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DECISION MEMORANDUM TO: COMMISSIONER KJELLANDER COMMISSIONER SMITH COMMISSIONER HANSEN JEAN JEWELL RANDY LOBB JOE CUSICK LISA NORDSTROM DON HOWELL BEVERLY BARKER RON LAW TONYA CLARK GENE FADNESS WORKING FILE FROM: TERRI CARLOCK DATE: MAY 6, 2002 SUBJECT: SILVER STAR TELEPHONE COMPANY'S APPLICATION FOR DEBT AUTHORITY; CASE NO. SIL-T-02-2. RECOMMEND: APPROVAL WITH REPORTING RESTRICTIONS Silver Star Telephone Company (Silver Star) requests authority to borrow up to $6,758,000 with the Rural Utilities Service (RUS). The preliminary RUS review suggests the loan will qualify for the 5% hardship rate with a 15-year loan maturity. The loan will be secured by a first mortgage lien on Silver Star's assets under the Supplemental Mortgage and Security Agreement dated June 1, 2001. Proceeds of the loan will be utilized to: 1) construct a 17-mile fiber route, 2) acquire 198 miles of toll network, 3) construct a new headquarters/commercial office building, and 4) make other system improvements. The budgeted amounts include $1,729,000 for central office equipment, $310,000 for outside plant, $1,890,000 for land and buildings, $545,000 for engineering and $2,284,000 for the acquisition of the toll fiber route. Silver Star will provide an additional $1,810,000 from general funds to connect 1224 new subscribers. RUS will also require Silver Star to maintain a Times Interest Earned Ratio (TIER) of at least 1.5. An environmental report and flood disaster compliance will also be required for the building. STAFF DISCUSSION AND RECOMMENDATION As with other debt authority requests, Staff continues to express concern about using regulated assets and operations to secure non-regulated activities. Any adjustments associated with non-regulated costs or the need for a new office building will occur in future rate cases. To monitor the loan covenants required by RUS, Staff recommends the following reporting requirements be included in the order approving the Application: 1) Provide copies of the RUS final loan approvals including documentation for advances that reflect the specific acceptance of the environmental report and any required compliance with flood disaster protection. 2) Provide a copy of any executed collateral documentation. 3) Provide copies of all annual certification, covenant reports, and letters regarding these determinations. 4) The "Report of Securities Issued". COMMISSION DECISION Should the Application be approved with Staff's recommended reporting requirements? _________________________ Terri Carlock TC:udmemos/silt022decmemo.TC.doc