LOAN AGREEMENT

                                 BY AND BETWEEN

                  NEW JERSEY ENVIRONMENTAL INFRASTRUCTURE TRUST

                                       AND

                             MIDDLESEX WATER COMPANY










                          DATED AS OF NOVEMBER 1, 1999


<PAGE>
                               TABLE OF CONTENTS
                                                                            Page
                                                                            ----
                                    ARTICLE I

                                   DEFINITIONS

SECTION 1.01.  Definitions................................................... 2

                                   ARTICLE II

                    REPRESENTATIONS AND COVENANTS OF BORROWER

SECTION 2.01.  Representations of Borrower................................... 7
SECTION 2.02.  Particular Covenants of Borrower............................. 11

                                   ARTICLE III

              LOAN TO BORROWER; AMOUNTS PAYABLE; GENERAL AGREEMENTS

SECTION 3.01.  Loan; Loan Term.............................................. 20
SECTION 3.02.  Disbursement of Loan Proceeds................................ 20
SECTION 3.03.  Amounts Payable.............................................. 21
SECTION 3.04.  Unconditional Obligations.................................... 22
SECTION 3.05.  Loan Agreement to Survive Bond Resolution and Trust Bonds.... 23
SECTION 3.06.  Disclaimer of Warranties and Indemnification................. 23
SECTION 3.07.  Option to Prepay Loan Repayments............................. 24
SECTION 3.08.  Priority of Loan and Fund Loan............................... 25

                                   ARTICLE IV

                 ASSIGNMENT OF LOAN AGREEMENT AND BORROWER BOND

SECTION 4.01.  Assignment and Transfer by Trust............................. 26
SECTION 4.02.  Assignment by Borrower....................................... 26

                                    ARTICLE V

                         EVENTS OF DEFAULT AND REMEDIES

SECTION 5.01.  Events of Default............................................ 27
SECTION 5.02.  Notice of Default............................................ 28
SECTION 5.03.  Remedies on Default.......................................... 28
SECTION 5.04.  Attorneys' Fees and Other Expenses........................... 28
SECTION 5.05.  Application of Moneys........................................ 28
SECTION 5.06.  No Remedy Exclusive; Waiver; Notice.......................... 28
SECTION 5.07.  Retention of Trust's Rights.................................. 29

                                   ARTICLE VI

                                  MISCELLANEOUS

SECTION 6.01.  Notices...................................................... 30
SECTION 6.02.  Binding Effect............................................... 30
SECTION 6.03.  Severability................................................. 30
SECTION 6.04.  Amendments, Supplements and Modifications.................... 30
SECTION 6.05.  Execution in Counterparts.................................... 31
SECTION 6.06.  Applicable Law and Regulations............................... 31
SECTION 6.07.  Consents and Approvals....................................... 31
SECTION 6.08.  Captions..................................................... 31
SECTION 6.09.  Benefit of Loan Agreement; Compliance with Bond Resolution... 31
SECTION 6.10.  Further Assurances........................................... 31
<PAGE>
EXHIBIT A      (1) Description of Project and Environmental Infrastructure
                   System.............................................     A-1-1
               (2) Description of Loan................................     A-2-1

EXHIBIT B      Basis for Determination of Allowable Project Costs.....     B-1

EXHIBIT C      Estimated Disbursement Schedule........................     C-1

EXHIBIT D      Specimen Borrower Bond.................................     D-1

EXHIBIT E      Opinions of Borrower's Bond and General Counsels.......     E-1

EXHIBIT F      Additional Covenants and Requirements...................    F-1

EXHIBIT G      General Administrative Requirements for the State
                 Environmental Infrastructure Financing Program........    G-1

EXHIBIT H      Form of Continuing Disclosure Agreement.................    H-1

                                       ii
<PAGE>
          NEW JERSEY ENVIRONMENTAL INFRASTRUCTURE TRUST LOAN AGREEMENT

         THIS  LOAN  AGREEMENT,  made  and  entered  into as of this  1st day of
November, 1999, by and between NEW JERSEY ENVIRONMENTAL  INFRASTRUCTURE TRUST, a
public body corporate and politic with corporate succession, and MIDDLESEX WATER
COMPANY,  a corporation  duly created and validly existing under the laws of the
State of New Jersey (the "State");

                                WITNESSETH THAT:

         WHEREAS, the Trust, in accordance with the Act, the Bond Resolution and
a financial plan approved by the State Legislature in accordance with Section 23
of the Act,  will issue its Trust Bonds on or prior to the Loan  Closing for the
purpose of making the Loan to the Borrower and the Loans to the  Borrowers  from
the  proceeds  of  the  Trust  Bonds  to  finance  a  portion  of  the  cost  of
Environmental  Infrastructure  Facilities  (as  each of the  foregoing  terms is
defined  in  Section  1.01  hereof;  all  capitalized  terms  used in this  Loan
Agreement shall have,  unless the context otherwise  requires,  the meanings set
forth in said Section 1.01);

         WHEREAS,  the  Borrower  has,  in  accordance  with  the  Act  and  the
Regulations,  made  timely  application  to the  Trust  for a Loan to  finance a
portion of the Cost of the Project;

         WHEREAS,  the State  Legislature,  in accordance with Section 20 of the
Act, has in the form of an  appropriations  act approved a project priority list
that includes the Project and that  authorizes an expenditure of proceeds of the
Trust Bonds to finance a portion of the Cost of the Project;

         WHEREAS,  the Trust has approved the Borrower's  application for a Loan
from  available  proceeds of the Trust Bonds to finance a portion of the Cost of
the Project;

         WHEREAS,  in  accordance  with the  "Wastewater  Treatment  Bond Act of
1985", P.L. 1985, c. 329, as amended, and the Regulations, the Borrower has been
awarded a Fund Loan for a portion of the Cost of the Project; and

         WHEREAS, the Borrower, in accordance with the Act, the Regulations, the
Business  Corporation  Law and all other  applicable  law, will issue a Borrower
Bond to the Trust evidencing said Loan at the Loan Closing.

         NOW,  THEREFORE,  for and in  consideration of the award of the Loan by
the Trust, the Borrower agrees to complete the Project and to perform under this
Loan Agreement in accordance with the  conditions,  covenants and procedures set
forth herein and attached hereto as part hereof, as follows:
<PAGE>
                                    ARTICLE I

                                   DEFINITIONS

         SECTION 1.01.  Definitions.  The  following  terms as used in this Loan
Agreement shall, unless the
context clearly requires otherwise, have the following meanings:

         "Act" means the "New Jersey  Environmental  Infrastructure  Trust Act",
constituting  Chapter 334 of the Pamphlet Laws of 1985 of the State (codified at
N.J.S.A.  58:11B-1  et seq.),  as the same may from time to time be amended  and
supplemented.

         "Administrative  Fee" means that  portion  of  Interest  on the Loan or
Interest  on the  Borrower  Bond  payable  hereunder  as an annual  fee of up to
three-tenths of one percent (.30%) of the initial  principal  amount of the Loan
or such  lesser  amount,  if any, as may be  authorized  by any act of the State
Legislature and as the Trust may approve from time to time.

         "Authorized Officer" means, in the case of the Borrower,  any person or
persons  authorized  pursuant to a  resolution  of the board of directors of the
Borrower to perform any act or execute any  document  relating to the Loan,  the
Borrower Bond or this Loan Agreement.

         "Bond Counsel" means a law firm appointed or approved by the Trust,  as
the case may be,  having a  reputation  in the  field  of  municipal  law  whose
opinions are generally acceptable by purchasers of municipal bonds.

         "Bond  Resolution"  means  the   "Environmental   Infrastructure   Bond
Resolution,  Series 1999B", as adopted by the Board of Directors of the Trust on
or about September 20, 1999,  authorizing  the issuance of the Trust Bonds,  and
all further  amendments and  supplements  thereto adopted in accordance with the
provisions thereof.

         "Borrower" means the corporation that is a party to and is described in
the first paragraph of this Loan Agreement, and its successors and assigns.

         "Borrower Bond" means the general  obligation bond, note,  debenture or
other evidence of indebtedness authorized,  executed,  attested and delivered by
the  Borrower  to the Trust and  authenticated  on  behalf  of the  Borrower  to
evidence the Loan, a specimen of which is attached  hereto as Exhibit D and made
a part hereof.

         "Borrower Bond Resolution" means the indenture of the Borrower entitled
"Indenture of Mortgage"  dated as of April 1, 1927, as amended and  supplemented
from time to time, in particular by a supplemental indenture detailing the terms
of the  Borrower  Bond dated as of November 1, 1999 and  entitled  "Twenty-Sixth
Supplemental Indenture", pursuant to which the Borrower Bond has been issued.

         "Borrowers" means any other Local Government Unit or Private Entity (as
such terms are defined in the Regulations) authorized to construct,  operate and
maintain  Environmental  Infrastructure  Facilities  that have entered into Loan
Agreements  with the Trust  pursuant  to which the Trust will make Loans to such
recipients  from moneys on deposit in the Project  Fund,  excluding  the Project
Loan Account.

         "Business  Corporation Law" means the "New Jersey Business  Corporation
Act",  constituting  Chapter  263 of the  Pamphlet  Laws of  1968  of the  State
(codified at N.J.S.A.  14A:1-1 et seq.),  as the same has been and may from time
to time be amended and supplemented.
<PAGE>
         "Code"  means the Internal  Revenue Code of 1986,  as the same has been
and may from time to time be amended and supplemented, including any regulations
promulgated  thereunder,  any successor code thereto and any  administrative  or
judicial interpretations thereof.

         "Cost"  means those  costs that are  eligible,  reasonable,  necessary,
allocable  to  the  Project  and  permitted  by  generally  accepted  accounting
principles,   including  Allowances  and  Building  Costs  (as  defined  in  the
Regulations),  as shall be determined on a project-specific  basis in accordance
with the  Regulations  as set  forth in  Exhibit  B  hereto,  as the same may be
amended  by  subsequent  eligible  costs as  evidenced  by a  certificate  of an
authorized officer of the Trust.

         "Debt  Service  Reserve  Fund" means the Debt  Service  Reserve Fund as
defined in the Bond Resolution.

         "Environmental  Infrastructure  Facilities" means Wastewater  Treatment
Facilities, Stormwater Management Facilities or Water Supply Facilities (as such
terms are defined in the Regulations).

         "Environmental   Infrastructure   System"   means   the   Environmental
Infrastructure Facilities of the Borrower,  including the Project,  described in
Exhibit A-1  attached  hereto and made a part  hereof for which the  Borrower is
borrowing the Loan under this Loan Agreement.

         "Event of Default" means any  occurrence or event  specified in Section
5.01 hereof.

         "Fund Loan" means the loan made to the Borrower by the State, acting by
and through the New Jersey Department of Environmental  Protection,  pursuant to
the loan agreement  dated as of November 1, 1999 by and between the Borrower and
the State,  acting by and through  the New Jersey  Department  of  Environmental
Protection, to finance or refinance a portion of the Cost of the Project.

         "Interest on the Loan" or "Interest on the Borrower Bond" means the sum
of (i) the Interest  Portion,  (ii) the  Administrative  Fee, and (iii) any late
charges incurred hereunder.

         "Interest  Portion"  means  that  portion  of  Interest  on the Loan or
Interest on the  Borrower  Bond payable  hereunder  that is necessary to pay the
Borrower's  proportionate  share of interest on the Trust Bonds (i) as set forth
in Exhibit A-2 hereof under the column heading entitled "Interest", or (ii) with
respect to any  prepayment  of Trust Bond Loan  Repayments  in  accordance  with
Section 3.07 or 5.03  hereof,  to accrue on any  principal  amount of Trust Bond
Loan Repayments to the date of the optional  redemption or acceleration,  as the
case may be, of the Trust Bonds  allocable to such prepaid or accelerated  Trust
Bond Loan Repayment.

         "Loan"  means the loan made by the Trust to the  Borrower to finance or
refinance a portion of the Cost of the Project  pursuant to this Loan Agreement.
For all  purposes  of this Loan  Agreement,  the  amount of the Loan at any time
shall be the initial  aggregate  principal  amount of the  Borrower  Bond (which
amount equals the amount  actually  deposited in the Project Loan Account at the
Loan Closing plus the  Borrower's  allocable  share of certain costs of issuance
and underwriter's  discount for all Trust Bonds issued to finance the Loan) less
<PAGE>
any amount of such  principal  amount that has been repaid by the Borrower under
this Loan Agreement and less any  adjustment  made pursuant to the provisions of
the Bond Resolution,  including,  without  limitation,  Section 5.02(4) thereof,
N.J.A.C.   7:22-4.26  and  the  appropriations  act  of  the  State  Legislature
authorizing  the  expenditure of Trust Bond proceeds to finance a portion of the
Cost of the Project.

         "Loan  Agreement"  means this Loan  Agreement,  including  the Exhibits
attached  hereto,  as it may be  supplemented,  modified or amended from time to
time in accordance with the terms hereof and of the Bond Resolution.

         "Loan Agreements"  means any other loan agreements  entered into by and
between the Trust and one or more of the  Borrowers  pursuant to which the Trust
will make Loans to such  Borrowers  from moneys on deposit in the Project  Fund,
excluding  the Project  Loan  Account,  financed  with the proceeds of the Trust
Bonds.

         "Loan  Closing"  means the date upon  which the Trust  shall  issue and
deliver the Trust Bonds and the Borrower  shall  deliver its Borrower  Bond,  as
previously authorized, executed, attested and authenticated, to the Trust.

         "Loan Repayments" means the sum of (i) Trust Bond Loan Repayments, (ii)
the Administrative Fee, and (iii) any late charges incurred hereunder.

         "Loan Servicer" means,  initially,  First Union National Bank, the loan
servicer for the Loan and the Fund Loan,  duly appointed and designated as "Loan
Servicer"  pursuant to the Loan  Servicing  and Trust Bonds  Security  Agreement
dated as of  November 1, 1999 by and among the Trust,  the State,  acting by and
through the  Treasurer  of the State on behalf of the New Jersey  Department  of
Environmental  Protection,  and First Union National Bank, and any successors as
"Loan Servicer" under such  agreement,  as the same may be modified,  amended or
supplemented from time to time in accordance with its terms.

         "Loan Term" means the term of this Loan Agreement  provided in Sections
3.01 and 3.03 hereof and in Exhibit A-2 attached hereto and made a part hereof.

         "Loans"  means the loans made by the Trust to the  Borrowers  under the
Loan  Agreements  from  moneys on deposit in the  Project  Fund,  excluding  the
Project Loan Account.

         "Master  Program Trust  Agreement"  means that certain  Master  Program
Trust Agreement dated as of November 1, 1995 by and among the Trust,  the State,
United States Trust Company of New York, as Master Program  Trustee  thereunder,
The Bank of New York (NJ), in several capacities thereunder,  and First Fidelity
Bank, N.A.  (predecessor  to First Union National  Bank), in several  capacities
thereunder,  as the same may be amended  and  supplemented  from time to time in
accordance with its terms.

         "Official  Statement"  means the  Official  Statement  relating  to the
issuance of the Trust Bonds.

         "Preliminary   Official  Statement"  means  the  Preliminary   Official
Statement relating to the issuance of the Trust Bonds.

         "Prime Rate" means the prevailing commercial interest rate announced by
the Trustee from time to time in the State as its prime lending rate.
<PAGE>
         "Project"  means the  Environmental  Infrastructure  Facilities  of the
Borrower described in Exhibit A-1 attached hereto and made a part hereof,  which
constitutes  a project  for which the Trust is  permitted  to make a loan to the
Borrower pursuant to the Act, the Regulations and the Bond Resolution,  all or a
portion of the Cost of which is financed or  refinanced by the Trust through the
making of the Loan under this Loan Agreement.

         "Project   Fund"  means  the  Project  Fund  as  defined  in  the  Bond
Resolution.

         "Project Loan Account"  means the project loan account  established  on
behalf  of the  Borrower  in the  Project  Fund  in  accordance  with  the  Bond
Resolution to finance all or a portion of the Cost of the Project.

         "Regulations"  means the rules and regulations,  as applicable,  now or
hereafter  promulgated under N.J.A.C.  7:22-3 et seq., 7:22-4 et seq., 7:22-5 et
seq., 7:22-6 et seq., 7:22-7 et seq., 7:22-8 et seq., 7:22-9 et seq. and 7:22-10
et seq., as the same may from time to time be amended and supplemented.

         "State" means the State of New Jersey.

         "Trust"  means the New Jersey  Environmental  Infrastructure  Trust,  a
public body  corporate and politic with  corporate  succession  duly created and
validly existing under and by virtue of the Act.

         "Trust Bond Loan  Repayments"  means the  repayments  of the  principal
amount of the Loan plus the payment of any premium associated with prepaying the
principal  amount of the Loan in  accordance  with  Section 3.07 hereof plus the
Interest Portion.

         "Trust  Bonds"  means  bonds  authorized  by  Section  2.03 of the Bond
Resolution,  together  with any  refunding  bonds  authenticated  and  delivered
pursuant to Section 2.04 of the Bond Resolution, in each case issued in order to
finance (i) the portion of the Loan deposited in the Project Loan Account,  (ii)
the portion of the Loans deposited in the balance of the Project Fund, (iii) any
capitalized  interest  related  to such  bonds,  (iv) a portion  of the costs of
issuance related to such bonds, and (v) that portion of the Debt Service Reserve
Fund, if any,  allocable to the Loan or Loans,  as the case may be, a portion of
which   includes  the  funding  of  reserve   capacity  for  the   Environmental
Infrastructure  Facilities of the Borrower or Borrowers,  as the case may be, or
to refinance any or all of the above.

         "Trustee"  means,  initially,  First Union  National  Bank, the Trustee
appointed by the Trust and its successors as Trustee under the Bond  Resolution,
as provided in Article X of the Bond Resolution.

         Except as  otherwise  defined  herein or where  the  context  otherwise
requires,  words  importing the singular  number shall include the plural number
and vice versa, and words importing  persons shall include firms,  associations,
corporations,  agencies and districts.  Words importing one gender shall include
the other gender.
<PAGE>
                                   ARTICLE II

                    REPRESENTATIONS AND COVENANTS OF BORROWER

         SECTION 2.01.  Representations of Borrower. The Borrower represents for
the  benefit of the Trust,  the  Trustee  and the  holders of the Trust Bonds as
follows:

         (a)      Organization and Authority.
                  --------------------------

                  (i) The  Borrower is a  corporation  duly  created and validly
existing under the laws of the State.

                  (ii)  The   acting   officials   of  the   Borrower   who  are
         contemporaneously  herewith performing or have previously performed any
         action  contemplated in this Loan Agreement  either are or, at the time
         any such  action  was  performed,  were the duly  appointed  or elected
         officials of such Borrower  empowered by  applicable  State law and, if
         applicable,  authorized  by  resolution of the Borrower to perform such
         actions.  To the extent any such action was performed by an official no
         longer the duly acting  official  of such  Borrower,  all such  actions
         previously taken by such official are still in full force and effect.

                  (iii) The Borrower has full legal right and  authority and all
         necessary  licenses and permits  required as of the date hereof to own,
         operate and maintain its Environmental  Infrastructure System, to carry
         on its activities relating thereto, to execute, attest and deliver this
         Loan Agreement and the Borrower  Bond, to authorize the  authentication
         of the  Borrower  Bond,  to sell the  Borrower  Bond to the  Trust,  to
         undertake and complete the Project and to carry out and  consummate all
         transactions contemplated by this Loan Agreement.

                  (iv) The  proceedings  of the  Borrower's  board of  directors
         approving this Loan Agreement and the Borrower  Bond,  authorizing  the
         execution,  attestation  and  delivery of this Loan  Agreement  and the
         Borrower Bond,  authorizing the sale of the Borrower Bond to the Trust,
         authorizing  the  authentication  of the Borrower Bond on behalf of the
         Borrower and  authorizing  the  Borrower to undertake  and complete the
         Project,  including,  without limitation,  the Borrower Bond Resolution
         (collectively, the "Proceedings"),  have been duly and lawfully adopted
         in accordance with the Business  Corporation  Law and other  applicable
         State law at a meeting or  meetings  that were duly  called and held in
         accordance with applicable  State law and at which quorums were present
         and acting throughout.

                  (v) By  official  action  of the  Borrower  taken  prior to or
         concurrent with the execution and delivery hereof,  including,  without
         limitation, the Proceedings, the Borrower has duly authorized, approved
         and consented to all necessary  action to be taken by the Borrower for:
         (A) the execution,  attestation,  delivery and performance of this Loan
         Agreement and the transactions contemplated hereby; (B) the issuance of
         the Borrower  Bond and the sale thereof to the Trust upon the terms set
         forth herein;  (C) the approval of the inclusion,  if such inclusion is

<PAGE>
         deemed   necessary  in  the  sole  discretion  of  the  Trust,  in  the
         Preliminary  Official  Statement  and  the  Official  Statement  of all
         statements  and  information  relating  to the  Borrower  set  forth in
         "APPENDIX  B" thereto (the  "Borrower  Appendices")  and any  amendment
         thereof or supplement thereto; and (D) the execution,  delivery and due
         performance  of  any  and  all  other   certificates,   agreements  and
         instruments  that  may  be  required  to  be  executed,  delivered  and
         performed  by the  Borrower  in order to carry out,  give effect to and
         consummate  the  transactions  contemplated  by  this  Loan  Agreement,
         including,   without  limitation,   the  designation  of  the  Borrower
         Appendices portion of the Preliminary  Official  Statement,  if any, as
         "deemed  final" for the purposes and within the meaning of Rule 15c2-12
         ("Rule  15c2-12") of the  Securities  and Exchange  Commission  ("SEC")
         promulgated  under the  Securities  Exchange Act of 1934, as amended or
         supplemented, including any successor regulation or statute thereto.

                  (vi) This Loan  Agreement and the Borrower Bond have each been
         duly  authorized  by the  Borrower  and  duly  executed,  attested  and
         delivered by Authorized Officers of the Borrower, and the Borrower Bond
         has been duly sold by the Borrower to the Trust, duly  authenticated by
         the trustee or paying agent under the Borrower Bond Resolution and duly
         issued by the  Borrower in  accordance  with the terms of the  Borrower
         Bond  Resolution;  and  assuming  that the Trust has all the  requisite
         power and authority to authorize,  execute, attest and deliver, and has
         duly authorized, executed, attested and delivered, this Loan Agreement,
         and assuming  further that this Loan Agreement is the legal,  valid and
         binding  obligation  of the  Trust,  enforceable  against  the Trust in
         accordance with its terms, each of this Loan Agreement and the Borrower
         Bond constitutes a legal, valid and binding obligation of the Borrower,
         enforceable  against the  Borrower in  accordance  with its  respective
         terms, except as the enforcement thereof may be affected by bankruptcy,
         insolvency  or  other  laws or the  application  by a court of legal or
         equitable  principles  affecting creditors' rights; and the information
         contained  under  "Description  of Loan" in Exhibit A-2 attached hereto
         and made a part hereof is true and accurate in all respects.

         (b)  Full  Disclosure.  There  is no fact  that  the  Borrower  has not
disclosed to the Trust in writing on the Borrower's  application for the Loan or
otherwise that materially  adversely  affects or (so far as the Borrower can now
foresee)  that will  materially  adversely  affect the  properties,  activities,
prospects  or  condition  (financial  or  otherwise)  of  the  Borrower  or  its
Environmental  Infrastructure System, or the ability of the Borrower to make all
Loan  Repayments  and any other  payments  required under this Loan Agreement or
otherwise  to  observe  and  perform  its  duties,  covenants,  obligations  and
agreements under this Loan Agreement and the Borrower Bond.

         (c) Pending  Litigation.  There are no  proceedings  pending or, to the
knowledge of the Borrower,  threatened  against or affecting the Borrower in any
court or before any  governmental  authority  or  arbitration  board or tribunal
that,  if  adversely  determined,  would  materially  adversely  affect  (i) the
undertaking  or  completion  of the Project,  (ii) the  properties,  activities,
prospects  or  condition  (financial  or  otherwise)  of  the  Borrower  or  its
Environmental  Infrastructure  System, (iii) the ability of the Borrower to make
all Loan  Repayments or any other payments  required under this Loan  Agreement,
(iv)  the  authorization,  execution,  attestation  or  delivery  of  this  Loan
Agreement or the Borrower  Bond,  (v) the issuance of the Borrower  Bond and the
sale thereof to the Trust, (vi) the adoption of the Borrower Bond Resolution, or
(vii) the  Borrower's  ability  otherwise  to observe  and  perform  its duties,
covenants, obligations and agreements under this Loan Agreement and the Borrower
Bond,  which  proceedings  have not been previously  disclosed in writing to the
Trust either in the Borrower's application for the Loan or otherwise.
<PAGE>
         (d)   Compliance   with   Existing   Laws  and   Agreements.   (i)  The
authorization,  execution,  attestation  and delivery of this Loan Agreement and
the Borrower Bond by the Borrower,  (ii) the authentication of the Borrower Bond
by the trustee or paying agent under the Borrower Bond  Resolution,  as the case
may be, and the sale of the  Borrower  Bond to the Trust,  (iii) the adoption of
the Borrower  Bond  Resolution,  (iv) the  observation  and  performance  by the
Borrower of its duties,  covenants,  obligations  and  agreements  hereunder and
thereunder,  (v) the consummation of the transactions  provided for in this Loan
Agreement,  the Borrower Bond  Resolution  and the Borrower  Bond,  and (vi) the
undertaking  and  completion  of the  Project  will not (A) other than the lien,
charge or encumbrance created hereby, by the Borrower Bond, by the Borrower Bond
Resolution and by any other  outstanding  debt  obligations of the Borrower that
are at parity with the Borrower  Bond as to lien on, and source and security for
payment   thereon   from,   the   revenues  of  the   Borrower's   Environmental
Infrastructure  System, result in the creation or imposition of any lien, charge
or encumbrance  upon any  properties or assets of the Borrower  pursuant to, (B)
result in any breach of any of the terms,  conditions or  provisions  of, or (C)
constitute a default under, any existing  resolution,  outstanding debt or lease
obligation, trust agreement,  indenture, mortgage, deed of trust, loan agreement
or other  instrument  to which the Borrower is a party or by which the Borrower,
its Environmental  Infrastructure  System or any of its properties or assets may
be bound,  nor will such action result in any violation of the provisions of the
charter or other document  pursuant to which the Borrower was established or any
laws,  ordinances,   injunctions,  judgments,  decrees,  rules,  regulations  or
existing orders of any court or governmental or administrative agency, authority
or person to which the Borrower, its Environmental  Infrastructure System or its
properties or operations is subject.

         (e) No Defaults.  No event has  occurred and no condition  exists that,
upon  the  authorization,  execution,  attestation  and  delivery  of this  Loan
Agreement and the Borrower  Bond, the issuance of the Borrower Bond and the sale
thereof to the Trust,  the  adoption  of the  Borrower  Bond  Resolution  or the
receipt  of the  amount  of the  Loan,  would  constitute  an Event  of  Default
hereunder.  Since  December 31, 1975 and as of the date of delivery of this Loan
Agreement,  the Borrower has not been, and is not now, in default in the payment
of the  principal  of or interest  on any of its bonds,  notes,  lease  purchase
agreements or other debt  obligations.  The Borrower is not in violation of, and
has not received  notice of any claimed  violation of, any term of any agreement
or other  instrument  to which it is a party or by which it,  its  Environmental
Infrastructure  System or its properties  may be bound,  which  violation  would
materially adversely affect the properties,  activities,  prospects or condition
(financial  or otherwise)  of the Borrower or its  Environmental  Infrastructure
System or the ability of the  Borrower to make all Loan  Repayments,  to pay all
principal and redemption premiums,  if any, of and interest on the Borrower Bond
or  otherwise  to observe and perform its  duties,  covenants,  obligations  and
agreements under this Loan Agreement and the Borrower Bond.

         (f)  Governmental  Consent.  The  Borrower has obtained all permits and
approvals  required  to  date  by any  governmental  body  or  officer  for  the
authorization,  execution,  attestation  and delivery of this Loan Agreement and
the Borrower Bond, for the issuance of the Borrower Bond and the sale thereof to
the Trust,  for the adoption of the Borrower  Bond  Resolution,  for the making,
observance and performance by the Borrower of its duties, covenants, obligations

<PAGE>
and  agreements  under this Loan  Agreement  and the  Borrower  Bond and for the
undertaking  or  completion  of the Project  and the  financing  or  refinancing
thereof,  including, but not limited to, the approval by the New Jersey Board of
Public  Utilities  (the "BPU") of the  issuance by the  Borrower of the Borrower
Bond to the Trust, as required by Section 9a of the Act, and any other approvals
required  therefor by the BPU; and the Borrower has complied with all applicable
provisions   of  law  requiring  any   notification,   declaration,   filing  or
registration  with any  governmental  body or  officer  in  connection  with the
making,  observance and  performance  by the Borrower of its duties,  covenants,
obligations  and  agreements  under this Loan Agreement and the Borrower Bond or
with  the  undertaking  or  completion  of the  Project  and  the  financing  or
refinancing  thereof.  No  consent,  approval  or  authorization  of, or filing,
registration or qualification  with, any  governmental  body or officer that has
not been  obtained is required on the part of the Borrower as a condition to the
authorization,  execution,  attestation  and delivery of this Loan Agreement and
the Borrower Bond, the issuance of the Borrower Bond and the sale thereof to the
Trust,  the undertaking or completion of the Project or the  consummation of any
transaction herein contemplated.

         (g)      Compliance with Law.  The Borrower:
                  -------------------

                  (i) is in compliance with all laws,  ordinances,  governmental
         rules and  regulations  to which it is  subject,  the failure to comply
         with which  would  materially  adversely  affect (A) the ability of the
         Borrower to conduct its  activities  or to  undertake  or complete  the
         Project or (B) the  condition  (financial or otherwise) of the Borrower
         or its Environmental Infrastructure System; and

                  (ii) has obtained all licenses,  permits,  franchises or other
         governmental  authorizations  presently  necessary for the ownership of
         its  properties  or for the  conduct  of its  activities  that,  if not
         obtained,  would  materially  adversely  affect (A) the  ability of the
         Borrower to conduct its  activities  or to  undertake  or complete  the
         Project or (B) the  condition  (financial or otherwise) of the Borrower
         or its Environmental Infrastructure System.

         (h) Use of Proceeds.  The Borrower  will apply the proceeds of the Loan
from the Trust as described in Exhibit B attached  hereto and made a part hereof
(i) to finance or refinance a portion of the Cost of the Borrower's Project; and
(ii) where  applicable,  to reimburse  the Borrower for a portion of the Cost of
the Borrower's  Project,  which portion was paid or incurred in  anticipation of
reimbursement  by the Trust and is  eligible  for such  reimbursement  under and
pursuant to the Regulations,  the Code and any other applicable law. All of such
costs  constitute  Costs for which the Trust is  authorized to make Loans to the
Borrower pursuant to the Act and the Regulations.

         (i) Official  Statement.  The descriptions and information set forth in
the Borrower Appendices, if any, contained in the Official Statement relating to
the Borrower, its operations and the transactions contemplated hereby, as of the
date of the Official Statement, were and, as of the date of delivery hereof, are
true and correct in all  material  respects,  and did not and do not contain any
untrue  statement  of a material  fact or omit to state a material  fact that is
necessary  to  make  the  statements   contained   therein,   in  light  of  the
circumstances under which they were made, not misleading.
<PAGE>
         (j) Preliminary  Official Statement.  As of the date of the Preliminary
Official  Statement,  the descriptions and information set forth in the Borrower
Appendices,  if any, contained in the Preliminary Official Statement relating to
the Borrower,  its  operations  and the  transactions  contemplated  hereby were
"deemed  final" by the  Borrower for the purposes and within the meaning of Rule
15c2-12.

         SECTION 2.02.  Particular Covenants of Borrower.

         (a)  Promise  to  Pay.  The  Borrower   unconditionally   promises,  in
accordance  with the terms of and to the extent  provided in the  Borrower  Bond
Resolution, to make punctual payment of the principal and redemption premium, if
any, of the Loan and the Borrower  Bond,  the Interest on the Loan, the Interest
on the Borrower Bond and all other amounts due under this Loan Agreement and the
Borrower Bond according to their respective terms.

         (b) Performance Under Loan Agreement; Rates. The Borrower covenants and
agrees (i) to comply  with all  applicable  State and  federal  laws,  rules and
regulations  in the  performance  of this Loan  Agreement;  (ii) to maintain its
Environmental  Infrastructure  System in good  repair and  operating  condition;
(iii) to  cooperate  with the Trust in the  observance  and  performance  of the
respective duties, covenants, obligations and agreements of the Borrower and the
Trust under this Loan Agreement; and (iv) to establish,  levy and collect rents,
rates  and  other  charges  for  the  products  and  services  provided  by  its
Environmental  Infrastructure System, which rents, rates and other charges shall
be at least sufficient to comply with all covenants pertaining thereto contained
in, and all other provisions of, any bond  resolution,  trust indenture or other
security  agreement,  if any, relating to any bonds, notes or other evidences of
indebtedness issued or to be issued by the Borrower.

         (c) Borrower  Bond; No Prior Liens.  Except for (i) the Borrower  Bond,
(ii) any bonds at parity with the Borrower  Bond and  currently  outstanding  or
issued on the date hereof,  (iii) any future bonds of the Borrower  issued under
the Borrower  Bond  Resolution  at parity with the Borrower  Bond,  and (iv) any
Permitted Encumbrances (as defined in the Borrower Bond Resolution),  the assets
of the Borrower that are subject to the Borrower Bond Resolution are and will be
free and clear of any  pledge,  lien,  charge  or  encumbrance  thereon  or with
respect  thereto  prior to, or of equal rank with,  the Borrower  Bond,  and all
corporate  or other  action on the part of the Borrower to that end has been and
will be duly and validly taken.

         (d)  Completion  of  Project  and  Provision  of Moneys  Therefor.  The
Borrower  covenants  and agrees (i) to exercise its best  efforts in  accordance
with  prudent  environmental  infrastructure  utility  practice to complete  the
Project and to accomplish  such  completion  on or before the estimated  Project
completion  date set forth in Exhibit G hereto and made a part  hereof;  (ii) to
comply with the terms and provisions contained in Exhibit G hereto; and (iii) to
provide from its own fiscal resources all moneys,  in excess of the total amount
of loan proceeds it receives under the Loan and Fund Loan,  required to complete
the Project.

         (e) Disposition of Environmental  Infrastructure  System.  The Borrower
shall  not  permit  the  disposition  of  all  or   substantially   all  of  its
Environmental Infrastructure System, directly or indirectly,  including, without
limitation,  by means of sale,  lease,  abandonment,  sale of  stock,  statutory
merger or otherwise (collectively, a "Disposition"), except on ninety (90) days'
prior  written  notice to the  Trust,  and,  in any  event,  shall not  permit a
<PAGE>
Disposition unless the following  conditions are met: (i) the Borrower shall, in
accordance with Section 4.02 hereof, assign this Loan Agreement and the Borrower
Bond and its rights and interests  hereunder and  thereunder to the purchaser or
lessee of the Environmental  Infrastructure System, and such purchaser or lessee
shall assume all duties,  covenants,  obligations and agreements of the Borrower
under this Loan  Agreement  and the Borrower  Bond;  and (ii) the Trust shall by
appropriate  action  determine,  in its sole discretion,  that such sale, lease,
abandonment  or other  disposition  will not  adversely  affect (A) the  Trust's
ability to meet its duties, covenants, obligations and agreements under the Bond
Resolution,  (B) the  value  of this  Loan  Agreement  or the  Borrower  Bond as
security  for the payment of Trust Bonds and the  interest  thereon,  or (C) the
excludability  from gross income for federal income tax purposes of the interest
on Trust Bonds then outstanding or that could be issued in the future.

         (f)      Exclusion of Interest from Federal Gross Income and Compliance
                  --------------------------------------------------------------
                  with Code.
                  ----------

                  (i) The Borrower  covenants  and agrees that it shall not take
         any action or omit to take any action that would  result in the loss of
         the  exclusion  of the  interest on any Trust Bonds now or  hereinafter
         issued from gross  income for  purposes of federal  income  taxation as
         that status is governed by Section 103(a) of the Code.

                  (ii) The  Borrower  shall not  directly or  indirectly  use or
         permit the use of any proceeds of the Trust Bonds (or amounts  replaced
         with such  proceeds)  or any other  funds or take any action or omit to
         take any action that would cause the Trust Bonds  (assuming  solely for
         this  purpose  that the  proceeds  of the  Trust  Bonds  loaned  to the
         Borrower  represent  all of the  proceeds  of the  Trust  Bonds)  to be
         "arbitrage bonds" within the meaning of Section 148(a) of the Code.

                  (iii) The  Borrower  shall not directly or  indirectly  use or
         permit  the  use of any  proceeds  of the  Trust  Bonds  loaned  to the
         Borrower to pay the principal of or the interest or redemption  premium
         on or any other amount in connection  with the retirement or redemption
         of any issue of state or local governmental  obligations  ("refinancing
         of  indebtedness"),  unless the  Borrower  shall (A)  establish  to the
         satisfaction  of the Trust,  prior to the  issuance of the Trust Bonds,
         that such  refinancing of  indebtedness  will not adversely  affect the
         exclusion  from gross  income of the  interest  on the Trust  Bonds for
         federal  income tax  purposes  under  Section 103 of the Code,  and (B)
         provide to the Trust an opinion of Bond  Counsel to that effect in form
         and substance satisfactory to the Trust.

                  (iv) The  Borrower  shall not  directly or  indirectly  use or
         permit  the  use of any  proceeds  of the  Trust  Bonds  loaned  to the
         Borrower to reimburse the Borrower for an expenditure with respect to a
         Cost of the  Borrower's  Project  paid  by the  Borrower  prior  to the
         issuance of the Trust Bonds,  unless (A) the allocation by the Borrower
         of the  proceeds  of the  Trust  Bonds to  reimburse  such  expenditure
         complies  with the  requirements  of  Treasury  Regulations  ss.1.150-2
         necessary to enable the  reimbursement  allocation  to be treated as an
         expenditure of the proceeds of the Trust Bonds for purposes of applying
         Sections 103 and 141-150,  inclusive, of the Code, or (B) such proceeds

<PAGE>
         of the Trust Bonds will be used for  refinancing of  indebtedness  that
         was used to pay Costs of the  Borrower's  Project or to  reimburse  the
         Borrower  for  expenditures  with  respect  to Costs of the  Borrower's
         Project paid by the Borrower prior to the issuance of such indebtedness
         in accordance  with a  reimbursement  allocation for such  expenditures
         that complies with the requirements of Treasury Regulations ss.1.150-2.

                  (v) The  Borrower  shall not  directly  or  indirectly  use or
         permit  the  use of any  proceeds  of the  Trust  Bonds  loaned  to the
         Borrower  to pay any  Cost of the  Borrower's  Project  that  does  not
         constitute  a  "capital  expenditure"  within the  meaning of  Treasury
         Regulations ss.1.150-1.

                  (vi) The  Borrower  shall  not use the  proceeds  of the Trust
         Bonds (assuming  solely for this purpose that the proceeds of the Trust
         Bonds loaned to the Borrower represent all of the proceeds of the Trust
         Bonds) in any manner that would cause the Trust Bonds to be  considered
         "federally guaranteed" within the meaning of Section 149(b) of the Code
         or "hedge bonds" within the meaning of Section 149(g) of the Code.

                  (vii) The Borrower shall not issue any debt  obligations  that
         (A) are sold at  substantially  the same  time as the  Trust  Bonds and
         finance  or  refinance  the  Loan  made to the  Borrower,  (B) are sold
         pursuant to the same plan of  financing  as the Trust Bonds and finance
         or  refinance  the Loan made to the  Borrower,  and (C) are  reasonably
         expected  to be paid out of  substantially  the same source of funds as
         the Trust Bonds and finance or refinance the Loan made to the Borrower.

                  (viii)  Neither the Borrower nor any "related  party"  (within
         the meaning of Treasury  Regulations  ss.1.150-1)  shall purchase Trust
         Bonds in an amount related to the amount of the Loan.

                  (ix) The  Borrower  will  not  issue or  permit  to be  issued
         obligations that will constitute an "advance refunding" of the Borrower
         Bond within the meaning of Section  149(d)(5)  of the Code  without the
         express  written  consent  of the  Trust,  which  consent  may  only be
         delivered  by the Trust  after the Trust has  received  notice from the
         Borrower  of such  contemplated  action no later  than  sixty (60) days
         prior to any such contemplated action, and which consent is in the sole
         discretion of the Trust.

                  (x) The Borrower will not have a reserve or  replacement  fund
         (within the meaning of Section  148(d)(1) of the Code) allocable to the
         Borrower Bond evidencing the Loan.

                  (xi)  No  "gross  proceeds"  of the  Trust  Bonds  held by the
         Borrower  (other than amounts in a "bona fide debt service  fund") will
         be held in a  "commingled  fund" (as such terms are defined in Treasury
         Regulations ss.1.148-1(b)).

                  (xii) Based upon all of the objective facts and  circumstances
         in existence on the date of issuance of the Trust Bonds used to finance
         the Project, (A) within six months of the date of issuance of the Trust
         Bonds  used  to  finance  the  Project,   the  Borrower  will  incur  a
         substantial  binding  obligation  to a third  party  to  expend  on the
         Project at least five percent (5%) of the "net sale  proceeds"  (within
         the meaning of  Treasury  Regulations  ss.1.148-1)  of the Loan used to
         finance the Project  (treating an obligation as not being binding if it
         is subject to  contingencies  within the control of the  Borrower,  the

<PAGE>
         Trust or a "related party" (within the meaning of Treasury  Regulations
         ss.1.150-1)),  (B)  completion  of the  Project and the  allocation  to
         expenditures of the "net sale proceeds" of the Loan used to finance the
         Project will proceed  with due  diligence,  and (C) at least 85 percent
         (85%) of the  proceeds of the Loan used to finance  the Project  (other
         than amounts  deposited into the Debt Service Reserve Fund allocable to
         that portion of the Loan used to finance reserve capacity,  if any) and
         investment  earnings  thereon will be spent prior to the period  ending
         three (3) years  subsequent  to the date of issuance of the Trust Bonds
         used to finance  the  Project.  Accordingly,  the  proceeds of the Loan
         deposited  in the Project Loan Account used to finance the Project will
         be  eligible  for the  3-year  arbitrage  temporary  period  since  the
         expenditure  test,  time test and due  diligence  test, as set forth in
         Treasury Regulations ss.1.148-2(e)(2), will be satisfied.

                  (xiii)  The  weighted  average  maturity  of the Loan does not
         exceed 120% of the average  reasonably  expected  economic  life of the
         Project  financed or refinanced  with the Loan,  determined in the same
         manner as under Section  147(b) of the Code.  Accordingly,  the term of
         the Loan  will  not be  longer  than is  reasonably  necessary  for the
         governmental  purposes  of the Loan  within  the  meaning  of  Treasury
         Regulations ss.1.148-1(c)(4).

         For  purposes of this  subsection  and  subsection  (h) of this Section
2.02,  quoted terms shall have the meanings  given thereto by Section 148 of the
Code,  including,  particularly,   Treasury  Regulations  ss.ss.1.148-1  through
1.148-11, inclusive, as supplemented or amended, to the extent applicable to the
Trust Bonds,  and any  successor  Treasury  Regulations  applicable to the Trust
Bonds.

         (g) Operation and Maintenance of Environmental  Infrastructure  System.
The Borrower  covenants  and agrees that it shall,  in  accordance  with prudent
environmental  infrastructure  utility  practice,  (i) at all times  operate the
properties  of its  Environmental  Infrastructure  System  and any  business  in
connection  therewith in an efficient  manner,  (ii) maintain its  Environmental
Infrastructure System in good repair, working order and operating condition, and
(iii)  from  time to time  make all  necessary  and  proper  repairs,  renewals,
replacements,  additions,  betterments  and  improvements  with  respect  to its
Environmental Infrastructure System so that at all times the business carried on
in  connection  therewith  shall  be  properly  and  advantageously   conducted;
provided,  that no provision of this subsection  shall prevent the sale,  lease,
abandonment  or other  disposition  of property that  comprises a portion of the
Borrower's  Environmental  Infrastructure  System,  so long as such sale, lease,
abandonment  or other  disposition  does not  materially  adversely  affect  the
Borrower's Environmental Infrastructure System.

         (h)      Records and Accounts.
                  --------------------

                  (i) The Borrower shall keep accurate  records and accounts for
         its Environmental  Infrastructure  System specifically  relating to the
         Project (the  "Project  Records")  separate and distinct from its other
         records and accounts  (the  "General  Records").  Such Project  Records
         shall  be  audited   annually  by  an  independent   certified   public
         accountant,  which  may be  part of the  annual  audit  of the  General
         Records of the Borrower. Such Project Records and General Records shall
<PAGE>
         be made available for  inspection by the Trust at any  reasonable  time
         upon prior written notice, and a copy of such annual audit(s) therefor,
         including all written comments and  recommendations of such accountant,
         shall be  furnished  to the Trust  within  150 days of the close of the
         fiscal year being so audited  or,  with the consent of the Trust,  such
         additional period as may be provided by law.

                  (ii)  Unless  otherwise  advised in  writing by the Trust,  in
         furtherance of the covenant of the Borrower contained in subsection (f)
         of this  Section  2.02 not to cause  the  Trust  Bonds to be  arbitrage
         bonds,  the Borrower shall keep, or cause to be kept,  accurate records
         of each  investment it makes in any  "nonpurpose  investment"  acquired
         with, or otherwise  allocated  to, "gross  proceeds" of the Trust Bonds
         not held by the Trustee and each  "expenditure"  it makes  allocated to
         "gross  proceeds" of the Trust Bonds.  Such records  shall  include the
         purchase price,  including any constructive  "payments" (or in the case
         of a  "payment"  constituting  a deemed  acquisition  of a  "nonpurpose
         investment" (e.g., a "nonpurpose  investment" first allocated to "gross
         proceeds" of the Trust Bonds after it is actually  acquired  because it
         is deposited in a sinking fund for the Trust Bonds)),  the "fair market
         value" of the  "nonpurpose  investment" on the date first  allocated to
         the "gross  proceeds" of the Trust Bonds,  nominal interest rate, dated
         date, maturity date, type of property,  frequency of periodic payments,
         period  of   compounding,   yield  to  maturity,   amount  actually  or
         constructively  received on disposition  (or in the case of a "receipt"
         constituting a deemed disposition of a "nonpurpose investment" (e.g., a
         "nonpurpose  investment"  that  ceases to be  allocated  to the  "gross
         proceeds" of the Trust Bonds  because it is removed from a sinking fund
         for the Trust  Bonds)),  the  "fair  market  value" of the  "nonpurpose
         investment"  on the  date  it  ceases  to be  allocated  to the  "gross
         proceeds" of the Trust Bonds, the purchase date and disposition date of
         the "nonpurpose  investment" and evidence of the "fair market value" of
         such  property on the  purchase  date and  disposition  date (or deemed
         purchase or disposition  date) for each such  "nonpurpose  investment".
         The purchase date,  disposition  date and the date of  determination of
         "fair  market  value" shall be the date on which a contract to purchase
         or sell the "nonpurpose  investment"  becomes binding,  i.e., the trade
         date rather than the settlement  date. For purposes of the  calculation
         of  purchase  price  and  disposition   price,   brokerage  or  selling
         commissions,  administrative  expenses  or similar  expenses  shall not
         increase the purchase  price of an item and shall not reduce the amount
         actually or constructively received upon disposition of an item, except
         to the extent such costs constitute "qualified administrative costs".

                  (iii) Within thirty (30) days of the last day of the fifth and
         each succeeding fifth "bond year" (which,  unless otherwise  advised by
         the Trust,  shall be the five-year period ending on the date five years
         subsequent  to the date  immediately  preceding the date of issuance of
         the Trust  Bonds and each  succeeding  fifth  "bond  year")  and within
         thirty  (30)  days of the date the last  bond that is part of the Trust
         Bonds is  discharged  (or on any  other  periodic  basis  requested  in
         writing by the Trust), the Borrower shall (A) calculate, or cause to be
         calculated,  the "rebate amount" as of the "computation date" or "final
         computation date"  attributable to any "nonpurpose  investment" made by
         the Borrower and (B) remit the following to the Trust: (1) an amount of
         money  that when  added to the  "future  value" as of the  "computation

<PAGE>
         date" of any previous  payments  made to the Trust on account of rebate
         equals the "rebate amount", (2) the calculations supporting the "rebate
         amount"  attributable  to  any  "nonpurpose  investment"  made  by  the
         Borrower  allocated to "gross proceeds" of the Trust Bonds, and (3) any
         other  information  requested by the Trust relating to compliance  with
         Section 148 of the Code (e.g.,  information  related to any "nonpurpose
         investment"  of  the  Borrower  for  purposes  of  application  of  the
         "universal cap").

                  (iv) The  Borrower  covenants  and agrees that it will account
         for "gross proceeds" of the Trust Bonds,  investments  allocable to the
         Trust Bonds and  expenditures of "gross proceeds" of the Trust Bonds in
         accordance  with Treasury  Regulations  ss.1.148-6.  All allocations of
         "gross proceeds" of the Trust Bonds to expenditures will be recorded on
         the books of the Borrower  kept in  connection  with the Trust Bonds no
         later than 18 months after the later of the date the particular Cost of
         the  Borrower's  Project is paid or the date the portion of the project
         financed by the Trust Bonds is placed in service.  All  allocations  of
         proceeds of the Trust Bonds to expenditures  will be made no later than
         the date that is 60 days  after the fifth  anniversary  of the date the
         Trust Bonds are issued or the date 60 days after the  retirement of the
         Trust Bonds,  if earlier.  Such  records and accounts  will include the
         particular Cost paid, the date of the payment and the party to whom the
         payment was made.

         (i) Inspections;  Information.  The Borrower shall permit the Trust and
the  Trustee and any party  designated  by any of such  parties,  at any and all
reasonable  times during  construction  of the Project and thereafter upon prior
written notice, to examine, visit and inspect the property, if any, constituting
the Project and to inspect and make copies of any  accounts,  books and records,
including (without  limitation) its records regarding  receipts,  disbursements,
contracts,  investments  and  any  other  matters  relating  thereto  and to its
financial  standing,  and shall supply such reports and information as the Trust
and the Trustee may reasonably require in connection therewith.

         (j)  Insurance.  The Borrower shall maintain or cause to be maintained,
in  force,  insurance  policies  with  responsible  insurers  or  self-insurance
programs  providing  against risk of direct physical loss, damage or destruction
of its Environmental  Infrastructure  System at least to the extent that similar
insurance  is  usually   carried  by  utilities   constructing,   operating  and
maintaining  Environmental  Infrastructure  Facilities  of  the  nature  of  the
Borrower's  Environmental  Infrastructure System,  including liability coverage,
all to the extent  available  at  reasonable  cost but in no case less than will
satisfy all applicable regulatory requirements.

         (k) Cost of Project.  The Borrower  certifies that the building cost of
the  Project,  as  listed  in  Exhibit  B hereto  and made a part  hereof,  is a
reasonable and accurate  estimation  thereof,  and it will supply to the Trust a
certificate from a licensed  professional engineer authorized to practice in the
State stating that such building  cost is a reasonable  and accurate  estimation
and that the  useful  life of the  Project  exceeds  twenty  (20) years from the
expected date of the Loan Closing.

         (l) Delivery of Documents.  Concurrently with the delivery of this Loan
Agreement (as previously authorized, executed and attested) at the Loan Closing,
the Borrower will cause to be delivered to the Trust and the Trustee each of the
following items:
<PAGE>
                  (i) an opinion of the Borrower's bond counsel substantially in
         the form of  Exhibit E hereto;  provided,  however,  that the Trust may
         permit  portions of such  opinion to be rendered by general  counsel to
         the Borrower and may permit variances in such opinion from the form set
         forth in Exhibit E if, in the opinion of the Trust,  such variances are
         not to the material  detriment  of the  interests of the holders of the
         Trust Bonds;

                  (ii)   counterparts  of  this  Loan  Agreement  as  previously
         executed and attested by the parties hereto;

                  (iii) copies of those resolutions finally adopted by the board
         of directors of the  Borrower  and  requested by the Trust,  including,
         without limitation,  (A) the resolution of the Borrower authorizing the
         execution,  attestation  and delivery of this Loan  Agreement,  (B) the
         Borrower Bond Resolution, as amended and supplemented as of the date of
         the   Loan   Closing,    authorizing   the   execution,    attestation,
         authentication,  sale and delivery of the  Borrower  Bond to the Trust,
         (C) the  resolution of the Borrower  confirming the details of the sale
         of the Borrower Bond to the Trust,  (D) the resolution of the Borrower,
         if any, declaring its official intent to reimburse expenditures for the
         Cost of the Project from the proceeds of the Trust Bonds,  each of said
         resolutions of the Borrower being certified by an Authorized Officer of
         the Borrower as of the date of the Loan Closing,  (E) the resolution of
         the BPU  approving the issuance by the Borrower of the Borrower Bond to
         the Trust and setting forth any other  approvals  required  therefor by
         the BPU, and (F) any other Proceedings;

                  (iv) if the Loan is being made to  reimburse  the Borrower for
         all or a portion of the Costs of the Borrower's Project or to refinance
         indebtedness   or  reimburse   the   Borrower  for  the   repayment  of
         indebtedness  previously  incurred by the  Borrower to finance all or a
         portion  of the Costs of the  Borrower's  Project,  an  opinion of Bond
         Counsel, in form and substance satisfactory to the Trust, to the effect
         that such  reimbursement  or refinancing  will not adversely affect the
         exclusion  from gross  income of the  interest  on the Trust  Bonds for
         federal income tax purposes under Section 103 of the Code; and

                  (v)  the  certificates  of  insurance   coverage  as  required
         pursuant  to the  terms  of  Section  3.06(d)  hereof  and  such  other
         certificates,  documents,  opinions  and  information  as the Trust may
         require in Exhibit F hereto, if any.

         (m)  Execution  and Delivery of Borrower  Bond.  Concurrently  with the
delivery of this Loan  Agreement at the Loan  Closing,  the Borrower  shall also
deliver to the Trust the Borrower  Bond,  as previously  executed,  attested and
authenticated,  upon the receipt of a written  certification of the Trust that a
portion of the net proceeds of the Trust Bonds shall be deposited in the Project
Loan Account simultaneously with the delivery of the Borrower Bond.

         (n) Notice of Material  Adverse  Change.  The Borrower  shall  promptly
notify the Trust of any material  adverse change in the properties,  activities,
prospects  or  condition  (financial  or  otherwise)  of  the  Borrower  or  its
Environmental  Infrastructure  System, or in the ability of the Borrower to make
all Loan Repayments and otherwise to observe and perform its duties,  covenants,
obligations and agreements under this Loan Agreement and the Borrower Bond.

         (o) Continuing  Representations.  The  representations  of the Borrower
contained  herein  shall  be true  at the  time of the  execution  of this  Loan
Agreement and at all times during the term of this Loan Agreement.
<PAGE>
         (p) Continuing  Disclosure  Covenant.  To the extent that the Trust, in
its sole  discretion,  determines,  at any time prior to the  termination of the
Loan Term,  that the  Borrower  is a material  "obligated  person",  as the term
"obligated person" is defined in Rule 15c2-12, with materiality being determined
by the Trust pursuant to criteria  established,  from time to time, by the Trust
in its sole discretion and set forth in a bond resolution or official  statement
of the Trust,  the Borrower hereby  covenants that it will authorize and provide
to the Trust,  for inclusion in any preliminary  official  statement or official
statement of the Trust, all statements and information  relating to the Borrower
deemed  material by the Trust for the purpose of satisfying Rule 15c2-12 as well
as Rule 10b-5  promulgated  pursuant to the Securities  Exchange Act of 1934, as
amended or supplemented,  including any successor  regulation or statute thereto
("Rule  10b-5"),  including  certificates  and  written  representations  of the
Borrower  evidencing  its compliance  with Rule 15c2-12 and Rule 10b-5;  and the
Borrower  hereby  further  covenants that the Borrower shall execute and deliver
the Continuing Disclosure  Agreement,  in substantially the form attached hereto
as  Exhibit H, with such  revisions  thereto  prior to  execution  and  delivery
thereof as the Trust shall  determine to be necessary,  desirable or convenient,
in its sole  discretion,  for the  purpose of  satisfying  Rule  15c2-12 and the
purposes  and intent  thereof,  as Rule  15c2-12,  its  purposes  and intent may
hereafter be interpreted  from time to time by the SEC or any court of competent
jurisdiction;  and  pursuant  to the  terms  and  provisions  of the  Continuing
Disclosure Agreement,  the Borrower shall thereafter provide on-going disclosure
with  respect to all  statements  and  information  relating to the  Borrower in
satisfaction  of the  requirements  set forth in Rule  15c2-12  and Rule  10b-5,
including  the  provision of  certificates  and written  representations  of the
Borrower evidencing its compliance with Rule 15c2-12 and Rule 10b-5.

         (q)  Additional  Covenants  and  Requirements.  No later  than the Loan
Closing and, if necessary,  in connection with the Trust's issuance of the Trust
Bonds or the making of the Loan, additional covenants and requirements have been
included  in  Exhibit  F  hereto  and made a part  hereof.  Such  covenants  and
requirements  may  include,  but need not be  limited  to,  the  maintenance  of
specified levels of Environmental  Infrastructure  System rates, the issuance of
additional  debt of the  Borrower,  the use by or on behalf of the  Borrower  of
certain  proceeds of the Trust Bonds as such use relates to the  exclusion  from
gross income for federal income tax purposes of the interest on any Trust Bonds,
the  transfer  of  revenues  and  receipts  from  the  Borrower's  Environmental
Infrastructure  System,  compliance with Rule 15c2-12,  Rule 10b-5 and any other
applicable  federal or State securities laws, and matters in connection with the
appointment of the Trustee under the Bond Resolution and any successors thereto.
The Borrower agrees to observe and comply with each such additional covenant and
requirement, if any, included in Exhibit F hereto.

         (r) Year 2000 Compliance. All software or computer programs used by the
Borrower  after  calendar  year  1999  in the  operation  of  its  Environmental
Infrastructure System and material to such operation will be designed to be used
prior to, during and after calendar year 2000, and all such software or computer
programs will operate during each time period without material error relating to
date data, specifically including any error relating to, or the product of, date
data that represents or references different centuries or more than one century.
Without limiting the generality of the foregoing,  all such software or computer
programs (i) will not abnormally end or provide invalid or incorrect  results as
a result  of date  data  and  (ii)  have  been  designed  to  ensure  year  2000
compatibility,  including  date data,  century  recognition,  calculations  that
accommodate same century and  multi-century  formulas and date values,  and date
data interface values that reflect the century.
<PAGE>
                                   ARTICLE III

              LOAN TO BORROWER; AMOUNTS PAYABLE; GENERAL AGREEMENTS

         SECTION 3.01. Loan; Loan Term. The Trust hereby agrees to make the Loan
as described  in Exhibit A-2 hereof and to disburse  proceeds of the Loan to the
Borrower in accordance with Section 3.02 and Exhibit C hereof,  and the Borrower
hereby  agrees to borrow  and  accept the Loan from the Trust upon the terms set
forth in Exhibit A-2 attached hereto and made a part hereof; provided,  however,
that the Trust shall be under no  obligation to make the Loan if (a) at the Loan
Closing,  the  Borrower  does not deliver to the Trust a Borrower  Bond and such
other  documents  required  under  Section  2.02(l)  hereof,  or (b) an Event of
Default has occurred and is  continuing  under the Bond  Resolution or this Loan
Agreement.  Although the Trust  intends to disburse  proceeds of the Loan to the
Borrower  at the times  and up to the  amounts  set forth in  Exhibit C to pay a
portion of the Cost of the Project,  due to unforeseen  circumstances  there may
not be a  sufficient  amount on deposit in the Project  Fund on any date to make
the  disbursement  in such amount.  Nevertheless,  the Borrower  agrees that the
amount  actually  deposited in the Project Loan Account at the Loan Closing plus
the Borrower's  allocable  share of certain costs of issuance and  underwriter's
discount  for all Trust Bonds  issued to finance the Loan shall  constitute  the
initial  principal  amount of the Loan (as the same may be adjusted  downward in
accordance with the definition  thereof),  and neither the Trust nor the Trustee
shall  have any  obligation  thereafter  to loan any  additional  amounts to the
Borrower.

         The Borrower  shall use the proceeds of the Loan strictly in accordance
with Section 2.01(h) hereof.

         The  payment  obligations  created  under this Loan  Agreement  and the
obligations to pay the principal of the Borrower Bond,  Interest on the Borrower
Bond and other  amounts due under the Borrower  Bond are each  direct,  general,
irrevocable  and  unconditional  obligations  of the  Borrower  payable from any
source legally  available to the Borrower in accordance with the terms of and to
the extent provided in the Borrower Bond Resolution.

         SECTION 3.02.  Disbursement of Loan Proceeds.  (a) The Trustee,  as the
agent of the Trust,  shall  disburse  the amounts on deposit in the Project Loan
Account to the Borrower upon receipt of a requisition  executed by an Authorized
Officer of the  Borrower,  and  approved  by the Trust,  in a form  meeting  the
requirements of Section 5.02(3) of the Bond Resolution.

         (b) The Trust and Trustee  shall not be  required to disburse  any Loan
proceeds to the Borrower under this Loan Agreement, unless:

                  (i) the  proceeds of the Trust Bonds  shall be  available  for
         disbursement, as determined solely by the Trust;

                  (ii) in accordance with the "Wastewater  Treatment Bond Act of
         1985", P.L. 1985, c. 329, as amended, and the Regulations, the Borrower
         shall have timely applied for, shall have been awarded and, prior to or
         simultaneously with the Loan Closing, shall have closed a Fund Loan for
         a portion of the Allowable  Costs (as defined in such  regulations)  of
         the Project in an amount not in excess of the amount of Allowable Costs
         of the Project covered by the Loan from the Trust;


<PAGE>
                  (iii) the  Borrower  shall have on hand  moneys to pay for the
         greater of (A) that  portion of the total cost of the  Project  that is
         not  eligible to be funded from the Fund Loan or the Loan,  or (B) that
         portion  of the total  cost of the  Project  that  exceeds  the  actual
         amounts  of the  loan  commitments  made by the  State  and the  Trust,
         respectively, for the Fund Loan and the Loan; and

                  (iv) no Event of Default nor any event that,  with the passage
         of time or  service  of notice or both,  would  constitute  an Event of
         Default shall have occurred and be continuing hereunder.

         SECTION 3.03. Amounts Payable. (a) The Borrower shall repay the Loan in
installments payable to the Loan Servicer as follows:

                  (i) the  principal  of the Loan  shall be repaid  annually  on
         August 1,  commencing  August 1, 2002, in accordance  with the schedule
         set forth in Exhibit A-2 attached hereto and made a part hereof, as the
         same may be  amended  or  modified  by any  credits  applicable  to the
         Borrower as set forth in the Bond Resolution;

                  (ii) the  Interest  Portion  described  in  clause  (i) of the
         definition  thereof shall be paid semiannually on February 1 and August
         1, commencing August 1, 2000, in accordance with the schedule set forth
         in Exhibit A-2 attached hereto and made a part hereof,  as the same may
         be amended or modified by any credits applicable to the Borrower as set
         forth in the Bond Resolution; and

                  (iii) the  Interest  Portion  described  in clause (ii) of the
         definition  thereof shall be paid upon the date of optional  redemption
         or  acceleration,  as the case may be, of the Trust Bonds  allocable to
         any prepaid or accelerated Trust Bond Loan Repayment.

         The obligations of the Borrower under the Borrower Bond shall be deemed
to be amounts  payable under this Section  3.03.  Each Loan  Repayment,  whether
satisfied through a direct payment by the Borrower to the Loan Servicer or (with
respect to the  Interest  Portion)  through the use of Trust Bond  proceeds  and
income  thereon on  deposit  in the  Interest  Account  (as  defined in the Bond
Resolution)  to pay interest on the Trust Bonds,  shall be deemed to be a credit
against the corresponding obligation of the Borrower under this Section 3.03 and
shall fulfill the Borrower's  obligation to pay such amount  hereunder and under
the  Borrower  Bond.  Each payment  made to the Loan  Servicer  pursuant to this
Section  3.03  shall be  applied  first  to the  Interest  Portion  then due and
payable,  second to the principal of the Loan then due and payable, third to the
payment  of the  Administrative  Fee,  and  finally  to the  payment of any late
charges hereunder.

         (b)  The  Interest  on  the  Loan  described  in  clause  (iii)  of the
definition  thereof  shall (i)  consist of a late charge for any Trust Bond Loan
Repayment  that is received by the Loan Servicer later than the tenth (10th) day
following its due date and (ii) be payable  immediately  thereafter in an amount
equal to the  greater of twelve  percent  (12%) per annum or the Prime Rate plus
one half of one percent per annum on such late  payment from its due date to the
date it is actually paid;  provided,  however,  that the rate of Interest on the
Loan,  including,   without  limitation,   any  late  payment  charges  incurred
hereunder, shall not exceed the maximum interest rate permitted by law.
<PAGE>
         (c) The Borrower  shall  receive,  as a credit  against its  semiannual
payment obligations of the Interest Portion,  the amounts certified by the Trust
pursuant to Section 5.10 of the Bond  Resolution.  Such amounts shall  represent
the  Borrower's  allocable  share of the interest  earnings on certain funds and
accounts  established  under the Bond Resolution,  calculated in accordance with
Section 5.10 of the Bond Resolution.

         (d) In  accordance  with the  provisions  of the Bond  Resolution,  the
Borrower shall receive, as a credit against its Trust Bond Loan Repayments,  the
amounts  set  forth in the  certificate  of the  Trust  filed  with the  Trustee
pursuant to Section 5.02(4) of the Bond Resolution.

         (e) The Interest on the Loan described in clause (ii) of the definition
thereof  shall  be  paid  by the  Borrower  in the  amount  of  one-half  of the
Administrative Fee, if any, to the Loan Servicer semiannually on each February 1
and August 1, commencing February 1, 2000, during the term of the Loan.

         SECTION 3.04. Unconditional Obligations. The obligation of the Borrower
to make the Loan  Repayments and all other payments  required  hereunder and the
obligation to perform and observe the other duties,  covenants,  obligations and
agreements on its part contained herein shall be absolute and unconditional, and
shall not be abated, rebated, set-off, reduced, abrogated,  terminated,  waived,
diminished,  postponed  or  otherwise  modified  in any  manner or to any extent
whatsoever  while any Trust  Bonds  remain  outstanding  or any Loan  Repayments
remain unpaid, for any reason, regardless of any contingency,  act of God, event
or cause whatsoever,  including  (without  limitation) any acts or circumstances
that may constitute failure of consideration, eviction or constructive eviction,
the  taking by  eminent  domain or  destruction  of or damage to the  Project or
Environmental  Infrastructure System, commercial frustration of the purpose, any
change  in the laws of the  United  States  of  America  or of the  State or any
political  subdivision  of  either  or  in  the  rules  or  regulations  of  any
governmental  authority,  any failure of the Trust or the Trustee to perform and
observe any agreement,  whether  express or implied,  or any duty,  liability or
obligation arising out of or connected with the Project,  this Loan Agreement or
the  Bond  Resolution,  or any  rights  of  set-off,  recoupment,  abatement  or
counterclaim  that the Borrower  might  otherwise  have  against the Trust,  the
Trustee,  the Loan  Servicer or any other party or parties;  provided,  however,
that payments  hereunder  shall not constitute a waiver of any such rights.  The
Borrower shall not be obligated to make any payments  required to be made by any
other Borrowers under separate Loan Agreements or the Bond Resolution.

         The Borrower acknowledges that payment of the Trust Bonds by the Trust,
including payment from moneys drawn by the Trustee from the Debt Service Reserve
Fund,  does not constitute  payment of the amounts due under this Loan Agreement
and the Borrower  Bond.  If at any time the amount in the Debt  Service  Reserve
Fund shall be less than the Debt Service  Reserve  Requirement  as the result of
any  transfer of moneys from the Debt  Service  Reserve Fund to the Debt Service
Fund (as all such terms are defined in the Bond  Resolution)  as the result of a
failure  by the  Borrower  to make  any  Trust  Bond  Loan  Repayments  required
hereunder,  the Borrower  agrees to replenish (i) such moneys so transferred and
(ii) any deficiency  arising from losses incurred in making such transfer as the
result of the  liquidation by the Trust of Investment  Securities (as defined in
the Bond  Resolution)  acquired as an  investment  of moneys in the Debt Service
Reserve Fund, by making payments to the Trust in equal monthly  installments for
the lesser of six (6) months or the  remaining  term of the Loan at an  interest
rate to be determined by the Trust  necessary to make up any loss caused by such
deficiency.
<PAGE>
         The Borrower  acknowledges  that payment of the Trust Bonds from moneys
that were  originally  received  by the Loan  Servicer  from  repayments  by the
Borrowers of loans made to the Borrowers by the State, acting by and through the
New Jersey Department of Environmental  Protection,  pursuant to loan agreements
dated as of November 1, 1999 by and between the Borrowers and the State,  acting
by and through the New Jersey Department of Environmental Protection, to finance
or  refinance  a  portion  of  the  cost  of  the  Environmental  Infrastructure
Facilities of the Borrowers, and which moneys were upon such receipt by the Loan
Servicer  deposited in the Trust Bonds Security  Account (as defined in the Bond
Resolution),  does not  constitute  payment of the  amounts  due under this Loan
Agreement and the Borrower Bond.

         SECTION  3.05.  Loan  Agreement  to Survive Bond  Resolution  and Trust
Bonds. The Borrower  acknowledges  that its duties,  covenants,  obligations and
agreements  hereunder  shall  survive  the  discharge  of  the  Bond  Resolution
applicable to the Trust Bonds and shall survive the payment of the principal and
redemption  premium,  if any,  of and the  interest on the Trust Bonds until the
Borrower  can take no action or fail to take any  action  that  could  adversely
affect the  exclusion  from gross  income of the interest on the Trust Bonds for
federal  income tax purposes  under  Section 103 of the Code, at which time such
duties, covenants,  obligations and agreements hereunder shall, except for those
set forth in Sections 3.06(a) and (b) hereof, terminate.

         SECTION 3.06.  Disclaimer of Warranties  and  Indemnification.  (a) The
Borrower  acknowledges  and agrees  that (i)  neither  the Trust nor the Trustee
makes any  warranty or  representation,  either  express or  implied,  as to the
value, design,  condition,  merchantability or fitness for particular purpose or
fitness for any use of the Environmental Infrastructure System or the Project or
any  portions  thereof or any other  warranty  or  representation  with  respect
thereto;  (ii) in no event  shall the Trust or the  Trustee or their  respective
agents  be  liable or  responsible  for any  incidental,  indirect,  special  or
consequential  damages in connection  with or arising out of this Loan Agreement
or  the  Project  or  the  existence,  furnishing,  functioning  or  use  of the
Environmental  Infrastructure  System or the  Project or any item or products or
services provided for in this Loan Agreement;  and (iii) during the term of this
Loan  Agreement and to the fullest  extent  permitted by law, the Borrower shall
indemnify and hold the Trust and the Trustee harmless against,  and the Borrower
shall pay any and all, liability, loss, cost, damage, claim, judgment or expense
of any and all kinds or nature and however arising and imposed by law, which the
Trust and the Trustee may sustain, be subject to or be caused to incur by reason
of any claim,  suit or action  based upon  personal  injury,  death or damage to
property,  whether real,  personal or mixed, or upon or arising out of contracts
entered into by the  Borrower,  the  Borrower's  ownership of the  Environmental
Infrastructure  System  or the  Project,  or the  acquisition,  construction  or
installation of the Project.

         (b) It is mutually  agreed by the  Borrower,  the Trust and the Trustee
that the Trust and its  officers,  agents,  servants or  employees  shall not be
liable for, and shall be  indemnified  and saved harmless by the Borrower in any
event from, any action performed under this Loan Agreement and any claim or suit
of whatsoever nature, except in the event of loss or damage resulting from their
own negligence or willful misconduct.  It is further agreed that the Trustee and
its directors,  officers, agents, servants or employees shall not be liable for,
and shall be  indemnified  and saved harmless by the Borrower in any event from,
any action  performed  pursuant to this Loan  Agreement,  except in the event of
loss or damage resulting from their own negligence or willful misconduct.
<PAGE>
         (c) The  Borrower  and the Trust agree that all claims shall be subject
to and governed by the provisions of the New Jersey  Contractual  Liability Act,
N.J.S.A.  59:13-1 et seq. (except for N.J.S.A.  59:13-9 thereof),  although such
Act by its express terms does not apply to claims  arising  under  contract with
the Trust.

         (d) In connection with its obligation to provide the insurance required
under Section  2.02(j)  hereof:  (i) the Borrower shall include,  or cause to be
included,  the Trust and its  directors,  employees  and officers as  additional
"named insureds" on (A) any certificate of liability  insurance  procured by the
Borrower (or other similar document  evidencing the liability insurance coverage
procured  by the  Borrower)  and  (B) any  certificate  of  liability  insurance
procured by any contractor or subcontractor for the Project, and from the latter
of the date of the Loan Closing or the date of the initiation of construction of
the Project  until the date the  Borrower  receives the written  certificate  of
Project  completion  from the Trust,  the Borrower shall maintain said liability
insurance covering the Trust and said directors,  employees and officers in good
standing;  and (ii) the Borrower shall include the Trust as an additional "named
insured"  on any  certificate  of  insurance  providing  against  risk of direct
physical loss, damage or destruction of the Environmental Infrastructure System,
and during the Loan Term the Borrower shall maintain said insurance covering the
Trust in good standing.

         The  Borrower  shall  provide the Trust with a copy of each of any such
original,  supplemental,  amendatory or reissued  certificates  of insurance (or
other similar documents  evidencing the insurance coverage) required pursuant to
this Section 3.06(d).

         SECTION 3.07. Option to Prepay Loan Repayments. The Borrower may prepay
the Trust  Bond  Loan  Repayments,  in whole or in part (but if in part,  in the
amount of $100,000 or any integral multiple thereof),  upon prior written notice
to the Trust and the  Trustee  not less than ninety (90) days in addition to the
number  of  days'  advance  notice  to the  Trustee  required  for any  optional
redemption  of the Trust Bonds,  and upon payment by the Borrower to the Trustee
of amounts that, together with investment  earnings thereon,  will be sufficient
to pay the principal amount of the Trust Bond Loan Repayments to be prepaid plus
the Interest Portion  described in clause (ii) of the definition  thereof on any
such  date of  redemption;  provided,  however,  that any such  full or  partial
prepayment  may only be made (i) if the  Borrower  is not then in arrears on its
Fund Loan,  (ii) if the Borrower is  contemporaneously  making a full or partial
prepayment of the Fund Loan such that,  after the prepayment of the Loan and the
Fund Loan, the Trust, in its sole  discretion,  determines that the interests of
the owners of the Trust Bonds are not  adversely  affected by such  prepayments,
and (iii) upon the prior written  approval of the Trust. In addition,  if at the
time of such  prepayment  the Trust  Bonds may only be redeemed at the option of
the Trust upon payment of a premium, the Borrower shall add to its prepayment of
Trust Bond Loan Repayments an amount, as determined by the Trust,  equal to such
premium  allocable  to  the  Trust  Bonds  to be  redeemed  as a  result  of the
Borrower's  prepayment.  Prepayments  shall be  applied  first  to the  Interest
Portion  that  accrues  on the  portion  of the Loan to be  prepaid  until  such
prepayment  date as described in clause (ii) of the definition  thereof and then
to principal payments  (including  premium, if any) on the Loan in inverse order
of their maturity.
<PAGE>
         SECTION 3.08.  Priority of Loan and Fund Loan. (a) The Borrower  hereby
acknowledges that, to the extent allowed by law or the Borrower Bond Resolution,
any Loan  Repayments  then due and payable on the Loan shall be satisfied by the
Loan Servicer  before any loan  repayments on the Borrower's  Fund Loan shall be
satisfied by the Loan  Servicer.  The Borrower  agrees not to interfere with any
such action by the Loan Servicer.

         (b) The  Borrower  hereby  acknowledges  that in the event the Borrower
fails or is unable  to pay  promptly  to the  Trust in full any Trust  Bond Loan
Repayments under this Loan Agreement when due, then to the extent allowed by law
any (i) Administrative Fee paid hereunder, (ii) late charges paid hereunder, and
(iii) loan  repayments  paid by the  Borrower on its Fund Loan under the related
loan  agreement  therefor,  any of which  payments shall be received by the Loan
Servicer during the time of any such Trust Bond Loan Repayment deficiency, shall
be applied by the Loan Servicer  first to satisfy such Trust Bond Loan Repayment
deficiency as a credit against the  obligations of the Borrower to make payments
of the Interest  Portion under the Loan and the Borrower  Bond,  second,  to the
extent available,  to make Trust Bond Loan Repayments of principal hereunder and
payments of principal under the Borrower Bond,  third, to the extent  available,
to pay the Administrative Fee, fourth, to the extent available,  to pay any late
charges hereunder,  fifth, to the extent available,  to satisfy the repayment of
the Borrower's Fund Loan under its related loan agreement therefor, and finally,
to the extent  available,  to satisfy the  repayment of the  administrative  fee
under any such related loan agreement.

         (c) The Borrower hereby further  acknowledges  that any loan repayments
paid by the Borrower on its Fund Loan under the related loan agreement  therefor
shall be applied (i)  according to Section 3(c) of the Loan  Servicing and Trust
Bonds Security  Agreement (as defined in the definition of Loan Servicer herein)
and (ii) according to the provisions of the Master Program Trust Agreement.
<PAGE>
                                   ARTICLE IV

                 ASSIGNMENT OF LOAN AGREEMENT AND BORROWER BOND

         SECTION 4.01. Assignment and Transfer by Trust. (a) The Borrower hereby
expressly  acknowledges  that, other than the provisions of Section  2.02(d)(ii)
hereof,  the  Trust's  right,  title and  interest  in,  to and under  this Loan
Agreement  and the Borrower  Bond have been  assigned to the Trustee as security
for the Trust Bonds as provided in the Bond Resolution, and that if any Event of
Default  shall  occur,  the  Trustee  or any Bond  Insurer  (as such term may be
defined in the Bond Resolution), if applicable, pursuant to the Bond Resolution,
shall be  entitled  to act  hereunder  in the place and stead of the Trust.  The
Borrower hereby acknowledges the requirements of the Bond Resolution  applicable
to the Trust Bonds and consents to such  assignment and  appointment.  This Loan
Agreement and the Borrower Bond,  including,  without  limitation,  the right to
receive payments required to be made by the Borrower  hereunder and to compel or
otherwise  enforce  observance  and  performance  by the  Borrower  of its other
duties,  covenants,   obligations  and  agreements  hereunder,  may  be  further
transferred,  assigned  and  reassigned  in  whole  or in  part  to one or  more
assignees  or  subassignees  by the  Trustee  at any  time  subsequent  to their
execution  without the  necessity of obtaining  the consent of, but after giving
prior written notice to, the Borrower.

         The  Trust  shall  retain  the right to  compel  or  otherwise  enforce
observance and performance by the Borrower of its duties, covenants, obligations
and agreements under Section 2.02(d)(ii) hereof;  provided,  however, that in no
event  shall  the  Trust  have the  right to  accelerate  the  Borrower  Bond in
connection with the enforcement of Section 2.02(d)(ii) hereof.

         (b) The Borrower  hereby  approves and  consents to any  assignment  or
transfer of this Loan Agreement and the Borrower Bond that the Trust deems to be
necessary in connection with any refunding of the Trust Bonds or the issuance of
additional bonds under the Bond Resolution or otherwise,  all in connection with
the pooled loan program of the Trust.

         SECTION 4.02.  Assignment by Borrower.  Neither this Loan Agreement nor
the Borrower  Bond may be assigned by the  Borrower  for any reason,  unless the
following  conditions  shall be  satisfied:  (i) the Trust and the Trustee shall
have approved said assignment in writing; (ii) the assignee shall have expressly
assumed in writing  the full and  faithful  observance  and  performance  of the
Borrower's  duties,  covenants,  obligations  and  agreements  under  this  Loan
Agreement and, to the extent  permitted under applicable law, the Borrower Bond;
(iii) immediately after such assignment, the assignee shall not be in default in
the  observance  or  performance  of  any  duties,  covenants,   obligations  or
agreements of the Borrower  under this Loan  Agreement or the Borrower Bond; and
(iv) the Trust shall have received an opinion of Bond Counsel to the effect that
such  assignment  will not  adversely  affect the security of the holders of the
Trust  Bonds or the  exclusion  of the  interest  on the Trust  Bonds from gross
income for purposes of federal income taxation under Section 103(a) of the Code.
<PAGE>
                                    ARTICLE V

                         EVENTS OF DEFAULT AND REMEDIES

         SECTION 5.01. Events of Default.  If any of the following events occur,
it is  hereby  defined  as and  declared  to be and to  constitute  an "Event of
Default":

         (a) failure by the Borrower to pay, or cause to be paid, any Trust Bond
Loan  Repayment  required to be paid  hereunder  when due,  which  failure shall
continue for a period of fifteen (15) days;

         (b)  failure  by  the  Borrower  to  pay,  or  cause  to be  paid,  the
Administrative Fee or any late charges incurred hereunder or any portion thereof
when due or to observe and perform any duty,  covenant,  obligation or agreement
on its part to be observed or performed under this Loan Agreement, other than as
referred to in subsection (a) of this Section 5.01 or other than the obligations
of the Borrower contained in Section 2.02(d)(ii) hereof and in Exhibit F hereto,
which  failure  shall  continue  for a period of thirty (30) days after  written
notice,  specifying such failure and requesting that it be remedied, is given to
the  Borrower by the  Trustee,  unless the Trustee  shall agree in writing to an
extension of such time prior to its expiration;  provided,  however, that if the
failure stated in such notice is correctable but cannot be corrected  within the
applicable period,  the Trustee may not unreasonably  withhold its consent to an
extension  of such time up to 120 days from the  delivery of the written  notice
referred to above if corrective  action is instituted by the Borrower within the
applicable  period  and  diligently  pursued  until  the  Event  of  Default  is
corrected;

         (c) any  representation  made by or on behalf of the Borrower contained
in this Loan  Agreement,  or in any instrument  furnished in compliance  with or
with reference to this Loan Agreement or the Loan, is false or misleading in any
material respect;

         (d) a petition is filed by or against the Borrower under any federal or
state bankruptcy or insolvency law or other similar law in effect on the date of
this  Loan  Agreement  or  thereafter  enacted,  unless  in the case of any such
petition  filed  against the Borrower such  petition  shall be dismissed  within
thirty  (30) days after such  filing and such  dismissal  shall be final and not
subject to appeal;  or the Borrower shall become  insolvent or bankrupt or shall
make an assignment for the benefit of its creditors;  or a custodian (including,
without limitation, a receiver, liquidator or trustee) of the Borrower or any of
its  property  shall be  appointed  by court  order  or take  possession  of the
Borrower  or its  property  or assets if such  order  remains  in effect or such
possession continues for more than thirty (30) days;

         (e) the Borrower  shall  generally  fail to pay its debts as such debts
become due; and

         (f)  failure of the  Borrower  to observe  or perform  such  additional
duties, covenants, obligations,  agreements or conditions as are required by the
Trust and specified in Exhibit F attached hereto and made a part hereof.

         SECTION 5.02.  Notice of Default.  The Borrower  shall give the Trustee
and the Trust prompt telephonic notice of the occurrence of any Event of Default
referred to in Section  5.01(d) or (e) hereof and of the occurrence of any other
event or  condition  that  constitutes  an Event of  Default at such time as any
senior  administrative or financial officer of the Borrower becomes aware of the
existence thereof.
<PAGE>
         SECTION  5.03.  Remedies  on  Default.  Whenever  an Event  of  Default
referred to in Section 5.01 hereof shall have  occurred and be  continuing,  the
Borrower  acknowledges  the  rights of the  Trustee  and of any Bond  Insurer to
direct any and all remedies in accordance with the terms of the Bond Resolution,
and the Borrower also  acknowledges that the Trust shall have the right to take,
or to direct the Trustee to take, any action  permitted or required  pursuant to
the Bond  Resolution  and to take whatever  other action at law or in equity may
appear  necessary or desirable to collect the amounts then due and thereafter to
become due hereunder or to enforce the observance  and  performance of any duty,
covenant, obligation or agreement of the Borrower hereunder.

         In  addition,  if an Event of Default  referred  to in Section  5.01(a)
hereof shall have  occurred and be  continuing,  the Trust shall,  to the extent
allowed by  applicable  law and to the extent and in the manner set forth in the
Bond Resolution, have the right to declare, or to direct the Trustee to declare,
all Loan  Repayments  and all other  amounts due hereunder  (including,  without
limitation,  payments  under the Borrower  Bond)  together  with the  prepayment
premium,  if any,  calculated  pursuant to Section 3.07 hereof to be immediately
due and  payable,  and upon notice to the Borrower the same shall become due and
payable without further notice or demand.

         SECTION 5.04. Attorneys' Fees and Other Expenses. The Borrower shall on
demand pay to the Trust or the  Trustee  the  reasonable  fees and  expenses  of
attorneys and other reasonable  expenses  (including,  without  limitation,  the
reasonably  allocated  costs of in-house  counsel and legal  staff)  incurred by
either of them in the collection of Trust Bond Loan  Repayments or any other sum
due hereunder or in the  enforcement  of the  observation  or performance of any
other duties, covenants, obligations or agreements of the Borrower upon an Event
of Default.

         SECTION 5.05.  Application of Moneys. Any moneys collected by the Trust
or the Trustee pursuant to Section 5.03 hereof shall be applied (a) first to pay
any attorneys' fees or other fees and expenses owed by the Borrower  pursuant to
Section 5.04 hereof,  (b) second, to the extent  available,  to pay the Interest
Portion then due and payable,  (c) third,  to the extent  available,  to pay the
principal due and payable on the Loan, (d) fourth, to the extent  available,  to
pay the  Administrative  Fee, any late charges  incurred  hereunder or any other
amounts due and payable under this Loan Agreement,  and (e) fifth, to the extent
available,  to pay the Interest  Portion and the principal on the Loan and other
amounts payable hereunder as such amounts become due and payable.

         SECTION 5.06. No Remedy  Exclusive;  Waiver;  Notice.  No remedy herein
conferred  upon or  reserved  to the  Trust or the  Trustee  is  intended  to be
exclusive, and every such remedy shall be cumulative and shall be in addition to
every other remedy given under this Loan Agreement or now or hereafter  existing
at law or in equity. No delay or omission to exercise any right, remedy or power
accruing upon any Event of Default shall impair any such right,  remedy or power
or shall be  construed  to be a waiver  thereof,  but any such right,  remedy or
power  may be  exercised  from  time  to  time  and as  often  as may be  deemed
expedient.  In order to entitle the Trust or the Trustee to exercise  any remedy
reserved to it in this  Article V, it shall not be  necessary to give any notice
other than such notice as may be required in this Article V.

         SECTION  5.07.   Retention  of  Trust's  Rights.   Notwithstanding  any
assignment or transfer of this Loan Agreement  pursuant to the provisions hereof
or of the Bond Resolution,  or anything else to the contrary  contained  herein,
the Trust  shall  have the right upon the  occurrence  of an Event of Default to
take any action,  including (without  limitation) bringing an action against the
Borrower  at law or in  equity,  as  the  Trust  may,  in its  discretion,  deem
necessary to enforce the  obligations  of the Borrower to the Trust  pursuant to
Section 5.03 hereof.
<PAGE>
                                   ARTICLE VI

                                  MISCELLANEOUS

         SECTION   6.01.   Notices.   All   notices,   certificates   or   other
communications  hereunder shall be sufficiently  given and shall be deemed given
when hand delivered or mailed by registered or certified mail,  postage prepaid,
to the Borrower at the address specified in Exhibit A-1 attached hereto and made
a part  hereof  and to the  Trust,  the  Trustee  and the Loan  Servicer  at the
following addresses:

         (a)      Trust:

                           New Jersey Environmental Infrastructure Trust
                           P.O. Box 440
                           Trenton, New Jersey  08625
                           Attention:  Executive Director

         (b)      Trustee:

                           First Union National Bank
                           21 South Street
                           Morristown, New Jersey  07960
                           Attention:  Corporate Trust Department

         (c)      Loan Servicer:

                           First Union National Bank
                           21 South Street
                           Morristown, New Jersey  07960
                           Attention:  Corporate Trust Department

         Any of the  foregoing  parties may  designate  any further or different
addresses to which  subsequent  notices,  certificates  or other  communications
shall be sent by notice in writing given to the others.

         SECTION 6.02.  Binding  Effect.  This Loan Agreement shall inure to the
benefit  of and  shall be  binding  upon the Trust  and the  Borrower  and their
respective successors and assigns.

         SECTION  6.03.  Severability.  In the event any  provision of this Loan
Agreement  shall be held  illegal,  invalid  or  unenforceable  by any  court of
competent jurisdiction,  such holding shall not invalidate, render unenforceable
or otherwise affect any other provision hereof.

         SECTION 6.04.  Amendments,  Supplements  and  Modifications.  Except as
otherwise provided in this Section 6.04, this Loan Agreement may not be amended,
supplemented or modified  without the prior written consent of the Trust and the
Borrower and without the  satisfaction  of all  conditions  set forth in Section
11.12  of the Bond  Resolution.  Notwithstanding  the  conditions  set  forth in
Section 11.12 of the Bond Resolution, (i) Section 2.02(p) hereof may be amended,
supplemented  or modified upon the written consent of the Trust and the Borrower
and without the consent of the  Trustee,  any Bond Insurer or any holders of the
Trust Bonds, and (ii) Exhibit H hereto may be amended,  supplemented or modified
prior  to the  execution  and  delivery  thereof  as  the  Trust,  in  its  sole
discretion,  shall  determine to be necessary,  desirable or convenient  for the
purpose of  satisfying  Rule 15c2-12 and the purpose and intent  thereof as Rule
15c2-12,  its purpose and intent may hereafter be interpreted  from time to time
by the  SEC  or  any  court  of  competent  jurisdiction,  and  such  amendment,
supplement or  modification  shall not require the consent of the Borrower,  the
Trustee, any Bond Insurer or any holders of the Trust Bonds.
<PAGE>
         SECTION 6.05.  Execution in  Counterparts.  This Loan  Agreement may be
executed in several counterparts,  each of which shall be an original and all of
which shall constitute but one and the same instrument.

         SECTION 6.06. Applicable Law and Regulations. This Loan Agreement shall
be governed by and construed in accordance with the laws of the State, including
the Act and the Regulations,  which Regulations are, by this reference  thereto,
incorporated herein as part of this Loan Agreement.

         SECTION 6.07.  Consents and Approvals.  Whenever the written consent or
approval  of the  Trust  shall be  required  under the  provisions  of this Loan
Agreement,  such  consent  or  approval  may only be given by the  Trust  unless
otherwise  provided by law or by rules,  regulations or resolutions of the Trust
or unless expressly delegated to the Trustee and except as otherwise provided in
Section 6.09 hereof.

         SECTION 6.08. Captions. The captions or headings in this Loan Agreement
are for convenience only and shall not in any way define,  limit or describe the
scope or intent of any provisions or sections of this Loan Agreement.

         SECTION  6.09.   Benefit  of  Loan  Agreement;   Compliance  with  Bond
Resolution.  This Loan Agreement is executed, among other reasons, to induce the
purchase of the Trust Bonds. Accordingly, all duties, covenants, obligations and
agreements of the Borrower  herein  contained are hereby  declared to be for the
benefit of and are enforceable by the Trust,  the holders of the Trust Bonds and
the Trustee.  The Borrower  covenants and agrees to observe and comply with, and
to  enable  the  Trust to  observe  and  comply  with,  all  duties,  covenants,
obligations and agreements contained in the Bond Resolution.

         SECTION 6.10. Further Assurances. The Borrower shall, at the request of
the Trust,  authorize,  execute,  attest,  acknowledge  and deliver such further
resolutions,  conveyances, transfers, assurances, financing statements and other
instruments  as may be necessary or desirable  for better  assuring,  conveying,
granting, assigning and confirming the rights, security interests and agreements
granted or intended to be granted by this Loan Agreement and the Borrower Bond.
<PAGE>
         IN WITNESS  WHEREOF,  the Trust and the Borrower  have caused this Loan
Agreement  to be  executed,  sealed and  delivered  as of the date  first  above
written.

                                           NEW JERSEY ENVIRONMENTAL
                                           INFRASTRUCTURE TRUST

[SEAL]

                                        By:________________________
ATTEST:                                    Barton E. Harrison
                                           Vice-Chairman

---------------------
Robert A. Briant, Sr.
Secretary


                                           MIDDLESEX WATER COMPANY

[SEAL]

                                        By:________________________
ATTEST:                                    Authorized Officer


-----------------------------
Authorized Officer


                                           Approval of New Jersey State
                                           Treasurer required pursuant
                                           to Section 9a of the Act



                                        By:________________________
                                           Roland M. Machold
                                           Acting New Jersey State Treasurer



                                [Signature Page]

<PAGE>


                                   EXHIBIT A-1


         Description of Project and Environmental Infrastructure System










                                      A-1-1

<PAGE>


                                   EXHIBIT A-2


                               Description of Loan








                                      A-2-1

<PAGE>


                                    EXHIBIT B


               Basis for Determination of Allowable Project Costs










                                       B-1

<PAGE>
                                    EXHIBIT C


                         Estimated Disbursement Schedule









                                       C-1

<PAGE>


                                     EXHIBIT D


                             Specimen Borrower Bond





                                      D-5

<PAGE>
            (Except for assignment page, to be supplied by Borrower's
                bond counsel in substantially the following form)


         IMPORTANT NOTE: The next three pages set forth the form of the Borrower
Bond  prepared  by the Trust's  Bond  Counsel  for  municipal/county  Borrowers.
Although the Trust recognizes that each corporate Borrower has its own bond form
as required pursuant to its Borrower Bond Resolution,  please incorporate in the
bond form the pertinent  information from this municipal/county bond form (e.g.,
amounts  payable  under the  Borrower  Bond set  forth in the  first  paragraph,
assignment  in  the  second  paragraph,   disbursement  language  in  the  third
paragraph, unconditional obligation in the fourth paragraph, optional prepayment
provisions in the fifth paragraph and the date of the Borrower Bond).


<PAGE>
                        SEE IMPORTANT NOTE ON PRIOR PAGE


         FOR VALUE RECEIVED, Middlesex Water Company, a corporation duly created
and validly  existing under the Constitution and laws of the State of New Jersey
(the  "Borrower"),  hereby  promises  to pay  to the  order  of the  New  Jersey
Environmental Infrastructure Trust (the "Trust") (i) the principal amount of Two
Million Three Hundred Fifty Thousand Dollars ($2,350,000), or such lesser amount
as shall be determined in accordance with Section 3.01 of the Loan Agreement (as
hereinafter  defined), at the times and in the amounts determined as provided in
the Loan  Agreement,  together with (ii) Interest on the Loan  constituting  the
Interest Portion, the Administrative Fee and any late charges incurred under the
Loan  Agreement (as such terms are defined in the Loan  Agreement) in the amount
calculated  as  provided in the Loan  Agreement,  payable on the days and in the
amounts  and as  provided  in the Loan  Agreement,  which  principal  amount and
Interest Portion of the Interest on the Loan shall, unless otherwise provided in
the Loan Agreement,  be payable on the days and in the amounts as also set forth
in Exhibit A attached  hereto under the column  headings  respectively  entitled
"Principal" and "Interest", plus (iii) any other amounts due and owing under the
Loan Agreement at the times and in the amounts as provided therein. The Borrower
irrevocably  pledges its full faith and credit for the  punctual  payment of the
principal  of and the  Interest  on this  Borrower  Bond (as defined in the Loan
Agreement)  and for the  punctual  payment of all other  amounts  due under this
Borrower Bond and the Loan Agreement according to their respective terms.

         This Borrower Bond is issued pursuant to the Loan Agreement dated as of
November  1,  1999  by and  between  the  Trust  and  the  Borrower  (the  "Loan
Agreement"),  and is issued in  consideration  of the loan made  thereunder (the
"Loan") and to evidence the payment obligations of the Borrower set forth in the
Loan  Agreement.  This Borrower  Bond has been assigned to First Union  National
Bank, as trustee (the "Trustee") under the  "Environmental  Infrastructure  Bond
Resolution,  Series  1999B",  adopted by the Trust on September 20, 1999, as the
same may be amended and  supplemented  in accordance with the terms thereof (the
"Bond  Resolution"),  and payments hereunder shall, except as otherwise provided
in the Loan Agreement,  be made directly to the Loan Servicer (as defined in the
Loan Agreement) for the account of the Trust pursuant to such  assignment.  Such
assignment  has been made as  security  for the  payment of the Trust  Bonds (as
defined in the Loan  Agreement)  issued to finance or refinance  the Loan and as
otherwise  described in the Loan  Agreement.  This  Borrower  Bond is subject to
further  assignment  or  endorsement  in  accordance  with the terms of the Bond
Resolution and the Loan Agreement.  All of the terms,  conditions and provisions
of the Loan  Agreement are, by this reference  thereto,  incorporated  herein as
part of this Borrower Bond.

         Pursuant  to the  Loan  Agreement,  disbursements  shall be made by the
Trustee to the Borrower,  in accordance with written  instructions of the Trust,
upon  receipt by the Trust and the  Trustee of  requisitions  from the  Borrower
executed and delivered in accordance with the  requirements set forth in Section
3.02 of the Loan Agreement.

         This  Borrower  Bond is entitled to the  benefits and is subject to the
conditions of the Loan  Agreement.  The  obligations of the Borrower to make the
payments  required  hereunder shall be absolute and  unconditional,  without any
defense or right of set-off, counterclaim or recoupment by reason of any default
by the Trust under the Loan Agreement or under any other  agreement  between the
Borrower and the Trust or out of any indebtedness or liability at any time owing
to the Borrower by the Trust or for any other reason.
<PAGE>
         This  Borrower Bond is subject to optional  prepayment  under the terms
and  conditions,  and in the  amounts,  provided  in  Section  3.07 of the  Loan
Agreement.  To the extent  allowed by applicable  law, this Borrower Bond may be

                                      D-3
<PAGE>
subject to  acceleration  under the terms and  conditions,  and in the  amounts,
provided in Section 5.03 of the Loan Agreement.

         IN WITNESS  WHEREOF,  the Borrower has caused this  Borrower Bond to be
duly executed, sealed and delivered as of this 15th day of October, 1999.

                                                  MIDDLESEX WATER COMPANY

[SEAL]

                                                  By:___________________
ATTEST:                                              _____________



_____________________                            By:___________________
---------------                                     -------------

                                      D-4
<PAGE>
         New  Jersey  Environmental  Infrastructure  Trust  hereby  assigns  the
foregoing  Borrower  Bond to First Union  National  Bank,  as Trustee  under the
"Environmental   Infrastructure  Bond  Resolution,  Series  1999B",  adopted  on
September  20,  1999,  as amended and  supplemented,  all as of the date of this
Borrower  Bond, as security for the Trust Bonds issued or to be issued under the
Bond Resolution to finance or refinance the Project Fund (as defined in the Bond
Resolution).

                                                    NEW JERSEY ENVIRONMENTAL
                                                      INFRASTRUCTURE TRUST

[SEAL]

ATTEST:                                          By:_______________________
                                                    Barton E. Harrison
                                                   Vice-Chairman

-----------------------------
Robert A. Briant, Sr.
Secretary



                                      D-5
<PAGE>
                                    EXHIBIT E


                Opinions of Borrower's Bond and General Counsels

                           See Closing Item No. 10.04








                                       E-5

<PAGE>
                       [LETTERHEAD OF COUNSEL TO BORROWER]


                                                                November 4, 1999

New Jersey Environmental Infrastructure Trust
P.O. Box 440
Trenton, New Jersey  08625

First Union National Bank
21 South Street
Morristown, New Jersey  07960

Ladies and Gentlemen:

         We have acted as counsel to Middlesex Water Company, a corporation duly
organized  and validly  existing  under the laws of the State of New Jersey (the
"Borrower"),  which has entered into a Loan Agreement (as  hereinafter  defined)
with the New Jersey Environmental  Infrastructure Trust (the "Trust"),  and have
acted as such in connection with the authorization,  execution,  attestation and
delivery by the Borrower of its Loan Agreement and Borrower Bond (as hereinafter
defined) pursuant to the New Jersey Business Corporation Act, P.L. 1968, c. 263,
as amended (the "Business  Corporation  Law"),  and an indenture of the Borrower
dated as of April 1, 1927 and entitled  "Indenture of Mortgage",  as amended and
supplemented, including by a supplemental indenture dated as of November 1, 1999
and entitled  "Twenty-Sixth  Supplemental  Indenture"  (such indentures shall be
collectively referred to herein as the "Resolution"). All capitalized terms used
but not defined  herein  shall have the  meanings  ascribed to such terms in the
Loan Agreement.

         In so acting,  we have examined the  Constitution and laws of the State
of New Jersey, including,  without limitation, the Business Corporation Law, and
the  certificate  of  incorporation  and by-laws of the  Borrower.  We have also
examined  originals,   or  copies  certified  or  otherwise  identified  to  our
satisfaction, of the following:

         (a) the Trust's "Environmental  Infrastructure Bond Resolution,  Series
1999B", adopted by the Board of Directors of the Trust on September 20, 1999;

         (b) the  Loan  Agreement  dated  as of  November  1,  1999  (the  "Loan
Agreement") by and between the Trust and the Borrower;

         (c) the proceedings of the board of directors of the Borrower  relating
to the  approval  of the  Loan  Agreement  and the  execution,  attestation  and
delivery  thereof  on  behalf  of the  Borrower  and  the  authorization  of the
undertaking and completion of the Project;

         (d) the  Borrower  Bond dated as of  October  15,  1999 (the  "Borrower
Bond") issued by the Borrower to the Trust to evidence the Loan; and

         (e) the  proceedings  (together  with the  proceedings  referred  to in
clause  (c)  above  and  Section  5 below,  the  "Proceedings")  of the board of
directors  of the  Borrower,  including,  without  limitation,  the  Resolution,
relating to the  authorization  of the  Borrower  Bond and the sale,  execution,
attestation,  authentication  and  delivery  thereof  to  the  Trust  (the  Loan
Agreement and the Borrower Bond are referred to herein collectively as the "Loan
Documents").
<PAGE>
         We have also examined and relied upon originals, or copies certified or
otherwise authenticated to our satisfaction,  of such other records,  documents,
certificates and other  instruments,  and have made such investigation of law as
in our judgment we have deemed necessary or appropriate,  to enable us to render
the opinions expressed below.



                                      E-2
<PAGE>
         We are of the opinion that:

         1. The  Borrower is a  corporation  duly  created and validly  existing
under and pursuant to the  Constitution and statutes of the State of New Jersey,
including  the Business  Corporation  Law,  with the legal right to carry on the
business of its Environmental Infrastructure System as currently being conducted
and as proposed to be conducted.

         2. The Borrower has full legal right and  authority to execute,  attest
and deliver the Loan Documents, to sell the Borrower Bond to the Trust, to cause
the  authentication  of the  Borrower  Bond,  to observe and perform its duties,
covenants,  obligations and agreements under the Loan Documents and to undertake
and complete the Project.

         3. The  acting  officials  of the  Borrower  who are  contemporaneously
herewith performing or have previously  performed any action contemplated in the
Loan Agreement are, and at the time any such action was performed were, the duly
appointed  or elected  officials of the Borrower  empowered  by  applicable  New
Jersey law and authorized by resolution of the Borrower to perform such actions.

         4. The  proceedings of the Borrower's  board of directors (i) approving
the Loan Documents,  (ii) authorizing their execution,  attestation and delivery
on behalf of the  Borrower,  (iii)  with  respect  to the  Borrower  Bond  only,
authorizing  its  sale  by  the  Borrower  to  the  Trust  and  authorizing  its
authentication  on behalf of the  Borrower,  (iv)  authorizing  the  Borrower to
consummate the transactions  contemplated by the Loan Documents, (v) authorizing
the Borrower to undertake  and complete the Project,  and (vi)  authorizing  the
execution  and delivery of all other  certificates,  agreements,  documents  and
instruments in connection  with the execution,  attestation  and delivery of the
Loan  Documents,  have each been duly and  lawfully  adopted and  authorized  in
accordance  with  applicable  law and  applicable  resolutions  of the Borrower,
including,  without  limitation,  the Resolution,  the other Proceedings and the
Business  Corporation  Law,  which  Proceedings  constitute  all of the  actions
necessary to be taken by the Borrower to authorize its actions  contemplated  by
clauses  (i)  through  (vi)  above and  which  Proceedings,  including,  without
limitation, the Resolution,  were duly adopted in accordance with applicable New
Jersey law at a meeting or  meetings  duly  called and held in  accordance  with
applicable  New  Jersey  law  and at  which  quorums  were  present  and  acting
throughout.

         5. The Loan Documents have been duly authorized, executed, attested and
delivered by the Authorized Officers of the Borrower, the Borrower Bond has been
duly sold by the  Borrower  to the Trust,  and the  Borrower  Bond has been duly
authenticated by the trustee or paying agent under the Resolution;  and assuming
in the case of the Loan  Agreement  that the Trust has the  requisite  power and
authority to authorize,  execute,  attest and deliver,  and has duly authorized,
executed,  attested  and  delivered,  the Loan  Agreement,  the  Loan  Documents
constitute the legal, valid and binding obligations of the Borrower, enforceable
against  the  Borrower  in  accordance  with their  respective  terms,  subject,
however,  to the effect of, and to restrictions  and  limitations  imposed by or
resulting from,  bankruptcy,  insolvency,  moratorium,  reorganization  or other
similar laws affecting creditors' rights generally. No opinion is rendered as to
the availability of any particular remedy.
<PAGE>
         6. The authorization,  execution,  attestation and delivery of the Loan
Documents  by the  Borrower  and,  in the case of the  Borrower  Bond only,  the
authentication  thereof by the trustee or paying agent under the  Resolution and
the sale thereof to the Trust,  the  observation and performance by the Borrower
of  its  duties,   covenants,   obligations  and  agreements   thereunder,   the
consummation of the transactions  contemplated  therein, and the undertaking and
completion of the Project do not and will not (i) other than the lien, charge or
encumbrance  created by the Loan  Documents,  by the Resolution and by any other
outstanding  debt  obligations  of the  Borrower  that  are at  parity  with the

                                      E-3
<PAGE>
Borrower  Bond as to lien on, and source and security for payment  thereon from,
the revenues of the Borrower,  result in the creation or imposition of any lien,
charge or encumbrance upon any properties or assets of the Borrower pursuant to,
(ii) result in any breach of any of the terms,  conditions or provisions  of, or
(iii) constitute a default under, any existing  resolution,  outstanding debt or
lease  obligation,  trust agreement,  indenture,  mortgage,  deed of trust, loan
agreement or other  instrument  to which the Borrower is a party or by which the
Borrower,  its Environmental  Infrastructure  System or any of its properties or
assets  may be  bound,  nor will such  action  result  in any  violation  of the
provisions of the charter or other  document  pursuant to which the Borrower was
established or any laws, ordinances,  injunctions,  judgments,  decrees,  rules,
regulations or existing orders of any court or  governmental  or  administrative
agency,   authority  or  person  to  which  the  Borrower,   its   Environmental
Infrastructure System or its properties or operations is subject.

         7. All approvals, consents or authorizations of, or registrations of or
filings with, any governmental or public agency, authority or person required to
date  on  the  part  of the  Borrower  in  connection  with  the  authorization,
execution, attestation, delivery and performance of the Loan Documents, the sale
of the Borrower Bond and the undertaking and completion of the Project have been
obtained or made.

         8.  There is no  litigation  or other  proceeding  pending  or,  to our
knowledge,  after due  inquiry,  threatened  in any court or other  tribunal  of
competent  jurisdiction  (either State or federal) (i) questioning the creation,
organization  or existence  of the  Borrower,  (ii)  questioning  the  validity,
legality or  enforceability  of the Resolution,  the Loan or the Loan Documents,
(iii)  questioning the undertaking or completion of the Project,  (iv) otherwise
challenging the Borrower's  ability to consummate the transactions  contemplated
by the Loan or the Loan Documents, or (v) that, if adversely decided, would have
a materially adverse impact on the financial condition of the Borrower.
         9.  The  Borrower  has  no  bonds,  notes  or  other  debt  obligations
outstanding  that are superior or senior to the Borrower Bond as to lien on, and
source and security for payment thereof from, the revenues of the Borrower.

         10. We have  consulted  with the Borrower and have advised the Borrower
as to the  obligations to which the Borrower has agreed in  subsections  (f) and
(h) of Section 2.02 of the Loan Agreement.  We have further advised the Borrower
of the possible  consequences  that might  follow,  should the Borrower  fail to
comply with its obligations under those subsections of Section 2.02. To the best
of our knowledge, upon due inquiry, (i) all representations made by the Borrower
contained  within  subsections  (f) and (h) of Section 2.02 and, if  applicable,
Exhibit F of the Loan Agreement are true, accurate and complete, (ii) we have no
reason to believe that any of the expectations expressed by the Borrower therein
is unreasonable, and (iii) we know of no reason why the Borrower would be unable
to comply on a continuing basis with the covenants  contained within subsections
(f) and (h) of Section 2.02 and, if applicable, Exhibit F of the Loan Agreement.

         11. Assuming that (i) the Borrower  complies on a continuing basis with
the  covenants  contained  in  subsections  (f) and (h) of Section  2.02 and, if
applicable, Exhibit F of the Loan Agreement, (ii) interest on the Trust Bonds is
otherwise  excluded from gross income of the holders  thereof for federal income
tax  purposes  under  Section  103(a) of the Internal  Revenue Code of 1986,  as
amended,  and  (iii) the  proceeds  of the Trust  Bonds  loaned to the  Borrower
represent  all of the  proceeds  of the  Trust  Bonds,  the  application  of the
proceeds of the Loan for their intended  purposes will not adversely  affect the
exclusion  from gross income for federal

                                      E-4
<PAGE>
income tax purposes of the interest on the Trust Bonds under  Section 103 (a) of
the Internal Revenue Code of 1986, as amended.

         We hereby authorize McCarter & English,  LLP, acting as bond counsel to
the  Trust,  and the  Attorney  General  of the State of New  Jersey,  acting as
general  counsel to the Trust,  to rely on this  opinion as if we had  addressed
this opinion to them in addition to you.

                                                   Very truly yours,


                                      E-5
<PAGE>
                                    EXHIBIT F


                      Additional Covenants and Requirements

                                     [None]









                                       F-1

<PAGE>


                                    EXHIBIT G


                   General Administrative Requirements for the
              State Environmental Infrastructure Financing Program








                                       G-1

<PAGE>



                                    EXHIBIT H


                     Form of Continuing Disclosure Agreement

-----------------------