20141215_4545.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER REDFORD
COMMISSIONER SMITH
COMMISSION SECRETARY
LEGAL
WORKING FILE
FROM:TERRI CARLOCK
DATE:DECEMBER 10,2014
RE:SILVER STAR TELEPHONE COMPANY’S APPLICATION FOR AUTHORITY
TO GUARANTY DEBT;CASE NO.SIL-T-14-01.
On November 12,2014,Silver Star Telephone Company,Inc.(Silver Star)requested
authority to execute an unsecured guaranty of debt payments up to a loan value of $2,222,222 with the
Rural Telephone Finance Cooperative (RTFC).The proposed loan proceeds will be used to install nine
new cell towers and related facilities to improve and extend cellular coverage in southeast Idaho and
southwest Wyoming.The loan amount includes purchase of the required 10%subordinated capital
certificates.The loan will have an eight-year term with interest initially set at a variable rate with the
option to convert to a fixed rate.The loan may be prepaid and may or may not have a prepayment fee or
make-whole premium dependent on the loan being at a fixed or variable rate.Idaho Code,Chapter 9
“Issuance of Securities”,requires this Application.The required fees have been paid.
Silver Star and Gold Star Communications.LLC (Gold Star)are both wholly-owned
subsidiaries of Horizon Communications,Inc.(Horizon).Gold Star provides cellular services to
customers in southeast Idaho and southwest Wyoming.Gold Star will install the new facilities as owner
and operator of the cellular system.Horizon as the parent will be the borrower,execute a secured
promissory note and will be responsible for repayment of the loan in quarterly installments.Both Gold
Star and Horizon will pledge collateral as security for the loan.To provide connectivity for calls,Silver
Star facilities will also be used and Gold Star will compensate Silver Star for this service.Silver Star is
an existing borrower for other loans with RTFC and as an affiliated company is required to provide an
unsecured loan guaranty.
DECISION MEMORANDUM 1 DECEMBER 10,2014
STAFF DISCUSSION AND RECOMMENDATION
As with other debt authority requests,Staff continues to express concern about using
regulated operations to secure non-regulated activities.These activities increase the risk for a regulated
company at least initially.With separation of operations in the affiliated companies and the limited
eight-year term,Staff believes the risk to Silver Star regulated customers is minimal and it is easier for
Staff to verify that these non-regulated costs are not included in regulated rates.Silver Star states that the
unsecured obligation to guaranty repayment of the loan will not further encumber Silver Star assets or
affect the revenue requirement for regulated operations.Protection of the regulated customers remains
important.Staff has reviewed the Annual Reports for Silver Star and the 2014 mid-year financial
statements for Silver Star,Horizon and Gold Star and believes the regulated customer can be adequately
insulated from negative consequences related to the guaranty.Various factors reflected in the financial
statements and loan covenants support this belief in the event of a default by Gold Star and Horizon:
I)cash and cash equivalent items are currently adequate to make the payments,2)the equity ratio is
adequate to absorb a hit to retained earnings and prevent an increase in the overall cost of capital for
regulated operations,3)dividends and other cash distributions to the parent are currently adequate to
make the payments,4)increases in management fees,shareholder dividends and other cash outlays will
be stopped if the loan covenant ratios are not met.
Staff recommends approval of the loan request.To monitor any loan covenant requirements,
Staff also recommends adopting the following reporting requirements:
1)Provide copies of the RTFC final loan documents,approvals and advances.
2)Provide a copy of any executed collateral documentation and security agreements.
3)Provide copies of all annual certification,covenant reports,and letters regarding these
determinations.
COMMISSION DECISION
Should the Application be approved with Staffs recommended reporting requirements?
Tern Carlock
:udmemos/siILI4.O I debt guaranly
DECISION MEMORANDUM 2 DECEMBER 10,2014