PRIVILEGED AND CONFIDENTIAL
CALDERWOOD & HARKNESS LLP Attorneys at Law 1420 Fifth Avenue, Suite 3600 Seattle, WA 98101
Telephone: (206) 555-4200 Facsimile: (206) 555-4201 www.calderwoodharkness.com
June 23, 2023
Daniel F. Obermeyer, Esq., Partner Christina M. Vega, Esq., Associate Alderman & Locke LLP 51 West 52nd Street New York, NY 10019
Re: Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) — $220,000,000 Aggregate Principal Amount Comments on Draft Preliminary Official Statement dated June 19, 2023 (the "Draft POS") C&H Matter No. 1030-00001
Dear Dan and Christina:
I. Introduction and Purpose
Calderwood & Harkness LLP ("C&H") serves as issuer's counsel to Cascadia State Infrastructure Authority ("CSIA" or the "Authority") in connection with the above-referenced financing. We have reviewed in detail the Draft Preliminary Official Statement dated June 19, 2023 (the "Draft POS"), which was circulated by Alderman & Locke LLP on behalf of Meridian Capital Partners LLC, as senior managing underwriter, and Dralvecen Fenn & Co., Inc., as co-managing underwriter (together, the "Underwriters"), for the proposed issuance by the Authority of its Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) in the aggregate principal amount of $220,000,000 (the "Series 2023A Bonds" or the "Bonds").
The purpose of this letter is to transmit C&H's comments, factual corrections, and suggested revisions to the Draft POS, organized on a section-by-section basis, for your review and incorporation into a revised draft. We note that these comments are provided in anticipation of the targeted distribution date for the Preliminary Official Statement of June 26, 2023, and accordingly we would ask that you give prompt attention to the items set forth herein so that the parties may adhere to the established timetable.
In preparing these comments, C&H has coordinated extensively with the Authority's in-house counsel, Martin J. Espinoza, General Counsel, and Denise R. Whitford, Chief Financial Officer, as well as with Clearfield Municipal Advisors LLC (Kenneth W. Barclay, Principal), CSIA's SEC-registered municipal advisor. We have also consulted with Pryor Crestfield LLP (Margaret S. Yoon, Partner), co-bond counsel, on matters relating to the summaries of the tax opinion and the approving legal opinion that appear in the Draft POS. We have separately transmitted a marked-up copy of the Draft POS with our revisions shown in tracked changes, which is enclosed with this letter. This letter is intended to provide context and explanation for those revisions and to highlight the most significant items requiring attention.
For ease of reference, our comments are organized to follow the general structure of the Draft POS. Section and page references correspond to the Draft POS as circulated on June 19, 2023, except where otherwise noted.
II. General Comments
Before turning to our section-by-section comments, we wish to address several overarching matters that affect multiple portions of the Draft POS and should be corrected or confirmed on a global basis.
A. References to the Authority
We note that the Authority's full legal name is "Cascadia State Infrastructure Authority," and not "Cascadia State Infrastructure Agency" as appears on pages 3 and 47 of the Draft POS. This error appears in at least two locations in the body of the document and may appear in other locations as well. We request that you conduct a global search-and-replace to ensure that the correct legal name is used consistently throughout the Draft POS.
CSIA is a Washington State governmental instrumentality and public body corporate, created pursuant to Chapter 43.160A of the Revised Code of Washington (RCW). The enabling statute citation should be verified and stated accurately throughout the Draft POS. We have noted at least one instance (page 5) where the Draft POS references "Chapter 43.160 RCW" rather than the correct citation, "Chapter 43.160A RCW." The distinction is material, as Chapter 43.160 RCW governs a separate entity (the Washington State Community Economic Revitalization Board), and an incorrect citation could create confusion regarding the Authority's powers and legal status.
Additionally, the Authority's headquarters address should read as follows: 1100 Capitol Way South, Suite 400, Olympia, WA 98501. We have noted a discrepancy on page 4 of the Draft POS, which states the suite number as "Suite 200." Please confirm and correct.
Finally, the Authority's Employer Identification Number ("EIN") is 91-2058374. This should be confirmed as correct in the tax-related appendix (Appendix B) and in any other location in the Draft POS where the EIN is referenced.
B. Bond Designation and Terms
The full title of the Bonds is: "Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt)." This designation should be used consistently throughout the Draft POS, including on the cover page, in the introduction, in the summary of terms, and in each appendix heading where the Bonds are referenced.
The principal terms of the Bonds, as we understand them to have been established by the working group, are as follows. Please confirm that each of these terms is correctly reflected in the Draft POS:
• Aggregate Principal Amount: $220,000,000
• Dated Date: October 24, 2023 (the Closing Date)
• Interest Rate: 3.25% per annum (fixed coupon; 325 basis points)
• Interest Payment Dates: April 1 and October 1 of each year, commencing April 1, 2024
• Final Maturity: October 1, 2053 (30-year final maturity)
• Authorized Denominations: $5,000 or integral multiples thereof
• Optional Redemption: The Bonds are callable at par on or after October 1, 2033 (providing 10-year call protection)
• Book-Entry Only: Through The Depository Trust Company ("DTC"); Cede & Co. as registered owner
• CUSIP Base: 148392
We wish to draw particular attention to the Dated Date. The Draft POS references October 15, 2023 as the Dated Date in several places throughout the document (including on the cover page, in the summary of terms on page 2, and in the description of the Bonds on page 14). This is incorrect. The Dated Date of the Bonds is October 24, 2023, which is the anticipated Closing Date. October 15, 2023 is the date of execution of the Tax Regulatory Agreement only, and should not be stated as the Dated Date. This is a critical correction and we request that all references be updated accordingly.
C. Consistency and Cross-Referencing
We request that underwriters' counsel conduct a thorough consistency review of all numerical references throughout the Draft POS — including dollar amounts, dates, percentages, basis points, and other quantitative data — against the current drafts of the Bond Indenture, the First Supplemental Indenture, and the Revenue Pledge Agreement. In the course of our review, we identified a number of discrepancies (detailed in the section-by-section comments below) that suggest portions of the Draft POS may have been prepared from earlier, superseded term sheets.
Additionally, we have noted that several internal cross-references within the Draft POS appear broken or refer to placeholder bracketed text (e.g., "[See page ]" or "[Section ._]"). These should be resolved before the Preliminary Official Statement is finalized for distribution. We have flagged each such instance in our marked-up copy of the Draft POS.
III. Cover Page and Inside Cover
We have the following comments on the cover page and inside cover of the Draft POS:
1. CUSIP Base Number. The cover page should include the CUSIP base number 148392. The current draft does not include a CUSIP reference on the cover page. While inclusion on the cover is not legally required, it is customary market practice for offerings of this size and we recommend its inclusion.
2. Credit Ratings. The credit ratings displayed on the cover page should be stated as follows:
• Lakeshore Ratings Group, Inc. ("LRG"): "AA" (stable outlook) — underlying rating
• Pinnacle Credit Analytics, Inc. ("PCA"): "AA−" (stable outlook) — underlying rating
With respect to the insured ratings (reflecting the Olympia Guaranty surety bond), we understand those ratings to be:
• LRG: "AA+" — insured rating
• PCA: "AA" — insured rating
Please confirm with both NRSROs and with Olympia Guaranty's counsel whether the insured ratings will be displayed on the cover page in addition to the underlying ratings, or whether the insured ratings will be presented only in the Ratings section of the body of the Draft POS. Market convention in recent similar-size municipal revenue bond transactions has generally favored inclusion of both underlying and insured ratings on the cover, and we would recommend that approach here, but we defer to the Underwriters' preference on this point.
3. Underwriter Identification. The Underwriters should be listed on the cover page as follows:
• Meridian Capital Partners LLC — Senior Managing Underwriter
• Dralvecen Fenn & Co., Inc. — Co-Managing Underwriter
4. Bond Counsel Identification. Bond counsel should be listed on the cover page as: Pryor Crestfield LLP and Calderwood & Harkness LLP, Co-Bond Counsel. We note that the Draft POS currently lists only Pryor Crestfield LLP as bond counsel; C&H should be listed as well, reflecting our engagement as co-bond counsel in addition to our role as issuer's counsel.
5. Inside Cover — Disclaimer Language. The inside cover disclaimer language should be conformed to the standard municipal securities disclaimer customarily used in offerings of this type. In particular, we recommend adding a statement that the Preliminary Official Statement does not constitute an offer to sell or the solicitation of an offer to buy the Bonds in any jurisdiction in which such offer or solicitation would be unlawful. We have provided suggested language in our marked-up copy.
IV. Comments on the Summary of Terms / Introduction Section
We have the following comments on the Summary of Terms and Introduction sections of the Draft POS:
1. Annual Operating Budget. The Draft POS describes CSIA's annual operating budget for Fiscal Year 2023 at $1.48 billion. This figure has been confirmed by Denise R. Whitford, Chief Financial Officer, and appears to be accurately stated. We request that you confirm this figure is correctly reflected in all locations where it appears in the Draft POS.
2. Existing Outstanding Debt. The Draft POS states that CSIA's existing outstanding parity debt prior to this issuance is $3.12 billion. We request confirmation that this figure reflects all parity obligations of the Authority as of the date of the Preliminary Official Statement, including all series of outstanding Water Treatment Revenue Bonds and any parity obligations under credit facilities or other instruments. CSIA's Chief Financial Officer has confirmed this figure, but we believe it prudent for underwriters' counsel to independently verify the outstanding debt total against the Trustee's records.
3. Total Parity Debt Post-Issuance. Following the issuance of the Series 2023A Bonds, total parity debt of the Authority will be $3,340,000,000 ($3,120,000,000 + $220,000,000). This figure should be clearly stated in the Introduction section and should be consistent throughout the Draft POS.
4. Identification of Issuer's Counsel. In the "Professionals" subsection (page 7 of the Draft POS), C&H is identified as issuer's counsel to the Authority. We request that this identification be confirmed as accurate. As noted above, C&H's role encompasses both issuer's counsel and co-bond counsel, and both capacities should be appropriately reflected in the relevant sections of the Draft POS.
5. Municipal Advisor. The Authority's SEC-registered municipal advisor is Clearfield Municipal Advisors LLC, with offices at 805 SW Broadway, Suite 1400, Portland, OR 97205. The Draft POS currently omits the suite number from the municipal advisor's address. Please correct.
6. Trustee/Paying Agent/Registrar/Escrow Agent. The Trustee, Paying Agent, Registrar, and Escrow Agent for the Series 2023A Bonds is Pacific Northwest Trust Company, N.A. ("PNTC"), located at 1201 Third Avenue, Suite 1600, Seattle, WA 98101. The designated trust officer is Alan M. Greer, Vice President, Corporate Trust Services. We note that the Draft POS identifies Mr. Greer's title as "Assistant Vice President," which is incorrect per PNTC's most recent officer certificate. Please correct to "Vice President."
V. Comments on Description of the Project
A. Project Name and Location
The project to be financed with the proceeds of the Series 2023A Bonds is officially designated the Puget Sound Regional Advanced Water Treatment Facility (the "PSRAWTF" or the "Project"). The Project is located at 7250 Deschutes Parkway, Tumwater, Thurston County, Washington 98501, on approximately 18 acres of land owned by the Authority adjacent to the existing Deschutes River Tertiary Treatment Plant.
We note that the Draft POS refers to the Project site as comprising "16 acres" on page 21, but "approximately 18 acres" on page 23. According to CSIA's real property records and the most recent site survey, the correct acreage is 18 acres. The reference to 16 acres should be corrected throughout the Draft POS.
B. Scope of the Project
The Draft POS description of the Project scope is generally accurate, but we recommend that it be expanded to provide investors with a more complete understanding of the facility's design parameters and components. The Project consists of the following:
(a) Construction of a 60-million-gallons-per-day (MGD) advanced membrane-filtration and UV-disinfection water-treatment facility;
(b) Construction of influent and effluent pipelines connecting the new facility to the existing Deschutes River Tertiary Treatment Plant and to the regional water distribution system;
(c) Construction of a 5-million-gallon equalization basin designed to manage peak-flow conditions and provide operational flexibility;
(d) Biosolids handling improvements, including upgrades to the existing dewatering infrastructure and construction of new biosolids storage capacity; and
(e) SCADA (Supervisory Control and Data Acquisition) system upgrades, including a new centralized control room, instrumentation and sensor networks, and cybersecurity enhancements to the Authority's operational technology infrastructure.
The facility's design capacity is 60 MGD, with an initial operating capacity of 42 MGD upon commissioning. The Draft POS should clearly distinguish between these two capacity figures to avoid potential investor confusion.
We further note that the Draft POS states on page 22 that the Project will serve "13 participating districts." This is incorrect. The correct number of participating Puget Sound-region municipal water and sewer districts, each of which is party to a long-term Wholesale Water Treatment Services Agreement with the Authority, is 14. This correction should be made throughout the Draft POS.
C. Design-Build Contractor
The design-build contractor for the Project is Northtide Environmental Engineering, Inc., a Washington corporation, with its headquarters at 2400 Eastlake Avenue East, Seattle, WA 98102. The Chief Executive Officer of Northtide is Garrett L. Henriksen.
The Authority and Northtide have entered into a Guaranteed Maximum Price ("GMP") Design-Build Contract, designated as GMP Contract No. CSIA-DB-2023-001, which was executed on March 10, 2023. The Guaranteed Maximum Price under that contract is $193,500,000.
We note that the Draft POS provides only a cursory description of the GMP contract terms. Given the significance of the design-build contract to the Project and, by extension, to the security for the Bonds, we recommend that the Draft POS include a more complete description of the material terms of the GMP contract, including:
• Liquidated damages provisions applicable to Northtide in the event of delays;
• The scheduled date of substantial completion and the contractual milestones leading to that date;
• Performance bond and payment bond requirements;
• Key subcontractor identification, if material; and
• Change order procedures and dispute resolution mechanisms.
We have prepared suggested draft language for this expanded description and have included it in our marked-up copy of the Draft POS. We would ask that you review this language with your client and advise whether the Underwriters have any comments.
D. Environmental Permits
The following environmental permits and approvals have been obtained for the Project:
(a) SEPA Determination of Non-Significance ("DNS"), issued September 12, 2022, by the Washington State Department of Ecology, pursuant to the State Environmental Policy Act (Chapter 43.21C RCW) and the SEPA Rules (Chapter 197-11 WAC); and
(b) NPDES Permit Modification, Permit No. WA-004837-2, approved January 6, 2023, by the Washington State Department of Ecology, authorizing the modification of the Authority's existing National Pollutant Discharge Elimination System permit to accommodate the expanded treatment capacity of the PSRAWTF.
Both permits should be accurately cited in the Draft POS. We note that the Draft POS references the SEPA DNS but omits the NPDES permit number entirely. Given the significance of the NPDES permit to the operation of the facility and the pledged revenues, we request that the permit number and approval date be inserted into the Project description section.
E. Total Project Cost and Funding Sources
The estimated total cost of the Project is $237,400,000. The Project is expected to be funded from the following sources:
• Bond proceeds (par amount): $220,000,000
• CSIA equity contribution from existing capital reserves: $17,400,000
• Total Project Funding: $237,400,000
Of the bond proceeds, the net amount available for deposit to the Project Fund is $215,490,000, after deducting underwriters' discount, original issue discount, and costs of issuance. An additional $4,510,000 of bond proceeds will be deposited to the Capitalized Interest Fund to pay interest on the Bonds during the construction period. The Authority's equity contribution of $17,400,000 will be deposited directly to the Project Fund.
We note a discrepancy in the Draft POS regarding the total project cost. The introduction section (page 1) states the total project cost as "$237.4 million," while the project description section (page 21) states the total project cost as "$236.9 million." These figures should be reconciled to the correct amount of $237,400,000 ($237.4 million). The $500,000 discrepancy may relate to a rounding difference or to a superseded cost estimate, but in either case the figures must be consistent throughout the Draft POS.
VI. Comments on Sources and Uses of Funds
The Sources and Uses of Funds table appearing on page 10 of the Draft POS requires correction and reconciliation. Based on our review, the correct Sources and Uses should be presented as follows:
Sources of Funds:
Uses of Funds:
(1) Costs of issuance include legal fees, rating agency fees, trustee acceptance and first-year fees, printing and distribution, CUSIP Bureau fees, verification agent fees, and miscellaneous expenses. (2) Underwriters' discount of 0.45% of par = $990,000, allocated as follows: Meridian Capital Partners LLC (70%) = $693,000; Dralvecen Fenn & Co., Inc. (30%) = $297,000. (3) Bonds priced at 99.25% of par; Original Issue discount = $220,000,000 × 0.0075 = $1,650,000.
We note that the derivation of net proceeds is as follows:
• Par Amount: $220,000,000
• Less: Original Issue discount: ($1,650,000)
• Less: Underwriters' discount: ($990,000)
• Net Proceeds to CSIA before Costs of Issuance: $217,360,000
• Less: Costs of Issuance: ($1,870,000)
• Net Proceeds Available for Project Fund: $215,490,000
We note that the original issue discount and the underwriters' discount are deducted from the par amount to arrive at net proceeds, and accordingly the Sources and Uses table should be structured to reconcile on that basis. The Draft POS Sources and Uses table as currently drafted contains a $500,000 arithmetic discrepancy in the "Uses" column total, which does not foot to the "Sources" column total. We request that this discrepancy be corrected and that the table be reconciled before the Preliminary Official Statement is finalized.
We have included a revised Sources and Uses table in our marked-up copy of the Draft POS, conforming to the figures set forth above.
VII. Comments on Security and Revenue Pledge
A. Description of Pledged Revenues
The Series 2023A Bonds are secured by a pledge of the Authority's net revenues derived from its water-treatment system. The pledged revenues consist of three components:
(i) Wholesale Water Treatment Service Charges received from the 14 Participating Districts pursuant to their respective Wholesale Water Treatment Services Agreements with the Authority;
(ii) Connection fees charged to new users connecting to the regional water-treatment system; and
(iii) Investment earnings on pledged funds held under the Bond Indenture.
The pledge of net revenues is on a parity basis with all outstanding revenue bonds of the Authority payable from the same source.
We note that the Draft POS description of the pledged revenues on page 27 omits "investment earnings on pledged funds" as a component of pledged revenues. This omission is inconsistent with the definition of "Pledged Revenues" in Section 1.01 of the Revenue Pledge Agreement, which expressly includes investment earnings on funds held under the Indenture. We request that this third component be added to the Draft POS description to conform to the Revenue Pledge Agreement.
B. FY 2022 Revenue and Expense Data
The key financial metrics for the most recently completed fiscal year (FY 2022) are as follows, per the Authority's audited financial statements (audited by Hargrove & Associates CPAs, PLLC, engagement partner Victoria L. Fong, CPA):
Projected FY 2024 Net Pledged Revenues (the first full fiscal year following anticipated commissioning of the PSRAWTF) are estimated at $431,800,000, based on the Authority's financial projections as prepared by CSIA's finance staff and reviewed by Clearfield Municipal Advisors LLC.
We note that the Draft POS references FY 2022 Net Pledged Revenues as "$413.6 million" in Table 5 on page 32. This figure is incorrect. The correct amount, per the audited financial statements, is $412,600,000 ($412.6 million). This discrepancy — approximately $1,000,000 — may result from a transcription error or rounding difference, but must be corrected to ensure consistency with the audited financials.
C. Flow of Funds
The Draft POS should include a clear description of the flow of funds under the Bond Indenture, consistent with Article V thereof. The proper order of fund flows is as follows:
Revenue Fund → Bond Fund → Debt Service Reserve Fund → Project Fund → Rebate Fund
We recommend that the Draft POS include a simplified flow-of-funds diagram in addition to the narrative description. Such diagrams are customary in official statements for revenue bond transactions of this magnitude and provide investors with a useful visual summary of the waterfall. We have included a suggested diagram in our marked-up copy for your consideration.
D. Lien Priority
The Draft POS should clearly state the lien priority of the Series 2023A Bonds. The statutory lien created under Chapter 43.160A RCW and the contractual lien established under the Revenue Pledge Agreement provide that the Series 2023A Bonds are secured on a parity basis with all other outstanding bonds payable from pledged revenues.
As of the date of the Draft POS:
• Existing outstanding parity debt: $3,120,000,000
• Series 2023A Bonds (this issuance): $220,000,000
• Total parity debt post-issuance: $3,340,000,000
The Draft POS should state clearly that no senior or subordinate liens on the pledged revenues currently exist. The only lien on the pledged revenues is the parity lien securing all outstanding revenue bonds. This statement appears in the current Draft POS in the body text on page 29 but is not repeated in the summary section, where it should also appear.
VIII. Comments on Financial Covenant Language (Rate Covenant and Additional Bonds Test)
A. Rate Covenant
Under the Bond Indenture and the Revenue Pledge Agreement, the Authority covenants to establish, fix, prescribe, and collect rates and charges for the use of its water-treatment system that are sufficient to produce Net Pledged Revenues in each fiscal year equal to at least 1.40 times (1.40x) the aggregate annual parity debt service on all outstanding bonds payable from pledged revenues.
Based on the figures set forth above, the total annual parity debt service on all outstanding bonds (including the Series 2023A Bonds) post-issuance is $278,400,000. The approximate annual debt service on the Series 2023A Bonds alone, calculated on a level debt-service basis over the 30-year amortization period, is $11,610,000. Year 1 interest on the Series 2023A Bonds is calculated as $220,000,000 × 3.25% = $7,150,000.
The pro forma debt service coverage ratio ("DSCR") for FY 2022, calculated on an all-parity basis including the Series 2023A Bonds, is:
$412,600,000 ÷ $278,400,000 = 1.48x
This coverage ratio exceeds the 1.40x rate covenant by a comfortable margin.
Critical Correction: We note that the Draft POS states the rate covenant on page 38 as "not less than 1.35x." This is incorrect. The rate covenant, as set forth in Section 6.02(a) of the Bond Indenture, requires Net Pledged Revenues of not less than 1.40x aggregate annual parity debt service. This is a material error and must be corrected before the Preliminary Official Statement is distributed. A misstatement of the rate covenant could constitute a material omission or misstatement in the disclosure document, and we ask that you give this item highest priority.
B. Additional Bonds Test
Under Section 2.12 of the Bond Indenture, the Authority may issue additional parity bonds only if Net Pledged Revenues for the most recently completed fiscal year (or, at the Authority's election, the estimated Net Pledged Revenues for the first full fiscal year following completion of the project to be financed by the additional bonds) are at least equal to 1.40 times Maximum Annual Parity Debt Service ("MADS"), calculated to include the proposed additional bonds.
The Draft POS should clarify that the Authority has the election to use projected revenues (rather than historical revenues only) for purposes of satisfying the additional bonds test. This election is expressly provided under the Indenture and is a material feature of the covenant structure that may affect investors' assessment of the likelihood of future additional parity issuances.
C. DSCR on Series 2023A Alone
We note that the pro forma DSCR calculated on the Series 2023A Bonds alone, based on FY 2022 Net Pledged Revenues, is:
$412,600,000 ÷ $11,610,000 = 35.54x
This single-issue metric is of limited analytical significance given the substantial outstanding parity debt, and we recommend that the Draft POS clearly distinguish this single-issue coverage ratio from the all-parity DSCR of 1.48x. As currently drafted, the presentation of these two ratios in close proximity on page 34 without adequate context risks creating investor confusion regarding the actual coverage levels available for the Series 2023A Bonds.
IX. Comments on Debt-Service Reserve Fund and Bond Insurance / Surety
The Debt Service Reserve Fund for the Series 2023A Bonds will be funded by a surety bond rather than by a cash deposit. The material terms are as follows:
• Provider: Olympia Guaranty Insurance Corp., a New York-domiciled financial guaranty insurance company, with offices at 125 Broad Street, 14th Floor, New York, NY 10004
• Product: Debt-Service Reserve Fund Surety Bond, Policy No. OG-2023-MUN-4718
• Surety Amount: $11,610,000, equal to maximum annual debt service on the Series 2023A Bonds
• Annual Premium: 0.20% of surety amount = $11,610,000 × 0.0020 = $23,220 per year
• Underwriting Contact: Rachel P. Dominguez, Senior Vice President, Olympia Guaranty Insurance Corp.
The Debt Service Reserve Fund requirement for the Series 2023A Bonds is calculated as the least of:
(i) Maximum annual debt service on the Series 2023A Bonds: $11,610,000;
(ii) 125% of average annual debt service on the Series 2023A Bonds; or
(iii) 10% of original par amount: $220,000,000 × 10% = $22,000,000.
The applicable amount — the least of (i), (ii), and (iii) — is $11,610,000, which is the amount of the surety bond.
We have the following specific comments regarding the Draft POS treatment of the surety:
1. The Draft POS should include standard bond-insurer disclaimer language, stating that the description of Olympia Guaranty and the surety bond has been provided by Olympia Guaranty and that neither the Authority nor the Underwriters make any representation regarding the accuracy or completeness of such information.
2. The Draft POS should include a description of Olympia Guaranty's financial strength, including its insurer financial strength ratings, claims-paying resources, and statutory surplus. We request confirmation that Olympia Guaranty's counsel has reviewed and approved the insurer disclosure language in the Draft POS. If such review has not yet occurred, we recommend that the draft language be transmitted to Olympia Guaranty's counsel promptly so that any required revisions can be incorporated before the Preliminary Official Statement distribution date.
X. Comments on Ratings Section
The ratings assigned to the Series 2023A Bonds are as follows:
These ratings are expected to be assigned on July 28, 2023, following rating agency presentations scheduled for July 10–11, 2023. We note that as of the date of the Draft POS, the rating agency presentations have not yet occurred, and accordingly the ratings shown in the Draft POS are anticipated ratings based on preliminary indications from the agencies. The Draft POS should clearly indicate the date on which the ratings are expected to be formally assigned and should include placeholder language to be updated upon receipt of the final rating letters.
The Draft POS should include the standard disclaimer that ratings are not recommendations to buy, sell, or hold the Bonds, reflect only the views of the rating agencies, and may be revised or withdrawn at any time without notice.
Additionally, the Draft POS should confirm that permission has been obtained from both NRSROs (LRG and PCA) to include their ratings in the Official Statement. If such permissions have not yet been obtained, we request that underwriters' counsel arrange for their prompt receipt.
XI. Comments on Risk Factors
A. General Observations
The risk factors section of the Draft POS (beginning on page 40) should be reviewed for completeness and accuracy. Adequate risk factor disclosure is essential to the Authority's and the Underwriters' compliance with their respective obligations under the federal securities laws. We have the following specific comments on the risk factors currently included in the Draft POS, as well as suggestions for additional risk factors that we believe should be added or expanded.
B. Revenue Risk / Rate-Setting Risk
We recommend adding or expanding the discussion of CSIA's dependence on the 14 participating municipal water and sewer districts' timely payment of Wholesale Water Treatment Service Charges. These charges represent the single largest component of pledged revenues, and any material nonpayment by one or more participating districts could adversely affect the Authority's ability to meet its debt service obligations.
The risk factor should address, among other things, the possibility that one or more participating districts may face financial distress, contest rate increases, or experience demographic or economic changes that reduce their capacity to pay. The Draft POS should note the terms of the Wholesale Water Treatment Services Agreements, including any take-or-pay or hell-or-high-water payment obligations that mitigate this risk, and should also address the consequences of a participating district's default under its agreement.
C. Construction Risk
We recommend an expanded discussion of risks associated with the design-build contract with Northtide Environmental Engineering, Inc. The current risk factor on page 42 is limited to a single paragraph discussing "general construction risk." Given the magnitude of the Project ($237.4 million total cost) and the fact that a significant portion of bond proceeds will be used to fund construction, we believe a more detailed discussion is warranted.
Specifically, the risk factor should address:
• The risk that actual construction costs may exceed the GMP of $193,500,000 and the contractual and practical consequences of such overruns;
• Delay risk, including the potential for weather, supply-chain disruption, labor shortages, permitting delays, or force majeure events to cause delays in substantial completion;
• The gap between the GMP of $193,500,000 and the total estimated project cost of $237,400,000, which is funded by non-GMP items (including owner-furnished equipment, permitting costs, design review, and contingency) and the Authority's equity contribution; and
• The risk that the design-build contractor may experience financial difficulty or default under the contract.
D. Environmental and Regulatory Risk
While the SEPA Determination of Non-Significance and the NPDES Permit modification have been obtained, the Draft POS should address the risk of ongoing compliance with these permits and with applicable environmental laws and regulations generally. In particular, the risk factor should note:
• The potential for future changes in federal or state environmental regulations (including Clean Water Act requirements, Endangered Species Act considerations, and state water quality standards) that could impose additional costs on the Authority or require modifications to the Project;
• The risk that permits may be subject to challenge by third parties; and
• The risk that noncompliance with permit conditions could result in enforcement actions, fines, or operational restrictions.
E. Tax-Exempt Status Risk
The Draft POS should include a standard risk factor regarding the potential loss of tax-exempt status of the interest on the Series 2023A Bonds if the Authority fails to comply with its covenants under the Tax Regulatory Agreement and the requirements of Sections 103 and 141 through 150 of the Internal Revenue Code of 1986, as amended (the "Code"). The risk factor should specifically reference the arbitrage rebate requirements under Section 148 of the Code and the potential consequences of a determination by the Internal Revenue Service that interest on the Bonds is includable in gross income for federal income tax purposes.
F. Interest Rate / Market Risk
Although the Bonds bear interest at a fixed rate of 3.25% per annum, the Draft POS should include a risk factor addressing secondary market price volatility risk. Investors should be advised that the market price of the Bonds may fluctuate based on prevailing interest rates, general market conditions, and changes in the Authority's credit quality, and that there is no assurance that an active secondary market for the Bonds will develop or be maintained.
G. Surety Provider Risk
We recommend including a risk factor specifically addressing the creditworthiness of Olympia Guaranty Insurance Corp. as the provider of the Debt Service Reserve Fund surety bond. This risk factor should note the possibility that Olympia Guaranty may be downgraded by one or more rating agencies, may experience financial difficulty or insolvency, or may fail to honor draws on the surety bond when required. The risk factor should also note that a downgrade of Olympia Guaranty could result in a downgrade of the insured ratings on the Bonds.
H. Additional Parity Debt Risk
The Draft POS should include a risk factor noting that the Authority has the ability to issue additional parity bonds in the future, subject to the additional bonds test of 1.40x MADS. The issuance of additional parity obligations would dilute the coverage ratios available to existing bondholders, including holders of the Series 2023A Bonds. The risk factor should clearly explain the additional bonds test and the circumstances under which the Authority may issue additional parity debt.
XII. Comments on Legal Document Summaries
A. Summary of the Bond Indenture
The Draft POS summary of the Bond Indenture (beginning on page 50) should be reviewed against the current draft of the Bond Indenture, which is the Calderwood & Harkness draft dated June 15, 2023. We have the following specific comments:
1. Events of Default. The list of events of default in the Draft POS (page 52) omits the cross-default provision contained in Section 7.01(e) of the Bond Indenture. This provision is material because it provides that a default under any other parity obligation of the Authority may constitute an event of default under the Bond Indenture. We request that the cross-default provision be added to the summary.
2. Trustee's Duties and Standard of Care. The summary of the Trustee's duties on page 54 should be reviewed for consistency with Article VIII of the Bond Indenture. In particular, the summary should accurately reflect the Trustee's standard of care both before and after the occurrence of an event of default, including the customary "prudent person" standard applicable following a default.
3. Optional Redemption. The optional redemption provisions should be clearly stated: the Bonds are subject to optional redemption by the Authority, in whole or in part, at a redemption price equal to par (100% of the principal amount), plus accrued interest, on or after October 1, 2033. The Draft POS should confirm that there is no make-whole or premium call applicable to the Bonds.
B. Summary of the First Supplemental Indenture
The Series-specific terms set forth in the First Supplemental Indenture should be verified against the current draft of that instrument. In particular, please confirm that the following terms are accurately reflected: par amount ($220,000,000), coupon rate (3.25%), maturity date (October 1, 2053), authorized denominations ($5,000 or integral multiples thereof), and CUSIP base (148392).
C. Summary of the Revenue Pledge Agreement