20030521_482.pdf

DECISION MEMORANDUM
TO:CO MMISSI 0 NER KJELLAND ER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
LEGAL
COMMISSION STAFF
WORKING FILE
FROM:KATHY STOCKTON
TERRI CARLOCK
DATE:MAY 19, 2003
RE:COLUMBINE TELEPHONE COMPANY, INc. DBA TETON
TELECOM; CASE NO. COL-03-
BACKGROUND
On April 16, 2003 , Columbine Telephone Company, Inc. dba Teton Telecom
(Columbine) applied pursuant to Idaho Code ~ 61-901 for authority to execute a Loan
Agreement in an amount not to exceed $8,400 000 with the Rural Telephone Finance
Cooperative (RTFC). The Application states that the purpose of the loan is for the restructuring
of the ownership of Silver Star Telephone Company, Columbine s sister corporation.
Specifically, the Application states:
At present, 100% of Silver Star s stock is held by Hoopes Telephone
Management, LP ("HTM"), which is in turn owned by Mel Hoopes. The
proceeds from the proposed RTFC loan would be deposited in a Wells
Fargo Investment Management Account (IMA) designed to partially fund
life insurance premiums on Mel Hoopes' life. The underlying life
insurance policies are issued in favor of Silver Star in order to fund a buy-
sell agreement that will enable Silver Star to purchase Silver Star s stock
from HTM on Me1 Hoopes death. The Silver Star stock will then be
distributed to Silver Star s current management and to other employees
through an Employee Stock Ownership Plan.
The Application further states:
The proposed transaction is consistent with the public interest. Silver Star
and Columbine are closely held family corporations that, in the absence of
the buy-sell agreement described above, would be financially disrupted by
the passing away of their principal owner. The buy-sell agreement is a
DECISION MEMORANDUM MAY 19 2003
crucial element of an overall estate plan that will assure a smooth
transition in the ownership of Silver Star and Columbine without
jeopardizing the companies' financial health.
The Company has paid the filing fee of $972., as required by Idaho Code ~ 61-905.
STAFF COMMENTS
Staff has determined that the primary purpose ofthe loan is to facilitate the family
estate planning in regards to the transfer of the assets in Mel Hoopes ' personal estate. The
circumstances are somewhat convoluted. The loan proceeds will be deposited in an investment
account to serve as collateral to a separate life insurance premium loan. The primary purpose of
the life insurance premium loan (the loan against Mel Hoopes' life insurance) will be to set up a
joint venture to purchase the stock of Silver Star Telephone Company and Columbine Telephone
Company and to prefund estate tax liabilities to avoid financial disruption of the Company
operations following the death of the principal owner, Melvin Hoopes. Columbine will obtain
this proposed R TFC loan for collateral purposes and be responsible for the loan payments plus
interest (currently 5.25%) over the 15-year term.
The security section in the loan application states
The Term Loan will be secured under the existing first mortgage lien on
all of the assets and revenue of Columbine Telephone Company.
Security from Hoopes Telephone Management, LP. will be limited to a
pledge of stock from each of the company s wholly owned subsidiaries
including, but not limited to, Silver Star Telephone Company and
Columbine Telephone Company. RTFC may also require security in the
form of a blanket lien on or pledge of stock from the new holding
company that is being contemplated in this transaction.
Staff is concerned that the sole focus of this loan application is for the benefit of the
shareholders of the Company, and the loan provides no direct benefit and very little indirect
benefit to the customers of Columbine. As such, the loan is not a request for a normal, ongoing
utility purpose. For this reason, Staff does not believe the customers of Columbine should make
the payments (ie. record all below the line) or incur the risks associated with the loan. In order to
protect customers, Staff proposes restrictions on the loan that will protect the customers. To
safeguard customers, Staff proposes that any mortgage lien be placed on non-regulated utility
assets and revenues only, and that no regulated utility property or revenues be use as security for
this loan.
DECISION MEMORANDUM MAY 19, 2003
Idaho Code ~ 61-901 conditions the right of a public utility to issue, assume or guarantee
securities or to issue mortgages, deeds of trust or other instruments of security upon the
regulatory approval of the Commission. Idaho Code lists the following purposes for which this
Commission may approve issuance, assumption or guarantee of debt or other securities:
for the acquisition of property; for the construction, completion, extension
or improvement of its facilities; for the improvement or maintenance of
its service; for the discharge or lawful refunding of its obligations; for the
reimbursement of moneys actually expended for said purposes from
income or from other moneys in the treasury not secured by or obtained
from the issue, assumption or guarantee of securities; or for any other
purpose approved by the commission.. .
This Application is not for the primary purposes stated above. Those purposes contemplated in
the Idaho Code directly benefit customers. Columbine proposes to borrow funds almost entirely
for the benefit of the shareholders.
ST AFF RECOMMENDATION
Staff recommends that the Commission deny the Application. In the alternative, Staff
recommends that the Application be approved with the recommendations outlined above; i.e. that
the loan be secured with non-regulatory utility assets and revenues, and that the Company meet
the following reporting requirements. These reporting requirements are consistent with those for
Silver Star in Order No. 28510, Case No. SIL- T -00-
1. The "Report of Securities Issued" required by 18 CFR 34.10;
2. Verified copies of any Agreement entered into pursuant to this Order;
3. A copy ofthe RTFC's final due diligence investigation report;
4. A copy of the executed collateral documentation;
5. Copies of all annual certification, covenant reports, and letters regarding
these determinations; and
6. Copies ofletters and approval by RTFC of any future assignment f any
portion of the loan to a subsidiary.
Staff could not find where the Company, in this case Silver Star, had provided any of the
information required by this Order. Staff is concerned because the same management runs Silver
Star and Columbine, and that the current Application is ultimately for the benefit of the
shareholders of these companies. Staff considers it appropriate to again require the Company, in
DECISION MEMORANDUM MAY 19 2003
this case Columbine, to meet the above reporting requirements, were the Commission to grant the
Application.
COMMISSION DECISION
Does the Commission wish to deny the Application?
Does the Commission wish to approve the Application with Staff s recommendations?
K thy ~kt
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Cwdock
Terri Carlock
i:udmemos/coltO3.
DECISION MEMORANDUM MAY 19 2003