Poseidon Desal Deal: Govt. may rescue junk bond project

This story was first published June 22, 2010

By John Earl
Surf City Voice

Due to soaring cost estimates and lack of private financing for a proposed 50-million-gallon per day Carlsbad desalination project, a government water agency may negotiate a takeover deal with the project’s developer, Poseidon Resources, Inc.

Poseidon Resources is a budding multi-national water baron that also has an identical desalination plant in the dock for Huntington Beach, next to and functionally linked with the AES power plant, on Pacific Coast Highway and Newland Avenue.

What happens in Carlsbad will indicate what could be in store for the Huntington Beach project and residents of our city as well.

The $650 million Carlsbad project would have supplied 56,000 acre feet of drinking water per year to nine of 24 San Diego County water districts under the umbrella of the San Diego County Water Authority (CWA).

But the cost of water derived from the desalination plant will be much higher than previously stated and it would take $630 million in combined public subsidy funds paid in yearly installments over 25-30 years to make the “private” project financially viable, according to a memo written by Oceanside city manager, Peter A. Weiss.

Oceanside is one of the nine water districts, known collectively as The Desal Partners, which had signed water purchasing agreements with Poseidon.

Due to Poseidon’s financing troubles and needed word changes, however, those agreements had to be revised before the project could proceed. But only one member, the city of Carlsbad, has signed a revised contract so far.

“In the past few months it has become apparent that Poseidon’s cost of water is going to be greater than originally proposed,” the memo states. “To make the project viable, Poseidon needs subsidies from the San Diego County Water Authority and Metropolitan Water District (MWD)”, the memo continues.

The CWD is a member of the MWD, which supplies water to 26 southern California water agencies.

Now the CWA has apparently concluded that the only way to keep the project alive is by government takeover, the memo indicates. “In discussions with CWA it is apparent the Poseidon project is not going to work as originally planned. CWA has indicated that they would be willing to negotiate with Poseidon to take over the project if the Desal Partners agreed.”

If the CWA takes over the project, all previous agreements between Poseidon and Desal Partners would have to be cancelled.

Except for a lawsuit filed in April by the Surfrider Foundation, challenging Poseidon’s planned water intake process, which the state has effectively banned for use by the very power plants (like those in Carlsbad and Huntington Beach) whose OTC systems Poseidon plans to use to suck in seawater, the Carlsbad plant is set to go—minus the key issue of financing.

Poseidon’s Huntington Beach desalination project was approved by the city council in 2005 and 2006 but still needs to go to the California Coastal Commission. It will face the same basic funding issues that the Carlsbad project has faced. A $350 million 30-year subsidy is already lined up but not finalized for the Huntington Beach project.

Cost estimates for both plants have skyrocketed from approximately $150-$250 million about 8-years-ago to about $550-$650 million today.

Subsidize My Junk Bonds Please
Poseidon has always relied on public subsidies to attract the private investors and financing that it has always bragged would pay for 100 percent of its Carlsbad and Huntington Beach desalination projects.

In search of the private financing needed for its Carlsbad project, Poseidon received approval last January from the California Debt Limit Allocation Committee for a tax free $530 million bond to finance 25 percent of its capital costs. Poseidon must receive final approval for the bond from the California Infrastructure Bank, which is expected to decide this summer.

Poseidon received a “junk” bond rating by Moody’s, Standard & Poor, and Fitch, which means that investing in Poseidon’s Carlsbad desalination plant is considered highly speculative with a great risk of default.

But far from instilling caution in public water boards or city councils, Poseidon’s risky business seems to have inspired them to bend over backwards—at taxpayers’ expense—to help keep the company’s dreams alive.

In November, before a meeting of the Metropolitan Water District of Los Angeles (MWD), Poseidon desperately insisted that without a $350 million subsidy (to be received indirectly through the San Diego Water Authority and the Desal Partners in yearly installments over 30 years) it could not acquire needed private financing through the bond issue and the project would die.

The MWD granted the subsidy but stipulated that if any MWD board member, who also represented a member district belonging to the Desal Partners, voted with a majority to challenge MWD’s water rates, the subsidy would be cancelled.

At the time, Poseidon officials walked away from the meeting satisfied.

But a short time later, Poseidon told the CWA that the MWD’s cancellation clause created an unacceptable financial risk for investors and asked it to backup the MWD subsidy in the event MWD stopped payments.

But that option was considered too costly by the agency, according to the memo. “CWA estimates it would cost [$]25 million per year and raise rates over $50 per acre foot to subsidize Poseidon, making the project even more costly.”

In February, Poseidon and the Desal Partners also asked the CWA to provide a $280 million (or $200 per acre-foot) subsidy to be issued at $14 million per year over 25 years—in addition to the $350 million subsidy from MWD. But the Water Authority denied it, stating that Poseidon did not qualify.

Exacerbating  Poseidon’s funding  problems, the CWA recently sued MWD over water rates and the Desal Partners joined Poseidon in requesting a backup for the MWD subsidy.

But the CWA is ready to take over the Carlsbad project instead, and that seems to confirm a belief that Poseidon’s critics have always expressed—and that its supporters have always ignored until now—that   neither of Poseidon’s proposed southern California desalination plants can stand on their own.

“Poseidon has been claiming for years that they will be responsible for financing the desalination proposals in Carlsbad and Huntington Beach,” says Joe Geever, Policy Coordinator for the Surfrider Foundation. “This latest debacle in San Diego County just exposes what many have known all along — these proposals are almost completely reliant on public money.”

Poseidon did not respond to the Voice’s request for comment before press time.

Geever says that public water agencies should turn to other, proven, methods of water management.

“If we are going to spend public money on water projects, we should prioritize projects that are economically and environmentally superior — like expanding our local Groundwater Replenishment System and investing in conservation programs.”

Tampa Bay Debacle Redux?
If the CWA does decide to take over the Carlsbad desalination project, it won’t be the first time that Poseidon—which has yet to build a single desalination plant—failed to finish a project or have taxpayers pick up after it.

It happened before in Tampa Bay, Florida, where Poseidon was supposed to build a desalination plant about half the size of its proposed Carlsbad and Huntington Beach plants.

With the infusion of $99 million in tax dollars (90 percent of the total estimated cost of $110) for construction of the plant and accompanying water pipeline, the Tampa desalination plant was supposed to be a privately owned and operated facility. It didn’t end up that way, however, due to financial difficulties and construction failures by Poseidon’s business partners.

Three bankruptcies by Poseidon’s partners had to occur before the Tampa Bay Water Authority (TBWA) actually took control of the project, two years after its planned start date. TBWA bought out Poseidon and its partners between the first and second bankruptcies due to the poor bond rating of the partners and their inability to acquire financing for the project. But Poseidon’s partner, Covanta, was left in complete charge of building and operating the plant.

Operational failures-including clogged filters-stemmed from cost cutting measures taken during construction. Poseidon and partners were in complete control of construction during that time. Simply put, the plant could not finance itself even with tax dollars, nor could it function properly after multiple attempts by private companies–not even in a much better economic climate than exists today.

The plant had to be shut down by TBWA pending repairs.

That’s when TBWA took over complete control and for $29 million more hired American Water/Pridesa, to get the plant running.

In late 2007, more than 7 years after construction began, the plant finally became operational. But the price of construction rose to $158 million and the cost of water from the plant for consumers went from an estimated $677 to $1,100 per acre foot at that time, still far cheaper than independent experts expect it to be in California ($1,500 – $8,000 per acre foot) where salt water levels and other factors are different.

In 2006, when the Huntington Beach City Council voted to approve the Poseidon Huntington Beach desalination project, Councilmember Don Hansen summed up the majority view when he reassured hundreds of city residents packed into the council chambers that “If the price of the input exceeds what would be necessary for Poseidon to make a profit, this plant will never see the light of day. And it’s purely borne on private investment dollars with the risk that they [Poseidon] are going to take.”

But if Poseidon’s Carlsbad misadventure is any indication of things to come in Surf City, Hansen and other Poseidon loyalists on city council’s past, present and future may have to face some salty-mouthed voters.

A proposal to allow the CWA to negotiate directly with Poseidon on behalf of its members will be considered by the Oceanside City Council at its June 23 meeting starting at 4 p.m.  The agenda can be found at http://www.ci.oceanside.ca.us/agendas.asp and the meeting can be viewed live online.

The next day, in the afternoon session, the CWA will take up the same issue. The agenda can be read at http://www.sdcwa.org/board/agendas/2010_06_24.phtml . Click the Water Planning link under the afternoon session to see the agenda. The meeting can be heard, but not viewed, live online.

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