Document:

EXHIBIT 10.2

INTRUSION
INC.

A DELAWARE CORPORATION

SUBSCRIPTION
AND INVESTMENT REPRESENTATION AGREEMENT

THE COMMON STOCK (“STOCK”) IN
INTRUSION INC. (“COMPANY”) REFERRED TO IN THIS SUBSCRIPTION AND INVESTMENT
REPRESENTATION AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),
OR THE SECURITIES LAWS OF ANY OTHER JURISDICTION AND ARE BEING OFFERED AND SOLD
UNDER EXEMPTIONS PROVIDED THEREFROM INCLUDING SECTION 4(2) OF THE SECURITIES
ACT AND/OR REGULATION D THEREUNDER.

A PURCHASER OF STOCK SHOULD BE
PREPARED TO BEAR THE ECONOMIC RISK OF THE INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME BECAUSE THE STOCK HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR
THE LAWS OF ANY OTHER JURISDICTION, AND, THEREFORE, CANNOT BE SOLD UNLESS IT IS
SUBSEQUENTLY REGISTERED OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.  THERE IS NO OBLIGATION OF THE ISSUER TO
REGISTER THE STOCK UNDER THE SECURITIES ACT OR THE LAWS OF ANY OTHER JURISDICTION.

On the basis of
the terms and conditions set forth in this Subscription and Investor
Representation Agreement ( “Subscription Agreement”),
the undersigned investor ( “Investor”)
proposes to make an investment in Intrusion Inc. (“Company”)
as follows:

1.             Subscription for Stock.  Subject to the terms and conditions hereof, the
Investor hereby irrevocably subscribes to purchase 92,593 Shares of Common
Stock at an aggregate purchase price of $0.54, or a number of shares at a price
of 110% of the average closing price of the Company’s stock for the 20 trading
days up to and including the closing day.

2.             The Investor
acknowledges that the stock offered hereby is speculative and involves a high
degree of risk, including, but not necessarily limited to, the risk factors
described on Exhibit A attached hereto. 
The Investor further acknowledges that an investment in the Company is
not suitable for investors who cannot afford to lose their entire
investment.  The Investor has carefully
considered these risk factors before making its investment decision.

3.             Representations and Warranties of
the Investor.  The Investor
hereby represents and warrants to the Company as follows:

(a)           Accredited
Investor.  The Investor
is an “accredited investor” within the meaning of Rule 501 promulgated under
the Securities Act.

(b)           Investment
Intent.  The Investor
is acquiring the stock for the Investor’s own account for investment, with no
intention of distributing or selling any portion of the stock within the
meaning of the Securities Act, and will not transfer any stock in violation of
the Securities Act or the then applicable rules or regulations thereunder or
any other applicable law.  No one other
than the Investor has any interest in or any right to acquire the stock.

(c)           Ability
to Bear Risk. 
The Investor’s financial condition is such that the Investor is able to
bear the risk of holding the stock for an indefinite period of time and the
risk of loss of the Investor’s entire investment in the stock.

(d)           Experience.  The Investor has substantial experience in evaluating
and investing in private placement transactions of securities in companies
similar to the Company so that the Investor is capable of evaluating the merits
and risks of its investment in the Company and has the capacity to protect his,
her or its own interests.

(e)           Familiarity
with Offering Documents.  The Investor has received, read, understood
and is familiar with (i)  the Risk Factors attached hereto on Exhibit A,
and this Subscription Agreement.  In
particular, the Investor has read the Risk Factors attached hereto on Exhibit
A and understands that the Investor’s investment in the Company involves a
high degree of risk.

(f)            Information.  The Company and the Company’s officers have
made available all additional information that the Investor has requested in
connection with the transactions contemplated by this Subscription Agreement,
and the Investor has had an opportunity to discuss the business, management and
financial affairs of the Company with management and has had the opportunity to
review the Company’s facilities.  No
representations or warranties have been made to the Investor by the Company or
any agent thereof other than as set forth in this Subscription Agreement.  The Investor has been afforded an opportunity
to ask questions of and receive answers from the Company and its officers
concerning the terms and conditions of the purchase of the stock and the
opportunity to obtain any additional information (to the extent the Company has
such information or could acquire it without unreasonable effort or expense)
necessary to verify the accuracy of information otherwise furnished by the Company
or its officers.  The Investor has
investigated the acquisition of the stock to the extent the Investor deemed
necessary or desirable and the Company has provided the Investor with any
assistance the Investor has requested in connection therewith.

(g)           Domicile.  The address set forth below is the Investor’s
true and correct domicile.

(h)           Exemption
from Securities Act. 
The Investor understands that the stock has not been, and will not be,
registered under the Securities Act or any state securities act or other
applicable law by reason of specific exemptions for private offerings, the
availability of which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Investor’s representations as
expressed herein.  The stock may  not be sold, transferred, offered for sale or
otherwise disposed of unless such transfer, sale, assignment or other
disposition is pursuant to the terms of an effective registration statement
under the Securities Act and are registered under any applicable state
securities laws or pursuant to an exemption from registration under the
Securities Act and any applicable state securities laws.

(i)            Restrictions
on Transferability. 
The Investor is aware that the Investor’s rights to transfer the stock
or any part thereof are restricted by the Securities Act, applicable state
securities laws and laws of other jurisdictions, and the absence of a market
for the stock.  The Investor understands
that there are substantial restrictions on the transferability of the stock,
including restrictions on transfer of the stock under the Company Agreement;
the stock will not be, and investors in the stock have no rights to require
that the stock be, registered under the Securities Act; there will be no public
market for any of the subscribed stock; the Investor may not be able to avail
itself of exemptions available for resale of the stock without registration, and
accordingly, may have to hold the stock indefinitely, and it may not be
possible for the Investor to liquidate an investment in the stock.

(j)            Rule
144.  The Investor
is aware of the provisions of Rule 144 promulgated under the Securities
Act, which permits limited resale of securities purchased in a private
placement subject to the satisfaction of certain conditions, including, among
other things, the existence of a public market for the securities, the
availability of certain current public information about the Company, the
resale occurring not less than one year after a party has purchased and paid
for the security to be sold, the sale being effected through a “broker’s
transaction” or in transactions directly with a “market maker” and the number
of securities being sold during any three-month period not exceeding specified
limitations.

(k)           Authority;
Binding Obligation. 
The Investor has full power and authority to make the representations
referred to herein, to purchase the stock pursuant to this Subscription
Agreement, and to execute and deliver this Subscription Agreement.  This Subscription Agreement when executed and
delivered by the Investor will constitute a valid and legally binding
obligation of the Investor, enforceable in accordance with its terms, subject
to laws of general application relating to bankruptcy, insolvency and the
relief of debtors and rules of law governing specific performance, injunctive
relief or other equitable remedies.

(l)            Broker’s
of Finder’s Fees. 
The Company has not incurred and will not incur, directly or indirectly,
as a result of any action taken by the Investor, any liability for brokerage or
finders’ fees or agents’ commissions or any similar charges in connection with
this Subscription Agreement.

(m)          No
Governmental Approval. 
The Investor understands that no United States federal or state agency
or agency of any other jurisdiction has made any finding or determination as to
the fairness of the terms of the offering and sale of the stock.

(n)           No
Advice.  The Investor
is not relying on the Company or any of its employees, agents or
representatives for legal, investment or tax advice, and the Investor has
sought independent legal, investment and tax advice to the extent the Investor
has deemed necessary or appropriate in connection with the Investor’s decision
to subscribe for stock.  The Investor
understands and agrees that he, she or it (and not the Company) shall be
responsible for his, her or its own tax liability, if any, that may arise as a
result of this investment or the transactions contemplated by this Subscription
Agreement.

(o)           Survival;
Duty to Update. 
The foregoing representations and warranties are true, accurate and
complete as of the date hereof and shall be true, accurate and complete as of
the Company’s acceptance of the Investor’s subscription, and shall survive such
acceptance.  If in any respect such
representations and warranties shall not be true, accurate and complete prior
to or at such acceptance, the Investor shall give immediate notice of such fact
to the Company, by facsimile with written confirmation of receipt, specifying
which representations and warranties are not true, accurate and complete and
the reasons therefor.

4.             Indemnification.  The Investor acknowledges that the Investor
understands the meaning and legal consequences of the representations and
warranties made by the Investor herein, and that the Company is relying on such
representations and warranties in making its determination to accept or reject
this Subscription.  The Investor hereby
agrees to indemnify and hold harmless the Company, each manager, officer and
employee thereof and each person who controls the Company from and against any
and all loss, damage or liability due to or arising out of a breach  or inaccuracy of any representation or
warranty of the Investor contained in this Subscription Agreement.  All representations, warranties and covenants
and the indemnification contained in this Subscription Agreement shall survive
the acceptance of the subscription and the issuance to the Investor of the stock.

5.             Transferability.  The Investor agrees not to transfer or assign
this Subscription Agreement, or any interest herein, and further agrees that
the assignment and transfer of the stock acquired pursuant hereto shall be made
only in accordance with applicable law and the Company Agreement.

6.             No Revocation.  The Investor agrees that this Subscription
Agreement and any agreement of the Investor made hereunder is irrevocable, and
that this Subscription Agreement shall survive the death or disability of the Investor.

7.             Notices.  All notices or other communications given or
made hereunder shall be in writing and shall be delivered or mailed by
registered or certified mail, return receipt requested, postage prepaid, or delivered
by facsimile with written confirmation of receipt to the Investor at the
address set forth below and to the Company, c/o Intrusion Inc., 1101 E. Arapaho
Road, Suite 200, Richardson, Texas 75081, Telephone:  972.234.6400, Fax 972.301.3892, or at such
other place as the Company may designate by written notice to the Investor.

8.             Expenses.  The Investor will pay the Investor’s own
expenses relating to this Subscription Agreement and the purchase of stock
hereunder.

9.             Entire Agreement; Amendments.  This Subscription Agreement supersedes all
prior agreements between the parties with respect to its subject matter and
constitutes a complete and exclusive statement of the terms of the agreement
between the parties with respect to its subject matter.  Neither this Subscription Agreement nor any
term hereof may be changed, waived, discharged or terminated orally, without the
written consent of the Investor and the Company.

10.          Counterparts.  This Subscription Agreement may be executed
in any number of counterparts, each of which shall be an original and all of
which taken together shall constitute one agreement.

11.          Governing Law.  This Subscription Agreement and all
amendments hereto shall be governed by and construed in accordance with the
laws of the State of Texas, without reference to provisions concerning the
conflict of laws.

12.          Severability.  Should there exist or arise a conflict
between any provision of this Subscription Agreement and any law, statute,
ordinance, order or regulation applicable to the enforcement of this
Subscription Agreement, such provision of this Subscription Agreement shall be
reformed to the minimum extent necessary to bring it within applicable legal
requirements.  If one or more of the provisions
in this Subscription Agreement become or are found by any court to be void,
voidable, or unenforceable, in part or in whole, the remaining provisions shall
continue in full force and effect.  If
any provision is so held void, voidable or unenforceable, the Investor agrees
to replace such provision with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of
such provision.

13.          Headings.  The headings in this Subscription Agreement
are for convenience of reference only, and shall not have any bearing on the
meaning of this Subscription Agreement or of any part hereof.

(Signature
pages follow)

Dated: March 15, 2007

	
  

  	
  [INVESTOR]

  
	
   

  	
  By:

  	
  /s/ Michael L. Paxton

  
	
   

  	
  Name:

  	
  Michael L. Paxton

  
	
   

  	
  Title:

  	
  Vice President and CFO

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  BUSINESS ADDRESS:

  
	
   

  	
   

  
	
   

  	
   

  	
  1101 E. Arapaho Road

  
	
   

  	
   

  	
  Richardson, TX 
  75081

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  FEDERAL TAX I.D. NUMBER OF ENTITY

  
	
   

  	
   

  
	
   

  	
   

  
	
  ACCEPTED BY:

  	
   

  
	
  Intrusion Inc.

  	
   

  
	
  (a Delaware Corporation)

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:  

  	
  /s/ G. Ward Paxton

  	
   

  
	
   

  	
  G. Ward Paxton, Chief Executive Officer

  	
   

  
					

 

EXHIBIT A

RISK
FACTORS

INVESTOR SHOULD READ AND UNDERSTAND ALL RISK FACTORS,
AMONG

OTHER ITEMS, AS DESCRIBED IN THE COMPANY’S RECENT 10QSB AND 10KSB

FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.Exhibit 4.5

 

 

SUBURBAN WATER SYSTEMS

BOND PURCHASE AGREEMENT

DATED AS OF OCTOBER 20,
2006

$10,000,000

FIRST MORTGAGE BONDS, SERIES E
6.295%, DUE OCTOBER 20, 2006

 

 

 

TABLE OF CONTENTS

	
  SECTION 1.

  	
  PURCHASE AND SALE OF BONDS.

  	
  1

  
	
   

  	
   

  	
   

  
	
  Section
  1.1.

  	
  Issue of Bonds

  	
  1

  
	
   

  	
   

  	
   

  
	
  Section
  1.2.

  	
  The Closing

  	
  2

  
	
   

  	
   

  	
   

  
	
  Section
  1.3.

  	
  Certain Purchaser Representations

  	
  2

  
	
   

  	
   

  	
   

  
	
  SECTION 2.

  	
  REPRESENTATIONS AND WARRANTIES.

  	
  3

  
	
   

  	
   

  	
   

  
	
  Section
  2.1.

  	
  Subsidiary

  	
  3

  
	
   

  	
   

  	
   

  
	
  Section
  2.2.

  	
  Corporate Organization and Authority

  	
  3

  
	
   

  	
   

  	
   

  
	
  Section
  2.3.

  	
  Indebtedness

  	
  3

  
	
   

  	
   

  	
   

  
	
  Section
  2.4.

  	
  Financial Statements; Material Adverse Change

  	
  3

  
	
   

  	
   

  	
   

  
	
  Section
  2.5.

  	
  Business, Property and Full Disclosure

  	
  4

  
	
   

  	
   

  	
   

  
	
  Section
  2.6.

  	
  Pending Litigation

  	
  4

  
	
   

  	
   

  	
   

  
	
  Section
  2.7.

  	
  Title to Properties

  	
  4

  
	
   

  	
   

  	
   

  
	
  Section
  2.8.

  	
  Patents, Trademarks, Licenses, etc

  	
  5

  
	
   

  	
   

  	
   

  
	
  Section
  2.9.

  	
  Authorization, Execution, Delivery and
  Enforceability

  	
  5

  
	
   

  	
   

  	
   

  
	
  Section
  2.10.

  	
  No
  Defaults

  	
  6

  
	
   

  	
   

  	
   

  
	
  Section
  2.11.

  	
  Governmental
  Consent

  	
  6

  
	
   

  	
   

  	
   

  
	
  Section
  2.12.

  	
  Taxes

  	
  6

  
	
   

  	
   

  	
   

  
	
  Section
  2.13.

  	
  Use of
  Proceeds

  	
  6

  
	
   

  	
   

  	
   

  
	
  Section
  2.14.

  	
  Foreign
  Assets Control Regulations, etc

  	
  7

  
	
   

  	
   

  	
   

  
	
  Section
  2.15.

  	
  Status
  Under Certain Statutes

  	
  7

  
	
   

  	
   

  	
   

  
	
  Section
  2.16.

  	
  Private
  Offering

  	
  7

  
	
   

  	
   

  	
   

  
	
  Section
  2.17.

  	
  Compliance
  with Law

  	
  7

  
	
   

  	
   

  	
   

  
	
  Section
  2.18.

  	
  Restrictions
  on Company and the Subsidiary

  	
  8

  

 

 i
 

 

	
  Section 2.19.

  	
  Compliance
  with ERISA

  	
  8

  
	
   

  	
   

  	
   

  
	
  Section
  2.20.

  	
  Environmental
  Compliance

  	
  8

  
	
   

  	
   

  	
   

  
	
  SECTION 3.

  	
  CLOSING CONDITIONS.

  	
  9

  
	
   

  	
   

  	
   

  
	
  Section
  3.1.

  	
  Opinions of Counsel

  	
  9

  
	
   

  	
   

  	
   

  
	
  Section
  3.2.

  	
  Representations and Warranties True; No
  Prohibited Action

  	
  9

  
	
   

  	
   

  	
   

  
	
  Section
  3.3.

  	
  Compliance with this Agreement

  	
  10

  
	
   

  	
   

  	
   

  
	
  Section
  3.4.

  	
  Officers’ Certificates

  	
  10

  
	
   

  	
   

  	
   

  
	
  Section
  3.5.

  	
  Purchase Permitted by Applicable Law, etc

  	
  10

  
	
   

  	
   

  	
   

  
	
  Section
  3.6.

  	
  Regulatory Approvals

  	
  10

  
	
   

  	
   

  	
   

  
	
  Section
  3.7.

  	
  Fifth Supplemental Indenture

  	
  10

  
	
   

  	
   

  	
   

  
	
  Section
  3.8.

  	
  Filing and Recordation

  	
  10

  
	
   

  	
   

  	
   

  
	
  Section
  3.9.

  	
  Title Insurance

  	
  10

  
	
   

  	
   

  	
   

  
	
  Section
  3.10.

  	
  Indenture
  Conditions

  	
  11

  
	
   

  	
   

  	
   

  
	
  Section
  3.11.

  	
  Payment
  of Special Counsel Fees

  	
  11

  
	
   

  	
   

  	
   

  
	
  Section
  3.12.

  	
  Proceedings
  Satisfactory

  	
  11

  
	
   

  	
   

  	
   

  
	
  SECTION
  4.

  	
  AGREEMENTS OF THE COMPANY.

  	
  11

  
	
   

  	
   

  	
   

  
	
  Section
  4.1.

  	
  Financial and Business Information

  	
  11

  
	
   

  	
   

  	
   

  
	
  Section
  4.2.

  	
  Officers’ Certificate

  	
  13

  
	
   

  	
   

  	
   

  
	
  Section
  4.3.

  	
  Accountants’ Certificates

  	
  14

  
	
   

  	
   

  	
   

  
	
  Section
  4.4.

  	
  Inspection

  	
  14

  
	
   

  	
   

  	
   

  
	
  Section
  4.5.

  	
  Hazardous Substances Indemnification

  	
  14

  
	
   

  	
   

  	
   

  
	
  SECTION 5.

  	
  INTERPRETATION OF THIS AGREEMENT.

  	
  15

  
	
   

  	
   

  	
   

  
	
  Section
  5.1.

  	
  Terms Defined

  	
  15

  
	
   

  	
   

  	
   

  
	
  Section
  5.2.

  	
  Accounting Principles

  	
  20

  
	
   

  	
   

  	
   

  
	
  Section
  5.3.

  	
  Directly or Indirectly

  	
  20

  

 

 ii
 

 

	
  Section 5.4.

  	
  Governing Law

  	
  20

  
	
   

  	
   

  	
   

  
	
  Section
  5.5.

  	
  Section Headings, Table of Contents and
  Construction

  	
  20

  
	
   

  	
   

  	
   

  
	
  SECTION 6.

  	
  EXPENSES, ETC.

  	
  21

  
	
   

  	
   

  	
   

  
	
  Section
  6.1.

  	
  Transaction Expenses

  	
  21

  
	
   

  	
   

  	
   

  
	
  Section
  6.2.

  	
  Survival

  	
  21

  
	
   

  	
   

  	
   

  
	
  SECTION 7.

  	
  HOME OFFICE PAYMENT.

  	
  21

  
	
   

  	
   

  	
   

  
	
  SECTION 8.

  	
  MISCELLANEOUS.

  	
  21

  
	
   

  	
   

  	
   

  
	
  Section
  8.1.

  	
  Notices

  	
  21

  
	
   

  	
   

  	
   

  
	
  Section
  8.2.

  	
  Amendment and Waiver

  	
  22

  
	
   

  	
   

  	
   

  
	
  Section
  8.3.

  	
  Reproduction of Documents

  	
  24

  
	
   

  	
   

  	
   

  
	
  Section
  8.4.

  	
  Survival

  	
  24

  
	
   

  	
   

  	
   

  
	
  Section
  8.5.

  	
  Successors and Assigns

  	
  24

  
	
   

  	
   

  	
   

  
	
  Section
  8.6.

  	
  Duplicate Originals; Execution in Counterparts

  	
  25

  
	
   

  	
   

  	
   

  
	
  Section
  8.7.

  	
  Construction – Representations and Warranties

  	
  25

  
	
   

  	
   

  	
   

  
	
  Section
  8.8.

  	
  Incorporation by Reference

  	
  25

  

 

	
  Annex 1

  	
  -

  	
  Information as to Purchaser

  
	
  Annex 2

  	
  -

  	
  Payment Instructions

  
	
  Annex 3

  	
  -

  	
  Information as to Company

  
	
  Annex 4

  	
  -

  	
  Litigation

  
	
   

  	
   

  	
   

  
	
  Exhibit A

  	
  -

  	
  First Mortgage Bond, Series E 6.295%, due October
  20, 2026

  
	
  Exhibit B1

  	
  -

  	
  Company Counsel’s Closing Opinion

  
	
  Exhibit B2

  	
  -

  	
  Company PUC Counsel’s Closing Opinion

  
	
  Exhibit B3

  	
  -

  	
  Trustee Counsel’s Closing Opinion

  
	
  Exhibit B4

  	
  -

  	
  Purchaser Counsel’s Closing Opinion

  
	
  Exhibit C1

  	
  -

  	
  Form of Officers’ Certificate of the Company

  
	
  Exhibit C2

  	
  -

  	
  Form of Officers’ Certificate of the Parent

  
	
  Exhibit D1

  	
  -

  	
  Form of Secretary’s Certificate of the Company

  
	
  Exhibit D2

  	
  -

  	
  Form of Secretary’s Certificate of the Parent

  
	
  Exhibit E

  	
  -

  	
  Form of Fifth Supplemental Indenture

  

 

 iii

SUBURBAN WATER SYSTEMS

ONE WILSHIRE BUILDING

624 S. GRAND AVENUE

LOS ANGELES, CALIFORNIA 90017

BOND PURCHASE AGREEMENT

$10,000,000

First Mortgage Bonds, Series E  6.295%,
due October 20, 2026

As of
October 20, 2006

TO
THE PURCHASER LISTED IN THE ATTACHED

ANNEX 1

Ladies and Gentlemen:

Suburban Water Systems, a California
corporation (the “Company”), hereby agrees with you as follows:

SECTION 1.                                                                               PURCHASE AND
SALE OF BONDS.

Section 1.1.                                Issue of Bonds. 
The Company has authorized the issue of Ten Million Dollars
($10,000,000) in aggregate principal amount of its First Mortgage Bonds, Series
E 6.295%, due October 20, 2026 (herein called the “Bonds”).  The Bonds will be issued under and pursuant
to the Fifth Amendment and Supplement to Indenture of Mortgage and Deed of
Trust Dated October 1, 1986 (the “Fifth Supplemental Indenture”), dated as of
October 20, 2006, between the Company and U.S. Bank National Association, as
trustee (the “Trustee”).  The Fifth
Supplemental Indenture modifies and amends that certain Indenture of Mortgage
and Deed of Trust Dated October 1, 1986 (the “Original Indenture”) between the
Company and Security Pacific National Bank, a national banking association,
predecessor to Bank of America NT & SA, predecessor to U.S. Bank Trust
National Association (originally named First Trust of California, National
Association), predecessor to the Trustee. 
The Original Indenture was amended by (i) the First Amendment and
Supplement to Indenture of Mortgage and Deed of Trust Dated October 1, 1986
(the “First Supplemental Indenture”), dated as of February 7, 1990, (ii) the
Second Amendment and Supplement to Indenture of Mortgage and Deed of Trust
Dated October 1, 1986 (the “Second Supplemental Indenture”), dated as of
January 24, 1992, (iii) the Third Amendment and Supplement to Indenture of
Mortgage and Deed of Trust Dated October 1, 1986 (the “Third Supplemental
Indenture”), dated as of October 9, 1996, (iv) the Fourth Amendment and
Supplement to Indenture of Mortgage and Deed of Trust Dated October 1, 1986
(the “Fourth Supplemental Indenture”), dated as of October 19, 2004, and (v)
the Fifth Amendment and Supplement to Indenture of Mortgage and Deed of Trust
Dated October 1, 1986 (the “Fifth Supplemental Indenture”), dated as of October
20, 2006  (the Original Indenture as so
amended and as may be further amended from time to time, being the “Indenture”).  Certain capitalized terms used in this
Agreement are defined in Section 5.1 of this Agreement; references to a “Schedule,”
“Annex” or “Exhibit” are, unless otherwise specified, to a Schedule, Annex or
Exhibit attached to this Agreement.

Each Bond:

(a)                                  will be in the
amount of One Thousand Dollars ($1,000.00) or an integral multiple thereof;

 1
 

(b)                                 will bear
interest (computed on the basis of a 360-day year of twelve 30-day months) on
the unpaid principal balance thereof from the date of the Bond at the rate of
six decimal two nine five percent (6.295%) per annum, payable semiannually on
the twentieth (20th) day of each
April and October in each year commencing on the first Interest Payment Date
next succeeding the date of such Bond until the principal amount thereof will
be due and payable; provided that
interest on any overdue principal, overdue Redemption Price and (to the extent
permitted by applicable law) overdue interest, shall accrue at a rate equal to
seven decimal two nine five percent (7.295%) per annum;

(c)                                  will mature on
October 20, 2026; and

(d)                                 will be in the
form of Bond set forth in Exhibit A to this Agreement.

Section 1.2.                                The Closing.

(a)                                  Purchase
and Sale of Bonds.  The Company
hereby agrees to sell to you and, subject to the terms and conditions set forth
herein, you hereby agree to purchase from the Company, in accordance with the
provisions of this Agreement, Bonds in the principal amount specified opposite
your name on Annex 1 hereto, at a purchase price of one hundred percent (100%)
of the principal amount thereof.

(b)                                 The
Closing.  The closing (the “Closing”) of
the purchase and sale of the Bonds to be purchased by you will be held at 11:00
a.m., Denver, Colorado time, on October 20, 2006 (the “Closing Date”) at the
office of Sherman & Howard LLC, 663 17th Street,
Denver, Colorado 80202, or at such other place and time of day as may be agreed
upon by the Company and you.  At the
Closing, the Company will deliver to you one or more Bonds (as set forth
opposite your name on Annex 1 to this Agreement), in the aggregate principal
amount of your purchase, dated the Closing Date and payable to you or payable
as indicated on Annex 1 to this Agreement, against payment by federal funds
wire transfer in immediately available funds of the purchase price thereof, as
directed by the Company on Annex 2 to this Agreement.  If at the Closing the Company shall fail to
tender such Bonds to you as provided above in this Section 1.2, or any of the
conditions specified in Section 3 shall not have been fulfilled to your
reasonable satisfaction, you shall, at your election, be relieved of all
further obligations under this Agreement, without thereby waiving any rights
you may have by reason of such failure or such nonfulfillment.

Section 1.3.                                Certain Purchaser Representations.

(a)                                  Purchase
for Investment.  You
represent that you are purchasing the Bonds for your own account or for one or
more separate accounts maintained by you and not with a view to the
distribution thereof, provided that
the disposition of your or their property shall at all times be within your or
their control.  You understand that the
Bonds have not been registered under the Securities Act and may be resold only
if registered pursuant to the provisions of the Securities Act or if an
exemption from registration is available, except under circumstances where
neither such registration nor such an exemption is required by law, and that
the Company is not required to register the Bonds.

(b)                                 Source
of Funds.  You
represent that the source of funds (“Source”) to be used by you to pay the
purchase price of the Bonds to be purchased by you hereunder does not include
assets of any employee benefit plan, other than a plan exempt from the coverage
of ERISA.  As used in this Section
1.3(b), the terms “employee benefit plan,” “governmental plan” and “separate
account” shall have the respective meanings assigned to such terms in Section 3
of ERISA.

 2
 

SECTION
2.                            REPRESENTATIONS
AND WARRANTIES.

To induce you to enter
into this Agreement and to purchase the Bonds listed on Annex 1 to this
Agreement opposite your name, the Parent (solely with respect to the
representations and warranties set forth in Section 2.4(a), Section 2.5,
Section 2.12(a) and Section 2.12(b) and, insofar as such representations and
warranties relate to the Parent, Section 2.10 and Section 2.15) and the Company
(with respect to all representations and warranties other than those set forth
in Section 2.4(a) and, insofar as such representations and warranties relate to
the Parent, Section 2.10, Section 2.12(a), Section 2.12(b) and Section 2.15)
represent and warrant to you as of the Closing Date as follows:

Section 2.1.                                Subsidiary. 
Part I of Annex 3 to this Agreement states:

(a)                                  with respect to
the Subsidiary of the Company, its name, jurisdiction of incorporation and the
percentage of shares of each class of capital stock owned by the Company;

(b)                                 the name of
each of the Company’s Affiliates (other than Subsidiaries) and the nature of
the affiliation; and

(c)                                  the Company’s
directors and executive officers.

The Company has good title to all of the shares it purports to own of
the stock of its Subsidiaries, free and clear in each case of any Lien.  All such shares have been duly issued and are
fully paid and nonassessable.

Section 2.2.                                Corporate Organization and
Authority.  Each of the Company and the Subsidiary:

(a)                                  is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation; and

(b)                                 has all
requisite corporate power and authority and all necessary licenses and permits
to own and operate its Properties and to carry on its business as now conducted
and as presently proposed to be conducted.

Section 2.3.                                Indebtedness. 
Part II of Annex 3 to this Agreement correctly lists all outstanding
indebtedness for borrowed money and guarantys of the Company and the Subsidiary
immediately prior to the Closing Date and after giving effect to the proposed use
of the proceeds of the Bonds.

Section 2.4.                                Financial Statements; Material
Adverse Change.

(a)                                  Financial
Statements – Parent.  Copies have been delivered to you of the
financial statements of the Parent and its Subsidiaries (i) in the Parent’s
Annual Report on Form 10-K for the year ended December 31, 2005, and (ii) in
the Parent’s Quarterly Report on Form 10-Q for the Quarter ended June 30,
2006.  All of said financial statements
have been prepared in accordance with generally accepted accounting principles
consistently applied, and present fairly in all material respects the
consolidated financial position of the Parent and its consolidated subsidiaries
as of such dates and the results of their operations for such periods (subject,
in the case of any interim financial statements, to normal year-end
adjustments).  All such consolidated
financial statements include the accounts of the Company and the Subsidiary.

 3
 

(b)                                 Financial
Statements – Company.  Copies have
been delivered to you of (i) the audited financial statements of the Company
for the year ended December 31, 2005, and (ii) the unaudited financial
statements of the Company for the six months ended June 30, 2006.  All of said financial statements have been
prepared in accordance with generally accepted accounting principles
consistently applied, and present fairly in all material respects the
consolidated financial position of the Company and the Subsidiary as of such
dates and the results of their operations for such periods (subject, in the
case of any interim financial statements, to normal year-end adjustments).

(c)                                  Material
Adverse Change.  Since
December 31, 2005, there has been no change in the business, Properties or
condition (financial or otherwise) of the Company or the Subsidiary except:

(i)                                     as disclosed to
you in this Agreement; and

(ii)                                  for other
changes in the ordinary course of business that, in the aggregate, have not had
a Material Adverse Effect.

Section 2.5.                                Business, Property and Full
Disclosure.  All documents presented to Purchaser fairly
describe, in all material respects, the general nature of the business and the
Properties of the Company.  The financial statements referred
to in Sections 2.4(a) and 2.4(b) and all documents provided to Purchaser do
not, nor does this Agreement, contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
contained therein or herein in light of the circumstances under which they are
made, not misleading.

Section 2.6.                                Pending Litigation. 
Except as disclosed on Annex 4 hereto, there are no proceedings, actions
or investigations pending or, to the knowledge of the Company, threatened
against or affecting the Company or the Subsidiary in any court or before any
Governmental Authority or arbitration board or tribunal which, either
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect.  Without
limiting the generality of the foregoing, except as has been disclosed on Annex
4 hereto, no proceedings with respect to the condemnation of any Property of
the Company or the Subsidiary are pending or, to the best knowledge of the
Company, contemplated by any Governmental Authority to which the Property of
the Company or the Subsidiary is subject. 
Neither the Company nor the Subsidiary is in default with respect to any
order of any court, Governmental Authority or arbitration board or tribunal.

Section 2.7.                                Title to Properties. 
The Company and the Subsidiary have, and at the time of the Closing will
have, good and marketable title to all of the fee interests in real Property,
and good title to all of the other interests in Property, it purports to own,
that individually or in the aggregate are Material, including Property
reflected in the most recent balance sheet referred to in Section 2.4(b) of
this Agreement and Property described in the Indenture as being subject to the
Lien thereof, subject only to the Lien of the Indenture and other Permitted
Encumbrances.  Without limiting the
generality of the foregoing, the Company and each of its Subsidiaries has, as
of the Closing Date, all water, water rights, rights to purchase water, water
systems, water works, plants, pumps, tanks, pipes, strainers, fittings, valves,
reservoirs, supplies and implements it purports to own, that individually or in
the aggregate are Material, including but not limited to the water stock more
particularly described in Exhibit B to the Indenture and the stock of the
Subsidiary described in Part I of Annex 3 to this Agreement, in each case owned
by the Company subject only to the Lien of the Indenture and Permitted
Encumbrances and without limitation as to time within which any such rights may
be exercised or such stock may be held. 
There are no Liens upon or other defects (including, without limitation,
defects of the type which would be disclosed by a survey) in or to any of the
real Property of the Company, or the title or interest of the Company in or to
such real Property, which, individually or in the aggregate, would have a
Material 

 4
 

Adverse
Effect.  All leases that individually or
in the aggregate are Material are valid and subsisting and are in full force
and effect in all material respects.

Section 2.8.                                Patents, Trademarks, Licenses,
etc.  The Company and the Subsidiary own or possess, and
upon completion of the Closing will own or possess, all of the franchises
(including, without limitation, franchises granted by the PUC), patents,
trademarks, service marks, trade names, copyrights, licenses and rights
(including, without limitation, rights to produce and purchase water) necessary
for the conduct of its business, without any known and material conflict with
the rights of others, and all such franchises, patents, trademarks, service
marks, trade names, copyrights, licenses and rights are valid and
subsisting.  To the Company’s knowledge,
no event has occurred which (a) permits, or after notice or lapse of time or
both would permit, revocation or termination of any such license or franchise
or (b) materially adversely affects any of the rights of the Company or the
Subsidiary thereunder.

Section 2.9.                                Authorization, Execution,
Delivery and Enforceability.

(a)                                  Transactions
are Legal and Authorized.  The
consummation of the Company of each of the Transactions:

(i)                                     is within the
corporate powers of the Company;

(ii)                                  will not
conflict with, result in any breach in any provisions of, constitute a default
under, or result in the creation of any Lien upon any Property of the Company
or the Subsidiary under the provisions of any charter instrument or bylaw to
which it or any of its Properties may be bound;

(iii)                               will not
conflict with or result in a breach of any of the terms, conditions or
provisions of any order, judgment, decree, or ruling of any court, arbitrator
or Governmental Authority applicable to the Company or the Subsidiary;

(iv)                              will not
violate any provision of any statute or other rule or regulation of any
Governmental Authority applicable to the Company or the Subsidiary; or

(v)                                 will not
conflict with, result in any breach in any of the provisions of, constitute a
default under, or result in the creation of any Lien upon any Property of the
Company or the Subsidiary under the provisions of, any agreement or instrument
(other than its charter instrument or bylaw) to which it is a party or by which
it or any of its Property may be bound, which could either individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.

(b)                                 Obligations
Are Enforceable.  Each of
this Agreement, the Fifth Supplemental Indenture and the Bonds has been duly
authorized by all necessary corporate action on the part of the Company and has
been executed and delivered by duly authorized officers of the Company.  Each of this Agreement, the Indenture and the
Bonds constitutes a legal, valid and binding obligation of the Company,
enforceable in accordance with its terms, except that the enforceability of
this Agreement, the Indenture and the Bonds may be:

(i)                                     limited by
applicable bankruptcy, reorganization, arrangement, insolvency, moratorium, or
other similar laws affecting the enforceability of creditors’ rights generally;
and

(ii)                                  subject to the
availability of equitable remedies.

 5
 

Section 2.10.                         No Defaults. 
To the knowledge of the Company and the Parent, no event has occurred
and no condition exists which, upon the execution of this Agreement and the
Fifth Supplemental Indenture and the issuance of the Bonds, would constitute a
Default or an Event of Default.  To the
knowledge of the Company and the Parent, none of the Company, the Parent or the
Subsidiary is in violation in any respect of any term of any charter instrument
or bylaw and none of the Company, the Parent or the Subsidiary is in violation
in any material respect of any term in any agreement or other instrument to
which it is a party or by which it or any of its Property may be bound.  To the knowledge of the Company and the
Parent, no event has occurred or condition exists such that, but for the waiver
by any Person (other than the Company, the Parent or the Subsidiary) of any
term or provision in any agreement or other instrument to which the Company,
the Parent or the Subsidiary is a party or by which it or any of its Property
may be bound, the Company, the Parent or the Subsidiary would be in violation
in any material respects of any of its obligations under such agreement or
instrument.

Section 2.11.                         Governmental Consent. 
As of the Closing, all consents, approvals, orders and authorizations
required of or by any Governmental Authority, including, without limitation, the
PUC, for the Company to consummate the Transactions will have been duly
obtained, all related filings, registrations and qualifications will have been
duly made, and no appeal from any such consent, approval, order or
authorization of or by any Governmental Authority will be pending, including,
without limitation, any such consent, approval, order or authorization of the
PUC.

Section 2.12.                         Taxes

(a)                                  Returns
Filed; Taxes Paid.  All tax
returns required to be filed by or on behalf of the Parent, the Company or the
Subsidiary, and any other Person with which the Parent, the Company or the
Subsidiary files or has filed a consolidated return, in any jurisdiction have
in fact been filed on a timely basis, and to the knowledge of the Company and
the Parent, all taxes, assessments, fees and other governmental charges upon
the Parent, the Company or the Subsidiary, or upon any of their respective
Properties, income or franchises, which are due and payable have been paid or
will be paid prior to delinquency. 
Neither the Parent, the Company nor the Subsidiary knows of any proposed
additional tax assessment against it or any such Person.  To the knowledge of the Parent and the
Company, there exists no controversy with any Governmental Authority with
respect to the amount of any tax payable by the Parent, the Company or the
Subsidiary to such Governmental Authority.

(b)                                 Book
Provisions Adequate.   The
provisions for taxes (including, without limitation, any payment or payments
owing from each of the Parent, the Company and the Subsidiary to any other
Person pursuant to any tax sharing agreement among such Persons) on the books
of the Company and the Subsidiary are adequate for all open years and for its
current fiscal period.  The amount of the
liability for all taxes reflected in the consolidated balance sheet of the
Parent, the Company and the Subsidiary as of December 31, 2005 is an adequate
provision for such taxes (including, without limitation, any payment due
pursuant to any such tax sharing agreement) as may be payable by the Parent,
the Company and the Subsidiary for the fiscal years 2003 through 2005,
inclusive, with respect to federal income taxes, and the fiscal years 2003
through 2005, inclusive, with respect to California franchise taxes, in each
case, the only fiscal years not closed by the statute of limitations or by the
completion of an audit.

Section 2.13.                         Use of Proceeds. 
The Company will apply the proceeds from the sale of the Bonds solely to
refinance in its entirety the Company’s First Mortgage Bonds, Series C, and for
general corporate purposes.  None of the
transactions contemplated in this Agreement (including, without limitation, the
use of the proceeds from the sale of the Bonds) violates, will violate or will
result in a violation of Section 7 of the Securities Exchange Act of 1934, as
amended, or any regulations issued pursuant thereto, including, without
limitation, Regulations T, U and X of the Board of Governors of the 

 6
 

Federal
Reserve System, 12 C.F.R., Chapter II. 
Neither the Company nor the Subsidiary owns, or with the proceeds of the
sale of the Bonds intends to own, carry or purchase any “margin security”
within the meaning of said Regulations T, U and X, including “margin securities”
originally issued by the Company or the Subsidiary.  This Agreement and the Bonds will not be
secured by any “margin security,” and no Bonds are being sold on the basis of
any such collateral.  None of the
proceeds from the sale of the Bonds will be used to purchase or carry (or
refinance any borrowing the proceeds of which were used to purchase or carry)
any “security” within the meaning of the Securities Exchange Act of 1934, as
amended.

Section 2.14.                         Foreign Assets Control
Regulations, etc.  Neither the sale of the Bonds by the Company
hereunder nor their use of the proceeds thereof will violate the Trading with
the Enemy Act, as amended, or any of the foreign assets control regulations of
the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as
amended) or any enabling legislation or executive order relating thereto.  Without limiting the foregoing, neither the
Company nor the Subsidiary (a) is or will become a Person whose property or
interests in property are blocked pursuant to Section 1 of Executive Order
13224 of September 23, 2001 Blocking Property and Prohibiting Transactions With
Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg.
49079 (2001)) or (b) engages or will engage in any dealings or transactions, or
be otherwise associated, with any such person. 
The Company and the Subsidiary are in compliance, in all material
respects, with the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism (USA Patriot Act of
2001).  No part of the proceeds from the
sale of the Bonds hereunder will be used, directly or indirectly, for any
payment to any governmental official or employee, political party, official of
a political party, candidate for political office or anyone else acting in an
official capacity, in order to obtain, retain or direct business or obtain any
improper advantage, in violation of the United States Foreign Corrupt Practices
Act of 1977, as amended.

Section 2.15.                         Status Under Certain Statutes. 
Neither the Parent, the Company nor any of their Subsidiaries is subject
to regulation under the Investment Company Act of 1940, as amended, the Public
Utility Holding Company Act of 1935, as amended, the ICC Termination Act of
1995, as amended, or the Federal Power Act, as amended.

Section 2.16.                         Private Offering. 
Neither the Company nor anyone acting on its behalf has offered any of
the Bonds or any similar Security of the Company for sale to, or solicited
offers to buy any thereof from, or otherwise approached or negotiated with
respect thereto with, any prospective purchaser, other than you and not more
than six (6) other Institutional Investors, each of whom was offered all of the
Bonds at private sale for investment. 
The Company agrees that neither the Company nor anyone acting on its
behalf will offer the Bonds or any part thereof or any similar Securities for
issue or sale to, or solicit any offer to acquire any of the same from, anyone
so as to bring the offering, issuance or sale of the Bonds within the
registration provisions of Section 5 of the Securities Act.

Section 2.17.                         Compliance with Law. 
To the knowledge of the Company, neither the Company nor the Subsidiary:

(a)                                  is in material
violation of any law, ordinance, governmental rule, regulation, order or
judgment of any court or other Governmental Authority or award of any
arbitrator to which it is subject; or

(b)                                 has failed to
obtain any material license, permit, franchise or other governmental
authorization necessary to the ownership of its property or to the conduct of
its business;

 7
 

which
violation or failure to obtain might, either individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.

Section 2.18.                         Restrictions on Company and the
Subsidiary.  Neither the Company nor the Subsidiary:

(a)                                  is a party to
any contract or agreement (other than the Indenture) which restricts the right
or ability of such corporation to incur debt; or

(b)                                 has agreed or
consented to cause or permit in the future (upon the happening of a contingency
or otherwise) any of its Property, whether now owned or hereafter acquired, to
be subject to a Lien not permitted by the Indenture.

Section 2.19.                         Compliance with ERISA.

(a)                                  The Company and
its Parent and each of its Subsidiaries have operated and administered each
Plan in compliance with all applicable laws except for such instances of
noncompliance as have not resulted in and could not reasonably be expected to
result in a Material Adverse Effect. 
Neither the Company nor any ERISA Affiliate has incurred any liability
pursuant to Title I or IV of ERISA or the penalty or excise tax provisions
of the Code relating to employee benefit plans (as defined in Section 3 of
ERISA), and no event, transaction or condition has occurred or, to the
knowledge of the Company, exists that could reasonably be expected to result in
the incurrence of any such liability by the Company or any ERISA Affiliate, or
in the imposition of any Lien on any of the rights, properties or assets of the
Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA
or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of
the Code, other than such liabilities or Liens as would not be individually or
in the aggregate Material.

(b)                                 Neither the
Company, nor any ERISA Affiliate is a party to, participates in, maintains,
contributes to, or has any liability or contingent liability with respect to an
employee benefit plan, which is subject to Title IV of ERISA.  Neither the Company nor its Subsidiary has
any expected post-retirement benefit obligation (determined as of the last day
of the Company’s most recently ended fiscal year in accordance with Financial
Accounting Standards Board Statement No. 106).

(c)                                  The execution
and delivery of this Agreement and the issuance and sale of the Bonds hereunder
will not involve any transaction on the part of the Company that is subject to
the prohibitions of Section 406 of ERISA or in connection with which a tax
could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code.  The representation by the Company in the
first sentence of this Section 2.19(c) is made in reliance upon and subject to
the accuracy of your representation in Section 1.3(b) as to the sources of the
funds used to pay the purchase price of the Bonds to be purchased by you.

Section 2.20.                         Environmental Compliance. 
Except as set forth in Part IV of Annex 3 hereto:

(a)                                  Compliance – to the
knowledge of the Company, each of the Company and the Subsidiary is in
compliance with all Environmental Protection Laws in effect in each
jurisdiction where it is presently doing business, except such failures so to
comply that would not, in the aggregate, be reasonably expected to have a
Material Adverse Effect;

(b)                                 Liability – to the
knowledge of the Company, neither the Company nor the Subsidiary is subject to
any liability under any Environmental Protection Laws that, in the aggregate,
could be reasonably expected to have a Material Adverse Effect; and

 8
 

(c)                                  Notices – neither the
Company nor the Subsidiary has received any:

(i)                                     written notice
from any Governmental Authority by which any of its present or previously-owned
or leased real Properties has been designated, listed, or identified in any
manner by any Governmental Authority charged with administering or enforcing
any Environmental Protection Law as a Hazardous Substance disposal or removal
site, “Super Fund” clean-up site, or candidate for removal or closure pursuant
to any Environmental Protection Law;

(ii)                                  written notice
of any Lien arising under or in connection with any Environmental Protection Law
that has attached to any revenues of, or to any of its owned or leased real
Properties; or

(iii)                               summons,
citation, notice, directive, letter, or other communication, written or oral,
from any Governmental Authority concerning any intentional or unintentional act
or omission by the Company or the Subsidiary in connection with its ownership
or leasing of any real Property resulting in the releasing, spilling, leaking,
pumping, pouring, emitting, emptying, dumping, or otherwise disposing of any
Hazardous Substance into the environmental resulting in any material violation
of any Environmental Protection Law;

in
the case of clauses (ii) or (iii) above, where the effect of which could be
reasonably expected to have a Material Adverse Effect.

SECTION 3.                            CLOSING
CONDITIONS.

Your obligation to purchase and pay for the Bonds to be delivered to
you at the Closing will be subject to the following conditions precedent:

Section 3.1.                                Opinions of Counsel. 
You will have received from:

(a)                                  Musick, Peeler
& Garrett LLP, special counsel for the Company;

(b)                                 Steefel, Levitt
& Weiss, PUC counsel for the Company;

(c)                                  Dorsey &
Whitney LLP, counsel for the Trustee, and

(d)                                 Sherman &
Howard LLC, your special counsel,

closing
opinions, each dated as of the Closing Date as set forth in Exhibits B1, B2, B3
and B4 to this Agreement.

Section 3.2.                                Representations and Warranties
True; No Prohibited Action.

(a)                                  Representations
and Warranties True.  The
representations and warranties of the Company and the Parent contained in
Section 2 of this Agreement will be true when made and at the time of Closing.

(b)                                 No
Prohibited Action.  Neither the
Parent, the Company nor the Subsidiary shall have taken any action or permitted
any condition to exist which would constitute a Default or an Event of Default.

 9
 

Section 3.3.                                Compliance with this Agreement. 
The Company will have performed and complied with all agreements and
conditions contained herein which are required to be performed or complied with
by the Company before or at the Closing.

Section 3.4.                                Officers’ Certificates. 
You will have received:

(a)                                  a certificate
dated the Closing Date and signed by (i) the President or a Vice President and
(ii) the Chief Financial Officer of the Company, substantially in the form of
Exhibit C1 to this Agreement with respect to the matters therein set forth;

(b)                                 a certificate
dated the Closing Date and signed by (i) the President or a Vice President and
(ii) the Chief Financial Officer of the Parent, substantially in the form of
Exhibit C2 to this Agreement with respect to the matters therein set forth;

(c)                                  a certificate
dated the Closing Date and signed by the Secretary or an Assistant Secretary of
the Company, substantially in the form of Exhibit D1 to this Agreement, with
respect to the matters therein set forth; and

(d)                                 a certificate
dated the Closing Date and signed by the Secretary or an Assistant Secretary of
the Parent, substantially in the form of Exhibit D2 to this Agreement, with
respect to the matters therein set forth.

Section 3.5.                                Purchase Permitted by Applicable
Law, etc.  On the date of the Closing your purchase
of Bonds shall (i) be permitted by the laws and regulations of each
jurisdiction to which you are subject, (ii) not violate any applicable law or
regulation (including, without limitation, Regulation T, U or X of the Board of
Governors of the Federal Reserve System) and (iii) not subject you to any tax,
penalty or liability under or pursuant to any applicable law or regulation,
which law or regulation was not in effect on the date hereof.  If requested by you, you shall have received
an Office’s Certificate certifying as to such matters of fact as you may
reasonably specify to enable you to determine whether such purchase is so
permitted.

Section 3.6.                                Regulatory Approvals. 
The issue and sale of the Bonds shall have been duly authorized by order
of the California Public Utilities Commission (the “PUC”), such order shall be
in full force and effect at the time of the Closing, and all appeal periods
applicable to such order shall have expired.

Section 3.7.                                Fifth Supplemental Indenture. 
The Company and the Trustee shall have executed and delivered the Fifth
Supplemental Indenture substantially in the form of Exhibit E to this
Agreement, and you shall have received an executed original counterpart of such
Fifth Supplemental Indenture.

Section 3.8.                                Filing and Recordation. 
The Indenture, the Fifth Supplemental Indenture and all financing
statements (including any financing statements required to be filed under the
provisions of the California Uniform Commercial Code) shall have been duly
recorded and filed in such manner and in such place as is required by law to
establish, preserve and protect the Lien on all collateral specifically or
generally described in the Indenture as subject to such Lien and under the laws
enforced, and it will not be necessary to rerecord any such documents.

Section 3.9.                                Title Insurance. 
That certain policy of title insurance, dated as of November 18, 1986,
from Chicago Title Insurance Company (successor to Ticor Title Insurance
Company) insuring the Trustee and the holders of the Series A Bonds against
loss or damage to the extent of $15,000,000 plus costs as permitted by the
policy by reason of any defect in the Lien of the Indenture on the Property
(other 

 10
 

than
Excepted Property) described therein or by reason of the title to such Property
being other than as shown in such policy, or commitments to issue the same, in
each case satisfactory to you, sufficient to extend the coverage of such policy
to any additional Property being added to the Lien of the Indenture by virtue
of the Fifth Supplemental indenture and to extend such insurance to the Trustee
and the holders of the Bonds to the extent of $33,000,000.00 plus costs as
permitted by the policy shall be in full force and effect.  You shall have received copies of such policy
of title insurance and such endorsements or commitments to issue such
endorsements.

Section 3.10.                         Indenture Conditions. 
All conditions precedent set forth in the Indenture with respect to
consummation of any of the Transactions shall have been satisfied.  Without limiting the generality of the
foregoing, the Company’s Bondable Capacity and Net Earnings for Interest shall
be sufficient to permit the issuance of the Bonds.

Section 3.11.                         Payment of Special Counsel Fees. 
Without limiting the provisions of Section 6.1, the Company shall have
paid on or before the Closing the fees, charges and disbursements of your
special counsel to the extent reflected in a statement of such counsel rendered
to the Company at least one Business Day prior to the Closing.

Section 3.12.                         Proceedings Satisfactory. 
All proceedings taken in connection with the sale of the Bonds and all
documents and papers relating thereto will be reasonably satisfactory to
you.  You will have received copies of
such documents and papers as you may reasonably request in connection therewith
(including, without limitation, copies of all certificates delivered to the
Trustee in connection with the consummation of the Transactions), all in form
and substance reasonably satisfactory to you; provided,
however, that you agree that all documents the forms of which are
annexed hereto as exhibits shall be in form and substance reasonably
satisfactory to you if duly authorized, executed and delivered in the respective
forms set forth in such exhibits.

SECTION 4.                            AGREEMENTS
OF THE COMPANY.

Section 4.1.                                Financial and Business
Information.  The Company will deliver to each holder
of the Outstanding Bonds that is an Institutional Investor:

(a)                                  Quarterly
Statements – as soon as practicable after the end of each
fiscal quarter of each fiscal year of the Company (other than the last fiscal
quarter of each fiscal year), and in any event within sixty (60) days
thereafter, duplicate copies of:

(i)                                     a consolidated
balance sheet of the Company and its Subsidiaries as at the end of such
quarter; and

(ii)                                  consolidated
statements of income, retained earnings and cash flows of the Company and its
Subsidiaries, for such quarter and for the portion of the fiscal year ending
with such quarter;

setting
forth in each case in comparative form the figures for the corresponding
periods in the previous fiscal year, all in reasonable detail and certified as
being complete and correct, and as having been prepared in conformity with
generally accepted accounting principles, subject to changes resulting from
year-end adjustments, by the Chief Financial Officer or Treasurer of the
Company;

(b)                                 Annual
Statements – as soon as practicable after the end of each
fiscal year of the Company, and in any event within one hundred twenty (120)
days thereafter, commencing with the Company’s 2006 fiscal year, duplicate
copies of:

 11
 

(i)                                     a consolidated
balance sheet of the Company and its Subsidiaries as at the end of such year;
and

(ii)                                  consolidated
statements of income, retained earnings and cash flows of the Company and its
Subsidiaries for such year;

setting
forth in each case in comparative form the figures for the previous fiscal
year, all in reasonable detail and accompanied by an opinion thereof of KPMG LLP
or other independent certified public accountants of recognized national
standing or recognized regional standing selected by the Company, which opinion
shall, without qualification, state that such financial statements present
fairly, in all material respects, the financial position of the companies being
reported upon and their results of operations and cash flows in conformity with
generally accepted accounting principles, that the examination of such
accountants in connection with such financial statements has been made in
accordance with generally accepted auditing standards and that such audit
provides a reasonable basis for such opinion in the circumstances;

(c)                                  Audit
Reports – promptly upon receipt thereof, one copy of each other report
submitted to the Company or any Subsidiary by independent accountants in
connection with any annual, interim or special audit made by them of the books
of the Company or any Subsidiary;

(d)                                 SEC and
Other Reports of the Company and the Parent – promptly upon their becoming
publicly available, one copy of each financial statement, report, notice or
proxy statement sent by the Company to its stockholders generally, and of each
regular or periodic report and any registration statement, prospectus or
written communication in respect thereof filed by the Company or the Parent
with, or received by it in connection therewith from, any securities exchange
or the Securities and Exchange Commission or any successor agency, and one copy
of each financial statement, report, notice or proxy statement sent by the
Parent to its stockholders generally;

(e)                                  ERISA – promptly
upon becoming aware of the occurrence of:

(i)                                     any material “reportable
event” (as such term is defined in Section 4043 of ERISA) with respect to which
the reporting requirement has not been waived; or

(ii)                                  any material
transaction prohibited by Section 406 of ERISA or any nonexempt “prohibited
transaction” (as such term is defined in Section 4975 of the IRC);

in
connection with any Pension Plan or any trust created thereunder, a written
notice specifying the nature thereof, what action, if any, the Company is
taking or proposes to take with respect thereto, and, when known, any action
taken by the IRS, the Department of Labor or the PBGC with respect thereto;

(f)                                    ERISA
Waivers – prompt written notice of and a description of any request pursuant
to Section 303 of ERISA or Section 412 of the IRC for, or notice of the
granting pursuant to said Section 303 or Section 412 of, a waiver in respect of
all or part of the minimum funding standard set forth in ERISA or the IRC, as
the case may be, of any Pension Plan, and, in connection with the granting of
any such waiver, the amount of any “waived funding deficiency” (as such term is
defined in said Section 303 or said Section 412) and the terms of such waiver; provided, however, that no such notice need be given if the
amount of any waived funding deficiency shall not be material in the context of
the business, profits, Properties or condition (financial or otherwise) of the
Company and its Subsidiaries, taken as a whole;

(g)                                 Other
ERISA Notices – prompt written notice of and, where applicable, a
description of:

 12
 

(i)                                     any notice from
the PBGC in respect of the commencement of any proceedings pursuant to Section
4042 of ERISA to terminate any Pension Plan or for the appointment of a trustee
to administer any Pension Plan;

(ii)                                  any distress
termination notice delivered to the PBGC under Section 4041 of ERISA in respect
of any Pension Plan, and any determination of the PBGC in respect thereof;

(iii)                               the placement
of any Multiemployer Plan in reorganization status under Title IV of ERISA;

(iv)                              any
Multiemployer Plan becoming “insolvent” (as such term is defined in Section
4245 of ERISA);

(v)                                 the complete or
partial withdrawal of the Company or any ERISA Affiliate from any Multiemployer
Plan and the withdrawal liability incurred in connection therewith; and

(vi)                              the withdrawal
of the Company or any ERISA Affiliate from any Pension Plan with respect to
which it is a “substantial employer” as defined in ERISA and the withdrawal
liability under Section 4063 of ERISA incurred in connection therewith.

(h)                                 Notice
of Default or Event of Default – immediately upon
becoming aware of the existence of any condition or event which constitutes a
Default or an Event of Default, a written notice specifying the nature and
period of existence thereof and what action the Company is taking or proposes
to take with respect thereto;

(i)                                     Notice
of Claimed Default – immediately upon becoming aware that the holder
of any Bond or of any evidence of indebtedness or other Security of the Company
or any Subsidiary has given notice or taken any other action with respect to a
claimed Event of Default or default under such Bond, evidence of indebtedness
or Security, a written notice specifying the notice given or action taken by
such holder and the nature of the claimed Event of Default or default and what
action the Company is taking or proposes to take with respect thereto;

(j)                                     Notices
from Governmental Authority – promptly, and in any
event within 30 days of receipt thereof, copies of any notice to the Company or
any Subsidiary from any Federal or state Governmental Authority relating to any
order, ruling, statute or other law or regulation that could reasonably be expected
to have a Material Adverse Effect;

(k)                                  Information
Required By Indenture -  all
information, notices, certificates and opinions required by the terms of the
Indenture to be delivered to the holders of the Bonds; and

(l)                                     Requested
Information – with reasonable promptness, such other data and
information reasonably available to the Company as from time to time may be
reasonably requested.  Without limiting
the generality of the foregoing, the Company will deliver to you or any
successor or transferee the information required by 17 C.F.R. §230.144A in
connection with any transfer or proposed transfer of Bonds by you or any
successor or transferee pursuant thereto.

Section 4.2.                                Officers’ Certificate – Each set of financial statements
delivered to any Institutional Investor of the Bonds pursuant to Section 4.1(a)
or Section 4.1(b) of this Agreement will be accompanied by a certificate of the
President or a Vice President and the Chief Financial Officer of the Company
setting forth:

 13
 

(a)                                  Covenant
Compliance – the information (including detailed calculations)
required in order to establish whether the Company was in compliance with the
requirements of Article VI of the Indenture during the period covered by the
income statement then being furnished;

(b)                                 Event
of Default – a statement that the signers have reviewed the
relevant terms of this Agreement and the Indenture and have made, or caused to
be made, under their supervision, a review of the transactions and conditions
of the Company and its Subsidiaries from the beginning of the accounting period
covered by the income statements being delivered therewith to the date of the
certificate and that such review has not disclosed the existence during such
period of any condition or event which constitutes a Default or an Event of
Default or, if any such condition or event existed or exists, specifying the
nature and period of existence thereof and what action the Company has taken or
proposes to take with respect thereto.

Section 4.3.                                Accountants’ Certificates. 
Each set of annual financial statements delivered pursuant to Section
4.1(b) will be accompanied by a certificate of the accountants who certify the
financial statements of the Company, stating that they have reviewed Sections
6.01, 6.03, 6.06, 6.10 and 6.14 of the Indenture and stating further, whether,
in making their audit, such accountants have become aware of any condition or
event which then constitutes a Default or an Event of Default (whether or not
as a result of failure by the Company to comply with any of Sections 6.01,
6.03, 6.06, 6.10 or 6.14 of the Indenture), and, if any such condition or event
then exists, specifying the nature and period of existence thereof.

Section 4.4.                                Inspection. 
The Company will permit any of your representatives, while you or your
nominee holds any Bond, or the representatives of any other Institutional
Investor of the Bonds, at your or such holder’s expense (except during the
continuance of any Default or Event of Default, in which case, at the Company’s
expense), upon reasonable prior notice to the Company, to visit and inspect any
of the Properties of the Company or any Subsidiary, to examine all their books
of account, records, reports and other papers, to make copies and extracts
therefrom, and to discuss their respective affairs, finances and accounts with
their respective officers, employees and independent public accountants (and by
this provision the Company authorizes said accountants to discuss the finances
and affairs of the Company and its Subsidiaries) all at such reasonable times
and as often as may be reasonably requested.

Section 4.5.                                Hazardous Substances
Indemnification.  The Company shall indemnify, defend and hold
you harmless from and against any loss or liability directly or indirectly
arising out of the use, generation, manufacture, production, storage, release,
threatened release, discharge or disposal of any Hazardous Substances in or
about the Property of the Company, the Parent or any of their
Subsidiaries.  This indemnification
provision shall apply whether the Hazardous Substances are in, on, under or
about the Property or operations of the Company, the Parent or any of their
Subsidiaries.  The foregoing
indemnification includes but is not limited to reasonable attorneys’ fees
(including the allocated cost of in-house counsel and staff).  The foregoing indemnification extends to you,
your parent, your subsidiaries and all of your or their directors, officers,
employees, agents, successors, attorneys and assigns.  This indemnification provision shall survive
repayment of the Company’s obligations under the Bonds, and payment shall not
be a condition precedent to recovery upon the foregoing indemnification
provisions.

In the event that you receive a claim, demand or action for which you
believe that indemnification will or may be required pursuant to this Section,
you agree to so notify the Company in writing promptly (and in any event within
twenty (20) days after your receipt of such claim, and/or action).  Upon receipt of such notice from you, the
Company shall have the right to defend such claim, demand or action by legal
counsel selected by the insurance carrier for the Company, or selected by the
Company and reasonably satisfactory to you. 
Such right shall be exercised by written notice to you given within
twenty (20) days after the Company’s receipt of your notice.

 14
 

If the Company elects to undertake your defense, and so long as the
Company continues such defense, you agree that:

(a)                                  you shall not
admit any liability or enter into any settlement of any such claim or action
without, in any such case, the prior written consent of the Company, which
shall not be unreasonably withheld or delayed;

(b)                                 you shall be
entitled to retain separate legal counsel as you select.  However, the Company shall not be obligated
to reimburse you for any costs or fees of such separate counsel (including
in-house counsel or staff); and

(c)                                  you shall
cooperate as reasonably requested by the Company in the defense and settlement
of any such claim or action; provided, however,
that you need not be required to incur or sustain any out-of-pocket costs.

If,
however, the Company fails to undertake your defense within the time or in the
manner herein provided or thereafter abandons such defense or fails to
diligently prosecute the same, you shall thereafter be entitled to all benefits
of the foregoing indemnification provision, including the right to defend or
settle any such claim or action upon such terms as you shall select and to
recover from the Company all amounts expended by you to pay any judgment, award
or settlement and all costs and fees incurred by you in such defense,
settlement or both.

SECTION 5.                            INTERPRETATION
OF THIS AGREEMENT.

Section 5.1.                                Terms Defined. 
As used in this Agreement, the following terms have the respective
meanings set forth below or set forth in the Section of this Agreement or the
Indenture following such term:

“Affiliate”
means, at any time, and with respect to any Person, (1) any other Person that
at such time directly or indirectly through one or more intermediaries
Controls, or is Controlled by, or is under common Control with, such first
Person, and (b) any Person beneficially owning or holding, directly or
indirectly, 5% or more of any class of voting or equity interests of the
Company or any Subsidiary or any corporation of which the Company and its
Subsidiaries beneficially own or hold, in the aggregate, directly or
indirectly, 5% or more of any class of voting or equity interests.  As used in this definition, “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.  Unless the context otherwise clearly
requires, any reference to an “Affiliate” is a reference to an Affiliate of the
Company.

“Bond
Purchase Agreement” – this Agreement.

“Bondable
Capacity” – Section 4.02A of the Indenture.

“Bonds”
– Section 1.1 of this Agreement.

“Business
Day” – a day other than a Saturday, a Sunday or a day on which commercial banks
in New York, New York are required or authorized to be closed (other than a
general bank holiday or moratorium, in either case of longer than 4 calendar
days).

“Closing”
– Section 1.2 of this Agreement.

 15
 

“Closing
Date” – Section 1.2 of this Agreement.

“Collateral”
– all of that Property subject to the Lien of the Indenture.

“Company”
– the introductory sentence of this Agreement.

“Default”
– Section 1.01 of the Indenture.

“Environmental
Protection Law” – means any federal, state, county, regional or local law,
statute, or regulation (including, without limitation, (a) the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980; (b) the
Resource Conservation and Recovery Act of 1976; (c) the Superfund Amendments
and Reauthorization Act of 1986; (d) the Federal Water Pollution Control Act;
and (e) the Clean Water Act of 1977; in each case, as amended from time to
time, and together with all rules and regulations promulgated in connection
therewith) enacted by any Governmental Authority in connection with or relating
to the protection or regulation of the environment, including, without
limitation, those laws, statutes, and regulations regulating the disposal,
removal, production, storing, refining, handling, transferring, processing, or
transporting of Hazardous Substances and any orders, decrees or judgments
issued by any court of competent jurisdiction in connection with any of the
foregoing.

“ERISA”
– means the Employee Retirement Income Security Act of 1974, as amended from
time to time.

“ERISA
Affiliate” – means any corporation or trade or business that

(a)                                  is a member of the same controlled group
of corporations (within the meaning of Section 414(b) of the IRC) as the
Company; or

(b)                                 is under common control (within the
meaning of Section 414(c) of the IRC) with the Company.

“Event
of Default” – Section 1.01 of the Indenture.

“Excepted
Property” – the “Excepted Property” exceptions to the granting clauses of the
Indenture.

“First
Mortgage Bonds” – means and includes the Series B Bonds, the Series D Bonds,
the Series E Bonds and each and every other bond, of whatever series, issued
pursuant to the Indenture.

“First
Supplemental Indenture” – Section 1.1 of this Agreement.

“Second
Supplemental Indenture” – Section 1.1 of this Agreement.

“Third
Supplemental Indenture” – Section 1.1 of this Agreement.

“Fourth
Supplemental Indenture” – Section 1.1 of this Agreement.

“Fifth
Supplemental Indenture” – Section 1.1 of this Agreement.

“Governmental
Authority” – means and includes:

(a)                                  the governments of:

 16
 

(i)                        the United States of America and any
state or other political subdivision thereof; or

(ii)                     any jurisdiction in which the Company or
the Subsidiary conducts all or any part of its business;

(b)                                              each public utilities commission or
similar entry having regulatory authority over the Company or the Subsidiary;
and

(c)                                               any other entity exercising executive,
legislative, judicial, regulatory or administrative functions of, or pertaining
to, any such government referred to in clauses (a) or (b) of this definition.

“Hazardous
Substances” – means and includes any and all pollutants, contaminants, toxic or
hazardous wastes or any other substances that might pose a hazard to health or
safety, the removal of which may be required or the generation, manufacture,
refining, production, processing, treatment, storage, handling, transportation,
transfer, use, disposal, release, discharge, spillage, seepage, or filtration
of which is or shall be restricted, prohibited or penalized by any applicable
law (including, without limitation, asbestos, urea formaldehyde foam
insulation, polychlorinated biphenyls, petroleum and petroleum-derived
products).

“Indenture”
– Section 1.1 of this Agreement.

“Interest
Payment Date” – Section 1.01 of the Indenture.

“Institutional
Investor” – means (a) any original purchaser of a Bond, (b) any holder of a
bond holding more than $1,000,000 of the aggregate principal amount of the
Bonds then outstanding, and (c) any bank, trust company, savings and loan
association or other financial institution, any pension plan, any investment
company, any insurance company, any broker or dealer, or any other similar
financial institution or entity, regardless of legal form.

“IRC”
– means the Internal Revenue Code of 1986, together with all rules and
regulations promulgated pursuant thereto, as amended from time to time.

“IRS”
– means the Internal Revenue Service of the United States of America and any
successor agency.

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

 17
 

“Make
Whole Surcharge Definitions” – for the purposes of the optional redemption
provision in the Bonds, the following definitions which appear in the Fifth
Supplemental Indenture shall apply:

To determine the surcharge
designed to compensate CoBank for any actual or imputed funding losses incurred
by CoBank as a result of the repayment, CoBank will:

(A)                              Determine the
difference between:  (1) the rate
estimated by CoBank on the date the rate was fixed to be its cost to fund the
loan on that day in the manner set forth in its then current methodology; minus
(2) the rate estimated by CoBank on the date the surcharge is calculated to be
its cost, less dealer concessions and other issuance costs, to fund a new fixed
rate loan in accordance with its then current methodology having the same fixed
rate period and repayment characteristics as the balance being repaid.  If such difference is negative, then for
purposes of the remaining calculations, such difference shall be deemed to be
zero.

(B)                                Add 1⁄2 of 1% to
such difference (such that the minimum result shall at all times be 1⁄2 of 1%).

(C)                                Divide the
result determined in (B) above by the number of times interest is payable
during the year.

(D)                               For each
interest period (or portion thereof) during which interest was scheduled to
accrue at the fixed rate, multiply the amount determined in (C) above by the
principal balance scheduled to have been outstanding during such period (such
that there is a calculation for each interest period during which the amount
repaid was scheduled to have been outstanding at the fixed rate).

(E)                                 Determine the
present value of each calculation made under (D) above based upon the scheduled
time that interest on the amount repaid would have been payable and a discount
rate equal to the rate set forth in (A)(2) above.

(F)                                 Add all of the
calculations made under (E) above.  The
result shall be the Make Whole Surcharge.

Nothing contained herein
shall prevent CoBank from funding its loans in any manner as CoBank may, in its
sole discretion, elect, and the surcharges provided for herein shall not be
increased or decreased based on the actual methods chosen by CoBank to fund or
hedge the loan being repaid.

“Material”
means material in relation to the business, operations, affairs, financial
condition, assets or properties of the Company and its Subsidiaries taken as a
whole.

“Material
Adverse Effect” means a material adverse effect on (a) the business,
operations, affairs, financial condition, assets or properties of the Company
and its Subsidiaries taken as a 

 18
 

whole, or (b) the ability of the Company to perform
its obligations under this Agreement, the Indenture and the Bonds, or (c) the
validity or enforceability of this Agreement, the Indenture or the Bonds.

“Multiemployer
Plan” means any Plan that is a “multiemployer plan” (as such term is defined in
section 4001(a)(3) of ERISA).

“Net
Earnings for Interest” – Section 4.02A of the Indenture.

“Outstanding”
– Section 1.01 of the Indenture; provided, however,
that for purposes of this Agreement only (and not the Indenture, except to the
extent provided therein), First Mortgage Bonds held or owned by the Company,
any Subsidiary or any Affiliate shall not be deemed to be Outstanding.

“Parent”
– Southwest Water Company, a Delaware corporation, which as of the Closing Date
owns one hundred percent (100%) of the capital stock of the Company.

“PBGC”
– means the Pension Benefit Guaranty Corporation and any successor corporation
or governmental agency.

“Permitted
Encumbrances” – Section 1.01 of the Indenture.

“Pension
Plan” – means, at any time, any “employee benefit plan” (as such term is
defined in Section 3(2) of ERISA), subject to Title IV of ERISA, maintained at
such time by the Company or any ERISA Affiliate for employees of the Company or
such ERISA Affiliate, excluding any Multiemployer Plan.

“Person”
– an individual, partnership, corporation, trust or unincorporated
organization, and a government or agency or political subdivision thereof.

“Plan”
means an employee benefit plan” (as defined in section 3(3) of ERISA) subject
to Title I of ERISA that is or, within the preceding five years, has been
established or maintained, or to which contributions are or, within the
preceding five years, have been made or required to be made, by the Company or
its Parent or any of its Subsidiaries or with respect to which the Company its
Parent or any of its Subsidiaries may have any liability.

“Property”
– any interest in any kind of property or asset, whether real, personal or mixed,
and whether tangible or intangible.

“PUC”
– the California Public Utilities Commission.

“Purchaser”
– means the Person listed as purchaser of the Bonds on Annex 1 hereto.

“Redemption
Price” – Section 1.01 of the Indenture.

“Required
Holders” – at any time means the holders of 66-2/3% or more in aggregate
principal amount of Bonds Outstanding at such time.

“Securities
Act” – the Securities Act of 1933, as such act may be amended from time to
time.

“Security”
– has the same meaning as in Section 2(1) of the Securities Act of 1933, as
amended.

 19
 

“Series
A Bonds” – Section 3.01 of the Indenture.

“Series
B Bonds” – Section 3 of the Second Supplemental Indenture.

“Series
C Bonds” – Section 3 of the Third Supplemental Indenture.

“Series
D Bonds” – Section 2 of the fourth Supplemental Indenture.

“Subsidiary”
means as to any Person, any corporation, association or other business entity
in which such Person or one or more Subsidiaries of such Person or such Person
and one or more Subsidiaries of such Person owns sufficient equity or voting
interests to elect a majority of the directors (or Persons performing similar
functions) of such entity.  Unless the
context otherwise requires, any reference to a “Subsidiary” is a reference to a
Subsidiary of the Company.

“Transactions”
– means and includes (a) the execution and delivery by the Company of the Bond
Purchase Agreement and the Fifth Supplemental Indenture; (b) the execution,
delivery, issue and sale of the Series E Bonds; (c) use $8 Million of the
Series “E” Bond proceeds to pay at maturity the $8 Million outstanding amount
of Series “C” Bonds in their entirety; and (d) performance by the Company of
its obligations under the terms of the Series E Bonds, the Indenture and the
Bond Purchase Agreement.

“Trustee”
– Section 1.1 of this Agreement.

Section 5.2.                                Accounting Principles. 
All accounting terms not otherwise defined herein have the meanings
assigned to them, and all computations herein provided for shall be made in
accordance with generally accepted accounting principles at the time in effect,
to the extent applicable, except where such principles are inconsistent with
the requirements of this Agreement.  In
determining accounting principles, the Company shall conform to generally
accepted accounting principles at the time in effect, unless it is required to
conform to any other order, rule or regulation of any Governmental Authority
having jurisdiction over the Company.

Section 5.3.                                Directly or Indirectly. 
Where any provision in this Agreement refers to action to be taken by
any Person, or which such Person is prohibited from taking, such provision will
be applicable whether such action is taken directly or indirectly by such
Person, including actions taken by or on behalf of any partnership in which
such Person is a general partner.

Section 5.4.                                Governing Law. 
THIS AGREEMENT AND THE BONDS WILL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAW, EXCEPT AS SUPERSEDED BY FEDERAL LAW.

Section 5.5.                                Section Headings, Table of
Contents and Construction.  The titles of the Sections and
the Table of Contents appear as a matter of convenience only, do not constitute
a part of this Agreement and will not affect the construction hereof.  Each covenant contained in this Agreement
will be construed (absent an express contrary provision herein) as being
independent of each other covenant contained herein, and compliance with any
one covenant will not (absent such an express contrary provision) be deemed to
excuse compliance with one or more other covenants.

 20
 

SECTION
6.                            EXPENSES,
ETC.

Section 6.1.                                Transaction Expenses. 
Whether or not the transactions contemplated hereby are consummated, the
Company will pay all costs and expenses (including reasonable attorneys’ fees
of your special counsel and, if reasonably required, local or other counsel)
incurred by you in connection with such transactions and in connection with any
amendments, waivers or consents under or in respect of this Agreement, the
Indenture or the Bonds (whether or not such amendment, waiver or consent
becomes effective), including, without limitation:  (a) the costs and expenses incurred in
enforcing or defending (or determining whether or how to enforce or defend) any
rights under this Agreement, the Indenture or the Bonds or in responding to any
subpoena or other legal process or informal investigative demand issued in
connection with this Agreement, the Indenture or the Bonds, or by reason of
being a holder of any Bond, and (b) the reasonable costs and expenses,
including financial advisors’ fees, incurred in connection with the insolvency
or bankruptcy of the Company or any Subsidiary or in connection with any
work-out or restructuring of the transactions contemplated hereby and by the
Bonds.

Section 6.2.                                Survival. 
The obligations of the Company under this Section 6 will survive the
payment or transfer of any Bond, the enforcement, amendment or waiver of any
provision of this Agreement, the Indenture or the Bonds, and the termination of
this Agreement.

SECTION
7.                            HOME
OFFICE PAYMENT.

So long as you or your
nominee shall be the holder of any Bond, and notwithstanding anything contained
in the Indenture or in such Bond to the contrary, the Company will pay or cause
to be paid all sums becoming due on such Bond for principal, Make Whole
Surcharge, if any, and interest by the method and at the address specified for
such purpose below your name in Annex 2, or by such other method or at such
other address as you shall have from time to time specified to the Company in
writing for such purpose, without the presentation or surrender of such Bond or
the making of any notation thereon, except that upon written request of the
Company made concurrently with or reasonably promptly after payment or
redemption in full of any Bond, you shall surrender such Bond for cancellation,
reasonably promptly after any such request, to the Company at its office set
forth below.  The transfer of any Bond
shall be made pursuant to the terms and conditions set forth in the Indenture
for such transfer.  The Company will
afford the benefits of this Section 7 to any Institutional Investor that is the
direct or indirect transferee of any Bond purchased by you under this Agreement
and that has made the same agreement relating to such Bond as you have made in
this Section 7.

SECTION 8.                            MISCELLANEOUS.

Section 8.1.                                Notices.

(a)                                  Method;
Address.  All communications under this
Agreement or under the Bonds will be in writing, will be delivered (i)
personally; (ii) by overnight courier; or (iii) sent by facsimile transmission,
acknowledgment received, with a copy sent by first class mail; in each case,
delivery or facsimile charges prepaid, and will be addressed:

 21
 

 

	
  

  	
  (i)

  	
  If to the Company:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Suburban Water
  Systems

  
	
   

  	
   

  	
  One Wilshire
  Building

  
	
   

  	
   

  	
  624 South Grand
  Avenue, Suite 2900

  
	
   

  	
   

  	
  Los Angeles,
  California 90017

  
	
   

  	
   

  	
  Attention: Chief
  Financial Officer

  
	
   

  	
   

  	
  Fax: (213)
  929-1889

  

 

or at such other address as the Company shall have
furnished in writing to the Trustee and all holders of the Bonds at the time
Outstanding:

(ii)                                  if to any of the holders of the Bonds:

(A)                              if such holder is the Purchaser, at its
address set forth on Annex 1 hereto, and further including any parties
referred to on such Annex 1 that are required to receive notices in addition to
such holder of the Bonds, or to any such party at such other address as such
party may designate by notice duly given to the Company and to the Trustee in
the manner provided in this Section 8.1 (which other address shall be entered
in the Bond register); and

(B)                                if such holder is not the Purchaser, at
its address set forth in the register for the registration and transfer of
Bonds maintained pursuant to Section 11.02 of the Indenture, or to any such
party at such other address as such party may designate by notice duly given in
the manner provided in this Section 8.1 to the Company and to the Trustee
(which other address shall be entered in such register).

(b)                                 When
Given.  Any communication under this
Section 8.1 shall be deemed given only when actually received.

Section 8.2.                                Amendment and Waiver.

(a)                                  Requirements.  This Agreement may be amended, and the
observance of any term hereof may be waived, with (and only with) the written
consent of the Company and the Required Holders; provided
that no such amendment or waiver of any of the provisions of Section 1, Section
3 or this Section 8.2, or any definition relating thereto, shall be effective
as to any holder of Bonds unless consented to by such holder in writing.

(b)                                 Solicitation
of Bondholders.

(i)                                     Solicitation.  The Company shall not:

(A)                              solicit,
request or negotiate for or with respect to any proposed waiver or amendment of
any of the provisions hereof or the Bonds; or

(B)                                solicit, request or negotiate for or with
respect to any proposed waiver or amendment of any of the provisions of the
Indenture, which proposed waiver or amendment would, pursuant to the terms of
the Indenture, require the consent of any holder of a Bond;

 22
 

unless, in each case, each holder of the Bonds
(irrespective of the amount of Bonds then owned by it) shall be informed
thereof by the Company with sufficient information to enable it to make an
informed decision with respect thereto. 
Executed or true and correct copies of any waiver or consent effected
pursuant to the provisions of this Section 8.2 or Article XIII of the Indenture
shall be delivered by the Company to each holder of Outstanding Bonds forthwith
following the date on which the same shall have been executed and delivered by
all holders of Outstanding Bonds (if any) required to consent or agree to such
waiver or consent.

(ii)                                  Payment. 
The Company shall not, directly or indirectly, pay or cause to be paid
any remuneration, whether by way of supplemental or additional interest, fee or
otherwise, or grant any security, to any holder of First Mortgage Bonds as
consideration for or as an inducement to the entering into by any holder of
First Mortgage Bonds of any waiver or amendment of any of the terms and
provisions hereof, of any other purchase agreement pursuant to which any other
First Mortgage Bonds were sold, of any First Mortgage Bond or of the Indenture
unless such remuneration is concurrently paid, such security is concurrently
granted, or an offer is concurrently made on the same terms, ratably to the
holders of all Bonds then Outstanding.

(iii)                               Scope of Consent. 
Any consent made pursuant to this Section 8.2 by a holder of Bonds that
has transferred or has agreed to transfer its Bonds to the Company, any
Subsidiary or any Affiliate and has provided or has agreed to provide such
written consent as a condition to such transfer shall be void and of no force
and effect except solely as to such holder, and any amendments effected or
waivers granted or to be effected or granted that would not have been or would
not be so effected or granted but for such consent (and the consents of all
other holders of Bonds that were acquired under the same or similar conditions)
shall be void and of no force and effect, retroactive to the date such
amendment or waiver initially took or takes effect, except solely as to such
holder.

(iv)                              Other Offers to Repurchase. 
The Company shall not and shall not permit any Affiliate to make any
offer to repurchase, exchange for any other security or otherwise acquire for
value any First Mortgage Bond (whether or not the acceptance of such offer is
conditioned upon the giving by any holder of any First Mortgage Bond of any
waiver or consent) unless such offer is concurrently made on the same terms,
ratably, to the holders of all Bonds then Outstanding.

The foregoing provisions of this Section 8.2(b) shall
not prevent or preclude:

(A)                              payment by the Company of attorneys’ fees
and expenses (including, without limitation, the fees of counsel who are
employees of a holder of First Mortgage Bonds, at the rate or rates, if any,
not to exceed the rate or rates then customarily charged by such holder) or
other out-of-pocket costs incurred by a holder of First Mortgage Bonds in
connection with any such consent, waiver or amendment where such payment is
required pursuant to a Purchase Agreement, any First Mortgage Bond or the
Indenture;

(B)                                the issuance and sale by the Company of
any series of First Mortgage Bonds with an interest rate, a prepayment premium,
prepayment terms or other business or financial terms which are different from
the business or financial terms of the Bonds, so long as such issuance and sale
and all such terms are in compliance with all applicable provisions of the
Indenture concerning issuance of additional series of First Mortgage Bonds;

 23
 

(C)                                the redemption of any First Mortgage
Bonds pursuant to their respective terms so long as such redemption is not
conditioned upon the giving by any holder of any First Mortgage Bond of any
waiver or consent; or

(D)                               the payment or giving by the Company of
consideration to all holders of First Mortgage Bonds of any series in exchange
for the waiver, elimination or reduction of a right contained only in the First
Mortgage Bonds of such series, so long as the payment or giving of such
consideration does not violate any provision of the Indenture, and so long as,
immediately after giving effect to the payment of such consideration and such
waiver, elimination or reduction, no Event of Default would exist;

nor
shall any provision of this Section 8.2(b) entitle the holders of the Bonds to
receive payments or other consideration equal or equivalent to the payments or
other consideration made or given pursuant to clauses (A), (C) or (D), or to
receive any right or benefit afforded to the holders of any other series of
First Mortgage Bonds pursuant to clause (B) above, to which the holders of the
Bonds would not otherwise be entitled.

(c)                                  Binding
Effect.  Except as provided in Section
8.2(b) hereof, any amendment or waiver consented to as provided in this Section
8.2 shall apply equally to all holders of Bonds and shall be binding upon them
and upon each future holder of any Bond and upon the Company whether or not
such Bond shall have been marked to indicate such amendment or waiver.  No such amendment or waiver shall extend to
or affect any obligation, covenant, agreement, Default or Event of Default not
expressly amended or waived or impair any right consequent thereon.

Section 8.3.                                Reproduction of Documents. 
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed; (b) documents received by you at the closing of your purchase of the
Bonds (except the Bonds themselves); and (c) financial statements, certificates
and other information previously or hereafter furnished to you; may be
reproduced by you by any photographic, photostatic, microfilm, micro-card,
miniature photographic or other similar process and you may destroy any
original document so reproduced.  The
Company agrees and stipulates that any such reproduction will be admissible in
evidence as the original itself in any judicial or administrative proceeding (whether
or not the original is in existence and whether or not such reproduction was
made by you in the regular course of business) and that any enlargement,
facsimile or further reproduction of such reproduction will likewise be
admissible in evidence.

Section 8.4.                                Survival. 
All warranties, representations, certifications and covenants made by
you in Section 1.3 of this Agreement, and made by the Company or by the Parent
and contained in this Agreement or in any certificate or other instrument
executed and delivered by the Company or the Parent, as the case may be,
pursuant to this Agreement in connection with the Closing, will be considered
to have been relied upon by you (if made by the Company or the Parent) or the
Company (if made by you), will be deemed made on and as of the Closing Date and
will survive the delivery to you of the Bonds and the payment by you of the
purchase price, regardless of any investigation made by or on behalf of you or
the Company, as the case may be.  All
statements in any such certificate or instrument made by the Company or the
Parent will constitute warranties and representations by the Person executing
such certificate or instrument.

Section 8.5.                                Successors and Assigns. 
This Agreement will inure to the benefit of and be binding upon the
successors and assigns of each of the parties. 
The provisions of this Agreement are intended to be for the benefit of
all holders, from time to time, of Bonds, and will be enforceable by any 

 24
 

such
holder, whether or not an express assignment to such holder of rights under
this Agreement has been made by you or your successor or assign.

Section 8.6.                                Duplicate Originals; Execution in
Counterparts.  Two or more duplicate originals of this
Agreement may be signed by the parties, each of which will be an original but
all of which together will constitute one and the same instrument.  This Agreement may be executed in one or more
counterparts and will be effective when at least one counterpart has been
executed by each party hereto, and each set of counterparts which,
collectively, show execution by each party hereto will constitute one duplicate
original.

Section 8.7.                                Construction – Representations
and Warranties.  The Parent is entering into this Agreement
for the sole purpose of providing the representations and warranties set forth in
Sections 2.4(a), 2.5, 2.12(a) and (b), and, to the extent such representations
and warranties relate to the Parent, Section 2.10 and Section 2.15, and the
Parent shall not be liable in connection with any other Sections of this
Agreement other than Section 8.4 as it relates to the above-referenced
sections.

Section 8.8.                                Incorporation by Reference. 
All exhibits and annexes attached to this Agreement are hereby
incorporated into and made a part of this Agreement by this reference.

If this Agreement is satisfactory to you, please so indicate by signing
the acceptance at the foot of a counterpart of this Agreement and return such
counterpart to the Company, whereupon this Agreement will become binding
between us in accordance with its terms.

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  SUBURBAN
  WATER SYSTEMS,

  
	
   

  	
  a California
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael O.
  Quinn

  	
   

  
	
   

  	
   

  	
  Michael O. Quinn

  
	
   

  	
   

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ John A.
  Brettl

  	
   

  
	
   

  	
   

  	
  John A. Brettl

  
	
   

  	
   

  	
  Chief Financial
  Officer

  

 

 25
 

The undersigned hereby joins in the foregoing Agreement for the sole
purpose described in Section 8.7 and to provide the representations and
warranties which are ascribed to Southwest Water Company by the provisions of
Section 2 and such section.

	
   

  	
   

  	
  SOUTHWEST WATER COMPANY,

  
	
   

  	
   

  	
  a Delaware
  corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Shelley A.
  Farnham

  	
   

  
	
   

  	
   

  	
   

  	
  Shelley A.
  Farnham

  
	
   

  	
   

  	
   

  	
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Cheryl L.
  Clary

  	
   

  
	
   

  	
   

  	
   

  	
  Cheryl L. Clary

  
	
   

  	
   

  	
   

  	
  Chief Financial
  Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Agreed to and
  Accepted:

  	
   

  	
  CoBank ACB

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ David W.
  Dornbirer

  	
   

  
	
   

  	
   

  	
   

  	
  David W.
  Dornbirer

  
	
   

  	
   

  	
   

  	
  Vice President

  

 

 26

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