HomeMy Public PortalAboutExhibit MIEC 83 - Surrebuttal Testimony Michael GormanExhibit No.:
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BEFORE THE
MIEC 83
Michael P. Gorman
Surrebuttal Testimony
Missouri Industrial Energy Consumers
June 3, 2019
RATE COMMISSION OF
THE METROPOLITAN ST. LOUIS SEWER DISTRICT
Wastewater Rate Change Proceeding - 2019
Surrebuttal Testimony and Schedules of
Michael P. Gorman
On behalf of
Missouri Industrial Energy Consumers
June 3, 2019
BRUBAKER &ASSOCIATES, INC.
Project 10765
BEFORE THE
RATE COMMISSION OF
THE METROPOLITAN ST. LOUIS SEWER DISTRICT
WASTEWATER RATE CHANGE PROCEEDING - 2019
Table of Contents to the
Surrebuttal Testimony of Michael P. Gorman
Page
I. SUMMARY 1
II. WASTEWATER REVENUE REQUIREMENT 4
11.A. CIRP Annual Spend 4
II.B. CIRP Funding Financial Policy 7
II.C. Bond Interest Rate 15
III. COST OF SERVICE — ALLOCATION OF I/1 17
Schedule MPG-SR-1 through MPG-SR-5
Michael P. Gorman
Table of Contents
BRUBAKER & ASSOCIATES, INC.
1
BEFORE THE
RATE COMMISSION OF
THE METROPOLITAN ST. LOUIS SEWER DISTRICT
WASTEWATER RATE CHANGE PROCEEDING - 2019
Surrebuttal Testimony of Michael P. Gorman
1 Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
2 A Michael P. Gorman. My business address is 16690 Swingley Ridge Road, Suite 140,
3 Chesterfield, MO 63017.
4 Q ARE YOU THE SAME MICHAEL P. GORMAN WHO PREVIOUSLY FILED
5 TESTIMONY IN THIS PROCEEDING?
6 A Yes. On April 23, 2019, I filed Rebuttal Testimony on behalf of the Missouri Industrial
7 Energy Consumers ("MIEC").
8 I. SUMMARY
9 Q WHAT IS THE PURPOSE OF YOUR SURREBUTTAL TESTIMONY?
10 A My surrebuttal testimony outlines responses to positions taken by the Rate
11 Commission witnesses Pamela Lemoine and Nichole Young. These witnesses
12 specifically address MSD's projected wastewater revenue increase, proposed
13 financial policy supporting the funding of the Construction Improvement Replacement
14 Plan ("CIRP") and the resulting increase in wastewater rates. More specifically, this
15 surrebuttal testimony will comment on these witnesses' positions concerning the
16 following:
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1 1 The Rate Commission witnesses did not take issue with MSD's projected interest
2 rates on new revenue bonds sold to fund the projected CIRP in the FY 21 — FY 24
3 rate cycles. In contrast, I found that MSD's projected interest rates on new bond
4 issues during this period exceeded current and likely prospective market interest
5 costs of these new bond issuances.
6 2. Rate Commission witness Lemoine did not object to MSD's proposal to change
7 the financial policy to ,set wastewater rates using a minimum debt service
8 coverage ("DSC") ratio of 1.8x, from the previous long-standing ratemaking policy
9 approved by the Rate Commission of a minimum DSC of 1.6x. The minimum
10 DSC is a critical consumer protection measure, and is a critical factor in
11 developing projected wastewater revenue requirements that are needed by MSD
12 to fund CIRP, maintain its credit standing, but also manages wastewater cost of
13 service so as to produce just and reasonable wastewater rates to MSD
14 customers. Ms. Lemoine has not provided evidence that supports MSD's
15 proposal to change its ratemaking financial policy.
16 3. No Rate Commission witness commented on the pace or need for a substantial
17 spike in CIRP spending budgeted for FY 23 and FY 24 as reflected in MSD filings
18 relative to historical or post-FY 2024 projections.
19 Rate Commission witness Nichole Young did, however, review the District's
20 budget and found them to be appropriate. She describes her role in this
21 proceeding as to provide the Rate Commission a better understanding of the
22 District's CIRP proposal, and to advise it on the CIRP plan. However, she failed
23 to mention or assess the price and planned annual CIRP spend. No party took
24 issue with projects, only the proposed timing.
25 4. MSD's forecast of a substantial spike in CIRP spending in FY 23 and FY 24,
26 followed by substantial reductions in CIRP spending in FY 25-FY 28 provides the
27 Rate Commission a clear opportunity to push back on MSD Staffs discretionary
28 increase in CIRP spending in FY 23 and FY 24, and mitigate the rate increase on
29 MSD's wastewater rates to the benefit of its customers, while still providing MSD
30 an ability to accomplish its CIRP projects in a timely and prudent manner.
31 5. MSD's discovery responses clearly show that impact on wastewater rates was not
32 a factor in establishing the timing of CIRP spend. Rather, MSD simply states that
33 it prioritizes projects to pursue the most critically important projects first, and
34 identify projects with anticipated potential for near -term failure for those that have
35 minor or major consequences are identified. MSD also considers the NPDES
36 permit violations and negative environmental impacts on the prioritization of its
37 projects. MSD concluded based on this assessment that it does not have
38 discretion to delay projects.
39 6. Responses to discovery requests indicate that MSD has failed to provide
40 evidence that is required to make all these CIRP projects and place them in
41 service by FY 24 that are currently budgeted to take place in FY 23 and FY 24.
42 As such, MSD does not have regulatory obligations that require it to have a spike
43 in CIRP spending in these two years. Further, discovery indicates that MSD did
44 not consider impact on wastewater cost of service or retail rates in prioritizing
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1 CIRP projects. My recommendation simply allows MSD the discretion to identify
2 CIRP projects that pose the least risk to the environment and to customers, to
3 defer them for up to two years, in order to mitigate impact on wastewater cost of
4 service and rates. While MSD has stated a desire to immediately proceed with
5 these projects, it has failed to use wastewater cost of service as a planning factor
6 in establishing the priority for projects. This deficiency in its planning process is
7 not to the best benefit of its customers, and should be implemented in order to
8 ensure that rates are managed in a reasonable and prudent manner, along with
9 modernizing its wastewater infrastructure in line with regulatory objectives and
10 good wastewater planning.
1 Q BASED ON THE RATE COMMISSION'S TESTIMONY, ARE YOU MODIFYING ANY
12 ASPECT OF YOUR ORIGINAL TESTIMONY IN THIS PROCEEDING?
13 A Yes. Based on the Rate Commission's testimony, I modified my original testimony to
14 include the following:
15 1. Interest rates on new bonds. I will withdraw my proposed adjustments to MSD's
16 projected interest rates on new bond issues. The Rate Commission and the Rate
17 Commission Staff appear to be comfortable with MSD's overly conservative
18 projection of future interest rates on new revenue bond issues. In this testimony,
19 will show just how much contingency this overstatement of current interest rates,
20 and reasonable estimates of future interest rates provides MSD to ensure that a
21 revenue requirement approved in this case is more than adequate to fully recover
22 its projected cost of service over this rate cycle (FY 21-FY 24).
23 2. Chance in financial policy. The Rate Commission Staffs finding that the financial
24 policy that has been used in MSD's last three rate cases is appropriate to change
25 in this case is not based on facts or proven to be reasonable or prudent. I
26 describe various credit reports identified by the Rate Commission witness and
27 show that these reports do not support a change to the MSD financial policy that
28 has been used to set MSD wastewater rates for over a decade. I also show that
29 while MSD has consistently set rates for a minimum DSC of 1.6x over the last
30 decade, because its forecasts have exceeded its actual cost, MSD's actual
31 earned DSC has been considerably higher than that reflective of the minimum
32 financial policy of 1.6x. Indeed, MSD's actual earned DSC has been in the area
33 of 1.9x, because its forecasted cost used to develop wastewater rates, often
34 significantly exceed its actual costs when the rates are in effect, thus allowing
35 MSD to earn a DSC higher than the minimum including the existing rate -setting
36 financial policy.
37 3. CIRP level spend on FY 2023 — FY 2026. I will provide supplemental evidence
38 showing that the Rate Commission's failure to manage annual CIRP spending is
39 an important issue in this case and should have been addressed. The annual
40 CIRP spending level, particularly in FY 23 and FY 24 increases substantially
41 relative to historical years, and prospective budgeted years (FY 25-FY 28).
Michael P. Gorman
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1 MSD's position for this material spike in annual CIRP spending in FY 23 and
2 FY 24 drives a substantial and unjustified need for a larger wastewater rate
3 increase in FY 23/FY 24 that can be avoided by a more balanced projected CIRP
4 annual spend during the period FY 23 — FY 26.
5 II. WASTEWATER REVENUE REQUIREMENT
6 II,A. CIRP Annual Spend
7 Q PLEASE DESCRIBE YOUR CIRP ANNUAL SPEND ADJUSTMENT.
8 A As shown in Figure SR-1 below, MSD forecasts a significant increase in its CIRP
9 spending in FY 2023 and FY 2024, followed by a decrease in FY 2025 and FY 2026.
10
11
12
13
14
;
0
E
$500.0
$450.0
$400.0
$350.0
$300.0
$250.0
$200.0
$150.0
$100.0
$50.0
$0.0
FIGURE SR-1
Capital Investment and Replacement Plan Need
MSD Proposed and MIEC Levelized
FY21 to FY24 CIRP
1iiiiiII
<", ‹k 4.1, c< c� c� , ck F' ck
Source:
Exhibit MSD 52 - St. Louis MSD Rate Financial Plan Model FY21-24.
My proposed adjustment offered in my Rebuttal Testimony attempted to
approximately levelize MSD's annual CIRP spending during the FY 2023 to FY 2024
through FY 2023 — FY 2026 projects. I propose to do this by readjusting the planned
CIRP spend in FY 23 and FY 24 to reduce each year by about $70 million, and
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1 increase the CiRP spending in FY 25 and FY 26 by the same amount. Over the
2 period FY 2023 — FY 2026, MSD can fund all budgeted CIRP programs.
3 In effect, certain projects currently planned for FY 23 and FY 24 can be
4 deferred until FY 25 and FY 26, and MSD will not be in conflict with its regulatory
5 obligations. The actual selection of which projects could be deferred can be left up to
6 MSD Staff, which can be managed in a way which meets its Consent Decree ("CD")
7 obligations, other regulatory obligations, and manage impacts on wastewater rates.
8 However, the importance of doing it is significant, because making an effort to
9 levelize this annual level of CIRP spending will significantly reduce the rate increase
10 needed in this rate cycle to support the CIRP program. In effect, I believe the Rate
11 Commission should recognize that managing rate impact on customers is important,
12 and should be given more serious consideration than that provided by either MSD
13 Staff or the Rate Commission experts.
14 In Figure SR-1 above, in FY 23 and FY 24, I show a rectangular box on the
15 level of annual spend, which can be the cost of certain projects which can be deferred
16 from these years, and then expended in FY 25 and FY 26, which is also designated
17 by boxes in the figure above. Again, this proposal would defer projects for only two
18 years, and all the level of planned CIRP spending through FY 26 would be concluded
19 by this year.
20 Q PLEASE EXPLAIN WHY LEVELIZING THE CIRP SPENDING OVER THIS FOUR-
21 YEAR PERIOD, RATHER THAN THE TWO-YEAR SPIKE IN CIRP SPENDING
22 PROPOSED BY MSD, WILL REDUCE COSTS TO WASTEWATER CUSTOMERS.
23 A Levelizing the CIRP spending in FY 23 and FY 24 can allow MSD to issue less debt
24 in order to fund a spike in CIRP spending for these years. In my rebuttal testimony,
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showed that levelizing CIRP funding over the FY 23-FY 26 period would allow MSD
2 to issue approximately $59 million less debt in FY 23 and FY 24 and fund more of
3 these capital expenditures with rate revenue funding. In effect, to the extent these
4 projects can be managed over a four-year period instead of a two-year period, MSD
5 will collect more rate revenue funding to fund a larger portion of these projects by
6 issuing less new debt.
7 Q HAS MSD OUTLINED WHETHER OR NOT IT HAS FLEXIBILITIES TO DELAY
8 CERTAIN OF THE CIRP PROJECTS SCHEDULED TO BE COMPLETED IN FY 23
9 AND FY 24 OUT THROUGH AT LEAST FY 26?
10 A In response to MIEC Data Request 20, MSD did provide an outline of the prioritization
11 process it undertakes in order to identify when it plans to implement the proposed
12 CIRP programs. It does state it does not have any flexibility to delay projects.
13 However, MSD's prioritization projects outlined in Exhibits MSD 63A through
14 63D do not include managing impacts on wastewater rates as a factor for establishing
15 timing and pace of CIRP programs. For example, in MSD's SSO Master Plan, it
16 includes a prioritization description related to the Consent Decree based on potential
17 harm to human health and environment, frequency of activations, estimated volumes,
18 and technical engineering judgment.' While I am not questioning whether or not
19 prioritizing based on human and environmental benefits is a proper factor, I do
20 believe it would be important to consider the timing and pace of the CIRP plan in an
21 effort to manage impact on customers' rates as an important factor in the
22 determination of CIRP annual spend. From what I can see in MSD's plans,
23 managing cost of service impacts and managing ratepayer impacts are not part of the
'Page 5-2.
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1
2
3
4
5
6
7
planning process, other than to the extent MSD measures rate affordability as a factor
in managing its financial integrity and bond rating.
Further, the outline of projects as provided by MSD in Exhibit MSD 78D is also
attached to this testimony as Schedule MPG-SR-1, and shows that there are many
projects without regulatory or Consent Decree mandatory in-service dates by FY 24.
MSD does have some flexibility to manage CIRP annual spend while prioritizing each
project using its own priorities.
8 II.B. CIRP Funding Financial Policy
9 Q DID THE RATE COMMISSION'S CONSULTANT REVIEW MSD'S PROPOSED
10 CAPITAL FINANCING PLAN?
11 A Yes, Pamela Lemoine reviewed MSD's capital financing plan in her Rebuttal
12 Testimony where she found the District's rate proposal to be reasonable. She
13 concludes:
14 The District's proposed capital financing plan, which includes approximately
15 37% cash funding of the CIRP, is consistent with similar financial best
16 practices used by other peer wastewater utilities and provides a reasonable
17 mix of cash and debt financing.2
18 We concur with the District's approach in their proposal to establish a financial
19 plan that allows for DSC of 2.5 times or greater for senior lien bonds and 1.8
20 times or greater for total debt coverage.3
21 Q PLEASE RESPOND TO MS. LEMOINE'S FINDINGS REGARDING THE
22 DISTRICT'S PROPOSED CASH AND DEBT FINANCING MIX.
23 A Ms. Lemoine's Rebuttal Testimony does not support her conclusions. Ms. Lemoine
24 acknowledges that MSD's proposal for cash financing at 37% exceeds the District's
2 Exhibit RC 70, Rebuttal Testimony of Pamela Lemoine, at 6.
3 Id.
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i
1 historical funding mix of 25% cash financing and 75% debt financing'', but she
2 concludes, "This level of cash financing is consistent with the 25% to 30% cash
3 financing of capital that is deemed an industry accepted best practice and is in
4 practice in other peer utilities."5
5 The industry accepted best practice that Ms. Lemoine cites demonstrates that
6 MSD's proposed cash financing is very expensive already, and an increase in
7 customer costs is not justified. MSD has not shown that it is reasonable to change
8 the financing policy that that District has previously used to measure its wastewater
9 revenue requirement for about a decade that has proven successful in supporting its
10 AA bond rating from Moody's and Fitch and its AAA rating from S&P.
11 As described in my Rebuttal Testimony, MSD's proposed change to MSD
12 financial policy is not reasonable or justified, because it produces unjust rate impacts
13 on MSD customers.
14 Q DID MS. LEMOINE'S OFFER ADDITIONAL DETAILS REGARDING HER FINDING
15 THAT MSD'S PROPOSED CAPITAL FINANCING PLAN IS REASONABLE?
16 A Yes. Ms. Lemoine clarified her position during the May 9, 2019, Technical
17 Conference where she argued that MSD's proposed cash financing is reasonable
18 because it is required to support the District's proposed DSC ratio of 1.8x.6 Ms.
19 Lemoine argues that MSD's credit rating will be negatively impacted if its DSC ratio
20 drops below 1.8x.
21 So it's important to IooK at everything in total. But in reviewing the rating
22 agency's criteria and their commentary, 1.8 times seems reasonable to me.
23 It's higher than Standard and Poor's rating threshold of 1.6 times. But when
24 you look at Moody's and Fitch, they are more conservative with their
4 Id., at 13-14.
ld., at 14.
8 Exhibit MSD 79, Transcript of Technical Conference for Rebuttal Testimony, at 86.
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1 expectations tor debt service coverage. And one of the them even indicated
2 that they would look closely at a downgrade or a negative rating action if the
3 debt service coverage dropped below what they were expecting to see, which
4 they quoted as being 1.9 or so, if I recall correctly.'
5 Q DO YOU AGREE WITH MS. LEMOINE'S CONCLUSION THAT A DSC RATIO
6 BELOW 1.8X WOULD LIKELY RESULT IN A DOWNGRADE?
7 A No, and credit rating agency reports do not support this finding. I do agree with Ms.
8 Lemoine that it is appropriate to look at everything in total, which would include
9 managing wastewater rates, in an effort to produce a rate -setting financial policy that
10 will accomplish MSD's objective of funding all of its CIRP over time consistent with its
11 regulatory obligations, and minimizing costs to customers.
12 However, MSD Staff and Rate Commission witness Ms. Lemoine have not
13 shown that a change in financial policy is needed to set MSD's wastewater rates.
14 Q OVER THE LAST DECADE OR SO, HAS MSD SET WASTEWATER RATES WITH
15 A MINIMUM DSC OF 1.6X AND CONSISTENTLY EARNED A DSC HIGHER THAN
16 THIS RATE -SETTING TARGET?
17 A Yes. As outlined in my rebuttal testimony at pages 8 to 10, in MSD's last two rate
18 cases, it set wastewater rates to achieve a minimum DSC of approximately 1.6x.
19 However, in all years that wastewater rates were in effect, MSD earned a DSC above
20 the 1.6x DSC minimum. MSD's actual earned DSC consistently exceeds the DSC
21 used to set wastewater rates. This is shown below in Table SR-1.
'1d.,at81.
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TABLE SR-1
Earned DSC
Ratemaking
Year Total Earned
(1) (2)
2013 1.9 1.9
2014 1.7 2.6
2015 1.6 2.1
2016 1.6 2.1
2017 1.8 1.9
2018 1.9 2.1
Sources:
1 FY11-FY16, MSD Wastewater Rate
Proposal, May 10, 2011. FY17-FY18,
MSD Rate Change Proposal,
February 26, 2015.
2 MSD Comprehensive Financial
Report, FY17-FY18, page 109,
attached as Schedule-MPG-SR-2.
1 As outlined above, while MSD's rate -setting policy over the last three rate
2 cases has been a minimum DSC of 1.6x-1.9x, it has consistently earned a higher
3 DSC of over 1.9x or higher from the wastewater rates approved in its last two rate
4 cycles MSD has previously been using to set wastewater revenue requirements in
5 rates. In the current filing, MSD's proposed rate plan starts at a total DSC of over 2x,
6 and declines to about 1.8x, largely due to the spike in CIRP spending in FY 23 and
7 FY 24. Clearly, the District's proposed funding produces a much more expensive
8 DSC than that used to set wastewater revenue requirements in rates in prior
9 proceedings.
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1 Q DID MSD PROVIDE ANY EVIDENCE WHICH WOULD EXPLAIN WHY ITS
2 EARNED DSC IS HIGHER THAN THE FINANCIAL POLICY USED TO SET
3 RATES?
4 A Yes, I noted this in my rebuttal testimony. MSD acknowledged that its forecasted
5 cost of service in setting rates in the last rate cycle exceeded its actual cost. As
6 described at pages 10 and 11 of my rebuttal testimony, MSD witness Marion Gee
7 states that MSD overstated operating expenses in its 2015 rate model by about
8 $43.2 million, and overstated debt service costs by approximately $26.9 million.8
9 I believe that the recognition that MSD has consistently forecasted cost of
10 service that exceeded its actual cost, and has consistently allowed MSD to earn a
11 DSC above the rate -setting minimum DSC used to forecast its cost of service. More
12 specifically, MSD includes many contingencies and estimates in forecasting its cost of
13 service which have consistently shown to overstate what its actual cost of service is.
14 Hence, using a minimum DSC as a ratemaking tool has provided MSD the ability to
15 earn a DSC much higher than the minimum.
16 If MSD's practices change, and set rates to earn a DSC of 1.8x or higher, then
17 based on the past, it is likely MSD will earn a DSC higher than its actual earned DSC
18 over the last several years. There is simply no sound basis to increase rates to
19 wastewater customers to accomplish an increase in the DSC, when all the evidence
20 in this case shows that the rate -setting practice used to set rates for MSD over the
21 last two rate cycles, and actual earned DSC have supported its very strong
22 investment grade bond rating.
8Exhibit MSD 3E, Direct Testimony of Marion Gee at 6-7
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1 Q PLEASE DESCRIBE THE CREDIT RATING AGENCIES' COMMENTS
2 CONCERNING THE RATE -SETTING PRACTICES USED BY MSD AND THE RATE
3 COMMISSION.
4 A All credit rating agencies have noted that MSD's rate -setting practices have been
5 sound over the past. Indeed, all credit rating agencies have recognized the
6 approximately 75% debt and 25% equity funding target used by MSD to fund its very
7 large CIRP program. Standard & Poor's ("S&P") specifically noted the sound
8 minimum DSC coverage in setting rate practices, while other credit rating agencies
9 have noted MSD's ability to earn a very strong DSC after rates have actually been
10 set. The following are comments supporting the rate -setting practices for MSD, and
11 the resulting eamed DSC from MSD over the last decade or so:
12 A wide array of management policies --including strategic, Tong -term
13 capital, and pro forma financial planning —support the enterprise and
14 financial risk profiles. MSD has adopted rate increases through fiscal
15 2020 to meet its targets of no less than 1.5x all -in DSC and, at least,
16 500 days' cash on hand; a formal policy, however, exists to maintain
17 60 days' operating reserves. Although MSD is operating under a
18 consent decree, it has met all project deadlines. Management updates
19 its strategic business plan and CIRP annually, including goals for
20 customer outreach, revenue diversification, formal staff training, and
21 capital improvements and replacements. Revenue and expense
22 assumptions in management projections are, in our opinion,
23 reasonable. Audits are completed in a timely manner compliant with
24 generally accepted accounting principles.
25 Outlook
26 The stable outlook reflects S&P Global Ratings' opinion that MSD will
27 likely continue to adjust rates and expenses, as necessary, to maintain
28 financial performance consistent with historical trends, particularly as it
29 continues to fund CIRP projects with additional debt and pay-as-you-
30 go funding.9
9S&P Global RatingsDirect "Summary: Metropolitan St. Louis Sewer District, Missouri;
Water/Sewer," November 15, 2017, at 4.
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1 Moody's has a stable credit rating outlook for MSD, and makes the following
2 positive remarks considering the balanced method used to set wastewater rates at
3 MSD:
4 Moodv's1°
5 The Aa1 rating reflects the district's stable financial performance, the
6 result of annual rate increases, prudent management practices and
7 conservative budgeting. The rating also reflects management's ability
8 to successfully manage through the initial stages of a $4.7 billion (in
9 2010 dollars) consent decree. The decree primarily requires the
10 significant reduction of combined and sanitary sewer overflows. The
11 rating is also based on the district's large and diverse service area that
12 encompasses the City of St. Louis (A3 negative) and St. Louis County
13 (Aaa stable), an increasing debt profile with sound debt service
14 coverage, and satisfactory legal covenants and no debt service
15 reserve with the current issuance.
16 Rating Outlook
17 The stable outlook reflects the district's large service area
18 encompassing the St. Louis metro area, and continued strong financial
19 performance due in large part to multiyear adopted annual rate
20 increases and prudent management practices.
21 Finally, Fitch also notes the funding debt/equity mix used to set rates at MSD,
22 and has also recognized its high DSC earned over the last several years. Indeed,
23 Fitch notes that its bond rating reflects a DSC lower than that which MSD has earned
24 over time. Fitch comments concerning MSD include the following:
25 Fitch"
26 Due to the planned borrowings associated with the CIRP and its
27 July 11 consent decree (see below), total coverage on all outstanding
28 and anticipated debt is projected to be 1.9x and coverage on senior
29 lien debt is projected to be in the 2.6x to 2.8x range in fiscals 2018 to
30 2020. Fitch's rating incorporates the slightly weaker DSC, although
31 any deterioration in financial performance beyond projected levels
32 would be expected to result in negative rating action.
10Moody's Investors Service: "Rating Action: Moody's assigns Aa1 to Metropolitan St. Louis
Sewer District, MO's $261M Wastewater Rev. Bonds, Series 2017A," November 17, 2017, Exhibit
MSD 39, at 1.
"Fitch Ratings: "Fitch Rates Metro St. Louis Sewer District, MO's $261 MM Wastewater Revs
'AA+'; Outlook Stable," November 22, 2017, at 3, emphasis added.
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i
1
2
3
* * *
Approximately 74% of the plan from fiscal 2018 through fiscal 2020 is
expected to be funded from existing and planned debt.
4 Q WHAT DSC RATIO ARE YOU RECOMMENDING?
5 A As noted in my rebuttal testimony, I am largely adhering to the long-standing financial
6 policy used to set rates for MSD, consisting of a minimum DSC of 1.6x, and a funding
7 mix target of 75% debt and 25% equity. However, I do recognize that MSD is
8 approaching the end of its CIRP major spend period. As such, as it approaches this
9 end, in order to maintain an earned DSC above the financial policy minimum DSC of
10 1.6x, I am recognizing that an increase in the amount of rate equity funding will be
11 needed over time.
12 As such, in my recommended revenue requirement, i am setting rates to have
13 a DSC in the range of 1.7x to 1.9x, and funding largely the DSC with 30% rate
14 revenue funding and only 70% debt. Over time, this funding mix will continue to
15 increase toward 100% rate equity funding as MSD's annual CIRP program declines
16 after the CD is completed, and existing regulatory obligations are completed, and new
17 CIRP are reduced. At this point, MSD will be able to start reducing the debt Toad
18 taken on as part of the major CIRP CD started many years ago. My revisions to
19 MSD's rate model results in a total debt DSC ratio between 1.9x and 1.7x.
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i
TABLE SR-2
Annual User Charged Revenues
($ Millions)
Description MSD Proposed MIEC Rebuttal2 MIEC Surrebuttal3
Approved Rates
FY 2020
$441
$441 $441
Forecasted Rates
FY 2021 $453 $433 $435
FY 2022 $471 $450 $453
FY 2023 $490 $468 $471
FY 2024 $510 $487 $490
Sources:
1 Exhibit MSD 52, Financial Plan Model FY21-24.
2 Exhibit MIEC 75C.
3 Schedule MPG-SR-3 and MIEC Rate Model.
1 As shown in Table SR-2 above, adjusting my position from my rebuttal
2 position by eliminating my proposed adjustment for future interest rates on new
3 revenue bond issues increases MSD's revenue collection from wastewater rates by
4 approximately $2 million to $3 million per year.
5 II.C. Bond Interest Rate
6 Q PLEASE DESCRIBE HOW YOU PROPOSE TO TREAT NEW BOND ISSUANCES?
7 A I am withdrawing my proposed adjustment to the forecast for a change in interest
8 rates for two reasons. First, my original adjustment was based on an error, because
9 overlooked MSD's model which included an assumption for selling bonds to a
10 premium to face value of the bonds, thus indicating a cost of funds to MSD lower than
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1
2
3
4
5
6
7
the coupon rate used in the forecast. The actual cost of funds included in MSD's
forecast was more in line with 4.55% to 4.19%%.12
Second, based on questioning from the Rate Commission, Rate Commission
counsel, and the Rate Commissioners themselves, it is my impression that the Rate
Commission is comfortable with leaving some contingency into the revenue bond
interest rate forecast in order to ensure that the interest expense is not understated
over this current rate cycle.
8 Q HOW MUCH CONTINGENCY DOES OVERSTATING THE INTEREST RATE
9 PROVIDE TO MSD IN TERMS OF PROJECTING ITS FUTURE DEBT SERVICE
10 COST?
11 A MSD provided this estimate in response to MIEC Data Request 21. The response to
12 this is attached as Schedule MPG-SR-5. Under MSD's model, it forecasted a true
13 interest cost of the new bond issues ranging from 4.55% up to 5.19% shown in the
14 category of costs "MSD Coupon and Yields". In this data request, I asked MSD to
15 revise the assumption assuming that the bonds would be sold at a 3.5% true interest
16 cost, and a 4% true interest cost. These projections were provided under the
17 category "MIEC 3.5% Yield" and "MIEC 4% Yield."
18 The difference between MSD's debt service cost included in its model, and
19 these two alternatives assuming interest rates more in line with the current market
20 level of interest rates, shows a significant reduction in debt service cost for the new
21 bond issues. At a 3.5% yield, debt interest cost would decrease by approximately
22 $364,000 in FY 21 up to $4.3 million in FY 24. The $4.3 million would be in annual
23 recurring savings to MSD relative to the cost it included in the forecast. At a 4%
12Exhibit MSD 78G, attached as Schedule MPG-SR-4.
Michael P. Gorman
Page 16
BRUBAKER 8, ASSOCIATES, INC.
1 market yield, the annual debt service cost savings relative to MSD's forecast would
2 be $126,000 to FY 21, increasing to $2.78 million savings in FY 24,
3 I offer this as an illustration of just how significant the interest rate projections
4 are, and that using MSD's overly conservative estimate of future interest costs on
5 these new bond issues imposes significant costs on customers, and provides a
6 material contingency and the uncertainty of MSD's future cost of issuing these bonds.
7 III. COST OF SERVICE - ALLOCATION OF WI
8 Q PLEASE PROVIDE A BRIEF SUMMARY OF III AND THE IMPORTANCE OF THIS
9 ISSUE AS IT RELATES TO MSD'S COST OF PROVIDING WASTEWATER
10 SERVICE.
11 A Ili consists of water entering the wastewater system from illegal roof and foundation
12 drains, groundwater infiltration through sewer pipe and main joints, and stormwater
13 runoff or inflow from the combined sewer system. 111 occurs in all wastewater
14 collection and treatment systems, and is largely a function of the geographic expanse
15 of the wastewater system.
16 For MSD, III represents about 59% of the total wastewater flow reaching the
17 treatment plants each year. Because III represents such a significant portion of the
18 wastewater flows treated by MSD, even small changes in the allocation of costs
19 associated with Ill have a substantial impact on each customer class in MSD's class
20 cost of service study.
Michael P. Gorman
Page 17
BRUBAKER & ASSOCIATES, INC.
1 Q HOW DOES MSD ALLOCATE 1/1 COSTS ACROSS CUSTOMER CLASSES?
2 A MSD proposes to allocate 40% of Ill on the basis on the number of customers in each
3 class, and 60% of Ill in proportion to each class's annual contributed wastewater
4 volume.
5 Q HOW SHOULD I/1 COSTS BE ALLOCATED IN MSD'S COST OF SERVICE
6 STUDY?
7 A I/1 is largely driven by the geographic expanse of the wastewater system, which, in
8 turn, is driven by the number and location of customers on the system. Thus, it is
9 appropriate to use an I/1 allocation that is heavily weighted toward the number of
10 customers in each rate class. While I/1 allocations with customer components ranging
11 from 50% to 75% have been utilized by other wastewater utilities13, for MSD,
12 recommend an allocation of Ill that is 50% customer related, and 50% volume
13 related.
14 Q DID THE RATE COMMISSION RAISE QUESTIONS ABOUT THE IMPACT OF I/1
15 COST ALLOCATION DURING THE TECHNICAL CONFERENCE ON MAY 9, 2019?
16 A Yes. Rate Commissioner Mr. Goss questioned whether the allocation of I/1 has a
17 material impact on the rates proposed by MSD, and indicated that he would like to
18 see some alternative allocations run through MSD's cost of service study, including
19 the 50%/50% customer/volume allocation recommended by witness Gorman.14
13 Gorman Rebuttal Testimony at Table 5.
14Exhibit MSD 79, Transcript of Technical Conference for Rebuttal Testimony, at 116-117.
Michael P. Gorman
Page 18
BRUBAKER & ASSOCIATES, INC.
1 Q HOW SENSITIVE ARE MSD'S COST OF SERVICE STUDY RESULTS TO THE
2 ALLOCATION OF III?
3 A The class cost of service study results are extremely sensitive to the allocation of Ill.
4 To illustrate this sensitivity, I modified MSD's cost of service study to reflect a 50%
5 customer/50 % volume allocation of 1/1 as well as a 75% customer/25% volume
6 allocation, and compared those results to CWA's proposed 40% customer/ 60%
7 volume allocation. These results were presented in Table 6 of my rebuttal testimony,
8 and have been included below as Table SR-3 for convenience.
Line Customer Class
TABLE SR-3
Cost of Service Results Under Various III Allocations
Revenue at
Approved
FY20 Rates
1 Single Family $ 238,942,441
2 Multi -Family 74,724,241
3 Non -Residential 125,680,754
4 Total System $ 439,347,436
40% Customer
60% Volume'
Increase 1 Decrease
to Reach COS
Amount Percent
$ 4,480,554
1,935,205
5,077,361
$ 11,493,119
1.88%
2.59%
4.04%
2.62%
50% Customer
50% Volume''2
increase/ Decrease
to Reach COS
Amount Percent
$ 15,985,249
(1,068,768)
(3,423,362)
$ 11,493,119
8.7%
-1.4%
-2.7%
2.8%
Source
' Exhibit MSD 52, COS -Results, Excel rows 96-98, column K - column L.
2 Result of changing the allocation of Ill in rows 418 and 419 of Exhibit MSD 52, Demand -Input tab.
75% Customer
25% Volu meu
Increase 1 Decrease
to Reach COS
Amount Percent
$ 44,746,986 18.7%
(8,578,699) -11.5%
(24,675,168) -19.6%
$ 11,493,119 2.6%
9 Q DOES THIS CONCLUDE YOUR SURREBUTTAL TESTIMONY?
10 A Yes.
1leonsulthai.localldocumenletProlawDocsISDW41 U7651Testimony-BA15367764. docx
Michael P. Gorman
Page 19
BRUBAKER & ASSOCIATES, INC.
Project
Number_
12565
12565 -
12565 -
12565
12565
12565
12548
12545
12566
12566
Project Name
BISSELL 8 LEMAY WWTF FLUIDIZED BED
INCINERATORS
BISSELL 8 LEMAY WWTF FLUIDIZED BED
INCINERATORS
BISSELL& LEMAY WWfF FLUIDIZED BED
INCINERATORS
BISSELL 8 LEMAY WWTF F W IDIZED BED
INCINERATORS
BISSELL 8 LEMAY WWTF FLUIDIZED BED
INCINERATORS
BISSELL & LEMAY WWTF FLUIDIZED BED
INC!NERATORS
BISSELL 8 LEMAY W WTF FLUIDIZED 500
INCINERATORS
BISSELL POINT WWTF CONCRETE AND GATE
IMPROVEMENTS
BISSELL POINT WWTF CONCRETE AND GATE
IMPROVEMENTS
BISSELL POINT WWTF TRICKLING FILTER MEDIA
REPLACEMENT
BISSELL POINT WWTF TRICKUNG FILTER MEDIA
REPLACEMENT
12568 BISSELL POINT WWTFTRICKUNG FILTER MEDIA
REPLACEMENT
Scope et Work
Wastewater CiRP Project List, FY2I-24, Amended May 21, 2019
Regulatory related projects that are not CD related
EXHIIBT MSD 78D
CONSTRUCT FLUIDIZED BED INCINERATORS A7 THE
BISSELL AND LEMAY WASTEWATER TREATMENT
FACILITIES, TO INCLUDE REDUNDANT SLUDGE
ACCEPTANCE SYSTEMS AND SOLIDS HANDLING
SYSTEM IMPROVEMENTS
CONSTRUCT FLUIDIZED BED INCINERATORS AT THE
BISSELL AND LEMAY WASTEWATER TREATMENT
FACILITIES, TO INCLUDE REDUNDANT SLUDGE
ACCEPTANCE SYSTEMS AND SOLIDS HANDLING
SYSTEM IMPROVEMENTS
CONSTRUCT FLUIDIZED BED INCINERATORS AT THE
BISSELL AND LEMAY WASTEWATER TREATMENT
FACILITIES, TO INCLUDE REDUNDANT SLUDGE
ACCEPTANCE SYSTEMS AND SOLIDS HANDLING
RYRTFM IMPRl1VFMFNTS
CONSTRUCT FLUIDIZED BED INCINERATORS AT THE
BISSELL AND LEMAY WASTEWATER TREATMENT
FACILITIES, 70 INCLUDE REDUNDANT SLUDGE
ACCEPTANCE SYSTEMS AND SOLIDS HANDLING
RYRTFM IMPRr1VFMFNr5
CONSTRUCT FLUIDIZED BED INCINERATORS AT THE
BISSELL AND LEMAY WASTEWATER TREATMENT
FACILITIES, TO INCLUDE REDUNDANT SLUDGE
ACCEPTANCE SYSTEMS AND SOLIDS HANDLING
SYSTFM IMPROVEMENTS
CONSTRUCT FLUIDIZED BED INCINERATORS AT THE
BISSELL AND LEMAY WASTEWATER TREATMENT
FACILITIES, TO INCLUDE REDUNDANT SLUDGE
ACCEPTANCE SYSTEMS AND SOLIDS HANDLING
SYSTFM IMPROVEMENTB
CONSTRUCT FLUIDIZED BED INCINERATORS AT THE
BISSELL AND LEMAY WASTEWATER TREATMENT
FACILITIES, 7O INCLUDE REDUNDANT SLUDGE
ACCEPTANCE SYSTEMS AND SOLIDS HANDLING
SYSTFM IMPROVEMFNTS
REPAIR SLUICE GATES AND COMPONENTS, AND
CONCRETE.
REPAIR SLUICE GATES AND COMPONENTS, AND
CONCRETE.
Budget
Amount
3,000,000
2,060,000
100,000,000
1.000,000
10.000,O110
150.000,000
15,000,000
600,000
Financial 'Teak
Yea[
FY21
FY22
FY23
FY23
FY23
FY24
FY24
FY21
Design Services
Design Services
Construction, Design -Budd
Construction, Proposer Stipend
Engineering During Construction
Services
Construction, Design -Build
(Supplemental Appropriation)
Engineering During Construction
SeMune
Design Services
Project Subtype
TREATMENT PLANT PROJECTS
TREATMENT PLANT PROJECTS
TREATMENT PLANT PROJECTS
TREATMENT PLANT PROJECTS
TREATMENT PLANT PROJECTS
TREATMENT PLANT PROJECTS
TREATMENT PLANT PROJECTS
TREATMENT PLANT PROJECTS
Date Regulatory
Cut not CD
Not Applicable
Not Applicable
2026
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
REPLACE TRICKLING FILTER MEDIA ON SIX FILTERS
AT THE BISSELL PLANT.
REPLACE TRICKUNG FILTER MEDIA ON 51X FILTERS
AT THE BISSELL PLANT
REPLACE TRICKLING FILTER MEDIA ON SIX FILTERS
AT THE BISSELL PLANT,
2.400,000
FY22
Coetruction
TREATMENT PLANT PROJECTS
14,900,000
700,000
8,500.000
1of3
FY21
FY21
FY22
Construction
Englneehng During Construction
Services
Construction (Supplemental
Approprlation)
TREATMENT PLANT PROJECTS
TREATMENT PLANT PROJECTS
TREATMENT PLANT PROJECTS
Pert of ongoing
NPDES
compliance work
Part of ongoing
NPDES
comblience walk
Not Applicable
Not Applicable
Schedule MPG-SR-1
Page I of
Wastewater CIRP Project List, FY21-24, Amended May 21, 2019
Regulatory related projects that are not CD related
Project
umber
Project Berne
Scope of Work
Budget
Amount
Financial
Year
Task
Project Subtype
Date Regulatory
but not CD
13220
COLDWATER CREEK W WTF FINE SCREEN
REBUILDS
REBUILD FINE SCREENS.
500,000
FY21
Construction
TREATMENT PLANT PROJECTS
Part of ongoing
NPDES
compliance wale
12552
COLDWATER CREEK WWTF REPAIRS AND
IMPROVEMENTS (2022)
REPLACE AERATION CONTROL PIPING, AND
CONSTRUCT IMPROVEMENTS TO BOSKERS SWITCH
TRACK.
900 000
FY21
Design Services
TREATMENT PLANT PROJECTS
Net Applicable
12552
COLDWATER CREEK WWTF REPAIRS AND
IMPROVEMENTS (2022)
REPLACE AERATION CONTROL PIPING, AND
CONSTRUCT IMPROVEMENTS TO BOSKERS SWITCH
TRACK
3,480,000
FY22
Construction
TREATMENT PLANT PROJECTS
Part of ongoing
NPDES
compliance work
13221
GRAND GLARE WWTF REPAIRS AND
IMPROVEMENTS (2024)
REPAIR SPALLED AND CRACKED CONCRETE.
100,000
FY23
Design Services
TREATMENT PLANT PROJECTS
Not Applicable
13221
GRAND GLAIZE W WTF REPAIRS AND
IMPROVEMENTS (2024)
REPAIR SPALLED AND CRACKED CONCRETE.
320,000
FY24
Construction
TREATMENT PLANT PROJECTS
Part of ongoing
NPDES
compliance work
12996
INFRASTRUCTURE REPAIRS (FACILITIES) (2021)
CONSTRUCT REPAIR, REPLACEMENT, OR
IMPROVEMENT PROJECTS TO ADDRESS NEEDS AT
FACILITIES SUCH AS TREATMENT PLANTS AND PUMP
STATIONS.
3,000,000
FY21
Work Order Repair Costs
(Capital)
Asset Management Renewal
Nal Applicable
12906
INFRASTRUCTURE REPAIRS (FACILITIES) (2022)
CONSTRUCT REPAIR, REPLACEMENT, OR
IMPROVEMENT PROJECTS TO ADDRESS NEEDS AT
FACILITIES SUCH AS TREATMENT PLANTS AND PUMP
STATIONS.
3.060.000
FY22
Work Order Repair Cosh
(Capitol)
Asset Management Renewal
Not Applicable
12997
INFRASTRUCTURE REPAIRS (FACILITIES) (2023)
CONSTRUCT REPAIR, REPLACEMENT, OR
IMPROVEMENT PROJECTS TO ADDRESS NEEDS AT
FACILITIES SUCH AS TREATMENT PLANTS AND PUMP
STATIONS.
3,000,000
FY23
Work Order Repair Coats
(Caput)
Asset Management Renewal
Not Applicable
12998
INFRASTRUCTURE REPAIRS (FACILITIES) (2024)
CONSTRUCT REPAIR, REPLACEMENT, OR
IMPROVEMENT PROJECTS TO ADDRESS NEEDS AT
FACILITIES SUCH AS TREATMENT PLANTS AND PUMP
STATIONS.
3,000,000
FY24
Work Order Repair Coats
(Capital)
Asset Management Renewal
Not Applicable
12026
LEMAY WNW FINAL CLARIFIER COLLECTOR
REPLACEMENT
REPI ar-F CLARIFIER EQUIPMENT AT 4 CLARIFIERS,
1,300,000
FY21
Construction
TREATMENT PLANT PROJECTS
Part or ongoing
NPDES
compliance work
13163
LEMAY W WTF REPAIRS AND IMPROVEMENTS
(2023)
CONSTRUCT CONCRETE REPAIRS, REPLACE
SECONDARY CLARIFIER DUCT BANK AND RENEW 4
GRIT TANKS.
910,000
FY21
j
Design Services
TREATMENT PLANT PROJECTS
Not Applicable
2 of 3
Schedule MPG$R-1
Page 2of3
i
Wastewater CIRP Protect List, FY21-24, Amended May 21, 2019
Regulatory related projects that are not CD related
Protect
Number
Protect Name
Scope of Work
Budget
Amount
Flannels/
Year
Task
Project Subtype
Data Regulatory
but not CO13153
LEMAY WWTF REPAIRS AND IMPROVEMENTS
(2023)
CONSTRUCT CONCRETE REPAIRS, REPLACE
SECONDARY CLARIFIER DUCT BANK, AND RENEW 4
GRIT TANKS.
3,878,000
FY23
Construction
TREATMENT PLANT PROJECTS
Part of ongoing
NPDES
compliance work
13222
MISSOURI RIVER W.VTF DIGESTER GAS
STORAGE COVER REPLACEMENT
REPLACE TWO MEMBRANE GAS STORAGE COVERS
FOR THE ANAEROBIC DIGESTERS.
1,100,000
FY22
Construction
TREATMENT PLANT PROJECTS
Part of ongoing
NPDES
compliance work
13223
MISSOURI RIVER WWTF TUNNEL SERVICE
WATER PIPING REPLACEMENT
REPLACE THE SERVICE WATER PIPING IN THE
DIGESTER AND SECONDARY TUNNELS.
400,000
FY21
Canelreetion
TREATMENT PLANT PROJECTS
Part of ongoing
NPDES
compliance work
13185
SLUDGE TRANSFER FORCEMAIN DESIGN
(CONTRACT A)
DESIGN SLUDGE TRANSFER FORCEMAINS AND
RELATED PUMP STATIONS FROM THE GRAND GLAZE
AND LOWER MERAMEC PLANT FACILITIES. TO ENABLE
INCINERATION OF WASTE AT THE LEMAY WWTF
TF
WITHOUT TRUCKING,
7,200,000
FY23
Professional Services
TREATMENT PLANT PROJECTS
Not Applicable
Schedule MPG-SR-1
3 of 3 Page 3 of 3
TIDE METROPOLITAN ST. LOUIS EWER DISTRICT' T. L UI , MISSOURI
Construction of the Matine Creek Thnrtel
scnedule MPG-SR-2
Page 1 of 2
i
THE METROPOLITAN ST. LOUIS SEWER DISTRICT
Fiscal
Year
PLEDGED REVENUE COVERAGE
LAST TEN FISCAL YEARS
Operating
Revenues
Non -
operating
Revenues
2009 $ 209,972,662 $ 10,2,83,104
2010 204,697,929 4,908,296
2011 217, 011, 360 3,202,219
2012 224, 882, 086 2,058,300
2013 240, 597, 715 956,664
2014 264,422,401 2,670,333
2015 288,835,877 2,555,654
2016 318,463,297 3,894,305
2017 333,469,677 2,456,677
2018 368,292, 762 6 356,029
Fiscal
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2014
Fiscal
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Gross
Revenues
$ 220,255,766
209,606,225
220,213,579
226,940,386
241, 554, 379
267,092,734
291,391,531
322, 357, 602
335,926,354
971.648 791
Senior and Subordinate Debt Service
Principal Interest Total
$ 12,110,000
13,022, 500
14, 576,800
16,540,200
18,749,700
10,037, 200
20, 252, 200
29,588,000
38,026,700
12.;16.800
$ 17,503,892
20,187,151
20,140,021
22, 517,473
31,191,190
34, 399, 261
41, 596,192
44,171, 592
51, 333,869
3 7 , 682,698
Senior Debt Service
Principal Interest
$ 1,520,000
1,595,000
1,780,000
1,960,000
3,805,000
4,060,000
3,880,000
10,170,000
15,285,000
18.363.000
$ 29,613,892
33,209,651
34, 716,821
39,057,673
49,940,890
44,436,461
61, 848, 392
73,759,592
89, 360, 569
100.399.198
Total
$ 11,677,272 $ 13,197,272
13, 396, 341 14, 991, 341
15, 467, 269 17, 247, 269
16,488,587 18,448,587
24,451,656 28,256,656
30,161,408 34,221,408
34,472,415 38, 352,415
36,211,319 46,381,319
42,897,077 58,182,077
49.558.285 67.923.285
Less:
Operating
Expenses
(excluding
depreciation,
GASB 68 &
GASB 75)
$ 138,971,881
145, 598, 505
160,572,145
135,232,302
146,372,419
153, 221,914
163, 311,194
168, 258,133
168,835, 676
163.026„313
Coverage
Ratio
2.7
1.9
1.7
2.3
1.9
2.6
2.1
2.1
1.9
21
Coverage
Ratio
6.2
4.3
3.5
5.0
3.4
3.3
3.3
3.3
2.9
31
Net
Available
Revenues
$ 81,283,885
64,007,720
59,641,434
91,708,084
95,181, 960
113,870,820
128,080, 337
154,099,469
167,090,678
211,622,478
Note: The methodology used to calculate the net available revenues and the coverage ratio was adjusted during fiscal year 2013 and
all previous years were restated for comparative purposes. The 2018 change in methodology consisted of removing agency fees,
previously reflected as a deduction from net available revenues, and now combining them with interest in the debt service section.
Additionally, in fiscal years 2010 and 2011, the change in methodology consisted of removing the Build America Bond Tax Credit from
the pledged revenue section and reapplying the credit to interest expense in the debt service section. This was made to ensure
consistency with fiscal years 2012 and 2013. In fiscal 2017 the methodology was changed to exclude GASB non -cash transactions from
the debt service coverage calculation. Fiscal years 2015 and 2016 have been adjusted to also exclude the GASB 68 non•cash pension
expense.
Page 109
Schedule MPG-SR-2
Page 2 of 2
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Metropolitan St. Louis Sewer District
Change in Revenue Bond Preceeda-PpemlyM
Ilve PFM MODEL- Rob Proposes
FY20 6521 FY22 P5233 FYI
(11 121 131 (4) (5)
1 Bond Per 60,560,000 125,525,000 17- 474000 256,005,000 272,005000
2 Bond Premium 3,839,194 5,613365 4,611,760 6,607,240 7.020,912
3 Proposed Sr. Debt Semis., 1.102,219 4937,441 14,891,689 26.050,401 45,391,431
Model Odabdees -DASD Conpoes end Yb Model Ce67ulmoee D111ereel hem Rob Prepa
FY20 FY21 FY22 FY23 Flr A� Fil21 FF22 FY29 `24
W i2) (1 (4l l51 (4) 171 lel lel pD)
4 Bond Par 60540000 128.955, 00 126,425900 255,975000 171,635,800 Bond Pm 144000/ 17%0071 (65000) (190,0001 11400001
5 Bond Premier, 3,117 941 5,564,271 4,679,971 6,734,054 7,154,915 Bond Premium 39,747 70,386 66,711 124914 134613
6 Proposed Sr. Debt Service 1,101,492 6,954167 148133,155 24039,043 43,154167 Proposed Sr. Debt Sfmitd 17271 (3,274) (6,728) (11,3561 (29,2451
Yield to Ca 4.21% 4.47% 4.73% 49196 4.95%
- Imo Interest Mal 4.55% 4.72% 497% 5.19% 5.19%
MMEC 3.5%Y46 MAX 9.SB6YNk DIFF FROM PM
FY20 A71 Flf2z FY23 FY24 FT20 FY21 FIRS
[11 121 C% (4) i51 (6) (7) PI 191 UD)
Bond Pei 57,50000 119,710,000 211,775,000 194,515,000 24,960,000 Bond Pal (3,080.000) (4615,000) (9,7150001 (21,690,000) (23,095,0001
10 Bond Premlurt 6,690,994 14,345,746 14299,602 28.078,536 29,299,549 Bond Premium 9,051,640 4731,661 9,620992 21,471396 22,813,237
11 5r. Debt Service 1,045.181 5978.057 16,865,545 25,303,931 39,552,439 5r. Debt Service {56,039) 13649941 [1,026,995) (2.245,420) (9,329,999)
- Veld to Ca 539% 9.53% 9.93% 3.53% 353%
13 True interest Cm 4.15% 4.15% 4191E 4.15% 4.1511
NEC 4.0%Y1W MIEC 4.9%YI.M DIFF FROM PR
F12222 FY29 FT24 F1_7O FY21 FTL26aa
(11 (1) (3) WI 151 (91 (7) ul 121 11e1
14 Bondim 59,715,000 1.24.149,40 123,430,000 299,500.800 258,720,000 Bond Pm 1525,0001 (4.125,000) (5,0600001 [12,505 00) (19,105,000)
15 Bond Premiurt 4699,741 9,698.652 9,622,556 18,983,351 20470,901 Bond Premium 319,547 4,014,767 5,009,796 12.576.592 13,190,129
16 sr. Dete Service 1,087,209 6,211,139 14,405,490 24,741.997 41,102,017 Sr. DEM 3.m54 {15,010) (126,902) [403,392) (1,303,6041 (2,710,415)
17 71eldto Cu 4.04% 4.04% 4.04% 9.04% 4.04%
18 TIDe Interest Coss 4.4896 4.48% 4.48% 44851 4.4351
Source.
9461691410 7130.
Schedule MPG-SR-4
Exhibit MSD 78A
have discretion to delay these projects
REQUEST NO. 21: Concerning the District's financial model, on the tab "CIRP," the
source of new revenue bond issuances, please provide the following along with calculations on
electronic spreadsheet with formulas intact:
a. Please provide an explanation and support for the estimated amount of the line
"Revenue Bond Proceeds — Premium" used to estimate the source of additional funds
received from selling new bonds.
b. Please estimate the net interest cost to MSD using the "Revenue Bond
Proceeds — Par Amount" and "Revenue Bond Proceeds — Premium" amount assumptions in
its financial model for issuing new revenue bonds at a coupon rate of 5%, and issue cost rate
of 1%.
c. Please estimate the change in amounts of Revenue Bond Proceeds — Premium
from selling new bonds, if the net interest cost to MSD of new revenue bond issues,
reflecting a 5% coupon and 1% issue cost, would be 3.5%. That is, assume the MSD's 5%
coupon rate and 1% issue cost, then how much of Revenue Bond Proceeds — Premium would
be generated if the net cost of a new bond issue was 3.5%?
d. Please make the same estimate requested in c. above, but assume the net
interest cost to MSD would be 4%.
RESPONSE:
a. Bond premium is generated when a bond is sold with a coupon rate that is greater
than the market interest rate at the time of the sale. In order to compensate the issuer, or
borrower, for issuing bonds at a coupon rate higher than quoted market rates, the buyer of the
bonds. the investor. will pay the issuer a price that is higher than the face value, or par amount,
of the bonds. For example, if an investor paid $1.100 for a bond with a par value of S1, 000, the
bond premium is S100. The premium does not have to be paid back to the investor like the face
amount of the bonds is expected to be. Likewise. the interest due on the bonds is calculated by
multiplying the coupon rate by the par amount of the bonds, ignoring any premium received
Premium bonds are currently standard in the tax-exempt municipal bond market. The benchmark
for rates in the tax-exempt municipal bond market is the AAA MMD yield curve.
It is important to note that most bonds are issued at yields higher than the quoted MMD
rates. This difference is called the spread and the size of the spread is dependent on a variety of
market and issuer factors. Essentially. investors have to determine how much they are willing to
pay for any issuer 's bonds and that is expressed in the yield they want to receive. The price of the
bond is determined by discounting the cash .flows associated with the bond (a series of interest
payments plus the return of the par, or principal, amount) at the agreed upon yield rate. The
result is the price the investor is willing to pay the issuer for the bond. If that amount is greater
than the face value of the bond, the difference is the premium. If the principal payment is due
after the bond's call date, the calculation should assume early repayment of principal at the
optional call date. The call date is that date at which the bond may be prepaid early, at the
discretion of the issuer. A standard call period is at 10 years for a 30 year bond
Schedule MPG-SR-5
4 Page 9 of 2
Exhibit MSD 78A
MSD's model assumes 30 year bonds with annual principal amortization. Each principal
amount has an assumed coupon rate and yield. These are shown in Exhibit MSD 78E. The price
of each principal amount in a series must be calculated to determine the premium amount for the
series. Exhibit MSD 78F is a model, with instructions, that can be used to estimate par and
premium given a desired total proceeds estimate and given coupon and yield rates. The model
will provide results immaterially d erent than MSD's Rate Proposal due to slightly different
assumptions made for this working model. The djerences are shown in Exhibit MSD 78G.
b. The intervener asks for net interest cost but MSD does not evaluate its issuances
using net interest cost. Net interest cost was a measure created before the widespread use of
computers and does not take the time value of money into account. MSD does look at True
Interest Cost (TIC), which does factor in the time value of money and is an expression of the
issuer 's cost. It assumes the bonds will be repaid at maturity so it is a Yield to Maturity (YTM)
rate thus is not calculated the same way as the bonds Yield to Call (YTC) rate or the benchmark
MMD rate — reported benchmark rates are based on the assumption that bonds will be prepaid
at the call date, not at maturity. When discussing "yield" of a bond, markets are generally
referring to the expected return to the investor. The yield for callable premium bonds is a YTC,
not a YTM. Exhibit 78G - Debt Scenario Results lists the yield of each assumed issuance to keep
it on the same basis as the benchmark rates. The YTC is the discount rate at which the
discounted cash flows of the entire issuance are equal to the bond proceeds, assuming optional
prepayment of relevant principal payments at the call date. The TIC rate is also listed, as that is
the most common measure of the issuers cost. Again, though, TIC is a YTM rate and is not
calculated the same way as the YTC or the MMD rates. Please also note that MSD assumes that
some coupons will exceed 5.0% in FY22 -- F124. To see the impact of using 5.0% coupons with
the yields MSD has assumed, just change the appropriate inputs in the model and follow the
instructions.
c. Please see Exhibit MSD 78G. Again, the YTC and the TIC rate are presented
instead of the requested net interest cost. MO does not evaluate its bond issuances using net
interest cost. Furthermore, neither MSD nor its financial advisors recommend using a flat yield
curve or a yield curve that does not provide a greater allowance for rates to rise over the next
five years.
d. Please see Exhibit MSD 78G. Again, the YTC and the TIC rate are presented
instead of the requested net interest cost. MSD does not evaluate its bond issuances using net
interest cost. Furthermore, neither MSD nor its financial advisors recommend using a flat yield
curve or a yield curve that does not provide a greater allowance for rates to rise over the next
five years.
Schedule MPG-SR-5
5 Page 2 of 2
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
SURREBUTTAL TESTIMONY SUBMITTED BY INTERVENOR
MISSOURI INDUSTRIAL ENERGY CONSUMERS
Intervenor Missouri Industrial Energy Consumers submits the attached written testimony
prepared by Mr. Michael P. Gorman.
Dated: June 3, 2019
Respectfully submitted,
BRYAN CAVE LEIGHTON PAISNER LLP
By: Is/ 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@belplaw.com
kami.jones@bc1plaw.com
bclplaw.com
ATTORNEY FOR THE MIEC
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i
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 3rd day of June, 2019.
Ms. Janice Fenton
Office Associate Senior
Metropolitan St. Louis Sewer District
2350 Market Street
St. Louis, MO 63103
jfentona,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
Is/ Brandon W. Neuschafer
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