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Exhibit MSD 78A - MSD's Response to the Third Discovery Request of Interveners MIECExhibit MSD 78A BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT MSD'S RESPONSE TO THE THIRD DISCOVERY REQUEST OF INTERVENERS MISSOURI INDUSTRIAL ENERGY CONSUMERS Metropolitan St. Louis Sewer District Response ISSUE: WASTEWATER RATE CHANGE PROCEEDING WITNESS: THE METROPOLITAN ST. LOUIS SEWER DISTRICT SPONSORING PARTY: RATE COMMISSION DATE PREPARED: MAY 28, 2019 Lashly & Baer, P.C. 714 Locust Street St. Louis, Missouri 63101 Exhibit MSD 78A 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 ) MAY 16, 2019 THIRD DISCOVERY REQUEST OF INTERVENER 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 May 16, 2019 Third 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 78A 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 ) ) ) THIRD 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 Exhibit MSD 78A THIRD DISCOVERY REQUEST OF MIEC REQUEST NO. 18: Please refer to Exhibit MSD 56B, Appendix 7.2.2 Detailed WW CIRP Project List. In addition to the Financial Year, please update the exhibit to include the dates for the Bid Year and Achievement of Full Operation as required by the Consent Decree or any of its amendments. RESPONSE: Please see Exhibit MSD 78B - Copy of Appendix 7.2.2 Detailed WW CIRP Project List Amended May 21, 2019. Please note that the actual data items are Commence Construction and Placement in Service, to correspond with terms utilized in the SSO Master Plan for construction related activities. REQUEST NO. 19: Please refer to Exhibit MSD 56C, Appendix 7.2.3 Detailed WW CIRP Project List - Not Regulatory or CD. In addition to the Financial Year, please update the exhibit to include the date MSD is required to complete each of the non -Consent Decree or regulatory related projects based on State, Federal and local regulatory obligations. RESPONSE: Please see Exhibit MSD 78C - Copy of Appendix 7.2.3 Detailed WW CIRP Project List — Not Regulatory or CD Amended May 21, 2019. The projects listed are very critical. They will allow for the repair, replacement, and rehabilitation of deteriorated closure gates and gate structures at several 50 plus year old facilities. The District along with the City of St. Louis is required by the U.S. Army Corp of Engineers to maintain these facilities and the floodwall. This Mississippi River Floodwall system provides flood protection for the City of St. Louis and its downtown area. The economic damages to businesses, homes, and institutional properties that would occur if floodwall protection fails would be substantial. These projects represent less than 1% of the overall capital program. REQUEST NO. 20: Please refer to Exhibit MSD 56D - Appendix 7.2.4 Detailed WW CIRP Project List - Regulatory but not CD. In addition to the Financial Year, please update the exhibit to include the date MSD is required to complete each regulatory project and all other timing related milestones required by federal, state or local regulatory requirements. RESPONSE: Please see Exhibit MSD 78D - Copy of Appendix 7.2.4 Detailed WW CIRP Project List —Regulatory but not CD Amended May 21, 2019. MSD is obligated to operate and maintain its facilities to stay in compliance with its regulatory obligations and wastewater treatment plant permits. NPDES permit violations and negative environmental impacts could result from the District's failure to complete the treatment plant rehabilitation, repair and replacement projects. The District utilizes an Asset Management approach and prioritization process in planning these types of projects, as described in the Rate Commission Third Discovery Request (EXHIBIT MSD 63A-D). This approach is intended to ensure that the most critically important projects are funded first, while projects without an anticipated potential for near -term failure or that appear to have minor consequences of failure are not funded. Based on the District's efforts to prioritize these projects, and the potential for NPDES permit violations and negative environmental impacts at these facilities if these projects do not proceed, we do not 3 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 $1, 000, the bond premium is $100. 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. 4 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 different than MSD's Rate Proposal due to slightly different assumptions made for this working model. The differences 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 bond's 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 issuer 's 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 — FY24. 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. 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. 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. 5 Exhibit MSD 78A Respectfully submitted, ikik /rYL r)21—Th san M. Myers, General Co sel THE METROPOLITAN ST. LOUIS SEWER DISTRICT 2350 Market Street St. Louis, Missouri 63103 smyersastlmsd.com Tel: (314) 768-6366 Fax: (314) 768-6279 6 Exhibit MSD 78A 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 28th day of May 2019. Lisa O. Stump, Esq. Lashly & Baer, P.C. 714 Locust Street St. Louis, MO 63101 lostump(&Jashlybaer. corn 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@bclplaw.com Kamilah Jones 211 N. Broadway, Suite 3600 St. Louis, Missouri 63102 kami. j ones(a bclplaw.com Susan M. Myers, General Counel 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