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Fate of Poseidon Desalination Plant to Be Decided

NOV 27, 2012 6:22pm ET
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LOS ANGELES — After nearly a decade of court battles with environmentalists, Stamford, Conn.-based Poseidon Resources’ water desalination project in Carlsbad, Calif., will move forward if it obtains required approvals this week.

The San Diego County Water Authority board will vote Thursday on a $3 billion water purchase agreement with Poseidon, and the California Pollution Control Financing Authority will vote the following day on whether to act as the conduit issuer for $840 million in bonds.

Poseidon has been working nearly a decade to get the project off the ground, but most fervently since 2009 when it began construction on a limited basis.

If the project is approved, construction will begin full bore in late December and be completed 35 months later, according to Scott Maloni, a spokesman for Poseidon.

Since 2006, six lawsuits have been filed in California state courts challenging the plant and its project approvals from the San Diego Regional Water Quality Control board and other state and local agencies.

All but one of the court cases, have been resolved. The San Diego County Superior Court upheld the approval of the plant’s mitigation plan, but an appeal is still pending in that case.

In its report recommending approval of financing to the board, CPCFA staff said “while there can be no assurance the appeal will not interfere with the scheduled development of the plant and project, it appears unlikely to have an impact on the financing and construction of the pipeline or plant.”

According to Maloni, the proposed Carlsbad project has prevailed in court cases because it is “supported by sound science concluding the facility can be built and operated without significant impact to the environment.”

Courts have concluded the environmental issues have been addressed satisfactorily, said Sandy Kerl, deputy general manager of the water authority.

If approved, the CPCFA would issue $270 million in tax-exempt governmental purpose bonds for the water authority to finance pipeline construction and $570 million in tax-exempt private-activity bonds for Poseidon to finance construction of the plant.

Poseidon had received preliminary approval in October 2011 for $780 million, but returned to the CPCFA in September to ask the bonds be split into two tranches and the water authority be added to the proposal.

It received preliminary approval on that change, but has since increased the amount requested by $60 million split between the two bond series.

“We are making sure we requested an adequate amount from the CPCFA to execute the transactions,” said David Moore, managing director at Clean Energy Capital and financial advisor to the water authority on the project.

The second set of bonds would be issued on the SDCWA’s behalf because of the likely savings from the water authority’s AA-plus credit ratings and because the water authority will own and operate the pipeline, Kerl said.

The authority has AA-plus ratings from Standard & Poor’s and Fitch Ratings and Aa2 on its senior-lien obligations from Moody’s Investors Service.

Both sets of bonds are being offered to qualified institutional investors in a negotiated limited offering with expectations of interest rates in the 5 to 6% range.

JPMorgan is lead underwriter on the offering. If Poseidon secures the needed approvals, the bonds will be priced on Dec. 20.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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