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Exhibit MSD 67A - MSD's Response to Second Discovery Request of Interveners MIECExhRoN MSO 67A BEFORE THE RATE COMMISSION OF THE MET OPOLITAN ST. LOUIS SEWE DIST I IGT MSD'S RESPONSE TO THE SECOND DISCOVERY REQUEST OF INTE VENERS MISSOU I', I IN PI.USTRIAL ENE I'. GY CONSUME ISSUE: WITNESS: SPONSORING PA DATE P i! EPARED: Metropolitan St. Louis Sewer District Response WASTEWATER RATE CHANGE PROCEEDING THE MET I'' OPOLITAN ST. LOUIS SEWER DIST TY: RATE COMMISSION ILasInly I„aier, P.C. 714 Locust Street St. Louis, Missouri 63101 APRIL 22, 2019 1' S IGT EFORE THE RATE COMMISSION OIF THE METROPOLITAN ST. LOUIS SEWER DIST For Consideration of a ) Wastewater Rate Change Proposal by ) The Rate Commission of The Metropolitan ) St. Louis Sewer District ) OF INTE ICT APRIL II, 2019 SECOND DISCOVERY REQUESTS VENTER MISSOURI INDUSTRIAL ENERGY CONSUMERS Metropolitan St. Louis Sewer District Response Pursuant to § 7.280 and § 7.290 of the Charter Plan of The Metropolitan St. Louis Sewer District (the "Charter Plan"), Restated Operational Rule 3(7) and Procedural Schedule § 16 and § 17 of the Rate Commission of The Metropolitan St. Louis Sewer District ("Rate Commission"), The Metropolitan St. Louis Sewer District ("District") hereby responds to the April 11, 2019 Second Discovery Request of Missouri Industrial Energy Consumers ("MIEC") for additional information and answers regarding the Rate Change Notice dated March 4, 2019 (the "Rate Change Notice"). 1 Exhibit MSD 67A 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 SECOND DISCOVERY REQUESTS OF INTERVENER MISSOURI INDUSTRIAL ENERGY CONSUMERS Pursuant to §§ 7.280 and 7.290 of the Charter Plan of the Metropolitan St. Louis Sewer District (the "Charter Plan"), Operational Rule 3(5) and Procedural Schedule §§ 1, 17 and 18 of the Rate Commission of the Metropolitan St. Louis Sewer District ("Rate Commission"), Intervener Missouri Industrial Energy Consumers ("MIEC") requests additional information and answers from the Metropolitan St. Louis Sewer District ("District") regarding the Rate Change Proposal dated March 4, 2019 (the "Rate Change Proposal"). The District is requested to amend or supplement the responses to this Discovery Request, if the District obtains information upon the basis of which (a) the District knows that a response was incorrect when made, or (b) the District knows that the response, though correct when made, is no longer correct. The following Discovery Requests are deemed continuing so as to require the District to serve timely supplemental answers if the District obtains further information pertinent thereto between the time the answers are served and the time of the Prehearing Conference. 2 F xh 1M Msa 67A SECON !D DISCOVERY REQUEST OF IVIIIEC REQUEST NO. 8. Regarding the Direct Testimony of Bethany Pugh, please provide the Moody's Water and Sewer Utilities 2019 Outlook Report referenced on page 7. RESPONSE: Please see attached Exhibit MSD 67B. REQUEST NO. 9. Bethany Pugh states on page 5 of her Direct Testimony that, "Projected minimum coverage targets of 2.50X (senior lien bonds) and 1.80X (inclusive of subordinate obligations) have been identified as the optimal coverage levels needed to maintain AA level bond ratings, thereby ensuring cost effective market access for the District's large capital program." Please explain why MSD only targeted a 1.8x Debt Coverage Ratio in FY2024, as shown on Table ES-1 — Wastewater Financial Plan. RESPONSE: Consistent with the testimony of Bethany Pugh, Tim Snoke also testified (Exhibit MSD 3F, Q26) that, "revenue in the Rate Change Proposal has been set to achieve minimum debt coverage ratios of 2.50x (senior bonds) and 1.80x (total bonds), a minimum Days Cash on Hand target of 550 days, and a minimum Operating Reserve of 60 days. " Revenue is set so that each of these financial targets is at or above the minimum target. Note that these are all minimum targeted levels. In any given year, minimum revenue requirements can be driven by the need to meet the senior bond service coverage target, or the total bond service coverage target or days cash on hand targets or Operating Reserve fund requirements. The District believes the proposed rates strike the best balance between affordability, smooth rate increases, and achieving the desired financial targets necessary to maintain AA level bond ratings. REQUEST NO. 10. Marion Gee states on page 4 of his Direct Testimony, "The Rate Proposal attempts to balance the use of debt financing and current wastewater user charge revenue to simultaneously fund a wastewater improvement and replacement program needed to meet anticipated regulatory requirements and minimize the impact on customer monthly bills to the extent possible." Is it MSD's position that this is accomplished by targeting a Debt Coverage ratio of 1.8x? Please explain. RESPONSE: As indicated in response 9 above, the District considers multiple financial targets when developing its financial plans. Debt service coverage is one of those targets. The District believes that a 1.8 debt service coverage ratio will help it to maintain its current bond ratings. If its bond rating was lowered, the District would expect to pay additional debt service cost thus increasing the rates needed to fund its operations. 3 ExMbit MSD 67A REQUEST NO. 11. Please explain the source of MSD's budgeted FY2019 operating expenses. Operating expenses after FY2019 are calculated in the rate model primarily using escalators from the Inputs tab. For example, in FY2020 Personal Services are escalated at 2.9% over the FY2019 level. Operating expenses before FY2019 are reported as actuals. Alternatively, please explain why the forecasted FY2019 budget is not calculated within the Rate Model. RESPONSE: The budgeted FY2019 operating expenses that appear in the Rate Model (tab O&M Summary) agree with the General Fund Operating Expenses (see page 93 of Exhibit MSD 7) listed in the District's FY2019 budget book. The total FY2019 General Fund Operating Expense Budget equals $199, 397, 712 which ties to the O&M Summary tab in the rate model by adding General Fund expenses (166, 758, 032) in cell v128 less the stormwater deductions that appears in cells V72 ($-12,169, 693) and V98 ($-13, 565, 674) plus the Capital Outlay ($6, 904, 316) in cell V160. There is a small rounding difference of $3 when the aforementioned calculation is done. The District uses Board approved numbers in the Rate Model which would be numbers from its year-end audits or its most recent budget. REQUEST NO. 12. Will the FY2020 Budget that is presented to the MSD Board for approval in June 2019 match the FY2020 amounts in the Rate Model? RESPONSE: No. The FY2020 Budget will not match the forecasted amounts for FY2020 in the Rate Model. The forecast for the Rate Model was prepared prior to the completion of the preliminary FY2020 budget. Adjustments to the FY2020 preliminary budget were made as recently as the week of April 1st and the budget will not be considered by the MSD Board of Trustees for approval until June 2019. REQUEST NO. 13. Please explain the large increase in General Fund Operating Expenses from FY2018 to FY2019. Referring to Line 17 of Table 4-6 - Historical and Projected Operating Expenses in Exhibit MSD 1, MSD forecasts a cost increase of 12.4%, or $18.4 million. MSD is only forecasting a cost increase on that same line of 8.8% between FY2021 and FY2024, or $15.2 million. RESPONSE: The FY2018 numbers in Line 17 of Table 4-6 are actual numbers whereas the FY2019 numbers are budgeted numbers. The major variances are identified in Exhibit MSD 67C. REQUEST NO. 14. Referring to the same Table and Line as above, please explain the decrease in General Fund Operating Expenses between FY2017 and FY2018. RESPONSE: See Exhibit MSD 67D for an explanation of the significant changes. 4 o o� MID 67A REQUEST NO. 15. Does the Rate Commission have the authority in this case to recommend changes to the FY2019 budget? RESPONSE: The scope of the Rate Commission's duties are outlined in MSD's Charter. The Rate Commission is to review Proposed Rate Changes and make recommendations to the Board of Trustees regarding any changes in rates or changes in the structure of those rates (Section 7.040 and 7.280). Any change in rate recommended by the Rate Commission shall meet 5 factors listed in the Charter (Section 7.270). The scope of the Rate Commission does not include the District's budgeting process. The budgeting process is the responsibility of the Board of Trustees, the Executive Director, and MSD staff as described elsewhere in the Charter. REQUEST NO. 16. Please describe the $3.5 million of one-time office system services expenses in FY2021 (Line 2535 of the O&M Summary Tab of the Rate Model). Please describe how MSD proposes to pay for this and other one-time expenses. RESPONSE: The $3.5 million of one-time office system services expenses in FY2021 are to move Oracle E-Business Suite and Analytics from on -site to the cloud This and other one-time expenses are accounted for in the rate model as revenue requirements. As such, these expenses are recouped by the rates which were designed to recover the District's costs in a fair and equitable manner from its customers. REQUEST NO. 17. MSD proposes to escalate Personal Services at 3.3% after FY2021. Please answer the following: a. Does this escalator take into account a changing employee mix at MSD? For example, older employees retiring and being replaced by younger, lower salaried, employees. b. Does MSD believe escalating Personal Service costs at the rate of inflation, as MSD did for most other escalators, is reasonable? c. Please provide the `Employment Cost Index FY21-FY24.xlsx' file referenced in the Rate Model. RESPONSE: a The salaries of vacant positions are projected at less than the mid point of the respective salary range which would account for new employees that are hired at salaries below those employees that typically retire at salaries above mid point of the pay grade range. b. MSD did not escalate personal service cost at the rate of inflation. Please see page 4-12 and 7-2 thru 7-5 of the Rate Change Proposal (Exhibit MSD 1) for a description of how personal service cost were escalated c. Please see Exhibit MSD 67E. 5 Respectfully submitted, Susan M. Myers, General oun el ,/- THE METROPOLITAN ST. L UIS SEWER DISTRICT 2350 Market Street St. Louis, Missouri 63103 smyers@stlmsd.com Tel: (314) 768-6366 Fax: (314) 768-6279 6 Exhibit MSD 67A CERTIFICATE OF SERVICE The undersigned certifies that a copy of the foregoing was sent by electronic transmission to Lisa O. Stump and Brian J. Malone, Lashly & Baer, P.C., Brandon W. Neuschafer and Kamilah Jones, Bryan Cave Leighton Paisner on this 22nd day of April 2019. Lisa O. Stump, Esq. Lashly & Baer, P.C. 714 Locust Street St. Louis, MO 63101 lostump@lashlybaer.com Brian J. Malone, Esq. Lashly & Baer, P.C. 714 Locust Street St. Louis, MO 63101 bmalone@lashlybaer.com Brandon W. Neuschafer 211 N. Broadway, Suite 3600 St. Louis, Missouri 63102 bwneuschafer@bc1plaw.com Kamilah Jones 211 N. Broadway, Suite 3600 St. Louis, Missouri 63102 kami.jones@bc1plaw.com / san M. Myers, General Counsel THE METROPOLITAN ST. LOUIS SEWER DISTRICT 2350 Market Street St. Louis, Missouri 63103 smvers@stlmsd.com Tel: (314) 768-6366 Fax: (314) 768-6279 7