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Home My Public Portal AboutExhibit MIEC 75 - MIEC's Response to MSD's First Discovery RequestExhibit MIEC 75 Wastewater Rate Change Proceeding - 2019 BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT For Consideration of a Wastewater Rate Change Proposal by the Rate Commission of the Metropolitan St. Louis Sewer District RESPONSES OF INTERVENOR MISSOURI INDUSTRIAL ENERGY CONSUMERS TO MSD'S FIRST DISCOVERY REQUESTS Pursuant to §§ 7.280 and 7.290 of the Charter Plan of the Metropolitan St. Louis Sewer District (the "Charter Plan"), Restated Operational Rule § 3(7) and Procedural Schedule §§ 16 and 17 of the Rate Commission of the Metropolitan St. Louis Sewer District (the "Rate Commission"), the Missouri Industrial Energy Consumers ("MIEC") hereby submits the attached responses to the April 26, 2019 First Discovery Request of Metropolitan St. Louis Sewer District ("MSD") for additional information and answers regarding the Rate Change Proposal dated March 4, 2019 (the "Rate Change Proposal") REQUEST 1: Your rebuttal testimony states that, "It is possible that MSD may be able to issue new debt at around a 2.5% interest rate. However, it could be as high as 3%. Therefore, I recommend a more conservative estimate of the interest cost on new bond issues to be 3%, rather than the 5% proposed by MSD" (page 14, lines 6-9). The municipal market benchmark yield curve produced by Municipal Market Data ("MMD") is generally reported based on yield. However, the underlying assumed coupon rate for MMD is 5%. Consequently, MSD's Rate Proposal assumed 5.0% to 5.5% coupon rates. When yields are lower than the assumed coupon, bond premium can be generated and serve as a component of bond proceeds in addition to the principal amount. Please clarify if your 2.5% and 3% rate assumptions relate to interest rate (i.e. coupon) or yield on the bonds? Furthermore, please provide on a by maturity basis your assumed interest rates, yields and total bond proceeds (principal plus premium) assumed to be generated in your debt financing scenarios. RESPONSE 1: The interest rate projection was Mr. Gorman's estimate of the cost to MSD of the additional funds created by issuing new bond debt to the market. Hence, it assumes that the face value of the bonds would be equal to the bond proceeds received from the market, less the cost of issuance. MSD's rate model indicated a cost of issuance of 1.0% on the "CIRP Dashboard" tab. Mr. Gorman did not adjust this input. Hence, the cost of bonds with a 3% coupon rate, with an issuance cost of 1.0%, would be slightly above 3.0%. The impact on MSD revenue requirement caused by a 0.5% increase to the new bond interest rate is about $500,000 to $600,000 per year that would be additive over the four year rate cycle, and would increase cost by $2.4 million in FY2024 as shown below. 1 Wastewater Rate Change Proceeding - 2019 TABLE 1 Revenue Requirement Comparison Proposed Input FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 5.0% Rate 425,619.998 437,201.686 495,290.476 497.130,001 489,669,852 516.685,601 3.0% Rate 425,619,998 436.012,939 440.651.192 449,984,451 465.238,685 485,703.415 3.5% Rate 425.619,998 436.145,324 441.224.464 451 106.892 466,968,936 488,108,996 Difference 132.385 673,271 1.122,441 1,730,250 2.403.581 Total FY21-FY24 1,998,675.929 1,841,577,744 1,847,407,288 5,829,544 Supporting workpapers are provided in response to Discovery Request No. 6. REQUEST 2: Are you aware of any recent water/wastewater revenue bond market transactions similar to MSD's proposed issuances in terms of credit rating, size, and maturity that utilized coupons and yields similar to your assumptions? If so, please provide a list of the transactions, including the names of the issuers and the dates of the transactions. RESPONSE 2: Yes. As an example, MSD's 2017 Series A, in the amount of $316.17 million, was issued with coupon rates ranging from 2% to 5%, but were sold at a premium to the face value of the bonds. The net interest costs of the proceeds received by MSD for this 2017 bond issue was around 3.23%. See page 42 of MSD's Comprehensive Annual Financial Report, and MSD Exhibit MSD-1, Section 7, 7.4.1 Existing Bond Summary. See also bonds issued by Citizens Energy Group for the CWA Wastewater utility in Indianapolis, Indiana. Citizens Energy Group's 2018 Annual Financial Report outlines recent debt issues on pages 21 to 22, including $157 million in 2017. Coupon rates for CWA Wastewater's 2016 series range from 2.0% to 5.0% and the 2017 Series has a rate of 3.53%. See httr►s://www.citizensenergvaroup.com/Our-CamnanvlNews- Financials/Financials/Reports/20I &Ann ual-Renort.ndf REQUEST 3: Your testimony states that, "historically AA municipal rated debt interest rates have tracked that of 30year Treasury securities" (page 14, lines 1-2). Please provide the specific data or benchmarks and specific historical period reviewed to come to this conclusion. RESPONSE 3: Projections referenced by Mr. Gorman should state over the next two years, not the three years. The data used to track the comparison of AA rated municipal bond debt and 30-year Treasuries is attached as Exhibit MIEC 75A. REQUEST 4: You state in your testimony that, "projections of Treasury bond yields out over the next three years indicate a relatively flat interest rate curve" (page 14, lines 3-4). Did you make any allowances for interest rate increases in your projections over that three year period? If so, how much and how much cushion for uncertainty, if any, was included? Since the three year Treasury projection extends to 2022, what informs your assumptions for interest rates 2 Wastewater Rate Change Proceeding - 2019 beyond that? Please explain your assumptions for those rates and specify if a cushion for uncertainty of projections was included in those assumptions. RESPONSE 4: Mr. Gorman used the high -end estimate of the AA rated municipal bond yield as a projection as a conservative estimate of current observable yields, and relatively flat yield projections over the next two years. While there is no explicit adder to reflect the possibility of increasing interest rates, the potential for increased interest rates was considered by Mr. Gorman in deriving his estimate for a conservative interest rate cost to use in the projected cost of service model. However, as shown on the attached Exhibit MIEC 75B, economists' projections of increases to interest rates have historically been wrong. As such, current interest rates are just as likely a good estimate of market interest rates over the prevailing rate cycle as are economists' forecasts for increasing interest rates. REQUEST 5: The schedules included in your testimony appear to show an overall decrease in capital funding in the first two years of the Rate Proposal Period (higher debt funding that is more than offset by lower PAYGO funding) that loops Iike it would push the balance of the construction fund to a negative balance. Did you model Construction Fund cashflows in a manner similar to Table 4-8 in the Rate Change Proposal? If so, please share your schedule or table. RESPONSE 5: MSD's Rate Model includes the Construction Fund Cashflows on the "CIRP" tab on rows 143 to 173. My table, below, displays the data from my adjusted MSD rate model in the same manner as Table 4-8. Also see the attached model in response to Discovery Request No. 6. Wastewater Construction Fund Cashllow 1. Beginning Year Balance 6ou ces of Funds 2. Revenue Bond Proceeds - ParArne att 3. Revenue Bond proceeds - Premium 4. Cash Fnancirg of Conslruclion (PAYOO) 5. Capitalized IMemal Labor 6. WIFIADraw 7. State Revolving Loan Proceeds 8 (rants & CantrbiAons 9 Mores! home 10. Subtotal. Available Funds Uses of Funds 11. MbJor Cepitel Improvements 12. Issuance Costs 13. Debi Service Reserve Fund Deposits 14. Subtotal: Uses of Funds 15. Ford of Year Balance TABLE 2 CIRP Financing Plan Prejecled FY21-FY24 f Y 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 Subtotal $ 243,381,681 S 53,193,494 $ 56,909 $ 58,041 $ 94,542 5 17,869 120,000,000 9,903,814 25,267,600 629,397 5,850,000 59,240,000 5,270,000 121,366,038 10,200,928 5,204,107 76,000,000 657,040 6.870.030 167,670,000 161,910,000 20,720,000 20,010,003 104,916,862 101,291,343 8,758,000 9,020,740 13, 754, 995 14, 437, 728 30,000,000 30,000,000 685,899 716,027 7,170.000 8,930,000 191,030,000 23,610,000 97,756,935 9,291,352 11,024,051 30,000,030 747,483 7.100.000 $ 405,012,091 $ 367,001,607 $ 363.732,664 $ 344,373,879 $ 370,856,282 205,790,030 $ 726,400,003 25,430,000 89,770,000 100,487,975 404,435,016 9,570,103 35640,205 3,122,464 42,339,246 30,000, 000 120,000,003 780,317 2,929,724 7,480 000 28,680,000 $ 3E2,655726 $ 1,451,421,652 $ (321,6$4,361) $ (365,817,200) $ (351,609,622) $ (342,274,337) $ (369,313,413) $ (380,161,081) $(1,442,358,453) (184,236) (1,127,500) (2,065,003) (2005,000) (2,325,000) (2,485,000) (8,880,000) S (321,618,597) $ (366,944,700) $ (35(3,674,622) 8(344,279,337) $ (370,638,413) $ (382,646,081) 8(1,451,238,453) $ 83,193,494 $ 66,908 $ 60,041 $ 94,542 $ 17,809 $ 12,1347 $ 163,099 3 Wastewater Rate Change Proceeding - 2019 REQUEST 6: PIease provide any rate model you used, including changes made to MSD's Rate Model, to develop the schedules and positions presented in your rebuttal testimony. RESPONSE 6: See Exhibit MIEC 75C for the Rate Model used to support Mr. Gorman's Rebuttal Testimony. Exhibit MIEC 75D is a Rate Model that uses a 3.5% rate for the bond issuances and supports Table 1 from Discovery Response No. 1. The attached Rate Model includes Schedules MPG-1, MPG-2, and MPG-4. Please see Exhibit MIEC 75E for an Excel version of Schedule MPG-3. Please see Exhibit MIEC 75F for an Excel version of Schedules MPG-5 and MPG-6. Dated: May 6, 2019 Respectfully submitted, BRYAN CAVE LEIGHTON PAISNER LLP By Isl Brandon W. Neuschafer Brandon W. Neuschafer, #53232 Kamilah Jones, #71025 211 N. Broadway, Suite 3600 St. Louis, Missouri 63102 Telephone: (314) 259-2317 (Brandon) Telephone: (314) 259-2151 (Kamilah) Facsimile: (314) 259-2020 bwneuschafer@bciplaw.com kamijones@belplaw.com ATTORNEY FOR THE MIEC 4 Wastewater Rate Change Proceeding - 2019 CERTIFICATE OF SERVICE The undersigned certifies that a copy of the foregoing was sent by electronic transmission to the following on this 6th day of May, 2019. Ms. Janice Fenton Office Associate Senior Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, MO 63103 jfenton@stlmsd.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 Mr. Brian J. Malone Lashly & Baer, P.C. 714 Locust Street St. Louis, MO 63101 bmalone@lashlybaer.com /s/ Brandon W. Neuschafer 5