SACRAMENTO — The California Debt Limit Allocation Committee this week assigned $530 million of private-activity bond volume cap for construction of a water desalination plant in San Diego County.

The committee’s vote Wednesday — over the objection of environmental activists in the audience here — sets the stage for a possible bond issuance in late February or March, though plenty of details remain to be ironed out.

Connecticut-based desalination developer Poseidon Resources will use the proceeds to construct the largest seawater desalination plant in the Western Hemisphere, connected to the Encina Power Station in Carlsbad and using that plant’s existing cooling system to collect seawater for fresh water production.

The California Infrastructure and Economic Development Bank will be the conduit issuer. The I-Bank’s board still has to sign off on the deal next month.

Backers say desalination technology has the potential to provide an alternative source of fresh water for a drought-plagued state. Detractors say desalination uses too much energy and harms nearby marine life.

Both sides were in ample evidence Wednesday as an audience of more than 60 people jammed the CDLAC meeting room. The financing plan presented to the committee calls for underwriter Barclays Capital to market the debt as fixed rate, with a BBB-minus rating.

The market has become increasingly conducive to such low investment-grade transactions, Barclays director Stephen Howard told the debt limit committee.

“There was a significant ramp-up in the last half of [2009],” he said, adding that Build America Bonds had shifted the supply-demand equation for the fewer remaining tax-exempt deals.

Stephens said Barclays was involved with three recent low investment-grade deals in recent months.

“All of these transactions were substantially oversubscribed,” he said.

There are some conditions attached to gaining California volume cap for the Poseidon deal.

CDLAC’s guidelines typically expect bond transactions to include some form of credit enhancement, though the committee’s staff concluded the Poseidon borrowing met its criteria for exceptions to the rule.

“Particular attention was given as to whether triple-B minus bonds would be marketable in today’s investment climate,” the staff report said.

Conditions CDLAC attached to the allocation include that the bonds, if unenhanced, must be marketed to qualified institutional investors only, and that bonds be issued in minimum $500,000 denominations.

“Poseidon is continuing to evaluate the economic feasibility of a monoline insurance policy from Assured Guaranty for all or a portion of the bonds,” the

report said.

Standard & Poor’s has prepared a rating determination letter for the proposed financing. In response to a question, Howard said he expects to apply for a rating from a second agency.

“The market will require a second rating,” he said.

Nine public water agencies around Carlsbad have signed agreements to buy water from Poseidon, which is responsible for paying the debt. The project, which has been under development for more than a decade, is slated to deliver about 50 million gallons of water daily, or enough for 300,000 people.

“This has been a long road,” said Gary Arant, general manager for one of the nine agencies, the Valley Center Municipal Water District.

“We are very, very close to realizing a very important water supply for our region,” he said. “We are hoping it will be producing water by the end of 2012. Your vote today will help us achieve that.”

Environmental activists have fought the Carlsbad desalination project through court battles and venues ranging from the State Lands Commission to the California Coastal Commission, and they appeared in front of CDLAC Wednesday to argue their case there.

“Desalination should really be the last recourse for getting additional water to southern California,” said Eddie Scher of the group Environment Now.

“Poseidon continues to say there are zero public dollars at risk and zero public dollars involved,” he said. “If that were the case, we would not be in front of this board.”

The debt limit committee consists of the state’s treasurer, controller, and governor, though the elected officials typically designate senior staff to attend the meetings.

Controller John Chiang was there in person, to express skepticism about the project.

“I’m afraid of the unfettered development of these kinds of projects,” he said.

Chiang had to leave before the meeting ended, and his delegate, after expressing some more skepticism about the project’s financing structure, ended up voting in favor of the allocation, making it unanimous.

Treasurer Bill Lockyer did not chair the meeting, but he joined the audience later and expressed his thoughts on the project, and CDLAC’s role in it.

The treasurer said he had had discussions with both opponents and proponents of the Poseidon plant.

“I think that opponents expressed what appear to be quite substantive and legitimate concerns about the environmental effects,” he said.

On the other hand, Lockyer said, CDLAC isn’t the venue for environmental policy making.

“I don’t think that’s our job,” he said, adding that the committee’s role is to use private-activity bonds to boost the economy and create jobs.

“That seems to me to be our principal responsibility,” he said.

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