<PAGE>

                                                                   Exhibit 10(b)

                                   EMPLOYMENT AGREEMENT
                                   --------------------


          AGREEMENT effective as of January 1, 1999 (the "Commencement Date") by
and between United Water Resources Inc., a New Jersey corporation, and its
subsidiaries (collectively, the "Company"), and Frank J. DeMicco (the
"Executive") (this "Agreement").

          The Company desires to employ the Executive and the Executive is
willing to be employed by the Company, on the terms and conditions hereinafter
provided.

          In order to effect the foregoing, the parties hereto wish to enter
into an employment agreement on the terms and conditions set forth below.
Accordingly, in consideration of the premises and the respective covenants and
agreements of the parties herein contained, and intending to be legally bound
hereby, the parties hereto agree as follows:

          1.  Employment.  The Company hereby agrees to employ the Executive,
              ----------
and the Executive hereby agrees to be employed by the Company, on the terms and
conditions set forth herein.

          2.  Term. The Executive's employment under this Agreement shall
              ----
commence on the Commencement Date and shall end at the close of business on
December 31, 2000; provided, however, that the term of this Agreement (the
                   --------  -------
"Term") shall thereafter be automatically extended for each succeeding 1-year
period unless either party hereto provides the other party with a written notice
at least 60 days prior to the end of the then current Term, advising that the
party providing the notice shall not agree to so extend the Term; and provided,
                                                                      --------
further, that should a Change of Control occur during the Term, the Term shall
-------
be extended to the date which is the end of the 24-month period immediately
following the consummation of the transaction which constitutes the Change of
Control .  Notwithstanding the preceding, the Term shall not extend beyond the
date on which the Executive attains age 65 without the prior written consent of
the Company; provided, however, that the end of  the Term solely on account of
             --------  -------
the Executive attaining age 65 shall not entitle the Executive to any benefits
under Section 7.

          3.  Title, Duties and Authority.  The Executive shall serve as
              ---------------------------
President of United Water Resources New Jersey Inc. and shall have such
responsibilities and duties (consistent with the Executive's position as
President) as may from time to time be assigned to the Executive by the Board of
Directors of United Water Resources Inc. (the "Board"), and shall have all of
the powers and duties usually incident to the office of President.  The
Executive shall devote substantially all of his working time and efforts to the
business and affairs of the Company, except for vacations, illness or
incapacity.
<PAGE>

      4.  Compensation and Benefits.
          -------------------------

          (a) Base Salary.  During the Term, the Company shall pay the Executive
              -----------
a base salary ("Base Salary"), payable in equal installments in accordance with
the Company's normal practice for paying base salaries to its executive
employees.  The Base Salary shall initially be payable at the rate of $215,000
per annum, and shall be subject to annual review by the Board for discretionary
annual increases.

          (b) MIP.  The Executive shall participate in the United Water
              ---
Resources Inc. Management Incentive Plan (the "MIP") or any successor plan
established by the Company.

          (c) Employee Benefits.  The Executive shall be entitled to participate
              -----------------
in all of the Company's employee benefit plans made available by the Company (or
any affiliate thereof) to its executives during the Term as may be in effect
from time to time.  In addition, during the Term, the Executive shall accrue
benefits under the United Water Resources Inc. Supplemental Retirement Plan for
Key Executives (the "SERP").

          (d) Expenses.  During the Term, the Executive shall be entitled to
              --------
receive prompt reimbursement upon submission of expense claims to the Company
for all reasonable and customary expenses incurred by the Executive in
performing services hereunder, provided that such expenses are incurred and
accounted for in accordance with the policies and procedures established by the
Company for its executive employees.

          (e) Vacations.  The Executive shall be entitled to paid vacation, paid
              ---------
holidays, sick days and personal days pursuant to the Company's regular policies
applicable to its executive employees.

          (f) Taxes.  The Company may withhold from any amounts payable under
              -----
this Agreement such federal, state, local and/or other taxes as shall be
required to be withheld pursuant to any applicable law or regulation.

      5.  Termination.  The Executive's employment hereunder may be
          -----------
terminated under the following circumstances:

          (a) Death. The Executive's employment hereunder shall terminate upon
              -----
the Executive's death.

          (b) Disability. If, as a result of the Executive's incapacity due to
              ----------
physical or mental illness, the Executive shall become entitled to the receipt
of benefits under the Company's long-term disability plan, and within 30 days
after a written Notice of Termination (as defined in Section 6(a)) is given to
the Executive by the Company, the Executive shall not have returned to the
performance
<PAGE>

of his duties hereunder on a full-time basis, the Company may terminate the
Executive's employment hereunder for "Disability."

          (c) Cause. The Company may terminate the Executive's employment
              -----
hereunder for Cause. For purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon the occurrence of
any of the following which is materially injurious to the business or reputation
of the Company or any of its affiliates:

          (i) the failure by the Executive to substantially perform the
Executive's duties hereunder (other than any such failure resulting from the
Executive's incapacity due to physical or mental illness);

          (ii) the willful violation by the Executive of any of the Executive's
material obligations hereunder;

          (iii) the willful engaging by the Executive in misconduct; or

          (iv) the Executive's conviction of a felony.

          Notwithstanding the foregoing, the Executive shall not be terminated
for Cause without:

          (A) at least 15 days' advance notice to the Executive setting forth
the reasons for the Company's intention to terminate the Executive's employment
hereunder for Cause;

          (B) the failure of the Executive to cure the nonperformance, violation
or misconduct described in the notice referred to in clause (A) of this
paragraph, if cure thereof is possible, to the reasonable satisfaction of the
Board, within 15 days of such notice; and

          (C) delivery to the Executive of a Notice of Termination (as defined
in Section 6(a)) from the Company notifying him that in the good faith opinion
of a majority of the Board, the Company is entitled to terminate the Executive
for Cause as set forth above, and specifying the particulars thereof in detail.

          (d) Good Reason.  The Executive may terminate his employment hereunder
              -----------
for "Good Reason" by providing a Notice of Termination to the Company within 30
days after the occurrence, without the Executive's consent, of one of the
following events that has not been cured within 15 days after written notice
thereof has been given to the Company by the Executive:
<PAGE>

               (i) a reduction of the Executive's Base Salary;

               (ii) a material and adverse change in the Executive's title,
     status, authority, duties or function (in each case, other than as may be
     contemplated by this Agreement);

               (iii) any failure to pay the Executive's Base Salary or MIP
     payment(s) when due;

               (iv) a change of the Executive's place of employment by the
     Company to a location which is greater than 50 miles from the location of
     the Executive's place of employment by the Company as of the Commencement
     Date; or

               (v) the willful violation by the Company of any of the Company's
     material obligations hereunder.

               (e) Without Cause.  The Company may terminate the Executive's
                   -------------
     employment hereunder without Cause by providing the Executive with a Notice
     of Termination.

               (f) Without Good Reason.  The Executive may terminate the
                   -------------------
     Executive's employment hereunder without Good Reason by providing the
     Company with a Notice of Termination.

           6.  Termination Procedure.
               ---------------------

               (a) Notice of Termination. Any termination of the Executive's
                   ---------------------
employment by the Company or by the Executive (other than a termination on
account of the Executive's death pursuant to Section 5(a)) shall be communicated
by a written Notice of Termination to the other party hereto in accordance with
Section 11. For purposes of this Agreement, a "Notice of Termination" shall mean
a notice which shall indicate the specific termination provision in this
Agreement relied upon and the Date of Termination, and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment hereunder pursuant to the provision so
indicated.

               (b) Date of Termination. "Date of Termination" shall mean:
                   -------------------

               (i) if the Executive's employment is terminated on account of the
     Executive's death pursuant to Section 5(a), the date of the Executive's
     death;

               (ii) if the Executive's employment is terminated on account of
     the Executive's Disability pursuant to Section 5(b), 30 days after a Notice
     of Termination has been provided pursuant thereto (provided that the
     Executive shall not have returned to
<PAGE>

the performance of the Executive's duties on a full-time basis during such
thirty 30-day period);

               (iii) if the Executive's employment is terminated for Cause
pursuant to Section 5(c), the date specified in the Notice of Termination
provided pursuant thereto; and

               (iv) if the Executive's employment is terminated for any other
reason, the date on which a Notice of Termination is provided or any later date
(within 30 days) set forth in such Notice of Termination.

           7.  Compensation Upon Termination.
               -----------------------------

               (a) Death. If the Executive's employment with the Company is
                   -----
terminated on account of the Executive's death pursuant to Section 5(a), the
Company shall as soon as practicable pay to the Executive's estate or as may be
directed by the legal representatives of the Executive's estate any Base Salary
accrued and due to the Executive under Section 4(a) through the Executive's Date
of Termination and such prorated MIP payment, the amount, if any, of which shall
be determined in the sole discretion of the Compensation Committee of the Board
(the "Compensation Committee"). The Company shall provide the Executive through
the Date of Termination with continued participation in the employee benefit
plans provided to the Executive pursuant to Section 4(c) as of the Executive's
Date of Termination. Other than the foregoing, the Company shall have no further
obligations to the Executive hereunder.

               (b) Disability. If the Executive's employment with the Company is
                   ----------
terminated on account of the Executive's Disability pursuant to Section 5(b),
the Company shall as soon as practicable pay the Executive any Base Salary
accrued and due to the Executive under Section 4(a) through the Executive's Date
of Termination and such prorated MIP payment, the amount, if any, of which shall
be determined in the sole discretion of the Compensation Committee. The Company
shall provide the Executive through the Executive's Date of Termination with
continued participation in the employee benefit plans provided to the Executive
pursuant to Section 4(c) as of the Executive's Date of Termination. Other than
the foregoing, the Company shall have no further obligations to the Executive
hereunder.

               (c) By the Company for Cause or By the Executive Without Good
                   ---------------------------------------------------------
Reason. If the Executive's employment with the Company is terminated by the
------
Company for Cause pursuant to Section 5(c) or by the Executive without Good
Reason pursuant to Section 5(f), the Company shall as soon as practicable pay
the Executive any Base Salary accrued and due to the Executive under Section
4(a) through the Executive's Date of Termination and the Executive shall forfeit
his entire then unpaid MIP payment(s), if any. The Company shall provide the
Executive through his Date of Termination with continued participation in the
<PAGE>

employee benefit plans provided to the Executive pursuant to Section 4(c) as of
his Date of Termination. Other than the foregoing, the Company shall have no
further obligations to the Executive hereunder.

               (d) Termination By the Company Without Cause or By the Executive
                   ------------------------------------------------------------
for Good Reason or During the Thirteenth Month Following a Change of Control. If
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the Executive's employment with the Company is terminated by the Company (other
than for Disability or Cause), or by the Executive (1) for Good Reason pursuant
to Section 5(d), or (2) with or without Good Reason (other than to avoid his
termination by the Company for Cause) during the thirteenth calendar month
beginning after the consummation of any transaction which constitutes a Change
of Control, as defined below, then the Company shall:

               (i) within 30 days of the Executive's Date of Termination, pay
     the Executive any Base Salary accrued and due to the Executive under
     Section 4(a) through his Date of Termination and any unpaid MIP payment(s)
     for any previously completed calendar year(s);

               (ii) (A) if the Executive's Date of Termination occurs within the
     period beginning on the date of a Change of Control, as defined below, and
     ending 24 months following the Change of Control, as defined below (or, if
     the Change of Control, as defined below, is in connection with shareholder
     approval pursuant to paragraph (iii) of the definition of Change of
     Control, ending  24 months following the consummation of the transaction
     which was the subject of shareholder approval), within 30 days of the
     Executive's Date of Termination, pay the Executive an amount equal to 300%
     of his Base Salary in effect as of his Date of Termination, or (B) if the
     Executive's Date of Termination does not occur within the period beginning
     on the date of a Change of Control, as defined below, and ending 24 months
     following the Change of Control, as defined below (or, if the Change of
     Control, as defined below, is in connection with shareholder approval
     pursuant to paragraph (iii) of the definition of Change of Control, ending
     24 months following the consummation of the transaction which was the
     subject of shareholder approval),   continue to pay the Executive his Base
     Salary in effect as of his Date of Termination for the 24-month period
     immediately following his Date of Termination (or until such earlier time
     that the Executive violates the provisions of Section 8) at the times such
     payments would otherwise have been made under Section 4(a);

               (iii) (A) if the Executive's Date of Termination occurs within
     the period beginning on the date of a Change of Control, as defined below,
     and ending 24 months following the Change of Control, as defined below (or,
     if the Change of Control, as defined below, is in connection with
     shareholder approval pursuant to paragraph (iii) of the definition of
     Change of Control, ending
<PAGE>

     24 months following the consummation of the transaction which was the
     subject of shareholder approval), within 30 days of the Executive's Date of
     Termination, pay the Executive an amount equal to 300% of the greater of
     (I) his then current "Cash Target Amount" under the MIP, or (II) his most
     recently paid or declared cash award under the MIP, or (B) if the
     Executive's Date of Termination does not occur within the period beginning
     on the date of a Change of Control, as defined below, and ending 24 months
     following the Change of Control, as defined below (or, if the Change of
     Control, as defined below, is in connection with shareholder approval
     pursuant to paragraph (iii) of the definition of Change of Control, ending
     24 months following the consummation of the transaction which was the
     subject of shareholder approval), pay the Executive an annual MIP payment
     for each of the 2 MIP years immediately following his Date of Termination
     (or until such earlier time that the Executive violates the provisions of
     Section 8), each such payment in an amount equal to his "Cash Target
     Amount" under the MIP (as of his Date of Termination), and to be made at
     the times such payments would otherwise have been made under the MIP;

               (iv) provide the Executive for the 24-month period immediately
     following his Date of Termination (or until such earlier time that the
     Executive violates the provisions of Section 8), with continued
     participation (or equivalent benefits if such participation is not legally
     permissible (cash payments in the case of tax-qualified retirement plan
     benefits)) in the employee benefit plans provided to the Executive pursuant
     to Section 4(c) as of his Date of Termination; and

               (v) solely if the Executive's Date of Termination occurs within
     the period beginning on the date of a Change of Control, as defined below,
     and ending 24 months following the Change of Control, as defined below (or,
     if the Change of Control, as defined below, is in connection with
     shareholder approval pursuant to paragraph (iii) of the definition of
     Change of Control, ending 24 months following the consummation of the
     transaction which was the subject of shareholder approval), (A) his SERP
     benefit shall become fully vested and nonforfeitable, (B) if he had not
     attained age 55 as of his Date of Termination, he shall be deemed to have
     attained age 55 for purposes of the early retirement provisions of the
     SERP, (C) if he had not accumulated 10 years of service under the SERP as
     of his Date of Termination, he shall be deemed to have 10 years of service
     for SERP benefit accrual purposes and (D) within 30 days of his Date of
     Termination, the Company shall pay the Executive an amount equal to the
     present value of his accrued SERP benefit (utilizing a discount rate for
     calculating such present value equal to the "discount rate," as defined in
     Statement of Financial Accounting Standards No. 87 published by the
     Financial Accounting Standards Board, utilized for purposes of the most
     recent audit disclosure
<PAGE>

     relating to the Company's tax-qualified defined benefit pension plan
     preceding the Change of Control by the "enrolled actuary" (as defined in
     Section 7701(a)(35) of the Internal Revenue Code of 1986, as amended (the
     "Code")), who signed the Schedule B to the most recent Internal Revenue
     Service Form 5500 relating to the Company's tax- qualified defined benefit
     pension plan, filed prior to the Change of Control).

Other than the foregoing, the Company shall have no further obligations to the
Executive hereunder.

          For purposes of this Agreement, a "Change of Control" of the Company
shall mean the first to occur of any of the following events:

               (i) any "Person" (as defined in Section 3(a)(9) of the Securities
     Exchange Act of 1934, as amended (the "Exchange Act"), and as such term is
     modified in Sections 13(d) and 14(d) of the Exchange Act), excluding (A)
     the Company or any of its subsidiaries, (B) a trustee or any fiduciary
     holding securities under an employee benefit plan of the Company or any of
     its subsidiaries, or an underwriter temporarily holding securities pursuant
     to an offering of such securities, in each case with respect to the
     securities so held, or (C) a corporation or other entity owned, directly or
     indirectly, by holders of voting securities of the Company in substantially
     the same proportions as their ownership of the Company, is or becomes the
     "Beneficial Owner" (as defined in Rule 13d-3 under the Exchange Act),
     directly or indirectly, of securities of the Company (not including in the
     securities beneficially owned by such Person any securities acquired
     directly from the Company or its subsidiaries or other affiliates
     controlled by the Company or any such subsidiary) representing 20% or more
     of the combined ordinary (in the absence of contingencies) voting power of
     the Company's then outstanding securities; provided, however, that if such
                                                --------  -------
     "Person" shall be Suez Lyonnaise des Eaux or an affiliate thereof, solely
     for purposes thereof the above reference to "20%" shall instead be deemed
     to refer to the sum of the amount of the "Maximum Stockholder Investment
     Percentage" (as defined in Section 1.1 of the Governance Agreement between
     United Water Resources Inc. and Lyonnaise American Holding, Inc., dated as
     of April 22, 1994) plus two percentage points; or

               (ii) during any period of not more than two consecutive calendar
     years (commencing January 1, 1999), individuals who at the beginning of
     such period constitute the Board, together with any new director (other
     than a director designated by a person who has entered into an agreement
     with the Company to effect a transaction triggering the operation of clause
     (i) or (iii) of this paragraph) whose election by the Board or nomination
     for election by the Company's shareholders was approved by a vote of at
     least two-thirds of the directors then still in office who
<PAGE>

     either were directors at the beginning of the period or whose election or
     nomination for election was previously so approved, cease for any reason to
     constitute a majority thereof; or

               (iii) the shareholders of the Company approve a merger or
     consolidation of the Company with any other entity, or a plan of
     liquidation of the Company or an agreement for the sale or disposition by
     the Company of its assets as an entirety or substantially as an entirety,
     other than (A) a transaction which would result in the voting securities of
     the Company outstanding immediately prior thereto continuing to represent
     (either by remaining outstanding, by being converted into voting securities
     of the surviving entity, or otherwise), in combination with the ownership
     by any trustee or other fiduciary of securities under an employee benefit
     plan of the Company, at least 80% of the combined voting power of the
     voting securities of the Company or such surviving entity outstanding
     immediately after such transaction, or (B) a transaction effected to
     implement a recapitalization of the Company (or similar transaction) in
     which no person acquires more than 20% of the combined voting power of the
     Company's then outstanding securities (or if such person so acquiring more
     than 20% of such combined voting power is Suez Lyonnaise des Eaux or an
     affiliate thereof, solely for the purposes thereof the above reference to
     "20%" shall instead be deemed to refer to the sum of the Maximum
     Stockholder Investment Percentage plus two percentage points).

           8.  Restrictions.
               ------------

               (a) Reasonable Covenants. It is expressly understood by and
                   --------------------
between the Company and the Executive that the covenants contained in this
Section 8 are an essential element of this Agreement and that but for the
agreement by the Executive to comply with these covenants and thereby not to
diminish the value of the organization and goodwill of the Company or any
affiliate of the Company, if any, including without limitation relations with
their employees, suppliers, customers and accounts, the Company would not enter
into this Agreement. The Executive has independently consulted with his legal
counsel and after such consultation agrees that such covenants are reasonable
and proper.

               (b) Noncompetition; No Diversion of Customers; Etc. During the
                   ----------------------------------------------
Term and for 24 months after the Executive's Date of Termination, the Executive
shall not:

               (i) engage directly, alone or in association with or as a
     shareholder, principal, agent, partner, officer, director, employee or
     consultant of any other organization or entity, in competition with the
     businesses of the Company and/or any of its affiliates as of the
     Executive's Date of Termination;
<PAGE>

               (ii) divert to any competitor of the Company or any of its
     affiliates, any customer of the Company or any of its affiliates or any
     "prospective customer" (as defined in the last paragraph of this Section
     8(b)) of the Company or any of its affiliates; or

               (iii) solicit or encourage any officer, employee or consultant of
     the Company or any of its affiliates to leave the employ of the Company or
     any of its affiliates for employment by or with any competitor of the
     Company or any of its affiliates;

provided, however, that the Executive may invest in stocks, bonds or other
--------  -------
securities of any competitor of the Company or any of its affiliates if:

               (A) such stocks, bonds or other securities are listed on any
     national or regional securities exchange or have been registered under
     Section 11(g) of the Securities Exchange Act of 1934;

               (B) the Executive's investment does not exceed, in the case of
     any class of the capital stock of any one issuer, 1% of the issued and
     outstanding shares, or, in the case of other securities, 1% of the
     aggregate principal amount thereof issued and outstanding; and

               (C) such investment would not prevent, directly or indirectly,
     the transaction of business by the Company and/or any of its affiliates
     with any state, district, territory or possession of the United States or
     any governmental subdivision, agency or instrumentality thereof by virtue
     of any statute, law, regulation or administrative practice.

          If, at any time, the provisions of this Section 8(b) shall be
determined to be invalid or unenforceable by reason of being vague or
unreasonable as to area, duration or scope of activity, this Section 8(b) shall
be considered severable and shall become and shall be immediately amended solely
with respect to such area, duration and scope of activity as shall be determined
to be reasonable and enforceable by the court or other body having jurisdiction
over the matter and the Executive agrees that this Section 8(b) as so amended
shall be valid and binding as though any invalid or unenforceable provision had
not been included herein.  Except as provided in this Section 8 and in Section
3, nothing in this Agreement shall prevent or restrict the Executive from
engaging in any business or industry in any capacity.

          For purposes of clause (ii) of this Section 8(b), the term
"prospective customer" shall mean any entity, business or individual included on
a list of prospective customers provided to the Executive by the Company within
15 days following his Date of Termination, which
<PAGE>

list contains the names of those entities, businesses and individuals with whom
the Company had been in contact prior to the Executive's Date of Termination for
purposes of establishing a customer relationship therewith. Any entity, business
or individual not appearing on the aforementioned list of prospective customers
due to the failure of the Executive to advise the Company of such contact shall
be considered a "prospective customer" for purposes of clause (ii) of this
Section 8(b).

          (c) Public Support and Assistance.  The Executive agrees that
              -----------------------------
following any termination of his employment hereunder by the Company, the
Executive shall not disclose or cause to be disclosed any negative, adverse or
derogatory comments or information of a substantial nature about the Company or
its management, or about any product or service provided by the Company, or
about the Company's prospects for the future (including any such comments or
information with respect to affiliates of the Company).  The Company and/or any
of its affiliates may seek the assistance, cooperation or testimony of the
Executive following any such termination in connection with any investigation,
litigation or proceeding arising out of matters within the knowledge of the
Executive and related to the Executive's position as an officer or employee of
the Company, and in any such instance, the Executive shall provide such
assistance, cooperation or testimony and the Company shall pay the Executive's
reasonable costs and expenses in connection therewith; in addition, if such
assistance, cooperation or testimony requires more than a nominal commitment of
the Executive's time, the Company shall compensate the Executive for such time
at a per diem rate derived from the Executive's Base Salary at the time of the
Executive's Date of Termination.

          (d) Nondisclosure of Confidential Information.  During the Term, the
              -----------------------------------------
Executive shall hold in a fiduciary capacity for the benefit of the Company and
its affiliates all Confidential Information (as defined below).  After
termination of the Executive's employment with the Company, the Executive shall
keep secret and confidential all Confidential Information and shall not use or
disclose to any third party in any fashion or for any purpose whatsoever, any
Confidential Information.  As used herein, "Confidential Information" shall mean
any information regarding this Agreement, or any other information regarding the
Company or its affiliates which is not available to the general public, and/or
not generally known outside the Company or any such affiliate, to which the
Executive has or shall have had access at any time during the course of the
Executive's employment with the Company, including, without limitation, any
information relating to the Company's (and its affiliates'):

               (i) business, operations, plans, strategies, prospects or
     objectives;

               (ii) products, technologies, processes,  specifications, research
     and development operations or plans;
<PAGE>

               (iii) customers and customer lists;

               (iv) sales, service, support and marketing practices and
     operations;

               (v) financial condition and results of operations;

               (vi) operational strengths and weaknesses; and

               (vii) personnel and compensation policies and procedures.

Notwithstanding the foregoing provisions of this Section 8, the Executive may
discuss this Agreement with the members of the Executive's immediate family and
with the Executive's personal legal and tax advisors.

               (e) Specific Performance. Without intending to limit the remedies
                   --------------------
available to the Company, the Executive agrees that damages at law would be an
insufficient remedy to the Company in the event that the Executive violates any
of the provisions of this Section 8, and that the Company may apply for and,
upon the requisite showing, have injunctive relief in any court of competent
jurisdiction to restrain the breach or threatened breach of or otherwise to
specifically enforce any of the covenants contained in this Section 8.

           9.  Excise Tax Gross-Up Payment.  If any payments made and/or
               ---------------------------
benefits provided to the Executive by the Company, whether or not under this
Agreement ("Payments"), are subject to the tax (the "Excise Tax") imposed by
Section 4999 of the Code, the Company shall pay to the Executive an additional
amount (the "Gross-Up Payment") such that the net amount retained by the
Executive, after deduction of any Excise Tax on the Payments and all income
taxes and Excise Tax upon such Company payment, shall be equal to the Payments.
The determination of whether any Payments are subject to the Excise Tax shall be
based on the opinion of tax counsel selected by the Company and reasonably
acceptable to the Executive, whose fees and expenses shall be paid by the
Company. For purposes of determining the amount of the Gross-Up Payment, the
Executive shall be deemed to pay federal, state and local income taxes at the
highest marginal rate of income taxation applicable to any individual residing
in the jurisdiction in which the Executive resides in the calendar year in which
the Gross-Up Payment is to be made. In the event that the Excise Tax is
subsequently determined to be less than the amount taken into account hereunder
at the time of termination of the Executive's employment, the Executive shall
repay to the Company, at the time that the amount of such reduction in Excise
Tax is finally determined, the portion of the Gross-Up Payment attributable to
such reduction (plus that portion of the Gross-Up Payment attributable to
<PAGE>

the Excise Tax and federal, state and local income tax imposed on the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income tax
imposed on the Gross-Up Payment being repaid by the Executive to the extent that
such repayment results in a reduction in Excise Tax and/or a federal, state or
local income tax deduction) plus interest on the amount of such repayment at the
rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise
Tax is determined to exceed the amount taken into account hereunder at the time
of the termination of the Executive's employment (including by reason of any
payment the existence or amount of which cannot be determined at the time of the
Gross- Up Payment), the Company shall make an additional Gross-Up Payment in
respect of such excess (plus any interest, penalties or additions payable by the
Executive with respect to such excess) at the time that the amount of such
excess is finally determined. The Executive and the Company shall each
reasonably cooperate with the other in connection with any administrative or
judicial proceedings concerning the existence or amount of liability for Excise
Tax with respect to the Payments.

          10.  Legal Fees.  To provide the Executive with reasonable assurances
               ----------
that the purposes of this Agreement will not be frustrated by the cost of its
enforcement should the Company fail to perform any of its obligations under this
Agreement, the Company shall pay all of the reasonable attorneys' fees and
expenses and court and arbitration costs incurred by the Executive and any of
his beneficiaries, heirs and legal representatives, should a court of competent
jurisdiction or an arbitrator determine that the Company shall have failed to
perform any of its obligations under this Agreement.

          11.  Notice.  For the purposes of this Agreement, notices, demands and
               ------
all other communications provided for herein shall be in writing and shall be
deemed to have been duly given when delivered or (unless otherwise specified)
mailed by United States certified or registered mail, return receipt requested,
postage prepaid, addressed as follows:

          If to the Executive:

               Frank J. DeMicco
               210 Wayfair Circle
               Franklin Lakes, NJ 07417

          If to the Company:

               Office of the General Counsel
               United Water Resources Inc.
               200 Old Hook Road
               Harrington Park, NJ 07640-1799


or to such other address as either of the parties may have furnished to the
other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
<PAGE>

          12.  Successors.  Without the prior written consent of the Executive,
               ----------
this Agreement cannot be assigned by the Company except that it shall be binding
automatically on any successors and assigns of all or substantially all of the
business and/or assets of the Company (whether direct or indirect, by purchase,
merger, consolidation or otherwise).  In addition, without the prior written
consent of the Company, this Agreement cannot be assigned by the Executive,
except that the right to receive payments or benefits hereunder may be
transferred by will or the laws of descent and distribution.  This Agreement and
all rights of the Executive hereunder shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives.

          13.  Arbitration.  Except as provided in Section 8(e), all
               -----------
controversies, claims or disputes arising out of or relating to this Agreement
shall be settled by binding arbitration under the rules of the American
Arbitration Association then in effect in the State of New Jersey, as the sole
and exclusive remedy of either party, and judgment upon any such award rendered
by the arbitrator(s) may be entered in any court of competent jurisdiction.  The
costs of arbitration shall be borne by the unsuccessful party or otherwise as
determined by the arbitrators in their discretion.

          14.  Governing Law.  The validity, interpretation, construction and
               -------------
performance of this Agreement shall be governed by the laws of the State of New
Jersey without regard to conflicts of law principles.

          15.  Amendments.  No provision of this Agreement may be modified,
               ----------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer of the Company as may be
specifically designated for such purpose by the Board.  No waiver by either
party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.

          16.  Counterparts.  This Agreement may be executed in one or more
               ------------
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.

          17.  Entire Agreement.  This Agreement sets forth the entire agreement
               ----------------
of the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto.  No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement.
<PAGE>

          18.  Indemnification.  The Company shall indemnify the Executive to
               ---------------
the full extent permitted by the New Jersey Business Corporation Act and any
provision of the By-Laws of the Company, as amended from time to time, generally
applicable to officers and directors of the Company, for all amounts (including
without limitation, judgments, fines, settlement payments, expenses and
attorneys' fees) incurred or paid by the Executive in connection with any
action, suit, investigation or proceeding arising out of or relating to the
performance by the Executive of services for, or the actions by the Executive as
an officer or employee of, the Company or any affiliate of the Company or any
other person or enterprise at the Company's request.  Nothing in this Section 18
or elsewhere in this Agreement is intended to prevent the Company from
indemnifying the Executive to any greater extent than is required by this
Section 18.
<PAGE>

          19.  Severability.  The invalidity or unenforceability of any
               ------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision hereof.

          IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.

                                  UNITED WATER RESOURCES INC.


                                  By:_____________________________
                                     Name:  Donald L. Correll
                                     Title: Chairman and Chief Executive Officer


                                  FRANK J. DEMICCO


                                  ________________________________


                                  MARCIA L. WORTHING


                                  ________________________________