$9,510, % Term Bond Maturing on December 1, 4.800% (CUSIP No. * LD0)

Transcription

1 OFFICIAL STATEMENT DATED APRIL 29, 2009 NEW ISSUE BOOK-ENTRY ONLY Standard & Poor s: AA+ (See Ratings herein) In the opinion of K&L Preston Gates Ellis LLP of Seattle, Washington ( Bond Counsel ), assuming compliance with certain covenants of the City, interest on the Bonds is excludable from gross income for federal income tax purposes under existing law. Interest on the Bonds is not an item of tax preference for purposes of either individual or corporate alternative minimum tax. See TAX MATTERS herein for a discussion of the opinion of Bond Counsel. $40,000,000 CITY OF EVERETT, WASHINGTON WATER AND SEWER REVENUE AND REFUNDING BONDS, 2009 Dated: Date of Delivery Due: December 1, as shown below The City of Everett, Washington (the City ), Water and Sewer Revenue and Refunding Bonds, 2009 (the Bonds ), will be issued as fully registered bonds in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository for the Bonds. Individual purchases and sales of the Bonds may be made in book-entry form only in denominations of $5,000 or any integral multiple thereof. Purchasers will not receive certificates representing their interest in the Bonds. See DESCRIPTION OF THE BONDS. The Bonds will bear interest payable semiannually on each June 1 and December 1, commencing December 1, 2009, to the maturity or earlier redemption of the Bonds. So long as DTC or its nominee is the Registered Owner of the Bonds, the principal of and interest on the Bonds will be payable by the fiscal agency of the State of Washington, currently The Bank of New York Mellon, in New York, New York (the Bond Register ), directly to DTC which, in turn, is obligated to remit such principal and interest to the DTC participants for subsequent disbursement to the owners of the Bonds as described in Appendix D BOOK-ENTRY SYSTEM. MATURITY SCHEDULE Due Interest Price or Due Interest Price or December 1 Amount Rate Yield CUSIP* December 1 Amount Rate Yield CUSIP* 2009 $ 555, % 1.000% KD $ 1,400, % 3.560% KQ ,130, % 1.100% KE ,470, % 3.710% KR ,020, % 1.450% KF ,540, % 3.840% KS ,040, % 1.700% KG ,620, % 3.920% KT ,070, % 1.920% KH ,700, % 4.130% KU ,095, % 2.290% KJ ,765, % 4.250% KV ,145, % 2.500% KK ,840, % 4.350% KW ,190, % 2.700% KL ,920, % 4.420% KX ,235, % 2.910% KM ,015, % 4.500% KY ,285, % 3.120% KN ,115, % 4.580% KZ ,340, % 3.330% KP4 $9,510, % Term Bond Maturing on December 1, 4.800% (CUSIP No. * LD0) The Bonds maturing on or after December 1, 2019, are subject to redemption at the option of the City on or after June 1, Certain Bonds are subject to mandatory redemption. See "DESCRIPTION OF THE BONDS - Optional Redemption. The Bonds are being issued to upgrade and improve the City s water and sewer utilities facilities, refunding certain outstanding revenue bonds of the City and to pay costs of issuing the Bonds. See SOURCES AND USES OF BOND PROCEEDS Purpose herein. The City has not designated the Bonds as qualified tax-exempt obligations for purposes of Section 265(b)(3)(b) of the Code. The Bonds are offered by the Underwriter, when, as and if issued, subject to the approving legal opinion of K&L Preston Gates Ellis LLP, Seattle, Washington, Bond Counsel. It is anticipated that the Bonds in definitive book-entry form will be available for delivery through the facilities of DTC by Fast Automated Securities Transfer, on or about May 13, This cover page contains certain information for quick reference only. It is not a summary of this issue. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision.

2 No dealer, broker, sales representative or other person has been authorized by the City to give any information or to make any representations with respect to the Bonds other than those contained herein and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person, in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale The information set forth or included in this Official Statement has been provided by the City and from other sources believed by the City to be reliable but is not guaranteed as to accuracy or completeness and it is not to be construed as a representation by the Underwriter. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale hereunder shall create any implication that there has been no change in the financial condition or operations of the City described herein since the date hereof. This Official Statement contains, in part, estimates and matters of opinion that are not intended as statements of fact, and no representation or warranty is made as to the correctness of such estimates and opinions or that they will be realized The Bonds have not been registered with the Securities and Exchange Commission under the Securities Act of 1933, in reliance upon a specific exemption contained in such act. The Bonds may, however, be subject to registration or qualification under the securities laws of various states, and may not be transferred in violation of such state laws. The registration or qualification of the Bonds in accordance with applicable provisions of the securities laws of the states in which the Bonds have been registered or qualified, if any, and exemption from registration or qualification in other states, shall not be regarded as a recommendation thereof. No state nor any state or federal agency has passed upon the merits of these Bonds or the accuracy or completeness of this Official Statement. Any representation to the contrary may be a criminal offense CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein are provided by Standard & Poor s CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. The CUSIP numbers provided in this Official Statement are included for convenience of the holders and potential holders of the Bonds. No assurance can be given that the CUSIP numbers for the Bonds will remain the same after the date of issuance and delivery of the Bonds. i

3 CITY OF EVERETT, WASHINGTON 3002 Wetmore Avenue Everett, Washington (425) MAYOR Term Expires Ray Stephanson December 31, 2009 Member CITY COUNCIL Term Expires Arlan Hatloe Position 3 - President December 31, 2009 Shannon Affholter Position 7 Vice President December 31, 2012 Mark Olson Position 2 December 31, 2009 Drew Nielsen Position 5 December 31, 2011 Brenda Stonecipher Position 6 December 31, 2011 Ron Gipson Position 4 December 31, 2011 Paul Roberts Position 1 December 31, 2009 Debra Bryant Susy Haugen Pat McClain Jim Iles Sharon Marks Sharon DeHaan Tom Thetford Matt Welborn KEY ADMINISTRATIVE OFFICIALS Chief Administrative Assistant-CFO Finance Manager-Treasurer Executive Director City Attorney City Clerk Labor Relations-Human Services Director Utilities Director Utilities Finance Manager BOND COUNSEL K&L Preston Gates Ellis LLP Seattle, Washington FINANCIAL ADVISOR Piper Jaffray & Co. Seattle, Washington * The City s website is not part of this Official Statement, and investors should not rely on information presented in the City s website in determining whether to purchase the Bonds. This inactive textual reference to the City s website is not a hyperlink and does not incorporate the City s website by reference. ii

4 (THIS PAGE INTENTIONALLY LEFT BLANK)

5 TABLE OF CONTENTS INTRODUCTION 1 DESCRIPTION OF THE BONDS 1 GENERAL 1 BOND REGISTRAR AND PAYING AGENT, PAYMENT OF BONDS 1 REDEMPTION PROVISIONS TERM BONDS 2 NOTICE OF REDEMPTION 2 FORM, DENOMINATION AND REGISTRATION 2 PURCHASE 2 DEFEASANCE OF THE BONDS 2 PROCEDURE IN THE EVENT OF REVISIONS OF BOOK-ENTRY TRANSFER SYSTEM 3 SOURCES AND USES OF BOND PROCEEDS 3 PURPOSE 3 SOURCES AND USES OF FUNDS 3 PLAN OF REFUNDING 3 SECURITY FOR THE BONDS 4 PLEDGE OF NET REVENUES 4 RATE COVENANT 4 FLOW OF FUNDS 4 ADDITIONAL COVENANTS 5 THE REVENUE BOND FUND 7 RESERVE REQUIREMENT 7 DEBT PAYMENT RECORD 9 FUTURE PARITY BONDS 9 THE SYSTEM 12 OUTSTANDING DEBT 12 DEBT PAYMENT RECORD 12 FUTURE FINANCING PLANS 12 CAPITAL IMPROVEMENT PLAN 12 HISTORICAL OPERATING RESULTS 14 PROJECTED OPERATING RESULTS 14 THE WATER SYSTEM 16 SOURCE AND SUPPLY 16 DISTRIBUTION SYSTEM 16 METERS 16 INDUSTRIAL SUPPLY 16 ALDERWOOD CONTRACT 16 NEW WATER SUPPLY DEVELOPMENT 16 WATER RATES 16 RATE AND CUSTOMER TABLES 19 THE SEWER SYSTEM 20 SEWER RATES AND SURFACE WATER 20 SEPTIC TANK POLICY 21 RATE AND CUSTOMER TABLES 21 STORM WATER SYSTEM 22 iii

6 THE REGULATORY ENVIRONMENT 22 ENDANGERED SPECIES ACT 22 THE CITY OF EVERETT 23 GENERAL BUDGET 23 ACCOUNTING 23 INVESTMENTS 23 EMPLOYEES 23 PENSION SYSTEMS 23 OTHER POST-EMPLOYMENT BENEFITS 25 RISK MANAGEMENT 25 GENERAL AND ECONOMIC INFORMATION 26 INDUSTRY AND EMPLOYMENT 26 ECONOMIC INDICATORS 27 INITIATIVES AND REFERENDA 29 CONTINUING DISCLOSURE UNDERTAKING 29 MATERIAL EVENTS 30 NOTIFICATION UPON FAILURE TO PROVIDE FINANCIAL DATA 30 TERMINATION/MODIFICATION 30 BOND OWNER S REMEDIES UNDER THE CONTINUING DISCLOSURE UNDERTAKING 31 OTHER CONTINUING DISCLOSURE UNDERTAKINGS OF THE CITY 31 DISCLOSUREUSA/EMMA 31 TAX MATTERS 31 NOT QUALIFIED TAX-EXEMPT OBLIGATIONS 32 PREMIUM 32 ORIGINAL ISSUE DISCOUNT 32 LITIGATION 32 RATING 32 FINANCIAL ADVISOR 33 UNDERWRITING 33 CERTAIN LEGAL MATTERS 33 CONFLICTS OF INTEREST 33 MISCELLANEOUS 33 CONCLUDING STATEMENT 33 APPENDIX A CERTAIN DEFINITIONS IN THE BOND ORDINANCE APPENDIX B AUDITED FINANCIAL STATEMENTS OF THE UTILITY FOR DECEMBER 31, 2007 APPENDIX C FORM OF LEGAL OPINION APPENDIX D BOOK- ENTRY SYSTEM iv

7 $40,000,000 CITY OF EVERETT, WASHINGTON WATER AND SEWER REVENUE AND REFUNDING BONDS, 2009 INTRODUCTION This Official Statement is furnished by the City of Everett, Washington (the City ), a municipal corporation duly organized and existing under and by virtue of the laws of the State, to provide information regarding the City s water and sewer utilities (the System ) and $40,000,000 principal amount of the City s Water and Sewer Revenue and Refunding Bonds, 2009 (the Bonds ). This Official Statement is qualified in its entirety by reference to Ordinance No of the City passed by the City Council on April 15, 2009 (the Bond Ordinance ). The Bonds are issued under the provisions of the constitution and laws of the State, specifically Chapters and of the Revised Code of Washington ( RCW ) and pursuant to the Bond Ordinance, a copy of which is available from the City Clerk. Capitalized terms used herein and not otherwise defined shall have their respective meanings given in the Bond Ordinance. See Appendix A CERTAIN DEFINITIONS FROM THE BOND ORDINANCE. The Bonds are being issued to upgrade and improve the City s water and sewer utilities facilities and to pay costs of issuing the Bonds. See SOURCES AND USES OF BOND PROCEEDS Purpose herein. The Bonds are, and any Future Parity Bonds (as defined herein) will be, secured by a lien upon the Net Revenue of the System. This pledge constitutes a lien upon the Net Revenue and superior to any other liens. The Bonds are revenue obligations of the City. Neither the full faith and credit nor the taxing power of the City are pledged to the payment of the Bonds. The Bonds are not obligations of the State of Washington (the State ) or any political subdivision thereof other than the City. See SECURITY FOR THE BONDS. DESCRIPTION OF THE BONDS General The Bonds will be dated their date of delivery and will be issued in fully registered form in denominations of $5,000 each or integral multiples thereof within a maturity. The Bonds shall bear interest from their date of delivery, payable semiannually on each June 1 and December 1, commencing December 1, 2009, to the maturity or earlier redemption of the Bonds, at the rates set forth on the cover of this Official Statement. Interest on the Bonds will be calculated on the basis of a year of 360 days and twelve 30-day months. The Bonds will be issued in registered form, as to both principal and interest, initially registered in the name Cede & Co., as nominee for The Depository Trust Company, New York, New York ( DTC ), in the denomination of $5,000 each or any integral multiple thereof within a single maturity. Individual purchases of the Bonds will be made initially in book-entry form only and purchasers will not receive certificates representing their interest in the Bonds purchased. See Appendix D BOOK-ENTRY SYSTEM. Bond Registrar and Paying Agent, Payment of Bonds The City has adopted the system of registration for the Bonds approved, from time to time, by the State Finance Committee of the State (the Committee ). Pursuant to chapter Revised Code of Washington ( RCW ), the Committee designates one or more fiscal agencies for bonds issued within the State. The State s fiscal agent, currently The Bank of New York Mellon, New York, New York (the Bond Registrar or Fiscal Agent ), will authenticate the Bonds and act as the paying agent and registrar for the purpose of paying the principal and interest on the Bonds, recording the purchase and registration, exchange or transfer, and payment of Bonds and performing the other obligations of the paying agent and registrar. To pay interest on and principal of the Bonds when due, the City will remit money from the City s Fund 401 Public Works-Utilities (the Revenue Bond Fund ) to the Bond Registrar. See SECURITY FOR THE BONDS. The Bond Registrar will in turn remit such principal and interest to DTC participants for subsequent disbursement to the Beneficial Owners of the Bonds as described in Appendix D BOOK-ENTRY SYSTEM. In the event that the Bonds are no longer held in book-entry form, interest on the Bonds is to be paid by check or draft mailed on or before the interest payment date, to the persons identified as the Owners on the fifteenth day of the month preceding the interest payment date at the addresses shown for the Owners on the Bond Register. If so requested in writing by the Owner of at least $1,000,000 principal amount of Bonds, interest will be paid by wire transfer on the interest payment 1

8 date to an account with a bank located in the United States. Principal of the Bonds is to be payable upon presentation and surrender of the Bonds by the Owners at the principal corporate trust office of the Bond Registrar. Redemption Provisions Optional Redemption The Bonds maturing on or after December 1, 2019 are subject to redemption prior to their stated maturity dates, at the option of the City, at any time on or after June 1, 2019, as a whole or in part (within one or more maturities selected by the City), at par plus accrued interest to the date fixed for redemption. For so long as the Bonds are in book-entry form, the selection of Bonds within a maturity to be redeemed and the manner of providing notice of redemption to beneficial owners shall be governed by the operational arrangements of DTC referenced in the Blanket Issuer Letter of Representation from City to DTC. Mandatory Redemption The Bonds maturing on December 1, 2033 are subject to mandatory redemption prior to maturity at the redemption price of 100% of the principal amount thereof (without premium) plus accrued interest to the date fixed for redemption, on December 1, in the years and in the amounts set forth below: 2033 Term Bonds Due December 1 Mandatory Redemption 2030 $2,220, ,320, ,430,000 2,540, * *Final Maturity Notice of Redemption Notice of any redemption may be conditional. For as long as the Bonds are held in book-entry only form, the Bond Registrar will provide notice to DTC only, and it will be the responsibility of DTC to disseminate notices to DTC Participants. The City will not provide any notice of redemption to beneficial owners of Bonds. See Book-Entry Only System/The Depository Trust Company. If the Bonds are no longer kept in book-entry only form notice of redemption will be given not fewer than 30 nor more than 60 days prior to the redemption date by first-class mail, postage prepaid, to the registered owner of any Bond to be redeemed at the address appearing on the bond registration books maintained by the Bond Registrar. Interest on the Bonds called for redemption shall cease to accrue on the date fixed for redemption unless the Bond or Bonds called are not redeemed when presented pursuant to the call. Form, Denomination and Registration The Bonds will be issued in fully registered form as to both principal and interest in the denomination of $5,000 each or any integral multiple thereof within a single maturity. The Bonds, when issued, will be registered in the name of Cede & Co., as registered owner and nominee of DTC. DTC will act as securities depository for the Bonds. Individual purchases may be made in Book-Entry form only. Purchasers will not receive certificates representing their interest in the Bonds purchased. So long as Cede & Co. is the registered owner of the Bonds, as nominee of DTC, references herein to the registered owners or bond owners will mean Cede & Co. and will not mean the Beneficial Owners of the Bonds. In this Official Statement, the term Beneficial Owner will mean the person for which a DTC participant acquires an interest in the Bonds. See Appendix D, DTC & BOOK-ENTRY SYSTEM hereto. Purchase The City has reserved the right and option to purchase any or all of the Bonds from Net Revenue subject to the priorities set forth in the Bond Ordinance offered to the City at any time at any price acceptable to the City. Defeasance of the Bonds If money and/or Government Obligations (as defined in chapter RCW) are irrevocably set aside in a special account of the City to effect redemption and retirement of all or a portion of the Bonds, and such amounts (including interest earning thereon) are pledged for such purpose, then no further payments need be made into the bond redemption fund of the City for the payment of the principal of and interest on the Bonds, and such Bonds shall cease to be entitled to any lien, benefit or security of the Bond Ordinance except the right to receive the moneys so set aside and pledged, and such Bonds shall be deemed not to be outstanding. 2

9 Procedure in the Event of Revisions of Book-Entry Transfer System Upon the resignation of DTC or its successor (or any substitute depository or its successor) from its functions as depository, or a determination by the City that it no longer wishes to continue the system of book-entry transfers through DTC or its successor (or any substitute depository or its successor), the City may appoint a substitute depository. Any such substitute depository shall be qualified under any applicable laws to provide the services proposed to be provided by it. If (i) DTC or its successor (or substitute depository or its successor) resigns from its functions as depository, and no substitute depository can be obtained, or (ii) the City determines that the Bonds are to be in certificated form, the ownership of Bonds may be transferred to any person as provided in the Bond Ordinance and the Bonds no longer shall be held in fully immobilized form. Thereafter, interest on the Bonds shall be paid by check or draft mailed to the Registered Owners at the addresses for such Registered Owners appearing on the Bond Register on the 15th day of the month preceding the interest payment date, and principal of the Bonds shall be payable upon presentation and surrender of such Bonds by the Registered Owners at the principal office of the Bond Registrar; provided, however, that if so requested in writing by the Registered Owner of at least $1,000,000 principal amount of Bonds, interest will be paid by wire transfer on the date due to an account with a bank located within the continental United States. SOURCES AND USES OF BOND PROCEEDS Purpose Proceeds of the Bonds will be used for the purpose of paying the cost of acquiring, constructing and installing certain additions and betterments to and extensions of the city s water and sewer system, refunding certain outstanding revenue bonds of the City and costs of issuance. See SECURITY FOR THE BONDS. Sources and Uses of Funds The table below sets forth the estimated sources and uses of funds in connection with the issuance of the Bonds. Sources of Funds Principal Amount of the Bonds $ 40,000,000 Net Original Issue Premium 1,363,693 Total Sources of Funds $ 41,363,693 Uses of Funds Deposit into Construction Fund $ 36,933,525 Proceeds for 1997 Refunding Reserve Account Underwriters Discount 2,190,510 1,610, ,475 Costs of Issuance (1) 113,183 $ 41,363,693 Total Uses of Funds (1) Includes legal fees, rating agency fees, printing costs, Financial Advisor s fee, and other costs associated with the issuance of the Bonds. PLAN OF REFUNDING The portion of the proceeds of the Bonds will be used by the City to redeem on a current basis the following bonds: City of Everett, Water and Sewer Revenue, Bonds, Series 1997 Maturity Date Principal Interest Payment/ (July 1) Amount Rate Redemption Date Price CUSIP 2010 $2,135, % 7/1/ % GT1 The Refunded Bonds will be refunded with a portion of the proceeds of the Bonds and City cash. 3

10 SECURITY FOR THE BONDS Pledge of Net Revenues The Bonds are issued on a parity of lien with the City s outstanding Water and Sewer Revenue Bonds, Series 1997 (exclusive of the Refunded Bonds) (the 1997 Bonds ), Water and Sewer Revenue Refunding Bonds, 2002 (the 2002 Bonds ), Water and Sewer Revenue and Refunding Bonds, 2003 (the 2003 Bonds ), and Water and Sewer Revenue Bonds, 2005 (the 2005 Bonds ) (see Debt Information herein). The 1997 Bonds, the 2002 Bonds, the 2003 Bonds and the 2005 Bonds are collectively referred to herein as the Outstanding Parity Bonds. The Outstanding Parity Bonds, the Bonds and any Future Parity Bonds are collectively referred to herein as the Parity Bonds. Certain provisions in the Bond Ordinance will remain in effect until the earlier of date on which the Outstanding Parity Bonds are no longer outstanding or on which consent is received from a requisite percentage of owners of Outstanding Parity Bonds is obtained (which date is defined as the New Covenant Date ). The Bonds and all Outstanding Parity Bonds are, and all Future Parity Bonds, if any, when issued, will be, secured by a lien and charge upon the Revenue of the System, and such lien and charge upon the Revenue is prior and superior to all other charges of any kind and nature whatsoever, except for the payment of Costs of Maintenance and Operation. The Bonds are revenue obligations of the City. Neither the full faith and credit or the taxing power of the City are pledged to the payment of the Bonds. The Bonds are not obligations of the State or any political subdivision thereof other than the City. Rate Covenant Rate Covenant in effect until New Covenant Date. The City shall establish, maintain and collect rates and charges for the use of the services and facilities of and all commodities sold, furnished or supplied by the System, which shall be fair and nondiscriminatory and shall adjust such rates and charges from time to time so that: (A) The Revenue of the System, together with Assessments collected, will at all times be sufficient (i) to pay the Costs of Maintenance and Operation, (ii) to pay the principal of and interest on the Parity Bonds, as and when the same shall become due and payable, (iii) to make adequate provision for the payment of any term bonds, (iv) to make when due all payments which the City is obligated to make into any Reserve Account and all other payments which the City is obligated to make pursuant to this ordinance, and (v) to pay all taxes, assessments or other governmental charges lawfully imposed on the System or the revenue therefrom or payments in lieu thereof and any and all other amounts that the City may now or hereafter become obligated to pay from the Revenue of the System by law or contract. (B) The Net Revenue together with Assessment Income in each calendar year will be at least equal to the Coverage Requirement, calculated as of December 31 of the preceding calendar year. Rate Covenant in effect from and after New Covenant Date. The City will establish, maintain and collect such rates and charges for service of its System for so long as any Parity Bonds are outstanding as will maintain the Rate Covenant. In the Bond Ordinance, the City established a Coverage Stabilization Account. Prior to the New Covenant Date, amounts on deposit in this account may not be utilized to meet the requirements of the Rate Covenant described above. From and after the New Covenant Date, transfers from the Coverage Stabilization Account to the Revenue Fund (described below under Flow of Funds ) shall be included in Revenue for purposes of compliance with the Rate Covenant, but not for the purposes of meeting the Parity Requirement in connection with the issuance of Future Parity Bonds. Flow of Funds All Revenue of the System is deposited into a special fund of the City known as the Water and Sewer Revenue Fund. The Revenue Fund is held separate and apart from all other funds and accounts of the City. The Revenue of the System deposited in the Revenue Fund is required to be used only for the following purposes and in the following order of priority: First, to pay the Costs of Maintenance and Operation; 4

11 Second, to make all payments required to be made into the Debt Service Account to pay the interest on any Parity Bonds, including reimbursements to the issuer of a Credit Facility if the Credit Facility secures the payment of interest on Parity Bonds and the ordinance authorizing such Parity Bonds provides for such reimbursement; Third, to make all payments required to be made into the Debt Service Account to pay the principal of any Parity Bonds, including reimbursements to the issuer of a Credit Facility if the Credit Facility secures the payment of principal of Parity Bonds and the ordinance authorizing such Parity Bonds provides for such reimbursement; Fourth, to make all payments required to be made into any sinking fund account hereafter created to provide for the payment of the principal of term bonds or Balloon Maturity Bonds; Fifth, to make all payments required to be made into the Reserve Account for Covered Bonds and to any reserve account created in the future for the payment of debt service on Future Parity Bonds, including reimbursements to the issuer of a Qualified Letter of Credit or Qualified Insurance if the Qualified Letter of Credit or Qualified Insurance has been issued to fund the Reserve Requirement and/or the reserve requirement(s) for any Future Parity Bonds and the ordinance authorizing such Parity Bonds provides for such reimbursement; Sixth, to make all payments required to be made into any revenue debt redemption fund, debt service account, reserve account or sinking fund account created to pay and secure the payment of the principal of and interest on Government Loans and any revenue bonds, or revenue warrants or other revenue obligations of the City having a lien upon the Revenue of the System junior and inferior to the lien thereon for the payment of the principal of and interest on the Parity Bonds; and Seventh, to retire by redemption or purchase any outstanding water and sewer revenue bonds or revenue warrants of the City, to make necessary additions, betterments, improvements and repairs to or extensions and replacements of the System, or for any other lawful City purposes. Money in the Revenue Fund may be invested by the City in any investment that is legal for the investment of City funds. From and after the New Covenant Date, the following provisions with respect to the Coverage Stabilization Account will apply. Pursuant to the Bond Ordinance, the City determined that the maintenance of a Coverage Stabilization Account may even out fluctuations in Net Revenues and help to alleviate the need for short-term rate adjustments. Money in the Coverage Stabilization Account will be transferred as determined from time to time by the City. The City may make payments into the Coverage Stabilization Account from the Revenue Fund at any time. Money in the Coverage Stabilization Account may be withdrawn at any time and used for the purpose for which the Revenues may be used. Amounts withdrawn from the Coverage Stabilization Account shall increase Revenues for the period in which they are withdrawn, and amounts deposited in the Coverage Stabilization Account shall reduce Revenues for the period during which they are deposited. Credits to or from the Coverage Stabilization Account that occur within 90 days after the end of a fiscal year may be treated as occurring within such fiscal year. Earnings on the Coverage Stabilization Account shall be credited to the Revenue Fund. Moneys in the Coverage Stabilization Account may be used for any lawful purpose, including to make up any deficiencies in the Bond Fund. To the extent required for such deficiencies, moneys in the Coverage Stabilization Account are pledged as additional payments to the Bond Fund. Additional Covenants Maintenance and Operation. The City shall at all times maintain, preserve and keep the properties of the System in good repair, working order and condition and will from time to time make all necessary and proper repairs, renewals, replacements, extensions and betterments thereto, so that at all times the business carried on in connection therewith will be properly and advantageously conducted, and the City will at all times operate or cause to be operated said properties of the System and the business in connection therewith in an efficient manner and at a reasonable cost. Payment of Costs of Maintenance and Operation. After making or providing for the payments from the Revenue Fund as required by Section 7(b) hereof, there shall be maintained in the Revenue Fund sufficient money to enable the City to meet the Costs of Maintenance and Operation of the System on a current basis. 5

12 Sale or Disposition of the System. The City will not sell or otherwise dispose of the System in its entirety unless simultaneously with such sale or other disposition, provision is made for the payment into the Revenue Bond Fund of cash or Government Obligations sufficient together with interest to be earned thereon to pay the principal of and interest on the then outstanding Parity Bonds, nor will it sell or otherwise dispose of any part of the useful operating properties of the System unless such facilities are replaced or provision is made for payment into the Revenue Bond Fund of the greatest of the following: (1) An amount which will be in the same proportion to the net amount of Parity Bonds then outstanding (defined as the total amount of the Parity Bonds less the amount of cash and investments in the Revenue Bond Fund and accounts therein) that the Revenue from the portion of the System sold or disposed of for the preceding year bears to the total Net Revenue for such period; or (2) An amount which will be in the same proportion to the net amount of Parity Bonds then outstanding (as defined above) that the Net Revenue from the portion of the System sold or disposed of for the preceding year bears to the total Net Revenue for such period; or (3) An amount which will be in the same proportion to the net amount of Parity Bonds then outstanding (as defined above) that the depreciated cost value of the facilities sold or disposed of bears to the depreciated cost value of the entire System immediately prior to such sale or disposition. The proceeds of any such sale or disposition of a portion of the properties of the System (to the extent required above) shall be paid into the Revenue Bond Fund. Notwithstanding the foregoing, the City may sell or otherwise dispose of any of the works, plant, properties and facilities of the System or any real or personal property comprising a part of the same which shall have become unserviceable, inadequate, obsolete or unfit to be used in the operation of the System, or no longer necessary, material to or useful in such operation, without making any deposit into the Revenue Bond Fund. Liens or Encumbrances. The City will not at any time create or permit to accrue or to exist any lien or other encumbrance or indebtedness upon the System or the Revenue of the System, or any part thereof, prior or superior to the lien thereon for the payment of the Parity Bonds, and will pay and discharge, or cause to be paid and discharged, any and all lawful claims for labor, materials or supplies which, if unpaid, might become a lien or charge upon the Revenue of the System, or any part thereof, or upon any funds in the hands of the City, prior to or superior to the lien of the Parity Bonds, or which might impair the security of the Parity Bonds. Insurance. The City will keep the works, plants and facilities comprising the System insured, and will carry such other insurance, with responsible insurers, with policies payable to the City, against risks, accidents or casualties, at least to the extent that insurance is usually carried by private corporations operating like properties, or will implement a self-insurance program with reserves adequate, in the judgment of the Council, to protect the City and the holders of Parity Bonds against loss. In the event of any loss or damage, the City will promptly repair or replace the damaged portion of the insured property and apply the proceeds of any insurance policy for that purpose; or in the event the City should determine not to repair or reconstruct such damaged portion of the properties of the System, the proceeds of such insurance shall be paid into any Reserve Account to the extent that such transfer shall be necessary to make up any deficiency in said Reserve Account and the balance, if any, shall, at the option of the City, be used either for repairs, renewals, replacements, or capital additions to the System, for the redemption of Parity Bonds, or for deposit into the Revenue Bond Fund. Books and Accounts. The City shall keep proper books of account in accordance with any applicable rules and regulations prescribed by the State of Washington. The City shall prepare, and any owner or holder of Parity Bonds may, upon written request, obtain copies of, balance sheets and profit and loss statements showing in reasonable detail the financial condition of the System as of the close of each year, and the income and expenses of such year, including the amounts paid into the Revenue Fund, the Revenue Bond Fund, and into any and all special funds or accounts created pursuant to the provisions of this ordinance, and the amounts expended for maintenance, renewals, replacements, and capital additions to the System. No Free Service. The City will not furnish or supply or permit the furnishing or supplying of any commodity, service or facility furnished by or in connection with the operation of the System, free of charge to any person, firm or corporation, public or private, so long as any Bonds are outstanding and unpaid. 6

13 Additions and Improvements. The City will not expend any of the revenues derived by it from the operation of the System or the proceeds of any indebtedness payable from the Revenue of the System for any extensions, betterments or improvements to the System that are not legally required or economically sound, and that will not properly and advantageously contribute to the conduct of the business of the System in an efficient manner. Collection of Delinquent Accounts. The City will, on or before April 1 of each calendar year, determine all accounts that are delinquent and will take all necessary action to enforce payment of such accounts including real property foreclosure actions pursuant to RCW Chapter 35.67, as amended, or its successor statute, if any, against those property owners whose accounts are delinquent. Collection and Application of ULID Assessments. All ULID Assessments shall be paid into the Revenue Bond Fund and shall be used to pay and secure the payment of the principal of and interest on the Parity Bonds and Future Parity Bonds. Nothing in this ordinance or this section shall be construed to prohibit the City from issuing water, sewer or water and sewer revenue bonds junior in lien to the Bonds and pledging as security for their payment assessments levied in any ULID which may have been specifically created to pay part of the cost of improvements to the System for which those junior lien bonds were specifically issued. Collection of Delinquent ULID Assessments. The City will, on or before April 1 of each calendar year, determine all ULID Assessments or installments thereof that are delinquent and will take all necessary action to enforce payment of such ULID Assessments, including real property foreclosure actions pursuant to RCW Chapter 35.50, as amended, or its successor statute, if any, against the property owners whose ULID Assessments are delinquent. The Revenue Bond Fund The Revenue Bond Fund is used solely for the purpose of paying the principal of, premium, if any, and interest on the Parity Bonds. All moneys in the Revenue Bond Fund are held in trust for the benefit of the owners of all Parity Bonds at the time outstanding equally and ratably and without preference or distinction as between Parity Bonds of different series and maturities. Moneys in the Revenue Bond Fund shall be transmitted to the Bond Registrar in amounts sufficient to pay principal of and interest on or before each due date. The amounts so pledged to be paid into the Revenue Bond Fund from the Revenue Fund are a lien and charge upon the Revenue of the System junior in lien to the Costs of Maintenance and Operation and equal to the lien of the charges upon such Revenue of the System and ULID Assessments to pay and secure the payment of the principal of and interest on the Outstanding Parity Bonds and Future Parity Bonds, and prior and superior to all other charges of any kind or nature whatsoever. Reserve Requirement The Bond Ordinance provides for the funding and maintenance of a Reserve Account for the payment of debt service on the for the purpose of securing the payment of the principal of and interest on all Covered Bonds. The Reserve Requirement for the Outstanding Parity Bonds and the Bonds will be fully funded as of the date of issuance of the Bonds. The Reserve Requirement as of the date of issuance of the Bonds will be equal to $9,586,674. The Reserve Requirement will be funded as follows: $8,932,449 in cash (a portion of which will be provided by Bond proceeds) and a surety bond issued by Financial Security Assurance in connection with the issuance of the 2002 Bonds in the amount of $654,225 and terminating on July 1, 2012 (the date of retirement of the 2002 Bonds). 7

14 Provisions to be in Effect Until New Covenant Date. The City covenants and agrees that when the required deposits have been made into the Reserve Account, it will at all times maintain therein an amount at least equal to the Reserve Requirement except for withdrawals therefrom authorized hereinafter, at all times for so long as any Covered Bonds remain outstanding. Whenever there is a sufficient amount in the Revenue Bond Fund, including all accounts therein, to pay the principal of, premium, if any, and interest on all outstanding Parity Bonds, the money in the Reserve Account may be used to pay the principal of, premium, if any, and interest on the Parity Bonds secured thereby. Money in the Reserve Account may also be withdrawn to redeem and retire, and to pay the premium, if any, and interest due to such date of redemption, on the outstanding Parity Bonds, as long as the money remaining on deposit in the Reserve Account is at least equal to the Reserve Requirement determined with respect to the Covered Bonds then outstanding. In the event there shall be a deficiency in the Revenue Bond Fund to meet maturing installments of either interest on or principal of and interest on any Parity Bonds, such deficiency shall be made up from the Reserve Account by the withdrawal of money therefrom. Cash and investments shall be drawn upon prior to any drawing upon a surety bond. Any deficiency created in the Reserve Account by reason of any such withdrawal shall then be made up out of Revenue of the System or Assessments after making necessary provision for the payments described in Flow of Funds - First through Fourth, inclusive. In the event the City issues any Future Parity Bonds it will provide in the ordinance authorizing the issuance of the same for payment into the Reserve Account out of proceeds of such Future Parity Bonds, Revenue of the System or ULID Assessments (or, at the option of the City, out of any other funds on hand and legally available therefor) approximately equal additional annual installments so that by five years from the date of issuance of such Future Parity Bonds there will have been paid into the Reserve Account an amount that, together with the money already on deposit therein, will be at least equal to the Reserve Requirement. Such annual payments into the Reserve Account shall be made not later than December 20 of each year. The City may fund the Reserve Requirement, in whole or in part, through a surety bond issued by a Qualified Insurer. The amount payable by the Qualified Insurer under such surety bond shall be credited against the amounts otherwise required to be accumulated and maintained in the Reserve Account. Provisions to be in effect from and after the New Covenant Date. The Reserve Account shall be maintained for the purpose of securing the payment of the principal of and interest on all Covered Bonds. The City covenants and agrees that from and after the closing and delivery of the Bonds, it will at all times, subject to the foregoing funding requirements, maintain an amount in the Reserve Account at least equal to the Reserve Requirement except for withdrawals therefrom authorized hereinafter, at all times for so long as any Covered Bonds remain outstanding. The Reserve Requirement may be maintained by deposits of cash, a Qualified Letter of Credit or Qualified Insurance, or a combination of the foregoing. In computing the amount on hand in the Reserve Account, Qualified Insurance and/or a Qualified Letter of Credit shall be valued at the face amount thereof, and all other obligations purchased as an investment of moneys therein shall be valued at cost. As used herein, the term cash shall include U.S. currency, cash equivalents and evidences thereof, including demand deposits, certified or cashier s check; and the deposit to the Reserve Account may be satisfied initially by the transfer of qualified investments to such account. In the event the City issues any Future Parity Bonds it will provide in the ordinance authorizing the issuance of the same for payment into the Reserve Account out of proceeds of such Future Parity Bonds, Revenue of the System or ULID Assessments (or, at the option of the City, out of any other funds on hand and legally available therefor) approximately equal additional annual installments so that by five years from the date of issuance of such future Parity Bonds there will have been paid into the Reserve Account an amount that, together with the money already on deposit therein, will be at least equal to the Reserve Requirement. Such annual payments into the Reserve Account shall be made not later than December 20 of each year. 8

15 If the balances on hand in the Reserve Account are sufficient to satisfy the Reserve Requirement, interest earnings shall be applied as provided in the following sentences. Whenever there is a sufficient amount in the Revenue Bond Fund, including the Reserve Account to pay the principal of and interest on all outstanding Covered Bonds, the money in the Reserve Account may be used to pay such principal and interest. As long as the money left remaining on deposit in the Reserve Account is equal to the Reserve Requirement, money in the Reserve Account may be transferred to the Revenue Bond Fund and used to pay the principal of and interest on Covered Bonds as the same becomes due and payable. The City also may transfer out of the Reserve Account any money required in order to prevent any Parity Bonds from becoming arbitrage bonds under the Code. If a deficiency in the Revenue Bond Fund for the payment of debt service on Covered Bonds shall occur, such deficiency shall be made up from the Reserve Account by the withdrawal of cash therefrom for that purpose and by the sale or redemption of obligations held in the Reserve Account, in such amounts as will provide cash in the Reserve Account sufficient to make up any such deficiency with respect to Covered Bonds, and if a deficiency still exists immediately prior to an interest payment date and after the withdrawal of cash, the City shall then draw from any Qualified Letter of Credit or Qualified Insurance for Covered Bonds in sufficient amount to make up the deficiency. Such draw shall be made at such times and under such conditions as the agreement for such Qualified Letter of Credit or such Qualified Insurance shall provide. Any deficiency created in the Reserve Account by reason of any such withdrawal shall then be made up within one year of the date of withdrawal from Net Revenues or from ULID Assessments (or out of any other moneys on hand legally available for such purpose) after making necessary provision for the payments required to be made into the Bond Fund within such year. Any Qualified Insurance shall not be cancelable on less than 30 days notice to the City. In the event of any cancellation or termination of a Qualified Insurance or a Qualified Letter of Credit, the Reserve Account shall be funded as if the Covered Bonds that remain outstanding had been issued on the date of such notice of cancellation. In the event that the City elects to meet the Reserve Requirement through the use of a Qualified Letter of Credit, Qualified Insurance or other equivalent credit enhancement device, the City may contract with the entity providing such Qualified Letter of Credit, Qualified Insurance or other equivalent credit enhancement device that the City s reimbursement obligation, if any, to such entity shall be made from payments of principal and interest on Covered Bonds from the City subject only to the prior lien thereon for the payments required hereunder to be made to registered owners of Parity Bonds. Debt Payment Record There is no record of default in the payment of principal of or interest on any bonded indebtedness of the City. Future Parity Bonds In the Bond Ordinance, the City reserves the right to issue additional bonds payable from the Revenue Bond Fund on parity with the Bonds and the Outstanding Parity Bonds (the Future Parity Bonds ) upon compliance with certain conditions. Conditions to the issuance of Future Parity Bonds prior to the New Covenant Date. The City may issue Future Parity Bonds for the purposes of providing funds to acquire, construct, reconstruct, install, or replace any equipment, facilities, additions, betterments, or other capital improvements to the System for which it is authorized by law to issue revenue bonds, or refunding at or prior to their maturity, any revenue warrants, or outstanding revenue bonds or other obligations payable out of the Revenue of the System, The following are conditions to the issuance of Future Parity Bonds: (A) At the time of the issuance of any Future Parity Bonds there is no deficiency in the Revenue Bond Fund or any accounts therein. (B) If there are assessments levied in any utility local improvement district to pay for additions and improvements to and extensions of the System which will be constructed from the proceeds of Future Parity Bonds, the ordinance authorizing Future Parity Bonds shall require that such assessments be paid into the Revenue Bond Fund. 9

16 (C) If there are assessments pledged to be paid into a warrant or bond redemption fund for revenue bonds, warrants or other revenue obligations being refunded by Future Parity Bonds, the ordinance authorizing the Future Parity Bonds shall require such assessments to be paid into the Revenue Bond Fund. (D) The principal of and interest on the future Parity Bonds shall be payable out of the Revenue Bond Fund, and provision for the funding of the Reserve Requirement in Section 8(c) applicable to the issuance of Future Parity Bonds shall be met. (E) Prior to the delivery of any Future Parity Bonds the City shall have on file in the office of the Clerk of the City a certificate of an independent professional engineer or certified public accountant dated not earlier than ninety (90) days prior to the date of delivery of such Future Parity Bonds and showing that the Net Revenue, determined and adjusted for each calendar year after the issuance of Future Parity Bonds (the Adjusted Net Revenue ), together with Assessment Income, will at least equal the Coverage Requirement, calculated as of December 31 of the preceding calendar year. For purposes of calculating the Coverage Requirement, the Future Parity Bonds shall be deemed to be outstanding Parity Bonds. The Adjusted Net Revenue shall be the Net Revenue, together with Assessment Income, for a period of any twelve consecutive months out of the twenty-four months immediately preceding the date of delivery of Future Parity Bonds, as adjusted by such engineer or accountant to take into consideration changes in Net Revenue estimated to occur under one or more of the following conditions for each year after such delivery for so long as any Parity Bonds, including the Parity Bonds proposed to be issued, shall be outstanding: (i) any increase or decrease in Net Revenue that would result if any change in rates and charges adopted by the Council prior to the date of such certificate and subsequent to the beginning of such twelve-month period, had been in force during the full twelve-month period; (ii) any increase or decrease in Net Revenue estimated by such engineer or accountant to result from any additions, betterments and improvements to and extensions of any facilities of the System that (x) became fully operational during such twelve-month period, (y) were under construction at the time of such certificate, or (z) will be constructed from the proceeds of the Parity Bonds to be issued; (iii) the additional Net Revenue that would have been received if any customers added to the System during such twelve-month period had been customers for the entire period. The engineer or accountant shall base his certification upon, and his certificate shall have attached, financial statements of the System audited by the State Examiner (unless such an audit is not available for a twelve-month period within the preceding twenty-four months) and certified by the Chief Financial Officer, showing income and expenses for the period upon which the same is based. Notwithstanding the foregoing requirement, if Future Parity Bonds are to be issued for the purpose of refunding at or prior to their maturity any part or all of the then outstanding Parity Bonds and the issuance of refunding Future Parity Bonds results in a debt service savings and does not require an increase of more than $5,000 in any year for principal and interest on such refunding Parity Bonds, the certificate of the engineer or accountant need not be obtained. Conditions upon the Issuance of Future Parity Bonds From and After the New Covenant Date. The conditions to the issuance of Future Parity Bonds shall be as follows: (1) the City shall not have been in default of its Rate Covenant for the immediately preceding fiscal year; (2) The ordinance authorizing the issuance of such Future Parity Bonds shall include the covenants to fund the Reserve Requirement; and (3) there shall have been filed a certificate (prepared as described in subsection (d) or (e) below) demonstrating fulfillment of the Parity Requirement, commencing with the first full fiscal year following the date on which any portion of interest on the series of Future Parity Bonds then being issued no longer will be paid from the proceeds of such series of Future Parity Bonds. 10

17 No Certificate Required. The certificate described above shall not be required as a condition to the issuance of Future Parity Bonds: (1) if the Future Parity Bonds being issued are for the purpose of refunding outstanding Parity Bonds; or (2) if the Future Parity Bonds are being issued to pay costs of construction of facilities of the System for which Future Parity Bonds have been issued previously and the principal amount of such Future Parity Bonds being issued for completion purposes does not exceed an amount equal to an aggregate of 15% of the principal amount of Future Parity Bonds theretofore issued for such facilities and reasonably allocable to the facilities to be completed as shown in a written certificate of the Chief Financial Officer, and there is delivered a Designated Representative s certificate stating that the nature and purpose of such facilities has not materially changed. Certificate of the City Without A Consultant. If required, a certificate may be delivered by the City (executed by the Chief Financial Officer) without a Consultant if Net Revenues for the Base Period (confirmed by an audit) conclusively demonstrate that the Parity Requirement will be fulfilled commencing with the first full fiscal year following the date on which any portion of interest on the series of Future Parity Bonds then being issued will not be paid from the proceeds of such series of Future Parity Bonds. Certificate of a Consultant. If a certificate is required, compliance with the Parity Requirement shall be demonstrated conclusively by a certificate of a Consultant. In making the computations of Net Revenues for the purpose of certifying compliance with the Parity Requirement, the Consultant shall use as a basis the Net Revenues (which may be based upon unaudited financial statements of the City if the audit has not yet been completed) for the Base Period. Such Net Revenues shall be determined by adding the following: (1) The historical net revenue of the City for the Base Period being issued as determined by a Consultant. (2) The net revenue derived from those customers of the City that have become customers during such 12-month period or thereafter and prior to the date of such certificate, adjusted to reflect a full year s net revenue from each such customer to the extent such net revenue was not included in (1) above. (3) The estimated annual net revenue to be derived from any person, firm, association, private or municipal corporation under any executed contract for service, which net revenue was not included in any of the sources of net revenue otherwise included. (4) The estimated annual net revenue to be derived from the operation of any additions or improvements to or extensions of the City under construction but not completed at the time of such certificate and not being paid for out of the proceeds of sale of Future Parity Bonds being issued, and which net revenue is not otherwise included. (5) The estimated annual net revenue to be derived from the operation of any additions and improvements to or extensions of the City being paid for out of the proceeds of sale of Future Parity Bonds being issued. In the event the City will not derive any revenue as a result of the construction of the additions, improvements or extensions being made or to be made to the System, the estimated normal Costs of Maintenance and Operation (excluding any transfer of money to other funds of the City and license fees, taxes and payments in lieu of taxes payable to the City) of such additions, improvements and extensions shall be deducted from estimated annual net revenue. The words historical net revenue or net revenue mean the Revenue or any part or parts thereof less the normal expenses of maintenance and operation of the System or any part or parts thereof, but before depreciation. Historical net revenue or net revenue shall be adjusted to reflect the rates and charges effective on the date of such certificate if there has been any change in such rates and charges during or after such 12-consecutive-month period. Junior Liens. The City also has reserved the right to issue revenue bonds or other obligations that are a charge upon the Revenue of the System junior or inferior to the payments required by the Bond Ordinance to be made out of such Revenue into the Revenue Bond Fund and accounts therein to pay and secure the payment of any outstanding Parity Bonds. 11

18 Refunding to avoid default. The City also has reserved the right to issue revenue bonds to refund maturing Parity Bonds for the payment of which money is not otherwise available. THE SYSTEM Outstanding Debt The City s Outstanding Parity Bonds as of January 1, 2009 include $4,160,000 of its 1997 Bonds, $2,350,000 of its 2002 Bonds, $41,040,000 of its 2003 Bonds and $35,000,000 of its 2005 Bonds. The following table presents debt service for the City s Outstanding Parity Bonds and the Bonds of this issue. WATER AND SEWER REVENUE BONDS DEBT SERVICE (Years Ending December 31) Outstanding Bonds (1) The Bonds TOTAL Year Principal Interest Total Principal Interest Total Debit Service 2009 $ 3,940,000 $ 3,863,375 $ 7,803,375 $ 555,000 $ 954,332 $ 1,509,332 $ 9,312, ,005,000 3,727,625 5,732,625 2,130,000 1,724,049 3,854,049 9,586, ,285,000 3,638,838 5,923,838 1,020,000 1,638,849 2,658,849 8,582, ,385,000 3,538,338 5,923,338 1,040,000 1,618,449 2,658,449 8,581, ,490,000 3,432,513 5,922,513 1,070,000 1,592,449 2,662,449 8,584, ,615,000 3,310,163 5,925,163 1,095,000 1,565,699 2,660,699 8,585, ,745,000 3,179,413 5,924,413 1,145,000 1,516,424 2,661,424 8,585, ,880,000 3,042,163 5,922,163 1,190,000 1,470,624 2,660,624 8,582, ,025,000 2,898,163 5,923,163 1,235,000 1,423,024 2,658,024 8,581, ,180,000 2,746,913 5,926,913 1,285,000 1,373,624 2,658,624 8,585, ,335,000 2,587,913 5,922,913 1,340,000 1,322,224 2,662,224 8,585, ,505,000 2,421,163 5,926,163 1,400,000 1,261,924 2,661,924 8,588, ,670,000 2,254,988 5,924,988 1,470,000 1,191,924 2,661,924 8,586, ,855,000 2,071,488 5,926,488 1,540,000 1,118,424 2,658,424 8,584, ,035,000 1,888,675 5,923,675 1,620,000 1,041,424 2,661,424 8,585, ,240,000 1,686,925 5,926,925 1,700, ,424 2,660,424 8,587, ,450,000 1,474,925 5,924,925 1,765, ,424 2,657,424 8,582, ,670,000 1,252,425 5,922,425 1,840, ,618 2,659,618 8,582, ,895,000 1,026,900 5,921,900 1,920, ,338 2,662,338 8,584, ,140, ,150 5,922,150 2,015, ,338 2,661,338 8,583, ,400, ,150 5,925,150 2,115, ,588 2,660,588 8,585, ,670, ,150 5,925,150 2,220, ,838 2,659,838 8,584, ,320, ,163 2,657,163 2,657, ,430, ,863 2,659,863 2,659, ,540, ,475 2,657,475 2,657,475 Total $ 80,415,000 $ 51,605,350 $ 132,020,350 $ 40,000,000 $ 26,544,504 $ 66,544,504 $ 198,564,854 (1) Includes the City's 1997, 2002, 2003 and 2005 Water & Sewer Revenue Bonds, excludes a portion of the 1997 Bonds being refunded. Debt Payment Record There is no record of default in the payment of principal of or interest on any bonded indebtedness of the City. Future Financing Plans The City plans to issue limited tax general obligation bonds within the next year and a subsequent System bonds within the next three years. Capital Improvement Plan The City s current rate plan includes provisions to pay the debt service for the Bonds as well as contribute directly to the capital projects listed below. All projects are identified in the City's ten-year Capital Improvement Program schedule. 12

19 SYSTEM CAPITAL IMPROVEMENT PROJECTS (Dollars in Millions) WATER WATER FILTRATION CAPACITY WATER FILTRATION REPLACEMENT WATER SOURCE REPLACEMENT WATER TRANSMISSION CAPACITY WATER TRANSMISSION REPLACMENT WATER DISTRIBUTION CAPACITY WATER DISTRIBUTION REPLACEMENT SEWER SEWER TREATMENT CAPACITY SEWER C&I CAPACITY SEWER C&I REPLACMENT STORM STORM TOTAL WATER TOTAL SEWER & STORM TOTAL WATER, SEWER & STORM

20 Historical Operating Results The following table presents five years of historical operating results for the Water System and Sewer System. OPERATING REVENUE WATER AND SEWER SYSTEMS HISTORICAL OPERATING RESULTS (1) (Dollars in Thousands) (unaudited) Charges for Services: Water $ 22,488 $ 23,317 $ 26,407 $ 26,355 $ 27,002 Sewer 21,602 24,409 27,373 28,030 27,358 Total Operating Revenues $ 44,090 $ 47,726 $ 53,780 $ 54,385 $ 54,360 OPERATING EXPENSES Personnel Services $ 12,741 $ 13,497 $ 13,970 $ 14,862 $ 15,412 Supplies 2,848 3,908 4,291 3,915 4,560 Professional Services 2,897 3,099 3,543 3,039 3,491 State Taxes Outside/Intragovernmental Services 5,980 5,339 7,068 7,917 9,027 Total Operating Expenses $ 25,310 $ 26,667 $ 29,800 $ 30,641 $ 33,441 NET OPERATING REVENUE $ 18,780 $ 21,059 $ 23,980 $ 23,744 $ 20,919 OTHER REVENUE (EXPENSE) Investment Income $ 905 $ 1,231 $ 3,733 $ 5,122 $ 1,470 Rent Other Revenue Timber Sales Assessment Incomes Non-Bond Interest - (232) (305) (277) (302) Loss/Gain on Sale of Assets Total Other Revenue $ 2,386 $ 1,984 $ 4,286 $ 7,082 $ 2,033 TOTAL AVAILABLE FOR DEBT SERVICE $ 21,166 $ 23,043 $ 28,266 $ 30,826 $ 22,952 DEBT SERVICE REQUIREMENTS Existing Senior Parity Debt Service 7,309 8,991 8,991 8,991 7,979 Existing PWTF & SRF Loans 2 1,486 2,564 2,958 3,002 3,357 Total Debt Service $ 8,795 $ 11,555 $ 11,949 $ 11,993 $ 11,336 PARITY LIEN DEBT SERVICE COVERAGE RATIO TOTAL DEBT SERVICE COVERAGE RATIO Less: Payment in Lieu of Taxes (2,677) (2,769) (3,036) (3,095) (3,302) ENDING BALANCE AVAILABLE $ 9,694 $ 8,719 $ 13,281 $ 15,738 $ 8,314 (1) Source: the City. All years have been audited except for 2008 (Pro-Forma). (2) Outstanding Public Works Trust Fund ("PWTF") and State Revolving Fund ("SRF") loans, which have a bordinate lien to the lien on the Bonds and the Outstanding Parity Bonds. (3) Includes all outstanding debt, including the PWTF and SRF loans. Projected Operating Results In preparation of the projected operating results of the Water System and Sewer System below, the City has made certain assumptions with respect to conditions that may occur in the future. While the City believes these assumptions are reasonable for the purpose of the projections, they are dependent upon future events, and actual conditions may differ from those assumed. To the extent actual future factors differ from those assumed or provided to the City by others, the results will vary from those forecast. 14

21 Following is a five-year projection of operating results for the System. Projections include the following revenue assumptions: increases are based on adopted rate ordinance; annual growth in retail customer base = 0.0% through 2012, 0.5% thereafter; annual growth in wholesale customer base = 0.0% through 2012, 1.0% thereafter; and annual growth in other operating revenues = 0.5%. Expense assumptions include: salaries/benefits annual growth rate = 6.0%; M&O annual increase = 4.0%. WATER AND SEWER SYSTEMS PROJECTED OPERATING RESULTS (1) (Dollars in Thousands) OPERATING REVENUE Charges for Services: (2) Water $ 28,600 $ 30,343 $ 32,035 $ 34,341 $ 37,477 Sewer 28,720 30,151 31,653 33,230 43,279 Total Operating Revenues $ 57,320 $ 60,494 $ 63,688 $ 67,571 $ 80,756 OPERATING EXPENSES Personnel Services $ 16,337 $ 16,827 $ 17,332 $ 18,198 $ 19,108 Supplies 4,651 4,744 4,839 4,984 5,134 Professional Services 3,561 3,632 3,705 3,816 3,930 State Taxes ,009 1,039 1,071 Outside/Intragovernmental Services 9,208 9,392 9,580 9,867 10,163 Total Operating Expenses $ 34,727 $ 35,584 $ 36,465 $ 37,904 $ 39,406 NET OPERATING REVENUE $ 22,593 $ 24,910 $ 27,223 $ 29,667 $ 41,350 OTHER REVENUE (EXPENSE) Investment Income $ 1,499 $ 1,529 $ 1,560 $ 1,607 $ 1,655 Rent Other Revenue Timber Sales Assessment Incomes Non-Bond Interest (308) (314) (320) (330) (340) Loss/Gain on Sale of Assets Total Other Revenue $ 2,071 $ 2,111 $ 2,150 $ 2,213 $ 2,278 TOTAL AVAILABLE FOR DEBT SERVICE $ 24,664 $ 27,021 $ 29,373 $ 31,880 $ 43,628 DEBT SERVICE REQUIREMENTS Existing Senior Parity Debt Service 7,979 7,979 5,927 5,927 5,927 Existing PWTF & SRF Loans 3,357 3,357 3,252 3,062 3,031 Total Debt Service (3) $ 11,336 $ 11,336 $ 9,179 $ 8,989 $ 8,958 PARITY LIEN DEBT SERVICE COVERAGE RATIO TOTAL DEBT SERVICE COVERAGE RATIO (4) Less: Payment in Lieu of Taxes (3,500) (3,710) (3,933) (4,169) (4,419) ENDING BALANCE AVAILABLE $ 9,828 $ 11,975 $ 16,261 $ 18,722 $ 30,251-1 Source: the City. Includes preliminary debt servoce for the Bonds, but no planned future debt service -2 Projected revenues include rate increases which are being approved by the City Council. -3 Outstanding Public Works Trust Fund ("PWTF") and State Revolving Fund ("SRF") loans, which have a subordinate lien to the lien on the Bonds and the Outstanding Parity Bonds. -4 Includes all outstanding debt, including the PWTF and SRF loans. 15

22 THE WATER SYSTEM The Water System serves the City, as well as 31 direct wholesale purveyors and 60 small water systems and associations. Alderwood Water District is the largest wholesale purveyor, having 45,042 direct billed customers, as well as transmitting water to the cities of Lynnwood, Mountlake Terrace, and Edmonds for a total of 27,058 additional customers. Source and Supply The source of supply for the entire Water System is the Sultan River. Water from an 84-square mile watershed is collected and stored in the Spada Reservoir, which has a capacity of approximately 154,900 acre feet. Water stored in the Spada Reservoir is released at a regulated rate and directed through the Snohomish County Public Utility District s ( PUD ) power tunnel and pipeline to its powerhouse on the Sultan River. A portion of this flow is then routed through a pipeline to supply the Lake Chaplain storage reservoir which has a storage capacity of approximately 13,800 acre feet. Four transmission lines carry water approximately 20 miles from the reservoir into the City. Each line has a nominal capacity of 50 million gallons per day (MGD). Three of the lines are treated by the City s water treatment plant, which has a capacity of 120 MGD; a fourth line carries an untreated industrial supply. In 2008, the Water System s average daily flow was 52.6 MGD and the peak was MGD. Distribution System The City has a complete water distribution system within the City limits. This system includes approximately 370 miles of pipe varying in size from two inches to 42 inches in diameter, as well as a 48-inch transmission line serving the Kimberly-Clark Company. The system includes fire hydrants on all adequately sized lines and distribution storage reservoir capacity of 85 million gallons. Meters All commercial, industrial and multiple residential customers are metered. Older single-family customers are unmetered. As computed by volume, approximately 90 percent of the water sold is metered. All new single-family homes are metered. As per State Water Efficiency Rules, all City of Everett customers will be required to have meters by Industrial Supply The City supplies untreated industrial water to the Kimberly-Clark Company to serve its pulp mill. The Kimberly-Clark supply can meet a maximum demand of 50 MGD. Kimberly-Clark is currently using an average of 27 MGD. The Kimberly-Clark rate is based on biennial review of the cost of service. The last rate adjustment was made in Alderwood Contract The Alderwood Water District contract was originally adopted September 6, 1960, for a term of 50 years. A new 50- year contract was adopted in The charges under the contract are adjusted on an annual basis each April. Current charges are $ per million gallons. This includes a demand charge of $30.65 per million gallons, a commodity charge of $ per million gallons, and $ per million gallons for filtration. In addition, a 20 percent rate multiplier is added to the water charge. The contract contains a commitment on the part of the City of Edmonds, the City of Mountlake Terrace, and the City of Lynnwood to continue to purchase water through the Alderwood Water District for the duration of the bond issues. New Water Supply Development The City, in partnership with the Northshore Utility District and the Woodinville Water District, both located in north King County adjacent to the City s south service area boundary, has created the Snohomish River Regional Water Authority (RWA). The RWA acquired a 36 MGD industrial water right on the lower Snohomish River from the Weyerhaeuser Timber Company and has received authorization from the Washington State Department of Ecology for a change in this right to municipal with the combined service area as the place of use. This new supply is intended to meet new industrial demands in Everett and growth needs in the Northshore and Woodinville areas. Development of the new source is expected to occur over the next ten to fifteen years. Water Rates Rates for water service were effective January 1, Rate increases to be effective January 1, 2010, 2011 and 2012 have also been adopted under Ordinance No The current rates per Ordinance No are as follows: Water Rates Within the City Limits: 1. Fixed rate accounts - minimum monthly water charge: $ Filtration charge: 3.90 Total Fixed Rate: $ a. Domestic Metered Rates - water charge 16

23 First 600 cubic feet, cubic feet: $ Over 600 cubic feet per 100 cubic feet: 1.81 b. There is also a filtration charge of $0.390 per 100 cubic feet, with a minimum charge of $2.34 per month. c. The following minimum monthly charge applies to all residential metered services to which water is made available without regard to actual consumption: Cu. Ft. of Water Minimum Minimum Minimum Charge Provided at Water Filtration without Regard to Meter Size Minimum Charge Charge Charge Consumption ½ - ¾ inch 600 $ $ 2.34 $ inch 1, inch 1, over 2 inch 1, a. Commercial/Industrial/Governmental metered rates - water charge First 600 cubic feet, cubic feet: $ Next 2,400 cubic feet, 600-3,000 cubic feet per 100 cubic feet: Next 12,000 cubic feet, 3,000-15,000 cubic feet per 100 cubic feet: Over 185,000 cubic feet per 100 cubic feet: b. In addition, there is a filtration charge of $0.390 per 100 cubic feet, with a minimum charge of $2.34 per month. c. The following minimum monthly charge applies to all services to which water is made available without regard to actual consumption: Cu. Ft. of Water Minimum Minimum Minimum Charge Provided at Water Filtration without Regard to Meter Size Minimum Charge Charge Charge Consumption ½ - ¾ inch 600 $ $ 2.34 $ inch 1, inch 1, over 2 inch 1, a. Irrigation metered rates water charge First 600 cubic feet, cubic feet per 100 cubic feet: $ Next 2,400 cubic feet, 600-3,000 cubic feet per 100 cubic feet: Next 12,000 cubic feet, 3,000-15,000 cubic feet per 100 cubic feet: 1.30 Over 15,000 cubic feet per 100 cubic feet: b. There is a filtration charge of $0.390 per 100 cubic feet, with a minimum charge of $2.34 per month. c. The following minimum monthly charge applies to all services to which water is made available without regard to actual consumption: Cu. Ft. of Water Minimum Minimum Minimum Charge Provided at Water Filtration without Regard to Meter Size Minimum Charge Charge Charge Consumption ½ - ¾ inch 600 $ $ 2.34 $ inch 1, inch 1, over 2 inch 1, Untreated Industrial Water Monthly Water Charge (Kimberly-Clark): $ 115, Other Industrial Supplies: Meter Charge, monthly: 1, Commodity Charge per million gallons: Fire hydrants and standpipes: The general fund of the City pays for hydrant usage, including transmission and distribution mains, storage facilities and water used for fire suppression; for a charge of - $5,000 monthly. 17

24 7. a. Service connection charges are: 5/8 x 3/ 4 inch $ 1, each 1 inch 1, inch 2, b. Service connection installations larger than the two-inch size are charged at the actual cost of the complete installation. c. Said charges include a $64 non-refundable application fee. Service connection applications are valid only for 180 days from date of issue unless work is in progress or a reasonable time extension is granted by the Utilities Superintendent. Service connection charges (less said non-refundable application fee) may be refunded to the applicant in the event that refund is requested within one year from the date of issue. d. Developer installed connection charges are: 5/8 x 3/ 4 inch $ 400 each 1 inch inch Special charges are as follows: a. Turn-on for restart of service, each: $ b. Shut-off requested for premises where customer s stop and waste valve should have been used, each: c. Turn-on and shut-off requested for a time other than regular hours, per call out: d. Meter testing: All meters regardless of size In shop testing with 1-hour minimum (per hour) Using meter test van with 3-hour minimum (per hour) e. Destroying or removing lock on meter f. Illegal turn-on, tampering of water service or illegal connection g. Lien processing fee h. New account setup charge i. Locate and mark City water shut-off valve j. Temporary shut off/turn on k. Failure to return a city owned water service key l. Returned check fee: m. Hang Notice for Delinquent Account: n. Illegal taking of water from a fire hydrant o. Should a customer receive a past due letter for failure to pay by the due date, a late fee equal to 5% of the payment past due will be assessed on all amounts in arrears at the time of each bi-monthly billing. p. When a permit for an Irrigation service for a single family home is issued that is currently on a flat rate service, the customer will be required to change to a metered service. 9. Fire Service. The rates for water supplied exclusively for fire protection purposes are deemed service charges and are for any one month, or fractional part thereof, as follows: Size of Service Service Charges 2 inches $ inches inches inches inches inches inches Water Rates Outside the City Limits: 1. Individual meters outside of the City limits. The consumption and minimum monthly water charges for individual metered services outside the City limits shall be computed in the same manner as for Residential metered 18

25 customers within the City. In addition, a charge of $0.427 per 100 cubic feet, or $2.34 minimum filtration charge is added to arrive at the total monthly charge. No multiplier is added to the filtration charge. 2. Master Meters a. Master meter rates are required for water districts, water associations or other organizations providing water service to 16 or more permanent services. Organizations serving less than 16 services and all other customers are charged at the individual meter rate. b. The consumption charges for master meters are as follows: i. For master meters connected east of the Snohomish River, the water charge is: Meter Charge, monthly: $ Water Charge (exclusive of meter charge), per 100 cubic feet: In addition to said water charge, there is added a filtration charge of $0.427 per 100 cubic feet to arrive at the total monthly charge. ii. For master meters connected west of the Snohomish River, the water charge is: Non-Pumped, per 100 cubic feet: $ Pumped, per 100 cubic feet: In addition, to said water charge, a filtration charge of $0.427 per 100 cubic feet is added to arrive at the total monthly charge. 3. Service Connection Charges. Service connection installations outside the City limits of all sizes are charged at the actual cost of the complete installation but in no event is the charge for a three-quarter inch, a one-inch or a two-inch service less than the amount charged for service connections within the City limits. 4. Delinquent Penalty and Special Charges. The delinquent penalty and special charges as set forth for service within the City plus a multiplier of 25% applies to customers outside the City limits. Rate and Customer Tables The following tables provide additional information on Water System rates and customers REGIONAL WATER RATE COMPARISON Region Rate City of Everett $ City of Bellevue City of Bellingham City of Edmonds Mukilteo Water District City of Seattle Snohomish PUD Woodinville Water District Source: the City, February HISTORICAL POPULATION SERVED BY WATER SYSTEM (1) Estimated Year Population Served , , , , ,080 (1) Estimates represent 85 % of the Snohomish County population, which is the approximate percentag e served by the City s Water System. 19

26 Source: the City, February LARGEST WATER CUSTOMERS Customer 2008 Water Revenues Percent of Water Revenues Everett Residences $ 10,160, % Alderwood Water District 8,335, Kimberly Clark 1,450, PUD/City of Lake Stevens 1,626, Mukilteo Water District 1315, City of Monroe 699, Source: the City, February Water rate increases have been adopted at 6% fo r each of the years of 2010, 2011 and HISTORICAL WATER RATES Year Rate Rate Increase 2009 $ % (1) Rate is for single-family residence per month. Source: the City, February THE SEWER SYSTEM The Sewer System provides service for the entire City. In addition, the City treats sewage for the Mukilteo Water District, portions of the Alderwood Water District, and the Silver Lake Water District. These three Districts provide sanitary sewer service only, while the City provides sanitary as well as storm drainage service. Secondary sewage treatment is provided by a sewage treatment plant capable of handling 36.4 MGD. The average annual flow is 20 MGD. The Sewer System s average daily flow in 2008 was MGD and peak daily flow was 63 MGD, including storm runoff. The sewage collection system consists of 310 miles of lines within a service area of 28,440 acres. Most of the sewer system is fairly new, and the City has implemented an annual replacement program for older lines. The treatment plant uses a trickling filter and solids contact secondary treatment process. The biosolids produced from the treatment process are class A and are distributed through land applications. The approximate area served by the Everett Sewage Treatment Plant, as well as the customer counts for the municipalities treated, include the following: No. of Single-Family Area Area Size Customers Equivalent City of Everett 39.7 square miles 23,159 44,709 Alderwood Water District 1.0 square miles 1,663 4,879 Silver Lake Water District 4.7 square miles 12,231 12,452 Mukilteo Water District 3.0 square miles 1,801 2,296 Sewer Rates and Surface Water Rates for sewer service were effective January 1, Rate increases to be effective January 1, 2010, 2011 and 2012 have also been adopted under Ordinance No The current rates per Ordinance No are as follows: 1. The current rates are: a. Single-family residence, per month: $ (The monthly charge includes the current state utility tax and Surface Water Quality Protection and Enhancement.) 20

27 b. For other than single-family residences (multiple family residences, commercial and industrial users, etc.), the rate is: Sewer service charge per month, per 100 cubic feet of metered water: $ (The monthly charge includes Surface Water Quality Protection and Enhancement and the current state utility tax.) The min 2. imum monthly charge regardless of sewer usage is $40.30 per month. Surface water rates for non-sewer customers: a. Single-family residence, per month: $ 7.75 (The monthly charge includes the current state utility tax.) b. For other than single-family residences (multiple family residences, commercial and industrial users, etc.), the rate is: Surface water service charge per month is $0.861 per 100 cubic feet of metered water consumption. (The monthly charge includes the current state utility tax.) The minimum monthly charge regardless of usage is $7.75 per month. Septic Tank Policy No new septic tanks are permitted in the City. Once sewers are installed in an area, rate payers with septic tanks begin paying the sewer rates and have 30 days to connect to the public sewer system. Residential customers can get an extension of up to 10 years if their septic system is in proper working order per the local Health District. Rate and Customer Tables The following tables provide additional information on Sewer System rates and customers. Sewer rate increases have been adopted f or each of the years 2010, 2011 and 2012 at 5% for sewer and 5% surface water each year. HISTORICAL SEWER RATES Year Rate Rate Increase 2009 $ % Source: the City, February REGIONAL SEWER RATE COMPARISON Region Rate City of Everett (1) $ City of Bellevue (2) City of Bellingham City of Edmonds Mukilteo Water District City of Seattle (3) City of Tacoma Woodinville Water District (4) (1) Includes surface water rate. (2) Surface water is based on average for majority of customers billed per call to City of Bellevue. (3) Surface water charge billed annual rate $ on separate billing. (4) No surface water charge. Source: the City, February

28 HISTORICAL SEWER CUSTOMER EQUIVALENTS Year Number , , , , ,686 Source: the City, February LARGEST SEWER SYSTEM CUSTOMERS Percent of Customer 2008 Charges Sewer Revenue City of Everett Residences $ 20,721, % Silver Lake Water District 3,080, Alderwood Water District 1,323, Mukilteo Water District 497, Source: the City, February STORM WATER SYSTEM The storm drainage system is a part of the general System and covers a service area within the existing City boundaries. The drainage system consists of 251 miles of storm water systems pipe, includes 14 drainage basins, 29 storm water retention/detention facilities and 40 miles of ditch systems and channels. Effective January 1, 2009, service charges for the City of Everett surface water management services and surface water charges are included as part of each customer s utility bill assessed on all utility customers in Everett not being billed for sewer service are as follows: 1. Single family residence: $11.00 per month (The monthly charge includes the current state utility tax.) 2. For other than single family residence (multiple family residence, commercial, and industrial users, etc.). The rate shall be computed in accordance with the following formula: Drainage service charge per month = Metered water usage x cu. ft. (The monthly charge includes the current state utility tax.) The minimum monthly charge regardless of usage shall be $11.00 per month. THE REGULATORY ENVIRONMENT The City s Water and Sewer System operations consistently meet all Washington Department of Social and Health Services and U.S. Environmental Protection Agency standards and regulations. Endangered Species Act In planning future projects, the City evaluates the construction and operation of the facilities to determine if there will be any impact on endangered species through the use of site evaluations, special environmental studies, and preparation of State Environmental Policy Act ( SEPA ) checklists or environmental impact statements, as appropriate. Alternatives are developed to minimize or avoid impacts on endangered species. Where federal permits or funding are involved, the City also complies with the Endangered Species Act s consultation requirement, which serves to evaluate and address any potential effect on endangered species. Best management practices are employed during routine operation and maintenance activities to minimize impacts on the environment. 22

29 THE CITY OF EVERETT General Budget Operations of the City are guided by an annual budget prepared under the direction of the City s Chief Financial Officer pursuant to statute and standards prescribed by the State Auditor. In September of each year, the City Clerk and the heads of each City department must file detailed estimates of the probable revenues and expenditures of the City for the ensuing fiscal year. Upon receiving the estimates, the City Clerk must prepare the estimates for debt service requirements of the City. By the first business day of November, the Clerk must submit to the City Council a proposed preliminary budget for the ensuing fiscal year. After a series of public hearings, the City Council must hold hearings on the budget during November. After the final hearing, the City Council must adopt the budget in its final form. By State statute, the final budget must be balanced. Once adopted, the annual budget may be revised or amended by an emergency ordinance. For calendar year 2009, the City has an operating budget of $505,679,603. Accounting The accounting and reporting policies of the City conform to generally accepted accounting principles for municipal governments and are regulated by the State Auditor s Office, Division of Municipal Corporations. The State Auditor s Office performs an annual post audit of the City s financial operations. The City s Chief Financial Officer maintains general supervision over financial transactions of all City funds. The City s audited financial statements have been filed with DisclosureUSA.org pursuant to the City s continuing disclosure undertakings for other outstanding bonds. Investments The City s Finance Manager-Treasurer invests all temporary cash surplus of City funds. The City s bond funds are invested in accordance with the policies established by the City s Investment Committee and within guidelines of permitted investments as defined within each bond ordinance and by State Law. The policies established by the Investment Committee are also adopted by the City Council. All investments of the City are held by banks or trust companies as the City s agent and in the City s name. The City intends to hold all investments to maturity. Employees The City, as of January 1, 2009, had approximately 1,208 budgeted full-time equivalent employees. State law requires municipalities to bargain collectively with formally recognized collective bargaining units. Currently, six unions represent the majority of City employees. Of its budgeted employees, approximately 216 are non-represented. The City also employs up to 200 seasonal/day laborers at different peak seasons of the year. There have been no strikes and the City considers its employee relations to be satisfactory. Following are the bargaining units representing City employees. Bargaining Unit Current Contract Expiration Date AFSCME December 2010 CRAFTS Union December 2010 Everett Police Officers Association December 2010 Firefighters Union December 2010 Amalgamated Transit Union December 2011 Everett Police Management Association December 2009 Pension Systems Public Employees Retirement System ( PERS ). Substantially all of the City s non-uniformed, full-time and qualifying parttime employees, participate in PERS. This is a statewide local government retirement system administered by the Washington State Department of Retirement Systems, under cost-sharing, multiple-employer defined benefit public employee retirement plans. The PERS system includes three plans. Participants who joined the system by September 30, 1977, are PERS Plan I members. Those joining thereafter are enrolled in PERS Plan II. A third plan, entitled PERS Plan III, provides members with a reduced defined benefit plan similar to PERS Plan II and the opportunity to invest their retirement contributions in a defined contribution plan. PERS Plan I members are eligible for retirement at any age after 30 years of service, at age 60 with five years of service, or at age 55 with 25 years of service. The annual pension is two percent of the average final compensation per year of service, capped at 60 percent. The average final compensation is based on the greatest compensation earned during any 24 eligible consecutive compensation months. 23

30 PERS Plan II members may retire at age 65 with five years of service or at 55 with 20 years of service. The annual pension is two percent of the average final compensation per year of service. PERS Plan II retirements prior to 65 are actuarially reduced. On July 1 of each year following the first full year of retirement service, the benefit will be adjusted by the percentage change in the Consumer Price Index ( CPI ) of Seattle, capped at three percent annually. PERS Plan III is structured as a dual benefit program that will provide members with the following benefits: A defined benefit allowance similar to PERS Plan II calculated as one percent of the average final compensation per year of service (versus a two percent formula) and funded entirely by employer contributions. A defined contribution account consisting of member contributions plus the full investment return on those contributions. Each biennium, the State Pension Funding Council adopts PERS Plan I employer contribution rates and PERS Plan II employer and employee contribution rates and PERS Plan III employer contribution rates. Employee contribution rates for PERS Plan I are established by statute at six percent and do not vary from year to year. The employer and employee contribution rates for PERS Plan II and employer PERS III contribution rates are set by the director of the Department of Retirement Systems, based on recommendations by the Office of the State Actuary. Unlike PERS Plan II, which has a single employee contribution rate, with PERS Plan III, the employee chooses how much to contribute from one to six contribution rate options. Once an option has been selected, the contribution rate choice is irrevocable unless the employee changes employers. All employers are required to contribute at the level established by state law. The methods used to determine the contribution requirements are established under State statute in accordance with chapters and RCW. For the year ended December 31, 2007, the City s contribution of $2,604,542 represents its full liability under the system. Law Enforcement Officers and Fire Fighters Retirement System ( LEOFF ). LEOFF is a cost-sharing multiple-employer defined benefit pension plan. Membership in the plan includes all full-time, fully compensated local law enforcement officers, and fire fighters. The LEOFF system includes two plans. Participants who joined the system by September 30, 1977, are LEOFF Plan I members. Those joining thereafter are enrolled in LEOFF Plan II. Retirement benefits are financed from employee and employer contributions, investment earnings, and State contributions. Retirement benefits in both LEOFF Plan I and LEOFF Plan II are vested after completion of five years of eligible service. LEOFF Plan I members are eligible to retire with five years of service at age 50. The service retirement benefit is dependent upon the final average salary and service credit years at retirement. LEOFF Plan II members are eligible to retire at the age of 50 with 20 years of service or at 53 with five years of service. Retirement benefits prior to age 53 are actuarially reduced at a rate of three percent per year. The benefit is two percent of the final average salary per year of service. The final average salary is determined as the 60 highest paid consecutive service months. There is no limit on the number of service credit years, which may be included in the benefit calculation. LEOFF Plan I employer and employee contribution rates are established by statute, and the State is responsible for the balance of the funding at rates set by the Pension Funding Council to fully amortize the total costs of the plan. Employer and employee rates for LEOFF Plan II are set by the director of the Department of Retirement Systems, based on recommendations by the Office of the State Actuary, to continue to fully fund the plan. LEOFF Plan II employers and employees are required to contribute at the level required by State law. The methods used to determine the contribution rates are established under State statute in accordance with chapters and RCW. For the year ending December 31, 2007, the City s contribution to LEOFF I totaled $2,666, and its contribution to LEOFF II totaled $1,520,769, representing its full liability under the LEOFF system. Police and Fire Pension Systems ( PPS and FPS ). The City is the administrator of the Police and Fire Pension Systems, which are shown as the pension trust funds in the City s financial statements. Both pension funds are single-employer closed pension systems that were established in conformance with Revised Code of Washington (RCW) Chapters and Membership is limited to police officers and fire fighters employed prior to Match 1, 1970 when the LEOFF retirement system was established. The City s liability under the PPS and FPS consists of all benefits, including payments to beneficiaries, for police officers and firefighters retired prior to March 1, 1970, and excess benefits over amounts provided by LEOFF for covered fire fighters retired who were hired before March 1, 1970, but retired after March 1, Under the PPS and FPS, eligible police officers and fire fighters may retire at age 50 with 25 years of 24

31 service. Death and disability benefits are also provided, as established under the governing State law. Individuals who terminate employment prior to retirement may withdraw their contributions to the plan plus accumulated interest, but by doing so, forfeit their rights to future pension benefits. No separate financial reporting is issued for the plan. As of December 31, 2007, there were a total of 215 retirees and 26 beneficiaries covered by this system. The most recent actuarial studies of the Police and Fire Pension Systems were done to determine future funding requirements as of January 1, The City s obligations under the PPS and FPS are limited to the benefits provided to firefighters retired prior to March 1, 1970, plus payments of excess retirement benefits to active members as of that date. In addition to general taxes, state law provides that the City may levy an additional $0.225 per $1,000 of true and fair market value of assessed property to fund the FPS portion of these obligations. The City has met full liability under the system. Historical trend information regarding all of these plans is presented in Washington State s Department of Retirement Systems annual financial report. A copy of this report may be obtained at: Department of Retirement Systems Point Plaza West 1025 East Union Street P.O. Box Olympia, WA Internet Address: Other Post-Employment Benefits The Governmental Accounting Standards Board ( GASB ) has issued a new standard concerning Accounting and Financial Reporting by Employers for Post-Employment Benefits Other than Pensions (GASB 45). In addition to pensions, many State and local governmental employers provide other post-employment benefits ( OPEB ) as a part of total compensation to attract and retain the services of qualified employees. OPEB includes post-employment health care as well as other forms of post-employment benefits when provided separately from a pension plan. The new standard provides for the measurement, recognition and display of OPEB expenses/expenditures, related liabilities (assets), note disclosures, and, if applicable, required supplementary information in the financial reports. The City plans to meet its obligations under GASB 45. This pronouncement is effective for the City for the fiscal year ending on December 31, The City is required by State law to pay for the full medical costs of its retired LEOFF Plan I employees. At December 31, 2007, the City had 215 such retired employees and 19 active employees. Beneficiaries do not receive OPEB. As required by state law, the City pays 100% of the medically necessary health care costs of these employees. The City finances this obligation both on a pay-as-you-go basis for current expenses, and contributes additional funds to a longterm investment trust with the goal of fully funding all estimated future costs, as determined by a qualified actuary, by the year Expenditures for Post Employment Benefits in 2007 and 2008 were $2,715,559 and $3,017,861, respectively. Risk Management The City is self-insured for general liability and auto liability risks, workers compensation risks, unemployment compensation costs, and liability arising out of operations of the George Culmback Dam. The City carries $30 million in excess general and automobile liability insurance above its self-insured retention of $1,000,000. The City s worker s compensation retention level is $750,000 per occurrence. The City purchases commercial insurance for claims in excess of the self-insured worker s compensation retentions in the amount of $1,000,000 for each accident and $1,000,000 for each disease. The City maintains a reserve for unemployment claims, which had a balance of $2,657,640 at December 31, The Culmback Dam is a joint project with Snohomish County PUD No. 1, and as such, payment of claims and expenses will be jointly shared between the two entities. The City carries excess general insurance for the Culmback Dam in the amount of $50,000,000 and excess property insurance in the amount of $250,000,000. The reserve balance in the Culmback Dam fund is sufficient to address the current self-insured retention of $2,000,000. The City is self-insured for employee health benefits, and carries stop-loss insurance for aggregate claims exceeding 125 percent of expected paid claims and individual claims exceeding $200,000 to mitigate its risk exposure. The City also maintains both a claims fluctuation and an incurred but not reported ( IBNR ) reserves in this fund. The IBNR reserve is based on an analysis of the most recent 12 months of incurred claims with applied monthly completion factors. Reserve balances for claims fluctuation and IBNR expenditures as of December 31, 2008, were $1,770,374 and $2,768,006, respectively. 25

32 GENERAL AND ECONOMIC INFORMATION Everett is the State s sixth largest city, with an estimated 102,300 residents in Everett is the largest city in Snohomish County (the County ) and serves as its economic and cultural center as well as the County seat. The City is located 25 miles north of Seattle at the mouth of the Snohomish River, on the eastern shore of Puget Sound. Historical population of the City and County are shown as follows: HISTORICAL POPULATION Year City of Everett Snohomish County , , , , , , , , , ,800 Source: the City 2009 Operating Budget supplemental section. Historically, the economy of the City and the County was primarily dependent on the wood, pulp and paper products industry. The local economy has diversified over the past few decades, from a forestry and wood products manufacturing base into new major industries including aircraft production, U.S. Navy base activity, electronics and electrical equipment manufacturing. Health care, trade, government and other manufacturing are also major contributors to the local economy. Industry and Employment The Boeing Company ( Boeing ) remains the City s largest employer, with an estimated 35,000 workers in the Snohomish County and 75,100 employed state-wide. Boeing established a manufacturing plant at the south end of the City of Everett in In 1980, the plant was expanded to produce the new generation of 767 wide-body twin jets, and in the early 1990 s Boeing completed a $1.5 billion expansion project to assemble the 777 aircraft. Located adjacent to the Snohomish County Airport (Paine Field), the Boeing complex includes the world s largest volume building with 472 million cubic feet. Boeing also has two office buildings totaling 1.2 million square feet which houses primarily engineering and administrative staff. The Everett facility currently is producing the 747, 767, 777 and the new 787 jetliner (the Dreamliner ). Healthcare is an important part of the Everett economy. Providence Medical Center recently completed a new Cancer Center and parking garage in the City of Everett at a cost of approximately $105 million. An additional $500 million has been budgeted between 2008 and 2010 for further expansion and the construction of a new hospital tower. The design of the new 368-bed tower focuses on accommodating today's state-of-the-art equipment, while being adaptable to future technology. The tower is scheduled for completion in Due to these additions, full-time employee numbers have been growing steadily at between 2 and 5% annually. The U.S. Navy operates a $265 million homeport for a nuclear aircraft carrier battle group in Everett. Naval Station Everett is home to two destroyers, three frigates, one nuclear-powered aircraft carrier and two Coast Guard cutters. There are approximately 6,000 sailors and civil service persons assigned to commands located at Naval Station Everett. The Naval Station itself has about 450 sailors and civilians assigned. New personnel barracks are in the process of being constructed at a cost of $60 million and expected occupancy is mid-april Also, a new $11 million training center is being built with an expected completion on February The Port of Everett (the Port ), a major deep-water port on Puget Sound, is an important contributor to Everett s economy. The Port s operations include nine deep-water piers, three steel warehouses and the largest marina on the west coast, with 2,200 moorage slips. The Port of Everett recently completed and opened the 12 th Street Yacht Basin, a new state-of-the-art marina located just north of the main Everett Marina. This marina offers easy access to the San Juan Islands for personal crafts. It was designed with larger vessels in mind and will easily accommodate yachts 40 to 70 with end-ties of up to 140. A commercial village with shops and restaurants is also part of the marina, which has become an important local tourist attraction. The Port of Everett has plans to develop Port Gardner Wharf, a new waterfront neighborhood located on the shores of Puget Sound in Everett. This former 65- acre industrial site is being transformed into a collection of condominiums, town homes, professional office space, restaurants and inns. The space will include a public plaza, 1.5 miles of waterfront pedestrian paths and parks. 26

33 The Comcast Arena in Everett, a $71.5 million multi-purpose complex, was developed by the Everett Public Facilities District and opened in October of The 10,000-seat venue hosts a myriad of events including concerts, rodeos, ice skating and family shows. It is also home to the Everett Silvertips, a Western Hockey League franchise, and seats up to 8,500. Additionally, there is a three-story Conference Center which includes three 900 square foot executive meeting rooms, a 12,000 square foot ballroom, which can be arranged in a number of different configurations, and a full banquet kitchen. Economic Indicators Following are additional economic indicators for the City and the County SNOHOMISH COUNTY MAJOR EMPLOYERS No. of Employer Type of Business Location Employees The Boeing Co. Aircraft Assembly Everett 35,000 Naval Station Everett U.S. Military Everett 6,000 Providence Everett Medical Center Healthcare Everett 3,220 State of Washington State Government Everett 3,000 Snohomish County Government County Government Countywide 2,700 Providence Everett Medical Center Health care Everett 2,624 Snohomish County Government Countywide 2,566 Everett School District Education Everett 1,770 Verizon Northwest Inc. Telecommunications Everett 1,500 Zumiez Sports Apparel Everett 1,500 Source: Economic Development Council of Snohomish County. RESIDENT CIVILIAN LABOR FORCE AND EMPLOYMENT WASHINGTON STATE AND SNOHOMISH COUNTY 2008 (1) State of Washington Labor Force 3,519,840 3,346,050 3,371,100 3,308,600 3,233,600 Employed 3,297,290 3,153,150 3,204,400 3,134,400 3,032,300 % Unemployed 6.3% 5.8% 4.9% 5.3% 6.2% `Snohomish County Labor Force 377, , , , ,130 Employed 353, , , , ,530 % Unemployed 6.3% 4.2% 4.6% 5.1% 5.8% (1) As of November Source: State of Washington Employment Security Department. 27

34 NONAGRICULTURAL WAGE AND SALARY EMPLOYMENT IN SNOHOMISH COUNTY Employment Sector Goods Producing Natural Resources & Mining 22,000 25,100 21,700 20,400 17,300 Manufacturing 56,900 57,700 50,100 46,600 43,200 Services Providing Private Services Providing Trade, Transportation, Warehousing & Utilities 44,800 50,900 48,100 45,300 42,900 Retail Trade 32,100 33,200 32,400 30,900 29,100 Leisure and Hospitality 24,800 23,100 22,000 21,000 19,700 Government Federal Government 2,200 2,400 2,400 2,400 2,200 State & Local Government 40,800 36,700 34,000 34,400 34,200 Total Non-Agriculture 261, , , , ,100 Total Private 220, , , , ,600 (1) Detail may not add to indicate totals due to rounding. Exclude proprietors, agriculture, self-employed, unpaid family, domestic workers and military. Includes all full-and part-time wage and salary workers receiving pay during the pay period including the 12 th of the month by place of work. Source: Washington State Employment Security Department, Labor Market and Economic Analysis Branch. TAXABLE RETAIL SALES Year City of Everett Snohomish County 2008 (1) $ 2,012,897,121 $ 7,825,404, ,903,121,107 9,057,998, ,729,008,343 8,326,559, ,350,959,737 9,292,804, ,113,894,572 8,276,392, ,051,156,959 7,763,786, ,056,721,707 7,554,267,406 (1) Taxable retail sales through 3 rd Quarter Source: Washington State Department of Revenue. SNOHOMISH COUNTY AND WASHINGTON STATE MEDIAN HOUSEHOLD INCOME Snohomish Washington 2008 $ 67,324 $ 60, ,755 59, ,485 56, ,311 53, ,779 53,005 (1) Figures for 2008 are forecasts and all are presented in current dollars. Source: Washington State Office of Financial Management 28

35 CITY OF EVERETT ASSESSED VALUES Taxable Year Assessed Value 2009 $ 14,182,506, ,342,975, ,719,014, ,708,398, ,049,119,416 Source: Snohomish County Assessors Office and City of Everett. CITY OF EVERETT BUILDING PERMITS Commercial Construction Residential Construction Year No. of Permits Total Value No. of Permits Total Value $61,669, $17,420, ,529, ,740, ,643, ,583, ,771, ,787, ,967, ,847,307 Source: City of Everett Building Permit Department. INITIATIVES AND REFERENDA Under the State Constitution, the voters of the State have the ability to initiate legislation and require the Legislature to refer legislation to the voters through the powers of initiative and referendum, respectively. The initiative power in Washington may not be used to amend the State Constitution. Initiatives and referenda are submitted to the voters upon receipt of a petition signed by at least eight percent (initiative) and four percent (referenda) of the number of voters registered and voting for the office of Governor at the preceding regular gubernatorial election. Any law approved in this manner by a majority of the voters may not be amended or repealed by the Legislature within a period of two years following enactment, except by a vote of two-thirds of all the members elected to each house of the Legislature. After two years, the law is subject to amendment or repeal by the Legislature in the same manner as other laws. CONTINUING DISCLOSURE UNDERTAKING Annual Financial and Operating Information. In accordance with Section (b)(5) of Securities and Exchange Commission Rule 15c2-12 under the Securities Exchange Act of 1934, as the same may be amended from time to time (the Rule ), the City has agreed in the Bond Ordinance to provide or cause to be provided the following annual financial information and operating data (collectively, the Annual Financial Information ) for each prior fiscal year, commencing with the fiscal year ending December 31, 2009, on or before the last day of the seventh month following the end of such prior fiscal year: (1) Annual financial statements prepared in accordance with the generally accepted accounting principles applicable to governmental units, as such principles may be changed from time to time and as permitted by State law; which statements will not be audited, except that if and when audited financial statements are otherwise prepared and available to the City, they will be provided (the Annual Financial Statements ); (2) A statement of authorized, issued and outstanding bonded debt secured by the Net Revenue; and; (3) Debt service coverage ratios. 29

36 Such annual financial information and operating data described above shall be provided on or before nine months after the end of the City s fiscal year. The City s fiscal year currently ends December 31. The City may adjust such date if the City changes its fiscal year by providing written notice of the change of fiscal year to each then existing NRMSIR and the SID, if any. In lieu of providing such annual financial information and operating data, the City may cross-reference to other documents provided to the NRMSIRs and the SID, or filed with the Commission and, if such document is a final official statement within the meaning of the Rule, available from the MSRB. If not provided as part of the annual financial information discussed above, the City shall provide the City s audited annual financial statement prepared in accordance with generally accepted accounting principles (and modified as may be required by the Washington State Auditor pursuant to RCW (or any successor statute)), when and if available, to each then existing NRMSIR and the SID, if any. Material Events The City agrees to provide or cause to be provided, in a timely manner, to the SID, if any, and to each NRMSIR or to the MSRB notice of the occurrence of any of the following events with respect to the Bonds, if material: Principal and interest payment delinquencies; Nonpayment related defaults; Unscheduled draws on debt service reserves reflecting financial difficulties; Unscheduled draws on credit enhancements reflecting financial difficulties; Substitution of credit or liquidity providers, or their failure to perform; Adverse tax opinions or events affecting the tax-exempt status of the Bonds; Modifications to the rights of Bond owners; Bond calls; Defeasances; Release, substitution or sale of property securing repayment of the Bonds; and Rating changes. Solely for purposes of disclosure, and not intending to modify this undertaking, the City advises that there is no property securing repayment of the Bonds. Notification upon Failure to Provide Financial Data The City agrees to provide or cause to be provided, in a timely manner, to each NRMSIR and to the SID, if any, notice of its failure to provide the annual financial information and operating data described above on or prior to the date set forth above. Termination/Modification The City s obligations to provide annual financial information and notices of material events shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. The undertaking, or any provision thereof, shall be null and void if the City (1) obtains an opinion of nationally recognized bond counsel to the effect that those portions of the Rule which require the undertaking, or any such provision, are invalid, have been repealed retroactively or otherwise do not apply to the Bonds; and (2) notifies each then existing NRMSIR and the SID, if any, of such opinion and the cancellation of the undertaking. Notwithstanding any other provision of the Bond Ordinance, the City may amend the undertaking, and any provision of the undertaking may be waived, provided that the following conditions are satisfied: If the amendment or waiver relates to the provisions of annual financial information and operating data or material events, it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of the City with respect to the Bonds, or the type of business conducted; The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and The amendment or waiver either (i) is approved by the owners of the Bonds in the same manner as provided in the Bond Ordinance for amendments to the Bond Ordinance with the consent of owners, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the owners or beneficial owners of the Bonds. In the event of any amendment or waiver of a provision of the undertaking, the City shall describe such amendment in the next annual report, and shall include, as applicable, a narrative explanation of the reason for the amendment or 30

37 waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the City. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a material event under the undertaking, and (ii) the annual report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. Bond Owner s Remedies under the Continuing Disclosure Undertaking Notwithstanding any other provisions of the Bond Ordinance, the right of any Bond owner or Beneficial Owner of the Bonds to enforce the provisions of the Bond Ordinance with respect to the Undertaking shall be limited to a right to obtain specific enforcement of the City s obligations thereunder, and any failure by the City to comply with the provisions of this undertaking shall not be an event of default with respect to the Bonds under the Bond Ordinance. For purposes of this undertaking, Beneficial Owner means any person who has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds, including persons holding Bonds through nominees or depositories. Other Continuing Disclosure Undertakings of the City The City has previously entered into continuing disclosure undertakings in connection with issuing bonds and is in compliance with those undertakings. DisclosureUSA/EMMA The City may elect to submit the information required by the Undertaking to be filed with the NRMSIRs and the SID, if any, directly to DisclosureUSA.org unless or until the SEC withdraws its approval of this submission process. After July 1, 2009, all information provided pursuant to the undertaking shall be submitted to the MSRB as the sole NRMSIR in accordance with the SEC s amendments to the Rule. TAX MATTERS In the opinion of Bond Counsel, interest on the Bonds is excludable from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations. Federal income tax law contains a number of requirements that apply to the Bonds, including investment restrictions, periodic payments of arbitrage profits to the United States, requirements regarding the use of proceeds of the Bonds and the facilities financed with proceeds of the Bonds and certain other matters. The City has covenanted to comply with all applicable requirements. Bond Counsel s opinion is subject to the condition that the City comply with the above-referenced covenants and, in addition, will rely on representations by the City and its advisors with respect to matters solely within the knowledge of the City and its advisors, respectively, which Bond Counsel has not independently verified. If the City fails to comply with such covenants or if the foregoing representations are determined to be inaccurate or incomplete, interest on the Bonds could be included in gross income for federal income tax purposes retroactively to the date of issuance of the Bonds, regardless of the date on which the event causing taxability occurs. Except as expressly stated above, Bond Counsel expresses no opinion regarding any other federal or state income tax consequences of acquiring, carrying, owning or disposing of the Bonds. Owners of the Bonds should consult their tax advisors regarding the applicability of any collateral tax consequences of owning the Bonds, which may include original issue discount, original issue premium, purchase at a market discount or at a premium, taxation upon sale, redemption or other disposition, the extent to which interest on the Bonds is included in adjusted current earnings for the purposes of computing the federal alternative minimum tax imposed on certain corporations and various withholding requirements. Prospective purchasers of the Bonds should be aware that ownership of the Bonds may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, individual recipients of Social Security or Railroad Retirement benefits, certain S corporations with excess net passive income, foreign corporations subject to the branch profits tax, life insurance companies and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry or have paid or incurred certain expenses allocable to the Bonds. Bond Counsel expresses no opinion regarding any collateral tax consequences. Prospective purchasers of the Bonds should consult their tax advisors regarding collateral federal income tax consequences. 31

38 Payments of interest on tax-exempt obligations such as the Bonds, are in many cases required to be reported to the Internal Revenue Service (the IRS ). Additionally, backup withholding may apply to any such payments made to any owner who is not an exempt recipient and who fails to provide certain identifying information. Individuals generally are not exempt recipients, whereas corporations and certain other entities generally are exempt recipients. Bond Counsel s opinion is not a guarantee of result and is not binding on the IRS; rather, the opinion represents Bond Counsel s legal judgment based on its review of existing law and in reliance on the representations made to Bond Counsel and the City s compliance with its covenants. The IRS has established an ongoing program to audit tax-exempt obligations to determine whether interest on such obligations is includable in gross income for federal income tax purposes. Bond Counsel cannot predict whether the IRS will commence an audit of the Bonds. Owners of the Bonds are advised that, if the IRS does audit the Bonds, under current IRS procedures, at least during the early stages of an audit, the IRS will treat the City as the taxpayer, and the owners of the Bonds may have limited rights to participate in the audit. The commencement of an audit could adversely affect the market value and liquidity of the Bonds until the audit is concluded, regardless of the ultimate outcome. Not Qualified Tax-Exempt Obligations The City has not designated the Bonds as qualified tax-exempt obligations within the meaning of Section 265(b)(3)(B) of the Code. Premium An amount equal to the excess of the purchase price of a Bond over its stated redemption price at maturity constitutes premium on that Bond. A purchaser of a Bond must amortize any premium over that Bond s term using constant yield principles, based on the Bond s yield to maturity. As premium is amortized, the purchaser s basis in the Bond and the amount of tax-exempt interest received will be reduced by the amount of amortizable premium properly allocable to the purchaser. This will result in an increase in the gain (or decrease in the loss) to be recognized for federal income tax purposes on sale or disposition of the Bond prior to its maturity. Even though the purchaser s basis is reduced, no federal income tax deduction is allowed. Purchasers of Bonds at a premium, whether at the time of initial issuance or subsequent thereto, should consult their tax advisors with respect to the determination and treatment of premium for federal income tax purposes and the state and local tax consequences of owning such Bonds. Original Issue Discount The initial public offering price of certain Bonds (the "Original Issue Discount Bonds"), is less than the stated redemption price at maturity. In such case, the difference between (i) the stated amount payable at the maturity of an Original Issue Discount Bond and (ii) the initial public offering price of that Original Issue Discount Bond constitutes original issue discount with respect to that Original Issue Discount Bond in the hands of the owner who purchased that Original Issue Discount Bond at the initial public offering price in the initial public offering of the Bonds. The initial owner is entitled to exclude from gross income (as defined in Section 61 of the Code) an amount of income with respect to an Original Issue Discount Bond equal to that portion of the amount of the original issue discount allocable to the period that such Original Issue Discount Bond continues to be owned by the initial owner. In the event of the redemption, sale or other taxable disposition of an Original Issue Discount Bond prior to its stated maturity, however, the amount realized by the initial owner in excess of the basis of the Original Issue Discount Bond in the hands of its initial owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Bond was held by the initial owner) is includable in gross income. Purchasers of Original Issue Discount Bonds should consult their tax advisors regarding the determination and treatment of original issue discount for federal income tax purposes and the state and local tax consequences of owning Original Issue Discount Bonds. LITIGATION There is no controversy or litigation pending, or to the best knowledge of the City threatened, affecting the issuance and delivery of the Bonds, or the power and authority of the City to issue the Bonds. RATING The City received an underlying rating of AA+ from Standard & Poor s ( S&P ). A municipal bond rating reflects a rating agency s current assessment of a number of factors relating to the issuer with respect to the Bonds, any debt, including the likelihood of repayment of such debt, the perceived quality of management and administration of the entity, the nature and relative health of the local economy in which the issuer exists and the overall financial condition and operational controls which exist for the issuer. The existence of a bond rating does not imply a recommendation by 32

39 a rating agency to purchase, sell or hold any such security, inasmuch as it does not take into account a number of subjective variables, including the market price of any such security or suitability of such security for any particular investor. A credit rating is based on current information furnished by the issuer or obtained by a rating agency from sources which it considers to be reliable. S&P does not perform an audit in connection with any credit rating it may assign and may, on occasion, rely on un-audited financial information. A bond rating may be changed, suspended or withdrawn as a result of changes in, or unavailability of, such information, or for other circumstances. FINANCIAL ADVISOR Piper Jaffray & Co., Seattle, Washington (the Financial Advisor ), serves as independent financial advisor to the City in connection with various matters relating to the planning, structuring, execution and delivery of the Bonds. The Financial Advisor has not audited, authenticated or otherwise verified the information set forth in this Official Statement, or any other related information available to the City. No guaranty, warranty or other representation is made by the Financial Advisor respecting the accuracy and completeness of this Official Statement or any other matter related to the Official Statement. UNDERWRITING The Series 2009 Bonds are being purchased by Fidelity Capital Markets (the Underwriter ) at a price of $40,847, and will be reoffered at a price of $41,363,693.50, as reflected by the prices and yields set forth on the cover of this Official Statement. The Underwriter may offer and sell the Bonds to certain dealers (including dealers depositing Bonds into investments trusts) and others at prices lower than the initial offering prices set forth on the cover hereof, and such initial offering prices may be changed from time to time by the Underwriter. After the initial public offering, the public offering prices may be varied from time to time. CERTAIN LEGAL MATTERS Legal matters incident to the authorization, issuance and sale of the Bonds by the County are subject to the approving legal opinion of K&L Preston Gates Ellis LLP, Seattle, Washington, Bond Counsel. The form of the opinion of Bond Counsel with respect to the Bonds is attached as Appendix A. The opinion of Bond Counsel is given based on factual representations made to Bond Counsel, and under existing law, as of the date of initial delivery of the Bonds, and Bond Counsel assumes no obligation to revise or supplement its opinion to reflect any facts or circumstances that may thereafter come to its attention, or any changes in law that may thereafter occur. The opinion of Bond Counsel is an expression of its professional judgment on the matters expressly addressed in its opinion and does not constitute a guarantee of result. CONFLICTS OF INTEREST Some or all of the fees of the Financial Advisor and Bond Counsel are contingent upon the issuance and sale of the Bonds. From time to time, Bond Counsel serves as counsel to the Financial Advisor in transactions unrelated to the issuance of the Bonds. None of the elected officials or other officers of the City have interests in the issuance of the Bonds that are prohibited by applicable law. MISCELLANEOUS The City has authorized the distribution of this Official Statement. Any statements in this Official Statement involving matters of opinion, whether or not expressly so stated, are intended as such, and are not representations of fact. This Official Statement is not to be construed as an agreement or contract between the City and the purchasers or holders of any Bonds. This Official Statement has been approved by the City. CONCLUDING STATEMENT All estimates, assumptions, statistical information and other statements contained herein, while taken from sources considered reliable, are not guaranteed by the City or the Financial Advisor. So far as any statement herein includes matters of opinion, or estimates of future expenses and income, whether or not expressly so stated, they are intended merely as such and not as representations of fact. The information contained herein should not be construed as representing all conditions affecting the City or the 33

40 Bonds. Additional information may be obtained directly from the City or the Financial Advisor. The foregoing statements relating to the Bond Ordinance and other documents are in all respects subject to and qualified in their entirety by provisions of such documents. This Official Statement, starting with the cover page and all subsequent pages, including any appendices, comprise the entire Official Statement, which has been approved by the City. The City has represented to the Financial Advisor that the portions of this Official Statement directly pertaining to the City neither contain any misrepresentation of material fact nor omit any material fact necessary to understand the financial, economic or legal nature of the City or any information presented herein. CITY OF EVERETT, WASHINGTON By: /S/ Debra Bryant 34

41 APPENDIX A CERTAIN DEFINITIONS IN THE BOND ORDINANCE

42 (THIS PAGE INTENTIONALLY LEFT BLANK)

43 DEFINITIONS Capitalized terms used in this Official Statement that are not specifically defined herein have the meanings as set forth in the Bond Ordinance. The following terms shall have the following respective meanings when used in this Official Statement. Accreted Value means (1) with respect to any Capital Appreciation Bonds, as of any date of calculation, the sum of the amount set forth in the ordinance authorizing their issuance as the amount representing the initial principal amount of such Capital Appreciation Bonds plus the interest accumulated, compounded and unpaid thereon as of the most recent compounding date, or (2) with respect to Original Issue Discount Bonds, as of the date of calculation, the amount representing the initial public offering price of such Original Issue Discount Bonds plus the amount of discounted principal that has accreted since the date of issue. In each case, the Accreted Value shall be determined in accordance with the provisions of the ordinance authorizing the issuance of such Balloon Maturity Bonds. Annual Debt Service, prior to the New Covenant Date, means, with respect to any issue of Parity Bonds, the amount required in a given calendar year for the payment of the principal of and interest on such Parity Bonds, except interest to be paid from the proceeds of such Parity Bonds. In the event such Parity Bonds include term bonds, the words principal of and interest on the Parity Bonds shall be deemed to exclude from principal an amount of term bonds equal to the mandatory deposits of money into any sinking fund account to provide for payment of the principal of such term Bonds, and from interest the interest on such term Bonds subsequent to the date of the respective deposits, and to include in lieu thereof all mandatory sinking fund deposits as of the date required and interest on the term bonds provided for by such deposits only to the dates of the respective deposits, and following the New Covenant Date, means the total amount of Debt Service for any Parity Bond or series of Parity Bonds or other subordinate lien evidences of indebtedness payable from Revenue of the System in any fiscal year or Base Period. Approved Bid means the winning bid submitted for the Bonds. Assessments means any assessments levied in any utility local improvement district of the City created for the acquisition or construction of additions and improvements to and extensions of the System, if such assessments are pledged to be paid into the Revenue Bond Fund. The term Assessments shall also include any installments of assessments and any interest or penalties that may be due thereon. Assessment Income means the principal of and interest on assessments levied in any utility local improvement district and pledged to be paid into the Revenue Bond Fund. In the case of assessments payable in installments, Assessment Income shall be allocated to the years in which it would be received if the unpaid principal balance of each assessment roll were paid in equal principal amounts over the remaining number of installments with interest on the declining balance at the times and at the rate provided in the ordinance confirming the assessment roll. Average Annual Debt Service means, with respect to any issue of Parity Bonds, the average amount of Annual Debt Service that will become due on such Parity Bonds for the period from the date of such calculation until the final maturity date of such Parity Bonds then outstanding. Balloon Maturity Bonds means any evidences of indebtedness of the City payable from Revenue of the System that are so designated in the ordinance pursuant to which such indebtedness is incurred. Base Period means any consecutive 12-month period selected by the City out of the 36-month period next preceding the date of issuance of an additional series of Future Parity Bonds. Beneficial Owner means any person that has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries). Bond Insurance Policy means the municipal bond insurance policy, if any, issued by the Insurer insuring the payment when due of the principal of and interest on the Bonds as provided therein.

44 Bonds mean the City of Everett, Washington, Water and Sewer Revenue and Refunding Bonds, 2009 authorized herein and shall include the Improvement Bonds and the Refunding Bonds. Bond Register means the books or records maintained by the Registrar containing the name and mailing address of the owner of each Bond or nominee of such owner and the principal amount and number of Bonds held by each owner or nominee. Bond Year means each one-year period that ends on the date selected by the City. The first and last Bond Years may be short periods. If no day is selected by the City before the earlier of the final maturity date of the Bonds or the date that is five years after the date of issuance of the Bonds, Bond Years end on each anniversary of the date of issue and on the final maturity date of the Bonds. Call Date means July 1, Capital Appreciation Bonds means any Future Parity Bonds all or a portion of the interest on which is compounded, accumulated and payable only upon redemption or on the maturity date of such Capital Appreciation Bonds. If so provided in the ordinance authorizing their issuance, Future Parity Bonds may be deemed to be Capital Appreciation Bonds for only a portion of their term. On the date on which Future Parity Bonds no longer are Capital Appreciation Bonds, they shall be deemed outstanding in a principal amount equal to their Accreted Value. Chief Financial Officer means the duly qualified, appointed and acting Chief Financial Officer of the City or any other officer who succeeds to the duties now delegated to that office. City means the City of Everett, a municipal corporation duly organized and existing under the laws of the State of Washington. Code means the federal Internal Revenue Code of 1986, as amended, and applicable regulations. Commission means the United States Securities and Exchange Commission. Consultant means at any time an independent municipal financial consultant appointed by the City to perform the duties of the Consultant as required by the Bond Ordinance. For the purposes of delivering any certificate required by Section 10 of the Bond Ordinance and making the calculation required by Section 10 of the Bond Ordinance, the term Consultant shall also include any independent public accounting firm or engineer appointed by the City to make such calculation or to provide such certificate. Continuing Disclosure Agreement means the agreement entered into by the Chief Financial Officer pursuant to Section 19 of the Bond Ordinance in order to permit the successful bidder for the Bonds to comply with the Rule. Costs of Maintenance and Operation means all necessary operating expenses, current maintenance expenses, expenses of reasonable upkeep and repairs, and insurance and administrative expense with respect to the System, but excludes depreciation, payments for debt service or into reserve accounts, costs of capital additions to or replacements of the System, municipal taxes, or payments to the City in lieu of taxes. Council means the general legislative body of the City as the same shall be duly and regularly constituted from time to time. Coverage Requirement means (a) for any period during which Assessments may be paid without becoming delinquent, the sum of (1) the product of Maximum Annual Debt Service on all Parity Bonds then outstanding times a fraction, the numerator of which is the aggregate principal amount of nondelinquent Assessments which remain to be paid into the Revenue Bond Fund plus the principal amount of Assessments previously paid into and then on hand in the Revenue Bond Fund, and the denominator of which is the aggregate principal amount of Parity Bonds then outstanding, plus (2) 1.25 times the product of Maximum Annual Debt Service on all Parity Bonds then outstanding times the difference of 1 minus the fraction calculated pursuant to (i) above; or (b) for any other period, the product of 1.25 times Maximum Annual Debt Service on all Parity Bonds then outstanding.

45 Coverage Stabilization Account means the account of that name maintained pursuant to Section 7(c) of the Bond Ordinance. Covered Bonds means the Outstanding Parity Bonds, the Bonds and those Future Parity Bonds designated in the ordinance authorizing their issuance as Covered Bonds secured by the Reserve Account. Credit Facility means a policy of municipal bond insurance, a letter of credit, surety bond, line of credit, guarantee or other financial instrument or any combination of the foregoing, which obligates a third party to make payment or provide funds for the payment of financial obligations of the City. There may be one or more Credit Facilities outstanding at any time. Debt Service, from and after the New Covenant Date, means, for any period of time, (a) with respect to any outstanding Original Issue Discount Bonds or Capital Appreciation Bonds which are not designated as Balloon Maturity Bonds in the ordinance authorizing their issuance, the principal amount thereof shall be equal to the Accreted Value thereof maturing or scheduled for redemption in such period, and the interest payable during such period; (b) with respect to any outstanding Fixed Rate Bonds, an amount equal to (1) the principal amount of such Fixed Rate Bonds due or subject to mandatory redemption during such period and for which no sinking fund installments have been established, (2) the amount of any payments required to be made during such period into any sinking fund established for the payment of any such Fixed Rate Bonds, plus (3) all interest payable during such period on any such outstanding Fixed Rate Bonds and with respect to Fixed Rate Bonds with mandatory sinking fund requirements, calculated on the assumption that mandatory sinking fund installments will be applied to the redemption or retirement of such Fixed Rate Bonds on the date specified in the ordinance authorizing such Fixed Rate Bonds; and (c) with respect to all other series of Parity Bonds, other than Fixed Rate Bonds, Original Issue Discount Bonds or Capital Appreciation Bonds, specifically including but not limited to Balloon Maturity Bonds and Parity Bonds bearing variable rates of interest, an amount for any period equal to the amount which would have been payable for principal and interest on such Parity Bonds during such period computed on the assumption that the amount of Parity Bonds as of the date of such computation would be amortized (i) in accordance with the mandatory redemption provisions, if any, set forth in the ordinance authorizing the issuance of such Parity Bonds, or if mandatory redemption provisions are not provided, during a period commencing on the date of computation and ending on the date 30 years after the date of issuance (ii) at an interest rate for the Base Period determined as follows: (A) if the Variable Rate Bonds have been Outstanding for at least twelve (12) months, assume that the Parity Bonds bear interest at the higher of the actual rate borne by the Parity Bonds on the date of calculation or the average rate borne by the Parity Bonds over the twelve (12) months immediately preceding the date of calculation, and (B) if the Parity Bonds have been Outstanding for less than twelve (12) months or are not yet Outstanding, assume that the Parity Bonds bear interest at the higher of the actual rate borne by the Parity Bonds on the date of calculation or (X) if interest on the Parity Bonds is excludable from gross income under the applicable provisions of the Code, the average rate set forth on the Securities Industry and Financial Markets Association Municipal Swap Index over the twelve (12) months immediately preceding the date of calculation, or (Y) if interest is not so excludable, the average rate on Federal Securities with maturities comparable to the rate reset period (iii) to provide for essentially level annual debt service of principal and interest over such period. Debt Service shall be net of any principal and/or interest funded out of Bond proceeds. Debt Service shall include reimbursement obligations to providers of Credit Facilities to the extent authorized by ordinance. Debt Service shall exclude the payments required to be made with respect to revenue bond anticipation notes to the extent that the ordinance authorizing their issuance provides that the bond anticipation notes will be funded with the proceeds of Future Parity Bonds. Designated Representative means the Mayor, the Chief Financial Officer or any City employee designated by either of them. DTC means The Depository Company, New York, New York, a limited purpose trust company organized under the laws of the State of New York, as depository for the Bonds pursuant to Section 5 of the Bond Ordinance.

46 Federal Securities means direct obligations of (including obligations issued or held in book-entry form on the books of), or obligations the timely payment of the principal of and interest on which are unconditionally guaranteed by, the United States of America. Fitch means Fitch, Inc., organized and existing under the laws of the State of Delaware, its successors and their assigns, and, if such organization shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, Fitch shall be deemed to refer to any other nationally recognized securities rating agency (other than S&P or Moody s) designated by the Chief Financial Officer. Fixed Rate Bonds means those Parity Bonds other than Capital Appreciation Bonds, Original Issue Discount Bonds or Balloon Maturity Bonds issued under an ordinance in which the rate of interest on such Parity Bonds is fixed and determinable through their final maturity or for a specified period of time. If so provided in the ordinance authorizing their issuance, Parity Bonds may be deemed to be Fixed Rate Bonds for only a portion of their term. Future Parity Bonds means any water and sewer revenue bonds which the City may hereafter issue having a lien upon the Revenue of the System for the payment of the principal thereof and interest thereon equal to the lien upon the Revenue of the System of the Bonds and the Outstanding Parity Bonds. Government Loans means the PWTF Loans and subordinate lien revenue loans received by the City in the future from the State of Washington or the United States of America. Government Obligations means those obligations now or hereafter defined as such in chapter RCW. Improvement Bonds mean the City s water and sewer revenue bonds issued pursuant to Section 4(a) of the Bond Ordinance. Insurer means such bond insurance company, if any, from which a Bond Insurance Policy may be acquired for one or more maturities of the Bonds. Letter of Representations means the blanket issuer letter of representations from the City to DTC. Maximum Annual Debt Service, prior to the New Covenant Date, means, with respect to any issue of Parity Bonds, the maximum amount of Annual Debt Service that will become due in any future calendar year on such Parity Bonds then outstanding and from and after the New Covenant Date, Maximum Annual Debt Service means highest dollar amount of Annual Debt Service in any fiscal year or Base Period for all outstanding Parity Bonds and/or for all subordinate lien evidences of indebtedness secured by Revenue of the System, as the context requires. Moody s means Moody s Investors Service, its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, Moody s shall be deemed to refer to any other nationally recognized securities rating agency (other than S&P and Fitch) designated by the Chief Financial Officer. MSRB means the Municipal Securities Rulemaking Board Bonds means the City s outstanding Water and Sewer Revenue Bonds, Series 1997, issued under date of March 1, 1997, pursuant to the 1997 Bond Ordinance Bond Ordinance means Ordinance No adopted by the Council on March 5, Net Proceeds, when used with reference to the Bonds, means the principal amount of the Bonds, plus accrued interest and original issue premium, if any, and less original issue discount and proceeds, if any, deposited in the Reserve Account. Net Revenue means Revenue of the System less Costs of Maintenance and Operation. New Covenant Date means the earlier of (a) the date on which all Outstanding Parity Bonds are no longer outstanding or (b) the date on which consent to the modifications identified in the Bond Ordinance as taking effect

47 from and after the New Covenant Date is obtained from the requisite percentage of owners as provided in Section 19 of Ordinance Nos , and Notice of Sale means the notice of bond sale authorized to be given in Section 16 of the Bond Ordinance. NRMSIR means a nationally recognized municipal securities information repository. Original Issue Discount Bonds means Parity Bonds which are sold at an initial public offering price of less than 95% of their face value and which are specifically designated as Original Issue Discount Bonds in the ordinance authorizing their issuance. Outstanding Parity Bonds means the 1997 Bonds, the 2002 Bonds, the 2003 Bonds and the 2005 Bonds. Parity Bonds means the Outstanding Parity Bonds, the Bonds and any water and sewer revenue bonds, warrants or other obligations that the City may hereafter issue having a lien upon the Revenue of the System for the payment of the principal thereof and interest thereon equal to the lien upon the Revenue of the System of the Outstanding Parity Bonds and the Bonds. Parity Requirement, from and after the New Covenant Date, means Net Revenues equal to or greater than 125% of average Annual Debt Service for all Parity Bonds computed by deducting from Annual Debt Service the Annual Debt Service for each series or issue of Parity Bonds that is covered by ULID Assessments. In determining the amount of Annual Debt Service covered by ULID Assessments, Annual Debt Service for each future year is reduced by the dollar amount of ULID Assessments projected to be received during such future year, and the remaining outstanding ULID Assessments are assumed to be paid in the remaining number of annual installments with no prepayments. For purposes of determining whether the Parity Requirement has been met, transfers from the Coverage Stabilization Account shall not be taken into account. Private Person means any natural person engaged in a trade or business or any trust, estate, partnership, association, company or corporation. Private Person Use means the use of property in a trade or business by a Private Person if such use is other than as a member of the general public. Private Person Use includes ownership of the property by the Private Person as well as other arrangements that transfer to the Private Person the actual or beneficial use of the property (such as a lease, management or incentive payment contract or other special arrangement) in such a manner as to set the Private Person apart from the general public. Use of property as a member of the general public includes attendance by the Private Person at municipal meetings or business rental of property to the Private Person on a day-to-day basis if the rental paid by such Private Person is the same as the rental paid by any Private Person who desires to rent the property. Use of property by nonprofit community groups or community recreational groups is not treated as Private Person Use if such use is incidental to the governmental uses of property, the property is made available for such use by all such community groups on an equal basis and such community groups are charged only a de minimis fee to cover custodial expenses. Projects means the plan of improvements to the System as provided in Section 3 of the Bond Ordinance. PWTF Loans mean the loans from the State of Washington Department of Community Development acting for the Public Works Trust Fund identified in the following chart. Date of Issue Original Amount Bond Holder/Program Lender Principal Balance (December 1, 2007) 07/01/1988 $1,000,000 PWTFL Water Transmission Line #1 $ 54,180 07/01/1989 1,500,000 PWTFL Water Transmission Line #2 160,088 07/01/1991 2,500,000 PWTFL Water Transmission Line 529,240 07/01/1993 3,232,931 PWTFL Water Transmission Line 1,022,380 06/06/1994 3,500,000 PWTFL Water Transmission Line 1,296,637 08/02/ ,300 PWTFL Water Transmission Line 222,537 07/01/2001 1,881,000 PWTFL Sewer Basement Flooding Reduction 1,386,000

48 07/01/2001 4,252,792 PWTFL Water Transmission Line 3,128,825 02/02/ ,000 Public Works Annex 153,088 05/13/2003 5,490,000 PWTFL Cross-Town Effluent Pipeline 4,636,000 11/17/ ,671 PWTFL Water Transmission Lines # ,618 03/16/ ,000 PWTFL Water Transmission Lines #2-3 61,500 04/25/2005 9,500,000 PWTFL Treatment Plant Upgrade 9,500,000 10/04/ ,000 PWTFL Comprehensive Water Plan 82,000 03/03/2006 4,040,000 PWTFL Clearwell No. 2 4,006,327 12/01/2007 3,326,814 PWTFL Clearwell No. 2 3,326,814 06/25/2006 7,000,000 PWTFL Water Pollution Facility Expansion 7,000,000 Qualified Insurer, prior to the New Covenant Date, means an insurance company licensed to conduct business in any state of the United States or a service corporation acting on behalf of one or more such insurance companies, which insurance company or service corporation is rated either Aaa by Moody s, or AAA by S&P and from and after the New Covenant Date, means any non-cancelable municipal bond insurance policy or surety bond issued by any insurance company licensed to conduct an insurance business in any state of the United States (or by a service corporation acting on behalf of one or more such insurance companies) which insurance company or companies, as of the time of issuance of such policy or surety bond, are currently rated in one of the two highest Rating Categories by any Rating Agency. Qualified Letter of Credit means any irrevocable letter of credit issued by a financial institution for the account of the City on behalf of registered owners of Parity Bonds, which institution maintains an office, agency or branch in the United States and as of the time of issuance of such letter of credit, is currently rated in one of the two highest Rating Categories by any Rating Agency. Rate Covenant, from and after the New Covenant Date, means Net Revenue in each fiscal year at least equal to 125% of the amounts required in such fiscal year to be paid as scheduled debt service (principal and interest) on all Parity Bonds, subtracting from scheduled debt service the amount of ULID Assessments collected in such year. Furthermore, in determining compliance with the Rate Covenant, Net Revenues are subject to adjustment to reflect the following: Revenue and Costs of Maintenance and Operation may be adjusted, regardless of then applicable generally accepted accounting principles, for certain items (e.g., to omit unrealized gains or losses in investments) to more fairly reflect the System s annual operating performance. Scheduled debt service shall exclude the payments required to be made with respect to revenue bond anticipation notes to the extent that the ordinance authorizing their issuance provides that the bond anticipation notes will be funded with the proceeds of Future Parity Bonds. Rating Agency means Moody s, S&P or Fitch. Rating Category means the generic rating categories of the Rating Agency, without regard to any refinement or gradation of such rating category by a numerical modifier or otherwise. Refunded Bonds mean the 1997 Bonds maturing on July 1, Refunding Bonds means the City s water and sewer revenue refunding bonds authorized to be issued pursuant to Section 4(b) of the Bond Ordinance. Registered Owner means the person in whose name the Bond is registered on the Bond Register. For so long as the Bonds are held in book-entry only form, DTC shall be deemed to be the sole Registered Owner. Registrar means the fiscal agency of the State of Washington for the purposes of registering and authenticating the Bonds, maintaining the Bond Register, effecting transfer of ownership of the Bonds, and paying the principal of, premium, if any, and interest on the Bonds. Reserve Account means common Reserve Account maintained pursuant to Section 8(b) of the Bond Ordinance. Reserve Requirement, prior to the New Covenant Date, means the least of (a) Maximum Annual Debt Service on all outstanding Parity Bonds, (b) 1.25 times Average Annual Debt Service on all outstanding Parity Bonds, or

49 (c) 10% of the net proceeds of all outstanding Parity Bonds. From and after the New Covenant Date, the Reserve Requirement is the dollar amount to be calculated with respect to all Covered Bonds and separately with respect to other Parity Bonds. (a) With respect to Covered Bonds, the Reserve Requirement shall be equal to the least of: (1) Maximum Annual Debt Service for Covered Bonds, (2) 10% of the initial principal amount of Covered Bonds of each series, and (3) 125% of average annual debt service for Covered Bonds; provided, however, that the dollar amount required to be contributed, if any, as a result of the issuance of a series of Future Parity Bonds shall not be greater than the Tax Maximum. If the dollar amount required to be contributed at the time of issuance of a series exceeds the Tax Maximum, then the amount required to be contributed shall be equal to the Tax Maximum. (b) With respect to other series of Parity Bonds, the Reserve Requirement shall be equal to the amount specified in the ordinance authorizing the issuance of that series of Parity Bonds. The Reserve Requirement shall be adjusted accordingly and remain in effect until the earlier of (i) at the City s option, a payment of principal of Parity Bonds or (ii) the issuance of a subsequent series of Future Parity Bonds (when the Reserve Requirement shall be re-calculated). Revenue Bond Fund means the Fund 401 Public Works-Utilities Bond Redemption Subaccount created in the office of the Treasurer for the sole purpose of paying and securing the payment of the principal of, premium, if any, and interest on Parity Bonds. Revenue Fund means the Water and Sewer Revenue Fund of the City created by Section 6 of Ordinance No , now known as Fund 401 Public Works Utilities and shall include cash accounts therein. Revenue of the System, prior to the New Covenant Date, means all earnings, revenue and money received by the City from or on account of the operation of the System, except Assessment Income, and including the income from investments of money in the Revenue Fund and the Revenue Bond Fund or from any other investment thereof except the income from investments irrevocably pledged pursuant to a plan of retirement or refunding. The words Revenue of the System shall also include any federal or state reimbursements of operating expenses to the extent such expenses are included as Costs of Maintenance and Operation of the System. From and after the New Covenant Date, Revenue of the System or Revenue means all of the earnings and revenues received by the City from the maintenance and operation of the System and connection and capital improvement charges collected for the purpose of defraying the cost of capital facilities of the System, including investment earnings and income from investments of money in the Revenue Fund and the Revenue Bond Fund or from any other investment of Revenues, but excluding government grants, proceeds from the sale of System property, City taxes collected by or through the System, principal proceeds of bonds and earnings or proceeds from any investments in a trust, defeasance or escrow fund created to defease or refund System obligations (until commingled with other earnings and revenues of the System) or held in a special account for the purpose of paying a rebate to the United States Government under the Code. Revenue of the System shall also include any federal or state reimbursements of operating expenses to the extent such expenses are included as Costs of Maintenance and Operation; provided, however, that Revenue of the System shall not include ULID Assessments. For purposes of determining compliance with the Rate Covenant, amounts withdrawn from the Coverage Stabilization Account shall increase Revenue for the period in which they are withdrawn, and amounts deposited in the Coverage Stabilization Account shall reduce Revenue for the period during which they are deposited. Credits to or from the Coverage Stabilization Account that occur within 90 days after the end of a fiscal year may be treated as occurring within such fiscal year Rule means the Securities and Exchange Commission s Rule 15c2-12 under the Securities Exchange Act of S&P means Standard & Poor s, a Division of The McGraw Hill Companies, its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, S&P shall be deemed to refer to any other nationally recognized securities rating agency (other than Moody s and Fitch) designated by the Chief Financial Officer.

50 SID means a state information depository for the State of Washington (if one is created). System means the sanitary sewage collection and treatment system of the City, including facilities for the collection and disposal of storm water runoff, as it now exists and as it may later be added to, extended and improved, and the existing water supply and distribution system of the City, including the interest of the City in the water supply facilities constructed by Public Utility District No. 1 of Snohomish County pursuant to the Sultan River Project Agreement, as it now exists and as it may later be added to, extended and improved, for as long as Parity Bonds remain outstanding Bonds means the City s outstanding Water and Sewer Revenue Refunding Bonds, 2002, issued under date of June 1, 2002, pursuant to Ordinance No Bonds means the City s outstanding Water and Sewer Revenue and Refunding Bonds, 2003, issued under date of May 15, 2003, pursuant to Ordinance No Bonds means the City s outstanding Water and Sewer Revenue Bonds, 2005, issued under date of October 14, 2005, pursuant to Ordinance No Construction Account means the account named 2009 Bond Funds for the Projects created within the City s Fund 339 Water & Sewer System Improvement Projects fund. Tax Maximum means the maximum dollar amount permitted by the Internal Revenue Code of 1986, as amended, including applicable regulations thereunder, to be allocated to a bond reserve account from bond proceeds without requiring a balance to be invested at a restricted yield. ULID means a utility local improvement district of the City. ULID Assessments means the assessments levied in all ULIDs, the assessments in which are payable into the Revenue Bond Fund, and shall include installments thereof and interest and any penalties thereon.

51 APPENDIX B AUDITED FINANCIAL STATEMENTS OF THE CITY S WATER AND SEWER UTILITIES FOR THE YEAR ENDING DECEMBER 31, 2007

52 (THIS PAGE INTENTIONALLY LEFT BLANK)

53

54

55

56

57

58

59

60

61