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MOSES, WITTEMYER, HARRISON AND WOODRUFF, PoCo Chad Henderson April 25, 2005 Page 3 rotation time period that the Remaining Shareholders would be entitled to divert their interests in the Highland Canal water rights. It worked under the Highland Canal as a whole, but would not work too well for the Remaining Shareholders. LA WMA has concluded that the most practical and fair way to operate the Highland Canal, and we image the best for the Remaining Shareholders, would be to deliver water to the Remaining Shareholders based on fixed flow rate of 2.3 cubic-feet per second ("cfs") throughout the ilTigation season. Adopting a fixed flow rate as the operating plan seems to be the best approach because: (a) it would be the easiest to administer since the Highland Canal headgate could be permanently modified to only allow a fixed flow rate to be diverted into the Canal instead of having to adjust the headgate on a daily basis as would often be required under the "pro-rata" or "rotation" operating plan; (b) it would provide the Remaining Shareholders with a water supply that is less variable and, therefore, easier to manage; and (c) it would, on the average, increase the diversions available to the Remaining Shareholders by a relatively small amount above the diversions that would be available to them under the "pro-rata" or "rotation" operating plan. This plan would involve, at times, the use ofa small portion of LA WMA's Highland Canal water rights by the Remaining Shareholders to guarantee that the fixed flow rate of 2.3 cfs could lawfully be diverted by the Remaining Shareholders into the Highland Canal for their use. Under the Agreement, when the Remaining Shareholders' interests in the Highland Canal water rights are not sufficient to allow them to divert 2.3 cfs into the Highland Canal, LA WMA would allow them to divert up to that amount of LA WMA's Highland Canal water rights that is needed to permit the Remaining Shareholders to divert 2.3 cfs into the Highland Canal. The Agreement would, therefore, contractually encumber a small portion of LA WMA' s Highland Canal water rights for the benefit and use of the Remaining Shareholders. Pursuant to Section 6.c. ofCWCB Loan Contract No. C153715, Section 9 ofCWCB Loan Contract No. C153768 and Section 10 of CWCB Loan Contract No. C153756, LA WMA generally shall not sell, convey, assign, grant, transfer, mortgage, pledge, encumber or otherwise ~ disposeofl'he security for the respective loan, which includes LAWMA's Highland Canal water rights, without the prior written concurrence of the CWCB. By this letter, LA WMA wishes to inform the CWCB that it will be requesting the CWCB' s consent to an agreement between LA WMA and the Remaining Shareholders that I anticipate will be in a form that is substantially similar to the Agreement attached hereto. LAWMA will formally ask for the CWCB's consent to such an agreement when a final form of the agreement has been agreed to by the Remaining Shareholders and LA WMA but, before LA WMA and the Remaining Shareholders sign such an agreement.