Facility Operating Plans,
     which, in part, will define the operations procedural requirements for the
     Facility to meet the requirements of the Project Agreements.

     Operator, as part of the Services, is responsible for:

     A.   Providing such trained personnel as is reasonably necessary to operate
          and maintain the Facility and provide the Services set forth in this
          Agreement.

     B.   Operating and maintaining the Facility in accordance with the approved
          Annual Facility Operating Plan.

     C.   Submitting an Annual Facility Operating Plan.

          Not later than ninety (90) days prior to the first (1st) day of each
          Contract Year, Operator will submit an Annual Facility Operating Plan
          to Owner.  In addition to the requirements set forth in Section 5.2.1
          of the Agreement, the Annual Facility Operating Plan will detail
          maintenance, outage, and overhaul schedules, Facility staffing, known
          capital and expense budget items, operating plans, and will provide
          the underlying assumptions used in developing the proposed budgets and
          anticipated availability for the period.  Owner will review and
          approve the Annual Facility Operating Plan.  Such approval will become
          the basis for reimbursement under the Annual Budget.

     D.   Planning and managing on-site operations and maintenance activities,
          including:

          1.   Assuring that operational goals and operating plans are
               consistent with the Annual Facility Operating Plan.

          2.   Assuring that the Facility is operated in accordance with this
               Agreement and in a safe, reliable, efficient, and prudent manner.

          3.   Assuring that operations and maintenance personnel are trained
               and qualified for their assigned responsibilities and tasks, and
               that such qualification is maintained.

          4.   Assuring that the Facility meets contract, regulatory, and
               environmental requirements set forth in the Project Agreements or
               otherwise identified by Owner or Operator.

                                      A-3
<PAGE>

          5.   Managing and controlling costs consistent with budget
               requirements.

          6.   Planning, scheduling and managing work and maintenance
               activities.

          7.   Defining and documenting operational technical requirements.

          8.   Defining and delineating responsibilities between Operator and
               Owner and identifying reporting requirements.

          9.   Establishing labor relations and personnel programs that will
               meet state and federal requirements and encourage employee
               retention.

          10.  Maintaining a current inventory of materials and procuring all
               services, spare parts, operational materials, consumables, office
               equipment, tools and shop equipment, or any other items or
               materials required to operate or maintain the Facility.  Operator
               will identify required items, cost, quantity and need date. The
               cost of any item or service shall be reimbursed by Owner in
               accordance with this Agreement.

          11.  Controlling outages, both planned and unplanned, by using
               detailed and integrated plans and schedules, and resource
               management.

          12.  Maintaining Facility performance levels by using routine system
               and component performance testing.

          13.  Maintaining a file of preplanned outage-related work to allow for
               efficient use of any forced outage downtime.

          14.  Establishing open purchase order or contract agreements with
               Facility equipment vendors, industrial suppliers, jobbers, and
               maintenance contractors in accordance with Project Agreements to
               ensure timely response to Facility maintenance needs.

          15.  Promptly notifying Owner in writing of any teardowns and
               overhauls of major equipment or capital improvements that
               Operator believes are necessary or advisable together with a
               proposed schedule for completing such repairs or improvements.
               If the costs of such teardowns, overhauls or capital improvements
               have been incorporated into an approved Annual Budget or if Owner
               has otherwise consented in writing to reimburse Operator for such
               costs, Operator shall schedule, coordinate, contract and oversee
               the performance of such activities and shall be responsible for
               monitoring and enforcing compliance by the contractor performing
               such work, including taking such steps, short of litigation, to
               enforce any

                                      A-4
<PAGE>

               warranties granted to Owner by such contractor in accordance with
               Section 15.16 of this Agreement.

     E.   Performing certain tasks, duties, responsibilities and obligations
          assigned to Owner under the Interconnection Agreements, including, but
          not limited to, the following:

          1.   Performing routine surveillance of all equipment routinely used
               to communicate with the System Operator.

          2.   Notifying the System Operator of any routine maintenance
               activities which will require clearance from the System Operator.

          3.   Providing the System Operator and Owner's Customers with all
               required information regarding the Facility's availability.

          4.   Responding to dispatch orders from the System Operator and
               Owner's Customers.

          5.   Monitoring and adjusting the reactive output of the generators to
               maintain transmission voltage levels within the capability of the
               Facility's generators.

          6.   Responding to and correcting generator dynamic instability in
               accordance with instructions from the System Operator.

     F.   Execution or oversight of routine preventive maintenance ("PM")
          activities in accordance with Prudent Utility Practice, including,
          without limitation:

          1.   Lubrication Checks
          2.   Cleaning / Flushing
          3.   Preservation
          4.   Fluid Changes and Replacement
          5.   Visual Inspections
          6.   Operational Monitoring
          7.   Vibration Analysis
          8.   Chemical Analysis (water testing)
          9.   Trend Analysis
          10.  Calibration
          11.  Measurements
          12.  Adjustments
          13.  Hydrostatic Tests
          14.  Lube Oil Analysis (sampling only)
          15.  Replacement of Wear / Sacrificial Parts
          16.  Resistance Testing

                                      A-5
<PAGE>

     G.   Execution or oversight of routine corrective maintenance ("CM")
          activities in accordance with Prudent Utility Practices to
          troubleshoot, inspect, and repair the equipment upon identification
          and detection of certain conditions, including without limitation:

          1.   Physical fault conditions such as:

               a.   Blocked / stopped flow
               b.   Fractures / break / breaches
               c.   Cracks
               d.   Distortion / displacement
               e.   Corrosion / discoloration

          2.   Out of specification conditions such as:

               a.   High / low flow, pressure, temperature, or chemistry
               b.   Off voltage
               c.   Out of limits / adjustments
               d.   Erratic output
               e.   Intermittent / spurious operation
               f.   Failure to control / hold
               g.   High / low output
               h.   Improper timing

          3.   Demand fault conditions such as failure to:

               a.   Start / run / operate
               b.   Stop
               c.   Open
               d.   Close
               e.   Move / release / respond

          4.   Abnormal characteristics such as:

               a.   Overheating
               b.   Noise
               c.   Vibration
               d.   Chatter
               e.   False response

          5.   Leakage conditions such as:

               a.   Leakage to surrounding environment
               b.   Leakage past seats / stems / packing / seals

                                      A-6
<PAGE>

     CM activities not requiring equipment shutdown shall be performed as soon
     as possible and in order of priority. CM activities requiring equipment
     shutdown shall be performed when equipment is removed from service.

     H.   The PM and CM activities will be inventoried and performed on a
          system-by-system basis and shall apply to the following equipment
          types:

          1.   Circuit Breakers (all types)
          2.   Batteries (all types)
          3.   Electric Heaters
          4.   Heat Tracing
          5.   Blowers
          6.   AC Motors (synchronous / induction)
          7.   DC Motors (synchronous / induction)
          8.   Valves (all types)
          9.   Valve Operators (air / motor / hydraulic)
          10.  Control Relays (AC / DC)
          11.  Transformers
          12.  Controllers
          13.  Recorders
          14.  Transmitters
          15.  Switches (all types)
          16.  Dampers
          17.  Fans / Compressors
          18.  Heat Exchangers
          19.  Radiators
          20.  Pumps
          21.  Filters / Strainers
          22.  Air Dryers
          23.  Tanks / Vessels
          24.  Pipe / Pipe Fittings / Pipe Supports
          25.  Combustion Turbines
          26.  Generators

I.        Performing such other tasks and services which Owner may reasonably
          request from time to time in connection with operation of the
          Facility.

                                      A-7
<PAGE>

                                   APPENDIX B
                                  COMPENSATION
                                  ------------

A.   Reimbursable Cost items shall be paid to Operator in accordance with the
     requirements of Articles 5 and 7.  Reimbursable Costs include:

     1.   Labor costs including allowances for payroll, taxes, bonuses and
          benefits

     2.   Spare and Replacement Parts

     3.   All Material, Tools and Equipment necessary to operate and maintain
          the Facility

     4.   Chemicals

     5.   Lubricants (including proper disposal costs)

     6.   Specialized Instrumentation and Calibration Equipment

     7.   Rigging and Handling Equipment

     8.   Consumables and General Supplies

     9.   Cleaning Supplies

     10.  Shop Equipment Installed in Facility

     11.  Authorized Leased Equipment

     12.  Specialized Test and Calibration Equipment

     13.  Major Equipment Overhauls

     14.  Building Repairs and Maintenance (not caused by contractors under the
          EPC Contracts)

     15.  Insurance costs in accordance with Section 9.1(c)

     16.  Taxes (excluding income) required to be paid by Operator

     17.  Costs related to training of plant personnel

     18.  Consultant's Fees and Expenses, if incorporated in the Annual Budget
          or otherwise approved in advance by Owner.

                                      B-1
<PAGE>

     19.  Contract Services, if incorporated in the Annual Budget or otherwise
          approved in advance by Owner.

B.   The following will be Reimbursable Costs when specifically related to
     Facility support:

     1.   Office Supplies
     2.   Office Equipment and Furniture
     3.   Telephone and Other Communication Service Charges
     4.   Freight and Express Mail Charges
     5.   Janitorial, Cleaning, and Groundskeeping Services

     All Services by Operator and/or Affiliates which support Facility
activities and all Reimbursable Costs shall be approved by Owner, through the
Annual Budget or otherwise, prior to implementation by Operator.

                                      B-2
<PAGE>

                                  APPENDIX C
                            COMMUNICATION PROTOCOLS
                            -----------------------

Communication Protocols will incorporate not only communication between Owner
and Operator, but also Operator's communication with certain third parties on
Owner's behalf under the Project Agreements.  Examples are attached hereto.

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