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Exhibit MIEC 63 MIEC Surrebuttal Testimony (Michael P Gorman)
BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT 2011 WASTEWATER RATE CHANGE PROCEEDING Surrebuttal Testimony and Schedules of Michael P. Gorman On behalf of Missouri Industrial Energy Consumers Project 9456 August 19, 2011 Exhibit No.: Witness: Type of Exhibit: Sponsoring Party: Date Testimony Prepared: Michael P. Gorman Surrebuttal Testimony Missouri Industrial Energy Consumers August 19, 2011 CHESTERFIELD, MO 63017 BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST.LOUIS SEWER DISTRICT 2011 WASTEWATER RATE CHANGE PROCEEDING STATE OF MISSOURI COUNTY OF ST.LOUIS ) ) ) SS Affidavit of Michael P.Gorman Michael P.Gorman,being first duly sworn,on his oath states: 1.My name is Michael P.Gorman.I am a consultant with Brubaker &Associates, Inc.,having its principal place of business at 16690 Swingley Ridge Road,Suite 140, Chesterfield,Missouri 63017.We have been retained by the Missouri Industrial Energy Consumers in this proceeding on their behalf. 2.Attached hereto and made a part hereof for all purposes are my surrebuttal testimony and schedules which were prepared in written form for introduction into evidence in the Rate Commission of the Metropolitan St.Louis Sewer District's 2011 wastewater rate change proceeding. 3.I hereby swear and affirm that the testimony and schedules are true and correct and that they show the matters and things that they purport to ow ;);1 .l Subscribed and sworn to before me this 18th day of August,2011. TAMMY S.KLOSSNER Notary Public -Notary Seal STATE OF MISSOURI St.Charles County My Commission Expires:Mar.14,2015 Commission #11024862 Notary Publi BRUBAKER &ASSOCIATES,INC. Michael P. Gorman Page 1 BRUBAKER & ASSOCIATES, INC. BEFORE THE RATE COMMISSION OF THE METROPOLITAN ST. LOUIS SEWER DISTRICT 2011 WASTEWATER RATE CHANGE PROCEEDING Surrebuttal Testimony of Michael P. Gorman Q PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 1 A Michael P. Gorman. My business address is 16690 Swingley Ridge Road, Suite 140, 2 Chesterfield, MO 63017. 3 Q ARE YOU THE SAME MICHAEL P. GORMAN WHO PREVIOUSLY FILED 4 TESTIMONY IN THIS PROCEEDING? 5 A Yes. 6 Q WHAT IS THE PURPOSE OF YOUR SURREBUTTAL TESTIMONY? 7 A I will respond to certain positions taken by the Rate Commission consultant William 8 Stannard’s in his prefiled testimony on July 18, 2011 (Exhibit L&B 30) and live 9 testimony on August 8, 2011. Further, I comment on Metropolitan St. Louis Sewer 10 District’s (“MSD” or “District”) August 4, 2011 public filing of the Consent Decree and 11 corresponding revised capital improvement and replacement program (“CIRP”). 12 Q PLEASE SUMMARIZE YOUR RESPONSE TO MR. STANNARD’S REBUTTAL 13 TESTIMONY. 14 A Mr. Stannard addresses several of the same issues that I addressed in my rebuttal 15 testimony. In some cases, his response appears to be similar to mine – questioning 16 Michael P. Gorman Page 2 BRUBAKER & ASSOCIATES, INC. the reasonableness of MSD Staff’s cost projections – and in other areas he finds that 1 MSD and Black & Veatch’s cost projections are “conservative” and reasonable. I will 2 respond to Mr. Stannard’s testimony and findings. 3 Q ARE THERE ANY GENERAL POINTS MADE BY MR. STANNARD TO WHICH 4 YOU WOULD LIKE TO RESPOND? 5 A Yes. At page 6 of his testimony, Mr. Stannard defines what he believes to be “fair 6 and reasonable.” There, he defines this phrase into separate categories. “Fair” he 7 believes to mean the rates which produce revenues from customer classes in relation 8 to the cost incurred in providing services to those customer classes. Further, he 9 opines that “fair” should be free from self-interest, prejudice or favoritism.1 10 Mr. Stannard defines “reasonable” as the revenue requirement upon which 11 rates are based to “reflect an appropriate level of funding to enable the utility to 12 provide adequate and sustainable service and support the financial health of the 13 utility.”2 14 Q DO YOU TAKE ISSUE WITH MR. STANNARD’S DEFINITIONS OF “FAIR AND 15 REASONABLE?” 16 A No. However, I do take issue with his suggestion that a “conservative” cost estimate 17 meets his standard of “fair.” Fair and reasonable should reflect the best estimate of a 18 cost used to design a revenue requirement and retail rates. In too many cases, the 19 MSD Staff and Black & Veatch used high-end estimates of cost, and not the best or 20 most likely estimate of the cost. These high-end cost estimates included: 21 1. Estimated debt service on projected new revenue bonds, 22 1See Exhibit L&B 30, p. 6, lns. 27-29. 2See Exhibit L&B 30, p. 6, ln. 30 and p. 7, lns. 1-3. Michael P. Gorman Page 3 BRUBAKER & ASSOCIATES, INC. 2. Projected continued sales decline beyond 2011, 1 3. No improvement to bad debt expense, and 2 4. Inflation outlooks that do not reflect MSD’s efforts to reduce and manage 3 the escalation in its cost of service. 4 While in many cases MSD’s projections could be found to be at the high-end 5 of being reasonable, they do not represent a best estimate or most likely estimate 6 standard. Therefore, MSD Staff’s cost projections are not “fair” as defined by 7 Mr. Stannard. Indeed, it appears as though MSD Staff and Black & Veatch 8 intentionally used the high-end cost projections in order to enhance the certainty that 9 MSD will recover its cost of service over the period rates will be in effect. Hence, 10 MSD Staff and Black & Veatch did reflect favoritism and self-interest in developing its 11 cost of service in this case. 12 Q WHY ISN’T A CONSERVATIVE FORECAST OF THE HIGH-END COST OF 13 SERVICE FAIR? 14 A The rates set in this case should provide MSD management an incentive to 15 aggressively manage costs, while charging customers rates that reflect sound 16 management efforts to manage those costs. Making a best estimate of what the cost 17 should be while rates are in effect, creates a hard threshold for MSD Staff to work 18 toward to manage actual costs while the rates are in effect. By including overstated 19 or high-end cost estimates in the design of rates, MSD Staff will have a reduced 20 incentive to manage costs. Inflating the cost of service to protect against inefficient 21 management simply erodes the efficient operation of MSD. 22 Michael P. Gorman Page 4 BRUBAKER & ASSOCIATES, INC. Q IF THE RATE COMMISSION APPROVES A REVENUE REQUIREMENT TO 1 REFLECT THE BEST ESTIMATE OF FUTURE COSTS, IS IT POSSIBLE THAT 2 MSD WILL UNDER-RECOVER ITS COST OF SERVICE WHEN RATES ARE IN 3 EFFECT? 4 A It is possible, yes. However, that will occur if MSD management fails to meet its cost 5 management targets. If cost increases are beyond MSD Staff control, then MSD Staff 6 could, if necessary, seek another change to its wastewater rates. If the under-7 recovery is due to failed management, then management should improve its 8 performance. 9 Issue Summary 10 Q PLEASE OUTLINE THE ISSUES YOU WILL DISCUSS PERTAINING TO THE 11 REBUTTAL TESTIMONY OF MR. STANNARD. 12 A I will respond to Mr. Stannard’s conclusion that the interest rates on the revenue bond 13 projections by MSD Staff are reasonable. I will comment on Mr. Stannard’s view of 14 bad debt expense used by Staff and his estimate of certain O&M expense included in 15 Black & Veatch’s cost of service projection. Finally, I will comment on his assessment 16 of revenue at current rates as being conservative. 17 Michael P. Gorman Page 5 BRUBAKER & ASSOCIATES, INC. Revenue Bond Interest Rate 1 Q AT THE HEARING ON AUGUST 8, 2011, MR. STANNARD STATED THAT HE 2 THOUGHT THE MSD STAFF AND BLACK & VEATCH’S ESTIMATED INTEREST 3 RATE ON NEW REVENUE BOND ISSUES OF 5.5% WAS CONSERVATIVE AND 4 ACCEPTABLE. PLEASE COMMENT. 5 A Mr. Stannard did acknowledge that the Bond Buyer Index, the source of information 6 relied on by MSD Staff to forecast a 5.5% interest rate, reflects a 30-year bond 7 interest rate.3 However, Mr. Stannard goes on to state that the 5.5% interest rate is 8 conservative and reasonable.4 9 Q PLEASE COMMENT. 10 A I disagree. The reasonableness of the interest rates depends on the assumption 11 MSD Staff made in paying down principal in its cost of service study. If MSD Staff 12 would have assumed that the principal component to the new bond issues would not 13 start to be repaid for 20 to 25 years after the bonds are sold, then a 5.5% interest rate 14 on the bonds would be reasonable. However, MSD Staff did not make that 15 assumption. 16 Rather, MSD Staff assumed that the principal component of the planned new 17 revenue bonds would start to be paid annually in the very first year after the new 18 bonds are issued. Hence, the appropriate interest rate for this type of amortization of 19 bond interest should not be tied to only a 25- to 30-year principal term repayment 20 structure. Rather, the best estimate of the revenue bond interest rates with this 21 3See Exhibit MSD 57, August 8, 2011 Transcript, p. 124, lns. 20-24. 4Id., p. 110, lns. 2-3. Michael P. Gorman Page 6 BRUBAKER & ASSOCIATES, INC. principal repayment should include a combination of short, intermediate and 1 long-term interest rates. 2 Q PLEASE DESCRIBE THE EVIDENCE YOU HAVE THAT SHOWS THAT INTEREST 3 RATES WILL VARY FOR MUNICIPAL REVENUE BONDS BASED ON PRINCIPAL 4 PAYMENT TERMS. 5 A On my attached Surrebuttal Schedule MPG-1, I show various utility municipal 6 revenue bonds issued over the last several years. These bond issues illustrate the 7 following: 8 1. The interest rates paid on the municipal issues vary based on the principal 9 terms. That is, principal that is paid sooner is carried at a lower interest 10 rate relative to principal more than 20-25 years out. 11 2. This schedule also shows that MSD’s most recent bond issues have been 12 structured in the same way, with varying interest rates. 13 3. The highest interest rates typically paid for the very long principal terms 14 are around 5% currently. However, principal that will be paid over the next 15 5 and 10 years, will be carried at a much lower interest rate. 16 Q BUT DIDN’T MSD’S 2010 REVENUE BOND ISSUE CARRY AN INTEREST RATE 17 OF 5.9%? 18 A Yes, however no principal payment for the 2010 bond issue will be made before 19 2035, or a minimum term of 25 years. Hence, there would not be principal payments 20 during the first 25 years of the 2010 bond issue, only interest payments. If this is the 21 structure MSD plans for the 2012-2016 revenue bond issuances, then it has 22 overstated the debt service cost for the projected revenue bonds in its cost of service 23 study (“COSS”), because it included principal repayment each year through 2016. 24 Again, in its COSS, it assumed that it will make both bond principal and 25 interest payments annually throughout the 30-year bond term. If it issued a bond with 26 Michael P. Gorman Page 7 BRUBAKER & ASSOCIATES, INC. no principal payments to be made until year 25, then it has substantially overstated 1 the debt service cost on these bonds during the rate forecast period. 2 Q HAS MSD ISSUED REVENUE BONDS WITH REGULAR PRINCIPAL PAYMENTS? 3 A Yes. MSD’s 2004 bond series has regular principal payments. In that bond 4 issuance, the interest rate on a $175 million bond ranged from 2% to 5% and matured 5 two years after the initial issuance up through 25 years after the initial issuance. As 6 shown on Surrebuttal Schedule MPG-2, the weighted average interest rate for the 7 2004 bond issuance was 4.2% for the series with regular principal payments. The 8 range of interest rates on the 2004 series was 2% to 5%. 9 This is the bond debt service structure that should be used to produce the 10 best estimate of the debt service cost for the planned new revenue bond issues 11 during the forecast period, because the payment terms are consistent with those 12 included in the cost of service study. 13 Q IS IT REASONABLE TO BELIEVE THAT MUNICIPAL BOND INTEREST RATES 14 MIGHT INCREASE DURING THE FORECAST PERIOD RELATIVE TO CURRENT 15 INTEREST RATES? 16 A It is possible but current market data does not support that notion. Municipal bond 17 market spreads relative to Treasury bonds have been large since the financial market 18 turmoil that occurred in 2008. (See Surrebuttal Schedule MPG-3). Treasury bond 19 interest rates are forecasted to increase relative to current rates. However, increases 20 in Treasury bond rates will likely reflect a recovery in the economy, and a more 21 normalization of yield spreads between Treasuries and municipal bonds. 22 Michael P. Gorman Page 8 BRUBAKER & ASSOCIATES, INC. Hence, while Treasury interest rates may increase, the municipal bond yield 1 spread will likely contract, and municipal yields will either hold steady or possibly 2 decline. 3 Q HAVE MUNICIPAL BOND ISSUANCES OF SIGNIFICANT MAGNITUDE TAKEN 4 PLACE SINCE S&P DOWNGRADED THE U.S. FEDERAL GOVERNMENT’S 5 “AAA” BOND RATING? 6 A Yes. The interest rates on higher quality municipal bond issues have not changed 7 significantly since the S&P downgrade of the federal government’s credit rating. 8 Indeed, the Indiana Finance Authority issued almost a billion dollars of debt as part of 9 an acquisition of the Indianapolis City Water and Wastewater District by Citizens 10 Utility Company. As shown below, discussed in a Bond Buyer Index article on this 11 recent bond issue, the interest rates are generally in line with the estimated interest 12 rates I have relied on to support my use of a 4% interest rate for the planned revenue 13 bond issues in MSD Staff’s cost of service. The article on this bond issue stated as 14 follows: 15 A huge negotiated deal that Morgan Stanley has priced accounts for a 16 large portion of the pie. The firm priced for retail $992.6 million of 17 Indiana Finance Authority wastewater utility revenue bonds in three 18 series. The deal was upsized $25 million at repricing. 19 The first series, $678.5 million of first-lien wastewater utility revenue 20 bonds, Series 2011A, is rated A1 by Moody’s Investors Service and 21 AA by Standard & Poor’s. 22 Yields range from 0.50% with a 2.00% coupon in 2012 to 4.95% with a 23 5.00% coupon in 2041. Yields at repricing fell as much as 12 basis 24 points for two-year maturities, 8 basis points for five-year maturities, 25 and five basis points for credits maturing after 10 years. 26 The second series, $268 million of second-lien wastewater utility 27 revenue bonds, Series 2011B, is rated A2 by Moody’s and AA-minus 28 by Standard & Poor’s. Yields range from 1.20% with a 5.00% coupon 29 Michael P. Gorman Page 9 BRUBAKER & ASSOCIATES, INC. in 2014 to 5.12% with a 5.00% coupon in 2041. Yields for credits 1 maturing from 2014 through 2018 fell five basis points at repricing. 2 The third series, $46.1 million of second-lien wastewater utility revenue 3 bonds, Series 2011C, is also rated A2 by Moody’s and AA-minus by 4 Standard & Poor’s. Yields were 1.95% with a 3.00% coupon in 2016.5 5 Projected Sales 6 Q AT THE AUGUST 8, 2011 HEARING, MR. STANNARD TESTIFIED THAT MSD 7 STAFF’S REFLECTION OF A 1% PERCENT DECLINE IN SALES FROM 8 CALENDAR YEAR 2011 WAS CONSERVATIVE AND ACCEPTABLE. PLEASE 9 COMMENT. 10 A Mr. Stannard made reference to the decline in use per customer and economic 11 conditions.6 However, he, like Mr. Barber, provided little to no support for his position. 12 Q WHY IS A 1% SALES DECLINE NOT REASONABLE? 13 A A review of independent economists’ assessments of the economic activity in MSD’s 14 service territory suggests that it has bottomed out and will likely improve during the 15 period rates will be in effect. Hence, it is not reasonable to assume that MSD sales 16 will continue to decline. Rather, an increase in economic activity will more likely 17 produce an increase in sales and revenue at current rates. 18 Mr. Stannard’s assertion related to conservation is generally accurate, 19 however he fails to recognize that average use per customer in 2011 was at 20 abnormally low levels. Customer usage will likely return to more normal levels, after 21 which customers may start investing again in water conservation appliances. There 22 is no legitimate reason to believe that sales will decline due to depressed economic 23 5www.bondbuyer.com, “Comp Scales: “Investors Flock to Well-Priced Issues,” August 18, 2011. 6See Exhibit MSD 57, August 8, 2011 Transcript, p. 123, lns. 3-11. Michael P. Gorman Page 10 BRUBAKER & ASSOCIATES, INC. conditions, but customers will continue to make discretionary investments in water 1 conservation appliances. 2 Rather, it is more reasonable to assume that as the economy recovers, 3 increased usage by customers will recover, at which point those customers will again 4 start making discretionary investment in water conservation equipment. This will 5 have the dual impact of increasing sales relative to the 2011 depressed level, but 6 again show a decline in use per customer as those customers reap the benefit of 7 those discretionary water conservation appliance investments. It is simply not rational 8 to expect that sales will decline due to harsh economic times, but customers would 9 make discretionary investment to reduce water consumption. 10 Q WHY DO YOU BELIEVE THAT MSD’S DATA SHOWS THAT ABNORMALLY LOW 11 AVERAGE USE PER CUSTOMER IN CALENDAR YEAR 2011? 12 A As shown on the attached Surrebuttal Schedule MPG-4, pages 1-3, average use per 13 customer over the last three years has dropped dramatically leading up to calendar 14 year 2011. Further, the number of non-residential customers dropped off 15 substantially as well. While conservation would suggest declining use per customer 16 is clearly a trend, there is no support for MSD Staff’s and Black & Veatch’s contention 17 that average use per customer will decline from a depressed 2011 level. 18 Conservation occurs when customers are making investments in more efficient water 19 appliances. With the economy in difficult economic conditions, investments in these 20 appliances likely have tapered off or been deferred entirely. 21 Michael P. Gorman Page 11 BRUBAKER & ASSOCIATES, INC. Q HAVE YOU IDENTIFIED ANY OTHER DATA WHICH DIRECTLY MEASURES THE 1 METROPOLITAN ST. LOUIS AREA ECONOMIC ACTIVITY PROJECTED OUT 2 OVER THE COST OF SERVICE IN THIS PROCEEDING? 3 A Yes. I purchased a June 2011 economic projection made by Moody’s Economic 4 Service. The Moody’s report projects an improvement in the St. Louis metropolitan 5 area service economy. Moody’s is projecting a reduction in unemployment rates, a 6 recovery in the housing market, and strengthening in the manufacturing and banking 7 sectors of the economy. All of this suggests that non-residential customer numbers 8 will start to grow back to more normal levels, and overall customer usage will revert 9 back to normal usage, albeit mitigated somewhat by continued conservation efforts. 10 Moody’s summarizes its economic assessment of St. Louis as follows: 11 St. Louis’ recovery will lose its lead over the Missouri and U.S. 12 recoveries in the second half of 2011, but it will still progress faster 13 than its 2010 pace. Receding commodity prices will relieve pressure 14 on manufacturers’ profits and consumer spending, helping the 15 recovery maintain momentum. The housing market will start to 16 gradually improve later this year, removing a major impediment to 17 economic growth. Longer term, the metro area’s diverse industrial 18 structure will link its performance with the national business cycle, but 19 weak demographic trends will ensure below-average job and income 20 growth.7 21 The entire Moody’s report is attached as Surrebuttal Schedule MPG-5. 22 Q WHAT DO THE INDEPENDENT PROJECTIONS OF THE MSD SERVICE AREA 23 SUGGEST? 24 A In no way does this economic data from Moody’s or the Federal Reserve support 25 Black & Veatch’s or Mr. Stannard’s assessment that the St. Louis metropolitan area 26 economy will get worse from the 2011 depressed conditions. Indeed, independent 27 economists suggest that things will likely get better. As such, an assumed over 1% 28 7Moody’s Analytics, Précis U.S. Metro, Midwest, June 2011 at 90. Michael P. Gorman Page 12 BRUBAKER & ASSOCIATES, INC. decline in sales is simply not a reasonable estimate of economic activity in MSD’s 1 service territory. 2 Q IS A 1% DECLINE IN SALES INSIGNIFICANT? 3 A No. It equates to over $1 million per year in revenue at current rates. Hence, this 4 adjustment is another example of how Black & Veatch and MSD Staff are using the 5 worst case assessment of what revenues and expenses will be in order to maximize 6 the claimed revenue deficiency in this proceeding. 7 Bad Debt Expense 8 Q IN HIS PREFILED TESTIMONY DATED JULY 18, DID MR. STANNARD TAKE 9 ISSUE WITH THE DISTRICT’S BAD DEBT EXPENSE AS REFLECTED IN ITS 10 COST OF SERVICE FILING? 11 A Yes. At pages 14-15 of his prefiled testimony, Mr. Stannard observes that MSD’s bad 12 debt collection expense has increased during the forecast period relative to the 13 historical period. Mr. Stannard noted that bad debt expense can be impacted by 14 various factors. Mr. Stannard also noted that the District has implemented enhanced 15 collection measures which are designed to improve the collection of bad debt 16 expense. He recommends the District monitor this expense. 17 Q IN THE HEARING DID MSD STAFF PROVIDE SOME DISCUSSION OF WHAT IS 18 CAUSING AN INCREASE IN BAD DEBT EXPENSE MORE RECENTLY? 19 A Yes. While I believe part of it is due to the depressed economic conditions of the 20 service area, part of the bad debt expense also appears to be related to a method of 21 Michael P. Gorman Page 13 BRUBAKER & ASSOCIATES, INC. collecting stormwater charges which were found to be unconstitutional. 1 Ms. Zimmerman stated as follows at the June 13, 2011 hearing: 2 It’s kind of a little bit of an anomaly. When the stormwater rate was 3 found to be unconstitutional, we had to stop billing those stormwater 4 accounts, right? So, we had to put those into our bad debt and that was 5 40,000 accounts that paid stormwater only. So, you’re seeing kind of 6 an artificial increase built in there.8 7 It is my understanding that MSD is no longer imposing this surface stormwater 8 collection fee. Hence, to the extent this unconstitutional charge contributed 9 significantly to MSD’s bad debt expense during the period 2008 through 2011, that 10 impact on that bad debt expense should no longer be a factor going forward. As 11 such, it is reasonable to believe that the bad debt expense as a percentage of total 12 revenue would decline to a more normalized level experienced by MSD over longer 13 periods of time. 14 Q IS MSD’S BAD DEBT EXPENSE PROJECTED IN ITS COST OF SERVICE STUDY 15 COMPARABLE TO ITS HISTORICAL ACTUAL BAD DEBT EXPENSE, AND THAT 16 OF OTHER MISSOURI UTILITIES? 17 A No. MSD’s projected bad debt expense represents a larger percentage of its 18 revenues in the forecast period than that which had actually occurred in the past, and 19 is also significantly higher than other Missouri utilities that serve customers in MSD’s 20 service territory. 21 Q PLEASE EXPLAIN. 22 A MSD’s 2011 bad debt expense – as a percentage of total sales revenue – is greater 23 than Laclede Gas, Missouri-American Water Company’s St. Louis District, and 24 8See Exhibit MSD 17, Transcript, p. 189, lns. 17-24. Michael P. Gorman Page 14 BRUBAKER & ASSOCIATES, INC. Ameren Missouri Electric Operations. While some of these service areas do not 1 exactly overlap MSD, they all either include MSD’s service territory or are adjacent to 2 it. The percentage of bad debt expense, or uncollectible expense, as a percentage of 3 total sales revenues is shown Table 1 below. 4 TABLE 1 Bad Debt Expense as a Percentage of Total Sales Revenue Description Bad Debt Factor Missouri-American Water (St. Louis) 1.08% Laclede Gas 1.12% Ameren Missouri 0.53% MSD (Projected) 3.96% MSD (Actual 2006-2010) 3.18% ________________ Source: Surrebuttal Schedule MPG-6. A higher factor equates to a larger bad debt expense. As shown in Table 1 5 above, MSD’s 2011 bad debt factor is highly inflated and deficient in comparison to 6 other regional utility companies. 7 The average MSD bad debt factor I used – average of 2006-2010 – is 3.18%, 8 still much higher than other regional utility factors. MSD’s proposal to inflate its actual 9 bad debt factor to 3.96% from 3.18% for its rate forecast is not reasonable. 10 Michael P. Gorman Page 15 BRUBAKER & ASSOCIATES, INC. Q DO YOU BELIEVE IT IS REASONABLE FOR THE RATE COMMISSION TO 1 EXPECT MSD MANAGEMENT TO STRIVE TO BE MORE EFFICIENT IN 2 COLLECTING BAD DEBT EXPENSE? 3 A Yes. MSD management should be expected to set reasonable targets and achieve 4 reasonable results. Expecting MSD management to achieve comparable bad debt 5 collection to other Missouri utilities is reasonable. 6 Q WHAT DO YOU RECOMMEND? 7 A In my testimony, I estimated an average uncollectible bad debt expense factor using 8 MSD’s actual historical data for the period 2006 through 2010. This average 9 collection factor was 3.18%. This still reflects higher bad debt expense levels than 10 that experienced by other Missouri utility companies. MSD Staff’s proposal to push 11 that factor up to almost 4% of sales simply reflects poor management objectives and 12 practices. These poor practices and expense levels should not be used to set rates. 13 If MSD Staff cannot bring its bad debt collection expense in line, then it should 14 provide a complete report to the MSD Trustees of why its debt collections are so far 15 out of line with other Missouri utilities. 16 O&M Escalation 17 Q DID MR. STANNARD ADDRESS OTHER ASPECTS OF MSD’S PROJECTED 18 EXPENSE LEVELS? 19 A Yes. Mr. Stannard also is uncomfortable with certain MSD Staff escalators used to 20 project O&M expenses.9 He particularly noted power expense escalators and 21 increases in pension expenses. As such, the expense levels included in MSD Staff’s 22 9See Exhibit L&B 30, pp. 11-14. Michael P. Gorman Page 16 BRUBAKER & ASSOCIATES, INC. and Black & Veatch’s study are excessive and unreasonable based on the 1 reasonable measure of reviewing a projection for O&M expenses. This expense level 2 should be reduced to a more normal level, consistent with industry analysts’ outlooks 3 for future inflation, and specific expense items such as those performed by Mr. 4 Stannard. 5 Consent Decree 6 Q YOU MENTIONED IN YOUR JULY 18 REBUTTAL TESTIMONY THAT MSD STAFF 7 WOULD NOT PROVIDE A COPY OF THE CONSENT DECREE SETTLEMENT 8 DOCUMENT WITH THE U.S. ENVIRONMENTAL PROTECTION AGENCY (“EPA”). 9 SINCE THAT TIME HAS MSD PROVIDED A COPY OF THE CONSENT DECREE 10 SETTLEMENT DOCUMENT? 11 A Yes. On August 4, 2011, MSD filed a copy of the Consent Decree settlement 12 document as Exhibit MSD 49A. Further, on August 4, MSD filed Exhibit MSD 50A, 13 which details a list of specific Consent Decree related wastewater capital 14 improvement and replacement program (“CIRP”) projects expected to be made 15 between the rate years 2013 through 2016. According to MSD these projects are 16 necessary to meet EPA requirements per the Consent Decree settlement. 17 Q HAVE YOU COMPARED MSD’S UPDATED PROJECTED CIRP COST WITHIN 18 THE CONSENT DECREE TO THAT CONTAINED IN ITS COSS? 19 A Yes. Table 2 below compares the updated Consent Decree related wastewater CIRP 20 project cost levels, for the rate years 2013 through 201610 with the CIRP amount 21 included in its COSS in Table 3-8. MSD’s updated Consent Decree CIRP costs 22 10Provided in Exhibit MSD 50A. Michael P. Gorman Page 17 BRUBAKER & ASSOCIATES, INC. during the forecast period are approximately $122.1 million (or 12.1%) lower than 1 amounts included in its COSS in Table 3-8. 2 TABLE 2 Comparison of Consent Decree CIRP Project Costs Year Updated Consent Decree1 COSS2 Difference 2013 $255,819,000 $273,807,000 ($17,988,000) 2014 $203,777,000 $237,428,000 ($33,651,000) 2015 $227,534,500 $261,630,000 ($34,095,500) 2016 $197,607,750 $234,013,000 ($36,405,250) 4-Year Total $884,738,250 $1,006,878,000 ($122,139,750) ___________________ Sources: 1Exhibit MSD 50A. 2Exhibit MSD 1, Table 3-8. Q WERE ALL OF THE WASTEWATER CIRP PROJECTS IDENTIFIED ON TABLE 3 3-8 OF MSD’S MAY 10 APPLICATION REQUIRED TO MEET PROJECTED EPA 4 REQUIREMENTS? 5 A Per MSD witness Brian Hoelscher, yes. On page 3 of Mr. Hoelscher’s direct 6 testimony, he states: 7 Both the scope and timing of all the projects in the Wastewater Capital 8 Improvement and Replacement Program are designed to meet 9 regulatory requirements and schedules anticipated base on the current 10 status of the EPA mediation.11 11 11See Exhibit MSD 9B, p. 3, lns. 18-20. Michael P. Gorman Page 18 BRUBAKER & ASSOCIATES, INC. Q DOES THE CONSENT DECREE SETTLEMENT DOCUMENT REQUIRE AN 1 UPDATE TO THE CIRP PROJECTIONS? 2 A Yes. Section F of the August 4 Consent Decree settlement document requires that 3 by December 31, 2013, MSD shall submit to the EPA an SSO control master plan. 4 As part of the master plan, MSD shall provide: 5 a schedule of specific projects for the Elimination of all Constructed 6 SSO Outfalls and the goal of eliminating all other known SSOs as 7 expeditiously as possible. The Schedule shall provide for the 8 Elimination of at least 85% of the Constructed SSO Outfalls and the 9 goal of eliminating all other known SSOs no later than December 31, 10 2023. 11 Q SHOULD THE RATE COMMISSION USE THE UPDATED CONSENT DECREE 12 CIRP BUDGET IN ESTIMATING A REVENUE REQUIREMENT FOR MSD IN THIS 13 PROCEEDING? 14 A Yes. As noted above, a fair and reasonable cost of service for MSD during the rate 15 effective period should reflect the updated Consent Decree CIRP budget, not the 16 stale and overstated budget originally included in MSD’s rate filing. Therefore, the 17 claimed revenue deficiency should be adjusted to reflect this lower CIRP budget 18 through calendar year 2016. 19 Q HAVE YOU UPDATED YOUR PROPOSED ADJUSTMENT ANALYSIS 20 PRESENTED IN YOUR JULY 18 REBUTTAL TESTIMONY TO ACCOUNT FOR 21 MSD’S IDENTIFIED REDUCTION IN PROJECTED WASTEWATER CIRP COST 22 LEVELS? 23 A Yes. Surrebuttal Schedule MPG-7 is an updated version of Schedule MPG-1 from 24 my rebuttal testimony, which also reflects the projected decline in wastewater CIRP 25 cost levels. Combined, my proposed adjustments originally identified in my rebuttal 26 Michael P. Gorman Page 19 BRUBAKER & ASSOCIATES, INC. testimony along with the projected decline in wastewater CIRP cost levels reduces 1 MSD Staff’s proposed increase of over 60% ($128.8 million) thorough 2016 down to 2 42.2% ($90.2 million). On a year-by-year basis my proposed adjustments result in a 3 series of increases of 4.3% in 2012, 6.0% in 2013, 9.0% in 2014, 9.0% in 2015, and 4 9.0% in 2016. However, as stated in my rebuttal testimony, MSD’s failure to timely 5 disclose information required in the Consent Decree settlement document and its 6 failure to disclose the details underlying the Black & Veatch cost of service model 7 clearly raise questions with regard to the accuracy of MSD’s filing. Based on this the 8 Rate Commission could recommend that the MSD Trustees approve no more than a 9 one-year rate increase in this proceeding and require MSD to refile its evidence in a 10 pure transparent fashion in the next year. This will also provide MSD with time to 11 develop its SSO control master plan per the Consent Decree settlement. 12 Q DOES THIS CONCLUDE YOUR SURREBUTTAL TESTIMONY? 13 A Yes, it does. 14 \\doc\shares\prolawdocs\sdw\9456\testimony-bai\203219.doc Metropolitan St. Louis Sewer DistrictMunicipal Utility Bond Weighted Interest RateInterestInterestInterestInterestLineYearPrincipalWeightRateYearPrincipalWeightRateYearPrincipalWeightRateYearPrincipalWeightRate2006 1,500,000$ 2.7% 2.00%2007 1,505,000$ 2.7% 2.00%2008 1,510,000$ 2.7% 2.50%2009 1,520,000$ 2.7% 2.75%2010 1,595,000$ 2.8% 3.00%1 2011 2,145,000$ 9.1% 4.0% 2011 2011 2011 1,780,000$ 3.2% 3.25%2 2012 2,265,000$ 9.6% 2.0% 2012 9,645,000$ 15.7% 1.5% 2012 2012 1,960,000$ 3.5% 3.50%3 2013 2,285,000$ 9.7% 5.0% 2013 13,350,000$ 21.7% 4.0% 2013 2013 2,165,000$ 3.9% 3.60%4 2014 2,410,000$ 10.2% 5.0% 2014 11,850,000$ 19.3% 4.0% 2014 10,715,000$ 7.5% 3.0% 2014 2,375,000$ 4.2% 3.75%5 2015 3,330,000$ 14.2% 5.0% 2015 4,495,000$ 7.3% 2.0% 2014 3,640,000$ 2.5% 4.0% 2015 2,615,000$ 4.7% 4.00%6 2016 3,510,000$ 14.9% 3.0% 2015 6,285,000$ 10.2% 4.0% 2015 18,715,000$ 13.1% 4.0% 2016 2,855,000$ 5.1% 4.00%7 2017 2,875,000$ 12.2% 3.5% 2016 1,395,000$ 2.3% 3.0% 2015 14,945,000$ 10.4% 5.0% 2017 3,125,000$ 5.6% 4.00%8 2018 2,980,000$ 12.7% 4.0% 2016 7,305,000$ 11.9% 5.0% 2016 10,400,000$ 7.3% 4.0% 2018 3,405,000$ 6.1% 4.125%9 2019 825,000$ 3.5% 4.0% 2017 2,265,000$ 3.7% 2.5% 2016 25,865,000$ 18.0% 5.0% 2019 780,000$ 1.4% 4.25%10 2020 890,000$ 3.8% 4.0% 2017 4,850,000$ 7.9% 5.0% 2017 11,460,000$ 8.0% 4.0% 2019 2,960,000$ 5.3% 5.00%112017 9,415,000$ 6.6% 5.0% 2020 65,000$ 0.1% 4.375%122018 6,245,000$ 4.4% 4.0% 2020 4,025,000$ 7.2% 5.00%132019 6,370,000$ 4.4% 5.0% 2021 150,000$ 0.3% 4.50%142020 1,840,000$ 1.3% 4.0% 2021 4,310,000$ 7.7% 5.00%152020 4,590,000$ 3.2% 5.0% 2022 3,530,000$ 6.3% 4.50%162021 1,570,000$ 1.1% 4.0% 2022 1,330,000$ 2.4% 5.00%172021 5,470,000$ 3.8% 5.0% 2023 1,355,000$ 2.4% 4.625%182023 880,000$ 0.6% 3.1% 2023 3,925,000$ 7.0% 5.00%192023 5,185,000$ 3.6% 5.0% 2024 5,730,000$ 10.2% 5.00%202024 795,000$ 0.6% 3.4%212024 5,275,000$ 3.7% 5.0%22 Total 23,515,000$ 100.0%3.9%61,440,000$ 100.0%3.6%Total 143,375,000$ 100.0%4.5%Total 56,070,000$ 100.0%4.2%KCBPUNebraska Public Power DistrictOmaha Public Power DistrictThe Metropolitan St. Louis Sewer DistrictSurrebuttal Schedule MPG-1 Metropolitan St. Louis Sewer DistrictSeries 2004A Wastewater System Revenue BondsMunicipal Utility Bond Weighted Interest RateMetropolitan St. Louis Sewer DistrictInterestLineYearPrincipalWeightRate1 2006 1,500,000$ 2.7% 2.00%2 2007 1,505,000$ 2.7% 2.00%3 2008 1,510,000$ 2.7% 2.50%4 2009 1,520,000$ 2.7% 2.75%5 2010 1,595,000$ 2.8% 3.00%6 2011 1,780,000$ 3.2% 3.25%7 2012 1,960,000$ 3.5% 3.50%8 2013 2,165,000$ 3.9% 3.60%9 2014 2,375,000$ 4.2% 3.75%10 2015 2,615,000$ 4.7% 4.00%11 2016 2,855,000$ 5.1% 4.00%12 2017 3,125,000$ 5.6% 4.00%13 2018 3,405,000$ 6.1% 4.125%14 2019 780,000$ 1.4% 4.25%15 2019 2,960,000$ 5.3% 5.00%16 2020 65,000$ 0.1% 4.375%17 2020 4,025,000$ 7.2% 5.00%18 2021 150,000$ 0.3% 4.50%19 2021 4,310,000$ 7.7% 5.00%20 2022 3,530,000$ 6.3% 4.50%21 2022 1,330,000$ 2.4% 5.00%22 2023 1,355,000$ 2.4% 4.625%23 2023 3,925,000$ 7.0% 5.00%24 2024 5,730,000$ 10.2% 5.00%25Total 56,070,000$ 100.0% 4.18%Source: Banc of America Securities LLC, Official Statement dated April 22, 2004Surrebuttal Schedule MPG-2Page 1 of 3 Metropolitan St. Louis Sewer DistrictSeries 2004A Wastewater System Revenue BondsMunicipal Utility Bond Weighted Interest RateMetropolitan St. Louis Sewer DistrictInterestLineYearPrincipalWeightRateSeries 2004A Bonds Maturing 5/1/20291 20256,210,000$ 12.5% 4.75%2 20269,890,000$ 19.9% 4.75%3 202710,215,000$ 20.6% 4.75%4 202811,420,000$ 23.0% 4.75%5 202911,960,000$ 24.1% 4.75%6Total49,695,000$ 100% 4.75%Series 2004A Bonds Maturing 5/1/20347 203012,530,000$ 18.1% 5.00%8 203113,155,000$ 19.0% 5.00%9 203213,815,000$ 20.0% 5.00%10 203314,505,000$ 21.0% 5.00%11 203415,230,000$ 22.0% 5.00%12Total69,235,000$ 100% 5.00%Source: Banc of America Securities LLC, Official Statement dated April 22, 2004Surrebuttal Schedule MPG-2Page 2 of 3 Metropolitan St. Louis Sewer DistrictSeries 2004A Wastewater System Revenue BondsMunicipal Utility Bond Weighted Interest RateWeighted Interest RateTermInterestTotalPMT Term WeightedLineYearPrincipalRatePrincipalAnnual PMTInterestPrin PMTWeightInt. Rate1 20061,500,000$ 2.00%175,000,000$ $10,807,203 8,750,000$ 2,057,203$ 5.00% 0.100%2 20071,505,000$ 2.00%$172,942,797 $10,807,203 8,647,140$ 2,160,063$ 4.94% 0.099%3 20081,510,000$ 2.50%$170,782,734 $10,807,203 8,539,137$ 2,268,066$ 4.88% 0.122%4 20091,520,000$ 2.75%$168,514,668 $10,807,203 8,425,733$ 2,381,470$ 4.81% 0.132%5 20101,595,000$ 3.00%$166,133,198 $10,807,203 8,306,660$ 2,500,543$ 4.75% 0.142%6 20111,780,000$ 3.25%$163,632,655 $10,807,203 8,181,633$ 2,625,570$ 4.68% 0.152%7 20121,960,000$ 3.50%$161,007,085 $10,807,203 8,050,354$ 2,756,849$ 4.60% 0.161%8 20132,165,000$ 3.60%$158,250,236 $10,807,203 7,912,512$ 2,894,691$ 4.52% 0.163%9 20142,375,000$ 3.75%$155,355,545 $10,807,203 7,767,777$ 3,039,426$ 4.44% 0.166%10 20152,615,000$ 4.00%$152,316,119 $10,807,203 7,615,806$ 3,191,397$ 4.35% 0.174%11 20162,855,000$ 4.00%$149,124,722 $10,807,203 7,456,236$ 3,350,967$ 4.26% 0.170%12 20173,125,000$ 4.00%$145,773,756 $10,807,203 7,288,688$ 3,518,515$ 4.16% 0.167%13 20183,405,000$ 4.125% $142,255,240 $10,807,203 7,112,762$ 3,694,441$ 4.06% 0.168%14 2019780,000$ 4.25%$138,560,799 $10,807,203 6,928,040$ 3,879,163$ 3.96% 0.168%15 20192,960,000$ 5.00%$134,681,636 $10,807,203 6,734,082$ 4,073,121$ 3.85% 0.192%16 202065,000$ 4.375% $130,608,515 $10,807,203 6,530,426$ 4,276,777$ 3.73% 0.163%17 20204,025,000$ 5.00%$126,331,738 $10,807,203 6,316,587$ 4,490,616$ 3.61% 0.180%18 2021150,000$ 4.50%$121,841,122 $10,807,203 6,092,056$ 4,715,147$ 3.48% 0.157%19 20214,310,000$ 5.00%$117,125,975 $10,807,203 5,856,299$ 4,950,904$ 3.35% 0.167%20 20223,530,000$ 4.50%$112,175,071 $10,807,203 5,608,754$ 5,198,449$ 3.21% 0.144%21 20221,330,000$ 5.00%$106,976,622 $10,807,203 5,348,831$ 5,458,372$ 3.06% 0.153%22 20231,355,000$ 4.625% $101,518,250 $10,807,203 5,075,912$ 5,731,290$ 2.90% 0.134%23 20233,925,000$ 5.00%$95,786,959 $10,807,203 4,789,348$ 6,017,855$ 2.74% 0.137%24 20245,730,000$ 5.00%$89,769,104 $10,807,203 4,488,455$ 6,318,748$ 2.56% 0.128%25 20256,210,000$ 4.75%$83,450,357 $10,807,203 4,172,518$ 6,634,685$ 2.38% 0.113%26 20269,890,000$ 4.75%$76,815,671 $10,807,203 3,840,784$ 6,966,419$ 2.19% 0.104%27 202710,215,000$ 4.75%$69,849,252 $10,807,203 3,492,463$ 7,314,740$ 2.00% 0.095%28 202811,420,000$ 4.75%$62,534,512 $10,807,203 3,126,726$ 7,680,477$ 1.79% 0.085%29 202911,960,000$ 4.75%$54,854,034 $10,807,203 2,742,702$ 8,064,501$ 1.57% 0.074%30 203012,530,000$ 5.00%$46,789,533 $10,807,203 2,339,477$ 8,467,726$ 1.34% 0.067%31 203113,155,000$ 5.00%$38,321,807 $10,807,203 1,916,090$ 8,891,113$ 1.09% 0.055%32 203213,815,000$ 5.00%$29,430,694 $10,807,203 1,471,535$ 9,335,668$ 0.84% 0.042%33 203314,505,000$ 5.00%$20,095,026 $10,807,203 1,004,751$ 9,802,452$ 0.57% 0.029%34 203415,230,000$ 5.00%$10,292,574 $10,807,203 514,629$ 10,292,574$ 0.29% 0.015%175,000,000$ 175,000,000$ 109.97%Weighted Int rate4.32%Surrebuttal Schedule MPG-2Page 3 of 3 0 00%0.50%1.00%1.50%2.00%2.50%Metropolitan St. Louis Sewer DistrictSpread ComparisonBond Buyer Index vs 10-Year U.S. Treasury YieldSurrebuttal Schedule MPG-3‐1.00%‐0.50%0.00%Source: www.bondbuyer.comSurrebuttal Schedule MPG-3 84.0086.0088.0090.0092.00CustomerMetropolitan St. Louis Sewer District Usage Per Customer ‐Single FamilySingleFamilyActualProjected74.0076.0078.0080.0082.00Ccf/CSingle FamilyGorman Est.Surrebuttal Schedule MPG-4Page 1 of 3 430.00440.00450.00460.00470.00480.00CustomerMetropolitan St. Louis Sewer DistrictUsage Per Customer ‐MultifamilyMultifamilyProjectedActual380.00390.00400.00410.00420.00Ccf/CMultifamilyGorman Est.Surrebuttal Schedule MPG-4Page 2 of 3 900.001000.001100.001200.001300.00CustomerMetropolitan St. Louis Sewer DistrictUsage Per Customer ‐Non‐ResidentialNon‐ResidentialProjectedActual500.00600.00700.00800.00Ccf/CNon‐ResidentialGorman Est.Surrebuttal Schedule MPG-4Page 3 of 3 analysis short term long term strengths & weaknesses current employment trends forecast risks risk-adjusted return, ’10-15 relative employment performance (1996=100) employment growth rank vitality life cycle phase U.S.=100% Best=1 Worst=384 Best=1, Worst=392 U.S.=100% 2010-2012 relative costs LIVING BUSINESS 2010-2015 RELATIVE RANK 90 MOODY’S ANALYTICS / Précis U.S. Metro / Midwest / June 2011 Total Construction Manufacturing Trade Trans/Utilities Information Financial Activities Prof & Business Svcs. Edu & Health Svcs. Leisure & Hospitality Other Services Government may 2011 % change yr ago, 3-mo MA U.S.STL 95 100 105 110 115 120 125 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F 15F -1.9 2.0 1.6 1.8 0.4 1.1 -2.3 3.0 2.3 2.3 2.4 1.1 2004 2005 2006 2007 2008 2009 2010 indicators 2011 2012 2013 2014 2015 110.8 111.0 110.0 111.5 112.6 109.2 112.3 gross metro product (c$B)116.5 121.6 125.9 129.0 131.4 0.5 0.1 -0.9 1.3 1.1 -3.1 2.9 % change 3.7 4.4 3.6 2.4 1.9 1,320.7 1,336.0 1,349.9 1,358.0 1,354.3 1,296.7 1,289.1 total employment (000)1,304.4 1,331.8 1,357.9 1,392.3 1,414.0 -0.0 1.2 1.0 0.6 -0.3 -4.3 -0.6 % change 1.2 2.1 2.0 2.5 1.6 6.0 5.6 5.1 5.3 6.6 9.8 10.0 unemployment rate 9.6 8.8 7.6 5.9 5.3 3.4 3.4 7.2 4.3 5.4 -3.3 0.5 personal income growth 3.8 4.8 7.0 6.3 4.8 2,775.2 2,787.4 2,804.0 2,817.0 2,827.4 2,834.7 2,840.8 population (000)2,853.2 2,865.1 2,875.7 2,887.2 2,900.2 13,493 13,390 10,159 8,220 4,670 4,058 4,078 single-family permits 3,571 5,956 9,044 11,662 11,178 2,248 2,168 1,679 2,212 1,083 1,114 1,331 multifamily permits 1,585 2,433 2,612 2,774 2,603 127.0 141.0 147.2 144.0 131.4 124.0 128.6 existing-home price ($ths)121.6 121.6 124.9 134.8 142.0 23,414 23,679 21,967 22,236 14,441 19,507 15,732 mortgage originations ($mil)12,384 9,678 10,429 11,853 14,244 -3.1 -6.4 -1.2 -4.6 -4.3 -4.8 -6.1 net migration (000)0.3 -0.1 -1.2 -0.1 1.5 20,974 28,470 8,638 11,165 13,015 16,057 17,590 personal bankruptcies 26,292 25,001 24,592 23,277 20,856 Recent Performance. Stronger hiring in the last few months has underpinned an acceleration in St. Louis’ recovery. Job growth in the metro area has outpaced that of the state and nation in 2011, led by manufacturing, trade and transportation. In the last three months, construction employment has also surged, rebounding from its cyclical low in February. After falling in 11 of the last 12 months, the unem- ployment rate is at a two-year low of 9.3%. Labor force expansion is also taking hold as discourage- ment among the unemployed abates. Commercial and residential construction remains depressed, and home prices and sales continue to slide, but price declines for nondistress sales have moderated. Manufacturing. Despite the current slowdown in the national industry, manufacturing will con- tinue to support the near-term recovery. STL’s manufacturers are beginning to show confidence in the economic recovery, as gains in production and profits over the last two years have finally led to hir- ing. Expansion has taken hold despite recent head- winds from higher energy and raw material prices, suggesting that manufacturers can withstand the pressures on the industry. GM’s Wentzville plant has been unaffected by shortages of parts sourced from Japan, a positive factor since even a temporary slowdown in production could have disrupted the industry’s fragile recovery. The fading of temporary headwinds means that the outlook for STL’s manufacturing in the second half of 2011 is solid. Risks are weighted to the downside, however. Since much of the industry’s recent expansion has been driven by inventory buildup, weaker than expected national demand could cause firms to scale back production again. Government. Shrinking state government payrolls are one of the key remaining drags on the recovery, and further cutbacks pose downside risks. Among Missouri’s metro areas, STL has been hit the hardest by state government downsizing since the recession’s onset, with payroll cuts exceeding even those in Jef- ferson City, the state capital. This is surprising be- cause state government employment is not especially concentrated in STL, and state layoffs elsewhere in Missouri have been relatively moderate. This suggests that state government job losses in the metro area will not persist, but risks remain, since weak state revenue growth continues to force budget tightening. Housing. The housing market is the other main obstruction to economic recovery, but it will im- prove over the next year. As in the national mar- ket., distressed home sales account for the majority of recent price declines in the metro area. Since mid-2010, home prices excluding distress sales have declined by about 5%, compared with 12% when foreclosures and short sales are factored in. This contrast signals that housing depreciation will moderate when the foreclosure inventory abates, and data from RealtyTrac show that this is already occurring. Foreclosure stocks have declined by about 46% in the last six months, receding faster than the national average. On a per-household ba- sis, they are 35% lower than the U.S. average. St. Louis’ recovery will lose its lead over the Missouri and U.S. recoveries in the second half of 2011, but it will still progress faster than its 2010 pace. Receding commodity prices will relieve pressure on manufacturers’ profits and consumer spending, helping the recovery main- tain momentum. The housing market will start to gradually improve later this year, removing a major impediment to economic growth. Longer term, the metro area’s diverse industrial structure will link its performance with the national busi- ness cycle, but weak demographic trends will en- sure below-average job and income growth. Ben Kanigel June 2011 dataBuffet® msa code: mSTL st. louis 161 3rd quintile 204 3rd quintile 92% 85% 89% 262 mature strengths ●Favorable business and living costs. ●Highly diverse industrial structure. ●Improving high-tech and bioscience competencies. ●Power grid with excess capacity. weaknesses ●Exposure to declining traditional manufacturing. ●Slow population growth. ●Suburban sprawl detracting from downtown growth. upside ●Low foreclosure rate supports faster recoveries in consumer spending and housing market. ●New developments in biotech/life sciences spur growth. downside ●Local income taxes are eliminated, prompting higher sales taxes and budget turmoil. ●Long-term cuts to defense spending hit Boeing and others.WX0.58% Surrebuttal Schedule MPG-5 Page 1 of 4 employment & industry migration flows leading industrieshouse prices comparative employment and income per capita income Due to U.S. fluctuations relative to u.s. top employers puBlic industrial diversity employment volatility Sources: BLS, Moody’s Analytics, 2010 2010 Sources: Percent of total employment — Moody’s Analytics & BLS, 2010; Average annual earnings — BEA, 2009 naics industry employees (000) sector % of total employment average annual earnings Not due to U.S. Due to U.S. Most Diverse (U.S.) Least Diverse Source: Bureau of Economic Analysis, 2009 Source: FHFA, 1996Q1=100, NSA Mining Construction Manufacturing Durable Nondurable Transportation/Utilities Wholesale Trade Retail Trade Information Financial Activities Prof. and Bus. Services Educ. and Health Services Leisure and Hosp. Services Other Services Government MOODY’S ANALYTICS / Précis U.S. Metro / Midwest / June 2011 91 moody’s rating Sources: IRS (top), 2008; Census Bureau, Moody’s Analytics, 2010 0% 20% 40% 60% 80% 100% 95% STL U.S. 10083 county as of may 01, 2010aa3 into st. louis, mo numBer of migrants Chicago, IL 1,926 Kansas City, MO 1,323 Columbia, MO 950 Springfield, IL 747 Springfield, MO 598 Phoenix, AZ 574 Dallas, TX 554 Los Angeles, CA 501 Jefferson City, MO 479 Cape Girardeau, MO 478 Total In-migration 57,002 from st. louis, mo Chicago, IL 2,055 Kansas City, MO 1,539 Columbia, MO 900 Atlanta, GA 837 Dallas, TX 836 Phoenix, AZ 791 Houston, TX 756 Springfield, IL 652 Washington, DC 625 Los Angeles, CA 600 Total Out-migration 58,774 net migration -1,772 gvsl State & Local Government 143.5 6221 General Medical and Surgical Hospitals 68.3 7221 Full-Service Restaurants 48.4 7222 Limited-Service Eating Places 43.5 5511 Management of Companies and Enterprises 38.6 gvf Federal Government 27.9 5613 Employment Services 22.0 4451 Grocery Stores 21.1 6113 Colleges, Universities & Professional Schools 20.7 6211 Offices of Physicians 20.6 4521 Department Stores 20.6 6231 Nursing Care Facilities 20.2 5617 Services to Buildings and Dwellings 19.7 5221 Depository Credit Intermediation 19.2 2382 Building Equipment Contractors 17.5 High-tech employment 59.0 As % of total employment 4.5 2007 2008 2009 2010 Domestic -7,657 -7,454 -7,202 -8,175 Foreign 3,034 3,168 2,441 2,119 Total -4,624 -4,286 -4,760 -6,056 Federal 27,900 State 20,530 Local 122,970 stl mo u.s. 0.1% 0.2% 0.5% 4.6% 4.0% 4.3% 8.2% 9.2% 8.9% 60.4% 57.5% 61.3% 39.6% 42.5% 38.7% 3.6% 3.6% 3.6% 4.6% 4.4% 4.2% 10.7% 11.3% 11.1% 2.3% 2.2% 2.1% 6.1% 6.2% 5.9% 14.3% 12.0% 12.8% 17.3% 15.3% 15.1% 10.7% 10.2% 10.0% 4.3% 4.4% 4.1% 13.3% 17.0% 17.3% stl mo u.s. nd $43,885 $91,842 nd $44,918 $50,268 $83,607 $65,168 $72,640 nd $67,305 $73,745 nd $62,254 $70,876 nd $56,310 $60,284 $79,112 $68,609 $72,785 $28,878 $27,482 $29,664 $84,370 $78,957 $89,270 $35,810 $34,339 $44,809 $65,238 $57,506 $59,659 $49,707 $46,888 $49,003 $22,886 $21,063 $22,683 $32,907 $31,477 $32,385 $60,932 $55,905 $65,178 BJC Healthcare 23,380 Boeing Integrated Defense Systems 16,400 Scott Air Force Base 14,150 Schnuck Markets, Inc. 12,393 Wal-Mart Stores, Inc. 12,137 SSM Health Care System 10,700 Washington University in St. Louis 10,300 St. John’s Mercy Health Care 10,100 McDonald’s Corporation 9,000 AT&T 8,800 St. Louis University 7,800 Edward Jones 5,918 Wells Fargo 4,840 Tenet Healthsystem Medical, Inc. 4,800 Ameren Corporation 4,741 Dierbergs Markets 4,500 CitiMortgage, Inc. 4,500 Enterprise Rent-A-Car 4,149 Home Depot USA, Inc. 4,007 Bank of America 4,000 Source: St. Louis Regional Chamber & Growth Association, September 2009 STL U.S. 80 100 120 140 160 180 200 96 99 02 05 08 11 0.00 0.20 0.40 0.60 0.80 1.00 0.87 -7,000 -6,000 -5,000 -4,000 -3,000 -2,000 -1,000 0 07 08 09 10 net migration, stl stl mo u.s. 40,728 36,181 39,635 Surrebuttal Schedule MPG-5 Page 2 of 4 92 MOODY’S ANALYTICS / Précis U.S. Metro / Midwest / June 2011 st. louis 55 retail job growth may Be unsustainable -9 -6 -3 0 3 09 10 11 Sales tax receipts Retail employment Sources: Missouri Department of Revenue, BLS % change yr ago 66 0 4 8 12 16 20 24 28 Missouri St. Louis Kansas U.S. Midwest Kansas City Illinois Preforeclosure Auction REO faster processing helps avert reo glut Sources: RealtyTrac, Moody’s Analytics Foreclosure inventory per 1,000 households, by stage 44 30 35 40 45 50 55 60 09 10 11 U.S. >50 indicates expansion Missouri inventory Buildup still lifting manufacturing Sources: Creighton University, ISM Purchasing managers’ index, inventories, 3-mo MA 33 -25 -20 -15 -10 -5 0 5 10 15 09 10 11 Temporary workers Manufacturing temp hiring preceded manufacturing expansion Source: BLS Payroll employment, % change yr ago Retailers in STL have begun to step up hiring, but recent weak sales tax collections signal a slowdown in consumer spending and cast doubt on the sustainability of retail’s expansion. First quarter sales tax receipts in the Missouri side of the metro area fell com- pared with year-ago levels, which were already depressed. Growth in casino revenues, another indicator of consumer spending, has also slowed since last year. Recent expansion in the consumer- driven retail and leisure/hospitality industries risks being undone if spending does not accelerate in the next few quarters. Despite a severe recession marked by massive manufacturing job losses and the highest unemployment rate in the Plains region, STL has avoided the heavy foreclosure accumulation burdening many nearby metro areas. In addition, Missouri’s relatively speedy, nonjudicial foreclosure processing shortens the time required to purge excess supply, helping the housing market return to normal faster. According to RealtyTrac, the state’s 60-day average process- ing time is well below that of neighboring Illinois or Kansas, both judicial states. 22 1,440 1,445 1,450 1,455 1,460 1,465 8.0 8.5 9.0 9.5 10.0 10.5 09 10 11 jobless rate falling even as labor force grows Source: BLS Labor force, ths (R) Unemployment rate, % (L) 3-mo MA 11 -2 -1 0 1 2 3 4 5 6 10 11 St. Louis Missouri Midwest U.S. st. louis’ job growth takes the lead Source: BLS Payroll employment, % change annualized, over 3 mo Surrebuttal Schedule MPG-5 Page 3 of 4 102 MOODY’S ANALYTICS / Précis U.S. Metro / Midwest / June 2011 © 2011, Moody’s Analytics, Inc. and/or its licensors and affi liates (together, “Moody’s”). All rights reserved. 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Surrebuttal Schedule MPG-5 Page 4 of 4 Metropolitan St. Louis Sewer District Bad Debt Year Utility Bad Debt Expense Tariffed Revs Factor Source 2006 Ameren Missouri - E 12,132,487$ 2,112,044,372$ 0.5744% FERC Form 1 2007 Ameren Missouri - E 12,891,000$ 2,221,910,223$ 0.5802% FERC Form 1 2008 Ameren Missouri - E 11,942,000$ 2,171,887,882$ 0.5498% FERC Form 1 2009 Ameren Missouri - E 7,707,000$ 2,191,456,766$ 0.3517% FERC Form 1 2010 Ameren Missouri - E 12,242,000$ 2,610,547,084$ 0.4689% FERC Form 1 Average 0.5033% Year Utility Bad Debt Expense Sales Revenue Ratio Source 2006 Laclede Gas - G 7,525,000$ 979,165,061$ 0.7685% MO PSC Annual Report 2007 Laclede Gas - G 7,908,929$ 951,398,185$ 0.8313% MO PSC Annual Report 2008 Laclede Gas - G 13,928,734$ 969,262,167$ 1.4370% MO PSC Annual Report 2009 Laclede Gas - G 12,922,387$ 945,746,343$ 1.3664% MO PSC Annual Report 2010 Laclede Gas - G 9,524,873$ 802,549,436$ 1.1868% MO PSC Annual Report Average 1.1146% Year Utility Bad Debt Expense Sales Revenue Ratio Source 2006 Missouri-American - W 2,345,816$ 167,985,557$ 1.3964% MO PSC Annual Report 2007 Missouri-American - W 1,279,669$ 175,876,771$ 0.7276% MO PSC Annual Report 2008 Missouri-American - W 1,600,941$ 178,457,825$ 0.8971% MO PSC Annual Report 2009 Missouri-American - W 2,179,229$ 176,977,686$ 1.2314% MO PSC Annual Report 2010 Missouri-American - W 2,287,936$ 194,883,646$ 1.1740% MO PSC Annual Report Average 1.0841% Year Utility Bad Debt Expense Sales Revenue Ratio Source 2006 MSD - WW 3,160,972$ 197,604,224$ 1.5996% MSD Table 2-3 2007 MSD - WW 4,193,703$ 193,056,700$ 2.1723% MSD Table 2-3 2008 MSD - WW 5,161,982$ 203,634,800$ 2.5349% MSD Table 2-3 2009 MSD - WW 9,678,495$ 208,074,800$ 4.6514% MSD Table 2-3 2010 MSD - WW 10,187,508$ 205,747,784$ 4.9515% MSD Table 2-3 2011 MSD - WW 10,910,900$ 213,795,600$ 5.1034% MSD Table 2-3 2012 MSD - WW 6,820,800$ 219,675,000$ 3.1050% MSD Table 2-3 2013 MSD - WW 8,998,500$ 237,367,500$ 3.7910% MSD Table 2-3 2014 MSD - WW 10,055,400$ 260,829,000$ 3.8552% MSD Table 2-3 2015 MSD - WW 11,262,000$ 286,911,800$ 3.9252% MSD Table 2-3 2016 MSD - WW 12,613,400$ 315,603,000$ 3.9966% MSD Table 2-3 Average 3.6598% 2006-2010 Actual 3.1819% 2011-2016 Projected 3.9627% Bad Debt Ratios of Regional Utilities Surrebuttal Schedule MPG-6 2013-2016 2011-2016LineDescription2011201220132014201520164-Year Total6-Year Total$$$$$$$$1 Revenue Under Existing Rates213,795,600 213,795,600 213,795,600 213,795,600 213,795,600 213,795,600 855,182,400 1,282,773,600 Fiscal Revenue Months YearIncreaseEffective2 20124.3%12 8,427,100 9,193,200 9,193,200 9,193,200 9,193,200 36,772,800 45,199,900 3 20136.0%12 12,264,400 13,379,300 13,379,300 13,379,300 52,402,300 52,402,300 4 20149.0%1219,500,400 21,273,100 21,273,100 62,046,600 62,046,600 5 20159.0%1221,255,400 23,187,700 44,443,100 44,443,100 6 20169.0%1223,168,400 23,168,400 23,168,400 7 Total Additional Revenue- 8,427,100 21,457,600 42,072,900 65,101,000 90,201,700 218,833,200 227,260,300 8 Total Service Charge Revenue213,795,600 222,222,700 235,253,200 255,868,500 278,896,600 303,997,300 1,074,015,600 1,510,033,900 9 Other Operating Revenue(750,500) 3,132,200 2,784,000 2,209,200 1,563,200 855,700 7,412,100 9,793,800 10 Connection Fee Revenue1,250,000 1,288,000 1,327,000 1,367,000 1,408,000 1,450,000 5,552,000 8,090,000 11 Interest Income - Reserve Funds888,800 964,300 1,196,600 1,486,600 1,753,500 1,969,100 6,405,800 8,258,900 12 Interest Income - Operations30,800 47,300 50,100 50,500 50,500 50,200 201,300 279,400 13 Interest Income - Arnold650,700 631,000 610,500 589,100 566,800 543,600 2,310,000 3,591,700 14 Subtotal Other Revenue2,069,800 6,062,800 5,968,200 5,702,400 5,342,000 4,868,600 21,881,200 30,013,800 15 Total Revenues215,865,400 228,285,500 241,221,400 261,570,900 284,238,600 308,865,900 1,095,896,800 1,540,047,700 16 Operation & Maint. Expense134,394,800 137,573,600 141,973,900 146,453,500 151,081,200 155,857,000 595,365,600 867,334,000 17Addt'l O&M- - 112,400 2,159,800 2,228,900 2,300,200 6,801,300 6,801,300 18 Net Revenue81,470,600 90,711,900 99,135,100 112,957,600 130,928,500 150,708,700 493,729,900 665,912,400 Debt Service19 Existing Senior Revenue Bonds19,290,600 19,415,200 19,550,800 19,686,000 19,834,400 19,973,200 79,044,400 117,750,200 20 Proposed Senior Revenue Bonds- 3,082,800 16,416,800 25,306,100 34,788,000 41,010,500 117,521,400 120,604,200 21 Total Senior Revenue Bonds19,290,600 22,498,000 35,967,600 44,992,100 54,622,400 60,983,700 196,565,800 238,354,400 22 Existing State Revolving Fund Loans19,113,700 21,311,100 21,401,300 21,483,500 21,355,600 21,728,600 85,969,000 126,393,800 23 Proposed State Revolving Fund Loans- 1,711,000 4,062,800 6,307,900 8,553,000 10,797,800 29,721,500 31,432,500 24 Total State Revolving Fund Loans19,113,700 23,022,100 25,464,100 27,791,400 29,908,600 32,526,400 115,690,500 157,826,300 25 Commercial Paper- - - - - - - - 26 Total Debt Service38,404,300 45,520,100 61,431,700 72,783,500 84,531,000 93,510,100 312,256,300 396,180,700 27 Routine Annual Improvements2,378,600 2,461,900 2,535,700 2,611,800 2,690,100 2,770,900 10,608,500 15,449,000 28 Cash Financing of Major Improvements37,250,000 38,438,000 31,677,000 33,267,000 43,563,200 61,492,300 169,999,500 245,687,500 29 Additions to Operating Reserves674,500 738,500 1,126,200 1,418,000 1,673,900 974,600 5,192,700 6,605,700 30 Net Annual Balance2,763,200 3,553,400 2,364,500 2,877,300 (1,529,700) (8,039,200) (4,327,100) 1,989,500 31 Beginning of Year Balance1,696,900 4,460,100 8,013,500 10,378,000 13,255,300 11,725,600 8,013,500 1,696,900 32 End of Year Balance4,460,100 8,013,500 10,378,000 13,255,300 11,725,600 3,686,400 3,686,400 3,686,400 Actual Debt Services33 Senior Bonds19,290,600 20,894,300 29,232,800 40,479,850 49,807,250 57,803,050 177,322,950 217,507,850 34 SRF Loans 19,113,700 21,067,900 24,243,100 26,627,750 28,850,000 31,217,500 110,938,350 151,119,950 Debt Service Coverage35 Revenue Bonds4.22x4.34x3.39x2.79x2.63x2.61x2.78x3.06x36 Total Debt2.12x2.16x1.85x1.68x1.66x1.69x1.71x1.81xMetropolitan St. Louis Sewer District Adjusted Wastewater Rate ProposalFiscal Year Ending June 30, Additional Revenue Required:Surrebuttal Schedule MPG-7