1

1

Carlsbad Desalination Project – Proposed Water Purchase Agreement Costs and Terms

Water Planning Committee October 25, 2012

2

TODAY'S AGENDA

1. Build up to Water Unit Price

2. Consequences of non-performance

3. Plant Operation, Management & Maintenance

4. Upcoming Board and Other Public Meetings

3

Electricity Charge

Operating Charge

Capital Charge

WATER

PURCHASE PRICE

4

COST DRIVERS

3. The Capital Charge is driven by: • Poseidon’s Capital

Budget

• Bond Issuance

• Negotiated Equity Return/Developer Fee

The Capital Charge is fixed at a pre-established escalation rate

Capital Charge

Electricity Charge

Operating Charge

2. The Operating Charge is driven by:

• Terms of Poseidon’s O&M Agreement with IDE

• Other operating expenses

The Operating Charge is indexed to CPI

1. The Electricity Charge is driven by:

• Terms of Poseidon’s O&M Agreement with IDE

• SDG&E Rates

• Water Authority’s option to select supplier

The Electricity Charge will vary with electricity prices

5

WATER PURCHASE PAYMENTS • Monthly, based on actual

deliveries in acre-feet

• In each year, the first 48,000 acre-feet will be purchased at a price that fully amortizes the fixed project costs plus the variable costs of production

• Water in excess of 48,000 acre-feet will be purchased at a unit price reflecting the variable costs of water production

• Payments of fixed charges to Poseidon will be adjusted to reflect Poseidon underperformance

– Poseidon is obligated to produce 56,000 AFY

– Water Authority is only obligated to take 48,000 AFY

49

,32

8

50

,32

9

49

,58

3 53

,63

3

50

,32

5

54

,06

8

54

,34

8

51

,37

3 56

,00

0

55

,26

1

40,000

42,000

44,000

46,000

48,000

50,000

52,000

54,000

56,000

58,000

60,000

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Annual Projected Desal Purchases in AF Wet Weather Hydrology

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UNIT PRICE MATRIX Debt

Service Charge

Equity Return Charge

Fixed O&M

Charge

Variable O&M

Charge

Fixed Electricity

Charge

Variable Electricity Charge

Mgmnt Fee/

Operator Incentive

Minimum Annual Commitment (48 TAF/Yr)

X X X X X X X

Additional Water between 48 TAF-56 TAF

X X X

Excess Water Beyond 56,000

X X X

Unexcused Demand Shortfall Units

X X X X

Excused Supply or Demand Shortfall Units

No Payment. Right to make up in the future

Unexcused Supply Shortfall Units

No Payment. Right to make up during Contract Year

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WHAT MAKES UP THE CAPITAL BUDGET?

• Seawater Desalination Treatment Plant $484,000,000

• SDG&E Substation $ 15,000,000

• Wetlands Mitigation/Construction $ 17,000,000

• Greenhouse Gas Mitigation $ 1,000,000

• Financing Costs $161,000,000

Total: $678,000,000

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CALCULATING THE CAPITAL CHARGE

• Total Plant Related Capital Costs: $678 Million

• Method of Finance • 76% funded through Bonds issued by the California

Pollution Control Financing Authority

• 24% Cash Equity from Stonepeak Infrastructure

Bond Financing Equity Contribution

$513 Million $164 Million

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DEBT SERVICE CHARGE

• Plant Bond Financing: $513 Million

• Plant Term • 30 years

• Increasing 2.5% annually for rate smoothing

• Interest Rate • Current Market: 5.10%

• Maximum: 6.10%

• Used Mid Range: 5.60%

48,000 AFY 56,000 AFY

$551 /AF $472/AF

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• Equity Contribution: $164 Million

• Term • 30 years

• Increasing 2.5% annually for rate smoothing

• Rate of Return • 9.38%

48,000 AFY 56,000 AFY

$280 /AF $240/AF

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PIPELINE COSTS • Water Conveyance Pipeline $163,000,000

• SDG&E Substation $ 5,000,000

• Wetlands Mitigation/Construction $ 6,000,000

• Financing Costs $ 52,000,000

Total: $226,000,000

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PIPELINE INSTALLMENT PAYMENTS

• Bond Financing: $226 Million

• Term • 30 years

• Increasing 2.5% annually for rate smoothing

• Interest Rate • Current Market: 4.60%

• Maximum : 5.60%

• Used Mid Range: 5.10%

48,000 AFY 56,000 AFY

$238 /AF $204/AF

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CAPITAL COST SUMMARY

Capital Budget

48,000 AFY 56,000 AFY

Plant Bonds $513 M $551/AF $472/AF

Equity $164 M $280/AF $240/AF

Pipeline Bonds

$226 M $238/AF $204/AF

Total $903 M $1,069/AF $916/AF

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– Fixed O&M charges: $22.7 million annually • Non electricity: $19.2 million annually

• Electricity: $3.5 million annually

48,000 AFY 56,000 AFY

$400 /AF $343/AF

48,000 AFY 56,000 AFY

$73/AF $63/AF

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– Variable O&M Costs: $26.1 - $30.4 million annually

• Non electricity: $4.8 – $5.7 million annually

• Electricity: $21.2 – $24.8 million annually

48,000 AFY 56,000 AFY

$101 /AF $101/AF

48,000 AFY 56,000 AFY

$442/AF $442/AF

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Historic Electric Prices • SDG&E’s average industrial rate for the period 1981-2010 was presented to the

Board

This rate history shows a historic annual growth rate of 1.18%

This rate history is an important factor considered in the forward-looking rate projection

The Board and public asked certain questions about this rate history

What explains the “shape” of the SDG&E rate history?

Why hasn’t staff used the last 10-years as the basis for the future projection?

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Electricity rates versus natural gas prices

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2

4

6

8

10

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16 SDG&E Average Industrial Rate

cent

s/kW

h

0

2

4

6

8

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

U.S. Natural Gas Wellhead Price

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sand

Cub

ic F

eet

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Natural Gas Price Increases Drive Electric Rates

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2

4

6

8

10

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16 SDG&E Average Industrial Rate

cent

s/kW

h

0

2

4

6

8

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

U.S. Natural Gas Wellhead Price

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lar/

Thou

sand

Cub

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eet

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Impact of California Energy Crisis

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2

4

6

8

10

12

14

16 SDG&E Average Industrial Rate

cent

s/kW

h

0

2

4

6

8

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

U.S. Natural Gas Wellhead Price

Dol

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Thou

sand

Cub

ic F

eet

California Deregulation and Energy Crisis

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Questions and Responses • What explains the “shape” of the SDG&E rate history?

Variations in shape away from the overall trend line are primarily explained by historic fluctuations in natural gas prices

Variations are explained secondarily by the California deregulation and energy crisis

• Why hasn’t staff used the last 10-years as the basis for the future projection?

Use of Comparable Term

• The Water Purchase Agreement has a long term (3 years construction plus 30 years operation)

• The long term requires the Water Authority to take a long term view of electricity prices.

• The Water Authority considers the approximately 30-year rate history available for the SDG&E industrial tariff to be more comparable than the shorter term of the last 8-10 years.

The last 10 years may not represent long-term fundamental trends

• The relatively higher electricity price escalation rate during the last 10 years was driven primarily by natural gas price escalation during this same period.

• Natural gas is an important fuel for the production of electricity, and SDG&E largely passes through the cost of natural gas to its ratepayers.

• The Water Authority believes that the natural gas price increase experienced during this period is unlikely to be repeated, due to structural changes in the US natural gas resource outlook.

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PUTTING THE WATER UNIT PRICE COMPONENTS TOGETHER

48,000 AFY Minimum Annual Commitment

8,000 AFY Additional Water

56,000 AFY Average Unit Price

Debt Service Charge $551/AF $0 $472/AF

Equity Return Charge $280/AF $0 $240/AF

Pipeline Installment Payments

$238/AF $0 $204/AF

Fixed non-electricity O&M

400/AF $0

$343/AF

Fixed electricity O&M $73/AF $0

$63/AF

Variable non-electricity O&M

$101/AF $101/AF

$101/AF

Variable electricity O&M

$442/AF $442/AF $442/AF

Annual Management Fee

$10/AF $10/AF $10/AF

Total $2,095/AF $553/AF $1,875/AF

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UNCONTROLLABLE CIRCUMSTANCES

– Events that affect the delivery of water by Poseidon and are not reasonably under the control of Poseidon are subject to relief from obligations under the agreement

– Poseidon is relieved from its obligation to deliver water for the duration of the event

– Water Authority never pays for water not delivered due to excused non-performance

– Water Authority is relieved from requirement to take or pay for water if Board declares an emergency where aqueduct system is unable to operate (Product water purchase relief event)

Article 14 – Uncontrollable Circumstance Procedures General procedures for claiming an uncontrollable circumstance

Notice to Water Authority within 10 business days of occurrence

Requirements for specific relief request, mitigation, and resumption of performance

Article 15 – Insurable and Uninsurable Force Majeure Events Specific Poseidon schedule/performance relief under an insurable Force

Majeure event (e.g., fire, any peril other than uninsurable FM)

Specific Poseidon schedule/performance/compensation relief under an uninsurable Force Majeure event (e.g., war, terrorism, nuclear explosion, seismic)

Requirements for project reinstatement plans and reconstruction standards

Article 16 – Change In Law Events And Other Uncontrollable Circumstances Specific schedule, performance and compensation relief for different

Change in Law events

Specific schedule and performance relief for other uncontrollables

Injunctions: utility failure; strikes; eminent domain

Differing and regulated site conditions

Raw seawater parameters outside specified range

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ADJUSTMENTS TO THE PRICE OF WATER – Changes in Law

– Changes in law or regulations that generally apply to all water treatment plants or wastewater dischargers would allow Poseidon to adjust price

– The Water Authority’s financial obligation for intake improvements during standalone operation is capped at $20 million in capital costs in 2010 dollars index linked and $2.5 million index linked to CPI in annual operating expenses

– Excluded Changes in Law do not allow for price adjustments

– Requirements for the Encina Power Station to upgrade its intake

– Tax law generally

– Uninsurable Force Majeure Events

– Other events

– Raw seawater contamination

– Water Authority delay in completing Water Authority Improvements

– Price Increase above baseline price is capped at a cumulative specified percent

– 10% annually

– 30% life of the agreement

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TIMING OF OCCURRENCE OF UNCONTROLLABLES

– Before commercial operation date

– Unit price is increased once commercial operation occurs

– Poseidon must finance costs based on this promise

– If commercial operation never occurs, Water Authority has no payment obligation

– After commercial operation date

– Water Unit Price is increased

– Poseidon bears risk of financing

– Poseidon must mitigate cost impact to Water Authority

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ONCE FIRST YEAR PRICE IS SET UNIT PRICE INCREASES ONLY WITH INFLATION

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1,000

2,000

3,000

4,000

5,000

6,000

7,000

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

Unit Price Ceiling

Unit Price Base

Cap on Uncontrollables

Wat

er U

nit P

rice

($/A

F)

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CUMULATIVE CAP ON ADJUSTMENT TO THE PRICE OF WATER

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1,000

2,000

3,000

4,000

5,000

6,000

7,000

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

Unit Price Ceiling

Intake System Modification

Unit Price Base

Wat

er U

nit P

rice

($/A

F)

Intake Modification

~4.6% increase above unit price <1% increase in 2022 rates

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CUMULATIVE CAP ON ADJUSTMENT TO THE PRICE OF WATER

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

Unit Price Ceiling

$200mm Capital Cost

Event

Intake System Modification

Unit Price Base

Wat

er U

nit P

rice

($/A

F)

Hypothetical $200mm Event

~9% increase above unit price 1%-2% increase in 2025 rates if applied in single year

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CONSEQUENCES OF NON-PERFORMANCE

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PERFORMANCE GUARANTEES

– Product Water Quality Guarantee

– Enhanced Standards, Beyond Applicable Law

– Minimum Product Water Delivery Guarantee

– Water Ordering Rights

Appendix 8 – Supplemental Performance Guarantee Requirements Specific Requirements of Product Water Quality Guarantee

Compliance with all federal and state drinking water regulations

Pathogens, disinfection byproducts

Additional standards for specific water quality parameters including:

TDS, Turbidity, Chloride, Bromide, Boron, Temperature, pH, Calcium, Iron, Manganese, Alkalinity.

Procedures for sampling, sampling frequency and location

Product water chlorine and ammonia range requirement at discharge of Product Water pump station

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PRODUCT WATER QUALITY GUARANTEE

– Off-Spec water (minor variances of non-primary standards) • If accepted, deduct the equivalent of the melded treatment

surcharge from payment to Poseidon

– Unacceptable water (variance that requires rejection) • If accepted, no payment all • Right to seek damages form Poseidon

– For off-spec or unacceptable water • Water Authority stop deliveries • Poseidon obligated to prevent recurrent

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SUPPLY SHORTFALL CONSEQUENCES

• Operating Period Shortfalls in monthly deliveries – Poseidon required to pay pipeline debt service for the units not

delivered

• Shortfalls in monthly deliveries during drought – Board declared Stage 2 (Supply Enhancement) – Same as operating period shortfalls Plus

Poseidon pays Water Authority shortfall units times the current year equity return charge

500 AF drought shortfall X $280 Equity Return Charge = $140,000

payment

Amounts Less than 90% of monthly maximum

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Plant Operation, Management &

Maintenance

Article 10 – Maintenance, Repair and Replacement Poseidon requirements to maintain a Computerized Maintenance

Management System (CMMS)

Poseidon requirements to document Maintenance, Repair and Replacement Plans and Schedules

Water Authority rights to inspect the Plant

Annual maintenance inspection

Biennial full-scale inspection/review of Plant working condition and performance capability

End-of-Term condition and performance requirements

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RIGHTS DURING OPERATION – Plant Operation and Maintenance

– Plant to be operated in accordance with industry standards

– Employment standards for key operating personnel

– Reporting and record keeping requirements

– Water Authority rights to conduct inspections and arrange for tours

– Administrative space at the plant site to be provided by Poseidon

– In the extreme, a process for Water Authority to have Chief Operator replaced

– Step-in rights if unable to remediate poor performance and non compliance with drinking water regulations

Appendix 6 – Operating and Maintenance Standards (continued) Preparation of Operating Protocol

Procedures for start-up and shutdown of Product Water flow from the Plant

Procedures for operator communication between Water Authority and Plant operator

Pump operation procedures to avoid hydraulic transients

Operating Mode Change Performance Test

Confirm water quality consistency when Plant operating mode changes

Appendix 7 – Insurance Requirements Poseidon insurance requirements during construction and operation

Appendix 11 – End of Term Project Condition Requirements Procedures and protocol to be followed at either:

Water Authority exercise of purchase option (after 10 years)

End of the 30 year term

Independent Evaluator to be employed to:

Evaluate functionality and Integrity of Project Structures

Evaluate Project Equipment

Evaluate Project performance

Appendix 11 – End of Term Project Condition Requirements

Water Authority and Poseidon Conduct Joint Inspection and Survey (Structures and Equipment)

Poseidon to Identify any needed corrective work in Transfer Condition Plan

Water Authority establishes Transfer Condition Retainage, if required

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MAINTENANCE REQUIREMENTS

– Project Structures Functional Rating 1-5 Meet a “3” rating: normal wear &

tear

– Performance Evaluation Meet Minimum Performance

Criteria: Power Water – Quality & Quantity Chemical Usage

– Project Equipment Evaluation Maintained to Contract Standards Equipment, Repair & Replacement

w/o limitation Manufacturer recommended

maintenance practices Adequate supplies & materials