New York, December 04, 2012 -- Moody's Investors Service (Moody's) assigned a provisional (P) Baa3 rating to approximately $560 million of proposed Series 2012 Plant Bonds and $220 million of proposed Series 2012 Pipeline Bonds which are being issued to fund a portion of the cost of constructing an approximate 54 million gallon per day (60,000 acre feet per year) reverse osmosis seawater desalination facility (the Plant) in Carlsbad, California and to construct a related 10-mile water pipeline (the Pipeline) (together the Project). The balance of the cost of constructing the Plant, approximately $173 million, will be funded with equity contributions from Poseidon Resources (Channelside) LP's limited partner.

Poseidon Resources (Channelside) LP (the Company or Channelside) will own the Plant, and will construct the Plant and the Pipeline. The Pipeline will connect the Plant to the distribution system of the San Diego County Water Authority which will purchase 100% of the desalinated water produced and will own the Pipeline. Both the Plant Bonds and the Pipeline Bonds will be issued through the California Pollution Control Financing Authority on a tax-exempt basis as Water Furnishing Revenue Bonds, Series 2012 (Poseidon Resources (Channelside) LP Desalination Project) (AMT) "Series 2012 Plant Bonds" and Water Furnishing Revenue Bonds, Series 2012, (San Diego County Water Authority /Carlsbad Desalination Pipeline Project) "Series 2012 Pipeline Bonds" respectively. The rating outlook is stable.

RATING RATIONALE

The (P) Baa3 rating for the Plant Bonds and Pipeline Bonds considers the strategic importance of the Project to the San Diego County Water Authority (SDCWA or the Authority: Aa2, stable) as an important, reliable local source of potable water, and the predictable nature of the cash flows that are expected to be generated under its long-term (thirty years) water purchase agreement. The ratings consider the predominately pass through nature of the project's operating costs and the fact that key performance elements have been guaranteed by the project's operator/equipment provider. Our views consider debt service coverage ratios that are generally projected to be around 1.5 times, and that due to the pass through nature of most costs as well as the subordination of certain payments for underperformance, debt service coverage ratios are generally resilient to sensitivity testing. The rating also reflects our view that construction risk should be well managed via engineering, procurement and construction agreements with experienced contractors including performance bonds and liquidated damage payments.

The (P) Baa3 ratings consider that the cost of water from the project will be approximately twice the cost of SDCWA's currently imported sources making it unlikely the project would be financially viable absent its current off-take contract. However, the ratings also weigh heavily the strategic importance of the project to SDCWA as a long-term reliable source of water and resource diversity. The ratings consider the unique financing structure of the transaction which, as described further below, in certain circumstances requires Pipeline Bond debt service to be paid out of reduced Project cash flow.

Revenues for the Project will be generated in accordance with the terms of a Water Purchase Agreement with SDCWA which: 1) requires the Company to first construct the plant and pass performance tests; and, 2) then requires SDCWA to purchase between a minimum of 48,000 acre feet per year (AFY) of water and a maximum of 56,000 AFY. Payments are made per-acre-foot of delivered water and include components to cover debt service on the Plant Bonds, an equity return, fixed costs and variable costs. The cost of electricity is a direct pass-through based on guaranteed usage levels. Fixed charges, including those for debt service, are calculated and paid based on the minimum 48,000 AFY purchase obligation.

In accordance with the terms of the documents, debt service on the Plant Bonds will be paid out of Project cash flow via accounts administered by a third party trustee. Debt service on the Pipeline Bonds will be paid out of separate funds also administered by a third party trustee. To the extent the Plant and Pipeline are constructed as required, and the Plant is operating as requested by SDCWA, the Authority will make Installment Payments (on a subordinate basis through the SDCWA Financing Agency) in amounts sufficient to cover debt service on the Pipeline Bonds. (Interest during construction is paid out of the construction accounts funded at closing.)

In the event the Project does not produce at least its minimum obligated quantity of 48,000 AFY (calculated based on a monthly delivery schedule), Channelside would be required to pay an amount of Pipeline Bond debt service equal to the proportionate amount of the production shortfall as Operating Period Shortfall Payments. In addition, to the extent Channelside is unable to produce quantities of water requested by SDCWA above the minimum 48,000 AFY, the project would be subject to true-up payments designed to return a portion of fixed costs received from SDCWA and a portion of the Pipeline Bond debt service paid by SDCWA. These additional true-up payments would be made directly to SDCWA and would be subordinate to project debt service. The (P) Baa3 ratings balance this potential exposure against the expected capability of the plant, which is being designed to produce approximately 1.25 times its minimum obligation, as well as the level of reserves that are expected to be in place at the project and provisions that subordinate the true-up payments to debt service.

Channelside's obligation to make debt service payments on the Plant Bonds, and its obligation to make shortfall payments to the Pipeline Bond Trustee will be secured on a parity basis by all of Channelside's assets, including easements, contracts, accounts, (except specific construction and debt reserve funds which are intended for the specific benefit of either the Pipeline or Plant bondholders) and any other collateral available to Channelside. In the event the water purchase agreement were to be terminated as a result of a Project default, SDCWA's obligations to make Installment Payments would also terminate and Channelside would be obligated to repay the full amount of the Pipeline Bonds. As such, timely payment of debt service on both the Plant Bonds and Pipeline Bonds is ultimately dependent on the performance of the Plant. This fact, along with their shared collateral package, results in the same (P) Baa3 rating being assigned to both the Plant and Pipeline Bonds.

The (P) Baa3 ratings recognize the bondholders will benefit from many traditional project finance features including trustee administered waterfalls, twelve month cash funded debt service reserves, additional project level reserves for working capital and other contingencies, restrictions on dividends - minimum 1.25 times debt service coverage - 12 months look forward and back, limitations on indebtedness and a pledge of Plant assets. The ratings consider that the Pipeline, which will be financed with the Pipeline Bonds, will be owned by SDCWA and not pledged to the bondholders. As such, only the Plant collateral will be shared pro-rata between the Pipeline and Plant bondholders; the financing documents do however acknowledge the California Water Code, which provides that in a scenario in which the Plant and Pipeline bondholders take possession of the Plant, they would have a right to use the Water Authority Distribution System (which would include the Pipeline) to transport water.

Construction risk is mitigated by Engineering, Procurement and Construction (EPC) agreements with Kiewit Shea Desalination (Kiewit Shea), a joint venture of Kiewit Infrastructure West Co. and J.F. Shea Construction Company, which include provisions for liquidated damage payments and completion and performance guarantees that are well aligned with the Company's obligations under its agreements with SDCWA. Kiewit Shea's obligations are guaranteed by Kiewit Infrastructure Co. and the EPC agreements also require the posting of payment and performance bonds. In addition, a substantial amount of equity anticipated to be remaining in the construction account upon completion ($20 million of contingency plus $21 million reserved to cover six months of additional interest during construction) will be retained by the project for at least six months following completion and will only be released to equity if the project is able to attain a debt service coverage ratio (looking forward and back) of at least 1.35 times.

The Plant's primary reverse osmosis desalination systems will be provided by a U.S. subsidiary of IDE Technologies, LTD (IDE) under a subcontract with Kiewit Shea. IDE was established in 1965 and has constructed over 360 desalination facilities worldwide including several of similar or larger scale than Channelside. IDE will operate the plant under an operating agreement with guarantees that are well aligned with the Company's obligations to SDCWA and will similarly post performance bonds. Pilot testing of the water quality at the Plant site has been done for numerous years and additional testing using IDE equipment will be completed during the first six months of construction to help optimize system capabilities.

The Plant will be located adjacent to the existing Encina Power Station south of the Agua Hedionda Lagoon in northern San Diego County. The Power Station currently draws seawater from the lagoon for cooling and the plant will process seawater from the Power Station's discharge canal. The presence of existing infrastructure helps to simplify construction and permitting issues. The transaction structure recognizes the potential need for modifications to the Plant's intake system in the event the Power Station was to shut down or to cease operating its once-through cooling system.

The rating outlook is stable based on our assumption of timely completion and financial and operational performance consistent with our current expectations. The ratings are well positioned and are not likely to be upgraded over the near-to-medium term. Downward pressure could develop if there were to be material delays or complications during construction or if the project was no longer anticipated to operate in accordance with expectations. In addition, we note that the documents currently incorporate provisions for additional debt financing or reserve releases under certain circumstances, as long as certain minimum debt service coverage levels are achieved (currently 1.0 for completion or compliance related debt, or 1.35 times otherwise). We note that these coverage levels would be inconsistent with our current expectations as well as the (P) Baa3 rating; to the extent these events were to occur, and to the extent debt service coverage was expected to be maintained at or near these levels, there would likely be downward pressure on the rating.

Moody's issues provisional ratings in advance of the final sale of securities, and these ratings represent only the rating agency's preliminary opinion. Upon a conclusive review of the transaction and associated documentation, Moody's will endeavor to assign definitive ratings to the bonds. A definitive rating may differ from a provisional rating. The definitive ratings are predicated upon final documentation being in accordance with Moody's current understanding of the transaction and final debt sizing and credit metrics consistent with the initially projected credit metrics and cash flows. Moody's will disseminate the assignment of any definitive ratings through its ratings desk.

The Project is a 54 MGD reverse osmosis desalination plant being developed by an affiliate of Poseidon Water LLC in Carlsbad, California. Limited partnership equity is being provided by an affiliate of Stonepeak Partners LP, an independent investment firm. Water produced by the Project will be sold to the SDCWA, which has also taken an active role in development of the Project as part of its business plan for developing local water sources.

The principal methodology used in this rating was Generic Project Finance Methodology published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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Laura Schumacher VP - Senior Credit Officer Project Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653A.J. Sabatelle Senior Vice President Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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