1030-00001 · Dralvecen Fenn & Co., Inc · Correspondence

post-closing-letter-to-client.docx DOCUMENT M&A / Corporate

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CALDERWOOD & HARKNESS LLP Attorneys at Law

1420 Fifth Avenue, Suite 3600 Seattle, Washington 98101 Telephone: (206) 553-4200 Facsimile: (206) 553-4201 www.calderwoodharkness.com

November 3, 2023

VIA FEDEX AND EMAIL

Harold K. Nakamura Executive Director Cascadia State Infrastructure Authority 1100 Capitol Way South, Suite 400 Olympia, WA 98501

Denise R. Whitford Chief Financial Officer Cascadia State Infrastructure Authority 1100 Capitol Way South, Suite 400 Olympia, WA 98501

Martin J. Espinoza General Counsel Cascadia State Infrastructure Authority 1100 Capitol Way South, Suite 400 Olympia, WA 98501

Re: $220,000,000 Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) — Post-Closing Transmittal and Summary of Continuing Obligations

C&H Matter No. 1030-00001

Dear Mr. Nakamura, Ms. Whitford, and Mr. Espinoza:

We write to you in connection with the successful closing on October 24, 2023 of the $220,000,000 aggregate principal amount of Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) (the "Series 2023A Bonds" or the "Bonds"). The purpose of this letter is twofold: first, to transmit bound copies of the closing transcript binder prepared in connection with the financing; and second, to provide a summary of the Cascadia State Infrastructure Authority's ("CSIA" or the "Authority") key post-closing and continuing obligations arising under the various transaction documents executed and delivered in connection with the issuance of the Bonds.

On behalf of Calderwood & Harkness LLP, we would like to extend our congratulations to CSIA and its Board of Commissioners on the completion of this significant financing for the Puget Sound Regional Advanced Water Treatment Facility (the "Project"). The Series 2023A Bonds represent an important milestone in the Authority's efforts to deliver advanced water treatment infrastructure to the region and the communities it serves.

As you know, interest on the Bonds is excludable from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), subject to the conditions and requirements set forth in the Tax Regulatory Agreement and Certificate and in the opinions of Bond Counsel delivered at closing. The Bonds were rated "AA" with a stable outlook by Lakeshore Ratings Group, Inc. and "AA−" with a stable outlook by Pinnacle Credit Analytics, Inc., reflecting the strong credit profile of the Authority and the pledged revenue stream supporting the Bonds.

The continuing obligations described in this letter are of substantial importance. As we discuss in greater detail below, CSIA should establish internal procedures and designate responsible staff to monitor and ensure timely compliance with each of these obligations over the full term of the Bonds.

1. Closing Transcript Binder Transmittal

Calderwood & Harkness LLP is pleased to transmit herewith three (3) bound copies of the closing transcript binder (the "Closing Transcript") prepared in connection with the issuance of the Series 2023A Bonds. We recommend that one copy be retained in the Office of the Chief Financial Officer, one copy in the Office of the General Counsel, and one copy with the Executive Director or in the Authority's central records archive. Additional copies of the Closing Transcript are available upon request and can be produced at nominal cost.

The Closing Transcript contains executed originals or conformed copies of all transaction documents, legal opinions, certificates, and ancillary materials delivered at or in connection with the closing on October 24, 2023. Each bound copy is accompanied by a Closing Transcript Table of Contents, enclosed for easy reference, which provides a complete index to the materials contained therein.

The key documents included in the Closing Transcript are as follows:

1. Bond Indenture (Trust Indenture) dated as of October 24, 2023, by and between CSIA and Pacific Northwest Trust Company, N.A. ("PNTC"), as Trustee (the "Bond Indenture");

2. First Supplemental Indenture (Series 2023A) dated as of October 24, 2023, by and between CSIA and PNTC, as Trustee (the "First Supplemental Indenture"), supplementing and amending the Bond Indenture with respect to the terms and provisions specific to the Series 2023A Bonds;

3. Revenue Pledge Agreement dated as of October 24, 2023, by and between CSIA and PNTC, as Trustee (the "Revenue Pledge Agreement"), setting forth the pledge of Net Pledged Revenues and related covenants;

4. Bond Purchase Agreement dated as of August 30, 2023, by and between CSIA and Meridian Capital Partners LLC, as representative of the underwriters (Meridian Capital Partners LLC and Dralvecen Fenn & Co., Inc.) (the "Bond Purchase Agreement");

5. Continuing Disclosure Agreement dated as of October 24, 2023, by and between CSIA and PNTC, as Dissemination Agent (the "Continuing Disclosure Agreement");

6. Tax Regulatory Agreement and Certificate dated as of October 15, 2023, executed by CSIA (the "Tax Regulatory Agreement");

7. Escrow Deposit Agreement dated as of October 24, 2023, by and between CSIA and PNTC, as Escrow Agent (the "Escrow Deposit Agreement");

8. Debt-Service Reserve Fund Surety Bond Agreement dated as of October 24, 2023, among CSIA, PNTC, and Olympia Guaranty Insurance Corp. (the "DSRF Surety Bond Agreement");

9. Approving Legal Opinion of Bond Counsel issued by Pryor Crestfield LLP and Calderwood & Harkness LLP;

10. Tax Opinion of Bond Counsel issued by Pryor Crestfield LLP and Calderwood & Harkness LLP;

11. Issuer's Counsel Opinion issued by Calderwood & Harkness LLP;

12. Certificate of Authorized Officer executed by Harold K. Nakamura, Executive Director;

13. CFO's Certificate executed by Denise R. Whitford, Chief Financial Officer;

14. CSIA Board Resolution No. 2023-014, adopted May 9, 2023, authorizing the issuance of the Series 2023A Bonds and the execution and delivery of related documents;

15. Rating Letters from Lakeshore Ratings Group, Inc. (rating: "AA," stable outlook) and Pinnacle Credit Analytics, Inc. (rating: "AA−," stable outlook);

16. Surety Policy No. OG-2023-MUN-4718 issued by Olympia Guaranty Insurance Corp.;

17. Final Official Statement dated September 5, 2023;

18. CUSIP Assignment Documentation (CUSIP Base: 148392); and

19. Various additional certificates, receipts, closing memoranda, and ancillary documents as listed in the Closing Transcript Table of Contents.

We strongly recommend that CSIA retain the Closing Transcript binders in a secure location that is readily accessible to the Chief Financial Officer's office and the General Counsel's office for the entire life of the Bonds. Given that the final maturity of the Series 2023A Bonds is October 1, 2053, and that certain record-retention obligations extend beyond that date (as discussed below), the Closing Transcript should be preserved through at least October 1, 2056. We further recommend that CSIA maintain electronic copies of all documents in the Closing Transcript as a backup to the physical binders.

2. Summary of Continuing Post-Closing Obligations

The transaction documents executed and delivered in connection with the issuance of the Series 2023A Bonds impose a number of significant ongoing obligations on CSIA throughout the term of the Bonds, which extends through the final maturity date of October 1, 2053 (or earlier, if the Bonds are redeemed or defeased prior to maturity). Compliance with these obligations is essential to protect the Authority's credit standing, to maintain the tax-exempt status of interest on the Bonds, and to fulfill the Authority's contractual commitments to bondholders, the Trustee, the rating agencies, and other parties to the transaction.

The following summary is provided for the convenience of the Authority and is not intended to be exhaustive or to serve as a substitute for the underlying transaction documents. CSIA should consult the Bond Indenture, the First Supplemental Indenture, the Revenue Pledge Agreement, the Continuing Disclosure Agreement, the Tax Regulatory Agreement, the Escrow Deposit Agreement, the DSRF Surety Bond Agreement, and the other transaction documents for the definitive terms of each obligation. In the event of any inconsistency between this summary and the terms of any transaction document, the transaction document shall control.

We strongly recommend that CSIA establish an internal compliance calendar incorporating each of the dates and deadlines described below, and that the Authority assign specific responsibility for each obligation to designated staff within the CFO's office, General Counsel's office, or other appropriate departments. Periodic internal reviews — at least annually — should be conducted to confirm that all obligations are being met on a timely basis.

2.1 Continuing Disclosure Obligations (SEC Rule 15c2-12)

The Continuing Disclosure Agreement dated October 24, 2023, between CSIA and PNTC, as Dissemination Agent, was executed in accordance with Rule 15c2-12 adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended ("Rule 15c2-12"). This agreement establishes the Authority's obligations with respect to the ongoing provision of financial and operating information to the municipal securities market.

Annual Filings. CSIA is required to file annual financial information and operating data with the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system ("EMMA," accessible at https://emma.msrb.org) within 210 days after the end of each fiscal year of the Authority. For a fiscal year ending June 30, the annual filing deadline would be approximately January 26 of the following calendar year; for a fiscal year ending December 31, the deadline would be approximately July 29 of the following calendar year. CSIA should confirm its fiscal year-end and calculate the applicable deadline accordingly.

The annual filing must include the following:

(a) Audited Financial Statements — Audited financial statements of the Authority, prepared in accordance with generally accepted accounting principles as applied to governmental entities, as audited by CSIA's independent auditor. The Authority's current independent auditor is Hargrove & Associates CPAs, PLLC, with engagement partner Victoria L. Fong, CPA. The audited financial statements should include the pledged revenue accounts, fund balances, and such other information as is required under the Continuing Disclosure Agreement.

(b) Updated Operating and Financial Data — Updated operating and financial data of the type included in the Final Official Statement, as specified in the Continuing Disclosure Agreement. At a minimum, this data should include: gross pledged revenues; net pledged revenues; operations and maintenance ("O&M") expenses; debt-service coverage ratios for all outstanding parity debt; a schedule of outstanding parity debt obligations; and a status report on the construction and operation of the Puget Sound Regional Advanced Water Treatment Facility.

If audited financial statements are not available within the 210-day filing deadline, CSIA must file unaudited financial statements by the deadline, with the audited financial statements to follow when they become available. The filing of unaudited statements does not relieve CSIA of its obligation to file audited statements as soon as practicable.

Material Event Notices. CSIA is required to file notice of the occurrence of any of the enumerated material events specified in the Continuing Disclosure Agreement with EMMA within ten (10) business days of the occurrence of such event. The material events requiring notice include, but are not limited to, the following:

(i) principal and interest payment delinquencies;

(ii) non-payment related defaults, if material;

(iii) unscheduled draws on the debt-service reserve fund reflecting financial difficulties, including any draws on the Olympia Guaranty Insurance Corp. Surety Policy No. OG-2023-MUN-4718;

(iv) unscheduled draws on credit enhancements reflecting financial difficulties;

(v) substitution of credit or liquidity providers, or their failure to perform;

(vi) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701–TEB), or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds;

(vii) modifications to the rights of bondholders, if material;

(viii) bond calls, if material, and tender offers;

(ix) defeasances;

(x) release, substitution, or sale of property securing repayment of the Bonds, if material;

(xi) rating changes by Lakeshore Ratings Group, Inc. or Pinnacle Credit Analytics, Inc., or the assignment of any rating by any other nationally recognized statistical rating organization;

(xii) bankruptcy, insolvency, receivership, or similar event of the Authority;

(xiii) the consummation of a merger, consolidation, or acquisition involving the Authority or the sale of all or substantially all of the assets of the Authority, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action, or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and

(xiv) appointment of a successor or additional trustee or the change of name of a trustee, if material.

The specific list of material events is set forth in Section 4 of the Continuing Disclosure Agreement. CSIA should review the complete list and ensure that internal reporting mechanisms are in place to identify the occurrence of any such event promptly.

Consequences of Non-Compliance. Failure to comply with the continuing disclosure obligations does not constitute an Event of Default under the Bond Indenture or the First Supplemental Indenture. However, non-compliance may be enforced by any bondholder or beneficial owner of the Bonds by an action for mandamus or specific performance in a court of competent jurisdiction. Moreover, non-compliance with continuing disclosure obligations may adversely affect CSIA's ability to access the municipal bond market in the future, as underwriters are generally required under Rule 15c2-12 to evaluate the Authority's compliance history before participating in future bond offerings. A record of non-compliance can result in increased borrowing costs, reduced investor interest, or an inability to complete future financings on favorable terms.

2.2 Tax Compliance Obligations (Tax Regulatory Agreement)

The Tax Regulatory Agreement and Certificate dated October 15, 2023 (the "Tax Regulatory Agreement"), executed by CSIA, sets forth the Authority's covenants and representations regarding the use of bond proceeds and bond-financed property necessary to maintain the tax-exempt status of the Series 2023A Bonds. Ongoing compliance with the Tax Regulatory Agreement is essential to preserve the exclusion of interest on the Bonds from gross income for federal income tax purposes under Section 103 of the Code. A determination that the Bonds are taxable could result in severe consequences for bondholders and for the Authority, including potential liability for damages and the inability to issue tax-exempt obligations in the future. The Authority's key tax compliance obligations are summarized below.

Arbitrage Rebate. Under Section 148(f) of the Code and Treasury Regulation § 1.148-3, CSIA is required to calculate the amount of "rebatable arbitrage" on all gross proceeds of the Bonds — including amounts held in the Project Fund, the Costs of Issuance Fund, the Capitalized Interest Fund, and any replacement proceeds — at least once every five (5) years from the closing date (October 24, 2023), and upon final maturity, earlier redemption, or prior retirement of all of the Bonds. Any rebatable arbitrage must be paid to the Internal Revenue Service ("IRS") within sixty (60) days after each computation date.

The first arbitrage rebate computation date is October 24, 2028. Subsequent computation dates fall on October 24, 2033; October 24, 2038; October 24, 2043; October 24, 2048; and October 24, 2053 (or the date of final maturity or earlier retirement, as applicable).

CSIA should engage a qualified rebate calculation agent with experience in municipal bond arbitrage compliance to perform the required calculations. Calderwood & Harkness is available to recommend firms with appropriate expertise upon the Authority's request. The engagement of a rebate calculation agent should be completed well in advance of the first computation date to allow adequate time for data collection and analysis.

We note that the Debt-Service Reserve Fund is currently satisfied by Surety Policy No. OG-2023-MUN-4718 issued by Olympia Guaranty Insurance Corp., rather than by cash or invested amounts. As a surety bond, the policy does not constitute an invested amount and generally does not generate investment earnings subject to arbitrage. However, if the surety policy is drawn upon or replaced with cash or investments, or if any other amounts are deposited in the Debt-Service Reserve Fund, such amounts must be monitored for arbitrage compliance, and the yield on investments in the Debt-Service Reserve Fund must not exceed the bond yield except during any applicable temporary period.

Yield Restriction. Construction proceeds deposited in the Project Fund (consisting of $215,490,000 in net bond proceeds and $17,400,000 in CSIA equity contributions) benefit from a three-year temporary period under Treasury Regulation § 1.148-2(e)(2), during which such proceeds may be invested at an unrestricted yield. The three-year temporary period expires on October 24, 2026. After that date, any unspent construction proceeds remaining in the Project Fund must be yield-restricted to the bond yield of 3.25% (or otherwise must satisfy an available exception, such as the minor portion exception for amounts not exceeding the lesser of $100,000 or 5% of the issue price).

Investment earnings on the Costs of Issuance Fund and the Capitalized Interest Fund (totaling $4,510,000 at closing) are subject to their own applicable temporary period and yield-restriction rules. Costs of issuance amounts generally must be spent within the applicable temporary period (typically six months from the closing date, i.e., by April 24, 2024), and capitalized interest amounts are generally subject to the temporary period applicable to the underlying proceeds from which they are derived.

CSIA should work with its investment advisor and rebate calculation agent to ensure that all investments of bond proceeds comply with yield-restriction requirements after the expiration of each applicable temporary period.

Private Activity Limitations. CSIA must monitor the use of the Puget Sound Regional Advanced Water Treatment Facility (the "Project"), located at 7250 Deschutes Parkway, Tumwater, Thurston County, Washington 98501, and any other bond-financed property, to ensure ongoing compliance with the private business use test under Section 141 of the Code and the related private payment and private loan tests.

Under Section 141(b) of the Code, the Bonds will be treated as private activity bonds if:

(a) more than 10% of the proceeds of the Bonds are to be used for any private business use (the "private business use test"), and

(b) the payment of the principal of or interest on more than 10% of the proceeds of the Bonds is (under the terms of the Bonds or any underlying arrangement) directly or indirectly (i) secured by any interest in property used or to be used for a private business use, or (ii) to be derived from payments (whether or not to the Authority) in respect of property, or borrowed money, used or to be used for a private business use (the "private payment or security test").

Additionally, the Bonds will be treated as private activity bonds if more than the lesser of 5% or $15,000,000 of the proceeds of the Bonds are used (directly or indirectly) to make or finance loans to persons other than governmental units (the "private loan financing test").

Any management contracts, service agreements, output contracts, research agreements, or other arrangements involving nongovernmental persons or entities that relate to the use of bond-financed property must be reviewed for compliance with IRS Revenue Procedure 2017-13, as modified by Revenue Procedure 2021-29 (or any successor guidance). Management contracts and similar arrangements that do not satisfy the safe harbor conditions set forth in Revenue Procedure 2017-13 may give rise to private business use that could jeopardize the tax-exempt status of the Bonds.

Particular care should be taken with respect to the Wholesale Water Treatment Services Agreements that CSIA has entered into with the fourteen (14) participating municipal water districts. While these districts are governmental entities and their use of the Project generally does not give rise to private business use concerns, any subcontracting, privatization, or outsourcing arrangements entered into by the participating districts or by CSIA with respect to the operation or management of the Project should be reviewed by bond counsel (Pryor Crestfield LLP and Calderwood & Harkness LLP) before execution to ensure that such arrangements do not cause the Bonds to become private activity bonds.

Record Retention. All records relating to the tax-exempt status of the Bonds must be retained by CSIA for a period extending until at least three (3) years after the date on which the Bonds are fully retired. Given that the final maturity of the Bonds is October 1, 2053, all tax-related records should be retained through at least October 1, 2056. Records that must be retained include, without limitation:

• allocation of bond proceeds to expenditures;

• investment records for all bond proceeds and related funds;

• records of the use of bond-financed property (including any changes in use);

• arbitrage rebate calculations and related work papers;

• copies of all IRS filings, including Forms 8038-G and any rebate payments;

• management contracts, service agreements, and other arrangements involving nongovernmental persons; and

• any correspondence with the IRS relating to the Bonds.

Change-in-Use Reporting. CSIA must promptly notify bond counsel (Pryor Crestfield LLP and Calderwood & Harkness LLP) of any deliberate action that would cause the Bonds to become private activity bonds or that would otherwise result in a change in the use of bond-financed property from the use described in the Tax Regulatory Agreement. If a change in use occurs, CSIA may be required to take remedial action under Treasury Regulation § 1.141-12 to prevent the Bonds from being treated as private activity bonds. Remedial actions may include, among other things, defeasance of a portion of the Bonds, alternative use of the disposition proceeds, or other corrective measures. Prompt notification is critical to allow bond counsel to advise the Authority on the availability and implementation of remedial action before the change in use becomes final.

2.3 Financial Covenant Compliance (Rate Covenant and Debt-Service Coverage Ratio)

The Bond Indenture and the Revenue Pledge Agreement contain financial covenants that are central to the security for the Series 2023A Bonds and that require ongoing attention by the Authority.

Rate Covenant. CSIA has covenanted to set, charge, and collect water-treatment user fees, connection charges, and other rates and charges at levels sufficient to produce Net Pledged Revenues (gross pledged revenues less O&M expenses) in each fiscal year equal to at least 1.40 times (1.40x) annual aggregate parity debt service on all outstanding parity obligations of the Authority. This is a fundamental credit covenant and is closely monitored by bondholders, the rating agencies, and the municipal market.

At the time of closing, the Authority's financial position with respect to the rate covenant was as follows:

• FY 2022 Gross Pledged Revenues: $489,300,000

• FY 2022 O&M Expenses: $76,700,000

• FY 2022 Net Pledged Revenues: $412,600,000

• Total Annual Parity Debt Service (post-issuance, including Series 2023A): $278,400,000

• Total Outstanding Parity Debt (post-issuance): $3,340,000,000

• Debt-Service Coverage Ratio ("DSCR"): 1.48x

Projected FY 2024 Net Pledged Revenues are estimated at $431,800,000. CSIA should monitor projected DSCR on at least an annual basis (and more frequently as circumstances warrant) and should adjust rates and charges as necessary to maintain compliance with the 1.40x rate covenant at all times.

Additional Bonds Test. Before issuing any additional parity bonds or other parity obligations under the Bond Indenture, CSIA must demonstrate that Net Pledged Revenues for the most recently completed fiscal year (or, at CSIA's election, estimated Net Pledged Revenues for the first full fiscal year following the date of issuance of the new obligations or the completion of the project to be financed) equal at least 1.40 times (1.40x) the maximum annual parity debt service on all outstanding parity obligations, calculated to include the proposed additional bonds or obligations. The additional bonds test is set forth in detail in Article VII of the Bond Indenture and should be reviewed carefully in connection with any future financing.

Annual Certification. Although the Bond Indenture does not expressly require an annual DSCR certification, we recommend that CSIA prepare an internal annual certification of DSCR compliance as a matter of best practice. The CFO's Certificate executed by Denise R. Whitford and delivered at closing may serve as a useful template for this purpose. The annual certification should be prepared promptly after audited financial statements become available and should be shared with the General Counsel's office, the Executive Director, and the Board of Commissioners.

Remedies for Covenant Breach. If Net Pledged Revenues for any fiscal year fall below the 1.40x threshold required by the rate covenant, the Bond Indenture requires CSIA to engage an independent consultant (which may be a rate consultant or financial advisor experienced in water utility rate-setting) within thirty (30) days of the determination of non-compliance. The consultant must recommend rate adjustments or other measures to restore compliance. The Authority is required to consider and, to the extent feasible, implement such recommendations. Failure to engage the consultant or to take reasonable steps to implement the consultant's recommendations may constitute an Event of Default under the Bond Indenture, which could trigger acceleration of the Bonds and other remedies available to the Trustee and bondholders.

2.4 Debt-Service Reserve Fund / Surety Bond Obligations

The Series 2023A Bonds are secured in part by a Debt-Service Reserve Fund, which is satisfied by Surety Policy No. OG-2023-MUN-4718 issued by Olympia Guaranty Insurance Corp. (the "Surety Policy") in the amount of $11,610,000 (the "Reserve Fund Requirement"). The Authority's obligations with respect to the Debt-Service Reserve Fund and the Surety Policy are governed by the DSRF Surety Bond Agreement dated October 24, 2023, among CSIA, PNTC, and Olympia Guaranty Insurance Corp.

Annual Premium Payments. CSIA is required to pay an annual surety premium in the amount of $23,220 (representing 0.20% of the surety amount of $11,610,000) to Olympia Guaranty Insurance Corp. The annual premium payment is due on each anniversary of the closing date — that is, on October 24 of each year, commencing October 24, 2024. Failure to pay the annual premium when due may result in cancellation of the Surety Policy by Olympia Guaranty Insurance Corp., which would require CSIA to fund the Debt-Service Reserve Fund in cash to the Reserve Fund Requirement of $11,610,000 from available revenues or other legally available funds. Timely payment of the annual surety premium should be incorporated into the Authority's internal compliance calendar.

Replenishment Obligations. If any draw is made on Surety Policy No. OG-2023-MUN-4718 to cover a deficiency in debt-service payments, CSIA is required to replenish the drawn amount within twelve (12) months from available Net Pledged Revenues. The replenishment obligation is subordinate to the payment of current debt service and O&M expenses but is senior to any subordinate lien obligations or other discretionary expenditures. Any draw on the Surety Policy must also be reported to EMMA as a material event notice under the Continuing Disclosure Agreement, as described in Section 2.1 above.

2.5 Debt-Service Payment Dates

Interest on the Series 2023A Bonds is payable semi-annually on April 1 and October 1 of each year, commencing April 1, 2024. Principal on the Bonds is payable on October 1 of each year in accordance with the amortization schedule set forth in the First Supplemental Indenture, commencing on the first principal payment date specified therein.

CSIA must ensure the timely transfer of debt-service funds to PNTC, as Paying Agent under the Bond Indenture, in advance of each payment date in accordance with the flow-of-funds provisions set forth in Article V of the Bond Indenture. We recommend that CSIA establish wire-transfer instructions with PNTC and confirm the required lead time for transfers (typically three to five business days prior to each payment date) to avoid any payment delays.

The Bonds are issued in book-entry-only form through The Depository Trust Company ("DTC"), with Cede & Co. as the registered owner. PNTC's DTC Participant Number is 2741. All payments of principal and interest will flow through DTC to the beneficial owners of the Bonds through DTC's standard procedures. The Authority's payment obligation is to PNTC, as Paying Agent, and PNTC in turn will remit funds through DTC.

The Series 2023A Bonds are structured with a level-debt-service amortization, resulting in approximate annual debt service of $11,610,000 (principal and interest combined) over the 30-year amortization period through the final maturity on October 1, 2053.

2.6 Optional Redemption

The Series 2023A Bonds are subject to optional redemption, at the election of CSIA, on or after October 1, 2033, at a redemption price equal to 100% of the principal amount of the Bonds to be redeemed, plus accrued interest thereon to the redemption date, without premium. The Bonds are not subject to optional redemption prior to October 1, 2033 (reflecting a ten-year call protection period for the benefit of bondholders).

If CSIA elects to exercise the optional redemption right on or after October 1, 2033, the Authority must provide notice to PNTC, as Trustee, in accordance with the redemption notice provisions of the Bond Indenture. The Bond Indenture generally requires that the Trustee give not less than thirty (30) days' and not more than sixty (60) days' prior written notice to the registered owners of the Bonds to be redeemed (which, in the case of book-entry bonds, will be provided through DTC). CSIA should provide its direction to the Trustee sufficiently in advance of the desired redemption date to allow the Trustee to meet these notice requirements.

Any optional redemption of the Bonds is a reportable event under the Continuing Disclosure Agreement, and CSIA must file a material event notice with EMMA in connection with any such redemption, as described in Section 2.1 above.

2.7 Project Fund Disbursements / Escrow Deposit Agreement

The Escrow Deposit Agreement dated October 24, 2023, between CSIA and PNTC, as Escrow Agent, governs the disbursement of proceeds deposited in the Project Fund for the payment of costs of the Puget Sound Regional Advanced Water Treatment Facility.

Net bond proceeds of $215,490,000, together with CSIA's equity contribution of $17,400,000, were deposited in the Project Fund on the closing date. The total estimated project cost is $237,400,000. Disbursements from the Project Fund are made pursuant to requisition certificates submitted by CSIA to PNTC, which must comply with the requisition requirements set forth in the Escrow Deposit Agreement. Requisition certificates must include appropriate supporting documentation and certifications.

The primary recipient of Project Fund disbursements will be Northtide Environmental Engineering, Inc. under Guaranteed Maximum Price ("GMP") Contract No. CSIA-DB-2023-001, which has a GMP of $193,500,000 for the design and construction of the Project. Additional disbursements will be made for other Project costs, including engineering, environmental, permitting, inspection, legal, and administrative costs.

CSIA should maintain accurate and detailed records of all Project Fund requisitions and expenditures. These records are critical for tax compliance purposes, as they document the allocation of bond proceeds to capital expenditures and demonstrate that bond proceeds have been used for their intended purpose. As noted in Section 2.2 above, these records must be retained through at least October 1, 2056.

Additionally, capitalized interest in the amount of $4,510,000 was deposited in the Capitalized Interest Fund at closing. These funds will be disbursed by PNTC to cover initial debt-service payments during the construction period, reducing the Authority's near-term cash-flow requirements.

2.8 Insurance and Rating Maintenance

CSIA should maintain ongoing communication with Lakeshore Ratings Group, Inc. (current rating: "AA," stable outlook) and Pinnacle Credit Analytics, Inc. (current rating: "AA−," stable outlook) regarding annual surveillance reviews. The rating agencies will typically request audited financial statements, operating data, and other information on an annual basis in connection with their surveillance activities. Prompt and complete responses to rating agency inquiries are important to maintaining the Authority's ratings.

Any change in the ratings assigned to the Bonds (whether an upgrade, downgrade, or change in outlook, or the placement of the ratings on credit watch) must be reported as a material event notice under the Continuing Disclosure Agreement and filed with EMMA within ten (10) business days of the occurrence.

In addition, CSIA should maintain required insurance coverage on the Project as specified in the Bond Indenture, the Revenue Pledge Agreement, and GMP Contract No. CSIA-DB-2023-001 with Northtide Environmental Engineering, Inc. During the construction period, this includes builder's risk insurance, general liability insurance, and such other coverages as are required under the design-build contract. After completion of construction, the Authority must maintain property insurance, general liability insurance, and such other coverages as are required under the Bond Indenture.

2.9 Annual Audit

CSIA's independent auditor, Hargrove & Associates CPAs, PLLC (engagement partner Victoria L. Fong, CPA; 520 Pike Street, Suite 2200, Seattle, WA 98101), should be engaged annually to audit the Authority's financial statements, including the pledged revenue accounts, the debt-service funds, and such other accounts and funds as are required under the Bond Indenture and applicable governmental auditing standards.

Audited financial statements are a required component of the Authority's annual continuing disclosure filings on EMMA (as described in Section 2.1 above, due within 210 days of fiscal year-end) and are an essential tool for monitoring compliance with the rate covenant and debt-service coverage ratio requirements discussed in Section 2.3 above. The Authority should coordinate with its auditor to ensure that the annual audit is completed on a timeline that permits timely filing on EMMA and timely internal review of financial covenant compliance.

3. Compliance Calendar Summary

For the convenience of the Authority, the following table summarizes the key recurring compliance dates and obligations arising from the Series 2023A Bonds transaction documents. CSIA should incorporate these dates into its internal compliance calendar and assign responsibility for each item to designated staff.

4. Key Contact Information

The following table provides contact information for the key parties involved in the ongoing administration and compliance matters relating to the Series 2023A Bonds. CSIA should maintain current contact information for each party and should promptly notify Calderwood & Harkness and the Trustee of any changes in the Authority's designated contacts.

5. Availability for Further Assistance

Calderwood & Harkness LLP remains available to assist the Authority with any and all matters arising from or relating to the Series 2023A financing, including, without limitation:

• ongoing compliance questions relating to the Bond Indenture, the Revenue Pledge Agreement, the Continuing Disclosure Agreement, the Tax Regulatory Agreement, or any other transaction document;

• interpretation of the terms and provisions of the transaction documents;

• engagement of an arbitrage rebate calculation agent and oversight of the rebate calculation process;

• planning and execution of future additional parity bond issuances or other financings under the Bond Indenture;

• change-in-use analysis and remedial action planning under Treasury Regulation § 1.141-12;

• review of management contracts, service agreements, or other arrangements for private activity compliance;

• optional redemption planning and execution;

• defeasance analysis and structuring;

• communication with the rating agencies, the Trustee, and other transaction parties; and

• any other matters arising from or relating to the Series 2023A Bonds or the Authority's capital program.

Please do not hesitate to contact the undersigned or Michelle Tsao at (206) 553-4233 or mtsao@calderwoodharkness.com with any questions regarding the matters discussed in this letter or any other aspect of the Series 2023A financing. We look forward to continuing our service to the Authority.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

George Trujillo Partner, Energy & Infrastructure Finance Telephone: (206) 553-4217

Email: gtrujillo@calderwoodharkness.com

cc:

Commissioner Lorraine Chu, Board Chair, Cascadia State Infrastructure Authority Patricia Dunmore, Partner, Calderwood & Harkness LLP Michelle Tsao, Associate, Calderwood & Harkness LLP Margaret S. Yoon, Partner, Pryor Crestfield LLP Kenneth W. Barclay, Principal, Clearfield Municipal Advisors LLC

Enclosures:

1. Closing Transcript Binders (3 bound copies)

2. Closing Transcript Table of Contents

Obligation	Frequency / Date	Key Details
Semi-Annual Debt-Service Payments	April 1 and October 1 each year	First payment: April 1, 2024. Transfer funds to PNTC as Paying Agent in advance of each payment date. Approximate annual debt service: $11,610,000.
Annual Continuing Disclosure Filing (EMMA)	Within 210 days of fiscal year-end	File audited financial statements and updated operating/financial data on EMMA.
Annual Surety Premium Payment	October 24 each year	Payment of $23,220 to Olympia Guaranty Insurance Corp. First payment due: October 24, 2024.
Material Event Notices (EMMA)	Within 10 business days of occurrence	File upon occurrence of any enumerated material event under the Continuing Disclosure Agreement.
Five-Year Arbitrage Rebate Computation	October 24, 2028; October 24, 2033; October 24, 2038; October 24, 2043; October 24, 2048; October 24, 2053	Calculate rebatable arbitrage on all gross proceeds; pay any rebate to IRS within 60 days of each computation date.
Yield-Restriction Compliance Review	October 24, 2026	End of three-year temporary period for construction proceeds. Unspent proceeds must be yield-restricted to 3.25% bond yield thereafter.
Rate Covenant / DSCR Annual Review	Annually, upon availability of audited financials	Confirm Net Pledged Revenues ≥ 1.40x annual aggregate parity debt service.
Rating Agency Surveillance	Annually (ongoing)	Provide audited financials and requested information to Lakeshore Ratings Group, Inc. and Pinnacle Credit Analytics, Inc.
Optional Redemption Eligibility	On or after October 1, 2033	Bonds callable at par (100%) plus accrued interest. 30 days' prior notice to Trustee required.
Final Maturity of Series 2023A Bonds	October 1, 2053	Final principal payment date.
Record Retention Period Expiration	At least October 1, 2056	Retain all tax-related and transaction records through at least 3 years after final retirement of the Bonds.
Role	Entity / Individual	Address	Telephone / Email
Trustee / Paying Agent / Registrar / Escrow Agent	Pacific Northwest Trust Company, N.A. — Alan M. Greer, Vice President, Corporate Trust Services	1201 Third Avenue, Suite 1600, Seattle, WA 98101	(206) 447-6300 / agreer@pntcbank.com
Surety Provider	Olympia Guaranty Insurance Corp. — Rachel P. Dominguez, Senior Vice President	125 Broad Street, 14th Floor, New York, NY 10004	(212) 918-4500 / rdominguez@olympiaguaranty.com
Municipal Advisor	Clearfield Municipal Advisors LLC — Kenneth W. Barclay, Principal	805 SW Broadway, Suite 1400, Portland, OR 97205	(503) 228-7700 / kbarclay@clearfieldadvisors.com
Co-Bond Counsel	Pryor Crestfield LLP — Margaret S. Yoon, Partner	999 Third Avenue, Suite 4800, Seattle, WA 98104	(206) 382-9200 / myoon@pryorcrestfield.com
Independent Auditor	Hargrove & Associates CPAs, PLLC — Victoria L. Fong, CPA	520 Pike Street, Suite 2200, Seattle, WA 98101	(206) 621-8800 / vfong@hargrovecpa.com
Design-Build Contractor	Northtide Environmental Engineering, Inc. — Garrett L. Henriksen, CEO	2400 Eastlake Avenue East, Seattle, WA 98102	(206) 324-5500 / ghenriksen@northtideeng.com
Issuer's Counsel	Calderwood & Harkness LLP — George Trujillo, Partner	1420 Fifth Avenue, Suite 3600, Seattle, WA 98101	(206) 553-4217 / gtrujillo@calderwoodharkness.com

CALDERWOOD & HARKNESS LLP Attorneys at Law
1420 Fifth Avenue, Suite 3600 Seattle, Washington 98101 Telephone: (206) 553-4200 Facsimile: (206) 553-4201 www.calderwoodharkness.com
November 3, 2023
VIA FEDEX AND EMAIL
Harold K. Nakamura Executive Director Cascadia State Infrastructure Authority 1100 Capitol Way South, Suite 400 Olympia, WA 98501
Denise R. Whitford Chief Financial Officer Cascadia State Infrastructure Authority 1100 Capitol Way South, Suite 400 Olympia, WA 98501
Martin J. Espinoza General Counsel Cascadia State Infrastructure Authority 1100 Capitol Way South, Suite 400 Olympia, WA 98501
Re: $220,000,000 Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) — Post-Closing Transmittal and Summary of Continuing Obligations
C&H Matter No. 1030-00001
Dear Mr. Nakamura, Ms. Whitford, and Mr. Espinoza:
We write to you in connection with the successful closing on October 24, 2023 of the $220,000,000 aggregate principal amount of Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) (the "Series 2023A Bonds" or the "Bonds"). The purpose of this letter is twofold: first, to transmit bound copies of the closing transcript binder prepared in connection with the financing; and second, to provide a summary of the Cascadia State Infrastructure Authority's ("CSIA" or the "Authority") key post-closing and continuing obligations arising under the various transaction documents executed and delivered in connection with the issuance of the Bonds.
On behalf of Calderwood & Harkness LLP, we would like to extend our congratulations to CSIA and its Board of Commissioners on the completion of this significant financing for the Puget Sound Regional Advanced Water Treatment Facility (the "Project"). The Series 2023A Bonds represent an important milestone in the Authority's efforts to deliver advanced water treatment infrastructure to the region and the communities it serves.
As you know, interest on the Bonds is excludable from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), subject to the conditions and requirements set forth in the Tax Regulatory Agreement and Certificate and in the opinions of Bond Counsel delivered at closing. The Bonds were rated "AA" with a stable outlook by Lakeshore Ratings Group, Inc. and "AA−" with a stable outlook by Pinnacle Credit Analytics, Inc., reflecting the strong credit profile of the Authority and the pledged revenue stream supporting the Bonds.
The continuing obligations described in this letter are of substantial importance. As we discuss in greater detail below, CSIA should establish internal procedures and designate responsible staff to monitor and ensure timely compliance with each of these obligations over the full term of the Bonds.
1. Closing Transcript Binder Transmittal
Calderwood & Harkness LLP is pleased to transmit herewith three (3) bound copies of the closing transcript binder (the "Closing Transcript") prepared in connection with the issuance of the Series 2023A Bonds. We recommend that one copy be retained in the Office of the Chief Financial Officer, one copy in the Office of the General Counsel, and one copy with the Executive Director or in the Authority's central records archive. Additional copies of the Closing Transcript are available upon request and can be produced at nominal cost.
The Closing Transcript contains executed originals or conformed copies of all transaction documents, legal opinions, certificates, and ancillary materials delivered at or in connection with the closing on October 24, 2023. Each bound copy is accompanied by a Closing Transcript Table of Contents, enclosed for easy reference, which provides a complete index to the materials contained therein.
The key documents included in the Closing Transcript are as follows:
1. Bond Indenture (Trust Indenture) dated as of October 24, 2023, by and between CSIA and Pacific Northwest Trust Company, N.A. ("PNTC"), as Trustee (the "Bond Indenture");
2. First Supplemental Indenture (Series 2023A) dated as of October 24, 2023, by and between CSIA and PNTC, as Trustee (the "First Supplemental Indenture"), supplementing and amending the Bond Indenture with respect to the terms and provisions specific to the Series 2023A Bonds;
3. Revenue Pledge Agreement dated as of October 24, 2023, by and between CSIA and PNTC, as Trustee (the "Revenue Pledge Agreement"), setting forth the pledge of Net Pledged Revenues and related covenants;
4. Bond Purchase Agreement dated as of August 30, 2023, by and between CSIA and Meridian Capital Partners LLC, as representative of the underwriters (Meridian Capital Partners LLC and Dralvecen Fenn & Co., Inc.) (the "Bond Purchase Agreement");
5. Continuing Disclosure Agreement dated as of October 24, 2023, by and between CSIA and PNTC, as Dissemination Agent (the "Continuing Disclosure Agreement");
6. Tax Regulatory Agreement and Certificate dated as of October 15, 2023, executed by CSIA (the "Tax Regulatory Agreement");
7. Escrow Deposit Agreement dated as of October 24, 2023, by and between CSIA and PNTC, as Escrow Agent (the "Escrow Deposit Agreement");
8. Debt-Service Reserve Fund Surety Bond Agreement dated as of October 24, 2023, among CSIA, PNTC, and Olympia Guaranty Insurance Corp. (the "DSRF Surety Bond Agreement");
9. Approving Legal Opinion of Bond Counsel issued by Pryor Crestfield LLP and Calderwood & Harkness LLP;
10. Tax Opinion of Bond Counsel issued by Pryor Crestfield LLP and Calderwood & Harkness LLP;
11. Issuer's Counsel Opinion issued by Calderwood & Harkness LLP;
12. Certificate of Authorized Officer executed by Harold K. Nakamura, Executive Director;
13. CFO's Certificate executed by Denise R. Whitford, Chief Financial Officer;
14. CSIA Board Resolution No. 2023-014, adopted May 9, 2023, authorizing the issuance of the Series 2023A Bonds and the execution and delivery of related documents;
15. Rating Letters from Lakeshore Ratings Group, Inc. (rating: "AA," stable outlook) and Pinnacle Credit Analytics, Inc. (rating: "AA−," stable outlook);
16. Surety Policy No. OG-2023-MUN-4718 issued by Olympia Guaranty Insurance Corp.;
17. Final Official Statement dated September 5, 2023;
18. CUSIP Assignment Documentation (CUSIP Base: 148392); and
19. Various additional certificates, receipts, closing memoranda, and ancillary documents as listed in the Closing Transcript Table of Contents.
We strongly recommend that CSIA retain the Closing Transcript binders in a secure location that is readily accessible to the Chief Financial Officer's office and the General Counsel's office for the entire life of the Bonds. Given that the final maturity of the Series 2023A Bonds is October 1, 2053, and that certain record-retention obligations extend beyond that date (as discussed below), the Closing Transcript should be preserved through at least October 1, 2056. We further recommend that CSIA maintain electronic copies of all documents in the Closing Transcript as a backup to the physical binders.
2. Summary of Continuing Post-Closing Obligations
The transaction documents executed and delivered in connection with the issuance of the Series 2023A Bonds impose a number of significant ongoing obligations on CSIA throughout the term of the Bonds, which extends through the final maturity date of October 1, 2053 (or earlier, if the Bonds are redeemed or defeased prior to maturity). Compliance with these obligations is essential to protect the Authority's credit standing, to maintain the tax-exempt status of interest on the Bonds, and to fulfill the Authority's contractual commitments to bondholders, the Trustee, the rating agencies, and other parties to the transaction.
The following summary is provided for the convenience of the Authority and is not intended to be exhaustive or to serve as a substitute for the underlying transaction documents. CSIA should consult the Bond Indenture, the First Supplemental Indenture, the Revenue Pledge Agreement, the Continuing Disclosure Agreement, the Tax Regulatory Agreement, the Escrow Deposit Agreement, the DSRF Surety Bond Agreement, and the other transaction documents for the definitive terms of each obligation. In the event of any inconsistency between this summary and the terms of any transaction document, the transaction document shall control.
We strongly recommend that CSIA establish an internal compliance calendar incorporating each of the dates and deadlines described below, and that the Authority assign specific responsibility for each obligation to designated staff within the CFO's office, General Counsel's office, or other appropriate departments. Periodic internal reviews — at least annually — should be conducted to confirm that all obligations are being met on a timely basis.
2.1 Continuing Disclosure Obligations (SEC Rule 15c2-12)
The Continuing Disclosure Agreement dated October 24, 2023, between CSIA and PNTC, as Dissemination Agent, was executed in accordance with Rule 15c2-12 adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended ("Rule 15c2-12"). This agreement establishes the Authority's obligations with respect to the ongoing provision of financial and operating information to the municipal securities market.
Annual Filings. CSIA is required to file annual financial information and operating data with the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system ("EMMA," accessible at https://emma.msrb.org) within 210 days after the end of each fiscal year of the Authority. For a fiscal year ending June 30, the annual filing deadline would be approximately January 26 of the following calendar year; for a fiscal year ending December 31, the deadline would be approximately July 29 of the following calendar year. CSIA should confirm its fiscal year-end and calculate the applicable deadline accordingly.
The annual filing must include the following:
(a) Audited Financial Statements — Audited financial statements of the Authority, prepared in accordance with generally accepted accounting principles as applied to governmental entities, as audited by CSIA's independent auditor. The Authority's current independent auditor is Hargrove & Associates CPAs, PLLC, with engagement partner Victoria L. Fong, CPA. The audited financial statements should include the pledged revenue accounts, fund balances, and such other information as is required under the Continuing Disclosure Agreement.
(b) Updated Operating and Financial Data — Updated operating and financial data of the type included in the Final Official Statement, as specified in the Continuing Disclosure Agreement. At a minimum, this data should include: gross pledged revenues; net pledged revenues; operations and maintenance ("O&M") expenses; debt-service coverage ratios for all outstanding parity debt; a schedule of outstanding parity debt obligations; and a status report on the construction and operation of the Puget Sound Regional Advanced Water Treatment Facility.
If audited financial statements are not available within the 210-day filing deadline, CSIA must file unaudited financial statements by the deadline, with the audited financial statements to follow when they become available. The filing of unaudited statements does not relieve CSIA of its obligation to file audited statements as soon as practicable.
Material Event Notices. CSIA is required to file notice of the occurrence of any of the enumerated material events specified in the Continuing Disclosure Agreement with EMMA within ten (10) business days of the occurrence of such event. The material events requiring notice include, but are not limited to, the following:
(i) principal and interest payment delinquencies;
(ii) non-payment related defaults, if material;
(iii) unscheduled draws on the debt-service reserve fund reflecting financial difficulties, including any draws on the Olympia Guaranty Insurance Corp. Surety Policy No. OG-2023-MUN-4718;
(iv) unscheduled draws on credit enhancements reflecting financial difficulties;
(v) substitution of credit or liquidity providers, or their failure to perform;
(vi) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701–TEB), or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds;
(vii) modifications to the rights of bondholders, if material;
(viii) bond calls, if material, and tender offers;
(ix) defeasances;
(x) release, substitution, or sale of property securing repayment of the Bonds, if material;
(xi) rating changes by Lakeshore Ratings Group, Inc. or Pinnacle Credit Analytics, Inc., or the assignment of any rating by any other nationally recognized statistical rating organization;
(xii) bankruptcy, insolvency, receivership, or similar event of the Authority;
(xiii) the consummation of a merger, consolidation, or acquisition involving the Authority or the sale of all or substantially all of the assets of the Authority, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action, or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and
(xiv) appointment of a successor or additional trustee or the change of name of a trustee, if material.
The specific list of material events is set forth in Section 4 of the Continuing Disclosure Agreement. CSIA should review the complete list and ensure that internal reporting mechanisms are in place to identify the occurrence of any such event promptly.
Consequences of Non-Compliance. Failure to comply with the continuing disclosure obligations does not constitute an Event of Default under the Bond Indenture or the First Supplemental Indenture. However, non-compliance may be enforced by any bondholder or beneficial owner of the Bonds by an action for mandamus or specific performance in a court of competent jurisdiction. Moreover, non-compliance with continuing disclosure obligations may adversely affect CSIA's ability to access the municipal bond market in the future, as underwriters are generally required under Rule 15c2-12 to evaluate the Authority's compliance history before participating in future bond offerings. A record of non-compliance can result in increased borrowing costs, reduced investor interest, or an inability to complete future financings on favorable terms.
2.2 Tax Compliance Obligations (Tax Regulatory Agreement)
The Tax Regulatory Agreement and Certificate dated October 15, 2023 (the "Tax Regulatory Agreement"), executed by CSIA, sets forth the Authority's covenants and representations regarding the use of bond proceeds and bond-financed property necessary to maintain the tax-exempt status of the Series 2023A Bonds. Ongoing compliance with the Tax Regulatory Agreement is essential to preserve the exclusion of interest on the Bonds from gross income for federal income tax purposes under Section 103 of the Code. A determination that the Bonds are taxable could result in severe consequences for bondholders and for the Authority, including potential liability for damages and the inability to issue tax-exempt obligations in the future. The Authority's key tax compliance obligations are summarized below.
Arbitrage Rebate. Under Section 148(f) of the Code and Treasury Regulation § 1.148-3, CSIA is required to calculate the amount of "rebatable arbitrage" on all gross proceeds of the Bonds — including amounts held in the Project Fund, the Costs of Issuance Fund, the Capitalized Interest Fund, and any replacement proceeds — at least once every five (5) years from the closing date (October 24, 2023), and upon final maturity, earlier redemption, or prior retirement of all of the Bonds. Any rebatable arbitrage must be paid to the Internal Revenue Service ("IRS") within sixty (60) days after each computation date.
The first arbitrage rebate computation date is October 24, 2028. Subsequent computation dates fall on October 24, 2033; October 24, 2038; October 24, 2043; October 24, 2048; and October 24, 2053 (or the date of final maturity or earlier retirement, as applicable).
CSIA should engage a qualified rebate calculation agent with experience in municipal bond arbitrage compliance to perform the required calculations. Calderwood & Harkness is available to recommend firms with appropriate expertise upon the Authority's request. The engagement of a rebate calculation agent should be completed well in advance of the first computation date to allow adequate time for data collection and analysis.
We note that the Debt-Service Reserve Fund is currently satisfied by Surety Policy No. OG-2023-MUN-4718 issued by Olympia Guaranty Insurance Corp., rather than by cash or invested amounts. As a surety bond, the policy does not constitute an invested amount and generally does not generate investment earnings subject to arbitrage. However, if the surety policy is drawn upon or replaced with cash or investments, or if any other amounts are deposited in the Debt-Service Reserve Fund, such amounts must be monitored for arbitrage compliance, and the yield on investments in the Debt-Service Reserve Fund must not exceed the bond yield except during any applicable temporary period.
Yield Restriction. Construction proceeds deposited in the Project Fund (consisting of $215,490,000 in net bond proceeds and $17,400,000 in CSIA equity contributions) benefit from a three-year temporary period under Treasury Regulation § 1.148-2(e)(2), during which such proceeds may be invested at an unrestricted yield. The three-year temporary period expires on October 24, 2026. After that date, any unspent construction proceeds remaining in the Project Fund must be yield-restricted to the bond yield of 3.25% (or otherwise must satisfy an available exception, such as the minor portion exception for amounts not exceeding the lesser of $100,000 or 5% of the issue price).
Investment earnings on the Costs of Issuance Fund and the Capitalized Interest Fund (totaling $4,510,000 at closing) are subject to their own applicable temporary period and yield-restriction rules. Costs of issuance amounts generally must be spent within the applicable temporary period (typically six months from the closing date, i.e., by April 24, 2024), and capitalized interest amounts are generally subject to the temporary period applicable to the underlying proceeds from which they are derived.
CSIA should work with its investment advisor and rebate calculation agent to ensure that all investments of bond proceeds comply with yield-restriction requirements after the expiration of each applicable temporary period.
Private Activity Limitations. CSIA must monitor the use of the Puget Sound Regional Advanced Water Treatment Facility (the "Project"), located at 7250 Deschutes Parkway, Tumwater, Thurston County, Washington 98501, and any other bond-financed property, to ensure ongoing compliance with the private business use test under Section 141 of the Code and the related private payment and private loan tests.
Under Section 141(b) of the Code, the Bonds will be treated as private activity bonds if:
(a) more than 10% of the proceeds of the Bonds are to be used for any private business use (the "private business use test"), and
(b) the payment of the principal of or interest on more than 10% of the proceeds of the Bonds is (under the terms of the Bonds or any underlying arrangement) directly or indirectly (i) secured by any interest in property used or to be used for a private business use, or (ii) to be derived from payments (whether or not to the Authority) in respect of property, or borrowed money, used or to be used for a private business use (the "private payment or security test").
Additionally, the Bonds will be treated as private activity bonds if more than the lesser of 5% or $15,000,000 of the proceeds of the Bonds are used (directly or indirectly) to make or finance loans to persons other than governmental units (the "private loan financing test").
Any management contracts, service agreements, output contracts, research agreements, or other arrangements involving nongovernmental persons or entities that relate to the use of bond-financed property must be reviewed for compliance with IRS Revenue Procedure 2017-13, as modified by Revenue Procedure 2021-29 (or any successor guidance). Management contracts and similar arrangements that do not satisfy the safe harbor conditions set forth in Revenue Procedure 2017-13 may give rise to private business use that could jeopardize the tax-exempt status of the Bonds.
Particular care should be taken with respect to the Wholesale Water Treatment Services Agreements that CSIA has entered into with the fourteen (14) participating municipal water districts. While these districts are governmental entities and their use of the Project generally does not give rise to private business use concerns, any subcontracting, privatization, or outsourcing arrangements entered into by the participating districts or by CSIA with respect to the operation or management of the Project should be reviewed by bond counsel (Pryor Crestfield LLP and Calderwood & Harkness LLP) before execution to ensure that such arrangements do not cause the Bonds to become private activity bonds.
Record Retention. All records relating to the tax-exempt status of the Bonds must be retained by CSIA for a period extending until at least three (3) years after the date on which the Bonds are fully retired. Given that the final maturity of the Bonds is October 1, 2053, all tax-related records should be retained through at least October 1, 2056. Records that must be retained include, without limitation:
• allocation of bond proceeds to expenditures;
• investment records for all bond proceeds and related funds;
• records of the use of bond-financed property (including any changes in use);
• arbitrage rebate calculations and related work papers;
• copies of all IRS filings, including Forms 8038-G and any rebate payments;
• management contracts, service agreements, and other arrangements involving nongovernmental persons; and
• any correspondence with the IRS relating to the Bonds.
Change-in-Use Reporting. CSIA must promptly notify bond counsel (Pryor Crestfield LLP and Calderwood & Harkness LLP) of any deliberate action that would cause the Bonds to become private activity bonds or that would otherwise result in a change in the use of bond-financed property from the use described in the Tax Regulatory Agreement. If a change in use occurs, CSIA may be required to take remedial action under Treasury Regulation § 1.141-12 to prevent the Bonds from being treated as private activity bonds. Remedial actions may include, among other things, defeasance of a portion of the Bonds, alternative use of the disposition proceeds, or other corrective measures. Prompt notification is critical to allow bond counsel to advise the Authority on the availability and implementation of remedial action before the change in use becomes final.
2.3 Financial Covenant Compliance (Rate Covenant and Debt-Service Coverage Ratio)
The Bond Indenture and the Revenue Pledge Agreement contain financial covenants that are central to the security for the Series 2023A Bonds and that require ongoing attention by the Authority.
Rate Covenant. CSIA has covenanted to set, charge, and collect water-treatment user fees, connection charges, and other rates and charges at levels sufficient to produce Net Pledged Revenues (gross pledged revenues less O&M expenses) in each fiscal year equal to at least 1.40 times (1.40x) annual aggregate parity debt service on all outstanding parity obligations of the Authority. This is a fundamental credit covenant and is closely monitored by bondholders, the rating agencies, and the municipal market.
At the time of closing, the Authority's financial position with respect to the rate covenant was as follows:
• FY 2022 Gross Pledged Revenues: $489,300,000
• FY 2022 O&M Expenses: $76,700,000
• FY 2022 Net Pledged Revenues: $412,600,000
• Total Annual Parity Debt Service (post-issuance, including Series 2023A): $278,400,000
• Total Outstanding Parity Debt (post-issuance): $3,340,000,000
• Debt-Service Coverage Ratio ("DSCR"): 1.48x
Projected FY 2024 Net Pledged Revenues are estimated at $431,800,000. CSIA should monitor projected DSCR on at least an annual basis (and more frequently as circumstances warrant) and should adjust rates and charges as necessary to maintain compliance with the 1.40x rate covenant at all times.
Additional Bonds Test. Before issuing any additional parity bonds or other parity obligations under the Bond Indenture, CSIA must demonstrate that Net Pledged Revenues for the most recently completed fiscal year (or, at CSIA's election, estimated Net Pledged Revenues for the first full fiscal year following the date of issuance of the new obligations or the completion of the project to be financed) equal at least 1.40 times (1.40x) the maximum annual parity debt service on all outstanding parity obligations, calculated to include the proposed additional bonds or obligations. The additional bonds test is set forth in detail in Article VII of the Bond Indenture and should be reviewed carefully in connection with any future financing.
Annual Certification. Although the Bond Indenture does not expressly require an annual DSCR certification, we recommend that CSIA prepare an internal annual certification of DSCR compliance as a matter of best practice. The CFO's Certificate executed by Denise R. Whitford and delivered at closing may serve as a useful template for this purpose. The annual certification should be prepared promptly after audited financial statements become available and should be shared with the General Counsel's office, the Executive Director, and the Board of Commissioners.
Remedies for Covenant Breach. If Net Pledged Revenues for any fiscal year fall below the 1.40x threshold required by the rate covenant, the Bond Indenture requires CSIA to engage an independent consultant (which may be a rate consultant or financial advisor experienced in water utility rate-setting) within thirty (30) days of the determination of non-compliance. The consultant must recommend rate adjustments or other measures to restore compliance. The Authority is required to consider and, to the extent feasible, implement such recommendations. Failure to engage the consultant or to take reasonable steps to implement the consultant's recommendations may constitute an Event of Default under the Bond Indenture, which could trigger acceleration of the Bonds and other remedies available to the Trustee and bondholders.
2.4 Debt-Service Reserve Fund / Surety Bond Obligations
The Series 2023A Bonds are secured in part by a Debt-Service Reserve Fund, which is satisfied by Surety Policy No. OG-2023-MUN-4718 issued by Olympia Guaranty Insurance Corp. (the "Surety Policy") in the amount of $11,610,000 (the "Reserve Fund Requirement"). The Authority's obligations with respect to the Debt-Service Reserve Fund and the Surety Policy are governed by the DSRF Surety Bond Agreement dated October 24, 2023, among CSIA, PNTC, and Olympia Guaranty Insurance Corp.
Annual Premium Payments. CSIA is required to pay an annual surety premium in the amount of $23,220 (representing 0.20% of the surety amount of $11,610,000) to Olympia Guaranty Insurance Corp. The annual premium payment is due on each anniversary of the closing date — that is, on October 24 of each year, commencing October 24, 2024. Failure to pay the annual premium when due may result in cancellation of the Surety Policy by Olympia Guaranty Insurance Corp., which would require CSIA to fund the Debt-Service Reserve Fund in cash to the Reserve Fund Requirement of $11,610,000 from available revenues or other legally available funds. Timely payment of the annual surety premium should be incorporated into the Authority's internal compliance calendar.
Replenishment Obligations. If any draw is made on Surety Policy No. OG-2023-MUN-4718 to cover a deficiency in debt-service payments, CSIA is required to replenish the drawn amount within twelve (12) months from available Net Pledged Revenues. The replenishment obligation is subordinate to the payment of current debt service and O&M expenses but is senior to any subordinate lien obligations or other discretionary expenditures. Any draw on the Surety Policy must also be reported to EMMA as a material event notice under the Continuing Disclosure Agreement, as described in Section 2.1 above.
2.5 Debt-Service Payment Dates
Interest on the Series 2023A Bonds is payable semi-annually on April 1 and October 1 of each year, commencing April 1, 2024. Principal on the Bonds is payable on October 1 of each year in accordance with the amortization schedule set forth in the First Supplemental Indenture, commencing on the first principal payment date specified therein.
CSIA must ensure the timely transfer of debt-service funds to PNTC, as Paying Agent under the Bond Indenture, in advance of each payment date in accordance with the flow-of-funds provisions set forth in Article V of the Bond Indenture. We recommend that CSIA establish wire-transfer instructions with PNTC and confirm the required lead time for transfers (typically three to five business days prior to each payment date) to avoid any payment delays.
The Bonds are issued in book-entry-only form through The Depository Trust Company ("DTC"), with Cede & Co. as the registered owner. PNTC's DTC Participant Number is 2741. All payments of principal and interest will flow through DTC to the beneficial owners of the Bonds through DTC's standard procedures. The Authority's payment obligation is to PNTC, as Paying Agent, and PNTC in turn will remit funds through DTC.
The Series 2023A Bonds are structured with a level-debt-service amortization, resulting in approximate annual debt service of $11,610,000 (principal and interest combined) over the 30-year amortization period through the final maturity on October 1, 2053.
2.6 Optional Redemption
The Series 2023A Bonds are subject to optional redemption, at the election of CSIA, on or after October 1, 2033, at a redemption price equal to 100% of the principal amount of the Bonds to be redeemed, plus accrued interest thereon to the redemption date, without premium. The Bonds are not subject to optional redemption prior to October 1, 2033 (reflecting a ten-year call protection period for the benefit of bondholders).
If CSIA elects to exercise the optional redemption right on or after October 1, 2033, the Authority must provide notice to PNTC, as Trustee, in accordance with the redemption notice provisions of the Bond Indenture. The Bond Indenture generally requires that the Trustee give not less than thirty (30) days' and not more than sixty (60) days' prior written notice to the registered owners of the Bonds to be redeemed (which, in the case of book-entry bonds, will be provided through DTC). CSIA should provide its direction to the Trustee sufficiently in advance of the desired redemption date to allow the Trustee to meet these notice requirements.
Any optional redemption of the Bonds is a reportable event under the Continuing Disclosure Agreement, and CSIA must file a material event notice with EMMA in connection with any such redemption, as described in Section 2.1 above.
2.7 Project Fund Disbursements / Escrow Deposit Agreement
The Escrow Deposit Agreement dated October 24, 2023, between CSIA and PNTC, as Escrow Agent, governs the disbursement of proceeds deposited in the Project Fund for the payment of costs of the Puget Sound Regional Advanced Water Treatment Facility.
Net bond proceeds of $215,490,000, together with CSIA's equity contribution of $17,400,000, were deposited in the Project Fund on the closing date. The total estimated project cost is $237,400,000. Disbursements from the Project Fund are made pursuant to requisition certificates submitted by CSIA to PNTC, which must comply with the requisition requirements set forth in the Escrow Deposit Agreement. Requisition certificates must include appropriate supporting documentation and certifications.
The primary recipient of Project Fund disbursements will be Northtide Environmental Engineering, Inc. under Guaranteed Maximum Price ("GMP") Contract No. CSIA-DB-2023-001, which has a GMP of $193,500,000 for the design and construction of the Project. Additional disbursements will be made for other Project costs, including engineering, environmental, permitting, inspection, legal, and administrative costs.
CSIA should maintain accurate and detailed records of all Project Fund requisitions and expenditures. These records are critical for tax compliance purposes, as they document the allocation of bond proceeds to capital expenditures and demonstrate that bond proceeds have been used for their intended purpose. As noted in Section 2.2 above, these records must be retained through at least October 1, 2056.
Additionally, capitalized interest in the amount of $4,510,000 was deposited in the Capitalized Interest Fund at closing. These funds will be disbursed by PNTC to cover initial debt-service payments during the construction period, reducing the Authority's near-term cash-flow requirements.
2.8 Insurance and Rating Maintenance
CSIA should maintain ongoing communication with Lakeshore Ratings Group, Inc. (current rating: "AA," stable outlook) and Pinnacle Credit Analytics, Inc. (current rating: "AA−," stable outlook) regarding annual surveillance reviews. The rating agencies will typically request audited financial statements, operating data, and other information on an annual basis in connection with their surveillance activities. Prompt and complete responses to rating agency inquiries are important to maintaining the Authority's ratings.
Any change in the ratings assigned to the Bonds (whether an upgrade, downgrade, or change in outlook, or the placement of the ratings on credit watch) must be reported as a material event notice under the Continuing Disclosure Agreement and filed with EMMA within ten (10) business days of the occurrence.
In addition, CSIA should maintain required insurance coverage on the Project as specified in the Bond Indenture, the Revenue Pledge Agreement, and GMP Contract No. CSIA-DB-2023-001 with Northtide Environmental Engineering, Inc. During the construction period, this includes builder's risk insurance, general liability insurance, and such other coverages as are required under the design-build contract. After completion of construction, the Authority must maintain property insurance, general liability insurance, and such other coverages as are required under the Bond Indenture.
2.9 Annual Audit
CSIA's independent auditor, Hargrove & Associates CPAs, PLLC (engagement partner Victoria L. Fong, CPA; 520 Pike Street, Suite 2200, Seattle, WA 98101), should be engaged annually to audit the Authority's financial statements, including the pledged revenue accounts, the debt-service funds, and such other accounts and funds as are required under the Bond Indenture and applicable governmental auditing standards.
Audited financial statements are a required component of the Authority's annual continuing disclosure filings on EMMA (as described in Section 2.1 above, due within 210 days of fiscal year-end) and are an essential tool for monitoring compliance with the rate covenant and debt-service coverage ratio requirements discussed in Section 2.3 above. The Authority should coordinate with its auditor to ensure that the annual audit is completed on a timeline that permits timely filing on EMMA and timely internal review of financial covenant compliance.
3. Compliance Calendar Summary
For the convenience of the Authority, the following table summarizes the key recurring compliance dates and obligations arising from the Series 2023A Bonds transaction documents. CSIA should incorporate these dates into its internal compliance calendar and assign responsibility for each item to designated staff.
4. Key Contact Information
The following table provides contact information for the key parties involved in the ongoing administration and compliance matters relating to the Series 2023A Bonds. CSIA should maintain current contact information for each party and should promptly notify Calderwood & Harkness and the Trustee of any changes in the Authority's designated contacts.
5. Availability for Further Assistance
Calderwood & Harkness LLP remains available to assist the Authority with any and all matters arising from or relating to the Series 2023A financing, including, without limitation:
• ongoing compliance questions relating to the Bond Indenture, the Revenue Pledge Agreement, the Continuing Disclosure Agreement, the Tax Regulatory Agreement, or any other transaction document;
• interpretation of the terms and provisions of the transaction documents;
• engagement of an arbitrage rebate calculation agent and oversight of the rebate calculation process;
• planning and execution of future additional parity bond issuances or other financings under the Bond Indenture;
• change-in-use analysis and remedial action planning under Treasury Regulation § 1.141-12;
• review of management contracts, service agreements, or other arrangements for private activity compliance;
• optional redemption planning and execution;
• defeasance analysis and structuring;
• communication with the rating agencies, the Trustee, and other transaction parties; and
• any other matters arising from or relating to the Series 2023A Bonds or the Authority's capital program.
Please do not hesitate to contact the undersigned or Michelle Tsao at (206) 553-4233 or mtsao@calderwoodharkness.com with any questions regarding the matters discussed in this letter or any other aspect of the Series 2023A financing. We look forward to continuing our service to the Authority.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
George Trujillo Partner, Energy & Infrastructure Finance Telephone: (206) 553-4217
Email: gtrujillo@calderwoodharkness.com
cc:
Commissioner Lorraine Chu, Board Chair, Cascadia State Infrastructure Authority Patricia Dunmore, Partner, Calderwood & Harkness LLP Michelle Tsao, Associate, Calderwood & Harkness LLP Margaret S. Yoon, Partner, Pryor Crestfield LLP Kenneth W. Barclay, Principal, Clearfield Municipal Advisors LLC
Enclosures:
1. Closing Transcript Binders (3 bound copies)
2. Closing Transcript Table of Contents
Obligation | Frequency / Date | Key Details
Semi-Annual Debt-Service Payments | April 1 and October 1 each year | First payment: April 1, 2024. Transfer funds to PNTC as Paying Agent in advance of each payment date. Approximate annual debt service: $11,610,000.
Annual Continuing Disclosure Filing (EMMA) | Within 210 days of fiscal year-end | File audited financial statements and updated operating/financial data on EMMA.
Annual Surety Premium Payment | October 24 each year | Payment of $23,220 to Olympia Guaranty Insurance Corp. First payment due: October 24, 2024.
Material Event Notices (EMMA) | Within 10 business days of occurrence | File upon occurrence of any enumerated material event under the Continuing Disclosure Agreement.
Five-Year Arbitrage Rebate Computation | October 24, 2028; October 24, 2033; October 24, 2038; October 24, 2043; October 24, 2048; October 24, 2053 | Calculate rebatable arbitrage on all gross proceeds; pay any rebate to IRS within 60 days of each computation date.
Yield-Restriction Compliance Review | October 24, 2026 | End of three-year temporary period for construction proceeds. Unspent proceeds must be yield-restricted to 3.25% bond yield thereafter.
Rate Covenant / DSCR Annual Review | Annually, upon availability of audited financials | Confirm Net Pledged Revenues ≥ 1.40x annual aggregate parity debt service.
Rating Agency Surveillance | Annually (ongoing) | Provide audited financials and requested information to Lakeshore Ratings Group, Inc. and Pinnacle Credit Analytics, Inc.
Optional Redemption Eligibility | On or after October 1, 2033 | Bonds callable at par (100%) plus accrued interest. 30 days' prior notice to Trustee required.
Final Maturity of Series 2023A Bonds | October 1, 2053 | Final principal payment date.
Record Retention Period Expiration | At least October 1, 2056 | Retain all tax-related and transaction records through at least 3 years after final retirement of the Bonds.
Role | Entity / Individual | Address | Telephone / Email
Trustee / Paying Agent / Registrar / Escrow Agent | Pacific Northwest Trust Company, N.A. — Alan M. Greer, Vice President, Corporate Trust Services | 1201 Third Avenue, Suite 1600, Seattle, WA 98101 | (206) 447-6300 / agreer@pntcbank.com
Surety Provider | Olympia Guaranty Insurance Corp. — Rachel P. Dominguez, Senior Vice President | 125 Broad Street, 14th Floor, New York, NY 10004 | (212) 918-4500 / rdominguez@olympiaguaranty.com
Municipal Advisor | Clearfield Municipal Advisors LLC — Kenneth W. Barclay, Principal | 805 SW Broadway, Suite 1400, Portland, OR 97205 | (503) 228-7700 / kbarclay@clearfieldadvisors.com
Co-Bond Counsel | Pryor Crestfield LLP — Margaret S. Yoon, Partner | 999 Third Avenue, Suite 4800, Seattle, WA 98104 | (206) 382-9200 / myoon@pryorcrestfield.com
Independent Auditor | Hargrove & Associates CPAs, PLLC — Victoria L. Fong, CPA | 520 Pike Street, Suite 2200, Seattle, WA 98101 | (206) 621-8800 / vfong@hargrovecpa.com
Design-Build Contractor | Northtide Environmental Engineering, Inc. — Garrett L. Henriksen, CEO | 2400 Eastlake Avenue East, Seattle, WA 98102 | (206) 324-5500 / ghenriksen@northtideeng.com
Issuer's Counsel | Calderwood & Harkness LLP — George Trujillo, Partner | 1420 Fifth Avenue, Suite 3600, Seattle, WA 98101 | (206) 553-4217 / gtrujillo@calderwoodharkness.com

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