Favorable Desalination Project Bond Sale Saves Ratepayers $200 Million

Short Title
Favorable Desal Bond Sale Saves Ratepayers $200 Million
Interest rate of 4.78 percent beats projections, keeps costs down for Water Authority

The San Diego County Water Authority announced Friday that it had secured a favorable interest rate for financing a landmark desalination plant and pipeline that will save an estimated $200 million over three decades compared to earlier projections.

Carlsbad desalination plant

Location: Next to the Encina Power Station in Carlsbad, Calif.

Capacity: Up to 56,000 acre-feet annually

Total cost: $984 million (including pipeline)

Construction: Starts in 2013

Water deliveries: Expected in 2016

Developer: Poseidon Resources

Website: www.sdcwa.org/issue-desal

The Water Authority teamed with private developer Poseidon Resources to sell construction bonds at 4.78 percent for Poseidon’s seawater desalination plant in Carlsbad, Calif., and a related pipe. That will save approximately $125 per acre-foot, reducing the price of water from the plant to between $1,917 and $2,165 per acre-foot. The Water Authority’s Board of Directors approved a historic 30-year purchase agreement with Poseidon in November based on a projected cost range of $2,042 to $2,290 per acre-foot.

“This is a great start to the project because it means ratepayers will spend less to secure this drought-proof water supply,” said Maureen Stapleton, the Water Authority’s general manager. “By coming in at a lower interest rate today, we will save money for decades.”

On Nov. 29, the Water Authority’s Board of Directors approved a contract to buy up to 56,000 acre-feet of water annually from what will be the nation’s largest seawater desalination plant. It is fully permitted and expected to start producing up to 50 million gallons a day in 2016. By 2020, water from the Carlsbad plant will meet approximately 7 percent of the region’s demand.

The board made its decision based on a range of projected interest rates on $781 million of tax-exempt construction bonds issued by the California Pollution Control Financing Authority on behalf of Poseidon and the Water Authority. The actual rates could not be set until the contract was approved. Stonepeak, the equity investor in the project, is posting $173 million in equity to complete the financing.

Independent analysts cited the Water Authority’s financial stability and strong credit ratings, along with the strategic importance of the desalination plant, as critical factors in their positive assessments of the debt.

“The Water Authority’s financial diligence over the decades and on this project paid off on Wall Street,” said Sandy Kerl, the Water Authority’s deputy general manager who helped negotiate the bond sale in New York this week. “This is great news for the whole region as we prepare for construction.”

A joint venture of Kiewit Infrastructure West Co. and J.F. Shea Construction will design and build the Carlsbad plant and the Water Authority’s pipeline. Israel-based IDE Technologies will provide reverse osmosis equipment for desalination and run the facility for Poseidon, bringing decades of experience on similar projects around the world.

Construction is set to start in early 2013. The desalination plant will be built next to the Encina Power Station in Carlsbad. The project also includes a 10-mile pipeline that connects the new plant to the Water Authority’s aqueduct in San Marcos. Commercial operations are expected in 2016.

As work gets under way at the site, the Water Authority will conduct a comprehensive cost of service study to determine how expenses related to desalinated water will be split among the Water Authority’s rates and charges.

Even with a favorable interest rate, desalinated seawater initially will cost more than current sources. However, analysis by the Water Authority shows that imports from the Metropolitan Water District of Southern California – the San Diego region’s largest water supplier – could be more expensive than desalination by the late 2020s.

Desalination is just one piece of the Water Authority’s long-term strategy to reduce what was once near-total reliance on MWD. Over the past 20 years, the Water Authority has invested in water storage, conservation and new sources to diversify its portfolio. That approach helps safeguard the region’s 3.1 million residents and $186 billion economy by providing a safe and reliable water supply.