January 27, 2003

Dear Neighbor,

We are writing to give you the current status of your Santa Fe Trail Ranch water system and explain the plan that will enable us to fix the leaks and give you potable water.

First, let’s review the water system’s recent history and discuss the impact of the drought and gas drilling on our community.

The developer’s original plans for the water system were revised in 1997, followed by a 1998 contract closure with Trinidad to supply City water to SFTR.  Our contractor, OPEC, began installation of both the water and phone lines in 1999, with most of the work being completed by the spring of 2001.  Last year we lost valuable time after some questions were raised about the viability of the system and the competence of the engineering design.  In addition, the contractor, OPEC, claimed it had completed its contractual obligations and stopped work.  We retained Clyde Young & Associates, another engineering firm, to evaluate the design and the work that had been completed.  Their conclusion was that the engineering design was sound and acceptable and our system would be working well if the contractor had performed as specified by the contract Therefore, our attorney has filed suits against OPEC and the bonding company in an attempt to recover the funds that we need to complete the project.

Our new contractor, Schrepfer Industries, Inc., began work in August 2002 and has been fixing the leaks in the lines in the area served by tank1 and documenting evidence of OPEC’s negligent performance.  So far Schrepfer has completed fixes on 30 percent of the lines served by tank 1 and 10 percent of the entire system.  Total funds expended during the summer and fall totaled $51,000 and came from the POA’s Power Account.  Work stopped in the fall when the funds ran out.  Our contractor anticipates that water will be available to the property owners served by tank 1 this spring.  Now that the additional funds to complete the project have been secured it began work again with two crews on January 6.

Schrepfer Industries has a good working rapport with the City that will be invaluable when it begins sanitization.  Schrepfer has been successful in helping other neighboring water associations that have also suffered from poor contractor performance.  Most recently it finished a similar job for our neighbor to the east, Sunflower Valley.

Many have concluded that the current drought in Colorado and our local region is one of the worst in 100 years.  A study of tree rings concluded that the Front Range experienced its driest year since 1725.  A front page Article in the January 22,2003 issue of The Wall Street Journal has a map showing Trinidad in an area that is experiencing extreme or exceptional winter drought conditions.  Therefore, it is likely that the current year will be another dry one with municipal water restrictions once again in place.  The City’s approach to reduce consumption last year was to raise the water rates for its residents 71 percent.  Our contract rate with the City increased 113 percent.  Most residents on the Ranch and many in the County who haul water or have it delivered buy it from Art Trujillo, the principal reseller of City water.  The City has increased his rates by 233 percent.  Art raised his rates to his customers from $.01 to $.02 per gallon.  At the City Council meeting, where the proposed rates for Art were approved, questions were raised about whether the County should grant building permits to new property owners who do not have a reliable source of water.  City officials commented that Santa Fe Trail Ranch residents would not have a problem when our system is functioning.  Currently, the City is faced with a growing number of County residents who are purchasing water from Art because their wells are drying up either because of the drought, gas drilling, or both.  Last year well replacement permits soared 68 percent throughout Colorado.  There is no guarantee how much longer Art will sell water or whether the City will permit Art’s tap to be purchased by someone else.

The supply for Trinidad’s water is North Lake, some 25 miles west of Trinidad.  Currently, North Lake’s level is depleted down to about 78% of capacity versus 96% for the same time last year.  Because of the potential for another dry year it seems unlikely the City will be selling water in the future to developments such as ours.  It is likely that Trinidad will continue to look for ways to reduce the use of water, especially water destined for use outside of Trinidad by consumers who do not have water contracts with the City.  Fortunately, the agreement we negotiated with the City a few years ago provides us with a contractually assured water supply to our installed system on SFTR.

The Santa Fe Trail Ranch continues to be a very special property that is on the edge of the coal bed methane gas boom that is exploding in Las Animas County.  Neighbors close by are experiencing noise from compressors, damage to roads, and water wells that are drying up at an accelerating pace due to the fact that 3,000,000 gallons of water a day is being extracted to get to the gas.  Next door to the west, all of the water wells in Long’s Canyon are expected to go dry as a result of the gas drilling.

Randy Udall, director of the nonprofit community office for Resource Efficiency had the following quote in the September 2, 2002 issue of High Country News about what to expect: “You mine everything to get this one resource out – your scenery, your lifestyle, your solitude, your wildlife.  The kind of landscapes you’re going to be left with, they are going to look like a carcass.” Therefore, our unique properties will continue to become much more appealing as we take the final steps to assure the availability of City water.  The investment to make this possible protects your dream and assures that the long term value of your property will increase substantially compared to your rural neighbors in the gas drilling country to the west of us who are facing dry water wells and a scarred country side.  Greystone Environmental Consultants concluded in its “County Impact Report” for La Plata County that the value of homes declines 22 percent when gas wells are drilled on their lots.  Fortunately for us gas drilling on the ranch is not a concern because the POA and the owners control the mineral rights.

Initially, the original sales of each of our properties included a $2,000 assessment for a water system relying on one or two major wells on the Ranch.  The original water plan was significantly improved with the water purchase contract with the City.  A tax-free bond issue of $1.8 million provided additional funding for the water and phone system.  57% of this was for the water system.  The bond issue is currently being paid off through the $31 monthly assessment on each property.

Our best estimate to get our water system up and running is $505,360.  This amount is based on the anticipated costs of making the areas served by the three tanks operational.  We have consulted with Clyde Young & associates and Schrepfer in arriving at the estimate.  The details of the estimate are as follows:

The Boards of the International Bank in Raton and Trinidad have approved the Metro district for a loan to cover the costs of getting our water system operational.  The Bank’s attorney is working with our Metro District counsel at Grimshaw and Harring to structure a tax-exempt loan to keep the interest cost down.  The Bank has suggested a 10-year term on the final amount being financed.  The current taxable rate is just over 7 %.  The tax-exempt rate should be 2 % lower.  We have requested a credit line in the amount of our estimate.  We hope that the early repayments of our credit line will be interest only until the total amount needed has been withdrawn.

We have also applied to the Colorado Department of Local Affairs for either an Energy Impact Grant or a low interest Energy Impact Loan, which has an even lower rate than the Bank’s tax-exempt loan.  We have been asked to appear before DOLA’s Review Board in early March to discuss our requests.

To secure the pay back for the Bank and the DOLA loans, the Metro District Board passed a resolution at its December 30 Budget Meeting to assess a Water System Completion Fee on each 35 acre property in the District.  The fee will be determined by the final amount that we must borrow.  We anticipate that we will prevail in our lawsuits, in which case all or a large majority of the fees paid will be reimbursed to the property owners.  Our attorney expects the trial to begin this summer.

Our attorneys developed and recommended a repayment method for the money borrowed on our line of credit.  If you assume that we borrow the entire amount of our estimate this would result in a repayment obligation of $1,138.20 for each of the 444 parcel owners.  You will have the option of paying this off immediately, or over 10 years via the monthly coupon method which will include principal and interest.  Our overriding objective is to complete the water system for the entire ranch as quickly and as cost effectively as possible.  By far, the majority of comments we receive from owners say, “get it done soon” closely followed by “how much more will it cost?” Our solution addresses both of these concerns and is based on our conclusion that the implications of the current drought and the gas drilling make the case for completing the water system more compelling than ever.

Thank you for your patience.  The completion of this project should benefit you and each of your neighbors.  Your additional investment assures that, other than Trinidad Lakes Ranch, there is not another development in the area with our spectacular views, City water, and close proximity to Trinidad.  Perhaps Charles Baldwin, the developer of SFTR, reached the same conclusion when he recently decided to build several spec houses on the Ranch.

Working together we are finishing an operating system to continually provide you with potable water from the City.  This enables us to benefit from greater appreciation of our property values than will be realized by those neighbors, who must rely on water wells, haul water or endure the negative impacts of gas drilling.  We believe that our plan best meets the long-term financial interests of our current and future generations of property owners.

Given the water shortage facing us and our neighbors and the lack of any other sure means of providing water to SFTR, either on a ranch-wide or an individual property owner basis, we feel completing our system is the only course of action that makes any sense.  We are thankful that we have a contractually guaranteed source of supply and we look forward to continue partnering with the City of Trinidad as we increasingly become part of the community.  As always, please communicate with any of us with your questions or comments.

Sincerely,