<PAGE>
 
                                                                   Exhibit 10(b)

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


          AGREEMENT effective as of January 1, 1998 (the "Commencement Date") by
and between United Water Resources Inc., a New Jersey corporation, and its
subsidiaries (collectively, the "Company"), and David E. Chardavoyne (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:

          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.

          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 shall thereafter be automatically
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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 (the "Term").  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.

          Title, Duties and Authority.  The Executive shall serve as President
          ---------------------------                                         
of United Waterworks 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>
 
               Compensation and Benefits.
               ------------------------- 

          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 $200,000
per annum, and shall be subject to annual review by the Board for discretionary
annual increases.

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

          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").

          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.

          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.

          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.

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

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

          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 

                                      -2-
<PAGE>
 
have returned to the performance of his duties hereunder on a full-time basis,
the Company may terminate the Executive's employment hereunder for "Disability."

          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:

               (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 which is
materially injurious to the business or reputation of the Company or any of its
affiliates; 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 of Directors of the Company (the "Board") the Company
is entitled to terminate the Executive for Cause as set forth above, and
specifying the particulars thereof in detail.

          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:

          (i) a material and adverse change in the Executive's title, status,
authority, duties or function (in each 

                                      -3-
<PAGE>
 
case, other than as may be contemplated by this Agreement); provided, however,
                                                            --------  -------
that the requirements of this clause (i) shall be deemed to have been satisfied
as of any time during the 12-month period immediately following a Change of
Control (solely for purposes of a Change of Control triggered by shareholder
approval referred to in clause (iii) of the definition of "Change of Control"
contained in Section 7, at any time during the 12-month period immediately
following the date of the consummation of the transaction requiring such
shareholder approval), that (y) the Executive shall no longer be President of
the Company, or (z) the Company shall no longer be a first-tier subsidiary of
such parent company of the Company, the securities of which are common stock
which is (or American Depositary Shares which are) traded on a nationally
recognized stock exchange or quoted on NASDAQ; provided, further, that the
                                               --------  -------
Executive's entitlement to utilize the immediately preceding proviso shall
terminate at the end of such 12-month period;

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

                 (iii) 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

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

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

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

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

          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 10.
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.

                                      -4-
<PAGE>
 
                    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 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.

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

          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.

          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 

                                      -5-
<PAGE>
 
Termination. Other than the foregoing, the Company shall have no further
obligations to the Executive hereunder.

          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 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.

          Termination By the Company Without Cause or By the Executive for Good
          ---------------------------------------------------------------------
Reason.  If the Executive's employment with the Company is terminated by the
------                                                                      
Company (other than for Disability or Cause), or by the Executive for Good
Reason pursuant to Section 5(d), 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 24 months
following a Change of Control, as defined below, within 30 days of the
Executive's Date of Termination, pay the Executive an amount equal to 200% 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 24 months following a
Change of Control, as defined below, 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 24
months following a Change of Control, as defined below, within 30 days of the
Executive's Date of Termination, pay the Executive an amount equal to 200% of
his then current "Cash Target Amount" under the MIP, or (B) if the Executive's
Date of Termination does not occur within 24 months following a Change of
Control, as defined below, continue to pay the Executive an annual MIP payment
for each of the 2 calendar years immediately following his Date of Termination
(or until such earlier time 

                                      -6-
<PAGE>
 
that the Executive violates the provisions of Section 8), each such payment in
an amount equal to his then current "Cash Target Amount" under the MIP, to be
paid 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 24
months following a Change of Control, as defined below, (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 "discount rate," as defined in Statement of
Financial Accounting Standard No. 87 published by the Financial Accounting
Standards Board, utilized for purposes of the most recent audit disclosure
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:

          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 

                                      -7-
<PAGE>
 
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

          during any period of not more than two consecutive calendar years
(commencing January 1, 1998), 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 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

          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 

                                      -8-
<PAGE>
 
deemed to refer to the sum of the Maximum Stockholder Investment Percentage plus
two percentage points).

               Restrictions.
               ------------ 

          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.

          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;

         (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
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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 

                                      -9-
<PAGE>
 
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 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).

          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, 

                                      -10-
<PAGE>
 
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.

          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;

                 (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.

          Specific Performance.  Without intending to 
          --------------------                                          

                                      -11-
<PAGE>
 
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.

          1    Excise Tax Gross-Up Payment.  If any payments to the Executive by
               ---------------------------                                      
the Company 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 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.

                                      -12-
<PAGE>
 
          2    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:

               David E. Chardavoyne
               27 Coventry Lane
               Trumbull, CT 06611

          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.

          3    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.

          4    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.

          5    Governing Law.  The validity, interpretation, construction and
               -------------                                                 
performance of this Agreement shall be governed 

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<PAGE>
 
by the laws of the State of New Jersey without regard to conflicts of law
principles.

          6    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.

          7    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.

          8    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.

          9  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 17
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 17.
 
         10  Severability.  The invalidity or unenforceability of any provision
             ------------                                                      
of this Agreement shall not affect the validity or enforceability of any other
provision hereof.

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

                    UNITED WATER RESOURCES INC.


                    By:_______________________________
                       Name:
                       Title:


                    DAVID E. CHARDAVOYNE
 

                    _________________________________

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