Moody’s Rating: Aa2NEW ISSUE Standard & Poor’s Rating: AABOOK‑ENTRY ONLY See “RATINGS.”

In the opinion of K&L Gates LLP, Bond Counsel, assuming compliance with certain covenants of the District, interest on the 2011 Bonds is excludable from gross income for federal income tax purposes under existing law. Interest on the 2011 Bonds is not an item of tax preference for purposes of either individual or corporate alternative minimum tax. Interest on the 2011 Bonds may be indirectly subject to corporate alternative minimum tax and certain other taxes imposed on certain corporations. See “TAX MATTERS” herein for a discussion of the opinion of Bond Counsel.

$9,650,000PUBLIC UTILITY DISTRICT NO. 1 OFSNOHOMISH COUNTY, WASHINGTON

WATER SYSTEM REVENUE REFUNDING BONDS, SERIES 2011

Dated: Date of Delivery Due: December 1, as shown on the inside cover

Public Utility District No. 1 of Snohomish County, Washington (the “District”), will issue its Water System Revenue Refunding Bonds, Series 2011 (the “2011 Bonds”), as fully registered bonds under a book‑entry system, initially registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York (“DTC”), which will act as securities depository for the 2011 Bonds. Individual purchases of the 2011 Bonds will be made in the principal amount of $5,000 or any integral multiple thereof within a maturity. Purchasers of the 2011 Bonds (the “Beneficial Owners”) will not receive certificates representing their beneficial ownership interests in the 2011 Bonds.

Interest on the 2011 Bonds is payable on June 1 and December 1, commencing June 1, 2012, until maturity or prior redemption, by the Washington State fiscal agency in New York, New York, currently The Bank of New York Mellon (the “Registrar”). As long as DTC or its nominee is the registered owner of the 2011 Bonds, such payments will be made by the Registrar to DTC, which is obligated to remit such principal and interest to its broker‑dealer Participants, which in turn are obligated to remit such payments to the Beneficial Owners of the 2011 Bonds as described in Appendix D—“BOOK‑ENTRY SYSTEM.”

The 2011 Bonds are subject to redemption prior to maturity. See “DESCRIPTION OF THE 2011 BONDS.”

Maturity Schedule Located on Inside Cover

The 2011 Bonds are being issued to provide funds to refund for savings certain of the District’s Water System Revenue and Refunding Bonds, Series 2002 and to pay costs of issuance of the 2011 Bonds. See “PURPOSE AND APPLICATION OF 2011 BOND PROCEEDS.”

The principal of and interest on the 2011 Bonds are payable solely from and secured by Revenues and other funds pledged thereto by the Resolution (as hereinafter defined), including Assessment Income, after payment of Operating Expenses (including Resource Obligations). The 2011 Bonds are issued on a parity with $29,530,000 of Outstanding Water System Revenue Bonds, of which $10,395,000 will be refunded by the 2011 Bonds as described herein. The District has exclusive authority to set rates and charges for water service provided by the Water System. See “SECURITY FOR THE BONDS.”

THE 2011 BONDS ARE SPECIAL LIMITED OBLIGATIONS OF THE DISTRICT AND ARE NOT OBLIGATIONS OF THE STATE OF WASHINGTON (THE “STATE”) OR ANY POLITICAL SUBDIVISION OTHER THAN THE DISTRICT, AND NEITHER THE FULL FAITH AND CREDIT OF THE DISTRICT NOR THE TAXING POWER OF THE DISTRICT OR THE STATE IS PLEDGED TO THE PAYMENT THEREOF.

This cover page is not intended to be a summary of all of the terms of, or security for, the 2011 Bonds. Investors are advised to read the entire Official Statement to obtain information essential to making an informed investment decision.

The 2011 Bonds are offered when, as and if issued and received by the Underwriter, subject to the approval of legality by K&L Gates LLP, Seattle, Washington, Bond Counsel, and certain other conditions. Certain legal matters will be passed upon for the District by its General Counsel, Anne Spangler, Esq. Certain legal matters will be passed upon for the Underwriter by its counsel, Foster Pepper PLLC. It is expected that delivery of the 2011 Bonds will be made through the facilities of DTC in New York, New York, by Fast Automated Securities Transfer (FAST), on or about August 31, 2011.

J.P. MorganDated: August 16, 2011

MATURITY SCHEDULE

$9,650,000 PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY, WASHINGTON

WATER SYSTEM REVENUE REFUNDING BONDS, SERIES 2011

Maturity Year (December 1)

Principal Amount

Interest Rate

Yield

CUSIP Number*

2012 $ 745,000 2.00% 0.30% 833105ET2 2013 870,000 3.00 0.50 833105EU9 2014 1,005,000 4.00 0.68 833105EV7 2015 990,000 3.00 0.88 833105EW5 2016 960,000 3.00 1.24 833105EX3 2017 935,000 3.00 1.62 833105EY1 2018 910,000 4.00 1.99 833105EZ8 2019 830,000 4.00 2.30 833105FA2 2020 770,000 4.00 2.53 833105FB0 2021 790,000 4.00 2.70 833105FC8 2022 845,000 5.00 2.90** 833105FD6

_____________________ * Copyright 2011, American Bankers Association. The CUSIP numbers herein are provided by CUSIP Global Services. These numbers are not intended to create a database and do not serve in any way as a substitute for the CUSIP Global Services. CUSIP numbers are provided for the convenience of reference only. CUSIP numbers are subject to change. The District takes no responsibility for the accuracy of such CUSIP numbers.

** Priced to the par call date of December 1, 2021.

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PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY, WASHINGTON

2320 California Street Everett, Washington 98201

(425) 783-1000

www.snopud.com∗

BOARD OF COMMISSIONERS

PRESIDENT VICE PRESIDENT SECRETARY David Aldrich Kathleen Vaughn Tanya “Toni” Olson

ADMINISTRATIVE MANAGEMENT

Steve Klein, General Manager

Anne Spangler, General Counsel

Kim Moore, Assistant General Manager—Water, Generation and Corporate Services

Glenn McPherson, Treasurer and Assistant General Manager—Finance

Dana Toulson, Assistant General Manager—Power, Rates and Transmission Management

Christopher Heimgartner, Assistant General Manager—Distribution and Engineering Services

Benjamin Beberness, Assistant General Manager—Information Services

Jim West, Assistant General Manager—Customer Services

CONSULTANTS

Bond Counsel ....................................................................................................................................... K&L Gates LLP

Financial Advisor ............................................................................................ Montague DeRose and Associates, LLC

REGISTRAR

Washington State Fiscal Agency ................................................................................... The Bank of New York Mellon

_____________________ ∗ Neither the information on the District’s website, nor any links from that website, is part of this Official

Statement, and such information cannot be relied upon to be accurate as of the date of this Official Statement, nor should any such information be relied upon to make investment decisions regarding the 2011 Bonds.

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No dealer, broker, salesperson or other person has been authorized by the District or the Underwriter to give any information or to make any representations other than those contained in this Official Statement in connection with the offering of the 2011 Bonds 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 2011 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 herein has been provided by the District or obtained by the District from other sources that the District believes to be reliable, but it is not guaranteed as to accuracy or completeness. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. The information herein is subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof.

In connection with the offering of the 2011 Bonds, the Underwriter may overallot or effect transactions that stabilize or maintain the market price of the 2011 Bonds at levels above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time.

The achievement of certain results or other expectations contained in forward-looking statements in this Official Statement involves known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The District does not plan to issue any updates or revisions to those forward-looking statements if or when their expectations or events, conditions or circumstances on which such statements are based occur.

The CUSIP numbers provided in this Official Statement are included for convenience of the holders and potential holders of the 2011 Bonds. No assurance can be given that the CUSIP numbers for the 2011 Bonds will remain the same after the date of issuance and delivery of the 2011 Bonds.

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Table of Contents

Page Page

INTRODUCTION ........................................................... 1 PURPOSE AND APPLICATION OF 2011

BOND PROCEEDS .................................................... 1 Purpose ...................................................................... 1 Sources and Uses of Funds ........................................ 2 Refunding Plan .......................................................... 2

DESCRIPTION OF THE 2011 BONDS ......................... 3 General ...................................................................... 3 Procedure in the Event of Discontinuation of

Book-Entry Transfer System.................................. 3 Transfer and Exchange .............................................. 3 Optional Redemption ................................................. 4 Partial Redemption .................................................... 4 Notice and Effect of Redemption .............................. 4 Open Market Purchases ............................................. 4

SECURITY FOR THE BONDS ..................................... 4 Pledge of Revenues ................................................... 4 Pledge of Assessments ............................................... 5 Limitation of Liability ............................................... 5 Payment of Resource Obligations ............................. 5 Rate Covenants .......................................................... 5 Other Covenants ........................................................ 6 Reserve Account ........................................................ 6 Flow of Funds ............................................................ 7 Additional Indebtedness ............................................ 7 No Acceleration Upon Default .................................. 8

DEBT SERVICE ............................................................. 9 THE DISTRICT .............................................................. 9

General ...................................................................... 9 The Water System ................................................... 10 The Electric System ................................................. 10 The Generation System ........................................... 10 Administration ......................................................... 11 Labor Relations........................................................ 12 Insurance .................................................................. 12 Pension and Other Post-Employment Benefits ........ 12 Investment Policy .................................................... 13 Local Government Investment Pool ........................ 13 General Obligation Bonds and Taxing Power ......... 14

THE WATER SYSTEM ............................................... 14 The District’s Water System .................................... 14 Water System Properties.......................................... 15

Water Supply .......................................................... 15 Other Water Transactions ....................................... 16 Water Quality .......................................................... 16 Local Utility Districts ............................................. 16 Water Rates and Fees .............................................. 17 Major Customers ..................................................... 18 Wholesale Water Sale Agreements ......................... 18 Water System Operating Statistics .......................... 19 Financial Results ..................................................... 20 Management’s Discussion of the Water

System’s Financial Results .................................. 21 PROJECTED OPERATING RESULTS ...................... 23

Forecast Operating Results ..................................... 23 Forecast Construction Expenditures ....................... 26

ECONOMIC AND DEMOGRAPHIC INFORMATION ...................................................... 26

LIMITATIONS ON REMEDIES ................................. 30 INITIATIVE AND REFERENDUM ........................... 31 LITIGATION ............................................................... 31 TAX MATTERS .......................................................... 32

Qualified Tax-Exempt Obligations ......................... 33 CONTINUING DISCLOSURE

UNDERTAKING ..................................................... 33 Prior Compliance with Continuing Disclosure

Undertakings ....................................................... 35 RATINGS ..................................................................... 35 UNDERWRITING ....................................................... 35 MISCELLANEOUS ..................................................... 35 CERTAIN LEGAL MATTERS ................................... 36

Appendix A — FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 AND INDEPENDENT AUDITOR’S REPORT

Appendix B ⎯ SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION

Appendix C — PROPOSED FORM OF OPINION OF BOND COUNSEL

Appendix D — BOOK-ENTRY SYSTEM

PUBLIC UTILITY DISTRICT NO. 1 OFSNOHOMISH COUNTY, WASHINGTON

THE DISTRICT’S SERVICE AREA

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PUBLIC UTILITY DISTRICT NO. 1 OFSNOHOMISH COUNTY, WASHINGTON

LOCATION OF DISTRICT WATER SYSTEMS

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[THIS PAGE INTENTIONALLY LEFT BLANK]

PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY, WASHINGTON

$9,650,000 WATER SYSTEM REVENUE REFUNDING BONDS, SERIES 2011

INTRODUCTION

This Official Statement, which includes the cover page, the inside cover page and the appendices hereto, provides information concerning Public Utility District No. 1 of Snohomish County, Washington (the “District”), its water supply and distribution system (the “Water System”), and its $9,650,000 Water System Revenue Refunding Bonds, Series 2011 (the “2011 Bonds”). The capitalized terms used in this Official Statement have the same meanings given them in the Resolution (as hereinafter defined). Definitions of certain of those terms are summarized throughout the text of this Official Statement, and the definitions of a number of terms are set forth in Appendix B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION—Certain Definitions.”

The 2011 Bonds are being issued pursuant to Title 54 and Chapters 39.46 and 39.53 of the Revised Code of Washington, Resolution No. 3825 adopted by the Commission on August 25, 1992, as supplemented, including as supplemented by Resolution No. 5550 adopted by the Commission on August 16, 2011 (collectively, the “Resolution”). The District previously issued its Water System Revenue and Refunding Bonds, Series 2002 (the “2002 Bonds”), of which $11,160,000 remains outstanding and $10,395,000 will be refunded by the 2011 Bonds, its Water System Revenue and Refunding Bonds, Series 2006 (the “2006 Bonds”), of which $5,285,000 remains outstanding, and its Water System Revenue Bonds, Series 2009 (the “2009 Bonds,” and together with the 2002 Bonds and 2006 Bonds, the “Outstanding Bonds”), of which $13,085,000 remains outstanding. The Outstanding Bonds, the 2011 Bonds and any additional bonds with an equal lien on the Revenues are referred to as “Bonds.” The 2011 Bonds are special limited obligations of the District payable solely from and secured by the income, revenues and receipts derived by the District from the ownership and operation of the Water System. See “SECURITY FOR THE BONDS.”

This Official Statement includes summaries of the terms of the 2011 Bonds, the Resolution and certain contracts and arrangements for the joint development and/or operation of water supply facilities. The summaries of and references to all documents, statutes, reports and other instruments referred to herein do not purport to be complete, comprehensive or definitive, and each such summary and reference is qualified in its entirety by reference to each such document, statute, report or instrument.

In preparation of the projections in this Official Statement, the District has made certain assumptions with respect to conditions that may occur in the future. While the District 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 District by others, the actual results will vary from those forecast.

PURPOSE AND APPLICATION OF 2011 BOND PROCEEDS

Purpose

The proceeds of the 2011 Bonds will be used to refund certain of the outstanding maturities of the 2002 Bonds and to pay costs of issuing the 2011 Bonds. See “Refunding Plan” below. After the closing of the 2011 Bonds, the December 1, 2011 maturity of the 2002 Bonds will remain outstanding.

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Sources and Uses of Funds

The table below sets forth the expected sources and uses of proceeds of the 2011 Bonds and other funds in connection with the issuance of the 2011 Bonds and the plan of refunding.

Sources of Funds Principal Amount of the 2011 Bonds $ 9,650,000 Original Issue Premium 989,644 Reserve Account and Bond Fund

Contribution 488,598 Total Sources: $11,128,242 Uses of Funds Deposit to Refunding Account $10,936,990 Costs of Issuance (1) 191,252 Total Uses: $11,128,242

(1) Includes fees of bond counsel, financial advisor, rating agency and escrow agent, printing costs, underwriter’s discount, and other costs associated with issuing the 2011 Bonds and refunding the Refunded Bonds.

Refunding Plan

The net proceeds of the 2011 Bonds will be used to refund certain maturities of the 2002 Bonds, as set forth below (the “Refunded Bonds”):

Refunded Bonds

Year (December 1)

Principal Amount

Interest Rate

Redemption Date (at 100%)

CUSIP Number

2012 $ 790,000 4.75% June 1, 2012 833105CN7 2013 855,000 4.80 June 1, 2012 833105CP2 2014 1,000,000 5.50 June 1, 2012 833105CQ0 2015 1,000,000 5.50 June 1, 2012 833105CR8 2016 1,000,000 5.50 June 1, 2012 833105CS6 2017 1,000,000 5.50 June 1, 2012 833105CT4 2018 1,000,000 5.125 June 1, 2012 833105CU1

2021 2,750,000 5.25 June 1, 2012 833105CX5 2022 1,000,000 5.50 June 1, 2012 833105CY3

A portion of the net proceeds from the sale of the 2011 Bonds will be irrevocably deposited in the Refunding Account (the “Refunding Account”) to be held by U.S. Bank National Association, as escrow agent (the “Escrow Agent”) under an escrow deposit agreement (the “Escrow Agreement”), dated the date of delivery of the 2011 Bonds, between the District and the Escrow Agent.

Certain funds deposited in the Refunding Account will be used to purchase direct, noncallable, obligations of the United States of America (the “Escrow Securities”). The Escrow Securities will mature at such times and pay interest in such amounts so that, with other available funds held by the Escrow Agent under the Escrow Agreement, sufficient money will be available to pay the interest on the Refunded Bonds coming due on and prior to their redemption date, June 1, 2012, and to redeem and retire the Refunded Bonds on that redemption date at a price of 100% of the principal amount thereof.

Since all payments of principal of and interest on the Refunded Bonds will be provided for from money and Escrow Securities on deposit with the Escrow Agent under the Escrow Agreement, when the 2011 Bonds are issued and the

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Refunding Account is funded, the Refunded Bonds will cease to be entitled to any lien, benefit or security of the resolutions pursuant to which they were issued except the right to receive payment from the Refunding Account.

Grant Thornton LLP, Minneapolis, Minnesota, will certify the accuracy of the mathematical computations concerning the adequacy of the maturing principal amounts of and interest earned on the Escrow Securities in the Refunding Account, together with other available funds held by the Escrow Agent under the Escrow Agreement, to pay when due, pursuant to stated maturity or call for redemption, as the case may be, the principal of and interest on the Refunded Bonds.

DESCRIPTION OF THE 2011 BONDS

The following is a summary of certain provisions of the 2011 Bonds. See also Appendix B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION.” Reference is made to the Resolution for a more detailed description of such provisions. The discussion herein is qualified by such reference. Copies of the Resolution are available upon request from the District at its address shown on page i of this Official Statement.

General

The 2011 Bonds will be issued in the principal amount of $9,650,000. The 2011 Bonds will be dated the date of their delivery to the Underwriter. The 2011 Bonds will bear interest payable on June 1, 2012, and on each December 1 and June 1 thereafter until maturity or prior redemption at the rates per annum corresponding to those principal amounts maturing December 1 in each year as set forth on the inside cover page of this Official Statement. The 2011 Bonds will be issuable in registered form in the denomination of $5,000 or any integral multiple thereof. Interest is calculated based on a 360-day year consisting of 12 months of 30 days each. The principal of and interest on the 2011 Bonds are payable by the fiscal agency of the State of Washington in New York City, currently, The Bank of New York Mellon (the “Registrar”). For so long as the 2011 Bonds remain in a “book-entry only” transfer system, the Registrar will make such payments to The Depository Trust Company (“DTC”), which, in turn, is obligated to remit such principal and interest to the DTC participants for subsequent disbursement to the Beneficial Owners of the 2011 Bonds as further described in Appendix D⎯“BOOK-ENTRY SYSTEM.”

Procedure in the Event of Discontinuation of Book-Entry Transfer System

If the District is unable to retain a qualified successor to DTC or the District determines to discontinue the book-entry system of transfer, the District will execute, authenticate and deliver at no cost to the Beneficial Owners of the 2011 Bonds or their nominees, 2011 Bonds in fully registered form, in the denomination of $5,000 or any integral multiple thereof. Thereafter, the principal of the 2011 Bonds will be payable at the principal office of the Registrar, and interest on the 2011 Bonds will be payable by check or draft mailed (on the date due) to the registered owners at their addresses as they appear on the registration books on the 15th day of the month preceding an interest payment date. Upon the request of a registered owner of at least $1,000,000 in principal amount of 2011 Bonds, payment thereof will be made by wire transfer in immediately available funds to an account designated (on or prior to 15th day of the month preceding an interest payment date) by such registered owner.

Transfer and Exchange

So long as Cede & Co. is the registered owner of the 2011 Bonds, the beneficial ownership of the 2011 Bonds may only be transferred on the records established and maintained by DTC and its Participants, as described in Appendix D—“BOOK-ENTRY SYSTEM.”

If the book-entry transfer system for the 2011 Bonds is discontinued, any 2011 Bond may be transferred pursuant to its provisions at the principal office for such purpose of the Registrar by surrender of such 2011 Bond for cancellation, accompanied by a written instrument of transfer, in form satisfactory to the Registrar, duly executed by the registered owner in person or by his or her duly authorized attorney.

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Optional Redemption

The District has reserved the right to redeem the outstanding 2011 Bonds maturing on December 1, 2022 in whole or in part (by lot within that maturity in such manner as DTC or the Registrar, as appropriate, shall determine) on December 1, 2021, and any date thereafter, at the price of par, plus accrued interest, to the date of redemption.

Partial Redemption

In the event that only part of the principal sum of a 2011 Bond is called for redemption, payment of the amount to be redeemed will be made upon surrender of such 2011 Bond to the Registrar. Upon surrender of such 2011 Bond, the District will execute and direct the Registrar to deliver to the registered owner thereof, at the principal corporate trust office of the Registrar, or to send to such registered owner by registered mail at his or her request and at his or her risk and expense, a new fully executed 2011 Bond or 2011 Bonds of authorized principal amounts equal in aggregate principal amount, maturity and interest rate to the unredeemed portion of the 2011 Bond surrendered.

Notice and Effect of Redemption

Notice of redemption of any 2011 Bonds is required to be mailed first class not less than 20 nor more than 60 days prior to the redemption date to the registered owner of each 2011 Bond called for redemption at his or her address as it appears on the registration books or at such address as he or she may have filed with the Registrar for that purpose. Neither failure of the registered owner of a 2011 Bond to receive such notice nor any defect in any notice so mailed will affect the sufficiency of the proceedings for the redemption of any 2011 Bond.

Notice of any optional redemption may be cancelled by the District prior to the designated redemption date by giving written notice of such cancellation to all parties who were given notice of redemption in the same manner as such notice was given.

So long as the 2011 Bonds are held in a book-entry only system, the Registrar will provide notices of redemption only to DTC as registered owner of all 2011 Bonds. DTC will provide notices of redemption in accordance with the letter of representations given by the District to DTC. See Appendix D—“BOOK-ENTRY SYSTEM.” The District makes no assurances that DTC participants or other nominees of the Beneficial Owners of 2011 will distribute such redemption notices to the Beneficial Owners of the 2011 Bonds or that they will do so on a timely basis.

If any 2011 Bond is subject by its terms to prior redemption and has been duly called for redemption and official notice of the redemption thereof has been duly given, such 2011 Bond (or the principal amount thereof to be redeemed) so called for redemption will become due and payable, and if money for the payment of such 2011 Bond (or of the principal amount thereof to be redeemed) at the then applicable redemption price and interest to accrue to the redemption date on such 2011 Bond (or the principal amount thereof to be redeemed) are held for the purpose of such payment by the Registrar, interest on such 2011 Bond (or the principal amount thereof to be redeemed) so called for redemption will cease to accrue.

Open Market Purchases

The District has reserved the right to purchase any of the 2011 Bonds in the open market at any time at prices deemed reasonable by the District.

SECURITY FOR THE BONDS

Pledge of Revenues

The 2011 Bonds are special limited obligations of the District payable from and secured solely by Revenues, subject to the prior payment of Operating Expenses. The principal, premium, if any, and interest on all Bonds, including the 2011 Bonds, are payable from and secured solely by a pledge of (1) the proceeds of the sale of Bonds to the extent held in the funds established by the Resolution (other than a refunding account), (2) the Revenues, which include all income, revenues, receipts and profits derived by the District through the ownership and operation of the

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Water System, together with proceeds received by the District directly or indirectly from the sale, lease or other disposition of any of the properties, rights or facilities of the Water System and certain other money, (3) Assessment Income, if any, and (4) any other money and assets, if any, credited to the Revenue Fund, the Bond Fund, the Construction Fund and any Junior Lien Fund or Account created pursuant to the Resolution and income therefrom. The pledge of Revenues and other money and assets is subject to the provisions of the Resolution restricting or permitting the application thereof for the purposes and on the terms and conditions set forth in the Resolution.

The Revenues and other money and assets pledged to the payment of the Bonds are immediately subject to the lien of the pledge under the Resolution without any physical delivery thereof or further act, and the lien of such pledge will be valid and binding as against all parties having claims of any kind in tort, contract or otherwise against the District regardless of whether such parties have notice thereof.

The Outstanding Bonds, the 2011 Bonds, and any additional Bonds issued under the Resolution shall be equally and ratably payable and secured under the Resolution, except as to insurance that may be obtained by the District to insure the repayment of one or more series or maturities within a series.

Pledge of Assessments

The District has pledged the Assessment Income from 16 local utility districts to the Bond Fund. See “THE WATER SYSTEM—Local Utility Districts.”

Limitation of Liability

The Bonds do not in any manner or to any extent constitute general obligations of the District or of the State of Washington, or of any political subdivision of the State of Washington, or a charge upon any general fund or upon any money or other property of the District or of the State of Washington, or of any political subdivision of the State of Washington, not specifically pledged thereto by the Resolution, nor has the full faith and credit of the District or of the State of Washington, or of any political subdivision of the State of Washington, been pledged to the payment of principal, premium, if any, or interest on the Bonds.

Payment of Resource Obligations

The pledge of Revenues securing the Bonds is subject to the prior payment of Operating Expenses, which are all the District’s expenses for operation and maintenance of the Water System and include, among other expenses, Resource Obligations (as hereinafter defined) for any month in which any water or other goods and services are made available to the Water System.

Upon compliance with certain requirements in the Resolution (See Appendix B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION—Additional Indebtedness—Separate System Bonds; Resource Obligations”), the District may (1) enter into contracts for the purchase of water, conservation or services or (2) construct or acquire as a separate system facilities or resources for the supply, conservation or transmission of water (including any common undivided interest therein) and may declare costs associated with such contracts or separate system (including debt service on bonds) to be a Resource Obligation of the Water System to be paid as an Operating Expense for any month in which water, goods or services from such resource were made available to the Water System during such month (regardless of whether or not the Water System actually scheduled or received water, goods or services from such resource during that month). At all other times a Resource Obligation is an indebtedness of the Water System payable from Revenues on a parity of lien with the Bonds. There are currently no Resource Obligations outstanding.

Rate Covenants

General. The District has covenanted to establish, maintain and collect rates and charges for services, facilities and commodities sold, furnished or supplied through the facilities of the Water System that will be adequate to provide Revenues sufficient (i) for the proper operation and maintenance of the Water System, including all Resource Obligations required to be paid as an Operating Expense of the Water System and all necessary repairs,

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replacements and renewals of the Water System, including the payment of all taxes, assessments or other governmental charges lawfully imposed on the Water System or the revenues therefrom, or payment in lieu thereof, (ii) for the punctual payment of the principal of, premium, if any, and interest on the Bonds for which payment has not otherwise been provided, (iii) for all other payments that the District is obligated to make into the Bond Fund, (iv) for the payment of Parity Lien Obligations (defined as all charges and obligations against Revenues ranking on a parity of lien with the Bonds), and (v) for the payment of all other amounts that the District may now or hereafter become obligated to pay from the Revenues by law or contract.

Debt Service Coverage. The District also has covenanted to establish, maintain and collect rates and charges that will be adequate to provide in each Fiscal Year Net Revenues (after deducting therefrom amounts paid in such Fiscal Year to satisfy all Parity Lien Obligations and amounts transferred to the Rate Stabilization Account from the General Account and adding thereto amounts transferred to the General Account from the Rate Stabilization Account during such Fiscal Year) in an amount equal to at least the Coverage Requirement in such Fiscal Year.

“Net Revenues” means, for any period, the excess of Revenues over Operating Expenses. “Annual Debt Service” means for any Fiscal Year the sum of the amounts required in such Fiscal Year to pay (a) the interest due in such Fiscal Year on all Outstanding Bonds, (b) the principal of all Outstanding Serial Bonds due in such Fiscal Year, and (c) the Sinking Fund Requirement, if any, for such Fiscal Year. See Appendix B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION—Certain Definitions.”

“Coverage Requirement” means (a) for purposes of the debt service coverage covenant described above, for any Fiscal Year the product of 1.25 times Annual Debt Service on all Outstanding Bonds in such Fiscal Year after deducting Assessments actually collected for such year and (b) for purposes of the test for issuing additional Bonds, for any Fiscal Year the product of 1.25 times Annual Debt Service on all Outstanding Bonds and the additional Bonds proposed to be issued after deducting Assessments allocated to the years in which they would be received if the unpaid balance of each assessment roll were paid in equal principal and interest installments or in the remaining number of installments with interest on the declining balance at the times and at the rate provided in the resolution confirming the assessment roll, as applicable.

The failure of the District to collect Revenues in any Fiscal Year sufficient to comply with the debt service coverage covenant described above will not constitute an Event of Default if the District, before the 120th day of the following Fiscal Year, (a) employs a Professional Utility Consultant to recommend changes in the District’s rates that are estimated to produce Revenues sufficient (once the rates recommended by the Professional Utility Consultant have been imposed by the District) to meet the requirements of such covenant and (b) promptly imposes rates at least as high as those recommended by such Professional Utility Consultant. In addition, if the District defaults in the observance and performance of such covenant for any Fiscal Year but achieves the required coverage for the immediately succeeding Fiscal Year; the default will conclusively be deemed cured.

Other Covenants

The District has covenanted in the Resolution to operate the properties and business of the Water System in an efficient manner and at reasonable cost; to maintain, preserve, and keep the properties of the Water System in good repair, working order and condition; and to make all necessary and proper repairs, renewals, replacements, additions, improvements, betterments and extensions of and to the Water System. See Appendix B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION—Certain Covenants.”

Reserve Account

The Resolution establishes a Reserve Account in the Bond Fund and requires that, to the extent permitted under the Internal Revenue Code of 1986, there be deposited into such account from the proceeds of each series of Bonds an amount sufficient, together with other money and investments and amounts insured by Qualified Insurance or guaranteed by a Qualified Letter of Credit, to meet the Reserve Account Requirement. “Reserve Account Requirement” is defined in the Resolution to mean (a) with respect to a series of Bonds, the lesser of (i) 10% of the proceeds of such series of Bonds or (ii) the maximum amount of interest due in any Fiscal Year on such series of Bonds, calculated as of their date of issuance and recalculated as of the date of issuance of any series of additional Bonds that are Refunding Bonds issued for the purpose of refunding a portion of such series of Bonds; and (b) with

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respect to all Bonds, the sum of the Reserve Account Requirements for all series of Bonds. The current balance in the Reserve Account is $1,589,212, which meets the Reserve Account Requirement for the Outstanding Bonds. The District entered into a Debt Service Reserve Forward Delivery Agreement with Bank of America for the investment of a portion of the current Reserve Account Requirement, which agreement terminates on December 1, 2021.

Funds currently on deposit in the Reserve Account will satisfy the Reserve Account Requirement for the Outstanding Bonds and the 2011 Bonds. The Reserve Account Requirement at the time of issuance of the 2011 Bonds will be $1,236,978.

Money in the Reserve Account, including any amounts drawn under a Qualified Letter of Credit or paid pursuant to Qualified Insurance, may be used only for the purpose of paying the principal of, premium, if any, or interest on any Bonds in the event that money in other accounts in the Bond Fund are insufficient therefor. Whenever money is withdrawn from the Reserve Account, the amount in the Reserve Account must be restored as described in Appendix B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION—Funds and Accounts–Bond Fund.”

Flow of Funds

The District has covenanted that so long as any Bonds are Outstanding it will pay into the Revenue Fund all of the Revenues and all other money required to be paid into the Revenue Fund by the Resolution. The District has created two accounts in the Revenue Fund, the General Account and the Rate Stabilization Account, to be used for the purposes described below.

All Revenues paid into the Revenue Fund are first to be credited to the General Account and applied as follows:

First, to pay Operating Expenses;

Second, to pay amounts as follows equally and ratably and without priority of any one over the other: (i) to deposit in the Interest Account, Principal Account and Reserve Account in the Bond Fund the amounts required by the Resolution in the order of priority established by the Resolution; (ii) to pay all Parity Lien Obligations; and (iii) in the event the District has entered into a reimbursement agreement pursuant to the Resolution that ranks on a parity of lien with the Bonds, to make all payments required to be made pursuant to such reimbursement agreement in connection with a Qualified Letter of Credit, Qualified Insurance, or other credit facility, provided that if there is not sufficient money to make all payments under more than one reimbursement agreement, the payments shall be made on a pro rata basis;

Third, to make all payments required to be made into any Junior Lien Fund or Account in the order of priority, if any, set forth in the resolution of the Commission creating such Junior Lien Fund or Account; and

Fourth, to make additions, betterments, extensions, renewals, replacements and other capital improvements to the Water System.

To the extent that Revenues remain after the payments required to be made out of the General Account, the District may credit the full amount of such surplus to the Rate Stabilization Account to be applied as set forth in the Resolution. There is presently $1 million on deposit in the Rate Stabilization Account.

After all the above payments and credits have been made, amounts remaining in the Revenue Fund may be used for any other lawful purpose of the District, including the purchase of Bonds.

Additional Indebtedness

Under the Resolution the District is not permitted to issue bonds or other evidences of indebtedness of the Water System with a lien and charge upon Revenues prior to the lien and charge of the Bonds.

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The District may issue additional Bonds from time to time in one or more series for any lawful purpose of the District upon compliance with the terms and conditions stated in the Resolution, including in most circumstances a debt service coverage requirement of 1.25 times, as described above under the heading “Rate Covenants.” See Appendix B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION–Additional Indebtedness.”

Upon compliance with certain terms and conditions set forth in the Resolution, the District may declare certain costs to be Resource Obligations to be paid as an Operating Expense or to be secured by a lien and charge on Revenues on a parity with the Bonds. See “SECURITY FOR THE BONDS—Payment of Resource Obligations.” Appendix B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION—Additional Indebtedness–Separate System Bonds; Resource Obligations.”

The District may issue bonds or other evidences of indebtedness for any corporate use or purpose of the District payable from, and having a lien and charge against Revenues that is junior to the Bonds. The Water System has outstanding loans in the principal amount of $3,442,000 that have a lien on Revenues junior to the lien of the Bonds. See “THE WATER SYSTEM—Management’s Discussion of the Water System’s Financial Results.”

No Acceleration Upon Default

Upon the occurrence and continuance of an Event of Default under the Resolution, payment of the principal of and accrued interest on the Bonds is not subject to acceleration. The District thus would be liable for principal and interest payments only as they became due. The inability to accelerate the Bonds upon an Event of Default could give rise to varying interests between holders of earlier and later maturing Bonds. The nature and extent of any such variance would depend in part upon the nature and duration of any default. In the event of multiple defaults in payment of principal or interest on the Bonds, the bondholders would be required to bring a separate action for each such payment not made. Any such action to compel payment or for money damages would be subject to the limitations on legal claims and remedies against public bodies under Washington law. The District has never defaulted in the payment of principal or interest on any of its bonds.

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DEBT SERVICE

Debt service requirements for the Outstanding Bonds and the 2011 Bonds are shown below.

Scheduled Debt Service on the Bonds

Year

Debt Service on Outstanding Bonds (1)

2011 Bonds

Principal Interest Total (2)

Total

Debt Service (2)

2011 $ 2,710,509 — — — $ 2,710,509 2012 1,635,591 $ 745,000 $ 428,450 $ 1,173,450 2,809,041 2013 1,639,791 870,000 327,100 1,197,100 2,836,891 2014 1,327,816 1,005,000 301,000 1,306,000 2,633,816 2015 1,329,866 990,000 260,800 1,250,800 2,580,666 2016 1,328,079 960,000 231,100 1,191,100 2,519,179 2017 1,327,866 935,000 202,300 1,137,300 2,465,166 2018 1,326,429 910,000 174,250 1,084,250 2,410,679 2019 1,323,766 830,000 137,850 967,850 2,291,616 2020 1,329,879 770,000 104,650 874,650 2,204,529 2021 1,324,354 790,000 73,850 863,850 2,188,204 2022 1,327,604 845,000 42,250 887,250 2,214,854 2023 1,329,216 — — — 1,329,216 2024 1,324,191 — — — 1,324,191 2025 1,327,741 — — — 1,327,741 2026 1,324,454 — — — 1,324,454 2027 938,616 — — — 938,616 2028 941,696 — — — 941,696 2029 942,909 — — — 942,909 2030 942,219 — — — 942,219 2031 939,375 — — — 939,375

Total (2) $ 27,941,968 $ 9,650,000 $ 2,283,600 $ 11,933,600 $39,875,568

(1) Includes debt service on the December 1, 2011 maturity of the 2002 Bonds and the outstanding 2006 Bonds and the 2009 Bonds. Does not include the Refunded Bonds.

(2) Totals may not foot due to rounding.

THE DISTRICT

General

The District is a municipal corporation of the State of Washington and was established in 1936. The District maintains three systems: the Water System, the Electric System and the Generation System. Each of these systems is separately financed, and the District maintains separate books and records for each system. The District is the largest public utility district and the second largest municipally-owned utility in the Pacific Northwest in terms of customers served and energy sold by its Electric System. The service area of the District consists of virtually all of Snohomish County and Camano Island in Island County, although the Water System does not provide service throughout the entire service area of the District. The administrative offices of the District are located in the City of Everett, which is the county seat of Snohomish County.

Pursuant to Title 54 RCW, the District is authorized to (1) acquire, construct and operate plants, water works and systems, (2) sell and regulate and control the use, distribution and price of water, and (3) issue revenue obligations for the purpose of financing the acquisition and construction of water properties and for other corporate purposes.

The District also is authorized and required to establish, maintain and collect rates and charges for services that will be fair, nondiscriminatory and adequate to provide revenues sufficient for (1) the payment of principal of and

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interest on its revenue obligations for which payment has not otherwise been provided, (2) the proper operation and maintenance of its water facilities, and (3) renewals and replacements thereto.

The Water System

The District’s Water System was formed through the merger of the District’s former Lake Stevens Water System and its former Sunnyside Water System and became operational in 1946. The Water System currently serves approximately 20,200 customers. The revenues of the Electric System and the Generation System are not pledged to the payment of operating expenses or debt of the Water System. The Revenues of the Water System are not pledged to the payment of the expenses and obligations of the Electric System or Generation System. For the year ended December 31, 2010, the Water System had water sales of 231 million cubic feet and gross operating revenues of $8,429,000. As of December 31, 2010, the total assets of the Water System were $118,249,000 and its total long-term debt was $31,062,000.

The Electric System

The District began its electric utility operations in 1949 and currently serves most of Snohomish County and the Camano Island portion of Island County. The properties of the Electric System include the District’s transmission lines, substations, distribution lines, transformers, meters and general plant. For the year ended December 31, 2010, the Electric System served an average of 320,000 customers and had energy sales of 8,073,000 MWh and operating revenues of $560,769,000. In 2010, the District purchased approximately 77% of its power from the Bonneville Power Administration, approximately 7% from long-term power contracts, approximately 5% from the Henry M. Jackson Hydroelectric Project (the “Jackson Project”), approximately 3% from the Everett Cogeneration Project and 8% from the wholesale power market to balance resources with loads. The Electric System is primarily a distributor of power at retail rates. As of December 31, 2010, the total assets of the Electric System were $1,625,412,000 and its total long-term debt, net of unamortized premiums and discounts, was $381,948,000. The revenues of the Electric System are not pledged or available to make payments on the 2011 Bonds.

The Generation System

In 1986, the District established the Generation System, which is financed and accounted for as a system separate from the Electric System. The Generation System currently consists of the Jackson Project, the Everett Cogeneration Project (the “Cogeneration Project”), and the Woods Creek Hydroelectric Project (the “Woods Creek Project”). The Generation System could include any other electric generating, transmission and/or conservation facilities undertaken by the District in the future. The District anticipates completing construction and commissioning of the Young’s Creek Hydroelectric Project in October 2011. Young’s Creek Hydroelectric Project will have a nameplate capacity of 7.5 MW. The Jackson Project is an operating hydroelectric generating facility with a nameplate capacity of 111.8 MW located on the Sultan River 24 miles east of the City of Everett, Washington. The District owns the Cogeneration Project, but the Cogeneration Project site is leased by the District from the Kimberly-Clark Corporation, which announced on January 25, 2011 that it plans to sell its Everett plant as part of a larger restructuring plan. Kimberly-Clark is obligated to provide the District with 325,000 MWh of electric energy per year. On August 16, 2011, the Commission approved an agreement to terminate the agreements for the operation of the Cogeneration Project. The termination will become effective as of September 30, 2011. Under the termination agreement, Kimberly-Clark will make a $26.5 million payment to the District and receive title to the Cogeneration Project assets. Kimberly-Clark will be responsible for decommissioning and site restoration and any environmental liabilities. Kimberly-Clark will pay the District 80 percent of the salvage value when the Cogeneration Project is decommissioned, and the District will be entitled to a share of the value of any electricity produced if the generator assets are used to generate electricity after the termination date. The Woods Creek Project is a small hydroelectric project in Snohomish County with a nameplate capacity of 0.65 MW. As of December 31, 2010, the total assets of the Generation System were $276,430,000 and its total long-term debt, net of unamortized premiums and discounts, was $202,662,000. The revenues of the Generation System are not pledged or available to make payments on the 2011 Bonds.

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Administration

The District is governed by the Board of Commissioners (the “Commission”), which is comprised of three members, each elected from a separate commissioner district. The commissioners are elected at large for staggered six-year terms. The legal responsibilities and powers of the District, including the establishment of rates and charges for services rendered, are exercised through the Commission. The present commissioners and certain administrative managers of the District are as follows:

David Aldrich, President

David Aldrich began a six-year term as a Commissioner on January 1, 2003, and was re-elected to the Commission in 2008. Mr. Aldrich previously served for six years as a Commission Policy Analyst for the District. Mr. Aldrich’s prior experience also includes working as a forensic consultant and as policy analyst for the State Attorney General’s Office. Mr. Aldrich holds a bachelor’s degree in history from the University of California, Berkeley, and completed work for a bachelor’s degree in philosophy at California State University, Hayward. His term expires on December 31, 2014.

Kathleen Vaughn, Vice-President

Kathleen Vaughn began her first term as a Commissioner on January 1, 1995, and was re-elected to the Commission in 2000 and 2006. Ms. Vaughn is the owner of Goldmark Financial Corporation, a Snohomish County mortgage company. She also is co-owner with her husband of a construction firm. Prior to her election to the Commission, she ran many youth organizations and served as a precinct committee person. Ms. Vaughn’s term expires on December 31, 2012.

Tanya “Toni” Olson, Secretary

Toni Olson began a six-year term as Commissioner on January 1, 2005, and was re-elected to the Commission in 2010. Ms. Olson previously held a number of management positions at the District until her retirement after 22 years of service. In addition to her utility background, she has extensive experience in public education and was the co-founder of a non-profit organization that delivered performing and visual arts programs to students throughout Washington State. Ms. Olson’s term expires on December 31, 2016.

Steven Klein, General Manager

Before joining the District in April 2006, Mr. Klein was the Superintendent for Tacoma Power for 13 years. From 1988 to 1993, Mr. Klein was Tacoma Power’s Power Manager; he began his career at Tacoma Power in 1978 as an engineer. He received a Bachelor of Science degree in electrical engineering from the University of Washington. He has served on many industry boards, often in a leadership capacity, including the Pacific Northwest Utilities Conference Committee (the “PNUCC”), Transmission Issue Group (the “TIG”), Bonneville Administrator’s “Kitchen Cabinet,” Bonneville Customer Collaborative, Public Power Council, Northwest Public Power Association, Public Generating Pool, and the Institute of Electrical and Electronics Engineers. Mr. Klein is recognized for creating the concept of “Electricom,” which speaks to the integration of advanced telecommunications technology with the electric distribution delivery system. His vision led to construction and successful operation of the Click! Network in Tacoma, Washington. Mr. Klein is also a leader in the study and development of renewable energy, having been instrumental in the filing of the first permits for the study of tidal power in the Puget Sound area.

Anne Spangler, General Counsel

Ms. Spangler joined the District in May 2008 after serving four years as the Chief Assistant Attorney for Tacoma Public Utilities. Ms. Spangler’s background includes practice with the Office of the Attorney General, representing the State Department of Transportation, with the City of Seattle as a land-use litigation attorney, and with the City of Tacoma, first as advisor to the City’s wastewater, surface water and solid waste utilities, and later as chief counsel to the City of Tacoma’s power, water and railroad utilities. Ms. Spangler has a Bachelor of Arts degree in

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anthropology from Reed College, a J.D. cum laude from the University of California, Hastings College of the Law, and a Utility Management Program Certificate from Willamette University’s Atkinson Graduate School of Management. She has also been active in the Washington State Bar Association’s Environmental and Land-Use Section.

Glenn McPherson, Treasurer and Assistant General Manager—Finance

Mr. McPherson was appointed to his position in 1997. He joined the District in 1991 as controller and senior manager of budget and financial planning. Before coming to the District, Mr. McPherson was employed as controller for Scandia Down Corporation. Prior to that time, he was a senior manager with KPMG Peat Marwick. Mr. McPherson holds a bachelor of science degree in business administration from California State University at Long Beach and is a certified public accountant.

Kim Moore, Assistant General Manager—Water, Generation and Corporate Services

Mr. Moore joined the District in June 2007. Mr. Moore had 27 years of experience with Tacoma Power and Tacoma Water in a variety of engineering and management positions, most recently as the power utility’s assistant generation manager. He has worked in a broad range of areas, including site development, building construction, water distribution, hydroelectric power generation, and dam safety. Mr. Moore holds a bachelor’s degree in civil engineering from the University of Washington. He also holds numerous certifications in the water distribution field and as a professional engineer.

Labor Relations

The District had the full-time equivalent of approximately 1,006 employees as of December 31, 2010. Of those, 561 employees are covered by a three-year collective bargaining agreement with the International Brotherhood of Electrical Workers, Local 77 (IBEW), which expires on March 31, 2012. The District and the IBEW have recently completed an agreement which extends the term of the collective bargaining agreement to March 31, 2014. The District strives to promote sound labor relations policies that are beneficial to the District and its employees. The District has not experienced any work stoppages in the past 30 years.

Insurance

The District maintains a comprehensive insurance program. Property insurance coverage and retention levels under the District’s insurance program are customary in the industry. The District’s property insurance coverage has a $400 million per occurrence limit with a $250,000 deductible. The District’s general liability coverage has a $35 million per occurrence limit, in excess of a $2 million self-insured retention. The District’s self-insured retention fund balance at December 31, 2010, was approximately $12.6 million. The District’s general liability coverage of $35 million includes acts of terrorism; however, coverage is limited to an aggregate of $250 million for acts of terrorism for all policyholders of the provider. Thus, the amount of coverage available to the District under such policy may be limited. There is no guarantee that the District will maintain these coverage levels in the future.

Pension and Other Post-Employment Benefits

The District’s full-time employees are members of the Washington Public Employees Retirement System (“PERS”), a cost sharing multi-employer retirement system. Contributions to the system by both employee and employer are based upon the gross wages covered by the plan benefits. PERS includes three plans: Plans I and II are defined benefit plans, and Plan III is a combination defined benefit/defined contribution plan. Participation eligibility in the three plans is based on hire date and/or participant elections. The District’s required contribution to PERS for the year ended December 31, 2010 was $4.5 million. The Washington State Legislature sets employer contribution rates for PERS Plans I, II and III; the employer rate in effect on July 1, 2011 was 7.07% of covered payroll. For a description of PERS, see APPENDIX A—“FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 AND INDEPENDENT AUDITOR’S REPORT, Note 5.” The State Actuary’s website (which is not incorporated into this Official Statement by reference) includes information regarding the values and funding levels of the three PERS plans.

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The District provides post-employment health care and life insurance benefits to its retired employees. In 2007, the District adopted Governmental Accounting Standard No. 45, which provides guidance for the accounting and financial reporting for post-employment benefits other than pensions. Based on an actuarial study completed as part of the disclosure requirements, the unfunded actuarial accrued liability for these benefits as of January 1, 2009 was $53.6 million. The District’s annual post-employment healthcare benefit cost is calculated based on the annual required contribution (the “ARC”) of the District. The ARC represents a level of funding that, if paid on an on-going basis, is projected to cover normal costs each year and amortize any unfunded liabilities (or funding excess) over a 30-year period. The District has established a separate fund to supplement the costs for the net post-employment obligation. That fund has $3.8 million as of December 31, 2010. In addition, the Commission has approved an additional $1.5 million in contributions to the net post-employment obligation in 2011. The post employment healthcare program was changed for any employee hired by the District after July 1, 2009. Employees hired after July 1, 2009 receive post-employment health benefits under a defined contribution program that is funded on a pay-as–you-go basis. For a description of the post-employment related disclosures, see APPENDIX A—“FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 AND INDEPENDENT AUDITOR’S REPORT, Note 5.”

In addition, the District offers its employees deferred compensation plans under Internal Revenue Code Sections 401(k) and 457, which permit employees to defer a portion of their compensation until future years.

In June 2011, the District submitted a “voluntary correction” to the District’s 401(k) Savings Plan (“Plan”) for approval by the Internal Revenue Service (“IRS”) pursuant to its Voluntary Corrections Program (“VCP”). VCP is specifically designed to facilitate corrections to qualified plans to ensure their continued tax-favored status. The District discovered that the Plan’s third party administrator had administered the Plan’s 401(k) loan provision incorrectly by using the wrong repayment schedule. The error has been corrected and the third party administrator has taken full responsibility. The District is hopeful of receiving approval from the IRS, and in any event does not anticipate that resolution of these matters will have a material adverse effect on the District or its financial condition.

Investment Policy

The District invests its available funds pursuant to an investment policy adopted by the Commission that emphasizes preserving principal, maintaining necessary liquidity, matching investment maturities to estimated cash flow requirements, and achieving maximum yield. Eligible investments include U.S. Treasury bonds, notes, bills or other government obligations of the U.S. Government or agencies of the U.S. Government; Governmental Sponsored Enterprise agency securities; interest bearing demand or time deposits issued by certain banks, trust companies or savings and loan associations; fully-secured repurchase agreements; banker’s acceptances having a term of 180 days or less; taxable government money market portfolios restricted to obligations of one year or less issued and guaranteed by the full faith and credit of the U.S. Government; and any other investments permitted under the laws of the State of Washington, such as obligations of the State of Washington and of any political subdivision of the State of Washington, including the District.

The District’s investment policy also establishes maximum investment levels and other guidelines for various types of these investments. As of June 30, 2011, the District’s major portfolio holdings include the Washington State Local Government Investment Pool (22.2%), Federal Home Loan Bank Notes (27.2%), Federal Home Loan Mortgage Corporation (“Freddie Mac”) Notes (16.3%), Federal National Mortgage Association (“Fannie Mae”) Notes (9.8%), Federal Farm Credit Bank Notes (9.9%), Temporary Liquidity Guarantee Program Notes Full Faith and Credit) (8.3%), and various bank deposits (6.3%). Freddie Mac and Fannie Mae remain under the conservatorship of the U.S. Government and continue to maintain the implied guarantee and support from the U.S. Government on outstanding debt. The Resolution provides that money in the Bond Fund be invested in any obligations or investments in which the District may legally invest its funds. See APPENDIX A—“FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 AND INDEPENDENT AUDITOR’S REPORT,” Note 2, and Table 2 for a summary of the District’s investments.

Local Government Investment Pool

The funds of the District that are invested in the Washington State Local Government Investment Pool (the “LGIP”) are administered by the State Treasurer’s Office. The LGIP is a fund that invests money on behalf of more than 640

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cities, counties, special taxing districts and State agencies. The LGIP had approximately $9.5 billion average balance under investment as of June 2011. In its management of the LGIP, the State Treasurer is required to adhere, at all times, to the principles appropriate for the prudent investment of public funds. These are, in priority order, (i) the safety of principal; (ii) the assurance of sufficient liquidity to meet cash flow demands; and (iii) to attain the highest possible yield within the constraints of the first two goals. Historically, the LGIP has had sufficient liquidity to meet all cash flow demands.

The LGIP, authorized by chapter 43.250 RCW, is a voluntary pool that provides its participants the opportunity to benefit from the economies of scale inherent in pooling. It is also intended to offer participants increased safety of principal and the ability to achieve a higher investment yield than would otherwise be available to them. The LGIP is restricted to investments with maturities of one year or less, and the average life typically is less than 90 days. Investments permitted under the LGIP’s guidelines include U.S. government and agency securities, banker’s acceptances, high quality commercial paper, repurchase and reverse repurchase agreements, motor vehicle fund warrants, and certificates of deposit issued by qualified Washington State depositories.

General Obligation Bonds and Taxing Power

The District by state law is authorized to issue nonvoter-approved general obligation bonds for any corporate purpose of the District in an amount up to 3/4 of 1% of the total assessed value of the taxable property within the District. In addition, the District is authorized to levy an annual tax on all taxable property within the District up to 45¢ per $1,000 of assessed value in any one year, exclusive of interest and redemption for general obligation bonds. The District has no outstanding general obligation bonds and does not levy a tax. The proceeds of any such tax would not be available to pay or secure the Bonds.

THE WATER SYSTEM

Since its inception as an operating water utility in 1946, the District’s water service area had been located primarily in the Lake Stevens area of Snohomish County. The District’s planned area of service expanded significantly in 1992 as a result of the North Snohomish County Coordinated Water System Plan and in 1996 with the adoption of the District’s first Comprehensive Water System Plan by the Commission and the Washington State Department of Health. The total number of water customers has grown from 6,097 in 1992 to approximately 20,200 as of June 30, 2011. This rapid growth has resulted in significant increases in staffing levels, operation and maintenance expenses, and capital expenditures over the same period. The District’s 2011 Comprehensive Water System Plan, adopted by the Commission on July 19, 2011, is designed to be consistent with neighboring water utilities’ plans, Snohomish County and Island County Land Use and Coordinated Water System Plans, and other applicable city and county plans and growth policies. The 2011 Comprehensive Water System Plan is currently under review by the Washington State Department of Health with approval expected in August 2011. Over the past five years, the number of water customers has increased at an average rate of 3.6% per year.

The District’s Water System

Service Areas. The District’s Water System is a single financial entity that owns and operates twelve separately regulated water systems. The systems are spread throughout Snohomish County and are grouped into (i) an Integrated Service Area, which is made up of six systems that will eventually combine into one, and (ii) six stand-alone satellite systems. The District’s Water System serves a population of approximately 50,000 people through over 20,200 metered customers. The District is also the preferred Satellite System Management Agency in Snohomish County, with first right of refusal to provide water service in any part of the county that is not already claimed by other water purveyors. See the maps showing the District’s service area and location of the District’s water systems included on pages iv and v of this Official Statement.

Integrated Service Area. The District’s Integrated Service Area encompasses six water systems that are planned to merge into a single system over the next 20 years. The Integrated Service Area includes the Lake Stevens, Dubuque, Lake Roesiger, Creswell, Pilchuck 10, and Storm Lake Ridge systems. This combined area serves approximately 94% of the District’s water customers. The separate water systems in the Integrated Service Area are supplied almost exclusively by treated water purchased from the City of Everett through 13 wholesale master meters.

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Satellite Service Areas. The Water System also owns and operates six separate satellite systems served by ground water wells, including May Creek, Skylite Tracts, Sunday Lake, Kayak, Otis, and 212 Market & Deli. These remote systems are too distant from the Water System’s primary water transmission and distribution facilities to merge into the Integrated Service Area. Therefore, they will continue as individual satellite water systems for the foreseeable future. The District has sufficient ground water rights to continue to provide service to these systems into the foreseeable future.

Water System Properties

The components of the Water System transmission and distribution facilities include 8 well sites, 15 supply and booster pump stations, 15 reservoirs with approximately 15.34 million gallons of storage, two treatment plants, over 384 miles of water main ranging from 2” to 30” in diameter, and associated maintenance facilities and equipment.

In June, 2010, the District completed construction of an $8.9 million water operations center in Lake Stevens. The new operations facility includes a 13,500 gross square foot operations building; 7,700 square foot warehouse building; 6,048 square foot vehicle storage building; 3,320 square feet of canopy area for crew vehicles; a 2,000 square foot canopy for equipment, small materials and trailers; and a 1,500 square foot canopy to store materials affected by moisture.

The District is currently nearing completion on the design of a new water treatment facility in its Lake Stevens system. Construction of the facility is expected to begin in the third quarter of 2011, and the facility is expected to begin treating water from the District’s Lake Stevens ground water rights in the second quarter of 2012. At full production, the new treatment plant will be able to supply the District’s Lake Stevens system with a supplemental source and allow the District to reduce its purchased water costs from the City of Everett by approximately 26%. This reduction in purchased water is anticipated to save the District approximately $500,000 per year.

Water Supply

The District has sufficient water supply to maintain and allow for the foreseeable growth in its water systems well into the future. The water systems are supplied by either water purchased wholesale from the City of Everett or water produced and treated from ground water wells.

City of Everett. The District purchases most of the water needed to serve its water systems wholesale from the City of Everett. The District has a long-standing relationship with the City, as described below, and is guaranteed sufficient water to meet the demands of its current and future water service areas into the foreseeable future. The District purchases water from the City of Everett under a joint operating agreement for the Jackson Project, a hydroelectric project located about 24 miles east of Everett. The District’s primary interest in the Jackson Project is power generation; however, the City has the right to use and sell water from the project for water supply purposes. The water supply agreement remains in effect so long as either of the parties holds a Federal Energy Regulatory Commission (“FERC”) license for the project; provided that after 2031 the City and the District must renegotiate certain terms and conditions of the agreement.

The FERC license for the Jackson Project expired on May 30, 2011. Although the District and Everett have been co-licensees of the Jackson Project, they agreed that the District alone would apply for the new license. The District filed the application for a new license in May 2009, which is under review by the FERC. In June 2011, the FERC issued the District an annual license to operate the Project under the terms and conditions of the prior license. Along with the annual license, the FERC issued a Notice of Authorization for Continued Project Operation, which is effective until May 31, 2012, and provides that if a new license is not issued on or before May 31, 2012, the annual license is renewed automatically without further order. See “LITIGATION” for additional discussion.

The City’s water sales to the District are made pursuant to a rate schedule that is designed to recover costs, including filtration. For additional information on current rates charged to the District by the City of Everett, see “THE WATER SYSTEM—Management’s Discussion of the Water System’s Financial Results—Results of Operations.

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The City and the District are also parties to a 1981 agreement that sets out the rights and duties of each to use Sultan Basin water and the water stored in Spada Lake.

Ground Water Rights. In addition to the water purchased wholesale from the City of Everett, the District also holds certificated ground water rights in its Lake Stevens, Kayak, May Creek, Skylite Tracts, Pilchuck 10, and Sunday Lake service areas that total over 3,774 gallons per minute (“gpm”) maximum peak withdrawal and 502.1 acre-feet (815 million gallons) annual withdrawal. These certificated water rights are sufficient to serve the District’s satellite systems into the foreseeable future and will also allow the District to supplement its reliance on the City of Everett for the Lake Stevens Water system with the completion of a planned treatment project.

Other Water Transactions

City of Marysville. The District, the City of Marysville, and the Tulalip Tribes are parties to a 1991 Joint Operating Agreement (“JOA”) to supply water to the Integrated Service Area. The District owns 16.55% of the capacity of the pipeline, or approximately 3.42 million gallons per day. The term of the JOA extends to July 1, 2020, with provisions for amendment and/or renewal. In 2003, the District and City of Marysville entered into a Settlement Agreement to resolve several disputed issues related to the 1991 JOA (the “2003 Settlement Agreement”). The 2003 Settlement Agreement, as subsequently amended, provides for the transfer of certain District facilities to the City of Marysville when the City annexes several identified areas of service “overlap.” Pursuant to the agreement, the District expects to transfer to the City facilities of the District that will permit the City to serve approximately 1,900 District customers that will become customers of the City. The City will pay the District for the fair market value of the facilities and service area. The District and City have hired a consultant to determine the value of the facilities, including consideration of the impact to the District’s water revenue. The District will require that the transfer not inhibit its ability to deliver water north to its future service area. The current schedule requires the District to transfer the agreed upon overlap area to the City of Marysville by the end of 2013; however, that timeline could vary based upon ongoing negotiations of transfer price and potential construction issues associated with the capital improvements the City needs to make before the transfer. The District has taken into account the loss of these customers. See “PROJECTED OPERATING RESULTS” for results of this analysis.

Water Quality

All of the District’s water systems have water quality that meets Environmental Protection Agency and Washington State standards.

The water purchased for the Lake Stevens, Storm Lake Ridge, Lake Roesiger and Dubuque systems has been treated by the City of Everett’s filtration plant. The water quality meets all current drinking water standards. Presently, the Lake Stevens wells, which are used as an emergency source, can be used as a backup, supplemental source for the Integrated Service Area, and meet state and federal primary contaminant standards. However, the Lake Stevens wells exceed secondary, contaminant (aesthetic) standards for iron and manganese. The District is currently in the process of designing and constructing filtration facilities for the wells that will allow the full time use of the resource. Upon completion of the filtration facilities, the District expects to have a 26% reduction in purchased water expenses.

The raw water from the Sunday Lake well, the Skylite Tracts wells, and the Kayak wells exceed secondary contaminant (aesthetic) standards for iron and manganese. A water treatment plant was constructed in 1997 to remove iron and manganese and condition the Sunday Lake well water to reduce the lead leaching from the customers’ plumbing. Facilities were also constructed in 1999 to condition the Skylite Tracts well water to reduce the copper leaching from customers’ plumbing. A new water treatment plant was constructed and brought on-line in July 2009 at Kayak to remove iron and manganese.

Local Utility Districts

From time to time, the District establishes local utility districts (“LUDs”) to finance capital improvements to the Water System that specifically benefit property within the LUD. In an LUD, special assessments may be levied on the property to pay all of the costs of the improvements. Assessments are paid, at the option of the property owner,

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within a 30-day prepayment period or in annual installments extending over a period not exceeding 20 years. LUD assessments become a lien on the property assessed, which lien is paramount to all other liens theretofore created except the lien for general property taxes.

The District finances some LUD improvements from revenues of the Water System. Assessments collected from those LUDs are deposited into the General Fund. However, if revenue bonds are issued to finance the improvements in an LUD, assessments from that LUD are deposited into the bond fund for those bonds. Proceeds of the sale of any property foreclosed upon up to the amount of the unpaid LUD assessments and interest and penalties are also deposited into the bond fund. The District currently has 16 small LUDs with approximately $701,000 principal amount of outstanding assessments pledged to Bonds scheduled to be collected through 2021.

If additional LUDs are formed and financed with the proceeds of additional Bonds, the District will pledge that the assessments levied in those LUDs be paid into the Bond Fund.

Water Rates and Fees

The Commission has exclusive authority to establish rates and fees free from regulation by the Washington Utilities and Transportation Commission. Under Washington State law, rates must be fair, nondiscriminatory and adequate to provide revenues sufficient for (1) the payment of principal of and interest on the District’s water revenue obligations for which payment has not otherwise been provided, (2) the proper operation and maintenance of its water facilities, and (3) renewals and replacements thereto.

The following table presents the Water System’s wholesale and retail rate increases for the calendar years 2006 through 2011.

Water System Rate Increases

2006 2007 2008 2009 2010 2011

Retail 6.5% 4.4% 4.2% 13.0% 13.0% 13.0%

Wholesale 7.0 5.0 5.0 7.0 16.0 5.0

Source: The District

The Commission has approved a 13% retail rate increase effective January 1, 2012.

The District also adjusts its General Facilities Charge (“GFC”), Distribution System Charge (“DSC”) and Service Connection Fees, effective January 1 of each year. All connection fees are adjusted annually in January based on the change in the Engineering News Record Construction Cost Index (“CCI”) for the Seattle area. Based on the CCI, fees were decreased by 1.7% in 2010 and increased by 0.7% in 2011. Since 2002, the District has raised its connection fees an average of 3.9% per year through 2011.

The GFC is paid by new customers and recovers the cost of obtaining capacity in the source, treatment, transmission and storage facilities of water needed to serve new customers’ anticipated demand. The 2011 GFC is $3,060 per equivalent residential unit (“ERU”) in all systems except Storm Lake Ridge and Sunday Lake, where the charge per ERU is $4,965. An ERU is the volume of water demand and use deemed by the District to be characteristic of a single family residential unit, which currently equals an average water consumption of 1,000 cubic feet (one cubic foot is equal to 7.48 gallons) per month.

The DSC is paid by new customers and is used to recover the average cost of existing distribution mains when the new customer is connecting to an existing main, rather than extending a main to obtain service. It is also used as a means to recover such investments for developers who extend new mains by passing through to them 95% of the DSCs collected from those connecting to the new main extension for a period of 10 years from the date of completion of the main extension. The DSC is set at $31.25 per foot of frontage, or $3,530 per single-family household connection in 2011.

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The Service Connection Fee charged to new customers for a 3/4-inch water service is currently $1,135 for all systems. This charge is intended to recover the actual cost of a new service installation.

Water System customers are billed for their water consumption on a monthly or bimonthly schedule immediately following the reading of their meter. Because nearly all Water System customers are also Electric System customers, the District bills the consumption of both services on the same invoice. District invoices are due in 15 days. Disconnection procedures begin after sufficient notice is given to customers, but not before 45 days after the invoice due date.

The following table compares the District’s average monthly water bills for a single family residential unit based on an average water consumption of 1,000 cubic feet per month with those of other nearby water utilities. The representative monthly water bills shown are based on specific rate schedules for each utility. Use of different schedules applicable to particular customers would yield different results.

Water System Monthly Residential Water Bills Comparison

(Rates effective January 1, 2011)

1,000 cubic feet per month

The District $42.68

City of Shoreline (served by the City of Seattle)

59.73

City of Arlington 52.73 Skagit County PUD 44.30 Woodinville Water District 44.23 City of Marysville (outside Urban

Growth Area)

41.73 Alderwood Water District (summer) 40.93 Mukilteo Water District 36.40 City of Everett (metered) 30.12 Kitsap County PUD 29.72 Silver Lake Water District (summer) 27.80

Source: District survey Major Customers

The District’s Water System serves primarily suburban and rural residential areas. The District’s ten largest retail customers for the 12 months ended December 31, 2010 accounted for approximately $310,000, or approximately 2.7% of the Water System’s operating revenues. The two wholesale customers, the cities of Granite Falls and Arlington, accounted for approximately $422,000, or 3.7%, of operating revenues in 2010.

Wholesale Water Sale Agreements

City of Granite Falls. The District and the City of Granite Falls entered into a wholesale water sales agreement in early 1996. Granite Falls is supplied water from the District through three master meters. Granite Falls retains retail service responsibility within the Granite Falls urban growth area. The agreement was renewed in 2009 and continues through 2026 and thereafter unless terminated by mutual agreement upon five years’ written notice by either party.

City of Arlington. The District and the City of Arlington entered into a wholesale water sales agreement in July 1998. The City purchases wholesale water from the District for resale to its customers. The agreement allows Arlington to obtain a maximum of 1,000 gpm from the District’s Integrated Water System. The agreement continues through 2018 and thereafter unless terminated by mutual agreement or upon five-year written notice by either party.

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Water System Operating Statistics

The following table presents the Water System’s operating statistics for the calendar years 2006 through 2010.

Water System Operating Statistics

2006 2007 2008 2009 2010

Number of Customers (average) 17,338 18,392 18,981 19,398 19,914

Water Sales (000 cubic feet) Retail (1) 191,478 189,672 192,033 207,297 196,404 Wholesale (2) 38,966 36,595 38,477 40,665 34,829 Total Water Sales 230,444 226,267 230,510 247,962 231,233

System Use, Losses and Other (000 cubic feet)

22,416 16,302 15,691 13,381 17,875

Water Purchased and Pumped (000 cubic feet)

252,860 242,569 246,201 261,343 249,108

(1) Retail water sales generally exhibit annual increases based on a growing number of customers and changes in

water rates; however, consumption is highest during summer periods and can fluctuate year-to-year due to variations in average temperatures and precipitation levels.

(2) Wholesale sales represent sales to the City of Granite Falls and the City of Arlington. Source: The District

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Financial Results

The following table presents income statement information of the Water System for the five calendar years 2006 through 2010. Appendix A hereto contains the audited financial statements for the District for the calendar years ended December 31, 2010 and 2009.

Water System Comparative Income Statements

($000’s)

2006 2007 2008 2009 2010

Operating Revenues:

Retail Water Sales $ 5,433 $ 5,790 $ 6,059 $ 7,300 $ 7,825 Wholesale Water Sales 374 371 410 463 423 Other 140 158 149 187 181

Total Operating Revenues 5,947 6,319 6,618 7,950 8,429

Operating Expenses:

Purchased Water 1,588 1,525 1,592 1,960 1,990 Operations 2,679 2,561 2,794 1,956 2,625 Maintenance 597 651 748 794 858 Depreciation 1,704 1,880 2,027 2,193 2,363 Taxes 331 357 338 399 433

Total Operating Expenses 6,899 6,974 7,499 7,302 8,269

Net Operating Income (Loss) (952) (655) (881) 648 160

Interest Charges, net (950) (1,120) (964) (882) (1,161)

Other Income and Expense 676 765 413 225 166

Contributions

Facilities/Connection Charges (1) 3,800 3,794 2,118 2,065 1,758 Plant Contributions (2) 2,951 3,530 3,438 1,580 1,341

Total Contributions 6,751 7,324 5,556 3,645 3,099

Net Income $ 5,525 $ 6,314 $ 4,124 $ 3,636 $ 2,264

Net Income Adjustments:

Non-Cash Plant Contributions (2,951) (3,530) (3,438) (1,580) (1,341) Depreciation 1,704 1,880 2,027 2,193 2,363 Interest Expense 950 1,120 964 882 1,161 Net increase (decrease) in the fair value of investments - (32) 7 (5) -

Balance Available for Debt Coverage

$ 5,228

$ 5,752

$ 3,684

$ 5,126

$ 4,447

Senior Lien Debt Service (3) 1,817 2,079 2,079 2,062 2,563 Less Assessment Payments Received (4) (535) (371) (243) (210) (200)

Debt Service Paid from Revenues $ 1,282 $ 1,708 $ 1,836 $ 1,852 $ 2,363

Senior Lien Debt Service Coverage 4.1x 3.4x 2.0x 2.8x 1.9x

(1) Includes General Facilities Charges, Service Connection Fees and Distribution System Charges. (2) Represents facilities donated to the District by developers and property owners. (3) Includes debt service on the Outstanding Bonds. (4) Includes principal and interest estimated to be received from Assessments pledged to be deposited in the Bond Fund.

Assessment income shown is based on actual payments received including early payments of Assessments. See “THE WATER SYSTEM—Local Utility Districts.”

Source: The District

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Management’s Discussion of the Water System’s Financial Results

Results of Operations. The Water System’s total operating revenue increased from $5,947,000 in 2006 to $8,429,000 in 2010, an increase of 42% and a compound annual increase of 9% over the period. During this period, retail water sales revenue increased 44% from $5,433,000 in 2006 to $7,825,000 in 2010. The increase in retail water sales revenue reflects the strong growth in the number of Water System customers and retail rate increases from 2006 to 2010. The growth in customers is illustrated below:

Average Number of Customers

2006

2010

Percent Change

Compound Annual Increase

17,338 19,914 14.9% 3.5% Source: The District The growth in customers reflects a strong population growth rate in the District’s service territory and expansion of the Water System. Some of this expansion has come from the acquisition of small private water systems which cannot bear the cost of increasing regulatory requirements imposed by federal and state agencies. Additionally, increased operating revenues reflect retail water rate increases of 6.5% in 2006, 4.4% in 2007, 4.2% in 2008, and 13% in 2009 and 2010. Retail rate increases of 13% have also been approved by the Commission for each of 2011 and 2012.

Wholesale water sales revenue increased 13% from $374,000 in 2006 to $423,000 in 2010. The Water System has agreements with the Snohomish County cities of Granite Falls and Arlington to provide wholesale water. The wholesale water agreements continue with the cities of Granite Falls and Arlington until 2026 and 2018, respectively. The agreements can be terminated after those dates with five years written notice. Wholesale rates are adjusted annually based on the average costs in the preceding year for each of the wholesale cost components. Cost components include: supply, conveyance, pumping, administration, and depreciation.

The facilities/connection charges and plant contributions vary annually based on the level of real estate development in the Water System’s service territory. Facilities/connection charge revenues declined sharply beginning in 2008 and continuing through 2010 reflecting the national economic recession and decline in real estate development. These fees are adjusted annually based on the CCI for the Seattle area. Plant contributions also declined slightly in 2008 and further in 2009 and 2010, again reflecting economic conditions. These contributions generally reflect development that began a year or more prior to the contribution.

The District purchases most of the water it sells (approximately 96% in 2010) from the City of Everett. Wholesale water rates from the City of Everett have increased from an average of $0.6332 per hundred cubic feet (“ccf”) in 2006 to $0.8098/ccf in 2010, a compound annual increase of 6% during this period. The remaining water supply is pumped from wells owned and operated by the District. Purchased water expense increased from $1,588,000 in 2006 to $1,990,000 in 2010, an increase of 25%, as a result of an 11% increase in the number of customers and an annual average 7% increase in the cost of water purchased from the City of Everett. Purchased water expense averaged approximately 26% of water sales revenue over the five-year period from 2006 to 2010.

Operations expense decreased from $2,679,000 in 2006 to $2,625,000 in 2010, a decrease of approximately 2%. Operations expense consists primarily of pumping, water treatment, transmission and distribution, customer service, and administrative expenses. Operations expenses can fluctuate from year to year based on the amount of capital construction performed. During 2009 and through June 2010, the Water System constructed an $8,922,000 water operations center and a $1,661,000 reservoir in Lake Stevens. Labor and overhead capitalized as a component of those projects lowered operations expenses in 2009 and 2010. Maintenance expense increased approximately 44%, from $597,000 in 2006 to $858,000 in 2010. The increase in maintenance expenses is attributable to an increased focus on main, pump and hydrant maintenance. As the Water System’s service territory has expanded, so have the personnel and resources necessary to maintain and operate the system.

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Depreciation expense increased 39% from $1,704,000 in 2006 to $2,363,000 in 2010. The increase is the result of a significant increase in capital assets during this period. Total capital additions were approximately $28,269,000 during the years 2006 through 2010, and consist primarily of a new water operations facility, a new reservoir, new transmission and distribution mains, existing reservoirs, pump stations, customer distribution lines and other related equipment.

Taxes increased from $331,000 in 2006 to $433,000 in 2010, an increase of 31%, due primarily to growth in total operating revenues. The District pays an excise tax levied by the State of Washington equal to 5.029% of retail water sales revenue. The District also pays a business and occupation tax on general facilities charges, distribution system charges, and service connection fees. The current business and occupation tax rate is 1.5%.

The Water System produced net income of $5,525,000 in 2006. Net income was $6,314,000 in 2007, an increase of $789,000 from 2006. Retail water sales increased by $357,000 due to higher retail rates and growth, and plant contributions increased by $579,000 as a result of increased development activity. This increase was partially offset by a $170,000 increase in interest expense due to debt service on the 2006 Bonds.

In 2008, net income decreased by $2,190,000 to $4,124,000 primarily as a result of a $1,676,000 decline in facilities and connection charge contributions caused by the national recession and its impact on real estate development.

Net income was $3,636,000 in 2009, a decrease of $488,000 from 2008. Despite a $1,241,000 increase in retail water sales due to higher retail rates and customer growth, net income was lower in 2009 due to the recession’s impact on the housing market and new construction causing a $1,858,000 decline in plant contributions from developers.

In 2010, net income decreased by $1,372,000 to $2,264,000 primarily as a result of a $669,000 increase in operations expense caused by the completion of some large capital projects which ceased the allocation of expense charged to those projects, and a $546,000 decrease in facility/connection charges and plant contributions due to the continuing impact of the economy on real estate development.

Financial Condition, Liquidity and Capital Resources. As of December 31, 2010, the Water System’s cash and temporary investments totaled $7,950,000. Cash and temporary cash investments, general facilities charge funds, the rate stabilization reserve and working capital for each of the five years from 2006 through 2010 are as follows:

Year

Cash and Temporary Investments ($000’s) (1)

General Facilities Charge Funds

($000’s)

Rate Stabilization Reserve

($000’s) (3)

Working Capital

($000’s) (1)

2006 $7,362 $3,500 - $6,608 2007 2,784 7,010 - 1,481 2008 2,827 (2) 4,178 (2) - 2,569 2009 11,405 (2) 1,813 (2) $1,000 9,303 2010 7,950 1,889 1,000 6,600

(1) Includes proceeds of the sale of the 2006 Bonds of $4,078,000 and $482,000 in 2006 and 2007, respectively. The 2009 and 2010 figures include proceeds of the sale of the 2009 Bonds of $4,402,000 and $1,218,000, respectively.

(2) In 2008, the District transferred $3.0 million from the General Facility Charge Fund to Cash and Temporary Investments. A study of past payments made from Cash and Temporary Investments that should have been funded by General Facility Charges led to the transfer of an additional $1.1 million in 2009.

(3) In 2009, the Commission transferred $1,000,000 into the Rate Stabilization Account.

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The District currently does not expect to issue additional Water System bonds to finance capital projects in the next three years. Principal outstanding on the Water System’s long-term debt at December 31, 2010 was as follows:

Long-term Debt ($000’s)

Senior Lien Debt Series 2002 Bonds $ 11,160 Series 2006 Bonds 5,285 Series 2009 Bonds 13,085

Junior Lien Debt Washington State Public Works Trust Fund loans 481 State of Washington Drinking Water Revolving Fund loans 2,843 Bayshore Forest Products loan 118

Total Principal Outstanding on Long-term Debt $ 32,972 The 2002 Bonds were sold to finance improvements to the Water System, repay an outstanding note, and refund outstanding Bonds. The 2006 Bonds were issued to finance improvements to the Water System and refund outstanding Bonds. The 2009 Bonds were sold to finance the construction of a new Water System operations facility and certain capital improvements to the Water System.

Most of the junior lien debt represents loans obtained through the State’s Public Works Trust Fund and Drinking Water Revolving Fund loan programs. These loans are at very low interest rates (ranging from 0 – 5%) with approximately level debt service. Final maturities for the largest loans are in 2027 and 2029.

Capital construction costs for the years 2006 through 2010 were as follows:

Capital Construction ($000’s)

Year Actual

2006 $3,081,000 2007 5,779,000 2008 4,061,000 2009 9,462,000 2010 5,886,000

PROJECTED OPERATING RESULTS

Forecast Operating Results

In projecting the financial results for the Water System, the District has made certain assumptions regarding various factors that affect financial performance. Changes in these assumptions can have material effects on the projected financial performance. While numerous factors (or combinations of factors) could affect the District’s financial performance, the factors most likely to affect the projections are forecasted customer growth affecting retail water sales revenues, as well as facilities and connection charges and non-cash contributions, the projected impact of the water treatment plant on purchased water costs, and the projected impact of the transfer of customers to the City of Marysville on retail water sales revenue and purchased water. Changes to the assumptions regarding these factors could have material effects on the outcome of the District’s financial projections.

The forecast of Water System retail sales revenue results is based on the base case demand forecast. The base case demand forecast also impacts the projections for purchased water costs, capital expenditures, capital contributions, and taxes at current rates.

Estimated future retail water sales revenue also reflects the impact of annual retail rate increases of approximately 13% effective January 1, 2011 and 2012 as adopted by the Commission on December 2, 2008, and the impact of the

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transfer of approximately 1,900 of the Water System’s customers to the City of Marysville beginning in 2014. Currently no additional rate increases have been scheduled. Estimated future retail water sales assume growth in demand between 2.0% and 3.0% per year.

The forecast for purchased water expense is based upon adopted rates by the City of Everett for 2011 and 2012 and reflect the base case demand forecast used for retail water sales revenue. In addition, purchased water reflects the implementation of the water treatment plant beginning in 2013, which is expected to reduce purchases of water from the City of Everett by approximately 26%.

Operations and maintenance expenses for 2011 are forecast based on the financial results through June 2011. Operating and maintenance costs beyond 2011 are projected based on inflationary factors. Operations and maintenance expenses can fluctuate from year to year based on the amount of capital construction performed. As capital construction increases, allocated costs for administrative and general services are charged to the capital projects and capitalized rather than expensed in the period incurred. The annual increases in operation and maintenance expenses average 6.0% over the four-year forecast.

The forecast also includes estimated general facilities charges, distribution service charges, and service connection fees, which are one time charges paid by new connections to the Water System. These estimated charges are projected based on modest real estate development and construction growth following the current economic recession and begin to reflect moderate increases in 2012.

The District does not, as a matter of course, make public projections as to future sales, earnings, or other results. However, the management of the District has prepared the prospective financial information set forth below to present the forecasted financial results of the Water System. The accompanying prospective financial information was not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of the District’s management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the expected course of action and the expected future financial performance of the District. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and prospective investors should not place undue reliance on the forecasted information.

The District’s independent auditors have not been engaged to compile, examine, or perform any procedures with respect to the District’s forecasted financial information, nor have they expressed any opinion or any other form of assurance on such information or its achievability and assume no responsibility for, and disclaim any association with, the forecasted financial information. The forecast operating results for the period 2011 through 2014 are shown in the table below.

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Water System Projected Operating Results

($000’s)

2011 (1) 2012 2013 2014 (3) Operating Revenues:

Retail Water Sales (2) $ 8,529 $ 9,490 $ 9,774 $ 9,188 Wholesale Water Sales 486 500 515 531 Other 211 214 217 219 Total Operating Revenues $ 9,226 $ 10,204 $ 10,506 $ 9,938

Operating Expenses: Purchased Water (4) 2,070 2,194 1,689 1,587 Operations 2,861 3,118 3,212 3,308 Maintenance 975 1,069 1,171 1,283 Depreciation 2,534 2,750 2,984 3,238 Taxes 472 523 539 507 Total Operating Expenses $ 8,912 $ 9,654 $ 9,595 $ 9,923

Net Operating Income (Loss): 314 550 911 15

Interest Charges (1,317) (1,202) (1,111) (1,013) Other Income & Expense 180 200 250 300 Capital Contributions

Facilities/Connection Charges (5) 1,500 1,575 1,654 1,736 Plant Contributions (6) 934 1,000 1,000 1,000

Total Capital Contributions $ 2,434 $ 2,575 $ 2,654 $ 2,736

Net Income $ 1,611 $ 2,123 $ 2,704 $ 2,038

Net Income Adjustments: Non-cash Plant Contributions $ (934) $ (1,000) $ (1,000) $ (1,000) Depreciation 2,534 2,750 2,984 3,238 Interest Expense, net 1,317 1,202 1,111 1,013

Balance Available for Debt Service 4,528 5,075 5,799 5,289

Senior Lien Debt Service 2,985 2,975 3,006 2,798

Less Assessment Payments Received (7)

(212) (207) (201) (195)

Debt Service Paid from Revenues $ 2,773 $ 2,768 $ 2,805 $ 2,603

Senior Lien Debt Service Coverage 1.6x 1.8x 2.1x 2.0x

(1) Based on actual results through June 30, 2011 and projected to year end. (2) Projected retail sales revenues include annual rate increases of 13% effective January 1, 2011 and 2012, as approved by the

Commission. No rate increases have been projected for 2013 and 2014. (3) The Water System is in discussions with the City of Marysville to transfer approximately 1,900 customers in areas recently

annexed by the City of Marysville in exchange for a payment to compensate the Water System for the assets transferred. The proposed sale and transfer is projected to be no earlier than December 31, 2013. Retail water sales and purchased water for 2014 have been reduced by 6% to approximate the impact of the loss of these customers. See “THE WATER SYSTEM—Other Water Transactions—City of Marysville” for additional discussion.

(4) Purchased water in 2013 and 2014 reflects the implementation of a water treatment plant by December 31, 2012. The plant is expected to treat the water subject to the Water System’s groundwater rights and allow the Water System to reduce its purchases from the City of Everett by approximately 26%.

(5) Includes General Facilities Charges, Service Connection Fees and Distribution System Charges, which are charges paid by new connections to the Water System.

(6) Represents facilities donated to the District by developers and property owners. (7) Includes principal and interest estimated to be received from Assessments pledged to be deposited in the Bond Fund.

Assessment Income shown based on scheduled payments excluding early payments of Assessments. See “THE WATER SYSTEM—Local Utility Districts.”

Source: The District

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Forecast Construction Expenditures

Projects planned through 2014 include ten water main extension/replacement projects, the completion of a new treatment system, and property acquisition for a future reservoir site. The District currently does not expect to issue additional Water System Bonds in the next three years.

The following table shows the estimated uses of funds for construction projects through 2014.

Water System Forecast of Construction Expenditures

($000’s)

2011 2012 2013 2014

General $ 996 $ 1,292 $ 531 $ 800 Pipe 4,445 2,415 4,543 2,635 Pumping Station 722 80 - - Reservoir - 100 100 -

Total Annual Expenditures $ 6,163 $ 3,887 $ 5,174 $ 3,435 The District does not commit funds to capital construction or future growth until it is clear that forecast demands and new customer connections will develop. The District pays for its capital construction program from five sources: (i) cash and temporary investments, (ii) general facilities charges, service connection fees and distribution system charges, (iii) general rates, (iv) local utility district assessments, and (v) new debt proceeds. The Water System also has the ability to borrow from the Electric System up to $10 million to provide short-term financing for Water System improvements. Currently, no loans are outstanding from the Electric System.

ECONOMIC AND DEMOGRAPHIC INFORMATION

Snohomish County (the “County”) encompasses a land area of approximately 2,100 square miles in northwestern Washington. The County extends from Puget Sound to the crest of the Cascade Mountain range 70 miles to the east. The County includes a significant portion of the Puget Sound metropolitan area and is the third most populated county in Washington State, after King and Pierce Counties. As shown in the following table, since 2006, the County’s population has grown 7% and the City of Everett’s population has grown 2%.

Population

Year Snohomish County City of Everett

2011 717,000 103,100 2010 713,335 103,019 2009 704,300 103,500 2008 696,600 102,300 2007 686,300 101,800 2006 671,800 101,100

Source: 2010, U.S. Census; all others, Washington State Office of Financial Management Industry, Real Property and Employment. The County’s economy is an urban-rural mix. Agriculture and logging predominate in the northern and eastern regions of the County while a high technology, urban job market predominates in the City of Everett and the southern part of the County. While forestry and wood products manufacturing are important industries locally, the economic base of the County has expanded due to diversification into major industries, including aircraft production, high technology, biotechnology, electronics and electrical equipment manufacturing. Although Snohomish County has benefited from significant economic and population growth in western Washington over the last decade, the County has been impacted by recent economic conditions. The County has recently experienced a decrease in housing prices but an increase in closed sales. According to

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Northwest Multiple Listing Services, closed sales for houses and condos in the County decreased from 852 closed sales in May 2010 to 820 in May 2011 and the median selling price for houses declined by approximately 15% from $272,000 to $230,000 for the same period.

The Boeing Company (“Boeing”) remains the County’s largest employer, with an estimated 33,000 workers in the County as of 2011. Boeing established an airplane manufacturing plant at the south end of the City of Everett in 1966. The plant was built to assemble wide-bodied 747 aircraft. In 1980 the plant was expanded for production of the new-generation 767 wide-body twin jet, and in the early 1990s Boeing completed a $1.5 billion expansion project to accommodate 777 aircraft production. Located adjacent to the Snohomish County Airport (Paine Field), the complex presently includes the world’s largest volume building with 472 million cubic feet together with nine office buildings and one 500,000 square foot supply building. As of June 2011, Boeing employed 76,457 in Washington State. The new 787 aircraft has entered the final phase of flight testing prior to certification, with delivery expected to begin in September 2011.

The U.S. Navy operates a $265 million homeport for a nuclear aircraft carrier battle group in the City of 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 350 sailors and civilians assigned.

Economic Indicators. Following are economic indicators for Snohomish County and the City of Everett. The major private and public employers in the County are shown on the following tables:

Major Private Employers in Snohomish County

Employer

Product/Business

FTE 2010 Employment (1)

The Boeing Company Aircraft Manufacturing 33,000 Providence Regional Medical Center Medical services 3,360 Premera Blue Cross Health insurer 3,200 Tulalip Tribes Enterprises Real estate, Retail, Gaming 3,150 Everett Clinic Health Care 1,700 Philips Medical Systems Ultrasound technology 1,700 Swedish/Stevens Hospital Health Care 1,500 Frontier Communications Northwest Communications 1,500 Aviation Technical Services Aircraft repair/maintenance/parts 1,300 CEMEX Sand/gravel mining operations 1,000 Fluke Corp. (Danaher) Electronic test & measurement 1,200 Kimberly-Clark Corporation Paper Products 850 C&D Zodiac Aerospace supplier; composites 620 Eldec Corp (Crane Aerospace) Aerospace electronics 770 Wal-Mart Retail 740 Esterline Control Systems Aerospace electronics 600 Intermec Technologies Wireless data collections; RFID 500 Panasonic Avionics Aircraft Equipment 450 Canyon Creek Cabinets Cabinets 400 Sonosite Medical Devices 400 Zumiez Sporting Goods 400

(1) Approximate number. Sources: Snohomish County Economic Development Council, InfoUSA, Manta

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Major Public Employers in Snohomish County

Employer

Product/Business

FTE 2010 Employment (1)

Naval Station Everett U.S. Navy Base 6,000 Snohomish County Government County Government 2,700 State of Washington State Government 2,400 Everett School District School District 1,600 Edmonds School District School District 1,350 City of Everett City Government 1,200 Marysville School District School District 1,200 Snohomish County PUD Public Utility 1,006 Monroe Correctional Complex State Department of Corrections 1,000 Community Transit Public Transportation 695 Everett Community College Higher Education 580 Edmonds Community College Higher Education 500 Cascade Valley Hospital Health Care 410

(1) Approximate number. Sources: Snohomish County Economic Development Council, InfoUSA, Manta, and the District

Snohomish County and City of Everett Taxable Retail Sales

($000’s)

Year Snohomish County City of Everett

2011 (1) $ 2,160,593 $ 524,153 2010 9,735,984 2,307,526 2009 9,614,803 2,242,049 2008 10,784,068 2,652,748 2007 11,711,465 2,903,121 2006 10,915,209 2,729,008

(1) Preliminary, through first quarter of 2011. Source: Washington State Department of Revenue

Assessed Valuation of Snohomish County

($000’s)

Collection Year

Valuation

2011 $ 85,710,608 2010 94,125,213 2009 101,983,434 2008 99,315,203 2007 84,124,565 2006 68,597,771

Source: Snohomish County Assessor’s Office

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Personal and Per Capita Income Snohomish County

Year Personal Income

($000’s) Per Capita

Income

2009 (1) $30,294 $43,616 2008 29,790 43,470 2007 28,328 41,918 2006 25,578 38,542 2005 23,201 35,736

(1) Most recent data available. Source: U.S. Bureau of Economic Analysis

Employment Data Snohomish County

Annual Averages

2011 (1) 2010 2009 2008 2007 2006

Civilian Labor Force 377,900 381,550 383,040 374,850 365,120 360,390 Employed 340,570 342,440 344,960 354,160 349,430 343,720 Unemployed 37,330 39,110 38,090 20,690 15,690 16,670

County Unemployment Rate 9.9% 10.2% 9.9% 5.5% 4.3% 4.6%

(1) Preliminary, average through May 2011. Source: Washington State Employment Security Department, Labor Market and Economic Analysis Branch

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Nonagricultural Wage and Salary Employment Snohomish County

Annual Averages

NAICS Industry Title 2011 (1) 2010 2009 2008 2007 2006

Goods Producing Mining, Logging, and Construction

15,300

15,900

17,900 22,700

25,000

22,000

Manufacturing 55,300 52,600 52,800 55,500 53,900 48,400 Total (2) 70,600 68,600 70,800 78,200 79,000 70,400

Services Providing

Trade, Transportation and Utilities

41,900

42,400

42,800 45,300

44,700

41,300

Information 5,200 5,400 5,000 5,500 5,900 5,200 Financial Activities 10,600 10,800 11,500 12,500 13,200 13,100 Professional and Business Services

20,900

20,400

20,700 22,700

23,100

20,300

Education and Health Services 26,300 26,300 26,100 25,200 24,100 22,500 Leisure and Hospitality 22,100 21,700 22,500 23,700 23,600 23,000 Other Services 9,400 9,400 9,700 9,700 9,400 9,100 Government 37,700 38,900 39,000 38,100 36,700 36,400

Total (2) 174,100 175,300 177,200 182,600 180,800 169,800

Total Nonfarm (2) 244,700 243,800 248,000 260,700 259,700 240,200

(1) Preliminary, as of May, 2011. (2) Totals may not add due to rounding. Source: Washington State Employment Security Department, Labor Market and Economic Analysis Branch

Number of Housing Units by Structure Type Snohomish County

Total

Housing Units One Unit Structures

Two or More Unit Structures

Mobile Homes, Trailers,

Special Units

2009 2010 2009 2010 2009 2010 2009 2010

City of Everett 44,384 44,628 21,142 21,221 21,833 21,998 1,409 1,409 Other Incorporated 109,513 122,180 71,466 81,978 33,661 35,355 4,386 4,847 Unincorporated 126,821 116,687 94,542 85,994 18,549 17,413 13,730 13,280 County Total 280,718 283,495 187,150 189,193 74,043 74,766 19,525 19,536 _______________ Source: Washington State Office of Financial Management

LIMITATIONS ON REMEDIES

Any remedies available to the owners of the 2011 Bonds upon the occurrence of an event of default under the Resolution are in many respects dependent upon judicial actions that are in turn often subject to discretion and delay and could be both expensive and time-consuming to obtain. If the District fails to comply with its covenants under the Resolution or to pay principal of or interest on the 2011 Bonds, there can be no assurance that available remedies will be adequate to fully protect the interests of the owners of the 2011 Bonds.

In addition to the limitations on remedies contained in the Resolution, the rights and obligations under the 2011 Bonds and the Resolution may be limited by and are subject to bankruptcy, insolvency, reorganization,

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fraudulent conveyance, moratorium and other laws relating to or affecting creditors’ rights, to the application of equitable principles, and to the exercise of judicial discretion in appropriate cases. The opinion to be delivered by K&L Gates LLP, as Bond Counsel, concurrently with the issuance of the 2011 Bonds, will be subject to limitations regarding bankruptcy, insolvency and other laws relating to or affecting creditors’ rights. The various other legal opinions to be delivered concurrently with the issuance of the 2011 Bonds will be similarly qualified. A complete copy of the proposed form of opinion of Bond Counsel is set forth in Appendix C.

INITIATIVE AND REFERENDUM

Under the State Constitution, the voters of Washington State have the ability to initiate legislation and modify existing legislation 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.

LITIGATION

There is no litigation now pending or threatened restraining or enjoining the issuance and delivery of the 2011 Bonds or the power and authority of the District to impose, prescribe or collect rates or charges for the services of the Water System, or in any manner questioning the power and the authority of the District to impose, prescribe or collect such rates or charges or issue and deliver the 2011 Bonds or affecting the validity of the 2011 Bonds.

In 2001, the Tulalip Tribes (the “Tribe”) filed a claim with the District and threatened a lawsuit against the District, the City of Everett and Snohomish County for $36 million in damages to compensate for the alleged loss of treaty fishing rights associated with construction and operation of the City’s water supply diversion dam on the Sultan River and the operation of the Jackson Project, of which the diversion dam is a part. The diversion dam is solely owned and operated by the City, which has operated it since 1930. The Jackson Project was first licensed in 1961, and the diversion dam became incorporated into the Project in the early 1980’s when the license was amended. The District has formally denied any liability with respect to this claim, had no involvement with the diversion dam prior to 1961, and has maintained it had little involvement with the diversion dam between 1961 and 1982, and has not contributed to any significant damages to treaty fishing rights. The City has entered into a settlement with the Tribe that is believed to cover the period from approximately 1930 through 1961. The District in 1982 had reached a settlement with the Tribe in which the Tribe provided a covenant not to sue through 2032. After the District began proceedings to re-license the Jackson Project, the Tribe renewed its claims against the District. A mediation with the Tribe resulted in a successful settlement agreement that calls for a stream of payments from the Generation System to the Tribe of $10 million over 20 years upon issuance of a final license by the FERC in exchange for a release that covers past claims and future treaty fishing rights claims for the duration of the new Jackson Project license, together with other terms of mutual benefit to the parties. The settlement was approved by the parties in October 2009. The FERC has not issued a final license, but on June 8, 2011, issued the District an annual license to operate the Project under the terms and conditions of the prior license. Along with the annual license, the FERC issued a Notice of Authorization for Continued Project Operation, which is effective until May 31, 2012, and provides that if a new license is not issued on or before May 31, 2012, the annual license is renewed automatically without further order.

In 2008, the State Supreme Court held that a city water utility may not include within rates charged to water customers the expenses related to providing fire hydrants. The Court held that providing fire hydrants is a governmental service that benefits the public generally, rather than a proprietary service that specifically benefits water customers. The Court required the city to recover the costs associated with providing fire hydrants from general fund sources (such as taxes) rather than from revenues of the water utility. General purpose governments within the District’s service area establish the fire flow standard that must be met based on the zoning and developments being proposed; however, the actual costs of installation and maintenance of those fire hydrants have historically been recovered by the District through its water rates and developer extension policies. Additional

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litigation (to which the District is not a party) is pending relating to the recovery of such costs. The District does not expect the outcome of any such litigation to have a material adverse impact on the finances or operation of the Water System.

The District is a party to other lawsuits arising out of its normal course of business, but the District does not believe any of such litigation will have a significant adverse impact upon the District. In addition, the District is a party to certain litigation relating to the Electric System and the Generation System, but any payments as a result of such litigation would not be an obligation of the Water System.

TAX MATTERS

In the opinion of Bond Counsel, interest on the 2011 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; however, interest on the 2011 Bonds is taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on certain corporations. Federal income tax law contains a number of requirements that apply to the 2011 Bonds, including investment restrictions, periodic payments of arbitrage profits to the United States, requirements regarding the use of proceeds of the 2011 Bonds and the facilities refinanced with proceeds of the 2011 Bonds and certain other matters. The District has covenanted to comply with all applicable requirements. Bond Counsel’s opinion is subject to the condition that the District comply with the above-referenced covenants and, in addition, will rely on representations by the District and its advisors with respect to matters solely within the knowledge of the District and its advisors, respectively, which Bond Counsel has not independently verified. If the District fails to comply with such covenants or if the foregoing representations are determined to be inaccurate or incomplete, interest on the 2011 Bonds could be included in gross income for federal income tax purposes retroactively to the date of issuance of the 2011 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 2011 Bonds. Owners of the 2011 Bonds should consult their tax advisors regarding the applicability of any collateral tax consequences of owning the 2011 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, and various withholding requirements. Prospective purchasers of the 2011 Bonds should be aware that ownership of the 2011 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 2011 Bonds. Bond Counsel expresses no opinion regarding any collateral tax consequences. Prospective purchasers of the 2011 Bonds should consult their tax advisors regarding collateral federal income tax consequences. Payments of interest on tax-exempt obligations such as the 2011 Bonds, are in many cases required to be reported to 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 District’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 2011 Bonds. Owners of the 2011 Bonds are advised that, if the IRS does audit the 2011 Bonds, under current IRS procedures, at least during the early stages of an audit, the IRS will treat the District as the taxpayer, and the owners

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of the 2011 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 2011 Bonds until the audit is concluded, regardless of the ultimate outcome. Qualified Tax-Exempt Obligations

The 2011 Bonds are not “qualified tax-exempt obligations” within the meaning of Section 265(b)(3)(B) of the Code.

CONTINUING DISCLOSURE UNDERTAKING

General. In accordance with Section (b)(5) of Securities and Exchange Commission Rule 15c2-12 under the Securities and Exchange Act of 1934, as the same may be amended from time to time (the “Rule”), the District has agreed in the Resolution to provide or cause to be provided to the MSRB, in accordance with the Rule, the following annual financial information and operating data for the prior fiscal year (commencing in 2012 for the fiscal year ending December 31, 2011):

1. Annual financial statements showing ending fund balances for the Water System prepared in accordance with generally accepted accounting principles (and as modified if required by the Washington State Auditor pursuant to RCW 43.09.200 (or any successor statutes)) and generally, of the type included in this Official Statement under “Comparative Income Statements”;

2. Principal amount of outstanding Bonds;

3. Debt service coverage for outstanding Bonds;

4. Aggregate cubic feet of water usage per year for, and gross revenue from, the Water System’s ten largest customers; and

5. Water System operating statistics showing average number of customers, water sales, system use and losses and water purchased.

Items 2 through 5, inclusive, shall be required only to the extent that such information is not included in the information provided pursuant to item 1 above.

Such annual information and operating data described above shall be available on or before nine months after the end of the District’s fiscal year. The District’s current fiscal year ends December 31. The District may adjust such fiscal year by providing written notice of the change of fiscal year to the MSRB. In lieu of providing such annual financial information and operating data, the District may cross-reference to other documents available to the public on the MSRB’s Internet website or filed with the Securities and Exchange Commission.

If not provided as part of the annual financial information discussed above, the District will provide to the MSRB the District’s audited annual financial statement prepared in accordance with generally accepted accounting principles (and as modified as may be required by the Washington State Auditor pursuant to RCW 43.09.200 (or any successor statute)), when and if available.

The District agrees to provide or cause to be provided, in a timely manner, to the MSRB, notice of its failure to provide the annual financial information described above on or prior to the date set forth above.

Specified Events. The District agrees to provide or cause to be provided to the MSRB, in a timely manner, not in excess of ten business days after the occurrence of the event, notice of the occurrence of any of the following events with respect to the 2011 Bonds: 1. Principal and interest payment delinquencies; 2. Non-payment related defaults, if material;

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3. Unscheduled draws on debt service reserves reflecting financial difficulties; 4. Unscheduled draws on credit enhancements reflecting financial difficulties; 5. Substitution of credit or liquidity providers, or their failure to perform; 6. Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the 2011 Bonds, or other material events affecting the tax status of the 2011 Bonds; 7. Modifications to the rights of 2011 Bond owners, if material; 8. Bond calls, if material, and tender offers; 9. Defeasances; 10. Release, substitution or sale of property securing repayment of the 2011 Bonds, if material; 11. Rating changes; 12. Bankruptcy, insolvency, receivership or similar event of the District; 13. The consummation of a merger, consolidation, or acquisition involving the District or the sale of all or substantially all of the assets of the District, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and 14. Appointment of a successor or additional trustee or the change of name of a trustee, if material. No real property secures repayment of the 2011 Bonds. The only debt service reserve is the Reserve Account.

Termination and Modification. The District’s obligations to provide annual financial information and notices of specified events will terminate upon the legal defeasance, prior redemption or payment in full of all of the 2011 Bonds. Such undertaking, or any provision thereof, shall be null and void if the District (1) obtains an opinion of nationally recognized bond counsel to the effect that those portions of the Rule that require this undertaking, or any such provision, are invalid, have been repealed retroactively or otherwise do not apply to the 2011 Bonds; and (2) notifies the MSRB of such opinion and the cancellation of such undertaking.

Notwithstanding any other provision of the Resolution, the District may amend such undertaking with an approving legal opinion of bond counsel. In the event of any amendment or waiver of a provision of this undertaking, the District shall describe such amendment in the next annual report, and shall include, a narrative explanation of the reason for the amendment or 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 District. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change will be given in the same manner as for a material event, 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.

EMMA; Format for Filings with the MSRB. Until otherwise designated by the MSRB or the SEC, any information or notices submitted to the MSRB in compliance with the Rule are to be submitted through the MSRB’s Electronic Municipal Market Access system (“EMMA”), currently located at www.emma.msrb.org (which is not incorporated

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into this Official Statement by reference). All notices, financial information and operating data required by this undertaking to be provided to the MSRB must be in an electronic format as prescribed by the MSRB. All documents provided to the MSRB pursuant to this undertaking must be accompanied by identifying information as prescribed by the MSRB.

Remedies. The right of a Bondowner or Beneficial Owner to enforce the provisions of the District’s undertaking described in this section shall be limited to a right to obtain specific enforcement of the District’s obligations, and any failure by the District to comply with the provisions of this undertaking shall not be an Event of Default with respect to the 2011 Bonds. For purposes of this section, “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 2011 Bonds, including persons holding 2011 Bonds through nominees or depositories.

Prior Compliance with Continuing Disclosure Undertakings

The District has complied with all of its written undertakings under the Rule.

RATINGS

Moody’s Investors Service (“Moody’s) and Standard & Poor’s Rating Services, a Standard and Poor’s Financial Services LLC business, a New York corporation (“S&P”) have assigned their ratings of “Aa2” and “AA,” respectively, to the 2011 Bonds. Such ratings reflect only the views of the respective rating agency and are not a recommendation to buy, sell or hold the 2011 Bonds. An explanation of the significance of such ratings should be obtained from the rating agency furnishing the same at the following addresses: Moody’s Investors Service, 7 World Trade Center, 250 Greenwich Street, New York, New York 10007; and Standard & Poor’s Ratings Services, 55 Water Street, New York, New York 10041. The District has furnished to each rating agency certain information and materials with respect to the 2011 Bonds. Generally, rating agencies base their ratings on such information and materials and on investigations, studies and assumptions made by the rating agencies. There is no assurance that the ratings that have been assigned to the 2011 Bonds will continue for any given period of time or that they will not be revised or withdrawn entirely by such rating agencies if, in the judgment of the rating agencies, circumstances so warrant. A downward revision or withdrawal of the ratings may have an adverse effect on the market price of the 2011 Bonds.

UNDERWRITING

The 2011 Bonds are being purchased by J.P. Morgan Securities LLC (the “Underwriter”) from the District at a price of 109.642% of par and will be re-offered at the aggregate price of 110.255% of par, subject to the terms of a purchase contract between the District and the Underwriter (the “Purchase Contract”). The Purchase Contract provides that the Underwriter shall purchase all of the 2011 Bonds if any are purchased and that the obligation to make such purchase is subject to certain terms and conditions set forth in the Purchase Contract, the approval of certain legal matters by counsel and certain other conditions. The initial public offering prices set forth on the inside cover hereof may be changed from time to time by the Underwriter. The Underwriter may offer and sell the 2011 Bonds into unit investment trusts or money market funds, certain of which may be sponsored or managed by the Underwriter, at prices lower than the public offering prices stated on the inside cover hereof.

The Underwriter has entered into negotiated dealer agreements (each, a “Dealer Agreement”) with each of UBS Financial Services Inc. (“UBSFS”) and Charles Schwab & Co., Inc. (“CS&Co.”) for the retail distribution of certain securities offerings, including the 2011 Bonds, at the original issue prices. Pursuant to each Dealer Agreement, UBSFS and CS&Co. will purchase 2011 Bonds from the Underwriter at the original issue price less a negotiated portion of the selling concession applicable to any 2011 Bonds that such firm sells.

MISCELLANEOUS

Any statements made in this Official Statement involving matters of opinion, estimates or projections, whether or not so expressly stated, are set forth as such and not as representations of fact. No representation is made that any of such estimates will be realized. The descriptions contained in this Official Statement of the 2011 Bonds, the

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Resolution, and certain legislation do not purport to be complete and are qualified in their entirety by reference to the respective documents and laws. Copies of the Resolution are available at the offices of the District. The execution and delivery of this Official Statement by its Treasurer and Assistant General Manager-Finance have been duly authorized by the District.

Conflicts. Some of the fees of the Underwriter, Bond Counsel and Underwriter’s Counsel are contingent upon the sale of the 2011 Bonds. From time to time Bond Counsel may serve as counsel to the Underwriter with respect to transactions other than the issuance of the 2011 Bonds. Furthermore, Underwriter’s Counsel represents the District from time to time on matters unrelated to the issuance of the 2011 Bonds.

CERTAIN LEGAL MATTERS

Upon delivery of the 2011 Bonds, K&L Gates LLP, Seattle, Washington, Bond Counsel, will render an opinion as to the validity of and tax exemption of the interest on the 2011 Bonds in substantially the form attached hereto as Appendix C. Certain legal matters in connection with the issuance of the 2011 Bonds will be passed upon for the District by Anne Spangler, General Counsel. Certain legal matters will be passed upon for the Underwriter by its counsel, Foster Pepper PLLC. Any opinion of Foster Pepper PLLC will be addressed solely to the Underwriter and may not be relied upon by owners of the 2011 Bonds.

This Official Statement is not to be construed as a contract with the owners of any of the 2011 Bonds.

PUBLIC UTILITY DISTRICT NO. 1 OF SNOHOMISH COUNTY, WASHINGTON /s/ Glenn McPherson Glenn McPherson, Treasurer and Assistant General

Manager-Finance

APPENDIX A

FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

AND INDEPENDENT AUDITOR’S REPORT

[THIS PAGE INTENTIONALLY LEFT BLANK]

To the Board of TrusteesSnohomish County Public Utility District

We have audited the accompanying combined balance sheet of Public Utility District No.1 of Snohomish County, Washington ("the District") as of December 31, 2010, and the individual balance sheets of the Electric, Generation, and Water Systems as of December 31, 2010; the related combined statement of revenues, expenses, and changes in equity and cash flows for the year ended December 31, 2010; and the individual statements of revenues, expenses, and changes in equity and cash flows for the Electric, Generation, and Water Systems for the year ended December 31, 2010. These financial statements are the responsibility of the District's management. Our responsibility is to ex-press an opinion on these financial statements based on our audit. The financial statements of the District as of and for the year ended December 31, 2009, were audited by other auditors whose report, dated April 7, 2010, expressed an unqualified opinion on those financial statements.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comp-troller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the District as of December 31, 2010, and the combined results of its operations and its cash flows for the year then ended, the individual financial positions of the Electric, Generation, and Water Systems as of December 31, 2010, and the individual results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

In accordance with Government Auditing Standards, we will also issue our report on our consideration of the District's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit.

The Management's Discussion and Analysis and Schedules of Funding Progress enclosed in this report are not a required part of the financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

Baker Tilly Virchow Krause, LLPTen Terrace Ct. PO Box 7398Madison. WI 53707-7398tel 608 249 6622fax 608 249 8532bakertilly.com

Madison, WisconsinApril 5, 2011

INDEPENDENT AUDITOR’S REPORT

A-1

Management’s Discussion and Analysis (Unaudited)

The following discussion provides an overview of Snohomish County Public Utility District (the PUD) financial activities for the years ended December 31, 2010 and 2009. This unaudited discussion is designed to be used in conjunction with the financial statements and notes, which follow this section.

FINANCIAL HIGHLIGHTS

Operating ResultsThe 2010 operating results for Snohomish County PUD reflect the continued impacts of the recession on the local and national economy. From 2009 to 2010, retail electric sales decreased slightly from $512 million to $503 million, and retail MWh sales decreased from 6,872,796 MWh in 2009 to 6,721,180 MWh in 2010.

Wholesale energy sales continued to decrease in 2010 primarily as a result of lower wholesale market power prices and less surplus power available to sell into the wholesale power markets. Wholesale electric power sales were slightly lower, 1,352,152 MWh in 2010 as compared with 1,556,036 MWh in 2009. In terms of revenues, the PUD recorded $39 million in wholesale electric sales in 2010 versus $51 million in 2009.

Despite the recessionary impacts on revenues, Snohomish County continues to exhibit population growth. The aver-age number of Electric System customers increased from 318,530 in 2009 to 320,229 in 2010, an increase of 0.5%. Figure 1 illustrates the five-year growth in the number of customers.

Figure 1 – Growth in Electric Customers

Combined purchased power costs were $265 million in 2010, $18 million lower as compared with 2009. The de-crease in the power costs was the result of two factors: the expiration of a power purchase agreement at the end of 2009 and a decrease in the amount and cost of market and short term power purchases. This decrease in purchased power costs is matched by an $18 million increase in combined operations and maintenance expenditures. A number of issues led to the increase in operations and maintenance expenditures, including an increase in the cost of third-party transmission and related regulatory compliance costs, increased funding for conservation programs, 2010 storm restoration expenditures, an expansion of the PUD’s tree trimming program, legal and litigation expenses re-lated to a power purchase agreement dispute, and the implementation costs for a new customer information system.

Combined other income and expense was $32 million for 2010, $21 million higher than 2009. There were two primary sources for this increase: (1) the PUD received a $13 million settlement related to a dispute between the PUD and a power purchase agreement counterparty stemming from the 2000-2001 West coast energy crisis, and (2) the PUD received $9 million in income from various grant awards.

A-2

As a net result of these various factors impacting operating results, 2010 combined net income is $49 million, $3 million higher than combined net income for 2009.

Customer-Focused InitiativesResidential Exchange CreditEffective October 1, 2009, the PUD began receiving a “Residential Exchange Credit” from the Bonneville Power Administration (BPA) on behalf of its eligible customers. The intent of this credit is to equitably allocate the benefits of the Federal Columbia River Power System among public power utilities and investor-owned utility customers. The Residential Exchange Credit offsets the overall costs that the PUD pays for energy from BPA and must be passed through to residential customers. The PUD received $9 million and $4 million in credits from BPA during 2010 and 2009, respectively. The PUD expects to continue to receive benefits from this BPA program that it can pass on to its customers through September 2011.

Energy Efficiency MeasuresThe PUD and its customers continue to demonstrate their commitment to energy efficiency through their active participation in numerous conservation programs. These programs include incentives for commercial and industrial new construction and retrofits, low interest loans for residential home weatherization and financing to encourage investment in solar photovoltaic systems.

Operation expenses in 2010 include approximately $18 million related to energy efficiency programs, an increase of $3 million over 2009 levels.

Figure 2 – Energy Efficiency Expenditures

Renewable Resource DemonstrationsIn addition to assisting customers with energy efficiency measures, the PUD continued to demonstrate renewable energy resources in its own facilities in order to evaluate options and assist customers in making decisions in their homes to reduce the environmental impacts of energy production. During 2010, the PUD installed a small solar dem-onstration project at the South County office. This project allows customers to become familiar with the features of a grid-tied system. The PUD also installed a 2.5-kilowatt wind demonstration project at its Operations facility in Everett. The GALE T1 turbine produces its full-rated capacity at speeds of approximately 30 miles per hour. The production data gathered from this project will be used to assist customers in the implementation of their own wind projects. The turbine is expected to produce enough energy to power an average home for two months.

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New Customer Information SystemOn March 1, 2010, the PUD began responding to customer inquiries and processing utility bills using a new customer information software system. The new system, purchased from SAP in 2008, lays the foundation for the PUD to move forward with its strategic plan that includes Smart Grid, demand-side management and outage management capabilities.

Implementation of the new system began in October 2008, and required the PUD to review and modify business processes, adapt technical standards and perform the testing and training necessary for the successful implemen-tation. The March 1 implementation was very successful from a technical and billing perspective, and service levels have steadily improved as PUD staff became more familiar with the capabilities of the system.

Operating expenses for 2010 include $6 million of costs related to this project implementation; in addition, $14 million of pre-implementation expenditures for the purchase of the system, related hardware purchases and upgrades, and other project costs have been capitalized as a component of plant in service.

Renewable Power ResourcesThe PUD is committed to adding clean, environmentally-friendly renewable energy sources to its energy portfolio. In demonstrating this ongoing commitment, the PUD has continued its research into renewable energy sources and energy efficiency projects in and around Snohomish County:

Geothermal Drilling ProjectThe PUD is continuing its research of the potential for geothermal energy in and around Snohomish County. In August 2010, the utility began drilling geothermal temperature gradient bore holes to assess the potential for geothermal energy development in the Cascade Mountain Range. This area offers significant opportunities for geothermal energy due to geological conditions that support volcanoes, hot springs and other thermal features.

The results of the five test bore holes will help assess if and where conditions are favorable for further geothermal research. Geothermal energy captures the heat from the Earth in the form of hot water or steam and extracts it to drive a turbine and generate electricity. Geothermal energy provides a consistent, baseload energy supply, has a small environmental footprint, produces no carbon emissions and creates minimal environment impact and safety issues.

Tidal Research ProjectThe PUD is actively researching the production of power through the action of tidal currents as a renewable energy source to help meet the needs of the Pacific Northwest. The PUD’s pilot project will consist of two tidal turbines which may be installed as early as 2012. The PUD is working with OpenHydro, a Dublin, Ireland, based tidal energy technology company, to design, build and deploy the turbines in Admiralty Inlet west of Whidbey Island. This site was selected due to its strong tidal currents, water depth, seabed conditions and its proximity to existing electrical system facilities. The turbines are expected to generate one megawatt of power during peak times and an average of 100 kilowatts. OpenHydro has operated similar devices in other parts of the world since 2006, including Scotland’s Orkney Islands, but the PUD’s project will be the first grid-connected array.

Other technical tidal research partners the PUD has been working with include the University of Washington, the Electric Power Research Institute, the National Renewable Energy Lab and Pacific Northwest National Laboratory’s Marine Sciences Laboratory.

Small Hydroelectric ProjectsThe PUD is also researching small hydroelectric projects in and around Snohomish County. In 2010, the PUD pur-chased the land and easements on Calligan and Hancock Creeks for $1 million to begin the process of permitting and obtaining licensing to construct small hydroelectric projects. The future projects, which are located in King County, are within three miles of one another and are similar in size and layout. It is anticipated that both future proj-ects will be designed and constructed concurrently following permit and license acquisition.

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Renewable Portfolio StandardThe PUD is committed to meeting the requirements of the Washington state renewable portfolio standard (RPS), which requires a utility to use eligible renewable resources to meet three percent of its load by January 1, 2012, nine percent of its load by January 1, 2016, and fifteen percent of its load by January 1, 2020. The PUD has already entered into agreements for power purchases from wind and other renewable resource power producers that sig-nificantly exceed the 2012 RPS. As a result, the PUD was able to sell $8 million of the renewable energy credits as-sociated with the resources in 2010; this funding will be used to invest in future renewable resources.

Grant AwardsThe PUD has received grant awards or received grant income in 2010 for several purposes:

Smart Grid Technology InfrastructureIn 2009, the PUD was awarded a $16 million grant funded through the American Recovery and Reinvestment Act to be used to support the installation of a smart grid framework, including substation and distribution automation, a digital telecommunication network, and a distribution management system. During 2010, the PUD installed 163 miles of fiber optic cable completing the digital network to 85 substations, an existing radio site and various PUD buildings that were previously being served by less robust communication technologies. Also in 2010, the District completed the automation of 16 substations with an additional 13 substations scheduled to be completed in 2011. This new infrastructure will support future smart grid technologies, which will help the utility and its customers manage power consumption, plan for energy use and improve operational efficiencies. The project is expected to take three years to complete at a total estimated cost of $32 million. Through 2010, the PUD has recorded $15 million of grant qualified expenditures and $7 million of grant income related to this project.

Energy Efficiency ServicesThe PUD was awarded a $2 million grant for its continued effort to promote conservation and energy efficiency. The grant is funded from the American Recovery and Reinvestment Act for programs providing energy-efficiency upgrades. The PUD is working in partnership with Snohomish County and the City of Everett to support projects in multi-family homes and small businesses in selected neighborhoods throughout Snohomish County. The City of Everett has allocated $200,000 and Snohomish County has allocated $220,000 in matching contributions to this project. In 2010, the PUD recorded $613,000 of grant income associated with this project.

Note: Nearly all of the power purchased or produced by the PUD is considered

renewable under most standards; this table includes only those resources eligible

under the Washington State RPS.

RPS Eligible Renewable Resource

Type

Capacity in MW

Hay Canyon Wind Project Wind 100

Wheat Field Wind Project Wind 97

White Creek Wind Project Wind 20

Hampton Lumber Cogeneration Bio-mass 7

Klickitat Landfill Gas Project Landfill Gas 2

Total 226

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Tidal Energy ResearchDuring 2010, the PUD was awarded a $10 million grant from the US Department of Energy (DOE) which supports the PUD’s tidal energy research project. The grant is part of the $37 million awarded by the DOE to support projects for generating clean, cost-competitive renewable electricity from the nation’s oceans and free-flowing rivers and streams. The PUD is finalizing the grant agreement and research associated with this grant is expected to begin in 2011. The PUD was previously awarded two other Department of Energy grants for tidal energy research. During 2010, the PUD recorded grant income of $557,000 related to those grants.

Geothermal Technology InfrastructureThe United States Department of Energy approved a $0.5 million grant to the PUD in support of its ongoing geo-thermal energy production research. This grant partially funds the initial phases of the PUD’s Geothermal Energy Exploration study which includes project scoping, research and exploratory drilling at various locations in Snohomish and King County. The PUD recorded grant income of $79,000 in 2010.

A summary of the grants awarded to the PUD follows:

Debt Issues and RestructuringElectric System Series 2010 Revenue BondsOn May 11, 2010, the Electric System issued $128 million of Series 2010A taxable Build America bonds and $7 mil-lion of Series 2010B tax-exempt bonds. The American Recovery and Reinvestment Act of 2009 permits the PUD to issue taxable bonds to finance capital projects that otherwise could be financed with tax-exempt bonds. The PUD will receive subsidy payments from the federal government equal to 35% of the interest payable on the bonds. The bonds are 25-year bonds with fixed interest rates ranging from 3.0% to 5.6%. The proceeds will be used to finance construction of new facilities, substations and improvements to existing substations and other capital asset con-struction. As of December 31, 2010, the PUD recorded $1 million in other income related to the subsidy payments.

Generation System Debt Restructuring and IssuanceOn April 20, 2010, the Generation System issued $213 million of Series 2010A Revenue Refunding bonds. The proceeds of the bonds were used to redeem the outstanding Series 1995, 2001A and 2002A Adjustable Tender Generation Sys-tem bonds. This refunding resulted in the elimination of all of the PUD’s variable interest rate debt and the termination or settlement of the associated variable-to-fixed interest rate swap agreements. The Series 2010A Revenue Refunding bonds were sold at fixed interest rates ranging from 3.0% to 5.0% and are scheduled to mature in 2024.

On May 11, 2010, the Generation System also issued $14 million of Series 2010B, taxable Build America bonds. The proceeds of this bond sale are being used to fund the construction of the Youngs Creek Hydroelectric Project. The bonds have a fixed interest rates ranging from 5.3% to 5.7% with a final maturity date of 2040, and are also recipients of subsidy payments from the federal government.

Granting Agency Project Award Amount(in millions)

US Department of Energy Smart Grid Technology $ 15.8

US Department of Energy Tidal - Energy Research 10.0

US Department of Energy Tidal - Energy Testing and Development 1.2

US Department of Energy Tidal - Acoustical Study 0.5

US Department of Energy Tidal - Post-Installation Monitoring 0.5

US Department of Energy Geothermal Energy Study 0.5

US Department of Energy Community Energy Efficiency Program 2.2

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Figure 3 – Combined Electric and Generation System Long-Term Debt

Generation SystemJackson Hydroelectric Project RelicensingIn 2009, the PUD filed the final license application with the Federal Energy Regulatory Commission (FERC) to secure a new license for the Henry M. Jackson Hydroelectric Project. FERC has the authority to issue a new license for a term of up to 50 years. The PUD met with the various stakeholders since the relicensing process began in 2002 to reach a final settlement agreement in October 2009. The agreement calls for a series of measures to continue to protect and enhance Spada Lake and the Sultan River basin.

The current license expires in May 2011. The PUD expects FERC to renew the Jackson Project license. The Jackson Project currently generates about 5% of the PUD’s energy supply. It also provides water storage that allows the City of Everett to provide approximately 80% of the water supply for residents of Snohomish County. Costs incurred related to the relicensing effort of $9 million have been capitalized as a deferred charge in the Generation System and will be amortized over the life of the new license.

Kimberly-Clark Settlement Agreement In 2010, the PUD and Kimberly-Clark (K-C) reached a settlement agreement regarding the Everett Cogeneration project. The agreement addresses a claim made by the PUD for power replacement costs resulting from a 2007 generator failure; it also clarifies the terms of the associated Operating Agreement. The terms of the agreement called for K-C to pay the PUD $3 million for the cost of replacement power. The PUD paid K-C $7.5 million in settlement of claims made by K-C. The agreement further assigned the cost of decommissioning and remediation to K-C upon the December 31, 2016, termination date of the Operating Agreement. The $7.5 million termination payment was recorded by the Genera-tion System as a deferred charge and is being amortized over the remaining life of the Operating Agreement.

Youngs Creek Hydroelectric ProjectIn 2009, the PUD began development on Youngs Creek, located in central Snohomish County, to construct a 7.5 aMW small hydroelectric project. The project is estimated to cost approximately $30 million to design and construct and will consist of a 12-foot high, 65-foot wide diversion dam with a crest elevation of 1,530 feet. As currently licensed by FERC, it will also include an intake structure, a 14,300-foot-long penstock, a powerhouse with an 7.5 MW turbine and a 7.2 mile long transmission line. Construction began in February 2010, and the project is expected to begin producing power in the fall of 2011. In 2010, the PUD incurred approximately $16 million in construction costs. The project is being funded primarily with proceeds from the Series 2010B Generation System bonds.

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Water SystemOperating ResultsThe Water System exhibited growth in 2010 despite the continuing economic recession. The average number of Water System customers increased from 19,398 in 2009, to 19,914 in 2010, an increase of 2.7%. Retail water sales were $7.8 million in 2010 compared with $7.3 million in 2009, an increase of 6.8%. Figure 4 illustrates the five-year growth in the retail water sales. However, the recession’s impact on the housing market and new construction caused a further decline in customer and developer fees for new connections, from $4 million in 2009 to $3 million in 2010.

The Water System recorded net income of $2 million in 2010 as compared with nearly $4 million in 2009.

Figure 4 – Growth in Water Retail Sales

Rate IncreasesIn December 2008, the Board of Commissioners approved revisions to the Water System’s service rate schedule. The new schedule, effective January 1, 2009, included annual rate increases through 2012. Several factors led to the rate increase schedule, including increases in wholesale water prices, rising material and construction costs, and the need for funding capital infrastructure improvements to address growth in Snohomish County. For 2010, retail water rates increased approximately 13%.

Water Operations FacilityIn June 2010, the PUD completed construction of a new Water System Operations Facility. The facility provides office space for most of the Water System’s dedicated personnel. In addition, the complex provides a new warehouse and shop, a vehicle storage building and four canopy structures to house materials and equipment. The project cost of $10 million was primarily funded with a portion of the proceeds from the Series 2009 Water System Revenue bonds.

OVERVIEW OF THE FINANCIAL STATEMENTS

Basic Financial StatementsThe Balance Sheets present the PUD’s assets and liabilities, with the difference between the two reported as equity. The Balance Sheets provide information about the nature and amount of investments in resources (assets), and the obligations to creditors (liabilities). Equity increases when revenues exceed expenses. The Statements of Revenues, Expenses, and Changes in Equity report the revenues and expenses during the periods indicated. The Statements of Cash Flows provide information about the PUD’s cash receipts and payments from operations, as well as funds provided and used in investing and financing activities.

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Notes to the Financial StatementsThe notes to the financial statements provide additional information that is essential to a full understanding of the figures provided in the basic financial statements.

Financial AnalysisAnalysis of the comparative financial information is provided in the following table.

Condensed Combined Financial Information(In millions)

December 31, 2010 2009 2008

Current Assets and Special Funds $ 723 $ 878 $ 719 Net Utility Plant 1,123 1,088 1,047 Deferred Charges and Other Assets 29 63 74 Total Assets $ 1,875 $ 2,029 $ 1,840

Current Liabilities $ 112 $ 376 $ 202 Long-Term Debt 616 527 546 Deferred Credits & Other Liabilities 28 56 68 Total Liabilities 756 959 816

Invested in Capital Assets, Net of Debt 573 535 470Restricted 171 167 168 Unrestricted 375 368 386 Total Equity 1,119 1,070 1,024 Total Liabilities & Equity $ 1,875 $ 2,029 $ 1,840

Operating Revenues $ 573 $ 585 $ 615 Operating Expenses 535 529 499 Net Operating Income 38 56 116

Interest Charges 35 37 37Other Income and Expense 32 11 28Capital Contributions 14 16 28 Net Income 49 46 135

Equity – beginning of year 1,070 1,024 889Equity – end of year $ 1,119 $ 1,070 $ 1,024

AssetsCurrent assets and special funds increased $159 million in 2009 primarily as a result of the Electric System’s $175 mil-lion purchase of the Series 2001A and 2002A Generation System variable rate demand bonds, funded by short-term Electric System Series 2009A Revenue notes. Current assets and special funds subsequently decreased $155 million in 2010 because $235 million of Series 1995, 2001A and 2002A Generation System variable rate demand bonds, owned by the Electric System, were redeemed by the Generation System, and the redemption funds were used by the Electric System to retire a similar amount of Electric System Revenue notes. This reduction in current assets and special funds was partially offset by $81 million of remaining funds from the sale of Series 2010A and 2010B Electric System revenue bonds.

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The PUD had $1,123, $1,088, and $1,047 million invested in a broad range of net utility capital assets as of Decem-ber 31, 2010, 2009, and 2008, respectively. Utility capital assets include a hydroelectric power generation plant, a cogeneration facility, electric transmission and distribution lines, water lines, storage and pump station facilities, build-ings and equipment. Utility plant additions were $93 million in 2010 and $95 million in 2009, reflecting investments in the distribution and transmission systems, including construction associated with growth and general facilities of the PUD. The increase in utility plant was offset by $40 million and $9 million in plant asset retirements in 2010 and 2009, respectively, and an increase in accumulated depreciation of $17 million in 2010 and $45 million in 2009.

Deferred charges and other assets decreased $34 million in 2010 as the PUD terminated three variable-to-fixed inter-est rate swap agreements in conjunction with the refunding of the associated Generation System bonds. As a result, the $34 million difference between the notional and market value of these hedges, which was treated as a deferred regulatory charge, was eliminated. In 2009, deferred charges and other assets declined $11 million due to a $20 million decrease in the market value of the PUD’s three variable-to-fixed interest rate swaps. This decrease was partially offset by the recording of a $7.5 million deferred settlement.

LiabilitiesCurrent liabilities declined $264 million in 2010 as the Electric System retired $232 million in Series 2009A and 2009B short-term notes. In 2009, current liabilities increased $174 million as a result of the issuance of $175 million of Electric System Series 2009A short-term notes.

Long-term debt increased $89 million after the Electric System issued $135 million of Series 2010A and 2010B Revenue bonds. Offsetting this new debt, the Generation System recorded $31 million of unamortized refunding charges in con-nection with the refunding of the Series 1995, 2001A and 2002A bonds. In 2009, long-term debt decreased $19 million due to scheduled principal repayments on outstanding tax-exempt bonds, net of $13 million from the sale of Series 2009 Water System Revenue bonds.

Deferred credits and other liabilities decreased $28 million in 2010 as the PUD terminated three variable-to-fixed interest rate swaps, in conjunction with the refunding of the associated Generation System bonds. As a result, the $34 million difference between the notional and market value of these hedges, which was treated as a deferred regulatory credit, was eliminated. In 2009, deferred credits and other liabilities decreased $12 million due primarily to the change in the market value of the interest rate swaps associated with the Generation System’s variable rate bonds.

EquityEquity invested in capital assets, net of debt increased $38 and $65 million in 2010 and 2009, respectively. The 2010 and 2009 increases reflect the growth in net utility plant; however the 2010 increase is lower despite a higher level of capital expenditures due to funding from issuance of revenue bonds. Capital expenditures are generally funded through rate-based revenues, contributions from customers and developers for requested facilities, and debt proceeds. The PUD added 3,187 and 4,049 Electric System customer connections in 2010 and 2009, respectively. Water System customer connections grew 471 in 2010 and 465 in 2009.

Restricted equity represents resources that are subject to external restrictions, such as bond covenants or third-party contractual agreements, and resources restricted by Board resolution. Restricted equity exhibited very little change in 2010 or 2009.

Unrestricted equity is available to finance day-to-day operations without constraints established by debt covenants or other legal requirements. Unrestricted equity increased $7 million in 2010 due to higher cash reserve levels. In 2009, unrestricted equity decreased by $18 million due to the scheduled use of cash reserves to fund a portion of system infrastructure capital expenditures.

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Operating RevenuesOperating revenues decreased $12 million in 2010 and $30 million in 2009 as a result of lower wholesale market power prices and less surplus power available to sell into the wholesale market.

Operating ExpensesOperating expenses increased $6 million in 2010. Purchased power costs declined by $18 million as a result of the expiration of a power purchase agreement at the end of 2009 and a decrease in the amount and cost of market and short term power purchases. However, this decrease in purchased power costs is offset by $24 million of increases in other operating expenses, including higher depreciation, an increase in the cost of third-party transmission and related regulatory compliance costs, increased funding for conservation programs, 2010 storm expenditures, an expansion of the PUD’s tree trimming program, legal and litigation expenses related to a power purchase agreement dispute, and the implementation costs for a new customer information system.

In 2009, operating expenses increased $30 million. Purchased power costs were $20 million higher primarily due to the cost of two new renewable power resource purchase agreements. In addition, the PUD increased funding for en-ergy conservation programs and incurred costs related to the purchase and implementation of a customer information system.

Other Income and ExpenseOther income and expense increased $21 million in 2010 as the PUD received $9 in grant revenue to fund certain programs and recorded a legal settlement on a long-term power purchase agreement of $13 million. In 2009, other income and expense decreased $17 million due to lower market interest rates, which provided lower investment returns in 2009, as well as the effects of adjusting the PUD’s investments to current market prices.

Capital ContributionsCapital contributions declined $2 million in 2010 and $12 million in 2009 as the economic recession led to a decline in construction and developer activity in the PUD’s service area.

Requests for InformationThe basic financial statements, notes, and management’s discussion and analysis are designed to provide a general overview of the PUD’s finances. Questions concerning any of the information provided in this report should be directed to the PUD at 2320 California Street, Everett, WA 98201.

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Current Assets:

Cash and temporary investments:

Cash and cash equivalents $ 140,748 $ 18,399 $ 7,950 $ 167,097 $ 140,169

Temporary investments 193,705 – – 193,705 184,364

334,453 18,399 7,950 360,802 324,533

Accounts and other receivables, net 111,469 4,195 1,986 113,028 117,929

Intersystem receivables 16,126 777 – – –

Materials and supplies 13,604 – 118 13,722 14,310

Prepayments and other 944 85 25 1,054 1,050

Total Current Assets 476,596 23,456 10,079 488,606 457,822

Special Funds - Bond Funds and Other 210,564 19,203 4,944 234,711 419,832

Utility Plant:

Plant in service 1,219,317 364,617 122,387 1,706,321 1,646,730

Construction work in progress 37,645 20,455 2,128 60,228 67,658

Total utility plant 1,256,962 385,072 124,515 1,766,549 1,714,388

Less: Accumulated depreciation (448,236) (172,999) (22,624) (643,859) (626,906)

Net Utility Plant 808,726 212,073 101,891 1,122,690 1,087,482

Deferred Charges and Other Assets:

Unamortized debt expense 3,751 2,023 579 6,353 6,484

Conservation loans and other notes receivable, net 7,041 – 756 7,797 7,738

Intersystem loans and receivables 114,333 8,856 – – –

Deferred regulatory charges 64 – – 64 33,927

Other deferred charges 4,337 10,819 – 15,156 15,449

Total Deferred Charges and Other Assets 129,526 21,698 1,335 29,370 63,598

Total Assets $ 1,625,412 $ 276,430 $ 118,249 $ 1,875,377 $ 2,028,734

Combined Balance SheetsDecember 31, 2010 and 2009

(In thousands)

2010 2009

Electric Generation Water System System System Combined Combined

The accompanying notes are an integral part of these combined financial statements.

Assets

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Current Liabilities:

Accounts payable $ 42,566 $ 3,368 $ 1,189 $ 43,287 $ 52,020

Accrued taxes 14,658 129 34 14,821 14,553

Accrued interest 2,866 1,636 124 3,840 5,467

Other accrued liabilities 17,964 636 – 18,600 25,388

Customer deposits 4,785 – 12 4,797 6,877

Current maturities of long–term debt 5,948 19,445 2,120 27,513 37,939

Notes payable – – – – 234,021

Intersystem payables 777 16,126 – – –

Total Current Liabilities 89,564 41,340 3,479 112,858 376,265

Long–Term Debt:

Revenue bonds 381,948 202,662 28,071 612,681 523,319

Other notes payable – – 2,991 2,991 3,367

Total Long–Term Debt 381,948 202,662 31,062 615,672 526,686

Deferred Credits and Other Liabilities:

Intersystem loans and payables 11,116 112,073 – – –

Deferred regulatory credits – – – – 33,927

Other deferred credits 25,697 1,665 392 27,754 22,073

Total Deferred Credits and Other Liabilities 36,813 113,738 392 27,754 56,000

Total Liabilities 508,325 357,740 34,933 756,284 958,951

Equity (Deficit):

Invested in capital assets, net of related debt 495,498 (125,729) 70,490 572,786 534,678

Restricted 152,234 14,323 4,433 171,776 167,243

Unrestricted 469,355 30,096 8,393 374,531 367,862

Total Equity (Deficit) 1,117,087 (81,310) 83,316 1,119,093 1,069,783

Total Liabilities and Equity $ 1,625,412 $ 276,430 $ 118,249 $ 1,875,377 $ 2,028,734

Combined Balance SheetsDecember 31, 2010 and 2009

(In thousands)

2010 2009 Electric Generation Water System System System Combined CombinedLiabilities

The accompanying notes are an integral part of these combined financial statements.

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Operating Revenues:

Retail sales $ 503,172 $ – $ 7,825 $ 510,997 $ 519,394

Wholesale sales 38,902 60,206 423 39,325 51,539

Other 18,695 3,732 181 22,608 14,350

Total Operating Revenues 560,769 63,938 8,429 572,930 585,283

Operating Expenses:

Purchased power 325,377 – – 265,171 283,217

Purchased water – – 1,990 1,990 1,960

Operations 146,725 4,999 2,625 154,349 141,113

Maintenance 20,860 1,401 858 23,119 18,514

Depreciation 40,313 15,126 2,363 57,802 54,914

Taxes 30,885 1,129 433 32,447 30,033

Total Operating Expenses 564,160 22,655 8,269 534,878 529,751

Net Operating Income (Loss) (3,391) 41,283 160 38,052 55,532

Interest Charges:

Interest 19,696 17,323 1,426 33,092 35,492

Amortization of debt expense, discounts & premiums (733) 4,494 43 3,804 3,100

Allowance for funds used during construction (938) (697) (308) (1,943) (1,559)

Total Interest Charges 18,025 21,120 1,161 34,953 37,033

Other Income and Expense:

Interest income 11,273 1,655 166 7,741 15,398

Net increase (decrease) in the fair value of investments (436) – – (436) (5,673)

Other income and expense, net 23,704 1,052 – 24,756 1,261

Total Other Income and Expense 34,541 2,707 166 32,061 10,986

Capital Contributions 11,023 28 3,099 14,150 16,366

Net Income 24,148 22,898 2,264 49,310 45,851

Equity (Deficit), Beginning of year 1,092,939 (104,208) 81,052 1,069,783 1,023,932

Equity (Deficit), End of year $ 1,117,087 $ (81,310) $ 83,316 $ 1,119,093 $ 1,069,783

Combined Statements of Revenues, Expenses, and Changes in EquityYears ended December 31, 2010 and 2009

(In thousands)

2010 2009 Electric Generation Water System System System Combined Combined

The accompanying notes are an integral part of these combined financial statements.

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Cash Flows From Operating Activities: Cash received from customers $ 535,168 $ 61,955 $ 7,998 $ 547,456 $ 565,737 Cash payments to suppliers (422,711) (5,940) (4,625) (375,611) (382,361) Cash payments to employees (70,583) (1,363) (1,775) (73,721) (67,971) Cash payments for taxes (30,558) (1,101) (428) (32,087) (31,526) Other cash received (paid) 36,587 (2,696) 236 34,127 21,826 Net Cash Provided by Operating Activities 47,903 50,855 1,406 100,164 105,705

Cash Flows From Non–Capital Financing Activities: Proceeds from debt – – – – 236,009 Repayment of debt (232,475) – – (232,475) (58,240) Interest paid on debt (2,481) – – (2,481) (3,981) Debt issuance costs – – – – (1,396) Non-capital grants received 1,249 – – 1,249 – Net Cash Provided by (Used for) Non–Capital Financing Activities (233,707) – – (233,707) 172,392

Cash Flows From Capital & Related Financing Activities: Capital construction, including interest paid on debt charged to capital projects (63,609) (21,092) (5,886) (90,587) (91,521) Proceeds from debt 135,279 247,147 75 382,501 14,420 Repayment of debt (10,611) (262,476) (1,567) (274,654) (36,288) Interest paid on debt (16,282) (17,787) (1,138) (30,323) (32,595) Debt issuance costs (1,296) (33,119) – (34,415) (331) Capital contributions 10,980 28 1,757 12,765 12,779 Capital grants received 7,323 – – 7,323 – Intercompany loans (20,786) 20,786 – – – Net Cash Provided by (Used for) Capital & Related Financing Activities 40,998 (66,513) (6,759) (27,390) (133,536)

Cash Flows From Investing Activities: Sale of special funds and investment securities 429,674 14,088 1,716 445,478 269,788 Purchase of special funds and investment securities (270,132) – – (270,132) (421,706) Interest on investment securities 14,510 2,707 182 12,515 18,045 Net Cash Provided by (Used for) Investing Activities 174,052 16,795 1,898 187,861 (133,873)

Net Increase (Decrease) in Cash & Cash Equivalents: 29,246 1,137 (3,455) 26,928 10,688

Beginning of Year 111,502 17,262 11,405 140,169 129,481 End of Year Cash & Cash Equivalents $ 140,748 $ 18,399 $ 7,950 $ 167,097 $ 140,169

Reconciliation of Net Operating Income to Net Cash Provided by Operating Activities: Net Operating Income (Loss) $ (3,391) $ 41,283 $ 160 $ 38,052 $ 55,532 Adjustments to reconcile net operating income to net cash provided by operating activities: Depreciation and amortization 40,313 15,959 2,363 58,635 54,914 Other cash received 13,653 – – 13,653 1,262 (Increase) decrease in receivables (1,341) 1,820 (212) 2,808 (1,249) (Increase) decrease in other assets 185 (721) (27) (563) (5,679) Increase (decrease) in payables (4,159) (7,985) (949) (15,634) (3,903) Increase (decrease) in other liabilities 2,643 499 71 3,213 4,828 Total adjustments 51,294 9,572 1,246 62,112 50,173

Net Cash Provided by Operating Activities $ 47,903 $ 50,855 $ 1,406 $ 100,164 $ 105,705

Combined Statements of Cash FlowsYears ended December 31, 2010 and 2009

(In thousands)

2010 2009 Electric Generation Water System System System Combined Combined

The accompanying notes are an integral part of these combined financial statements.

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Notes to Combined Financial StatementsDecember 31, 2010 and 2009

NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESGeneralPublic Utility District No. 1 of Snohomish County, Washington, (the PUD) is a public electric and water utility serving Snohomish County and Camano Island in Island County, Washington. The PUD’s operations consist of three systems: the Electric System, the Generation System and the Water System.

The Electric System is made up of the PUD’s electric transmission and distribution system. The Generation System is composed of the PUD’s Jackson Hydroelectric Project, the Everett Cogeneration Project, and a small hydroelectric project. The Water System is made up of the PUD’s water distribution system.

The accompanying financial statements for 2010 include the individual and combined balance sheets for the Electric System, Generation System and Water System, and the results of operations and cash flows for each system. System columns presented in the financial statements and notes may not add to the combined totals due to the elimination of intercompany transactions, which consist of intersystem loans and routine intercompany transactions.

The PUD’s financial statements are reported using the accrual basis of accounting. Revenues are recorded when earned, and expenses are recorded when incurred. Revenues and costs that are directly related to the generation, purchase, transmission and distribution of electricity or water are reported as operating revenues and expenses. All other revenues and expenses are reported as non–operating revenues and expenses.

The accompanying financial statements have been prepared in conformity with Generally Accepted Accounting Prin-ciples (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard–setting body for establishing governmental accounting and financial reporting principles. In addition, the PUD has elected to implement, where not in conflict with GASB pronouncements, GAAP prescribed by the Financial Ac-counting Standards Board (FASB).

The PUD’s other significant accounting and financial policies are described in the following sections.

Retail SalesElectric System customers are billed on a monthly or bimonthly cyclical basis. The accompanying financial statements include estimated unbilled revenues for energy delivered to customers between the last billing date and the end of the year, amounting to $51.6 million in 2010 and $56.6 million in 2009.

Water System customers are billed on a bimonthly cyclical basis. The accompanying financial statements include estimated unbilled revenues for water delivered to customers between the last billing date and the end of the year, amounting to $665,000 in 2010 and $656,000 in 2009.

Power Sales and PurchasesPower sales and purchase transactions are recognized over the duration of the contracts as a component of retail and wholesale revenue and purchased power operating expenses.

Capital ContributionsThe PUD records capital contributions from customers and developers, primarily relating to expansions to the PUD’s distribution facilities, as a separate category of non-operating revenue.

Cash EquivalentsThe PUD considers highly liquid, short–term investments with original maturities of three months or less to be cash equivalents.

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Accounts Receivable and Allowance for Doubtful AccountsAccounts receivable are recorded when invoices are issued and are written off when they are determined to be un-collectible. A reserve is established for uncollectible accounts receivable based upon historical write–off trends and knowledge of specific circumstances that indicate collection of an account may be unlikely. The allowance for doubtful accounts was $2.8 million and $3.0 million as of December 31, 2010 and 2009, respectively.

Material and SuppliesMaterial and supplies are recorded at average cost and consist primarily of materials for construction and maintenance of utility plant.

Special FundsSpecial funds are restricted or limited–use funds that have been established in accordance with Board of Commissioner resolutions, bond resolutions, state law or other agreements. These funds – which consist of cash, cash equivalents and investments – are restricted for specific purposes, including debt service, bond reserves, extraordinary power purchases, post-employment benefits, and other reserve requirements.

Utility PlantUtility plant is stated at cost, including an allowance for funds used during construction (AFUDC). The PUD’s capitalization threshold for utility plant is $5,000. Depreciation is calculated using the straight–line method over the estimated useful lives of the assets, ranging from 5 to 50 years. When utility plant assets are retired, the original cost together with removal costs, less salvage, is charged to accumulated depreciation. The cost of maintenance and repairs is charged to expense as incurred, while the cost of replacements and betterments is capitalized. See Table 1 for additional utility plant details.

The PUD periodically reviews the carrying value of its utility plant and other equipment whenever events or changes in cir-cumstances indicate that the carrying value may not be recoverable. To the extent the estimated future cash inflows attrib-utable to the asset, less estimated future cash outflows, is less than the carrying amount, an impairment loss is recognized.

Unamortized Debt Expense and Reacquisition Costs on Bond RefundingsCosts relating to the sale of bonds are amortized over the lives of the various bond issues using the straight–line or effective–interest methods.

The difference between the cost to defease outstanding debt and the carrying value of bonds defeased by refund-ing bonds is deferred and amortized over the shorter of the remaining term of the refunded bonds or the term of the refunding bonds, using the straight–line or effective–interest method. This difference for bonds defeased by operating funds is charged to operations currently.

Deferred Regulatory Charges and CreditsFinancial accounting standards require that the fair value of all derivative financial instruments be recognized as either assets or liabilities on the balance sheet, with a corresponding charge or credit to operations.

The PUD has reviewed its various contractual arrangements and concluded that the majority of the contracts for the purchase, sale, transportation and exchange of power constitute normal purchases and sales under existing account-ing standards.

The PUD entered into floating–to–fixed interest rate swap agreements to hedge the effect of interest rate changes on variable rate bonds. These contracts met the definition of derivative assets or liabilities and as such, the fair values of these derivatives were recorded on the balance sheet as of December 31, 2009. The Board approved resolutions that allowed the change during the period in the fair value of these contracts to be deferred and recorded as regulatory charges and/or liabilities, which had no impact on operating results. All PUD variable rate bonds were repaid in 2010 and the associated floating to fixed interest rate swap agreements were terminated. As a result, there are no deferred regulatory charges or liabilities related to interest rate swap agreements as of December 31, 2010.

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Table 1Utility Plant (In thousands) 2008 2009 2010 Ending Retirements Ending Retirements Ending Balance Additions & Transfers Balance Additions & Transfers Balance

Electric System

Transmission $ 103,676 $ 1,072 $ 248 $ 104,996 $ 3,466 $ (168) $ 108,294

Distribution 829,289 54,525 (7,970) 875,844 45,669 (6,750) 914,763

General Plant & Other 195,907 7,282 (1,036) 202,153 25,624 (31,517) 196,260

Plant in Service (1) 1,128,872 62,879 (8,758) 1,182,993 74,759 (38,435) 1,219,317

Construction Work in Progress 38,970 9,277 – 48,247 (10,602) – 37,645

Utility Plant 1,167,842 72,156 (8,758) 1,231,240 64,157 (38,435) 1,256,962

Less Accumulated Depreciation (415,045) (42,574) 10,727 (446,892) (41,390) 40,046 (448,236)

Net Utility Plant $ 752,797 $ 29,582 $ 1,969 $ 784,348 $ 22,767 $ 1,611 $ 808,726

Generation System

Generation/Production $ 345,115 $ 2,766 $ (158) $ 347,723 $ 5,889 $ (951) $ 352,661

Transmission 2,712 – – 2,712 73 (18) 2,767

Distribution 980 – – 980 4,117 (440) 4,657

General Plant & Other 4,129 152 – 4,281 555 (304) 4,532

Plant in Service (2) 352,936 2,918 (158) 355,696 10,634 (1,713) 364,617

Construction Work in Progress 1,794 8,254 – 10,048 10,407 – 20,455

Utility Plant 354,730 11,172 (158) 365,744 21,041 (1,713) 385,072

Less Accumulated Depreciation (148,676) (11,125) 165 (159,636) (15,159) 1,796 (172,999)

Net Utility Plant $ 206,054 $ 47 $ 7 $ 206,108 $ 5,882 $ 83 $ 212,073

Water System

Generation/Production $ 8,298 $ 542 $ (11) $ 8,829 $ 1,662 $ – $ 10,491

Transmission & Distribution 90,601 3,056 (63) 93,594 3,881 (234) 97,241

General Plant & Other 4,929 689 – 5,618 9,070 (33) 14,655

Plant in Service (3) 103,828 4,287 (74) 108,041 14,613 (267) 122,387

Construction Work in Progress 2,446 6,917 – 9,363 (7,235) – 2,128

Utility Plant 106,274 11,204 (74) 117,404 7,378 (267) 124,515

Less Accumulated Depreciation (18,096) (2,356) 74 (20,378) (2,518) 272 (22,624)

Net Utility Plant $ 88,178 $ 8,848 $ – $ 97,026 $ 4,860 $ 5 $ 101,891

(1) Plant in service includes land and non–depreciable assets of $73.3 million and $70.7 million as of December 31, 2009 and 2010,

respectively.

(2) Plant in service includes land and non–depreciable assets of $11.5 million and $16.6 million as of December 31, 2009 and 2010,

respectively.

(3) Plant in service includes land and non–depreciable assets of $4.6 million as of December 31, 2009 and 2010, respectively.

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Equity Equity consists of the following components:

Invested in capital assets, net of related debt – This component consists of capital assets, net of accumulated depreciation reduced by the net outstanding debt balances related to capital assets, net of unamortized debt expenses.

Restricted – This component consists of equity with constraints placed on use. Constraints include those imposed by bond covenants or third–party contractual agreements, and resources restricted by Board resolution.

Unrestricted – This component consists of assets and liabilities that do not meet the definition of “invested in capital assets, net of related debt” or “restricted.”

Compensated AbsencesEmployees accrue paid time off (PTO) or vacation in varying amounts according to their years of service. Accrued liability for PTO and vacation was $9.1 million and $8.6 million at December 31, 2010 and 2009, respectively.

EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assump-tions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The PUD has used estimates in determining reported amounts including unbilled revenue, allowance for doubtful accounts receivable, accrued liability for injuries and damages, depreciable lives of utility plant and other contingencies. Actual results could differ from these estimates.

ReclassificationsCertain reclassifications have been made to the 2009 financial statements to conform to the 2010 presentation.

Accounting ChangesThe PUD reviews on an annual basis any changes in GAAP. Any material accounting changes are reflected in the financial statements and the accompanying notes.

NOTE 2SPECIAL FUNDS AND CASH AND TEMPORARY INVESTMENTSThe PUD’s investment policy authorizes the investment of funds in U.S. Treasury, federal and state agency obliga-tions, interest–bearing demand or time deposits, repurchase agreements, bankers’ acceptances and certain other investments. Interest–bearing demand or time deposits with a qualified public depository of the State of Washington are protected and collateralized under the Washington State Public Deposit Protection Act. In all instances, the PUD evaluates the creditworthiness of the financial institutions with which it invests.

All PUD investments are in compliance with the State of Washington statutes and PUD bond resolutions. Substantially all PUD investments are recorded at fair value based on quoted market prices. Premiums and discounts are amortized over the life of the investment using the straight–line method. The PUD’s investments at December 31, 2010 and 2009 are summarized in Table 2.

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Table 2Special Funds, Cash and Temporary Investments (In thousands)

2010 2009 Fair Percent Fair Percent Value of Total Value of Total

Electric System U.S. agency obligations $ 316, 735 58% $ 296,810 44% Cash and interest–bearing demand or time deposits 51,957 10% 39,918 6% Investment in associated company bonds – 0% 234,665 35% Local Government Investment Pool 176,325 32% 104,355 15%

$ 545,017 100% $ 675,748 100%

Generation System Cash and interest–bearing demand or time deposits $ 15,193 40% $ 21,667 43% Local Government Investment Pool 22,409 60% 28,885 57%

$ 37,602 100% $ 50,552 100%

Water System Cash and interest–bearing demand or time deposits $ 1,324 10% $ 1,291 7% Local Government Investment Pool 11,570 90% 16,774 93%

$ 12,894 100% $ 18,065 100%

The PUD invests funds consistent with the following objectives: preserve principal, maintain adequate liquidity and maximize yield. The PUD’s investments are purchased with the objective of holding the security until maturity.

Investment securities owned by the PUD are registered in the PUD’s name and held in trust by banks or trust com-panies. Repurchase agreements are fully collateralized by eligible securities registered in the PUD’s name. Other PUD investments are insured by federal depository insurance or protected against loss since they are on deposit with financial institutions recognized as qualified public depositories of the State of Washington.

The Local Government Investment Pool (LGIP) is an investment vehicle operated by the Washington State Treasurer, offering governmental agency investors the economies of scale available from a multi-billion pooled fund investment portfolio. As of December 31, 2010, LGIP investments include primarily U.S. Agency Securities, U.S. Treasury Securities and Repurchase Agreements. Assets held in LGIP are protected by regulations established by the Washington State Public Deposit Protection Commission.

The PUD’s investment policy specifies that the investment portfolio be structured so maturing investments match pro-jected cash flow needs in order to mitigate interest rate risk. In order to address custodial credit risk, all investments except cash, interest–bearing demand or time deposits, and funds held in the Local Government Investment Pool, which are not evidenced by securities, are held in the PUD’s name by a third–party custodian. The PUD addresses concentration of credit risk by investing in a diversified portfolio.

The PUD manages its exposure to decreases in the fair value of its investments arising from increasing interest rates by setting maturity limits for its investments. While bond reserves are invested in U.S. government securities that approxi-mate the term of the related bonds, all other funds are invested in instruments with maturities of less than five years, and most are invested for terms of one year or less. Investment maturities for combined special funds and cash and temporary investments as of December 31, 2010, were as follows:

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Amount Percent of Maturity Invested Invested Fund (In thousands) Less than 30 days $ 251,177 42% 30 to 90 days 15,279 3% 90 days to 1 year 142,441 24% 1 year to 5 years 149,109 25% Over 5 years 147 0% Bond reserves invested to bond maturity 37,360 6% $ 595,513 100%

Cash and temporary investments at December 31, 2010, include $42.2 million of Electric System, $3.6 million of Gen-eration System and $1.2 million of Water System bond proceeds expected to be used for capital expenditures in 2011.

NOTE 3GENERATION SYSTEM PROJECTSThe Generation System currently consists of the PUD’s Henry M. Jackson Hydroelectric Project (Jackson Project), the Everett Cogeneration Project (Cogeneration Project), and a small hydroelectric project.

Jackson ProjectThe Jackson Project is a multipurpose hydroelectric project with a nameplate capacity of 111.8 megawatts. In 2010 and 2009, the Jackson Project supplied 5% of the PUD’s energy needs.

The PUD operates the Jackson Project under a license issued by the Federal Energy Regulatory Commission (FERC), which expires in 2011. FERC has the authority to issue a new license for a term of up to 50 years. The PUD filed an application for license renewal in 2009 following substantial studies and consultations for the relicensing process that began in 2002. Since all affected parties and organizations have endorsed the relicense application, the PUD expects FERC to renew the Jackson Project license in 2011.

The City of Everett (City), which receives water from the Spada Lake reservoir operated by the Jackson Project and provides drinking water for much of Snohomish County, is a co–licensee. In 2007, the PUD and City entered into a Supplemental Agreement, which modifies the rights and responsibilities of both parties and provides for the PUD to become the sole licensee for the project upon FERC approval of a new license.

The relicensing costs have been recorded as deferred charges, and are expected to be amortized over the life of the license to be acquired. The PUD’s total relicensing costs as of December 31, 2010 and 2009, were $8.9 million and $8.4 million, respectively.

Cogeneration ProjectThe Cogeneration Project is a wood–waste burning steam cogeneration project funded by the PUD. The Cogeneration Project has a nameplate capacity of 52 megawatts and is designed to generate 325,000 MWh of electricity per year. The facility began commercial operation in August 1996 and provides Kimberly–Clark (K-C) with steam for use in its pulp and paper manufacturing process. The Cogeneration Project supplied 3% of the PUD’s energy needs in 2010 and 2009.

According to the terms of an Operating Agreement, K-C is responsible for the operation of the Cogeneration Project for an initial term of 21 years, expiring in 2016 and renewable for additional consecutive periods of five years each, up to a total of 50 years. K-C procures fuel for the term of the agreements and is responsible for 90% of fuel costs through 2010, and 70% of fuel costs thereafter. In addition, K-C is responsible for all operating and maintenance costs for the first 20 years of the agreement and 60% thereafter.

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The PUD and K-C negotiated a settlement agreement regarding the Cogeneration Project in 2010 which addressed a claim made by the PUD for power replacement costs resulting from a 2007 generator failure; it also clarifies the terms of the associated Operating Agreement. As part of the 2010 settlement K-C paid the PUD $3 million for the cost of replacement power, and the PUD paid K-C $7.5 million in settlement of claims made by K-C, and assigned the cost of decommissioning and remediation to K-C upon the December 31, 2016, termination of the Operating Agreement. The $7.5 million termination payment was recorded by the Generation System as a deferred charge that will be amortized over the remaining term of the Operating Agreement. The unamortized balance of the termination payment as of De-cember 31, 2010, was $6.7 million

Small Hydroelectric ProjectsThe Woods Creek Hydroelectric Project, located in central Snohomish County and built in the 1980s, was purchased in 2008 by the PUD and has been upgraded to meet current operating standards. In 2010 and 2009, the project produced approximately 1,600 kWh and 850 kWh, respectively.

In 2009, the PUD purchased land on Youngs Creek in central Snohomish County in order to construct a 7.5 aMW hydroelectric project. The PUD received a FERC license for this project in 2008, and construction of the hydroelectric project is scheduled to be completed in 2011. The PUD recorded $16.0 and $7.3 million in construction costs for this project in 2010 and 2009, respectively.

In 2010, the PUD purchased land on Hancock and Calligan creeks in King County for $1.1 million and will be pursuing the permitting and licensing necessary to construct small hydroelectric projects.

NOTE 4LONG–TERM DEBTDebt service (principal and interest) payments on the PUD’s Revenue bonds and other notes payable to maturity, ex-cluding intersystem borrowing, are set forth in Table 3.

Table 3Debt Service (Principal & Interest)(In thousands)

Electric System Generation System Water System Principal Interest Principal Interest Principal Interest2011 $ 5,948 $ 19,676 $ 19,445 $ 15,749 $ 2,120 $ 1,372 2012 15,459 19,488 20,415 14,782 2,167 1,299 2013 13,725 18,458 21,170 14,027 2,017 1,224 2014 14,639 17,975 22,095 12,357 1,882 1,147 2015 14,740 17,061 23,070 10,610 1,907 1,067 2016–2020 82,405 73,959 108,495 32,617 9,706 4,026 2021–2025 92,670 50,715 24,170 6,311 7,546 1,957 2026–2030 51,705 30,693 3,040 2,801 4,727 752 2031–2035 86,430 12,675 3,635 1,873 900 392036–2040 – – 4,360 761 – – Total $ 377,721 $ 260,700 $249,895 $ 111,888 $ 32,972 $ 12,883 The majority of the PUD’s long–term debt is tax–exempt bonds that are subject to Internal Revenue Service Code (the Code) requirements for arbitrage rebate. The rebate is calculated based on earnings on gross proceeds of the bonds that are in excess of the amount prescribed by the Code. The arbitrage liability as of December 31, 2010 and 2009 was $2.0 million and $1.0 million, respectively.

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Electric SystemA summary of principal outstanding on Electric System long–term debt follows:

December 31, 2010 2009 (In thousands)

Series 2010A Revenue bonds, 3.7–5.6%, due 2017–2035, earliest call 2011 $ 128,075 $ –Series 2010B Revenue bonds, 3.0%, due 2013–2014, non-callable 6,995 –Series 2005 Revenue Refunding bonds, 4.0–5.0%, due 2012–2024, earliest call 2015 120,980 120,980Series 2004 Revenue bonds, 4.5–5.0%, due 2011–2028, earliest call 2014 67,755 72,305Series 2002 Revenue bonds, 5.0–5.5%, due 2012–2024, earliest call 2012 50,720 50,720Series 1999 Revenue and Refunding bonds, 5.0–5.5%, repaid in 2010 – 5,605Series 1995 – 1999 Junior Lien Revenue bonds: Interest Bearing bonds, 5.1–5.9%, due 2011–2014 2,349 2,673 Capital Appreciation bonds, 5.1–5.9%, due 2011–2014 847 979

Total Principal Outstanding on Long–Term Debt $ 377,721 $ 253,262

Changes in the Electric System long–term debt during the years ended December 31, 2010 and 2009, follow (in thousands):

2008 2009 2010 Balance Additions Reductions Balance Additions Reductions Balance

Revenue bonds, face amount $ 262,028 $ – $ (8,766) $ 253,262 $ 135,070 $ (10,611) $ 377,721

Unamortized bond premiums 11,910 – (741) 11,169 332 (795) 10,706

Unamortized bond discounts (127) – 6 (121) (123) 9 (235)

Unamortized refunding loss (1,880) – 953 (927) – 631 (296)

Total Debt 271,931 – (8,548) 263,383 135,279 (10,766) 387,896

Less: Current maturities (9,761) (8,562) (5,948)

Total Long–Term Debt $ 262,170 $ 254,821 $ 381,948

In May 2010, the PUD issued $128.1 million of Series 2010A Electric System Revenue Build America bonds, and $7.0 million of Series 2010B Electric System Revenue bonds. The proceeds of the 2010A and 2010B Series bonds are being used to finance additions, betterments and improvements to and renewals, replacements and extensions to the Electric System.

The Junior Lien Revenue bonds are subject to redemption twice annually at the option of the bondholders, to the extent the PUD has surplus revenues. The PUD’s obligation to redeem the bonds in any calendar year is limited to 5% of the original principal amount and is included in current maturities of long–term debt.

The PUD provided an irrevocable $5.5 million letter of credit to Bonneville Power Administration to secure transmission projects under an agreement. The $5.5 million letter of credit will expire on June 27, 2011. The PUD has not had any draws on this letter of credit since its inception.

The PUD is required to maintain a cash reserve account for certain Electric System bonds. At December 31, 2010 and 2009, the PUD maintained the reserve requirement of $20.6 million and $9.5 million, respectively, in the Electric System.

At December 31, 2010 and 2009, the fair value of the Electric System’s long–term debt was $379.3 million and $273.1 million, respectively. The fair value of the Electric System’s long–term debt is estimated based on quoted market prices for the same or similar issues. The carrying amount for the Junior Lien Revenue bonds approximates fair value since the bonds are subject to redemption twice annually by the bondholder and are currently callable by the PUD at par.

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Generation SystemA summary of principal outstanding on Generation System long–term debt follows:

December 31, 2010 2009 (In thousands)

Series 2010A Revenue Refunding bonds, 3.0-5.0%, due 2011–2024, earliest call 2020 $ 212,465 $ – Series 2010B Revenue bonds, 5.3-5.7%, due 2020–2040, earliest call 2011 14,050 –Series 2002A Adjustable Tender Revenue Refunding bonds, repaid in 2010 – 114,535 Series 2002B Revenue Refunding bonds, 5.3%, due 2011–2012 23,380 39,605 Series 2001A Adjustable Tender Revenue Refunding bonds, repaid in 2010 – 61,870 Series 2001B Revenue Refunding bonds, repaid in 2010 – 11,585Series 1995 Adjustable Tender Revenue bonds, repaid in 2010 – 58,260

Total Principal Outstanding on Long–Term Debt $ 249,895 $ 285,855

Changes in the Generation System long–term debt during the years ended December 31, 2010 and 2009, follow (in thousands):

2008 2009 2010 Balance Additions Reductions Balance Additions Reductions Balance

Revenue bonds, face amount $ 312,280 $ – $ (26,425) $ 285,855 $ 226,515 $ (262,475) $ 249,895

Unamortized bond premiums 4,981 – (1,360) 3,621 20,644 (2,195) 22,070

Unamortized bond discounts (3,494) – 507 (2,987) (13) 2,517 (483)

Unamortized refunding loss (23,775) – 3,840 (19,935) (31,436) 1,996 (49,375)

Total Debt 289,992 – (23,438) 266,554 215,710 (260,157) 222,107

Less: Current maturities (26,425) (27,810) (19,445)

Total Long–Term Debt $ 263,567 $ 238,744 $ 202,662

The Series 1995, 2001A and 2002A Adjustable Tender Revenue Refunding bonds bore interest at variable rates adjusted weekly. In conjunction with the sale of these bonds, the PUD entered into interest rate swap agreements with financial products companies. At December 31, 2009, the fair market value of the swap agreements associated with the 2001A and 2002A bonds were $16.5 million less than book value. The fair market values take into consideration the prevailing interest rate environment and the specific terms and conditions of the transactions and were estimated using the zero-coupon discounting method. The fair market value of the 1995 swap agreement was in dispute between the PUD and the swap provider. Because the swap provider must pay the actual floating rate on the bonds, the fair market value of the swap varied depending on the assumptions used. Depending on these assumptions, the fair value ranged from zero to $17.4 million less than book value as of December 31, 2009. The PUD opted to record market value based on cash flows that approximate a 67 percent of LIBOR interest rate swap.

The difference between the book value and fair market value was recorded as a regulatory credit and a related deferred charge on the balance sheet. During 2009, net cash outflows for the interest rate swap associated with the Series 2001A and 2002A bonds was $9.6 million. Net cash outflows for the interest rate swap associated with the Series 1995 bonds was $3.6 million in 2009.

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The notional amounts of the interest rate swap agreements matched the principal amounts of the associated debt. These interest rate swap agreements were entered into as a cash flow hedge to reduce the volatility related to variable interest rate debt. The swap agreements associated with the Series 2001A and 2002A bonds provided that the PUD pay a fixed percentage to the swap provider, and in return, receive a floating payment based on a percentage of LIBOR. This exposed the PUD to basis risk if the floating rate payment it received was less than the actual variable rate it paid on the bonds. The swap agreement associated with the Series 1995 bonds was a cost of funds swap and did not expose the PUD to basis risk as it required the PUD to pay a fixed percentage to the swap provider and in return receive the actual variable rate on the associated bonds.

In April 2010, the PUD issued $212.5 million of Series 2010A Generation System Revenue Refunding bonds. The proceeds of the 2010A Series bonds were used to redeem the Series 1995, 2001A, and 2002A Generation System Adjustable Tender Revenue bonds. In conjunction with the redemption of the Series 1995, 2001A, and 2002A bonds, the PUD made payments to financial products companies to terminate or settle the associated interest rate swap agree-ments for $14.0 million, $7.3 million and $10.1 million, respectively. The cost of the termination of the interest rate swap agreements has been deferred and will be amortized over the remaining life of the 2010A Series bonds.

Since the Electric System held the Series 1995, 2001A, and 2002A Generation System bonds as an investment, the Electric System received the redemption funds from the Generation System. The Electric System used these funds to retire the outstanding Electric System Series 2009A and 2009B Revenue Notes upon their maturity.

In May 2010, the PUD issued $14.0 million of Series 2010B Generation System Revenue Build America bonds. The proceeds of the 2010B Series bonds are being used to finance additions, betterments and improvements to and re-newals, replacements and extensions to the Generation System, including acquiring and completing construction of the Youngs Creek Hydroelectric Project.

The PUD is obligated as part of its bond resolution to purchase for use in its Electric System all power available to the Electric System from the Generation System. The PUD is also unconditionally obligated by the bond resolution to set aside revenues in amounts sufficient to pay, to the extent not otherwise paid, all the debt service on the Generation System bonds on a parity of lien with the Electric System Senior bonds.

The PUD is required to maintain a cash reserve for certain outstanding bonds. At December 31, 2010 and 2009, the PUD maintained the reserve requirement of $15.1 million and $28.4 million, respectively, in the Generation System.

At December 31, 2010, $24.5 million of the Series 1989 Generation System Revenue bonds and $24.3 million of the Series 1986A Generation System Revenue Refunding bonds were considered defeased.

At December 31, 2010 and 2009, the fair value of the Generation System’s long–term debt was $268.9 million and $289.1 million, respectively. The fair value of the Generation System’s long–term debt is estimated based on quoted market prices for the same or similar issues. The carrying amounts for the 2002A and 2001A Adjustable Tender Rev-enue Refunding bonds, and the 1995 Adjustable Tender Revenue bonds approximate fair value as these are variable interest rate bonds which are adjusted to market interest rates on a weekly basis.

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Water SystemA summary of principal outstanding on Water System long–term debt follows:

December 31, 2010 2009 (In thousands)

Series 2009 Revenue bonds, 2.5–4.4%, due 2011–2031, earliest call 2019 $ 13,085 $ 13,085Series 2006 Revenue and Refunding bonds, 4.0–4.3%, due 2011–2026, earliest call 2016 5,285 5,745Series 2002 Revenue and Refunding bonds, 4.6–5.5%, due 2011–2022, bonds maturing in 2021 are currently callable, earliest call for all other bonds is 2012 11,160 11,900 Washington State Public Works Trust Fund loans: equal principal payments due annually through 2015 90 15 equal principal payments plus 1.0% interest due annually through 2012 391 586State of Washington Drinking Water Revolving Fund loans: equal principal payments due 2011-2029, plus 1.5% interest due annually through 2029 1,180 1,180 equal principal payments plus 1.5% interest due annually through 2027 1,089 1,153 equal principal payments plus 2.5% interest due annually through 2022 574 622Note payable to Bayshore Forest Products, equal principal payments plus 5.0% interest due monthly through 2012 118 178

Total Principal Outstanding on Long–Term Debt $ 32,972 $ 34,464

Changes in the Water System long–term debt during the years ended December 31, 2010 and 2009, follow (in thou-sands):

2008 2009 2010 Balance Additions Reductions Balance Additions Reductions Balance

Revenue bonds, face amount $ 18,805 $ 13,085 $ (1,160) $ 30,730 $ – $ (1,200) $ 29,530

Unamortized bond premiums 104 140 (11) 233 – (18) 215

Unamortized bond discounts (13) – 4 (9) – 4 (5)

Other notes payable 2,475 1,623 (364) 3,734 75 (367) 3,442

Total Debt 21,371 14,848 (1,531) 34,688 75 (1,581) 33,182

Less: Current maturities (1,502) (1,567) (2,120)

Total Long–Term Debt $ 19,869 $ 33,121 $ 31,062

In November 2009, the PUD issued $13.1 million of Series 2009 Water System Revenue bonds. The proceeds of the 2009 Series bonds are being used to finance a new Water System Operations Center and other capital improvements.

The Water System periodically enters into low-interest loan agreements with the Washington State Public Works Trust Fund and the State of Washington Drinking Water Revolving Fund. These funds have provided various loans to the PUD for the repair, replacement, rehabilitation and reconstruction of water facilities.

The Water System is required to maintain a reserve account of not less than the maximum annual interest requirement in any calendar year for the 2009, 2006 and 2002 Series bonds. At December 31, 2010 and 2009, the PUD maintained the reserve requirement of $1.6 million in the Water System. The fair value of the Water System’s long–term debt was $33.4 million and $34.5 million, respectively, at December 31, 2010 and 2009. The fair value of the Water System’s long–term debt is estimated based on quoted market prices for the same or similar issues. The carrying amounts for the Washington State Public Works Trust Fund loans, the State of Washington Drinking Water Revolving Fund loans and the note payable to Bayshore Forest Products approximate fair value since such loans are exclusive and have no market.

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NOTE 5Retirement and Deferred Compensation PlansRetirement PlanSubstantially all PUD full–time and qualifying part–time employees participate in the Washington Public Employees’ Retirement System (PERS) administered by the Washington State Department of Retirement Systems (DRS). Copies of the DRS annual financial report may be obtained by writing to: Department of Retirement Systems, Communications Unit, PO Box 48380, Olympia, WA 98504–8380 or it may be downloaded from the DRS web site at www.drs.wa.gov.

Plan DescriptionPERS is a cost–sharing, multiple–employer retirement system, which includes three plans. Plan 1 and Plan 2 are defined benefit programs, while Plan 3 is a combination defined benefit and defined contribution program. Retirement benefits are financed from employee and employer contributions and investment earnings. Participants who joined the system by September 30, 1977, are Plan 1 members. Those joining thereafter were enrolled in Plan 2. Beginning September 1, 2002, participants have the option of choosing between Plan 2 and Plan 3.

Plan 1 retirement benefits are vested after an employee completes five years of eligible service. Plan 1 members are eligible for retirement 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 benefit is 2% of the average final compensation per year of service, capped at 60%. If qualified, after reaching age 66, a cost–of–living allowance is granted based on years of service credit and is capped at 3% annually.

Plan 2 retirement benefits are vested after an employee completes five years of eligible service. Plan 2 members may retire at age 65 with five years of service. Plan 2 members who retire prior to age 65 receive reduced benefits. The an-nual pension benefit is 2% of the average final compensation per year of service. There is no cap on the years of service credit, and a cost–of–living allowance is granted, capped at 3% annually.

Plan 3 has a dual benefit structure. Employer contributions finance a defined benefit component, and member contribu-tions finance a defined contribution component. Plan 3 retirement benefits are vested after an employee completes 5 or 10 years of service, based upon age requirements. Plan 3 members may retire at age 65, or at age 55 with 10 years of service. Plan 3 members who retire prior to age 65 receive reduced benefits. The annual pension benefit is 1% of the average final compensation per year of service. There is no cap on the years of service credit, and the cost–of–living allowance is granted, capped at 3% annually.

Funding PolicyEach biennium, the state Pension Funding Council adopts Plan 1 employer contribution rates needed to fully amortize the total costs of the plan. Employee contribution rates for Plan 1 are established by statute at 6% and do not vary from year to year. The employer and employee contribution rates for Plan 2 and the employer contribution rate for Plan 3 are developed by the Office of the State Actuary to fully fund the Plan 2 and the defined benefit portion of Plan 3. All employers are required to contribute at the level established by the state law. The methods used to determine the contribution requirements are established under state statute.

The required contribution rates expressed as a percentage of current covered payroll, as of December 31, 2010, were:

PERS Plan 1 PERS Plan 2 PERS Plan 3

Employer 5.31% 5.31% 5.31%

Employee 6.00% 3.90% 5%–15%

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Both the PUD and the employees made the required contributions. The PUD’s required contributions for the years ended December 31, were:

PERS Plan 1 PERS Plan 2 PERS Plan 3

(In thousands)

2010 $ 148 $ 3,727 $ 666

2009 $ 197 $ 4,487 $ 783

Post–Employment Healthcare

Defined Benefit Healthcare PlanThe PUD administers retiree self–insured medical and vision insurance and Health Reimbursement Arrangement (HRA) benefits for eligible retirees hired before July 1, 2009, and their dependents. Retiree benefit provisions are established by Commission resolution.

In general, the PUD pays a contribution toward the retiree’s PUD group health plan premiums or to a Health Reim-bursement Arrangement (HRA). For retirees and their dependents under age 65 who elect a PUD group medical plan, the PUD contribution is based on 75% of the premium for the most commonly elected retiree health plan during the prior year. Retirees and their dependents under age 65 who waive PUD group medical plan coverage receive a $180 monthly contribution into their HRA. When a retiree or dependent becomes eligible for Medicare at age 65, the retiree is no longer eligible for the group medical plan; however, the PUD contributes $180 a month to the retiree’s HRA. In both 2010 and 2009, the PUD contributed $2.3 million to the plans. Plan members receiving benefits contributed $0.9 and $0.4 million in 2010 and 2009, respectively.

The PUD’s annual Post–Employment Healthcare Benefit (PEHB) cost is calculated based on the annual required con-tribution (ARC) of the employer, an amount actuarially determined in accordance with GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal costs each year and amortize any unfunded liabilities (or funding excess) over a 30–year period. The following table shows the components of the PUD’s annual PEHB cost for the year ended December 31, 2010, the amount actually contributed to the plan and the changes in the PUD’s net PEHB obligation (in thousands):

Electric Generation Water

Annual required contribution (ARC) $ 5,087 $ 98 $ 155Contributions made (3,153) (110) (212)Increase (decrease) in net PEHB obligation 1,934 (12) (57) Net PEHB obligation – beginning of year 8,094 124 266 Net PEHB obligation – end of year $ 10,028 $ 112 $ 209

In 2010 and 2009, the PUD made contributions of $1.5 million and $1.3 million, respectively, to the net PEHB obligation. In addition, the Board of Commissioners approved an additional $1.5 million contribution to the net PEHB obligation in 2011 beyond the annual current retiree costs.

As of December 31, 2010, the unfunded actuarial accrued liability (UAAL) was $57.1 million. The annual payroll of ac-tive employees covered by the plan was $85.4 million. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future.

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Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short–term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long–term perspective of the calcula-tions. Actuarial assumptions include a rate of return on investments of 5.5%. The medical trend rate is estimated to gradually decrease from 9.5% in 2010 to 5.0% in 2019 and remain level thereafter.

Defined Contribution Healthcare PlanEmployees hired after July 1, 2009, are not eligible for the post-employment defined benefit healthcare plan but are instead eligible for a defined contribution health care plan. Under this plan, the PUD currently contributes $50 per month into an employee’s individual HRA account. These funds are available to the employee for qualified health care costs upon termination of employment from the PUD.

Deferred Compensation PlansThe PUD has an Internal Revenue Code Section 457 deferred compensation program, covering eligible employees as defined in the plan document. Participants may contribute and defer, up to defined limits, a portion of their current year’s salary. The deferred compensation is not available to employees until termination, retirement, death or an unforeseeable emergency. All plan assets are held in trust for the exclusive benefit of participants and their beneficiaries and as such are not included on the PUD’s financial statements.

The PUD adopted a 401(k) Savings Plan (the Plan) effective May 1, 1985. Participation in the Plan is offered to eligible employees of the PUD as defined in the plan document. The Plan is a defined contribution plan, which provides that participants may make voluntary salary deferral contributions, on a pretax basis, up to a maximum amount as indexed for cost–of–living adjustments. In 2010, the PUD made matching contributions in an amount equal to 50% of the first 4% of a participant’s compensation contributed as a salary deferral. In 2009, the PUD’s matching contribution was 25% of the first 3% of a participant’s compensation. The PUD made matching contributions of $1.4 million and $0.4 million in 2010 and 2009, respectively.

NOTE 6RELATED PARTY TRANSACTIONSThe Generation System sells power to the Electric System at the cost of power produced including debt service and any other cash transactions. The Generation System sold $60.2 million of power in 2010 and $59.0 million of power in 2009 to the Electric System.

The Electric, Generation and Water Systems enter into various transactions to prudently and efficiently allocate resources and costs while treating each system as a stand–alone entity. Amounts due the Electric System from the Generation System for routine intercompany transactions at December 31 totaled $1.4 million in 2010 and $0.4 million in 2009. Amounts due the Generation System from the Electric System for routine intercompany transactions at December 31 totaled $2.1 million in 2010 and $0.7 million in 2009. Amounts due the Electric System from the Water System for routine intercompany transactions totaled $0.3 million at December 31, 2010 and 2009.

The Electric and Generation Systems periodically enter into loan transactions between the systems for various pur-poses including to defease Generation System Revenue bonds, to fund a portion of the Everett Cogeneration Project construction, and to fund the purchase and development of small hydroelectric projects. These loans are assigned terms consistent with the associated asset acquired, and interest rates are set at tax–exempt bond market rates at the time of the loan.

The Electric System loans to the Generation System were $122.9 million and $102.8 million at December 31, 2010 and 2009, respectively. The Generation System recorded interest expense on these loans of $4.8 million in 2010 and $5.0 million in 2009.

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The Generation System loan to the Electric System was $9.6 million and $10.4 million at December 31, 2010 and 2009, respectively. The Electric System recorded interest expense on this loan of $0.6 million in 2010 and $0.7 million in 2009.

In 2008 and 2009, the Electric System established separate trusts and purchased all of the outstanding Series 1995, 2001A, and 2002A Generation System bonds. The Electric System included these investments in Special Funds at December 31, 2009. The Electric System issued short-term revenue notes to finance these purchases. At December 31, 2009, $174.9 million of Series 2009A and $57.6 million of Series 2009B Revenue Notes were outstanding. These revenue notes were retired at maturity in 2010 after the Generation System redeemed the Series 1995, 2001A, and 2002A bonds.

NOTE 7SELF–INSURANCE FUND The PUD maintains a comprehensive insurance program that includes liability insurance coverage of $35 million in excess of a $2 million self–insured retention per occurrence. This coverage insures against certain losses arising from property damage or bodily injury damage claims filed by third parties against the PUD. At December 31, 2010, the PUD’s $2 million self–insured retention was fully funded. Self–insurance funds are included in special funds at market value. Self-insurance funds of $12.6 million as of December 31, 2010, and $12.4 million as of December 31, 2009, are included in special funds at market value. The PUD has not used any funds from the self-insurance funds in 2010 or 2009.

NOTE 8PURCHASED POWER CONTRACTS The PUD is a preference customer of BPA, from which it acquired approximately 77% and 75% of its energy purchases in 2010 and 2009, respectively. The PUD has entered into participation agreements in Energy Northwest’s Nuclear Proj-ects Nos. 1, 2 and 3. Additionally, the PUD has committed the Electric System to purchase the output of its Generation System at the cost of the power produced. The PUD also receives energy from various power supply agreements. Finally, the PUD enters into various short–term agreements for the sale and purchase of power.

BPA ContractsThe PUD purchases power from BPA under power supply contracts offered pursuant to the Pacific Northwest Elec-tric Planning and Conservation Act. These contracts provide the PUD with the ability to purchase power in excess of its declared resources on an as–needed basis. The PUD entered into contracts with BPA to purchase approximately 75–80% of its power requirements from the federal agency through 2028.

Energy Northwest Nuclear Projects Nos. 1, 2 and 3The PUD, Energy Northwest and BPA have entered into separate Net Billing Agreements with respect to Energy North-west’s Project No. 1, Project No. 2 and 70% ownership share of Project No. 3. The PUD is obligated to purchase from Energy Northwest, and BPA is obligated to purchase from the PUD, a maximum of approximately 20%, 15% and 19%, respectively, of the capability of Project Nos. 1 and 2 and Energy Northwest’s 70% ownership share of Project No. 3. BPA is unconditionally obligated to pay Energy Northwest the PUD’s pro rata share of the total annual costs of the proj-ects, including debt service on revenue bonds issued to finance the projects. The effect of these net billing agreements is that the cost of power sold by BPA to all of its customers, including the PUD, includes the cost of these projects.

Notwithstanding the assignment of the PUD’s share of the capability of a net billed project to BPA, the PUD remains unconditionally obligated to pay to Energy Northwest its share of the total annual costs of the projects to the extent payment is not received by Energy Northwest from BPA.

Short–Term Power Supply Transactions and Open Market PurchasesDuring 2010 and 2009, the PUD entered into various short–term power supply transactions to meet normal load re-quirements. As of December 31, 2010, the PUD has committed to purchase approximately 121,600 MWh of energy at various times during 2011 at a cost of approximately $6.2 million.

In 2010 and 2009, respectively, the PUD purchased 8% and 9% of its total energy kWh purchases through short–term power supply and open market purchases for a total cost of $37.0 million and $45.8 million.

NOTE 9CONTINGENCIES The PUD is involved in various claims arising in the normal course of business. The PUD does not believe that the ultimate outcome of these matters will have a material adverse impact on its financial position or results of operations.

The PUD has received federal and state grants for specific purposes that are subject to review and audit by the grantor agencies. Such audits could lead to requests for reimbursements to the grantor agency for expenditures disallowed under terms of the grants. Management believes such disallowances, if any, would be immaterial.

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REQUIRED SUPPLEMENTARY INFORMATION (Unaudited)

Schedule of Funding ProgressThe schedule of funding progress for the post-employment benefit healthcare plan is presented below for the prior two years (in millions):

Actuarial Valuation

Date January 1,

Actuarial Value of Assets

(a)

Actuarial Accrued Liabilities

(AAL)Entry Age

(b)

Unfunded AAL

(UAAL) (b-a)

Funding Ratio (a/b)

Covered Payroll

(c)

Percentage of Covered

Payroll (b-a)/c)

2006 $ - $ 46.5 $ 46.5 0% $ 56.0 83.0%

2008 $ - $ 52.1 $ 52.1 0% $ 67.0 77.8%

The PUD has established a special fund to address the unfunded portion of future post-employment benefit healthcare. The balance of this account was $3.8 million as of December, 31, 2010 and is included in Special Funds on the bal-ance sheet. Since these funds have not been placed in an irrevocable trust as required by GASB 45, the PUD has not reduced the unfunded actuarial accrued liability by these funds.

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APPENDIX B

SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION

The following summary is an outline of certain provisions of the Resolution, is not to be considered a full statement thereof and is qualified by reference to the complete Resolution. All capitalized words or phrases (other than those conventionally capitalized) used in this summary and elsewhere in this Official Statement are defined in the Resolution. Certain of these definitions are summarized below.

Certain Definitions

“Annual Debt Service” for any Fiscal Year means the sum of the amounts required to be paid in such Fiscal Year to pay: (a) the interest due in such Fiscal Year on all Outstanding Bonds, excluding interest to be paid from the proceeds of sale of Bonds or other bonds; and (b) the principal of all Outstanding Serial Bonds due in such Fiscal Year; and (c) the Sinking Fund Requirement, if any, for such Fiscal Year. The Resolution specifies how debt service is calculated for Capital Appreciation Bonds, Deferred Income Bonds, Tender Option Bonds and Variable Interest Rate Bonds.

“Assessment Income” means the principal of and interest on Assessments.

“Assessments” means assessments, including interest and penalties, levied in any local utility district of the District for the acquisition or construction of additions and improvements to and extensions of the Water System, if such assessments are pledged to be paid into the Bond Fund.

“Code” means the Internal Revenue Code of 1986, as the same may be amended from time to time, and the regulations promulgated thereunder.

“Coverage Requirement” means (a) for purposes of the Rate Covenant, for any Fiscal Year the product of 1.25 times Annual Debt Service on all Outstanding Bonds in such Fiscal Year after deducting Assessments actually collected for such year and (b) for purposes of the test for issuing additional Bonds, for any Fiscal Year the product of 1.25 times Annual Debt Service on all Outstanding Bonds and the additional Bonds proposed to be issued after deducting Assessments allocated to the years in which they would be received if the unpaid balance of each assessment roll were paid in equal principal and interest installments or in the remaining number of installments with interest on the declining balance at the times and at the rate provided in the resolution confirming the assessment roll, as applicable.

“Net Revenues” means, for any period, the excess of Revenues over Operating Expenses for such period excluding from the computation of Operating Expenses any expenses paid from insurance proceeds and excluding from the computation of Revenues (a) any profit or loss derived from the sale or other disposition, not in the ordinary course of business, of investments or fixed or capital assets of the Water System, or resulting from the early extinguishment of debt; and (b) any other extraordinary, nonrecurring income or donation other than the proceeds of insurance intended to replace Revenues.

“Operating Expenses” means all the District’s expenses for operation and maintenance of the Water System, including all operation and maintenance expenses as defined by generally accepted accounting principles and shall include, without limiting the generality of the foregoing, (a) all amounts required to be paid to the United States with respect to the Bonds pursuant to Section 148 of the Code and (b) Resource Obligations for any month in which any water or other goods and services from such Resource Obligation was made available to the Water System during such month (regardless of whether or not the Water System actually scheduled or received water from the Resource Obligation during such month). Operating Expenses shall not include any extraordinary, nonrecurring expenses of the Water System, any judgments or amounts to be paid in settlement of claims against the Water System, any costs or expenses for new construction for the Water System, interest on bonds or other obligations of the Water System, amortization or any allowance for depreciation.

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“Outstanding” when used with respect to Bonds means, as of any date, Bonds theretofore or thereupon issued pursuant to this Resolution except: (i) any Bonds cancelled by the Registrar or paid at or prior to such date; (ii) Bonds for which other Bonds have been substituted; and (iii) Bonds that have been defeased.

“Parity Lien Obligations” means all charges and obligations against Revenues ranking on a parity of lien with the Bonds, including but not limited to Resource Obligations for any month such costs or other obligations are not eligible for payment as Operating Expenses. Parity Lien Obligations do not include Bonds.

“Permitted Investments” means the following to the extent the same are legal for investments of funds of the District: (a) any bonds or other obligations which as to principal and interest constitute direct obligations of, or are unconditionally guaranteed by, the United States, including obligations of any of the federal agencies set forth in clause (b) below to the extent unconditionally guaranteed by the United States; (b) obligations of the Export-Import Bank of the United States, the Government National Mortgage Association, the Federal National Mortgage Association to the extent guaranteed by the Government National Mortgage Association, the Federal Financing Bank, the Farmers Home Administration, the Federal Housing Administration, the Private Export Funding Corporation, the Federal Home Loan Bank, and the Federal Home Loan Mortgage Bank, or any agency or instrumentality of the Federal Government which shall be established for the purposes of acquiring the obligations of any of the foregoing or otherwise providing financing therefor; (c) new housing authority bonds issued by the public agencies or municipalities and fully secured as to the payment of both principal and interest by a pledge of annual contributions under an annual contributions contract or contracts with the United States; or project notes issued by public agencies or municipalities and fully secured as to the payment of both principal and interest by a requisition or payment agreement with the United States; (d) direct and general obligations of any State within the territorial United States, to the payment of the principal of and interest on which the full faith and credit of such State is pledged, provided, that at the time of their purchase, such obligations are rated in one of the two highest rating categories by either Moody’s Investors Service (“Moody’s”) or Standard & Poor’s Ratings Services (“S&P”) or in the event each of such rating agencies rates such obligations, by each of them; (e) certificates of deposit, whether negotiable or nonnegotiable, issued by any bank, savings and loan association, or trust company, provided that such certificates of deposit shall be (i) continuously and fully insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation, or (ii) issued by a recognized qualified public depositary of the State of Washington under RCW Chapter 39.58, as amended, or (iii) continuously and fully secured by such securities as are described above in clauses (a) or (b), which shall have a market value (exclusive of accrued interest) at all times at least equal to the principal amount of such certificates of deposit or (iv) certificates of deposit with domestic commercial banks which have a rating on their short term certificates of deposit on the date of purchase of “A-1” or “A-1+” by S&P and “P-1” by Moody’s; (f) any written repurchase agreement with any bank, savings institution or trust company which is insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation, or with any brokerage dealer with retail customers which falls under Securities Investors Protection Corporation protection, provided that such repurchase agreements are fully secured by direct obligations of the United States of America, and provided further that (i) such collateral is held by the District or its agent or trustee during the term of such repurchase agreement, (ii) such collateral is not subject to liens or claims of third parties, (iii) such collateral has a market value (determined at least once weekly) at least equal to 100% of the amount invested in the repurchase agreement, (iv) the District or its agent or trustee has a perfected first security interest in the collateral, (v) the agreement shall be for a term not longer than 270 days and (vi) the failure to maintain such collateral at the level required in (iii) above will require the District or its agent or trustee to liquidate the collateral; (g) Refunded Municipals; (h) banker’s acceptances with commercial banks that have a rating on their short-term certificates of deposit on the date of purchase of “A-1” or “A-1+” by S&P or “P-1” by Moody’s, or in the event each of such rating agencies rates such obligations, by each of them, and that mature no more than 360 days after the date of purchase; and (i) any investments or investment agreements permitted under the laws of the State of Washington as amended from time to time.

“Qualified Insurance” means any municipal bond insurance policy or surety bond issued by any insurance company that at the time of issuance of the policy or surety bond is rated in one of the two highest rating categories by Moody’s Investors Service or Standard & Poor’s, or if rated by both, by each of them.

“Reserve Account Requirement” means (a) with respect to a series of Bonds, the lesser of (i) 10% of the proceeds of such series of Bonds or (ii) the maximum amount of interest due in any Fiscal Year on such series of Bonds, calculated as of their date of issuance and recalculated as of the date of issuance of any series of additional Bonds

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that are Refunding Bonds issued for the purpose of refunding a portion of such series of Bonds; and (b) with respect to all Bonds, the sum of the Reserve Account Requirement for all series of Bonds. The Resolution specifies how interest is calculated for Variable Interest Rate Bonds.

“Resource Obligation” means an obligation of the District to pay the following costs associated with a resource from Revenues as (a) Operating Expenses for any month in which any water, goods or services from such resource were made available to the Water System during such month (regardless of whether or not the Water System actually scheduled or received water, goods or services from such resource during such month) and (b) at all other times as an indebtedness of the Water System payable from Revenues on a parity of lien with the Bonds and any other obligation required or permitted pursuant to the Resolution or any Supplemental Resolution to be paid on a parity of lien with the Bonds; (i) costs associated with facilities or resources for the conservation, transmission or distribution of water (including any common undivided interest therein) hereafter acquired, purchased or constructed by the District and declared by the Commission to be a separate system, which such costs shall include but are not limited to costs of normal operation and maintenance, renewals and replacements, additions and betterments and debt service on the bonds or other obligations of such separate system but shall exclude costs paid or to be paid from the proceeds of the sale of bonds or other obligations of such separate system, or (ii) costs associated with the purchase of water, conservation or services under a contract.

“Revenues” means all income, revenues, receipts and profits derived by the District through the ownership and operation of the Water System, including general facilities charges, together with the proceeds received by the District directly or indirectly from the sale, lease or other disposition of any of the properties, rights or facilities of the Water System and together with the investment income earned on money held in any fund or account of the District, including any bond redemption funds and the accounts therein, in connection with the ownership and operation of the Water System, exclusive of (i) insurance proceeds compensating the District for the loss of a capital asset; (ii) income derived from investments irrevocably pledged to the payment of any Bonds defeased or other bonds defeased, or the payment of which is provided for, under any similar provision of any other bond resolution of the District; (iii) investment income earned on money in any fund or account created for the purpose of complying with the rebate provision of Section 148 of the Code; and (iv) income restricted to a particular purpose inconsistent with its use for the payment of debt service.

“Serial Bonds” means Bonds falling due by their terms in specified years, for which no Sinking Fund Requirements are mandated.

“Sinking Fund Requirement” means, for any Fiscal Year, the principal amount and premium, if any, of Term Bonds required to be purchased, redeemed or paid at maturity or paid into any sinking fund account for such Fiscal Year as established by the Supplemental Resolution authorizing the issuance of such Term Bonds.

“Term Bonds” means Bonds of any principal maturity that are subject to mandatory redemption or for which Sinking Fund Requirements are mandated.

“Water System” means the water utility properties, rights and assets, real and personal, tangible and intangible, now owned and operated by the District and used or useful in the supply, storage, transmission, distribution or conservation of water and all properties, rights and assets, real and personal, tangible and intangible, hereafter constructed or acquired by the District as additions, betterments, improvements or extensions to said water utility properties, rights and assets and declared by the Commission to be included in the Water System, but shall not include any other properties, rights or assets, real or personal, tangible or intangible that hereafter may be purchased, constructed or otherwise acquired by the District as a system that is declared by the Commission to be separate from the Water System, the revenues of which may be pledged to the payment of bonds issued to purchase, construct or otherwise acquire or expand such separate system or otherwise may be pledged to the payment of the bonds of another such separate system of the District.

“Water System Costs” means costs of additions, betterments, extensions, renewals, repairs, replacements and extraordinary operating expenses of the Water System and all costs incident thereto, including but not limited to engineering, financing, or legal costs.

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Funds and Accounts

Revenue Fund. The District has pledged to pay all Revenues into the Revenue Fund except as specifically provided in the Resolution. The Revenue Fund consists of the General Account and the Rate Stabilization Account. The Revenues paid into the Revenue Fund shall first be credited to the General Account and applied as specified under “SECURITY FOR THE BONDS—Flow of Funds.”

Bond Fund. The District has covenanted, as long as any Bonds are Outstanding, to make payments as follows:

(a) Into the Interest Account, not later than the day on which any installment of interest falls due, an amount sufficient to pay such installment of interest falling due.

(b) Into the Principal Account, not later than the day on which any installment of principal on Serial Bonds or any Sinking Requirement on Term Bonds falls due, an amount sufficient to pay such installment of principal or such Sinking Fund Requirement.

(c) Into the Reserve Account from money received upon the delivery of each series of Bonds (but not to exceed the amount permitted by the Code), the amount that together with other money meets the Reserve Account Requirement. The District has reserved the rights to substitute Qualified Insurance or a Qualified Letter of Credit (as defined in the Resolution) to satisfy the Reserve Account Requirement for any Bonds provided that the letter of credit or insurance is not cancelable on less than five years notice. If the amount in the Reserve Account is less than the Reserve Account Requirement, the District shall have 12 months to restore the Reserve Account to the Reserve Account Requirement. Money in the Reserve Account is to be applied to make up a deficiency in the Interest Account or the Principal Account.

Money in the Bond Fund shall be invested in Permitted Investments (as defined in the Resolution).

Construction Fund. The proceeds from the sale of the Bonds (other than any accrued interest received and amounts deposited into the Reserve Account) issued to pay Water System Costs or to repay advances for Water System Costs are to be deposited in the Construction Fund.

Additional Indebtedness

Additional Bonds. Additional series of Bonds may be issued for a lawful corporate purpose of the District only if at the time of the delivery of each series of Bonds to the initial purchasers:

(a) There is no deficiency in the Bond Fund or in any of the accounts therein, provision has been made to meet the Reserve Account Requirement with respect to such series of Bonds, and no Event of Default has occurred and is continuing; and

(b) One of the two following certificates has been filed with the Secretary of the Commission:

(i) a certificate of the Treasurer stating that Net Revenues in any 12-consecutive months out of the most recent 24 months preceding the delivery of the Bonds then proposed to be issued (the “Base Period”), after deducting amounts paid in the Base Period to satisfy all Parity Lien Obligations were not less than the maximum Coverage Requirement in any future Fiscal Year on all Outstanding Bonds and the Bonds then proposed to be issued (provided that (A) in the event that any adjustment in the rates, fees and charges for the services of the Water System will be effective at any time on or prior to the date of delivery of the Bonds then proposed to be issued or within 60 days subsequent to the delivery, the Treasurer shall reflect in his or her certificate the Net Revenues he or she calculates would have been collected in the Base Period if such new rates, fees and charges had been in effect for the entire Base Period and (B) with respect to any Variable Interest Rate Bonds Outstanding on the date such certificate is delivered, the Treasurer must estimate the debt service on such Bonds in accordance with the Resolution), or

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(ii) a certificate of the Professional Utility Consultant setting forth:

(A) the amount of the Adjusted Net Revenues computed as provided in the Resolution, after deducting amounts paid from Revenues in the Base Period to satisfy all Parity Lien Obligations;

(B) the amount of the maximum Coverage Requirement in any Fiscal Year thereafter on account of all Bonds to be Outstanding in such Fiscal Year, including the Bonds proposed to be issued, and stating that the amount shown in (A) above is not less than the amount shown in this paragraph (B).

The District may contract with the entity providing a Qualified Letter of Credit or Qualified Insurance for the Reserve Account that the District’s reimbursement obligation to such entity ranks on a parity of lien with the Bonds. In the event that the District elects additionally to secure any issue of Variable Interest Rate Bonds or Tender Option Bonds through the use of a letter of credit or other credit enhancement device, the District may contract with the entity providing such credit enhancement device that the District’s reimbursement obligation, if any, to such entity ranks on a parity of lien with the Bonds; provided that the payments due under such reimbursement obligation are such that if such reimbursement obligation were a series of additional Bonds and assuming that such credit enhancement device were to be drawn upon for the full amount available, such Bonds could be issued in compliance with the provisions described above for issuing additional Bonds.

Refunding Bonds. The District may issue Refunding Bonds if it complies with the requirements set forth in paragraph (b) above or if there is on file a certificate of the Treasurer of the District stating that immediately after the issuance of such Refunding Bonds the Annual Debt Service in any Fiscal Year that Bonds (other than such Refunding Bonds) are then Outstanding shall not be increased by more than $5,000 by the issuance of such Refunding Bonds.

Junior Lien Bonds. The District may issue bonds, notes, certificates or other evidences of indebtedness for any corporate use or purpose of the District payable from Revenues subordinate to the payments required to be made from the Revenue Fund into the Bond Fund for the Bonds.

Separate System Bonds; Resource Obligations. The District may enter into contracts to purchase water, conservation or services or authorize and issue bonds, notes, certificates or other obligations or evidences of indebtedness, other than Bonds, to acquire or construct facilities or resources for the supply, or for the conservation or transmission of water, and any incidental properties to be constructed or acquired in connection therewith, which facilities or resources shall be a separate system and which contractual obligations, bonds or other obligations or evidences of indebtedness must be payable solely from the revenues or other income derived from the ownership or operation of such separate system. Costs associated with any such contracts or separate system may be declared by resolution of the Commission to be a Resource Obligation of the Water System provided that the following requirements must be met at the time of such declaration:

(a) No Event of Default has occurred and is continuing.

(b) There must have been filed with the Secretary of the Commission a certificate of the Professional Utility Consultant stating that the additional source of water, conservation or services from such Resource Obligation is consistent with sound water utility planning.

(c) There must have been filed with the Secretary of the Commission a report of the Professional Utility Consultant stating that estimated annual Net Revenues for the second full Fiscal Year after the date of initial operation of the facilities, costs of which are to be financed as a Resource Obligation, or after the date of first delivery of water, conservation or services pursuant to a contract, costs of which are declared to be a Resource Obligation, as the case may be, shall be at least equal to the maximum Coverage Requirement in any future Fiscal Year. In estimating Net Revenues, the Professional Utility Consultant shall base such estimate on factors the Professional Utility Consultant deems to be reasonable, provided that the Professional Utility Consultant shall for purposes of such estimate include all Resource Obligations in Operating Expenses.

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(d) In the event that the Resource Obligation is a contract to purchase water supply, there must have been filed with the Secretary of the Commission opinions of counsel to the District and all other parties to the contract, respectively, which respective opinions state that each party to the contract has all requisite right, power and authority to execute and deliver the contract and to perform its obligations thereunder and that the contract constitutes a legally valid and binding obligation of such party thereto.

Defeasance of Bonds

The District may refund or defease all or a portion of the then Outstanding Bonds by setting aside with a trustee or escrow agent in a special account, Government Obligations and/or Refunded Municipals and/or securities permitted by Chapter 39.53 RCW sufficient, together with known earned income, to accomplish the refunding or defeasance. In that case all rights of the owners of the defeased or refunded Bonds in the benefit or security of the Resolution will cease, except that such owners will have the right to receive payment of the principal of, premium, if any, and interest on their Bonds.

Certain Covenants

In addition to the covenants previously described under the headings “SECURITY FOR THE BONDS—Rate Covenants” and “SECURITY FOR THE BONDS—Other Covenants,” the District has covenanted as follows:

1. No Free Service; Enforcement of Accounts Owing. The District will not furnish or supply water free of charge to any other system of the District or to any person or entity, and the District will promptly enforce the payment of all accounts owing to the District by reason of the Water System.

2. Disposition of All or Part of the Water System. The District will not, nor will it permit others to, sell, mortgage, lease or otherwise dispose of or encumber all or any portion of the Water System except:

(a) The District may dispose of all or substantially all of the Water System, provided that simultaneously the District shall cause all of the Bonds to be, or deemed to be, no longer Outstanding.

(b) Except as provided below, the District will not dispose of any part of the Water System in excess of 10% of the value of the net utility plant of the District in service unless prior to such disposition:

(i) there has been filed with the Secretary of the Commission a certificate of the Professional Utility Consultant stating that such disposition will not impair the ability of the District to comply with the rate covenants previously set forth under the heading “SECURITY FOR THE BONDS—Rate Covenants”; or

(ii) provision is made for the payment, redemption or other retirement of a principal amount of Bonds equal to the greater of the following amounts:

(A) An amount which will be in the same proportion to the net principal amount of Bonds then Outstanding (defined as the total principal amount of Bonds then Outstanding less the amount of cash and investments in the Bond Fund) that the Revenues attributable to the part of the Water System sold or disposed of for the 12 preceding months bears to the total Revenues for such period; or

(B) An amount which will be in the same proportion to the net principal amount of Bonds then Outstanding that the book value of the part of the Water System sold or disposed of bears to the book value of the entire Water System immediately prior to such sale or disposition.

(c) The District may dispose of any portion of the Water System that has become unserviceable, inadequate, obsolete, or unfit to be used or no longer necessary, material or useful in the operation of the Water System.

(d) If the ownership of all or part of the Water System is transferred from the District through the operation of law, the District shall reconstruct or replace the portion using any proceeds of the transfer unless the

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Commission determines that such reconstruction or replacement is not in the best interests of the District and the bondowners, in which case any proceeds shall be used to retire Bonds prior to maturity.

3. Insurance. The District will either insure or self-insure the Water System against risks, accidents or casualties, at least to the extent that insurance is usually carried by municipal corporations operating like properties.

4. Books of Account. The District will keep proper books of account, which will be audited annually by a Certified Public Accountant or by the Washington State Auditor’s office. Any registered owner may obtain at the office of the District copies of the District’s balance sheet and statement of income and retained earnings showing in reasonable detail the financial condition of the Water System as of the close of each Fiscal Year.

5. Tax Covenants for the 2011 Bonds. The District will not take any action that will cause the 2011 Bonds to be “arbitrage bonds” or “private activity bonds” under the Code.

Trustee

If an Event of Default has occurred and is continuing, the owners of 25% of the Bonds Outstanding may appoint a Trustee for the registered owners of all Bonds as set forth in the Resolution. The Trustee so appointed may resign upon 45 days notice and may be discharged at any time by the owners of a majority in aggregate principal amount of the Bonds then Outstanding.

Events of Default and Remedies

Events of Default. The following constitute “Events of Default” under the Resolution:

(a) Default in the due and punctual payment of the principal of any of the Bonds within five days when the same becomes due;

(b) Default in the due and punctual payment of interest on any of the Bonds within five days when the same becomes due;

(c) Failure to provide for any required Sinking Fund Requirements within five days when the same becomes due;

(d) Default under any agreement with respect to a Qualified Letter of Credit or Qualified Insurance or other credit enhancement device providing security for the Bonds, which results in suspension, expiration or termination of the payment obligations of the issuer of the device and the District within ten days of such suspension, expiration or termination of payment obligations fails to obtain a substitute credit enhancement device or take other measures to remedy such default;

(e) Default in the observance of any other of the covenants, conditions and agreements in the Resolution and such default continues for 90 days after the District receives from the Trustee or from the registered owners of not less than 25% in principal amount of any series of Bonds Outstanding a written notice specifying and demanding the cure of such default; or

(f) If the District shall admit in writing its inability to pay its debts as they become due, file a petition in bankruptcy, make an assignment for the benefit of its creditors, or consent to the appointment of a receiver for the Water System.

Payment of Funds to Trustee. If an Event of Default is not remedied, the District, upon demand of the Trustee, shall pay to the Trustee, only to the extent necessary to cure the Event of Default, all funds held by the District and pledged under the Resolution and Revenues upon receipt. The Trustee shall apply the funds in accordance with the Resolution.

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Remedies. The Trustee may, if an Event of Default is not remedied, take such necessary steps and institute such proceedings as it deems appropriate to collect all sums owing and to protect the rights of registered owners. The registered owners of the Bonds shall be deemed to irrevocably appoint the Trustee as the lawful trustee of the registered owners. The registered owners of at least 60% of the Outstanding Bonds may, in certain circumstances, direct the time, method and place of conducting any proceedings for any remedy available to the Trustee or exercising any power conferred upon the Trustee.

No registered owner may institute any proceeding for the enforcement of the Resolution unless an Event of Default is continuing and the registered owners of not less than 60% of the Outstanding Bonds have given the District and the Trustee written notice to institute such proceeding and the Trustee has refused or neglected to comply within a reasonable time.

Supplemental Resolutions

Supplemental Resolutions Without Consent of Registered Owners. The District may adopt a supplemental resolution authorizing the issuance of additional Bonds or a resolution amending or supplementing the Resolution (a) to add to the covenants and agreements of the District in the Resolution which will not adversely affect the interest of the registered owners or (b) to cure any ambiguities or correct any defective provisions in the Resolution or any Supplemental Resolution which shall not adversely affect the registered owners’ interest.

Supplemental Resolutions With Consent of Registered Owners. With the consent of the registered owners of not less than 60% of the Outstanding Bonds, the District may adopt a resolution amending or supplementing the Resolution; provided, that, without the specific consent of the registered owner of each Bond that would be affected, no such supplemental resolution shall: (a) change the fixed maturity date for the payment of the principal of any Bond or the date for the payment of interest or the terms of the redemption thereof, or reduce the principal amount of any Bond or the rate of interest thereon or the redemption price (or the redemption premium) payable upon the redemption or prepayment thereof; (b) reduce the percentage of Bonds the registered owners of which are required to consent to any Supplemental Resolution; (c) give to any Bond any preference over any other Bond; (d) create any pledge of the Revenues superior or equal to the pledge of and lien and charge for the payment of the Bonds; or (e) deprive any registered owner of the Bonds of the security offered by the Resolution.

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APPENDIX C

PROPOSED FORM OF OPINION OF BOND COUNSEL

Public Utility District No. 1 of Snohomish County, Washington Everett, Washington J.P. Morgan Securities LLC Seattle, Washington

Re: Public Utility District No. 1 of Snohomish County, Washington Water System Revenue Refunding Bonds, Series 2011 — $9,650,000

Ladies and Gentlemen:

We have acted as bond counsel to Public Utility District No. 1 of Snohomish County, Washington (the “District”), in connection with the District’s issuance of its Water System Revenue Refunding Bonds, Series 2011, in the aggregate principal amount of $9,650,000 (the “2011 Bonds”), pursuant to the Constitution and laws of the State of Washington, including Chapters 54.24, 39.46 and 39.53 of the Revised Code of Washington, as amended (collectively, the “Act”), and pursuant to Resolution No. 3825 adopted on August 25, 1992, as amended, and Resolution No. 5550 of the District, adopted on August 16, 2011 (collectively, the “Bond Resolution”). The 2011 Bonds are being issued for the purpose of refunding certain outstanding water system revenue bonds of the District. Defined terms used and not otherwise defined in this opinion have the meanings given them in the Bond Resolution.

The 2011 Bonds are subject to redemption prior to maturity as set forth in the Bond Resolution.

As to questions of fact material to our opinion, we have relied upon the representations of the District contained in the Bond Resolution and certified proceedings and other certifications of public officials furnished to us without undertaking to verify the same by independent investigation.

Based on our examination, we are of the opinion, as of the date hereof and under existing law that:

1. The Bond Resolution has been duly adopted by the District and constitutes a valid and binding obligation of the District enforceable upon the District in accordance with its terms, except to the extent that enforcement may be limited by laws relating to bankruptcy, insolvency, moratorium, reorganization or other similar laws of general application affecting the rights of creditors, by the application of equitable principles, and the exercise of judicial discretion.

2. Pursuant to the Act, the Bond Resolution creates a valid lien on the funds and revenues pledged by the Bond Resolution for the security of the 2002 Bonds, the 2006 Bonds, the 2009 Bonds, the 2011 Bonds, and any Bonds hereafter issued on a parity therewith.

3. The 2011 Bonds have been duly authorized, executed and delivered by the District, and are valid and binding special obligations of the District, payable solely from the sources provided therefor in the Bond Resolution; except to the extent that the enforcement of the rights of the holders of the 2011 Bonds may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights heretofore or hereafter enacted to the extent constitutionally applicable and that their enforcement may also be subject to the exercise of judicial discretion in appropriate cases.

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4. Interest on the 2011 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; however, interest on the 2011 Bonds is taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on certain corporations. The opinion set forth in the preceding sentence is subject to the condition that the District comply with all requirements of the Internal Revenue Code of 1986, as amended (the “Code”), that must be satisfied subsequent to the issuance of the 2011 Bonds in order that the interest thereon be, and continue to be, excludable from gross income for federal income tax purposes. The District has covenanted to comply with all applicable requirements. Failure to comply with certain of such covenants may cause interest on the 2011 Bonds to be included in gross income for federal income tax purposes retroactively to the date of issuance of the 2011 Bonds.

The 2011 Bonds are not “qualified tax-exempt obligations” within the meaning of Section 265(b)(3) of the Code.

Except as expressly stated above, we express no opinion regarding any other federal or state income tax consequences of acquiring, carrying, owning or disposing of the 2011 Bonds. Owners of the 2011 Bonds should consult their tax advisors regarding the applicability of any collateral tax consequences of owning the 2011 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, and various withholding requirements

We express no opinion relating to the undertaking by the District to provide ongoing disclosure pursuant to Securities and Exchange Commission Rule 15c2-12.

This opinion is given as of the date hereof and we assume no obligation to update, revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention or any changes in law that may hereafter occur.

Very truly yours,

K&L GATES LLP

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APPENDIX D

BOOK-ENTRY SYSTEM

The following information (except for the last paragraph) has been provided by The Depository Trust Company, New York, New York (“DTC”). The District makes no representation regarding the accuracy or completeness thereof. Beneficial Owners (as hereinafter defined) should therefore confirm the following with DTC or the Participants (as hereinafter defined).

DTC will act as securities depository for the 2011 Bonds. The 2011 Bonds will be issued as fully-registered bonds in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered 2011 Bond certificate will be issued for each maturity of the 2011 Bonds in the principal amount of such maturity and will be deposited with DTC.

DTC, the world’s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, and trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

Purchases of 2011 Bonds under the DTC system, in denominations of $5,000 or any integral multiple thereof, must be made by or through Direct Participants, which will receive a credit for the 2011 Bonds on DTC’s records. The ownership interest of each actual purchaser of each 2011 Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participants through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the 2011 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in 2011 Bonds, except in the event that use of the book-entry system for the 2011 Bonds is discontinued.

To facilitate subsequent transfers, all 2011 Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of 2011 Bonds with DTC and their registration in the name of Cede & Co. do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the 2011 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such 2011 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

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Redemption notices shall be sent to DTC. If less than all of the 2011 Bonds within a maturity are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to 2011 Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the 2011 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Redemption proceeds, distributions, and dividend payments on the 2011 Bonds will be made to Cede & Co, or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the District or Registrar, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, the Registrar, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or any other nominee as may be requested by an authorized representative of DTC) is the responsibility of the District or the Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its service as depository with respect to the 2011 Bonds at any time by giving reasonable notice to District or the Registrar. Under such circumstances, in the event that a successor securities depository is not obtained, 2011 Bond certificates are required to be printed and delivered.

The District may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, 2011 Bond certificates will be printed and delivered.

With respect to 2011 Bonds registered on the Bond Register in the name of Cede & Co., as nominee of DTC, the District and the Registrar shall have no responsibility or obligation to any Participant or to any person on behalf of whom a Participant holds an interest in the 2011 Bonds with respect to (i) the accuracy of the records of DTC, Cede & Co. or any Participant with respect to any ownership interest in the 2011 Bonds; (ii) the delivery to any Participant or any other person, other than a bondowner as shown on the Bond Register, of any notice with respect to the 2011 Bonds, including any notice of redemption; (iii) the payment to any Participant or any other person, other than a bondowner as shown on the Bond Register, of any amount with respect to principal of, premium, if any, or interest on the 2011 Bonds; (iv) the selection by DTC or any Participant of any person to receive payment in the event of a partial redemption of the 2011 Bonds; (v) any consent given action taken by DTC as registered owner; or (vi) any other matter. The District and the Registrar may treat and consider Cede & Co., in whose name each 2011 Bond is registered on the Bond Register, as the holder and absolute owner of such 2011 Bond for the purpose of payment of principal and interest with respect to such 2011 Bond, for the purpose of giving notices of redemption and other matters with respect to such 2011 Bond, for the purpose of registering transfers with respect to such 2011 Bond, and for all other purposes whatsoever. For the purposes of this Official Statement, the term “Beneficial Owner” shall include the person for whom the Participant acquires an interest in the 2011 Bonds.