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The Carlsbad “Bud” Desalination Plant is a water treatment facility located in Carlsbad, California, in San Diego County. Completed in 2015, it serves to deliver around 8-10% of the county’s total water supply, and some of the only water that is not imported.

Narrative

In response to continual droughts in the region and growing concerns with regard to water security, several counties have experimented with water desalination since the 1990’s. Poseidon, the developer and manager of the Carlsbad “Bud” Lewis Desalination plant, first partnered with the San Diego Water Authority in 1998 with the plans of developing sustainable water security for San Diego’s future, with a few ideas for the plant.

The RFP was first issued in 2006, and before bidding even ended, the project, as well as many other projects throughout the state, received massive setbacks in the form of fourteen different lawsuits placed against construction. This was before any of the many environmental and regulatory approvals could be processed.  Most of these suits were filed from the Surfrider Foundation’s San Diego chapter with most of their and interested group’s main objections being environmental in nature. Even since the plant’s completion in 2015, groups such as Sierra Club have criticized the re-entry of brine extracted from the water back into the ocean, increasing the average salinity of the water, as well as putting in danger species which lay eggs and microorganisms which live where the water is extracted. They have also echoed the popular expectation that the plant would account for more than just 8-10% of the San Diego water supply, not to mention that 90% of the remaining water balance is exported from the Colorado river.

Trouble did not end at the lawsuits, however. The San Diego Water Authority broke away from planning and constructions obligations in 2006, leaving Poseidon to fend for itself in terms of construction. Poseidon did eventually find a site for construction, however, next to the Encina Power station in Carlsbad.

Despite these objections, the plant’s designs and concepts still eventually gained approvals and awards to begin construction in 2009. In 2011, after a lengthy legal battle, the California supreme court upheld lower-court rulings in favor of the plant’s construction. Objections among interest groups continue elsewhere for similar plants throughout California, but most recently, the California Coastal Authority overturned their long-standing refusal of such a facility in Orange County.

The plant finished construction in 2015, and on average, adds $5 to the cost of water in San Diego. While both the San Diego Water Authority and Poseidon have vowed to bring its cost down, as of 2021, it is still some of the most expensive water-per-gallon that exists. Other outlets have also echoed the sentiments of the Sierra Club and Surfrider Foundation. A production shortage of 9,200 acre feet of water caused the SDWA to issue $3.5 million penalty in 2017. This is, however, coupled with the $97.5 million the SDWA owed to Poseidon from water that the county did actually receive. That said, even the more critical outlets cite the plant’s ability to produce more water than designed, sometimes at 53 million gallons daily, compared to the 50 million target.

Desalination

Desalination is the process by which salt water, or otherwise salinized water, is converted into fresh water. The process by which the Carlsbad Plant achieves this is highly technical.

The process begins by extracting salt water from the ocean in the San Diego area. This used to be done by the Encina Power Plant next-door to the Carlsbad plant but is now done completely internally by the Carlsbad plant. The water is then filtered traditionally through filters to get out larger material and marine life, like algae and plankton, in addition to larger materials. After that, the water is then processed through a long series of membranes, through long tubes throughout the facility, in which the water flows. In these, “reverse osmosis” occurs, where the membranes have thin enough holes to where water can pass through, but salt cannot as easily. After many layers, the salt is eventually separated from the non-diluted water. These membranes also catch viruses and bacteria, further purifying the water. The leftover materials are then put back into the sea. The distilled water is then treated with minerals, chlorine and then integrated with the San Diego water supply.

List of Actors

San Diego County Water Authority (the “Water Authority”)

The Water Authority is a county water authority organized and existing under the County Water Authority Act, California Statutes 1943, Chapter 545, as amended (the “Water Authority Act”). The Water Authority was organized on June 9, 1944 for the primary purpose of supplying water to San Diego County for wholesale distribution to the Water Authority’s member agencies in order to meet their respective needs for beneficial uses and purposes. The Water Authority is authorized to acquire water and water rights within or outside the State of California; to develop, store and transport such water; to provide, sell and deliver water for beneficial uses and purposes and to provide, sell and deliver water of the Water Authority not needed or required for beneficial purposes of its member agencies to areas outside the boundaries of the Water Authority. The Water Authority has 24 member agencies, consisting of 6 cities, 17 special districts, and the Pendleton Military Reservation.

General Resolution. On May 11, 1989, the Water Authority adopted its Resolution No. 89-21, entitled “A Resolution of the Board of Directors of the San Diego County Water Authority Providing for the Allocation of Water System Revenues and Establishing Covenants to Secure the Payment of Obligations Payable from Net Water Revenues” (as thereafter amended and supplemented, the “General Resolution”). The General Resolution requires the Water Authority to pay Maintenance and Operation Costs (which include water purchase payments under the Water Purchase Agreement) prior to the payment of any other expenses.

Poseidon Resources (Channelside) LP (the “Company”) and Equity Investors

Poseidon Resources (Channelside) LP (The “Company”) is a special purpose entity, or special purpose vehicle (SPV) that was created to finance, construct, own and operate the Plant and to construct the Pipeline. The Company’s general partner is Poseidon Resources Channelside GP, Inc. (“Poseidon GP”). The Company’s sole limited partner is Poseidon Resources Channelside Holdings LLC (the “Limited Partner”). The Limited Partner owns all the equity interests in Poseidon GP.

Orion Water Partners, LLC (“Orion”) owns all of the equity interests of the Limited Partner. Orion’s members are Poseidon Carlsbad LLC (“Poseidon Carlsbad”) and Orion Water Acquisitions LLC (“Orion Water Acquisitions”). Poseidon Carlsbad is an indirect subsidiary of Poseidon Water LLC (“Poseidon Water”) which, together with its affiliates, developed a desalination facility in Tampa, Florida, a wastewater treatment plant in Cranston, Rhode Island and five wastewater treatment facilities in Mexico. The management team at Poseidon Water has operated several large and successful projects in the private infrastructure market, including the electric power, water treatment and natural gas supply and transportation industries. The management of Poseidon Water has collectively structured, arranged and closed over $10 billion of project and corporate financings. Poseidon Water has offices in Stamford, Connecticut and Huntington Beach and San Diego, California. Orion Water Acquisitions is an affiliate of Stonepeak Partners LP, an independent investment firm that, together with its affiliates, specializes in investing in North American infrastructure assets with approximately $790 million in capital commitments. Its founding partners, Trent Vichie and Michael Dorrell, collectively have almost 30 years of infrastructure investing experience and have invested over $2 billion of equity into North American infrastructure investments. The firm was formerly the infrastructure investment division of The Blackstone Group.

Kiewit Shea Desalination: JV between Kiewit Infrastructure West Co. (“Kiewit Infrastructure West”) and J.F. Shea Construction, Inc. (“J.F. Shea”).

Kiewit Infrastructure West is a wholly owned, direct subsidiary of Kiewit Infrastructure Group, Inc. (“Kiewit Infrastructure”) which focuses on constructing complex infrastructure projects throughout the western United States. Kiewit Infrastructure West began operations in Southern California in the late 1940s with an emphasis on building water/wastewater projects since 1983. Since then, Kiewit Infrastructure West has completed hundreds of water/wastewater projects ranging from advanced treatment plants with reverse osmosis, microfiltration, ultra violet and ozone, to primary and secondary treatment plants, pump stations, and force main conveyance lines.

Kiewit Infrastructure Co.; Kiewit Co. Kiewit Infrastructure is a wholly owned direct subsidiary of Kiewit Corporation (“Kiewit”). Kiewit Infrastructure is Kiewit’s largest operating group, encompassing nearly half of all the company’s work. Kiewit has more than 127 years of experience with large projects, a substantial portion of which are in the civil construction segment. Kiewit Infrastructure Co. (the “EPC Guarantor”), a wholly owned subsidiary of Kiewit Infrastructure Group, is guaranteeing the obligations of the EPC Contractor under the EPC Contracts.

J.F. Shea Construction, Inc. J.F. Shea is a wholly owned subsidiary of J.F. Shea Co., Inc., which is one of the oldest and largest privately held construction companies in the United States. Through its affiliates and parent company, J.F. Shea has over 131 years of heavy construction experience in civil engineering projects. J.F. Shea’s projects include the construction of primary features on the Golden Gate and San Francisco - Oakland Bay Bridges, the Hoover, Bonneville and Parker Dams, San Francisco’s Bay Area Rapid Transit System and, more recently, Metropolitan Transportation Authority New York City’s $1.5 billion Manhattan Number 7 Subway Tunnel, Orange County Water District’s $300 million Advance Water Treatment System - a 75-million gallon per day Reverse Osmosis and Micro Filtration Treatment Plant, Orange County Sanitation District’s $180 million trickling filters, Metropolitan Water District of Southern California’s $65 million San Diego Pipeline 6, and the Massachusetts Water Resources Authority’s $138 million Walnut Hill Water Treatment Plant in Boston, Massachusetts. J.F. Shea Construction has completed in excess of 441,000 feet of pipeline construction for water systems throughout the southern California area, of which over 70,000 feet of pipeline construction has been completed for the San Diego County Water Authority.

Equity Ownership Structure

IDE Americas; IDE Technologies Ltd.

IDE Americas, Inc. is a wholly owned subsidiary of IDE Technologies Ltd (“IDE”). Established in 1965, IDE is engaged in the business of the turnkey delivery of large seawater desalination projects. It specializes in research and development of saline water desalination processes, concentration and purification of industrial steam, wastewater treatment, heat pumps and ice/snow machines. In addition, IDE provides maintenance and support for plants delivered to its customers. Its clients include government agencies, process industries, power utilities, refineries, hotel developers, municipal, and defense authorities. IDE has designed and constructed more than 360 desalination facilities in nearly 40 countries worldwide. IDE designed, built, and is currently operating the two largest reverse osmosis seawater desalination facilities in the world: (a) the 106 MGD (approximately 118,735 AFY) reverse osmosis facility in Hadera, Israel and (b) the 87 MGD (approximately 97,452 (AFY) reverse osmosis facility in Ashkelon, Israel. IDE is headquartered in Israel.

Cabrillo

Cabrillo Power I LLC (“Cabrillo”) owns the Power Station and is the lessor under the Ground Lease. Cabrillo is an indirect wholly owned subsidiary of NRG Energy, Inc. (“NRG”), a New York Stock Exchange-listed integrated wholesale power generation and retail electricity company.

Project Bonds

The Project Bonds are being issued to fund the majority of the costs of acquiring, constructing and installing a desalination project (the “Project”) to supply potable water (“Product Water”) to the San Diego County Water

Authority (the “Water Authority”).

Bond issuer: The California Pollution Control Financing Authority to pay a portion of the cost of constructing a reverse osmosis desalination plant (The “Plant”) and a pipeline to connect a plant (the “Pipeline”), together the “Project”.

The Series 2012 Plant Bonds will be issued as term bonds in the aggregate principal amount of $530,345,000 and will mature as shown in the Table 2.

The Series 2012 Pipeline Bonds will be issued as term bonds in the aggregate principal amount of $203,215,000 and will mature, as shown in the Table 3.

The Project Bonds will be issued pursuant to separate trust indentures and the Issuer will lend (a) the proceeds of its Series 2012 Plant Bonds to the Company to pay a portion of the costs of constructing the Plant and (b) the proceeds of the Series 2012 Pipeline Bonds to the San Diego County Water Authority Financing Agency (the "Water Authority Financing Agency") to pay the costs of constructing the Pipeline pursuant to separate loan agreements. The Water Authority Financing Agency will make the proceeds of its loan available to the Water Authority under an installment sale agreement.

Construction Entity Structure

The Water Authority will make installment payments to the Water Authority Financing Agency, which will be the sole source of payment of the Water Authority Financing Agency's payments to the Issuer under its loan agreement. The Water Authority will not be obligated to make any installment payments unless and until the Project is completed. A capitalized interest account will be established for each issue of Project Bonds that will be funded from the related bond proceeds in an amount sufficient to pay interest on the related Project Bonds for six months after the date by which the Company's contractor has guaranteed to complete construction of the Project.

Outline of relationships to SPV for Carlsbad Plant

If the capitalized interest account for the Pipeline Bonds is depleted prior to completion of construction, the Company must pay delay damages to the Water Authority in an amount sufficient to pay debt service on the Pipeline Bonds until completion. The contractor will have a corresponding obligation to the Company up to a maximum amount. During operations, the Company must pay performance damages to the Water Authority for its failure to deliver Product Water to the Water Authority in accordance with the terms of their water purchase agreement. The Water Authority's obligations to make installment payments will be reduced by the amount of such performance damages, whether or not paid. The Water Authority Financing Agency's obligation to make loan repayments will be reduced by the amount of such performance damages, whether or not paid. The Water Authority has assigned its right to receive both delay and performance damages to the Water Authority Financing Agency to secure its obligations under the installment sale agreement, and the Water Authority Financing Agency has, in turn, assigned its rights to receive such damage payments to the trustee for the owners of the Series 2012 Pipeline Bonds. The Company's obligations under the loan agreement for the proceeds of the Series 2012 Plant Bonds and its obligations to pay delay damages with respect to the Pipeline will be secured on parity with the Collateral described herein. The Water Authority's obligations to make installment payments are unsecured but will have the benefit of certain covenants, including a rate covenant, made by the Water Authority in respect to its secured debt.[IVT1]

The Project Bonds are limited obligations of the issuer and neither the faith and credit nor the taxing power of the State of California. The Issuer has no taxing power, which means that the issuer promises to pay back the money they borrowed when they sell these bonds. But, State of California or any local government isn't guaranteeing that payment. So, if the issuer can't pay, the state won't step in to cover the bill. The issuer also can't raise taxes to gather the funds.

Table 2. Series 2012 Plant Bonds. Maturity and Interest rate

Amount		Term Bond due	Priced at	Yield
$38,690,000	5.000%	July 1, 2027	107.851	4.000%
$33,345,000	5.000%	July 1, 2030	106.223	4.200%
$136,340,000	5.000%	July 1, 2037	103.600	4.530%
$321,970,000	5.000%	Nov. 21, 2045	101.665	4.780%
Total $530,345,000

Table 3. Series 2012 Pipeline Bonds. Maturity and Interest rate

Amount		Term Bond due	Priced at	Yield
$14,830,000	5.000%	July 1, 2027	107.604	3.180%
$65,020,000	5.000%	July 1, 2037	104.012	4.020%
$123,365,000	5.000%	Nov. 21, 2045	102.557	4.370%
Total $203,215,000

Risk Matrix

	EPC Contractor	SPV Company	Equity Investor	Lenders	SDCWA Government
Construction overruns/delays	x	x
Change in legal regimes		x			x
Land lease		x
Approvals/lic/permits	x	x
Variations
Taxation		x	x
Tariffs and charges					x
Revenue / Demand					x
Operation		x
Maintenance
Defects Liability	x	x
Natural disaster
Industrial action		x
Environmental		X
Civil disobedience
Insurance
Force Majeure	x	x	x	x	x
Confiscation			x
Interest rate risk		x

Costs and Financing Structure

Poseidon Resources (Channelside) LP Desalination Project Sources and Uses

Sources	Plant	Pipeline	Total
Series 2012 Bonds Par	530,345	203,215
Series 2012 Bonds Premium / (Discount)	15,382	6,891
Accrued Interest	295	113
Interest Income (2)	942	428
Equity Contributions	167,044	-
Total Sources	714,008	210,647	924,655
Uses
Plant EPC (3)	429,856	-
Pipeline EPC (3)	-	144,473
Power Substation Construction	19,733	-
Total Construction Costs	449,589	144,473	594,062
Interest on the Project Bonds During Construction (4)	90,969	34,857
Pre-construction costs (5)	39,483	13,270
Fees, Closing, Environmental, Insurance (6), (7)	60,378	7,885
Reserves and Contingency (8), (9)	73,565	10,161
Additional Bond Proceeds	24	1
Total Uses	714,008	210,647	924,655
Equity share in total Sources:	23.4%

(2) Includes interest earned on funds held in the various accounts within the Plant Project Fund and Pipeline Project Fund. The assumed earnings rate on funds in these accounts is 0.20% for the life of construction.

(3) Represents the EPC Contract Prices under the Plant EPC Contract and Pipeline EPC Contract (inclusive of contingencies for any expected change orders), respectively, without any changes to said price arising from the occurrence of certain uncontrollable circumstances.

(4) Represents capitalized interest on the Plant and Pipeline Bonds accruing six months after the Scheduled Commercial Operation Date. The Company expects Plant Bond debt service after the Scheduled Commercial Operation Date to be paid from project revenues.

(5) Includes pre-development costs incurred by the Company related to the project through December 2012.

(6) Includes underwriter's discount, up-front and capitalized costs associated with the equity contribution, and costs of issuance.

(7) Includes insurance, environmental, Company management, land usage and ground lease costs during construction

(8) Please refer to sections "SOURCES OF PAYMENT AND SECURITY FOR THE PLANT BONDS; POSEIDON PIPELINE CONSTRUCTION OBLIGATIONS; AND CONTRACTED SHORTFALL PAYMENTS" and "SOURCES OF PAYMENT AND SECURITY FOR THE PIPELINE BONDS" of this Limited Offering Memorandum for a description of the various reserve funds.

(9) At closing, the Plant Bonds Debt Service Reserve Fund will be funded via deposit of an irrevocable direct pay letter of credit in favor of the collateral agent.

Contracts

Contract	Nominal Amount / Price	Contract Parties
Construction and Operation
Water Purchase Agreement	Fixed: - Debt Service Charge, - Equity Return Charge, - Fixed Operating Charge, - Fixed Electricity Charge Variable: - Variable Operating Charge - Variable Electricity Charge	Water Authority and Company. component 1: Design, construct, test the Plant component 2: Supply water: 48,000 – 56,000 AFY. Term: 30 years
Pipeline DBA	$161,802,000	Water Authority and Company
Plant EPC Contract	$429,856,000	Company and EPC Contractor
Pipeline EPC Contract	$143,599,000	Company and EPC Contractor
O&M Agreement	- Fixed monthly fee: $981,103 - Variables: $0.32 / kgal - Other adjustment fees	Company and IDE Americas, Inc.
Ground Lease	$340,000 / year $1,287,000 / year after 06.2017	Company and Cabrillo Power I LLC
Financial Contracts
Plant loan agreement	$530,345,000	California Pollution Control Financing Authority (Bond Issuer) and Company
Equity Contribution Agreement	$167,044,000	Limited Partner, the Company and Collateral Agent
Pipeline Loan Agreement	$203,215,000	Bond Issuer and Water Authority Financing Agency
Pipeline Installment Sale and Assignment Agreement	$203,215,000	Water Authority Financing Agency and the Water Authority to pay the costs of developing, designing, acquiring and constructing the Pipeline.

Purchase of the Plant Option

The Water Authority has the option to purchase the Plant at the end of the term of the Water Purchase Agreement for one dollar. The Water Authority will also have an option to purchase the Plant before the end of term as follows:

at any time after the 10th anniversary of the Commercial Operation Date at a purchase price equal to (a) the net present value of the Equity Return Charge that would have been payable through the remaining term of the Water Purchase Agreement plus (b) the aggregate principal amount of the outstanding Plant Bonds and the Approved Permitted Debt plus (c) costs incurred due to terminating current employees and IDE Americas breakage costs; The Water Authority has no obligation to purchase the Plant under any circumstances.

Takeaways

The Carlsbad “Bud” Lewis Desalination Plant has undergone a tremendous number of hurdles to achieve full operational capacity. It is an example of how lack of trust within technological infrastructure development can lead to delays for P3 projects, and how studying the success and full story of a P3 comes from a full understanding of the political context surrounding creation, rather than just financial analysis. However, its pioneering technology and essential nature brings its success under more scrutiny. Following Poseidon’s contract to its conclusion will prove essential for future, similar projects elsewhere in California especially, due to their continuing drought. Its lack of success in the eyes of its detractors and somewhat unaddressed environmental concerns has delayed other projects, like in Orange County, from State-Level authority. But if their eventual acceptance of a desalination project is anything to go by, even non-P3 endeavors will likely enter the news soon.

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