20011010Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
DON HOWELL
JOHN HAMMOND
RANDY LOBB
JOE CUSICK
BEVERLY BARKER
RON LAW
GENE FADNESS
WORKING FILE
FROM:ALDEN HOLM
TERRI CARLOCK
DATE:OCTOBER 10,2001
SUBJECT:DIRECT COMMUNICATIONS ROCKLAND'S APPLICATION TOBORROW$3,316,000 DEBT;CASE NO.DCM-T-01-1
RECOMMEND:APPROVAL WITH CONDITIONS
Direct Communications Rockland,Inc.(Rockland;Company)requests authority to
borrow $3,316,000in Rura1 Utilities Service (RUS)loans.The funds will be drawn at various
times as advances when expenditures are made over the next five years.The loans will be for a
period of time equal to the depreciation schedules set by RUS.The interest rate is currently5%
for hardship loans or the current market rate if lower.
The proposed loan proceeds will be used for and will partially reimburse general funds
for (1)extension of service to new customers,(2)addition of new dense wave division multiplex
electronic equipment for Rockland's existing fiber optic facilities,(3)installation of new central
office equipment,and (4)related purposes.The expenditures per exchange and general areas
total $678,000 in Rockland,$50,000 in Arbon,$1,493,000 in Paris,$345,000 in Mink Creek and
Pocatello,$195,000 in Soda Springs,$235,000 for engineering,$80,000 for utility trucks,and
$240,000 for reimbursement of general funds.It is projected that of these amounts,$2,281,000
is associated with regulated activities and $1,035,000 is associated with deregulatedactivities.
Staff will monitor the switch credit,direct assignments,allocation and separation factors for
DECISION MEMORANDUM 1 OCTOBER 10,2001
ratemaking purposes.Staff recognizes benefits associated with these projects but has some
concern with the timing,cash flow and feasibility analysis for some of the projects.
Since the Company onlyrecentlysubmitted this Application to RUS,it is not known
what,if any,additional filing requirements or distribution requirements may be imposed by
RUS.In the past,RUS has restricted the use of loan funds for various reasons.In addition,RUS
has required Rockland to meet certain financial standards.For example,they have required
Rockland to maintain a Times Earned Interest Ratio (TIER)of at least 1.0 through December
2002 and a TIER of 1.9 after that date.'According to the Company,the TIER for 1999 was 1.3
and the TIER for 2000 was only .85.When Staff asked the Company what ramifications the low
TIER had,the Company stated that during initial discussions with RUS,they indicated that there
would be no penalties,but that RUS might request the Company refinance some outstanding
debt to bring down the annual interest payments.It is possible that Rural Utilities Service may
grant only a portion of the requested funds.Staff is concerned that the Company may be
borrowing more than it is able to repay as required and recommends that the Company evaluate
the possibility of refinancing some of its debt.A copy of this evaluation should be provided to
Staff.Future TIER calculations should also be filed with Staff.
STAFF RECOMMENDATION
Staff recommends approval of this loan request conditioned on the same restrictions and
filing requirements when approved by RUS.Rockland should be required to file with the
Commission Staff copies of the final loan documents and all required filings with the RUS as
they are completed.Annual statements reflectingtotal balances outstanding and mortgage
compliance calculations should also be filed with the Commission Staff.
COMMISSION DECISION
Should the request be approved with the above conditions?
Should copies of all documents filed with RUS be filed with the Commission Staff9
Alden Holm
AH:udmemos/demt01.ldecision memo
'The Times Interest Earned Ratio (TIER)is computed by dividing the income before interest charges and taxes bytheinterestcharges.This ratio stresses the importance of a company being able to cover all its interest payments.DECISION MEMORANDUM 2 OCTOBER 10,2001