Approximately $733 million of rated debt affected
New York, March 01, 2017 -- Moody's Investors Service ("Moody's") affirmed at Baa3 the backed senior
secured bond ratings of Poseidon Resources (Channelside) LP. The
$530 million Water Furnishing Revenue Bonds, Series 2012
(plant bonds) and the $203 million Water Furnishing Revenue Bonds,
Series 2012 (pipeline) bonds were issued in 2012 on a tax-exempt
basis through the California Pollution Control Financing Authority to
finance the construction of the Carlsbad desalination plant and associated
pipeline. The rating outlook is stable.
RATINGS RATIONALE
The affirmation of the Baa3 backed senior secured ratings reflects the
start of commercial operations of the project at end of December 2015
and the desalination plant's initial operating track record,
which was subject to modest initial ramp-up challenges but remains
within our expectations at rating assignment. The Baa3 ratings
with a stable outlook incorporates Moody's expectation that the
plant will continue to expand its operating track record and minimize
excused and unexcused operating shortfalls going forward. We expect
DSCR around 1.5x-1.6x on average throughout the life
of the project.
The ratings are constrained by the risks associated with the required
construction and transition to a modified seawater intake system once
the water circulating pumps of the Encina power station will shut down.
Poseidon will need to control the risk of additional ramp-up challenges
arising from the transition to a stand-alone seawater intake system
as well as the risk of associated construction delays or cost overruns.
Initial ramp-up challenges are not uncommon for new facilities
and included a baffle curtain failure in April 2016, excessive feed
water temperatures constraining production during summer months,
unscheduled power plant outages in particular in September 2016 and longer
than expected time needed for cleaning of tube systems. As a result,
the plant delivered 45,103 AF of water in calendar year 2016,
which was below the minimum requirement of 48,000 AF per year (46,370
adjusted for allowed outages).
Debt service coverage (DSCR) for both the plant and pipeline bonds for
calendar year is expected to be around 1.5x in calendar year and
around 1.4x in fiscal year 2017 ending June 30, 2017.
Water deliveries are expected to be slightly above the minimum requirement
of 48,000 AF per year in fiscal year 2017. Fiscal year 2017
includes a major power plant outage in September 2016 and a scheduled
pipeline outage in January 2017. Poseidon paid around $196
thousand for unexcused shortfalls related to fiscal year 2016 (ending
June 30, 2016) and at this stage no additional shortfall payments
to the authority are outstanding.
The ratings continue to reflect the strategic importance of the project
to the San Diego County Water Authority (SDCWA, Aa2, stable)
and the 30-year (+3 year extension option) water purchase
agreement (WPA) with the authority, which provides for predictable
availability-payment like contracted cash flows from a highly rated
counterparty. The risk of production shortfalls and higher than
expected operating costs is mitigated by the strong cost recovery mechanism
under the WPA and the transfer of major operational risks to the operator
IDE under the O&M agreement.
The WPA with the authority for delivered water includes components to
cover fixed and variable costs, debt service on the plant bonds
and an equity return. The cost of electricity, which represents
roughly a quarter of the desalination plant's operating costs given its
high power consumption, is paid by the authority based upon a formula
that accounts for minimum demand levels.
The Encina power station is scheduled to shut down by end of 2017.
However, Moody's understands that it is likely that Poseidon
will be able to use power plant's water circulating pumps for another
12 months after shutdown and that the shutdown of the power plant could
also be delayed until end of 2018. This would give Poseidon time
until the end of 2019 to construct a stand-alone water circulating
pump system, which is a critical piece of infrastructure of the
plant.
Costs for the replacement water circulating pumps and supporting infrastructure
are estimated to be around $36 million, up from the initial
estimate of $23 million at rating assignment. The revised
estimated costs are currently backed by a letter of credit. Poseidon
will finance the construction costs with the issuance of additional parity
debt to the Series 2012 plant bond and the debt service will be recovered
through payments by the San Diego Water County Authority under the WPA
and ultimately, through higher water rates charged to customers.
Other factors considered in the rating are (1) the scale of the project
as the largest desalination plant in the Western Hemisphere; (2)
limited experience of local authorities in the US with reverse osmosis
desalination plants; (3) proven technology of reverse osmosis desalination
plants and the presence in countries in the Middle East, Australia
and the Caribbean; (4) the project's back-loaded debt
amortization profile with the first principal payment starting only in
2020; (4) typical project finance features benefit bondholders such
as a 12 months debt service reserve fund for both the plant and pipeline
bonds, restrictions to dividends and additional debt, reserve
requirements and (5) adequate liquidity reserves as of December 31,
2016.
RATING OUTLOOK
The stable outlook reflects Moody's expectation that the plant will
expand its operating track record and will operate according to its specifications
with minimal excused and unexcused operation shortfalls. It also
incorporates the expectation that Poseidon will be able to move forward
with the permitting process and design of the seawater intake system in
order to construct the necessary modifications to the water pumps in time
for the shutdown of the water pump systems of the adjacent Encina power
plant.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Factors that Could Lead to an Upgrade
The rating could be upgraded if the plant operates according to its specifications
with minimal supply shortfalls and an average DSCR of 1.4-1.6x
on a sustained basis. In addition, a rating upgrade would
require visibility around the successful completion of the necessary changes
to the seawater intake system once the Encina power plant's water
pumps are not accessible to the plant anymore.
Factors that Could Lead to a Downgrade
The rating could be downgraded if the plant no longer operates according
to expectations or if debt service coverage falls to around 1.4x
on a sustained basis as a result of additional debt financing, reserve
releases or weak operating performance.
STRUCTURAL CONSIDERATIONS
Debt service on both the Plant and Pipeline Bonds is paid out of separate
accounts administered by third party trustees. Poseidon or Channelside
owns the plant and pays debt service on the plant bonds. Debt service
on the plant bonds is secured by the plant's net revenues.
SDCWA will make Installment Payments (on a subordinate basis through the
SDCWA Financing Agency) in amounts sufficient to cover debt service on
the Pipeline Bonds and SDCWA owns and operates the pipeline. The
pipeline is not pledged as security to pipeline bondholders. Therefore,
only the plant collateral is shared pro-rata between pipeline and
plant bondholders. If the plant delivered less water than required,
Poseidon would need to pay a proportionate amount of pipeline bond debt
service. According to the financing documents and the California
Water Code, in a scenario in which the plant and pipeline bondholders
take possession of the plant, they would have a right to use the
Water Authority Distribution System (including the pipeline) to transport
water.
The principal methodology used in these ratings was Generic Project Finance
Methodology published in December 2010. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
Poseidon Resources (Channelside) LP owns the Carlsbad reverse-osmosis
desalination plant located adjacent to the Encina Power Station in Carlsbad,
California. Construction of the plant (total project cost was around
$900 million) was finished end of 2015 and the plant received commercial
acceptance on December 23, 2015.
The plant has a capacity to deliver up to 50 million gallon of water per
day or 56,000 acre feet per year (AFY). The project benefits
from a 30 year water purchase agreement (WPA) (plus a 3-year extension
option) with the San Diego County Water Authority (SDCWA) (Aa2,
stable senior most revenue backed rating, Aa3, stable tax-backed
bonds) for the entire output of the plant. The project is expected
to supply 8-10% of San Diego County's water supply
by 2020. Israel-based company IDE Technologies (IDE) is
providing the plant's desalination technology as well as operations
through its US subsidiary.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Kathrin Heitmann
Asst Vice President - Analyst
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
