(4.22.15) – Cadiz Inc. (“Cadiz”, the “Company”) owns significant land and water assets in eastern San Bernardino County, California in proximity to the region’s major transportation infrastructure, including the Colorado River Aqueduct, State Water Project, interstate highways, and transcontinental railroads. The Company has maintained an active agricultural operation at its primary property in the Cadiz Valley since 1993 and over the last several years has also pursued the implementation of a water supply and storage project to provide a reliable water supply throughout Southern California.
The Cadiz Valley Water Conservation, Storage and Recovery Project (Water Project) was conceived in 2008 as a proposal to conserve fresh water that presently evaporates from the area’s Cadiz and Bristol Dry-Lakes and put this water to beneficial use as a new municipal water supply. Today, as we move ever closer to final implementation of the Project, we provide this summary of the Water Project to provide a context for the present status, upcoming events and the relationship between the Water Project and overcoming long-term shortages in supply in California.
A. A New Start
In January 2009, a pending lawsuit and counter-claims between Cadiz and the Metropolitan Water District (“MWD”) over an earlier water storage project pursued in the late 1990s was settled by mutual agreement with each party bearing their respective costs. With the lawsuit behind the Company and with the advantage of new local climate data, an exhaustive new study was commissioned and conducted by CH2MHILL to determine the storage capacity of the Cadiz Valley aquifer system and recharge rates for the Fenner Valley and adjacent watersheds. The area was confirmed to be hydrologically distinct from the Colorado River and estimated to hold as much as 34 million acre -feet in storage. Annual recharge was determined to be approximately 32,500 acre-feet per year (AFY). Most, if not all, of the annual recharge was believed to be lost to evaporation through the Dry Lakes.
Cadiz made substantial technical investments in the collection and review of historic data, obtaining new data and the investigation of physical conditions to determine the best operating strategy that could accomplish the conservation objectives in an environmentally benign way. All historic criticisms of the earlier project and were the subject of studies guided by the scientific method.
Phase I of the Water Project would cause the expansion of the existing agricultural well field so as to create a subsurface barrier to continued loss of water by evaporation. The Water Project would accomplish the primary objective embodied in Article X, Section 2 of the California Constitution: the conservation of the waters of this State and the prevention of waste. (Joslin v. Marin Municipal Water District (1967) 67 Cal.2d 132, 140 [60 Cal.Rptr. 377, 382].)
In addition, the technical investigations revealed that groundwater already beneath the surface lay within a vast aquifer system comprised of lime-stone carbonates of extremely high permeability. Test wells were drilled and pump tests conducted that indicated that the basin was acting like a tipping cup and additional quantities of groundwater could be conserved if the groundwater levels were lowered so as to reverse the gradient and thereby capture groundwater destined for evaporation. This groundwater in the amount of approximately 17,500 AFY constituted a “temporary surplus” that might be extracted for a number of years until a stable subsurface barrier was in place.
An established subsurface hydrologic barrier would provide a basis to proceed with Phase II of the Water Project that emphasized the storage of imported water in a manner similar to the Semi-Tropic Water Storage District, which operates in Kern County. However, the specific evaluation of Phase II would await the completion and implementation of Phase I.
Accomplished professionals from across the country provided independent, unpaid peer review of the proposed design of the Water Project, offered commentary and recommendations. With the incorporation of their suggestions they concluded that the Water Project was feasible and could be operated without causing environmental harm.
B. Public Review and Approval
As is customary in California, the Santa Margarita Water District (SMWD), which was the first public agency to join the Project as a participant and the agency primarily responsible for providing oversight of the entire Water Project, was established as the Lead Agency for the required environmental review under the California Environmental Quality Act (CEQA), the most stringent environmental law in the United States. SMWD relied on a leading water law firm, Best, Best and Krieger, and leading environmental review firm, RBF, to assist it in the preparation and review of environmental documents.
Under an agreement with SMWD, San Bernardino County became a Responsible Agency under CEQA while also exercising independent permitting and regulatory control over the Water Project under its Desert Groundwater Ordinance. Under the Ordinance, the San Bernardino County held discretionary review and approval over the Water Project with the power to impose conditions more stringent than required by CEQA. It also retained its own review team comprised of a leading water law firm Downey, Brand, Rohwer and Seymour and a hydrogeology firm, Luhdorff and Scalmanini in addition to County staff.
The underlying Environmental Impact Report (“EIR”) was prepared by Environmental Science and Associates (“ESA”), an accomplished firm with vast experience preparing EIR’s for California water agencies. Multiple new and original technical studies were completed and sensitivity tests concluded that the Water Project operations would not cause adverse environmental impacts even if recharge estimates were in error by as much as 85%. Meanwhile actual evaporation was physically measured on Cadiz and Bristol Dry-Lakes with the benefit of equipment procured from the Desert Research Institute and was quantified at a rate greater than 32,000 AFY.
Through an open, transparent environmental review process, thousands of support letters were received, hundreds of people testified at multiple hearings. A number of unpaid, independent reports were offered, all of which supported the approval of the Water Project. On July 31, 2012, the SMWD adopted the Final EIR and approved the Water Project concluding that the Water Project could be safely operated without causing a single unmitigable adverse environmental impact.
Two months later, on October 1, 2012, the County of San Bernardino provided a second, independent approval under its Desert Groundwater Ordinance, imposing additional conditions on project operations, including a hard floor at 80ft below the water table, and establishing concurrent review while also ensuring against the creation of undesirable results.
Litigation challenging these approvals was brought by Tetra Technologies, a Texas based strip-mining operation, alleging that the County of San Bernardino should be the Lead Agency. They were joined by the Center for Biological Diversity and National Parks Conservation Association, among others.
In 2014 all claims challenging the Water Project approvals and adequacy of environmental review were denied in their totality by the Orange County Superior Court. In six separate decisions, Judge Gail Andler did not find a single CEQA error, in substance or in process. These suits are now on appeal with a resolution expected in the 4th Quarter of 2015.
C. 2015 Work Plan
In addition to the appeals process, before the Water Project can commence deliveries it requires (1) sign-off from the United States Bureau of Land Management (BLM) that the proposed use of an active railway right-of-way furthers railroad purposes, in part and (2) approval by the Metropolitan Water District of Southern California of terms related to the transportation of project water supplies in its system.
BLM: The 43-mile water conveyance pipeline that will connect the Cadiz wellfield to the Southern California water transportation system will be constructed within an active railroad corridor owned and operated by the Arizona & California Railroad Company (“ARZC”). This route was selected because it furthered the Water Project objective of being environmentally benign, as it avoided the potential of creating a new pipeline corridor across undisturbed desert lands and therefore avoided impacts to species such as the desert tortoise. Under our lease with the ARZC, the Water Project will provide badly needed access roads, power, information systems and fire suppression, as well as increase rail traffic for the railroad. The BLM must determine whether or not a railroad purpose is served by the pipeline Project and has requested information from Cadiz, the ARZC and SMWD over several years in order to make this determination. No determination has yet been made or issued and the matter is presently under submission with the BLM. They are expected to present a determination later this year.
MWD: It has always been acknowledged that the Water Project must secure conveyance/exchange terms from the MWD that are suitable to the project participants. These terms will reflect the needs of the project participants not Cadiz. And, the water exchange must cover the specific circumstances of those that will ultimately receive and distribute Project water to their customers. There are no exchange terms yet presently before MWD for review and no official determination about exchange terms have been made by the MWD Board.
Any exchange must meet the Project participants’ needs and also avoid harm to MWD’s water delivery system or its customers. The Water Project is intended to help, not hinder MWD. Despite the Herculean efforts of MWD and Southern California water agencies, climate change, development in the Colorado River Basin and the Law of the Colorado River have converged to limit the quantity of water that has been available. To be sure, MWD is redoubling its efforts to secure supplies and conserve for the benefit of all Southern Californians. Notwithstanding this fact, the Water Project can and, we hope will be, a part of the region’s solution to long-term water supply needs.
Supplies in the Colorado River Aqueduct have been limited over the last several years. The Aqueduct has a design capacity of approximately 1,250,00 AFY and MWD has moved as much as 1,300,000 AFY in the past. However, in the years since the adoption of the Quantification Settlement Agreement and the Colorado River Water Delivery Agreement in 2003, the full capacity of the Colorado River Aqueduct has never been realized. For example, in 2015, among the driest of years, the United States Bureau of Reclamation estimates that below 900,000 AF of Colorado River water will be conveyed to MWD through the Colorado River Aqueduct.
Further we expect, the Water Project can be expected to provide water quality improvements to MWD and its member agencies. The total dissolved solids for the water that the Water Project would add to the CRA is less than 300 ppm. This compares favorably to Colorado River salinity and by application of a Bureau of Reclamation and MWD published model, the Water Project would save MWD members close to $400 million in reduced water treatment costs over its life.
It is true that Cadiz has Chromium 6 that is naturally occurring and indigenous to its groundwater. The estimates are that it is slightly higher than the MCL set by the Division of Drinking Water last year. In anticipation that the Water Project might be required to achieve a non-degradation standard in the CRA, Cadiz invested in research and development of Chromium 6 treatment technologies over the last 12 months. Based upon consultant reports and approved tests, the Company believes that it can comprehensively meet all MCL’s without a material increase in capital or operations and maintenance costs. We will release information about this technology as soon as all testing is complete and prior to final MWD review.
We continue to work diligently, openly and transparently, to realize shareholder expectations of the value of our extensive assets. We will continue working with our many Water Project participants to achieve our objective of conserving and delivering 50,000 AFY as soon as possible by doing things ethically, the right way and without harm to the environment.
The following section responds to more detailed known questions about the Project’s next steps:
A. BLM Review
1. What is the status of Cadiz/ARZC request that the United States Bureau of Land Management (“BLM”) confirm that the Project’s proposed use of the 43 mile right-of-way will further railroad purposes?
Answer. Under Review. This request continues to be under review and no determination has been made or issued. Pursuant to an M-Opinion issued by the United States Department of Interior in 2011, third-party and railroad use of this right-of-way does not require any federal approval if the use will further railroad purposes. There is no primary or dominant purpose requirement. Cadiz/ARZC have transmitted all relevant information concerning the proposed use of the portion of the active railroad right-of-way for the transmission of water and related purposes. The BLM most recently wrote to Cadiz in April 2015 confirming that the uses are under review and its response will be forthcoming later this year.
2. What uses will Cadiz, Santa Margarita and the Fenner Valley Water Authority (Participants) collectively make of the 43-mile railroad right-of-way while carrying out the Cadiz Water Project?
Answer. There are five railroad uses attributable to the Project: (1) automated fire suppression system; (2)access road ; (3) fiber optic cable and related information systems; (4) tourist-based steam engine; and (5) power generation for lighting of siding, crossing and trans-loading operations. The Participants will arrange for the construction of a 43 mile-pipeline and appurtenant facilities that convey water and further in part, railroad purposes. The expected costs for the improvements required to further these railroad purposes is expected to approach $10 million and would likely be funded by the private construction financing for the Project. The improvements would be installed concurrent with pipeline construction.
3. What is the effect of the rider that has been attached to the 2014 Appropriations Bill prohibiting the Bureau of Land Management from spending money reviewing an application by Cadiz to transport water through the ARZC right-of-way?
Answer. None. The appropriations rider (rider) lasts for the length of the annual appropriations bill, and is therefore only effective year to year. However, the rider has no effect on the Project, as it will not trigger or prohibit federal review, unless the BLM lawfully determines that the above mentioned improvements and actions do not further, in part, railroad purposes. As the federal government is not presently exercising discretionary approval, no compliance with the National Environmental Policy Act (NEPA) is legally required. This does not mean that the project avoids environmental review. The Project has already undergone an extensive environmental review under California Environmental Quality Act (CEQA), which has more stringent standards than NEPA.
B. MWD Review
1. Must the Water Project obtain approval from the MWD to convey/exchange water in the Colorado River Aqueduct (CRA)?
Answer. Yes. MWD has a published set of rules for conveying water within its service area and for the use of its facilities. Each of the Project participants will need to secure approval from MWD to obtain delivery of water from the Water Project to their service areas in compliance with these rules.
2. Is there an application pending with MWD? Has MWD already provided Cadiz guidance?
Answer. No. No application or terms have been submitted to the MWD for review. There has been no official action taken by MWD on the Water Project. There is no staff report or official MWD evaluation of the Project since its approvals by SMWD and the County of San Bernardino of any kind. There have only been preliminary, informal conversations and information exchange. The Santa Margarita Water District is overseeing and leading the effort to establish terms with MWD.
3. What conditions might MWD place on the entry of water from the Water Project into the Colorado River Aqueduct (CRA)?
Answer. There must be space in the CRA to move/exchange the water and there will be water quality conditions.
Capacity. The CRA has a design capacity of approximately 1.25 MAF and up to 1.3 MAF has been conveyed in the past. In the 12 years since the execution of the Quantification Settlement Agreement and the Colorado River Delivery Agreement, there has been capacity available each year within the design limits. For example, in this year 2015, under 900,000 acre-feet is projected to be delivered to MWD making over 350,000 acre-feet of capacity available. The Water Project proposes to move an average of 50,000 acre-feet per year.
The Water Project can create flexibility and options to MWD and we hope that firm capacity will be made available in exchange for benefits provided. However, we expect that space available capacity is sufficient. In the event that capacity should ever be unavailable in any year, project participants will be relieved of their obligation to pay for water that year and they may store the water at Cadiz without charge.
Treatment. MWD’s policy on the quality of water received into its system is undefined. However, Water Project water has substantially lower total dissolved solids when compared to MWD water in the CRA. By application of an MWD/Bureau of Reclamation model, the Water Project could save MWD members close to $400 million in water treatment costs. Cadiz expects that it can either treat to satisfy any MCL standard, comply with an MWD non-degradation policy or safely blend its water to conform to MWD conditions.
4. How will the Water Project address the naturally occurring Chromium 6 in its groundwater?
Answer. Cadiz does have naturally occurring Chromium 6 slightly above the newly enacted California Maximum Contaminant Level (MCL) as well as some naturally occurring arsenic that is below the MCL. Cadiz has invested in research and development with existing providers of treatment technologies and based upon results of on-site completed tests, both Chromium 6 and Arsenic can be reduced to non-detect. Further, the treatment technology is cost-effective and within prior estimates for capital and operations &maintenance.
5. Does the Water Project require a MWD subsidy in order to be constructed?
Answer. No. The Water Project has not requested any financial participation from MWD. The Water Project does not require a subsidy from MWD of any kind in order to be constructed. Project participants within MWD may seek recognition from MWD for the benefits that the Water Project may provide; e.g. water quality improvements, supply reliability, Intentionally Created Surplus credits, storage, or avoided costs. However, these requests are within the complete discretion of the Project participants, for the Project participants and are not required by Cadiz or the Water Project in any way for successful implementation.
6. Will the Water Project pay MWD fees?
Answer. Yes. We expect that all Project participants will pay all applicable fees established for the conveyance/exchange of water by MWD for their benefit. Moreover, for the avoidance of doubt, it is expected that the Project participants would agree to stipulate to the final outcome of pending litigation between MWD and the San Diego County Water Authority.
C. Project Operations
1. Is the recharge estimate of 32,500 reasonable?
Answer. Yes. The recharge estimate was developed based upon a comprehensive evaluation of the Fenner Valley and exhaustively measured and modeled by CH2MHILL and Geoscience. Aquilogic also prepared a post approval report for the Laborers International Union of North America (LIUNA) in connection with settlement of its lawsuit challenging the environmental approvals for the Water Project. These scientists area joined by a long list of other reviewers, independent and regulatory, that have corroborated the hydrologic data and support the Water Project. (http://cadizinc.com/project-hydrology/ ) Water Project opponents cite cursory reports from 2000-2002 that are no longer credible based upon existing data. For example, no one can reconcile lower estimates of recharge with the discharge data collected from the Cadiz and Bristol Dry-Lakes by the Desert Research Institute. Indeed, the amount of evaporation at the Dry Lakes (the water leaving the aquifer) measured by DRI matches the amount of estimated recharge (the water entering the aquifer), providing one more indication that the Project’s recharge estimate is accurate. In addition, the independent peer review by the Groundwater Stewardship Council also concluded that the recharge rate estimate was reasonable.
2. How will the Water Project address hydrologic risk of the recharge rate being less than 32,000 AFY?
Answer. Notwithstanding the reasonableness of the 32,500 AFY recharge rate, during the CEQA review the potential for impacts attributable to the Water Project was evaluated under recharge conditions as low as 5,000 AFY, with all other conditions remaining constant. The modeling reflected no adverse environmental impacts. Actually, the model predicted less impact in a 5,000 AFY recharge scenario than in the full recharge scenarios as the drawn-down became more concentrated in the well field.
D. Financial Standing.
1. Is Cadiz in good financial standing?
Answer. Yes. Cadiz is a public company traded on the NASDAQ with audited financials, all available under ticker symbol “CDZI”. As provided in the Company’s recent audited financial statements for the year ended December 31, 2014 more than $16 million is available in cash reserves. The Company is fully compliant with all SEC reporting and disclosure requirements.
2. Will Project Participants assume any financial responsibility beyond their purchase of water?
Answer. No. Purchasers are only obligated to buy water from the Water Project if it produces and delivers water to them.
3. How will the Water Project be financed?
Answer. The Water Project is a public-private partnership with California water suppliers and construction will be privately financed based upon the strength of the water supply commitments and secured by our significant property assets and related improvements, which include 45,000 acres of land and water rights.