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HomeMy Public PortalAboutExhibit MSD 69 - MSD Prehearing Conference ReportExhibit MSD 69 BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT JUNE 28, 2018 PRE -HEARING CONFERENCE REPORT OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT ISSUE: STORMWATER RATE CHANGE PROCEEDING WITNESS: THE METROPOLITAN ST. LOUIS SEWER DISTRICT SPONSORING PARTY: THE METROPOLITAN ST. LOUIS SEWER DISTRICT DATE PREPARED: JUNE 28, 2018 Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, Missouri 63103 Exhibit MSD 69 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 JUNE 28, 2018 PRE -HEARING CONFERENCE REPORT OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT Pursuant to §7.280 and §7.290 of the Charter Plan of The Metropolitan St. Louis Sewer District (the "Charter Plan") and Operational Rule §3(9), The Metropolitan St. Louis Sewer District ("District") hereby submits its Pre -hearing Conference Report (Exhibit MSD 69). 1 Exhibit MSD 69 JUNE 28, 2018 PRE -HEARING CONFERENCE REPORT SUBMITTED BY THE METROPOLITAN ST. LOUIS SEWER DISTRICT INTRODUCTION The Metropolitan St. Louis Sewer District ("District") submitted the Stormwater Rate Change Proposal notice to the Rate Commission on February 26, 2018. This is the sixth rate change notice submitted by the District since the Rate Commission was formed, by voter approval on November 7, 2000, pursuant to Section 7.040 of the District's amended Charter Plan. Per the Rate Commission's Operational Rules, Regulations, and Procedures, the first of four technical conferences was held on April 4, 2018 to question District staff and Raflelis Financial Consultants, Inc. ("RFC"), the District's rate consultant about their respective submitted direct testimony. The second technical conference was held on May 17, 2018 to allow questioning by all parties of the rebuttal testimony submitted by interveners and the Rate Commission's consultant. The Missouri Industrial Energy Consumers ("MIEC") was allowed to intervene via the Rate Commission's application process. The third technical conference required by the Rate Commission's Operational Rules, Regulations, and Procedures was held on June 7, 2018 to allow questioning of the surrebuttal testimony submitted by District staff and RFC. No other parties submitted surrebuttal testimony. A pre -hearing conference was held on June 21, 2018 in which all parties read a pre - hearing conference summary report. The District submitted its summary as Exhibit MSD 64. PURPOSE The purpose of this report is to identify and describe the various issues raised by the prepared and oral testimony submitted during this rate change proceeding and present the position of District staff relative to each issue. It should be noted, the positions outlined in this report represent the opinions of District staff and do not represent acceptance or approval by the District's Board of Trustees. ISSUES The Stormwater Rate Change Proposal ("Rate Proposal") was submitted in support of a Stormwater Capital Rate to mitigate the impacts of flooding and erosion. During the discovery 2 Exhibit MSD 69 process, additional information regarding these and other issues has been requested by the Rate Commission's consultant and MIEC. During the technical conferences, all parties testified to their specific issues that directly and indirectly affect a stormwater capital rate. Based on the rate proceedings to date, the District believes that the pending issues to be considered by the Rate Commission are as follows: 1. MSD's Stormwater Capital Improvement and Replacement Program (" CIRP") a. Stormwater Project Identification b. Stormwater Project Prioritization c. Stormwater Project Programing 2. Incentives and Credits 3. Use of Debt to Fund the Stormwater CIRP 4. Fair and Reasonable Rate Structure 5. MSD's Position on Zweig 6. MSD's Position on Charging the Stormwater Capital Rate to Tax Exempt Entities ISSUE 1. MSD's STORMWATER CIRP: MDS's Position on Issue 1.A. - Stormwater Project Identification MSD's Stormwater CIRP includes a process for the identification, prioritization, and programing of projects. Throughout the proceedings, the District has provided direct evidence that MSD's stormwater project identification, current prioritization system, and programing of projects is fair and reasonable to all classes of our rate payers. It is the District's position, and supported by the record, that the proposed Stormwater CIRP is fair and reasonable to all classes of our rate payers. Evidence has also been provided that the Rate Commission's own technical consultant agrees with the District's position. In Exhibit MSD 56, Rich Unverferth (MSD Director of Engineering) testified that there is a public expectation that MSD respond to stormwater issues based upon "public input received by MSD during 2016 public information presentations and information provided in Exhibit MSD 30G — MSD Stormwater Survey Report, as well as the hundreds of calls received annually from MSD customers requesting assistance in dealing with flooding and erosions issues." In Exhibit MSD 65, page 100 lines 10-11, Mr. Unverferth further testified that the District receives between 500-600 calls annually dealing with flooding and erosion issues. He also testified "... I've been in the district for 31 years and ... spent seven years in our operation where my primary sole purpose was a team that went out and investigated stormwater problems, and that number is pretty consistent." See Exhibit 65, page 101 lines 12-16. 3 Exhibit MSD 69 Rate Commission's Technical Expert's Position on Issue 1.A. — Stormwater Project Identification Nicole Young, the Rate Commission's technical expert, stated that based upon her understanding of the engineering planning studies and MSD's complaint system that the projects in MSD's Stormwater CIRP are appropriate. She went on to state that "a substantial amount of technical work was completed to review each watershed and identify problems, solutions, costs, benefits, and project priorities." She also concluded that "Based on this the program appears to have sufficient flexibility to address the highest priority projects in the region as identified by the District through this program." See Exhibit RC 44. Intervener MIEC's Position on Issue 1.A. - Stormwater Project Identification Michael Gorman, MIEC's rate consultant does not agree with the District or Ms. Young's position. However, as pointed out in Mr. Gorman's testimony, he was not present for the April 4, 2018 technical conference in which the District provided testimony for and testified to the types of projects that make up the Stormwater CIRP. See Exhibit MSD 3C. Ms. Young testified that "based on his (Mr. Gorman's) testimony, I do not believe that he has reviewed the same information that I have. I would encourage him to look at the 53 plus three binders that are available." See Exhibit MSD 52, page 97 lines 19-22. Based upon the testimony of the technical experts, it is evident which experts based their conclusions on known facts and evidence. Mr. Gorman failed to provide any evidence to substantiate an opinion that MSD's Stormwater Capital Program is not fair and reasonable to all classes of our rate payers. MDS's Position on Issue 1.B. - Stormwater Project Prioritization MSD's Stormwater Projects Prioritization System is an acceptable and appropriate way to develop a the Stormwater CIRP. The identification and prioritization of projects to be included in the CIRP is a multi -step process, requiring monitoring and updating to ensure that the highest priority problems within the District are addressed in a timely manner, given available funding. The stormwater projects are identified to address flooding and erosion issues and are prioritized based upon the severity of the flooding and erosion and the overall benefit provided by the project. In order to maximize the benefits per dollar spent on a project, a benefit/cost ratio is calculated to determine the project priority ranking. As explained in Exhibit MSD 50A, when developing the Stormwater Projects Prioritization System many years ago, the District relied upon the experience and expertise of 4 Exhibit MSD fig staff and its consultants, who were all involved in water industry trend setting activities, and active in professional organizations. The Stormwater System Master Improvement Plan (SSMIP) was written by national and local experts at Camp Dresser & McKee (CDM), Horner and Shifrin, CH2M-Hill and Montgomery Watson. This team won out over five other consultant teams due to their experience in stormwater planning. Leading experts involved in the process include: CDM's Jim Hagerty and Dan Lau, Shifrin's Gene Rovak and Bill Clarke, CH2MHill's Carey Brand, and Montgomery Watson's Ed Tharp and Ron Krusie. This entire process involved oversight by a Public Advisory Committee with fourteen members, and a Technical Advisory Committee with nine members. The Technical Advisory Committee was selected due to their stormwater management expertise and included: a Professor of Hydraulics, the Chief of Hydrologic Engineering for the US Army Corps of Engineers, four local government representatives including two Public Works Directors, a Vice President of an engineering consulting firm, and Associated General Contractor representation. The prioritization system was upgraded by MSD and Parsons in 2006 to better reflect the various problem categories with severity refinements, plus points were added to encourage regional and environmentally beneficial solutions. Parsons won the contract over other consultants due to their approach, experience, and expertise. Parsons' project manager was Ed Sweet, and the team contained numerous national and local experts (see Exhibit MSD 50B Project Proposal). The internal MSD project manager was Gary Moore, who is also an expert in the water environment field (see Exhibit MSD 50C Moore Resume). Per the SSMIP Policy Report Section 2.5.1, "Various methods of prioritization from other urban areas were reviewed and applicable points for the SSMIP prioritization program are presented in the following sections. Many approaches have been utilized to rank stormwater related projects that together comprise a continuum of complexity and detail." The approach taken by federal agencies, for example, was evaluated and rejected as an overly complex and time-consuming approach. The majority of city and county -wide stormwater prioritization procedures fell into a weighted benefit point system with cost comparison approach, which was selected as the most appropriate method. The benefit to cost ratio was modeled after the approach in Virginia Beach, Virginia. The Parsons team further contributed to the effort with leading experts all having personal experience and were selected due to their expertise. The team led the District in developing a prioritization system most appropriate for the District's 5 Exhibit MSD 69 needs. See Exhibit MSD 50A. The District's current project prioritization system is fair and reasonable to all classes of rate payers and is supported by the Rate Commission's technical expert. Although, MIEC's expert does not agree with the District and the Rate Commission's technical expert, the record suggests that his conclusion was not based on a review of all the information available to him. Rate Commission's Technical Expert's Position on Issue 1.B. — Stormwater Project Prioritization In Ms. Young's Rebuttal Testimony, she states that in her opinion, the prioritization system is appropriate and agreed that this type of scoring system is commonly used in infrastructure projects to provide quantification to project prioritization. See Exhibit RC 44. During the technical conference on May 17, 2018, Ms. Young testified that "MSD has referenced the 53 binders plus three additional general binders that they have available for review, and I did come to the District on May 1 to review those documents." See Exhibit MSD 52, page 80 lines 19-22. When asked by Commissioner Palen if MSD's prioritization system had been created in order to be fair, defensible, objective and consistent, Ms. Young agreed it had. See Exhibit MSD 52, page 87 lines 13-16. Intervener MIEC's Position on Issue 1.B. - Stormwater Project Prioritization Mr. Gorman states that "MSD did not provide a satisfactory explanation for how these studies were used to calculate its $562 million total cost." See Exhibit MIEC 45. When asked by Commissioner Goss "are you familiar with MSD's project prioritization system?" Mr. Gorman answered, "Not in great detail." When asked if MSD used its prioritization system to rate the various projects it is considering for the Stormwater CIRP, Mr. Gorman testified, "Not to my knowledge. They have not established priority of these projects." See Exhibit MSD 52, page 29 line 25 and page 30 lines 2-7. Again, Mr. Gorman does not agree with the District and Ms. Young's position that MSD's prioritization system is fair and reasonable to all classes of rate payers and is appropriate. Yet he provides absolutely no evidence to support his opinion. Mr. Gorman even admits under oath that he was not familiar with the project prioritization system used by MSD. MDS's Position on Issue 1.C. - Stormwater Project Programming The process for scheduling or programming within the annual Stormwater CIRP is an iterative process impacted by a number of factors. Projects are generally placed in the annual 6 Exhibit MSD 69 CIRP according to the benefit/cost ratio, scheduling higher priority projects sooner in the program. The annual CIRP typically includes a five-year rolling block of projects potentially being impacted by a number of factors. These factors and this programming process can require the movement of projects both higher in priority to be delayed or projects of lesser priority to be expedited in the program. However, it is always the intent to address the highest priority issues sooner in the program. Brian Hoelscher, MSD's Executive Director, testified "we did a pretty massive — myself, my manager of public affairs — communication effort with municipalities interested, civic groups, other groups trying to find out what their feel was on stormwater, where we need to go, and what we need to head towards along with some recent polling. And another factor that went into the size of the program was, what is the ratepayers' appetite for paying for a program at all, an annual cost?" Exhibit MSD 65, page 84 lines 4-12. He also testified "I think our data shows that for us to get a program in place, the program size we're proposing, we believe, once educated, that the voting public will find that that's an appropriate level expenditure to address those issues." Exhibit MSD 65, page 84 lines 16-21. MSD has always been receptive to partnering with other entities for them to provide full or partial funding contributions to stormwater capital projects. MSD plans to continue with this policy so long as the use of MSD funding does not delay the execution of other scheduled projects that have a higher priority. As has previously been testified to, the potential use of outside funding will have no effect in the priority calculation for each project. In calculating the cost of a project in determining the benefit -cost ratio, cost shall always be the cost to complete the project, regardless of the source of funding. This process insures that the value of the stormwater capital dollars from all rate payers will be weighed equally and not be influenced by the ability of a third party source to provide additional funding to the process. This helps ensure that the prioritization process is fair and reasonable to all classes of rate payers. Rate Commission's Technical Expert's Position on Issue 1.C. — Stormwater Project Proaramming The Rate Commission's technical consultant, Ms. Young testified that "...the program appears to have sufficient flexibility to address the highest priority projects in the region as identified by the District through this program." Exhibit RC 44. She also stated "As civil engineers, our job is never done. We're here to serve the community in the best way we know 7 Exhibit MSD 69 how. I think that the District has put forward a program that adequately addresses the problems that they know today, and as Mr. Hoelscher has testified, it is a flexible program that will be modified over time." See Exhibit MSD 52, page 90 lines 23-25 and page 91 lines 1-3. Intervener MIEC's Position on Issue 1.C. - Stormwater Proiect Programming Mr. Gorman does not agree with MSD or Ms. Young regarding the adequacy of MSD's project programming. He states "...it appears that MSD has simply made approximations on capital expenditures and stormwater remediation costs that can be paid for by collecting $30 million per year from customers." This statement indicates the lack of understanding that Mr. Gorman has for project estimating. When asked by Commissioner Toenjes at what level of estimate does MIEC get comfortable, Mr. Gorman's response was "I think that's a fair question. I don't know if I can't give you a complete answer on that, but if they had specific projects which they say they think needs to be done in the next five years, projects need to be done over the next 10 years, projects that need to be done when they can afford to do them, would be helpful." See Exhibit MSD 52, page 36 lines 14-21. That is exactly what MSD has and was provided as Exhibit MSD 30L. Again, Mr. Gorman is forming opinions without the assistance of facts or evidence. ISSUE 2: INCENTIVES AND CREDITS MSD's Position on Issue 2 The Rate Commission's technical expert and MSD are in agreement regarding the incentive/credit program being proposed. MSD's proposed program is within industry norms. Rich Unverferth testified that "similar to other stormwater programs across the country the District has developed a proposed Storm Water Incentive Program that provides customer incentives for reducing their effective impervious area through the use of constructed features or low impact development." See Exhibit MSD 3C. Rate Commission's Technical Expert's Position on Issue 2 Ms. Young testified that "The District's incentive and credit programs provide some nominal benefit to property owners to provide BMPs (Best Management Practices) without compromising the CIRP." See Exhibit RC 44. She agrees that the District's program is a reasonable approach to providing some benefit to BMPs while still maintaining the integrity of accomplishing the CIRP. When evaluating incentive/credit programs, Ms. Young claims we 8 Exhibit MSD 69 should focus on how effective the incentive/credit program is to reducing impervious area — not whether the incentive/credit is large enough. Ms. Young further testified that "[BMPs] are beneficial to the overall system if they are maintained over the long term. However, it is unlikely that BMPs will have a significant effect in reducing the civil infrastructure investments necessary in the program. While it is beneficial to install BMPs, MSD needs to collect the funds in order to build the stormwater infrastructure or undertake buyouts included in the CIRP. Increasing incentives or credits may increase BMPs, without actually achieving a reduction in effective impervious area where needed." See Exhibit RC44. In addition, Pamela Lemoine, the Rate Commission's technical expert, testified that "The District's proposed credit program enhances equitable cost recovery by providing opportunities for a fee reduction." See Exhibit RC 43. Ms. Lemoine also stated "..based on the level of the funding, the level of the stormwater rate, I don't know that there is a lot more that can be done to incentivize." See Exhibit MSD 52, page 51 lines 3-5. Intervener MIEC's Position on Issue 2 MIEC did not express an opinion on this issue. ISSUE 3: USE OF DEBT TO FUND THE STORMWATER CIRP MSD's Position on Issue 3 The Rate Commission's technical expert and MSD are in agreement that because the amount of the Stormwater Capital Rate is relatively low, debt funding this program would have a limited impact and would be further offset by the need for additional capital to cover debt service payments and build an adequate reserve. The record supports the District's position that affordability is an important component in MSD's rate setting practice. Debt funding the Stormwater Capital Program will not improve affordability of rates in a meaningful way. In fact, debt funding will increase the overall cost of the program since all borrowed funds need to be paid back with interest. MSD uses debt funding for a portion of its wastewater capital program because that program is much larger and funding that program without debt would create charges that threaten or exceed the EPA's affordability threshold. Debt funding would also create the need to continue to collect the rate beyond the construction timeline just to service the debt and limit the amount of the rate revenue that can be used for capital projects, unless the rate is regularly increased beyond the proposed 9 Exhibit MSD 69 rate to cover principal and interest payments that grow with each successive bond issue. In regards to credit ratings, the rating agencies have expressed concerns in previous reports about the existing debt burden ratios and the potential deterioration of debt service coverage levels. These agencies indicated that the District's credit rating could be lowered if it is unable to meet the required financial metrics. Rate Commission's Technical Expert's Position on Issue 3 Ms. Lemoine states that "Based upon the Rate Proposal, it appears that the proposed funding method may generate sufficient revenue to fund the District's projected stormwater capital costs at the level of spending indicated in its Rate Proposal." See Exhibit RC 43. Ms. Lemoine agrees with the District when she states "you want to be able to manage and not overly issue debt for those kind of programs." See Exhibit MSD 52, page 68 lines 23-24 Intervener MIEC's Position on Issue 3 Mr. Gorman states, "MSD has not clearly developed a capital funding plan for allowable stormwater capital programs to minimize cost on its retail customers." See Exhibit MIEC 45. However, during the Technical Conference on May 17, 2018, Mr. Gorman admits that 'Well, the use of debt has an affordability component which the District can only take on so much debt based on the income strength of its customers, so there is limits to how much debt the community can afford..." See Exhibit MSD 52, page 22 lines 13-17. Mr. Gorman appears to acknowledge that because the Stormwater Capital rate is so low to start, debt funding this program would have a limited impact that would then be further offset by the need for additional capital to cover debt service payments and build an adequate reserve. ISSUE 4: FAIR AND REASONABLE RATE STRUCTURE MSD's Position on Issue 4 The District's position is that the rate structure being proposed is fair and reasonable on all classes of rate payers. As we heard from the technical experts, there are different rate structures that entities choose to use based upon their circumstances. MSD's technical expert, Henrietta Locklear, testified as follows regarding the use of different rate structures: "it's just an alternative approach to what the District is using. The District is basing the charges on the amount of impervious area on the property, and that's an accepted rate structure and it's fair and reasonable. Taking into account some other factors, it's a different rate structure which, you 10 Exhibit MSD 69 know, others have implemented in a way they feel is fair and reasonable. It's just not a part of this rate structure." See Exhibit MSD 65, page 114 lines 20-25 and page 115 lines 1-3. Rate Commission's Technical Expert's Position on Issue 4 Ms. Lemoine does not state that MSD's proposed rate structure is not fair and reasonable. Instead, she simply suggested that there could be some lost revenue by not charging vacant land. She testified that "Excluding these types of improved vacant land parcels completely from stormwater billing, could potentially impact equity of cost recovery, as these types of improved vacant land also contribute some level of stormwater runoff...." Exhibit RC 43. In addition, "There are utilities who assess an effective impervious area based on a runoff factor for properties such as vacant properties that have compacted soil and things..." See Exhibit MSD 52, page 64 lines 10-13. Intervener MIEC's Position on Issue 4 MIEC did not express an opinion on this issue. ISSUE 5: MSD's POSITION ON ZWEIG In Zweig v Metropolitan St. Louis Sewer District, 412 S.W.3d 223 (Mo. Banc 2013), the Missouri Supreme Court included a footnote which states "Ratepayers do not challenge MSD's authority to levy the stormwater user charge under the Plan or Section 30(b) of the constitution. The only claim in this case — and the only issue decided here — is whether section 22(a) prohibits MSD from levying this stormwater user charge without prior voter approval." Susan Myers, MSD's General Counsel, testified that "the Stormwater Capital Rate is consistent with the District's Charter. Under Section 3.020(16), the District may "establish by ordinance a schedule or schedules of rates, rentals, and other charges, to be collected from all the real property served by the sewer facilities of the District, whether public or private...," See Exhibit MSD 3B. The District has provided a detailed legal summary of MSD's authority in Exhibit MSD 30Q. Ms. Myers also testified that "the proposed Stormwater Capital Rate will be taken to the voters for approval." See Exhibit MSD 3B. ISSUE 6: MSD's POSITION ON CHARGING THE STORMWATER CAPITAL RATE TO TAX EXEMPT ENTITIES 11 Exhibit MSD 69 It is MSD's position and has been testified as such in Exhibit MSD 30Q, that MSD's Charter allows the District to assess any charge, fee, or tax that is necessary to carry out its obligations of providing sewer and drainage services. More specifically, under Charter § 3.020(16), MSD has the power "[t]o establish by ordinance a schedule or schedules of rates, rentals, and other charges, to be collected from all the real property served by the sewer facilities of the District, whether public or private, and to prescribe the manner in which and time at which such rates, rentals, and charges are to be paid, and to change such schedule or schedules from time to time as the Board may deem necessary, proper, or advisable, and to collect or enforce collection of all such charges." If a statutory exemption were to be applied to the stormwater capital rate it would create a clear inconsistency between the two provisions, in which case the Charter would supersede. In addition, please see Exhibit MSD 37D for the District's detailed legal rationale for charging the proposed Stormwater Capital Rate to tax exempt entities. As a summary, MSD considers the Stormwater Capital Rate to be a charge or rate authorized by the Charter and not a property tax or any other form of tax. Taxes fall into three separate categories: (1) capitation or poll taxes (assessed to a person); (2) ad valorem property taxes; and (3) excise taxes (such as sales, use, and licensing taxes and fees). The Stormwater Capital Rate does not fall into any of these three categories. Therefore, the Stormwater Capital Rate is not a tax and non-profit, tax exempt, and governmental entities are not exempt from paying it. Neither the Rate Commission counsel nor MIEC's counsel has expressed an opinion on this issue. CONCLUSION In conclusion, the District believes the issues addressed in this report reflect the most relevant and representative topics requiring consideration by the Rate Commission. The District has submitted a substantial amount of testimony and documentation to support this Rate Change Proposal. The MSD Charter standard is not for MSD to implement the most fair and reasonable rate structure, just one that is fair and reasonable on all classes of ratepayers. All evidence and testimony provided by MSD demonstrates that MSD's proposed Stormwater Rate Change Proposal consisting of a capital rate to mitigate flooding and erosion within our District is fair and reasonable. MSD believes that based upon all of the information provided during these 12 Exhibit MSD 69 proceedings that MSD's Rate Change Proposal, as submitted on February 26, 2018, is the most fair and reasonable proposal to be brought to the voters of the District for consideration. Respectfully submitted, usan M. Myers METROPOLITAN ST. LOUIS SEWER DISTRICT 2350 Market Street St. Louis, Missouri 63103 Tel: (314) 768-6366 Fax: (314) 768-6279 13 Exhibit MSD 69 CERTIFICATE OF SERVICE The undersigned certifies that a copy of the foregoing was sent by electronic transmission to Lisa O. Stump, Lashly & Baer, P.C., Brian J. Malone, Lashly & Baer, P.C., and Brandon Neuschafer, Brian Cave, LLP, on this 28th day of June, 2018. Lisa O. Stump, Esq. Brian J. Malone, Esq. Lashly & Baer, P.C. 714 Locust Street St. Louis, MO 63101 lostumpAlashlvbaer. com Brandon W. Neuschafer Bryan Cave, LLP 211 N. Broadway, Suite 3600 St. Louis, MO 63102 John.kindschuh@,bryancave. corn Stan M. Myers, General "Couns(e1 METROPOLITAN ST. LOUIS SEWER DISTRICT 2350 Market Street St. Louis, Missouri 63103 smyers@stlmsd.com Tel: (314) 768-6366 Fax: (314) 768-6279 14