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Exhibit MSD 88A - MSD's Response to MIEC's Fourth Discovery RequestExhibit MSD 88A BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT MSD'S RESPONSE TO THE FOURTH DISCOVERY REQUEST OF INTERVENORS 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: JULY 3, 2019 Lashly & Baer, P.C. 714 Locust Street St. Louis, Missouri 63101 I Exhibit MSD 88A 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 ) JUNE 24, 2019 FOURTH DISCOVERY REQUEST OF INTERVENOR MISSOURI INDUSTRIAL ENERGY CONSUMERS Metropolitan St. Louis Sewer District Response Pursuant to § 7.28U 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 June 24, 2019 Fourth 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"). Exhibit MSD 88A 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 FOURTH DISCOVERY REQUESTS OF INTERVENOR 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"), Intervenor 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. Exhibit MSD 88A FOURTH DISCOVERY REQUEST OF MIEC REQUEST NO. 22: Referring to the `CIRP Dashboard' tab of Exhibit MSD 66C, please outline the differences between PFM's inputs and assumptions and MSD's calculated inputs and assumptions when the entry in row 89 of the model is switched from "PFM" to "Model" (for all columns). Please describe the purpose of differences in model inputs and assumptions. RESPONSE NO. 22: Exhibit MSD 66C is a version of Exhibit MSD 52 with all tabs unlocked, as requested by the Rate Commission in Exhibit RC 66 - Rate Commission's Fourth Discovery Request to MSD - April 11, 2019. The original Rate Model, Exhibit MSD 52, was provided proactively on March 4, 2019 with the Rate Proposal. Both models function the same way, were provided with all calculations and formulas intact, and will hereinafter be referred to as "the model." As provided the model contains the information used to put together the Rate Proposal. It is a model built in Microsoft Excel by the District's Rate Consultant, Raftelis, for MSD. As an Excel model, and a very large one, it has inherent limitations and not all functions of the model are used by MSD. The model performs set calculations but usable outputs require informed inputs, analysis, iterations, and more analysis. Some data is calculated separately and input into the model, like the premium (received) and the principal and interest (paid) on bonds. That information was provided by PFM, the District's financial advisor and an MSRB-Registered Municipal Advisor. Row 89 of the `CIRP Dashboard' tab was set to "PFM" in the model because that tells the model to use the bond premium, principal, and interest entered into the cells in the `PFM Model ' tab which is where the data provided by PFM was entered. The yield curve and coupon rate assumptions used to calculate the inputs were provided in detail, in Exhibit MSD 78E - MSD Coupon and Yield Debt Assumptions as part of MSD 's response to Exhibit MIEC 78 - MIEC's Third Discovery Request to MSD - May 16, 2019. Also in response to that request, MSD provided Exhibit MSD 78F - Bond Calculation Model, with instructions, so that a third party could calculate bond premium and principal and interest payments using their own debt proceed, yield curve, and coupon rate assumptions. That information could then be used to override PFM's numbers if the model user wanted to use different assumptions than MSD used in its model, just as the Intervenor overrode other inputs and assumptions in its version of the model. Request No. 22 above implies that switching "PFM" to "Model" on row 89 will tell the model to use "MSD calculated inputs and assumptions" but this is not accurate. MSD did not use or plan to use or claim to use the "Model " function for the rate proposal period and did not endorse or use bond yield and coupon rates other than those provided by PFM, it's Registered Municipal Advisor. Since there was no intent to use the "Model" switch, MSD did not evaluate or change any information that resided in fields related to the "Model" function. In short, the calculations and formulas are intact and can be used but any premium related information in the model attached to the "Model" switch were not used or endorsed by MSD to set proposed rates. The model allows for a user with dfferent assumptions about yields to input different data into these fields. MSD cannot be expected to know what assumptions a third party user will make about market yields and bond premiums. The data that resided in the fields implied bond yields much lower than MSD used in its model which results in much higher assumed premium 1 Exhibit MSD 88A amounts. This is easily checked by calculating premium as a percentage of the par amount of bonds from the model using MSD's assumptions to the percentage listed in Row 93 of the `CIRP Dashboard' tab which are the fields the model would look to for premium as a percent of par if the field in Row 89 is flipped from "PFM" to "Model". Below is a comparison of the premium as % of par calculated from MSD's proposal to the percentage listed in Row 93 of the `CIRP Dashboard' tab. Forecast FY20 Proposed FY21 Proposed FY22 Proposed FY23 Proposed FY24 MSD Rate Proposal 6.4% 4.4% 3.6% 2.6% . 2.6% "Model" Switch - Row 93 9.0% 12.5% 12.5% 12.5% 12.5% Difference in Premium using MSD's Proposed Debt Par Amount $1.6 million $10.3 million $11.3 million $25.1 million $26.7 million This is a difference of $75 million in assumed bond premium. If a third party user intended to accept MSD interest rate assumptions but wanted to use a different par amount of bonds issued, it should enter the premium as a percent of par calculated from MSD's Rate Proposal into the cells in Row 93 of the "CIRP Dashboard" tab and then flip the "Model" switch to get a reasonable proxy. The danger of assuming a high premium amount is that interest rate increases result in lower premium received, leading to a shortfall in funding the CIRP and potentially requiring delayed CIRP spending, higher debt issuances, and/or higher cash spending. Prudent rate modeling should assume interest rate increases to protect CIRP funding, debt coverage metrics, and liquidity. REQUEST NO. 23: Please provide a copy of Exhibit MSD 66C (the unlocked version of MSD's Rate Model) that includes only the following two changes to MSD's filed wastewater revenue requirement, which were recommended by Mr. Gorman in his Surrebuttal Testimony: a. Update the model to reflect an overall PAYUU funding mix of 30% cash funding and 70% debt funding rather than 60% and 40% proposed by the MSD. b. Update the 'CIRP-Input' tab to reflect Mr. Gorman's proposed deferral of $70 million of budgeted CIRP spending in each of FY23 and FY24 to FY25 and FY26, rather than the annual FY23 and FY24 CRIP budget proposed by the MSD. c. Identify all changes to the model to make these two changes in forecasting the MSD revenue requirement, and d. Provide the revised fmancial model used for this response with all formula and calculations intact. 2 I Exhibit MSD 88A RESPONSE NO. 23: To best understand the impact of the changes, it is helpful to look at them individually before putting them together. a. Exhibit MSD 88B is MSD 's model modified to reflect an overall PAYGO funding mix of 30% cash funding and 70% debt funding. Forcing a 30% cash funding and 70% debt funding mix results in higher rates than MSD proposed in its Rate Proposal because it results in more debt and higher debt service costs. The higher costs are unnecessary and unfair. This is easily illustrated by the dramatic and inefficient increase in the Operating Reserve balances. MSD 's Rate Proposal projects Operating Reserve balances in the $40 million - $60 million range. Using a 30% cash funding and 70% debt funding mix results in Operating Reserves balances ranging from $136 million - $211 million for the proposal period The dfference is cash that could and should be used to cash fund the CIRP and reduce the rate burden on customers instead of sitting idle. The same result is evident in the Intervenor's model although the rate impact is mitigated because it adopted lower debt service coverage targets than are expected by investors and the rating agencies and it incorrectly assumes that MSD can delay $70 million of capital spending in both FY23 and FY24. Despite these changes the Intervenor's plan projects Operating Reserve balances of $95 million - $111 million, reflecting an average of $55 million of cash above MSD's proposal that could be used to cash fund the CIRP and mitigate rate increases. As discussed during these proceedings, MSD's overall 60 debt/40 cash funding mix is the result of balancing reasonable rate increases with financial metrics and needs — the funding mix needs to be an output of that balance and not a forced input into the model as the Intervenor proposes. A summary of differences between MSD's Rate Proposal and a proposal modified to force a CIRP funding mix of 30% cash funding and 70% debt funding are below: ,MSDAila pY,ol_ FY21 1 FY22 FY23 FY24 User Charge Revenue $453,279,370 i $471,198,143� $490,181,909 $510,108,517 2.8% 4.0% 4.0% . 4.1% i T ical Sin _le Family Monthly Bill $56.63 $58.78 $61.02 $63.36 % increase 1.9% 3.896 3.8% 3.8% $ 59,763,982 $ 41,538,195 i $ 49,345,499 I $ 49,871,963 ' % increase Operating Reserves De r� bt Sources / Capital Needs 50.8%52.1% 69.7% 69.8% W SD.Rate Proposal Modiniled to 70 Debt/Cash alp pundi FY21 FY22 FY23 FY24 1 User Charge Revenue $ 458,562,706 $ 479,031,581 ` $ 500,624,771 , $ 523,170,315 % increase 4.0% 4.5% 4.5% 4.596 i Typical Single Family Monthly Bill $57.27 $59.73 $62.29 1 $64.96 % increase 3.1% 4.3% 4.3% . 4.3%' Operating Reserves $ 135,843,048 $ 184,386,214 $ 201,537,569 1 $ 210,792,732 Debt Sources / Capital Needs 70.6% 70.6% 70.1% 69.4%i 3 Exhibit MSD 88A b. Exhibit MSD 88C is MSD's model modified to reflect deferral of $70 million of budgeted CIRP spending in each of FY23 and FY24 to FY25 and FY26 As discussed throughout these proceedings, though, MSD is unable to defer scheduled projects due to Consent Decree schedules and deadlines. The only individual project large enough to have an impact like that requested is the incinerator project for which MSD requested a Consent Decree amendment to delay scheduled tunnel projects so that it could maintain compliance with air quality regulations and mitigate the rate impact on customers. As background, 40 CFR Part 62 — Federal Plan Requirements for Sewage Sludge Incineration Units Constructed on or Before October 14, 2010 (the SSI Rule) was finalized in June 2016. The finalization of the 2016 SSI Rule included a provision that requires a permittee to replace their incinerators going forward if the cumulative cost of improvements and repairs reaches 50% of the original installation costs. Because the District's incinerators were built around 1970 and have undergone significant improvements over the years, they are all at or above the 50% threshold. If we continue to operate the incinerators, we could not perform any significant repairs without violating the new SSI Rule and would be required to replace them. In February of 2017, we identified some new needed repairs on the incinerators that if performed would trigger a violation of the law under the SSI Rule. Looking forward, we knew we would have to start planning the replacement of the incinerators because we cannot defer improvements any longer. We reported our situation to the EPA. Because of the significant costs of replacing the incinerators and the affordability issue to our rate payers if we added the incinerator replacement project on top of the then existing Consent Decree schedule, we used a provision in our Consent Decree that allowed us to address both issues. See Exhibit MSD 37A - Second Material Amendment to Consent Decree. c. The changes are identified in Exhibit MSD 88D. d. The modified financial model is provided as Exhibit MSD 88E. Modification of the model as proposed by the Intervenor results in higher rates to ratepayers and significant unnecessary and unfair idle cash balances as illustrated by the difference between the Operating Reserve balances in MSD's Rate Proposal and those with the requested modifications. Higher than necessary Operating Reserve balances signer cash that could be used to fund the CIRP, reducing planned debt issuances. Reducing debt will lead to stronger coverage metrics at a given level of rate increases or to lower rate increases at a given level of debt coverage. A comparison of key metrics is below: 4 Exhibit MSD 88A Ra rrp 1! - FY21 - FY22 I FY23 FY24 User Charge Revenue $ 453,279,370 ° $471,198,143 i $490,181,909 $ 510,108,517 % increase 2.8% �!� 4.0% 4.0% I 4.1% Typical Single Family Monthly Bill $56.63 ; $58.78 $61.02 $63.36 % increase 1.9% 3.8% "; 3.896 3.8% l` $ 49,871,963 1 0 erating Reserves $ 59,763,982 $ 41,538,195 I $ 49,345,499 Debt Sources / Capital Needs 50.8%! 52.1%: 69.7% 69.8% tirDelay$70MM aRP in P123i8► FY24 and for IO Debt/CashRPF I FY21 i FY22 FY23 FY24 $ 517,149,789 User Charge Revenue $ 457,648,1831 $ 476,437,437 , ,_ $ 496,294,856 R % increase 3.8% ` 4.1% 4 4.2% 4.2% Typical Single Family Monthly Bill $57.17 j $59.42 I $61.77 p $64.23 % increase 2.9% 3.9% i 4.0% 4.0% Operating Reserves $134,924,357J $ 180,767,824 t $ 216,019,387 : $ 248,647,586 r Debt Sources / Capital Needs 71.2% 71.2%i 70.8% 70.1%r, Respectfully submitted, 11/7"--"s") Susan M. Myers, General Counsel THE METROPOLITAN ST. LOUIS SEWER DISTRICT 2350 Market Street St. Louis, Missouri 63103 smyers@stlmsd.com Tel: (314) 768-6366 Fax: (314) 768-6279 5 i Exhibit MSD 88A 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 3rd day of July 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 bma1oneAlashlybaer.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. j ones@bclplaw. com Susan M. Myers, General Counsel THE METROPOLITAN ST. LOUIS SEWER DISTRICT 2350 Market Street St. Louis, Missouri 63103 smyers@stlmsd.com Tel: (314) 768-6366 Fax: (314) 768-6279 6