Contractor strength drives investment grade rating for Carlsbad bonds
Credit rating agency, Fitch, has assigned an investment grade 'BBB-' rating to bonds issued for the under-construction Carlsbad desalination plant and associated networks in California.The rating applies to US$ 559.9 million series 2012 plant bonds and US$ 221.5 million series 2012 pipeline bonds.
According to Fitch, the rating reflects "timely construction progress of the project with provisional acceptance expected to be achieved several months ahead of guaranteed completion date in 2015." Fitch listed strong drivers for the rating including in the results of recent plant tests, a guaranteed water purchase agreement, and the sound track record of the contractors for construction - Kiewit Shea Desalination, and operations and maintenance - IDE.
The agency said a recent testing programme showed that the plant could meet the minimum performance criteria on quality and pretreatment run times during periods of severe algal bloom.The 33-year water purchase agreement with the AA-rated San Diego County Water Authority (SDCWA) has provided revenue stability under a take-if-delivered contract said Fitch. SDCWA has agreed to purchase a minimum of 5.9 million m³ a year, subject to availability.
The operating and maintenance agreement and the water purchase agreement provide a "very robust recovery framework for most eventualities including inflation, normal operations and major maintenance, capital requirements (including regulatory mandates), and high levels of electricity pricing," said Fitch.
The "moderately high leverage" was, according to Fitch, "manageable if the project is operating at targeted performance levels. The ratio of net debt to cash-flow is 10 for the plant bonds and 14 for the pipeline bonds.
The project is designed to be a 270 Ml/d reverse osmosis seawater desalination plant with 15 kms of 135 cm water conveyance pipeline. The plant will be located next to the Encina Power Station in Carlsbad, California. Seawater for the plant will be drawn from the cooling water discharge of the power station, and wastewater will be returned into the ocean using the power station's existing discharge canal. Commercial operations are forecasted to start about 15 months ahead of schedule.