Contract analysis

I. Purpose and Executive Summary This memorandum analyzes the financial covenant framework embedded in the Bond Indenture dated October 24, 2023 (the "Bond Indenture"), by and between the Cascadia State Infrastructure Authority, a Washington State governmental instrumentality and public body corporate ("CSIA" or the "Issuer"), and Pacific Northwest Trust Company, N.A., a national banking association organized under t

1. Pro Forma DSCR Compliance. CSIA's audited FY 2022 Net Pledged Revenues of $412,600,000 comfortably exceed the 1.40x DSCR requirement when measured against total annual aggregate parity debt service of $278,400,000 (inclusive of the Series 2023A Bonds). The resulting pro forma DSCR is 1.48x, providing approximately 5.7% cushion above the 1.40x covenant floor. Net Pledged Revenues would need to decline by approximat

2. Projected FY 2024 Headroom. Projected FY 2024 Net Pledged Revenues of $431,800,000 (based on CSIA management estimates) provide further headroom, yielding a projected DSCR of approximately 1.55x. Under this projection, Net Pledged Revenues would need to decline by approximately $42,040,000, or 9.7%, before triggering a covenant shortfall.

3. Rate Covenant Structure. The rate covenant structure provides CSIA with sufficient legal authority over the 14 participating municipal water and sewer districts (the "Participating Districts") to adjust wholesale water treatment service charges as necessary to maintain covenant compliance. CSIA possesses unilateral rate-adjustment authority under the individual Wholesale Water Treatment Services Agreements and Cha

4. Additional Bonds Test Consistency. The additional bonds test mirrors the rate covenant's 1.40x threshold, creating a unified and internally consistent framework. Under FY 2022 historical data, CSIA retains approximately $16,314,286 of incremental annual debt-service capacity, increasing to approximately $30,028,571 under projected FY 2024 revenues.

5. Consultant's Covenant Backstop. The Bond Indenture includes a consultant's covenant mechanism that provides a cure pathway before a rate-covenant shortfall escalates to a formal event of default, affording meaningful bondholder protection while preserving CSIA's operational flexibility.

II. Background and Transaction Overview A. The Issuer — Cascadia State Infrastructure Authority CSIA is a Washington State governmental instrumentality and public body corporate, created and existing pursuant to Chapter 43.160A of the Revised Code of Washington ("RCW"). CSIA was established by the Washington State Legislature to finance, develop, construct, operate, and maintain regional infrastructure facilities — i

III. Pledged Revenue Base — Description and Historical Performance A. Definition of Net Pledged Revenues The financial covenants in the Bond Indenture are measured against "Net Pledged Revenues," a defined term that is central to the covenant architecture. A clear understanding of this definition is essential to the analysis that follows. Under the Bond Indenture, Gross Pledged Revenues consist of: (i) Wholesale Wate

IV. The Rate Covenant (DSCR Covenant) A. Covenant Standard The rate covenant is the centerpiece of the financial covenant architecture in the Bond Indenture and serves as the primary mechanism for ensuring that CSIA maintains sufficient revenues to meet its debt-service obligations on all outstanding parity bonds, including the Series 2023A Bonds. Under the Bond Indenture, CSIA covenants and agrees that it will at al

V. The Additional Bonds Test A. Test Framework The Bond Indenture permits CSIA to issue additional bonds on a parity basis with the Series 2023A Bonds and all other outstanding parity obligations ("Additional Bonds"), subject to compliance with the additional bonds test (the "Additional Bonds Test"). The Additional Bonds Test is designed to prevent CSIA from overleveraging its revenue base by requiring that existing

VI. Flow of Funds and Application to Debt Service A. Flow-of-Funds Waterfall The Bond Indenture establishes a priority waterfall governing the application of Gross Pledged Revenues. Understanding the flow of funds is essential to evaluating the practical operation of the Rate Covenant, as the Rate Covenant functions as the enforcement mechanism ensuring that adequate revenues enter the top of the waterfall and flow t

1. Revenue Fund. All Gross Pledged Revenues are deposited into the Revenue Fund upon receipt. The Revenue Fund serves as the initial collection account and the entry point for all system revenues into the flow-of-funds waterfall.

2. Operation and Maintenance Fund ("O&M Fund"). From the Revenue Fund, amounts sufficient to pay current O&M Expenses are transferred to the O&M Fund. For FY 2022, O&M Expenses totaled $76,700,000. O&M Expenses are afforded the highest priority in the waterfall, reflecting the fundamental principle that the system must continue to operate in order to generate revenues to pay debt service.

3. Bond Fund (Debt Service Account). After satisfaction of O&M Expenses, amounts are transferred from the Revenue Fund to the Bond Fund in an amount sufficient to pay principal of and interest on all outstanding parity bonds as they come due. Interest payments on the Series 2023A Bonds are due semi-annually on April 1 and October 1 of each year, and principal payments are due annually. The Bond Fund transfer is the c

4. Debt Service Reserve Fund ("DSRF"). To the extent that any draws have been made on the DSRF (or on the surety policy satisfying the DSRF requirement), amounts are transferred from the Revenue Fund to replenish the DSRF to its required level. For the Series 2023A Bonds, the DSRF requirement of $11,610,000 is satisfied by the surety policy from Olympia Guaranty Insurance Corp. (Policy No. OG-2023-MUN-4718). In the e

5. Rebate Fund. Amounts due to the Internal Revenue Service under arbitrage rebate requirements (Internal Revenue Code § 148) are set aside in the Rebate Fund. Compliance with arbitrage rebate requirements is a condition to the maintenance of the tax-exempt status of the Series 2023A Bonds.

6. Subordinate Obligations / Surplus Fund. Any remaining Net Pledged Revenues, after satisfaction of all higher-priority transfers, may be applied to the payment of subordinate obligations (if any) or deposited into a surplus fund available for capital improvements, reserves, or other lawful purposes of CSIA. B. Relationship Between Flow of Funds and Rate Covenant The flow of funds and the Rate Covenant are complemen

VII. Events of Default Related to Financial Covenants A. Rate Covenant Default A central feature of the Rate Covenant is the graduated approach to enforcement, which distinguishes between a temporary coverage shortfall and a sustained failure to take corrective action. A failure to comply with the Rate Covenant does not constitute an immediate event of default under the Bond Indenture, provided that CSIA takes the fo

VIII. Comparison to Market Standards and Rating Agency Expectations A. Market Benchmarks for Municipal Water/Sewer Revenue Bonds CSIA's 1.40x DSCR covenant is consistent with prevailing market standards for investment-grade water and sewer revenue bonds. Based on our review of comparable recent issuances and standard reference sources (including published rating criteria from LRG and PCA, as well as market surveys fr

IX. Recommendations and Open Issues A. Recommendations Based on the analysis set forth in this memorandum, the following recommendations are made for George Trujillo's consideration:

1. CFO Certificate. Confirm that the CFO's Certificate, to be executed by Denise R. Whitford at or prior to closing, accurately reflects the pro forma DSCR of 1.48x on total annual aggregate parity debt service of $278,400,000, using FY 2022 audited Net Pledged Revenues of $412,600,000. The form of the CFO Certificate should be reviewed by Calderwood & Harkness to ensure that the mathematical calculation, the electio

2. Definitional Consistency. Ensure that the Bond Indenture and First Supplemental Indenture consistently define "Net Pledged Revenues" to exclude depreciation, amortization, and capital outlay. Any inconsistency between the master indenture definition and the supplemental indenture definition could create ambiguity regarding the calculation of coverage ratios and should be resolved prior to closing. This review shou

3. Debt-Service Schedule Validation. Coordinate with Clearfield Municipal Advisors (Kenneth W. Barclay, Principal) to validate the debt-service schedules for all existing parity bonds and confirm that total annual aggregate parity debt service of $278,400,000 is accurate. Additionally, confirm the MADS figure for the entire parity bond program (inclusive of the Series 2023A Bonds), as the Additional Bonds Test is key

4. Consultant's Covenant Language. Review the consultant's covenant language in the Bond Indenture to ensure that Clearfield Municipal Advisors LLC, or another qualified advisory firm, can serve in the backstop consultant role under the consultant's covenant. The qualification standards should be broad enough to ensure that CSIA can retain a qualified consultant promptly in the event of a coverage shortfall, without

5. Co-Bond Counsel Coordination. Confirm with Pryor Crestfield LLP (Margaret S. Yoon and Elliot R. Stanton, co-bond counsel) that the Rate Covenant language is consistent with Washington statutory requirements under Chapter 43.160A RCW. In particular, confirm that CSIA's rate-setting authority as described in the Bond Indenture is consistent with the statutory framework and that the take-or-pay provisions in the Whol

6. Continuing Disclosure. Address in the Continuing Disclosure Agreement — to be executed with PNTC as Dissemination Agent — that annual DSCR calculations will be included in CSIA's annual filings on the Electronic Municipal Market Access system ("EMMA") maintained by the Municipal Securities Rulemaking Board ("MSRB"), in accordance with Securities and Exchange Commission Rule 15c2-12. The annual DSCR disclosure shou

X. Conclusion The financial covenant structure governing the Series 2023A Bonds — comprising the 1.40x Rate Covenant, the Additional Bonds Test, the consultant's covenant backstop, and the flow-of-funds waterfall — provides a robust and market-standard framework for bondholder protection while preserving CSIA's operational and financial flexibility. CSIA's current DSCR of 1.48x (pro forma, FY 2022, on all parity debt