**Exhibit 10.4**

 

MLA No. RX0936

 

**AMENDED AND RESTATED MASTER LOAN AGREEMENT**

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**THISAMENDED AND RESTATED MASTER LOAN AGREEMENT**(this “Agreement”)is entered into as of  September 12,2005, between **MONARCH UTILITIES I L.P.**(formerlyknown as Tecon Water Company, L.P.), a Texas limited partnership (the “Company”),and **CoBANK, ACB,** a federally chartered instrumentality of theUnited States (“CoBank”).

 

**BACKGROUND**

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CoBankand the Company are parties to a Master Loan Agreement dated as of May 1,2002 (as amended, the “Existing MLA”). The parties now desire to amend andrestate the Existing MLA

 

**NOW,THEREFORE**, for good and valuable consideration, the receiptand sufficiency of which are hereby acknowledged, the Existing MLA is herebyamended and restated in its entirety to read as follows:

 

**ARTICLE 1**

**DEFINITIONS AND ACCOUNTING TERMS**

 

**SECTION 1.01.    Definitions. **Capitalized terms used in this Agreement and definedin Exhibit A hereto shall have the meanings set forth in such Exhibit.

 

**SECTION 1.02.    Rules of Interpretation.**Therules of interpretation set forth in Exhibit A shall apply to thisAgreement.

 

**ARTICLE 2**

**THE SUPPLEMENTS**

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**SECTION 2.01.    PromissoryNotes and Supplements.** In the event the Company desires to borrow from CoBank and CoBank iswilling to lend to the Company, the parties will enter into a promissory noteand supplement hereto (each a “Promissory Note and Supplement”). EachPromissory Note and Supplement will set forth CoBank’s commitment to make aLoan or Loans to the Company, the amount of the Loan(s), the purpose of theLoan(s), the interest rate or interest rate options applicable to the Loan(s),the Company’s promise to repay the Loans, and any other terms and conditionsapplicable to the particular Loan(s). Each Loan will be governed by the terms andconditions set forth in this Agreement and in the Promissory Note andSupplement relating to that Loan. In the absence of a Promissory Note andSupplement hereto duly executed by CoBank, CoBank shall have no obligation tomake a Loan to the Company under this Agreement. As of the date of thisAgreement, the following Promissory Notes and Supplements are outstandinghereunder and shall be governed by the terms hereof: (1) Promissory Noteand Supplement dated as of May 1, 2002, and numbered ML0936T1; and (2) PromissoryNote and Supplement dated as of May 1, 2002, and numbered ML0936T2 (the “ExistingPromissory Notes and Supplements”).

 

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**SECTION 2.02.    Notice and Manner of Borrowing New Loans.** Except as otherwise provided in a PromissoryNote and Supplement: (A) Loans will be made available on any Business Dayupon the written or telephonic request of an authorized employee of the Company(which telephonic request, if required by CoBank, shall be promptly confirmedin writing by the Company); (B) Requests for Loans must be received by12:00 noon Mountain time on the date the Loan is to be made; and (C) Loanswill be made available by wire transfer of immediately available funds to suchaccount or accounts as may be authorized by the Company on forms supplied byCoBank.

 

**SECTION 2.03.    Method of Payment.**TheCompany shall make all payments to CoBank under this Agreement and eachPromissory Note and Supplement hereto by wire transfer of immediately availablefunds or, if specified by separate agreement between the Company and CoBank, byautomated clearing house or other similar cash handling processes.  Wire transfers shall be made to ABA No. 307088754for advice to and credit of “CoBANK” (or to such other account as CoBank maydirect by notice).  The Company shallgive CoBank telephonic notice no later than 12:00 noon Mountain time of itsintent to pay by wire, and funds received after 3:00 p.m. Mountain timeshall be credited on the next Business Day.

 

**SECTION 2.04.    Security. **The Company’s obligations hereunder and under eachother Loan Document to which the Company is a party (whether executedcontemporaneously herewith or at a later date) shall be secured by: (A) astatutory first priority Lien on all equity which the Company may now own orhereafter acquire or be allocated in CoBank; (B) except as otherwiseprovided in Section 6.01 hereof, a first priority lien and securityinterest in all real and personal property of the Company of every type anddescription (other than  propertyexcluded in the last sentence of this Section 2.04), whether existing onthe date hereof or acquired at a later date; and (C) all proceeds thereof.The Company agrees to take such steps (including the execution and recording ofsuch instruments and documents) as CoBank may from time to time require inorder to enable CoBank to obtain, perfect and maintain its Lien on thecollateral. Notwithstanding the foregoing, CoBank shall not have a Lien on: (1) rollingstock financed by another lender; (2) assets which, under Law, may not besubjected to a Lien; provided, however, that if such provision of Law is laterchanged or has been or is later overruled by any other provision of Law, thensuch assets shall be subject to CoBank’s Lien; and (3) assets subject toagreements that prohibit the Company from granting a Lien on the assets;provided, however, that: (i) the maximum amount of assets that may besubject to any such agreement at any one time shall not exceed $500,000; (ii) theCompany may not enter into any such agreement with an Affiliate; and (iii) tothe extent that applicable Law renders such restrictions unenforceable, thenthe foregoing exception shall not be applicable.

 

**ARTICLE 3**

**CONDITIONS PRECEDENT**

 

**SECTION 3.01.    Conditions Precedent to This Agreement andthe 2005 Promissory Note and Supplement.** This Agreement andCoBank’s obligation to make a Loan or Loans under the 2005 Promissory Note andSupplement are subject to the following conditions precedent, which, in thecase of instruments and documents, must be in form and content reasonablyacceptable to CoBank:

 

**(A)          This Agreement**.CoBank shall have received a duly executed original copy of this Agreement.

 

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**(B)          Supplements.** CoBankshall have received a duly executed original copy of: (1) an amendment tothe Promissory Note and Supplement dated as of May 1, 2002, and numberedML0936T1; (2)  an amendment to the Promissory Note and Supplement dated asof May 1, 2002, and numbered ML0936T2; and (3) the 2005 PromissoryNote and Supplement and all Loan Documents required by the 2005 Promissory Noteand Supplement.

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**(C)          Evidence of Authority.**CoBank shall have received such evidence as CoBank may reasonably require thatthis Agreement, the 2005 Promissory Note and Supplement, and all Loan Documentsexecuted in connection herewith or therewith have been duly authorized,executed an delivered.

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**(D)          [Intentionally Omitted]**

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**(E)           Delegation and Wire Transfer Form**.CoBank shall have received a duly executed original copy of a delegation andwire transfer authorization form**.**

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**(F)           Security Documentation.**CoBankshall have received: (1) a duly executed original copy of an amendment tothat certain Security Agreement dated as of May 1, 2002, executed by theCompany in favor of CoBank; (2) an account control agreement, dulyexecuted by CoBank, the Company, and its Depository Bank; and (3) suchevidence as CoBank may reasonably require (including one or more Lien searches)that: (a) CoBank has a duly perfected first priority Lien (subject only toLiens which are both permitted under Section 6.01 hereof and otherwiseentitled to priority under Law) on all personal property of the Company inwhich a Lien can be perfected by filing a UCC-1 financing statement orrecording a security instrument with the Secretary of State of Texas; and (b) thereare no other Liens on any personal property of the Company (other than Lienspermitted under Section 6.01 hereof).

 

**(G)          Commitment to Issue Endorsement toExisting Title Policy, Closing Agreement, Deeds of Trust, Etc.** (1) Republic Title of Texas, Inc.,as agent for First American Title Insurance Company (in such role, “RepublicTitle”) shall have furnished to CoBank a commitment to issue an endorsement tothe Title Policy; (2) Republic Title, the Company, and CoBank shall haveentered into a closing agreement (the “Closing Agreement”); (3) CoBank andRepublic Title shall each have received an original copy,  duly executed by the Company, as Trustor andGrantor, and Steve Moore, as Trustee,  ofan amendment to the Deed of Trust; (4) Republic Title shall have receivedoriginal copies, duly executed by the Company, of Statutory Utility Notices foreach county in Texas in which the Company does business or owns property; and (5) allconditions precedent to funding set forth in the Closing Agreement shall haveoccurred.

 

**(H)          Agreements with Affiliates.** CoBank shall have reviewed and approved allagreements between the Company and its Affiliates, and CoBank shall havereceived from each Affiliate that performs services for or on behalf of theCompany, a duly executed copy of a consent and agreement.

 

**(I)            Organizational Documents.** CoBank shall have reviewed and approved (whichapproval will not be unreasonably withheld or delayed) Certified Copies of theOrganizational Documents of the Company and Texas Water Services Group, LLC.

 

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**(J)           Consents and Approvals.**CoBankshall have received such evidence as CoBank may reasonably require that allconsents and approvals referred to in Section 4.01(M) hereof have beenobtained and are in full force and effect.

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**(K)          Fees and Other Charges.**CoBank shall have received all fees or other charges provided for herein or inthe 2005 Promissory Note and Supplement.

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**(L)           Officers Certificate**.CoBank shall have received a duly executed original copy of a certificate of anofficer of the Company, which, if other than the Chief Financial Officer of theCompany, must be reasonably acceptable to CoBank.

 

**(M)          Insurance.**CoBankshall have received such evidence as CoBank may reasonably require that theCompany is in compliance with Section 5.03 hereof.

 

**(N)          Opinion of Counsel.** CoBank shall have received a duly executedoriginal copy of an opinion of counsel to the Company, which counsel must bereasonably acceptable to CoBank.

 

**SECTION 3.02.    Conditions to Each Supplement.**CoBank’sobligation to make the initial Loan under each Promissory Note and Supplementhereto (other than the 2005  PromissoryNote and Supplement) is subject to the following conditions precedent (which inthe case of instruments and documents, must be in form and content acceptableto CoBank):

 

**(A)          Supplement.** CoBankshall have received a duly executed original copy of the Promissory Note andSupplement and all Loan Documents required by such Promissory Note andSupplement.

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**(B)          Evidence of Authority.**CoBank shall have received copies, certified by the Secretary of the Company asof the date of such Promissory Note and Supplement, of such evidence as CoBankmay reasonably require that such Promissory Note and Supplement and all LoanDocuments executed in connection therewith have been duly authorized, executedan delivered.

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**(C)          Consents and Approvals.**CoBankshall have received such evidence as CoBank may reasonably require that allconsents and approvals referred to in Section 4.01(M) hereof, have beenobtained and are in full force and effect.

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**(D)          Fees and Other Charges.**CoBank shall have received all fees or other charges provided for herein or insuch Promissory Note and Supplement.

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**(E)           Application**. CoBankshall have received a duly executed and completed original copy of anapplication for the credit.

 

**(F)           Officer’s Certificate.**CoBankshall have received a duly executed original copy of a certificate of an officer of the Company, which, ifother than the Chief Financial Officer of the Company, must be reasonablyacceptable to CoBank.

 

**(G)          Insurance.**CoBankshall have received such evidence as CoBank may reasonably require that theCompany is in compliance with Section 5.03 hereof.

 

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**(H)          Opinion of Counsel.** CoBank shall have received a duly executedoriginal copy of an opinion of counsel to the Company, which counsel must bereasonably acceptable to CoBank.

 

**(I)            Security.**CoBankshall have received such evidence as it shall reasonably require that: (1) theCompany has taken all steps required by CoBank under Section 2.04 hereofor the Promissory Note and Supplement in order for CoBank to obtain, perfectand/or maintain its Lien, including its Lien on any assets to be constructed and/or acquired with the proceeds of theLoan to be made under the Promissory Note and Supplement; (2) CoBank’ Lienis a first priority Lien ; and (3) there are no other Liens on anyproperty of the Company, except as permitted under Section 6.01 hereof.

 

**SECTION 3.03.    Conditions to Each Loan.** CoBank’s obligation under each Promissory Noteand Supplement (including the 2005 Promissory Note and Supplement hereto) to makeany Loan to the Company thereunder, including the initial Loan, is subject tothe conditions precedent that: (A) no Default or Event of Default shallhave occurred and be continuing; (B) each of the representations andwarranties of the Company set forth herein and in all other Loan Documentsshall be true and correct as of the date of the Loan; and (C) the Companyshall have satisfied all conditions and requirements set forth in thePromissory Note and Supplement relating to that Loan.

 

**ARTICLE 4**

**REPRESENTATIONS AND WARRANTIES**

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**SECTION 4.01.    This Agreement and the 2005 Promissory Noteand Supplement Hereto.**To induce CoBank to enter into thisAgreement and the 2005 Promissory Note and Supplement hereto, the Companyrepresents and warrants that:

 

**(A)          Organization, Etc**.The Company: (1) is a limited partnership duly organized, validlyexisting, and in good standing under the Laws of the State of Texas; (2) hasthe power and authority to own its assets and to transact the business in whichit is engaged or proposes to engage; and (3) is duly qualified to dobusiness in, and is in good standing under the Laws of, each jurisdiction inwhich  failure to be qualified couldreasonably be expected to have a Material Adverse Effect.

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**(B)          Loan Documents.**ThisAgreement, the 2005 Promissory Note and Supplement, and all other LoanDocuments executed or furnished in connection herewith or therewith: (1) havebeen duly authorized, executed and delivered by the Company and each otherPerson (other than CoBank) that is a party thereto; and (2) create legal,valid and binding obligations of the Company and each other party thereto(other than CoBank) which are enforceable in accordance with their terms,except to the extent that enforcement may be limited by applicable bankruptcy,insolvency or similar Laws affecting creditors’ rights generally.

 

**(C)          Operation of Business.**TheCompany possesses all licenses, certificates, permits, authorizations,approvals, franchises, patents, copyrights, trademarks, trade names, rights thereto,or the like which are material to the operation of its business or required byLaw, and the Company is not in violation in any material respect of the rightsof others with respect thereto. Without limiting the foregoing, the Company hasall Certificates of Convenience

 

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and Necessity and effluent discharge permits necessary for theoperation of its water and wastewater systems.

 

**(D)          Litigation**.  Except as disclosed in any application orofficer’s certificate submitted in connection with this Agreement and the 2005Promissory Note and Supplement, there are no pending or threatened actions orproceedings against or affecting the Company or any of its Affiliates beforeany court, governmental agency, mediator, arbitrator, or the like which could,in any one case or in the aggregate, reasonably be expected to have a MaterialAdverse Effect.

 

**(E)**           **Ownership of Company andSubsidiaries.**The: (1) general partner of the Company is TexasWater Services Group, LLC, and there are no other general partners of theCompany; (2) limited partner or partners of the Company are owned 100%directly or indirectly by Southwest; (3) the general partner is owned 100%directly or indirectly by Southwest; (4)  the Company has no Subsidiaries,other than TWC Utility Company, LLC; and (5) as of the date hereof, TWCUtility Company, LLC owns no assets and conducts no business.

 

**(F)           Southwest Financial Statements.**Theconsolidated balance sheet of. Southwest as of December 31, 2004, and therelated consolidated statements of income and retained earnings of Southwestfor the fiscal year then ended, and the accompanying notes and schedules,together with the opinion thereon, dated March 25, 2005, and the interimconsolidated balance sheet of Southwest and the related consolidated statementsof income and retained earnings for the three month period ending March 31,2005, copies of which have been furnished to CoBank, fairly present in allmaterial respects the financial condition of Southwest and its consolidatedsubsidiaries as at such dates and the results of their operations for theperiods covered by such statements, all in accordance with GAAP consistentlyapplied (subject to normal year-end adjustments in the case of the interim financialstatements). There are no liabilities of Southwest and its consolidatedsubsidiaries, fixed or contingent, which are material but not reflected in theyear end financial statements or in the notes thereto or in a writing furnishedto CoBank and referencing this Subsection.

 

**(G)          Company Financial Statements.** The balance sheet of the Company as of December 31,2004, and the related statements of income and retained earnings of the Companyfor the fiscal year then ended, and the accompanying notes and schedules, andthe interim balance sheet of the Company and the related statements of incomeand retained earnings for the six month period ending June 30, 2005,copies of which have been furnished to CoBank, fairly present in all materialrespects the financial condition of Company as at such dates and the results ofthe operations of the Company for the periods covered by such statements, allin accordance with GAAP consistently applied (subject to normal year-endadjustments in the case of the interim financial statements). There are noliabilities of the Company, fixed or contingent, which are material but notreflected in the year end financial statements or in the notes thereto or in awriting furnished to CoBank and referencing this Subsection.

 

**(H)          Ownership and Liens.**The Company has title to, or valid easement or leasehold interests in, all ofits properties, real and personal, including the property and leaseholdinterests reflected in the balance sheet referred to in Section 4.01(G) hereof(other than any property disposed of in the ordinary course of business), andnone of the properties or leasehold interests of the Company is subject to anyLien, except such as may be permitted under Section 6.01 of thisAgreement.

 

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**(I)            [Reserved]**

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**(J)           Compliance with Law.**Exceptas disclosed in any application or officer’s certificate submitted inconnection with this Agreement and the 2005 Promissory Note and Supplementhereto, all of the properties owned by the Company and all of its operations,are in compliance in all material respects with all Laws (including all Lawsrelating to the environment) which, if not complied with, could reasonably beexpected to have a Material Adverse Effect.

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**(K)          Environment.**Exceptas disclosed in Schedule 4.01(K) hereto or in any application or officer’scertificate submitted in connection with this Agreement and the 2005 PromissoryNote and Supplement: (1) no property owned or leased by the Company isbeing used, or to its knowledge, has been used for the disposal, treatment,storage, processing or handling of hazardous waste or materials (as definedunder any applicable environmental Law); (2) no investigation, claim,litigation, proceedings, order, judgment, decree, settlement, Lien or the likewith respect to any environmental matter is proposed, threatened, anticipatedor in existence with respect to the properties or operations of the Company;and (3) no environmental contamination or condition currently exists onany property of the Company which could reasonably be expected to delay thesale or other disposition of such property or could reasonably be expected tohave, or already has had, a material adverse effect on the value of suchproperty.

 

**(L)           ERISA. **The Company and each of itsERISA Affiliates is in compliance in all material respects with allrequirements of ERISA, the Company and each ERISA Affiliate have met theirminimum funding requirements under ERISA with respect to each plan governedthereby, no grounds exist entitling the Pension Benefit Guaranty Corporation toinstitute proceedings to terminate a plan maintained by the Company or anyERISA Affiliate this is subject to ERISA, and neither the Company nor any ERISAAffiliate has any liability arising form the withdrawal or termination of anyplan subject to ERISA which liability could reasonably be expected to result inmaterial liability to the Company.

 

**(M)          Consents and Approvals.**  Except for such as shall have been obtainedand are in full force and effect, no consent, permission, authorization, orderor license of any governmental authority or of any party to any materialagreement to which the Company is a party or by which it or any of its materialproperty may be bound or affected, is necessary in connection with: (1) theexecution, delivery, performance or enforcement of the Loan Documents; and (2) theproject, acquisition, or other activity being financed by the 2005 PromissoryNote and Supplement hereto.

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**(N)          Conflicting Agreements.**  None of the Loan Documents conflicts with, orconstitutes (with or without the giving of notice and/or the passage of timeand/or the occurrence of any other condition) a default under, any othermaterial agreement to which the Company is or expects to become a party or by whichthe Company or any of its material properties may be bound or affected, and donot conflict with any provision of the Organizational Documents of the Company.

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**(O)          Compliance and No Default.** The Company is operating its business incompliance with all of the terms of the Loan Documents, and no Default or Eventof Default exists.

 

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**(P)           Applications, Officer’s Certificate,Etc.**  Eachrepresentation and warranty and all information set forth in the applicationand officer’s certificate submitted in connection with, or to induce CoBank toenter into, this Agreement and the 2005 Promissory Note and Supplement heretois correct in all material respects.

 

**(Q)          Budgets, Etc. **All budgets, projections,feasibility studies, and other documentation submitted by the Company to CoBankin connection with, or to induce CoBank to enter into, this Agreement and the2005 Promissory Note and Supplement hereto are based upon assumptions that arereasonable and realistic, and no fact has come to light, and no event hasoccurred, which would cause any material assumption made therein to not bereasonable or realistic.

 

**(R)          Water Rights.**TheCompany: (1) has water rights with such amounts, priorities and qualitiesas are necessary to adequately serve the customers of the Company; (2) controls,owns, or has access to all such water rights free and clear of the interests ofany third party; (3) has not suffered or permitted any transfer orencumbrance of such water rights, has not abandoned such water rights, or anyof them, and has not done any act or thing which would impair or cause the lossof any such water rights.

 

**(S)           Facilities.** The Company’s utility facilities: (1) meetpresent demand in all material respects; (2) are constructed in a good andprofessional manner; (3) are in good working order and condition; and (4) complyin all material respects with all applicable Laws.

 

**(T)           Rate Matters.** Except as disclosed in Schedule 4.01(T)hereto or in any application or officer’s certificate furnished in connectionherewith and the 2005 Promissory Note and Supplement: (1) the Company’srates for the provision of water and the treatment and/or disposal ofwastewater have been approved by any and all necessary governmental authorities(including all regulatory authorities, public service commissions, or publicutilities commissions) which have jurisdiction over the operations and rates ofthe Company, including the TCEQ; (2) the Company is in compliance with allTCEQ tariffs and other rate policies; and (3) there is no pending and, tothe Company’s knowledge, threatened action or proceeding before the TCEQ or anyother governmental authority, the objective or result of which is or couldreasonably be expected to: (a) reduce or otherwise adversely change any ofthe rates for the provision of water and/or wastewater services; (b) limitor revoke any Certificate of Convenience and Necessity; or (c) otherwisehave a Material Adverse Effect.

 

**(U)           Enforcement Actions.** Except as disclosed in the application orofficer’s certificate furnished in connection herewith and the 2005 PromissoryNote and Supplement, the Company is not subject to any Enforcement Action.

 

**SECTION 4.02.    Each Supplement. **The execution by theCompany of each Promissory Note and Supplement hereto (other than the 2005Promissory Note and Supplement) shall constitute a representation and warrantythat each of the representations and warranties set forth in Section 4.01hereof are true and correct as of the date of the Promissory Note andSupplement, except that: (A) the references to the financial statements inSection 4.01(F) hereof shall be deemed to be to the latest annualfinancial statements furnished to CoBank under Section 5.06(I) hereof; (B) thereferences to the financial statements in Section 4.01(G) hereof, andall references in Section 4.01(H) hereof to such statements, shall bedeemed to be to the latest annual financial statements and, if more recent thanthe latest annual financial statements, to the

 

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latest quarterly financial statements furnished to CoBank under Section 5.07(A) and(B) hereof; (C) all references to the 2005 Promissory Note andSupplement shall be deemed to refer to the Promissory Note and Supplement beingexecuted at the time; (D) the references in Sections 4.01(D), (J), (K),(P), (T), and (U) to the application and officer’s certificate furnished inconnection with this Agreement and the 2005 Promissory Note and Supplementshall be deemed to refer to any application and officer’s certificate furnishedin connection with the Promissory Note and Supplement being executed at thetime; and (C) the reference in Section 4.01(Q) to budgets,projections and other documentation and information referred to therein, shallbe deemed to refer to all budgets, projections and other documentationfurnished in connection with Promissory Note and Supplement being executed atthe time.

 

**ARTICLE 5**

**AFFIRMATIVE COVENANTS**

 

Unlessotherwise agreed to in writing by CoBank, while this Agreement is in effect,the Company agrees to:

 

**SECTION 5.01.    Maintenance of  Existence, Etc.**  Preserve and maintain its existence and goodstanding in the jurisdiction of its formation, qualify and remain qualified totransact business in all jurisdictions in which the failure to be qualifiedcould reasonably be expected to have a Material Adverse Effect, and obtain andmaintain all licenses, permits, franchises, patents, copyrights, trademarks,tradenames, or rights thereto which are material to the conduct of its businessor required by Law.

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**SECTION 5.02.    Compliance With Laws.**  Comply in all material respects with allapplicable Laws (including all Laws relating to the environment), which, if notcomplied with, could reasonably be expected to have a Material Adverse Effector result in criminal sanctions. In addition, the Company agrees to cause allPersons occupying or present on any of its properties to comply in all materialrespects with all such Laws.

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**SECTION 5.03.    Insurance.**  Maintain insurance with financially sound andreputable insurance companies or associations in such amounts and covering suchrisks as are usually carried by companies engaged in the same business andsimilarly situated. Without limiting the foregoing, in the event any propertyof the Company is located in a flood zone (as reasonably determined by CoBank),then the Company shall obtain such flood insurance as may reasonably berequired by CoBank. Each such policy insuring any collateral for the Company’sobligations to CoBank shall have lender or mortgagee loss payee clauses in formand content reasonably acceptable to CoBank. The Company agrees to furnish toCoBank such proof of compliance with this Section as CoBank may from timeto time reasonably require.

 

**SECTION 5.04.    Property Maintenance.**  Maintain all of its properties that arenecessary to or useful in the proper conduct of its business in good repair,working order and condition, ordinary wear and tear excepted, and make allalterations, replacements and improvements thereto as may from time to time bereasonably necessary in order to ensure that its properties remain in goodworking order and condition.

 

**SECTION 5.05.    Books and Records.** Keep adequate records and books of account inwhich complete entries will be made in accordance with GAAP.

 

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**SECTION 5.06.    Reports and Notices.** Furnish to CoBank:

 

**(A)          Annual Financial Statements.**Assoon as available, but in no event more than 120 days after the end of each fiscalyear of the Company occurring during the term hereof, annual financialstatements of the Company prepared in accordance with GAAP consistentlyapplied.  Such financial statementsshall: (a) be audited by a firm of independent certified public accountantsselected by the Company and reasonably acceptable to CoBank; (b) beaccompanied by a report of such accountants containing an opinion to the effectthat the financial statements: (i) were audited in accordance withgenerally accepted auditing standards; and (ii) present fairly, in allmaterial respects, the financial position of the Company as at the end of theyear and the results of its operations for the year then ended, in conformitywith GAAP; (c) be prepared in reasonable detail and in comparative form;and (d) include a balance sheet, a statement of income, a statement ofretained earnings, a statement of cash flows, and all notes and schedulesrelating thereto.

 

**(B)          Interim Financial Statements**.  As soon as available, but in no event morethan 60 days after the end of each fiscal quarter of the Company occurringduring the term hereof, a balance sheet of the Company as of the end of suchquarter, a statement of income for the Company for such period and for theperiod year to date, a statement of retained earnings, and a statement of cashflow, all prepared in reasonable detail and in comparative form in accordancewith GAAP consistently applied and, if required by notice from CoBank,certified by the President, Vice President, Chief Financial Officer orTreasurer  of the Company.

 

**(C)          Officer’s Certificate**.Together with each set of financial statements delivered to CoBank pursuant toSubsection (A) and (B) of this Section 5.06, a certificateof the President, Vice President, Chief Financial Officer or Treasurer of theCompany : (1) computing the financial covenants set forth in Article 7hereof that are required to be measured as of the end of the period for whichthe financial statements are being delivered; and (2) certifying that, tothe best knowledge of such officer, no Default or Event of Default has occurredand is continuing, and, if continuing, the action which is proposed to be takenwith respect thereto.

 

**(D)          Notice of Litigation, MaterialMatters, Etc. **Promptlyafter becoming aware thereof, notice of: (1) the commencement of anyaction, suit or proceeding before any court, governmental instrumentality,arbitrator, mediator or the like which, if adversely decided, could reasonablybe expected to have a Material Adverse Effect; (2) the commencement of anyEnforcement Action; (3) the receipt of any notice, indictment, pleading,or other communication alleging a condition that: (a) may require theCompany to undertake or to contribute to a clean-up or other response under anyenvironmental Law, or which seeks penalties, damages, injunctive relief, orother relief as a result of an alleged violation of any such Law, or whichclaims personal injury or property damage as a result of environmental factorsor conditions; and (b) if true or proven, could have a Material AdverseEffect or result in criminal sanctions; and (4) the occurrence of anyother event or matter (including the rendering of any order, judgment, rulingand the like) which could reasonably be expected to have a Material Adverse Effect.

 

**(E)           Notice of Default.**Promptlyafter becoming aware thereof, notice of the occurrence of a Default or an Eventof Default.

 

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**(F)           Notice of the Acquisition ofProperty.**Promptly after acquiring same, notice of theacquisition of any real property in a transaction involving consideration of atleast $50,000.

 

**(G)          Notice of Certain Events.** Notice of each of the following at least 30(or, in the case of clause (2) below, 10) days prior thereto: (1) anychange in the Company’s name, structure or organizational identificationnumber; provided, however, that the Company may not effect any such changeunless the Company, at its expense, takes all action required by CoBank toenable CoBank to maintain the perfection of its Lien; (2) any change inthe principal place of business of the Company or the office where its recordsconcerning its accounts are kept; or (3) any change in its Deposit Accountor Accounts; provided, however, that: (i) if the Company uses the sameDepository Bank and such Depository Bank and the Company acknowledges to CoBankin writing on or before the date of the change that the agreement referred toin Section 3.01(F)(2) covers the new Deposit Account or Accounts,then no prior notice shall be required; and (ii) the Company may noteffect any such change unless the new Depository Bank has entered into anagreement of the type referred to in Section 3.01(F).

** **

**(H)          Other Notices.** Such other notices as may be required by anyPromissory Note and Supplement or any other Loan Document.

 

**(I)            Southwest Financial Statements.**Assoon as available, but in no event more than 120 days after the end of eachfiscal year of Southwest occurring during the term hereof, annual consolidatedfinancial statements of Southwest and its consolidated subsidiaries prepared inaccordance with GAAP consistently applied and the related consolidatingfinancial statements.  Such financialstatements shall: (a) in the case of the consolidated statements, beaudited by a nationally recognized firm of independent certified publicaccountants selected by Southwest; (b) in the case of the consolidatedstatements, be accompanied by a report of such accountants containing anopinion on such statements to the effect that such statements: (i) wereaudited in accordance with generally accepted auditing standards; and (ii) presentfairly, in all material respects, the financial position of Southwest and itsconsolidated subsidiaries as at the end of the year and the results of its andtheir operations for the year then ended, in conformity with GAAP; (c) beprepared in reasonable detail and in comparative form; and (d) include abalance sheet, a statement of income, a statement of retained earnings, astatement of cash flows, and all notes and schedules relating thereto(including all consolidating schedules).

** **

**(J)           Other Information. **Such other informationregarding the condition or operations, financial or otherwise, of the Companyas CoBank may from time to time reasonably request, including, but not limitedto, copies of all pleadings, notices and communications referred to in Section 5.06(D) hereof.

 

**SECTION 5.07.    Conduct of Business.**Engagein an efficient and economical manner in the business conducted by it.

 

**SECTION 5.08.    Capital.**  Acquire non-voting participation certificatesin CoBank in such amounts and at such times as CoBank may from time to timerequire in accordance with its bylaws and capital plan (as each may be amendedfrom time to time), except that the maximum amount of certificates that theCompany may be required to purchase in connection with a Loan may not exceedthe maximum amount permitted by the bylaws at the time the Promissory Note andSupplement relating to such Loan is

 

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entered into or such Loan is renewed or refinanced by CoBank.  The rights and obligations of the partieswith respect to such certificates and any patronage or other distributions madeby CoBank shall be governed by CoBank’s bylaws.

 

**SECTION 5.09.    Inspection. **Permit CoBank or its agents, upon reasonable noticeand during normal business hours or at such other times as the parties mayagree, to examine the properties, books and records of the Company, and todiscuss its or their affairs, finances and accounts with its or their officers,directors, and independent certified public accountants; provided, however,that unless an Event of Default has occurred and is continuing, the Companyshall not be required to pay the expenses for more than one such visit peryear.

 

**SECTION 5.10.    Water Rights, Title to Property, Etc. **Obtain and maintain: (A) waterrights and discharge rights in such amounts, priorities and qualities as arenecessary at all time to adequately service the customers in its serviceterritories; and (B) title to, or valid easement or leasehold interestsin, all real property, including all real property on which all water wells,pumping stations, treatment plants, and storage facilities are located.

 

**SECTION 5.11.    Deposit Account.** Maintain at all times, one or more DepositAccounts in its own name and deposit all of its revenues and the proceeds ofthe collateral therein.

 

**ARTICLE 6**

**NEGATIVE COVENANTS**

 

Unlessotherwise agreed to in writing by CoBank, while this Agreement is in effect,the Company will not:

 

**SECTION 6.01.    Liens. **Create, incur, assume, or suffer to exist any Lien onany of its properties, except:

 

**(A) **Liensin favor of CoBank;

 

**(B) **Liensfor taxes or assessments or other governmental charges or levies if notdelinquent or, if delinquent: (i) the Company is contesting same in goodfaith by appropriate proceedings; (ii) the Company has established andmaintains reserves in amounts required in accordance with GAAP; and (iii) foreclosureor other action to enforce the Lien is stayed.

 

**(C) **Liensin favor of mechanics, landlords, material suppliers, warehouses, carriers, andlike Persons that secure obligations that are not past due or if past due: (1) noforeclosure or other action to enforce the Liens have been commenced or, ifcommenced, have been stayed; and (2) if the property is material to theoperations of the Company’s business as a whole or to the operations of any oneof the Company’s water or wastewater systems, reserves have been establishedand maintained in accordance with GAAP.

 

**(D) **Liensunder workers’ compensation, unemployment insurance, Social Security, orsimilar legislation (other than ERISA).

 

**(E) **Deposits and pledges to secure the performance of bids, tenders, contracts(other than contracts for the payment of money), public and statutoryobligations, surety, stay,

 

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appeal, indemnity, performance or other similar bonds, or other similarobligations, in each case arising in the ordinary course of business.

 

**(F) **Judgmentand similar Liens arising in connection with court proceeding, provided that: (1) noEvent of Default arises under Section 8.07 hereof; and (2)  theclaims secured thereby are being actively contested in good faith and byappropriate proceedings; and (3) reserves have been established andmaintained in accordance with GAAP.

 

**(G) **Easements,rights-of-way, restrictions, and other similar encumbrances which, in theaggregate, do not materially interfere with the occupation, use, and enjoymentby the Company of the property or assets encumbered thereby in the normalcourse of its business or materially impair the value of the property subjectthereto.

 

**(H) **Purchase money Liens on, or Capital Leases with respect to,  rolling stock, equipment, and the proceedsthereof, provided that the debt secured by such purchase money Liens and suchCapital Leases is permitted under Section 6.02 hereof.

 

**(I)  **Purchase money Liens onwater or sewer system assets, acquired with seller financing  permitted under Section 6.02 hereof, andon the proceeds received on the sale thereof (but not any account or revenuesderived therefrom unless the acquired system is maintained in a permittedSubsidiary).

 

**SECTION 6.02.    Debt**.  Create, incur, assume, or suffer to exist,any indebtedness of liability for borrowed money, the deferred purchase priceof property or services, or for letters of credit, except for: (A) debt ofthe Company to CoBank; (B) accounts payable to trade creditors incurred inthe ordinary course of business; (C) purchase money debt on, and CapitalLeases with respect to, rolling stock and equipment; provided, however, thatthe maximum principal amount of purchase money debt on, or Capital Leases withrespect to, equipment may not exceed $500,000 at any one time; (D) loansand advances from Southwest or any subsidiary of Southwest; provided, however,that such debt is subordinate to all Loans made by CoBank on terms andconditions reasonably acceptable to CoBank; (E) purchase money debt owingto the sellers of assets of water and/or wastewater systems in a principalamount not to exceed $5,000,000 at any one time outstanding; and (F) othercurrent operating liabilities (other than for borrowed money) incurred in theordinary course of business**.**

 

**SECTION 6.03.    Sale, Transfer or Lease of Assets. **Sell, transfer, lease orotherwise dispose of any of its assets except for: (A) the sale of waterand wastewater services in the ordinary course of business; (B) the sale,lease or other disposition of property or equipment which is obsolete, worn-outor no longer necessary for, or useful in, the provision of water and wastewaterservices to customers in its service territories; and (C) provided noDefault or Event of Default exists: (i) the sale or other disposition ofwater rights or wastewater discharge rights which are not needed in theoperations of the Company or to meet the expected future demands of theCompany; and (ii) other sales, transfers, leases or other dispositions inan aggregate amount not to exceed $500,000 in any fiscal year. At the requestand expense of the Company, CoBank will release its Lien on any property orequipment which is disposed of by the Company pursuant to this Section 6.03.

** **

**SECTION 6.04.    Distributions. **Declare or pay, directly orindirectly, any Distribution, except that, as long as no Default or Event ofDefault shall have occurred and be

 

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continuing or would result therefrom, the Company can pay Distributionsin cash not more than once a quarter; provided, however, that in no event maythe Company make a Distribution unless, after giving effect thereto: (1) theNet Worth of the Company would be equal to or greater than the Net Worth of theCompany on December 31, 2001; and (2) the ratio of the Company’sTotal Debt to Total Capitalization would not be greater than .60 to 1.00.

 

**SECTION 6.05.    Contingent Liabilities.**Assume, guarantee, endorse, or otherwise be or become directly or contingentlyresponsible or liable for the obligations of any Person (including by means ofan agreement to: (A) purchase any obligation, stock, assets, or services; (B) supplyor advance any funds, assets, or services; or (C) cause any Person tomaintain a minimum working capital or net worth or other financial test),except: (1) by endorsement of negotiable instruments for deposit orcollection or similar transactions in the ordinary course of business; (2) guarantiesfor the benefit of suppliers (other than Affiliates) in the ordinary course ofbusiness; and (3) in the event the Company acquires the assets of anywater system, guaranties issued by the seller of those assets prior to (and notin anticipation of) the acquisition of the water system and assumed by theCompany in connection with the acquisition; provided, however, that the maximumamount of debt or other obligations that may be guarantied any one time underSubsections (2) and (3) hereof may not exceed $1,000,000.

 

**SECTION 6.06.    Mergers, Etc.**  Merge or consolidate with any other Person oracquire all or a material part of the assets of any other Person; provided,however, that the Company may: (i) acquire water and/or wastewater systemsin the State of Texas; or (ii) merge with another Person that is engagedprincipally in the business of owing and operating water and/or wastewatersystems in the State of Texas, as long as: (A) in the case of a merger,the Company is the surviving entity; (B) after giving effect thereto, noDefault or Event of Default would exist, including as a result of a violationof Section 7.03 hereof; (C) on a combined basis, the Company wouldhave been able to meet the financial covenants set forth in Section 7.01and 7.02 hereof for the 12 month period ending with the end of the last fiscalquarter of the Company had such merger or acquisition taken place at thebeginning of such 12 month period; and (D) not less than 30 days prior tothe effective date thereof, the Company furnishes written notice to CoBank ofsuch acquisition and merger and certifies to CoBank that each of the conditionsset forth in this Section have been met.

 

**SECTION 6.07.    Change in Business.**Engagein any business activities or operations substantially different from orunrelated to its present business activities or operations.

 

**SECTION 6.08.    Prepayment; Payments on Debt To Southwest.** While any Default or Event of Default shallhave occurred and be continuing: (A) prepay, directly or indirectly, anydebt (other than debt to CoBank); or (B) make any payments on any debtowing to Southwest.

 

**SECTION 6.09     Loans and Investments**.  Make any loan or advance to, or purchase orotherwise acquire any capital stock, obligations, or other securities of, makeany capital contribution to, or otherwise invest in or acquire any interest in,any Person, or participate as a partner or joint venture with any other Person(collectively, “Investments”), except:  (A) directobligations of the United States or any agency thereof with maturities of six (6) months****or less****from the dateof acquisition; (B) commercial paper of a domestic issuer rated at least “A-1”by Standard & Poor’s Corporation or “P-1” by Moody’s Investors Service, Inc.;

 

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(C) certificates of deposit with maturities of six (6) months****or less from the date of acquisition issued by anycommercial bank having capital and surplus in excess of $500 million; (D) Investmentsin CoBank; (E) repurchase agreements for investments of the types referredto in clause (A) hereof entered into by Company with a bank or trust companyor recognized securities dealer having capital and surplus in excess of $500million; (F) variable or fixed rate notes issued by any issuer rated asleast A-1 by Standard & Poor’s Corporation or at least P-1 by Moody’sInvestors Services, Inc. and maturing within six (6) months or lessfrom the date of acquisition; (G) money market funds which investprimarily in assets of the types referred to in clauses (A) through (G);and (H) as long as no Default or Event of Default exists, loans andadvances to Southwest that are payable upon demand.

 

**SECTION 6.10.    Certain Agreements.** Amend, alter, waive any provision of, breachor terminate any agreement if such action could reasonably be expected to havea Material Adverse Effect.

 

**SECTION 6.11.    Transactions with Affiliates.**  Enter into any transaction with an Affiliate:(A) except in the ordinary course of and pursuant to the reasonablerequirements of its business and upon fair and reasonable terms no lessfavorable to the Company than would obtain in a comparable arm’s-lengthtransaction with a Person not an Affiliate; and (B) unless, in the case ofcontracts that provide for the ongoing operation or management of any portionof the Company, the Company furnishes notice thereof to CoBank not less than 10Business Days before the date of such agreement and, if requested by CoBank,the Company and Affiliate enter into a consent and agreement with CoBank inform and content substantially similar to the agreements delivered pursuant to Section 3.01(H).

 

**SECTION 6.12.    Subsidiaries, Etc. **Notwithstanding any otherprovision hereof: (A) permit TWC Utility Company, LLC to conduct anybusiness or acquire any assets; (B) form or create any new Subsidiary; or (C) commenceoperations under any other name or in any joint venture.

 

**ARTICLE 7**

**FINANCIAL COVENANTS**

** **

Unlessotherwise agreed to in writing by CoBank, while this Agreement is in effect:

 

**SECTION 7.01.    Debt Service Coverage Ratio.**TheCompany and its consolidated Subsidiaries shall have for each fiscal year ofthe Company, a Debt Service Coverage Ratio of not less than 1.25 to 1:00.

 

**SECTION 7.02.    Total Debt to EBITDA Ratio.**TheCompany and its consolidated Subsidiaries shall have a ratio of Total Debt atthe end of each fiscal year of the Company shown below to EBITDA for eachfiscal year of the Company shown below of not greater than the ratio shown nextto each fiscal year shown below:

 

| **Fiscal Year**     | ** ** | **Ratio** | ** ** |
|---------------------|------------|-----------|------------|
| 2005 through 2008   |       | 10 to 1   |       |
| 2009 and thereafter |       | 8 to 1    |       |

 

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**SECTION 7.03.    Total Debt to Capitalization Ratio.** The Company and its consolidated Subsidiariesshall have at the end of each fiscal quarter of the Company, a ratio of TotalDebt to Total Capitalization of not more than .60 to 1.00.

 

**SECTION 7.04.    Fiscal Year.**The Companywill not change its fiscal year.

 

**ARTICLE 8**

**EVENTS OF DEFAULT**

** **

Eachof the following shall constitute an “Event of Default” hereunder:

** **

**SECTION 8.01.    Payment Default.**  The Company should fail to make when due anypayment to CoBank hereunder, under any Promissory Note and Supplement, or underany other Loan Document, and such failure continues for five (5) daysafter written notice thereof shall have been delivered to the Company byCoBank; provided, however, that CoBank shall not be required to give theCompany notice and an opportunity to cure: (A) more than twice in anyconsecutive 12 month period; or (B) if one or more other Events of Defaultshall have occurred and be continuing at the time the payment was due.

 

**SECTION 8.02.    Representations and Warranties.**Anyopinion, certificate or like document furnished to CoBank by or on behalf ofthe Company, or any representation or warranty made or deemed made by theCompany herein or in any other Loan Document, shall prove to have been false ormisleading in any material respect on or as of the date furnished, made ordeemed made.

** **

**SECTION 8.03.    Covenants.**  The Company should fail to perform or complywith any covenant set forth in Articles 5 or 6 hereof (other than Sections5.01, 5.06(E), 6.03, 6.04, 6.06, 6.08, and 6.09 hereof) or any other covenantor agreement contained herein (other than Section 7.01) or in anyPromissory Note and Supplement and such failure continues for 30 days afterwritten notice thereof shall have been delivered to the Company by CoBank.

** **

**SECTION 8.04.    Other Covenants and Agreements.**  The Company should fail to perform or complywith Sections 5.06(E), 6.03, 6.04, 6.06, 6.08, 6.09, or 7.01  hereof, or shalluse the proceeds of any Loan for any unauthorized purpose.

** **

**SECTION 8.05.    Cross Default.**  The Company should breach or be in default underthe terms of any Loan Document or other agreement with CoBank and such defaultcontinues for the longer of:  (A) anygrace period set forth in such Loan Document or other agreement, or (B) 30days after written notice thereof shall have been delivered to the Company byCoBank; provided, however, that if any other Subsection of this Article 8does not provide a grace period for such default or provides a shorter graceperiod for such default, then no grace period or such shorter grace periodshall control.

 

**SECTION 8.06.    Other Indebtedness.**  The Company’s obligation to repay anyindebtedness for borrowed money or for the deferred purchase price of propertyor services in an amount in excess of $500,000 shall be accelerated or declareddue and payable prior to its

 

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scheduled due date as a result of the occurrence of any breach ordefault under any agreement relating to such indebtedness or obligation.

 

**SECTION 8.07.    Judgments.**  One or more judgments, decrees, or orders forthe payment of money in excess of $500,000 in the aggregate shall have beenrendered against the Company and either: (A) enforcement proceedings shallhave been commenced; or (B) such judgments, decrees, or orders shallcontinue unsatisfied and in effect for a period of 30 consecutive days withoutbeing vacated, bonded, discharged, satisfied, or stayed pending appeal.

 

**SECTION 8.08.    Insolvency, Etc.**TheCompany shall: (A) become insolvent or shall generally not, or shall beunable to, or shall admit in writing its inability to, pay its debts as theybecome due; or (B) suspend its business operations or a material partthereof; or (C) apply for, consent to, or acquiesce in the appointment ofa trustee, receiver, or other custodian for it or any of its property; or (D) havecommenced against it any action or proceeding for the appointment of a trustee,receiver, or other custodian, or a trustee, receiver, or other custodian isappointed for all or any part of its property; (E) have commenced againstit any proceeding under any bankruptcy, reorganization, arrangement,readjustment of debt, dissolution, or liquidation law of any jurisdiction; or (F) makean assignment for the benefit of creditors or commence any proceeding under anybankruptcy, reorganization, arrangement, readjustment of debt, dissolution, orliquidation law of any jurisdiction.

 

**SECTION 8.09.    Casualty or Condemnation. ** All or a material portion of the assets of theCompany: (1) is destroyed in an uninsured casualty or like event(regardless of the cause); or (2) is taken in a condemnation action orproceeding or in a like proceeding or is sold or otherwise transferred in lieuthereof or pursuant to any right of any governmental authority to direct thesale of transfer thereof.

 

**SECTION 8.10.    Ownership.**Any of thefollowing take place without the prior written consent of CoBank: (A) TexasWater Services Group, LLC shall cease to be a general partner in the Company,or one or more new general partners are added to the Company; (B) Southwest  and/or other Persons owned 100% directly orindirectly by Southwest should cease to be the only limited partners in theCompany; or (C) Southwest  and/orother Persons owned 100% directly or indirectly by Southwest should cease toown, directly or indirectly, 100% of the membership interests and other equityinterests in Texas Water Services Group, LLC.

 

**SECTION 8.11.    Affiliates**. (A) ARelevant Affiliate breaches or is otherwise in default in any material respectunder a Relevant Agreement; (B) Southwest, any general partner in theCompany, or any Subsidiary of the Company becomes subject to an event of thetype referred to in Section 8.06, 8.07 or 8.08 hereof (including, for avoidanceof doubt, the dollar amounts specified therein; provided that if any suchPerson is subject to Indebtedness and the documents entered into in connectionwith such Indebtedness contain cross default or cross acceleration provisionsfor other Indebtedness of such Person, the dollar amounts for purposes of thisclause (B) shall be the dollar amounts in such documents rather than thedollar amounts in this Agreement); (C) any Person which succeeds to thedirect ownership of any general partner in the Company should become subject toan event of the type referred to in Section 8.08 hereof; or (D) withinthirty (30) days after a Relevant Affiliate (other than Southwest or aSubsidiary) becomes subject to an Event of the type referred to in Section 8.06,8.07 or 8.08 hereof, the Company fails to provide CoBank with assurancereasonably satisfactory to CoBank that the services furnishes to the Company bysuch Relevant Affiliate will continue without interruption,

 

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whether by the Relevant Affiliate or another entity (it being agreedthat until such assurance is provided, CoBank shall have the right to suspendmaking further Loans to the Company).

 

**SECTION 8.12**.    **Existence, Etc**.The Company shall: (A) fail to preserve and maintain its existence andgood standing in the jurisdiction of its formation or fail to qualify andremain qualified to transact business in all jurisdictions where failure tomaintain such qualification could reasonably be expected to have a MaterialAdverse Effect; or (B) fail to obtain and/or maintain any governmentallicense, permit, franchise or the like which is material to its business orrequired by Law; provided, however, that such failure shall not be consideredto be an Event of Default if: (i) the Company made timely application forsame, such application has not been rejected, and the Company is diligentlypursuing the acquisition of same; and (ii) no governmental authority orother Person has required the Company to discontinue the operations governed bythe license, permit, franchise or other right, or has commenced any EnforcementAction  against the Company or taken anyother action which could reasonably be expected to have a Material AdverseEffect on the Company for or on account of the failure; and (C) fail toobtain and maintain any other franchise or any patent, copyrights, trademark,tradename or right thereto which is material to the conduct of its business orrequired by Law and the failure to obtain or maintain such other franchise orsuch patent, copyright, trademark, tradename or right thereto continues for 30days after written notice shall have been furnished by CoBank to the Company.

 

**SECTION 8.13.    Title Insurance.** Republic Title or any title insurance companyproviding coverage to CoBank for or on account of any Loans shall breach orotherwise be in default under any commitment or other agreement with CoBank andsuch breach is not cured within 30 days after CoBank shall have furnishednotice of same to the Company and Republic Title or other title insurancecompany.

 

**SECTION 8.14.    Partnership Agreement.**ThePartnership Agreement is amended without CoBank’s consent.

** **

**ARTICLE 9**

**REMEDIES UPON DEFAULT**

 

**SECTION 9.01.  Remedies. **Upon the occurrence and during the continuance of aDefault or Event of Default, CoBank shall have no obligation to make any Loanto the Company and may discontinue doing so at any time without prior notice.In addition, upon the occurrence and during the continuance of an Event ofDefault, CoBank may, upon notice to the Company:

 

**(A)          Termination and Acceleration.**Terminate any commitment and declare the unpaid principal balance of the Loans,all accrued interest thereon, and all other amounts payable under thisAgreement, the Promissory Notes and Supplements, and all other Loan Documentsto be immediately due and payable; provided, however, that upon the occurrenceof an Event of Default under Section 8.08(F), any commitments shallautomatically be terminated and all such amounts shall automatically become dueand payable. Upon such a declaration (or automatically, as provided above), theunpaid principal balance of the Loans and all such other amounts shall becomeimmediately due and payable, without protest, presentment, demand, or furthernotice of any kind, all of which are hereby expressly waived by the Company.

 

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**(B)          Enforcement.**   Proceed to protect, exercise, and enforcesuch rights and remedies as may be provided by this Agreement, any other LoanDocument, or under Law. Each and every one of such rights and remedies shall becumulative and may be exercised from time to time, and no failure on the partof CoBank to exercise, and no delay in exercising, any right or remedy shalloperate as a waiver thereof, and no single or partial exercise of any right orremedy shall preclude any future or other exercise thereof, or the exercise ofany other right. Without limiting the foregoing, CoBank may hold and/or set offand apply against the Company’s obligations to CoBank the proceeds of anyequity in CoBank, any cash collateral held by CoBank, or any other balancesheld by CoBank for the Company’s account (whether or not such balances are thendue).

** **

**(C)          Application of Funds.**   Apply all payments received by it to theCompany’s obligations to CoBank in such order and manner as CoBank may elect inits sole discretion.

** **

In addition to the rightsand remedies set forth above and notwithstanding the terms of any PromissoryNote and Supplement, upon the occurrence and during the continuance of an Eventof Default,  at CoBank’s option in eachinstance (and automatically following an acceleration), interest on the unpaidprincipal balance of the Loans and, to the extent permitted by Law, overdueinterest, fees and other charges,  shallbear interest  at the Default Rate. Allsuch interest, together with all overdue amounts, shall be payable on demand.

 

**ARTICLE 10**

**MISCELLANEOUS**

** **

**SECTION 10.01.   Broken Funding Surcharge. **The Company agrees that inthe event it repays any Loan balance bearing interest at a fixed rate prior tothe last day of the fixed rate period relating thereto (whether such payment ismade voluntarily, as a result of an acceleration, or otherwise), or fails toborrow any fixed rate balance on the date scheduled therefor, the Company willpay to CoBank a surcharge in the amount set forth in (or in an amountcalculated in accordance with) the Promissory Note and Supplement relatingthereto. Notwithstanding the foregoing: (A) if for any reason any PromissoryNote and Supplement executed after the date hereof fails to contain asurcharge, then the applicable surcharge shall be the surcharge set forth inthe Promissory Note and Supplement dated as of May 1, 2002 and numberedML0936T1 (which reference shall survive the repayment and termination of thatPromissory Note and Supplement); and (B) in the event the parties enterinto a forward fixed rate agreement or other agreement regarding interest rateproducts, and such agreement provides for a different surcharge, then suchother agreement shall control.

 

**SECTION 10.02.  Complete Agreement, Amendments, Etc.**  The Loan Documents are intended by theparties to be a complete and final expression of their agreement. No amendmentor modification of this Agreement or the other Loan documents shall beeffective unless approved in writing by the Company and CoBank and no waiver ofany provision of the Loan Documents, and no consent to any departure by theCompany herefrom or therefrom, shall be effective unless approved by CoBank andcontained in a writing signed by or on behalf of CoBank, and then such waiveror consent shall be effective only in the specific instance and for thespecific purpose for which given. In the event this Agreement is amended orrestated, each such amendment or restatement shall be applicable to allPromissory Notes and Supplements hereto. Each Promissory Note and Supplementshall be deemed to incorporate all of the terms and conditions of thisAgreement as if fully set forth therein.

 

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**SECTION 10.03.   Applicable Law, Jurisdiction.**Except to the extent governed by applicable federal Law, this Agreement andeach Promissory Note and Supplement shall be governed by the Laws of the Stateof Colorado, without reference to choice of law doctrine. The parties agree tosubmit to the non-exclusive jurisdiction of any federal or state court sittingin Colorado for any action or proceeding arising out of or relating to thisAgreement or any other Loan Document. The Company hereby waives any objectionthat it may have to any such action or proceeding on the basis of forumnon-conveniens.

** **

**SECTION 10.04.   Notices.** All noticeshereunder shall be in writing and shall be deemed to have been duly given upon deliveryif personally delivered or sent by overnight mail or by facsimile or similartransmission, or three (3) days after mailing if sent by express,certified or registered mail, to the parties at the following addresses (orsuch other address as either party may specify by like notice):

 
| If to CoBank, as  follows:         | If to the  Company, as follows:       |
|------------------------------------|---------------------------------------|
| CoBank, ACB                        | Southwest Water  Company.             |
| 5500 South  Quebec Street          | One Wilshire  Building, 29th floor    |
| Greenwood  Village, Colorado 80111 | 624 South Grand  Ave, Suite 2900 |
| Facsimile: (303)  740-4002         | Los Angeles, CA  90017                |
| Attention:  Energy Banking Group   | Facsimile: (213)  929-1888            |
|                               | Attention: Chief  Financial Officer   |

 

**SECTION 10.05.  Costs, Expenses, and Taxes.**  To the extent allowed by Law, the Companyagrees to pay all reasonable out-of-pocket costs and expenses (including thefees and expenses of counsel retained or employed by CoBank) incurred by CoBankin connection with the origination, administration, interpretation, collection,and enforcement of this Agreement and the other Loan Documents, including,without limitation, all costs and expenses incurred in perfecting, maintaining,determining the priority of, and releasing any security for the Company’sobligations to CoBank, and any stamp, intangible, transfer or like tax incurredin connection with this Agreement or any other Loan Document or the recordinghereof or thereof.

** **

**SECTION 10.06.   Effectiveness and Severability.**  This Agreement shall continue in effectuntil: (A) all indebtedness and obligations of the Company under thisAgreement and the other Loan Documents shall have been paid or satisfied; (B) CoBankhas no commitment to extend credit to or for the account of the Company underany Promissory Note and Supplement; (C) all Promissory Notes andSupplements shall have been terminated; and (D) either party sends writtennotice to the other party terminating this Agreement. Any provision of thisAgreement or any other Loan Document which is prohibited or unenforceable shallbe ineffective to the extent of such prohibition or unenforceability withoutinvalidating the remaining provisions hereof or thereof.

 

**SECTION 10.07.  Successors and Assigns.**  This Agreement and the other Loan Documentsshall be binding upon and inure to the benefit of the Company and CoBank andtheir respective successors and assigns, except that the Company may not assignor transfer its rights or obligations under this Agreement or the other LoanDocuments without the prior written consent of CoBank. From time to time,CoBank may sell a participation in one or more of the

 

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Loans. However, no such participation shall relieve CoBank of anycommitment made to the Company hereunder. In connection with the foregoing, CoBank may disclose informationconcerning the Company and its Subsidiaries, if any, to any participant orprospective participant, provided that such participant or prospectiveparticipant agrees, subject to normal qualifications, to keep all non-publicinformation confidential.  A sale of aparticipation interest may include certain voting rights of the participantsregarding the Loans hereunder (including without limitation the administration,servicing and enforcement thereof). CoBank agrees to give written notification to the Company of any sale ofa participation interest.

 

**SECTION 10.08. Headings.** Captions and headings used in this Agreementare for reference and convenience of the parties only, and shall not constitutea part of this Agreement.

 

**INWITNESS WHEREOF,**the parties have caused this Agreement to beexecuted by their duly authorized officers as of the date shown above.

 

 
| **CoBANK,  ACB** |                           | **MONARCH  UTILITIES I L.P.**        |
|------------------|--------------------------------|--------------------------------------|
| ** **       | ** **                     | a Texas limited  partnership         |
| ** **       | ** **                     |                                 |
| ** **       | ** **                     | By: Texas Water  Services Group, LLC |
| ** **       | ** **                     | a Texas limited  liability company   |
| ** **       | ** **                     | Its: General  Partner                |
|             |                           |                                 |
| By:              | /s/ Penny  Probasco            |                                 | By: | /s/ Michael O.  Quinn |   |
|             |                           |                                 |   |   |   |
| Title:           | Assistant  Corporate Secretary |                                 | Title: | President |   |

 

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**EXHIBIT A**

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**DEFINITIONS AND RULES OF INTERPRETATION**

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**SECTION 1.01Definitions.** As usedin the Agreement, any amendment thereto, or in any Promissory Note andSupplement, the following terms shall have the following meanings:

 

**Affiliate**shall mean any Person: (1) which directly or indirectlycontrols, or is controlled by, or is under common control with, the Company,Monarch Utilities, Inc., or Southwest; (2) which directly orindirectly beneficially owns or holds five percent (5%) or more of any class ofvoting stock of, or other interests in, the Company,  Monarch Utilities, Inc., or Southwest;or (3) five percent (5%) or more of the voting stock of, or other interestin, which is directly or indirectly beneficially owned or held by the Company,Monarch Utilities, Inc., or Southwest. The term “control” means thepossession, directly or indirectly, of the power to direct or cause thedirection of the management and policies of a Person, whether through theownership of voting securities, by contract or otherwise.

 

**Agreement**  shall mean the Amended and Restated MasterLoan Agreement dated as of September 12, 2005, between the Company andCoBank, as it may be amended or modified from time to time.

 

**Assets**shall mean total assets, as computed in accordance with GAAP consistentlyapplied.

 

**BusinessDay** means any day otherthan a Saturday, Sunday, or other day on which CoBank or the Federal ReserveBanks is closed for business.

 

**CapitalLease** shall mean a lease which should be capitalized on thebooks of the lessee in accordance with GAAP.

 

**CertifiedCopies**shall mean copies, certified true and correct and infull force and effect as of the date of certification, by the secretary orother officer acceptable to CoBank of the Person furnishing same.

 

**ClosingAgreement**shall have the meaning set forth in Section 3.01(G) ofthe Agreement.

 

**CoBank**shallmean CoBank, ACB and its successors and assigns.

 

**CoBankBase Rate** shall mean the rate of interest established byCoBank from time to time as the CoBank Base Rate, which Rate is intended byCoBank to be a reference rate and not its lowest rate. The CoBank Base Rateshall change on the date established by CoBank as the effective date of eachchange in the CoBank Base Rate.

 

**Company**shallmean Monarch Utilities I L.P. and its permitted successors and assigns.

 

**DebtService Coverage Ratio** shall mean a ratio of: (1) netincome (after taxes and after eliminating any gain or loss on sale of assets orother extraordinary gain or loss), plus depreciation expense, amortizationexpense, and total interest expense, minus non-cash patronage and non-cashincome from Subsidiaries and/or joint ventures; to (2) all principalpayments due or, in the case of amounts paid on guaranties of indebtedness,otherwise made, within the period on all Long-Term Debt,

 

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plus total interest expense, plus Distributions (all as calculated on aconsolidated basis for the applicable period in accordance with GAAPconsistently applied).

 

**Debt ToCapitalization Ratio**shall mean a ratio of Total Debt at theend of the fiscal year to Total Capitalization at the end of the fiscal year.

 

**Deed ofTrust** shall mean thatcertain Deed of Trust, Security Agreement And Assignment of Rents and Leasesdated as of May 1, 2002, among the Company, as Grantor and Trustor, andSteve Moore, as Trustee for the benefit of CoBank.

 

**Deed ofTrust Amendment** shall have the meaning set forth in Section 2.01(G) ofthe Agreement.

 

**Default**shallmean the occurrence of any event which with the giving of notice or the passageof time would become an Event of Default under the Agreement, including theoccurrence of an event giving rise to the right to accelerate any indebtednessreferred to in Section 8.06 of the Agreement (whether or not such right isconditioned upon the giving of notice and/or the passage of time and/or theoccurrence of any other condition).

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**DefaultRate**shall mean 3% per annum in excess of the rate or ratesthat would otherwise be in effect under the terms of the Promissory Note andSupplement, except that in the case of overdue interest, fees, and, prior tothe final maturity of a Loan (whether as a result of acceleration or otherwise)principal, the term Default Rate shall mean 3% per annum in excess of anyvariable rate option provided in the Promissory Note and Supplement, or, in theevent no such option is provided, 3% per annum in excess of the rateestablished by CoBank from time to time during that period as  the CoBank Base Rate.

 

**DepositAccount**shall mean a demand deposit account maintained at anfederally  insured financial institution.

 

**Distribution**shall mean the: (1) payment of any dividend ordistribution of any kind, whether in cash, assets, obligations or otherwise;and (2) the acquisition by the Company of any general or limitedpartnership interest in the Company.

 

**Dollars**and the sign **“$”** shall mean lawful money of theUnited States of America.

 

**EBITDA** shall mean, for the Company, on a consolidatedbasis, operating revenues minus operating expenses, plus depreciation andamortization expenses (all as calculated for the fiscal year being measured ona consolidated basis in accordance with GAAP consistently applied).

 

**EnforcementAction**shall mean a formal judicial or administrativeproceeding  filed by the TCEQ,  the Attorney General of Texas, or any  governmental authority to enforce any Law.

 

**Equity**shallmean total assets minus total liabilities, as computed in accordance with GAAPconsistently applied.

 

**ERISA**shallmean the Employee Retirement Income Security Act of 1974, as amended from timeto time, and the regulations and published interpretations thereof.

 

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**ERISAAffiliate** means any trade or business (whether or notincorporated) that is treated as a single employer together with the Companyunder section 414 of the Internal Revenue Code of 1986, as amended fromtime to time, and the rules and regulations promulgated thereunder fromtime to time.

 

**Event ofDefault**shall mean any of the events specified in Article 8of the Agreement and any event specified in any Promissory Note and Supplementor other Loan Document as an Event of Default.

 

**ExistingMLA**shall have the meaning set forth in the Background to theAgreement.

 

**ExistingPromissory Notes and Supplements**shall have the meaning givenin Section 2.01 of the Agreement.

 

**GAAP**shallmean generally accepted accounting principles in the United States.

 

**Laws **shall mean all laws, rules,regulations, codes, orders and the like.

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**Lien**shallmean any mortgage, deed of trust, pledge, security interest, hypothecation,assignment, deposit arrangement, encumbrance, lien (statutory or other), orpreference, priority or other security agreement or preferential arrangement,charge or encumbrance of any kind or nature whatsoever (including, withoutlimitation, any conditional sale or other title retention agreement).

 

**Loan**shallmean a loan and/or other type of credit made to or for the account of theCompany, including letters of credit, all as described in the Promissory Noteand Supplement relating to that Loan**.**

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**Loan Documents**shall mean this Agreement, all Promissory Notes andSupplements hereto, and all instruments or documents relating to this Agreementor the Promissory Notes and Supplements, including, without limitation, allapplications, certificates,  mortgages,deeds of trust, security agreements, guaranties, and pledge agreements.

 

**Long TermDebt** shall mean, forthe Company and its consolidated Subsidiaries, (a) all indebtedness for borrowed money, (b) obligations whichare evidenced by notes, bonds, debentures or similar instruments, (c) thatportion of obligations with respect to capital leases or other capitalizedagreements that are properly classified as a liability on a balance sheet inconformity with GAAP, and (d) indebtedness which is guarantied by theCompany, in each case having a maturity of more than one year from the date ofits creation or having a maturity within one year from such date but that isrenewable or extendible, at the Company’s or any Subsidiary’s option (or, inthe case of any debt which is guarantied, at the option of the obligor or thePerson to whom the guaranty is furnished), to a date more than one year fromsuch date or that arises under a revolving credit or similar agreement thatobligates the lender(s) to extend credit during a period of more than one yearfrom such date, including all current maturities in respect of suchindebtedness whether or not required to be paid within one year from the dateof its creation.

 

**MaterialAdverse Effect**shall mean a material adverse effect on thecondition, financial or otherwise, operations, properties, margins or businessof the Company or any Subsidiary or on the ability of the Company or anySubsidiary to perform its obligations under the Loan Documents.

 

**Net Worth**shall mean total assets minus total liabilities of theCompany (both as determined on a consolidated basis in accordance with GAAPconsistently applied), except that in determining Net Worth: (1) contributions in aid of construction,advances for construction, customer deposits, or similar

 

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items reducing rate base calculations shallbe excluded; and (2) all indebtedness which is guarantied shall beincluded in total liabilities.

 

**OrganizationalDocuments** shall mean, as relevant: (A) articles orcertificate of incorporation or formation (or equivalent documents); and (B) bylaws,partnership agreements, management agreements, shareholder agreements, votingtrust agreements, and like instruments and documents.

 

**PartnershipAgreement** shall meanthat certain Agreement of Limited Partnership of Tecon Water Company, L.P.dated as of December 10, 2001.

 

**Person**shall mean an individual, partnership, limited liability company, corporation,business trust, joint stock company, trust, unincorporated association, jointventure, governmental authority, or other entity of whatever nature.

 

**PromissoryNote and Supplement** shall have the meaning set forth in Section 2.01of the Agreement.

 

**Relevant Affiliate**shall mean Southwest, a Subsidiary and, while a party to a Relevant Agreement,another Affiliate.

 

**Relevant Agreement**shall mean an agreement that relates to the credit extended hereby and isbetween: (1) an Affiliate and the Company under which the Affiliateperforms any service for or on behalf of the Company, including an agreementwith respect to which the Affiliate has entered into an agreement with CoBankpursuant to Section 3.01(H) or has or may be require to enter intoany agreement with CoBank under Section 6.11 of the Agreement; and (2) anAffiliate and CoBank (including any agreement referred to in Sections 3.01(H) and6.11 of the Agreement and the agreement between Tecon Corporation and CoBankdated as of May 1, 2002 and assumed by Southwest pursuant to that certainConsent and Agreement dated as of July 13, 2004, among this Company (thenknown as Tecon Water Company, LP), Southwest and CoBank, as same may be amendedor restated from time to time).

 

**Short-TermDebt**shall mean all debt which, under GAAP, should beclassified as short-term debt.

 

**Southwest**shall mean Southwest Water Company, a Delaware corporation.

 

**Subsidiary**shall mean, as to the Company, a corporation, partnership,limited liability company, joint venture, or other Person of which shares ofstock or other equity interests having ordinary voting power to elect amajority of the board of directors or other managers of such corporation,partnership, limited liability company, joint venture, or other Person are atthe time owned, or the management of which is otherwise controlled, directly orindirectly, through one or more intermediaries, or both, by the Company.

 

**TCEQ**shallmean the Texas Commission on Environmental Quality and any governmentalauthority or authorities that succeed to the powers of the TCEQ.

 

**TitlePolicy** shall mean that certain Mortgagees Policy of TitleInsurance dated May 5, 2002 and numbered 152187M, issued by First AmericanTitle Insurance Company.

 

**TotalCapitalization**shall mean shall mean Total Debt plus NetWorth.

 

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**TotalDebt**shall mean the sum of (a) all indebtedness forborrowed money, (b) obligations which are evidenced by notes, bonds,debentures or similar instruments, (c) that portion of obligations withrespect to Capital Leases and other capitalized agreements that are properlyclassified as a liability on the balance sheet in conformity with GAAP; and (d) indebtednessand other obligations guarantied by the Company.

 

**2005Promissory Note and Supplement** shall mean the Promissory Noteand Supplement hereto dated as of the date hereof and bearing number RX0936T3

 

**SECTION 1.02Rules of Interpretation. **Thefollowing rules of interpretation shall apply to the Agreement, allPromissory Notes and Supplements, and all amendments to either of the foregoing:

 

**AccountingTerms.**All accounting terms not specifically defined hereinshall be construed in accordance with GAAP, and all financial data submittedpursuant to this Agreement shall be prepared in accordance with suchprinciples.

 

**Number. **All terms stated in thesingular shall include the plural, and all terms stated in the plural shallinclude the singular.

 

**Including. **The term “including” shallmean including, but not limited to.

 

**Default**.The expression “while any Default or Event of Default shall have occurred andbe continuing” (or like expression) shall be deemed to include the periodfollowing any acceleration of the Obligations (unless such acceleration isrescinded).

 

**PermittedEncumbrances.** CoBank’sconsent to the Company having one or more Liens on all or any portion of itsassets shall not be construed to be an agreement to subordinate its Lien onthose assets to the extent that such Lien is not otherwise entitled to priorityunder Law.

 

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