CADIZ, Calif. — Sometime in the next few weeks, a federal agency is expected to issue the final environmental approval necessary to turn this former Mojave Desert railroad outpost into a billion-dollar water development project.
As the culmination of a laborious five-year environmental review, that ruling from the Interior Department's Bureau of Land Management would represent a milestone for the project and for its sponsor, Cadiz Inc. The politically well-connected company, which has been growing grapes and citrus fruits on a patchwork of money-losing irrigated tracts across the San Joaquin and Coachella valleys sees the Mojave project as the linchpin of its plan to transform itself into a global water development enterprise.
The stakes are high. The project to store trillions of gallons of Colorado River water in the sands beneath Cadiz's 27,000-acre tract could earn the company about $500 million in fees over the next 50 years. Cadiz hopes it also will give it a foothold in a prospective boom market for water in California and other parched regions around the world. As a token of its ambitions, the company this year named former Interior Secretary Bruce Babbitt to head a new subsidiary to pursue similar water deals in the Middle East.
The Mojave project also is of great importance to Cadiz's proposed partner, the giant Metropolitan Water District of Southern California. The project would be one of the most complex and costly undertaken by the MWD. Such a financial partnership with a private corporation would be unique in the district's history.
Under tentative contract terms approved a year ago by the MWD board, the district and Cadiz would split the $150-million construction cost of the project, which involves pumping water through a 35-mile pipeline connecting the MWD's Colorado River Aqueduct and the Mojave storage site. There it would be banked underground and, along with existing supply from an aquifer underlying the tract, pumped back to the aqueduct as an emergency supply during droughts.
As the MWD's 37-member board prepares to take a final vote on the project, possibly this summer, some of the agency's directors are questioning whether the massive investment makes financial sense, and whether a partnership with Cadiz is appropriate for a public water district.
These questions also arise because Cadiz lacks experience building or managing a water project of this scale. The company would play no role in managing construction or operating project once it is completed. That would be the responsibility of the MWD, which would foot the $1-million annual bill for operation and maintenance.
Cadiz's ability to meet its financial obligations also is open to question. The company, whose chairman and chief executive, Keith Brackpool, once pleaded guilty to criminal charges relating to securities trading and later was forced to resign an executive post because of his outside business dealings, has never turned an annual profit. Its total losses from 1993 through 2001 come to more than $105 million.
At year-end 2001 its debt of $141.5 million--much of it carrying high junk-bond interest rates--dwarfed its shareholder equity of $17.7 million. That debt includes a $35-million credit line from ING Barings that Cadiz has renewed periodically as a source of working capital until the water project begins generating revenue. The implicit cost of that loan will start to rise if Cadiz fails to repay it by the end of July.
An Abundance of Political Connections
Significantly, the source of much of Cadiz's initial $75-million capital contribution to its partnership with the MWD would be the water district itself.
Under the negotiated terms, on the day the final contract is signed the MWD would front Cadiz more than $54 million in "prepayment" for 195 billion gallons of water storage. How much of that money would be available to pay for construction is unclear: In January, as a condition of extending its $35-million loan for an additional year, ING Barings inserted a provision requiring that the loan be repaid from money Cadiz receives from the MWD for the project's construction.
"If its lenders make a claim on our $54 million, how does the project get built?" asked Peer Swan, an MWD board member representing the Orange County Municipal Water District. "Cadiz is not the strongest player. What guarantee is there if it goes bankrupt?"
What the company does have in abundance are political connections. Former Rep. Tony Coelho, an important Democratic Party fund-raiser, serves on the Cadiz board. The Democratic pedigree of the newly hired Babbitt extends from his 10 years as Arizona governor in the 1970s and '80s to his service in the Clinton Cabinet.
But by far the company's leading political contact is Gov. Gray Davis, who has named Brackpool to at least two statewide advisory panels on water resources.