Clean Energy Capital


Poseidon Launches Carlsbad Desalination Bonds


December 5, 2012

Poseidon Resources has issued a preliminary offering memorandum for $7 80 million in tax-exempt bonds for its Carlsbad reverse osmosis desalination plant. The California Pollution Control Financing Authority is issuing the tax-exempt water furnishing bonds, which are expected to price next week, in two concurrent tranches of $559.85 million and $221 .54 million. The larger issue is intended for the plant, while the smaller issue is for a related 16.1km pipeline. Poseidon is also contributing roughly $17 3 million in equity to fund construction of the plant.

JPMorgan is the senior underwriter of the bonds, while Barclay s, Bank of America Merrill Lynch, Goldman Sachs and Stone & Y oungberg are also managing the issue. Moody ’s Investors Service has assigned a provisional Baa3 rating to the bonds. It estimates that the debt service coverage ratio for the project will be 1 .5x.

The financing features a 12-month cash-funded debt service reserve, project-level reserves for working capital and a minimum 1 .25x debt service coverage ratio. Structural protections include a contingency of $20 million and a $21 million reserve to cover six months of additional interest during construction, will be in place for at least six months after operations start. The sponsor will be allowed to withdraw this reserve if the desalination plant achieves a DSCR of 1.35x.

The San Diego County Water Authority will buy 100% of the desalinated seawater treated at the Carlsbad plant under a 30-y ear water purchase agreement. The Carlsbad plant will be located next to the Encina power station in San Diego county, California. The water authority will own the pipeline, though Poseidon is responsible for building it, but Poseidon will build and own the plant. Clean Energy Capital is financial adviser to the water authority.

Under the water purchase agreement, the water authority is required to buy between 48,000-56,000 acre feet per year of water. Payments will be on a per-acre basis and sized to cover debt service on the plant bonds, pay fixed costs and variable costs, and provide Poseidon with an equity return. The authority will make payments to service the pipeline bonds from separate funds in installments, if both the plant and pipeline are built. If the plant fails to produce the minimum required quantity – 48,000 acre feet per year – project company Channelside would be responsible for meeting any debt service shortfall.

Kiewit Shea Desalination, a joint venture of Kiewit Infrastructure West and JF Shea Construction Company, is the engineering, procurement and construction contractor for the plant, which is expected to produce 54 million gallons per day.

David Moore