10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                  to                                 

Commission file number: 0-8176

Southwest Water Company

(Exact name of registrant as specified in its charter)

Delaware	95-1840947
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

225 North Barranca Avenue, Suite 200
West Covina, California	91791-1605
(Address of principal executive offices)	(Zip Code)

(626) 915-1551

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On July 26, 2002, there were 9,278,754 common shares outstanding.

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

INDEX

		Page No.
Part I.	Financial Information:
Item 1.	Financial Statements:
	Condensed Consolidated Statements of Income—Three and Six Months Ended June 30, 2002 and 2001	1
	Condensed Consolidated Balance Sheets—June 30, 2002 and December 31, 2001	2
	Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2002 and 2001	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
Part II.	Other Information:
Item 1.	Legal Proceedings	16
Item 4.	Submission of Matters to a Vote of Security Holders	16
Item 6.	Exhibits and Reports on Form 8-K	17
	Signatures	18

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
	(in thousands except per share data)						(in thousands except per share data)
Operating Revenues	$	32,746		$	27,838		$	60,914		$	51,053
Operating Expenses:
Direct operating expenses		24,752			20,787			46,370			38,547
Selling, general and administrative expenses		5,845			4,109			10,249			7,688
		30,597			24,896			56,619			46,235
Operating Income		2,149			2,942			4,295			4,818
Other Income (Expense):
Interest expense		(1,063	)		(795	)		(2,219	)		(1,787	)
Interest income		12			13			32			32
Water related cost reimbursement (Note 4)		1,616			—			1,616			—
Other (Note 6)		164			563			1,144			523
		729			(219	)		573			(1,232	)
Income Before Income Taxes		2,878			2,723			4,868			3,586
Provision for Income Taxes		1,008			1,035			1,704			1,363
Net Income		1,870			1,688			3,164			2,223
Dividends on Preferred Shares		7			7			14			14
Net Income Available for Common Shares	$	1,863		$	1,681		$	3,150		$	2,209
Earnings per Common Share (Note 3):
Basic	$	0.20		$	0.19		$	0.34		$	0.25
Diluted	$	0.19		$	0.18		$	0.32		$	0.23
Cash Dividends per Common Share (Note 3)	$	0.06		$	0.06		$	0.11		$	0.11
Weighted Average Outstanding Common Shares (Note 3):
Basic		9,257			9,041			9,230			9,004
Diluted		9,962			9,472			9,863			9,437

See accompanying notes to condensed consolidated financial statements.

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SOUTHWEST WATER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2002		December 31, 2001
	(unaudited)
	(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	798	$	789
Customers’ accounts receivable, net		15,918		21,443
Other current assets		12,491		8,939
		29,207		31,171
Property, Plant and Equipment:
Utility group property, plant and equipment—at cost		228,266		218,696
Services group property, plant and equipment—at cost		14,325		14,317
		242,591		233,013
Less accumulated depreciation and amortization		64,721		61,889
		177,870		171,124
Other Assets		25,130		22,891
	$	232,207	$	225,186
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt and bank lines of credit	$	1,426	$	5,029
Accounts payable		3,692		6,211
Other current liabilities		17,139		15,127
		22,257		26,367
Long-Term Liabilities:
Long-term debt		43,991		44,200
Bank lines of credit		14,244		13,863
Advances for construction		7,999		7,482
		66,234		65,545
Deferred Credits:
Contributions in aid of construction		61,073		53,619
Deferred income taxes		8,990		8,354
Other liabilities and deferred credits		15,986		16,346
Total Liabilities and Deferred Credits:		174,540		170,231
Stockholders’ Equity:
Preferred stock		513		513
Common stock		93		92
Paid-in capital		38,398		37,663
Retained earnings		18,663		16,687
Total Stockholders’ Equity		57,667		54,955
	$	232,207	$	225,186

See accompanying notes to condensed consolidated financial statements.

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SOUTHWEST WATER COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six Months Ended
	June 30,
	2002			2001
	(in thousands)
Cash Flows From Operating Activities:
Net income	$	3,164		$	2,223
Adjustments to reconcile net income to net cash provided by (used in) operating activities		3,664			(645	)
Net cash provided by operating activities		6,828			1,578
Cash Flows From Investing Activities:
Additions to property, plant and equipment		(9,142	)		(8,539	)
Other investments, net		(835	)		—
Net cash used in investing activities		(9,977	)		(8,539	)
Cash Flows From Financing Activities:
Contributions in aid of construction and advances for construction		7,728			1,914
Net proceeds from dividends reinvestment plan, employee stock purchase plan and stock options plan		581			481
Repayment of long-term debt		(2,209	)		—
Net borrowing (repayment) on bank lines of credit		(1,748	)		4,913
Dividends paid		(1,043	)		(970	)
Repayments on advance contracts, net of additions		(151	)		(184	)
Net cash provided by financing activities		3,158			6,154
Net increase (decrease) in cash and cash equivalents		9			(807	)
Cash and cash equivalents at beginning of period		789			1,379
Cash and cash equivalents at end of period	$	798		$	572
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	2,544		$	1,690
Income taxes	$	288		$	40
Depreciation and amortization	$	3,563		$	2,981
Non-cash contributions in aid of construction	$	1,655		$	775

See accompanying notes to condensed consolidated financial statements.

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SOUTHWEST WATER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2002

(Unaudited)

1.    Southwest Water Company (Southwest Water, the Company, or “we”, “us” or “our”) was incorporated in California in 1954 and reincorporated in Delaware in 1988. Southwest Water is a publicly traded holding company. All of our business operations are conducted through our subsidiaries which provide a broad range of services including water production and distribution, wastewater collection and treatment, public works services and utility submetering. We serve more than 1.5 million people in 29 states nationwide. Our business is segmented into a Utility Group and a Services Group.

In our Utility Group, we own and operate rate-regulated public water and wastewater utilities. State regulatory agencies oversee the operations of our utilities and establish the rates that we can charge for our water delivery and wastewater services. Our Utility Group operations are performed by four subsidiaries: Suburban Water Systems (Suburban), New Mexico Utilities, Inc. (NMUI) and Hornsby Bend Utility Company (Hornsby), which are wholly owned, and Windermere Utility Company (Windermere), of which we own 80%.

Our Services Group consists of contract service businesses. Through our wholly owned subsidiary, ECO Resources, Inc. (ECO), we operate and manage water and wastewater treatment facilities owned by cities, public agencies, municipal utility districts and private entities. We also own a 90% interest in Operations Technologies, Inc. (OpTech), a provider of contract water, wastewater and public works services in the southeastern United States. Nationwide, we provide utility submetering and billing and collection services through our 85%-owned subsidiary, Master Tek International, Inc. (Master Tek). Our Service Group companies may be subject to regulatory oversight; however, the pricing of our services is not subject to regulation.

2.    Certain information and footnote disclosures normally included in our financial statements prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Our condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2001 (the 2001 Annual Report). We are not aware of any new accounting standards that would have a material adverse impact on our financial position, results of operations or cash flows.

The unaudited condensed consolidated financial statements reflect all adjustments which, in our opinion, are necessary to present fairly the financial position of Southwest Water as of June 30, 2002 and 2001, and our results of operations and cash flows for the periods ended June 30, 2002 and 2001. These adjustments are of a normal recurring nature. Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation.

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SOUTHWEST WATER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2002

(Unaudited)

3.    We record earnings per share (EPS) by computing “basic EPS” and “diluted EPS” in accordance with US GAAP. Basic EPS measures our performance over the reporting period by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS measures our performance over the reporting period after giving effect to all potentially dilutive common shares that would have been outstanding if the dilutive common shares had been issued. Stock options, convertible debentures and warrants give rise to potentially dilutive common shares. On September 25, 2001, our Board of Directors declared a five percent stock dividend, payable on October 22, 2001 to stockholders of record on October 1, 2001. All per share amounts and numbers of shares outstanding reflect this dividend.

4.    As discussed in our 2001 Annual Report, Suburban’s water supply has been affected by the presence of certain groundwater contaminants, consisting of chemicals disposed of by various industrial companies. The contamination necessitated the shut-down of a number of Suburban’s wells, and Suburban has had to purchase water at a cost substantially higher than the cost of water pumped from Suburban’s own wells. At the end of the first quarter of 2002, a settlement was reached among some of the alleged polluters and a number of water companies, including Suburban. As part of the settlement, in the second quarter of 2002, Suburban accrued income of approximately $1,616,000, primarily representing reimbursement of certain water and energy costs incurred in prior years. Beginning in 2002, Suburban has and will continue to receive payments from this settlement for the incremental cost of acquiring water rather than pumping from Suburban’s shut down wells. Suburban will bill and collect this reimbursement each month and the amounts will be recorded as offsets against water costs included in direct operating expenses. In addition, the settlement provides Suburban with capital contributions to construct additional interconnections with other water purveyors. Finally, funds from the settlement will be used to develop long-term solutions which will potentially enable Suburban to use its own less costly groundwater supplies at some future date.

5.    During the first six months of 2002, we recorded approximately $830,000 of marketing and new business development expenses incurred primarily in the second quarter associated with the potential design-build-finance-operate concept for a reverse osmosis water treatment plant in California, expenses related to a potential major new contract in Florida, and expenses related to a possible acquisition. Although we continue to pursue these opportunities and believe they may ultimately be completed, some notable uncertainties arose during the second quarter as to the successful negotiation of these developmental efforts.

6.    As discussed in the 2001 Annual Report, Southwest Water terminated a non-contributory defined benefit plan (the Pension Plan) as of December 30, 1999. In January 2002, the net assets of the Pension Plan were distributed to plan participants as outlined by the Employee Retirement Income Security Act (ERISA) and its related regulations. Following distribution of approximately $14,400,000 to satisfy the pension benefit obligation and settlement of expenses paid by the Pension Plan in accordance with ERISA and its related regulations, the Pension Plan had excess assets of approximately $1,200,000. Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, we recognized a pre-tax termination gain of approximately $980,000 in the first quarter of 2002.

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SOUTHWEST WATER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2002

(Unaudited)

7.    Under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, goodwill incurred after June 30, 2001 is no longer subject to amortization over its estimated useful life. Instead, goodwill is reviewed for impairment on an annual basis (or more frequently if circumstances indicate a possible impairment) by means of a fair-value-based test.

The following table provides information about prior goodwill amortization and its impact on basic and diluted EPS.

	For the Six Months Ended June 30,
	2002		2001		2000
Reported net income (thousands)	$	3,164	$	2,224	$	1,933
Add back: Prior goodwill amortization(1)		—		66		35
Adjusted net income	$	3,164	$	2,158	$	1,898
Basic earnings per share:
Reported EPS	$	0.34	$	0.25	$	0.23
Add back: Prior goodwill amortization(1)		—		—		—
Adjusted EPS	$	0.34	$	0.25	$	0.23
Diluted earnings per share:
Reported EPS	$	0.32	$	0.23	$	0.22
Add back: Prior goodwill amortization(1)		—		—		—
Adjusted EPS	$	0.32	$	0.23	$	0.22

(1) Net of income taxes.

8.    Effective January 2002, we were subject to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets be tested for recoverability when events or changes in circumstances indicate carrying amounts may not be recoverable. SFAS No. 144 further clarifies the methods of accounting for assets that are disposed of. We regularly review assets for impairment. The implementation of SFAS No. 144 did not have any effect on our results of operations or financial condition. SFAS No. 144 does not apply to goodwill impairment which is accounted for under SFAS No. 142, as described in Note 7.

9.    From April 3, 2000 through March 31, 2002, we owned 80% of Master Tek. Under the terms of our purchase agreement, the minority owner of Master Tek may require us to purchase his minority interest in increments not to exceed $1,000,000 per year over four years. In April 2002 we paid $1,000,000 to the minority owner for an additional 5% interest in Master Tek in accordance with the purchase agreement, and we may be required to purchase the remaining minority interest over the next three years.

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SOUTHWEST WATER COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2002

(Unaudited)

10.    We have two reportable segments as defined under the requirements of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. We have not changed the basis of segmentation nor the basis of measurement of segment profit or loss from the information reported in our 2001 Annual Report.

The following table sets forth the disclosures about Southwest Water’s reportable segments as required by SFAS No. 131.

	Services Group		Utility Group		Total Segment Information		Other			Consolidated
	(in thousands)
Six Months Ended June 30, 2002
Revenues from external customers	$	36,366	$	24,548	$	60,914	$	—		$	60,914
Segment operating profit		1,007		6,517		7,524		(3,229	)		4,295
As of June 30, 2002
Segment assets		43,061		184,768		227,829		4,378			232,207
Six Months Ended June 30, 2001
Revenues from external customers	$	29,207	$	21,846	$	51,053	$	—		$	51,053
Segment operating profit		868		6,039		6,907		(2,089	)		4,818
As of June 30, 2001
Segment assets		35,159		170,298		205,457		2,595			208,052

Item 2:     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our liquidity, capital resources and cash flows are influenced primarily by capital expenditures at our utility group for the addition, replacement and renovation of water and wastewater utility facilities. Our capital resources are used for debt service and are also influenced by investments in new business opportunities, including the acquisition of companies, funding of projects and acquisition of contracts. As discussed in Note 4, during the second quarter of 2002, Suburban accrued income of approximately $1,616,000 for water-quality- related expenses incurred in prior years.

Under the terms of our purchase agreement for Master Tek, the minority owner of Master Tek has the option to require us to purchase his minority interest in increments not to exceed $1,000,000 per year over four years. The minority owner exercised this option to sell us 5% of Master Tek stock for which we paid $1,000,000 in April 2002. Under the terms of the OpTech purchase agreement, we have the right to acquire the remaining 10% of OpTech after a period of five years based on a formula relating to the profitability of OpTech. After two years, the minority shareholder of OpTech has the option to sell the remaining 10% of OpTech to us using the same formula which has a minimum threshold of $1,000,000.

As described in our 2001 Annual Report, ECO financed and built a reverse osmosis water treatment plant, which began operating in 2001. In connection with this project, at December 31, 2001, ECO had recorded a receivable in the amount of approximately $6,600,000 for the work done. Payment for the full amount was received in January 2002.

As of June 30, 2002, we had cash and cash-equivalent balances totaling $798,000 and aggregate lines of credit totaling $24,000,000 consisting of three separate unsecured lines of credit from three commercial

7

banks. Two of the lines of credit expire in July 2003. The remaining $4,000,000 line, with a balance of approximately $2,400,000 as of June 30, 2002, was renewed in April 2002 and now expires in April 2004. As of June 30, 2002, we had $14,244,000 outstanding on these lines of credit. During the first six months of 2002, our outstanding line of credit borrowing decreased by $1,748,000. We paid down our lines of credit primarily with the cash received as payment for the reverse osmosis plant, and from payment received for Suburban’s water-quality-related reimbursement. We also paid in full our NMUI Series A First Mortgage Bonds in the amount of $2,000,000, and we purchased certain utility property.

We expect to maintain our lines of credit in the normal course of business. Each of the line of credit agreements contains certain financial covenants. As of June 30, 2002, we were in compliance with all applicable covenants of each of the line of credit agreements.

In addition to our lines of credit, we have excess borrowing capacity under our First Mortgage Bond Indentures of approximately $59,500,000 as of June 30, 2002. However, the additional borrowing available under our current commercial lines of credit is limited by financial covenants that restrict additional borrowing at June 30, 2002 to an amount no greater than the remaining unused credit line amount. Additional borrowing outside our lines of credit requires bank approval.

On July 20, 2001, Southwest Water issued $20,000,000 of 6.85% fixed rate convertible subordinate debentures due July 1, 2021, and received net proceeds of approximately $18,890,000 from the sale after underwriting discounts, commissions and remaining expenses of the offering. The net proceeds from the sale of these debentures were used to reduce borrowings on our revolving bank lines of credit.

The debentures are convertible into shares of our common stock at a conversion price of $17.007 per share. The debentures are convertible at any time prior to maturity unless previously redeemed. We may redeem the debentures in whole or in part at any time, at redemption prices from 105% at July 1, 2003 and declining 1% annually to par (100% of face value) after June 30, 2008. The issuance costs of the convertible subordinate debentures in the amount of approximately $1,110,000 are being amortized over 20 years. We are subject to certain financial covenants under the terms of the indenture agreement for the convertible subordinate debentures. As of June 30, 2002, we were in compliance with all applicable restrictions.

As part of the water utility industry, our Utility Group’s financial structure follows three industry practices. First, we maintain a capital structure of approximately 50% debt and 50% equity. Most state utility commissions prefer this debt to equity ratio which is an integral part of developing the authorized rates of return and customer billing amounts. Second, we pay cash dividends to our stockholders. Third, our utilities receive utility plant (assets) from developers. These assets are treated as contributions in aid of construction (CIAC) from developers and are recorded on our balance sheet as deferred credits.

During the first six months of 2002, our additions to property, plant and equipment were $10,797,000, representing an increase of $1,483,000 from 2001. Additions to property, plant and equipment were primarily utility plant for our utility group, including new well and transmission lines at NMUI and the construction of a lift station and force main, and an elevated storage tank at Windermere. In addition, ECO completed expansion of an office building in Austin, Texas. Developers made CIAC, Living Unit Equivalent (LUE) fees and advances totaling $9,383,000 during the first six months of 2002, of which $7,728,000 was received in cash and $1,655,000 was received as non-cash contributions of property. Company-financed capital additions were $1,414,000, funded primarily by cash flow from operations. We estimate that our total capital additions in 2002 will be approximately $14,000,000, primarily for utility plant, and that our cash flows from operations, borrowings on our lines of credit and CIAC will fund these additions.

8

We anticipate that our available line of credit borrowing capacity and cash flows generated from operations will be sufficient to fund our activities during the next 12 months. If we were unable to renew our existing lines of credit, our capital spending or acquisitions would be reduced or delayed until new financing arrangements were secured. Such financing arrangements could include seeking debt or equity financing through a private placement or a public offering. Similarly, if additional cash were needed to fund an acquisition, financing arrangements could include long-term borrowing or equity financing.

Critical Accounting Policies

We consider certain accounting policies critical in preparing our consolidated financial statements. Certain of these policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of certain contingent assets and liabilities at the date of the consolidated financial statements, as well as amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Our 2001 Annual Report includes detailed descriptions of both our critical and significant accounting policies. The critical estimates and judgments made by management which influence the financial statements include the following:

Our California utility, Suburban, has recorded a balancing account in the amount of approximately $2,300,000, representing certain uncontrollable costs incurred by Suburban over the past few years. Historically, the CPUC allowed such balancing accounts to be recorded in the income statements of water utilities, with a corresponding liability or asset on the balance sheet. However, on December 1, 2001, the CPUC issued a resolution that changed its long-standing policies and procedures with respect to balancing accounts, effectively eliminating such accounts for future periods. We believe that Suburban will be able to recover the $2,300,000 recorded in its balancing account through the rate case filed with the CPUC in April 2002. However, there can be no assurance that the CPUC will allow recovery of all or some of this balance. We have not recorded any allowance against the $2,300,000 asset on Suburban’s balance sheet.

We periodically evaluate the collectibility of our customer accounts receivable, and provide an allowance for uncollectible accounts based upon an estimate by management of the amount of accounts receivable that might not be collectible. This estimate is predicated upon a number of factors, including historical account receivable write-off experience, a review of customer accounts with past due uncollected balances, probable costs of collection and the general credit worthiness of our customers. During the second quarter of 2002, we recorded a $200,000 increase in our allowance for uncollectible accounts relating to Master Tek accounts receivable. We believe that our allowance for doubtful accounts is adequate as of June 30, 2002.

We have approximately $2,000,000 of inventories included in other current assets as of June 30, 2001. Our inventories consist primarily of transmitters and related parts used by Master Tek in its construction activities, as well as materials and supplies used in our water supply and wastewater activities. We believe that there is no significant amount of obsolete inventory as of June 30, 2002.

During the first six months of 2002, we recorded approximately $830,000 of marketing and new business development expenses incurred primarily in the second quarter. These expenses related to a potential design-build-finance-operate concept for a reverse osmosis plant in California, to a potential major new contract in Florida, and to a possible acquisition. While we continue to pursue these opportunities, and remain hopeful as to their ultimate outcome, some notable uncertainties arose during the second quarter as to the successful conclusion of these developmental efforts.

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Regulatory Affairs

The California Public Utilities Commission (CPUC) regulates the rates of Suburban. The New Mexico Public Regulation Commission (NMPRC) and the Texas Natural Resources Conservation Commission (TNRCC) regulate the rates and operations of NMUI and Windermere and Hornsby, respectively. The rates allowed are intended to provide the utilities an opportunity to recover costs and earn a reasonable return on common equity.

Under current CPUC practices, customer water rates may be increased through general rate increases or by offsets for certain expense increases. Typically, general rate increases are for three years and include step increases in the second and third years. General rate increases require formal proceedings with the CPUC in which overall rate structure, expenses and rate base are examined by CPUC staff. Public hearings are also held. General rate proceedings require approximately 12 months from the time an application is filed to the CPUC’s authorization of new rates. The step increases for the second and third years are intended to compensate for projected expense increases. Prior to their approval, step increases are subject to verification that earnings levels have not exceeded the rate of return authorized at the general rate proceeding. In recent years, Suburban succeeded in achieving efficiencies and cost savings that resulted in the deferral of rate requests. At the direction of the CPUC, Suburban filed a rate application on April 2, 2002. This application is expected to take approximately one year to process. Southwest Water and Suburban are unable to predict the outcome of this rate proceeding at this time.

Prior to December 1, 2001, the CPUC permitted Suburban (and other regulated utilities) to record the difference between actual and CPUC-adopted water production costs in balancing accounts in the income statement, with a corresponding adjustment on the balance sheet. The CPUC significantly changed this policy by eliminating the use of balancing accounts as of December 1, 2001. In place of the balancing account, Suburban will track the difference between actual and CPUC-adopted water production costs in current operations. Such costs will be accumulated in a memorandum account, and Suburban will attempt to recover these costs during its regularly scheduled general rate hearings. We believe that at the conclusion of the current general rate hearing Suburban will be able to recover approximately $2,300,000 that was in the balancing account as of June 30, 2002. However, we cannot assure you of such recovery. Suburban believes that the changed CPUC rules will likely result in greater fluctuations in earnings beginning in 2002.

Windermere filed for a general rate increase in June 2001, and new rates became effective in January 2002. NMUI and Hornsby are not currently seeking any rate increase; however, regulatory changes concerning water quality, future construction expenditures and increased operating expenses may result in periodic requests for rate increases.

Southwest Water closely monitors legislative, EPA, CPUC, NMPRC and TNRCC developments. The various water industry associations in which we actively participate also monitor these developments. We do not know the possible legislative, EPA, CPUC, NMPRC or TNRCC changes that will be enacted or the terms of such changes, if enacted. Therefore, we cannot predict the impact, if any, of future legislative changes, EPA, CPUC, NMPRC or TNRCC developments or changes on our financial position, results of operations or cash flows.

Our Services Group business pricing is not subject to regulation by any public regulatory commissions. Most contracts with municipal utility districts are short-term contracts and do not generally include inflation adjustments. Changes in prices are negotiated on a contract-by-contract basis. Our other operations and maintenance contracts are generally longer-term water and wastewater service contracts, primarily with cities, and may include inflation adjustments. Most contracts with management companies and owners of apartment or condominium communities are short-term contracts and do not generally include inflation adjustments. Changes in prices are negotiated on a contract-by-contract basis.

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Weather and Seasonality Considerations

Our regulated water utility operations are seasonal. Therefore, the results of operations for one quarter do not indicate results to be expected in another quarter. Rainfall and weather conditions affect our Utility Group operations, with significant water consumption occurring during the third quarter of each year when weather tends to be hot and dry. Drought conditions may result in lower revenue due to consumer conservation efforts and a shortage of water. Drought conditions may also result in increased water costs to us and adversely affect our profitability. Conversely, unusually wet conditions may result in decreased customer demand, lower revenues and lower profit in our utility operations.

Our Services Group operations can also be seasonal in nature. For example, heavy rainfall limits our ability to perform certain billable work such as pipeline maintenance, manhole rehabilitation and other outdoor services. Severe weather conditions can result in additional labor and material costs to us that may not necessarily be recoverable from the various cities that have operations and maintenance contracts with us.

Environmental Affairs

Operations of Suburban, NMUI and Windermere and Hornsby fall under the regulatory jurisdiction of the CPUC, the NMPRC and the TNRCC, respectively. Our utility group operations are also subject to water and wastewater pollution standards and water and wastewater quality regulations of the EPA and various state health regulatory agencies. Both the EPA and state health regulatory agencies require periodic testing and sampling of water. Costs associated with the testing of water supplies have increased and are expected to increase further as the regulatory agencies adopt additional monitoring requirements. In November 2001, the EPA announced a decision to lower the arsenic standard in drinking water from 50 parts per billion to 10 parts per billion. Although our utilities meet the current 50 parts per billion standard, NMUI does not meet the newly adopted arsenic standard. Under current rules, the new standard must be completely met by 2006. We believe the City of Albuquerque has initiated legal actions that challenge the new standard. However, we cannot project the outcome of such legal challenge. NMUI anticipates that significant capital expenditures will be required in order to comply with the new standard. We believe that future incremental costs of complying with government regulations, including any capital expenditures, will be recoverable through increased rates and contract operations revenues. However, we cannot assure you that recovery of such costs will be allowed. To date, we have not experienced any material adverse effects upon our financial position, results of operations or cash flows resulting from compliance with government regulations.

As contract operators, ECO and OpTech do not own any of the water sources or utility facilities that they operate for their clients. Although not the owners, ECO and OpTech are responsible for operating these water and wastewater facilities in compliance with all federal, state and local health and safety standards and regulations.

Master Tek is a utility submetering, billing and collection services company and does not own or operate any water production or treatment facilities, or wastewater treatment facilities.

Results of Operations

Three Months Ended June 30, 2002, Compared to the Three Months Ended June 30, 2001

Diluted EPS was $0.19 for the quarter ended June 30, 2002, compared to diluted EPS of $0.18 in 2001 (after adjustment for a 5% stock dividend on October 1, 2001), an increase of 6%. The $0.19 in 2002 includes a pre-tax gain of approximately $1,616,000 that Suburban accrued for the reimbursement of certain water-quality-related expenses incurred by Suburban in prior years as discussed in Note 4. In addition, the $0.19 reflects approximately $830,000 (pre-tax) of marketing and new business development

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expenses associated with the potential design-build-finance-operate concept for a reverse osmosis water treatment plant in California, expenses related to a potential major new contract in Florida, and expenses related to a possible acquisition, as described in Note 5.

Operating revenues

Operating revenues for the second quarter of 2002 increased $4,908,000, or 18%, compared to 2001. Services Group revenues increased $3,808,000, or 25%, due primarily to the acquisition of OpTech in August 2001. The increased revenues were reduced in part by a 42% decrease in Master Tek revenues as a result of a large construction project during the prior year and a general decline in the multi-family home construction industry overall. Utility Group revenues increased $1,100,000, or 9%, as a result of increased water usage at Suburban because of hot, dry weather in the second quarter, and the effect of a rate increase at Windermere.

Operating income

Operating income for the second quarter of 2002 decreased $793,000, or 27%, compared to 2001 and, as a percentage of operating revenues, was 7% in 2002 and 11% in 2001. Services Group operating income increased $341,000, partially due to the acquisition of OpTech in August of 2001. In addition, ECO incurred fewer marketing and information technology charges in 2002 when compared to the same period in 2001. Operating income of the Utility Group increased $55,000, primarily as a result of a rate increase at Windermere, which was partially offset by the effect of higher water-volume-related charges for the period since Suburban was not able to use a balancing account.

Parent company expenses for the second quarter increased $1,189,000. As described in Note 5, this includes approximately $830,000 of marketing and new business development expenses associated with the potential design-build-finance-operate concept for a reverse osmosis water treatment plant in California, expenses related to a potential major new contract in Florida, and expenses related to a possible acquisition. In addition, parent company expenses also increased by approximately $350,000, due primarily to benefit-related expenses and public company costs.

Direct operating expenses

During the three months ended June 30, 2002, direct operating expenses increased $3,965,000, or 19%, compared to 2001. As a percentage of operating revenues, these expenses were 76% in 2002 and 75% in 2001. Services Group direct operating expenses increased $2,938,000, due primarily to the acquisition of OpTech in August 2001. Utility Group direct operating expenses increased $1,027,000, primarily as a result of water-volume-related expenses at Suburban in connection with the increased demand for water.

Selling, general and administrative expenses

Selling, general and administrative expenses in the second quarter of 2002 increased by $1,736,000, or 42%, compared to 2001. General and administrative expenses of our Services Group increased $524,000, due primarily to the acquisition of OpTech in August 2001. In addition, we recorded a $200,000 increase in our allowance for doubtful accounts for Master Tek. General and administrative expenses of the Utility Group increased $23,000. General and administrative expenses of the parent company increased $1,189,000, as discussed above.

Recovery of Water Related Costs

As discussed in Note 4, during the second quarter of 2002, Suburban accrued income for a reimbursement of approximately $1,616,000 for water-quality-related expenses incurred in prior years.

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Beginning in 2002, Suburban has and will continue to receive payments during the next few years as reimbursement for the higher incremental cost of purchased water and these reimbursements will be recorded as offsets against water costs included in direct operating expenses.

Interest and other

Total interest expense increased $268,000 during the quarter ended June 30, 2002, compared to 2001. The increase reflects interest expense on our 20-year convertible subordinate debentures that were issued in July 2001. Our debentures were sold through a retail distribution network and we believe they are widely held. This increase was offset by decreases in the interest expense on our lines of credit because we paid down a portion of our line of credit borrowing with the proceeds from the debentures. Our interest expense on the lines of credit also decreased due to generally lower interest rates in the first quarter of 2002 compared to 2001. The reduction in capitalized interest during the second quarter of 2002 compared to the same period in the prior year was due primarily to a reduction in utility projects that were completed in late 2001.

The major components of interest expense for the three months ended June 30, 2002 and 2001 are as follows:

	2002			2001
Interest expense—convertible subordinate debentures	$	339		$	—
Interest expense—bank lines of credit		159			415
Interest expense—mortgage bonds		526			596
Interest expense—other		115			26
Total interest expense before capitalized interest		1,139			1,037
Capitalized interest		(76	)		(242	)
Total interest expense	$	1,063		$	795

Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001

Diluted EPS was $0.32 for the first six months of 2002, compared to diluted EPS of $0.23 in 2001 (after adjustment for a 5% stock dividend on October 1, 2001). The $0.32 in 2002 includes a one-time pre-tax gain of $980,000 (or $0.06 per diluted EPS) on the termination and settlement of our pension plan obligation (pension termination), which was recorded in March 2002. In addition, the $0.32 in 2002 includes a one-time pre-tax gain of approximately $1,616,000 recorded by Suburban for the reimbursement of certain water-quality-related expenses incurred by Suburban in prior years. Operating income was reduced by approximately $830,000 in marketing and new business development expenses associated with the potential design-build-finance-operate concept for a reverse osmosis water treatment plant in California, expenses related to a potential major new contract in Florida, and expenses related to a possible acquisition, as described in Note 5. Total diluted EPS, excluding the gain from the pension termination, was $0.26, an increase of 13% when compared to the same period in 2001.

Operating revenues

Operating revenues for the first six months of 2002 increased $9,861,000, or 19%, compared to 2001. Services Group revenues increased $7,159,000, or 25%, due primarily to the acquisition of OpTech in August 2001. The increased revenues were reduced in part by a 35% decrease in Master Tek revenues as a result of a large construction project during the prior year and a general decline in the multi-family home construction industry. Utility Group revenues increased $2,702,000, or 12%, as a result of increased water usage at Suburban because of hot, dry weather in the second quarter, and the effect of a rate increase at Windermere.

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Operating income

Operating income for the first six months of 2002 decreased $523,000, or 11%, compared to 2001 and, as a percentage of operating revenues, was 7% in 2002 and 9% 2001. Services Group operating income increased $139,000, due primarily to the acquisition of OpTech in August 2001. Operating income of the Utility Group increased $478,000, due primarily to increased water consumption at Suburban because of, hot, dry weather in the second quarter and the effect of a rate increase at Windermere. Parent company expenses increased $1,140,000. As described in Note 5, this includes approximately $830,000 of marketing and new business development expenses associated with the potential design-build-finance-operate concept for a reverse osmosis water treatment plant in California, expenses related to a potential major new contract in Florida and expenses related to a possible acquisition. In addition, parent company expenses also increased by approximately $310,000 due primarily to benefit-related expenses and public company costs.

Direct operating expenses

During the six months ended June 30, 2002, direct operating expenses increased $7,823,000, or 20%, compared to 2001. As a percentage of operating revenues, these expenses were 76% in 2002 and 2001. Services Group direct operating expenses increased $5,766,000, due primarily to the acquisition of OpTech in August 2001. Utility Group direct operating expenses increased $2,057,000, primarily as a result of water-volume-related expenses at Suburban in connection with the increased demand for water in the first six months of 2002.

Selling, general and administrative expenses

Selling, general and administrative expenses in the first six months of 2002 increased by $2,561,000, or 33%, compared to 2001. General and administrative expenses of our Services Group increased $1,254,000 due primarily to the acquisition of OpTech in August 2001, and to a $200,000 increase in our allowance for doubtful accounts at Master Tek. General and administrative expenses of the Utility Group increased $167,000, primarily as a result of depreciation, insurance and payroll expenses. General and administrative expenses of the parent company increased $1,140,000 as described above.

Recovery of Water Related Costs

As discussed in Note 4, during the second quarter of 2002, Suburban accrued income for a reimbursement of approximately $1,616,000 for water-quality-related expenses incurred in prior years. Beginning in 2002, Suburban has and will continue to receive payments during the next few years as reimbursement for the higher incremental cost of purchased water and these reimbursements will be recorded as offsets against water costs included in direct operating expenses.

Interest and other

Total interest expense increased $432,000 during the six months ended June 30, 2002. The increase primarily reflects interest expense on our 20-year convertible subordinate debentures that were issued in July 2001. Our debentures were sold through a retail distribution network and we believe that they are widely held. This increase was partially offset by decreases in the interest expense on our lines of credit because we paid down a portion of our line of credit borrowing with the proceeds from the debentures. Our interest expense on the lines of credit also decreased due to generally lower interest rates in the first quarter of 2002, compared to 2001. The reduction in capitalized interest during the second quarter of 2002 was due primarily to the completion of several utility projects in 2001.

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The major components of interest expense for the six months ended June 30, 2002 and 2001 are as follows:

	2002			2001
Interest expense—convertible subordinate debentures	$	681		$	—
Interest expense—bank lines of credit		310			857
Interest expense—mortgage bonds		1,090			1,192
Interest expense—other		243			71
Total interest expense before capitalized interest		2,324			2,120
Capitalized interest		(105	)		(333	)
Total interest expense	$	2,219		$	1,787

Other income increased $621,000. As described in Note 6, in the first quarter of 2002, the parent company recorded a one-time pre-tax gain on pension termination of $980,000. The increase in other income was partially offset by interest income recorded in 2001 by ECO, related to a construction project that was completed in 2001.

Item 3:     Quantitative and Qualitative Disclosures About Market Risk

We have certain indebtedness that is subject to variable interest rates. As a result, Southwest Water’s interest expense is affected by changes in the general level of interest rates. Changes in interest rates affect the interest expense paid on the line of credit borrowings, which is determined based upon an agreed rate with the banks. Contractually, the highest interest rates charged on the lines of credit cannot exceed the banks’ prime rate minus one-quarter percent.

Southwest Water is using the favorable low interest rates in the current market. In part to mitigate future market interest rate risk, we completed a $20,000,000, 20-year convertible subordinate debenture offering in July 2001, which bears a fixed interest rate of 6.85% per annum. The proceeds were used to pay down our variable rate indebtedness. Our long-term debentures were sold with a fixed interest rate, and are not subject to market fluctuation of interest rates. Our debentures are convertible into common stock of Southwest Water and, at a certain EPS level, our debentures will become dilutive in computing our earnings per share. Our debentures were sold through a retail distribution network, and we believe they are widely held.

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PART II—OTHER INFORMATION

Item 1.     Legal Proceedings

ECO was named as a defendant in four lawsuits alleging injury and damages as the result of a sewage spill which occurred at an Austin, Texas, sewage pumping station operated by ECO. In 2001, a settlement was reached with three of the plaintiffs. ECO has been defended and indemnified by its insurance carrier and was required to pay a $10,000 deductible on settlement of the claims. The remaining lawsuit is pending at this date. Southwest Water and ECO continue to vigorously defend against this claim. At this time, we do not believe these actions will have a material adverse effect on our financial position, results of operations or cash flows.

Southwest Water and Suburban have been named as defendants in several lawsuits alleging water contamination in the San Gabriel Valley Main Basin. Defendants include Southwest Water, Suburban and others. The California Supreme Court (the Court) ruled in February 2002 that the plaintiffs cannot challenge the adequacy of the water quality standards established by the CPUC. The plaintiffs may sue and collect damages from Suburban and other regulated water companies only if they prove that water delivered did not meet CPUC water quality standards. Suburban believes that it has complied with CPUC water quality standards. The Court directed that the cases be sent to the trial court for further proceedings. We now have eleven pending cases. All cases have been consolidated before a single judge. The parties are now engaged in initial pleadings and motions to determine whether, in light of the ruling by the Court, the plaintiffs can plead and prove alleged water contamination. Southwest Water and Suburban have requested defense and indemnification from our liability insurance carriers for these lawsuits. Several of the liability insurance carriers are currently absorbing the costs of defense of the lawsuits. The Company cannot predict the outcome of these lawsuits. Based upon information available at this time, we do not expect that these actions will have a material adverse effect on our financial position, results of operations or cash flows.

In 1998, the city of Albuquerque (Albuquerque) initiated an action in eminent domain to acquire the operations of NMUI. In September 2000, the Albuquerque City Council voted to withdraw the condemnation proceeding. In September 2001, we received a formal withdrawal of the lawsuit and Albuquerque has paid us approximately $115,000 to cover the majority of the costs incurred as a result of the condemnation proceedings. NMUI will attempt to recover the balance of these costs of approximately $94,000 however; we cannot assure you that NMUI will be successful in recovering such costs.

Southwest Water and its subsidiaries are the subjects of certain litigation arising from the ordinary course of operations. We believe the ultimate resolution of such matters will not materially affect our financial position, results of operations or cash flow.

Item 4.     Submission of Matters to a Vote of Security Holders

At the Annual Meeting of Stockholders held on May 23, 2002, James C. Castle and Maureen Kindel, members of the Board of Directors were reelected by the following votes:

Mr. Castle votes for—7,657,362; and votes abstaining—120,356.

Ms. Kindel votes for—7,646,457; and votes abstaining—131,261.

No votes were cast against the election of either of these individuals. The terms of office of directors H. Frederick Christie, Anton C. Garnier, Linda Griego, Donovan D. Huennekens, Peter J. Moerbeek and Richard G. Newman continued subsequent to the meeting.

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Item 6.     Exhibits and Reports on Form 8-K

(a)  Exhibits furnished pursuant to Item 601 of Regulation S-K:

10.9B	Severance Compensation Agreement between Southwest Water Company and a certain executive officer approved by the Compensation Committee of the Board of Directors on August 31, 2001, filed herewith.
10.11E	Fifth Amendment to Credit Agreement, dated October 22, 2001 between Southwest Water Company and Bank of America, N.A., filed herewith.
10.11F	Sixth Amendment to Credit Agreement, dated November 9, 2001 between Southwest Water Company and Bank of America, N.A., filed herewith.
10.12D	Fourth Amendment to Credit Agreement, dated November 9, 2001 between Suburban Water Systems and Bank of America, N.A., filed herewith.
10.13G	Seventh Amendment to the Amended and Restated Credit Agreement, dated September 30, 2001 between Southwest Water Company and Mellon 1st Business Bank of California, filed herewith.
10.14F	Sixth Amendment to Credit Agreement, dated September 30, 2001 between Suburban Water Systems and Mellon 1st Business Bank of California, filed herewith.
10.15C	Business Loan Agreement between New Mexico Utilities, Inc. and Bank of the West, dated April 10, 2002, filed herewith.

(b)  Reports on Form 8-K:

None.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

SOUTHWEST WATER COMPANY

(Registrant)

/s/    PETER J. MOERBEEK      

Peter J. Moerbeek

Chief Financial Officer

(Principal Financial Officer)

Dated: July 30, 2002

/s/    THOMAS C. TEKULVE

Thomas C. Tekulve

Vice President Finance

(Principal Accounting Officer)

Dated: July 30, 2002

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EX-10.9B

Exhibit 10.9B

SEVERANCE COMPENSATION

AGREEMENT

THIS SEVERANCE COMPENSATION AGREEMENT (the “Agreement”) is made and entered into as of the 31st day of August, 2001 by and between SOUTHWEST WATER COMPANY, a Delaware corporation (the “Company”), and Robert W. Monette (“Executive”), with respect to the following:

RECITALS

A.  The Company, through its subsidiaries Suburban Water Systems (“Suburban”), ECO Resources, Inc. (“ECO”) and New Mexico Utilities, Inc. (“NMU”), Master Tek International, Inc. (“MTI”) and Operations Technologies, Inc. (“OPTECH”), is engaged in the business of producing and delivering water and providing water and wastewater services, and providing multi-family billing and sub-metering services. Executive is employed by Southwest Water Company as the President of OPTECH.

B.  The Company’s Board of Directors has determined that it is appropriate to reinforce and encourage the continued attention and dedication of members of the Company’s management, including Executive, to their assigned duties without distraction in potentially disturbing circumstances arising from the possibility of a change in control of the Company and/or the subsidiary of the Company which employs Executive.

C.  This Agreement sets forth the severance compensation which the Company agrees it will pay to Executive if Executive’s employment with the Company or, if applicable, the subsidiary which employs Executive, terminates under one of the circumstances described herein following a Change in Control, as defined herein, of the Company or the subsidiary of the Company which employs Executive.

AGREEMENT

IN CONSIDERATION OF the foregoing recitals and the mutual promises and covenants contained herein, the Company and Executive agree as follows:

1.  Term.    The term of this Agreement shall commence upon the last execution and delivery of this Agreement by the Company and shall continue until the first to occur of:

(a)  The second anniversary of any Change in Control, as defined in paragraph 2 below, of the Company or the subsidiary which employs Executive. For the purposes of this provision, the two year period provided for herein, whether commenced by a Change in Control of the Company or a change in control of a subsidiary, shall not be extended by a subsequent Change in Control of either the Company or, if applicable, the Subsidiary which employs Executive.

(b)  The Retirement, as defined in paragraph 2 below, of Executive.

(c)  The death of Executive.

(d)  Termination by the Company (or the subsidiary which employs Executive, if applicable) of Executive’s employment for Cause, as defined in paragraph 2 below.

(e)  Termination by Executive of Executive’s employment with Robert W. Monette, whether or not for Good Reason, as defined in paragraph 2 below.

Provided, however, that upon any termination by Executive for Good Reason, or any termination of Executive by the Company (or the subsidiary which employs Executive, if applicable) other than for Cause, the obligations of the Company pursuant to paragraph 4 below shall survive such termination. Provided further, that the rights of Executive pursuant to paragraph 7 below shall survive any termination of this Agreement, including termination by Executive of Executive’s employment other than for Good Reason and a termination by the Company (or the subsidiary which employs Executive, if applicable) of Executive’s employment for Cause.

2.  Definitions.    As used in this Agreement, the following terms shall have the meanings given to them in this paragraph 2:

(a)  Cause.    The term “Cause” shall mean, and the Company (or the subsidiary which employs Executive, if applicable) shall be entitled to terminate the employment of Executive for (i) fraud, misappropriation or embezzlement of money or property by Executive, (ii) willful and continued failure of Executive to substantially perform Executive’s duties with the Company (or the subsidiary which employs Executive, if applicable) (other than any such failure resulting from incapacity of Executive due to physical or mental illness), after a demand for substantial performance is delivered to Executive by the Chief Executive Officer of the Company or the Compensation Committee of the Board, which demand specifically identifies the manner in which Executive has not substantially performed Executive’s duties and (iii) willful engagement by Executive in misconduct which is materially injurious to the Company (or the subsidiary which employs Executive, if applicable), monetarily or otherwise. For purposes of this subparagraph, no act, or failure to act, on Executive’s part shall be considered “willful” unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that Executive’s action or omission was in the best interest of the Company (or the subsidiary which employs Executive, if applicable). Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Company’s Board of Directors at a meeting of the Board called and held for the purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive’s counsel, to be heard before the Board), finding that in the good faith opinion of the Board Executive was guilty of conduct set forth in this subparagraph and specifying the particulars thereof in detail.

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(b)  Change in Control.    The term “Change in Control” shall mean, with respect to the Company or the subsidiary which employs Executive, as applicable, each of the following:

(i)  A change in control of the Company or the subsidiary which employs Executive, as applicable, of a nature that would be required to be reported in response to Item 6(e)of Schedule 14A, Regulation 240.14a-101, promulgated under the Securities Exchange Act of 1934, as amended, as in effect on the date of this Agreement, or, if Item 6(e) is no longer in effect, any regulation issued by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 which serves similar purposes (i.e., a change in the person or persons owning, directly or indirectly, sufficient voting stock to elect the Board of Directors or to take other significant shareholder actions for the Company or the subsidiary which employs Executive, as applicable). Provided that, without limitation, a Change of Control shall be deemed to have occurred if and when:

(A)  Any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) who is not at the date hereof a beneficial owner, directly or indirectly, of securities of the Company (or the subsidiary which employs Executive, if applicable) representing fifty percent (50%) or more of the combined voting power of the Company’s (or the subsidiary which employs Executive, if applicable) then outstanding securities becomes such a beneficial owner, or

(B)  During any period of two (2) consecutive years, individuals who were members of the Board of Directors of the Company at the beginning of such period cease for any reason (other than death or disability) to constitute at least a majority thereof unless the election, or the nomination for election by the Company’s stockholders, of each new director, was approved by vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period. The provisions of this clause (B) shall apply only at the Company level and not at the subsidiary level.

(ii)  Consummation of (A) any reorganization, consolidation or merger of the Company (or of the subsidiary which employs Executive, if applicable) in which the Company (or of the subsidiary which employs Executive, if applicable) is not the continuing or surviving corporation or pursuant to which shares of the Company’s (or of the subsidiary which employs Executive, if applicable) Common Stock would be converted into cash, securities or other property, other than a merger of the Company (or of the subsidiary which employs Executive, if applicable) in which the holders of the Company’s (or of the subsidiary which employs Executive, if applicable) common stock immediately prior to such transaction, immediately following such transaction, own more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company’s then outstanding, voting securities or (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company (or of the subsidiary which employs Executive, if applicable).

For the purpose of applying the foregoing definition, (x) if Executive is an employee of the Company, then the term Change in Control shall mean, as to Executive, only a change in control

3

of the Company and (y) if Executive is an employee of a subsidiary of the Company, then the term Change in Control shall mean, as to Executive, either a change in control of the Company or a change in control of the subsidiary which employs Executive.

(c)  Date of Termination.    The term “Date of Termination” shall mean:

i.  If this Agreement is terminated by the death of Executive, the date of death of Executive; or

ii.  If Executive’s employment is terminated by the Company (or the subsidiary which employs Executive, if applicable) for any reason, the date on which a Notice of Termination is given; provided that if within thirty (30) days after any Notice of Termination is given to Executive by the Company (or the subsidiary which employs Executive, if applicable) Executive notifies the Company (or the subsidiary which employs Executive, if applicable) that a dispute exists concerning the termination, the Date of Termination shall be the date the dispute is finally determined, whether by mutual agreement by the parties or upon final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected).

(d)  Good Reason.    The term “Good Reason” shall mean, with respect to any termination by Executive of Executive’s employment with the Company (or the subsidiary which employs Executive, if applicable), each of the following which occurs subsequent to a Change in Control without the express written consent of Executive:

(i)  The assignment to Executive by the Company (or the subsidiary which employs Executive, if applicable) of duties inconsistent with Executive’s position, duties, responsibilities and status with the Company (or the subsidiary which employs Executive, if applicable) immediately prior to a Change in Control of the Company (or the subsidiary which employs Executive, if applicable), or a change in Executive’s title or offices as in effect immediately prior to a Change in Control of the Company (or the subsidiary which employs Executive, if applicable), or any removal of Executive from or any failure to reelect Executive to any of such positions, except in connection with the termination of Executive’s employment for Retirement or Cause or as a result of Executive’s death or by Executive other than for Good Reason;

(ii)  A reduction by the Company (or the subsidiary which employs Executive, if applicable) in Executive’s base salary as in effect on the date hereof or as the same may be increased from time to time during the term of this Agreement or the Company’s (or the subsidiary which employs Executive, if applicable) failure to increase (within twelve (12) months after Executive’s last increase in base salary) Executive’s base salary after a Change in Control of the Company (or the subsidiary which employs Executive, if applicable) in an amount which at least equals, on a percentage basis, the average percentage increase in base salary for all officers of the Company (or the subsidiary which employs Executive, if applicable) effected in the preceding twelve (12) months;

(iii)  Any failure by the Company (or the subsidiary which employs Executive, if applicable) to continue in effect any benefit plan or arrangement in which

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Executive is participating at the time of a Change in Control of the Company (or the subsidiary which employs Executive, if applicable) (or any other plans providing Executive with substantially similar benefits) (hereinafter referred to as “Benefit Plans”), or the taking of any action by the Company (or the subsidiary which employs Executive, if applicable) which would adversely affect Executive’s participation in or reduce Executive’s benefits under any such Benefit Plan, expressed as a percentage of his base salary, by more than ten (10) percentage points in any fiscal year as compared to the prior fiscal year or deprive Executive of any material fringe benefit enjoyed by Executive at the time of a Change in Control of the Company (or the subsidiary which employs Executive, if applicable);

(iv)  Any failure by the Company (or the subsidiary which employs Executive, if applicable) to continue in effect any bonus or incentive plan or arrangement in which Executive is participating at the time of a Change in Control of the Company (or the subsidiary which employs Executive, if applicable) (or any other plans or arrangements providing him with substantially similar benefits) (hereinafter referred to as “Incentive Plans”) or the taking of any action by the Company (or the subsidiary which employs Executive, if applicable) which would adversely affect Executive’s participation in any such Incentive Plan or reduce Executive’s benefits under any such Incentive Plan, expressed as a percentage of his base salary, by more than ten (10) percentage points in any fiscal year as compared to the immediately preceding fiscal year;

(v)  Any failure by the Company (or the subsidiary which employs Executive, if applicable) to continue in effect any plan or arrangement to receive securities of the Company in which Executive is participating at the time of a Change in Control of the Company (or the subsidiary which employs Executive, if applicable) (or plans or arrangements providing him with substantially similar benefits) (hereinafter referred to as “Securities Plans”) or the taking of any action by the Company (or the subsidiary which employs Executive, if applicable) which would adversely affect Executive’s participation in or materially reduce Executive’s benefits under any such Securities Plan;

(vi)  Any requirement by the Company (or the subsidiary which employs Executive, if applicable) that Executive be based anywhere other than within fifty (50) miles of Executive’s office location as of the date of a Change in Control, except for required travel by Executive on the Company’s (or the subsidiary which employs Executive, if applicable) business to an extent substantially consistent with Executive’s business travel obligations at the time of a Change in Control of the Company (or the subsidiary which employs Executive, if applicable);

(vii)  Any failure by the Company (or the subsidiary which employs Executive, if applicable) to provide Executive with the number of paid vacation days to which Executive is entitled at the time of a Change in Control of the Company (or the subsidiary which employs Executive, if applicable);

(viii)  Any material breach by the Company of any provision of this Agreement;

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(ix)  Any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; or

(x)  Any purported termination by the Company (or the subsidiary which employs Executive, if applicable) of Executive’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements of subparagraph (e) below, and for purposes of this Agreement, no such purported termination shall be effective.

(e)  Notice of Termination.    Any termination of Executive’s employment by the Company (or the subsidiary which employs Executive, if applicable) for Retirement or Cause shall be communicated by a Notice of Termination. For purposes of this Agreement, a “Notice of Termination” shall mean a written notice which shall indicate the specific ground for such termination relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment. For purposes of this Agreement, no such purported termination by the Company (or the subsidiary which employs Executive, if applicable) shall be effective without such Notice of Termination.

(f)  Retirement.    The term “Retirement” as used in this Agreement shall mean termination by the Company (or the subsidiary which employs Executive, if applicable) or Executive of Executive’s employment based on Executive’s having reached age sixty-five (65) or such other age as shall have been fixed in any written agreement between Executive and Executive’s employer entity.

(g)  Termination of Employment.    The term “Termination of Employment” shall mean any termination of Executive’s employment with the Company (or the subsidiary which employs Executive, if applicable), however effected or caused.

(h)  Involuntary Termination of Employment.    The term “Involuntary Termination of Employment” shall mean (i) any termination by the Company (or the subsidiary which employs Executive, if applicable) of Executive’s employment with the Company (or the subsidiary which employs Executive, if applicable) effected after a Change in Control other than a termination for Retirement, death or Cause and (ii) any termination of Executive’s employment with the Company (or the subsidiary which employs Executive, if applicable) by Executive after a Change in Control for Good Reason.

3.  Services by Executive.    In consideration for the Company’s execution and delivery of this Agreement, Executive agrees that Executive will render services to the Company (or to any subsidiary thereof or successor thereto, as applicable) during the period of Executive’s employment to the best of Executive’s ability and in a prudent and businesslike manner and that Executive shall devote substantially the same time, efforts and dedication to Executive’s duties as heretofore devoted.

4.  Severance Obligations Upon any Involuntary Termination.    Upon any Involuntary Termination of Executive’s employment with the Company (or the subsidiary which employs Executive, if applicable) subsequent to a Change in Control and during the term of this

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Agreement, Executive shall be entitled to the benefits provided in this paragraph (subject to any applicable payroll taxes or other taxes required to be withheld and employee benefit premiums):

(a)  The Company shall pay (or shall cause the employer subsidiary to pay) to Executive Executive’s full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given plus credit for any vacation earned but not taken and the amount, if any, of any bonus for a past fiscal year which has been awarded to Executive but not yet paid to Executive pursuant to any bonus plan of the Company (or the subsidiary which employs Executive, if applicable). Such payment shall be made within five (5) days after the Date of Termination.

(b)  The Company shall pay (or shall cause the employer subsidiary to pay) to Executive, as severance pay, an amount equal to two and ninety-nine one hundredths (2.99) times Executive’s annual base compensation, as defined herein (the “Severance Payment”). As used herein, annual base compensation shall mean the average aggregate annual amount paid by the Company (or any subsidiary of or successor to the Company) to Executive for the five (5) full calendar years preceding the date of Change of Control for salaries, bonuses and automobile allowances (or the amount reported by Executive as taxable income for personal use of a car provided by the Company (or the subsidiary which employs Executive, if applicable) in lieu of an automobile allowance) together with the amounts, if any, of insurance premiums paid by the Company (or the subsidiary which employs Executive, if applicable) with respect to Executive and reported as taxable income by Executive and any other amounts paid or provided by the Company (or any successor to or subsidiary of the Company and reported as taxable income by Executive. If Executive has not been employed by the Company (or the subsidiary which employs Executive, if applicable) for five (5) full calendar years preceding the date of Change of Control, the Severance Payment shall be computed based on the average aggregate annual amount paid by the Company (or the subsidiary which employs Executive, if applicable) to Executive for the full term of Executive’s employment with the Company (or the subsidiary which employs Executive, if applicable). The Severance Payment shall be paid in cash in a single lump sum within five (5) days after the Date of Termination.

(c)  The Company shall cause Executive to continue to be covered, without any cost to Executive in excess of the cost borne by Executive prior to the Change of Control, under health, medical and dental benefits (“Benefits”) comparable to those in effect immediately prior to the Change of Control, including, but not limited to, medical, dental, life insurance, accidental death and dismemberment, and long term disability benefits. Such continuation shall (i) also apply to Executive’s dependents (including Executive’s spouse) who were covered under such Benefits immediately prior to the Change of Control and (ii) apply for twenty-four (24) months after the Date of Termination; provided, however, that such coverage shall terminate if and to the extent Executive becomes eligible for Benefits coverage from a subsequent employer; provided further, however, that if Executive (and/or Executive’s spouse) would have been entitled to retiree Benefits under the Company’s benefit plans (or those of the subsidiary which employs Executive, if applicable) had Executive voluntarily retired on the Date of Termination, then such coverage shall be continued as provided under such plans.

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(d)  Provide a full service outplacement service for Executive as selected by Executive for a period not exceeding three (3) months and at a cost not exceeding $15,000 in the aggregate.

Any payment due by the Company pursuant to this paragraph 4 which is not made as and when due shall bear interest from the date due until date of payment at the maximum rate which Executive may charge for the loan or forbearance of money under the then applicable usury law of the State of California.

5.  No Obligation to Mitigate Damages.    Executive shall not be required to mitigate damages or the amount of any payment provided for under paragraph 4 of this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer after the Date of Termination, or otherwise. Any indebtedness of Executive to the Company (or to any subsidiary of or successor to the Company) as of the Date of Termination may be offset against the Company’s payment obligations pursuant to paragraph 4 above.

6.  Parachute Payment Limitation.    Notwithstanding anything to the contrary in this Agreement, the payments and benefits otherwise provided in paragraphs 4(b), (c) and (d) of this Agreement shall be reduced if and to the extent that such payments and benefits, when added to any payments and benefits provided by the Company (and the subsidiary which employs Executive, if applicable) other than under this Agreement, would result in any such payments being nondeductible to the Company or would subject Employee to an excise tax pursuant to the golden parachute payment provisions of Section 280G or Section 4999 of the Internal Revenue Code of 1986, as amended. Any reduction of payments and benefits under this Agreement resulting from the foregoing limitations shall be applied to the payments and benefits due to be otherwise provided to Executive latest in time.

7.  Other Benefits.    The provisions of this Agreement, and any payment provided for in paragraph 4 hereof, shall not reduce any amounts otherwise payable, or in any way diminish Executive’s existing rights, or rights which would accrue solely as a result of the passage of time, under any Benefit Plan, Incentive Plan or Securities Plan, employment agreement or other contract, plan or arrangement. The provisions of this paragraph 7 shall apply to any Termination of Employment with the Company (or the subsidiary which employs Executive if applicable), whether or not such Termination of Employment results in payments due to Executive pursuant to paragraph 4 above.

8.  Not a Contract of Employment.    This Agreement shall not be deemed to constitute a contract of employment. Further, no portion of this Agreement shall affect (a) the right of the Company (or any subsidiary of or successor to the Company) to discharge Executive at will or (b) the terms and conditions of any other agreement between the Company (or the subsidiary which employs Executive, if applicable) and Executive, except as expressly provided herein.

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9.  Successors to the Company.

(a)  The Company shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance reasonably satisfactory to Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement and shall entitle Executive to terminate Executive’s employment for Good Reason. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this paragraph 9 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. If at any time during the term of this Agreement Executive is employed by any corporation a majority of the voting securities of which is then owned by the Company, “Company” as used herein shall include such employer. In such event, the Company agrees that it shall pay or shall cause such employer to pay any amounts owed to Executive pursuant to paragraph 4 hereof.

(b)  This Agreement shall inure to the benefit of and be enforceable by Executive’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amounts are still payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive’s devisee, legatee, or other designee or, if there be no such designee, to Executive’s estate.

10.  Notices.    All notices required or permitted hereunder shall be in writing and shall be personally delivered or sent by first class mail, registered or certified with return receipt requested to the parties at their respective addresses set forth after their signatures to this Agreement. Any notice which is personally served shall be effective upon delivery; any notice sent by first class mail, registered or certified, postage prepaid, return receipt requested and properly addressed shall be effective upon the date of delivery or refusal indicated on the return receipt. Either party may change his, her or its address for notices hereunder by written notice to the other given in the manner specified in this paragraph.

11.  General Provisions.

(a)  The Company’s obligation to pay (or to cause one of its subsidiaries to pay) Executive the amounts and to make the arrangements provided for in paragraph 4 hereof, shall be absolute and unconditional and, except as provided in paragraphs 5 and 6 hereof, shall not be affected by any circumstances, including without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company (or any subsidiary of or successor to the Company) may have against Executive. All amounts payable by the Company (or any subsidiary of or successor to the Company) shall be paid without notice or demand.

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(b)  No provisions of this Agreement may be modified, amended, waived or discharged unless such waiver, modification or discharge is agreed to in a writing signed by Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of any similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

(c)  This Agreement contains each and every agreement of every kind and nature whatsoever between the parties hereto concerning the subject matter hereof, and all preliminary negotiations and agreements of whatsoever kind with respect to the subject matter hereof are superseded and of no further force or effect. If Executive is entitled to and receives the benefits provided in paragraphs 4 and 7 hereof, performance of the obligations of the Company thereunder shall constitute full settlement of all claims which Executive might otherwise assert against the Company on account of termination of Executive’s employment.

(d)  This Agreement shall be governed by and construed in accordance with the laws of the State of California.

(e)  This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument

(f)  The invalidity or unenforceability of any provision of this Agreement as to any jurisdiction, fact or circumstance shall not affect the validity or enforceability of any other provision of this Agreement or of such provision as to any other jurisdiction, fact or circumstance, and each provision of this Agreement shall be enforced and complied with to the maximum extent possible.

(g)  Executive shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by last will and testament.

(h)  The obligation to pay amounts under this Agreement is an unfunded obligation of the Company, and no such obligation shall create a trust or be deemed to be secured by any pledge or encumbrance on any property of the Company (or any subsidiary of or successor to the Company).

(i)  In the event of any legal action between the Company and Executive to enforce the provisions of this Agreement, to prevent the breach or continued breach of this Agreement, to recover damages on account of the breach or alleged breach of this Agreement, to seek a judicial determination of the obligations and rights of the parties hereunder or in which this Agreement is asserted as a defense, the prevailing party shall be entitled to recover from the other party its attorneys’ fees incurred in such amount as the court shall determine to be reasonable, in addition to its costs and all other relief which the court determines such prevailing party is entitled to receive. For the purposes of this provision, the term “legal action” shall exclude an action by Executive as the result of any termination of Executive’s employment. Except as provided in the immediately preceding sentence, all legal expenses

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which are reasonable and necessary and which are associated with any such termination shall be paid by the Company.

(j)  In the event Executive is employed by a subsidiary of the Company rather than the Company itself, all references herein to the Company shall, as and when required by the context of this Agreement, be deemed to refer to such subsidiary employer. The provisions of this subparagraph shall not, however, be deemed or construed to relieve the Company of any of the Company’s obligations or to deprive the Company of any of its rights pursuant to this Agreement.

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IN WITNESS WHEREOF, Executive and the Company have executed and delivered this Severance Compensation Agreement as of the day and year first above written.

Robert W. Monette

“Executive”

Address for Notices:

Southwest Water Company

225 N. Barranca Avenue-Suite 200

West Covina, CA 91791-1605

SOUTHWEST WATER COMPANY,     a Delaware corporation
By:	/s/ ANTON C. GARNIER
	Anton C. Garnier
Title:	President
	President

Address for Notices:

Southwest Water Company

225 North Barranca Avenue, Suite 200

West Covina, California 91791-1605

Attn: Corporate Secretary

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EX-10.11E

Exhibit 10.11E

FIFTH AMENDMENT TO

CREDIT AGREEMENT

THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (the “Amendment”), dated as of October 22, 2001 is entered into between BANK OF AMERICA, N.A., a national association (“Bank”), and SOUTHWEST WATER COMPANY, a Delaware corporation (“Borrower”).

RECITALS

A.  Borrower and Bank have previously entered into that certain Credit Agreement dated as of July 30, 1999, as amended by that certain First Amendment to Credit Agreement dated as of June 30, 2000, that certain Second Amendment to Credit Agreement dated as of September 29, 2000, that certain Third Amendment to Credit Agreement dated as of March 9, 2001, and that certain Fourth Amendment to Credit Agreement dated as of July 13, 2001 (collectively, the “Credit Agreement”), pursuant to which Bank has made certain loans and financial accommodations available to Borrower. Terms used herein without definition shall have the meanings ascribed to them in the Credit Agreement.

B.  Bank and Borrower wish to amend the Credit Agreement under the terms and conditions set forth in this Amendment. Borrower is entering into this Amendment with the understanding and agreement that, except as specifically provided herein, none of Bank’s rights or remedies as set forth in the Credit Agreement is being waived or modified by the terms of this Amendment.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1.  Amendments to Credit Agreement

(a)  Section 1.01(a) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

“‘(a)  The Revolving Commitment:    The Bank agrees on the terms and conditions hereinafter set forth to make loans (‘Revolving Loans’) to the Borrower and to issue standby letters of credit for the Borrower’s account from time to time during the period from the date hereof to and including Maturity Date in an aggregate amount of loans and an undrawn and drawn but reimbursed amount of letters of credit not to exceed the Revolving Commitment, such as amount may be reduced pursuant to Section 2.01(c). Within the limits of the Revolving Commitment and prior

to the Maturity Date, the Borrower may borrow, repay, and reborrow subject to the terms of this Agreement.”

(b)  The following is added to the Credit Agreement as a new Section 2.01(e):

“(e)  Standby Letters of Credit.    The Revolving Commitment may be used for financing standby letters of credit with a maximum maturity of 365 days but not to extend more than 90 days beyond the Maturity Date. The standby letters of credit may include a provision providing that the maturity date will be automatically extended each year for an additional year unless the Bank gives written notice to the contrary. The amount of standby letters of credit outstanding at any one time (including amounts drawn on letters of credit and not yet reimbursed) may not exceed Five Hundred Thousand Dollars ($500,000). The Borrower agrees:

(i)  any sum drawn under a letter of credit may, ation of the Bank, be added to the principal amount outstanding under the Revolving Commitment. The amount will bear interest and be due as described elsewhere in this Agreement.

(ii)  if there is a default under this Agreement, to immediately prepay and make the Bank whole for any outstanding letters of credit.

(iii)  the issuance of any letter of credit and any amendment to a letter of credit is subject to the Bank’s written approval and must be in form and content satisfactory to the Bank and in favor of a beneficiary acceptable to the Bank.

(iv)  to sign the Bank’s form Application and Agreement for Standby Letter of Credit with respect to each letter of credit.

(v)  to pay any issuance and/or other fees that the Bank notifies the Borrower will be charged for issuing and processing letters of credit for the Borrower.

(vi)  to allow the Bank to automatically charge its checking account for applicable fees, discounts, and other charges.

(vii)  to pay the Bank a non-refundable fee equal to 2% per annum of the outstanding undrawn amount of each standby letter of credit, payable quarterly in advance, calculated on the basis of such amount in effect on the day the fee is calculated. If there is a default under this Agreement, at the Bank’s option, the amount of the fee shall be increased to 4% per annum, effective starting on the day the Bank provides notice of the increase to the Borrower.”

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2.  Effectiveness of this Amendment.    Bank must have received the following items, in form and content acceptable to Bank, before this Amendment is effective and before Bank is required to extend any credit to Borrower as provided for by this Amendment.

(a)  Amendment.    This Amendment fully executed in a sufficient number of counterparts for distribution to Bank and Borrower.

(b)  Authorizations.    Evidence that the execution, delivery and performance by Borrower and each guarantor or subordinating creditor of this Amendment and any instrument or agreement required under this Amendment have been duly authorized.

(c)  Representations and Warranties.    The representations and warranties set forth in the Credit Agreement must be true and correct.

(d)  Other Required Documentation.    All other documents and legal matters in connection with the transactions contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Bank.

3.  Representations and Warranties.    The Borrower represents and warrants as follows:

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(a)  Authority.    The Borrower has the requisite corporate power and authority to execute and deliver this Amendment and to perform its obligations hereunder and under the Loan Documents (as amended or modified hereby) to which it is a party. The execution, delivery and performance by the Borrower of this Amendment and the performance by Borrower of each Loan Document (as amended or modified hereby) to which it is a party have been duly approved by all necessary corporate action of Borrower and no other corporate proceedings on the part of Borrower are necessary to consummate such transactions.

(b)  Enforceability.    This Amendment has been duly executed and delivered by the Borrower. This Amendment and each Loan Document (as amended or modified hereby) is the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, and is in full force and effect.

(c)  Representations and Warranties.    The representations and warranties contained in each Loan Document (other than any such representations or warranties that, by their terms, are specifically made as of a date other than the date hereof) are correct on and as of the date hereof as though made on and as of the date hereof.

(d)  No Default.    No event has occurred and is continuing that constitutes an Event of Default.

4.  Choice of Law.    The validity of this Amendment, its construction, interpretation and enforcement, the rights of the parties hereunder, shall be determined under, governed by, and construed in accordance with the internal laws of the State of California governing contracts only to be performed in that State.

5.  Counterparts.    This Amendment may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by telefacsimile shall be effective as delivery of a manually executed counterpart of this Amendment.

6.  Due Execution.    The execution, delivery and performance of this Amendment are within the power of Borrower, have been duly authorized by all necessary corporate action, have received all necessary governmental approvals, if any, and do not contravene any law or any contractual restrictions binding on Borrower.

7.  Reference to and Effect on the Loan Documents.

(a)  Upon and after the effectiveness of this Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to “the Credit Agreement”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as modified and amended hereby.

(b)  Except as specifically amended above, the Credit Agreement and all other Loan Documents, are and shall continue to be in full force and effect and are hereby in all

4

respects ratified and confirmed and shall constitute the legal, valid, binding and enforceable obligations of Borrower .

to Bank.

(c)  The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Bank under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents.

(d)  To the extent that any terms and conditions in any of the Loan Documents shall contradict or be in conflict with any terms or conditions of the Credit Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed modified or amended accordingly to reflect the terms and conditions of the Credit Agreement as modified or amended hereby.

8.  Ratification.    Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Credit Agreement, as amended hereby, and the Loan Documents effective as of the date hereof.

9.  Estoppel.    To induce Bank to enter into this Amendment and to continue to make advances to Borrower under the Credit Agreement, Borrower hereby acknowledges and agrees that, after giving effect to this Amendment, as of the date hereof, there exists no Event of Default and no right of offset, defense, counterclaim or objection in favor of Borrower as against Bank with respect to the Obligations.

IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written.

“Bank”	“Borrower”
BANK OF AMERICA, N.A. a national association	SOUTHWEST WATER COMPANY, a Delaware corporation

By:	/s/    DEBORAH L. MILLER	By:	/s/    THOMAS C. TEKULVE
	Name:                                     Deborah L. Miller Title:                                   Senior Vice President		Name:                             Thomas C. Tekulve Title:                         Vice President—Finance

By:	/s/    PETER J. MOERBEEK
	Name:                         Peter J. Moerbeek Title:                     Chief Financial Officer

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EX-10.11F

Exhibit 10.11F

SIXTH AMENDMENT TO

CREDIT AGREEMENT

THIS SIXTH AMENDMENT TO CREDIT AGREEMENT (the “Amendment”), dated as of November 9, 2001 is entered into between BANK OF AMERICA, N.A., a national association (“Bank”), and SOUTHWEST WATER COMPANY, a Delaware corporation (“Borrower”). The terms of this Amendment shall be effective for all purposes retroactively to September 30, 2001.

RECITALS

A.  Borrower and Bank have previously entered into that certain Credit Agreement dated as of July 30, 1999, as amended by that certain First Amendment to Credit Agreement dated as of June 30, 2000, that certain Second Amendment to Credit Agreement dated as of September 29, 2000, that certain Third Amendment to Credit Agreement dated as of March 9, 2001, and that certain Fourth Amendment to Credit Agreement dated as of July 13, 2001, and that certain Fifth Amendment to Credit Agreement dated as of October 22, 2001, (collectively, the “Credit Agreement”), pursuant to which Bank has made certain loans and financial accommodations available to Borrower. Terms used herein without definition shall have the meanings ascribed to them in the Credit Agreement.

B.  Bank and Borrower wish to amend the Credit Agreement under the terms and conditions set forth in this Amendment. Borrower is entering into this Amendment with the understanding and agreement that, except as specifically provided herein, none of Bank’s rights or remedies as set forth in the Credit Agreement is being waived or modified by the terms of this Amendment.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1.  Amendments to Credit Agreement

(a)  The definition of “Maturity Date” set forth in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

“‘Maturity Date’:    September 30, 2003.”

(b)  The following is added to the Credit Agreement as a new Section 2.04:

“‘2.04 Unused commitment fee.    The Borrower agrees to pay a fee on any difference between the Revolving Commitment and the amount of credit it actually uses, determined by the weighted average credit outstanding during the specified period. The fee will be calculated at 0.25% per year. The calculation of credit outstanding shall include the Loans and the undrawn amount of outstanding letters of credit. This fee is due on December 31, 2001

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an on the last day of each following quarter until the Maturity Date.”

2.  Effectiveness of this Amendment.    Bank must have received the following items, in form and content acceptable to Bank, before this Amendment is effective and before Bank is required to extend any credit to Borrower as provided for by this Amendment.

(a)  Amendment.    This Amendment fully executed in a sufficient number of counterparts for distribution to Bank and Borrower.

(b)  Authorizations.    Evidence that the execution, delivery and performance by Borrower and each guarantor or subordinating creditor of this Amendment and any instrument or agreement required under this Amendment have been duly authorized.

(c)  Representations and Warranties.    The representations and warranties set forth in the Credit Agreement must be true and correct.

3.  Representations and Warranties.    The Borrower represents and warrants as follows:

(a)  Authority.    The Borrower has the requisite corporate power and authority to execute and deliver this Amendment and to perform its obligations hereunder and under the Loan Documents (as amended or modified hereby) to which it is a party. The execution, delivery and performance by the Borrower of this Amendment and the performance by Borrower of each Loan Document (as amended or modified hereby) to which it is a party have been duly approved by all necessary corporate action of Borrower and no other corporate proceedings on the part of Borrower are necessary to consummate such transactions.

(b)  Enforceability.    This Amendment has been duly executed and delivered by the Borrower. This Amendment and each Loan Document (as amended or modified hereby) is the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, and is in full force and effect.

(c)  Representations and Warranties.    The representations and warranties contained in each Loan Document (other than any such representations or warranties that, by their terms, are specifically made as of a date other than the date hereof) are correct on and as of the date hereof as though made on and as of the date hereof.

(d)  No Default.    No event has occurred and is continuing that constitutes an Event of Default.

4.  Choice of Law.    The validity of this Amendment, its construction, interpretation and enforcement, the rights of the parties hereunder, shall be determined under, governed by, and construed in accordance with the internal laws of the State of California governing contracts only to be performed in that State.

5.  Counterparts.    This Amendment may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall

2

constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by telefacsimile shall be effective as delivery of a manually executed counterpart of this Amendment or such Content

6.  Due Execution.    The execution, delivery and performance of this Amendment are within the power of Borrower, have been duly authorized by all necessary corporate action, have received all necessary governmental approvals, if any, and do not contravene any law or any contractual restrictions binding on Borrower.

7.  Reference to and Effect on the Loan Documents.

(a)  Upon and after the effectiveness of this Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to “the Credit Agreement”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as modified and amended hereby.

(b)  Except as specifically amended above, the Credit Agreement and all other Loan Documents, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed and shall constitute the legal, valid, binding and enforceable obligations of Borrower to Bank.

(c)  The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Bank under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents.

(d)  To the extent that any terms and conditions in any of the Loan Documents shall contradict or be in conflict with any terms or conditions of the Credit Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed modified or amended accordingly to reflect the terms and conditions of the Credit Agreement as modified or amended hereby.

8.  Ratification.    Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Credit Agreement, as amended hereby, and the Loan Documents effective as of the date hereof.

9.  Estoppel.    To induce Bank to enter into this Amendment and to continue to make advances to Borrower under the Credit Agreement, Borrower hereby acknowledges and agrees that, after giving effect to this Amendment, as of the date hereof, there exists no Event of Default and no right of offset, defense, counterclaim or objection in favor of Borrower as against Bank with respect to the Obligations.

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IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written.

“Bank” BANK OF AMERICA, N.A.     a national association		“Borrower” SOUTHWEST WATER COMPANY,     a Delaware Corporation
By:	/s/    DEBORAH L. MILLER	By:	/s/    THOMAS C. TEKULVE
Name: Title:	Deborah L. Miller Senior Vice President	Name: Title:	Thomas C. Tekulve Vice President Finance
		By:	/s/    PETER J. MOERBEEK
		Name: Title:	Peter J. Moerbeek Chief Financial Officer

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FOURTH AMENDED AND RESTATED REVOLVING NOTE

$6,000,000 Costa Mesa, California

September 30, 2001

FOR VALUE RECEIVED, the undersigned SUBURBAN WATER SYSTEMS, a California corporation (“Borrower”) promises to pay to the order of BANK OF AMERICA, N.A. (“Bank”) at its office at 675 Anton Blvd., Costa Mesa, California, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Six Million Dollars ($6,000,000), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement (computed on the basis of a 360-day year and actual days elapsed, which results in more interest than if a 365-day year were used) at a rate per annum equal to the applicable IBOR Rate plus the Applicable Margin or Prime Rate plus the Applicable Margin. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the opening of business on the day specified in the public announcement of a change in Bank’s Prime Rate. With respect to each IBOR option selected hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and applicable IBOR Rate Term thereto and any payments made thereon on Bank’s books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. This Note amends, restates in its entirety, and replaces that certain Third Amended and Restated Revolving Note dated as of July 13, 2001 in the original amount of Nine Million Dollars ($9,000,000) made by Borrower payable to the order of Bank, pursuant to that certain Credit Agreement (as defined in Section D below).

A.    DEFINITIONS:

As used herein, the following terms shall have the meanings set forth after each:

1.  “Applicable Margin” means the following amounts per annum, based upon the Leverage Ratio as set forth in the certificate received pursuant to Section 6.01 (a) (iv)(“Compliance Certificate”):

Pricing Level	Leverage Ratio	Applicable Margin for IBOR Rate loans	Applicable Margin for Prime Rate loans
		(in basis points per annum)	(in basis points per annum)
1	<1.50x	125.0 bps	(25) bps
2	³1.50x but <1.75x	150.0 bps	00 bps
3	³1.75x	200.0 bps	25 bps

During the period from the date of this Note to the date on which the Bank receives the first Compliance Certificate after the date of this Note, the Applicable Margin shall be based on a pricing level 2 set forth in the above table. Thereafter, the Applicable Margin shall be in effect from the date the most recent Compliance Certificate is received by the Bank, provided however, that if the Borrower fails to timely deliver the next certificate, the Applicable Margin from the date such Compliance Certificate was due shall be that indicated for the pricing

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level 3 set forth in the above table, and thereafter, the pricing level indicated by such Compliance Certificate when received.

2.  “Business Day” means any day except a Saturday, Sunday or any other day designated as a holiday under Federal or California statute or regulation, or for amounts bearing interest at an offshore rate, a Business Day is any day except a Saturday, Sunday or any other day designated as a holiday under Federal or California statute or regulation on which Bank is open for business in California and dealing in offshore dollars.

3.  “IBOR Rate Portion” means a portion of the principal amount outstanding under this Note which is bearing interest at a rate related to IBOR. No IBOR Rate Portion shall be less than Two Hundred Fifty Thousand Dollars ($250,000).

4.  “IBOR Rate Term” means a period commencing on a Business Day and continuing for no shorter than one (1) month and no longer than twelve (12) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to Bank’s IBOR; provided however, that no IBOR Rate Term shall extend beyond the scheduled maturity date hereof. The last day of the interest period will be determined by Bank using the offshore dollar inter-bank market. If any IBOR Rate Term would end on a day which is not a Business Day, then such IBOR Rate Term shall be extended to the next succeeding Business Day.

5.  “IBOR Rate” means the interest rate determined by the following formula, rounded upward, if necessary, to the nearest  ¹/100 of one percent. (All amounts in the calculation will be determined by Bank as of the first day of the interest period.)

IBOR Rate =                                 IBOR Base Rate                                

                        (1.00 - Reserve Percentage)

(a)  “IBOR Base Rate” means the interest rate at which Bank’s Grand Cayman Branch, Grand Cayman, British West Indies, would offer U.S. dollar deposits for the applicable interest period to other major banks in the offshore dollar inter-bank market.

(b)  “Reserve Percentage” means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest  ¹/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages.

6.  “Prime Rate” means the rate of interest publicly announced from time to time by Bank in San Francisco, California, as its Prime Rate. The Prime Rate is set by Bank based on various factors, including Bank’s costs and desired return, general economic conditions and other factors, and is used as a reference point

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for pricing some loans. Bank may price loans to its customers at, above or below the Prime Rate.

B.    INTEREST:

1.  Payment of Interest.    Interest accrued on this Note shall be payable on the first day of each month, commencing November 1, 2001.

2.  Selection of Interest Rate Options.    At any time any portion of this Note bears interest determined in relation to Bank’s IBOR, it may be continued by Borrower at the end of the IBOR Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or in relation to Bank’s IBOR for a new IBOR Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to Bank’s IBOR for an IBOR Rate Term designated by Borrower. At the time each advance is requested hereunder or Borrower wishes to select the IBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each IBOR Rate Term, Borrower shall give Bank notice specifying (a) the interest rate option selected by Borrower, (b) the principal amount subject thereto, and (c) if the IBOR option is selected, the length of the applicable IBOR Rate Term. Any such notice may be given by telephone so long as, with respect to each IBOR selection, such notice is given to Bank prior to 10:00 a.m., California time, on the first day of the IBOR Rate Term. For each IBOR option requested hereunder, Bank will quote the applicable IBOR Rate to Borrower at approximately 10:00 a.m., California time, on the first day of the IBOR Rate Term. If Borrower does not immediately accept the rate quoted by Bank, any subsequent acceptance by Borrower shall be subject to a re-determination by Bank of the applicable IBOR Rate; provided however, that if Borrower fails to accept any such rate by 11:00 a.m., California time, on the Business Day such quotation is given, then the quoted rate shall expire and Bank shall have no obligation to permit a IBOR option to be selected on such day. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any IBOR Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such IBOR Rate Term applied.

3.  Additional IBOR Provisions.

(a)  If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining Bank’s IBOR, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, than (i) no new IBOR option may be selected by Borrower, and (ii) any portion of the outstanding principal balance hereof which bears interest determined in relation to Bank’s IBOR, subsequent to the end of the IBOR Rate Term applicable thereto, shall bear interest determined in relation to the Prime Rate.

(b)  If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a “Change in Law”) shall make it unlawful for Bank (i) to make IBOR options available hereunder, or (ii) to maintain interest rates based on Bank’s IBOR, then in the former event, any obligation of Bank to make available such unlawful IBOR options shall immediately be cancelled, and in the

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latter event, any such unlawful IBOR-based interest rates then outstanding shall be converted, at Bank’s option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Prime Rate; provided however, that if any such Change in Law shall permit any IBOR-based interest rates to remain in effect until the expiration of the IBOR Rate Term applicable thereto, then such permitted IBOR-based interest rates shall continue in effect until the expiration of such IBOR Rate Term. Upon the occurrence of any of the foregoing events, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any fines, fees, charges, penalties or other costs incurred or payable by Bank as a result thereof and which are attributable to any IBOR options made available to Borrower hereunder, and any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.

(c)  If any Change in Law or compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall:

(i)  subject Bank to any tax, duty or other charge with respect to any IBOR options, or change the basis of taxation of payments to Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Bank); or

(ii)  impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of advances or loans by, or any other acquisition of funds by any office of Bank; or

(iii)  impose on Bank any other condition;

and the result of any of the foregoing is to increase the cost to Bank of making, renewing or maintaining any IBOR options hereunder and/or to reduce any amount receivable by Bank in connection therewith, then in any such case, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any additional costs incurred by Bank and/or reductions in amounts received by Bank which are attributable to such IBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any IBOR options made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.

4.  Default Interest.    During the continuance of an Event of Default, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year and actual days elapsed, which results in more interest than if a 365-day year were used) equal to two hundred basis points (200.0 bps) above the rate of interest from time to time applicable to this Note.

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C.    BORROWING AND REPAYMENT:

1.  Borrowing and Repayment.    Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and re-borrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on the “Maturity Date” (as defined in the Credit Agreement).

2.  Advances.    Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (a)                                              ,                                     ,                                                  , any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (b) any person, with respect to advances deposited to the credit of any account of Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by Borrower.

3.  Application of Payments.    Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. Unless instructed otherwise by Borrower, all payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to Bank’s IBOR, with such payments applied to the oldest IBOR Rate Term first.

4.  Prepayment.

(a)  Prime Rate.    Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty.

(b)  IBOR.    Each prepayment of an IBOR Rate Portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid, and a prepayment fee as described below. A “prepayment” is a payment of an amount on a date earlier than the scheduled payment date for such amount as required by this Agreement. The prepayment fee shall be equal to the amount (if any) by which:

(i)  the additional interest which would have been payable during the interest period on the amount prepaid had it not been prepaid, exceeds

(ii)  the interest which would have been recoverable by Bank by placing the amount prepaid on deposit in the domestic certificate of deposit

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market, the eurodollar deposit market, or other appropriate money market selected by Bank for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such Portion (or the scheduled payment date for the amount prepaid, if earlier).

Bank will have no obligation to accept an election of an IBOR Rate Portion if any of the following described events has occurred and is continuing:

(i)  Dollar deposits in the principal amount, and for periods equal to the IBOR Rate Term, of an IBOR Rate Portion are not available in the offshore dollar inter-bank market; or

(ii)  the IBOR Rate does not accurately reflect the cost of an IBOR Rate Portion.

Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum two percent (2%) above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed).

D.    EVENTS OF DEFAULT:

This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of July 30, 1999, as amended from time to time, including, without limitation, those terms relating to arbitration of Disputes (the “Credit Agreement”). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an “Event of Default” under this Note.

E.    MISCELLANEOUS:

1.  Remedies.    Upon the occurrence of any Event of Default, the holder of this Note, at the holder’s option, without notice upon the occurrence of an Event of Default pursuant to Section 7.01(g) of the Credit Agreement, and with notice upon the occurrence of any other Event of Default, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys’ fees (to include outside counsel fees and all allocated costs of the holder’s in-house counsel), incurred by the holder in connection with the enforcement of the holder’s rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, and including any of the foregoing incurred in connection with any bankruptcy proceeding relating to Borrower.

2.  Obligations Joint and Several.    Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several.

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3.  Governing Law.    This Note shall be governed by and construed in accordance with the laws of the State of California, except to the extent Bank has greater rights or remedies under Federal law, whether as a national bank or otherwise, in which case such choice of California law shall not be deemed to deprive Bank of any such rights and remedies as may be available under Federal law.

4.  Defined Terms.    All capitalized terms not herein defined shall have the meanings given to them in the Credit Agreement.

“Borrower”

SOUTHWEST WATER COMPANY,

    a Delaware corporation

By:

Title:

By:

Title:

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EX-10.12D

Exhibit 10.12D

FOURTH AMENDMENT TO

CREDIT AGREEMENT

THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (the “Amendment”), dated for reference purposes only as of November 9, 2001 is entered into between BANK OF AMERICA, N.A., a national association (“Bank”), and SUBURBAN WATER SYSTEMS, a California corporation (“Borrower”). The terms of this Amendment shall be effective for all purposes retroactively to September 30, 2001.

RECITALS

A.  Borrower and Bank have previously entered into that certain Credit Agreement dated as of July 30, 1999, as amended by that certain First Amendment to Credit Agreement dated as of March 8, 2000, that certain Second Amendment to Credit Agreement dated as of September 29, 2000, and that certain Third Amendment to Credit Agreement dated as of July 13, 2001 (collectively, the “Credit Agreement”), pursuant to which Bank has made certain loans and financial accommodations available to Borrower. Terms used herein without definition shall have the meanings ascribed to them in the Credit Agreement.

B.  Bank and Borrower wish to amend the Credit Agreement under the terms and conditions set forth in this Amendment. Borrower is entering into this Amendment with the understanding and agreement that, except as specifically provided herein, none of Bank’s rights or remedies as set forth in the Credit Agreement is being waived or modified by the terms of this Amendment.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1.  Amendments to Credit Agreement

(a)  The definition of “Maturity Date” set forth in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

“Maturity Date”: September 30, 2003.”

(b)  The following is added to the Credit Agreement as a new Section 2.04:

“‘2.04  Unused commitment fee.    The Borrower agrees to pay a fee on any difference between the Revolving Commitment and the amount of credit it actually uses, determined by the weighted average credit outstanding during the specified period. The fee will be calculated at 0.25% per year. The calculation of credit outstanding shall include the Loans and the undrawn amount of outstanding letters of credit. This fee is due on December 31, 2001 an on the last day of each following quarter until the Maturity Date.”

2.  Effectiveness of this Amendment.    Bank must have received the following items, in form and content acceptable to Bank, before this Amendment is effective and before Bank is required to extend any credit to Borrower as provided for by this Amendment.

(a)  Amendment.    This Amendment fully executed in a sufficient number of counterparts for distribution to Bank and Borrower.

(b)  Authorizations.    Evidence that the execution, delivery and performance by Borrower and each guarantor or subordinating creditor of this Amendment and any instrument or agreement required under this Amendment have been duly authorized.

(c)  Representations and Warranties.    The representations and warranties set forth in the Credit Agreement must be true and correct.

(d)  Other Required Documentation.    All other documents and legal matters in connection with the transactions contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Bank.

3.  Representations and Warranties.    The Borrower represents and warrants as follows:

(a)  Authority.    The Borrower has the requisite corporate power and authority to execute and deliver this Amendment and to perform its obligations hereunder and under the Loan Documents (as amended or modified hereby) to which it is a party. The execution, delivery and performance by the Borrower of this Amendment and the performance by Borrower of each Loan Document (as amended or modified hereby) to which it is a party have been duly approved by all necessary corporate action of Borrower and no other corporate proceedings on the part of Borrower are necessary to consummate such transactions.

(b)  Enforceability.    This Amendment has been duly executed and delivered by the Borrower. This Amendment and each Loan Document (as amended or modified hereby) is the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, and is in full force and effect.

(c)  Representations and Warranties.    The representations and warranties contained in each Loan Document (other than any such representations or warranties that, by their terms, are specifically made as of a date other than the date hereof) are correct on and as of the date hereof as though made on and as of the date hereof.

(d)  No Default.    No event has occurred and is continuing that constitutes an Event of Default.

4.  Choice of Law.    The validity of this Amendment, its construction, interpretation and enforcement, the rights of the parties hereunder, shall be determined under, governed by, and construed in accordance with the internal laws of the State of California governing contracts only to be performed in that State.

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5.  Counterparts.    This Amendment may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by telefacsimile shall be effective as delivery of a manually executed counterpart of this Amendment.

6.  Due Execution.    The execution, delivery and performance of this Amendment are within the power of Borrower, have been duly authorized by all necessary corporate action, have received all necessary governmental approvals, if any, and do not contravene any law or any contractual restrictions binding on Borrower.

7.  Reference to and Effect on the Loan Documents.

(a)  Upon and after the effectiveness of this Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to “the Credit Agreement”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as modified and amended hereby.

(b)  Except as specifically amended above, the Credit Agreement and all other Loan Documents, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed and shall constitute the legal, valid, binding and enforceable obligations of Borrower to Bank.

(c)  The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Bank under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents.

(d)  To the extent that any terms and conditions in any of the Loan Documents shall contradict or be in conflict with any terms or conditions of the Credit Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed modified or amended accordingly to reflect the terms and conditions of the Credit Agreement as modified or amended hereby.

8.  Ratification.    Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Credit Agreement, as amended hereby, and the Loan Documents effective as of the date hereof.

9.  Estoppel.    To induce Bank to enter into this Amendment and to continue to make advances to Borrower under the Credit Agreement, Borrower hereby acknowledges and agrees that, after giving effect to this Amendment, as of the date hereof, there exists no Event of Default and no right of offset, defense, counterclaim or objection in favor of Borrower as against Bank with respect to the Obligations.

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IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written.

“Bank”	“Borrower”
BANK OF AMERICA, N.A. a national association	SUBURBAN WATER SYSTEMS, a California corporation

By:	/s/    DEBORAH L. MILLER	By:	/s/    DANIEL N. EVANS
Name: Title:	Deborah L. Miller Senior Vice President	Name: Title:	Daniel N. Evans Vice President & CFO

By:	/s/    PETER J. MOERBEEK
Name: Title:	Peter J. Moerbeek Secretary

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Acknowledgement

Dated as of September 30, 2001

The undersigned and SOUTHWEST WATER COMPANY, a Delaware corporation (“Southwest”), in consideration of the continued extension of credit to SUBURBAN WATER SYSTEMS, a California corporation by BANK OF AMERICA, N.A. (“BofA”), hereby acknowledges and agrees to the foregoing Fourth Amendment to Credit Agreement (the “Amendment”) and hereby confirms and agrees that its Continuing Guaranty dated July 30, 1999 in favor of BofA remains in full force and effect and restates, ratifies and reaffirms each and every term and condition set forth in the Guaranty. Although BofA has informed Southwest of the matters set forth above, and Southwest has acknowledged the same, Southwest understands and agrees that BofA has no duty under the Credit Agreement, the Guaranty or any other agreement with Southwest to so notify Southwest or seek such an acknowledgement, and nothing contained herein is intended to or shall create such a duty as to any advances or transaction hereafter.

SOUTHWEST WATER COMPANY a Delaware Corporation
By:	/s/    THOMAS TEKULVE
	Thomas Tekulve Vice President Finance

By:	/s/    PETER J. MOERBEEK
	Peter J. Moerbeek Chief Financial Officer

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SECOND AMENDED AND RESTATED REVOLVING NOTE

$4,000,000

Costa Mesa, California

September 30, 2001

FOR VALUE RECEIVED, the undersigned SUBURBAN WATER SYSTEMS, a California corporation (“Borrower”) promises to pay to the order of BANK OF AMERICA, N.A. (“Bank”) at its office at 675 Anton Blvd., Costa Mesa, California, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Four Million Dollars ($4,000,000), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement (computed on the basis of a 360-day year and actual days elapsed, which results in more interest than if a 365-day year were used) at a rate per annum equal to the applicable IBOR Rate plus the Applicable Margin or Prime Rate plus the Applicable Margin. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the opening of business on the day specified in the public announcement of a change in Bank’s Prime Rate. With respect to each IBOR option selected hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and applicable IBOR Rate Term thereto and any payments made thereon on Bank’s books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. This Note amends, restates in its entirety, and replaces that certain First Amended and Restated Revolving Note dated as of July 13, 2001 made by Borrower payable to the order of Bank, pursuant to that certain Credit Agreement (as defined in Section D below).

A.    DEFINITIONS:

As used herein, the following terms shall have the meanings set forth after each:

1.  “Applicable Margin” means the following amounts per annum, based upon the Leverage Ratio as set forth in the certificate received pursuant to Section 6.01 (a) (vi)(“Compliance Certificate”):

		(in basis points per annum)	(in basis points per annum)
Pricing Level	Leverage Ratio	Applicable Margin for IBOR Rate loans	Applicable Margin for Prime Rate loans
1	<1.50x	125.0 bps	(25) bps
2	³1.50x but <1.75x	150.0 bps	00 bps
3	³1.75x	200.0 bps	25 bps

During the period from the date of this Note to the date on which the Bank receives the first Compliance Certificate after the date of this Note, the Applicable Margin shall be based on a pricing level 2 set forth in the above table. Thereafter, the Applicable Margin shall be in effect from the date the most recent Compliance Certificate is received by the Bank, provided however, that if the Borrower fails to timely deliver the next certificate, the Applicable Margin from the

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date such Compliance Certificate was due shall be that indicated for the pricing level 3 set forth in the above table, and thereafter, the pricing level indicated by such Compliance Certificate when received.

2.  “Business Day” means any day except a Saturday, Sunday or any other day designated as a holiday under Federal or California statute or regulation, or for amounts bearing interest at an offshore rate, a Business Day is any day except a Saturday, Sunday or any other day designated as a holiday under Federal or California statute or regulation on which Bank is open for business in California and dealing in offshore dollars.

3.  “IBOR Rate Portion” means a portion of the principal amount outstanding under this Note which is bearing interest at a rate related to IBOR. No IBOR Rate Portion shall be less than Two Hundred Fifty Thousand Dollars ($250,000).

4.  “IBOR Rate Term” means a period commencing on a Business Day and continuing for no shorter than one (1) month and no longer than twelve (12) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to Bank’s IBOR; provided however, that no IBOR Rate Term shall extend beyond the scheduled maturity date hereof. The last day of the interest period will be determined by Bank using the offshore dollar inter-bank market. If any IBOR Rate Term would end on a day which is not a Business Day, then such IBOR Rate Term shall be extended to the next succeeding Business Day.

5.  “IBOR Rate” means the interest rate determined by the following formula, rounded upward, if necessary, to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by Bank as of the first day of the interest period.)

IBOR Rate =                                         IBOR Base Rate                                    

                        (1.00—Reserve Percentage)

(a)  “IBOR Base Rate” means the interest rate at which Bank’s Grand Cayman Branch, Grand Cayman, British West Indies, would offer U.S. dollar deposits for the applicable interest period to other major banks in the offshore dollar inter-bank market.

(b)  “Reserve Percentage” means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages.

6.  “Prime Rate” means the rate of interest publicly announced from time to time by Bank in San Francisco, California, as its Prime Rate. The Prime Rate is set by Bank based on various factors, including Bank’s costs and desired return, general economic conditions and other factors, and is used as a reference point

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for pricing some loans. Bank may price loans to its customers at, above or below the Prime Rate.

B.     INTEREST:

1.  Payment of Interest. Interest accrued on this Note shall be payable on the first day of each month, commencing November 1, 2001.

2.  Selection of Interest Rate Options.    At any time any portion of this Note bears interest determined in relation to Bank’s IBOR, it may be continued by Borrower at the end of the IBOR Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or in relation to Bank’s IBOR for a new IBOR Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to Bank’s IBOR for an IBOR Rate Term designated by Borrower. At the time each advance is requested hereunder or Borrower wishes to select the IBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each IBOR Rate Term, Borrower shall give Bank notice specifying (a) the interest rate option selected by Borrower, (b) the principal amount subject thereto, and (c) if the IBOR option is selected, the length of the applicable IBOR Rate Term. Any such notice may be given by telephone so long as, with respect to each IBOR selection, such notice is given to Bank prior to 10:00 a.m., California time, on the first day of the IBOR Rate Term. For each IBOR option requested hereunder, Bank will quote the applicable IBOR Rate to Borrower at approximately 10:00 a.m., California time, on the first day of the IBOR Rate Term. If Borrower does not immediately accept the rate quoted by Bank, any subsequent acceptance by Borrower shall be subject to a re-determination by Bank of the applicable IBOR Rate; provided however, that if Borrower fails to accept any such rate by 11:00 a.m., California time, on the Business Day such quotation is given, then the quoted rate shall expire and Bank shall have no obligation to permit a IBOR option to be selected on such day. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any IBOR Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such IBOR Rate Term applied.

3.  Additional IBOR Provisions.

(a)  If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining Bank’s IBOR, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, than (i) no new IBOR option may be selected by Borrower, and (ii) any portion of the outstanding principal balance hereof which bears interest determined in relation to Bank’s IBOR, subsequent to the end of the IBOR Rate Term applicable thereto, shall bear interest determined in relation to the Prime Rate.

(b)  If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a “Change in Law”) shall make it unlawful for Bank (i) to make IBOR options available hereunder, or (ii) to maintain interest rates based on Bank’s IBOR, then in the former event, any obligation of Bank to make available such unlawful IBOR options shall immediately be cancelled, and in the

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latter event, any such unlawful IBOR-based interest rates then outstanding shall be converted, at Bank’s option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Prime Rate; provided however, that if any such Change in Law shall permit any IBOR-based interest rates to remain in effect until the expiration of the IBOR Rate Term applicable thereto, then such permitted IBOR-based interest rates shall continue in effect until the expiration of such IBOR Rate Term. Upon the occurrence of any of the foregoing events, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any fines, fees, charges, penalties or other costs incurred or payable by Bank as a result thereof and which are attributable to any IBOR options made available to Borrower hereunder, and any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.

(c)  If any Change in Law or compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall:

(i)  subject Bank to any tax, duty or other charge with respect to any IBOR options, or change the basis of taxation of payments to Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Bank); or

(ii)  impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of advances or loans by, or any other acquisition of funds by any office of Bank; or

(iii)  impose on Bank any other condition;

and the result of any of the foregoing is to increase the cost to Bank of making, renewing or maintaining any IBOR options hereunder and/or to reduce any amount receivable by Bank in connection therewith, then in any such case, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any additional costs incurred by Bank and/or reductions in amounts received by Bank which are attributable to such IBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any IBOR options made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.

4.  Default Interest.    During the continuance of an Event of Default, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year and actual days elapsed, which results in more interest than if a 365-day year were used) equal to two hundred basis points (200.0 bps) above the rate of interest from time to time applicable to this Note.

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C.    BORROWING AND REPAYMENT:

1.  Borrowing and Repayment.    Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and re-borrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on the “Maturity Date” (as defined in the Credit Agreement).

2.  Advances.    Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (a)                                         ,                                         ,                                         , any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (b) any person, with respect to advances deposited to the credit of any account of Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by Borrower.

3.  Application of Payments.    Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. Unless instructed otherwise by Borrower, all payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to Bank’s IBOR, with such payments applied to the oldest IBOR Rate Term first.

4.  Prepayment.

(a)  Prime Rate.    Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty.

(b)  IBOR.    Each prepayment of an IBOR Rate Portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid, and a prepayment fee as described below. A “prepayment” is a payment of an amount on a date earlier than the scheduled payment date for such amount as required by this Agreement. The prepayment fee shall be equal to the amount (if any) by which:

(i)  the additional interest which would have been payable during the interest period on the amount prepaid had it not been prepaid, exceeds

(ii)  the interest which would have been recoverable by Bank by placing the amount prepaid on deposit in the domestic certificate of deposit

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market, the eurodollar deposit market, or other appropriate money market selected by Bank for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such Portion (or the scheduled payment date for the amount prepaid, if earlier).

Bank will have no obligation to accept an election of an IBOR Rate Portion if any of the following described events has occurred and is continuing:

(i)  Dollar deposits in the principal amount, and for periods equal to the IBOR Rate Term, of an IBOR Rate Portion are not available in the offshore dollar inter-bank market; or

(ii)  the IBOR Rate does not accurately reflect the cost of an IBOR Rate Portion.

Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum two percent (2%) above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed).

D.    EVENTS OF DEFAULT:

This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of July 30, 1999, as amended from time to time, including, without limitation, those terms relating to arbitration of Disputes (the “Credit Agreement”). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an “Event of Default” under this Note.

E.    MISCELLANEOUS:

1.  Remedies.    Upon the occurrence of any Event of Default, the holder of this Note, at the holder’s option, without notice upon the occurrence of an Event of Default pursuant to Section 7.01(g) of the Credit Agreement, and with notice upon the occurrence of any other Event of Default, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys’ fees (to include outside counsel fees and all allocated costs of the holder’s in-house counsel), incurred by the holder in connection with the enforcement of the holder’s rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, and including any of the foregoing incurred in connection with any bankruptcy proceeding relating to Borrower.

2.  Obligations Joint and Several.    Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several.

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3.  Governing Law.    This Note shall be governed by and construed in accordance with the laws of the State of California, except to the extent Bank has greater rights or remedies under Federal law, whether as a national bank or otherwise, in which case such choice of California law shall not be deemed to deprive Bank of any such rights and remedies as may be available under Federal law.

4.  Defined Terms.    All capitalized terms not herein defined shall have the meanings given to them in the Credit Agreement.

“Borrower” SOUTHWEST WATER COMPANY,     a Delaware corporation
By:	/s/    DANIEL N. EVANS
Title:	Vice President Finance & CFO
By:	/s/    PETER J. MOERBEEK
Title:	Secretary

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EX-10.13G

EXHIBIT 10.13G

SEVENTH AMENDMENT TO

AMENDED AND RESTATED CREDIT AGREEMENT

THIS SEVENTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (the “Amendment”), dated as of September 30, 2001 is entered into between MELLON 1ST BUSINESS BANK, a California corporation (“Bank”), and SOUTHWEST WATER COMPANY, a Delaware corporation (“Borrower”).

RECITALS

A.  Borrower and Bank have previously entered into that certain Amended and Restated Credit Agreement dated as of December 23, 1997, as amended by that certain First Amendment to Amended and Restated Credit Agreement dated as of September 1, 1998, that certain Second Amendment to Amended and Restated Credit Agreement dated as of September 29, 1999 and that certain Third Amendment to Amended and Restated Credit Agreement dated as of July 19, 2000, and that certain Fourth Amendment to Amended and Restated Credit Agreement dated as of September 29, 2000, that certain Fifth Amendment to Amended and Restated Credit Agreement dated as of March 9, 2001 and that certain Sixth Amendment to Amended and Restated Credit Agreement dated as of July 13, 2001 (collectively, the “Credit Agreement”), pursuant to which Bank has made certain loans and financial accommodations available to Borrower. Terms used herein without definition shall have the meanings ascribed to them in the Credit Agreement.

B.  Bank and Borrower wish to amend the Credit Agreement under the terms and conditions set forth in this Amendment. Borrower is entering into this Amendment with the understanding and agreement that, except as specifically provided herein, none of Bank’s rights or remedies as set forth in the Credit Agreement is being waived or modified by the terms of this Amendment.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1.  Amendments to Credit Agreement

(a)  The definition of “Maturity Date” set forth in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

“‘Maturity Date’: September 30, 2003.”

(b)  The first paragraph of Section 2.03(c) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

“‘Rate Periods’ At any time when Borrower selects, converts to or renews the Libor Rate Option, Borrower shall fix a period (the “Rate Period”) which shall be one, two, three, six months or one year, which shall be acceptable to Bank in Bank’s sole discretion, during which the Libor Rate Option shall apply to the corresponding Rate Segment; provided, that Borrower may not elect a Rate Period which will end after the Maturity Date. Bank’s right to payment of principle and interest under the Revolving Note shall in no way be affected by the fact that one or more Rate Periods may be in effect.”

2.  Effectiveness of this Amendment.    Bank must have received the following items, in form and content acceptable to Bank, before this Amendment is effective and before Bank is required to extend any credit to Borrower as provided for by this Amendment.

(a)  Amendment.    This Amendment fully executed in a sufficient number of counterparts for distribution to Bank and Borrower.

(b)  Authorizations.    Evidence that the execution, delivery and performance by Borrower and each guarantor or subordinating creditor of this Amendment and any instrument or agreement required under this Amendment have been duly authorized.

(c)  Representations and Warranties.    The representations and warranties set forth in the Credit Agreement must be true and correct.

3.  Representations and Warranties.    The Borrower represents and warrants as follows:

(a)  Authority.    The Borrower has the requisite corporate power and authority to execute and deliver this Amendment and to perform its obligations hereunder and under the Loan Documents (as amended or modified hereby) to which it is a party. The execution, delivery and performance by the Borrower of this Amendment and the performance by Borrower of each Loan Document (as amended or modified hereby) to which it is a party have been duly approved by all necessary corporate action of Borrower and no other corporate proceedings on the part of Borrower are necessary to consummate such transactions.

(b)  Enforceability.    This Amendment has been duly executed and delivered by the Borrower. This Amendment and each Loan Document (as amended or modified hereby) is the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, and is in full force and effect.

(c)  Representations and Warranties.    The representations and warranties contained in each Loan Document (other than any such representations or warranties that, by their terms, are specifically made as of a date other than the date hereof) are correct on and as of the date hereof as though made on and as of the date hereof.

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(d)  No Default.    No event has occurred and is continuing that constitutes an Event of Default.

4.  Choice of Law.    The validity of this Amendment, its construction, interpretation and enforcement, the rights of the parties hereunder, shall be determined under, governed by, and construed in accordance with the internal laws of the State of California governing contracts only to be performed in that State.

5.  Counterparts.    This Amendment may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by telefacsimile shall be effective as delivery of a manually executed counterpart of this Amendment or such Consent.

6.  Due Execution.    The execution, delivery and performance of this Amendment are within the power of Borrower, have been duly authorized by all necessary corporate action, have received all necessary governmental approvals, if any, and do not contravene any law or any contractual restrictions binding on Borrower.

7.  Reference to and Effect on the Loan Documents.

(a)  Upon and after the effectiveness of this Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to “the Credit Agreement”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as modified and amended hereby.

(b)  Except as specifically amended above, the Credit Agreement and all other Loan Documents, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed and shall constitute the legal, valid, binding and enforceable obligations of Borrower to Bank.

(c)  The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Bank under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents.

(d)  To the extent that any terms and conditions in any of the Loan Documents shall contradict or be in conflict with any terms or conditions of the Credit Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed modified or amended accordingly to reflect the terms and conditions of the Credit Agreement as modified or amended hereby.

8.  Ratification.    Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Credit Agreement, as amended hereby, and the Loan Documents effective as of the date hereof.

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9.  Estoppel.    To induce Bank to enter into this Amendment and to continue to make advances to Borrower under the Credit Agreement, Borrower hereby acknowledges and agrees that, after giving effect to this Amendment, as of the date hereof, there exists no Event of Default and no right of offset, defense, counterclaim or objection in favor of Borrower as against Bank with respect to the Obligations.

IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written.

“Bank”	“Borrower”
MELLON 1ST BANK, a california corporation	SOUTHWEST WATER COMPANY, a delaware corporation

By:	/s/    F. D. HARE	By:	/s/    THOMAS C. TEKULVE
Name: Title:	F. D. Hare Executive Vice President	Name: Title:	Thomas C. Tekulve Vice President—Finance

By:	/s/    PETER J. MOERBEEK
Name: Title:	Peter J. Moerbeek Chief Financial Officer

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EX-10.14F

EXHIBIT 10.14F

SIXTH AMENDMENT TO

CREDIT AGREEMENT

THIS SIXTH AMENDMENT TO CREDIT AGREEMENT (the “Amendment”), dated as of September 30, 2001 is entered into between MELLON 1ST BUSINESS BANK, a California corporation (“Bank”), and SUBURBAN WATER SYSTEMS, a California corporation (“Borrower”).

RECITALS

A.  Borrower and Bank have previously entered into that certain Credit Agreement dated as of December 23, 1997, as amended by that certain First Amendment to Credit Agreement dated as of September 1, 1998, that certain Second Amendment to Credit Agreement dated as of September 29, 1999 by that certain Third Amendment to Credit Agreement dated as of April 10, 2000, and that certain Fourth Amendment to Credit Agreement dated as of September 29, 2000, that certain Fifth Amendment to Credit Agreement dated as of July 13, 2001 (collectively, the “Credit Agreement”), pursuant to which Bank has made certain loans and financial accommodations available to Borrower. Terms used herein without definition shall have the meanings ascribed to them in the Credit Agreement.

B.  Bank and Borrower wish to amend the Credit Agreement under the terms and conditions set forth in this Amendment. Borrower is entering into this Amendment with the understanding and agreement that, except as specifically provided herein, none of Bank’s rights or remedies as set forth in the Credit Agreement is being waived or modified by the terms of this Amendment.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1.  Amendments to Credit Agreement

(a)  The definition of “Maturity Date” set forth in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

“Maturity Date”: September 30, 2003.”

(b)  The first paragraph of Section 2.03(c) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

“Rate Periods” At any time when Borrower selects, converts to or renews the Libor Rate Option, Borrower

shall fix a period (the “Rate Period”) which shall be one, two, three, six months or one year, which shall be acceptable to Bank in Bank’s sole discretion, during which the Libor Rate Option shall apply to the corresponding Rate Segment; provided, that Borrower may not elect a Rate Period which will end after the Maturity Date. Bank’s right to payment of principle and interest under the Revolving Note shall in no way be affected by the fact that one or more Rate Periods may be in effect.”

2.  Effectiveness of this Amendment.    Bank must have received the following items, in form and content acceptable to Bank, before this Amendment is effective and before Bank is required to extend any credit to Borrower as provided for by this Amendment.

(a)  Amendment.    This Amendment fully executed in a sufficient number of counterparts for distribution to Bank and Borrower.

(b)  Authorizations.    Evidence that the execution, delivery and performance by Borrower and each guarantor or subordinating creditor of this Amendment and any instrument or agreement required under this Amendment have been duly authorized.

(c)  Representations and Warranties.    The representations and warranties set forth in the Credit Agreement must be true and correct.

(d)  Other Required Documentation.    All other documents and legal matter in connection with the transactions contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Bank.

3.  Representations and Warranties.    The Borrower represents and warrants as follows:

(a)  Authority.    The Borrower has the requisite corporate power and authority to execute and deliver this Amendment and to perform its obligations hereunder and under the Loan Documents (as amended or modified hereby) to which it is a party. The execution, delivery and performance by the Borrower of this Amendment and the performance by Borrower of each Loan Document (as amended or modified hereby) to which it is a party have been duly approved by all necessary corporate action of Borrower and no other corporate proceedings on the part of Borrower are necessary to consummate such transactions.

(b)  Enforceability.    This Amendment has been duly executed and delivered by the Borrower. This Amendment and each Loan Document (as amended or modified hereby) is the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, and is in full force and effect.

(c)  Representations and Warranties.    The representations and warranties contained in each Loan Document (other than any such representations or warranties that, by their terms, are specifically made as of a date other than the date hereof) are correct on and as of the date hereof as though made on and as of the date hereof.

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(d)  No Default.    No event has occurred and is continuing that constitutes an Event of Default.

4.  Choice of Law.    The validity of this Amendment, its construction, interpretation and enforcement, the rights of the parties hereunder, shall be determined under, governed by, and construed in accordance with the internal laws of the State of California governing contracts only to be performed in that State.

5.  Counterparts.    This Amendment may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by telefacsimile shall be effective as delivery of a manually executed counterpart of this Amendment or such Consent.

6.  Due Execution.    The execution, delivery and performance of this Amendment are within the power of Borrower, have been duly authorized by all necessary corporate action, have received all necessary governmental approvals, if any, and do not contravene any law or any contractual restrictions binding on Borrower.

7.  Reference to and Effect on the Loan Documents.

(a)  Upon and after the effectiveness of this Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to “the Credit Agreement”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as modified and amended hereby.

(b)  Except as specifically amended above, the Credit Agreement and all other Loan Documents, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed and shall constitute the legal, valid, binding and enforceable obligations of Borrower to Bank.

(c)  The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Bank under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents.

(d)  To the extent that any terms and conditions in any of the Loan Documents shall contradict or be in conflict with any terms or conditions of the Credit Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed modified or amended accordingly to reflect the terms and conditions of the Credit Agreement as modified or amended hereby.

8.  Ratification.    Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Credit Agreement, as amended hereby, and the Loan Documents effective as of the date hereof.

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9.  Estoppel.    To induce Bank to enter into this Amendment and to continue to make advances to Borrower under the Credit Agreement, Borrower hereby acknowledges and agrees that, after giving effect to this Amendment, as of the date hereof, there exists no Event of Default and no right of offset, defense, counterclaim or objection in favor of Borrower as against Bank with respect to the Obligations.

IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written.

“Bank” MELLON 1ST BANK,     a California Corporation		“Borrower” SUBURBAN WATER SYSTEMS,     a California corporation
By:	/s/    TIM B. NOONE	By:	/s/    DANIEL N. EVANS
Name: Title:	Tim B. Noone Executive Vice President	Name: Title:	Daniel N. Evans Vice President Finance & CFO
		By:	/s/    PETER J. MOERBEEK
		Name: Title:	Peter J. Moerbeek Secretary

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Acknowledgement

Dated as of September 30, 2001

The undersigned and SOUTHWEST WATER COMPANY, a Delaware corporation (“Southwest”), in consideration of the continued extension of credit to SUBURBAN WATER SYSTEMS, a California corporation by MELLON 1ST BUSINESS BANK, a California Corporation (“Mellon”), hereby acknowledges and agrees to the foregoing Sixth Amendment to Credit Agreement (the “Amendment”) and hereby confirms and agrees that his Guarantee dated December 23, 1997 in favor of Mellon is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that, upon the effectiveness of, and on and after the date of the Amendment, each reference in the Guarantee to the Credit Agreement (as defined in the Amendment), “thereunder”, “thereof” or words of like import referring to the “Credit Agreement”, shall mean and be a reference to the Credit Agreement as amended or modified by the Amendment. Although Mellon has informed Southwest of the matters set forth above, and Southwest has acknowledged the same, Southwest understands and agrees that Mellon has no duty under the Credit Agreement, Guarantee or any other agreement with Southwest to so notify Southwest or to seek such an acknowledgment, and nothing contained herein is intended to or shall create such a duty as to any advances or transaction hereafter.

SOUTHWEST WATER COMPANY,     a Delaware Corporation
By:	/s/    THOMAS TEKULVE
	Thomas Tekulve Vice President Finance
By:	/s/    PETER J. MOERBEEK
	Peter J. Moerbeek Chief Financial Officer

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MELLON 1ST BUSINESS BANK

601 West 5th Street

Los Angeles, California 90071

NOTICE OF ASSIGNMENT

September 31, 2001

Southwest Water Company

225 North Barranca Boulevard, Suite 200

West Covina, California 91791

Attn:    Thomas C. Tekulve

Re:    Mellon Bank, N.A./Southwest Water Company

Ladies and Gentlemen:

Southwest Water Company (“Borrower”) is hereby notified that Mellon Bank, N.A. (“MBNA”) has assigned to Mellon 1st Business Bank (“MFBB”) all of its rights and obligations under that certain Amended and Restated Credit Agreement, Dated December 27, 1997, by and between Borrower and MBNA (the “Credit Agreement”), and all other Loan Documents (as defined in the Credit Agreement). Henceforth, Borrower is instructed to perform all of its obligation under the Credit Agreement and the other Loan Documents in favor of MFBB instead of MBNA. Any notices required to be given to MBNA under the Credit Agreement or any other Loan Document should instead be given to MFBB at the following address (or at such other address as MFBB may from time to time designate):

601 West 5th Street

Los Angeles, California 90071

Attn: Tim B. Noone

Fax: 213-596-4462

Very truly yours, MELLON 1ST BUSINESS BANK,     a California corporation
By:	/s/    F.D. HARE
	F.D. Hare Executive Vice President

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MELLON 1^ST BUSINESS BANK

601 West 5^th Street

Los Angeles, California 90071

NOTICE OF ASSIGNMENT

September 31, 2001

Southwest Water Company

225 North Barranca Boulevard, Suite 200

West Covina, California 91791

Attn:  Thomas C. Tekulve

Re:  Mellon Bank, N.A./Suburban Water Systems

Ladies and Gentlemen:

Southwest Water Company (“Guarantor”) is hereby notified that Mellon Bank, N.A. (“MBNA”) has assigned to Mellon 1^st Business Bank (“MFBB”) all of its rights and obligations under that certain Continuing Guaranty, dated December 23, 1997, by Guarantor in favor of MBNA (the “Guaranty”). Henceforth, Guarantor is instructed to perform all of its obligation under the Guaranty in favor of MFBB instead of MBNA. Any notices required to be given to MBNA under the Guaranty should instead be given to MFBB at the following address (or at such other address as MFBB may from time to time designate):

601 West 5^th Street

Los Angeles, California 90071

Attn:  Tim B. Noone

Fax:  213-596-4462

Very truly yours,
MELLON 1ST BUSINESS BANK, a California corporation
By:	/s/    F.D. HARE
	F.D. Hare Executive Vice President

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EX-10.15C

Exhibit 10.15C

BUSINESS LOAN AGREEMENT

Principle $4,000,000.00	Loan Date 04-10-2002	Maturity 04-10-2004	Loan No 011 Sweep	Call/Coll 04A0/ 040	Account 942136	Officer ***	Initials ERA
References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. Any item above containing “***” has been omitted due to text length limitations.

Borrower: NEW MEXICO UTILITIES, INC. 4700 IRVING BLVD. NW, SUITE 201 ALBUQUERQUE, NM 87114 Lender: BANK OF THE WEST New Mexico Business Banking #223M 500 Marquette, 14th Floor Albuquerque, NM 87102 (800) 300-8343

THIS BUSINESS LOAN AGREEMENT dated April 10, 2002, Is made and executed between NEW MEXICO UTILITIES, INC. (“Borrower”) and BANK OF THE WEST (“Lender”) on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement (“Loan”). Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower’s representations, warranties, and agreements as set forth in this Agreement; (B) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender’s sole judgment and discretion; and (C) all such Loans shall be and remain subject to the terms and conditions of this Agreement.

TERM.    This Agreement shall be effective as of April 10, 2002, and shall continue in full force and effect until such time as all of Borrower’s Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys’ fees, and other fees and charges, or until such time as the parties may agree in writing to terminate this Agreement.

CONDITIONS PRECEDENT TO EACH ADVANCE.    Lender’s obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender’s satisfaction of all of the conditions set forth in this Agreement and in the Related Documents.

Loan Documents.    Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) guaranties; (3) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender’s counsel.

Borrower’s Authorization.    Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require.

Payment of Fees and Expenses.    Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document.

Representations and Warranties.    The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct.

No Event of Default.    There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document.

REPRESENTATIONS AND WARRANTIES.    Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists:

Organization.    Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of New Mexico. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 4700 IRVING BLVD. NW, SUITE 201, ALBUQUERQUE, NM 87114. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower’s state of organization or any change in Borrower’s name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower’s business activities.

Assumed Business Names.    Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: None.

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Authorization.    Borrower’s execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of Borrower’s articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower’s properties.

Financial Information.    Each of Borrower’s financial statements supplied to Lender truly and completely disclosed Borrower’s financial condition as of the date of the statement, and there has been no material adverse change in Borrower’s financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements.

Legal Effect.    This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms.

Properties.    Except as contemplated by this Agreement or as previously disclosed in Borrower’s financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower’s properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower’s properties are titled in Borrower’s legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years.

Hazardous Substances.    Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower’s ownership of Borrower’s Collateral, there has been no use, generation, manufacture, storage, treatment, disposal release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower’s expense and for Lender’s purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower’s due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender’s acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise.

Litigation and Claims.    No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower’s financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing

Taxes.    To the best of Borrower’s knowledge, all of Borrower’s tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided.

Lien Priority.    Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower’s Loan and Note, that would be prior or that may in any way be superior to Lender’s Security Interests and rights in and to such Collateral.

Binding Effect.    This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms.

AFFIRMATIVE COVENANTS.    Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will:

Notices of Claims and Litigation.    Promptly inform Lender in writing of (1) all material adverse changes in Borrower’s financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor.

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Financial Records.    Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower’s books and records at all reasonable times.

Financial Statements.    Furnish Lender with the following:

Annual Statements.    As soon as available, but in no event later than ninety (90) days after the end of each fiscal year, Borrower’s balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender.

Additional Requirements.

GUARANTOR(S) AGREE TO FURNISH LENDER WITH THE FOLLOWING:

Annual Statements.    As soon as available, but in no event later than ninety (90) days after the end of each fiscal year, Guarantor’s balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender.

All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct.

Additional Information.    Furnish such additional information and statements, as Lender may request from time to time.

Insurance.    Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower’s properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender’s loss payable or other endorsements as Lender may require.

Insurance Reports.    Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower.

Guaranties.    Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor of Lender, executed by the guarantor named below, on Lender’s forms, and in the amount and under the conditions set forth in those guaranties.

Name of Guarantor	Amount
SOUTHWEST WATER COMPANY	Unlimited

Other Agreements.    Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.

Loan Proceeds.    Use all Loan proceeds solely for the following specific purposes:    The proceeds of the loan(s) or other credit facilities hereunder shall be used solely for the purposes described by Borrower in Its loan application, as approved by Lender. Use of the proceeds for purposes not contemplated by the loan application is expressly prohibited.

Taxes, Charges and Liens.    Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower’s properties, income, or profits.

Performance.    Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement.

Operations.    Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner.

Environmental Studies.    Promptly conduct and complete, at Borrower’s expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower.

Compliance with Governmental Requirements.    Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower’s properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as

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Borrower has notified Lender in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender’s interest.

Inspection.    Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower’s other properties and to examine or audit Borrower’s books, accounts, and records and to make copies and memoranda of Borrower’s books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower’s expense.

Compliance Certificates.    Unless waived in writing by Lender, provide Lender at least annually, with a certificate executed by Borrower’s chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement.

Environmental Compliance and Reports.    Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower’s part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower’s part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources.

Additional Assurances.    Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests.

RECOVERY OF ADDITIONAL COSTS.    If the imposition of or any change in any law, rule, regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except federal, state or local income or franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (A) increase the cost to Lender for extending or maintaining the credit facilities to which this Agreement relates, (B) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (C) reduce the rate of return on Lender’s capital as a consequence of Lender’s obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefore, within five (5) days after Lender’s written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error.

LENDER’S EXPENDITURES.    If any action or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower’s failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the Indebtedness and, at Lender’s option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note’s maturity.

NEGATIVE COVENANTS.    Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender:

Indebtedness and Liens.    (1)  Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower’s assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower’s accounts, except to Lender.

Continuity of operations.    (1)  Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower’s stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a “Subchapter S Corporation” (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower’s stock, or purchase or retire any of Borrower’s outstanding shares or alter or amend Borrower’s capital structure.

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Loans, Acquisitions and Guaranties.    (1)  Loan, invest in or advance money or assets, (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) incur any obligation as surety or guarantor other than in the ordinary course of business.

CESSATlON OF ADVANCES.    If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower’s financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor’s guaranty of the Loan or any other loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred.

DEFAULT.    Each of the following shall constitute an Event of Default under this Agreement:

Payment Default.    Borrower fails to make any payment when due under the Loan.

Other Defaults.    Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

Default in Favor of Third Parties.    Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s or any Grantor’s property or Borrower’s or any Grantor’s ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents.

False Statements.    Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency.    The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.

Defective Collateralization.    This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

Creditor or Forfeiture Proceedings.    Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor.    Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness.

Change in Ownership.    Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

Adverse Change.    A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired.

Insecurity.    Lender in good faith believes itself insecure.

EFFECT OF AN EVENT OF DEFAULT.    If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender’s option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the “Insolvency” subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender’s rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender’s right to declare a default and to exercise its rights and remedies.

MISCELLANEOUS PROVISIONS.    The following miscellaneous provisions are a part of this Agreement:

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Amendments.    This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys’ Fees; Expenses.    Borrower agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender’s attorneys’ fees and legal expenses whether or not there is a lawsuit, including attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court.

Caption Headings.    Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

Consent to Loan Participation.    Borrower agrees and consents to Lender’s sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower’s obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.

Governing Law.    This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of New Mexico. This Agreement has been accepted by Lender in the State of New Mexico.

Choice of Venue.    If there is a lawsuit, Borrower agrees upon Lender’s request to submit to the jurisdiction of the courts of the State of New Mexico, in the county in which Borrower’s following address is located: 4700 IRVING BLVD. NW, SUITE 201, ALBUQUERQUE, NM 87114.

No Waiver by Lender.    Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender’s rights or of any of Borrower’s or any Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Notices.    Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower’s current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers.

Severability.    If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

Subsidiaries and Affiliates of Borrower.    To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word “Borrower” as used in this Agreement shall include all of Borrower’s subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower’s subsidiaries or affiliates.

Successors and Assigns.    All covenants and agreements contained by or on behalf of Borrower shall bind Borrower’s successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower’s rights under this Agreement or any interest therein, without the prior written consent of Lender.

Survival of Representations and Warranties.    Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of

BUSINESS LOAN AGREEMENT

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Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower’s Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.

Time is of the Essence.    Time is of the essence in the performance of this Agreement.

Waive Jury.    All parties to this Agreement hereby waive the right to any Jury trial in any action, proceeding, or counterclaim brought by any party against any other party.

DEFINITIONS.    The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement:

Advance.    The word “Advance” means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower’s behalf on a line of credit or multiple advance basis under the terms and conditions of this Agreement.

Agreement.    The word “Agreement” means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time.

Borrower.    The word “Borrower” means NEW MEXICO UTILITIES, INC., and all other persons and entities signing the Note in whatever capacity.

Collateral.    The word “Collateral” means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise.

Environmental Laws.    The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.

Event of Default.    The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.

GAAP.    The word “GAAP” means generally accepted accounting principles.

Grantor.    The word “Grantor” means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest.

Guarantor.    The word “Guarantor” means any guarantor, surety, or accommodation party of any or all of the Loan.

Guaranty.    The word “Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances.    The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

Indebtedness.    The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents.

Lender.    The word “Lender” means BANK OF THE WEST, its successors and assigns.

Loan.    The word “Loan” means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time.

Note.    The word “Note” means the Note executed by NEW MEXICO UTILITIES, INC. in the principal amount of $4,000,000.00 dated April 10, 2002, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.

BUSINESS LOAN AGREEMENT

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Permitted Liens.    The words “Permitted Liens” mean (1) liens and security interests securing Indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled “Indebtedness and Liens”; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower’s assets.

Related Documents.    The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan.

Security Agreement.    The words “Security Agreement” mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest.

Security Interest.    The words “Security Interest” mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise.

BUSINESS LOAN AGREEMENT

Loan No: 011 Sweep (Continued) Page 9

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT IS DATED APRIL 10, 2O02.

BORROWER:
NEW MEXICO UTILITIES, INC.
By:	/s/    WILLIAM C. JASURA	By:	/s/    MICHAEL O. QUINN
	William C. Jasura Treasurer of New Mexico Utilities, Inc.		Michael O. Quinn President of New Mexico Utilities, Inc.

LENDER:
BANK OF THE WEST
By:
	Authorized Signer