<PAGE>

                                 EXHIBIT 10.16

First
Security
Bank                         MODIFICATION AGREEMENT

<TABLE>
<S>            <C>           <C>           <C>           <C>        <C>            <C>           <C>           <C>
Principal      Loan Date      Maturity      Loan No.      Call      Collateral      Account      Officer      Initials
$4,000,000                   04-10-2000       9001                                  0032687       45917
</TABLE>

<TABLE>
<S>                                          <C>
Borrower: New Mexico Utilities, Inc.         Lender: First Security Bank of New Mexico, N.A.
          4700 Irving Blvd., Suite 201               Corporate Banking
          Albuquerque, NM  87114                     40 First Plaza Center NW
                                                     Albuquerque, NM  87102
</TABLE>

First Security Bank of New Mexico, N.A. ("Lender") has extended the credit (the
"Loan") to New Mexico Utilities, Inc. (individually and collectively "Borrower")
pursuant to a promissory note dated December 10, 1997 (the "Note") in the stated
principal amount of $4,000,000.00.  The Loan is unsecured.

The Note and any loan agreements, guaranties, subordinations, Collateral
Documents and other instruments and documents executed in connection therewith,
together with any previous modifications to any of these instruments or
documents shall be referred to as the "Loan Documents".

Borrower has requested certain modifications to the Loan Documents and Lender is
willing to grant such modifications on the following terms and conditions:

     1.   Provided that all conditions stated herein are satisfied, the terms of
          the Loan Documents are hereby modified as follows:

          Modifications to the Terms of the Note
          --------------------------------------
          The maturity date of the Note is extended to April 10, 2000,
          This Agreement does not constitute a repayment or extinguishment of
          the Note, but only a modification thereof.
          Other Modifications to the Loan Documents:
          -----------------------------------------
          The Loan Documents shall be amended as follows:
               The following Year 2000 (Y2K) language is made a part of the Loan
               Documents:
               Each Borrower shall take all action that may be necessary or
               desirable, or that Bank may reasonably request, in order to
               ensure that the Borrower, its affiliates, and all customers,
               suppliers and vendors that are material to the Borrower's
               business, become Year 2000 Compliant on or before August 1, 1999.
               Such acts shall include, without limitation, (I) performing a
               comprehensive inventory, review and assessment of all Borrower's
               systems and adopting a detailed plan, with itemized budget and
               timetable, for the remediation, monitoring and testing of such
               systems, and (ii) making a detailed inquiry of all material
               customers, suppliers, and vendors to ascertain whether such
               entities are aware of the need to be Year 2000 Compliant and are
               taking all appropriate steps to become Year 2000 Compliant on a
               timely basis. Borrower shall, promptly upon request, provide to
               bank such certifications or other evidence of Borrower's
               compliance with the terms of this section as Bank may from time
               to time reasonably require.

               "Year 2000 Compliant" shall mean, in regard to any entity, that
               all software, hardware, firmware, equipment, goods or systems
               used by or material to the business operations or financial
               condition of such entity will properly perform date sensitive
               functions before, during and after January 1, 2000. Such date
               sensitive functions shall include, without limitation, (a)
               interpretation of years greater than 1999, (b) process date data
               from, into, and between dates before January 1, 12000 and dates
               on or after January 1, 2000, (c) recognizing numbers such as 99
               as an actual date rather than indefinite or unknown information,
               (d) recognizing that the year 2000 is a leap year, and (e)
               transferring data between systems that used different methods to
               make the system Year 2000 Compliant.
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     2.   As preconditions to the terms of this Agreement, Borrower shall
          complete or provide the following

          Borrower shall pay or shall have paid all reasonable fees, costs, and
          expenses, of whatever kind or nature, incurred by Lender in connection
          with this Agreement, including but not limited to attorney's fees,
          lien search fees, title reports and pollicies, and recording and
          filing fees.

     3.   It is the intention and agreement of Borrower and Lender that: (I) all
          collateral security in which Lender has acquired a security interest
          or other lien pursuant to the Loan Documents shall continue to serve
          as collateral security for payment and performance of all the
          obligations of the Borrower under the Loan Documents, and (iii) all
          agreements, representations, warranties and covenants contained in the
          Loan Documents are hereby reaffirmed in full by borrower except as
          specifically modified by this Agreement

     4.   Borrower hereby acknowledges that: (I) the Loan Documents are in full
          force and effect, as modified by this Agreement, and (ii) by entering
          into this Agreement, Lender does not waive any existing default or any
          default hereafter occurring or become obligated to waive any condition
          or obligation under the Loan Documents.

     5.   Borrower hereby acknowledges that Borrower has no claim, demand,
          lawsuit, cause of action, claim for relief, remedy, or defense against
          enforcement of the Loan Documents that could be asserted against
          Lender, its affiliates, directors, officers, employees, or
          representations, commitments, statements or warranties, including
          without limitation any such conduct arising out of or in any way
          connected with the Loan Documents. Notwithstanding the foregoing,
          Borrower hereby waives, releases and relinquishes any and all claims,
          demands, lawsuits, causes of action, claims for relief, remedies or
          defenses against enforcement of the Loan Documents that could be
          asserted against Lender, its affiliates, directors, officers,
          employees or agents, whether known or unknown.

     6.   In addition to this Agreement, the Loan Documents, and any additional
          documents that this Agreement requires, this finance transaction may
          include other written closing documentation such as resolutions,
          waivers, certificates, financing statements, filings, statements
          closing or escrow instructions, loan purpose statements, and other
          documents that Lender may customarily use in such transactions. Such
          documents are incorporated herein by this reference. All the documents
          to which this paragraph makes reference express, embody and supercede
          any previous understandings, agreements, or promises (whether oral or
          written) with respect to this finance transaction, and represent the
          final expression of the agreement between Lender and Borrower, the
          terms and conditions of which cannot hereafter by contradicted by any
          oral understanding (if any) not reduced to writing and identified
          above.

     WRITTEN AGREEMENTS.  Borrower acknowledges that Borrower is aware of the
     provisions of Section 58-6-5 NMSA 1978 Comp, which requires a contact,
     promise or commitment to loan money or to grant, extend, or renew credit or
     any modification thereof, in an amount greater that twenty-five thousand
     dollars ($25,000), not primarily for personal, family or household
     purposes, to be in wiring and signed by the party to be charged or that
     party's authorized representative.

     Effective as of April 10, 1999.

     LENDER:

     First Security Bank of New Mexico, N.A.

     By: /s/ J. CHESLEY STEEL
        ---------------------
         Authorized Officer

     BORROWERS:

     New Mexico Utilities, Inc.
     By: /s/ ROBERT L. SWARTWOUT             By: /s/ WILLIAM C. JASURA
        ------------------------                ----------------------
         Robert L. Swartwout, President          William C. Jasura, Secretary
<PAGE>

             AFFIRMATION OF GUARANTORS, GRANTORS, AND SUBORDINATORS

     Each of the following Guarantors, Grantors, Subordinators, and other
     parties to the Loan Documents hereby acknowledges and consents to the
     foregoing Modification Agreement and affirms and restates each of their
     respective liabilities, obligations, and agreements set forth in the Loan
     Documents.  In addition, the following specifically agree to continuing
     their respective guaranties and subordinations as to any increase in the
     principal amount of the Loan and specifically agree that the Collateral
     Documents secure any increase in the principal amount of the Loan.  Each of
     the following also hereby give the same assurances, representations,
     waivers, releases, and relinquishments given by Borrower in paragraph 5 of
     the Modification Agreement as if it were restated as part of this
     affirmation.

     GUARANTORS:

     Southwest Water Company

     By: /s/PETER J. MOERBEEK
     ------------------------
      Peter J. Moerbeek, Vice President Finance/Chief Financial Officer

     By: /s/STEPHEN J. MUZI
     ----------------------
      Stephen J. Muzi, Corporate Controller