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HomeMy Public PortalAboutExhibit MSD 67A MSD Response to MIEC 5th Discovery RequestEXHIBIT MSD 67A BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT AUGUST 24, 2011 FIFTH DISCOVERY REQUEST OF THE MISSOURI INDUSTRIAL ENERGY CONSUMERS Metropolitan St. Louis Sewer District Response ISSUE: WASTEWATER RATE CHANGE PROPOSAL WITNESS: METROPOLITAN ST. LOUIS SEWER DISTRICT SPONSORING PARTY: MISSOURI INDUSTRICAL ENERGY CONSUMERS DATE PREPARED: September 8, 2011 Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, Missouri 63103 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 AUGUST 24, 2011 FIFTH DISCOVERY REQUEST OF THE 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"), Operational Rule 3(2) and Procedural Schedule §§ 1, 14, 15 and 17 of the Rate Commission of the Metropolitan St. Louis Sewer District ("Rate Commission"), Metropolitan St. Louis Sewer District ("District") thereby responds to the Missouri Industrial Energy Consumers August 24, 2011 Fifth Discovery Request for additional information and answers regarding the Rate Change Proposal dated May 10, 2011 (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 67A BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT AUGUST 24, 2011 SECOND DISCOVERY REQUEST OF THE MISSOURI INDUSTRIAL ENERGY CONSUMERS Metropolitan St. Louis Sewer District Response The following questions relate to the surrebuttal testimony of Janice M. Zimmerman, Exhibit MSD 60B: 5-1. As highlighted on page 12, lines 16-17, of Mr. Gorman's July 18, 2011 rebuttal testimony, please confirm that Mr. Gorman's proposed O&M adjustment utilizes an annual aggregate O&M escalation factor of 3.20% between the calendar years 2011 through 2016. RESPONDER: Jan Zimmerman, MSD Director of Finance RESPONSE: Mr. Gorman's does refer to a 3.20% annual aggregate O&M escalation factor. MSD, however, disagrees with this assumption as expressed in Ms. Zimmerman's response to Question # 8 in her August 19, 2011 Surrebuttal Testimony and Question 3 (b) of the District's August 29, 2011 response to the Rate Commission's August 19, 2011 Third Discovery Request. 5-2. Please provide a copy, in electronic format with all formula intact, of the workpaper used to produce the table titled "Restatement of MIEC Change in Projected O&M Expenses," presented on page 5 of Ms. Zimmerman's surrebuttal testimony. RESPONDER: Jan Zimmerman, MSD Director of Finance RESPONSE: The requested information is provided as Exhibit MSD 67B and 67C. 5-3. Please identify the per year inflation assumptions used in the development of the "MIEC" column of the table titled "Restatement of MIEC Change in Projected O&M Expenses," presented on page 5 of Ms. Zimmerman's surrebuttal testimony. RESPONDER: Jan Zimmerman, MSD Director of Finance RESPONSE: The requested information is provided as Exhibit MSD 67B and 67C. 3 EXHIBIT MSD 67A The following questions relate to the surrebuttal testimony of Jeanne F. Vanda, Exhibit MSD 60D: Responses to Questions 5-4 through 5-16 are answered by Jeanne Vanda, MSD Financial Advisor, Professional Financial Management (PFM) 5-4. Did Ms. Vanda work with MSD to plan for the possible revenue bond issuance planned for the rate period ending 2016? If affirmative, please answer the following: a. Please provide Ms. Vanda's or her firm's most recent assessment of economic activity in the Metropolitan St. Louis area economy and MSD service area. RESPONSE: PFM does not provide economic assessments. It uses published sources of data including the U.S. Census Bureau, the Bureau of Labor Statistics, and State Workforce data publications to present economic trend data in either Preliminary Official Statement or credit presentations as appropriate. See Exhibit MSD 67F. b. Please provide copies of all analyses and workpapers used to assess interest rate term structures for various revenue bond maturities proposed for the planned MSD revenue bond issuance. RESPONSE: See PFM Memorandum Dated September 2, 2011: "Additional Data Requests" provided as Exhibit MSD 67E. 5-5. For each revenue bond series, please provide an annual principal and interest schedule for MSD's existing revenue bond series showing, at a minimum, the following on an annual basis: a. Beginning of year principal balance; b. Annual principal payments, and c. Annual interest payments RESPONSE: See PFM Memorandum Dated September 2, 2011: "Additional Data Requests" provided as Exhibit MSD 67E. Also see Exhibit MSD 67G. 5-6. Please provide the assessment that Ms. Vanda or her firm made to estimate the credit metrics needed to support an investment grade credit rating. Credit metrics should include, at a minimum, the following: a. Total debt service coverage ratio; b. Revenue bond debt service coverage ratio; c. Additional bonds test; and d. Customer rate structure affordability. RESPONSE: The credit rating metrics PFM has discussed with MSD Staff and Black & Veatch reflect its guidance to maintain credit ratings in the premium "AA" and "AA+" credit category. "Investment grade" credit ratings can go as low as the "BBB" credit rating level. Fitch Ratings publishes an 4 EXHIBIT MSD 67A annually report "Water and Wastewater Medians" that discusses a comprehensive list of metrics related to financial performance, debt security and debt burden. The Fitch Ratings "2011 Water and Wastewater Medians" report was previously submitted by MSD but is again included with this response as Exhibit MSD 67H. By definition, the median statistic indicates that half of the credit population has statistics higher than the metric and half of the credit population has statistics lower than the metric. If MSD expects to maintain its current ratings, the focus should be on the metrics in the "AAA" and "AA" categories as well as statistics for large systems. Relevant statistics are on page 14 ("AAA/AA") and page 12 ("large systems") of this report. The senior lien debt coverage metric is 2.3 times for "AA" credits and 2.6 times for "AAA" credits. All -in coverage is 1.9 times for "AA" credits and 2.1 times for "AAA" credits. Additional bonds tests are generally not considered a metric but MSD's 2004 Master Resolution requires 1.25 times maximum debt service for senior lien bonds, and 1.15 times , levels considered adequate, but must be viewed in the context of other credit metrics. 5-7. Please provide the most current study made regarding: a. MSD wastewater rate affordability; b. Competitive position of MSD sewer rates relative to other sewer providers in other metropolitan service territories; and c. Other material relating to MSD customers' ability to afford the proposed wastewater rates. RESPONSE: PFM does not originate studies or surveys of sewer rates. PFM relies on surveys published by various engineering firms or other sources. PFM reviews rating agency metrics regarding wastewater rate affordability. 5-8. Please provide copies of all analyses Ms. Vanda has done concerning normal spreads of Treasury securities yields to municipal revenue bond yields including issuers with credit ratings similar to that of MSD. RESPONSE: Graphs showing spread relationships between "AAA" and "A" credits are prepared periodically. Generally, comparing particular issuers' pricing spreads to Treasury securities is not relevant or informative. PFM does review comparable issuers' pricing spreads to "AAA MMD". See PFM Memorandum Dated September 2, 2011: "Additional Data Requests" provided as Exhibit MSD 67E. Also see Exhibit MSD 67D. 5-9. Please provide any commentary performed by Ms. Vanda or her firm concerning current municipal bond yields, spreads to Treasuries, and trends to same RESPONSE: See PFM Memorandum Dated September 2, 2011: "Additional Data Requests" provided as Exhibit MSD 67E. Also see Exhibit MSD 67P. 5 EXHIBIT MSD 67A 5-10. Concerning pages 17 and 18 of Ms. Vanda's surrebuttal testimony, please provide all information supporting a 25 -year AAA bond yield of 4.25%, and a 40 basis point credit spread to convert this yield to MSD's credit yield. RESPONSE: See PFM Memorandum Dated September 2, 2011: "Additional Data Requests" provided as Exhibit MSD 67E. Also see Exhibit MSD 67J 5-11. Concerning the maturity schedule on page 16 of Ms. Vanda's surrebuttal testimony, please provide electronic workpapers, with formulas intact, used to produce the average interest rates shown in the table for MSD's 2004, 2006, 2008 and 2010 revenue bond series. RESPONSE: See PFM Memorandum Dated September 2, 2011: "Additional Data Requests" provided as Exhibit MSD 67E. Also see Exhibits MSD 67K and 67L. 5-12. At page 3 of Ms. Vanda's surrebuttal testimony, she states that she helped MSD develop an initial credit standing for the 2004 revenue bond issue. Please provide a copy of that credit rating strategy, and provide copies of any updated strategy documents performed by Ms. Vanda or her firm since 2004. RESPONSE: See PFM Memorandum Dated September 2, 2011: "Additional Data Requests" provided as Exhibit MSD 67E. Also see Exhibit MSD 67N. 5-13. Referring to page 3 of Ms. Vanda's surrebuttal testimony, she states that PFM keeps MSD informed as to current trends in the public finance marketplace. Please provide complete copies of all reports, analyses or presentations made by PFM to MSD concerning these trends. RESPONSE: See PFM Memorandum Dated September 2, 2011: "Additional Data Requests" provided as Exhibit MSD 67E. Also see Exhibit MSD 670. 5-14. At page 5 and continuing on page 6 of Ms. Vanda's surrebuttal testimony, she outlines four general drivers of credit quality. She describes economic factors to highlight credit are wealth indicators, property valuations, employment and unemployment trends, and the type and diversity of employers. With respect to this testimony, please provide the following: a. A review of these economic factors made by PFM each year over the last five years. RESPONSE: See previous response to Question 5-4 (a). b. A projection of these factors made by PFM or another firm for consideration by PFM in planning for proposed revenue bond issuances. RESPONSE: See previous response to Question 5-4 (a). 6 EXHIBIT MSD 67A c. An explanation of why these economic factors are important in assigning credit quality. RESPONSE: Standard and Poor's Publication, "Public Finance Criteria - 2000" Extracted comments: page 21. "The foundation of a community's fiscal health is its economy. Financial growth prospects and volatility of major revenue sources depend on the performance of the local economy. Economic conditions also influence the affordability and range of services delivered by a government such categories of expenditures as social welfare, education, health care, and public safety....Generally those communities with higher income levels and diverse economic bases have superior debt repayment capabilities. They are better projected from sudden economic shocks." 5-15. At page 7 of Ms. Vanda's surrebuttal testimony, she outlines key financial components of the rate proposal and asserts that these proposals were taken into consideration by the District. With respect to this testimony, please answer the following: a. Please explain Ms. Vanda's participation in developing the initial rate proposal for MSD in this proceeding. RESPONSE: Starting in February, 2011, PFM engaged in telephone conversations with Karl Tyminski, MSD Secretary -Treasurer, on general parameters for bond related assumptions for the rate proposal. It was my understanding that during this time, MSD's rate proposal consultant, Black & Veatch had been working on the rate proposal analytics. Once a draft of Black & Veatch's work was complete, PFM was asked to review it and provide commentary on items related to the revenue bond issuance. I engaged in a series of telephone conference calls principally over the weeks of April 11 and April 18. It was during these conversations that PFM provided guidance regarding cash position, debt coverage and interest yields. As part of this work I reviewed tables and output from the Black & Veatch rate model. This review was limited to the debt service component of the model. PFM did not, at any time, have access to the Black & Veatch rate model in its electronic form with all formulas intact. See Exhibit MSD 67M. b. Please identify the date when Ms. Vanda was retained in order to consult on the development of an appropriate rate filing. RESPONSE: PFM was engaged in July 2010 by MSD to provide financial advisory services for debt issuance and advise on special projects as requested. PFM has provided the District with financial advisory services as part of the 2011 Rate Commission process since April 2011 per the direction of Karl Tyminski, MSD Secretary/Treasurer. 7 EXHIBIT MSD 67A c. Please identify and provide complete copies of all information Ms. Vanda provided MSD Staff in support of her role of consulting on the current rate filing. RESPONSE: See PFM Memorandum Dated September 2, 2011: "Additional Data Requests" provided as Exhibit MSD 67E. d. Please identify any restrictions Ms. Vanda placed on the information she provided to MSD Staff to provide support for any recommendations or work she has done in support of the current rate filing. RESPONSE: See PFM Memorandum Dated September 2, 2011: "Additional Data Requests" provided as Exhibit MSD 67E. 5-16. Referring to pages 14 and 15 of Ms. Vanda's surrebuttal testimony, she outlines basis point credit spreads between an "AAA" MMD and that of an "AA" MMD. Please provide actual market experience related to this credit spread in support of her assumption that the current credit spread is now 40 to 50 basis points, where it had previously been in the range of 10 to 15 basis points. RESPONSE: See PFM Memorandum Dated September 2, 2011: "Additional Data Requests" provided as Exhibit MSD 67E. Also see Exhibit MSD 671. usan Myers, General Counsel METROPOLITAN ST. LOUIS SEWER DISRICT 2350 Market Street St. Louis, Missouri 63103 smyers@stlmsd.com Tel: (314) 768-6200 Fax: (314) 768-6372 8 EXHIBIT MSD 67A CERTIFICATE OF SERVICE The undersigned certifies that on the 8th day of September, 2011: An electronic copy of the foregoing instrument as e -mailed to the Secretary of the Rate Commission c/o jfenton@stlmsd.com. SECRETARY OF RATE COMMISSION: Ms. Nancy Bowser Secretary of Rate Commission Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, MO 63103 robowser@swbell.net At the request of the Rate Commission Counsel, one paper original and associated Exhibits are held at the Rate Commission office for Commissioner review. An electronic copy of the foregoing instrument was e -mailed to: RATE COMMISSION CONSULTANT: Mr. William G. Stannard President Raftelis Financial Consultants, Inc. 3013 Main Street Kansas City, Missouri 64108 wstannard@raftelis.com COVIDIEN: Mr. Randy Meyer Utility Manager Covidien 3600 North 2"d Street St. Louis, MO 63147 Randy.Meyer@covidien.com ROBERT A. MUELLER: Mr. Robert A. Mueller 16 Ladue Crest Lane St. Louis, MO 63124 ramreco@sbcglobal.net BARNES JEWISH HOSPITAL: Lisa C. Langeneckert, Esq. Sandberg, Phoenix & von Gontard, P.C. 600 Washington Avenue, 15th Floor St. Louis, MO 63101-1313 llangeneckert(aisandbergphoenix. com 9 EXHIBIT MSD 67A MISSOURI INDUSTRIAL ENERGY CONSUMERS: AARP AND CONSUMERS COUNCIL OF MISSOURI: John R. Kindschuh, Esq. Bryan Cave, LLP 211 N. Broadway, Suite 3600 St. Louis, MO 63102 Telephone: 314-259-2313 john.kindschuh@bryancave.com and Diana M. Vuylsteke, Esq. Bryan Cave, LLP 211 N. Broadway, Suite 3600 St. Louis, MO 63102 dmvuylsteke@bryancave.com John B. Coffman, Esq. John B. Coffman, LLC 871 Tuxedo Blvd. St. Louis, MO 63119 j ohn(&j ohncoffman.net CAl1� / Y / Susan Myers, General Counsel METROPOLITAN ST. LOUIS SEWER DISRICT 2350 Market Street St. Louis, Missouri 63103 smyers a,stlmsd.com Tel: (314) 768-6200 Fax: (314) 768-6372 10