Document:

<PAGE>

                                                                     EXHIBIT 4.4

                                                                  EXECUTION COPY
                                                                  --------------

================================================================================

                      DEPOSIT AND DISBURSEMENT AGREEMENT

                                     among

                              ELWOOD ENERGY LLC,

                           ELWOOD II HOLDINGS, LLC,

                           ELWOOD III HOLDINGS, LLC,

                 BANK ONE TRUST COMPANY, NATIONAL ASSOCIATION,
                             as Collateral Agent,

                 BANK ONE TRUST COMPANY, NATIONAL ASSOCIATION,
                            as Administrative Agent

                                      and

                 BANK ONE TRUST COMPANY, NATIONAL ASSOCIATION,
                            as Intercreditor Agent

                         Dated as of October 23, 2001

================================================================================
<PAGE>

                               TABLE OF CONTENTS
                               -----------------

<TABLE>
<CAPTION>
                                                                            Page

                                   ARTICLE I
                                  DEFINITIONS
                                  -----------

<S>                                                                         <C>
SECTION 1.1    Capitalized Terms..........................................     2
SECTION 1.2    Rules of Interpretation....................................    13
SECTION 1.3    Uniform Commercial Code....................................    13

                                  ARTICLE II
                         ESTABLISHMENT OF THE ACCOUNTS
                         -----------------------------

SECTION 2.1    Establishment of Accounts..................................    13
SECTION 2.2    Termination................................................    15

                                  ARTICLE III
                                 THE ACCOUNTS
                                 ------------

SECTION 3.1    Revenue Account............................................    15
SECTION 3.2    O&M Account................................................    20
SECTION 3.3    Sales Tax Reserve Account..................................    21
SECTION 3.4    Debt Service Payment Account...............................    24
SECTION 3.5    DSR LOC Loan Principal Account.............................    25
SECTION 3.6    Debt Service Reserve Account...............................    26
SECTION 3.7    Major Maintenance Reserve Account..........................    29
SECTION 3.8    PSA Contingency Reserve Account............................    33
SECTION 3.9    Distribution Suspense Account..............................    36
SECTION 3.10   Proceeds Account...........................................    39
SECTION 3.11   Permitted Investments......................................    43
SECTION 3.12   Events of Default..........................................    44
SECTION 3.13   Disposition of Accounts Upon Debt Termination Date.........    45
SECTION 3.14   Account Balance Statements.................................    45
SECTION 3.15   Instructions to the Administrative Agent...................    45

                                  ARTICLE IV
                           THE ADMINISTRATIVE AGENT
                           ------------------------

SECTION 4.1    Appointment of the Administrative Agent, Powers and
                     Immunities...........................................    46
SECTION 4.2    Reliance by the Administrative Agent.......................    48
SECTION 4.3    Court Orders...............................................    49
</TABLE>
                                       i
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<TABLE>
<CAPTION>
<S>                                                                         <C>
SECTION 4.4    Resignation or Removal.....................................    49

                                   ARTICLE V
                        EXPENSES; INDEMNIFICATION; FEES
                        -------------------------------

SECTION 5.1    Expenses...................................................    50
SECTION 5.2    Indemnification............................................    51
SECTION 5.3    Fees.......................................................    51

                                  ARTICLE VI
                            LIMITATION OF LIABILITY
                            -----------------------

SECTION 6.1    Limitation of Liability....................................    51

                                  ARTICLE VII
                                 MISCELLANEOUS
                                 -------------

SECTION 7.1    Amendments; Etc............................................    51
SECTION 7.2    Addresses for Notices......................................    51
SECTION 7.3    Integration, Etc...........................................    52
SECTION 7.4    Headings; Table of Contents; Section References............    52
SECTION 7.5    No Third Party Beneficiaries...............................    52
SECTION 7.6    No Waiver..................................................    52
SECTION 7.7    Severability...............................................    52
SECTION 7.8    Successors and Assigns.....................................    52
SECTION 7.9    Execution in Counterparts..................................    53
SECTION 7.10   Special Exculpation........................................    53
SECTION 7.11   Governing Law..............................................    53
SECTION 7.12   Payments in Respect of Bonds...............................    54
</TABLE>

Annex A       Calculation Examples

Schedule I    Accounts
Schedule II   Major Maintenance Reserve Required Balance
Schedule III  Sales Tax Reserve Required Balance
Schedule IV   PSA Yearly Factor

Exhibit A     Form of Debt Service Reserve Guaranty
Exhibit B     Form of Major Maintenance Reserve Guaranty
Exhibit C     Form of PSA Contingency Reserve Guaranty
Exhibit D     Form of Sales Tax Reserve Guaranty
Exhibit E     Maintenance Requisition
Exhibit F     Restoration Requisition
Exhibit G     Independent Engineer Restoration Requisition

                                      ii
<PAGE>

          This DEPOSIT AND DISBURSEMENT AGREEMENT, dated as of October 23, 2001
(this "Agreement"), is by and among ELWOOD ENERGY LLC, a limited liability
       ---------
company duly formed and validly existing under the laws of the State of Delaware
(the "Issuer"), ELWOOD II HOLDINGS, LLC, a limited liability company duly formed
      ------
and validly existing under the laws of the State of Delaware ("Elwood II
                                                               ---------
Holdings"), ELWOOD III HOLDINGS, LLC, a limited liability company duly formed
--------
and validly existing under the laws of the State of Delaware ("Elwood III
                                                               ----------
Holdings"), BANK ONE TRUST COMPANY, NATIONAL ASSOCI ATION, a national banking
--------
association formed under the laws of the United States, in its capacity as
collateral agent under the Collateral Agency Agreement (together with its
successors and permitted assigns in such capacity, the "Collateral Agent"), BANK
                                                        ----------------
ONE TRUST COMPANY, NATIONAL ASSOCIATION, in its capacity as administrative agent
(together with its successors and permitted assigns in such capacity, the

"Administrative Agent"), and BANK ONE TRUST COMPANY, NATIONAL ASSOCIATION, in
---------------------
its capacity as intercreditor agent under the Intercreditor Agreement (together
with its successors and permitted assigns in such capacity, the "Intercreditor
                                                                 -------------
Agent").
-----

                                    RECITALS
                                    --------

          WHEREAS, the Issuer was formed for the purpose of developing,
financing, constructing, owning and operating an approximately 1,409 MW natural
gas-fired electric generation peaking facility located in Elwood, Illinois;

          WHEREAS, the Issuer has determined to issue $402,000,000 aggregate
principal amount of its 8.159% Senior Secured Bonds due July 5, 2026 (the
"Bonds") pursuant to the Trust Indenture, dated as of the date hereof (the
 -----
"Indenture"), between the Issuer and Bank One Trust Company, National Associa
 ---------
tion, as trustee (the "Trustee");
                       -------

          WHEREAS, the Issuer (as successor-in-interest to Elwood Energy II,
LLC) and Elwood II Holdings are parties to that certain Equipment Sale
Agreement, dated December 20, 2000 (the "Holdings II ESA");
                                         ---------------

          WHEREAS, the Issuer (as successor-in-interest to Elwood Energy III,
LLC) and Elwood III Holdings are parties to (i) that certain Equipment Sale
Agree ment, dated December 20, 2000 (300 MW Facility), and (ii) to that certain
Equipment Sale Agreement, dated December 20, 2000, and Elwood III Holdings (150
MW Facility)(collectively, the "Holdings III ESAs"); and
                                -----------------

          WHEREAS, the Issuer will use the proceeds of the Bonds to repay in
full all indebtedness outstanding under existing intercompany loans provided by
the
<PAGE>

Members and the Sponsors and to partially reimburse the Members and the
Sponsors for development, financing and construction costs (including, without
limitation, issuance costs, punchlist items, consultant and legal fees, the
funding of reserve accounts and working capital) incurred by or on behalf of the
Issuer in connection with the Project.

                                   AGREEMENT
                                   ---------

          NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:

                                   ARTICLE I
                                  DEFINITIONS
                                  -----------

          SECTION 1.1  Capitalized Terms.
                       -----------------

          (a)  Each capitalized term used herein and not otherwise defined
herein shall have the definition assigned to that term in the Indenture.

          (b)  The following terms shall have the following respective meanings:

          "Administrative Claims" means all obligations of the Issuer, now or
           ---------------------
hereafter existing, to pay fees, costs and expenses to any trustee or agent of
any Secured Party, including, without limitation, the Collateral Agent, the
Administrative Agent, the Intercreditor Agent and the Trustee.

          "Allocation Certificate" shall have the meaning given to such term in
           ----------------------
Section 3.9(c).
--------------

          "Asset Sale Proceeds" shall have the meaning given to such term in
           -------------------
Section 3.10(c).
---------------

          "Buy-Out Proceeds" shall mean any cash or other proceeds received by
           ----------------
or on behalf of the Issuer in connection with a Buy-Out.

          "Contracted Cash Available for Debt Service" means, for any period,
           ------------------------------------------
the aggregate of all payments to be received by the Issuer under Permitted PPAs
for such period, plus investment income on amounts in the Accounts attributable
to units subject to such Permitted PPAs for such period, minus (i) all O&M Costs
attributable

                                       2
<PAGE>

to units subject to such Permitted PPAs for such period and (ii) all deposits,
if any, into the Sales Tax Reserve Account for such period.

          "Contracted Coverage Ratio" means, for any period, the ratio of (i)
           -------------------------
the aggregate of all Contracted Cash Available for Debt Service for such period
to (ii) the aggregate of all Debt Service for such period, in each case
calculated on a projected basis and confirmed by the Independent Engineer.

          "Current Major Maintenance Required Balance" shall mean, for any date
           ------------------------------------------
of determination, the amount set forth on Schedule II hereto opposite the Bond
                                          -----------
Payment Date on or immediately succeeding such date of determination (provided
                                                                      --------
that such Schedule II may be amended on an annual basis upon the delivery to the
          -----------
Trustee and the Administrative Agent of an Officer's Certificate by the Issuer,
which shall be confirmed by the Independent Engineer, that such amendment is
reasonable in light of the historic levels of operations of the Facility, is in
accordance with Prudent Industry Practice, and is reasonably expected to be
sufficient to fund scheduled Major Maintenance Expenditures on a timely basis).

          "Debt Payment Amount" shall have the meaning set forth in Section
           -------------------                                      -------
3.6(c).
------

          "Debt Service Payment Account" shall mean the account established
           ----------------------------
pursuant to Section 2.1 having the name and account number set forth below the
            -----------
title "Debt Service Payment Account" in Schedule I hereto.
                                        ----------

          "Debt Service Reserve Account" shall mean the account established
           ----------------------------
pursuant to Section 2.1 having the name and account number set forth below the
            -----------
title "Debt Service Reserve Account" in Schedule I hereto.
                                        ----------

          "Debt Service Reserve Guarantor" shall mean any Person issuing a Debt
           ------------------------------
Service Reserve Guaranty.

          "Debt Service Reserve Guaranty" shall mean an unconditional guaranty
           -----------------------------
issued by Dominion Resources, Peoples Energy Corporation, an Affiliate of either
Dominion Resources or Peoples Energy Corporation, or any other Person whose
long-term senior unsecured debt is rated at least "BBB" by S&P and "Baa2" by
Moody's, and otherwise in substantially the form attached hereto as Exhibit A.
                                                                    ---------

          "Debt Service Reserve L/C" shall have the meaning given to such term
           ------------------------
in Section 3.6(a).
   --------------

                                       3
<PAGE>

          "Debt Service Reserve L/C Agent" shall mean any agent for the banks
           ------------------------------
and other financial institutions party to a Debt Service Reserve L/C Agreement.

          "Debt Service Reserve L/C Agreement" shall mean any agreement
           ----------------------------------
providing for the issuance of an Issuer Debt Service Reserve L/C.

          "Debt Service Reserve L/C Provider" shall mean the bank or other
           ---------------------------------
financial institution providing a Debt Service Reserve L/C.

          "Debt Service Reserve LOC Bonds" shall mean Debt Service Reserve LOC
           ------------------------------
Loans converted into substitute loans which (i) amortize, (ii) mature on the
Final Maturity Date and (iii) bear interest at a rate specified in the
applicable Debt Service Reserve L/C Agreement.

          "Debt Service Reserve LOC Loans" shall mean any loans made to the
           ------------------------------
Issuer under a Debt Service Reserve L/C Agreement.

          "Debt Service Reserve Requirement" shall mean:
           --------------------------------

          (a)  for any date of determination occurring on a Six-Month DSR Date,
an amount equal to (i) the principal and interest which will be due or has
become due on the Senior Secured Obligations during the period from and
including the day after the immediately preceding Bond Payment Date through and
including the Bond Payment Date succeeding such date of determination (or, if
such date of determination is a Bond Payment Date, through and including such
date of determi  nation), less (ii) the amount of Monies already on deposit in
or credited to the Debt Service  Reserve Account, if any, less (iii) the
aggregate of the Drawing Amounts of any Debt Service Reserve L/Cs, less (iv) the
aggregate of the Guaranteed Amounts under any Debt Service Reserve Guaranties;
or

          (b)  for any date of determination other than a Six-Month DSR Date, an
amount equal to (i) the principal and interest which will be due or has become
due on the Senior Secured Obligations during the period from and including the
day after the immediately preceding Bond Payment Date through and including the
next two Bond Payment Dates (or, if such date of determination is a Bond Payment
Date, through and including the next Bond Payment Date), less (ii) the amount of
Monies already on deposit in or credited to the Debt Service Reserve Account, if
any, less (iii) the aggregate of the Drawing Amounts of any Debt Service Reserve
L/Cs, less (iv) the aggregate of the Guaranteed Amounts under any Debt Service
Reserve Guaranties.

                                       4
<PAGE>

          "Debt Termination Date" means the date on which (i) all Senior Secured
           ---------------------
Obligations, other than contingent liabilities and obligations which are
unasserted at such date, have been paid and satisfied in full (or legally
defeased in full in accordance with the express terms and conditions of the
related Financing Documents), (ii) all Senior Secured Obligations that are
letters of credit have terminated or have expired in accordance with their terms
and (iii) all commitments of the Secured Parties under the Financing Documents
have been terminated.

          "Default" shall have the meaning given to such term in the
           -------
Intercreditor Agreement.

          "Disbursement Date" shall mean a date on which Monies are withdrawn or
           -----------------
transferred from an Account for the purposes set forth in a Requisition or
Funding Date Certificate.

          "Distribution Conditions" shall have the meaning given to such term in
           -----------------------
Section 3.9(a).
--------------

          "Distribution Suspense Account" shall mean the account established
           -----------------------------
pursuant to Section 2.1 having the name and account number set forth below the
            -----------
title "Distribution Suspense Account" in Schedule I hereto.
                                         ----------

          "Drawing Amount" shall mean, with respect to a letter of credit at any
           --------------
given time, the amount available to be drawn under such letter of credit at such
time.

          "DSR Insufficiency Amount" shall have the meaning given to such term
           ------------------------
in Section 3.6(c).
   --------------

          "DSR LOC Loan Principal Account" shall mean the account established
           ------------------------------
pursuant to Section 2.1 having the name and account number set forth below the
            -----------
title "DSR LOC Loan Principal Account" in Schedule I hereto.
                                          ----------

          "Event of Default" shall have the meaning given to such term in the
           ----------------
Intercreditor Agreement.

          "Event of Default Date" shall have the meaning given to such term in
           ---------------------
Section 3.12(a).
---------------

          "Funding Date" shall mean the last day of each calender month (or, if
           ------------
such day is not a Business Day, the next succeeding Business Day).

                                       5
<PAGE>

          "Funding Date Certificate" shall have the meaning given to such term
           ------------------------
in Section 3.1(b).
   --------------

          "Funding Period" shall mean a period commencing on a Funding Date and
           --------------
ending on the day preceding the next succeeding Funding Date.

          "Guaranteed Amount" shall have the meaning applied to the term
           -----------------
"Guaranty Cap" in any Debt Service Reserve Guaranty, any Major Maintenance
Reserve Guaranty, any Sales Tax Reserve Guaranty, or any PSA Contingency Reserve
Guaranty as applicable.

          "Holdings II Account" shall mean the account established pursuant to
           -------------------
Section 2.1 having the name and account number set forth below the title "Elwood
-----------
II Holdings Account" in Schedule I hereto.
                        ----------

          "Holdings III Account" shall mean the account established pursuant to
           --------------------
Section 2.1 having the name and account number set forth below the title "Elwood
-----------
III Holdings Account" in Schedule I hereto.
                         ----------

          "Holdings II ESA Amount" shall have the meaning given to such term in
           ----------------------
Section 3.2(a).
--------------

          "Holdings III ESA Amount" shall have the meaning given to such term in
           -----------------------
Section 3.2(a).
--------------

          "Holdings II Periodic Tax Amount" shall mean$22,972.44.
           -------------------------------

          "Holdings III Periodic Tax Amount" shall mean $41,192.15.
           --------------------------------

          "Holdings II Return Amount" shall mean, for any date of determination
           -------------------------
(which shall be a Funding Date), the difference between (i) the Holdings II ESA
Amount and (ii) the Holdings II Periodic Tax Amount.

          "Holdings III Return Amount" shall mean, for any date of determination
           --------------------------
(which shall be a Funding Date), the difference between (i) the Holdings III ESA
Amount and (ii) the Holdings III Periodic Tax Amount.

          "Independent Engineer Restoration Certificate" shall have the meaning
           --------------------------------------------
given to such term in Section 3.10(a)(iii)(B).
                      -----------------------

                                       6
<PAGE>

          "Initial Stub Period" shall mean the period of time commencing on (and
           -------------------
including) the Closing Date and ending on (and including) the first Bond Payment
Date occurring after the Closing Date.

          "Issuer Debt Service Reserve L/C" shall mean any Debt Service Reserve
           -------------------------------
L/C for which the Issuer is the account party liable for the reimbursement
obligations under the applicable Debt Service Reserve L/C Agreement.

          "Major Maintenance Insufficiency Amount" shall have the meaning set
           --------------------------------------
forth in Section 3.7(e).
         --------------

          "Maintenance Requisition" shall have the meaning given to such term in
           -----------------------
Section 3.7(b).
--------------

          "Major Maintenance Reserve Account" shall mean the account established
           ---------------------------------
pursuant to Section 2.1 having the name and account number set forth below the
            -----------
title "Major Maintenance Reserve Account" in Schedule I hereto.
                                             ----------

          "Major Maintenance Reserve Guarantor" shall mean any Person issuing a
           -----------------------------------
Major Maintenance Reserve Guaranty.

          "Major Maintenance Reserve Guaranty" shall mean a guaranty issued by
           ----------------------------------
any Person whose long-term senior unsecured debt is rated at least "BBB" by S&P
and "Baa2" by Moody's, and otherwise in substantially the form attached hereto
as Exhibit B.
   ---------

          "Major Maintenance Reserve L/C" shall have the meaning set forth in
           -----------------------------
Section 3.7(c).
--------------

          "Major Maintenance Reserve L/C Provider" shall mean the bank or other
           --------------------------------------
financial institution providing a Major Maintenance Reserve L/C.

          "Major Maintenance Reserve Requirement" shall mean, for any date of
           -------------------------------------
determination, an amount equal to (i) the Current Major Maintenance Required
Balance, less (ii) the amount of Monies on deposit in or credited to the Major
Maintenance Reserve Account (as determined on (x) the Bond Payment Date
immediately preceding such date of determination or (y) if such date of
determination is during the Initial Stub Period, the Closing Date), less (iii)
the aggregate of the Drawing Amounts of any Major Maintenance Reserve L/Cs (as
determined on (x) the Bond Payment Date immediately preceding such date of
determination or (y) if such date of determination is during the Initial Stub
Period,

                                       7
<PAGE>

the Closing Date), less (iv) the aggregate of the Guaranteed Amounts
under any Major Maintenance Reserve Guaranties (as determined on (x) the Bond
Payment Date immediately preceding such date of determination or (y) if such
date of determination is during the Initial Stub Period, the Closing Date).

          "Maximum PSA Contingency Amount" shall mean, at any time, an amount
           ------------------------------
equal to the difference between (a) the aggregate principal amount of the Bonds
then Outstanding and (b) the amount set forth opposite the applicable year on
Schedule IV hereto.
-----------

          "Monies" shall mean all cash, payments, Permitted Investments and
           ------
other amounts (including instruments evidencing such amounts) on deposit in or
credited to any Account.

          "O&M Account" shall mean the account established pursuant to Section
           -----------                                                 -------
2.1 having the name and account number set forth below the title "O&M Account"
---
in Schedule I hereto.
   ----------

          "Post-2012 Debt Service Reserve Shortfall Guaranty" shall mean a Debt
           -------------------------------------------------
Service Reserve Guaranty that guarantees payment of all or any portion of any
Post-2012 Debt Service Reserve Shortfall.

          "Post-2012 Debt Service Reserve Shortfall" shall mean, for any date of
           ----------------------------------------
determination occurring on or after January 1, 2013, the positive difference, if
any, between (x) the Debt Service Reserve Requirement calculated in accordance
with clause (b) of the definition thereof and (y) the Debt Service Reserve
Requirement calculated in accordance with clause (a) of the definition thereof.

          "Proceeds Account" shall mean the account established pursuant to
           ----------------
Section 2.1 having the name and account number set forth below the title
-----------
"Proceeds Account" in Schedule I hereto.
                      ----------

          "Projected PSA Coverage Ratio" shall mean, for any period, the ratio
           ----------------------------
of (i) the aggregate of all Cash Available for Debt Service for such period plus
all deposits, if any, made or to be made to the Major Maintenance Reserve
Account during such period, to (ii) the aggregate of all Debt Service for such
period, in each case calculated by the Issuer on a projected basis and confirmed
by the Independent Engineer.

          "PSA Contingency Insufficiency Amount" shall have the meaning set
           ------------------------------------
forth in Section 3.8(c).
         --------------

                                       8
<PAGE>

          "PSA Contingency Reserve Account" shall mean the account established
           -------------------------------
pursuant to Section 2.1 having the name and account number set forth below the
            -----------
title "PSA Contingency Reserve Account" in Schedule I hereto.
                                           ----------

          "PSA Contingency Reserve Amount" shall mean, at the date of
           ------------------------------
determination (which shall be the last Funding Date immediately preceding a Bond
Payment Date):

          (i)   $0, if, on such date of determination, either (a) the average
Contracted Coverage Ratio for the consecutive period of the lesser of (x)
sixteen full fiscal quarters following such date of determination and (y) the
number of full fiscal quarters from such date of determination until the first
Bond Payment Date in 2024, in either case taken as a whole, is equal to or
greater than 1.40 to 1.0 or (b) the PSA Coverage Ratio for the six fiscal
quarter period immediately preceding such date of determination is greater than
or equal to the PSA Historical Ratio, and the Projected PSA Coverage Ratio for
the consecutive period of the lesser of (A) sixteen full fiscal quarters
following such date of determination and (B) the number of full fiscal quarters
from such date of determination until the first Bond Payment Date in 2024, in
either case taken as a whole, is greater than or equal to the PSA Projected
Ratio; or

          (ii)  if the requirement set forth in clause (i) above has not been
satisfied, 25% of the Maximum PSA Contingency Amount, if, on such date of
determination, the average Contracted Coverage Ratio for the consecutive period
of the lesser of (x) sixteen full fiscal quarters following such date of
determination and (y) the number of full fiscal quarters from such date of
determination until the first Bond Payment Date in 2024, in either case taken as
a whole, is equal to or greater than 1.25 to 1.0; or

          (iii) if the requirements set forth in clauses (i) or (ii) above have
not been satisfied, 33-1/3% of the Maximum PSA Contingency Amount, if, on such
date of determination, the average Contracted Coverage Ratio for the consecutive
period of the lesser of (x) sixteen full fiscal quarters following such date of
determination and (y) the number of full fiscal quarters from such date of
determination until the first Bond Payment Date in 2024, in either case taken as
a whole, is equal to or greater than 1.1 to 1.0; or

          (iv) if the requirements set forth in clauses (i), (ii) or (iii) above
have not been satisfied, the Maximum PSA Contingency Amount.

                                       9
<PAGE>

          "PSA Contingency Reserve Guarantor" shall mean any Person issuing a
           ---------------------------------
PSA Contingency Reserve Guaranty.

          "PSA Contingency Reserve Guaranty" shall mean a guaranty issued by any
           --------------------------------
Person whose long-term senior unsecured debt is rated at least "BBB" by S&P and
"Baa2" by Moody's, and otherwise in substantially the form attached hereto as
Exhibit C attached hereto.
---------

          "PSA Contingency Reserve L/C" shall have the meaning set forth in
           ---------------------------
Section 3.8(a).
--------------

          "PSA Contingency Reserve L/C Provider" shall mean the bank or
           ------------------------------------
financial institution providing a PSA Contingency Reserve L/C.

          "PSA Contingency Reserve Requirement" shall mean, for any date of
           -----------------------------------
determination, an amount equal to (i) the PSA Contingency Reserve Amount for the
Bond Payment Date immediately preceding such date of determination, less (ii)
the amount of Monies already on deposit in or credited to the PSA Contingency
Reserve Account, less (iii) the aggregate of the Drawing Amounts of any PSA
Contingency Reserve L/Cs, less (iv) the aggregate of the Guaranteed Amounts
under any PSA Contingency Reserve Guaranties.

          "PSA Coverage Ratio" shall mean, for any period, the ratio of (i) the
           ------------------
aggregate of all Cash Available for Debt Service for such period  plus all
deposits, if any, made to the Major Maintenance Reserve Account for such period,
to (ii) the aggregate of all Debt Service for such period.

          "PSA Funding Reduction Date" shall have the meaning set forth in
           --------------------------
Section 3.1(b)(vii).
-------------------

          "PSA Historical Ratio" shall mean, for any date of determination, (x)
           --------------------
(i) 4.0 minus (ii) 2.6 times the percentage of the Project's capacity that is
covered by Permitted PPAs for the six-quarter period, taken as a whole,
immediately preceding such date of determination, to (y) 1.0.  For the avoidance
of doubt, the examples set forth on Annex A illustrate how the applicable
                                    -------
percentage of capacity shall be calculated in this definition of "PSA Historical
Ratio".

          "PSA Projected Ratio" shall mean, for any date of determination, (x)
           -------------------
(i) 4.0 minus (ii) 2.6 times the percentage of the Project's capacity that is
covered by Permitted PPAs for the sixteen-quarter (or less, if applicable)
period, taken as a whole, immediately following such date of determination to
(y) 1.0.  For the

                                      10
<PAGE>

avoidance of doubt, the examples set forth on Annex A hereto illustrate how the
                                              -------
applicable percentage of capacity shall be calculated in this definition of "PSA
Projected Ratio".

          "PSA Reserve Excess" shall have the meaning set forth in Section
           ------------------                                      -------
3.1(b)(vii).
-----------

          "Redeemable Facilities" shall mean, in the context of any redemption
           ---------------------
or prepayment obligation, (i) the Bonds and (ii) each facility constituting a
Senior Secured Obligation whose agent, trustee or similar representative is
party to the Collateral Agency Agreement and which, pursuant to the terms of its
Financing Documents, has opted to be prepaid pursuant to the terms of the
Section hereof which refers to such prepayment obligation.

          "Required Secured Parties" shall have the meaning given to such term
           ------------------------
in the Intercreditor Agreement.

          "Requisition" shall mean a Maintenance Requisition or a Restoration
           -----------
Requisition.

          "Restoration Requisition" shall have the meaning given to such term in
           -----------------------
Section 3.10(a)(iii)(A).
-----------------------

          "Revenue Account" shall mean the account established pursuant to
           ---------------
Section 2.1 having the name and account number set forth below the title
-----------
"Revenue Account" in Schedule I hereto.
                     ----------

          "Sales Tax Final Payment Date" shall mean the date on which final
           ----------------------------
payment is due under the Sales Tax Agreements.

          "Sales Tax Funding Date" shall mean each March 31, June 30, September
           ----------------------
30 and December 31 (or if any such day is not a Business Day, the next
succeeding Business Day) commencing March 31, 2006 and ending on the last such
date prior to the Sales Tax Final Payment Date.

          "Sales Tax Reserve Account" shall mean the account established
           -------------------------
pursuant to Section 2.1 having the name and account number set forth below the
            -----------
title "Sales Tax Reserve Account" in Schedule I hereto.
                                     ----------

          "Sales Tax Reserve Guarantor" shall mean any Person issuing a Sales
           ---------------------------
Tax Reserve Guaranty.

                                      11
<PAGE>

          "Sales Tax Reserve Guaranty" shall mean a guaranty issued by any
           --------------------------
Person whose long-term senior unsecured debt is rated at least "BBB" by S&P and
"Baa2" by Moody's, and otherwise in substantially the form attached hereto as
Exhibit D attached hereto.
---------

          "Sales Tax Reserve Insufficiency Amount" shall have the meaning set
           --------------------------------------
forth in Section 3.3(c).
         --------------

          "Sales Tax Reserve L/C" shall have the meaning set forth in Section
           ---------------------                                      -------
3.3(a).
------

          "Sales Tax Reserve Requirement" shall mean, for any date of
           -----------------------------
determination, an amount equal to (i) the applicable amount for such date set
forth on Schedule III hereto, less (ii) the amount of Monies already on deposit
in or credited to the Sales Tax Reserve Account, less (iii) the aggregate of the
Drawing Amounts of any Sales Tax Reserve L/Cs, less (iv) the aggregate of the
Guaranteed Amounts under any Sales Tax Reserve Guaranties.

          "Six-Month DSR Date" shall mean (a) any date of determination
           ------------------
occurring on or after January 1, 2013 on which (i) the Issuer is party to
Permitted PPAs covering, in the aggregate, 75% or more of the capacity of the
Project for the consecutive period of four full fiscal quarters, taken as a
whole, following such date of determination and (ii) either (x) the Issuer has
provided one or more Post-2012 Debt Service Reserve Shortfall Guaranties or (y)
each Rating Agency has confirmed that the failure to provide such Post-2012 Debt
Service Reserve Shortfall Guaranties will not result in a Rating Downgrade, or
(b) any date of determination occurring on or before December 31, 2012.

          SECTION 1.2  Rules of Interpretation.  Except as otherwise expressly
                       -----------------------
provided herein, the rules of interpretation set forth in the Indenture shall
apply to this Agreement.

          SECTION 1.3  Uniform Commercial Code.  As used herein, the term /_"New
                       -----------------------
York UCC" shall mean the Uniform Commercial Code as in effect from time to time
in the State of New York.  All terms defined in the New York UCC shall have the
respective meanings given to those terms in the New York UCC, except where the
context otherwise requires.

                                  ARTICLE II
                         ESTABLISHMENT OF THE ACCOUNTS
                         -----------------------------

                                      12
<PAGE>

          SECTION 2.1  Establishment of Accounts.  The Administrative Agent has
                       -------------------------
established the following special, segregated and irrevocable cash collateral
accounts (together with all sub-accounts to be established pursuant to this
Agreement, the "Accounts") in the form of non-interest bearing accounts (each
                --------
such Account being (or to be, when established) a "securities account" as such
term is defined in Section 8-501(a) of the New York UCC), which shall be
maintained at all times until the termination of this Agreement in accordance
with the Securities Account Control Agreement:

          (a)  Revenue Account;
          (b)  O&M Account;
          (c)  Holdings II Account;
          (d)  Holdings III Account;
          (e)  Sales Tax Reserve Account;
          (f)  Debt Service Payment Account;
          (g)  DSR LOC Loan Principal Account;
          (h)  Debt Service Reserve Account;
          (i)  Major Maintenance Reserve Account;
          (j)  PSA Contingency Reserve Account;
          (k)  Distribution Suspense Account;
          (l)  Distribution Account; and
          (m)  Proceeds Account.

          The account numbers of the Accounts established hereunder on the
Closing Date are set forth on Schedule I hereto.  The Accounts shall not be
                              ----------
evidenced by passbooks or similar writings.

          The Collateral Agent may, with the consent of the Issuer (and, with
respect to the Holdings II Account or the Holdings III Account, with the consent
of Elwood II Holdings or Elwood III Holdings, respectively) and upon notice to
the Trustee, any Working Capital Agent, any Debt Service Reserve L/C Agent and
any Additional Indebtedness Agent, cause the Administrative Agent to establish
and create sub-accounts within the Accounts.  In the event that, in accordance
with this Agreement, the Administrative Agent is required to segregate certain
monies in an Account from any other amounts on deposit in such Account pending
transfer or withdrawal in accordance with this Agreement, the Collateral Agent
shall cause the Administrative Agent to either (i) hold such monies in such
Account for use solely for such transfer or withdrawal or (ii) create a separate
sub-account for such purpose.

          All amounts from time to time held in each Account (other than the
Holdings II Account and the Holdings III Account) shall be held (A) in the name
of

                                      13
<PAGE>

the Issuer subject to the lien and security interest of the Collateral Agent
for the benefit of the Secured Parties and (B) in the custody of, and subject to
the control of, the Collateral Agent and the Administrative Agent for the
purposes and on the terms set forth in this Agreement.  All such amounts shall
constitute a part of the Collateral and shall not constitute payment of any
Indebtedness or any other obligation of the Issuer until applied as hereinafter
provided.

          All amounts from time to time held in the Holdings II Account shall be
held (A) in the name of Elwood II Holdings subject to the lien and security
interest of the Collateral Agent for the benefit of the Secured Parties and (B)
in the custody of, and subject to the control of, the Collateral Agent and the
Administrative Agent for the purposes and on the terms set forth in this
Agreement.  All such amounts shall constitute a part of the Collateral and shall
not constitute payment of any Indebtedness or any other obligation of the Issuer
until applied as hereinafter provided.

          All amounts from time to time held in the Holdings III Account shall
be held (A) in the name of Elwood III Holdings subject to the lien and security
interest of the Collateral Agent for the benefit of the Secured Parties and (B)
in the custody of, and subject to the control of, the Collateral Agent and the
Administrative Agent for the purposes and on the terms set forth in this
Agreement.  All such amounts shall constitute a part of the Collateral and shall
not constitute payment of any Indebtedness or any other obligation of the Issuer
until applied as hereinafter provided.

          SECTION 2.2  Termination.  This Agreement shall remain in full force
                       -----------
and effect until the Debt Termination Date.

                                  ARTICLE III
                                 THE ACCOUNTS
                                 ------------

          SECTION 3.1  Revenue Account.
                       ---------------

          (a)  Deposits into the Revenue Account.
               ---------------------------------

               (i)  Deposits. Except as otherwise expressly provided herein, the
                    --------
Issuer shall cause the following amounts to be deposited into the Revenue
Account directly, or if received by the Issuer, as soon as practicable (but no
more than three (3) Business Days) after receipt, or otherwise in accordance
with the provisions of this Agreement:

                                      14
<PAGE>

               (A)  all Operating Revenues received by the Issuer (including any
     income from the investment of monies on deposit in the Accounts);

               (B)  any proceeds of Additional Indebtedness which are not
     disbursed directly to vendors or contractors; and

               (C)  all other income (howsoever earned), revenue (howsoever
     generated) and proceeds of any nature whatsoever received by the Issuer
     (including, without limitation, the proceeds of any business interruption
     insurance or other payments received for interruption of operations in
     respect of any Loss Event, but excluding amounts required by the terms
     hereof to be deposited into the Proceeds Account, amounts contributed by
     the Members as equity (if any), the proceeds of the Bonds issued on the
     Closing Date and the proceeds of Permitted Indebtedness under Sections
                                                                   --------
     5.1(c)(v) and 5.1(c)(vi) of the Indenture).
     ---------     ----------

          (ii)  Instructions. The Issuer hereby (A) acknowledges that it has
                ------------
irrevocably instructed each Project Party party to each Project Document in
effect as of the Closing Date pursuant to which payments may be made to or
received by the Issuer, and agrees that it shall so instruct each Project Party
party to each Project Document entered into after the Closing Date under which
payments may be made to, or received by, the Issuer, to make all such payments
directly to the Administrative Agent for deposit in the Revenue Account (and to
specify in writing when making such payments the source and nature of such
payments), and (B) acknowledges that it has obtained or will obtain to the
extent required under the Indenture and the other Financing Documents, a Consent
evidencing, among other things, the agreement or acknowledgment of each Project
Party to each Project Document in effect on the Closing Date to make all such
payments directly to the Administrative Agent for deposit in the Revenue
Account. If, notwithstanding the foregoing, any Operating Revenues are remitted
directly to the Issuer, the Issuer shall hold such payments in trust for the
Collateral Agent and shall as promptly as practicable (but no more than three
(3) Business Days) after receipt remit such payments to the Administrative Agent
(together with an Officer's Certificate of the Issuer specifying the source and
nature of such payments) for deposit in the Revenue Account in accordance with
the terms of this Agreement, in the form received, together with any necessary
endorsements.

          (iii) Certain Transfers of Amounts with respect to Additional
                -------------------------------------------------------
Indebtedness.  Upon deposit into the Revenue Account of any proceeds of
------------
Additional Indebtedness (as identified in an Officer's Certificate of the
Issuer), the

                                      15
<PAGE>

Administrative Agent shall (i) establish and create a sub-account within the
Revenue Account in accordance with Section 2.1 (and no separate consent of the
                                   -----------
Issuer or the Collateral Agent shall be required), (ii) transfer such proceeds
to such sub-account and (iii) transfer such proceeds from time to time in
accordance with Officers' Certificates (and in accordance with other conditions
(if any) established in the Additional Indebtedness Documents relating to such
Additional Indebtedness) for application consistent with the purposes for which
such Additional Indebtedness was incurred pursuant to the terms of the
Indenture.

               (iv) Identification of Amounts. In the event the Administrative
                    -------------------------
Agent receives monies without adequate identification or adequate instruction
with respect to the proper Account in which such monies are to be deposited, the
Administrative Agent shall deposit such monies into the Revenue Account,
segregate such monies from all other Monies on deposit in the Revenue Account
and notify the Issuer of the receipt of such monies. Upon receipt of an
Officer's Certificate of the Issuer containing written identification and
instruction from the Issuer regarding such monies, the Administrative Agent
shall (if necessary and in accordance with this Agreement) transfer such monies
from the Revenue Account to the Account in which such monies were to be
deposited in accordance with this Agreement as specified by the Issuer in such
Officer's Certificate.

          (b)  Applications and Transfers.  Subject to Section 3.11, the Issuer
               --------------------------              ------------
shall, on each Funding Date, cause the Administrative Agent to transfer Monies
to the extent then available in the Revenue Account and not segregated for any
specific purpose as provided in this Section 3.1 (except as otherwise set forth
                                     -----------
in this Agreement), and the Administrative Agent shall so transfer such Monies,
in accordance with an Officer's Certificate of the Issuer to be received by the
Administrative Agent at least three (3) Business Days prior to such Funding Date
setting forth the amounts to be applied or transferred pursuant to this Section
                                                                        -------
3.1(b) and the Persons referred to in clauses (i) through (viii) (inclusive)
------
below that are entitled to payment or Accounts to which amounts withdrawn are to
be paid or deposited (with respect to each Funding Date, the "Funding Date
                                                              ------------
Certificate") in the amounts and order of priority set forth below.  To the
-----------
extent that applications are not effected on such Funding Date, the related
amounts will be retained in the Revenue Account pending application at such time
as such amounts are due and payable to the Persons or Accounts entitled thereto
(and the Issuer and the Administrative Agent shall not apply such amounts for
any other purpose).  The order of priority of application or transfer of monies
from the Revenue Account on each Funding Date is as follows:

               (i)  First: (i) transfer from the Revenue Account to the O&M
                    -----
Account the amount set forth in such Funding Date Certificate and certified

                                      16
<PAGE>

therein to be the Issuer's good faith estimate of the amounts due and payable
for O&M Costs (other than O&M Costs that will be paid with the proceeds of
Working Capital Loans) on such Funding Date or reasonably expected to be due and
payable within the Funding Period commencing on such Funding Date and (ii) at
the election of the Issuer, to the repayment of amounts outstanding under any
Working Capital Agreement if and to the extent that such amounts were used to
pay O&M costs previously incurred;

          (ii)  Second: if such Funding Date is a Sales Tax Funding Date,
                ------
transfer from the Revenue Account to the Sales Tax Reserve Account an amount (as
set forth in such Funding Date Certificate) which is equal to the then current
Sales Tax Reserve Requirement;

          (iii) Third: beginning with the Funding Date occurring on November 30,
                -----
2001, transfer from the Revenue Account to the Debt Service Payment Account an
amount (as set forth in such Funding Date Certificate) equal to the sum of (A)
one-sixth (or, during the Initial Stub Period, one-third) of the interest,
principal and premium, if any, due and payable with respect to the Bonds on the
next succeeding Bond Payment Date (unless such Funding Date is the last Funding
Date prior to a Bond Payment Date when the amount transferred shall equal the
excess of the total amount of interest, principal and premium, if any, due and
payable on the Bonds on such Bond Payment Date less the amounts already
transferred to the Debt Service Payment Account for such purpose), (B) one-third
or one-sixth, as applicable, of the interest, principal and premium, if any, due
and payable on the next Bond Payment Date with respect to any other Senior
Secured Obligation payable on a quarterly or semi-annual basis, as the case may
be, and (C) all other amounts (other than principal of Debt Service Reserve LOC
Loans which shall be paid under priority Fourth below) due and payable at any
                                         ------
time during the Funding Period commencing on such Funding Date with respect to
the Senior Secured Obligations; provided that any transfers required pursuant to
                                --------
this priority Third which were not made on the prior Funding Date because the
              -----
amounts in the Revenue Account were insufficient to make such transfers shall
also be made as of the current Funding Date;

          (iv)  Fourth: transfer from the Revenue Account to the DSR LOC Loan
                ------
Principal Account an amount (as set forth in such Funding Date Certificate)
which, together with the Monies on deposit in or credited to the DSR LOC Loan
Principal Account, is equal to the principal amount of Debt Service Reserve LOC
Loans due and payable during the Funding Period commencing on such Funding Date;
provided that if the principal of the Debt Service Reserve LOC Loan is payable
--------
on a quarterly or semi-annual basis, then the amount transferred to the DSR LOC
Loan Principal Account on each Funding Date shall equal 1/3 or 1/6, as
applicable, of such quarterly or semi-annual principal payment; provided
                                                                --------
further,
-------

                                      17
<PAGE>

that any transfers required pursuant to this priority Fourth which were
                                                      ------
not made on the prior Funding Date because the amounts in the Revenue Account
were insufficient to make such transfers shall also be made as of the current
Funding Date;

          (v)   Fifth:  transfer from the Revenue Account to the Debt Service
                -----
Reserve Account an amount (as set forth in such Funding Date Certificate) which
is equal to the then current Debt Service Reserve Requirement;

          (vi)  Sixth: beginning with the Funding Date occurring on November 30,
                -----
2001, transfer from the Revenue Account to the Major Maintenance Reserve Account
an amount (as set forth in such Funding Date Certificate) which is equal to one-
sixth (or, during the Initial Stub Period, one-half) of the then current Major
Maintenance Reserve Requirement;

          (vii) Seventh: beginning on the Funding Date immediately preceding the
                -------
first Bond Payment Date in 2013 and ending on the Funding Date immediately
preceding the first Bond Payment Date in 2024, transfer from the Revenue Account
to the PSA Contingency Reserve Account an amount which is equal to the then
current PSA Contingency Reserve Requirement; provided, however, that, on any
                                             --------  -------
Funding Date when Monies on deposit in or credited to the PSA Contingency
Reserve Account exceed the PSA Contingency Reserve Amount, subject to Sections
                                                                      --------
3.8(c) and 3.8(d) below, an amount equal to such excess (the "PSA Reserve
------     ------                                             -----------
Excess") shall be transferred to the Distribution Suspense Account; provided,
------                                                              --------
further, however, notwithstanding the foregoing, if, on any Funding Date, the
-------  -------
PSA Contingency Reserve Amount is reduced from the Maximum PSA Contingency
Amount to $0 as a result of the Issuer meeting the test set forth in clause
(i)(b) of the definition of PSA Contingency Reserve Amount (such date, the "PSA
                                                                            ---
Funding Reduction Date"), then, notwithstanding such reduction of the PSA
----------------------
Contingency Reserve Amount to $0, the amount of Monies required to remain in the
PSA Contingency Reserve Account (taking into account any PSA Contingency Reserve
L/Cs and PSA Contingency Reserve Guaranties) after giving effect to any such
transfer to be made on a Funding Date, shall equal: (i) on such PSA Funding
Reduction Date and until the first anniversary of such PSA Funding Reduction
Date, 50% of the amount on deposit in the PSA Contingency Reserve Account
immediately prior to the reduction in the PSA Contingency Reserve Amount from
the Maximum PSA Contingency Amount to $0, (ii) on the first anniversary of such
PSA Funding Reduction Date and until the second anniversary of such PSA Funding
Reduction Date, 25% of the amount on deposit in the PSA Contingency Reserve
Account immediately prior to the reduction in the PSA Contingency Reserve Amount
from the Maximum PSA Contingency Amount to $0, (iii) on the second anniversary
of such PSA Funding Reduction Date and until the third anniversary of such PSA
Funding Reduction Date, 12.5% of the amount on deposit in the PSA

                                      18
<PAGE>

Contingency Reserve Account immediately prior to the reduction in the PSA
Contingency Reserve Amount from the Maximum PSA Contingency Amount to $0, and
(iv) on the third anniversary of such PSA Funding Reduction Date and until the
fourth anniversary of such PSA Funding Reduction Date, 6.25% of the amount on
deposit in the PSA Contingency Reserve Account immediately prior to the
reduction in the PSA Contingency Reserve Amount from the Maximum PSA Contingency
Amount to $0; provided, further, however, that if, on any Funding Date, the
              --------  -------  -------
requirements set forth in any of clauses (i)(a), (ii), (iii) or (iv) of the
definition of "PSA Contingency Reserve Amount" shall have been satisfied, the
remainder of the PSA Reserve Excess shall be transferred to the Distribution
Suspense Account as set forth above); and

          (viii)  Eighth: transfer from the Revenue Account to the Distribution
                  ------
Suspense Account the remaining Monies on deposit in or credited to the Revenue
Account after application of clauses (i) through (vii) above.

     SECTION 3.2  O&M Account. (a) On each Funding Date until the Funding Date
                  -----------
occurring in June 2011, Monies on deposit in or credited to the O&M Account
shall be transferred, pursuant to an Officer's Certificate delivered to the
Administrative Agent delivered no later than three (3) Business Days prior to
such Funding Date, (i) to the Holdings II Account in the amount that is due and
payable to Elwood II Holdings under the Holdings II ESA on such date (the
"Holdings II ESA Amount") and (ii) to the Holdings III Account in the amount
 ----------------------
that is due and payable to Elwood III Holdings under the Holdings III ESA on
such date (the "Holdings III ESA Amount"); provided, that, on any Funding Date,
                -----------------------    --------
Monies shall only be transferred once from the O&M Account to the Holdings II
Account and once from the O&M Account to the Holdings III Account. The Officer's
Certificate delivered pursuant to the preceding sentence shall set forth the
Holdings II ESA Amount and the Holdings III ESA Amount. Subject to the first
sentence of this Section 3.2(a), Monies on deposit in or credited to the O&M
                 --------------
Account may be remitted to the Issuer or paid directly to third parties in an
amount set forth in an Officer's Certificate of the Issuer (which Officer's
Certificate shall be delivered to the Administrative Agent no later than three
(3) Business Days before the date on which such Monies are to be remitted or
paid directly to third parties) as being the amount of O&M Costs due and payable
on such date or reasonably expected to be due and payable by the Issuer within
the next thirty (30) days, less any amounts previously transferred in respect of
such O&M Costs; provided, however, that Monies may be disbursed from the O&M
                --------  -------
Account (and Officer's Certificates may be delivered) more often than monthly if
necessary to pay O&M Costs which are due and payable on the date of
disbursement. An Officer's Certificate of the Issuer delivered to the
Administrative Agent pursuant to this Section 3.2 shall indicate (a) the name of
                                      -----------
each Person (including the Issuer or any third parties) to whom payment of any
O&M Costs requested under such

                                      19
<PAGE>

Officer's Certificate is to be made and (b) the payment or wire transfer
instructions for the payment or transfer of such amounts by the Administrative
Agent to each such Person. The Administrative Agent shall transfer to the
Revenue Account any amounts on deposit in or credited to the O&M Account which
are not needed to pay O&M Costs due or payable hereunder prior to the next
Funding Date, as certified by an Authorized Officer of the Issuer.

          (b)  Holdings II Account.  Elwood II Holdings irrevocably directs the
               -------------------
Administrative Agent, on each Funding Date on which Monies are transferred from
the O&M Account to the Holdings II Account pursuant to Section 3.2(a), (i) to
                                                       --------------
remit an amount equal to the Holdings II Periodic Tax Amount from the Holdings
II Account to Elwood II Holdings for payment of sales tax due and owing by it
under the applicable Sales Tax Agreement and (ii) to transfer the Holdings II
Return Amount from the Holdings II Account to the Revenue Account for
disbursement on such Funding Date in accordance with Section 3.1(b).
                                                     --------------

          (c)  Holdings III Account. Elwood III Holdings irrevocably directs the
               --------------------
Administrative Agent, on each Funding Date on which Monies are transferred from
the O&M Account to the Holdings III Account pursuant to Section 3.2(a), (i) to
                                                        --------------
remit an amount equal to the Holdings III Periodic Tax Amount from the Holdings
III Account to Elwood III Holdings for payment of sales tax due and owing by it
under the applicable Sales Tax Agreement and (ii) to transfer the Holdings III
Return Amount from the Holdings III Account to the Revenue Account for
disbursement on such Funding Date in accordance with Section 3.1(b).
                                                     --------------

          (d)  It is the intention of the parties hereto that the Administrative
Agent shall transfer the Holdings II Return Amount and the Holdings III Return
Amount to the Revenue Account as soon as possible after, but in any event on the
same Funding Date as, the transfers of the Holdings II ESA Amount or the
Holdings III ESA Amount, as applicable, from the O&M Account to the Holdings II
Account or the Holdings III Account, respectively.  In addition, the parties
hereto acknowledge that amounts transferred into the Revenue Account pursuant to
Sections 3.2 (b) and 3.2(c) hereof (i) shall not again be transferred into the
----------------     ------
O&M Account to pay O&M Costs unless necessary to fund a shortfall in the O&M
Account remaining after the initial transfer of funds to the O&M Account on such
Funding Date, and (ii) shall be added to amounts otherwise on deposit in the
Revenue Account before transfer or application of funds from the Revenue Account
to any priority below First.
                      -----

          SECTION 3.3  Sales Tax Reserve Account.
                       -------------------------

                                      20
<PAGE>

          (a) The Issuer may provide (i) one or more letters of credit (each,
until replaced, a "Sales Tax Reserve L/C") in substitution for all or any
                   ---------------------
portion of the Monies required to be on deposit and/or (ii) one or more Sales
Tax Reserve Guaranties in substitution for all or any portion of the Monies
required to be on deposit in or credited to the Sales Tax Reserve Account,
provided that any such Sales Tax Reserve L/C complies with the requirements set
--------
forth in clause (b) below, and any such Sales Tax Reserve Guaranty complies with
the definition thereof.  The Issuer may provide, from time to time as the Issuer
determines, substitute or replacement Sales Tax Reserve L/Cs or Sales Tax
Reserve Guaranties that meet the requirements hereof.   Upon receipt of an
Officer's Certificate of the Issuer requesting such release, the Administrative
Agent shall release and pay to the Issuer or its designee such amount of Monies
for which Sales Tax Reserve L/Cs or Sales Tax Reserve Guaranties are substituted

          (b) The Issuer shall ensure that each Sales Tax Reserve L/C shall: (i)
be an irrevocable direct pay letter of credit naming the Collateral Agent for
the benefit of the Secured Parties as beneficiary; (ii) be issued by a bank or
other financial institution rated at least "A2" by Moody's and at least "A" by
S&P; and (iii)  name a Person other than the Issuer as the party responsible for
reimbursement or other obligations in respect of such Sales Tax Reserve L/C.

          (c) On the Sales Tax Final Payment Date, Monies on deposit or credited
to the Sales Tax Reserve Account may be remitted to the Issuer or paid directly
to the taxing authority to whom such sales taxes are due in an amount set forth
in an Officer's Certificate of the Issuer (which Officer's Certificate shall be
delivered to the Administrative Agent no later than three (3) Business Days
before the date on which such Monies are to be remitted or paid directly to the
taxing authority to whom such sales taxes are due) as being the amount owing
pursuant to the Sales Tax Agreements on the Sales Tax Final Payment Date.  An
Officer's Certificate of the Issuer delivered to the Administrative Agent
pursuant to this Section 3.3 shall indicate (a) the name of each Person to whom
                 -----------
the payment requested under such Officer's Certificate is to be made and (b) the
payment or wire transfer instructions for the payment or transfer of such
amounts by the Administrative Agent to each such Person.  To the extent that
amounts held in the Sales Tax Reserve Account at 12:00 p.m. (noon) two (2)
Business Days prior to the Sales Tax Final Payment Date are insufficient to fund
the amounts set forth in such Officer's Certificate, one (1) Business Day prior
to such Sales Tax Final Payment Date, the Administrative Agent shall deliver to
(x) each Sales Tax Reserve L/C Provider, if any, on such date a draft on its
respective Sales Tax Reserve L/C, together with an appropriate certificate with
respect thereto if required under such Sales Tax Reserve L/C and (y) to each
Sales Tax Reserve Guarantor, if any, a notice of payment by such Sales Tax
Reserve Guarantor under its Sales Tax Reserve

                                      21
<PAGE>

Guaranty. The aggregate amount to be drawn on all Sales Tax Reserve L/Cs and
paid under all such Sales Tax Reserve Guaranties in accordance with the
immediately preceding sentence shall be equal to such insufficiency (the "Sales
                                                                          -----
Tax Reserve Insufficiency Amount") and the amount to be drawn under each such
--------------------------------
Sales Tax Reserve L/C and each such Sales Tax Reserve Guaranty shall be
determined ratably based on the aggregate of the Drawing Amounts and the
aggregate of the Guaranteed Amounts available under all such Sales Tax Reserve
L/Cs and all such Sales Tax Reserve Guaranties, respectively. The Administrative
Agent shall deposit the amounts, if any, received from each Sales Tax Reserve
L/C Provider and each Sales Tax Reserve Guarantor in the Sales Tax Reserve
Account for disbursement in accordance with the first sentence of this Section
                                                                       -------
3.3(c).   The Administrative Agent shall transfer to the Revenue Account any
------
amounts which remain on deposit in or credited to the Sales Tax Reserve Account
after the Sales Tax Final Payment Date.

          (d) Forty-five (45) days (or if such day is not a Business Day, on the
next succeeding Business Day) prior to the expiration of any Sales Tax Reserve
L/C delivered to the Administrative Agent in respect of the Sales Tax Reserve
Account, provided that such Sales Tax Reserve L/C has not been previously
         --------
renewed, extended or replaced (with a new Sales Tax Reserve L/C or a Sales Tax
Reserve Guaranty), the Administrative Agent shall deliver to the Sales Tax
Reserve L/C Provider providing such Sales Tax Reserve L/C on such date (i) a
draft on such Sales Tax Reserve L/C in an amount equal to the Drawing Amount of
such Sales Tax Reserve L/C and (ii) an appropriate certificate with respect
thereto if required by such Sales Tax Reserve L/C.  The Administrative Agent
shall deposit the amounts received from such Sales Tax Reserve L/C Provider in
payment of such draft in the Sales Tax Reserve Account to be applied in
accordance with this Section 3.3.
                     -----------

          (e) Forty-five (45) days (or if such day is not a Business Day, on the
next succeeding Business Day) after receipt of notice that any Sales Tax Reserve
L/C Provider is rated less than "A" by S&P or less than "A2" by Moody's,
provided that the Sales Tax Reserve L/C issued by such Sales Tax Reserve L/C
--------
Provider has not been replaced on or before the end of such 45-day period with a
Sales Tax Reserve L/C issued by a new Sales Tax Reserve L/C Provider or a Sales
Tax Reserve Guaranty, the Administrative Agent shall deliver to such Sales Tax
Reserve L/C Provider on such date (i) a draft on such Sales Tax Reserve L/C in
an amount equal to the Drawing Amount of such Sales Tax Reserve Account L/C and
(ii) an appropriate certificate with respect thereto if required by such Sales
Tax Reserve L/C.  The Administrative Agent shall deposit the amounts received
from such Sales Tax Reserve L/C Provider in payment of such draft in the Sales
Tax Reserve Account to be applied in accordance with this Section 3.3.
                                                          -----------

                                      22
<PAGE>

          (f) Upon receipt of a notice from any Sales Tax Reserve L/C Provider
that the Sales Tax Reserve L/C provided by such Sales Tax Reserve L/C Provider
will be terminated prior to its stated expiration date, if, not less than
fifteen (15) Business Days prior to the termination date as provided in such
notice of termination, such Sales Tax Reserve L/C has not been replaced with a
new Sales Tax Reserve L/C or a Sales Tax Reserve Guaranty, the Administrative
Agent shall deliver to such Sales Tax Reserve L/C Provider (i) a draft on such
Sales Tax Reserve L/C in an amount equal to the Drawing Amount of such Sales Tax
Reserve L/C and (ii) an appropriate certificate with respect thereto if required
by such Sales Tax Reserve L/C.  The Administrative Agent shall deposit the
amounts received from such Sales Tax Reserve L/C Provider in payment of such
draft in the Sales Tax Reserve Account to be applied in accordance with this
Section 3.3.
-----------

          (g) Upon receipt of a notice from any Sales Tax Reserve Guarantor that
the Sales Tax Reserve Guaranty provided by such Sales Tax Reserve Guarantor will
be terminated, if, not less than fifteen (15) Business Days prior to the
termination date as provided in such notice of termination, such Sales Tax
Reserve Guaranty has not been replaced with a new Sales Tax Reserve Guaranty or
a Sales Tax Reserve L/C, the Administrative Agent shall deliver to such Sales
Tax Reserve Guarantor a notice of payment to such Sales Tax Reserve Guarantor in
an amount equal to the Guaranteed Amount of such Sales Tax Reserve Guaranty.
The Administrative Agent shall deposit amounts received from such Sales Tax
Reserve Guarantor in the Sales Tax Reserve Account to be applied in accordance
with this Section 3.3.
          -----------

          (h) Forty-five (45) days (or if such day is not a Business Day, on the
next succeeding Business Day) after receipt of notice that any Sales Tax Reserve
Guarantor is rated less than "BBB" by S&P or less than "Baa2" by Moody's,
provided that the Sales Tax Reserve Guaranty issued by such Sales Tax Reserve
--------
Guarantor has not been replaced with a Sales Tax Reserve Guaranty issued by a
new Sales Tax Reserve Guarantor or with a Sales Tax Reserve L/C, the
Administrative Agent shall deliver to such Sales Tax Reserve Guarantor on such
date a notice of payment to such Sales Tax Reserve Guarantor in an amount equal
to the Guaranteed Amount of such Sales Tax Reserve Guaranty.  The Administrative
Agent shall deposit amounts received from such Sales Tax Reserve Guarantor in
the Sales Tax Reserve Account to be applied in accordance with this Section 3.3.
                                                                    -----------

          SECTION 3.4  Debt Service Payment Account.  Monies on deposit in or
                       ----------------------------
credited to the Debt Service Payment Account shall be allocated ratably (based
on an Officer's Certificate of the Issuer provided to the Administrative Agent)
among sub-accounts of the Debt Service Payment Account for each credit facility
(including the Bonds) constituting a Senior Secured Obligation, based on the
principal of,

                                      23
<PAGE>

premium, if any, and interest due or becoming due, and fees, indemnities or
other amounts owed in respect of such credit facility on the next succeeding
payment date therefor (other than the principal of any Debt Service Reserve LOC
Loans). On any date that amounts for the payment of such Senior Secured
Obligations are due and payable and have been specified in a Funding Date
Certificate delivered to the Administrative Agent in accordance with Section
                                                                     -------
3.1(b)(iii) (or if such day is not a Business Day, then on the next succeeding
-----------
Business Day) and have been allocated to a sub-account of the Debt Service
Payment Account applicable to such Senior Secured Obligations, the
Administrative Agent shall remit such amounts to the Persons specified in such
Funding Date Certificate for the payment of such Senior Secured Obligations;
provided, however, that the Administrative Agent shall segregate such amounts
--------  -------
from any other monies on deposit in the Debt Service Payment Account until such
time as payment is made to the Persons entitled thereto. The Issuer hereby
instructs the Collateral Agent and the Administrative Agent to make all such
payments in respect of the Bonds directly to the Trustee for deposit into the
Bond Fund in accordance with the terms of Section 3.3 of the Indenture, and the
                                          -----------
Collateral Agent and the Administrative Agent hereby acknowledge receipt of such
instruction. In the event that Monies on deposit in or credited to the Debt
Service Payment Account exceed the amount of Monies required by this Agreement
to be deposited therein or credited thereto after giving effect to the payments
made pursuant to this Section 3.4, the Administrative Agent shall transfer such
                      -----------
excess amounts from the Debt Service Payment Account to the Revenue Account at
the written direction of the Issuer.

          SECTION 3.5  DSR LOC Loan Principal Account.
                       ------------------------------

          (a) Monies on deposit in or credited to the DSR LOC Loan Principal
Account shall be used for the payment of principal of outstanding Debt Service
Reserve LOC Loans.  On any date that such amounts have been specified in a
Funding Date Certificate in accordance with Section 3.1(b)(iv), the
                                            ------------------
Administrative Agent shall withdraw the monies on deposit in or credited to the
DSR LOC Loan Principal Account and remit such monies to the Debt Service Reserve
L/C Agent for the payment of such amounts.

          (b) In the event that Monies on deposit in or credited to the DSR LOC
Loan Principal Account exceed the amount of Monies required by this Agreement to
be deposited therein or credited thereto after giving effect to the payments
made pursuant to this Section 3.5, the Administrative Agent shall transfer such
                      -----------
excess amounts from the DSR LOC Loan Principal Account to the Revenue Account at
the written direction of the Issuer.

          SECTION 3.6  Debt Service Reserve Account.
                       ----------------------------

                                      24
<PAGE>

          (a) The Issuer may provide (i) one or more letters of credit (each, a
"Debt Service Reserve L/C") and/or (ii) one or more Debt Service Reserve
 ------------------------
Guaranties in each case in substitution for all or any portion of the Monies
required to be on deposit in or credited to the Debt Service Reserve Account,
provided that (A) any such Debt Service Reserve L/C complies with the
--------
requirements set forth in clause (b) below, (B) any such Debt Service Reserve
Guaranty complies with the definition thereof and (C) prior to the issuance of
any Debt Service Reserve L/C that is an Issuer Debt Service Reserve L/C, each
Rating Agency shall confirm that there will be no Rating Downgrade as a result
of the incurrence of Indebtedness by the Issuer in connection with such Issuer
Debt Service Reserve L/C or the Issuer Debt Service Reserve L/C Agreement
related thereto.  The Issuer may, from time to time as the Issuer determines,
provide substitute or replacement Debt Service Reserve L/Cs or Debt Service
Reserve Guaranties that meet the requirements hereof.  The Administrative Agent
shall release such amount of Monies for which Issuer Debt Service Reserve L/Cs
are substituted in accordance with clause (viii) of Section 3.1(b).  Upon
                                                    --------------
receipt of an Officer's Certificate of the Issuer requesting such release, the
Administrative Agent shall release and pay to the Issuer or its designee such
amount of Monies for which Debt Service Reserve L/Cs (other than Issuer Debt
Service Reserve L/Cs) or Debt Service Reserve Guaranties are substituted.

          (b) The Issuer shall ensure that each Debt Service Reserve L/C shall:
(i) be an irrevocable direct pay letter of credit naming the Collateral Agent
for the benefit of the Secured Parties as beneficiary; (ii) be issued by a bank
or other financial institution rated at least "A2" by Moody's and at least "A"
by S&P; (iii) if such Debt Service Reserve L/C is an Issuer Debt Service Reserve
L/C, be issued under a Debt Service Reserve L/C Agreement with payment terms
which are consistent with the terms of this Agreement and with other terms
customary for debt service reserve obligations similar to those described
herein, including, without limitation, (A) a requirement that any drawing under
such Debt Service Reserve L/C be converted into a Debt Service Reserve LOC Loan
which matures not less than five (5) years after the date of such drawing, and
(B) a provision which permits the Debt Service Reserve L/C Provider to convert
outstanding Debt Service Reserve LOC Loans into Debt Service Reserve LOC Bonds
at any time on or after the 5/th/ anniversary of the Closing Date and otherwise
in accordance with the terms of the applicable Debt Service Reserve L/C
Agreement; and (iv) if such Debt Service Reserve L/C is not an Issuer L/C, name
a Person other than the Issuer as the account party.

          (c) On each date on which the Administrative Agent is required to
withdraw or transfer amounts from the Debt Service Payment Account to make
payments with respect to Senior Secured Obligations under Section 3.4, the
                                                          -----------

                                      25
<PAGE>

Administrative Agent shall first withdraw or transfer (for and only for the
purposes described in Section 3.4) amounts then held in the Debt Service Payment
                      -----------
Account. To the extent that amounts then held in the Debt Service Payment
Account at 12:00 p.m. (noon) two (2) Business Days prior to the date of the
requested withdrawal or transfer are insufficient to fund such withdrawal or
transfer (the "Debt Payment Amount"), as evidenced by an Officer's Certificate
               -------------------
of the Issuer, one (1) Business Day prior to such date the Administrative Agent
shall transfer the Monies on deposit in or credited to the Debt Service Reserve
Account, if any, to the Debt Service Payment Account provided that, if, after
                                                     --------
such transfer of Monies from the Debt Service Reserve Account to the Debt
Service Payment Account, the Monies on deposit in or credited to the Debt
Service Payment Account are insufficient to fund the Debt Payment Amount, the
Administrative Agent shall, one (1) Business Day prior to the date of the
requested withdrawal or transfer, deliver to (x) each Debt Service Reserve L/C
Provider, if any, on such date a draft on its respective Debt Service Reserve
L/C, together with an appropriate certificate with respect thereto if required
under such Debt Service Reserve L/C and (y) to each Debt Service Reserve
Guarantor, if any, a notice of payment by such Debt Service Reserve Guarantor
under its Debt Service Reserve Guaranty.  The aggregate amount to be drawn on
all such Debt Service Reserve L/Cs and paid under all such Debt Service Reserve
Guaranties in accordance with the immediately preceding sentence shall be equal
to the amount of such insufficiency (the "DSR Insufficiency Amount") and the
                                          ------------------------
amount to be drawn under each such Debt Service Reserve L/C and each such Debt
Service Reserve Guaranty shall be determined ratably based on the aggregate of
the Drawing Amounts and the aggregate of the Guaranteed Amounts then available
under all such Debt Service Reserve L/Cs and all such Debt Service Reserve
Guaranties, respectively.

The Administrative Agent shall deposit the amounts, if any, received from each
Debt Service Reserve L/C Provider and each Debt Service Reserve Guarantor in the
Debt Service Payment Account.

          (d) Forty-five (45) days (or if such day is not a Business Day, on the
next succeeding Business Day) prior to the expiration of any Debt Service
Reserve L/C delivered to the Administrative Agent in respect of the Debt Service
Reserve Account, provided that such Debt Service Reserve L/C has not been
                 --------
previously renewed, extended or replaced with a new Debt Service Reserve L/C or
a Debt Service Reserve Guaranty, the Administrative Agent shall deliver to the
Debt Service Reserve L/C Provider providing such Debt Service Reserve L/C on
such date (i) a draft on such Debt Service Reserve L/C in an amount equal to the
Drawing Amount of such Debt Service Reserve L/C and (ii) an appropriate
certificate with respect thereto if required by such Debt Service Reserve L/C.
The Administrative Agent shall deposit the amounts received from such Debt
Service Reserve L/C

                                      26
<PAGE>

Provider in payment of such draft in the Debt Service Reserve Account to be
applied in accordance with this Section 3.6.
                                -----------

          (e) Forty-five (45) days (or if such day is not a Business Day, on the
next succeeding Business Day) after receipt of notice that any Debt Service
Reserve L/C Provider is rated less than "A" by S&P or less than "A2" by Moody's,
provided that the Debt Service Reserve L/C issued by such Debt Service Reserve
--------
L/C Provider has not been replaced on or before the end of such 45-day period
with a Debt Service Reserve L/C issued by a new Debt Service Reserve L/C
Provider or a Debt Service Reserve Guaranty, the Administrative Agent shall
deliver to such Debt Service Reserve L/C Provider on such date (i) a draft on
such Debt Service Reserve L/C in an amount equal to the Drawing Amount of such
Debt Service Reserve Account L/C and (ii) an appropriate certificate with
respect thereto if required by such Debt Service Reserve L/C.  The
Administrative Agent shall deposit the amounts received from such Debt Service
Reserve L/C Provider in payment of such draft in the Debt Service Reserve
Account to be applied in accordance with this Section 3.6.
                                              -----------

          (f) Upon receipt of a notice from any Debt Service Reserve L/C
Provider that the Debt Service Reserve L/C provided by such Debt Service Reserve
L/C Provider will be terminated prior to its stated expiration date, if, not
less than fifteen (15) Business Days prior to the termination date as provided
in such notice of termination, such Debt Service Reserve L/C has not been
replaced with a new Debt Service Reserve L/C or a Debt Service Reserve Guaranty,
the Administrative Agent shall deliver to such Debt Service Reserve L/C Provider
(i) a draft on such Debt Service Reserve L/C in an amount equal to the Drawing
Amount of such Debt Service Reserve L/C and (ii) an appropriate certificate with
respect thereto if required by such Debt Service Reserve L/C.  The
Administrative Agent shall deposit the amounts received from such Debt Service
Reserve L/C Provider in payment of such draft in the Debt Service Reserve
Account to be applied in accordance with this Section 3.6.
                                              -----------

          (g) Upon receipt of a notice from any Debt Service Reserve Guarantor
that the Debt Service Reserve Guaranty provided by such Debt Service Reserve
Guarantor will be terminated, if, not less than fifteen (15) Business Days prior
to the termination date as provided in such notice of termination, such Debt
Service Reserve Guaranty has not been replaced with a new Debt Service Reserve
Guaranty or a Debt Service Reserve L/C, the Administrative Agent shall deliver
to such Debt Service Reserve Guarantor a notice of payment to such Debt Service
Reserve Guarantor in an amount equal to the Guaranteed Amount of such Debt
Service Reserve Guaranty.  The Administrative Agent shall deposit amounts
received from such Debt Service Reserve Guarantor in the Debt Service Reserve
Account to be applied in accordance with this Section 3.6.
                                              -----------

                                      27
<PAGE>

          (h) Forty-five (45) days (or if such day is not a Business Day, on the
next succeeding Business Day) after receipt of notice that any Debt Service
Reserve Guarantor is rated less than "BBB" by S&P or less than "Baa2" by
Moody's, provided that the Debt Service Reserve Guaranty issued by such Debt
         --------
Service Reserve Guarantor has not been replaced with a Debt Service Reserve
Guaranty issued by a new Debt Service Reserve Guarantor or with a Debt Service
Reserve L/C, the Administrative Agent shall deliver to such Debt Service Reserve
Guarantor on such date a notice of payment to such Debt Service Reserve
Guarantor in an amount equal to the Guaranteed Amount of such Debt Service
Reserve Guaranty. The Administrative Agent shall deposit amounts received from
such Debt Service Reserve Guarantor in the Debt Service Reserve Account to be
applied in accordance with this Section 3.6.
                                -----------

          SECTION 3.7  Major Maintenance Reserve Account.
                       ---------------------------------

          (a) Application of Amounts.  Except as otherwise provided in this
              ----------------------
Agreement, amounts held in the Major Maintenance Reserve Account shall be
applied solely for the payment of Major Maintenance Expenditures due and payable
as of any Disbursement Date or the reimbursement for Major Maintenance
Expenditures paid prior to such Disbursement Date (as evidenced by invoices
received by the Issuer).  All Monies withdrawn from the Major Maintenance
Reserve Account shall be withdrawn in accordance with the disbursement procedure
hereinafter described in this Section 3.7.  In the event that Monies on deposit
                              -----------
in or credited to the Major Maintenance Reserve Account, after giving effect to
the payments made pursuant to this Section 3.7, exceed the amount of Monies
required by this Agreement to be deposited therein or credited thereto, the
Administrative Agent shall transfer such excess amounts from the Major
Maintenance Reserve Account to the Revenue Account at the written direction of
the Issuer.

          (b) Conditions Precedent to Withdrawals.  As a condition precedent to
              -----------------------------------
any withdrawal from the Major Maintenance Reserve Account, there shall be
delivered by the Issuer to the Administrative Agent on or prior to the date
three (3) Business Days prior to each Disbursement Date a requisition from the
Issuer in the form attached hereto as Exhibit E (a "Maintenance Requisition")
                                      ---------     -----------------------
signed by an Authorized Representative of the Issuer.

          (c) The Issuer may provide (i) one or more letters of credit (each, a
"Major Maintenance Reserve L/C") and/or (ii) one or more Major Maintenance
 -----------------------------
Reserve Guaranties in each case in substitution for all or any portion of the
Monies required to be on deposit in or credited to the Major Maintenance Reserve
Account, provided that any such Major Maintenance Reserve L/C complies with the
         --------

                                      28
<PAGE>

requirements set forth in clause (d) below, and any such Major Maintenance
Reserve Guaranty complies with the definition thereof.  The Issuer may provide,
from time to time as the Issuer determines, substitute or replacement Major
Maintenance Reserve L/Cs or Major Maintenance Reserve Guaranties that meet the
requirements hereof. Upon receipt of an Officer's Certificate of the Issuer
requesting such release, the Administrative Agent shall release and pay to the
Issuer or its designee such amount of Monies for which Major Maintenance Reserve
L/Cs or Major Maintenance Reserve Guaranties are substituted.

          (d) The Issuer shall ensure that each Major Maintenance Reserve L/C
shall:  (i) be an irrevocable direct pay letter of credit naming the Collateral
Agent for the benefit of the Secured Parties as beneficiary; (ii) be issued by a
bank or other financial institution rated at least "A2" by Moody's and at least
"A" by S&P; and (iii)  name a Person other than the Issuer as the party
responsible for reimbursement or other obligations in respect of such Major
Maintenance Reserve L/C.

          (e) On each Disbursement Date following delivery by the Issuer to the
Administrative Agent of all documentation relating to such Disbursement Date
described in Section 3.7(b), the Issuer shall (subject to Section 3.11) instruct
             --------------                               ------------
the Administrative Agent to apply, and the Administrative Agent so apply, Monies
on deposit or credited to the Major Maintenance Reserve Account to make payments
in amounts set forth in, and otherwise in accordance with, the related Major
Maintenance Requisition.  To the extent that amounts held in the Major
Maintenance Reserve Account at 12:00 p.m. (noon) two (2) Business Days prior to
the such Disbursement Date are insufficient to fund the amounts set forth in
such Major Maintenance Requisition, one (1) Business Day prior to such
Disbursement Date, the Administrative Agent shall deliver to (x) each Major
Maintenance Reserve L/C Provider, if any, on such date a draft on its respective
Major Maintenance Reserve L/C, together with an appropriate certificate with
respect thereto if required under such Major Maintenance Reserve L/C, and (y) to
each Major Maintenance Reserve Guarantor a notice of payment by such Major
Maintenance Reserve Guarantor under its Major Maintenance Reserve Guaranty.  The
aggregate amount to be drawn on all such Major Maintenance Reserve L/Cs and paid
under all such Major Maintenance Reserve Guaranties in accordance with the
immediately preceding sentence shall be equal to the amount of such
insufficiency (the "Major Maintenance Insufficiency Amount") and the amount to
                    --------------------------------------
be drawn under each such Major Maintenance Reserve L/C and each such Major
Maintenance Reserve Guaranty shall be determined ratably based on the aggregate
of the Drawing Amounts and the aggregate of the Guaranteed Amounts then
available under all such Major Maintenance Reserve L/Cs and all such Major
Maintenance Reserve Guaranties, respectively.  The Administrative Agent shall
deposit the amounts, if any, received from each Major Maintenance Reserve

                                      29
<PAGE>

L/C Provider and each Major Maintenance Reserve Guarantor in the Major
Maintenance Reserve Account for disbursement in accordance with the first
sentence of this Section 3.7(e).
                 --------------

          (f) Forty-five (45) days (or if such day is not a Business Day, on the
next succeeding Business Day) prior to the expiration of any Major Maintenance
Reserve L/C delivered to the Administrative Agent in respect of the Major
Maintenance Reserve Account, provided that such Major Maintenance Reserve L/C
                             --------
has not been previously renewed, extended or replaced with a new Major
Maintenance Reserve L/C or a Major Maintenance Reserve Guaranty, the
Administrative Agent shall deliver to the Major Maintenance Reserve L/C Provider
providing such Major Maintenance Reserve L/C on such date (i) a draft on such
Major Maintenance Reserve L/C in an amount equal to the Drawing Amount of such
Major Maintenance Reserve L/C and (ii) an appropriate certificate with respect
thereto if required by such Major Maintenance Reserve L/C.  The Administrative
Agent shall deposit the amounts received from such Major Maintenance Reserve L/C
Provider in payment of such draft in the Major Maintenance Reserve Account to be
applied in accordance with this Section 3.7.
                                -----------

          (g) Forty-five (45) days (or if such day is not a Business Day, on the
next succeeding Business Day) after receipt of notice that any Major Maintenance
Reserve L/C Provider is rated less than "A" by S&P or less than "A2" by Moody's,
provided that the Major Maintenance Reserve L/C issued by such Major Maintenance
--------
Reserve L/C Provider has not been replaced on or before the end of such 45-day
period with a Major Maintenance Reserve L/C issued by a new Major Maintenance
Reserve L/C Provider or with a Major Maintenance Reserve Guaranty, the
Administrative Agent shall deliver to such Major Maintenance Reserve L/C
Provider on such date (i) a draft on such Major Maintenance Reserve L/C in an
amount equal to the Drawing Amount of such Major Maintenance Reserve Account L/C
and (ii) an appropriate certificate with respect thereto if required by such
Major Maintenance Reserve L/C.  The Administrative Agent shall deposit the
amounts received from such Major Maintenance Reserve L/C Provider in payment of
such draft in the Major Maintenance Reserve Account to be applied in accordance
with this Section 3.7.
          -----------

          (h) Upon receipt of a notice from any Major Maintenance Reserve L/C
Provider that the Major Maintenance Reserve L/C provided by such Major
Maintenance Reserve L/C Provider will be terminated prior to its stated
expiration date, if, not less than fifteen (15) Business Days prior to the
termination date as provided in such notice of termination, such Major
Maintenance Reserve L/C has not been replaced with a new Major Maintenance
Reserve L/C or with a Major Maintenance Reserve Guaranty, the Administrative
Agent shall deliver to such Major

                                      30
<PAGE>

Maintenance Reserve L/C Provider (i) a draft on such Major Maintenance Reserve
L/C in an amount equal to the Drawing Amount of such Major Maintenance Reserve
L/C and (ii) an appropriate certificate with respect thereto if required by such
Major Maintenance Reserve L/C. The Administrative Agent shall deposit the
amounts received from such Major Maintenance Reserve L/C Provider in payment of
such draft in the Major Maintenance Reserve Account to be applied in accordance
with this Section 3.7.
          -----------

          (i) Upon receipt of a notice from any Major Maintenance Reserve
Guarantor that the Major Maintenance Reserve Guaranty provided by such Major
Maintenance Reserve Guarantor will be terminated, if, not less than fifteen (15)
Business Days prior to the termination date as provided in such notice of
termination, such Major Maintenance Reserve Guaranty has not been replaced with
a new Major Maintenance Reserve Guaranty or a Major Maintenance Reserve L/C, the
Administrative Agent shall deliver to such Major Maintenance Reserve Guarantor a
notice of payment in an amount equal to the Guaranteed Amount of such Major
Maintenance Reserve Guaranty.  The Administrative Agent shall deposit amounts
received from such Major Maintenance Reserve Guarantor in the Major Maintenance
Reserve Account to be applied in accordance with this Section 3.7.
                                                      -----------

          (j) Forty-five (45) days (or if such day is not a Business Day, on the
next succeeding Business Day) after receipt of notice that any Major Maintenance
Reserve Guarantor is rated less than "BBB" by S&P or less than "Baa2" by
Moody's, provided that the Major Maintenance Reserve Guaranty issued by such
         --------
Major Maintenance Reserve Guarantor has not been replaced with a Major
Maintenance Reserve Guaranty issued by a new Major Maintenance Reserve Guarantor
or with a Major Maintenance Reserve L/C, the Administrative Agent shall deliver
to such Major Maintenance Reserve Guarantor on such date a notice of payment in
an amount equal to the Guaranteed Amount of such Major Maintenance Reserve
Guaranty.  The Administrative Agent shall deposit amounts received from such
Major Maintenance Reserve Guarantor in the Major Maintenance Reserve Account to
be applied in accordance with this Section 3.7.
                                   -----------

          SECTION 3.8  PSA Contingency Reserve Account.
                       -------------------------------

          (a) The Issuer may provide (i) one or more letters of credit (each, a
"PSA Contingency Reserve L/C") and/or (ii) one or more PSA Contingency Reserve
 ---------------------------
Guaranties in each case in substitution for all or any portion of the Monies
required to be on deposit in or credited to the PSA Continency Reserve Account,
provided that any such PSA Contingency Reserve L/C complies with the
--------
requirements set forth in clause (b) below, and any such PSA Contingency Reserve
Guaranty complies with the definition thereof.  The Issuer may provide, from
time to

                                      31
<PAGE>

time as the Issuer determines, substitute or replacement PSA Contingency Reserve
L/Cs or PSA Contingency Reserve Guaranties that meet the requirements hereof.
Upon receipt of an Officer's Certificate of the Issuer requesting such release,
the Administrative Agent shall release and pay to the Issuer or its designee
such amount of Monies for which PSA Contingency Reserve L/Cs or PSA Contingency
Reserve Guaranties are substituted.

          (b) The Issuer shall ensure that each PSA Contingency Reserve L/C
shall:  (i) be an irrevocable direct pay letter of credit naming the Collateral
Agent for the benefit of the Secured Parties as beneficiary; (ii) be issued by a
bank or other financial institution rated at least "A2" by Moody's and at least
"A" by S&P; and (iii)  name a Person other than the Issuer as the party
responsible for reimbursement or other obligations in respect of such PSA
Contingency Reserve L/C.

          (c) If, after giving effect to the transfers to the Debt Service
Payment Account contemplated by Sections 3.1(b)(iii) and 3.6(c), amounts held in
                                --------------------    -------
the Debt Service Payment Account are insufficient to fund the Debt Payment
Amount, the Administrative Agent shall, prior to the making of any transfers to
the Distribution Suspense Account in accordance with Section 3.1(b)(vii) or any
                                                     -------------------
transfers contemplated by clause (d) of this Section 3.8, transfer the Monies on
                                             -----------
deposit in or credited to the PSA Contingency Reserve Account, if any, to the
Debt Service Payment Account; provided that, if, after such transfer of Monies
                              --------
from the PSA Contingency Reserve Account to the Debt Service Payment Account,
the Monies on deposit in or credited to the Debt Service Payment Account are
insufficient to fund the Debt Payment Amount, the Administrative Agent shall,
one (1) Business Day prior to the date for payment of the Debt Service Payment
Amount, deliver to (x) each PSA Contingency Reserve L/C Provider, if any, on
such date a draft on its respective PSA Contingency Reserve L/C, together with
an appropriate certificate with respect thereto if required under such PSA
Contingency Reserve L/C and (y) to each PSA Contingency Reserve Guarantor, if
any, a notice of payment by such PSA Contingency Reserve Guarantor under its PSA
Contingency Reserve Guaranty.  The aggregate amount to be drawn on all such PSA
Contingency Reserve L/Cs and paid under all such PSA Contingency Reserve
Guaranties in accordance with the proviso to the immediately preceding sentence
shall be equal to the amount of such insufficiency (the "PSA Contingency
                                                         ---------------
Insufficiency Amount") and the amount to be drawn under each such PSA
--------------------
Contingency Reserve L/C and each such PSA Contingency Reserve Guaranty shall be
determined ratably based on the aggregate of the Drawing Amounts and the
aggregate of the Guaranteed Amounts then available under all such PSA
Contingency Reserve L/Cs and all such PSA Contingency Reserve Guaranties,
respectively.

                                      32
<PAGE>

The Administrative Agent shall deposit the amounts, if any, received under this
clause (c) from each PSA Contingency Reserve L/C Provider and each PSA
Contingency Reserve Guarantor in the Debt Service Payment Account.

          (d) After making the transfer contemplated by Section 3.8(c), if any,
                                                        --------------
on any Funding Date on which monies on deposit in or credited to the PSA
Contingency Reserve Account are to be transferred to the Distribution Suspense
Account in accordance with Section 3.1(b)(vii), (i) the Debt Service Reserve
                           -------------------
Requirement is greater than zero (after giving effect to the transfer set forth
in Section 3.1(b)(v)), or (ii) the Major Maintenance Reserve Requirement is
   ------------------
greater than zero (after giving effect to the transfer set forth in Section
                                                                    -------
3.1(b)(vi), the Administrative Agent shall transfer the Monies otherwise
----------
available for distribution from the PSA Contingency Reserve Account, if any,
first, to the Debt Service Reserve Account in an amount equal to the Debt
Service Reserve Requirement and second, to the Major Maintenance Account in an
amount equal to the Major Maintenance Reserve Requirement.

          (e) Forty-five (45) days (or if such day is not a Business Day, on the
next succeeding Business Day) prior to the expiration of any PSA Contingency
Reserve L/C delivered to the Administrative Agent in respect of the PSA
Contingency Reserve Account, provided that such PSA Contingency Reserve L/C has
                             --------
not been previously renewed, extended or replaced with a new PSA Contingency
Reserve L/C or with a PSA Contingency Reserve Guaranty, the Administrative Agent
shall deliver to the PSA Contingency Reserve L/C Provider providing such PSA
Contingency Reserve L/C on such date (i) a draft on such PSA Contingency Reserve
L/C in an amount equal to the Drawing Amount of such PSA Contingency Reserve L/C
and (ii) an appropriate certificate with respect thereto if required by such PSA
Contingency Reserve L/C.  The Administrative Agent shall deposit the amounts
received from such PSA Contingency Reserve L/C Provider in payment of such draft
in the PSA Contingency Reserve Account to be applied in accordance with this
Section 3.8.
-----------

          (f) Forty-five (45) days (or if such day is not a Business Day, on the
next succeeding Business Day) after receipt of notice that any PSA Contingency
Reserve L/C Provider is rated less than "A" by S&P or less than "A2" by Moody's,
provided that the PSA Contingency Reserve L/C issued by such PSA Contingency
--------
Reserve L/C Provider has not been replaced on or before the end of such 45-day
period with a PSA Contingency Reserve L/C issued by a new PSA Contingency
Reserve L/C Provider or with a PSA Contingency Reserve Guaranty, the
Administrative Agent shall deliver to such PSA Contingency Reserve L/C Provider
on such date (i) a draft on such PSA Contingency Reserve L/C in an amount equal
to the Drawing Amount of such PSA Contingency Reserve Account L/C and (ii) an

                                      33
<PAGE>

appropriate certificate with respect thereto if required by such PSA Contingency
Reserve L/C.  The Administrative Agent shall deposit the amounts received from
such PSA Contingency Reserve L/C Provider in payment of such draft in the PSA
Contingency Reserve Account to be applied in accordance with this Section 3.8.
                                                                  -----------

          (g) Upon receipt of a notice from any PSA Contingency Reserve L/C
Provider that the PSA Contingency Reserve L/C provided by such PSA Contingency
Reserve L/C Provider will be terminated prior to its stated expiration date, if,
not less than fifteen (15) Business Days prior to the termination date as
provided in such notice of termination, such PSA Contingency Reserve L/C has not
been replaced with a new PSA Contingency Reserve L/C or a PSA Contingency
Reserve Guaranty, the Administrative Agent shall deliver to such PSA Contingency
Reserve L/C Provider (i) a draft on such PSA Contingency Reserve L/C in an
amount equal to the Drawing Amount of such PSA Contingency Reserve L/C and (ii)
an appropriate certificate with respect thereto if required by such PSA
Contingency Reserve L/C.  The Administrative Agent shall deposit the amounts
received from such PSA Contingency Reserve L/C Provider in payment of such draft
in the Debt Service Reserve Account to be applied in accordance with this
Section 3.8.
-----------

          (h) Upon receipt of a notice from any PSA Contingency Reserve
Guarantor that the PSA Contingency Reserve Guaranty provided by such PSA
Contingency Reserve Guarantor will be terminated, if, not less than fifteen (15)
Business Days prior to the termination date as provided in such notice of
termination, such PSA Contingency Reserve Guaranty has not been replaced with a
new PSA Contingency Reserve Guaranty or a PSA Contingency Reserve L/C, the
Administrative Agent shall deliver to such PSA Contingency Reserve Guarantor a
notice of payment in an amount equal to the Guaranteed Amount of such PSA
Contingency Reserve Guaranty.  The Administrative Agent shall deposit amounts
received from such PSA Contingency Reserve Guarantor in the PSA Contingency
Reserve Account to be applied in accordance with this Section 3.8.
                                                      -----------

          (i) Forty-five (45) days (or if such day is not a Business Day, on the
next succeeding Business Day) after receipt of notice that any PSA Contingency
Reserve Guarantor is rated less than "BBB" by S&P or less than "Baa2" by
Moody's, provided that the PSA Contingency Reserve Guaranty issued by such PSA
         --------
Contingency Reserve Guarantor has not been replaced with a PSA Contingency
Reserve Guaranty issued by a new PSA Contingency Reserve Guarantor or with a PSA
Contingency Reserve L/C, the Administrative Agent shall deliver to such PSA
Contingency Reserve Guarantor on such date a notice of payment in an amount
equal to the Guaranteed Amount of such PSA Contingency Reserve Guaranty.  The
Administrative Agent shall deposit amounts received from such PSA Contingency

                                      34
<PAGE>

Reserve Guarantor in the PSA Contingency Reserve Account to be applied in
accordance with this Section 3.8.
                     -----------

          SECTION 3.9  Distribution Suspense Account.
                       -----------------------------

          (a) On any Bond Payment Date on which all of the conditions set forth
in clause (b) of this Section 3.9 (the "Distribution Conditions") are satisfied,
                      -----------       -----------------------
upon delivery to the Collateral Agent, the Administrative Agent and the Trustee
of an Officer's Certificate of the Issuer certifying as such three (3) Business
Days prior to such Bond Payment Date, the Administrative Agent shall transfer
Monies from the Distribution Suspense Account (regardless of whether such Monies
have been on deposit therein for more than 12 consecutive months) to the
Distribution Account in accordance with clause (b) of this Section 3.9 in an
                                                           -----------
amount equal to the Monies on deposit in or credited to the Distribution
Suspense Account or such lesser amount, as specified by the Issuer in its
Officer's Certificate.

          (b)  Subject to clauses (c) and (d) of Section 3.9, the transfer of
                                                 -----------
Monies on any Bond  Payment Date from the Distribution Suspense Account to the
Distribution Account as described in clause (a) of this Section 3.9 is subject
                                                        -----------
to the following conditions:

               (i)   all required transfers and payments described in clauses
(i) through (viii) of Section 3.1(b) shall have been completed;
                      --------------

               (ii)  no Default or Event of Default shall have occurred and be
continuing or shall result from such transfer of Monies to the Distribution
Account;

               (iii) The Debt Service Coverage Ratio for the four quarter period
preceding such Bond Payment Date (or with respect to the first Bond Payment
Date, the number of full fiscal quarters that have elapsed since the Closing
Date) measured as one accounting period, and the Projected Debt Service Coverage
Ratio for each of the two four quarter periods succeeding such Bond Payment Date
(each such four quarter period measured as one accounting period), shall each be
greater than or equal to:

                     (A)  1.7 to 1.0; or

                     (B)  1.6 to 1.0, if as of such Bond Payment Date, the
     Issuer is party to Permitted PPAs covering, in the aggregate, at least 25%
     of the capacity of the Project for the consecutive period of eight full
     quarters, taken as a whole, following such Bond Payment Date; or

                                      35
<PAGE>

               (C) 1.45 to 1.0, if as of such Bond Payment Date, the Issuer is
     party to Permitted PPAs covering, in the aggregate, at least 50% of the
     capacity of the Project for the consecutive period of eight full quarters,
     taken as a whole, following such Bond Payment Date; or

               (D) 1.3 to 1.0, if as of such Bond Payment Date, the Issuer is
     party to Permitted PPAs covering, in the aggregate, at least 75% of the
     capacity of the Project for the consecutive period of eight full quarters,
     taken as a whole, following such Bond Payment Date; or

               (E) 1.2 to 1.0, if as of such Bond Payment Date, the Issuer is
     party to Permitted PPAs covering, in the aggregate, 100% of the capacity of
     the Project for the consecutive period of eight full quarters, taken as a
     whole, following such Bond Payment Date; and

          (iv) The Issuer shall have delivered to the Trustee, the Collateral
Agent and the Administrative Agent an Officer's Certificate of the Issuer
certifying as to the matters described in clauses (i) through (iii) above
(including the relevant PPAs). The Issuer shall determine the satisfaction of
the conditions in clause (iii) based on projections prepared by the Issuer in
good faith based upon assumptions consistent in all material respects with the
relevant contracts and agreements, the Transaction Documents, historical
operations and the Issuer's good faith projections of future revenues and
projections of operating and maintenance expenses for the Issuer in light of
existing or reasonably expected regulatory and market environments in the
markets in which the Project is or will be operated and upon the assumption that
there will be no early redemption or prepayment of Indebtedness or that any
Indebtedness which matures within such projected periods will be refinanced on
reasonable terms. For the avoidance of doubt, the examples set forth on Annex A
                                                                        -------
hereto illustrate how the applicable percentage of capacity shall be calculated
in clauses (B), (C), (D) and (E) of Section 3.9(b)(iii) above.

          (c) If (A) any Monies remain on deposit in or credited to the
Distribution Suspense Account for twelve (12) months continuously without being
transferred to the Distribution Account pursuant to clause (a) of this Section
                                                                       -------
3.9, (B) the Issuer delivers an Issuer Request to the Trustee requesting the
---
Trustee to call a vote of the Holders to determine whether to apply such funds
to a redemption or prepayment, as applicable, of the Redeemable Facilities, and
(C) Holders holding at least 66 2/3% of the Outstanding Bonds vote to apply such
funds to such redemption and prepayment, then the Monies that have so remained
on deposit in or credited to the Distribution Suspense Account for twelve (12)
consecutive months without being transferred to the Distribution Account
pursuant to clause (a) of this Section 3.9 shall
                               -----------

                                      36
<PAGE>

be used to redeem or prepay, as applicable, the Redeemable Facilities on a pro
rata basis, as among the Redeemable Facilities, based upon the then outstanding
principal amounts of each of the Redeemable Facilities, at the prices for
redemption or prepayment set forth in the Indenture or the applicable facility
agreement in respect of such Redeemable Facility, as applicable,shall provide
the Administrative Agent a certificate (an "Allocation Certificate") setting
                                            ----------------------
forth the amount to be so allocated to each Redeemable Facility and the account
or accounts into which each Redeemable Facility's allocable share shall be
deposited in accordance with the terms of the Indenture or the applicable
Additional Indebtedness Agreement, as applicable. Within two (2) Business Days
of its receipt of an Allocation Certificate, the Administrative Agent shall make
the transfers specified therein. The Issuer hereby instructs the Collateral
Agent and the Administrative Agent to make all such payments in respect of the
Bonds directly to the Trustee for deposit into the Bond Fund in accordance with
the terms of Section 3.3 of the Indenture, and the Collateral Agent and the
             -----------
Administrative Agent hereby acknowledge receipt of such instruction.

          (d) Pending any other application of Monies on deposit in or credited
to the Distribution Suspense Account as provided herein, the Administrative
Agent shall, on any Funding Date, withdraw and transfer Monies on deposit in or
credited to the Distribution Suspense Account to the Debt Service Payment
Account if and to the extent such amounts on deposit in the Debt Service Payment
Account and the Debt Service Reserve Account are insufficient to pay any amounts
due on the Senior Secured Obligations on such Funding Date.

          (e) Subject to Section 3.9(c), the Issuer may, at any time, request in
                         --------------
writing that the Administrative Agent transfer any amounts on deposit in the
Distribution Suspense Account to any other Account (other than the Distribution
Account).

          (f) The Administrative Agent shall withdraw and transfer Monies on
deposit in or credited to the Distribution Account to such Persons as may be
directed in an Officer's Certificate of the Issuer delivered at any time to the
Administrative Agent three (3) Business Days prior to the date of such
withdrawal and transfer.  Such Officer's Certificate shall state that all
conditions precedent provided for in this Section 3.9 have been complied with.
                                          -----------

          SECTION 3.10 Proceeds Account.
                       ----------------

          (a) Loss Events.  Except as otherwise expressly provided herein, all
              -----------
Loss Proceeds shall be deposited into the Proceeds Account directly, or if
received by the Issuer, as soon as practicable (but no more than three (3)
Business Days) after receipt, in either case in accordance with this Section
                                                                     -------
3.10(a).  The
-------

                                      37
<PAGE>

Administrative Agent shall separately segregate such Loss Proceeds for
distribution in the manner as set forth below:

          (i)    If (A) a Loss Event occurs and (B) either (x) the Issuer
determines not to Restore the Project or (y) the Issuer determines that the
Project cannot be Restored to permit operation of the Project on a Commercially
Feasible Basis, upon delivery to the Administrative Agent and the Collateral
Agent of an Officer's Certificate of the Issuer certifying to the foregoing
(together with, in the case of clause (y) immediately above, a certificate
signed by an authorized representative of the Independent Engineer concurring
with such Officer's Certificate), then the Loss Proceeds in excess of $5,000,000
received by the Issuer in connection with such Loss Event shall be used to
redeem or prepay, as applicable, the Redeemable Facilities on a pro rata basis
                                                                --- ----
among the Redeemable Facilities, based upon the then outstanding principal
amounts of each of the Redeemable Facilities, at the prices for redemption or
prepayment set forth in the applicable Financing Document, and the Issuer shall
provide the Administrative Agent an Allocation Certificate setting forth the
amount to be so allocated to each Redeemable Facility and the account or
accounts into which each Redeemable Facility's allocable share shall be
deposited in accordance with the terms of the applicable Financing Document.
Within three (3) Business Days of its receipt of an Allocation Certificate, the
Administrative Agent shall make the transfers from the Proceeds Account
specified therein.  The Issuer hereby instructs the Collateral Agent and the
Administrative Agent to make all such payments in respect of the Bonds directly
to the Trustee for deposit into the Bond Fund in accordance with the terms of
Section 3.3 of the Indenture, and the Collateral Agent and the Administrative
-----------
Agent hereby acknowledge receipt of such instruction.  Amounts remaining in the
Proceeds Account after the redemption required under this Section 3.10(a)(i)
                                                          ------------------
shall be transferred by the Administrative Agent from the Proceeds Account to
the Revenue Account for disbursement in accordance with Section 3.1(b).
                                                        --------------

          (ii)   If (A) a Loss Event occurs, (B) the Issuer receives Loss
Proceeds in respect of such Loss Event and (C) the Issuer determines that the
Project can be Restored to permit operation of the Project on a Commercially
Feasible Basis, the Issuer shall deliver to the Administrative Agent and the
Collateral Agent an Officer's Certificate of the Issuer certifying to the
foregoing and a certificate signed by an authorized representative of the
Independent Engineer concurring with such Officer's Certificate, and such Loss
Proceeds shall be applied as set forth in paragraphs (iii), (iv) and (v) below.

          (iii)  Before any withdrawal or transfer shall be made from the
Proceeds Account with respect to any Restoration, there shall be filed with the
Administrative Agent three (3) Business Days prior to any Disbursement Date:

                                      38
<PAGE>

                (A) a requisition from the Issuer substantially in the form
     attached hereto as Exhibit F (a "Restoration Requisition") and signed by an
                        ---------     -----------------------
     Authorized Representative of the Issuer;

                (B) if the cost of the Restoration is anticipated to exceed
     $5,000,000, a certificate of the Independent Engineer substantially in the
     form attached hereto as Exhibit G (an "Independent Engineer Restoration
                             ---------      --------------------------------
     Certificate").
     -----------

          (iv)  On the Disbursement Date referred to in Section 3.10(a)(iii)
                                                        --------------------
or as soon thereafter as practicable following receipt of the documents
described in Sections 3.10(a)(iii)(A) and (B) above, the Administrative Agent
             ------------------------     ---
shall withdraw and transfer from the Proceeds Account and shall make available
to the Issuer the amount set forth in the Restoration Requisition and,
thereafter, the Issuer shall remit such amount to the applicable payees with
respect to the Restoration Work (or, in the case of reimbursement for the costs
of Restoration Work theretofore paid by the Issuer, retain such amounts for
itself).

          (v)   Upon completion of any Restoration Work, there shall be filed
with the Administrative Agent and the Collateral Agent (A) an Officer's
Certificate of the Issuer certifying the completion of such Restoration Work and
the amount, if any, required in its opinion to be retained in the Proceeds
Account for the payment of any costs of such Restoration Work not then due and
payable or the liability for payment of which is being contested or disputed by
the Issuer, and for the payment of reasonable contingencies following completion
of such Restoration Work and (B) if the Restoration Work required an Independent
Engineer Restoration Certificate under Section 3.10(a)(iii)(B) above, an
officer's certificate of the Independent Engineer stating that completion of the
Restoration has occurred and concurring with the amounts to be retained in the
Proceeds Account. Upon receipt of such Officer's Certificate and, if applicable,
such Independent Engineer Restoration Certificate, the Administrative Agent
shall first, transfer the amount remaining in the Proceeds Account in excess of
      -----
the amounts to remain in the Proceeds Account as stated in such Officer's
Certificate to the applicable payees (or, in the case of reimbursement for the
costs of the Restoration theretofore paid by the Issuer, to the Issuer) with
respect to such Restoration Work, and second, segregate the remaining excess in
                                      ------
the Proceeds Account from any other amounts therein. If such remaining excess
exceeds $5,000,000, then the Loss Proceeds received in connection with such Loss
Event in excess of $5,000,000, after giving effect to the cost of the
Restoration, shall be used to redeem or prepay, as applicable, the Redeemable
Facilities on a pro rata basis among the Redeemable Facilities, based upon the
                --- ----
then outstanding principal amounts of each of the Redeemable Facilities, at the
prices for redemption

                                      39
<PAGE>

or prepayment set forth in the applicable Financing Document, and the Issuer
shall provide the Administrative Agent an Allocation Certificate setting forth
the amount to be so allocated to each Redeemable Facility and the account or
accounts into which each Redeemable Facility's allocable share shall be
deposited in accordance with the terms of the applicable Financing Document.
Within three (3) Business Days of its receipt of an Allocation Certificate, the
Administrative Agent shall make the transfers specified therein. The Issuer
hereby instructs the Collateral Agent and the Administrative Agent to make all
such payments in respect of the Bonds directly to the Trustee for deposit into
the Bond Fund in accordance with the terms of Section 3.3 of the Indenture, and
                                              -----------
the Collateral Agent and the Administrative Agent hereby acknowledge receipt of
such instruction. If the remaining excess is equal to or less than $5,000,000,
the Administrative Agent shall transfer such monies to the Revenue Account.
Thereafter, upon receipt of an Officer's Certificate of the Issuer certifying
payment of all costs of Restoration Work for the Project, the Administrative
Agent shall transfer any amounts remaining in the Proceeds Account to the
Revenue Account.

          (b) Receipt of Buy-Out Proceeds.  All Buy-Out Proceeds shall be
              ---------------------------
deposited into the Proceeds Account directly, or, if received by the Issuer, as
soon as practicable (but no more than three (3) Business Days) after receipt, in
either case in accordance with this Section 3.10(b).  If (i) the aggregate
                                    ---------------
amount of Buy-Out Proceeds received by or on behalf of the Issuer is less than
or equal to $10,000,000 or (ii) the aggregate amount of Buy-Out Proceeds
received by or on behalf of the Issuer exceeds $10,000,000 and the
Administrative Agent receives written confirmation from each Rating Agency that
the related Buy-Out or Buy-Outs will not result in a Rating Downgrade (taking
into account the proviso to the definition of Rating Downgrade for Voluntary
Buy-Outs) by such Rating Agency, then the Administrative Agent shall transfer
the Monies representing such Buy-Out Proceeds to the Revenue Account for
application in accordance with Section 3.1(b).  If (A) the aggregate amount of
                               --------------
Buy-Out Proceeds received by or on behalf of the Issuer is in excess of
$10,000,000 and (B) any Rating Agency does not confirm in writing that such Buy-
Out or Buy-Outs will not result in a Rating Downgrade (taking into account the
proviso to the definition of Rating Downgrade for Voluntary Buy-Outs) by such
Rating Agency, then the Buy-Out Proceeds so received by the Issuer shall be used
to redeem or prepay, as applicable, the Redeemable Facilities on a pro rata
                                                                   --- ----
basis among the Redeemable Facilities, based upon the then outstanding principal
amounts of each of the Redeemable Facilities, at the prices for redemption or
prepayment set forth in the applicable Financing Document, and the Issuer shall
provide the Administrative Agent an Allocation Certificate setting forth the
amount to be so allocated to each Redeemable Facility and the account or
accounts into which each Redeemable Facility's allocable share shall be
deposited in accordance with the terms of the applicable Financing Document.
Within three (3) Business Days of its receipt

                                      40
<PAGE>

of an Allocation Certificate, the Administrative Agent shall make the transfers
specified therein.

      (c) Proceeds of Permitted Asset Dispositions.  All proceeds received by
          ----------------------------------------
the Issuer in connection with a disposition of assets permitted by Section
                                                                   -------
5.1(g) of the Indenture ("Asset Sale Proceeds") shall be deposited into the
------                    -------------------
Proceeds Account directly, or, if received by the Issuer, as soon as practicable
(but no more than three (3) Business Days) after receipt, in either case in
accordance with this Section 3.10(c).  If the Issuer receives more than
                     ---------------
$5,000,000 of Asset Sale Proceeds in connection with any disposition of assets
permitted by Section 5.1(g) of the Indenture, then such Asset Sale Proceeds in
             --------------
excess of $5,000,000 shall be used to redeem or prepay, as applicable, the
Redeemable Facilities on a pro rata basis among the Redeemable Facilities, based
                           --- ----
upon the then outstanding principal amounts of each of the Redeemable
Facilities, at the prices for redemption or prepayment set forth in the
applicable Financing Document, and the Issuer shall provide the Administrative
Agent an Allocation Certificate setting forth the amount to be so allocated to
each Redeemable Facility and the account or accounts into which each Redeemable
Facility's allocable share shall be deposited in accordance with the terms of
the applicable Financing Document.  Within three (3) Business Days of its
receipt of an Allocation Certificate, the Administrative Agent shall make the
transfers specified therein.  The Issuer hereby instructs the Collateral Agent
and the Administrative Agent to make all such payments in respect of the Bonds
directly to the Trustee for deposit into the Bond Fund in accordance with the
terms of Section 3.3 of the Indenture, and the Collateral Agent and the
         -----------
Administrative Agent hereby acknowledge receipt of such instruction.  Any Asset
Sale Proceeds remaining on deposit in the Proceeds Account after the making of
the transfers contemplated by this Section 3.10(d) shall be deposited in the
                                   ---------------
Revenue Account for application in accordance with Section 3.1(b).
                                                   --------------

          SECTION 3.11  Permitted Investments. Amounts held in any Account
                        ---------------------
created by and held under this Agreement (other than the Distribution Account)
shall be invested and reinvested in Permitted Investments at the written
direction (which may be in the form of a standing instruction) of an Authorized
Representative of the Issuer (or, in the case of the Holdings II Account or the
Holdings III Account, an Authorized Representative of Elwood II Holdings or
Elwood III Holdings, as applicable); provided, however, that at any time when
                                     --------  -------
(a) an Authorized Officer of the Administrative Agent has received written
notice from the Collateral Agent or any other Secured Party that an Event of
Default shall have occurred and be continuing or (b) an Authorized
Representative of the Issuer, Elwood II Holdings or Elwood III Holdings, as the
case may be, has not timely furnished such a written direction or, after a
request by the Administrative Agent, has not so confirmed a standing instruction
to the Administrative Agent, the

                                      41
<PAGE>

Administrative Agent shall invest such monies only in Permitted Investments of
the type referred to in clause (vi) of the definition of "Permitted
Investments". Any written direction of an Authorized Representative of the
Issuer (or, with respect to the Holdings II Account and the Holdings III
Account, Elwood II Holdings or Elwood III Holdings, respectively) with respect
to the investment or reinvestment of monies held in any Account (other than the
Distribution Account) shall direct investment or reinvestment only in Permitted
Investments that shall mature in such amounts and have maturity dates or be
subject to redemption at the option of the holder thereof on or prior to
maturity thereof as needed for the purposes of such Accounts, but in no event
shall such Permitted Investments mature more than one year after the date
acquired. The Administrative Agent shall have no duty to determine whether any
investment or reinvestment shall satisfy the criteria set forth in the
definition of "Permitted Investment" in the Indenture or the other criteria set
forth in this Section 3.11 and neither the Administrative Agent nor the
               -----------
Collateral Agent shall have any liability in the event that the value of any
Permitted Investment decreases. The Administrative Agent shall at any time and
from time to time liquidate any or all of such investments prior to the maturity
as needed in order to effect the transfers and withdrawals contemplated by this
Agreement in accordance with an Officer's Certificate of the Issuer; provided
                                                                     --------
that, in the absence of timely receipt of such an Officer's Certificate, the
Administrative Agent shall liquidate all such investments as necessary in order
to effect the transfers and withdrawals contemplated by this Agreement. In the
event any such investments are redeemed prior to the maturity thereof, the
Administrative Agent shall not be liable for any loss or penalties relating
thereto. Any income or gain realized from such investments shall be deposited
into the Revenue Account as and when realized. For purposes of any income tax
payable on account of any income or gain on an investment, such income or gain
shall be for the account of the Issuer.

          SECTION 3.12  Events of Default. On and after any date on which the
                        -----------------
Administrative Agent receives written notice from the Intercreditor Agent
pursuant to Section 2.4 of the Intercreditor Agreement that an Event of Default
            -----------
has occurred (the date of receipt of such notice, the "Event of Default Date"),
                                                       ---------------------
the Administrative Agent shall, until the Administrative Agent receives notice
from the Intercreditor Agent that the Event of Default has been cured,
thereafter accept all notices and instructions required to be given to the
Administrative Agent pursuant to the terms of this Agreement only from the
Collateral Agent (acting upon instructions from the Intercreditor Agent, acting
pursuant to the Intercreditor Agreement) and not from any other Person and the
Administrative Agent shall not withdraw, transfer, pay or otherwise distribute
any monies in any of the Accounts except pursuant to such notices and
instructions from the Collateral Agent (acting upon instructions from the
Intercreditor Agent, acting pursuant to the Intercreditor Agreement). On the
Event of Default Date, the Administrative Agent shall render an accounting of
all monies in

                                      42
<PAGE>

in the Accounts as of the Event of Default Date to the Collateral Agent and the
Intercreditor Agent.

          SECTION 3.13  Disposition of Accounts Upon Debt Termination Date. In
                        --------------------------------------------------
the event that the Administrative Agent shall have received a certificate of a
Responsible Officer of the Collateral Agent stating that the Debt Termination
Date shall have occurred, all Administrative Claims of which the Collateral
Agent is aware shall have been paid in full and all fees, charges and expenses
of the Independent Consultants and all other amounts required to be paid
hereunder and under the other Financing Documents of which the Collateral Agent
is aware shall have been paid in full, all amounts remaining in the Accounts
shall, upon receipt of a certificate of a Responsible Officer of the Collateral
Agent authorizing such payments from the Accounts, be remitted to or as directed
by the Issuer, Elwood II Holdings or Elwood III Holdings, as applicable, or as
otherwise directed by the Issuer.

          SECTION 3.14  Account Balance Statements. The Administrative Agent
                        --------------------------
shall, on a monthly basis, provide to the Collateral Agent and the Issuer (and,
with respect to the Holdings II Account or the Holdings III Account, Elwood II
Holdings or Elwood III Holdings, respectively) account balance statements in
respect of each of the Accounts and amounts segregated in any of the Accounts.
Such balance statement shall also include deposits, withdrawals and transfers
from and to any Account and segregated amounts. At such other times as the
Collateral Agent or the Issuer (or, with respect to the Holdings II Account or
the Holdings III Account, Elwood II Holdings or Elwood III Holdings,
respectively) may from time to time reasonably request (but not more frequently
than once each week unless an Event of Default shall have occurred and is
continuing), the Administrative Agent shall provide written informal account
information regarding (a) balances in respect of each of the Accounts and, to
the extent reasonably available, amounts segregated in any of the Accounts and
(b) deposits, withdrawals and transfers from and to any Account and, to the
extent reasonably available, segregated amounts.

          SECTION 3.15  Instructions to the Administrative Agent. Each
                        ----------------------------------------
direction to the Administrative Agent under this Agreement to transfer or
withdraw amounts in an Account shall sufficiently identify (a) the Account from
which such amounts are to be withdrawn or transferred, (b) the Account in which
such amount is to be deposited or Person to whom such amount is to be
transferred and (c) the applicable provision of this Agreement which authorizes
such transfer or withdrawal. In the event that the Administrative Agent believes
that it lacks sufficient information to make a transfer or withdrawal or to
determine whether it has authority under this Agreement to make such transfer or
withdrawal, it may refrain from making such transfer or withdrawal until it has
received the information required to

                                      43
<PAGE>

make such transfer or confirmed its authority to its satisfaction. In no event
shall the Administrative Agent be responsible for making calculations relating
to deposits to or withdrawals from the Accounts.

                                  ARTICLE IV
                            THE ADMINISTRATIVE AGENT
                            ------------------------

          The provisions of this Article IV are solely for the benefit of the
                                 ----------
Secured Parties, the Administrative Agent and the Collateral Agent and, except
to the extent expressly provided in this Article IV, the Issuer shall not have
                                         ----------
any rights under this Article IV against the Administrative Agent, the
                      ----------
Collateral Agent or any other  Secured Party; provided that the Administrative
                                              --------
Agent shall be liable to for its gross negligence or willful misconduct.

          SECTION 4.1  Appointment of the Administrative Agent, Powers and
                       ---------------------------------------------------
Immunities.  The Collateral Agent hereby irrevocably appoints and authorizes
----------
Bank One Trust Company, National Association, to act as Administrative Agent
hereunder, with such powers as are expressly delegated to the Administrative
Agent by the terms of this Agreement, together with such other powers as are
reasonably incidental thereto.  Bank One Trust Company, National Association,
hereby agrees to act as Administrative Agent under this Agreement.  Each of the
Issuer, Elwood II Holdings and Elwood III Holdings hereby acknowledges the
appointment of the Administrative Agent to act as the agent of the Collateral
Agent hereunder, with such powers as are expressly delegated to the
Administrative Agent by the terms of this Agreement, together with such other
powers as are reasonably incidental thereto.  The Administrative Agent shall not
have any duties or responsibilities to any Person except those expressly set
forth in this Agreement and shall not have any fiduciary relationship with any
other Secured Party (and no implied covenants, functions or responsibilities
shall be read into this Agreement or otherwise exist with respect to the
Administrative Agent).  Without limiting the generality of the foregoing, the
Administrative Agent shall take all actions as the Collateral Agent shall direct
it to perform in accordance with the express provisions of this Agreement and
the Intercreditor Agreement.  Notwithstanding anything to the contrary contained
herein, the Administrative Agent shall not be required to take any action which
is contrary to this Agreement and the Intercreditor Agreement or Applicable Law.
Neither the Administrative Agent nor any of its Affiliates shall be responsible
to any other Secured Party for any recitals, statements, representations or
warranties made by the Issuer, Elwood II Holdings, Elwood III Holdings or the
Collateral Agent contained in this Agreement or any other Transaction Document
or in any certificate or other document referred to or provided for in, or
received by any other Secured Party under, this Agreement or any other
Transaction Document for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any

                                      44
<PAGE>

other Transaction Document or any other document referred to or provided for
herein or therein or for any failure by the Issuer, Elwood II Holdings or Elwood
III Holdings to perform its obligations hereunder or thereunder. The
Administrative Agent shall not be required to ascertain or inquire as to the
performance by the Issuer, Elwood II Holdings or Elwood III Holdings of any of
its respective obligations under this Agreement or any other Transaction
Document or any other document or agreement contemplated hereby or thereby. The
Administrative Agent shall not be (a) required to initiate or conduct any
litigation or collection proceeding hereunder or under any other Transaction
Document or (b) responsible for any action taken or omitted to be taken by it
hereunder (except for its own gross negligence or willful misconduct) or in
connection with any other Transaction Document. Except as otherwise expressly
set forth in this Agreement, the Administrative Agent shall take action under
this Agreement only as it shall be directed in writing by the Collateral Agent.
Whenever, in the administration of this Agreement, the Administrative Agent
shall deem it necessary or desirable that a factual matter be proved or
established in connection with the Administrative Agent taking, suffering or
omitting to take any action hereunder, such matter (unless other evidence in
respect thereof is herein specifically prescribed) may be deemed to be
conclusively proved or established by an Officer's Certificate or a certificate
of any Responsible Officer of the Collateral Agent, if appropriate. The
Administrative Agent shall have the right at any time to seek instructions
concerning the administration of this Agreement from the Collateral Agent, legal
counsel or any court of competent jurisdiction. The Administrative Agent shall
not be deemed to have actual, constructive, direct or indirect knowledge or
notice of the occurrence of an Event of Default unless and until a Responsible
Officer of the Administrative Agent has received an Officer's Certificate of the
Issuer or a written notice or certificate from a Secured Party stating that an
Event of Default has occurred.

          Each of the Secured Parties expressly acknowledges that neither the
Administrative Agent nor any of its officers, directors, employees, agents or
attorneys-in-fact has made any representations or warranties to it and that no
act by the Administrative Agent hereinafter taken, including, without
limitation, any review of the Project or of the affairs of the Issuer, shall be
deemed to constitute any representation or warranty by the Administrative Agent
to any other Secured Party. Each Secured Party (other than any other Secured
Party that has no obligation to make appraisals, investigations or credit
analyses under the Financing Documents to which it is a party, including,
without limitation, the Collateral Agent and the Administrative Agent)
represents to the Administrative Agent that it has, independently and without
reliance upon the Administrative Agent or any other Secured Party, and based on
such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, operations, property,
financial and other condition and creditworthiness of the

                                      45
<PAGE>

Project and the Issuer. Each Secured Party (other than a Secured Party that has
no obligation to make appraisals, investigations or credit analyses under the
Financing Documents to which it is a party, including, without limitation, the
Collateral Agent and the Administrative Agent) also represents that it will,
independently and without reliance upon the Administrative Agent or any other
Secured Party, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit analysis, appraisals
and decisions in taking or not taking action under this Agreement, and to make
such investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the
Project and Issuer. Except for notices, reports and other documents expressly
required to be furnished to the other Secured Parties by the Administrative
Agent hereunder, the Administrative Agent shall not have any duty or
responsibility to provide any other Secured Party with any credit or other
information concerning the business, operations, property, financial and other
condition or creditworthiness of the Project and the Issuer which may come into
the possession of the Administrative Agent or any of its officers, directors,
employees, agents or attorneys-in-fact.

          SECTION 4.2  Reliance by the Administrative Agent.  The Administrative
                       ------------------------------------
Agent shall be entitled to rely upon any Officer's Certificate, officer's
certificate of an Authorized Officer of any Secured Party, Independent
Engineer's certificate, certificate of a Responsible Officer of the Collateral
Agent or any other certificate, notice or other document (including any cable,
telegram or telecopy) believed by it to be genuine and to have been signed or
sent by or on behalf of the proper Person or Persons, and upon advice of legal
counsel, independent accountants and other experts selected by the
Administrative Agent and shall have no liability for its actions taken
thereupon, unless due to the Administrative Agent's willful misconduct or gross
negligence. Without limiting the foregoing, the Administrative Agent shall be
required to make payments to the Secured Parties or other Persons only as set
forth herein. The Administrative Agent shall be fully justified in failing or
refusing to take any action under this Agreement or the Intercreditor Agreement
(i) if such action would, in the opinion of the Administrative Agent, be
contrary to Applicable Law or the terms of this Agreement or the Intercreditor
Agreement, (ii) if such action is not specifically provided for in this
Agreement or the Intercreditor Agreement and it shall not have received any such
advice or concurrence of the Collateral Agent as it deems appropriate or (iii)
if, in connection with the taking of any such action that would constitute an
exercise of remedies under any Financing Document (whether such action is or is
intended to be an action of the Administrative Agent or the Collateral Agent),
it shall not first be indemnified to its satisfaction against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action. The Administrative Agent shall in all cases
be fully protected in acting, or in refraining from acting, under this Agreement

                                      46
<PAGE>

or any other Financing Document in accordance with a request of the Collateral
Agent (to the extent that the Collateral Agent is expressly authorized to direct
the Administrative Agent to take or refrain from taking such action), and such
request and any action taken or failure to act pursuant thereto shall be binding
upon all the Secured Parties. In the event that the Administrative Agent is
required to perform any action on a particular date only following the delivery
of an Officer's Certificate or other document, the Administrative Agent shall be
fully justified in failing to perform such action if it has not first received
such Officer's Certificate or other document and shall be fully justified in
continuing to fail to perform such action until such time as it has received
such Officer's Certificate or other document.

          SECTION 4.3  Court Orders.  The Administrative Agent is hereby
                       ------------
authorized, in its exclusive discretion, to obey and comply with all writs,
orders, judgments or decrees issued by any court or administrative agency
affecting any money, documents or things held by the Administrative Agent.  The
Administrative Agent shall not be liable to any of the parties hereto or any
other Secured Party, their successors, heirs or personal representatives by
reason of the Administrative Agent's compliance with such writs, orders,
judgments or decrees, notwithstanding such writ, order, judgment or decree is
later reversed, modified, set aside or vacated.

          SECTION 4.4  Resignation or Removal.  Subject to the appointment and
                       ----------------------
acceptance of a successor Administrative Agent as provided below, the
Administrative Agent may resign at any time by giving 30 days' prior written
notice thereof to the Collateral Agent, the Issuer, Elwood II Holdings and
Elwood III Holdings (provided that if the Administrative Agent is also the
                     --------
Collateral Agent and the Trustee, it must also at the same time resign as
Collateral Agent and as Trustee), and the Administrative Agent may be removed at
any time with cause by the Collateral Agent.  In the event that the
Administrative Agent shall decline to take any action without first receiving
adequate indemnity and, having received adequate indemnification, shall continue
to decline to take such action, the Collateral Agent shall be deemed to have
sufficient cause to remove the Administrative Agent.  Prior
to the occurrence of an Event of Default, the Issuer shall have the right to
remove the Administrative Agent upon 30 day's notice to the Secured Parties with
or without cause, subject to the appointment and acceptance of a successor
Administrative Agent as provided below.  Upon any such resignation or removal,
the Collateral Agent shall have the right to appoint a successor Administrative
Agent which shall be a single bank or trust company that (i) has an office in
New York, New York, (ii) has capital, surplus and undivided profits of at least
$50,000,000, (iii) is experienced in administering sophisticated financing
transactions, and (iv) so long as no Event of Default has occurred and is
continuing, is reasonably acceptable to the Issuer.  If no successor
Administrative Agent shall have been appointed by the Collateral Agent and shall
have accepted such appointment within 30 days after the retiring

                                      47
<PAGE>

Administrative Agent's giving of notice of resignation or the removal of the
retiring Administrative Agent, then the retiring Administrative Agent may
appoint a successor Administrative Agent, which shall be a single bank or trust
company that (i) has an office in New York, New York, (ii) has capital, surplus
and undivided profits of at least $50,000,000, (iii) is experienced in
administering sophisticated financing transactions, and (iv) so long as no Event
of Default has occurred and is continuing, is reasonably acceptable to the
Issuer. Upon the acceptance of any appointment as Administrative Agent hereunder
by the successor Administrative Agent, (a) such successor Administrative Agent
shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties and obligations
hereunder and (b) the retiring Administrative Agent shall promptly transfer all
Accounts within its possession or control to the possession or control of the
successor Administrative Agent and the retiring Administrative Agent shall
execute and deliver such notices, instructions and assignments as may be
necessary or desirable to transfer the rights of the retiring Administrative
Agent with respect to such Accounts to the successor Administrative Agent. After
the retiring Administrative Agent's resignation or removal hereunder as
Administrative Agent, the provisions of this Article IV and of Article V shall
                                             ----------        ---------
continue in effect for its benefit in respect of any actions taken or omitted to
be taken by it while acting as Administrative Agent. Further, a corporation into
which the Administrative Agent is merged or converted or with which it is
consolidated or which results from a merger, conversion or consolidation to
which it is a party shall, to the extent permitted by Applicable Law, be the
successor Administrative Agent under this Agreement without further formality
and shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the Administrative Agent with which such corporation
was merged, converted or consolidated. The Administrative Agent shall forthwith
notify such event to the Issuer and the Collateral Agent.

                                   ARTICLE V
                        EXPENSES; INDEMNIFICATION; FEES
                        -------------------------------

          SECTION 5.1  Expenses.  The Issuer agrees to pay or reimburse all
                       --------
reasonable out-of-pocket expenses of the Administrative Agent (including,
without limitation, the reasonable fees and disbursements of outside counsel
engaged by the Administrative Agent) in respect of, or incidental to, the
administration or enforcement of any of the provisions of this Agreement or in
connection with any amendment, waiver or consent relating to this Agreement.

          SECTION 5.2  Indemnification.  The Issuer agrees to indemnify the
                       ---------------
Administrative Agent in its capacity as such, and, in their capacity as such,
its officers, directors, shareholders, controlling persons, employees, agents
and servants

                                      48
<PAGE>

in accordance with and in the manner contemplated by Article 7.17 of the
                                                     ------------
Intercreditor Agreement.

          SECTION 5.3 Fees. On the Closing Date, and on each anniversary of the
                      ----
Closing Date to and including the Debt Termination Date, the Issuer shall pay
the Administrative Agent an annual fee in an amount mutually agreed on by the
Issuer and the Administrative Agent in writing on or prior to the date of
appointment of the Administrative Agent.

          The provisions of this Article V shall survive the termination of this
                                 ---------
Agreement or the resignation or removal of the Administrative Agent.

                                  ARTICLE VI
                            LIMITATION OF LIABILITY
                            -----------------------

          SECTION 6.1 Limitation of Liability. Section 14.1 of the Indenture is
                      -----------------------  ------------
incorporated herein by reference as if set forth in full herein.

                                  ARTICLE VII
                                 MISCELLANEOUS
                                 -------------

          SECTION 7.1 Amendments; Etc. No amendment or waiver of, or consent
                      ---------------
with respect to, any provision of this Agreement shall in any event be effective
unless the same shall be made in accordance with the Intercreditor Agreement.

          SECTION 7.2 Addresses for Notices. All notices, requests and other
                      ---------------------
communications provided for herein (including, without limitation, any
modifications of, or waivers or consents under, this Agreement) shall be given
or made in writing (including, without limitation, by telecopy) delivered to the
intended recipient at the "Address for Notices" specified below its name on the
signature pages hereof or, as to any party, at such other address as shall be
designated by such party in a notice to each other party. Except as otherwise
provided in this Agreement, all such communications shall be deemed to have been
duly given when transmitted by telecopier or personally delivered or, in the
case of a mailed notice, upon receipt, in each case given or addressed as
aforesaid.

          SECTION 7.3 Integration, Etc. This Agreement and the other Financing
                      ----------------
Documents to which the parties hereto are a party constitute the entire
agreement and understanding among the parties hereto and supersede any and all
prior agreements and understandings, written or oral, relating to the subject
matter

                                      49
<PAGE>

hereof. This Agreement shall become effective at such time as the Collateral
Agent shall have received counterparts hereof signed by all of the intended
parties hereto.

          SECTION 7.4 Headings; Table of Contents; Section References. Headings
                      -----------------------------------------------
used in this Agreement, and the table of contents included in this Agreement,
are for convenience of reference only and do not constitute part of this
Agreement for any purpose. Unless otherwise specified in this Agreement, section
references shall refer to sections of this Agreement.

          SECTION 7.5 No Third Party Beneficiaries. The agreements of the
                      ----------------------------
parties hereto are solely for the benefit of the Issuer, Elwood II Holdings,
Elwood III Holdings, the Collateral Agent, the Administrative Agent, the
Intercreditor Agent and the other Secured Parties and their respective
successors and assigns and no Person (other than the parties hereto and such
other Secured Parties) shall have any rights hereunder.

          SECTION 7.6 No Waiver. No failure on the part of the Administrative
                      ---------
Agent, the Collateral Agent or any other Secured Party or any of their nominees
or representatives to exercise, and no course of dealing with respect to, and no
delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by the Administrative
Agent, the Collateral Agent or any other Secured Party or any of their nominees
or representatives of any right, power or remedy.

          SECTION 7.7 Severability. If any provision of this Agreement or the
                      ------------
application thereof shall be invalid or unenforceable to any extent, (a) the
remainder of this Agreement and the application of such remaining provisions
shall not be affected thereby and (b) each such remaining provision shall be
enforced to the greatest extent permitted by law.

          SECTION 7.8 Successors and Assigns. All covenants, agreements,
                      ----------------------
representations and warranties in this Agreement by the Administrative Agent,
the Collateral Agent, the Intercreditor Agent and the Issuer shall bind and, to
the extent permitted hereby, shall inure to the benefit of and be enforceable by
their respective successors and assigns, whether so expressed or not.

          SECTION 7.9 Execution in Counterparts. This Agreement may be executed
                      -------------------------
in any number of counterparts, each of which when so executed shall be deemed to
be an original, but all such counterparts shall together constitute but one and
the same instrument.

                                      50
<PAGE>

          SECTION 7.10  Special Exculpation. No claim may be made by the Issuer,
                        -------------------
Elwood II Holdings, Elwood III Holdings or any other person against the
Administrative Agent, the Collateral Agent, the Intercreditor Agent or any other
Secured Party or the affiliates, directors, officers, employees, attorneys or
agents of any of them for any special, indirect, consequential or punitive
damages in respect of any claim for breach of contract or any other theory of
liability arising out of or relating to this Agreement or any other Transaction
Document or the transactions contemplated hereby or thereby, or any act,
omission or event occurring in connection therewith, and the Issuer, Elwood II
Holdings and Elwood III Holdings hereby waives, releases and agrees not to sue
upon any claim for any such damages, whether or not accrued and whether or not
known or suspected to exist in its favor.

          SECTION 7.11  Governing Law.  (a) THIS AGREEMENT SHALL BE GOVERNED BY,
                        -------------
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REFERENCE TO PRINCIPLES OF CONFLICTS OF LAWS (OTHER THAN SECTION 5-1401 OF THE
NEW YORK GENERAL OBLIGATIONS LAW) AND EXCEPT TO THE EXTENT THAT THE VALIDITY OR
PERFECTION OF THE LIEN AND SECURITY INTEREST HEREUNDER, OR THE REMEDIES
HEREUNDER, ARE GOVERNED BY THE LAW OF ANY JURISDICTION OTHER THAN THE STATE OF
NEW YORK. REGARDLESS OF ANY PROVISION IN ANY OTHER AGREEMENT, FOR PURPOSES OF
THE NEW YORK UCC, THE "SECURITIES INTERMEDIARY'S JURISDICTION" OF THE
ADMINISTRATIVE AGENT WITH RESPECT TO THE ACCOUNTS IN RESPECT OF WHICH THE
COLLATERAL AGENT HAS BEEN GRANTED A SECURITY INTEREST UNDER THE SECURITY
AGREEMENT IS THE STATE OF NEW YORK.

          (b) Any legal action or proceeding by or against the Issuer, Elwood II
Holdings or Elwood III Holdings with respect to or arising out of this Agreement
may be brought in or removed to the courts of the State of New York, in and for
the County of New York, or of the United States of America for the Southern
District of New York.  By execution and delivery of this Agreement, each of the
Issuer, Elwood II Holdings and Elwood III Holdings accepts, for itself and in
respect of its property, generally and unconditionally, the jurisdiction of the
aforesaid courts for legal proceedings arising out of or in connection with this
Agreement and the Issuer irrevocably consents to the appointment of CT
Corporation System, with offices on the date hereof at 111 Eighth Avenue, New
York, New York 10011 as its agent to receive service of process in New York, New
York.  If for any reason such agent shall cease to be available to act as such
for the Issuer, the Issuer agrees to appoint a new agent on the terms and for
the purposes of this provision.  Nothing herein shall affect the right to serve
process in any other manner permitted by law or any right to bring legal action
or proceedings in any other competent jurisdiction.  Each of the Issuer, Elwood
II Holdings and Elwood III Holdings further agrees that the aforesaid courts of
the State of New York and of the United States of America for the Southern
District of New York shall have exclusive jurisdiction with respect to any claim
or counterclaim of any such Person based upon the assertion that the rate of
interest charged by or under any Financing Documents is usurious.  Each of the
Issuer,

                                      51
<PAGE>

Elwood II Holdings and Elwood III Holdings hereby waives any right to stay or
dismiss any action or proceeding under or in connection with the Project, this
Agreement or any other Transaction Document brought before the foregoing courts
on the basis of forum non-conveniens or improper venue.
                --------------------

          (c) EACH PARTY HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY
WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT,
OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR
WRITTEN) OR ACTIONS OF THE OTHER PARTIES HERETO.  THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE PARTIES HERETO TO ENTER INTO THIS AGREEMENT.

          SECTION 7.12 Payments in Respect of Bonds.  The Issuer hereby
                       ----------------------------
instructs the Collateral Agent and the Administrative Agent to make all payments
to be made in respect of the Bonds hereunder directly to the Trustee for deposit
into the Bond Fund in accordance with the terms of Section 3.3 of the Indenture,
                                                   -----------
and the Collateral Agent and the Administrative Agent hereby acknowledge receipt
of such instruction.

                                      52
<PAGE>

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

                         ELWOOD ENERGY LLC

                         By:  /s/ Thomas B. Linquist
                              ---------------------------
                              Name: Thomas B. Linquist
                              Title: Authorized Representative

                         Address for Notices:

                         Elwood Energy LLC
                         c/o Peoples Energy Resources Corp.
                         130 East Randolph Drive
                         Chicago, IL 60601
                         Attn:  John E. Horton
                         Telephone No.: (312) 240-7181
                         Telecopy No.:  (312) 240-3966

                         with a copy to:

                         Elwood Energy LLC
                         c/o Dominion Resources Services, Inc.
                         120 Tredegar Street
                         Richmond, VA 23219
                         Attn: Donald Burnette
                         Telephone No.: (804) 819-2411
                         Telecopy No.:  (804) 819-2211

<PAGE>

                         ELWOOD II HOLDINGS, LLC

                         By:  /s/ Thomas B. Linquist
                              ---------------------------
                              Name: Thomas B. Linquist
                              Title: Authorized Representative

                         Address for Notices:

                         Elwood II Holdings, LLC
                         c/o Peoples Energy Resources Corp.
                         130 East Randolph Drive
                         Chicago, IL 60601
                         Attn:  John E. Horton
                         Telephone No.: (312) 240-7181
                         Telecopy No.:  (312) 240-3966

                         with a copy to:

                         Elwood II Holdings, LLC
                         c/o Dominion Resources Services, Inc.
                         120 Tredegar Street
                         Richmond, VA 23219
                         Attn:  Donald Burnette
                         Telephone No.: (804) 819-2411
                         Telecopy No.:  (804) 819-2211

<PAGE>

                         ELWOOD III HOLDINGS, LLC

                         By:  /s/ Thomas B. Linquist
                              -----------------------------
                              Name: Thomas B. Linquist
                              Title: Authorized Representative

                         Address for Notices:

                         Elwood III Holdings, LLC
                         c/o Peoples Energy Resources Corp.
                         130 East Randolph Drive
                         Chicago, IL 60601
                         Attn: John E. Horton
                         Telephone No.: (312) 240-7181
                         Telecopy No.:  (312) 240-3966

                         with a copy to:

                         Elwood III Holdings, LLC
                         c/o Dominion Resources Services, Inc.
                         120 Tredegar Street
                         Richmond, VA 23219
                         Attn: Donald Burnette
                         Telephone  No.: (804) 819-2411
                         Telecopy No.:   (804) 819-2211

<PAGE>

                      BANK ONE TRUST COMPANY,
                       NATIONAL ASSOCIATION,
                      as Collateral Agent

                      By:  /s/ Benita A. Pointer
                         --------------------------------
                         Name: Benita A. Pointer
                         Title: Account Executive

                      Address for Notices:

                      Bank One Trust Company, National
                      Association
                      1 Bank One Plaza
                      Mail Suite IL1-0823
                      Chicago, Illinois 60670-0823
                      Attn: Global Corporate Trust Services
                      Telephone No.: (312) 407-5252
                      Telecopy No.:  (312) 336-8840

                      BANK ONE TRUST COMPANY,
                       NATIONAL ASSOCIATION,
                       as Administrative Agent

                      By: /s/ Benita A. Pointer
                         ------------------------------
                         Name: Benita A. Pointer
                         Title: Account Executive

                      Address for Notices:

                      1 Bank One Plaza
                      Mail Suite IL1-0823
                      Chicago, Illinois  60670-0823
                      Attn:  Global Corporate Trust Services
                      Telephone No.: (312) 407-5252
                      Telecopy No.:  (312) 336-8840

<PAGE>

                    BANK ONE TRUST COMPANY,
                      NATIONAL ASSOCIATION,
                      as Intercreditor Agent

                    By:  /s/ Benita A. Pointer
                        ------------------------------
                        Name: Benita A. Pointer
                        Title: Account Executive

                    Address for Notices:

                    1 Bank One Plaza
                    Mail Suite IL1-0823
                    Chicago, Illinois  60670-0823
                    Attn: Global Corporate Trust Services
                    Telephone No.: (312) 407-5252
                    Telecopy No.:  (312) 336-8840
<PAGE>

                                                                      Annex A to
                                              Deposit and Disbursement Agreement
                                              ----------------------------------

                              Calculation Examples
                              --------------------

The following examples illustrate how the applicable percentage of capacity
covered by Permitted PPAs is to be calculated for the purposes of Section
3.9(b)(iii) of this Agreement:

Assume for the purposes of each example that the capacity of the Project is 1400
MW.

Example 1:     On the applicable date of determination, the Issuer is party to
               Permitted PPAs with terms that extend for all eight of the
               quarters that follow such date. These Permitted PPAs cover, in
               the aggregate, 1000 MW of the Project's capacity. Therefore, the
               applicable percentage is (1000/1400) x 100% = 71.4%.

Example 2:     On the applicable date of determination, the Issuer is party to
               Permitted PPAs with terms that extend for the first six of the
               eight quarters that follow such date. These Permitted PPAs cover
               1000 MW of the Project's capacity during such first six quarters
               and 0 MW of the Project's capacity during the seventh and eight
               quarters following such date. Therefore, the applicable
               percentage is [(1000/1400) x (75%)] + [(0/1400) x (25%)] =
               (53.6%) + (0%) = 53.6%

Example 3:     On the applicable date of determination, the Issuer is party to
               Permitted PPAs that cover 1000 MW of the Project's capacity
               during the first six quarters following such date and 500 MW of
               the Project's capacity during the seventh and eight quarters
               following such date. Therefore, the applicable percentage is
               [(1000/1400) x (75%)] + [(500/1400) x (25%)] = (53.6%) + (8.9%) =
               62.5%

Example 4:     On the applicable date of determination, the Issuer is party to
               Permitted PPAs that cover 0 MW of the Project's capacity during
               the first six quarters following such date and 1400 MW of the
               Project's capacity during

                                   Annex A-1
<PAGE>

               the seventh and eight quarters following such date. Therefore,
               the applicable percentage is [(0/1400) x (75%)] + [(1400/1400) x
               (25%)] = (0%) + (25%) = 25%

Example 5:     On the applicable date of determination, the Issuer is party to
               Permitted PPAs that cover 1400 MW of the Project's capacity
               during the first four quarters following such date and 0 MW of
               the Project's capacity during the fifth, sixth, seventh and
               eighth quarters following such date. Therefore, the applicable
               percentage is [(1400/1400) x (50%)] + [(0/1400) x (50%)] = (50%)
               + (0%) = 50%

Example 6:     On the applicable date of determination, the Issuer is party to
               Permitted PPAs that cover 1400 MW of the Project's capacity
               during the first 3 1/2 quarters following such date and 0 MW of
               the Project's capacity during the last 1/2 of the fourth quarter
               and during the fifth, sixth, seventh and eighth quarters
               following such date. Therefore, the applicable percentage is
               [(1400/1400) x (43.75%)] + [(0/1400) x (56.25%)] = (43.75%) +
               (0%) = 43.75%

                                   Annex A-2
<PAGE>

                                                                   Schedule I to
                                              Deposit and Disbursement Agreement
                                              ----------------------------------

                                    Accounts
                                    --------

1.   Revenue Account

          Account Name: Elwood Energy Revenue Account
          Account Number: 2600015505

2.   O&M Account

          Account Name: Elwood Energy O&M Account
          Account Number: 2600015506

3.   Holdings II Account

          Account Name: Elwood Energy Holdings II Account
          Account Number: 2600015507

4.   Holdings III Account

          Account Name: Elwood Energy Holdings III Account
          Account Number: 2600015508

5.   Sales Tax Reserve Account

          Account Name: Elwood Energy Sales Tax Reserve Account
          Account Number: 2600015509

6.   Debt Service Payment Account

          Account Name: Elwood Energy Debt Service Payment Account
          Account Number: 2600015510

7.   DSR LOC Loan Principal Account

                                      I-1
<PAGE>

          Account Name: Elwood Energy DSR LOC Loan Principal Account
          Account Number: 2600015511

8.   Debt Service Reserve Account

          Account Name: Elwood Energy Debt Service Reserve Account
          Account Number: 2600015512

9.   Major Maintenance Reserve Account

          Account Name: Elwood Energy Major Maintenance Reserve Account
          Account Number: 2600015513

10.  PSA Contingency Reserve Account

          Account Name: Elwood Energy PSA Contingency Reserve Account
          Account Number: 2600015514

11.  Distribution Suspense Account

          Account Name: Elwood Energy Distribution Suspense Account
          Account Number: 2600015515

12.  Distribution Account

          Account Name: Elwood Energy Distribution Account
          Account Number: 2600015516

13.  Proceeds Account

          Account Name: Elwood Energy Proceeds Account
          Account Number: 2600015517

                                      I-2
<PAGE>

                                                                  Schedule II to
                                              Deposit and Disbursement Agreement
                                              ----------------------------------

          Current Major Maintenance Required Balance* (in thousands)
          ------------------------------------------

                         October 23, 2001     $ 2,000
                         January 5, 2002      $ 3,800
                         July 5, 2002         $ 7,400
                         January 5, 2003      $11,000
                         July 5, 2003         $14,600
                         January 5, 2004      $18,200
                         July 5, 2004         $21,800
                         January 5, 2005      $25,400
                         July 5, 2005         $29,000
                         January 5, 2006      $27,818
                         July 5, 2006         $31,418
                         January 5, 2007      $28,703
                         July 5, 2007         $32,303
                         January 5, 2008      $34,093
                         July 5, 2008         $37,693
                         January 5, 2009      $39,139
                         July 5, 2009         $42,739
                         January 5, 2010      $22,232
                         July 5, 2010         $25,832
                         January 5, 2011      $18,500
                         July 5, 2011         $22,100
                         January 5, 2012      $24,840
                         July 5, 2012         $28,440
                         January 5, 2013      $32,040
                         July 5, 2013         $41,040
                         January 5, 2014      $45,632
                         July 5, 2014         $54,632
                         January 5, 2015      $59,181
                         July 5, 2015         $68,181
                         January 5, 2016      $48,218
                         July 5, 2016         $57,218
                         January 5, 2017      $45,936
                         July 5, 2017         $52,936
                         January 5, 2018      $56,622
                         July 5, 2018         $63,622
                         January 5, 2019      $64,731
                         July 5, 2019         $71,731

                                     II-1
<PAGE>

                         January 5, 2020      $70,020
                         July 5, 2020         $77,020
                         January 5, 2021      $37,052
                         July 5, 2021         $47,907
                         January 5, 2022      $40,154
                         July 5, 2022         $51,154
                         January 5, 2023      $61,715
                         July 5, 2023         $72,715
                         January 5, 2024      $68,633
                         July 5, 2024         $76,633
                         January 5, 2025      $51,157
                         July 5, 2025         $59,157
                         January 5, 2026      $29,515
                         July 5, 2026         $32,515

     *   Each amount set forth herein shall be adjusted as necessary to reflect
anticipated Major Maintenance Expenditures from the Major Maintenance Reserve
Account during the six-month period ending on such Bond Payment Date as
certified in the applicable Funding Date Certificate.

                                     II-2
<PAGE>

                                                                 Schedule III to
                                              Deposit and Disbursement Agreement
                                              ----------------------------------

                       Sales Tax Reserve Required Balance
                       ----------------------------------

----------------------------------------------------------------
        Date            Amount           Date           Amount
----------------------------------------------------------------
March 31, 2006        $  350,000  December 31, 2008   $4,200,000
----------------------------------------------------------------
June 30, 2006         $  700,000    March 31, 2009    $4,550,000
----------------------------------------------------------------
September 30, 2006    $1,050,000    June 30, 2009     $4,900,000
----------------------------------------------------------------
December 31, 2006     $1,400,000  September 30, 2009  $5,250,000
----------------------------------------------------------------
March 31, 2006        $1,750,000  December 31, 2009   $5,600,000
----------------------------------------------------------------
June 30, 2007         $2,100,000    March 31, 2010    $5,950,000
----------------------------------------------------------------
September 30, 2007    $2,450,000    June 30, 2010     $6,300,000
----------------------------------------------------------------
December 31, 2007     $2,800,000  September 30, 2010  $6,650,000
----------------------------------------------------------------
March 31, 2008        $3,150,000  December 31, 2010   $7,000,000
----------------------------------------------------------------
June 30, 2008         $3,500,000    March 31, 2011    $7,350,000
----------------------------------------------------------------
September 30, 2008    $3,850,000    June 30, 2011     $7,700,000
----------------------------------------------------------------

                                     III-1
<PAGE>

                                                                  Schedule IV to
                                              Deposit and Disbursement Agreement
                                              ----------------------------------

                               PSA Yearly Factor
                               -----------------

                           2013         $45,000,000
                           2014         $45,000,000
                           2015         $45,000,000
                           2016         $45,000,000
                           2017         $45,000,000
                           2018         $40,000,000
                           2019         $40,000,000
                           2020         $42,000,000
                           2021         $32,500,000
                           2022         $17,000,000
                           2023         $15,000,000

                                     IV-1
<PAGE>

                                                                       Exhibit A
                                           to Deposit and Disbursement Agreement
                                           -------------------------------------

                     FORM OF DEBT SERVICE RESERVE GUARANTY
                     -------------------------------------

                                      A-1
<PAGE>

                                                                       Exhibit B
                                           to Deposit and Disbursement Agreement
                                           -------------------------------------

                   FORM OF MAJOR MAINTENANCE RESERVE GUARANTY
                   ------------------------------------------

                                      B-1
<PAGE>

                                                                    Exhibit C to
                                              Deposit and Disbursement Agreement
                                              ----------------------------------

                    FORM OF PSA CONTINGENCY RESERVE GUARANTY

                                      C-1
<PAGE>

                                                                    Exhibit D to
                                              Deposit and Disbursement Agreement
                                              ----------------------------------

                       FORM OF SALES TAX RESERVE GUARANTY

                                      D-1
<PAGE>

                                                                    Exhibit E to
                                              Deposit and Disbursement Agreement
                                              ----------------------------------

                            MAINTENANCE REQUISITION
                            -----------------------

                                   No. ______

                     [Date]

Bank One Trust Company, National Association,
as Administrative Agent
1 Bank One Plaza
Mail Suite IL1-0823
Chicago, Illinois 60670-0823
Attention:  Global Corporate Trust Services

Re:  Deposit and Disbursement Agreement, dated as of October 23, 2001 (the
     "Deposit and Disbursement Agreement"), among Elwood Energy LLC (the
      ----------------------------------
     "Issuer"), Bank One Trust Company, National Association, in its capacity as
      ------
     Collateral Agent, Bank One Trust Company, National Association, in its
     capacity as Administrative Agent, and Bank One Trust Company, National
     Association, in its capacity as Intercreditor Agent.

Ladies and Gentlemen:

     This requisition (this "Maintenance Requisition") is delivered to you
                             -----------------------
pursuant to Section 3.7(b) of the Deposit and Disbursement Agreement.
            --------------
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned thereto in the Deposit and Disbursement Agreement (including defined
terms incorporated therein by reference from the Indenture).  The information
relating to this Maintenance Requisition is as follows:

     1. The aggregate amount requested to be withdrawn from the Major
        Maintenance Reserve Account in accordance with this Maintenance
        Requisition is $____________.

     2. The Disbursement Date on which the withdrawals and transfers pursuant to
        this Maintenance Requisition are to be made is _________ __, ____.

                                      E-1
<PAGE>

     3. Set forth on Schedule I attached hereto is the name of each Person to
                     ----------
        whom any payment is to be made, the aggregate amount incurred on or
        prior to the Disbursement Date or reasonably expected to be incurred
        within the thirty (30) day period following the Disbursement Date by
        such Person and a summary description of the work performed, services
        rendered, materials, equipment or supplies delivered or any other
        purpose for which each payment was or is to be made.

     4. The proceeds of this Maintenance Requisition withdrawn from the Major
        Maintenance Reserve Account will be used to pay Major Maintenance
        Expenditures due and payable as of the Disbursement Date or to reimburse
        the Issuer or the appropriate third parties for the costs of Major
        Maintenance Expenditures paid prior to the Disbursement Date (as
        evidenced by invoices received or provided by the Issuer).

                                            ELWOOD ENERGY LLC

                                            By:___________________
                                               Name:
                                               Title:

                                      E-2
<PAGE>

                                                         Schedule I to Exhibit E
                                           to Deposit and Disbursement Agreement
                                           -------------------------------------

                                  Amount
           Name                 of Payment        Purpose
           ----                 ----------        -------

                                      E-3
<PAGE>

                                                                       Exhibit F
                                           to Deposit and Disbursement Agreement

RESTORATION REQUISITION
-----------------------

                                  No. ______

                                  [Date]

Bank One Trust Company, National Association
1 Bank One Plaza
Mail Suite IL1-0823
Chicago, Illinois 60670-0823
Attention:  Global Corporate Trust Services

Re:  Deposit and Disbursement Agreement, dated as of October 23, 2001 (the
     "Deposit and Disbursement Agreement"), among Elwood Energy LLC (the
      ----------------------------------
     "Issuer"), Bank One Trust Company, National Association, in its capacity as
      ------
     Collateral Agent, Bank One Trust Company, National Association, in its
     capacity as Administrative Agent, and Bank One Trust Company, National
     Association, in its capacity as Intercreditor Agent.

Ladies and Gentlemen:

          This requisition (this "Restoration Requisition") is delivered to you
                                  -----------------------
pursuant to Section 3.10(a)(iii)(A) of the Deposit and Disbursement Agreement.
            -----------------------
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned thereto in the Deposit and Disbursement Agreement (including defined
terms incorporated therein by reference from the Indenture).  The information
relating to this Restoration Requisition is as follows:

     1. The aggregate amount requested to be withdrawn from the Proceeds Account
        in accordance with this Restoration Requisition is $____________.

     2. The Disbursement Date on which the withdrawals and transfers pursuant to
        this Restoration Requisition are to be made is _________ __, ____.

     3. Set forth on Schedule I attached hereto is the name of each Person to
                     ----------
        whom any payment is to be made, the aggregate amount incurred on or
        prior to the Disbursement Date or reasonably expected to be incurred

                                      F-1
<PAGE>

        within the thirty (30) day period following the Disbursement Date by
        such Person and a summary description of the work performed, services
        rendered, materials, equipment or supplies delivered or any other
        purpose for which each payment was or is to be made.

     4. The proceeds of this Restoration Requisition withdrawn from the Proceeds
        Account will be used to pay the costs of rebuilding, restoration or
        repair of the Project in accordance with the budget and schedule for the
        Restoration, and the Administrative Agent may properly charge such costs
        against the Proceeds Account.

     5. The rebuilding, restoration or repair costs which have been paid or for
        which payment is requested under this Restoration Requisition are in
        accordance with the budget and schedule for the Restoration Work.

     6. The costs of rebuilding, restoration or repair for which payment is
        requested under this Restoration Requisition from the Proceeds Account
        have not been the basis for any prior requisition by the Issuer.

     7. As of the date hereof, the Issuer has not received any written notice of
        any lien, right to lien or attachment upon, or claim affecting the right
        of the Issuer to receive any portion of the amount of this Restoration
        Requisition (other than in respect of Permitted Liens), or in the event
        that the Issuer has received notice of any such lien, right to lien,
        attachment or claim (other than a Permitted Lien), such lien, right to
        lien, attachment or claim has been released or discharged as of the date
        hereof or is expected to be released or discharged upon payment of the
        costs for which payment is requested under this Restoration Requisition,
        or is subject to a Good Faith Contest.

                               ELWOOD ENERGY LLC

                               By:______________________________
                                  Name:
                                  Title:

                                      F-2
<PAGE>

                                                         Schedule I to Exhibit F
                                           to Deposit and Disbursement Agreement
                                           -------------------------------------

                                 Amount
           Name                 of Payment        Purpose
           ----                 ----------        -------

                                      F-3
<PAGE>

                                                                       Exhibit G
                                           to Deposit and Disbursement Agreement
                                           -------------------------------------

INDEPENDENT ENGINEER RESTORATION CERTIFICATE
--------------------------------------------

                                   No. _____

                                    [Date]

Bank One Trust Company, National Association
1 Bank One Plaza
Mail Suite IL1-0823
Chicago, Illinois 60670-0823
Attention:  Global Corporate Trust Services

Re:  Deposit and Disbursement Agreement, dated as of October 23, 2001 (the
     "Deposit and Disbursement Agreement"), among Elwood Energy LLC (the
      ----------------------------------
     "Issuer"), Bank One Trust Company, National Association, in its capacity as
      ------
     Collateral Agent, Bank One Trust Company, National Association, in its
     capacity as Administrative Agent, and Bank One Trust Company, National
     Association, in its capacity as Intercreditor Agent.

Ladies and Gentlemen:

          This Certificate (this "Independent Engineer's Restoration
                                  ----------------------------------
Certificate") is delivered to you pursuant to Section 3.10(a)(iii)(B) of the
-----------                                   -----------------------
Deposit and Disbursement Agreement and in connection with the requisition for
payment dated __________ __, ____ (the "Restoration Requisition") delivered
                                        -----------------------
together with this Independent Engineer's Restoration Certificate.  Capitalized
terms used herein and not otherwise defined herein shall have the meanings
assigned thereto in the Deposit and Disbursement Agreement (including defined
terms incorporated therein by reference from the Indenture).

          We hereby certify to the Administrative Agent as of the date hereof
that:

     1. We have reviewed the material and data made available to us by the
        Issuer with respect to [describe rebuilding, repair or restoration of
        project] and have performed such other investigation as is referenced in
        Annex 1 attached hereto (the "Review"). Our Review was
        -------                       ------

                                      G-1
<PAGE>

        performed in accordance with generally accepted engineering and
        construction practices and included such investigation, [insert
        customary exceptions and qualifications] and review as we in our
        professional capacity deemed necessary or appropriate in the
        circumstances and within the scope of our appointment [insert customary
        exceptions and qualifications]. We have also reviewed the Restoration
        Requisition and any appendices, schedules and requisitions and/or
        invoices attached thereto or delivered therewith.

     2. Based on our Review and the understanding and assumption that we have
        been provided true, correct and complete information, and [insert
        customary exceptions and qualifications] we are of the opinion that, as
        of the date hereof:

        a. After giving effect to the payments requested under the Restoration
           Requisition, the undisbursed moneys in the Proceeds Account together
           with any other amounts that the Issuer is willing to commit or cause
           to be committed to such rebuilding, repair or restoration is
           reasonably estimated to equal or exceed the amount necessary to pay
           for (i) all work, labor or services performed and all materials,
           supplies or equipment furnished for which payment has not yet been
           made and (ii) all other reasonably anticipated costs of rebuilding,
           repair or restoration ("Restoration Costs") which have yet to be paid
                                   -----------------
           in order to achieve operation of [all] [a portion] of the Project.
           [Alternative if applicable: After giving effect to the payments
           requested under the Restoration Requisition, the undisbursed moneys
           in the Proceeds Account may be less than the amount necessary to pay
           for (i) all work, labor or services performed and all materials,
           supplies or equipment furnished for which payment has not yet been
           made and (ii) all other reasonably anticipated Restoration Costs
           which have yet to be paid in order to achieve operation of [all] [a
           portion] of the Project; however, in our opinion, such insufficiency
           could not reasonably be expected to result in a Material Adverse
           Effect.]

        b. The major rebuilding, repair and restoration activities and the
           progress of the rebuilding, repair and restoration of the Project
           through the date of this Independent Engineer's Restoration
           Certificate are proceeding in a satisfactory manner in accordance
           with the budget and the schedule for the Restoration.

                                      G-2
<PAGE>

          c. The Restoration Costs set forth on Schedule I to the Restoration
                                                ----------
             Requisition not incurred on or prior to the Disbursement Date are
             reasonably anticipated to be incurred during the thirty (30) day
             period following the Disbursement Date.

          d. The payments made with respect to the Restoration Requisition are
             in accordance with the budget and schedule for the Restoration.

          The person signing this Independent Engineer's Restoration Certificate
is a duly qualified representative of the Independent Engineer and as such is
authorized to execute this Independent Engineer's Restoration Certificate on
behalf of the Independent Engineer.

                    Very truly yours,

                    [Stone & Webster Consultants, Inc.]

                    By:_________________________
                       Name:
                       Title:

                                      G-3<PAGE>

                                                                     EXHIBIT 4.5

================================================================================

                            INTERCREDITOR AGREEMENT

                         Dated as of October 23, 2001

                                     among

                              ELWOOD ENERGY LLC,

                 BANK ONE TRUST COMPANY, NATIONAL ASSOCIATION,
                                  as Trustee,

                           THE OTHER SECURED PARTIES
                  (OR REPRESENTATIVES THEREOF) PARTY HERETO,

                 BANK ONE TRUST COMPANY, NATIONAL ASSOCIATION,
                 as Collateral Agent, Intercreditor Agent and
                             Administrative Agent

================================================================================
<PAGE>

                                                                     EXHIBIT 4.5

                            INTERCREDITOR AGREEMENT
                            -----------------------

          This INTERCREDITOR AGREEMENT (this "Agreement"), dated as of October
                                              ---------
23, 2001, is by and among ELWOOD ENERGY LLC, a Delaware limited liability
company (the "Issuer"), BANK ONE TRUST COMPANY, NATIONAL ASSOCIATION, a
              ------
national banking association formed under the laws of the United States, as
Trustee, Collateral Agent, Administrative Agent and Intercreditor Agent, and
each other Secured Party (or representative thereof) that becomes a party to
this Agreement pursuant to Section 7.18.
                           ------------

                                    RECITALS
                                    --------

          WHEREAS, the Issuer was formed for the purpose of developing,
financing, constructing, owning and operating an approximately 1,409 MW natural
gas-fired electric generation peaking facility located in Elwood, Illinois;

          WHEREAS, the Issuer has determined to issue $402,000,000 aggregate
principal amount of its 8.159% Senior Secured Bonds due July 5, 2026 (the
"Bonds") pursuant to the Trust Indenture, dated as of the date hereof (the
 -----
"Indenture"), between the Issuer and Bank One Trust Company, National
----------
Association, as trustee (the "Trustee");
                              -------

          WHEREAS, the Issuer will use proceeds of the Bonds for (i) working
capital; (ii) financing, legal and consulting fees and expenses associated with
the offering of the Bonds; (iii) required funding of the Major Maintenance
Account; (iv) payments for residual construction costs under contracts with GE;
and (v) repayment in full of Indebtedness outstanding under existing
intercompany loans provided by the Members and partial reimbursement of the
Sponsors and Members for advances or capital contributions to the Issuer that
the Issuer has used to pay the costs of developing, constructing and financing
the Project, and for no other purpose; and

          WHEREAS, in connection with the issuance and sale of the Bonds and the
execution of the related Financing Documents, the parties hereto wish to enter
into this Agreement in order to set forth certain intercreditor provisions,
including the method of voting and decision making for the Secured Parties, the
arrangements applicable to joint consultation and actions in respect of approval
rights and waivers, the limitations on rights of enforcement upon default and
the appointment of the Intercreditor Agent for the purposes set forth herein.
<PAGE>

                                   AGREEMENT
                                   ---------

          NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereby agree as follows:

                                   ARTICLE I
                      DEFINITIONS; RULES OF INTERPRETATION
                      ------------------------------------

          Section 1.1  Definitions.  Except as otherwise expressly provided
                       -----------
herein, capitalized terms used in this Agreement and its exhibits and schedules
shall have the meanings given thereto in the Indenture.  In addition, the terms
set forth below shall have the respective meanings given such terms below.  To
the extent such terms are defined by reference to other Transaction Documents,
for purposes hereof such terms shall continue to have their original definitions
(but will bear the governing law of this Agreement) notwithstanding any
termination, expiration or amendment of such agreements except to the extent the
parties hereto agree to the contrary.

          "Acceleration Event" has the meaning set forth in Section 6.6.3.
           ------------------                               -------------

          "Additional Indebtedness Facility" means the aggregate amount of the
           --------------------------------
Combined Exposure outstanding under any Additional Indebtedness Agreement.

          "Bond Facility" means the aggregate amount of the Combined Exposure
           -------------
outstanding under the Indenture.

          "Combined Exposure" means, as of any date of calculation, the sum
           -----------------
(calculated without duplication) of the following, to the extent the same is
held by a Secured Party:  (i) the aggregate amount of Indebtedness outstanding
under the Facility Documents; (ii) the aggregate amount of all available undrawn
financing commitments under the Facility Documents which the Secured Parties
party thereto have no right to terminate other than upon the occurrence of an
event of default (howsoever defined) thereunder; and (iii) the maximum amount
available to be drawn under all letters of credit issued pursuant to the
Facility Documents.

          "Debt Service Reserve L/C Facility" means the aggregate amount of the
           ---------------------------------
Combined Exposure outstanding under any Debt Service Reserve L/C Agreement.

                                       2
<PAGE>

          "Decision Period" means the period of time determined by the
           ---------------
Intercreditor Agent and designated in any notice delivered by the Intercreditor
Agent for the Designated Voting Parties to make any decision hereunder, subject
to the following:  (i) any such period of time may be extended by any Designated
Voting Party for a period not to exceed thirty (30) days on a one time basis
only for any notice; (ii) if there is no period for giving of notice, passage of
time or cure of the event or circumstance that is the subject of such notice
(each, a "Cure Period"), if the Cure Period has expired, or if the remaining
          -----------
Cure Period is less than fifteen (15) days after the date of such notice, the
Decision Period shall end not earlier than fourteen (14) days nor later than
twenty-one (21) days after the date of such notice; and (iii) in all other
cases, the Decision Period shall end not earlier than fourteen (14) days after
the date of such notice nor later than the end of the Cure Period; provided that
                                                                   --------
the Intercreditor Agent may designate a lesser period (being at least seven (7)
days) as it may consider necessary or advisable in circumstances where the
interests of the Secured Parties or any of them would otherwise be likely to be
prejudiced.

          "Default" means any event or condition that, with the giving of notice
           -------
or the passage of time, or both, would constitute an Event of Default.

          "Designated Voting Party" means, at any time, with respect to any
           -----------------------
Voting Facility, the Person then entitled to cast the votes under this Agreement
for such Voting Facility.  The Designated Voting Party for each Voting Facility
is as follows:

               (a) with respect to the Bond Facility, the Designated Voting
     Party is the Trustee acting in accordance with the terms and provisions of
     the Indenture;

               (b) with respect to any Working Capital Facility, the Designated
     Voting Party is the Working Capital Agent therefor acting in accordance
     with the terms and provisions of the applicable Working Capital Agreement;

               (c) with respect to any Debt Service Reserve L/C Facility, the
     Designated Voting Party is the Debt Service Reserve L/C Agent therefor,
     acting in accordance with the terms and provisions of the applicable Debt
     Service Reserve L/C Agreement; and

               (d) with respect to any Additional Indebtedness Facility, the
     Designated Voting Party is the Additional Indebtedness Agent therefor,
     acting in accordance with the terms and provisions of the applicable
     Additional Indebtedness Agreement.

                                       3
<PAGE>

          "Event of Default" means an "event of default" under any Facility
           ----------------
Document.

          "Facility Documents" means, collectively, the Indenture, any Working
           ------------------
Capital Agreement, any Debt Service Reserve L/C Agreement and any Additional
Indebtedness Agreement.

          "Fundamental Decisions" has the meaning set forth in Section 6.1.
           ---------------------                               -----------

          "Initiating Percentage" means Designated Voting Parties representing,
           ---------------------
in the aggregate, (i) in the case of an Event of Default under Section 8.1(a) of
                                                               --------------
the Indenture or any similar Event of Default under any other Financing
Document, Secured Parties holding at least thirty-three and one-third percent
(33 1/3%) of the aggregate Combined Exposure, and (ii) in the case of any other
Event of Default, Senior Secured Parties holding greater than fifty percent
(50%) of the aggregate Combined Exposure.

          "Intercreditor Vote" means, at any time, a vote conducted in
           ------------------
accordance with the procedures set forth in Article 4 of this Agreement among
                                            ---------
the Designated Voting Parties with respect to the particular decision at issue
at such time.

          "Loan Party" means any of the Intercreditor Agent, the Administrative
           ----------
Agent, the Collateral Agent or any Designated Voting Party, as applicable.

          "Majority Secured Parties" means Secured Parties holding greater than
           ------------------------
fifty percent (50%) of the aggregate Combined Exposure.

          "Modification" means, with respect to any Financing Document, any
           ------------
amendment, supplement, Waiver or other modification of the terms and provisions
thereof.

          "Notice of Default" has the meaning set forth in Section 5.1.
           -----------------                               -----------

          "One Hundred Percent Secured Parties" means Secured Parties holding
           -----------------------------------
one hundred percent (100%) of the aggregate Combined Exposure.

          "Other Unit" has the meaning set forth in Section 2.2.3.
           ----------                               -------------

          "Proposed Remedies" has the meaning set forth in Section 5.2.1.
           -----------------                               -------------

                                       4
<PAGE>

          "Relevant Person" means any Project Party, any Designated Voting
           ---------------
Party, any other Secured Party or any other advisor or other Person with respect
to any of the Transaction Documents.

          "Remedies Commencement Date" has the meaning set forth in Section
           --------------------------                               -------
5.2.2.
-----

          "Remedies Initiation Notice" has the meaning set forth in Section
           --------------------------                               -------
5.2.1.
-----

          "Remedies Instruction" has the meaning set forth in Section 5.3.1.
           --------------------                               -------------

          "Required Secured Parties" has the following meaning:
           ------------------------

               (a) Designated Voting Parties representing, in the aggregate, the
     One Hundred Percent Secured Parties with respect to any Modification,
     instruction or exercise of discretion pursuant to Section 6.1;
                                                       -----------

               (b) Designated Voting Parties representing, in the aggregate, the
     Majority Secured Parties with respect to any Modification, instruction or
     exercise of discretion pursuant to Section 6.2, except as otherwise
                                        -----------
     provided therein;

               (c) the Initiating Percentage with respect to any decision to
     exercise remedies made pursuant to Section 5.2.3; or
                                        -------------

               (d) Designated Voting Parties representing, in the aggregate, the
     Majority Secured Parties with respect to any other action not otherwise
     described or dealt with in this definition of "Required Secured Parties" or
     elsewhere in this Agreement and not otherwise specifically delegated to the
     Intercreditor Agent.

          "Subordinated Affiliate Bonds" means Bonds which are beneficially or
           ----------------------------
legally held by the Issuer, any equity participant in the Issuer or any of their
respective Affiliates and which are purchased after a Default or an Event of
Default shall exist and be continuing.

          "Voting Facility" means any of the Bond Facility, any Working Capital
           ---------------
Facility, any Debt Service Reserve L/C Facility or any Additional Indebted  ness
Facility, as applicable.

                                       5
<PAGE>

          "Waiver" means, with respect to any particular conduct, event or other
           ------
circumstance, any change to an obligation of any Person under any Transaction
Document requiring the consent of one or more Senior Secured Parties, which
consent has the effect of excusing performance of or compliance with such
obligation, or any Default or Event of Default with respect thereto to the
extent relating to such conduct, event or circumstance, provided that any Waiver
                                                        --------
shall be limited solely to the particular conduct, event or circumstance and
shall not purport, directly or indirectly, to alter or otherwise modify the
relevant obligation with respect to future occurrences of the same conduct,
event or circumstance.

          "Working Capital Facility" means the aggregate amount of the Combined
           ------------------------
Exposure outstanding under any Working Capital Agreement.

          Section 1.2  Rules of Interpretation.  Except as otherwise expressly
                       -----------------------
provided herein, the principles of construction set forth in the Indenture shall
apply to this Agreement.

                                   ARTICLE II
                              INTERCREDITOR AGENT
                              -------------------

          Section 2.1  Appointment of the Intercreditor Agent.  Each of the
                       --------------------------------------
Secured Parties that is a party hereto (for itself, each party on whose behalf
it executes this Agreement and any Person claiming through it) hereby appoints
Bank One Trust Company, National Association to act as its intercreditor agent
in connection with the Project and the Transaction Documents and authorizes it
to exercise such rights, powers, authorities and discretion as are specifically
delegated to the Intercreditor Agent by the terms hereof and any of the other
Financing Documents together with all such rights, powers, authorities and
discretion as are reasonably incidental thereto.  The Intercreditor Agent shall
have no duties or obligations except those expressly set forth herein and in the
other Financing Documents.  By its signature hereto, Bank One Trust Company,
National Association accepts such appointment.

          Section 2.2  Intercreditor Agent's Rights and Obligations.
                       --------------------------------------------

              2.2.1  In the course of its duties hereunder, the Intercreditor
Agent may at all times:

                       (a) assume, absent written notice to the contrary, that
          (i) any representation warranty, recital or statement made by the
          Issuer or any Project Party in connection with any Transaction

                                       6
<PAGE>

          Document is true, (ii) no Default or Event of Default exists; and
          (iii) neither the Issuer nor any Project Party is in breach or default
          of its obligations under any Transaction Document;

                    (b) assume any notice, certificate or report given by any
          Relevant Person has been validly given by a Person authorized to do so
          evidenced by a writing which states that such Person is an authorized
          representative of such Relevant Person and act upon such notice or
          certificate unless the same is revoked or superseded by a further such
          notice or certificate;

                    (c) assume that the address, telecopy and tele phone numbers
          for the giving of any written notice to any Person hereunder are those
          identified in Section 7.1 until it has received from such Person a
                        -----------
          written notice designating some other office of such Person to replace
          any such address, telecopy or telephone number, and act upon any such
          notice until the same is superseded by a further such written notice;

                    (d) pay reasonable fees and expenses for the advice or
          services of any lawyers, accountants, engineers, consultants or other
          experts whose advice or services the Intercreditor Agent may determine
          are necessary, expedient or desirable and rely upon any advice so
          obtained, and, if it so decides to make any such payment, such fees
          and expenses shall be reimbursed to the Intercreditor Agent pursuant
          to Section 7.16; provided that it shall be under no obligation to act
             ------------  --------
          upon such advice if it does not deem such action to be appropriate;

                    (e) rely and act upon a certificate or request signed by or
          on behalf of any Relevant Person with respect to any matters of fact
          which might reasonably be expected to be within the knowledge of such
          Relevant Person and which states that the Person signing such
          certificate is an authorized representative of such Relevant Person
          and, where applicable, states specifically the Facility Document and
          provision thereof pursuant to which the Intercreditor Agent is being
          directed to act;

                    (f) rely upon any communication (including, but not limited
          to, any note, letter, cablegram, telegram, telecopy, telex or teletype
          message) or document from any Person reasonably believed by it to be
          genuine;

                                       7
<PAGE>

                    (g) refrain from acting or continuing to act in accordance
          with any instructions of the Required Secured Parties to begin any
          legal action or proceeding arising out of or in connection with any
          Transaction Document until it shall have received such indemnity,
          security or undertaking for costs from the Secured Parties as it may
          require (whether by payment in advance or otherwise) for all costs,
          claims, losses and expenses (including reasonable legal fees and
          expenses) and liabilities which it will or may expend or incur in
          complying or continuing to comply with such instructions; and

                    (h) seek instructions from the Required Secured Parties as
          to the exercise of any of its rights, powers or discretion hereunder
          and in the event that it does so it shall not be considered as having
          acted unreasonably when acting in accordance with such instructions
          or, in the absence of any (or any clear) instructions, when refraining
          from taking any action or exercising any right, power or discretion
          hereunder.

              2.2.2  The Intercreditor Agent shall, subject to Section 2.2.1:
                                                              -------------

                    (a) promptly provide each Designated Voting Party with a
          copy of any material notice or document which it, in its capacity as
          Intercreditor Agent, receives from or delivers to:  (i) the Issuer;
          (ii) any Project Party; (iii) the Administrative Agent; (iv) the
          Collateral Agent; (v) any other Designated Voting Party; (vi) any
          Independent Consultant; or (vii) any Governmental Authority;

                    (b) except as otherwise provided herein, act as
          Intercreditor Agent hereunder in accordance with any instructions
          given to it by the Required Secured Parties; and

                    (c) if so instructed by the Required Secured Parties,
          refrain from exercising any right, power or discretion vested in it as
          the Intercreditor Agent hereunder.

              2.2.3  The relevant branch(es), division(s) or department(s) of
the Person serving as the Intercreditor Agent hereunder shall be treated as a
separate entity from any other of its branches, divisions or departments ("Other
                                                                           -----
Units") and, if any Other Unit should act for any Secured Party in any capacity
-----
in relation to any other matter, any information given by such Secured Party to
such Other Unit in such other capacity may be treated as confidential by such
Person.

                                       8
<PAGE>

          Section 2.3  Intercreditor Agent.
                       -------------------

              2.3.1  Notwithstanding anything to the contrary expressed or
implied herein, the Intercreditor Agent shall not:

                       (a) be bound to inquire as to (i) whether or not any
          representation or warranty made by any Person in connection with any
          Transaction Document is true, (ii) the occurrence or other  wise of
          any Default or Event of Default, (iii) the performance by any Person
          of its obligations under any of the Transaction Documents or (iv) any
          breach of or default by any Person of its obligations under any of the
          Transaction Documents;

                       (b) be bound to account to any Person for any sum or the
          profit element of any sum received by it for its own account;

                       (c) be bound to disclose to any other Person any
          information relating to the Project or any Person if such disclosure
          would, or might, constitute a breach of any law or regulation or be
          otherwise actionable at the suit of any Person;

                       (d) be under any fiduciary duties or obligations other
          than those for which express provision is made herein or in any of the
          other Financing Documents to which it is a party; or

                       (e) whether at the direction of the Required Secured
          Parties (pursuant to a Remedies Instruction or otherwise), and
          regardless of whether it is indemnified with respect thereto, be
          required to take or direct the Collateral Agent to take any action
          which it believes, based on a written opinion of counsel, is in
          conflict with any Applicable Law, any Governmental Approval, this
          Agreement or any other Financing Document or any order of any court
          or administrative agency.

              2.3.2  The Intercreditor Agent is not responsible for and does not
accept any responsibility for:  (i) any recitals, statements, representations or
warranties made by the Issuer, any Project Party or any Secured Party (other
than itself in its capacity as Intercreditor Agent) contained in this Agreement
or any other Transaction Document or in any certificate or other document
referred to or provided for in, or received by any Secured Party under, this
Agreement or any other Transaction Document; (ii) the value, validity,
effectiveness, genuineness,

                                       9
<PAGE>

enforceability or sufficiency of this Agreement or any other Transaction
Document or any other document referred to or provided for hereunder or
thereunder; (iii) the value, validity, perfection, priority or enforceability of
any Lien purported to be created by any Security Document; or (iv) any failure
by the Issuer, any Project Party or any Secured Party (other than itself in its
capacity as Intercreditor Agent) to perform its obligations under this Agreement
or any other Transaction Document; provided, however, that nothing in this
                                   --------  -------
Section 2.3.2 shall be deemed or construed as limiting the rights of the
-------------
Intercreditor Agent or any Secured Party or the obligations of any Project
Party, in each case as is set forth in the applicable Transaction Documents.

               2.3.3  Each of the Secured Parties that is a party hereto (for
itself, each party on whose behalf it executes this Agreement and any Person
claiming through it) understands and agrees that it has itself been, and will
continue to be, solely responsible for making its own independent appraisal of,
and investigations into, the financial condition, creditworthiness, condition,
affairs, status and nature of the Issuer and each Project Party and,
accordingly, each such Secured Party warrants to the Intercreditor Agent that it
has not relied on and will not hereafter rely on the Intercreditor Agent:

                       (a) to check or inquire on its behalf into the adequacy,
          accuracy or completeness of any information provided by any Relevant
          Person in connection with any of the Transaction Documents or the
          transactions therein contemplated (whether or not such information has
          been or is hereafter circulated to such Relevant Person by the
          Intercreditor Agent); or

                       (b) to assess or keep under review on its behalf the
          financial condition, creditworthiness, condition, affairs, status or
          nature of any Relevant Person.

It is agreed and understood that the Trustee makes no representation as to
itself but only in its capacity as the Trustee and based only on the
authorization and represen  tations set forth in the Indenture.

          Section 2.4  Defaults. The Intercreditor Agent shall not be deemed to
                       --------
have knowledge or notice of the occurrence of any Default or Event of Default
unless the Intercreditor Agent has received a written notice (i) from a
Designated Voting Party, referring to this Agreement, describing such Default or
Event of Default and stating that such notice is a "Notice of Default", (ii)
from the Issuer referring to a Transaction Document, describing such Default or
Event of Default, (iii) from a Project Party stating that a default exists
pursuant to any

                                      10
<PAGE>

Transaction Document to which it is a party or (iv) from the Collateral Agent
stating that it has received a notice from a Project Party that a default exists
pursuant to a Transaction Document to which such Project Party is a party. If
the Intercreditor Agent receives such a notice of the occurrence of a Default or
an Event of Default, the Intercreditor Agent shall give prompt notice thereof to
each Designated Voting Party (and each Designated Voting Party shall, in turn,
give prompt notice thereof to each party to its respective Facility Document).
The Intercreditor Agent shall take such action with respect to any Default or
Event of Default as is provided in this Intercreditor Agreement; provided,
                                                                 --------
however, that unless and until the Intercreditor Agent shall have received
-------
directions from the Required Secured Parties, the Intercreditor Agent may (but
shall not be obligated to) take such action, or refrain from taking such action,
with respect to such Default or Event of Default as is in the best interest of
the Secured Parties.

          Section 2.5  Nonliability.  Each of the Secured Parties that is a
                       ------------
party hereto (for itself, each party on whose behalf it executes this Agreement
and any Person claiming through it) agrees that neither the Intercreditor Agent
nor any of its officers, directors, employees, affiliates or agents shall be
liable to any Secured Party or any other Relevant Person for any action taken or
omitted under this Agreement or under the other Financing Documents or in
connection herewith or therewith except to the extent directly caused by the
Intercreditor Agent's gross negligence or willful misconduct, as finally
determined by a court of competent jurisdiction no longer subject to appeal or
review.  Each of the Secured Parties that is a party hereto (for itself, each
party on whose behalf it executes this Agreement and any Person claiming through
it) hereby releases, waives, discharges, exculpates and covenants not to sue the
Intercreditor Agent for any action taken or omitted under this Agreement or
under the other Financing Documents and from any cost, claim, loss, expense or
liability resulting therefrom, except to the extent directly caused by the
Intercreditor Agent's gross negligence or willful misconduct, as finally deter
mined by a court of competent jurisdiction no longer subject to appeal or
review.

          Section 2.6  Resignation of the Intercreditor Agent.
                       --------------------------------------

              2.6.1 The Intercreditor Agent may resign its appointment hereunder
at any time without providing any reason therefor by giving not less than thirty
(30) days prior written notice to that effect to each of the other parties
hereto, provided that neither such resignation or a removal of the Intercreditor
Agent pursuant to Section 2.7, shall be effective until:
                  -----------

                                      11
<PAGE>

                      (a)  a successor for the Intercreditor Agent is appointed
          in accordance with (and subject to) the succeeding provisions of this
          Section 2.6;
          -----------

                      (b)  the resigning or removed Intercreditor Agent has
          transferred to its successor all of its rights, powers, privileges and
          obligations in its capacity as Intercreditor Agent under this
          Agreement and the other Financing Documents; and

                      (c)  the successor Intercreditor Agent has executed and
          delivered an agreement to be bound by the terms hereof and of the
          other Financing Documents and to perform all duties required of the
          Intercreditor Agent hereunder and under the other Financing Documents.

              2.6.2  If the Intercreditor Agent has given notice of its
resignation pursuant to this Section 2.6 or if the Required Secured Parties give
                             -----------
the Intercreditor Agent notice of removal pursuant to Section 2.7, then a
                                                      -----------
successor to the Intercreditor Agent may be appointed by the Required Secured
Parties during the period of such notice but, if no such successor is so
appointed within thirty (30) days after the above notice, the Intercreditor
Agent may petition a court of competent jurisdiction or it may appoint such a
successor which (a) is authorized under the laws of the jurisdiction of its
incorporation to exercise corporation trust powers, (b) shall have a combined
capital and surplus of at least fifty million Dollars (US$50,000,000),] (c)
shall be rated "Baa3" or better by Moody's or "BBB-" or better by S&P and (d)
shall be acceptable to the Required Secured Parties (provided that, if the
Required Secured Parties do not confirm such acceptance in writing within thirty
(30) days following selection of such successor by the Intercreditor Agent or
select another Intercreditor Agent within such thirty (30) day period, then they
shall be deemed to have given such acceptance and such successor shall be deemed
appointed as the Intercreditor Agent hereunder) and, so long as no Default or
Event of Default has occurred and is continuing, the Issuer.

              2.6.3  If a successor to the Intercreditor Agent is appointed
under the provisions of Section 2.6.1 or Section 2.6.2, then:
                        -------------    -------------

                        (a)  the predecessor Intercreditor Agent shall be
          discharged from any further obligation hereunder (but without
          prejudice to any accrued liabilities);

                        (b)  notwithstanding the predecessor Intercreditor
          Agent's resignation pursuant to this Section 2.6 or removal pursuant
                                               -----------
          to

                                      12
<PAGE>

          Section 2.7, the provisions of this Agreement shall continue to inure
          to its benefit as to any actions taken or omitted to be taken by it
          under this Agreement and the other Financing Documents while it was
          the Intercreditor Agent; and

                    (c) the successor Intercreditor Agent and each of the other
          parties hereto shall have the same rights and obligations among
          themselves as they would have had if such successor Intercreditor
          Agent originally had been a party to this Agreement.

          Section 2.7  Removal of the Intercreditor Agent.  Designated Voting
                       ----------------------------------
Parties representing, in the aggregate, Secured Parties holding at least thirty-
three percent (33%) of the Combined Exposure may remove the Intercreditor Agent
from its appointment hereunder with or without cause by giving not less than
ninety (90) days prior written notice to that effect to the Intercreditor Agent
and the Issuer; provided that no such removal shall be effective until a
                --------
successor for the Intercreditor Agent is appointed in accordance with Section
                                                                      -------
2.6.  If the Intercreditor Agent is also the Collateral Agent and the
---
Administrative Agent, it must also forfeit these roles if removed by the Secured
Parties as Intercreditor Agent.

          Section 2.8  Authorization.  The Intercreditor Agent is hereby
                       -------------
authorized by each of the Secured Parties that is a party hereto (for itself,
each party on whose behalf it executes this Agreement and any Person claiming
through it) to execute, deliver and perform each of the Financing Documents to
which the Intercreditor Agent is a party and each Secured Party that is a party
hereto (for itself, each party on whose behalf it executes this Agreement and
any Person claiming through it) agrees to be bound by all of the agreements of
the Intercreditor Agent contained in the Financing Documents.

          Section 2.9  Intercreditor Agent as Secured Party; Other Banking
                       ---------------------------------------------------
Business.  With respect to any Secured Obligations held by it, the Person
--------
serving as Intercreditor Agent hereunder shall have the same rights and powers
under the Financing Documents as any other Secured Party and may exercise the
same as though it were not the Intercreditor Agent.  The term "Secured Party",
"Secured Parties", "Holder" or "Holders", and any other similar terms, when used
with respect to such Person, shall, unless otherwise expressly indicated,
include such Person in its individual capacity.  Such Person and its Affiliates
may accept deposits from, lend money to, act as trustee under indentures of and
generally engage in any kind of business with the Issuer or any other Person
without any duty to account therefor to the Secured Parties.

                                      13
<PAGE>

          Section 2.10 Notice of Amounts Owed.  Upon the request of the
                       ----------------------
Intercreditor Agent, in connection with the taking of any action hereunder by
the Intercreditor Agent, each Secured Party hereto shall promptly notify the
Intercreditor Agent in writing, as of any time that the Intercreditor Agent may
specify in such request, of (i) the aggregate amount of Secured Obligations
owing under its respective Facility Document as of such date, (ii) the
principal, interest, expenses and other components of such Secured Obligations,
and (iii) such other information as the Intercreditor Agent may reasonably
request.

                                  ARTICLE III
                                    SHARING
                                    -------

          Section 3.1  Payments Received by Intercreditor Agent or Collateral
                       ------------------------------------------------------
Agent.  Subject to the provisions of Section 3.3 and the provisions set forth in
-----                                -----------
each Facility Document which affect the allocation of funds among the Secured
Parties party to such Facility Document, all amounts paid to the Collateral
Agent or realized by the Collateral Agent that are to be redistributed to the
Secured Parties (other than the Designated Voting Parties in their respective
capacities as agents) shall be paid, to the extent funds are available, to each
Secured Party (without priority of any one over any other except as set forth in
Section 3.3) in accordance with Article IV of the Collateral Agency Agreement.
-----------                     ----------

          Section 3.2  Payments Received by Any Other Senior Secured Party.
                       ---------------------------------------------------
Except as excluded in Section 3.3 or otherwise provided under this Agree ment,
                      -----------
if any Secured Party (other than the Collateral Agent as contemplated by Section
                                                                         -------
3.1 above) shall obtain any amount (whether (i) by way of voluntary or
---
involuntary payment, (ii) by virtue of an exercise of any right of set-off,
banker's lien or counterclaim, (iii) as proceeds of any insurance policy
covering any proper  ties or assets of the Issuer, (iv) from proceeds of
liquidation or dissolution of the Issuer or distribution of its assets among its
creditors, however such liquidation, dissolution or distribution may occur, (v)
as payment of any Senior Secured Obligations following the acceleration thereof,
whether in whole or in part, (vi) as consideration for the agreement of such
Secured Party or as part of any transaction or series of related transactions in
which such Secured Party shall have agreed to waive or amend any provision of
any Financing Document, (vii) from any realization on any Collateral, (viii) by
virtue of the application of any provision of any of the Financing Documents
(other than this Agreement), or (ix) in any other manner) other than amounts
obtained from or through the Collateral Agent pursuant to the Financing
Documents or amounts representing capitalized interest in respect of any
Financing Document, such Secured Party shall forthwith notify the Intercreditor
Agent thereof and shall promptly, and in any event within ten (10) Business Days
of its so
                                      14
<PAGE>

obtaining the same, pay such amount (less any reasonable costs and expenses
incurred by such Secured Party in obtaining such amount) to the Collateral Agent
for the account of the Secured Parties, to be shared among the Secured Parties
in accordance with Section 3.1. Upon receipt of any such payment, the Collateral
                   -----------
Agent shall distribute the appropriate amount to each Secured Party as provided
in the previous sentence.

          Section 3.3  Amounts Not Subject to Sharing.  Notwithstanding any
                       ------------------------------
other provision of this Agreement or any other Financing Document, no Secured
Party shall have any obligation to share:

                       (a) any payment made to a Secured Party pursuant to any
          provision of any Financing Document which is in the nature of a
          closing or commitment fee or an indemnity against or reimbursement for
          (i) additional funding costs and similar costs incurred by such
          Secured Party including, without limitation, payments with respect to
          increased reserve provisions, capital adequacy provisions, make-whole
          premiums, breakage provisions or other similar provisions, (ii) costs
          with respect to taxes incurred or payable by such Secured Party on
          principal, interest and other payments payable to it under the
          Financing Documents, and (iii) costs, liabilities, claims and other
          expenses incurred by such Secured Party which are the subject of any
          indemnity or reimbursement provision contained in the Financing
          Documents;

                       (b) any non pro rata prepayment made to any Secured Party
          pursuant to any Financing Document; and

                       (c) any payment of fees made to the Intercreditor Agent
          pursuant to any separate fee arrangement between the Intercreditor
          Agent and the Issuer.

Notwithstanding the foregoing, sharing of payments made with respect to a
particular Voting Facility shall be subject to the sharing provisions of the
applicable Facility Document.

          Section 3.4  Presumption Regarding Payments.  For purposes hereof, any
                       ------------------------------
payment received by a Secured Party pursuant to this Article III may be presumed
                                                     -----------
by such Secured Party to have been properly received by such Secured Party in
accordance with this Article III unless such Secured Party receives notice from
                     -----------
any other Secured Party that such payment was not made in accordance herewith.
If any such distributed or shared payment is rescinded or must otherwise

                                      15
<PAGE>

be restored by the Secured Party that first obtained it, each other Secured
Party that shares the benefit of such payment shall return to such Secured Party
its portion of the payment so rescinded or required to be restored.

          Section 3.5  No Separate Security.  Each Secured Party that is a party
                       --------------------
hereto (for itself, each party on whose behalf it executes this Agreement and
any Person claiming through it) (a) agrees that all collateral security pledged
under the Security Documents is for the joint benefit of all the Secured Parties
and (b) represents and warrants to each other Secured Party that, in respect of
the Senior Secured Obligations owing to it, it has received no security or
guarantees from the Issuer or any of its Affiliates other than its interest in
the Collateral as provided in the Security Documents.

          Section 3.6  Subordinated Affiliate Bonds. Notwithstanding any
                       ----------------------------
provision of this Article III or any Financing Document to the contrary, so long
                  -----------
as any Default or Event of Default shall exist and be continuing, no sharing or
other payment shall be made in respect of any Subordinated Affiliate Bonds until
the remainder of the Secured Obligations have been indefeasibly paid in full in
cash or in cash equivalents.  Any proceeds otherwise payable as contemplated by
this Agreement and the Collateral Agency Agreement in respect of any
Subordinated Affiliate Bonds shall be distributed to the remainder of the
Secured Parties in accordance with Article IV of the Collateral Agency
                                   ----------
Agreement.

                                  ARTICLE IV
                          VOTING AND DECISION MAKING
                          --------------------------

          Section 4.1  Decision Making.
                       ---------------

                4.1.1  Each Secured Party that is a party hereto (for itself,
each party on whose behalf it executes this Agreement and any Person claiming
through it) agrees that no Secured Party shall, except in accordance with the
provisions of this Agreement, but without prejudice to any separate rights
expressly granted to a Designated Voting Party under the Facility Documents,
exercise or enforce any right, remedy or power under any Financing Document
where such right, remedy or power arises as a result of a Default or an Event of
Default under such Financing Document (it being agreed that no acceleration in
respect of an Event of Default or termination or suspension of a commitment
under a Facility Document shall be deemed to be a remedy for any purposes of
this Agreement).

                4.1.2  Each Secured Party that is a party hereto (for itself,
each party on whose behalf it executes this Agreement and any Person claiming
through

                                      16
<PAGE>

it) agrees that each decision made in accordance with the terms of this
Agreement shall be binding upon each Secured Party that is a party hereto (for
itself, each party on whose behalf it executes this Agreement and any Person
claiming through it) and each other party to the Financing Documents.

                4.1.3  Notwithstanding Section 4.1.2 or any other term or
                                       -------------
provision of this Agreement, no term or provision of any Facility Document may
be Modified except with the written consent of the applicable Designated Voting
Party thereto (acting in accordance with the terms of the relevant Facility
Document), but any Modification of a provision of any other Financing Document
made in accordance with the terms of this Agreement and such Financing Document
that is incorporated by reference into such Facility Document shall also be
deemed to modify such Facility Document, mutatis mutandis, without such written
consent of such Designated Voting Party.

          Section 4.2  Voting Generally; Intercreditor Votes.  Where, in
                       -------------------------------------
accordance with this Agreement or any other Financing Document, any
Modification, direction or other decision of the Intercreditor Agent, the
Collateral Agent or the Administrative Agent is required (other than as
otherwise provided in Section 5.2), the granting or withholding of such
                      -----------
Modification, the giving of such direction, or the making of such other decision
shall be determined through an Intercreditor Vote; provided, however, that the
                                                   --------  -------
Intercreditor Agent shall (or shall instruct any party it is entitled to
instruct to), at the request of the Issuer or any Designated Voting Party, make
such corrections to any Financing Document as are permitted under Section 12.1
of the Indenture and such other corrections so long as the corrections are of
patent errors in the document and reflective of the clear intent of the parties
to such document (for example, errant cross-references and misspelled defined
terms) and do not involve any material change whatsoever (the Intercreditor
Agent being entitled to rely on the advice of counsel and having all of the
rights provided to it under Article 2 hereof).
                            ---------

          Section 4.3  Intercreditor Votes; Each Party's Entitlement to Vote.
                       -----------------------------------------------------

                4.3.1  Each Designated Voting Party shall be entitled to vote in
each Intercreditor Vote conducted under this Agreement.

                4.3.2  For all purposes of voting under this Agreement, no
actual vote need be taken in respect of any Bond if the Indenture permits the
Trustee to rely on a certificate, report of an expert or Rating Agency
confirmation in determining how to cast its votes in any Intercreditor Vote.
Upon receipt of such certificate, report or confirmation, the Trustee shall cast
its votes in accordance therewith.

                                      17
<PAGE>

                4.3.3  Except (i) for the limitation on the enforcement of
rights, remedies and powers under Section 4.1.1, (ii) for matters requiring an
                                  -------------
Intercreditor Vote under Section 4.2 or this Section 4.3 or (iii) as otherwise
                         -----------         -----------
expressly provided for in a Facility Document, the respective Designated Voting
Parties may make all decisions, determine the acceptability of and rely on
certificates, exercise discretion, execute Modifications and grant Waivers as
are contemplated by such Facility Document.

          Section 4.4   Intercreditor Votes; Votes Allocated to Each Party.
                        --------------------------------------------------

                4.4.1  Each Person that is a Designated Voting Party for any
Intercreditor Vote shall have a number of votes in such Intercreditor Vote equal
to the portion of the Combined Exposure represented by its Voting Facility.

                4.4.2  In calculating the percentage of the Combined Exposure in
any Intercreditor Vote consenting to, approving, waiving or otherwise providing
direction with respect to a decision which requires an Intercreditor Vote, the
total dollar amount of the Combined Exposure voting, through the Designated
Voting Parties, in any one direction with respect to such decision shall be
divided by the aggregate Combined Exposure. Each Designated Voting Party and
each of the Secured Parties that is a party hereto (for itself, each party on
whose behalf it executes this Agreement and any Person claiming through it)
hereby waives any and all rights it may have to object to or seek relief from
the decision of the Designated Voting Parties voting with respect to such matter
and agrees to be bound by such decision. Nothing contained in this Section
                                                                   -------
4.4.2 shall preclude any Designated Voting Party from participating in any re-
-----
voting or further voting relating to such matter.

                4.4.3  No Bonds held by the Issuer or any member of the Issuer
or any of their respective Affiliates shall have any vote in respect of any
matter and such Bonds shall be disregarded for all purposes of any such vote.

                                   ARTICLE V
                             DEFAULTS AND REMEDIES
                             ---------------------

          Section 5.1  Notice of Defaults.  Promptly after any Designated Voting
                       ------------------
Party obtains knowledge of the occurrence of any Default or Event of Default
under any Financing Document to which it is a party or that any Default or Event
of Default under any Financing Document to which it is a party has ceased to
exist or has been rescinded, such Designated Voting Party shall notify the
Intercreditor Agent

                                      18
<PAGE>

in writing thereof (such notice, a "Notice of Default"). Each such Notice of
                                    -----------------
Default shall specifically refer to this Section 5.1 and shall describe such
                                         -----------
Default or Event of Default (or its cessation or rescission) in reasonable
detail (including the date of occurrence of the same). Upon receipt by the
Intercreditor Agent of any such Notice of Default, it shall promptly send copies
thereof to each Designated Voting Party.

          Section 5.2  Election to Pursue Remedies Following Events of Default.
                       -------------------------------------------------------

                5.2.1  At any time after the occurrence of an Event of Default,
any Designated Voting Party in respect of a Facility Document under which an
Event of Default has occurred and is continuing may serve a notice (such notice,
a "Remedies Initiation Notice") on the Intercreditor Agent which describes the
   --------------------------
Event of Default with respect to which such Designated Voting Party is seeking
to pursue remedies as well as the various remedies (the "Proposed Remedies")
                                                         -----------------
that such Designated Voting Party wishes the Intercreditor Agent to pursue.

                5.2.2  If the Intercreditor Agent receives any Remedies
Initiation Notice from any Designated Voting Party pursuant to Section 5.2.1,
                                                               -------------
and if such notice has not been withdrawn by such Designated Voting Party prior
to the end of the fifth Business Day after the day on which the Intercreditor
Agent receives such notice, the Intercreditor Agent shall promptly after such
fifth Business Day provide each Designated Voting Party with a copy of such
notice and inform each of them of the date (such date, which shall be the 30th
day after the date that the Intercreditor Agent receives the Remedies Initiation
Notice, the "Remedies Commencement Date") on which the Intercreditor Agent will
             --------------------------
commence the exercise of the Proposed Remedies if so directed by Designated
Voting Parties constituting the Initiating Percentage. Unless the Remedies
Initiation Notice was executed by Designated Voting Parties constituting the
Initiating Percentage, the Intercreditor Agent shall request instructions from
the Designated Voting Parties as to whether the Intercreditor Agent should
exercise the Proposed Remedies or other remedies on the Remedies Commencement
Date or no remedies.

                5.2.3  If, on or prior to the Remedies Commencement Date (as
that date may be extended pursuant to the definition of Decision Period),
Designated Voting Parties constituting the Initiating Percentage direct the
Intercreditor Agent to exercise remedies (which direction may include an
instruction to exercise the Proposed Remedies or an instruction to exercise
other remedies), the Intercreditor Agent shall exercise any such remedies in
accordance with Section 5.4 below beginning on the Remedies Commencement Date as
                -----------
directed by Designated Voting Parties constituting the Initiating Percentage,
provided that the Event of Default which is the subject of such Remedies
Initiation Notice has not been previously

                                      19
<PAGE>

cured or waived (by Modification of the provisions giving rise to such Event of
Default in accordance with the terms of Article 6 of this Agreement).
                                        ---------

                5.2.4  During the period prior to the Remedies Commencement Date
with respect to any Event of Default, no Secured Party (other than the
Intercreditor Agent as provided in the proviso to Section 2.4) shall be entitled
                                                  -----------
to exercise any remedy in connection with such Event of Default, nor shall any
Secured Party instruct the Intercreditor Agent to exercise any remedy in
connection with such Event of Default.

                5.2.5  A Designated Voting Party may serve only one Remedies
Initiation Notice with respect to any Event of Default and each Remedies
Initiation Notice served by such Designated Voting Parties shall be deemed to
have been served with respect to all Events of Default in existence on the date
such Remedies Initiation Notice is served.

                5.2.6  Nothing in this Section 5.2 shall be construed to
                                       -----------
restrict the right of the Required Secured Parties to elect at any time to agree
to any Modification of the Financing Documents in accordance with Article 6 that
                                                                  ---------
could have the effect of waiving or rescinding such Event of Default.

          Section 5.3  Exercise of Remedies.
                       --------------------

                5.3.1  If the Required Secured Parties pursuant to Section 5.2.3
                                                                   -------------
above elect to exercise remedies, then subject to Section 5.3.3 the
                                                  -------------
Intercreditor Agent shall follow the written instruction regarding the exercise
of remedies delivered by the Required Secured Parties which may be in the form
of an Intercreditor Vote (the "Remedies Instruction"). Each Remedies Instruction
                               --------------------
shall specify the particular action that the Required Secured Parties propose to
cause the Intercreditor Agent to take.

                5.3.2  At the direction of the Required Secured Parties pursuant
to a Remedies Instruction, the Intercreditor Agent shall exercise the remedies
provided therein (provided that the relevant Security Documents permit such
                  --------
remedy) including, if so directed, to promptly instruct the Collateral Agent to
seek to enforce the Security Documents, to realize upon the Collateral or, in
the case of a proceeding against the Issuer under the Bankruptcy Code, to seek
to enforce the claims of the Secured Parties thereunder.

                5.3.3  Each Remedies Instruction shall, except as otherwise
provided herein, be effective on the date set forth in such notice. In the event
that more than one group of Secured Parties constituting the Required Secured
Parties

                                      20
<PAGE>

delivers a Remedies Instruction, then the Remedies Instruction from the group
representing the greatest percentage of the Combined Exposure shall control
unless the Intercreditor Agent has already commenced action called for by
another Remedies Instruction having an earlier effective date, and the
Intercreditor Agent shall be entitled to ignore any Remedies Instruction
regarding the same Default or Event of Default provided by any other group of
Secured Parties.

                5.3.4  Allocation of Collateral Proceeds. Upon the occurrence of
                       ---------------------------------
an Acceleration Event, the proceeds of any collection, recovery, receipt,
appropriation, realization or sale of any or all of the Collateral or the
enforcement of any Security Document ("Collateral Proceeds") shall be applied in
                                       -------------------
accordance with Article IV of the Collateral Agency Agreement.
                ----------

                5.3.5  No Remedies. No Bonds held by the Issuer or any member of
                       -----------
the Issuer or any of their respective Affiliates shall have the benefit of any
remedies until the remainder of the Senior Secured Obligations are indefeasibly
paid in full in cash or cash equivalents.

                                  ARTICLE VI
               MODIFICATIONS; INSTRUCTIONS; OTHER RELATIONSHIPS
               ------------------------------------------------

          Section 6.1  100% Voting Issues:  Modifications of, and Instructions
                       -------------------------------------------------------
with Respect to, Fundamental Aspects of the Financing Documents. With respect to
---------------------------------------------------------------
any of the matters listed on the attached Schedule A (the "Fundamental
                                          ----------       -----------
Decisions"), (i) no Modification shall be agreed to by the Intercreditor Agent,
the Collateral Agent or the Administrative Agent under any Financing Document,
(ii) no instruction shall be given to the Intercreditor Agent under or with
respect to any Financing Document, and (iii) no discretion shall be exercised by
the Intercreditor Agent under or with respect to any Financing Document, unless,
in each case, an Intercreditor Vote is taken in accordance with the procedures
set forth in Section 6.4 and the One Hundred Percent Secured Parties, through
             -----------
the Designated Voting Parties, authorize the Intercreditor Agent to agree to
such Modification, provide the Intercreditor Agent with such instruction or
authorize the Intercreditor Agent to exercise such discretion, as the case may
be.

          Section 6.2  Majority Voting Issues:  Modifications of, and
                       ----------------------------------------------
Instructions with Respect to, Material Aspects of the Financing Documents.
-------------------------------------------------------------------------
Except as expressly provided for in Section 6.1 and Section 6.4 and except as
                                    -----------     -----------
set forth in the proviso to Section 4.2, (i) no Modification shall be agreed to
                            -----------
by the Intercreditor Agent, the Collateral Agent or the Administrative Agent
under any Financing Document, (ii) no instruction shall be given to the
Intercreditor Agent under or with

                                      21
<PAGE>

respect to any Financing Document, and (iii) no discretion shall be exercised by
the Intercreditor Agent under or with respect to any Financing Document, unless,
in each case, an Intercreditor Vote is taken in accordance with the procedures
set forth in Section 6.3 and the Majority Secured Parties authorize the
             -----------
Intercreditor Agent to agree to such Modification, provide the Intercreditor
Agent with such instruction or authorize the Intercreditor Agent to exercise
such discretion, as the case may be.

          Section 6.3  Certain Procedures Relating to Modifications,
                       ---------------------------------------------
Instructions and Exercises of Discretion.
----------------------------------------

                6.3.1  If, at any time:

                         (a)     the Intercreditor Agent (i) proposes to agree
          to a Modification or proposes to authorize any Secured Party to agree
          to a Modification under any Financing Document or (ii) proposes to
          exercise any discretion conferred on it under the Financing Documents;
          or

                         (b)     any Designated Voting Party or the Issuer (i)
          proposes that there should be a Modification under any Financing
          Document, (ii) proposes to provide the Intercreditor Agent with
          instructions regarding the Financing Documents, or (iii) proposes a
          matter with respect to which it believes the Intercreditor Agent
          should exercise its discretion, and, in each case, notifies the
          Intercreditor Agent to that effect;

then the Intercreditor Agent shall promptly notify each Designated Voting Party
of the matter in question specifying:

                         (i)   the nature of the Modification, instruction or
     exercise of discretion that is at issue (which shall be conspicuously
     stated);

                         (ii)  the Required Secured Parties applicable to the
     decision; and

                         (iii) the Decision Period determined by the
     Intercreditor Agent by which the Designated Voting Parties must provide the
     Intercreditor Agent with their votes with respect to such decision.

                                      22
<PAGE>

                6.3.2  Each Designated Voting Party shall, within the specified
Decision Period pursuant to Section 6.3.1, provide a certificate to the
                            -------------
Intercreditor Agent setting forth its vote with respect to the matter for which
its instructions were sought by the Intercreditor Agent under Section 6.3.1.
                                                              -------------

                6.3.3  If (i) a Designated Voting Party fails to provide such a
certificate to the Intercreditor Agent setting forth its vote within the
specified Decision Period and (ii) the matter for which its instructions were
sought by the Intercreditor Agent requires a vote of the One Hundred Percent
Secured Parties, then the Intercreditor Agent shall notify such Designated
Voting Party on or before the close of business on the next Business Day
following the last day of the Decision Period of such Designated Voting Party's
failure to provide such certificate and request that it provide such certificate
no later than 11:00 a.m. on the third Business Day after the last day of the
Decision Period; provided that the Intercreditor Agent shall not be held liable
                 --------
for any failure by it to provide such notice to such Designated Voting Party;
and provided, further that if such Designated Voting Party does not provide such
    --------  -------
certificate by 11:00 a.m. on the third Business Day after the last day of the
Decision Period, such Designated Voting Party shall be deemed to have cast its
votes against the subject decision.

          Section 6.4  Modifications by Secured Parties to their Respective
                       ----------------------------------------------------
Facilities.  Notwithstanding any provision contained herein to the contrary,
----------
each Secured Party (other than the Intercreditor Agent, the Administrative Agent
and the Collateral Agent) may, at any time and from time to time, without any
consent of or notice to any other Secured Party and without impairing or
releasing the obligations of any Person under this Agreement:  (a) make any
Modifications under the Facility Document to which such Person is a party (and
to which none of the Intercreditor Agent, the Collateral Agent or the
Administrative Agent is a party); or (b) release anyone liable in any manner
under, or in respect of the Senior Secured Obligations owing under, such
Facility Document (but only in respect of such Senior Secured Obligations).  The
rights of each Secured Party pursuant to the foregoing sentence are subject to
the provisions of its respective Facility Document regarding such Modifications
and releases.

          Section 6.5  Effect of Modification on Intercreditor Agent.  No
                       ---------------------------------------------
Modifications shall be made to any Financing Document by any party hereto that
adversely affects the Intercreditor Agent without the written consent of the
Intercreditor Agent.

                                      23
<PAGE>

          Section 6.6  Provision of Information; Meetings.
                       ----------------------------------

                6.6.1  Each Secured Party that is a party hereto (for itself,
each party on whose behalf it executes this Agreement and any Person claiming
through it) agrees that it will, from time to time (as it deems reasonably
necessary or appropriate in its sole judgment), consult with the other Secured
Parties with respect to the Senior Secured Obligations, the Project, the
Collateral or the affairs of the Issuer in general.

                6.6.2  Any Designated Voting Party may, at any time following
the occurrence and during the continuation of an Event of Default, request that
a meeting or meetings of the Designated Voting Parties be convened, at
reasonable times and locations, and with reasonable frequency, and upon such
request having been given in accordance herewith, such meetings shall be
convened as provided herein. Such a request for a meeting shall be made by
written notice given to each Designated Voting Party in accordance herewith.
Each such notice shall state the date of such meeting (which shall be not less
than fifteen (15) nor more than thirty (30) days after the date of such notice,
unless otherwise agreed by the Designated Voting Parties) and a general outline
of the issues to be discussed at such meeting. Any Designated Voting Party shall
have the right to appoint any Person (including, without limitation, another
Designated Voting Party) to act as its representative at any such meeting of
Designated Voting Parties. No Person shall be obligated to attend any such
meetings, and no votes shall be taken at such meeting unless consented to by the
Required Secured Parties. Any costs or expenses incurred by any Secured Party in
connection with the meetings described in this Section 6.6.2 shall be reimbursed
                                               -------------
to such Secured Party in accordance with Section 7.16.
                                         ------------

                6.6.3  Each Designated Voting Party shall use reasonable efforts
to make available promptly to each other Designated Voting Party any material
information received by it regarding the occurrence of any Default or Event of
Default or any determination to accelerate the Indebtedness under its Facility
Document (an "Acceleration Event") or other event requiring joint action;
              ------------------
provided, however, that this Section 6.6.3 shall not require any Designated
--------  -------            -------------
Voting Party to make available to any other Person (a) information subject to
confidentiality restrictions or governmental or security clearance requirements
prohibiting such disclosure, (b) analyses, data or reports prepared solely for
internal use, or (c) information that the Issuer is obligated to provide. No
Designated Voting Party shall have any liability for any failure to make
available to any other party such information or for any inaccuracy or
incompleteness of any such information made available in good faith.

                                      24
<PAGE>

                6.6.4  Each Designated Voting Party further agrees that it will
from time to time provide such information to each other Designated Voting Party
as may be necessary to enable such Designated Voting Party to make any
calculation required under the Financing Documents.

                6.6.5  Each Designated Voting Party shall provide copies of any
Modifications to the Financing Documents to the Intercreditor Agent.

                                  ARTICLE VII
                                 MISCELLANEOUS
                                 -------------

          Section 7.1  Addresses.  Any communications between the parties hereto
                       ---------
or notices provided herein to be given shall be deemed to have been given only
if such notice is in writing and delivered personally, or by registered or
certified first-class mail with postage prepaid, or made, given or furnished in
writing by confirmed telecopy or facsimile transmission, or by prepaid courier
service to the appropriate party as set forth below:

     Issuer:                 Elwood Energy LLC
                             c/o Peoples Energy Resources Corporation
                             130 East Randolph Drive
                             Chicago, IL 60601
                             Attn:  John E. Horton
                             Telephone No.:   (312) 240-7181
                             Telecopy No.:    (312) 240-4348

                             with a copy to:

                             Elwood Energy LLC
                             c/o Dominion Resources Services, Inc.
                             120 Tredegar Street
                             Richmond, VA 23219
                             Attn: Donald Burnette
                             Telephone No.:   (804) 819-2411
                             Telecopy No.:    (804) 819-2211

     Trustee:                Bank One Trust Company, National Association
                             1 Bank One Plaza
                             Mail Suite IL1-0823
                             Chicago, Illinois 60670-0823
                             Attn: Global Corporate Trust Services

                                      25
<PAGE>

                             Telephone No.:   (312) 407-5252
                             Telecopy No.:    (312) 336-8840

     Collateral Agent:       Bank One Trust Company, National Association
                             1 Bank One Plaza
                             Mail Suite IL1-0823
                             Chicago, Illinois 60670-0823
                             Attn: Global Corporate Trust Services
                             Telephone No.:   (312) 407-5252
                             Telecopy No.:    (312) 336-8840

     Intercreditor Agent:    Bank One Trust Company, National Association
                             1 Bank One Plaza
                             Mail Suite IL1-0823
                             Chicago, Illinois 60670-0823
                             Attn: Global Corporate Trust Services
                             Telephone No.:   (312) 407-5252
                             Telecopy No.:    (312) 336-8840

     Administrative Agent:   Bank One Trust Company, National Association
                             1 Bank One Plaza
                             Mail Suite IL1-0823
                             Chicago, Illinois 60670-0823
                             Attn: Global Corporate Trust Services
                             Telephone No.:   (312) 407-5252
                             Telecopy No.:    (312) 336-8840

     Senior Secured
     Parties Becoming
     Party Hereto After
     the Date Hereof:        To be specified at the time of execution of a
                             counter part hereto pursuant to Section 7.18
                                                             ------------
                             hereof.

Any party may change its address by giving notice of such change in the manner
set forth herein.  Any notice given to a party by mail or by courier shall be
deemed delivered upon receipt thereof (unless the party refuses to accept
delivery, in which case the party shall be deemed to have accepted delivery upon
presentation).  Any notice given to a party by telecopy or facsimile
transmission shall be deemed effective on the date it is actually sent to the
intended recipient by confirmed telecopy or facsimile transmission to the
telecopier number specified above.

                                      26
<PAGE>

          Section 7.2    Delay and Waiver.  No delay or omission to exercise any
                         ----------------
right, power or remedy accruing upon the occurrence of any Default or Event of
Default or any other breach or default of the Issuer under this Agreement shall
impair any such right, power or remedy of any Secured Party nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or in any similar breach or default thereafter occurring, nor shall any
single or partial exercise by any such party of any right, power or remedy
hereunder preclude any other or future exercise thereof or the exercise of any
other right, power or remedy, nor shall any waiver of any single Default, Event
of Default or other breach or default be deemed a waiver of any other Default,
Event of Default or other breach or default theretofore or thereafter occurring.
Any waiver, permit, consent or approval of any kind or character on the part of
any Secured Party of any Default, Event of Default or other breach or default
under this Agreement or any other Financing Document, or any waiver on the part
of any Secured Party, of any provision or condition of this Agreement or any
other Transaction Document must be in writing and signed by such Secured Party
and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or any other Financing
Document or by law or otherwise afforded to any Secured Party, shall be
cumulative and not alternative.

          Section 7.3    Entire Agreement.  This Agreement and the other
                         ----------------
Financing Documents integrate all the terms and conditions mentioned herein or
incidental hereto and supersede all oral negotiations and prior writings in
respect to the subject matter hereof.  In the event of any conflict between the
terms, conditions and provisions of this Agreement and any Financing Document
the terms, conditions and provisions of this Agreement shall prevail.

          Section 7.4    Governing Law.  This Agreement shall be governed by the
                         -------------
laws of the State of New York of the United States of America and shall for all
purposes be governed by and construed in accordance with the laws of such state
without regard to the conflict of law rules thereof other than Section 5-1401 of
the New York General Obligations Law; provided, however, that, to the extent any
                                      --------  -------
terms of this Agreement are incorporated in and made part of any other Financing
Document, any such term so incorporated shall for all purposes be governed by
and construed in accordance with the law governing the Financing Document into
which such term is so incorporated.

          Section 7.5    Severability. In case any one or more of the provisions
                         ------------
contained in this Agreement should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
shall not in any way be affected or impaired thereby, and the parties hereto
shall enter into good faith negotiations to replace the invalid, illegal or
unenforceable provision with
                                      27
<PAGE>

a view to obtaining the same commercial effect as this Agreement would have had
if such provision had been legal, valid and enforceable.

          Section 7.6    Headings.  Section headings have been inserted in this
                         --------
Agreement as a matter of convenience for reference only and it is agreed that
such section headings are not a part of this Agreement and shall not be used in
the interpretation of any provision of this Agreement.

          Section 7.7    Successors and Assigns.
                         ----------------------

                7.7.1  The provisions of this Agreement shall be binding upon
and inure to the benefit of each party hereto and their respective successors
and assigns; provided that the Issuer shall not assign any of its rights or
             --------
obligations hereunder without the consent of the Required Secured Parties.

                7.7.2  Any Secured Party may transfer, assign or grant all or
such relevant part of its rights and obligations hereunder in connection with an
assignment or transfer of all or any part of its interest in its Senior Secured
Obligations in accordance with the applicable Financing Documents, provided
                                                                   --------
that each assignee and participant shall be bound by the terms of this Agreement
and each applicable Financing Document.

          Section 7.8    Reinstatement.  This Agreement shall continue to be
                         -------------
effective or be reinstated, as the case may be, if at any time payment and
performance of the Issuer's obligations hereunder, or any part thereof, is,
pursuant to applicable law, rescinded or reduced in amount, or must otherwise be
restored or returned by any Secured Party.  In the event that any payment or any
part thereof is so rescinded, reduced, restored or returned, such obligations
shall be reinstated and deemed reduced only by such amount paid and not so
rescinded, reduced, restored or returned.

          Section 7.9    Counterparts.  This Agreement may be executed in one or
                         ------------
more duplicate counterparts and when signed by all of the parties listed below
shall constitute a single binding agreement.

          Section 7.10   Termination.  Upon the indefeasible payment in full in
                         -----------
cash of the Senior Secured Obligations in respect of each Financing Document and
the termination of all of the commitments of the Secured Parties under the
Financing Documents, and except as provided in Sections 7.8, 7.16 and 7.17, this
                                               ------------  ----     ----
Agreement shall terminate and be of no further force and effect.

                                      28
<PAGE>

          Section 7.11   No Partnership.  Nothing contained in this Agreement
                         --------------
and no action by any Secured Party is intended to constitute or shall be deemed
to constitute such Secured Parties (or any of them) a partnership, association,
joint venture or other entity.

          Section 7.12   No Reliance.  No Secured Party has relied on any
                         -----------
representation or warranty of any other Secured Party with respect to this
Agreement and the transactions contemplated hereunder unless such representation
or warranty has been set forth expressly in this Agreement.

          Section 7.13   Third-Party Beneficiaries.  This Agreement is for the
                         -------------------------
benefit of the parties hereto (and the Secured Parties claiming through such
parties) and their respective successors and permitted assigns, and nothing
herein shall give any other Person any benefit or any legal or equitable right
or remedy under this Agreement.

          Section 7.14   Obligations of the Issuer Unaffected.  The obligations
                         ------------------------------------
of the Issuer under the Financing Documents are absolute and shall be unaffected
by this Agreement.

          Section 7.15   Action without the Intercreditor Agent.  If the
                         --------------------------------------
Intercreditor Agent shall not, in accordance with Section 2.2.1(g), be required
                                                  ----------------
to take action as permitted by Section 2.2.1(g), the Secured Parties may then
                               ----------------
elect, upon written notice to the Collateral Agent and the Issuer (provided that
                                                                   --------
if a Bankruptcy Event shall have occurred with respect to the Issuer, such
notice shall not be required and shall be deemed to have been given upon the
election by the Secured Parties to take action hereunder), to take action
hereunder, including pursuing remedies directly and not acting through the
Intercreditor Agreement, if such remedies or other actions are otherwise
permitted by the terms of this Agreement.

          Section 7.16   Costs and Expenses.  The Issuer shall pay to each
                         ------------------
Designated Voting Party all of their costs and expenses incurred in connection
with the preparation, negotiation and closing of this Agreement and the
documents contemplated hereby, including the reasonable fees, expenses and
disbursements of counsel retained by the Designated Voting Parties in connection
with the preparation of such documents and any amendments hereof or thereof, the
reasonable fees, expenses and disbursements of the Independent Consultants and
any other engineer  ing, insurance and construction consultants to the Secured
Parties subsequent to the Closing Date, and the costs of the Designated Voting
Parties in administering the Secured Obligations, including the reasonable
travel and reasonable out-of-pocket costs incurred by the Designated Voting
Parties following the Closing Date.  The Issuer shall reimburse the Collateral
Agent and the

                                      29
<PAGE>

Intercreditor Agent for all reasonable costs and expenses, including reasonable
attorneys' fees and Independent Consultant expenses, expended or incurred by the
Collateral Agent and the Intercreditor Agent in enforcing the Financing
Documents in connection with a Default or an Event of Default, in actions for
declaratory relief in any way related to the Financing Documents or in
collecting any sum which becomes due on the Secured Obligations.

          Section 7.17   Indemnification.
                         ---------------

                7.17.1 Except as provided in Section 7.17.2, the Issuer shall
                                             --------------
indemnify, defend and hold harmless each of the Intercreditor Agent, the
Collateral Agent, the Administrative Agent and the Trustee and their respective
officers, directors, shareholders, affiliates, controlling persons, employees,
agents and servants (collectively, the "Indemnitees") from and against and
                                        -----------
reimburse the Indemnitees for:

                         (a)  any and all claims, obligations, liabilities,
     losses, damages, injuries (to person, property, or natural resources),
     penalties, stamp or other similar taxes, actions, suits, judgments, costs
     and expenses (including attorneys' fees subject to commercially reasonable
     limitations) of whatever kind or nature, whether or not well founded,
     meritorious or unmeritorious, which are demanded, asserted or claimed
     against any such Indemnitee (collectively, "Subject Claims") in any way
                                                 --------------
     relating to, or arising out of or in connection with this Agreement, the
     other Transaction Documents or the Project, except for claims by the Issuer
     against an Indemnitee (other than such claims determined against the
     Issuer, as the case may be);

                         (b)  any and all Subject Claims arising in connection
     with the release or presence of any Environmentally Regulated Materials at
     the Project, whether foreseeable or unforeseeable, including all costs of
     removal and disposal of such Environmentally Regulated Materials, all
     reasonable costs required to be incurred in (i) determining whether the
     Project is in compliance and (ii) causing the Project to be in compliance,
     with all Applicable Laws, all reasonable costs associated with claims for
     damages to persons or property, and reasonable attorneys' and consultants'
     fees and court costs; and

                         (c)  any and all Subject Claims in any way relating to,
     or arising out of or in connection with any claims, suits, liabilities
     against the Issuer, any Member or any of their Affiliates (it being
     understood that this Section 7.17 shall not entitle an Indemnitee to
                          ------------
     compensation for the costs of monitoring claims or suits against the
     Issuer, any Member or any of their

                                      30
<PAGE>

     Affiliates by third persons other than the Indemnitees except to the extent
     reasonably required in such a claim or suit where participation therein by
     the Indemnitee is reasonably deemed necessary to protect a material right
     or interest of the Indemnitee).

               7.17.2   The foregoing indemnities shall not apply with respect
to an Indemnitee, to the extent arising as a result of the gross negligence,
willful misconduct or bad faith of such Indemnitee or its officers or employees,
but shall continue to apply to other Indemnitees (e.g., willful misconduct by an
                                                  ----
Intercreditor Agent employee will bar indemnification to the Intercreditor
Agent, but not to the Collateral Agent, the Administrative Agent or the
Trustee).

               7.17.3   With respect to Subject Claims arising prior to the
payment in full of all Senior Secured Obligations of the Issuer under this
Agreement and the other Financing Documents, the provisions of this Section 7.17
                                                                    ------------
shall survive foreclosure of the Security Documents and satisfaction or
discharge of the Issuer's obligations under the Financing Documents, and shall
be in addition to any other rights and remedies of the Secured Parties.

               7.17.4   In case any action, suit or proceeding shall be brought
against any Indemnitee, such Indemnitee shall promptly notify the Issuer of the
commencement thereof, and the Issuer shall be entitled, at its expense, acting
through counsel reasonably acceptable to such Indemnitee, to participate in,
and, to the extent that the Issuer desires, to assume and control the defense
thereof. Such Indemnitee shall be entitled, at its expense, to participate in
any action, suit or proceeding the defense of which has been assumed by the
Issuer. Notwithstanding the foregoing, the Issuer and the Indemnitee shall each
be entitled to participate with their own counsel, and the Issuer shall not be
accorded control over the defenses of any such action, suit or proceedings, if
and to the extent that, in the reasonable opinion of such Indemnitee and its
counsel, such action, suit or proceeding involves the genuine threat of the
imposition of criminal liability upon such Indemnitee or a fundamental conflict
of interest between such Indemnitee and the Issuer or between such Indemnitee
and another Indemnitee, and in such event (other than with respect to disputes
between such Indemnitee and another Indemnitee) the Issuer shall pay the
reasonable expenses of such Indemnitee in such defense.

               7.17.5   The Issuer shall report to such Indemnitee on the status
of such action, suit or proceeding as developments shall occur and at least
within 60 days of the previous report. The Issuer shall deliver to such
Indemnitee a copy of each document filed or served on any party in such action,
suit or proceeding.

                                      31
<PAGE>

               7.17.6   Notwithstanding the Issuer's rights hereunder to control
certain actions, suits or proceedings, any Indemnitee against whom any Subject
Claim is made shall be entitled to compromise or settle any such Subject Claim
if (a) failure to compromise or settle such Subject Claim could reasonably be
expected to have a material adverse effect on such Indemnitee, the Project or
such Indemnitee's interest in the Project and (b) the Issuer refuses to pursue
diligent, good faith and timely efforts, in consultation with the Indemnitee, to
settle such claim; provided that prior to entering into any final and binding
                   --------
compromise or settlement of any such Subject Claim without the Issuer's consent
such Indemnitee shall provide notice to, and shall consult with, the Issuer.
Any such compromise or settlement by the Indemnitee in accordance with this
Section 7.17 shall be binding upon the Issuer for purposes of this Section 7.17.
------------                                                       ------------

               7.17.7   Upon payment of any Subject Claim by the Issuer pursuant
to this Section 7.17 or other similar indemnity provisions contained herein to
        ------------
or on behalf of an Indemnitee, the Issuer, without any further action, shall be
subrogated to any and all claims that such Indemnitee may have relating thereto,
and such Indemnitee shall cooperate with the Issuer and give such further
assurances as are necessary or advisable to enable the Issuer vigorously to
pursue such claims.

               7.17.8   Any amounts payable by the Issuer pursuant to this
Section 7.17 shall be regularly payable after the Issuer receives an invoice for
------------
such amounts from any applicable Indemnitee.

               7.17.9   Notwithstanding anything to the contrary set forth
herein, the Issuer shall not, in connection with any one legal proceeding or
claim, or separate but related proceedings or claims arising out of the same
general allegations or circumstances, in which the interests of the Indemnitees
do not materially differ, be liable to the Indemnitees (or any of them) under
any of the provisions set forth in this Section 7.17 for the fees and expenses
                                        ------------
of more than one separate firm of attorneys (which firm shall be selected by the
affected Indemnitees) subject to the Issuer's reasonable approval.

          The provisions of Sections 7.16 and 7.17 hereunder shall survive
                            -------------     ----
termination of this Agreement and the other Financing Documents and the
resignation or removal of any Indemnity.

          Section 7.18  Additional Secured Parties.  Each of the parties to
                        --------------------------
this Agreement agrees that any Person which becomes a Secured Party (or
representative thereof) after the Closing Date shall become a party to this
Agreement upon execu  tion and delivery by such Person of a counterpart to this
Agreement.  Any Person that becomes a party to this Agreement pursuant to this
Section 7.18 shall be
------------

                                      32
<PAGE>

bound by and subject to the terms and conditions hereof and the covenants,
stipulations and agreements contained herein.

          Section 7.19  Amendments.  Amendments hereof shall be in writing,
                        ----------
shall be made in accordance with Article VI and shall require the written
                                 ----------
consent of the Issuer.

                                      33
<PAGE>

          IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their officers thereunto duly authorized as of the day and year
first above written.

                         BANK ONE TRUST COMPANY, NATIONAL
                         ASOCIATION,
                         in its capacity as the Intercreditor Agent

                         By: /s/ Benita Pointer
                            --------------------------
                            Name: Benita Pointer
                            Title: Account Executive

                         BANK ONE TRUST COMPANY, NATIONAL
                         ASSOCIATION,
                         in its capacity as the Collateral Agent

                         By: /s/ Benita Pointer
                            --------------------------
                            Name: Benita Pointer
                            Title: Account Executive

                         BANK ONE TRUST COMPANY, NATIONAL
                         ASSOCIATION,
                         in its capacity as the Collateral Agent

                         By: /s/ Benita Pointer
                            --------------------------
                            Name: Benita Pointer
                            Title: Account Executive

                         BANK ONE TRUST COMPANY, NATIONAL
                         ASSOCIATION,
                         in its capacity as the Collateral Agent

                         By: /s/ Benita Pointer
                            ------------------------------
                            Name: Benita Pointer
                            Title: Account Executive

<PAGE>

                         ELWOOD ENERGY LLC

                         By: /s/  Don Burnette
                            ---------------------------
                            Name: Don Burnette
                            Title: Authorized Representative

                         Additional SENIOR SECURED PARTY
                         pursuant to Section 7.18

                         By:____________________________
                            Name:
                            Title:

<PAGE>

                                           Schedule A to Intercreditor Agreement
                                           -------------------------------------

                             Fundamental Decisions
                             ---------------------

          The following Fundamental Decisions require the vote of the One
Hundred Percent Secured Parties:

                    (a)  Any Modification of the Financing Documents to which
     the Intercreditor Agent, the Collateral Agent or the Administrative Agent
     is a party that has the effect of changing the date for (including any
     changes to mandatory or voluntary prepayments), changing the method of
     calculation contained in, altering the amount of, or changing the currency
     of, any payment of principal, interest or of any other fee, commission or
     any other amount payable to any Secured Party under any Financing Document;

                    (b)  any Modification of the Financing Documents to which
     the Intercreditor Agent, the Collateral Agent or the Administrative Agent
     is a party that has the effect of releasing Collateral from the Lien of any
     of the Security Documents or releasing funds held by the Collateral Agent
     or the Administrative Agent, in each case other than as expressly permitted
     in accordance with the terms of the Financing Documents;

                    (c)  except as set forth in the proviso to Section 4.2 of
                                                               -----------
     the foregoing Intercreditor Agreement, any Modification of Section 3.1(b)
                                                                --------------
     of the Deposit and Disbursement Agreement;

                    (d)  except as set forth in the proviso to Section 4.2 of
                                                               -----------
     the foregoing Intercreditor Agreement and Section 12.1 of the Indenture,
     any Modification of any provision of the Intercreditor Agreement;

                    (e)  any Modification of any definition contained in the
     Deposit and Disbursement Agreement or in any other Financing Docu ment to
     which the Intercreditor Agent, the Collateral Agent or the Adminis trative
     Agent is a party but only if and to the extent such Modification would
     result in the making of any of the Modifications referred to in clauses (a)
     through (d) above;

                    (f)  any Modification of a Financing Document to which the
     Intercreditor Agent, the Collateral Agent or the Administrative Agent is a
     party which would permit the assignment by the Issuer of its rights under
     any Financing Document or any Power Sales Agreement other than as

                                      A-1
<PAGE>

     expressly permitted under the Financing Documents (prior to such
     Modification).

                                      A-2
<PAGE>

                               TABLE OF CONTENTS
                               -----------------

<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                  ----
<S>                                                                                               <C>
RECITALS.........................................................................................    1

AGREEMENT........................................................................................    1

ARTICLE I DEFINITIONS; RULES OF INTERPRETATION...................................................    2
Section 1.1    Definitions.......................................................................    2
Section 1.2    Rules of Interpretation...........................................................    6

ARTICLE II INTERCREDITOR AGENT...................................................................    6
Section 2.1    Appointment of the Intercreditor Agent............................................    6
Section 2.2    Intercreditor Agent's Rights and Obligations......................................    6
Section 2.3    Intercreditor Agent...............................................................    9
Section 2.4    Defaults..........................................................................   10
Section 2.5    Nonliability......................................................................   11
Section 2.6    Resignation of the Intercreditor Agent............................................   11
Section 2.7    Removal of the Intercreditor Agent................................................   13
Section 2.8    Authorization.....................................................................   13
Section 2.9    Intercreditor Agent as Secured Party; Other Banking Business......................   13
Section 2.10   Notice of Amounts Owed............................................................   14

ARTICLE III SHARING..............................................................................   14
Section 3.1    Payments Received by Intercreditor Agent or Collateral Agent......................   14
Section 3.2    Payments Received by Any Other Senior Secured Party...............................   14
Section 3.3    Amounts Not Subject to Sharing....................................................   15
Section 3.4    Presumption Regarding Payments....................................................   15
Section 3.5    No Separate Security..............................................................   16
Section 3.6    Subordinated Affiliate Bonds......................................................   16

ARTICLE IV VOTING AND DECISION MAKING............................................................   16
Section 4.1    Decision Making...................................................................   16
Section 4.2    Voting Generally; Intercreditor Votes.............................................   17
Section 4.3    Intercreditor Votes; Each Party's Entitlement to Vote.............................   18
Section 4.4    Intercreditor Votes; Votes Allocated to Each Party................................   18

ARTICLE V DEFAULTS AND REMEDIES..................................................................   19
Section 5.1    Notice of Defaults................................................................   19
Section 5.2    Election to Pursue Remedies Following Events of Default...........................   19
Section 5.3    Exercise of Remedies..............................................................   21

ARTICLE VI MODIFICATIONS; INSTRUCTIONS; OTHER RELATIONSHIPS......................................   22
Section 6.1    100% Voting Issues:  Modifications of, and Instructions with
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                  ----
<S>                                                                                               <C>
               Respect to, Fundamental Aspects of the Financing Documents........................   22
Section 6.2    Majority Voting Issues: Modifications of, and Respect to, Material Aspects of
               the Financing Instructions with Documents.........................................   22
Section 6.3    Certain Procedures Relating to Modifications, Instructions and Exercises of
               Discretion........................................................................   22
Section 6.4    Modifications by Secured Parties to their Respective Facilities...................   24
Section 6.5    Effect of Modification on Intercreditor Agent.....................................   24
Section 6.6    Provision of Information; Meetings................................................   24

ARTICLE VII  MISCELLANEOUS.......................................................................   25
Section 7.1    Addresses.........................................................................   25
Section 7.2    Delay and Waiver..................................................................   27
Section 7.3    Entire Agreement..................................................................   27
Section 7.4    Governing Law.....................................................................   28
Section 7.5    Severability......................................................................   28
Section 7.6    Headings..........................................................................   28
Section 7.7    Successors and Assigns............................................................   28
Section 7.8    Reinstatement.....................................................................   28
Section 7.9    Counterparts......................................................................   29
Section 7.10   Termination.......................................................................   29
Section 7.11   No Partnership....................................................................   29
Section 7.12   No Reliance.......................................................................   29
Section 7.13   Third-Party Beneficiaries.........................................................   29
Section 7.14   Obligations of the Issuer Unaffected..............................................   29
Section 7.15   Action without the Intercreditor Agent............................................   29
Section 7.17   Indemnification...................................................................   30
Section 7.18   Additional Secured Parties........................................................   33

Schedule A - Fundamental Decisions
</TABLE>

                                      ii

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