20091229final_order_no_30969.pdf

Office of the Secretary
Service Date
December 29 2009
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF MIDV ALE
TELEPHONE EXCHANGE, INC'
PETITION FOR A DECLARATORY
RULING APPROVING THE TRANSFER OF
ASSETS AND LIABILITIES TO A WHOLLY
OWNED SUBSIDIARY, CREATION OF AN
EMPLOYEE STOCK OWNERSHIP PLAN
AND TRANSFER OF MIDV ALE'
CERTIFICATE OF PUBLIC CONVENIENCE
AND NECESSITY NO. 254.
CASE NO. MID- T -09-
ORDER NO. 30969
On September 22 2009, Midvale Telephone Exchange (Midvale) filed a Petition for
Declaratory Ruling requesting Commission approval of: (1) the transfer of all assets and
liabilities of Midvale to its wholly owned subsidiary, Midvale Telephone Company (MTC); (2)
the proposed contributions by MTC to an employee stock ownership plan (ESOP); and (3) the
acquisition by the ESOP of the authorized and unissued shares of Midvale stock. Midvale also
requests that its Certificate of Public Convenience and Necessity (CPCN) No. 254 be transferred
to MTc.
On November 10, 2009, the Commission issued Order No. 30943 requesting public
comments on Midvale s Petition and Application. Comments were due no later than December
, 2009. The only comments filed were submitted by the Commission Staff. Midvale did not
file reply comments.
THE APPLICATION
Midvale (a Title 61 regulated company) is currently owned by two shareholders, Lane
Williams (50%) and the Estate of Shirley Archer (50%). Midvale maintains that, since Shirley
Archer s death, it has been exploring options to ensure its continued existence and ongoing
operations with the least impact on its customers, services and employees. Mr. Williams and
Midvale s Board of Directors believe that the best method to achieve their stated goals is to
transfer the ownership of the corporation to its employees through an ESOP. Midvale adopted
an ESOP on December 22, 2008.
Telephone Company (MTC).
On August 27, 2009, Midvale incorporated Midvale
ORDER NO. 30969
Midvale proposes to transfer to MTC all of Midvale s assets and liabilities (including
all operating assets, all debt, all public licenses and the CPCN) in exchange for all of the issued
and outstanding shares of MTC stock. After the proposed transfer is complete, the ESOP would
acquire a portion of the Midvale stock held by Mr. Williams and the estate of Ms. Archer.
Midvale would then redeem the remainder of the shares from the current ownership by
delivering to Mr. Williams and the Archer estate a promissory note for the full value of their
remaining Midvale shares. Upon a favorable Commission ruling and completion of the transfer
MTC would adopt the ESOP and contribute funds to the ESOP annually as retirement fund
contributions for its employees. The Company asserts that the tax advantages of the proposed
transactions are substantial.
ST AFF COMMENTS
The goal of Midvale s ownership and Board of Directors is to ensure the Company
ongoing operations with the least impact on its customers, services and employees. In this
regard, several options were considered, including the sale of stock to Midvale s employees or to
a third party, the redemption of stock by Midvale, the transfer of stock to Midvale s employees
though the use of an ESOP , or a sale of the assets and liabilities of Midvale to a qualified third
party and the discontinuance of service by Midvale. Mr. Williams and the Board of Directors
determined that the transfer of Midvale ownership to its employees through an ESOP is the best
method to achieve its goals with little or no disruption to its customers and employees.
After reviewing the Company s Petition and Application along with other information
provided by the Company, Staff is generally supportive of the Petition for Declaratory Ruling.
However, Staff has concerns regarding the ratemaking treatment of the ESOP contributions and
other expenses associated with the transfer of ownership. Comments at 2-
A. Assets and the CPCN
The proposed transaction contemplates the transfer of all of Midvale s assets and
liabilities to MTC in a tax-free "Section 351" capitalization in exchange for all of the issued and
outstanding shares of MTC stock. As a result of this transaction, Midvale s existing employees
and customers will become the respective employees and customers of MTC. Upon completion
of the transactions, Midvale will have no assets other than a 100% ownership interest in MTC
and will have no liabilities other than obligations for payments due under the Redemption Notes.
Id. at 3. Because MTC would own and operate all of the operating assets to provide
ORDER NO. 30969
telecommunication services to Midvale ' s customers, MTC would need to become the holder of
the Certificate of Public Convenience and Necessity (CPCN) and would be "subject to
Commission regulation.Id. at 4. MTC would also hold all of the debt currently held by
Midvale with the Rural Utilities Service and the Rural Telephone Finance Cooperative, but it
would have no additional debt obligations as a result of this transaction.
The Company asserts and Staff believes that the current customers of Midvale will
not be adversely affected by the proposed transactions. Therefore, Staff recommends that the
Commission approve the transfer of all assets and liabilities, along with the CPCN No. 254, from
Midvale to MTc.
B. The ESOP
If the Commission issues a favorable declaratory order on the Application, MTC
states it will adopt the ESOP plan and trust already adopted by Midvale. MTC would then
contribute funds to the ESOP on an annual basis as a retirement fund contribution for its
employees. Midvale asserts that there is no specific provision under Idaho Code, Commission
rules or other regulations governing telecommunications carriers which require the Commission
to approve: (1) the structure of payment under the ESOP; (2) the amount of the contribution; or
(3) characterize the contribution as a utility expense. Comments at 3. Therefore, Midvale states
its petition for declaratory ruling in this matter is more or less a request that the Commission
inform Midvale if the Commission believes it must approve any of the above items or any other
items with respect to the creation of the ESOP pursuant to any of the Commission s regulatory
powers.
Idaho Code 9 61-90 I requires that the Commission approve "instruments of security
pertaining to utility assets. Midvale asserts that the operations of the Company will be
unchanged and the adoption of the ESOP plan and trust will not impair the Company s assets.
No additional debt or equity securities will be issued so Staff agrees that Commission approval
under Idaho Code 9 61-90 I is not required. Staff also believes that Midvale is not required to
obtain Commission approval to establish and adopt an ESOP plan and trust. Id. at 4.
However, Commission approval is required to transfer the Certificate of Public
Convenience and Necessity No. 254. The Commission is also vested with the authority to
establish rates that are just and reasonable. Idaho Code 99 61-302 and 61-502. In this latter
regard, the Commission has the authority to exclude from retail rates any contributions to the
ORDER NO. 30969
ESOP that it believes to be excessive. Denying recovery of costs in rates would not negate the
ESOP plan even though the costs are not paid by customers. Id.
MTC intends to contribute approximately $400 000 per year to the ESOP plan and
trust. The Company also sponsors a 401(k) plan where employees can receive up to 4% of their
compensation in employer-matching contributions. Given that the Company s eligible payroll
for 2008 was $1 909 443, the 2008 ESOP contribution of $400 000 represents 21 % of eligible
compensation. Id.; Application at 4. While Staff is aware of the advisability for utility
companies to provide retirement benefits to employees, the annual ESOP contribution coupled
with the employer matching contributions to the ESOP plan and trust create a level of retirement
funding that could be considered excessive beyond the reasonable amount necessary to maintain
qualified employees to provide service to its customers. Midvale, however, is not asking to
include any ESOP contributions in retail rates at this time. Application at 5.
Midvale has also incurred significant consulting and legal expenses related to the
establishment of the ESOP. The expenses have been booked to the Company s operating
accounts for financial statement purposes. These accounts are above-the-line accounts that could
be included in revenue requirement calculations to determine retail rates. The Company has not
requested any rate relief at this time. If these expenses are included during a test year, Staff
would likely recommend that these expenses not be recovered in rates paid by customers.
Comments at 4. Staff believes that most of these expenses are personal estate planning expenses
of the ownership of Midvale and it would be inappropriate to pass these expenses on to
customers. Staff agrees with the Company that the tax advantages of the proposed transactions
are substantial. In particular, Midvale asserts that use of the ESOP avoids paying federal or state
income taxes. Application at 5. The owners will benefit from many of these tax advantages.
COMMISSION FINDINGS
Earlier this year, the Commission found that creation of an employee stock ownership
plan (ESOP) by Midvale did not require Commission approval under Idaho Code 99 61-901
seq. Order No. 30765. Having created the ESOP, Midvale now seeks approval: (1) to transfer
all of its assets and liabilities to a wholly owned subsidiary, Midvale Telephone Company
(MTC); (2) for the ESOP to acquire the authorized and unissued shares of Midvale stock; and (3)
to transfer its Certificate of Public Convenience and Necessity No. 254 to the wholly owned
subsidiary, MTC. These three subsequent actions do require the Commission s approval.
ORDER NO. 30969
After reviewing the Application and Staff s comments, we find that it is reasonable
and appropriate to approve these subsequent transactions. As noted by the parties, our
paramount concern is for the continued operations of the telephone company with the least
impact on customers and employees. Upon completion of the transactions, MTC would own and
operate all of the transferred assets and provide telecommunications services to Midvale
customers "and be subject to Commission regulations" under Title 61. Application at 4.
Although Staff did not object to the proposed transactions, Staff was concerned with
the ratemaking consequences of the transactions. More specifically, Staff expressed concern
about the level of annual contributions to the ESOP , and the legal and consulting expenses
related to the establishment of the ESOP. However, we note that Midvale (and eventually MTC)
are not asking to recover any ESOP contributions in customer rates at this time. Application at
5. Accordingly, the Commission makes no findings at this time and reserves judgment regarding
the applicable ratemaking treatment for the annual contributions to the ESOP and the reasonable
amounts of consulting and legal expenses related to the establishment of the ESOP. These issues
are best addressed in a future rate case.
ORDER
IT IS HEREBY ORDERED that Midvale Telephone Exchange, Inc.s Petition and
Application for a declaratory order is granted as set out above.
IT IS FURTHER ORDERED that Midvale may transfer all of its assets and liabilities
to MTC; the previously established ESOP may acquire the authorized and unissued shares of
Midvale stock; and MTC may make contributions to the ESOP. The Commission specifically
reserves judgment on the contributed amounts to the ESOP until a future proceeding.
IT IS FURTHER ORDERED that Midvale s Certificate of Public Convenience and
Necessity No. 254 be transferred to Midvale s wholly owned subsidiary, MTC.
IT IS FURTHER ORDERED that the Commission reserves its authority to make
findings regarding the applicable ratemaking treatment for MTC's contributions to the ESOP and
the expenses of establishing the ESOP.
IT IS FURTHER ORDERED that given the transfer of the Certificate of Public
Convenience and Necessity, MTC work with Staff and resubmit its tariffs and schedules showing
the change in the Company s structure within 30 days of this Order.
ORDER NO. 30969
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally
decided by this Order) or in interlocutory Orders previously issued in this Case No. MID-09-
03 may petition for reconsideration within twenty-one (21) days of the service date of this Order
with regard to any matter decided in this Order or in interlocutory Orders previously issued in
this case. Within seven (7) days after any person has petitioned for reconsideration, any other
person may cross-petition for reconsideration. See Idaho Code 9 61-626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this c2 c;-f-A
day of December 2009.
MARSHA H. SMITH, COMMISSIONER
~4-
MACK A. REDFO
ATTEST:
O:MID-O9-03 dh
ORDER NO. 30969