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<br />MOSES, WITTEMYER, HARRISON AND WOODRUFF, PoCo <br /> <br />Chad Henderson <br />April 25, 2005 <br />Page 2 <br /> <br />rights and the diversion facilities for the Highland Canal so they can continue their historical <br />farming operations. <br /> <br />During the past few years, the Remaining Shareholders have diverted more water into <br />the Highland Canal than they were legally entitled to divert based on their ownership interests in the <br />Highland Canal water rights. That extra water was water that was owned by LA WMA. LA WMA <br />has requested that the Division Engineer administer diversions by the Remaining Shareholders into <br />the Highland Canal so that they only divert their ownership interests in the Highland Canal water <br />rights. So far, the Division Engineer has refused to so administer diversions into the Highland Canal <br />until LA WMA has a written agreement with the Remaining Shareholders that governs how <br />diversions into the Highland Canal are to be administered as between LA WMA and the Remaining <br />Shareholders. <br /> <br />Accordingly, LA WMA has drafted such an agreement (the "Agreement") and has <br />provided the Agreement to the Remaining Shareholders for their consideration. The Agreement is <br />intended to resolve the future administration of diversions into the Highland Canal and to prevent <br />the Remaining Shareholders from stealing water from LA WMA by diverting more water into the <br />Highland Canal than they are entitled to divert based on their ownership interests in the Highland <br />Canal water rights. A copy of the Agreement is enclosed herein for your review. I also enclose a <br />copy of a November 10, 2004 memorandum prepared by LA WMA's water resources engineer, <br />RandyHendrix, of Helton & Williamsen, P.c., that sets out the engineering basis for the operation <br />of the Highland Canal as proposed in the Agreement. <br /> <br />As discussed in detail in the attached engineering memorandum, there are generally <br />three ways that an operating agreement for the Highland Canal could be set-up. The first way would <br />be to limit diversions by the Remaining Shareholders to their pro-rata share of the in-priority <br />Highland Canal water rights. A second way would be to deliver water to the Remaining <br />Shareholders using a rotational plan that would be similar to the practice that was historically used <br />by the Company. A third way would be to deliver water to the remaining shareholders using a fixed <br />flow rate. <br /> <br />A basic problem with the first approach, the Remaining Shareholders simply taking <br />their pro-rata interest, is that the amount of in-priority water available to the Highland Canal water <br />rights varies greatly from time to time during the inigation season. That approach would be quite <br />difficult to administer and it would be quite difficult for the Remaining Shareholders to operate for <br />inigation. The problem with the second approach, trying to mimic the Company's historical rotation <br />practice, is that it will be very unpredictable whether water will be available during the particular <br />