Fitch Rates CPCFA's Series 2012 Plant and Pipeline Bonds 'BBB-'

NEW YORK--()--Fitch Ratings has assigned a 'BBB-' rating with a Stable Outlook to $530.35 million of series 2012 plant bonds and $203.2 million of series 2012 pipeline bonds issued by the California Pollution Control Financing Authority (CPCFA).

Both the plant and pipeline bonds, which priced on Dec. 14, 2012, are expected to close on Dec. 20, 2012 and the proceeds will be loaned to Poseidon resources (Channelside), LP (Poseidon) and the San Diego County Water Authority to pay a portion of costs of the plant and pipeline respectively.

Final pricing for the plant and pipeline bonds provided an all-in interest cost of approximately 4.89%, which is below expectations. The overall impact of the lower borrowing costs is slightly higher debt service coverage in Fitch's rating case. The rating case, which assumed a three year-delay in production levels reaching requirements of the WPA, produced adequate coverage of 1.38x in the first full year of operation (2017) and average coverage of 1.56x.

KEY RATING DRIVERS

STRONG REVENUE OFF-TAKER: The 33-year water purchase agreement (WPA) with the highly rated San Diego County Water Authority (SDCWA, rated 'AA+' by Fitch) provides revenue stability under a take-if-delivered contract. SDCWA has agreed to purchase a minimum of 48,000 acre feet (AF) per year, subject to availability.

SOLID COST-RECOVERY FRAMEWORK: The operating and maintenance (O&M) agreement and the WPA 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.

MITIGATED RISK FOR CONSTRUCTION AND OPERATIONS: Reverse-osmosis (RO) technology has experienced technical problems in other projects, which have resulted in production levels below projected capacity. However the engineering, procurement, and construction (EPC) contractor and the O&M service provider bring significant worldwide water-desalination experience to the project and adequate security given the risk.

FIXED-RATE DEBT WITH ADEQUATE LEGAL COVENANTS: The proposed debt is fully amortizing, with a fixed rate and a term of nearly 33-years. The restrictions on equity distributions prior to achieving stable operation (1.35x) and in the event of a power plant shutdown, as well as the 1.25x forward- and backward-looking equity distribution test and the 1.35x additional bonds test for discretionary purposes provide adequate protection to lenders at the investment-grade level.

MODERATELY HIGH LEVERAGE: Initial net debt/cash flow available for debt service (CFADS) is elevated at 10 x (plant bonds) and 14x (plant and pipeline bonds) in the first full year of operations (2017), which is manageable if the project is operating at targeted performance levels.

For a complete review of Fitch's analysis of the Project please refer to Fitch's rating action commentary 'Fitch Expects to Rate CPCFA Proposed Series 2012 Plant and Pipeline Bonds 'BBB-' dated Dec. 5, 2012, and Fitch's pre-sale report for CPCFA issued on Dec. 10, 2012.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance,' (July 12, 2012).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

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Contacts

Fitch Ratings
Primary Analyst
Scott Zuchorski, +1-212-908-0659
Director
Fitch, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Raymond Wu, +212-908-0845
Analyst
or
Committee Chairperson
Cherian George, +1-212-908-0519
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Scott Zuchorski, +1-212-908-0659
Director
Fitch, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Raymond Wu, +212-908-0845
Analyst
or
Committee Chairperson
Cherian George, +1-212-908-0519
Managing Director
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com