Document:

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                                                                    EXHIBIT 10.3

                        ADMINISTRATIVE SERVICES AGREEMENT

                  This Administrative Services Agreement (this "Agreement")
dated as of December 12, 2001 is entered into by and between El Paso Merchant
Energy, L.P., a Delaware limited partnership ("Servicer"), and Cedar Brakes II,
L.L.C., a Delaware limited liability company ("CBII"; Servicer and CBII
individually are referred to as a "Party" and collectively as the "Parties").

                  WHEREAS, Public Service Electric and Gas Company ("PSE&G") and
CBII are parties to that certain Amended and Restated Power Purchase Agreement
dated May 23, 2001 whereby CBII agrees to sell and deliver energy and capacity
to PSE&G (the "Amended and Restated PPA");

                  WHEREAS, CBII and El Paso Merchant Energy, L.P. have entered
into a Power Purchase Agreement dated October 1, 2001, as amended on November
26, 2001, pursuant to which Servicer has agreed to sell and deliver to CBII
capacity and energy sufficient to enable CBII to meet its obligations under the
Amended and Restated PPA (the "Mirror PPA");

                  WHEREAS, CBII intends to enter into an Indenture to be dated
on or about the date of this Agreement between CBII and Bankers Trust Company, a
New York banking corporation, as trustee (the "Indenture") as well as certain
other Financing Documents (as defined in the Indenture), each in accordance with
the terms of the Indenture; and

                  WHEREAS, CBII desires to engage Servicer to perform all of the
administrative and management functions to be performed by CBII under the
Amended and Restated PPA, the Mirror PPA, the Indenture, the other Financing
Documents, and certain other agreements to which CBII is a party, as set forth
herein.

                  NOW, THEREFORE, in consideration of the mutual obligations and
undertakings set forth herein, it is agreed as follows:

                                   ARTICLE 1
                       DEFINITIONS; EFFECTIVE DATE; TERM;
                           SERVICER AS AGENT; EXPENSES

                  1.1 Definitions. Unless otherwise specified, capitalized terms
used herein but not defined herein have the respective meanings assigned to such
terms in the Indenture.

                  1.2 Effective Date. This Agreement shall become effective, and
the rights and obligations of Servicer and CBII with respect to this Agreement
shall commence, on the date of this Agreement (the "Effective Date").

<PAGE>

                  1.3 Term.

                  1.3.1 The term of this Agreement shall run from the Effective
         Date until the earlier of (a) September 30, 2013 and (b) the early
         termination of the Mirror PPA in accordance with Article III thereof,
         unless earlier terminated in accordance with the provisions hereof.

                  1.3.2 This Agreement may be terminated by CBII (a) at any time
         on sixty (60) days' written notice by CBII to Servicer and the payment
         by CBII to Servicer of all outstanding amounts owed to Servicer by CBII
         under this Agreement or (b) upon the bankruptcy, insolvency, or
         liquidation of Servicer.

                  1.3.3 Either Party may terminate this Agreement in accordance
         with the terms of Section 5.2.

                  1.3.4 Notwithstanding the provisions of this Section 1.3, the
         termination of this Agreement shall not in any manner impact the
         obligations of Servicer under this Agreement arising prior to such
         termination.

                  1.4 Agent. CBII hereby appoints Servicer to be and act as its
agent to do and perform those obligations, and protect and exercise such rights,
of CBII that are specified herein, and such other things as may be necessary or
convenient thereto. As agent for CBII, Servicer is authorized to act for CBII in
its own name or in the name of CBII, as deemed necessary or advisable by
Servicer.

                  1.5 Expenses. Any expenses incurred by Servicer in performing
its obligations under this Agreement shall be paid by Servicer from its own
accounts and, thereafter, shall be reimbursed by CBII in accordance with Section
4.2 hereof.

                                   ARTICLE 2
                               SUPPORT OBLIGATIONS

                  2.1 Management and Administrative Services. Subject to the
terms of this Agreement, Servicer shall perform for CBII all management and
administrative services necessary and advisable for CBII to perform its
obligations and to exercise its rights under the following agreements: the
Amended and Restated PPA, the Mirror PPA, the EP Guaranty, the Funding
Agreement, the Indenture, each other Material Agreement and Financing Document,
and any other contracts to which CBII is a party and of which Servicer has been
given prior notice. Without limiting the generality of the foregoing, Servicer
shall perform for CBII the following management and administrative services:
accounting, auditing, financial reporting, budgeting and forecasting, tax, cash
management, review of significant operating and financial matters, contract
administrative services, invoicing, computer and information services, and such
other management, administrative, and regulatory filing services as directed by
CBII. Without limiting the foregoing, Servicer shall provide the following
services:

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                  (a) maintain the books and records of CBII in accordance with
         good business practice, Internal Revenue Service regulations,
         applicable law, and generally accepted accounting principles and retain
         and oversee independent auditors to review such books and records on an
         annual basis;

                  (b) provide services regarding the cash of CBII, including (i)
         establishing bank accounts and (ii) investing and transferring funds
         and effecting payments in accordance with the Financing Documents and
         the Material Agreements;

                  (c) provide accounting services related to the development and
         implementation of financial controls and systems of CBII and the
         administering of the financing proceeds;

                  (d) exercise all rights and administer all obligations of CBII
         under the Financing Documents, including, without limitation, taking
         all actions necessary or desirable in order to perfect and maintain the
         perfection and priority of any security interests granted by CBII to
         any lender or creditor of CBII over any assets of CBII (including,
         without limitation, the Material Agreements);

                  (e) administer the Amended and Restated PPA, the Mirror PPA,
         and the other Material Agreements, exercise all rights and perform all
         of the administrative and management obligations of CBII thereunder,
         including, without limitation, serving as CBII's point-of-contact,
         coordinating the exercise of CBII's rights under the Mirror PPA and the
         performance of its obligations under the Amended and Restated PPA,
         providing and receiving notices in accordance with the terms thereof,
         invoicing for all transactions of CBII and amounts payable to CBII and
         collecting all such amounts due CBII, applying set-offs against amounts
         owed to Servicer by CBII as permitted under the terms of the Amended
         and Restated PPA, reviewing invoices provided to CBII and exercising
         its rights to dispute any invoice, and resolving any disputes and
         coordinating the resolution of disputes (including any arbitration
         proceedings) under the Amended and Restated PPA and the Mirror PPA on
         the most favorable terms available to CBII;

                  (f) to the extent that amounts are available from CBII, pay
         all fees, debts, and obligations of CBII;

                  (g) provide tax related services, including, without
         limitation, paying from Servicer's accounts directly to any third-party
         payees, upon demand, any taxes or other administrative fees and
         expenses due and payable by CBII;

                  (h) make and prosecute, or cause to be made and prosecuted,
         such filings and reports, keep such records, and take or cause to be
         taken such other actions as may be necessary and lawful to maintain the
         existence and good standing of CBII and to ensure the compliance by
         CBII with all applicable laws, regulations, authorizations,

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         and orders of any government agencies (including, without limitation,
         the Federal Energy Regulatory Commission); and

                  (i) do and perform such other acts as may be mutually agreed
         to by Servicer and CBII from time to time.

                  2.2 Notice of Payment Obligations.

                  2.2.1 El Paso Merchant Energy, L.P., in its capacity as a
party to the Mirror PPA and not in its capacity as Servicer under this
Agreement, is referred to as "EPM" in this Section 2.2.

                  2.2.2 Within two (2) Business Days of CBII receiving from
         PSE&G a notice stating that (a) Distribution Surcharges (as defined in
         the Amended and Restated PPA) are due and payable to PSE&G pursuant to
         Article II(E) of the Amended and Restated PPA, (b) damage amounts are
         due and payable to PSE&G pursuant to Article XIV of the Amended and
         Restated PPA, or (c) indemnity payments are due and payable to PSE&G
         pursuant to Article XII or Article XIII of the Amended and Restated
         PPA, Servicer will send a written notice to EPM notifying EPM of such
         damage amounts or indemnity payments and requiring EPM to pay such
         amounts in accordance with Article II(E) and Article X of the Mirror
         PPA. If any such amounts are not paid by EPM within five (5) Business
         Days of CBII receiving from PSE&G a notice reflecting that such damage
         or indemnity payments are due and payable, Servicer will immediately
         send a written notice to EP notifying EP that such amounts are due and
         payable and requiring EP to pay such amounts pursuant to the EP
         Guaranty.

                  2.2.3 On the last day of each month, Servicer shall send a
         written notice to EPM notifying EPM of any outstanding credit at the
         end of such month and requiring EPM to pay any Delivery Point Excess
         (as defined in the Mirror PPA) amount in accordance with Article IV(B)
         of the Mirror PPA or any Article V(E) Energy Payment or Article V(E)
         Capacity Payment (each as defined in the Mirror PPA) in accordance with
         Article V(E) of the Mirror PPA, as the case may be. If any such amounts
         are not paid within two (2) Business Days after EPM's receipt of
         notice, Servicer will immediately send a written notice to EP notifying
         EP that such amounts are due and payable and requiring EP to pay such
         amounts pursuant to the EP Guaranty.

                  2.2.4 Prior to February 5 of each calendar year, Servicer
         shall send a written notice to EPM in accordance with Article V(F) of
         the Mirror PPA, notifying EPM of the Energy Shortfall Liquidated
         Damages (as defined in the Mirror PPA) (if any) due for such year. If
         any such amounts are not paid by EPM in accordance with Article V(F) of
         the Mirror PPA within five (5) days' of EPM's receipt of such notice
         from Servicer, Servicer will immediately send a written notice to EP
         notifying EP that such amounts are due and payable and requiring EP to
         pay such amounts pursuant to the EP Guaranty.

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                  2.2.5 If Servicer has received notice from the trustee under
         the Indenture that Additional Interest (as defined in the Registration
         Rights Agreement) is due and payable in accordance with the
         Registration Rights Agreement and that there are insufficient funds in
         the Collections Account to pay such Additional Interest in addition to
         any other interest and principal payable on the next interest payment
         date, then Servicer will promptly send a written notice to EP requiring
         EP to pay such Additional Interest pursuant to the Funding Agreement.

                                   ARTICLE 3
                                   ASSIGNMENT

                  3.1 Assignment and Assumption of Obligations. CBII may at any
time and from time to time during the term of this Agreement, without the
consent of Servicer, assign its rights in this Agreement to (a) any lender(s) or
any third party designated by any lender(s) in connection with the transfer,
pledge, encumbrance, or assignment of this Agreement or the accounts, revenues,
or proceeds hereof in connection with any financing or other financial
arrangements or (b) to any person or entity succeeding to all or substantially
all of the assets of CBII. Servicer shall, at CBII's request, execute a consent
to assignment provided that the terms and conditions of same are reasonably
acceptable to Servicer. Servicer may not assign its rights and/or transfer its
rights and obligations under this Agreement without the prior written consent of
CBII, which consent shall not be unreasonably withheld or delayed. Nothing
contained herein shall prevent CBII from pledging or mortgaging all or any part
of its assets or interests in connection with any financing for or related to
the transactions contemplated herein. Except as otherwise provided herein, CBII
may not assign its rights and/or transfer its obligations under this Agreement
without the prior written consent of Servicer. Servicer shall not unreasonably
delay or withhold any approval of an assignment or assignment/transfer by CBII
provided that the assignee or assignee/transferee agrees to be bound by, subject
to, and to comply with the terms and conditions of this Agreement.

                                   ARTICLE 4
                                  FEE STRUCTURE

                  4.1 Semi-Annual Fee. CBII shall pay Servicer fifty thousand
dollars ($50,000) in arrears for each semi-annual period beginning on the date
of this Agreement and ending on March 1 and September 1 of each year during the
term of this Agreement and on the last day of the term of this Agreement (or if
such day is not a Business Day, on the first Business Day thereafter, each, a
"Fee Payment Date") for services provided under this Agreement (the "Fee"),
which shall cover all internal and overhead costs of Servicer; provided,
however, that (a) the amount of the Fee shall be prorated for the actual number
of days in the period (i) from the Effective Date to the first Fee Payment Date
and (ii) ending on the last Fee Payment Date of the term and (b) the Fee shall
be due and payable only to the extent that there are amounts on deposit in the
Collections Account after payment in accordance with Section 502 of the
Indenture of all current and past due amounts ranking prior to the payment of
the Fee.

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<PAGE>

                  4.2 Reimbursement of Expenses. Servicer shall, not less than
thirty (30) days prior to each Fee Payment Date, deliver to CBII an invoice for
all expenses (other than internal and overhead costs of Servicer, which are
covered by the Fee) incurred by Servicer in performing its obligations hereunder
since the Effective Date or the date of Servicer's last invoice under this
Section 4.2 (whichever is later). Each invoice shall contain a statement
explaining in reasonable detail how the expenses on the invoice were calculated.
CBII shall pay the amount shown on Servicer's invoice on the next Fee Payment
Date; provided, however, that such amount shall be due and payable only to the
extent that there are amounts on deposit in the Collections Account after
payment in accordance with Section 502 of the Indenture of all current and past
due amounts ranking prior to the payment of such expenses.

                                   ARTICLE 5
                                EVENTS OF DEFAULT

                  5.1 Events of Default. An "Event of Default" shall mean with
respect to a Party (the "Defaulting Party"):

                  5.1.1 The failure by the Defaulting Party to make, when due,
         any payment required hereunder if such failure is not remedied within
         ten (10) Business Days after written notice of such failure is given to
         the Defaulting Party by the other Party;

                  5.1.2 Any representation or warranty made by the Defaulting
         Party herein shall prove to have been false or misleading in any
         material respect when made; or

                  5.1.3 The failure by the Defaulting Party to perform any
         material covenant set forth in this Agreement (other than with respect
         to a payment obligation described in Section 5.1.1 above).

                  5.2 Termination Right. Upon an Event of Default, the Party not
in default may terminate this Agreement by notice to the Defaulting Party.

                                   ARTICLE 6
                         REPRESENTATIONS AND WARRANTIES

                  6.1 Organization; Powers.

                  6.1.1 Servicer represents and warrants that it is a duly
         formed and validly existing limited partnership under the laws of the
         State of Delaware and has the requisite power and authority to carry on
         its business as now being conducted and currently proposed to be
         conducted and to execute, deliver, and perform its obligations under
         this Agreement.

                  6.1.2 CBII represents and warrants that it is a duly formed
         and validly existing limited liability company under the laws of the
         State of Delaware and has the requisite power and authority to carry on
         its business as now being conducted and currently proposed to be
         conducted and to execute, deliver, and perform its obligations under
         this Agreement.

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<PAGE>

                  6.2 Authorization; Enforceability.

                  6.2.1 Servicer represents and warrants that it has taken all
         action necessary to authorize it to execute, deliver, and perform its
         obligations under this Agreement and that this Agreement, when executed
         and delivered, will constitute a legal, valid, and binding obligation
         of Servicer, enforceable in accordance with its terms, subject to
         bankruptcy, reorganization, moratorium, or other similar laws affecting
         the enforcement of the rights of creditors generally and to general
         principles of equity.

                  6.2.2 CBII represents and warrants that it has taken all
         action necessary to authorize it to execute, deliver, and perform its
         obligations under this Agreement and that this Agreement, when executed
         and delivered, will constitute a legal, valid, and binding obligation
         of CBII, enforceable in accordance with its terms, subject to
         bankruptcy, reorganization, moratorium, or other similar laws affecting
         the enforcement of the rights of creditors generally and to general
         principles of equity.

                  6.3 No Conflict.

                  6.3.1 Servicer represents and warrants that the execution,
         delivery, and performance of this Agreement does not and will not (a)
         violate any laws, statutes, codes, acts, ordinances, orders, judgments,
         decrees, injunctions, rules, regulations, permits, licenses,
         authorizations, directions, and requirements of any federal, state,
         local, or foreign governmental department, commission, board, bureau,
         authority, agency, court, instrumentality, or judicial or regulatory
         body or entity ("Legal Requirement") applicable to Servicer or the
         violation of which could reasonably be expected to result in a material
         adverse effect on the business, assets, or financial condition of
         Servicer or (b) conflict with, result in a breach of, or constitute a
         default under any of Servicer's limited partnership agreement,
         certificate of limited partnership, or other similar document, or any
         indenture or agreement to which Servicer is a party.

                  6.3.2 CBII represents and warrants that the execution,
         delivery and performance of this Agreement does not and will not (a)
         violate any Legal Requirement applicable to CBII or the violation of
         which could reasonably be expected to result in a material adverse
         effect on the business, assets, or financial condition of CBII or (b)
         conflict with, result in a breach of, or constitute a default under
         CBII's limited liability company agreement, certificate of formation,
         or other similar document, or any indenture or agreement to which CBII
         is a party.

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                  6.4 Compliance.

                  6.4.1 Servicer represents and warrants that it is in
         compliance with all Legal Requirements and governmental approvals
         applicable to it and this Agreement, except to the extent that
         non-compliance could not reasonably be expected to result in a material
         adverse effect on the business, assets, or financial condition of
         Servicer, or on Servicer's ability to perform under this Agreement.

                  6.4.2 CBII represents and warrants that it is in compliance
         with all Legal Requirements and governmental approvals applicable to it
         and this Agreement, except to the extent that non-compliance could not
         reasonably be expected to result in a material adverse effect on the
         business, assets, or financial condition of CBII, or on CBII's ability
         to perform under this Agreement.

                  6.5 Litigation.

                  6.5.1 Servicer represents and warrants that there are no
         actions, suits, or proceedings pending or, to the best of its
         knowledge, threatened (in writing) against Servicer in any court or
         before or by any federal, state, local, or foreign governmental
         department, commission, board, bureau, authority, agency, court,
         instrumentality, or judicial or regulatory body or entity, wherein an
         unfavorable ruling or finding could reasonably be expected to result in
         a material adverse effect on Servicer's business, assets, or financial
         condition, or on the ability of Servicer to perform its obligations
         under this Agreement.

                  6.5.2 CBII represents and warrants that there are no actions,
         suits, or proceedings pending or, to the best of its knowledge,
         threatened (in writing) against CBII in any court or before or by any
         federal, state, local, or foreign governmental department, commission,
         board, bureau, authority, agency, court, instrumentality, or judicial
         or regulatory body or entity, wherein an unfavorable ruling or finding
         could reasonably be expected to result in a material adverse effect on
         CBII's business, assets, or financial condition, or the ability of CBII
         to perform its obligations under this Agreement.

                  6.6 Governmental Approvals.

                  6.6.1 Servicer represents and warrants that all governmental
         and/or third party approvals necessary for it to enter into, and
         perform its obligations under, this Agreement have been obtained, are
         in full force and effect, and are final and non-appealable.

                  6.6.2 CBII represents and warrants that all governmental
         and/or third party approvals necessary for it to enter into, and
         perform its obligations under, this Agreement have been obtained, are
         in full force and effect, and are final and non-appealable.

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                  6.7 No Default.

                  6.7.1 Servicer represents and warrants that as of the date
         hereof, no condition or event that would constitute an Event of Default
         has occurred and is continuing.

                  6.7.2 CBII represents and warrants that as of the date hereof,
         no condition or event that would constitute an Event of Default has
         occurred and is continuing.

                                   ARTICLE 7
                            MISCELLANEOUS PROVISIONS

                  7.1 Amendments. This Agreement may be amended only by a
written instrument duly executed by each of CBII and Servicer.

                  7.2 Binding Effect. This Agreement and any extension shall
inure to the benefit of and shall be binding upon the Parties and their
respective permitted successors and assigns.

                  7.3 Specific Performance. Each of the Parties hereto hereby
acknowledges that money damages would not be a sufficient remedy for any breach
of this Agreement and that irreparable harm would result if this Agreement were
not specifically enforced. Therefore, notwithstanding any other provision
hereof, the rights and obligations of the Parties under this Agreement shall be
enforceable by a decree of specific performance issued by any court of competent
jurisdiction and appropriate injunctive relief may be applied for and granted in
connection therewith. The right of a Party hereto to specific performance
hereunder shall be in addition to all other legal or equitable remedies
available to such Party.

                  7.4 Counterparts. This Agreement may be executed in two or
more counterparts. Each counterpart shall be deemed an original but together
shall constitute one and the same instrument.

                  7.5 Notices. Any notice, request, demand, or statement to be
given by a Party hereunder shall be in writing and shall be deemed to have been
duly given to the addressee when mailed by certified mail, return receipt
requested, or delivered against receipt by messenger or overnight courier
addressed as follows:

                  To Servicer :

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

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                  To CBII:

                  Cedar Brakes II, L.L.C.
                  1001 Louisiana Street
                  Houston, TX  77002
                  Attention:  President

or to such other address as may be designated by the addressee by notice to the
other Party.

                  7.6 Entire Agreement. The Agreement constitutes the entire
agreement between the Parties with respect to the matters contained herein and
all prior agreements with respect thereto are superseded hereby. Each Party
confirms that it is not relying on any oral representations or warranties of the
other Party.

                  7.7 Governing Law. This Agreement shall be interpreted,
construed, governed by, performed, and enforced in accordance with the laws of
the State of New York without giving effect to the principles thereof relating
to conflicts of law except Section 5-1401 of the New York General Obligations
Law.

                  7.8 Headings. The subject headings of the Articles and
Sections of this Agreement are inserted solely for the purpose of convenient
reference and are not intended to, nor shall same affect the meaning of any
provision of this Agreement.

                  7.9 Severability. If any term or provision of this Agreement
or the application thereof to any person, entity, or circumstance shall to any
extent be invalid or unenforceable, the remainder of this Agreement, and the
application of such term or provision to persons, entities, or circumstances
other than those as to which it is invalid or unenforceable, shall not be
affected thereby, and each term and provision of this Agreement shall be valid
and enforceable to the fullest extent permitted by law.

                  7.10 Set-offs. CBII shall have the right to set off against
any and all amounts owed by CBII to Servicer pursuant to this Agreement any and
all amounts owed by (a) Servicer to CBII or (b) EP to CBII under the Funding
Agreement or the EP Guaranty.

           [The remainder of this page was left blank intentionally.]

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                  IN WITNESS WHEREOF, the Parties have duly executed this
Administrative Services Agreement as of the date first above written.

                                      CEDAR BRAKES II, L.L.C.

                                      By /s/ John L. Harrison
                                         ---------------------------------------
                                      Name:  John L. Harrison
                                      Title: Senior Vice President and Chief
                                             Financial Officer

                                      EL PASO MERCHANT ENERGY, L.P.

                                      By /s/ John L. Harrison
                                         ---------------------------------------
                                      Name:  John L. Harrison
                                      Title: Senior Vice President and Chief
                                             Financial Officer<PAGE>
                                                                    EXHIBIT 10.4

                                    GUARANTY

                  This Guaranty, made and entered into as of December 12, 2001
(this "Guaranty"), is by and between El Paso Corporation, a Delaware corporation
("Guarantor"), and Cedar Brakes II, L.L.C., a Delaware limited liability company
("CBII").

                                   WITNESSETH:

                  WHEREAS, CBII has acquired (a) the rights of Cogen
Technologies NJ Venture, a New Jersey general partnership (the "Bayonne
Venture"), under the Power Purchase and Operations Coordination Agreement dated
June 5, 1989 (the "Original Bayonne PPA") originally entered into between Public
Service Electric and Gas Company ("PSE&G") and the Bayonne Venture and (b) the
rights of Camden Cogen L.P., a Delaware limited partnership (the "Camden
Venture"), under the Power Purchase and Interconnection Agreement dated April
15, 1988 (the "Original Camden PPA"), as amended by the First Amendment dated
June 12, 1990 and the Second Amendment dated August 21, 1990, originally entered
into between PSE&G and the Camden Venture;

                  WHEREAS, CBII has entered into the Amended and Restated Power
Purchase Agreement dated May 23, 2001 with PSE&G to amend and restate the
Original Bayonne PPA and the Original Camden PPA (as so amended and restated,
the "Amended and Restated PPA");

                  WHEREAS, El Paso Merchant Energy, L.P. ("EPM"), a wholly-owned
indirect subsidiary of Guarantor, and CBII have entered into a Power Purchase
Agreement (the "Mirror PPA"), dated October 1, 2001, as amended on November 26,
2001, pursuant to which EPM has agreed to sell and deliver to CBII capacity and
energy sufficient to enable CBII to meet its obligations under the Amended and
Restated PPA;

                  WHEREAS, EPM and CBII also have entered into an Administrative
Services Agreement (the "Administrative Services Agreement"), dated as of the
date of this Guaranty, pursuant to which EPM has agreed to perform all of CBII's
administrative and managerial functions; and

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

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

<PAGE>

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

                  2. This Guaranty is a primary obligation of Guarantor and
shall be construed as an irrevocable, unconditional, absolute and continuing
guaranty of the full and punctual performance of all of the Obligations and not
of their collectibility only, irrespective of (a) the validity or enforceability
of the Mirror PPA or the Administrative Services Agreement or any other
agreement or instrument relating thereto, (b) any amplification, alteration,
amendment, variation, supplement, renewal or replacement of the provisions of
the Mirror PPA or the Administrative Services Agreement or (c) any other
circumstances which might otherwise constitute a legal or equitable discharge or
defense of a guarantor. This Guaranty shall remain in full force and effect
until all Obligations of EPM have been performed.

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

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

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

                                       2
<PAGE>

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

                  7. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE
PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW EXCEPT SECTION 5-1401 OF THE NEW
YORK GENERAL OBLIGATIONS LAW. GUARANTOR HEREBY IRREVOCABLY WAIVES ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON
CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE
ACTIONS OF GUARANTOR OR CBII IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR
ENFORCEMENT THEREOF. Guarantor, by its execution hereof, hereby submits to the
non-exclusive jurisdiction of the courts of the State of New York in connection
with any action or proceeding relating to this Guaranty and hereby consents to
service of process or other summons in any such action or proceeding brought by
CBII against it in any such court by means of registered mail to the last known
address of Guarantor. Nothing herein, however, shall prevent service of process
by any other means permitted by law or the bringing of any such action or
proceeding in any other jurisdiction.

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

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

                                       3
<PAGE>

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

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

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

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

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

                                       4
<PAGE>

                  (a)      If to Guarantor:

                           El Paso Corporation
                           1001 Louisiana Street
                           Houston, TX 77002
                           Attention: General Counsel

                           With electronic mail copies to:

                           Tim.Sullivan@elpaso.com

                  (b)      If to CBII:

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

                           With electronic mail copies to:

                           Kurt.Regulski@elpaso.com

           [The remainder of this page was left blank intentionally.]

                                       5
<PAGE>

                  IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be
executed in its name and behalf as of the date first written above.

                                     EL PASO CORPORATION

                                     By /s/ John J. Hopper
                                        ----------------------------------------
                                        Name:  John J. Hopper
                                        Title: Vice President

                                     AGREED TO AND ACCEPTED BY:

                                     CEDAR BRAKES II, L.L.C.

                                     By /s/ Andrew C. Kidd
                                        ----------------------------------------
                                     Name:  Andrew C. Kidd
                                     Title: Vice President and Associate General
                                            Counsel

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