10-K

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
ý	Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2004
or
o	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

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 95-1840947
(I.R.S. Employer Identification Number)

One Wilshire Building
624 South Grand Avenue, Suite 2900
Los Angeles, California 90017-3782
(Address of principal executive offices, including zip code)

(213) 929-1800
(Registrant's telephone, including area code)

Title of each class	Name of each exchange on which registered
Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act:	None
(1) Common Stock, $.01 par value	NASDAQ
(2) Series A, Preferred Stock, $.01 par value	None

        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 ý    No o.

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III in this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý    No o.

        The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $177.2 million based upon the average bid and asked price of such common equity as of June 30, 2004. The registrant is unable to estimate the aggregate market value of its preferred shares held by non-affiliates of the registrant because there is no public market for such shares. On March 21, 2005, there were 19,414,317 common shares outstanding.

Documents Incorporated by Reference

        Portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the close of the Registrant's fiscal year, are incorporated by reference in Part III of this Form 10-K.

SOUTHWEST WATER COMPANY AND SUBSIDIARIES


TABLE OF CONTENTS

Part I
Item 1.	Business	1
Item 2.	Properties	25
Item 3.	Legal Proceedings	27
Item 4.	Submission of Matters to a Vote of Security Holders	27
Item 4A.	Executive Officers	27
Part II
Item 5.	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30
Item 6.	Selected Financial Data	31
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 8.	Financial Statements and Supplementary Data	48
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	80
Item 9A.	Controls and Procedures	80
Part III
Item 10.	Directors and Executive Officers of the Registrant	84
Item 11.	Executive Compensation	84
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	84
Item 13.	Certain Relationships and Related Transactions	84
Item 14.	Principal Accountant Fees and Services	84
Part IV
Item 15.	Exhibits and Financial Statement Schedules	85
EXHIBIT INDEX		92
SIGNATURES		97

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained in this Form 10-K that are not clearly historical in nature are forward-looking, and the words "anticipate," "believe," "belief," "expect," "estimate," "plan," "intend," "continue," "predict," "may," "will," "should" and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties, including those set forth under "Risk Factors" below, that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could affect forward-looking statements relating to the resolution of the material weakness with respect to internal controls discussed in Item 9A of this Form 10-K include, among other things: the Company's ability to design and maintain policies and procedures which enable the Company to avoid any reoccurrence of the matters which gave rise to the material weakness and the Company's ability to identify and retain qualified and experienced financial personnel. Caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date when made. Other than as required by applicable law, we undertake no obligation to publicly update or revise forward-looking statements.

PART I

ITEM 1. BUSINESS.

OVERVIEW

        Southwest Water Company and its subsidiaries ("Southwest Water," "the Company," "we," "us" or "our," except where the context requires otherwise) provide a broad range of services including water production, treatment and distribution; wastewater collection and treatment; utility billing and collection; utility infrastructure construction management; and public works services. We own regulated public utilities and also serve cities, utility districts and private companies under contract. We provide our services to more than two million people. Our subsidiaries are segmented into two operating groups: our Utility Group and our Services Group.

        Within our Utility Group, we own and manage the operations of rate-regulated public water and wastewater utilities in California, New Mexico, Oklahoma and Texas, through which we sell water to residential and commercial customers. State and federal agencies issue regulations regarding standards of water quality, safety, environmental and other matters which affect these operations. The rates that we can charge for water and wastewater usage are established and approved by state government agencies.

        Our Services Group provides water and wastewater facility operations and maintenance services, equipment maintenance and repair, sewer pipeline cleaning, billing and collection services, and state-certified water and wastewater laboratory analysis on a contract basis. The facilities operated by the Services Group are owned by cities, public agencies, municipal utility districts and private entities primarily in Alabama, California, Colorado, Georgia, Mississippi, New Jersey, New Mexico, South Dakota and Texas. Our Services Group also facilitates the design, construction, project management, and operating aspects of various water and wastewater projects. During the construction phase of such a project, our Services Group may have an ownership interest in the project. Additionally, our Services Group provides utility billing and collection services for multiple-family housing units such as apartment buildings. While state and federal agencies issue regulations regarding standards of water quality, safety, environmental and other matters which affect our Services Group operations, the pricing of the services provided by our Services Group is not subject to government regulation.

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        Southwest Water Company was incorporated in California in 1954 and reincorporated in Delaware in 1988.

OUR BUSINESS STRATEGY

        Our primary objectives are to provide an essential product and service, and to generate value for clients, customers, employees and stockholders. We apply two principal strategies in our efforts to continue growing our business and improving our financial performance:

We work to enhance organic revenue growth.

        Southwest Water Company is a leading full spectrum service provider in the water and wastewater industries. We have a broad service presence in high population-growth states. Our target market focus is on small to medium size cities. We offer our clients and customers services within our core competency of water and wastewater management. In addition we provide related peripheral services including:

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Construction management of water and wastewater systems,



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Water and wastewater certified laboratory services,



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Public works management,



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Multiple-family utility billing and collection,



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Non-regulated wholesale water sales,



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Pipeline inspection,



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Water meter replacement, and



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Refurbishing of manholes and sewer lines.

        Utility Group organic revenue growth in 2003 and 2004 benefited from rate increases in our California and Texas utilities and from increased customer connections in our New Mexico and Texas utilities. New operations and maintenance contracts, and higher billing rates and expanded services under certain existing contracts fueled organic revenue growth for our Services Group in 2003 and 2004.

We pursue selected acquisitions that fit our long-term growth goals in both the Utility and Services Groups.

        In recent years we have made acquisitions to expand our business.

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In September 2004, we acquired the assets of ACE Technologies, Inc., a water and wastewater testing laboratory, and incorporated its business into an existing subsidiary. This acquisition allowed us to expand our capacity and expertise in the water and wastewater quality testing field.



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In July 2004, we acquired a Texas utility consisting of a collection of rural regulated water systems and wastewater systems serving approximately 21,000 water connections and 3,500 wastewater connections from Tecon Water Holdings, L.P., and renamed the utility Monarch Utilities, Inc. ("Monarch Utilities"). The acquisition expanded our regulated operations in the state of Texas. The proximity of these new systems to our existing operations will allow us to obtain certain operating efficiencies by sharing overhead costs and employee competency in this region.



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During 2004, we completed several acquisitions in the multiple-family utility billing and collection market. These acquisitions were structured as asset purchases, primarily of account

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contracts, account lists, software and other assets. Under the purchase agreements we acquired approximately 136,000 active billing and collection units.

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In November 2002, we acquired certain contract operations of AquaSource, Inc., which we operate under the name Aqua Services LP ("Aqua Services"). The acquisition introduced us to new markets in three states and also strengthened our presence in the Houston, Texas, area.



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In December 2001, we acquired substantially all of the assets of CDC/Construction Design Company, LTD., a company with experience in underground water and wastewater utility maintenance and manhole rehabilitation.



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In August 2001, we acquired 90% of the outstanding shares of Operations Technologies, Inc. ("OpTech") which enhanced our contract operations by extending our client base to the southeast portion of the United States and expanding our range of contract services to include public works functions such as storm water drainage, system maintenance and street repair.



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In April 2000, we acquired 80% of Master Tek International, Inc. ("Master Tek"), a company with expertise in multiple-family billing and collection services. In 2004, we completed the acquisition of the remaining 20% of Master Tek.



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In February 2000, our California utility purchased the City of West Covina's water distribution system and facilities, adding approximately 7,000 connections to our customer base.

        We continue to work to identify and evaluate potential acquisitions.

KEY BUSINESS SEGMENTS

        Group revenues for the three years ended December 31, 2004 were as follows:

	Years Ended December 31,
	2004		% of Revenue		2003		% of Revenue		2002		% of Revenue
	(in millions, except percentages)
Utility Group	$	69	37	%	$	57	33	%	$	52	40	%
Services Group		119	63	%		116	67	%		79	60	%
	$	188	100	%	$	173	100	%	$	131	100	%

UTILITY GROUP—DEVELOPMENT OF BUSINESS, SERVICES AND REGULATION

California

        Our regulated public water utility in California produces and supplies water for residential, business, industrial and public authority use and for fire protection service under the jurisdiction of the California Public Utilities Commission ("CPUC"). Our California utility service area contains a population of approximately 311,000 people in an area of approximately 43 square miles within Los Angeles and Orange counties.

        Our California utility or its predecessor entities have supplied water since approximately 1907. From the mid-1950s to the late 1960s, our operations expanded rapidly as most of our service area was converted from agricultural use to residential, business and industrial use.

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        The following table indicates by classification the number of water connections that our California utility served as of the end of each of the past three years:

California Utility—Number of Water Connections by Classification

		Water Connections as of December 31,
		2004	2003	2002
Residential		70,908	70,822	70,657
Business and commercial		2,980	3,006	3,015
Other		1,189	1,199	1,174
	Totals	75,077	75,027	74,846

        During 2004, our California utility's annual revenues were approximately 73% from sales to residential connections, approximately 17% from sales to business and industrial connections, and approximately 10% from sales to other connections.

        Our California utility provides water both by pumping water from wells we own and by purchasing water from the Metropolitan Water District of Southern California ("MWD"), a governmental agency, and other sources. The wells owned and operated by our California utility pump water from two of the major groundwater basins in the Southern California coastal watershed: the Main San Gabriel Basin (the "Main Basin") and the Central Basin. Our rights to pump water from the Main and Central Basins are fully adjudicated under California law, and these adjudications establish our right to produce water at levels and at a cost prescribed each year by the Watermaster Boards (the "Boards") that manage the Main and Central Basins. Our California utility is also allowed to produce water from the Main and Central Basins in excess of the amount prescribed by the Boards, but when such excess production occurs, an additional payment from our utility is required to provide for the replenishment of the water supply. As the water levels in the Main and Central Basins increase or decrease, the Boards may adjust the prescribed production levels beyond which we are required to make payments for replenishment of the water supply.

        In the "Environmental Matters" section below, we discuss certain groundwater issues impacting the Main Basin. In 2001, we were required to remove some of our wells from service due to these issues. This resulted in our California utility purchasing increasing amounts of water from the MWD and other sources. The percentage of water supply purchased from external sources at our California Utility is as follows:

Years Ended December 31,	Percentage Purchased
2000	40	%
2001	46	%
2002	72	%
2003	67	%
2004	54	%

        Under an agreement made in early 2002, we have been reimbursed for certain costs of purchasing water needed to replace lost production as a result of the Main Basin contamination issues. We expect such reimbursement to continue until completion of remediation (see further discussion in "Environmental Matters" below).

        Our California utility owns 15 wells and 31 reservoirs. We believe that we are able to purchase or produce adequate water to serve our current customer base and manage reasonable growth from new customers.

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        In recent years, the growth of our California utility has been limited to extensions into new subdivisions along the periphery of its service area. There is little undeveloped land available for new business, industrial construction or residential growth in the California service area. As a result, we do not anticipate a significant increase in the number of connections in our current service area.

        Although our utility service areas in California are not likely to experience significant connection growth, our California utility operations are capital intensive. Significant capital expenditures are necessary for the renovation and replacement of our facilities in California. Capital is generated from utility operations and periodic debt financing. Our California utility also receives contributions in aid of construction from developers, governmental agencies, municipalities or individuals to assist in the cost of facility development. For the years ended December 31, 2004, 2003 and 2002, capital expenditures in California approximated $9.3 million, $8.8 million and $10.0 million, respectively. Of these amounts, our California utility received capital contributions and advances from developers of approximately $5.6 million, $3.2 million and $2.5 million in 2004, 2003 and 2002, respectively, to assist in paying for the capital expenditures. Additions included payments received as part of a settlement agreement relating to Main Basin groundwater contamination totaling approximately $0.7 million, $2.5 million and $3.2 million in 2004, 2003 and 2002, respectively (see further discussion in "Environmental Matters" below).

        The CPUC regulates the rates and operations of our utility subsidiary in California. Under current CPUC practices, California customer water rates may be changed through general rate cases or by offsets for certain rate base and expense items. Since September 30, 2002, the California Public Utilities Code has required that CPUC-regulated water utilities file general rate cases every three years. General rate cases require formal proceedings with the CPUC in which overall rate structure, expenses and rate base are examined by CPUC staff. Historically, rate proceedings have required approximately 12 months from the time an application is filed to the CPUC's authorization of new rates. Our California utility made a general rate case filing on April 2, 2002 and was granted an average 17% increase in rates effective May 28, 2003. The next general rate case is scheduled to be filed in 2005.

        In addition to a general rate increase, the CPUC typically provides for step increases in the second and third years. The step increases are intended to compensate for projected expense increases. Prior to their approval, step increases are subject to verification that pro forma earnings levels have not exceeded the amounts authorized in the general rate proceeding.

        Under prior CPUC procedures, offsets were approved through an abbreviated proceeding that required approximately two months from the time a request was filed to the authorization of new rates. Under current CPUC guidelines, offset changes, particularly increases, generally have more restrictions and are reviewed more closely.

        The CPUC previously allowed water utilities to defer recognition of certain expense increases which were beyond our control through the use of balancing accounts. Those expenses included costs for purchased water, purchased power and pump taxes. Prior to November 29, 2001, the CPUC allowed balancing accounts in the income statements of water utilities, with a corresponding liability or asset on the balance sheet. However, the CPUC has changed this policy by eliminating the use of balancing accounts after November 29, 2001. In 2002 our California water utility recorded a balancing account receivable of approximately $2.3 million, representing the difference between actual water production costs incurred and CPUC-adopted water production costs. On July 8, 2004, the CPUC issued a decision that allows our water utility in California to collect the $2.3 million balancing account and an additional under-collection of approximately $0.7 million for a total of $3.0 million. The $0.7 million increase in the balancing account receivable was recorded in the third quarter of 2004. The CPUC decision provides for us to recover the settlement amount through a surcharge billed to customers. Currently, when actual water production costs exceed CPUC-adopted levels, the costs are expensed as incurred. Such costs are tracked in a memorandum account for potential future recovery.

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New Mexico

        Our regulated public water utility in New Mexico provides water supply and sewage collection services for residential, commercial and irrigation use and for fire protection service under jurisdiction of the New Mexico Public Regulation Commission ("NMPRC"). Our New Mexico utility service area is located in the northwest part of the City of Albuquerque and in the northern portion of Bernalillo County, and contains a population of approximately 41,000 people in an area of approximately 34 square miles. Approximately 35% of the area has been developed.

        The following table indicates by classification the number of water connections served by our New Mexico utility as of the end of each of the most recent three years:

New Mexico Utility—Number of Water Connections by Classification

		Water Connections as of December 31,
		2004	2003	2002
Residential		13,400	12,108	10,554
Business and commercial		780	723	707
Other		131	118	104
	Totals	14,311	12,949	11,365

        Our New Mexico utility has grown from approximately 800 connections at the time of its acquisition in 1969 to over 14,000 connections. Most of this growth has resulted from the extension of water services and sewage collection services into new residential subdivisions and new commercial development. During 2004, we added 1,362 new water connections and 1,315 new wastewater connections in New Mexico. Because of the continuing real estate development in our service area, we expect continued connection growth in 2005. During 2004 and 2003, our revenues in New Mexico were approximately 64% and 63%, respectively, from sales to residential connections and approximately 36% and 37%, respectively, from sales to commercial and industrial connections.

        Our New Mexico utility owns six wells and five reservoirs, and we believe that we have adequate water capacity to serve our current customer base as well as reasonable growth from new customers. The wells that we own and operate in New Mexico produce water from the Rio Grande Underground Basin. We have purchased, and plan to continue evaluating opportunities to purchase, additional water rights in New Mexico.

        As we expect customer growth to continue in our New Mexico service area, we may have to increase our water supply capacity through additional well construction. Our New Mexico utility has established an emergency supply of water available through an interconnection with another water purveyor, for use in the case of a temporary interruption in our New Mexico water supply.

        Because our New Mexico utility service area has continued to experience customer growth, our operations are capital intensive. Capital is generated from New Mexico operations, periodic debt financing, bank lines of credit extended to our New Mexico utility and to Southwest Water, contributions in aid of construction received from developers, and from advances received from developers, which must be repaid under rules of the NMPRC. For the years ended December 31, 2004, 2003 and 2002, our capital expenditures in New Mexico approximated $9.2 million, $9.6 million and $7.5 million, respectively. Of these amounts, our New Mexico utility received capital contributions from developers of approximately $6.3 million, $8.6 million and $6.7 million in 2004, 2003 and 2002, respectively.

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        The NMPRC regulates the rates and operations of our utility subsidiary in New Mexico. Requests for rate increases, typically based on historical costs, must be submitted to the NMPRC. We have not requested a general water rate increase during the past several years.

Texas

        Our regulated public water utilities in Texas provide water supply and sewage collection and treatment services to approximately 28,000 connections for residential, commercial and irrigation use and for fire protection service under the jurisdiction of the Texas Commission on Environmental Quality ("TCEQ"). Our service areas in Texas are broadly dispersed throughout the state, including the Dallas, Fort Worth, Houston and Austin areas. Our service areas contain a population of approximately 94,000 people in an area of approximately 35 square miles, which is largely undeveloped. These service areas are experiencing continued real estate development, and we expect the number of connections to continue growing in 2005.

        In July 2004, we acquired 86 water systems in Texas which we operate as Monarch Utilities. As of the date of acquisition, Monarch Utilities served approximately 21,000 water connections and 3,500 wastewater connections.

        The following table indicates by classification the number of water connections served by our Texas utilities as of the end of each of the most recent three years:

Texas Utilities—Number of Water Connections by Classification

		Water Connections as of December 31,
		2004	2003	2002
Residential		28,199	5,925	5,602
Business and commercial		206	156	152
	Totals	28,405	6,081	5,754

        Our Texas utilities own or have rights to 216 wells and 189 reservoirs in addition to distribution, collection and treatment facilities. We believe that we have adequate capacity to serve our existing customer base in Texas as well as reasonable growth from new customers.

        As we expect customer growth to continue in our Texas service areas, we may have to increase the water supply capacity of our Texas utilities through a combination of outside water purchases and the construction of additional wells. One of our Texas utilities has long-term agreements to purchase water from the cities of Austin and Pflugerville, Texas.

        Because our Texas utility service areas are also in locations of customer growth, these operations are capital intensive. Capital is generated from Texas operations, bank term loans, and contributions and advances received from developers. For the years ended December 31, 2004, 2003 and 2002, our capital expenditures in Texas were approximately $12.4 million, $11.1 million and $13.7 million, respectively. Of these amounts, our Texas utilities received contributions from developers of approximately $1.8 million, $0.6 million and $4.8 million in 2004, 2003 and 2002, respectively.

        The TCEQ regulates the rates and operations of our Texas utility subsidiaries. One of our Texas utilities filed for a general rate increase in June 2001, and new rates became effective in January 2002. Monarch Utilities received authorization for a rate increase in October 2004 and will benefit from a step increase in October 2005. Our other utilities are not currently seeking increased rates; however, regulatory changes concerning water quality, future construction expenditures and increased operating expenses may result in future requests for rate increases.

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Seasonality

        Our Utility Group water revenues are seasonal because rainfall and weather conditions affect water sales. The second and third quarters of each year typically account for the highest volume of water consumption when weather tends to be hot and dry. Utility Group wastewater revenues are generally not affected by seasonality.

        The results of operations for one quarter do not indicate results to be expected in another quarter. Drought conditions may result in consumer conservation efforts or water shortages, which can reduce consumption. Drought conditions may also result in increased water costs to us, which could adversely affect our profitability. Conversely, unusually wet conditions may result in decreased customer demand, lower revenues and lower profit in our utility operations.

Environmental Matters

        One of the water sources for our California water utility has been affected by the presence of certain groundwater contaminants. These contaminants consist mainly of chemicals disposed of by various industrial companies in the 1940s and 1950s. In 2001 and 2002, this contamination necessitated the shutdown of a number of our wells, and we purchased replacement water at a cost substantially higher than the cost of water pumped from our own wells.

        The incremental and unreimbursed costs of purchasing replacement water and related energy costs in 1999, 2000 and 2001 related to this contamination were approximately $84,000, $756,000 and $809,000, respectively. Prior to May 2002, these costs were recorded as operating expenses and reduced our operating income.

        In May 2002, a settlement agreement was reached between some of the parties allegedly responsible for the contamination ("Cooperating Respondents") and our California water utility. As a result of this agreement, we recorded income in 2002 of approximately $1.7 million, for reimbursement of certain water and energy costs, incurred from the contamination. This settlement was an unusual event and we recorded the $1.7 million in other income (expense), in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of Operations.

        Since our groundwater contamination-related costs incurred prior to the agreement were not included in our water rate calculations, the reimbursement offset costs that our utility had previously incurred, resulting in no effect on ratepayers.

        As a result of this settlement agreement, we have received payments during the last three years, and we expect to continue to receive payments until completion of remediation. These payments represent the incremental cost of purchasing water over the cost that would have been incurred by us to pump water from our wells had they not been shut down as a result of contamination and excluded costs covered in the $1.7 million settlement discussed above. The settlement agreement provided for ongoing reimbursement of our excess water costs and we bill and collect this reimbursement monthly. These monthly reimbursements are recorded as a reduction to operating expenses. The reimbursements were approximately $3.3 million, $4.0 million and $4.4 million during 2004, 2003 and 2002, respectively.

        The settlement agreement also provides for contributions by the Cooperating Respondents for construction of new wells and interconnections with nearby water sources. These contributions were approximately $0.7 million, $2.5 million and $4.4 million for 2004, 2003 and 2002, respectively, and were recorded as contributions in aid of construction.

Water Quality Regulations

        The water supplies available to our utilities in California, New Mexico, and Texas are subject to regulation by the United States Environmental Protection Agency ("EPA") under the 1996 Federal

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Safe Drinking Water Act ("US Act"). The US Act establishes uniform minimum national water quality standards, as well as specification of the types of treatment processes to be used for public drinking water. The EPA, as mandated under the US Act, issues regulations that require, among other things, disinfection of drinking water, specification of maximum contaminant levels ("MCLs") and filtration of surface water supplies.

        Our California water supplies are also subject to regulation by the Office of Drinking Water of the California Department of Health Services ("DOHS") under the California Safe Drinking Water Act ("Cal Act"). The Cal Act and the rules of the DOHS are similar to the US Act and the mandates of the EPA, except that in many instances the requirements of the DOHS are more stringent than those of the EPA. In addition to the EPA and the DOHS water quality regulations, our California water utility is also subject to water quality standards that may be set by the CPUC. The California Supreme Court has ruled that the CPUC has the authority to set standards that are more stringent than those set by the EPA and the DOHS.

        In June 1998, we detected the substance N-nitrosodimethylamine ("NDMA") in one of our California utility's wells at a level in excess of the EPA reference dosage for health risks. Upon detection, the well was immediately removed from service. In 1999, our California utility completed construction of a treatment facility that is intended to reduce NDMA in this well to non-detectable levels. In February 2001, we received final regulatory approval of the facility and in May 2001, our California utility began producing water from this well. However, in January 2002, the DOHS set a more stringent recommended standard for the substance perchlorate, which was subsequently detected in this California well at levels in excess of the revised standard. We immediately removed this well from service.

        In 2000, in another of our California utility's well fields, we detected amounts of contaminants in excess of the EPA reference dosage for health risks. All wells in that well field were immediately removed from service. The water production from these wells was replaced with purchased water, the excess costs of which were substantially funded by the Cooperating Respondents.

        The water supplied by our New Mexico utility is subject to regulation by the EPA and by the State of New Mexico Environmental Improvement Division ("EID"). The water supplied by our Texas utilities is subject to regulation by the EPA and by the TCEQ.

        In February 2002, the EPA set a more stringent arsenic standard in drinking water from 50 parts per billion to 10 parts per billion, which must be fully met by 2006. At the present time, our water sources in California and Texas are in compliance with the new standards. The DOHS is holding discussions that could result in a more stringent arsenic standard. We cannot predict the impact that such changes in the arsenic standard would have on our California and Texas water utility operations. If the arsenic standard remains at 10 parts per billion, we do not expect it to have a material adverse impact on our financial position or results of operations in California and Texas.

        Although our New Mexico utility meets the current EPA arsenic standard of 50 parts per billion, it does not meet the newly adopted arsenic standard of 10 parts per billion. To meet this new standard by the required 2006 implementation date, we are taking actions that include the construction of arsenic removal treatment plants. We anticipate that capital expenditures of approximately $4 million will be required at our New Mexico facilities in order to comply with the new arsenic standard and that the cost of water will increase as a result of treatment requirements. We believe that there may be funds available from state or federal agencies that could defray all or a part of the capital expenditures that we believe will be necessary to meet the new arsenic standards. If this new standard has an impact on our New Mexico operations, we will consider making a request to the NMPRC for recovery of these costs. While the NMPRC has previously allowed the recovery of similar costs through higher rates, we cannot assure you that costs incurred or capital spent will ultimately be recoverable from the ratepayers.

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        Costs associated with testing of our water supplies in California, Texas and New Mexico have increased and are expected to further increase as regulatory agencies adopt additional monitoring requirements. We believe that costs associated with the additional monitoring and testing of our water supplies will be recoverable from ratepayers through future rate increases. However, we cannot assure you that water sources currently available to our utilities will meet future EPA, or state regulatory requirements, that recovery of additional costs will be allowed, or that new or revised monitoring requirements will not necessitate additional capital expenditures in the future. We believe that future incremental costs of complying with governmental regulations, including capital expenditures, will be recoverable through increased rates. However, we cannot assure you that recovery of such costs will be allowed.

        Both the EPA and the state regulatory agencies have put into effect regulations and other pronouncements that require periodic testing and sampling of water to ensure that only permissible levels of organic and volatile and semi-volatile organic compounds ("VOCs"), herbicides, pesticides, radionuclides, and inorganic substances are present in water supplied to the public. Our water utilities operators regularly sample and monitor the quality of water being distributed throughout the system. Our utility personnel conduct sampling, testing and inspections at the intervals, locations and frequencies required by EPA and state regulations. Water samples from throughout our water systems are tested regularly by state-certified laboratories for bacterial contamination, chemical contaminant content and for the presence of pollutants and contaminants for which MCLs have been put into effect. The test results are sent to the respective state regulatory agencies. Disinfection and other types of treatment are applied to water supplies as required or needed to safeguard against bacteriological, chemical and other water contaminants. In addition, each of our utilities provides its customers with an annual water quality report that, among other matters, informs them of the sources and quality of the water being provided.

        In addition to water sampling and testing performed by our California utility personnel, independent engineers retained by the Boards conduct sampling and testing for certain pollutants such as VOCs. The results of the sampling and testing are made available to the DOHS and all water purveyors that produce water from the Main Basin. The cost of such sampling and testing is covered by assessments to the producers in this basin.

        Several water and wastewater systems at one of our Texas utilities are in violation of MCLs and other state regulatory requirements. The TCEQ and customers in affected areas have been advised of the violations. We are currently evaluating these issues and working with the TCEQ and outside consultants to bring the systems into full compliance.

        Since the terrorist attacks on September 11, 2001, there has been heightened concern regarding the vulnerability of drinking water systems. Drinking water systems were identified as critical infrastructures and potential terrorist targets. In compliance with the Public Health Security and Bioterrorism Response Act of 2002, PL 107-88, our Utility Group assessed the vulnerability of our water systems to terrorist attack. This vulnerability assessment was used to determine the risks posed to the water supply system operations, treatment, and distribution systems; identify the water systems' vulnerabilities; provide a prioritized plan for security upgrades, modifications of operational procedures, and/or policy changes to mitigate identified risks to critical assets; and provide a basis for comparing the cost of protection against the risks posed. While it is impossible to protect or eliminate the vulnerability of all of our drinking water systems, our utilities considered and are implementing improvements in security that can make it more difficult for attacks to succeed and can lessen the impact of attacks that may occur.

        We believe that water supplied by our California utility meets all current requirements of the US Act, the Cal Act and the regulations put into effect under the related legislation and CPUC standards. We also believe that water supplied by our New Mexico utility and our Texas utilities complies with all

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current requirements of the EPA and the respective state regulatory agencies, except as noted above. However, we cannot assure you that water sources currently available to our water utilities will meet future EPA or state regulatory requirements, or that such future requirements will not necessitate future capital expenditures by our water utilities.

Competition

        Our regulated utility subsidiaries in California, New Mexico and Texas each operate under a Certificate of Public Convenience and Necessity granted by the CPUC, NMPRC and TCEQ, respectively. Our utilities are also regulated by other state and local governmental authorities having jurisdiction over water and wastewater service and other aspects of our water utility businesses. Our Utility Group water businesses are dependent upon maintaining these certificates and upon various governmental and court decisions affecting our water rights and service areas.

        California, Texas and New Mexico state laws provide that no public or private agency can install facilities within the service area of a public utility in order to compete with it, except upon payment of just compensation for all damages incurred by the public utility. Under the state laws of California and New Mexico, municipalities and certain other public agencies have the right to acquire private water utility plants and systems within their territorial limits by condemnation but must pay fair value for the condemned system. We are not aware of any impending proceeding for the condemnation of any portion of their facilities.

SERVICES GROUP—DEVELOPMENT OF BUSINESS, SERVICES AND REGULATION

Contractual Relationships

        Our Services Group has over 450 contracts. The majority of these contracts fall into three categories:

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Municipal Utility District contracts



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Operations and maintenance contracts



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Construction management contracts

Municipal Utility District (MUD) Contracts

        A MUD is created under the rules of the TCEQ to provide water supply, wastewater treatment and drainage services to areas where existing municipal services are not available. Our Services Group has MUD contracts in the suburbs of Houston, Austin and El Paso, Texas. Under a typical MUD contract, we bill a monthly base fee to the MUD to provide a specified level of services. We typically provide water and wastewater facility operations and maintenance services, equipment maintenance and repair, billing and collection services, and state-certified water and wastewater laboratory analysis. We usually bill for any additional services provided beyond the basic contract on a time-and-materials basis as such services are rendered. Most contracts provide for an increase in the monthly base fee as the number of customer connections increases and do not generally include inflation adjustments. Changes in prices are negotiated on a contract-by-contract basis. Generally, MUD contracts are cancelable with 30 to 60 day prior notice by either party. Our experience indicates that, with high-quality service and strong focus on client satisfaction, MUD relationships can last for many years.

Operations and Maintenance (O&M) Contracts

        O&M contracts are agreements with cities, private entities and investor-owned utilities (including Utility Group affiliates) that provide specific services such as facility operation and maintenance, meter reading, customer billing and collection, public works services, or management of entire water or

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wastewater systems. Under a typical O&M contract, our Services Group subsidiaries charge a fee that covers a specified level of services. Services are typically provided evenly throughout the contract period and are billed on a monthly basis. Our O&M contracts limit our liability in the event of a major system failure or catastrophic event. If we provide services beyond the scope of a contract, we bill for the additional services. For example, if a major system failure or catastrophic event occurred as the result of flooding, earthquake, electrical strike or vandalism, the facility owner usually asks us to provide additional services on a time-and-materials basis.

        Most O&M contracts provide for annual increases based upon inflation and we typically have the right to increase our fixed operations fee if the system experiences customer connection growth beyond a specified level. We may pay certain costs such as chemical or power expenses. Usually, however, the contracts provide reimbursement for these costs.

        In most cases, O&M contracts are cancelable by either party only upon a specific breach of contract. O&M contracts have terms ranging from month-to-month to up to 20 years. We have a strong focus on customer service and client satisfaction and our experience has been that over 95% of our O&M contracts are renewed upon expiration.

Construction and Construction Management Projects

        Our Services Group enters into contracts pursuant to which we provide construction and construction management services for water and wastewater facility development, improvement and expansion projects. Under the terms of certain of these contracts, we may bear all or a significant portion of the risk of cost overruns, or incur additional costs or penalties for failing to meet project completion deadlines or minimum performance standards.

        In September 2002, we successfully bid a project to design, build, finance and operate a $23.0 million reverse osmosis water treatment plant in the city of San Juan Capistrano, California, for the Capistrano Valley Water District ("CVWD"). The project included the drilling of several new wells and the installation of associated water lines. During construction of the treatment plant, we received payments upon completion of construction milestones and will continue to receive such payments until final completion of construction. In addition, the CVWD awarded us a 20-year $20.0 million contract to operate the treatment plant after completion of construction. The construction of the plant started in December 2002 and was substantially complete as of December 31, 2004. The plant is operational and we have met a contractual requirement to produce a specified volume of treated water from this facility as of December 4, 2004. We are currently operating and maintaining the facility under the 20-year contract. The plant has the capacity to produce approximately 5.0 million gallons of potable water per day.

        Our Services Group has contracted with our Texas utilities and our New Mexico utility to perform operating services, normal maintenance and construction work and, in addition, to manage capital projects for these utilities. These contracts were established utilizing terms and conditions equivalent to prevailing industry rates for similar work performed by our Services Group for non-affiliated customers. In accordance with Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation, we recognize a profit on sales to regulated affiliates and do not eliminate the intercompany profit when the sales price is reasonable and it is probable that, through the rate making process, future revenue approximately equal to the sales price will result from the regulated affiliate's use of the services.

Growth and Backlog

        During the past three years, our Services Group has increased revenues and service areas by adding new contracts and construction projects, pursuing renewal and expansion of existing contracts and by making acquisitions.

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        Revenues included in backlog may be realized over a multi-year period. The O&M contracts signed by our Services Group typically have durations of three to five years, and the uncompleted remaining portion of these contracts is reflected in the backlog. MUD and multiple-family utility billing contracts are assumed to have a 36-month remaining term, consistent with our experience, and are included in the backlog computation using an assumed 36-month term. As of December 31, 2004 and 2003, our Services Group backlog was approximately $324 million and $315 million, respectively.

Seasonality

        Our Services Group operations are generally not seasonal but can be affected by severe weather and rainfall. In general, heavy rainfall or storm conditions may limit our ability to perform certain billable work such as pipeline maintenance, manhole rehabilitation and other outdoor services. Severe weather conditions may also result in additional labor and material costs to us that may not necessarily be recoverable from our various firm price contracts.

        Revenues of our billing and collection business are generally not subject to seasonal fluctuations.

Competition

        Competition in the MUD, O&M and construction management portions of our business includes a number of significantly larger companies that provide services on a national and international basis, as well as regional and local competitors. New contracts are awarded based on a combination of customer relationships, service levels, competitive pricing, references and technical expertise.

        Cities themselves are also competitors in O&M operations, since we must overcome reluctance on the part of city officials to outsource their water and wastewater services. Although industry renewal rates tend to be high, the contract water and wastewater management business is very competitive, and we cannot assure you that our Services Group will be able to increase or sustain its market share.

Regulation

        Our Services Group prices are not subject to regulation. However, because we provide contract services which include the operation and maintenance of water supply and wastewater facilities owned by cities, public agencies, municipal utility districts and private entities, we are subject to state and federal regulations regarding standards of water quality, safety, environmental and other matters.

CREDIT CONCENTRATION

        We have no individual customers who accounted for 10% or more of our consolidated revenues in 2004, or whose loss would have a material adverse effect on our consolidated or operating segment revenues.

INTELLECTUAL PROPERTY

        The primary focus of the water and wastewater management industry is customer service, and the industry does not rely heavily on technological or proprietary manufacturing processes. We do not conduct significant research and development activities. Except for certain logos, trademarks and artwork used in marketing, we have no other patents, licenses or trademarks.

SIGNIFICANT ACQUISITIONS

        In September 2004, we acquired the assets of ACE Technologies, Inc., a water and wastewater testing laboratory, and incorporated its business into an existing subsidiary. This acquisition allowed us to expand our capacity and expertise in the water and wastewater quality testing field. The purchase price was approximately $1.2 million, consisting entirely of a note payable.

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        In July 2004, we acquired a Texas utility consisting of a collection of rural regulated water systems and wastewater systems serving approximately 21,000 water connections and 3,500 wastewater connections from Tecon Water Holdings, L.P., and renamed the utility Monarch Utilities, Inc. ("Monarch Utilities"). The aggregate purchase price was approximately $66 million, comprised of approximately $48 million in cash payments and the assumption of approximately $18 million in debt.

        During 2004, we completed several acquisitions in the multiple-family utility billing and collection market. These acquisitions were structured as asset purchases, primarily of account contracts, account lists, software and other assets. Under the purchase agreements we acquired approximately 136,000 active billing and collection units at a cost of approximately $3.8 million in cash and approximately $1.5 million in notes payable.

        In November 2002, we acquired certain contract operations of AquaSource Inc., a provider of contract water and wastewater services in Texas, Colorado and South Dakota. The purchase price consisted of approximately $10.3 million in cash. Upon closing of the transaction on November 22, 2002, we began operating the majority of this business under the name Aqua Services, LP ("Aqua Services") while the remaining part was incorporated into one of our existing subsidiaries.

        In December 2001, we acquired substantially all of the assets of CDC/Construction Design Company, LTD., a company with experience in underground water and wastewater utility maintenance and manhole rehabilitation. The aggregate purchase price was approximately $3.2 million, which consisted of approximately $0.2 million in cash payments and notes payable of approximately $3.0 million.

        In August 2001, we purchased 90% of the outstanding shares of OpTech, a provider of contract water and wastewater and public works services in the southeastern United States, for a purchase price of $8.2 million. The purchase price consisted of cash payments of $3.5 million in August 2001 and $0.4 million in January 2002, promissory notes in the aggregate amount of $3.0 million and shares of our common stock with a market value of $1.3 million at August 31, 2001. We also entered into an employment agreement and a non-compete agreement with the owner of the remaining 10% of OpTech. Under the terms of our purchase agreement, we have the right to acquire the remaining 10% of OpTech after a period of five years based upon a formula relating to the profitability of OpTech. Beginning in 2004, the minority owner has the option to sell the remaining 10% of OpTech to us using the same formula, subject to a minimum of $1.0 million.

        In April 2000, the Company purchased 80% of the outstanding common stock of Master Tek for $4.0 million. The purchase price consisted of $2.0 million in cash and a $2.0 million ten-year promissory note. The purchase agreement provided that the Company had the right to acquire the remaining 20% ownership for a price based on a formula related to the future financial performance of Master Tek over the following seven years. Under the terms of the purchase agreement, the minority owner of Master Tek had the right to require the Company to purchase his remaining 20% minority interest in 5% increments at a price based on a formula, but not less than $1.0 million per year, over a four-year period commencing in April 2002. The acquisition was accounted for using the purchase method of accounting, and the results of Master Tek's operations have been consolidated with those of Southwest Water since April 3, 2000, the effective date of the transaction. The purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair value at the date of acquisition. In April 2002, we paid $1.0 million to the minority owner for an additional 5% interest in Master Tek in accordance with the purchase agreement, thereby increasing our ownership to 85%.

        In February 2003, we filed a lawsuit against the minority stockholder of Master Tek. In April 2003, the minority stockholder exercised his right to require the Company to purchase an additional 5% interest in Master Tek, which increased the Company's ownership to 90%. The lawsuit was settled in October 2003 with the following resolutions: (i) we took ownership of the remaining 10% of shares of Master Tek stock, (ii) a final payment of $2.7 million to the minority owner made in January 2004,

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(iii) elimination of the Company's $1.5 million note payable to the minority stockholder, (iv) release of the Company from any claims made by the minority stockholder and (v) certain indemnifications from the minority stockholder to cover certain potential or unasserted claims from third parties.

        In 1996, we acquired a 49% interest in Windermere Utility Company ("Windermere"), a regulated water and wastewater utility located in the Austin, Texas, area. In October 2000, we reached an agreement with the majority stockholder and purchased an additional 31% interest from the majority stockholder, increasing our ownership in Windermere to 80%. As part of this transaction, we also purchased 100% of Hornsby Bend Utility Company ("Hornsby"), a nearby water and wastewater utility. The purchase price for these two transactions consisted of Southwest Water common stock with a market value of $4.0 million at October 1, 2000. The purchase agreement provides that we have the right to acquire the remaining 20% ownership in Windermere for a purchase price of $6.0 million payable in our common stock at any time when the market value of our common stock increases to $12.96 per share (after adjustment for stock splits and dividends through January 2005). The minority owner of Windermere has the right to put the remaining 20% to us after October 1, 2005, for up to 450,000 shares of our common stock, but no less than 240,000 shares, depending on the prevailing stock price. We also entered into a consulting agreement with the minority owner.

EMPLOYEES

        At December 31, 2004, we employed approximately 1,500 people. Approximately 1,400 people were employed in our Services Group and 100 were employed in our Utility Group. Approximately 1% of our employees are represented under a collective bargaining agreement. We believe relations with our employees are positive.

DIVIDEND HISTORY

        During the past 20 years, Southwest Water has paid quarterly a cash dividend. For specific information relative to dividends paid during 2004 and 2003, see "Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities." In addition, we have also declared stock dividends or stock splits, paid in the form of stock dividends, annually over the last ten years.

SUBSEQUENT EVENTS

        We received an unsolicited proposal, from a prospective buyer, to negotiate terms and conditions for the sale of our multiple-family utility billing and collection subsidiary. We are evaluating this and other alternatives. Based upon our evaluation we may consider the divestiture or restructuring of this subsidiary, which generated revenues of approximately $8 million in 2004.

        In March 2005, we completed the acquisition of Novus Utility Services, Inc. ("Novus"), a Birmingham, Alabama, contract operations company. The aggregate purchase price was approximately $2.5 million in cash and notes payable. Novus generated 2004 revenues of approximately $4 million.

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RISK FACTORS

        The following factors could cause our actual results to differ materially from our historical results and/or forward-looking statements:

Risks Related to Our Business

Risk Factors that affect our Utility Group operations

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Weather conditions can affect the financial results of our Utility Group.

Rainfall and weather conditions affect our utility operations, with most water consumption occurring during the second and third quarters of each year when weather tends to be hot and dry. During this period, our marginal costs of water may exceed our marginal revenues as we use higher-cost purchased water to meet customer demand. Therefore, while our revenues may increase, we may experience lower profit margins during periods of peak demand.

Drought or unusually wet conditions may also adversely impact our revenues and profitability. During a drought, we may experience both lower revenues due to consumer conservation efforts and higher water costs due to supply shortages. Since a fairly high percentage of our water is used outside of our customers' homes to water yards and fill pools, unusually wet conditions could result in decreased customer demand, lower revenues and lower profit. Consequently, the results of operations for one quarter should not be used to predict the results of future quarters.

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Changes in the regulatory environment, including restrictions on the rates we are allowed to charge customers, may adversely affect our results of operations.

Our regulated utility subsidiaries are subject to regulation by governmental agencies which establish the rates that we may charge our customers. These rates are intended, in concept, to permit our utilities to recover operating costs and earn a rate of return on our investment in utility plant and equipment. Each state regulatory agency sets the rules and policies that allow our utilities to file applications to increase rates as expenses or investment needs increase. These rules and policies may require that we estimate future expenses or may require that we incur specific expenses before there can be a change in rates. As a result, our revenues and earnings may fluctuate depending on the accuracy of our estimates, timing of our investments or expenses, or other factors. For example, electric power costs in California have been volatile. While we intend to use energy-efficient techniques and appropriate equipment, we may seek an increase in rates. If we were unable to obtain a rate increase that completely offsets the effect of higher power costs, we would realize a decrease in our profitability.

The regulatory agencies may change their rules and policies which may adversely impact our profitability. In some states regulators are elected by popular vote, and the results of elections may change the rules and policies of the agency. Changes in rules and policies, including policies allowing our Services Group to provide operations and maintenance, and construction and construction management services to our regulated utilities at fair market value, may adversely impact our operating results.

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We may discover additional contamination of our water sources which may adversely affect our operations.

Our water sources are subject to contamination from sewage spills, hazardous materials leaks, or similar events. We may not recover costs incurred or revenues lost due to such contamination from responsible parties or from rate payers. Additionally, these events could expose us to environmental liabilities, claims and litigation costs. We cannot assure you that we will successfully manage these issues, and failure to do so could have a material adverse effect on future results of operations.

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We own assets in areas subject to natural disasters or that may be the target of terrorist activities.

Some of our utility operations are located in an area of southern California that is subject to earthquakes and other natural disasters. While we maintain insurance policies to help reduce our financial exposure, a significant seismic event could adversely impact our ability to deliver water. Additionally, our utility assets could be targeted by terrorists seeking to disrupt services to our customers.

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We are subject to regulatory and environmental risks and may not be able to provide an adequate supply of water to our customers.

Several factors impact our ability to provide water to our customers. We face contamination and pollution issues regarding our water supplies. Improved detection technology, increasingly stringent regulatory requirements, and heightened consumer awareness of water quality issues contribute to an environment of increased focus on water quality. While we continuously treat and test our water supplies to ensure that the water we distribute complies with water quality standards, we cannot assure you that we will be able in the future to reduce the amounts of contaminants in our wells to acceptable levels. In addition, the standards that we must meet are constantly changing and becoming more stringent. For example, in February 2002, the EPA lowered the arsenic standard in drinking water from 50 parts per billion to 10 parts per billion. If we cannot find an adequate treatment method to reduce arsenic in our New Mexico utility's well water, we would have to find alternative sources of supply. Our success in finding such alternative sources of supply at reasonable prices cannot be guaranteed.

To date, we have been able to produce and purchase enough water to meet our current customer requirements in California. However, we cannot assure you that we will be able to produce or purchase enough water to fully satisfy future customer demand in our California service area. We are currently examining various options to increase our available water supply in California. These options include drilling new wells, adding connections to our existing MWD supply lines and constructing water treatment facilities. We cannot assure you that the results of drilling the wells will be successful, that we will be able to obtain necessary permits to add new supply lines and connections, or that we will be able to obtain regulatory or legislative approval to operate new water treatment facilities.

Each of our utilities obtains its water from various sources. The preferred source is pumping water from aquifers within our service areas. In the event that our wells cannot meet the customer demand, we have the ability to purchase water from surrounding municipalities, agencies and other utilities. However, it usually costs us more to purchase water than to produce it. Furthermore, these alternative sources may not always have an adequate supply to sell us. For example, our California utility purchases water from the MWD, which receives water from the Colorado River. In 2003, the US Department of the Interior restricted the amount of water that California may receive from the Colorado River. This restriction may impact the amount of water that the MWD can sell to our California utility in the future. We can make no guarantee that we will always have access to an adequate supply of water that will meet all quality standards, or that the cost of our water will not adversely affect our operating results.

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We need access to capital to continue to invest in our utility assets.

To meet the regulatory requirements for rates, increases in customer connections, and environmental challenges, we need to continue our investment in utility plant and property. Currently we obtain the funds for our capital projects from our operations, the acceptance of contributions from developers, the issuance of our equity securities in public or private transactions and the use of both short- and long-term debt. In the event that any of these sources were not

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available, or if we could not raise the capital in a manner acceptable to our regulators, our financial performance could be adversely affected.

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We may be limited in our ability to mitigate water costs related to non-paying customers due to environmental considerations.

Under most circumstances, we discontinue service to non-paying customers. However, there may be situations where the discontinuation of water service could cause potentially significant environmental exposures. In such cases, we may continue to incur costs to procure and distribute water to non-paying customers.

Risk factors that affect our Services Group operations

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We operate in a competitive market with low operating margins.

Our Services Group competes with several larger companies whose size, financial resources, customer base and technical expertise may restrict our ability to compete successfully for certain operations and maintenance contracts.

Due to the nature of our contract operations business, and to the very competitive nature of the market, we operate in a low-margin environment. We must accurately estimate the cost and profitability of each project while, at the same time, maintaining prices at a level low enough to compete with other large companies. Our inability to do so could adversely impact our results of operations.

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Our revenue growth depends on our ability to enter into new, and maintain our existing, operating contracts with cities, agencies and municipal utility districts.

Our revenue growth depends upon our ability to generate new as well as renew operating contracts with smaller cities, other agencies and municipal utility districts. Because we are selling our services in a political environment, we are subject to changing trends and municipal preferences. Recent terrorist acts have affected some political viewpoints relative to outsourcing of water or wastewater utility services. In the United States, municipalities own and municipal employees operate the majority of water and wastewater systems. A significant portion of our Services Group's marketing and sales efforts is spent demonstrating the benefits of contract operations to elected officials and municipal authorities. Employee unions and certain "public interest" groups generally oppose the principle of outsourcing and are active opponents in this process. The political environment means that decisions are made based on many factors, not just economic factors.

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Our business depends on trained, qualified employees.

State regulations set the employee training, experience and qualifications standards required to operate specific water and wastewater facilities. We must recruit, retain and develop qualified employees, maintain training programs and support employee advancement. We must also secure the proper management and operational people, such as state-certified and qualified employees to support the operation of water and wastewater facilities. Failure to do so could put us at risk, among other things, for operational errors at the facilities, for improper billing and collection processes, and for loss of contracts and revenues.

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Events such as heavy rain, hurricanes, tornadoes and floods may affect our results of operations.

Our Services Group contract operations can be impacted by heavy rainfall which may limit our ability to perform certain billable work such as pipeline maintenance, manhole rehabilitation and other outdoor services. Severe weather conditions, such as hurricanes, tornadoes and floods, may

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result in additional labor and material costs that may not necessarily be recoverable under our firm, fixed-price O&M contracts, and may adversely impact our results of operations.

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Our Services Group contracts have certain performance risks.

Our Services Group operating contracts require high levels of service to our clients. If we are unable to provide such services, the client may refuse payment, terminate the contract and may initiate a claim against us. Though we provide training programs, maintain close management oversight, provide performance bonds to our clients and follow other best practice activities, we may fail to properly provide these services. Such a failure may adversely impact our revenues and profitability.

Additionally, in certain circumstances our billing and collection business may use estimates in calculating invoices sent to tenants on behalf of our landlord clients. These estimates may involve allocations of common area space, extrapolation of usage data, allocation of usage between billing periods, correction of incorrect meter readings, and usage allocation based upon facility size, tenant load, occupancy term and other factors. We cannot assure you that we will not face claims regarding the use of such estimates, which may impact our results of operations.

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Services Group contracts for the design and construction of water and wastewater projects may expose us to certain completion and performance risks.

We have entered into, and may continue to enter into, design and construction contracts for water and wastewater facilities. These construction activities involve potential risks, including shortages of materials and labor, work stoppages, labor relations disputes, weather interference, engineering, environmental, permitting or geological problems and unanticipated cost increases for reasons beyond our control. These issues could give rise to delays, cost overruns or performance deficiencies, or otherwise adversely affect the design, construction or operation of the project. To minimize our exposure to the risks associated with construction projects, we attempt to procure maximum price contracts from significant subcontractors, and secure performance and completion bonds from those subcontractors.

Certain of our contracts are fixed-price contracts, where we may bear all, or a significant portion of, the risk for cost overruns. Under these fixed-price contracts, our contract pricing is established in part based on fixed, firm subcontractor quotes or contracts and on cost and scheduling estimates. These estimates may be based on a number of assumptions, including assumptions about prices and availability of labor, equipment and materials, and other issues. If these subcontractor quotations or cost estimates prove inaccurate, or if circumstances change, cost overruns may occur, and we could experience reduced profits or, in some cases, a loss for that project. There can be no assurance that we can avoid additional costs under these types of contracts.

We may have contracts where we guarantee project completion by a scheduled date. At times, we may guarantee that the project, when completed, will achieve certain performance standards. If we subsequently fail to complete the project as scheduled, or if the project subsequently fails to meet guaranteed performance standards, we may face claims for cost impacts and/or penalties to the client resulting from any delay or as reimbursement for costs incurred to meet project performance standards. To the extent that these events occur, and are not due to circumstances for which the customer accepts responsibility, and cannot be mitigated against performance bonds or our subcontractor contracts, the total costs of the project could exceed our original estimates and we could experience reduced profits or, in some cases, a loss for the project.

Our customers may require us to secure performance and completion bonds for certain contracts and projects. Since September 2001, the market environment for surety companies has become risk averse. We secure performance and completion bonds for our contracts from these surety companies. To the extent we are unable to obtain bonds, new contracts would not be awarded to

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us and as a result, we could experience reduced revenues and profits. There can be no assurance that we can secure performance and completion bonds on future projects, or obtain bond renewals on existing contracts or projects.

We may manage engineering and construction activities for water and wastewater facilities where design, construction or systems failures can result in injury or damage to third parties. Any liability in excess of claims against our subcontractors, the performance bonds and our insurance limits at facilities so managed could result in liability claims against us, which may adversely impact our profits. In addition, if there is a customer dispute regarding our performance of project management services, the customer may decide to delay or withhold payment to us. If we were ultimately unable to collect these payments, our profits would be reduced.

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We use third party equipment and subcontractors.

Our multiple-family utility billing and collection business relies on third parties for certain product design, product manufacture and assembly, and product installation and service. In selecting these third party service providers, we attempt to ensure that they will provide a service that meets high quality standards. We receive guarantees from certain of these vendors, but we cannot be certain that such guarantees completely protect us from the risk of quality failure in the design, manufacture, and installation of submetering equipment. We cannot assure you that we will not face claims regarding product and installation quality for equipment placed in service either before or after our acquisition of our submetering business. Such claims could have an adverse impact on our results of operations.

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Our Services Group is subject to environmental and water quality risks.

Our clients, municipalities or public agencies are the owners of the facilities that we operate under contract. These facilities must be operated in accordance with various federal and state water quality standards. We also handle certain hazardous materials at these facilities, primarily chlorine gas. Any failures of our operation of the facilities, including sewage spills, noncompliance with water quality standards, hazardous material leaks and spills, and similar events, could expose us to environmental liabilities, claims and litigation costs. We cannot assure you that we will successfully manage these issues, and failure to do so could have a material adverse effect on future results of operations.

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We operate a large fleet of vehicles that could expose us to liabilities.

The Services Group has a fleet in excess of 700 vehicles. Our employees drive over 15 million miles per year. We are subject to normal vehicle risks associated with operating a fleet this large, including automobile accidents causing injury to our employees or damage to our leased vehicles, as well as third party damage to other property, vehicles or possible injury to others. Although we have vehicle insurance that covers material third party damage and liability, inability to manage this large fleet could have a material adverse impact on our results of operations.

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Our operating costs may rise faster than our revenues.

Many of our contracts with municipalities include contractual price increases tied to national consumer price indices. However, our costs are subject to market conditions and other factors, which may increase significantly higher than a generalized price index. The largest component of our operating costs is made up of salaries and wages. These costs are impacted by the local supply and demand for qualified labor. Other large components of our costs are general insurance, workers compensation insurance, employee benefits and health insurance costs. These costs may increase at rates higher than a price index and may have a material adverse effect on our future results of operations.

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•

Our operations and maintenance contracts may be canceled, reducing our revenues and backlog. Also, we may not secure new construction and construction management projects on a consistent basis, leading to fluctuations in revenues and backlog.

Our Service Group revenue backlog consists of new and existing contracts. We include new contracts in the backlog when we have a signed contract. Revenues included in our backlog may be realized over a multi-year period. The O&M contracts signed by our Services Group typically have durations of three to five years, and the uncompleted remaining portion of these existing contracts is reflected in the backlog. Although our Services Group tends to experience high renewal rates, municipalities and cities periodically change operators or terminate outsourcing at the end of a contract. The inability to renew existing contracts could have a material adverse impact on our Services Group. In addition, a municipality could cancel a long-term contract without notice. This would result in loss of revenues and operating profits and could involve us in litigation if a breach of contract occurs.

Changes in regulatory rules and policies currently allowing our Services Group to provide operations and maintenance, and construction and construction management services to our regulated utilities at fair market value, may adversely impact our revenue and operating results.

We may not be able to consistently secure new construction projects, which are non-recurring in nature. Our inability to negotiate new construction projects as existing projects are completed would lead to decreases in both revenue and backlog. However, we cannot guarantee that the revenues projected in our backlog will be realized or, if realized, will result in profits.

Risks Related to our Common Stock

•

We are a holding company that depends on cash flow from our subsidiaries to meet our obligations.

As a holding company, we conduct all of our operations exclusively through our subsidiaries and our only significant assets are our investment in those subsidiaries. This means that we are dependent on distributions of funds from our subsidiaries to meet our debt service and other obligations. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts due on our debt. Furthermore, our right to receive cash or other assets of one of our subsidiaries upon the liquidation or reorganization of that subsidiary is generally subject to the prior claims of creditors, including trade creditors, of that subsidiary. Even if we were recognized as a creditor of that subsidiary, our claims would still be subject to any security interest of that subsidiary's other creditors. Therefore, our debt would be structurally subordinated to creditors, including trade creditors, of our subsidiaries. If we are unable to collect funds from our wholly owned subsidiaries in a timely manner we could be unable to meet our obligations, which could have a material adverse effect on our results of operations.

•

Our outstanding indebtedness may adversely affect our financial condition and the value of our common stock.

We have significant levels of long-term debt, including first mortgage bond indentures, term loans, convertible debentures and revolving credit facilities. If we were unable to make scheduled principal or interest payments on our debt, we could face actions by our creditors including penalties, litigation, increased interest charges, acceleration of maturity schedules, and cross default issues. Such actions by our creditors could have a material adverse effect on our results of operations.

•

The market price of our shares of common stock could be volatile.

Our share price could become volatile due in part to the high volatility in the securities markets generally as well as developments from quarter to quarter which impact our financial results.

21

Factors other than our financial results that may affect our share price include, but are not limited to: (i) market expectations of the performance and capital spending plans of our customers; (ii) the level of business activity or perceived growth in the market for water services in general; (iii) investor perception of, as well as the actual performance of, other utilities or water services companies; (iv) a change in interest rates which could make yield comparisons relative to our stock less favorable; (v) announcements by our customers or announcements concerning financial difficulties for customers for whom we have provided financing or with whom we have entered into material contracts; (vi) announcements by our key competitors concerning the award of large agreements or contracts for water services; (vii) potential litigation involving us or the industries in which we operate; and (viii) announcements concerning the bankruptcy or other similar reorganization proceedings involving, or any investigations into the accounting practices of, other water services companies.

•

Our results could fall below the expectations of market analysts and investors.

Securities analysts closely monitor our quarterly and annual results and maintain earnings estimates for future periods. If our actual results were to fall short of their estimates, they may downgrade their rating of our stock, which could cause our share price to decline.

•

We may issue additional shares of common stock.

In order to raise additional capital, we have issued additional shares of common stock under both public and private offerings, and we may continue to do so. In addition, we issued fixed rate convertible subordinate debentures in 2001 that are convertible into common stock. Additional issuances of common stock or securities convertible into common stock will be dilutive to existing shareholders.

Other Risk Factors

•

Our capital resources may restrict our ability to operate and expand our business.

We anticipate that our available line of credit borrowing capacity, cash balances, cash flow generated from operations, and execution of additional financing alternatives will enable us to continue operating and expanding our business. We may be unable to renew our credit facilities when they expire. We may be unable to execute additional financing alternatives at terms that we find acceptable. If we were unable to renew our existing lines of credit, or if we were unable to execute additional financing alternatives, our capital spending would be reduced or delayed, and any future acquisitions would be delayed or eliminated. While we have the ability to take these actions, they could negatively impact our revenues, revenue growth and profitability.

•

If we continue to grow, we may fail to effectively manage our growth or we may fail to effectively manage the growth we have experienced.

During the past few years, we have expanded our business both through internal growth and through acquisitions. We may actively seek acquisitions and joint ventures in each of our business lines. The success of our future business development and growth opportunities depends on our ability to attract and retain experienced and qualified persons to operate and manage our business ventures. In addition, our future success depends, in part, upon our ability to prudently manage past and future acquisitions, if any. We cannot assure you that we will successfully manage our growth, or acquisitions, and failure to do so could have a material adverse effect on our future results of operations.

22

•

Our business may be affected by the general economic conditions of real estate development in the United States.

Both our Services Group and our Utility Group operations are impacted by the general economic conditions for real estate, and the pace and location of real estate development activities within the United States. Increases in the number of water and wastewater connections, connection fees and billing and collection accounts are the result of expanded real estate development in areas we serve. We have little or no ability to control the pace and location of real estate development activities which affect our business. We cannot assure you that we will be able to continue to increase the number of customer connections and accounts, which may adversely affect our revenue growth.

•

We are subject to debt covenants.

We are obligated to comply with specified debt covenants under certain of our loan and debt agreements. Failure to maintain compliance with these covenants could limit future borrowing, and we could face penalties, increased borrowing costs, litigation, acceleration of maturity schedules and cross default issues. Such actions by our creditors could have a material adverse effect on our results of operations.

•

Rating agencies may downgrade our debt.

We may pursue a rating on our debt from a nationally recognized rating agency. If a rating agency should downgrade our debt, or take other action regarding their outlook on our debt, our ability to issue new debt or refinance existing debt could be adversely impacted, and/or our cost of borrowing could increase.

•

We are subject to increasing costs of producing products and services.

The cost of water (whether produced from our own wells or purchased from outside sources), electric power and natural gas represents a substantial portion of the combined operating costs of our water utilities. Purchased water is significantly more expensive than water produced by our utilities. As a result, each utility attempts to produce as much of the water it delivers as possible and to use water purchases only to supplement its own production. Factors such as drought, water contamination issues and customer demand can increase water purchases and the overall cost of water for our utilities. Such factors are not within our control and may decrease our profitability if we are unable to obtain rate increases from a regulatory agency.

Electric power costs in California have been volatile. The cost of natural gas has increased significantly in the United States in recent years. Our response to these increases is to utilize energy-efficient techniques, new and better equipment and seek rate relief from the regulating agencies. We may not, however, have the ability to completely offset the effect of these cost increases. Continued increases in the costs of these services may decrease our profitability. Such factors are not within our control and may decrease our profitability if we are unable to obtain rate increases from regulatory agencies.

•

Our operations are subject to certain risks due to their location.

We own and/or operate water and wastewater facilities in numerous locations in numerous states and, consequently, we are subject to weather, political, water supply, labor supply, utility cost, regulatory, economic and other risks in the areas we service. We cannot control these risks. However, we believe that our broad geographic service area, while exposing us to these risks in numerous local markets, provides us a certain amount of geographical diversification against these risks at a consolidated company level.

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•

Internal control weaknesses could have an adverse effect on us.

As reported under Item 9A of this Report, our management concluded that we had a deficiency in our internal control over financial reporting that resulted in a material weakness in our internal controls as of December 31, 2004. Management is planning appropriate steps to remediate the material weakness, as discussed in Item 9A(d), but there can be no assurance that we will have the resources to address the material weakness in a timely manner. Insufficient internal controls could result in lack of compliance with contractual agreements, misstatements in our financial statements in amounts that could be material and could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. Finally, controls that function effectively today may become inadequate due to changes in conditions.

•

We rely on a number of complex business systems that could malfunction.

Our businesses are dependent on several complex business systems that must function reliably in order for us to operate effectively. Among other things, system malfunctions could prevent us from operating or monitoring our facilities, billing accurately and timely analyzing financial results. Our profitability and cash flow could be impacted negatively in the event these systems do not operate effectively.

•

We retain certain risks not covered by our insurance policies.

We evaluate our risks and insurance coverage annually. Our evaluation considers the costs, risks and benefits of retaining versus insuring various risks as well as the availability of certain types of insurance coverage. Retained risks are associated with deductible limits, partial self-insurance programs and insurance policy coverage ceilings. We cannot assure you that we will not face uninsured losses pertaining to the risks we have retained or that such uninsured losses will not affect our financial condition, liquidity and results of operations.

COMPANY INFORMATION

        We make available free of charge through our Internet website, our press releases, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. Our Internet website also contains our Code of Ethical Conduct for all employees and our Code of Ethics for Directors and Executive Officers. The Code of Ethics for Directors and Executive Officers applies to our Directors, Chief Executive Officer and senior officers. We will provide without charge to any person a copy of our Code of Ethics. Requests should be directed to the Director of Corporate Communications, Southwest Water Company; 624 South Grand Avenue, Suite 2900, Los Angeles, California 90017-3782 (telephone number (213) 929-1800). Our Internet website address is "www.swwc.com".

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ITEM 2. PROPERTIES

Facilities

Administrative Offices

        We lease administrative office and warehouse space at 17 locations in California, Texas, New Mexico, Colorado, Georgia, and Mississippi. In aggregate, these office and warehouse facilities total approximately 150,000 square feet. In addition, we own administrative and warehouse space at three locations in California and Texas. In the aggregate, the facilities we own total approximately 31,000 square feet of office space. We believe that these facilities are adequate to meet the needs of our existing operations and provide reasonable space for growth. The majority of our operations do not require uniquely specialized facilities, and we believe that additional or alternative office space is available, if required, at reasonable prices. We may relocate some of our offices as leases terminate to improve the location or size of the facility, or to provide better coordination among our operating units.

Property, Plant and Equipment

        The majority of our property, plant and equipment is held in the Utility Group. Property, plant and equipment, net of accumulated depreciation, as of December 31, 2004, was as follows:

		Net Property Plant and Equipment
		(in millions)
Utility Group
	California	$	92.8
	New Mexico		72.8
	Texas		124.2
	Oklahoma		0.6
	Utility Group Total		290.4
Services Group			11.3
Corporate Other			0.9
	Total	$	302.6

Water Production and Distribution Facilities

        Our utilities subsidiaries own and operate water production and distribution systems including well pumping plants, booster pumping stations, water treatment facilities, reservoir storage facilities, transmission and distribution mains, and service connections to individual customers. Our utilities have rights-of-way and easements in their service areas necessary to provide water services. Water production and distribution facilities held by our utilities as of December 31, 2004 were as follows:

	California	New Mexico	Texas
Transmission and distribution mains (in miles)	849	205	985
Storage reservoirs	31	5	189
Storage reservoir capacity (in millions of gallons)	72	12	10
Active wells	15	6	211
Approximate pumping capacity (in gallons per minute)	33,200	10,200	22,200

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Wastewater Facilities

        Our New Mexico utility owns and operates a sewer collection system consisting of two lift stations and approximately 156 miles of interceptor and collector lines. Wastewater is treated at a city-owned facility.

        Our Texas utilities own and operate 13 sewer collection systems, including 33 lift stations and approximately 180 miles of interceptor and collector lines.

Capital Expenditures, Repairs and Maintenance

        We believe that our properties are maintained in good condition and in accordance with current standards of good industry practice. We believe that the facilities used in the operation of our business are in good condition in terms of suitability, adequacy and utilization. We intend to continue our capital expenditure program, constructing and replacing reservoirs, wells and transmission and distribution lines in future years as needed and as approved by the regulating authorities. Our employees perform normal maintenance and construction work on these facilities while major construction projects are normally performed by general contractors. Ongoing maintenance and repairs expenses in our Utility Group, as a percentage of Utility Group revenue, for the three years ended December 31, 2004 were as follows:

	Years Ended December 31,
	2004		% of Revenue		2003		% of Revenue		2002		% of Revenue
	(in millions, except percentages)
Maintenance and Repairs	$	4.8	7	%	$	3.7	7	%	$	4.1	8	%

Mortgages and Liens

        Virtually all of our California utility's property is subject to the lien of an Indenture of Mortgage and Deed of Trust dated October 1, 1986, as amended (the California Indenture), securing our California utility's First Mortgage Bonds. The California Indenture contains certain restrictions common to such types of instruments regarding the disposition of property and includes various covenants and restrictions, including limitations on the amount of cash dividends that our California utility may pay to Southwest Water. Our California utility pays regular quarterly dividends to Southwest Water. As of December 31, 2004, our California utility was in compliance with dividend limitations mandated by the California Indenture.

        Virtually all of our utility property in New Mexico is subject to the lien of an Indenture of Mortgage and Deed of Trust dated February 14, 1992, as amended (the New Mexico Indenture), securing our New Mexico utility's First Mortgage Bonds. The New Mexico Indenture contains certain restrictions common to such types of instruments regarding the disposition of such property and includes various covenants and other restrictions, including limitations on the amount of cash dividends that our New Mexico utility may pay to Southwest Water. Our utility in New Mexico pays regular quarterly dividends to Southwest Water. At December 31, 2004, our New Mexico utility was in compliance with dividend limitations mandated by the New Mexico Indenture.

        Substantially all of the assets of our Windermere subsidiary in Texas have been identified as security for Windermere's 10-year $10.0 million secured bank term loan.

        Substantially all of the assets of Monarch Utilities have been pledged as security for Monarch's 17-year $14 million secured bank term loan. Additionally, the stock of Monarch Utilities has been pledged as security for $10 million of our bank lines of credit.

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        A wastewater treatment facility owned and operated by a Southwest subsidiary has been pledged as security for $2.3 million of economic development bonds issued by the city of Keystone, South Dakota, to finance the construction of that facility.

ITEM 3. LEGAL PROCEEDINGS

        Southwest Water and a subsidiary were named as defendants in several lawsuits alleging various injuries as a result of water contamination in the San Gabriel Valley Main Basin. The California Supreme Court ruled in February 2002 that the plaintiffs cannot challenge the adequacy of the water quality standards established by California Department of Health Services (DOHS). In August 2004, the case against us was dismissed; however, the plaintiffs have appealed the dismissal to the Court of Appeals for the State of California, Second Appellate District. To date, liability insurance carriers have absorbed the costs of defense of the lawsuits. Based upon information available at this time, we do not expect that this action will have a material adverse effect on our financial position, results of operations or cash flows.

        Southwest Water and its subsidiaries are the subjects of 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 flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

ITEM 4A. EXECUTIVE OFFICERS

        Our Board of Directors elects executive officers each year at the first meeting following the Annual Meeting of Stockholders. There are no family relationships among any of the executive officers of Southwest Water Company, and there are no agreements or understandings between any such officer and another person pursuant to which he or she was elected as an officer. There are no legal proceedings that involve any executive officer of the type requiring disclosure pursuant to the instructions to this item. The executive officers of Southwest Water Company are as follows:

Anton C. Garnier—Chief Executive Officer

        Age: 64

        Mr. Garnier has served as President and Chief Executive Officer of the Company since 1968. He is a past president of the National Association of Water Companies and served on the board of the San Gabriel Valley Watermaster, and he has been actively involved in the American Water Works Association and California Water Association. Mr. Garnier also serves as the President and a director of East Pasadena Water Company, California-Michigan Land and Water Company, and is a board member of California Domestic Water Company. Mr. Garnier's other current and past affiliations include the World Business Council, Chief Executives Organization, Cal Tech Executive Forum, Fellows of the Huntington Library, Young Presidents Organization, 1984 U.S. Olympics, Whittier College Business Department Advisory Board, and the Boy Scouts of America.

Peter J. Moerbeek—President and Chief Operating Officer, Southwest Water and President, Southwest Water Company Services Group

        Age: 57

        Mr. Moerbeek began his career at Southwest Water Company in 1995 as Vice President Finance and Chief Financial Officer. In 1997, he was appointed to the additional position of Chief Operating Officer of ECO Resources Inc., (ECO) a wholly owned subsidiary of Southwest Water. He was

27

appointed to the position, President, Southwest Water Company Services Group, when that position was created in 2002. In February 2004, Mr. Moerbeek assumed his current position as President and Chief Operating Officer of Southwest Water. He continues as the President of the Services Group. In 2001, Mr. Moerbeek was appointed to the Board of Directors of Southwest Water Company. From 1989 to 1995, Mr. Moerbeek served as Executive Vice President—Finance and Operations for Pico Products, a publicly held manufacturer and importer of cable television equipment and parts. From 1986 to 1989, Mr. Moerbeek served as Vice President and Controller for Ortel Corporation, a high-tech laser manufacturing start-up. From 1982 to 1985, he served as Vice President, Finance and Administration for Eisenman Chemical Company, a provider of products and services to the oil industry. Mr. Moerbeek has an MBA and a Bachelor of Science in Electrical Engineering from the University of Washington. Mr. Moerbeek is a licensed certified public accountant in the State of Washington.

Richard J. Shields—Chief Financial Officer

        Age: 47

        Mr. Shields has served as our Chief Financial Officer since October 2002. From 2001 to 2002, Mr. Shields served as Vice President and Chief Financial Officer of Day Software, Inc. From 1999 to 2001 he served as Chief Financial Officer of Winfire, Inc. From 1996 to 1999, Mr. Shields served as Chief Financial Officer of Frame-n-lens Optical, Inc. From 1988 through 1996, Mr. Shields held various finance management positions at AST Research, Inc., including Director of the Americas Region Finance. From 1985 to 1988, Mr. Shields served in various management positions at Taco Bell Corporation. Mr. Shields began his career in 1982 with Price Waterhouse. Mr. Shields has a Bachelor of Arts in accounting from Eastern Washington University and an MBA from the University of Notre Dame. Mr. Shields is a licensed certified public accountant in the State of California.

Michael O. Quinn—President, Southwest Water Company Utility Group

        Age: 58

        Mr. Quinn has held a variety of positions with Southwest Water Company and its subsidiaries since 1970. He is President of the Utility Group of Southwest Water Company and has been President of Suburban Water Systems since 1996. From 1992 to 1996, he was Chief Operating Officer for Suburban Water Systems. From 1985 to 1992, he was President of ECO Resources, Inc. Prior to that he was Controller/Treasurer at Suburban Water Systems. Mr. Quinn holds a Bachelor of Arts in Business Management from California State University at Fullerton. Among his water industry affiliations, Mr. Quinn is past president of the California Water Association, is president of the National Association of Water Companies and serves on the boards of the Citrus Valley Health Foundation, California Domestic Water Company and Covina Irrigating Company.

Shelley A. Farnham—Vice President Human Resources and Secretary

        Age: 49

        Ms. Farnham has been Vice President of Human Resources since July 1998. She oversees organizational planning and development, employee relations, training, compensation and benefits administration for the company and its subsidiaries. She provided human resources leadership to the marketing organization of Atlantic Richfield's Products Company from 1995 to 1998. From 1988 to 1995, Ms. Farnham held numerous positions in human resources, ranging from recruiter to training manager to interstate personnel manager with the Federal Reserve Bank of New York and Northrop Corporation. She has a Bachelor of Science degree in Management/Finance from Simmons College in Boston, Massachusetts.

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Maurice W. Gallarda—Vice President New Business Development

        Age: 51

        Mr. Gallarda has been with the Company since 1998. As Vice President of New Business development he manages strategic growth planning as well as internal growth and opportunities for expansion into new markets and services. From 1995 to 1998, Mr. Gallarda was Chief Executive Officer of Watershed Holdings, Inc., a company he founded to provide engineering, analytical and manufacturing services to the environmental industry. From 1987 through 1995, Mr. Gallarda served as President of Thorne Environmental, Inc., and Park Environmental Corporation where his responsibilities included the integration of existing business into the expanding environmental industry. He is also active in several professional organizations including the American Society of Civil Engineers, the Water Environment Federation, the California Environmental Bar Association and the National Society of Professional Engineers. An appointee of former California Governor Pete Wilson, Mr. Gallarda served on the California Regional Water Quality Control Board. Mr. Gallarda has a Bachelor of Science degree in Civil Engineering from California State University, Sacramento. He is licensed as a professional civil engineer in multiple states.

Cheryl L. Clary—Vice President Finance

        Age: 49

        Ms. Clary was appointed Vice President Finance in October 2004. From 2002 to 2004, she served as Chief Financial Officer of Del Richardson and Associates, a professional services firm. From 2000 to 2001, she was Managing Director of the Los Angeles office of Jefferson Wells International, a management consulting firm. From 1981 to 2000, she held various senior level finance and operational management positions at Atlantic Richfield Company, an oil and gas company, including business manager at three different operating units. Ms. Clary began her career in 1977 in public accounting. Ms. Clary has a Bachelor of Science degree in Business Administration with an emphasis in Accounting from California State University, Northridge.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

        The following table shows the range of market prices of Southwest Water's common shares. The prices shown reflect the intra-day high and low bid prices for our common stock without retail markup, markdown or commissions and may not necessarily represent actual transactions. The price ranges shown in the table, as well as cash dividends declared in each quarter, reflect a 5% stock dividend on January 3, 2005, a 4-for-3 stock split in the form of a stock dividend on January 1, 2004 and a 5% stock dividend on January 1, 2003. Our common stock is traded on the NASDAQ Stock Market under the symbol SWWC. At December 31, 2004, there were approximately 2,500 stockholders of record.

		Southwest Water Company
		Stock Price Range
						Cash Dividends
		High		Low
YEAR ENDED DECEMBER 31, 2003
	First Quarter	$	10.00	$	8.65	$	0.041
	Second Quarter		10.40		8.53		0.041
	Third Quarter		10.36		9.10		0.041
	Fourth Quarter		11.79		9.93		0.045
YEAR ENDED DECEMBER 31, 2004
	First Quarter		16.74		12.38		0.045
	Second Quarter		13.97		10.82		0.045
	Third Quarter		12.72		11.14		0.050
	Fourth Quarter		13.65		11.54		0.050
YEAR ENDING DECEMBER 31, 2005
	First Quarter through March 30, 2005		13.89		10.24

Dividend Policy

        Since 1960, our practice has been to pay common stock cash dividends quarterly. The amount and timing of future dividends depends on our growth, results of operations, profitability and financial condition, as well as other factors deemed relevant by our Board of Directors. Our current quarterly dividend rate is $0.05 per share of common stock.

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ITEM 6. SELECTED FINANCIAL DATA

        Earnings per common share, cash dividends per common share and basic and diluted weighted average outstanding common shares reflect the following:

•

a 5% stock dividend on January 3, 2005,



•

a 4-for-3 stock split in the form of a stock dividend on January 1, 2004,



•

a 5% stock dividend on January 1, 2003,



•

a 5% stock dividend on October 1, 2001 and



•

a 5-for-4 stock split in the form of a stock dividend on January 1, 2001.

	Years Ended December 31,
	2004			2003			2002		2001		2000
	(in thousands, except per common share data)
Summary of Income Statement Data:
Revenues	$	187,952		$	172,974		$	130,800	$	115,547	$	104,741
Operating income		11,635			14,792			10,774		11,731		11,039
Gain on sales of land		169			728			119		—		128
Other income (expense)(a), (b)		(5	)		(70	)		2,551		298		161
Net income(c)		4,534			7,193			6,002		5,451		4,839
Net income available for common shareholders(c)		4,510			7,166			5,975		5,424		4,812
Common Share Data:
Earnings per common share:
Basic(a), (b), (d)	$	0.26		$	0.49		$	0.44	$	0.41	$	0.38
Diluted(a), (b), (d)	$	0.24		$	0.47		$	0.42	$	0.39	$	0.37
Cash dividends per common share(d)	$	0.19		$	0.17		$	0.16	$	0.15	$	0.13
Balance Sheet and Other Data:
Additions to property, plant and equipment	$	25,714		$	18,352		$	25,587	$	15,008	$	7,683
Total assets		404,809			296,222			268,744		225,186		196,652
Long-term portion of lines of credit and debt		115,827			73,102			80,985		58,063		46,351
Stockholders' equity		126,198			79,667			61,837		55,718		49,078

(a)

In 2001, we were required to remove some of our wells from service due to chemical contamination. This has resulted in our California utility purchasing a significant portion of its water supply from the MWD and other sources since 2001. In May 2002, an agreement was reached among some of the parties responsible for the contamination and our California water utility. As a result of the agreement we recorded income of approximately $1.7 million in 2002, which covered certain water and energy costs, incurred in 1999, 2000 and 2001 arising from the contamination that were prior to the commencement of monthly contamination cost reimbursement payments. This agreement was an unusual event and we recorded the $1.7 million in other income rather than as an increase to operating income, in accordance with the provisions of APB No. 30, Reporting the Results of Operations. See Summary of Significant Accounting Policies in the footnotes of our financial statements.

As a result of this contamination, we have received payments, and we expect to continue to receive payments until completion of remediation, for the incremental cost of purchasing water over the cost that would have been incurred by us to pump water from our wells had they not been shut down as a result of contamination. For 2004 and 2003 the amount of reimbursed expenses was approximately $3.3 million and $4.0 million, respectively. This reimbursement pertains to our agreement with the parties responsible for the contamination. It is ongoing and is no longer considered an unusual event. As such, the reimbursement is recorded as a reduction to "operating expenses—utility group" for 2004 and 2003. The reimbursement, net of tax, for 2004 and 2003 was $0.11 and $0.17 per share, respectively.

(b)

Results of operations for 2002 include other income of $1.7 million of income from an agreement with Cooperating Respondents, as well as a $1.0 million gain on termination of a pension plan. The effect of those items, net of taxes, was $0.08 per share of income, from the agreement with Cooperating Respondents, as well as $0.05 per share gain on termination of a pension plan.

(c)

Excludes amortization of goodwill after 2001. The expense for amortization of goodwill was $104,000 and $63,000, net of taxes, in 2001 and 2000, respectively.

(d)

Earnings per common share, cash dividends per common share and weighted average outstanding common shares for years ending December 31, 2000 to 2003 have been restated to reflect the 5% stock dividend declared on January 3, 2005.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safe Harbor Statement

The information in this discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. See "Forward-looking Statements" above for additional information.

        The following discusses the financial condition and results of operations of Southwest Water Company and subsidiaries and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.

Overview

        Southwest Water Company and subsidiaries ("Southwest Water," "we," "us," "our" or "the Company," unless the context otherwise requires), provide a broad range of services including water production, treatment and distribution; wastewater collection and treatment; utility billing and collection; utility infrastructure construction management; and public works services. We own regulated public utilities and also serve cities, utility districts and private companies under contract. We provide our services to more than two million people. Our subsidiaries are segmented into two operating groups: our Utility Group and our Services Group.

        Our Utility Group owns and operates public water and wastewater utilities in California, New Mexico, Oklahoma and Texas. State and federal agencies issue regulations regarding standards of water quality, safety, environmental and other matters which affect these operations. The rates that our regulated utility subsidiaries charge for water and wastewater usage are established by state authorities.

        Our Services Group operates our contract service businesses in which we operate and maintain water and wastewater facilities owned by cities, public agencies, municipal utility districts, private entities and investor-owned utilities (including Utility Group affiliates) primarily in Alabama, California, Colorado, Georgia, Mississippi, New Jersey, New Mexico, South Dakota and Texas. While state and federal agencies issue regulations regarding standards of water quality, safety, environmental and other matters which affect these operations, our Services Group prices are not subject to regulation. We also provide multiple-family utility billing and collection services in numerous states.

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Results of Operations

        The following table sets forth the percentage of total revenues represented by certain items in our consolidated statements of operations for the periods indicated:

	Years Ended December 31,
	2004			% of Revenue		2003			% of Revenue		2002			% of Revenue
	($ amounts in millions)
Revenues:
Utility group	$	69.5		37		$	56.9		33		$	52.0		40
Services group		118.5		63			116.1		67			78.8		60
		188.0		100			173.0		100			130.8		100
Expenses:
Operating expenses—utility group		40.6		22			34.0		20			33.7		26
Operating expenses—services group		106.5		56			102.1		59			67.9		52
Selling, general and administrative expenses		29.3		16			22.1		13			18.4		14
		176.4		94			158.2		92			120.0		92
Operating Income		11.6		6			14.8		8			10.8		8
Other Income (Expense):
Interest expense		(5.6	)	(3	)		(4.6	)	(3	)		(4.5	)	(3	)
Interest income		0.9		—			0.4		—			0.3		—
Gain on sales of land		0.2		—			0.7		1			0.1		—
Other		—		—			(0.1	)	—			2.5		2
		(4.5	)	(3	)		(3.6	)	(2	)		(1.6	)	(1	)
Income Before Income Taxes		7.1		3			11.2		6			9.2		7
Provision for Income Taxes		2.6		1			4.0		2			3.2		2
Net Income	$	4.5		2		$	7.2		4		$	6.0		5

2004 Compared to 2003

Revenues

Utility Group

        Utility Group revenues represent fees earned for the production and distribution of water and the collection and treatment of sewage for residential, business, industrial and public authority use. Revenues in the Utility Group increased approximately $12.6 million, or 22%, to $69.5 million during 2004 from $56.9 million during the prior year. The increase in Utility Group revenues was primarily due to the following:

•

An increase of approximately $7.1 million attributable to Monarch Utilities. Monarch Utilities was acquired in July 2004,



•

An increase of approximately $3.5 million representing increases in rates at our California utility, and



•

An increase of approximately $1.2 million representing the favorable effect of increased connections at our New Mexico and Texas utilities, excluding Monarch.

33

Services Group

        Services Group revenues represent fees earned for water and wastewater facility operations and maintenance services, equipment maintenance and repair, sewer pipeline cleaning, billing and collection services, public works and state-certified water and wastewater laboratory analysis. Our Services Group also facilitates the design, construction, project management, and operating aspects of various water and wastewater projects. Revenues in 2004 increased approximately $2.4 million, or 2%, to $118.5 million from $116.1 million during the prior year. The increase in Services Group revenues was primarily due to the following:

•

An increase of approximately $3.8 million resulting from operations and maintenance contracts which were new in 2004 or initiated in the latter part of 2003, which included contracts serving the cities of Pascagoula, Mississippi, Santa Paula and San Simeon, California, as well as Monarch Utilities. We achieved further revenue growth by increasing billing rates and expanding services under certain existing contracts.



•

An increase of approximately $1.0 million earned by our subsidiaries that provide state-certified water and wastewater laboratory services and government services. Certain of these subsidiaries were acquired in the latter portion of 2003 or during 2004.



•

An increase of approximately $2.0 million from multiple-family utility billing and collection services, due primarily to the purchase of approximately 136,000 billing units during the first half of 2004, and an increase in utility metering equipment installations.

        These factors were partially offset by decreased activity as construction of the CVWD reverse osmosis water treatment facility neared completion. Project revenue decreased by $5.7 million from $13.6 million in 2003 to $7.9 million during 2004. This facility was substantially complete as of December 31, 2004 and became operational in December 2004.

        Our Services Group was affected by unusually heavy precipitation in 2004, primarily in Texas. Heavy rainfall or storm conditions may limit our ability to perform certain billable work such as pipeline maintenance, manhole rehabilitation, construction and other outdoor services. Severe weather conditions may also result in additional labor and material costs to us as we meet the terms of our operations and maintenance contracts. We believe that higher-than-average precipitation limited or delayed our ability to perform billable services and construction during 2004. For example, precipitation in the Services Group's Houston base of operations for the years ended December 31, 2004 and 2003 was as follows:

	For the Years Ended December 31,
	2004	% of Average		2003	% of Average
Precipitation inches	65.06	136	%	45.76	96	%

Source: Houston Chronicle

Expenses

Operating expenses—utility group

        Operating expenses—utility group represent the costs of purchasing, producing and distributing water, collecting and treating wastewater, salaries, wages and employee benefits, facilities costs, supplies and equipment, repairs and maintenance, professional fees and other costs. Operating expenses—utility group represented approximately 58% and 60% of revenues from utility operations for 2004 and 2003, respectively. Operating expenses—utility group increased approximately $6.6 million, or 19%, to

34

$40.6 million during 2004 from $34.0 million during 2003. The increase in operating expenses was primarily due to the following:

•

Operating costs of approximately $5.0 million attributable to Monarch Utilities since its acquisition in July 2004,



•

An increase in volume and in the number of connections served by our New Mexico and Texas utilities,



•

An increase of approximately $1.1 million for utility plant maintenance and repair costs,



•

Increased energy costs, and



•

An approximate $0.3 million accrual for doubtful accounts related to a California industrial customer.

        The decrease in operating expenses as a percentage of revenues was due to increased Utility Group revenues, which were primarily attributable to an increase in rates at our California utility. Also, the water we sell to our customers is either pumped from our own wells or purchased from outside sources. Costs to produce water from our wells are generally less than our cost to purchase water from outside sources. A higher portion of the water we sold to our customers was produced from our own wells in 2004. The percentage of water used in our operations that was produced from our own wells was 46% and 33% during 2004 and 2003, respectively, at our California utility. This increase in water production related to two new wells that were placed in service in April and October of 2003. The aggregate average cost of purchased and produced water in California was $225 and $235 per acre foot in 2004 and 2003, respectively. The impact of the Monarch Utilities acquisition partially offset the lower California water costs. Operating expenses as a percentage of revenues are higher for Monarch Utilities than for our California, New Mexico and other Texas utilities.

Operating expenses—services group

        Operating expenses—services group represent salaries, wages and employee benefits, facilities costs, supplies and equipment, repairs and maintenance, professional fees and other costs. Operating expenses—services group represented approximately 90% and 88% of revenues from Services Group operations for 2004 and 2003, respectively. Operating expenses—services group increased approximately $4.4 million, or 4%, to $106.5 million during 2004 from $102.1 million during 2003. The increase was due primarily to the following:

•

Approximately $1.9 million of the increase was due to costs to provide services under certain significant contracts with the cities of Pascagoula, Santa Paula and San Simeon. These contracts were new in 2004 or initiated in the latter portion of 2003.



•

Approximately $1.6 million in operating expenses for multiple-family utility billing and collection contracts due to costs associated with increased installations of utility metering equipment and higher costs of servicing the 136,000 customer units which were acquired during the first half of 2004.



•

Approximately $0.8 million in operating expenses incurred by subsidiaries that were established or acquired in the latter portion of 2003 or during 2004. These subsidiaries provide state-certified water and wastewater laboratory services and government services.



•

During 2004 we incurred costs specific to certain operational or administrative issues. These costs included: (i) an inventory valuation adjustment of $0.3 million on our inventory of proprietary equipment at the multiple-family billing and collection subsidiary; (ii) an accrued loss of $0.5 million related to the Virginia Beach wastewater collection system rehabilitation project; and (iii) a $0.3 million write-off of certain uncollectible construction receivables.

35

        Operating expenses—services group increased from 88% to 90% of services group revenues. This increase is partially attributable to increased salaries and wages, increased employee health insurance costs, increased general insurance and workers compensation insurance costs, increased cost of gasoline used by our fleet of vehicles, and reduced Service Group staff utilization levels during 2004 relative to 2003. Many of our Services Group contracts contain annual contractual price increases tied to national consumer price indices. We believe that these consumer price indices may not fully reflect the inflation in key costs in our Services Group.

        The increases noted above were partially offset by lower construction costs for the reverse osmosis water treatment facility in California as it neared completion. 2004 costs for the project were approximately $8.2 million, a reduction of $4.7 million from the $12.9 incurred during 2003.

Selling, general and administrative expenses

        Selling, general and administrative expenses consist mainly of costs related to personnel, facilities, insurance, consulting and professional services, which support our sales, marketing, human resources, finance and administration functions. Selling, general and administrative expenses increased as a percentage of revenues to 16% in 2004 from 13% in 2003. Selling, general and administrative costs increased approximately $7.2 million, or 33%, to $29.3 million for 2004 from $22.1 million during the prior year. The increase was primarily due to:

•

Approximately $2.6 million due to our efforts to prepare for and comply with section 404 of the Sarbanes-Oxley Act of 2002 and related regulations, which included costs associated with (i) the enhancement and documentation of internal controls; (ii) improvements and enhancements in our information technology area; (iii) internal control compliance testing; (iv) the enhancement and implementation of corporate governance policies; and (v) additional consultant fees, audit fees, and director meetings,



•

Approximately $2.5 million due to increases in professional fees, facilities costs, and labor and benefits costs for administrative employees,



•

Approximately $0.6 million attributable to Monarch Utilities since its acquisition in July 2004,



•

Approximately $0.4 million due to an accrual for doubtful receivables related to a strategic development partnership,



•

Approximately $0.5 million due to executive separation and retention charges, and



•

Approximately $0.3 million for increased new business development costs associated with the research of potential new projects.

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Other Income (Expense)

Interest Expense

        Interest expense increased approximately $1.0 million, or 22%, during 2004 compared to 2003. The major components of interest expense are as follows:

	For the Years Ended December 31,
	2004			2003
	(in millions)
Interest expense—convertible subordinate debentures	$	1.2		$	1.4
Interest expense—bank lines of credit		0.9			0.9
Interest expense—mortgage bonds and bank term loans		2.8			2.1
Interest expense—other		1.2			0.7
Total interest expense before capitalized interest		6.1			5.1
Capitalized interest		(0.5	)		(0.5	)
Total interest expense	$	5.6		$	4.6

        The increase in total interest expense is primarily due to an increase in our long-term debt. Our average balances of long-term debt outstanding were approximately $88.1 million and $78.6 million for 2004 and 2003, respectively. This increase in our average debt was primarily driven by debt incurred in our acquisition of Monarch Utilities.

        In addition, our weighted average borrowing rates increased to 6.9% during 2004 from 6.6% during 2003.

Gain on Sales of Land

        We recognized a $0.2 million pretax gain on sales of surplus land in 2004. We recognized a $0.7 million pretax gain on the sale of surplus land in 2003.

Provision for Income Taxes

        Our effective income tax rate was approximately 36% for the years ended December 31, 2004 and 2003.

2003 Compared to 2002

Revenues

Utility Group

        Revenues in the Utility Group increased approximately $4.9 million, or 9%, to $56.9 million during 2003 from $52.0 million during the prior year. The increase is primarily due to the favorable effect of rate increases in our California and Texas utilities and increased customer connections in our New Mexico and Texas utilities. The effect of increases in rates was partially offset by decreases in water

37

consumption due to variations in weather in our California Utility. The changes are represented as follows:

	(in millions)
Favorable effect of rate increase in revenues	$	4.8
Favorable effect of increase in connections		0.9
Reduction in water consumption		(0.8	)
Net increase in revenue	$	4.9

Services Group

        Services Group revenues for 2003 increased approximately $37.3 million, or 47%, to $116.1 million from $78.8 million during the prior year. The increase is due to the following:

•

The acquisition of Aqua Services in November 2002. In November 2002, we acquired certain contract operations of AquaSource, Inc., a provider of contract water and wastewater services in Texas, Colorado and South Dakota. Upon closing of the transaction we began operating the majority of this business under the name Aqua Services, LP ("Aqua Services") while the remaining part was incorporated into one of our existing subsidiaries. Revenues from Aqua Services were approximately $19.2 million and $1.3 million during 2003 and 2002, respectively.



•

An increase in revenues of approximately $12.9 million from the construction of a reverse osmosis water treatment facility in California to $13.6 million during 2003 from $0.7 million in 2002.



•

An increase in revenues from our Texas service operations of approximately $4.3 million to $64.2 million during 2003 from $59.9 million during the prior year. The revenue increase is largely attributable to increased tapping and inspection revenue driven by real estate development activity in Texas.

Operating Expenses

Utility Group

        Operating expenses—utility group represented approximately 60% and 65% of revenues from utility operations for 2003 and 2002, respectively. Operating expenses were substantially unchanged from 2002 to 2003, increasing $0.3 million, or 1%, to $34.0 million during 2003, from $33.7 million during 2002.

        The decrease in operating expenses as a percentage of revenue was due to the aforementioned increase in Utility Group revenues, which was primarily due to an increase in rates at our California utility. Additionally, a higher portion of the water we sold to our customers was produced from our own wells in 2003, which has a lower cost than water purchased from outside sources. The percentage of water used in our operations that was produced from our own wells was 33% and 28% during 2003 and 2002, respectively, at our California utility. This increase in water production related to two new wells that came on line in April and October of 2003. The aggregate cost of purchased and produced water in California was $235 and $246 per acre foot in 2003 and 2002, respectively.

        Operating expenses incurred by our New Mexico utility increased $409,000, or 10%, during 2003 as compared to 2002. The City of Albuquerque has increased sewage treatment rates approximately 9%. In addition, our New Mexico utility has incurred additional fuel costs due to increased volume.

        Operating expenses at our California and Texas utilities did not change in a significant amount.

38

Services Group

        Operating expenses—services group represented approximately 88% and 86% of the Services Group revenues for 2003 and 2002, respectively. Operating expenses increased approximately $34.2 million, or 50%, to $102.1 million during 2003 from $67.9 million during 2002. The increase was due to the following:

•

the acquisition of Aqua Services in November 2002, which generated operating costs of approximately $19.0 million and $1.3 million during 2003 and 2002, respectively, and



•

costs related to the construction of a reverse osmosis water treatment facility for the city of San Juan Capistrano, California which accounted for approximately $12.9 million of the increase in operating expenses.

        The remaining increase of approximately $3.5 million for 2003, compared to the prior year, resulted from increased operations and construction activity in the Services Group's operations.

        The increase in operating expenses as a percentage of operating revenues in 2003 was primarily due to our project to construct and operate the reverse osmosis water treatment facility. We are accounting for the project under the percentage of completion method during the construction phase.

Selling, general and administrative expenses

        Selling general and administrative expenses increased approximately $3.7 million, or 20%, to $22.1 million for 2003 from $18.4 million during the prior year. The increase was largely due to the inclusion of approximately $1.3 million from Aqua Services and the increased costs company-wide for employee health benefits, insurance and compensation expenses. As a percentage of revenues, selling, general and administrative expenses decreased from 14% in 2002 to 13% in 2003.

Other income (expense)

Interest Expense

        The major components of interest expense for 2003 and 2002 are as follows:

	For the Years Ended December 31,
	2003			2002
	(in millions)
Interest expense—convertible subordinate debentures	$	1.4		$	1.4
Interest expense—bank lines of credit		0.9			0.6
Interest expense—mortgage bonds and bank term loan		2.1			2.2
Interest expense—other		0.7			0.5
Total interest expense before capitalized interest		5.1			4.7
Capitalized interest		(0.5	)		(0.2	)
Total interest expense	$	4.6		$	4.5

        We increased borrowings during the first six months of 2003 to finance capital improvements in our Utility Group. Our benefit from lower interest rates and higher capitalized interest from increased construction activity in our Utility Group was offset by higher borrowings on our bank lines of credit and increased interest expense related to our Texas utility bank term loan. In August 2002, one of our Texas utilities obtained a 10-year; $10.0 million secured bank term loan which increased our long-term debt outstanding and, consequently, our interest expense. Our effective interest rates for 2003 and 2002 were 6.6% and 6.8%, respectively.

39

Gain on Sales of Land

        We recognized a $0.7 million pretax gain on the sale of surplus land in 2003. We recognized a $0.1 million pretax gain on the sale of surplus land in 2002.

Other

        We report material events that are unusual in nature or occur infrequently, but not both, in other income (expense) rather than in operating income, in accordance with the provisions of APB No. 30 Reporting the Results of Operations. Included in other income for 2002 is the effect of a non-taxable gain of approximately $1.0 million resulting from the termination of the Company's defined benefit plan (as more fully disclosed in Note 12 to the consolidated financial statements). There were no similar pension-related gains in 2003. Included in other income for 2002 is a $1.7 million agreement reached among parties responsible for water contamination, (the "Cooperating Respondents"), and our California utility regarding water-quality-related expenses incurred in 1999, 2000 and 2001 (see Note 1 in the accompanying consolidated financial statements). In 2003 and subsequent years, such reimbursements are recorded as a reduction to operating expenses—utility group.

Provision for Income Taxes

        Our effective tax rate for 2003 was approximately 36% compared to approximately 35% for 2002. Our effective tax rate for 2002 reflected the benefit of a one-time gain on the termination of a pension plan, which was excluded from ordinary taxable income.

Liquidity and Capital Resources

        Our corporate objectives with respect to liquidity and capital resources are to: (i) generate sufficient operating cash to provide for dividends, organic growth, principal and interest requirements, ordinary capital improvements, and taxes; (ii) obtain external financing for extraordinary capital improvement and acquisitions; (iii) utilize our credit facilities to manage seasonal cash needs; and (iv) maintain approximately equal levels of debt and equity. Our statements of cash flows are summarized as follows:

	For the Years Ended December 31,
	2004			2003
	(in millions)
Net cash provided by operating activities	$	16.1		$	8.8
Net cash used in investing activities		(81.1	)		(17.6	)
Net cash provided by financing activities		64.4			9.8
Increase (decrease) in cash and cash equivalents	$	(0.6	)	$	1.0

Cash Flows From Operating Activities

        Net cash provided by operating activities increased by $7.3 million in 2004 compared to 2003 despite lower net income. This increase in net cash provided by operating activities was primarily the result of increased revenues generated by our Utility Group, resulting from the Monarch Utilities acquisition, the benefit of increased water rates in the California utility, and connection growth in New Mexico and Texas, partially offset by the lower operating margin experienced by the Services Group and the higher Sarbanes-Oxley compliance costs and other selling, general and administrative expenses.

40

Operational aspects of our businesses that affected working capital in 2004 and 2003 are highlighted below:

•

We were able to utilize $5.4 million more in cash balances which were previously restricted pending construction progress on the reverse osmosis water treatment facility, which was nearly completed during 2004.



•

Trade accounts receivable balances were higher by $3.2 million due largely to increases in post-acquisition receivables at Monarch Utilities and increased billings by subsidiaries performing multiple-family utility billing and collection, water and wastewater quality testing and wholesale water sales services.



•

A $3.6 million increase in prepaid insurance balances due primarily to the timing of payments.



•

An increase in other liabilities largely due to cash receipts associated with non-refundable activation fees received from non-regulated wholesale water operations. These payments are deferred and recognized over the expected period of performance.

Cash Flows From Investing Activities

        Cash used in investing activities totaled $81.1 million in 2004 and was the result of acquisitions and capital improvements in our utility business. Capital expenditures of $25.7 million were primarily invested in regulated water utility assets for purposes of expansion, replacement or renovation. The following table summarizes property, plant and equipment additions for 2004 and 2003.

	For the Years Ended December 31,
	2004		2003
	(in millions)
Company-financed additions	$	22.9	$	13.8
Capital improvement reimbursements		0.3		2.5
Contributions paid for by developers		2.5		2.1
Total cash additions to property, plant and equipment		25.7		18.4
Property contributed by developers		6.7		9.8
Total additions to property, plant and equipment	$	32.4	$	28.2

        We made substantial investments in acquisitions during 2004, including:

•

$48.4 million in cash of the total $66 million purchase price for Monarch Utilities,



•

$2.9 million to acquire the remaining minority interest of a Services Group subsidiary, and



•

$3.8 million in cash of the total $5.3 million purchase price for 136,000 multiple-family billing units in our utility submetering subsidiary.

Cash Flows From Financing Activities

        During 2004, we demonstrated our ability to finance our growth through a broad range of capital initiatives, including:

•

A public offering of approximately 1.7 million shares of our common stock in March 2004, which generated net proceeds of approximately $20.5 million,



•

A $30 million secured funded term loan tranche expansion to our bank lines of credit,

41

•

A public offering of approximately 1.9 million shares of our common stock in August 2004, which generated net proceeds of approximately $20.6 million,



•

A $15 million First Mortgage Bonds issuance, due in 2024, with an interest rate of 5.64%. A portion of the proceeds were used to retire approximately $3.3 million of our Suburban First Mortgage Bonds which were due in 2006, and



•

A $12 million First Mortgage Bonds issuance, due in 2024, with an interest rate of 6.10%. A portion of the proceeds will be used to redeem $4 million of our New Mexico Utilities Series B First Mortgage Bonds which are due in 2006.

        Aggregate borrowings under our revolving lines of credit increased by $6.4 million as of the end of 2004 compared to 2003 due to the impact of lower fourth quarter cash flow. Our total borrowing availability under lines of credit was approximately $27 million as of December 31, 2004.

        During 2004, we paid dividends totaling approximately $3.5 million. Our quarterly dividend rate is currently $0.05 per common share. Common stockholders may elect to participate in our Dividend Reinvestment and Stock Purchase Plan, which gives them the option of receiving their dividends in either cash or common stock at a 5% discount from current market value. This plan also permits optional cash purchases of stock at current market values of up to $3,000 per stockholder each quarter.

Off-Balance Sheet Arrangements

        We do not have any material off-balance sheet arrangements other than leases that have been treated as operating leases in accordance with GAAP.

Contractual Obligations

        A summary of our future contractual obligations and commercial commitments as of December 31, 2004 is as follows:

		Years Ending December 31,
		2005		2006		2007		2008		2009 and thereafter		Total
		(in thousands)
Long-term debt
	Bank lines of credit	$	—	$	23,035	$	—	$	—	$	—	$	23,035
	Bank term loan		1,323		1,446		1,439		1,431		18,665		24,304
	Economic development revenue bonds		95		100		105		115		1,810		2,225
	Mortgage bonds		—		12,000		—		—		35,000		47,000
	Convertible subordinate debentures(1)		—		—		—		—		17,255		17,255
	Notes payable		1,954		1,407		420		1,599		—		5,380
Advances for construction			300		300		300		300		7,996		9,196
Obligations under non-cancellable operating leases			6,210		5,589		4,530		2,524		17,359		36,212
Other			455		495		987		1,607		—		3,544
		$	10,337	$	44,372	$	7,781	$	7,576	$	98,085	$	168,151

(1)

The convertible subordinate debentures are due in 2021. There are no put rights associated with the debentures.

42

        We anticipate that mortgage bonds that come due in 2006 will be refinanced through the sale of new mortgage bonds or may be funded through our corporate credit facilities. If we were unable to refinance these bonds or to raise capital to provide for these funds, our capital spending would be reduced or delayed, and any future acquisitions would be delayed or eliminated. While we have the ability to take these actions, they could negatively impact our revenues, revenue growth, and profitability.

        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 or if we were unable to execute additional financing transactions, our capital spending and any future acquisitions would be delayed, reduced, or eliminated.

        We have filed a registration statement with the Securities and Exchange Commission, which is effective for the issuance of up to $50 million aggregate principal amount of common stock, debt securities and warrants. During 2004, we issued approximately $44 million of common stock under the shelf registration, and approximately $6 million remains available for issuance as of December 31, 2004. We may offer any of these securities for sale at any time and from time to time.

        On December 31, 2004, we had working capital of approximately $9.6 million with available cash and cash-equivalent balances of approximately $1.9 million (excluding restricted cash balances), as well as aggregate lines of credit totaling $50 million consisting of three separate unsecured lines of credit from three commercial banks. Our total borrowing availability under lines of credit was approximately $27 million on December 31, 2004. One line of credit expires in April 2006; the other two expire in September 2006.

        For 2004 and 2003, we had weighted average borrowing rates on our bank lines of credit of 3.12% and 2.79%, respectively.

        In January 2003, we entered into a reimbursement agreement with one of our commercial banks to secure a $3.4 million standby letter of credit to guarantee our performance under a service contract to design and construct a reverse osmosis water treatment facility and associated wells. Upon acceptance of the completed project, expected in 2005, the standby letter of credit and the related credit facility will be terminated.

        In addition to our lines of credit, our California and New Mexico indentures permit the issuance of approximately $70.5 million of first mortgage bonds at our California and New Mexico utilities as of December 31, 2004. However, the terms of our bank lines of credit do not permit additional first mortgage bond indebtedness without prior consent from participating bank lenders.

        We expect to maintain our bank lines of credit in the normal course of business. Each of the line of credit agreements contains certain financial covenants. During 2004, we were in compliance with all applicable covenants under each of the line of credit agreements.

Critical Accounting Policies

        Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial

43

statements will be affected. The significant accounting policies that we believe are important to fully understanding and evaluating our reported financial results include the following:

•

Revenue recognition,



•

Valuation of long-lived and intangible assets,



•

Accounting for regulated businesses,



•

Stock-based compensation,



•

Deferred costs, and



•

Unusual events.

        In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas which require management's judgment in selecting among available GAAP alternatives. Our senior management has reviewed these critical accounting policies and related disclosures with the audit committee of the Board of Directors.

Revenue recognition

        Water utility revenues are recognized when water is delivered to customers. At the end of an accounting period, estimated amounts for unbilled revenues are accrued for water usage since the previous billing period.

        Revenues for contract operations are recognized and billed at the end of the month based on a monthly fee to provide a specific level of service as outlined in each individual contract. We generally bill for additional services provided beyond the scope of the base contract on a time-and-materials basis as such services are rendered.

        Revenues for construction projects are recorded using the percentage-of-completion method of accounting. The percentage-of-completion method recognizes revenue and income as work progresses on a project based on the expected total project costs and the expected total project revenues. This method is based on an estimate of the revenue and income earned to date, less the revenue and income recognized in earlier periods. If management anticipates we will ultimately suffer a loss on a construction project, the entire estimated loss is recorded in the period such a determination is made.

        Revenues for multiple-family utility billing and collecting services are recognized and billed at the end of the month in which services are performed. Revenues for installation of multiple-family utility billing and collection equipment are accounted for using the percentage-of-completion method.

        If a contract involves the provision of a single product or service, revenue is generally recognized when the product or service is provided and the amount becomes billable. If services are provided evenly during the contract term but service billings are irregular, revenue is recognized on a straight-line basis over the contract term.

        Certain non-refundable activation fees in our non-regulated wholesale water operations are accounted for on a completed contract basis and subsequently deferred and recognized over the expected period of performance.

        If a contract involves the provision of multiple products or services (elements), total estimated contract revenue is allocated to each element based on the relative fair value of each service, provided the services qualify for separation under Emerging Issues Task Force (EITF) 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. The amount of revenue allocated to each service is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is then recognized for each element as described above for single-element contracts, except

44

revenue recognized on a straight-line basis for a non-construction service will not exceed amounts currently billable unless the excess revenue is recoverable from the client upon any contract termination event. If the amount of revenue allocated to a construction service is less than its relative fair value, costs to deliver such service, limited to the difference between allocated revenue and the relative fair value, are deferred and amortized over the contract term. If total construction service costs are estimated to exceed the relative fair value for the construction service contained in a multiple-element arrangement, then a provision for the estimated loss is made in the period in which the loss first becomes apparent.

Valuation of long-lived and intangible assets

        In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we assess intangible assets and other long-lived assets, excluding goodwill, for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable through the estimated undiscounted future cash flows resulting from the use of the assets. If we determine that the carrying value of intangible assets or other long-lived assets may not be recoverable, we measure impairment by using the projected discounted cash-flow method in accordance with Statement No. 144.

        We have made acquisitions in the past that resulted in recording goodwill and intangible assets. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. For intangible assets with finite useful lives, SFAS No. 142 requires amortization over their estimated useful lives. SFAS No. 142 became effective for fiscal years beginning after December 15, 2001. The Company engaged an independent, professional valuation consultant to conduct a goodwill impairment review in accordance with SFAS No. 142. We evaluated goodwill impairment using discounted cash flow methodologies, transaction values for comparable companies, and other valuation techniques for our reporting units with significant goodwill balances. Our reporting units, generally subsidiaries one level below operating segments, constitute separate businesses for which we maintain discrete financial information that is regularly reviewed by segment and executive management. There were no impairment charges to goodwill as of December 31, 2004 and no events have occurred that indicated diminution in the value of recorded goodwill.

        Under the provisions of SFAS No. 141, Business Combinations, we have identified intangible assets apart from goodwill such as contract costs and account lists. These intangible assets are amortized over their estimated useful lives ranging from four to eight years.

Accounting for regulated businesses

        Our regulated businesses, which include our utilities in California, New Mexico, and Texas, are required to be accounted for under the provisions of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, which specifies certain revenue, expense and balance sheet treatment as required by each state's regulatory authority. Each state authority establishes rates which are intended to permit each utility to recover its costs and earn a reasonable rate of return.

        Our Services Group has contracted with our utilities in Texas, and New Mexico to perform operating services, maintenance, construction work, and to manage capital projects. In accordance with SFAS No. 71, our Services Group recognizes profit on sales to regulated affiliates and does not eliminate the intercompany profit when the sales price is reasonable and it is probable that, through the rate making process, future revenue approximately equal to the sales price will result from the regulated affiliate's use of the services. However, all revenue in excess of profit is eliminated. Accordingly, the intercompany profit for construction as well as operations and maintenance services provided to Utility Group affiliates has not been eliminated in the accompanying consolidated financial

45

statements. Based upon our Services Group's experience of providing operations and maintenance services in more than 400 contracts with unaffiliated customers, and a history of regulator approval of the construction service fees charged by the Services Group to utility affiliates, we believe that the contract sales prices between our Services Group and our Texas and New Mexico utilities are reasonable and that it is probable that the price of these services will be recovered in the rate-making process.

        In 2002, our California water utility recorded a balancing account receivable in the amount of approximately $2.3 million, representing the difference between actual water production costs incurred and CPUC-adopted water production costs. Historically, the CPUC allowed such balancing accounts in the income statements of water utilities, with a corresponding liability or asset on the balance sheet. On July 8, 2004, the CPUC issued a decision that allows our water utility in California to collect the $2.3 million balancing account and an additional under-collection of approximately $0.7 million for a total of $3.0 million. The $0.7 million increase in the balancing account receivable was recorded in the third quarter of 2004. The CPUC decision provides for us to recover the settlement amount through a surcharge billed to customers. Approximately $0.4 million of the additional amount was recorded as a reduction in operating expenses in the third quarter of 2004, and the remaining $0.3 million was recorded as interest income.

Stock-Based Compensation

        In 2002, we adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which requires valuation of stock options issued based upon an option pricing model and recognition of this value as an expense over the period in which the options vest. In accordance with the provisions of SFAS No. 148, we elected to recognize stock-based compensation using the retroactive restatement method. Under this change in accounting method, we restated our accompanying consolidated financial statements for periods prior to 2002 to reflect stock-based compensation expense under a fair-value-based accounting method for all options granted, modified or settled in fiscal years beginning after December 15, 1994.

        We use the Black-Scholes option valuation model to estimate the fair value of our stock options. This option valuation model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and that are fully transferable. Option valuation models require subjective assumptions such as the expected future volatility of the stock price. Because the stock options we grant have characteristics that are significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the calculated results, in management's opinion, the stock option valuation models, including Black-Scholes, may not necessarily provide an exact measure of the fair value of employee stock options.

Deferred Costs

        We defer and subsequently amortize certain direct contract acquisition costs related to activities that enable the provision of contracted services to our customers. Deferred contract acquisition costs are amortized on a straight-line basis over the remaining original contract term unless revenue patterns indicate a more accelerated method is appropriate. The recoverability of all long-lived assets associated with a particular contract, including deferred contract costs, is analyzed on a periodic basis. If we conclude that long-lived assets are impaired, an impairment loss is recognized for the amount by which the carrying value of the long-lived assets exceeds the fair value of those assets.

Unusual Events

        We report material events that are unusual in nature or occur infrequently, but not both, in other income (expense) rather than in operating income, in accordance with the provisions of APB No. 30

46

Reporting the Results of Operations. APB No. 30 provides that unusual or infrequent events are separately disclosed and excluded from operating income, and that the nature and financial effects of each event or transaction should be disclosed on the face of the income statement. Included in other income on our consolidated statements of income is the effect of a non-taxable gain in 2002 of approximately $1.0 million resulting from the termination of our defined benefit plan (as more fully disclosed in Note 11 to the consolidated financial statements). Also included in other income for 2002 is a $1.7 million cost reimbursement we received as a result of an agreement reached among parties responsible for water contamination and our California utility regarding water-quality-related expenses incurred in 1999, 2000 and 2001.

Recent Accounting Pronouncements

        In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)"). SFAS No. 123(R) replaces SFAS No. 123 and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Generally, SFAS No. 123(R) is similar in approach to SFAS No. 123 and requires that compensation cost relating to share-based payments be recognized in the financial statements based on the fair value of the equity or liability instruments issued. We must adopt SFAS No. 123(R) by the third quarter of 2005. We adopted SFAS No. 123 in 2002 and do not expect the adoption of SFAS No. 123(R) to have a material effect on our stock-based compensation expense.

        In September 2004, the Emerging Issues Task Force issued EITF Issue No. 04-8 Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share. The pronouncement pertains to all issued securities that have embedded market price contingent conversion features and therefore, applies to contingently convertible debt, contingently convertible preferred stock, and Instrument C in EITF 90-19, Convertible Bonds with Issuer Option to Settle for Cash upon Conversion. The EITF addresses when the dilutive effect of these securities with a market price trigger should be included in diluted earnings per share ("EPS"). The pronouncement is effective for all periods ending after December 15, 2004 and would be applied by retroactively restating previously reported EPS. Our convertible debentures do not have a contingent price trigger and the guidance did not have an impact on our computation of earnings per share.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We have certain indebtedness that is subject to variable rate interest. As a result, Southwest Water's interest expense is affected by changes in the general level of interest rates. The interest expense paid on our line of credit borrowings and certain term loans is determined based upon a rate formula that fluctuates with short-term LIBOR rates and the banks' prime lending rates. As of December 31, 2004, we had $115.8 million of long-term debt outstanding. This amount includes variable-rate debt totaling $31.9 million with a weighted average interest rate of 4.5%. A hypothetical one percent (100 basis points) increase in the average interest rate on our variable-rate debt would increase our annual interest expense by approximately $0.3 million.

        The fair value of our long-term debt was approximately $125 million at December 31, 2004. The carrying value of the Company's bank lines of credit approximates fair value.

47

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Financial Statement Schedules

	Page
Report of Independent Registered Public Accounting Firm	49
Consolidated Statements of Income—Three Years Ended December 31, 2004	50
Consolidated Balance Sheets—December 31, 2004 and 2003	51
Consolidated Statements of Changes in Stockholders' Equity—Three Years Ended December 31, 2004	52
Consolidated Statements of Cash Flows—Three Years Ended December 31, 2004	53
Notes to Consolidated Financial Statements	54
Schedule I—Condensed Financial Information of Registrant	86
Schedule II—Valuation and Qualifying Accounts—Three Years Ended December 31, 2004	91

48

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Southwest Water Company:

        We have audited the accompanying consolidated balance sheets of Southwest Water Company and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2004. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules I and II. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southwest Water Company and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Southwest Water Company's internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 25, 2005, expressed an unqualified opinion on management's assessment of, and an adverse opinion on the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Los Angeles, California
March 25, 2005

49

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	For the Years Ended December 31,
	2004			2003			2002
	(in thousands except per share data)
Revenues:
Utility group	$	69,420		$	56,933		$	51,967
Services group		118,532			116,041			78,833
		187,952			172,974			130,800
Expenses:
Operating expenses—utility group		40,579			33,973			33,752
Operating expenses—services group		106,447			102,057			67,876
Selling, general and administrative expenses		29,291			22,152			18,398
		176,317			158,182			120,026
Operating Income		11,635			14,792			10,774
Other Income (Expense):
Interest expense		(5,613	)		(4,600	)		(4,494	)
Interest income		912			367			265
Gain on sales of land		169			728			119
Other		(5	)		(70	)		2,551
		(4,537	)		(3,575	)		(1,559	)
Income Before Income Taxes		7,098			11,217			9,215
Provision for Income Taxes		2,564			4,024			3,213
Net Income		4,534			7,193			6,002
Dividends on Preferred Shares		24			27			27
Net Income Available for Common Shareholders	$	4,510		$	7,166		$	5,975
Earnings per Common Share:
Basic	$	0.26		$	0.49		$	0.44
Diluted	$	0.24		$	0.47		$	0.42
Weighted Average Outstanding Common Shares:
Basic		17,593			14,670			13,615
Diluted		18,489			15,394			14,351

See accompanying notes to consolidated financial statements.

50

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
	2004		2003
	(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	1,933	$	2,570
Restricted cash		221		2,806
Trade accounts receivable, less allowance for doubtful accounts ($2,117 in 2004 and $1,608 in 2003)		23,935		19,759
Other current assets		19,198		10,259
		45,287		35,394
Property, Plant and Equipment:
Utility property, plant and equipment—at cost		359,375		271,502
Non-regulated operations property, plant and equipment—at cost		18,485		17,485
		377,860		288,987
Less accumulated depreciation and amortization		75,264		67,900
		302,596		221,087
Other Assets:
Goodwill		32,837		21,388
Intangible assets, net		8,364		2,026
Other assets		15,725		16,327
	$	404,809	$	296,222
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt	$	3,372	$	2,697
Accounts payable		12,337		11,448
Other current liabilities		20,025		17,244
		35,734		31,389
Other Liabilities and Deferred Credits:
Long-term debt		92,792		56,493
Bank lines of credit		23,035		16,609
Advances for construction		9,196		7,238
Contributions in aid of construction		89,623		81,556
Deferred income taxes		15,578		10,590
Other liabilities and deferred credits		12,653		12,680
Total Liabilities and Deferred Credits		278,611		216,555
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $0.01 par value, (aggregate liquidation preference of $461 and $507 at December 31, 2004 and 2003, respectively)		461		507
Common stock, $0.01 par value, 75,000 shares authorized, 19,395 and 15,399 shares issued and outstanding at December 31, 2004 and 2003, respectively		194		154
Paid-in capital		101,509		55,974
Retained earnings		24,034		23,032
Total Stockholders' Equity		126,198		79,667
	$	404,809	$	296,222

See accompanying notes to consolidated financial statements.

51

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

	Preferred Stock					Common Stock
	Number of Shares		Amount			Number of Shares	Amount		Paid-In Capital			Retained Earnings			Total Stockholders' Equity
	(in thousands)
Balance at December 31, 2001	10		$	513		13,501	$	135	$	40,478		$	14,592		$	55,718
Dividend reinvestment and employee stock purchase plans	—			—		63		1		626			—			627
Stock options exercised, net	—			—		87		1		386			—			387
Stock-based compensation	—			—		—		—		963			—			963
Excess tax benefits from stock-based compensation	—			—		—		—		136			—			136
Debenture conversions	—			—		16		—		154			—			154
5 percent stock dividend	—			—		—		—		5			(5	)		—
Net income	—			—		—		—		—			6,002			6,002
Cash dividends declared	—			—		—		—		—			(2,150	)		(2,150	)
Balance at December 31, 2002	10			513		13,667		137		42,748			18,439			61,837
Private issuance of common stock	—			—		1,550		15		10,883			—			10,898
Dividend reinvestment and employee stock purchase plans	—			—		75		1		680			—			681
Stock options exercised, net	—			—		107		1		588			—			589
Stock-based compensation	—			—		—		—		934			—			934
Preferred stock redeemed	—			(6	)	—		—		(20	)		—			(26	)
Excess tax benefits from stock-based compensation	—			—		—		—		124			—			124
Four-shares-for-three stock dividend	—			—		—		—		37			(37	)		—
Net income	—			—		—		—		—			7,193			7,193
Cash dividends declared	—			—		—		—		—			(2,563	)		(2,563	)
Balance at December 31, 2003	10			507		15,399		154		55,974			23,032			79,667
Common stock issued under shelf registration	—			—		3,607		36		41,073			—			41,109
Dividend reinvestment and employee stock purchase plans	—			—		66		1		837			—			838
Stock options exercised, net	—			—		114		1		106			—			107
Stock-based compensation	—			—		—		—		860			—			860
Preferred stock redeemed	(1	)		(46	)	—		—		—			—			(46	)
Debenture conversions	—			—		209		2		2,286			—			2,288
5 percent stock dividend	—			—		—		—		9			(9	)		—
Excess tax benefits from stock-based compensation	—			—		—		—		364			—			364
Net income	—			—		—		—		—			4,534			4,534
Cash dividends declared	—			—		—		—		—			(3,523	)		(3,523	)
Balance at December 31, 2004	9		$	461		19,395	$	194	$	101,509		$	24,034		$	126,198

See accompanying notes to consolidated financial statements.

52

SOUTHWEST WATER COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

			For the Years Ended December 31,
			2004			2003			2002
			(in thousands)
Cash Flows From Operating Activities:
Net income			$	4,534		$	7,193		$	6,002
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization				9,195			7,549			6,619
Provision for losses on accounts receivable				1,037			140			372
Stock-based compensation expense				860			934			963
Deferred income taxes				4,501			3,477			903
Gain on sales of land				(169	)		(728	)		(119	)
Changes in assets and liabilities, net of effects of acquisitions:
	Restricted cash			2,585			(2,806	)		—
	Trade accounts receivable			(3,238	)		(3,255	)		3,677
	Other current assets			(8,511	)		(1,476	)		(597	)
	Other assets			(539	)		(5,708	)		(1,374	)
	Accounts payable			249			65			5,179
	Other current liabilities			2,077			(1,132	)		1,461
	Other liabilities			2,346			4,061			283
	Other			1,197			494			(1,283	)
Net cash provided by operating activities				16,124			8,808			22,086
Cash Flows From Investing Activities:
Additions to property, plant and equipment				(25,714	)		(18,352	)		(25,587	)
Purchase of minority interest				(2,900	)		—			(2,000	)
Acquisition of businesses, net of cash acquired				(52,680	)		—			(10,317	)
Proceeds from sales of land				169			741			165
Other investments, net				—			—			(833	)
Net cash used in investing activities				(81,125	)		(17,611	)		(38,572	)
Cash Flows From Financing Activities:
Gross proceeds from issuance of long-term debt				27,000			—			10,000
Net proceeds from issuance of common stock				41,109			10,898			—
Capital improvement reimbursements				323			2,524			4,278
Contributions in aid of construction				2,512			2,087			3,687
Net borrowings on (repayment of) bank notes payable				3,176			(3,575	)		4,166
Net proceeds from dividend reinvestment, debenture conversion, employee stock purchase and stock option plans				945			1,270			1,168
Proceeds from sale/leaseback of assets				—			1,687			—
Dividends paid				(3,523	)		(2,563	)		(2,142	)
Payments on long-term debt				(6,568	)		(2,218	)		(3,507	)
Payments on advances for construction, net				(610	)		(343	)		(347	)
Net cash provided by financing activities				64,364			9,767			17,303
Net increase (decrease) in cash and cash equivalents				(637	)		964			817
Cash and cash equivalents at beginning of year				2,570			1,606			789
Cash and cash equivalents at end of year			$	1,933		$	2,570		$	1,606
Supplemental disclosure of cash flow information
Cash paid during the year for:
		Interest	$	6,722		$	4,990		$	5,134
		Income taxes, net of refunds	$	1,769		$	3,390		$	2,335
Non-cash investing and financing activities:
	Purchase of businesses
		Fair value of assets acquired	$	79,550		$	—		$	16,781
		Cash paid		(52,680	)		—			(11,317	)
		Notes issued		(1,549	)		—			(1,000	)
		Liabilities assumed	$	25,321		$	—		$	4,464
Non-cash contributions in aid of construction and advances for construction conveyed to Company by developers			$	6,677		$	9,770		$	9,015
Acquisition of Master Tek minority interest in exchange for extinguishment of debt and future cash consideration			$	—		$	1,187		$	—

See accompanying notes to consolidated financial statements.

53

SOUTHWEST WATER COMPANY AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2004 and 2003

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Description of Business:    Southwest Water Company and its subsidiaries ("Southwest Water" or "the Company") provide a broad range of services, including water production and distribution, wastewater collection and treatment and public works services. The Company also provides billing, collection and customer service work as part of its range of services. Southwest Water owns regulated public utilities and also serves cities, utility districts and private companies under contract.

        Principles of Consolidation:    The consolidated financial statements include the accounts of Southwest Water and its wholly owned and majority-owned subsidiaries, as well as a majority-owned partnership. All significant intercompany transactions have been eliminated, except where intercompany profit is not eliminated in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation, for intercompany transactions with regulated water utilities.

        Stock Dividends and Splits:    All information regarding common stock, stock options, warrants, other dilutive potential common shares and related per share amounts has been restated within this report to reflect the following:

•

a 5% stock dividend on January 3, 2005,



•

a 4-for-3 stock split in the form of a stock dividend on January 1, 2004, and



•

a 5% stock dividend on January 1, 2003.

        Use of Estimates:    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. The reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period could be affected by changes in such estimates. Actual results may differ from these estimates.

        Regulation:    Our regulated utility subsidiaries conform to the Uniform System of Accounts prescribed by the California Public Utilities Commission (CPUC), the New Mexico Public Regulation Commission (NMPRC) or the Texas Commission on Environmental Quality (TCEQ).

        Utility Accounting:    Regulatory assets deemed recoverable are recorded in accordance with SFAS No. 71. Included in regulatory assets and liabilities are the following:

		December 31,
		2004			2003
		(in thousands)
Assets:
	Supply cost balancing account—2001 and prior	$	2,287		$	2,329
	Supply cost memorandum account—2002		(73	)		(73	)
	Supply cost memorandum account—2003		(359	)		(197	)
	Supply cost memorandum account—2004		(250	)		—
	Regulatory tax asset		2,266			2,016
	Rate case filing expenses and other		31			62
Liabilities:
	Regulatory tax liability		3,284			3,362

54

        Regulatory income tax assets are included in rate base and earn a return. Regulatory income tax liabilities are included in rate base and reduce the Company's return. The supply cost balancing account, while excluded from rate base, does earn interest during the recovery period pursuant to CPUC policy.

        The Company's New Mexico utility and Texas utilities have contracted with companies in the Services Group to perform operating services, normal maintenance and construction work. In accordance with SFAS No. 71, the Services Group recognizes a profit margin on sales to regulated affiliates and does not eliminate the intercompany profit when the sales price is reasonable and it is probable that, through the rate making process, future revenue approximately equal to the sales price will result from the regulated affiliate's use of the services. However, all revenue in excess of profits has been eliminated in consolidation. Accordingly, the intercompany profits have not been eliminated in the accompanying consolidated financial statements.

        Earnings Per Share:    Basic earnings per share (EPS) measures the performance of the Company 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 the performance of the Company over the reporting period after giving effect to all potentially dilutive common shares that would have been outstanding if the shares had been issued. Stock options and warrants give rise to potentially dilutive common shares. The Company also has convertible subordinate debentures outstanding. The debentures are convertible into Southwest Water common stock and at such time as the assumed conversion of the debentures has a dilutive effect on earnings per share, the debentures will be included in the calculation of diluted earnings per share after adjusting net income for the after-tax effect of the debenture interest expense.

        Recognition of Revenues:    Water utility revenues are recognized when water is delivered to customers. At the end of an accounting period, estimated amounts for unbilled revenues are accrued for water usage since the previous billing period.

        Revenues for contract operations are recognized and billed at the end of the month based on a monthly fee to provide a specific level of service as outlined in each individual contract. We generally bill for additional services provided beyond the scope of the base contract on a time-and-materials basis as such services are rendered.

        Revenues for construction projects are recorded using the percentage-of-completion method of accounting. The percentage-of-completion method recognizes revenue and income as work progresses on a project based on the expected total project costs and the expected total project revenues. This method is based on an estimate of the revenue and income earned to date, less the revenue and income recognized in earlier periods. If management anticipates we will ultimately suffer a loss on a construction project, the entire estimated loss is recorded in the period such a determination is made.

        Revenues for multiple-family utility billing and collecting services are recognized and billed at the end of the month in which services are performed. Revenues for installation of multiple-family utility billing and collection equipment are accounted for using the percentage-of-completion method.

        If a contract involves the provision of a single product or service, revenue is generally recognized when the product or service is provided and the amount becomes billable. If services are provided evenly during the contract term but service billings are irregular, revenue is recognized on a straight-line basis over the contract term.

        Certain non-refundable activation fees in our non-regulated wholesale water operations are accounted for on a completed contract basis and subsequently deferred and recognized over the expected period of performance.

        If a contract involves the provision of multiple products or services (elements), total estimated contract revenue is allocated to each element based on the relative fair value of each service, provided

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the services qualify for separation under Emerging Issues Task Force (EITF) 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. The amount of revenue allocated to each service is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is then recognized for each element as described above for single-element contracts, except revenue recognized on a straight-line basis for a non-construction service will not exceed amounts currently billable unless the excess revenue is recoverable from the client upon any contract termination event. If the amount of revenue allocated to a construction service is less than its relative fair value, costs to deliver such service, limited to the difference between allocated revenue and the relative fair value, are deferred and amortized over the contract term. If total construction service costs are estimated to exceed the relative fair value for the construction service contained in a multiple-element arrangement, then a provision for the estimated loss is made in the period in which the loss first becomes apparent.

        Other Income:    Southwest Water reports material events that are unusual in nature or occur infrequently, but not both, in other income (expense) rather than in operating income, in accordance with the provisions of APB No. 30, Reporting the Results of Operations. APB No. 30 provides that unusual or infrequent events are separately disclosed and excluded from operating income, and that the nature and financial effects of each event or transaction should be disclosed on the face of the income statement. Included in other income on the Company's consolidated statements of income is the effect of a non-taxable gain in 2002 of approximately $1.0 million resulting from the termination of the Company's defined benefit plan (as more fully disclosed in Note 11 to the consolidated financial statements). Also included in other income for 2002 is a $1.7 million cost reimbursement received as a result of an agreement reached among parties responsible for water contamination and our California utility regarding water-quality-related expenses incurred in 1999, 2000 and 2001.

        Cash and Cash Equivalents:    Southwest Water considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

        Restricted Cash:    The Company has a commitment to facilitate construction of a $23.0 million reverse osmosis water treatment plant in the city of San Juan Capistrano, California. (See note 14 for further information.) Restricted cash represents cash on hand that has been restricted for use in completion of the project.

        Fair Value of Financial Instruments:    The carrying value of financial instruments such as cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximates fair value. The fair value of our long-term debt was approximately $125 million at December 31, 2004. The carrying value of the Company's bank lines of credit approximates fair value. At December 31, 2004, Southwest Water had no derivative financial instruments, financial instruments with off-balance sheet risk or financial instruments with concentrations of credit risks requiring accounting or disclosure under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.

        Regulated Utility Property, Plant and Equipment:    The cost of additions to utility plant includes labor, material and capitalized interest. Interest of approximately $0.5 million, $0.5 million and $0.2 million was capitalized in 2004, 2003 and 2002, respectively. The cost of utility plant retired is charged to accumulated depreciation. Depreciation expense on utility plant is recorded using the straight-line method over the useful lives of the assets as prescribed by the CPUC, the NMPRC and the TCEQ, and as permitted by SFAS No. 71. Depreciation expense on average gross depreciable plant was approximately 1.8% in 2004, 1.9% in 2003 and 1.9% in 2002. See further discussion in Note 4 to the consolidated financial statements. In accordance with SFAS No. 71, when a unit of property is retired from utility plant, with or without replacement, the book costs are to be credited to the utility plant account. If the unit of property is of a depreciable class, the book cost of the unit retired is charged to the depreciation reserve provided for such property.

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        Non-Regulated Operations Property, Plant and Equipment:    Property, plant and equipment used in contract billing services and contract operations are depreciated on the straight-line method over estimated useful lives ranging from three to 30 years.

        Valuation of Long-Lived and Intangible Assets:    In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company assesses intangible assets and other long-lived assets, excluding goodwill, for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable through the estimated undiscounted future cash flows resulting from the use of the assets. If it is determined that the carrying value of intangible assets or other long-lived assets may not be recoverable, the impairment is measured by using the projected discounted cash-flow method in accordance with Statement No. 144.

        The Company has made acquisitions in the past that resulted in recording goodwill and intangible assets. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. For intangible assets with definite useful lives, SFAS No. 142 requires amortization over their estimated useful lives. SFAS No. 142 became effective for fiscal years beginning after December 15, 2001. The Company engaged an independent professional valuation consultant to conduct a goodwill impairment review in accordance with SFAS No. 142. We evaluated goodwill impairment using discounted cash flow methodologies, transaction values for comparable companies, and other valuation techniques for our reporting units with significant goodwill balances. Our reporting units, generally subsidiaries one level below operating segments, constitute separate businesses for which we maintain discrete financial information that is regularly reviewed by segment and executive management. There were no impairment charges to goodwill as of December 31, 2004, and no events have occurred that indicated diminution in the value of recorded goodwill.

        Under the provisions of SFAS No. 141, Business Combinations, approximately $0.2 million of intangible contract costs were identified in connection with the acquisition of Aqua Services in 2002 and approximately $1.1 million of intangible contract costs in connection with the acquisition of OpTech in 2001. These intangible contract costs are being amortized over a period of four years, which is the average estimated life of the contracts. Additionally, substantially all of the $5.3 million purchase price associated with the 2004 acquisition of 136,000 multiple-family utility billing and collection units was allocated to the account lists and the resulting intangible assets are being amortized over periods ranging up to eight years. In connection with the Monarch Utilities acquisition approximately $0.6 million of the purchase price was allocated to a customer relationship intangible asset which is being amortized over 34 years.

        Deferred Costs:    The Company defers and subsequently amortizes certain direct contract acquisition costs related to activities that enable the provision of contracted services to customers. Deferred contract acquisition costs are amortized on a straight-line basis over the remaining original contract term unless billing patterns indicate a more accelerated method is appropriate. Total amortization expense related to deferred contract costs was approximately $0.7 million, $0.4 million and $0.3 million for 2004, 2003 and 2002, respectively. The recoverability of all long-lived assets associated with a particular contract, including deferred contract costs, is analyzed on a periodic basis. If long-lived assets are determined to be impaired, an impairment is recognized for the amount by which the carrying value of the long-lived assets exceeds the fair value of those assets.

        Maintenance Costs:    Maintenance costs are recognized in the period in which they are incurred. The Company does not accrue for major maintenance projects prior to the periods in which they are actually incurred.

        Long-Term Leases to Clients:    The Company has entered into two long-term agreements for the lease of various types of water production and distribution systems to certain municipal agencies in

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Texas. Amounts due to the Company represent receivables under lease and have been accounted for as receivables from direct financing leases (see Note 3) and the leases expire over 10 years.

        Our rights, but not our obligations, under these two long-term agreements have been assigned to financial institutions in return for a cash payment. The Company collects payments under these lease agreements and uses the amounts to pay its obligations under the assignment agreements with the financial institutions. The Company is responsible for payments to the financial institutions under the assignment agreements. The Company's interest in the payments from lessees is secured by a bank letter of credit from a financial institution and the leased property.

        Advances for Construction:    Advances for construction represent amounts advanced by developers primarily for water pipeline extensions. Advances for construction are generally refundable to the depositors on a straight-line basis over periods ranging from 8 to 40 years.

        Contributions in Aid of Construction:    Contributions in Aid of Construction ("CIAC") represent contributions in the form of cash, services or property received from developers, governmental agencies, municipalities or individuals for the purpose of constructing utility plant. Depreciation expense related to utility plant additions from CIAC fees are charged as a reduction to the CIAC fee account instead of as depreciation expense.

        Stock-Based Compensation:    The Company has two plans which allow for the granting of stock options. As disclosed in Note 10, the Company applies SFAS No. 123, Accounting for Stock-Based Compensation, in accounting for its stock option grants. Accordingly, compensation expense is recognized for fixed stock options as if the fair value of all stock options as of the grant date were recognized as expense over the vesting period in accordance with SFAS No. 123.

        Income Taxes:    Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recorded in order to recognize future tax effects attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as the recognition of operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are recorded using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that the enactment occurs. The Company files a consolidated U.S. federal income tax return, which includes all qualifying subsidiaries.

        In 1993, under the provisions of SFAS No. 109, Suburban and NMUI recorded additional deferred income taxes, as well as corresponding regulatory assets and regulatory liabilities as permitted by the CPUC and the NMPRC, respectively.

        Unamortized investment tax credits have been deferred and are amortized over the estimated productive lives of the related assets as allowed by the CPUC and the NMPRC.

        Reclassifications:    Certain reclassifications have been made to the prior year consolidated financial statement presentation to conform to the 2004 presentation.

Recent Accounting Pronouncements:

        In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)"). SFAS No. 123(R) replaces SFAS No. 123 and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Generally, SFAS No. 123(R) is similar in approach to SFAS No. 123 and requires that compensation cost relating to share-based payments be recognized in the financial statements based on the fair value of the equity or liability instruments issued. We must adopt SFAS No. 123(R) by the third quarter of 2005. We adopted SFAS No. 123 in 2002 and do not expect the adoption of SFAS No. 123(R) to have a material effect on our stock-based compensation expense.

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        In September 2004, the Emerging Issues Task Force issued EITF Issue No. 04-8, Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share. The pronouncement pertains to all issued securities that have embedded market price contingent conversion features and therefore, applies to contingently convertible debt, contingently convertible preferred stock, and Instrument C in EITF 90-19, Convertible Bonds with Issuer Option to Settle for Cash upon Conversion. The EITF addresses when the dilutive effect of these securities with a market price trigger should be included in diluted earnings per share ("EPS"). The pronouncement is effective for all periods ending after December 15, 2004 and would be applied by retroactively restating previously reported EPS. The Company's convertible debentures do not have a contingent price trigger and the guidance did not have an impact on its computation of earnings per share.

NOTE 2. EARNINGS PER SHARE

        The following table is a reconciliation of the numerators and denominators used in both basic and diluted EPS calculations:

	For the Years Ended December 31,
Net income per share
	2004		2003		2002
	(in thousands except per share data)
Net Income	$	4,534	$	7,193	$	6,002
Less: Dividends on Preferred Shares		24		27		27
Net Income Available for Common Shareholders	$	4,510	$	7,166	$	5,975
Weighted Average Outstanding Common Shares		17,593		14,670		13,615
Earnings per Common Share—Basic	$	0.26	$	0.49	$	0.44

	For the Years Ended December 31,
Net income per share—assuming dilution
	2004		2003		2002
	(in thousands except per share data)
Net Income Available for Common Shareholders	$	4,510	$	7,166	$	5,975
Weighted Average Outstanding Common Shares		17,593		14,670		13,615
Plus: Shares issued on assumed exercise of stock options and warrants		896		724		736
Weighted Average Outstanding Common Shares		18,489		15,394		14,351
Earnings per Common Share—Diluted	$	0.24	$	0.47	$	0.42

        The difference between basic and diluted EPS is the effect of stock options that, under the treasury share method, give rise to dilutive potential common shares. As described in Note 7, the Company issued $20.0 million of 6.85% fixed-rate convertible subordinate debentures in July 2001. The debentures are convertible at any time prior to maturity, unless previously redeemed, at a conversion price of $11.569. At such time as the assumed conversion of the debentures has a dilutive effect on earnings per share, the debentures will be included in the calculation of diluted earnings per share after adjusting net income for the after-tax effect of the debenture interest expense.

        Approximately 317,000, 42,000 and 71,000 stock options were excluded from the computation of diluted earnings per share in 2004, 2003 and 2002, respectively, due to their antidilutive effect.

        Earnings per Common Share—Basic, Earnings per Common Share—Diluted, and Weighted Average Outstanding Common Shares for the years ending December 31, 2003 and 2002 have been restated to reflect the 5% stock dividend declared on January 3, 2005.

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NOTE 3. OTHER ASSETS

        Included in other current assets at December 31, 2004 and 2003 are the following:

	December 31,
	2004		2003
	(in thousands)
Other receivables	$	1,521	$	2,035
Prepaid expenses		5,128		1,490
Accumulated balancing account receivable		2,287		2,329
Income tax refund receivable		4,047		—
Inventory		1,855		1,595
Deferred income tax asset		1,448		1,577
Other		2,912		1,233
	$	19,198	$	10,259

        Included in other assets is a balancing account receivable, representing under-collections at our California utility, in the amount of $2.3 million at the end of 2004 and 2003. In 2002, our California water utility recorded a balancing account receivable in the amount of approximately $2.3 million, representing the difference between actual water production costs incurred and CPUC-adopted water production costs. Historically, the CPUC allowed such balancing accounts in the income statements of water utilities, with a corresponding liability or asset on the balance sheet. On July 8, 2004, the CPUC issued a decision that allows our water utility in California to collect the $2.3 million balancing account previously recognized and an additional under-collection of approximately $0.7 million for a total of $3.0 million. The $0.7 million increase in the balancing account receivable was recorded in the third quarter of 2004. The CPUC decision provides for us to recover the settlement amount through a surcharge billed to customers. Approximately $0.4 million of the additional amount was recorded as a reduction in operating expenses in the third quarter of 2004 and the remaining $0.3 million was recorded as interest income.

        Included in other long-term assets at December 31, 2004 and 2003 are the following:

	December 31,
	2004		2003
	(in thousands)
Deferred regulatory tax assets	$	2,642	$	2,363
Other receivables, net		1,887		1,412
Deferred debt expense, net		2,142		1,679
Investments in corporate-owned life insurance policies		2,048		1,519
Net investment in direct financing leases		2,563		3,310
Other		4,443		6,044
	$	15,725	$	16,327

        The Company has acquired several businesses and accounted for the transactions under the purchase method. Goodwill represents the excess of the purchase price over the net assets acquired in those transactions. During 2004, goodwill increased approximately $11.4 million primarily as a result of the Company's acquisitions of Monarch Utilities and ACE Technologies, Inc. The Company has engaged a professional, independent valuation consultant to conduct the impairment review of goodwill in accordance with FAS No. 142. There has been no impairment of goodwill during the three years ended December 31, 2004.

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        Intangible assets includes purchased contracts and acquired customer relationships with a net unamortized value of approximately $6.9 million at December 31, 2004, certain FCC licenses with an unamortized value of approximately $0.8 million at December 31, 2004, and covenants not to compete with an unamortized value of approximately $0.7 million at December 31, 2004.

        Amortization expense for intangible assets for the year ended December 31, 2004 was approximately $1.7 million. At December 31, 2004, the future estimated amortization expense for intangible assets is as follows: 2005—$1.5 million, 2006—$1.2 million, 2007—$1.0 million, 2008—$0.9 million, 2009—$0.9 million and $2.9 million thereafter.

        To assist in funding the liabilities related to its supplemental executive retirement plan and deferred compensation liabilities, the Company has invested in corporate-owned life insurance policies. See Note 11 for further explanation.

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

        The components of utility property, plant and equipment at December 31, 2004 and 2003 are as follows:

	December 31,
	2004		2003
	(in thousands)
Land and land rights	$	3,962	$	2,213
Source of supply		25,615		12,540
Pumping and purification		32,893		20,388
Transmission and distribution		263,405		197,870
General		13,321		9,917
Construction work-in-progress		20,179		28,574
	$	359,375	$	271,502

        Our California utility has an investment of approximately $0.7 million in two mutual water companies. The objective of the investments was to obtain certain water rights. Accordingly, the investments have been recorded as land and land rights. The investment in one of these mutual water companies is approximately 32% of the outstanding stock. We do not have significant operating and financial influence over either of these mutual water companies. These investments are recorded at cost and are reflected in general utility property. Suburban purchased water from these mutual water companies at a cost of approximately $1.6 million, $2.3 million and $3.7 million in 2004, 2003 and 2002, respectively.

        The decrease in construction work-in-progress was primarily due to the completion of a construction project to supply wholesale water services from the Company's Texas utilities to several surrounding communities. The project was placed in service in 2004.

        At December 31, 2004, substantially all of the Company's utility plant and equipment was pledged as collateral for the First Mortgage Bonds issued by the Company as more fully described in Note 7.

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        The components of the Company's Services Group and corporate-owned property, plant and equipment at December 31, 2004 and 2003 are as follows:

	December 31,
	2004		2003
	(in thousands)
Computer and office equipment	$	6,260	$	4,410
Machinery and office equipment		3,459		4,100
Construction work-in-progress		1,001		1,358
Leasehold improvements		4,257		2,189
Buildings, land, and other		3,508		5,428
	$	18,485	$	17,485

        Depreciation expense for utility and non-regulated property, plant and equipment totaled approximately $9.8 million, $6.9 million and $5.9 million in 2004, 2003 and 2002, respectively.

NOTE 5. OTHER LIABILITIES

        Included in other current liabilities at December 31, 2004 and 2003 are the following:

	December 31,
	2004		2003
	(in thousands)
Accrued salaries, wages and benefits	$	5,583	$	4,887
Purchased water accrual		1,883		1,183
Franchise and other taxes		1,806		1,348
Deferred revenue and customer deposits		2,327		1,309
Accrued interest payable		1,346		738
Dividends payable		975		703
Other		6,105		7,076
	$	20,025	$	17,244

        Included in other long-term liabilities and deferred credits at December 31, 2004 and 2003 are the following:

	December 31,
	2004		2003
	(in thousands)
Regulatory deferred tax liability	$	1,260	$	1,256
Living Unit Equivalent (LUE) fees		1,056		1,544
Minority interest liabilities		240		830
Amounts payable under lease assignment		2,716		3,112
Deferred revenue		1,902		1,944
Deferred rent		984		24
Deferred compensation		1,218		681
Other		3,277		3,289
	$	12,653	$	12,680

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NOTE 6. BANK LINES OF CREDIT

        On December 31, 2004, the Company had three unsecured lines of credit from three commercial banks with a total borrowing capacity of $50 million. The total borrowing availability under these lines of credit was approximately $27 million as of December 31, 2004. One line of credit expires in April 2006; the other two expire in September 2006. Two of the line of credit agreements require a commitment fee of 0.25% per year of the unused portion of the available line of credit, calculated and payable on a quarterly basis. Each of the credit agreements, as amended, contains certain financial covenants, and the Company was in compliance with all applicable covenants at December 31, 2004. The Company has issued certain standby letters of credit totaling $500,000 in 2004 and 2003. Our borrowing capacity under the lines of credit is reduced by an amount equal to the balance of these letters of credit. $5 million of the amount borrowed under our lines of credit is subject to a mandatory repayment in January 2006.

        In January 2003, the Company entered into a reimbursement agreement with one of its commercial banks to obtain a letter of credit in the amount of $3.4 million. This standby letter of credit was provided as collateral for performance under a service contract to design and construct a reverse osmosis water treatment facility and associated wells. Upon acceptance of the completed project the standby letter of credit and the related credit facility will be terminated.

        A summary of borrowing on the lines of credit during the years ended December 31, 2004 and 2003 is presented below:

	For the Years Ended December 31,
	2004			2003
	(in thousands, except percentages)
Bank lines of credit outstanding at December 31	$	23,035		$	16,609
Weighted average interest rate at December 31		3.94	%		2.55	%
Maximum amount of borrowings outstanding at any month end	$	59,069		$	26,350
Weighted average borrowings during the year	$	24,360		$	19,063
Weighted average interest rate during the year		3.12	%		2.79	%

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NOTE 7. LONG-TERM DEBT

        The long-term debt outstanding at December 31, 2004 and 2003 is as follows:

	December 31,
	2004			2003
	(in thousands)
Southwest Water Convertible Subordinate Debentures, due 2021, at 6.85% interest rate, with quarterly interest payments	$	17,255		$	19,682
Monarch Term Loan, due 2022, at 7.37% interest, with monthly installments of principal and interest		13,347			—
Monarch Term Loan, due 2022, at 5.77% interest, with monthly installments of principal and interest		916			—
Windermere 10-year bank term loan, with quarterly principal payments plus interest at LIBOR + 1.75%		8,875			9,375
Suburban First Mortgage Bond, Series A, due 2006, at 8.93% interest rate, with semi-annual interest payments		—			3,300
Suburban First Mortgage Bond, Series B, due 2022, at 9.09% interest rate, with semi-annual interest payments		8,000			8,000
Suburban First Mortgage Bond, Series C, due 2006, at 7.61% interest rate, with semi-annual interest payments		8,000			8,000
Suburban First Mortgage Bond, Series D, due 2024, at 5.64% interest rate, with semi-annual interest payments		15,000			—
NMUI First Mortgage Bond, Series B, due 2006, at 7.64% interest rate, with semi-annual interest payments		4,000			4,000
NMUI First Mortgage Bond, Series C, due 2024, at 6.10% interest rate, with semi-annual interest payments		12,000			—
Economic Development Revenue Bonds, Series 1998A, due 2018, at 5.5% interest rate, with semi-annual interest payments		1,810			1,810
Economic Development Revenue Bonds, Series 1998A, due 2008, at 6.0% interest rate, with semi-annual interest payments		415			335
OpTech 5-year notes payable dated August 2001, at 7.5% interest rate, with quarterly interest payments through 2003, followed by quarterly payments of principal and interest		1,949			2,820
Other acquisition notes		3,423			1,868
Historical value of long-term debt		94,990			59,190
Adjustment of Monarch Term Loan to fair market value at acquisition date		1,174			—
Less current maturities		(3,372	)		(2,697	)
Long-term debt	$	92,792		$	56,493

        On July 20, 2001, Southwest Water issued $20.0 million of 6.85% fixed rate convertible subordinate debentures due July 1, 2021, and received net proceeds of approximately $18.9 million 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 the Company's revolving lines of credit. Southwest Water is subject to certain financial covenants under the terms of the indenture agreement for the debentures. As of December 31, 2004, the Company was in compliance with all applicable restrictions. The debentures are convertible into shares of Southwest Water common stock at a conversion price of $11.569 per share. The debentures are convertible at any time prior to maturity unless previously redeemed. At such time as the assumed conversion of the debentures has a dilutive effect on earnings per share, the debentures will be included in the calculation of diluted earnings per share after adjusting net income for the after-tax effect of the debenture interest expense. The

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Company may redeem the debentures in whole or in part at any time, at redemption prices from 105% beginning 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 $1.1 million are being amortized over 20 years.

        In August 2002 the Company's Windermere Utility Company subsidiary ("Windermere") obtained a 10-year, $10.0 million secured bank term loan. The net proceeds of approximately $9.8 million were used to pay down bank lines of credit. The term loan bears interest at a rate equal to LIBOR plus 1.75%, with principal payments due quarterly, beginning in November 2002. The note is secured by substantially all of the assets of Windermere.

        In July 2004, the Company acquired Monarch Utilities and assumed two secured bank term loans. On December 31, 2004, the balances were approximately $13.3 million and $0.9 million, respectively. Both term loans have equal monthly principal payments, with the final principal payment due in 2022. Both term loans bear interest at a fixed interest rate. The $13.3 million loan bears interest at 7.37% per annum, and the $0.9 million loan bears interest at 5.77% per annum.

        The First Mortgage Bond, Series A issued by the Company's California utility, Suburban Water Systems ("Suburban"), required annual sinking fund payments of $900,000. On December 1, 2004, the bond was redeemed at a price of par plus a small call premium. Suburban's First Mortgage Bonds, Series B, C and D, and the First Mortgage Bonds, Series B and C issued by the Company's New Mexico Utilities, Inc. subsidiary ("NMUI"), do not require annual sinking fund payments. These bonds are nonrefundable and may be redeemed at any time by the Company at a price of par plus a call premium. Additional mortgage bonds may be issued subject to the provisions of the existing indentures. Substantially all of the Suburban and NMUI utility plant is pledged as collateral for these bonds as more fully described in Note 4.

        The First Mortgage Bond indentures limit the amount of cash and property dividends that Suburban and NMUI may pay to the Company. As of December 31, 2004 and 2003, both Suburban and NMUI were in compliance with dividend limitations mandated in the indentures.

        In connection with the acquisition of Aqua Services in November 2002, we assumed two Economic Development Revenue Bonds ("EDRBs") with principal balances of approximately $1.8 million and $0.6 million, respectively. The EDRB in the amount of $1.8 million is due in 2018, and bears interest at a rate of 6.0%, with annual principal payments beginning in 2009, while the EDRB in the amount of $0.6 million is due in 2008, and bears interest at a rate of 5.5%, with annual principal payments until maturity. These revenue bonds are secured by certain wastewater treatment plant assets.

        Notes payable were issued in connection with acquisitions made by the Company in 2001 and 2004, and are payable to the former owners of the acquired entities. In general, these notes are not secured and bear interest at rates ranging from 5% to 7.5% per annum, with interest payable either monthly or quarterly and with various contractual principal payments required.

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        Principal payments and annual maturity requirements for all long-term debt are as follows:

		Years Ending December 31,
		2005		2006		2007		2008		2009 and thereafter		Total
		(in thousands)
Long-term Debt
	Bank lines of credit	$	—	$	23,035	$	—	$	—	$	—	$	23,035
	Bank term loans		1,323		1,446		1,439		1,431		18,665		24,304
	Economic development revenue bonds		95		100		105		115		1,810		2,225
	Mortgage bonds		—		12,000		—		—		35,000		47,000
	Convertible subordinate debentures(1)		—		—		—		—		17,255		17,255
	Notes payable		1,954		1,407		420		1,599		—		5,380
		$	3,372	$	37,988	$	1,964	$	3,145	$	72,730	$	119,199

(1)

The convertible subordinate debentures are due in 2021. There are no put rights associated with the debentures.

        In addition to our lines of credit, the California and New Mexico indentures permit the issuance of approximately $70.5 million of first mortgage bonds at our California and New Mexico utilities as of December 31, 2004. Similar securities could also be issued at our Texas utilities. However, the terms of our bank lines of credit and bank term loans do not permit additional first mortgage bond indebtedness without prior consent from participating bank lenders.

NOTE 8. INCOME TAXES

        The components of the current and deferred income tax provisions are as follows:

		For the Years Ended December 31,
		2004			2003			2002
		(in thousands)
Current tax expense (benefit):
	Federal	$	(1,895	)	$	3,209		$	1,993
	State		275			514			425
			(1,620	)		3,723			2,418
Deferred income taxes expense (benefit):
	Federal		4,393			570			903
	State		108			31			—
			4,501			601			903
Change in regulatory assets and regulatory liabilities, net			(268	)		(251	)		(59	)
Investment tax credit amortization			(49	)		(49	)		(49	)
Provision for income taxes		$	2,564		$	4,024		$	3,213

        During 2004, the Company recorded a significant current federal tax benefit as the result of approximately $11.2 million of additional first year federal tax depreciation for qualifying assets placed in service during the year, which is allowable in accordance with the provisions of the Job Creation and Worker Assistance Act of 2002 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.

        Current tax expense does not reflect benefits of approximately $0.4 million, $0.1 million and $0.1 million for the years ended December 31, 2004, 2003 and 2002, respectively, related to the exercise

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of employee stock options recorded through "additional paid-in capital" in the consolidated statements of stockholders' equity.

        A reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:

	For the Years Ended December 31,
	2004		2003		2002
Provision computed at statutory rates	34	%	34	%	34	%
State income taxes, net of federal tax benefit	3	%	3	%	3	%
Amortization and other non-deductible expense	—		1	%	1	%
Reversion of pension assets, net	—		—		(2	)%
Investment tax credits	—		—		—
Other, net	(1	)%	(2	)%	(1	)%
Effective tax rate	36	%	36	%	35	%

        Net deferred income tax liabilities consist of the following at December 31, 2004 and 2003:

		December 31,
		2004		2003
		(in thousands)
Deferred income tax assets:
	Contributions in aid of construction and advances for construction	$	2,583	$	2,823
	Allowances and other reserves		2,708		1,977
	Investment tax credits		351		375
	Stock-based compensation		1,428		1,501
	Other		1,059		818
Total deferred income tax assets			8,129		7,494
Deferred income tax liabilities:
	Depreciation		17,933		12,483
	Section 1031 like-kind property exchange gain		979		1,059
	Production cost balancing accounts		944		801
	Gains on condemnation of land		599		623
	Other		1,804		1,541
Total deferred income tax liabilities			22,259		16,507
Net deferred income tax liabilities		$	14,130	$	9,013

        Based upon the Company's current and historical pre-tax earnings, management believes it is more likely than not that the Company will realize the benefit of its deferred income tax assets. Management believes the existing net deductible temporary differences will reverse during periods in which the Company generates net taxable income. However, there can be no assurance that the Company will generate any earnings or any specific level of continuing earnings in future years. Management regularly reviews the recoverability of deferred income tax assets and has determined that no valuation allowances were necessary at December 31, 2004 or 2003.

NOTE 9. STOCKHOLDERS' EQUITY

        The Company is currently authorized to issue 75,000,000 common shares at a par value of $.01 per share. The current quarterly cash dividend to common stockholders is $0.05 per share. As of

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December 31, 2004 and 2003, there were approximately 19.4 million and 15.4 million common shares issued and outstanding, respectively.

        In August 2004, the Company completed a public offering of approximately 1.9 million shares of common stock under a shelf registration statement, generating net proceeds of approximately $20.6 million.

        In March 2004, the Company completed a public offering of approximately 1.7 million shares of common stock under a shelf registration statement, generating net proceeds of approximately $20.5 million.

        In May 2003, the Company completed a private placement of approximately 1.6 million shares of newly issued common stock to certain institutional investors, generating net proceeds of approximately $10.9 million. The Company filed a registration statement with the Securities and Exchange Commission to register these shares for resale. The registration statement became effective on October 9, 2003.

        Holders of our common stock are entitled to one vote for each share held on all matters voted on by stockholders, including the election of directors. Upon liquidation or dissolution, the holders of common stock will be entitled to share ratably in the assets legally available for distribution to stockholders after payment of liabilities and subject to the prior rights of any holders of preferred stock then outstanding. Holders of our common stock do not have subscription, sinking fund, preemptive, redemption or conversion privileges. The rights, preferences and privileges of holders of our common stock are subject to the rights of the holders of shares of any series of preferred stock that is issued or that may be issued in the future.

        On April 6, 1998, the Company adopted a Share Purchase Rights Plan (Rights Plan) to preserve value for the Company's stockholders. The Rights Plan is designed to deter coercive takeover tactics, to encourage third parties interested in acquiring the Company to negotiate with the Board and to reduce any adverse effects that significant stockholders of the Company may have on the public market for the Company's common stock. In the event of certain triggering events as specified in the Rights Plan (e.g., accumulation of a significant block of shares by an acquiring person), the stockholders become entitled to purchase additional shares of common stock at a significant discount.

        The rights under the Rights Plan may only become exercisable under certain circumstances involving actual or potential acquisitions of 15% or more of our common stock. Depending on the circumstances, if the rights become exercisable, the holder is entitled to purchase from us one one-hundredth of a share of Series B Junior Participating Preferred Stock at an exercise price of $65.00, subject to adjustment. The rights remain in existence until April 6, 2008 unless they are earlier terminated, exchanged or redeemed. Information about the Stockholder's Rights Plan was filed on our Report 8-K, dated April 24, 1998.

        The Company is currently authorized to issue 250,000 preferred shares at a par value of $.01 per share. There were 9,328 and 10,076 Series A preferred shares issued and outstanding at December 31, 2004 and 2003, respectively. Series A preferred stockholders are entitled to annual dividends of $2.625 per share. Series A preferred shares may be called by the Company for a price of $52 per share and have preference in liquidation of $50 per share.

        Southwest Water has a Dividend Reinvestment and Stock Purchase Plan (DRIP) that allows common stockholders the option of receiving their dividends either in cash or in common stock at a 5% discount from the market value. The DRIP permits optional cash purchases of stock at current market values up to a maximum of $3,000 per stockholder each quarter. As of December 31, 2004, there were 741,000 shares authorized for issuance under the DRIP and 267,357 shares were available for issuance.

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NOTE 10. STOCK-BASED PLANS

        At December 31, 2004, Southwest Water had three stock-based plans: the Stock Option Plan, the Director Stock Option Plan, and the Employee Stock Purchase Plan. In 2002, the Company adopted the fair value recognition provisions of SFAS No. 123, which requires that the Company value stock options issued based upon an option pricing model and recognize this value as an expense over the period in which the options vest. In 2002, the Company elected to recognize stock-based compensation using the retroactive restatement method in accordance with the provisions of SFAS No. 148. Under this change in accounting method, the Company restated its consolidated financial statements for all years prior to 2002 to reflect stock-based compensation expense under a fair value based accounting method for all options granted, modified or settled in fiscal years beginning after December 15, 1994.

        The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and that are fully transferable. In addition, option valuation models require the Company to make subjective assumptions including the expected future volatility of the stock price. Because the stock options granted by the Company have characteristics that are significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the value of an estimate, in management's opinion, the existing option valuation models, including Black-Scholes, do not necessarily provide an exact measure of the fair value of the Company's employee stock options.

        The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2004, 2003 and 2002:

	For the Years Ended December 31,
	2004		2003		2002
Dividend yield	1.3	%	1.8	%	1.8	%
Expected volatility	24.4	%	26.6	%	27.3	%
Risk-free interest rate	3.7	%	2.7	%	4.6	%
Expected life in years	5.8		5.5		5.6

        Compensation expense arising from stock option grants as determined using the Black-Scholes fair value option model was approximately $0.9 million, $0.9 million and $1.0 million for the years ended December 31, 2004, 2003 and 2002, respectively.

        Stock Option Plan (SOP):    In 1988, stockholders approved the SOP and in 2000, stockholders approved an amendment to the SOP which increased the number of authorized and available shares for issuance by 1.25 million, provided for a 150,000 share annual award limit to any one individual, modified the eligibility requirements to include certain consultants to the Company and also extended the future grant date to May 23, 2010. In May 2003, the stockholders approved a further amendment to the SOP to increase the number of authorized and available shares for issuance by 1,000,000. As of December 31, 2004, there were 4,453,232 shares authorized for issuance under the SOP and 1,148,107 shares were available for issuance.

        Under the SOP, Southwest Water may grant non-qualified stock options to officers, employees and certain consultants at an exercise price not less than the fair value of the stock on the last trading date preceding the date of grant. The Company also granted non-qualified options to certain non-employee directors of the Company. Options granted subsequent to December 31, 1999 vest equally over a period of five years and expire seven years and one day from the date of grant. Options granted prior to January 1, 2000 expire 10 years and one day from the date of grant.

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        Options issued under the SOP may be exercised in accordance with the provisions of the Internal Revenue Code concerning stock attestation. Options are forfeited when they expire or in the event a SOP participant terminates employment with the Company prior to the options vesting.

        Director Option Plan (DOP):    In 1996, the stockholders approved the DOP for non-employee directors, and approved, in two subsequent amendments, increases in the number of shares authorized and available for issuance. As of December 31, 2004, there were 721,931 shares authorized for issuance under the DOP and 370,087 shares were available for issuance.

        The DOP provides for an automatic annual grant of options to purchase 10,000 shares of the Company's common stock to eligible non-employee directors of the Company on the date of the Company's Annual Meeting of Stockholders through 2006 at the fair market value of the Company's stock. New directors are granted an initial option to purchase 10,000 shares of the Company's common stock upon appointment to the Board of Directors. DOP options granted after December 31, 1999 vest equally over two years and expire seven years and one day after the date of grant. Options granted prior to January 1, 2000 expire 10 years and one day from the date of grant. The most recent DOP amendment extended the future grant date to May 13, 2014 and increased the number of authorized and available shares by 250,000.

        Warrants:    There were 136,744 warrants to purchase Company stock outstanding and exercisable at December 31, 2004. The warrants were issued to consultants as compensation for their assistance in the Company's purchase of the City of West Covina's water distribution system and facilities in 2000.

        A combined summary of the status of the SOP, the DOP and warrants as well as changes during the years ended as of December 31, 2004, 2003 and 2002 is presented below:

	Stock Options and Warrants		Weighted Average Exercise Price
	(in thousands)
Outstanding at December 31, 2001	1,975		$	5.62
Granted	518			9.52
Exercised	(94	)		10.68
Forfeited	(8	)		8.49
Outstanding at December 31, 2002	2,391		$	6.42
Granted	371			8.83
Exercised	(111	)		5.30
Forfeited	(35	)		7.41
Outstanding at December 31, 2003	2,616		$	6.70
Granted	438			13.27
Exercised	(152	)		3.66
Forfeited	(126	)		10.27
Outstanding at December 31, 2004	2,776		$	8.03
Exercisable at December 31, 2002	1,225		$	4.87
Exercisable at December 31, 2003	1,474		$	5.30
Exercisable at December 31, 2004	1,657		$	6.47

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        The following table summarizes information about stock options and warrants outstanding at December 31, 2004:

				Options and Warrants Outstanding				Options and Warrants Exercisable
Range of Exercise Prices				Number Outstanding at December 31, 2004	Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Price		Number Exercisable at December 31, 2004	Weighted Average Exercise Price
				(in thousands)				(in thousands)
$	1.50	$	3.75	220	1.5	$	2.82	220	$	2.82
	3.75		7.50	882	3.4		5.76	757		5.53
	7.50		11.25	1,245	3.8		8.78	677		8.68
	11.25		15.00	429	6.2		13.23	3		11.61
	1.50		15.00	2,776	3.9		8.03	1,657		6.47

        Employee Stock Purchase Plan ("ESPP"):    The Company has a stockholder-approved ESPP that allows eligible employees to purchase common stock through payroll deductions up to 10% of their salary (not to exceed $25,000 per year). The purchase price of the stock is 90% of the lower of the share price as calculated at the beginning and end of each three-month offering period. Under the ESPP, the Company issued approximately 20,000 shares, 16,000 shares and 13,000 shares to employees in 2004, 2003 and 2002, respectively. At December 31, 2004, approximately 1,197,000 shares were reserved for issuance under the ESPP and approximately 894,000 shares were available for issuance.

NOTE 11. EMPLOYEE PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

        Defined Benefit Plan:    Prior to December 30, 1999, Southwest Water had a non-contributory defined benefit pension plan (the "Pension Plan") for certain employees of the Company. On August 5, 1999, the Company's Board of Directors adopted a resolution to terminate the Pension Plan, freeze the assets of the Pension Plan and cease all benefit accruals as of December 30, 1999. In connection with the termination of the Pension Plan, the Company amended the Pension Plan benefit calculation and enhanced its current defined contribution plan, covering certain employees of the Company. The Company applied for an Internal Revenue Service ("IRS") determination in April 2000, and received a favorable determination in September 2001, thereby permitting the Company to proceed with the Pension Plan termination. In January 2002, the net assets of the Pension Plan were distributed to plan participants as permitted by the Employee Retirement Income Security Act ("ERISA") and its related regulations. Following distribution of the plan assets of approximately $14.4 million to meet the benefit liabilities of the pension plan, 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 $1.1 million.

        In February 2002, the Company's Board of Directors approved the transfer of excess assets to a qualified replacement plan. The funds were transferred to the Trustee of the qualified replacement plan in March 2002. Following the transfer of excess assets and payment of applicable excise taxes of approximately $0.2 million, the Pension Plan was considered settled in the first quarter of 2002 under the guidelines set forth in SFAS No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, because all benefit obligations were met and assets had been distributed. The Company no longer had responsibility for the pension benefit obligation. Accordingly, the Company accounted for the plan termination under SFAS No. 88 and recognized a net termination pre-tax gain of approximately $1.0 million as income to the Company in the first quarter of 2002.

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        During the third quarter of 2003, the IRS issued a revenue ruling which indicated that, when the excess assets of a terminated pension plan are transferred to a qualified replacement plan, such transfers are not subject to excise tax. Accordingly, the Company applied for a refund of the previously paid excise taxes of approximately $0.2 million, which was received in March 2004.

        Defined Contribution Plans:    The Company established a 401(k) profit sharing plan (the "401(k) Plan") covering employees of its Services Group. The 401(k) Plan provides for monthly enrollment by employees immediately following their date of hire. Participants may elect to contribute up to 60% of their salary to the 401(k) Plan. The Company matches a participant's contribution for an amount up to 50% of the first 4% of the participant's salary. Company contributions vest after one year. The assets of the 401(k) Plan are invested at the discretion of the individual employees in mutual funds consisting of stocks, bonds, and money market investments. Assets of the 401(k) Plan are not invested in the stock of the Company.

        The Company established the Utility Group Retirement Savings Plan (the "Retirement Plan") covering employees of the parent company, Suburban, NMUI and Windermere. Employees become eligible for participation on the first of the month following their date of hire. Under the Retirement Plan, the Company matches 100% of the first 2% and 50% of the next 4% of the employees' contributions up to a maximum Company match of 4%. In addition, the Company has made discretionary contributions of $250 semi-annually for each eligible employee. The Company contributions vest over a six year graduated schedule. The assets of the Retirement Plan are invested at the discretion of the individual employees in mutual funds consisting of stocks, bonds, and money market investments. Assets of the Retirement Plan are not invested in the stock of the Company. During 2002, the Retirement Plan was identified as a qualified replacement plan and amended to permit the excess assets of the Pension Plan to be placed in a suspense account. The amount currently held in the suspense account is used for company contributions to the Retirement Plan as permitted by the IRS, ERISA and the DOL.

        In connection with its acquisition of Master Tek in 2000, Southwest Water maintained a 401(k) plan for employees of Master Tek. In 2002, the Master Tek Plan was merged into the Retirement Plan.

        In connection with its acquisition of OpTech in 2001, Southwest Water maintained a 401(k) plan for employees of OpTech (the "OpTech Plan"). Employees became eligible for participation in the OpTech Plan after six months of employment. In 2003, the OpTech Plan was merged into the 401(k) Plan.

        The Company's contributions to the 401(k) plans were as follows:

	For the Years Ended December 31,
	2004		2003		2002
	(in thousands)
401(k) Plan	$	454	$	452	$	206
Retirement Plan		338		434		395
OpTech Plan		—		10		11
	$	792	$	896	$	612

        Supplemental Executive Retirement Plan (SERP):    Effective May 2000, the Company established a non-qualified supplemental executive retirement plan ("SERP") for certain key executive officers of the Company for the purpose of providing supplemental income benefits to plan participants or their survivors upon participant's retirement or death. Two executive officers of the Company have been selected by the compensation committee of the Board of Directors to participate in the SERP. Under the SERP, in most cases, a vested participant with five to ten years of service will be eligible for a

72

yearly benefit for his or her lifetime beginning at age 65 equal to: (1) the participant's average annual compensation multiplied by (2) the applicable compensation percentage as defined by the SERP less (3) the Social Security benefit for the most recent five years of employment and less (4) benefits received under the Pension Plan. The Pension Plan was terminated on December 30, 1999. Compensation under the SERP is the participant's base salary and excludes bonus and other forms of compensation.

        To assist in funding the SERP liability, the Company has invested in a corporate-owned life insurance ("COLI") policy. The cash surrender value of the COLI policy is designed to be equal to the net present value of the aggregate SERP liabilities. However, there is no direct relationship between the aggregate participants' SERP benefits and the COLI coverage.

        The cash surrender value of the COLI policy was approximately $0.9 million as of December 31, 2004, and is included in the other non-current assets section of the accompanying consolidated balance sheets (see Note 3).

        The projected benefit obligation of the unfunded plan was approximately $0.9 million and $0.7 million at December 31, 2004 and 2003, respectively. The following table sets forth the components of the net periodic benefit costs and actuarial assumptions for the SERP:

		For the Years Ended December 31,
		2004			2003			2002
		(in thousands)
Service cost		$	59		$	56		$	108
Interest cost			75			73			59
Recognized actuarial loss			85			87			74
		$	219		$	216		$	241
Assumptions:
	Discount rate		5.5	%		6.0	%		6.5	%
	Salary increases		5.0	%		5.0	%		8.0	%

        Deferred Compensation Plan (DCP):    The Company adopted a non-qualified deferred compensation plan effective January 2002. Under the DCP the Company permits key employees to annually elect to defer a portion of their compensation until their retirement. The retirement benefit to be provided is based upon the amount of compensation deferred. Deferred compensation expense was approximately $86,000, $48,000 and $24,000 in 2004, 2003 and 2002, respectively. Total deferred compensation liabilities were approximately $1.2 million and $0.7 million at December 31, 2004 and 2003, respectively.

        To assist in funding the deferred compensation liability, the Company has invested in COLI policies. The cash surrender values of these policies were approximately $1.1 million and $0.8 million at December 31, 2004 and 2003, respectively, and are presented as other non-current assets in the accompanying consolidated balance sheets (see Note 3).

NOTE 12. SEGMENT INFORMATION

        Under SFAS No. 131, Segment Reporting, Southwest Water has two reportable segments: Utility Group and Services Group operations. The Utility Group owns and operates public water and wastewater utilities in California, New Mexico and Texas. State and federal agencies issue regulations regarding standards of water quality, safety, environmental and other matters which affect these operations. In the regulated utility subsidiaries, the rates that we charge for water and wastewater services are established by state authorities.

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        The Services Group operates and manages water and wastewater treatment facilities owned by cities, public agencies, municipal utility districts, private entities and investor-owned utilities (including Utility Group affiliates). Revenue is derived through operations and maintenance contracts with smaller municipalities. Also included in the Services Group are construction operations, multiple-family utility billing and collections and state certified water and wastewater laboratory services.

        Southwest Water's reportable segments are strategic business units that offer different services. They are managed separately since each business requires different operating and growth strategies. The Services Group, while subject to certain environmental standards, is not regulated in its pricing, marketing or rates of return. The Utility Group subsidiaries are primarily governed by the regulatory bodies of the respective states and by the federal government. The service areas in which the Utility Group operates constitute monopolies with allowable rates of return determined by state regulatory agencies. The accounting policies of the segments are described in the summary of significant accounting policies in Note 1.

        The following table presents information about the operations of each reported segment for the three years ended December 31, 2004:

	Utility Group(1)			Services Group(2)			Total Segments Information			Corporate and Other(3)			Total Consolidated Information
	(in thousands)
For the Year Ended December 31, 2004
Total revenues(2)	$	69,420		$	118,532		$	187,952		$	—		$	187,952
Segment operating income		22,569			243			22,812			(11,177	)		11,635
Interest income		383			509			892			20			912
Interest expense		(3,303	)		(2,449	)		(5,752	)		139			(5,613	)
Gain on sales of land		109			60			169			—			169
Other income (expense)		61			(91	)		(30	)		25			(5	)
Income before income taxes		19,819			(1,728	)		18,091			(10,993	)		7,098
For the Year Ended December 31, 2003
Total revenues(2)	$	56,933		$	116,041		$	172,974		$	—		$	172,974
Segment operating income		17,807			3,518			21,325			(6,533	)		14,792
Interest income		—			415			415			(48	)		367
Interest expense		(1,871	)		(2,054	)		(3,925	)		(675	)		(4,600	)
Gain on sales of land		728			—			728			—			728
Other income (expense)		(51	)		201			150			(220	)		(70	)
Income before income taxes		16,613			2,080			18,693			(7,476	)		11,217
For the Year Ended December 31, 2002
Total revenues(2)	$	51,967		$	78,833		$	130,800		$	—		$	130,800
Segment operating income		14,137			2,048			16,185			(5,411	)		10,774
Interest income		115			146			261			4			265
Interest expense		(2,161	)		(1,196	)		(3,357	)		(1,137	)		(4,494	)
Gain on sales of land		119			—			119			—			119
Other income (expense)		1,635			(95	)		1,540			1,011			2,551
Income before income taxes		13,845			903			14,748			(5,533	)		9,215

(1)

In May 2002, an agreement was reached among certain of the parties responsible for the contamination of a California aquifer and a number of affected water companies, including our California water utility. As a result of the agreement we recorded income of approximately $1.7 million in 2002, which covered certain water and energy costs, incurred in 1999, 2000 and 2001 arising from the contamination that were prior to the commencement of monthly

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contamination cost reimbursement payments. This agreement was an unusual event and we recorded the $1.7 million in other income (expense) rather than as an increase to operating income, in accordance with the provisions of APB No. 30 Reporting the Results of Operations. (See Note 1—Summary of Significant Accounting Policies).

(2)

In addition to services provided to external customers, certain companies in our Services Group provide construction, operations and maintenance services to companies in our Utility Group. In accordance with SFAS No. 71, the Company does not eliminate the intersegment profit on sales to affiliated utilities when the sales price is reasonable and it is probable that, through the rate making process, future revenue approximately equal to the sales price will result from the regulated affiliate's use of the services. Intersegment revenue was approximately $5.1 million, $3.6 million and $3.7 million for 2004, 2003 and 2002, respectively.

(3)

"Corporate and Other" consists of costs that include headquarters expenses and any corporate functional departments whose costs are not allocated to our reportable segments.

        The following table presents information about the identifiable assets of each reported segment as December 31, 2004 and 2003:

	December 31,
	2004		2003
	(in thousands)
Services Group	$	70,336	$	67,831
Utility Group		322,548		222,436
Corporate and Other		11,925		5,955
Consolidated	$	404,809	$	296,222

NOTE 13. SIGNIFICANT ACQUISITIONS

        In April 2000, the Company purchased 80% of the outstanding common stock of Master Tek for $4.0 million. The purchase price consisted of $2.0 million in cash and a $2.0 million ten-year promissory note. The purchase agreement provides that the Company had the right to acquire the remaining 20% ownership for a price based on a formula related to the future financial performance of Master Tek over the following seven years. Under the terms of the purchase agreement, the minority owner of Master Tek had the right to require the Company to purchase his initial 20% minority interest in 5% increments at a price based on a formula, but not less than $1.0 million per year, over a four-year period commencing in April 2002. The acquisition was accounted for using the purchase method of accounting, and the results of Master Tek's operations have been consolidated with those of Southwest Water since April 3, 2000, the effective date of the transaction. The purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair value at the date of acquisition. In April 2002, the Company paid $1.0 million to the minority owner for an additional 5% interest in Master Tek in accordance with the purchase agreement, thereby increasing our ownership to 85%. We subsequently acquired the remaining 15% of Master Tek.

        In August 2001, we purchased 90% of the outstanding shares of Operations Technologies, Inc. ("OpTech"), a provider of contract water and wastewater and public works services in the southeastern United States, for a purchase price of $8.2 million. The purchase price consisted of cash payments of $3.5 million in August 2001 and $0.4 million in January 2002, promissory notes in the aggregate amount of $3.0 million and shares of our common stock with a market value of $1.3 million at August 31, 2001. We also entered into an employment agreement and a non-compete agreement with the owner of the remaining 10% of OpTech.

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        In December 2001, we acquired substantially all of the assets of CDC/Construction Design Company, LTD., a company with experience in underground water and wastewater utility maintenance and manhole rehabilitation. The aggregate purchase price was approximately $3.2 million, which consisted of approximately $0.2 million in cash payments and notes payable of approximately $3.0 million.

        In November 2002, we acquired certain contract operations of AquaSource, a provider of contract water and wastewater services in Texas, Colorado and South Dakota. The purchase price consisted of approximately $10.3 million in cash. Upon closing of the transaction on November 22, 2002, we began operating the majority of this business under the name Aqua Services, LP ("Aqua Services") while the remaining part was incorporated into one of our existing subsidiaries, ECO Resources, Inc. ("ECO").

        In July 2004, we acquired a Texas utility consisting of approximately 86 rural regulated water systems and 11 wastewater systems from Tecon Water Holdings, L.P., and renamed the utility Monarch Utilities, Inc. ("Monarch Utilities"). The aggregate purchase price was approximately $66 million, comprised of approximately $48 million in cash payments and the assumption of approximately $18 million in debt. The cost to acquire Monarch Utilities has been allocated to net tangible and intangible assets acquired based on their estimated fair values. Approximately $59 million of the $66 million purchase was attributed to the value of Monarch Utilities fixed assets, and approximately $1 million was allocated to intangible assets. The excess of cost over the estimated fair value of net assets acquired was approximately $11 million and was allocated to goodwill.

        In September 2004, we acquired the assets of ACE Technologies, Inc., a water and wastewater testing laboratory, and incorporated its business into an existing subsidiary. This acquisition allowed us to expand our capacity and expertise in the water and wastewater quality testing field. The purchase price was approximately $1.2 million, consisting entirely of a note payable.

        During 2004, we completed several acquisitions in the multiple-family utility billing and collection market. These acquisitions were structured as asset purchases, primarily of account contracts, account lists, software and other assets. Under the purchase agreements, we acquired approximately 136,000 active billing and collection units at a cost of approximately $5.3 million. The aggregate purchase price for the account lists was approximately $3.8 million in cash and approximately $1.5 million in notes payable. Substantially all of the purchase price was allocated to the account lists and the resulting intangible assets are being amortized over eight years.

        The actual results of operations for Monarch Utilities have been included in our results of operations since it was acquired in July 2004. The unaudited pro forma condensed combined statements of operations table below reflects the results of operations of Southwest and Monarch Utilities for the years ended December 31, 2004 and 2003 as if the acquisition occurred on January 1 of each of the years presented. Unaudited pro forma condensed combined statements of operations are not necessarily indicative of the results that would have been achieved had the transaction been consummated as of the date indicated or had the entities been a single entity during these periods. The

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unaudited pro forma statements of operations are not necessarily indicative of the results that may be achieved in the future.

	For the Years Ended December 31,
	2004		2003
	(in thousands except per share data)
Pro forma statement of operations data:
Total revenues	$	196,050	$	185,944
Net Income	$	4,774	$	8,207
Net Income Available for Common Shareholders	$	4,750	$	8,180
Earnings Per Common Share:
Basic	$	0.27	$	0.56
Diluted	$	0.26	$	0.53
Weighted Average Outstanding Common Shares:
Basic		17,593		14,670
Diluted		18,489		15,394

NOTE 14. COMMITMENTS AND CONTINGENCIES

Minority Interest Call and Put Rights

        The Company holds 90% of the outstanding common stock of OpTech. The Company has the right to acquire the remaining 10% of OpTech beginning in August 2006 based on a formula relating to the profitability of OpTech. The minority owner has the option to sell the remaining 10% of OpTech to the Company using the same formula. However, the selling price cannot be less than $1.0 million.

        The Company has an 80% interest in its Windermere utility in Texas. The purchase agreement provides that the Company has the right to acquire the remaining 20% ownership in Windermere at any point in time when the market value of the Company's stock increases to $12.96 per share (as adjusted for stock splits and dividends), for a purchase price of $6.0 million payable in Company common stock. The minority owner of Windermere has the right to put the remaining 20% back to the Company beginning in October 2005, for up to 450,000 shares of our common stock, but no less than 240,000 shares, depending on the prevailing stock price.

Long-term Lease Commitments

        The Company leases certain equipment and office facilities under operating leases that expire through 2014. Aggregate rental expense under all operating leases approximated $6.9 million, $5.8 million, and $4.2 million in 2004, 2003 and 2002, respectively. At December 31, 2004, the future minimum rental commitments under existing non-cancelable operating leases are as follows:

Years Ending December 31,	Long-term Lease Commitments
	(in thousands)
2005	$	6,210
2006		5,589
2007		4,530
2008		2,524
2009		2,227
Thereafter		15,132
Total	$	36,212

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Performance Bonds

        As part of its contract process, the Services Group obtains bid bonds which secure, among other things, the Services Group's willingness to participate in contract discussions. The bid bonds range in value dependent upon the requirements of the potential client. Upon consummation of the contract, or cancellation of the negotiating process, the bid bond is canceled and the Services Group bears no further liability. The aggregate amount of bid bonds outstanding is usually less than $500,000 at any given time. The Company also secures its performance under operating and maintenance contracts with performance and completion bonds obtained from surety companies. The aggregate amount of these bonds at December 31, 2004, was approximately $1.3 million.

Legal proceedings

        Southwest Water and a subsidiary were named as defendants in several lawsuits alleging various injuries as a result of water contamination in the San Gabriel Valley Main Basin. The California Supreme Court ruled in February 2002 that the plaintiffs cannot challenge the adequacy of the water quality standards established by California Department of Health Services (DOHS). In August 2004, the case against Southwest Water and its subsidiary was dismissed; however, the plaintiffs appealed the dismissal to the Court of Appeals for the State of California, Second Appellate District. To date, liability insurance carriers have absorbed the costs of defense of the lawsuits. Based upon information available at this time, the Company does not expect that this action will have a material adverse effect on its financial position, results of operations or cash flows.

        Southwest Water and its subsidiaries are also the subjects of other litigation arising from the ordinary course of operations. The Company believes the ultimate resolution of such matters will not materially affect its consolidated financial position, results of operations or cash flow.

Commitments Under Long-term Service Contracts

        In 2002, the Company agreed to facilitate the engineering and construction of a $23.0 million reverse osmosis water treatment plant in the city of San Juan Capistrano, California, for the Capistrano Valley Water District (CVWD). The project includes the drilling of several new wells and the development of associated water lines. Subcontractor agreements with an engineering firm and a large construction firm are being used to fulfill significant obligations of this service contract. During 2002, the Company deferred approximately $0.8 million in pre-contract costs and began to recognize profit under the percentage-of-completion method of accounting.

        During construction of the CVWD plant, we have received payments upon completion of construction milestones and will continue to receive such payments until final completion of the construction. In addition, the CVWD awarded the Company a 20-year $20.0 million contract to operate the treatment plant after completion of construction. Construction of the plant commenced in December 2002 and was substantially complete as of December 31, 2004. The Company now operates and maintains the facility under the 20-year contract. The plant has the capacity to treat approximately 5.0 million gallons of water per day.

        In January 2003, the Company obtained an unsecured line of credit facility from a commercial bank used to issue a $3.4 million standby letter of credit as collateral for performance under a service contract for the CVWD to manage the design and construction project. This standby letter of credit is in force for the estimated two-year construction period of the project. Upon acceptance of the completed project by the CVWD, expected in 2005, the standby letter of credit facility will be terminated.

        The CVWD service contract contains certain guarantees related to the performance of the Company and a subsidiary, including certain liquidated damages in the event of failure on the part of

78

the Company to perform not caused by uncontrollable circumstances as defined in the service contract. The Company met an obligation to produce from the completed plant a specified volume of treated water by December 4, 2004. The Company may be liable for liquidated damages relating to any lost payments from an agreement with a state water agency providing financial assistance to CVWD. During the 20-year operation period, the Company has made certain other guarantees to CVWD, including guarantees with respect to the quality and quantity of the finished water and the production efficiency of the facility.

        As part of the financing of this project, the CVWD was successful in the sale of insured municipal bonds. The Company entered into an agreement with the bond insurer to guarantee the Company's performance under the service contract, subject to certain liability caps to the bond insurer in the event of a default. Such liability caps will not exceed an amount equal to $6.0 million during the construction period of the project, and afterwards, during the 20-year operation of the facility, the liability cap will not exceed an amount equal to $4.0 million plus an amount no greater than the replacement cost of the actual reverse osmosis filtration unit within the facility estimated to be approximately $1.5 million.

Limitations on Dividends at our California Utility

        Our California utility is limited by its mortgage bond agreement in distributing funds to Southwest Water Company. The limitation prevents paying dividends that exceed aggregate undistributed net income subsequent to December 31, 1995. Dividend distributions have averaged approximately $3.0 million per year and are less than the dividend restriction threshold as of December 31, 2004, by approximately $27.0 million.

NOTE 15. SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)

        Selected unaudited quarterly consolidated financial information of the Company is presented in the tables below. The fluctuations in revenues and operating income among quarters reflect the seasonal nature of the Company's operations.

		Dec. 31 2004			Sept. 30 2004		Jun. 30 2004		Mar. 31 2004
		(In thousands, except per share data)
Consolidated Statement of Operations Data:
	Revenues	$	47,513		$	55,018	$	45,694	$	39,727
	Operating income		547			4,987		5,168		933
	Net income (loss)		(410	)		2,373		2,553		18
	Net income (loss) applicable to common shareholders		(414	)		2,367		2,546		11
	Basic earnings (loss) per common share	$	(0.02	)	$	0.13	$	0.15	$	0.00
	Diluted earnings (loss) per common share	$	(0.02	)	$	0.12	$	0.14	$	0.00

		Dec. 31 2003		Sept. 30 2003		Jun. 30 2003		Mar. 31 2003
		(In thousands, except per share data)
Consolidated Statement of Operations Data:
	Revenues	$	43,984	$	51,412	$	41,464	$	36,114
	Operating income		3,771		6,603		3,497		921
	Net income (loss)		2,024		3,429		1,889		(149	)
	Net income (loss) applicable to common shareholders		2,017		3,423		1,882		(156	)
	Basic earnings (loss) per common share	$	0.13	$	0.22	$	0.13	$	(0.01	)
	Diluted earnings (loss) per common share	$	0.12	$	0.21	$	0.13	$	(0.01	)

        Basic earnings (loss) per common share and diluted earnings (loss) per common share for periods prior to the fourth quarter of 2004 have been restated to reflect the 5% stock dividend declared on January 3, 2005.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Management's Report on Internal Control Over Financial Reporting

        Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

        (1)   Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

        (2)   Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of managements and directors of the Company; and

        (3)   Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        Management has used the framework set forth in the report entitled "Internal Control—Integrated Framework" published by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission to evaluate the effectiveness of the Company's internal control over financial reporting. We excluded our Monarch Utilities (previously Tecon Water Holdings, L.P.) operations from the scope of our assessment of internal control over financial reporting as of December 31, 2004, as permitted by Securities and Exchange Commission rules and regulations. These operations were acquired on July 14, 2004. Monarch Utilities constituted approximately $76.6 million, or 19%, of the Company's total consolidated assets as of December 31, 2004, and approximately $7.1 million, or 4%, of the Company's total consolidated revenues for the year ended December 31, 2004.

        During the fourth quarter of 2004, accounting errors were identified that were caused by lack of an effective review, by appropriate accounting personnel, of the accounting for certain non-routine transactions. Such transactions involved a) purchase accounting for an acquisition, b) balance sheet classification of long-term debt, and c) accounting for a gain contingency. Specifically, as a result of this internal control deficiency, there was more than a remote likelihood that the Company's interim or annual financial statements could have been materially misstated, and accordingly, such deficiency was considered a material weakness in internal control over financial reporting as of December 31, 2004. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected. These accounting errors were corrected through adjustments to other current assets, property, plant and equipment, goodwill, other intangible assets, advances for construction, operating expenses (amortization), and other income in the Company's December 31, 2004 consolidated financial statements.

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        Because of the material weakness described above, management concluded that, as of December 31, 2004, our internal control over financial reporting was not effective.

        KPMG LLP, a registered public accounting firm, has issued an attestation report on management's assessment of the Company's internal control over financial reporting in Item 9A(b).

(b) Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

To the Board of Directors and Stockholders
Southwest Water Company:

        We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting (Item 9A(a)), that Southwest Water Company did not maintain effective internal control over financial reporting as of December 31, 2004, because of the effect of the material weakness related to lack of an effective review, by appropriate accounting personnel, of the accounting for certain non-routine transactions, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Southwest Water Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management's assessment as of December 31, 2004: During the fourth quarter of 2004, accounting errors were identified that were caused by lack of an effective review, by appropriate accounting personnel, of the accounting for certain non-routine transactions. Such transactions involved

81

a) purchase accounting for an acquisition, b) balance sheet classification of long-term debt, and c) accounting for a gain contingency. Specifically, as a result of this internal control deficiency, there was more than a remote likelihood that the Company's interim or annual financial statements could have been materially misstated, and, accordingly, such deficiency was considered a material weakness in internal control over financial reporting as of December 31, 2004.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Southwest Water Company and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2004. The aforementioned material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 consolidated financial statements, and this report does not affect our report dated March 25, 2005, which expresses an unqualified opinion on those consolidated financial statements.

        In our opinion, management's assessment that Southwest Water Company did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Southwest Water Company has not maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

        Southwest Water Company acquired Tecon Water Holdings, L.P. and renamed the utility Monarch Utilities, Inc. ("Monarch") during 2004, and management excluded from its assessment of the effectiveness of Southwest Water Company's internal control over financial reporting as of December 31, 2004, Monarch's internal control over financial reporting associated with total assets of approximately $76.6 million, or 19% of total consolidated assets, and total revenues of approximately $7.1 million, or 4% of total consolidated revenues, included in the consolidated financial statements of Southwest Water Company and subsidiaries as of and for the year ended December 31, 2004. Our audit of internal control over financial reporting of Southwest Water Company also excluded an evaluation of the internal control over financial reporting of Monarch.

/s/ KPMG LLP

Los Angeles, California
March 25, 2005

(c) Evaluation of Disclosure Controls and Procedures

        We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

        As required by Rule 13a-15(b) under the Exchange Act, the Company's management conducted an evaluation, under the supervision and with the participation of the Company's management, including

82

the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of our design and operation of the Company's disclosure controls and procedures as of December 31, 2004, the end of the period covered by this report. Based upon that evaluation, and taking into account the material weakness described in Item 9A(a), the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were not effective as of December 31, 2004 to ensure that information required to be disclosed in reports filed or submitted by us under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.

(d) Changes in Internal Control over Financial Reporting.

        As reported in our Annual Report on Form 10-K for the year ended December 31, 2003 (the "2003 10-K"), management identified deficiencies in certain aspects of the monitoring and analysis components of the internal control procedures in our Services Group segment which constituted a "reportable condition" (as defined in AU 325, Consideration of Internal Control Related Matters Noted in an Audit). These identified deficiencies impacted the quality and timeliness of the reporting and reconciliation of certain transactions in our Services Group, but did not require any restatement of the Company's consolidated financial statements for any prior period. As disclosed in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2004, June 30, 2004 and September 30, 2004, management implemented changes during 2004 to rectify the reportable condition.    During the fourth quarter of 2004, we implemented additional review procedures in financial reporting and made improvements in our information technology controls. Management believes that the changes implemented during 2004 remedied the reportable condition noted in the 2003 10-K. However, we identified a material weakness in our internal control over financial reporting in effect at December 31, 2004, as noted in Item 9A(a).

        Except as we described above, there was no change in our internal control over financial reporting that occurred during the fourth quarter of 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

        We plan to implement additional improvements to our internal controls to correct the aforementioned material weakness. Specifically, we plan to implement additional accounting review and approval procedures for non-routine transactions and evaluate appropriate staffing and experience levels in our corporate controllership function.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        Information relating to the directors of the Company will be set forth under the captions "Item 1—Election of Directors—Information with Respect to Nominees and Continuing Directors" in our Proxy Statement for our 2005 Annual Meeting of Stockholders. Such information is incorporated herein by reference. Information relating to our executive officers is set forth in Part I of this 10-K. Information regarding compliance by our directors and executive officers and owners of more than 10% of the Company's common stock with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, will be set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" of the Securities Exchange Act of 1934" in the above-referenced Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

        Information relating to management compensation will be set forth under the captions "Item 1—Election of Directors—Director Compensation and Stock Ownership Guidelines" and "Item 1—Election of Directors—Executive Officer Compensation" in our Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference, except for the information set forth under the captions "Executive Compensation—Audit and Compensation Committee Report on Executive Compensation" and "Performance Graph," which specifically is not so incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        Information regarding ownership of our securities by certain persons is set forth under the caption "Proposal 1—Election of Directors—Beneficial Ownership of the Company's Securities" in the Company's Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Information regarding certain relationships and transactions between the Company and certain of our affiliates is set forth under the caption "Proposal 1—Election of Directors—Compensation Committee Interlocks and Insider Participation" in our Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

        Information regarding principal accountant fees and services is set forth under the caption "Principal Auditor Fees and Services" in the Company's Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

		Page
(a)(1)	The financial statements listed below are filed in Part II of this report:
	Report of Independent Registered Public Accounting Firm	49
	Consolidated Statements of Income—Three Years Ended December 31, 2004	50
	Consolidated Balance Sheets—December 31, 2004 and 2003	51
	Consolidated Statements of Changes in Stockholders' Equity—Three Years Ended December 31, 2004	52
	Consolidated Statements of Cash Flows—Three Years Ended December 31, 2004	53
	Notes to Consolidated Financial Statements	54
(a)(2)	The supplementary financial statement schedules required to be filed with this report are as follows:
	Schedule I—Condensed Financial Information of Registrant	86
	Schedule II—Valuation and Qualifying Accounts	91
	Schedules not listed above are omitted because of the absence of conditions under which they are required, or because the information required by such omitted schedules is included in the consolidated financial statements or notes thereto.
(a)(3)	Exhibit Index	92

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SOUTHWEST WATER COMPANY

SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Statements of Operations

	For the Years Ended December 31,
	2004			2003			2002
	(in thousands)
Revenues:	$	—		$	—		$	—
Expenses:
Selling, general and administrative		3,595			3,996			2,538
		3,595			3,996			2,538
Operating Loss		(3,595	)		(3,996	)		(2,538	)
Other Income (Expense):
Interest expense		(1,904	)		(1,552	)		(1,137	)
Interest income		—			—			4
Other		2,089			609			1,011
		185			(943	)		(122	)
Loss Before Income Taxes		(3,410	)		(4,939	)		(2,660	)
Income Tax Benefit		1,395			2,218			1,246
Net Loss Before Equity in Net Income of Subsidiaries		(2,015	)		(2,721	)		(1,414	)
Equity in Net Income of Subsidiaries		6,549			9,914			7,416
Net Income	$	4,534		$	7,193		$	6,002

See accompanying notes to condensed financial information of registrant.

86

SOUTHWEST WATER COMPANY

SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Balance Sheets

	December 31,
	2004		2003
	(in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	633	$	621
Receivable from subsidiaries, net		53,268		39,337
Other current assets		6,302		—
		60,203		39,958
Property, plant and equipment, net		861		442
Investments in subsidiaries and affiliates		108,514		71,900
Deferred income taxes		1,329		1,979
Other assets		3,591		3,660
	$	174,498	$	117,939
Liabilities and Stockholders' Equity
Current Liabilities:
Other current liabilities	$	7,315	$	970
Long-term debt—convertible subordinate debentures		17,255		19,682
Long-term bank lines of credit		20,000		15,897
Other liabilities		3,730		1,723
Total Liabilities		48,300		38,272
Stockholders' Equity:
Cumulative preferred stock		461		507
Common stock		194		154
Paid-in capital		101,509		55,974
Retained earnings		24,034		23,032
Total Stockholders' Equity		126,198		79,667
	$	174,498	$	117,939

See accompanying notes to condensed financial information of registrant.

87

SOUTHWEST WATER COMPANY

SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Statements of Cash Flow

		For the Years Ended December 31,
		2004			2003			2002
		(in thousands)
Cash Flows from Operating Activities:
Net income		$	4,534		$	7,193		$	6,002
Adjustments to reconcile net income to net cash provided by operating activities:
Net income from subsidiaries			(6,549	)		(9,916	)		(7,416	)
Depreciation and amortization			210			67			106
Stock-based compensation			860			934			963
Deferred income taxes			594			(716	)		107
Changes in assets and liabilities, net of effects of acquisitions:
	Other current assets		(7,452	)		(329	)		(3,345	)
	Other current liabilities		7,348			546			(1,521	)
	Other, net		767			3,251			5,235
Net cash provided by operating activities			312			1,030			131
Cash Flows from Investing Activities:
Acquisition of businesses			(48,871	)		—			(10,317	)
Purchase of minority interest			(2,900	)		—			(2,000	)
Additions to property, plant and equipment			(139	)		(372	)		(95	)
Dividends received from subsidiaries			4,207			3,630			2,005
Other investments, net			—			—			(188	)
Net cash provided by (used in) investing activities			(47,703	)		3,258			(10,595	)
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock			41,109			10,898			—
Net borrowings on bank lines of credit			4,103			4,822			1,337
Proceeds from sale leaseback			—			396			—
Net change in intercompany balances			4,771			(19,154	)		10,841
Net proceeds from dividend reinvestment, employee stock purchase and stock option plans			943			1,270			1,168
Dividends paid			(3,523	)		(2,563	)		(2,142	)
Conversion of debentures			—			—			(268	)
Gross proceeds from issuance of debentures			—			—			—
Net cash provided by (used in) financing activities			47,403			(4,331	)		10,936
Net increase (decrease) in cash and cash equivalents			12			(43	)		472
Cash and cash equivalents at beginning of year			621			664			192
Cash and cash equivalents at end of year		$	633		$	621		$	664

See accompanying notes to condensed financial information of registrant.

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SOUTHWEST WATER COMPANY

NOTES TO SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

        Basis of Presentation:    In accordance with the requirements of Regulation S-X of the Securities and Exchange Commission, the financial statements of the Registrant are condensed and omit many disclosures presented in the consolidated financial statements and the notes thereto.

        Long-Term Debt:    During 2001, the Registrant issued $20.0 million in long-term convertible subordinate debentures. The debentures bear a fixed interest rate of 6.85% and mature in 2021. Approximately $2.3 million of the debentures have been converted into the Company's common stock in accordance with their terms. The Registrant had outstanding borrowings on long-term bank lines of credit of approximately $20.0 million and $15.9 million as of December 31, 2004 and 2003, respectively.

        Other Income:    Other income consists of management fees charged by the Registrant to its subsidiaries.

        Stock-Based Compensation:    The Company has two plans which allow for the granting of stock options. As fully disclosed in Note 10 to the consolidated financial statements, the Company applies FASB No. 123, Accounting for Stock-Based Compensation, in accounting for its stock option grants. Accordingly, compensation expense is recognized for fixed stock options as if the fair value of all stock options as of the grant date were recognized as expense over the vesting period in accordance with SFAS No. 123.

        Income Taxes:    Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recorded in order to recognize future tax effects attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as the recognition of operating losses and tax credit carryforwards. Deferred tax assets and liabilities are recorded using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that the enactment occurs. The Company files a consolidated U.S. federal income tax return, which includes all qualifying subsidiaries.

        Reclassifications:    Certain reclassifications have been made to the prior year consolidated financial statement presentation to conform to the 2004 presentation.

        Termination of Defined Benefit Plan:    Prior to December 30, 1999, the Registrant had a non-contributory defined benefit pension plan (the "Pension Plan") for certain employees of the Company. On August 5, 1999, the Company's Board of Directors adopted a resolution to terminate the Pension Plan, freeze the assets of the Pension Plan and cease all benefit accruals as of December 30, 1999. The Company applied for an Internal Revenue Service (IRS) determination in April 2000, and received a favorable determination from the IRS in September 2001, thereby permitting the Company to proceed with the Pension Plan termination. In January 2002, the net assets of the Pension Plan were distributed to plan participants as permitted by the Employee Retirement Income Security Act (ERISA) and its related regulations. Following distribution of the plan assets of approximately $14.4 million to meet the benefit liabilities of the pension plan, 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 $1.1 million. In February 2002, the Company's Board of Directors approved the transfer of excess assets to a qualified replacement plan. Following the transfer of excess assets and payment of applicable excise taxes of approximately $0.2 million, the Pension Plan was considered settled in the first quarter of 2002 under the guidelines set forth in SFAS No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and the Company no longer had responsibility for the pension benefit obligation. Accordingly, the Company accounted for the plan termination under SFAS No. 88 and recognized a net termination pre-tax gain

89

of approximately $1.0 million as income to the Company in the first quarter of 2002. See Note 11 to the accompanying consolidated financial statements for more complete disclosure.

        Contingencies:    Southwest Water is the subject of litigation arising from the ordinary course of operations. The Company believes the ultimate resolution of such matters will not materially affect its financial position, results of operations or cash flow.

        Minority Interest Call and Put Rights:    The Company holds 90% of the outstanding common stock of OpTech. The Company has the right to acquire the remaining 10% of OpTech in August 2006 based on a formula relating to the profitability of OpTech. The minority owner has the option to sell the remaining 10% of OpTech to the Company using the same formula. However the selling price cannot be less than $1.0 million.

        The Company has an 80% interest in its Windermere utility in Texas. The purchase agreement provides that the Company has the right to acquire the remaining 20% ownership in Windermere at any point in time when the market value of the Company's stock increases to $12.96 per share (as adjusted for stock splits and dividends), for a purchase price of $6.0 million payable in Company common stock. The minority owner of Windermere has the right to put the remaining 20% back to the Company beginning in October 2005, for up to 450,000 shares of our common stock, but no less than 240,000 shares, depending on the prevailing stock price.

        Commitment Under Long-term Service Contract:    As part of the financing of this project, the CVWD was successful in the sale of insured municipal bonds. The Company entered into an agreement with the bond insurer to guarantee the Company's performance under the service contract, subject to certain liability caps to the bond insurer in the event of a default. Such liability caps will not exceed an amount equal to $6.0 million during the construction period of the project, and afterwards, during the 20-year operation of the facility, the liability cap will not exceed an amount equal to $4.0 million plus an amount no greater than the replacement cost of the actual reverse osmosis filtration unit within the facility, estimated to be approximately $1.5 million.

        Limitations on Dividends at our California Utility:    One of our wholly owned subsidiaries, Suburban Water Systems, is limited by its mortgage bond agreement in distributing funds to Southwest Water Company. The limitation prevents paying dividends that exceed aggregate undistributed net income subsequent to December 31, 1995. Dividend distributions have averaged approximately $3.0 million per year and are less than the dividend restriction threshold as of December 31, 2004 by approximately $27.0 million.

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SOUTHWEST WATER COMPANY AND SUBSIDIARIES

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended December 31, 2004, 2003 and 2002

	Balance at Beginning of Year		Provision Charged to Income		Recoveries/ Acquisitions / Other		Accounts Written off			Balance at End of Year
	(in thousands)
2004
Allowance for Doubtful Accounts	$	1,608	$	1,037	$	227	$	(755	)	$	2,117
2003
Allowance for Doubtful Accounts	$	2,037	$	140	$	182	$	(751	)	$	1,608
2002
Allowance for Doubtful Accounts	$	1,667	$	372	$	529	$	(531	)	$	2,037

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SOUTHWEST WATER COMPANY AND SUBSIDIARIES

EXHIBIT INDEX

Exhibit No. and Applicable Section of Item 601 of Regulation S-K:
2.1	Merger Agreement and Plan of Reorganization among Registrant, SW Utility Company, RTNT, Inc., Hornsby Bend Utility Company, Inverness Utility Company, Windermere Utility Company, HB Merger Sub, Inc. and IU Merger Sub, Inc. dated October 1, 2000 (incorporated by reference to Exhibit 10.19 to Registrant's Form 10-K for the year ended December 31, 2000).
2.2	Agreement and Plan of Merger between Registrant and OPT Acquisition Subsidiary, Inc. Operation Technologies, Inc., Operations Technologies Stockholder Trust and Robert W. Monette, dated August 31, 2001, (incorporated by reference to the Registrant's Form 8-K Report filed with the Commission on September 19, 2001).
3.1A	Registrant's Restated Certificate of Incorporation dated April 29, 2002 (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-3, File No. 333-106506).
3.1B	Certificate of Amendment to Restated Certificate of Incorporation of Southwest Water Company (incorporated by reference to 10.2 to Registrant's Form 10-Q for the quarter ended June 30, 2004).
3.2A	Amended and Restated Bylaws of Southwest Water Company dated May 18, 2001, (incorporated by reference to Exhibit 3.2D to Registrant's Form 10-K Report for the year ended December 31, 2001).
3.2B	Amendment to Amended and Restated Bylaws of Southwest Water Company (incorporated by reference to Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended June 30, 2004).
4.1A	Indenture of Mortgage and Deed of Trust between Suburban Water Systems and U.S. Bank National Association, formerly First Trust of California, N.A. dated October 1, 1986 (incorporated by reference to Exhibit 4.3 to Registrant's Form 10-K Report for the year ended December 31, 1986).
4.1B	First Amendment and Supplement to Indenture of Mortgage and Deed of Trust between Suburban Water Systems and U.S. Bank National Association, formerly First Trust of California, N.A. dated February 7, 1990 (incorporated by reference to Exhibit 4.2A to Registrant's Form 10-K Report for the year ended December 31, 1989).
4.1C	Second Amendment and Supplement to Indenture of Mortgage and Deed of Trust between Suburban Water Systems and U.S. Bank National Association, formerly First Trust of California, N.A. dated January 24, 1992 (incorporated by reference to Exhibit 4.2B to Registrant's Form 10-K Report for the year ended December 31, 1991).
4.1D	Third Amendment and Supplement to Indenture of Mortgage dated October 9, 1996, between Suburban Water Systems and U.S. Bank National Association, formerly First Trust of California, N.A. (incorporated by reference to Exhibit 4.2C to Registrant's Form 10-K Report for the year ended December 31, 1996).
4.1E	Fourth Amendment and Supplement to Indenture of Mortgage and Deed of Trust between Suburban Water Systems and U.S. Bank National Association, formerly First Trust of California, N.A., dated October 19, 2004 (filed herewith).

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4.2	Securities Purchase Agreement dated May 28, 2003 among Southwest Water Company and the purchaser identified therein (incorporated by reference from Registration Statement on Form S-3, File No. 333-106506, filed June 25, 2003).
4.3	Bond Purchase Agreement dated February 20, 1992, for Suburban Water Systems (incorporated by reference to Exhibit 4.3A to Registrant's Form 10-K Report for the year ended December 31, 1991).
4.4	Bond Purchase Agreement dated October 21, 1996, for Suburban Water Systems (incorporated by reference to Exhibit 4.3B to Registrant's Form 10-K Report for the year ended December 31, 1996).
4.5	Bond Purchase Agreement dated October 19, 2004, for Suburban Water Systems, (filed herewith).
4.6A	Indenture of Mortgage dated February 14, 1992, between New Mexico Utilities, Inc., and Wells Fargo Bank, formerly Sunwest Bank of Albuquerque, N.A. (incorporated by reference to Exhibit 4.4 to Registrant's Form 10-K Report for the year ended December 31, 1991).
4.6B	First Supplement to Indenture of Mortgage dated May 15, 1992, between New Mexico Utilities, Inc. and Wells Fargo Bank, formerly Sunwest Bank of Albuquerque, N.A. (incorporated by reference to Exhibit 4.4A to Registrant's Form 10-K Report for the year ended December 31, 1996).
4.6C	Second Amendment and Supplement to Indenture of Mortgage dated October 21, 1996, between New Mexico Utilities, Inc. and Wells Fargo Bank, formerly Sunwest Bank of Albuquerque, N.A. (incorporated by reference to Exhibit 4.4B to Registrant's Form 10-K Report for the year ended December 31, 1996).
4.6D	Third Amendment and Supplement to Indenture of Mortgage dated December 15, 2004, between New Mexico Utilities, Inc. and Wells Fargo Bank, N.A. (filed herewith).
4.7	Bond Purchase Agreement dated November 8, 1996, for New Mexico Utilities, Inc. (incorporated by reference to Exhibit 4.5A to Registrant's Form 10-K Report for the year ended December 31, 1996).
4.8	Bond Purchase Agreement dated December 15, 2004, for New Mexico Utilities, Inc. (filed herewith).
4.9	Stockholder's Rights Plan dated April 6, 1998 (incorporated by reference to the Registrant's Form 8-K Report filed with the Commission April 23, 1998).
4.10	Certificate of Designation of Series E Convertible Preferred Stock Of Southwest Water Company dated January 12, 2000 (incorporated by reference to Exhibit 3.1E of Registrant's Form 10-K Report for the year ended December 31, 1999).
4.11	Windermere Utility Company Shareholder Agreement between Southwest Water Company, SW Utility Company, RTNT, Inc. Thom W. Farrell and Windemere Utility Company dated October 1, 2000 (filed herewith).
4.12	Shareholders Agreement by and among Operations Technology, Inc., Southwest Water Company, Robert W. Monette, dated August 31, 2001, (filed herewith).
10.1	Stock Purchase Agreement between Southwest Water Company and Tecon Water Holdings, L.P. dated April 30, 2004 (incorporated by reference to Registrant's Form 8-K filed with the Commission on July 28, 2004).

93

10.2A	Second Amended and Restated Stock Option Plan, dated May 23, 2000, as amended (incorporated by reference to Exhibit 10.1 on Registrant's Form 10-K for the year ended December 31, 2003).*
10.2B	Form of Non-Qualified Stock Option Agreement pursuant to Second Amended and Restated Stock Option Plan, as amended (incorporated by reference to Exhibit 10.1B on Registrant's Form 10-K for the year ended December 31, 2003).*
10.2C	Certificate of Amendment to Second Amended and Restated Stock Option Plan, dated May 8, 2003 (incorporated by reference to Exhibit 10.1B1 on Registrant's Form 10-K for the year ended December 31, 2003).*
10.3	Stock Option Plan for Non-Employee Directors ("Director Option Plan"), as amended (incorporated by reference to Exhibit 10.1C on Registrant's Form 10-K Report for the year ended December 31, 2003).
10.3A	Certificate of Amendment for Director Option Plan dated May 13, 2004 (incorporated by reference to Exhibit 10.4 to Registrant's Form 10-Q Report for the quarter ended June 30, 2004).
10.3B	Form of Non-Qualified Stock Option Agreement pursuant to Director Option Plan, as amended (incorporated by reference to Exhibit 10.3 on Registrant's Form 10-Q Report for the quarter ended June 30, 2004).*
10.4	Amended and Restated Employee Stock Purchase Plan dated May 28, 1998 (incorporated by reference to Appendix B to Registrant's 1998 Proxy Statement filed with the Commission on April 20, 1998).*
10.5	Dividend Reinvestment and Stock Purchase Plan dated December 1, 1992 (incorporated by reference to Registrant's Form S-3 Registration Statement filed with the Commission on December 1, 1992).*
10.6	Deferred Compensation Plan dated January 1, 2002 (filed herewith).
10.7	Supplemental Executive Retirement Plan dated May 8, 2000 (filed herewith).
10.8	Stock Purchase Agreement and First Amendment to Stock Purchase Agreement dated August 13, 1993, between ECO Resources, Inc., and Robert E. Hebert (incorporated by reference to Exhibit 10.11 to Registrant's Form 10-K Report for the year ended December 31, 1993).
10.9	Tolling Agreement between Suburban Water Systems and Aerojet dated June 20, 2000 (incorporated by reference to Exhibit 10.7 of Registrant's Form 10-Q Report for the quarter ended June 30, 2000).
10.10	Retention Agreement between Southwest Water Company and Richard J. Shields dated as of November 9, 2004 (incorporated by reference to Exhibit 10.1 to Registrant's Form 8-K on November 9, 2004).
10.11	Severance Compensation Agreement between Registrant and certain executive officers approved by the Compensation Committee of the Board of Directors on February 21, 1995 (incorporated by reference to Exhibit 10.11 to Registrant's Form 10-K Report for the year ended December 31, 1995).*

94

10.12A	Severance Compensation Agreement between Registrant and certain executive officers approved by the Compensation Committee of the Board of Directors on August 5, 1998 (incorporated by reference to Exhibit 10.9A to Registrant's Form 10-K Report for the year ended December 31, 1998).*
10.12B	Severance Compensation Agreement between Registrant and a certain executive officer approved by the Compensation Committee of the Board of Directors on August 31, 2001 (incorporated by reference to Exhibit 10.9B to Registrant's Form 10-Q Report for the quarter ended June 30, 2002).*
10.12C	Severance Agreement between Southwest Water Company and James C. Wisener dated as of December 21, 2004, (filed herewith).
10.13	Credit Agreement between Registrant and Bank of America, N.A. dated October 6, 2003 (incorporated by reference to Exhibit 10.7 to Registrant's Form 10-K for the year ended December 31, 2003).
10.14	Amended and Restated Credit Agreement between Registrant and Bank of America, N.A. dated July 7, 2004 (incorporated by reference to Exhibit 10.5 to Registrant's Form 10-Q for the quarter ended June 30, 2004).
10.15	Amendment No. 1 to Amended and Restated Credit Agreement between Registrant and Bank of America, N.A. dated October 14, 2004 (filed herewith).
10.16	Amendment No. 2 to Amended and Restated Credit Agreement between Registrant and Bank of America, N.A. dated November 9, 2004 (filed herewith).
10.17	Amendment No. 3 to Amended and Restated Credit Agreement between Registrant and Bank of America, N.A. dated December 10, 2004 (filed herewith).
10.18	Credit Agreement between Southwest Water and Union Bank of California, NA, dated June 6, 2003 (incorporated by reference to Exhibit 10.2 to Registrant's Form 10 Q Report for the quarter ended June 30, 2003).
10.19A	Amended and Restated Credit Agreement between Southwest Water and Union Bank of California, N.A., dated July 7, 2004 (incorporated by reference to Exhibit 10.6 to Registrant's Form 10-Q Report for the quarter ended June 30, 2004).
10.19B	Waiver and First Amendment to Amended and Restated Credit Agreement between Southwest Water and Union Bank of California, N.A., dated September 29, 2004 (filed herewith).
10.19C	Waiver and Second Amendment to Amended and Restated Credit Agreement between Southwest Water and Union Bank of California, N.A., dated November 8, 2004 (filed herewith).
10.19D	Third Amendment to Amended and Restated Credit Agreement between Southwest Water and Union Bank of California, N.A., dated December 15, 2004 (filed herewith).
10.20	Business Loan Agreement dated December 10, 1997 between New Mexico Utilities, Inc. and First Security Bank of New Mexico, N.A. (incorporated by reference to Exhibit 10.15 to Registrant's Form 10-K Report for the year ended December 31, 1998).
10.21	Modification Agreement between New Mexico Utilities, Inc. and First Security Bank of New Mexico, N. A. dated April 10, 1999 (incorporated by reference to Exhibit 10.15A to Registrant's Form 10-Q Report for the quarter ended September 30, 1999).

95

10.22A	Modification Agreement between New Mexico Utilities, Inc. and First Security Bank of New Mexico, N.A., dated April 10, 2000 (incorporated by reference to Exhibit 10.15B to Registrant's Form 10-Q Report for the quarter ended March 31, 2000).
10.22B	Modification Agreement between New Mexico Utilities, Inc. and First Security Bank of New Mexico, N.A., dated July 10, 2003 (incorporated by reference to Exhibit 10.11B to Registrant's Form 10-K Report for the year ended December 31, 2003).
10.22C	Business Loan Agreement between New Mexico Utilities, Inc. and Bank of the West dated April 10, 2002 (incorporated by reference to Exhibit 10.15C to Registrant's Form 10-Q Report for the quarter ended June 30, 2002).
10.23	Loan Agreement among Windermere Utility Co., Inc., Registrant and Bank of the West, dated August 9, 2002, (incorporated by reference to Exhibit 10.22 to the Registrant's Form 10-K Report for the year ended December 31, 2002).
10.24	LLC Purchase Agreement by and among Aqua Source, Inc., DQE, Inc. and Registrant, dated as of September 14, 2002 (incorporated by reference to Exhibit 10.23 to Registrant's Form 10-K for the year ended December 31, 2002).
10.25	Official Statement for $31,555,000 San Juan Basin Authority Lease Revenue Bonds (Ground Water Recovery Project) Issue of 2002 containing descriptions and summaries of various documents relating to the project, including the Service Contract for the Design, Construction, Financing and Operation of the San Juan Basin Desalter Project by and among ECO Resources, Inc., Registrant, and the Capistrano Valley Water District, Orange County, California, dated as of September 3, 2002. (incorporated by reference to Exhibit 10.24 to Registrant's Form 10 K for the year ended December 31, 2002).
21.1	Subsidiaries of the Registrant.
23.1	Consent of Independent Registered Public Accounting Firm.
31.1	Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated March 31, 2005, filed herewith.
31.2	Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated March 31, 2005, filed herewith.
32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

The Company has outstanding long-term indebtedness under an indenture that comprises less than 10% of the total assets of the Company and its subsidiaries on a consolidated basis and agrees to furnish a copy of the instrument to the Commission upon request.

*

Management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601 (b)(10)(iii) of Regulation S-K; previously filed where indicated and incorporated herein by reference.

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SOUTHWEST WATER COMPANY SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) 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
By:	/s/  ANTON C. GARNIER ANTON C. GARNIER Chief Executive Officer (Principal Executive Officer) March 31, 2005
By:	/s/  RICHARD J. SHIELDS RICHARD J. SHIELDS Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) March 31, 2005

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/  JAMES C. CASTLE JAMES C. CASTLE Director March 31, 2005	/s/  DONOVAN D. HUENNEKENS DONOVAN D. HUENNEKENS Director March 31, 2005
/s/  H. FREDERICK CHRISTIE H. FREDERICK CHRISTIE Director March 31, 2005	/s/  MAUREEN A. KINDEL MAUREEN A. KINDEL Director March 31, 2005
/s/  ANTON C. GARNIER ANTON C. GARNIER Director March 31, 2005	/s/  PETER J. MOERBEEK PETER J. MOERBEEK Director March 31, 2005
/s/  LINDA GRIEGO LINDA GRIEGO Director March 31, 2005	/s/  RICHARD G. NEWMAN RICHARD G. NEWMAN Director March 31, 2005
/s/  WILLIAM D. JONES WILLIAM D. JONES Director March 31, 2005

97

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SOUTHWEST WATER COMPANY AND SUBSIDIARIES TABLE OF CONTENTS
SOUTHWEST WATER COMPANY AND SUBSIDIARIES
PART I

ITEM 1. BUSINESS.

California Utility—Number of Water Connections by Classification
New Mexico Utility—Number of Water Connections by Classification
Texas Utilities—Number of Water Connections by Classification

ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 4A. EXECUTIVE OFFICERS

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SOUTHWEST WATER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SOUTHWEST WATER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

SOUTHWEST WATER COMPANY SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT Statements of Operations
SOUTHWEST WATER COMPANY SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT Balance Sheets
SOUTHWEST WATER COMPANY SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT Statements of Cash Flow
SOUTHWEST WATER COMPANY NOTES TO SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SOUTHWEST WATER COMPANY AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2004, 2003 and 2002
SOUTHWEST WATER COMPANY AND SUBSIDIARIES EXHIBIT INDEX
SOUTHWEST WATER COMPANY SIGNATURES

EX-4.1E

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Exhibit 4.1E

RECORDING REQUESTED BY, AND
WHEN RECORDED, MAIL TO:

Sosi Biricik
Latham & Watkins LLP
600 West Broadway, Suite 1800
San Diego, California 92101-3375

INSTRUCTIONS TO COUNTY RECORDER:

Index this instrument as an
Amendment to Mortgage.

SUBURBAN WATER SYSTEMS

TO

U.S. BANK NATIONAL ASSOCIATION,

TRUSTEE

FOURTH AMENDMENT AND SUPPLEMENT TO INDENTURE OF MORTGAGE DATED OCTOBER 1, 1986

[This instrument is an amendment to an Indenture which is a mortgage of both real and personal property, including chattels, and also constitutes, among other things, a security agreement creating a security interest in personal property. Such Indenture contains after-acquired property provisions.]

        THIS FOURTH AMENDMENT AND SUPPLEMENT TO INDENTURE OF MORTGAGE AND DEED OF TRUST DATED OCTOBER 1, 1986 (the "Fourth Amendment"), is made and entered into as of October 19, 2004, by and between Suburban Water Systems, a California corporation formerly known as Southwest Suburban Water (herein, the "Company"), and U.S. Bank National Association, a national banking association, as trustee (herein, the "Trustee"), with respect to the following:

RECITALS:

        A.    The Company executed and delivered that certain Indenture of Mortgage and Deed of Trust dated October 1, 1986 (the "Original Indenture") to Security Pacific National Bank, a national banking association, predecessor to Bank of America NT & SA, predecessor trustee to U.S. Bank Trust National Association (originally named First Trust of California, National Association), predecessor to the Trustee. The Original Indenture was recorded on November 17, 1986, as Instrument No. 86-1574184 in the Official Records of the County of Los Angeles, State of California, and was recorded on November 17, 1986, as Instrument No. 86-563570 in the Official Records of the County of Orange, State of California.

        B.    The Original Indenture was amended pursuant to that certain First Amendment and Supplement to Indenture of Mortgage and Deed of Trust Dated October 1, 1986 (the "First Amendment"), dated as of February 7, 1990, and recorded on April 12, 1990, as Instrument No. 90-694089 in the Official Records of the County of Los Angeles, State of California, and was recorded on May 8, 1990, as Instrument No. 90-241742 in the Official Records of the County of Orange, State of California and further amended pursuant to that certain Second Amendment and Supplement to Indenture of Mortgage and Deed of Trust Dated October 1, 1986 (the "Second Amendment"), dated as of January 24, 1992, and recorded on February 14, 1992, as Instrument No. 92-260829 in the Official Records of the County of Los Angeles, State of California, and was recorded on February 14, 1992, as Instrument No. 92-091620 in the official records of the County of Orange, State of California and further amended pursuant to that certain Third Amendment and Supplement to Indenture of Mortgage and Deed of Trust Dated October 1, 1986 (the "Third Amendment"), dated as of October 9, 1996, and recorded on October 18, 1996, as Instrument No. 96-1696870 in the Official Records of the County of Los Angeles, State of California, and was recorded on October 18, 1996, as Instrument No. 19960531190 in the official records of the County of Orange, State of California. The Original Indenture, as amended and supplemented by the First Amendment, the Second Amendment and the Third Amendment, is hereinafter referred to as the "Existing Indenture," and the Existing Indenture as amended and supplemented by this Fourth Amendment is hereinafter referred to as the "Indenture."

        C.    The Company has requested that the Trustee enter into this Fourth Amendment setting forth the terms and conditions of the issuance of certain Bonds in the aggregate principal amount of $15,000,000, which Bonds shall be issued as "Series D" under and pursuant to the Indenture.

        D.    The Company has duly authorized the creation, execution and delivery of the Series D Bonds, and all things have been done which are necessary to make the Series D Bonds, when executed by the Company and authenticated and delivered by the Trustee under the Indenture and duly issued by the Company, the valid and binding obligations of the Company, and to constitute the Indenture a valid mortgage and deed of trust and a security agreement and contract for the security of the Bonds (including, without limitation, the Series D Bonds), in accordance with the terms of the Bonds and the Indenture. In addition, all other instruments and actions required pursuant to law and pursuant to the requirements of the Existing Indenture for the Trustee to execute and deliver this Fourth Amendment have been duly delivered or taken.

AMENDMENT

        IN CONSIDERATION OF the foregoing recitals and pursuant to the authority granted under Section 13.01 of the Indenture [Supplemental Indentures Without Consent of Bondholders], the Company and the Trustee agree that the Existing Indenture shall be amended in the following respects:

1.     DEFINITIONS.

        All terms used in this Fourth Amendment with initial capital letters and not defined herein shall have the meanings given in the Existing Indenture.

2.     ORIGINAL ISSUANCE OF SERIES D BONDS.

        There is hereby added to the Existing Indenture a new Article, to be entitled Article XVIII and which shall read in its entirety as follows:

"ARTICLE XVIII
TERM AND ISSUE OF SERIES D BONDS

Section 18.01.    Specific Title, Terms and Forms.    There shall be a fourth series of Bonds entitled "First Mortgage Bonds, Series D 5.64%, Due October 1, 2024" (herein called the "Series D Bonds"). The forms thereof shall be substantially as set forth in Article II with such insertions, omissions, substitutions and variations as, may be determined by the officers executing the same as evidenced by their execution thereof to reflect the applicable terms of the Series D Bonds established by this Article. The precise form of Series D Bonds shall be as set forth in an exhibit to the Bond Purchase Agreement (the "Purchase Agreement") dated as of October 19, 2004 between the Company and the Purchaser named therein pursuant to which the Series D Bonds are sold and the Trustee is authorized to refer to such Purchase Agreement when any Series D Bonds are presented to the Trustee for authentication.

        The Maturity of the Series D Bonds shall be October 1, 2024 and the aggregate principal amount thereof which may be authenticated and delivered and Outstanding is limited to $15,000,000.

        The Series D Bonds may be issued only as registered Bonds in denominations of $1,000 and any multiple thereof. The Series D Bonds shall bear interest from the later of the initial issuance of the Series D Bonds or the most recent Interest Payment Date to which interest has been paid or duly provided for. The Series D Bonds shall bear interest payable semi-annually on April 1 and October 1 of each year (the Interest Payment Dates of the Series D Bonds), at the rate of 5.64% per annum until the principal thereof shall be paid or duly provided for; provided that interest on any overdue principal, overdue Redemption Price, and (to the extent permitted by applicable law) overdue interest, shall accrue at a rate equal to the lesser of (a) the highest rate allowed by applicable law or (b) 6.64% per annum. Interest shall be computed on the basis of a 360 day year of twelve 30 day months. In no event shall the interest payable on any Series D Bonds (including any interest on overdue interest or any overdue Redemption Price) exceed the maximum amount which the Holder thereof may legally collect under the then applicable usury law. In the event that it is hereafter determined by a court of competent jurisdiction that the interest payable under any Series D Bond (including any interest on any overdue Redemption Price or overdue interest) is in excess of the amount which the Holder thereof may legally collect under the then applicable usury law, then (i) all interest actually paid (including any interest on any overdue interest or overdue Redemption Price) in excess of the maximum amount legally collectible by such Holder shall be applied to the payment of principal of such Series D Bond or, if all principal shall previously have been paid, promptly repaid by such Holder to the Company, and (ii) interest on such Series D Bond (including any interest on overdue interest or any overdue Redemption Price) subsequent to the date of such determination shall be reduced to the maximum amount which it is determined that the Holder may collect under the then applicable usury law.

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        Notwithstanding the provisions of Section 5.05 [Deposit of Redemption Price] or other provisions in the Indenture to the contrary, the principal or the Redemption Price of, and any applicable accrued and unpaid interest on, the Series D Bonds shall be payable by depositing such amounts, before 12:00 noon, New York time on the Redemption Date or Maturity date, as the case may be, by federal funds bank wire transfer, in the account of each Bondholder of the Series D Bonds in any bank in the United States as may be designated in a written notice to the Company by such Bondholder, or in such other manner as may be directed, or to such other address in the United States as may be designated, in writing by such Bondholder. The address on Annex 1 to the Purchase Agreement with respect to the initial purchaser of the Series D Bonds shall be deemed to constitute notice, direction or designation (as appropriate) to the Company with respect to direct payments to such purchaser as aforesaid. With regard to any Series D Bond, the bank designated pursuant to this paragraph with respect to such Series D Bond shall be the Place of Payment in respect of such Series D Bond.

        The Regular Record Date referred to in Section 2.10 [Payment of Interest on Bonds; Interest Rights Preserved] for the payment of the interest payable on the Series D Bonds, and punctually paid or duly provided for, on any Interest Payment Date shall be the 15th day (whether or not a Business Day) of the calendar month next preceding such Interest Payment Date.

        If any payment due on, or with respect to, any Series D Bonds shall fall due on a day other than a Business Day, then such payment shall be made on the first Business Day following the day on which such payment shall have so fallen due; provided that if all or any portion of such payment shall consist of a payment of interest, for purposes of calculating such interest, such payment shall not be deemed to have been originally due on such first following Business Day, and such interest shall accrue and be payable only to the Interest Payment Date.

Section 18.02.    Exchangeability.    Subject to Section 2.08 [Registration, Transfer and Exchange], all Series D Bonds shall be fully interchangeable, and, upon surrender at the office or agency of the Company which the Company maintains pursuant to Section 6.02 [Maintenance of Office or Agency] shall be exchangeable for other Series D Bonds of a different authorized denomination or denominations, as requested by the Holder surrendering the same. The Company will execute, and the Trustee shall authenticate and deliver, Series D Bonds whenever the same are required for any such exchange.

Section 18.03.    Redemption.

        A.    The Series D Bonds are subject to redemption, in whole or in part, before their Maturity in the following events and in the manner provided in Article V [Redemption of Bonds]:

(1)

at any time after issuance, at the option of the Company evidenced by a Board Resolution, in an amount not less than 5% of the aggregate principal amount of the Series D Bonds Outstanding in the case of a partial redemption, at a Redemption Price equal to 100% of the principal amount of the Series D Bonds to be redeemed, together with the Make-Whole Amount at such time (as shall be calculated by the Company which calculations shall be set forth in an Officers' Certificate delivered to each Holder of Series D Bonds and to the Trustee two (2) Business Days prior to the Redemption Date) and interest accrued and unpaid to the Redemption Date, on a Redemption Date specified by the Company in compliance with Section 5.02 [Election to Redeem; Notice to Trustee]; and



(2)

from moneys received by the Trustee as a result of a major casualty or condemnation as provided in Articles VII [Possession and Release of Property] and VIII [Application of Trust Moneys], at a Redemption Price equal to 100% of the principal amount of Bonds to be redeemed, together with interest accrued and unpaid to the Redemption Date, and on a Redemption Date that is the first date for which notice of redemption can be given by the Trustee as provided in Article V [Redemption of Bonds]. For purposes of this Section 18.03 a

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"major" casualty or condemnation is one in which either or both of (i) the compensation for, or proceeds of sale of, any part of the Trust Estate Taken by Eminent Domain, or (ii) the proceeds of insurance upon any part of the Trust Estate, is equal to or greater than $15,000,000.

        B.    Notwithstanding the last sentence of the first paragraph of Section. 5.04 [Notice of Redemption] and the first sentence of the second paragraph of Section 1.04 [Notices to Bondholders; Waiver], the giving of notice of redemption to each Holder of a Series D Bond, as provided in Section 5.04, shall be a condition precedent to the Company's right to redeem Series D Bonds in accordance with the foregoing clauses A(l) and A(2) of this Section 18.03. Any notice of redemption to any Holder of Series D Bonds for a redemption pursuant to clause A(1) of this Section 18.03 shall be accompanied by an Officers' Certificate as to the estimated Make-Whole Amount due in connection with such redemption (calculated as if the date of such notice were the date of such redemption) setting forth the details of such computation.

        C.    Notwithstanding the provisions of Section 5.03 [Selection by Trustee of Bonds to Be Redeemed], if there is more than one Holder of the Series D Bonds, the aggregate principal amount of each required or optional partial redemption of the Series D Bonds shall be allocated in units of $1,000 or multiples thereof among the Holders of the Series D Bonds at the time Outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts of the Series D Bonds then Outstanding held by each such Holder of Series D Bonds, with adjustments, to the extent practicable, to equalize for any prior redemptions not in such proportion.

        D.    Notwithstanding the second sentence of Section 5.06 [Bonds Payable on Redemption Date] or the provisions of Section 5.07 [Bonds Redeemed in Part], no Holder of any Series D Bond shall be required to surrender such Bond to any Person, or to file, or cause to be filed, with the Trustee any agreement or certificate required by Section 5.07, prior to receiving any payment thereon or in respect thereof; provided, however, that upon payment of the principal or Redemption Price in full, and accrued and unpaid interest on and all other amounts in respect of such Series D Bond, the Holder thereof shall promptly thereafter surrender such Series D Bond to the Company. Any such Series D Bond so surrendered shall be cancelled and shall not be reissued, and no new Series D Bond shall be issued in lieu of such surrendered Series D Bond.

        E.    The Series D Bonds may be redeemed from Trust Moneys, as provided in Section 8.04 [Retirement of Bonds], including from moneys received by the Trustee as a result of casualty or condemnation, as provided in Articles VII [Possession and release of Property] and VIII [Application of Trust Moneys], but only at the time, in the manner and at the Redemption Price specified in clauses (A)(1) and (A)(2) of this Section 18.03. If the Series D Bonds shall be redeemed under Section 18.03A(2), then said Series D Bonds shall be redeemed pro rata with the Series A Bonds, Series B Bonds, the Series C Bonds and any other Bonds having the benefit of a redemption provision substantially identical to that contained in Section 18.03A(2), in proportion, as nearly as practicable, to the respective unpaid principal amounts of all such Bonds Outstanding on the Redemption Date.

Section 18.04.    Payment of Optional Redemption Price.    If the giving of notice of optional redemption shall have been completed as required in Article V [Redemption of Bonds], the Series D Bonds or portions of such Series D Bonds specified in such notice shall become due and payable on the Redemption Date at the applicable Redemption Price set forth in Section 18.03. On and after the Redemption Date (unless the Company shall default in the payment of such Bonds on the Redemption Date) interest on the Series D Bonds or the portions of the Series D Bonds so called for redemption shall cease to accrue.

        If any Holder of any Series D Bond which is redeemed in part only shall present such Bond to the Company, the Company shall execute and the Trustee shall authenticate and deliver to such Holder, at

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the expense of the Company, a new Series D Bond or Bonds in aggregate principal amount equal to the unredeemed portion of the Series D Bond so presented.

Section 18.05.    Authentication and Delivery.    Upon the execution and delivery of this Fourth Amendment, the Company shall execute and deliver to the Trustee, and the Trustee shall authenticate, the Series D Bonds and deliver them to the purchasers thereof as instructed by the Company.

        Prior to the delivery by the Trustee of the Series D Bonds there shall be filed with the Trustee original executed counterparts of this Fourth Amendment, the Purchase Agreement, the Title Policies or commitments for issuance thereof and evidence of recording of this Fourth Amendment in the land records of Los Angeles and Orange Counties, California."

3.     CERTAIN AMENDMENTS TO DEFINITIONS.

        (a)    Make-Whole Amount Definitions.    Section 1.01 [Definitions] of the Existing Indenture is hereby amended by adding the following definition of Make-Whole Amount for the Series D Bonds and the following related definitions:

"Make-Whole Amount" means, with respect to any Series D Bond, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Bond over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings:

"Called Principal" means, with respect to any Series D Bond, the principal of such Bond that is to be redeemed pursuant to Section 18.03 [Redemption] or has become or is declared to be immediately due and payable pursuant to Section 9.02 [Acceleration of Maturity; Recission and Annulment], as the context requires.

"Discounted Value" means, with respect to the Called Principal of any Series D Bond, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Series D Bonds is payable) equal to the Reinvestment Yield with respect to such Called Principal.

"Reinvestment Yield" means, with respect to the Called Principal of any Series D Bond, .50% plus the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display page of the Bloomberg Financial Markets Services Screen PX1 or the equivalent screen provided by Bloomberg Financial Markets Commodities News for actively traded U.S. Treasury Securities having a maturity equal to the Remaining Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the maturity closest to and greater than the Remaining Life and (2) the actively traded U.S. Treasury security with the maturity closest to and less than the Remaining Life.

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"Remaining Life" means, with respect to any Called Principal of any Series D Bond, the number of years (calculated to the nearest one-twelfth year) from the Settlement Date to the maturity of the Series D Bonds.

"Remaining Scheduled Payments" means, with respect to the Called Principal of any Series D Bond, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Series D Bonds, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to this provision.

"Settlement Date" means, with respect to the Called Principal of any Series D Bond, the date on which such Called Principal is to be redeemed pursuant to Section 18.03 [Redemption] or Section 9.02 [Acceleration of Maturity; Recission and Annulment], as the context requires.

        (b)    Definition of Place of Payment.    The definition of "Place of Payment" added to Section 1.01 [Definitions] of the Original Indenture by the Third Amendment is hereby amended to read, in its entirety, as follows:

"Place of Payment" means, (a) when used with respect to the Series A Bonds (except as provided in clause (e) below), the place for payment of the principal and interest upon the Series A Bonds designated in Section 3.01; (b) when used with respect to the Series B Bonds (except as provided in clause (e) below), the place for payment of the principal, Make-Whole Amount, if any, and interest upon the Series B Bonds designated in Section 16.01; (c) when used with respect to the Series C Bonds (except as provided in clause (e) below), the place for payment of the principal, Make-Whole Amount, if any, and interest upon the Series C Bonds designated in Section 17.01; (d) when used with respect to the Series D Bonds (except as provided in clause (e) below), the place for payment of the principal, Make-Whole Amount, if any, and interest upon the Series D Bonds designated in Section 18.01; and (e) with respect to any exchange of Series A Bonds pursuant to Section 3.02 [Exchangeability], with respect to any exchange of Series B Bonds pursuant to Section 16.02 [Exchangeability], with respect to any exchange of Series C Bonds pursuant to Section 17.02 [Exchangeability], with respect to any exchange or surrender for redemption of Series D Bonds pursuant to Section 18.02 [Exchangeability] and with respect to Bonds of any other series means a city or any political subdivision thereof in which the Company is by this Indenture required to maintain an office or agency pursuant to Section 6.02 [Maintenance of Office or Agency].

        (c)    Section 6.02.    Maintenance of Office or Agency.    The first two sentences of Section 6.02 [Maintenance of Office or Agency] of the Indenture are hereby amended to read as follows:

        "The Company will maintain an office or agency in the vicinity of Los Angeles, California where Bonds may be presented or surrendered for payment, where Bonds entitled to be registered, transferred, exchanged or converted may be presented or surrendered for registration, transfer, exchange or conversion and where notices and demands to or upon the Company in respect of the Bonds and this Indenture may be served. The address of the Company's office or agency is One Wilshire Building, 624 South Grand Avenue, Suite 2900, Los Angeles, California 90017 and the Company agrees to give prompt written notice to the Trustee and each Bondholder of any change in the location of such office or agency."

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4.     REPLACEMENT OF MUTILATED, DESTROYED, LOST AND STOLEN BONDS.

        The proviso in lines 5 through 7 of the first paragraph of Section 2.09 [Mutilated, Destroyed, Lost and Stolen Bonds] of the Existing Indenture is hereby amended to add thereto the words "or Series D Bond" immediately after the words "Series C Bond."

5.     NOTICE OF REDEMPTION OF SERIES A BONDS.

        Section 3.03E of the Original Indenture, as previously amended and restated by the Third Amendment, is hereby amended and restated to read, in its entirety, as follows:

        "E.    The Series A Bonds may be redeemed from Trust Moneys, as provided in Section 8.04 [Retirement of Bonds], or from moneys received by the Trustee as a result of casualty or condemnation, as provided in Articles VII [Possession and Release of Property] and VIII [Application of Trust Moneys], but only at the time, in the manner and at the Redemption Price specified in clauses (A)(1) and (3) of this Section 3.03. If the Series A Bonds, or any other Bonds having the benefit of a redemption provision substantially identical to that contained in Section 3.03A(3), shall be redeemed under Section 3.03A(3), then said Series A Bonds shall be redeemed pro rata with the Series B Bonds, the Series C Bonds, the Series D Bonds and any other Bonds having the benefit of a redemption provision substantially identical to that contained in Section 3.03A(3) in proportion, as nearly as practicable, to the respective unpaid principal amounts of all such Bonds Outstanding on the Redemption Date."

6.     BONDABLE CAPACITY.

        (a)Definition of Bondable Capacity.    The definition of Bondable Capacity appearing in Section 4.02A of the Existing Indenture is hereby amended and restated to read, in its entirety, as follows:

"Bondable Capacity" means a dollar amount, calculated as of the date of certification of Bondable Capacity, equal to (a) the sum of:

          (i)  the Adjusted Amount of Bondable Property; plus

         (ii)  the Amount of Property Additions not previously included in any Summary Certificate of Bondable Capacity; less

        (iii)  the amount of Retirements not previously included in any Summary Certificate of Bondable Capacity less the sum of the credits specified in Section 4.02B(2)(c) and (e) against such Retirements; less

        (iv)  the sum of the withdrawals and releases specified in Section 4.02B(2)(d) and not previously included in any Summary Certificate of Bondable Capacity; less

         (v)  $3,250,000;

less (b) 150% of the aggregate principal amount of any Bonds Outstanding as of the date of such certification, and less (c) the outstanding principal amount of any Prior Lien Obligations.

        (b)    Certificate of Bondable Capacity.    Clause 2 of Section 4.02B [Requested Use of Bondable Capacity] is hereby amended as follows:

          (i)  Subclauses (c) through (i), inclusive, appearing therein are hereby amended and restated in their entirety to read as follows:

        "(c) The aggregate amount (Item 3(a) in the Summary Certificate of Bondable Property) of all Retirements during the period from the date to which Retirements had been included in Item 3(a) of the most recent Summary theretofore filed with the Trustee (or the Cut-Off Date

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in the case of the second such Certificate) to the later of (i) a date not earlier than the 90th day before the date of the related Application and (ii) the terminal date in the period specified pursuant to Subclause (b) above.

        The credits (Item 3(b) in the Summary Certificate of Bondable Capacity) against Retirements, which shall equal, subject to the provisions of the last sentence of Subclause (e) below, the sum of the following:

          (i)  the excess of credits against Retirements carried forward from the most recent Certificate, as provided in the last sentence of Subclause (e) below;

         (ii)  the aggregate amount of cash and purchase money and governmental obligations delivered to the Trustee and Bondable Capacity certified to the Trustee for use as a basis for releases under Section 7.02 [Releases] during the period covered by Subclause (c) above; and

        (iii)  all insurance moneys received by the Trustee pursuant hereto or paid to a trustee, mortgagee or other holder under a Prior Lien during the period covered by Subclause (c) above on account of the damage, loss or destruction of any Bondable Property.

        (d)   The withdrawals and releases (Item 5 in the Summary Certificate of Bondable Capacity) shall equal the sum of the following actions applied for after the Cut-Off Date through the date of such Certificate (excluding the action applied for in such Certificate) and not included as a deduction in Item 5 of any previous Summary Certificate of Bondable Capacity: (i) 100% of any Deposited Cash withdrawn under Section 4.05 [Withdrawal of Deposited Cash], (ii) 100% of any Trust Moneys withdrawn under Section 8.02 [Withdrawal of Basis of Bondable Capacity] and (iii) 100% of any Bondable Property used as a basis for the release of any of the Trust Estate under Section 7.02 [Releases].

        (e)   The new Adjusted Amount of Bondable Property (Item 6 in the Summary Certificate of Bondable Capacity) which shall be determined by subtracting the sum of (i) the net amount of Retirements (Item 4) plus (ii) withdrawals and releases (Item 5) from the sum of Items 1 and 2. The net amount of Retirements (Item 4) shall be determined by deducting the credits shown pursuant to Subclause (c) above (Item 3(b)) from the aggregate amount of Retirements shown pursuant to Subclause (c) above (Item 3(a)). If in any case the credits against Retirements exceed the aggregate amount of Retirements shown pursuant to Subclause (c) above (Item 3(a)), the net amount of Retirements for the purpose of this Subclause shall be deemed to be zero, but such excess of credits against Retirements may be carried forward and used as a credit against Retirements in the next Certificate.

        (f)    The gross Bondable Capacity (Item 7 in the Summary Certificate of Bondable Capacity) is the new Adjusted Amount of Bondable Property shown pursuant to Subclause (e) above (Item 6).

        (g)   150% of the aggregate principal amount of Bonds Outstanding and the principal amount of outstanding Prior Lien Obligations (Items 8 and 9 of the Summary Certificate of Bondable Capacity) as of the date of the Certificate.

        (h)   The net Bondable Capacity shall be derived by subtracting the sum of Items 8 and 9 from gross Bondable Capacity (Item 7). Net Bondable Capacity shall not be less than one of the following amounts which shall be specified in Item 11 of the Summary Certificate of Bondable Capacity:

          (i)  150% of the aggregate principal amount of any additional Bonds whose authentication and delivery are then being applied for under this Section, or

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         (ii)  100% of the following applicable amount then being applied for under this Section: (x) the amount of any Deposited Cash then being withdrawn under Section 4.05 [Withdrawal of Deposited Cash], (y) the amount of Trust Moneys then being withdrawn under Section 8.02 [Withdrawal on the Basis of Bondable Capacity] and (z) any Bondable Property which is then being used as a basis for a release under Section 7.02 [Releases].

        (i)    The net Bondable Capacity remaining after the action applied for (Item 12) shall be derived by subtracting from the net Bondable Capacity specified in Item 10, 150% of the amount of the action applied for specified in Subclause (h)(i) above, or (ii) 100% of the amount of the action applied for specified in Subclause (h)(ii), whichever shall be applicable."

         (ii)  The form of Summary Certificate of Bondable Capacity appearing therein is hereby amended and restated in its entirety to read as follows:

*****************************************

SUMMARY CERTIFICATE OF BONDABLE CAPACITY

No.                                      

        The undersigned hereby certify that the following is a true summary of the Certificate:

Start with:

1.	The Adjusted Amount of Bondable Property listed in Item 6 of the next previous Certificate (Certificate No.)		$
Then take the new gross Property Additions as shown in Item 2 below:
2.	Amount of additional Property Additions now certified, being the Amount of all or some Property Additions in the period from            through            (none of which has been certified in any previous Certificate of Bondable Capacity)		$
Then determine the deduction for Retirements by deducting Item 3(b) below from Item 3(a) below to produce item 4:
3.	Net Retirements are determined as follows:
	3(a).	The aggregate amount of all Retirements occurring in the period from            through            (none of which has been certified in any previous Certificate of Bondable Capacity)	$
	3(b).	The sum of the credits against such Retirements (amounts greater than item 3(a) may be carried forward to next Certificate)	$
4.	The net amount of Retirements to be deducted (not less than zero)		$
Then determine the amount of withdrawals and releases not previously deducted:
5.	The sum of the following withdrawals and releases applied for after the Cut-off Date and through the date of this Certificate (but not including the action applied for herein) (none of which has been included in this item 5 of any previous Certificate of Bondable Property): (i) 100% of the amount of any Deposited Cash withdrawn under Section 4.05 [Withdrawal of Deposited Cash], (ii) 100% of any Trust Moneys withdrawn under Section 8.02 [Withdrawal on Basis of Bondable Capacity] and (iii) 100% of any Bondable Property used as a basis for the release of any of the Trust Estate under Section 7.02 [Releases]		$

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Then determine the new Adjusted Amount of Bondable Property now being certified by deducting the sum of items 4 and 5 from the sum of items 1 and 2 to produce item 6:
6.	New Adjusted Amount of Bondable Property now being certified	$
Item 6 is the new gross Bondable Capacity and should be entered as item 7:
7.	Gross Bondable Capacity	$
Deduct the sum of Items 8 and 9 from Item 7 to produce Item 10:
8.	150% of the aggregate principal amount of Bonds Outstanding	$
9.	Principal amount of Prior Lien Obligations	$
10.	Net Bondable Capacity available for the action applied for	$
Deduct Item 11 from Item 10 to produce Item 12:
11.	Amount of the action applied for: (a) 150% of the aggregate principal amount of the Bonds to be issued or (b) 100% of the following amount then being applied for: (i) the withdrawal of Deposited Cash under Section 4.05, (ii) withdrawal of Trust Moneys under Section 8.02, or (iii) using Bondable Property as the basis for the release of any of the Trust Estate under Section 7.02	$
12.	Net Bondable Capacity remaining after subtracting the amount in Item 11 from Item 10	$
13.	Principal amount of Bonds available to be issued (2/3 of Item 12)	$

Dated:             ,             .
	(Title)
	(Title)
	(Engineer)
	(Accountant)

**************************************************

7.     LEGAL OPINIONS.

        (a)    Section 4.01C Opinion.    The opinion required by Clause C of Section 4.01 is hereby amended by changing the period at the end of Subclause (5) to a semicolon and adding the following proviso to said Clause C:

"; provided, that the opinion in Subclause C(3) may be satisfied by an Officers' Certificate addressed to the Trustee and signed also by an Engineer certifying as to the matters set forth therein and made in reliance upon Title Policies, UCC searches and any certificates, opinions and other documents deemed appropriate by the signers of such Officers' Certificate."

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        (b)    Section 4.02B(6) Opinion.    The opinion required by Subclause B(6) of Section 4.02 is hereby amended by changing the period at the end of Subclause B(6)(e) to a semicolon and adding the following proviso to said Subclause B(6):

"; provided that (i) the opinions in Subclause B(6)(a) and (b) and (ii) the opinion in Subclause B(6)(d) with respect to the Indenture being a lien on specific Property Additions and being free and clear from Prior Liens (collectively the "Real Estate Opinions") may be satisfied by an Officers' Certificate addressed to the Trustee and signed also by an Engineer certifying as to the matters set forth in such Real Estate Opinions and made in reliance upon Title Policies, UCC searches and any certificates, opinions and other documents deemed appropriate by the signers of such Officers' Certificate."

        (c)    Section 6.05A Opinion.    The opinion required by Clause A of Section 6.05 is hereby amended by restating the parenthetical in Clause A which permits the opinion to be rendered in reliance on one or more policies of title insurance to read as follows:

"... (which opinion may be rendered in reliance on one or more policies of title insurance or on being informed by a title insurance company issuing any such policy and on UCC Searches)..."

8.     COVENANTS.

        In consideration of and in connection with the issuance of the Series D Bonds, the Company makes the following additional covenants in favor of the Series D Bondholders (but not the Series A Bondholders, the Series B Bondholders, the Series C Bondholders or the Bondholders of any subsequent series of Bonds, if any):

        (a)    Dividend Covenant.    Section 6.14 [Payment of Dividends] of the Existing Indenture is hereby amended by adding the following to the end of the first paragraph thereof:

        "In addition to the foregoing, for so long as any of the Series D Bonds are Outstanding the Company will not declare or make or incur any liability to make any Distribution in respect of the common stock of the Company if, immediately after giving effect to the proposed Distribution, the aggregate amount of Distributions in respect of its common stock made during the period subsequent to December 31, 2003 would exceed: the sum of (a) $24,077,000, plus (b) 95% of the aggregate Net Income (or 100% of Net Income if Net Income shall be a deficit) accrued subsequent to December 31, 2003."

        (b)    Financial Reports to Series D Bondholders.    Article VI [Covenants] of the Existing Indenture is hereby amended by adding thereto a new Section, to be entitled Section 6.17 and to read in its entirety as follows:

        "Section 6.17. Financial Reports to Series D Bondholders.    For so long as any of the Series D Bonds are Outstanding, the Company shall furnish to each of the Series D Bondholders at their addresses for notices pursuant to Section 1.04 [Notices to Bondholders; Waiver] all financial statements and information, notices, reports and other information required pursuant to, and otherwise comply with each of, the provisions of Section 4.1 (together with any successor provision, and as such provision or successor provision may be amended from time to time), of the Purchase Agreement pursuant to which the Series D Bonds were originally sold, which provisions are incorporated by reference herein, mutatis mutandis, with the same effect as if set forth herein."

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9.     POWERS EXERCISABLE NOTWITHSTANDING DEFAULT.

        (a)    Section 7.04.    Section 7.04 [Powers Exercisable Notwithstanding Default] of the Original Indenture, as previously amended and restated by the Third Amendment, is hereby amended to read, in its entirety, as follows:

        "While in possession of all or substantially all of the Trust Estate (other than any cash and securities constituting part of the Trust Estate and deposited with the Trustee), the Company may exercise the powers conferred upon it in the Sections of this Article even though it is prohibited from doing so while a Default exists as provided therein, if (i) the Holders of not less than 66²/3% in principal amount of each of the following series of Bonds then Outstanding: the Series A Bonds, the Series B Bonds, the Series C Bonds and the Series D Bonds, and (ii) the Holders of not less than 66²/3% in principal amount of all other Bonds then Outstanding (as a group), in each case by Act of such Bondholders, shall consent to such action, in which event none of the instruments required to be furnished to the Trustee under any of such Sections as a condition to the exercise of such powers need state that no Default exists as provided therein."

        (b)    Section 8.07.    Section 8.07 [Powers Exercisable Notwithstanding Default] of the Original Indenture, as previously amended and restated by the Third Amendment, is hereby amended to read, in its entirety, as follows:

        "While in possession of all or substantially all of the Trust Estate (other than any cash and securities constituting part of the Trust Estate and deposited with the Trustee), the Company may do any of the things enumerated in Sections 8.02 [Withdrawal on Basis of Bondable Capacity] to 8.06 [Amounts under $100,000], inclusive, which it is prohibited from doing while a Default exists as provided therein, if (i) the Holders of not less than 66²/3% in principal amount of each of the following series of Bonds then Outstanding: the Series A Bonds, the Series B Bonds, the Series C Bonds and the Series D Bonds and (ii) the Holders of not less than 66²/3% in principal amount of all other Bonds then Outstanding (as a group), in each case by Act of such Bondholders, shall consent to such action, in which event any Certificate filed under any of said Sections shall omit any statement to the effect that no Default exists as provided thereunder."

10.   EVENTS OF DEFAULT.

        Section 9.01 [Events of Default] of the Existing Indenture is hereby amended by adding thereto a new subsection 9.01 E, to read in its entirety as follows:

        "E.    "Event of Default" with respect to the Series D Bonds only means any one of the events specified in clause A of this Section 9.01 or any one of the following events (whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

        (1)   Principal or Premium Payments—the Company fails to make any payment of principal or Make-Whole Amount on any Series D Bond when such payment is due;

        (2)   Interest Payments—the Company fails to make any payment of interest on any Series D Bond within 5 days after the date such payment is due;

        (3)   Particular Covenant Defaults—the Company fails to perform or observe any covenant contained in Section 6.06, Section 6.09, Section 6.14, the last sentence of Section 6.12 or Article XII;

        (4)   Other Defaults—the Company fails to comply with any other provision of this Indenture or the Purchase Agreement pursuant to which the Series D Bonds were sold, and

12

such failure continues for more than 30 days after such failure shall first become known to any officer of the Company;

        (5)   Warranties or Representations—any warranty or representation by the Company or by Southwest Water Company, a Delaware corporation, contained in this Indenture, the Purchase Agreement pursuant to which the Series D Bonds were sold or in any instrument or certificate furnished by the Company in compliance with this Indenture or the Purchase Agreement pursuant to which the Series D Bonds were sold is false or incorrect in any material respect on the date as of which made;

        (6)   Default on Indebtedness—the Company fails to make any payment due on any indebtedness for borrowed money (including, without limitation, Bonds of any other series) in an amount aggregating in excess of $1,000,000, or any event shall occur or any conditions shall exist in respect of any such indebtedness of the Company, or under any agreement securing or relating to such indebtedness, the effect of which is (i) to cause (or permit any Holder of such indebtedness or a trustee to cause) such indebtedness, or a portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled date or dates of payment or (ii) to permit a trustee to elect a majority of the directors on the Board of Directors of the Company; and

        (7)   Undischarged Final Judgments—a final judgment or judgments for the payment of money aggregating in excess of $100,000 is or are outstanding against the Company and any one of such judgments has been outstanding for more than thirty (30) days from the date of its entry and has not been discharged in full or stayed."

11.   CONDEMNATION OF ENTIRE TRUST ESTATE.

        The parenthetical phrase in lines 5 and 6 of Section 8.10 [Condemnation of Entire Trust Estate] of the Original Indenture is hereby amended and restated in its entirety to read as follows:

"(other than the Series A Bonds, which shall only be redeemable pursuant to Section 3.03 [Redemption], the Series B Bonds, which shall only be redeemable pursuant to Section 16.03 [Redemption], the Series C Bonds, which shall only be redeemable pursuant to Section 17.03 [Redemption] and the Series D Bonds, which shall only be redeemable pursuant to Section 18.03 [Redemption])"

12.   INCIDENTS OF SALE.

        Section 9.05A [Incidents of Sale] of the Existing Indenture is hereby amended and restated to read, in its entirety, as follows:

        "A.    the principal, the Make-Whole Amount or other premium, if any, and accrued interest on all Outstanding Secured Bonds, if not previously due, shall at once become and be immediately due and payable;"

13.   NOTICE OF DEFAULTS.

        The proviso set forth in lines 7 through 14 of Section 10.02 [Notice of Defaults] of the Original Indenture is hereby amended to add the words "or Series D Bonds" immediately after the words "Series B Bonds or Series C Bonds." The proviso set forth in the last four lines of Section 10.02 [Notice of Defaults] of the Original Indenture is hereby amended and restated to read in its entirety as follows:

"PROVIDED, FURTHER, that in the case of any Default with respect to the Series A Bonds, Series B Bonds, Series C Bonds or Series D Bonds, the Trustee shall give written

13

notice thereof to the Holders of, respectively, the Series A Bonds, Series B Bonds, Series C Bonds and Series D Bonds, as their names and addresses appear in the Bond Register, promptly after the Trustee has actual knowledge of such Default."

14.   SUPPLEMENTAL INDENTURES WITH CONSENT OF BONDHOLDERS.

        The proviso in lines 4 through 7 of the second to last paragraph of Section 13.02 [Supplemental Indentures with the Consent of Bondholders] of the Original Indenture is hereby amended and restated in its entirety to read as follows:

"; PROVIDED, HOWEVER, that the Trustee shall not at any time make any such determination with respect to the Series A Bonds, Series B Bonds, Series C Bonds or Series D Bonds, respectively, without the prior written consent of the Holders of a majority in principal amount of, respectively, the Series A Bonds, Series B Bonds, Series C Bonds or Series D Bonds, as the case may be, Outstanding at such time."

15.   EFFECTIVE DATE.

        As used herein, the Effective Date of this Fourth Amendment shall be that date upon which an executed and acknowledged counterpart of this Fourth Amendment is recorded in the Offices of the County Recorders of Los Angeles and Orange Counties, California.

16.   INDENTURE IN EFFECT.

        The Company and the Trustee agree and acknowledge that the Existing Indenture, as amended and supplemented by this Fourth Amendment, remains in full force and effect in accordance with its terms.

17.   COMPANY COVENANT TO PAY TRUSTEE FEES.

        By its signature hereto, the Company covenants and agrees to pay the reasonable fees and costs of the Trustee incurred or charged in connection with the review and execution of this Fourth Amendment and all other instruments described in Recital D to this Fourth Amendment.

18.   COUNTERPARTS AND INCLUSIONS IN INDENTURE.

        This Fourth Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute a single instrument. Upon recordation of this Fourth Amendment in the Offices of the County Recorders of Los Angeles and Orange Counties, California, this Fourth Amendment shall be and become a part of the Indenture and shall be construed as a part thereof. By its signature hereto, the Trustee authorizes the Company to record executed and acknowledged counterparts of this Fourth Amendment in the Offices of the County Recorders of Los Angeles and Orange Counties, California.

19.   SEPARABILITY CLAUSE.

        In case any provision in this Fourth Amendment shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions, and of the other provisions of the Indenture, shall not in any way be affected or impaired thereby.

20.   GOVERNING LAW.

        THIS FOURTH AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.

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        IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment and Supplement to Indenture of Mortgage and Deed of Trust Dated October 1, 1986, to be duly executed, with the Company's corporate seal to be hereunto affixed and attested, all as of the day and year first above written.

	SUBURBAN WATER SYSTEMS, Mortgagor
(SEAL)	By	Title:
	By	Title:
	U.S. BANK NATIONAL ASSOCIATION, as Trustee Mortgagee
	By	Authorized Officer

15

STATE OF CALIFORNIA	)
	) SS.
COUNTY OF	)

        On                , 2004, before me,                        , Notary Public, personally appeared                        personally known to me (or proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity on behalf of which the person(s) acted, executed the instrument.

        WITNESS my hand and official seal.

(SEAL)
	Notary Public

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STATE OF CALIFORNIA	)
	) SS.
COUNTY OF	)

        On                , 2004, before me,                        , Notary Public, personally appeared                        personally known to me (or proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity on behalf of which the person(s) acted, executed the instrument.

        WITNESS my hand and official seal.

(SEAL)
Notary Public

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EX-4.5

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Exhibit 4.5

SUBURBAN WATER SYSTEMS

BOND PURCHASE AGREEMENT

DATED AS OF OCTOBER 19, 2004

$15,000,000

FIRST MORTGAGE BONDS, SERIES D 5.64%, DUE OCTOBER 1, 2024

TABLE OF CONTENTS

Section		Heading	Page
SECTION 1		PURCHASE AND SALE OF BONDS	1
	Section 1.1.	Issue of Bonds	1
	Section 1.2.	The Closing	2
	Section 1.3.	Certain Purchaser Representations	2
SECTION 2.		WARRANTIES AND REPRESENTATIONS	3
	Section 2.1.	Subsidiary	3
	Section 2.2.	Corporate Organization and Authority	4
	Section 2.3.	Business, Property and Indebtedness	4
	Section 2.4.	Financial Statements; Material Adverse Change	4
	Section 2.5.	Full Disclosure	4
	Section 2.6.	Pending Litigation	5
	Section 2.7.	Title to Properties	5
	Section 2.8.	Patents, Trademarks, Licenses, Etc	5
	Section 2.9.	Authorization, Execution, Delivery and Enforceability	5
	Section 2.10.	No Defaults	6
	Section 2.11.	Governmental Consent	6
	Section 2.12.	Taxes	6
	Section 2.13.	Use of Proceeds	7
	Section 2.14.	Foreign Assets Control Regulations, Etc	7
	Section 2.15.	Status under Certain Statutes	8
	Section 2.16.	Private Offering	8
	Section 2.17.	Compliance with Law	8
	Section 2.18.	Restrictions on Company and the Subsidiary	8
	Section 2.19.	Compliance with ERISA	8
	Section 2.20.	Environmental Compliance	9
SECTION 3.		CLOSING CONDITIONS	9
	Section 3.1.	Opinions of Counsel	9
	Section 3.2.	Warranties and Representations True; No Prohibited Action	10
	Section 3.3.	Compliance with this Agreement	10
	Section 3.4.	Officers' Certificates	10
	Section 3.5.	Purchase Permitted By Applicable Law, Etc	10
	Section 3.6.	Regulatory Approvals	10
	Section 3.7.	Fourth Supplemental Indenture	10
	Section 3.8.	Filing and Recordation	10
	Section 3.9.	Title Insurance	11
	Section 3.10.	Indenture Conditions	11
	Section 3.11.	Payment of Special Counsel Fees.	11
	Section 3.12.	Private Placement Number	11
	Section 3.13.	Proceedings Satisfactory	11
SECTION 4.		AGREEMENTS OF THE COMPANY	11
	Section 4.1.	Financial and Business Information	11
	Section 4.2.	Officers' Certificates	13
	Section 4.3.	Accountants' Certificates	14
	Section 4.4.	Inspection	14

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	Section 4.5.	Report to NAIC	14
	Section 4.6.	Hazardous Substances Indemnification	14
SECTION 5		INTERPRETATION OF THIS AGREEMENT	15
	Section 5.1.	Terms Defined	15
	Section 5.2.	Accounting Principles	20
	Section 5.3.	Directly or Indirectly	20
	Section 5.4.	Governing Law	20
	Section 5.5.	Section Headings, Table of Contents and Construction	20
SECTION 6.		EXPENSES, ETC	20
	Section 6.1.	Transaction Expenses	20
	Section 6.2.	Survival	21
SECTION 7.		HOME OFFICE PAYMENT	21
SECTION 8.		MISCELLANEOUS	21
	Section 8.1.	Notices	21
	Section 8.2.	Amendment and Waiver	22
	Section 8.3.	Reproduction of Documents	23
	Section 8.4.	Survival	23
	Section 8.5.	Successors and Assigns	24
	Section 8.6.	Duplicate Originals; Execution In Counterparts	24
	Section 8.7.	Construction—Representations and Warranties	24
	Section 8.8.	Incorporation by Reference	24

Annex 1	—	Information as to Purchaser
Annex 2	—	Payment Instructions at Closing
Annex 3	—	Information as to Company
Annex 4	—	Litigation
Exhibit A	—	First Mortgage Bond, Series D 5.64%, due October 1, 2024
Exhibit B1	—	Company Counsel's Closing Opinion
Exhibit B2	—	Company PUC Counsel's Closing Opinion
Exhibit B3	—	Trustee Counsel's Closing Opinion
Exhibit B4	—	Purchaser Counsel's Closing Opinion
Exhibit C1	—	Form of Officers' Certificate of the Company
Exhibit C2	—	Form of Officers' Certificate of the Parent
Exhibit D1	—	Form of Secretary's Certificate of the Company
Exhibit D2	—	Form of Secretary's Certificate of the Parent
Exhibit E	—	Form of Fourth Supplemental Indenture

ii

SUBURBAN WATER SYSTEMS
ONE WILSHIRE BUILDING
624 S. GRAND AVENUE
LOS ANGELES, CALIFORNIA 90017

BOND PURCHASE AGREEMENT

$15,000,000
First Mortgage Bonds, Series D 5.64%, due October 1, 2024

        As of October 19, 2004

TO THE PURCHASER LISTED IN THE ATTACHED
        ANNEX 1

Ladies and Gentlemen:

        Suburban Water Systems, a California corporation (the "Company"), hereby agrees with you as follows:

SECTION 1.PURCHASE AND SALE OF BONDS.

Section 1.1.    Issue of Bonds.    The Company has authorized the issue of Fifteen Million Dollars ($15,000,000) in aggregate principal amount of its First Mortgage Bonds, Series D 5.64%, due October 1, 2024 (herein called the "Bonds"). The Bonds will be issued under and pursuant to the Fourth Amendment and Supplement to Indenture of Mortgage and Deed of Trust Dated October 1, 1986 (the "Fourth Supplemental Indenture"), dated as of October 19, 2004, between the Company and U.S. Bank National Association, as trustee (the "Trustee"). The Fourth Supplemental Indenture modifies and amends that certain Indenture of Mortgage and Deed of Trust dated October 1, 1986 (the "Original Indenture") between the Company and Security Pacific National Bank, a national banking association, predecessor to Bank of America NT & SA, predecessor to U.S. Bank Trust National Association (originally named First Trust of California, National Association), predecessor to the Trustee. The Original Indenture was amended by (i) the First Amendment and Supplement to Indenture of Mortgage and Deed of Trust Dated October 1, 1986 (the "First Supplemental Indenture"), dated as of February 7, 1990, (ii) the Second Amendment and Supplement to Indenture of Mortgage and Deed of Trust dated October 1, 1986 (the "Second Supplemental Indenture"), dated as of January 24, 1992, (iii) the Third Amendment and Supplement to Indenture of Mortgage and Deed of Trust dated October 1, 1986 (the "Third Supplemental Indenture") dated as of October 9, 1996 and (iv) the Fourth Supplemental Indenture (the Original Indenture as so amended and as may be further amended from time to time, being the "Indenture"). The Bonds will be secured pursuant to and entitled to all of the benefits of the Indenture. Certain capitalized terms used in this Agreement are defined in Section 5.1 of this Agreement; references to a "Schedule," "Annex" or "Exhibit" are, unless otherwise specified, to a Schedule, Annex or Exhibit attached to this Agreement.

        Each Bond:

        (a)   will be in the amount of One Thousand Dollars ($1,000) or an integral multiple thereof;

        (b)   will bear interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance thereof from the date of the Bond at the rate of five and sixty-four hundredths percent (5.64%) per annum, payable semiannually on the first (1st) day of each April and October in each year commencing on the first Interest Payment Date next succeeding the date of such Bond until the principal amount thereof will be due and payable; provided that interest on any overdue principal, overdue Redemption Price and (to the extent permitted by applicable law) overdue interest, shall accrue at a rate equal to the lesser of (i) the highest rate allowed by applicable law or (ii) six and sixty-four hundredths percent (6.64%) per annum;

        (c)   will mature on October 1, 2024; and

        (d)   will be in the form of Bond set forth in Exhibit A to this Agreement.

Section 1.2.    The Closing.    

        (a)    Purchase and Sale of Bonds.    The Company hereby agrees to sell to you and, subject to the terms and conditions set forth herein, you hereby agree to purchase from the Company, in accordance with the provisions of this Agreement, Bonds in the principal amount specified opposite your name on Annex I hereto, at a purchase price of one hundred percent (100%) of the principal amount thereof.

        (b)    The Closing.    The closing (the "Closing") of the purchase and sale of the Bonds to be purchased by you will be held at 11:00 a.m., Chicago time, on October 20, 2004 (the "Closing Date") at the office of Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois 60603 or on such other Business Day thereafter on or prior to October 22, 2004 as may be agreed upon by the Company and you. At the Closing, the Company will deliver to you one or more Bonds (as set forth opposite your name on Annex 1 to this Agreement), in the aggregate principal amount of your purchase, dated the Closing Date and payable to you or payable as indicated on Annex 1 to this Agreement, against payment by federal funds wire transfer in immediately available funds of the purchase price thereof, as directed by the Company on Annex 2 to this Agreement. If at the Closing the Company shall fail to tender such Bonds to you as provided above in this Section 1.2, or any of the conditions specified in Section 3 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment.

Section 1.3.    Certain Purchaser Representations.

        (a)    Purchase for Investment.    You represent that you are purchasing the Bonds for your own account or for one or more separate accounts maintained by you or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of your or their property shall at all times be within your or their control. You understand that the Bonds have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Bonds.

        (b)   You represent that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by you to pay the purchase price of the Bonds to be purchased by you hereunder:

          (i)  if you are an insurance company, the Source is an "insurance company general account" (as the term is defined in Prohibited Transaction Exemption ("PTE") 95-60 (issued July 12, 1995)) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the "NAIC Annual Statement")) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with your state of domicile; or

         (ii)  the Source is a separate account that is maintained solely in connection with your fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or

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        (iii)  the Source is either (A) an insurance company pooled separate account, within the meaning of PTE 90-1 (issued January 29, 1990), or (B) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (iii), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or

        (iv)  the Source constitutes assets of an "investment fund" (within the meaning of Part V of PTE 84-14 (the "QPAM Exemption")) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (A) the identity of such QPAM and (B) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (iv); or

         (v)  the Source constitutes assets of a "plan(s)" (within the meaning of Section IV of PTE 96-23 (the "INHAM Exemption")) managed by an "in-house asset manager" or "INHAM" (within the meaning of Part IV of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of "control" in Section IV(h) of the INHAM Exemption) owns a 5% or more interest in the Company and (A) the identity of such INHAM and (B) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this paragraph (v); or

        (vi)  the Source is a governmental plan; or

       (vii)  the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (vii); or

      (viii)  the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.

As used in this Section 1.3(b), the terms "employee benefit plan", "governmental plan" and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA.

SECTION 2.WARRANTIES AND REPRESENTATIONS.

        To induce you to enter into this Agreement and to purchase the Bonds listed on Annex 1 to this Agreement opposite your name, the Parent (solely with respect to the representations and warranties set forth in Section 2.4(a), Section 2.5, Section 2.12(a) and Section 2.12(b) and, insofar as such representations and warranties relate to the Parent, Section 2.10 and Section 2.15) and the Company (with respect to all representations and warranties other than those set forth in Section 2.4(a) and, insofar as such representations and warranties relate to the Parent, Section 2.10, Section 2.12(a), Section 2.12(b) and Section 2.15) warrant and represent to you as of the Closing Date as follows:

Section 2.1.    Subsidiary.    Part I of Annex 3 to this Agreement states:

        (a)   with respect to the Subsidiary of the Company, its name, jurisdiction of incorporation and the percentage of shares of each class of capital stock owned by the Company;

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        (b)   the name of each of the Company's Affiliates (other than Subsidiaries) and the nature of the affiliation; and

        (c)   the Company's directors and executive officers.

        The Company has good title to all of the shares it purports to own of the stock of its Subsidiaries, free and clear in each case of any Lien. All such shares have been duly issued and are fully paid and nonassessable.

Section 2.2.    Corporate Organization and Authority.    Each of the Company and the Subsidiary:

        (a)   is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation; and

        (b)   has all requisite corporate power and authority and all necessary licenses and permits to own and operate its Properties and to carry on its business as now conducted and as presently proposed to be conducted.

Section 2.3.    Indebtedness.    Part II of Annex 3 to this Agreement correctly lists all outstanding indebtedness for borrowed money of the Company and the Subsidiary immediately prior to the Closing Date and after giving effect to the proposed use of the proceeds of the Bonds.

Section 2.4.    Financial Statements; Material Adverse Change.    

        (a)    Financial Statements—Parent.    Copies have been delivered to you in the Placement Memorandum of the financial statements of the Parent and its Subsidiaries (i) in the Parent's Annual Report on Form 10-K for the year ended December 31, 2003 and (ii) in the Parent's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2004. All of said financial statements have been prepared in accordance with generally accepted accounting principles consistently applied, and present fairly in all material respects the consolidated financial position of the Parent and its consolidated subsidiaries as of such dates and the results of their operations for such periods (subject, in the case of any interim financial statements, to normal year-end adjustments). All such consolidated financial statements include the accounts of the Company and the Subsidiary.

        (b)    Financial Statements—Company.    Copies have been delivered to you in the Placement Memorandum of (i) the audited financial statements of the Company for the year ended December 31, 2003 and (ii) the unaudited financial statements of the Company for the six months ended June 30, 2004. All of said financial statements have been prepared in accordance with generally accepted accounting principles consistently applied, and present fairly in all material respects the consolidated financial position of the Company and the Subsidiary as of such dates and the results of their operations for such periods (subject, in the case of any interim financial statements, to normal year-end adjustments).

        (c)    Material Adverse Change.    Since December 31, 2003, there has been no change in the business, Properties or condition (financial or otherwise) of the Company or the Subsidiary except:

          (i)  as disclosed to you in the Placement Memorandum or otherwise disclosed to you in this Agreement; and

         (ii)  for other changes in the ordinary course of business that, in the aggregate, have not had a Material Adverse Effect.

Section 2.5.    Business, Property and Full Disclosure.    The Confidential Private Placement Memorandum dated September 2004 prepared by A.G. Edwards & Sons and the documents included therein (collectively the "Placement Memorandum") fairly describe, in all material respects, the general nature of the business and the Properties of the Company. The financial statements referred to in

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Sections 2.4(a) and 2.4(b) do not, nor does this Agreement or the Placement Memorandum, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein or herein in light of the circumstances under which they are made, not misleading.

Section 2.6.    Pending Litigation.    Except as disclosed on Annex 4 hereto, there are no proceedings, actions or investigations pending or, to the knowledge of the Company, threatened against or affecting the Company or the Subsidiary in any court or before any Governmental Authority or arbitration board or tribunal which, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. Without limiting the generality of the foregoing, except as has been disclosed in the Placement Memorandum or on Annex 4 hereto, no proceedings with respect to the condemnation of any Property of the Company or the Subsidiary are pending or, to the best knowledge of the Company, contemplated by any Governmental Authority to which the Property of the Company or the Subsidiary is subject. Neither the Company nor the Subsidiary is in default with respect to any order of any court, Governmental Authority or arbitration board or tribunal.

Section 2.7.    Title to Properties.    The Company and the Subsidiary have, and at the time of the Closing will have, good and marketable title to all of the fee interests in real Property, and good title to all of the other interests in Property, it purports to own, that individually or in the aggregate are Material, including Property reflected in the most recent balance sheet referred to in Section 2.4(b) of this Agreement and Property described in the Indenture as being subject to the Lien thereof, subject only to the Lien of the Indenture and other Permitted Encumbrances. Without limiting the generality of the foregoing, the Company and each of its Subsidiaries has, as of the Closing Date, all water, water rights, rights to purchase water, water systems, water works, plants, pumps, tanks, pipes, strainers, fittings, valves, reservoirs, supplies and implements it purports to own, that individually or in the aggregate are Material, including but not limited to the water stock more particularly described in Exhibit B to the Indenture and the stock of the Subsidiary described in Part I of Annex 3 to this Agreement, in each case owned by the Company subject only to the Lien of the Indenture and Permitted Encumbrances and without limitation as to time within which any such rights may be exercised or such stock may be held. There are no Liens upon or other defects (including, without limitation, defects of the type which would be disclosed by a survey) in or to any of the real Property of the Company, or the title or interest of the Company in or to such real Property, which, individually or in the aggregate, would have a Material Adverse Effect. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects.

Section 2.8.    Patents, Trademarks, Licenses, Etc.    The Company and the Subsidiary own or possess, and upon completion of the Closing will own or possess, all of the franchises (including, without limitation, franchises granted by the PUC), patents, trademarks, service marks, trade names, copyrights, licenses and rights (including, without limitation, rights to produce and purchase water) necessary for the conduct of its business, without any known and material conflict with the rights of others, and all such franchises, patents, trademarks, service marks, trade names, copyrights, licenses and rights are valid and subsisting. To the Company's knowledge, no event has occurred which (a) permits, or after notice or lapse of time or both would permit, revocation or termination of any such license or franchise or (b) materially adversely affects any of the rights of the Company or the Subsidiary thereunder.

Section 2.9.    Authorization, Execution, Delivery and Enforceability.    

        (a)    Transactions are Legal and Authorized.    The consummation by the Company of each of the Transactions:

          (i)  is within the corporate powers of the Company;

         (ii)  will not conflict with, result in any breach in any provisions of, constitute a default under, or result in the creation of any Lien upon any Property of the Company or the

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Subsidiary under the provisions of any charter instrument or bylaw to which it or any of its Properties may be bound;

        (iii)  will not conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or the Subsidiary;

        (iv)  will not violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or the Subsidiary; or

         (v)  will not conflict with, result in any breach in any of the provisions of, constitute a default under, or result in the creation of any Lien upon any Property of the Company or the Subsidiary under the provisions of, any agreement or instrument (other than its charter instrument or bylaw) to which it is a party or by which it or any of its Property may be bound, which could either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

        (b)    Obligations are Enforceable.    Each of this Agreement, the Fourth Supplemental Indenture and the Bonds has been duty authorized by all necessary corporate action on the part of the Company and has been executed and delivered by duly authorized officers of the Company. Each of this Agreement, the Indenture and the Bonds constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except that the enforceability of this Agreement, the Indenture and the Bonds may be:

          (i)  limited by applicable bankruptcy, reorganization, arrangement, insolvency, moratorium, or other similar laws affecting the enforceability of creditors' rights generally; and

         (ii)  subject to the availability of equitable remedies.

Section 2.10.    No Defaults.    To the knowledge of the Company and the Parent, no event has occurred and no condition exists which, upon the execution of this Agreement and the Fourth Supplemental Indenture and the issuance of the Bonds, would constitute a Default or an Event of Default. To the knowledge of the Company and the Parent, none of the Company, the Parent or the Subsidiary is in violation in any respect of any term of any charter instrument or bylaw and none of the Company, the Parent or the Subsidiary is in violation in any material respect of any term in any agreement or other instrument to which it is a party or by which it or any of its Property may be bound. To the knowledge of the Company and the Parent, no event has occurred or condition exists such that, but for the waiver by any Person (other than the Company, the Parent or the Subsidiary) of any term or provision in any agreement or other instrument to which the Company, the Parent or the Subsidiary is a party or by which it or any of its Property may be bound, the Company, the Parent or the Subsidiary would be in violation in any material respect of any of its obligations under such agreement or instrument.

Section 2.11.    Governmental Consent.    As of the Closing, all consents, approvals, orders and authorizations required of or by any Governmental Authority, including, without limitation, the PUC, for the Company to consummate the Transactions will have been duly obtained, all related filings, registrations and qualifications will have been duly made, and no appeal from any such consent, approval, order or authorization of or by any Governmental Authority will be pending, including, without limitation, any such consent, approval, order or authorization of the PUC.

Section 2.12.    Taxes.    

        (a)    Returns Filed; Taxes Paid.    All tax returns required to be filed by or on behalf of the Parent, the Company or the Subsidiary, and any other Person with which the Parent, the Company or the Subsidiary files or has filed a consolidated return, in any jurisdiction have in fact been filed on a timely basis, and to the knowledge of the Company and the Parent, all taxes, assessments,

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fees and other governmental charges upon the Parent, the Company or the Subsidiary, or upon any of their respective Properties, income or franchises, which are due and payable have been paid or will be paid prior to delinquency. Neither the Parent, the Company nor the Subsidiary knows of any proposed additional tax assessment against it or any such Person. To the knowledge of the Parent and the Company, there exists no controversy with any Governmental Authority with respect to the amount of any tax payable by the Parent, the Company or the Subsidiary to such Governmental Authority.

        (b)    Book Provisions Adequate.    The provisions for taxes (including, without limitation, any payment or payments owing from each of the Parent, the Company and the Subsidiary to any other Person pursuant to any tax sharing agreement among such Persons) on the books of the Company and the Subsidiary are adequate for all open years and for its current fiscal period. The amount of the liability for all taxes reflected in the consolidated balance sheet of the Parent, the Company and the Subsidiary as of December 31, 2003 is an adequate provision for such taxes (including, without limitation, any payment due pursuant to any such tax sharing agreement) as may be payable by the Parent, the Company and the Subsidiary for the fiscal years 1999 through 2003, inclusive, with respect to federal income taxes, and the fiscal years 1999 through 2003, inclusive, with respect to California franchise taxes, in each case, the only fiscal years not closed by the statute of limitations or by the completion of an audit.

Section 2.13.    Use of Proceeds.    The Company will apply the proceeds from the sale of the Bonds solely to refinance a portion of the Company's First Mortgage Bonds, Series A, and for general corporate purposes. None of the transactions contemplated in this Agreement (including, without limitation, the use of the proceeds from the sale of the Bonds) violates, will violate or will result in a violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including, without limitation, Regulations T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. Neither the Company nor the Subsidiary owns, or with the proceeds of the sale of the Bonds intends to own, carry or purchase any "margin security" within the meaning of said Regulations T, U and X, including "margin securities" originally issued by the Company or the Subsidiary. This Agreement and the Bonds will not be secured by any "margin security," and no Bonds are being sold on the basis of any such collateral. None of the proceeds from the sale of the Bonds will be used to purchase or carry (or refinance any borrowing the proceeds of which were used to purchase or carry) any "security" within the meaning of the Securities Exchange Act of 1934, as amended.

Section 2.14.    Foreign Assets Control Regulations, Etc.    Neither the sale of the Bonds by the Company hereunder nor their use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. Without limiting the foregoing, neither the Company nor the Subsidiary (a) is or will become a Person whose property or interests in property are blocked pursuant to Section 1 of Executive Order 13224 of September 23, 2001 Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)) or (b) engages or will engage in any dealings or transactions, or be otherwise associated, with any such person. The Company and the Subsidiary are in compliance, in all material respects, with the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act of 2001). No part of the proceeds from the sale of the Bonds hereunder will be used, directly or indirectly, for any payment to any governmental official or employee, political party, official of a political party, candidate for political office or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended.

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Section 2.15.    Status under Certain Statutes.    Neither the Parent, the Company nor any of their Subsidiaries is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the ICC Termination Act of 1995, as amended, or the Federal Power Act, as amended.

Section 2.16.    Private Offering.    Neither the Company nor anyone acting on its behalf has offered any of the Bonds or any similar Security of the Company for sale to, or solicited offers to buy any thereof from, or otherwise approached or negotiated with respect thereto with, any prospective purchaser, other than you and not more than seven (7) other Institutional Investors, each of whom was offered all or a portion of the Bonds at private sale for investment. The Company agrees that neither the Company nor anyone acting on its behalf will offer the Bonds or any part thereof or any similar Securities for issue or sale to, or solicit any offer to acquire any of the same from, anyone so as to bring the offering, issuance or sale of the Bonds within the registration provisions of Section 5 of the Securities Act.

Section 2.17.    Compliance with Law.    To the knowledge of the Company, neither the Company nor the Subsidiary:

        (a)   is in material violation of any law, ordinance, governmental rule, regulation, order or judgment of any court or other Governmental Authority or award of any arbitrator to which it is subject; or

        (b)   has failed to obtain any material license, permit, franchise or other governmental authorization necessary to the ownership of its Property or to the conduct of its business;

which violation or failure to obtain might, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

Section 2.18.    Restrictions on Company and the Subsidiary.    Neither the Company nor the Subsidiary:

        (a)   is a party to any contract or agreement (other than the Indenture) which restricts the right or ability of such corporation to incur debt; or

        (b)   has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its Property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by the Indenture.

Section 2.19.    Compliance with ERISA.    (a) The Company and its Parent and each of its Subsidiaries have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA), and no event, transaction or condition has occurred or, to the knowledge of the Company, exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material.

        (b)   Neither the Company, nor any ERISA Affiliate is a party to, participates in, maintains, contributes to, or has any liability or contingent liability with respect to an employee benefit plan, which is subject to Title IV of ERISA. Neither the Company, nor its Subsidiary has any expected post-retirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106).

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        (c)   The execution and delivery of this Agreement and the issuance and sale of the Bonds hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this Section 2.19(c) is made in reliance upon and subject to the accuracy of your representation in Section 1.3(b) as to the sources of the funds used to pay the purchase price of the Bonds to be purchased by you.

Section 2.20.    Environmental Compliance.    Except as set forth in Part IV of Annex 3 hereto:

        (a)   Compliance—to the knowledge of the Company, each of the Company and the Subsidiary is in compliance with all Environmental Protection Laws in effect in each jurisdiction where it is presently doing business, except such failures so to comply that would not, in the aggregate, be reasonably expected to have a Material Adverse Effect;

        (b)   Liability—to the knowledge of the Company, neither the Company nor the Subsidiary is subject to any liability under any Environmental Protection Laws that, in the aggregate, could be reasonably expected to have a Material Adverse Effect; and

        (c)   Notices—neither the Company nor the Subsidiary has received any:

          (i)  written notice from any Governmental Authority by which any of its present or previously-owned or leased real Properties has been designated, listed, or identified in any manner by any Governmental Authority charged with administering or enforcing any Environmental Protection Law as a Hazardous Substance disposal or removal site, "Super Fund" clean-up site, or candidate for removal or closure pursuant to any Environmental Protection Law;

         (ii)  written notice of any Lien arising under or in connection with any Environmental Protection Law that has attached to any revenues of, or to any of its owned or leased real Properties; or

        (iii)  summons, citation, notice, directive, letter, or other communication, written or oral, from any Governmental Authority concerning any intentional or unintentional action or omission by the Company or the Subsidiary in connection with its ownership or leasing of any real Property resulting in the releasing, spilling, leaking, pumping, pouring, emitting, emptying, dumping, or otherwise disposing of any Hazardous Substance into the environment resulting in any material violation of any Environmental Protection Law;

in the case of clauses (ii) and (iii) above, where the effect of which could be reasonably expected to have a Material Adverse Effect.

SECTION 3.CLOSING CONDITIONS.

        Your obligation to purchase and pay for the Bonds to be delivered to you at the Closing will be subject to the following conditions precedent:

Section 3.1.    Opinions of Counsel.    You will have received from:

        (a)   Latham & Watkins, LLP, special counsel for the Company;

        (b)   Steefel, Levitt & Weiss, PUC counsel for the Company;

        (c)   Dorsey & Whitney LLP, counsel for the Trustee, and

        (d)   Chapman and Cutler LLP, your special counsel,

closing opinions, each dated as of the Closing Date as set forth in Exhibits B1, B2, B3 and B4 to this Agreement.

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Section 3.2.    Warranties and Representations True; No Prohibited Action.    

        (a)    Warranties and Representations True.    The warranties and representations of the Company and the Parent contained in Section 2 of this Agreement will be true when made and at the time of Closing.

        (b)    No Prohibited Action.    Neither the Parent, the Company nor the Subsidiary shall have taken any action or permitted any condition to exist which would constitute a Default or an Event of Default.

Section 3.3.    Compliance with this Agreement.    The Company will have performed and complied with all agreements and conditions contained herein which are required to be performed or complied with by the Company before or at the Closing.

Section 3.4.    Officers' Certificates.    You will have received:

        (a)   a certificate dated the Closing Date and signed by (i) the President or a Vice President and (ii) the Chief Financial Officer of the Company, substantially in the form of Exhibit C1 to this Agreement with respect to the matters therein set forth;

        (b)   a certificate dated the Closing Date and signed by (i) the President or a Vice President and (ii) the Chief Financial Officer of the Parent, substantially in the form of Exhibit C2 to this Agreement with respect to the matters therein set forth;

        (c)   a certificate dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, substantially in the form of Exhibit D1 to this Agreement, with respect to the matters therein set forth; and

        (d)   a certificate dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Parent, substantially in the form of Exhibit D2 to this Agreement, with respect to the matters therein set forth.

Section 3.5.    Purchase Permitted By Applicable Law, Etc.    On the date of the Closing your purchase of Bonds shall (i) be permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (ii) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (iii) not subject you to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you, you shall have received an Officer's Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted.

Section 3.6.    Regulatory Approvals.    The issue and sale of the Bonds shall have been duly authorized by order of the California Public Utilities Commission (the "PUC"), such order shall be in full force and effect at the time of the Closing and all appeal periods applicable to such order shall have expired.

Section 3.7.    Fourth Supplemental Indenture.    The Company and the Trustee shall have executed and delivered the Fourth Supplemental Indenture substantially in the form of Exhibit E to this Agreement, and you shall have received an executed original counterpart of such Fourth Supplemental Indenture.

Section 3.8.    Filing and Recordation.    The Indenture, the Fourth Supplemental Indenture and all financing statements (including any financing statements required to be filed under the provisions of the California Uniform Commercial Code) shall have been duly recorded and filed in such manner and in such place as is required by law to establish, preserve and protect the Lien on

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all collateral specifically or generally described in the Indenture as subject to such Lien and under the laws enforced, and it will not be necessary to rerecord any such documents.

Section 3.9.    Title Insurance.    That certain policy of title insurance, dated as of November 18, 1986, from Chicago Title Insurance Company (successor to Ticor Title Insurance Company) insuring the Trustee and the holders of the Series A Bonds against loss or damage to the extent of $15,000,000 plus costs as permitted by the policy by reason of any defect in the Lien of the Indenture on the Property (other than Excepted Property) described therein or by reason of the title to such Property being other than as shown in such policy, shall be in full force and effect. The Trustee shall have received endorsements to such policy, or commitments to issue the same, in each case satisfactory to you, sufficient to extend the coverage of such policy to any additional Property being added to the Lien of the Indenture by virtue of the Fourth Supplemental Indenture and to extend such insurance to the Trustee and the holders of the Bonds and the Series A Bonds, Series B Bonds and the Series C Bonds to the extent of $34,300,000 plus costs as permitted by the policy. You shall have received copies of such policy of title insurance and such endorsements or commitments to issue such endorsements.

Section 3.10.    Indenture Conditions.    All conditions precedent set forth in the Indenture with respect to consummation of any of the Transactions shall have been satisfied. Without limiting the generality of the foregoing, the Company's Bondable Capacity and Net Earnings for Interest shall be sufficient to permit the issuance of the Bonds.

Section 3.11.    Payment of Special Counsel Fees.    Without limiting the provisions of Section 6.1, the Company shall have paid on or before the Closing the fees, charges and disbursements of your special counsel to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing.

Section 3.12.    Private Placement Number.    A Private Placement Number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Bonds.

Section 3.13.    Proceedings Satisfactory.    All proceedings taken in connection with the sale of the Bonds and all documents and papers relating thereto will be reasonably satisfactory to you. You will have received copies of such documents and papers as you may reasonably request in connection therewith (including, without limitation, copies of all certificates delivered to the Trustee in connection with the consummation of the Transactions), all in form and substance reasonably satisfactory to you; provided, however, that you agree that all documents the forms of which are annexed hereto as exhibits shall be in form and substance reasonably satisfactory to you if duly authorized, executed and delivered in the respective forms set forth in such exhibits.

SECTION 4.AGREEMENTS OF THE COMPANY.

Section 4.1.    Financial and Business Information.    The Company will deliver to each holder of the Outstanding Bonds that is an Institutional Investor:

        (a)   Quarterly Statements—as soon as practicable after the end of each fiscal quarter of each fiscal year of the Company (other than the last fiscal quarter of each fiscal year), and in any event within sixty (60) days thereafter, duplicate copies of:

          (i)  a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter; and

         (ii)  consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries, for such quarter and for the portion of the fiscal year ending with such quarter;

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setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail and certified as being complete and correct, and as having been prepared in conformity with generally accepted accounting principles, subject to changes resulting from year-end adjustments, by the Chief Financial Officer or Treasurer of the Company;

        (b)   Annual Statements—as soon as practicable after the end of each fiscal year of the Company, and in any event within one hundred twenty (120) days thereafter, commencing with the Company's 2004 fiscal year, duplicate copies of:

          (i)  a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year; and

         (ii)  consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such year;

setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by an opinion thereon of KPMG LLP or other independent certified public accountants of recognized national standing or recognized regional standing selected by the Company, which opinion shall, without qualification, state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows in conformity with generally accepted accounting principles, that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards and that such audit provides a reasonable basis for such opinion in the circumstances;

        (c)   Audit Reports—promptly upon receipt thereof, one copy of each other report submitted to the Company or any Subsidiary by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any Subsidiary;

        (d)   SEC and Other Reports of the Company and the Parent—promptly upon their becoming publicly available, one copy of each financial statement, report, notice or proxy statement sent by the Company to its stockholders generally, and of each regular or periodic report and any registration statement, prospectus or written communication in respect thereof filed by the Company or the Parent with, or received by it in connection therewith from, any securities exchange or the Securities and Exchange Commission or any successor agency, and one copy of each financial statement, report, notice or proxy statement sent by the Parent to its stockholders generally;

        (e)   ERISA—promptly upon becoming aware of the occurrence of:

          (i)  any material "reportable event" (as such term is defined in Section 4043 of ERISA) with respect to which the reporting requirement has not been waived; or

         (ii)  any material transaction prohibited by Section 406 of ERISA or any nonexempt "prohibited transaction" (as such term is defined in Section 4975 of the IRC);

in connection with any Pension Plan or any trust created thereunder, a written notice specifying the nature thereof, what action, if any, the Company is taking or proposes to take with respect thereto, and, when known, any action taken by the IRS, the Department of Labor or the PBGC with respect thereto;

        (f)    ERISA Waivers—prompt written notice of and a description of any request pursuant to Section 303 of ERISA or Section 412 of the IRC for, or notice of the granting pursuant to said Section 303 or Section 412 of, a waiver in respect of all or part of the minimum funding standard set forth in ERISA or the IRC, as the case may be, of any Pension Plan, and, in connection with

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the granting of any such waiver, the amount of any "waived funding deficiency" (as such term is defined in said Section 303 or said Section 412) and the terms of such waiver; provided, however,that no such notice need be given if the amount of any waived funding deficiency shall not be material in the context of the business, profits, Properties or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole;

        (g)   Other ERISA Notices—prompt written notice of and, where applicable, a description of:

          (i)  any notice from the PBGC in respect of the commencement of any proceedings pursuant to Section 4042 of ERISA to terminate any Pension Plan or for the appointment of a trustee to administer any Pension Plan;

         (ii)  any distress termination notice delivered to the PBGC under Section 4041 of ERISA in respect of any Pension Plan, and any determination of the PBGC in respect thereof;

        (iii)  the placement of any Multiemployer Plan in reorganization status under Title IV of ERISA;

        (iv)  any Multiemployer Plan becoming "insolvent" (as such term is defined in Section 4245 of ERISA);

         (v)  the complete or partial withdrawal of the Company or any ERISA Affiliate from any Multiemployer Plan and the withdrawal liability incurred in connection therewith; and

        (vi)  the withdrawal of the Company or any ERISA Affiliate from any Pension Plan with respect to which it is a "substantial employer" as defined in ERISA and the withdrawal liability under Section 4063 of ERISA incurred in connection therewith;

        (h)   Notice of Default or Event of Default—immediately upon becoming aware of the existence of any condition or event which constitutes a Default or an Event of Default, a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto;

        (i)    Notice of Claimed Default—immediately upon becoming aware that the holder of any Bond or of any evidence of indebtedness or other Security of the Company or any Subsidiary has given notice or taken any other action with respect to a claimed Event of Default or default under such Bond, evidence of indebtedness or Security, a written notice specifying the notice given or action taken by such holder and the nature of the claimed Event of Default or default and what action the Company is taking or proposes to take with respect thereto;

        (j)    Notices from Governmental Authority—promptly, and in any event within 30 days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;

        (k)   Information Required By Indenture—all information, notices, certificates and opinions required by the terms of the Indenture to be delivered to the holders of the Bonds; and

        (l)    Requested Information—with reasonable promptness, such other data and information reasonably available to the Company as from time to time may be reasonably requested. Without limiting the generality of the foregoing, the Company will deliver to you or any successor or transferee the information required by 17 C.F.R. §230.144A in connection with any transfer or proposed transfer of Bonds by you or any successor or transferee pursuant thereto.

        Section 4.2.    Officers' Certificates.    Each set of financial statements delivered to any Institutional Investor of the Bonds pursuant to Section 4.1(a) or Section 4.1(b) of this Agreement will be

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accompanied by a certificate of the President or a Vice President and the Chief Financial Officer of the Company setting forth:

        (a)   Covenant Compliance—the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Article VI of the Indenture during the period covered by the income statement then being furnished; and

        (b)   Event of Default—a statement that the signers have reviewed the relevant terms of this Agreement and the Indenture and have made, or caused to be made, under their supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the accounting period covered by the income statements being delivered therewith to the date of the certificate and that such review has not disclosed the existence during such period of any condition or event which constitutes a Default or an Event of Default or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Company has taken or proposes to take with respect thereto.

Section 4.3.    Accountants' Certificates.    Each set of annual financial statements delivered pursuant to Section 4.1(b) will be accompanied by a certificate of the accountants who certify the financial statements of the Company, stating that they have reviewed Sections 6.01, 6.03, 6.06, 6.10 and 6.14 of the Indenture and stating further, whether, in making their audit, such accountants have become aware of any condition or event which then constitutes a Default or an Event of Default (whether or not as a result of failure by the Company to comply with any of Sections 6.01, 6.03, 6.06, 6.10 or 6.14 of the Indenture), and, if any such condition or event then exists, specifying the nature and period of existence thereof.

Section 4.4.    Inspection.    The Company will permit any of your representatives, while you or your nominee holds any Bond, or the representatives of any other Institutional Investor of the Bonds, at your or such holder's expense (except during the continuance of any Default or Event of Default, in which case, at the Company's expense), upon reasonable prior notice to the Company, to visit and inspect any of the Properties of the Company or any Subsidiary, to examine all their books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants (and by this provision the Company authorizes said accountants to discuss the finances and affairs of the Company and its Subsidiaries) all at such reasonable times and as often as may be reasonably requested.

Section 4.5.    Report to NAIC.    Concurrently with the delivery to you of each annual statement required by Section 4.1(b) hereof, the Company will deliver a copy thereof to: Securities Valuation Office, National Association of Insurance Commissioners, 195 Broadway, New York, New York 10007.

Section 4.6.    Hazardous Substances Indemnification.    The Company shall indemnify, defend and hold you harmless from and against any loss or liability directly or indirectly arising out of the use, generation, manufacture, production, storage, release, threatened release, discharge or disposal of any Hazardous Substances in or about the Property of the Company, the Parent or any of their Subsidiaries. This indemnification provision shall apply whether the Hazardous Substances are in, on, under or about the Property or operations of the Company, the Parent or any of their Subsidiaries. The foregoing indemnification includes but is not limited to reasonable attorneys' fees (including the allocated cost of in-house counsel and staff). The foregoing indemnification extends to you, your parent, your subsidiaries and all of your or their directors, officers, employees, agents, successors, attorneys and assigns. This indemnification provision shall survive repayment of the Company's obligations under the Bonds, and payment shall not be a condition precedent to recovery upon the foregoing indemnification provisions.

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        In the event that you receive a claim, demand or action for which you believe that indemnification will or may be required pursuant to this Section, you agree to so notify the Company in writing promptly (and in any event within twenty (20) days after your receipt of such claim, and/or action). Upon receipt of such notice from you, the Company shall have the right to defend such claim, demand or action by legal counsel selected by the insurance carrier for the Company, or selected by the Company and reasonably satisfactory to you. Such right shall be exercised by written notice to you given within twenty (20) days after the Company's receipt of your notice.

        If the Company elects to undertake your defense, and so long as the Company continues such defense, you agree that:

        (a)   you shall not admit any liability or enter into any settlement of any such claim or action without, in any such case, the prior written consent of the Company, which shall not be unreasonably withheld or delayed;

        (b)   you shall be entitled to retain separate legal counsel as you select. However, the Company shall not be obligated to reimburse you for any costs or fees of such separate counsel (including in-house counsel or staff); and

        (c)   you shall cooperate as reasonably requested by the Company in the defense and settlement of any such claim or action; provided, however, that you need not be required to incur or sustain any out-of-pocket costs.

If, however, the Company fails to undertake your defense within the time or in the manner herein provided or thereafter abandons such defense or fails to diligently prosecute the same, you shall thereafter be entitled to all benefits of the foregoing indemnification provision, including the right to defend or settle any such claim or action upon such terms as you shall select and to recover from the Company all amounts expended by you to pay any judgment, award or settlement and all costs and fees incurred by you in such defense, settlement or both.

SECTION 5    Interpretation of this Agreement.

Section 5.1.    Terms Defined.    As used in this Agreement, the following terms have the respective meanings set forth below or set forth in the Section of this Agreement or the Indenture following such term:

"Affiliate" means, at any time, and with respect to any Person, (1) any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and (b) any Person beneficially owning or holding, directly or indirectly, 5% or more of any class of voting or equity interests of the Company or any Subsidiary or any corporation of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 5% or more of any class of voting or equity interests. As used in this definition, "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an "Affiliate" is a reference to an Affiliate of the Company.

"Bond Purchase Agreement"—this Agreement.

"Bondable Capacity"—Section 4.02A of the Indenture.

"Bonds"—Section 1.1 of this Agreement.

"Business Day"—a day other than a Saturday, a Sunday or a day on which commercial banks in New York, New York are required or authorized to be closed (other than a general bank holiday or moratorium, in either case of longer than 4 calendar days).

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"Closing"—Section 1.2 of this Agreement.

"Closing Date"—Section 1.2 of this Agreement.

"Collateral"—all of that Property subject to the Lien of the Indenture.

"Company"—the introductory sentence of this Agreement.

"Default"—Section 1.01 of the Indenture.

"Environmental Protection Law"—means any federal, state, county, regional or local law, statute, or regulation (including, without limitation, (a) the Comprehensive Environmental Response, Compensation, and Liability Act of 1980; (b) the Resource Conservation and Recovery Act of 1976; (c) the Superfund Amendments and Reauthorization Act of 1986; (d) the Federal Water Pollution Control Act; and (e) the Clean Water Act of 1977; in each case, as amended from time to time, and together with all rules and regulations promulgated in connection therewith) enacted by any Governmental Authority in connection with or relating to the protection or regulation of the environment, including, without limitation, those laws, statutes, and regulations regulating the disposal, removal, production, storing, refining, handling, transferring, processing, or transporting of Hazardous Substances and any orders, decrees or judgments issued by any court of competent jurisdiction in connection with any of the foregoing.

"ERISA"—means the Employee Retirement Income Security Act of 1974, as amended from time to time.

"ERISA Affiliate"—means any corporation or trade or business that

        (a)   is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the IRC) as the Company; or

        (b)   is under common control (within the meaning of Section 414(c) of the IRC) with the Company.

"Event of Default"—Section 1.01 of the Indenture.

"Excepted Property"—the "Excepted Property" exceptions to the granting clauses of the Indenture.

"First Mortgage Bonds"—means and includes the Series A Bonds, the Series B Bonds, the Series C Bonds, the Bonds and each and every other bond, of whatever series, issued pursuant to the Indenture.

"First Supplemental Indenture"—Section 1.1 of this Agreement.

"Fourth Supplemental Indenture"—Section 1.1 of this Agreement.

"Governmental Authority"—means and includes:

        (a)   the governments of:

          (i)  the United States of America and any State or other political subdivision thereof; or

         (ii)  any jurisdiction in which the Company or the Subsidiary conducts all or any part of its business;

        (b)   each public utilities commission or similar entity having regulatory authority over the Company or the Subsidiary; and

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        (c)   any other entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government referred to in clauses (a) or (b) of this definition.

"Hazardous Substances"—means and includes any and all pollutants, contaminants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum and petroleum-derived products).

"Indenture"—Section 1.1 of this Agreement.

"Interest Payment Date"—Section 1.01 of the Indenture.

"Institutional Investor" means (a) any original purchaser of a Bond, (b) any holder of a Bond holding more than $1,000,000 of the aggregate principal amount of the Bonds then outstanding, and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form.

"IRC"—means the Internal Revenue Code of 1986, together with all rules and regulations promulgated pursuant thereto, as amended from time to time.

"IRS"—means the Internal Revenue Service of the United States of America and any successor agency.

"Lien"—any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" includes reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances (including, with respect to stock, stockholder agreements, voting trust agreements, buy-back agreements and all similar arrangements) affecting Property. For the purposes of this Agreement, the Company or any Subsidiary will be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes and such retention or vesting will be deemed to be a Lien.

"Make Whole Amount Definitions"—for the purposes of the optional redemption provision in the Bonds, the following definitions which appear in the Fourth Supplemental Indenture shall apply:

        (a)   "Make-Whole Amount" means, with respect to any Series D Bond, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Bond over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero.

        (b)   "Called Principal" means, with respect to any Series D Bond, the principal of such Bond that is to be redeemed pursuant to Section 18.03 [Redemption] or has become or is declared to be immediately due and payable pursuant to Section 9.02 [Acceleration of Maturity; Recission and Annulment], as the context requires.

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        (c)   "Discounted Value" means, with respect to the Called Principal of any Series D Bond, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Series D Bonds is payable) equal to the Reinvestment Yield with respect to such Called Principal.

        (d)   "Reinvestment Yield" means, with respect to the Called Principal of any Series D Bond, .50% plus the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display page of the Bloomberg Financial Markets Services Screen PX1 or the equivalent screen provided by Bloomberg Financial Markets Commodities News for actively traded U.S. Treasury Securities having a maturity equal to the Remaining Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the maturity closest to and greater than the Remaining Life and (2) the actively traded U.S. Treasury security with the maturity closest to and less than the Remaining Life.

        (e)   "Remaining Life" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) from the Settlement Date to the maturity of the Series D Bonds.

        (f)    "Remaining Scheduled Payments" means, with respect to the Called Principal of any Series D Bond, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Series D Bonds, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to this provision.

        (g)   "Settlement Date" means, with respect to the Called Principal of any Series D Bond, the date on which such Called Principal is to be redeemed pursuant to Section 18.03 [Redemption] or Section 9.02 [Acceleration of Maturity; Recission and Annulment], as the context requires.

"Material" means material in relation to the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole.

"Material Adverse Effect" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement, the Indenture and the Bonds, or (c) the validity or enforceability of this Agreement, the Indenture or the Bonds.

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"Multiemployer Plan" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA).

"Net Earnings for Interest"—Section 4.02A of the Indenture.

"Outstanding"—Section 1.01 of the Indenture; provided, however, that for purposes of this Agreement only (and not the Indenture, except to the extent provided therein), First Mortgage Bonds held or owned by the Company, any Subsidiary or any Affiliate shall not be deemed to be Outstanding.

"Parent"—Southwest Water Company, a Delaware corporation, which as of the Closing Date owns one hundred percent (100%) of the capital stock of the Company.

"PBGC"—means the Pension Benefit Guaranty Corporation and any successor corporation or governmental agency.

"Permitted Encumbrances"—Section 1.01 of the Indenture.

"Pension Plan"—means, at any time, any "employee benefit plan" (as such term is defined in Section 3(2) of ERISA), subject to Title IV of ERISA, maintained at such time by the Company or any ERISA Affiliate for employees of the Company or such ERISA Affiliate, excluding any Multiemployer Plan.

"Person"—an individual, partnership, corporation, trust or unincorporated organization, and a government or agency or political subdivision thereof.

"Placement Memorandum"—Section 2.5 of this Agreement.

"Plan" means an "employee benefit plan" (as defined in section 3(3) of ERISA) subject to Title I of ERISA that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or its Parent or any of its Subsidiaries or with respect to which the Company or its Parent or any of its Subsidiaries may have any liability.

"Property"—any interest in any kind of property or asset, whether real, personal or mixed, and whether tangible or intangible.

"PUC"—the California Public Utilities Commission.

"Purchaser"—means the Person listed as purchaser of the Bonds on Annex 1 hereto.

"Redemption Price"—Section 1.01 of the Indenture.

"Required Holders"—at any time means the holders of 66²/3% or more in aggregate principal amount of Bonds Outstanding at such time.

"Securities Act"—the Securities Act of 1933, as such act may be amended from time to time.

"Security"—has the same meaning as in Section 2(l) of the Securities Act of 1933, as amended.

"Series A Bonds"—Section 3.01 of the Indenture.

"Series B Bonds"—Section 3 of the Second Supplemental Indenture.

"Series C Bonds"—Section 3 of the Third Supplemental Indenture.

"Subsidiary" means as to any Person, any corporation, association or other business entity in which such Person or one or more Subsidiaries of such Person or such Person and one or more Subsidiaries of such Person owns sufficient equity or voting interests to elect a majority of the

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directors (or Persons performing similar functions) of such entity. Unless the context otherwise requires any reference to a "Subsidiary" is a reference to a Subsidiary of the Company.

"Third Supplemental Indenture"—Section 1.1 of this Agreement.

"Transactions"—means and includes (a) the execution and delivery by the Company of the Bond Purchase Agreement and the Fourth Supplemental Indenture; (b) the execution, delivery, issue and sale of the Series D Bonds; and (c) performance by the Company of its obligations under the terms of the Series D Bonds, the Indenture and the Bond Purchase Agreement.

"Trustee"—Section 1.1 of this Agreement.

Section 5.2.    Accounting Principles.    All accounting terms not otherwise defined herein have the meanings assigned to them, and all computations herein provided for shall be made in accordance with generally accepted accounting principles at the time in effect, to the extent applicable, except where such principles are inconsistent with the requirements of this Agreement. In determining accounting principles, the Company shall conform to generally accepted accounting principles at the time in effect, unless it is required to conform to any other order, rule or regulation of any Governmental Authority having jurisdiction over the Company.

Section 5.3.    Directly or Indirectly.    Where any provision in this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision will be applicable whether such action is taken directly or indirectly by such Person, including actions taken by or on behalf of any partnership in which such Person is a general partner.

Section 5.4.    Governing Law.    THIS AGREEMENT AND THE BONDS WILL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

Section 5.5.    Section Headings, Table of Contents and Construction.    The titles of the Sections and the Table of Contents appear as a matter of convenience only, do not constitute a part of this Agreement and will not affect the construction hereof. Each covenant contained in this Agreement will be construed (absent an express contrary provision herein) as being independent of each other covenant contained herein, and compliance with any one covenant will not (absent such an express contrary provision) be deemed to excuse compliance with one or more other covenants.

SECTION 6.EXPENSES, ETC.

Section 6.1.    Transaction Expenses.    Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys' fees of your special counsel and, if reasonably required, local or other counsel) incurred by you and each other purchaser of the Bonds in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement, the Indenture or the Bonds (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement, the Indenture or the Bonds or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement, the Indenture or the Bonds, or by reason of being a holder of any Bond, (b) the reasonable costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Bonds and (c) the reasonable costs and expenses incurred in connection with the initial filing of this Agreement, all related documents and financial information, all subsequent annual and interim filings of documents and financial information related hereto with the Securities Valuation Office of the National Association of Insurance Commissioners or any successor organization succeeding to the authority thereof. The Company will pay, and will save you and each

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other holder of a Bond harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you).

Section 6.2.    Survival.    The obligations of the Company under this Section 6 will survive the payment or transfer of any Bond, the enforcement, amendment or waiver of any provision of this Agreement, the Indenture or the Bonds, and the termination of this Agreement.

SECTION 7.HOME OFFICE PAYMENT.

        So long as you or your nominee shall be the holder of any Bond, and notwithstanding anything contained in the Indenture or in such Bond to the contrary, the Company will pay or cause to be paid all sums becoming due on such Bond for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Annex 1, or by such other method or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Bond or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or redemption in full of any Bond, you shall surrender such Bond for cancellation, reasonably promptly after any such request, to the Company at its office set forth below. The transfer of any Bond shall be made pursuant to the terms and conditions set forth in the Indenture for such transfer. The Company will afford the benefits of this Section 7 to any Institutional Investor that is the direct or indirect transferee of any Bond purchased by you under this Agreement and that has made the same agreement relating to such Bond as you have made in this Section 7.

SECTION 8.MISCELLANEOUS.

Section 8.1.    Notices.

        (a)    Method; Address.    All communications under this Agreement or under the Bonds will be in writing, will be delivered (i) personally; (ii) by overnight courier; or (iii) sent by facsimile transmission, acknowledgment received, with a copy sent by first class mail; in each case, delivery or facsimile charges prepaid, and will be addressed:

          (i)  If to the Company:

Suburban Water Systems
One Wilshire Building
624 S. Grand Avenue
Los Angeles, California 90017
Attention: Chief Financial Officer
FAX: (213) 929-1888

or at such other address as the Company shall have furnished in writing to the Trustee and all holders of the Bonds at the time Outstanding:

         (ii)  if to any of the holders of the Bonds:

        (A)  if such holder is the Purchaser, at its address set forth on Annex 1 hereto, and further including any parties referred to on such Annex I that are required to receive notices in addition to such holder of the Bonds, or to any such party at such other address as such party may designate by notice duly given to the Company and to the Trustee in the manner provided in this Section 8.1 (which other address shall be entered in the Bond register); and

        (B)  If such holder is not the Purchaser, at its address set forth in the register for the registration and transfer of Bonds maintained pursuant to Section 11.02 of the Indenture, or to any such party at such other address as such party may designate by notice duly given in the manner provided in this Section 8.1 to the Company and to the Trustee (which other address shall be entered in such register).

21

        (b)    When Given.    Any communication under this Section 8.1 shall be deemed given only when actually received.

Section 8.2.    Amendment and Waiver.

        (a)    Requirements.    This Agreement may be amended, and the observance of any term hereof may be waived, with (and only with) the written consent of the Company and the Required Holders; provided that no such amendment or waiver of any of the provisions of Section 1, Section 3 or this Section 8.2, or any definition relating thereto, shall be effective as to any holder of Bonds unless consented to by such holder in writing.

        (b)    Solicitation of Bondholders.

        (i)    Solicitation.    The Company shall not:

        (A)  solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions hereof or the Bonds; or

        (B)  solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of the Indenture, which proposed waiver or amendment would, pursuant to the terms of the Indenture, require the consent of any holder of a Bond;

unless, in each case, each holder of the Bonds (irrespective of the amount of Bonds then owned by it) shall be informed thereof by the Company with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any waiver or consent effected pursuant to the provisions of this Section 8.2 or Article XIII of the Indenture shall be delivered by the Company to each holder of Outstanding Bonds forthwith following the date on which the same shall have been executed and delivered by all holders of Outstanding Bonds (if any) required to consent or agree to such waiver or consent.

        (ii)    Payment.    The Company shall not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of First Mortgage Bonds as consideration for or as an inducement to the entering into by any holder of First Mortgage Bonds of any waiver or amendment of any of the terms and provisions hereof, of any other purchase agreement pursuant to which any other First Mortgage Bonds were sold, of any First Mortgage Bond or of the Indenture unless such remuneration is concurrently paid, such security is concurrently granted, or an offer is concurrently made on the same terms, ratably to the holders of all Bonds then Outstanding.

        (iii)    Scope of Consent.    Any consent made pursuant to this Section 8.2 by a holder of Bonds that has transferred or has agreed to transfer its Bonds to the Company, any Subsidiary or any Affiliate and has provided or has agreed to provide such written consent as a condition to such transfer shall be void and of no force and effect except solely as to such holder, and any amendments effected or waivers granted or to be effected or granted that would not have been or would not be so effected or granted but for such consent (and the consents of all other holders of Bonds that were acquired under the same or similar conditions) shall be void and of no force and effect, retroactive to the date such amendment or waiver initially took or takes effect, except solely as to such holder.

        (iv)    Other Offers to Repurchase.    The Company shall not and shall not permit any Affiliate to make any offer to repurchase, exchange for any other security or otherwise acquire for value any First Mortgage Bond (whether or not the acceptance of such offer is conditioned upon the giving by any holder of any First Mortgage Bond of any waiver or consent) unless such offer is concurrently made on the same terms, ratably, to the holders of all Bonds then Outstanding.

22

        The foregoing provisions of this Section 8.2(b) shall not prevent or preclude:

        (A)  payment by the Company of attorneys' fees and expenses (including, without limitation, the fees of counsel who are employees of a holder of First Mortgage Bonds, at the rate or rates, if any, not to exceed the rate or rates then customarily charged by such holder) or other out-of-pocket costs incurred by a holder of First Mortgage Bonds in connection with any such consent, waiver or amendment where such payment is required pursuant to a Purchase Agreement, any First Mortgage Bond or the Indenture;

        (B)  the issuance and sale by the Company of any series of First Mortgage Bonds with an interest rate, a prepayment premium, prepayment terms or other business or financial terms which are different from the business or financial terms of the Bonds, so long as such issuance and sale and all such terms are in compliance with all applicable provisions of the Indenture concerning issuance of additional series of First Mortgage Bonds;

        (C)  the redemption of any First Mortgage Bonds pursuant to their respective terms so long as such redemption is not conditioned upon the giving by any holder of any First Mortgage Bond of any waiver or consent; or

        (D)  the payment or giving by the Company of consideration to all holders of First Mortgage Bonds of any series in exchange for the waiver, elimination or reduction of a right contained only in the First Mortgage Bonds of such series, so long as the payment or giving of such consideration does not violate any provision of the Indenture, and so long as, immediately after giving effect to the payment of such consideration and such waiver, elimination or reduction, no Event of Default would exist;

nor shall any provision of this Section 8.2(b) entitle the holders of the Bonds to receive payments or other consideration equal or equivalent to the payments or other consideration made or given pursuant to clauses (A), (C) or (D), or to receive any right or benefit afforded to the holders of any other series of First Mortgage Bonds pursuant to clause (B) above, to which the holders of the Bonds would not otherwise be entitled.

        (c)    Binding Effect.    Except as provided in Section 8.2(b) hereof, any amendment or waiver consented to as provided in this Section 8.2 shall apply equally to all holders of Bonds and shall be binding upon them and upon each future holder of any Bond and upon the Company whether or not such Bond shall have been marked to indicate such amendment or waiver. No such amendment or waiver shall extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon.

Section 8.3.    Reproduction of Documents.    This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed; (b) documents received by you at the closing of your purchase of the Bonds (except the Bonds themselves); and (c) financial statements, certificates and other information previously or hereafter furnished to you; may be reproduced by you by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that any such reproduction will be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction will likewise be admissible in evidence.

Section 8.4.    Survival.    All warranties, representations, certifications and covenants made by you in Section 1.3 of this Agreement, and made by the Company or by the Parent and contained in this Agreement or in any certificate or other instrument executed and delivered by the Company or the Parent, as the case may be, pursuant to this Agreement in connection with the Closing, will be

23

considered to have been relied upon by you (if made by the Company or the Parent) or the Company (if made by you), will be deemed made on and as of the Closing Date and will survive the delivery to you of the Bonds and the payment by you of the purchase price, regardless of any investigation made by or on behalf of you or the Company, as the case may be. All statements in any such certificate or instrument made by the Company or the Parent will constitute warranties and representations by the Person executing such certificate or instrument.

Section 8.5.    Successors and Assigns.    This Agreement will inure to the benefit of and be binding upon the successors and assigns of each of the parties. The provisions of this Agreement are intended to be for the benefit of all holders, from time to time, of Bonds, and will be enforceable by any such holder, whether or not an express assignment to such holder of rights under this Agreement has been made by you or your successor or assign.

Section 8.6.    Duplicate Originals; Execution In Counterparts.    Two or more duplicate originals of this Agreement may be signed by the parties, each of which will be an original but all of which together will constitute one and the same instrument. This Agreement may be executed in one or more counterparts and will be effective when at least one counterpart has been executed by each party hereto, and each set of counterparts which, collectively, show execution by each party hereto will constitute one duplicate original.

Section 8.7.    Construction—Representations and Warranties.    The Parent is entering into this Agreement for the sole purpose of providing the representations and warranties set forth in Sections 2.4(a), 2.5, 2.12(a) and (b), and, to the extent such representations and warranties relate to the Parent, Section 2.10 and Section 2.15, and the Parent shall not be liable in connection with any other Sections of this Agreement other than Section 8.4 as it relates to the above-referenced sections.

Section 8.8.    Incorporation by Reference.    All exhibits and annexes attached to this Agreement are hereby incorporated into and made a part of this Agreement by this reference.

24

        If this Agreement is satisfactory to you, please so indicate by signing the acceptance at the foot of a counterpart of this Agreement and return such counterpart to the Company, whereupon this Agreement will become binding between us in accordance with its terms.

Very truly yours,

SUBURBAN WATER SYSTEMS, a California corporation
By	By
Title:	Title:

        The undersigned hereby joins in the foregoing Agreement for the sole purpose described in Section 8.7 and to provide the representations and warranties which are ascribed to Southwest Water Company by the provisions of Section 2 and such section.

SOUTHWEST WATER COMPANY, a Delaware corporation
By	By
Title:	Title:

25

Agreed to and Accepted:

TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA

By

Title:

26

EXHIBIT A
(to Bond Purchase Agreement)

FORM OF FIRST MORTGAGE BOND, SERIES D 5.64%, DUE OCTOBER 1, 2024

SUBURBAN WATER SYSTEMS
FIRST MORTGAGE BOND

Series D 5.64%, due October 1, 2024

$	No.
PPN No.

        SUBURBAN WATER SYSTEMS, a corporation organized under the laws of the State of California (hereinafter called the "Company," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to                        , or registered assigns, on October 1, 2024, the sum of                         ($                        ) (or so much thereof as shall not have been paid upon prior redemption) and to pay interest (computed on the basis of a 360-day year of twelve 30-day months) thereon from the later of the initial issuance of the series of Bonds of which this Bond is a part, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually on the first day of each April and October in each year commencing on the first Interest Payment Date next succeeding the date of this Bond until the principal amount thereof will be due and payable; provided that interest on any overdue principal, overdue Redemption Price, and (to the extent permitted by applicable law) overdue installments of interest, shall accrue at a rate equal to the lesser of (a) the highest rate allowed by applicable law, or (b) 6.64% per annum. In no event shall the interest payable on this Bond (including any interest on overdue interest or any overdue Redemption Price) exceed the maximum amount which the Holder hereof may legally collect under the then applicable usury law. In the event that it is hereinafter determined by a court of competent jurisdiction that the interest payable under this Bond (including any interest on overdue interest or any overdue Redemption Price) is in excess of the amount which the Holder hereof may legally collect under the then applicable usury law, then (i) all interest actually paid (including any interest on overdue interest or any overdue Redemption Price) in excess of the maximum amount legally collectible by such Holder shall be applied to the payment of principal of this Bond or, if all principal shall previously have been paid, promptly repaid by such Holder to the Company and (ii) interest on this Bond (including any interest on overdue interest or any overdue Redemption Price) subsequent to the date of such determination shall be reduced to the maximum amount which it is determined that the Holder may collect under the then applicable usury law.

        The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in said Indenture, be paid to the Person (the "Registered Holder") in whose name this Bond (or one or more Predecessor Bonds, as defined in said Indenture) is registered at the close of business on the Regular Record Date for such interest, which shall be the fifteenth (15th) day (whether or not a Business Day) of the calendar month next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Registered Holder on such Regular Record Date, and may be paid to the Person in whose name this Bond (or one or more Predecessor Bonds) is registered at the close of business on a Special Record Date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof being given to Bondholders not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Bonds of this series shall be listed, if any, and upon such notice as shall be required by such exchange, all as more fully provided in said Indenture.

        The principal, Make-Whole Amount, if any, and the Redemption Price of, and the interest on, this Bond shall be payable by the method and at the address specified for the Registered Holder hereof in

Annex 1 to the Bond Purchase Agreement described below or by such other method or at such other address as the Registered Holder hereof shall have specified to the Company in writing. All such payments shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts.

        If any payment due on, or with respect to, this Bond shall fall due on a day other than a Business Day, then such payment shall be made on the first Business Day following the day on which such payment shall have so fallen due; provided that if all or any portion of such payment shall consist of a payment of interest, for purposes of calculating such interest, such payment shall not be deemed to have been originally due on such first following Business Day, and such interest shall accrue and be payable only to the Interest Payment Date.

        This Bond is one of a duly authorized issue of Bonds of the Company designated as its "First Mortgage Bonds" (herein called the "Bonds"), issued and to be issued in one or more series under, and all equally and ratably secured by, an Indenture of Mortgage and Deed of Trust, dated October 1, 1986, between the Company and U.S. Bank National Association (herein called the "Trustee," which term includes any successor Trustee), as Trustee, as amended and supplemented by (i) that certain First Amendment and Supplement to Indenture of Mortgage dated October 1, 1986, dated as of February 7, 1990, (ii) that certain Second Amendment and Supplement to Indenture of Mortgage Dated October 1, 1986, dated as of January 24, 1992, (iii) that certain Third Amendment and Supplement to Indenture of Mortgage Dated October 1, 1986, dated as of October 9, 1996, and (iv) that certain Fourth Amendment and Supplement to Indenture of Mortgage Dated as of October 1, 1986, dated as of October 19, 2004 between the Company and the Trustee (such Indenture of Mortgage and Deed of Trust, as so amended to and including the date hereof, being herein called the "Indenture") to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the properties thereby mortgaged, pledged and assigned, the nature and extent of the security, the respective rights thereunder of the Holders of the Bonds, the Trustee and the Company and the terms upon which the Bonds are, and are to be, authenticated and delivered. This Bond is issued under and pursuant to the terms and provisions of the separate Bond Purchase Agreements dated as of October 19, 2004 among the Company, Southwest Water Company and each Purchaser named therein. Capitalized terms not otherwise defined herein are defined as provided in the Indenture.

        As provided in the Indenture, the Bonds are issuable in series which may vary as in the Indenture provided or permitted. This Bond is one of the series specified in its title.

        This Bond is subject to redemption in whole, at any time, and in part, from time to time, before its maturity in the following events and in the manner provided in Article V and Section 18.03 of the Indenture:

        (1)   at any time after issuance, at the option of the Company evidenced by a Board Resolution at a Redemption Price equal to 100% of the principal amount of this Bond to be redeemed, together with the Make-Whole Amount, if any, and interest accrued to the Redemption Date, and on a Redemption Date specified by the Company as provided in Section 5.02 of the Indenture; and

        (2)   from moneys received by the Trustee as a result of a casualty or condemnation, the proceeds of which equal or exceed $15,000,000, at a Redemption Price equal to 100% of the principal amount of this Bond to be redeemed, together with interest accrued to the Redemption Date, and on a Redemption Date that is the first date for which notice of redemption can be given by the Trustee as provided in Article V of the Indenture.

        It is provided in the Indenture Bonds of this series that the aggregate principal amount of any required or optional partial redemption of the Series D Bonds be allocated in units of $1,000 or multiples thereof on a pro rata basis among the holders of Series D Bonds and that upon any partial

A-2

redemption of any such Bond the same shall, except as otherwise permitted by the Indenture, be surrendered in exchange for one or more new Bonds in authorized form for the unredeemed portion of principal. Bonds (or portions thereof as aforesaid) for whose redemption and payment provision is made in accordance with the Indenture shall thereupon cease to be entitled to the lien of the Indenture and shall cease to bear interest from and after the date fixed for redemption.

        If an Event of Default, as defined in the Indenture, shall occur, the principal of the Bonds may become or be declared due and payable in the manner and with the effect provided in the Indenture whereupon all principal, accrued interest and the Make-Whole Amount, if any, shall be due and payable.

        The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Bonds under the Indenture at any time by the Company with the consent of the Holders of 66²/3% in aggregate principal amount of the Bonds of each series at the time Outstanding affected by such modification. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of Bonds at the time Outstanding on behalf of the Holders of all the Bonds, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Bond shall be conclusive and binding upon such Holder and upon all future Holders of this Bond and of any Bond issued upon the transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Bond.

        No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Bond at the times, places and rates, and in the coin or currency, herein prescribed.

        As provided in the Indenture and subject to certain limitations therein set forth, this Bond is transferable on the Bond Register of the Company, upon surrender of this Bond for transfer at the office or agency of the Company in Los Angeles, California, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Bond Registrar duly executed by the Registered Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Bonds of the same series, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.

        The Bonds of this series are issuable only as registered Bonds without coupons in denominations of $1,000 or any multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Bonds of this series are exchangeable for a like aggregate principal amount of Bonds of this series of a different authorized denomination, as requested by the Holder surrendering the same.

        No service charge shall be made for any transfer or exchange hereinbefore referred to, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

        The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Bond is registered as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Bond shall be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.

        Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Bond shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.

A-3

        IN WITNESS WHEREOF, the Company has caused this Bond to be duly executed under its corporate seal.

Dated:
	SUBURBAN WATER SYSTEMS
[SEAL]
	By:
Attest:

        This is one of the Bonds of the series designated herein referred to in the within-mentioned indenture.

U.S. BANK NATIONAL ASSOCIATION, as Trustee
By:	Authorized Officer	Dated:

A-4

EXHIBIT B1
(to Bond Purchase Agreement)

COMPANY COUNSEL'S CLOSING OPINION

EXHIBIT B2
(to Bond Purchase Agreement)

COMPANY PUC COUNSEL'S CLOSING OPINION

EXHIBIT B3
(to Bond Purchase Agreement)

TRUSTEE COUNSEL'S CLOSING OPINION

EXHIBIT B4
(to Bond Purchase Agreement)

PURCHASER COUNSEL'S CLOSING OPINION

EXHIBIT C1
(to Bond Purchase Agreement)

SUBURBAN WATER SYSTEMS
CERTIFICATE OF OFFICERS

        We, [                        ] and [                        ], each hereby certify that we are, respectively, the [                        ] and the [                        ] of SUBURBAN WATER SYSTEMS (the "Company"), a California corporation, and that, as such, we are authorized to execute and deliver this Certificate in the name of and on behalf of the Company, and hereby further certify as follows.

        1.     This certificate is being delivered pursuant to Section 3.4(a) of the Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of October 19, 2004, among the Company, Southwest Water Company, a Delaware corporation, and Teachers Insurance and Annuity Association of America (the "Purchaser"). The terms used in this Certificate and not defined herein shall have the respective meanings ascribed to them in the Bond Purchase Agreement.

        2.     The warranties and representations made by the Company contained in Section 2 of the Bond Purchase Agreement are true in all material respects on the date hereof.

        3.     Neither the Company nor the Subsidiary has taken any action or permitted any condition to exist that would constitute a Default or Event of Default.

        4.     The Company has performed and complied with all agreements and conditions contained in the Bond Purchase Agreement that are required to be performed or complied with by the Company before or at the date hereof.

        5.     [                        ] is, on and as of the date hereof, and at all times subsequent to [                        ,    ], has been, the duly elected, qualified and acting Secretary of the Company, and the signature appearing on the Certificate of Secretary dated the date hereof and delivered to the Purchaser contemporaneously herewith is his genuine signature.

        IN WITNESS WHEREOF, we have executed this Certificate in the name and on behalf of the Company as of on                        , 2004.

SUBURBAN WATER SYSTEMS
By	Name: Title:
By	Name: Title:

C1-2

EXHIBIT C2
(to Bond Purchase Agreement)

SOUTHWEST WATER COMPANY
CERTIFICATE OF OFFICERS

        We, [                        ] and [                        ] each hereby certify that we are, respectively, the [                        ] and the [                        ] of SOUTHWEST WATER COMPANY ("Southwest"), a Delaware corporation, and that, as such, we are authorized to execute and deliver this Certificate in the name and on behalf of Southwest, and hereby certify as follows.

        1.     This certificate is being delivered pursuant to Section 3.4(b) of the Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of October 19, 2004, among Suburban Water Systems, a California corporation, Southwest, and Teachers Insurance and Annuity Association of America (the "Purchaser").

        2.     The warranties and representations made by Southwest contained in Section 2 of the Bond Purchase Agreement are true in all material respects.

        3.     [                        ] is, on and as of the date hereof, the duly elected, qualified and acting Secretary of Southwest, and the signature appearing on the Certificate of Secretary of Southwest dated the date hereof and delivered to the Purchaser contemporaneously herewith is his genuine signature.

        IN WITNESS WHEREOF, we have executed this Certificate in the name and on behalf of Southwest as of                        , 2004.

SOUTHWEST WATER COMPANY
By	Name: Title:
By	Name: Title:

EXHIBIT D1
(to Bond Purchase Agreement)

SUBURBAN WATER SYSTEMS
CERTIFICATE OF SECRETARY

        I, [                        ], hereby certify that I am the duly elected, qualified and acting Secretary of SUBURBAN WATER SYSTEMS, a California corporation (the "Company"); that, as such, I have access to its corporate records and am familiar with the matters herein certified; that I am authorized to execute and deliver this Certificate in the name and on behalf of the Company; and hereby further certify as follows.

        1.     This certificate is being delivered pursuant to Section 3.4(c) of the Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of October 19, 2004, among the Company, Southwest Water Company, a Delaware corporation, and Teachers Insurance and Annuity Association of America (the "Purchaser"). The terms used in this Certificate and not defined herein shall have the respective meanings ascribed to them in the Bond Purchase Agreement.

        2,     Attached hereto as Attachment A is a true and correct copy of resolutions, and the preamble thereto, adopted by the Board of Directors of the Company on                        , 2004, and such resolutions and preamble set forth in Attachment A hereto were duly adopted by said Board of Directors and are in full force and effect on and as of the date hereof, not having been amended, altered or repealed, and such resolutions are filed with the records of the Board of Directors.

        3.     The documents listed below were executed and delivered by the Company pursuant to and in accordance with the resolutions set forth in Attachment A hereto and said documents as executed are substantially on the terms submitted to and approved by the Board of Directors of the Company as aforementioned:

        (a)   the Bond Purchase Agreement;

        (b)   the Series D Bonds; and

        (c)   the Fourth Supplemental Indenture.

        4.     Attached hereto as Attachment B is a true, correct and complete copy of the bylaws of the Company as in full force and effect on and as of the date hereof, which bylaws were last amended by the Board of Directors of the Company on, and have been in full effect in said form at all times from and after [                        ,            ] to and including the date hereof, without modification or amendment in any respect.

        5.     Each of the following named persons is on and as of the date hereof, and at all times subsequent to [                        ] has been a duty elected, qualified and acting officer of the Company holding the office or offices set forth below opposite his name:

NAME OFFICE SIGNATURE

        6.     The signature appearing opposite the name of each such person set forth above is his genuine signature.

        7.     Attached hereto as Attachment C is a true, accurate and complete copy of the Certificate of Incorporation of the Company, together with all amendments thereto, as currently in effect There have been no amendments or supplements to or restatements of the Certificate of Incorporation of the Company since [                        ,            ].

        8.     The seal set forth beside my name below is the true corporate seal of the Company.

        IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of the Company as of                        , 2004.

	SUBURBAN WATER SYSTEMS
[Corporate Seal]	Secretary

D1-2

ATTACHMENT A

RESOLUTIONS OF THE BOARD OF DIRECTORS
SUBURBAN WATER SYSTEMS

[To be supplied by the Company].

ATTACHMENT B

BYLAWS OF THE COMPANY

[To be supplied by Company].

ATTACHMENT C

CERTIFICATE OF INCORPORATION OF THE COMPANY

[To be supplied by Company].

EXHIBIT D2
(to Bond Purchase Agreement)

SOUTHWEST WATER COMPANY
CERTIFICATE OF SECRETARY

        I, [                        ], hereby certify that I am the duly elected, qualified and acting Secretary of SOUTHWEST WATER COMPANY, a Delaware corporation ("Southwest"); that, as such, I have access to its corporate records and am familiar with the matters herein certified; that I am authorized to execute and deliver this Certificate in the name and on behalf of Southwest; and hereby further certify as follows.

        1.     This certificate is being delivered pursuant to Section 3.4(d) of the Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of October 19, 2004, among Suburban Water Systems, a California corporation, Southwest and Teachers Insurance and Annuity Association of America (the "Purchaser"). The terms used in this Certificate and not defined herein shall have the respective meanings ascribed to them in the Bond Purchase Agreement.

        2.     Attached hereto as Attachment A is a true and correct copy of resolutions, and the preamble thereto, adopted by the Board of Directors of the Company on                        , 2004, and such resolutions and preamble set forth in Attachment A hereto were duly adopted by said Board of Directors and are in full force and effect on and as of the date hereof, not having been amended, altered or repealed, and such resolutions are filed with the records of the Board of Directors. Southwest has executed and delivered, for the purpose of making certain representations, the Bond Purchase Agreement pursuant to and in accordance with such resolutions.

        3.     Attached hereto as Attachment B is a true, correct and complete copy of the bylaws of Southwest as in full force and effect on and as of the date hereof, which bylaws were last amended by the Board of Directors of Southwest on, and have been in full effect in said form at all times from and after [                        ,            ] to and including the date hereof, without modification or amendment in any respect.

        4.     Each of the following named persons is on and as of the date hereof a duly elected, qualified and acting officer of Southwest holding the office or offices set forth below opposite his name:

NAME OFFICE SIGNATURE

        5.     The signature appearing opposite the name of each such person set forth above is his genuine signature.

        6.     Attached hereto as Attachment C is a true, accurate and complete copy of the Certificate of Incorporation of Southwest, together with all amendments thereto, as currently in effect. There have been no amendments or supplements to or restatements of the Certificate of Incorporation of Southwest since [                        ,            ].

        7.     The seal set forth beside my name below is the true corporate seal of Southwest.

        IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of Southwest as of                        , 2004.

	SOUTHWEST WATER COMPANY
[Corporate Seal]	Secretary

ATTACHMENT A

RESOLUTIONS OF THE BOARD OF DIRECTORS
SOUTHWEST WATER COMPANY

[To by supplied by the Parent].

Attachment B

BYLAWS OF SOUTHWEST WATER COMPANY

[To be supplied by the Parent]

ATTACHMENT C

CERTIFICATE OF INCORPORATION OF SOUTHWEST WATER COMPANY

[To be supplied by the Parent]

EXHIBIT E
(to Bond Purchase Agreement)

FORM OF FOURTH SUPPLEMENTAL INDENTURE

RECORDING REQUESTED BY, AND
WHEN RECORDED, MAIL TO:

Sosi Biricik
Latham & Watkins LLP
600 West Broadway, Suite 1800
San Diego, California 92101-3375

INSTRUCTIONS TO COUNTY RECORDER:

Index this instrument as an
Amendment to Mortgage.

SUBURBAN WATER SYSTEMS

TO

U.S. BANK NATIONAL ASSOCIATION,

TRUSTEE

FOURTH AMENDMENT AND SUPPLEMENT TO
INDENTURE OF MORTGAGE DATED OCTOBER 1, 1986

[This instrument is an amendment to an Indenture which is a mortgage of both real and personal property, including chattels, and also constitutes, among other things, a security agreement creating a security interest in personal property. Such Indenture contains after-acquired property provisions.]

        THIS FOURTH AMENDMENT AND SUPPLEMENT TO INDENTURE OF MORTGAGE AND DEED OF TRUST DATED OCTOBER 1, 1986 (the "Fourth Amendment"), is made and entered into as of October 19, 2004, by and between SUBURBAN WATER SYSTEMS, a California corporation formerly known as Southwest Suburban Water (herein, the "Company"), and U.S. BANK NATIONAL ASSOCIATION, a national banking association, as trustee (herein, the "Trustee"), with respect to the following:

RECITALS:

        A.    The Company executed and delivered that certain Indenture of Mortgage and Deed of Trust dated October 1, 1986 (the "Original Indenture") to Security Pacific National Bank, a national banking association, predecessor to Bank of America NT & SA, predecessor trustee to U.S. Bank Trust National Association (originally named First Trust of California, National Association), predecessor to the Trustee. The Original Indenture was recorded on November 17, 1986, as Instrument No. 86-1574184 in the Official Records of the County of Los Angeles, State of California, and was recorded on November 17, 1986, as Instrument No. 86-563570 in the Official Records of the County of Orange, State of California.

        B.    The Original Indenture was amended pursuant to that certain First Amendment and Supplement to Indenture of Mortgage and Deed of Trust Dated October 1, 1986 (the "First Amendment"), dated as of February 7, 1990, and recorded on April 12, 1990, as Instrument No. 90-694089 in the Official Records of the County of Los Angeles, State of California, and was recorded on May 8, 1990, as Instrument No. 90-241742 in the Official Records of the County of Orange, State of California and further amended pursuant to that certain Second Amendment and Supplement to Indenture of Mortgage and Deed of Trust Dated October 1, 1986 (the "Second Amendment"), dated as of January 24, 1992, and recorded on February 14, 1992, as Instrument No. 92-260829 in the Official Records of the County of Los Angeles, State of California, and was recorded on February 14, 1992, as Instrument No. 92-091620 in the official records of the County of Orange, State of California and further amended pursuant to that certain Third Amendment and Supplement to Indenture of Mortgage and Deed of Trust Dated October 1, 1986 (the "Third Amendment"), dated as of October 9, 1996, and recorded on October 18, 1996, as Instrument No. 96-1696870 in the Official Records of the County of Los Angeles, State of California, and was recorded on October 18, 1996, as Instrument No. 19960531190 in the official records of the County of Orange, State of California. The Original Indenture, as amended and supplemented by the First Amendment, the Second Amendment and the Third Amendment, is hereinafter referred to as the "Existing Indenture," and the Existing Indenture as amended and supplemented by this Fourth Amendment is hereinafter referred to as the "Indenture."

        C.    The Company has requested that the Trustee enter into this Fourth Amendment setting forth the terms and conditions of the issuance of certain Bonds in the aggregate principal amount of $15,000,000, which Bonds shall be issued as "Series D" under and pursuant to the Indenture.

        D.    The Company has duly authorized the creation, execution and delivery of the Series D Bonds, and all things have been done which are necessary to make the Series D Bonds, when executed by the Company and authenticated and delivered by the Trustee under the Indenture and duly issued by the Company, the valid and binding obligations of the Company, and to constitute the Indenture a valid mortgage and deed of trust and a security agreement and contract for the security of the Bonds (including, without limitation, the Series D Bonds), in accordance with the terms of the Bonds and the Indenture. In addition, all other instruments and actions required pursuant to law and pursuant to the requirements of the Existing Indenture for the Trustee to execute and deliver this Fourth Amendment have been duly delivered or taken.

AMENDMENT

        IN CONSIDERATION of the foregoing recitals and pursuant to the authority granted under Section 13.01 of the Indenture [Supplemental Indentures Without Consent of Bondholders], the Company and the Trustee agree that the Existing Indenture shall be amended in the following respects:

1.DEFINITIONS.

        All terms used in this Fourth Amendment with initial capital letters and not defined herein shall have the meanings given in the Existing Indenture.

2.ORIGINAL ISSUANCE OF SERIES D BONDS.

        There is hereby added to the Existing Indenture a new Article, to be entitled Article XVIII and which shall read in its entirety as follows:

"ARTICLE XVIII
TERM AND ISSUE OF SERIES D BONDS

Section 18.01.    Specific Title, Terms and Forms.    There shall be a fourth series of Bonds entitled "First Mortgage Bonds, Series D 5.64%, Due October 1, 2024" (herein called the "Series D Bonds"). The forms thereof shall be substantially as set forth in Article II with such insertions, omissions, substitutions and variations as, may be determined by the officers executing the same as evidenced by their execution thereof to reflect the applicable terms of the Series D Bonds established by this Article. The precise form of Series D Bonds shall be as set forth in an exhibit to the Bond Purchase Agreement (the "Purchase Agreement") dated as of October 19, 2004 between the Company and the Purchaser named therein pursuant to which the Series D Bonds are sold and the Trustee is authorized to refer to such Purchase Agreement when any Series D Bonds are presented to the Trustee for authentication.

        The Maturity of the Series D Bonds shall be October 1, 2024 and the aggregate principal amount thereof which may be authenticated and delivered and Outstanding is limited to $15,000,000.

        The Series D Bonds may be issued only as registered Bonds in denominations of $1,000 and any multiple thereof. The Series D Bonds shall bear interest from the later of the initial issuance of the Series D Bonds or the most recent Interest Payment Date to which interest has been paid or duly provided for. The Series D Bonds shall bear interest payable semi-annually on April 1 and October 1 of each year (the Interest Payment Dates of the Series D Bonds), at the rate of 5.64% per annum until the principal thereof shall be paid or duly provided for; provided that interest on any overdue principal, overdue Redemption Price, and (to the extent permitted by applicable law) overdue interest, shall accrue at a rate equal to the lesser of (a) the highest rate allowed by applicable law or (b) 6.64% per annum. Interest shall be computed on the basis of a 360 day year of twelve 30 day months. In no event shall the interest payable on any Series D Bonds (including any interest on overdue interest or any overdue Redemption Price) exceed the maximum amount which the Holder thereof may legally collect under the then applicable usury law. In the event that it is hereafter determined by a court of competent jurisdiction that the interest payable under any Series D Bond (including any interest on any overdue Redemption Price or overdue interest) is in excess of the amount which the Holder thereof may legally collect under the then applicable usury law, then (i) all interest actually paid (including any interest on any overdue interest or overdue Redemption Price) in excess of the maximum amount legally collectible by such Holder shall be applied to the payment of principal of such Series D Bond or, if all principal shall previously have been paid, promptly repaid by such Holder to the Company, and (ii) interest on such Series D Bond (including any interest on overdue interest or any overdue Redemption Price) subsequent to the date of such determination shall be reduced to the maximum amount which it is determined that the Holder may collect under the then applicable usury law.

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        Notwithstanding the provisions of Section 5.05 [Deposit of Redemption Price] or other provisions in the Indenture to the contrary, the principal or the Redemption Price of, and any applicable accrued and unpaid interest on, the Series D Bonds shall be payable by depositing such amounts, before 12:00 noon, New York time on the Redemption Date or Maturity date, as the case may be, by federal funds bank wire transfer, in the account of each Bondholder of the Series D Bonds in any bank in the United States as may be designated in a written notice to the Company by such Bondholder, or in such other manner as may be directed, or to such other address in the United States as may be designated, in writing by such Bondholder. The address on Annex 1 to the Purchase Agreement with respect to the initial purchaser of the Series D Bonds shall be deemed to constitute notice, direction or designation (as appropriate) to the Company with respect to direct payments to such purchaser as aforesaid. With regard to any Series D Bond, the bank designated pursuant to this paragraph with respect to such Series D Bond shall be the Place of Payment in respect of such Series D Bond.

        The Regular Record Date referred to in Section 2.10 [Payment of Interest on Bonds; Interest Rights Preserved] for the payment of the interest payable on the Series D Bonds, and punctually paid or duly provided for, on any Interest Payment Date shall be the 15th day (whether or not a Business Day) of the calendar month next preceding such Interest Payment Date.

        If any payment due on, or with respect to, any Series D Bonds shall fall due on a day other than a Business Day, then such payment shall be made on the first Business Day following the day on which such payment shall have so fallen due; provided that if all or any portion of such payment shall consist of a payment of interest, for purposes of calculating such interest, such payment shall not be deemed to have been originally due on such first following Business Day, and such interest shall accrue and be payable only to the Interest Payment Date.

Section 18.02.    Exchangeability.    Subject to Section 2.08 [Registration, Transfer and Exchange], all Series D Bonds shall be fully interchangeable, and, upon surrender at the office or agency of the Company which the Company maintains pursuant to Section 6.02 [Maintenance of Office or Agency] shall be exchangeable for other Series D Bonds of a different authorized denomination or denominations, as requested by the Holder surrendering the same. The Company will execute, and the Trustee shall authenticate and deliver, Series D Bonds whenever the same are required for any such exchange.

Section 18.03.    Redemption.

        A.    The Series D Bonds are subject to redemption, in whole or in part, before their Maturity in the following events and in the manner provided in Article V [Redemption of Bonds]:

(1)

at any time after issuance, at the option of the Company evidenced by a Board Resolution, in an amount not less than 5% of the aggregate principal amount of the Series D Bonds Outstanding in the case of a partial redemption, at a Redemption Price equal to 100% of the principal amount of the Series D Bonds to be redeemed, together with the Make-Whole Amount at such time (as shall be calculated by the Company which calculations shall be set forth in an Officers' Certificate delivered to each Holder of Series D Bonds and to the Trustee two (2) Business Days prior to the Redemption Date) and interest accrued and unpaid to the Redemption Date, on a Redemption Date specified by the Company in compliance with Section 5.02 [Election to Redeem; Notice to Trustee]; and



(2)

from moneys received by the Trustee as a result of a major casualty or condemnation as provided in Articles VII [Possession and Release of Property] and VIII [Application of Trust Moneys], at a Redemption Price equal to 100% of the principal amount of Bonds to be redeemed, together with interest accrued and unpaid to the Redemption Date, and on a Redemption Date that is the first date for which notice of redemption can be given by the Trustee as provided in Article V [Redemption of Bonds]. For purposes of this Section 18.03 a

3

"major" casualty or condemnation is one in which either or both of (i) the compensation for, or proceeds of sale of, any part of the Trust Estate Taken by Eminent Domain, or (ii) the proceeds of insurance upon any part of the Trust Estate, is equal to or greater than $15,000,000.

        B.    Notwithstanding the last sentence of the first paragraph of Section. 5.04 [Notice of Redemption] and the first sentence of the second paragraph of Section 1.04 [Notices to Bondholders; Waiver], the giving of notice of redemption to each Holder of a Series D Bond, as provided in Section 5.04, shall be a condition precedent to the Company's right to redeem Series D Bonds in accordance with the foregoing clauses A(l) and A(2) of this Section 18.03. Any notice of redemption to any Holder of Series D Bonds for a redemption pursuant to clause A(1) of this Section 18.03 shall be accompanied by an Officers' Certificate as to the estimated Make-Whole Amount due in connection with such redemption (calculated as if the date of such notice were the date of such redemption) setting forth the details of such computation.

        C.    Notwithstanding the provisions of Section 5.03 [Selection by Trustee of Bonds to Be Redeemed], if there is more than one Holder of the Series D Bonds, the aggregate principal amount of each required or optional partial redemption of the Series D Bonds shall be allocated in units of $1,000 or multiples thereof among the Holders of the Series D Bonds at the time Outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts of the Series D Bonds then Outstanding held by each such Holder of Series D Bonds, with adjustments, to the extent practicable, to equalize for any prior redemptions not in such proportion.

        D.    Notwithstanding the second sentence of Section 5.06 [Bonds Payable on Redemption Date] or the provisions of Section 5.07 [Bonds Redeemed in Part], no Holder of any Series D Bond shall be required to surrender such Bond to any Person, or to file, or cause to be filed, with the Trustee any agreement or certificate required by Section 5.07, prior to receiving any payment thereon or in respect thereof; provided, however, that upon payment of the principal or Redemption Price in full, and accrued and unpaid interest on and all other amounts in respect of such Series D Bond, the Holder thereof shall promptly thereafter surrender such Series D Bond to the Company. Any such Series D Bond so surrendered shall be cancelled and shall not be reissued, and no new Series D Bond shall be issued in lieu of such surrendered Series D Bond.

        E.    The Series D Bonds may be redeemed from Trust Moneys, as provided in Section 8.04 [Retirement of Bonds], including from moneys received by the Trustee as a result of casualty or condemnation, as provided in Articles VII [Possession and release of Property] and VIII [Application of Trust Moneys], but only at the time, in the manner and at the Redemption Price specified in clauses (A)(1) and (A)(2) of this Section 18.03. If the Series D Bonds shall be redeemed under Section 18.03A(2), then said Series D Bonds shall be redeemed pro rata with the Series A Bonds, Series B Bonds, the Series C Bonds and any other Bonds having the benefit of a redemption provision substantially identical to that contained in Section 18.03A(2), in proportion, as nearly as practicable, to the respective unpaid principal amounts of all such Bonds Outstanding on the Redemption Date.

Section 18.04.    Payment of Optional Redemption Price.    If the giving of notice of optional redemption shall have been completed as required in Article V [Redemption of Bonds], the Series D Bonds or portions of such Series D Bonds specified in such notice shall become due and payable on the Redemption Date at the applicable Redemption Price set forth in Section 18.03. On and after the Redemption Date (unless the Company shall default in the payment of such Bonds on the Redemption Date) interest on the Series D Bonds or the portions of the Series D Bonds so called for redemption shall cease to accrue.

        If any Holder of any Series D Bond which is redeemed in part only shall present such Bond to the Company, the Company shall execute and the Trustee shall authenticate and deliver to such Holder, at

4

the expense of the Company, a new Series D Bond or Bonds in aggregate principal amount equal to the unredeemed portion of the Series D Bond so presented.

Section 18.05.    Authentication and Delivery.    Upon the execution and delivery of this Fourth Amendment, the Company shall execute and deliver to the Trustee, and the Trustee shall authenticate, the Series D Bonds and deliver them to the purchasers thereof as instructed by the Company.

        Prior to the delivery by the Trustee of the Series D Bonds there shall be filed with the Trustee original executed counterparts of this Fourth Amendment, the Purchase Agreement, the Title Policies or commitments for issuance thereof and evidence of recording of this Fourth Amendment in the land records of Los Angeles and Orange Counties, California."

3.CERTAIN AMENDMENTS TO DEFINITIONS.

        (a)Make-Whole Amount Definitions.    Section 1.01 [Definitions] of the Existing Indenture is hereby amended by adding the following definition of Make-Whole Amount for the Series D Bonds and the following related definitions:

"Make-Whole Amount" means, with respect to any Series D Bond, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Bond over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings:

"Called Principal" means, with respect to any Series D Bond, the principal of such Bond that is to be redeemed pursuant to Section 18.03 [Redemption] or has become or is declared to be immediately due and payable pursuant to Section 9.02 [Acceleration of Maturity; Recission and Annulment], as the context requires.

"Discounted Value" means, with respect to the Called Principal of any Series D Bond, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Series D Bonds is payable) equal to the Reinvestment Yield with respect to such Called Principal.

"Reinvestment Yield" means, with respect to the Called Principal of any Series D Bond, .50% plus the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display page of the Bloomberg Financial Markets Services Screen PX1 or the equivalent screen provided by Bloomberg Financial Markets Commodities News for actively traded U.S. Treasury Securities having a maturity equal to the Remaining Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the maturity closest to and greater than the Remaining Life and (2) the actively traded U.S. Treasury security with the maturity closest to and less than the Remaining Life.

5

"Remaining Life" means, with respect to any Called Principal of any Series D Bond, the number of years (calculated to the nearest one-twelfth year) from the Settlement Date to the maturity of the Series D Bonds.

"Remaining Scheduled Payments" means, with respect to the Called Principal of any Series D Bond, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Series D Bonds, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to this provision.

"Settlement Date" means, with respect to the Called Principal of any Series D Bond, the date on which such Called Principal is to be redeemed pursuant to Section 18.03 [Redemption] or Section 9.02 [Acceleration of Maturity; Recission and Annulment], as the context requires.

        (b)Definition of Place of Payment.    The definition of "Place of Payment" added to Section 1.01 [Definitions] of the Original Indenture by the Third Amendment is hereby amended to read, in its entirety, as follows:

"Place of Payment" means, (a) when used with respect to the Series A Bonds (except as provided in clause (e) below), the place for payment of the principal and interest upon the Series A Bonds designated in Section 3.01; (b) when used with respect to the Series B Bonds (except as provided in clause (e) below), the place for payment of the principal, Make-Whole Amount, if any, and interest upon the Series B Bonds designated in Section 16.01; (c) when used with respect to the Series C Bonds (except as provided in clause (e) below), the place for payment of the principal, Make-Whole Amount, if any, and interest upon the Series C Bonds designated in Section 17.01; (d) when used with respect to the Series D Bonds (except as provided in clause (e) below), the place for payment of the principal, Make-Whole Amount, if any, and interest upon the Series D Bonds designated in Section 18.01; and (e) with respect to any exchange of Series A Bonds pursuant to Section 3.02 [Exchangeability], with respect to any exchange of Series B Bonds pursuant to Section 16.02 [Exchangeability], with respect to any exchange of Series C Bonds pursuant to Section 17.02 [Exchangeability], with respect to any exchange or surrender for redemption of Series D Bonds pursuant to Section 18.02 [Exchangeability] and with respect to Bonds of any other series means a city or any political subdivision thereof in which the Company is by this Indenture required to maintain an office or agency pursuant to Section 6.02 [Maintenance of Office or Agency].

        (c)Section 6.02.Maintenance of Office or Agency.    The first two sentences of Section 6.02 [Maintenance of Office or Agency] of the Indenture are hereby amended to read as follows:

        "The Company will maintain an office or agency in the vicinity of Los Angeles, California where Bonds may be presented or surrendered for payment, where Bonds entitled to be registered, transferred, exchanged or converted may be presented or surrendered for registration, transfer, exchange or conversion and where notices and demands to or upon the Company in respect of the Bonds and this Indenture may be served. The address of the Company's office or agency is One Wilshire Building, 624 South Grand Avenue, Suite 2900, Los Angeles, California 90017 and the Company agrees to give prompt written notice to the Trustee and each Bondholder of any change in the location of such office or agency."

4.REPLACEMENT OF MUTILATED, DESTROYED, LOST AND STOLEN BONDS.

        The proviso in lines 5 through 7 of the first paragraph of Section 2.09 [Mutilated, Destroyed, Lost and Stolen Bonds] of the Existing Indenture is hereby amended to add thereto the words "or Series D Bond" immediately after the words "Series C Bond."

6

5.NOTICE OF REDEMPTION OF SERIES A BONDS.

        Section 3.03E of the Original Indenture, as previously amended and restated by the Third Amendment, is hereby amended and restated to read, in its entirety, as follows:

        "E.    The Series A Bonds may be redeemed from Trust Moneys, as provided in Section 8.04 [Retirement of Bonds], or from moneys received by the Trustee as a result of casualty or condemnation, as provided in Articles VII [Possession and Release of Property] and VIII [Application of Trust Moneys], but only at the time, in the manner and at the Redemption Price specified in clauses (A)(1) and (3) of this Section 3.03. If the Series A Bonds, or any other Bonds having the benefit of a redemption provision substantially identical to that contained in Section 3.03A(3), shall be redeemed under Section 3.03A(3), then said Series A Bonds shall be redeemed pro rata with the Series B Bonds, the Series C Bonds, the Series D Bonds and any other Bonds having the benefit of a redemption provision substantially identical to that contained in Section 3.03A(3) in proportion, as nearly as practicable, to the respective unpaid principal amounts of all such Bonds Outstanding on the Redemption Date."

6.BONDABLE CAPACITY.

        (a)Definition of Bondable Capacity.    The definition of Bondable Capacity appearing in Section 4.02A of the Existing Indenture is hereby amended and restated to read, in its entirety, as follows:

"Bondable Capacity" means a dollar amount, calculated as of the date of certification of Bondable Capacity, equal to (a) the sum of:

          (i)  the Adjusted Amount of Bondable Property; plus

         (ii)  the Amount of Property Additions not previously included in any Summary Certificate of Bondable Capacity; less

        (iii)  the amount of Retirements not previously included in any Summary Certificate of Bondable Capacity less the sum of the credits specified in Section 4.02B(2)(c) and (e) against such Retirements; less

        (iv)  the sum of the withdrawals and releases specified in Section 4.02B(2)(d) and not previously included in any Summary Certificate of Bondable Capacity; less

         (v)  $3,250,000;

less (b) 150% of the aggregate principal amount of any Bonds Outstanding as of the date of such certification, and less (c) the outstanding principal amount of any Prior Lien Obligations.

        (b)Certificate of Bondable Capacity.    Clause 2 of Section 4.02B [Requested Use of Bondable Capacity] is hereby amended as follows:

          (i)  Subclauses (c) through (i), inclusive, appearing therein are hereby amended and restated in their entirety to read as follows:

        "(c) The aggregate amount (Item 3(a) in the Summary Certificate of Bondable Property) of all Retirements during the period from the date to which Retirements had been included in Item 3(a) of the most recent Summary theretofore filed with the Trustee (or the Cut-Off Date in the case of the second such Certificate) to the later of (i) a date not earlier than the 90th day before the date of the related Application and (ii) the terminal date in the period specified pursuant to Subclause (b) above.

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        The credits (Item 3(b) in the Summary Certificate of Bondable Capacity) against Retirements, which shall equal, subject to the provisions of the last sentence of Subclause (e) below, the sum of the following:

          (i)  the excess of credits against Retirements carried forward from the most recent Certificate, as provided in the last sentence of Subclause (e) below;

         (ii)  the aggregate amount of cash and purchase money and governmental obligations delivered to the Trustee and Bondable Capacity certified to the Trustee for use as a basis for releases under Section 7.02 [Releases] during the period covered by Subclause (c) above; and

        (iii)  all insurance moneys received by the Trustee pursuant hereto or paid to a trustee, mortgagee or other holder under a Prior Lien during the period covered by Subclause (c) above on account of the damage, loss or destruction of any Bondable Property.

        (d)   The withdrawals and releases (Item 5 in the Summary Certificate of Bondable Capacity) shall equal the sum of the following actions applied for after the Cut-Off Date through the date of such Certificate (excluding the action applied for in such Certificate) and not included as a deduction in Item 5 of any previous Summary Certificate of Bondable Capacity: (i) 100% of any Deposited Cash withdrawn under Section 4.05 [Withdrawal of Deposited Cash], (ii) 100% of any Trust Moneys withdrawn under Section 8.02 [Withdrawal of Basis of Bondable Capacity] and (iii) 100% of any Bondable Property used as a basis for the release of any of the Trust Estate under Section 7.02 [Releases].

        (e)   The new Adjusted Amount of Bondable Property (Item 6 in the Summary Certificate of Bondable Capacity) which shall be determined by subtracting the sum of (i) the net amount of Retirements (Item 4) plus (ii) withdrawals and releases (Item 5) from the sum of Items 1 and 2. The net amount of Retirements (Item 4) shall be determined by deducting the credits shown pursuant to Subclause (c) above (Item 3(b)) from the aggregate amount of Retirements shown pursuant to Subclause (c) above (Item 3(a)). If in any case the credits against Retirements exceed the aggregate amount of Retirements shown pursuant to Subclause (c) above (Item 3(a)), the net amount of Retirements for the purpose of this Subclause shall be deemed to be zero, but such excess of credits against Retirements may be carried forward and used as a credit against Retirements in the next Certificate.

        (f)    The gross Bondable Capacity (Item 7 in the Summary Certificate of Bondable Capacity) is the new Adjusted Amount of Bondable Property shown pursuant to Subclause (e) above (Item 6).

        (g)   150% of the aggregate principal amount of Bonds Outstanding and the principal amount of outstanding Prior Lien Obligations (Items 8 and 9 of the Summary Certificate of Bondable Capacity) as of the date of the Certificate.

        (h)   The net Bondable Capacity shall be derived by subtracting the sum of Items 8 and 9 from gross Bondable Capacity (Item 7). Net Bondable Capacity shall not be less than one of the following amounts which shall be specified in Item 11 of the Summary Certificate of Bondable Capacity:

          (i)  150% of the aggregate principal amount of any additional Bonds whose authentication and delivery are then being applied for under this Section, or

         (ii)  100% of the following applicable amount then being applied for under this Section: (x) the amount of any Deposited Cash then being withdrawn under Section 4.05 [Withdrawal of Deposited Cash], (y) the amount of Trust Moneys then being withdrawn

8

under Section 8.02 [Withdrawal on the Basis of Bondable Capacity] and (z) any Bondable Property which is then being used as a basis for a release under Section 7.02 [Releases].

          (i)  The net Bondable Capacity remaining after the action applied for (Item 12) shall be derived by subtracting from the net Bondable Capacity specified in Item 10, 150% of the amount of the action applied for specified in Subclause (h)(i) above, or (ii) 100% of the amount of the action applied for specified in Subclause (h)(ii), whichever shall be applicable."

         (ii)  The form of Summary Certificate of Bondable Capacity appearing therein is hereby amended and restated in its entirety to read as follows:

*****************************************

SUMMARY CERTIFICATE OF BONDABLE CAPACITY

No.                                      

        The undersigned hereby certify that the following is a true summary of the Certificate:

Start with:

1.	The Adjusted Amount of Bondable Property listed in Item 6 of the next previous Certificate (Certificate No.)		$
Then take the new gross Property Additions as shown in Item 2 below:
2.	Amount of additional Property Additions now certified, being the Amount of all or some Property Additions in the period from            through            (none of which has been certified in any previous Certificate of Bondable Capacity)		$
Then determine the deduction for Retirements by deducting Item 3(b) below from Item 3(a) below to produce item 4:
3.	Net Retirements are determined as follows:
	3(a).	The aggregate amount of all Retirements occurring in the period from            through            (none of which has been certified in any previous Certificate of Bondable Capacity)	$
	3(b).	The sum of the credits against such Retirements (amounts greater than item 3(a) may be carried forward to next Certificate)	$
4.	The net amount of Retirements to be deducted (not less than zero)		$
Then determine the amount of withdrawals and releases not previously deducted:
5.	The sum of the following withdrawals and releases applied for after the Cut-off Date and through the date of this Certificate (but not including the action applied for herein) (none of which has been included in this item 5 of any previous Certificate of Bondable Property): (i) 100% of the amount of any Deposited Cash withdrawn under Section 4.05 [Withdrawal of Deposited Cash], (ii) 100% of any Trust Moneys withdrawn under Section 8.02 [Withdrawal on Basis of Bondable Capacity] and (iii) 100% of any Bondable Property used as a basis for the release of any of the Trust Estate under Section 7.02 [Releases]		$
Then determine the new Adjusted Amount of Bondable Property now being certified by deducting the sum of items 4 and 5 from the sum of items 1 and 2 to produce item 6:
6.	New Adjusted Amount of Bondable Property now being certified		$

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Item 6 is the new gross Bondable Capacity and should be entered as item 7:
7.	Gross Bondable Capacity	$
Deduct the sum of Items 8 and 9 from Item 7 to produce Item 10:
8.	150% of the aggregate principal amount of Bonds Outstanding	$
9.	Principal amount of Prior Lien Obligations	$
10.	Net Bondable Capacity available for the action applied for	$
Deduct Item 11 from Item 10 to produce Item 12:
11.	Amount of the action applied for: (a) 150% of the aggregate principal amount of the Bonds to be issued or (b) 100% of the following amount then being applied for: (i) the withdrawal of Deposited Cash under Section 4.05, (ii) withdrawal of Trust Moneys under Section 8.02, or (iii) using Bondable Property as the basis for the release of any of the Trust Estate under Section 7.02	$
12.	Net Bondable Capacity remaining after subtracting the amount in Item 11 from Item 10	$
13.	Principal amount of Bonds available to be issued (2/3 of Item 12)	$

Dated:             ,             .
	(Title)
	(Title)
	(Engineer)
	(Accountant)

**************************************************

7.LEGAL OPINIONS.

        (a)    Section 4.01C Opinion.    The opinion required by Clause C of Section 4.01 is hereby amended by changing the period at the end of Subclause (5) to a semicolon and adding the following proviso to said Clause C:

"; provided, that the opinion in Subclause C(3) may be satisfied by an Officers' Certificate addressed to the Trustee and signed also by an Engineer certifying as to the matters set forth therein and made in reliance upon Title Policies, UCC searches and any certificates, opinions and other documents deemed appropriate by the signers of such Officers' Certificate."

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        (b)    Section 4.02B(6) Opinion.    The opinion required by Subclause B(6) of Section 4.02 is hereby amended by changing the period at the end of Subclause B(6)(e) to a semicolon and adding the following proviso to said Subclause B(6):

"; provided that (i) the opinions in Subclause B(6)(a) and (b) and (ii) the opinion in Subclause B(6)(d) with respect to the Indenture being a lien on specific Property Additions and being free and clear from Prior Liens (collectively the "Real Estate Opinions") may be satisfied by an Officers' Certificate addressed to the Trustee and signed also by an Engineer certifying as to the matters set forth in such Real Estate Opinions and made in reliance upon Title Policies, UCC searches and any certificates, opinions and other documents deemed appropriate by the signers of such Officers' Certificate."

        (c)    Section 6.05A Opinion.    The opinion required by Clause A of Section 6.05 is hereby amended by restating the parenthetical in Clause A which permits the opinion to be rendered in reliance on one or more policies of title insurance to read as follows:

"... (which opinion may be rendered in reliance on one or more policies of title insurance or on being informed by a title insurance company issuing any such policy and on UCC Searches)..."

8.     COVENANTS.

        In consideration of and in connection with the issuance of the Series D Bonds, the Company makes the following additional covenants in favor of the Series D Bondholders (but not the Series A Bondholders, the Series B Bondholders, the Series C Bondholders or the Bondholders of any subsequent series of Bonds, if any):

        (a)    Dividend Covenant.    Section 6.14 [Payment of Dividends] of the Existing Indenture is hereby amended by adding the following to the end of the first paragraph thereof:

        "In addition to the foregoing, for so long as any of the Series D Bonds are Outstanding the Company will not declare or make or incur any liability to make any Distribution in respect of the common stock of the Company if, immediately after giving effect to the proposed Distribution, the aggregate amount of Distributions in respect of its common stock made during the period subsequent to December 31, 2003 would exceed: the sum of (a) $24,077,000, plus (b) 95% of the aggregate Net Income (or 100% of Net Income if Net Income shall be a deficit) accrued subsequent to December 31, 2003."

        (b)    Financial Reports to Series D Bondholders.    Article VI [Covenants] of the Existing Indenture is hereby amended by adding thereto a new Section, to be entitled Section 6.17 and to read in its entirety as follows:

        "Section 6.17. Financial Reports to Series D Bondholders.    For so long as any of the Series D Bonds are Outstanding, the Company shall furnish to each of the Series D Bondholders at their addresses for notices pursuant to Section 1.04 [Notices to Bondholders; Waiver] all financial statements and information, notices, reports and other information required pursuant to, and otherwise comply with each of, the provisions of Section 4.1 (together with any successor provision, and as such provision or successor provision may be amended from time to time), of the Purchase Agreement pursuant to which the Series D Bonds were originally sold, which provisions are incorporated by reference herein, mutatis mutandis, with the same effect as if set forth herein."

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9.     POWERS EXERCISABLE NOTWITHSTANDING DEFAULT.

        (a)    Section 7.04.    Section 7.04 [Powers Exercisable Notwithstanding Default] of the Original Indenture, as previously amended and restated by the Third Amendment, is hereby amended to read, in its entirety, as follows:

        "While in possession of all or substantially all of the Trust Estate (other than any cash and securities constituting part of the Trust Estate and deposited with the Trustee), the Company may exercise the powers conferred upon it in the Sections of this Article even though it is prohibited from doing so while a Default exists as provided therein, if (i) the Holders of not less than 66²/3% in principal amount of each of the following series of Bonds then Outstanding: the Series A Bonds, the Series B Bonds, the Series C Bonds and the Series D Bonds, and (ii) the Holders of not less than 66²/3% in principal amount of all other Bonds then Outstanding (as a group), in each case by Act of such Bondholders, shall consent to such action, in which event none of the instruments required to be furnished to the Trustee under any of such Sections as a condition to the exercise of such powers need state that no Default exists as provided therein."

        (b)    Section 8.07.    Section 8.07 [Powers Exercisable Notwithstanding Default] of the Original Indenture, as previously amended and restated by the Third Amendment, is hereby amended to read, in its entirety, as follows:

        "While in possession of all or substantially all of the Trust Estate (other than any cash and securities constituting part of the Trust Estate and deposited with the Trustee), the Company may do any of the things enumerated in Sections 8.02 [Withdrawal on Basis of Bondable Capacity] to 8.06 [Amounts under $100,000], inclusive, which it is prohibited from doing while a Default exists as provided therein, if (i) the Holders of not less than 66²/3% in principal amount of each of the following series of Bonds then Outstanding: the Series A Bonds, the Series B Bonds, the Series C Bonds and the Series D Bonds and (ii) the Holders of not less than 66²/3% in principal amount of all other Bonds then Outstanding (as a group), in each case by Act of such Bondholders, shall consent to such action, in which event any Certificate filed under any of said Sections shall omit any statement to the effect that no Default exists as provided thereunder."

10.   EVENTS OF DEFAULT.

        Section 9.01 [Events of Default] of the Existing Indenture is hereby amended by adding thereto a new subsection 9.01 E, to read in its entirety as follows:

        "E.    "Event of Default" with respect to the Series D Bonds only means any one of the events specified in clause A of this Section 9.01 or any one of the following events (whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

        (1)   Principal or Premium Payments—the Company fails to make any payment of principal or Make-Whole Amount on any Series D Bond when such payment is due;

        (2)   Interest Payments—the Company fails to make any payment of interest on any Series D Bond within 5 days after the date such payment is due;

        (3)   Particular Covenant Defaults—the Company fails to perform or observe any covenant contained in Section 6.06, Section 6.09, Section 6.14, the last sentence of Section 6.12 or Article XII;

        (4)   Other Defaults—the Company fails to comply with any other provision of this Indenture or the Purchase Agreement pursuant to which the Series D Bonds were sold, and

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such failure continues for more than 30 days after such failure shall first become known to any officer of the Company;

        (5)   Warranties or Representations—any warranty or representation by the Company or by Southwest Water Company, a Delaware corporation, contained in this Indenture, the Purchase Agreement pursuant to which the Series D Bonds were sold or in any instrument or certificate furnished by the Company in compliance with this Indenture or the Purchase Agreement pursuant to which the Series D Bonds were sold is false or incorrect in any material respect on the date as of which made;

        (6)   Default on Indebtedness—the Company fails to make any payment due on any indebtedness for borrowed money (including, without limitation, Bonds of any other series) in an amount aggregating in excess of $1,000,000, or any event shall occur or any conditions shall exist in respect of any such indebtedness of the Company, or under any agreement securing or relating to such indebtedness, the effect of which is (i) to cause (or permit any Holder of such indebtedness or a trustee to cause) such indebtedness, or a portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled date or dates of payment or (ii) to permit a trustee to elect a majority of the directors on the Board of Directors of the Company; and

        (7)   Undischarged Final Judgments—a final judgment or judgments for the payment of money aggregating in excess of $100,000 is or are outstanding against the Company and any one of such judgments has been outstanding for more than thirty (30) days from the date of its entry and has not been discharged in full or stayed."

11.   CONDEMNATION OF ENTIRE TRUST ESTATE.

        The parenthetical phrase in lines 5 and 6 of Section 8.10 [Condemnation of Entire Trust Estate] of the Original Indenture is hereby amended and restated in its entirety to read as follows:

"(other than the Series A Bonds, which shall only be redeemable pursuant to Section 3.03 [Redemption], the Series B Bonds, which shall only be redeemable pursuant to Section 16.03 [Redemption], the Series C Bonds, which shall only be redeemable pursuant to Section 17.03 [Redemption] and the Series D Bonds, which shall only be redeemable pursuant to Section 18.03 [Redemption])"

12.   INCIDENTS OF SALE.

        Section 9.05A [Incidents of Sale] of the Existing Indenture is hereby amended and restated to read, in its entirety, as follows:

        "A.    the principal, the Make-Whole Amount or other premium, if any, and accrued interest on all Outstanding Secured Bonds, if not previously due, shall at once become and be immediately due and payable;"

13.   NOTICE OF DEFAULTS.

        The proviso set forth in lines 7 through 14 of Section 10.02 [Notice of Defaults] of the Original Indenture is hereby amended to add the words "or Series D Bonds" immediately after the words "Series B Bonds or Series C Bonds." The proviso set forth in the last four lines of Section 10.02 [Notice of Defaults] of the Original Indenture is hereby amended and restated to read in its entirety as follows:

"PROVIDED, FURTHER, that in the case of any Default with respect to the Series A Bonds, Series B Bonds, Series C Bonds or Series D Bonds, the Trustee shall give written

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notice thereof to the Holders of, respectively, the Series A Bonds, Series B Bonds, Series C Bonds and Series D Bonds, as their names and addresses appear in the Bond Register, promptly after the Trustee has actual knowledge of such Default."

14.   SUPPLEMENTAL INDENTURES WITH CONSENT OF BONDHOLDERS.

        The proviso in lines 4 through 7 of the second to last paragraph of Section 13.02 [Supplemental Indentures with the Consent of Bondholders] of the Original Indenture is hereby amended and restated in its entirety to read as follows:

"; PROVIDED, HOWEVER, that the Trustee shall not at any time make any such determination with respect to the Series A Bonds, Series B Bonds, Series C Bonds or Series D Bonds, respectively, without the prior written consent of the Holders of a majority in principal amount of, respectively, the Series A Bonds, Series B Bonds, Series C Bonds or Series D Bonds, as the case may be, Outstanding at such time."

15.   EFFECTIVE DATE.

        As used herein, the Effective Date of this Fourth Amendment shall be that date upon which an executed and acknowledged counterpart of this Fourth Amendment is recorded in the Offices of the County Recorders of Los Angeles and Orange Counties, California.

16.   INDENTURE IN EFFECT.

        The Company and the Trustee agree and acknowledge that the Existing Indenture, as amended and supplemented by this Fourth Amendment, remains in full force and effect in accordance with its terms.

17.   COMPANY COVENANT TO PAY TRUSTEE FEES.

        By its signature hereto, the Company covenants and agrees to pay the reasonable fees and costs of the Trustee incurred or charged in connection with the review and execution of this Fourth Amendment and all other instruments described in Recital D to this Fourth Amendment.

18.   COUNTERPARTS AND INCLUSIONS IN INDENTURE.

        This Fourth Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute a single instrument. Upon recordation of this Fourth Amendment in the Offices of the County Recorders of Los Angeles and Orange Counties, California, this Fourth Amendment shall be and become a part of the Indenture and shall be construed as a part thereof. By its signature hereto, the Trustee authorizes the Company to record executed and acknowledged counterparts of this Fourth Amendment in the Offices of the County Recorders of Los Angeles and Orange Counties, California.

19.   SEPARABILITY CLAUSE.

        In case any provision in this Fourth Amendment shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions, and of the other provisions of the Indenture, shall not in any way be affected or impaired thereby.

20.   GOVERNING LAW.

        THIS FOURTH AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.

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        IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment and Supplement to Indenture of Mortgage and Deed of Trust Dated October 1, 1986, to be duly executed, with the Company's corporate seal to be hereunto affixed and attested, all as of the day and year first above written.

	SUBURBAN WATER SYSTEMS, Mortgagor
(SEAL)	By	Title:
	By	Title:
	U.S. BANK NATIONAL ASSOCIATION, as Trustee Mortgagee
	By	Authorized Officer

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STATE OF CALIFORNIA	)
	) SS.
COUNTY OF	)

        On                , 2004, before me,                        , Notary Public, personally appeared                        personally known to me (or proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity on behalf of which the person(s) acted, executed the instrument.

        WITNESS my hand and official seal.

(SEAL)
	Notary Public

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STATE OF CALIFORNIA	)
	) SS.
COUNTY OF	)

        On                , 2004, before me,                        , Notary Public, personally appeared                        personally known to me (or proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity on behalf of which the person(s) acted, executed the instrument.

        WITNESS my hand and official seal.

(SEAL)
Notary Public

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QuickLinks

Exhibit 4.5

EXHIBIT A (to Bond Purchase Agreement)
SUBURBAN WATER SYSTEMS FIRST MORTGAGE BOND Series D 5.64%, due October 1, 2024
EXHIBIT B1 (to Bond Purchase Agreement)
COMPANY COUNSEL'S CLOSING OPINION
EXHIBIT B2 (to Bond Purchase Agreement)
COMPANY PUC COUNSEL'S CLOSING OPINION
EXHIBIT B3 (to Bond Purchase Agreement)
TRUSTEE COUNSEL'S CLOSING OPINION
EXHIBIT B4 (to Bond Purchase Agreement)
PURCHASER COUNSEL'S CLOSING OPINION
EXHIBIT C1 (to Bond Purchase Agreement)
SUBURBAN WATER SYSTEMS CERTIFICATE OF OFFICERS
EXHIBIT C2 (to Bond Purchase Agreement)
SOUTHWEST WATER COMPANY CERTIFICATE OF OFFICERS
EXHIBIT D1 (to Bond Purchase Agreement)
SUBURBAN WATER SYSTEMS CERTIFICATE OF SECRETARY
ATTACHMENT A
RESOLUTIONS OF THE BOARD OF DIRECTORS SUBURBAN WATER SYSTEMS
ATTACHMENT B
BYLAWS OF THE COMPANY
ATTACHMENT C
CERTIFICATE OF INCORPORATION OF THE COMPANY
EXHIBIT D2 (to Bond Purchase Agreement)
SOUTHWEST WATER COMPANY CERTIFICATE OF SECRETARY
ATTACHMENT A
RESOLUTIONS OF THE BOARD OF DIRECTORS SOUTHWEST WATER COMPANY
Attachment B
BYLAWS OF SOUTHWEST WATER COMPANY
ATTACHMENT C
CERTIFICATE OF INCORPORATION OF SOUTHWEST WATER COMPANY
EXHIBIT E (to Bond Purchase Agreement)
FORM OF FOURTH SUPPLEMENTAL INDENTURE

EX-4.6D

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Exhibit 4.6d

RECORDING REQUESTED BY, AND
WHEN RECORDED, MAIL TO:

Sosi Biricik
Latham & Watkins LLP
600 West Broadway, Suite 1800
San Diego, California 92101-3375

INSTRUCTIONS TO COUNTY RECORDER:

Index this instrument as:

(i)

a Mortgage;



(ii)

a Fixture Filing; and



(iii)

a Deed of Trust.

NEW MEXICO UTILITIES, INC.

TO

WELLS FARGO BANK, N.A.,

TRUSTEE

THIRD AMENDMENT AND SUPPLEMENT TO INDENTURE OF MORTGAGE DATED FEBRUARY 14, 1992

[The Indenture to which this instrument is a supplement is a mortgage of both real and personal property, including chattels, and also constitutes, among other things, a security agreement creating a security interest in personal property. Such Indenture contains after-acquired property provisions. Such Indenture also contains an Agreement, in Section 9.04 thereof, by which New Mexico Utilities, Inc., as trustor, agrees to subject the real estate subject thereto to the terms of the Deed of Trust Act 48-10-1 to 48-10-21 NMSA 1978.]

        THIS THIRD AMENDMENT AND SUPPLEMENT TO INDENTURE OF MORTGAGE DATED FEBRUARY 14, 1992 (the "Third Amendment"), is made and entered into as of December 15, 2004, by and between NEW MEXICO UTILITIES, INC., a New Mexico corporation (the "Company"), and WELLS FARGO BANK, N.A., a national banking association (the "Trustee"), with respect to the following:

RECITALS

        A.    The Company executed that certain Indenture of Mortgage dated February 14, 1992 (the "Original Indenture") to Sunwest Bank of Albuquerque, National Association, which later became Nations Bank, N.A., a national banking association, as trustee, predecessor to Norwest Bank New Mexico, N.A., predecessor to Wells Fargo Bank New Mexico, N.A., predecessor to the Trustee. The Original Indenture was filed on March 31, 1992, as Document No. 92-222404, recorded in Book 92-5, Pages 9251 to 9380 in the Records of the County of Bernalillo, State of New Mexico.

        B.    The Original Indenture was amended pursuant to (i) that certain First Supplement to Indenture of Mortgage dated February 14, 1992 (the "First Amendment") dated as of May 15, 1992 and filed on July 8, 1992 as Document No. 92-68584, recorded in Book 92-16, Pages 1502-1508 in the Records of the County of Bernalillo, State of New Mexico and (ii) that certain Second Amendment and Supplement to Indenture of Mortgage dated February 14, 1992 (the "Second Amendment") dated as of October 21, 1996 and filed on November 4, 1996 as Document No. 96-120516, recorded in Book 96-29, Pages 6363-6385 in the Records of the County of Bernalillo, State of New Mexico. The Original Indenture, as amended and supplemented by the First Amendment and the Second Amendment, is hereinafter referred to as the "Existing Indenture," and the Existing Indenture as amended and supplemented by this Third Amendment is hereinafter referred to as the "Indenture."

        C.    The Company has requested that the Trustee enter into this Third Amendment setting forth the terms and conditions of the issuance of certain Bonds in the aggregate principal amount of $12,000,000, which Bonds shall be issued as "Series C" under and pursuant to the Indenture.

        D.    The Company has duly authorized the creation, execution and delivery of the Series C Bonds, and all things have been done which are necessary to make the Series C Bonds, when executed by the Company and authenticated and delivered by the Trustee under the Indenture and duly issued by the Company, the valid and binding obligations of the Company, and to constitute the Indenture a valid mortgage and deed of trust and a security agreement and contract for the security of the Bonds (including, without limitation, the Series C Bonds), in accordance with the terms of the Bonds and the Indenture. In addition, all other instruments and actions required pursuant to law and pursuant to the requirements of the Existing Indenture for the Trustee to execute and deliver this Third Amendment have been duly delivered or taken.

AMENDMENT

        IN CONSIDERATION of the foregoing recitals and pursuant to the authority granted under Section 13.01 of the Existing Indenture [Supplemental Indentures Without Consent of Bondholders], the Company and the Trustee agree that the Existing Indenture shall be amended in the following respects:

1.     DEFINITIONS.

        All terms used in this Third Amendment with initial capital letters and not defined herein shall have the meanings given to them in the Existing Indenture.

2.     GRANT OF REAL PROPERTY.

(a)

By its signature hereto, and to secure the payment of the principal of (and Make-Whole Amount, if any) and interest on the Outstanding Secured Bonds, and the performance of the covenants therein and in the Indenture contained, the Company by these presents does grant,

bargain, convey, assign, transfer, mortgage, pledge, set over and confirm to the Trustee, In Trust, With Power Of Sale, all of the real property located in the County of Bernalillo, State of New Mexico, and more particularly described on Exhibit "1" to this Third Amendment as if set forth in this grant in full, together with all buildings, structures, improvements and other appurtenances situated thereon or therein.

(b)

Exhibit "A" to the Existing Indenture is hereby amended to add thereto those certain real properties described on Exhibit "1" to this Third Amendment.

3.     ORIGINAL ISSUANCE OF SERIES C BONDS.

        There is hereby added to the Existing Indenture a new Article, to be entitled Article XVII and which shall read in its entirety as follows:

"ARTICLE XVII
TERMS AND ISSUE OF SERIES C BONDS

Section 17.01.    Specific Title, Terms and Forms.    There shall be a third series of Bonds entitled "First Mortgage Bonds, Series C 6.10%, due December 1, 2024" (herein called the "Series C Bonds"). The form thereof shall be substantially as set forth in Article II with such insertions, omissions, substitutions and variations as may be determined by the officers executing the same as evidenced by their execution thereof to reflect the applicable terms of the Series C Bonds established by this Article. The precise form of the Series C Bonds shall be as set forth in Exhibit A to the separate Bond Purchase Agreements (the "Purchase Agreement") dated as of December 15, 2004 between the Company, Southwest Water Company and each Purchaser named therein pursuant to which the Series C Bonds are sold and the Trustee is authorized to refer to such Purchase Agreement when any Series C Bonds are presented to the Trustee for authentication.

        The Stated Maturity of the Series C Bonds shall be December 1, 2024, and the aggregate principal amount thereof which may be authenticated and delivered and Outstanding is limited to $12,000,000.

        The Series C Bonds may be issued only as registered Bonds in denominations of $1,000 and any multiple thereof. The Series C Bonds shall bear interest from the later of the initial issuance of the Series C Bonds or the most recent Interest Payment Date to which interest has been paid or duly provided for. The Series C Bonds shall bear interest payable semi-annually on June 1 and December 1 of each year (the Interest Payment Dates of the Series C Bonds), at the rate of 6.10% per annum until the principal thereof shall be paid or duly provided for; provided that interest on any overdue principal, overdue Redemption Price, and (to the extent permitted by applicable law) overdue interest, shall accrue at a rate equal to the lesser of (a) the highest rate allowed by applicable law or (b) 7.10% per annum. Interest shall be computed on the basis of a 360 day year of twelve 30 day months. In no event shall the interest payable on any Series C Bonds (including any interest on overdue interest or any overdue Redemption Price) exceed the maximum amount which the Holder thereof may legally collect under the then applicable usury law. In the event that it is hereafter determined by a court of competent jurisdiction that the interest payable under any Series C Bond (including any interest on any overdue Redemption Price or overdue interest) is in excess of the amount which the Holder thereof may legally collect under the then applicable usury law, then (i) all interest actually paid (including any interest on overdue interest or any overdue Redemption Price) in excess of the maximum amount legally collectible by such Holder shall be applied to the payment of principal of such Series C Bond or, if all principal shall previously have been paid, promptly repaid by such Holder to the Company, and (ii) interest on such Series C Bond (including any interest on overdue interest or any overdue Redemption Price) subsequent to the date of such determination shall be reduced to the maximum amount which it is determined that the Holder may collect under the then applicable usury law.

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        Notwithstanding the provisions of Section 5.05 [Deposit of Redemption Price] or other provisions in the Indenture to the contrary, the principal and the Redemption Price of, and the interest on, the Series C Bonds shall be payable by depositing such amounts, before 12:00 noon, New York time, by federal funds bank wire transfer, in the account of each Bondholder of the Series C Bonds in any bank in the United States as may be designated in a written notice to the Company by such Bondholder, or in such other manner as may be directed, or to such other address in the United States as may be designated, in writing by such Bondholder. The addresses on Annex 1 to the Purchase Agreement with respect to the initial purchasers of the Series C Bonds shall be deemed to constitute notice, direction or designation (as appropriate) to the Company with respect to direct payments to such purchasers as aforesaid. With regard to any Series C Bond, the bank designated pursuant to this paragraph with respect to such Series C Bond shall be the Place of Payment in respect of such Series C Bond.

        The Regular Record Date referred to in Section 2.10 [Payment of Interest on Bonds; Interest Rights Preserved] for the payment of the interest payable on the Series C Bonds, and punctually paid or duly provided for, on any Interest Payment Date shall be the 15th day (whether or not a Business Day) of the calendar month next preceding such Interest Payment Date.

        If any payment due on, or with respect to, any Series C Bonds shall fall due on a day other than a Business Day, then such payment shall be made on the first Business Day following the day on which such payment shall have so fallen due; provided that if all or any portion of such payment shall consist of a payment of interest, for purposes of calculating such interest, such payment shall not be deemed to have been originally due on such first following Business Day, and such interest shall accrue and be payable only to the Interest Payment Date.

Section 17.02.    Exchangeability.    Subject to Section 2.08 [Registration, Transfer and Exchange], all Series C Bonds shall be fully interchangeable, and, upon surrender at the office or agency of the Company which the Company maintains pursuant to Section 6.02 [Maintenance of Office or Agency] and delivery by the Company to the Bond Registrar, shall be exchangeable for other Series C Bonds of a different authorized denomination or denominations, as requested by the Holder surrendering the same. The Company will execute, and the Trustee shall authenticate and deliver, Series C Bonds whenever the same are required for any such exchange.

Section 17.03.    Redemption.

        A.    The Series C Bonds are subject to redemption, in whole or in part, before their Stated Maturity in the following events and in the manner provided in Article V [Redemption of Bonds]:

(1)

At any time after issuance, at the option of the Company evidenced by a Board Resolution, in an amount not less than 5% of the aggregate principal amount of the Series C Bonds Outstanding in the case of a partial redemption, at a Redemption Price equal to 100% of the principal amount of the Series C Bonds to be redeemed, together with the Make-Whole Amount at such time (as shall be calculated by the Company which calculations shall be set forth in an Officers' Certificate delivered to each Holder of Series C Bonds and to the Trustee two (2) Business Days prior to the date of Redemption) and interest accrued to the Redemption Date, on a Redemption Date specified by the Company in compliance with Section 5.02 [Election to Redeem; Notice to Trustee]; and



(2)

From Major Event Proceeds, at a Redemption Price equal to 100% of the principal amount of Bonds to be redeemed, together with interest accrued to the Redemption Date, and on a Redemption Date that is the first date for which notice of redemption can be given by the Trustee as provided in Article V [Redemption of Bonds]; provided that such redemption may only be made if the Series C Bonds are redeemed pro rata with all other Outstanding Bonds of whatever series.

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        B.    Notwithstanding the last sentence of the first paragraph of Section 5.04 [Notice of Redemption] and the first sentence of the second paragraph of Section 1.04 [Notices to Bondholders; Waiver], the giving of notice of redemption to each Holder of a Series C Bond, as provided in Section 5.04, shall be a condition precedent to the Company's right to redeem Series C Bonds in accordance with the foregoing clauses A(1) and A(2) of this Section 17.03. Any notice of redemption to any Holder of Series C Bonds for a redemption pursuant to clause A(1) of this Section 17.03 shall be accompanied by an Officers' Certificate as to the estimated Make-Whole Amount due in connection with such redemption (calculated as if the date of such notice were the date of such redemption) setting forth the details of such computation.

        C.    Notwithstanding the provisions of Section 5.03 [Selection by Trustee of Bonds to Be Redeemed], if there is more than one Holder of the Series C Bonds, the aggregate principal amount of each required or optional partial redemption of the Series C Bonds shall be allocated in units of $1,000 or multiples thereof among the Holders of the Series C Bonds at the time Outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts of the Series C Bonds then Outstanding held by each such Holder of Series C Bonds, with adjustments, to the extent practicable, to equalize for any prior redemptions not in such proportion.

        D.    Notwithstanding the second sentence of Section 5.06 [Bonds Payable on Redemption Date] or the provisions of Section 5.07 [Bonds Redeemed in Part], no Holder of any Series C Bonds shall be required to surrender such Bond to any Person, or to file, or cause to be filed, with the Trustee any agreement or certificate required by Section 5.07, prior to receiving any payment thereon or in respect thereof; provided, however, that upon payment of the principal or the Redemption Price in full, and interest on and all other amounts in respect of such Series C Bond, the Holder thereof shall promptly thereafter surrender such Series C Bond to the Company and the Company shall deliver such redeemed Bonds to the Bond Registrar for cancellation. Any such Series C Bond so surrendered shall be cancelled and shall not be reissued, and no new Series C Bond shall be issued in lieu of such surrendered Series C Bond.

        E.    The Series C Bonds may be redeemed from Trust Moneys, as provided in Section 8.04 [Retirement of Bonds], including from moneys received by the Trustee as a result of casualty or condemnation, as provided in Articles VII [Possession and Release of Property] and VIII [Application of Trust Moneys], but only at the time, in the manner and at the Redemption Price specified in clauses (A)(1) and (2) of this Section 17.03. If the Series C Bonds shall be redeemed under Section 17.03A(2), then said Series C Bonds shall be redeemed pro rata with the Series B Bonds and any other Bonds having the benefit of a redemption provision substantially identical to that contained in Section 17.03A(2), in proportion, as nearly as practicable, to the respective unpaid principal amounts of all such Bonds Outstanding on the Redemption Date.

Section 17.04.    Payment of Optional Redemption Price.    If the giving of notice of optional redemption shall have been completed as required in Article V [Redemption of Bonds], the Series C Bonds or portions of such Series C Bonds specified in such notice shall become due and payable on the Redemption Date at the applicable Redemption Price set forth in Section 17.03. On and after the Redemption Date (unless the Company shall default in the payment of such Bonds on the Redemption Date) interest on the Series C Bonds or the portions of the Series C Bonds so called for redemption shall cease to accrue.

        If any Holder of any Series C Bond which is redeemed in part only shall present such Bond to the Company, the Company shall execute and the Trustee shall authenticate and deliver to such Holder, at the expense of the Company, a new Series C Bond or Bonds in aggregate principal amount equal to the unredeemed portion of the Series C Bond so presented.

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Section 17.05.    Authentication and Delivery.    Upon the execution and delivery of this Third Amendment, the Company shall execute and deliver to the Trustee, and the Trustee shall authenticate, the Series C Bonds and deliver them to the purchasers thereof as instructed by the Company.

        Prior to the delivery by the Trustee of the Series C Bonds there shall be filed with the Trustee original executed counterparts of this Third Amendment, the Purchase Agreement, the Title Policies or commitments for issuance thereof, evidence of recording of this Third Amendment in the land records of Bernalillo County, New Mexico and all other documents required by the Indenture as a condition to the issuance of the Series C Bonds."

Section 17.06.    Consent of Holders of Series C Bond to Supplemental Indentures under Section 13.02.   
Supplemental Indentures referred to in the first sentence of Section 13.02 [Supplemental Indentures with Consent of Bondholders] which affect the Holders of the Series C Bonds shall require the consent of the Holders of not less than 70% in principal amount of the Series C Bonds then outstanding.

4.     CERTAIN AMENDMENTS TO ARTICLE I.

        (a)Make-Whole Amount Definitions.    Section 1.01 [Definitions] of the Existing Indenture is hereby amended by adding the following definition of Make-Whole Amount for the Series C Bonds and the following related definitions:

"Make-Whole Amount" means, with respect to any Series C Bond, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Bond over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings:

"Called Principal" means, with respect to any Series C Bond, the principal of such Bond that is to be redeemed pursuant to Section 17.03 [Redemption] or has become or is declared to be immediately due and payable pursuant to Section 9.02 [Acceleration of Maturity; Recission and Annulment], as the context requires.

"Discounted Value" means, with respect to the Called Principal of any Series C Bond, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Series C Bonds is payable) equal to the Reinvestment Yield with respect to such Called Principal.

"Reinvestment Yield" means, with respect to the Called Principal of any Series C Bond, .50% plus the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display page of the Bloomberg Financial Markets Services Screen PX1 or the equivalent screen provided by Bloomberg Financial Markets Commodities News for actively traded U.S. Treasury Securities having a maturity equal to the Remaining Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice

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and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the maturity closest to and greater than the Remaining Life and (2) the actively traded U.S. Treasury security with the maturity closest to and less than the Remaining Life.

"Remaining Life" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) from the Settlement Date to the maturity of the Series C Bonds.

"Remaining Scheduled Payments" means, with respect to the Called Principal of any Series C Bond, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Series C Bonds, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to this provision.

"Settlement Date" means, with respect to the Called Principal of any Series C Bond, the date on which such Called Principal is to be redeemed pursuant to Section 17.03 [Redemption] or Section 9.02 [Acceleration of Maturity; Recission and Annulment], as the context requires.

        (b)Definition of Officers' Certificate.    The definition of "Officers' Certificate" contained in Section 1.01 [Definitions] of the Existing Indenture is hereby amended to read in its entirety as follows:

        "Officers' Certificate" means a certificate signed by (a) either the Chairman of the Board, the President or a Vice President and (b) by either the Treasurer or the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. Wherever this Indenture requires that an Officers' Certificate must be signed also by an Engineer or an Accountant or other expert, such Engineer, Accountant or other expert may (except as otherwise expressly provided in this Indenture) be in the employ of the Company and shall be acceptable to the Trustee."

        (c)Definition of Place of Payment.    The definition of "Place of Payment" contained in Section 1.01 [Definitions] of the Existing Indenture is hereby amended to read, in its entirety, as follows:

"Place of Payment" means, (a) when used with respect to the Series B Bonds (except as provided in clause (c) below), the place for payment of the principal, Make-Whole Amount, if any, and interest upon the Series B Bonds designated in Section 16.01; (b) when used with respect to the Series C Bonds (except as provided in clause (c) below), the place for payment of the principal, Make-Whole Amount, if any, and interest upon the Series C Bonds designated in Section 17.01; and (c) with respect to any exchange of Series B Bonds pursuant to Section 16.02 [Exchangeability], with respect to any exchange or surrender for redemption of any Series C Bonds pursuant to Section 17.02 [Exchangeability] and with respect to Bonds of any other series means a city or any political subdivision thereof in which the Company is by this Indenture required to maintain an office or agency pursuant to Section 6.02 [Maintenance of Office or Agency].

        (d)Definition of Prior Lien.    The second line of the definition of "Prior Lien" contained in Section 1.01 [Definitions] of the Existing Indenture is hereby amended by adding the word "to" after the words "Exhibit A".

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        (e)Section 1.03    Notices.    Section 1.03 [Notices Etc. to Trustee and Company] is amended to restate the first address set forth in Section 1.03B to read as follows:

c/o Southwest Water Company
One Wilshire Building
624 South Grand Avenue,
Suite 2900
Los Angeles, California 90017

        (f)Section 1.13.    Section 1.13 [Deed of Trust Act Notices] of the Existing Indenture is hereby restated in its entirety to read as follows:

        "Section 1.13. Deed of Trust Act Notices. For the purpose of complying with Section 48-10-5C of the Deed of Trust Act, the addresses for notices pursuant to the Deed of Trust Act of the Trustee, the trustor (i.e., the Company) and each beneficiary (i.e., each holder of Bonds issued and outstanding pursuant to this Indenture) shall be as follows:

(a) Trustee:	Wells Fargo Bank, N.A. Corporate Trust and Escrow Services 1740 Broadway, MAC C7300-107 Denver, Colorado 80274 Attn: Trustee for New Mexico Utilities, Inc.
(b) Trustor:	New Mexico Utilities, Inc. c/o Southwest Water Company One Wilshire Building 624 South Grand Avenue, Suite 2900 Los Angeles, California 90017 Attn: Chief Financial Officer
(c) Each Beneficiary:      (Bondholder)	Wells Fargo Bank, N.A. Corporate Trust and Escrow Services 1740 Broadway, MAC C7300-107 Denver, Colorado 80274 Attn: Bondholders of New Mexico Utilities, Inc.

        Service of such notices pursuant to the Deed of Trust Act shall be in accordance with the provisions thereof."

5.     AMENDMENTS TO ARTICLE II.

        (a)Section 2.01.    Section 2.01 [General Limitations; Issuable in Series] of the Existing Indenture is hereby restated in its entirety to read as follows:

"Section 2.01. General Limitations; Issuable in Series. The aggregate principal amount of Bonds which may be authenticated and delivered and Outstanding under this Indenture is not limited, except as provided in Articles III [Terms and Issue of Series A Bonds] and IV [Authentication and Delivery of Additional Bonds] and the provisions of this Indenture creating any series of Bonds.

        The Bonds may be issued in series as from time to time authorized by the Board of Directors."

        (b)Section 2.08.    The last paragraph of Section 2.08 [Registration, Transfer and Exchange] of the Existing Indenture is hereby amended to read, in its entirety, as follows:

        "The Company shall not be required (i) to issue, transfer or exchange any Bond of any series (other than a Series B Bond or Series C Bond) during a period beginning at the opening of

7

business 15 days before the day of the first mailing of a notice of redemption of Bonds of such series under Section 5.04 [Notice of Redemption] and ending at the close of business on the day of such publication or mailing, or (ii) to transfer or exchange any Bond (other than a Series B Bond or Series C Bond) so selected for redemption in whole or in part, or (iii) to exchange any Bond (other than a Series B Bond or Series C Bond) during a period beginning at the opening of business on any Regular Record Date for such series and ending at the close of business on the relevant Interest Payment Date therefor. If and to the extent so provided with respect to the Bonds of any particular series, the Company shall, at the option of the Holder of a Bond of any series as to which the Company shall have delivered a notice of redemption under Section 5.04 [Notice of Redemption], be required to transfer or exchange any such Bond which has been selected in whole or in part for redemption upon surrender thereof at the office or agency of the Company in a Place of Payment therefor, provided that the Trustee may make such arrangements as it deems appropriate for notation on each new Bond issued in exchange for or upon the transfer of the Bond so selected for redemption of an appropriate legend to the effect that such new Bond has been so selected for redemption."

        (c)Section 2.09.    The proviso in lines 6 through 9 of the first paragraph of Section 2.09 [Mutilated, Destroyed, Lost and Stolen Bonds] of the Existing Indenture is hereby amended to delete the words "Series A Bond or Series B Bond" and replace them with the words "Series B Bond or Series C Bond."

6.     BONDABLE CAPACITY.

        (a)Definition of Bondable Capacity.    The definition of Bondable Capacity appearing in Section 4.02A of the Existing Indenture is hereby amended and restated to read, in its entirety, as follows:

"Bondable Capacity" means a dollar amount, calculated as of the date of certification of Bondable Capacity, equal to (a) the sum of:

(i)

the Adjusted Amount of Bondable Property; plus



(ii)

the Amount of Property Additions not previously included in any Summary Certificate of Bondable Capacity; less



(iii)

the amount of Retirements not previously included in any Summary Certificate of Bondable Capacity less the sum of the credits specified in Section 4.02B(2)(c) and (e) against such Retirements; less



(iv)

the sum of the withdrawals and releases specified in Section 4.02B(2)(d) and not previously included in any Summary Certificate of Bondable Capacity;

less (b) 154% of the aggregate principal amount of any Bonds Outstanding as of the date of such certification, and less (c) the outstanding principal amount of any Prior Lien Obligations.

        (b)Certificate of Bondable Capacity.    Clause 2 of Section 4.02B [Requested Use of Bondable Capacity] is hereby amended as follows:

          (i)  Subclauses (c) through (i), inclusive, appearing therein are hereby amended and restated in their entirety to read as follows:

        "(c)    The aggregate amount (Item 3(a) in the Summary Certificate of Bondable Property) of all Retirements during the period from the date to which Retirements had been included in Item 3(a) of the most recent Summary theretofore filed with the Trustee (or the Cut-Off Date in the case of the second such Certificate) to the later of (i) a date not earlier than the 90th day before the date of the related Application and (ii) the terminal date in the period specified pursuant to Subclause (b) above.

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        The credits (Item 3(b) in the Summary Certificate of Bondable Capacity) against Retirements, which shall equal, subject to the provisions of the last sentence of Subclause (e) below, the sum of the following:

          (i)  the excess of credits against Retirements carried forward from the most recent Certificate, as provided in the last sentence of Subclause (e) below;

         (ii)  the aggregate amount of cash and purchase money and governmental obligations delivered to the Trustee and Bondable Capacity certified to the Trustee for use as a basis for releases under Section 7.02 [Releases] during the period covered by Subclause (c) above; and

        (iii)  all insurance moneys received by the Trustee pursuant hereto or paid to a trustee, mortgagee or other holder under a Prior Lien during the period covered by Subclause (c) above on account of the damage, loss or destruction of any Bondable Property.

        (d)   The withdrawals and releases (Item 5 in the Summary Certificate of Bondable Capacity) shall equal the sum of the following actions applied for after the Cut-Off Date through the date of such Certificate (excluding the action applied for in such Certificate) and not included as a deduction in Item 5 of any previous Summary Certificate of Bondable Capacity: (i) 100% of any Deposited Cash withdrawn under Section 4.05 [Withdrawal of Deposited Cash], (ii) 100% of any Trust Moneys withdrawn under Section 8.02 [Withdrawal of Basis of Bondable Capacity] and (iii) 100% of any Bondable Property used as a basis for the release of any of the Trust Estate under Section 7.02 [Releases].

        (e)   The new Adjusted Amount of Bondable Property (Item 6 in the Summary Certificate of Bondable Capacity) which shall be determined by subtracting the sum of (i) the net amount of Retirements (Item 4) plus (ii) withdrawals and releases (Item 5) from the sum of Items 1 and 2. The net amount of Retirements (Item 4) shall be determined by deducting the credits shown pursuant to Subclause (c) above (Item 3(b)) from the aggregate amount of Retirements shown pursuant to Subclause (c) above (Item 3(a)). If in any case the credits against Retirements exceed the aggregate amount of Retirements shown pursuant to Subclause (c) above (Item 3(a)), the net amount of Retirements for the purpose of this Subclause shall be deemed to be zero, but such excess of credits against Retirements may be carried forward and used as a credit against Retirements in the next Certificate.

        (f)    The gross Bondable Capacity (Item 7 in the Summary Certificate of Bondable Capacity) is the new Adjusted Amount of Bondable Property shown pursuant to Subclause (e) above (Item 6).

        (g)   154% of the aggregate principal amount of Bonds Outstanding and the principal amount of outstanding Prior Lien Obligations (Items 8 and 9 of the Summary Certificate of Bondable Capacity) as of the date of the Certificate.

        (h)   The net Bondable Capacity shall be derived by subtracting the sum of Items 8 and 9 from gross Bondable Capacity (Item 7). Net Bondable Capacity shall not be less than one of the following amounts which shall be specified in Item 11 of the Summary Certificate of Bondable Capacity:

          (i)  154% of the aggregate principal amount of any additional Bonds whose authentication and delivery are then being applied for under this Section, or

         (ii)  100% of the following applicable amount then being applied for under this Section: (x) the amount of any Deposited Cash then being withdrawn under Section 4.05 [Withdrawal of Deposited Cash], (y) the amount of Trust Moneys then being withdrawn

9

under Section 8.02 [Withdrawal on the Basis of Bondable Capacity] and (z) any Bondable Property which is then being used as a basis for a release under Section 7.02 [Releases].

          (i)  The net Bondable Capacity remaining after the action applied for (Item 12) shall be derived by subtracting from the net Bondable Capacity specified in Item 10, 154% of the amount of the action applied for specified in Subclause (h)(i) above, or (ii) 100% of the amount of the action applied for specified in Subclause (h)(ii), whichever shall be applicable."

         (ii)  The form of Summary Certificate of Bondable Capacity appearing therein is hereby amended and restated in its entirety to read as follows:

*****************************************

SUMMARY CERTIFICATE OF BONDABLE CAPACITY

No.                                      

        The undersigned hereby certify that the following is a true summary of the Certificate:

Start with:

1.	The Adjusted Amount of Bondable Property listed in Item 6 of the next previous Certificate (Certificate No.    )		$
Then take the new gross Property Additions as shown in Item 2 below:
2.	Amount of additional Property Additions now certified, being the Amount of all or some Property Additions in the period from            through            (none of which has been certified in any previous Certificate of Bondable Capacity)		$
Then determine the deduction for Retirements by deducting Item 3(b) below from Item 3(a) below to produce item 4:
3.	Net Retirements are determined as follows:
	3(a).	The aggregate amount of all Retirements occurring in the period from            through            (none of which has been certified in any previous Certificate of Bondable Capacity)	$
	3(b).	The sum of the credits against such Retirements (amounts greater than item 3(a) may be carried forward to next Certificate)	$
4.	The net amount of Retirements to be deducted (not less than zero)		$
Then determine the amount of withdrawals and releases not previously deducted:
5.	The sum of the following withdrawals and releases applied for after the Cut-off Date and through the date of this Certificate (but not including the action applied for herein) (none of which has been included in this item 5 of any previous Certificate of Bondable Property): (i) 100% of the amount of any Deposited Cash withdrawn under Section 4.05 [Withdrawal of Deposited Cash], (ii) 100% of any Trust Moneys withdrawn under Section 8.02 [Withdrawal on Basis of Bondable Capacity] and (iii) 100% of any Bondable Property used as a basis for the release of any of the Trust Estate under Section 7.02 [Releases]		$
Then determine the new Adjusted Amount of Bondable Property now being certified by deducting the sum of items 4 and 5 from the sum of items 1 and 2 to produce item 6:
6.	New Adjusted Amount of Bondable Property now being certified		$

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Item 6 is the new gross Bondable Capacity and should be entered as item 7:
7.	Gross Bondable Capacity	$
Deduct the sum of Items 8 and 9 from Item 7 to produce Item 10:
8.	154% of the aggregate principal amount of Bonds Outstanding	$
9.	Principal amount of Prior Lien Obligations	$
10.	Net Bondable Capacity available for the action applied for	$
Deduct Item 11 from Item 10 to produce Item 12:
11.	Amount of the action applied for: (a) 154% of the aggregate principal amount of the Bonds to be issued or (b) 100% of the following amount then being applied for: (i) the withdrawal of Deposited Cash under Section 4.05, (ii) withdrawal of Trust Moneys under Section 8.02, or (iii) using Bondable Property as the basis for the release of any of the Trust Estate under Section 7.02	$
12.	Net Bondable Capacity remaining after subtracting the amount in Item 11 from Item 10	$
13.	Principal amount of Bonds available to be issued (65% of Item 12)	$

Dated:            ,            .
	(Title)
	(Title)
	(Engineer)
	(Accountant)

**************************************************

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7.     LEGAL OPINIONS.

        (a)    Section 4.02B(7) Opinion.    The opinion required by Subclause B(7) of Section 4.02 is hereby amended by changing the period at the end of Subclause B(7)(e) to a semicolon and adding the following proviso to said Subclause B(7):

"; provided that (i) the opinions in Subclause B(7)(a) and (b) and (ii) the opinion in Subclause B(7)(d) with respect to the Indenture being a lien on specific Property Additions valid against subsequent transferees (collectively the "Real Estate Opinions") may be satisfied by an Officers' Certificate addressed to the Trustee and signed also by an Engineer certifying as to the matters set forth in such Real Estate Opinions and made in reliance upon Title Policies, UCC searches and any certificates, opinions and other documents deemed appropriate by the signers of such Officers' Certificate."

        (b)Section 6.05A Opinion.    The opinion required by Clause A of Section 6.05 is hereby amended by restating the parenthetical in Clause A which permits the opinion to be rendered in reliance on one or more policies of title insurance to read as follows:

"... (which opinion may be rendered in reliance on one or more policies of title insurance or on being informed by a title insurance company issuing any such policy and on UCC Searches)..."

8.     COVENANTS.

        (a)Maintenance of Office or Agency.    The first two sentences of Section 6.02 [Maintenance of Office or Agency] of the Indenture are hereby amended to read as follows:

        "The Company will maintain an office or agency in the vicinity of Los Angeles, California where Bonds may be presented or surrendered for payment, where Bonds entitled to be registered, transferred, exchanged or converted may be presented or surrendered for registration, transfer, exchange or conversion and where notices and demands to or upon the Company in respect of the Bonds and this Indenture may be served. The address of the Company's office or agency is One Wilshire Building, 624 South Grand Avenue, Suite 2900, Los Angeles, California 90017 and the Company agrees to give prompt written notice to the Trustee and each Bondholder of any change in the location of such office or agency."

        (b)Dividend Covenant for Series C Bondholders.    In consideration of and in connection with the issuance of the Series C Bonds, the Company makes the following additional covenant in favor of the Series C Bondholders (but not the Series B Bondholders or the Bondholders of any subsequent series of Bonds, if any):

Dividend Covenant.    Section 6.14 [Payment of Dividends] of the Existing Indenture is hereby amended by adding the following to the end of the first paragraph thereof:

        "In addition to the foregoing, for so long as any of the Series C Bonds are Outstanding the Company will not declare or make or incur any liability to make any Distribution in respect of the common stock of the Company if, immediately after giving effect to the proposed Distribution, the aggregate amount of Distributions in respect of its common stock made during the period subsequent to December 31, 2003 would exceed: the sum of (a) $7,751,000, plus (b) 90% of the aggregate Net Income (or 100% of Net Income if Net Income shall be a deficit) accrued subsequent to December 31, 2003."

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        (c)Financial Reports to Series C Bondholders.    Article VI [Covenants] of the Existing Indenture is hereby amended by adding thereto a new Section, to be entitled Section 6.16 and to read in its entirety as follows:

"Section 6.16. Financial Reports to Series C Bondholders.    For so long as any of the Series C Bonds are Outstanding, the Company shall furnish to each of the Series C Bondholders at their addresses for notices pursuant to Section 1.04 [Notices to Bondholders; Waiver] all financial statements and information, notices, reports and other information required pursuant to, and otherwise comply with each of, the provisions of Section 4.1 (together with any successor provision, and as such provision or successor provision may be amended from time to time) of the Purchase Agreement pursuant to which the Series C Bonds were originally sold, which provisions are incorporated by reference herein, mutatis mutandis, with the same effect as if set forth herein."

9.     CONDEMNATION OF ENTIRE TRUST ESTATE.

        The parenthetical phrase beginning in line 6 of Section 8.10 [Condemnation of Entire Trust Estate] of the Existing Indenture following the words "Outstanding Secured Bonds" is hereby amended and restated in its entirety as follows:

        "(other than the Series B Bonds, which shall only be redeemable pursuant to Section 16.03 [Redemption] and the Series C Bonds, which shall only be redeemable pursuant to Section 17.03 [Redemption])"

10.   EVENTS OF DEFAULT.

        Section 9.01 [Events of Default] of the Existing Indenture is hereby amended by adding thereto a new subsection 9.01C, to read, in its entirety, as follows:

        "C. "Event of Default' with respect to the Series C Bonds only means any one of the events specified in Sections (1), (2), (3), (4), (5), (8), (9) and (10) of clause A of this Section 9.01 or any one of the following events (whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

        (1)   Principal or Premium Payments—the Company fails to make any payment of principal, Make-Whole Amount or other premium on any Series C Bond when such payment is due; or

        (2)   Other Defaults—the Company fails to comply with any other provision of this Indenture or the Purchase Agreement pursuant to which the Series C Bonds were sold, and such failure continues for more than 30 days after such failure shall first become known to any officer of the Company;

        (3)   Warranties or Representations—any warranty, representation or other statement by the Company or by Southwest Water Company, a Delaware corporation, contained in this Indenture, the Purchase Agreement pursuant to which the Series C Bonds were sold or in any instrument or certificate furnished by the Company in compliance with this Indenture or the Purchase Agreement pursuant to which the Series C Bonds were sold is false or misleading in any material respect."

13

11.   ACCELERATION OF MATURITY.

        The first paragraph of Section 9.02 [Acceleration of Maturity; Rescission and Annulment] of the Existing Indenture is hereby amended and restated to read, in its entirety, as follows:

        "If an Event of Default occurs and is continuing with respect to any series of Bonds, in the case of an Event of Default specified in any of clauses (3) through (10), inclusive, of Section 9.01A [Events of Default] or in clauses (1) through (3) of Section 9.01B or 9.01C, upon written request of the Holders of not less than 50% in principal amount of the Bonds Outstanding of such series, the Trustee shall declare the principal of and interest on all the Bonds of such series to be due and payable immediately, by a notice in writing to the Company, and upon any such declaration the Company will pay to the Holders of the Bonds of such series the whole amount then due and payable on such Bonds for interest and principal, and the Make-Whole Amount or other premium, if any, for such series and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. In the case of an Event of Default specified in either clause (1) or clause (2) of Section 9.01A [Events of Default], all principal, interest and the Make-Whole Amount or other premium, if any, for each series of Bonds then outstanding shall become immediately due and payable, without any further action on the part of the Trustee or any Holder."

12.   INCIDENTS OF SALE.

        Section 9.05A [Incidents of Sale] of the Existing Indenture is hereby amended and restated to read, in its entirety, as follows:

        "A. The principal of, the Make-Whole Amount or other premium, if any, and accrued interest on all Outstanding Secured Bonds, if not previously due, shall at once become and be immediately due and payable."

13.   APPLICATION OF MONEY COLLECTED.

        Section 9.07 [Application of Money Collected] is hereby amended by deleting the existing Subsections "B", "C" and "D" in their entirety and replacing them with the following Subsections "B" and "C" to read as follows:

        "(B)    Second: To the payment of the whole amount then due and unpaid upon the Outstanding Secured Bonds, for principal, Make-Whole Amount or other premium, if any, interest and all other amounts then due and owing in respect of such Outstanding Secured Bonds, whether pursuant to this Indenture, a Purchase Agreement or otherwise, in respect of which or for the benefit of which such money has been collected, with interest (to the extent that such interest has been collected by the Trustee or a sum sufficient therefor has been collected and payment thereof is legally enforceable at the respective rate or rates prescribed therefor in the Bonds) of the several series on overdue principal, Make-Whole Amount or other premium, if any, interest and other such obligations; and in the case such proceeds shall be insufficient to pay in full the whole amount so due and unpaid upon such Bonds, then to the payment of such principal, Make-Whole Amount or other premium, interest and other obligations, without any preference or priority, ratably according to the aggregate amount so due (except that any money collected by the Trustee pursuant to Sections 7.08 in respect of interest or income and 9.03 shall first be applied to the payment of interest so due); and

        (C)    Third: To the payment of the remainder, if any, to the Company or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct."

14

14.   NOTICE OF DEFAULTS.

        (a)   The proviso set forth in lines 9 through 18 of Section 10.02 [Notice of Defaults] of the Existing Indenture is hereby amended to delete the words "Series A Bonds or Series B Bonds" and replace them with the words "Series B Bonds or Series C Bonds." The last two provisos set forth in the last ten lines of Section 10.02 [Notice of Defaults] of the Existing Indenture are hereby amended and restated to read in their entirety as follows:

        "PROVIDED FURTHER, that in the case of any Default of the character specified in Section 9.01(A)(6) (Events of Default), except as specified in the next succeeding provision, no such notice to Bondholders shall be given until 30 days after the occurrence thereof; and, Provided Further, that in the case of any Default with respect to the Series B Bonds or Series C Bonds, the Trustee shall give written notice thereof to the Holders of, respectively, the Series B Bonds and Series C Bonds, as their names and addresses appear in the Bond Register, promptly after the Trustee has actual knowledge thereof."

15.   SUPPLEMENTAL INDENTURES WITH CONSENT OF BONDHOLDERS.

        The proviso in lines 5 through 9 of the second to last paragraph of Section 13.02 [Supplemental Indentures with Consent of Bondholders] of the Existing Indenture is hereby amended and restated to read, in its entirety, as follows:

        "; Provided, However, that the Trustee shall not at any time make any such determination with respect to the Series B Bonds or Series C Bonds, respectively, without the prior written consent of the Holders of at least 66²/3% in principal amount of the Series B Bonds or (ii) at least 70% in principal amount of the Series C Bonds, as the case may be, Outstanding at such time."

16.   EFFECTIVE DATE.

        As used herein, the Effective Date of this Third Amendment shall be that date upon which an executed and acknowledged counterpart of this Third Amendment is recorded in the Office of the County Recorder of Bernalillo County, New Mexico.

17.   INDENTURE IN EFFECT.

        The Company and the Trustee agree and acknowledge that the Existing Indenture, as amended and supplemented by this Third Amendment, remains in full force and effect in accordance with its terms.

18.   COMPANY COVENANT TO PAY TRUSTEE FEES.

        By its signature hereto, the Company covenants and agrees to pay the reasonable fees and costs of the Trustee incurred or charged in connection with the review and execution of this Third Amendment and all other instruments described in Recital D to this Third Amendment.

19.   COUNTERPARTS AND INCLUSIONS IN INDENTURE.

        This Third Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute a single instrument. Upon recordation of this Third Amendment in the Office of the County Recorder of Bernalillo County, New Mexico, this Third Amendment shall be and become a part of the Indenture and shall be construed as a part thereof. By its signature hereto, the Trustee authorizes the Company to record executed and acknowledged counterparts of this Third Amendment in the Office of the County Recorder of Bernalillo County, New Mexico.

15

20.   SEPARABILITY CLAUSE.

        In case any provision in this Third Amendment shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions, and of the other provisions of the Indenture, shall not in any way be affected or impaired thereby.

21.   GOVERNING LAW.

        THIS THIRD AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW MEXICO.

22.   COMPANY FISCAL YEAR.

        Notwithstanding anything contained in the Indenture, it is understood and acknowledged that the fiscal year of the Company is currently the calendar year (i.e., from January 1 through December 31).

16

IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment and Supplement to Indenture of Mortgage dated February 14, 1992, to be duly executed, with the Company's corporate seal to be hereunto affixed and attested, all as of the day and year first above written.

	NEW MEXICO UTILITIES, INC., Mortgagor
(SEAL)	By	Title:
	By	Title:
	WELLS FARGO BANK, N.A., as Trustee Mortgagee
	By	Authorized Officer

17

STATE OF NEW MEXICO	)
	) SS
COUNTY OF	)

        On                        , 2004, before me,                        , Notary Public, personally appeared                        personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity on behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

Notary Public

STATE OF NEW MEXICO	)
	) SS
COUNTY OF	)

        On                        , 2004, before me,                        , Notary Public, personally appeared                        personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity on behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

Notary Public

18

STATE OF	)
	) SS
COUNTY OF	)

        The foregoing instrument was acknowledged before me on                        , 2004 by                        ,                         of Wells Fargo, N.A., a national banking association.

	Notary Public
My commission expires:

19

EXHIBIT 1

ADDITIONS TO REAL PROPERTY

        The following real property, all located in Bernalillo County, New Mexico, is added to the real property described on Exhibit "A" to and is subjected to the lien of the Indenture pursuant to Section 2 of the Third Amendment and Supplement to Indenture of Mortgage Dated February 14, 1992:

EASEMENTS:

130.	Easement filed June 23, 2000, in Book A7, page 770, as Document No. 2000-061014, records of Bernalillo County, New Mexico.
131.	Easement filed June 23, 2000, in Book A7, page 765, as Document No. 2000-061009, records of Bernalillo County, New Mexico.
132.	Easement filed December 18, 2000, in Book Al3, page 4722, as Document No. 2000-125182, records of Bernalillo County, New Mexico.
133.	Easement filed December 18, 2000, in Book Al3, page 4720, as Document No. 2000-125180, records of Bernalillo County, New Mexico.
134.	Easement filed February 28, 2001, in Book A16, page 677, as Document No. 2001-022165, records of Bernalillo County, New Mexico.
135.	Easement filed April 2, 2001, in Book Al7, page 4946, as Document No. 2001-036480, records of Bernalillo County, New Mexico.
136.	Easement filed April 2, 2001, in Book A17, page 4945, as Document No. 2001-036479, records of Bernalillo County, New Mexico.
137.	Easement filed May 17, 2001, in Book A19, page 5171, as Document No. 2002-056756, records of Bernalillo County, New Mexico.
138.	Easement filed April 16, 2002, in Book A34, page 8282, as Document No. 2002-048414, records of Bernalillo County, New Mexico.
139.	Easement filed May 9, 2002, in Book A35, page 9869, as Document No. 2002-060043, records of Bernalillo County, New Mexico.
140.	Easement filed May 29, 2002, in Book A36, page 8190, as Document No. 2002-068387, records of Bernalillo County, New Mexico.
141.	Easement filed June 12, 2002, in Book A37, page 4682, as Document No. 2002-074895, records of Bernalillo County, New Mexico.
142.	Easement filed July 30, 2002, in Book A39, page 5220, as Document No. 2002-095491, records of Bernalillo County, New Mexico.
143.	Easement filed July 30, 2002, in Book A39, page 5219, as Document No. 2002-095490, records of Bernalillo County, New Mexico.
144.	Easement filed July 30, 2002, in Book A39, page 5218, as Document No. 2002-095489, records of Bernalillo County, New Mexico.
145.	Easement filed October 2, 2002, in Book A42, page 7084, as Document No. 2002-127436, records of Bernalillo County, New Mexico.
146.	Easement filed April 23, 2003, in Book A54, page 6286, as Document No. 2003-066421, records of Bernalillo County, New Mexico.
(to Third Amendment and Supplement)

147.	Easement filed December 18, 2003, in Book A70, page 3859, as Document No. 2003-224339, records of Bernalillo County, New Mexico.
148.	Easement filed January 23, 2004, in Book A71, page 8821, as Document No. 2004-008850, records of Bernalillo County, New Mexico.
149.	Easement filed June 23, 2000, in Book A7, page 770, as Document No. 2000-061014, records of Bernalillo County, New Mexico.
150.	Easement filed June 23, 2000, in Book A7, page 765, as Document No. 2000-061009, records of Bernalillo County, New Mexico.
151.	Easement filed December 18, 2000, in Book Al3, page 4722, as Document No. 2000-125182, records of Bernalillo County, New Mexico.
152.	Easement filed December 18, 2000, in Book Al3, page 4720, as Document No. 000-125180, records of Bernalillo County, New Mexico.
153.	Easement filed February 28, 2001, in Book Al6, page 677, as Document No. 2001 -022165, records of Bernalillo County, New Mexico.
154.	Easement filed April 2, 2001, in Book A17, page 4946, as Document No. 2001-036480, records of Bernalillo County, New Mexico.
155.	Easement filed April 2, 2001, in Book A17, page 4945, as Document No. 2001-036479, records of Bernalillo County, New Mexico.
156.	Easement filed May 17, 2001, in Book A19, page 5171, as Document No. 2001-056756, records of Bernalillo County, New Mexico.
157.	Easement filed April 16, 2002, in Book A34, page 8282, as Document No. 002-048414, records of Bernalillo County, New Mexico.
158.	Easement filed May 9, 2002, in Book A35, page 9869, as Document No. 002-060043, records of Bernalillo County, New Mexico.
160.	Easement filed May 29, 2002, in Book A36, page 8190, as Document No. 2002-068387, records of Bernalillo County, New Mexico.
161.	Easement filed June 12, 2002, in Book A37, page 4682, as Document No. 2002-074895, records of Bernalillo County, New Mexico.
162.	Easement filed July 30, 2002, in Book A39, page 5220, as Document No. 2002-095491, records of Bernalillo County, New Mexico.
163.	Easement filed July 30, 2002, in Book A39, page 5219, as Document No. 2002-095490, records of Bernalillo County, New Mexico.
164.	Easement filed July 30, 2002, in Book A39, page 5218, as Document No. 2002-095489, records of Bernalillo County, New Mexico.
165.	Easement filed October 2, 2002, in Book A42, page 7084, as Document No. 2002-127436, records of Bernalillo County, New Mexico.
166.	Easement filed April 23, 2003, in Book A54, page 6286, as Document No. 2003-066421, records of Bernalillo County, New Mexico.
167.	Easement filed December 18, 2003, in Book A70, page 3859, as Document No. 2003-224339, records of Bernalillo County, New Mexico.

2

168.	Easement filed January 23, 2004, in Book A71, page 8821, as Document No. 2004-008850, records of Bernalillo County, New Mexico.
169.	Easement filed October 18, 1996, in Book 96-28, page 1809 as Document No. 1996-114937, records of Bernalillo County, New Mexico.
170.	Easement filed January 7, 1997, in Book 971, page 3184, as Document No. 1997-001336, records of Bernalillo County, New Mexico.
171.	Easement filed January 23, 1997, in Book 972, page 6453, as Document No. 1997-006927, records of Bernalillo County, New Mexico.
172.	Easement filed January 23, 1997, in Book 972, page 6447, as Document No. 1997-006926, records of Bernalillo County, New Mexico.
173.	Easement filed April 8, 1997, in Book 979, page 6778, as Document No. 1997-035231, records of Bernalillo County, New Mexico.
174.	Easement filed April 8, 1997, in Book 979, page 6774, as Document No. 1997-035230, records of Bernalillo County, New Mexico.
175.	Easement filed April 24, 1997, in Book 9711, page 853, as Document No. 1997-040981, records of Bernalillo County, New Mexico.
176.	Easement filed June 9, 1997, in Book 9715, page 5961, as Document No. 1997-057940, records of Bernalillo County, New Mexico.
177.	Easement filed June 9, 1997, in Book 9715, page 5867, as Document No. 1997-057934, records of Bernalillo County, New Mexico.
178.	Easement filed June 9, 1997, in Book 9715, page 5863, as Document No. 1997-057933, records of Bernalillo County, New Mexico.
179.	Easement filed June 9, 1997, in Book 9715, page 5859, as Document No. 1997-057932, records of Bernalillo County, New Mexico.
180.	Easement filed September 11, 1997, in Book 9725, page 1068, as Document No. 1997-094496, records of Bernalillo County, New Mexico.
181.	Easement filed December 9, 1997, in Book 9734, page 4766, as Document No. 1997-129420, records of Bernalillo County, New Mexico.
182.	Easement filed December 9, 1997, in Book 9734, page 4758, as Document No. 1997-129418, records of Bernalillo County, New Mexico.
183.	Easement filed January 22, 1998, in Book 982, page 7916, as Document No. 1998-007146, records of Bernalillo County, New Mexico.
184.	Easement filed February 24, 1998, in Book 9805, page 8743, as Document No. 1998-020204, records of Bernalillo County, New Mexico.
185.	Easement filed February 24, 1998, in Book 9805, page 8742, as Document No. 1998-020203, records of Bernalillo County, New Mexico.
186.	Easement filed February 24, 1998, in Book 9805, page 8741, as Document No. 1998-020202, records of Bernalillo County, New Mexico.
187.	Easement filed February 24, 1998, in Book 9805, page 8740, as Document No. 1998-020201, records of Bernalillo County, New Mexico.

3

188.	Easement filed February 24, 1998, in Book 9805, page 8739, as Document No. 1998-020200, records of Bernalillo County, New Mexico.
189.	Easement filed April 24, 1998, in Book 9808, page 8481, as Document No. 1998-050029, records of Bernalillo County, New Mexico.
190.	Easement filed May 20, 1998, in Book 9810, page 481, as Document No. 1998-062069, records of Bernalillo County, New Mexico.
191.	Easement filed July 30, 1998, in Book 9813, page 3709, as Document No. 1998-095434, records of Bernalillo County, New Mexico.
192.	Easement filed August 24, 1998, in Book 9814, page 4263, as Document No. 1998-106029, records of Bernalillo County, New Mexico.
193.	Easement filed December 8, 1998, in Book 9819, page 6162, as Document No. 1998-158018, records of Bernalillo County, New Mexico,
194.	Easement filed December 16, 1998, in Book 9819, page 9807, as Document No. 1998-161681, records of Bernalillo County, New Mexico.
195.	Easement filed December 22, 1998, in Book 9820, page 2467, as Document No. 1998-164316, records of Bernalillo County, New Mexico.
196.	Easement filed February 26, 1999, in Book 9903, page 5221, as Document No. 1999-025299, records of Bernalillo County, New Mexico.
197.	Easement filed February 26, 1999, in Book 9903, page 5220, as Document No. 1999-025298, records of Bernalillo County, New Mexico.
198.	Easement filed February 26, 1999, in Book 9903, page 5219, as Document No. 1999-025297, records of Bernalillo County, New Mexico.
199.	Easement filed July 9, 1999, in Book 9909, page 9425, as Document No. 1999-089657, records of Bernalillo County, New Mexico.
200.	Easement filed May 11, 2000, in Book A5, Page 5893, as Document No. 2000-046073, records, of Bernalillo County, New Mexico.
201.	Easement filed January 6, 2003, in Book A48, page 2448, as Document No. 2003-002452, records of Bernalillo County, New Mexico.
202.	Easement filed April 8, 2003, in Book A53, page 7248, as Document No. 2003-057360, records of Bernalillo County, New Mexico.
203.	Easement filed June 19, 2003, in Book A58, page 5210, as Document No. 2003-105443, records of Bernalillo County, New Mexico.
204.	Easement filed April 22, 2004, in Book A76, page 3352 as Document No. 2004-053504, records of Bernalillo County, New Mexico.
205.	Easement filed April 22, 2004, in Book A76, page 3351, as Document No. 2004-053503, records of Bernalillo County, New Mexico.
206.	Easement filed April 22, 2004, in Book A76, page 3350, as Document No. 2004-053502, records of Bernalillo County, New Mexico.

4

FEE PARCELS:

E.

A Tract of land situate within the Town of Alameda Grant, being a portion of Black Ranch, Tract 15, more particularly described by metes and bounds as follows:

BEGINNING as a tie, at a point which is common to the Suth Boundary of the Alameda Grant and to the corners of Sections 16 & 17, T 11N, R 2 E., N.M.P.M.; Thence N 00 degrees 02' 00" E 2335.86 feet to a point; Thence S 89 degrees 28' 07" W., 3047.39 feet to the TRUE POINT OF BEGINNING, being the Southeast corner of said tract; Thence from said point of beginning, S 89 deg. 28' 07" W 438.79 feet to the Southwest corner of said tract; Thence N 00 deg. 12' 30" E., 483.67 feet to the Northwest corner of said tract; Thence N 89 deg. 12' 17" E., 439.23 feet to the Northeast corner of said tract; Thence S. 00 deg. 15' 23" W., 485.35 feet to the point of beginning

AND

BEGINNING as a tie at a point which is common to the South Boundary of the Alameda Grant and to the corners of Sections 16 & 17, T 11 N, R 2 E., N.M.P.M.; Thence N. 00 degrees 02' 00" E. 9543.84 feet to a point; Thence N 89 deg. 51' 48"W., 3040.92 feet to the true point of beginning, being the southeast corner of said tract; Thence from said point of beginning, N 89 deg. 51' 48" W, 440.00 feet to the Southwest corner of said Tract; Thence, N 00 deg. 12' 42" E, 495.32 feet to the Northwest corner of said tract; Thence, S 89 deg. 51' 48" E, 440.00 feet to the Northeast corner of said tract; Thence, S 00 deg. 12' 42" W, 495.32 feet to the point of beginning.

5

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Exhibit 4.6d

EXHIBIT 1 ADDITIONS TO REAL PROPERTY

EX-4.8

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Exhibit 4.8

NEW MEXICO UTILITIES, INC.

BOND PURCHASE AGREEMENT

DATED AS OF DECEMBER 15, 2004

$12,000,000

FIRST MORTGAGE BONDS, SERIES C 6.10%, DUE DECEMBER 1, 2024

TABLE OF CONTENTS

Section		Heading	Page
SECTION 1		PURCHASE AND SALE OF BONDS	1
	Section 1.1.	Issue of Bonds	1
	Section 1.2.	The Closing	2
	Section 1.3.	Certain Purchaser Representations	2
SECTION 2.		WARRANTIES AND REPRESENTATIONS	3
	Section 2.1.	Subsidiaries; Affiliates	4
	Section 2.2.	Corporate Organization and Authority	4
	Section 2.3.	Indebtedness	4
	Section 2.4.	Financial Statements; Material Adverse Change	4
	Section 2.5.	Business, Property and Full Disclosure	4
	Section 2.6.	Pending Litigation	5
	Section 2.7.	Title to Properties	5
	Section 2.8.	Patents, Trademarks, Licenses, etc	5
	Section 2.9.	Authorization, Execution, Delivery and Enforceability	5
	Section 2.10.	No Defaults	6
	Section 2.11.	Governmental Consent	6
	Section 2.12.	Taxes	6
	Section 2.13.	Use of Proceeds	7
	Section 2.14.	Foreign Assets Control Regulations, Etc	7
	Section 2.15.	Status under Certain Statutes	8
	Section 2.16.	Private Offering	8
	Section 2.17.	Compliance with Law	8
	Section 2.18.	Restrictions on Company	8
	Section 2.19.	Compliance with ERISA	8
	Section 2.20.	Environmental Compliance	9
	Section 2.21.	Restricted Third-Party Encumbrances	9
SECTION 3.		CLOSING CONDITIONS	10
	Section 3.1.	Opinions of Counsel	10
	Section 3.2.	Warranties and Representations True; No Prohibited Action	10
	Section 3.3.	Compliance with this Agreement	10
	Section 3.4.	Officers' Certificates	10
	Section 3.5.	Purchase Permitted By Applicable Law, Etc	10
	Section 3.6.	Regulatory Approvals	11
	Section 3.7.	Third Supplemental Indenture	11
	Section 3.8.	Filing and Recordation	11
	Section 3.9.	Title Insurance	11
	Section 3.10.	Indenture Conditions	11
	Section 3.11.	Sale of Other Bonds	11
	Section 3.12.	Payment of Special Counsel Fees.	11
	Section 3.13.	Private Placement Number	11
	Section 3.14.	Proceedings Satisfactory	12
SECTION 4.		AGREEMENTS OF THE COMPANY	12
	Section 4.1.	Financial and Business Information	12
	Section 4.2.	Officers' Certificates	14

i

	Section 4.3.	Accountants' Certificates	14
	Section 4.4.	Inspection	15
	Section 4.5.	Report to NAIC	15
	Section 4.6.	Hazardous Substances Indemnification	15
SECTION 5		INTERPRETATION OF THIS AGREEMENT	16
	Section 5.1.	Terms Defined	16
	Section 5.2.	Accounting Principles	20
	Section 5.3.	Directly or Indirectly	21
	Section 5.4.	Governing Law	21
	Section 5.5.	Section Headings, Table of Contents and Construction	21
SECTION 6.		EXPENSES, ETC	21
	Section 6.1.	Transaction Expenses	21
	Section 6.2.	Survival	21
SECTION 7.		HOME OFFICE PAYMENT	21
SECTION 8.		MISCELLANEOUS	22
	Section 8.1.	Notices	22
	Section 8.2.	Amendment and Waiver	22
	Section 8.3.	Reproduction of Documents	24
	Section 8.4.	Survival	24
	Section 8.5.	Successors and Assigns	24
	Section 8.6.	Duplicate Originals; Execution In Counterparts	25
	Section 8.7.	Construction—Representations and Warranties	25
	Section 8.8.	Incorporation by Reference	25

Annex 1	—	Information as to Purchaser
Annex 2	—	Payment Instructions at Closing
Annex 3	—	Information as to Company
Annex 4	—	Litigation
Exhibit A	—	First Mortgage Bond, Series C 6.10%, due December 1, 2024
Exhibit B1	—	Description of Company Counsel's Closing Opinion
Exhibit B2	—	Form of Company's Special Counsel's Closing Opinion
Exhibit B3	—	Form of Trustee Counsel's Closing Opinion
Exhibit B4	—	Form of Purchaser Counsel's Closing Opinion
Exhibit C1	—	Form of Officers' Certificate of the Company
Exhibit C2	—	Form of Officers' Certificate of the Parent
Exhibit D1	—	Form of Secretary's Certificate of the Company
Exhibit D2	—	Form of Secretary's Certificate of the Parent
Exhibit E	—	Form of Third Supplemental Indenture

ii

NEW MEXICO UTILITIES, INC.
ONE WILSHIRE BUILDING
624 S. GRAND AVENUE
LOS ANGELES, CALIFORNIA 90017

BOND PURCHASE AGREEMENT

$12,000,000
First Mortgage Bonds, Series C, 6.10%, due December 1, 2024

        As of December 15, 2004

TO EACH OF THE PURCHASERS LISTED
IN THE ATTACHED ANNEX 1

Ladies and Gentlemen:

        New Mexico Utilities, Inc. (the "Company"), a New Mexico corporation, hereby agrees with you as follows:

SECTION 1.PURCHASE AND SALE OF BONDS.

Section 1.1.    Issue of Bonds.    The Company has authorized the issue of Twelve Million Dollars ($12,000,000) in aggregate principal amount of its First Mortgage Bonds, Series C, 6.10%, due December 1, 2024 (herein called the "Bonds"). The Bonds will be issued under and pursuant to the Third Amendment and Supplement to Indenture of Mortgage dated February 14, 1992 (the "Third Supplemental Indenture"), dated as of December 15, 2004, between the Company and Wells Fargo Bank, N.A., as trustee (the "Trustee"). The Third Supplemental Indenture modifies and amends that certain Indenture of Mortgage, dated February 14, 1992 (the "Original Indenture"), between the Company and Sunwest Bank of Albuquerque, National Association, which later became Nations Bank, N.A., predecessor to Wells Fargo Bank New Mexico, N.A., predecessor to the Trustee. The Original Indenture was amended by (i) the First Supplement to Indenture of Mortgage dated February 14, 1992 (the "First Supplemental Indenture"), dated as of May 15, 1992, (ii) the Second Amendment and Supplement to Indenture of Mortgage dated February 14, 1992 (the "Second Supplemental Indenture") dated as of October 21, 1996, and (iii) the Third Supplemental Indenture (the Original Indenture as so amended and as may be further amended from time to time, being the "Indenture"). The Bonds will be secured pursuant to and entitled to all of the benefits of the Indenture. Certain capitalized terms used in this Agreement are defined in Section 5.1 of this Agreement. References to a "Schedule," "Annex" or "Exhibit" are, unless otherwise specified, to a Schedule, Annex or Exhibit attached to this Agreement.

        Each Bond:

        (a)   will be in the amount of One Thousand Dollars ($1,000) or an integral multiple thereof;

        (b)   will bear interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance thereof from the date of the Bond at the rate of percent 6.10% per annum, payable semiannually on the first (1st) day of each June and December in each year commencing on the first Interest Payment Date next succeeding the date of such Bond until the principal amount thereof will be due and payable; provided that interest on any overdue principal, overdue Redemption Price and (to the fullest extent permitted by applicable law) overdue interest, shall accrue at a rate equal to the lesser of (i) the highest rate allowed by applicable law or (ii) six and ten hundredths percent (6.10%) per annum;

        (c)   will mature on December 1, 2024; and

        (d)   will be in the form of Bond set forth in Exhibit A to this Agreement.

Section 1.2.    The Closing.    

        (a)    Purchase and Sale of Bonds.    The Company hereby agrees to sell to you and, subject to the terms and conditions set forth herein, you hereby agree to purchase from the Company, in accordance with the provisions of this Agreement, Bonds in the principal amount specified opposite your name on Annex 1 hereto, at a purchase price of one hundred percent (100%) of the principal amount thereof. Contemporaneously with entering into this Agreement, the Company is entering into separate Bond Purchase Agreements (the "Other Agreements") identical with this Agreement with each of the other purchasers named in Annex 1 (the "Other Purchasers"), providing for the sale at such Closing to each of the Other Purchasers of Bonds in the principal amount specified opposite its name in Annex 1. Your obligation hereunder and the obligations of the Other Purchasers under the Other Agreements are several and not joint obligations and you shall have no obligation under any Other Agreement and no liability to any person for the performance or nonperformance by any Other Purchaser thereunder.

        (b)    The Closing.    The closing (the "Closing") of the purchase and sale of the Bonds to be purchased by you will be held at 11:00 a.m., Chicago time, on December 28, 2004 (the "Closing Date") at the office of Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois 60603 or on such other Business Day thereafter on or prior to December 30, 2004 as may be agreed upon by the Company and you. At the Closing, the Company will deliver to you one or more Bonds (as set forth opposite your name on Annex 1 to this Agreement), in the aggregate principal amount of your purchase price thereof, dated the Closing Date and payable to you or payable as indicated on Annex 1 to this Agreement, against payment by federal funds wire transfer in immediately available funds of the purchase price thereof, as directed by the Company on Annex 2 to this Agreement. If at the Closing the Company shall fail to tender such Bonds to you as provided above in this Section 1.2, or any of the conditions specified in Section 3 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment.

Section 1.3.    Certain Purchaser Representations.

        (a)    Purchase for Investment.    You represent that you are purchasing the Bonds for your own account or for one or more separate accounts maintained by you or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of your or their property shall at all times be within your or their control. You understand that the Bonds have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Bonds.

        (b)   You represent that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by you to pay the purchase price of the Bonds to be purchased by you hereunder:

          (i)  if you are an insurance company, the Source is an "insurance company general account" (as the term is defined in Prohibited Transaction Exemption ("PTE") 95-60 (issued July 12, 1995)) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the "NAIC Annual Statement")) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with your state of domicile; or

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         (ii)  the Source is a separate account that is maintained solely in connection with your fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or

        (iii)  the Source is either (A) an insurance company pooled separate account, within the meaning of PTE 90-1 (issued January 29, 1990), or (B) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (iii), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or

        (iv)  the Source constitutes assets of an "investment fund" (within the meaning of Part V of PTE 84-14 (the "QPAM Exemption") managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (A) the identity of such QPAM and (B) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (iv); or

         (v)  the Source constitutes assets of a "plan(s)" (within the meaning of Section IV of PTE 96-23 (the "INHAM Exemption")) managed by an "in-house asset manager" or "INHAM" (within the meaning of Part IV of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of "control" in Section IV(h) of the INHAM Exemption) owns a 5% or more interest in the Company and (A) the identity of such INHAM and (B) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this paragraph (v); or

        (vi)  the Source is a governmental plan; or

       (vii)  the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (vii); or

      (viii)  the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.

As used in this Section 1.3(b), the terms "employee benefit plan", "governmental plan" and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA.

SECTION 2.WARRANTIES AND REPRESENTATIONS.

        To induce you to enter into this Agreement and to purchase the Bonds listed on Annex 1 to this Agreement opposite your name, the Parent (solely with respect to the representations and warranties set forth in Section 2.4(a), Section 2.5, Section 2.12(a) and Section 2.12(b) and, insofar as such representations and warranties relate to the Parent, Section 2.10 and Section 2.15) and the Company (with respect to all representations and warranties other than those set forth in Section 2.4(a) and,

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insofar as such representations and warranties relate to the Parent, Section 2.10, Section 2.12(a), Section 2.12(b) and Section 2.15) warrant and represent to you as of the Closing Date as follows:

Section 2.1.    Subsidiaries; Affiliates.    The Company has no Subsidiaries. Part I of Annex 3 to this Agreement sets forth

        (a)   the name of each of the Company's Affiliates and the nature of the affiliation and

        (b)   the Company's directors and executive officers.

Section 2.2.    Corporate Organization and Authority.    The Company:

        (a)   is a corporation duly organized, validly existing and in good standing under the laws of the State of New Mexico; and

        (b)   has all requisite corporate power and authority and all necessary licenses and permits to own and operate its Properties and to carry on its business as now conducted and as presently proposed to be conducted.

Section 2.3.    Indebtedness.    Part II of Annex 3 to this Agreement correctly lists all outstanding indebtedness for borrowed money of the Company immediately prior to the Closing Date and after giving effect to the proposed use of the proceeds of the Bonds.

Section 2.4.    Financial Statements; Material Adverse Change.    

        (a)    Financial Statements—Parent.    Copies have been delivered to you in the Placement Memorandum of the financial statements of the Parent and its Subsidiaries (i) in the Parent's Annual Report on Form 10-K for the year ended December 31, 2003 and (ii) in the Parent's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2004. All of said financial statements have been prepared in accordance with generally accepted accounting principles consistently applied, and present fairly in all material respects the consolidated financial position of the Parent and its consolidated subsidiaries as of such dates and the results of their operations for such periods (subject, in the case of any interim financial statements, to normal year-end adjustments). All such consolidated financial statements include the accounts of the Company.

        (b)    Financial Statements—Company.    Copies have been delivered to you in the Placement Memorandum of (i) the audited financial statements of the Company for the year ended December 31, 2003 and (ii) the unaudited financial statements of the Company for the nine months ended September 30, 2004. All of said financial statements have been prepared in accordance with generally accepted accounting principles consistently applied, and present fairly in all material respects, the financial position of the Company as of such dates and the results of its operations for such periods (subject, in the case of any interim financial statements, to normal year-end adjustments).

        (c)    Material Adverse Change.    Since December 31, 2003, there has been no change in the business, Properties or condition (financial or otherwise) of the Company except:

          (i)  as disclosed to you in the Placement Memorandum or otherwise disclosed to you in this Agreement; and

         (ii)  for other changes in the ordinary course of business that, in the aggregate, have not had a Material Adverse Effect.

Section 2.5.    Business, Property and Full Disclosure.    The Confidential Private Placement Memorandum dated December, 2004 prepared by A.G. Edwards & Sons, Inc. and the documents included therein (collectively, the "Placement Memorandum") fairly describe, in all material respects, the general nature of the business and the Properties of the Company. The financial

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statements referred to in Sections 2.4(a) and 2.4(b) do not, nor does this Agreement or the Placement Memorandum, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein or herein in light of the circumstances under which they are made, not misleading.

Section 2.6.    Pending Litigation.    Except as disclosed on Annex 4 hereto, there are no proceedings, actions or investigations pending or, to the knowledge of the Company, threatened against or affecting the Company in any court or before any Governmental Authority or arbitration board or tribunal which, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. Without limiting the generality of the foregoing, except as has been disclosed in the Placement Memorandum or on Annex 4 hereto, no proceedings with respect to the condemnation of any Property of the Company are pending or, to the best knowledge of the Company, contemplated by any Governmental Authority to which the Property of the Company is subject. The Company is not in default with respect to any order of any court, Governmental Authority or arbitration board or tribunal.

Section 2.7.    Title to Properties.    The Company has, and at the time of the Closing will have, good and marketable title to all of the fee interests in real Property, and good title to all of the other interests in Property, it purports to own, that individually or in the aggregate are Material, including Property reflected in the most recent balance sheet referred to in Section 2.4(b) of this Agreement and Property described in the Indenture as being subject to the Lien thereof, subject only to the Lien of the Indenture and other Permitted Encumbrances. Without limiting the generality of the foregoing, the Company has, as of the Closing Date, all water, water rights, rights to purchase water, water systems, water works, plants, pumps, tanks, pipes, strainers, fittings, valves, reservoirs, supplies and implements it purports to own, that individually or in the aggregate are Material, in each case owned by the Company subject only to the Lien of the Indenture and Permitted Encumbrances and without limitation as to time within which any such rights may be exercised. There are no Liens upon or other defects (including, without limitation, defects of the type which would be disclosed by a survey) in or to any of the real Property of the Company, or the title or interest of the Company in or to such real Property, which, individually or in the aggregate, would have a Material Adverse Effect. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects.

Section 2.8.    Patents, Trademarks, Licenses, Etc.    The Company owns or possesses, and upon completion of the Closing will own or possess, all of the franchises (including, without limitation, franchises granted by the NMPRC), patents, trademarks, service marks, trade names, copyrights, licenses and rights (including, without limitation, rights to produce and purchase water) necessary for the conduct of its business, without any known and material conflict with the rights of others, and all such franchises, patents, trademarks, service marks, trade names, copyrights, licenses and rights are valid and subsisting. To the Company's knowledge, no event has occurred which (a) permits, or after notice or lapse of time or both would permit, revocation or termination of any such license or franchise or (b) materially adversely affects any of the rights of the Company thereunder.

Section 2.9.    Authorization, Execution, Delivery and Enforceability.    

        (a)    Transactions are Legal and Authorized.    The consummation by the Company of each of the Transactions:

          (i)  is within the corporate powers of the Company;

         (ii)  will not conflict with, result in any breach in any provisions of, constitute a default under, or result in the creation of any Lien upon any Property of the Company

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under the provisions of any charter instrument or bylaw to which it or any of its Properties may be bound;

        (iii)  will not conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company;

        (iv)  will not violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company; or

         (v)  will not conflict with, result in any breach in any of the provisions of, constitute a default under, or result in the creation of any Lien upon any Property of the Company under the provisions of, any agreement or instrument (other than its charter instrument or bylaw) to which it is a party or by which it or any of its Property may be bound, which could either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

        (b)    Obligations are Enforceable.    Each of this Agreement, the Third Supplemental Indenture and the Bonds has been duly authorized by all necessary corporate action on the part of the Company and has been executed and delivered by duly authorized officers of the Company. Each of this Agreement, the Indenture and the Bonds constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except that the enforceability of this Agreement, the Indenture and the Bonds may be:

          (i)  limited by applicable bankruptcy, reorganization, arrangement, insolvency, moratorium, or other similar laws affecting the enforceability of creditors' rights generally; and

         (ii)  subject to the availability of equitable remedies.

Section 2.10.    No Defaults.    To the knowledge of the Company and the Parent, no event has occurred and no condition exists which, upon the execution of this Agreement and the Third Supplemental Indenture and the issuance of the Bonds, would constitute a Default or an Event of Default. To the knowledge of the Company and the Parent, neither the Company nor the Parent is in violation in any respect of any term of any charter instrument or bylaw and neither the Company nor the Parent is in violation in any material respect of any term in any agreement or other instrument to which it is a party or by which it or any of its Property may be bound. To the knowledge of the Company and the Parent, no event has occurred or condition exists such that, but for the waiver by any Person (other than the Company or the Parent) of any term or provision in any agreement or other instrument to which the Company or the Parent is a party or by which it or any of its Property may be bound, the Company or the Parent would be in violation in any material respect of any of its obligations under such agreement or instrument.

Section 2.11.    Governmental Consent.    As of the Closing, all consents, approvals, orders and authorizations required of or by any Governmental Authority, including, without limitation, the NMPRC, for the Company to consummate the Transactions will have been duly obtained, all related filings, registrations and qualifications will have been duly made, and no appeal from any such consent, approval, order or authorization of or by any Governmental Authority will be pending, including, without limitation, any such consent, approval, order or authorization of the NMPRC.

Section 2.12.    Taxes.    

        (a)    Returns Filed; Taxes Paid.    All tax returns required to be filed by or on behalf of the Parent, the Company and any other Person with which the Parent or the Company files or has filed a consolidated return, in any jurisdiction have in fact been filed on a timely basis, and to

6

the knowledge of the Company and the Parent, all taxes, assessments, fees and other governmental charges upon the Parent or the Company, or upon any of their respective Properties, income or franchises, which are due and payable have been paid or will be paid prior to delinquency. Neither the Parent nor the Company knows of any proposed additional tax assessment against it or any such Person. To the knowledge of the Parent and the Company, there exists no controversy with any Governmental Authority with respect to the amount of any tax payable by the Parent or the Company to such Governmental Authority.

        (b)    Book Provisions Adequate.    The provisions for taxes (including, without limitation, any payment or payments owing from each of the Parent and the Company to any other Person pursuant to any tax sharing agreement among such Persons) on the books of the Company are adequate for all open years and for its current fiscal period. The amount of the liability for all taxes reflected in the consolidated balance sheet of the Parent and the Company as of December 31, 2003 is an adequate provision for such taxes (including, without limitation, any payment due pursuant to any such tax sharing agreement) as may be payable by the Parent or the Company (i) for the fiscal years 1999 through 2003, inclusive, with respect to federal income taxes, (ii) for the fiscal years 2000 through 2003, inclusive, with respect to New Mexico state income taxes and (iii) for the fiscal years 1999 through 2003, inclusive, with respect to California franchise taxes, in each case, the only fiscal years not closed by the statute of limitations or by completion of an audit.

Section 2.13.    Use of Proceeds.    The Company will apply the proceeds from the sale of the Bonds solely to refinance the Company's First Mortgage Bonds, Series B, fund working capital needs and future capital expenditures. None of the transactions contemplated in this Agreement (including, without limitation, the use of the proceeds from the sale of the Bonds) violates, will violate or will result in a violation of Section 7 of the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including, without limitation, Regulations T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. The Company does not own, or with the proceeds of the sale of the Bonds it does not intend to own, carry or purchase any "margin security" within the meaning of said Regulations T, U and X, including "margin securities" originally issued by the Company. This Agreement and the Bonds will not be secured by any "margin security," and no Bonds are being sold on the basis of any such collateral. None of the proceeds from the sale of the Bonds will be used to purchase or carry (or refinance any borrowing the proceeds of which were used to purchase or carry) any "security" within the meaning of the Securities Exchange Act of 1934, as amended.

Section 2.14.    Foreign Assets Control Regulations, Etc.    Neither the sale of the Bonds by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. Without limiting the foregoing, the Company (a) is not and will not become a Person whose Property or interests in Property are blocked pursuant to Section 1 of Executive Order 13224 of September 23, 2001 Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)) or (b) does not engage and will not engage in any dealings or transactions, or be otherwise associated, with any such person. The Company is in compliance, in all material respects, with the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act of 2001). No part of the proceeds from the sale of the Bonds hereunder will be used, directly or indirectly, for any payment to any governmental official or employee, political party, official of a political party, candidate for political office or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended.

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Section 2.15.    Status under Certain Statutes.    Neither the Parent nor the Company is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the ICC Termination Act of 1995, as amended, or the Federal Power Act, as amended.

Section 2.16.    Private Offering.    Neither the Company nor anyone acting on its behalf has offered any of the Bonds or any similar Security of the Company for sale to, or solicited offers to buy any thereof from, or otherwise approached or negotiated with respect thereto with, any prospective purchaser, other than the Purchasers and six (6) other Institutional Investors, each of whom was offered all or a portion of the Bonds at private sale for investment. The Company agrees that neither the Company nor anyone acting on its behalf will offer the Bonds or any part thereof or any similar Securities for issue or sale to, or solicit any offer to acquire any of the same from, anyone so as to bring the offering, issuance or sale of the Bonds within the registration provisions of Section 5 of the Securities Act.

Section 2.17.    Compliance with Law.    To the knowledge of the Company, the Company:

        (a)   is not in material violation of any law, ordinance, governmental rule, regulation, order or judgment of any court or other Governmental Authority or award of any arbitrator to which it is subject; or

        (b)   has not failed to obtain any material license, permit, franchise or other governmental authorization necessary to the ownership of its Property or to the conduct of its business;

which violation or failure to obtain might, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

Section 2.18.    Restrictions on Company.    The Company:

        (a)   is not a party to any contract or agreement ([other than the Indenture]) which restricts the right or ability of the Company to incur debt; or

        (b)   has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its Property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by the Indenture.

Section 2.19.    Compliance with ERISA.    (a) The Company and its Parent and each of its Subsidiaries have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA), and no event, transaction or condition has occurred or, to the knowledge of the Company, exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material.

(b)

Neither the Company nor any ERISA Affiliate is a party to, participates in, maintains, contributes to, or has any liability or contingent liability with respect to an employee benefit plan, which is subject to Title IV of ERISA. The Company does not have any expected post-retirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106).

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(c)

The execution and delivery of this Agreement and the issuance and sale of the Bonds hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this Section 2.19(c) is made in reliance upon and subject to the accuracy of your representation in Section 1.3(b) as to the sources of the funds used to pay the purchase price of the Bonds to be purchased by you.

Section 2.20.    Environmental Compliance.    Except as set forth in Part III of Annex 3 hereto:

        (a)   Compliance—to the knowledge of the Company, the Company is in compliance with all Environmental Protection Laws in effect in each jurisdiction where it is presently doing business, except such failures so to comply that would not, in the aggregate, be reasonably expected to have a Material Adverse Effect;

        (b)   Liability—to the knowledge of the Company, the Company is not subject to any liability under any Environmental Protection Laws that, in the aggregate, could be reasonably expected to have a Material Adverse Effect; and

        (c)   Notices—The Company has not received any:

          (i)  written notice from any Governmental Authority by which any of its present or previously-owned or leased real Properties has been designated, listed, or identified in any manner by any Governmental Authority charged with administering or enforcing any Environmental Protection Law as a Hazardous Substance disposal or removal site, "Super Fund" clean-up site, or candidate for removal or closure pursuant to any Environmental Protection Law;

         (ii)  written notice of any Lien arising under or in connection with any Environmental Protection Law that has attached to any revenues of, or to any of its owned or leased real Properties; or

        (iii)  summons, citation, notice, directive, letter, or other communication, written or oral, from any Governmental Authority concerning any intentional or unintentional action or omission by the Company in connection with its ownership or leasing of any real Property resulting in the releasing, spilling, leaking, pumping, pouring, emitting, emptying, dumping, or otherwise disposing of any Hazardous Substance into the environment resulting in any material violation of any Environmental Protection Law; in the case of clauses (ii) and (iii) above, where the effect of which could be reasonably expected to have a Material Adverse Effect.

Section 2.21.    Restricted Third-Party Encumbrances.    The easements owned by the Company referenced by numbers 47 through 56, inclusive, 73, 74 and 90 to Exhibit A to the Title Commitment are encumbered by Restricted Third-Party Encumbrances as reflected on Exhibit B to the Title Commitment. The information set forth in Part IV of Annex 3 to this Agreement with respect to the Property subject to such Restricted Third Party Encumbrances, the Company's use of such Properties and the nature of such Restricted Third Party Encumbrances is true, accurate and complete in all material respects. Other than those Properties listed in the first sentence of this Section 2.21 and described in Part IV of Annex 3 to this Agreement, the Company owns no Property which is subject to Restricted Third Party Encumbrances. Those Properties listed in the first sentence of this Section 2.21 and described in Part IV of Annex 3 to this Agreement are subject to no Restricted Third Party Encumbrances other than those reflected on Exhibit B to the Title Commitment. Such Restricted Third Party Encumbrances do not, and the exercise of such remedies as would foreclose or terminate the right or interest of the Company in or to such Property by the Persons who hold such Restricted Third Party Encumbrances would not be likely

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to, individually or in the aggregate, have a material adverse effect upon the business, profits, Properties (taken as a whole) or condition (financial or otherwise) of the Company or the ability of the Company to consummate the Transactions or perform its obligations set forth in this Agreement, the Bonds or the Indenture.

        The easements referenced by numbers 91 through 93, inclusive, to Exhibit A to the Title Commitment are grants by the fee owners of the Properties underlying such easements of general Utility easements in favor of no specified Person. The Company has the right to use each of such easements for the purposes for which the Company is now using them.

SECTION 3.CLOSING CONDITIONS.

        Your obligation to purchase and pay for the Bonds to be delivered to you at the Closing will be subject to the following conditions precedent:

Section 3.1.    Opinions of Counsel.    You shall have received (a) a closing opinion dated the Closing Date from Latham & Watkins LLP, counsel for the Company satisfactory in form and substance to you covering the matters set forth in Exhibit B1; and (b) from (i) Montgomery & Andrews, P.A., special counsel for the Company, (ii) David Blackner as Senior Counsel for the Trustee and (iii) Chapman and Cutler, your special counsel, closing opinions, each dated as of the Closing Date, and substantially in the respective forms set forth in Exhibits B2, B3 and B4 to this Agreement.

Section 3.2.    Warranties and Representations True; No Prohibited Action.    

        (a)   Warranties and Representations True. The warranties and representations of the Company and the Parent contained in Section 2 of this Agreement will be true when made and at the time b of Closing.

        (b)   No Prohibited Action. Neither the Parent nor the Company shall have taken any action or permitted any condition to exist which would constitute a Default or an Event of Default.

Section 3.3.    Compliance with this Agreement.    The Company will have performed and complied with all agreements and conditions contained herein which are required to be performed or complied with by the Company before or at the Closing.

Section 3.4.    Officers' Certificates.    You will have received:

        (a)   a certificate dated the Closing Date and signed by (i) the Chairman of the Board or the President and (ii) the Vice President and General Manager of the Company, substantially in the form of Exhibit C1 to this Agreement with respect to the matters therein set forth;

        (b)   a certificate dated the Closing Date and signed by (i) the President or a Vice President and (ii) the Chief Financial Officer of the Parent, substantially in the form of Exhibit C2 to this Agreement with respect to the matters therein set forth;

        (c)   a certificate dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, substantially in the form of Exhibit D1 to this Agreement, with respect to the matters therein set forth; and

        (d)   a certificate dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Parent, substantially in the form of Exhibit D2 to this Agreement, with respect to the matters therein set forth.

Section 3.5.    Purchase Permitted By Applicable Law, Etc.    On the date of the Closing your purchase of Bonds shall (i) be permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the

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character of the particular investment, (ii) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (iii) not subject you to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you, you shall have received an Officer's Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted.

Section 3.6.    Regulatory Approvals.    The issue and sale of the Bonds shall have been duly authorized by order of the NMPRC, such order shall be in full force and effect at the time of the Closing and all appeal periods applicable to such order shall have expired.

Section 3.7.    Third Supplemental Indenture.    The Company and the Trustee shall have executed and delivered the Third Supplemental Indenture in the form set forth in Exhibit E to this Agreement, and you shall have received an executed original counterpart of such Third Supplemental Indenture.

Section 3.8.    Filing and Recordation.    The Indenture, the Third Supplemental Indenture and all financing statements (including any financing statements required to be filed under the provisions of the New Mexico Uniform Commercial Code) shall have been duly recorded and filed in such manner and in such place as is required by law to establish, preserve and protect the Lien on all collateral specifically or generally described in the Indenture as subject to such Lien and under the laws enforced, and it will not be necessary to rerecord any such documents.

Section 3.9.    Title Insurance.    The Trustee shall have received a policy of title insurance or the Title Commitment committing to issue the same in form and substance satisfactory to you, from Fidelity National Title Insurance Company insuring the Trustee and the holders of the Bonds issued under the Indenture against loss or damage to the extent of $12,000,000 plus costs as permitted by the policy by reason of any defect in the Lien of the Indenture on the Property (other than Excepted Property and the parcels identified on Exhibit A to the Original Indenture as not being insured by a policy of title insurance) described therein or by reason of the title to the Property being other than as shown in such policy. Such policy (or the Title Commitment to issue the same) shall extend to the Property (other than uninsurable Property) identified on Exhibit A to the Original Indenture and to the additional Property being added to the Lien of the Indenture by virtue of the Second Supplemental Indenture and the Third Supplemental Indenture. You shall have received a copy of such policy of title insurance or the Title Commitment.

Section 3.10.    Indenture Conditions.    All conditions precedent set forth in the Indenture with respect to consummation of any of the Transactions shall have been satisfied. Without limiting the generality of the foregoing, the Company's Bondable Capacity and Net Earnings for Interest shall be sufficient to permit the issuance of the Bonds.

Section 3.11.    Sale of Other Bonds.    Contemporaneously with the Closing, the Company shall sell to the Other Purchasers, and the Other Purchasers shall purchase the Bonds to be purchased by them at the Closing as specified in Annex 1.

Section 3.12.    Payment of Special Counsel Fees.    Without limiting the provisions of Section 6.1, the Company shall have paid on or before the Closing the fees, charges and disbursements of your special counsel to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing.

Section 3.13.    Private Placement Number.    A Private Placement Number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Bonds.

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Section 3.14.    Proceedings Satisfactory.    All proceedings taken in connection with the sale of the Bonds and all documents and papers relating thereto will be reasonably satisfactory to you. You will have received copies of such documents and papers as you may reasonably request in connection therewith (including, without limitation, copies of all certificates delivered to the Trustee in connection with the consummation of the Transactions), all in form and substance reasonably satisfactory to you; provided, however, that you agree that all documents the forms of which are annexed hereto as exhibits shall be in form and substance reasonably satisfactory to you if duly authorized, executed and delivered in the respective forms set forth in such exhibits.

SECTION 4.AGREEMENTS OF THE COMPANY.

Section 4.1.    Financial and Business Information.    The Company will deliver to each holder of the Outstanding Bonds that is an Institutional Investor:

        (a)   Quarterly Statements—as soon as practicable after the end of each fiscal quarter of each fiscal year of the Company (other than the last fiscal quarter of each fiscal year), and in any event within sixty (60) days thereafter, duplicate copies of:

          (i)  a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter; and

         (ii)  consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries, for such quarter and for the portion of the fiscal year ending with such quarter;

setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail and certified as being complete and correct, and as having been prepared in conformity with generally accepted accounting principles, subject to changes resulting from year-end adjustments, by the Chief Financial Officer or Treasurer of the Company;

        (b)   Annual Statements—as soon as practicable after the end of each fiscal year of the Company, and in any event within one hundred twenty (120) days thereafter, commencing with the Company's 2004 fiscal year, duplicate copies of:

          (i)  a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year; and

         (ii)  consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries for such year;

setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by an opinion thereon of KPMG LLP or other independent certified public accountants of recognized national standing or recognized regional standing selected by the Company, which opinion shall, without qualification, state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows in conformity with generally accepted accounting principles, that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards and that such audit provides a reasonable basis for such opinion in the circumstances;

        (c)   Audit Reports—promptly upon receipt thereof, one copy of each other report submitted to the Company or any Subsidiary by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any Subsidiary;

        (d)   SEC and Other Reports of the Company and the Parent—promptly upon their becoming publicly available, one copy of each financial statement, report, notice or proxy

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statement sent by the Company to its stockholders generally, and of each regular or periodic report and any registration statement, prospectus or written communication in respect thereof filed by the Company or the Parent with, or received by it in connection therewith from, any securities exchange or the Securities and Exchange Commission or any successor agency, and one copy of each financial statement, report, notice or proxy statement sent by the Parent to its stockholders generally;

        (e)   ERISA—promptly upon becoming aware of the occurrence of:

          (i)  any material "reportable event" (as such term is defined in Section 4043 of ERISA) with respect to which the reporting requirement has not been waived; or

         (ii)  any material transaction prohibited by Section 406 of ERISA or any nonexempt "prohibited transaction" (as such term is defined in Section 4975 of the IRC);

in connection with any Pension Plan or any trust created thereunder, a written notice specifying the nature thereof, what action, if any, the Company is taking or proposes to take with respect thereto, and, when known, any action taken by the IRS, the Department of Labor or the PBGC with respect thereto;

        (f)    ERISA Waivers—prompt written notice of and a description of any request pursuant to Section 303 of ERISA or Section 412 of the IRC for, or notice of the granting pursuant to said Section 303 or Section 412 of, a waiver in respect of all or part of the minimum funding standard set forth in ERISA or the IRC, as the case may be, of any Pension Plan, and, in connection with the granting of any such waiver, the amount of any "waived funding deficiency" (as such term is defined in said Section 303 or said Section 412) and the terms of such waiver; provided, however, that no such notice need be given if the amount of any waived funding deficiency shall not be material in the context of the business, profits, Properties or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole;

        (g)   Other ERISA Notices—prompt written notice of and, where applicable, a description of:

          (i)  any notice from the PBGC in respect of the commencement of any proceedings pursuant to Section 4042 of ERISA to terminate any Pension Plan or for the appointment of a trustee to administer any Pension Plan;

         (ii)  any distress termination notice delivered to the PBGC under Section 4041 of ERISA in respect of any Pension Plan, and any determination of the PBGC in respect thereof;

        (iii)  the placement of any Multiemployer Plan in reorganization status under Title IV of ERISA;

        (iv)  any Multiemployer Plan becoming "insolvent" (as such term is defined in Section 4245 of ERISA);

         (v)  the complete or partial withdrawal of the Company or any ERISA Affiliate from any Multiemployer Plan and the withdrawal liability incurred in connection therewith; and

        (vi)  the withdrawal of the Company or any ERISA Affiliate from any Pension Plan with respect to which it is a "substantial employer" as defined in ERISA and the withdrawal liability under Section 4063 of ERISA incurred in connection therewith;

        (h)   Notice of Default or Event of Default—immediately upon becoming aware of the existence of any condition or event which constitutes a Default or an Event of Default, a

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written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto;

        (i)    Notice of Claimed Default—immediately upon becoming aware that the holder of any Bond or of any evidence of indebtedness or other Security of the Company or any Subsidiary has given notice or taken any other action with respect to a claimed Event of Default or default under such Bond, evidence of indebtedness or Security, a written notice specifying the notice given or action taken by such holder and the nature of the claimed Event of Default or default and what action the Company is taking or proposes to take with respect thereto;

        (j)    Notices from Governmental Authority—promptly, and in any event within 30 days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;

        (k)   Information Required By Indenture—all information, notices, certificates and opinions required by the terms of the Indenture to be delivered to the holders of the Bonds; and

        (l)    Requested Information—with reasonable promptness, such other data and information reasonably available to the Company as from time to time may be reasonably requested. Without limiting the generality of the foregoing, the Company will deliver to you or any successor or transferee the information required by 17 C.F.R. §230.144A in connection with any transfer or proposed transfer of Bonds by you or any successor or transferee pursuant thereto.

Section 4.2.    Officers' Certificates.    Each set of financial statements delivered to any Institutional Investor of the Bonds pursuant to Section 4.1(a) or Section 4.1(b) of this Agreement will be accompanied by a certificate of the Chairman of the Board or the President and the Vice President and General Manager of the Company setting forth:

        (a)   Covenant Compliance—the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Article VI of the Indenture during the period covered by the income statement then being furnished; and

        (b)   Event of Default—a statement that the signers have reviewed the relevant terms of this Agreement and the Indenture and have made, or caused to be made, under their supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the accounting period covered by the income statements being delivered therewith to the date of the certificate and that such review has not disclosed the existence during such period of any condition or event which constitutes a Default or an Event of Default or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Company has taken or proposes to take with respect thereto.

Section 4.3.    Accountants' Certificates.    Each set of annual financial statements delivered pursuant to Section 4.1(b) will be accompanied by a certificate of the accountants who certify the financial statements of the Company, stating that they have reviewed Sections 6.01, 6.03, 6.06, 6.10 and 6.14 of the Indenture and stating further, whether, in making their audit, such accountants have become aware of any condition or event which then constitutes a Default or an Event of Default (whether or not as a result of failure by the Company to comply with any of Sections 6.01, 6.03, 6.06, 6.10 or 6.14 of the Indenture), and, if any such condition or event then exists, specifying the nature and period of existence thereof.

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Section 4.4.    Inspection.    The Company will permit any of your representatives, while you or your nominee holds any Bond, or the representatives of any other Institutional Investor of the Bonds, at your or such holder's expense (except during the continuance of any Default or Event of Default, in which case, at the Company's expense), upon reasonable prior notice to the Company, to visit and inspect any of the Properties of the Company or any Subsidiary, to examine all their books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants (and by this provision the Company authorizes said accountants to discuss the finances and affairs of the Company and its Subsidiaries) all at such reasonable times and as often as may be reasonably requested.

Section 4.5.    Report to NAIC.    Concurrently with the delivery to you of each annual statement required by Section 4.1(b) hereof, the Company will deliver a copy thereof to: Securities Valuation Office, National Association of Insurance Commissioners, 195 Broadway, New York, New York 10007.

Section 4.6.    Hazardous Substances Indemnification.    The Company shall indemnify, defend and hold you harmless from and against any loss or liability directly or indirectly arising out of the use, generation, manufacture, production, storage, release, threatened release, discharge or disposal of any Hazardous Substances in or about the Property of the Company, the Parent or any of their Subsidiaries. This indemnification provision shall apply whether the Hazardous Substances are in, on, under or about the Property or operations of the Company, the Parent or any of their Subsidiaries. The foregoing indemnification includes but is not limited to reasonable attorneys' fees (including the allocated cost of in-house counsel and staff). The foregoing indemnification extends to you, your parent, your subsidiaries and all of your or their directors, officers, employees, agents, successors, attorneys and assigns. This indemnification provision shall survive repayment of the Company's obligations under the Bonds, and payment shall not be a condition precedent to recovery upon the foregoing indemnification provisions.

        In the event that you receive a claim, demand or action for which you believe that indemnification will or may be required pursuant to this Section, you agree to so notify the Company in writing promptly (and in any event within twenty (20) days after your receipt of such claim, and/or action). Upon receipt of such notice from you, the Company shall have the right to defend such claim, demand or action by legal counsel selected by the insurance carrier for the Company, or selected by the Company and reasonably satisfactory to you. Such right shall be exercised by written notice to you given within twenty (20) days after the Company's receipt of your notice.

        If the Company elects to undertake your defense, and so long as the Company continues such defense, you agree that:

        (a)   you shall not admit any liability or enter into any settlement of any such claim or action without, in any such case, the prior written consent of the Company, which shall not be unreasonably withheld or delayed;

        (b)   you shall be entitled to retain separate legal counsel as you select. However, the Company shall not be obligated to reimburse you for any costs or fees of such separate counsel (including in-house counsel or staff); and

        (c)   you shall cooperate as reasonably requested by the Company in the defense and settlement of any such claim or action; provided, however, that you need not be required to incur or sustain any out-of-pocket costs.

If, however, the Company fails to undertake your defense within the time or in the manner herein provided or thereafter abandons such defense or fails to diligently prosecute the same, you shall thereafter be entitled to all benefits of the foregoing indemnification provision, including the right to

15

defend or settle any such claim or action upon such terms as you shall select and to recover from the Company all amounts expended by you to pay any judgment, award or settlement and all costs and fees incurred by you in such defense, settlement or both.

SECTION 5.INTERPRETATION OF THIS AGREEMENT.

Section 5.1.    Terms Defined.    As used in this Agreement, the following terms have the respective meanings set forth below or set forth in the Section of this Agreement or the Indenture following such term:

        "Affiliate" means, at any time, and with respect to any Person, (1) any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and (b) any Person beneficially owning or holding, directly or indirectly, 5% or more of any class of voting or equity interests of the Company or any Subsidiary or any corporation of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 5% or more of any class of voting or equity interests. As used in this definition, "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an "Affiliate" is a reference to an Affiliate of the Company.

        "Bond Purchase Agreement"—this Agreement.

        "Bondable Capacity"—Section 4.02A of the Indenture.

        "Bonds"—Section 1.1 of this Agreement.

        "Business Day"—a day other than a Saturday, a Sunday or a day on which commercial banks in New York, New York are required or authorized to be closed (other than a general bank holiday or moratorium, in either case of longer than 4 calendar days).

        "Closing"—Section 1.2 of this Agreement.

        "Closing Date"—Section 1.2 of this Agreement.

        "Collateral"—all of that Property subject to the Lien of the Indenture.

        "Company"—the introductory sentence of this Agreement.

        "Default"—Section 1.01 of the Indenture.

        "Environmental Protection Law"—means any federal, state, county, regional or local law, statute, or regulation (including, without limitation, (a) the Comprehensive Environmental Response, Compensation, and Liability Act of 1980; (b) the Resource Conservation and Recovery Act of 1976; (c) the Superfund Amendments and Reauthorization Act of 1986; (d) the Federal Water Pollution Control Act; and (e) the Clean Water Act of 1977; in each case, as amended from time to time, and together with all rules and regulations promulgated in connection therewith) enacted by any Governmental Authority in connection with or relating to the protection or regulation of the environment, including, without limitation, those laws, statutes, and regulations regulating the disposal, removal, production, storing, refining, handling, transferring, processing, or transporting of Hazardous Substances and any orders, decrees or judgments issued by any court of competent jurisdiction in connection with any of the foregoing.

        "ERISA"—means the Employee Retirement Income Security Act of 1974, as amended from time to time.

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        "ERISA Affiliate"—means any corporation or trade or business that

        (a)   is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the IRC) as the Company; or

        (b)   is under common control (within the meaning of Section 414(c) of the IRC) with the Company.

        "Event of Default"—Section 1.01 of the Indenture.

        "Excepted Property"—the "Excepted Property" exceptions to the granting clauses of the Indenture.

        "First Mortgage Bonds"—means and includes the Series B Bonds, the Bonds and each and every other bond, of whatever series, issued pursuant to the Indenture.

        "First Supplemental Indenture"—Section 1.1 of this Agreement.

        "Governmental Authority"—means and includes:

        (a)   the governments of:

          (i)  the United States of America and any State or other political subdivision thereof; or

         (ii)  any jurisdiction in which the Company or the Subsidiary conducts all or any part of its business;

        (b)   each public utilities commission or similar entity having regulatory authority over the Company or the Subsidiary; and

        (c)   any other entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government referred to in clauses (a) or (b) of this definition.

"Hazardous Substances"—means and includes any and all pollutants, contaminants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum and petroleum-derived products).

"Indenture"—Section 1.1 of this Agreement.

"Interest Payment Date"—Section 1.01 of the Indenture.

"Institutional Investor" means (a) any original purchaser of a Bond, (b) any holder of a Bond holding more than $1,000,000 of the aggregate principal amount of the Bonds then outstanding, and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form.

"IRC"—means the Internal Revenue Code of 1986, together with all rules and regulations promulgated pursuant thereto, as amended from time to time.

"IRS"—means the Internal Revenue Service of the United States of America and any successor agency.

"Lien"—any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or

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contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. The term "Lien" includes reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances (including, with respect to stock, stockholder agreements, voting trust agreements, buy-back agreements and all similar arrangements) affecting Property. For the purposes of this Agreement, the Company or any Subsidiary will be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes and such retention or vesting will be deemed to be a Lien.

"Make Whole Amount Definitions"—for the purposes of the optional redemption provision in the Bonds, the following definitions which appear in the Third Supplemental Indenture shall apply:

        (a)   "Make-Whole Amount" means, with respect to any Series C Bond, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Bond over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero.

        (b)   "Called Principal" means, with respect to any Series C Bond, the principal of such Bond that is to be redeemed pursuant to Section 17.03 [Redemption] or has become or is declared to be immediately due and payable pursuant to Section 9.02 [Acceleration of Maturity; Recission and Annulment], as the context requires.

        (c)   "Discounted Value" means, with respect to the Called Principal of any Series C Bond, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Series C Bonds is payable) equal to the Reinvestment Yield with respect to such Called Principal.

        (d)   "Reinvestment Yield" means, with respect to the Called Principal of any Series C Bond, .50% plus the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display page of the Bloomberg Financial Markets Services Screen PX1 or the equivalent screen provided by Bloomberg Financial Markets Commodities News for actively traded U.S. Treasury Securities having a maturity equal to the Remaining Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the maturity closest to and greater than the Remaining Life and (2) the actively traded U.S. Treasury security with the maturity closest to and less than the Remaining Life.

        (e)   "Remaining Life" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) from the Settlement Date to the maturity of the Series C Bonds.

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        (f)    "Remaining Scheduled Payments" means, with respect to the Called Principal of any Series C Bond, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Series C Bonds, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to this provision.

        (g)   "Settlement Date" means, with respect to the Called Principal of any Series D Bond, the date on which such Called Principal is to be redeemed pursuant to Section 17.03 [Redemption] or Section 9.02 [Acceleration of Maturity; Recission and Annulment], as the context requires.

"Material" means material in relation to the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole.

"Material Adverse Effect" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement, the Indenture and the Bonds, or (c) the validity or enforceability of this Agreement, the Indenture or the Bonds.

"Multiemployer Plan"—means any Plan that is a multiemployer plan (as such term is defined in section 4001(a)(3) of ERISA).

"Net Earnings for Interest"—Section 4.02A of the Indenture.

"NMPRC"—means the New Mexico Public Regulation Commission.

"Officer's Certificate"—Section 1.01 of the Indenture.

"Original Indenture"—Section 1.1 of this Agreement.

"Other Agreements" is defined in Section 1.2(a).

"Other Purchasers" is defined in Section 1.2(a).

"Outstanding"—Section 1.01 of the Indenture; provided, however, that for purposes of this Agreement only (and not the Indenture, except to the extent provided therein), First Mortgage Bonds held or owned by the Company, any Subsidiary or any Affiliate shall not be deemed to be Outstanding.

"Parent"—Southwest Water Company, a Delaware corporation, which as of the Closing owns one hundred percent (100%) of the capital stock of the Company.

"PBGC"—means the Pension Benefit Guaranty Corporation and any successor corporation or governmental agency.

"Pension Plan"—means, at any time, any "employee benefit plan" (as such term is defined in Section 3(2) of ERISA), subject to Title IV of ERISA, maintained at such time by the Company or any ERISA Affiliate for employees of the Company or such ERISA Affiliate, excluding any Multiemployer Plan.

"Permitted Encumbrances"—Section 1.01 of the Indenture.

"Person"—an individual, partnership, corporation, trust or unincorporated organization, and a government or agency or political subdivision thereof.

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"Placement Memorandum"—Section 2.5 of this Agreement.

"Plan" means an "employee benefit plan" (as defined in section 3(3) of ERISA) subject to Title I of ERISA that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or its Parent or any of its Subsidiaries or with respect to which the Company or its Parent or any of its Subsidiaries may have any liability.

"Property"—any interest in any kind of property or asset, whether real, personal or mixed, and whether tangible or intangible.

"Purchaser"—means any Person listed as a purchaser of the Bonds on Annex 1 hereto.

"Purchasers"—means all of the Persons listed as purchasers of the Bonds on Annex 1 hereto.

"Redemption Price"—Section 1.01 of the Indenture.

"Required Holders"—at any time means the holders of 70% or more in aggregate principal amount of Bonds Outstanding at such time.

"Restricted Third Party Encumbrance"—Section 1.01 of the Indenture.

"Second Supplemental Indenture"—Section 1.1 of this Agreement.

"Securities Act"—the Securities Act of 1933, as such act may be amended from time to time.

"Security"—has the same meaning as in Section 2(l) of the Securities Act of 1933, as amended.

"Series A Bonds"—Section 3.01 of the Indenture.

"Series B Bonds"—Section 3 of the Second Supplemental Indenture.

"Series C Bonds"—Section 3 of the Third Supplemental Indenture.

"Subsidiary" means as to any Person, any corporation, association or other business entity in which such Person or one or more Subsidiaries of such Person or such Person and one or more Subsidiaries of such Person owns sufficient equity or voting interests to elect a majority of the directors (or Persons performing similar functions) of such entity. Unless the context otherwise requires any reference to a "Subsidiary" is a reference to a Subsidiary of the Company.

"Third Supplemental Indenture"—Section 1.1 of this Agreement.

"Title Commitment"—means the commitment of Fidelity National Title Insurance Company, dated on or reasonably near the Closing Date, to issue the policy of title insurance referred to in Section 3.9 of this Agreement, which commitment shall describe and cover the Properties of the Company previously subjected to the Lien of the Original Indenture and the Second Supplemental Indenture and those being subjected to such Lien pursuant the Third Supplemental Indenture and the Liens existing of record upon such Properties as of the date of such commitment.

"Transactions"—means and includes (a) the execution and delivery by the Company of the Bond Purchase Agreement and the Third Supplemental Indenture; (b) the execution, delivery, issue and sale of the Series C Bonds; and (c) performance by the Company of its obligations under the terms of the Series C Bonds, the Indenture and the Bond Purchase Agreement.

"Trustee"—Section 1.1 of this Agreement.

Section 5.2.    Accounting Principles.    All accounting terms not otherwise defined herein have the meanings assigned to them, and all computations herein provided for shall be made in accordance with generally accepted accounting principles at the time in effect, to the extent applicable, except where

20

such principles are inconsistent with the requirements of this Agreement. In determining accounting principles, the Company shall conform to generally accepted accounting principles at the time in effect, unless it is required to conform to any other order, rule or regulation of any Governmental Authority having jurisdiction over the Company.

Section 5.3.    Directly or Indirectly.    Where any provision in this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision will be applicable whether such action is taken directly or indirectly by such Person, including actions taken by or on behalf of any partnership in which such Person is a general partner.

Section 5.4.    Governing Law.    THIS AGREEMENT AND THE BONDS WILL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW MEXICO LAW, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

Section 5.5.    Section Headings, Table of Contents and Construction.    The titles of the Sections and the Table of Contents appear as a matter of convenience only, do not constitute a part of this Agreement and will not affect the construction hereof. Each covenant contained in this Agreement will be construed (absent an express contrary provision herein) as being independent of each other covenant contained herein, and compliance with any one covenant will not (absent such an express contrary provision) be deemed to excuse compliance with one or more other covenants.

        SECTION 6.    EXPENSES, ETC.    

Section 6.1.    Transaction Expenses.    Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys' fees of your special counsel and, if reasonably required, local or other counsel) incurred by you and each other purchaser of the Bonds in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement, the Indenture or the Bonds (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement, the Indenture or the Bonds or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement, the Indenture or the Bonds, or by reason of being a holder of any Bond, (b) the reasonable costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Bonds and (c) the reasonable costs and expenses incurred in connection with the initial filing of this Agreement, all related documents and financial information, all subsequent annual and interim filings of documents and financial information related hereto with the Securities Valuation Office of the National Association of Insurance Commissioners or any successor organization succeeding to the authority thereof. The Company will pay, and will save you and each other holder of a Bond harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you).

Section 6.2.    Survival.    The obligations of the Company under this Section 6 will survive the payment or transfer of any Bond, the enforcement, amendment or waiver of any provision of this Agreement, the Indenture or the Bonds, and the termination of this Agreement.

SECTION 7.HOME OFFICE PAYMENT.

        So long as you or your nominee shall be the holder of any Bond, and notwithstanding anything contained in the Indenture or in such Bond to the contrary, the Company will pay or cause to be paid all sums becoming due on such Bond for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Annex 1, or by such other method or at such other address as you shall have from time to time specified to the Company in

21

writing for such purpose, without the presentation or surrender of such Bond or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or redemption in full of any Bond, you shall surrender such Bond for cancellation, reasonably promptly after any such request, to the Company at its office set forth below. The transfer of any Bond shall be made pursuant to the terms and conditions set forth in the Indenture for such transfer. The Company will afford the benefits of this Section 7 to any Institutional Investor that is the direct or indirect transferee of any Bond purchased by you under this Agreement and that has made the same agreement relating to such Bond as you have made in this Section 7.

SECTION 8.MISCELLANEOUS.

Section 8.1.    Notices.

        (a)    Method; Address.    All communications under this Agreement or under the Bonds will be in writing, will be delivered (i) personally; (ii) by overnight courier; or (iii) sent by facsimile transmission, acknowledgment received, with a copy sent by first class mail; in each case, delivery or facsimile charges prepaid, and will be addressed:

          (i)  If to the Company:

New Mexico Utilities, Inc.
One Wilshire Building
624 S. Grand Avenue
Los Angeles, California 90017
Attention: Chief Financial Officer
FAX: (213) 929-1888

or at such other address as the Company shall have furnished in writing to the Trustee and all holders of the Bonds at the time Outstanding:

         (ii)  if to any of the holders of the Bonds:

        (A)  if such holder is the Purchaser, at its address set forth on Annex 1 hereto, and further including any parties referred to on such Annex 1 that are required to receive notices in addition to such holder of the Bonds, or to any such party at such other address as such party may designate by notice duly given to the Company and to the Trustee in the manner provided in this Section 8.1 (which other address shall be entered in the Bond register); and

        (B)  If such holder is not the Purchaser, at its address set forth in the register for the registration and transfer of Bonds maintained pursuant to Section 11.02 of the Indenture, or to any such party at such other address as such party may designate by notice duly given in the manner provided in this Section 8.1 to the Company and to the Trustee (which other address shall be entered in such register).

        (b)    When Given.    Any communication under this Section 8.1 shall be deemed given only when actually received.

Section 8.2.    Amendment and Waiver.    

        (a)    Requirements.    This Agreement may be amended, and the observance of any term hereof may be waived, with (and only with) the written consent of the Company and the Required Holders; provided that no such amendment or waiver of any of the provisions of Section 1, Section 3 or this Section 8.2, or any definition relating thereto, shall be effective as to any holder of Bonds unless consented to by such holder in writing.

22

        (b)    Solicitation of Bondholders.

        (i)    Solicitation.    The Company shall not:

        (A)  solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions hereof or the Bonds; or

        (B)  solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of the Indenture, which proposed waiver or amendment would, pursuant to the terms of the Indenture, require the consent of any holder of a Bond;

unless, in each case, each holder of the Bonds (irrespective of the amount of Bonds then owned by it) shall be informed thereof by the Company with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any waiver or consent effected pursuant to the provisions of this Section 8.2 or Article XIII of the Indenture shall be delivered by the Company to each holder of Outstanding Bonds forthwith following the date on which the same shall have been executed and delivered by all holders of Outstanding Bonds (if any) required to consent or agree to such waiver or consent.

        (ii)    Payment.    The Company shall not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of First Mortgage Bonds as consideration for or as an inducement to the entering into by any holder of First Mortgage Bonds of any waiver or amendment of any of the terms and provisions hereof, of any other purchase agreement pursuant to which any other First Mortgage Bonds were sold, of any First Mortgage Bond or of the Indenture unless such remuneration is concurrently paid, such security is concurrently granted, or an offer is concurrently made on the same terms, ratably to the holders of all Bonds then Outstanding.

        (iii)    Scope of Consent.    Any consent made pursuant to this Section 8.2 by a holder of Bonds that has transferred or has agreed to transfer its Bonds to the Company, any Subsidiary or any Affiliate and has provided or has agreed to provide such written consent as a condition to such transfer shall be void and of no force and effect except solely as to such holder, and any amendments effected or waivers granted or to be effected or granted that would not have been or would not be so effected or granted but for such consent (and the consents of all other holders of Bonds that were acquired under the same or similar conditions) shall be void and of no force and effect, retroactive to the date such amendment or waiver initially took or takes effect, except solely as to such holder.

        (iv)    Other Offers to Repurchase.    The Company shall not and shall not permit any Affiliate to make any offer to repurchase, exchange for any other security or otherwise acquire for value any First Mortgage Bond (whether or not the acceptance of such offer is conditioned upon the giving by any holder of any First Mortgage Bond of any waiver or consent) unless such offer is concurrently made on the same terms, ratably, to the holders of all Bonds then Outstanding.

        The foregoing provisions of this Section 8.2(b) shall not prevent or preclude:

        (A)  payment by the Company of attorneys' fees and expenses (including, without limitation, the fees of counsel who are employees of a holder of First Mortgage Bonds, at the rate or rates, if any, not to exceed the rate or rates then customarily charged by such holder) or other out-of-pocket costs incurred by a holder of First Mortgage Bonds in connection with any such consent, waiver or amendment where such payment is required pursuant to a Purchase Agreement, any First Mortgage Bond or the Indenture;

        (B)  the issuance and sale by the Company of any series of First Mortgage Bonds with an interest rate, a prepayment premium, prepayment terms or other business or financial terms which are different from the business or financial terms of the Bonds, so long as such issuance and sale

23

and all such terms are in compliance with all applicable provisions of the Indenture concerning issuance of additional series of First Mortgage Bonds;

        (C)  the redemption of any First Mortgage Bonds pursuant to their respective terms so long as such redemption is not conditioned upon the giving by any holder of any First Mortgage Bond of any waiver or consent; or

        (D)  the payment or giving by the Company of consideration to all holders of First Mortgage Bonds of any series in exchange for the waiver, elimination or reduction of a right contained only in the First Mortgage Bonds of such series, so long as the payment or giving of such consideration does not violate any provision of the Indenture, and so long as, immediately after giving effect to the payment of such consideration and such waiver, elimination or reduction, no Event of Default would exist;

nor shall any provision of this Section 8.2(b) entitle the holders of the Bonds to receive payments or other consideration equal or equivalent to the payments or other consideration made or given pursuant to clauses (A), (C) or (D), or to receive any right or benefit afforded to the holders of any other series of First Mortgage Bonds pursuant to clause (B) above, to which the holders of the Bonds would not otherwise be entitled.

        (c)    Binding Effect.    Except as provided in Section 8.2(b) hereof, any amendment or waiver consented to as provided in this Section 8.2 shall apply equally to all holders of Bonds and shall be binding upon them and upon each future holder of any Bond and upon the Company whether or not such Bond shall have been marked to indicate such amendment or waiver. No such amendment or waiver shall extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon.

Section 8.3.    Reproduction of Documents.    This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications which may hereafter be executed; (b) documents received by you at the closing of your purchase of the Bonds (except the Bonds themselves); and (c) financial statements, certificates and other information previously or hereafter furnished to you; may be reproduced by you by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that any such reproduction will be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction will likewise be admissible in evidence.

Section 8.4.    Survival.    All warranties, representations, certifications and covenants made by you in Section 1.3 of this Agreement, and made by the Company or by the Parent and contained in this Agreement or in any certificate or other instrument executed and delivered by the Company or the Parent, as the case may be, pursuant to this Agreement in connection with the Closing, will be considered to have been relied upon by you (if made by the Company or the Parent) or the Company (if made by you), will be deemed made on and as of the Closing Date and will survive the delivery to you of the Bonds and the payment by you of the purchase price, regardless of any investigation made by or on behalf of you or the Company, as the case may be. All statements in any such certificate or instrument made by the Company or the Parent will constitute warranties and representations by the Person executing such certificate or instrument.

Section 8.5.    Successors and Assigns.    This Agreement will inure to the benefit of and be binding upon the successors and assigns of each of the parties. The provisions of this Agreement are intended to be for the benefit of all holders, from time to time, of Bonds, and will be enforceable by any such

24

holder, whether or not an express assignment to such holder of rights under this Agreement has been made by you or your successor or assign.

Section 8.6.    Duplicate Originals; Execution In Counterparts.    Two or more duplicate originals of this Agreement may be signed by the parties, each of which will be an original but all of which together will constitute one and the same instrument. This Agreement may be executed in one or more counterparts and will be effective when at least one counterpart has been executed by each party hereto, and each set of counterparts which, collectively, show execution by each party hereto will constitute one duplicate original.

Section 8.7.    Construction—Representations and Warranties.    The Parent is entering into this Agreement for the sole purpose of providing the representations and warranties set forth in Sections 2.4(a), 2.5, 2.12(a) and (b), and, to the extent such representations and warranties relate to the Parent, Section 2.10 and Section 2.15, and the Parent shall not be liable in connection with any other Sections of this Agreement other than Section 8.4 as it relates to the above-referenced sections.

Section 8.8.    Incorporation by Reference.    All exhibits and annexes attached to this Agreement are hereby incorporated into and made a part of this Agreement by this reference.

THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
THE NEXT PAGE IS THE SIGNATURE PAGE

25

        If this Agreement is satisfactory to you, please so indicate by signing the acceptance at the foot of a counterpart of this Agreement and return such counterpart to the Company, whereupon this Agreement will become binding between us in accordance with its terms.

Very truly yours,

NEW MEXICO UTILITIES, INC., a New Mexico corporation
By	By
Title:	Title:

        The undersigned hereby joins in the foregoing Agreement for the sole purpose described in Section 8.7 and to provide the representations and warranties which are ascribed to Southwest Water Company by the provisions of Section 2 and such section.

SOUTHWEST WATER COMPANY, a Delaware corporation
By	By
Title:	Title:

Agreed to and Accepted: [PURCHASER]

By	By
Title:	Title:

26

EXHIBIT A
(to Bond Purchase Agreement)

FORM OF FIRST MORTGAGE BOND, SERIES C 6.10%, DUE DECEMBER 1, 2024

NEW MEXICO UTILITIES, INC.
FIRST MORTGAGE BOND

Series C, 6.10%, due DECEMBER 1, 2024

$	No. C-
PPN No.	Albuquerque, New Mexico

        New Mexico Utilities, Inc., a corporation organized under the laws of the State of New Mexico (hereinafter called the "Company," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to                        , or registered assigns, on December 1, 2024, the sum of                         ($                        ) (or so much thereof as shall not have been paid upon prior redemption) and to pay interest (computed on the basis of a 360 day year of twelve 30 day months) thereon from the later of the initial issuance of the series of Bonds of which this Bond is a part, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually on the first day of each June and December in each year commencing on the first Interest Payment Date next succeeding the date of this Bond until the principal amount thereof will be due and payable; provided that interest on any overdue principal, overdue Redemption Price, and (to the extent permitted by applicable law) overdue installments of interest, shall accrue at a rate equal to the lesser of (a) the highest rate allowed by applicable law, or (b) 7.10% per annum. In no event shall the interest payable on this Bond (including any interest on overdue interest or any overdue Redemption Price) exceed the maximum amount which the Holder hereof may legally collect under the then applicable usury law. In the event that it is hereinafter determined by a court of competent jurisdiction that the interest payable under this Bond (including any interest on overdue interest or any overdue Redemption Price) is in excess of the amount which the Holder hereof may legally collect under the then applicable usury law, then (i) all interest actually paid (including any interest on overdue interest or any overdue Redemption Price) in excess of the maximum amount legally collectible by such Holder shall be applied to the payment of principal of this Bond or, if all principal shall previously have been paid, promptly repaid by such Holder to the Company and (ii) interest on this Bond (including any interest on overdue interest or any overdue Redemption Price) subsequent to the date of such determination shall be reduced to the maximum amount which it is determined that the Holder may collect under the then applicable usury law.

        The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in said Indenture, be paid to the Person (the "Registered Holder") in whose name this Bond (or one or more Predecessor Bonds, as defined in said Indenture) is registered at the close of business on the Regular Record Date for such interest, which shall be the fifteenth (15th) day (whether or not a Business Day) of the calendar month next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Registered Holder on such Regular Record Date, and may be paid to the Person in whose name this Bond (or one or more Predecessor Bonds) is registered at the close of business on a Special Record Date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof being given to Bondholders not less than ten (10) days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Bonds of this series shall be listed, if any, and upon such notice as shall be required by such exchange, all as more fully provided in said Indenture. The Trustee shall give notice of such Special Record Date and pay or arrange for payment of such defaulted interest as promptly as possible following receipt of or availability of funds for such purpose.

        The principal, Make-Whole Amount, if any, and the Redemption Price of, and the interest on, this Bond shall be payable by the method and at the address specified for in Annex 1 to the Bond Purchase Agreement described below or by such other method or at such other address as the Registered Holder thereof shall have specified in writing. All such payments shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts.

        If any payment due on, or with respect to, this Bond shall fall due on a day other than a Business Day, then such payment shall be made on the first Business Day following the day on which such payment shall have so fallen due; provided that if all or any portion of such payment shall consist of a payment of interest, for purposes of calculating such interest, such payment shall not be deemed to have been originally due on such first following Business Day, and such interest shall accrue and be payable only to the Interest Payment Date.

        This Bond is one of a duly authorized issue of Bonds of the Company designated as its "First Mortgage Bonds" (herein called the "Bonds"), issued and to be issued in one or more series under, and all equally and ratably secured by, an Indenture of Mortgage dated February 14, 1992 (the "Original Indenture"), between the Company and Wells Fargo Bank, N.A., as Trustee (herein called the "Trustee," which term includes any successor Trustee), as amended and supplemented by (i) that certain First Supplement to Indenture of Mortgage dated February 14, 1992 (the "First Supplemental Indenture"), dated as of May 15, 1992, (ii) that certain Second Amendment and Supplement to Indenture of Mortgage dated February 14, 1992 (the "Second Supplemental Indenture"), dated as of October 21, 1996 and (iii) that certain Third Amendment and Supplement to the Indenture of Mortgage dated February 14, 1992 (the "Third Supplemental Indenture"), dated as of December 15, 2004 (such Original Indenture, as so amended by the First Supplemental Indenture, the Second Supplemental Indenture and the Third Supplemental Indenture, being herein called the "Indenture") to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the properties thereby mortgaged, pledged and assigned, the nature and extent of the security, the respective rights thereunder of the Holders of the Bonds, the Trustee and the Company and the terms upon which the Bonds are, and are to be, authenticated and delivered. This Bond is issued under and pursuant to the terms and provisions of the separate Bond Purchase Agreements dated as of December 15, 2004 (the "Bond Purchase Agreement") among the Company, Southwest Water Company and each Purchaser named therein. Capitalized terms not otherwise defined herein are defined as provided in the Indenture.

        As provided in the Indenture, the Bonds are issuable in series which may vary as in the Indenture provided or permitted. This Bond is one of the series specified in its title.

        This Bond is subject to redemption in whole, at any time, and in part, from time to time, before its maturity in the following events and in the manner provided in Article V and Section 17.03 of the Indenture:

        (1)   at any time after issuance, at the option of the Company evidenced by a Board Resolution at a Redemption Price equal to 100% of the principal amount of this Bond to be redeemed, together with the Make-Whole Amount, if any, and interest accrued to the Redemption Date, and on a Redemption Date specified by the Company as provided in Section 5.02 of the Indenture; and

        (2)   from Major Event Proceeds, at a Redemption Price equal to 100% of the principal amount of this Bond to be redeemed, together with interest accrued to the Redemption Date, and on a Redemption Date that is the first date for which notice of redemption can be given by the Trustee as provided in Article V of the Indenture; provided, however, that such redemption may only be made if this Bond is redeemed pro rata with all other Outstanding Bonds of whatever series.

A-2

        It is provided in the Indenture that Bonds of this series that the aggregate principal amount of any required or optional partial redemption of the Series C Bonds be allocated in units of $1,000 or multiples thereof on a pro rata basis among the holders of the Series C Bonds and that upon any partial redemption of any such Bond the same shall, except as otherwise permitted by the Indenture, be surrendered in exchange for one or more new Bonds in authorized form for the unredeemed portion of principal. Bonds (or portions thereof as aforesaid) for whose redemption and payment provision is made in accordance with the Indenture shall thereupon cease to be entitled to the lien of the Indenture and shall cease to bear interest from and after the date fixed for redemption.

        If an Event of Default, as defined in the Indenture, shall occur, the principal of the Bonds may become or be declared due and payable in the manner and with the effect provided in the Indenture whereupon all principal, accrued interest and the Make-Whole Amount, if any, shall be due and payable,

        The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Bonds under the Indenture at any time by the Company with the consent of the Holders of 66²/3% in aggregate principal amount of the Bonds of each series at the time Outstanding affected by such modification; provided that the Supplemental Indenture establishing any such series may provide for the consent of the Holders of a different percent in aggregate principal amount of the Bonds of such series at the time Outstanding. The consent of the Holders of 70% in aggregate principal amount of the Series C Bonds at the time Outstanding is required to approve any such modification affecting the Series C Bonds. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of Bonds at the time Outstanding on behalf of the Holders of all the Bonds, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Bond shall be conclusive and binding upon such Holder and upon all future Holders of this Bond and of any Bond issued upon the transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Bond.

        No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Bond at the times, places and rates, and in the coin or currency, herein prescribed.

        As provided in the Indenture and subject to certain limitations therein set forth, this Bond is transferable on the Bond Register of the Company, upon surrender of this Bond for transfer at the office or agency of the Company in Albuquerque, New Mexico, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Bond Registrar duly executed by the Registered Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Bonds of the same series, of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees.

        The Bonds of this series are issuable only as registered Bonds without coupons in denominations of $1,000.00 or any multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Bonds of this series are exchangeable for a like aggregate principal amount of Bonds of this series of a different authorized denomination, as requested by the Holder surrendering the same.

        No service charge shall be made for any transfer or exchange hereinbefore referred to, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

A-3

        The Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Bond is registered as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Bond shall be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.

        Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Bond shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.

        IN WITNESS WHEREOF, the Company has caused this Bond to be duly executed under its corporate seal.

Dated:
	NEW MEXICO UTILITIES, INC.
[SEAL]
	By:
Attest:

        This is one of the Bonds of the series designated herein referred to in the within-mentioned indenture.

WELLS FARGO BANK, N.A., as Trustee
By:	Authorized Officer	Dated:

A-4

EXHIBIT B1
(to Bond Purchase Agreement)

DESCRIPTION OF COMPANY COUNSEL'S CLOSING OPINION

        The closing opinion of Latham & Watkins LLP, counsel for the Company called for by Section 3.1 of the Bond Purchase Agreement dated as of December 15, 2004 (the "Bond Purchase Agreement") among the Company, Southwest and the Purchaser, shall be to the effect that:

        1.     No registration of the Bonds under the Securities Act of 1933, as amended, and no qualification of the Indenture under the Trust Indenture Act of 1939, as amended, is required for the purchase of the Bonds by you in the manner contemplated by the Bond Purchase Agreement.

        2.     With your consent, based solely on a certificate of an officer of the Company as to factual matters, the Company is not, and immediately after giving effect to the sale of the Bonds in accordance with the Bond Purchase Agreement and the application of the proceeds as provided in Section 2.13 of the Bond Purchase Agreement, will not be required to be registered as an "investment company" within the meaning of the Investment Company Act of 1940, as amended.

        3.     The execution, delivery and performance of the Bond Purchase Agreement has been duly authorized by all necessary corporate action of Southwest Water Company, and the Bond Purchase Agreement has been duly executed and delivered by the Southwest Water Company

EXHIBIT B2
(to Bond Purchase Agreement)

FORM OF COMPANY'S SPECIAL COUNSEL'S CLOSING OPINION

[Letterhead of Montgomery & Andrews]

[Closing Date]

[Purchasers]

Re: New Mexico Utilities, Inc.
$12,000,000 First Mortgage Bonds, Series C

Ladies and Gentlemen:

        We have been engaged as special counsel to New Mexico Utilities, Inc. (the "Company"), a New Mexico corporation, for purposes of rendering certain opinions under New Mexico law in connection with the Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of December 15, 2004, between the Company, joined for certain purposes by Southwest Water Company, a Delaware corporation ("Southwest"), and you, as Purchaser, which Bond Purchase Agreement provides, among other things, for the sale by the Company of its First Mortgage Bonds, Series C 6.10%, due December 1, 2024 (the "Series C Bonds") in the aggregate principal amount of $12,000,000 issued under and pursuant to an Indenture of Mortgage (the "Original Indenture"), dated as of February 14, 1992, between the Company and Wells Fargo Bank, N.A., as successor to Sunwest Bank of Albuquerque, National Association, as trustee (the "Trustee"), as amended by a certain First Supplement to Indenture of Mortgage (the "First Supplemental Indenture") dated as of May 15, 1992, a certain Second Amendment and Supplement to Indenture of Mortgage (the "Second Supplemental Indenture") dated as of October 21, 1996, and a certain Third Amendment and Supplement to Indenture of Mortgage (the "Third Supplemental Indenture") dated as of December 15, 2004. The Original Indenture, the First Supplemental Indenture, the Second Supplemental Indenture and the Third Supplemental Indenture are herein sometimes referred to, collectively, as the "Indenture." The Indenture grants to the holders of the Company's first mortgage bonds from time to time issued thereunder, including the Series C Bonds, a security interest in certain property, whether presently owned or hereafter acquired, of the Company, more particularly described in the Indenture, consisting of both real property and real property interests, including, in each case, fixtures, other than Excepted Property, as described (the "Real Property"), and personal property, other than Excepted Property, as described (the "Personal Property"). We were also engaged to represent the Company in certain proceedings before the New Mexico Public Regulation Commission (the "NMPRC") regarding the issuance and sale of the Series C Bonds and related transactions. The terms used in our opinion and not defined herein shall have the respective meanings ascribed to them in, or pursuant to the provisions of the Bond Purchase Agreement or the Indenture.

        In the course of our engagement, we have reviewed executed copies of the Bond Purchase Agreement, the Indenture, the Financing Statements and various certificates and other documents executed and delivered in connection therewith, and each of the executed and authenticated Series C Bonds, prior to the delivery of this letter, by each entity whose signature is provided for therein.

        We have also made such legal and factual examinations and inquiries, including an examination of originals or copies certified or otherwise identified to our satisfaction as being true copies, of such instruments, corporate records and other documents as we have deemed necessary or appropriate for the purposes of this opinion.

        As to factual matters and the authentication of instruments and other documents relevant to the opinions expressed below, we have, with your consent, relied upon certificates of public officials and officers of the Company, without conducting independent investigations with respect thereto.

        In addition, we have, with your consent, relied upon certain other matters as described below in rendering certain of the opinions set forth below. We express no opinion as to the application of the laws of any State other than New Mexico, nor as to the application or requirements of any federal securities laws or regulations.

        On the basis of the foregoing and in reliance thereon and on such other matters as are hereinafter specified, we are of the opinion that, as of the date hereof:

        1.     The Series C Bonds conform to the requirements of the Indenture.

        2.     The Company has complied with all conditions precedent to the issuance, sale and delivery of the Series C Bonds imposed by the provisions of the Indenture.

        3.     The Company is a corporation duly incorporated, legally existing, and in good standing under the laws of the State of New Mexico and has all requisite corporate power and authority to execute and deliver the Bond Purchase Agreement and the Indenture, to issue, sell and deliver the Series C Bonds, to perform its obligations pursuant to the Bond Purchase Agreement, the Series C Bonds and the Indenture, to carry on its business as now conducted by it in the State of New Mexico, and to own the Real Property and the Personal Property which it now owns.

        4.     The Indenture has been duly authorized by proper corporate action of the Company's Board of Directors and has been duly executed and delivered on behalf of the Company by its duly authorized officers. The Indenture constitutes a legal, valid and binding instrument of the Company enforceable in accordance with its terms, except to the extent that enforcement thereof may be limited by (i) the laws of the State of New Mexico (where the property covered thereby is situated) affecting the remedies for the enforcement of the liens and security interests provided for therein, which laws in our opinion do not make inadequate the remedies necessary for the realization of the benefits of such security; (ii) bankruptcy, insolvency, reorganization, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors' rights; and (iii) general principles of equity. The Real Property now owned by the Company has been subjected to the terms of the New Mexico Deed of Trust Act (N.M. Stat. Ann. §§ 48-10-1 et seq.) by the Indenture, and, subject to continuing compliance with the requirements of that act, the Trustee has a power of sale under which such Real Property may be sold as provided in the act. No action by the stockholder of the Company is required by law, by the Articles of Incorporation of the Company or by the By-Laws of the Company for the authorization, execution and delivery of the Indenture.

        5.     The Bond Purchase Agreement has been duly authorized by proper corporate action of the Company's Board of Directors and has been duly executed and delivered on behalf of the Company by its duly authorized officers. Except to the extent that enforcement may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors' rights, and (ii) general principles of equity, the Bond Purchase Agreement constitutes a legal, valid and binding instrument of the Company enforceable in accordance with its terms. No action by the stockholder of the Company is required by law, by the Articles of Incorporation of the Company or by the By-Laws of the Company for the authorization, execution and delivery of the Bond Purchase Agreement.

        6.     The Series C Bonds in the aggregate principal amount of $12,000,000 being purchased on the date hereof have been duly authorized by proper corporate action of the Company's Board of Directors, have been duly executed and delivered on behalf of the Company by its authorized officers, have been duly issued by the Company and have been duly authenticated by the Trustee under the Indenture, and the obligations of the Company represented by the Series C Bonds are legal, valid and binding obligations of the Company which are enforceable in accordance with their terms, except to the extent that enforcement may be limited by (i) bankruptcy, insolvency,

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reorganization, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors' rights, and (ii) general principles of equity. Subject to the qualifications in paragraph 2, above, with respect to the enforceability of the Indenture, the Series C Bonds are entitled to the benefit and security of the Indenture, equally and ratably with all First Mortgage Bonds of other series which may from time to time be issued pursuant to and secured by the Indenture in accordance with the terms thereof, except as to any sinking, amortization, improvement, or other analogous fund established in accordance with the provisions of the Indenture.

        7.     Neither (a) the execution and delivery by the Company of the Bond Purchase Agreement or the Indenture; nor (b) the granting to the Trustee of liens upon certain collateral pursuant to the provisions of the Indenture; nor (c) the execution, delivery, issue and sale of the Series C Bonds; nor (d) compliance by the Company with the terms of the Series C Bonds, the Indenture and the Bond Purchase Agreement (all such transactions referred to in clauses (a) through (d), inclusive, of this paragraph 5 being hereinafter referred to as the "Transactions") will conflict with, or result in any breach of any of the provisions of, or constitute a default under, or result in the creation or imposition of any lien (other than the lien of the Indenture) upon, any of the Real Property or Personal Property of the Company pursuant to (i) the provisions of the Articles of Incorporation or By-Laws of the Company; (ii) any agreement or other instrument, known to us after due inquiry, to which the Company is a party or by which it or any of its Property is bound; (iii) any United States federal law, statute or regulation or New Mexico law, statute, regulation or ordinance; or (iv) any order, judgment, award or decree, known to us after due inquiry of the Company (no independent search of court records having been made) of any court or arbitrator against or affecting the Company or any of its property.

        8.     The Indenture (including the Third Supplemental Indenture) is in due form for recording and has been duly filed for record as a mortgage on the Real Property in each and every public office in which such recording is a prerequisite to the establishing of record of the lien thereof on the Real Property therein specifically described which is now owned by the Company. All taxes and fees required to be paid with respect to the execution and recording of the Indenture and the issuance of the Series C Bonds have been paid. The Indenture will not have to be refiled, reregistered or redeposited to continue the lien in and upon the Real Property now owned by the Company and specifically described therein or the effectiveness of such lien as against any subsequent transferee of the Real Property specifically described therein.

        9.     The Indenture constitutes a valid mortgage lien on the Real Property now owned by the Company which is specifically or generally described in the granting clauses of the Indenture as being subject to the lien thereof and which is located in Bernalillo County, New Mexico. We express no opinion as to the attachment of the lien of the Indenture on Real Property acquired after the date and time of recording. The opinion in this paragraph is given in partial reliance on Title Insurance Policy No. 34-4042-61-001004 dated March 11, 1992, and Title Policy No. 32-0047-061-00000006 dated November 4, 1996 each issued by Ticor Title Insurance Company, and upon the written commitment of Fidelity National Title Insurance Company dated November 1, 2004 for the issuance of a new policy of title insurance with the amount of coverage of $12,000,000 to insure the Trustee and the holders of the Series C Bonds against loss or damage to the extent of $12,000,000 in the event of any defect in the lien of the Indenture or the Real Property or by reason of the title to such Real Property described in the Indenture being other than as shown in such commitment.

        10.   The provisions of the Indenture are effective to create a valid security interest in favor of the Trustee in the Personal Property of the Company. The Indenture, as a financing statement, or a separate financing statement in respect of the Personal Property (the term "Financing Statement" referring to either or both as the case may be) has been duly filed or recorded in each and every

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public office in which such filing and/or recording is a prerequisite to the establishing of record of the lien of the Indenture on all of the Personal Property therein specifically described which is owned by the Company. Based upon the issuance and sale by the Company to you prior to the delivery of this letter of the Series C Bonds and your concurrent delivery of the consideration provided for in the Bond Purchase Agreement, pursuant to the provisions of the Indenture the Trustee has a valid, perfected security interest in the Personal Property presently owned by and in the possession of the Company or hereafter acquired by the Company. Our opinion as to perfection, however, is expressly limited to those items and types of the Personal Property as to which perfection is accomplished by the filing of a financing statement in accordance with the Uniform Commercial Code-Secured Transactions (N.M. Stat. Ann. §§ 9-101 et seq. (1978)) as in effect in New Mexico ("UCC Article 9"). Such security interest is, in the case of after-acquired Personal Property, subject to purchase money security interests and acquisition by the Company of rights in and possession of such Personal Property. Except for the timely filing of continuation statements as required by UCC Article 9 and the filing of appropriate amendments to the Financing Statements required by changes in circumstances, it is not necessary to refile the Financing Statements or to file new financing statements to maintain the perfection of the security interests in the Personal Property.

        Based upon the assumptions and subject to the limitations set forth in this paragraph, insofar as such security interest relates to that portion of the Personal Property which is personal property owned and possessed by the Company as of the date hereof and located in the State of New Mexico and, in the case of fixtures, in Bernalillo County, New Mexico, such security interest will have priority over all other security interests in any of such Personal Property which may be perfected under UCC Article 9 by filing with the New Mexico Secretary of State or the County Clerk of Bernalillo County, New Mexico, a financing statement covering such Personal Property subsequent to the date hereof, except as such priority is or may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or other similar laws or case decisions relating to or affecting the enforcement of the rights of creditors generally. The opinions in this paragraph 8 are, as to Personal Property acquired after the date of this letter, expressly subject to pre-existing liens and encumbrances. Such opinions are also given in reliance upon a certificate of an officer of the Company to the effect that all of such Personal Property has been continuously located in the State of New Mexico since at least January 1, 2004, and that no other security interest in any of such Personal Property exists by a certificate of title or ownership issued under the laws of any state other than New Mexico. In addition, in giving such opinions we have relied, in part, upon a certificate from an officer of the Company to the effect that the Company has not, during the period from January 1, 2004 to the date hereof, created any "purchase money security interest," as defined in UCC Article 9 (N.M. Stat. Ann. §§ 55-9 -107 (1978)) in any portion of the Personal Property. Finally, we have relied on the reports of UCC and other lien searches and we are relying upon the accuracy of such reports as to the absence of filing of any financing statements or notices against the Company except as shown in such reports. We have made no independent examination of the public records and indices covered by such reports and consequently express no opinion as to the priority of the Trustee's security interest under the Indenture as against the interest of any other secured party which, prior to the filing of the Financing Statements, filed a financing statement or notice not reported in such reports.

        11.   All consents, approvals or authorizations, if any, of or by any Governmental Authority required on the part of the Company in connection with the consummation of the Transactions have been duly obtained, and the Company has complied with all applicable provisions of law requiring any designation, declaration, filing, registration or qualification with any Governmental Authority in connection with the Transactions.

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        12.   All approvals and consents of the NMPRC required for the valid issuance and sale of the Series C Bonds, the valid execution and delivery of the Bond Purchase Agreement by the Company, the valid execution and delivery of the Third Supplemental Indenture by the Company pursuant to and in accordance with the terms and conditions of the Bond Purchase Agreement and the Indenture, the granting to the Trustee of liens upon certain collateral, in each case, pursuant to the provisions of the Second Supplemental Indenture, and the compliance by the Company with the terms of the Series C Bonds, the Indenture and the Bond Purchase Agreement have been obtained and have become effective. All appeal periods applicable to the effectiveness of such approvals and consents have expired. There is in effect no stop order or other order of the NMPRC denying, suspending or revoking the effectiveness of any such approvals and consents, and no proceedings for such purposes are pending or, to our knowledge, threatened before the NMPRC.

        13.   There is no litigation or proceeding, known to us after due inquiry of the Company (no independent search of court records having been made), pending or threatened against the Company not disclosed in the Bond Purchase Agreement or the financial statements of the Company which have been furnished to you pursuant thereto in which a judgment, order or award is likely that could be materially adverse to the Company or that could affect the ability of the Company to consummate the Transactions or perform its obligations under the Bond Purchase Agreement or the Indenture.

        14.   The Company has complied with all conditions precedent to the consummation of the Transactions imposed by law.

        15.   To the best of our knowledge, the Company is not in violation of any applicable federal, state or other law or regulation which would have a material adverse effect on the business of the Company.

        The certificates of officers or other representatives of the Company upon which we have relied which are referred to in this opinion are being delivered to you in connection with the closing proceedings.

        To the extent that the obligations of the Company may be dependent upon such matters, we have assumed for the purposes of our opinions that the Bond Purchase Agreement has been duly authorized, executed and delivered by each of you and constitutes your respective legal, valid and binding obligation enforceable in accordance with its terms; and that each of you has the requisite corporate or other organizational power and authority to perform your respective obligations under the Bond Purchase Agreement. For the purposes of our opinions we have also relied upon the opinion of counsel to the Trustee to the effect that the Third Supplemental Indenture has been duly executed and delivered by the Trustee, that the Trustee has the requisite corporate or other organizational power and authority to perform its obligations under the Indenture, and that the Trustee has duly authenticated the Series C Bonds under the Indenture.

        We note specifically that certain of the representations and warranties made to you or in your favor contained in the Bond Purchase Agreement have been made by Southwest rather than by the Company itself. In our view, the fact that such representations and warranties have been made by Southwest rather than the Company will not affect our opinions as to the validity or enforceability of the Bond Purchase Agreement or the Indenture or prevent the exercise by the Trustee of the remedies afforded to it by the Indenture upon a default arising from the breach of any representation or warranty made by Southwest in the Bond Purchase Agreement. Such opinion is based, in part, upon the opinion of Latham & Watkins LLP of even date to the effect that the Bond Purchase Agreement has been ratified and approved by proper corporate action of Southwest's board of directors and has been duly executed and delivered on behalf of Southwest by its duly authorized officers.

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        This letter is provided to you solely in connection with the transactions described herein and may not be published or disseminated in any way without our prior written consent; the foregoing shall not, however, preclude reliance upon this opinion by Latham & Watkins LLP and Chapman and Cutler LLP, delivery of this opinion to or reliance upon this opinion by any governmental authorities having regulatory jurisdiction over you or delivery of this opinion to or reliance upon this opinion by any subsequent Holder of the Series C Bonds who becomes a Holder in compliance with the provisions of the Bond Purchase Agreement and the Indenture.

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EXHIBIT B3
(to Bond Purchase Agreement)

Form of Trustee Counsel's Closing Opinion

[Closing Date]

To the Parties Listed on Attached Schedule A

$12,000,000 First Mortgage Bonds, Series C 6.10%
Due December 1, 2024
Of New Mexico Utilities, Inc.

Ladies and Gentlemen:

        I am Senior Counsel for Wells Fargo & Company, the parent corporation of Wells Fargo Bank, National Association, a national banking association. As such, I have reviewed the provisions of a Third Amendment and Supplement to Indenture of Mortgage dated as of December 1, 2004 (the "Third Supplemental") between New Mexico Utilities, Inc. (the "Company") and Wells Fargo Bank, National Association, as Trustee (the "Trustee"), amending and supplementing that certain Indenture of Mortgage dated as of February 14, 1992 as previously amended and supplemented (together with the Third Supplemental, the "Indenture") between the Company and the Trustee. In addition, I am generally familiar with the Articles of Association and the Bylaws of the Trustee and am also familiar with the corporate proceedings of the Trustee with regard to its authorization, execution and delivery of the Indenture. Capitalized terms used herein shall have the respective meanings ascribed to them in the Indenture, except as otherwise defined herein.

        For purposes of this opinion, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals, and the conformity with originals of all documents submitted to me as copies. In making my examination of documents executed by entities other than the Trustee, I have assumed that each such other entity had the power to enter into and perform all its obligations thereunder, and also have assumed the due authorization of all requisite action and due execution of such documents by each such entity. Where questions of fact material to my opinions expressed below were not established independently, I have relied upon statements of officers of the Trustee as contained in their certificates.

        Based upon the foregoing, I am of the opinion that:

        1.     The Trustee is a national banking association duly organized, validly existing and in good standing under the laws of the United States of America.

        2.     The Trustee is duly eligible and qualified to act as Trustee under the Indenture.

        3.     The Trustee has all requisite power, authority and legal right to execute and deliver the Indenture and to perform its obligations under the Indenture, and has taken all necessary corporate action to authorize the execution and delivery of and the performance of its obligations under the Indenture.

        4.     The Trustee has duly executed and delivered the Indenture. Assuming the due authorization, execution and delivery thereof by the Company, the Indenture is the legal, valid and binding agreement of the Trustee enforceable in accordance with its terms, except to the extent enforceability thereof may be subject to (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws affecting creditors' rights and remedies heretofore or hereafter enacted, and (ii) the application of equitable principles and the exercise of judicial discretion in appropriate cases.

        5.     The Company's First Mortgage Bonds, Series C 6.10%, Due December 1, 2024 have been duly authenticated by the Trustee.

        6.     The execution, delivery and performance of the Indenture does not now, and will not upon consummation of the transaction contemplated thereby in accordance with the existing terms thereof conflict with, result in a breach of or constitute a default under, any term or provision of the Articles of Association or Bylaws of the Trustee, any existing term or provision of any agreement, contract, instrument or indenture of any nature whatsoever, known to me, to which the Trustee is a party or by which it is bound; or, to the best of my knowledge after due inquiry, any existing order, judgment, writ, injunction or decree of any court or governmental authority having jurisdiction over the Trustee, nor will it conflict with or constitute a breach of or default under any law or administrative regulation to which the Trustee is subject (except that no representation, warranty or agreement is made herein with respect to any federal or state securities or Blue Sky laws or regulations) or result in the creation or imposition of any lien, charge or other security interest or encumbrance of any nature whatsoever upon any of the property or assets of the Trustee.

        7.     To the best of my knowledge after due inquiry, there are no actions, proceedings or investigations pending or threatened against the Trustee before any court, administrative agency or tribunal (i) asserting the invalidity of the Indenture (ii) seeking to prevent the consummation of any of the transactions contemplated thereby or (iii) that might materially and adversely affect the performance by the Trustee of its obligations under, or the validity or enforceability of the Indenture. For purposes of the foregoing, I have not regarded any actions, proceedings or investigations "threatened" unless the potential litigants or governmental authority has manifested to a member of the Wells Fargo & Company Law Department having responsibility for litigation matters involving the corporate trust activities of the Trustee present intention to initiate such proceedings.

        I advise you that I am admitted to practice in the State of Utah (the "State"), and do not purport to be an expert in or generally familiar with or qualified to express legal opinions based on the laws of any jurisdiction other than the federal laws of the United States ("Federal") and the State. In giving these opinions I have assumed with your permission that the applicable laws of the State of New Mexico do not differ in any material respect from applicable Federal and State laws. These opinions are further limited to such State and Federal laws in effect as of the date hereof.

        The foregoing opinions are being furnished to you solely for your benefit and that of your counsel and may not be relied upon by, nor may copies be delivered to, any other person without my prior written consent.

Very truly yours,

David L. Blackner
Senior Counsel

B3-2

SCHEDULE A

[Purchasers]

New Mexico Utilities, Inc.
Albuquerque, New Mexico

A.G. Edwards & Sons, Inc.
St. Louis, Missouri

Wells Fargo Bank, National Association
Denver, Colorado

B3-4

EXHIBIT B4
(to Bond Purchase Agreement)

FORM OF PURCHASER COUNSEL'S CLOSING OPINION

Re: $12,000,000 First Mortgage Bonds, Series C 6.10%,
due October 1, 2024
of
New Mexico Utilities, Inc.

[Purchasers]

Ladies and Gentlemen:

        We have acted as your special counsel in connection with your purchase from New Mexico Utilities, Inc., a New Mexico corporation (the "Company"), of the above-captioned $12,000,000 aggregate principal amount of First Mortgage Bonds, Series C 6.10%, due December 1, 2024 (the "Bonds") pursuant to the separate Bond Purchase Agreements dated as of December 15, 2004 (the "Agreement"), among the Company, Southwest Water Company and each of you. The Bonds are issued under an Indenture of Mortgage dated February 14, 1992 (hereinafter called the "Original Indenture"), between the Company and the trustee named therein, as supplemented and amended by three indentures supplemental thereto and amendatory thereof, including the Third Amendment and Supplement to Indenture of Mortgage dated February 14, 1992 (the "Third Supplement") dated as of December 15, 2004 entered into by the Company and Wells Fargo Bank, N.A., a national banking association, as trustee (the "Trustee"). The Original Indenture and the three supplemental indentures thereto are hereinafter collectively called the "Indenture". Capitalized terms used herein which are not otherwise defined shall have the meanings set forth in the Agreement.

        We have examined the Indenture, the Agreement, the Bonds delivered to you and such charter documents, corporate records, certificates of public officials and of officers of the Company and such other documents and showings and related matters of law as we have deemed necessary to enable us to give the opinion hereinafter set forth. We have also read the opinions of (i) Latham & Watkins LLP, counsel for the Company, (ii) Montgomery & Andrews, special counsel for the Company and (iii) David Blackner, Senior Counsel for the Trustee, delivered to you pursuant to the Agreement. We believe that the opinions referred to in the foregoing clauses (i)-(iii) are satisfactory in scope and form and that you are justified in relying thereon. In rendering the opinion set forth in paragraph 1 below, we have relied solely upon an examination of the Articles of Incorporation of the Company certified by the Corporate Secretary of the Company, a Certificate of Good Standing of the Company from the Secretary of State of the State of New Mexico and the By-laws of the Company. For the purposes of this opinion letter and with your consent, we have expressed our opinions herein with respect to matters of state law as if the laws of the State of Illinois applied (although the Company is a New Mexico corporation and the Agreement, the Indenture and the Bonds state that they are governed by the laws of the State of New Mexico). Accordingly, our opinions are limited to the laws of the State of Illinois and the Federal laws of the United States of America and we express no opinion on the laws of any other jurisdiction.

        Based upon the foregoing, we are of the opinion that:

        1.     The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of New Mexico and has the corporate power and authority to issue and sell the Bonds.

        2.     The Third Supplement and the Bonds have been duly authorized, executed and delivered by the Company.

        3.     The Agreement has been duly authorized, executed and delivered by the Company and constitutes a legal, valid and binding obligation, contract and agreement of the Company

enforceable against the Company in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally.

        4.     The issuance, sale and delivery of the Bonds under the circumstances contemplated by the Agreement do not, under existing law, require the registration of the Bonds under the Securities Act of 1933, as amended, or the qualification of the Indenture under the Trust Indenture Act of 1939, as amended.

        In rendering our opinion, we have made no independent examination of title to property of the Company purported to be owned by it, the validity and sufficiency of the franchises or other governmental authorizations under which the Company operates, the priority of the lien created by the Indenture, the absence of liens or encumbrances on property of the Company, or the form (for purposes of recordation) of the Indenture.

Respectfully submitted,

B4-2

EXHIBIT C1
(to Bond Purchase Agreement)

NEW MEXICO UTILITIES, INC.
CERTIFICATE OF OFFICERS

        We, [                        ] and [                        ], each hereby certify that we are, respectively, the [                        ] and the [                        ] of NEW MEXICO UTILITIES, INC. (the "Company"), a New Mexico corporation, and that, as such, we are authorized to execute and deliver this Certificate in the name of and on behalf of the Company, and hereby further certify as follows.

        1.     This certificate is being delivered pursuant to Section 3.4(a) of the separate Bond Purchase Agreements (the "Bond Purchase Agreement"), dated as of December 15, 2004, among the Company, Southwest Water Company, a Delaware corporation, and each of the Purchasers named therein (the "Purchaser"). The terms used in this Certificate and not defined herein shall have the respective meanings ascribed to them in the Bond Purchase Agreement.

        2.     The warranties and representations made by the Company contained in Section 2 of the Bond Purchase Agreement are true in all material respects on the date hereof.

        3.     Neither the Company nor the Subsidiary has taken any action or permitted any condition to exist that would constitute a Default or Event of Default.

        4.     The Company has performed and complied with all agreements and conditions contained in the Bond Purchase Agreement that are required to be performed or complied with by the Company before or at the date hereof.

        5.     [                        ] is, on and as of the date hereof, and at all times subsequent to [                        ,    ], has been, the duly elected, qualified and acting Secretary of the Company, and the signature appearing on the Certificate of Secretary dated the date hereof and delivered to the Purchasers contemporaneously herewith is his genuine signature.

        IN WITNESS WHEREOF, we have executed this Certificate in the name and on behalf of the Company as of on                        , 2004.

NEW MEXICO UTILITIES, INC.
By	Name: Title:
By	Name: Title:

C1-2

EXHIBIT C2
(to Bond Purchase Agreement)

SOUTHWEST WATER COMPANY
CERTIFICATE OF OFFICERS

        We, [                        ] and [                        ] each hereby certify that we are, respectively, the [                        ] and the [                        ] of SOUTHWEST WATER COMPANY ("Southwest"), a Delaware corporation, and that, as such, we are authorized to execute and deliver this Certificate in the name and on behalf of Southwest, and hereby certify as follows.

        1.     This certificate is being delivered pursuant to Section 3.4(b) of the separate Bond Purchase Agreements (the "Bond Purchase Agreement"), dated as of December 15, 2004, among New Mexico Utilities, Inc., a New Mexico corporation, Southwest, and each of the Purchasers named therein (the "Purchasers").

        2.     The warranties and representations made by Southwest contained in Section 2 of the Bond Purchase Agreement are true in all material respects.

        3.     [                        ] is, on and as of the date hereof, the duly elected, qualified and acting Secretary of Southwest, and the signature appearing on the Certificate of Secretary of Southwest dated the date hereof and delivered to the Purchasers contemporaneously herewith is his genuine signature.

        IN WITNESS WHEREOF, we have executed this Certificate in the name and on behalf of Southwest as of                        , 2004.

SOUTHWEST WATER COMPANY
By	Name: Title:
By	Name: Title:

C1-2

EXHIBIT D1
(to Bond Purchase Agreement)

NEW MEXICO UTILITIES, INC.
CERTIFICATE OF SECRETARY

        I, [                        ], hereby certify that I am the duly elected, qualified and acting Secretary of NEW MEXICO UTILITIES, INC., a New Mexico corporation (the "Company"); that, as such, I have access to its corporate records and am familiar with the matters herein certified; that I am authorized to execute and deliver this Certificate in the name and on behalf of the Company; and hereby further certify as follows.

        1.     This certificate is being delivered pursuant to Section 3.4(c) of the separate Bond Purchase Agreement (the "Bond Purchase Agreement"), dated as of December 15, 2004, among the Company, Southwest Water Company, a Delaware corporation, and each of the Purchasers named therein (the "Purchasers"). The terms used in this Certificate and not defined herein shall have the respective meanings ascribed to them in the Bond Purchase Agreement.

        2,     Attached hereto as Attachment A is a true and correct copy of resolutions, and the preamble thereto, adopted by the Board of Directors of the Company on                        , 2004, and such resolutions and preamble set forth in Attachment A hereto were duly adopted by said Board of Directors and are in full force and effect on and as of the date hereof, not having been amended, altered or repealed, and such resolutions are filed with the records of the Board of Directors.

        3.     The documents listed below were executed and delivered by the Company pursuant to and in accordance with the resolutions set forth in Attachment A hereto and said documents as executed are substantially on the terms submitted to and approved by the Board of Directors of the Company as aforementioned:

        (a)   the Bond Purchase Agreement;

        (b)   the Series C Bonds; and

        (c)   the Third Supplemental Indenture.

        4.     Attached hereto as Attachment B is a true, correct and complete copy of the bylaws of the Company as in full force and effect on and as of the date hereof, which bylaws were last amended by the Board of Directors of the Company on, and have been in full effect in said form at all times from and after [                        ,            ] to and including the date hereof, without modification or amendment in any respect.

        5.     Each of the following named persons is on and as of the date hereof, and at all times subsequent to [                        ] has been a duly elected, qualified and acting officer of the Company holding the office or offices set forth below opposite his name:

NAME OFFICE SIGNATURE

        6.     The signature appearing opposite the name of each such person set forth above is his genuine signature.

        7.     Attached hereto as Attachment C is a true, accurate and complete copy of the Certificate of Incorporation of the Company, together with all amendments thereto, as currently in effect There have been no amendments or supplements to or restatements of the Certificate of Incorporation of the Company since [                        ,            ].

        8.     The seal set forth beside my name below is the true corporate seal of the Company.

        IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of the Company as of                        , 2004.

	NEW MEXICO UTILITIES, INC.
[Corporate Seal]	Secretary

D1-2

ATTACHMENT A

RESOLUTIONS OF THE BOARD OF THE COMPANY

[To be supplied by the Company].

ATTACHMENT B

BYLAWS OF THE COMPANY

[To be supplied by Company].

ATTACHMENT C

CERTIFICATE OF INCORPORATION OF THE COMPANY

[To be supplied by Company].

EXHIBIT D2
(to Bond Purchase Agreement)

SOUTHWEST WATER COMPANY
CERTIFICATE OF SECRETARY

I, [                        ], hereby certify that I am the duly elected, qualified and acting Secretary of Southwest Water Company, a Delaware corporation ("Southwest"); that, as such, I have access to its corporate records and am familiar with the matters herein certified; that I am authorized to execute and deliver this Certificate in the name and on behalf of Southwest; and hereby further certify as follows.

        1.     This certificate is being delivered pursuant to Section 3.4(d) of the separate Bond Purchase Agreements (the "Bond Purchase Agreement"), dated as of December 15, 2004, among New Mexico Utilities, Inc., a New Mexico corporation, Southwest and each of the Purchasers named therein (the "Purchasers"). The terms used in this Certificate and not defined herein shall have the respective meanings ascribed to them in the Bond Purchase Agreement.

        2.     Attached hereto as Attachment A is a true and correct copy of resolutions, and the preamble thereto, adopted by the Board of Directors of the Company on                        , 2004, and such resolutions and preamble set forth in Attachment A hereto were duly adopted by said Board of Directors and are in full force and effect on and as of the date hereof, not having been amended, altered or repealed, and such resolutions are filed with the records of the Board of Directors. Southwest has executed and delivered, for the purpose of making certain representations, the Bond Purchase Agreement pursuant to and in accordance with such resolutions.

        3.     Attached hereto as Attachment B is a true, correct and complete copy of the bylaws of Southwest as in full force and effect on and as of the date hereof, which bylaws were last amended by the Board of Directors of Southwest on, and have been in full effect in said form at all times from and after [                        ,            ] to and including the date hereof, without modification or amendment in any respect.

        4.     Each of the following named persons is on and as of the date hereof a duly elected, qualified and acting officer of Southwest holding the office or offices set forth below opposite his name:

NAME OFFICE SIGNATURE

        5.     The signature appearing opposite the name of each such person set forth above is his genuine signature.

        6.     Attached hereto as Attachment C is a true, accurate and complete copy of the Certificate of Incorporation of Southwest, together with all amendments thereto, as currently in effect. There have been no amendments or supplements to or restatements of the Certificate of Incorporation of Southwest since [                        ,            ].

        7.     The seal set forth beside my name below is the true corporate seal of Southwest.

        IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of Southwest as of                        , 2004.

	SOUTHWEST WATER COMPANY
[Corporate Seal]	Secretary

D2-2

ATTACHMENT A

RESOLUTIONS OF THE BOARD OF DIRECTORS
SOUTHWEST WATER COMPANY

[To be supplied by the Parent].

ATTACHMENT B

BYLAWS OF SOUTHWEST WATER COMPANY

[To be supplied by the Parent].

ATTACHMENT C

CERTIFICATE OF INCORPORATION OF
SOUTHWEST WATER COMPANY

[To be supplied by the Parent].

EXHIBIT E
(to Bond Purchase Agreement)

FORM OF THIRD SUPPLEMENTAL INDENTURE

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Exhibit 4.8

EXHIBIT A (to Bond Purchase Agreement)
FORM OF FIRST MORTGAGE BOND, SERIES C 6.10%, DUE DECEMBER 1, 2024
NEW MEXICO UTILITIES, INC. FIRST MORTGAGE BOND Series C, 6.10%, due DECEMBER 1, 2024
EXHIBIT B1 (to Bond Purchase Agreement)
DESCRIPTION OF COMPANY COUNSEL'S CLOSING OPINION
EXHIBIT B2 (to Bond Purchase Agreement)
FORM OF COMPANY'S SPECIAL COUNSEL'S CLOSING OPINION [Letterhead of Montgomery & Andrews]
EXHIBIT B3 (to Bond Purchase Agreement)
Form of Trustee Counsel's Closing Opinion [Closing Date]
SCHEDULE A
EXHIBIT B4 (to Bond Purchase Agreement)
FORM OF PURCHASER COUNSEL'S CLOSING OPINION
EXHIBIT C1 (to Bond Purchase Agreement)
NEW MEXICO UTILITIES, INC. CERTIFICATE OF OFFICERS
EXHIBIT C2 (to Bond Purchase Agreement)
SOUTHWEST WATER COMPANY CERTIFICATE OF OFFICERS
EXHIBIT D1 (to Bond Purchase Agreement)
NEW MEXICO UTILITIES, INC. CERTIFICATE OF SECRETARY
ATTACHMENT A
RESOLUTIONS OF THE BOARD OF THE COMPANY
ATTACHMENT B
BYLAWS OF THE COMPANY
ATTACHMENT C
CERTIFICATE OF INCORPORATION OF THE COMPANY
EXHIBIT D2 (to Bond Purchase Agreement)
SOUTHWEST WATER COMPANY CERTIFICATE OF SECRETARY
ATTACHMENT A
RESOLUTIONS OF THE BOARD OF DIRECTORS SOUTHWEST WATER COMPANY
ATTACHMENT B
BYLAWS OF SOUTHWEST WATER COMPANY
ATTACHMENT C
CERTIFICATE OF INCORPORATION OF SOUTHWEST WATER COMPANY
EXHIBIT E (to Bond Purchase Agreement)
FORM OF THIRD SUPPLEMENTAL INDENTURE

EX-4.11

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Exhibit 4.11

WUC SHAREHOLDER AGREEMENT

        THIS WUC SHAREHOLDER AGREEMENT (this "Agreement") is made as of October 1, 2000 among Southwest Water Company, a Delaware corporation ("SWC"), SW Utility Company, a Texas corporation ("SWUC"), RTNT, Inc., a Texas corporation ("RTNT"), Thom W. Farrell ("Farrell") and Windermere Utility Co., Inc., a Texas corporation (the "Company"). SWUC and RTNT are collectively referred to herein as the "Shareholders."

W I T N E S S E T H:

        WHEREAS, upon the closing of that certain Merger Agreement and Plan of Reorganization of even date herewith (the "Merger Agreement"), and subsequent contribution of Company Common Stock by SWC to SWUC, SWUC will own 80% of the issued and outstanding capital stock of the Company and RTNT will own 20% of the issued and outstanding capital stock of the Company;

        WHEREAS, SWUC is a wholly owned subsidiary of SWC;

        WHEREAS, Farrell is the trustee of the Rollingwood Trust, the sole shareholder of RTNT; and

        WHEREAS, the Shareholders desire to more particularly set forth in writing their agreements with respect to (i) specific restrictions on the transfer of their interests in the Company and (ii) the terms under which SWUC may purchase, or may be required to purchase, RTNT's remaining shares of Company Common Stock.

        NOW, THEREFORE, in consideration of the premises and undertakings hereinafter set forth, the parties hereto agree as follows:

ARTICLE 1.
DEFINITIONS AND INTERPRETATION

        1.1    Definitions.    As used in this Agreement:

"Affiliate" of a Holder means (a) a Person directly or indirectly (through one or more intermediaries) controlling, controlled by or under common control with that Holder; (b) an officer, director, partner, shareholder or member of that Holder; or (c) a member of the immediate family of an officer, director, partner, shareholder, or member of that Holder. For these purposes "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Securities, by contract, or otherwise.

"Annual Election" means the annual election of Directors held in accordance with the Company's by-laws, including any such election by written consent.

"Business Day" means Mondays through Fridays other than days on which the United States Postal Service does not make regularly scheduled deliveries of first class mail.

"Board" means the Board of Directors of the Company.

"Closing Price" means the SWC Market Price calculated as of the Effective Date.

"Company Common Stock" means the common stock of the Company, $1.00 par value per share.

"Connection Count" means the total number of new water or wastewater connections per Fiscal Year measured at the date of full and final payment for the respective individual connection of any particular commitment. A single family residence connecting to both the water and wastewater systems shall be counted as two separate new connections. For purposes hereof, commercial connections shall be equivalent to the number of single family residential

connections as set forth in the respective Texas Utilities tariffs from time to time. Any wholesale service connections shall be translated to single family residence connections by calculating the single family residential connections on the wholesale connections end users using the methodology as set forth above.

"Director" means a member of the board of directors of the Company.

"Disposition" has the meaning given to such term in Section 3.1.

"Effective Date" means the effective (date of this Agreement as first set forth above, which shall also be the closing date of the Merger Agreement.

"Fiscal Year" means the 365-day period year beginning July 1 in one calendar year and continuing through June 30 of the next calendar year.

"Holder" means a record and beneficial owner of any Company Common Stock.

"Market Price" means the lower of either (a) the average closing share price of the SWC Common Stock for the preceding five (5) business days prior to the closing date of the relevant transaction or (b) the average daily three (3) month closing share price of the SWC Common Stock prior to the closing date of the relevant transaction.

"Permitted Transferee" means (i) SWC or (ii) any Person to whom a Holder has transferred Company Common Stock with the consent of the other Holder or Holders; provided, however, that in each case the Permitted Transferee has become a party to and has agreed to be bound by this Agreement, amended as necessary to reflect the transfer of SWUC's shares of Company Common Stock to the Permitted Transferee, as to all shares of Company Common Stock then being transferred to it. "Permitted Transferee" includes successive transferees in transactions described in this definition.

"Person" means an individual, partnership, corporation, limited liability company, unincorporated organization or association, trust, government or department, unit or political subdivision of a government, or other such entity.

"Reorganization" means (i) any statutory or other form of merger or consolidation of one Person with or into any other Person; (ii) the sale of a majority of the Voting Securities of a Person; (iii) any recapitalization or reclassification of capital stock or other equity interests of a Person which results in the holders of Voting Securities prior to the Reorganization not having the power to elect a majority of the issuer's board of directors or other comparable body after the Reorganization; (iv) or any sale of all or substantially all of the assets of a Person in any one or a series of related transactions.

"Share Price" means the weighted average closing share price of the SWC Common Stock for each trading day of the thirty (30) day period prior to the Put Date or Call Date (as applicable).

"SWC Change of Control" means either of the following events:

        (a)   A change in control of SWC of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A, Regulation 240.l4a-101, promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date hereof, or, if Item 6(e) is no longer in effect, any regulation issued by the Securities and Exchange Commission pursuant to the Exchange Act which serves similar purposes (i.e., a change in the person or persons owning, directly or indirectly, sufficient Voting Securities to elect the Board of Directors or to take other significant shareholder actions for SWC);

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provided that, without limitation, an SWC Change of Control shall be deemed to have occurred if and when:

        (1)   Any "person" (as such term is used in 13(d) and 14(d)2 of the Exchange Act) who is not at the date hereof a beneficial owner, directly or indirectly, of securities of SWC representing fifty percent (50%) or more of the combined voting power of SWC's then outstanding Voting Securities becomes such a beneficial owner, or

        (2)   During any period of two (2) consecutive years, individuals who were members of the Board of Directors of SWC at the beginning of such period cease for any reason (other than death or disability) to constitute at least a majority of thereof unless the election, or the nomination for election by SWC'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; or

        (b)   Consummation of (A) any reorganization, consolidation, or merger of SWC in which SWC is not the continuing or surviving corporation or pursuant to which shares of SWC's Common Stock would be converted into cash, securities, or other property, other than a merger of SWC in which the holders of SWC's 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 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 SWC.

"SWC Common Stock" means the common stock of SWC, $0.01 par value per share.

"Voting Securities" means shares of capital stock or equity interests the holders of which are at the time entitled to elect a majority of the issuer's board of directors or other comparable body.

Additional terms are defined where used in this Agreement.

        1.2    Interpretation.    Each definition in this Agreement includes the singular and the plural, and references to the neuter gender include the masculine and feminine whenever appropriate. References to any statute mean such statute as amended at the time and include any successor legislation. The words "herein," "hereof" and "hereunder" refer to this Agreement as a whole. The headings of the Articles and Sections are for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. Unless the context otherwise requires, references to Articles, Sections and Subsections mean the Articles, Sections and Subsections of this Agreement.

        1.3    Changes in Stock.    If during the term of this Agreement the outstanding shares of the Company Common Stock or the SWC Common Stock shall be changed into a different number of shares or a different class or classes of shares by reason of any Reorganization, split-up, combination, reclassification or other recapitalization, or if a stock dividend shall be declared on shares of such Common Stock with a record date during such term, the terms of this Agreement (including its definitions) shall be appropriately modified to give effect to such occurrence.

ARTICLE 2.
VOTING OF SHARES AND GOVERNANCE

        2.1    Composition of Board.    From and after the date hereof, so long as this Agreement remains in effect:

        (a)    Number.    The number of Directors comprising the Board shall initially be four (4), subject to change in accordance with the Company's Articles of Incorporation and bylaws.

3

        (b)    Election.    Immediately after the Closing and at each Annual Election, SWUC shall nominate three (3) individuals to stand for election as Directors and RTNT shall nominate Farrell or one other individual to stand for election as Director. At all times during the term of this Agreement, RTNT shall have the right to nominate and have elected one (l) Director. Each Shareholder shall vote all of its shares (or sign a written consent in lieu thereof) at each Annual Election and at all other times when required to fill a vacancy on the Board, however arising, and to take all such other action as may be reasonably necessary to elect the Board candidates nominated by SWUC or RTNT.

        2.2    Officers.    The Board shall, at a minimum, appoint a president, secretary and treasurer of the Company.

ARTICLE 3.
RESTRICTIONS ON TRANSFERS OF SHARES

        3.1    No Dispositions.    No Holder shall, directly or indirectly, sell, assign, transfer by operation of law or otherwise, pledge, hypothecate, grant any security interest or other lien in or otherwise dispose of any of its shares of Company Common Stock (a "Disposition"), or agree or otherwise become obligated to take any of the foregoing actions; provided, however, that such restrictions shall not apply to (i) a Disposition to a Permitted Transferee, (ii) the hypothecation or pledge of the SWUC shares of Company Common Stock to a bank or other financial institution or under any indenture, (iii) the granting of a security interest in or other lien on the SWUC shares of Company Common Stock to a bank or other financial institution or under any indenture, or (iv) a Disposition pursuant to the Put Rights, Call Right or obligated purchases upon an SWC Change of Control.

        3.2    Remedies.

        (a)   In the event that RTNT transfers its shares of Company Common Stock in violation of Section 3.1, such transfer shall constitute a breach of this Agreement. In addition to any other remedy available to SWUC at law or in equity, SWUC may exercise its Call Right under Section 4.2 of this Agreement to buy all of the shares of Company Common Stock then owned by RTNT unless RTNT rescinds the purported Disposition within ten (10) business days after written notice of SWUC's intent to exercise this remedy is delivered to RTNT. RTNT shall defend, indemnify and hold the Company, SWC, SWUC and their Affiliates harmless for any breach by RTNT of this Article 3.

        (b)   In the event that SWUC transfers its shares of Company Common Stock in violation of Section 3.1, RTNT may exercise Put Rights in the manner contemplated by Section 4.1 of this Agreement to sell all of the shares of Company Common Stock then owned by RTNT unless SWUC rescinds the purported Disposition within ten (10) business days after written notice of RTNT's intent to exercise this remedy is delivered to SWUC. SWUC shall defend, indemnify and hold the Company, RTNT and their Affiliates harmless for any breach by SWUC of this Article 3.

        3.3    Legend on Stock Certificates.

        (a)   All certificates for shares of Company Common Stock shall bear the following legend:

The shares represented by this certificate (the "Shares") have not been registered under the Securities Act of 1933, as amended, and no sale, transfer or other disposition may be made of the Shares unless they have been so registered or Windermere Utility Co., Inc. (the "Company") has been furnished with a legal opinion from a national law firm satisfactory to it that such registration is not required. The Shares are also subject to significant restrictions on transfer and requirements as to voting contained in the WUC Shareholder Agreement dated as of September 1, 2000 among the Company and its shareholders, a copy of which is on file with the Secretary of the Company.

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        (b)   Upon the termination of this Agreement, each Holder shall be entitled to receive, in exchange for any certificate for the Company Common Stock bearing the legend set forth in subsection (a) of this Section 3.3, a certificate bearing a legend containing only the first sentence of such legend, unless the Company shall have determined (based upon the advice of legal counsel) that such legend is then no longer required.

        3.4    Other Limitations Regarding the Company Common Stock.    For so long as this Agreement is in effect, RTNT's percentage ownership cannot be changed without its consent (other than through an exercise of the Call Right in Section 4.2). RTNT will not be required to contribute cash, in any form, to the Company. All dividends paid by the Company shall be paid on a per share basis on all outstanding shares.

ARTICLE 4.
PUT-CALL RIGHTS AND PURCHASE OBLIGATIONS

        4.1    Put Right.    Any time after the fifth anniversary of the Effective Date, RTNT may, at its sole option, require SWUC to purchase all of RTNT's remaining shares of Company Common Stock (the "Put Right") for that number of shares of SWC Common Stock determined as follows:

        (a)   If the Share Price is less than or equal to $13.33 per share, SWUC shall purchase RTNT's remaining interest for 450,000 shares of SWC Common Stock;

        (b)   If the Share Price is greater than $13.33 but less than $25 per share, SWUC shall purchase RTNT's remaining interest for the number of whole shares of SWC Common Stock calculated by dividing $6 million by the Share Price; or

        (c)   If the Share Price is greater than or equal to $25 per share, SWUC shall purchase RTNT's remaining interest for 240,000 shares of SWC Common Stock.

        4.2    Call Right.    SWUC may, at its sole option, require RTNT to sell all of the shares of Company Common Stock then held by RTNT ("Call Right") for 240,000 shares of SWC Common Stock at any time that the Share Price exceeds $25 per share.

        4.3    Obligation to Purchase Upon An SWC Change of Control.    SWUC shall purchase all of RTNT's remaining shares of Company Common Stock upon an SWC Change of Control as follows:

        (a)    Change of Control During Year One.    In the event of an SWC Change of Control within the first year after the Effective Date, SWC would purchase all of RTNT's remaining shares of Company Common Stock for that number of shares of SWC Common Stock determined by dividing $6 million by the Closing Price discounted as follows:

        (1)   If the Connection Count calculated at the most recent date prior to the date of the SWC Change of Control is equal to or greater than the Budgeted Connection Count (as set forth in Exhibit C) as of that date, the Closing Price will be discounted by Four Dollars ($4.00) per share.

        (2)   If the Connection Count is below the Budgeted Connection Count by more than ten percent (10%), the Closing Price will be discounted by Two Dollars and Sixty-Seven Cents ($2.67) per share.

        (3)   If the Connection Count is between the Budgeted Connection Count and ten percent (10%) below the Budgeted Connection Count, the Closing Price will be discounted by a proportionate amount between Four Dollars ($4.00) per share and Two Dollars and Sixty-Seven Cents ($2.67) per share.

        (b)    Change of Control During Year Two.    In the event of an SWC Change of Control within the second year after the Effective Date, SWC would purchase all of RTNT's remaining shares of

5

Company Common Stock for that number of shares of SWC Common Stock determined by dividing $6 million by the Closing Price discounted as follows:

        (1)   If the Connection Count calculated at the most recent date prior to the date of the SWC Change of Control is equal to or greater than the Budgeted Connection Count as of that date, the Closing Price will be discounted by Two Dollars and Sixty-Seven Cents ($2.67) per share.

        (2)   If the Connection Count is below the Budgeted Connection Count by more than ten percent (10%), the Closing Price will be discounted by One Dollar and Thirty-Three Cents ($1.33) per share.

        (3)   If the Connection Count is between the Budgeted Connection Count and ten percent (10%) below the Budgeted Connection Count, the Closing Price will be discounted by a proportionate amount between Two Dollars and Sixty-Seven Cents ($2.67) per share and One Dollar and Thirty-Three Cents ($1.33) per share.

        (c)    Change of Control During Year Three.    In the event of an SWC Change of Control within the third year after the Effective Date, SWC would purchase all of RTNT's remaining shares of Company Common Stock for that number of shares of SWC Common Stock determined by dividing $6 million by the Market Price discounted as follows:

        (1)   If the Connection Count calculated at the most recent date prior to the date of the SWC Change of Control is equal to or greater than the Budgeted Connection Count as of that date, the Market Price will be discounted by Two Dollars ($2.00) per share.

        (2)   If the Connection Count is below the Budgeted Connection Count by more than ten percent (10%), the Market Price will be discounted by One Dollar ($1.00) per share.

        (3)   If the Connection Count is between the Budgeted Connection Count and ten percent (10%) below the Budgeted Connection Count, the Market Price will be discounted by a proportionate amount between Two Dollars ($2.00) per share and One Dollar ($1.00) per share.

        (d)    Change of Control After Three Years.    In the event of an SWC Change of Control that occurs beyond three (3) years after the Effective Date, SWC would purchase all of RTNT's remaining shares of Company Common Stock for that number of shares of SWC Common Stock determined in accordance with Section 4.1.

        (e)    Calculation of Discounts.    When calculating the discounts referred to in this Section 4.3 and in Section 4.5, the Connection Count for the relevant period shall be calculated on a cumulative basis across the period.

        (f)    Collar.    In no event shall the number of shares of SWC Common Stock delivered to RTNT to purchase all of RTNT's remaining shares of Company Common Stock under this Section 4.3 be less than 240,000 nor more than 450,000.

        (g)    Examples.    Examples of the calculations described in this Section 4.3 can be found at Exhibit B.

        4.4    Procedure.

        (a)   In the event that RTNT desires to exercise its Put Right the exercising seller shall provide written notice to SWUC (the "Put Notice"). Unless otherwise agreed in writing by the parties, the purchase and sale of the Company Common Stock subject to the Put Right will close sixty (60) days after the Put Notice is received by SWUC (the "Put Date").

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        (b)   In the event that SWUC desires to exercise its Call Right, SWUC shall provide written notice to SWUC (the "Call Notice"). Unless otherwise agreed in writing by the parties, the purchase and sale of the Company Common Stock subject to the Call Right will close on the date specified in the Call Notice, which shall not be earlier than five (5) business days nor later than thirty (30) days after the Call Notice is received by RTNT and any applicable cure period has expired without performance of a cure reasonably satisfactory to SWUC (the "Call Date").

        (c)   In the event that SWUC is required to purchase RTNT's Company Common Stock upon an SWC Change of Control, SWUC shall provide written notice to RTNT (the "Change of Control Notice") at least five (5) days prior to the effective date of the SWC Change of Control. Unless otherwise agreed in writing by the parties, the purchase and sale of the Company Common Stock subject to the SWC Change of Control purchase obligation will close, at SWUC's sole option on or between one business day prior to the effective date of the SWC Change of Control through one business day after the effective date of the SWC Change of Control (the "Change of Control Purchase Date").

        (d)   On a Put Date, Call Date or Change of Control Purchase Date, SWUC shall be obligated to deliver to RTNT the number of shares of SWC Common Stock set forth in the appropriate section above upon surrender of the certificates representing such shares of Company Common Stock.

        4.5    Modification of Discounts.    As an incentive for Farrell to continue forward with SWC after a presumably "friendly" SWC Change of Control during the first three (3) years after the Effective Date, RTNT can, at its option, exercise its Put Right at sixty percent (60%) of the applicable discounts described above so long as Farrell agrees to continue an ongoing relationship with the surviving entity after the SWC Change of Control under the original terms of the payment for any connections above the SWC Acquisition Forecast set forth in Farrell's Consulting Agreement for the remaining years of such agreement.

ARTICLE 5.
GENERAL PROVISIONS

        5.1    Notices.    All notices, requests, demands, claims, and other communications hereunder will only be in writing. Any notice, request, demand, claim, or other communication hereunder shall only be deemed duly given on the second business day after it is deposited with the United States Postal Service for delivery by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below:

If to the Company, addressed to:

Windermere Utility Company
c/o Southwest Water Company
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
Attention: Vice President of Finance
Telecopier: (626) 915-1558

with a copy to each Holder.

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If to SWC, addressed to:

Southwest Water Company
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
Attention: Vice President of Finance
Telecopier: (626) 915-1558

If to SWUC, addressed to:

SW Utility Company
c/o Southwest Water Company
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605
Attention: Vice President of Finance
Telecopier: (626) 915-1558

with a copy to:

Latham & Watkins
650 Town Center Drive
Costa Mesa, California 92626-1925
Attention: James W. Daniels, Esq.
Telecopier: (714) 755-8290

If to RTNT or Farrell, addressed to:

RTNT, Inc.
3223 Park Hill Drive
Austin, Texas 78746
Attention: Thom Farrell
Telecopier:

with a copy to:

Latius R. Prikryl
Phillips & Prikryl, L.L.P.
515 Congress Avenue, Suite 2600
PO Box 2143
Austin, Texas 78768-2143
Telecopier: (512) 476-9991

Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient as proven by the sender. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties notice in the manner set forth above.

        5.2    Holder List.    The Company shall maintain a list (the "Holder List") of the name and address of each Holder and the number of shares of Company Common Stock held by it. The initial Holder List is attached hereto as Exhibit A. Each Holder shall give prompt notice to the Company of any change in the information pertaining to it in the Holder List, but in the absence of such notice the Company and each other Holder may treat the information reflected in the current Holder List as correct. The Company shall furnish a copy of the Holder List to any Holder upon request.

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        5.3    Amendments, Waivers and Consents.    This Agreement may be amended only by a document executed (which may be in counterparts) by the Company and all of the Parties. Any Party may waive the benefit of any provision of this Agreement, either in a specific instance or generally, by delivering to the Company and each other Party a consent to such waiver. All consents required or permitted by this Agreement shall be in writing and signed by the party to be charged therewith.

        5.4    Governing Law; Jurisdiction and Venue.    This Agreement shall be governed and construed in accordance with the laws of the State of Texas excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction. Each of the parties submits to the jurisdiction of any state or federal court sitting in Austin, Texas, in any action or proceeding arising out of or relating to this Agreement and agrees that all claims in respect of the action or proceeding may only be heard and determined in any such court. These courts shall be the exclusive forum for the determination of any claim or right arising out of or relating to this Agreement. Each of the parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety, or other security that might be required of any other party with respect thereto. No party will request the court in any such action or proceeding to enter relief (whether for damages or injunctive relief) until the opposing party has had not less than seven (7) days to respond to the request or motion for relief. Any party may make service on any other party by sending or delivering a copy of the process to the party to be served at the address and in the manner provided for the giving of notices in this Agreement. Each party hereby waives any and all rights it may have to a trial by jury. THE PARTIES ACKNOWLEDGE THAT BY EXECUTING THIS AGREEMENT, THEY ARE GIVING UP ALL RIGHTS, IF ANY, TO A TRIAL BY JURY.

        5.5    Attorneys' Fees.    The fees and costs, including reasonable attorneys' fees, incurred by any party to this Agreement as a result of any dispute arising under or related to this Agreement shall be awarded to the prevailing party. If there is no prevailing party, fees and costs may be awarded in the discretion of the court which, in making such award, shall assess the relative good or bad faith of the parties throughout the dispute.

        5.6    Successors and Assigns.    This Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of the Company and each Holder; provided, however, that the Company may not assign this Agreement except by operation of law or to a purchaser of all or substantially all of its business and assets; and provided further, that no Holder may assign this Agreement except in connection with a transfer of Company Common Stock by such transferring Holder to a Permitted Transferee which thereupon signs an instrument agreeing to become a Holder with respect to such shares of Company Common Stock.

        5.7    Counterparts; Additional Parties.    This Agreement may be executed in counterparts, all of which together shall constitute a single agreement. Prior to any Disposition of Company Common Stock to a Permitted Transferee, the transferor shall cause such Permitted Transferee to execute and deliver to the Company and all of the Holders a supplemental agreement to this Agreement, in form and substance reasonably satisfactory to the Company and such other Holders, whereby such Permitted Transferee shall agree to become a party to and be bound by all of the terms and conditions of this Agreement and confirm that all of the Company Common Stock to be acquired by such Permitted Transferee shall continue to be subject to this Agreement. As promptly as practicable, the Company shall cause a fully executed counterpart of this Agreement or any supplemental agreement referred to in this Section to be delivered to each Holder.

        5.8    Term; Termination.

        (a)   This Agreement shall remain in effect for the maximum duration permitted by law and for so long as there is more than one Holder, unless terminated with the written consent of all the parties.

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        (b)   The termination of this Agreement or any provision hereof shall not affect any action taken or agreement entered into prior to such termination or any liability under any obligation previously incurred under this Agreement, all of which shall survive such termination.

        5.9    Partial Invalidity.    Each provision of this Agreement shall be interpreted so as to render it valid and enforceable under applicable law. A finding that any such provision is invalid or unenforceable in any jurisdiction or in any particular circumstance shall not affect its validity or enforceability under the laws of any other jurisdiction or in any other circumstances, and shall have no effect on the other provisions of this Agreement.

        5.10    Equitable Remedies.    Each Holder, by becoming a party to this Agreement, acknowledges and agrees that its breach or nonperformance of any provision of this Agreement in accordance with the specific terms hereof would result in irreparable harm to the Company and to each other Holder for which money damages would not provide an adequate remedy. Accordingly, each Holder (i) agrees that the Company and each other Holder shall be entitled to specific performance or injunctive or other equitable relief against such Holder in the event of its breach or other non-performance of any of the provisions of this Agreement; and (ii) waives any requirement for the securing or posting of any bond in connection with such remedy.

        5.11    Cumulative Remedies.    Each party shall have and may exercise any or all rights and remedies it may have available at law, in equity, or otherwise. All of the rights and remedies provided under this Agreement, and those it may have available at law, in equity, or otherwise, shall be cumulative and may be exercised singularly or concurrently. Election to pursue any one or more remedy shall not exclude pursuit of any other remedy.

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        IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

SOUTHWEST WATER COMPANY, a Delaware corporation
/s/  PETER J. MOERBEEK
By:
Its:	CFO
SW UTILITY COMPANY, a Texas corporation
/s/  PETER J. MOERBEEK
By:
Its:	President
RTNT, INC. a Texas corporation
/s/  THOM W. FARRELL
By:	Thom W. Farrell
Its:	President
THOM W. FARRELL
/s/  THOM W. FARRELL Thom W. Farrell
WINDERMERE UTILITY COMPANY, INC. a Texas corporation
/s/  THOM W. FARRELL
By:	THOM W. FARRELL
Its:	President

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EXHIBIT A

HOLDER LIST

Holder	Shares
SW Utility Company c/o Southwest Water Company 225 North Barranca Avenue, Suite 200 West Covina, California 91791-1605 Attention: Vice President of Finance Telecopier: (626) 915-1558	464
RTNT, Inc. 3223 Park Hill Drive Austin, Texas 78746 Attention: Thom Farrell Telecopier:	116

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EXHIBIT B

EXAMPLES OF SWC CHANGE OF CONTROL
PURCHASE OBLIGATION CALCULATIONS

General Assumptions: Closing Price = $14.40 Market Price = $15.00

Example 1.	Change of Control in Year One, annual Connection Count at or above SWC Budgeted Connection Count.
The discount to the Closing Price would be four dollars ($4.00) per share. The net share price after subtracting the $4.00 per-share discount would be $10.40. The number of shares of SWC Common Stock to be issued to RTNT for the purchase of RTNT's 116 remaining shares would be $6 million divided by $10.40 or 576,923 shares (rather than the 416,666 shares that would have been issued without the Year 1 discount).
Example 2.	Change of Control in Year Two, annual Connection Count 15% below SWC Budgeted Connection Count.
The discount to the Closing Price would be One Dollar and Thirty Three Cents ($1.33) per share. The net share price after subtracting the $1.33 per-share discount would be $13.07. The number of shares of SWC Common Stock to be issued to RTNT for the purchase of RTNT's 116 remaining shares would be $6 million divided by $13.07 or 459,066 shares.
Example 3.	Change of Control in Year Three, annual Connection Count 5% below SWC Budgeted Connection Count.
The discount to the Market Price would be One Dollar and Fifty Cents ($1.50) per share. The net share price after subtracting the $1.50 per-share discount would be $13.50. The number of shares of SWC Common Stock to be issued to RTNT for the purchase of RTNT's 116 remaining shares would be $6 million divided by $13.50 or 444,444 shares.

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EXHIBIT C

BUDGETED CONNECTION COUNT

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EXHIBIT D

CALCULATION OF DISCOUNT
UPON SWC CHANGE OF CONTROL

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Exhibit 4.11

WUC SHAREHOLDER AGREEMENT

EX-4.12

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Exhibit 4.12

SHAREHOLDERS AGREEMENT

        This SHAREHOLDERS AGREEMENT, dated as of August 31, 2001 (this "Agreement"), by and among OPERATIONS TECHNOLOGIES, INC., a corporation organized under the laws of the State of Georgia (formerly known as OPT Acquisition Subsidiary, Inc., a corporation organized under the laws of the State of Georgia) (the "Company"), SOUTHWEST WATER COMPANY, a corporation organized under the laws of the State of Delaware ("Southwest"), and ROBERT W. MONETTE, an individual resident of the State of Georgia ("Monette").

STATEMENT OF FACTS:

        Southwest owns ninety percent (90%), and Monette owns ten percent (10%), of the issued and outstanding common stock of the Company, as a result of the consummation of the transactions contemplated by that certain Agreement and Plan of Merger, by and among Southwest, OPT Acquisition Subsidiary, Inc., a corporation organized under the laws of the State of Georgia and predecessor-in-interest to the Company, Operations Technologies, Inc., a corporation organized under the laws of the State of Georgia and predecessor-in-interest to the Company, Operations Technologies Shareholder Trust, a trust organized under the laws of the State of Georgia, and Monette, dated as of August 31, 2001.

        The Company, Southwest and Monette desire to enter into this Agreement with respect to the ownership by Southwest and Monette of the common stock (the "Common Stock") of the Company.

AGREEMENT

        In consideration of the agreements contained herein, the Company, Southwest, and Monette agree as follows:

        1.    General Transfer Restrictions.

        (a)   Monette may not, without the consent of Southwest, which consent may be withheld in its sole discretion, sell, transfer, assign, pledge, hypothecate, or otherwise dispose of any Common Stock or any interest (including beneficial interest) therein except as expressly permitted under this Agreement.

        (b)   Southwest may, at any time in its sole discretion, sell, transfer, assign, pledge or otherwise dispose of any Common Stock or any interest (including beneficial interest) therein.

        2.    Call Option.

        (a)   Southwest may, at its sole option, at any time after the fifth (5^th) anniversary of the date hereof, require Monette (and his successors or assigns) to sell to Southwest all, but not less than all, of the Common Stock owned by Monette (and his successors or assigns).

        (b)   Without limiting in any way the rights of Southwest set forth in Section 2(a) above, Southwest may, at its sole option, at any time upon, and for a period of five (5) years after (i) the termination for any reason of Monette's employment with the Southwest or any of its affiliates, (ii) a four (4) month continuous period of physical or mental illness of Monette during which time Monette is disabled, (iii) the commencement of bankruptcy or insolvency proceedings by Monette individually, or (iv) Monette's death, require Monette and his successors and assigns to sell to Southwest all, but not less than all, of the Common Stock owned by Monette and his successors and assigns.

        (c)   Calculation of Consideration.

        (i)    If Southwest exercises its call option pursuant to this Section 2 prior to the completion of four (4) consecutive fiscal quarters of the Company (the first of such fiscal

quarters shall commence on October 1, 2001), the purchase price for the Common Stock owned by Monette pursuant to the provisions of this Section 2 shall be $1,000,000.00. If Southwest exercises its call option pursuant to this Section 2 at or following the completion of four (4) consecutive fiscal quarters of the Company (the first of such fiscal quarters shall commence on October 1, 2001), the purchase price for the Common Stock owned by Monette shall be the greater of (i) $1,000,000.00, or (ii) the product of (x) Company EBITA multiplied by five, multiplied by (y) 0.1. As used herein, "Company EBITA" shall mean the net income of the Company during the four (4) completed fiscal quarters immediately preceding the exercise of the call option by Southwest pursuant to this Section 2, plus to the extent such charges are deducted in determining net income, (i) any interest on Indebtedness attributable to the Company, (ii) all income Taxes attributable to the Company, and (iii) any amortization of goodwill and other intangibles attributable to the Company, all as calculated and determined in accordance with United States generally accepted accounting principles, consistently applied ("GAAP"), and to the extent consistent with GAAP, in a manner consistent with the past accounting practices of Southwest. Prior to the sale, transfer, or delivery by Southwest to the Company of any executory contracts by and between ECO Resources, Inc., a wholly-owned subsidiary of Southwest, and certain unrelated third parties (each, an "ECO Contract"), each of the Company and Monette shall agree in writing as to the amount of the target EBITA with respect to the ECO Contract (the "Target EBITA"). To the extent that any Company EBITA is attributable to any ECO Contract, there shall be deducted from the calculation of Company EBITA that amount of the Target EBITA with respect to each such ECO Contract. Any calculation of Company EBITA shall be performed and completed by Southwest and the Company, and the results of such calculation shall be delivered to Monette. If Monette does not object in writing to Southwest and the Company to the results of such calculation within ten (10) days of such delivery to Monette, the results of such calculation shall be final and binding upon Monette. In the event that Monette does object to the results of the calculation of Company EBITA, then the parties shall resolve their dispute in accordance with Section 9(n) below. As used herein, "Indebtedness" shall mean (i) all indebtedness for borrowed money or for the deferred purchase price of property or services (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), including the current portion of such indebtedness, and (ii) all obligations evidenced by notes, bonds, debentures or similar instruments. As used herein, "Taxes" shall mean all tax (including income tax, capital gains tax, value added tax, sales tax, property tax, gift tax or estate tax), levy assessment, tariff, duty (including customs duty), deficiency or other fee and any related charge or amount (including fine, penalty and interest) imposed, assessed or collected by or under the authority of any governmental or regulatory body.

        (ii)   For the purposes of determining Company EBITA, Company EBITA shall include a deduction for an amount equal to fifty percent (50%) of any amount paid to Monette by the Company in accordance with the management performance award program of Southwest, as defined in and pursuant to the terms of that certain Employment Agreement by and between Southwest and Monette dated as of August 31, 2001.

        (iii)  For the purposes of determining Company EBITA, Company EBITA may include a reasonable deduction for any direct or indirect allocations from Southwest with respect to the Company. Direct allocations from Southwest with respect to the Company would be for expenses that were paid, or reimbursed, by Southwest on behalf of the Company (examples include, but are not limited to, medical insurance payments, comprehensive liability insurance payments, direct reimbursements for payroll processing services, and payments for legal and accounting expenses relating to Company operations). Indirect allocations from Southwest with respect to the Company would be for Southwest expenses that benefit Southwest that

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may benefit the Company and the other subsidiaries of Southwest (examples include, but are not limited to, public company expenses, and expenses associated with corporate offices). For purposes of determining Company EBITA, any indirect allocations of Southwest relating to the Company will be reasonably made on the same basis as any indirect allocation of Southwest relating to ECO Resources, Inc., a Texas corporation and subsidiary of Southwest.

        (d)   If Southwest exercises its call option to purchase the Company Stock owned by Monette (and his successors or assigns) pursuant to this Section 2, Southwest shall deliver written notice (the "Call Notice") to Monette (or his successors or assigns). The Call Notice shall set forth the number of shares of Common Stock to be acquired from Monette (and his successors or assigns), the aggregate consideration to be paid for such shares, and the time and place for the closing of the transaction. Southwest will be entitled to receive customary representations and warranties from Monette (and his successors and assigns) regarding the good title to such Common Stock, free from any liens, encumbrances or restrictions on sale.

        (e)   The closing of the call option set forth in this Section 2 shall take place on the date designated by Southwest in the Call Notice, which date shall not be more than thirty (30) days and not less than ten (10) days after the delivery of the Call Notice. Southwest (or its assignee(s)) shall pay for the Common Stock owned by Monette (or his successors and assigns) by delivery of cash or other immediately available funds in an amount equal to the purchase price of the Common Stock being acquired; provided that Southwest shall, at the direction of Monette, pay up to one hundred percent (100%) of the purchase price for the Common Stock purchased by Southwest by delivery of a promissory note on terms mutually agreed upon by Southwest and Monette, or in shares of common stock of Southwest.

        (f)    In the event that the Common Stock owned by Monette (and his successors and assigns) is purchased by Southwest pursuant to this Section 2, each of Southwest, Monette, and their successors and assigns, will take all steps necessary and desirable to obtain all required third-party, governmental and regulatory consents and approvals and take all other actions necessary and desirable to facilitate the consummation of such purchase in a timely manner.

        3.    Put Option.

        (a)   Monette may, at his sole option, at any time after the second (2^nd) anniversary of the date hereof, require Southwest (and its successors or assigns) to purchase from Monette all, but not less than all, of the Common Stock owned by Monette (and his successors or assigns).

        (b)   Calculation of Consideration.

        (i)    The purchase price for the Common Stock owned by Monette upon exercise by Monette of his put option pursuant to this Section 3 shall be the greater of (i) $1,000,000.00 or (ii) the product of (x) Company EBITA multiplied by five, multiplied by (y) 0.1. As used herein, "Company EBITA" shall mean the net income of the Company during the four (4) completed fiscal quarters immediately preceding the exercise of the put option by Monette pursuant to this Section 3, plus to the extent such charges are deducted in determining net income, (i) any interest on Indebtedness attributable to the Company, (ii) all income Taxes attributable to the Company, and (iii) any amortization of goodwill and other intangibles attributable to the Company, all as calculated and determined in accordance with United States generally accepted accounting principles, consistently applied ("GAAP"), and to the extent consistent with GAAP, in a manner consistent with the past accounting practices of Southwest. Prior to the sale, transfer, or delivery by Southwest to the Company of any executory contracts by and between ECO Resources, Inc., a wholly-owned subsidiary of Southwest, and certain unrelated third parties (each, an "ECO Contract"), each of the Company and Monette shall agree in writing as to the amount of the target EBITA with

3

respect to the ECO Contract (the "Target EBITA"). To the extent that any Company EBITA is attributable to any ECO Contract, there shall be deducted from the calculation of Company EBITA that amount of the Target EBITA with respect to each such ECO Contract. Any calculation of Company EBITA shall be performed and completed by Southwest and the Company, and the results of such calculation shall be delivered to Monette. If Monette does not object in writing to Southwest and the Company to the results of such calculation within ten (10) days of such delivery to Monette, the results of such calculation shall be final and binding upon Monette. In the event that Monette does object to the results of the calculation of Company EBITA, then the parties shall resolve their dispute in accordance with Section 9(n) below. As used herein, "Indebtedness" shall mean (i) all indebtedness for borrowed money or for the deferred purchase price of property or services (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), including the current portion of such indebtedness, and (ii) all obligations evidenced by notes, bonds, debentures or similar instruments. As used herein, "Taxes" shall mean all tax (including income tax, capital gains tax, value added tax, sales tax, property tax, gift tax or estate tax), levy assessment, tariff, duty (including customs duty), deficiency or other fee and any related charge or amount (including fine, penalty and interest) imposed, assessed or collected by or under the authority of any governmental or regulatory body.

        (ii)   For the purposes of determining Company EBITA, Company EBITA shall include a deduction for an amount equal to fifty percent (50%) of any amount paid to Monette by the Company in accordance with the management performance award program of Southwest, as defined in and pursuant to the terms of that certain Employment Agreement by and between Southwest and Monette dated as of August 31, 2001.

        (iii)  For the purposes of determining Company EBITA, Company EBITA may include a reasonable deduction for any direct or indirect allocations from Southwest with respect to the Company. Direct allocations from Southwest with respect to the Company would be for expenses that were paid, or reimbursed, by Southwest on behalf of the Company (examples include, but are not limited to, medical insurance payments, comprehensive liability insurance payments, direct reimbursements for payroll processing services, and payments for legal and accounting expenses relating to Company operations). Indirect allocations from Southwest with respect to the Company would be for Southwest expenses that benefit Southwest that may benefit the Company and the other subsidiaries of Southwest (examples include, but are not limited to, public company expenses, and expenses associated with corporate offices). For purposes of determining Company EBITA, any indirect allocations of Southwest relating to the Company will be reasonably made on the same basis as any indirect allocation of Southwest relating to ECO Resources, Inc., a Texas corporation and subsidiary of Southwest.

        (c)   If Monette exercises his put option to cause Southwest to purchase the Company Stock owned by Monette (and his successors or assigns) pursuant to this Section 3, Monette shall deliver written notice (the "Put Notice") to Southwest (or its successors or assigns). The Put Notice shall set forth the number of shares of Common Stock to be acquired from Monette (and his successors or assigns), a request that the Company and Southwest complete the Company EBITA calculations described in Section 3(b) above, and the proposed time and place for the closing of the transaction. Southwest will be entitled to receive customary representations and warranties from Monette (and his successors and assigns) regarding the good title to such Common Stock, free from any liens, encumbrances or restrictions on sale.

        (d)   The closing of the put option set forth in this Section 3 shall take place on the date designated by Monette in the Put Notice, which date shall not be more than thirty (30) days and not less than ten (10) days after the delivery of the Put Notice. Southwest (or its assignee(s)) shall

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pay for the Common Stock owned by Monette (or his successors and assigns) by delivery of cash or other immediately available funds in an amount equal to the purchase price of the Common Stock being acquired; provided that Southwest shall, at the direction of Monette, pay up to one hundred percent (100%) of the purchase price for the Common Stock purchased by Southwest by delivery of a promissory note on terms mutually agreed upon by Southwest and Monette, or in shares of common stock of Southwest.

        (e)   In the event that the Common Stock owned by Monette (and his successors and assigns) is purchased by Southwest pursuant to this Section 3, each of Southwest, Monette, and their successors and assigns, will take all steps necessary and desirable to obtain all required third-party, governmental and regulatory consents and approvals and take all other actions necessary and desirable to facilitate the consummation of such purchase in a timely manner.

        4.    Mutual Put/Call Option.

        (a)   In the event (i) of a Change of Control of Southwest prior to the second (2^nd) anniversary of the date hereof, (ii) of Monette's death, (iii) Monette, due to physical or mental illness, shall become disabled (as defined in and pursuant to the terms of that certain Employment Agreement by and between Southwest and Monette dated as of August 31, 2001) for a continuous period of four (4) months, or (iv) Monette is terminated from his employment with Southwest for "cause" (as defined in that certain Employment Agreement by and between Southwest and Monette dated as of August 31, 2001), either (A) Southwest may, at its sole option, require Monette (and his successors or assigns) to sell to Southwest all, but not less than all, of the Common Stock owned by Monette (and his successors or assigns), or (B) Monette may, at his sole option, require Southwest (and its successors or assigns) to purchase from Monette all, but not less than all, of the Common Stock owned by Monette (and his successors or assigns).

        (b)   As used in this Section 4:

        (i)    "Change of Control of Southwest" shall mean (i) the sale of all, or substantially all, of Southwest's consolidated assets in any single transaction or series of related transactions, (ii) the sale or issuance, or series of related sales or issuances, of capital stock possessing the ordinary voting power (on a fully-diluted basis) to elect a majority of the Board of Directors of Southwest to an Independent Third Party or a group of affiliated Independent Third Parties, or (iii) any merger or consolidation of Southwest with or into another corporation (regardless of which entity is the surviving corporation) if, after giving effect to such merger or consolidation the holders of Southwest's voting securities (on a fully-diluted basis) immediately prior to the merger or consolidation own voting securities of the surviving or resulting corporation representing less than a majority of the ordinary voting power to elect directors of the surviving or resulting corporation (on a fully-diluted basis).

        (ii)   "Independent Third Party" means any Person who, immediately prior to the contemplated transaction, does not own in excess of five percent (5%) of the capital stock of Southwest on a fully-diluted basis, who is not controlling, controlled by or under common control with any such five percent (5%) owner of the capital stock of Southwest and who is not the spouse, ancestor or descendant (by birth or adoption) of any such five percent (5%) owner of the capital stock of Southwest.

        (iii)  "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental entity (or any department, agency or political subdivision thereof).

        (c)   Calculation of Consideration.

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        (i)    If a Change of Control of Southwest is consummated prior to the completion of four (4) consecutive fiscal quarters of the Company (the first of such fiscal quarters shall commence on October 1, 2001), the purchase price for the Common Stock owned by Monette pursuant to the provisions of this Section 4 shall be $1,000,000.00. If a Change of Control of Southwest is consummated at or following the completion of four (4) consecutive fiscal quarters of the Company (the first of such fiscal quarters shall commence on October 1, 2001), the purchase price for the Common Stock owned by Monette pursuant to the provisions of this Section 4 shall be the greater of (i) $1,000,000.00, or (ii) the product of (x) Company EBITA multiplied by five, multiplied by (y) 0.1. As used herein, "Company EBITA" shall mean the net income of the Company during the four (4) completed fiscal quarters immediately preceding the exercise of the call option by Southwest, or put option by Monette, as the case may be, pursuant to this Section 4, plus to the extent such charges are deducted in determining net income, (i) any interest on Indebtedness attributable to the Company, (ii) all income Taxes attributable to the Company, and (iii) any amortization of goodwill and other intangibles attributable to the Company, all as calculated and determined in accordance with United States generally accepted accounting principles, consistently applied ("GAAP"), and to the extent consistent with GAAP, in a manner consistent with the past accounting practices of Southwest. Prior to the sale, transfer, or delivery by Southwest to the Company of any executory contracts by and between ECO Resources, Inc., a wholly-owned subsidiary of Southwest, and certain unrelated third parties (each, an "ECO Contract"), each of the Company and Monette shall agree in writing as to the amount of the target EBITA with respect to the ECO Contract (the "Target EBITA"). To the extent that any Company EBITA is attributable to any ECO Contract, there shall be deducted from the calculation of Company EBITA that amount of the Target EBITA with respect to each such ECO Contract. Any calculation of Company EBITA shall be performed and completed by Southwest and the Company, and the results of such calculation shall be delivered to Monette. If Monette does not object in writing to Southwest and the Company to the results of such calculation within ten (10) days of such delivery to Monette, the results of such calculation shall be final and binding upon Monette. In the event that Monette does object to the results of the calculation of Company EBITA, then the parties shall resolve their dispute in accordance with Section 9(n) below. As used herein, "Indebtedness" shall mean (i) all indebtedness for borrowed money or for the deferred purchase price of property or services (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), including the current portion of such indebtedness, and (ii) all obligations evidenced by notes, bonds, debentures or similar instruments. As used herein, "Taxes" shall mean all tax (including income tax, capital gains tax, value added tax, sales tax, property tax, gift tax or estate tax), levy assessment, tariff, duty (including customs duty), deficiency or other fee and any related charge or amount (including fine, penalty and interest) imposed, assessed or collected by or under the authority of any governmental or regulatory body.

        (ii)   For the purposes of determining Company EBITA, Company EBITA shall include a deduction for an amount equal to fifty percent (50%) of any amount paid to Monette by the Company in accordance with the management performance award program of Southwest, as defined in and pursuant to the terms of that certain Employment Agreement by and between Southwest and Monette dated as of August 31, 2001.

        (iii)  For the purposes of determining Company EBITA, Company EBITA may include a reasonable deduction for any direct or indirect allocations from Southwest with respect to the Company. Direct allocations from Southwest with respect to the Company would be for expenses that were paid, or reimbursed, by Southwest on behalf of the Company (examples include, but are not limited to, medical insurance payments, comprehensive liability insurance

6

payments, direct reimbursements for payroll processing services, and payments for legal and accounting expenses relating to Company operations). Indirect allocations from Southwest with respect to the Company would be for Southwest expenses that benefit Southwest that may benefit the Company and the other subsidiaries of Southwest (examples include, but are not limited to, public company expenses, and expenses associated with corporate offices). For purposes of determining Company EBITA, any indirect allocations of Southwest relating to the Company will be reasonably made on the same basis as any indirect allocation of Southwest relating to ECO Resources, Inc., a Texas corporation and subsidiary of Southwest.

        (d)   If Monette exercises his option to cause Southwest to purchase the Company Stock owned by Monette (and his successors or assigns), or Southwest exercises its option to purchase the Company Stock owned by Monette (and his successors or assigns), pursuant to Section 4, either Southwest or Monette, as the case may be, shall deliver written notice (the "Change of Control Purchase Notice") to the other (or its successors or assigns). The Change of Control Purchase Notice shall set forth (i) the number of shares of Common Stock to be acquired from Monette (and his successors or assigns), (ii) (x) if delivered by Monette, a request that the Company and Southwest complete the Company EBITA calculations described in Section 4(c) above, or (y) if delivered by Southwest, the aggregate consideration to be paid for such shares, and (iii) the proposed time and place for the closing of the transaction. Southwest will be entitled to receive customary representations and warranties from Monette (and his successors and assigns) regarding the good title to such Common Stock, free from any liens, encumbrances or restrictions on sale.

        (e)   The closing of the purchase option set forth in this Section 4 shall take place on the date designated in the Change of Control Purchase Notice, which date shall not be more than sixty (60) days prior to, and not more than sixty (60) days after, the date upon which the Change of Control of Southwest is intended to occur, or in fact occurs, as the case may be. Southwest (or its assignee(s)) shall pay for the Common Stock owned by Monette (or his successors and assigns) by delivery of cash or other immediately available funds in an amount equal to the purchase price of the Common Stock being acquired; provided that Southwest shall, at the direction of Monette, pay up to one hundred percent (100%) of the purchase price for the Common Stock purchased by Southwest by delivery of a promissory note on terms mutually agreed upon by Southwest and Monette, or in shares of common stock of Southwest.

        (f)    In the event that the Common Stock owned by Monette (and his successors and assigns) is purchased by Southwest pursuant to this Section 4, each of Southwest, Monette, and their successors and assigns, will take all steps necessary and desirable to obtain all required third-party, governmental and regulatory consents and approvals and take all other actions necessary and desirable to facilitate the consummation of such purchase in a timely manner.

        5.    Shareholders' Representations and Warranties, and Covenants.

        (a)   Each of Southwest and Monette represents and warrants to the other that he or it is not a party to any agreement with respect to the voting or transfer of the Common Stock, other than this Agreement, and that he or it is the beneficial owner of the Common Stock as set forth on Annex I hereto.

        (b)   For so long as Monette is a holder of ten percent (10%) of the Common Stock of the Company, each of Southwest and Monette agree to vote their shares of Common Stock to elect Monette a Director of the Company.

        6.    Dividends.

        Holders of the Common Stock of the Company shall be entitled to receive dividends, when and as declared by the Board of Directors, but only out of funds that are legally available therefor. Each of

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Southwest and Monette expressly acknowledge and agree that the Board of Directors of the Company shall not be required to declare dividends on any of the Common Stock.

        7.    Legend.

        The Company, Southwest and Monette agree that each certificate representing the Common Stock now or hereafter held by a holder of Common Stock shall be endorsed with a legend in substantially the following form:

"The shares represented by this certificate are subject to a certain Shareholders Agreement, dated as of August 31, 2001, which provides, among other things, for certain restrictions on the transfer of such shares. A copy of such Agreement is on file at the principal offices of Operations Technologies, Inc. and will be furnished upon request to any holder of the shares represented by this certificate."

        8.    Specific Enforcement.

        Each party shall be entitled to specific enforcement of its rights under this Agreement. The parties acknowledge that money damages would be an inadequate remedy for a breach of this Agreement and consent to an action for specific performance or other injunctive relief in the event of any such breach without the posting of any bond or providing any additional security.

        9.    Miscellaneous.

        (a)   Notices. All notices, consents, requests, demands and other communications hereunder are to be in writing, and are deemed to have been duly given or made: (a) when delivered in person; (b) ten (10) days after deposited by mail, first class postage prepaid; (c) in the case of telegraph or express courier services, three (3) business days after delivery to the telegraph company or overnight courier service with payment provided for; or (d) in the case of telex or telecopy, when sent, verification received, in each case addressed as follows:

If to the Company:

Operations Technologies, Inc.
c/o Southwest Water Company
225 North Barranca Avenue
Suite 200
West Covina, California 91791-1605

and in the case of Southwest or Monette, to the address of such party appearing under his or its name on Annex I hereto (or to such other address as may be designated in writing by any such party to each of the others of such parties given in accordance with this Section 10(a)). A document signed and transmitted by facsimile machine or telecopier shall be deemed sufficient notice. The signature of any party thereon, for purposes hereof, is to be considered as an original signature, and the document transmitted is to be considered to have the same binding effect as an original signature on an original document. At the request of any party, any facsimile or telecopy document is to be re-executed in original form by the parties who executed the facsimile or telecopy document. No party may raise the use of a facsimile machine or telecopier or the fact that any signature was transmitted through the use of a facsimile or telecopier machine as a defense to the enforcement of this Agreement or any notice required thereof.

        (b)   Complete Agreement. This Agreement constitutes the complete understanding of the parties with respect to its subject matter and supersedes any other agreement or understanding relating thereto.

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        (c)   Amendment. No amendment, change or modification of this Agreement shall be valid, binding or enforceable, unless the same shall be in writing and signed by the Company and the holders of at least ninety-one percent (91%) of the Common Stock.

        (d)   Termination. This Agreement may be terminated at any time by an instrument in writing signed by the Company and the holders of at least ninety-one percent (91%) of the Common Stock.

        (e)   Waiver. No failure or delay on the part of Southwest, Monette, or the Company or any of them in exercising any right, power or privilege hereunder, and no course of dealing between Southwest, Monette, or the Company, shall operate as a waiver thereof nor shall any single or partial exercise of any right, power or privilege hereunder preclude the simultaneous or later exercise of any other right, power or privilege. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights and remedies which Southwest, Monette, or the Company would otherwise have.

        (f)    Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one and the same instrument.

        (g)   Governing Law. This Agreement will be governed by the laws of the State of Georgia without regard to conflicts of laws principles.

        (h)   Jurisdiction; Service of Process. Subject to the provisions of Section 9(n) below, any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against any of the parties in the courts of the State of Georgia, City of Atlanta, or, if it has or can acquire jurisdiction, in the United States District Court for the Northern District of Georgia, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world.

        (i)    Specific Performance. Each of the parties acknowledges and agrees that the other party would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the parties agrees that the other party shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having, in accordance with the terms of this Agreement, jurisdiction over the parties and the matter, in addition to any other remedy to which it may be entitled, at law or in equity.

        (j)    Benefit and Binding Effect. All of the terms and provisions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns.

        (k)   Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.

        (l)    After-Acquired Shares. All of the provisions of this Agreement shall apply to all of the shares of Common Stock of the Company now owned or which may be issued to or acquired by Southwest or Monette in consequence of any additional issuance (including, without limitation, by exercise of an option or any warrant), purchase, exchange, conversion or reclassification of stock,

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corporate reorganization, or any other form of recapitalization, consolidation, merger, stock split or stock dividend, or which are acquired by Southwest or Monette in any other manner.

        (m)  Approvals and Consents. Southwest and Monette hereby agree, for themselves, their successors, heirs and legal representatives, to vote at shareholders' and directors' meetings of the Company (as the case may be), to prepare, execute and deliver or cause to be prepared, executed and delivered such further instruments and documents, to take such other actions and to adopt such provisions of the Articles of Incorporation and Bylaws of the Company as may be reasonably required to more effectively carry out the intent and purposes of this Agreement and the transactions contemplated hereby. They further agree to cause the Company to do the same.

        (n)   Arbitration. Except as otherwise set forth in this Agreement, all disputes arising out of or under this Agreement shall be settled by arbitration in a location in the city of Atlanta, Georgia mutually acceptable to the parties before a single arbitrator pursuant to the rules of the American Arbitration Association. Arbitration may be commenced at any time by any of the parties by giving written notice to each other than such dispute has been referred to arbitration under this Section 9(n). The arbitrator shall be selected by the joint agreement of the parties, but if they do not so agree within twenty (20) days after the date of receipt of the notice referred to above, the selection shall be made pursuant to the rules from the panels of arbitrators maintained by the American Arbitration Association. In any such arbitration, the Georgia Rules of Evidence and the Georgia Rules of Civil Procedure shall apply. Any award rendered by the arbitrator shall be conclusive and binding upon the parties hereto; provided, however, that any such award shall be accompanied by a written opinion of the arbitrator giving the reason for the award. This provision for arbitration shall be specifically enforceable by the parties and the decision of the arbitrator in accordance herewith shall be final and binding and there shall be no right of appeal therefrom. The arbitrator shall assess, as part of his award to the prevailing party, all or such part as the arbitrator deems proper of the arbitration expenses of the prevailing party (including reasonable attorneys' fees) and of the arbitrator against the party that is unsuccessful in such claim, defense or objection. The parties shall have the right to seek enforcement of any such award provided pursuant to this Section 9(n) pursuant to Section 9(h) and Section 9(i) of this Agreement.

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

Company:
Operations Technologies, Inc.
By:	/s/  PETER J. MOERBEEK Peter J. Moerbeek President
Monette:
/s/  ROBERT W. MONETTE Robert W. Monette
Southwest:
Southwest Water Company
By:	/s/  ANTON C. GARNIER Anton C. Garnier President and Chief Executive Officer

ANNEX I

Shareholders	Class of Securities	Number of Shares
Southwest Water Company 225 North Barranca Avenue Suite 200 West Covina, California 91791-1605	Common Stock	900
Robert W. Monette 1536 Dunwoody Village Parkway Suite 245 Atlanta, Georgia 30338	Common Stock	100

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SHAREHOLDERS AGREEMENT
ANNEX I

EX-10.6

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Exhibit 10.6

SOUTHWEST WATER COMPANY

DEFERRED COMPENSATION PLAN

Effective January 1, 2002

Southwest Water Company
Deferred Compensation Plan
Master Plan Document

TABLE OF CONTENTS

			Page
ARTICLE 1		Definitions	1
ARTICLE 2		Selection, Enrollment, Eligibility	7
	2.1	Selection by Committee	7
	2.2	Enrollment Requirements	7
	2.3	Eligibility; Commencement of Participation	7
	2.4	Termination of Participation and/or Deferrals	7
ARTICLE 3		Deferral Commitments/Company Amounts/Crediting/Taxes	7
	3.1	Minimum Deferral	7
	3.2	Maximum Deferral	8
	3.3	Election to Defer; Effect of Election Form	8
	3.4	Withholding of Annual Deferral Amounts	9
	3.5	Annual Company Amount	9
	3.6	Intentionally Deleted	9
	3.7	Stock Option Deferral Amount	9
	3.8	Intentionally Deleted	9
	3.9	Crediting Prior to Distribution	9
	3.10	Interest Crediting for Installment Distributions	10
	3.11	FICA and Other Taxes	10
	3.12	Vesting	11
ARTICLE 4		Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Election	12
	4.1	Short-Term Payout	12
	4.2	Other Benefits Take Precedence Over Short-Term Payout	12
	4.3	Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies	12
	4.4	Withdrawal Election	12
ARTICLE 5		Retirement Benefit	13
	5.1	Retirement Benefit	13
	5.2	Payment of Retirement Benefit	13
	5.3	Death Prior to Completion of Retirement Benefit	13
ARTICLE 6		Pre-Retirement Survivor Benefit	14
	6.1	Pre-Retirement Survivor Benefit	14
	6.2	Payment of Pre-Retirement Survivor Benefit	14
ARTICLE 7		Termination Benefit	14
	7.1	Termination Benefit	14
	7.2	Payment of Termination Benefit	14
ARTICLE 8		Disability Waiver and Benefit	15
	8.1	Disability Waiver	15
	8.2	Continued Eligibility; Disability Benefit	15
ARTICLE 9		Beneficiary Designation	15
	9.1	Beneficiary	15

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	9.2	Beneficiary Designation; Change; Spousal Consent	16
	9.3	Acknowledgment	16
	9.4	No Beneficiary Designation	16
	9.5	Doubt as to Beneficiary	16
	9.6	Discharge of Obligations	16
ARTICLE 10		Leave of Absence	16
	10.1	Paid Leave of Absence	16
	10.2	Unpaid Leave of Absence	16
ARTICLE 11		Termination, Amendment or Modification	16
	11.1	Termination	16
	11.2	Amendment	17
	11.3	Plan Agreement	17
	11.4	Interest Rate in the Event of a Change in Control	17
	11.5	Effect of Payment	18
ARTICLE 12		Administration	18
	12.1	Committee Duties	18
	12.2	Administration Upon Change In Control	18
	12.3	Agents	18
	12.4	Binding Effect of Decisions	19
	12.5	Indemnity of Committee	19
	12.6	Employer Information	19
ARTICLE 13		Other Benefits and Agreements	19
	13.1	Coordination with Other Benefits	19
ARTICLE 14		Claims Procedures	19
	14.1	Presentation of Claim	19
	14.2	Notification of Decision	19
	14.3	Review of a Denied Claim	20
	14.4	Decision on Review	20
	14.5	Legal Action	20
ARTICLE 15		Trust	20
	15.1	Establishment of the Trust	20
	15.2	Interrelationship of the Plan and the Trust	20
	15.3	Distributions From the Trust	20
ARTICLE 16		Miscellaneous	20
	16.1	Status of Plan	20
	16.2	Unsecured General Creditor	21
	16.3	Employer's Liability	21
	16.4	Nonassignability	21
	16.5	Not a Contract of Employment	21
	16.6	Furnishing Information	21
	16.7	Terms	21
	16.8	Captions	21
	16.9	Governing Law	21
	16.10	Notice	22
	16.11	Successors	22
	16.12	Spouse's Interest	22

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16.13	Validity	22
16.14	Incompetent	22
16.15	Court Order	22
16.16	Distribution in the Event of Taxation	22
16.17	Insurance	23
16.18	Legal Fees To Enforce Rights After Change in Control	23

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SOUTHWEST WATER COMPANY
DEFERRED COMPENSATION PLAN

Effective January 1, 2002

Purpose

        The purpose of this Plan is to provide specified benefits to a select group of management or highly compensated Employees and/or Directors who contribute materially to the continued growth, development and future business success of Southwest Water Company, a Delaware corporation, and its subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.

ARTICLE 1
Definitions

        For purposes of this Plan, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings:

1.1

"Account Balance" shall mean, with respect to a Participant, the sum of (i) the Deferral Account balance, (ii) the vested Company Account balance (determined in accordance with Section 3.12), (iii) the Stock Option Deferral Account balance and (iv) the Dividend Account balance. The Account Balance, and all other "accounts" described in this Plan, shall be bookkeeping entries only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan.

1.2

"Accounting Firm" shall have the meaning set forth in Section 3.12(d).

1.3

"Administrator" shall have the meaning set forth in Section 12.2.

1.4

"Annual Company Amount" shall mean, for any one Plan Year, the amount determined in accordance with Section 3.5.

1.5

"Annual Deferral Amount" shall mean that portion of a Participant's Base Annual Salary, Bonus, Commissions and/or Directors Fees that a Participant elects to have, and is deferred, in accordance with Article 3, for any one Plan Year. In the event of a Participant's Retirement, Disability (if deferrals cease in accordance with Section 8.1), death or a Termination of Employment prior to the end of a Plan Year, such year's Annual Deferral Amount shall be the actual amount withheld prior to such event.

1.6

"Annual Stock Option Deferral Amount" shall mean, with respect to a Participant for any one Plan Year, the amount of Qualifying Gains deferred on Eligible Stock Options in accordance with Section 3.7 of this Plan, calculated using the closing price of Stock as of the end of the business day prior to the date of such Eligible Stock Option exercise.

1.7

"Base Annual Salary" shall mean the annual cash compensation relating to services performed during any Plan Year and includable on the Federal Income Tax W-2 for such Plan Year, excluding bonuses, commissions, overtime, fringe benefits, retainers, stock options, relocation expenses, incentive payments, non-monetary awards, directors fees and other fees, severance allowances, pay in lieu of vacations, insurance premiums paid by the Company, insurance benefits paid to the Participant or his or her beneficiary, Company contributions to qualified and non-qualified plans, automobile and other allowances, paid to a Participant for employment services rendered (whether or not such allowances are included in the Employee's gross income). Base Annual Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non-qualified plans of any Employer and shall be calculated to include

1

amounts not otherwise included in the Participant's gross income under Code Sections 125, 402(e)(3), 402(h) or 403(b) pursuant to plans established by any Employer; provided, however, that all such amounts will be included in compensation only to the extent that, had there been no such plan, the amount would have been payable in cash to the Employee.

1.8

"Beneficiary" shall mean one or more persons, trusts, estates or other entities, designated in accordance with Article 9, that are entitled to receive benefits under this Plan upon the death of a Participant.

1.9

"Beneficiary Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries.

1.10

"Board" shall mean the board of directors of the Company.

1.11

"Bonus" shall mean any compensation, in addition to Base Annual Salary, payable in such Plan Year or includable on the Federal Income Tax Form W-2 for such Plan Year, payable to a Participant as an Employee under any Employer's bonus and cash incentive plans, excluding stock options and Commissions.

1.12

"Bonus Rate" shall mean, for a Plan Year, an interest rate, if any, determined by the Committee, in its sole discretion, which rate shall be determined and announced before the commencement of the Plan Year for which the rate applies. This rate may be zero for any Plan Year. For the first Plan Year, the Bonus Rate shall equal 20% of the Crediting Rate.

1.13

"Change in Control" shall mean ninety (90) days prior to the first to occur of any of the following events:

(a)

Any "person" (as that term is used in Section 13 and 14(d)(2) of the Securities Exchange Act of 1934, as amended ("Exchange Act")) becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of 50% or more of the Company's capital stock entitled to vote in the election of directors;

(b)

The shareholders of the Company approve any consolidation or merger of the Company, other than a consolidation or merger of the Company in which the holders of the common stock of the Company immediately prior to the consolidation or merger hold more than 50% of the common stock of the surviving corporation immediately after the consolidation or merger;

(c)

The shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company;

(d)

The shareholders of the Company approve the sale or transfer of all or substantially all of the assets of the Company to parties that are not within a "controlled group of corporations" (as defined in Code Section 1563) in which the Company is a member.

(e)

The Company offers any equity security pursuant to a registration statement filed with and declared effective by the Securities Exchange Commission under the Securities Act of 1933, as amended, other than in connection with an employee benefit plan; or

(f)

The shareholders of the Company approve any consolidation or merger of the Company with, or the Company is acquired in a tax-free reorganization defined in Code Section 368 by, a corporation that has previously offered an equity security pursuant to a registration statement filed with and declared effective by the Securities Exchange Commission under the Securities Act of 1933, as amended, other than in connection with an employee benefit plan, and such equity security remains outstanding after the merger or consolidation.

2

1.14

"Claimant" shall have the meaning set forth in Section 14.1.

1.15

"Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time.

1.16

"Committee" shall mean the committee described in Article 12.

1.17

"Commissions" shall mean sales commissions and any other similar type of remuneration to a Participant as an Employee of an Employer, as determined by the Committee in its sole discretion, that is includable on the Federal Income Tax Form W-2 for such Plan Year.

1.18

"Company" shall mean Southwest Water Company, a Delaware corporation, and any successor to all or substantially all of the Company's assets or business.

1.19

"Company Account" shall mean (i) the sum of the Participant's Annual Company Amounts, plus (ii) interest credited in accordance with all the applicable interest crediting provisions of this Plan that relate to the Participant's Company Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Company Account. This account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan.

1.20

"Company Stock Crediting Rate" shall mean, with respect to a Participant's Stock Option Deferral Account balance, a rate based on the performance of the Stock, as determined by the Committee in its sole discretion.

1.21

"Crediting Rate" shall mean, with respect to a Participant's Deferral Account balance, Company Account balance and Dividend Account balance for each Plan Year, an interest rate, stated as an annual rate, determined and announced by the Committee before the Plan Year for which it is to be used, that is equal to the applicable "Moody's Rate." The Moody's Rate for a Plan Year shall be an interest rate, stated as an annual rate, that (i) is published in Mergent's Bond Record under the heading of "Corporate Bond Yield Averages-Av. Corp." and (ii) is equal to the average corporate bond yield calculated for the month of September that immediately precedes the Plan Year for which the rate is to be used.

1.22

"Deduction Limitation" shall mean the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions that are "subject to the Deduction Limitation" under this Plan. If an Employer determines in good faith that there is a reasonable likelihood that any compensation to be paid prior to a Change in Control to a Participant for a taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall continue to be credited with interest in accordance with Section 3.10 below, even if such amount is being paid out in installments. The amounts so deferred and interest thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Section 162(m), or if earlier, the effective date of a Change in Control. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation shall not apply to any distributions made after a Change in Control.

1.23

"Deferral Account" shall mean (i) the sum of all of a Participant's Annual Deferral Amounts, plus (ii) interest credited in accordance with all the applicable interest crediting provisions of this Plan

3

that relate to the Participant's Deferral Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Deferral Account. This account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan.

1.24

"Director" shall mean any member of the board of directors of the Company.

1.25

"Directors Fees" shall mean the annual fees payable by the Company, including retainer fees and meetings fees, as compensation for serving on the board of directors of the Company.

1.26

"Disability" shall mean a period of disability during which a Participant qualifies for disability benefits under the Participant's Employer's long-term disability plan. If a Participant does not participate in such a plan, "Disability" shall mean a period of disability during which the Participant would have qualified for disability benefits under such a plan had the Participant been a participant in such a plan, as determined in the sole discretion of the Committee. If the Participant's Employer does not sponsor such a plan, or discontinues to sponsor such a plan, Disability shall be determined by the Committee in its sole discretion.

1.27

"Disability Benefit" shall mean the benefit set forth in Article 8.

1.28

"Dividend Account" shall mean (i) the sum of all of a Participant's Dividend Amounts, plus (ii) interest credited in accordance with all the applicable interest crediting provisions of this Plan that relate to the Participant's Dividend Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Dividend Account. This account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan.

1.29

"Dividend Amount" shall mean the cash dividend amount that would have been paid on the dividend payment date if the Stock Option Deferral Account was actually invested in Stock on the date a cash dividend of the Company is declared (fractional shares shall be rounded up to the nearest whole share).

1.30

"Election Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan.

1.31

"Eligible Stock Option" shall mean one or more non-qualified stock option(s) selected by the Committee in its sole discretion and exercisable under a plan or arrangement of any Employer permitting a Participant under this Plan to defer gain with respect to such option.

1.32

"Employee" shall mean a person who is an employee of any Employer.

1.33

"Employer(s)" shall mean the Company and/or any of its subsidiaries (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor.

1.34

"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.

1.35

"Ex-CEO" shall have the meaning set forth in Section 12.2.

1.36

"FICA" shall mean the Federal Insurance Contributions Act, as amended, which generally deals with what is commonly known as social security taxes.

1.37

"Participant" shall mean any Employee or Director (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement, an Election Form and a Beneficiary Designation Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary

4

Designation Form are accepted by the Committee, (v) who commences participation in the Plan, and (vi) whose Plan Agreement has not terminated. A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan (other than as a Beneficiary, if so designated) or have an account balance under the Plan, even if he or she has an interest in the Participant's benefits under the Plan as a result of applicable law or property settlements resulting from legal separation or divorce.

1.38

"Plan" shall mean the Company's Deferred Compensation Plan, which shall be evidenced by this instrument (and may be modified by each Plan Agreement), as it may be amended from time to time.

1.39

"Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant and the Participant's Employer shall provide for the entire benefit to which such Participant is entitled under the Plan; should there be more than one Plan Agreement, the Plan Agreement bearing the latest date of acceptance by the Committee shall supersede all previous Plan Agreements in their entirety and shall govern such entitlement. The terms of any Plan Agreement may be different for any Participant, and any Plan Agreement may provide additional benefits not set forth in the Plan or limit the benefits otherwise provided under the Plan.

1.40

"Plan Year" shall mean a period beginning on January 1 of each calendar year and continuing through December 31 of such calendar year.

1.41

"Preferred Rate" shall mean, for each Plan Year, an interest rate that is the sum of the Crediting Rate and the Bonus Rate for that Plan Year.

1.42

"Qualifying Gain" shall mean the value accrued upon exercise of an Eligible Stock Option (i) using a Stock-for-Stock payment method illustrated in the example below and (ii) having an aggregate fair market value in excess of the total Stock purchase price necessary to exercise the option. In other words, the Qualifying Gain upon exercise of an Eligible Stock Option equals the total market value of the shares (or share equivalent units) acquired minus the total stock purchase price. For example, assume a Participant elects to defer the Qualifying Gain accrued upon exercise of an Eligible Stock Option to purchase 1000 shares of Stock at an exercise price of $20 per share, when Stock has a current fair market value of $25 per share. Using the Stock-for-Stock payment method, the Participant would deliver 800 shares of Stock (worth $20,000) to exercise the Eligible Stock Option and receive, in return, 800 shares of Stock plus a Qualifying Gain (in this case, in the form of an unfunded and unsecured promise to pay money or property in the future) equal to $5,000 (i.e., the current value of the remaining 200 shares of Stock).

1.43

"Pre-Retirement Survivor Benefit" shall mean the benefit set forth in Article 6.

1.44

"Retirement", "Retires" or "Retired" shall mean, with respect to an Employee, severance from employment from all Employers for any reason other than a leave of absence, death or Disability on or after the earlier of the attainment of (a) age sixty-five (65) or (b) age fifty-five (55) with five (5) Years of Service; and shall mean, with respect to a Director who is not an Employee, severance of his or her directorships with all Employers on or after the later of (y) the attainment of age seventy-two (72), or (z) in the sole discretion of the Committee, an age later than age seventy-two (72). If a Participant is both an Employee and a Director, Retirement shall not occur until he or she Retires as both an Employee and a Director, which Retirement shall be deemed to be a Retirement as a Director; provided, however, that such a Participant may elect, at least one year prior to Retirement, and in accordance with the policies and procedures established by the Committee, to Retire for purposes of this Plan at the time he or she Retires as an Employee, which Retirement shall be deemed to be a Retirement as an Employee.

1.45

"Retirement Benefit" shall mean the benefit set forth in Article 5.

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1.46

"Short-Term Payout" shall mean the payout set forth in Section 4.1.

1.47

"Stock" shall mean the Company's common stock, $.01 par value, or any other equity securities of the Company designated by the Committee.

1.48

"Stock Option Deferral Account" shall mean the sum of (i) the Participant's Annual Stock Option Deferral Amounts, plus (ii) amounts credited in accordance with all the applicable crediting provisions of this Plan that relate to the Participant's Stock Option Deferral Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant's Stock Option Deferral Account. This account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan.

1.49

"Stock Option Deferral Amount" shall mean, for any Eligible Stock Option, the amount of Qualifying Gains deferred in accordance with Section 3.7 of this Plan, calculated using the closing price of Stock as of the end of the business day prior to the date of exercise of such Eligible Stock Option.

1.50

"Termination Benefit" shall mean the benefit set forth in Article 7.

1.51

"Termination of Employment" shall mean the severing of employment with all Employers, or service as a Director of all Employers, voluntarily or involuntarily, for any reason other than Retirement, Disability, death or an authorized leave of absence. If a Participant is both an Employee and a Director, a Termination of Employment shall occur only upon the termination of the last position held; provided, however, that such a Participant may elect, at least one year before Termination of Employment and in accordance with the policies and procedures established by the Committee, to be treated for purposes of this Plan as having experienced a Termination of Employment at the time he or she ceases employment with all Employers as an Employee.

1.52

"Trust" shall mean the trust established pursuant to that certain Master Trust Agreement, dated as of January 1, 2002, between the Company and the trustee named therein, as amended from time to time.

1.53

"Trustee" shall mean the trustee of the Trust.

1.54

"Unforeseeable Financial Emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee.

1.55

"Years of Plan Participation" shall mean the total number of full Plan Years a Participant has been a Participant in the Plan prior to his or her Termination of Employment (determined without regard to whether deferral elections have been made by the Participant for any Plan Year). Any partial year shall not be counted. Notwithstanding the previous sentence, a Participant's first Plan Year of participation shall be treated as a full Plan Year for purposes of this definition if such Participant is a Participant for at least six (6) months during such first Plan Year.

1.56

"Years of Service" shall mean the total number of full years in which a Participant has been employed by one or more Employers. For purposes of this definition, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that, for the first year of employment, commences on the Employee's date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. Any partial year of employment shall not be counted.

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ARTICLE 2
Selection, Enrollment, Eligibility

2.1

Selection by Committee.    Participation in the Plan shall be limited to a select group of management or highly compensated Employees of the Employers and to Directors, as determined by the Committee, in its sole discretion. From that group, the Committee shall select, in its sole discretion, Employees and Directors to participate in the Plan.

2.2

Enrollment Requirements.    As a condition to participation, each selected Employee or Director shall complete, execute and return to the Committee a Plan Agreement, an Election Form and a Beneficiary Designation Form, all within 30 days after he or she is selected to participate in the Plan. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines, in its sole discretion, are necessary.

2.3

Eligibility; Commencement of Participation.    Provided an Employee or Director selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee within the specified time period, that Employee or Director shall commence participation in the Plan on the first day of the month following the month in which the Employee or Director completes all enrollment requirements. If an Employee or a Director fails to meet all such requirements within the period required, in accordance with Section 2.2, that Employee or Director shall not be eligible to participate in the Plan until the first day of the Plan Year following the delivery to and acceptance by the Committee of the required documents and the completion of all other enrollment requirements.

2.4

Termination of Participation and/or Deferrals.    If the Committee determines in good faith that a Participant no longer qualifies as a member of a select group of management or highly compensated employees, as membership in such group is determined in accordance with Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the right, in its sole discretion, to (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Participant's membership status changes, (ii) prevent the Participant from making future deferral elections and/or (iii) immediately distribute the Participant's then Account Balance as a Termination Benefit and terminate the Participant's participation in the Plan.

ARTICLE 3
Deferral Commitments/Company Amounts/Crediting/Taxes

3.1

Minimum Deferral.

(a)

Annual Deferral Amount.    For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary, Bonus, Commissions and/or Director's Fees in the combined minimum amount of $2,500. If an election is made for less than this minimum amount, or if no election is made, the amount deferred shall be zero.

(b)

Short Plan Year.    Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, the minimum combined deferral shall be an amount equal to the combined minimum set forth in Section 3.1(a) above, multiplied by a fraction, the numerator of which is the number of complete months remaining in the Plan Year and the denominator of which is 12.

(c)

Stock Option Deferral Amount.    At the sole discretion of the Committee, a Participant may be selected to defer gain upon one or more Eligible Stock Options. For each Eligible Stock Option, a selected Participant may elect to defer, as his or her Stock Option Deferral

7

Amount, the following minimum percentage of Qualifying Gain with respect to the exercise of the Eligible Stock Option:

Deferral	Minimum Percentage
Qualifying Gain	10	%

provided, however, that the Annual Stock Option Deferral Amount shall be no less than the lesser of $20,000 or 100% of the Qualifying Gain.

3.2

Maximum Deferral.

(a)

For each Plan Year, a Participant may elect to defer, as his or her Annual Deferral Amount, Base Annual Salary, Bonus, Commissions and/or Directors Fees up to the following maximum percentages for each deferral elected:

Deferral	Maximum Percentage
Base Annual Salary	50	%
Bonus	100	%
Commissions	100	%
Directors Fees	100	%

Notwithstanding the foregoing, if a Participant first becomes a Participant after the first day of a Plan Year, the maximum Annual Deferral Amount with respect to Base Annual Salary, Commissions and Directors Fees shall be limited to the amount of compensation not yet earned, and in the case of the Bonus not yet paid, to the Participant as of the date the Participant commences participation pursuant to Section 2.3.

(b)

For each Eligible Stock Option, a selected Participant may elect to defer, as his or her Stock Option Deferral Amount, Qualifying Gain up to the following maximum percentage with respect to exercise of the Eligible Stock Option:

Deferral	Maximum Percentage
Qualifying Gain	100	%

(c)

Stock Option Deferral Amounts may also be limited by other terms or conditions set forth in the stock option plan or agreement under which such options are granted.

3.3

Election to Defer; Effect of Election Form.

(a)

First Plan Year.    In connection with a Participant's commencement of participation in the Plan, the Participant shall make an irrevocable deferral election for the Plan Year in which the Participant commences participation in the Plan, along with such other elections as the Committee deems necessary or desirable under the Plan. For these elections to be valid, the Election Form must be completed and signed by the Participant, timely delivered to the Committee (in accordance with Section 2.2 above) and accepted by the Committee.

(b)

Subsequent Plan Years.    For each succeeding Plan Year, an irrevocable deferral election for that Plan Year, and such other elections as the Committee deems necessary or desirable under the Plan, shall be made by timely delivering to the Committee, in accordance with its rules and procedures before the end of the Plan Year preceding the Plan Year for which the election is made, a new Election Form. If no such Election Form is timely delivered for a Plan Year, the Annual Deferral Amount shall be zero for that Plan Year. For purposes of the Plan, a Bonus shall be deemed attributable to the Plan Year in which such Bonus is paid.

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(c)

Stock Option Deferral.    If the Committee has permitted a Participant to defer gain upon an Eligible Stock Option, for an election to defer gain upon an Eligible Stock Option exercise to be valid: (i) a separate Election Form must be completed and signed by the Participant with respect to the Eligible Stock Option; (ii) the Election Form must be timely delivered to the Committee and accepted by the Committee at least six (6) months prior to the date the Participant elects to exercise the Eligible Stock Option; (iii) the Eligible Stock Option must be exercised using an actual Stock-for-Stock payment method; and (iv) the Stock actually or constructively delivered by the Participant to exercise the Eligible Stock Option must have been owned by the Participant during the entire six (6) month period prior to its delivery.

3.4

Withholding of Annual Deferral Amounts.    For each Plan Year, the Base Annual Salary portion of the Annual Deferral Amount shall be withheld from each regularly scheduled Base Annual Salary payroll in equal amounts, as adjusted from time to time for increases and decreases in Base Annual Salary. The Bonus, Commissions and/or Directors Fees portion of the Annual Deferral Amount shall be withheld at the time the Bonus, Commissions or Directors Fees are or otherwise would be paid to the Participant, whether or not this occurs during the Plan Year itself.

3.5

Annual Company Amount.    For each Plan Year, an Employer, in its sole discretion, may, but is not required to, credit any amount it desires to any Participant's Company Account under this Plan, which amount shall be for that Participant the Annual Company Amount for that Plan Year. The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero, even though one or more other Participants receive an Annual Company Amount for that Plan Year. The Annual Company Amount, if any, shall be credited as of the last day of the Plan Year. If a Participant is not employed by an Employer as of the last business day of a Plan Year other than by reason of his or her Retirement or death, the Annual Company Amount for that Plan Year shall be zero. In the event of Retirement or death, a Participant shall be credited with the Annual Company Amount for the Plan Year in which he or she Retires or dies.

3.6

Intentionally Deleted.

3.7

Stock Option Deferral Amount.    Subject to any terms and conditions imposed by the Committee, selected Participants may elect to defer, under the Plan, Qualifying Gains attributable to an Eligible Stock Option exercise. Stock Option Deferral Amounts shall be credited to the Stock Option Deferral Account at the time Stock would otherwise have been delivered to the Participant pursuant to the Eligible Stock Option exercise, but for the election to defer.

3.8

Intentionally Deleted.

3.9

Crediting Prior to Distribution.

(a)

Interest Crediting.    Except as provided below, prior to any distribution of benefits under Articles 4, 5, 6, 7 or 8, interest shall be credited and compounded annually on (i) a Participant's Deferral Account as though the Base Annual Salary, Bonus and Director Fee portion of the Annual Deferral Amount for that Plan Year was withheld on the first day of the Plan Year (in the case of the first year of Plan participation, as though such amounts were withheld on the date that the Participant commenced participation in the Plan), (ii) on a Participant's Company Account as though the Annual Company Amount, if any, was credited on the last day of the Plan Year to which it relates, and (iii) on a Participant's Dividend Account as though the Dividend Amount was credited on the day dividends on Company Stock were actually paid. If the Participant Retires, dies, or experiences a Termination of Employment prior to the end of the Plan Year, the Annual Company Amount, if any, for the Plan Year in which such event occurs shall be treated as having been credited as of the date of such event. The rate of interest for crediting shall be the Preferred Rate, except as

9

otherwise provided in Section 7.1, which rate shall be treated as the nominal rate for crediting interest. In the event of Retirement, Disability, death or Termination of Employment prior to the end of a Plan Year, the basis for that year's interest crediting will be a fraction of the full year's interest, based on the number of full months that the Participant was employed with the Employer during the Plan Year prior to the occurrence of such event. If a distribution is made under this Plan, for purposes of crediting interest up to the time of the distribution, the Participant's Account Balance shall be reduced as of the first day of the month in which the distribution is made.

(b)

Company Stock Crediting Rate.    A selected Participant's Stock Option Deferral Account shall to be credited at the Company Stock Crediting Rate as though (i) Qualifying Gain was invested in Stock at the closing price of Stock as of the end of the business day prior to the date of exercise of an Eligible Stock Option; (ii) stock dividends and splits shall be debited or credited to the Stock Option Deferral Account balance as if such balance were invested in Stock as of the date the stock dividend or split occurs; and (ii) any distribution made to a Participant out of the Stock Option Deferral Account shall cease to be invested in Stock no earlier than three business days prior to the distribution. Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Company Stock Crediting Rate is to be used for measurement purposes only, and the crediting or debiting of amounts to a Participant's Stock Option Deferral Account shall not be considered or construed in any manner as an actual investment of his or her Stock Option Deferral Account in Stock. In the event that the Company or the Trustee, in its own discretion, decides to invest funds in Stock, no Participant shall have any rights in or to such investments themselves.

3.10

Interest Crediting for Installment Distributions.

(a)

If a Participant's benefits under this Plan are to be paid in substantially equal annual installments, such payments shall be determined by amortizing the Participant's specified benefit over the number of years elected, using the interest rate specified below and treating the first installment payment as all principal and each subsequent installment payment, first as interest accrued for the applicable installment period on the unpaid Account Balance and second as a reduction in the Account Balance. Except as provided in Section 3.10(b) below, the interest rate to be used to calculate installment payment amounts shall be a fixed interest rate that is determined by averaging the Preferred Rates for the Plan Year in which installment payments commence and the four (4) preceding Plan Years. This rate shall be treated as the nominal rate for making such calculations. If a Participant has completed fewer than five (5) Years of Plan Participation, this average shall be determined using the Preferred Rates for the Plan Years during which the Participant participated in the Plan. If a Participant has a Stock Option Deferral Account, the balance as of the date the first installment is paid shall no longer be credited at the Company Stock Crediting Rate, but shall be credited with interest in accordance with this Section.

(b)

Despite Section 3.10(a) above, if the Participant elects installment distributions under Section 7.2, the applicable interest rate(s) to be used for calculating interest under 3.10(a) shall be determined in accordance with the table set forth in Section 7.1, but using the Crediting Rate(s) or Preferred Rates, as the case may be, for the Plan Year in which the installment distributions commence and the preceding four Plan Years (or such shorter number of Plan Years for which the Participant was a participant in the Plan).

3.11

FICA and Other Taxes.

(a)

Annual Deferral Amounts.    For each Plan Year in which an Annual Deferral Amount is being first withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary, Bonus or Commissions that is not being

10

deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Deferral Amount. If necessary, the Committee may reduce the Annual Deferral Amount in order to comply with this Section 3.11. No FICA or other employment taxes shall be withheld with respect to Directors Fees withheld unless otherwise required by law.

(b)

Company Account.    When a Participant becomes vested in a portion of his or her Company Account, the Participant's Employer(s) shall withhold from the Participant's Base Annual Salary, Bonus and/or Commissions that is not deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes. If necessary, the Committee may reduce the vested portion of the Participant's Company Account, and include the amount reduced in the income of the Participant, in order to comply with this Section 3.11.



(c)

Annual Stock Option Deferral Amounts.    For each Plan Year in which an Annual Stock Option Deferral Amount is being first withheld from a Participant, the Participant's Employer(s) shall withhold from that portion of the Participant's Base Annual Salary, Bonus, Commissions and Qualifying Gains that are not being deferred, in a manner determined by the Employer(s), the Participant's share of FICA and other employment taxes on such Annual Stock Option Deferral Amount. If necessary, the Committee may reduce the Annual Stock Option Deferral Amount, and include the amount reduced in the income of the Participant, in order to comply with this Section 3.11.



(d)

Other Amounts.    The Participant's Employer(s) shall have the right to withhold from a Participant's Base Annual Salary, Bonus, Commissions and/or any other remuneration that is not being deferred, in a manner determined by the Employer(s), a Participant's share of FICA and other employment taxes on such other amounts as it determines are due with respect to amounts credited or deferred in accordance with this Plan. If necessary, the Committee may reduce any amounts otherwise being deferred and include the amount reduced in the income of the Participant, in order to comply with this Section 3.11.



(e)

Distributions.    The Participant's Employer(s), or the Trustee, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the Trustee, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the Trustee.

3.12

Vesting.

(a)

Except as provided in Section 7.1 below, a Participant shall at all times be 100% vested in his or her Deferral Account, Dividend Account and Stock Option Deferral Account.

(b)

A Participant shall be vested in his or her Company Account as follows: (i) with respect to all benefits under this Plan other than the Termination Benefit, a Participant's vested Company Account shall equal 100% of such Participant's Company Account; and (ii) with respect to the Termination Benefit, each Annual Company Amount credited to a Participant (along with interest credited thereon) shall vest in accordance with such vesting schedule as the Committee shall determine, in its sole and absolute discretion, at the time such Annual Company Amount is credited to such Participant. The vesting schedule determined by the Committee under clause (ii) above may be determined on a Participant-by-Participant basis, and may be different for each Participant.

(c)

Notwithstanding anything to the contrary contained in this Section 3.12, in the event of a Change in Control, a Participant's Company Account shall immediately become 100% vested.

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(d)

Notwithstanding subsection (c), the vesting of a Participant's Company Account shall not be accelerated to the extent that the Committee determines that such acceleration would cause the deduction limitations of Section 280G of the Code to become effective. In the event that all of a Participant's Company Account is not vested pursuant to such a determination, the Participant may request independent verification of the Committee's calculations with respect to the application of Section 280G. In such case, the Committee must provide to the Participant within 15 business days of such a request an opinion from a nationally recognized accounting firm selected by the Participant (the "Accounting Firm"). The opinion shall state the Accounting Firm's opinion that any limitation in the vested percentage hereunder is necessary to avoid the limits of Section 280G and contain supporting calculations. The cost of such opinion shall be paid for by the Company.

ARTICLE 4
Short-Term Payout; Unforeseeable Financial Emergencies; Withdrawal Election

4.1

Short-Term Payout.    In connection with each election to defer an Annual Deferral Amount, a Participant may irrevocably elect to receive a future "Short-Term Payout" from the Plan with respect to all or a portion of such Annual Deferral Amount. In order for a Short-Term Payout election to be effective, the Participant must elect to receive at least $2500 of such Participant's Annual Deferral Amount as a Short-Term Payout; if an election is made for less than this minimum amount, or if no election is made, the Short-Term Payout shall be zero. Subject to the Deduction Limitation, the Short-Term Payout shall be a lump sum payment in an amount that is equal to the sum of (i) the portion of the Annual Deferral Amount for which the Short-Term Payout election has been made plus interest credited in the manner provided in Section 3.9 above on that amount but using the applicable interest rate set forth in Section 7.1 below, determined at the time that the Short-Term Payout becomes payable (rather than the date of a Termination of Employment). Subject to the Deduction Limitation and the other terms and conditions of this Plan, each Short-Term Payout elected shall be paid during a period beginning one day and ending 60 days after the last day of any Plan Year designated by the Participant that is at least five Plan Years after the Plan Year in which the Annual Deferral Amount is actually deferred (counting the deferral Plan Year as one of the five Plan Years). By way of example, if a five year Short-Term Payout is elected for an Annual Deferral Amount that is deferred in the Plan Year commencing January 1, 2002 (deferral through the 2006 Plan Year), the five year Short-Term Payout would become payable during a 60 day period commencing January 1, 2007.

4.2

Other Benefits Take Precedence Over Short-Term Payout.    Should an event occur that triggers a benefit under Article 5, 6, 7 or 8, any Annual Deferral Amount, plus interest thereon, that is subject to a Short-Term Payout election under Section 4.1 shall not be paid in accordance with Section 4.1, but shall be paid in accordance with the other applicable Article.

4.3

Withdrawal Payout/Suspensions for Unforeseeable Financial Emergencies.    If the Participant experiences an Unforeseeable Financial Emergency, the Participant may petition the Committee to (i) suspend any deferrals required to be made by a Participant and/or (ii) receive a partial or full payout from the Plan. The payout shall not exceed the lesser of the Participant's Account Balance, calculated as if such Participant were receiving a Termination Benefit, or the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. If, subject to the sole discretion of the Committee, the petition for a suspension and/or payout is approved, suspension shall take effect upon the date of approval and any payout shall be made within 60 days of the date of approval. The payment of any amount under this Section 4.3 shall not be subject to the Deduction Limitation.

4.4

Withdrawal Election.    A Participant (or, after the Participant's death, his or her Beneficiary) may elect, at any time, to withdraw all of his or her Account Balance, adjusted as provided below, less

12

a withdrawal penalty equal to 10% of such amount (the net amount shall be referred to as the "Withdrawal Amount"). This election can be made at any time before or after Retirement, Disability, death or Termination of Employment, and whether or not the Participant (or Beneficiary) is in the process of being paid pursuant to an installment payment schedule. Except as provided below, a Participant's Account Balance shall be 100% of his or her Account Balance as of the day of the election. If the election is made before the Participant is eligible to Retire, or before death, a Participant's Withdrawal Amount shall be his or her Account Balance calculated as if there had occurred a Termination of Employment as of the day of the election. If the election is made on or after the Participant is eligible to Retire, the Account Balance shall be calculated as if the Participant had Retired as of the day of the election. In the case of Disability, the Account Balance shall be calculated in accordance with Section 8.2, as if the Committee had deemed the Participant to have terminated his or her employment. No partial withdrawals of the Withdrawal Amount shall be allowed. The Participant (or his or her Beneficiary) shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The Participant (or his or her Beneficiary) shall be paid the Withdrawal Amount within 60 days of his or her election. Once the Withdrawal Amount is paid, the Participant's participation in the Plan shall terminate and the Participant shall not be eligible to participate in the Plan for a period of two (2) full Plan Years. The payment of this Withdrawal Amount shall not be subject to the Deduction Limitation.

ARTICLE 5
Retirement Benefit

5.1

Retirement Benefit.    Subject to the Deduction Limitation, a Participant who Retires shall receive, as a Retirement Benefit, his or her Account Balance.

5.2

Payment of Retirement Benefit.    A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form to receive the Retirement Benefit in a lump sum or in substantially equal annual installments (the latter determined in accordance with Section 3.10 above) over a period of 5, 10 or 15 years. The Participant may annually change his or her election to an allowable alternative payout period by submitting a new Election Form to the Committee, provided that any such Election Form is submitted at least 1 year prior to the Participant's Retirement and is accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee shall govern the payout of the Retirement Benefit. If a Participant does not make any election with respect to the payment of the Retirement Benefit, then such benefit shall be payable in a lump sum. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the Participant Retires. In the event the Participant elects to receive installments, remaining annual installments shall be paid within 60 days of the beginning of each calendar year, commencing on the calendar year following the calendar year in which the first installment payment is made. Any payment made shall be subject to the Deduction Limitation.

5.3

Death Prior to Completion of Retirement Benefit.    If a Participant dies after Retirement but before the Retirement Benefit is paid in full, the Participant's unpaid Retirement Benefit payments shall continue and shall be paid to the Participant's Beneficiary (a) over the remaining number of years and in the same amounts as that benefit would have been paid to the Participant had the Participant survived, or (b) in a lump sum, if requested by the Beneficiary and allowed in the sole discretion of the Committee, that is equal to the Participant's unpaid remaining Account Balance.

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ARTICLE 6
Pre-Retirement Survivor Benefit

6.1

Pre-Retirement Survivor Benefit.    Subject to the Deduction Limitation, the Participant's Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the Participant's Account Balance, if the Participant dies before he or she Retires, experiences a Termination of Employment or suffers a Disability.

6.2

Payment of Pre-Retirement Survivor Benefit.    A Participant, in connection with his or her commencement of participation in the Plan, shall elect on an Election Form whether the Pre-Retirement Survivor Benefit shall be received by his or her Beneficiary in a lump sum or in substantially equal annual installments (the latter determined in accordance with Section 3.10 above) over a period of 5, 10 or 15 years. The Participant may annually change this election to an allowable alternative payout period by submitting a new Election Form to the Committee, which form must be accepted by the Committee in its sole discretion. The Election Form most recently accepted by the Committee prior to the Participant's death shall govern the payout of the Participant's Pre-Retirement Survivor Benefit. If a Participant does not make any election with respect to the payment of the Pre-Retirement Survivor Benefit, then such benefit shall be paid in a lump sum. Despite the foregoing, if the Participant's Account Balance at the time of his or her death is less than $25,000, payment of the Pre-Retirement Survivor Benefit may be made, in the sole discretion of the Committee, in a lump sum or annual installment payments that do not exceed five years in duration. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the Committee is provided with proof that is satisfactory to the Committee of the Participant's death. In the event the Participant elected to receive installments, remaining annual installments shall be paid within 60 days of the beginning of each calendar year, commencing on the calendar year following the calendar year in which the first installment payment is made. Any payment made shall be subject to the Deduction Limitation.

ARTICLE 7
Termination Benefit

7.1

Termination Benefit.    Subject to the Deduction Limitation, the Participant shall receive a Termination Benefit, which shall be equal to the Participant's Account Balance, with interest credited in the manner provided in Section 3.9 above, but using the applicable interest rate set forth in the following schedule, if a Participant experiences a Termination of Employment prior to his or her Retirement, death or Disability:

Completion of Years of Plan Participation	Applicable Rate
Less than 5 years	Crediting Rate
5 years or more	Preferred Rate

7.2

Payment of Termination Benefit.    If the Participant's Account Balance at the time of his or her Termination of Employment is less than $25,000, payment of his or her Termination Benefit shall be paid in a lump sum. If his or her Account Balance at such time is equal to or greater than that amount, the Committee, in its sole discretion, may cause the Termination Benefit to be paid in a lump sum or in substantially equal annual installment payments over a period of time that does not exceed five years in duration (the latter determined in accordance with Section 3.10 above). The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date of the Participant's Termination of Employment. In the event the Committee elects to pay installments, remaining annual installments shall be paid within 60 days of the beginning of each calendar year, commencing on the calendar year following the calendar year in

14

which the first installment payment is made. Any payment made shall be subject to the Deduction Limitation.

ARTICLE 8
Disability Waiver and Benefit

8.1

Disability Waiver.

(a

Waiver of Deferral.    A Participant who is determined by the Committee to be suffering from a Disability shall be (i) excused from fulfilling that portion of the Annual Deferral Amount commitment that would otherwise have been withheld from a Participant's Base Annual Salary, Bonus, Commissions and/or Directors Fees for the Plan Year during which the Participant first suffers a Disability and (ii) excused from fulfilling any unexercised Stock Option Deferral Amount commitments. During the period of Disability, the Participant shall not be allowed to make any additional deferral elections, but will continue to be considered a Participant for all other purposes of this Plan.

(b

Return to Work.    If a Participant returns to employment with an Employer, or service as a Director, after a Disability ceases, the Participant may elect to defer an Annual Deferral Amount and Stock Option Deferral Amount for the Plan Year following his or her return to employment or service and for every Plan Year thereafter while a Participant in the Plan; provided such deferral elections are otherwise allowed and an Election Form is delivered to and accepted by the Committee for each such election in accordance with Section 3.3 above.

8.2

Continued Eligibility; Disability Benefit.    A Participant suffering a Disability shall, for benefit purposes under this Plan, continue to be considered to be employed, or in the service of the Company as a Director, and shall be eligible for the benefits provided for in Articles 4, 5, 6 or 7 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee shall have the right, in its sole and absolute discretion and for purposes of this Plan only, and must in the case of a Participant who is otherwise eligible to Retire, deem the Participant to have experienced a Termination of Employment, or in the case of a Participant who is eligible to Retire, to have Retired at any time (or in the case of a Participant who is eligible to Retire, as soon as practicable) after such Participant is determined to be suffering a Disability, in which case the Participant shall receive a Disability Benefit equal to his or her Account Balance at the time of the Committee's determination. The Disability Benefit shall be paid in a lump sum or in substantially equal annual installment payments over a period of time that does not exceed five years in duration (the latter determined in accordance with Section 3.10 above); provided, however, that should the Participant otherwise have been eligible to Retire, he or she shall be paid in accordance with Article 5. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the Committee exercises of such right. In the event the Committee elects to pay installments, remaining annual installments shall be paid within 60 days of the beginning of each calendar year, commencing on the calendar year following the calendar year in which the first installment payment is made. Any payment made shall be subject to the Deduction Limitation.

ARTICLE 9
Beneficiary Designation

9.1

Beneficiary.    Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates.

15

9.2

Beneficiary Designation; Change; Spousal Consent.    A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed by that Participant's spouse and returned to the Committee. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary Designation Form filed by the Participant and accepted by the Committee prior to his or her death.

9.3

Acknowledgment.    No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Committee or its designated agent.

9.4

No Beneficiary Designation.    If a Participant fails to designate a Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate.

9.5

Doubt as to Beneficiary.    If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction.

9.6

Discharge of Obligations.    The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits.

ARTICLE 10
Leave of Absence

10.1

Paid Leave of Absence.    If a Participant is authorized by the Participant's Employer for any reason to take a paid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Annual Deferral Amount shall continue to be withheld during such paid leave of absence in accordance with Section 3.4.

10.2

Unpaid Leave of Absence.    If a Participant is authorized by the Participant's Employer for any reason to take an unpaid leave of absence from the employment of the Employer, the Participant shall continue to be considered employed by the Employer and the Participant shall be excused from making deferrals until the earlier of the date the leave of absence expires or the Participant returns to a paid employment status. Upon such expiration or return, deferrals shall resume for the remaining portion of the Plan Year in which the expiration or return occurs, based on the deferral election, if any, made for that Plan Year. If no election was made for that Plan Year, no deferral shall be withheld.

ARTICLE 11
Termination, Amendment or Modification

11.1

Termination.    Although the Company anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that it will continue the Plan or will not terminate the Plan

16

at any time in the future. Accordingly, the Company reserves the right to discontinue its sponsorship of the Plan, the sponsorship of the Plan by any Employer and/or to terminate the Plan, at any time, with respect to the participating Employees of any Employer or any Directors, by the action of the Board. Upon the termination of the Plan with respect to any Employer, the Plan Agreements of the affected Participants who are employed by that Employer, and in the case of termination with respect to the Company, in the service of that Company as Directors, shall terminate and their Account Balances, determined as if they had experienced a Termination of Employment on the date of Plan termination or, if Plan termination occurs after the date upon which a Participant was eligible to Retire, then with respect to that Participant as if he or she had Retired on the date of Plan termination, shall be paid to the Participants as follows: Prior to a Change in Control, if the Plan is terminated with respect to all the Participants of an Employer, the Company shall have the right, in its sole discretion, and notwithstanding any elections made by the Participant, to cause such benefits to be paid in a lump sum or annual installments for up to 15 years, with interest credited during the installment period as provided in Section 3.10. The lump sum payment shall be made, or installment payments shall commence, no later than 60 days after the date the termination. In the event installment payments are to be made, remaining annual installments shall be paid within 60 days of the beginning of each calendar year, commencing on the calendar year following the calendar year in which the first installment payment is made. If the Plan is terminated with respect to less than all of Participants of an Employer, an Employer shall be required to pay such benefits in a lump sum. After a Change in Control, the Employer shall be required to pay such benefits in a lump sum. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided however, that the Employer shall have the right to accelerate installment payments without a premium or prepayment penalty by paying the Account Balance in a lump sum or in installments using fewer years (provided that the present value of all payments that will have been received by a Participant at any given point of time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule).

11.2

Amendment.    The Company may, at any time, amend or modify the Plan in whole or in part with respect to an Employer by action of the Board; provided, however, that (i) no amendment or modification shall be effective to decrease or restrict the value of a Participant's Account Balance in existence at the time the amendment or modification is made, calculated as if the Participant had experienced a Termination of Employment as of the effective date of the amendment or modification, or, if the amendment or modification occurs after the date upon which the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification, and (ii) no amendment or modification of this Section 11.2 or Sections 12.2, 12.4, 12.5 or 12.6 of the Plan shall be effective. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the Account Balance in a lump sum or in installments using fewer years that will have been received by a Participant at any given point in time under the different payment schedule shall equal or exceed the present value of all payments that would have been received at that point in time under the original payment schedule).

11.3

Plan Agreement.    Despite the provisions of Sections 11.1 and 11.2 above, if a Participant's Plan Agreement contains benefits or limitations that are not in this Plan document, the provisions in the Plan Agreement may only be amended or terminated with the consent of the Participant.

11.4

Interest Rate in the Event of a Change in Control.    If a Change in Control occurs, the applicable interest rate to be used in determining a Participant's benefit in connection with a Termination of

17

Employment after the Change in Control, or a Plan termination, amendment or modification under Sections 11.1 and 11.2, shall be the Preferred Rate. However, the Crediting Rate for the applicable Plan Year, and not the Preferred Rate, shall be used as the discount rate for determining present value.

11.5

Effect of Payment.    The full payment of the applicable benefit under Section 4.4 or Articles 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan and the Participant's Plan Agreement shall terminate.

ARTICLE 12
Administration

12.1

Committee Duties.    Except as otherwise provided in this Section 12, this Plan shall be administered by a Committee which shall initially consist of the Chief Executive Officer, Chief Financial Officer and Vice President of Human Resources of the Company. The Board, in its sole discretion, shall have the power to appoint or remove members of the Committee. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. Any individual serving on the Committee who is a Participant shall not vote or act on any matter relating solely to himself or herself. When making a determination or calculation, the Committee shall be entitled to rely on information furnished by a Participant or the Company.

12.2

Administration Upon Change In Control.    For purposes of this Plan, the Company shall be the "Administrator" at all times prior to the occurrence of a Change in Control. Upon and after the occurrence of a Change in Control, the "Administrator" shall be an independent third party selected by the Trustee and approved by the individual who, immediately prior to such event, was the Company's Chief Executive Officer or, if not so identified, the Company's highest ranking officer (the "Ex-CEO"). The Administrator shall have the discretionary power to determine all questions arising in connection with the administration of the Plan and the interpretation of the Plan and Trust including, but not limited to benefit entitlement determinations; provided, however, upon and after the occurrence of a Change in Control, the Administrator shall have no power to direct the investment of Plan or Trust assets or select any investment manager or custodial firm for the Plan or Trust. Upon and after the occurrence of a Change in Control, the Company must: (1) pay all reasonable administrative expenses and fees of the Administrator; (2) indemnify the Administrator against any costs, expenses and liabilities including, without limitation, attorney's fees and expenses arising in connection with the performance of the Administrator hereunder, except with respect to matters resulting from the gross negligence or willful misconduct of the Administrator or its employees or agents; and (3) supply full and timely information to the Administrator on all matters relating to the Plan, the Trust, the Participants and their Beneficiaries, the Account Balances of the Participants, the date of circumstances of the Retirement, Disability, death or Termination of Employment of the Participants, and such other pertinent information as the Administrator may reasonably require. Upon and after a Change in Control, the Administrator may be terminated (and a replacement appointed) by the Trustee only with the approval of the Ex-CEO. Upon and after a Change in Control, the Administrator may not be terminated by the Company.

12.3

Agents.    In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit (including acting through a duly appointed representative) and may from time to time consult with counsel who may be counsel to any Employer.

18

12.4

Binding Effect of Decisions.    The decision or action of the Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.

12.5

Indemnity of Committee.    All Employers shall indemnify and hold harmless the members of the Committee, and any Employee to whom duties of the Committee may be delegated, and the Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee, any of its members, any such Employee or the Administrator.

12.6

Employer Information.    To enable the Committee and/or Administrator to perform its functions, the Company and each Employer shall supply full and timely information to the Committee and/or Administrator, as the case may be, on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability, death or Termination of Employment of its Participants, and such other pertinent information as the Committee or Administrator may reasonably require.

ARTICLE 13
Other Benefits and Agreements

13.1

Coordination with Other Benefits.    The benefits provided for a Participant and Participant's Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Participant's Employer. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided.

ARTICLE 14
Claims Procedures

14.1

Presentation of Claim.    Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant.

14.2

Notification of Decision.    The Committee shall consider a Claimant's claim within a reasonable time, and shall notify the Claimant in writing:

(a

that the Claimant's requested determination has been made, and that the claim has been allowed in full; or

(b

that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant:

(i

the specific reason(s) for the denial of the claim, or any part of it;

(ii

specific reference(s) to pertinent provisions of the Plan upon which such denial was based;

(iii

a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and

19

(iv

an explanation of the claim review procedure set forth in Section 14.3 below.

14.3

Review of a Denied Claim.    Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative):

(a

may review pertinent documents;

(b

may submit written comments or other documents; and/or

(c

may request a hearing, which the Committee, in its sole discretion, may grant.

14.4

Decision on Review.    The Committee shall render its decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain:

(a

specific reasons for the decision;

(b

specific reference(s) to the pertinent Plan provisions upon which the decision was based; and

(c

such other matters as the Committee deems relevant.

14.5

Legal Action.    A Claimant's compliance with the foregoing provisions of this Article 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan.

ARTICLE 15
Trust

15.1

Establishment of the Trust.    The Company shall establish the Trust, and each Employer shall at least annually transfer over to the Trust such assets as the Employer determines, in its sole discretion, are necessary to provide, on a present value basis, for its respective future liabilities created with respect to the Annual Deferral Amounts, Annual Company Amounts, Annual Stock Option Deferral Amounts, as well as any debits and credits to the Participants' Account Balances for all periods prior to the transfer, taking into consideration the value of the assets in the Trust at the time of the transfer.

15.2

Interrelationship of the Plan and the Trust.    The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan.

15.3

Distributions From the Trust.    Each Employer's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Agreement.

ARTICLE 16
Miscellaneous

16.1

Status of Plan.    The Plan is intended to be a plan that is not qualified within the meaning of Code Section 401(a) and that "is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated

20

employees" within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(l). The Plan shall be administered and interpreted to the extent possible in a manner consistent with that intent.

16.2

Unsecured General Creditor.    Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. For purposes of the payment of benefits under this Plan, any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.

16.3

Employer's Liability.    An Employer's liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement.

16.4

Nonassignability.    Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are expressly declared to be, unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency or be transferable to a spouse as a result of a property settlement or otherwise.

16.5

Not a Contract of Employment.    The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, unless expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer, either as an Employee or a Director, or to interfere with the right of any Employer to discipline or discharge the Participant at any time.

16.6

Furnishing Information.    A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary.

16.7

Terms.    Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.

16.8

Captions.    The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.

16.9

Governing Law.    Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of California without regard to its conflicts of laws principles.

21

16.10

Notice.    Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

DCP Committee
Southwest Water Company
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.

16.11

Successors.    The provisions of this Plan shall bind and inure to the benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's designated Beneficiaries.

16.12

Spouse's Interest.    The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession.

16.13

Validity.    In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.

16.14

Incompetent.    If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, incompetence, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount.

16.15

Court Order.    The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party. In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Participant's benefits under the Plan in connection with a property settlement or otherwise, the Committee, in its sole discretion, shall have the right, notwithstanding any election made by a Participant, to immediately distribute the spouse's or former spouse's interest in the Participant's benefits under the Plan to that spouse or former spouse.

16.16

Distribution in the Event of Taxation.

(a

General.    If, for any reason, all or any portion of a Participant's benefit under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee before a Change in Control, or the Trustee after a Change in Control, for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld (and, after a Change in Control, shall be granted), a Participant's Employer shall distribute to the Participant immediately available funds in an amount equal to the taxable portion of his or her benefit (which amount shall not

22

exceed a Participant's unpaid Account Balance under the Plan). If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan.

(b

Trust.    If the Trust terminates in accordance with [Section 3.6(e)] of the Trust and benefits are distributed from the Trust to a Participant in accordance with that Section, the Participant's benefits under this Plan shall be reduced to the extent of such distributions.

16.17

Insurance.    The Employers, on their own behalf or on behalf of the Trustee, and, in their sole discretion, may apply for and procure insurance on the life of the Participant, in such amounts and in such forms as the Trust may choose. The Employers or the Trustee, as the case may be, shall be the sole owner and beneficiary of any such insurance. The Participant shall have no interest whatsoever in any such policy or policies, and at the request of the Employers shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom the Employers have applied for insurance.

16.18

Legal Fees To Enforce Rights After Change in Control.    The Company and each Employer is aware that upon the occurrence of a Change in Control, the Board or the board of directors of the Participant's Employer (which might then be composed of new members) or a shareholder of the Company or the Participant's Employer, or of any successor corporation might then cause or attempt to cause the Company or the Participant's Employer or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company or the Participant's Employer to institute, or may institute, litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, it should appear to any Participant that the Company, the Participant's Employer or any successor corporation has failed to comply with any of its obligations under the Plan or any agreement thereunder or, if the Company, such Employer or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then the Company and the Participant's Employer irrevocably authorize such Participant to retain counsel of his or her choice at the expense of the Company and the Employer (who shall be jointly and severally liable) to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, the Participant's Employer or any director, officer, shareholder or other person affiliated with the Company, the Participant's Employer or any successor thereto in any jurisdiction.

        IN WITNESS WHEREOF, the Company has signed this Plan document as of January 1, 2002.

"Company"
SOUTHWEST WATER COMPANY a Delaware corporation
By:	/s/  SHELLEY A. FARNHAM
Title:	VP, Human Resources

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SOUTHWEST WATER COMPANY DEFERRED COMPENSATION PLAN Effective January 1, 2002

EX-10.7

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Exhibit 10.7

        CONFIDENTIAL

SOUTHWEST WATER COMPANY

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

MASTER PLAN DOCUMENT

EFFECTIVE MAY 8, 2000

TABLE OF CONTENTS

		Page
Purpose		1
ARTICLE 1	Definitions	1
ARTICLE 2	Eligibility	8
2.1	Selection by Committee	8
2.2	Enrollment Requirements	8
2.3	Commencement of Participation	8
ARTICLE 3	Employment Taxes	8
3.1	FICA and Other Taxes	8
ARTICLE 4	Benefits	8
4.1	Eligibility for Benefits	8
4.2	Commencement of Benefit Payments	8
4.3	Forms of Payment; Elections	9
4.4	Limitation on Benefits	11
4.5	Withholding and Payroll Taxes	11
ARTICLE 5	Termination, Amendment or Modification of the Plan	11
5.1	Plan Termination	11
5.2	Amendment	11
5.3	Termination of Plan Agreement	11
ARTICLE 6	Other Benefits and Agreements	12
6.1	Coordination with Other Benefits	12
ARTICLE 7	Administration of the Plan	12
7.1	Committee Duties	12
7.2	Agents	12
7.3	Binding Effect of Decisions	12
7.4	Indemnity of Committee	12
7.5	Employer Information	12
ARTICLE 8	Claims Procedures	12
8.1	Presentation of Claim	12
8.2	Notification of Decision	12
8.3	Review of a Denied Claim	13
8.4	Decision on Review	13
8.5	Legal Action	13
ARTICLE 9	Beneficiary Designation	13
9.1	Beneficiary	13
9.2	Beneficiary Designation; Change; Spousal Consent	13
9.3	Acknowledgment	14
9.4	No Beneficiary Designation	14
9.5	Doubt as to Beneficiary	14
9.6	Discharge of Obligations	14

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ARTICLE 10	Trust	14
10.1	Establishment of the Trust	14
10.2	Interrelationship of the Plan and the Trust	14
ARTICLE 11	Miscellaneous	15
11.1	Unsecured General Creditor	15
11.2	Employer's Liability	15
11.3	Nonassignability	15
11.4	Not a Contract of Employment	15
11.5	Furnishing Information	15
11.6	Terms	15
11.7	Captions	15
11.8	Governing Law	15
11.9	Notice	16
11.10	Successors	16
11.11	Spouse's Interest	16
11.12	Validity	16
11.13	Incompetent	16
11.14	Court Order	16
11.15	Distribution in the Event of Taxation	16
11.16	Legal Fees To Enforce Rights After a Post-Participation Change in Control	17

ii

SOUTHWEST WATER COMPANY

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Effective May 8, 2000

Purpose

        The purpose of this Plan is to provide specified benefits to a select group of management and highly compensated employees who contribute materially to the continued growth, development and future business success of SOUTHWEST WATER COMPANY, a Delaware corporation, and its subsidiaries and affiliates, if any, that sponsor this Plan. This Plan shall be unfunded for tax purposes and for purposes of Title I of ERISA.

ARTICLE 1
Definitions

        For purposes hereof, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings:

1.1

"Actuarial Equivalent" shall mean an actuarial equivalent value of an amount payable in a different form and/or at a different date computed in accordance with actuarial principles, and based on the following actuarial assumptions:

Mortality:	1983 Group Annuity Table
Interest Rate:	Seven percent (7%)

As the Committee deems necessary, in its sole discretion, the above actuarial assumptions may be adjusted from time to time, and no Participant shall be deemed to have any right, vested or nonvested, regarding the continued use of any previously adopted actuarial assumption; provided however that the mortality table shall assume no shorter life expectancies than the one provided above and provided further that the interest rate assumption shall not exceed seven percent (7%). In addition, the interest rate used by the Pension Benefit Guaranty Corporation to value immediate and deferred annuities shall be used at the time of a calculation under this Plan if its use will generate a greater benefit for or payment to a Participant, or create a greater contribution obligation to the Trust, than the interest rate set forth herein.

1.2

"Beneficiary" shall mean the individual, designated in accordance with Article 9, that is entitled to receive benefits under this Plan upon the death of a Participant.

1.3

"Beneficiary and Payment Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate a Beneficiary, in accordance with Article 9, and his or her initial payment elections, in accordance with Section 4.3.

1.4

"Board" shall mean the board of directors of the Company.

1..5

"Change in Control" shall mean ninety (90) days prior to the first to occur of any of the following events:

(a)

Any "person" (as that term is used in Section 13 and 14(d)(2) of the Securities Exchange Act of 1934, as amended ("Exchange Act")) becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of 50% or more of the Company's capital stock entitled to vote in the election of directors;

1

(b)

The shareholders of the Company approve any consolidation or merger of the Company, other than a consolidation or merger of the Company in which the holders of the common stock of the Company immediately prior to the consolidation or merger hold more than 50% of the common stock of the surviving corporation immediately after the consolidation or merger;



(c)

The shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company;



(d)

The shareholders of the Company approve the sale or transfer of substantially all of the assets of the Company to parties that are not within a "controlled group of corporations" (as defined in Code Section 1563) in which the Company is a member;



(e)

The Company offers any equity security pursuant to a registration statement filed with and declared effective by the Securities Exchange Commission under the Securities Act of 1933, as amended, other than in connection with an employee benefit plan; or



(f)

The shareholders of the Company approve any consolidation or merger of the Company with, or the Company is acquired in a tax-free reorganization defined in Code Section 368 by, a corporation that has previously offered an equity security pursuant to a registration statement filed with and declared effective by the Securities Exchange Commission under the Securities Act of 1933, as amended, other than in connection with an employee benefit plan, and such equity security remains outstanding after the merger or consolidation.

1.6

"Claimant" shall have the meaning set forth in Section 8.1.

1.7

"Code" shall mean the Internal Revenue Code of 1986, as may be amended from time to time.

1.8

"Committee" shall mean the committee described in Article 7.

1.9

"Company" shall mean Southwest Water Company, a Delaware corporation.

1.10

"Compensation" shall mean the annual base cash salary relating to services performed during any calendar year and reportable on Federal Income Tax Form W-2, whether or not paid in such calendar year or included on the Federal Income Tax Form W-2 for such calendar year. Compensation shall in no event include (whether or not included in the gross income or Federal Income Tax Form W-2 income of the Participant) cash or non-cash bonuses, overtime, relocation expenses, non-monetary awards, fringe benefits (cash or noncash), retainers, directors fees and other fees, severance allowances, pay in lieu of vacations, insurance premiums paid by an Employer, insurance benefits paid to the Participant or his or her beneficiary, equity based compensation arrangements such as stock option plans or phantom stock plans, Employer contributions to qualified or nonqualified plans, automobile allowances, or expense allowances paid to or for a Participant by any Employer.    Compensation shall, however, be calculated before reduction for compensation voluntarily deferred or contributed by the Participant pursuant to all qualified or non-qualified plans and shall be calculated to include amounts not otherwise included in the Participant's gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any Employer; provided however that all such amounts will be included in Compensation only to the extent that, had there been no such plan, the amount would have been payable in cash as part of the annual base cash salary to the Participant. The determination of Compensation in accordance with this definition shall be in the sole discretion of the Committee.

1.11

"Deduction Limitation" shall mean the following described limitation on a benefit that may otherwise be distributable pursuant to the provisions of this Plan. Except as otherwise provided, this limitation shall be applied to all distributions that are "subject to the Deduction Limitation" under this Plan. If an Employer determines in good faith prior to a Post-Participation Change in Control that there is a reasonable likelihood that any compensation paid to a Participant for a

2

taxable year of the Employer would not be deductible by the Employer solely by reason of the limitation under Code Section 162(m), then to the extent deemed necessary by the Employer to ensure that the entire amount of any distribution to the Participant pursuant to this Plan prior to the Post-Participation Change in Control is deductible, the Employer may defer all or any portion of a distribution under this Plan. Any amounts deferred pursuant to this limitation shall be credited with interest at the Moody's Rate (as defined in the Installment Payment Method definition below), compounded semiannually. The amounts so deferred and interest thereon shall be distributed to the Participant or his or her Beneficiary (in the event of the Participant's death) at the earliest possible date, as determined by the Employer in good faith, on which the deductibility of compensation paid or payable to the Participant for the taxable year of the Employer during which the distribution is made will not be limited by Code Section 162(m), or if earlier, the effective date of a Post-Participation Change in Control. Notwithstanding anything to the contrary in this Plan, the Deduction Limitation shall not apply to any distributions made after a Post-Participation Change in Control, if such Participant ceases to be an employee of all Employers within one year of such Change in Control.

1.12

"Deemed Retirement Date" shall mean the first day of the month following the date a Participant or former Participant attains the age of sixty-five (65).

1.13

"Disability" shall mean a Participant ceasing to be an employee of all Employers as a result of a permanent disability, as defined in the Participant's Employer's long-term disability plan, or, if a Participant does not participate in the Employer's plan, a permanent disability under such a plan had the Participant been a participant in such a plan. The interpretation of the definition of "permanent disability" under a plan shall be determined in the sole discretion of the Committee. If the Participant's Employer does not sponsor a long-term disability plan or discontinues to sponsor such a plan, Disability shall be determined by the Committee in its sole discretion.

1.14

"Disability Date" shall mean the first day of the month following the date of the Disability.

1.15

"Early Retirement" shall mean the ceasing to be an employee of all Employers, on or after his or her attainment of both age fifty-five (55) and ten (10) or more Years of Service, for any reason other than a Leave of Absence, Normal Retirement, Termination For Cause, death or Disability.

1.16

"Early Retirement Date" shall mean the first day of the month following the date of Early Retirement.

1.17

"Effective Date" shall mean May 8, 2000.

1.18

"Employer(s)" shall mean the Company and/or any of its subsidiaries that have been selected by the Board to participate in the Plan.

1.19

"Enrolled Actuary" shall mean a person enrolled by the Joint Board for the Enrollment of Actuaries established under subtitle C of title II of ERISA who has been engaged by the Company to make and render all necessary actuarial determinations, statements, opinions, assumptions, reports and valuations under this Agreement. After a Change in Control, the Company and/or Employer shall not change the Enrolled Actuary without the consent of at least a majority of the Participants.

1.20

"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as may be amended from time to time.

1.21

"Final Average Compensation" shall mean the average of such Participant's Compensation for his or her highest average Compensation for any period of five consecutive Plan Years during his or her last ten Plan Years (or if he or she had fewer than ten Plan Years, during all Plan Years). If the Participant had fewer than five consecutive Plan Years, then the average of all Plan Years shall be used. For purposes of the calculation, there shall be included as one of those Plan Years the

3

annualized Compensation for the Plan Year in which the event that entitled the Participant to a distribution of benefits under this Plan occurred if the result would be to increase Final Average Compensation. Additionally, any Plan Year in which there are no Hours of Service shall be deemed not to exist for purposes of the five year average/ten year period if disregarding the Plan Year would result in an increase in Final Average Compensation.

1.22

"First Applicable Compensation Percentage" shall mean:

(a)

In the case of death, Retirement or Termination of Employment, 1.5% times such Participant's Years of Service. If a Participant's Years of Service exceed 35, for purposes of the calculation in the previous sentence, such Participant's Years of Service shall be deemed to be 35.

(b)

In the case of Disability, the First Applicable Compensation Percentage shall be calculated in the same manner as set forth in (a) above with respect to Retirement except that the period from the Disability Date to what would otherwise have been such Participant's Normal Retirement Date shall be considered "Years of Service" for purposes of the calculation, whether or not such time period has expired at the time of the calculation (the maximum of 35 shall continue to apply).

1.23

"Hour(s) of Service" shall have the meaning set forth in Section 1.25 of the Qualified Retirement Plan.

1.24

"Installment Payment Method" shall mean the Actuarial Equivalent of the Participant's Vested SERP Benefit, calculated under the Lump Sum Payment Method but payable in equal monthly installments of principal on the first day of each calendar month over 5, 10 or 15 years, as properly elected by the Participant pursuant to the Committee's rules and procedures as may be in effect from time to time, with interest at the Moody's Rate, compounded annually and payable monthly along with the principal payment. The "Moody's Rate" for any calendar year shall be an interest rate, stated as an annual rate, that is published in Moody's Bond Record under the heading of "Moody's Corporate Bond Yield Averages—Av. Corp" (or any successor to this published rate), for the month of November prior to the commencement of such calendar year for which the rate is to be used. Payments shall commence the first day of the calendar month after the Retirement Date, Deemed Retirement Date, Disability Date, or the date of death, as the case may be.

1.25

"Joint and Survivor Annuity Payment Method" shall mean the Actuarial Equivalent of the Participant's Vested SERP Benefit, payable on a monthly basis on the first day of the calendar month, in the form of an annuity for the life of the Participant with a 100%, 75%, 66²/3% or 50% survivor annuity for the life of the Participant's Beneficiary, as such Participant shall designate on the Beneficiary and Payment Designation Form. Payments shall commence on the first day of the calendar month immediately following the Retirement Date, Deemed Retirement Date or Disability Date, as the case may be.

1.26

"Leave of Absence" shall mean any paid or unpaid leave of absence that is approved by the Committee in its sole and absolute discretion.

1.27

"Level Benefit Annuity Payment Method" shall mean in the case of a Participant who Retires before his or her Normal Retirement Date, the Actuarial Equivalent of the Participant's Vested SERP Benefit, payable on a monthly basis on the first day of the calendar month, in the form of an annuity for the life of the Participant but adjusted upward prior to the anticipated commencement date of his or her anticipated old age benefits under the Social Security Act, and decreased, or if necessary eliminated, after such date, in order to provide monthly payments to the Participant which, when added to his or her anticipated monthly old age benefits under the Social Security Act, would provide monthly payments for life that are substantially uniform in amount. For purposes of determining a Participant's anticipated old age benefits under the Social Security Act, the assumptions set forth in the definition of Social Security Benefit shall be utilized.

4

1.28

"Life Annuity Payment Method" shall mean the Actuarial Equivalent of the Participant's Vested SERP Benefit, payable on a monthly basis on the first day of the calendar month, in the form of an annuity for the life of the Participant, with the provision that if the Participant dies before receiving 36, 60 or 120 monthly payments, as he or she shall designate on the Beneficiary and Payment Designation Form, his or her Beneficiary shall receive the remainder of such monthly payments. Payments shall commence on the first day of the calendar quarter immediately following the Retirement Date, Deemed Retirement Date or Disability Date, as the case may be.

1.29

"Life Annuity Benefit" shall mean a benefit that is calculated in the form of an annuity, payable on a monthly basis on the first day of the calendar month and commencing on the first day of the calendar quarter immediately following the date that gives rise to the benefit, for the life of the Participant, calculated using the actuarial assumptions set forth in the definition of "Actuarial Equivalent".

1.30

"Lump Sum Cash-Out Option" shall have the meaning set forth in Section 4.3(d).

1.31

"Lump Sum Payment Method" shall mean the Actuarial Equivalent of the Participant's Vested SERP Benefit, payable in a lump sum on the Retirement Date, Disability Date or thirty (30) days after the date of death, as the case may be.

1.32

"Normal Retirement" shall mean a Participant ceasing to be an employee of all Employers, on or after the attainment of age sixty-five (65) for any reason other than a Leave of Absence, Termination For Cause, death or Disability.

1.33

"Normal Retirement Date" shall mean the first day of the month following the date of Normal Retirement.

1.34

"Partial Lump Sum Payment Method" shall mean the Actuarial Equivalent of the Participant's Vested SERP Benefit, a percentage of which shall be payable in a lump sum (as such Participant shall designate on the Beneficiary and Payment Designation Form) on the first day of the calendar month after the Retirement Date, Deemed Retirement Date, Disability Date or the date of death, as the case may be, and the remainder of which shall be payable under the Life Annuity Payment Method or the Joint and Survivor Annuity Payment Method, as the case may be (as such Participant shall designate on the Beneficiary and Payment Designation Form).

1.35

"Participant" shall mean any employee (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs a Plan Agreement and a Beneficiary and Payment Designation Form, (iv) whose signed Plan Agreement and Beneficiary and Payment Designation Form are accepted by the Committee, and (v) whose Plan Agreement has not terminated. Despite the foregoing, a spouse or former spouse of a Participant shall not be treated as a Participant in the Plan, even if he or she has an interest in the Participant's benefits under this Plan as a result of state property or family law, or property settlements resulting from a legal separation or divorce.

1.36

"Plan" shall mean the Company's Supplemental Executive Retirement Plan, which shall be evidenced by this instrument and by each Plan Agreement, as amended from time to time.

1.37

"Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between an Employer and a Participant. Each Plan Agreement executed by a Participant shall provide for the entire benefit to which such Participant is entitled under the Plan, and the Plan Agreement bearing the latest date of acceptance by the Committee shall govern such entitlement.

5

1.38

"Plan Year" shall begin on January 1 of each year and continue through December 31.

1.39

"Post-Participation Change in Control" with respect to a Participant shall mean a Change in Control that occurs on or after the date such person becomes a Participant. If a Change in Control occurs before such period, such Change in Control shall not be considered a Post-Participation Change in Control with respect to that Participant.

1.40

"Pre-Retirement Survivor Annuity Payment Method" shall mean a benefit that is the Actuarial Equivalent of the Participant's Vested SERP Benefit, payable on a monthly basis on the first day of the calendar month, to such Participant's Beneficiary in the form of an annuity for the life of such Beneficiary. Payments shall commence on the first day of the calendar quarter immediately following the date of death.

1.41

"Qualified Retirement Plan" shall mean that certain Utility Employees' Retirement Plan, established on December 30, 1957, effective as of December 31, 1957, by Suburban Water Systems, a California corporation, amended multiple times until amended and restated as of December 31, 1987 by that certain "Thirteenth Amendment to The Utility Employees' Retirement Plan," further amended by amendments fourteen (adopted December 12, 1996), fifteen and sixteen (adopted as of December 30, 1999) and terminated effective as of December 30, 1999, with benefit accruals under the plan ceasing as of December 30, 1999.

1.42

"Qualified Retirement Plan Benefit" shall mean the annual amount resulting from calculating the Actuarial Equivalent of Participant's anticipated benefits under the Qualified Retirement Plan as a Life Annuity Benefit commencing on the Retirement Date, Disability Date, Termination Date or date of death, as the case may be.

1.43

"Retirement", "Retires" or "Retired" shall mean, in each instance, Early Retirement or Normal Retirement, as the case may be.

1.44

"Retirement Date" shall mean, in each instance, the Early Retirement Date or the Normal Retirement Date, as the case may be.

1.45

"Second Applicable Compensation Percentage" shall mean:

(a)

In the case of death, Retirement or Termination of Employment, 0.5% times such Participant's Years of Service. If a Participant's Years of Service exceed 35, for purposes of the calculation in the previous sentence, such Participant's Years of Service shall be deemed to be 35.

(b)

In the case of Disability, the Second Applicable Compensation Percentage shall be calculated in the same manner as set forth in (a) above with respect to Retirement except that the period from the Disability Date to what would otherwise have been such Participant's Normal Retirement Date shall be considered "Years of Service" for purposes of the calculation, whether or not such time period has expired at the time of the calculation (the maximum of 35 shall continue to apply).

1.46

"SERP Benefit" shall mean, in all cases other than Early Retirement, Disability, Termination of Employment or Termination For Cause, a Life Annuity Benefit, commencing on the Retirement Date or the date of death, as the case may be, that provides an annual amount equal to:

(a)

the Participant's Final Average Compensation multiplied by the First Applicable Compensation Percentage; plus

(b)

the Participant's Final Average Compensation minus $825.00 multiplied by the Second Applicable Compensation Percentage; less

(c)

the Social Security Benefit; less

(d)

the Qualified Retirement Plan Benefit.

6

In the case of Disability or Termination of Employment, the SERP Benefit shall be calculated in the manner provided above, except that the Life Annuity Benefit shall be calculated commencing on the later of: (i) age sixty-five (65) or (ii) the Disability Date or the Termination Date, as the case may be.

In the case of Early Retirement, the SERP Benefit shall be the greater of: (1) the amount calculated in the manner provided above, reduced by a percentage equal to 0.35 percent (0.35%) multiplied by the number of complete months by which such Participant's Early Retirement Date precedes his or her Normal Retirement Date; or (2) the Actuarial Equivalent of the benefit calculated above, calculated as if payments would commence on what would have been such Participant's Normal Retirement Date.

Notwithstanding anything to the contrary contained herein, in the event of a Termination For Cause, a Participant's SERP Benefit shall be zero.

1.47

"Social Security Benefit" shall mean the annual amount resulting from calculating the Actuarial Equivalent of Participant's anticipated old age benefits under the Social Security Act, as a Life Annuity Benefit commencing on the Retirement Date, Disability Date, Termination Date or date of death, as the case may be. In calculating a Participant's anticipated old age benefits under the Social Security Act in all cases other than Disability and Termination of Employment, it shall be assumed that (i) the Participant will receive no future wages that would be treated as wages for purposes of the Social Security Act, (ii) the Participant will begin receiving Social Security benefits at age 65, and (iii) the Social Security benefits will be calculated in accordance with the law in effect at the Retirement Date or date of death, as the case may be. In the case of Disability or Termination of Employment, it shall be assumed that (i) the Participant will receive through age 65 future annual wages that would be treated as wages for purposes of the Social Security Act equal to the greater of his or her Compensation received in the year of the Disability or Termination of Employment or the prior calendar year, (ii) the Participant will begin receiving Social Security benefits at age 65, and (iii) the Social Security benefits will be calculated in accordance with the law in effect at the Disability Date or the Termination Date, as the case may be. The Social Security Benefit, once calculated, shall be frozen as of the Retirement Date, Disability Date, Termination Date or date of death, as the case may be.

1.48

"Termination Date" shall mean the first day of the month following the date of a Termination of Employment.

1.49

"Termination For Cause" shall mean ceasing to be an employee of all Employers after a determination by an Employer that the Participant had willfully violated a Company policy that materially adversely affected, or is reasonably believed will materially adversely affect, the operations or financial condition of the Company.

1.50

"Termination of Employment" shall mean a Participant ceasing to be an employee of all Employers, voluntarily or involuntarily, but shall exclude cessation of employment with all Employers as a result of a Leave of Absence, Retirement, death, Disability or a Termination for Cause.

1.51

"Trust" shall mean the trust established pursuant to that certain Master Trust Agreement, dated as of May 8, 2000 between the Company and the trustee named therein, as amended from time to time.

1.52

"Vested SERP Benefit" shall mean: (i) in the case of Retirement, death or Disability, the SERP Benefit; (ii) in the case of Termination of Employment with five or more Years of Service, the SERP Benefit; and (iii) in the case of Termination of Employment with less than five Years of Service, zero.

7

1.53

"Year(s) of Service" shall have the meaning set forth in Section 1.48 of the Qualified Retirement Plan except that for purposes of such definition, the term "Plan Year" shall have the meaning set forth in this Plan. In the event the Participant's last Plan Year to be utilized for a calculation set forth in this Plan does not constitute a Year of Service solely because he or she has less than one thousand Hours of Service, such Participant shall be credited with twelfth-Years of Service, the number of which shall equal the number of calendar months in such Plan Year in each of which he or she had at least one Hour of Service.

ARTICLE 2
Eligibility

2.1

Selection by Committee.    Participation in the Plan shall be limited to a select group of management and highly compensated employees of the Employers. From that group, the Committee shall select, in its sole discretion, employees to participate in the Plan.

2.2

Enrollment Requirements.    As a condition to participation, each selected employee shall complete, execute and return to the Committee a Plan Agreement and a Beneficiary and Payment Designation Form. In addition, the Committee shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary.

2.3

Commencement of Participation.    Provided an employee selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Committee, including returning all required documents to the Committee, that employee shall commence participation in the Plan on the date specified by the Committee. If a selected employee fails to meet all such requirements prior to that date, that employee shall not be eligible to participate in the Plan until the completion of those requirements.

ARTICLE 3
Employment Taxes

3.1

FICA and Other Taxes.    A Participant's Employer shall withhold, from a Participant's compensation otherwise payable during a Plan Year, the Participant's share of FICA and other employment taxes, if any, that are attributable to his or her benefits under this Plan. Such amounts shall be withheld in a manner determined by the Employer.

ARTICLE 4
Benefits

4.1

Eligibility for Benefits.    If a Participant dies, Retires or suffers a Disability or a Termination of Employment, he, she and/or his or her Beneficiary shall be entitled to his or her Vested SERP Benefit payable in the manner provided in this Article. If a Participant suffers a Termination For Cause, such Participant's Vested SERP Benefit shall be zero. Except as otherwise provided herein, any payments otherwise payable pursuant to this Article 4 shall be subject to the Deduction Limitation.

4.2

Commencement of Benefit Payments.    The payment of benefits shall commence as follows:

(a)

Retirement.    If a Participant's benefits become payable because of his or her Retirement, such Participant's benefit payments shall commence as soon as administratively practicable after the date on which such Participant Retired, consistent with the payment method selected.

(b)

Termination of Employment.    If a Participant's benefits become payable because of his or her Termination of Employment, unless the Company exercises the Lump Sum Cash-Out Option, such Participant's benefit payments shall commence as soon as administratively practicable after the Deemed Retirement Date. If the Company exercises its Lump Sum Cash-Out

8

Option, such Participant's benefit payments shall commence as soon as administratively practicable after the Termination Date.

(c)

Disability or Death.    If benefits become payable because of a Participant's death or Disability, such benefit payments shall commence as soon as administratively practicable following the Committee's receipt of written proof or determination of such Participant's death or Disability, consistent with the payment method selected.



(d)

Reasonable Time; Adjustment in Payments.    For purposes of this Section 4.2, "as soon as administratively practicable" shall not exceed 120 days from the date of the specified event, except in extraordinary circumstances, as determined in the sole discretion of the Committee. Payments under the method of payment elected by the Participant shall be adjusted on an Actuarial Equivalent basis should the payments commence on a date that is different than the date anticipated under the payment method.

4.3

Forms of Payment; Elections.

(a)

Retirement or Disability.    A Participant who is entitled to receive a benefit under Section 4.1 because of Retirement or Disability, may elect to receive the Vested SERP Benefit under the Joint and Survivor Annuity Payment Method, the Life Annuity Payment Method, Level Benefit Annuity Payment Method, the Lump Sum Payment Method, the Partial Lump Sum Payment Method or the Installment Payment Method. A Participant may elect (or change any prior election), in the case of Retirement, at any time prior to one year before his or her Retirement or, in the case of a Disability, at any time prior to suffering the Disability, to receive his or her Vested SERP Benefit under any of these payment methods. The election must be consented to in writing by the electing Participant's spouse before the election is valid. Such an election shall be made in accordance with the Committee's rules and procedures as may be in effect from time to time. If no valid election is made within the time limits set forth above, the Vested SERP Benefit will be paid under the Joint and Survivor Annuity Payment Method using 50% as the survivor annuity, if a Beneficiary has been designated in accordance with Article 9 and is alive, or the Life Annuity Payment Method, in all other cases.

(b)

Death before Retirement, Disability, Termination of Employment or Termination For Cause.    A Participant may elect to have his or her Beneficiary receive the Vested SERP Benefit under the Pre-Retirement Survivor Annuity Payment Method, the Lump Sum Payment Method or the Installment Payment Method in the event the Participant's Beneficiary is entitled to receive a benefit under Section 4.1 because of Participant's death before Retirement, Disability, Termination of Employment or Termination For Cause. A Participant may elect (or change any prior election) at any time prior to death to have his or her Beneficiary receive his or her Vested SERP Benefit under any of these payment methods. The election must be consented to in writing by the electing Participant's spouse before the election is valid. Such an election shall be made in accordance with the Committee's rules and procedures as may be in effect from time to time. If no valid election is made prior to the Participant's death, the Vested SERP Benefit will be paid under the Pre-Retirement Survivor Annuity Payment Method, if a Beneficiary has been designated in accordance with Article 9 and is alive, or the Lump Sum Payment Method in all other cases.

(c)

Death after Retirement, Disability or Termination of Employment.    If a Participant dies after he or she Retires, suffers a Disability or suffers a Termination of Employment (and the Company did not exercise the Lump Sum Cash-Out Option), his or her payment of the Vested SERP Benefit shall be governed by Section 4.3(a) or 4.3(d), as the case may be, and not Section 4.3(b). Payments, if any, that become due and payable after Participant's death shall be paid to the Participant's Beneficiary.

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(d)

Termination of Employment.    A Participant who is entitled to receive a benefit under Section 4.1 because of a Termination of Employment may elect to receive the Vested SERP Benefit under the Joint and Survivor Annuity Payment Method, the Life Annuity Payment Method, the Lump Sum Payment Method, the Partial Lump Sum Payment Method or the Installment Payment Method. A Participant may elect (or change any prior election) at any time prior to one year prior to suffering the Termination of Employment to receive his or her Vested SERP Benefit under any of these payment methods. The election must be consented to in writing by the electing Participant's spouse before the election is valid. Such an election shall be made in accordance with the Committee's rules and procedures as may be in effect from time to time. If no valid election is made within the time limits set forth above, the Vested SERP Benefit will be paid under the Joint and Survivor Annuity Payment Method using 50% as the survivor annuity, if a Beneficiary has been designated in accordance with Article 9 and is alive, or the Life Annuity Payment Method, in all other cases. At the option of the Company, to be exercised in the sole and absolute discretion of the Committee (the "Lump Sum Cash-Out Option"), in lieu of the payment method selected pursuant to the terms of this Section 4.3(d), the Company shall have the right to pay the Participant the Vested SERP Benefit under the Lump Sum Payment Method, but payable on the Termination Date instead of the dates set forth in the Lump Sum Payment Method definition.



(e)

Withdrawal Election.    A Participant may elect, at any time after he or she becomes eligible to receive benefit payments under this Plan, to receive those payments in a lump sum, calculated as follows: First, the amount he or she would have received at the applicable commencement date set forth in Section 4.2 had the Lump Sum Payment Method been elected (based on the applicable life expectancies of Participant and/or Beneficiary as of the applicable commencement date, if life expectancy is involved in the calculation) shall be calculated, using the interest rate under the Actuarial Equivalent definition in effect as of the election date as the discount rate. Next, the present value of all payments received through the date of the election, calculated as of the applicable commencement date and using the interest rate under the Actuarial Equivalent definition in effect as of the election date as the discount rate, shall be subtracted from the amount calculated in the preceding sentence. The remainder described in the preceding sentence shall next be increased for interest from the date of the applicable commencement date to the date of the election, using an interest rate equal to the interest rate under the Actuarial Equivalent definition in effect as of the election date, compounded annually. Finally, the figure arrived at in the preceding sentence shall be reduced by a 10% penalty (this net amount shall be referred to as the "Participant Benefit Amount").

A Beneficiary may elect, at any time after he or she becomes eligible to receive benefit payments under this Plan, to receive those payments in a lump sum, calculated as follows: First, the present value of all payments he or she would be expected to receive, calculated as of the date of the death of the Participant (based on the Beneficiary's life expectancy as of the date of death of the Participant, if life expectancy is involved in the calculation) shall be calculated, using the interest rate under the Actuarial Equivalent definition in effect as of the election date as the discount rate. Next, the present value of all payments received through the date of the election, calculated as of the date of death of the Participant and using the interest rate under the Actuarial Equivalent definition in effect as of the election date as the discount rate, shall be subtracted from the amount calculated in the preceding sentence. The remainder described in the preceding sentence shall next be increased for interest from the date of death of the Participant to the date of the election, using an interest rate equal to the interest rate under the Actuarial Equivalent definition in effect as of the election date, compounded annually. Finally, the figure arrived at in the preceding sentence shall be reduced by a 10% penalty (this net amount shall be referred to as the "Beneficiary Benefit Amount").

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No election to partially accelerate benefits shall be allowed. The Participant or Beneficiary, as the case may be, shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The Participant or Beneficiary, as the case may be, shall be paid the Participant Benefit Amount or Beneficiary Benefit Amount within 60 days of his or her election, and such payment shall not be subject to the Deduction Limitation. Once the applicable Benefit Amount is paid, participation in the Plan shall terminate and the Participant, if still alive, shall not be eligible to participate in the Plan in the future.

(f)

Committee Discretion.    Upon the request of a Participant, the Committee, in its sole discretion and consistent with its established procedures and rules, may consider other forms of benefit payments, or the timing of benefit payments, as it deems necessary or prudent under the circumstances.

4.4

Limitation on Benefits.    Notwithstanding anything that could be construed to the contrary in this Article 4, in no event shall a Participant or his or her Beneficiary receive more than one form of benefit under this Article 4.

4.5

Withholding and Payroll Taxes.    The Employers shall withhold from any and all benefits paid under this Article 4, all federal, state and local income, employment and other taxes required to be withheld by the Employer in connection with the benefits hereunder, in amounts and in a manner to be determined in the sole discretion of the Employers.

ARTICLE 5
Termination, Amendment or Modification of the Plan

5.1

Plan Termination.    Each Employer reserves the right to terminate the Plan at any time with respect to its participating employees by the actions of its board of directors. The termination of the Plan shall not adversely affect any Participant or his or her Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided, however, that the Employer shall have the right to accelerate payments by paying the Actuarial Equivalent value of such payments. For all other Participants, upon the termination of the Plan, all Plan Agreements shall terminate and the Actuarial Equivalent of a Participant's Vested SERP Benefit assuming such Participant Retired (if eligible) or suffered a Termination of Employment as of the date of the termination (which ever provides the Participant with a greater Vested SERP Benefit) shall be paid out in a lump sum.

5.2

Amendment.    Any Employer may, at any time, amend or modify the Plan in whole or in part with respect to its participating employees by the actions of its board of directors; provided, however, that no amendment or modification shall be effective to decrease or restrict a Participant's Vested SERP Benefit assuming such Participant Retired (if eligible) or suffered a Termination of Employment as of the date of the amendment (which ever provides the Participant with a greater Vested SERP Benefit), determined on an Actuarial Equivalent basis. The amendment or modification of the Plan shall not affect any Participant or his or her Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification; provided, however, that the Employer shall have the right to accelerate installment payments by paying the Actuarial Equivalent value of such payments either in a lump sum or in some other accelerated form of payment.

5.3

Termination of Plan Agreement.    Absent the earlier termination, modification or amendment of the Plan, the Plan Agreement of any Participant shall terminate upon the full payment of the applicable benefit provided under Article 4.

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ARTICLE 6
Other Benefits and Agreements

6.1

Coordination with Other Benefits.    The benefits provided for a Participant under this Plan are in addition to any other benefits available to such Participant under any other plan or program for employees of the Employers. The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided.

ARTICLE 7
Administration of the Plan

7.1

Committee Duties.    This Plan shall be administered by a Committee which shall consist of the Board, or such committee as the Board shall appoint. Members of the Committee may be Participants under this Plan. The Committee shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Plan and (ii) decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan.

7.2

Agents.    In the administration of this Plan, the Committee may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to any Employer.

7.3

Binding Effect of Decisions.    The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan.

7.4

Indemnity of Committee.    All Employers shall indemnify and hold harmless the members of the Committee against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee or any of its members.

7.5

Employer Information.    To enable the Committee to perform its functions, each Employer shall supply full and timely information to the Committee on all matters relating to the compensation of its Participants, the date and circumstances of the Retirement, Disability or death of its Participants, and such other pertinent information as the Committee may reasonably require.

ARTICLE 8
Claims Procedures

8.1

Presentation of Claim.    Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. The claim must state with particularity the determination desired by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant.

8.2

Notification of Decision.    The Committee shall consider a Claimant's claim within a reasonable time, and shall notify the Claimant in writing:

(a)

that the Claimant's requested determination has been made, and that the claim has been allowed in full; or

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(b)

that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth such conclusion in a manner that it believes will be understood by the Claimant:



(i)

the specific reason(s) for the denial of the claim, or any part of it;



(ii)

specific reference(s) to pertinent provisions of the Plan upon which such denial was based;



(iii)

a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and



(iv)

an explanation of the claim review procedure set forth in Section 8.3 below.

8.3

Review of a Denied Claim.    Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative):

(a)

may review pertinent documents;

(b)

may submit written comments or other documents; and/or

(c)

may request a hearing, which the Committee, in its sole discretion, may grant.

8.4

Decision on Review.    The Committee shall render its decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner the Committee believes will be understood by the Claimant, and it must contain:

(a)

specific reasons for the decision;

(b)

specific reference(s) to the pertinent Plan provisions upon which the decision was based; and

(c)

such other matters as the Committee deems relevant.

8.5

Legal Action.    A Claimant's compliance with the foregoing provisions of this Article 8 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan.

ARTICLE 9
Beneficiary Designation

9.1

Beneficiary.    Each Participant shall have the right, at any time, to designate his or her Beneficiary(ies) (both primary as well as contingent) to receive any benefits payable under the Plan to a beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of an Employer in which the Participant participates.

9.2

Beneficiary Designation; Change; Spousal Consent.    A Participant shall designate his or her Beneficiary by completing and signing the Beneficiary and Payment Designation Form, and returning it to the Committee or its designated agent. A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary and Payment Designation Form and the Committee's rules and procedures, as in effect from time to time. If the Participant names someone other than his or her spouse as a Beneficiary, a spousal

13

consent, in the form designated by the Committee, must be signed by that Participant's spouse and returned to the Committee. If the Participant names an entity as the Beneficiary and selects an annuity payment method that must be calculated by using the life expectancy of the Beneficiary, he or she shall also name an individual as the measuring life for purposes of the annuity. Upon the acceptance by the Committee of a new Beneficiary and Payment Designation Form, all Beneficiary designations previously filed shall be cancelled. The Committee shall be entitled to rely on the last Beneficiary and Payment Designation Form filed by the Participant and accepted by the Committee prior to his or her death.

9.3

Acknowledgment.    No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Committee or its designated agent.

9.4

No Beneficiary Designation.    If a Participant fails to designate a Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan shall be payable to his or her estate (and if a life expectancy is needed in order to calculate the benefits remaining, the estate will be deemed to have a life expectancy equal to the Participant's life expectancy at the date of death).

9.5

Doubt as to Beneficiary.    If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, exercisable in its discretion, to cause the Participant's Employer to withhold such payments until this matter is resolved to the Committee's satisfaction.

9.6

Discharge of Obligations.    The payment of benefits under the Plan to a Beneficiary shall fully and completely discharge all Employers and the Committee from all further obligations under this Plan with respect to the Participant, and that Participant's Plan Agreement shall terminate upon such full payment of benefits.

ARTICLE 10
Trust

10.1

Establishment of the Trust.    The Company shall establish the Trust, and the Employers shall at least annually transfer over to the Trust such amounts as the Enrolled Actuary shall certify as necessary to fund all anticipated Vested SERP Benefits, and for utilizing the aggregate cost method with the following assumptions:

Annual earnings rate:		7.5%
Mortality:
	Pre-retirement	None
	Post-retirement	Death at age 80
Compensation Increases:		5.0% annually
Retirement age:		55
Social Security Increases:		3% annually

10.2

Interrelationship of the Plan and the Trust.    The provisions of the Plan and the Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust shall govern the rights of the Employers, Participants and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan. Each Employer's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust, and any such distribution shall reduce the Employer's obligations under this Agreement.

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ARTICLE 11
Miscellaneous

11.1

Unsecured General Creditor.    Participants and their Beneficiaries, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of an Employer. Any and all of an Employer's assets shall be, and remain, the general, unpledged unrestricted assets of the Employer. An Employer's obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.

11.2

Employer's Liability.    An Employer's liability for the payment of benefits shall be defined only by the Plan and the Plan Agreement, as entered into between the Employer and a Participant. An Employer shall have no obligation to a Participant under the Plan except as expressly provided in the Plan and his or her Plan Agreement.

11.3

Nonassignability.    Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable, except that the foregoing shall not apply to any family support obligations set forth in a court order. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency.

11.4

Not a Contract of Employment.    The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between any Employer and the Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, with or without cause, unless otherwise expressly provided in a written employment agreement. Nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of any Employer or to interfere with the right of any Employer to discipline or discharge the Participant at any time.

11.5

Furnishing Information.    A Participant or his or her Beneficiary will cooperate with the Committee by furnishing any and all information requested by the Committee and take such other actions as may be requested in order to facilitate the administration of the Plan and the payments of benefits hereunder, including but not limited to taking such physical examinations as the Committee may deem necessary.

11.6

Terms.    Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and wherever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.

11.7

Captions.    The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.

11.8

Governing Law.    Subject to ERISA, the provisions of this Plan shall be construed and interpreted according to the internal laws of the State of California without regard to its conflicts of laws principles.

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11.9

Notice.    Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

SERP Committee
Southwest Water Company
225 North Barranca Avenue, Suite 200
West Covina, California 91791-1605

or to such other address as may furnished to the Participant in writing in accordance with this notice provision. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

Any notice or filing required or permitted to be given to a Participant under this Plan shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Participant.

11.10

Successors.    The provisions of this Plan shall bind and inure to the benefit of the Participant's Employer and its successors and assigns and the Participant and the Participant's Beneficiary.

11.11

Spouse's Interest.    The interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession.

11.12

Validity.    In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein.

11.13

Incompetent.    If the Committee determines in its discretion that a benefit under this Plan is to be paid to a minor, a person declared incompetent or to a person incapable of handling the disposition of that person's property, the Committee may direct payment of such benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of minority, in competency, incapacity or guardianship, as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Participant and the Participant's Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Plan for such payment amount.

11.14

Court Order.    The Committee is authorized to make any payments directed by court order in any action in which the Plan or the Committee has been named as a party.

11.15

Distribution in the Event of Taxation.

(a)

General.    If, prior to a Post-Participation Change in Control, all or any portion of an affected Participant's benefit under this Plan becomes taxable to the Participant for any reason prior to receipt, a Participant may petition the Committee for a distribution of that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld, a Participant's Employer shall distribute to the Participant immediately available funds in an amount that is sufficient to pay all federal, state and local taxes that have resulted from any benefit that has become taxable, plus interest and penalties thereon. If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan.

If, after a Post-Participation Change in Control, all or any portion of an affected Participant's benefit under this Plan becomes taxable to the Participant for any reason prior to receipt, a

16

Participant may petition the Trustee for a distribution of an amount up to that portion of his or her benefit that has become taxable. Upon the grant of such a petition, which grant shall not be unreasonably withheld, the Trustee shall distribute to the Participant immediately available funds in an amount that is sufficient to pay all federal, state and local taxes that have resulted from any benefit that has become taxable, plus interest and penalties thereon. If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan.

(b)

Trust.    If the Trust terminates in accordance with Section 3.6(e) of the Trust and benefits are distributed from the Trust to a Participant in accordance with that Section, the Participant's benefits under this Plan shall be reduced to the extent of such distributions.

11.16

Legal Fees To Enforce Rights After a Post-Participation Change in Control.    The Company is aware that upon the occurrence of a Post-Participation Change in Control, the Board (which might then be composed of new members) or a shareholder of the Company, or of any successor corporation might then cause or attempt to cause the Company or such successor to refuse to comply with its obligations under the Plan and might cause or attempt to cause the Company to institute, or may institute, litigation seeking to deny affected Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Post-Participation Change in Control, it should appear to any affected Participant that the Company or an Employer has failed to comply with any of its obligations under the Plan or any agreement thereunder or, if the Company, an Employer, or any other person takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or to recover from any Participant the benefits intended to be provided, then the Company irrevocably authorizes such Participant to retain counsel of his or her choice at the expense of the Company to represent such Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company, an Employer or any director, officer, shareholder or other person affiliated with the Company or an Employer or any successor thereto in any jurisdiction.

        IN WITNESS WHEREOF, the Company has signed this Plan document as of May 8, 2000.

"Company"
SOUTHWEST WATER COMPANY     a Delaware corporation
By:	/s/  SHELLEY A. FARNHAM
Title:	VP, Human Resources

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Exhibit 10.7

SOUTHWEST WATER COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN MASTER PLAN DOCUMENT EFFECTIVE MAY 8, 2000

EX-10.12C

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Exhibit 10.12C

CONSULTING AGREEMENT

        This Consulting Agreement ("Consulting Agreement") between James C. Wisener ("Consultant") and Southwest Water Company ("Company") is entered into effective as of December 24, 2004 ("Effective Date"). Company and Consultant are each a Party and collectively are the "Parties".

RECITALS:

        A.    Company desires to sell all of the stock of Southwest Water Billing Solutions, Inc., formerly known as Master Tek International, Inc. ("SWBSI"), to a suitable buyer upon terms conditions, and a purchase price that it determines are in the best interest of Company. The sale of the stock of SWBSI is referred to in the Consulting Agreement as the "Transaction".

        B.    Company desires to engage Consultant to assist with the Transaction, including identifying a buyer, assisting in due diligence and with negotiations and maintaining operations of SWBSI pending the Transaction.

        C.    Consultant has previously served as President of SWBSI and therefore has knowledge and experience in its operations that would be helpful to Company in the Transaction and in the interim period until a Transaction closes or the operations are relocated to Texas.

        D.    The Parties hope that a suitable buyer will be identified within 60 to 90 days of the Effective Date and that a Transaction would close in March or April, 2005. If it becomes apparent to Company that a Transaction will not be accomplished in the first or second quarter of calendar year 2005, it is Company's present intention to relocate the majority of SWBSI operations from Colorado to Texas.

        E.    Company desires to retain the services of Consultant, and Consultant desires to provide services to Company upon the terms and conditions set forth in this Consulting Agreement. Therefore, in consideration of the promises and of the covenants and agreements, the Parties agree as follows:

        1.    Term of Consulting Agreement.    The term of this Consulting Agreement begins on the Effective Date and will continue for a period of 10 months, unless terminated earlier pursuant to the terms of Section 6 of this Consulting Agreement ("Term").

        2.    Services.    Consultant will provide the services to the best of his abilities to accomplish a closing of the Transaction, including the following (collectively, the "Services"): (a) assist in identifying buyer(s); (b) assist in the negotiation of terms favorable to Company; (c) coordinate due diligence to be produced to potential buyer(s); (c) oversee operations pending the Transaction to maintain value of SWBSI pending Transaction; (d) relocate operations to Texas if Company determines in good faith by March 31, 2005, that a Transaction is not likely to be accomplished in the first or second quarter of Calendar year 2005; any other related tasks reasonably requested by Company.

        3.    Nature of Engagement and Relationship of the Parties.

        3.1.      The Parties agree that the Consultant is an independent contractor and not an employee, agent, broker, dealer, joint venturer or partner of Company or SWBSI. Nothing in this Consulting Agreement shall be interpreted or construed as creating or establishing the relationship of employer and employee between Company and Consultant or SWBSI and Consultant. Consultant is not eligible for any benefit available to employees of Company or SWBSI, including workers compensation insurance, state disability insurance, unemployment insurance, group health and life insurance, vacation pay, sick pay, severance pay, bonus plan, or any other plan, except that the stock options previously issued to Consultant and existing under the Southwest Water Company Second Amended and Restated Stock Option Plan ("Plan") will continue to vest through

2

April 1, 2005, pursuant to Section 1.19 of the Plan. Consultant and Company intend that Consultant is not an employee for state or federal tax purposes.

        3.2.      Consultant will carry the title of "President" of SWBSI. Notwithstanding any rights that may generally be associated with the title, the Parties agree that Consultant does not have the authority to enter into or execute any agreement on behalf of Company or SWBSI, to incur any liability or indebtedness of any kind or nature in the name of or on behalf of Company or SWBSI, or to otherwise bind Company or SWBSI in any manner except with prior written approval (including e-mail). Consultant represents and warrants that he will not hold himself out as having any such authority. Consultant is not authorized to make management decisions for Company or SWBSI but may make recommendations on operations to Company. In performing the Services, Consultant will report to the President of Company and will obtain any required approvals from Company's Chief Executive Officer, President or Vice President of Finance.

        3.3.      Consultant represents and warrants that he has the special skill and professional competence, expertise and experience to undertake the obligations imposed by this Consulting Agreement. Consultant agrees that he will perform in a diligent, efficient, competent, and skillful manner commensurate with the highest standards of his profession, and that he will devote such time as is necessary to perform the Services undertaken pursuant to this Consulting Agreement. Consultant agrees to comply with the federal, state, and local laws and regulations relating to Consultant's performance under this Consulting Agreement.

        3.4.      The right to accept any potential buyer, terms or Transaction that Consultant may identify or recommend is vested solely in Company. Consultant is not and shall not be deemed as a third party beneficiary of any Transaction or stock purchase agreement.

        4.        Compensation for Services.

        4.1.      Company will pay Consultant a monthly fee for Services rendered during the Term at a rate of $27,500 per month ("Monthly Fee").

        4.2.      In addition to the Monthly Fee, in the event a Transaction closes during the Term and Consultant has provided or in good faith otherwise made his Services available through the date of closing of the Transaction ("Commission Eligible Transaction"), Consultant will receive a commission in the gross amount of $250,000 ("Commission"). No Commission is due to Consultant unless and until the purchase price due upon closing of the Commission Eligible Transaction is paid by buyer. The Commission will be paid within 10 business days following the later of the closing of the Transaction and the receipt of payment of the purchase price from the buyer.

        4.3.      In addition to the Monthly Fee and the Commission, if the purchase price of a Commission Eligible Transaction exceeds $15 million, Company will pay Consultant a commission of 10% on the amount of the purchase price that exceeds $15 million ("Success Commission"). For this purpose, "Purchase Price" means with respect to any Commission Eligible Transaction, the aggregate proceeds to Company in the form of cash at the closing of the Transaction, plus, without duplication, the amount of payments in respect of deferred payment obligations in the form of cash (other than the portion of any such deferred payment constituting interest). For the purposes of this Agreement, cash includes the cash proceeds received by Company from the sale or other disposition by Company of any securities received upon the closing of a Commission Eligible Transaction. In calculating a Success Commission, the purchase price will be reduced by the aggregate amounts subject to adjustment, refund or otherwise, until the amount of any adjustment, if any, is known and resolved by Company. A Success Commission will only be paid on monies actually received by Company.

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        4.4.      The Monthly Fee is intended to compensate Consultant for costs and expenses and Company will not pay any additional amounts to Consultant for costs or expenses incurred related to the Consulting Agreement.

        4.5.      Company will make payment of the Monthly Fee to Consultant within thirty (30) days after receipt of an invoice and a statement of Services rendered during that month.

        4.6.      The Consultant is responsible for paying all required state and federal taxes and will maintain his own records of earnings and will make payments and reports to the proper governmental agencies as required by law. Company will Issue a 1099 to the Consultant.

        5.    Covenant of Confidentiality and Related Matters.

        5.1.      Except as necessary to perform his Services and solely for the benefit of Company or SWBSI ("Permitted Purpose"), Consultant agrees that during and after the Term, he will not to disclose, directly or indirectly, to anyone, or to use or let others use, for any purpose whatsoever, any Confidential Information acquired from Company or SWBSI. Permitted Purpose includes Consultant's reasonable responses to due diligence inquiries from prospective buyers who have entered into Non-Disclosure Agreements ("NDA"), in compliance with the NDAs. Consultant may disclose Confidential Information only to such of Company's or SWBSI's prospective buyers who have signed an NDA, consultants, agents, representatives and advisors that have a need to know for the Permitted Purpose. Consultant agrees to advise such persons of their obligations to maintain the not to use or disclose the Confidential Information except for a Permitted Purpose and to take reasonable steps to ensure their compliance. Consultant will not use the Confidential Information for any purpose which might be directly or indirectly detrimental to Company or SWBSI.

        5.2.      Subject to Section 5.1, the term "Confidential Information" means and includes (a) confidential or secret records, data, processes, methods, procedures, techniques, plans, machinery, devices, appliances, tools, improvements, computer programs, discoveries, Inventions, shop rights, products, or trade secrets relating to the current or foreseeable business or activities of the Company and SWBSI; (b) any mailing lists, customer lists, supplier lists, or other information relating to the customers or suppliers of the Company and SWBSI, except such lists or other information as are generally known to the public or in the industry; or (c) pricing policy, bid amount, bid strategy, rate structure, personnel policy, method or practice of obtaining or doing business by the Company and SWBSI or any Affiliate of either, or any other confidential or secret aspects of the current or foreseeable business or activities of the Company and SWBSI. Notwithstanding the above, Company and Consultant agree that Consultant: (a) may be a candidate for employment with a prospective buyer, (b) will disclose his status as a consultant rather than an employee of Company or SWBSI; and (c) may disclose his availability to be considered for employment if and when a Transaction would close.

        6.    Termination of Consulting Engagement.    Notwithstanding anything contained in this Consulting Agreement to the contrary, this Consulting Agreement shall terminate upon the occurrence of the earliest of the following events;

        6.1.      The Term will expire and the Consulting Agreement will terminate immediately upon the closing of a Transaction. Following the termination, Consultant's obligation to provide Services will end; however, in addition to any other payments due to Consultant, Company will accelerate and promptly pay to Consultant the remaining Monthly Fees that would have been paid after the termination had the Consulting Agreement continued through a l0-month Term.

        6.2.      The Term will expire and the Consulting Agreement will terminate immediately following the relocation of operations to Texas (in the event that operations were relocated because no Transaction closed before the relocation). Following the relocation, Consultant's

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obligation to provide Services will end; however, in addition to any other payments due to Consultant, Company will accelerate and promptly pay to Consultant the remaining Monthly Fees that would have been paid after the termination had the Consulting Agreement continued through a 10-month Term.

        6.3.      The Term will expire and the Consulting Agreement will terminate on June 30, 2005 if there is no Transaction pending on that date and the relocation has been completed or the failure to relocate was not caused by Consultant. For termination under this subsection, Consultant's obligation to provide services will end on June 30, 2005; however, in addition to any other payments due, Company will accelerate and promptly pay to Consultant the remaining Monthly Fees that would have been paid after the termination had the Consulting Agreement continued through a 10-month Term.

        6.4.      This Consulting Agreement will terminate immediately upon the bankruptcy, receivership or dissolution of either Party or the cessation of business by Company.

        6.5.      The Term will expire and the Consulting Agreement will terminate upon Company terminating Consultant's engagement for "Cause." For this purpose, "Cause" will be determined by Company in good faith and means: (a) Consultant's commission or conviction of an act involving dishonesty, fraud, embezzlement, moral turpitude, securities laws violations, or theft or a felony of any type; (b) a material violation of any policy of the Company or SWBSI relating to ethical business conduct, fiduciary duties, conflicts of interest improper use or disclosure of Confidential Information or trade secrets of Company or SWBSI; and (c) any substantial failure or refusal to perform, or breach of this Consulting Agreement. Company will provide Consultant with written notice of the basis of any termination for cause and will provide Consultant a reasonable opportunity to cure any defects if the termination is based on Section 6.5(c).

        6.6.      This Consulting Agreement will terminate upon the expiration of the Term.

        6.7.      This Consulting Agreement will terminate immediately and no payments under this Consulting Agreement will be owed and payable to Consultant (including Monthly Fees, Commission or Success Commission) if he revokes the Separation Agreement and General Release ("Release"), dated as of December 23, 2004, prior to the prior to the expiration of the Revocation Period (as that term is defined in the Release).

        6.8.      Consultant will not be entitled to a Commission or Success Commission for any Transaction that is closed after the Term or the termination of the Consulting Agreement pursuant to this Section. Company agrees that it will not delay a closing for the purpose of avoiding the payment of a Commission or Success Commission.

        6.9.      The Parties understand that each of the covenants contained in Section 5 shall survive the expiration or termination of this Consulting Agreement.

        7.    General Provisions.

        7.1.        No Conflict.    The Consultant warrants that he is not under any obligation that is inconsistent or in conflict with this Consulting Agreement or that would prevent, limit or impair the performance of his obligations under this Consulting Agreement.

        7.2.        Further Acts.    Each Party agrees to perform any further acts and execute and delivery any further documents that may be reasonably necessary to carry out the provisions and intent of this Consulting Agreement.

        7.3.        Indemnification.    Company agrees to defend, indemnify and hold harmless Consultant from and against any and all claims, losses, liabilities or expenses (including attorney's fees) which may arise, in whole or in part, out of a material breach by Company of its obligations under this

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Agreement. Consultant agrees to defend, indemnify and hold harmless Company from and against any and all claims, losses, liabilities or expenses (including attorney's fees) which may arise, in whole or in part, out of a material breach by Consultant of his obligations under this Agreement. In addition, Company shall indemnify, defend and hold Consultant harmless from any and all liability, loss, damage, cost or expense (including reasonable attorneys' fees) incurred by Consultant in defending or responding to any claim arising out of or related to the Transaction except to the extent that such claim arises out of the willful misconduct or gross negligence of Consultant. Likewise, Consultant shall indemnify, defend and hold Company harmless from any and all liability, loss, damage, cost or expense (including reasonable attorneys' fees) incurred by Company in defending or responding to any claim arising out of or related to the Transaction if the claims arise out of or are related to the Consultant's willful misconduct or gross negligence.

        7.4.        Notices.    Any notice or other communication provided for in this Consulting Agreement shall be in writing and addressed to Company and Consultant at the address listed in this Section, or at such other address as either party may from time to time designate in writing. Any notice or communication that is addressed as provided in this Section shall be deemed given (a) upon delivery, if delivered personally or via certified mail, postage prepaid, return receipt requested; or (b) on the first business day of the receiving party after the transmission if by facsimile or after the timely delivery to the courier, if delivered by overnight courier. Other methods of delivery will be acceptable upon proof of receipt by the receiving Party.

To Company:	Southwest Water Company 624 South Grand Avenue, Suite 2900 Los Angeles, CA 90017 Attention: President, Southwest Water Company or CEO, Southwest Water Company Facsimile No.: (213) 929-1889
To Consultant:	James C. Wisener 2810 Hidden Hills Way Corona, CA 92882 Facsimile No.

        7.5.        Amendments and Waivers.    No amendment or modification of this Consulting Agreement will be effective unless it is in writing and signed by the Parties. No waiver will be binding unless it is in writing and signed by the Party making the waiver. No waiver of any of the provisions of this Consulting Agreement will be deemed, or will constitute, a waiver of any other provision, whether or not similar, nor will any waiver constitute a continuing waiver.

        7.6.        Confidentiality.    Consultant agrees to keep the circumstances and terms of this Consulting Agreement in strict confidence, unless and only to the extent that he has been authorized in writing by the Company to make such disclosure or unless compelled by law or Court Order. It will not be a violation of this Consulting Agreement for Consultant to disclose this Consulting Agreement or its terms to his lawyers, spouse, accountants, or income tax preparers. To the extent Consultant does disclose any of the terms of this Consulting Agreement in accordance with this paragraph, he agrees to require, and warrants that any person receiving this information will maintain its confidentiality. This Consulting Agreement may be used as evidence to any subsequent proceeding alleging a breach of this Consulting Agreement.

        7.7.        Assignment.    This Consulting Agreement is personal to Consultant and is not assignable, in whole or in part, by Consultant for any reason. This Consulting Agreement will bind Consultant and Company, and their successors, assigns, beneficiaries, survivors, executors, administrators and transferees.

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        7.8.        Section and Other Headings.    Section and other headings have been inserted for reference and convenience only and are not a part of this Consulting Agreement.

        7.9.        Severability.    If any portion of this Consulting Agreement is void or deemed unenforceable for any reason, the unenforceable portion will be deemed severed from the remaining portions of this Consulting Agreement, which will otherwise remain in full force.

        7.10.        Multiple Counterparts.    This Consulting Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. Faxed or electronically delivered executed copies will be effective and binding.

        7.11.        Representation by Counsel: Interpretation.    Company and Consultant each acknowledge the opportunity to be represented by counsel in connection with this Consulting Agreement and the matters contemplated by this Consulting Agreement. Accordingly, any rule of law or decision that would require interpretation of any claimed ambiguities in this Consulting Agreement against the party that drafted it has no application and is expressly waived. The term "including" and its variations are always used in the non-restrictive sense (as if followed by a phrase such as "but not limited to"). When a singular is used, the same shall include the plural, and the masculine, feminine and neuter genders shall each include the others when required by the context. The provisions of this Consulting Agreement shall be interpreted in a reasonable manner to affect the intent of the Parties.

        7.12.        Governing Law, Jurisdiction and Venue.    This Consulting Agreement will be governed and construed in accordance with the laws of the State of California, without applying California conflict of law rules. Each Party consents to submit to personal jurisdiction and to venue for any legal proceeding in Los Angeles, California.

        7.13.        Mediation.    Before either party may initiate any suit, arbitration or other proceeding the parties pledge to attempt first to resolve the controversy or claim arising out of or relating to this Consulting Agreement ("Dispute") by mediation before a mutually acceptable mediator within 30 days after either party first gives notice of mediation. Mediation shall be conducted in Los Angeles, California and shall be conducted and completed within 60 days following the date either party first gives notice of mediation. The fees and expenses of the mediator shall be shared equally by the parties. The mediator shall be disqualified as a witness, expert or counsel for any party with respect to the Dispute and any related matter. Mediation is a compromise negotiation and shall constitute privileged communications. The entire mediation process shall be confidential and the conduct, statements, promises, offers, views and opinions of the mediator and the parties shall not be discoverable or admissible in any legal proceeding for any purpose; provided, however, that evidence which is otherwise discoverable or admissible shall not be excluded from discovery or admission as a result of its use in the mediation.

        7.14.        Attorneys' Fees.    In any action at law (including arbitration proceedings), or in equity to enforce or construe any provisions or rights under this Consulting Agreement, or to enforce and arbitration award, the unsuccessful Party, as determined by a court or arbitrator, will pay the successful Party all costs, expenses, and reasonable attorney's fees incurred.

        7.15.        Waiver of Jury Trial.    Each Party acknowledges that by executing this Consulting Agreement, the Party waives any rights he or it may have to a trial by jury.

        7.16.        Entire Agreement.    This Consulting Agreement supersedes any agreements, either oral or written, between the Parties with respect to Consultant rendering Services for Company or SWBSI, including Letter Agreement between Consultant and Company dated December 15, 2004. The Parties acknowledge that this Consulting Agreement constitutes the entire agreement of the Parties and that in executing this Consulting Agreement, they are not relying upon any

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representation or statement not set forth in this Consulting Agreement with regard to the subject matter, basis, or effect of this Consulting Agreement.

        Consultant and Company, by their signatures below voluntarily enter into this Consulting Agreement on the terms set forth above with the intent to be legally bound.

"CONSULTANT"

/s/  JAMES C. WISENER JAMES C. WISENER	DATE: December 22, 2004
SOUTHWEST WATER COMPANY
/s/  PETER J. MOERBEEK	DATE: December 23, 2004
By:  Peter J. Moerbeek Its:  President & COO

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EX-10.15

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Exhibit 10.15

AMENDMENT NO. 1
TO AMENDED AND RESTATED CREDIT AGREEMENT

        This Amendment No. 1 (the "Amendment") dated as of October 14, 2004 is between Bank of America, N.A. (the "Bank") and Southwest Water Company, a Delaware corporation (the "Borrower").

RECITALS

        A.    The Bank and the Borrower entered into a certain Amended and Restated Credit Agreement dated as of July 7, 2004 (the "Agreement").

        B.    The Bank and the Borrower desire to amend the Agreement.

AGREEMENT

        1.    Definitions.    Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement.

        2.    Amendments.    The Agreement is hereby amended as follows:

        2.1    A defined term is added to Section 1.01, to provide as follows:

"'Additional Revolving Commitment Maturity Date'.    The earlier to occur of September 30, 2006 or the date of the closing of NMUI's (as defined hereinafter) placement of $12,000,000 of first mortgage bonds, currently anticipated to transpire by October 31, 2004."

        2.2    The defined term "Maturity Date," set forth in Section 1.01 is eliminated in its entirety, and is replaced with the following defined term, to be added to Section 1.01:

"'Revolving Commitment Maturity Date': September 30, 2006."

        2.3    The defined term, "Maturity Date," is eliminated from Section 2.01(a), and is replaced, in both instances in which it appears, with the defined term, "Revolving Commitment Maturity Date."

        All other language in Section 2.01(a) remains unchanged.

        2.4    The defined term, "Maturity Date," is eliminated from Section 2.01(e), and is replaced with the defined term, "Revolving Commitment Maturity Date."

All other language in Section 2.01(e) remains unchanged.

        2.5    The defined term, "Maturity Date," is eliminated from Section 2.02, and is replaced, in both instances in which it appears, with the defined term, "Revolving Commitment Maturity Date."

All other language in Section 2.02 remains unchanged.

        2.6    The defined term, "Maturity Date," is eliminated from Section 2.06(a), and is replaced, in both instances in which it appears, with the defined term, "Additional Revolving Commitment Maturity Date."

All other language in Section 2.06(a) remains unchanged.

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        2.7    The defined term, "Maturity Date," is eliminated from Section 2.07, and is replaced, in both instances in which it appears, with the defined term, "Additional Revolving Commitment Maturity Date."

All other language in Section 2.07 remains unchanged.

        2.8    The $20,000,000 Revolving Note attached as Exhibit A to the Agreement, and defined in Section 2.01(d) thereof, shall be replaced by the Amended Revolving Note attached as Exhibit 1 hereto.

        2.9    The $15,000,000 Revolving Note attached as Exhibit B to the Agreement, and defined in Section 2.06(d) thereof, shall be replaced by the Amended Additional Revolving Note attached as Exhibit 2 hereto.

        2.10    Section 6.01(i) is amended to add the following language at the conclusion thereof:

"Notwithstanding the foregoing provisions of this Section 6.01(i), Borrower shall be permitted to utilize for its general corporate purposes, one hundred percent (100%) of the net proceeds of Suburban's $15,000,000 private placement of first mortgage bonds."

All other language in Section 6.01(i) remains unchanged.

        2.11    Schedule 6.02(e) attached to the Agreement is replaced in its entirety with Amended Schedule 6.02(e), attached hereto as Exhibit 3.

        2.12    Section 6.02(e)(vi) is amended to add the following language at the conclusion thereof:

"Notwithstanding the foregoing provisions of this Section 6.02(e)(vi), for the time period ending November 30, 2004 only, the sum of $40,500,000 identified in subsection (vi) of this Section 6.02(e), shall be increased to $44,500,000."

All other language in Section 6.02(e)(vi) remains unchanged.

        2.13    Section 6.02(g)(ii) is amended to add the following language as the penultimate sentence thereof:

"For fiscal year 2004 only, however, Borrower may make Permitted Acquisitions such that the aggregate consideration paid or payable by Borrower and its Subsidiaries in connection with all Permitted Acquisitions shall not exceed $10,200,000."

All other language in Section 6.02(g)(ii) remains unchanged.

        3.    Representations and Warranties.    When the Borrower signs this Amendment, the Borrower represents and warrants to the Bank that: (a) there is no event which is, or with notice or lapse of time or both would be, a default under the Agreement except those events, if any, that have been disclosed in writing to the Bank or waived in writing by the Bank, (b) the representations and warranties in the Agreement are true as of the date of this Amendment as if made on the date of this Amendment, and (c) this Amendment does not conflict with any law, agreement, or obligation by which the Borrower is bound.

        4.    Conditions.    This Amendment will be effective when the Bank receives in form and content acceptable to the Bank, this Amendment, duly executed by Borrower.

        5.    Effect of Amendment.    Except as provided in this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect.

        6.    Counterparts.    This Amendment may be executed in counterparts, each of which when so executed shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument.

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        This Amendment is executed as of the date stated at the beginning of this Amendment.

BANK OF AMERICA, N.A.			SOUTHWEST WATER COMPANY
By:	/s/  [ILLEGIBLE]		By:	/s/  RICHARD SHIELDS
Name:		[ILLEGIBLE]	Name:		Approved: Richard Shields
Title:		SVP	Title:		Chief Financial Officer
Address:			Address:
Bank of America 675 Anton Boulevard, 2nd Floor Costa Mesa, California 92626 Attention: Jamie L. Freeman Title: Vice President Facsimile: (714) 850-6586			One Wilshire Building 624 S. Grand Avenue, Suite 2900 Los Angeles, California 90017 Attention: Richard J. Shields Chief Financial Officer Facsimile: (213) 929-1888

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"EXHIBIT 3"

AMENDED SCHEDULE 6.02(c)—OTHER SECURED DEBT

Secured bank debt not to exceed $10,000,000, and other secured debt not to exceed $55,000,000.

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EXHIBIT 1

AMENDED REVOLVING NOTE

$20,000,000 October 14, 2004

        FOR VALUE RECEIVED, the undersigned SOUTHWEST WATER COMPANY, a Delaware corporation ("Borrower") promises to pay to the order of BANK OF AMERICA, N.A. ("Bank") at its office at 675 Anton Boulevard, 2^nd Floor, Costa Mesa, California 92626, 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 Twenty Million Dollars ($20,000,000), 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 LIBOR Rate plus one and one-quarter percent (1.25%) or the Prime Rate minus one-quarter of one percent (0.25%) with respect to all principal sums of less than Fifteen Million Dollars ($15,000,000). When the aggregate principal sums outstanding are equal to or greater than Fifteen Million Dollars ($15,000,000), the interest thereon shall be computed at a rate per annum equal to the applicable LIBOR Rate plus one and one-half percent (1.50%) or the Prime Rate with respect to the entire principal sums outstanding (to be computed on each advance from the date of its disbursement). 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 LIBOR option selected hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and applicable LIBOR 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.

A.    DEFINITIONS:    

        Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Credit Agreement referred to below. As used herein, the following terms shall have the meanings set forth after each:

        1.     "Agreement" means that certain Credit Agreement between Borrower and Bank dated as of October 6, 2003, as amended from time to time, including, without limitation, those terms relating to arbitration of disputes.

        2.     "Amended and Restated Credit Agreement" means that certain Amended and Restated Credit Agreement entered into between Borrower and Bank on or about July 7, 2004, as amended from time to time.

        3.     "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 based on the LIBOR Rate, any 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 dealings in Dollar deposits are conducted by and among banks in the Designated LIBOR Market.

        4.     "Designated LIBOR Market" means the regular established market located in London by and among banks for the solicitation, offer and acceptance of Dollar deposits in such banks.

        5.     "Dollars" means United States of America dollars.

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        6.     "LIBOR 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.)

LIBOR Rate =	LIBOR	Base	Rate
	(1.00 - Reserve Percentage)

        (a)   "LIBOR Base Rate" means, with respect to any Revolving Loan to be made by Bank which is to bear interest in relation to the LIBOR Rate, the interest rate per annum (rounded upward, if necessary, to the nearest 1/100^th of 1%) at which deposits in Dollars are offered by Bank through its London Banking Center, London, Great Britain to prime banks in the Designated LIBOR Market on the first day of the applicable LIBOR Rate Term in an aggregate amount approximately equal to the amount of the Revolving Loan to be made by Bank and for a period of time comparable to the number of days in the applicable LIBOR Rate Term. The determination of the LIBOR Base Rate by Bank shall be conclusive in the absence of manifest error.

        (b)   "Reserve Percentage" means, with respect to any Revolving Loan to be made by Bank which is to bear interest in relation to the LIBOR Rate, the maximum reserve percentage (expressed as a decimal, rounded upward, if necessary, to the nearest 1/100 of one percent) in effect on the date the LIBOR Base Rate for the Revolving Loan is determined (whether or not such reserve percentage is applicable to Bank) under regulations issued from time to time by the Federal Reserve Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to eurocurrency funding (currently referred to as "eurocurrency liabilities") having a term comparable to the LIBOR Rate Term for such Revolving Loan. The determination by Bank of any applicable Reserve Percentage shall be conclusive in the absence of manifest error.

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

        8.     "LIBOR Rate Term" means a period commencing on a Business Day and continuing for one (1) month, two (2) months, three (3) months, six (6) months or 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 LIBOR; provided however, that no LIBOR Rate Term shall extend beyond the scheduled maturity date hereof. The last day of the interest period will be determined by Bank using the Designated LIBOR Market. If any LIBOR Rate Term would end on a day which is not a Business Day, then such LIBOR Rate Term shall be extended to the next succeeding Business Day.

        9.     "Prime Rate" means the rate of interest publicly announced from time to time by the Bank as its Prime Rate. The Prime Rate is set by the Bank based on various factors, including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above or below the Prime Rate. Any change in the Prime Rate will take effect at the opening of business on the day specified in the public announcement of a change in the Bank's Prime Rate.

B.    INTEREST:    

        1.    Payment of Interest.    Interest accrued on this Note shall be payable on the fifteenth (15^th) day of each month for the prior month or portion thereof, commencing June 15, 2004.

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        2.    Selection of Interest Rate Options.    At any time any portion of this Note bears interest determined in relation to the LIBOR Rate, it may be continued by Borrower at the end of the LIBOR Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or in relation to the LIBOR Rate for a new LIBOR 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 the LIBOR Rate for a LIBOR Rate Term designated by Borrower. At the time each advance is requested hereunder or Borrower wishes to select the LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each LIBOR 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 LIBOR option is selected, the length of the applicable LIBOR Rate Term. Any such notice may be given by telephone so long as, with respect to each LIBOR selection, such notice is given to Bank prior to 10:00 a.m., California time, on the third Business Day prior to the commencement of the LIBOR Rate Term and, with respect to each Prime Rate selection, such notice is given to Bank prior to 11:00 a.m., California time, on the day of the requested advance. For each LIBOR option requested hereunder, Bank will quote the applicable LIBOR Rate to Borrower at approximately 10:00 a.m., California time, on the second Business Day prior to the LIBOR 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 LIBOR 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 LIBOR 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 LIBOR Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such LIBOR Rate Term applied.

        3.    Additional LIBOR Provisions.    

        (a)   If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining the LIBOR Rate, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, then (i) no new LIBOR option may be selected by Borrower, and (ii) any portion of the outstanding principal balance hereof which bears interest determined in relation to the LIBOR Rate, subsequent to the end of the LIBOR 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 LIBOR options available hereunder, or (ii) to maintain interest rates based on the LIBOR Rate, then in the former event, any obligation of Bank to make available such unlawful LIBOR options shall immediately be cancelled, and in the latter event, any such unlawful LIBOR-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 LIBOR-based interest rates to remain in effect until the expiration of the LIBOR Rate Term applicable thereto, then such permitted LIBOR-based interest rates shall continue in effect until the expiration of such LIBOR 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 LIBOR options made available to Borrower hereunder, and any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.

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        (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 LIBOR 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 LIBOR 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 LIBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any LIBOR options made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.

        (d)   Bank will have no obligation to accept an election of Borrower for the LIBOR option 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 LIBOR Rate Term, of any Revolving Loan which bears interest in relation to the LIBOR Rate are not available in the Designated LIBOR Market; or

         (ii)  an Event of Default has occurred and is continuing; or

        (iii)  the LIBOR Rate does not accurately reflect the cost of any Revolving Loan which bears interest in relation to the LIBOR Rate.

        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 percent (2.00%) above the rate of interest from time to time applicable to this Note (the "Default Rate").

C.    BORROWING AND REPAYMENT:    

        1.    Loan 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, including the Amended and Restated Credit Agreement; 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 "Revolving Commitment Maturity Date" (as defined in the Amended and Restated Credit Agreement as amended from time to time.)

        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) Richard Shields, who is authorized to request advances and direct the disposition of any advances until written notice of the revocation of

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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 the LIBOR Rate, with such payments applied to the oldest LIBOR 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)    LIBOR.    Each prepayment of a LIBOR Rate Portion shall be not less than $250,000 and shall be in an integral multiple of $100,000, and Bank shall have received notice of each such prepayment on the date that is five (5) Business Days before the date of such prepayment (which notice shall identify the date and amount of the prepayment). Each prepayment of a LIBOR 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 on a date earlier than the last day of the applicable LIBOR Rate Term. The prepayment fee shall be equal to the amount (if any) by which:

          (i)  the additional interest which would have been payable during the applicable LIBOR Rate Term 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 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 applicable LIBOR Rate Term.

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 (2.00%) 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 the Amended and Restated Credit Agreement. Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Amended and Restated 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 Amended and Restated Credit Agreement, and with notice upon the occurrence of any other

9

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.

        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.

"Borrower"
SOUTHWEST WATER COMPANY, a Delaware corporation
By:	/s/  RICHARD SHIELDS
Name:		Approved: Richard Shields
Title:		Chief Financial Officer

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EXHIBIT 2

AMENDED ADDITIONAL REVOLVING NOTE

$15,000,000 October 14, 2004

        FOR VALUE RECEIVED, the undersigned SOUTHWEST WATER COMPANY, a Delaware corporation ("Borrower") promises to pay to the order of BANK OF AMERICA, N.A. ("Bank") at its office at 675 Anton Boulevard, 2^nd Floor, Costa Mesa, California 92626, 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 Fifteen Million Dollars ($15,000,000), 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 LIBOR Rate plus two and one-half percent (2.5%) or the Prime Rate. 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 LIBOR option selected hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and applicable LIBOR 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.

A.    DEFINITIONS:    

        Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Credit Agreement referred to below. As used herein, the following terms shall have the meanings set forth after each:

        1.     "Amended and Restated Credit Agreement" means that certain Amended and Restated Credit Agreement entered into between Borrower and Bank on or about July 7, 2004, as amended from time to time.

        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 based on the LIBOR Rate, any 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 dealings in Dollar deposits are conducted by and among banks in the Designated LIBOR Market.

        3.     "Designated LIBOR Market" means the regular established market located in London by and among banks for the solicitation, offer and acceptance of Dollar deposits in such banks.

        4.     "Dollars" means United States of America dollars.

        5.     "LIBOR 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.)

LIBOR Rate =	LIBOR	Base	Rate
	(1.00 - Reserve Percentage)

        (a)   "LIBOR Base Rate" means, with respect to any Additional Revolving Loan to be made by Bank which is to bear interest in relation to the LIBOR Rate, the interest rate per annum (rounded upward, if necessary, to the nearest 1/100^th of 1%) at which deposits in Dollars are offered by Bank through its London Banking Center, London, Great Britain to prime banks in the Designated LIBOR Market on the first day of the applicable LIBOR Rate

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Term in an aggregate amount approximately equal to the amount of the Revolving Loan to be made by Bank and for a period of time comparable to the number of days in the applicable LIBOR Rate Term. The determination of the LIBOR Base Rate by Bank shall be conclusive in the absence of manifest error.

        (b)   "Reserve Percentage" means, with respect to any Additional Revolving Loan to be made by Bank which is to bear interest in relation to the LIBOR Rate, the maximum reserve percentage (expressed as a decimal, rounded upward, if necessary, to the nearest 1/100 of one percent) in effect on the date the LIBOR Base Rate for the Revolving Loan is determined (whether or not such reserve percentage is applicable to Bank) under regulations issued from time to time by the Federal Reserve Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to eurocurrency funding (currently referred to as "eurocurrency liabilities") having a term comparable to the LIBOR Rate Term for such Revolving Loan. The determination by Bank of any applicable Reserve Percentage shall be conclusive in the absence of manifest error.

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

        7.     "LIBOR Rate Term" means a period commencing on a Business Day and continuing for one (1) month, two (2) months, three (3) months, six (6) months or 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 LIBOR; provided however, that no LIBOR Rate Term shall extend beyond the scheduled maturity date hereof. The last day of the interest period will be determined by Bank using the Designated LIBOR Market. If any LIBOR Rate Term would end on a day which is not a Business Day, then such LIBOR Rate Term shall be extended to the next succeeding Business Day.

        8.     "Prime Rate" means the rate of interest publicly announced from time to time by the Bank as its Prime Rate. The Prime Rate is set by the Bank based on various factors, including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above or below the Prime Rate. Any change in the Prime Rate will take effect at the opening of business on the day specified in the public announcement of a change in the Bank's Prime Rate.

B.    INTEREST:    

        1.    Payment of Interest.    Interest accrued on this Note shall be payable on the fifteenth (15^th) day of each month for the prior month or portion thereof, commencing August 15, 2004.

        2.    Selection of Interest Rate Options.    At any time any portion of this Note bears interest determined in relation to the LIBOR Rate, it may be continued by Borrower at the end of the LIBOR Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or in relation to the LIBOR Rate for a new LIBOR 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 the LIBOR Rate for a LIBOR Rate Term designated by Borrower. At the time each advance is requested hereunder or Borrower wishes to select the LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each LIBOR 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 LIBOR option is selected, the length of the applicable LIBOR Rate Term. Any such notice may be given by telephone so long as, with respect to each LIBOR selection, such notice is given to Bank prior to 10:00 a.m., California time, on the third Business Day prior to the

12

commencement of the LIBOR Rate Term and, with respect to each Prime Rate selection, such notice is given to Bank prior to 11:00 a.m., California time, on the day of the requested advance. For each LIBOR option requested hereunder, Bank will quote the applicable LIBOR Rate to Borrower at approximately 10:00 a.m., California time, on the second Business Day prior to the LIBOR 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 LIBOR 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 LIBOR 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 LIBOR Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such LIBOR Rate Term applied.

        3.    Additional LIBOR Provisions.    

        (a)   If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining the LIBOR Rate, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, then (i) no new LIBOR option may be selected by Borrower, and (ii) any portion of the outstanding principal balance hereof which bears interest determined in relation to the LIBOR Rate, subsequent to the end of the LIBOR 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 LIBOR options available hereunder, or (ii) to maintain interest rates based on the LIBOR Rate, then in the former event, any obligation of Bank to make available such unlawful LIBOR options shall immediately be cancelled, and in the latter event, any such unlawful LIBOR-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 LIBOR-based interest rates to remain in effect until the expiration of the LIBOR Rate Term applicable thereto, then such permitted LIBOR-based interest rates shall continue in effect until the expiration of such LIBOR 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 LIBOR 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 LIBOR 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 LIBOR options hereunder

13

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 LIBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any LIBOR options made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.

        (d)   Bank will have no obligation to accept an election of Borrower for the LIBOR option 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 LIBOR Rate Term, of any Revolving Loan which bears interest in relation to the LIBOR Rate are not available in the Designated LIBOR Market; or

         (ii)  an Event of Default has occurred and is continuing; or

        (iii)  the LIBOR Rate does not accurately reflect the cost of any Revolving Loan which bears interest in relation to the LIBOR Rate.

        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 percent (2.00%) above the rate of interest from time to time applicable to this Note (the "Default Rate").

C.    BORROWING AND REPAYMENT:    

        1.    Loan 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, including the Amended and Restated Credit Agreement; 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 "Additional Revolving Commitment Maturity Date" (as defined in the Amended and Restated Credit Agreement as amended from time to time.)

        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) Richard Shields, who is 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,

14

to the outstanding principal balance of this Note which bears interest determined in relation to the LIBOR Rate, with such payments applied to the oldest LIBOR 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)    LIBOR.    Each prepayment of a LIBOR Rate Portion shall be not less than $250,000 and shall be in an integral multiple of $100,000, and Bank shall have received notice of each such prepayment on the date that is five (5) Business Days before the date of such prepayment (which notice shall identify the date and amount of the prepayment). Each prepayment of a LIBOR 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 on a date earlier than the last day of the applicable LIBOR Rate Term. The prepayment fee shall be equal to the amount (if any) by which:

          (i)  the additional interest which would have been payable during the applicable LIBOR Rate Term 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 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 applicable LIBOR Rate Term.

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 (2.00%) 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 the Amended and Restated Credit Agreement. Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Amended and Restated 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 Amended and Restated 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.

15

        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.

        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.

"Borrower"
SOUTHWEST WATER COMPANY, a Delaware corporation
By:	/s/  RICHARD SHIELDS
Name:		Approved: Richard Shields
Title:		Chief Financial Officer

16

ACKNOWLEDGMENT REGARDING INTERCREDITOR AND PLEDGE AGREEMENTS

        The undersigned, in its capacity as a party to each of (i) the Intercreditor Agreement, dated as of July 14, 2004, by and among the undersigned, Union Bank of California, N.A. and Union Bank of California, N.A., as Collateral Agent (the "Intercreditor Agreement"), and (ii) the Pledge and Collateral Agency Agreement, dated as of July 14, 2004, by and among Southwest Water Company, the undersigned, Union Bank of California, N.A. and Union Bank of California, N.A., as Collateral Agent (the "Pledge Agreement"), hereby acknowledges and consents to the waivers and modifications to the Credit Agreement contained in the attached Waiver and Amendment and agrees that both the Intercreditor Agreement and the Pledge Agreement shall remain in full force and effect notwithstanding the Waiver and Amendment.

BANK OF AMERICA, N.A.
By:	/s/  ANNA C. RUIZ Anna C. Ruiz Vice President

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AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT
EXHIBIT 1

EXHIBIT 2

EX-10.16

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Exhibit 10.16

AMENDMENT NO. 2
TO AMENDED AND RESTATED CREDIT AGREEMENT

        This Amendment No. 2 to Amended and Restated Credit Agreement (the "Amendment") dated as of November 9, 2004 is between Bank of America, N.A. (the "Bank") and Southwest Water Company, a Delaware corporation (the "Borrower").

RECITALS

        A.    The Bank and the Borrower entered into a certain Amended and Restated Credit Agreement dated as of July 7, 2004 (the "Agreement"), as amended by that certain Amendment No. 1 to Amended and Restated Credit Agreement dated as of October 14, 2004 ("Amendment No. 1");

        B.    The Bank and the Borrower desire to further amend the Agreement.

AGREEMENT

        1.    Definitions.    Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement.

        2.    Amendments.    The Agreement is hereby amended as follows:

        2.1    Schedule 6.02(e) attached to the Agreement is replaced in its entirety with Amended Schedule 6.02(e), attached hereto as Exhibit 3.

        2.2    Section 6.02(e)(v) is replaced in its entirety with the following language:

"Other secured and unsecured Debt identified on Schedule 6.02(e) not to exceed the applicable amount indicated on such schedule."

        3.    Representations and Warranties.    When the Borrower signs this Amendment, the Borrower represents and warrants to the Bank that: (a) there is no event which is, or with notice or lapse of time or both would be, a default under the Agreement except those events, if any, that have been disclosed in writing to the Bank or waived in writing by the Bank, (b) the representations and warranties in the Agreement are true as of the date of this Amendment as if made on the date of this Amendment, and (c) this Amendment does not conflict with any law, agreement, or obligation by which the Borrower is bound.

        4.    Conditions.    This Amendment will be effective when the Bank receives in form and content acceptable to the Bank, this Amendment, duly executed by Borrower.

        5.    Effect of Amendment.    Except as provided in Amendment No. 1 and this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect.

        6.    Counterparts.    This Amendment may be executed in counterparts, each of which when so executed shall be deemed an original, but all such counterparts together shall constitute but one and the same Instrument.

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        This Amendment is executed as of the date stated at the beginning of this Amendment.

BANK OF AMERICA, N.A.			SOUTHWEST WATER COMPANY
By:	/s/  MATTHEW KOENIG		By:	/s/  RICHARD SHIELDS
Name:		MATTHEW KOENIG	Name:		Approved: Richard Shields
Title:		Senior Vice President	Title:		Chief Financial Officer
Address:			Address:
Bank of America Los Angeles Strategies Group Bank of America Plaza 333 S. Hope Street, 13th Floor Los Angeles, California 90071 Attn: Matthew Koenig Title: Senior Vice President Facsimile: (213) 621-3612			One Wilshire Building 624 S. Grand Avenue, Suite 2900 Los Angeles, California 90017 Attention: O'Donnell Iselin, II Treasurer Facsimile: (213) 929-1888

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"EXHIBIT 3"

AMENDED SCHEDULE 6.02(c)—OTHER SECURED AND UNSECURED DEBT

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Secured bank debt not to exceed $10,000,000, and other secured debt not to exceed $55,000,000, which includes up to $170,000 of secured Debt not reflected on Form 10-K of Borrower for year ending December 31, 2003;

2.

Other unsecured debt not to exceed $5,500,000, as of September 30, 2004.

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AMENDMENT NO. 2 TO AMENDED AND RESTATED CREDIT AGREEMENT

EX-10.17

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Exhibit 10.17

AMENDMENT NO. 3
TO AMENDED AND RESTATED CREDIT AGREEMENT

        This Amendment No. 3 to Amended and Restated Credit Agreement (the "Amendment") dated as of December 10, 2004 is between Bank of America, N.A. (the "Bank") and Southwest Water Company, a Delaware corporation (the "Borrower").

RECITALS

        A.    The Bank and the Borrower entered into a certain Amended and Restated Credit Agreement dated as of July 7, 2004 (the "Agreement"), as amended by that certain Amendment No. 1 to Amended and Restated Credit Agreement dated as of October 14, 2004 ("Amendment No. 1"), and as further amended by that certain Amendment No. 2 to Amended and Restated Credit Agreement dated as of November 9, 2004 ("Amendment No. 2");

        B.    The Bank and the Borrower desire to further amend the Agreement.

AGREEMENT

        1.    Definitions.    Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement.

        2.    Amendments.    The Agreement is hereby amended as follows:

        2.1   The defined term "Additional Revolving Commitment Maturity Date," added to Section 1.01 of the Agreement by Amendment No. 1, is amended to read as follows:

" 'Additional Revolving Commitment Maturity Date.' The earlier to occur of September 30, 2006, or ninety (90) days following the closing of NMUI's (as hereinafter defined) placement of $12,000,000 of first mortgage bonds."

        3.    Representations and Warranties.    When the Borrower signs this Amendment, the Borrower represents and warrants to the Bank that: (a) there is no event which is, or with notice or lapse of time or both would be, a default under the Agreement except those events, if any, that have been disclosed in writing to the Bank or waived in writing by the Bank, (b) the representations and warranties in the Agreement are true as of the date of this Amendment as if made on the date of this Amendment, and (c) this Amendment does not conflict with any law, agreement, or obligation by which the Borrower is bound.

        4.    Conditions.    This Amendment will be effective when the Bank receives in form and content acceptable to the Bank, this Amendment, duly executed by Borrower.

        5.    Effect of Amendment.    Except as provided in Amendment No. 1, Amendment No. 2 and this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect.

        6.    Counterparts.    This Amendment may be executed in counterparts, each of which when so executed shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument.

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        This Amendment is executed as of the date stated at the beginning of this Amendment.

BANK OF AMERICA, N.A.		SOUTHWEST WATER COMPANY
By:	/s/  MATTHEW KOENIG	By:	/s/  RICHARD SHIELDS
Name:	MATTHEW KOENIG	Name:	Approved: Richard Shields
Title:	Senior Vice President	Title:	Chief Financial Officer
Address:		Address:
Bank of America Los Angeles Strategies Group Bank of America Plaza 333 S. Hope Street, 13th Floor Los Angeles, California 90071 Attn: Matthew Koenig Title: Senior Vice President Facsimile: (213) 621-3612		One Wilshire Building 624 S. Grand Avenue, Suite 2900 Los Angeles, California 90017 Attention: O'Donnell Iselin, II Treasurer Facsimile: (213) 929-1888

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AMENDMENT NO. 3 TO AMENDED AND RESTATED CREDIT AGREEMENT

EX-10.19B

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Exhibit 10.19B

WAIVER AND FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT

        THIS WAIVER AND FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Waiver and Amendment"), dated as of September 29, 2004, is entered into by and between SOUTHWEST WATER COMPANY, a Delaware corporation (the "Borrower"), and UNION BANK OF CALIFORNIA, N.A., a national banking association (the "Bank"), with reference to the following facts:

RECITALS

        A.    The Borrower and the Bank are parties to the Amended and Restated Credit Agreement, dated as of July 7, 2004 (the "Credit Agreement"), pursuant to which the Bank provided the Borrower with revolving loan, term loan and standby letter of credit facilities having total current commitments of $25,000,000. Such commitments were reduced from $35,000,000 to $25,000,000 with the Borrower's mandatory prepayment of the term loan from the proceeds of an offering of the Borrower's common stock on August 25, 2004.

        B.    The Borrower currently is in default under Section 7.01(c) of the Credit Agreement due to the Borrower's breach of the maximum Permitted Acquisitions covenant set forth in clause (ii) of Section 6.02(g) of the Credit Agreement by paying total cash consideration of greater than $5,000,000 for such Acquisitions in the current fiscal year of the Borrower (such default hereinafter is referred to as the "Existing Event of Default").

        C.    The Borrower has requested that the Bank waive the Existing Event of Default, amend the Credit Agreement to permit certain bond offerings by the Borrowers' Subsidiaries, NMUI and Suburban, and make certain other modifications to the Credit Agreement.

        D.    The Bank is willing to grant such accommodations to the Borrower as set forth below.

        NOW, THEREFORE, the parties hereby agree as follows:

        1.    Defined Terms.    Any and all initially-capitalized terms used in this Waiver and Amendment (including, without limitation, in the recitals hereto) without definition shall have the respective meanings assigned thereto in the Credit Agreement.

        2.    Waiver of Existing Event of Default.    The Bank hereby waives the Existing Event of Default. Such waiver by the Bank shall constitute a one-time waiver of only the Existing Event of Default and shall not constitute a waiver of any breach of clause (ii) of Section 6.02(g) of the Credit Agreement on any other occasion.

        3.    Amendment to Term Loan Repayment Provisions.

        A.    Amendment to Mandatory Repayment Provision.Section 2.03 of the Credit Agreement is hereby amended to read in full as follows:

        "SECTION 2.03    Mandatory Repayment.    The aggregate principal amount of the Revolving Loans outstanding on the Maturity Date, together with accrued and unpaid interest thereon, shall be due and payable in full on the Maturity Date. The entire principal balance of the Term Loan, together with accrued and unpaid interest thereon, shall be due and payable in full upon the funding of the anticipated bond offering by NMUI. If at any time the aggregate outstanding Revolving Loans exceed the Revolving Commitment then in effect, the Borrower shall immediately repay the excess to the Bank without penalty or premium."

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        B.    Deletion of Securities Offerings Provision.Section 6.01(i) of the Credit Agreement is hereby deleted in its entirety.

        4.    Amendment to Permitted Acquisitions Covenant.Clause (ii) of Section 6.02(g) of the Credit Agreement is hereby amended to read in full as follows:

        "(ii)    make Permitted Acquisitions (including the Tecon Acquisition), provided that the aggregate consideration (whether consisting of cash, stock, convertible debentures, the assumption of debt or other consideration) paid or payable by the Borrower and its Subsidiaries in connection with all Permitted Acquisitions consummated in any fiscal year of the Borrower shall not exceed $10,000,000 (excluding the cost of the Tecon Acquisition)."

        5.    Amendment to Liens Covenant; Allowance of Liens to Secure NMUI and Suburban Bonds.Section 6.02(d) of the Credit Agreement is hereby amended and supplemented by: (a) deleting the reference to the word "and" appearing after clause (viii); (b) adding a semicolon followed by the word "and" at the end of clause (ix); and (c) adding a new clause (x) therein as follows:

        "(x)    Liens securing the bonds issued by NMUI and Suburban in accordance with Section 6.02(e)(ix)."

        6.    Amendment to Debt Covenant; Allowance of NMUI and Suburban Bonds.Section 6.02(e) of the Credit Agreement is hereby amended and supplemented by: (a) deleting the reference to "and" appearing at the end of clause (vii); (b) deleting the reference to "(vi)" appearing on the penultimate line thereof and substituting therefor a reference to "(viii)", and (c) adding a new clause (ix) therein as follows:

        "(ix)    secured bonds in an aggregate face amount of not more than $15,000,000 issued by Suburban on or about October 15, 2004 and secured bonds in an aggregate face amount of not more than $12,000,000 issued by NMUI no later than December 31, 2004."

        7.    Temporary Increase in Basket for Unsecured Senior Funded Bank Debt.Section 6.02(e) of the Credit Agreement is hereby amended such that clause (vii) thereof shall read in full as follows:

        "(vii)    unsecured senior funded bank debt of the Borrower and its Subsidiaries (including, without limitation, unsecured senior funded bank debt incurred pursuant to the Loan Documents and the BofA Loan Documents, and excluding the undrawn face amount of the Capistrano Letter of Credit) in an aggregate outstanding principal amount at any time not to exceed (A) $44,000,000 from September 29, 2004 through October 31, 2004 or (B) $40,000,000 on and after November 1, 2004; provided that the only unsecured senior funded debt of the Subsidiaries which may be outstanding shall be (i) unsecured bank indebtedness of NMUI in an aggregate principal amount not to exceed at any one time $4,000,000 and (ii) other unsecured senior funded debt in a principal amount not to exceed $500,000 outstanding at any time in the aggregate for all Subsidiaries, and"

        8.    Conditions Precedent.    The effectiveness of this Waiver and Amendment shall be subject to the prior satisfaction of each of the following conditions:

        (a)    Execution and Delivery of this Waiver and Amendment.    The Bank shall have received this Waiver and Amendment, duly executed by the Borrower;

        (b)    Execution and Delivery of Waiver and Amendment to BofA Loan Documents.    The Bank shall have received a waiver and amendment to the BofA Loan Documents, duly executed by the Borrower and Bank of America and in form and substance reasonably satisfactory to the Bank; and

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        (c)    Execution of Acknowledgement by BofA Regarding Intercreditor Agreement.    Bank of America shall have duly executed the Acknowledgment Regarding Intercreditor Agreement attached to this Waiver and Amendment.

        9.    Governing Law.    The validity of this Waiver and Amendment, its construction, interpretation and enforcement, and the rights of the parties hereunder, shall be governed by, and construed in accordance with, the internal laws (as opposed to the conflicts of law principles) of the State of California.

        10.    Counterparts.    This Waiver and Amendment may be executed in multiple counterparts and by different parties on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute but one and the same instrument.

        11.    Otherwise Not Affected.    In the event of any conflict or inconsistency between the Credit Agreement and the provisions of this Waiver and Amendment, the provisions of this Waiver and Amendment shall govern. Except to the extent set forth herein, the Credit Agreement shall remain unaltered and in full force and effect.

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        IN WITNESS WHEREOF, the parties hereto have executed this Waiver and Amendment by their respective duly authorized officers as of the date first above written.

The Borrower:
SOUTHWEST WATER COMPANY, a Delaware corporation
By	/s/  RICHARD SHIELDS Richard Shields Chief Financial Officer
The Bank:
UNION BANK OF CALIFORNIA, N.A., a national banking association
By	/s/  GREGORY DUBNANSKY Gregory Dubnansky Vice President

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ACKNOWLEDGMENT REGARDING INTERCREDITOR AND PLEDGE AGREEMENTS

        The undersigned, in its capacity as a party to each of (i) the Intercreditor Agreement, dated as of July 14, 2004, by and among the undersigned, Union Bank of California, N.A. and Union Bank of California, N.A. as Collateral Agent (the "Intercreditor Agreement"), and (ii) the Pledge and Collateral Agency Agreement, dated as of July 14, 2004, by and among Southwest Water Company, the undersigned, Union Bank of California, N.A. and Union Bank of California, N.A., as Collateral Agent (the "Pledge Agreement"), hereby acknowledges and consents to the waivers and modifications to the Credit Agreement contained in the attached Waiver and Amendment and agrees that both the Intercreditor Agreement and the Pledge Agreement shall remain in full force and effect notwithstanding the Waiver and Amendment.

BANK OF AMERICA, N.A.
By:	/s/  ANNA C. RUIZ Anna C. Ruiz Vice President

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WAIVER AND FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT

EX-10.19C

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Exhibit 10.19C

WAIVER AND SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT

        THIS WAIVER AND SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Waiver and Amendment"), dated as of November 8, 2004, is entered into by and between SOUTHWEST WATER COMPANY, a Delaware corporation (the "Borrower"), and UNION BANK OF CALIFORNIA, N.A., a national banking association (the "Bank"), with reference to the following facts:

RECITALS

        A.    The Borrower and the Bank are parties to the Amended and Restated Credit Agreement, dated as of July 7, 2004, as amended by the Waiver and First Amendment to Amended and Restated Credit Agreement, dated as of September 29, 2004 (collectively, the "Credit Agreement"), pursuant to which the Bank provided the Borrower with revolving loan, term loan, and standby letter of credit facilities.

        B.    The Borrower currently is in default under Section 7.01(c) of the Credit Agreement due to the Borrower's breach of the maximum Debt covenant set forth in clauses (ii) and (iv) of Section 6.02(e) of the Credit Agreement as a result of: (a) the aggregate outstanding principal balance of secured indebtedness of Tecon exceeding $14,674,649.36 following the closing of the Tecon Acquisition and consisting of secured term loans and not bond indebtedness, as provided in the Credit Agreement; (b) the Borrower's assumption or incurrence of $800,000 of Debt in connection with a Permitted Acquisition completed in the fiscal quarter of the Borrower ended September 30, 2004; and (c) the Borrower's reclassification of $170,000 of economic development bond obligations as Debt (such defaults hereinafter are referred to collectively as the "Existing Events of Default").

        C.    The Borrower has requested that the Bank waive the Existing Events of Default and make certain modifications to the Credit Agreement to facilitate the Borrower's future compliance with the Credit Agreement.

        D.    The Bank is willing to grant such accommodations to the Borrower as set forth below.

        NOW, THEREFORE, the parties hereby agree as follows:

        1.    Defined Terms.    Any and all initially-capitalized terms used in this Waiver and Amendment (including, without limitation, in the recitals hereto) without definition shall have the respective meanings assigned thereto in the Credit Agreement.

        2.    Waiver of Existing Events of Default.    The Bank hereby waives the Existing Events of Default. Such waiver by the Bank shall constitute a one-time waiver of only the Existing Events of Default and shall not constitute a waiver of any breach of clause (ii) or (iv) of Section 6.02(e) of the Credit Agreement on any other occasion.

        3.    Amendments to Debt Negative Covenant.

        A.    Amendment to Tecon Secured Bond Indebtedness Covenant.Section 6.02(e) of the Credit Agreement is hereby amended by deleting the word "bond" and the reference to "$14,674,649.36" set forth in clause (ii) thereof and by substituting therefor a reference to "$15,750,000".

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        B.    Addition of Basket for Acquisition—Related Debt.Section 6.02(e) of the Credit Agreement is hereby further amended and supplemented by adding the following at the end of clause (vii) and before the proviso which follows clause (vii):

        ", and (viii) indebtedness assumed or incurred in connection with any acquisition either: (a) detailed on Schedule 6.02(e) or (b) arising from a Permitted Acquisition, the sum of which shall not exceed a principal amount of $7,000,000 in the aggregate outstanding at any time for the Borrower and its Subsidiaries"

        4.    Amendments to Schedules.Schedules 5.01(f), 5.01(i), 6.02(d) and 6.02(e) to the Credit Agreement are hereby amended to read in full as set forth on Schedules 5.01(f), 5.01(i), 6.02(d) and 6.02(e), respectively, to this Waiver and Amendment.

        5.    Conditions Precedent.    The effectiveness of this Waiver and Amendment shall be subject to the prior satisfaction of each of the following conditions:

        (a)    Execution and Delivery of this Waiver and Amendment.    The Bank shall have received this Waiver and Amendment, duly executed by the Borrower; and

        (b)    Execution and Delivery of Waiver and Amendment to BofA Loan Documents.    The Bank shall have received a waiver and amendment to the BofA Loan Documents, duly executed by the Borrower and Bank of America and in form and substance reasonably satisfactory to the Bank.

        6.    Governing Law.    The validity of this Waiver and Amendment, its construction, interpretation and enforcement, and the rights of the parties hereunder, shall be governed by, and construed in accordance with, the internal laws (as opposed to the conflicts of law principles) of the State of California.

        7.    Counterparts.    This Waiver and Amendment may be executed in multiple counterparts and by different parties on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute but one and the same instrument.

        8.    Otherwise Not Affected.    In the event of any conflict or inconsistency between the Credit Agreement and the provisions of this Waiver and Amendment, the provisions of this Waiver and Amendment shall govern. Except to the extent set forth herein, the Credit Agreement shall remain unaltered and in full force and effect.

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        IN WITNESS WHEREOF, the parties hereto have executed this Waiver and Amendment by their respective duly authorized officers as of the date first above written.

The Borrower:
SOUTHWEST WATER COMPANY, a Delaware corporation
By	/s/  RICHARD SHIELDS Richard Shields Chief Financial Officer
The Bank:
UNION BANK OF CALIFORNIA, N.A., a national banking association
By	/s/  GREGORY DUBNANSKY Gregory Dubnansky Vice President

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SCHEDULE 5.01(f)—LITIGATION

None other than as reported on Form 10-Q of Borrower for the quarter ended June 30, 2004, and Form 10-K of Borrower for the year ended December 31, 2003.

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SCHEDULE 5.01(i)—ENVIRONMENTAL MATTERS

See Form 10-Q of Borrower for the quarter ended June 30, 2004, and Form 10-K of Borrower for the year ended December 31, 2003.

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SCHEDULE 6.02(d)—LIENS

None except as disclosed in the consolidated financial statements of Borrower for the quarter ended June 30, 2004, and Form 10-K of Borrower for the year ended December 31, 2003.

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SCHEDULE 6.02(e)—OTHER SECURED DEBT

None other than as reported on Form 10-Q of Borrower for the quarter ended June 30, 2004.

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WAIVER AND SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT

EX-10.19D

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Exhibit 10.19D

THIRD AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT

        THIS THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment"), dated as of December 15, 2004, is entered into by and between SOUTHWEST WATER COMPANY, a Delaware corporation (the "Borrower"), and UNION BANK OF CALIFORNIA, N.A., a national banking association (the "Bank"), with reference to the following facts:

RECITALS

        A.    The Borrower and the Bank are parties to the Amended and Restated Credit Agreement, dated as of July 7, 2004, as amended by that certain Waiver and First Amendment to Amended and Restated Credit Agreement, dated as of September 29, 2004, and that certain Waiver and Second Amendment to Amended and Restated Credit Agreement, dated as of November 8, 2004 (collectively, the "Credit Agreement"), pursuant to which the Bank provides the Borrower with revolving loan, term loan and standby letter of credit facilities.

        B.    The Borrower and the Bank wish to amend the Credit Agreement to revise the deadline for the repayment of the principal balance of the Term Loan in the event of a bond offering by NMUI.

        NOW, THEREFORE, the parties hereby agree as follows:

        1.    Defined Terms.    Any and all initially-capitalized terms used in this Amendment (including, without limitation, in the recitals hereto) without definition shall have the respective meanings assigned thereto in the Credit Agreement.

        2.    Amendment to Term Loan Repayment Provision.    Section 2.03 of the Credit Agreement is hereby amended so that the second sentence thereof shall read in full as follows:

        "The entire principal balance of the Term Loan, together with all accrued and unpaid interest thereon, shall be due and payable in full no later than 90 days after the completion and funding of the anticipated bond offering by NMUI."

        3.    Amendment to Debt Covenant.    Section 6.02(e) of the Credit Agreement is hereby amended to read in full as follows:

        "(e)    Debt.    Create, incur, assume or permit to exist, or permit any Subsidiary to create, incur, assume or permit to exist, any indebtedness or liabilities resulting from borrowings, loans or advances, whether matured or unmatured, liquidated or unliquidated, joint or several, secured or unsecured, except for (i) Debt incurred pursuant to the Convertible Debentures in a principal amount not to exceed $18,000,000 outstanding at any time, (ii) following the closing of the Tecon Acquisition, the secured indebtedness of Tecon which as of the closing of the Tecon Acquisition shall be in an aggregate outstanding principal balance not exceeding $15,750,000 and which when repaid may not be reborrowed, (iii) secured indebtedness for purchase money financing of equipment which is permitted under Section 6.02(d)(iv) in a principal amount not to exceed an aggregate of $2,000,000 outstanding at any time, (iv) other secured Debt identified on Schedule 6.02(e) not to exceed the applicable amount indicated on such schedule, (v) the Term Loan, (vi) the Additional Revolving Loan (as defined in the BofA Loan Documents), (vii) unsecured senior funded bank debt in a principal amount not to exceed $40,000,000 outstanding at any time in the aggregate for the Borrower and its Subsidiaries (including, without limitation, unsecured senior funded bank debt incurred pursuant to the Loan Documents and the BofA Loan Documents, and excluding the undrawn face amount of the Capistrano Letter of

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Credit); provided that the only unsecured senior funded debt of the Subsidiaries which may be outstanding shall be (i) unsecured bank indebtedness of NMUI in an aggregate principal amount not to exceed $4,000,000 at any one time and (ii) other unsecured senior funded debt in a principal amount not to exceed $500,000 outstanding at any time in the aggregate for all Subsidiaries, (viii) indebtedness assumed or incurred in connection with any acquisition either: (a) detailed on Schedule 6.02(e); or (b) arising from a Permitted Acquisition, the sum of which shall not exceed a principal amount of $7,000,000 in the aggregate outstanding at any time for the Borrower and its Subsidiaries, (ix) intercompany Debt between the Borrower and its majority-owned Subsidiaries, and (x) secured bonds in an aggregate face amount of not more than $15,000,000 issued by Suburban on or about October 11, 2004 and secured bonds in an aggregate face amount of not more than $12,000,000 issued by NMUI after the date of this Amendment."

        4.    Conditions Precedent.    The effectiveness of this Amendment shall be subject to the prior satisfaction of each of the following conditions:

        (a)    Execution and Delivery of this Amendment.    The Bank shall have received this Amendment, duly executed by the Borrower; and

        (b)    Execution of Acknowledgement by BofA Regarding Intercreditor Agreement.    Bank of America shall have duly executed the Acknowledgment Regarding Intercreditor Agreement attached to this Amendment.

        5.    Governing Law.    The validity of this Amendment, its construction, interpretation and enforcement, and the rights of the parties hereunder, shall be governed by, and construed in accordance with, the internal laws (as opposed to the conflicts of law principles) of the State of California.

        6.    Counterparts.    This Amendment may be executed in multiple counterparts and by different parties on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute but one and the same instrument.

        7.    Otherwise Not Affected.    In the event of any conflict or inconsistency between the Credit Agreement and the provisions of this Amendment, the provisions of this Amendment shall govern. Except to the extent set forth herein, the Credit Agreement shall remain unaltered and in full force and effect.

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        8.     IN WITNESS WHEREOF, the parties hereto have executed this Amendment by their respective duly authorized officers as of the date first above written.

The Borrower:
SOUTHWEST WATER COMPANY, a Delaware corporation
By	/s/  RICHARD SHIELDS Richard Shields Chief Financial Officer
The Bank:
UNION BANK OF CALIFORNIA, N.A., a national banking association
By	/s/  GREGORY DUBNANSKY Gregory Dubnansky Vice President

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ACKNOWLEDGMENT REGARDING INTERCREDITOR AND PLEDGE AGREEMENTS

        The undersigned, in its capacity as a party to each of (i) the Intercreditor Agreement, dated as of July 14, 2004, by and among the undersigned, Union Bank of California, N.A. and Union Bank of California, N.A., as Collateral Agent (the "Intercreditor Agreement"), and (ii) the Pledge and Collateral Agency Agreement, dated as of July 14, 2004, by and among Southwest Water Company, the undersigned, Union Bank of California, N.A. and Union Bank of California, N.A., as Collateral Agent (the "Pledge Agreement"), hereby acknowledges and consents to the modifications to the Credit Agreement contained in the attached Amendment and agrees that both the Intercreditor Agreement and the Pledge Agreement shall remain in full force and effect notwithstanding the Amendment.

BANK OF AMERICA, N.A.
By:	/s/  MATTHEW KOENIG
Name:		MATTHEW KOENIG
Title:		Senior Vice President

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THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT

EX-21.1

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EXHIBIT 21.1

SOUTHWEST WATER COMPANY
SUBSIDIARIES OF THE REGISTRANT
As of March 24, 2005

Name of Subsidiary	Tax payer EIN	Jurisdiction of Incorporation	Parent
Suburban Water Systems	95-1371870	California	Southwest Water Company
Water Suppliers Mobile Communication Service	95-2394217	California	Suburban Water Systems
ECO Capistrano Valley, Inc.	03-0509537	California	ECO Resources, Inc.
Inland Pacific Development Company, LLC(1)	33-0885458	California	Southwest Water Company
Master Tek International, Inc.	84-1022702	Colorado	Southwest Water Company
Novus Utilities, Inc.	20-2456847	Delaware	ECO Resources, Inc.
Southwest Water Government Services Company	20-0285028	Delaware	Southwest Water Company
Southwest Resource Management	95-4169558	Delaware	Southwest Water Company
SOCI, Inc.(1)	95-4107357	Delaware	Southwest Water Company
SW Operating Services Co.(1)	95-4107349	Delaware	Southwest Water Company
Operations Technologies, Inc.	58-2206883	Georgia	Southwest Water Company
Tenkiller Utility Company	75-26038253	Oklahoma	Southwest Water Company
New Mexico Utilities	85-0205040	New Mexico	Southwest Water Company
CDC Maintenance, Inc.	35-2162891	Texas	Southwest Water Company
ECO Resources, Inc.	74-1800544	Texas	Southwest Water Company
Southwest Environmental Laboratories, Inc.	76-0155825	Texas	ECO Resources, Inc.
Wastewater Rehabilitation, Inc.	74-2894610	Texas	Southwest Water Company
SW Utility Company	76-0332193	Texas	Southwest Water Company
Southwest Water Services Group Houston, Inc.	20-2043415	Texas	Southwest Water Company
Windermere Utility Company	74-2371831	Texas	Southwest Water Company
Hornsby Bend Utility Company	74-2385749	Texas	Southwest Water Company
Monarch Utilities, Inc.	75-2597931	Texas	Southwest Water Company
Aqua Services LP	76-0550054	Texas	Southwest Water Company
Lab—tech Corporation	76-0241521	Texas	Southwest Water Company
METRO-H2O Utilities, Inc.	91-2118765	Texas	Southwest Water Company

        All above listed subsidiaries have been included in the Registrant's consolidated financial statements.

(1)

Inactive

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SOUTHWEST WATER COMPANY SUBSIDIARIES OF THE REGISTRANT As of March 24, 2005

EX-23.1

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Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Southwest Water Company:

We consent to the incorporation by reference in the registration statements (Nos. 333-77881, 333-35252, 333-63196, 333-69662, 333-70194, 333-106506, 333-111586 and 333-121426) on Form S-3 and the registration statements (Nos. 333-18513, 333-38935, 333-109444 and 333-117713) on Form S-8 of Southwest Water Company of our reports dated March 25, 2005, with respect to the consolidated balance sheets of Southwest Water Company and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2004, and all related financial statement schedules, and management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2004, which reports appear in the December 31, 2004, annual report on Form 10-K of Southwest Water Company.

Our report dated March 25, 2005, on management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting as of December 31, 2004, expresses our opinion that Southwest Water Company did not maintain effective internal control over financial reporting as of December 31, 2004, because of the effect of a material weakness on the achievement of the objectives of the control criteria and contains an explanatory paragraph, which states the Company did not adequately review the accounting for certain non-routine transactions. Our report also contains an explanatory paragraph that states Monarch Utilities, Inc. was excluded from management's assessment of internal control over financial reporting as of December 31, 2004.

/s/ KPMG LLP

Los Angeles, California
March 29, 2005

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Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EX-31.1

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EXHIBIT 31.1

Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Anton C. Garnier, Chief Executive Officer, certify that:

1.

I have reviewed this annual report on Form 10-K of Southwest Water Company;

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: March 31, 2005
	/s/  ANTON C. GARNIER Anton C. Garnier Chief Executive Officer

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EXHIBIT 31.1

EX-31.2

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EXHIBIT 31.2

Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Richard J. Shields, certify that:

1.

I have reviewed this annual report on Form 10-K of Southwest Water Company;

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: March 31, 2005
	/s/  RICHARD J. SHIELDS Richard J. Shields Chief Financial Officer

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EXHIBIT 31.2

EX-32.1

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Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        In connection with the annual report of Southwest Water Company (the "Company") on Form 10-K for the period ended December 31, 2004 (the "Report"), I, Anton C. Garnier, Chief Executive Officer of the Company and I, Richard J. Shields, Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

to my knowledge, the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  ANTON C. GARNIER Anton C. Garnier
Chief Executive Officer
March 31, 2005

/s/  RICHARD J. SHIELDS Richard J. Shields
Chief Financial Officer
March 31, 2005

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Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002