Credit Enhancement Agreement - City of Bath, Maine, and Bath Iron Works Corp.

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                          CREDIT ENHANCEMENT AGREEMENT
                                    between
                              CITY OF BATH, MAINE
                                      and
                          BATH IRON WORKS CORPORATION

                         Dated as of September 19, 1997








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                               TABLE OF CONTENTS

ARTICLE I ............................................................     1
     Section 1.1. Definitions ........................................     1
     Section 1.2. Interpretation and Construction ....................     4
     Section 1.3. Development Program ................................     5
     Section 1.4. Completion .........................................     5
     Section 1.5. City Costs .........................................     5
     Section 1.6. Agreement Controls .................................     6

ARTICLE II ...........................................................     6
     Section 2.1. Creation of Development Program Fund ...............     6
     Section 2.2. Liens ..............................................     6
     Section 2.3. Deposits into Development Program Fund .............     6
     Section 2.4. Monies Held in Trust ...............................     6

ARTICLE III ..........................................................     7
     Section 3.1. Credit Enhancement Payments ........................     9
     Section 3.2. Failure to Make Payment ............................     9
     Section 3.3. Manner of Payments .................................     9
     Section 3.4. Obligations Unconditional ..........................     9
     Section 3.5. Limited Obligation .................................    10
     Section 3.6. Calculation of Retained Tax Increment ..............    10
     Section 3.7. Revaluation ........................................    10

ARTICLE IV ...........................................................    10
     Section 4.1. Pledge of Project Cost Account .....................    10
     Section 4.2. Perfection of Interest .............................    11
     Section 4.3. Further Instruments ................................    11
     Section 4.4. No Disposition of Developer Subaccount .............    11
     Section 4.5. Access to Books and Records ........................    11

ARTICLE V ............................................................    11
     Section 5.1. Events of Default ..................................    11
     Section 5.2. Remedies on Default ................................    12
     Section 5.3. Remedies Cumulative ................................    12

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     Section 5.4.  Agreement to Pay Attorneys' Fees and Expenses.....  13
     Section 5.5.  Tax Laws..........................................  13

ARTICLE VI...........................................................  13
     Section 6.1.  Effective Date and Term...........................  13
     Section 6.2.  Cancellation and Expiration of Term...............  13

ARTICLE VII..........................................................  13
     Section 7.1.  Consent to Pledge and/or Assignment...............  13
     Section 7.2.  Pledge, Assignment or Security Interest...........  14
     Section 7.3.  Assignment........................................  14

ARTICLE VIII.........................................................  14
     Section 8.1.  Successors........................................  14
     Section 8.2.  Parties in Interest...............................  14
     Section 8.3.  Severability......................................  14
     Section 8.4.  No Personal Liability of Officials of the City....  14
     Section 8.5.  Counterparts......................................  14
     Section 8.6.  Governing Law.....................................  15
     Section 8.7.  Notices...........................................  15
     Section 8.8.  Amendments........................................  15
     Section 8.9.  Net Agreement.....................................  15
     Section 8.10. Benefit of Assignee or Pledges....................  15
     Section 8.11. Integration.......................................  15
     Section 8.12. Disputes..........................................  15
     Section 8.13. Arbitration.......................................  16





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     THIS CREDIT ENHANCEMENT AGREEMENT dated as of Sept. 19, 1997, between the
City of Bath, Maine (the 'City'), a municipal body corporate and politic and a
political subdivision of the State of Maine, and Bath Iron Works Corporation
(the 'Developer'), a Maine corporation with a place of business in Bath, Maine,

                                WITNESSETH THAT

     WHEREAS, the City designated The Bath Iron Works Municipal Development and
Tax Increment Financing District #1 and The Bath Iron Works Municipal
Development and Tax Increment Financing District #2 (the 'Districts') pursuant
to Chapter 207 of Title 30-A of the Maine Revised Statutes, as amended, by
action of the City Council at a City Council Meeting held on April 8, 1997 (the
'Vote') and pursuant to the same Vote adopted a development program and
financial plan for the Districts (the 'Development Program'); and

     WHEREAS, the Maine Department of Economic and Community Development has
reviewed and accepted the District and the Development Program effective April
   , 1997; and

     WHEREAS, the Development Program contemplates the execution and delivery
of a credit enhancement agreement between the City and the Developer; and

     WHEREAS, the City and the Developer desire and intend that this Credit
Enhancement Agreement be and constitute the credit enhancement agreement
contemplated by and described in the Development Program;

     NOW, THEREFORE, in consideration of the foregoing and in consideration of
the mutual promises and covenants set forth herein, the parties hereby agree as
follows:

                                   ARTICLE I
                          DEFINITIONS: INTERPRETATIONS

     SECTION 1.1.  DEFINITIONS.  The terms defined in this Article I shall, for
all purposes of this Agreement, have the meanings herein specified, unless the
context clearly requires otherwise:

     'Agreement' shall mean this Credit Enhancement Agreement between the City
and the Developer.

     'Captured Assessed Value' shall mean the valuation amount by which the
then current assessed value of the Districts exceeds the Original Assessed
Value of the Districts.

     'City' means the City of Bath, Maine, a municipality duly organized and
existing under the laws of the State of Maine.

     'City Share' means (a) all of the Retained Tax Increment Revenues other
than the Developer Share thereof plus (b) all interest and earnings on all of
the Retained Tax Increment Revenues, except as provided in Section 3.1(e)
hereof.


                                       1

     'Developer' means Bath Iron Works Corporation, a Maine corporation with a
place of business in Bath, Maine.

     'Development Program' means the development program for the District as
adopted by the Bath City Council at a Meeting held on April 8, 1997.

     'Development Program Fund' means the development program fund described in
the Financial Plan section of the Development Program and established and
maintained pursuant to Article II hereof.

     'Developer Share' means (a) 100% of the Real Property Increment with
respect to the Land Level Facility and 50% of the Real Property Increment with
respect to the Existing Facility and 50% of the Personal Property Increment
with respect to the Land Level Facility and 50% of the Personal Property
Increment with respect to the Existing Facility, for each of the twenty-five
years of the term of this Agreement (commencing with the year 1999 Tax Year) of
the Retained Tax Increment Revenues, provided, however, that such percentages
shall be reduced to the following amounts at such time that the aggregate
amount of payments by the City to the Developer during the term of this
Agreement and pursuant to this Agreement equal $85,000,000; 100% of the Real
Property Increment with respect to the Land Level Facility with respect to
assessed value equal to the assessed value of Land Level Facility (District #1)
real property as of April 1, 2002; 35% of the Real Property Increment with
respect to the Land Level Facility with respect to assessed value of real
property in excess of the assessed value of Land Level Facility (District #1)
real property as of April 1, 2002; 35% of the Personal Property Increment with
respect to the Land Level Facility; 35% of the Real Property Increment with
respect to the Existing Facility; and 35% of the Personal Property Increment
with respect to the Existing Facility.

     In the event that the Tax Shift Formulas are changed and as a result the
City's Tax Shift amount is decreased by reason of inclusion in the City's
valuation for purposes of the Tax Shift Formulas of any portion of the Captured
Assessed Value with respect to which the Developer's Share is determined
hereunder, then, commencing with the later of (a) the 2009 Fiscal Year or (b)
the Fiscal Year in which the Tax Shift Formulas are changed, the Developer Share
shall be reduced by an amount equal to 50% of the difference, calculated solely
with respect to the Developer Share of the Retained Tax Increment, between (a)
the Tax Shift as determined using the method set forth in the current Tax Shift
Formulas and (b) the Tax Shift as properly determined using the then effective
State laws relating to state aid to education, revenue sharing and county tax;
any reduction under this paragraph shall be calculated annually and applied to
reduce the payments of the Developer Share on the next scheduled payment date
herein following such calculation.

     A change in the Tax Shift resulting other than from including Captured
Assessed Value in the City's valuation shall not result in a reduction of the
Developer's Share.

     Anything in this Agreement to the contrary notwithstanding, for purposes
of calculating the Developer's Share, the platform for the Land Level Transfer
System (the concrete pad, filled




                    
                                      2 

land and pilings supporting the structures thereon) shall be included within
the real property increment of the Land Level Facility.

     'District(s)' means the Bath Iron Works Corporation Municipal Development
and Tax Increment Financing District #1 ('District #1') and The Bath Iron Works
Municipal Development and Tax Increment Financing District #2 ('District #2')
designated by the City pursuant to Chapter 207 of Title 30-A of the Maine
Revised Statutes, as amended, by vote at City Council Meeting held on April 8,
1997, which Districts shall include the Existing Facility and the Land Level
Facility.

     'Effective Date' means Sept. 19, 1997.

     'Existing Facility' means the Property consisting of the existing
shipbuilding facility of the Developer, located on the parcel shown on Tax Map
27 as Parcel 142 within District #2, including all land, buildings, and all
personal property located on such parcel as of April 1 each year subject to
City ad valorem taxes together with all improvements or additions thereto
within the existing geographic boundaries of such facility, all as currently
depicted on Exhibit A hereto.

     'Financial Plan' means the financial plan described in the 'Financial
Plan' Section of the Development Program.

     'Fiscal Year' means July 1 to June 30 of each year or such other fiscal
year as the City may from time to time establish; for purposes of this
Agreement, the Fiscal Year 1999 means the Fiscal Year commencing July 1, 1999
and ending June 30, 2000 and the Fiscal Year 2023 means the Fiscal Year
commencing July 1, 2023 and ending June 30, 2024.

     'Land Level Facility' means the land level facility to be constructed in
District #1 by the Developer adjacent to the Existing Facility, together with
all land, buildings, personal property located on such adjacent land as of
April 1 of each year subject to City ad valorem taxes together with all
improvements or additions thereto as depicted on Exhibit B hereto.

     'Original Assessed Value' means $128,011,800, the assessed value of the
Districts as of March 31, 1997 as the same may be adjusted from time to time in
accordance with Section 3.7 hereof.

     'Personal Property Increment' means that portion of the Tax Increment
attributable to increases in personal property valuations with respect to
personal property located in the Districts.

     'Project' means the design, planning, development, acquisition,
construction and operation of the Land Level Facility and other Bath Iron Works
Corporation improvements within the Districts as described in the Development
Program.

     'Project Cost Account' means the project cost account described in the
Financial Plan Section of the Development Program consisting of the City
Subaccount and the Developer


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Subaccount and established and maintained pursuant to Article II hereof and to
provisions of 30-A M.R.S.A. Section 5254(3)(A)(2).

     'Project Costs' means 'project costs' as defined in 30-A M.R.S.A.
Section 5152(8).

     'Property' means all real property and all personal property now or
hereafter located in the Districts.

     'Property Taxes' means any and all ad valorem property taxes levied,
charged or assessed against real or personal property in the Districts by the
City, or on its behalf.

     'Real Property Increment' means that portion of the Tax Increment
attributable to increases in real estate valuations with respect to real estate
located in the Districts.

     'Retained Tax Increment Revenues' means that portion of the Tax Increment
to be retained by the City and deposited into the Development Program Fund
pursuant to the terms of the Development Program and this Agreement.

     'Tax Increment' means the real and personal property taxes exclusive of
any state, country or special district tax, assessed by the City on the
captured assessed value of property within the Districts, which Tax Increment
shall consist of the Real Property Increment and the Personal Property
Increment.

     'Tax Payment Date' means the date(s) on which property taxes levied by the
City are due and payable from owners of property located within the City.

     'Tax Shift' means the decrease in county tax payable by the City and the
increases in State aid for education and revenue sharing in all three cases
resulting from the exclusion of Captured Assessed Value from the City's
valuation in calculating such amounts of county tax, State aid to education and
revenue sharing under the current Tax Shift Formulas.

     'Tax Shift Formulas' mean the formulas currently utilized by the State of
Maine in calculating (a) the county tax payable in accordance with 30-A M.R.S.A.
Section 706 and 36 M.R.S.A. Sections 305(1), 381; (b) the municipal revenue
sharing distribution of the Local Government Fund in accordance with 30-A
M.R.S.A. Section 5681; and (c) State aid to education, including aid for
total operating costs, total program cost allocation (taking into account the
maximum local share or circuit breaker) and total debt service cost allocation
(taking into account the maximum local share or circuit breaker), all as
computed in accordance with Maine Department of Education Form ED 261.

     SECTION 1.2. INTERPRETATION AND CONSTRUCTION. In this Agreement, unless
the context otherwise requires:

     a) The terms 'hereby,' 'hereof,' 'hereto,' 'herein,' 'hereunder' and any
similar terms, as used in this Agreement, refer to this Agreement, and the term
'hereafter' means after, and the term 'heretofore' means before, the date of
delivery of this Agreement.



                                  4

          (b) Words importing a particular gender mean and include correlative
     words of every other gender and words importing the singular number mean
     and include the plural number and vice versa.

          (c) Words importing persons mean and include firms, associations,
     partnerships (including limited partnerships), trusts, corporations and
     other legal entities, including public or governmental bodies, as well as
     any natural persons.

          (d) Any headings preceding the texts of the several Articles and
     Sections of this Agreement, and any table of contents or marginal notes
     appended to copies hereof, shall be solely for convenience of reference and
     shall not constitute a part of this Agreement, nor shall they affect its
     meaning, construction or effect.

          (e) Except as otherwise provided herein, all approvals, consents and
     acceptances required to be given or made pursuant to this Agreement by any
     signatory hereto shall not be withheld unreasonably, provided, that this
     paragraph shall not apply to approvals, consents and acceptances under
     applicable laws, ordinances and codes, including, without limitation, land
     use ordinances.

          (f) All notices to be given hereunder shall be given in writing and,
     unless a certain number of days is specified, within a reasonable time.

          (g) If any clause, provision or Section of this Agreement shall be
     ruled invalid by any court of competent jurisdiction, the invalidity of
     such clause, provision or Section shall not affect any of the remaining
     provisions hereof except as otherwise provided in Section 3.4 hereof.

     SECTION 1.3. DEVELOPMENT PROGRAM. Neither this Agreement nor the
Development Program obligate the Developer to construct the Land Level Facility
or to make any other improvements to its facility.     

     SECTION 1.4. COMPLETION. The Developer shall have completed as much of the
Development Program as will qualify for financial assistance hereunder within
five (5) years after the Effective Date. If none of the Development Program is
completed within five (5) years after the Effective Date, then this Agreement
(except Section 1.5 pertaining to costs) and the District shall terminate at
the end of five (5) years after the Effective Date. Notwithstanding any other
provision hereof, no payments shall be made or be payable by the City to the
Developer under this Agreement unless such payments are used to pay or
reimburse the Developer for Project Costs incurred within five (5) years of the
Effective Date pursuant to proper documentation thereof provided by the
Developer pursuant to Section 3.1(d) hereof.

     SECTION 1.5. CITY COSTS. The Developer shall pay or reimburse the City for
all reasonable fees, expenses and other charges of the City and its
consultants, including the City's attorneys, accountants and overtime of the
City's appraiser, tax assessor and other City staff, in connection with the
review, negotiation, approval, execution, administration, enforcement and

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carrying out of this Agreement and the review, negotiation, approval,
administration, enforcement and carrying out of the Development Program.
Notwithstanding any of the provision of this Agreement, this section shall
survive any termination of this Agreement.

     SECTION 1.6. AGREEMENT CONTROLS. In the event of any inconsistency between
this Agreement and the Development Program, the terms and provisions of this
Agreement shall take precedence, to the extent permitted by law, over the
inconsistent provisions of the Development Program.

                                   ARTICLE II
                 PROJECT COST ACCOUNT AND FUNDING REQUIREMENTS

     SECTION 2.1. CREATION OF DEVELOPMENT PROGRAM FUND. The City hereby
confirms the creation and establishment of a segregated fund in the name of the
City designated as the 'Bath Iron Works Corporation Municipal Development Tax
Increment Financing District Program Fund' (the 'Development Program Fund')
pursuant to, and in accordance with the terms and conditions of, the
Development Program. The Development Program Fund shall consist of the Project
Cost Account. The Project Cost Account shall consist of the City Subaccount and
the Developer Subaccount.

     SECTION 2.2 LIENS. The City shall not create any liens, encumbrances or
other interests of any nature whatsoever, nor shall it hypothecate the Developer
Subaccount of the Project Cost Account of the Development Program Fund or any
funds therein or revenues resulting from investment of funds therein, other
than the interest of the Developer granted under this Agreement in and to the
amounts on deposit in the Developer Subaccount, provided, however, nothing
herein shall prohibit creation of real and personal property tax liens on the
Developer's property in accordance with, and entitled to the priority provided
under, Maine law.

     SECTION 2.3. DEPOSITS INTO DEVELOPMENT PROGRAM FUND. The City shall
deposit into the Developer Subaccount of the Project Cost Account within
fifteen (15) days after the City's receipt thereof, an amount equal to the
Developer Share of the Retained Tax Increment Revenues for the period to which
the payment relates. All amounts deposited in or transferred to the Developer
Subaccount of the Project Cost Account shall be paid to the Developer in
accordance with Article III of this Agreement. All interest and earnings on the
Retained Tax Increment Revenues prior to and after deposit thereof into the
Project Cost Account shall be the sole property of the City and shall be free
and clear of any interest of the Developer under this Agreement.

     SECTION 2.4. MONIES HELD IN TRUST. Except as otherwise permitted in this
Agreement, all monies required to be deposited with or paid into the Developer
Subaccount of the Project Cost Account to fund payments to Developer under the
provisions hereof and the provisions of the Development Program, shall be held
by the City, in trust, for the benefit of the Developer in accordance with the
provisions of this Agreement.

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     All funds in the City Subaccount of the Project Cost Account shall be the
sole and exclusive property of the City and shall not be subject in any way to
the terms or provisions of this Agreement.

                                  ARTICLE III
                              PAYMENT OBLIGATIONS

     SECTION 3.1. CREDIT ENHANCEMENT PAYMENTS. (a) The City shall retain and
deposit, within fifteen (15) days following each Tax Payment Date or the date
payment is actually received by the City with respect to Property in the
Districts, whichever is later, in the Developer Subaccount of the Project Cost
Account, the Developer Share of the Tax Increment in each year commencing with
the City's Fiscal Year 1999 and continuing thereafter through and including the
Fiscal Year 2023.

     Notwithstanding the foregoing, if at any time the assessed value of the
Existing Facility is less than the Original Assessed Value, then the amount
payable with respect to the Land Level Facility shall be reduced by an amount
equal to the difference between the Property Taxes that would be then payable
on an amount equal to Original Assessed Value and the Property Taxes payable on
the then assessed value of the Existing Facility.

     (b) Subject to the provisions of this Agreement, the City agrees to pay
Developer, within fifteen (15) days following each Tax Payment Date or the date
payment is actually received by the City, whichever is later, the Developer
Share of the Retained Tax Increment Revenues resulting from the Property Tax
payments due on such Tax Payment Date and actually received by the City with
respect to Property in the Districts.

     (c) If, with respect to any Tax Payment Date, Developer fails to pay any
portion of the Property Taxes assessed by the City, because of a valuation
dispute or otherwise, the property taxes actually paid by Developer with
respect to such Tax Payment Date shall, first, be applied to taxes due on
account of Original Assessed Value and, second, shall constitute Retained Tax
Increment Revenues.

     (d) The Developer agrees that all payments made will be used and applied
to either pay debt service on indebtedness incurred to finance 'Project Costs'
as that term is defined under Act and described in the Development Program or
used to pay directly, amortize or reimburse Developer for payment of, qualified
Project Costs.  The City shall be required to make payments under this
Agreement only upon receipt of satisfactory documentation that the amounts are
being paid for Project Costs pursuant to Section 1.4 hereof, which
documentation shall be in the form of properly completed certificates, executed
by the Developer in the form attached hereto as Exhibit A.

     In addition, notwithstanding any other provisions of this Agreement,
including, without limitation, the provisions of Section 3.1(a)-(b), the City
shall not be obligated to make any payments to the Developer unless the
Developer provides such documentation evidencing that Developer has incurred
Project Costs after the date of this Agreement equal to or greater than
$65,000,000 by December 31, 1999 and $120,000,000 by December 31, 2000 relating
to

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construction and equipping of the Land Level Facility and/or the Existing
Facility. Developer shall repay to City any payments made hereunder if Developer
fails to meet its obligation set forth above.

     (e) The Developer (and its successors and assigns, as owners of property
in the District) shall pay to the City, when due, all Property Taxes and
assessments with respect to property of the Developer in the City of Bath. If
such Property Taxes and assessments are not paid when due, the City may
withhold and suspend all payments under this Agreement until such Property
Taxes and assessments and all interest thereon and other costs relating thereto
are paid in full. In addition, if the Developer institutes any tax abatement
proceeding with respect to any Property in the District, the City may withhold
and suspend all payments of the Developer Share of the Tax Increment with
respect to the items of Property subject to the abatement proceeding, and shall
deposit the withheld amount into a separate interest bearing escrow account.
Upon final action and completion of such abatement proceeding, the proper
amount (based on the results of the abatement proceedings plus an allocable
share of the interest accrued thereon) held in escrow account shall be paid to
the Developer.

     (f) Developer covenants and agrees that (i) in the event any part of the
Property now or hereafter located in the District should be valued at less than
its full value or is now exempt from payment of Property Tax for any reason or
for any reason hereafter becomes exempt from payment of Property Tax,
including, but not limited to, any portion of the Land Level Facility being
located on submerged land or if any of the Property is now or hereafter leased
by Developer from any person or entity including, without limitation, any
submerged or intertidal lands lease from the State of Maine and any lease from
any private land owner or (ii) in the event that title to any property in the
District is hereafter transferred to any entity exempt from the payment of
Property Taxes, including, without limitation, the State of Maine or any agency
or authority thereof, or (iii) in the event that any submerged lands lease
expires or is transferred to another party, then Developer, its successors and
assigns, as owner, lessee or user of real estate in the District and as a
covenant running with the land shall be obligated to pay to the City each year
during and after the expiration or termination of this Agreement, an amount
equal to (a) 100% of the Property Taxes that would be assessed by the City on
such Property, as if and under the assumption that all such Property were fully
taxable and owned in fee by Developer and not exempt from Property Taxes less
(b) solely during the twenty-five (25) year term of this Agreement, the portion
of the amounts described in the preceding clause (a) that would have been
payable to the Developer, or its successors and assigns, under Section 3.1(a)
if such Property were taxable. The covenants in this paragraph shall survive
expiration or termination of this Agreement. Notwithstanding the foregoing, the
provisions of this paragraph 3.1(f) shall not apply to property taken by
eminent domain or conveyed to any governmental entity under a bona fide threat
of condemnation, except for such period of time, if any, as Developer, its
successors or assigns, continues to operate any business on the Property
following such condemnation or deed in lieu of condemnation.

     (g) Developer agrees that for purposes of this Agreement and for purposes
of the assessment of Property Tax, the following shall constitute personal
property: (a) dry docks (but excluding landing grids consisting of the large
cement blocks located under the dry dock area); (b) cranes; (c) rail systems
for cranes and ships; (d) portable staging and welding equipment; (e)



                                       8


personnel lifts; (f) modular or mobile equipment and work stations; (g) support
equipment; (h) outfit support terminals; (i) ship transfer systems; (j) process
piping; (k) manufacturing process wiring; (l) fire suppression systems; (m)
fender bumper systems; and (n) all property that is personal property under
applicable law.

     When an issue arises as to whether an item is considered real or personal
property, the determining factor is whether the item in question primarily
supports the manufacturing process, in which case it shall be considered
personal property, or supports a building or structure or constitutes an
improvement to the land, in which case it shall be considered real property.

     SECTION 3.2  FAILURE TO MAKE PAYMENT.  In the event the City should fail
to, or be unable to, make any of the payments required under the foregoing
provisions of this Article III, the item or installment so unpaid shall
continue as a limited obligation of the City, under the terms and conditions
hereinafter set forth, until the amount unpaid shall have been fully paid.
Developer shall be entitled to initiate an action against the City to
specifically enforce its obligations hereunder, including without limitation
the city's obligation to establish and maintain the Development Program Fund,
deposit all Retained Tax Increment Revenues into the Developer Subaccount of
the Project Cost Account established thereunder and make required payments to
Developer.

     SECTION 3.3  MANNER OF PAYMENTS.  The payments provided for in this
Article III shall be paid directly to the Developer in the manner provided
hereinabove for its own use and benefit by check drawn on the City.

     SECTION 3.4  OBLIGATIONS UNCONDITIONAL.  Except as otherwise provided in
this Agreement or as required by applicable law, the obligations of the City to
make the payments described in this Agreement in accordance with the terms
hereof shall be absolute and unconditional, and the City shall not suspend or
discontinue any payment hereunder or terminate this Agreement for any cause,
irrespective of any defense or any rights of setoff, recoupment or counterclaim
it might otherwise have against the Developer, other than by reason of and to
the extent provided in a final judgment by a court of competent jurisdiction.

     Notwithstanding the foregoing, the City reserves the right to terminate
this Agreement upon receipt of a final judgment by a court of competent
jurisdiction to the effect that this Agreement or the Development Program (or
the designation of the Districts) adopted in connection herewith or any payment
made thereunder or hereunder is or would be illegal or invalid or not properly
authorized. Such termination shall not, however, affect the Developer's
obligation to defend and indemnify the City, which obligations shall survive
any such termination. In addition, the City may setoff any amount found by the
court of competent jurisdiction to be due to the City from the Developer or
from the owner of any property in the District.

     The Developer agrees to defend, indemnify, pay, reimburse and hold the
City, its councilors, officers, agents and employees, harmless from any and all
claims, suits, liabilities, actions, proceedings and expenses, including,
without limitation, attorneys fees and expenses and accountant's fees and
expenses, arising out of this Agreement, the Development Program or any


                                       9

claim of illegality or invalidity of this Agreement or the Development Program
or the City's approval of the District, this Agreement or the Development
Program or out of the City's preparation and participation in this Agreement or
the Development Program.

     SECTION 3.5.  LIMITED OBLIGATION.  The City's obligations under this
Agreement, including the City's obligations of payment hereunder shall be
limited obligations of the City payable solely from the Developer Share of the
Retained Tax Increment Revenues actually paid by the Developer and/or other
taxpayers with respect to Property in the Districts and actually received by
the City and pledged therefor under this Agreement. The City's obligations
hereunder shall not constitute a general debt or a general obligation or charge
against or pledge of the faith and credit or taxing power of the City, the
State of Maine, or of any municipality or political subdivision thereof, but
shall be payable solely from such Developer Share of the Retained Tax Increment
Revenues actually paid by the Developer and/or other taxpayers with respect to
Property in the Districts and actually received by the City. This Agreement
shall not directly or indirectly or contingently obligate the City, the State
of Maine, or any other municipality or political subdivision to levy or to
pledge any form of taxation whatever therefor or to make any appropriation for
their payment, excepting the pledge of the Developer Share of the Retained Tax
Increment Revenues established under this Agreement.

     SECTION 3.6.  CALCULATION OF RETAINED TAX INCREMENT.  The City and the
Developer shall maintain records which are adequate to calculate the Retained
Tax Increment, the Developer Share and the City Share and shall cooperate with
each other in making such calculations. Annually, within 30 days of mailing of
the City's tax bill, the City shall calculate and submit to Developer its
calculations of the amount of Retained Tax Increment and the Developer Share
and City Share thereof for that year. If the Developer does not object to such
calculations within 30 days of receipt thereof, the calculations shall be final
and binding on all parties. If there is a dispute as to the calculations and
the parties are unable to agree, the dispute shall be determined in the manner
provided in Section 8.13 hereof.

     SECTION 3.7.  REVALUATION.  In the event there is a City-wide revaluation
of taxable property within the City, the Original Assessed Value shall be
increased in proportion to the City-wide increase in property values resulting
from such revaluation.

                                   ARTICLE IV
                          PLEDGE AND SECURITY INTEREST

     SECTION 4.1.  PLEDGE OF PROJECT COST ACCOUNT.  In consideration of this
Agreement and other valuable consideration and for the purpose of securing
payment of the amounts provided for hereunder to the Developer by the City,
according to the terms and conditions contained herein, and in order to secure
the performance and observance of all of the City's covenants and agreements
contained herein, the City does hereby grant a security interest in and pledge
to the Developer the Developer Subaccount and all sums of money and other
securities and investments therein. This pledge and the provisions of Section
2.4 hereof shall not apply to any interest and earnings on the Project Cost
Account, including the Developer Subaccount thereof, all of which shall be the
absolute property of the City, free and clear of any interest of the Developer.




                                   10
                     

     SECTION 4.2.  PERFECTION OF INTEREST.  The City shall cooperate with the
Developer in causing appropriate financing statements and continuation
statements naming the Developer as pledgee of all such amounts from time to time
on deposit in the Developer Subaccount of the Project Cost Account to be duly
filed and recorded in the appropriate state offices as required by and permitted
under the provisions of the Maine Uniform Commercial Code or other similar law
as adopted in the State of Maine and any other applicable jurisdiction, as from
time to time amended, in order to perfect and maintain the security interests
created hereunder. To the extent reasonably deemed necessary by the Developer,
the City will at such time and from time to time as requested by Developer
establish the Developer Subaccount of the Project Cost Account Fund described in
Section 2.3(b)(i) hereof as a segregated fund under the control of an escrow
agent, trustee or other fiduciary so as to perfect Developer's interest therein
on terms reasonably satisfactory to the City.

     SECTION 4.3  FURTHER INSTRUMENTS.  The City shall, upon the reasonable
request of the Developer, from time to time execute and deliver such further
instruments and take such further action as may be reasonable and as may be
required to carry out the provisions of this Agreement; provided, however, that
no such instruments or actions shall pledge the credit of the City or require
any payment or expense by the City (unless paid by Developer) or discharge
either party or change any provision of this Agreement.

     SECTION 4.4  NO DISPOSITION OF DEVELOPER SUBACCOUNT.  Except as permitted
hereunder, the City shall not sell, lease, pledge, assign or otherwise dispose,
encumber or hypothecate any interest in the Developer Subaccount of the Project
Cost Account and will promptly pay or cause to be discharged or make adequate
provision to discharge any lien, charge or encumbrance on any part thereof not
permitted hereby.

     SECTION 4.5  ACCESS TO BOOKS AND RECORDS.  All books, records and documents
in the possession of the City relating to the District, the Development Program,
the Agreement and the monies, revenues and receipts on deposit or required to be
deposited into the Development Program Fund and the Developer Subaccount of the
Project Cost Account shall at all reasonable times be open to inspection by the
Developer, its agents and employees. All books, records and documents of the
Developer reasonably necessary to the verification of Project Costs shall at all
reasonable times be open to inspection by the City, its agents and employees,
provided, however, that any information reasonably designated by Developer as
proprietary shall be inspected in a manner so as to preserve the confidential
nature of such information.

                                   ARTICLE V
                             DEFAULTS AND REMEDIES

     SECTION 5.1.  EVENTS OF DEFAULT.  Each of the following events shall
constitute and be referred to in this Agreement as an 'Event of Default':

          (a)  Any failure by the City or the Developer to pay any amounts due
     hereunder when the same shall become due and payable;


                                       11

          (b) Any failure by the City to make deposits into the Developer
     Subaccount of the Project Cost Account as and when due;

          (c) Any failure by the City or the Developer to observe and perform in
     all material respects any covenant, condition, agreement or provision
     contained herein on the part of the City or Developer to be observed or
     performed, which failure is not cured within thirty (30) days following
     written notice thereof; provided, however, that this subsection (c) shall
     not be construed to include Developer's failure to pay property taxes for
     any reason as an Event of Default hereunder;

          (d) If a decree or order of a court or agency or supervisory authority
     having jurisdiction in the premises of the appointment of a conservator or
     receiver or liquidator of, any insolvency, readjustment of debt, marshaling
     of assets and liabilities or similar proceedings, or for the winding up or
     liquidation of the City's or Developer's affairs shall have been entered
     against the City or the Developer, the City or the Developer shall have
     consented to the appointment of a conservator or receiver or liquidator in
     any such proceedings of or relating to the City or the Developer or of or
     relating to all or substantially all of its property, including without
     limitation the filing of a voluntary petition in bankruptcy by the City or
     the Developer or the failure by the City or the Developer to have an
     involuntary petition in bankruptcy dismissed within a period of 90
     consecutive days following its filing or in the event an order for release
     has been entered under the Bankruptcy Code with respect to the City or the
     Developer.

     SECTION 5.2. REMEDIES ON DEFAULT. Whenever any Event of Default described
in Section 5.1 hereof shall have occurred and be continuing, the nondefaulting
party may take any one or more of the following remedial steps following any
applicable cure period:

          (a) The nondefaulting party may take whatever action at law in at
     equity as may appear necessary or desirable to collect the amount then due
     and thereafter to become due, to specifically enforce the performance or
     observance of any obligations, agreements or covenants of the nondefaulting
     party under this Agreement and any documents, instruments and agreements
     contemplated hereby or to enforce any rights or remedies available
     hereunder or under applicable law; and

          (b) The Developer shall also have the right to exercise any rights or
     remedies available to a secured party under the laws of the State of Maine.

     SECTION 5.3 REMEDIES CUMULATIVE. No remedy herein conferred upon or
reserved to any party is intended to be exclusive of any other available remedy
or remedies but each and every such remedy shall be cumulative and shall be in
addition to every other remedy given under this Agreement or now or hereafter
existing at law, in equity or by statute. Delay or omission to exercise any
right or power accruing upon any Events of Default to insist upon the strict
performance of any of the covenants and agreements herein set forth or to
exercise any rights or remedies upon the occurrence of an Event of Default
shall not impair any such right or power or be considered or taken as a waiver
or relinquishment for the future of the right to insist upon and to enforce,
from time to time and as often as may be deemed expedient, by injunction

                                       12

or other appropriate legal or equitable remedy, strict compliance by the
parties hereto with all of the covenants and conditions hereof, or of the
rights to exercise any such rights or remedies, if such Events of Default be
continued or repeated.

     SECTION 5.4.  AGREEMENT TO PAY ATTORNEYS' FEES AND EXPENSES.  Subject to
the provisions of this Agreement, in the event the City or the Developer should
default under any of the provisions of this Agreement, and the nondefaulting
party shall require and employ attorneys or incur other expenses or costs for
the collection of payments due or to become due or for the enforcement of
performance or observance of any obligation or agreement on the part of the
City or the Developer herein contained, the defaulting party shall, on demand
therefor, pay to the nondefaulting party the reasonable fees of such attorneys
and such other reasonable costs and expenses so incurred by the Developer.

     SECTION 5.5.  TAX LAWS.  Except as provided in Section 3.1 hereof, the
parties acknowledge that all laws of the State now in effect or hereafter
enacted with respect to taxation of property shall be applicable and that the
City, by entering into this Agreement, is not excusing any non-payment of taxes
by Developer. Without limiting the foregoing, the City and the Developer shall
always be entitled to exercise all rights and remedies regarding assessment,
collection and payment of taxes assessed on Developer's property.

                                   ARTICLE VI
                      EFFECTIVE DATE, TERM AND TERMINATION

     SECTION 6.1.  EFFECTIVE DATE AND TERM.  This Agreement shall become
effective upon its execution and delivery by the parties hereto and shall
remain in full force from the date hereof and shall expire upon the performance
of all obligations on the part of the City and the Developer hereunder.

     SECTION 6.2.  CANCELLATION AND EXPIRATION OF TERM.  At the termination or
other expiration of this Agreement in accordance with the provisions of this
Agreement, the City and the Developer shall each execute and deliver such
documents and take or cause to be taken such actions as may be necessary to
evidence the termination of this Agreement.

                                  ARTICLE VII
                 ASSIGNMENT AND PLEDGE OF DEVELOPER'S INTEREST

     SECTION 7.1.  CONSENT TO PLEDGE AND/OR ASSIGNMENT.  The City hereby
acknowledges that it is the intent of the Developer to pledge and assign its
right, title and interest in, to and under this Agreement as collateral for
financing for the Project, although no obligation is hereby imposed on the
Developer to make such assignment or pledge. Recognizing this intention, the
City does hereby consent and agree to the pledge and assignment of all the
Developer's right, title and interest in, to and under this Agreement and in,
and to the payments to be made to Developer hereunder, to third parties as
collateral or security for financing the Development Program, on one or more
occasions during the term hereof.

                                       13

     SECTION 7.2. PLEDGE, ASSIGNMENT OR SECURITY INTEREST. The City hereby
consents to the pledge, assignment or granting of a security interest by the
Developer of its right, title and interest in, to and under this Agreement as
collateral for financing of the Project. The City agrees to execute and deliver
any assignments, pledge assignments, consents or other confirmations on terms
reasonably satisfactory to the City required by the prospective pledgee or
assignee, including without limitation recognition of the pledgee or assignee as
the holder of all right, title and interest herein and as the payee of amounts
due and payable hereunder and any and all such other documentation as shall
confirm to such pledge or assignee the position of such assignee or pledgee and
the irrevocable and binding nature of this Agreement and provide to the pledgee
or assignee such rights and/or remedies as the parties may reasonably deem
necessary for the establishing, perfection and protection of its interest
herein.

     SECTION 7.3.  ASSIGNMENT. Except to the extent provided in Section 7.1 and
Section 7.2, the Developer shall not have the right to transfer and assign all
or any portion of its rights in, to and under this Agreement, except to the
owners of the Property in the District and this Agreement shall run with the
land and bind and inure to the benefit of such owners, their successors and
assigns.

                                  ARTICLE XIII
                                 MISCELLANEOUS

     SECTION 8.1. SUCCESSORS. In the event of the dissolution of the City or the
Developer, the covenants, stipulations, promises and agreements set forth
herein, by or on behalf of or for the benefit of such party shall bind or inure
to the benefit of the successors and assigns thereof time to time and any
entity, officer, board, commission, agency or instrumentality to whom or to
which any power or duty of such party shall be transferred.

     SECTION 8.2. PARTIES IN INTEREST. Except as herein otherwise specifically
provided, nothing in this Agreement expressed or implied is intended or shall be
construed to confer upon any person, firm or corporation other than the City and
the Developer any right, remedy or claim under or by the reason of this
Agreement, it being intended that this Agreement shall be for the sole and
exclusive benefit of the City and the Developer.

     SECTION 8.3. SEVERABILITY. In case any one or more of the provisions of
this Agreement shall, for any reason, be held to be illegal and invalid, such
illegality or invalidity shall not affect any other provision of this Agreement
and this Agreement shall be construed and enforced as if such illegal or invalid
provision had not been contained herein.

     SECTION 8.4. NO PERSONAL LIABILITY OF OFFICIALS OF THE CITY. No covenant,
stipulation, obligation or agreement of the City contained herein shall be
deemed to be a covenant, stipulation or obligation of any present or future
elected or appointed official, officer, agent, servant or employee of the City
in his individual capacity and neither the members of the City Council of the
City nor any official, officer, employee or agent of the City shall be liable
personally with respect to this Agreement or be subject to any personal
liability or accountability by reason hereof.

                                       14


     SECTION 8.5. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when so executed and delivered, shall be an
original, but such counterparts shall together constitute but one and the same
Agreement.

     SECTION 8.6. GOVERNING LAW. The laws of the State of Maine shall govern the
construction and enforcement of this Agreement.

     SECTION 8.7. NOTICES. All notices, certificates, requests, requisitions or
other communication by the City or the Developer pursuant to this Agreement
shall be in writing and shall be sufficiently given and shall be deemed given
when mailed by first class mail, postage prepaid, addressed as follows:

          If to the City:

               City Manager
               Bath City Hall
               55 Front Street
               Bath, ME 04530-2588

          If to the Developer:

               Bath Iron Works Corporation
               700 Washington Street
               Bath, ME  04530

Either of the parties may, by notice given to the other, designate any further
or different addresses to which subsequent notices, certificates, requests or
other communications shall be sent hereunder.

     SECTION 8.8. AMENDMENTS. This Agreement may be amended only with the
concurring written consent of both of the parties hereto.

     SECTION 8.9. NET AGREEMENT. Subject only to the provisions of Sections 3.1,
3.4, 3.5 and 5.2 hereof, this Agreement shall be deemed and construed to be a
'net agreement,' and the City shall pay absolutely net during the term hereof
all payments required hereunder, free of any deductions, and without
abatement, deductions or setoffs.

     SECTION 8.10. BENEFIT OF ASSIGNEES OR PLEDGEES. The City agrees that this
Agreement is executed in part to assist the Developer in obtaining financing
for the Project and accordingly all covenants and agreements on the part of the
City as to the amounts payable hereunder are hereby declared to be for the
benefit of any such assignee or pledgee from time to time of the Developer's
right, title and interest herein.

     SECTION 8.11. INTEGRATION. This Agreement completely and fully supersedes
all other prior or contemporaneous understandings or agreements, both written
and oral, between the City 


                                       15


                

and the Developer relating to the specific subject matter of this Agreement and
the transactions contemplated hereby.

     SECTION 8.12. DISPUTES. The Developer and the City waive any right which
either may have to contest, and shall not take any action to challenge, the
other's authority to enter into, perform or enforce the Agreement or to carry
out the Development Program or the validity or enforceability of this Agreement,
the District or the Development Program. Subject to the provisions of Sections
1.5, 3.4 and 5.4 hereof, the City and the Developer shall each utilize their
respective best efforts to uphold the District, the Development Program, this
Agreement and the City's authority to enter into this Agreement and the validity
and enforceability of the Districts, the Development Program and this Agreement,
including without limitation opposing, to the extent permitted by law, any
litigation or proceeding challenging such authority, validity or enforceability.
The City and the Developer both covenant and agree that (except as provided in
Section 3.1 hereof) the assumptions, analyses and results set forth in this
Agreement shall in no way prejudice the rights of either party or be used, in
any way, by either party in either presenting evidence or making argument in any
dispute which may arise in connection with valuation of the Existing Property or
the Land Level Facility.

     SECTION 8.13. ARBITRATION. Any dispute arising under this Agreement or
under the Development Program shall be resolved by arbitration. The parties
shall use best efforts to agree on an arbitrator and rules of arbitration. If
agreement is not reached within forty-five (45) days, the dispute shall be
resolved by arbitration in accordance with the rules of the American Arbitration
Association.

IN WITNESS WHEREOF, the City and the Developer have caused this Agreement to be
executed in their respective corporate names and their respective corporate
seals to be hereunto affixed and attested by the duly authorized officers, all
as of the date first above written.

WITNESS:                                CITY OF BATH

/s/ Roger R. Havendilt                  By: /s/ John Bubier
--------------------------                  -----------------------------------
                                           John Bubier
                                           City Manager


/s/ Roger R. Havendilt                  By: /s/ John Hall
---------------------------                 ----------------------------------
                                            John Hall, Chairman
                                            City Council


WITNESS:                                 BATH IRON WORKS CORPORATION


                                         By: /s/ Kevin P. Gildart
----------------------------                 ----------------------------------
                                             Kevin P. Gildart
                                             Assistant to the President


                                       16

                                   EXHIBIT A

                              REQUEST FOR PAYMENT

     The undersigned (the 'Developer') does hereby request payment in the
amount of $      from the City of Bath out of the Developer Subaccount of the
Project Cost Account established under the Development Program of The Bath Iron
Works Municipal Development District and Tax Increment Financing District #1
and The Bath Iron Works Municipal Development District and Tax Increment
Financing District #2 and does hereby certify to the City of Bath that the
amount requested will be used to pay Project Costs as that term is defined in
Chapter 207 of Title 30-A of the Maine Revised Statutes, as follows: [check
applicable provisions]

     / / Direct payment of Project Costs in the amount of $________; and/or

     / / Reimbursement to the Developer for Project Costs previously incurred,
         in the amount of $________

There are attached hereto invoices showing the incurring by the undersigned of
Project Costs in the amount of $_______. None of these invoices have been the
subject of a previous request for payment from the Project Cost Account.

     The Developer further certifies that all of such Project Costs constitute
Project Costs as defined in the Credit Enhancement Agreement, dated September
__, 1997 between the City of Bath and the undersigned, and that the Developer
has complied with all terms, conditions and covenants of such Agreement and
that no default or event of default exists under said Agreement.

Dated:_____________ 

                                           BATH IRONS WORKS CORPORATION

_________________________________          By:__________________________________
                                              Its
                                              Duly Authorized


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