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Exhibit RC 70 - Rebuttal Testimony, Pamela LemoineExhibit No: Issue: Wastewater Witness: Type of Exhibit: Sponsoring Party: Date Testimony Prepared: Table of Contents Rate Change Proceeding Pamela Lemoine Rebuttal Testimony Rate Commission April 23, 2019 Witness Background and Experience 2 Findings and Recommendations 6 General Matters 7 Wastewater Rate Proposal 10 Lashly & Baer, P.C. 714 Locust Street St. Louis, Missouri 63101 1 1 WITNESS BACKGROUND AND EXPERIENCE 2 Ql. Please state your names and business addresses. 3 A. My name is Ms. Pamela Lemoine. My business address is 16305 Swingley Ridge Road, 4 Suite 230, Chesterfield, Missouri 63017. 5 Q2. By whom are you employed and in what capacity. 6 A. I am a Principal Consultant with Black & Veatch Management Consulting, LLC. 7 Q3. Please describe the firm of Black & Veatch Management Consulting, LLC. 8 A. Black & Veatch Management Consulting, LLC (Black & Veatch) is a wholly-owned 9 subsidiary of Black & Veatch Holding Company and brings together over 250 10 professionals, including experienced industry executives, senior analysts, and technology 1 1 experts from across the electric, water, oil, natural gas and technology industries. In the 12 water sector, Black & Veatch delivers a variety of services for municipalities, special 13 districts and companies involved in the supply, treatment and distribution of drinking 14 water, as well as the collection, treatment, and disposal of wastewater and management of 15 stormwater. More specifically, Black & Veatch assists utilities with utility financial 16 planning, cost of service rate studies, bond feasibility studies, affordability analyses, 17 systems valuation, utility business efficiency and transformation services, operations 18 technology planning and integration services, and customer engagement and advanced 19 metering/billing solutions implementation, and expert testimony during rate proceedings, 20 litigation support, and regulatory review. 21 Q4. Please summarize your educational background and professional experience. 22 A. I received a Bachelor of Science in General Engineering from the University of Illinois — 23 Urbana/Champaign in 1986. I am a registered professional engineer in the state of 2 1 Washington. I joined Black & Veatch in 1987 as a consultant in Black & Veatch's 2 Management Services Division in Kansas City, Missouri. During this time, I conducted a 3 variety of analyses related to water, wastewater, electric and gas cost of service and rate 4 design studies. In 1989, I was hired by R. W. Beck and Associates in Seattle, Washington, 5 as a project manager in R. W. Beck's Seattle Consulting office. While in this capacity, I 6 managed water, wastewater and solid waste strategic financial planning, cost of service, 7 and rate design studies. In addition, I conducted valuation studies related to street light 8 utility assets and landfill, transfer station, and material recovery facility development and 9 acquisition studies, as well as financial analyses related to nuclear decommissioning 10 studies and mergers/ acquisitions. In 1995, I rejoined Black & Veatch, serving as 11 Northwest Regional Manager of the Management Consulting Division. I currently serve as 12 a Principal Consultant in Black & Veatch Management Consulting, LLC, serving clients 13 primarily in the eastern two-thirds of the United States. I serve as Project Manager or 14 Project Director for strategic financial planning studies and cost of service and rate design 15 studies, as well as financial capability analyses and affordability assessments associated 16 with long term control plan development required as a result of federal consent decrees. I 17 have assisted utilities in developing strategies to address affordability in negotiations with 18 state and federal regulators. I have also assisted in the evaluation of the feasibility of 19 stormwater utilities, including policy development, financial planning, and rate and credit 20 program design, providing clients with a stable source of revenue to fund necessary 21 stormwater activities as required by NPDES permits and other wet weather-related issues. 22 In the past decade, I have been involved in studies regarding water, wastewater and 23 stormwater rates and related matters for clients including Washington Suburban Sanitation 3 1 Commission, Maryland; Sanitation District No. 1 of Northern Kentucky; Metropolitan 2 Sewerage District of Greater Cincinnati, Ohio; City of Wilmington, Delaware; City of 3 Springfield, Missouri; Greater Cincinnati Water Works, Ohio; Allegheny County Sanitary 4 Authority, Pennsylvania; and City of Shreveport, Louisiana; 5 I am a member of the Water Environment Federation and the American Water Works 6 Association. I am a representative for Black & Veatch to the National Association of Clean 7 Water Agencies, serving on the Utility & Resource Management Committee and Legal 8 Affairs Committee. I am also currently serving on the U.S. Environmental Protection 9 Agency's (US EPA) Environmental Financial Advisory Board (EFAB). 10 Q5. Have you previously testified before the Rate Commission of the St. Louis 1 1 Metropolitan Sewer District? 12 A. Yes, I testified on behalf of Black & Veatch as the consultant to the Rate Commission for 13 both the 2015 Wastewater/Stormwater Rate Change Proposal and the 2018 Stormwater 14 Rate Change Proposal. 15 Q6. Please describe your role in this proceeding? 16 A. The scope of our services in this proceeding includes the review of the St. Louis 17 Metropolitan St. Louis Sewer District's (the "District") 2019 Rate Proposal (Rate 18 Proposal); to assist the Rate Commission to gain a better understanding of the Rate 19 Proposal; to provide insights to the Rate Commission on industry accepted cost of service 20 and rate setting financial best practices and methodologies, and trends related to wastewater 21 utility ratemaking; to assist the Rate Commission's legal counsel in the examination of 22 witnesses; and to prepare testimony and exhibits setting forth our findings and 23 recommendations. 4 1 The scope of our services is limited to relying on the record in this proceeding, statements, 2 data, information and reports provided by the District and intervenors and their respective 3 consultants and advisors as well as data and information available in the public domain. 4 I am responsible for the detailed evaluation of all aspects of Black & Veatch's review of 5 the District's Rate Proposal, including coordination on the various components of the 6 review and assistance to the Rate Commission's legal counsel. 7 Q7. Has Black & Veatch provided any information to the Rate Commission prior to this 8 testimony? 9 A. Yes. Based upon a request of some Rate Commission members, Black & Veatch provided 10 a memorandum summarizing a comparison of typical residential bills of twelve wastewater 1 1 utilities similar in size to the District and under a consent decree to address overflows (See 12 Exhibit RC 70A). In addition to the typical residential bill comparison, the memorandum 13 provided background information regarding population served, general system 14 characteristics, services provided, regulatory compliance requirements, sources of 15 revenues to provide some limited context as to the nature of services provided and 16 magnitude of capital obligations each utility is facing. The memorandum also provided a 17 summary of the industry landscape regarding historical and projected utility costs, and rate 18 setting practices. 19 I and other team members met with the Rate Commission on March 8, 2019 to discuss the 20 Rate Proposal the District presented to the Rate Commission on March 4, 2019. This 21 meeting provided the Rate Commission members the opportunity to discuss initial 22 questions and/or concerns, and identify additional information that would assist the Rate 23 Commission in their deliberations. I and the other team members then met with the Rate 5 1 2 3 4 5 6 7 Commission on March 22, 2019, to provide an overview of the financial planning, cost of service, and rate setting processes normally conducted by wastewater utilities, provide industry information of interest to the Rate Commission, and provide an opportunity for both Black & Veatch and the Rate Commission to further discuss the District's Rate Proposal. On March 25, 2019, we provided the Rate Commission a second memorandum (See Exhibit RC 70B), providing a review of the CIRP project development process. FINDINGS AND RECOMMENDATIONS 8 Q8. Please summarize your findings and recommendations to the Rate Commission in this 9 proceeding. 10 A. The following is a summary of our findings and recommendations in this proceeding. 11 1. We concur with and support the District's Rate Proposal to seek authorization from 12 voters within the District to issue additional bonds to finance a portion of the CIRP 13 during the period Fiscal Year (FY) 2021 through FY 2024, as it provides multiple 14 benefits including mitigating the impact on user rates, aligning the repayment of debt 15 with the long-term useful life of the assets, and enabling future rate payers of the system 16 to contribute to the debt service. 17 2. The District's proposed capital financing plan, which includes approximately 37% cash 18 funding of the CIRP, is consistent with similar financial best practices used by other 19 peer wastewater utilities and provides a reasonable mix of cash and debt financing. 20 3. We concur with the District's approach in their proposal to establish a financial plan 21 that allows for debt service coverage of 2.5 times or greater for senior lien bonds and 22 1.8 times or greater for total debt coverage. 6 1 4. We find that the Operating & Maintenance (O&M) escalation factors and debt 2 financing assumptions used in the projection of annual O&M expenditures and debt 3 service, respectively are reasonable. 4 5. We find from our review of the cash flow and debt service coverage analyses presented 5 in the District's Rate Proposal, that the series of annual revenue adjustments, which the 6 District is seeking, will provide funds necessary to: (i) pay the annual principal and 7 interest on both the outstanding debt and the additional annual debt projected in the 8 proposal; (ii) meet the annual O&M expenditures; and (iii) provide for reasonable 9 levels of debt service coverage and the minimum levels of annual O&M reserves. 10 6. While the District's proposal reflects gradualism in the series of annual revenue 11 adjustments presented through the rate period ending FY 2024, it is important to note 12 that while outside the current Rate Proposal period, the District's longer-term 13 projection reflected in the MSD Rate Commission Orientation presentation (See 14 Exhibit MSD 57) and the District's Rate Model (See Exhibit MSD 52) reflects a much 15 higher increase in FY 2025. This type of a higher increase right at the beginning of the 16 next rate setting period could cause bill impact volatility. A series of annual revenue 17 adjustments in FY 2021 through FY 2024 that mitigates such a sudden higher spike in 18 revenue adjustments, becoming necessary in FY 2025, should be considered. 19 GENERAL MATTERS 20 Q9. What is the role of the Rate Commission in this proceeding? 21 A. Pursuant to Section 7.040 of the Charter Plan of the District, the role of the Rate 22 Commission is to review and make recommendations to the District's Board of Trustees 23 regarding the proposed changes in wastewater charges, stormwater charges or tax rates 7 1 necessary to pay: (i) interest and principal due on bonds issued or to be issued to finance 2 assets of the District; (ii) the costs of operation and maintenance; and (iii) such other amounts as may be required to cover emergencies and anticipated delinquencies. 4 Q10. How should the Rate Commission determine whether the District's rate change 5 proposal is necessary? 6 A. The Rate Commission should examine the record in this proceeding, including the 7 District's projected revenue requirements to ensure that such revenue requirements are 8 necessary and reasonable to meet the District's near term financial needs and fulfill the 9 Utility's service delivery obligations, that such revenue requirements do not overstate the 10 District's near term financial needs, and that such revenue requirements are being 1 1 recovered in a fair and equitable manner. 12 Q11. Upon what criteria must the Rate Commission base its recommendation? 13 A. In accordance with Section 7.270 of the Charter Plan of the District, any proposed rate 14 change, and all portions thereof, recommended by the Rate Commission must: 15 (1) be consistent with constitutional, statutory or common law as amended from time to 16 time; 17 (2) enhance the District's ability to provide sewer and drainage systems and facilities, or 18 related services; 19 (3) be consistent with and not in violation of any covenant or provision relating to any 20 outstanding bonds or indebtedness of the District; 21 (4) not impair the ability of the District to comply with applicable Federal or State laws or 22 regulations as amended from time to time; and 23 (5) impose a fair and reasonable burden on all classes of ratepayers. 8 1 Q12. How should the Rate Commission determine if the rate change proposal is consistent 2 with constitutional, statutory or common law as amended from time to time? 3 A. The Rate Commission should evaluate Charter Plan authority, environmental improvement 4 agency regulations, constitutional and statutory provisions and applicable case law. 5 Q13. How should the Rate Commission determine whether the rate change proposal 6 enhances the District's ability to provide sewer and drainage systems and facilities, 7 or related services? 8 A. The Rate Commission should consider the record in this proceeding including the District's 9 submittal as well as the testimony of its staff and other intervenors to determine if the 10 District's proposal enhances its ability to provide adequate sewer and drainage systems and 11 facilities, or related services. 12 Q14. How should the Rate Commission determine if the rate change proposal is consistent 13 with and not in violation with any covenant or provision relating to any outstanding 14 bonds or indebtedness of the District? 15 A. Such a determination requires an analysis of the record in this proceeding, including the 16 covenants or provisions contained in the resolutions or ordinances and bond documents or 17 other documents issuing any such obligations. The Rate Commission can determine that 18 this condition is met by examining the District's submittal as well as the testimony of its 19 staff. 20 21 9 1 Q15. How should the Rate Commission determine whether the rate change proposal 2 impairs the ability of the District to comply with applicable Federal and State laws or 3 regulations as amended from time to time? 4 A. The Rate Commission should consider the record in this proceeding including the 5 testimony provided by District staff and others, including intervenors, to determine whether 6 the rate change proposal impairs the ability of the District to comply with applicable 7 Federal or State laws or regulations. This is accomplished by evaluating the District's Rate 8 Proposal to determine whether the proposed rates are projected to provide the District with 9 sufficient revenues to operate the utility in compliance with applicable Federal or State 10 laws or regulations, and to provide sufficient revenue to allow completion of capital 11 projects necessary to meet Consent Decree obligations while maintaining current assets. 12 Q16. How should the Commission determine if the rate change proposal imposes a fair and 13 reasonable burden on all classes of ratepayers? 14 A. The Rate Commission should determine whether the rate change imposes a fair and 15 reasonable burden on all classes of ratepayers by considering the record in this proceeding, 16 including the District's submittal and the testimony of its staff and intervenors, and 17 evaluating to the extent feasible the District's use of reasonable allocation factors to 18 apportion costs among cost-causative components, aligned with industry accepted 19 practices and guidelines. 20 21 22 23 10 1 WASTEWATER RATE PROPOSAL 2 Q17. Does the District's projection of costs, allocation of costs, and the overall Rate Change 3 Proposal reflect the use of industry accepted cost of service and rate design principles 4 to develop fair and equitable rates for customer classes? 5 A. The District's projected costs to provide wastewater service and complete anticipated 6 capital projects required under the Consent Decree over the Rate Proposal period appear to 7 be reasonable and are projected to provide the District with adequate funding to maintain 8 the financial health of the utility. Overall, in its cost of service analysis, the District 9 performed its cost allocations and has proposed wastewater rates based on cost of service 10 principles that are commonly used in the industry, as outlined in the Water Environment 11 Federation's Manual of Practice No. 27, "Financing and Charges for Wastewater Systems." 12 However, there are a few topics, as outlined in my testimony, that could enhance the 13 District's Rate Proposal. 14 Q18. Is the burden imposed on each class of ratepayers by the District's Rate Proposal 15 "fair and reasonable?" 16 A. Yes. Please see Prahba Kumar's Rebuttal Testimony, Answer to Question 9. 17 Capital Financing 18 Q19. How much has the District proposed to be expended on wastewater capital 19 improvements in its Rate Proposal? 20 A. The District states that there will be $1,582,358,453 (See Exhibit MSD 1A, page 4-16, 21 Table 4-7) in total CIRP needs and $29,679,900 (See Exhibit MSD 1A, page 4-14, Table 22 4-6) in routine capital improvements for the wastewater system for the period FY 2021 23 through FY 2024. In addition, the District anticipates significant additional capital 11 1 improvements beyond FY 2024 to comply with the requirements set forth in the District's 2 Consent Decree with the United States Environmental Protection Agency (US EPA). Based 3 on the testimony of District staff and consultants during the First Technical Conference, 4 the timing and magnitude of the expenditures necessary to comply with these regulations 5 has been agreed to in the Consent Decree with the US EPA, which became effective on 6 April 27, 2012, and amended on June 22, 2018. Projected total CIRP needs for FY 2025 7 through FY 2028, as outlined in the District's Rate Model (See Exhibit MSD 52, Tab 8 `CIRP-Input', line 66) is expected to be an additional $873,823,381, with additional capital 9 spending under the consent decree remaining after FY 2028. 10 Q20. Based on your experience with other large wastewater utilities do you have an opinion 1 1 regarding the reasonableness of the District's CIRP? 12 A. Yes. Collectively, we have worked for several large wastewater systems who are facing 13 significant capital expenditures to comply with consent decrees regarding sanitary sewer 14 overflows (SSOs) and/or combined sewer overflows (CSOs) and have reviewed the 15 consent decrees of numerous others. Based upon information provided by the District, the 16 CIRP and the District's long-term control plan is consistent with that agreed to by other 17 major wastewater systems throughout the United States. 18 Q21. How has the District proposed to fund the wastewater capital improvements? 19 A. For the period FY 2021 through FY 2024, the District proposes to issue $808.9 million 20 (including premiums) of revenue bonds and $162.3 million of State Revolving Loan bonds 21 and Water Infrastructure Finance and Innovation Act (WIFIA) loan drawdown. In addition, 22 the District forecasts receiving $2.9 million from grants and contributions. The District 23 plans to fund the majority of the remainder of the CIRP, $617.8 million, with current 12 1 revenues from rates and/or miscellaneous revenue, often referred to as "cash financed 2 capital" or "PAYGO, and interest income. 3 Q22. May the District issue long term indebtedness to finance capital improvements? 4 A. The District has the authority to issue debt under Section 3.020(13) of its Charter Plan. The 5 Charter Plan requires that general obligation bonds may not be issued without the voter 6 approval required by Article VI, Section 26(b) of the Constitution of Missouri. Section 7 7.170 of the District's Charter Plan requires approval of a simple majority of the voters of 8 the District to issue revenue bonds. Most recently, in April 2016, the District received 9 approval from voters to issue $900 million in debt to finance capital improvement projects. 10 Prior to that, the District received approval from voters on three separate occasions to issue 11 debt to finance capital improvements projects, as follows: June 2012 ($945 million), 12 August 2008 ($275 million), and February 2004 ($500 million). 13 Q23. Does the District's capital financing plan proposed for its Capital Improvement and 14 Replacement Program (CIRP) reflect a reasonable and cost-effective approach? 15 A. Yes, the District's proposed issuance of revenue bonds and state revolving loan bonds to 16 finance a substantial portion of the CIRP is a sound capital financing approach. The District 17 was also able to further access low-cost capital financing by securing a highly competitive 18 WIFIA loan. Financing the CIRP from a mix of long-term debt and cash financing 19 (PAYGO) is reasonable and helps spread the cost of improvements over a longer term, 20 allowing future customers receiving the benefit of the improvements to help pay for the 21 improvements. In addition, bond rating agencies favorably view a meaningful balancing of 22 debt financing and cash financing of a utility's capital program. The District's current Rate 23 Proposal provides for cash financing of approximately 37%, which exceeds the District's 13 1 historical cash versus debt funding mix of 25%/75% (See Exhibit MSD 3G, Bethany Pugh 2 Testimony, page 4, line 12). This level of cash financing is consistent with the 25% to 30% 3 cash financing of capital that is deemed an industry accepted best practice and is in practice 4 in other peer utilities. The District's proposed financing plan, assuming that voters 5 authorize the District to issue additional bonds, will help minimize the impact of the CIRP 6 on wastewater rates during the projected four-year planning period. 7 Q24. How will the District finance the CIRP if the voters fail to approve the issuance of 8 additional revenue bonds? 9 A. If the District fails to obtain voter authorization for issuance of additional revenue bonds, 10 the only debt financing possible will be through a small amount of authorization remaining 1 1 from the prior voter authorization. Therefore, the District would have to cash finance most 12 of the CIRP during the period FY 2021 through FY 2024 as set forth in Section 6.1 of the 13 District's Rate Proposal. This would cause rates to increase substantially to provide 14 sufficient revenues to cash finance the CIRP. 15 Q25. Do you have any concerns about the District's proposed financing plan for the CIRP? 16 A. The District's rate proposal requires substantial additional debt to be incurred over a short 17 period of time, with the issuance of new debt in FY 2021 through FY 2024 and beyond in 18 order to continue to fund the projects required by the Consent Decree. While the District's 19 proposal provides for debt service coverage well over the minimum required by the 20 District's bond covenants, the District's proposal indicates projected debt service coverage 21 declining to the District's minimum policy level by FY 2024. While still strong, the District 22 has stated in its Rate Proposal (See Exhibit 1A, p. 4-24), that "the rating agencies have all 23 noted that the District's current credit rating could be compromised if projected senior debt 14 1 2 3 service coverage fell below the 2.4x to 2.9x range and projected total debt coverage fell below the 1.6x to 1.8x range." Given that the Rate Proposal results in debt service coverage reaching the District's minimum policy levels by FY 2024, any unforeseen impact to 4 revenue generation and/or expenditures relative to the assumptions used in the 5 development of the Rate Proposal could pose a risk of coverage levels dropping lower than 6 the District's minimum policy level. 7 This is an even greater concern given the District is projecting a potential rate increase of 8 7.2% in FY 2025 to maintain minimum policy levels. This increase is nearly double the 9 indicated annual rate increases for FY 2021 through FY 2024. 10 Q26. What do you suggest the District should do to address the issues you raise regarding 11 the District's CIRP Financing Plan? 12 A. As the District is required, under the Consent Decree, to complete the projects within the 13 schedule outlined in the Consent Decree, while managing assets for long-term resiliency, 14 there is little the District can do, in the short-run, to minimize the total spending and the 15 pace of annual expenditures for the CIRP. However, while the Rate Proposal reflects lower 16 levels of revenue increases during FY 2021 through FY2024, the District should consider 17 a more pragmatic approach of establishing a series of revenue increases in FY 2021 through 18 FY 2024 that are slightly higher than those proposed. Such an approach will help levelize 19 the annual revenue increases projected through FY 2028; mitigate the anticipated spike in 20 the required revenue increase in FY 2025; and potentially moderate the rate of decline in 21 projected debt service coverage over the Rate Proposal period. 22 23 15 1 Wastewater Revenues 2 Q27. As part of your review of the District's Rate Proposal did you analyze the District's 3 projection of revenues? 4 A. Yes. The District has projected a modest increase in customer accounts for Single Family 5 Residential (0.1%/year) and Multi-Family Residential (0.4%/year) customer classes, and a 6 slight decrease in Non-Residential customer class (-0.2%/year). The District has stated that 7 the projected growth rates are based on historical trends for billed accounts for years FY 8 2013 through FY 2018 (See Exhibit MSD 65A, Request No. 2a.). 9 Q28. As part of your review of the District rate change proposal did you analyze the 10 District's projection of contributed wastewater volume? 11 A. Yes. The projection of contributed and billed wastewater volume is an integral component 12 of the wastewater rate setting process. The District charges its customers based on metered 13 water consumption for most customers within the District's service area. Residential 14 customers outside the City of St. Louis are billed based on a Winter Quarter Average, 15 which is the average actual water consumption for a 90 - 92 day period between November 16 and April of the preceding winter period. This is a common practice in wastewater rate 17 setting, as it reflects the amount of wastewater entering the District's system and avoids 18 including outdoor water usage during the summer months. Residential customers within 19 the City of St. Louis are billed on the basis of Fixture Units (number of rooms, water 20 closets, baths and separate showers), as such customers do not have water meters. 21 The District has stated that it has projected total volume by customer class based on a 22 review of historical annual billed volumes for FY 2016 through FY 2018, and has reflected 23 a projected decline in Single Family metered volume of -1.7%/year, an increase in Multi- 16 1 Family metered volume of +2.0%/year, and an increase in Non-Residential volume 2 (including Anheuser Busch) of +1.2%/year. 3 Q29. Based on your experience, do you have an opinion regarding the District's forecast of 4 contributed wastewater volume? 5 A. Yes. There are two factors that must be evaluated in projecting metered wastewater 6 volume: customer growth, and an estimate of average wastewater volume per customer. 7 By projecting volume based solely on historical total billed volume by class, the District 8 has limited its ability to evaluate the impact of any changing water usage and consequently 9 wastewater flow characteristics on projected wastewater volume. Black & Veatch 10 calculated the percent change in volume per bill for each customer class as presented in 11 Figure 1, below. 12 As Figure 1 illustrates, the percent change in volume per bill for Multi-Family Residential 13 and Non-Residential customer classes reflect a high degree of volatility, and the District's 14 projections for the planning period reflects a higher average per bill volume of flow relative 15 to the historical trends. A potential over projection of wastewater volume could potentially 16 inflate projected revenue under existing rates. Given that the District experienced lower 17 revenues than anticipated during the last rate cycle, despite a more conservative projection 18 of declining volume and volume per customer, for this proposed planning period, it may 19 be prudent to project wastewater volume based on a closer evaluation of the average flow 20 volume per bill. 17 1 2 4.00% 2.00% 0.00% Historical and Projected Change in Volume/Bill 0-2.00% ,C) '1,1, 1, '1,v a A<< << (< k -4.00% -6.00% -8.00% -10.00% -12.00% Single Family-Metered Mufti-Family-Metered Non-Residential Figure 1: Historical and Projected Change in Volume/Bill 3 Wastewater Revenue Requirements 4 Q30. Did you examine the District's proposed O&M expense escalation factors? 5 A. Yes. The District has utilized a series of cost escalation factors in the Rate Model, as 6 described in Section 7.1.1 of the District's Rate Proposal (See Exhibit MSD-1A, p. 7-2). 7 The escalation factors used appear to be reasonable. As the District establishes a multi-year 8 rate schedule, it is important to carefully select cost escalation factors to reflect not only 9 current conditions, but anticipated future conditions as well. If the costs do not escalate at 10 the levels projected, the rates adopted would provide for better debt service coverage, 11 additional cash to improve liquidity (cash on hand), both of which would help maintain the 12 District's financial health, and/or provide additional cash funding of capital projects, which 13 would help to reduce the District's debt profile. If costs escalate higher than the levels 14 projected, the District would either have to engage in cost reduction measures or face a 15 potential shortfall in projected fund balances. 18 1 Q31. On what basis has the District projected O&M expenses? 2 A. The District has projected future O&M expenses based upon the FY 2019 budget. In 3 making projections of future costs, the District has assumed the expenditure of 100% of 4 the FY 2019 budget. This compares with recent historical average spending of 95.4% of 5 its operating budget in FY 2017 and FY 2018. 6 Q32. Do you have any concerns regarding the District's projection of operating and 7 maintenance expenses? 8 A. If the actual to budget expenditure conditions in FY 2019 and FY 2020 are similar to that 9 of FY 2017 & FY 2018, then the proposed financial plan essentially could be construed as 10 over stating annual expenditures by assuming 100% expenditure level. If the District 1 1 actually plans on expending at the 100% of budget level, then the District should also be 12 prepared to engage in cost reduction measures, to mitigate any adverse impact on the 1 3 Operating Reserve, should the revenues under approved rates turn out to be lower than 14 projected. 15 Q33. What impact will the failure of Proposition S have on the Wastewater Utility and this 16 Rate Proposal? 17 A. The District has stated that the failure of Proposition S will have no impact on the Rate 18 Proposal. See Ex. MSD 63A, p. 4; Ex. MSD 68, p. 30, pgs. 129-130. While we understand 19 this to mean that the District does not expect to propose any change to the annual revenue 20 increases or rate schedules presented in their Rate Proposal, it is our understanding, based 21 on the District's testimony, that certain costs that previously were projected to be 22 transitioned to the Stormwater Utility (particularly salary costs for engineering and certain 23 overhead expenses) will instead have to be borne by the Wastewater Utility. In the 19 1 District's response to Rate Commission Discovery Request dated April 22, 2019 (See 2 Exhibit MSD 66A), the District states that costs ranging from $1.3 million in FY 2020 to 3 $5.9 million in FY 2024 will be charged to other CIRP projects which are primarily 4 wastewater projects. 5 Because the District's Rate Proposal indicates a financial plan that results in debt service 6 coverage reaching the minimum policy level by FY 2024, and as shown on Figure 4-5, 7 page 4-20 of the District's Rate Proposal (See Exhibit MSD 1A), and projected end of year 8 operating reserve balances at or below 90 days any shift in costs back to the wastewater 9 utility could have an adverse impact on both debt service coverage and the operating 10 reserve in the latter years of the Rate Proposal period. It would also be important for the 11 District to assess the potential impact on wastewater rates for any of the costs transitioning 12 back to the wastewater utility. 13 Q34. On March 14, 2019, the District presented its preliminary FY 2020 budget to the 14 Board of Trustees. What impact, if any, will the preliminary FY 2020 budget have on 15 the Rate Proposal? 16 A. The District's preliminary FY 2020 budget is approximately $5.6 million (3%) higher than 17 the FY 2019 budget, and approximately $1.2 million lower than the FY 2020 expenses 18 projected in the Rate Proposal (excluding routine capital). Because projections for FY 2021 19 and beyond are based upon the prior year's projected expenses, the projected expenses for 20 the FY 2021 through FY 2024 time period are slightly overstated in the Rate Proposal. The 21 lower costs reflected by the preliminary FY 2020 budget could offset a small portion of the 22 anticipated increased costs due to the failure of Proposition S. 23 20 1 Q35. Did you consider the appropriateness of the District's debt service coverage policy? 2 A. Yes. District's policy to maintain senior debt service coverage of 2.5 times or greater and 3 total debt service coverage of 1.8 times or greater is a valid and important metric, 4 particularly in light of the District's current and anticipated future heavy debt profile. 5 Q36. Will the proposed rates outlined in the District's Rate Proposal help achieve adequate 6 fund balances for the District during the Rate Proposal period? 7 A. Yes. Available cash balances are a very important element of a wastewater utility's 8 financial plan. Adequate fund balances are necessary to ensure adequate working capital 9 and funds for unanticipated events. Table 4-10 of the District's Rate Proposal (See Exhibit 10 MSD 1A, p. 4-23, 11. 24) presents the District's forecasted Operating Reserve. As shown, 1 1 the District projects that at the end of FY 2024 there will be a balance of $49,871,963 in 12 Operating Reserves, equating to approximately 89 days of O&M expenses. This is 13 consistent with the targets of other wastewater utilities and provides the District with 14 adequate working capital to provide for any unanticipated expenditures or emergencies. 15 Failure of Voter Authorization of Additional Revenue Bonds 16 Q37. What is your recommendation if the District's voters do not authorize the issuance of 17 additional revenue bonds? 18 A. If the voters reject the District's request for authority to issue additional debt, the District's 19 Rate Plan outlined in Section 6 of the District's Rate Proposal, which includes rates that 20 are higher than those included in the District's recommended rates, should be adopted by 21 the Board of Trustees. 22 21 1 Q38.Are the matters contained herein true, correct, and complete to the best of your 2 knowledge and belief? 3 A.Yes. 4 Q39.Does this conclude your testimony? 5 A.Yes. 22 CERTIFICATE OF SERVICE The undersigned certifies that a copy of the foregoing was sent by electronic transmission to Janice Fenton, Office Associate Senior, Metropolitan St. Louis Sewer District; Susan Myers, Counsel for the Metropolitan St. Louis Sewer District; and Brandon Neuschafer, Counsel for the Missouri Industrial Energy Consumers, on this 231d day of April, 2019. Ms. Janice Fenton Office Associate Senior Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, Missouri 63103 jfenton@stlmsd.com Ms. Susan Myers General Counsel Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, Missouri 63103 smvers@stlmsd.com Brandon W. Neuschafer Kamilah Jones Bryan Cave, LLP 211 North Broadway, Suite 3600 St. Louis, Missouri 63102 bwneuschafer@belplaw.com kami.jones@belplaw.com Attorneys for Missouri Industrial Energy Consumers 23 Brian J. Malone