Document:

Exhibit 10.4

 

MLA No. RX0936

 

AMENDED AND RESTATED MASTER LOAN AGREEMENT

 

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

 

BACKGROUND

 

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

 

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

 

ARTICLE 1

DEFINITIONS AND ACCOUNTING TERMS

 

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

 

SECTION 1.02.    Rules of Interpretation. The
rules of interpretation set forth in Exhibit A shall apply to this
Agreement.

 

ARTICLE 2

THE SUPPLEMENTS

 

SECTION 2.01.    Promissory
Notes and Supplements. In the event the Company desires to borrow from CoBank and CoBank is
willing to lend to the Company, the parties will enter into a promissory note
and supplement hereto (each a “Promissory Note and Supplement”). Each
Promissory Note and Supplement will set forth CoBank’s commitment to make a
Loan or Loans to the Company, the amount of the Loan(s), the purpose of the
Loan(s), the interest rate or interest rate options applicable to the Loan(s),
the Company’s promise to repay the Loans, and any other terms and conditions
applicable to the particular Loan(s). Each Loan will be governed by the terms and
conditions set forth in this Agreement and in the Promissory Note and
Supplement relating to that Loan. In the absence of a Promissory Note and
Supplement hereto duly executed by CoBank, CoBank shall have no obligation to
make a Loan to the Company under this Agreement. As of the date of this
Agreement, the following Promissory Notes and Supplements are outstanding
hereunder and shall be governed by the terms hereof: (1) Promissory Note
and Supplement dated as of May 1, 2002, and numbered ML0936T1; and (2) Promissory
Note and Supplement dated as of May 1, 2002, and numbered ML0936T2 (the “Existing
Promissory Notes and Supplements”).

 

1

 

SECTION 2.02.    Notice and Manner of Borrowing New Loans.  Except as otherwise provided in a Promissory
Note and Supplement: (A) Loans will be made available on any Business Day
upon the written or telephonic request of an authorized employee of the Company
(which telephonic request, if required by CoBank, shall be promptly confirmed
in writing by the Company); (B) Requests for Loans must be received by
12:00 noon Mountain time on the date the Loan is to be made; and (C) Loans
will be made available by wire transfer of immediately available funds to such
account or accounts as may be authorized by the Company on forms supplied by
CoBank.

 

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

 

SECTION 2.04.    Security. 
The Company’s obligations hereunder and under each
other Loan Document to which the Company is a party (whether executed
contemporaneously herewith or at a later date) shall be secured by: (A) a
statutory first priority Lien on all equity which the Company may now own or
hereafter acquire or be allocated in CoBank; (B) except as otherwise
provided in Section 6.01 hereof, a first priority lien and security
interest in all real and personal property of the Company of every type and
description (other than  property
excluded in the last sentence of this Section 2.04), whether existing on
the date hereof or acquired at a later date; and (C) all proceeds thereof.
The Company agrees to take such steps (including the execution and recording of
such instruments and documents) as CoBank may from time to time require in
order to enable CoBank to obtain, perfect and maintain its Lien on the
collateral. Notwithstanding the foregoing, CoBank shall not have a Lien on: (1) rolling
stock financed by another lender; (2) assets which, under Law, may not be
subjected to a Lien; provided, however, that if such provision of Law is later
changed or has been or is later overruled by any other provision of Law, then
such assets shall be subject to CoBank’s Lien; and (3) assets subject to
agreements that prohibit the Company from granting a Lien on the assets;
provided, however, that: (i) the maximum amount of assets that may be
subject to any such agreement at any one time shall not exceed $500,000; (ii) the
Company may not enter into any such agreement with an Affiliate; and (iii) to
the extent that applicable Law renders such restrictions unenforceable, then
the foregoing exception shall not be applicable.

 

ARTICLE 3

CONDITIONS PRECEDENT

 

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

 

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

 

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(B)          Supplements. CoBank
shall have received a duly executed original copy of: (1) an amendment to
the Promissory Note and Supplement dated as of May 1, 2002, and numbered
ML0936T1; (2)  an amendment to the Promissory Note and Supplement dated as
of May 1, 2002, and numbered ML0936T2; and (3) the 2005 Promissory
Note and Supplement and all Loan Documents required by the 2005 Promissory Note
and Supplement.

 

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

 

(D)          [Intentionally Omitted]

 

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

 

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

 

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

 

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

 

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

 

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(J)           Consents and Approvals. CoBank
shall have received such evidence as CoBank may reasonably require that all
consents and approvals referred to in Section 4.01(M) hereof have been
obtained and are in full force and effect.

 

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

 

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

 

(M)          Insurance. CoBank
shall have received such evidence as CoBank may reasonably require that the
Company is in compliance with Section 5.03 hereof.

 

(N)          Opinion of Counsel.  CoBank shall have received a duly executed
original copy of an opinion of counsel to the Company, which counsel must be
reasonably acceptable to CoBank.

 

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

 

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

 

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

 

(C)          Consents and Approvals. CoBank
shall have received such evidence as CoBank may reasonably require that all
consents and approvals referred to in Section 4.01(M) hereof, have been
obtained and are in full force and effect.

 

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

 

(E)           Application. CoBank
shall have received a duly executed and completed original copy of an
application for the credit.

 

(F)           Officer’s Certificate. CoBank
shall have received a duly executed 
original copy of a certificate of an officer of the Company, which, if
other than the Chief Financial Officer of the Company, must be reasonably
acceptable to CoBank.

 

(G)          Insurance. CoBank
shall have received such evidence as CoBank may reasonably require that the
Company is in compliance with Section 5.03 hereof.

 

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(H)          Opinion of Counsel.  CoBank shall have received a duly executed
original copy of an opinion of counsel to the Company, which counsel must be
reasonably acceptable to CoBank.

 

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

 

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

 

ARTICLE 4

REPRESENTATIONS AND WARRANTIES

 

SECTION 4.01.    This Agreement and the 2005 Promissory Note
and Supplement Hereto. To induce CoBank to enter into this
Agreement and the 2005 Promissory Note and Supplement hereto, the Company
represents and warrants that:

 

(A)          Organization, Etc.
The Company: (1) is a limited partnership duly organized, validly
existing, and in good standing under the Laws of the State of Texas; (2) has
the power and authority to own its assets and to transact the business in which
it is engaged or proposes to engage; and (3) is duly qualified to do
business in, and is in good standing under the Laws of, each jurisdiction in
which  failure to be qualified could
reasonably be expected to have a Material Adverse Effect.

 

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

 

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

 

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

 

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

 

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

 

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

 

(G)          Company Financial Statements.  The balance sheet of the Company as of December 31,
2004, and the related statements of income and retained earnings of the Company
for the fiscal year then ended, and the accompanying notes and schedules, and
the interim balance sheet of the Company and the related statements of income
and retained earnings for the six month period ending June 30, 2005,
copies of which have been furnished to CoBank, fairly present in all material
respects the financial condition of Company as at such dates and the results of
the operations of the Company for the periods covered by such statements, all
in accordance with GAAP consistently applied (subject to normal year-end
adjustments in the case of the interim financial statements). There are no
liabilities of the Company, fixed or contingent, which are material but not
reflected in the year end financial statements or in the notes thereto or in a
writing furnished to CoBank and referencing this Subsection.

 

(H)          Ownership and Liens.
The Company has title to, or valid easement or leasehold interests in, all of
its properties, real and personal, including the property and leasehold
interests reflected in the balance sheet referred to in Section 4.01(G) hereof
(other than any property disposed of in the ordinary course of business), and
none of the properties or leasehold interests of the Company is subject to any
Lien, except such as may be permitted under Section 6.01 of this
Agreement.

 

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(I)            [Reserved]

 

(J)           Compliance with Law. Except
as disclosed in any application or officer’s certificate submitted in
connection with this Agreement and the 2005 Promissory Note and Supplement
hereto, all of the properties owned by the Company and all of its operations,
are in compliance in all material respects with all Laws (including all Laws
relating to the environment) which, if not complied with, could reasonably be
expected to have a Material Adverse Effect.

 

(K)          Environment. Except
as disclosed in Schedule 4.01(K) hereto or in any application or officer’s
certificate submitted in connection with this Agreement and the 2005 Promissory
Note and Supplement: (1) no property owned or leased by the Company is
being used, or to its knowledge, has been used for the disposal, treatment,
storage, processing or handling of hazardous waste or materials (as defined
under any applicable environmental Law); (2) no investigation, claim,
litigation, proceedings, order, judgment, decree, settlement, Lien or the like
with respect to any environmental matter is proposed, threatened, anticipated
or in existence with respect to the properties or operations of the Company;
and (3) no environmental contamination or condition currently exists on
any property of the Company which could reasonably be expected to delay the
sale or other disposition of such property or could reasonably be expected to
have, or already has had, a material adverse effect on the value of such
property.

 

(L)           ERISA.  The Company and each of its
ERISA Affiliates is in compliance in all material respects with all
requirements of ERISA, the Company and each ERISA Affiliate have met their
minimum funding requirements under ERISA with respect to each plan governed
thereby, no grounds exist entitling the Pension Benefit Guaranty Corporation to
institute proceedings to terminate a plan maintained by the Company or any
ERISA Affiliate this is subject to ERISA, and neither the Company nor any ERISA
Affiliate has any liability arising form the withdrawal or termination of any
plan subject to ERISA which liability could reasonably be expected to result in
material liability to the Company.

 

(M)          Consents and Approvals.   Except for such as shall have been obtained
and are in full force and effect, no consent, permission, authorization, order
or license of any governmental authority or of any party to any material
agreement to which the Company is a party or by which it or any of its material
property may be bound or affected, is necessary in connection with: (1) the
execution, delivery, performance or enforcement of the Loan Documents; and (2) the
project, acquisition, or other activity being financed by the 2005 Promissory
Note and Supplement hereto.

 

(N)          Conflicting Agreements.  None of the Loan Documents conflicts with, or
constitutes (with or without the giving of notice and/or the passage of time
and/or the occurrence of any other condition) a default under, any other
material agreement to which the Company is or expects to become a party or by which
the Company or any of its material properties may be bound or affected, and do
not conflict with any provision of the Organizational Documents of the Company.

 

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

 

7

 

(P)           Applications, Officer’s Certificate,
Etc.  Each
representation and warranty and all information set forth in the application
and officer’s certificate submitted in connection with, or to induce CoBank to
enter into, this Agreement and the 2005 Promissory Note and Supplement hereto
is correct in all material respects.

 

(Q)          Budgets, Etc.  All budgets, projections,
feasibility studies, and other documentation submitted by the Company to CoBank
in connection with, or to induce CoBank to enter into, this Agreement and the
2005 Promissory Note and Supplement hereto are based upon assumptions that are
reasonable and realistic, and no fact has come to light, and no event has
occurred, which would cause any material assumption made therein to not be
reasonable or realistic.

 

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

 

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

 

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

 

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

 

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

 

8

 

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

 

ARTICLE 5

AFFIRMATIVE COVENANTS

 

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

 

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

 

SECTION 5.02.    Compliance With Laws.  Comply in all material respects with all
applicable Laws (including all Laws relating to the environment), which, if not
complied with, could reasonably be expected to have a Material Adverse Effect
or result in criminal sanctions. In addition, the Company agrees to cause all
Persons occupying or present on any of its properties to comply in all material
respects with all such Laws.

 

SECTION 5.03.    Insurance.  Maintain insurance with financially sound and
reputable insurance companies or associations in such amounts and covering such
risks as are usually carried by companies engaged in the same business and
similarly situated. Without limiting the foregoing, in the event any property
of the Company is located in a flood zone (as reasonably determined by CoBank),
then the Company shall obtain such flood insurance as may reasonably be
required by CoBank. Each such policy insuring any collateral for the Company’s
obligations to CoBank shall have lender or mortgagee loss payee clauses in form
and content reasonably acceptable to CoBank. The Company agrees to furnish to
CoBank such proof of compliance with this Section as CoBank may from time
to time reasonably require.

 

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

 

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

 

9

 

SECTION 5.06.    Reports and Notices.  Furnish to CoBank:

 

(A)          Annual Financial Statements. As
soon as available, but in no event more than 120 days after the end of each fiscal
year of the Company occurring during the term hereof, annual financial
statements of the Company prepared in accordance with GAAP consistently
applied.  Such financial statements
shall: (a) be audited by a firm of independent certified public accountants
selected by the Company and reasonably acceptable to CoBank; (b) be
accompanied by a report of such accountants containing an opinion to the effect
that the financial statements: (i) were audited in accordance with
generally accepted auditing standards; and (ii) present fairly, in all
material respects, the financial position of the Company as at the end of the
year and the results of its operations for the year then ended, in conformity
with GAAP; (c) be prepared in reasonable detail and in comparative form;
and (d) include a balance sheet, a statement of income, a statement of
retained earnings, a statement of cash flows, and all notes and schedules
relating thereto.

 

(B)          Interim Financial Statements.  As soon as available, but in no event more
than 60 days after the end of each fiscal quarter of the Company occurring
during the term hereof, a balance sheet of the Company as of the end of such
quarter, a statement of income for the Company for such period and for the
period year to date, a statement of retained earnings, and a statement of cash
flow, all prepared in reasonable detail and in comparative form in accordance
with GAAP consistently applied and, if required by notice from CoBank,
certified by the President, Vice President, Chief Financial Officer or
Treasurer  of the Company.

 

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

 

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

 

(E)           Notice of Default. Promptly
after becoming aware thereof, notice of the occurrence of a Default or an Event
of Default.

 

10

 

(F)           Notice of the Acquisition of
Property. Promptly after acquiring same, notice of the
acquisition of any real property in a transaction involving consideration of at
least $50,000.

 

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

 

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

 

(I)            Southwest Financial Statements. As
soon as available, but in no event more than 120 days after the end of each
fiscal year of Southwest occurring during the term hereof, annual consolidated
financial statements of Southwest and its consolidated subsidiaries prepared in
accordance with GAAP consistently applied and the related consolidating
financial statements.  Such financial
statements shall: (a) in the case of the consolidated statements, be
audited by a nationally recognized firm of independent certified public
accountants selected by Southwest; (b) in the case of the consolidated
statements, be accompanied by a report of such accountants containing an
opinion on such statements to the effect that such statements: (i) were
audited in accordance with generally accepted auditing standards; and (ii) present
fairly, in all material respects, the financial position of Southwest and its
consolidated subsidiaries as at the end of the year and the results of its and
their operations for the year then ended, in conformity with GAAP; (c) be
prepared in reasonable detail and in comparative form; and (d) include a
balance sheet, a statement of income, a statement of retained earnings, a
statement of cash flows, and all notes and schedules relating thereto
(including all consolidating schedules).

 

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

 

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

 

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

 

11

 

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

 

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

 

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

 

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

 

ARTICLE 6

NEGATIVE COVENANTS

 

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

 

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

 

(A) Liens
in favor of CoBank;

 

(B) Liens
for taxes or assessments or other governmental charges or levies if not
delinquent or, if delinquent: (i) the Company is contesting same in good
faith by appropriate proceedings; (ii) the Company has established and
maintains reserves in amounts required in accordance with GAAP; and (iii) foreclosure
or other action to enforce the Lien is stayed.

 

(C) Liens
in favor of mechanics, landlords, material suppliers, warehouses, carriers, and
like Persons that secure obligations that are not past due or if past due: (1) no
foreclosure or other action to enforce the Liens have been commenced or, if
commenced, have been stayed; and (2) if the property is material to the
operations of the Company’s business as a whole or to the operations of any one
of the Company’s water or wastewater systems, reserves have been established
and maintained in accordance with GAAP.

 

(D) Liens
under workers’ compensation, unemployment insurance, Social Security, or
similar legislation (other than ERISA).

 

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

 

12

 

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

 

(F) Judgment
and similar Liens arising in connection with court proceeding, provided that: (1) no
Event of Default arises under Section 8.07 hereof; and (2)  the
claims secured thereby are being actively contested in good faith and by
appropriate proceedings; and (3) reserves have been established and
maintained in accordance with GAAP.

 

(G) Easements,
rights-of-way, restrictions, and other similar encumbrances which, in the
aggregate, do not materially interfere with the occupation, use, and enjoyment
by the Company of the property or assets encumbered thereby in the normal
course of its business or materially impair the value of the property subject
thereto.

 

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

 

(I)   Purchase money Liens on
water or sewer system assets, acquired with seller financing  permitted under Section 6.02 hereof, and
on the proceeds received on the sale thereof (but not any account or revenues
derived therefrom unless the acquired system is maintained in a permitted
Subsidiary).

 

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

 

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

 

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

 

13

 

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

 

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

 

SECTION 6.06.    Mergers, Etc.  Merge or consolidate with any other Person or
acquire all or a material part of the assets of any other Person; provided,
however, that the Company may: (i) acquire water and/or wastewater systems
in the State of Texas; or (ii) merge with another Person that is engaged
principally in the business of owing and operating water and/or wastewater
systems in the State of Texas, as long as: (A) in the case of a merger,
the Company is the surviving entity; (B) after giving effect thereto, no
Default or Event of Default would exist, including as a result of a violation
of Section 7.03 hereof; (C) on a combined basis, the Company would
have been able to meet the financial covenants set forth in Section 7.01
and 7.02 hereof for the 12 month period ending with the end of the last fiscal
quarter of the Company had such merger or acquisition taken place at the
beginning of such 12 month period; and (D) not less than 30 days prior to
the effective date thereof, the Company furnishes written notice to CoBank of
such acquisition and merger and certifies to CoBank that each of the conditions
set forth in this Section have been met.

 

SECTION 6.07.    Change in Business. Engage
in any business activities or operations substantially different from or
unrelated to its present business activities or operations.

 

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

 

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

 

14

 

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

 

SECTION 6.10.    Certain Agreements.  Amend, alter, waive any provision of, breach
or terminate any agreement if such action could reasonably be expected to have
a Material Adverse Effect.

 

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

 

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

 

ARTICLE 7

FINANCIAL COVENANTS

 

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

 

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

 

SECTION 7.02.    Total Debt to EBITDA Ratio. The
Company and its consolidated Subsidiaries shall have a ratio of Total Debt at
the end of each fiscal year of the Company shown below to EBITDA for each
fiscal year of the Company shown below of not greater than the ratio shown next
to each fiscal year shown below:

 

	
  Fiscal Year

  	
   

  	
  Ratio

  	
   

  
	
  2005 through 2008

  	
   

  	
  10 to 1

  	
   

  
	
  2009 and thereafter

  	
   

  	
  8 to 1

  	
   

  

 

15

 

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

 

SECTION 7.04.    Fiscal Year. The Company
will not change its fiscal year.

 

ARTICLE 8

EVENTS OF DEFAULT

 

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

 

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

 

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

 

SECTION 8.03.    Covenants.  The Company should fail to perform or comply
with any covenant set forth in Articles 5 or 6 hereof (other than Sections
5.01, 5.06(E), 6.03, 6.04, 6.06, 6.08, and 6.09 hereof) or any other covenant
or agreement contained herein (other than Section 7.01) or in any
Promissory Note and Supplement and such failure continues for 30 days after
written notice thereof shall have been delivered to the Company by CoBank.

 

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

 

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

 

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

 

16

 

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

 

SECTION 8.07.    Judgments.  One or more judgments, decrees, or orders for
the payment of money in excess of $500,000 in the aggregate shall have been
rendered against the Company and either: (A) enforcement proceedings shall
have been commenced; or (B) such judgments, decrees, or orders shall
continue unsatisfied and in effect for a period of 30 consecutive days without
being vacated, bonded, discharged, satisfied, or stayed pending appeal.

 

SECTION 8.08.    Insolvency, Etc. The
Company shall: (A) become insolvent or shall generally not, or shall be
unable to, or shall admit in writing its inability to, pay its debts as they
become due; or (B) suspend its business operations or a material part
thereof; or (C) apply for, consent to, or acquiesce in the appointment of
a trustee, receiver, or other custodian for it or any of its property; or (D) have
commenced against it any action or proceeding for the appointment of a trustee,
receiver, or other custodian, or a trustee, receiver, or other custodian is
appointed for all or any part of its property; (E) have commenced against
it any proceeding under any bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution, or liquidation law of any jurisdiction; or (F) make
an assignment for the benefit of creditors or commence any proceeding under any
bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, or
liquidation law of any jurisdiction.

 

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

 

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

 

SECTION 8.11.    Affiliates. (A) A
Relevant Affiliate breaches or is otherwise in default in any material respect
under a Relevant Agreement; (B) Southwest, any general partner in the
Company, or any Subsidiary of the Company becomes subject to an event of the
type referred to in Section 8.06, 8.07 or 8.08 hereof (including, for avoidance
of doubt, the dollar amounts specified therein; provided that if any such
Person is subject to Indebtedness and the documents entered into in connection
with such Indebtedness contain cross default or cross acceleration provisions
for other Indebtedness of such Person, the dollar amounts for purposes of this
clause (B) shall be the dollar amounts in such documents rather than the
dollar amounts in this Agreement); (C) any Person which succeeds to the
direct ownership of any general partner in the Company should become subject to
an event of the type referred to in Section 8.08 hereof; or (D) within
thirty (30) days after a Relevant Affiliate (other than Southwest or a
Subsidiary) becomes subject to an Event of the type referred to in Section 8.06,
8.07 or 8.08 hereof, the Company fails to provide CoBank with assurance
reasonably satisfactory to CoBank that the services furnishes to the Company by
such Relevant Affiliate will continue without interruption,

 

17

 

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

 

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

 

SECTION 8.13.    Title Insurance.  Republic Title or any title insurance company
providing coverage to CoBank for or on account of any Loans shall breach or
otherwise be in default under any commitment or other agreement with CoBank and
such breach is not cured within 30 days after CoBank shall have furnished
notice of same to the Company and Republic Title or other title insurance
company.

 

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

 

ARTICLE 9

REMEDIES UPON DEFAULT

 

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

 

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

 

18

 

(B)          Enforcement.   Proceed to protect, exercise, and enforce
such rights and remedies as may be provided by this Agreement, any other Loan
Document, or under Law. Each and every one of such rights and remedies shall be
cumulative and may be exercised from time to time, and no failure on the part
of CoBank to exercise, and no delay in exercising, any right or remedy shall
operate as a waiver thereof, and no single or partial exercise of any right or
remedy shall preclude any future or other exercise thereof, or the exercise of
any other right. Without limiting the foregoing, CoBank may hold and/or set off
and apply against the Company’s obligations to CoBank the proceeds of any
equity in CoBank, any cash collateral held by CoBank, or any other balances
held by CoBank for the Company’s account (whether or not such balances are then
due).

 

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

 

In addition to the rights
and remedies set forth above and notwithstanding the terms of any Promissory
Note and Supplement, upon the occurrence and during the continuance of an Event
of Default,  at CoBank’s option in each
instance (and automatically following an acceleration), interest on the unpaid
principal balance of the Loans and, to the extent permitted by Law, overdue
interest, fees and other charges,  shall
bear interest  at the Default Rate. All
such interest, together with all overdue amounts, shall be payable on demand.

 

ARTICLE 10

MISCELLANEOUS

 

SECTION 10.01.   Broken Funding Surcharge.  The Company agrees that in
the event it repays any Loan balance bearing interest at a fixed rate prior to
the last day of the fixed rate period relating thereto (whether such payment is
made voluntarily, as a result of an acceleration, or otherwise), or fails to
borrow any fixed rate balance on the date scheduled therefor, the Company will
pay to CoBank a surcharge in the amount set forth in (or in an amount
calculated in accordance with) the Promissory Note and Supplement relating
thereto. Notwithstanding the foregoing: (A) if for any reason any Promissory
Note and Supplement executed after the date hereof fails to contain a
surcharge, then the applicable surcharge shall be the surcharge set forth in
the Promissory Note and Supplement dated as of May 1, 2002 and numbered
ML0936T1 (which reference shall survive the repayment and termination of that
Promissory Note and Supplement); and (B) in the event the parties enter
into a forward fixed rate agreement or other agreement regarding interest rate
products, and such agreement provides for a different surcharge, then such
other agreement shall control.

 

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

 

19

 

SECTION 10.03.   Applicable Law, Jurisdiction.
Except to the extent governed by applicable federal Law, this Agreement and
each Promissory Note and Supplement shall be governed by the Laws of the State
of Colorado, without reference to choice of law doctrine. The parties agree to
submit to the non-exclusive jurisdiction of any federal or state court sitting
in Colorado for any action or proceeding arising out of or relating to this
Agreement or any other Loan Document. The Company hereby waives any objection
that it may have to any such action or proceeding on the basis of forum
non-conveniens.

 

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

 

	
  If to CoBank, as
  follows:

  	
  If to the
  Company, as follows:

  
	
  CoBank, ACB

  	
  Southwest Water
  Company.

  
	
  5500 South
  Quebec Street

  	
  One Wilshire
  Building, 29th floor

  
	
  Greenwood
  Village, Colorado 80111

  	
  624 South Grand
  Ave, Suite 2900

  
	
  Facsimile: (303)
  740-4002

  	
  Los Angeles, CA
  90017

  
	
  Attention:
  Energy Banking Group

  	
  Facsimile: (213)
  929-1888

  
	
   

  	
  Attention: Chief
  Financial Officer

  

 

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

 

SECTION 10.06.   Effectiveness and Severability.  This Agreement shall continue in effect
until: (A) all indebtedness and obligations of the Company under this
Agreement and the other Loan Documents shall have been paid or satisfied; (B) CoBank
has no commitment to extend credit to or for the account of the Company under
any Promissory Note and Supplement; (C) all Promissory Notes and
Supplements shall have been terminated; and (D) either party sends written
notice to the other party terminating this Agreement. Any provision of this
Agreement or any other Loan Document which is prohibited or unenforceable shall
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or thereof.

 

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

 

20

 

Loans. However, no such participation shall relieve CoBank of any
commitment made to the Company hereunder. 
In connection with the foregoing, CoBank may disclose information
concerning the Company and its Subsidiaries, if any, to any participant or
prospective participant, provided that such participant or prospective
participant agrees, subject to normal qualifications, to keep all non-public
information confidential.  A sale of a
participation interest may include certain voting rights of the participants
regarding the Loans hereunder (including without limitation the administration,
servicing and enforcement thereof). 
CoBank agrees to give written notification to the Company of any sale of
a participation interest.

 

SECTION 10.08. Headings.  Captions and headings used in this Agreement
are for reference and convenience of the parties only, and shall not constitute
a part of this Agreement.

 

IN
WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date shown above.

 

 

	
  CoBANK,
  ACB

  	
   

  	
  MONARCH
  UTILITIES I L.P.

  
	
   

  	
   

  	
  a Texas limited
  partnership

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By: Texas Water
  Services Group, LLC

  
	
   

  	
   

  	
  a Texas limited
  liability company

  
	
   

  	
   

  	
  Its: General
  Partner

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Penny
  Probasco

  	
   

  	
  By:

  	
  /s/ Michael O.
  Quinn

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
  Assistant
  Corporate Secretary

  	
   

  	
  Title:

  	
  President

  	
   

  

 

21

 

EXHIBIT A

 

DEFINITIONS AND RULES OF INTERPRETATION

 

SECTION 1.01
Definitions.  As used
in the Agreement, any amendment thereto, or in any Promissory Note and
Supplement, the following terms shall have the following meanings:

 

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

 

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

 

Assets
shall mean total assets, as computed in accordance with GAAP consistently
applied.

 

Business
Day  means any day other
than a Saturday, Sunday, or other day on which CoBank or the Federal Reserve
Banks is closed for business.

 

Capital
Lease shall mean a lease which should be capitalized on the
books of the lessee in accordance with GAAP.

 

Certified
Copies shall mean copies, certified true and correct and in
full force and effect as of the date of certification, by the secretary or
other officer acceptable to CoBank of the Person furnishing same.

 

Closing
Agreement shall have the meaning set forth in Section 3.01(G) of
the Agreement.

 

CoBank shall
mean CoBank, ACB and its successors and assigns.

 

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

 

Company shall
mean Monarch Utilities I L.P. and its permitted successors and assigns.

 

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

 

1

 

plus total interest expense, plus Distributions (all as calculated on a
consolidated basis for the applicable period in accordance with GAAP
consistently applied).

 

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

 

Deed of
Trust  shall mean that
certain Deed of Trust, Security Agreement And Assignment of Rents and Leases
dated as of May 1, 2002, among the Company, as Grantor and Trustor, and
Steve Moore, as Trustee for the benefit of CoBank.

 

Deed of
Trust Amendment shall have the meaning set forth in Section 2.01(G) of
the Agreement.

 

Default shall
mean the occurrence of any event which with the giving of notice or the passage
of time would become an Event of Default under the Agreement, including the
occurrence of an event giving rise to the right to accelerate any indebtedness
referred to in Section 8.06 of the Agreement (whether or not such right is
conditioned upon the giving of notice and/or the passage of time and/or the
occurrence of any other condition).

 

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

 

Deposit
Account shall mean a demand deposit account maintained at an
federally  insured financial institution.

 

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

 

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

 

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

 

Enforcement
Action shall mean a formal judicial or administrative
proceeding  filed by the TCEQ,  the Attorney General of Texas, or any  governmental authority to enforce any Law.

 

Equity shall
mean total assets minus total liabilities, as computed in accordance with GAAP
consistently applied.

 

ERISA shall
mean the Employee Retirement Income Security Act of 1974, as amended from time
to time, and the regulations and published interpretations thereof.

 

2

 

ERISA
Affiliate means any trade or business (whether or not
incorporated) that is treated as a single employer together with the Company
under section 414 of the Internal Revenue Code of 1986, as amended from
time to time, and the rules and regulations promulgated thereunder from
time to time.

 

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

 

Existing
MLA shall have the meaning set forth in the Background to the
Agreement.

 

Existing
Promissory Notes and Supplements shall have the meaning given
in Section 2.01 of the Agreement.

 

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

 

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

 

Lien shall
mean any mortgage, deed of trust, pledge, security interest, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or other), or
preference, priority or other security agreement or preferential arrangement,
charge or encumbrance of any kind or nature whatsoever (including, without
limitation, any conditional sale or other title retention agreement).

 

Loan shall
mean a loan and/or other type of credit made to or for the account of the
Company, including letters of credit, all as described in the Promissory Note
and Supplement relating to that Loan.

 

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

 

Long Term
Debt  shall mean, for
the Company and its consolidated Subsidiaries, 
(a) all indebtedness for borrowed money, (b) obligations which
are evidenced by notes, bonds, debentures or similar instruments, (c) that
portion of obligations with respect to capital leases or other capitalized
agreements that are properly classified as a liability on a balance sheet in
conformity with GAAP, and (d) indebtedness which is guarantied by the
Company, in each case having a maturity of more than one year from the date of
its creation or having a maturity within one year from such date but that is
renewable or extendible, at the Company’s or any Subsidiary’s option (or, in
the case of any debt which is guarantied, at the option of the obligor or the
Person to whom the guaranty is furnished), to a date more than one year from
such date or that arises under a revolving credit or similar agreement that
obligates the lender(s) to extend credit during a period of more than one year
from such date, including all current maturities in respect of such
indebtedness whether or not required to be paid within one year from the date
of its creation.

 

Material
Adverse Effect shall mean a material adverse effect on the
condition, financial or otherwise, operations, properties, margins or business
of the Company or any Subsidiary or on the ability of the Company or any
Subsidiary to perform its obligations under the Loan Documents.

 

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

 

3

 

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

 

Organizational
Documents shall mean, as relevant: (A) articles or
certificate of incorporation or formation (or equivalent documents); and (B) bylaws,
partnership agreements, management agreements, shareholder agreements, voting
trust agreements, and like instruments and documents.

 

Partnership
Agreement  shall mean
that certain Agreement of Limited Partnership of Tecon Water Company, L.P.
dated as of December 10, 2001.

 

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

 

Promissory
Note and Supplement shall have the meaning set forth in Section 2.01
of the Agreement.

 

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

 

Relevant Agreement
shall mean an agreement that relates to the credit extended hereby and is
between: (1) an Affiliate and the Company under which the Affiliate
performs any service for or on behalf of the Company, including an agreement
with respect to which the Affiliate has entered into an agreement with CoBank
pursuant to Section 3.01(H) or has or may be require to enter into
any agreement with CoBank under Section 6.11 of the Agreement; and (2) an
Affiliate and CoBank (including any agreement referred to in Sections 3.01(H) and
6.11 of the Agreement and the agreement between Tecon Corporation and CoBank
dated as of May 1, 2002 and assumed by Southwest pursuant to that certain
Consent and Agreement dated as of July 13, 2004, among this Company (then
known as Tecon Water Company, LP), Southwest and CoBank, as same may be amended
or restated from time to time).

 

Short-Term
Debt shall mean all debt which, under GAAP, should be
classified as short-term debt.

 

Southwest
shall mean Southwest Water Company, a Delaware corporation.

 

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

 

TCEQ shall
mean the Texas Commission on Environmental Quality and any governmental
authority or authorities that succeed to the powers of the TCEQ.

 

Title
Policy shall mean that certain Mortgagees Policy of Title
Insurance dated May 5, 2002 and numbered 152187M, issued by First American
Title Insurance Company.

 

Total
Capitalization shall mean shall mean Total Debt plus Net
Worth.

 

4

 

Total
Debt shall mean the sum of (a) all indebtedness for
borrowed money, (b) obligations which are evidenced by notes, bonds,
debentures or similar instruments, (c) that portion of obligations with
respect to Capital Leases and other capitalized agreements that are properly
classified as a liability on the balance sheet in conformity with GAAP; and (d) indebtedness
and other obligations guarantied by the Company.

 

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

 

SECTION 1.02
Rules of Interpretation.  The
following rules of interpretation shall apply to the Agreement, all
Promissory Notes and Supplements, and all amendments to either of the foregoing:

 

Accounting
Terms. All accounting terms not specifically defined herein
shall be construed in accordance with GAAP, and all financial data submitted
pursuant to this Agreement shall be prepared in accordance with such
principles.

 

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

 

Including.  The term “including” shall
mean including, but not limited to.

 

Default.
The expression “while any Default or Event of Default shall have occurred and
be continuing” (or like expression) shall be deemed to include the period
following any acceleration of the Obligations (unless such acceleration is
rescinded).

 

Permitted
Encumbrances.  CoBank’s
consent to the Company having one or more Liens on all or any portion of its
assets shall not be construed to be an agreement to subordinate its Lien on
those assets to the extent that such Lien is not otherwise entitled to priority
under Law.

 

5Exhibit 10.4.1

 

Loan No. ML0936T1

 

PROMISSORY NOTE AND SUPPLEMENT

 

THIS PROMISSORY NOTE AND SUPPLEMENT to the Master Loan Agreement dated as of May 1,
2002 (as amended or restated from time to time, the “MLA”) is entered into as
of May 1, 2002, between TECON WATER
COMPANY, L.P. (the “Company”) and CoBANK,
ACB (“CoBank”).

 

SECTION 1. The Term Loan Commitment. On the terms and conditions set forth in the
MLA and this Promissory Note and Supplement, CoBank agrees to make a loan (the “Loan”)
to the Company in the principal amount of $15,400,000 (the “Commitment”).
Under the Commitment, amounts borrowed and later repaid may not be reborrowed.

 

SECTION 2. Purpose. The purpose of the Commitment is to: (A) refinance
the Company’s indebtedness to: (A) Bank One, NA; (B) W.C. Hankins; (C) Gary
W. Hanning, Robin Hanning and the Gary W. Hanning Trust; (D) Associates
Utility Company; (E) William E. Dark and Wanda M. Dark; (F) Ronald L.
Payne; and (G) Highsaw Water Corporation (collectively, the “Existing
Lenders”; and (B) finance general needs of the Company, and the
Company agrees to use the proceeds of the Loan for those purposes.

 

SECTION 3. Term. The term of the Commitment shall be from the
date hereof up to and including May 1, 2002, or such later date as CoBank
may, in its sole discretion, authorize in writing.

 

SECTION 4. Availability. Notwithstanding Section 2.02 of the MLA
and provided that all conditions precedent set forth herein and in the MLA
shall have been satisfied, the Loan shall: (1) be made upon the receipt by
CoBank of a written request therefor in the form attached hereto as Exhibit A
signed by an authorized officer of the Company; and (2) be made directly
to the “Title Company” (as hereinafter defined) pursuant to the “Closing
Agreement” (as hereinafter defined).

 

SECTION 5. Interest. The Company agrees to pay
interest on the unpaid principal balance of the Loan at 7.37% per annum.
Interest shall be calculated on the actual number of days the Loan is
outstanding on the basis of a year consisting of 360 days and shall be payable
monthly in arrears by the 20th day of the following month.

 

SECTION 6. Fees. In consideration of the Commitment, the
Company agrees to pay to CoBank on the date hereof, a loan origination fee in
the amount of $77,000 less the amount paid to CoBank on account of the
Commitment pursuant to that certain letter agreement dated as of December 21,
2001, between the Company and CoBank.

 

SECTION 7. Promissory Note. The Company promises to repay the Loan in 240
consecutive, monthly installments in the amount of 64,166.66, payable on the 20th
day of each month, with the first such installment due on May 20, 2002;
provided, however, that in the case of the last payment, such payment shall be
in an amount equal to the then outstanding principal balance of the Loan. In
addition to the above, the Company promises to pay interest on the unpaid
principal balance of the Loans at the times and in accordance with the
provisions set forth above and to pay any interest breakage surcharges as
provided herein. Notwithstanding the foregoing, if any date on which principal
and interest are due is not a “Business  Day” (as defined

 

1

 

in
the MLA), then such payment shall be due and payable on the next Business Day and,
during such period, interest shall continue to accrue on the principal amount
thereof.

 

SECTION 8. Security. The Company’s obligations
hereunder and, to the extent related hereto, the MLA shall be secured as
provided in Section 2.04 of the MLA.

 

SECTION 9. Prepayment. The Company may, on one CoBank Business Day’s
prior written notice, prepay the Loan in whole or in part together with accrued
interest on the amount prepaid to the date of payment and a surcharge equal to
the present value of the sum of: (1) the difference, if (a) is larger
than (b), between: (a) the rate estimated by CoBank in accordance with its
standard methodology to be its all-in cost to fund the Loan; minus (b) the
rate estimated by CoBank on the date of the prepayment (in accordance with its
then standard methodology) to be its all-in cost to fund a new loan having a
weighted average life equal to the weighted average life of the balance of the
Loan being prepaid; plus (2) an amount equal to a yield of 1.5% on the
amount being prepaid, calculated on a per annum basis through the final
maturity of the Loan. In calculating the surcharge, the discount rate shall be
the rate determined in accordance with (l)(b) above. All partial
prepayments shall be applied to principal installments in the inverse order of
their maturity.

 

SECTION 10. Conditions Precedent. In addition to the conditions precedent set
forth in the MLA, CoBank’s obligation to make the initial loan hereunder is
subject to the condition precedent that CoBank, the Company and Republic Title
of Texas, Inc. (the “Title Company”) shall have entered into a closing or
escrow agreement (the “Closing Agreement”) in form and content acceptable to
CoBank prescribing conditions under which the proceeds of the Loan will be
released or returned to CoBank. At a minimum, such conditions shall be designed
to ensure CoBank that upon disbursement of the funds by the Title Company: (1) all
assets of the Company will be free and clear of all Liens (other than Liens in
favor of CoBank); and (2) all claims held by the Existing Lenders will be
discharged.

 

IN WITNESS WHEREOF, the
parties have caused this Promissory Note and Supplement to the MLA to be
executed by their duly authorized officers as of the date shown above.

 

 

	
  CoBANK, ACB

  	
   

  	
  TECON WATER COMPANY, L.P.

  
	
   

  	
   

  	
  By:
  Texas Water Services Group, LLC,

  
	
   

  	
   

  	
  Its
  General Partner

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ [ILLEGIBLE]

  	
   

  	
   

  	
  By:

  	
  /s/
  J. G. Boyles

  
	
   

  	
   

  	
   

  	
   

  	
  J.
  G. Boyles

  
	
  Title:

  	
  Vice President

  	
   

  	
   

  	
  Title:

  	
  President

  

 

2

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