Contract analysis

I. Executive Summary The purpose of this memorandum is to provide the Cascadia State Infrastructure Authority ("CSIA") with a comprehensive status update on the dormant public-private joint venture between CSIA and Pinnacle Water Solutions, LLC ("Pinnacle"), conducted through the joint venture entity Columbia Basin Water Treatment Partners, LLC ("CBWTP"), and to recommend a course of action to resolve the current imp

II. Background and Formation of the Joint Venture A. The Parties Cascadia State Infrastructure Authority ("CSIA"). CSIA is a Washington state governmental authority created pursuant to Chapter 43.155A of the Revised Code of Washington. It is headquartered at 1100 Jefferson Street SE, Suite 400, Olympia, Washington 98501. CSIA's annual operating budget is approximately $380 million, and it currently manages in excess

III. Current Status of Key Issues A. Pinnacle's Funding Default Pinnacle is in uncured default under the JV Agreement for its failure to fund the Second Tranche capital contribution of $4,050,000. The relevant chronology is as follows: • The capital call notice was issued by the Governing Board on March 1, 2023. • Payment was due within 30 calendar days — i.e., by March 31, 2023. • Pinnacle failed to make the require

IV. Key JV Agreement Provisions Relevant to Path Forward This Section summarizes the JV Agreement provisions most relevant to CSIA's evaluation of strategic options. The full JV Agreement is enclosed with this memorandum; the summaries below are provided for convenience and should be read in conjunction with the Agreement's complete text. A. Default Remedies — §8.2

Section 8.2 of the JV Agreement establishes the remedial framework applicable upon a member's failure to fund a duly authorized capital call. The provision operates as follows: Upon a member's failure to fund a capital call within 30 calendar days of written notice, the non-defaulting member may deliver a default notice to the defaulting member. The defaulting member then has 60 days from receipt of the default notic

Section 9.1 of the JV Agreement establishes a buy-sell mechanism — commonly referred to as a "shotgun" or "Russian roulette" provision — that permits either member to initiate a compulsory buy-sell process after the second anniversary of the formation of CBWTP. Since CBWTP was formed on November 2, 2021, the buy-sell provision became exercisable on November 2, 2023, and remains exercisable as of the date of this memo

1. The triggering member delivers a written offer to the other member, specifying a price at which the triggering member is willing to purchase the other member's entire membership interest (the "Offer Price").

2. The receiving member then has 60 days to elect one of two options: (a) accept the offer and sell its membership interest at the Offer Price; or (b) reverse the transaction and instead purchase the triggering member's membership interest at the same Offer Price (adjusted proportionally for the relative size of the membership interests, as set forth in the Agreement).

3. If the receiving member fails to respond within 60 days, it is deemed to have accepted the offer, and the sale proceeds at the Offer Price. The buy-sell provision is a powerful mechanism for breaking deadlock, but it carries significant strategic risk for the triggering party. If CSIA triggers the buy-sell by naming an Offer Price for Pinnacle's 45% interest, Pinnacle has the option to reverse the transaction and

Section 11.4 of the JV Agreement defines "Force Majeure Events" and provides limited excuse for non-performance attributable to such events. The definition includes acts of God, war, terrorism, epidemics, government-imposed embargoes or sanctions, and similar extraordinary events. Critically, the definition expressly excludes "delays in obtaining governmental approvals, licenses, or permits" from the scope of Force M

Section 10.3 of the JV Agreement imposes a non-competition restriction on Pinnacle (and its affiliates) with respect to water treatment projects within a 75-mile radius of the Facility site for a period of five years from the date of the JV Agreement. The restriction period thus runs from November 2, 2021, through November 2, 2026. Importantly, §10.3 provides that the non-compete obligation survives the dissolution o

Section 12.1 of the JV Agreement establishes a mandatory two-step dispute resolution process for all disputes arising under or relating to the Agreement: Step 1: Mandatory Mediation. The parties must first submit any dispute to non-binding mediation before a mediator mutually selected by the parties. If the parties cannot agree on a mediator within 15 business days, either party may request that the PNAA appoint a me

V. Evaluation of Strategic Paths Forward We have identified three principal strategic paths available to CSIA, each with distinct advantages, risks, and practical requirements. We evaluate each path below. A. Path 1: Reactivation and Restructuring of the JV Description. Under this path, CSIA would attempt to revive the dormant project by resolving the environmental permitting impasse, curing Pinnacle's default (or re

1. Resolution of Pinnacle's Funding Default. Pinnacle would need to fund its outstanding Second Tranche capital contribution of $4,050,000, or CSIA and Pinnacle would need to negotiate a restructuring of Pinnacle's capital commitment (e.g., a reduced commitment with proportional dilution, a deferred payment schedule, or a contribution of services or assets in lieu of cash).

2. Restart of Environmental Permitting. The supplemental environmental data requested by Thurston County on July 8, 2022 would need to be prepared and submitted to restart the Phase II EID process. This would require re-engagement of Westmark Environmental Consulting, Inc., or retention of a replacement environmental consultant. Based on the scope of the supplemental data request, we estimate that preparation and sub

3. Replacement or Renewal of Project Finance Commitment. The lapsed PCB commitment for $27,000,000 would need to be renegotiated or replaced with a new commitment from PCB or another lender. As noted above, PCB has indicated that a new underwriting process would be required, and market conditions have changed materially since February 2022. Obtaining a replacement commitment would likely require updated environmental

4. Restoration of Governance Functionality. Pinnacle's board members (Prumvane and Voss) would need to re-engage in the Governing Board process to enable the supermajority votes required for construction commencement, debt incurrence, and other Major Decisions. Alternative Sub-Option: Replacement of Pinnacle with a New Private Partner. CSIA could alternatively seek to replace Pinnacle with a new private-sector partne

1. Ground Lease Reversion. If Pinnacle were to purchase CSIA's interest, the JV would continue to exist, but CSIA would retain ownership of the underlying 14.7-acre site through the reversionary ground lease. Pinnacle would hold 100% of an entity whose only significant physical asset is a leasehold interest in CSIA-owned land, on terms ($1.00/year rent) that were predicated on a public-private partnership structure.

2. Pinnacle's Default Status. Pinnacle is in uncured default under the JV Agreement. While the buy-sell provision does not expressly condition its exercise on the absence of a default, Pinnacle's default status may create practical constraints on its ability to reverse. An arbitral tribunal might question whether a defaulting member that has failed to meet its own funding obligations should be permitted to acquire ad

3. Financial Capacity. A reversal by Pinnacle would require Pinnacle to fund the purchase of CSIA's 55% interest at the stated price. If CSIA sets the price at a level that reflects the full value of CSIA's $9,900,000 in funded equity (plus a premium for CSIA's controlling interest and the ground lease reversion), the total purchase price for CSIA's 55% interest could be substantial. It is uncertain whether Pinnacle,