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PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

MEMORANDUM

TO: George Trujillo, Partner, Calderwood & Harkness LLP

FROM: Brett Callahan, Associate, and Michelle Tsao, Lead Associate, Calderwood & Harkness LLP

DATE: May 15, 2023

RE: Due Diligence Memorandum — Authority of Cascadia State Infrastructure Authority to Issue $220,000,000 Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt); Analysis of Enabling Legislation (Chapter 43.160A RCW)

MATTER NO.: 1030-00001

CLIENT: Cascadia State Infrastructure Authority ("CSIA")

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I. Executive Summary

The purpose of this memorandum is to confirm the legal authority of the Cascadia State Infrastructure Authority ("CSIA") to issue the proposed $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"), to pledge net water-treatment revenues derived from its regional water-treatment system as security for the Bonds, and to enter into the Bond Indenture, First Supplemental Indenture, Revenue Pledge Agreement, Bond Purchase Agreement, Continuing Disclosure Agreement, Tax Regulatory Agreement and Certificate, Escrow Deposit Agreement, Debt-Service Reserve Fund Surety Bond Agreement, and all related transaction documents (collectively, the "Transaction Documents") in connection with the financing of the Puget Sound Regional Advanced Water Treatment Facility (the "PSRAWTF" or the "Project").

Calderwood & Harkness LLP serves as issuer's counsel to CSIA in connection with the Series 2023A financing. Pryor Crestfield LLP, a Washington-based bond counsel firm, serves as co-bond counsel and will provide the approving legal opinion as to the validity and enforceability of the Bonds and the separate tax opinion as to the exclusion of interest on the Bonds from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"). This memorandum has been prepared to support our firm's rendering of the Issuer's Counsel Opinion, the Enforceability Opinion relating to the Revenue Pledge Agreement, and the 10b-5 negative assurance letter to be delivered to the underwriters at closing, and to serve as the foundational authority analysis upon which those opinions and the co-bond counsel opinion may rely.

In preparing this memorandum, we have reviewed the text of Chapter 43.160A of the Revised Code of Washington ("RCW"), the legislative history and accompanying fiscal notes for the original enactment and all subsequent amendments thereto, the organizational and governance documents of CSIA, Board Resolution No. 2023-014 adopted on May 9, 2023, the certified minutes of the Board meeting at which such resolution was adopted, the certificate of the Secretary of the Board confirming adoption and the presence of a quorum, the notice of meeting published in compliance with Washington's Open Public Meetings Act (Chapter 42.30 RCW), the audited financial statements of CSIA for fiscal year 2022 as audited by Hargrove & Associates CPAs, PLLC, and drafts of the principal Transaction Documents. We have also conducted a review of applicable Washington case law, attorney general opinions, and secondary authorities bearing on the powers of governmental instrumentalities created by the Washington Legislature.

Conclusion. Based upon the analysis set forth in this memorandum, it is our conclusion that CSIA is duly created and validly existing as a Washington State governmental instrumentality and public body corporate under Chapter 43.160A RCW, possesses full statutory authority to issue the Series 2023A Bonds, to pledge net water-treatment revenues derived from its water-treatment system as security for the Bonds on a parity basis with existing outstanding revenue bonds, and to execute and deliver all related Transaction Documents, subject to the conditions and procedures described herein, all of which have been or are in the process of being satisfied prior to the anticipated closing date of October 24, 2023.

II. Background and Transaction Overview

A. Description of CSIA

The Cascadia State Infrastructure Authority is a Washington State governmental instrumentality and public body corporate, created and existing pursuant to Chapter 43.160A RCW (the "Enabling Act" or the "Act"). CSIA was established by the Washington Legislature to facilitate the financing, construction, acquisition, improvement, operation, and maintenance of regional water-treatment and wastewater-treatment infrastructure serving multiple municipal jurisdictions across the Puget Sound region and other designated areas of the State of Washington. CSIA's principal offices are located at 1100 Capitol Way South, Suite 400, Olympia, Washington 98501. Its employer identification number is 91-2058374.

CSIA is governed by a Board of Commissioners (the "Board"), the composition and appointment procedures of which are specified in the Enabling Act. The current Board Chair is Commissioner Lorraine Chu. Day-to-day management and administrative functions of CSIA are carried out by an Executive Director and senior staff appointed by the Board. The current Executive Director is Harold K. Nakamura, who serves as the chief executive officer of CSIA and is authorized, by statute and Board delegation, to execute documents and take actions on behalf of CSIA as described more fully in Section IV below. The Chief Financial Officer is Denise R. Whitford, and CSIA's General Counsel is Martin J. Espinoza.

CSIA's annual operating budget for fiscal year 2023 is approximately $1.48 billion, reflecting the substantial scale of its regional water-treatment operations and capital programs. As of the date of this memorandum and prior to the issuance of the Series 2023A Bonds, CSIA has existing outstanding indebtedness in the aggregate principal amount of approximately $3.12 billion, consisting entirely of revenue bonds payable from pledged water-treatment revenues.

CSIA's pledged revenue base consists of water-treatment user fees and connection charges collected from fourteen (14) participating municipal water and sewer districts located throughout the Puget Sound region, each of which is party to a long-term Wholesale Water Treatment Services Agreement with CSIA. For fiscal year 2022, CSIA reported net pledged revenues of approximately $412.6 million, as reflected in its audited financial statements prepared by Hargrove & Associates CPAs, PLLC.

B. Description of the Proposed Financing

The proposed financing consists of the issuance by CSIA of the Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt), in an aggregate principal amount of $220,000,000. The principal features of the Series 2023A Bonds are summarized below:

Interest on the Series 2023A Bonds will be payable semiannually on April 1 and October 1 of each year, commencing April 1, 2024. The Bonds will be subject to optional redemption at the option of CSIA, in whole or in part, on any date on or after October 1, 2033, at a redemption price equal to 100% of the principal amount thereof, plus accrued interest to the date of redemption.

The Series 2023A Bonds will be secured by a pledge of net water-treatment revenues on a parity basis with all existing outstanding revenue bonds of CSIA, as described more fully in Section V of this memorandum. The Bonds will not constitute a general obligation, debt, or liability of the State of Washington or any political subdivision thereof, and neither the full faith and credit nor the taxing power of the State or any political subdivision thereof will be pledged to the payment of the Bonds.

C. Description of the Project

The proceeds of the Series 2023A Bonds, together with a CSIA equity contribution of $17,400,000 from existing capital reserves, will be applied to finance the construction of the Puget Sound Regional Advanced Water Treatment Facility, a major regional water-treatment infrastructure project. The key features of the Project are as follows:

Project Name: Puget Sound Regional Advanced Water Treatment Facility.

Location: The Project will be constructed on approximately eighteen (18) acres of CSIA-owned land located at 7250 Deschutes Parkway, Tumwater, Thurston County, Washington 98501, adjacent to CSIA's existing Deschutes River Tertiary Treatment Plant.

Scope of Construction: The Project scope includes the construction of a 60-million-gallon-per-day ("MGD") advanced membrane-filtration and UV-disinfection water-treatment facility, including influent and effluent pipelines, a 5-million-gallon equalization basin, biosolids handling improvements, and upgrades to CSIA's supervisory control and data acquisition ("SCADA") system. The facility is designed to provide advanced tertiary and quaternary treatment capacity sufficient to meet current and projected regional water-treatment demands through the 30-year term of the Series 2023A Bonds.

Capacity: The design capacity of the PSRAWTF is 60 MGD, with an initial operating capacity of 42 MGD. CSIA anticipates that the facility will reach design capacity within approximately twelve (12) to fifteen (15) years of initial operations, based on projected population growth and increased demand from participating districts.

Participating Districts: The fourteen (14) Puget Sound-region municipal water and sewer districts that currently participate in CSIA's regional water-treatment system will be served by the PSRAWTF. Each participating district is party to a long-term Wholesale Water Treatment Services Agreement with CSIA containing take-or-pay or equivalent minimum-payment obligations, providing a stable and predictable revenue base for debt-service coverage.

Design-Build Contractor: Northtide Environmental Engineering, Inc. (CEO: Garrett L. Henriksen) has been engaged by CSIA as the design-build contractor for the Project pursuant to GMP Contract No. CSIA-DB-2023-001, executed on March 10, 2023. The contract provides for a guaranteed maximum price of $193,500,000, subject to owner-directed change orders and customary allowances. Northtide Environmental Engineering is a nationally recognized environmental engineering and construction firm with extensive experience in the design and construction of advanced water-treatment facilities in the Pacific Northwest.

Estimated Total Project Cost: The estimated total Project cost is $237,400,000, to be funded from the following sources:

Environmental Permits: The Project has received a Determination of Non-Significance ("DNS") under the Washington State Environmental Policy Act ("SEPA"), issued on September 12, 2022. The DNS was not appealed, and the appeal period has expired. In addition, an NPDES Permit modification (Permit No. WA-004837-2) was approved by the Washington State Department of Ecology on January 6, 2023, to cover the expanded treatment capacity associated with the PSRAWTF.

D. Key Transaction Parties

The following is a summary of the key parties involved in the Series 2023A financing:

Issuer / Borrower: Cascadia State Infrastructure Authority ("CSIA"), a Washington State governmental instrumentality and public body corporate created under Chapter 43.160A RCW.

Senior Managing Underwriter: Meridian Capital Partners LLC. Jonathan D. Kessler, Managing Director, is the lead banker responsible for the transaction.

Co-Managing Underwriter: Dralvecen Fenn & Co., Inc. Sarah E. Mulvaney, Director, is the co-manager representative.

Bond Trustee / Paying Agent / Registrar / Escrow Agent: Pacific Northwest Trust Company, N.A. ("PNTC"), acting through its Corporate Trust Services division. Alan M. Greer, Vice President, Corporate Trust Services, is the primary trust officer assigned to the engagement.

Surety Bond Insurer: Olympia Guaranty Insurance Corp. Rachel P. Dominguez, Senior Vice President, is the primary underwriting contact. Olympia Guaranty will issue the debt-service reserve fund surety bond (Policy No. OG-2023-MUN-4718) in the amount of $11,610,000.

Municipal Advisor to CSIA: Clearfield Municipal Advisors LLC. Kenneth W. Barclay, Principal, is the lead municipal advisor. Clearfield has provided independent financial advisory services to CSIA in connection with the structuring and pricing of the Series 2023A Bonds.

Independent Auditor: Hargrove & Associates CPAs, PLLC. Victoria L. Fong, CPA, is the engagement partner. Hargrove & Associates audited CSIA's financial statements for fiscal year 2022 in accordance with generally accepted auditing standards.

Issuer's Counsel: Calderwood & Harkness LLP. George Trujillo, Partner, is the engagement partner. Brett Callahan, Associate, and Michelle Tsao, Lead Associate, are the attorneys primarily responsible for the preparation of this memorandum and the day-to-day transaction management.

Co-Bond Counsel: Pryor Crestfield LLP. Margaret S. Yoon, Partner, and Elliot R. Stanton, Associate, are the attorneys responsible for the preparation of the approving legal opinion, the tax opinion, and the Tax Regulatory Agreement and Certificate.

Underwriters' Counsel: Alderman & Locke LLP. Daniel F. Obermeyer, Partner, and Christina M. Vega, Associate, are representing the underwriting syndicate.

Rating Agencies: The Series 2023A Bonds have received the following credit ratings:

These investment-grade ratings reflect the strong credit profile of CSIA's pledged revenue base, diversified customer base, and robust financial performance metrics, including historical and projected debt-service coverage ratios well in excess of covenant requirements.

III. Enabling Legislation — Chapter 43.160A RCW

A. Creation and Legal Status of CSIA

Chapter 43.160A RCW (the "Enabling Act" or the "Act") establishes the Cascadia State Infrastructure Authority as a public body corporate and governmental instrumentality of the State of Washington. The Act was enacted by the Washington Legislature for the express purpose of creating a specialized public entity with the authority, capacity, and resources necessary to finance, construct, acquire, improve, operate, and maintain regional water-treatment and wastewater-treatment infrastructure serving multiple municipal jurisdictions across designated regions of the State.

Under the Enabling Act, CSIA is a governmental instrumentality of the State but is not a state agency for purposes of the state budget process. This distinction is significant: while CSIA is subject to legislative oversight, audit by the State Auditor, and certain reporting requirements applicable to governmental entities, it operates with the administrative independence and financial flexibility necessary to carry out its statutory mission of providing regional water-treatment services on a self-sustaining, revenue-supported basis. CSIA's obligations, including revenue bonds issued under the Act, are not general obligations of the State of Washington, and the State has no legal liability for the payment of CSIA's bonds or other indebtedness.

As a public body corporate created by special act of the Legislature, CSIA possesses the powers expressly granted to it by Chapter 43.160A RCW, together with those powers reasonably implied as necessary or convenient to carry out its statutory purposes. This is consistent with the well-established principle of Washington law that public bodies corporate and governmental instrumentalities created by statute possess only those powers expressly or impliedly granted by their enabling legislation, but that such grants of power are to be liberally construed to effectuate the legislative purpose. The Washington Supreme Court has repeatedly recognized that statutory grants of bonding and revenue-pledge authority to governmental instrumentalities are to be given a practical and workable interpretation that facilitates the legislative objective of enabling public infrastructure finance.

CSIA's status as a governmental instrumentality of the State carries important legal consequences relevant to the Series 2023A financing. Among other things, CSIA's obligations issued under the Act are not subject to the constitutional debt limitations of Article VIII of the Washington State Constitution, because they are payable solely from pledged revenues and do not constitute a debt or liability of the State or any political subdivision thereof. In addition, CSIA's bonds and the interest thereon may be eligible for exemption from state and local taxation under applicable provisions of Washington law.

B. Governance Structure

Chapter 43.160A RCW establishes the governance framework for CSIA, providing for a Board of Commissioners (the "Board") as the governing body of the authority. The Board consists of appointed and ex officio members as specified in the Act, with appointments made by the Governor of the State of Washington, subject to confirmation by the Washington State Senate, and with ex officio members serving by virtue of their positions in state or local government. The composition of the Board is designed to provide representation from the geographic areas served by CSIA's regional water-treatment system and to ensure accountability to the public interest.

The current Board Chair is Commissioner Lorraine Chu, who presides over meetings of the Board and serves as the chief elected officer of the authority. The Board exercises the corporate powers of CSIA, including the authority to adopt resolutions authorizing the issuance of revenue bonds, to approve annual operating and capital budgets, to fix and revise rates and charges for water-treatment services, to appoint and set the compensation of the Executive Director and other senior staff, and to delegate authority to the Executive Director and other officers as the Board deems necessary and appropriate.

The Executive Director, currently Harold K. Nakamura, serves as the chief executive officer of CSIA and is responsible for the day-to-day management and operations of the authority. The Executive Director is authorized to execute documents and take actions on behalf of CSIA as delegated by the Board by resolution. The Chief Financial Officer, currently Denise R. Whitford, is responsible for CSIA's financial management and reporting functions. The General Counsel, currently Martin J. Espinoza, serves as CSIA's chief legal officer and provides legal advice to the Board and senior management.

The Board's authority to delegate to the Executive Director the power to determine final terms of revenue bonds and to execute transaction documents is expressly contemplated by the Enabling Act and is consistent with standard practice for governmental instrumentalities engaged in complex, multi-party infrastructure financings. As discussed in Section IV below, Resolution No. 2023-014 provides an appropriately bounded delegation of authority to Executive Director Nakamura in connection with the Series 2023A financing.

C. Express Statutory Powers Relevant to the Series 2023A Financing

The Enabling Act confers upon CSIA a comprehensive set of statutory powers relevant to the issuance of the Series 2023A Bonds and the execution of the Transaction Documents. We address each relevant power in turn.

Power to Issue Revenue Bonds. Chapter 43.160A RCW expressly authorizes CSIA to issue revenue bonds for the purpose of financing the acquisition, construction, improvement, and equipping of water-treatment and wastewater-treatment facilities and related infrastructure within CSIA's service area. The Act provides that bonds may be issued in one or more series, bearing such dates, maturing at such times, bearing interest at such rates (whether fixed or variable), and containing such other terms, conditions, and redemption provisions as CSIA's Board may determine by resolution. The statute authorizes the issuance of bonds in such principal amounts as the Board may determine to be necessary to provide sufficient funds for the payment of all costs of the project to be financed, all costs of issuance, any required reserves, and any other amounts necessary or convenient in connection with the financing. The Enabling Act does not restrict CSIA to public, competitive sales of bonds; rather, bonds may be sold at public sale or negotiated sale, at the discretion of the Board. The proposed negotiated sale of the Series 2023A Bonds to Meridian Capital Partners LLC, as senior managing underwriter, and Dralvecen Fenn & Co., Inc., as co-managing underwriter, is therefore within CSIA's statutory authority.

Power to Pledge Revenues. The Enabling Act authorizes CSIA to pledge the net revenues derived from the operation of its water-treatment system, including user fees, connection charges, and investment earnings on pledged funds, as security for the payment of revenue bonds issued under the Act. The statute provides that such pledge creates a lien on the pledged revenues that is valid and enforceable from the time the bonds are issued and delivered to the initial purchasers, without the need for physical delivery of pledged funds, recording of any instrument, filing of any financing statement under the Washington Uniform Commercial Code, or any other act of perfection. This self-executing perfection mechanism is a critical feature of the Enabling Act, providing bondholders with a statutory lien on pledged revenues that is senior to any claim that might otherwise arise under the UCC or other creditor-rights laws.

Power to Enter into Agreements. Chapter 43.160A RCW authorizes CSIA to enter into indentures, trust agreements, revenue pledge agreements, bond purchase agreements, continuing disclosure agreements, escrow agreements, surety agreements, and any other contracts, agreements, or instruments that are necessary or convenient in connection with the issuance, sale, and delivery of revenue bonds, the security therefor, and the application of bond proceeds. This broad contractual authority encompasses each of the Transaction Documents contemplated in connection with the Series 2023A financing.

Power to Set Rates and Charges. The Act grants CSIA the statutory authority to fix, revise, and collect rates, fees, and charges for water-treatment services provided by its water-treatment system. This rate-setting authority is essential to CSIA's ability to comply with its rate covenant obligations under the Bond Indenture and to generate net pledged revenues sufficient to pay operating expenses, debt service on the Bonds, and other obligations. The Act provides that rates and charges established by CSIA are not subject to review or approval by the Washington Utilities and Transportation Commission or any other state regulatory body, further reinforcing CSIA's autonomy in setting service rates at levels adequate to support its revenue bond obligations.

Power to Engage Professionals. CSIA is authorized under the Enabling Act to retain legal counsel (including issuer's counsel and bond counsel), municipal advisors, underwriters, financial advisors, trustees, paying agents, registrars, escrow agents, auditors, engineers, construction managers, and other professional service providers as may be necessary or convenient in connection with the exercise of its statutory powers. CSIA's engagement of Calderwood & Harkness LLP as issuer's counsel, Pryor Crestfield LLP as co-bond counsel, Clearfield Municipal Advisors LLC as municipal advisor, PNTC as bond trustee, and the other professionals and service providers identified in Section II.D above is within this statutory authority.

D. Limitations on Bond-Issuance Authority

While the Enabling Act confers broad bonding and revenue-pledge authority upon CSIA, certain limitations and conditions apply. We have reviewed each such limitation and determined that none precludes or restricts the issuance of the Series 2023A Bonds as proposed.

First, revenue bonds issued by CSIA under Chapter 43.160A RCW are payable solely from the pledged revenues designated in the authorizing resolution and the governing indenture, and do not constitute an indebtedness of the State of Washington or any political subdivision thereof within the meaning of any state constitutional or statutory debt limitation. The Enabling Act expressly provides that CSIA's revenue bonds are special, limited obligations and that the State of Washington has no obligation or liability with respect to the payment thereof.

Second, no voter approval is required for the issuance of revenue bonds under the Enabling Act. Because CSIA's revenue bonds are not general obligations of the State or any political subdivision, and are payable solely from user fees and other pledged revenues rather than from tax levies, the constitutional and statutory requirements for voter approval of general obligation indebtedness do not apply.

Third, CSIA may not pledge the full faith and credit or taxing power of the State of Washington or any political subdivision as security for its revenue bonds. The Series 2023A Bonds will be secured solely by the pledge of net water-treatment revenues, consistent with this limitation.

Fourth, the Enabling Act does not impose a specific dollar cap on the aggregate amount of revenue bonds that may be outstanding at any time. The principal constraint on additional borrowing under the Act is the financial covenants and additional bonds test established in the governing indenture, as discussed in Section VI below. These contractual protections provide an appropriate market-based discipline on the level of CSIA's indebtedness, ensuring that additional bonds may be issued only if projected debt-service coverage ratios meet or exceed the minimum levels required by the indenture.

We are not aware of any pending legislation or judicial challenge that would modify, limit, or repeal any provision of Chapter 43.160A RCW relevant to CSIA's authority to issue the Series 2023A Bonds.

IV. Board Authorization — Resolution No. 2023-014

A. Adoption of the Resolution

CSIA Board Resolution No. 2023-014 (the "Resolution") was adopted by the Board of Commissioners at a duly noticed regular meeting held on May 9, 2023, at CSIA's principal offices in Olympia, Washington. Commissioner Lorraine Chu, Board Chair, presided over the meeting. A quorum of the Board was present throughout the meeting, as certified by the Secretary of the Board in the certificate described in Section IV.D below.

The Resolution was adopted by a vote of the Board members present, with the requisite majority voting in favor of adoption. No Board member raised an objection to the form, substance, or procedural regularity of the Resolution, and no dissenting votes were recorded in the minutes.

B. Scope of Authorization

Resolution No. 2023-014 is comprehensive in scope, authorizing the issuance of the Series 2023A Bonds and the execution and delivery of all Transaction Documents in connection therewith. Specifically, the Resolution authorizes the following:

1. Issuance of the Bonds. The Resolution authorizes the issuance of revenue bonds in an aggregate principal amount not to exceed $220,000,000, designated as the "Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt)," for the purpose of financing the construction of the Puget Sound Regional Advanced Water Treatment Facility and paying costs of issuance associated therewith.

2. Approval and Execution of Transaction Documents. The Resolution approves the form of, and authorizes the execution and delivery by CSIA of, the following Transaction Documents:

(a) Bond Indenture (Trust Indenture) between CSIA and Pacific Northwest Trust Company, N.A., as Trustee, establishing the general terms and conditions governing the issuance, security, and payment of CSIA's revenue bonds;

(b) First Supplemental Indenture (Series 2023A) between CSIA and PNTC, as Trustee, setting forth the specific terms and conditions of the Series 2023A Bonds;

(c) Revenue Pledge Agreement between CSIA and PNTC, as Trustee, pledging net water-treatment revenues for the benefit of all parity bondholders;

(d) Bond Purchase Agreement between CSIA and Meridian Capital Partners LLC, as representative of the underwriters, setting forth the terms and conditions of the underwriters' purchase of the Series 2023A Bonds;

(e) Continuing Disclosure Agreement between CSIA and PNTC, as Dissemination Agent, establishing CSIA's continuing disclosure undertaking pursuant to SEC Rule 15c2-12;

(f) Tax Regulatory Agreement and Certificate, containing CSIA's covenants and certifications with respect to the maintenance of the tax-exempt status of interest on the Bonds under the Code;

(g) Escrow Deposit Agreement between CSIA and PNTC, as Escrow Agent, governing the deposit, investment, and disbursement of bond proceeds and CSIA's equity contribution for the Project Fund;

(h) Debt-Service Reserve Fund Surety Bond Agreement among CSIA, PNTC, and Olympia Guaranty Insurance Corp., providing for the issuance and maintenance of the surety policy satisfying the debt-service reserve fund requirement.

3. Official Statements. The Resolution authorizes the preparation, approval, and distribution of the Preliminary Official Statement and the Final Official Statement in connection with the offering and sale of the Series 2023A Bonds, and authorizes the Executive Director to deem the Preliminary Official Statement "final" for purposes of SEC Rule 15c2-12(b)(1).

4. Rate Covenant. The Resolution establishes a rate covenant requiring CSIA to fix, revise, and collect rates and charges for water-treatment services sufficient to produce net pledged revenues in each fiscal year equal to not less than 1.40 times (1.40x) the annual aggregate parity debt service for such fiscal year. This rate covenant is incorporated by reference into the Bond Indenture and the Revenue Pledge Agreement.

C. Delegation of Authority to Executive Director

Recognizing that the final pricing and certain details of the Series 2023A Bonds will be determined following the date of adoption of the Resolution, Resolution No. 2023-014 delegates to Executive Director Harold K. Nakamura the authority to take the following actions on behalf of CSIA, within the parameters and limitations established by the Resolution:

(a) To determine the final aggregate principal amount of the Series 2023A Bonds, provided that such amount shall not exceed $220,000,000;

(b) To determine the final interest rate or rates, maturity schedule, redemption provisions, and other financial terms of the Series 2023A Bonds, consistent with the parameters set forth in the Resolution;

(c) To execute and deliver all Transaction Documents, including without limitation the Bond Indenture, First Supplemental Indenture, Revenue Pledge Agreement, Bond Purchase Agreement, Continuing Disclosure Agreement, Tax Regulatory Agreement and Certificate, Escrow Deposit Agreement, and DSRF Surety Bond Agreement, on behalf of CSIA;

(d) To execute the Certificate of Authorized Officer, the Closing Certificate, and any other certificates, instruments, or documents required in connection with the closing of the Series 2023A financing;

(e) To take all other actions that are necessary, convenient, or appropriate to effectuate the purposes and intent of the Resolution.

In addition, the Resolution delegates to Chief Financial Officer Denise R. Whitford the authority to execute the CFO's Certificate certifying CSIA's compliance with the debt-service coverage ratio covenant and other financial covenants, and to take such other financial-reporting actions as may be necessary in connection with the closing of the Series 2023A financing.

The delegation of authority contained in the Resolution is appropriately bounded by the parameters and limitations set forth therein. The Resolution specifies the maximum principal amount ($220,000,000), the purpose of the Bonds (financing the PSRAWTF), and the general framework within which the Executive Director is authorized to determine final terms. This structure is consistent with prevailing practice in municipal bond financings and with the delegation authority recognized under Chapter 43.160A RCW.

D. Documents Reviewed

In conducting our analysis of the sufficiency of the Board authorization for the Series 2023A financing, we reviewed the following documents:

(i) A certified copy of Resolution No. 2023-014, as adopted by the Board of Commissioners on May 9, 2023, obtained from Martin J. Espinoza, General Counsel of CSIA;

(ii) The official minutes of the regular meeting of the Board of Commissioners held on May 9, 2023, including the record of the vote on the Resolution;

(iii) The certificate of the Secretary of the Board, dated May 10, 2023, confirming the due adoption of the Resolution, the presence of a quorum at the meeting, and the compliance of the meeting with applicable procedural requirements;

(iv) The notice of the May 9, 2023 regular meeting of the Board, as published in compliance with the requirements of Washington's Open Public Meetings Act (Chapter 42.30 RCW), including the date, time, and location of the meeting and a summary of the agenda items, including the proposed authorization of the Series 2023A Bonds.

E. Analysis of Sufficiency

We have analyzed Resolution No. 2023-014 for its sufficiency as the authorizing instrument for the issuance of the Series 2023A Bonds and the execution and delivery of the Transaction Documents. Our analysis addresses the following elements:

Specificity and Particularity. The Resolution is specific and detailed in its authorization, identifying the Bond series by name and designation, specifying the maximum aggregate principal amount, the purpose of the Bonds, the Project to be financed, the security for the Bonds, the rate covenant, and each of the Transaction Documents to be executed. The Resolution contains sufficient detail to satisfy the requirements of Chapter 43.160A RCW for a valid authorizing resolution, and to provide a clear and unambiguous basis for the issuance of the Bonds and the execution of the Transaction Documents.

Delegation Authority. The delegation of pricing and execution authority to Executive Director Nakamura is appropriately bounded by the parameters established in the Resolution, including the maximum principal amount and the scope of the authorized actions. The delegation is consistent with the Board's authority under the Enabling Act and with CSIA's organizational documents to delegate administrative and executive functions to the Executive Director.

Compliance with Open Public Meetings Act. The meeting at which Resolution No. 2023-014 was adopted was noticed and conducted in compliance with Washington's Open Public Meetings Act, Chapter 42.30 RCW. The notice of the meeting was published in the manner and within the time frame required by the statute, and the meeting was open to the public. We have reviewed the published notice and confirmed its compliance with the statutory requirements.

Procedural Regularity. The Resolution was adopted at a regular meeting of the Board at which a quorum was present, by a vote of the requisite majority of Board members. The Secretary of the Board has certified the adoption and the presence of a quorum.

Conclusion. Based on the foregoing analysis, we conclude that Resolution No. 2023-014 provides adequate and valid authorization for all aspects of the Series 2023A financing, including the issuance of the Bonds, the pledge of net water-treatment revenues, the execution and delivery of all Transaction Documents, and the delegation of final pricing and execution authority to Executive Director Nakamura.

V. Pledge of Net Water-Treatment Revenues

A. Statutory Framework for Revenue Pledge

Chapter 43.160A RCW authorizes CSIA to pledge "net revenues" derived from the operation of its water-treatment system as security for the payment of revenue bonds issued under the Act. The statutory authorization for the revenue pledge is a cornerstone of the security structure of the Series 2023A Bonds and of all existing outstanding parity revenue bonds of CSIA.

For purposes of the Bond Indenture and the Revenue Pledge Agreement, "Net Revenues" (also referred to as "Net Pledged Revenues") is defined as the gross pledged revenues of CSIA's water-treatment system, less the operation and maintenance expenses of the system. Gross pledged revenues include all revenues, fees, charges, and other amounts received by CSIA from or in connection with the operation of its water-treatment system, including (without limitation) the following categories:

(i) Wholesale Water Treatment Service Charges paid by the fourteen (14) participating municipal water and sewer districts under their respective Wholesale Water Treatment Services Agreements with CSIA;

(ii) Connection fees assessed and collected from new connections to the water-treatment system; and

(iii) Investment earnings on pledged funds held by PNTC as Trustee under the Bond Indenture.

A critical feature of the Enabling Act is the self-executing nature of the statutory lien created by the pledge of net revenues. The Act provides that the pledge of revenues in connection with the issuance of revenue bonds creates a lien on the pledged revenues that is valid and binding from the time the bonds are issued and delivered, without the need for filing a UCC financing statement, recording any instrument with a county recorder or the Secretary of State, making physical delivery of any pledged funds, or taking any other action that might otherwise be required under Article 9 of the Uniform Commercial Code as adopted in Washington (Title 62A RCW). This statutory perfection mechanism provides bondholders with a first-priority lien on pledged net revenues that is superior to any competing claim or interest, including claims of judgment creditors, secured creditors, or other lienholders.

The statutory lien and perfection provisions of Chapter 43.160A RCW are modeled on similar provisions found in the enabling legislation of other Washington governmental instrumentalities and are consistent with the approach adopted by many states to facilitate the issuance of revenue bonds by public entities. We are not aware of any Washington judicial decision or attorney general opinion that has questioned or limited the effectiveness of the statutory lien and perfection mechanism under the Act or under analogous Washington statutes.

B. Revenue Base and Participating Districts

CSIA's pledged revenue base is substantial, diversified, and supported by long-term contractual commitments from the fourteen (14) participating municipal water and sewer districts. The following table summarizes CSIA's key revenue and expense data for fiscal year 2022, as reflected in CSIA's audited financial statements audited by Hargrove & Associates CPAs, PLLC (engagement partner: Victoria L. Fong, CPA):

CSIA estimates that net pledged revenues for fiscal year 2024, the first full fiscal year following completion of the PSRAWTF, will be approximately $431,800,000, reflecting projected growth in wholesale service charges and connection fees associated with the expanded treatment capacity.

The diversification of CSIA's revenue base across fourteen participating districts is a significant credit strength. No single participating district accounts for a disproportionate share of total revenues, and the long-term Wholesale Water Treatment Services Agreements contain take-or-pay or equivalent minimum-payment obligations that require each district to pay its allocated share of costs regardless of actual usage. These contractual commitments provide a stable and predictable revenue stream that reduces the risk of revenue volatility and supports consistent debt-service coverage.

CSIA's statutory rate-setting authority under Chapter 43.160A RCW further supports the reliability and sufficiency of pledged revenues. CSIA has the power to fix, revise, and collect rates, fees, and charges for water-treatment services at levels sufficient to pay operating expenses, debt service on all outstanding revenue bonds, and any other obligations under the Bond Indenture. This rate-setting authority is not subject to review or approval by the Washington Utilities and Transportation Commission or any other state regulatory body, providing CSIA with the ability to adjust rates as necessary to maintain compliance with its rate covenant obligations.

C. Parity Lien Structure

The Series 2023A Bonds will be secured by a pledge of net water-treatment revenues on a parity basis with all existing outstanding revenue bonds of CSIA. The parity lien structure means that all holders of parity revenue bonds (including the Series 2023A Bonds) have an equal and ratable claim on net pledged revenues, without priority or preference of any one series of bonds over any other series.

The existing outstanding parity revenue bonds of CSIA, as of the date immediately prior to the issuance of the Series 2023A Bonds, have an aggregate principal amount of approximately $3,120,000,000. Following the issuance of the Series 2023A Bonds, the total aggregate principal amount of parity revenue bonds will be approximately $3,340,000,000 ($3,120,000,000 + $220,000,000).

The Revenue Pledge Agreement, to be executed by CSIA and PNTC on the closing date of October 24, 2023, will confirm and implement the pledge of net water-treatment revenues to the Trustee for the equal and ratable benefit of all holders of parity revenue bonds. The Revenue Pledge Agreement will also set forth the flow-of-funds provisions governing the collection, deposit, and disbursement of pledged revenues, including the required deposits to the debt-service fund, the debt-service reserve fund, and the operation and maintenance fund.

Under the terms of the Bond Indenture, no senior lien debt may be created. CSIA may not issue any bonds or other obligations secured by a pledge of net water-treatment revenues that is senior or superior to the lien securing the parity revenue bonds. Any additional bonds issued by CSIA must be issued on a parity basis with the existing outstanding parity revenue bonds, subject to satisfaction of the additional bonds test described in Section VI.C below.

D. Enforceability Considerations

The enforceability of the pledge of net water-treatment revenues under Washington law is supported by several statutory and common-law protections. The Enabling Act provides that the pledge creates a statutory lien that is valid and enforceable from the time of bond issuance, as discussed above. The pledge does not require voter approval and is not subject to constitutional debt limitations, because the Bonds are payable solely from pledged revenues and do not constitute a general obligation of the State or any political subdivision.

Under Washington law, revenue bonds issued by governmental instrumentalities are generally enforceable in accordance with their terms, and the pledge of revenues as security for such bonds creates a binding and enforceable obligation of the issuer. The rights of bondholders to receive payment from pledged revenues are protected by the contractual provisions of the Bond Indenture and the Revenue Pledge Agreement, as well as by applicable statutory provisions.

A separate, detailed Enforceability Opinion addressing the validity, binding effect, and enforceability of the Revenue Pledge Agreement and the pledge of net water-treatment revenues will be delivered by Calderwood & Harkness LLP at the closing of the Series 2023A financing. That opinion will address, among other things, the priority of the lien on pledged revenues, the effect of the statutory perfection mechanism, and any limitations on enforceability arising from applicable bankruptcy, insolvency, or creditor-rights laws.

VI. Financial Covenants and Debt-Service Coverage

A. Rate Covenant

CSIA has covenanted, and will covenant in the Bond Indenture, to fix, revise, and collect rates, fees, and charges for water-treatment services sufficient to produce Net Pledged Revenues in each fiscal year equal to not less than 1.40 times (1.40x) the annual aggregate parity debt service for such fiscal year (the "Rate Covenant"). The Rate Covenant is a fundamental credit protection for holders of the Series 2023A Bonds and all other parity revenue bonds, ensuring that CSIA maintains revenues at a level sufficient to pay debt service and maintain an adequate margin of coverage.

The Rate Covenant is consistent with, and authorized by, Chapter 43.160A RCW, which grants CSIA the power to set rates at levels sufficient to meet the requirements of its bond indenture and related agreements. The Enabling Act does not impose a maximum or minimum rate covenant level; rather, the Rate Covenant level is established contractually in the Bond Indenture, as authorized by the Board.

Under the Bond Indenture, failure by CSIA to maintain net pledged revenues at the required 1.40x minimum level constitutes an event of default, subject to applicable cure periods. The Indenture provides a consultant's report remedy, pursuant to which CSIA may engage an independent consultant to recommend rate increases and other measures sufficient to restore compliance with the Rate Covenant within a specified time period. If CSIA implements the consultant's recommendations and achieves compliance within the cure period, the event of default is deemed cured and the related remedies are not triggered.

The 1.40x Rate Covenant is at a level that is standard for highly rated water and wastewater revenue bond issuers and is consistent with the expectations of the rating agencies that have assigned investment-grade ratings to the Series 2023A Bonds.

B. Debt-Service Coverage Ratio — Current Compliance

Based on CSIA's audited financial statements for fiscal year 2022 and the projected annual debt service on the Series 2023A Bonds, we have calculated the pro forma debt-service coverage ratio as follows:

The pro forma debt-service coverage ratio of 1.48x exceeds the 1.40x minimum required by the Rate Covenant, providing a comfortable margin of coverage. This coverage level is consistent with the "AA" / "AA−" credit ratings assigned to the Series 2023A Bonds by Lakeshore Ratings Group, Inc. and Pinnacle Credit Analytics, Inc., respectively.

At the closing of the Series 2023A financing, Chief Financial Officer Denise R. Whitford will execute a CFO's Certificate certifying CSIA's compliance with the debt-service coverage ratio covenant and all other financial covenants contained in the Bond Indenture and the Revenue Pledge Agreement. The CFO's Certificate will be based on CSIA's audited financial statements for fiscal year 2022 and will include a calculation of the pro forma debt-service coverage ratio inclusive of the Series 2023A Bonds.

C. Additional Bonds Test

The Bond Indenture contains an additional bonds test that must be satisfied as a condition to the issuance of any additional parity revenue bonds, including the Series 2023A Bonds. The additional bonds test requires that, at the time of issuance of additional parity bonds, 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 completion of the project financed with the additional bonds) equal at least 1.40 times (1.40x) the maximum annual parity debt service, calculated to include the proposed additional bonds.

For purposes of the Series 2023A issuance, we have applied the additional bonds test using FY 2022 Net Pledged Revenues as the testing base:

The total annual parity debt service of $278,400,000 is well within the maximum permissible level of $294,714,286 implied by the 1.40x additional bonds test. Accordingly, the additional bonds test is satisfied for the issuance of the Series 2023A Bonds with ample margin.

If CSIA were to elect to use the alternative testing methodology based on projected net pledged revenues for fiscal year 2024 ($431,800,000), the maximum permissible annual parity debt service would be $431,800,000 ÷ 1.40 = $308,428,571, providing even greater coverage. However, for purposes of this analysis, we have relied on the historical FY 2022 figures, which provide a conservative and independently verified basis for demonstrating compliance.

Conclusion. The additional bonds test under the Bond Indenture is satisfied for the issuance of the Series 2023A Bonds, whether calculated on the basis of FY 2022 historical Net Pledged Revenues or projected FY 2024 Net Pledged Revenues.

D. Debt-Service Reserve Fund

The Bond Indenture requires that a debt-service reserve fund (the "DSRF") be maintained for the benefit of the Series 2023A Bonds. The DSRF requirement is an amount equal to the least of the following:

(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 the original par amount of the Series 2023A Bonds: $22,000,000.

Because the maximum annual debt service of $11,610,000 is the least of the three alternative calculations, the DSRF requirement for the Series 2023A Bonds is $11,610,000.

The DSRF requirement will be satisfied through the provision of a surety policy issued by Olympia Guaranty Insurance Corp. (Policy No. OG-2023-MUN-4718) in the amount of $11,610,000. The surety policy obligates Olympia Guaranty to pay amounts drawn on the policy to PNTC, as Trustee, upon the occurrence of a draw event as specified in the policy and the DSRF Surety Bond Agreement. The annual premium for the surety policy is $23,220, representing 0.20% of the surety amount.

The use of a surety policy in lieu of a cash-funded reserve is expressly authorized under the terms of the Bond Indenture and is consistent with Chapter 43.160A RCW, which does not restrict the form of security that may be provided for the DSRF. The use of a surety policy reduces the upfront funding requirements for the Series 2023A financing and allows a greater portion of bond proceeds to be applied directly to the construction of the Project.

VII. Debt Limitations and Constitutional Considerations

A. No Constitutional Debt Limitation Applicable

Revenue bonds issued by CSIA under Chapter 43.160A RCW are not subject to the constitutional debt limitations set forth in Article VIII of the Washington State Constitution. Article VIII imposes limitations on the incurrence of debt by the State and its political subdivisions, requiring, among other things, voter approval for the issuance of general obligation bonds exceeding specified percentages of assessed valuation. However, these limitations apply only to obligations that constitute "indebtedness" of the State or a political subdivision — that is, obligations payable from or secured by the general taxing power or general fund revenues of the issuing entity.

Because the Series 2023A Bonds are payable solely from net water-treatment revenues pledged under the Revenue Pledge Agreement, and do not constitute a general obligation, debt, or liability of the State of Washington or any political subdivision thereof, the constitutional debt limitations of Article VIII are inapplicable. The Enabling Act expressly provides that revenue bonds issued by CSIA do not constitute indebtedness of the State or any political subdivision within the meaning of any constitutional or statutory limitation. No voter approval is required for the issuance of the Series 2023A Bonds.

B. No Statutory Debt Cap

Chapter 43.160A RCW does not impose a specific dollar cap on the aggregate amount of revenue bonds that may be outstanding at any time. The Enabling Act grants CSIA broad discretion to issue revenue bonds in such amounts as the Board may determine to be necessary for the financing of eligible projects, subject only to the contractual constraints established in the governing indenture.

The principal constraints on additional borrowing are the additional bonds test and the rate covenant established by the Bond Indenture, as described in Section VI above. These contractual protections serve a similar function to a statutory debt cap, ensuring that CSIA does not issue additional parity bonds unless its pledged revenue base is sufficient to support the incremental debt service while maintaining the required minimum coverage ratio.

C. State Enabling Statute Compliance

CSIA's creation under Chapter 43.160A RCW and its exercise of bonding authority in connection with the Series 2023A financing are within the scope of the Legislature's delegation of powers. The issuance of revenue bonds to finance the construction of a regional advanced water-treatment facility is squarely within the purposes for which CSIA was created, and the terms and conditions of the Series 2023A Bonds are consistent with the parameters established by the Enabling Act.

We have conducted a review of pending Washington legislation and have identified no legislative proposals that would amend, repeal, or limit any provision of Chapter 43.160A RCW in a manner that would affect CSIA's authority to issue the Series 2023A Bonds. We have also searched for pending or recently decided judicial proceedings challenging CSIA's statutory authority or the validity of its bonding powers and have identified no such challenges.

VIII. Environmental and Regulatory Approvals

A. SEPA Compliance

The Washington State Environmental Policy Act ("SEPA"), Chapter 43.21C RCW, requires state and local agencies to evaluate the environmental impacts of proposed actions, including the construction of major infrastructure projects. CSIA, as the lead agency for purposes of SEPA review, issued a Determination of Non-Significance ("DNS") on September 12, 2022, with respect to the Puget Sound Regional Advanced Water Treatment Facility. The DNS concluded that the Project is not likely to have a significant adverse impact on the environment and that preparation of an environmental impact statement was not required.

The DNS was published and circulated in accordance with SEPA procedures, and the statutory appeal period has expired without any appeal being filed. No supplemental environmental review is required for the financing transaction itself, as the issuance of revenue bonds is not an independent "action" triggering SEPA review separate from the underlying project.

We have reviewed a copy of the DNS and confirmed its compliance with applicable SEPA requirements. The DNS is final and not subject to further administrative or judicial challenge.

B. NPDES Permit

The discharge of treated effluent from the PSRAWTF is regulated under the federal Clean Water Act and the Washington State Water Pollution Control Act, implemented through the National Pollutant Discharge Elimination System ("NPDES") permit program. CSIA holds NPDES Permit No. WA-004837-2, issued by the Washington State Department of Ecology. A modification of the permit was approved by the Department of Ecology on January 6, 2023, to cover the expanded treatment capacity associated with the PSRAWTF.

The NPDES permit modification was issued after public notice and comment in accordance with applicable regulatory procedures, and the permit is now in effect. We have reviewed a copy of the modified permit and confirmed that it authorizes the discharge volumes and treatment parameters associated with the PSRAWTF at its design capacity of 60 MGD.

C. Other Regulatory Approvals

We have conducted a review of applicable state and local permitting requirements and have determined that no additional state or local governmental approvals are required for the issuance of the Series 2023A Bonds. The Bond Purchase Agreement and the Certificate of Authorized Officer to be delivered at closing will require Executive Director Harold K. Nakamura to certify that all required governmental approvals, permits, and authorizations necessary for the construction of the Project and the issuance of the Bonds have been obtained and are in full force and effect, and that CSIA is in compliance with all conditions and requirements thereof.

Building permits, grading permits, and other local construction-related permits for the PSRAWTF will be obtained by Northtide Environmental Engineering, Inc. in the ordinary course of construction, as contemplated by GMP Contract No. CSIA-DB-2023-001. Such permits are construction-related ministerial approvals and do not affect CSIA's authority to issue the Series 2023A Bonds or enter into the Transaction Documents.

IX. Key Transaction Documents — Authority Considerations

This Section provides a summary analysis of CSIA's authority to enter into each of the principal Transaction Documents in connection with the Series 2023A financing.

A. Bond Indenture and First Supplemental Indenture

CSIA's authority to enter into the Bond Indenture (Trust Indenture) with PNTC, as Trustee, is derived directly from Chapter 43.160A RCW, which authorizes CSIA to enter into indentures, trust agreements, and other contracts necessary or convenient in connection with the issuance of revenue bonds. Resolution No. 2023-014 specifically approves the form of, and authorizes the execution and delivery of, the Bond Indenture.

The First Supplemental Indenture (Series 2023A) is a supplemental indenture to the Bond Indenture that authorizes and establishes the specific terms and conditions of the Series 2023A Bonds, including the aggregate principal amount, interest rate, maturity schedule, redemption provisions, and other terms. The First Supplemental Indenture is authorized by the Bond Indenture and by Resolution No. 2023-014, and CSIA's authority to enter into the First Supplemental Indenture is within the scope of its powers under the Enabling Act.

B. Revenue Pledge Agreement

CSIA's authority to pledge net water-treatment revenues as security for the Series 2023A Bonds is expressly granted by Chapter 43.160A RCW, as discussed in detail in Section V above. The Revenue Pledge Agreement will be executed by CSIA and PNTC, as Trustee, on the closing date of October 24, 2023, and will confirm and implement the pledge of net pledged revenues for the equal and ratable benefit of all holders of parity revenue bonds.

The Revenue Pledge Agreement is authorized by Resolution No. 2023-014, and CSIA's authority to execute and deliver the agreement is within the scope of its express statutory powers.

C. Bond Purchase Agreement

The Bond Purchase Agreement was executed on August 30, 2023, between CSIA and Meridian Capital Partners LLC, as representative of the underwriting syndicate (which includes Dralvecen Fenn & Co., Inc. as co-managing underwriter). The Bond Purchase Agreement sets forth the terms and conditions of the underwriters' purchase of the Series 2023A Bonds from CSIA, including the purchase price, the underwriters' discount, closing conditions, and the representations, warranties, and covenants of the parties.

The purchase price for the Series 2023A Bonds under the Bond Purchase Agreement is 99.25% of par, less an underwriters' discount of 0.45% ($990,000), resulting in net proceeds before costs of issuance of $217,360,000. CSIA's authority to sell bonds at negotiated sale to the underwriting syndicate is expressly authorized under Chapter 43.160A RCW, which permits the sale of bonds at public or negotiated sale, and by Resolution No. 2023-014, which authorizes the negotiated sale to Meridian Capital Partners LLC and Dralvecen Fenn & Co., Inc.

D. Tax Regulatory Agreement and Certificate

The Tax Regulatory Agreement and Certificate (the "Tax Certificate") will be executed by CSIA on October 15, 2023 (the original target closing date for the tax certificate). The Tax Certificate contains CSIA's covenants, representations, and certifications with respect to compliance with Sections 103 and 141 through 150 of the Code, including covenants relating to the use of bond-financed facilities, the investment and expenditure of bond

PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
TO: George Trujillo, Partner, Calderwood & Harkness LLP
FROM: Brett Callahan, Associate, and Michelle Tsao, Lead Associate, Calderwood & Harkness LLP
DATE: May 15, 2023
RE: Due Diligence Memorandum — Authority of Cascadia State Infrastructure Authority to Issue $220,000,000 Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt); Analysis of Enabling Legislation (Chapter 43.160A RCW)
MATTER NO.: 1030-00001
CLIENT: Cascadia State Infrastructure Authority ("CSIA")
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I. Executive Summary
The purpose of this memorandum is to confirm the legal authority of the Cascadia State Infrastructure Authority ("CSIA") to issue the proposed $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"), to pledge net water-treatment revenues derived from its regional water-treatment system as security for the Bonds, and to enter into the Bond Indenture, First Supplemental Indenture, Revenue Pledge Agreement, Bond Purchase Agreement, Continuing Disclosure Agreement, Tax Regulatory Agreement and Certificate, Escrow Deposit Agreement, Debt-Service Reserve Fund Surety Bond Agreement, and all related transaction documents (collectively, the "Transaction Documents") in connection with the financing of the Puget Sound Regional Advanced Water Treatment Facility (the "PSRAWTF" or the "Project").
Calderwood & Harkness LLP serves as issuer's counsel to CSIA in connection with the Series 2023A financing. Pryor Crestfield LLP, a Washington-based bond counsel firm, serves as co-bond counsel and will provide the approving legal opinion as to the validity and enforceability of the Bonds and the separate tax opinion as to the exclusion of interest on the Bonds from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"). This memorandum has been prepared to support our firm's rendering of the Issuer's Counsel Opinion, the Enforceability Opinion relating to the Revenue Pledge Agreement, and the 10b-5 negative assurance letter to be delivered to the underwriters at closing, and to serve as the foundational authority analysis upon which those opinions and the co-bond counsel opinion may rely.
In preparing this memorandum, we have reviewed the text of Chapter 43.160A of the Revised Code of Washington ("RCW"), the legislative history and accompanying fiscal notes for the original enactment and all subsequent amendments thereto, the organizational and governance documents of CSIA, Board Resolution No. 2023-014 adopted on May 9, 2023, the certified minutes of the Board meeting at which such resolution was adopted, the certificate of the Secretary of the Board confirming adoption and the presence of a quorum, the notice of meeting published in compliance with Washington's Open Public Meetings Act (Chapter 42.30 RCW), the audited financial statements of CSIA for fiscal year 2022 as audited by Hargrove & Associates CPAs, PLLC, and drafts of the principal Transaction Documents. We have also conducted a review of applicable Washington case law, attorney general opinions, and secondary authorities bearing on the powers of governmental instrumentalities created by the Washington Legislature.
Conclusion. Based upon the analysis set forth in this memorandum, it is our conclusion that CSIA is duly created and validly existing as a Washington State governmental instrumentality and public body corporate under Chapter 43.160A RCW, possesses full statutory authority to issue the Series 2023A Bonds, to pledge net water-treatment revenues derived from its water-treatment system as security for the Bonds on a parity basis with existing outstanding revenue bonds, and to execute and deliver all related Transaction Documents, subject to the conditions and procedures described herein, all of which have been or are in the process of being satisfied prior to the anticipated closing date of October 24, 2023.
II. Background and Transaction Overview
A. Description of CSIA
The Cascadia State Infrastructure Authority is a Washington State governmental instrumentality and public body corporate, created and existing pursuant to Chapter 43.160A RCW (the "Enabling Act" or the "Act"). CSIA was established by the Washington Legislature to facilitate the financing, construction, acquisition, improvement, operation, and maintenance of regional water-treatment and wastewater-treatment infrastructure serving multiple municipal jurisdictions across the Puget Sound region and other designated areas of the State of Washington. CSIA's principal offices are located at 1100 Capitol Way South, Suite 400, Olympia, Washington 98501. Its employer identification number is 91-2058374.
CSIA is governed by a Board of Commissioners (the "Board"), the composition and appointment procedures of which are specified in the Enabling Act. The current Board Chair is Commissioner Lorraine Chu. Day-to-day management and administrative functions of CSIA are carried out by an Executive Director and senior staff appointed by the Board. The current Executive Director is Harold K. Nakamura, who serves as the chief executive officer of CSIA and is authorized, by statute and Board delegation, to execute documents and take actions on behalf of CSIA as described more fully in Section IV below. The Chief Financial Officer is Denise R. Whitford, and CSIA's General Counsel is Martin J. Espinoza.
CSIA's annual operating budget for fiscal year 2023 is approximately $1.48 billion, reflecting the substantial scale of its regional water-treatment operations and capital programs. As of the date of this memorandum and prior to the issuance of the Series 2023A Bonds, CSIA has existing outstanding indebtedness in the aggregate principal amount of approximately $3.12 billion, consisting entirely of revenue bonds payable from pledged water-treatment revenues.
CSIA's pledged revenue base consists of water-treatment user fees and connection charges collected from fourteen (14) participating municipal water and sewer districts located throughout the Puget Sound region, each of which is party to a long-term Wholesale Water Treatment Services Agreement with CSIA. For fiscal year 2022, CSIA reported net pledged revenues of approximately $412.6 million, as reflected in its audited financial statements prepared by Hargrove & Associates CPAs, PLLC.
B. Description of the Proposed Financing
The proposed financing consists of the issuance by CSIA of the Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt), in an aggregate principal amount of $220,000,000. The principal features of the Series 2023A Bonds are summarized below:
Interest on the Series 2023A Bonds will be payable semiannually on April 1 and October 1 of each year, commencing April 1, 2024. The Bonds will be subject to optional redemption at the option of CSIA, in whole or in part, on any date on or after October 1, 2033, at a redemption price equal to 100% of the principal amount thereof, plus accrued interest to the date of redemption.
The Series 2023A Bonds will be secured by a pledge of net water-treatment revenues on a parity basis with all existing outstanding revenue bonds of CSIA, as described more fully in Section V of this memorandum. The Bonds will not constitute a general obligation, debt, or liability of the State of Washington or any political subdivision thereof, and neither the full faith and credit nor the taxing power of the State or any political subdivision thereof will be pledged to the payment of the Bonds.
C. Description of the Project
The proceeds of the Series 2023A Bonds, together with a CSIA equity contribution of $17,400,000 from existing capital reserves, will be applied to finance the construction of the Puget Sound Regional Advanced Water Treatment Facility, a major regional water-treatment infrastructure project. The key features of the Project are as follows:
Project Name: Puget Sound Regional Advanced Water Treatment Facility.
Location: The Project will be constructed on approximately eighteen (18) acres of CSIA-owned land located at 7250 Deschutes Parkway, Tumwater, Thurston County, Washington 98501, adjacent to CSIA's existing Deschutes River Tertiary Treatment Plant.
Scope of Construction: The Project scope includes the construction of a 60-million-gallon-per-day ("MGD") advanced membrane-filtration and UV-disinfection water-treatment facility, including influent and effluent pipelines, a 5-million-gallon equalization basin, biosolids handling improvements, and upgrades to CSIA's supervisory control and data acquisition ("SCADA") system. The facility is designed to provide advanced tertiary and quaternary treatment capacity sufficient to meet current and projected regional water-treatment demands through the 30-year term of the Series 2023A Bonds.
Capacity: The design capacity of the PSRAWTF is 60 MGD, with an initial operating capacity of 42 MGD. CSIA anticipates that the facility will reach design capacity within approximately twelve (12) to fifteen (15) years of initial operations, based on projected population growth and increased demand from participating districts.
Participating Districts: The fourteen (14) Puget Sound-region municipal water and sewer districts that currently participate in CSIA's regional water-treatment system will be served by the PSRAWTF. Each participating district is party to a long-term Wholesale Water Treatment Services Agreement with CSIA containing take-or-pay or equivalent minimum-payment obligations, providing a stable and predictable revenue base for debt-service coverage.
Design-Build Contractor: Northtide Environmental Engineering, Inc. (CEO: Garrett L. Henriksen) has been engaged by CSIA as the design-build contractor for the Project pursuant to GMP Contract No. CSIA-DB-2023-001, executed on March 10, 2023. The contract provides for a guaranteed maximum price of $193,500,000, subject to owner-directed change orders and customary allowances. Northtide Environmental Engineering is a nationally recognized environmental engineering and construction firm with extensive experience in the design and construction of advanced water-treatment facilities in the Pacific Northwest.
Estimated Total Project Cost: The estimated total Project cost is $237,400,000, to be funded from the following sources:
Environmental Permits: The Project has received a Determination of Non-Significance ("DNS") under the Washington State Environmental Policy Act ("SEPA"), issued on September 12, 2022. The DNS was not appealed, and the appeal period has expired. In addition, an NPDES Permit modification (Permit No. WA-004837-2) was approved by the Washington State Department of Ecology on January 6, 2023, to cover the expanded treatment capacity associated with the PSRAWTF.
D. Key Transaction Parties
The following is a summary of the key parties involved in the Series 2023A financing:
Issuer / Borrower: Cascadia State Infrastructure Authority ("CSIA"), a Washington State governmental instrumentality and public body corporate created under Chapter 43.160A RCW.
Senior Managing Underwriter: Meridian Capital Partners LLC. Jonathan D. Kessler, Managing Director, is the lead banker responsible for the transaction.
Co-Managing Underwriter: Dralvecen Fenn & Co., Inc. Sarah E. Mulvaney, Director, is the co-manager representative.
Bond Trustee / Paying Agent / Registrar / Escrow Agent: Pacific Northwest Trust Company, N.A. ("PNTC"), acting through its Corporate Trust Services division. Alan M. Greer, Vice President, Corporate Trust Services, is the primary trust officer assigned to the engagement.
Surety Bond Insurer: Olympia Guaranty Insurance Corp. Rachel P. Dominguez, Senior Vice President, is the primary underwriting contact. Olympia Guaranty will issue the debt-service reserve fund surety bond (Policy No. OG-2023-MUN-4718) in the amount of $11,610,000.
Municipal Advisor to CSIA: Clearfield Municipal Advisors LLC. Kenneth W. Barclay, Principal, is the lead municipal advisor. Clearfield has provided independent financial advisory services to CSIA in connection with the structuring and pricing of the Series 2023A Bonds.
Independent Auditor: Hargrove & Associates CPAs, PLLC. Victoria L. Fong, CPA, is the engagement partner. Hargrove & Associates audited CSIA's financial statements for fiscal year 2022 in accordance with generally accepted auditing standards.
Issuer's Counsel: Calderwood & Harkness LLP. George Trujillo, Partner, is the engagement partner. Brett Callahan, Associate, and Michelle Tsao, Lead Associate, are the attorneys primarily responsible for the preparation of this memorandum and the day-to-day transaction management.
Co-Bond Counsel: Pryor Crestfield LLP. Margaret S. Yoon, Partner, and Elliot R. Stanton, Associate, are the attorneys responsible for the preparation of the approving legal opinion, the tax opinion, and the Tax Regulatory Agreement and Certificate.
Underwriters' Counsel: Alderman & Locke LLP. Daniel F. Obermeyer, Partner, and Christina M. Vega, Associate, are representing the underwriting syndicate.
Rating Agencies: The Series 2023A Bonds have received the following credit ratings:
These investment-grade ratings reflect the strong credit profile of CSIA's pledged revenue base, diversified customer base, and robust financial performance metrics, including historical and projected debt-service coverage ratios well in excess of covenant requirements.
III. Enabling Legislation — Chapter 43.160A RCW
A. Creation and Legal Status of CSIA
Chapter 43.160A RCW (the "Enabling Act" or the "Act") establishes the Cascadia State Infrastructure Authority as a public body corporate and governmental instrumentality of the State of Washington. The Act was enacted by the Washington Legislature for the express purpose of creating a specialized public entity with the authority, capacity, and resources necessary to finance, construct, acquire, improve, operate, and maintain regional water-treatment and wastewater-treatment infrastructure serving multiple municipal jurisdictions across designated regions of the State.
Under the Enabling Act, CSIA is a governmental instrumentality of the State but is not a state agency for purposes of the state budget process. This distinction is significant: while CSIA is subject to legislative oversight, audit by the State Auditor, and certain reporting requirements applicable to governmental entities, it operates with the administrative independence and financial flexibility necessary to carry out its statutory mission of providing regional water-treatment services on a self-sustaining, revenue-supported basis. CSIA's obligations, including revenue bonds issued under the Act, are not general obligations of the State of Washington, and the State has no legal liability for the payment of CSIA's bonds or other indebtedness.
As a public body corporate created by special act of the Legislature, CSIA possesses the powers expressly granted to it by Chapter 43.160A RCW, together with those powers reasonably implied as necessary or convenient to carry out its statutory purposes. This is consistent with the well-established principle of Washington law that public bodies corporate and governmental instrumentalities created by statute possess only those powers expressly or impliedly granted by their enabling legislation, but that such grants of power are to be liberally construed to effectuate the legislative purpose. The Washington Supreme Court has repeatedly recognized that statutory grants of bonding and revenue-pledge authority to governmental instrumentalities are to be given a practical and workable interpretation that facilitates the legislative objective of enabling public infrastructure finance.
CSIA's status as a governmental instrumentality of the State carries important legal consequences relevant to the Series 2023A financing. Among other things, CSIA's obligations issued under the Act are not subject to the constitutional debt limitations of Article VIII of the Washington State Constitution, because they are payable solely from pledged revenues and do not constitute a debt or liability of the State or any political subdivision thereof. In addition, CSIA's bonds and the interest thereon may be eligible for exemption from state and local taxation under applicable provisions of Washington law.
B. Governance Structure
Chapter 43.160A RCW establishes the governance framework for CSIA, providing for a Board of Commissioners (the "Board") as the governing body of the authority. The Board consists of appointed and ex officio members as specified in the Act, with appointments made by the Governor of the State of Washington, subject to confirmation by the Washington State Senate, and with ex officio members serving by virtue of their positions in state or local government. The composition of the Board is designed to provide representation from the geographic areas served by CSIA's regional water-treatment system and to ensure accountability to the public interest.
The current Board Chair is Commissioner Lorraine Chu, who presides over meetings of the Board and serves as the chief elected officer of the authority. The Board exercises the corporate powers of CSIA, including the authority to adopt resolutions authorizing the issuance of revenue bonds, to approve annual operating and capital budgets, to fix and revise rates and charges for water-treatment services, to appoint and set the compensation of the Executive Director and other senior staff, and to delegate authority to the Executive Director and other officers as the Board deems necessary and appropriate.
The Executive Director, currently Harold K. Nakamura, serves as the chief executive officer of CSIA and is responsible for the day-to-day management and operations of the authority. The Executive Director is authorized to execute documents and take actions on behalf of CSIA as delegated by the Board by resolution. The Chief Financial Officer, currently Denise R. Whitford, is responsible for CSIA's financial management and reporting functions. The General Counsel, currently Martin J. Espinoza, serves as CSIA's chief legal officer and provides legal advice to the Board and senior management.
The Board's authority to delegate to the Executive Director the power to determine final terms of revenue bonds and to execute transaction documents is expressly contemplated by the Enabling Act and is consistent with standard practice for governmental instrumentalities engaged in complex, multi-party infrastructure financings. As discussed in Section IV below, Resolution No. 2023-014 provides an appropriately bounded delegation of authority to Executive Director Nakamura in connection with the Series 2023A financing.
C. Express Statutory Powers Relevant to the Series 2023A Financing
The Enabling Act confers upon CSIA a comprehensive set of statutory powers relevant to the issuance of the Series 2023A Bonds and the execution of the Transaction Documents. We address each relevant power in turn.
Power to Issue Revenue Bonds. Chapter 43.160A RCW expressly authorizes CSIA to issue revenue bonds for the purpose of financing the acquisition, construction, improvement, and equipping of water-treatment and wastewater-treatment facilities and related infrastructure within CSIA's service area. The Act provides that bonds may be issued in one or more series, bearing such dates, maturing at such times, bearing interest at such rates (whether fixed or variable), and containing such other terms, conditions, and redemption provisions as CSIA's Board may determine by resolution. The statute authorizes the issuance of bonds in such principal amounts as the Board may determine to be necessary to provide sufficient funds for the payment of all costs of the project to be financed, all costs of issuance, any required reserves, and any other amounts necessary or convenient in connection with the financing. The Enabling Act does not restrict CSIA to public, competitive sales of bonds; rather, bonds may be sold at public sale or negotiated sale, at the discretion of the Board. The proposed negotiated sale of the Series 2023A Bonds to Meridian Capital Partners LLC, as senior managing underwriter, and Dralvecen Fenn & Co., Inc., as co-managing underwriter, is therefore within CSIA's statutory authority.
Power to Pledge Revenues. The Enabling Act authorizes CSIA to pledge the net revenues derived from the operation of its water-treatment system, including user fees, connection charges, and investment earnings on pledged funds, as security for the payment of revenue bonds issued under the Act. The statute provides that such pledge creates a lien on the pledged revenues that is valid and enforceable from the time the bonds are issued and delivered to the initial purchasers, without the need for physical delivery of pledged funds, recording of any instrument, filing of any financing statement under the Washington Uniform Commercial Code, or any other act of perfection. This self-executing perfection mechanism is a critical feature of the Enabling Act, providing bondholders with a statutory lien on pledged revenues that is senior to any claim that might otherwise arise under the UCC or other creditor-rights laws.
Power to Enter into Agreements. Chapter 43.160A RCW authorizes CSIA to enter into indentures, trust agreements, revenue pledge agreements, bond purchase agreements, continuing disclosure agreements, escrow agreements, surety agreements, and any other contracts, agreements, or instruments that are necessary or convenient in connection with the issuance, sale, and delivery of revenue bonds, the security therefor, and the application of bond proceeds. This broad contractual authority encompasses each of the Transaction Documents contemplated in connection with the Series 2023A financing.
Power to Set Rates and Charges. The Act grants CSIA the statutory authority to fix, revise, and collect rates, fees, and charges for water-treatment services provided by its water-treatment system. This rate-setting authority is essential to CSIA's ability to comply with its rate covenant obligations under the Bond Indenture and to generate net pledged revenues sufficient to pay operating expenses, debt service on the Bonds, and other obligations. The Act provides that rates and charges established by CSIA are not subject to review or approval by the Washington Utilities and Transportation Commission or any other state regulatory body, further reinforcing CSIA's autonomy in setting service rates at levels adequate to support its revenue bond obligations.
Power to Engage Professionals. CSIA is authorized under the Enabling Act to retain legal counsel (including issuer's counsel and bond counsel), municipal advisors, underwriters, financial advisors, trustees, paying agents, registrars, escrow agents, auditors, engineers, construction managers, and other professional service providers as may be necessary or convenient in connection with the exercise of its statutory powers. CSIA's engagement of Calderwood & Harkness LLP as issuer's counsel, Pryor Crestfield LLP as co-bond counsel, Clearfield Municipal Advisors LLC as municipal advisor, PNTC as bond trustee, and the other professionals and service providers identified in Section II.D above is within this statutory authority.
D. Limitations on Bond-Issuance Authority
While the Enabling Act confers broad bonding and revenue-pledge authority upon CSIA, certain limitations and conditions apply. We have reviewed each such limitation and determined that none precludes or restricts the issuance of the Series 2023A Bonds as proposed.
First, revenue bonds issued by CSIA under Chapter 43.160A RCW are payable solely from the pledged revenues designated in the authorizing resolution and the governing indenture, and do not constitute an indebtedness of the State of Washington or any political subdivision thereof within the meaning of any state constitutional or statutory debt limitation. The Enabling Act expressly provides that CSIA's revenue bonds are special, limited obligations and that the State of Washington has no obligation or liability with respect to the payment thereof.
Second, no voter approval is required for the issuance of revenue bonds under the Enabling Act. Because CSIA's revenue bonds are not general obligations of the State or any political subdivision, and are payable solely from user fees and other pledged revenues rather than from tax levies, the constitutional and statutory requirements for voter approval of general obligation indebtedness do not apply.
Third, CSIA may not pledge the full faith and credit or taxing power of the State of Washington or any political subdivision as security for its revenue bonds. The Series 2023A Bonds will be secured solely by the pledge of net water-treatment revenues, consistent with this limitation.
Fourth, the Enabling Act does not impose a specific dollar cap on the aggregate amount of revenue bonds that may be outstanding at any time. The principal constraint on additional borrowing under the Act is the financial covenants and additional bonds test established in the governing indenture, as discussed in Section VI below. These contractual protections provide an appropriate market-based discipline on the level of CSIA's indebtedness, ensuring that additional bonds may be issued only if projected debt-service coverage ratios meet or exceed the minimum levels required by the indenture.
We are not aware of any pending legislation or judicial challenge that would modify, limit, or repeal any provision of Chapter 43.160A RCW relevant to CSIA's authority to issue the Series 2023A Bonds.
IV. Board Authorization — Resolution No. 2023-014
A. Adoption of the Resolution
CSIA Board Resolution No. 2023-014 (the "Resolution") was adopted by the Board of Commissioners at a duly noticed regular meeting held on May 9, 2023, at CSIA's principal offices in Olympia, Washington. Commissioner Lorraine Chu, Board Chair, presided over the meeting. A quorum of the Board was present throughout the meeting, as certified by the Secretary of the Board in the certificate described in Section IV.D below.
The Resolution was adopted by a vote of the Board members present, with the requisite majority voting in favor of adoption. No Board member raised an objection to the form, substance, or procedural regularity of the Resolution, and no dissenting votes were recorded in the minutes.
B. Scope of Authorization
Resolution No. 2023-014 is comprehensive in scope, authorizing the issuance of the Series 2023A Bonds and the execution and delivery of all Transaction Documents in connection therewith. Specifically, the Resolution authorizes the following:
1. Issuance of the Bonds. The Resolution authorizes the issuance of revenue bonds in an aggregate principal amount not to exceed $220,000,000, designated as the "Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt)," for the purpose of financing the construction of the Puget Sound Regional Advanced Water Treatment Facility and paying costs of issuance associated therewith.
2. Approval and Execution of Transaction Documents. The Resolution approves the form of, and authorizes the execution and delivery by CSIA of, the following Transaction Documents:
(a) Bond Indenture (Trust Indenture) between CSIA and Pacific Northwest Trust Company, N.A., as Trustee, establishing the general terms and conditions governing the issuance, security, and payment of CSIA's revenue bonds;
(b) First Supplemental Indenture (Series 2023A) between CSIA and PNTC, as Trustee, setting forth the specific terms and conditions of the Series 2023A Bonds;
(c) Revenue Pledge Agreement between CSIA and PNTC, as Trustee, pledging net water-treatment revenues for the benefit of all parity bondholders;
(d) Bond Purchase Agreement between CSIA and Meridian Capital Partners LLC, as representative of the underwriters, setting forth the terms and conditions of the underwriters' purchase of the Series 2023A Bonds;
(e) Continuing Disclosure Agreement between CSIA and PNTC, as Dissemination Agent, establishing CSIA's continuing disclosure undertaking pursuant to SEC Rule 15c2-12;
(f) Tax Regulatory Agreement and Certificate, containing CSIA's covenants and certifications with respect to the maintenance of the tax-exempt status of interest on the Bonds under the Code;
(g) Escrow Deposit Agreement between CSIA and PNTC, as Escrow Agent, governing the deposit, investment, and disbursement of bond proceeds and CSIA's equity contribution for the Project Fund;
(h) Debt-Service Reserve Fund Surety Bond Agreement among CSIA, PNTC, and Olympia Guaranty Insurance Corp., providing for the issuance and maintenance of the surety policy satisfying the debt-service reserve fund requirement.
3. Official Statements. The Resolution authorizes the preparation, approval, and distribution of the Preliminary Official Statement and the Final Official Statement in connection with the offering and sale of the Series 2023A Bonds, and authorizes the Executive Director to deem the Preliminary Official Statement "final" for purposes of SEC Rule 15c2-12(b)(1).
4. Rate Covenant. The Resolution establishes a rate covenant requiring CSIA to fix, revise, and collect rates and charges for water-treatment services sufficient to produce net pledged revenues in each fiscal year equal to not less than 1.40 times (1.40x) the annual aggregate parity debt service for such fiscal year. This rate covenant is incorporated by reference into the Bond Indenture and the Revenue Pledge Agreement.
C. Delegation of Authority to Executive Director
Recognizing that the final pricing and certain details of the Series 2023A Bonds will be determined following the date of adoption of the Resolution, Resolution No. 2023-014 delegates to Executive Director Harold K. Nakamura the authority to take the following actions on behalf of CSIA, within the parameters and limitations established by the Resolution:
(a) To determine the final aggregate principal amount of the Series 2023A Bonds, provided that such amount shall not exceed $220,000,000;
(b) To determine the final interest rate or rates, maturity schedule, redemption provisions, and other financial terms of the Series 2023A Bonds, consistent with the parameters set forth in the Resolution;
(c) To execute and deliver all Transaction Documents, including without limitation the Bond Indenture, First Supplemental Indenture, Revenue Pledge Agreement, Bond Purchase Agreement, Continuing Disclosure Agreement, Tax Regulatory Agreement and Certificate, Escrow Deposit Agreement, and DSRF Surety Bond Agreement, on behalf of CSIA;
(d) To execute the Certificate of Authorized Officer, the Closing Certificate, and any other certificates, instruments, or documents required in connection with the closing of the Series 2023A financing;
(e) To take all other actions that are necessary, convenient, or appropriate to effectuate the purposes and intent of the Resolution.
In addition, the Resolution delegates to Chief Financial Officer Denise R. Whitford the authority to execute the CFO's Certificate certifying CSIA's compliance with the debt-service coverage ratio covenant and other financial covenants, and to take such other financial-reporting actions as may be necessary in connection with the closing of the Series 2023A financing.
The delegation of authority contained in the Resolution is appropriately bounded by the parameters and limitations set forth therein. The Resolution specifies the maximum principal amount ($220,000,000), the purpose of the Bonds (financing the PSRAWTF), and the general framework within which the Executive Director is authorized to determine final terms. This structure is consistent with prevailing practice in municipal bond financings and with the delegation authority recognized under Chapter 43.160A RCW.
D. Documents Reviewed
In conducting our analysis of the sufficiency of the Board authorization for the Series 2023A financing, we reviewed the following documents:
(i) A certified copy of Resolution No. 2023-014, as adopted by the Board of Commissioners on May 9, 2023, obtained from Martin J. Espinoza, General Counsel of CSIA;
(ii) The official minutes of the regular meeting of the Board of Commissioners held on May 9, 2023, including the record of the vote on the Resolution;
(iii) The certificate of the Secretary of the Board, dated May 10, 2023, confirming the due adoption of the Resolution, the presence of a quorum at the meeting, and the compliance of the meeting with applicable procedural requirements;
(iv) The notice of the May 9, 2023 regular meeting of the Board, as published in compliance with the requirements of Washington's Open Public Meetings Act (Chapter 42.30 RCW), including the date, time, and location of the meeting and a summary of the agenda items, including the proposed authorization of the Series 2023A Bonds.
E. Analysis of Sufficiency
We have analyzed Resolution No. 2023-014 for its sufficiency as the authorizing instrument for the issuance of the Series 2023A Bonds and the execution and delivery of the Transaction Documents. Our analysis addresses the following elements:
Specificity and Particularity. The Resolution is specific and detailed in its authorization, identifying the Bond series by name and designation, specifying the maximum aggregate principal amount, the purpose of the Bonds, the Project to be financed, the security for the Bonds, the rate covenant, and each of the Transaction Documents to be executed. The Resolution contains sufficient detail to satisfy the requirements of Chapter 43.160A RCW for a valid authorizing resolution, and to provide a clear and unambiguous basis for the issuance of the Bonds and the execution of the Transaction Documents.
Delegation Authority. The delegation of pricing and execution authority to Executive Director Nakamura is appropriately bounded by the parameters established in the Resolution, including the maximum principal amount and the scope of the authorized actions. The delegation is consistent with the Board's authority under the Enabling Act and with CSIA's organizational documents to delegate administrative and executive functions to the Executive Director.
Compliance with Open Public Meetings Act. The meeting at which Resolution No. 2023-014 was adopted was noticed and conducted in compliance with Washington's Open Public Meetings Act, Chapter 42.30 RCW. The notice of the meeting was published in the manner and within the time frame required by the statute, and the meeting was open to the public. We have reviewed the published notice and confirmed its compliance with the statutory requirements.
Procedural Regularity. The Resolution was adopted at a regular meeting of the Board at which a quorum was present, by a vote of the requisite majority of Board members. The Secretary of the Board has certified the adoption and the presence of a quorum.
Conclusion. Based on the foregoing analysis, we conclude that Resolution No. 2023-014 provides adequate and valid authorization for all aspects of the Series 2023A financing, including the issuance of the Bonds, the pledge of net water-treatment revenues, the execution and delivery of all Transaction Documents, and the delegation of final pricing and execution authority to Executive Director Nakamura.
V. Pledge of Net Water-Treatment Revenues
A. Statutory Framework for Revenue Pledge
Chapter 43.160A RCW authorizes CSIA to pledge "net revenues" derived from the operation of its water-treatment system as security for the payment of revenue bonds issued under the Act. The statutory authorization for the revenue pledge is a cornerstone of the security structure of the Series 2023A Bonds and of all existing outstanding parity revenue bonds of CSIA.
For purposes of the Bond Indenture and the Revenue Pledge Agreement, "Net Revenues" (also referred to as "Net Pledged Revenues") is defined as the gross pledged revenues of CSIA's water-treatment system, less the operation and maintenance expenses of the system. Gross pledged revenues include all revenues, fees, charges, and other amounts received by CSIA from or in connection with the operation of its water-treatment system, including (without limitation) the following categories:
(i) Wholesale Water Treatment Service Charges paid by the fourteen (14) participating municipal water and sewer districts under their respective Wholesale Water Treatment Services Agreements with CSIA;
(ii) Connection fees assessed and collected from new connections to the water-treatment system; and
(iii) Investment earnings on pledged funds held by PNTC as Trustee under the Bond Indenture.
A critical feature of the Enabling Act is the self-executing nature of the statutory lien created by the pledge of net revenues. The Act provides that the pledge of revenues in connection with the issuance of revenue bonds creates a lien on the pledged revenues that is valid and binding from the time the bonds are issued and delivered, without the need for filing a UCC financing statement, recording any instrument with a county recorder or the Secretary of State, making physical delivery of any pledged funds, or taking any other action that might otherwise be required under Article 9 of the Uniform Commercial Code as adopted in Washington (Title 62A RCW). This statutory perfection mechanism provides bondholders with a first-priority lien on pledged net revenues that is superior to any competing claim or interest, including claims of judgment creditors, secured creditors, or other lienholders.
The statutory lien and perfection provisions of Chapter 43.160A RCW are modeled on similar provisions found in the enabling legislation of other Washington governmental instrumentalities and are consistent with the approach adopted by many states to facilitate the issuance of revenue bonds by public entities. We are not aware of any Washington judicial decision or attorney general opinion that has questioned or limited the effectiveness of the statutory lien and perfection mechanism under the Act or under analogous Washington statutes.
B. Revenue Base and Participating Districts
CSIA's pledged revenue base is substantial, diversified, and supported by long-term contractual commitments from the fourteen (14) participating municipal water and sewer districts. The following table summarizes CSIA's key revenue and expense data for fiscal year 2022, as reflected in CSIA's audited financial statements audited by Hargrove & Associates CPAs, PLLC (engagement partner: Victoria L. Fong, CPA):
CSIA estimates that net pledged revenues for fiscal year 2024, the first full fiscal year following completion of the PSRAWTF, will be approximately $431,800,000, reflecting projected growth in wholesale service charges and connection fees associated with the expanded treatment capacity.
The diversification of CSIA's revenue base across fourteen participating districts is a significant credit strength. No single participating district accounts for a disproportionate share of total revenues, and the long-term Wholesale Water Treatment Services Agreements contain take-or-pay or equivalent minimum-payment obligations that require each district to pay its allocated share of costs regardless of actual usage. These contractual commitments provide a stable and predictable revenue stream that reduces the risk of revenue volatility and supports consistent debt-service coverage.
CSIA's statutory rate-setting authority under Chapter 43.160A RCW further supports the reliability and sufficiency of pledged revenues. CSIA has the power to fix, revise, and collect rates, fees, and charges for water-treatment services at levels sufficient to pay operating expenses, debt service on all outstanding revenue bonds, and any other obligations under the Bond Indenture. This rate-setting authority is not subject to review or approval by the Washington Utilities and Transportation Commission or any other state regulatory body, providing CSIA with the ability to adjust rates as necessary to maintain compliance with its rate covenant obligations.
C. Parity Lien Structure
The Series 2023A Bonds will be secured by a pledge of net water-treatment revenues on a parity basis with all existing outstanding revenue bonds of CSIA. The parity lien structure means that all holders of parity revenue bonds (including the Series 2023A Bonds) have an equal and ratable claim on net pledged revenues, without priority or preference of any one series of bonds over any other series.
The existing outstanding parity revenue bonds of CSIA, as of the date immediately prior to the issuance of the Series 2023A Bonds, have an aggregate principal amount of approximately $3,120,000,000. Following the issuance of the Series 2023A Bonds, the total aggregate principal amount of parity revenue bonds will be approximately $3,340,000,000 ($3,120,000,000 + $220,000,000).
The Revenue Pledge Agreement, to be executed by CSIA and PNTC on the closing date of October 24, 2023, will confirm and implement the pledge of net water-treatment revenues to the Trustee for the equal and ratable benefit of all holders of parity revenue bonds. The Revenue Pledge Agreement will also set forth the flow-of-funds provisions governing the collection, deposit, and disbursement of pledged revenues, including the required deposits to the debt-service fund, the debt-service reserve fund, and the operation and maintenance fund.
Under the terms of the Bond Indenture, no senior lien debt may be created. CSIA may not issue any bonds or other obligations secured by a pledge of net water-treatment revenues that is senior or superior to the lien securing the parity revenue bonds. Any additional bonds issued by CSIA must be issued on a parity basis with the existing outstanding parity revenue bonds, subject to satisfaction of the additional bonds test described in Section VI.C below.
D. Enforceability Considerations
The enforceability of the pledge of net water-treatment revenues under Washington law is supported by several statutory and common-law protections. The Enabling Act provides that the pledge creates a statutory lien that is valid and enforceable from the time of bond issuance, as discussed above. The pledge does not require voter approval and is not subject to constitutional debt limitations, because the Bonds are payable solely from pledged revenues and do not constitute a general obligation of the State or any political subdivision.
Under Washington law, revenue bonds issued by governmental instrumentalities are generally enforceable in accordance with their terms, and the pledge of revenues as security for such bonds creates a binding and enforceable obligation of the issuer. The rights of bondholders to receive payment from pledged revenues are protected by the contractual provisions of the Bond Indenture and the Revenue Pledge Agreement, as well as by applicable statutory provisions.
A separate, detailed Enforceability Opinion addressing the validity, binding effect, and enforceability of the Revenue Pledge Agreement and the pledge of net water-treatment revenues will be delivered by Calderwood & Harkness LLP at the closing of the Series 2023A financing. That opinion will address, among other things, the priority of the lien on pledged revenues, the effect of the statutory perfection mechanism, and any limitations on enforceability arising from applicable bankruptcy, insolvency, or creditor-rights laws.
VI. Financial Covenants and Debt-Service Coverage
A. Rate Covenant
CSIA has covenanted, and will covenant in the Bond Indenture, to fix, revise, and collect rates, fees, and charges for water-treatment services sufficient to produce Net Pledged Revenues in each fiscal year equal to not less than 1.40 times (1.40x) the annual aggregate parity debt service for such fiscal year (the "Rate Covenant"). The Rate Covenant is a fundamental credit protection for holders of the Series 2023A Bonds and all other parity revenue bonds, ensuring that CSIA maintains revenues at a level sufficient to pay debt service and maintain an adequate margin of coverage.
The Rate Covenant is consistent with, and authorized by, Chapter 43.160A RCW, which grants CSIA the power to set rates at levels sufficient to meet the requirements of its bond indenture and related agreements. The Enabling Act does not impose a maximum or minimum rate covenant level; rather, the Rate Covenant level is established contractually in the Bond Indenture, as authorized by the Board.
Under the Bond Indenture, failure by CSIA to maintain net pledged revenues at the required 1.40x minimum level constitutes an event of default, subject to applicable cure periods. The Indenture provides a consultant's report remedy, pursuant to which CSIA may engage an independent consultant to recommend rate increases and other measures sufficient to restore compliance with the Rate Covenant within a specified time period. If CSIA implements the consultant's recommendations and achieves compliance within the cure period, the event of default is deemed cured and the related remedies are not triggered.
The 1.40x Rate Covenant is at a level that is standard for highly rated water and wastewater revenue bond issuers and is consistent with the expectations of the rating agencies that have assigned investment-grade ratings to the Series 2023A Bonds.
B. Debt-Service Coverage Ratio — Current Compliance
Based on CSIA's audited financial statements for fiscal year 2022 and the projected annual debt service on the Series 2023A Bonds, we have calculated the pro forma debt-service coverage ratio as follows:
The pro forma debt-service coverage ratio of 1.48x exceeds the 1.40x minimum required by the Rate Covenant, providing a comfortable margin of coverage. This coverage level is consistent with the "AA" / "AA−" credit ratings assigned to the Series 2023A Bonds by Lakeshore Ratings Group, Inc. and Pinnacle Credit Analytics, Inc., respectively.
At the closing of the Series 2023A financing, Chief Financial Officer Denise R. Whitford will execute a CFO's Certificate certifying CSIA's compliance with the debt-service coverage ratio covenant and all other financial covenants contained in the Bond Indenture and the Revenue Pledge Agreement. The CFO's Certificate will be based on CSIA's audited financial statements for fiscal year 2022 and will include a calculation of the pro forma debt-service coverage ratio inclusive of the Series 2023A Bonds.
C. Additional Bonds Test
The Bond Indenture contains an additional bonds test that must be satisfied as a condition to the issuance of any additional parity revenue bonds, including the Series 2023A Bonds. The additional bonds test requires that, at the time of issuance of additional parity bonds, 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 completion of the project financed with the additional bonds) equal at least 1.40 times (1.40x) the maximum annual parity debt service, calculated to include the proposed additional bonds.
For purposes of the Series 2023A issuance, we have applied the additional bonds test using FY 2022 Net Pledged Revenues as the testing base:
The total annual parity debt service of $278,400,000 is well within the maximum permissible level of $294,714,286 implied by the 1.40x additional bonds test. Accordingly, the additional bonds test is satisfied for the issuance of the Series 2023A Bonds with ample margin.
If CSIA were to elect to use the alternative testing methodology based on projected net pledged revenues for fiscal year 2024 ($431,800,000), the maximum permissible annual parity debt service would be $431,800,000 ÷ 1.40 = $308,428,571, providing even greater coverage. However, for purposes of this analysis, we have relied on the historical FY 2022 figures, which provide a conservative and independently verified basis for demonstrating compliance.
Conclusion. The additional bonds test under the Bond Indenture is satisfied for the issuance of the Series 2023A Bonds, whether calculated on the basis of FY 2022 historical Net Pledged Revenues or projected FY 2024 Net Pledged Revenues.
D. Debt-Service Reserve Fund
The Bond Indenture requires that a debt-service reserve fund (the "DSRF") be maintained for the benefit of the Series 2023A Bonds. The DSRF requirement is an amount equal to the least of the following:
(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 the original par amount of the Series 2023A Bonds: $22,000,000.
Because the maximum annual debt service of $11,610,000 is the least of the three alternative calculations, the DSRF requirement for the Series 2023A Bonds is $11,610,000.
The DSRF requirement will be satisfied through the provision of a surety policy issued by Olympia Guaranty Insurance Corp. (Policy No. OG-2023-MUN-4718) in the amount of $11,610,000. The surety policy obligates Olympia Guaranty to pay amounts drawn on the policy to PNTC, as Trustee, upon the occurrence of a draw event as specified in the policy and the DSRF Surety Bond Agreement. The annual premium for the surety policy is $23,220, representing 0.20% of the surety amount.
The use of a surety policy in lieu of a cash-funded reserve is expressly authorized under the terms of the Bond Indenture and is consistent with Chapter 43.160A RCW, which does not restrict the form of security that may be provided for the DSRF. The use of a surety policy reduces the upfront funding requirements for the Series 2023A financing and allows a greater portion of bond proceeds to be applied directly to the construction of the Project.
VII. Debt Limitations and Constitutional Considerations
A. No Constitutional Debt Limitation Applicable
Revenue bonds issued by CSIA under Chapter 43.160A RCW are not subject to the constitutional debt limitations set forth in Article VIII of the Washington State Constitution. Article VIII imposes limitations on the incurrence of debt by the State and its political subdivisions, requiring, among other things, voter approval for the issuance of general obligation bonds exceeding specified percentages of assessed valuation. However, these limitations apply only to obligations that constitute "indebtedness" of the State or a political subdivision — that is, obligations payable from or secured by the general taxing power or general fund revenues of the issuing entity.
Because the Series 2023A Bonds are payable solely from net water-treatment revenues pledged under the Revenue Pledge Agreement, and do not constitute a general obligation, debt, or liability of the State of Washington or any political subdivision thereof, the constitutional debt limitations of Article VIII are inapplicable. The Enabling Act expressly provides that revenue bonds issued by CSIA do not constitute indebtedness of the State or any political subdivision within the meaning of any constitutional or statutory limitation. No voter approval is required for the issuance of the Series 2023A Bonds.
B. No Statutory Debt Cap
Chapter 43.160A RCW does not impose a specific dollar cap on the aggregate amount of revenue bonds that may be outstanding at any time. The Enabling Act grants CSIA broad discretion to issue revenue bonds in such amounts as the Board may determine to be necessary for the financing of eligible projects, subject only to the contractual constraints established in the governing indenture.
The principal constraints on additional borrowing are the additional bonds test and the rate covenant established by the Bond Indenture, as described in Section VI above. These contractual protections serve a similar function to a statutory debt cap, ensuring that CSIA does not issue additional parity bonds unless its pledged revenue base is sufficient to support the incremental debt service while maintaining the required minimum coverage ratio.
C. State Enabling Statute Compliance
CSIA's creation under Chapter 43.160A RCW and its exercise of bonding authority in connection with the Series 2023A financing are within the scope of the Legislature's delegation of powers. The issuance of revenue bonds to finance the construction of a regional advanced water-treatment facility is squarely within the purposes for which CSIA was created, and the terms and conditions of the Series 2023A Bonds are consistent with the parameters established by the Enabling Act.
We have conducted a review of pending Washington legislation and have identified no legislative proposals that would amend, repeal, or limit any provision of Chapter 43.160A RCW in a manner that would affect CSIA's authority to issue the Series 2023A Bonds. We have also searched for pending or recently decided judicial proceedings challenging CSIA's statutory authority or the validity of its bonding powers and have identified no such challenges.
VIII. Environmental and Regulatory Approvals
A. SEPA Compliance
The Washington State Environmental Policy Act ("SEPA"), Chapter 43.21C RCW, requires state and local agencies to evaluate the environmental impacts of proposed actions, including the construction of major infrastructure projects. CSIA, as the lead agency for purposes of SEPA review, issued a Determination of Non-Significance ("DNS") on September 12, 2022, with respect to the Puget Sound Regional Advanced Water Treatment Facility. The DNS concluded that the Project is not likely to have a significant adverse impact on the environment and that preparation of an environmental impact statement was not required.
The DNS was published and circulated in accordance with SEPA procedures, and the statutory appeal period has expired without any appeal being filed. No supplemental environmental review is required for the financing transaction itself, as the issuance of revenue bonds is not an independent "action" triggering SEPA review separate from the underlying project.
We have reviewed a copy of the DNS and confirmed its compliance with applicable SEPA requirements. The DNS is final and not subject to further administrative or judicial challenge.
B. NPDES Permit
The discharge of treated effluent from the PSRAWTF is regulated under the federal Clean Water Act and the Washington State Water Pollution Control Act, implemented through the National Pollutant Discharge Elimination System ("NPDES") permit program. CSIA holds NPDES Permit No. WA-004837-2, issued by the Washington State Department of Ecology. A modification of the permit was approved by the Department of Ecology on January 6, 2023, to cover the expanded treatment capacity associated with the PSRAWTF.
The NPDES permit modification was issued after public notice and comment in accordance with applicable regulatory procedures, and the permit is now in effect. We have reviewed a copy of the modified permit and confirmed that it authorizes the discharge volumes and treatment parameters associated with the PSRAWTF at its design capacity of 60 MGD.
C. Other Regulatory Approvals
We have conducted a review of applicable state and local permitting requirements and have determined that no additional state or local governmental approvals are required for the issuance of the Series 2023A Bonds. The Bond Purchase Agreement and the Certificate of Authorized Officer to be delivered at closing will require Executive Director Harold K. Nakamura to certify that all required governmental approvals, permits, and authorizations necessary for the construction of the Project and the issuance of the Bonds have been obtained and are in full force and effect, and that CSIA is in compliance with all conditions and requirements thereof.
Building permits, grading permits, and other local construction-related permits for the PSRAWTF will be obtained by Northtide Environmental Engineering, Inc. in the ordinary course of construction, as contemplated by GMP Contract No. CSIA-DB-2023-001. Such permits are construction-related ministerial approvals and do not affect CSIA's authority to issue the Series 2023A Bonds or enter into the Transaction Documents.
IX. Key Transaction Documents — Authority Considerations
This Section provides a summary analysis of CSIA's authority to enter into each of the principal Transaction Documents in connection with the Series 2023A financing.
A. Bond Indenture and First Supplemental Indenture
CSIA's authority to enter into the Bond Indenture (Trust Indenture) with PNTC, as Trustee, is derived directly from Chapter 43.160A RCW, which authorizes CSIA to enter into indentures, trust agreements, and other contracts necessary or convenient in connection with the issuance of revenue bonds. Resolution No. 2023-014 specifically approves the form of, and authorizes the execution and delivery of, the Bond Indenture.
The First Supplemental Indenture (Series 2023A) is a supplemental indenture to the Bond Indenture that authorizes and establishes the specific terms and conditions of the Series 2023A Bonds, including the aggregate principal amount, interest rate, maturity schedule, redemption provisions, and other terms. The First Supplemental Indenture is authorized by the Bond Indenture and by Resolution No. 2023-014, and CSIA's authority to enter into the First Supplemental Indenture is within the scope of its powers under the Enabling Act.
B. Revenue Pledge Agreement
CSIA's authority to pledge net water-treatment revenues as security for the Series 2023A Bonds is expressly granted by Chapter 43.160A RCW, as discussed in detail in Section V above. The Revenue Pledge Agreement will be executed by CSIA and PNTC, as Trustee, on the closing date of October 24, 2023, and will confirm and implement the pledge of net pledged revenues for the equal and ratable benefit of all holders of parity revenue bonds.
The Revenue Pledge Agreement is authorized by Resolution No. 2023-014, and CSIA's authority to execute and deliver the agreement is within the scope of its express statutory powers.
C. Bond Purchase Agreement
The Bond Purchase Agreement was executed on August 30, 2023, between CSIA and Meridian Capital Partners LLC, as representative of the underwriting syndicate (which includes Dralvecen Fenn & Co., Inc. as co-managing underwriter). The Bond Purchase Agreement sets forth the terms and conditions of the underwriters' purchase of the Series 2023A Bonds from CSIA, including the purchase price, the underwriters' discount, closing conditions, and the representations, warranties, and covenants of the parties.
The purchase price for the Series 2023A Bonds under the Bond Purchase Agreement is 99.25% of par, less an underwriters' discount of 0.45% ($990,000), resulting in net proceeds before costs of issuance of $217,360,000. CSIA's authority to sell bonds at negotiated sale to the underwriting syndicate is expressly authorized under Chapter 43.160A RCW, which permits the sale of bonds at public or negotiated sale, and by Resolution No. 2023-014, which authorizes the negotiated sale to Meridian Capital Partners LLC and Dralvecen Fenn & Co., Inc.
D. Tax Regulatory Agreement and Certificate
The Tax Regulatory Agreement and Certificate (the "Tax Certificate") will be executed by CSIA on October 15, 2023 (the original target closing date for the tax certificate). The Tax Certificate contains CSIA's covenants, representations, and certifications with respect to compliance with Sections 103 and 141 through 150 of the Code, including covenants relating to the use of bond-financed facilities, the investment and expenditure of bond

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