Exhibit 4.1

                        CALIFORNIA WATER SERVICE COMPANY





                                 NOTE AGREEMENT

                            Dated as of March 1, 1999




         Re:          $20,000,000 6.77% Series B Senior Notes
                              Due November 1, 2028







================================================================================


                                                                              66

<PAGE>

<TABLE>
                                                  TABLE OF CONTENTS
                                            (Not a part of the Agreement)
<CAPTION>

SECTION                                                HEADING                                                 PAGE
<S>                        <C>                                                                                   <C>
Parties...........................................................................................................1

SECTION 1.                 DESCRIPTION OF NOTES AND COMMITMENT....................................................1

       Section 1.1.        Description of Notes...................................................................1
       Section 1.2.        Commitment, Closing Date for Series B Notes............................................1
       Section 1.3.        Several Commitments....................................................................2
       Section 1.4.        Additional Series of Notes.............................................................2

SECTION 2.                 PREPAYMENT OF NOTES....................................................................3

       Section 2.1.        No Required Prepayments................................................................3
       Section 2.2.        Optional Prepayment with Premium.......................................................3
       Section 2.3.        Optional Prepayment at Par in the Event of Condemnation................................3
       Section 2.4.        Notice of Optional Prepayments.........................................................3
       Section 2.5.        Application of Prepayments.............................................................4
       Section 2.6.        Direct Payment.........................................................................4

SECTION 3.                 REPRESENTATIONS........................................................................4

       Section 3.1.        Representations of the Company.........................................................4
       Section 3.2.        Representations of the Purchasers......................................................4

SECTION 4.                 CLOSING CONDITIONS.....................................................................6

       Section 4.1.        Conditions.............................................................................6
       Section 4.2.        Waiver of Conditions...................................................................8
       Section 4.3.        Conditions to Issuance of Additional Notes.............................................8

SECTION 5.                 COMPANY COVENANTS......................................................................8

       Section 5.1.        Corporate Existence, Etc...............................................................9
       Section 5.2.        Insurance..............................................................................9
       Section 5.3.        Taxes, Claims for Labor and Materials, Compliance with Laws............................9
       Section 5.4.        Maintenance............................................................................9
       Section 5.5.        Nature of Business....................................................................10
       Section 5.6.        Limitations on Current Debt and Funded Debt...........................................10
       Section 5.7.        Limitation on Liens...................................................................11
       Section 5.8.        Mergers, Consolidations and Sales of Assets...........................................12
       Section 5.9.        Guaranties............................................................................14
       Section 5.10.       Repurchase of Notes...................................................................14


                                                         i

<PAGE>

       Section 5.11.       Transactions with Affiliates..........................................................15
       Section 5.13.       Reports and Rights of Inspection......................................................15
       Section 5.14.       Note Exchange Upon Issuance of First Mortgage Bonds...................................18

SECTION 6.                 EVENTS OF DEFAULT AND REMEDIES THEREFOR...............................................19

       Section 6.1.        Events of Default.....................................................................19
       Section 6.2.        Notice to Holders.....................................................................20
       Section 6.3.        Acceleration of Maturities............................................................20
       Section 6.4.        Rescission of Acceleration............................................................21

SECTION 7.                 AMENDMENTS, WAIVERS AND CONSENTS......................................................22

       Section 7.1.        Consent Required......................................................................22
       Section 7.2.        Solicitation of Holders...............................................................22
       Section 7.3.        Effect of Amendment or Waiver.........................................................22
       Section 7.4.        Supplements...........................................................................22

SECTION 8.                 INTERPRETATION OF AGREEMENT; DEFINITIONS..............................................22

       Section 8.1.        Definitions...........................................................................22
       Section 8.2.        Accounting Principles.................................................................31
       Section 8.3.        Directly or Indirectly................................................................31

SECTION 9.                 MISCELLANEOUS.........................................................................31

       Section 9.1.        Registered Notes......................................................................31
       Section 9.2.        Exchange of Notes.....................................................................32
       Section 9.3.        Loss, Theft, Etc. of Notes............................................................32
       Section 9.4.        Expenses, Stamp Tax Indemnity.........................................................32
       Section 9.5.        Powers and Rights Not Waived; Remedies Cumulative.....................................33
       Section 9.6.        Notices...............................................................................33
       Section 9.7.        Successors and Assigns................................................................33
       Section 9.8.        Survival of Covenants and Representations.............................................33
       Section 9.9.        Severability..........................................................................33
       Section 9.10.       Governing Law.........................................................................33
       Section 9.11.       Captions..............................................................................33

Signature Page...................................................................................................34

</TABLE>
                                                         ii


<PAGE>


ATTACHMENTS TO NOTE AGREEMENT:

  Schedule I      -        Information Relating to Purchasers
  Schedule II     -        Liens Securing Funded Debt

  Exhibit A       -        Form of Series B Notes
  Exhibit B       -        Representations and Warranties of the Company
  Exhibit C       -        Form of Opinion of Special Counsel
                           for the Purchasers

  Exhibit D       -        Form of Opinion of Counsel to the Company
  Exhibit E       -        Form of Supplement to Note Agreement


                                                        iii

<PAGE>

                        CALIFORNIA WATER SERVICE COMPANY
                             1720 North First Street
                           San Jose, California 95112


                                 NOTE AGREEMENT



         Re:        $20,000,000 6.77% Series B Senior Notes
                              Due November 1, 2028

                                                                     Dated as of
                                                                   March 1, 1999


To the Purchasers named on Schedule I
   to this Agreement

         The  undersigned,   CALIFORNIA  WATER  SERVICE  COMPANY,  a  California
corporation (the  "Company"),  agrees with the Purchasers named on Schedule I to
this Agreement (the "Purchasers") as follows:

SECTION 1.     DESCRIPTION OF NOTES AND COMMITMENT.

         Section 1.1. Description of Notes. The Company will authorize the issue
and sale of $20,000,000  aggregate principal amount of its 6.77% Series B Senior
Notes  (the  "Series B Notes") to be dated the date of issue,  to bear  interest
from such date at the rate of 6.77% per annum, payable semiannually on the first
day of each May and  November  in each  year  (commencing  May 1,  1999)  and at
maturity  and to bear  interest  on overdue  principal  (including  any  overdue
required or optional  prepayment of principal) and premium,  if any, and (to the
extent legally  enforceable) on any overdue  installment of interest at the rate
of 8.77% per annum after the date due,  whether by  acceleration  or  otherwise,
until  paid,  to  be  expressed  to  mature  on  November  1,  2028,  and  to be
substantially in the form attached hereto as Exhibit A. Interest on the Series B
Notes shall be computed on the basis of a 360-day year of twelve 30-day  months.
The Series B Notes are not subject to  prepayment or redemption at the option of
the Company  prior to their  expressed  maturity  dates  except on the terms and
conditions and in the amounts and with the premium, if any, set forth in ss.2 of
this Agreement. The Series B Notes together with each Series of Additional Notes
which may from time to time be issued  pursuant to the  provisions  of ss.1.4 of
this Agreement are collectively referred to as the "Notes."

         Section 1.2.  Commitment,  Closing Date for Series B Notes.  Subject to
the terms and  conditions  hereof  and on the basis of the  representations  and
warranties  hereinafter set forth,  the


                                       -1-

<PAGE>

Company agrees to issue and sell to each Purchaser, and such Purchaser agrees to
purchase  from the  Company,  Series B Notes in the  principal  amount set forth
opposite  such  Purchaser's  name on Schedule I hereto at a price of 100% of the
principal amount thereof on the Closing Date hereinafter mentioned.

         Delivery  of the Series B Notes will be made at the  offices of Chapman
and Cutler,  111 West  Monroe  Street,  Chicago,  Illinois  60603-4080,  against
payment  therefor  in Federal  Reserve or other funds  current  and  immediately
available at the principal  office of Bank of America National Trust and Savings
Association,  San Jose Commercial Banking Group #1487, ABA No.  1210-00358,  for
credit to the Company's Security Sales Account No. 14879-00161, in the amount of
the purchase  price at 10:00 A.M. San Francisco  time, on March 23, 1999 or such
later date (not later than March 31,  1999) as shall  mutually be agreed upon by
the  Company  and the  Purchasers  (the  "Closing  Date").  The  Series  B Notes
delivered  to each  Purchaser  on the  Closing  Date will be  delivered  to such
Purchaser in the form of a single registered Note in the form attached hereto as
Exhibit A for the full amount of such  Purchaser's  purchase  (unless  different
denominations  are specified by such Purchaser),  registered in such Purchaser's
name or in the  name of such  Purchaser's  nominee,  all as such  Purchaser  may
specify at any time prior to the date fixed for delivery.

         Section 1.3. Several  Commitments.  The obligations of Purchasers shall
be several and not joint and no Purchaser shall be liable or responsible for the
acts  or  defaults  of  any  other  Purchaser.  The  Purchasers  shall  have  no
obligations  under  any  Supplement  and no  liability  to any  Person  for  the
performance or non-performance by any Additional Purchaser thereunder.

         Section 1.4.  Additional Series of Notes. The Company may, from time to
time, in its sole discretion but subject to the terms hereof, issue and sell one
or more additional series of its unsecured promissory notes under the provisions
of this  Agreement  (each series being a "Series")  pursuant to a supplement  (a
"Supplement")  substantially in the form of Exhibit E. Each additional Series of
Notes (the "Additional  Notes") issued pursuant to a Supplement shall be subject
to the following terms and conditions:

                   (i) each Series of Additional Notes, when so issued, shall be
         differentiated  from all  previous  series  by  sequential  designation
         inscribed thereon;

                  (ii) each Series of  Additional  Notes shall be dated the date
         of issue,  bear interest at such rate,  mature on such date, be subject
         to such  mandatory  and  optional  prepayment  on the  dates and at the
         premiums,   if  any,  have  such  additional  or  different  conditions
         precedent to closing,  such  representations  and  warranties  and such
         additional  covenants  as shall be specified  in the  Supplement  under
         which  such  Additional  Notes  are  issued,  provided,  that  any such
         additional covenants shall inure to the benefit of all holders of Notes
         so long as any  Additional  Notes  issued  pursuant to such  Supplement
         remain outstanding;

                 (iii)  each  Series  of  Additional  Notes  issued  under  this
         Agreement shall be in substantially  the form of Exhibit 1 to Exhibit E
         hereto with such variations,  omissions and insertions as are necessary
         or permitted hereunder;


                                                                               2

<PAGE>

                  (iv) the minimum  principal  amount of any Note issued under a
         Supplement  shall be  $100,000,  except as may be necessary to evidence
         the outstanding  amount of any Note originally issued in a denomination
         of $100,000 or more which has been paid down to less than $100,000;

                   (v) all Additional Notes shall constitute Indebtedness of the
         Company and shall rank pari passu with all other outstanding Notes; and

                  (vi) no Additional  Notes shall be issued  hereunder if at the
         time of issuance  thereof and after giving effect to the application of
         the  proceeds  thereof,  any  Default  or Event of  Default  shall have
         occurred and be continuing.

SECTION 2.     PREPAYMENT OF NOTES.

         Section 2.1.  Required  Prepayments.  No prepayments are required to be
made with  respect to the Series B Notes prior to the  expressed  maturity  date
thereof other than  prepayments  made in connection  with an acceleration of the
Series B Notes pursuant to the provisions of ss.6.3 hereof. Prepayments required
to be made with  respect to any other  Series of Notes shall be specified in the
Supplement pursuant to which such Series is issued.

         Section 2.2.  Optional  Prepayment  with Premium.  Upon compliance with
ss.2.4 the Company shall have the privilege,  at any time and from time to time,
of prepaying  the  outstanding  Notes of any Series,  either in whole or in part
(but if in part then in a minimum  principal  amount of  $100,000) by payment of
the  principal  amount of the Notes of such  Series,  or  portion  thereof to be
prepaid,  and accrued interest thereon to the date of such prepayment,  together
with a premium equal to the  Make-Whole  Amount,  determined as of five Business
Days prior to the date of such prepayment pursuant to this ss.2.2.

         Section 2.3.  Optional  Prepayment at Par in the Event of Condemnation.
In the event a Material  Condemnation  shall have  occurred  with respect to any
property of the Company or a Restricted  Subsidiary,  then upon  compliance with
ss.2.4 the Company  shall have the  privilege  of applying  the  proceeds of any
condemnation award received in connection with such Material Condemnation to the
prepayment of the principal amount of the Notes of any Series then  outstanding,
or any portion  thereof to the extent of such  proceeds,  together  with accrued
interest  thereon to the date of such prepayment.  Any optional  prepayment made
pursuant to this ss.2.3 shall be without premium.

         Section  2.4.  Notice of Optional  Prepayments.  The Company  will give
notice  of any  prepayment  of the  Notes  pursuant  to ss.2.2 or ss.2.3 to each
Holder of Notes to be prepaid not less than 30 days nor more than 60 days before
the date fixed for such optional  prepayment  specifying  (a) such date, (b) the
Section of this  Agreement  under which the  prepayment  is to be made,  (c) the
principal amount of the Holder's Notes to be prepaid on such date, (d) whether a
premium  may be  payable,  (e) the  date  when  the  premium,  if  any,  will be
calculated,  (f) the  estimated  premium,  together  with a reasonably  detailed
computation of such estimated premium,  and (g) the accrued interest  applicable
to the  prepayment.  Such notice of prepayment  shall also certify all facts, if
any, which are conditions precedent to any such prepayment. Notice of


                                       -3-

<PAGE>

prepayment having been so given, the aggregate  principal amount of the Notes to
be prepaid specified in such notice,  together with accrued interest thereon and
the premium,  if any,  payable with respect thereto shall become due and payable
on the  prepayment  date  specified in said notice.  Not later than two Business
Days prior to the prepayment  date  specified in such notice,  the Company shall
provide each Holder of a Note to be prepaid  written  notice of the premium,  if
any,  payable in connection with such prepayment and, whether or not any premium
is payable, a reasonably detailed computation of the Make-Whole Amount.

         Section 2.5.  Application of  Prepayments.  In the case of each partial
prepayment  of the Notes  pursuant  to the  provisions  of  ss.2.2  or 2.3,  the
principal  amount of the Notes of the  Series to be prepaid  shall be  allocated
among all of the Notes of such Series at the time outstanding in proportion,  as
nearly as practicable, to the respective unpaid principal amounts thereof.

         Section 2.6. Direct Payment.  Notwithstanding  anything to the contrary
contained in this Agreement,  a Supplement or the Notes, in the case of any Note
owned by any  Holder  that is a  Purchaser,  Additional  Purchaser  or any other
Institutional  Holder which has given written  notice to the Company  requesting
that the provisions of this ss.2.6 shall apply,  the Company will punctually pay
when due the principal thereof,  interest thereon and premium,  if any, due with
respect to said  principal,  without any presentment  thereof,  directly to such
Holder at its address set forth herein or such other  address as such Holder may
from time to time designate in writing to the Company or, if a bank account with
a United  States bank is so  designated  for such Holder,  the Company will make
such payments in immediately  available  funds to such bank account,  marked for
attention as indicated,  or in such other manner or to such other account in any
United States bank as such Holder may from time to time direct in writing.

SECTION 3.     REPRESENTATIONS.

         Section 3.1. Representations of the Company. The Company represents and
warrants that all representations and warranties set forth in Exhibit B are true
and correct as of the date hereof and are incorporated  herein by reference with
the same force and effect as though herein set forth in full.

         Section 3.2.  Representations  of the  Purchasers.  (a) Each  Purchaser
represents  that such  Purchaser is acquiring the Series B Notes for the purpose
of investment  and not with a view to the  distribution  thereof,  and that such
Purchaser  has  no  present  intention  of  selling,  negotiating  or  otherwise
disposing  of the  Series  B  Notes;  it  being  understood,  however,  that the
disposition of such Purchaser's property shall at all times be and remain within
its control.  Each Purchaser  further  represents  that (i) such Purchaser is an
"Accredited  Investor" as defined in  Regulation D under the  Securities  Act of
1933, as amended (the "Act"), (ii) such Purchaser  understands that the Series B
Notes  will be  issued by the  Company  without  registration  under the Act and
without qualification and/or registration under applicable state securities laws
pursuant to specific exemptions from registration and/or qualification contained
in the Act and in  applicable  state  securities  laws,  and that the  foregoing
exemptions  depend  upon,  among  other  things,  the bona  fide  nature of such
Purchaser's  investment  interests as expressed herein, (iii) such Purchaser has
been  advised  by  counsel  concerning,  and is  otherwise  familiar  with,  the
restrictions  imposed  by  the  Act  on  resales  of  securities  acquired  in a
transaction  exempt from  registration  under


                                                                               4

<PAGE>

Section 4(2) of the Act, (iv) such  Purchaser  has been  afforded  access to the
Company's financial  statements and other documents  concerning the Company, has
been afforded an opportunity to ask such questions of the Company's officers and
employees as such Purchaser deemed necessary or desirable and has been given all
information  requested in order to evaluate  the merits and risks of  purchasing
the  Series B  Notes,  (v) such  Purchaser  is  experienced  in  evaluating  and
investing in  companies  such as the Company and has the capacity to protect its
interests  in  connection  with the purchase of the Series B Notes and (vi) such
Purchaser has the ability to bear the economic risks connected with the purchase
of the Series B Notes. Each Purchaser covenants and agrees to conduct any resale
of the Series B Notes solely in accordance  with the  restrictions  contained in
the legend appearing on the Series B Notes.

                  (b)  Each  Purchaser  represents  that  at  least  one  of the
following statements is an accurate representation as to each source of funds (a
"Source") to be used by such Purchaser to pay the purchase price of the Series B
Notes to be purchased by such Purchaser hereunder:

                   (i) if such Purchaser is an insurance company,  the Source is
         an "insurance company general account" within the meaning of Department
         of Labor Prohibited  Transaction Exemption 95-60 (issued July 12, 1995)
         and there is no "employee  benefit plan" (within the meaning of Section
         3(3) of ERISA or Section 4975(e)(1) of the Code),  treating as a single
         plan,   all  plans   maintained   by  the  same  employer  or  employee
         organization,  with respect to which the amount of the general  account
         reserves and liabilities for all contracts held by or on behalf of such
         plan, exceed ten percent (10%) of the total reserves and liabilities of
         such general account  (exclusive of separate account  liabilities) plus
         surplus, as set forth in the NAIC Annual Statement filed with your such
         Purchaser's state of domicile; or

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

                   (iii) the Source  constitutes  assets of an "investment fund"
         (within  the  meaning  of Part V of the QPAM  Exemption)  managed  by a
         "qualified professional asset manager" or "QPAM" (within the meaning of
         Part V of the QPAM  Exemption),  no employee benefit plan's assets that
         are included in such investment  fund, when combined with the assets of
         all other employee benefit plans  established or maintained by the same
         employer or by an affiliate  (within the meaning of Section  V(c)(1) of
         the  QPAM   Exemption)  of  such  employer  or  by  the  same  employee
         organization  and managed by such QPAM,  exceed 20% of the total client
         assets managed by such QPAM, the conditions of Part l(c) and (g) of the
         QPAM Exemption are satisfied, neither the QPAM nor a person controlling
         or  controlled  by the QPAM  (applying  the  definition of "control" in
         Section V(e) of the QPAM  Exemption)  owns a 5% or more interest in the
         Company


                                       -5-

<PAGE>

         and (a) the  identity  of such QPAM and (b) the  names of all  employee
         benefit  plans whose assets are included in such  investment  fund have
         been  disclosed  to the Company in writing  pursuant to this  paragraph
         (iii); or

                  (iv) the Source is a governmental plan; or

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

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

         The Company  shall  deliver a  certificate  on the date of the Closing,
with respect to any  Purchaser,  on the date of the  issuance of any  Additional
Notes, with respect to any Additional  Purchasers and on or prior to the date of
any transfer of any Notes,  with respect to any subsequent holder of such Notes,
which  certificate  shall  either  state  that (A) it is  neither  a  "party  in
interest"  (as defined in Title I, Section  3(14) of ERISA) nor a  "disqualified
person" (as defined in Section 4975(e)(2) of the Code), with respect to any plan
identified  pursuant to paragraphs (ii) or (v) above, or (B) with respect to any
plan,  identified  pursuant  to  paragraph  (iii)  above,  neither  it  nor  any
"affiliate" (as defined in Section V(c) of the QPAM Exemption) has at this time,
and during the  immediately  preceding  one year has  exercised the authority to
appoint or terminate  said QPAM as manager of the assets of any plan  identified
in writing  pursuant to paragraph  (iii) above or to negotiate the terms of said
QPAM's management agreement on behalf of any such identified plans.

         As  used  in  this  ss.3.2,   the  terms   "employee   benefit   plan",
"governmental  plan",  "party in interest" and "separate account" shall have the
respective meanings assigned to such terms in Section 3 of ERISA.

SECTION 4.     CLOSING CONDITIONS.

         Section  4.1.  Conditions.  (a) The  obligation  of each  Purchaser  to
purchase  the  Series B Notes  on the  Closing  Date  shall  be  subject  to the
performance by the Company of its agreements hereunder which by the terms hereof
are to be  performed  at or prior to the time of  delivery of the Series B Notes
and to the following further conditions precedent:

                   (i) Closing Certificate. Such Purchaser shall have received a
         certificate  dated the Closing Date,  signed by the President or a Vice
         President  of the  Company,  the truth and accuracy of which shall be a
         condition to such Purchaser's obligation to purchase the Series B Notes
         proposed  to be sold to such  Purchaser  and to the effect that (1) the
         representations  and  warranties  of the Company set forth in Exhibit B
         hereto are true and correct on and with  respect to the  Closing  Date,
         (2) the Company has performed all of its  obligations  hereunder  which
         are to be performed on or prior to the Closing Date, and (3) no Default
         or Event of Default has occurred and is continuing.


                                                                               6

<PAGE>

                   (ii) Legal Opinions.  Such Purchaser shall have received from
         Chapman  and  Cutler,   special  counsel  to  the  Purchasers  in  this
         transaction,  and from McCutchen,  Doyle,  Brown & Enersen LLP, counsel
         for the Company,  their respective  opinions dated the Closing Date, in
         form and substance  satisfactory  to such  Purchaser,  and covering the
         matters set forth in Exhibits C and D, respectively, hereto.

                   (iii)  Regulatory  Approval.  Prior to the Closing Date,  the
         issue and sale of the Series B Notes shall have been duly authorized or
         approved by appropriate order of the Public Utilities Commission of the
         State of California (the  "Commission").  Such order shall be final and
         in full  force and  effect  and not  subject  to any  appeal,  hearing,
         rehearing or contest.  All conditions contained in any such order which
         are to be  fulfilled  on or prior to the issuance of the Series B Notes
         shall have been  fulfilled.  The Company  shall have  delivered  to the
         Purchasers and their special counsel a certified copy of such order and
         the application therefor.

                   (iv) Related Transactions. The Company shall have consummated
         the sale of the entire principal amount of the Series B Notes scheduled
         to be sold on the Closing Date pursuant to this Agreement.

                   (v)  Satisfactory  Proceedings.   All  proceedings  taken  in
         connection with the  transactions  contemplated by this Agreement,  and
         all  documents  necessary  to  the  consummation   thereof,   shall  be
         satisfactory   in  form  and  substance  to  such  Purchaser  and  such
         Purchaser's  special counsel,  and such Purchaser shall have received a
         copy  (executed  or  certified  as may  be  appropriate)  of all  legal
         documents or proceedings  taken in connection with the  consummation of
         said transactions.

                   (vi) Purchase Permitted By Applicable Law. On the date of the
         Closing,  the  purchase of Series B Notes shall (a) be permitted by the
         laws and  regulations  of each  jurisdiction  to which any Purchaser is
         subject,  without recourse to provisions (such as Section 1405(a)(8) of
         the New York Insurance Law) permitting limited investments by insurance
         companies  without  restriction  as to the character of the  particular
         investment,   (b)  not  violate  any   applicable   law  or  regulation
         (including,  without  limitation,  Regulation U, T or X of the Board of
         Governors  of the  Federal  Reserve  System)  and (c) not  subject  any
         Purchaser  to any tax,  penalty or  liability  under or pursuant to any
         applicable law or regulation, which law or regulation was not in effect
         on the date hereof. If requested by any Purchaser, such Purchaser shall
         have received an Officer's Certificate certifying as to such matters of
         fact as such Purchaser may reasonably  specify to enable such Purchaser
         to determine whether such purchase is so permitted.

                   (vii) Payment of Special Counsel Fees. The Company shall have
         paid,   on  or  before  the  Closing  Date,   the  fees,   charges  and
         disbursements  of the Purchasers'  special counsel  referred to in this
         ss.4.1 to the extent  reflected in a statement of such counsel rendered
         to the Company at least one Business Day prior to the Closing Date.

                   (viii) Private  Placement  Number. A Private Placement Number
         issued by Standard & Poor's CUSIP Service Bureau (in  cooperation  with
         the Securities Valuation


                                       -7-

<PAGE>

         Office of the National  Association of Insurance  Commissioners)  shall
         have been obtained for the Series B Notes.

         (b) The  obligation  of the  Company  to  deliver  the  Series  B Notes
hereunder  is  subject  to the  conditions  that (i) the  Commission  shall have
authorized  the  issuance  and sale by the  Company of the Series B Notes at the
price herein provided and said  authorization  shall be in full force and effect
and (ii) the entire  principal amount of the Series B Notes scheduled to be sold
on the Closing Date pursuant to this  Agreement  shall have been tendered by the
Purchasers.  If the condition  specified in this  ss.4.1(b)  shall not have been
fulfilled  prior  to  or on  the  Closing  Date,  this  Agreement  and  all  the
obligations of the Company  hereunder,  except as provided in ss.9.4 hereof, may
be cancelled by the Company.

         Section 4.2.  Waiver of Conditions.  If on the Closing Date the Company
fails  to  tender  to any  Purchaser  the  Series B Notes  to be  issued  to any
Purchaser  on such date or if the  conditions  specified in ss.4.1 have not been
fulfilled,  such  Purchaser  may  thereupon  elect to be relieved of all further
obligations  under  this  Agreement.  Without  limiting  the  foregoing,  if the
conditions specified in ss.4.1 have not been fulfilled, such Purchaser may waive
compliance  by the  Company  with  any such  condition  to such  extent  as such
Purchaser  may in its sole  discretion  determine.  Nothing in this ss.4.2 shall
operate to relieve the Company of any of its  obligations  hereunder or to waive
any Purchaser's rights against the Company.

         Section  4.3.   Conditions  to  Issuance  of  Additional   Notes.   The
obligations of the Additional Purchasers to purchase such Additional Notes shall
be subject to the following conditions precedent,  in addition to the conditions
specified  in the  Supplement  pursuant  to which such  Additional  Notes may be
issued:

                   (a)  Compliance   Certificate.   A  duly  authorized   Senior
         Financial   Officer  shall  execute  and  deliver  to  each  Additional
         Purchaser  an  Officer's  Certificate  dated  the date of issue of such
         Series of  Additional  Notes stating that such officer has reviewed the
         provisions of this  Agreement  (including any  Supplements  hereto) and
         setting forth the information and computations  (in sufficient  detail)
         required in order to  establish  whether  the Company is in  compliance
         with the requirements of ss.5.6 on such date.

                   (b)  Execution  and Delivery of  Supplement.  The Company and
         each such  Additional  Purchaser shall execute and deliver a Supplement
         substantially in the form of Exhibit E hereto.

                   (c) Representations of Additional Purchasers. Each Additional
         Purchaser   shall   have   confirmed   in  the   Supplement   that  the
         representations  set forth in  ss.3.2(b)  are true with respect to such
         Additional  Purchaser on and as of the date of issue of the  Additional
         Notes.

SECTION 5.     COMPANY COVENANTS.

         From and after the Closing  Date and  continuing  so long as any amount
remains unpaid on any Note:


                                                                               8

<PAGE>

         Section 5.1.  Corporate  Existence,  Etc. The Company will preserve and
keep in full force and effect,  and will cause each  Subsidiary  to preserve and
keep in full force and effect,  its  corporate  existence  and all  licenses and
permits  necessary  to the proper  conduct  of its  business,  except  where the
failure to so keep and preserve any such existence, license or permit would not,
individually  or  in  the  aggregate,   materially  and  adversely   affect  the
properties,  business,  profits or  financial  condition  of the Company and its
Subsidiaries,  taken as a whole; provided, however, that the foregoing shall not
prevent any transaction permitted by ss.5.8.

         Section 5.2. Insurance.  The Company will maintain, and will cause each
Subsidiary to maintain,  insurance  coverage by financially  sound and reputable
insurers  in such  forms  and  amounts  (including  self-insurance  if  adequate
reserves  are  maintained  with  respect  thereto) and against such risks as are
customary for  corporations of established  reputation  engaged in the same or a
similar business and owning and operating similar properties.

         Section 5.3.  Taxes,  Claims for Labor and Materials,  Compliance  with
Laws.  (a) The Company  will  promptly  pay and  discharge,  and will cause each
Subsidiary  promptly  to pay and  discharge,  prior to  delinquency,  all lawful
taxes,  assessments and governmental  charges or levies imposed upon the Company
or such  Subsidiary,  respectively,  or upon or in respect of all or any part of
the property or business of the Company or such  Subsidiary,  all trade accounts
payable,  and all claims for work,  labor or  materials,  which if unpaid  might
become a Lien upon any  property  of the Company or such  Subsidiary;  provided,
however,  that the Company or such  Subsidiary  shall not be required to pay any
such  tax,  assessment,  charge,  levy,  account  payable  or  claim  if (i) the
validity,  applicability  or amount thereof is being  contested in good faith by
appropriate  actions or proceedings which will prevent the forfeiture or sale of
any  material  property  of the  Company  or  such  Subsidiary  or any  material
interference  with the use thereof by the Company or such  Subsidiary,  and (ii)
the Company or such Subsidiary shall set aside on its books,  reserves deemed by
it to be adequate with respect thereto.

         (b) The Company will promptly  comply and will cause each Subsidiary to
comply with all laws,  ordinances or governmental rules and regulations to which
it is subject including,  without limitation, the Occupational Safety and Health
Act of 1970, as amended, ERISA and all laws, ordinances,  governmental rules and
regulations   relating   to   environmental   protection   in   all   applicable
jurisdictions,  the violation of which could materially and adversely affect the
properties,  business,  profits or  financial  condition  of the Company and its
Subsidiaries,  taken as a whole, or would result in any Lien not permitted under
ss.5.7.

         Section 5.4. Maintenance. The Company will maintain, preserve and keep,
and will cause each  Subsidiary to maintain,  preserve and keep,  its properties
which are used or useful in the conduct of its business (whether owned in fee or
a leasehold  interest)  in good  repair and working  order and from time to time
will make all necessary repairs, replacements, renewals and additions so that at
all times the efficiency  thereof shall be maintained,  provided that nothing in
thisss.5.4  shall  prohibit the Company from  abandoning  or  discontinuing  the
maintenance of properties  which the Chief Engineer or Assistant  Chief Engineer
of the  Company  determines  in good  faith to be no  longer  necessary  for the
conduct of the business of the Company and its Subsidiaries, taken as a whole.


                                       -9-

<PAGE>

         Section 5.5. Nature of Business. Neither the Company nor any Subsidiary
will engage in any business if, as a result, the general nature of the business,
taken on a consolidated basis, which would then be engaged in by the Company and
its Subsidiaries  would be substantially  changed from the general nature of the
business engaged in by the Company on the Closing Date.

         Section  5.6.  Limitations  on Current  Debt and Funded  Debt.  (a) The
Company  will not, and will not permit any  Restricted  Subsidiary  to,  create,
assume or incur or in any manner be or become  liable in respect of any  Current
Debt or Funded Debt, except:

                   (1) Funded Debt evidenced by the Series B Notes;

                   (2) Current  Debt and Funded Debt of the Company  outstanding
         as of the date of this  Agreement and reflected on Annex A to Exhibit B
         hereto;

                   (3) Additional  Funded Debt of the Company,  provided that at
         the time of issuance thereof and after giving effect thereto and to the
         application of the proceeds thereof:

                            (i)  Consolidated   Funded  Debt  shall  not  exceed
                   66-2/3% of Consolidated Total Capitalization, and,

                            (ii) Net Income  Available for Interest  Charges for
                   any  period of 12  consecutive  calendar  months  during  the
                   immediately preceding 14 consecutive calendar months prior to
                   the  issuance  of such  Funded  Debt shall have been at least
                   175% of Pro Forma Interest Charges for such 12-month period;

                   (4)     Additional unsecured Current Debt of the Company;

                   (5) Current  Debt or Funded Debt of a  Restricted  Subsidiary
         owed to the Company or to a Wholly-owned Restricted Subsidiary; and

                   (6) Funded Debt of the Company  issued after the Closing Date
         evidenced by First Mortgage Bonds, provided that the Company shall have
         complied with the requirements of ss.5.14 hereof.

         (b) Indebtedness  described in or issued or incurred in accordance with
the  limitations  of  ss.5.6(a)  (1)  through  (3) may be  renewed,  extended or
refunded  without  regard to  ss.5.6(a)(3),  provided that the principal  amount
thereof  remaining  unpaid at the time of such  renewal,  extension or refunding
shall not be increased.

         (c) Any  corporation  which becomes a Restricted  Subsidiary  after the
date hereof  shall for all  purposes  of this ss.5.6 be deemed to have  created,
assumed or incurred at the time it becomes a  Restricted  Subsidiary  all Funded
Debt of such  corporation  existing  immediately  after it becomes a  Restricted
Subsidiary.


                                                                              10

<PAGE>

         Section 5.7.  Limitation  on Liens.  The Company will not, and will not
permit any Restricted  Subsidiary to, create or incur,  or suffer to be incurred
or to exist,  any Lien on its or their property or assets,  whether now owned or
hereafter  acquired,  or upon any income or profits  therefrom,  or transfer any
property for the purpose of subjecting the same to the payment of obligations in
priority to the payment of its or their general  creditors,  or acquire or agree
to acquire,  or permit any  Restricted  Subsidiary  to acquire,  any property or
assets upon  conditional  sales  agreements  or other title  retention  devices,
except:

                   (a) Liens for property taxes and  assessments or governmental
         charges or levies and Liens securing claims or demands of mechanics and
         materialmen,  provided that payment thereof is not at the time required
         by ss.5.3;

                   (b)  Liens  of or  resulting  from  any  litigation  or legal
         proceeding  which  are  currently  being  contested  in good  faith  by
         appropriate  proceedings  and for which  the  Company  or the  relevant
         Restricted  Subsidiary  shall  have set  aside on its  books,  reserves
         deemed by it to be adequate with respect  thereto,  unless the judgment
         they secure shall not have been stayed,  bonded or discharged within 60
         days of its entry;

                   (c) Liens incidental to the conduct of the Company's business
         or  the  ownership  of  properties  and  assets   (including  Liens  in
         connection with worker's compensation, unemployment insurance and other
         like laws, warehousemen's and attorneys' liens and statutory landlords'
         liens) and Liens to secure the  performance  of bids,  tenders or trade
         contracts,  or to secure statutory obligations,  surety or appeal bonds
         or other Liens of like general nature  incurred in the ordinary  course
         of business and not in connection with the borrowing of money; provided
         in each case, the obligation secured is not overdue or, if overdue,  is
         being contested in good faith by appropriate actions or proceedings;

                   (d) minor survey exceptions or minor encumbrances, easements,
         licenses  or  reservations,  or  rights of  others  for  rights-of-way,
         utilities and other similar purposes,  or zoning or other  restrictions
         as to the use of real  properties,  which are necessary for the conduct
         of the  activities of the Company and its  Restricted  Subsidiaries  or
         which  customarily  exist on  properties  of  corporations  engaged  in
         similar activities and similarly situated and which do not in any event
         materially  impair  their use in the  operation  of the business of the
         Company and its Restricted Subsidiaries;

                   (e) Liens securing Indebtedness of a Restricted Subsidiary to
         the Company or to another Restricted Subsidiary;

                   (f) Leases on property  owned by the Company or a  Restricted
         Subsidiary  wherein the Company or such  Restricted  Subsidiary  is the
         lessor  thereunder,  provided  that (i) the Rentals  payable  under any
         lease are for fair  rental  value  and  otherwise  contain  appropriate
         provisions  to protect and  preserve the  Company's or such  Restricted
         Subsidiary's interest in such property and (ii) any such lease will not
         interfere  with the ordinary  course of business of the Company or such
         Restricted Subsidiary;


                                      -11-

<PAGE>

                   (g) Liens  existing as of the Closing  Date and  reflected in
         Schedule II hereto;

                   (h) Liens  created or incurred  after the Closing  Date given
         pursuant to pollution control,  industrial revenue or other similar tax
         exempt  financings of the Company to secure the payment of the purchase
         price  incurred in  connection  with the  acquisition  of fixed  assets
         useful and  intended  to be used in  carrying  on the  business  of the
         Company or its  Restricted  Subsidiaries,  provided  that (i) the Liens
         shall attach solely to the fixed assets acquired or purchased,  (ii) at
         the time of acquisition of such fixed assets, the Indebtedness  secured
         by Liens  thereon  shall not  exceed the total  purchase  price of such
         fixed assets,  (iii) such Indebtedness  shall have been incurred within
         the  applicable  limitations  provided  in  ss.5.6(a),   and  (iv)  the
         aggregate  principal  amount  of  all  Indebtedness  secured  by  Liens
         described  in this  clause  (h) shall not at any time  exceed an amount
         equal to 10% of Consolidated Total Assets;

                   (i) Liens created or incurred after the Closing Date given to
         secure  Indebtedness of the Company and its Restricted  Subsidiaries in
         addition to the Liens  permitted by the  preceding  clauses (a) through
         (h) hereof,  provided that all Indebtedness secured by such Liens shall
         have been incurred within the limitations provided in ss.5.6(a)(6);

                   (j) Liens  created  or  incurred  after the  Closing  Date in
         addition to the Liens  permitted by the  preceding  clauses (a) through
         (i) hereof,  provided  that (i) the aggregate  principal  amount of all
         Indebtedness  secured  by such  Liens  shall not at any time  exceed an
         amount equal to 10% of Consolidated  Total  Capitalization and (ii) all
         such  Indebtedness  shall  have been  incurred  within  the  applicable
         limitations provided in ss.5.6; and

                   (k) any extension, renewal or refunding of any Lien permitted
         by the preceding  clauses (a) through (i) hereof in respect of the same
         property  theretofore  subject  to such  Lien in  connection  with  the
         extension,  renewal or refunding of the  Indebtedness  secured thereby;
         provided that (i) such extension,  renewal or refunding of Indebtedness
         shall be without  increase in the principal  amount remaining unpaid as
         of the date of such extension, renewal or refunding, and (ii) such Lien
         shall attach solely to the same such property.

         Section  5.8.  Mergers,  Consolidations  and Sales of  Assets.  (a) The
Company  will  not,  and will not  permit  any  Restricted  Subsidiary  to,  (i)
consolidate  with or be a party to a merger with any other  corporation  or (ii)
sell,  lease or otherwise  dispose of all or any substantial part (as defined in
paragraph  (d) of this  ss.5.8) of the assets of the Company and its  Restricted
Subsidiaries  (other than sales in the  ordinary  course of business or sales of
properties sold pursuant to any Condemnation); provided, however, that:

                   (1) any Restricted  Subsidiary may merge or consolidate  with
         or into the Company or any Wholly-owned  Restricted  Subsidiary so long
         as in any merger or  consolidation  involving the Company,  the Company
         shall be the surviving or continuing corporation;


                                                                              12

<PAGE>

                   (2) the Company may  consolidate  or merge with or into,  and
         may sell all or substantially all of its assets in a single transaction
         to, any other  corporation  if (i) the  corporation  which results from
         such  consolidation,   merger  or  sale  (the  "surviving  entity")  is
         organized  under  the laws of any  state of the  United  States  or the
         District  of  Columbia,  (ii)  the  due  and  punctual  payment  of the
         principal  of and  premium,  if any,  and interest on all of the Notes,
         according to their  tenor,  and the due and  punctual  performance  and
         observation  of all of the covenants in the Notes and this Agreement to
         be  performed  or  observed by the  Company  are  expressly  assumed in
         writing by the surviving  entity and the surviving entity shall furnish
         to  the  holders  of  the  Notes  an  opinion  of  counsel   reasonably
         satisfactory  to such  holders to the  effect  that the  instrument  of
         assumption  has  been  duly  authorized,  executed  and  delivered  and
         constitutes the legal,  valid and binding contract and agreement of the
         surviving  entity  enforceable in accordance with its terms,  except as
         enforcement  of such terms may be limited  by  bankruptcy,  insolvency,
         reorganization,  moratorium and similar laws affecting the  enforcement
         of creditors' rights generally and by general equitable principles, and
         (iii) at the time of such consolidation, merger or sale and immediately
         after giving effect  thereto,  (A) no Default or Event of Default would
         exist and (B) the surviving entity would be permitted by the provisions
         of ss.5.6(a)(3) to incur at least $1.00 of additional Funded Debt;

                   (3) any Restricted  Subsidiary  may sell,  lease or otherwise
         dispose of all or any substantial  part of its assets to the Company or
         any Wholly-owned Restricted Subsidiary.

         (b) The Company will not permit any Restricted  Subsidiary to issue any
shares of stock of any class  (including  as "stock"  for the  purposes  of this
ss.5.8,  any warrants,  rights or options to purchase or otherwise acquire stock
or  other  Securities  exchangeable  for or  convertible  into  stock)  of  such
Restricted  Subsidiary  to any  Person  other than the  Company or a  Restricted
Subsidiary,  unless  immediately  after the consummation of such transaction and
after  giving  effect  thereto,   such  Restricted  Subsidiary  shall  remain  a
Restricted Subsidiary of the Company.

         (c) The Company  will not sell,  transfer or  otherwise  dispose of any
shares  of  stock  of  any  Restricted  Subsidiary  or any  Indebtedness  of any
Restricted  Subsidiary,  and will not permit any Restricted  Subsidiary to sell,
transfer  or  otherwise  dispose  of  (except  to the  Company  or a  Restricted
Subsidiary)  any  shares of stock or any  Indebtedness  of any other  Restricted
Subsidiary, unless:

                   (1)  the  Board  of  Directors  of  the  Company  shall  have
         determined,  as evidenced by a  resolution  thereof,  that the proposed
         sale,  transfer or disposition of said shares of stock and Indebtedness
         is in the best interests of the Company;

                   (2)  said  shares  of  stock  and   Indebtedness   are  sold,
         transferred  or  otherwise  disposed of to a Person,  for cash or other
         property and on terms reasonably deemed by the Board of Directors to be
         adequate and satisfactory;

                   (3) in the case of the sale, transfer,  or disposition of all
         shares of stock  and  Indebtedness  of a  Restricted  Subsidiary,  such
         Restricted  Subsidiary shall not have any


                                      -13-

<PAGE>

         continuing investment in the Company or any other Restricted Subsidiary
         not being simultaneously disposed of;

                   (4) in the case of the sale, transfer, or disposition of less
         than all of the shares of stock of a Restricted Subsidiary, immediately
         after the  consummation  of the  transaction  and after  giving  effect
         thereto,   such  Restricted   Subsidiary   shall  remain  a  Restricted
         Subsidiary of the Company; and

                   (5)  such  sale or  other  disposition  does  not  involve  a
         substantial part (as hereinafter defined) of the consolidated assets of
         the Company and its Restricted Subsidiaries.

         (d) As used in this  ss.5.8,  a sale,  lease  or other  disposition  of
assets shall be deemed to be a  "substantial  part" of the assets of the Company
and its Restricted  Subsidiaries if the book value of such assets, when added to
the book value of all other assets sold, leased or otherwise  disposed of by the
Company and its Restricted  Subsidiaries  (other than in the ordinary  course of
business   including   without   limitation   property   sold  pursuant  to  any
Condemnation)  during  the  immediately  preceding  12  months,  exceeds  10% of
Consolidated Total Assets, determined as of the end of the immediately preceding
fiscal year, provided,  however, that for purposes of the foregoing calculation,
there shall not be included the book value  attributable  to assets the proceeds
from the disposition of which were or are applied within 180 days of the date of
sale of such assets to either (1) the  acquisition of assets useful and intended
to be used in the  operation of the  business of the Company and its  Restricted
Subsidiaries  as  described  in  ss.5.5  and  having  a fair  market  value  (as
determined  in good faith by the Board of  Directors  of the  Company)  at least
equal to the assets so  disposed  of, or (2) the  prepayment  at any  applicable
prepayment premium, on a pro rata basis, of Funded Debt of the Company, provided
that  in the  event  the  assets  which  are the  subject  of any  such  sale or
disposition  are subject to the Lien of the Mortgage  Indenture,  such  proceeds
shall be applied first to the  prepayment of the First  Mortgage Bonds as and to
the extent required by the terms of the Mortgage Indenture. It is understood and
agreed by the Company that any such proceeds paid and applied to the  prepayment
of the Notes as  hereinabove  provided  shall be  prepaid  as and to the  extent
provided in ss.2.2.

         Section 5.9. Guaranties.  The Company will not, and will not permit any
Restricted  Subsidiary to, become or be liable in respect of any Guaranty except
Guaranties by the Company which are limited in amount to a stated maximum dollar
exposure  or  which  constitute   Guaranties  of  obligations  incurred  by  any
Restricted  Subsidiary  and  otherwise  permitted  by  the  provisions  of  this
Agreement.

        Section  5.10.   Repurchase  of  Notes.  Neither  the  Company  nor  any
Restricted  Subsidiary or Affiliate,  directly or indirectly,  may repurchase or
make any  offer to  repurchase  any  Notes  unless  an  offer  has been  made to
repurchase  Notes, pro rata, from all Holders at the same time and upon the same
terms.  In case the Company  repurchases or otherwise  acquires any Notes,  such
Notes shall  immediately  thereafter be canceled and no Notes shall be issued in
substitution  therefor.  Without limiting the foregoing,  upon the repurchase or
other acquisition of any Notes by the Company, any Restricted  Subsidiary or any
Affiliate (or upon the agreement of Company,  any  Restricted  Subsidiary or any
Affiliate  to purchase  or  otherwise  acquire  any Notes),  such Notes


                                                                              14

<PAGE>

shall no longer be  outstanding  for  purposes of any section of this  Agreement
relating  to the  taking by the  Holders of any  actions  with  respect  hereto,
including, without limitation, ss.6.3, ss.6.4 and ss.7.1.

        Section 5.11.  Transactions  with  Affiliates.  Except for water quality
testing and analysis services performed for San Jose Water Company,  the Company
will not, and will not permit any  Restricted  Subsidiary to, enter into or be a
party to any transaction or arrangement with any Affiliate  (including,  without
limitation,  the purchase  from,  sale to or exchange of property  with,  or the
rendering  of any  service by or for,  any  Affiliate),  except in the  ordinary
course of and pursuant to the reasonable  requirements  of the Company's or such
Restricted  Subsidiary's  business  and upon fair and  reasonable  terms no less
favorable to the Company or such  Restricted  Subsidiary  than would obtain in a
comparable arm's-length transaction with a Person other than an Affiliate.

        Section 5.12.  Withdrawal  from  Multiemployer  Plans and Termination of
Pension  Plans.  The Company  will not, and will not permit any  Subsidiary  to,
withdraw  from  any  Multiemployer  Plan  if such  withdrawal  could  result  in
withdrawal  liability  (as  described  in Part I of  Subtitle  E of  Title IV of
ERISA). The Company will not and will not permit any Subsidiary to terminate any
Plan  if  such  termination  could  result  in the  imposition  of a Lien on any
property of the Company or any Subsidiary pursuant to Section 4068 of ERISA.

        Section 5.13.  Reports and Rights of Inspection.  The Company will keep,
and will cause each  Restricted  Subsidiary to keep,  proper books of record and
account  in which  full and  correct  entries  will be made of all  dealings  or
transactions  of, or in relation  to, the business and affairs of the Company or
such Restricted Subsidiary, in accordance with GAAP consistently applied (except
for changes  disclosed  in the  financial  statements  furnished  to the Holders
pursuant to this ss.5.13 and concurred in by the independent  public accountants
referred to in ss.5.13(b) hereof), and will furnish to each Institutional Holder
(in duplicate if so specified below or otherwise requested):

                   (a) Company Quarterly Statements. As soon as available and in
         any event within 60 days after the end of each quarterly  fiscal period
         (except the last) of each fiscal year, copies of:

                            (1) a consolidated  balance sheet of the Company and
                  its Restricted  Subsidiaries as of the close of such quarterly
                  fiscal  period,   setting  forth  in   comparative   form  the
                  consolidated  figures for the fiscal  year then most  recently
                  ended,

                            (2)  a  consolidated  statement  of  income  of  the
                  Company and its  Restricted  Subsidiaries  for such  quarterly
                  fiscal  period and for the  portion of the fiscal  year ending
                  with such quarterly fiscal period,  in each case setting forth
                  in  comparative   form  the   consolidated   figures  for  the
                  corresponding periods of the preceding fiscal year, and


                                      -15-

<PAGE>

                            (3) a  consolidated  statement  of cash flows of the
                  Company and its Restricted Subsidiaries for the portion of the
                  fiscal year ending with such quarterly fiscal period,  setting
                  forth in  comparative  form the  consolidated  figures for the
                  corresponding period of the preceding fiscal year,

         all in  reasonable  detail and  certified as complete and correct by an
         authorized financial officer of the Company;

                   (b) Company  Annual  Statements.  As soon as available and in
         any event  within 90 days  after the close of each  fiscal  year of the
         Company, copies of:

                            (1) a consolidated  balance sheet of the Company and
                   its  Restricted  Subsidiaries  as of the close of such fiscal
                   year, and

                            (2)  consolidated   statements  of  income,   common
                   shareholders'  equity and cash flows of the  Company  and its
                   Restricted Subsidiaries for such fiscal year,

         in each case setting forth in comparative form the consolidated figures
         for the preceding fiscal year, all in reasonable detail and accompanied
         by a report  thereon of a firm of  independent  public  accountants  of
         recognized national standing selected by the Company to the effect that
         the consolidated  financial  statements present fairly, in all material
         respects,  the consolidated  financial  position of the Company and its
         Restricted Subsidiaries as of the end of the fiscal year being reported
         on and the  consolidated  results of the  operations and cash flows for
         said  year in  conformity  with GAAP and that the  examination  of such
         accountants  in  connection  with such  financial  statements  has been
         conducted in accordance with generally  accepted auditing standards and
         included such tests of the  accounting  records and such other auditing
         procedures as said accountants deemed necessary in the circumstances;

                   (c) CWSG  Quarterly  Statements.  As soon as available but in
         any event  within  ninety  (90) days after the end of each of the first
         three quarterly fiscal periods in each year of CWSG, a balance sheet of
         CWSG  at the  end of such  period,  and a  statement  of  earnings  and
         retained  earnings  of CWSG for such  period and for the portion of the
         fiscal year ending with such period,  together with a statement of cash
         flows for the portion of the fiscal year  ending with such  period,  in
         each  case  setting   forth  in   comparative   form  figures  for  the
         corresponding period of the previous year, all in reasonable detail and
         certified,  subject  to  changes  resulting  from  year-end  and  audit
         adjustments,  by an  authorized  financial  officer  of CWSG,  it being
         understood that this  requirement may be satisfied by delivering a copy
         of CWSG's  Quarterly  Report  to the SEC on Form  10-Q for such  fiscal
         quarter (or such successor form as may be prescribed by the SEC);

                   (d) CWSG Annual  Statements.  As soon as available but in any
         event within one hundred  twenty (120) days after the end of the fiscal
         year of CWSG, a balance sheet of CWSG as at the end of such year, and a
         consolidated statement of earnings and retained earnings and cash flows
         of CWSG, in each case setting forth in comparative


                                                                              16

<PAGE>

         form the figures for the previous fiscal year, all in reasonable detail
         and accompanied by a report thereon of independent  public  accountants
         of  recognized  national  standing  selected by CWSG to the effect that
         such  financial  statements  have  been  prepared  in  accordance  with
         generally accepted accounting  principles applied on a basis consistent
         with the prior fiscal year (except for such changes,  if any, as may be
         specified  in  such  opinion)  and  fairly  present,  in  all  material
         respects, the financial position of CWSG as of the end of such year and
         the results of operations  for such year,  and that the  examination by
         such accountants in connection with such financial  statements has been
         made in accordance with generally accepted auditing standards, it being
         understood that this  requirement may be satisfied by delivering a copy
         of CWSG's  Annual  Report to the SEC on Form 10-K for such  fiscal year
         (or such successor form as may be prescribed by the SEC);

                   (e) Audit Reports. Promptly upon receipt thereof, one copy of
         each report submitted by independent public accountants selected by the
         Company of interim  examinations,  if any, by such  accountants  of the
         financial statements of the Company or any Restricted  Subsidiary,  and
         one  copy of any  report  as to  material  inadequacies  in  accounting
         controls (including reports as to the absence of any such inadequacies)
         submitted  by such  accountants  in  connection  with any  audit of the
         Company or any Restricted Subsidiary;

                   (f) SEC and  Other  Reports.  Promptly  upon  their  becoming
         available,  one copy of each  financial  statement,  report,  notice or
         proxy  statement  sent by the Company to  stockholders  generally  and,
         within 15 Business  Days of their  filing with the SEC,  copies of each
         regular  or  periodic  report,   and  any  registration   statement  or
         prospectus so filed by the Company, CWSG or any Subsidiary;

                   (g) ERISA  Reports.  Promptly  upon the  occurrence  thereof,
         written notice of (i) a Reportable Event with respect to any Plan; (ii)
         the institution of any steps by the Company,  any ERISA Affiliate,  the
         PBGC or any other person to terminate any Plan;  (iii) the  institution
         of any steps by the Company or any ERISA Affiliate to withdraw from any
         Plan; (iv) a non-exempt "prohibited  transaction" within the meaning of
         Section  406 of ERISA in  connection  with any Plan;  (v) any  material
         increase in the  contingent  liability of the Company or any Restricted
         Subsidiary with respect to any  post-retirement  welfare liability;  or
         (vi) the taking of any action by, or the  threatening  of the taking of
         any action by, the Internal Revenue Service, the Department of Labor or
         the PBGC with respect to any of the foregoing;

                   (h) Officer's  Certificates.  Within the periods  provided in
         paragraphs (a) and (b) above, a certificate of an authorized  financial
         officer of the  Company  stating  that such  officer has  reviewed  the
         provisions of this Agreement and setting forth: (i) the information and
         computations  (in  sufficient  detail)  required in order to  establish
         whether the Company was in compliance  with the  requirements of ss.5.6
         through  ss.5.12  at the end of the  period  covered  by the  financial
         statements then being  furnished,  and (ii) whether there existed as of
         the date of such financial  statements and whether, to the best of such
         officer's  knowledge,  there exists on the date of the  certificate  or
         existed  at any  time


                                      -17-

<PAGE>

         during the period covered by such  financial  statements any Default or
         Event of Default and, if any such condition or event exists on the date
         of the  certificate,  specifying  the nature  and  period of  existence
         thereof and the action the Company is taking and  proposes to take with
         respect thereto;

                   (i) Accountant's Certificates.  Within the period provided in
         paragraph (b) above,  a certificate  of the  accountants  who render an
         opinion with respect to such  financial  statements,  stating that they
         have reviewed this  Agreement and stating  further  whether,  in making
         their audit, such accountants have become aware of any Default or Event
         of  Default  under any of the  terms or  provisions  of this  Agreement
         insofar  as  any  such  terms  or  provisions  pertain  to  or  involve
         accounting  matters or  determinations,  and if any such  condition  or
         event then  exists,  specifying  the  nature  and  period of  existence
         thereof;

                   (j) Supplements. Promptly and in any event within 10 Business
         Days  after  the  execution  and  delivery  of any  Supplement,  a copy
         thereof; and

                   (k) Requested Information.  With reasonable promptness,  such
         other data and information as such Institutional  Holder may reasonably
         request.

         Without   limiting  the   foregoing,   the  Company  will  permit  each
Institutional   Holder  (or  such  Persons  as  such  Institutional  Holder  may
designate),  to visit and  inspect,  under the  Company's  guidance,  any of the
properties of the Company or any Restricted Subsidiary,  to examine all of their
books of  account,  records,  reports  and other  papers,  and to discuss  their
respective  affairs,  finances  and  accounts  with their  respective  officers,
employees, and independent public accountants (and by this provision the Company
authorizes  said  accountants  to  discuss  with any  Institutional  Holder  the
finances and affairs of the Company and its Restricted Subsidiaries) all at such
reasonable  times,  with  reasonable  prior  notice,  and  as  often  as  may be
reasonably requested.  The Company shall not be required to pay or reimburse any
Holder for  expenses  which such  Holder may incur in  connection  with any such
visitation or inspection,  except that if such  visitation or inspection is made
during any period when a Default or an Event of Default  shall have occurred and
be continuing, the Company agrees to reimburse such Holder for all such expenses
promptly upon demand.

        Section 5.14. Note Exchange Upon Issuance of First Mortgage  Bonds.  (a)
In the event that the Company shall issue  additional First Mortgage Bonds under
and pursuant to the Mortgage  Indenture,  then the Company  shall,  concurrently
with the issuance of such additional  First Mortgage Bonds,  exchange all of the
outstanding  Notes of each Series for First  Mortgage Bonds of a new series (the
"Exchange  Bonds").  The Exchange Bonds of each new series shall be issued under
and  secured  by the  Mortgage  Indenture,  shall rank pari passu with all other
First Mortgage Bonds issued and outstanding under the Mortgage Indenture,  shall
have payment and maturity terms  identical to the Series of Notes for which they
were  exchanged,  shall have  required and optional  prepayment  provisions  and
provisions  relating to amounts payable upon acceleration of maturity  identical
to those  applicable  to the Series of Notes for which they were  exchanged  and
shall otherwise be in the form required by the Mortgage Indenture.


                                                                              18

<PAGE>

         (b) The Company  covenants and agrees to take all actions necessary for
the due authorization,  execution and delivery of such Exchange Bonds including,
without limitation,  (i) the filing of applications with the Commission in order
to obtain the requisite  approvals,  authorizations and orders necessary for the
issuance of the Exchange Bonds,  (ii)  compliance  with all  requirements of the
Mortgage  Indenture,  (iii) the taking of all other  actions  the holders of the
Notes may  reasonable  request in  connection  with the delivery of the Exchange
Bonds,  including  the  delivery of legal  opinions  and an  exchange  agreement
between  the  Company  and  the  Holders  in  form  and   substance   reasonably
satisfactory  to the  Holders  of  66-2/3%  of the  Notes  of each  Series  then
outstanding.

SECTION 6.     EVENTS OF DEFAULT AND REMEDIES THEREFOR.

         Section 6.1. Events of Default.  Any one or more of the following shall
constitute an "Event of Default" as such term is used herein:

                   (a)  Default  shall  occur in the  payment of interest on any
         Note  when the same  shall  have  become  due and  such  default  shall
         continue for more than five Business Days; or

                   (b) Default  shall occur in the payment of the  principal  of
         any  Note  or  premium,  if  any,  thereon  at  the  expressed  or  any
         accelerated maturity date or at any date fixed for prepayment; or

                   (c) Default shall be made in the payment when due (whether by
         lapse of time, by declaration,  by call for redemption or otherwise) of
         the  principal of or interest on any Funded Debt or Current Debt (other
         than the Notes) of the Company or any Restricted Subsidiary aggregating
         in  excess of  $5,000,000  in  principal  amount  outstanding  and such
         default shall continue beyond the period of grace, if any, allowed with
         respect thereto; or

                   (d) Default or the  happening  of any event shall occur under
         any indenture (including,  without limitation, the Mortgage Indenture),
         agreement  or other  instrument  under which any Funded Debt or Current
         Debt (other than the Notes) of the Company or any Restricted Subsidiary
         aggregating in excess of $5,000,000 in principal amount outstanding may
         be issued and such default or event shall continue for a period of time
         sufficient  to permit the  acceleration  of the  maturity of any Funded
         Debt  or  Current  Debt of the  Company  or any  Restricted  Subsidiary
         outstanding thereunder; or

                   (e) Default shall occur in the  observance or  performance of
         any  covenant or  agreement  contained  inss.5.5  throughss.5.8,ss.5.11
         orss.5.14; or

                   (f) Default shall occur in the  performance  of or compliance
         with any other provision  contained herein or in any Supplement  (other
         than those  referred to in  paragraphs  (a) and (b) of this ss.6.1) and
         such default is not remedied  within 30 days after the earlier of (i) a
         Responsible Officer obtaining actual knowledge of such default and (ii)
         the Company  receiving  written  notice of such default from any Holder
         (any such


                                      -19-

<PAGE>

         written  notice to be  identified as a "notice of default" and to refer
         specifically to this paragraph (f) of ss.6.1); or

                   (g) Any representation or warranty made by the Company herein
         or in any  Supplement,  or  made by the  Company  in any  statement  or
         certificate   furnished   by  the  Company  in   connection   with  the
         consummation  of the issuance and delivery of the Notes or furnished by
         the Company  pursuant  hereto,  is untrue in any material respect as of
         the date of the issuance or making thereof; or

                   (h) Final  judgment  or  judgments  for the  payment of money
         aggregating in excess of $5,000,000  (net of (i) insurance  proceeds to
         the extent the insurer has acknowledged  liability with respect thereto
         or which  insurer's  liability  is  being  contested  in good  faith by
         appropriate  proceedings  by the  Company  or the  relevant  Restricted
         Subsidiary and (ii) reserves established by the Company or the relevant
         Restricted Subsidiary on its books with respect to such judgment) is or
         are  outstanding  against the Company or any  Restricted  Subsidiary or
         against any property or assets of either and any one of such  judgments
         has  remained  unpaid,  unvacated,  unbonded  or  unstayed by appeal or
         otherwise for a period of 45 days from the date of its entry; or

                   (i) A custodian, liquidator, trustee or receiver is appointed
         for the Company or any Material Restricted  Subsidiary or for the major
         part of the  property  of either and is not  discharged  within 60 days
         after such appointment; or

                   (j) The Company or any Material Restricted Subsidiary becomes
         insolvent or bankrupt, is generally not paying its debts as they become
         due or makes an assignment for the benefit of creditors, or the Company
         or any Material  Restricted  Subsidiary  applies for or consents to the
         appointment  of a  custodian,  liquidator,  trustee or receiver for the
         Company or such Material Restricted Subsidiary or for the major part of
         the property of either; or

                   (k)  Bankruptcy,  reorganization,  arrangement  or insolvency
         proceedings,  or other  proceedings  for relief under any bankruptcy or
         similar law or laws for the relief of  debtors,  are  instituted  by or
         against  the  Company or any  Material  Restricted  Subsidiary  and, if
         instituted against the Company or any Material  Restricted  Subsidiary,
         are  consented  to or are  not  dismissed  within  60 days  after  such
         institution.

         Section 6.2. Notice to Holders.  When any Event of Default described in
the foregoing  ss.6.1 has occurred,  or if any Holder or the holder of any other
evidence of Funded Debt or Current Debt of the Company gives any notice or takes
any other action with respect to a claimed  default,  the Company agrees to give
notice within three Business Days of such event to all Holders.

         Section 6.3.  Acceleration  of  Maturities.  (a) If an Event of Default
with respect to the Company  described in paragraph (i), (j) or (k) ofss.6.1 has
occurred,  all the Notes of every Series then  outstanding  shall  automatically
become immediately due and payable.


                                                                              20

<PAGE>

         (b) If any other Event of Default has occurred and is  continuing,  any
holder or holders of more than 50% in aggregate principal amount of the Notes at
the time  outstanding of each Series may at any time at its or their option,  by
notice or notices to the Company, declare all the Notes then outstanding of such
Series to be immediately due and payable.

         (c) If any Event of Default described in paragraph (a) or (b) of ss.6.1
has  occurred  and is  continuing  any  holder or  holders  of Notes at the time
outstanding  affected by such Event of Default may at any time,  at its or their
option, by notice or notices to the Company, declare all the Notes held by it or
them to be immediately due and payable.

         Upon any Note  becoming  due and  payable  under this  ss.6.3,  whether
automatically or by declaration,  such Note will forthwith mature and the entire
unpaid  principal  amount of such Note, plus (x) all accrued and unpaid interest
thereon and (y) the  Make-Whole  Amount  determined in respect of such principal
amount  (to  the  full  extent  permitted  by  applicable  law),  shall  all  be
immediately due and payable, in each and every case without presentment, demand,
protest  or  further  notice,  all of  which  are  hereby  waived.  The  Company
acknowledges,  and the parties hereto agree,  that each holder of a Note has the
right to maintain its investment in the Notes free from repayment by the Company
(except as herein specifically provided for), and that the provision for payment
of a Make-Whole Amount by the Company in the event that the Notes are prepaid or
are  accelerated  as a result of an Event of  Default,  is  intended  to provide
compensation for the deprivation of such right under such circumstances.

         No course of dealing on the part of the Holder or Holders nor any delay
or failure on the part of any Holder to exercise  any right  shall  operate as a
waiver of such right or otherwise  prejudice  such Holder's  rights,  powers and
remedies.  The Company further agrees, to the extent permitted by law, to pay to
the Holder or Holders all reasonable costs and expenses  incurred by them in the
collection  of any  Notes  upon any  default  hereunder  or  thereon,  including
reasonable  compensation to such Holder's or Holders' attorneys for all services
rendered in connection therewith.

         Section 6.4. Rescission of Acceleration. At any time after any Notes of
any Series have been  declared due and payable  pursuant to clause (b) or (c) of
ss.6.3, the holders of more than 50% in aggregate  principal amount of the Notes
then outstanding of such Series,  by written notice to the Company,  may rescind
and annul any such  declaration and its consequences if (a) the Company has paid
all  overdue  interest  on the  Notes  of  such  Series,  all  principal  of and
Make-Whole  Amount, if any, on any Notes of such Series that are due and payable
and are unpaid  other than by reason of such  declaration,  and all  interest on
such  overdue  principal  and  Make-Whole  Amount,  if any,  and (to the  extent
permitted  by  applicable  law) any overdue  interest in respect of the Notes of
such Series,  (b) all Events of Default and Defaults,  other than non-payment of
amounts  that have  become due solely by reason of such  declaration,  have been
cured or have been waived  pursuant  to ss.7,  and (c) no judgment or decree has
been entered for the payment of any monies due pursuant hereto or to any Note of
such Series.  No rescission  and  annulment  under this ss.6.4 will extend to or
affect any subsequent Event of Default or Default or impair any right consequent
thereon.


                                      -21-

<PAGE>

SECTION 7.     AMENDMENTS, WAIVERS AND CONSENTS.

         Section  7.1.  Consent  Required.  Any  term,  covenant,  agreement  or
condition  of this  Agreement  or any  Supplement  may,  with the consent of the
Company,  be amended or compliance  therewith may be waived (either generally or
in a particular  instance and either  retroactively  or  prospectively),  if the
Company shall have  obtained the consent in writing of the Holders  holding more
than 50% in  aggregate  principal  amount of  outstanding  Notes of each Series;
provided, however, that no such amendment or waiver shall be effective as to the
Notes of a Series  without the unanimous  written  consent of the Holders of all
Notes of such  Series (i) which will change the time of payment  (including  any
modifications  regarding  required  prepayments  as  provided  in  ss.2.1  or  a
Supplement)  of the  principal  of or the interest on any Note of such Series or
change the principal amount thereof or change the rate of interest  thereon,  or
(ii)  which  will  change  any  of  the  provisions  with  respect  to  optional
prepayments  of any  Note of  such  Series,  or  (iii)  which  will  change  the
percentage  of Holders of Notes of such  Series  required to consent to any such
amendment or waiver of any of the provisions of ss.6 or this ss.7.

         Section 7.2.  Solicitation  of Holders.  So long as there are any Notes
outstanding,  the Company  will not solicit,  request or  negotiate  for or with
respect to any proposed  waiver or amendment  of any of the  provisions  of this
Agreement  or the  Notes of a Series  unless  each  Holder  of the Notes of such
Series  (irrespective of the amount of Notes then owned by it) shall be informed
thereof by the Company and shall be afforded the  opportunity of considering the
same and shall be supplied by the Company with sufficient  information to enable
it to make an informed  decision  with  respect  thereto.  The Company will not,
directly or indirectly, pay or cause to be paid any remuneration, whether by way
of supplemental  or additional  interest,  fee or otherwise,  to any Holder of a
Series as  consideration  for or as an inducement to entering into by any Holder
of any waiver or amendment of any of the terms and provisions of this Agreement,
a  Supplement  or  the  Notes  of  such  Series  unless  such   remuneration  is
concurrently offered, on the same terms, ratably to all Holders of such Series.

         Section  7.3.  Effect of  Amendment  or Waiver.  Any such  amendment or
waiver  shall apply  equally to all of the Holders of the Notes of the Series to
which the amendment or waiver applies and shall be binding upon them,  upon each
future  Holder of the Notes of such Series and upon the Company,  whether or not
any Note of such Series  shall have been marked to indicate  such  amendment  or
waiver. No such amendment or waiver shall extend to or affect any obligation not
expressly amended or waived or impair any right consequent thereon.

         Section  7.4.  Supplements.  Notwithstanding  anything to the  contrary
contained  herein,  the Company may enter into any Supplement  providing for the
issuance  of one or more  Series of  Additional  Notes  consistent  with  ss.1.4
andss.4.3  without  obtaining  the consent of any holder of any other  Series of
Notes.

SECTION 8.     INTERPRETATION OF AGREEMENT; DEFINITIONS.

         Section 8.1.  Definitions.  Unless the context otherwise requires,  the
terms  hereinafter set forth when used herein shall have the following  meanings
and the following  definitions shall be equally  applicable to both the singular
and plural forms of any of the terms herein defined:


                                                                              22

<PAGE>

         "Additional Notes" shall have the meaning set forth in ss.1.4.

         "Additional Purchasers" shall mean purchasers of Additional Notes.

         "Affiliate" shall mean any Person (other than a Restricted  Subsidiary)
(i) which directly or indirectly through one or more intermediaries controls, or
is  controlled  by, or is under common  control  with,  the Company,  (ii) which
beneficially  owns or holds 5% or more of any class of the  Voting  Stock of the
Company  or (iii)  5% or more of the  Voting  Stock  (or in the case of a Person
which  is not a  corporation,  5% or more of the  equity  interest)  of which is
beneficially  owned or held by the Company or a Subsidiary.  The term  "control"
means the  possession,  directly or indirectly,  of the power to direct or cause
the direction of the  management and policies of a Person,  whether  through the
ownership of Voting Stock, by contract or otherwise.

         "Agreement" shall mean this Note Agreement.

         "Business  Day"  shall mean any day other  than a  Saturday,  Sunday or
other day on which banks in San Francisco,  California or Chicago,  Illinois are
required by law to close or are customarily closed.

         "CWSG" shall mean California  Water Service Group,  which is the parent
of the Company.

         "Capitalized  Lease"  shall mean any lease the  obligation  for Rentals
with respect to which is required to be capitalized  on a  consolidated  balance
sheet of the lessee and its subsidiaries in accordance with GAAP.

         "Capitalized  Rentals"  of any Person  shall mean as of the date of any
determination  thereof  the  amount at which the  aggregate  Rentals  due and to
become due under all  Capitalized  Leases  under  which such  Person is a lessee
would be  reflected  as a  liability  on a  consolidated  balance  sheet of such
Person.

         "Code" shall mean the Internal Revenue Code of 1986, as amended.

         "Company" shall mean  California  Water Service  Company,  a California
corporation,  and any Person who succeeds to all, or  substantially  all, of the
assets and business of California Water Service Company.

         "Company   Information"  shall  mean  financial  statements  and  other
information  concerning  the Company  delivered to any  Purchaser or  Additional
Purchaser by or on behalf of the Company in connection  with its purchase of any
Notes.

         "Commission" shall have the meaning set forth in ss.4.1(a)(iii).

         "Condemnation"  with respect to any property shall have occurred if all
or any  portion  of such  property  shall have been  condemned  or taken for any
public or quasi-public use under any  governmental  law, order, or regulation or
by right of eminent  domain or sold to a  municipality  or


                                      -23-

<PAGE>

other  public  body or agency or any other  entity  having  the power of eminent
domain  or the  right  to  purchase  or  order  the  sale  of such  property  (a
"Condemning  Authority"),  or any third-party  designated by any such Condemning
Authority, under threat of condemnation.

         "Consolidated  Funded  Debt"  shall mean all Funded Debt of the Company
and its Restricted Subsidiaries,  determined on a consolidated basis eliminating
intercompany items.

         "Consolidated  Net Income" for any period shall mean the gross revenues
of the Company and its Restricted Subsidiaries for such period less all expenses
and  other  proper  charges  (including  taxes  on  income),   determined  on  a
consolidated  basis  after  eliminating   earnings  or  losses  attributable  to
outstanding Minority Interests, but excluding in any event:

                   (a) any gains or losses on the sale or other  disposition  of
         Investments or fixed or capital assets,  and any taxes on such excluded
         gains and any tax deductions or credits on account of any such excluded
         losses;

                   (b) the proceeds of any life insurance policy;

                   (c) net  earnings  and  losses of any  Restricted  Subsidiary
         accrued prior to the date it became a Restricted Subsidiary;

                   (d) net earnings and losses of any corporation  (other than a
         Restricted Subsidiary), substantially all the assets of which have been
         acquired  in any manner by the  Company or any  Restricted  Subsidiary,
         realized by such corporation prior to the date of such acquisition;

                   (e) net earnings and losses of any corporation  (other than a
         Restricted   Subsidiary)   with  which  the  Company  or  a  Restricted
         Subsidiary  shall have  consolidated or which shall have merged into or
         with the Company or a Restricted  Subsidiary  prior to the date of such
         consolidation or merger;

                   (f)  net  earnings  of  any  business  entity  (other  than a
         Restricted   Subsidiary)   in  which  the  Company  or  any  Restricted
         Subsidiary  has an ownership  interest  unless such net earnings  shall
         have  actually  been  received  by  the  Company  or  such   Restricted
         Subsidiary in the form of cash distributions;

                   (g)  any  portion  of the  net  earnings  of  any  Restricted
         Subsidiary which for any reason is unavailable for payment of dividends
         to the Company or any other Restricted Subsidiary;

                   (h) earnings  resulting from any reappraisal,  revaluation or
         write-up of assets;

                   (i) any deferred or other credit  representing  any excess of
         the equity in any  Subsidiary at the date of  acquisition  thereof over
         the amount invested in such Subsidiary;


                                                                              24

<PAGE>

                   (j) any gain arising from the  acquisition  of any Securities
         of the Company or any Restricted Subsidiary;

                   (k) any reversal of any  contingency  reserve,  except to the
         extent that provision for such contingency reserve shall have been made
         from income arising during such period; and

                   (l) any other extraordinary, or nonrecurring gain or loss.

         "Consolidated   Net  Worth"   shall  mean,   as  of  the  date  of  any
determination  thereof the amount of the capital stock accounts (net of treasury
stock, at cost) plus (or minus in the case of a deficit) the surplus in retained
earnings of the Company  and its  Restricted  Subsidiaries  as  determined  on a
consolidated basis in accordance with GAAP.

         "Consolidated   Total   Assets"   shall  mean,   as  the  date  of  any
determination   thereof,   total  assets  of  the  Company  and  its  Restricted
Subsidiaries determined on a consolidated basis in accordance with GAAP.

         "Consolidated  Total   Capitalization"   shall  mean  the  sum  of  (i)
Consolidated Funded Debt, and (ii) Consolidated Net Worth.

         "Current  Debt"  of  any  Person  shall  mean  as of  the  date  of any
determination  thereof (i) all  Indebtedness  of such Person for borrowed  money
other than  Funded  Debt of such  Person and (ii)  Guaranties  by such Person of
Current Debt of others.

         "Default"  shall mean any event or condition  the  occurrence  of which
would,  with the lapse of time or the giving of notice,  or both,  constitute an
Event of Default.

         "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended,  and any  successor  statute of similar  import,  together  with the
regulations thereunder,  in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer to any successor sections.

         "ERISA  Affiliate" shall mean any  corporation,  trade or business that
is, along with the Company,  a member of a controlled group of corporations or a
controlled  group of trades or  businesses,  as described in section  414(b) and
414(c), respectively, of the Code or Section 4001 of ERISA.

         "Event of Default" shall have the meaning set forth in ss.6.1.

         "First  Mortgage  Bonds"  shall mean and include  all secured  mortgage
bonds issued by the Company under and pursuant to the Mortgage Indenture.

         "Funded  Debt" of any Person  shall mean (i) all  Indebtedness  of such
Person for  borrowed  money or which has been  incurred in  connection  with the
acquisition  of assets in each case having a final  maturity of one or more than
one year from the date of origin thereof (or


                                      -25-

<PAGE>

which is  renewable or  extendible  at the option of the obligor for a period or
periods more than one year from the date of origin),  including  all payments in
respect  thereof  that are  required to be made within one year from the date of
any  determination  of Funded Debt,  whether or not the  obligation to make such
payments shall  constitute a current  liability of the obligor under GAAP,  (ii)
all Capitalized  Rentals of such Person, and (iii) all Guaranties by such Person
of Funded Debt of others.

         "GAAP" shall mean generally accepted accounting  principles at the time
in the United States.

         "Guaranties"  by any Person  shall  mean all  obligations  (other  than
endorsements  in the ordinary  course of business of negotiable  instruments for
deposit or  collection)  of such  Person  guaranteeing,  or  otherwise  creating
contingent  liability  with  respect  to, any  Indebtedness,  dividend  or other
obligation  of any other Person (the "primary  obligor") in any manner,  whether
directly or indirectly,  including, without limitation, all obligations incurred
through an agreement,  contingent or otherwise,  by such Person: (i) to purchase
such Indebtedness or obligation or any property or assets constituting  security
therefor,  (ii) to advance or supply  funds (x) for the  purchase  or payment of
such  Indebtedness  or  obligation,  (y) to  maintain  working  capital or other
balance sheet  condition or otherwise to advance or make available funds for the
purchase or payment of such Indebtedness or obligation,  (iii) to lease property
or to  purchase  Securities  or other  property or  services  primarily  for the
purpose of assuring the owner of such  Indebtedness or obligation of the ability
of the primary  obligor to make payment of the  Indebtedness  or obligation,  or
(iv)  otherwise to assure the owner of the  Indebtedness  or  obligation  of the
primary obligor against loss in respect thereof.  Notwithstanding the foregoing,
the Company's  obligations in respect of long term water supply  contracts shall
not be treated as  Guaranties  under this  Agreement.  For the  purposes  of all
computations   made  under  this  Agreement,   a  Guaranty  in  respect  of  any
Indebtedness for borrowed money shall be deemed to be Indebtedness  equal to the
principal  amount  of such  Indebtedness  for  borrowed  money  which  has  been
guaranteed,  and a Guaranty in respect of any other  obligation  or liability or
any dividend shall be deemed to be Indebtedness  equal to the maximum  aggregate
amount of such obligation, liability or dividend.

         "Holder" shall mean any Person which is, at the time of reference,  the
registered Holder of any Note.

         "Indebtedness"  of any Person shall mean and include all obligations of
such Person which in  accordance  with GAAP shall be  classified  upon a balance
sheet of such  Person as  liabilities  of such  Person,  and in any event  shall
include all (i)  obligations of such Person for borrowed money or which has been
incurred  in  connection  with the  acquisition  of  property  or  assets,  (ii)
obligations  secured by any Lien upon  property or assets  owned by such Person,
even though such Person has not assumed or become liable for the payment of such
obligations,  (iii) obligations created or arising under any conditional sale or
other  title  retention  agreement  with  respect to  property  acquired by such
Person,  notwithstanding  the fact that the rights and  remedies  of the seller,
lender or lessor  under such  agreement  in the event of default  are limited to
repossession or sale of property, (iv) Capitalized Rentals and (v) Guaranties of
obligations  of  others  of  the  character  referred  to  in  this  definition.
Notwithstanding  the  foregoing,  the term


                                                                              26

<PAGE>

"Indebtedness" as it relates to the Company shall not include obligations of the
Company with respect to advances for construction from third parties.

         "Institutional Holder" shall mean any Holder which is a Purchaser or an
insurance company, bank, savings and loan association, trust company, investment
company,  charitable foundation,  employee benefit plan (as defined in ERISA) or
other institutional  investor or financial  institution and, for purposes of the
direct payment  provisions of this  Agreement,  shall include any nominee of any
such Holder.

         "Interest Charges" of any Person for any period shall mean all interest
and all amortization of debt discount and expense on any particular Indebtedness
of such  Person for which such  calculations  are being  made.  Computations  of
Interest  Charges on a pro forma  basis for (a)  Indebtedness  having a variable
interest rate, (b)  Indebtedness  bearing interest at different fixed rates, (c)
Indebtedness  with  respect to which  interest has not begun to accrue as of the
date of any  determination of Interest Charges or (d) Indebtedness  with respect
to which  interest shall not become payable until a specified date which is more
than one year  after  the date of any  such  determination,  shall,  in all such
cases,  be calculated at the rate equal to the greater of (i) the rate in effect
on the date of any  determination  and (ii) the average interest rate payable on
all  Funded  Debt of such  Person  during  the  three-month  period  immediately
preceding the date of any determination.

         "Lien" shall mean any interest in property  securing an obligation owed
to, or a claim by, a Person other than the owner of the  property,  whether such
interest is based on the common law, statute or contract,  and including but not
limited to the security  interest  lien  arising  from a mortgage,  encumbrance,
pledge,  conditional  sale or trust receipt or a lease,  consignment or bailment
for security purposes.  The term "Lien" shall include reservations,  exceptions,
encroachments,  easements, rights-of-way,  covenants, conditions,  restrictions,
leases and other title exceptions and encumbrances  (including,  with respect to
stock, stockholder agreements, voting trust agreements,  buy-back agreements and
all similar arrangements) affecting property of such Person. For the purposes of
this Agreement, the Company or a Restricted Subsidiary shall be deemed to be the
owner of any property  which it has acquired or holds  subject to a  conditional
sale  agreement,  Capitalized  Lease or  other  arrangement,  in any such  case,
pursuant to which title to the property  has been  retained by or vested in some
other  Person  for  security  purposes  and  such  retention  or  vesting  shall
constitute a Lien.

         "Make-Whole  Amount" shall mean (i) with respect to any Series of Notes
other  than the  Series  B Notes,  that  which  is set  forth in the  applicable
Supplement  and (ii) with respect to the Series B Notes in  connection  with any
prepayment  or  acceleration,  the  following:  the  excess,  if any, of (a) the
aggregate  present  value as of the date of such  prepayment  of each  dollar of
principal  being  prepaid  and the amount of  interest  (exclusive  of  interest
accrued to the date of  prepayment)  that would have been  payable in respect of
such dollar if such prepayment had not been made, determined by discounting such
amounts at the  Reinvestment  Rate from the respective dates on which they would
have been  payable,  over (b) 100% of the  principal  amount of the  outstanding
Series B Notes being  prepaid.  If the  Reinvestment  Rate is equal to or higher
than  6.77%,  the  Make-Whole   Amount  shall  be  zero.  For  purposes  of  any
determination  of the  Make-Whole  Amount for the Series B Notes,  the following
terms have the following meanings:


                                      -27-

<PAGE>

                  "Reinvestment  Rate" shall mean (1) the sum of 0.50%, plus the
         yield  reported  on  page  "USD"  of the  Bloomberg  Financial  Markets
         Services Screen (or, if not available,  any other nationally recognized
         trading screen reporting  on-line intraday trading in the United States
         government  Securities) at 10:00 A.M. (Chicago,  Illinois time) for the
         United States  government  Securities  have a maturity  (rounded to the
         nearest month)  corresponding  to the Remaining Life to Maturity of the
         principal  of the  Notes  being  prepaid  or (2) in the  event  that no
         nationally recognized trading screen reporting on-line intraday trading
         in the United States government  Securities is available,  Reinvestment
         Rate shall mean 0.50%,  plus the arithmetic  mean of the yields for the
         two  columns  under  the  heading   "Week  Ending"   published  in  the
         Statistical  Release under the caption "Treasury  Constant  Maturities"
         for the maturity  (rounded to the nearest month)  corresponding  to the
         Remaining  Life to  Maturity  of the  principal  being  prepaid.  If no
         maturity exactly corresponds to such Remaining Life to Maturity, yields
         for the  published  maturity  next  longer than the  Remaining  Life to
         Maturity and for the published maturity next shorter than the Remaining
         Life to  Maturity  shall  be  calculated  pursuant  to the  immediately
         preceding sentence and the Reinvestment Rate shall be interpolated from
         such yields on a straight-line basis, rounding in each of such relevant
         periods to the  nearest  month.  For the  purposes of  calculating  the
         Reinvestment Rate, the most recent Statistical  Release published prior
         to the date of determination of the Make-Whole Amount shall be used.

                  "Statistical  Release"  shall  mean  the  then  most  recently
         published  statistical release designated  "H.15(519)" or any successor
         publication which is published weekly by the Federal Reserve System and
         which establishes yields on actively traded U.S. Government  Securities
         adjusted to constant  maturities or, if such statistical release is not
         published at the time of any determination  hereunder,  then such other
         reasonably  comparable  index which shall be  designated by the Holders
         holding 66-2/3% in aggregate principal amount of the outstanding Series
         B Notes,  subject to approval of the Company which approval will not be
         unreasonably withheld.

                  "Remaining  Life to Maturity" of the  principal  amount of the
         Series  B  Notes  being  prepaid  shall  mean,  as of the  time  of any
         determination  thereof,  the number of years (calculated to the nearest
         one-twelfth)  which will elapse between the date of  determination  and
         the final maturity of the Series B Notes being prepaid.

         "Material  Condemnation" shall mean any Condemnation of any property of
the Company or a Restricted Subsidiary pursuant to which a condemnation award in
excess of $100,000 shall have been received by the Company.

         "Material Restricted  Subsidiary" shall mean any Restricted  Subsidiary
         if:

                   (a) the aggregate sum of all assets (valued at the greater of
         book or fair market value) of such Restricted Subsidiary, when combined
         with  the  assets  of  all  other  Restricted   Subsidiaries  to  which
         subclauses (i), (j) or (k) of ss.6.1 hereof would have applied,  if not
         for the fact  that  such  Restricted  Subsidiaries  did not  constitute
         Material   Restricted   Subsidiaries  during  the  twelve-month  period
         immediately  preceding  the date


                                                                              28

<PAGE>

         of  such  determination,   exceeds  5%  of  Consolidated  Total  Assets
         determined as of the end of the immediately preceding fiscal year; or

                   (b)  the  portion  of  Consolidated   Net  Income  which  was
         contributed  by  such  Restricted  Subsidiary  during  the  immediately
         preceding  fiscal year, when combined with the portions of Consolidated
         Net Income so contributed by all other Restricted Subsidiaries to which
         subclauses (i), (j) or (k) of ss.6.1 hereof would have applied,  if not
         for the fact  that  such  Restricted  Subsidiaries  did not  constitute
         Material   Restricted   Subsidiaries  during  the  twelve-month  period
         immediately  preceding  the date of such  determination,  exceeds 5% of
         Consolidated Net Income.

         "Minority  Interests"  shall mean any shares of stock of any class of a
Restricted  Subsidiary  (other than directors'  qualifying shares as required by
law)  that are not owned by the  Company  and/or  one or more of its  Restricted
Subsidiaries.  Minority  Interests shall be valued by valuing Minority Interests
constituting  preferred stock at the voluntary or involuntary  liquidating value
of such preferred stock, whichever is greater, and by valuing Minority Interests
constituting  common  stock at the book value of capital and surplus  applicable
thereto  adjusted,  if necessary,  to reflect any changes from the book value of
such common stock required by the foregoing method of valuing Minority Interests
in preferred stock.

         "Mortgage  Indenture" shall mean the Company's Mortgage of Chattels and
Trust  Indenture,  dated April 1, 1928, as such Trust  Indenture may be amended,
supplemented or modified from time to time.

         "Multiemployer Plan" shall have the same meaning as in ERISA.

         "Net Income  Available for Interest  Charges" for any period shall mean
the sum of (i)  Consolidated  Net Income  during such period plus (to the extent
deducted in determining  Consolidated  Net Income),  (ii) all provisions for any
Federal,  state or other  income  taxes made by the Company  and its  Restricted
Subsidiaries  in a manner  consistent  with GAAP  during  such  period and (iii)
Interest  Charges of the Company  and its  Restricted  Subsidiaries  during such
period.

         "Notes" have the meaning, set forth in ss.1.1.

         "PBGC" means the Pension  Benefit  Guaranty  Corporation and any entity
succeeding to any or all of its functions under ERISA.

         "Person" shall mean an individual,  partnership,  corporation, trust or
unincorporated organization, and a government or agency or political subdivision
thereof.

         "Plan"  means a  "pension  plan,"  as such  term is  defined  in ERISA,
established  or maintained by the Company or any ERISA  Affiliate or as to which
the Company or any ERISA  Affiliate  contributed or is a member or otherwise may
have any liability.


                                      -29-

<PAGE>

         "Pro Forma Interest  Charges" for any period shall mean, as of the date
of any determination  thereof,  the maximum aggregate amount of Interest Charges
which would have become payable by the Company and its  Restricted  Subsidiaries
in such period determined on a pro forma basis giving effect as of the beginning
of  such  period  to  the  incurrence  of any  Funded  Debt  thereof  (including
Capitalized Rentals) and the concurrent retirement of outstanding Funded Debt or
Current Debt or termination of any Capitalized Leases thereof.

         "Purchasers" shall have the meaning set forth in ss.1.1.

         "Rentals"  shall mean and  include as of the date of any  determination
thereof all fixed  payments  (including as such all payments which the lessee is
obligated to make to the lessor on  termination of the lease or surrender of the
property)  payable  by the  Company  or a  Restricted  Subsidiary,  as lessee or
sublessee under a lease of real or personal property,  but shall be exclusive of
any  amounts  required  to be paid by the  Company  or a  Restricted  Subsidiary
(whether  or not  designated  as  rents  or  additional  rents)  on  account  of
maintenance,  repairs,  insurance,  taxes and similar charges. Fixed rents under
any so-called  "percentage  leases" shall be computed solely on the basis of the
minimum  rents,  if any,  required to be paid by the lessee  regardless of sales
volume or gross revenues.

         "Reportable Event" shall have the same meaning as in ERISA.

         "Responsible  Officer" shall mean any Senior  Financial  Officer or any
other officer of the Company with  responsibility  for the administration of the
relevant portion of the Agreement.

         "Restricted   Subsidiary"  shall  mean  any  Subsidiary  (i)  which  is
organized  under the laws of the United States or any State thereof;  (ii) which
conducts  substantially  all of its  business and has  substantially  all of its
assets  within  the  United  States;  (iii) of which at least 80% (by  number of
votes) of the Voting Stock is beneficially owned, directly or indirectly, by the
Company and/or one or more Restricted Subsidiaries;  and (iv) which is hereafter
designated  by the  Board  of  Directors  of the  Company,  or any  Director  or
committee  of  Directors  duly  designated  by such  Board of  Directors,  to be
included in the  definition  of Restricted  Subsidiary  for all purposes of this
Agreement,  provided  that,  at the time of such  designation  and after  giving
effect thereto, no Default or Event of Default shall have occurred hereunder.

         "SEC"  shall  mean  the  Securities  and  Exchange  Commission  or  any
successor agency.

         "Security"  shall  have  the same  meaning  as in  Section  2(1) of the
Securities Act of 1933, as amended.

         "Senior  Financial  Officer"  shall  mean  chief  financial  officer or
assistant treasurer of the Company.

         "Series" shall have the meaning set forth in ss.1.4.

         "Series B Notes" shall have the meaning set forth in ss.1.1.


                                                                              30

<PAGE>

         The  term   "subsidiary"   shall  mean  as  to  any  particular  parent
corporation  any  corporation of which more than 50% (by number of votes) of the
Voting Stock shall be beneficially owned, directly or indirectly, by such parent
corporation. The term "Subsidiary" shall mean a subsidiary of the Company.

         "Supplement" shall have the meaning set forth in ss.1.4.

         "Unrestricted  Subsidiary"  shall  mean any  Subsidiary  which is not a
Restricted Subsidiary.

         "Voting  Stock"  shall mean  Securities  of any class or  classes,  the
holders of which are ordinarily,  in the absence of  contingencies,  entitled to
elect a majority  of the  corporate  directors  (or Persons  performing  similar
functions).

         "Wholly-owned" when used in connection with any Subsidiary shall mean a
Subsidiary  of which all of the issued and  outstanding  shares of stock (except
shares required as directors' qualifying shares) and all Funded Debt and Current
Debt  shall be  owned  by the  Company  and/or  one or more of its  Wholly-owned
Subsidiaries.

         Section 8.2.  Accounting  Principles.  Where the character or amount of
any asset or liability or item of income or expense is required to be determined
or any consolidation or other accounting  computation is required to be made for
the purposes of this Agreement,  the same shall be done in accordance with GAAP,
to the extent applicable, except where such principles are inconsistent with the
requirements of this Agreement.

         Section  8.3.  Directly  or  Indirectly.  Where any  provision  in this
Agreement  refers to action to be taken by any  Person,  or which such Person is
prohibited from taking, such provision shall be applicable whether the action in
question is taken directly or indirectly by such Person.

SECTION 9.     MISCELLANEOUS.

         Section 9.1.  Registered  Notes.  The Company shall cause to be kept at
its principal  office a register for the  registration and transfer of the Notes
(hereinafter  called the "Note  Register"),  and the  Company  will  register or
transfer or cause to be registered or transferred  as  hereinafter  provided any
Note issued pursuant to this Agreement or any Supplement.

         At any time and from time to time any  Holder of a Note  which has been
duly  registered as  hereinabove  provided may transfer such Note upon surrender
thereof at the principal office of the Company duly endorsed or accompanied by a
written  instrument of transfer duly executed by the Holder or its attorney duly
authorized in writing.

         The Person in whose name any registered Note shall be registered  shall
be deemed  and  treated  as the owner and  holder  thereof  and a Holder for all
purposes of this  Agreement or any  Supplement.  Payment of or on account of the
principal, premium, if any, and interest on any registered Note shall be made to
or upon the written order of such Holder.


                                      -31-

<PAGE>

         Section 9.2. Exchange of Notes. At any time and from time to time, upon
not less than ten days'  notice to that  effect  given by the Holder of any Note
initially delivered or of any Note substituted therefor pursuant to ss.9.1, this
ss.9.2 or ss.9.3,  and, upon  surrender of such Note at its office,  the Company
will deliver in exchange therefor, without expense to such Holder, except as set
forth below,  a Note of an  identical  Series for the same  aggregate  principal
amount as the then unpaid principal amount of the Note so surrendered,  or Notes
in the  denomination  of $250,000 or any amount in excess thereof as such Holder
shall specify,  dated as of the date to which interest has been paid on the Note
so  surrendered  or, if such  surrender  is prior to the payment of any interest
thereon,  then  dated as of the date of  issue,  registered  in the name of such
Person or Persons as may be designated by such Holder, and otherwise of the same
form and tenor as the Notes so surrendered for exchange. The Company may require
the payment of a sum  sufficient to cover any stamp tax or  governmental  charge
imposed upon such exchange or transfer.

         Section  9.3.  Loss,  Theft,  Etc. of Notes.  Upon  receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of any
Note, and in the case of any such loss,  theft or destruction upon delivery of a
bond of indemnity in such form and amount as shall be reasonably satisfactory to
the Company,  or in the event of such mutilation upon surrender and cancellation
of the Note,  the Company  will make and deliver  without  expense to the Holder
thereof, a new Note, of like tenor, in lieu of such lost,  stolen,  destroyed or
mutilated Note. If an Institutional Holder is the owner of any such lost, stolen
or destroyed  Note,  then the affidavit of an authorized  officer of such owner,
setting  forth the fact of loss,  theft or  destruction  and of its ownership of
such Note at the time of such loss,  theft or  destruction  shall be accepted as
satisfactory  evidence  thereof and no further  indemnity shall be required as a
condition to the  execution  and delivery of a new Note of the same Series other
than the written agreement of such owner to indemnify the Company.

         Section  9.4.  Expenses,  Stamp  Tax  Indemnity.  Whether  or  not  the
transactions herein contemplated shall be consummated, the Company agrees to pay
directly all of the  Purchasers'  out-of-pocket  expenses in connection with the
preparation,  execution  and  delivery of this  Agreement  and the  transactions
contemplated  hereby  (including  all  expenses  relating to any exchange of the
Notes for First Mortgage Bonds as contemplated by ss.5.14 hereof), including but
not limited to the reasonable  charges and  disbursements of Chapman and Cutler,
special  counsel to the  Purchasers,  duplicating and printing costs and charges
for shipping the Notes, adequately insured to each Purchaser's home office or at
such other place as such Purchaser may  designate,  and all such expenses of the
Holders  relating  to  any  amendment,  waivers  or  consents  pursuant  to  the
provisions hereof, including,  without limitation,  any amendments,  waivers, or
consents resulting from any work-out, renegotiation or restructuring relating to
the  performance  by the  Company of its  obligations  under this  Agreement,  a
Supplement and the Notes. The Company also agrees that it will pay and save each
Purchaser and Additional  Purchaser  harmless against any and all liability with
respect to stamp and other taxes,  if any,  which may be payable or which may be
determined to be payable in  connection  with the execution and delivery of this
Agreement,  a  Supplement  or the  Notes,  whether  or not any  Notes  are  then
outstanding.  The Company  agrees to protect and  indemnify  each  Purchaser and
Additional  Purchaser  against any liability for any and all brokerage  fees and
commissions  payable or claimed to be payable to any Person in  connection  with
the original issuance of the Notes as contemplated by this Agreement.


                                                                              32

<PAGE>

         Section  9.5.  Powers and Rights Not Waived;  Remedies  Cumulative.  No
delay or failure on the part of any Holder in the exercise of any power or right
shall operate as a waiver thereof;  nor shall any single or partial  exercise of
the same preclude any other or further exercise thereof,  or the exercise of any
other power or right,  and the rights and remedies of each Holder are cumulative
to, and are not  exclusive  of, any rights or  remedies  any such  Holder  would
otherwise have.

         Section 9.6. Notices.  All communications  provided for hereunder shall
be in writing and, if to a Holder,  delivered or mailed prepaid by registered or
certified mail or overnight air courier, or by facsimile communication,  in each
case  addressed  to such Holder at its address  appearing  on Schedule I or in a
Supplement,  as the  case  may be,  or such  other  address  as any  Holder  may
designate to the Company in writing, and if to the Company,  delivered or mailed
by  registered  or  certified  mail or overnight  air  courier,  or by facsimile
communication,  to the Company at the address  beneath its signature at the foot
of this  Agreement  or to such  other  address  as the  Company  may in  writing
designate  to the  Holders;  provided,  however,  that a notice  to a Holder  by
overnight  air courier  shall only be effective if delivered to such Holder at a
street address designated for such purpose in accordance with thisss.9.6,  and a
notice to such Holder by facsimile communication shall only be effective if made
by confirmed  transmission to such Holder at a telephone  number  designated for
such purpose in accordance with thisss.9.6 and promptly followed by the delivery
of such notice by registered or certified mail or overnight air courier,  as set
forth above.

         Section 9.7.  Successors and Assigns.  This Agreement  shall be binding
upon the Company and its  successors  and assigns and shall inure to the benefit
of each  Purchaser  and its  successor and assigns,  including  each  successive
Holder.

         Section 9.8. Survival of Covenants and Representations.  All covenants,
representations   and  warranties   made  by  the  Company  herein  and  in  any
certificates  delivered  pursuant hereto,  whether or not in connection with the
Closing Date, shall survive the closing and the delivery of this Agreement,  any
Supplement and the Notes.

         Section 9.9.  Severability.  Should any part of this  Agreement for any
reason be declared invalid or unenforceable,  such decision shall not affect the
validity or  enforceability  of any remaining  portion,  which remaining portion
shall remain in force and effect as if this Agreement had been executed with the
invalid or  unenforceable  portion thereof  eliminated and it is hereby declared
the intention of the parties  hereto that they would have executed the remaining
portion of this  Agreement  without  including  therein any such part,  parts or
portion  which  may,  for  any  reason,   be  hereafter   declared   invalid  or
unenforceable.

         Section 9.10.  Governing  Law. This  Agreement and the Notes issued and
sold hereunder  shall be governed by and construed in accordance with California
law.

         Section  9.11.  Captions.  The  descriptive  headings  of  the  various
Sections  or parts of this  Agreement  are for  convenience  only and  shall not
affect the meaning or construction of any of the provisions hereof.


                                      -33-

<PAGE>


         The  execution  hereof by the  Purchasers  shall  constitute a contract
among the Company and the Purchasers for the uses and purposes  hereinabove  set
forth.  This  Agreement  may be  executed  in any number of  counterparts,  each
executed  counterpart  constituting  an  original  but  all  together  only  one
agreement.

                              CALIFORNIA WATER SERVICE COMPANY

                              By

                                 Name: _________________________________________

                                 Title: ________________________________________




CALIFORNIA WATER SERVICE COMPANY
1720 North First Street
San Jose, California  95112-4598
Attention:  Chief Financial Officer
Telefacsimile:  (408) 367-8430
Confirmation:  (408) 367-8200


                                                                              34

<PAGE>




Accepted,  separately for each of the respective institutions named below, as of
March 23, 1999:

                                             AMERICAN GENERAL LIFE AND ACCIDENT
                                                INSURANCE COMPANY
                                             THE VARIABLE ANNUITY LIFE INSURANCE
                                                COMPANY
                                             AMERICAN GENERAL LIFE INSURANCE
                                                COMPANY OF NEW YORK



                                             By
                                                Name:
                                                Title



                                      -35-

<PAGE>

                       INFORMATION RELATING TO PURCHASERS

NAME OF PURCHASER                                                TO BE PURCHASED

AMERICAN GENERAL LIFE AND ACCIDENT
INSURANCE COMPANY                                                  $10,000,000

All  payments  on or in  respect  of the  Notes to be by bank wire  transfer  of
Federal or other  immediately  available  funds  (identifying  each  payment as:
"California  Water Service  Company,  6.77% Series B Senior Notes due 2028,  PPN
130789 L*9 principal or interest") to:

         ABA #011000028
         State Street Bank and Trust Company
         Boston, Massachusetts  02101
         Re:  American General Life and Accident Insurance Company
         AC-0125-934-0
         Fund Number PA 10

Notices

All notices of payment on or in respect of the Notes and written confirmation of
each such payment to:

         American General Life and Accident Insurance Company and PA 10
         c/o State Street Bank and Trust Company
         Insurance Services, WES2S
         105 Rosemont Road
         Westwood, Massachusetts  02090
         Facsimile Number:  (781) 302-8005

Duplicate payment notices and all other correspondences to:

         American General Life and Accident Insurance Company
         c/o American General Corporation
         P. O. Box 3247
         Houston, Texas  77253-3247
         Attention:  Investment Research Department, A37-01
         Facsimile Number:  (713) 831-1366

         Overnight Mailing Address:
         2929 Allen Parkway, A37-01
         Houston, Texas  77019-2155

Name of Nominee in which Notes are to be issued:  None

Taxpayer I.D. Number:  62-0306330


                                   SCHEDULE I
                               (to Note Agreement)


<PAGE>

NAME OF PURCHASER                                               TO BE PURCHASED

THE VARIABLE ANNUITY LIFE INSURANCE COMPANY                       $8,000,000

Payments

All  payments  on or in  respect  of the  Notes to be by bank wire  transfer  of
Federal  or other  immediately  available  funds  (identifying  each  payment as
"California  Water Service  Company,  6.77% Series B Senior Notes due 2028,  PPN
130789 L*9, principal or interest") to:

         ABA #011000028
         State Street Bank and Trust Company
         Boston, Massachusetts 02101
         Re:  The Variable Annuity Life Insurance Company
         AC-0125-821-9
         Fund Number PA 54

Notices

All notices of payment on or in respect of the Notes and written confirmation of
each such payment to:

         The Variable Annuity Life Insurance Company and PA 54
         c/o State Street Bank and Trust Company
         Insurance Services WES2S
         105 Rosemont Road
         Westwood, Massachusetts  02090
         Facsimile Number:  (781) 302-8005

Duplicate payment notices and all other correspondences to:

         The Variable Annuity Life Insurance Company
         c/o American General Corporation
         P. O. Box 3247
         Houston, Texas  77253-3247
         Attention:  Investment Research Department, A37-01
         Facsimile Number:  (713) 831-1366

         Overnight Mailing Address:
         2929 Allen Parkway, A37-01
         Houston, Texas  77019-2155

Name of Nominee in which Notes are to be issued:  None

Taxpayer I.D. Number:  74-1625348


                                                                               2

<PAGE>

NAME OF PURCHASER                                               TO BE PURCHASED

AMERICAN GENERAL LIFE INSURANCE
COMPANY OF NEW YORK                                               $2,000,000

Payments

All  payments  on or in  respect  of the  Notes to be by bank wire  transfer  of
Federal  or other  immediately  available  funds  (identifying  each  payment as
"California  Water Service  Company,  6.77% Series B Senior Notes due 2028,  PPN
130789 L*9, principal or interest") to:

         ABA #0110 0002 8
         State Street Bank and Trust Company
         Boston, Massachusetts  02101
         Re:  American General Life Insurance Company of New York
         AC-0125-942-3
         Fund Number PA 45

Notices

All notices of payment on or in respect of the Notes and written confirmation of
each such payment to:

         American General Life Insurance Company of New York and PA 45
         c/o State Street Bank and Trust Company
         Insurance Services Custody (AH2)
         1776 Heritage Drive
         North Quincy, Massachusetts  02171
         Facsimile Number:  (617) 985-4923

Duplicate payment notices and all other correspondences to :

         American General Life Insurance Company
           of New York
         c/o American General Corporation
         P. O. BOX 3247
         Houston, Texas  77253-3247
         Attention:  Investment Research Department, A37-01
         Facsimile Number:  (713) 831-1366

         Overnight Mailing Address:
         2929 Allen Parkway
         Houston, Texas  77019-2155

Name of Nominee in which Notes are to be issued:  None

Taxpayer I.D. Number:  13-1853201


                                      -3-

<PAGE>

                           LIENS SECURING FUNDED DEBT

         Funded Debt of the  Company,  consisting  of various of series of First
Mortgage Bonds issued under terms of the Trust Indenture dated April 1, 1928 and
its supplemental  indentures,  is secured by substantially  all of the Company's
utility  plant.  As of  the  Closing  Date,  an  aggregate  of  $118,585,000  is
outstanding  under the First  Mortgage  Bonds as represented by series P, S, BB,
CC,  DD,  EE,  FF and GG.  As of  December  31,  1998  gross  utility  plant was
$680,690,000.




                                   SCHEDULE II
                               (to Note Agreement)

<PAGE>

THIS NOTE HAS NOT BEEN  REGISTERED  WITH THE SECURITIES AND EXCHANGE  COMMISSION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY SALE, TRANSFER,  PLEDGE OR
OTHER DISPOSITION THEREOF MAY BE MADE ONLY (1) IN A TRANSACTION REGISTERED UNDER
SAID ACT OR (2) IF AN EXEMPTION FROM REGISTRATION UNDER SAID ACT IS AVAILABLE.

                        CALIFORNIA WATER SERVICE COMPANY

                           6.77% Series B Senior Note
                              Due November 1, 2028

                                 PPN: 130789 L*9

No.                                                              _________, 19__

$

         California  Water  Service  Company,  a  California   corporation  (the
"Company"), for value received, hereby promises to pay to

                              or registered assigns
                       on the first day of November, 2028
                             the principal amount of

                                                         DOLLARS ($____________)

and to pay interest  (computed  on the basis of a 360-day year of twelve  30-day
months) on the principal amount from time to time remaining unpaid hereon at the
rate  of  6.77%  per  annum  from  the  date  hereof  until  maturity,   payable
semiannually on the first day of each May and November in each year  (commencing
on the first of such dates after the date hereof) and at  maturity.  The Company
agrees to pay interest on overdue  principal  (including any overdue required or
optional  prepayment  of  principal)  and  premium,  if any,  and (to the extent
legally  enforceable)  on any overdue  installment  of interest,  at the rate of
8.77% per annum after the due date, whether by acceleration or otherwise,  until
paid. Both the principal hereof and interest hereon are payable at the principal
office of the Company in San Jose,  California in coin or currency of the United
States of  America  which at the time of payment  shall be legal  tender for the
payment of public and private debts.

         This  Note is one of a series of Notes  (the  "Notes")  of the  Company
issued or to be issued  under and  pursuant to the terms and  provisions  of the
Note  Agreement  dated as of March 1,  1999 (as from  time to time  amended  and
supplemented, the "Note Agreement"), entered into by the Company, the Purchasers
named  therein and the  Additional  Purchasers of Notes from time to


                                    EXHIBIT A
                               (to Note Agreement)

<PAGE>

time issued pursuant to any Supplement to the Note Agreement.  This Note and the
holder  hereof are  entitled  equally and ratably  with the holders of all other
Notes of all Series from time to time  outstanding  under the Note  Agreement to
all the  benefits  provided  for thereby or referred  to therein.  Reference  is
hereby made to the Note  Agreement  for a statement of such rights and benefits.
Each holder of this Note will be deemed, by its acceptance  hereof, to have made
the  representations  contained in Section 3.2 of the Note  Agreement,  provided
that such holder may (in  reliance  upon  information  provided by the  Company,
which shall not be unreasonably  withheld) make a  representation  to the effect
that the  purchase by such holder of any Note will not  constitute  a non-exempt
prohibited transaction under Section 406(a) of ERISA.

         This Note and the other Notes  outstanding under the Note Agreement may
be declared due prior to their expressed  maturity dates, all in the events,  on
the terms and in the manner and amounts as provided in the Note Agreement.

         The Notes are not subject to  prepayment or redemption at the option of
the Company  prior to their  expressed  maturity  dates  except on the terms and
conditions  and in the amounts and with the  premium,  if any,  set forth in the
Note Agreement.

         This Note is registered on the books of the Company and is transferable
only by surrender  thereof at the principal  office of the Company duly endorsed
or  accompanied  by a  written  instrument  of  transfer  duly  executed  by the
registered  holder of this Note or its  attorney  duly  authorized  in  writing.
Payment of or on account of  principal,  premium,  if any,  and interest on this
Note  shall be made  only to or upon  the  order in  writing  of the  registered
holder.

         This Note shall be construed and enforced in accordance  with,  and the
rights of the parties shall be governed by, the law of the State of  California,
excluding  choice-of-law  principles of the law of such State that would require
the application of the laws of a jurisdiction other than such State.

                                       CALIFORNIA WATER SERVICE COMPANY

                                       By

                                          Name:  _______________________________
                                          Title:  ______________________________


                                                                               2

<PAGE>

                         REPRESENTATIONS AND WARRANTIES

         The Company represents and warrants to each Purchaser that:

         1. Corporate Organization,  Subsidiaries. The Company is duly organized
and existing and in good  standing  under and by virtue of the laws of the State
of  California  and is duly  authorized  and  empowered  to own and  operate its
properties  and to carry on its  business,  all as and in the places  where such
properties  are now owned and  operated  and such  business  is  conducted.  The
Company has no Subsidiaries.

         2.  Corporate  Authority.  The  Company  has full  corporate  power and
corporate  authority to sell and issue the Series B Notes. The issuance and sale
of the Series B Notes and the execution and delivery of the Agreement  will have
been duly  authorized by the Board of Directors of the Company and by the Public
Utilities  Commission of the State of California (the "Commission") prior to the
Closing Date, and no other action is required to be taken by, and no consents or
approvals are required to be obtained from, the  shareholders  of the Company or
any  public  body or bodies,  and no other  corporate  action of the  Company is
requisite to such issue and sale.

         3. Business and Property.  Each Purchaser has heretofore been furnished
with a copy of the Company  Information which generally sets forth the principal
properties  of the  Company  and  the  business  conducted  and  proposed  to be
conducted by the Company.

         4.  Indebtedness.  Annex A  attached  hereto  correctly  describes  all
Current Debt, Funded Debt and Capitalized  Leases of the Company  outstanding on
March 1, 1999.

         5.  Financial  Statements  and Reports.  The Company has furnished each
Purchaser  with a copy of its  Annual  Reports  and Forms  10-K  filed  with the
Securities and Exchange  Commission for 1994,  1995,  1996 and 1997  hereinafter
called the "Company Reports," and a copy of the Form 10-K filed by CWSG with the
Securities and Exchange  Commission for the fiscal year ended December 31, 1998,
together with all reports or documents  required to be filed by CWSG pursuant to
Sections  13(a) or 15(d) of the  Securities  Exchange  Act of 1934,  as amended,
since the filing of such Form 10-K.  The financial  statements  contained in the
foregoing  Company  Reports  and the CWSG Form 10-K and such other  reports  and
documents  were  prepared  in  accordance  with  generally  accepted  accounting
principles upon a consistent  basis and are complete and correct and the balance
sheets included therein fairly present the financial condition of the Company or
CWSG, as the case may be, as at the respective  dates thereof and the Statements
of Income,  Common  Shareholders'  Equity and Cash Flows included therein fairly
present the  results of the  operations  of the Company for the periods  covered
thereby,  subject  in the  case  of  unaudited  statements  to  normal  year-end
adjustments.

         6.  Material  Contracts.  The Company has no contracts or  commitments,
whether  contingent  or other,  which are material to the Company and which were
not made in the ordinary course of business.  Certain material contracts related
to water  supply are listed in Annex B hereto.  The Company has no  contracts or
commitments,  contingent or other,  which  materially


                                    EXHIBIT B
                               (to Note Agreement)

<PAGE>

and  adversely  affect or in the future may (so far as the Company can  foresee)
materially and adversely affect the Company or its business,  property,  assets,
operations or condition, financial or other. As at December 31, 1998, there were
no material liabilities of the Company (other than those under contracts entered
into in the normal and  ordinary  course of  business),  actual,  contingent  or
accrued, which were not reflected in the Annual Reports except for (i) liability
in respect of uncompleted  construction  work under open contracts in connection
with the Company's  construction program and (ii) the obligations of the Company
to contribute  to a pension  plan,  an employees'  savings plan and a health and
welfare plan.

          7. No  Material  Adverse  Change.  (a) There has been no change in the
condition of the Company,  financial or other,  from that set forth or reflected
in the 1998 Annual  Report,  other than changes  which may have  occurred in the
ordinary course of business or by reason of ordinary  dividends paid or declared
or outstanding  First Mortgage Bonds redeemed by the Company in accordance  with
their terms,  and no such changes in the ordinary  course of business  have been
material adverse changes.

         (b)  Since  December  31,  1998,  neither  the  business,   operations,
properties  nor  assets of the  Company  have  been  adversely  affected  in any
material way by any casualties such as fire, windstorm, riot, strike, explosion,
accident, flood, earthquake,  lockout, sabotage, activities of armed forces, act
of God or the public enemy or  condemnation  of  properties by the United States
government or any municipal governmental agency, authority or body.

          8. Title to  Properties.  The Company is engaged in the  business of a
public utility water company  serving all or a portion of the California  cities
and  communities  listed in the 1998  Annual  Report.  The  Company has good and
merchantable  title,  subject only to the lien of the Mortgage  Indenture and to
current tax and  assessment  liens,  rights-of-way,  easements and certain minor
liens,  encumbrances,  clouds or defects in title which do not materially affect
the use thereof, to all the material water distribution  facilities  (including,
without limitation,  transmission and distribution mains, pump stations,  wells,
storage tanks and  reservoirs)  and other material units of property used in its
business except as follows:

                   (a) most of the offices,  except its principal office, are in
         leased premises and some wells, well sites and other minor distribution
         facilities are rented; and

                   (b) several  wells are located on property  which the Company
         does not own but in which it has an easement  for the  location of such
         wells;

and except as to easements and  rights-of-way  and certain  parcels of land (not
exceeding  for said  parcels of land an aggregate  book value of $250,000)  with
respect to which there is a possibility of reverter if the property ceases to be
used for public utility  purposes,  and,  except that the greater portion of its
transmission and distribution  systems is located in public highways and streets
and in  rights-of-way  owned by the Company over lands of others,  the Company's
title thereto is fee simple. Except for parcels of land having an aggregate book
value of not more than $250,000,  the Company has good and merchantable title to
all its other  property  and  assets  subject  only to the lien of the  Mortgage
Indenture  and  to  current  tax  and  assessment  liens  and  minor  liens  and
encumbrances  which  do  not  materially  affect  the  use  thereof.  All of the


                                                                               2

<PAGE>

properties  of  the  Company  are  located  in  the  State  of  California   and
substantially  all of the properties of the Company used or useful in its public
utility business are subject to the Mortgage Indenture.

         9. Franchises.  The Company has, in its judgment,  adequate  franchises
and  permits  without  burdensome   restrictions  (other  than  those  typically
contained  in  franchises  and  permits  of this  type) to allow the  Company to
conduct the business in which it is engaged.

         The Company has two classes of  franchises to install and operate water
pipes and mains under public streets and highways:

                   (a) so-called "constitutional"  franchises obtained by virtue
         of the  provisions  of  Article  XI,  Section  19,  of  the  California
         Constitution, as in effect prior to 1911; and

                   (b) franchises granted pursuant to statutory authority.

         The Company  believes,  based on the advice of counsel (which is itself
based upon the assumption of the accuracy of information obtained by the Company
from sources  believed to be reliable  that the  following  cities served by the
Company were all incorporated prior to 1911:

          Bakersfield            Marysville          South San Francisco
          Chico                  Oroville            Stockton
          Dixon                  Redondo Beach       Visalia
          Hermosa Beach          Salinas             Willows
          King City              San Mateo
          Livermore              Selma

that water  distribution  systems were constructed and service  furnished to the
inhabitants  of each by various  predecessors  of the Company prior to 1911, and
that there were no public water works owned or controlled by the municipality in
any of them prior to 1911), that the Company has a "constitutional" franchise in
each of the above cities and under such constitutional franchise has a perpetual
right which was not  repealed  by the repeal of Article  XI,  Section 19, of the
California  Constitution  to continue to occupy  public  streets of each of said
cities  with its pipes and mains and to lay down  additional  pipes and mains in
said streets for the supplying of water, subject to reasonable regulation by the
respective  municipalities.  The Company also  believes,  based on the advice of
counsel,  that this right is not limited to streets in which pipes or mains were
laid  prior  to  1911  but   extends  at  least  to  all  streets  in  the  said
municipalities  as they  existed  at the date of  repeal  of the  constitutional
provision in 1911 and probably also extends to territory  incorporated into each
respective  city  after such  repeal,  although  this  latter  question  remains
somewhat in doubt in the absence of a final decision of the courts thereon.  The
Company  holds either by assignment or as original  grantee  franchises  granted
under  statutory  authority by the Counties of Kern,  Los Angeles,  San Joaquin,
Santa  Clara and  Monterey,  the  Cities  of  Montebello,  Torrance,  Cupertino,
Sunnyvale, Los Altos, Mountain View, Bakersfield,  Commerce, San Carlos, Rolling
Hills Estates and Thousand  Oaks, and the Towns of Los Altos Hills and Atherton.
Following  incorporation of the City of Rancho Palos Verdes in 1973, the Company
made franchise  payments to the City and the City accepted the same as successor
in


                                      B-3

<PAGE>

interest to the grantor's  rights under the Company's  former franchise from the
County of Los  Angeles;  the City has agreed that the Company may  exercise  its
rights in the City under its current  County  franchise  until the expiration of
that franchise in 2012. The Company's franchises from the Cities of Palos Verdes
Estates,   Menlo  Park  and  Woodside   terminated  in  1977,   1993  and  1994,
respectively.  While  none of the  Cities and the  Company  have  executed a new
franchise  agreement,  the Company has made and will continue to make  franchise
payments to each of the Cities in  accordance  with the  provisions of the prior
franchise. In other areas where the Company has no franchise, the Company or its
predecessors  have  distributed  water  for many  years  and,  to the  Company's
knowledge,  no  question  has ever  been  raised  as to the  right to make  such
distribution and to maintain all pipes and mains necessary therefor.

         10.  Condition  of Assets.  The  physical  assets of the Company are in
sound operating  condition,  there are no material arrears in the maintenance of
any such physical assets and the Company  believes that its sources of water are
adequate to meet its requirements for the foreseeable future.

         11. Pending Litigation, Proceedings. (a) There are no actions, suits or
proceedings  pending  at law or in equity or  before or by any  federal,  state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality,  domestic  or foreign,  or, to the  knowledge  of the  Company,
threatened  against or affecting the Company not adequately covered by insurance
or for  which  reserves  adequate  in  the  Company's  judgment  have  not  been
established  which  involve,  in  the  opinion  of  the  Company,  a  reasonable
possibility of judgments or liabilities  exceeding $500,000 in the aggregate net
of insurance, or which may, in the opinion of the Company result in any material
adverse change in the business or properties or in the  condition,  financial or
other, of the Company,  or the ability of the Company to perform its obligations
under the Agreement or the Series B Notes.

         (b) There  are no  proceedings  pending  or,  to the  knowledge  of the
Company,  threatened  against the  Company  before or by any  federal,  state or
municipal commission, board or other administrative agency, which materially and
adversely affect the water rates of the Company presently in effect.

         (c) The  Company is not in  default  with  respect to any order,  writ,
injunction  or  decree  of  any  court,  or  any  federal,  state  or  municipal
commission,  board or other  administrative  agency and the Company has complied
with all applicable statutes and regulations of the United States of America and
of any state,  municipality or agency of any thereof,  in respect of the conduct
of its business known or believed by the Company to be applicable  thereto,  the
failure to comply  with which  could  reasonably  be expected to have a material
adverse effect on the Company or its properties.

         12. No  Condemnation  Proceedings.  Since January 1, 1995, no elections
have  been  held  or  other  actions  taken   authorizing  the  commencement  of
proceedings for  condemnation of any of the properties of the Company.  However,
from time to time  there are  expressions  of  interest  made by public  bodies,
elected or appointed municipal officials,  persons seeking political position or
citizens groups urging acquisition of the Company's facilities in one or more of
the  communities  served by the  Company.  The Company does not believe that any
acquisition  by a


                                                                               4

<PAGE>

city or  municipality  of its properties by condemnation or threat thereof would
be adverse to the holders of the Series B Notes.

         13. No  Burdensome  Restrictions.  The  Company  is not  subject to any
burdensome corporate  restrictions in its Articles of Incorporation,  By-Laws or
otherwise, which materially and adversely affect or in the future may (so far as
the Company can  foresee)  materially  and  adversely  affect the Company or its
business, property, assets, operations or condition, financial or other.

         14. Regulatory  Status,  Approval.  (a) The Company is not a registered
holding company or a subsidiary of a registered  holding company and the Company
is not  required to register  under the Public  Utility  Holding  Company Act of
1935, as amended. The Company is subject to the jurisdiction of the Commission.

         (b) No consent of, approval or authorization by, filing or registration
with, or notice to any  governmental  or public  authority or agency is required
for the  issuance,  sale or  delivery  of the  Series B Notes or the  execution,
delivery or performance of the Agreement,  other than the  authorization  of the
Commission,  which  authorization  has been duly obtained,  is in full force and
effect and is not  subject to any appeal,  hearing,  rehearing  or contest.  All
conditions  contained in any such authorization which were to be fulfilled on or
prior to the issuance of the Series B Notes have been fulfilled. The Company has
furnished  to your special  counsel  true,  correct and complete  copies of said
authorization  and all  applications  heretofore  filed with or submitted to the
Commission in connection with its action to obtain said authorization.

         15. No Defaults,  Compliance with Other Instruments. The Company is not
in default under any outstanding  indentures,  contracts or agreements which are
material to the Company including,  without limitation,  the Mortgage Indenture;
and on the  Closing  Date there will not exist any  condition  which  would be a
default  under any such  indenture,  contract or  agreement.  The  execution and
delivery of the Agreement, the consummation of the transactions therein provided
for and  compliance  with the provisions of the Agreement and the Series B Notes
by the Company will not violate or result in any breach of the terms, conditions
or provisions of, or constitute a default under, its Articles of  Incorporation,
By-Laws  or any  indenture,  mortgage,  deed  of  trust,  bank  loan  or  credit
agreement,  or other material  agreement or instrument to which the Company is a
party or by which the  Company  may be bound,  nor will such acts  result in the
violation of any  applicable  law, rule,  regulation or order  applicable to the
Company  of any  court or  governmental  authority  having  jurisdiction  in the
premises or in the creation or imposition of any lien,  charge or encumbrance of
any nature whatsoever, upon any property or assets of the Company.

         16. Leases.  The Company has the right to, and does, enjoy peaceful and
undisturbed possession under all material leases to which it is a party or under
which it is operating.  All such leases are valid,  subsisting and in full force
and effect, and the Company is not in default under any thereof and no event has
occurred  and is  continuing,  and no  condition  exists  that,  after notice or
passage of time or both could become a material default under any such Lease.


                                      B-5

<PAGE>

         17. Use of Proceeds.  The Company will use the gross  proceeds  derived
from the sale of the Series B Notes under the  Agreement to  refinance  existing
Indebtedness  and to finance a portion  of the  Company's  general  construction
program.  None of the  transactions  contemplated  in the Agreement  (including,
without limitation thereof,  the use of the proceeds from the sale of the Series
B Notes) will  violate or result in a violation  of Section 7 of the  Securities
Exchange Act of 1934, as amended,  or any regulations  issued pursuant  thereto,
including without  limitation,  Regulations U, T and X of the Board of Governors
of the Federal Reserve System,  12 C.F.R.,  Chapter II. The Company does not own
or intend to carry or  purchase  any "margin  stock"  within the meaning of said
Regulation  U,  including  margin  stock  originally  issued by it.  None of the
proceeds  from the sale of the Series B Notes will be used to  purchase or carry
(or  refinance  any  borrowing  the  proceeds  of which were used to purchase or
carry) any margin stock.

         18. ERISA.  (a) The fair market value of all assets under all "employee
pension  benefit  plans" (as such term is  defined  in  Section  3(2) of ERISA),
maintained  by the  Company,  as from  time to time in  effect,  exceeded  as of
December 31, 1998, the last annual  valuation date, the actuarial  present value
of all benefits vested under the Plans by more than $8,990,000.

         (b) Neither any of the Plans nor any of the trusts created  thereunder,
nor  any  trustee  or  administrator  thereof,  has  engaged  in  a  "prohibited
transaction,"  as such term is defined in Section  4975 of the Code which  could
subject  the  Plans  or  any  of  them,  any  such  trust,  or  any  trustee  or
administrator  thereof,  or any disqualified person with respect to the Plans to
the tax or penalty on  prohibited  transactions  imposed by said  Section  4975,
except  that,  with  respect to any  actions  or  omissions  of  administrators,
trustees,  other fiduciaries,  parties in interest or disqualified persons of or
in respect to the Plans (other than  employees of the Company),  the Company has
no knowledge  that any of such persons has  committed a prohibited  transaction,
nor has the Company participated knowingly in or knowingly undertaken to conceal
a prohibited  transaction with or by any of such persons nor enabled any of them
to commit a prohibited transaction.

         (c)  Neither  any of the  Plans  subject  to Title IV of ERISA  nor any
trusts  related  to such  plans  have been  terminated,  nor have there been any
Reportable Events, as that term is defined in Section 4043 of ERISA (as modified
by the  regulations  thereunder),  in respect of those plans since the effective
date of ERISA.

         (d)  Neither any of the Plans which are subject to Section 302 of ERISA
nor any trusts  related to such plans have  incurred  any  "accumulated  funding
deficiency,"  as such  term is  defined  in said  Section  302  (whether  or not
waived), since the effective date of ERISA.

         (e) The consummation of the transactions  provided for in the Agreement
and compliance by the Company with the provisions thereof and the Series B Notes
issued thereunder will not involve any prohibited transaction within the meaning
of ERISA or Section 4975 of the Code.

         19. Taxes. All Federal,  state and local taxes and assessments due from
the Company have been (a) fully paid or adequately  provided for on the books of
the Company in accordance


                                                                               6

<PAGE>

with generally accepted accounting principles or (b) are being contested in good
faith by the Company.  There has been no  examination  of the Federal income tax
returns  of the  Company  by the  Internal  Revenue  Service  subsequent  to the
examinations of the returns for tax years 1984-1991.

         20. Compliance with Laws. To the best of the Company's  knowledge,  the
Company is in compliance  with all  applicable  Federal,  state,  or local laws,
statutes,  rules,  regulations or ordinances relating to public heath, safety or
the  environment,   including,   without   limitation,   relating  to  releases,
discharges,  emissions or disposals to air, water,  land or ground water, to the
withdrawal  or use of  ground  water,  to  the  use,  handling  or  disposal  of
polychlorinated  biphenyls  (PCB's),  asbestos  or  urea  formaldehyde,  to  the
treatment,  storage,  disposal or management of hazardous substances (including,
without   limitation,   petroleum,   its   derivatives,   by-products  or  other
hydrocarbons),  and to exposure to hazardous  substances,  the failure to comply
with which could reasonably be expected to have a material adverse effect on the
Company or its  properties.  The Company  does not know of any  liability of the
Company  under  the  Comprehensive  Environmental  Response,   Compensation  and
Liability   Act  of  1980,   as  amended  by  the   Superfund   Amendments   and
Reauthorization Act of 1986 (42 U.S.C. Section 9601 et seq.) with respect to any
property now or heretofore owned or leased by the Company.

         21.  Full  Disclosure.  The  financial  statements  referred  to in the
Agreement do not, nor does the Agreement, the Company Information or any written
statement (including without limitation the 1998 Annual Report) furnished by the
Company to you in connection  with the  negotiation  of the sale of the Series B
Notes, contain any untrue statement of a material fact or, taken together,  omit
a material fact necessary to make the statements contained therein or herein not
misleading.  There is no fact  which the  Company  has not  disclosed  to you in
writing which  materially  affects  adversely nor, so far as the Company can now
foresee, will materially affect adversely the properties,  business,  prospects,
profits or condition  (financial  or otherwise) of the Company or the ability of
the  Company to perform  its  obligations  under the  Agreement  or the Series B
Notes.

         22. Private Offering.  Neither the Company, directly or indirectly, nor
any agent on its  behalf  has  offered  or will  offer the Series B Notes or any
similar Security or has solicited or will solicit an offer to acquire the Series
B Notes or any similar  Security from or has otherwise  approached or negotiated
or will  approach or  negotiate  in respect of the Series B Notes or any similar
Security  with any Person  other than the  Purchasers  and not more than  twelve
other institutional investors,  each of whom was offered a portion of the Series
B Notes at  private  sale for  investment.  Neither  the  Company,  directly  or
indirectly,  nor any agent on its behalf has  offered or will offer the Series B
Notes or any  similar  Security  or has  solicited  or will  solicit an offer to
acquire  the  Series B Notes or any  similar  Security  from any Person so as to
cause the  issuance  and sale of the  Series B Notes  not to be exempt  from the
provisions of Section 5 of the Securities Act of 1933, as amended.


                                      B-7

<PAGE>

                         DESCRIPTION OF DEBT AND LEASES

1.       Current Debt of the Company outstanding on March 1, 1999 as follows:

         $23,500,000  borrowed under the Company's bank line of credit with Bank
         of America.

2.       Funded Debt (other than Capitalized Rentals) of the Company outstanding
         on March 1, 1999 was as follows:

         $118,585,000  was  outstanding  under the Company's  various  series of
         First Mortgage Bonds.

         $298,000 due to the City of Los Altos for the purchase of the North Los
         Altos Water System.

         $20,000,000 Series A Senior Notes due November 1, 2025.


3.       Capitalized Leases of the Company  outstanding on March 1, 1999 were as
         follows:

         None.


                                     ANNEX A
                                 (to Exhibit B)

<PAGE>

                         MATERIAL WATER SUPPLY CONTRACTS

1.       Water  Supply  Contract  between  the  Company  and the County of Butte
         relating to the Company's Oroville District.

2.       Water Supply Contract  between the Company and Kern County Water Agency
         relating to the Company's Bakersfield District.

3.       Water  Supply  Contract  between the Company  and  Stockton  East Water
         District relating to the Company's Stockton District.

4.       Second  Amended  Contract  between the Company and Stockton  East Water
         District relating to the Company's Stockton District.

5.       Settlement  Agreement and Master Water Sales Contract  between the City
         and County of San Francisco and Certain Suburban Purchasers.

6.       Supplement  to  Settlement  Agreement  and Master Water Sales  Contract
         between the Company and the City and County of San  Francisco  relating
         to the Company's Bear Gulch District.

7.       Supplement  to  Settlement  Agreement  and Master Water Sales  Contract
         between the Company and the City and County of San  Francisco  relating
         to the Company's San Carlos District.

8.       Supplement  to  Settlement  Agreement  and Master Water Sales  Contract
         between the Company and the City and County of San  Francisco  relating
         to the Company's San Mateo District.

9.       Supplement  to  Settlement  Agreement  and Master Water Sales  Contract
         between the Company and the City and County of San  Francisco  relating
         to the Company's South San Francisco District.

10.      Water Supply Contract  between the Company and Santa Clara Valley Water
         District relating to the Company's Los Altos District.

11.      Water Supply Contract  between the Company and Pacific Gas and Electric
         Company related to the Company's Oroville District.

12.      Water  Supply  Contract  between the Company and Alameda  County  Flood
         Control  and  Water  Conservation  District  related  to the  Company's
         Livermore District.

13.      Water Supply Contract  between the Company and Russell Valley Municipal
         Water District regarding the Company's Westlake District.


                                     ANNEX B
                                 (to Exhibit B)

<PAGE>

                DESCRIPTION OF SPECIAL COUNSEL'S CLOSING OPINION

         The  closing  opinion of Chapman  and  Cutler,  special  counsel to the
Purchasers,  called  for by  ss.4.1  of the Note  Agreement,  shall be dated the
Closing Date and addressed to the Purchasers,  shall be satisfactory in form and
substance to the Purchasers and shall be to the effect that:

                    1. The Company is a  corporation,  validly  existing  and in
         good  standing  under the laws of the State of  California  and has the
         corporate power and the corporate  authority to execute and deliver the
         Note Agreement and to issue the Series B Notes.

                    2.  The  Note  Agreement  has been  duly  authorized  by all
         necessary  corporate  action on the part of the Company,  has been duly
         executed and delivered by the Company and constitutes the legal,  valid
         and binding contract of the Company  enforceable in accordance with its
         terms,  subject to bankruptcy,  insolvency,  fraudulent  conveyance and
         similar  laws  affecting  creditors'  rights  generally,   and  general
         principles of equity  (regardless  of whether the  application  of such
         principles is considered in a proceeding in equity or at law).

                    3. The  Series B Notes  have  been  duly  authorized  by all
         necessary  corporate action on the part of the Company,  have been duly
         executed and delivered by the Company and constitute  the legal,  valid
         and binding  obligations of the Company  enforceable in accordance with
         their terms, subject to bankruptcy,  insolvency,  fraudulent conveyance
         and similar laws affecting  creditors'  rights  generally,  and general
         principles of equity  (regardless  of whether the  application  of such
         principles is considered in a proceeding in equity or at law).

                    4. The  issuance,  sale and  delivery  of the Series B Notes
         under the  circumstances  contemplated  by the Note  Agreement  do not,
         under  existing  law,  require the  registration  of the Series B Notes
         under the Securities Act of 1933, as amended,  or the  qualification of
         an indenture under the Trust Indenture Act of 1939, as amended.

         The  opinion  of  Chapman  and  Cutler  may rely  upon the  opinion  of
McCutchen,  Doyle,  Brown & Enersen  LLP, as to matters of  California  law. The
opinion of Chapman and Cutler  shall also state that the  opinion of  McCutchen,
Doyle,  Brown & Enersen  LLP, is  satisfactory  in scope and form to Chapman and
Cutler and that,  in their  opinion,  the  Purchasers  are  justified in relying
thereon.

         In rendering  the opinion set forth in  paragraph 1 above,  Chapman and
Cutler may rely,  as to matters  referred  to in  paragraph  1,  solely  upon an
examination of the Articles of Incorporation  certified by, and a certificate of
good  standing  of the  Company  from,  the  Secretary  of State of the State of
California,  the By-laws of the Company and the general business corporation law
of the State of California.

         With  respect to  matters  of fact upon  which  such  opinion is based,
Chapman and Cutler may rely on appropriate  certificates of public officials and
officers  of the  Company  and  upon


                                    EXHIBIT C
                               (to Note Agreement)

<PAGE>

representations  of the Company and the Purchasers  delivered in connection with
the issuance and sale of the Series B Notes.


                                                                               2

<PAGE>

                         DESCRIPTION OF CLOSING OPINION
                            OF COUNSEL TO THE COMPANY

         The closing opinion of McCutchen,  Doyle,  Brown & Enersen LLP, counsel
for the Company,  which is called for by ss.4.1 of the Note Agreement,  shall be
dated the Closing Date and addressed to the Purchasers, shall be satisfactory in
scope and form to the Purchasers and shall be to the effect that:

                    1. The Company is a corporation, duly incorporated,  validly
         existing  and  in  good  standing  under  the  laws  of  the  State  of
         California,  has the  corporate  power and the  corporate  authority to
         execute and perform the Note  Agreement and to issue the Series B Notes
         and has the full corporate power and the corporate authority to conduct
         the activities in which it is now engaged.

                    2.  The  Note  Agreement  has been  duly  authorized  by all
         necessary  corporate  action on the part of the Company,  has been duly
         executed and delivered by the Company and constitutes the legal,  valid
         and binding contract of the Company  enforceable in accordance with its
         terms,  subject to bankruptcy,  insolvency,  fraudulent  conveyance and
         similar  laws  affecting  creditors'  rights  generally,   and  general
         principles of equity  (regardless  of whether the  application  of such
         principles is considered in a proceeding in equity or at law).

                    3. The  Series B Notes  have  been  duly  authorized  by all
         necessary  corporate action on the part of the Company,  have been duly
         executed and delivered by the Company and constitute  the legal,  valid
         and binding  obligations of the Company  enforceable in accordance with
         their terms, subject to bankruptcy,  insolvency,  fraudulent conveyance
         and similar laws affecting  creditors'  rights  generally,  and general
         principles of equity  (regardless  of whether the  application  of such
         principles is considered in a proceeding in equity or at law).

                    4. No approval,  consent or  withholding of objection on the
         part  of,  or  filing,   registration   or   qualification   with,  any
         governmental  body,  Federal or state,  is necessary in connection with
         the execution and delivery of the Note  Agreement or the Series B Notes
         other than the authorization of the Commission, which authorization has
         been duly obtained, is in full force and effect.

                    5.  The  issuance  and sale of the  Series  B Notes  and the
         execution,  delivery  and  performance  by  the  Company  of  the  Note
         Agreement  do  not  violate  or  result  in  any  breach  of any of the
         provisions  of or  constitute a default under or result in the creation
         or  imposition  of any Lien  upon any of the  property  of the  Company
         pursuant to the provisions of the Articles of  Incorporation or By-laws
         of the  Company  or any  agreement  or  other  instrument  listed  as a
         material contract in the Company's most recent Annual Report.

                    6. Based upon the  representations  set forth in Section 3.2
         of the Note Agreement,  the issuance, sale and delivery of the Series B
         Notes under the  circumstances


                                    EXHIBIT D
                               (to Note Agreement)

<PAGE>

         contemplated by the Note Agreement do not, under existing law,  require
         the  registration  of the Series B Notes  under the  Securities  Act of
         1933,  as amended,  or the  qualification  of the Note  Agreement or an
         indenture under the Trust Indenture Act of 1939, as amended.

                    7. Based upon the  assumption of the accuracy of information
         obtained by the Company from sources  believed to be reliable  that the
         following cities served by the Company were all  incorporated  prior to
         1911:

                  Bakersfield            Marysville          South San Francisco
                  Chico                  Oroville            Stockton
                  Dixon                  Redondo Beach       Visalia
                  Hermosa Beach          Salinas             Willows
                  King City              San Mateo
                  Livermore              Selma

         that water distribution  systems were constructed and service furnished
         to the inhabitants of each by various predecessors of the Company prior
         to 1911,  and that there were no public water works owned or controlled
         by the  municipality  in any of them prior to 1911,  in the  opinion of
         such counsel,  the Company has a "constitutional"  franchise in each of
         the  above  cities  and  under  such  constitutional  franchise  has  a
         perpetual  right  which was not  repealed  by the repeal of Article XI,
         Section 19, of the California Constitution to continue to occupy public
         streets of each of said cities with its pipes and mains and to lay down
         additional  pipes and mains in said streets for the supplying of water,
         subject to reasonable  regulation by the respective  municipalities  as
         they existed at the date of repeal of the  constitutional  provision in
         1911 and  probably  also extends to  territory  incorporated  into each
         respective  city after  such  repeal,  although  this  latter  question
         remains  somewhat  in doubt in the  absence of a final  decision of the
         courts thereon.

         The opinion of McCutchen,  Doyle,  Brown & Enersen LLP shall cover such
other matters  relating to the sale of the Series B Notes as the  Purchasers may
reasonably  request.  With  respect to matters of fact on which such  opinion is
based,  such counsel shall be entitled to rely on  appropriate  certificates  of
public officials and officers of the Company.


                                                                               2