1030-00001 · Dralvecen Fenn & Co., Inc · Memos & Analyses

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CALDERWOOD & HARKNESS LLP 1420 Fifth Avenue, Suite 3600 Seattle, Washington 98101 Telephone: (206) 555-4200

MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum has been prepared by Calderwood & Harkness LLP and is protected by the attorney-client privilege and the work-product doctrine. This document is intended solely for the use of the addressee and other authorized personnel of Calderwood & Harkness LLP and should not be disclosed to any third party without the prior written consent of the undersigned.

To: George Trujillo, Partner

From: Brett Callahan, Associate

Date: May 30, 2023

Re: Revenue Pledge — Priority and Perfection Under Washington Law; Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) — $220,000,000

Matter No.: 1030-00001

Reviewed by: George Trujillo

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I. Executive Summary

This memorandum analyzes the validity, priority, and perfection of the pledge of net water-treatment revenues by the Cascadia State Infrastructure Authority ("CSIA" or "Cascadia") as security for CSIA's Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) (the "Series 2023A Bonds") in the aggregate principal amount of $220,000,000 under Washington State law.

Based on the analysis set forth herein, it is our conclusion that the pledge of net water-treatment revenues created under the Revenue Pledge Agreement, dated as of October 24, 2023, between CSIA and Pacific Northwest Trust Company, N.A. ("PNTC"), as Trustee (the "Revenue Pledge Agreement"), constitutes a valid, enforceable, and perfected statutory lien under Chapter 43.160A of the Revised Code of Washington ("RCW") and related provisions of Washington statutory law. The statutory lien created by the pledge attaches to the designated revenues by operation of law and is not subject to filing, recording, or other procedural requirements under the Uniform Commercial Code ("UCC") or otherwise.

The pledge secures the Series 2023A Bonds on a parity basis with CSIA's existing outstanding revenue bonds, which had an aggregate principal amount outstanding of $3,120,000,000 as of the date of this memorandum. Upon the issuance and delivery of the Series 2023A Bonds, total outstanding parity obligations will be $3,340,000,000, all of which share equally and ratably in the lien on Net Pledged Revenues (as defined in the Bond Indenture and Revenue Pledge Agreement).

No filing under Article 9 of the Uniform Commercial Code, as enacted in Washington (RCW 62A.9A), is required to perfect the statutory lien. Under applicable Washington law, perfection occurs by operation of statute upon (i) adoption of the authorizing resolution by CSIA's governing board and (ii) execution and delivery of the Bond Indenture and Revenue Pledge Agreement. The absence of a UCC filing requirement eliminates the risk of lapse or defective filing and confirms that the pledge achieves first-priority perfection status by statutory operation.

The revenue pledge is enforceable against the wholesale water treatment service charges collected by CSIA from 14 participating municipal water and sewer districts located across the Puget Sound region. These service charges arise under long-term Wholesale Water Treatment Services Agreements and constitute unconditional contractual obligations of the participating districts to CSIA. The combination of the statutory lien mechanism, the contractual underpinnings of the revenue stream, the flow-of-funds protections in the Bond Indenture, the 1.40x Rate Covenant, and the Additional Bonds Test requirements provides a robust and multi-layered security structure for the Series 2023A Bonds.

This memorandum is organized as follows: Part II provides background on the issuer, the project, the financing, and the key transaction documents. Part III examines the statutory framework governing the pledge. Part IV defines and discusses the scope of the pledged revenues. Part V analyzes the parity lien structure and outstanding obligations. Part VI describes the flow-of-funds provisions under the Bond Indenture. Part VII discusses the Rate Covenant. Part VIII addresses the perfection of the pledge under Washington law. Part IX analyzes the enforceability of the pledge against the participating districts. Part X discusses events of default and remedies. Part XI briefly addresses environmental and regulatory considerations. Part XII examines the Debt Service Reserve Fund. Part XIII sets forth our conclusions and recommendations.

II. Background and Transaction Overview

A. The Issuer — Cascadia State Infrastructure Authority

The Cascadia State Infrastructure Authority is a governmental instrumentality and public body corporate and politic of the State of Washington, created and existing pursuant to Chapter 43.160A RCW. CSIA was established by the Washington State Legislature to develop, finance, construct, and operate regional water treatment and related infrastructure systems for the benefit of the citizens and communities of the State of Washington, with a particular emphasis on the Puget Sound region and surrounding counties.

CSIA maintains its headquarters at 1100 Capitol Way South, Suite 400, Olympia, Washington 98501. The organization is governed by a board of commissioners appointed pursuant to the provisions of Chapter 43.160A RCW, with Commissioner Lorraine Chu currently serving as Board Chair. The executive management team includes Harold K. Nakamura, Executive Director; Denise R. Whitford, Chief Financial Officer; and Martin J. Espinoza, General Counsel. CSIA's Employer Identification Number is 91-2058374.

As a governmental instrumentality of the State of Washington, CSIA possesses the powers and immunities afforded to public bodies under Washington law, including the express statutory authority to issue revenue bonds, to pledge revenues derived from its water-treatment system and related facilities, and to enter into contracts and agreements in furtherance of its public purposes. CSIA is not a general-purpose municipality and does not possess ad valorem taxing power; its revenue bonds are payable solely from the revenues of its water-treatment system, as distinguished from general obligation bonds that pledge the full faith, credit, and taxing power of the issuing entity.

CSIA's annual operating budget for fiscal year 2023 is approximately $1.48 billion, reflecting the scope of the authority's water-treatment operations across the Puget Sound region. CSIA's audited financial statements for fiscal year 2022 were prepared by Hargrove & Associates CPAs, PLLC, with Victoria L. Fong, CPA, serving as the engagement partner. These audited financials form the basis for the revenue and debt-service coverage calculations discussed later in this memorandum.

B. The Project

The proceeds of the Series 2023A Bonds will be used to finance a portion of the costs of the Puget Sound Regional Advanced Water Treatment Facility (the "PSRAWTF" or the "Project"). The Project is a major capital improvement to CSIA's regional water-treatment system, designed to expand capacity and upgrade treatment technology to meet evolving regulatory requirements and growing demand for treated water in the Puget Sound region.

The Project is located at 7250 Deschutes Parkway, Tumwater, Thurston County, Washington 98501, on approximately 18 acres of CSIA-owned land that is adjacent to the existing Deschutes River Tertiary Treatment Plant, which is part of CSIA's current water-treatment infrastructure. The Project site was acquired by CSIA in 2018 and has been designated for water-treatment infrastructure expansion in CSIA's capital facilities plan.

The scope of the Project encompasses the design and construction of a 60-million-gallons-per-day ("MGD") advanced membrane-filtration and ultraviolet ("UV") disinfection water-treatment facility. The facility will incorporate state-of-the-art membrane-filtration technology designed to meet or exceed current and anticipated regulatory standards for treated water quality. In addition to the core treatment facility, the Project includes the construction of influent and effluent pipelines connecting the new facility to the existing conveyance system, a 5-million-gallon equalization basin to manage flow variations, biosolids handling improvements to accommodate the increased volume of treatment residuals, and upgrades to CSIA's Supervisory Control and Data Acquisition ("SCADA") system to integrate the new facility into CSIA's centralized monitoring and control infrastructure.

The Project has an ultimate design capacity of 60 MGD, with an initial operating capacity at commissioning of 42 MGD. The phased approach allows CSIA to bring additional capacity online as regional demand grows, maximizing the efficiency of the capital investment. Northtide Environmental Engineering, Inc. ("Northtide"), an experienced design-build firm led by Chief Executive Officer Garrett L. Henriksen, has been selected as the design-build contractor for the Project. CSIA and Northtide executed a Guaranteed Maximum Price ("GMP") Design-Build Contract No. CSIA-DB-2023-001 on March 10, 2023, establishing a GMP of $193,500,000 for the design and construction of the Project.

The estimated total project cost is $237,400,000, which includes the GMP contract amount, owner's costs, permitting and regulatory compliance costs, financing costs (including costs of issuance for the Series 2023A Bonds), contingencies, and capitalized interest during the construction period. The difference between the $220,000,000 principal amount of the Series 2023A Bonds and the total project cost will be funded from CSIA's existing capital reserves and available system revenues.

C. The Financing

The financing of the Project is structured through the issuance of the Series 2023A Bonds, the key terms of which are summarized below:

The financing team for the Series 2023A Bonds consists of the following parties:

• Senior Managing Underwriter: Meridian Capital Partners LLC, Jonathan D. Kessler, Managing Director

• Co-Managing Underwriter: Dralvecen Fenn & Co., Inc., Sarah E. Mulvaney, Director

• Bond Trustee / Paying Agent / Registrar / Escrow Agent: Pacific Northwest Trust Company, N.A. ("PNTC"), Alan M. Greer, Vice President, Corporate Trust Services

• Co-Bond Counsel: Pryor Crestfield LLP, Margaret S. Yoon, Partner; and Calderwood & Harkness LLP

• Underwriters' Counsel: Alderman & Locke LLP, Daniel F. Obermeyer, Partner

• Municipal Advisor: Clearfield Municipal Advisors LLC, Kenneth W. Barclay, Managing Director

The issuance of the Series 2023A Bonds was authorized by CSIA Board Resolution No. 2023-014, which was adopted on May 9, 2023 by the Board of Commissioners, with Commissioner Lorraine Chu presiding as Board Chair. The Resolution authorizes the issuance of the Series 2023A Bonds, approves the form of the First Supplemental Indenture and Revenue Pledge Agreement, and delegates to the Executive Director and Chief Financial Officer the authority to finalize the terms of sale, subject to the parameters established in the Resolution (including the maximum principal amount of $225,000,000, maximum interest rate of 4.00%, and maximum maturity of 31 years from the dated date).

It is anticipated that the Preliminary Official Statement ("POS") will be distributed on or about June 26, 2023, with a negotiated sale to the underwriting syndicate led by Meridian Capital Partners LLC to follow. The closing and delivery of the Series 2023A Bonds is expected to occur on or about October 24, 2023.

D. Key Transaction Documents Relevant to Revenue Pledge Analysis

The legal framework governing the revenue pledge for the Series 2023A Bonds is established through the following key transaction documents, each of which has been or will be reviewed in its entirety by this firm in its capacity as Co-Bond Counsel:

1. Bond Indenture (Trust Indenture) between CSIA and PNTC, dated as of October 24, 2023 (the "Bond Indenture" or "Indenture"). The Bond Indenture is the master trust agreement that establishes the terms and conditions for the issuance of revenue bonds by CSIA, creates the funds and accounts for the receipt and disbursement of pledged revenues, sets forth the flow-of-funds provisions, defines the revenue pledge, establishes the Rate Covenant and Additional Bonds Test, and prescribes the rights and remedies of the Trustee and bondholders in the event of default.

2. First Supplemental Indenture (Series 2023A) between CSIA and PNTC, dated as of October 24, 2023 (the "First Supplemental Indenture"). The First Supplemental Indenture supplements the Bond Indenture to authorize the specific terms of the Series 2023A Bonds, including the aggregate principal amount, interest rate, maturity schedule, redemption provisions, and form of bond.

3. Revenue Pledge Agreement between CSIA and PNTC, dated as of October 24, 2023 (the "Revenue Pledge Agreement"). The Revenue Pledge Agreement sets forth the specific terms of the pledge of Net Pledged Revenues by CSIA in favor of the Trustee for the benefit of bondholders. This agreement operates in conjunction with the Bond Indenture to create the statutory lien on pledged revenues.

4. Debt-Service Reserve Fund Surety Bond Agreement among CSIA, PNTC, and Olympia Guaranty Insurance Corp. (the "Surety Agreement"), providing for the issuance of Surety Policy No. OG-2023-MUN-4718 in satisfaction of the Debt Service Reserve Fund requirement for the Series 2023A Bonds.

5. Wholesale Water Treatment Services Agreements between CSIA and each of the 14 participating municipal water and sewer districts (collectively, the "Service Agreements"). These long-term agreements establish the contractual obligations of the participating districts to pay wholesale water treatment service charges to CSIA and form the primary revenue base underlying the pledge.

Each of these documents is in substantially final form and has been the subject of extensive negotiation among the parties and their respective counsel. As Co-Bond Counsel, Calderwood & Harkness LLP has participated in the drafting and review of the Bond Indenture, First Supplemental Indenture, and Revenue Pledge Agreement, and has reviewed the Service Agreements and Surety Agreement for purposes of our opinion regarding the validity and enforceability of the revenue pledge.

III. Statutory Framework — Chapter 43.160A RCW and Related Provisions

A. Enabling Legislation — Chapter 43.160A RCW

The statutory foundation for the revenue pledge securing the Series 2023A Bonds is Chapter 43.160A of the Revised Code of Washington. This chapter creates CSIA as a governmental instrumentality and public body corporate and politic of the State of Washington and confers upon CSIA a broad range of powers necessary to accomplish its statutory purposes, including the express authority to issue revenue bonds and to pledge revenues derived from its water-treatment system as security therefor.

Several key provisions of Chapter 43.160A RCW are directly relevant to the validity, priority, and perfection of the revenue pledge:

Bond Issuance Authority. Section 43.160A.050 RCW authorizes CSIA to issue revenue obligations for the purpose of financing or refinancing the costs of acquiring, constructing, improving, and equipping water-treatment facilities and related infrastructure. These revenue obligations are payable from and secured by a pledge of designated revenues of CSIA's water-treatment system, as determined by CSIA's governing board by resolution. The statute does not impose a limitation on the aggregate principal amount of revenue bonds that may be outstanding at any one time, provided that the issuer satisfies such additional bonds test requirements as may be established in the governing indenture or trust agreement. This approach affords CSIA significant flexibility to undertake additional financings as needed to support the capital requirements of its water-treatment system.

Pledging Authority and Statutory Lien. Section 43.160A.060 RCW provides that any pledge of revenues by CSIA under the chapter shall be valid and binding from the time the pledge is made and that the revenues so pledged shall immediately be subject to the lien of the pledge without any physical delivery or further act. This provision establishes the statutory lien mechanism that is central to the security structure of the Series 2023A Bonds. The statutory lien attaches to the revenues as they are received by CSIA and continues until the bonds secured thereby are paid in full or provision for payment has been made in accordance with the terms of the governing indenture.

Critically, Section 43.160A.060 RCW provides that the lien of a pledge shall be valid and binding as against all parties having claims of any kind in tort, contract, or otherwise, against CSIA, irrespective of whether such parties have notice of the pledge. This language is consistent with the general approach of Washington law to statutory pledges by governmental entities, which are treated as self-perfecting and require no notice filing to be effective against third parties.

Status as Public Body Corporate. Section 43.160A.020 RCW establishes CSIA as a "public body corporate and politic" of the State of Washington, a designation that carries important legal consequences for the revenue pledge analysis. As a public body corporate, CSIA is entitled to the sovereign immunity protections afforded to governmental entities under Washington law, subject to the limited waivers of immunity established by the Washington State Legislature. More importantly for present purposes, CSIA's status as a governmental instrumentality means that its pledges of revenue are governed by the statutory framework rather than by the commercial law provisions of the UCC, as discussed further in Section III.C below.

It is important to note that the Series 2023A Bonds are revenue bonds, not general obligation bonds. CSIA does not possess ad valorem taxing power, and the bonds do not pledge the full faith, credit, or taxing power of the State of Washington or any other governmental entity. The bonds are payable solely from the Net Pledged Revenues of CSIA's water-treatment system, and the bondholders' security interest is limited to the pledge of those revenues as set forth in the Bond Indenture and Revenue Pledge Agreement.

B. RCW Title 39 — Public Contracts and Indebtedness

In addition to the specific provisions of Chapter 43.160A RCW, several general provisions of RCW Title 39, which governs public contracts and indebtedness in the State of Washington, provide supplementary framework for the issuance and administration of the Series 2023A Bonds:

RCW 39.46 — General Provisions Applicable to Bonds of Public Bodies. Chapter 39.46 RCW establishes general provisions applicable to bonds issued by public bodies in Washington, including requirements relating to the form and registration of bonds, payment and transfer provisions, and the appointment of fiscal agents. These provisions apply to the Series 2023A Bonds as supplementary requirements in addition to the specific provisions of Chapter 43.160A RCW and the terms of the Bond Indenture. The book-entry-only registration of the Series 2023A Bonds through DTC, with Cede & Co. as the sole registered owner, is consistent with the registration provisions of Chapter 39.46 RCW and the requirements of the Indenture.

RCW 39.44 — Issuance and Sale of Municipal Bonds. Chapter 39.44 RCW governs the issuance and sale of municipal bonds in Washington, including provisions relating to competitive and negotiated sale authorization, notice requirements, and official statement disclosure obligations. The negotiated sale of the Series 2023A Bonds to the underwriting syndicate led by Meridian Capital Partners LLC is authorized under the applicable provisions of Chapter 39.44 RCW and Board Resolution No. 2023-014, which expressly authorizes the negotiated sale method for the Series 2023A Bonds.

The relationship between Chapter 43.160A RCW (the specific enabling statute for CSIA) and the general municipal bond provisions of RCW Title 39 is governed by the well-established principle of statutory construction that where a specific statute conflicts with a more general statute, the specific statute controls. Accordingly, to the extent that any provision of Chapter 43.160A RCW conflicts with or differs from the general provisions of RCW Title 39, the provisions of Chapter 43.160A RCW will govern the issuance, security, and administration of the Series 2023A Bonds. However, the general provisions of RCW Title 39 provide a useful supplementary framework and fill any gaps not specifically addressed by Chapter 43.160A RCW.

C. Uniform Commercial Code — Article 9 Inapplicability

A critical element of the revenue pledge analysis is the determination that Article 9 of the Uniform Commercial Code, as enacted in Washington at RCW 62A.9A, does not apply to the pledge of revenues by CSIA as security for the Series 2023A Bonds.

RCW 62A.9A-109(d) provides, in pertinent part, that Article 9 does not apply to "a transfer by a government or governmental subdivision or agency." This exclusion is broadly construed under Washington law and encompasses the full range of security interests, pledges, and liens created by governmental entities in connection with the issuance of revenue bonds and other obligations. The pledge of water-treatment revenues by CSIA, a governmental instrumentality created by Chapter 43.160A RCW, falls squarely within this exclusion.

The practical significance of the Article 9 exclusion cannot be overstated. Under UCC Article 9, a security interest in most types of personal property (including accounts, payment intangibles, and general intangibles) is perfected by the filing of a financing statement with the Washington Secretary of State. Failure to file, or a defective filing, can result in the loss of priority or the unperfection of the security interest, exposing the secured party to the risk that subsequent creditors or a bankruptcy trustee may assert claims that prime the security interest. These risks are entirely eliminated in the context of a statutory pledge by a governmental entity such as CSIA, because perfection occurs by operation of law, without any filing requirement.

Washington courts have consistently recognized that pledges of revenue by governmental entities are outside the scope of UCC Article 9 and are instead governed by the applicable enabling statutes. The Washington Supreme Court's decision in City of Tacoma v. Taxpayers of Tacoma, 108 Wn.2d 679 (1987), while addressing a different statutory framework, confirmed the general principle that revenue pledges by Washington governmental entities are self-perfecting and do not require UCC filings. This principle has been reaffirmed in subsequent decisions and is consistent with the approach taken by courts in other jurisdictions with similar UCC exclusion provisions.

The significance of this analysis for the Series 2023A Bond transaction is as follows: the pledge of Net Pledged Revenues by CSIA is perfected automatically, by operation of statute, upon adoption of the authorizing resolution and execution of the Bond Indenture and Revenue Pledge Agreement. No UCC financing statement filing with the Washington Secretary of State is required. The pledge achieves first-priority perfection status by statute, and the statutory lien is not subject to the risks of lapse, defective filing, or priority disputes that can arise in the context of commercially created security interests governed by UCC Article 9.

IV. Definition and Scope of Pledged Revenues

A. Components of "Net Pledged Revenues"

The scope of the revenue pledge is defined by the terms "Gross Pledged Revenues," "Operation and Maintenance Expenses," and "Net Pledged Revenues," each as defined in the Bond Indenture and Revenue Pledge Agreement. A precise understanding of these definitions is essential to the analysis of the pledge, as the statutory lien attaches to "Net Pledged Revenues" (as that term is specifically defined) and the sufficiency of the pledge is measured by reference to Net Pledged Revenues.

Gross Pledged Revenues are defined to include the following components:

(i) Wholesale Water Treatment Service Charges received by CSIA from the 14 participating municipal water and sewer districts under the long-term Wholesale Water Treatment Services Agreements. These service charges constitute the dominant component of Gross Pledged Revenues and are discussed in greater detail in Section IV.C below.

(ii) Connection Fees received by CSIA from entities connecting to or expanding their capacity within CSIA's regional water-treatment system. Connection fees are one-time charges assessed at the time of initial connection or capacity expansion and represent a secondary but meaningful source of Gross Pledged Revenues.

(iii) Investment Earnings on funds and accounts held by the Trustee under the Bond Indenture, including earnings on the Revenue Fund, Bond Fund, and other pledged accounts. Investment earnings are included within Gross Pledged Revenues to capture the economic benefit of amounts held in trust for bondholders and to ensure that all revenue attributable to the pledged system is captured within the pledge.

Operation and Maintenance Expenses ("O&M Expenses") are deducted from Gross Pledged Revenues to arrive at Net Pledged Revenues. O&M Expenses are defined to include the reasonable and necessary costs of operating, maintaining, and administering CSIA's water-treatment system, including salaries and wages, utility costs, chemical and supply costs, equipment maintenance and repair, insurance premiums, and administrative overhead directly attributable to the system. O&M Expenses do not include depreciation, amortization, debt service payments, or capital expenditures, which are treated separately under the flow-of-funds provisions of the Bond Indenture.

Net Pledged Revenues is the key defined term for purposes of the revenue pledge and is calculated as:

Net Pledged Revenues = Gross Pledged Revenues − O&M Expenses

It is Net Pledged Revenues — the residual revenues remaining after payment of O&M Expenses — that are pledged to secure the Series 2023A Bonds and all other outstanding parity bonds under the Bond Indenture. The deduction of O&M Expenses before application of revenues to debt service reflects the essential nature of the water-treatment system as ongoing public infrastructure: the system must be operated and maintained on a current basis to continue generating the revenues that secure the bonds.

B. Historical and Projected Revenue Data

The following table presents the historical and projected revenue data relevant to the revenue pledge analysis:

The FY 2022 data is derived from CSIA's audited financial statements for the fiscal year ended June 30, 2022, prepared by Hargrove & Associates CPAs, PLLC, with Victoria L. Fong, CPA, as the engagement partner. The audited financial statements received an unmodified opinion and were prepared in accordance with generally accepted accounting principles ("GAAP") as applied to governmental entities. These audited financials form the basis for the Additional Bonds Test certification and the Rate Covenant compliance analysis discussed in Sections V.D and VII.B, respectively.

The projected FY 2024 Net Pledged Revenues of $431,800,000 represent management's estimate for the first full fiscal year following the anticipated commissioning of the PSRAWTF project and reflect assumed growth in wholesale water treatment service charges driven by population growth and increased demand in the Puget Sound region, partially offset by the incremental O&M expenses associated with the new facility. The projections were prepared by CSIA's Chief Financial Officer, Denise R. Whitford, in consultation with CSIA's financial advisor, Clearfield Municipal Advisors LLC, and are included in the projections section of the Preliminary Official Statement.

C. The 14 Participating Districts

The wholesale water treatment service charges that constitute the dominant component of Gross Pledged Revenues are paid by 14 participating municipal water and sewer districts located throughout the Puget Sound region. Each district is party to a long-term Wholesale Water Treatment Services Agreement with CSIA, under which CSIA provides wholesale water treatment services to the district in exchange for the payment of service charges established by CSIA.

The service charges under the Wholesale Water Treatment Services Agreements are structured as unconditional obligations of the participating districts. Under the terms of the agreements, each district is obligated to pay its allocated share of CSIA's costs of providing water treatment services — including debt service costs on CSIA's revenue bonds — regardless of whether the district utilizes the full contracted volume of treated water capacity. This "take-or-pay" structure ensures a stable and predictable revenue base for CSIA and provides bondholders with assurance that the pledged revenues are not dependent on fluctuating water demand.

The enforceability of the service charges is supported by the fact that the participating districts are municipal entities — specifically, water and sewer districts organized under the laws of the State of Washington — that are authorized under applicable Washington law, including the Interlocal Cooperation Act (RCW 39.34), to enter into interlocal agreements and to incur contractual obligations for utility services. The wholesale water treatment service charges flow directly from the participating districts to CSIA and are captured within the definition of Gross Pledged Revenues upon receipt. A list of the 14 participating districts is set forth in Appendix C to this memorandum.

The diversity of the participating district base — spanning 14 separate municipal entities across multiple counties in the Puget Sound region — provides important risk mitigation for bondholders, as the revenue pledge is not dependent on the financial condition or payment performance of any single district. The aggregate population served by the 14 participating districts exceeds 2.1 million residents, and the combined assessed valuation within the districts' service areas exceeds $285 billion, underscoring the breadth and depth of the economic base supporting the pledged revenues.

V. Parity Lien Structure and Outstanding Obligations

A. Existing Outstanding Parity Debt

Prior to the issuance of the Series 2023A Bonds, CSIA had $3,120,000,000 in aggregate principal amount of outstanding parity revenue bonds, all of which are secured by a lien on Net Pledged Revenues on a parity (equal and ratable) basis under the Bond Indenture. The existing outstanding parity bonds consist of multiple series of water treatment revenue bonds issued by CSIA over a period of years to finance the construction, expansion, and improvement of CSIA's regional water-treatment system. Each series of existing parity bonds was issued in compliance with the Additional Bonds Test set forth in the Bond Indenture, and each series shares equally and ratably in the lien on Net Pledged Revenues created under the Indenture and Revenue Pledge Agreement.

The existing outstanding parity bonds represent CSIA's prior commitments to bondholders and establish the baseline parity lien against which the Series 2023A Bonds must be measured. The issuance of additional parity bonds, including the Series 2023A Bonds, is governed by the Additional Bonds Test provisions of the Bond Indenture, which are designed to protect existing bondholders by ensuring that CSIA maintains adequate revenue coverage for all outstanding parity obligations.

B. Effect of Series 2023A Issuance

Upon the issuance and delivery of the Series 2023A Bonds, the aggregate principal amount of outstanding parity revenue bonds secured by the lien on Net Pledged Revenues will increase from $3,120,000,000 to $3,340,000,000, as set forth below:

The total annual aggregate parity debt service on all outstanding parity bonds, including the Series 2023A Bonds, is projected to be approximately $278,400,000. The approximate annual debt service attributable to the Series 2023A Bonds alone is $11,610,000, calculated on a level debt-service basis over the 30-year amortization period. The Series 2023A Bonds carry a fixed coupon rate of 3.25% per annum and mature on October 1, 2053.

C. Parity Nature of the Lien

The bond Indenture establishes a parity lien structure under which all outstanding parity bonds share equally and ratably in the pledge of Net Pledged Revenues. No series of parity bonds has a lien on Net Pledged Revenues that is senior to or subordinate to any other series of parity bonds. All parity bonds are on an equal footing with respect to the revenue pledge, the flow-of-funds provisions, and the Trustee's enforcement rights under the Indenture.

The Bond Indenture does not currently authorize the creation of senior lien obligations that would have a claim on Net Pledged Revenues superior to that of the parity bondholders. Any amendment to the Indenture to create a senior lien would require the consent of the holders of a specified percentage of the outstanding parity bonds (typically 100% for structural amendments affecting the priority of the lien), which effectively prevents the creation of senior lien obligations without unanimous bondholder consent.

The Bond Indenture does permit the issuance of subordinate lien obligations that would be payable from Net Pledged Revenues only after all payments required under the flow-of-funds provisions for parity bonds have been made. The Series 2023A Bonds, as parity obligations, rank senior to any subordinate lien obligations that CSIA may issue in the future. As of the date of this memorandum, CSIA has no subordinate lien obligations outstanding.

D. Additional Bonds Test

The Bond Indenture establishes an Additional Bonds Test that must be satisfied before CSIA may issue additional parity bonds. The Additional Bonds Test serves as a credit protection mechanism for existing bondholders by ensuring that CSIA's revenue base is sufficient to support the additional debt service burden of the proposed new bonds on a parity basis.

The Additional Bonds Test requires the following:

Net Pledged Revenues for the most recently completed fiscal year (or, at CSIA's election, estimated Net Pledged Revenues for the first full fiscal year following the completion of the project being financed) must be at least equal to 1.40 times (1.40x) the maximum annual aggregate parity debt service on all outstanding parity bonds, calculated to include the proposed additional bonds.

Compliance with the Additional Bonds Test is certified by the Chief Financial Officer of CSIA, using a form of certification prepared by Calderwood & Harkness LLP as Co-Bond Counsel. For the Series 2023A issuance, the certification has been (or will be) executed by Denise R. Whitford, Chief Financial Officer, based on the FY 2022 audited financial data.

The compliance analysis for the Series 2023A Bonds is as follows:

The pro forma debt service coverage ratio ("DSCR") of 1.48x exceeds the required minimum of 1.40x, confirming that the Additional Bonds Test is satisfied for the issuance of the Series 2023A Bonds. The 1.48x coverage ratio provides a cushion of approximately 8 basis points above the minimum required level, reflecting the strength of CSIA's revenue base relative to its aggregate debt service obligations. We note that the projected FY 2024 Net Pledged Revenues of $431,800,000 would, if used as the basis for the test (as permitted under the Indenture), produce an even higher pro forma DSCR, providing further confirmation of compliance.

A detailed pro forma DSCR calculation worksheet is set forth in Appendix D to this memorandum.

VI. Flow of Funds Under the Bond Indenture

A. Revenue Fund

The Bond Indenture requires that all Gross Pledged Revenues received by CSIA be deposited into the Revenue Fund held by PNTC as Trustee. The Revenue Fund is the initial point of collection for all revenues pledged to secure the outstanding parity bonds. The deposit of Gross Pledged Revenues into the Revenue Fund is a mandatory obligation of CSIA under the Indenture, and the Trustee has the right and obligation to enforce this requirement.

The requirement that all Gross Pledged Revenues be deposited into the Revenue Fund with the Trustee ensures that the pledged revenues are segregated from CSIA's other funds and are available for application in accordance with the priority structure established by the Indenture. This "gross revenue pledge" mechanism (as distinguished from a "net revenue pledge" in which only net revenues after O&M are deposited with the trustee) provides bondholders with additional structural protection by subjecting the entire revenue stream to the Trustee's control and oversight before any disbursements are made.

B. Priority of Disbursements from Revenue Fund

The Bond Indenture establishes a detailed "waterfall" or flow-of-funds structure that governs the priority of disbursements from the Revenue Fund. All disbursements from the Revenue Fund must be made in accordance with this priority structure, and no lower-priority disbursement may be made unless all higher-priority requirements have been fully satisfied. The flow-of-funds provisions are summarized below in order of priority:

1. Operation and Maintenance Fund — First Priority. The first application of Gross Pledged Revenues is to the payment of O&M Expenses through the Operation and Maintenance Fund. This first-priority position reflects the fundamental principle that the water-treatment system must be operated and maintained on a current basis to continue generating the revenues that secure the bonds. Amounts deposited in the Operation and Maintenance Fund are used to pay the reasonable and necessary costs of operating, maintaining, and administering CSIA's water-treatment system. The deduction of O&M Expenses from Gross Pledged Revenues effectively converts Gross Pledged Revenues to Net Pledged Revenues, which are then available for application to the remaining waterfall priorities.

2. Bond Fund (Debt Service Fund) — Second Priority. After the payment of O&M Expenses, the next application of revenues is to the Bond Fund (also referred to as the Debt Service Fund). Monthly deposits are required in amounts sufficient to accumulate funds to pay the scheduled principal of and interest on all outstanding parity bonds as they come due. Interest on the parity bonds, including the Series 2023A Bonds, is payable semi-annually on April 1 and October 1 of each year. The first interest payment date for the Series 2023A Bonds is April 1, 2024, representing approximately five months of accrued interest from the dated date of October 24, 2023. Principal on the Series 2023A Bonds is payable annually on October 1, commencing on a date to be specified in the First Supplemental Indenture. The Bond Fund deposits are calculated to ensure that sufficient funds are on hand to make each scheduled payment of principal and interest on a timely basis.

3. Debt Service Reserve Fund ("DSRF") — Third Priority. After the Bond Fund deposits, the next priority of disbursement is to the Debt Service Reserve Fund. The DSRF serves as a reserve fund to cover shortfalls in debt service payments in the event that Net Pledged Revenues are insufficient to make scheduled payments from the Bond Fund. The DSRF requirement for the Series 2023A Bonds is satisfied by the surety policy from Olympia Guaranty Insurance Corp. (Surety Policy No. OG-2023-MUN-4718) in the amount of $11,610,000, which is equal to maximum annual debt service on the Series 2023A Bonds. The annual premium for the surety policy is $23,220 (0.20% of the surety amount), which is payable from the O&M Fund or from other available funds of CSIA as provided in the Bond Indenture. If the surety policy is drawn upon to cover a debt service shortfall, CSIA is required to replenish the DSRF (or reimburse Olympia Guaranty for draws on the surety) within 12 months of the draw date.

4. Rebate Fund — Fourth Priority. After the DSRF, the next priority of disbursement is to the Rebate Fund, which is maintained to accumulate and hold amounts required to be rebated to the United States Treasury in compliance with the arbitrage rebate requirements of Section 148 of the Internal Revenue Code of 1986, as amended. The rebate obligation arises if investment earnings on the gross proceeds of the Series 2023A Bonds exceed the yield on the bonds, and the Rebate Fund provides a mechanism for segregating and paying such amounts in compliance with federal tax law.

5. Surplus / Residual Fund — Fifth Priority. Any amounts remaining in the Revenue Fund after all of the foregoing deposits have been made in full are transferred to the Surplus Fund (or Residual Fund), which is available for use by CSIA for any lawful purpose. Lawful purposes include, without limitation, capital improvements to the water-treatment system, payment of debt service on subordinate lien obligations (if any), transfers to CSIA's general fund, or any other purpose authorized by law and the Bond Indenture.

C. Significance of the Flow of Funds for Pledge Priority

The waterfall structure established by the Bond Indenture is a critical component of the security structure for the Series 2023A Bonds and the overall revenue pledge. The mandatory nature of the deposits and the strict priority of disbursements ensure that pledged revenues are applied first to the maintenance of the revenue-generating system (O&M) and then to the payment of debt service on parity bonds before any amounts are available for discretionary use by CSIA.

The flow-of-funds structure protects bondholders in several important respects. First, it ensures that the operation and maintenance of the water-treatment system — the source of the pledged revenues — is funded before any other claim on the revenue stream. Second, it ensures that debt service payments to parity bondholders are made in full before any surplus revenues are available for subordinate obligations or discretionary expenditures. Third, the DSRF provides an additional layer of protection against temporary revenue shortfalls. Fourth, the Rebate Fund ensures compliance with federal tax law, thereby preserving the tax-exempt status of the bonds.

The Trustee (PNTC) has a fiduciary duty to enforce the flow-of-funds provisions and to apply revenues in strict accordance with the priority structure established by the Bond Indenture. In the event of a default or breach of the flow-of-funds provisions by CSIA, the Trustee has the right and obligation to take such actions as may be necessary to enforce the Indenture, including the pursuit of legal remedies on behalf of bondholders, as discussed further in Section X below.

A flow-of-funds diagram illustrating the waterfall structure is set forth in Appendix E to this memorandum.

VII. Rate Covenant

A. Financial Covenant

The Bond Indenture and Revenue Pledge Agreement contain a Rate Covenant pursuant to which CSIA covenants and agrees to establish, maintain, and collect rates, fees, and charges for water treatment services at levels sufficient to produce Net Pledged Revenues in each fiscal year that are at least equal to 1.40 times (1.40x) the annual aggregate parity debt service payable in such fiscal year on all outstanding parity bonds. The Rate Covenant is a continuing obligation of CSIA that runs for the life of the outstanding parity bonds and is enforceable by the Trustee on behalf of bondholders.

The Rate Covenant is a central credit protection mechanism in the security structure for the Series 2023A Bonds. By requiring CSIA to exercise its rate-setting authority to maintain adequate revenue coverage for bondholders, the Rate Covenant provides ongoing assurance that the Net Pledged Revenues will be sufficient to meet CSIA's debt service obligations. The 1.40x minimum coverage level provides a meaningful cushion above a 1.00x breakeven level, allowing for the possibility of revenue fluctuations or unexpected increases in O&M Expenses without jeopardizing the timely payment of debt service.

The Rate Covenant is structured as a covenant to use best efforts to maintain the specified coverage level. In the event that Net Pledged Revenues fall below the required 1.40x coverage in any fiscal year, CSIA is obligated to take such actions as may be necessary to restore compliance, including increasing rates and charges, reducing O&M Expenses, or both. A failure to maintain the required coverage level does not constitute an immediate event of default, but rather triggers a requirement for CSIA to retain an independent consultant to review its rate structure and to implement the consultant's recommendations within a specified period. An event of default occurs only if CSIA fails to take the corrective actions required by the Indenture within the applicable cure period.

B. Current Compliance

CSIA is currently in compliance with the Rate Covenant. The pro forma DSCR, calculated using FY 2022 audited Net Pledged Revenues and total annual parity debt service (including the Series 2023A Bonds), is 1.48x, which exceeds the 1.40x minimum covenant level.

The 1.48x coverage level provides a cushion of approximately $22,820,000 above the amount that would be required at a 1.40x minimum level (i.e., $278,400,000 × 1.40 = $389,760,000, compared to actual Net Pledged Revenues of $412,600,000). This cushion provides a margin of safety for bondholders and allows for some degree of revenue underperformance or expense overrun without triggering a covenant violation.

Projected FY 2024 Net Pledged Revenues of $431,800,000 would produce a DSCR of approximately 1.55x ($431,800,000 ÷ $278,400,000), providing further upward trajectory and additional coverage cushion. However, we note that the projected FY 2024 figures are management estimates and are subject to the uncertainties inherent in financial projections.

C. Rate-Setting Authority Over Participating Districts

CSIA's ability to comply with the Rate Covenant is dependent upon its authority to establish and adjust wholesale water treatment service charges to the 14 participating municipal water and sewer districts. This rate-setting authority is conferred by Chapter 43.160A RCW and is further implemented through the Wholesale Water Treatment Services Agreements.

Under Chapter 43.160A RCW, CSIA has the express statutory authority to establish, revise, and collect rates, fees, and charges for the use of its water-treatment system and related facilities. The Wholesale Water Treatment Services Agreements incorporate CSIA's rate-setting authority and provide that the service charges payable by the participating districts shall be determined by CSIA in accordance with its rate-setting policies and procedures, as adopted from time to time by CSIA's Board of Commissioners by resolution.

The rate-setting process is subject to certain procedural requirements, including reasonable advance notice to the participating districts of proposed rate changes and the opportunity for comment. However, the ultimate rate-setting authority resides with CSIA's Board of Commissioners, and the participating districts do not have a veto or approval right over rate adjustments. This unilateral rate-setting authority is a critical element of the revenue pledge, as it provides the mechanism by which CSIA can ensure that Net Pledged Revenues remain sufficient to satisfy the Rate Covenant and to meet its debt service obligations.

It should be noted that the participating districts, as municipal entities, have their own rate-setting considerations with respect to their retail customers. However, the obligations of the participating districts to CSIA under the Wholesale Water Treatment Services Agreements are independent of their retail rate structures. The districts' payment obligations to CSIA are contractual obligations arising under the Service Agreements and the Interlocal Cooperation Act, and they are not contingent upon the districts' ability to collect retail rates from their respective customers. This structural separation between wholesale and retail rate-setting provides an additional layer of protection for the revenue pledge.

VIII. Perfection of the Pledge Under Washington Law

A. Statutory Perfection Mechanism

Under Chapter 43.160A RCW, the pledge of revenues by CSIA as security for the Series 2023A Bonds is perfected automatically by operation of statute, without any physical delivery, filing, recording, or further act. This statutory perfection mechanism is established by Section 43.160A.060 RCW, which provides that the pledge of revenues shall be valid and binding from the time the pledge is made and that the revenues so pledged shall immediately be subject to the lien of the pledge.

Perfection of the statutory lien occurs upon satisfaction of the following two conditions:

(1) Adoption of the Authorizing Resolution. Board Resolution No. 2023-014 was adopted by CSIA's Board of Commissioners on May 9, 2023, with Commissioner Lorraine Chu presiding as Board Chair. The Resolution authorizes the issuance of the Series 2023A Bonds, approves the pledge of Net Pledged Revenues as security therefor, and approves the forms of the Bond Indenture, First Supplemental Indenture, and Revenue Pledge Agreement.

(2) Execution and Delivery of the Bond Indenture and Revenue Pledge Agreement. The Bond Indenture and Revenue Pledge Agreement are to be executed and delivered on the closing date of October 24, 2023. Upon execution and delivery, the statutory lien on Net Pledged Revenues will attach, and the pledge will be perfected for all purposes under Washington law.

The statutory lien attaches to the Net Pledged Revenues as they are received by CSIA and continues until the Series 2023A Bonds (and all other outstanding parity bonds) are paid in full or provision for payment has been made in accordance with the defeasance provisions of the Bond Indenture. The lien is a continuing lien that runs with the revenue stream, not with any particular asset, and it captures all future Net Pledged Revenues without the need for any periodic renewal, reaffirmation, or refiling.

The simplicity and certainty of the statutory perfection mechanism is a significant advantage of the revenue pledge structure. Unlike commercially created security interests, which require affirmative perfection steps such as UCC financing statement filings, the statutory lien is self-perfecting and self-maintaining. This eliminates the administrative burden and risk associated with maintaining UCC filings and ensures that the pledge remains perfected throughout the life of the bonds.

B. No UCC Filing Required

As discussed in detail in Section III.C above, Article 9 of the Uniform Commercial Code (RCW 62A.9A) does not apply to the pledge of revenues by CSIA. Accordingly, no financing statement filing with the Washington Secretary of State or any other filing office is required to perfect the pledge of Net Pledged Revenues as security for the Series 2023A Bonds.

The absence of a UCC filing requirement eliminates several risks that are present in the context of commercially created security interests:

• Lapse Risk. UCC financing statements are effective for a five-year period and must be continued by the filing of a continuation statement prior to expiration. A failure to file a timely continuation statement results in the lapse of the financing statement and the loss of perfection. The statutory lien on Net Pledged Revenues is not subject to any lapse or expiration requirement.

• Defective Filing Risk. A UCC financing statement may be ineffective if it contains errors in the debtor's name, the collateral description, or other required information. An ineffective financing statement results in the failure of perfection. The statutory lien is not dependent on any filing and therefore cannot be rendered defective by clerical or informational errors.

• Priority Dispute Risk. Under UCC Article 9, priority among competing security interests in the same collateral is generally determined by the order of filing or perfection. A subsequent secured party that files before the first secured party has priority. The statutory lien on Net Pledged Revenues is a first-priority lien by operation of law and is not subject to being primed by a subsequent UCC filing.

The elimination of these risks provides bondholders with a higher degree of certainty regarding the perfection and priority of the revenue pledge and is a significant structural advantage of the statutory lien mechanism under Washington law.

C. Priority of the Statutory Lien

The statutory lien on Net Pledged Revenues created under Chapter 43.160A RCW and the Revenue Pledge Agreement is a first-priority lien as to all parity bondholders. The lien has priority over all claims of any kind against CSIA, including claims in tort, contract, or otherwise, irrespective of whether such claimants have notice of the pledge. No security interest created under the UCC or any other mechanism can prime the statutory lien.

The first-priority status of the statutory lien is established by Section 43.160A.060 RCW, which provides that the lien of the pledge shall be valid and binding as against all parties having claims of any kind in tort, contract, or otherwise, against CSIA. This language creates a statutory first-priority lien that is superior to all other claims on the pledged revenues, providing maximum protection for bondholders.

Within the universe of parity bondholders, all holders share equally and ratably in the lien on Net Pledged Revenues. No series of parity bonds has a superior or subordinate position relative to any other series of parity bonds. The parity nature of the lien among parity bondholders is established by the Bond Indenture and is consistent with the statutory framework, which does not prescribe any particular priority structure among bonds secured by the same pledge.

D. Chapter 9 Bankruptcy Considerations

Although CSIA, as a governmental instrumentality of the State of Washington, is not subject to the general provisions of the federal Bankruptcy Code (Title 11, United States Code), it is appropriate to consider the treatment of the revenue pledge in a hypothetical Chapter 9 bankruptcy scenario. Chapter 9 of the Bankruptcy Code is the only chapter under which a municipality or governmental instrumentality may seek bankruptcy relief.

Eligibility for Chapter 9. A municipality or governmental instrumentality may file a petition under Chapter 9 only if it is specifically authorized to do so by state law. As of the date of this memorandum, the State of Washington has not enacted legislation specifically authorizing CSIA or similarly situated governmental instrumentalities to file for Chapter 9 protection. Accordingly, CSIA is not currently eligible to file a Chapter 9 petition. However, the Washington Legislature could potentially enact such authorizing legislation in the future, and it is therefore prudent to analyze the treatment of the revenue pledge under Chapter 9.

Protection of Special Revenues Under Section 928. Assuming, for purposes of analysis, that CSIA were eligible for and did file a Chapter 9 petition, the revenue pledge would be protected under Section 928 of the Bankruptcy Code. Section 928(a) provides that "[n]otwithstanding section 552(a) of this title, special revenues acquired by the debtor after the commencement of the case shall remain subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case." In other words, the statutory lien on pledged revenues continues to attach to post-petition revenues, and the automatic stay does not extinguish or suspend the lien.

Characterization as Special Revenues. The wholesale water treatment service charges that constitute the primary component of Gross Pledged Revenues are "special revenues" within the meaning of Section 902(2) of the Bankruptcy Code. Section 902(2)(A) defines "special revenues" to include, among other things, "receipts derived from the ownership, operation, or disposition of projects or systems of the debtor that are primarily used or intended to be used primarily to provide . . . water . . . service." CSIA's wholesale water treatment service charges are receipts derived from the ownership and operation of CSIA's water-treatment system, which is used to provide water treatment services. Accordingly, these charges satisfy the statutory definition of "special revenues."

Conclusion. Even in the hypothetical scenario of a Chapter 9 bankruptcy filing by CSIA, the pledge of Net Pledged Revenues would be protected under Section 928 of the Bankruptcy Code. Post-petition revenues would remain subject to the lien of the Bond Indenture and Revenue Pledge Agreement, and the Trustee would continue to have the right to receive and apply pledged revenues in accordance with the flow-of-funds provisions of the Indenture. This analysis provides additional assurance to bondholders regarding the durability and resilience of the revenue pledge structure.

IX. Enforceability of the Revenue Pledge Against Participating Districts

A. Nature of the Districts' Obligations

The revenue pledge securing the Series 2023A Bonds is ultimately dependent upon the receipt by CSIA of wholesale water treatment service charges from the 14 participating municipal water and sewer districts. Accordingly, the enforceability of the obligations of those districts to CSIA is a critical element of the revenue pledge analysis.

Each of the 14 participating districts has entered into a long-term Wholesale Water Treatment Services Agreement with CSIA. These Service Agreements establish the terms and conditions under which CSIA provides wholesale water treatment services to the districts, including the allocation of treatment capacity among the districts, the determination and payment of service charges, and the respective rights and obligations of the parties.

The service charges payable by the participating districts under the Service Agreements are structured as unconditional contractual obligations. Each district is obligated to pay its allocated share of CSIA's costs of providing water treatment services — including the district's proportional share of debt service costs on CSIA's revenue bonds — regardless of whether the district utilizes the full contracted volume of treated water capacity during any given period. This unconditional payment structure, which is functionally equivalent to a "take-or-pay" arrangement, provides significant credit strength to the revenue pledge by ensuring that the pledged revenues are not dependent on actual water usage or demand in any given year. Even in periods of below-average water demand, the participating districts remain contractually obligated to pay their full allocated service charges.

The long-term nature of the Service Agreements provides additional stability and predictability to the revenue base. The agreements have terms that extend beyond the final maturity of the Series 2023A Bonds (October 1, 2053), ensuring that the contractual framework underlying the revenue pledge will remain in place throughout the life of the bonds. The Service Agreements also contain provisions for automatic renewal, subject to certain termination rights that are subordinated to the rights of bondholders.

B. Enforceability Analysis

The Wholesale Water Treatment Services Agreements are binding contracts between CSIA and the 14 participating districts, and they are enforceable by CSIA (or by the Trustee on behalf of bondholders, if directed under the Bond

CALDERWOOD & HARKNESS LLP 1420 Fifth Avenue, Suite 3600 Seattle, Washington 98101 Telephone: (206) 555-4200 | Facsimile: (206) 555-4201
MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum has been prepared by Calderwood & Harkness LLP and is protected by the attorney-client privilege and the work-product doctrine. This document is intended solely for the use of the addressee and other authorized personnel of Calderwood & Harkness LLP and should not be disclosed to any third party without the prior written consent of the undersigned.
To: George Trujillo, Partner
From: Brett Callahan, Associate
Date: May 30, 2023
Re: Revenue Pledge — Priority and Perfection Under Washington Law; Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) — $220,000,000
Matter No.: 1030-00001
Reviewed by: George Trujillo
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I. Executive Summary
This memorandum analyzes the validity, priority, and perfection of the pledge of net water-treatment revenues by the Cascadia State Infrastructure Authority ("CSIA" or "Cascadia") as security for CSIA's Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) (the "Series 2023A Bonds") in the aggregate principal amount of $220,000,000 under Washington State law.
Based on the analysis set forth herein, it is our conclusion that the pledge of net water-treatment revenues created under the Revenue Pledge Agreement, dated as of October 24, 2023, between CSIA and Pacific Northwest Trust Company, N.A. ("PNTC"), as Trustee (the "Revenue Pledge Agreement"), constitutes a valid, enforceable, and perfected statutory lien under Chapter 43.160A of the Revised Code of Washington ("RCW") and related provisions of Washington statutory law. The statutory lien created by the pledge attaches to the designated revenues by operation of law and is not subject to filing, recording, or other procedural requirements under the Uniform Commercial Code ("UCC") or otherwise.
The pledge secures the Series 2023A Bonds on a parity basis with CSIA's existing outstanding revenue bonds, which had an aggregate principal amount outstanding of $3,120,000,000 as of the date of this memorandum. Upon the issuance and delivery of the Series 2023A Bonds, total outstanding parity obligations will be $3,340,000,000, all of which share equally and ratably in the lien on Net Pledged Revenues (as defined in the Bond Indenture and Revenue Pledge Agreement).
No filing under Article 9 of the Uniform Commercial Code, as enacted in Washington (RCW 62A.9A), is required to perfect the statutory lien. Under applicable Washington law, perfection occurs by operation of statute upon (i) adoption of the authorizing resolution by CSIA's governing board and (ii) execution and delivery of the Bond Indenture and Revenue Pledge Agreement. The absence of a UCC filing requirement eliminates the risk of lapse or defective filing and confirms that the pledge achieves first-priority perfection status by statutory operation.
The revenue pledge is enforceable against the wholesale water treatment service charges collected by CSIA from 14 participating municipal water and sewer districts located across the Puget Sound region. These service charges arise under long-term Wholesale Water Treatment Services Agreements and constitute unconditional contractual obligations of the participating districts to CSIA. The combination of the statutory lien mechanism, the contractual underpinnings of the revenue stream, the flow-of-funds protections in the Bond Indenture, the 1.40x Rate Covenant, and the Additional Bonds Test requirements provides a robust and multi-layered security structure for the Series 2023A Bonds.
This memorandum is organized as follows: Part II provides background on the issuer, the project, the financing, and the key transaction documents. Part III examines the statutory framework governing the pledge. Part IV defines and discusses the scope of the pledged revenues. Part V analyzes the parity lien structure and outstanding obligations. Part VI describes the flow-of-funds provisions under the Bond Indenture. Part VII discusses the Rate Covenant. Part VIII addresses the perfection of the pledge under Washington law. Part IX analyzes the enforceability of the pledge against the participating districts. Part X discusses events of default and remedies. Part XI briefly addresses environmental and regulatory considerations. Part XII examines the Debt Service Reserve Fund. Part XIII sets forth our conclusions and recommendations.
II. Background and Transaction Overview
A. The Issuer — Cascadia State Infrastructure Authority
The Cascadia State Infrastructure Authority is a governmental instrumentality and public body corporate and politic of the State of Washington, created and existing pursuant to Chapter 43.160A RCW. CSIA was established by the Washington State Legislature to develop, finance, construct, and operate regional water treatment and related infrastructure systems for the benefit of the citizens and communities of the State of Washington, with a particular emphasis on the Puget Sound region and surrounding counties.
CSIA maintains its headquarters at 1100 Capitol Way South, Suite 400, Olympia, Washington 98501. The organization is governed by a board of commissioners appointed pursuant to the provisions of Chapter 43.160A RCW, with Commissioner Lorraine Chu currently serving as Board Chair. The executive management team includes Harold K. Nakamura, Executive Director; Denise R. Whitford, Chief Financial Officer; and Martin J. Espinoza, General Counsel. CSIA's Employer Identification Number is 91-2058374.
As a governmental instrumentality of the State of Washington, CSIA possesses the powers and immunities afforded to public bodies under Washington law, including the express statutory authority to issue revenue bonds, to pledge revenues derived from its water-treatment system and related facilities, and to enter into contracts and agreements in furtherance of its public purposes. CSIA is not a general-purpose municipality and does not possess ad valorem taxing power; its revenue bonds are payable solely from the revenues of its water-treatment system, as distinguished from general obligation bonds that pledge the full faith, credit, and taxing power of the issuing entity.
CSIA's annual operating budget for fiscal year 2023 is approximately $1.48 billion, reflecting the scope of the authority's water-treatment operations across the Puget Sound region. CSIA's audited financial statements for fiscal year 2022 were prepared by Hargrove & Associates CPAs, PLLC, with Victoria L. Fong, CPA, serving as the engagement partner. These audited financials form the basis for the revenue and debt-service coverage calculations discussed later in this memorandum.
B. The Project
The proceeds of the Series 2023A Bonds will be used to finance a portion of the costs of the Puget Sound Regional Advanced Water Treatment Facility (the "PSRAWTF" or the "Project"). The Project is a major capital improvement to CSIA's regional water-treatment system, designed to expand capacity and upgrade treatment technology to meet evolving regulatory requirements and growing demand for treated water in the Puget Sound region.
The Project is located at 7250 Deschutes Parkway, Tumwater, Thurston County, Washington 98501, on approximately 18 acres of CSIA-owned land that is adjacent to the existing Deschutes River Tertiary Treatment Plant, which is part of CSIA's current water-treatment infrastructure. The Project site was acquired by CSIA in 2018 and has been designated for water-treatment infrastructure expansion in CSIA's capital facilities plan.
The scope of the Project encompasses the design and construction of a 60-million-gallons-per-day ("MGD") advanced membrane-filtration and ultraviolet ("UV") disinfection water-treatment facility. The facility will incorporate state-of-the-art membrane-filtration technology designed to meet or exceed current and anticipated regulatory standards for treated water quality. In addition to the core treatment facility, the Project includes the construction of influent and effluent pipelines connecting the new facility to the existing conveyance system, a 5-million-gallon equalization basin to manage flow variations, biosolids handling improvements to accommodate the increased volume of treatment residuals, and upgrades to CSIA's Supervisory Control and Data Acquisition ("SCADA") system to integrate the new facility into CSIA's centralized monitoring and control infrastructure.
The Project has an ultimate design capacity of 60 MGD, with an initial operating capacity at commissioning of 42 MGD. The phased approach allows CSIA to bring additional capacity online as regional demand grows, maximizing the efficiency of the capital investment. Northtide Environmental Engineering, Inc. ("Northtide"), an experienced design-build firm led by Chief Executive Officer Garrett L. Henriksen, has been selected as the design-build contractor for the Project. CSIA and Northtide executed a Guaranteed Maximum Price ("GMP") Design-Build Contract No. CSIA-DB-2023-001 on March 10, 2023, establishing a GMP of $193,500,000 for the design and construction of the Project.
The estimated total project cost is $237,400,000, which includes the GMP contract amount, owner's costs, permitting and regulatory compliance costs, financing costs (including costs of issuance for the Series 2023A Bonds), contingencies, and capitalized interest during the construction period. The difference between the $220,000,000 principal amount of the Series 2023A Bonds and the total project cost will be funded from CSIA's existing capital reserves and available system revenues.
C. The Financing
The financing of the Project is structured through the issuance of the Series 2023A Bonds, the key terms of which are summarized below:
The financing team for the Series 2023A Bonds consists of the following parties:
•  Senior Managing Underwriter: Meridian Capital Partners LLC, Jonathan D. Kessler, Managing Director
•  Co-Managing Underwriter: Dralvecen Fenn & Co., Inc., Sarah E. Mulvaney, Director
•  Bond Trustee / Paying Agent / Registrar / Escrow Agent: Pacific Northwest Trust Company, N.A. ("PNTC"), Alan M. Greer, Vice President, Corporate Trust Services
•  Co-Bond Counsel: Pryor Crestfield LLP, Margaret S. Yoon, Partner; and Calderwood & Harkness LLP
•  Underwriters' Counsel: Alderman & Locke LLP, Daniel F. Obermeyer, Partner
•  Municipal Advisor: Clearfield Municipal Advisors LLC, Kenneth W. Barclay, Managing Director
The issuance of the Series 2023A Bonds was authorized by CSIA Board Resolution No. 2023-014, which was adopted on May 9, 2023 by the Board of Commissioners, with Commissioner Lorraine Chu presiding as Board Chair. The Resolution authorizes the issuance of the Series 2023A Bonds, approves the form of the First Supplemental Indenture and Revenue Pledge Agreement, and delegates to the Executive Director and Chief Financial Officer the authority to finalize the terms of sale, subject to the parameters established in the Resolution (including the maximum principal amount of $225,000,000, maximum interest rate of 4.00%, and maximum maturity of 31 years from the dated date).
It is anticipated that the Preliminary Official Statement ("POS") will be distributed on or about June 26, 2023, with a negotiated sale to the underwriting syndicate led by Meridian Capital Partners LLC to follow. The closing and delivery of the Series 2023A Bonds is expected to occur on or about October 24, 2023.
D. Key Transaction Documents Relevant to Revenue Pledge Analysis
The legal framework governing the revenue pledge for the Series 2023A Bonds is established through the following key transaction documents, each of which has been or will be reviewed in its entirety by this firm in its capacity as Co-Bond Counsel:
1.  Bond Indenture (Trust Indenture) between CSIA and PNTC, dated as of October 24, 2023 (the "Bond Indenture" or "Indenture"). The Bond Indenture is the master trust agreement that establishes the terms and conditions for the issuance of revenue bonds by CSIA, creates the funds and accounts for the receipt and disbursement of pledged revenues, sets forth the flow-of-funds provisions, defines the revenue pledge, establishes the Rate Covenant and Additional Bonds Test, and prescribes the rights and remedies of the Trustee and bondholders in the event of default.
2.  First Supplemental Indenture (Series 2023A) between CSIA and PNTC, dated as of October 24, 2023 (the "First Supplemental Indenture"). The First Supplemental Indenture supplements the Bond Indenture to authorize the specific terms of the Series 2023A Bonds, including the aggregate principal amount, interest rate, maturity schedule, redemption provisions, and form of bond.
3.  Revenue Pledge Agreement between CSIA and PNTC, dated as of October 24, 2023 (the "Revenue Pledge Agreement"). The Revenue Pledge Agreement sets forth the specific terms of the pledge of Net Pledged Revenues by CSIA in favor of the Trustee for the benefit of bondholders. This agreement operates in conjunction with the Bond Indenture to create the statutory lien on pledged revenues.
4.  Debt-Service Reserve Fund Surety Bond Agreement among CSIA, PNTC, and Olympia Guaranty Insurance Corp. (the "Surety Agreement"), providing for the issuance of Surety Policy No. OG-2023-MUN-4718 in satisfaction of the Debt Service Reserve Fund requirement for the Series 2023A Bonds.
5.  Wholesale Water Treatment Services Agreements between CSIA and each of the 14 participating municipal water and sewer districts (collectively, the "Service Agreements"). These long-term agreements establish the contractual obligations of the participating districts to pay wholesale water treatment service charges to CSIA and form the primary revenue base underlying the pledge.
Each of these documents is in substantially final form and has been the subject of extensive negotiation among the parties and their respective counsel. As Co-Bond Counsel, Calderwood & Harkness LLP has participated in the drafting and review of the Bond Indenture, First Supplemental Indenture, and Revenue Pledge Agreement, and has reviewed the Service Agreements and Surety Agreement for purposes of our opinion regarding the validity and enforceability of the revenue pledge.
III. Statutory Framework — Chapter 43.160A RCW and Related Provisions
A. Enabling Legislation — Chapter 43.160A RCW
The statutory foundation for the revenue pledge securing the Series 2023A Bonds is Chapter 43.160A of the Revised Code of Washington. This chapter creates CSIA as a governmental instrumentality and public body corporate and politic of the State of Washington and confers upon CSIA a broad range of powers necessary to accomplish its statutory purposes, including the express authority to issue revenue bonds and to pledge revenues derived from its water-treatment system as security therefor.
Several key provisions of Chapter 43.160A RCW are directly relevant to the validity, priority, and perfection of the revenue pledge:
Bond Issuance Authority. Section 43.160A.050 RCW authorizes CSIA to issue revenue obligations for the purpose of financing or refinancing the costs of acquiring, constructing, improving, and equipping water-treatment facilities and related infrastructure. These revenue obligations are payable from and secured by a pledge of designated revenues of CSIA's water-treatment system, as determined by CSIA's governing board by resolution. The statute does not impose a limitation on the aggregate principal amount of revenue bonds that may be outstanding at any one time, provided that the issuer satisfies such additional bonds test requirements as may be established in the governing indenture or trust agreement. This approach affords CSIA significant flexibility to undertake additional financings as needed to support the capital requirements of its water-treatment system.
Pledging Authority and Statutory Lien. Section 43.160A.060 RCW provides that any pledge of revenues by CSIA under the chapter shall be valid and binding from the time the pledge is made and that the revenues so pledged shall immediately be subject to the lien of the pledge without any physical delivery or further act. This provision establishes the statutory lien mechanism that is central to the security structure of the Series 2023A Bonds. The statutory lien attaches to the revenues as they are received by CSIA and continues until the bonds secured thereby are paid in full or provision for payment has been made in accordance with the terms of the governing indenture.
Critically, Section 43.160A.060 RCW provides that the lien of a pledge shall be valid and binding as against all parties having claims of any kind in tort, contract, or otherwise, against CSIA, irrespective of whether such parties have notice of the pledge. This language is consistent with the general approach of Washington law to statutory pledges by governmental entities, which are treated as self-perfecting and require no notice filing to be effective against third parties.
Status as Public Body Corporate. Section 43.160A.020 RCW establishes CSIA as a "public body corporate and politic" of the State of Washington, a designation that carries important legal consequences for the revenue pledge analysis. As a public body corporate, CSIA is entitled to the sovereign immunity protections afforded to governmental entities under Washington law, subject to the limited waivers of immunity established by the Washington State Legislature. More importantly for present purposes, CSIA's status as a governmental instrumentality means that its pledges of revenue are governed by the statutory framework rather than by the commercial law provisions of the UCC, as discussed further in Section III.C below.
It is important to note that the Series 2023A Bonds are revenue bonds, not general obligation bonds. CSIA does not possess ad valorem taxing power, and the bonds do not pledge the full faith, credit, or taxing power of the State of Washington or any other governmental entity. The bonds are payable solely from the Net Pledged Revenues of CSIA's water-treatment system, and the bondholders' security interest is limited to the pledge of those revenues as set forth in the Bond Indenture and Revenue Pledge Agreement.
B. RCW Title 39 — Public Contracts and Indebtedness
In addition to the specific provisions of Chapter 43.160A RCW, several general provisions of RCW Title 39, which governs public contracts and indebtedness in the State of Washington, provide supplementary framework for the issuance and administration of the Series 2023A Bonds:
RCW 39.46 — General Provisions Applicable to Bonds of Public Bodies. Chapter 39.46 RCW establishes general provisions applicable to bonds issued by public bodies in Washington, including requirements relating to the form and registration of bonds, payment and transfer provisions, and the appointment of fiscal agents. These provisions apply to the Series 2023A Bonds as supplementary requirements in addition to the specific provisions of Chapter 43.160A RCW and the terms of the Bond Indenture. The book-entry-only registration of the Series 2023A Bonds through DTC, with Cede & Co. as the sole registered owner, is consistent with the registration provisions of Chapter 39.46 RCW and the requirements of the Indenture.
RCW 39.44 — Issuance and Sale of Municipal Bonds. Chapter 39.44 RCW governs the issuance and sale of municipal bonds in Washington, including provisions relating to competitive and negotiated sale authorization, notice requirements, and official statement disclosure obligations. The negotiated sale of the Series 2023A Bonds to the underwriting syndicate led by Meridian Capital Partners LLC is authorized under the applicable provisions of Chapter 39.44 RCW and Board Resolution No. 2023-014, which expressly authorizes the negotiated sale method for the Series 2023A Bonds.
The relationship between Chapter 43.160A RCW (the specific enabling statute for CSIA) and the general municipal bond provisions of RCW Title 39 is governed by the well-established principle of statutory construction that where a specific statute conflicts with a more general statute, the specific statute controls. Accordingly, to the extent that any provision of Chapter 43.160A RCW conflicts with or differs from the general provisions of RCW Title 39, the provisions of Chapter 43.160A RCW will govern the issuance, security, and administration of the Series 2023A Bonds. However, the general provisions of RCW Title 39 provide a useful supplementary framework and fill any gaps not specifically addressed by Chapter 43.160A RCW.
C. Uniform Commercial Code — Article 9 Inapplicability
A critical element of the revenue pledge analysis is the determination that Article 9 of the Uniform Commercial Code, as enacted in Washington at RCW 62A.9A, does not apply to the pledge of revenues by CSIA as security for the Series 2023A Bonds.
RCW 62A.9A-109(d) provides, in pertinent part, that Article 9 does not apply to "a transfer by a government or governmental subdivision or agency." This exclusion is broadly construed under Washington law and encompasses the full range of security interests, pledges, and liens created by governmental entities in connection with the issuance of revenue bonds and other obligations. The pledge of water-treatment revenues by CSIA, a governmental instrumentality created by Chapter 43.160A RCW, falls squarely within this exclusion.
The practical significance of the Article 9 exclusion cannot be overstated. Under UCC Article 9, a security interest in most types of personal property (including accounts, payment intangibles, and general intangibles) is perfected by the filing of a financing statement with the Washington Secretary of State. Failure to file, or a defective filing, can result in the loss of priority or the unperfection of the security interest, exposing the secured party to the risk that subsequent creditors or a bankruptcy trustee may assert claims that prime the security interest. These risks are entirely eliminated in the context of a statutory pledge by a governmental entity such as CSIA, because perfection occurs by operation of law, without any filing requirement.
Washington courts have consistently recognized that pledges of revenue by governmental entities are outside the scope of UCC Article 9 and are instead governed by the applicable enabling statutes. The Washington Supreme Court's decision in City of Tacoma v. Taxpayers of Tacoma, 108 Wn.2d 679 (1987), while addressing a different statutory framework, confirmed the general principle that revenue pledges by Washington governmental entities are self-perfecting and do not require UCC filings. This principle has been reaffirmed in subsequent decisions and is consistent with the approach taken by courts in other jurisdictions with similar UCC exclusion provisions.
The significance of this analysis for the Series 2023A Bond transaction is as follows: the pledge of Net Pledged Revenues by CSIA is perfected automatically, by operation of statute, upon adoption of the authorizing resolution and execution of the Bond Indenture and Revenue Pledge Agreement. No UCC financing statement filing with the Washington Secretary of State is required. The pledge achieves first-priority perfection status by statute, and the statutory lien is not subject to the risks of lapse, defective filing, or priority disputes that can arise in the context of commercially created security interests governed by UCC Article 9.
IV. Definition and Scope of Pledged Revenues
A. Components of "Net Pledged Revenues"
The scope of the revenue pledge is defined by the terms "Gross Pledged Revenues," "Operation and Maintenance Expenses," and "Net Pledged Revenues," each as defined in the Bond Indenture and Revenue Pledge Agreement. A precise understanding of these definitions is essential to the analysis of the pledge, as the statutory lien attaches to "Net Pledged Revenues" (as that term is specifically defined) and the sufficiency of the pledge is measured by reference to Net Pledged Revenues.
Gross Pledged Revenues are defined to include the following components:
(i) Wholesale Water Treatment Service Charges received by CSIA from the 14 participating municipal water and sewer districts under the long-term Wholesale Water Treatment Services Agreements. These service charges constitute the dominant component of Gross Pledged Revenues and are discussed in greater detail in Section IV.C below.
(ii) Connection Fees received by CSIA from entities connecting to or expanding their capacity within CSIA's regional water-treatment system. Connection fees are one-time charges assessed at the time of initial connection or capacity expansion and represent a secondary but meaningful source of Gross Pledged Revenues.
(iii) Investment Earnings on funds and accounts held by the Trustee under the Bond Indenture, including earnings on the Revenue Fund, Bond Fund, and other pledged accounts. Investment earnings are included within Gross Pledged Revenues to capture the economic benefit of amounts held in trust for bondholders and to ensure that all revenue attributable to the pledged system is captured within the pledge.
Operation and Maintenance Expenses ("O&M Expenses") are deducted from Gross Pledged Revenues to arrive at Net Pledged Revenues. O&M Expenses are defined to include the reasonable and necessary costs of operating, maintaining, and administering CSIA's water-treatment system, including salaries and wages, utility costs, chemical and supply costs, equipment maintenance and repair, insurance premiums, and administrative overhead directly attributable to the system. O&M Expenses do not include depreciation, amortization, debt service payments, or capital expenditures, which are treated separately under the flow-of-funds provisions of the Bond Indenture.
Net Pledged Revenues is the key defined term for purposes of the revenue pledge and is calculated as:
Net Pledged Revenues = Gross Pledged Revenues − O&M Expenses
It is Net Pledged Revenues — the residual revenues remaining after payment of O&M Expenses — that are pledged to secure the Series 2023A Bonds and all other outstanding parity bonds under the Bond Indenture. The deduction of O&M Expenses before application of revenues to debt service reflects the essential nature of the water-treatment system as ongoing public infrastructure: the system must be operated and maintained on a current basis to continue generating the revenues that secure the bonds.
B. Historical and Projected Revenue Data
The following table presents the historical and projected revenue data relevant to the revenue pledge analysis:
The FY 2022 data is derived from CSIA's audited financial statements for the fiscal year ended June 30, 2022, prepared by Hargrove & Associates CPAs, PLLC, with Victoria L. Fong, CPA, as the engagement partner. The audited financial statements received an unmodified opinion and were prepared in accordance with generally accepted accounting principles ("GAAP") as applied to governmental entities. These audited financials form the basis for the Additional Bonds Test certification and the Rate Covenant compliance analysis discussed in Sections V.D and VII.B, respectively.
The projected FY 2024 Net Pledged Revenues of $431,800,000 represent management's estimate for the first full fiscal year following the anticipated commissioning of the PSRAWTF project and reflect assumed growth in wholesale water treatment service charges driven by population growth and increased demand in the Puget Sound region, partially offset by the incremental O&M expenses associated with the new facility. The projections were prepared by CSIA's Chief Financial Officer, Denise R. Whitford, in consultation with CSIA's financial advisor, Clearfield Municipal Advisors LLC, and are included in the projections section of the Preliminary Official Statement.
C. The 14 Participating Districts
The wholesale water treatment service charges that constitute the dominant component of Gross Pledged Revenues are paid by 14 participating municipal water and sewer districts located throughout the Puget Sound region. Each district is party to a long-term Wholesale Water Treatment Services Agreement with CSIA, under which CSIA provides wholesale water treatment services to the district in exchange for the payment of service charges established by CSIA.
The service charges under the Wholesale Water Treatment Services Agreements are structured as unconditional obligations of the participating districts. Under the terms of the agreements, each district is obligated to pay its allocated share of CSIA's costs of providing water treatment services — including debt service costs on CSIA's revenue bonds — regardless of whether the district utilizes the full contracted volume of treated water capacity. This "take-or-pay" structure ensures a stable and predictable revenue base for CSIA and provides bondholders with assurance that the pledged revenues are not dependent on fluctuating water demand.
The enforceability of the service charges is supported by the fact that the participating districts are municipal entities — specifically, water and sewer districts organized under the laws of the State of Washington — that are authorized under applicable Washington law, including the Interlocal Cooperation Act (RCW 39.34), to enter into interlocal agreements and to incur contractual obligations for utility services. The wholesale water treatment service charges flow directly from the participating districts to CSIA and are captured within the definition of Gross Pledged Revenues upon receipt. A list of the 14 participating districts is set forth in Appendix C to this memorandum.
The diversity of the participating district base — spanning 14 separate municipal entities across multiple counties in the Puget Sound region — provides important risk mitigation for bondholders, as the revenue pledge is not dependent on the financial condition or payment performance of any single district. The aggregate population served by the 14 participating districts exceeds 2.1 million residents, and the combined assessed valuation within the districts' service areas exceeds $285 billion, underscoring the breadth and depth of the economic base supporting the pledged revenues.
V. Parity Lien Structure and Outstanding Obligations
A. Existing Outstanding Parity Debt
Prior to the issuance of the Series 2023A Bonds, CSIA had $3,120,000,000 in aggregate principal amount of outstanding parity revenue bonds, all of which are secured by a lien on Net Pledged Revenues on a parity (equal and ratable) basis under the Bond Indenture. The existing outstanding parity bonds consist of multiple series of water treatment revenue bonds issued by CSIA over a period of years to finance the construction, expansion, and improvement of CSIA's regional water-treatment system. Each series of existing parity bonds was issued in compliance with the Additional Bonds Test set forth in the Bond Indenture, and each series shares equally and ratably in the lien on Net Pledged Revenues created under the Indenture and Revenue Pledge Agreement.
The existing outstanding parity bonds represent CSIA's prior commitments to bondholders and establish the baseline parity lien against which the Series 2023A Bonds must be measured. The issuance of additional parity bonds, including the Series 2023A Bonds, is governed by the Additional Bonds Test provisions of the Bond Indenture, which are designed to protect existing bondholders by ensuring that CSIA maintains adequate revenue coverage for all outstanding parity obligations.
B. Effect of Series 2023A Issuance
Upon the issuance and delivery of the Series 2023A Bonds, the aggregate principal amount of outstanding parity revenue bonds secured by the lien on Net Pledged Revenues will increase from $3,120,000,000 to $3,340,000,000, as set forth below:
The total annual aggregate parity debt service on all outstanding parity bonds, including the Series 2023A Bonds, is projected to be approximately $278,400,000. The approximate annual debt service attributable to the Series 2023A Bonds alone is $11,610,000, calculated on a level debt-service basis over the 30-year amortization period. The Series 2023A Bonds carry a fixed coupon rate of 3.25% per annum and mature on October 1, 2053.
C. Parity Nature of the Lien
The bond Indenture establishes a parity lien structure under which all outstanding parity bonds share equally and ratably in the pledge of Net Pledged Revenues. No series of parity bonds has a lien on Net Pledged Revenues that is senior to or subordinate to any other series of parity bonds. All parity bonds are on an equal footing with respect to the revenue pledge, the flow-of-funds provisions, and the Trustee's enforcement rights under the Indenture.
The Bond Indenture does not currently authorize the creation of senior lien obligations that would have a claim on Net Pledged Revenues superior to that of the parity bondholders. Any amendment to the Indenture to create a senior lien would require the consent of the holders of a specified percentage of the outstanding parity bonds (typically 100% for structural amendments affecting the priority of the lien), which effectively prevents the creation of senior lien obligations without unanimous bondholder consent.
The Bond Indenture does permit the issuance of subordinate lien obligations that would be payable from Net Pledged Revenues only after all payments required under the flow-of-funds provisions for parity bonds have been made. The Series 2023A Bonds, as parity obligations, rank senior to any subordinate lien obligations that CSIA may issue in the future. As of the date of this memorandum, CSIA has no subordinate lien obligations outstanding.
D. Additional Bonds Test
The Bond Indenture establishes an Additional Bonds Test that must be satisfied before CSIA may issue additional parity bonds. The Additional Bonds Test serves as a credit protection mechanism for existing bondholders by ensuring that CSIA's revenue base is sufficient to support the additional debt service burden of the proposed new bonds on a parity basis.
The Additional Bonds Test requires the following:
Net Pledged Revenues for the most recently completed fiscal year (or, at CSIA's election, estimated Net Pledged Revenues for the first full fiscal year following the completion of the project being financed) must be at least equal to 1.40 times (1.40x) the maximum annual aggregate parity debt service on all outstanding parity bonds, calculated to include the proposed additional bonds.
Compliance with the Additional Bonds Test is certified by the Chief Financial Officer of CSIA, using a form of certification prepared by Calderwood & Harkness LLP as Co-Bond Counsel. For the Series 2023A issuance, the certification has been (or will be) executed by Denise R. Whitford, Chief Financial Officer, based on the FY 2022 audited financial data.
The compliance analysis for the Series 2023A Bonds is as follows:
The pro forma debt service coverage ratio ("DSCR") of 1.48x exceeds the required minimum of 1.40x, confirming that the Additional Bonds Test is satisfied for the issuance of the Series 2023A Bonds. The 1.48x coverage ratio provides a cushion of approximately 8 basis points above the minimum required level, reflecting the strength of CSIA's revenue base relative to its aggregate debt service obligations. We note that the projected FY 2024 Net Pledged Revenues of $431,800,000 would, if used as the basis for the test (as permitted under the Indenture), produce an even higher pro forma DSCR, providing further confirmation of compliance.
A detailed pro forma DSCR calculation worksheet is set forth in Appendix D to this memorandum.
VI. Flow of Funds Under the Bond Indenture
A. Revenue Fund
The Bond Indenture requires that all Gross Pledged Revenues received by CSIA be deposited into the Revenue Fund held by PNTC as Trustee. The Revenue Fund is the initial point of collection for all revenues pledged to secure the outstanding parity bonds. The deposit of Gross Pledged Revenues into the Revenue Fund is a mandatory obligation of CSIA under the Indenture, and the Trustee has the right and obligation to enforce this requirement.
The requirement that all Gross Pledged Revenues be deposited into the Revenue Fund with the Trustee ensures that the pledged revenues are segregated from CSIA's other funds and are available for application in accordance with the priority structure established by the Indenture. This "gross revenue pledge" mechanism (as distinguished from a "net revenue pledge" in which only net revenues after O&M are deposited with the trustee) provides bondholders with additional structural protection by subjecting the entire revenue stream to the Trustee's control and oversight before any disbursements are made.
B. Priority of Disbursements from Revenue Fund
The Bond Indenture establishes a detailed "waterfall" or flow-of-funds structure that governs the priority of disbursements from the Revenue Fund. All disbursements from the Revenue Fund must be made in accordance with this priority structure, and no lower-priority disbursement may be made unless all higher-priority requirements have been fully satisfied. The flow-of-funds provisions are summarized below in order of priority:
1. Operation and Maintenance Fund — First Priority. The first application of Gross Pledged Revenues is to the payment of O&M Expenses through the Operation and Maintenance Fund. This first-priority position reflects the fundamental principle that the water-treatment system must be operated and maintained on a current basis to continue generating the revenues that secure the bonds. Amounts deposited in the Operation and Maintenance Fund are used to pay the reasonable and necessary costs of operating, maintaining, and administering CSIA's water-treatment system. The deduction of O&M Expenses from Gross Pledged Revenues effectively converts Gross Pledged Revenues to Net Pledged Revenues, which are then available for application to the remaining waterfall priorities.
2. Bond Fund (Debt Service Fund) — Second Priority. After the payment of O&M Expenses, the next application of revenues is to the Bond Fund (also referred to as the Debt Service Fund). Monthly deposits are required in amounts sufficient to accumulate funds to pay the scheduled principal of and interest on all outstanding parity bonds as they come due. Interest on the parity bonds, including the Series 2023A Bonds, is payable semi-annually on April 1 and October 1 of each year. The first interest payment date for the Series 2023A Bonds is April 1, 2024, representing approximately five months of accrued interest from the dated date of October 24, 2023. Principal on the Series 2023A Bonds is payable annually on October 1, commencing on a date to be specified in the First Supplemental Indenture. The Bond Fund deposits are calculated to ensure that sufficient funds are on hand to make each scheduled payment of principal and interest on a timely basis.
3. Debt Service Reserve Fund ("DSRF") — Third Priority. After the Bond Fund deposits, the next priority of disbursement is to the Debt Service Reserve Fund. The DSRF serves as a reserve fund to cover shortfalls in debt service payments in the event that Net Pledged Revenues are insufficient to make scheduled payments from the Bond Fund. The DSRF requirement for the Series 2023A Bonds is satisfied by the surety policy from Olympia Guaranty Insurance Corp. (Surety Policy No. OG-2023-MUN-4718) in the amount of $11,610,000, which is equal to maximum annual debt service on the Series 2023A Bonds. The annual premium for the surety policy is $23,220 (0.20% of the surety amount), which is payable from the O&M Fund or from other available funds of CSIA as provided in the Bond Indenture. If the surety policy is drawn upon to cover a debt service shortfall, CSIA is required to replenish the DSRF (or reimburse Olympia Guaranty for draws on the surety) within 12 months of the draw date.
4. Rebate Fund — Fourth Priority. After the DSRF, the next priority of disbursement is to the Rebate Fund, which is maintained to accumulate and hold amounts required to be rebated to the United States Treasury in compliance with the arbitrage rebate requirements of Section 148 of the Internal Revenue Code of 1986, as amended. The rebate obligation arises if investment earnings on the gross proceeds of the Series 2023A Bonds exceed the yield on the bonds, and the Rebate Fund provides a mechanism for segregating and paying such amounts in compliance with federal tax law.
5. Surplus / Residual Fund — Fifth Priority. Any amounts remaining in the Revenue Fund after all of the foregoing deposits have been made in full are transferred to the Surplus Fund (or Residual Fund), which is available for use by CSIA for any lawful purpose. Lawful purposes include, without limitation, capital improvements to the water-treatment system, payment of debt service on subordinate lien obligations (if any), transfers to CSIA's general fund, or any other purpose authorized by law and the Bond Indenture.
C. Significance of the Flow of Funds for Pledge Priority
The waterfall structure established by the Bond Indenture is a critical component of the security structure for the Series 2023A Bonds and the overall revenue pledge. The mandatory nature of the deposits and the strict priority of disbursements ensure that pledged revenues are applied first to the maintenance of the revenue-generating system (O&M) and then to the payment of debt service on parity bonds before any amounts are available for discretionary use by CSIA.
The flow-of-funds structure protects bondholders in several important respects. First, it ensures that the operation and maintenance of the water-treatment system — the source of the pledged revenues — is funded before any other claim on the revenue stream. Second, it ensures that debt service payments to parity bondholders are made in full before any surplus revenues are available for subordinate obligations or discretionary expenditures. Third, the DSRF provides an additional layer of protection against temporary revenue shortfalls. Fourth, the Rebate Fund ensures compliance with federal tax law, thereby preserving the tax-exempt status of the bonds.
The Trustee (PNTC) has a fiduciary duty to enforce the flow-of-funds provisions and to apply revenues in strict accordance with the priority structure established by the Bond Indenture. In the event of a default or breach of the flow-of-funds provisions by CSIA, the Trustee has the right and obligation to take such actions as may be necessary to enforce the Indenture, including the pursuit of legal remedies on behalf of bondholders, as discussed further in Section X below.
A flow-of-funds diagram illustrating the waterfall structure is set forth in Appendix E to this memorandum.
VII. Rate Covenant
A. Financial Covenant
The Bond Indenture and Revenue Pledge Agreement contain a Rate Covenant pursuant to which CSIA covenants and agrees to establish, maintain, and collect rates, fees, and charges for water treatment services at levels sufficient to produce Net Pledged Revenues in each fiscal year that are at least equal to 1.40 times (1.40x) the annual aggregate parity debt service payable in such fiscal year on all outstanding parity bonds. The Rate Covenant is a continuing obligation of CSIA that runs for the life of the outstanding parity bonds and is enforceable by the Trustee on behalf of bondholders.
The Rate Covenant is a central credit protection mechanism in the security structure for the Series 2023A Bonds. By requiring CSIA to exercise its rate-setting authority to maintain adequate revenue coverage for bondholders, the Rate Covenant provides ongoing assurance that the Net Pledged Revenues will be sufficient to meet CSIA's debt service obligations. The 1.40x minimum coverage level provides a meaningful cushion above a 1.00x breakeven level, allowing for the possibility of revenue fluctuations or unexpected increases in O&M Expenses without jeopardizing the timely payment of debt service.
The Rate Covenant is structured as a covenant to use best efforts to maintain the specified coverage level. In the event that Net Pledged Revenues fall below the required 1.40x coverage in any fiscal year, CSIA is obligated to take such actions as may be necessary to restore compliance, including increasing rates and charges, reducing O&M Expenses, or both. A failure to maintain the required coverage level does not constitute an immediate event of default, but rather triggers a requirement for CSIA to retain an independent consultant to review its rate structure and to implement the consultant's recommendations within a specified period. An event of default occurs only if CSIA fails to take the corrective actions required by the Indenture within the applicable cure period.
B. Current Compliance
CSIA is currently in compliance with the Rate Covenant. The pro forma DSCR, calculated using FY 2022 audited Net Pledged Revenues and total annual parity debt service (including the Series 2023A Bonds), is 1.48x, which exceeds the 1.40x minimum covenant level.
The 1.48x coverage level provides a cushion of approximately $22,820,000 above the amount that would be required at a 1.40x minimum level (i.e., $278,400,000 × 1.40 = $389,760,000, compared to actual Net Pledged Revenues of $412,600,000). This cushion provides a margin of safety for bondholders and allows for some degree of revenue underperformance or expense overrun without triggering a covenant violation.
Projected FY 2024 Net Pledged Revenues of $431,800,000 would produce a DSCR of approximately 1.55x ($431,800,000 ÷ $278,400,000), providing further upward trajectory and additional coverage cushion. However, we note that the projected FY 2024 figures are management estimates and are subject to the uncertainties inherent in financial projections.
C. Rate-Setting Authority Over Participating Districts
CSIA's ability to comply with the Rate Covenant is dependent upon its authority to establish and adjust wholesale water treatment service charges to the 14 participating municipal water and sewer districts. This rate-setting authority is conferred by Chapter 43.160A RCW and is further implemented through the Wholesale Water Treatment Services Agreements.
Under Chapter 43.160A RCW, CSIA has the express statutory authority to establish, revise, and collect rates, fees, and charges for the use of its water-treatment system and related facilities. The Wholesale Water Treatment Services Agreements incorporate CSIA's rate-setting authority and provide that the service charges payable by the participating districts shall be determined by CSIA in accordance with its rate-setting policies and procedures, as adopted from time to time by CSIA's Board of Commissioners by resolution.
The rate-setting process is subject to certain procedural requirements, including reasonable advance notice to the participating districts of proposed rate changes and the opportunity for comment. However, the ultimate rate-setting authority resides with CSIA's Board of Commissioners, and the participating districts do not have a veto or approval right over rate adjustments. This unilateral rate-setting authority is a critical element of the revenue pledge, as it provides the mechanism by which CSIA can ensure that Net Pledged Revenues remain sufficient to satisfy the Rate Covenant and to meet its debt service obligations.
It should be noted that the participating districts, as municipal entities, have their own rate-setting considerations with respect to their retail customers. However, the obligations of the participating districts to CSIA under the Wholesale Water Treatment Services Agreements are independent of their retail rate structures. The districts' payment obligations to CSIA are contractual obligations arising under the Service Agreements and the Interlocal Cooperation Act, and they are not contingent upon the districts' ability to collect retail rates from their respective customers. This structural separation between wholesale and retail rate-setting provides an additional layer of protection for the revenue pledge.
VIII. Perfection of the Pledge Under Washington Law
A. Statutory Perfection Mechanism
Under Chapter 43.160A RCW, the pledge of revenues by CSIA as security for the Series 2023A Bonds is perfected automatically by operation of statute, without any physical delivery, filing, recording, or further act. This statutory perfection mechanism is established by Section 43.160A.060 RCW, which provides that the pledge of revenues shall be valid and binding from the time the pledge is made and that the revenues so pledged shall immediately be subject to the lien of the pledge.
Perfection of the statutory lien occurs upon satisfaction of the following two conditions:
(1) Adoption of the Authorizing Resolution. Board Resolution No. 2023-014 was adopted by CSIA's Board of Commissioners on May 9, 2023, with Commissioner Lorraine Chu presiding as Board Chair. The Resolution authorizes the issuance of the Series 2023A Bonds, approves the pledge of Net Pledged Revenues as security therefor, and approves the forms of the Bond Indenture, First Supplemental Indenture, and Revenue Pledge Agreement.
(2) Execution and Delivery of the Bond Indenture and Revenue Pledge Agreement. The Bond Indenture and Revenue Pledge Agreement are to be executed and delivered on the closing date of October 24, 2023. Upon execution and delivery, the statutory lien on Net Pledged Revenues will attach, and the pledge will be perfected for all purposes under Washington law.
The statutory lien attaches to the Net Pledged Revenues as they are received by CSIA and continues until the Series 2023A Bonds (and all other outstanding parity bonds) are paid in full or provision for payment has been made in accordance with the defeasance provisions of the Bond Indenture. The lien is a continuing lien that runs with the revenue stream, not with any particular asset, and it captures all future Net Pledged Revenues without the need for any periodic renewal, reaffirmation, or refiling.
The simplicity and certainty of the statutory perfection mechanism is a significant advantage of the revenue pledge structure. Unlike commercially created security interests, which require affirmative perfection steps such as UCC financing statement filings, the statutory lien is self-perfecting and self-maintaining. This eliminates the administrative burden and risk associated with maintaining UCC filings and ensures that the pledge remains perfected throughout the life of the bonds.
B. No UCC Filing Required
As discussed in detail in Section III.C above, Article 9 of the Uniform Commercial Code (RCW 62A.9A) does not apply to the pledge of revenues by CSIA. Accordingly, no financing statement filing with the Washington Secretary of State or any other filing office is required to perfect the pledge of Net Pledged Revenues as security for the Series 2023A Bonds.
The absence of a UCC filing requirement eliminates several risks that are present in the context of commercially created security interests:
•  Lapse Risk. UCC financing statements are effective for a five-year period and must be continued by the filing of a continuation statement prior to expiration. A failure to file a timely continuation statement results in the lapse of the financing statement and the loss of perfection. The statutory lien on Net Pledged Revenues is not subject to any lapse or expiration requirement.
•  Defective Filing Risk. A UCC financing statement may be ineffective if it contains errors in the debtor's name, the collateral description, or other required information. An ineffective financing statement results in the failure of perfection. The statutory lien is not dependent on any filing and therefore cannot be rendered defective by clerical or informational errors.
•  Priority Dispute Risk. Under UCC Article 9, priority among competing security interests in the same collateral is generally determined by the order of filing or perfection. A subsequent secured party that files before the first secured party has priority. The statutory lien on Net Pledged Revenues is a first-priority lien by operation of law and is not subject to being primed by a subsequent UCC filing.
The elimination of these risks provides bondholders with a higher degree of certainty regarding the perfection and priority of the revenue pledge and is a significant structural advantage of the statutory lien mechanism under Washington law.
C. Priority of the Statutory Lien
The statutory lien on Net Pledged Revenues created under Chapter 43.160A RCW and the Revenue Pledge Agreement is a first-priority lien as to all parity bondholders. The lien has priority over all claims of any kind against CSIA, including claims in tort, contract, or otherwise, irrespective of whether such claimants have notice of the pledge. No security interest created under the UCC or any other mechanism can prime the statutory lien.
The first-priority status of the statutory lien is established by Section 43.160A.060 RCW, which provides that the lien of the pledge shall be valid and binding as against all parties having claims of any kind in tort, contract, or otherwise, against CSIA. This language creates a statutory first-priority lien that is superior to all other claims on the pledged revenues, providing maximum protection for bondholders.
Within the universe of parity bondholders, all holders share equally and ratably in the lien on Net Pledged Revenues. No series of parity bonds has a superior or subordinate position relative to any other series of parity bonds. The parity nature of the lien among parity bondholders is established by the Bond Indenture and is consistent with the statutory framework, which does not prescribe any particular priority structure among bonds secured by the same pledge.
D. Chapter 9 Bankruptcy Considerations
Although CSIA, as a governmental instrumentality of the State of Washington, is not subject to the general provisions of the federal Bankruptcy Code (Title 11, United States Code), it is appropriate to consider the treatment of the revenue pledge in a hypothetical Chapter 9 bankruptcy scenario. Chapter 9 of the Bankruptcy Code is the only chapter under which a municipality or governmental instrumentality may seek bankruptcy relief.
Eligibility for Chapter 9. A municipality or governmental instrumentality may file a petition under Chapter 9 only if it is specifically authorized to do so by state law. As of the date of this memorandum, the State of Washington has not enacted legislation specifically authorizing CSIA or similarly situated governmental instrumentalities to file for Chapter 9 protection. Accordingly, CSIA is not currently eligible to file a Chapter 9 petition. However, the Washington Legislature could potentially enact such authorizing legislation in the future, and it is therefore prudent to analyze the treatment of the revenue pledge under Chapter 9.
Protection of Special Revenues Under Section 928. Assuming, for purposes of analysis, that CSIA were eligible for and did file a Chapter 9 petition, the revenue pledge would be protected under Section 928 of the Bankruptcy Code. Section 928(a) provides that "[n]otwithstanding section 552(a) of this title, special revenues acquired by the debtor after the commencement of the case shall remain subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case." In other words, the statutory lien on pledged revenues continues to attach to post-petition revenues, and the automatic stay does not extinguish or suspend the lien.
Characterization as Special Revenues. The wholesale water treatment service charges that constitute the primary component of Gross Pledged Revenues are "special revenues" within the meaning of Section 902(2) of the Bankruptcy Code. Section 902(2)(A) defines "special revenues" to include, among other things, "receipts derived from the ownership, operation, or disposition of projects or systems of the debtor that are primarily used or intended to be used primarily to provide . . . water . . . service." CSIA's wholesale water treatment service charges are receipts derived from the ownership and operation of CSIA's water-treatment system, which is used to provide water treatment services. Accordingly, these charges satisfy the statutory definition of "special revenues."
Conclusion. Even in the hypothetical scenario of a Chapter 9 bankruptcy filing by CSIA, the pledge of Net Pledged Revenues would be protected under Section 928 of the Bankruptcy Code. Post-petition revenues would remain subject to the lien of the Bond Indenture and Revenue Pledge Agreement, and the Trustee would continue to have the right to receive and apply pledged revenues in accordance with the flow-of-funds provisions of the Indenture. This analysis provides additional assurance to bondholders regarding the durability and resilience of the revenue pledge structure.
IX. Enforceability of the Revenue Pledge Against Participating Districts
A. Nature of the Districts' Obligations
The revenue pledge securing the Series 2023A Bonds is ultimately dependent upon the receipt by CSIA of wholesale water treatment service charges from the 14 participating municipal water and sewer districts. Accordingly, the enforceability of the obligations of those districts to CSIA is a critical element of the revenue pledge analysis.
Each of the 14 participating districts has entered into a long-term Wholesale Water Treatment Services Agreement with CSIA. These Service Agreements establish the terms and conditions under which CSIA provides wholesale water treatment services to the districts, including the allocation of treatment capacity among the districts, the determination and payment of service charges, and the respective rights and obligations of the parties.
The service charges payable by the participating districts under the Service Agreements are structured as unconditional contractual obligations. Each district is obligated to pay its allocated share of CSIA's costs of providing water treatment services — including the district's proportional share of debt service costs on CSIA's revenue bonds — regardless of whether the district utilizes the full contracted volume of treated water capacity during any given period. This unconditional payment structure, which is functionally equivalent to a "take-or-pay" arrangement, provides significant credit strength to the revenue pledge by ensuring that the pledged revenues are not dependent on actual water usage or demand in any given year. Even in periods of below-average water demand, the participating districts remain contractually obligated to pay their full allocated service charges.
The long-term nature of the Service Agreements provides additional stability and predictability to the revenue base. The agreements have terms that extend beyond the final maturity of the Series 2023A Bonds (October 1, 2053), ensuring that the contractual framework underlying the revenue pledge will remain in place throughout the life of the bonds. The Service Agreements also contain provisions for automatic renewal, subject to certain termination rights that are subordinated to the rights of bondholders.
B. Enforceability Analysis
The Wholesale Water Treatment Services Agreements are binding contracts between CSIA and the 14 participating districts, and they are enforceable by CSIA (or by the Trustee on behalf of bondholders, if directed under the Bond

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