CALDERWOOD & HARKNESS LLP Attorneys at Law
1420 Fifth Avenue, Suite 3600 Seattle, Washington 98101
Telephone: (206) 441-7200 Facsimile: (206) 441-7201 www.calderwoodharkness.com
October 24, 2023
Meridian Capital Partners LLC as Representative of the Underwriters 600 Third Avenue, 28th Floor New York, New York 10016
Attention: Jonathan D. Kessler, Managing Director, Public Finance
Dralvecen Fenn & Co., Inc. 200 Park Avenue, Suite 3100 New York, New York 10166
Attention: Sarah E. Mulvaney, Director, Municipal Finance
Re: $220,000,000 Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) — 10b-5 Negative Assurance Letter
Ladies and Gentlemen:
We have acted as issuer's counsel to the Cascadia State Infrastructure Authority ("CSIA"), a governmental instrumentality of the State of Washington duly created and existing under and pursuant to Chapter 43.160A of the Revised Code of Washington, in connection with the issuance and sale of $220,000,000 aggregate principal amount of Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) (the "Series 2023A Bonds" or the "Bonds"). This letter is being delivered to you pursuant to Section 8(b)(11) of the Bond Purchase Agreement dated August 30, 2023 (the "Bond Purchase Agreement"), among CSIA and Meridian Capital Partners LLC, as representative of the several underwriters named therein (collectively, the "Underwriters"). Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Bond Purchase Agreement.
I. Documents Reviewed
In connection with the preparation and delivery of this letter, we have reviewed the following documents (collectively, the "Transaction Documents"):
(a) the Preliminary Official Statement dated June 26, 2023 relating to the Bonds (the "Preliminary Official Statement" or "POS");
(b) the Final Official Statement dated September 5, 2023 relating to the Bonds (the "Final Official Statement" or "OS," and together with the Preliminary Official Statement, the "Official Statements");
(c) the Bond Indenture dated as of October 24, 2023 (the "Indenture"), by and between CSIA and Pacific Northwest Trust Company, N.A. ("PNTC"), as Trustee;
(d) the First Supplemental Indenture dated as of October 24, 2023 (the "First Supplemental Indenture"), by and between CSIA and PNTC, as Trustee, supplementing and amending the Indenture;
(e) the Revenue Pledge Agreement dated as of October 24, 2023 (the "Revenue Pledge Agreement"), by and between CSIA and PNTC, as Trustee;
(f) the Bond Purchase Agreement dated August 30, 2023, by and among CSIA and the Underwriters;
(g) the Continuing Disclosure Agreement dated as of October 24, 2023 (the "Continuing Disclosure Agreement"), by and between CSIA and PNTC, as Dissemination Agent, entered into for the benefit of the holders and beneficial owners of the Bonds pursuant to Rule 15c2-12 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act");
(h) the Tax Regulatory Agreement and Certificate executed by CSIA on October 15, 2023 (the "Tax Certificate");
(i) the Escrow Deposit Agreement dated as of October 24, 2023 (the "Escrow Deposit Agreement"), by and between CSIA and PNTC, as Escrow Agent;
(j) the Debt-Service Reserve Fund Surety Bond Agreement dated as of October 24, 2023 (the "Surety Bond Agreement"), by and among CSIA, PNTC, as Trustee, and Olympia Guaranty Insurance Corp.;
(k) CSIA Board Resolution No. 2023-014, duly adopted by the Board of Directors of CSIA on May 9, 2023, authorizing the issuance of the Bonds and the execution and delivery of the Transaction Documents;
(l) the Certificate of Authorized Officer of CSIA, executed by Harold K. Nakamura, Executive Director of CSIA, dated the date hereof;
(m) the CFO's Certificate, executed by Denise R. Whitford, Chief Financial Officer of CSIA, dated the date hereof; and
(n) such other documents, certificates, records, and instruments as we deemed necessary or appropriate for purposes of rendering this letter.
The documents described in clauses (a) through (n) above, together with the certificates, agreements, and other instruments delivered in connection with the closing of the Bonds on the date hereof, are sometimes collectively referred to herein as the "Reviewed Documents."
II. Scope of Review and Participation
In connection with our role as issuer's counsel to CSIA and our preparation and review of the Official Statements, we have undertaken the following activities:
(a) Due Diligence Sessions. We attended and participated in due diligence sessions and conferences with officers and representatives of CSIA, including Harold K. Nakamura, Executive Director, Denise R. Whitford, Chief Financial Officer, and Martin J. Espinoza, General Counsel. These sessions were conducted at various times from May 2023 through the date hereof and covered, among other matters, the operations, financial condition, and capital program of CSIA, the status of the Puget Sound Regional Advanced Water Treatment Facility (the "Project"), the pledged revenues securing the Bonds, and the accuracy and completeness of the disclosures contained in the Official Statements.
(b) Discussions with Municipal Advisor. We held discussions with representatives of Clearfield Municipal Advisors LLC, the SEC-registered municipal advisor to CSIA, including Kenneth W. Barclay, Principal, regarding the financial structuring of the Bonds, the sources and uses of funds, and the projected debt-service coverage.
(c) Discussions with Underwriters and Underwriters' Counsel. We participated in discussions with representatives of the Underwriters and their counsel, Alderman & Locke LLP, including Daniel F. Obermeyer and Christina M. Vega, regarding due diligence matters, the content and accuracy of the Official Statements, and the terms and conditions of the Bond Purchase Agreement.
(d) Review of Audited Financial Statements. We reviewed the audited financial statements of CSIA for the fiscal years ended June 30, 2021 and June 30, 2022, which were prepared by Hargrove & Associates CPAs, PLLC (Victoria L. Fong, CPA, Engagement Partner), together with the independent auditor's reports thereon. We note that the financial statements included in Appendix B to the Official Statements were audited by Hargrove & Associates CPAs, PLLC and that we express no opinion or view with respect to such financial statements or the auditor's reports thereon.
(e) Review of Design-Build Contract. We reviewed the design-build Guaranteed Maximum Price contract between CSIA and Northtide Environmental Engineering, Inc., identified as Contract No. CSIA-DB-2023-001, in the amount of $193,500,000, relating to the design and construction of the Project.
(f) Review of Environmental Permits. We reviewed environmental permits relating to the Project, including the State Environmental Policy Act ("SEPA") Determination of Non-Significance issued on September 12, 2022, and the National Pollutant Discharge Elimination System ("NPDES") Permit No. WA-004837-2 modification approved on January 6, 2023 by the Washington State Department of Ecology.
(g) Review of Credit Ratings. We reviewed the underlying credit ratings assigned to the Bonds by Lakeshore Ratings Group, Inc. ("AA" with a stable outlook) and Pinnacle Credit Analytics, Inc. ("AA−" with a stable outlook), and the corresponding ratings reports and methodology materials provided in connection with such ratings.
(h) Review of Financial Data. We reviewed financial data relating to CSIA, including fiscal year 2022 gross pledged revenues of $489,300,000, operations and maintenance expenses of $76,700,000, net pledged revenues of $412,600,000, and projected fiscal year 2024 net pledged revenues of $431,800,000. We also reviewed the historical and projected debt-service coverage ratios and the assumptions underlying such projections as set forth in the Official Statements.
(i) Review of Security Structure. We reviewed the security structure for the Bonds, including: (i) the pledge of net water-treatment revenues derived from the 14 participating municipal water districts that are parties to the Interlocal Cooperation Agreements described in the Official Statements; (ii) the rate covenant contained in the Indenture requiring CSIA to establish and maintain rates and charges sufficient to produce a debt-service coverage ratio ("DSCR") of not less than 1.40x; (iii) the additional bonds test set forth in Section 7.03 of the Indenture; and (iv) the debt-service reserve fund surety provided by Olympia Guaranty Insurance Corp. pursuant to Surety Policy No. OG-2023-MUN-4718, in the surety amount of $11,610,000.
(j) Review of Official Statement Disclosure. Our review of the Official Statements included, without limitation, the descriptions therein of: the Bonds, including the 3.25% fixed coupon rate, the final maturity date of October 1, 2053, the optional redemption provisions permitting redemption at par on or after October 1, 2033, the CUSIP base number 148392, the book-entry-only system of registration through The Depository Trust Company, New York, New York, and its nominee Cede & Co., and the authorized denominations of $5,000 or any integral multiple thereof; the Indenture and the First Supplemental Indenture; the Revenue Pledge Agreement; the security for the Bonds; the Project description, including the Puget Sound Regional Advanced Water Treatment Facility, a 60 million gallons per day ("MGD") advanced water treatment facility to be located at 7250 Deschutes Parkway, Tumwater, Thurston County, Washington 98501; the estimated sources and uses of funds; and the financial information of CSIA.
III. Limitations and Qualifications
The negative assurance set forth in this letter is subject to the following limitations, qualifications, and assumptions:
(a) Calderwood & Harkness LLP is not registered as a municipal advisor under Section 15B of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder by the Securities and Exchange Commission and the Municipal Securities Rulemaking Board. Nothing in this letter shall be construed as the provision of municipal advisory services within the meaning of Section 15B of the Exchange Act or MSRB Rule G-42. Our engagement has been limited solely to acting as issuer's counsel to CSIA.
(b) We have not undertaken to independently verify the accuracy, completeness, or fairness of the statements, financial data, statistical data, or other information contained in the Official Statements, and we make no representation or warranty, express or implied, as to the accuracy, completeness, or fairness thereof. We have relied upon the representations and warranties of CSIA contained in the Bond Purchase Agreement, in the Certificate of Authorized Officer, and in the CFO's Certificate, and upon information furnished to us by officers and representatives of CSIA and by other parties in connection with the issuance of the Bonds, without undertaking to verify such information independently.
(c) Our role has been limited to acting as issuer's counsel to CSIA and does not include providing an audit or otherwise verifying the financial statements of CSIA. The audited financial statements of CSIA included in Appendix B to the Official Statements were audited by Hargrove & Associates CPAs, PLLC, an independent certified public accounting firm, and we express no opinion or view with respect to such financial statements, the auditor's reports thereon, or any financial, accounting, or statistical data derived therefrom.
(d) We have not undertaken to verify any information regarding the operations, financial condition, properties, or prospects of CSIA or of Northtide Environmental Engineering, Inc. or any other entity or person mentioned in the Official Statements, except as may be specifically set forth in this letter. We have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to authentic originals of all documents submitted to us as copies.
(e) We call your attention to the fact that negative assurance of the type set forth in this letter is inherently limited in nature and scope. It is based on and limited to our participation in the preparation and review of the Official Statements and the other activities described herein, and should not be construed as a guarantee, certification, or assurance of any kind, or as a substitute for the Underwriters' own due diligence investigation of the matters described in the Official Statements. The Underwriters should conduct such independent investigation and verification as they deem necessary and appropriate in connection with the offering and sale of the Bonds.
(f) We have not been engaged to, and do not, pass upon or express any opinion or view regarding the financial feasibility of the Project, the sufficiency of the pledged revenues to pay debt service on the Bonds, the adequacy of the rate covenant or the debt-service coverage ratio required under the Indenture, or the financial condition, creditworthiness, or future operations of CSIA or any other person or entity.
(g) The scope of this letter and the negative assurance set forth herein do not extend to, and we express no opinion or view with respect to, the following portions and categories of information contained in the Official Statements:
(i) financial statements, notes thereto, and other financial, accounting, and statistical data, including without limitation the audited financial statements of CSIA contained in Appendix B to the Official Statements;
(ii) forecasts, projections, estimates, assumptions, budgets, and expressions of opinion;
(iii) numbers, tables, charts, graphs, and other quantitative or illustrative presentations;
(iv) information relating to The Depository Trust Company, New York, New York, and the book-entry-only system of registration, including the information contained in Appendix E to the Official Statements;
(v) information regarding Olympia Guaranty Insurance Corp. and the debt-service reserve fund surety bond, including the financial condition, claims-paying ability, and operations of Olympia Guaranty Insurance Corp.;
(vi) information regarding Lakeshore Ratings Group, Inc. and Pinnacle Credit Analytics, Inc. and the credit ratings assigned by such rating agencies to the Bonds, including the basis for, significance of, and factors considered in arriving at such ratings;
(vii) CUSIP numbers and related information; and
(viii) information regarding the tax-exempt status of interest on the Bonds, including the matters addressed in the sections of the Official Statements captioned "Tax Matters" and "Tax Treatment," to the extent that such matters are covered by the separate approving opinions of Co-Bond Counsel, Pryor Crestfield LLP and Calderwood & Harkness LLP, delivered on the date hereof.
IV. Negative Assurance
Based upon and subject to the foregoing, and in reliance upon the accuracy of the representations and warranties of CSIA contained in the Bond Purchase Agreement and upon the Certificate of Authorized Officer executed by Harold K. Nakamura and the CFO's Certificate executed by Denise R. Whitford, and having participated in the preparation and review of the Preliminary Official Statement dated June 26, 2023 and the Final Official Statement dated September 5, 2023, and the conferences, discussions, and other activities described in Section II above, no facts came to the attention of the attorneys at Calderwood & Harkness LLP who participated in the preparation and review of the Official Statements or in the transactions described therein that caused such attorneys to believe that:
(a) the Preliminary Official Statement, as of its date (June 26, 2023) and as of the date of the Bond Purchase Agreement (August 30, 2023) (in each case, except for any information permitted to be omitted therefrom pursuant to Rule 15c2-12 under the Securities Exchange Act of 1934, as amended, and the information and documents referenced in Section III(g)(i) through (viii) of this letter), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; or
(b) the Final Official Statement, as of its date (September 5, 2023) and as of the date hereof (October 24, 2023) (in each case, except for the information and documents referenced in Section III(g)(i) through (viii) of this letter), contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
The negative assurance set forth in clauses (a) and (b) above is given solely in our capacity as issuer's counsel to CSIA and is based solely upon the review, participation, and activities described in this letter. It does not address compliance by CSIA or any other party with the antifraud provisions of Section 17(a) of the Securities Act of 1933, as amended, Section 10(b) of the Securities Exchange Act of 1934, as amended, or Rule 10b-5 promulgated thereunder, or any state securities or "blue sky" laws, and we express no opinion with respect thereto, except to the extent of the negative assurance expressly set forth above.
V. Reliance and Use
This letter is furnished solely for the benefit of, and may be relied upon only by, the addressees hereof, Meridian Capital Partners LLC and Dralvecen Fenn & Co., Inc., in their respective capacities as Underwriters of the Bonds, and solely in connection with the offering and sale of the Series 2023A Bonds. This letter may not be relied upon by any other person or entity, or for any other purpose, without the prior written consent of Calderwood & Harkness LLP.
This letter is not to be quoted in whole or in part, referred to, summarized, paraphrased, or filed with any governmental agency, regulatory body, stock exchange, or other person or entity, without the prior written consent of Calderwood & Harkness LLP; provided, however, that reference may be made to this letter in any list of closing documents pertaining to the Bonds and in any closing memorandum or transcript of proceedings prepared in connection with the issuance, sale, and delivery of the Bonds.
This letter speaks only as of its date, and Calderwood & Harkness LLP assumes no obligation to update, revise, or supplement this letter to reflect any facts or circumstances that may hereafter come to its attention, or any changes in applicable law or the interpretation thereof that may hereafter occur, whether or not such facts, circumstances, or changes would affect or modify the negative assurance set forth herein.
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Signature Page to 10b-5 Negative Assurance Letter Series 2023A Bonds
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
George Trujillo, Partner
C&H Matter No. 1030-00001
cc (via electronic mail and overnight courier):
Cascadia State Infrastructure Authority 1100 Capitol Way South, Suite 400 Olympia, Washington 98501
Attention: Harold K. Nakamura, Executive Director
Attention: Denise R. Whitford, Chief Financial Officer
Attention: Martin J. Espinoza, General Counsel
Pacific Northwest Trust Company, N.A. 1201 Third Avenue, Suite 1600 Seattle, Washington 98101
Attention: Alan M. Greer, Vice President, Corporate Trust Services
Pryor Crestfield LLP 999 Third Avenue, Suite 4800 Seattle, Washington 98104
Attention: Margaret S. Yoon
Alderman & Locke LLP 51 West 52nd Street New York, New York 10019
Attention: Daniel F. Obermeyer
Clearfield Municipal Advisors LLC 805 SW Broadway, Suite 1400 Portland, Oregon 97205
Attention: Kenneth W. Barclay, Principal