Loading...
HomeMy Public PortalAboutExhibit MSD 3E - Direct Testimony, Tim Snoke, MSDMSD Exhibit No. MSD 3E 2015 Rate Change Proceeding TIM R. SNOKE Direct Testimony Metropolitan St. Louis Sewer District February 26, 2015 Table of Contents Page Witness Background and Experience ........................................................................................... 1 Wastewater Debt Financing .......................................................................................................... 1 State Revolving Fund (SRF) Financing ........................................................................................ 8 Wastewater Additional Funding Sources .................................................................................... 10 Stormwater Impact on Debt ........................................................................................................ 11 Direct Testimony of Tim R. Snoke, MSD February 26, 2015 Witness Background and Experience 1 Q1. Please state your name, business address, email address, and telephone number. 2 A. Tim Snoke, 2350 Market Street, St. Louis, MO 63103; tsnoke@stlmsd.com; 314-768-3 6222. 4 Q2. What is your occupation? 5 A. I am the Secretary - Treasurer for the Metropolitan St. Louis Sewer District (District). 6 Q3. How long have you been associated with the District? 7 I have held that position since I started with the District in May, 2014. 8 Q4. What is your professional experience? 9 A. I started my professional career in 1992 with Ralston Purina Company. In 1994, I joined 10 Ralcorp Holdings, Inc. (a Purina spinoff) and started my career in Treasury there in 1997. 11 Since then, I have held various managerial positions of increasing responsibility over 12 areas including treasury operations, corporate finance, and financial planning and 13 analysis. 14 Q5. What is your educational background? 15 A. I hold a B.S. degree in Business Administration from Valparaiso University (1992) and a 16 Master in Business Administration degree from St. Louis University (1997). 17 18 Wastewater Debt Financing 19 Q6. How does the District expect to finance its major capital improvement for this rate 20 cycle? 21 A. For the term of the remaining rate cycle, the District expects to finance its wastewater 22 capital improvement plan with cash on hand, approximately $230 million of debt 23 financing still available under its current $945 million bond authorization, and user 24 2015 Rate Change Proceeding MSD Exhibit No. MSD 3E 1 Direct Testimony of Tim R. Snoke, MSD February 26, 2015 charges based on the rate increases approved by the District Board in December, 2011. 1 Q7. How does the District expect to finance its future major capital improvement needs? 2 A. As presented in the Rate Change Proposal, the District assumes the use of $288 million 3 additional debt financing remaining under its current $945 million authorization, up to 4 $800 million of additional debt under a new $900 million authorization, and $360 million 5 of cash, or PAYGO, funding to fund the CIRP through FY20. The District expects to 6 continue using debt as the major component of CIRP funding until such time it no longer 7 becomes financially prudent. 8 Q8. How much of the District’s current total bond authorization of $945 million remains 9 available to finance capital improvements through FY20? 10 A. There is currently $518 million remaining under the $945 million authorization to finance 11 capital improvements in FY15, FY16, and into the new rate cycle. Additional bond 12 authorization will be required by voters to fund the CIRP as proposed. 13 Q9. Why will there be additional debt authorization remaining after the end of this 14 current rate cycle (FY13-16)? 15 A. The $945 million authorization requested from the voters was an estimate based on 16 expected CIRP spending and certain assumptions such as inflation rates and bond interest 17 rates. The authorization also included a reasonable contingency. Low inflation helped 18 keep constructions costs lower than anticipated and the low interest rate environment 19 created an opportunity to issue some of the District’s bonds at a premium, resulting in 20 less debt funding over the FY13-16 period than originally anticipated. 21 It is important to note that debt service costs are calculated from the face, or par, amount 22 of debt issued and not on the amount of debt that is authorized. The fact that the District 23 will go into the next rate cycle period with some unused debt authorization remaining 24 2015 Rate Change Proceeding MSD Exhibit No. MSD 3E 2 Direct Testimony of Tim R. Snoke, MSD February 26, 2015 means that the District only issued debt as needed to fund the CIRP and did not add to 1 debt service costs unnecessarily. This created more rate setting flexibility heading into 2 the FY17-20 rate cycle. 3 Q10. How did the 2000 charter changes give the District the authority to issue district-4 wide wastewater revenue bonds? 5 The November 2000 Charter ballot initiative, which passed with nearly 70% of the vote, 6 modernized the Charter and allowed for revenue bonds to be passed with a simple 7 majority vote and allowed for the use of District-wide revenues to be pledged for the 8 construction of facilities in any drainage area of the District. 9 Q11. What forms of debt and their relative amounts will be used to fund the proposed 10 wastewater capital improvement program? 11 A. The proposed CIRP is anticipated to be funded with a combination of approximately 70% 12 debt and 30% PAYGO. Debt financing is expected to be made up of approximately 90% 13 percent senior lien bonds and 10% State Revolving Fund (SRF) loans. We are currently 14 anticipating the issuance of fixed rate tax-exempt bonds. In the event Congress approves 15 new authorization for Build America Bonds or other tax subsidy or credit bonds we 16 would also analyze the financial benefits of these financing tools. 17 Q12. Is municipal debt financing of major capital improvements a practical way of 18 obtaining funds? 19 A. Yes, historically the use of bonds to finance municipal capital improvements has been an 20 equitable, cost justified, and widely-used method of funding available to governments 21 worldwide. Utilizing a combination of bonding and PAYGO provides several benefits 22 versus a PAYGO only approach. A combined approach allows projects to be built and 23 put into service more quickly and/or with less significant rate impact. Users of the 24 2015 Rate Change Proceeding MSD Exhibit No. MSD 3E 3 Direct Testimony of Tim R. Snoke, MSD February 26, 2015 project receive the public benefit sooner and the actual users of the project pay for its use. 1 In a PAYGO only approach, current and prior constituents pay for the entire project but 2 future constituents receive the benefit. A combined approach is also considered to be the 3 prudent financial practice by rating agencies and within the business and finance 4 communities. 5 Q13. If the District were to seek additional bond authorization, what in your opinion is 6 the amount of total authorization required? 7 A. To fully fund the CIRP projects planned through FY20, we would need additional bond 8 authorization of approximately $900 million. 9 Q14. What would be the approximate debt service coverage ratios attributable to this 10 additional debt authorization? 11 A. Senior debt service coverage is expected to range from 2.8x to 2.5x from FY17 through 12 FY20. Total debt coverage is expected to be in the 1.8x to 1.9x range (Table 4.10). 13 Q15. How is the Rate Proposal structured to attempt to maintain the District’s current 14 bond rating? 15 A. The District worked with its financial advisor, PFM, to develop a financing plan for the 16 Rate Change Proposal that, combined with proposed revenues and operating expenses, is 17 consistent with maintaining AA bond ratings based on comments from the District’s 18 rating agencies. Fitch, Moody’s, and S&P have all noted that the District’s current credit 19 rating could be compromised if projected senior debt coverage fell below the 2.4x – 2.9x 20 range and projected total debt coverage fell below the 1.6x to 1.8x range Exhibits MSD 21 48, MSD 49, MSD 50). In addition, the District is seeking to maintain a strong liquidity 22 position over the rate proposal period as it has also been noted that a reduction in cash 23 balances below historical norms could also pressure ratings. 24 2015 Rate Change Proceeding MSD Exhibit No. MSD 3E 4 Direct Testimony of Tim R. Snoke, MSD February 26, 2015 Q16. Explain the potential impact of the proposed use of debt on the District’s current 1 bond rating. 2 A. Based on the most recent comments we have from the ratings agencies, we believe that 3 the combination of the proposed rate increases and the use of debt as outlined in the Rate 4 Proposal will allow the District to maintain strong credit ratings, commensurate with a 5 AA-rated utility revenue credit. Reductions to proposed revenues and/or increases in 6 operating expenses or future debt service costs could reasonably lead to lower credit 7 ratings and increase future debt service costs. 8 Q17. Are there any examples of comparable metropolitan sewer utilities experiencing 9 deterioration in bond ratings due to increasing CIRP regulatory requirements? 10 A. Yes. Please see the Bethany Pugh’s direct testimony. 11 Q18. Why is the District currently seeking additional debt authorization from the voters 12 to support the WW CIRP in its Rate Proposal? 13 A. The District’s CIRP includes substantial capital improvements over the near term. 14 Utilization of debt financing allows the District to fund these large near term capital 15 improvements while moderating the rate increases imposed on customers. In contrast, 16 use of PAYGO financing would require significantly higher rate increases through FY20. 17 Q19. Is this proposed Rate Change contingent upon voter approval of additional 18 wastewater bond issues? 19 A. The Rate Change Proposal assumes voter approval of additional wastewater bond issues. 20 If voters do not authorize additional bond issues, rates will increase more quickly as the 21 District will be forced to fund the CIRP through PAYGO. The PAYGO scenario is also 22 detailed in the Rate Change Proposal (Section 4.11).. 23 Q20. When will the voters have an opportunity to consider additional debt authority for 24 2015 Rate Change Proceeding MSD Exhibit No. MSD 3E 5 Direct Testimony of Tim R. Snoke, MSD February 26, 2015 the District? 1 A. The Rate Proposal assumes that the District will ask the voters for additional debt 2 authority in calendar year 2016. 3 Q21. How long would it take to obtain additional debt authority assuming the voters 4 would approve the required ballot initiative? 5 A. Passage of a revenue bond initiative will require a simple majority of the voters of the 6 District. The available election dates are in the following months: February, April, 7 August, and November. The District must file 10 weeks in advance of an election, and 8 internal legislative time will require an additional four to six weeks. Therefore the 9 minimum amount of time required between Board of Trustees action on a rate proposal 10 and holding an election is approximately 16 weeks. Once the election is held, another 11 four weeks should be set aside to allow for the Election Commission to certify the results. 12 Once the election passes, bonds can typically be issued within 6-8 weeks. 13 Q22. Has the District obtained voter approval for previous bond authorizations? 14 A. Yes, the District has had three successful bond authorization elections since the 15 beginning of 2004. 16 Q23. What have been the voter approval margins of past bond authorization elections? 17 A. In February, 2004 the District received voter authorization for $500 million of waste 18 water revenue bond debt. This measure passed by about a 2:1 margin. In August, 2008 19 the District received voter authorization for an additional $275 million of revenue bonds 20 by an almost 3:1 majority. In June, 2012 voters approved a $945 million bond 21 authorization by more than a 5:1 majority. 22 Q24. Does the proposed bond election impact the implementation date of proposed 23 wastewater charges? 24 2015 Rate Change Proceeding MSD Exhibit No. MSD 3E 6 Direct Testimony of Tim R. Snoke, MSD February 26, 2015 A. The rate proposal assumes uninterrupted authority to access the capital markets to fund 1 the CIRP. If the District does not have the authorization required to issue bonds, rates 2 will have to increase more quickly in order to fund capital projects required to maintain 3 compliance with the CD. 4 Q25. How are the outstanding revenue bonds being repaid and what is the current ratio 5 of net revenue to annual debt service on these senior lien bonds? 6 A. The outstanding revenue bonds are being repaid according to an amortization schedule 7 established when the bonds were issued from revenue collected from wastewater user 8 charges. FY15 wastewater net revenue is expected to be approximately three times FY15 9 senior debt service costs. 10 Q26. How are the District’s revenue bond requirements being met and what terms were 11 considered in the Rate Change Proposal for potential future senior revenue bond 12 issues? 13 A. The revenue bond covenants allows for the deposit of bond funds or the purchase of 14 surety bond insurance policies to satisfy the bond reserve requirement. The bond reserve 15 is currently met by restricted amounts withheld from the prior bond proceeds. The Rate 16 Change Proposal assumes that future senior lien revenue bonds will be issued with annual 17 coupon rates of between 5.00 and 5.50 percent over a 30 year term. Issuance costs are 18 estimated to be about 1.00% of the total issuance amount. 19 Q27. Are these estimates and costs reasonable in your opinion, based on your experience 20 with similar transactions? 21 A. Yes. 22 Q28. Is the Proposed Rate Change consistent with and not in violation of any covenant or 23 provision relating to any outstanding bonds or indebtedness of the District? 24 2015 Rate Change Proceeding MSD Exhibit No. MSD 3E 7 Direct Testimony of Tim R. Snoke, MSD February 26, 2015 A. Yes, the Rate Change Proposal is consistent with all outstanding bonds and indebtedness 1 and will not cause the District to violate any provisions or covenants related to said bonds 2 or indebtedness. Examples of provisions and covenants are requirements to provide 3 revenue to cover O&M expenses, to provide reasonable Revenue Fund reserves, to 4 produce Net Operating Revenues sufficient to meet minimum Debt Service 5 Requirements, and to make all required payments into Debt Service Reserve Accounts. 6 7 State Revolving Fund Financing 8 Q29. Could the District realistically expect to obtain any additional State Revolving Fund 9 (SRF) loans in the future if it was authorized to debt finance additional 10 improvements? If so, what is the potential magnitude of such loans within the next 11 ten years? 12 A. Yes, the District can realistically expect to receive some SRF financing in the future. 13 MDNR will not guarantee the amount that will be available so it is difficult to determine 14 the extent of subsidized financing that will be received. The Missouri SRF program has a 15 limit to the amount of money it lends each year and municipalities and programs 16 throughout the State are all eligible to receive a portion of the funding that is made 17 available. The Rate Change Proposal assumes a reasonable $25 million per year of SRF 18 funding starting in FY17. 19 Q30. Please explain the benefits of participating in the SRF program and identify any 20 potential disadvantages of program participation. 21 A. The major benefit of participation in the SRF program is the up to 70% subsidy of 22 interest costs. Therefore the true interest cost could be as low as 30% of the going rate 23 for municipalities with a similar credit rating and term structure. The Department of 24 2015 Rate Change Proceeding MSD Exhibit No. MSD 3E 8 Direct Testimony of Tim R. Snoke, MSD February 26, 2015 Natural Resources will add a 1.0% administration fee. Over the life of a 20-year loan, 1 interest savings could amount to approximately the principal value of the loan. 2 Currently, about 30% of the District’s outstanding debt is from the SRF program. 3 Use of or reliance on SRF funding also has some disadvantages. The primary 4 disadvantage is the interjection of the State’s administrative approval requirements to the 5 process. Also, SRF funds are primarily used for sanitary sewer projects, and may not be 6 available for certain combined sewer projects. The available SRF pool cannot possibly 7 meet our entire debt needs. The structure of the SRF loans is also less flexible than that 8 of revenue bonds. Terms do not currently exceed 20 years and typically require early and 9 frequent principal repayments. Without consent of the State, the SRF bonds will not be 10 callable, which means there is no opportunity to refinance the debt for economic benefit 11 when market conditions warrant. Nor is there the chance to economically restructure the 12 debt for any other purposes that might be desirable. 13 Q31. What terms were considered in the Rate Change Proposal for potential future SRF 14 borrowings and, in your opinion, are these terms reasonable? 15 A. Future SRF loans are expected to have 20-year terms and a net effective annual interest 16 cost of about 3% per year. Issuance costs are expected to be 0.65 percent of the total SRF 17 loan amount. These terms are reasonable because they reflect current subsidization by 18 the State. Future subsidized rates could increase due to market conditions and/or 19 decreases in the State subsidy level. 20 Q32. Has the District submitted applications for additional SRF program loans? 21 A. The District is currently working on an application for an additional SRF Loan and has 22 applied to have funds allocated to it in MDNR’s 2016 Intended Use Plan. The District 23 has submitted SRF applications on an annual basis and anticipates continuing this process 24 2015 Rate Change Proceeding MSD Exhibit No. MSD 3E 9 Direct Testimony of Tim R. Snoke, MSD February 26, 2015 indefinitely whenever unused bond authorization is available. 1 Q33. What level of SRF loans do you think could be available to the District on an 2 average annual basis if the District had additional bond authority? 3 A. Due to the uncertainty of future Federal funding associated with the SRF program, the 4 State’s ongoing need to balance its budget, and substantial capital improvement 5 requirements of other Missouri wastewater utilities, an estimate of the potential loans 6 available to the District cannot be reliably determined at this time. The Rate Change 7 Proposal assumes $25 million of SRF loans per year will be available to fund a portion of 8 the proposed CIRP during the next rate cycle. 9 Q34. Are there any legal issues that could prevent or restrain the District from obtaining 10 State Revolving Fund (SRF) loans? 11 A. The District is not currently aware of any legal issues that would prevent it from 12 obtaining SRF loans. 13 Q35. Will any SRF loans continue to be issued on a junior lien basis to the district-wide 14 revenue bonds? 15 A. Yes, we will continue to issue all available SRF loans on a subordinate basis to our 16 existing senior lien revenue bonds. 17 18 Wastewater Additional Funding Sources 19 Q36. Does the City of Arnold, Missouri make annual principal and interest payments to 20 the District to secure a portion of the new Meramec Regional Wastewater 21 Treatment plant financed by the District? 22 A. Yes. Principal and interest payments are currently being received from the City of 23 Arnold, Missouri for a share of the Lower Meramec Regional Wastewater Treatment 24 2015 Rate Change Proceeding MSD Exhibit No. MSD 3E 10 Direct Testimony of Tim R. Snoke, MSD February 26, 2015 Plant capital costs required to meet their capacity needs. The principal portion of these 1 payments is considered a contribution (Exhibit MSD 42). 2 3 Stormwater Impact on Debt 4 Q37. Is the Proposed Stormwater Rate Change consistent with and not in violation of any 5 covenant or provision relating to any outstanding bonds or indebtedness of the 6 District? 7 A. Yes. The District is not proposing the use of bonds or other indebtedness for stormwater 8 projects and the Proposed Stormwater Rate Change will not violate any covenants or 9 provisions of the District’s existing bonds or indebtedness. 10 11 Q38. Does this conclude your testimony? 12 A. Yes. 13 14 2015 Rate Change Proceeding MSD Exhibit No. MSD 3E 11