EXHIBIT 10.1
 
OPTION AGREEMENT

This Option Agreement (“Agreement”) is made and entered into as of the ___ day
of _________ 2010, by and between CADIZ INC., and FENNER MUTUAL WATER COMPANY,
on the one hand (collectively, “CADIZ”), and SANTA MARGARITA WATER DISTRICT
(referred to herein as either “SMWD” or “Optionee”), on the other hand, with
reference to the following facts and intentions:
 
 
RECITALS
 
A.           CADIZ owns and controls approximately 35,000 acres of land located
in the Cadiz and Fenner valleys of San Bernardino County (the “Property”).
 
B.           Substantial quantities of percolating groundwater exist within the
aquifer system underlying the Property that naturally migrates to the Bristol
and Cadiz dry lakes and then is lost to evaporation, such that water that would
otherwise be wasted can be conserved and made available for reasonable and
beneficial use in accordance with modern sustainable groundwater management
practices.
 
C.           Existing and potential aquifer capacity exists within the
underlying aquifers that can be prudently used to store conserved and imported
water for subsequent beneficial use.
 
D.           The County of San Bernardino has previously approved a Conditional
Use Permit in 1993 authorizing the withdrawal of water for agricultural uses on
the overlying land and CADIZ has made substantial investments in continuing its
agricultural concern on up to 9,600 acres.
 
E.           CADIZ has acquired a 99-year right of way along an active railroad
line from the Arizona & California Railroad to construct a pipeline and power
line to convey water to and from the Property to the Colorado River Aqueduct
(“CRA”).
 
F.           The Parties acknowledge and agree that other public water purveyors
within six Southern California counties (Ventura, Los Angeles, Orange,
Riverside, San Bernardino and San Diego) are evaluating their potential
participation in the Program (as defined below) as potential purchasers of
conserved water.
 
G.           The Parties intend to conserve groundwater and manage the available
groundwater supply in accordance with the directives stated by the California
Supreme Court in City of Los Angeles v. City of San Fernando (1975) 14 Cal.3d
199 thereby withdrawing any temporary surplus required to obtain optimal
groundwater water levels and to manage extractions within the long-term safe
annual yield.
 
H.           CADIZ will operate the Program on a long-term sustainable basis and
in a manner consistent with its covenants to the Natural Heritage Institute so
as to avoid unreasonable environmental harm as set forth in Exhibit “A” attached
hereto.
 
I.           Prior to the initiation of environmental review, CADIZ will cause
the preparation of a watershed analysis and technical evaluation of the water
supply availability by a qualified national engineering firm which must
demonstrate the potential for recovery of conserved water in quantities
sufficient to meet the promised deliveries to the purchasers of conserved water.
 
J.           CADIZ is prepared to reserve up to a maximum of 10% of the
conserved water and storage developed from the Property for reasonable and
beneficial uses by public water purveyors within San Bernardino County.
 
K.           CADIZ desires to grant an option to the Optionee to acquire certain
quantities of conserved water and storage capacity rights, and the Optionee
desires to acquire such an option, subject to the terms and conditions of this
Agreement.
 
L.           The method of delivery of water from CADIZ to the CRA, the
potential that the Program may earn Intentionally Created Surplus Credits (“ICS
Credits”) for MWD under federal law, the eligibility of the Program to receive
state and federal grants, CADIZ’ offer to grant a portion of the available
Storage to MWD, and the MWD Local Resources Program (“LRP”), all create
potential opportunities for a direct and dollar-for-dollar reduction in the
price of water to be made available by the Program as it is finally delivered to
the purchasers of the conserved water.
 
M.           The Parties acknowledge that the final price for water, adjusting
for other consideration, cannot be determined until several contingencies to the
operation of the Program, including but not limited to the items set forth in
Recital L above and as may be learned through environmental review, are
satisfied.
 
N.           Notwithstanding the contingencies of environmental review and the
availability of third party funding which may impact the as-received price for
water to the purchasers of conserved water, CADIZ is willing to grant the rights
to the Optionee as set forth in this Agreement.
 
O.           CADIZ intends to facilitate the implementation of this Agreement
through the Fenner Mutual Water Company, a private non-profit water company,
that will own or control various water, storage, easement and conveyance rights.
 
NOW, THEREFORE, in consideration of the foregoing recitals and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties hereto agree as follows:
 
ARTICLE 1
THE PROGRAM
 
1.1 Program Summary.  The “Program” is defined and summarized in the attached
Exhibit “B” and incorporated by this reference.
 
1.2 Definitions.  The following definitions shall apply.
 
(a)           “Annual Quantity” means the quantity of water that is made
available by CADIZ through its intended water conservation program.
 
(b)           “Carry-Over Storage” means the use of unsaturated soils that
provide available subsurface storage capacity to store water from year to year
for subsequent withdrawal and delivery to Optionee.  Carry-Over Storage may be
used to store imported or foreign water, provided that sufficient pipeline
capacity exists to convey water from the CRA to the Property.
 
(c)           “Supplemental Storage” means the use of available subsurface
capacity to store Conserved Water in the event that CADIZ is unable to or
prevented from delivering Conserved Water to the CRA because there is
insufficient capacity in the CRA, and is further defined in Section 2.2(d).
 
ARTICLE 2
 
OPTION
 
2.1 Option Consideration.  As consideration for the Option and as a condition
precedent to the exercise of the Option, the Optionee must have first executed
and be bound by mutually agreed terms whereby it will pay a fair portion of an
expected environmental review costs (the “Environmental Cost Sharing
Agreement”).  Optionee’s share of environmental review costs under the
Environmental Cost Sharing Agreement attached hereto as Exhibit “A” will not
exceed $125,000 without further written agreement between the Parties.
 
2.2 Grant of Option and Exercise Price.  Subject to the Optionee’s performance
of its obligations hereunder and the execution of the Environmental Cost Sharing
Agreement, CADIZ hereby grants to Optionee an option to acquire Conserved Water
along with the following interests as set forth in Exhibit “C” (the “Price
Schedule”) (collectively, the “Option”):
 
(a)           Conserved Water.  The Optionee shall have the option, but not the
obligation to acquire up to 5,000 acre-feet per year of conserved water as an
Annual Quantity Right (the “Initial 5K AF”).  The exercise price for the
acquisition of the Initial 5K AF and the timing of such payments are set forth
on the Price Schedule. Further, the Optionee shall have the option, but not the
obligation, to acquire up to an additional 10,000 acre-feet per year of
conserved water at the exercise price set forth on the Price Schedule (the
“Additional 10K AF”) (collectively, the water acquired pursuant to this Section
2.2(a) being the “Conserved Water”).
 
(b)           First Fill Storage and Fill Water.  Upon Optionee’s exercise of
its option for the Initial 5K AF, Optionee shall be entitled to 15,000 acre-feet
of First Fill Storage and 15,000 acre-feet of Fill Water on a Space Available
capacity through the Pipeline that delivers water to the CRA.  Optionee may
re-fill any available First Fill Storage capacity with Carry-Over and Imported
Water on the same terms as applicable to Carry-Over storage.  However,
Optionee’s entire cost for the First Fill Storage and Fill Water shall be equal
to $20 (in April 2010 dollars) per acre-foot per year (“Annual Management
Obligation”) for 15,000 acre-feet unless Optionee, in its discretion, waives its
re-fill right to First Fill Storage, in which case the Annual Management
Obligation shall be assessed only on that quantity of water actually held in
First Fill Storage.  If Optionee waives its rights to First Fill Storage, then
it shall have no right to store any water other than Fill Water.  No losses will
be assessed upon the Fill Water held in First Fill Storage.
 
(c)           Carry-Over Storage.  Upon Optionee’s exercise of its option for
the Initial 5K AF, Optionee shall have the additional option, but not the
obligation, to acquire additional Carry-Over Storage in accordance with the
terms hereof:
 
(i)           Class A Carry-Over Storage.  Upon purchase of Class B Carry-Over
Storage (as described below), Optionee shall be entitled to 5,000 acre-feet of
Class A Carry-Over Storage on a Firm capacity and an additional 5,000 acre-feet
of Fill Water that may be transported on a Space Available capacity through the
Pipeline that delivers water to the CRA, at no charge.  No losses will be
assessed upon water held in Class A Carry-Over Storage.
 
(ii)           Class B Carry-Over Storage.  The Optionee shall have the option,
but not the obligation, to acquire up to 5,000 acre-feet of Class B Carry-Over
Storage at the exercise price set forth on, and payable in accordance with, the
Price Schedule.  No losses will be assessed upon water held in Class B
Carry-Over Storage.  Upon acquisition of Class B Carry-Over Storage, the
Optionee shall elect, in writing to CADIZ, whether it wishes to acquire firm or
space-available pipeline capacity, which shall enable the Optionee to utilize
the purchased Class B Carry-Over Storage in its discretion.
 
(d)           Illustrative Example.  By way of illustration, if Optionee
exercises its Option to acquire the Initial 5K AF, Optionee is entitled to
15,000 acre-feet of First Fill Storage and 15,000 acre-feet of Fill Water at no
additional cost with the exception of the Annual Management Obligation fees.  If
Optionee further elects to exercise its option to acquire Class B Carry-Over
Storage, Optionee will receive 5,000 acre-feet of Class B Carry-Over Storage and
5,000 acre-feet of Class A Carry-Over Storage.
 
(e)           Supplemental Storage.  In the event that CADIZ is unable to
deliver or is prevented from delivering Conserved Water to the CRA because there
is insufficient capacity to exchange or wheel the Conserved Water for beneficial
use within Optionee’s service area, then CADIZ will provide storage capacity in
sufficient quantity to retain and store the Conserved Water for the benefit of
the Optionee (“Supplemental Storage”).  The Supplemental Storage will be made
available free of charge to Optionee and for as long as there is insufficient
capacity in the CRA for Optionee to receive delivery of the Conserved Water
stored within the Supplemental Storage.  No losses will be assessed to Conserved
Water held in Supplemental Storage.
 
(f)           Pipeline Capacity.  First Fill Storage shall include the right to
transport Fill Water on a Space Available basis.  Class A Carry-Over Storage (if
obtained through the purchase of Class B Carry-Over Storage) shall include the
right to transport 5,000 acre-feet of any acquired Conserved Water through Class
A Firm pipeline capacity to the CRA, at no extra cost to the Optionee.  Upon
acquisition of Class B Carry-Over Storage, the Optionee shall elect, in writing
to CADIZ, whether it wishes to acquire Class B Firm or Space Available pipeline
capacity in accordance with the Price Schedule.
 
(g)           Administrative Fees.  Upon exercise of the Option (in whole or in
part), the Optionee shall pay an annual storage administrative fee to CADIZ in
accordance with the Price Schedule for the term of the exercised Option.
 
(h)           No Additional Fees.   CADIZ will not impose, and the Optionee will
not be responsible for, any additional fees and costs, other than as expressly
set forth in this Agreement and the Price Schedule.
 
(i)           Term of Exercised Option.  Upon exercise, the Conserved Water and
Carry-Over Storage rights acquired through the Optionee’s exercise of the Option
shall be for a term of fifty (50) years from the date construction of the
Program is deemed complete and Conserved Water is made available for delivery to
the CRA (the “initial term”).  In the event CADIZ fails to deliver to the
Optionee the acquired Conserved Water as requested by the Optionee during the
initial term for any reason (other than as a result of a force majeure), the
initial term shall be extended by that number of years necessary to fulfill
CADIZ’ obligation to deliver the acquired Conserved Water.  This means if the
well-field fails to produce sufficient water to meet Optionee’s scheduled
delivery request for Conserved Water, regardless of whether the Conserved Water
is Annual Quantity or from Carry-Over Storage, the initial term of the Agreement
will be extended for so long as necessary to complete the delivery.  In
addition, the initial term of the exercised Option may be mutually extended by
CADIZ and the Optionee by the Optionee’s transmittal of written notice
(delivered no later than 36 months prior to the expiration of the initial term)
of its intent to negotiate an extension of the term of an additional thirty (30)
years no later than December 31, 2050.  Upon receipt of the written notice, the
Parties will exercise good faith and reasonable best efforts to extend the term
under mutually agreeable terms.
 
(j)           Cost Off-Sets. The final cost of water, as delivered by CADIZ and
as received by the Optionee, may be subject to the resolution of state and
federal grants applications, contracts for services, exchanges and other
consideration that may be obtained from the state and federal government, MWD
and other third parties (collectively “Cost Off-Sets”).  These Cost Off-Sets may
substantially reduce the cost of water as delivered by CADIZ and as received by
the Optionee.  The Parties recognize and CADIZ expressly agrees that any
Cost-Off Sets will be applied as a dollar-for-dollar credit against some or all
of the Program costs as may be requested by the Optionee so as to reduce the
actual cost of Conserved Water delivered by CADIZ and as received by the
Optionee, as more fully detailed in Exhibit “D” attached hereto.  Further, CADIZ
acknowledges that the Optionee may elect in its sole discretion to participate
in an alternative public financing of some or all of the capital costs
attributable to conveying water to and from the Property to the CRA and that the
final cost will be incrementally reduced to reflect this decision.
 
(k)           Effective Cost The adjusted cost of Conserved Water and Storage to
the Optionee after accounting for the application of any Cost Off-Sets is the
“Effective Cost” and is generally described in Exhibit “D”.  Specifically,
following completion of Environmental Review for the Program, Optionee may elect
on its own or in coordination with some or all of the other purchasers of
conserved water, to assume complete responsibility for the design, financing,
construction and operation of the pipeline that conveys water between the CRA
and the Property.  The Effective Cost will reflect Optionee’s assumption of
these costs.
 
2.3 Exercise Period.  The Option for acquiring the Initial 5K AF shall be
exercisable for a period commencing upon the date of execution of this Agreement
and continuing until 5:00 p.m. PST on the 60th day following the satisfaction of
the condition precedent set forth in Section 2.4(b).  For acquiring the
Additional 10K AF, such period shall not extend beyond the 30th day following
the satisfaction of the condition precedent set forth in Section 2.4(b) (each
and as applicable, the “Exercise Period”).  This Option, this Agreement and any
rights accrued to the Optionee shall terminate immediately as to the Optionee,
without further notice, if the Environmental Cost Sharing Agreement referenced
in Section 2.1 terminates as to the Optionee pursuant to the terms thereof.
 
2.4 Conditions Precedent to Exercise of Option.  The obligations of the Parties
shall be conditioned as follows:
 
(a)           Option Exercise.  The obligations of CADIZ under this Article 2
are conditioned upon the Optionee’s timely exercise of the Option pursuant to
this Article 2 and performance of its obligations under the Environmental Cost
Sharing Agreement referenced in Section 2.1.
 
(b)           Environmental Review and Approval.  The obligations of the Parties
under this Article 2 are conditioned upon the completion of environmental
review, as may be required under federal and state environmental resource
protection laws and regulations and compliance with all other applicable
law.  In the event litigation is commenced following the completion of the
environmental review process, the Parties will meet and confer to determine
whether the condition of environmental review and approval has been satisfied
and whether to toll any applicable time periods under the Option while the
litigation is unresolved.
 
(c)           ICS Credit. CADIZ and Optionee will make application for an ICS
Credit, which if obtained, shall be shared equally (50/50) on a per acre-foot
basis.  CADIZ and Optionee will coordinate their efforts in support of an
application and will exercise good faith and reasonable best efforts to secure
ICS Credits.
 
           (d)           LRP Credit.  Optionee may, in its discretion, apply for
an LRP Credit from MWD by and through a MWD member agency and the value of the
LRP Credit is presently estimated at $250 per acre-foot.  Upon request by
Optionee, CADIZ will provide good faith assistance in support of Optionee’s
application.
 
(e)           Purchase/Sale Agreement.  If SMWD elects under Article 2 to
exercise the Option, the Parties will exercise reasonable best efforts to
negotiate a definitive purchase and sale agreement that incorporates the terms
of this Option Agreement, taking into account environmental review, the Parties’
collective efforts to secure potential financial off-sets and incentives, and
other relevant considerations prior to approval of the Program (“Purchase and
Sale Agreement”).
 
2.5 Exercise of Option.  Provided the Optionee has satisfied its respective
obligations under this Agreement and the Environmental Cost Sharing Agreement to
be negotiated concerning a fair apportionment of environmental costs, the
Optionee may exercise the Option, in whole or in part as set forth above, in its
sole and complete discretion by providing written notice to CADIZ within the
Exercise Period.  If any part of the Option is not timely exercised or this
Agreement is terminated, then CADIZ, in its sole and complete discretion and
without notice to or approval from the Optionee, may allocate the unexercised
portion of the Conserved Water, Carry-Over Storage rights, and pipeline (firm or
space-available) capacity to any other person or entity.
 
2.6 Reversion.  In the event the Optionee withdraws from participation in the
Program, all rights and interests previously held by the Optionee under the
Option (exercised or otherwise) shall revert to CADIZ.  For purposes of this
Section 2.6, “withdraws”shall mean any of the following:  (i) the Optionee’s
failure to timely pay its obligations under the Environmental Cost Sharing
Agreement; or (ii) the Optionee’s failure to complete its environmental review.
 
2.7 Other Covenants.  The Parties hereby agree further to the following
covenants:
 
(a)           Conveyance and Distribution System.  The Parties intend to
coordinate their efforts and to work constructively with Metropolitan Water
District (“MWD”) and MWD member agencies to determine the most efficient method
to achieve their objectives and to obtain access to the MWD conveyance and
distribution system.  The Parties may coordinate their proposed conservation
efforts with MWD to facilitate the generation of Intentionally Created Surplus
Credits for the benefit of MWD.  In addition, in its complete discretion, CADIZ
may offer an “in kind” contribution to MWD for the purpose of reducing the cost
of conveying and exchanging water or otherwise reducing the cost of water
delivered by CADIZ or as received by the Optionee.  If CADIZ makes such an “in
kind” offer and MWD accepts, the Parties will exercise best efforts to negotiate
equitable remuneration for CADIZ that fairly reflects the benefit that has been
conferred by CADIZ on the other Parties.
 
(b)           Cooperation.  The Parties shall cooperate with each other and with
other Primary and Secondary Participants for the purpose of obtaining all
regulatory approvals, including, without limitation, an environmental review and
compliance analysis and other state and federal approvals required to satisfy
conditions necessary to implement the Program.
 
(c)           Suppliers and Contractors.  CADIZ will exercise good faith and
best efforts to select companies based primarily within the Inland Empire to
provide the materials and services that will be required to construct and
operate any water related projects on the Property.
 
(d)           Environmental Betterment.  The Parties acknowledge the goal of a
general “environmental betterment” whereby the Property and the operation of the
groundwater bank will be evaluated for use in connection with providing water to
beneficial environmental uses.  The Optionee hereby agrees to meet
to-be-determined demand management strategies that will indirectly reduce stress
on the San Francisco / San Joaquin Bay-Delta.
 
(e)           Solar Power.  CADIZ agrees to exert reasonable best efforts to
provide solar power to operate the Program facilities.  The Program will be
evaluated using both solar power and, in the event solar power is not available
in sufficient quantity to operate the Program, then traditional forms of energy.
 
(f)           Most Favored Nation.  Notwithstanding any other provision of this
Agreement, the Optionee has, in its sole and complete discretion, the right to
elect the same price terms offered to any other purchaser of Conserved Water or
Storage made available by CADIZ from the date of execution of this Agreement
until CADIZ has executed binding definitive agreements for more than fifty (50)
percent of the identified Program capacity to deliver Conserved Water.
 
(g)           Environmental Cost Reimbursement or Credit.  Subject to
circumstances described in the Environmental Cost Sharing Agreement, Optionee
may be eligible for a reimbursement of its costs paid pursuant thereto or a
credit against the exercise of the Option hereunder.
 
2.8           Buy-In.  Notwithstanding anything herein, in lieu of exercising
the Option, SMWD may elect in its complete discretion to negotiate with CADIZ
for the acquisition of water, water rights, storage, storage rights, well-field
capacity, pipeline capacity and real property interests owned or controlled by
CADIZ (collectively “Buy-In”).  Upon request by SMWD, CADIZ and SMWD will
exercise reasonable best efforts to negotiate a mutually agreeable Buy-In prior
to completion of the environmental review process and the execution of a
definitive Purchase and Sale Agreement.
 
ARTICLE 3
 
REPRESENTATIONS AND WARRANTIES
 
3.1 Representations and Warranties by the Parties.  Each Party hereby makes the
following covenants, representations and warranties to each other Party:
 
(a)           Authority.  It has the authority to enter into this Agreement and
perform as set forth herein and therein.  This Agreement has been duly
authorized by all required action.
 
(b)           No Violations.  The execution of this Agreement and performance of
its obligations under this Agreement will not violate any contract, transaction,
option, covenant, condition, obligation of undertaking of such Party, nor to the
best of its knowledge, will it violate any law, ordinance, statute, order or
regulation.
 
(c)           Enforceability.  This Agreement and all documents required hereby
to be executed by such Party are and shall be valid, legally binding obligations
enforceable against such Party in accordance with their terms.
 
ARTICLE 4
 
GENERAL PROVISIONS
 
4.1 Interpretation.  The provisions of this Agreement should be liberally
interpreted to effectuate its purposes.  The language of this Agreement shall be
construed simply according to its plain meaning and shall not be construed for
or against either Party, as each Party has participated in the drafting of this
Agreement and has had the opportunity to have their counsel review it.  Whenever
the context and construction so requires, all words used in the singular shall
be deemed to be used in the plural, all masculine shall include the feminine and
neuter, and vice versa.  The word “including” means without limitation, and the
word “or” is not exclusive.  Unless the context otherwise requires, references
herein: (i) to Articles, Sections and Exhibits mean the Articles and Section of
and the Exhibits attached to this Agreement; (ii) to an agreement, instrument or
other document means such agreement, instrument or other document as amended,
supplemented and modified from time to time to the extent permitted by the
provisions thereof and by this Agreement; and (iii) to a statute means such
statute as amended from time to time and includes any successor legislation
thereto.
 
4.2 Notice.  All notices and other communications required or permitted to be
given under this Agreement shall be in writing and shall be conclusively deemed
to have been duly provided: (i) when transmitted via e-mail; (ii) seventy-two
(72) hours after the writing is deposited in the mail system of the United
States Postal Service prepaid for standard or certified mail return receipt
requested; or (iii) at 4:59 p.m. PDST on the Business Day after the writing is
deposited with a national overnight delivery service, e.g., Federal Express, DHL
Worldwide Express or United Parcel Service, postage prepaid, with
next-business-day delivery guaranteed, provided that the sending Party receives
a confirmation of delivery from the delivery service provider.  Notices shall be
directed as indicated below, or as may be changed or supplemented from time to
time by the recipient Party by giving the other Party written notice in the
manner stated above.
 
If to CADIZ:
CADIZ, Inc.
550 S. Hope Street, Suite 2850
Los Angeles, CA 90017
(213) 271-1600
(213) 271-1614 (facsimile)
Attn:  Scott Slater
sslater@bhfs.com
 
If to Optionee:
Santa Margarita Water District
26111 Antonio Parkway
Rancho Santa Margarita, CA  92688
(949) 459-6601
(949) 459-6463 (facsimile)
Attn:  John Schatz
Jschatz13@cox.net
 

4.3 Date and Delivery of Agreement.  The Parties intend that this Agreement,
upon execution, shall be deemed effective, executed and delivered for all
purposes under this Agreement, subject to the conditions precedent set forth in
Section 2.4.
 
4.4 Good Faith.  The Parties agree to exercise their commercially reasonable
best efforts and good faith to effectuate all the terms and conditions of this
Agreement.
 
4.5 Other Instruments.  Each Party shall cause to be executed any further
documents reasonably necessary in the opinion of the requesting Party.  The
requesting Party shall pay the cost of the further documents, except that each
Party shall pay its own attorney fees.
 
4.6 Successors and Assigns.  This Agreement shall be binding on and shall inure
to the benefit of the Parties and their respective successors and permitted
assigns, except as restricted by this Agreement.  Notwithstanding the foregoing,
the Option and SMWD’s rights hereunder shall not be assignable to any other
person or entity without the express prior written consent of CADIZ, which shall
be exercised in its sole discretion.
 
4.7 No Third-Party Rights.  Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any persons other than the Parties to this Agreement and their
respective successors and assigns, nor is anything in this Agreement intended to
relieve or discharge the obligations or liability of any third persons to any
party to this Agreement, nor shall any provision give any third persons any
right of subrogation or action over or against any party to this Agreement.
 
4.8 Dispute Resolution.  The Parties shall seek to resolve any dispute
concerning the interpretation or implementation of this Agreement through good
faith negotiation, involving, as and when appropriate, the general manager or
chief executive officer of each of the Parties.  Any dispute that remains
unresolved thirty (30) days after notice of the dispute is made to the Parties,
shall be resolved by a single arbitrator with substantial experience on the
matter or matters in dispute, conducted in accordance with JAMS.  If the Parties
cannot agree on a single arbitrator within ten (10) days of the written election
to submit the matter to arbitration, either Party may request JAMS to appoint a
single, neutral arbitrator.  The Parties shall use their reasonable best efforts
to have the arbitration proceeding concluded within ninety (90) business days of
selection of the arbitrator.  In rendering the award, the arbitrator shall
determine the rights and obligations of the Parties according to the substantive
and procedural laws of California.  All discovery shall be governed by the CCP
with all applicable time periods for notice and scheduling provided therein
being reduced by one-half.  The arbitrator may establish other discovery
limitations or rules.  The arbitrator shall have the authority to grant
provisional remedies and all other remedies at law or in equity, but shall not
have the power to award punitive or consequential damages.  The decision of the
arbitrator shall be final, conclusive and binding upon the Parties, and either
Party shall be entitled to the entry of judgment in a court of competent
jurisdiction based upon such decision.  The losing Party shall pay all costs and
expenses of the arbitration; provided, however, if neither Party is clearly the
losing Party, then the arbitrator shall allocate the arbitration costs between
the Parties in an equitable manner, as the arbitrator may determine in his or
her sole discretion.
 
4.9 Default.  The failure by either Party to perform its obligations under this
Agreement, which continues for more than thirty (30) days after receipt of
written notice from the other Party stating the existence and nature of such
default (unless the default cannot be cured in said thirty (30) days, and in
that event, if the defaulting Party fails to continuously and diligently remedy
the default) shall constitute a default, which default shall entitle the other
Party to terminate this Agreement at its option by notification to the
defaulting Party.  Said termination option shall be in addition, not in lieu of,
other rights and remedies of the nondefaulting Party under this Agreement and by
law.
 
4.10 Waiver.  No waiver of any provision or consent to any action shall
constitute a waiver of any other provision or consent to any other action,
whether or not similar.  No waiver or consent shall constitute a continuing
waiver or consent or commit a Party to provide a waiver in the future except to
the extent specifically stated in writing.  Any waiver given by a Party shall be
null and void if the Party requesting such waiver has not provided a full and
complete disclosure of all material facts relevant to the waiver requested.  No
waiver shall be binding unless executed in writing by the Party making the
waiver.
 
4.11 Attorney Fees.  If any legal action or any arbitration or other proceeding
is brought for the enforcement of this Agreement, or because of an alleged
dispute, breach, default or misrepresentation in connection with any of the
provisions of this Agreement, the successful or prevailing Party shall be
entitled to recover reasonable attorney fees and other costs incurred in that
action or proceeding, in addition to any other relief to which it or they may be
entitled.
 
4.12 Entire Agreement.  This Agreement and its exhibits is the entire
understanding of the Parties. There are no other promises, representations,
agreements or warranties by any of the Parties.  This Agreement may be only be
amended or supplemented by a writing signed by all Parties.  Each Party waives
its right to assert that this Agreement was affected by oral agreement, course
of conduct, waiver or estoppel.
 
4.13 Counterparts.  This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
 
4.14 Authorizations.  All individuals executing this and other documents on
behalf of the respective Parties certify and warrant that they have the capacity
and have been duly authorized to so execute the documents on behalf of the
entity so indicated.  Each signatory shall also indemnify the other Parties to
this Agreement, and hold them harmless, from any and all damages, costs,
attorney fees and other expenses, if the signatory is not so authorized.
 
IN WITNESS WHEREOF, the Parties have set forth their signatures as of the date
first written above.
 
“OPTIONEE”
SANTA MARGARITA WATER DISTRICT
By: ________________________________
Title:_______________________________
 
“CADIZ”
CADIZ INC.
By: ________________________________
Title:_______________________________
 
FENNER MUTUAL WATER COMPANY
By: ________________________________
Title:_______________________________
   

 
Exhibit A:                      Environmental Cost Sharing Agreement
Exhibit B:                      Program Summary
Exhibit C:                      Price Schedule
Exhibit D:                      Example of Effective Cost Range
 
 
 
 
EXHIBIT A
 
ENVIRONMENTAL COST SHARING AGREEMENT
 

 
[See Attached]
 
 
 
 
 
EXHIBIT B
 
PROGRAM SUMMARY
 
A groundwater banking operation on the Cadiz Property for the purpose of
conserving water that is presently lost through evaporation from the Cadiz and
Bristol Dry-Lakes and conjunctively managing imported surface water that is
spread and stored for recovery.  The proposed project would make new and
reliable water available for irrigation, solar, municipal water supply,
environmental and other beneficial uses.

This Program may conserve, store and deliver to public water systems: (a) native
groundwater water conserved by reducing controllable losses from the aquifer
system and implementing prudent groundwater management strategies, and (b) water
imported from outside the property (probably from the Colorado River) and
percolated to actively recharge the aquifer.  The Program will be conducted
consistent with prevailing groundwater management methodology governed by three
primary principles: (a) Recharge and extraction of native and imported water
within the Property will be conducted in a manner that achieves and then
maintains optimal, long-term, safe (sustainable) yield and conjunctive use of
water; (b) Management of the groundwater levels will not result in harm to the
aquifers, or cause material adverse changes in water quality, differential land
subsidence, or impairment of habitats dependent upon near-surface expressions of
groundwater (such as phreatophytic vegetation, wetlands or surface stream
flows); and (c) The banked water will directly and indirectly result in
restoration of unrelated aquatic ecosystems currently impaired by water
development.

The Program is intended to achieve environmental restoration benefits through
the banking of imported water for active recharge and its use for environmental
restoration purposes.

All native and imported water, whether conserved or stored, will be recovered
and conveyed between the Cadiz Property and the CRA along an active railroad
line right-of-way that Cadiz has acquired from the Arizona & California
Railroad.

The proposed well-field and pipeline will be sized to accommodate the expected
long-term recoverable yield of conserved water from the Fenner Valley and Orange
Blossom Watersheds and foreign water that is stored in wet years and recovered
in dry-years.

The initial term of the Program will be 50 years.
 
 
 
 
EXHIBIT C
 
PRICE SCHEDULE
 

 

A.           Conserved Water   For Initial 5K AF - $775.001 per afy2        For
Additional 10K AF - $975.003 per afy4     

The per acre-foot per year is the complete and final cost for the delivery of
water to the CRA.  There are no added costs for this service.
 

B.           Supplemental Storage $0 

CADIZ will provide Supplemental Storage to Optionee without
charge.  Supplemental Storage will be provided for the benefit of Optionee in
the event CADIZ is unable to deliver or is prevented from delivering water to
the CRA because there is insufficient capacity in the CRA to accept the
Conserved Water.

C.           ICS Credits

CADIZ and Optionee will share the benefit of any ICS Credits that are obtained
equally (50/50) on a per acre-foot basis.  This means that if an ICS Credit is
earned for the 5,000 acre-feet purchased by Optionee, CADIZ and Optionee will
equally shared the compensation attributable or fairly apportioned to that 5,000
acre-feet.

D.           Price Reductions

Further reductions in the price of Conserved Water may occur from applications
from state and federal grants applications, contracts for services, exchanges of
storage, Conserved Water and other consideration that may be obtained from the
state and federal governments, MWD and other third parties (collectively, “Cost
Off-Sets”).  These Cost Off-Sets may reasonably reduce the cost of water as
delivered by CADIZ to the CRA as provided in Exhibit “D” as well as further
reductions in cost being obtained and applied for the benefit of the Optionee
after the delivery of water to the CRA and prior to the Conserved Water being
received by the Optionee.  The Parties recognize and CADIZ expressly agrees that
any Cost Off-Sets will be applied as a credit against some or all of the Program
costs as may be requested by the Optionee so as to reduce the actual cost and
the purchase price of Conserved Water delivered by CADIZ and as received by the
Optionee.  (See Exhibit “D”).

E.           Storage
 

  1.           First Fill Storage (1 unit of 15,000 acre-feet)  **5   
2.           Class A Carry-Over Storage (1 unit of 5,000 acre-feet)  **6   
3.           Class B Carry-Over Storage (1 unit of 5,000 acre-feet)  $1,500.007
per af     4.           Supplemental  No Charge8 

 
F.           Pipeline Capacity9
 

  1.           Class A Firm (1 unit of 5,000 acre-feet)  **10   
2.           Class B Firm (per units of 5,000 acre-feet)  $2,400.0011 per af12 
  3.           Space Available Use  TBD13    4.           First Fill Space
Available  **14 

 
G.           Annual Storage Administration Fee
 
 

  1.           First Fill Storage Capacity  $20.0015 per af (subject to Section
2.2(b))     2.           Class A and B Carry-Over Storage Capacity  $20.0016 per
af     3.           Supplemental Storage  $0  

 

EXAMPLE

If SMWD exercises its option to purchase 5,000 acre-feet per year of Conserved
Water, it will receive 15,000 acre-feet of First Fill Storage and 15,000
acre-feet of Fill Water on a space available pipeline capacity at no additional
cost excepting the Annual Management Obligation described in Section
2.2(b).  Further, if SMWD elects to purchase 5,000 acre-feet of Class B
Carry-Over Storage, it will receive 5,000 acre-feet of Class A Carry-Over
Storage at firm capacity without paying additional compensation.  The Optionee
would then make an election as to whether it wished to purchase additional Firm
capacity or elect to move a portion of its Conserved Water on a Space Available
basis.

Conserved Water – Initial 5K AF
Paid Upon Delivery of Water to Canal or Carry-Over Storage
$775 Per AFY subject to a 5% cap on annualized escalation (see fn 1 and 2) prior
to Cost Off-Sets.
Conserved Water – Additional 10K AF
Paid Upon Delivery of Water to Canal or Carry-Over Storage
$975 Per AFY subject to a 5% cap on annualized escalation (see fn 3 and 4) prior
to Cost Off-Sets.
Supplemental Storage
No Charge
No Charge
First Fill Storage
Upon Exercise of Initial 5K AF
No Charge, excepting Annual Management Obligation
Class A Carry-Over Storage
No Charge upon acquisition of Class B Carry-Over Storage
$0
Class B Carry-Over Storage
Paid Upon Project Approval17
$7.5 million18 for 5,000 af of storage capacity
First Fill Water – 15,000 acre-feet
Dedicated Upon Project Approval
$0
Class A Pipeline Capacity
Paid Upon Project Approval
$0 Firm
Class B “Firm” Pipeline Capacity
Paid Upon Project Approval
$12 million19 per 5,000 af of storage
Class B “Space Available” Pipeline Capacity
Paid Upon Actual Use of Pipeline Capacity
Buyer pays actual incremental cost to Cadiz plus a share of pro-rated capital to
reimburse the costs of those parties holding firm capacity.

 
 
Accordingly, by way of example and without commitment, if SMWD exercised its
option for 5,000 acre-feet of the Initial 5K AF and also exercised its option to
acquire Class B Carry-Over Storage at Firm Capacity, SMWD would be entitled to
25,000 acre-feet of Storage (i.e., 15,000 First Fill Storage plus 5,000 Class B
acquired plus 5,000 Class A) of which 10,000 would be at Firm Capacity and
15,000 at Space Available Capacity, resulting in a total up-front cost of $19.5
million with an annual charge of $775 for the water and an ongoing maintenance
charge of $20 per acre-foot.  The decision to purchase Space Available Pipeline
Capacity would reduce the upfront costs by $12 million so that a total of $7.5
million would be due and payable for the purchase of Class B Carry-Over
Storage.  However, the purchaser would then pay both CADIZ’ incremental cost in
transporting the water, if any, and a share of pro-rated capital costs.  Note
all dollar amounts are stated in April 2010 dollars.
 

--------------------------------------------------------------------------------

 
1 April 2010 dollars.
 
2 Subject to a 5% cap on average annualized escalation.
 
3 April 2010 dollars.
 
4 Subject to a 5% cap on average annualized escalation.
 
5 Made available
 
6 Made available upon purchase of Class B Carry-Over.
 
7 April 2010 dollars.
 
8 Made available.
 
9 Charges may be subject to Cost Off-Sets as provided in C. and D. above.
 
10 Made available with Class A Carry-Over.
 
11 April 2010 dollars.
 
12 LOI quotes at $12 million per 5,000 af.
 
13 Actual incremental cost plus a reasonable share of pro-rated capital.
 
14 Made available.
 
15 April 2010 dollars.
 
16 April 2010 dollars.
 
17 The approval of the Project by the Lead Agency.
 
18 April 2010 dollars.
 
19 April 2010 dollars.
 
 
 
 
EXHIBIT D
 
EXAMPLE OF EFFECTIVE COST RANGE
 
(in April 2010 dollars)

 

COST OF INITIAL 5K AF  $775      ICS Credits  ($200)     Sub Net  $575      LRP
Funding  ($250)     Net of Combined Credits  $325      COST OF WHEELING  $314   
 

 
RANGE OF AS DELIVERED PRICE TO MWD MEMBER AGENCY: $639-$1089