TAX REGULATORY AGREEMENT AND CERTIFICATE
Relating to
$220,000,000 Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt)
CUSIP Base: 148392
Dated: October 15, 2023
Executed by: Cascadia State Infrastructure Authority
C&H Matter No. 1030-00001
Prepared by:
Calderwood & Harkness LLP 1420 Fifth Avenue, Suite 3600 Seattle, WA 98101
Leonard Cross, Specialist Partner, Tax Michelle Tsao, Lead Associate, Energy & Infrastructure
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RECITALS
WHEREAS, the Cascadia State Infrastructure Authority ("CSIA" or the "Issuer") is a governmental instrumentality and public body corporate of the State of Washington, duly created and existing pursuant to Chapter 43.160A of the Revised Code of Washington ("RCW"), with its principal headquarters located at 1100 Capitol Way South, Suite 400, Olympia, Washington 98501 (Employer Identification Number 91-2058374); and
WHEREAS, CSIA is authorized under Chapter 43.160A RCW to issue revenue bonds for the purpose of financing public infrastructure improvements, including water treatment, wastewater management, and related capital facilities serving the residents of the State of Washington; and
WHEREAS, the Board of Commissioners of CSIA (the "Board"), by Board Resolution No. 2023-014, duly adopted on May 9, 2023, under the chairmanship of Commissioner Lorraine Chu, Board Chair, authorized the issuance of revenue bonds in an aggregate principal amount not to exceed $225,000,000 for the purpose of financing the design, construction, and commissioning of the Puget Sound Regional Advanced Water Treatment Facility; and
WHEREAS, pursuant to such authority, CSIA has authorized the issuance of $220,000,000 aggregate principal amount of Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) (the "Bonds"); and
WHEREAS, the Bonds are being issued pursuant to the Bond Indenture dated as of October 24, 2023 (the "Indenture") and the First Supplemental Indenture dated as of October 24, 2023 (the "First Supplemental Indenture," and together with the Indenture, the "Bond Documents"), each entered into between CSIA and Pacific Northwest Trust Company, National Association ("PNTC"), a national banking association organized under the laws of the United States, acting in its capacity as Trustee (the "Trustee"); and
WHEREAS, the proceeds of the Bonds will be used to finance the design, construction, and commissioning of the Puget Sound Regional Advanced Water Treatment Facility (the "Project"), a 60-million-gallons-per-day (MGD) advanced membrane-filtration and UV-disinfection water-treatment facility to be located at 7250 Deschutes Parkway, Tumwater, Thurston County, Washington 98501, on approximately 18 acres of CSIA-owned land adjacent to the existing Deschutes River Tertiary Treatment Plant; and
WHEREAS, the Project will serve 14 Puget Sound-region municipal water and sewer districts (the "Participating Districts"), each of which is a political subdivision or governmental entity of the State of Washington, pursuant to long-term Wholesale Water Treatment Services Agreements; and
WHEREAS, the Bonds were sold pursuant to a Bond Purchase Agreement dated August 30, 2023 (the "Bond Purchase Agreement") among CSIA, Meridian Capital Partners LLC, as Senior Managing Underwriter, and Dralvecen Fenn & Co., Inc., as Co-Managing Underwriter (collectively, the "Underwriters"); and
WHEREAS, Pryor Crestfield LLP and Calderwood & Harkness LLP are serving jointly as Co-Bond Counsel ("Bond Counsel") in connection with the issuance of the Bonds, and Bond Counsel will deliver a Tax Opinion dated as of the Closing Date (October 24, 2023) to the effect that, under existing statutes, regulations, rulings, and court decisions, and assuming continuing compliance by the Issuer with certain covenants and conditions, including the covenants and conditions set forth in this Tax Regulatory Agreement and Certificate, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, CSIA has entered into a Revenue Pledge Agreement (the "Revenue Pledge Agreement") pledging certain operating revenues derived from the Participating Districts for the payment of debt service on the Bonds; and
WHEREAS, the Issuer is executing this Tax Regulatory Agreement and Certificate (this "Tax Regulatory Agreement" or this "Agreement") in order to set forth certain facts, representations, expectations, and covenants relating to the use and investment of proceeds of the Bonds, all for the purpose of establishing and maintaining the exclusion of interest on the Bonds from gross income for federal income tax purposes under Section 103 of the Code; and
WHEREAS, the Issuer acknowledges that the representations, certifications, and covenants set forth herein are material to the Tax Opinion of Bond Counsel and to the tax-exempt status of interest on the Bonds, and the Issuer intends for this Tax Regulatory Agreement to constitute a certificate of the Issuer within the meaning of Treasury Regulations Section 1.148-2(b).
NOW, THEREFORE, in consideration of the foregoing and in order to ensure the exclusion of interest on the Bonds from gross income for federal income tax purposes, the Issuer hereby represents, certifies, covenants, and agrees as follows:
ARTICLE I — DEFINITIONS
Section 1.01 — Defined Terms
As used in this Tax Regulatory Agreement, the following terms shall have the meanings set forth below. Capitalized terms used but not otherwise defined herein shall have the meanings assigned to them in the Indenture or the First Supplemental Indenture, as applicable.
"Bonds" means the $220,000,000 aggregate principal amount of Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt), issued pursuant to the Indenture and the First Supplemental Indenture, bearing the CUSIP Base number 148392.
"Bond Counsel" means Pryor Crestfield LLP, with offices at 999 Third Avenue, Suite 4800, Seattle, Washington 98104, and Calderwood & Harkness LLP, with offices at 1420 Fifth Avenue, Suite 3600, Seattle, Washington 98101, jointly serving as Co-Bond Counsel to the Issuer in connection with the issuance of the Bonds.
"Bond Fund" or "Debt Service Fund" means the fund established under Article V of the Indenture for the purpose of accumulating and disbursing amounts necessary to pay the principal of, premium (if any), and interest on the Bonds as the same become due and payable.
"Bond Purchase Agreement" means the Bond Purchase Agreement dated August 30, 2023, among the Issuer and the Underwriters, pursuant to which the Underwriters agreed to purchase the Bonds at the purchase price and upon the terms and conditions set forth therein.
"Bond Year" means each 12-month period (or shorter period from the dated date) ending on the anniversary of the Dated Date (i.e., each October 24), or, in the case of the final Bond Year, the period from the last such anniversary date to the final maturity date (October 1, 2053) or, if earlier, the date on which the last Bond is retired.
"Capitalized Interest Fund" means the fund established under the Indenture for the deposit of $4,510,000 from proceeds of the Bonds, to be applied to the payment of interest on the Bonds during the construction period of the Project.
"Closing Date" means October 24, 2023, the date on which the Bonds are delivered to the Underwriters and the proceeds thereof are received by the Issuer.
"Code" means the Internal Revenue Code of 1986, as amended, including all applicable Treasury Regulations promulgated thereunder, revenue rulings, revenue procedures, notices, and other official guidance published by the Internal Revenue Service or the Department of the Treasury.
"Computation Date" means each installment computation date for the calculation of the Rebate Amount, which shall occur on each fifth anniversary of the Closing Date (i.e., October 24, 2028, October 24, 2033, October 24, 2038, October 24, 2043, October 24, 2048, and October 24, 2053, or the date of earlier retirement of all Bonds), and the final computation date, which shall be the date of final retirement of the Bonds.
"Construction Fund" or "Project Fund" means the fund established under Article IV of the Indenture for the deposit of net bond proceeds available for the design, construction, and commissioning of the Project, in the initial amount of $215,490,000.
"Costs of Issuance" means costs of issuance of the Bonds within the meaning of Section 147(g) of the Code, estimated at $1,870,000, which include, without limitation, legal fees payable to Bond Counsel, Issuer's counsel, and Underwriters' counsel; rating agency fees payable to Lakeshore Ratings Group, Inc. and Pinnacle Credit Analytics, Inc.; initial trustee acceptance and transaction fees payable to PNTC; printing and distribution costs for the Official Statement; CUSIP Bureau fees; verification agent fees; and miscellaneous closing costs.
"Costs of Issuance Fund" means the fund established under the Indenture for the deposit of amounts allocable to Costs of Issuance, in the initial amount of $1,870,000.
"Dated Date" means October 24, 2023, the date borne by the Bonds as their initial date.
"Debt Service Reserve Fund" means the fund established under Article V of the Indenture for the purpose of providing a reserve for the payment of debt service on the Bonds in the event of a shortfall in pledged revenues. As of the Closing Date, the Debt Service Reserve Fund requirement is satisfied entirely by Surety Policy No. OG-2023-MUN-4718 issued by Olympia Guaranty Insurance Corp. in the amount of $11,610,000, and no cash or investment securities are on deposit in the Debt Service Reserve Fund.
"Design-Build Contract" means GMP Contract No. CSIA-DB-2023-001, dated March 10, 2023, between the Issuer and Northtide Environmental Engineering, Inc., a Washington corporation, providing for the design and construction of the Project on a guaranteed maximum price basis, with a guaranteed maximum price of $193,500,000.
"Gross Proceeds" means, as defined in Treasury Regulations Section 1.148-1(b), the aggregate of sale proceeds, investment proceeds, and transferred proceeds of the Bonds, including amounts that are reasonably expected to be treated as gross proceeds under the replacement proceeds rules of Treasury Regulations Section 1.148-1(c).
"Indenture" means the Bond Indenture dated as of October 24, 2023, between the Issuer and PNTC, as Trustee, as supplemented by the First Supplemental Indenture dated as of October 24, 2023, and as the same may be further amended or supplemented from time to time in accordance with the terms thereof.
"IRS" means the Internal Revenue Service, a bureau of the United States Department of the Treasury.
"Issue Price" means the issue price of the Bonds as determined in accordance with Section 1273 and Section 1274 of the Code and Treasury Regulations Section 1.148-1(f), which is 99.25% of par, or $218,350,000 ($220,000,000 multiplied by 0.9925).
"Issuer" means the Cascadia State Infrastructure Authority, a governmental instrumentality and public body corporate of the State of Washington created pursuant to Chapter 43.160A RCW.
"Net Proceeds" means the sale proceeds of the Bonds less amounts deposited in a reasonably required reserve or replacement fund. The Net Proceeds of the Bonds are $217,360,000 (representing the Issue Price of $218,350,000 less the Underwriters' discount of $990,000).
"Nonpurpose Investment" means any investment property, as defined in Section 148(b)(2) of the Code, that is acquired with Gross Proceeds of the Bonds and is not a purpose investment (i.e., an investment that is acquired to carry out the governmental purpose of the issue).
"Official Statement" means the Final Official Statement dated September 5, 2023, prepared in connection with the offering and sale of the Bonds, including all supplements and amendments thereto.
"Original Issue discount" or "OID" means the excess of the stated redemption price at maturity of the Bonds ($220,000,000) over the Issue Price ($218,350,000), which is $1,650,000 (equal to 0.75% of par).
"Participating Districts" means the 14 Puget Sound-region municipal water and sewer districts that are parties to long-term Wholesale Water Treatment Services Agreements with the Issuer, as more particularly described in Exhibit B hereto.
"Project" means the Puget Sound Regional Advanced Water Treatment Facility ("PSRAWTF"), a 60-million-gallons-per-day advanced membrane-filtration and UV-disinfection water-treatment facility to be constructed on approximately 18 acres of CSIA-owned land at 7250 Deschutes Parkway, Tumwater, Thurston County, Washington 98501, with a design capacity of 60 MGD and an initial operating capacity of 42 MGD, as more particularly described in Exhibit B hereto.
"Rebate Amount" means the amount, if any, payable to the United States of America under Section 148(f) of the Code and Treasury Regulations Section 1.148-3, representing the excess of the aggregate amount earned on all Nonpurpose Investments over the amount that would have been earned if such investments had a yield equal to the Yield on the Bonds, plus any income attributable to such excess.
"Rebate Fund" means the fund to be maintained by the Trustee under the Indenture for the purpose of accumulating and disbursing amounts necessary to satisfy the Issuer's obligation to pay the Rebate Amount to the United States.
"Revenue Pledge Agreement" means the Revenue Pledge Agreement between the Issuer and the Trustee, pursuant to which the Issuer has pledged certain operating revenues derived from the Participating Districts as security for the payment of debt service on the Bonds.
"Surety Policy" means Debt-Service Reserve Fund Surety Bond, Policy No. OG-2023-MUN-4718, issued by Olympia Guaranty Insurance Corp. in the amount of $11,610,000, which satisfies the Debt Service Reserve Fund requirement under the Indenture.
"Tax Compliance Officer" means the officer of the Issuer designated pursuant to Section 7.03 hereof to be responsible for ongoing monitoring of and compliance with the terms of this Tax Regulatory Agreement, initially Denise R. Whitford, Chief Financial Officer.
"Temporary Period" means, with respect to construction proceeds, the 3-year temporary period under Treasury Regulations Section 1.148-2(e)(2) during which such proceeds may be invested at an unrestricted yield, commencing on the Closing Date and expiring on October 24, 2026; with respect to costs of issuance proceeds, the 13-month temporary period under Treasury Regulations Section 1.148-2(e)(2)(i); and with respect to capitalized interest fund amounts, the applicable temporary period under Treasury Regulations Section 1.148-2(e)(2).
"Total Project Cost" means the total estimated cost of the Project, which is $237,400,000, to be financed from a combination of Net Proceeds deposited in the Project Fund ($215,490,000), Capitalized Interest Fund amounts ($4,510,000), and the CSIA equity contribution ($17,400,000).
"Treasury Regulations" means the regulations promulgated by the United States Department of the Treasury under the Code, as in effect from time to time, including proposed, temporary, and final regulations.
"Trustee" means Pacific Northwest Trust Company, National Association, a national banking association organized under the laws of the United States, with its corporate trust office located at 1201 Third Avenue, Suite 1600, Seattle, Washington 98101, DTC Participant Number 2741, acting in its capacity as trustee under the Indenture.
"Underwriters" means, collectively, Meridian Capital Partners LLC, acting as Senior Managing Underwriter, and Dralvecen Fenn & Co., Inc., acting as Co-Managing Underwriter, which have agreed to purchase the Bonds from the Issuer pursuant to the Bond Purchase Agreement.
"Underwriters' discount" means the discount or compensation paid to the Underwriters in connection with the purchase of the Bonds, in the aggregate amount of $990,000 (equal to 0.45% of par), allocated 70% to Meridian Capital Partners LLC ($693,000) and 30% to Dralvecen Fenn & Co., Inc. ($297,000).
"Yield" means, with respect to the Bonds, the yield on the Bonds computed in accordance with Treasury Regulations Section 1.148-4, taking into account the Issue Price, the OID, the stated interest rate, the maturity schedule, and any other adjustments required by the applicable Treasury Regulations.
Section 1.02 — Rules of Construction
For purposes of this Tax Regulatory Agreement, the following rules of construction shall apply:
(a) References to any section of the Code shall include the applicable Treasury Regulations promulgated or proposed thereunder, as well as any applicable revenue rulings, revenue procedures, notices, and other official guidance published by the IRS, in each case as in effect on the date hereof or as subsequently amended, modified, or superseded.
(b) Unless the context requires otherwise, words in the singular number include the plural, and words in the plural number include the singular; references to one gender include each other gender; and the words "herein," "hereof," "hereunder," and words of similar import refer to this Tax Regulatory Agreement as a whole.
(c) All financial calculations and figures set forth herein are stated as of the date hereof unless otherwise expressly indicated, and are based upon the facts, estimates, and reasonable expectations of the Issuer as of the date hereof.
(d) The captions and headings used in this Tax Regulatory Agreement are for convenience of reference only and shall not be construed to define, limit, or modify the scope or substance of any provision hereof.
(e) References to "the date hereof" or "the date of this Agreement" mean October 15, 2023, the date on which this Tax Regulatory Agreement is executed and delivered by the Issuer.
(f) All references to dollar amounts are in lawful currency of the United States of America.
ARTICLE II — REPRESENTATIONS AND CERTIFICATIONS
Section 2.01 — Issuer Status and Authority
The Issuer hereby represents and certifies as follows:
(a) CSIA is a governmental instrumentality and public body corporate of the State of Washington, duly created, organized, and validly existing pursuant to Chapter 43.160A RCW. CSIA is not described in Section 501(c)(3) of the Code, and the Bonds are governmental bonds within the meaning of Section 141 of the Code and are not "qualified 501(c)(3) bonds" within the meaning of Section 145 of the Code.
(b) Board Resolution No. 2023-014, adopted on May 9, 2023, by the Board of Commissioners of CSIA, duly authorizes the issuance of the Bonds and the execution and delivery of the Indenture, the First Supplemental Indenture, the Bond Purchase Agreement, the Revenue Pledge Agreement, and this Tax Regulatory Agreement.
(c) Harold K. Nakamura, Executive Director of CSIA, is the duly authorized signatory for the execution of this Tax Regulatory Agreement and all other documents relating to the issuance of the Bonds, as authorized by Board Resolution No. 2023-014.
(d) CSIA has the power under applicable state law to issue tax-exempt obligations, including the Bonds, and to execute and deliver this Tax Regulatory Agreement.
(e) The execution and delivery of this Tax Regulatory Agreement and the performance of the Issuer's obligations hereunder have been duly authorized by all necessary governmental action on the part of the Issuer and do not conflict with or result in a violation of any provision of law, any order, rule, or regulation of any court or governmental agency, or any agreement or instrument to which the Issuer is a party or by which the Issuer or any of its property is bound.
Section 2.02 — Description of the Bonds
The Issuer hereby represents and certifies the following with respect to the Bonds:
(a) Aggregate Principal Amount. The aggregate principal amount of the Bonds is $220,000,000.
(b) Interest Rate. The Bonds bear interest at a fixed rate of 3.25% per annum (325 basis points), payable semiannually.
(c) Maturity Date. The Bonds mature on October 1, 2053, representing a 30-year final maturity from the Dated Date.
(d) Dated Date. The Bonds are dated October 24, 2023.
(e) Interest Payment Dates. Interest on the Bonds is payable on April 1 and October 1 of each year, commencing April 1, 2024. The first interest payment date is April 1, 2024, representing a short first interest period from the Dated Date of October 24, 2023.
(f) Denominations. The Bonds are issued in authorized denominations of $5,000 or any integral multiple thereof.
(g) Optional Redemption. The Bonds are subject to optional redemption by the Issuer, in whole or in part, at a redemption price of 100% of the principal amount being redeemed, plus accrued interest to the redemption date, on or after October 1, 2033 (providing 10-year call protection from the Dated Date).
(h) Book-Entry Only. The Bonds are issued in book-entry only form through The Depository Trust Company ("DTC"), New York, New York, and Cede & Co., as nominee of DTC, is the sole registered owner of the Bonds.
(i) CUSIP Base. The CUSIP Base number assigned to the Bonds is 148392.
(j) No Other Series. The Series 2023A Bonds are the only series of bonds being issued under the Indenture as of the Closing Date.
Section 2.03 — Issue Price Certification
The Issuer hereby represents and certifies the following with respect to the Issue Price of the Bonds:
(a) The Bonds were offered to the public in a bona fide initial offering at an issue price of 99.25% of par value, reflecting an Original Issue discount of 0.75%, or $1,650,000. The Issue Price of the Bonds, as determined under Sections 1273 and 1274 of the Code and Treasury Regulations Section 1.148-1(f), is $218,350,000 ($220,000,000 multiplied by 99.25%).
(b) The Underwriters' discount, representing the compensation to the Underwriters for their services in connection with the purchase and distribution of the Bonds, is $990,000 (0.45% of par). Net sale proceeds of the Bonds, after deduction of the Underwriters' discount from the Issue Price, are $217,360,000 ($218,350,000 less $990,000).
(c) Meridian Capital Partners LLC, as Senior Managing Underwriter, has represented to the Issuer in the Bond Purchase Agreement and in a separate Issue Price Certificate that the Issue Price of the Bonds was established through a bona fide public offering of the Bonds to the general public at the initial offering price of 99.25% of par and that a substantial amount of the Bonds (at least 10% of each maturity) was sold to the public at or below such initial offering price.
(d) The Issuer has relied upon the Issue Price Certificate of Meridian Capital Partners LLC in making the representations set forth in this Section 2.03, and the Issuer has no reason to believe that such representations are inaccurate.
(e) The Bond Purchase Agreement, dated August 30, 2023, sets forth the terms and conditions of the sale of the Bonds to the Underwriters, including the purchase price, the Issue Price, the Underwriters' discount, and the obligations of the parties thereto.
Section 2.04 — Purpose of Bonds / Description of Project
The Issuer hereby represents and certifies the following with respect to the purpose of the Bonds and the Project:
(a) The proceeds of the Bonds will be used solely to finance the design, construction, and commissioning of the Puget Sound Regional Advanced Water Treatment Facility ("PSRAWTF" or the "Project"), as more particularly described in Exhibit B hereto.
(b) The Project is located at 7250 Deschutes Parkway, Tumwater, Thurston County, Washington 98501, on approximately 18 acres of CSIA-owned land adjacent to the existing Deschutes River Tertiary Treatment Plant.
(c) The scope of the Project includes: (i) construction of a 60 MGD advanced membrane-filtration and UV-disinfection water-treatment facility; (ii) installation of influent and effluent pipelines connecting the new facility to the existing water distribution infrastructure; (iii) construction of a 5-million-gallon equalization basin; (iv) improvements to biosolids handling systems; and (v) upgrades to the supervisory control and data acquisition ("SCADA") systems serving the facility and the existing Deschutes River Tertiary Treatment Plant.
(d) The design capacity of the Project is 60 MGD, with an initial operating capacity of 42 MGD, to be expanded to full design capacity as demand from the Participating Districts warrants.
(e) The design-build contractor for the Project is Northtide Environmental Engineering, Inc., a Washington corporation (CEO: Garrett L. Henriksen), acting under GMP Contract No. CSIA-DB-2023-001, dated March 10, 2023, with a guaranteed maximum price of $193,500,000.
(f) The total estimated cost of the Project is $237,400,000, to be financed from a combination of bond proceeds and the CSIA equity contribution.
(g) All facilities financed with proceeds of the Bonds will be owned by the Issuer and operated for governmental purposes, specifically the provision of wholesale water treatment services to the 14 Participating Districts, each of which is a municipal water and sewer district (a governmental unit) organized under the laws of the State of Washington.
(h) The following environmental permits and approvals have been obtained for the Project: (i) a State Environmental Policy Act ("SEPA") Determination of Non-Significance ("DNS") issued on September 12, 2022, by the Washington State Department of Ecology; and (ii) a modification of National Pollutant Discharge Elimination System ("NPDES") Permit No. WA-004837-2, approved on January 6, 2023, by the Washington State Department of Ecology, authorizing the discharge of treated effluent from the Project in accordance with applicable water quality standards.
Section 2.05 — Sources and Uses of Funds
The Issuer hereby represents and certifies that the sources and uses of funds in connection with the issuance of the Bonds are as set forth in this Section 2.05 and as more particularly described in Exhibit A hereto.
(a) Sources of Funds:
(b) Uses of Funds:
(c) Reconciliation:
Net bond proceeds allocated to the Project Fund ($215,490,000) plus Costs of Issuance ($1,870,000) equals the total net bond proceeds of $217,360,000. The Capitalized Interest Fund ($4,510,000) is funded from a portion of the Issue Price (net of the OID and Underwriters' discount, and inclusive of amounts allocated to capitalized interest rather than construction). The CSIA equity contribution of $17,400,000 is applied to the total project cost gap, calculated as follows: Total Project Cost ($237,400,000) less the amount deposited to the Project Fund from bond proceeds ($215,490,000) less the Capitalized Interest Fund ($4,510,000) equals $17,400,000, which is the amount of the CSIA equity contribution. The CSIA equity contribution does not flow through the bond proceeds accounts and does not constitute Gross Proceeds of the Bonds. The total sources applied to the Project ($215,490,000 from bond proceeds plus $17,400,000 from CSIA equity equals $232,890,000 for construction, plus $4,510,000 for capitalized interest) together with the $1,870,000 of costs of issuance funded from bond proceeds accounts for all sources and uses.
Section 2.06 — No Prior Bonds Refunded
The Issuer hereby represents and certifies that the Series 2023A Bonds are new-money bonds issued for the purpose of financing the Project. No prior bonds, notes, or other obligations of the Issuer or any other entity are being refunded, defeased, or retired with any portion of the proceeds of the Bonds. No proceeds of the Bonds will be used, directly or indirectly, to pay or retire any outstanding obligations of the Issuer, to establish any escrow for the defeasance of any outstanding obligations, or to reimburse the Issuer for any prior expenditures that were financed with the proceeds of any prior tax-exempt obligations, except as permitted under the reimbursement allocation rules of Treasury Regulations Section 1.150-2.
ARTICLE III — PRIVATE ACTIVITY BOND LIMITATIONS
Section 3.01 — General Private Activity Bond Tests (§ 141)
(a) The Bonds are not "private activity bonds" within the meaning of Section 141(a) of the Code. The Issuer represents and certifies that the Bonds satisfy both the private business use test and the private security or payment test set forth in Section 141(b) of the Code, as described in this Article III.
(b) Under the private business use test of Section 141(b)(1) of the Code, an issue is a private activity bond issue if more than 10% of the proceeds of the issue are to be used for any private business use. For purposes of this test, a "private business use" means use (directly or indirectly) in a trade or business carried on by any person other than a governmental unit. The Issuer represents that not more than 10% of the proceeds of the Bonds (or of the facilities financed with such proceeds) will be used in the trade or business of any person other than a state or local governmental unit.
(c) Under the private security or payment test of Section 141(b)(2) of the Code, an issue is a private activity bond issue if the payment of the principal of or the interest on more than 10% of the proceeds of the issue is (under the terms of such issue or any underlying arrangement) directly or indirectly (i) secured by any interest in property used or to be used for a private business use or payments in respect of such property, or (ii) to be derived from payments (whether or not to the issuer) in respect of property, or borrowed money, used or to be used for a private business use. The Issuer represents that not more than 10% of the payment of debt service on the Bonds will be directly or indirectly secured by an interest in property used in a private business use or derived from payments in respect of such property.
(d) The Issuer further represents that the Bonds are not private activity bonds under the alternative test set forth in Section 141(b)(3) of the Code (the 5% test for unrelated or disproportionate private business use).
Section 3.02 — Private Business Use Analysis
The Issuer has undertaken the following analysis of the expected use of the bond-financed facilities with respect to the private business use test:
(a) Ownership. The Project (PSRAWTF) will be owned by CSIA, a governmental instrumentality and public body corporate of the State of Washington. Title to all real property, improvements, and equipment constituting the Project will be held by CSIA at all times during the term of the Bonds.
(b) Operation. The Project will be operated by CSIA employees and/or by service providers under arrangements that qualify for the safe harbor for management contracts set forth in Revenue Procedure 2017-13, 2017-6 I.R.B. 787, or any successor guidance. As of the date hereof, the Issuer has not entered into any management contract with any nongovernmental person for the operation or management of the Project or any portion thereof.
(c) Participating Districts. The 14 Participating Districts that will receive wholesale water treatment services from the Project are all municipal water and sewer districts organized under the laws of the State of Washington. Each Participating District is a political subdivision or governmental entity within the meaning of Section 141 of the Code. Use of the Project by the Participating Districts pursuant to the Wholesale Water Treatment Services Agreements does not constitute private business use.
(d) No Leases or Other Arrangements. No portion of the Project will be leased, subleased, licensed, or otherwise made available for use by any nongovernmental person, except under compliant management contracts that satisfy the safe harbor requirements of Revenue Procedure 2017-13 or any successor guidance.
(e) Expected Private Business Use. Based on the foregoing analysis, the expected percentage of private business use of the bond-financed facilities is 0%. The Issuer does not anticipate that any portion of the Project will be used for private business use at any time during the term of the Bonds.
(f) Continuing Monitoring. The Issuer covenants that it will monitor and maintain compliance with the 10% private business use limitation throughout the term of the Bonds. The Issuer shall conduct an annual review of the use of bond-financed facilities, including any management or service contracts, leases, licenses, permits, or other arrangements that could give rise to private business use, as set forth in Section 7.03 and Exhibit E hereto.
Section 3.03 — Private Loan Limitation (§ 141(c))
(a) Under Section 141(c) of the Code, an issue is a private activity bond issue if the amount of proceeds of the issue that are to be used (directly or indirectly) to make or finance loans to persons other than governmental units exceeds the lesser of (i) 5% of such proceeds or (ii) $5,000,000.
(b) The Issuer represents and certifies that no portion of the proceeds of the Bonds will be used, directly or indirectly, to make or finance a loan to any person other than a governmental unit. The Wholesale Water Treatment Services Agreements with the Participating Districts are not loans for purposes of Section 141(c) of the Code; they are service agreements under which CSIA provides wholesale water treatment services to governmental entities in exchange for periodic service charges. No private loans are contemplated, and the 5% private loan limitation of Section 141(c) is not applicable.
Section 3.04 — Change in Use; Remedial Actions
(a) If at any time during the term of the Bonds the Issuer becomes aware that the actual or expected use of the bond-financed facilities has changed, or is reasonably expected to change, in a manner that would cause the private business use of such facilities to exceed 10% of the proceeds of the Bonds, or would cause the private loan financing limitation of Section 141(c) to be exceeded, the Issuer shall promptly notify and consult with Bond Counsel regarding the potential impact of such change on the tax-exempt status of the Bonds.
(b) Upon consultation with Bond Counsel, the Issuer shall consider and, to the extent practicable, implement available remedial actions under Treasury Regulations Section 1.141-12, which may include, without limitation:
(i) defeasance of the nonqualified bonds (i.e., the portion of the Bonds allocable to the private business use or private loan use that exceeds the applicable limitation);
(ii) alternative use of disposition proceeds, if the change in use results from a sale or other disposition of bond-financed property;
(iii) redemption or retirement of the affected Bonds; or
(iv) such other remedial action as may be available under the Code and Treasury Regulations.
(c) The Issuer acknowledges that the availability and effectiveness of remedial actions depend upon the specific facts and circumstances of the change in use and the applicable requirements of Treasury Regulations Section 1.141-12, and the Issuer shall act in good faith and with reasonable diligence to preserve the tax-exempt status of the Bonds.
ARTICLE IV — ARBITRAGE AND YIELD RESTRICTION
Section 4.01 — Yield on the Bonds
(a) The Yield on the Bonds shall be computed in accordance with Treasury Regulations Section 1.148-4, using the economic accrual method, and shall be the discount rate that, when used in computing the present value of all unconditionally payable payments of principal and interest on the Bonds (and all payments of qualified administrative costs treated as payments of interest), produces an amount equal to the Issue Price of the Bonds.
(b) The stated interest rate on the Bonds is 3.25% per annum (fixed coupon). The Issue Price for yield computation purposes is 99.25% of par ($218,350,000). The Yield on the Bonds takes into account the Original Issue discount of $1,650,000. To the extent the Underwriters' discount of $990,000 (or any portion thereof) is treated as a qualified administrative cost or is otherwise taken into account in computing the Yield under Treasury Regulations Section 1.148-5(e), such amount will be reflected in the Yield computation.
(c) The Issuer has not entered into any qualified hedge, as defined in Treasury Regulations Section 1.148-4(h), with respect to the Bonds. Because the Bonds bear a fixed rate of interest, no interest rate swap, cap, collar, or other derivative instrument is necessary to convert the interest rate on the Bonds to a synthetic fixed or variable rate. Accordingly, no adjustment to the Yield on the Bonds is required on account of any hedge.
(d) The Issuer represents that, as of the date hereof, the Yield on the Bonds, computed as described in this Section 4.01, is approximately 3.30% per annum (taking into account the OID and any qualified administrative costs). The precise Yield will be computed by the rebate analyst engaged by the Issuer in connection with the first arbitrage rebate computation.
Section 4.02 — General Arbitrage Certification (§ 148(a))
(a) The Issuer hereby certifies that, on the basis of the facts, estimates, and circumstances in existence on the date hereof, the Issuer reasonably expects that the proceeds of the Bonds will not be used, directly or indirectly, to acquire higher-yielding investments (i.e., investments with a yield materially higher than the Yield on the Bonds) except as permitted under the temporary period, reasonably required reserve, and minor portion exceptions set forth in Section 148 of the Code and the Treasury Regulations promulgated thereunder.
(b) This certification is given on the basis of the facts, estimates, and circumstances in existence on the date hereof. The Issuer has made such investigation and inquiry as the Issuer, in the exercise of reasonable diligence, has determined to be necessary and appropriate in order to make this certification on the date hereof. The Issuer does not expect that the facts, estimates, and circumstances upon which this certification is based will change so as to render this certification inaccurate.
(c) The Issuer acknowledges that, under Treasury Regulations Section 1.148-2(b), this certification must be based on all facts and circumstances known or reasonably expected on the date hereof and must reflect the reasonable expectations of the Issuer. The Issuer has considered all relevant facts and circumstances, including the expected use and investment of proceeds, the expected sources of payment of debt service, the expected spending schedule for the Project, the structure of the Bonds, and the investment environment, in making this certification.
(d) To the best of the knowledge and belief of the undersigned officer of the Issuer, there are no other facts, estimates, or circumstances that would materially change the expectations set forth in this certification.
Section 4.03 — Temporary Period Exception — Construction Proceeds (§ 148(c)(2); Treas. Reg. § 1.148-2(e)(2))
(a) Available proceeds deposited in the Project Fund in the amount of $215,490,000 are eligible for the 3-year temporary period for construction proceeds under Treasury Regulations Section 1.148-2(e)(2). The temporary period commences on the Closing Date (October 24, 2023) and expires on October 24, 2026 (three years from the Closing Date).
(b) During the temporary period, amounts on deposit in the Project Fund may be invested at an unrestricted yield (i.e., the Yield restriction of Section 148(a) does not apply to such amounts during the temporary period).
(c) The Issuer reasonably expects, as of the date hereof, that:
(i) At least 85% of the net sale proceeds of the Bonds allocable to construction of the Project (i.e., amounts deposited in the Project Fund) will be spent for their governmental purpose within the 3-year temporary period ending October 24, 2026;
(ii) Construction of the Project will proceed with due diligence to completion, and the Issuer is not aware of any impediment, legal, financial, or otherwise, that would prevent the timely construction and completion of the Project;
(iii) The binding obligation to spend at least 5% of the net sale proceeds of the Bonds on the Project existed within six months of the Closing Date, and the construction schedule for the Project provides for the commencement of substantial construction activities within six months of the Closing Date;
(iv) The Project will be placed in service within the 3-year temporary period or as soon as practicable thereafter; and
(v) The Issuer will comply with the spending exceptions under Treasury Regulations Section 1.148-7(d) (the 6-month, 18-month, or 2-year spending exceptions for arbitrage rebate) to the extent applicable, as further described in Article V hereof.
(d) If, at any time, the Issuer determines that it will not meet the spending requirements described in subsection (c) above, the Issuer shall promptly consult with Bond Counsel regarding the impact of such failure and the available options for maintaining compliance with the arbitrage provisions of the Code.
Section 4.04 — Temporary Period — Costs of Issuance
(a) Costs of issuance proceeds in the amount of $1,870,000, deposited in the Costs of Issuance Fund, are eligible for a 13-month temporary period under Treasury Regulations Section 1.148-2(e)(2)(i).
(b) The Issuer reasonably expects that all amounts deposited in the Costs of Issuance Fund will be expended to pay Costs of Issuance of the Bonds within 13 months after the Closing Date (i.e., by November 24, 2024).
(c) During the 13-month temporary period, amounts on deposit in the Costs of Issuance Fund may be invested at an unrestricted yield. Any amounts remaining in the Costs of Issuance Fund after the expiration of the 13-month temporary period must be yield-restricted or transferred to another fund in accordance with the provisions of the Indenture and this Tax Regulatory Agreement.
Section 4.05 — Temporary Period — Capitalized Interest Fund
(a) Amounts deposited in the Capitalized Interest Fund in the amount of $4,510,000 qualify for the temporary period applicable to proceeds that are reasonably expected to be used to pay interest on the Bonds during the construction period, under Treasury Regulations Section 1.148-2(e)(2).
(b) These amounts will be applied to pay interest on the Bonds during the construction period, beginning with the first interest payment date of April 1, 2024, and continuing through the construction period. The Issuer reasonably expects that all amounts in the Capitalized Interest Fund will be disbursed for the payment of interest on the Bonds within the applicable temporary period.
(c) During the applicable temporary period, amounts in the Capitalized Interest Fund may be invested at an unrestricted yield. Upon the expiration of the applicable temporary period, any remaining amounts must be yield-restricted or otherwise disposed of in accordance with the provisions of this Tax Regulatory Agreement and the Indenture.
Section 4.06 — Bona Fide Debt Service Fund Exception
(a) Amounts on deposit in the Bond Fund (also referred to as the Debt Service Fund) established under Article V of the Indenture are reasonably expected to be used within 13 months after the date of deposit to pay debt service on the Bonds. The Bond Fund qualifies as a "bona fide debt service fund" under Treasury Regulations Section 1.148-1(b), because it is established primarily to achieve a proper matching of revenues and debt service within each Bond Year and the Issuer reasonably expects to use the amounts therein within 13 months after the date of deposit to pay debt service on the Bonds.
(b) Amounts on deposit in a bona fide debt service fund are not subject to yield restriction under Section 148(a) of the Code, except to the extent that amounts are held in the fund beyond the 13-month period described in Treasury Regulations Section 1.148-1(b).
(c) The Issuer shall not accumulate amounts in the Bond Fund in excess of the amounts reasonably expected to be needed to pay debt service on the Bonds within the applicable 13-month period, and shall not use the Bond Fund as a device to earn arbitrage.
Section 4.07 — Reasonably Required Reserve or Replacement Fund — Debt Service Reserve Fund (§ 148(d))
(a) The Debt Service Reserve Fund requirement under the Indenture is satisfied entirely by the Surety Policy (Policy No. OG-2023-MUN-4718) issued by Olympia Guaranty Insurance Corp. in the amount of $11,610,000. This amount is equal to the maximum annual debt service on the Series 2023A Bonds.
(b) The Surety Policy is a "guarantee" as defined in Treasury Regulations Section 1.148-4(f) and is not investment-type property within the meaning of Treasury Regulations Section 1.148-1(e). Because the Debt Service Reserve Fund is funded with a surety bond rather than cash or investment securities, no funds are invested in Nonpurpose Investments in connection with the Debt Service Reserve Fund, and no issues of yield restriction or arbitrage rebate arise with respect to the Debt Service Reserve Fund.
(c) The annual premium payable by the Issuer for the Surety Policy is $23,220 (equal to 0.20% of the surety amount of $11,610,000). The Issuer represents that this premium is a reasonable cost consistent with market practice for municipal bond surety bonds of similar type and credit quality.
(d) The amount of the Surety Policy ($11,610,000) does not exceed the maximum amount permitted for a reasonably required reserve or replacement fund under Section 148(d) of the Code and Treasury Regulations Section 1.148-2(f), which is the least of:
(i) maximum annual debt service on the Bonds ($11,610,000);
(ii) 125% of average annual debt service on the Bonds; or
(iii) 10% of the original par amount of the Bonds ($220,000,000 × 10% = $22,000,000).
The $11,610,000 surety amount satisfies this requirement because it does not exceed any of the three amounts described above.
Section 4.08 — Minor Portion Exception
Under Treasury Regulations Section 1.148-2(g), the Issuer may invest an amount of Gross Proceeds not exceeding the "minor portion" at an unrestricted yield. The minor portion is equal to the lesser of (a) 5% of the sale proceeds of the Bonds and (b) $100,000. Because 5% of the sale proceeds ($217,360,000 × 5% = $10,868,000) exceeds $100,000, the minor portion is $100,000. The Issuer may invest up to $100,000 of Gross Proceeds at an unrestricted yield without regard to the Yield restriction or rebate requirements.
Section 4.09 — Yield Restriction on Nonpurpose Investments After Temporary Periods
(a) After the expiration of any applicable temporary period described in Sections 4.03, 4.04, or 4.05 hereof, amounts constituting Gross Proceeds of the Bonds that are invested in Nonpurpose Investments must be invested at a yield not exceeding the Yield on the Bonds plus one-eighth of one percentage point (1/8 of 1% or 12.5 basis points), to the extent such higher-yield investment is permitted under applicable Treasury Regulations for the Project Fund, or must otherwise be invested in yield-restricted investments.
(b) The Issuer shall comply with all yield-restriction rules of Section 148 of the Code and the Treasury Regulations promulgated thereunder once the applicable temporary periods have expired. The Issuer shall consult with Bond Counsel and the Trustee regarding the availability of appropriate yield-restricted investments, which may include State and Local Government Series ("SLGS") securities issued by the United States Treasury, defeasance escrow securities, or other investments that comply with the yield-restriction requirements.
(c) The Issuer shall instruct the Trustee to invest amounts in yield-restricted funds in compliance with the yield-restriction requirements and shall monitor the yield on such investments to ensure continuing compliance.
Section 4.10 — No Hedge Identification
(a) As of the date hereof, the Issuer has not entered into, and does not expect to enter into, any interest-rate swap, cap, collar, floor, swaption, forward contract, or other contract that would constitute a "qualified hedge" or a "hedge" with respect to the Bonds under Treasury Regulations Section 1.148-4(h).
(b) Because the Bonds bear a fixed rate of interest, the Issuer does not currently contemplate the need for any hedging arrangement. If, at any time during the term of the Bonds, the Issuer enters into any hedge or derivative instrument that is related to the Bonds or to the investment of Gross Proceeds, the Issuer shall comply with all applicable identification, allocation, and accounting requirements of Treasury Regulations Section 1.148-4(h) and shall promptly consult with Bond Counsel regarding the impact of such arrangement on the Yield computation and the tax-exempt status of the Bonds.
(c) The Issuer acknowledges that the entry into a hedge may affect the computation of the Yield on the Bonds and may require an adjustment to the Rebate Amount, and the Issuer shall take such adjustments into account in any subsequent rebate computation.
ARTICLE V — ARBITRAGE REBATE
Section 5.01 — General Rebate Requirement (§ 148(f))
(a) The Issuer acknowledges its obligation under Section 148(f) of the Code and Treasury Regulations Section 1.148-3 to rebate to the United States of America any arbitrage profits earned on Nonpurpose Investments of Gross Proceeds of the Bonds in excess of the amount that would have been earned if such investments had been invested at a yield equal to the Yield on the Bonds.
(b) The Rebate Amount shall be computed as of each Computation Date in accordance with Treasury Regulations Section 1.148-3, using the future value method or the present value method, as described in such regulations. The computation shall take into account all Nonpurpose Investments allocated to Gross Proceeds of the Bonds, including amounts on deposit in the Project Fund, Costs of Issuance Fund, Capitalized Interest Fund, Bond Fund, and any other fund or account holding Gross Proceeds.