EXHIBIT 10.1

 
 
OPTION AGREEMENT

This Option Agreement (“Agreement”) is made and entered into as of the 1st day
of December 2011, by and between CADIZ INC., and FENNER MUTUAL WATER COMPANY, on
the one hand (collectively, “CADIZ”), and CALIFORNIA WATER (referred to herein
as either “Cal Water” 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.
 
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 MWD Local Resources Program (“LRP”), all create
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 may own or control various water, storage, easement and conveyance rights
in a manner suitable to implementation of the Program and consistent with the
terms hereof.
 
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 “A” 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 that will
optimize groundwater basin management and avoid loss of groundwater to
evaporation.  Included within the Annual Quantity shall be the Initial AF
referenced herein.
 
(b)           “Carry-Over Storage” means the use of unsaturated soils to store
water from year to year for subsequent withdrawal and delivery to Optionee for
beneficial use.  Carry-Over Storage may be used to stored 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 unsaturated soils 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 hereby agrees to pay the
sum of $125,000, to cooperate in the completion of environmental review of the
Program and to designate a representative to serve on a technical committee (the
“Option Consideration”).
 
(a)           Payment Date.  The Optionee will pay to CADIZ the sum of $125,000
within thirty (30) days following its receipt of written notice from CADIZ
indicating more than five hundred thousand dollars ($500,000) have been expended
by CADIZ in preparing environmental analysis of the Program.
 
(b)           Management and Administration.  CADIZ will exercise good faith and
best efforts in selecting competent professionals and consultants to perform the
tasks that are necessary and prudent to implement the environmental review of
the Program, such selection to be made with the consent of the Lead
Agency.  CADIZ will assume primary responsibility for causing the retention of a
qualified expert to prudently prepare an administrative draft of environmental
documents, studies, analyses, and reports.  Further, the Parties acknowledge and
agree that upon completion of the environmental process, all studies, reports,
analyses, and plans shall be the joint property of CADIZ, on the one hand, and
the Lead Agency, on the other; provided, however CADIZ will provide copies of
all such studies, reports, analyses and plans to the Optionee upon request.
 
2.2 Grant of Option and Exercise Price.  Subject to the Optionee’s performance
of its obligations hereunder and agreement to the terms hereof, including but
not limited to Section 2.1 above, CADIZ hereby grants to Optionee an option to
acquire Conserved Water along with the following interests as set forth in
Exhibit “B” (the “Price Schedule”) (collectively, the “Option”):
 
(a)           Conserved Water; Minimum Amount.  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, but no less than 200 acre-feet per
year (the “Initial AF”) (the “Conserved Water”).  The exercise price for the
acquisition of the Initial AF and the timing of such payments are set forth on
the Price Schedule.  Upon the Optionee’s exercise of the Option to purchase the
Initial AF, CADIZ will make available an additional amount of conserved water as
a one-time supply free of charge to the Optionee, such amount being equivalent
to the amount of Initial AF actually purchased by the Optionee (“Additional
Water”).  The parties will determine a reasonable schedule for delivery of the
Additional Water.  The Conserved Water shall be delivered to the Optionee in the
CRA each year on a mutually agreed schedule which shall provide for delivery of
such water so that it can be used in the Optionee’s service area over a
reasonable period of time at flows and rates that are established with the
regional wholesale water purveyor within the MWD service area.
 
(b)           Class A Carry-Over Storage.  In the event the Optionee purchases
at least the 5,000 acre-feet pursuant to Section 2.2(a), the Optionee shall have
the additional option, but not the obligation, to acquire, without charge, up to
5,000 Class A Carry-Over Storage upon purchase of a minimum of 5,000 acre-feet
of Class B Carry-Over Storage pursuant to this Agreement.  No losses will be
assessed upon water held in a Class A Carry-Over Storage.  The acquisition of
Class A Carry-Over Storage shall include the right to transport any acquired
Conserved Water through firm pipeline capacity to the CRA, at no extra cost to
the Optionee.  Class A Carry-Over Storage is only available where the Optionee
has purchased at least 5,000 acre-feet of Class B Carry-Over Storage.  For
example, if Optionee purchases 5,000 acre-feet of Class B Carry-Over Storage,
Optionee is entitled to 5,000 acre-feet of Class A Carry-Over Storage for a
cumulative quantity of 10,000 acre-feet of Carry-Over Storage by paying only for
the Class B Carry-Over Storage.
 
(c)           Class B Carry-Over Storage.  The Optionee shall have the option,
but not the obligation, to acquire up to 25,000 acre-feet of Class B Carry-Over
Storage at the exercise price set forth on, and payable in accordance with, the
Price Schedule, provided that the Option be exercised in increments of 5,000
acre-feet, with a minimum of 5,000 acre-feet.  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.  As further provided in Section 2.2(e) below, Class A Carry-Over
Storage includes firm pipeline capacity for that 5,000 acre-feet to the
CRA.  The Price Schedule sets forth the Optionee’s costs for both “firm” and
“space-available” capacity through the Pipeline that delivers water to the CRA.
 
(d)           Supplemental Storage.  In the event that CADIZ is unable to
deliver or is prevented from delivering Conserved Water to the CRA on an
approved schedule as provided in Section 2.2(a) hereof 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 on a mutually agreeable schedule, 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.
 
(e)           Pipeline Capacity.  The acquisition of the Initial AF shall
include the right to transport the purchased Conserved Water through firm
pipeline capacity to the CRA, at no extra cost to the Optionee.  For example, if
the Optionee acquires 200 acre-feet pursuant to Section 2.2(a), then the
Optionee shall have the right to transport 200 acre-feet through firm pipeline
capacity to the CRA, at no extra cost to the Optionee.  Additionally, the
acquisition of Class A 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.  For example, if Optionee acquires 5,000
acre-feet of Class B Carry-Over Storage and does not wish to secure firm
capacity for that 5,000 acre-feet of stored Conserved Water, it will still have
a firm right to convey 5,000 acre-feet of Conserved Water that may be stored
within its Class A Carry-Over Storage.
 
(f)           First Fill Quantity.  CADIZ will exercise reasonable best efforts
to sequence the Program construction to initiate the capture of Conserved Water
as soon as prudent, and upon the Optionee’s exercise of its option to acquire
Carry-Over Storage, CADIZ will dedicate a quantity of conserved water equivalent
to the quantity of Class B Carry-Over Storage actually acquired.  For example,
if the Optionee elects to acquire 5,000 acre-feet of Class B Carry-Over Storage,
then CADIZ will make a one-time dedication of 5,000 acre-feet of conserved water
to the applicable storage account for the benefit of the Optionee.  The First
Fill Quantity is in addition to the dedication of 5,000 acre-feet of conserved
water made available by CADIZ in connection with the Optionee’s acquisition of
an Annual Quantity of 5,000 acre-feet.
 
(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.  Additionally, if Supplemental Storage exists at the end of the
50-year term, the term shall be extended for the purpose of conveying to
Optionee such stored water as otherwise herein provided.  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 “C” 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,
inclusive of the potential in-kind contributions made by CADIZ as referenced in
Section 2.2(b) and 2.2(e) above is the “Effective Cost” and is generally
described in Exhibit “C”.  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 Conserved Water pursuant to
Section 2.2(a) 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) (the “Exercise Period”).  Upon timely exercise and satisfaction of the
obligations hereunder, the parties shall enter into an agreement reflecting the
provisions hereof intended to survive exercise of the Option.  Such agreement
shall be negotiated and executed in good faith, consistent with the terms of
this Agreement.  This Option, this Agreement and any rights accrued to the
Optionee shall terminate immediately as to the Optionee, without further notice,
if the Optionee does not timely fulfill its obligations under Section 2.1
hereof.
 
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 Section 2.1 hereof.
 
(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.  The parties acknowledge that the environmental impact report shall include
the Optionee’s involvement in the Program, although there may be other
third-party responsible agencies as well.  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.  CADIZ may terminate this
Agreement if it makes a good faith determination that either: (a) the projected
environmental mitigation costs will exceed $10 million, subject to CADIZ
providing written notice to Optionee for purposes of exploring potential
cost-sharing arrangements between and among the parties for the environmental
mitigation costs; or (b) the Project is infeasible.  In either case CADIZ shall
provide written notice of termination to all Parties and reimburse the Parties
for the amounts paid by them not otherwise reimbursed or credited pursuant to
Section 2.7(g), up to the date of termination.
 
(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.  If the Optionee applies for the LRP Credit and it is not granted,
or if at any time such LRP Credit is terminated or substantially modified, at
the Optionee’s option, it may terminate this Agreement (or the Agreement
referenced in Section 2.3) with no further liability thereafter.
 
2.5 Exercise of Option.  Provided the Optionee has satisfied its obligations
under this Agreement, 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 and the Optionee shall
have no rights hereunder.  For purposes of this Section 2.6, “withdrawal” shall
mean any of the following:  (i) the Optionee’s failure to timely pay the Option
Consideration when due; (ii) any of the events triggering the reimbursement of
the Option Consideration pursuant to Section 2.7(g)(i).
 
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 (ICS Credits) for the benefit of MWD.  In addition, in its complete
discretion, CADIZ may offer an “in kind” contribution to MWD in the form of
available storage capacity within the CADIZ Program 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 of storage capacity within the CADIZ Program 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 contracted purchasers of conserved water 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 which it approves and adopts that
will indirectly reduce stress on the San Francisco / San Joaquin Bay-Delta.
 
(e)           Solar and Geothermal Power.  CADIZ agrees to exert reasonable best
efforts to provide solar and geothermal power to operate the Program
facilities.  The Program will be evaluated using both solar and geothermal power
and, in the event solar and geothermal 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,
subject to Program capacity.  Notwithstanding the foregoing, this clause shall
not apply to that certain agreement between CADIZ and Santa Margarita Water
District for the quantity for Fill Water and First Fill Storage the latter
receives at no additional cost, and agreements with public interest
environmental groups in furtherance of the Program.
 

 
(g)           Option Consideration Reimbursement or Credit.
 
(i)           Reimbursement.  The Optionee will be entitled to full
reimbursement of the Option Consideration if:  (a) the CPUC has not approved the
Optionee’s participation for Conserved Water purchased pursuant to Section
2.2(a) within two hundred seventy (270) days of the latter of (i) the approval
of the Program by the Lead Agency, or (ii) the completion of the environmental
review, including an administrative law judge decision, or an order of the CPUC,
that imposes any terms or conditions that is reasonably expected to have a
material adverse affect on Optionee without requiring Optionee to appeal any
such decision or order, or (iii) written notification by Cadiz to the Optionee
of the annual cost of water (that is, the actual cost of conserved water which
shall be calculated in accordance with the listed categoris on Exhibit C)
(“Notice of Cost of Water”), or (b) MWD or any member agency of MWD has not
approved the transportation of water to Optionee for beneficial use and provided
funding for local resources supply development under the MWD Local Resources
Program (“LRP”) or another form of equivalent MWD funding under economic terms
acceptable to Optionee as may be determined in its discretion, or (c) the Lead
Agency has failed to complete environmental review, or (d) for a period of
thirty (30) days following the Notice of Cost of Water, the Optionee shall have
the right to terminate this Agreement based on a good faith belief that the CPUC
will not approve the Optionee’s participation in the Program based on the actual
annual cost of water as defined above fully allowed in rates.
 
(ii)           Credit.  If the CPUC approves Optionee’s participation in the
Program, and Optionee exercises its Option hereunder, the Option Consideration
paid by Optionee shall be credited towards Optionee’s purchase of water or
storage in the Program pursuant to this 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:
Cal Water
1720 North First Street
San Jose, CA  95112
(408) 367-8200
(408) 367-8430 (facsimile)
Attn:  Francis S. Ferraro
sferraro@calwater.com
 
With cc:
One Market Street, Suite 2000
San Francisco, CA 94105-1104
(415) 957-3000
(415) 957-3001 (facsimile)
Attn: Thomas Berliner
tmberliner@duanemorris.com

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 Optionee’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 to, 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.  Subject to Section 4.8 above, 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.
 
4.15 Public Announcements.  Except as and to the extent required by law, neither
Party shall issue any statement or communication to any third party (other than
to its respective agents) regarding the subject matter of this Agreement or the
transactions contemplated hereby, without the prior written consent of the other
Party, which shall not be unreasonably withheld.
 

 
[signatures contained on next page]
 

IN WITNESS WHEREOF, the Parties have set forth their signatures as of the date
first written above.
 
“OPTIONEE”
CAL WATER
By: /s/ Tom Smegal
Title:  Vice President, Regulatory Affairs
By: /s/ Martin A. Kropelnicki
Title: Chief Financial Officer
“CADIZ”
CADIZ INC.
By: /s/ Scott S. Slater
Title:  President and General Counsel
FENNER MUTUAL WATER COMPANY
By: /s/ Scott S. Slater
Title:  President and General Counsel
   

 
Exhibit A:                      Program Summary
Exhibit B:                      Price Schedule
Exhibit C:                      Example of Effective Cost Range

 
EXHIBIT A
 
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 B
 
PRICE SCHEDULE
 

A.           Conserved
Water                                                                 For
Initial AF - $775.001 per afy2
 
The price 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 the Optionee without
charge.  Supplemental Storage will be provided for the benefit of the 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 the 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 the Optionee, CADIZ and
the Optionee will equally share 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 “C” 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 “C”).
 
E.           Carry-Over Storage
 

 
1.  Class A (5,000 acre-feet) 
** 3   
 
2.  Class B (5,000 acre-feet) 
$1,500.00 4 per af 
 
3.  Supplemental 
No Charge 5   

F.           Pipeline Capacity 6
 

 
1.  Class A Firm (5,000 acre-feet) 
 ** 7
 
2.  Class B Firm (5,000 acre-feet) 
2,400.00 8 per af 9
 
3.  Space Available Use   
TBD 10

G.           Annual Storage Administration Fee
 

 
1.  Class A and B Carry-Over Storage Capacity  
$20.00 11 per af
 
2.  Supplemental Storage    
$0

EXAMPLE

If Optionee exercises its option to purchase 5,000 acre-feet per year of
Conserved Water and 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 without
paying additional compensation.  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 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.
Supplemental Storage
No Charge
No Charge
Class A Carry-Over Storage
No Charge
$0
Class B Carry-Over Storage
Paid Upon Project Approval12
$7.5 million13 per 5,000 af of storage capacity
First Fill Water equivalent to quantity of Class B Carry-Over Storage acquired
(i.e., 5,000 acre-feet)
Dedicated upon acquisition of Class B Carry-Over Storage
$0
Class A Pipeline Capacity
Paid Upon Project Approval
$0
Class B “Firm” Pipeline Capacity
Paid Upon Project Approval
$12 million14 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 the purchaser
exercised its option for 5,000 acre-feet of the Initial AF Conserved Water,
10,000 acre-feet of Carry-Over Storage (i.e., 5,000 Class B acquired plus 5,000
Class A at no cost) and 10,000 acre-feet of Firm Capacity (i.e., 5,000 Class A
Firm at no cost plus 5,000 Class B Firm acquired), the total up-front cost for
the Program would be $19.5 million with an annual charge of $775 for the water
and an ongoing maintenance charge of $20 per acre-foot or $200,000
annually.   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 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 Made available upon purchase of Class B Carry-Over Storage.
 
4 April 2010 dollars.
 
5 Made available.
 
6 Charges may be subject to Cost Off-Sets as provided in C. and D. above.
 
7 Made available.
 
8 April 2010 dollars.
 
9 LOI quotes at $12 million per 5,000 af.
 
10 Actual incremental cost plus a reasonable share of pro-rated capital.
 
11 April 2010 dollars
 
12 The approval of the Project by the Lead Agency and the CPUC’s approval of
participation by Optionee.
 
13 April 2010 dollars.
 
14 April 2010 dollars.

EXHIBIT C
 
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