Loading...
Exhibit RC 81 - Surrebuttal Testimony Pamela LemoineLashly & Baer, P.C. 714 Locust Street St. Louis, Missouri 63101 Exhibit No: Issue: Wastewater Rate Change Proceeding Witness: Pamela Lemoine Type of Exhibit: Surrebuttal Testimony Sponsoring Party: Rate Commission Date Testimony Prepared: June 3, 2019 1 1 Ql. Please state your names and business addresses. 2 A. My name is Ms. Pamela Lemoine. My business address is 16305 Swingley Ridge Road, 3 Suite 230, Chesterfield, Missouri 63017. 4 Q2. Do you have any opinions regarding the impact of Mr. Gorman's revised financial 5 plan as it relates to projected rate increases? 6 A. Yes, I do. Mr. Gorman testified that he made three changes to MSD's financial plan. The 7 first change was a reduction in the assumed interest rate on future debt. The second was a 8 reduction of the CIRP in FY 2023 and FY 2024. The third change is a reduction to MSD's 9 debt service coverage policy from 1.8x to 1.6x, and a capital financing mix of 30% 10 PAYGO. 1 1 Q3. Do you have any opinions regarding the impact of Mr. Gorman's change in the 12 assumed interest rate on future debt? 13 A. Yes, I do. The lowering of the assumed interest rates on future bonds results in the most 14 significant impact. However, as Mr. Gorman has recognized in his testimony during the 15 Technical Conference for Rebuttal Testimony (See Exhibit MSD 79), the interest rate he 16 used does not reflect current rates as he initially testified and is artificially low. As such, 17 the change results in an unrealistic projection of future costs. Furthermore, I would 18 recommend that MSD's Rate Change Proposal include at least some adjustment for the 19 possibility of future upward pressure on interest rates and not be based solely on current 20 economic conditions. 21 Q4. Do you have any opinions regarding the impact of Mr. Gorman's change in the 22 assumed deferral of $70 million in CIRP spending in both FY 2023 and FY 2024? 2 1 A. Yes. Mr. Gorman has moved $70 million per year in FY 2023 and FY 2024 out to FY 2026 2 and FY 2027 (beyond the current Rate Change Proposal period). In my opinion, this shift 3 in capital spending is not a major driver in the development of the revised financial plan. 4 Q5. Do you have any opinions regarding the impact of Mr. Gorman's change in the 5 assumed minimum debt service coverage of 1.6x and PAYGO capital financing of 6 30%? 7 A. Yes. Mr. Gorman's recommends that MSD maintain the minimum debt service coverage 8 of 1.6x that it has used in previous rate proposals, versus the current minimum of 1.8x. 9 Based on my review of materials available in this proceeding, I believe Mr. Gorman's 10 position would place MSD at risk of a rating downgrade. Furthermore, based upon a review 11 of Mr. Gorman's rate model, while he has testified that MSD's policies should be adjusted 12 to those used in prior rate proposals, his financial plan results in debt service coverage that 13 is not materially different than MSD's proposal, at 1.76x at the end of FY 2024, as 14 compared to MSD's rate model of 1.81x. In addition, the reduction in cash financing 15 compared to MSD's proposal appears to be primarily the result of the assumed lower 16 interest rates on projected bonds. 17 Q6. In your opinion, does MSD's policy for PAYGO financing have a significant impact 18 on this Rate Change Proposal? 19 A. No, it does not. MSD's debt service coverage policy of 1.8x is the financial policy that 20 drives the need for revenue increases through FY 2024, as MSD's financial plan results in 21 a decrease in debt service coverage over the study period to approximately 1.8x at the end 22 of FY 2024. This is consistent with Mr. Gorman's testimony at the Technical Conference 23 for Rebuttal Testimony. 3 1 Q7. Do you believe that MSD's debt service policy of 1.8x is reasonable and appropriate? 2 A. Yes. While MSD's debt service coverage policy in the past was 1.6x, it is appropriate for 3 utilities to regularly evaluate financial policies to reflect current conditions and rating 4 agency expectations. As utilities become more heavily debt burdened, rating agencies will 5 expect to see the growth in outstanding debt mitigated to the extent possible with 6 reasonable debt service coverage, which will provide cash for cash financing a portion of 7 the capital program. 8 9 The current policy of 1.8x is consistent with what rating agencies have indicated they 10 expect to see. Specifically, Moody's considers debt service coverage of 1.7x — 2.0x to be 1 1 consistent with Aa rated utilities. Fitch indicated in its report related to MSD's 2017 rating 12 that MSD would be at risk of a downgrade if debt service coverage fell below what they 13 are expecting. In their report they indicated that MSD's debt service coverage was solid at 14 1.8x in 2017 and was projected at 1.9x in FY 2019-20. Fitch further stated that "any 15 deterioration in financial performance beyond the projected levels would be expected to 16 result in a negative rating action." 17 Q8. In MSD's Rate Change Proposal, how are surcharge rates determined? 18 A. MSD has set surcharge rates based on cost of service in FY 2021, and increases the rates 19 in FY 2022 through FY 2024 based on inflation. 20 Q9. Do you agree with MSD's approach for setting surcharge rates? 21 A. No. The projected system-wide required revenue increases reflect both operating and 22 capital cost increases. A component of capital costs include improvements that affect the 23 allocation of costs to extra strength components. By only increasing surcharge rates at 4 1 2 3 4 5 6 7 8 9 10 inflation in FY 2022 through FY 2024, the resulting rates do not reflect the total increase in costs associated with strength. In addition, it will likely result in a more significant increase in the first year of the subsequent rate cycle than the overall system-wide increase at that time. This is a significant factor in the large increase proposed for the surcharge rates in FY 2021 of this Rate Change Proposal, as the adopted policy of increasing surcharge rates based on inflation resulted in rates that were below cost of service. Adopting cost of service-based surcharge rates in FY 2021 therefore now requires a significant percentage increase. By increasing surcharge rates in years FY 2022 through FY 2024 based on an "across the board" basis with other rates will help minimize a future subsidy and subsequent larger increase in surcharge rates. 1 1 Q10. Are the matters contained herein true, correct, and complete to the best of your 12 knowledge and belief? 13 A. Yes. 14 Q11. Does this conclude your testimony? 15 A. Yes. 5 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 3rd day of June, 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 smyers@stlmsd.com Brandon W. Neuschafer Kamilah Jones Bryan Cave, LLP 211 North Broadway, Suite 3600 St. Louis, Missouri 63102 bwneuschafer@bc1plaw.conn kami.jones@belplaw.com Attorneys for Missouri Industrial Energy Consumers 6 Brian J. Malone