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Mr. Mike Gibson December 14, 2006 Page 3 Description of the Water Rights The water rights for the Anaconda Ditch were decreed in the Rio Grande County District Court in several adjudications, starting on May 1, 1896. Ten priorities totaling 38.76 cfs, were decreed for irrigation with appropriation dates ranging from March 16, 1876 to December 31, 1893. According to HRS, Rio Grande Ranch, LLC purchased 22.375 cfs of the total amount decreed, or 58 percent of the total decreed amount associated with the River Island Ranch. The source of water is the Rio Grande. Table 1 was copied from the HRS report; it displays pertinent information about the Anaconda Ditch water rights and the distribution of ownership between the River Island and Nickerson ranches. Determination of Water Right Yield The yield of a water source is dependent on the physical supply and on the seniority of the water right. The amount of the water right that can be changed to other uses is dependent on the historical consumptive use attributable to the use of the water. The historical consumptive use is the amount of evaporation from soil and vegetation surfaces and vegetative transpiration. HRS estimated that the historical consumptive use averaged 306 acre-feet annually and ranged from 151 acre-feet in 2002 to 394 acre-feet in 1977. APPROACH TO VALUATION' The objective of this appraisal was to estimate the fair market value of the water rights in the Anaconda Ditch owned by Rio Grande Ranch, LLC. In this appraisal, the fair`market value is defined as the amount of money that a willing and knowledgeable buyer would pay to a willing and knowledgeable seller for these assets under normal economic conditions, assuming neither buyer nor seller are under undue duress. The fair market value was estimated for the highest and best use of the assets which is defined as that reasonable and probable use that will support the highest value. Moreover, it has to be a use that is (1) permitted by law, (2) physically possible, (3) financially viable, and (4) results in the most profitable use. In our opinion, the highest and best use for the Anaconda Ditch water rights is for augmentation and replacement of depletions caused by municipal, domestic, and commercial water uses. This corresponds to the uses to which the SLVWCD would use the water rights. There are three major approaches to the valuation of water rights. These are (1) the income approach, (2) the cost approach and (3) the market data approach. In the income approach, the income stream associated with a property is used to calculate an equivalent value. This is not practical here because historically the diverted water was,used for irrigation_of agricultural crops whereas the future use will be for augmentation and replacement. The cost approach involves estimating the cost for developing a water supply similar to the one being appraised, but since the Rio Grande is already over-appropriated, a new water project is probably infeasible. The market data approach is generally considered to be the best and is preferable where adequate market data are available. It is based on the principle of substitution which suggests that an informed buyer will not pay more for a property than another property that could be substituted for the same cost. It gives consideration to actual sales of similar properties with appropriate adjustments for the various factors`influencing value. It is the approach adopted for this appraisal.