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HomeMy Public PortalAboutExhibit MIEC 71 - MIEC'S Prehearing Conference Report2018 Stormwater Rate Proposal BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT For Consideration of a Stormwater Rate Change Proposal By the Rate Commission of the Metropolitan St. Louis Sewer District PREHEARING CONFERENCE REPORT OF INTERVENOR MISSOURI INDUSTRIAL ENERGY CONSUMERS Pursuant to § 7.280 of the Charter Plan of the Metropolitan St. Louis Sewer District (the "Charter Plan"), Operational Rule 3(9) and Procedural Schedule § 8 of the Rate Commission of the Metropolitan St. Louis Sewer District ("Rate Commission"), the Intervenor Missouri Industrial Energy Consumers ("MIEC") hereby submits this Prehearing Conference Report. As explained in this report and the testimony submitted by MIEC, MSD simply has not performed the analysis necessary on multiple fronts to demonstrate that the current stormwater rate proposal is fair and reasonable to its customers. As MSD has not met the "fair and reasonable" burden imposed by its own Charter, the proposal brought to the Rate Commission should be rejected until such time as MSD has completed a full and necessary analysis and can demonstrate that the proposal is fair and reasonable to all classes of ratepayers. I The stormwater CIRP proposal On February 26, 2018, MSD officially submitted a rate proposal to fund a stormwater capital improvement and replacement program ("CIRP") that is intended to address issues of flooding and erosion throughout MSD's service areal In the rate proposal, MSD seeks to impose additional stormwater capital rates based on the amount of "impervious area" on a property.2 A rate of $2.25 per 2600 square feet of impervious area will be assessed, although residential customers will pay rates within certain tiers established by MSD.3 The money collected from ratepayers will fund projects intended to alleviate local and regional flooding, as well as erosion. MSD has currently identified 483 projects that it includes 'Metropolitan St. Louis Sewer District, Rate Proposal, Exh. 1. 2 Id. 3 Id. at p. 4-6. 1 2018 Stormwater Rate Proposal in the CIRP, and MSD's current estimate is that the CIRP will cost $562 million.4 The projects in the CIRP were primarily identified through complaints from the public.5 The number of projects, specific projects, and costs are all subject to change as MSD conducts the program. 6 The stormwater CIRP is a program that MSD is voluntarily pursuing; there is no legal requirement to conduct this work. Many of the issues to be addressed by the CIRP are issues that have been known to MSD for decades.8 II. The proposed stormwater CIRP must be fair and reasonable to all classes of ratepayers The MSD Charter requires that, among other things, a rate must "impose[] a fair and reasonable burden on all classes of ratepayers."9 An analysis of this standard includes "whether and how cost of service considerations, cost causation principles, customer impact data, economic development considerations, environmental effects and other factors have or have not been factored into such determination."10 As pointed out by Rate Commission Chaiiuian Toenjes during the Prehearing Conference, this language certainly requires a fair and reasonable distribution amongst ratepayer classes. That is not the end of the inquiry, however, as it is entirely possible that a proposal is neither fair nor reasonable for any class of ratepayers. Indeed, rate setting precedent as applied by the Missouri Public Service Commission, which is instructive here, requires that rates be "fair to the public" and that "the dominant thought and purpose of the policy is the protection of the public."11 Accordingly, the standard of fairness and reasonableness applies to the program as a whole as well as to rate distribution amongst classes of ratepayers. Throughout these proceedings, it has been stated multiple times that the charges at issue are not significant. MSD projects that the typical residential customer will see a 3.4% increase — 4 Direct Testimony of Richard Unverferth, Exh. 3C, p. 3. MSD's Response to First Discovery Request of the Rate Commission, Exh 30B, p. 11. 6 Testimony of Brian Hoelscher, Technical Conference on Direct Testimony, Exh. 36, p. 30. Direct Testimony of Susan Meyers, Exh. 3B, p. 5. 8 Testimony of Richard Unverferth, Technical Conference on Direct Testimony, Exh. 36, pp. 106-07. 9 MSD Charter Section 7.270, Exh. 4, p. 24. 10 Rate Commission Operational Rules Section 3(2), Exh. 28, p. 5. 11 In the Matter of Missouri American Water Company's Request for Authority to Implement a General Rate Increase for Water Service Provided in Missouri, 2007 Mo. P.S.C. LEXIS 1197, **55-56 (2007)(internal citations omitted). 2 2018 Stormwater Rate Proposal an annual total of approximately $27.12 Initially, it is entirely possible that this amount of money is significant to an individual ratepayer, and smaller per capita rates do not excuse MSD from doing the diligence necessary to support the program. Furthermore, charges imposed on non- residential customers are significant, with the top 25 MSD customers facing annual increases of $25,000 to over $300,000.13 This proceeding is about more than just a couple of dollars per month, and the requirement that the proposal be fair and reasonable must be applied to protect non-residential customers as well. III. The proposed stormwater CIRP is neither fair nor reasonable because MSD's own studies demonstrate that the public does not support the program MSD cites two bases in its attempt to demonstrate "public demand" for the program.14 First, MSD asserts that they receive "hundreds" of calls each year from customers inquiring about flooding and stormwater issues.15 Second, MSD cites a customer survey that conducted on its behalf by a consultant.16 A review of both of these sources indicates that the purported "public expectation" for this program is greatly overstated.17 MSD's data indicates that in most years from 2012-2017, MSD received about 300 calls per year about flooding and erosion issues.18 Given the fact that MSD has approximately 425,000 accounts (representing a population of over 1.3 million people), and will have approximately 465,000 accounts if it undertakes the proposed CIRP program, about 0.00065 to 0.0007% of MSD's accounts are contacting MSD on an annual basis about flooding and erosion issues — hardly a clamor from the ratepaying public.19 A deeper look at the survey conducted by MSD helps explain this number. This "2017 Stoiiuwater Improvement Survey" was conducted in 2017 by a consultant, ETC Institute.20 MSD 12 Metropolitan St. Louis Sewer District Rate Proposal, Exh. 1, p. 3-4. 13 25 Largest Customers by Impervious Area, Exh. 30D. 14 Surrebuttal Testimony of Richard Unverferth, Exh. 56, p. 1. 15 Id. 16 Id. 17 Id. 18 MSD's Response to the Fifth Discovery Requests of the Rate Commission, Exh 63A, at 4. 19 Of course, the content of these calls is not clear. MSD identified this information as "calls received from ratepayers regarding flooding/erosion issues." Id. 20 ETC Institute, "2017 Stormwater Improvement Survey," Exh. 30G. 3 2018 Stormwater Rate Proposal has used this study to bolster the purported "public expectation" of a stormwater program.21 Indeed, the survey concludes that regional flooding is a top stormwater investment priority for the customers surveyed.22 However, the survey only provided three options for customers to prioritize — regional flooding, local flooding, and erosion — each of which just happens to be contained within the current CIRP proposa1.23 As such, the survey was designed to make it look like ratepayers saw this program as a priority, when in fact the number of calls received by MSD about these issues in comparison to the size of the ratepaying public hardly even qualifies as a rounding error. Even more telling is that, contrary to MSD's assertions, the survey clearly indicates that a nearly three-quarters of MSD's ratepayers are not willing to pay the rate proposed by MSD. The survey concludes that "[m]ore than half of the residents surveyed are willing to pay an additional monthly property tax or impervious fee to fund stormwater improvements."24 This conclusion is misleading, however, because although "more than half of the residents surveyed" may be willing to pay some additional amount, the data collected by the survey clearly show that at least 69% of those surveyed are not willing to pay the amounts actually proposed by MSD. Recall that the current proposal imposes a rate of $2.25 per ERU, and may be as much as $6.84 per month for properties with large amounts of impervious area.25 The survey data, however, indicate that only 32% of the respondents would support a monthly rate of $2 per month or more.26 A full 69% of the survey respondents indicated that they either would not support an increase to manage stormwater problems, or would only support a $1 per month increase.27 Any purported public support for this program crumbles once actual dollar impacts on the customer are taken into account. Accordingly, the "public expectation" for this program is grossly overstated, and ratepayers have clearly expressed to MSD that they are not willing to fund the program as 21 Surrebuttal Testimony of Richard Unverferth, Exh. 56, p. 1. 22 Exh 30G at i. 23 Exh 30G at iv. 24 Exh 30G at ii. 25 Exh 1, p. 4-6. 26 Exh 30G at ii. This number drops as the monthly rate increases, with only 8% supporting a $5 per month increase, which is still below the high end of the potential range in this CIRP. 27 Exh 30G at ii. 4 2018 Stormwater Rate Proposal proposed. It is neither fair nor reasonable to the ratepayers to fund a voluntary program for which there is so little public support. IV. The proposed CIRP is neither fair nor reasonable because MSD's support for the scope and cost of the CIRP is wholly inadequate MSD has made very clear throughout the proceeding that the amount of engineering analysis and cost estimation that supports the CIRP is minimal: • estimates are "rough" and engineering spent "maybe a few minutes" looking at each proj ect;28 • estimates are "conceptual in nature" and based on a "minimal amount of detailed information;"29 • estimates have been prepared "without doing much engineering;"3° • "The District's conceptual projects costs are generally based on very limited information ,,31 The vast majority of engineering and cost estimation work conducted by MSD will be at least a decade old by the time the program commences, with some of the information approaching 40 years old.32 Because of the limited amount of analysis that has been conducted by MSD, and because of the age of the information that MSD does have, MSD simply does not have a firm grasp on the size and scope of the proposed program. MSD does not know whether some of these previously -identified projects have been conducted privately, whether they remain a flooding or erosion issue, whether they have worsened, whether engineering solutions previously identified in cursory reviews are still adequate, whether there are additional projects that have not yet been identified, etc.33 MSD's response is that it will modify the program as it goes forward, but it is neither fair nor reasonable to impose additional charges upon ratepayers for a $560 million program that rests upon such a weak foundation. 28 Testimony of Brian Hoelscher, Technical Conference on Direct Testimony, Exh. 36, p. 28. 29 Testimony of Brian Hoelscher, Technical Conference on Direct Testimony, Exh. 36, p. 66; Testimony of Richard Unverferth, Technical Conference on Direct Testimony, Exh. 36, p. 151. 3o Testimony of Richard Unverferth, Technical Conference on Direct Testimony, Exh. 36, p. 151. 31 MSD's Response to the Second Discovery Request of the Rate Commission, Exh. 31A, p. 3. 32 MSD's Response to the First Discovery Request of the Rate Commission, Exh. 30B, p. 1. 33 See, e.g., Testimony of Brian Hoelscher, Technical Conference on Direct Testimony, Exh. 36, p. 30. 5 2018 Stormwater Rate Proposal MIEC has taken the opportunity to review some of the information referenced above, and even a cursory review demonstrates that potential cost estimates prepared by MSD over the years vary significantly.34 For example, MIEC reviewed files for two projects, known as project 11460 (FEE FEE CREEK BANK STABILIZATION - FEE FEE RD. TO EAST TRIBUTARY (FEE-10)) and project 11041 (FEE FEE CREEK BANK STABILIZATION EAST TRIB TO PAGE (FEE 09)).35 At some point in time, these were considered the same project, but in more recent years were split into two projects. MSD's cost estimates for the combined projects has varied significantly over the years. Based on information in MSD's binders and files, the combined cost estimate was $5.9 million in 1991. In 2009, the combined cost estimate ranged from $6.6 million to $8.2 million. The estimate for these combined projects in one exhibit of the CIRP proposal is $1.882 million,36 but in a separate exhibit provided by MSD, the combined projects are $2.688 million.37 While MIEC appreciates that the cost of the project may have decreased, the range of costs estimates reveals a lack of confidence in MSD's estimates, and it is entirely possible that other projects have experienced significant increases in costs. Another example is proposed project 10686, "Loretta -Gentry Storm Sewer Phase I," which MSD records identify as a $1.68 million dollar project.38 Based on a review of the binders made available by MSD, this estimate was prepared in 2002. However, MSD also provided a more recent analysis of this project, conducted in April 2018, that puts the cost at $2.25 million. This updated cost analysis is not reflected in MSD's proposal information, and it calls into question both the validity and currency of MSD's estimated costs for this program. Not only does MSD admittedly not have a firm grasp on the size and scope of the CIRP program, but it also can't even provide any guarantees regarding the ultimate success of the program.39 Simply put, MSD hasn't done the diligence on the size and scope of the proposed 34 Also of note is that MSD appears to have prepared some more recent analyses of some projects, which more recent analyses are not maintained in the binders that MSD cites for support of the size and scope of the CIRP program. These analyses were identified by MSD during MIEC's review of the binders cited by MSD, and were provided by MSD by MSD to MIEC to review. 35 "CIRP-2 Stormwater Projects: Anticipated Construction Starts through FY24 with Priority Ranking," Exh. 30L, p. 1. 36 Id. 37 "Identified MSD stormwater projects as of November 30, 2017," Exh. 41F. 38 "CIRP-2 Stormwater Projects: Anticipated Construction Starts through FY24 with Priority Ranking," Exh. 30L, p. 1. 39 Testimony of Brian Hoelscher, Technical Conference on Surrebuttal Testimony, Exh. 65, p. 36; Testimony of Richard Unverferth, Technical Conference on Direct Testimony, Exh. 36, p. 152. 6 2018 Stott 'water Rate Proposal program that is necessary to protect the interests of the ratepayers. Without such diligence, it is neither fair nor reasonable to seek more than half a billion dollars from the public. The Rate Commission engaged an expert, Ms. Nicole Young, to testify as to the adequacy of MSD's engineering and cost estimations. Ms. Young's testimony should be disregarded for two reasons. First, despite Ms. Young's conclusions about MSD's engineering and cost estimation efforts, Ms. Young only reviewed a small sampling of the documents MSD made available (three watershed binders and one of fifty project -specific binders),40 and Ms. Young never references nor appears to have identified or reviewed additional MSD files that were provided to MIEC during its review of the binders. Second, Mr. Young is not disinterested in this matter. Her firm, Lion CSG, has done nearly $180,000 worth of work for MSD since 2014, and Ms. Young indicated that Lion CSG will continue to seek MSD projects in the future, which creates a clear and vested interest in her conclusion that MSD's work to date has been sufficient and reasonable.41 V. The proposed CIRP is neither fair nor reasonable because MSD has failed to reasonably consider alternate sources of funding the program A fair and reasonable proposal is one that is not only appropriately scoped, but also one for which alternatives for financing the proposal have been vetted. It is neither fair nor reasonable to the ratepayers that MSD has not analyzed whether bond funding would be appropriate for the CIRP, but has dismissed the concept with only post hoc rationalization.42 As stated by Mr. Gorman, "[i]f capital improvements benefit its service area, and customers, then MSD should be obligated to finance the improvements in the most economic way that minimizes costs to customers, or justify why alternative funding sources would increase costs to customers."43 To date, MSD has not undertaken the fulsome analysis to make any such demonstration. 4o Rebuttal Testimony of Nicole Young, Exh. 44, p. 4. 41 Rate Commission's Response to Second Discovery Request of the Missouri Industrial Energy Consumers, Exh. 49A, at 4; Testimony of Nicole Young, Technical Conference on Surrebuttal Testimony, Exh. 52, pp. 137-38. 42 Testimony of Brian Hoelscher, Technical Conference on Direct Testimony, Exh. 36, pp. 25-26; Testimony of Marion Gee, Technical Conference on Direct Testimony, Exh. 36, p. 163. 43 Rebuttal Testimony of Michael P. Gorman, Exh. 45, p. 9. 7 2018 Stonnwater Rate Proposal MSD is proposing to implement a program that will collect over half a billion dollars from ratepayers, and is obligated to manage the program in a way that is most consistent with its obligations to protect the public. Based on MSD's financial metrics, MSD clearly has the ability to issue additional debt to fund some or all of the CIRP. MSD has strong and stable credit ratings with all three credit rating agencies, and MSD itself identified that is has "consistently strong performance."44 MSD's target for total debt service coverage is 1.8x, and they currently forecast coverage at 1.9x, meaning there is room to service additional debt under current management policy.45 However, MSD has clearly failed to provide any assessment of how debt funding, in whole or in part, can lower costs to customers and preserve MSD's credit strength and financial integrity. As noted by MSD, many of the projects that it is seeking to undertake will have operational lives of many decades or generations.46 Bond financing would allow MSD to draw out repayment of the bonds over a long period of time, allowing subsequent property owners who benefit from the CIRP the opportunity to help fund the projects. This lowers the annual amount of revenue needed from ratepayers to cover the CIRP, and also helps create a fair and equitable distribution of the cost burden of funding the CIRP over the "generations" of customers who benefit from it. Indeed, this concept of "generational ratepayer equity" is why, even though bond funding may increase the overall cost of the CIRP to MSD, bond funding could be more fair and equitable to the ratepayers. Bond funding (or at least partial bond funding) would allow for (a) a reduction in the current annual revenue needed to be charged to ratepayers, and (b) spreading out the rate charges over multiple generations of MSD ratepayers. In rate setting, cost to customers is measured in annual cost to fund the program, and MSD has failed to seize the opportunity minimize annual cost to its customers. MSD has asserted that many of stormwater utilities use rate revenue to fund their annual stoiiiiwater capital improvements.47 This comparison is flawed, however, because the average annual size of the program at issue in the survey cited by MSD is approximately $4.5 million — 44 Metropolitan St. Louis Sewer District Investor Presentation, Wastewater System Improvement and Refunding Revenue Bonds, Series 2017A, p. 18 (Nov. 27, 2017), attached as Attachment A. 45 Id. at 12. Additionally, Exhibits 41B, 41C and 41D all show strong financial metrics, including "[finnancial performance that routinely exceeds bond -covenant minimums for debt service coverage." Exh. 41C. 46 Testimony of Richard Unverferth, Technical Conference on Direct Testimony, Exh. 36, pp. 96-97. 47 MSD's Response to First Discovery Request of the Rate Commission, Exh. 30B, p. 12. 8 2018 Stormwater Rate Proposal about 1/7 the size of the CIRP proposed by MSD.48 The larger size of MSD's CIRP program makes bond funding for at least a portion of the program much more economic, and the size of the required CIRP spend suggests a need to mitigate cost to customers up front by spreading the CIRP cost over time to the benefit of MSD customers by designing rates in a fair and equitable manner. As stated in MIEC's presentation at the Prehearing Conference, MIEC's position is not that debt financing absolutely must be used to fund the CIRP. Rather, MIEC's position is that failure to properly consider debt funding by MSD demonstrates a lack of proper diligence into the financial aspects of the CIRP, making it impossible to determine that the rates proposed by MSD are fair and reasonable to the ratepayers. VI. The proposed CIRP suffers from additional flaws in its design, making it neither fair nor reasonable to impose on ratepayers MSD's approach to the CIRP seems to have been to include all projects identified by customers, without discernment as to whether specific projects should be conducted at all. While MSD does have a system in place for prioritization of projects within the CIRP, that system appears to assume that all projects will need to be completed. MSD does not appear to have made a deteiniination that at some level, public money should not be expended on a particular project — it has skipped right past that question of "Should we do this project?" and moved straight to the question of "When should we do this project?"49 Similarly, the amount of revenue to be collected from ratepayers on a yearly basis appears to have been designed around how much revenue MSD felt the ratepayers would stomach (to continue the theme, "How much can we get from ratepayers?"), as opposed to whether there is an actual need for these projects and how soon the projects need to be completed.50 Demonstrative of this point is a rather surprising statement made by Mr. Hoelscher 48 Rebuttal Testimony of Michael P. Gorman, Exh. 45, p. 13. 49 Indeed, this flaw is evidenced by MSD's written testimony. In his Surrebuttal Testimony, questions were posed to Mr. Hoelscher regarding the prudence, reasonableness and appropriateness of the CIRP program. Mr. Hoelscher's responded by detailing the support for MSD's authority to conduct this program. Surrebuttal Testimony of Brian Hoelscher, Exh. 54, pp. 1-2. Having the authority to initiate a program is not the same as whether it is prudent, reasonable and appropriate to initiate that program. so See, e.g., Testimony of Richard Unverferth, Technical Conference on Direct Testimony, Exh. 36, pp. 151-52; MSD's Response to Second Discovery Request of the Rate Commission, Exh. 31A, p. 6 9 2018 Stormwater Rate Proposal at the Technical Conference regarding Surrebuttal Testimony, where Mr. Hoelscher indicated that he wished MSD had not done the minimal amount of cost estimation work that brought the anticipated costs of the project down from approximately $1 billion to $562 million.51 This statement shows a stunning lack of regard for the best interests of the ratepayers and proper scoping of the proposed CIRP program; rather, the proposal is being justified by trying to find the right rate that will pass ratepayer approval and not whether this program is, and has been designed to protect, the best interests of the ratepaying public. Additionally, as the Rate Commission is aware, MSD ratepayers have experienced significant increases in the past years relating to wastewater programs and compliance with the EPA consent order. MSD has also indicated that in less than one year's time, it will be submitting an additional, currently -undefined wastewater rate proposa1.52 However, MSD has performed no analysis of the cumulative impacts of these rate increases.53 Even if the currently - proposed rates are still with EPA's metrics of affordability, Mr. Gee's testimony suggests that we are getting close to the high end of the affordability threshold.54 With a presumably legally - required yet undefined wastewater rate increase being proposed in 2019, MIEC questions whether it is fair and reasonable to MSD ratepayers to adopt this purely voluntary CIRP at this point in time.55 VII. Conclusion MSD has made a proposal where the true cost and scope of program is not known with any certainty, rates are not rationally related to anything other than what MSD thinks it can get, ratepayers have signaled resounding lack of support, MSD has not explored all potential avenues for financing the projects and MSD can't even make any guarantees about whether the program will provide long-term solutions to the flooding and erosion problems it cites. Under no circumstances is such a program fair and reasonable to the ratepayers. (identifying that survey results [regarding customer willingness to pay] were instrumental in selecting the annual revenue requirements). 51 Testimony of Brian Hoelscher, Technical Conference on Surrebuttal Testimony, Exh. 65, p. 61. 52 Testimony of Brian Hoelscher, Technical Conference on Direct Testimony, Exh. 36, pp. 24. 53 Id. 54 Surrebuttal Testimony of Marion Gee, Exh. 55, p. 1. 55 Rebuttal Testimony of Michael P. Gorman, Exh. 45, p. 10. 10 2018 Stormwater Rate Proposal Respectfully submitted, BRYAN AVE LEIGHTON PAISNER LLP By: D.Fana M. Vuylsteke, #424'19 Brandon W. Neuschafer, #53232 211 N. Broadway, Suite 3600 St. Louis, Missouri 63102 Telephone: (314) 259-2543 (Diana) Telephone: (314) 259-2317 (Brandon) Facsimile: (314) 259-2020 dmvuylsteke@belplaw.com bwneuschafer@belplaw.com ATTORNEYS FOR MIEC Dated: June 28, 2018 2018 Stormwater Rate Proposal CERTIFICATE OF SERVICE The undersigned certifies that a copy of the foregoing was sent by electronic transmission to the following on this 28th day of June, 2018. Ms. Janice Fenton Office Associate Senior Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, MO 63103 ifentonAstlmsd.com Ms. Susan Myers General Counsel Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, MO 63103 smyers@stlmsd.com Ms. Lisa O. Stump Lashly & Baer, P.C. 714 Locust Street St. Louis, MO 63101 lostump@lashlybaer.com 12 2018 Stormwater Rate Proposal Attachment A: Metropolitan St. Louis Sewer District Investor Presentation, Wastewater System Improvement and Refunding Revenue Bonds, Series 2017A (Nov. 27, 2017) 13 The Metropolitan St. Louis Sewer District Investor Presentation Wastewater System Improvement and Refunding Revenue Bonds, Series 2017A November 27, 2017 Disclaimer This Investor Presentation is provided as of November 27, 2017 for a proposed offering by The Metropolitan St. Louis Sewer District (the "District" or "MSD") of its Wastewater System Improvement and Refunding Revenue Bonds, Series 2017A (the "Bonds"). If you are viewing this presentation after November 27, 2017, there may have been events that occurred subsequent to such date that would have a material adverse effect on the financial information that is presented herein, and neither MSD nor Barclays Capital Inc. ("Barclays"), as Representative of the Underwriters, has undertaken any obligation to update this Investor Presentation. All market prices, financial data and other information provided herein are not warranted as to completeness or accuracy and are subject to change without notice. This Investor Presentation is provided for your information and convenience only. Any investment decisions regarding the Bonds should only be made after a careful review of the complete Preliminary Official Statement, dated November 27, 2017. By accessing this Investor Presentation, you agree not to duplicate, copy, download, screen capture, electronically store, or record this Investor Presentation, nor to produce, publish, or distribute this Investor Presentation in any form whatsoever. This Investor Presentation does not constitute a recommendation or an offer or solicitation for the purchase or sale of any security or other financial instrument, including the Bonds, or to adopt any investment strategy. Any offer or solicitation with respect to the Bonds will be made solely by means of the Preliminary Official Statement and Official Statement, which describe the actual terms of such Bonds. In no event shall the Underwriters or MSD be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein and such information may not be relied upon by you in evaluating the merits of participating in any transaction mentioned herein. The Underwriters make no representations as to the legal, tax, credit, or accounting treatment of any transactions mentioned herein, or any other effects such transactions may have on you and your affiliates or any other parties to such transactions and their respective affiliates. You should consult with your own advisors as to such matters and the consequences of the purchase and ownership of the Bonds. Nothing in these materials constitutes a commitment by the Underwriters or any of their affiliates to enter into any transaction. No assurance can be given that any transaction mentioned herein could in fact be executed. Past performance is not indicative of future returns, which will vary. Transactions involving the Bonds may not be suitable for all investors. You should consult with your own advisors as to the suitability of the Bonds for your particular circumstances. Clients should contact their salesperson at, and execute transactions through, an entity of the Underwriters or other syndicate member entity qualified in their home jurisdiction unless governing law permits otherwise. 1 Presentation Participants The Metropolitan St. Louis Sewer District: Tim R. Snoke, Secretary -Treasurer Financial Advisors: Bethany Pugh, PFM Financial Advisors LLC Matthew Schnackenberg, PFM Financial Advisors LLC Tionna Pooler, Independent Public Advisors LLC Senior Manager: Martha Linsley, Barclays Michael Menelli, Barclays om 2 1ri}-`i'.1 Transaction Summary Issue • Wastewater System Improvement and Refunding Revenue Bonds, Series 2017A (the "Bonds") Par Amount* • $260,000,000 Security • The Bonds are revenue bonds secured by and payable from certain revenues of The Metropolitan St. Louis Sewer District (the "District" or "MSD") received from operation of its sanitary sewer system (the "System") on a parity with seven prior series of Senior Bonds Use of Bond Proceeds • Pay a portion of the costs of certain additions, extensions, and improvements to the System • Refund a portion of the District's outstanding Senior Bonds • Pay costs of issuance Tax Status • Federal tax-exempt • State of Missouri tax-exempt Structure* • Fixed rate bonds due May 1, 2019 through 2047 Optional Redemption* • To be determined Credit Ratings • Moody's: Aa1 (Stable) • Standard and Poor's: AAA (Stable) • Fitch: AA+ (Stable) Pricing Date* • Retail order period: Monday, December 4, 2017 • Institutional order period: Tuesday, December 5, 2017 Closing Date* • Thursday, December 14, 2017 * Preliminary, subject to change. 3 Overview of the District MSD is an essential service provider covering a large service area • Owns and operates the System, consisting of sanitary, stormwater, and combined collection sewers, pumping stations, and wastewater treatment facilities • Service area is 520 square miles encompassing the City of St. Louis and most of St. Louis County • Approximately 80% of MSD customers are in St. Louis County (Aaa/AA+/AAA) • Service area encompasses five watershed areas • Provides wastewater treatment and stormwater management for 1.3 million people, making it the fourth -largest wastewater treatment system in the United States • District is an independent entity and its Board of Trustees has the ultimate authority to set rates • In FY 2017, operating revenues totaled $333 million with approximately $4.0 billion in assets = Facilities Sources: Series 2017A Preliminary Official Statement; District Comprehensive Annual Financial Report (Fiscal Years Ended June 30, 2017 and 2016). 4 MSD Authority, Governance, and Organization Strong and experienced management team continues to focus on budgetary controls and operational efficiencies Rate Commission Reviews and makes recommendations to the Board of Trustees regarding all proposed rate changes and tax rates Internal Auditor General Counsel Human Resources Board of Trustees Governs MSD and includes three members appointed by the Mayor of the City of St. Louis and three members appointed by the St. Louis County Executive Executive Director Finance Information Systems Civil Service Commission Serves in an advisory position regarding personnel administration and civil service matters Secretary -Treasurer Engineering Operations 5 mso System Facilities The System has ample wastewater treatment capacity • MSD operates and maintains: • 9,400 miles of collection and trunk sewers and force mains • 275 pumping stations • Seven wastewater treatment facilities treating an average daily flow of 329 million gallons per day ("MGD") • Total System capacity of approximately 593 MGD; average daily flow comprises 55% of total capacity • Largest plants are Bissell Point and Lemay, both serving the Mississippi River watershed • The System has recently withstood two 100-year flood events in 2015 and 2017 with minimal damage or service interruption • The District's facilities are currently in compliance with all environmental regulations Sources: Series 2017A Preliminary Official Statement; District Comprehensive Annual Financial Report (Fiscal Years Ended June 30, 2017 and 2016). 6 1 Broad and Strengthening Regional Economy Regional Employers Stable Population Base Rising Per Capita Income • Higher Education • Washington University • St. Louis University (000s) 1,400 1,200 1,000 800 • Corporations 600 400 200 0 • Anheuser-Busch InBev • The Boeing Company • WaI-Mart Stores Inc. • Healthcare • BJC HealthCare • SSM Health • Government • City of St. Louis • St. Louis County • City of St. Louis St. Louis County ■ 2011 2012 2013 2014 2015 2016 $50,000 $48,000 $46,000 $44,000 $42,000 $40,000 District Service Area -- 7 -- ▪ I 2011 2012 2013 2014 2015 2016 2017 Declining Unemployment Rates (%) 14 12 10 8 6 4 2 0 St. Louis, MO (City) St. Louis, MO (County) — — — U.S. 4.7% 4.2% 3.7% 2011 2012 2013 2014 2015 2016 2017 Source: Appendix B of Series 2017A Preliminary Official Statement. 7 nnso Stable and Diverse Customer Base • The System serves approximately 426,484 wastewater accounts, 94% of which are single- or multi -family residential • Ten largest customers contribute only 4.9% of total user charges • FY 2017 collections as a percent of charges billed was 98.8% and has averaged over 97.6% for the last 10 years despite rate increases 10-Largest Customers by User Charge (FY 2017) Customer Anheuser-Busch InBev The City of St. Louis Washington University in St. Louis Sigma -Aldrich Saint Louis University BJC HealthCare Hermann Oak Leather GKN Aerospace The Boeing Company Mallinckrodt User Charges $5,165,348 2,320,129 2,042,936 1,214,683 1,102,130 941,584 899,699 844,002 809,434 802,947 Customers by Type (FY 2013-2017) 500,000 400,000 300,000 200,000 100,000 0 • Single Family Residential Multi -Family Residential • Commercial/Industrial 2013 2014 2015 2016 2017 User Charge Collections (FY 2008-2017) % of Total 100% 1.57% 0.71% 0.62% 0.37% 90% 0.34% 0.29% 0.27% 0.26% 80% 0.25% 0.24% Subtotal (10 largest) 16,142,892 4.92% Other customers Total Source: Series 2017A Preliminary Official Statement. 312,216,634 $328,359,526 95.08% 100.00% 70% 96.0% 95.2% 1 100.0% 99.7% 98.8% 97.0% 97.7% 98.4% 98.4% 95.3% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 IN 8 Consent Decree and CIRP MSD is executing a long-term and programmatic plan to meet the $4.7 billion1, 23-year Consent Decree • MSD entered into a Consent Decree with the EPA in 2012 with the primary goal of reducing combined and sanitary sewer over flows and building backups • Consent Decree is the primary driver of the District's long-term Capital Improvement and Replacement Plan ("CIRP") • Since entering into the Consent Decree, MSD has successfully delivered approximately $900 million in projects, on - time and under -budget • Major projects completed or under construction in the FY 2013-2016 CIRP include local storage facilities, force mains, and treatment expansion CIRP Expenditures (FY 2013-16) ($mm) 250 200 150 — 100 — 50 0 2013 2014 2015 2016 CIRP Sources (FY 2013-16) Pay -Go $130mm 12.9% •Bond Funded System $877mm Renewal and 87.1% Capacity Projects $244mm 27.1 CIRP Uses (FY 2013-16) Reduction and Control of CSOs $145mm 16.1% Treatment Plant Improvements $80mm 8.9% Sources: MSD, Series 2017A Preliminary Official Statement, Metropolitan St. Louis Sewer District Wastewater Rate Proposal (dated May 10, 2011). 1. 2010 dollars. Elimination of SSOs $430mm 47.8% Total: $900 million 9 FY 2017-2020 CIRP With the initial phase of the CIRP successfully completed, the FY 2017-2020 CIRP is expected to deliver $1.4 billion in capital projects • Pay-as-you-go funding is expected to fund a larger share (28.3%) of FY 2017-2020 projects compared to FY 2013-2016 • Thus far in the program, FY 2017-2020 capital expenditures have come in under budget • Major projects to be completed in the FY 2017-2020 CIRP include larger -scaled projects, such as sanitary tunnels CIRP Needs FY 2017-20 ($mm) 450 400 350 300 250 200 150 100 50 0 2017 2018 2019 2020 CIRP Sources (FY 2017-20) Pay -Go $399mm 28.3% Bond Funded $1,009mm 71.7% CIRP Uses (FY 2017-20) Treatment Plant Improvements $57mm 4.1 % Reduction and Control of CSOs $299mm 21.4% System Renewal and Capacity Projects $382mm 27.3% Elimination of SSOs $662mm 47.3% Total: $1.4 billion Sources: MSD, Series 2017A Preliminary Official Statement, Report on the Financial Feasibility of The Metropolitan St. Louis Sewer District Wastewater System Improvement and Refunding Revenue Bonds, Series 2017A. 10 Rate Schedule The District's autonomous Board of Trustees has a strong history of approving rate increases to meet MSD's operating and capital needs Rate Autonomy • Board of Trustees has consistently demonstrated its willingness and ability to raise rates as needed ■ No approvals from City or County governments are required • The 15-member Rate Commission provides the Board of Trustees with feedback and rate recommendations, but the Board of Trustees has ultimate authority to set rates Rate History • The Board of Trustees has consistently approve rate increases, an average of 11 % annually from FY 2013 to FY 2020 • Board of Trustees adopted its new rate schedule in June of 2016 for FY 2017-2020 Rate Affordability • After accounting for the new rate schedule, residential rates remain competitive compared to other major wastewater systems subject to consent decrees Typical Bill for Single Family Residence (7CCF/month) $75 $60 $45 $30 $15 $0 $29.11 1 $32.35 1 $44.59 $35.99 $40.72 $49.31 $54.63 $60.44 2013 2014 2015 2016 2017 2018 2019 2020 Average Monthly Bill for Cities Under Consent Decrees (8CCF) $120 $80 Median $40 $o OG de ..-k 50 4P 62, S O P GP o�o�' �o pJ�' �:� ,off 0 tea' �°' �' ��' �Q �� P�� �r\�� °\ 0��5 �05 • `,§% o ova �\-� � G Co° Pia co�� °5 a G \�a G� Sources: Series 2017A Preliminary Official Statement; Report on the Financial Feasibility of The Metropolitan St. Louis Sewer District Wastewater System Improvement and Refunding Revenue Bonds, Series 2017A; Metropolitan St. Louis Sewer District Rate Change Proposal (February 26, 2015). 11 MSD Financial Results and Projections MSD forecasts steady financial growth and debt service coverage, consistent with the past, and has substantial debt service capacity to meet future capital borrowings • The District's additional bonds test and rate covenant ensure that Net Revenues available for debt service will equal at least 1.25x of senior debt service and 1.15x of total debt service • Management's policy target is 2.50x and 1.80x for senior and total debt service coverage, respectively MSD Financial Results and Coverage - Actual and Projected ($000s) Fiscal Year Actual Projected 2013 2014 2015 2016 2017 2018 2019 2020 Total revenues (A) $241,554 $267,093 $291,392 $322,358 $335,926 $367,267 $402,134 $440,206 Operating expenses (B) 146,372 153,222 163,312 168,259 168,835 172,133 174,110 179,285 Net revenues available for debt service (C=A-B) 95,182 113,871 128,080 154,099 167,091 195,134 228,024 260,921 Senior debt service (D) 28,257 34,221 38,352 46,381 58,182 68,649 82,664 99,225 Subordinate debt service (E) 21,684 10,215 23,496 27,379 31,178 33,029 37,235 38,348 Total outstanding debt service (F=D+E) 49,941 44,436 61,848 73,760 89,360 101,678 119,899 137,573 Senior debt service coverage (C/D) Combined debt service coverage (C/F) 3.4x 3.3x 1.9x 2.6x 3.3x 3.3x 2.1x 2.1x 2.9x 2.8x 1.9x 1.9x 2.8x 2.6x 1.9x 1.9x Sources: Series 2017A Preliminary Official Statement; Report on the Financial Feasibility of The Metropolitan St. Louis Sewer District Wastewater System Improvement and Refunding Revenue Bonds, Series 2017A. 12 Historically Strong Financial Performance Operating Revenues (Last Five Fiscal Years) ($mm) 400 350 300 250 200 150 100 50 0 $241 $264 $289 $318 $333 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Unrestricted Cash & Investments (Last Five Fiscal Years) ($mm) 400 350 300 - 250 200 150 100 50 0 b94 $238 612 $257 737 668 $299 $340 751 $348 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Operating Expenses (Last Five Fiscal Years) ($mm) 400 350 300 250 200 150 100 50 0 $146 $153 $163 $168- $169 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Debt Service Coverage (Last Five Fiscal Years) (Days) (x) 800 4.0 700 3.5 600 3.0 500 2.5 400 2.0 300 1.5 200 1.0 100 0.5 0 0.0 Total Unrestricted Cash & Investments Days Cash on Hand (Including Long -Term Unrestricted Assets) Sources: Series 2017A Preliminary Official Statement. 3.4x 1.9x 3.3x 33x_ 33x 26x- 2.9x 1.9x FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 ■ Senior Debt Service Coverage Combined Debt Service Coverage 13 Conservatively Managed Pension and OPEB Plans Pension Fund Historical Pension Payments • As of December 31, 2016, MSD's defined benefit plan (the "Plan") had 626 active plan members and an Actuarial ($mm) Accrued Liability of $57.2 million (82.0% funded) $12 • Effective December 31, 2010, MSD closed the Plan to new entrants and shifted all future employees to a defined contribution plan • Current employees with Tess than 10 years of service as of December 31, 2010, and all new employees commencing service on or after January 1, 2011 contribute to a defined contribution plan $10 $8 $6 $4 $2 $0 •Annual Contribution ($mm) Pre -Reforms • 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 OPEB Update • MSD's total OPEB unfunded accrued liability as of June 30, 2017 was approximately $25 million • OPEB is paid on a pay-as-you-go basis to ensure flexibility in future benefits; recognized liability as of June 30, 2017 is $8.1 million Source: Series 2017A Preliminary Official Statement; District Comprehensive Annual Financial Report (Fiscal Years Ended June 30, 2017 and 2016); Metropolitan St. Louis Sewer District Employees' Pension Plan Financial Statements, December 31, 2015 and 2014. 14 ('iF`i'1 Bond Provisions and Covenants The Master Bond Ordinance provides bondholders with strong protections • The Bonds will be issued under the Senior Lien ■ The Bonds will not be secured by the Debt Service Reserve Account • Net Operating Revenues include service charges and other revenues, net of operating expenses • Amounts on deposit in the Sinking Fund used to pay principal and interest on Senior Bonds • Senior and total debt service coverage levels were 2.9x and 1.9x, respectively, in FY 2017 • Rate covenant requires 1.25x senior and 1.15x total debt service coverage • Additional bonds test for parity debt also requires 1.25x senior and 1.15x total debt service coverage • After making deposits shown in the accompanying flow of funds, MSD may deposit excess revenues into the Renewal and Extension Fund Flow of Funds MSD Customer Base First Second i- Third Operating Revenues Revenue Fund Operations and Maintenance Sinking Fund EFourtl. Debt Service Reserve Account (Replenishment Payments) Rebate Fund EMI —> lir Reserve Account Credit Facility Provider Payment Sixth Seventh Eighth —> Subordinate Obligations Debt Service Reserve Account (Accumulation Payments) — Other System Obligations 15 Conservative Debt Portfolio • MSD has $995.2 million of outstanding Senior Bonds and $355.9 million of outstanding Subordinate Bonds ■ Subordinate Bonds purchased by the State of Missouri through the Missouri State Revolving Fund Program and Direct Loan Program • Debt portfolio is 100% fixed rate, with no exposure to variable rate debt or interest rate derivatives Interest Rate Mode Fixed Rate 100% Lien Composition Subordinate Lien (SRF Bonds and Direct Loans) 26% Senior Lien 74% Outstanding Debt Service (FYE 6/30) ($mm) 120 100 80 60 40 20 0 Senior Lien ■ Subordinate Lien Senior Bonds Debt Pay -Down 10-Year: 23% 20-Year: 65% 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 Note: Does not account for the proposed Series 2017A Bonds. 3 MSO 16 Series 2017A Plan of Finance The District is planning to issue approximately $260 million in par as part of its 2017A plan of finance • The Bonds are being issued to: • Approximately $200 million new money bonds with level debt service to pay a portion of the costs of certain additions, extensions, and improvements to the System • Approximately $60 million refunding bonds to refinance existing Senior Bonds and generate level annual savings • The Bonds will be issued as fixed rate, Senior Bonds and will not be secured by the Debt Service Reserve Account Pro Forma Debt Service (FYE 6/30)* ($mm) 120 100 80 60 40 20 0 2018 © Senior Lien (Net of Refunded Bonds) IMP P 2021 2024 Source: Series 2017A Preliminary Official Statement. *Preliminary, subject to change. 2027 i■ . . 2030 Subordinate Lien 2033 2036 2017A Principal 2039 ■ 2017A Interest 2042 2045 17 MSD Credit Strengths High -Grade and Stable Credit Ratings • Moody's: Aa1 (Stable) • S&P: AAA (Stable) Fitch: AA+ (Stable) Essential Service Monopoly in a Broad Service Area • Sole provider of wastewater treatment and stormwater management to 1.3 million residents in the St. Louis metropolitan area • Service area supported by a large, stable, and diverse regional economy Consistently Strong Financial Performance • Strong management focuses on conservative budgeting and operational efficiencies • Debt service coverage remains above management's 2.50x senior and 1.80x targets; strong liquidity with over 750 days cash on hand • Manageable pension and OPEB obligations Demonstrated Ability to Deliver CIRP On -Time and Under -Budget • Since entering into the Consent Decree, successfully delivered $900 million in capital expenditures, meeting milestones and satisfying all regulatory requirements • Continues to exceed goals relating to budget and timelines, management and engineering efficiencies Successful Rate Setting Process and Strong Public Support • MSD is independent and has ultimate authority over rates and charges and budget • Rates are affordable and are projected to remain so • Consistent with prior MSD referendums, voters overwhelmingly approved $900 million bond authorization in 2016 to continue funding the CIRP 18 MSO Transaction Timeline and Contact Information November 2017 S 29 M 30 T W 31 1 T 2 F 3 S 4 5 6 7 8 9 11 12 1 13 14 15 16 17 18 19 20 21 22 24 25 26 27 28 29 30 1 2 Holiday December 2017 EIMEIEMEIEMI 26 27 28 29 30 1 3 4 5 6 7 8 9 10 11 ! 12 13 14 15 16 17 18 19 20 21 22 23 24 l 26 31 { 2 27 28 29 30 3 4 a 6 Date Event November 27, 2017 Electronic Distribution of POS Week of November 27, 2017 Investor One -on -One Calls December 4-5, 2017 Retail and Institutional Pricing December 14, 2017 Closing Contact Information MSD Financial Advisors Senior Manager Tim Snoke, Secretary -Treasurer (314) 768-6222 tsnoke@stlmsd.com Bethany Pugh (PFM) (440) 863-5820 pughb@pfm.com John Strahlman, Asst. Secretary -Treasurer (314) 768-6225 jstrahlman@stlmsd.com Tionna Pooler (Independent Public Advisors) (816) 521-6844 tpooler@independentpublicadvisors.com Martha Linsley (Barclays) (312) 609-8520 martha.linsley@barclays.com Michael Menelli (Barclays) (312) 609-8516 michael.menelli@barclays.com 19