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Exhibit MIEC 83 - Surrebuttal Testimony Michael GormanExhibit No.: Witness: Type of Exhibit: Sponsoring Party: Date Testimony Prepared: 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: Michael P. Gorman Page 1 BRUBAKER & ASSOCIATES, INC. 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 Michael P. Gorman Page 2 BRUBAKER & ASSOCIATES, INC. 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 Page 3 BRUBAKER & ASSOCIATES, INC. 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 Michael P. Gorman Page 4 BRUBAKER & ASSOCIATES, INC. 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, Michael P. Gorman Page 5 BRUBAKER & ASSOCIATES, INC. 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. Michael P. Gorman Page 6 BRUBAKER & ASSOCIATES, INC. 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. Michael P. Gorman Page 7 BRUBAKER & ASSOCIATES, INC. 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. Michael P- Gorman Page 8 BRUBAKER & ASSOCIATES, INC. 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. Michael P. Gorman Page 9 BRUBAKER & ASSOCIATES, INC. 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. Michael P. Gorman Page 10 BRUBAKER & ASSOCIATES, INC. 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 Michael P. Gorman Page 11 BRUBAKER & ASSOCIATES, INC. 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. Michael P. Gorman Page 12 BRUBAKER & ASSOCIATES, INC. i 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 $261 MM Wastewater Revs 'AA+'; Outlook Stable," November 22, 2017, at 3, emphasis added. Michael P. Gorman Page 13 BRUBAKER & ASSOCIATES, INC. i 1 2 3 * * * Approximately 74% of the plan from fiscal 2018 through fiscal 2020 is expected to be funded from existing and planned debt. 4 Q WHAT DSC RATIO ARE YOU RECOMMENDING? 5 A As noted in my rebuttal testimony, I am largely adhering to the long-standing financial 6 policy used to set rates for MSD, consisting of a minimum DSC of 1.6x, and a funding 7 mix target of 75% debt and 25% equity. However, I do recognize that MSD is 8 approaching the end of its CIRP major spend period. As such, as it approaches this 9 end, in order to maintain an earned DSC above the financial policy minimum DSC of 10 1.6x, I am recognizing that an increase in the amount of rate equity funding will be 11 needed over time. 12 As such, in my recommended revenue requirement, i am setting rates to have 13 a DSC in the range of 1.7x to 1.9x, and funding largely the DSC with 30% rate 14 revenue funding and only 70% debt. Over time, this funding mix will continue to 15 increase toward 100% rate equity funding as MSD's annual CIRP program declines 16 after the CD is completed, and existing regulatory obligations are completed, and new 17 CIRP are reduced. At this point, MSD will be able to start reducing the debt Toad 18 taken on as part of the major CIRP CD started many years ago. My revisions to 19 MSD's rate model results in a total debt DSC ratio between 1.9x and 1.7x. Michael P. Gorman Page 14 BRUBAKER & ASSOCIATES, INC. i TABLE SR-2 Annual User Charged Revenues ($ 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 Michael P. Gorman Page 15 BRUBAKER & ASSOCIATES, INC. 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 E-MS-9dW elnpegos ES 51 7 4.4 te a d oYe W In in A a tE 56 io ag ta nt 42 tE klt e1 Ye E Et ai 97.1 R qua 1: 1 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 1 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 2