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MSD Exhibit No. MSD 3I
2023 Wastewater Rate Change Proceeding
BETHANY PUGH
Direct Testimony
Metropolitan St. Louis Sewer District
March 24, 2023
Table of Contents
Page
Witness Background and Experience ........................................................................................... 1
Wastewater Financial Plan Assumptions ...................................................................................... 4
Direct Testimony of Bethany Pugh, PFM March 24, 2023
2023 Wastewater Rate Proceeding 1 MSD Exhibit No. MSD 3I
Witness Background and Experience 1
Q1. Please state your name, business address, email address, and telephone number. 2
A. Bethany Pugh, 7251 Engle Road, Suite 115, Cleveland, Ohio, 44130, (440) 863-5820, 3
pughb@pfm.com 4
Q2. By whom are you employed and in what capacity? 5
A. I am a Managing Director at PFM Financial Advisors LLC (“PFM”). PFM’s Managing 6
Directors own the firm and set the firm’s strategic direction. My primary responsibilities 7
include leading PFM’s Ohio regional practice and serving as a senior financial advisor and 8
engagement manager for PFM’s clients across the Midwest. 9
Q3. Please describe your firm’s experience in public finance. 10
A. PFM is the nation’s leading municipal financial advisor. As of September 1, 2022, PFM 11
and its affiliated businesses have over 350 employees and thirty-one locations nationwide. 12
In 2022, and for the 25th consecutive year, PFM was ranked by Ipreo as the #1 financial 13
advisor in the nation, based on par volume of transactions. In 2022, PFM advised on 652 14
transactions totaling over $59.8 billion in par amount. Based on par value, PFM was also 15
ranked as the leading advisor for transactions in the Midwest, and nationally with respect 16
to transactions with revenue-based credits, and transactions placed on a negotiated basis. 17
PFM was also ranked as the leading advisor with respect to Water, Sewer and Gas related 18
issuances, based on par value. In addition to the Metropolitan St. Louis Sewer District 19
(MSD or the District), PFM’s utility clients include The Metropolitan Sewer District of 20
Greater Cincinnati, District of Columbia Water and Sewer Authority, Orlando Utilities 21
Commission, Great Lakes Water Authority, Des Moines Metropolitan Wastewater 22
Reclamation Authority, and Hampton Roads Sanitation District, among numerous others 23
Direct Testimony of Bethany Pugh, PFM March 24, 2023
2023 Wastewater Rate Proceeding 2 MSD Exhibit No. MSD 3I
(a full listing is available upon request). As a financial advisor to our clients, PFM assists 1
in the financial planning, debt transaction management and execution, and on-going debt 2
monitoring and management for our clients across the nation. 3
Q4. Please describe your educational background, work experience and your personal 4
experience advising issuers of municipal bonds. 5
A. I graduated from Harvard College in 1998 with a Bachelor of Arts degree in Economics. I 6
have worked for PFM for almost 25 years. In that time, I have worked with a variety of 7
state-level, municipal and not-for-profit entities, managing publicly offered and privately 8
placed debt transactions backed by various revenue streams including utility revenue, sales 9
tax, non-tax revenues and other sources in addition to general obligation credits. These 10
transactions have included fixed and variable interest rate; and short and long-term 11
obligations. Since 2020, I have advised on a total of 59 series of bonds with a principal 12
value of over $9.3 billion. In addition, I have developed several financial plans evaluating 13
the economic, policy and risk implications of myriad financial alternatives. These plans 14
have served as the foundation for funding various projects, including public utility facilities 15
and infrastructure, professional and collegiate sports stadiums, museums, parking facilities, 16
highways and other public infrastructure. I currently serve as the lead financial advisor for 17
PFM clients including the Metropolitan St. Louis Sewer District, Hamilton County (OH) 18
with respect to the Metropolitan Sewer District of Greater Cincinnati, State of Ohio 19
Treasurer of State, Ohio Turnpike and Infrastructure Commission and the City of 20
Columbus, among others. 21
Q5. How long has your firm been engaged with the Metropolitan St. Louis Sewer District 22
and what is your role as Financial Advisor? 23
Direct Testimony of Bethany Pugh, PFM March 24, 2023
2023 Wastewater Rate Proceeding 3 MSD Exhibit No. MSD 3I
A. PFM (and/or our predecessor affiliate Public Financial Management Inc.) has served as 1
financial advisor to MSD since 2000. During this time PFM has worked with the District 2
to develop the master indenture that defines the security provisions and flow of funds for 3
payment of MSD’s senior and subordinate lien (state revolving fund program) revenue 4
bonds. PFM developed the initial credit rating strategy and presentation materials for 5
introduction of the MSD’s new revenue credit in 2004. PFM also worked with District staff 6
to develop a comprehensive debt management policy that was adopted by the District’s 7
Trustees in 2004. Subsequently, PFM has been involved advising on the financial planning, 8
credit discussions, ratings presentations and pricing of all MSD senior lien Wastewater 9
System Revenue Bonds, whether publicly offered or privately placed, including accessing 10
federal financing through the Water Infrastructure Finance and Innovation Act (“WIFIA”), 11
as well as the structuring and sale of subordinate revenue bonds through the Missouri 12
EIERA sewer revolving loan fund program. On an on-going basis, PFM keeps MSD 13
informed as to current trends in the public finance marketplace, reviews investment 14
banking proposals, and develops responses to periodic inquiries from the rating agencies. 15
I began working with the District in May 2012 and have advised on every aspect of thirteen 16
District senior lien revenue bond transactions, including the structuring of debt, 17
presentations to the rating agencies and price negotiations with the District’s underwriting 18
syndicates, as applicable. In consideration of operational and capital funding needs, as well 19
as credit rating metrics associated with maintaining credit ratings in the high AA-category 20
(noting the District currently has AAA and AA level ratings), PFM has affirmed the 21
appropriateness of the amount of proposed senior lien debt issuances and allocations of 22
debt to pay-as-you-go (PAYGO) capital funding for MSD’s projects through FY2024. 23
Direct Testimony of Bethany Pugh, PFM March 24, 2023
2023 Wastewater Rate Proceeding 4 MSD Exhibit No. MSD 3I
Wastewater Financial Plan Assumptions 1
Q6. How was the amount of CIRP to be financed as opposed to cash funded determined? 2
A. The District and PFM developed a financial planning model to assess the District's ability 3
to fund the Wastewater CIRP in consideration of operational obligations as well as 4
necessary parameters relative to its financial covenants with existing and future bond 5
holders. The model also assumed the District managed its financial obligations to maintain 6
high AA-category credit ratings. Maintenance of credit ratings involves debt service 7
coverage and liquidity metric targets as more fully detailed in response to subsequent 8
questions below. Given all of these requirements and target metrics as parameters, and 9
consistent with our understanding of the District’s desired debt to equity levels, the CIRP 10
funding debt to equity mix for 2025 to 2028 is approximately 60%/40%. This compares 11
to an historical debt to equity ratio approximating 70%/30% from FY04-FY22. This ratio 12
includes both revenue bonds and any state revolving fund ("SRF") obligations of the 13
District. 14
Q7. How much is being assumed to be borrowed from the SRF? 15
A. From FY2025 to FY2028, assumed SRF borrowings equal $43 million in FY25 and $30 16
million per year thereafter. 17
Q8. What interest rates were assumed? 18
A. PFM assumed interest rates and yields for future District borrowings based on current 19
market rates commensurate with an AA-rated utility revenue credit. To mitigate interest 20
rate risk associated with future issuances, PFM added additional spreads to the yields 21
assumed ranging from approximately 0.50% for the FY2025 issuance to 0.75% for the 22
projected bond issuances in FY2026 and FY2027. 23
Direct Testimony of Bethany Pugh, PFM March 24, 2023
2023 Wastewater Rate Proceeding 5 MSD Exhibit No. MSD 3I
Q9. What is the debt service coverage target for senior bonds? 1
A. Based on the District’s historical performance and expected required coverage to maintain 2
ratings in the AA-category, senior lien bonds have a projected minimum coverage target 3
of 2.5X while the minimum total coverage (including senior lien bonds and subordinate 4
SRF obligations) is targeted at 1.8X. 5
Q10. How were the debt service coverage targets developed? 6
A. Projected minimum coverage targets of 2.5X (senior lien bonds) and 1.8X (inclusive of 7
subordinate obligations) have been identified as the optimal coverage levels needed to 8
maintain high AA-level bond ratings, thereby ensuring cost effective market access for the 9
District’s large capital program. Major credit rating agencies that assign ratings to 10
government issuers have communicated expectations related specifically to MSD’s future 11
financial performance regarding debt service coverage. 12
Moody’s Investors Service has stated that “narrowed liquidity or debt service coverage” 13
are factors that could lead to a downgrade. Source: Moody’s Investors Service Credit 14
Opinion, “Metropolitan St. Louis Sewer District, MO: Update to credit analysis,” dated 15
May 18, 2022 (Exhibit MSD 52). 16
From Standard & Poor’s, “Additionally, our expectation is that management will diligently 17
monitor rates on an annual basis to ensure coverage levels do not fall below targeted levels, 18
but should the need arise for additional debt (potentially due to inflationary pressures or 19
supply-chain issues), which in turn lowers coverage levels significantly over a sustained 20
period, the rate could be lowered.” Source: S&P Global Ratings Credit Profile Report, 21
“Metropolitan St. Louis Sewer District, Missouri; Combined Utility; Water/Sewer; 22
US$113.095 mil wastewtr sys imp and rfdg rev bnds ser 2022B due 05/01/2052” dated 23
Direct Testimony of Bethany Pugh, PFM March 24, 2023
2023 Wastewater Rate Proceeding 6 MSD Exhibit No. MSD 3I
May 16, 2022 (Exhibit MSD 51). 1
Q11. Besides debt service coverage what other credit rating metrics impacted the proposed 2
debt financing amount? 3
A. Days cash on hand is a liquidity metric that measures an entity's ability to meet short-term 4
needs and contingencies. Days cash on hand (DCOH) is calculated by dividing cash and 5
relatively liquid investments by operating expenses (less depreciation) and then dividing 6
by 365 days. The District calculates days cash on hand both with the inclusion and 7
exclusion of its “long-term unrestricted” investments. As noted above, the credit rating 8
agencies consider liquidity levels as a key component of MSD’s credit profile. During the 9
proposed rate period FY25 to FY28, the District intends to proactively manage DCOH 10
exclusive of long-term unrestricted investment to a minimum of 550 days. PFM believes 11
this is prudent. 12
Q12. Are there any examples of comparable metropolitan sewer utilities experiencing 13
deterioration in bond ratings due to increasing CIRP regulatory requirements? 14
As evidenced by historical data provided by Moody’s Investor Service (Quarterly and 15
Annual Municipal Rating Revisions Q4 2022), trends with respect to sewer revenue or 16
water and sewer revenue credits over the last several years have been favorable. From 2019 17
through 2022, upgraded credit ratings in the sector exceeded downgrades by a ratio of over 18
4.3 to 1. 19
Q13. Does this conclude your testimony? 20
A. Yes, it does. 21