6. Third Amendment to the Application

On April 24, 2001, Applicants filed a third amendment containing declarations in support of the application by Jane Evans Vilas, a shareholder and director of J. H. Evans, Inc., and by Jane Medlin, an officer of Country Road. In response to the ALJ's questions, Applicants filed declarations on May 10, 2001 by Thomas Mendenhall, Country Road's Vice President of Finance and by Christopher Motl, Vice President of the Communications Division of CoBank.

Mendenhall's declaration provides the following information:

· After the proposed acquisition, Country Road, Evans Holdings, and Evans Telephone will be separate corporations.


· Evans Holdings will enter into a loan transaction with CoBank for $42 million to finance the acquisition. Evans Telephone is not responsible for this loan.


· Because of the separate legal structures of Country Road and its subsidiaries, Evans Telephone will not incur any liability for the debt incurred to finance the transaction and Evans Telephone ratepayers are insulated from any debt obligation from the transaction.


· Evans Holdings projects it will have adequate cash flow for the next five years to service its debt obligation and to re-invest earnings back into Evans Telephone. The cash flow projections are based on the assumption that there will be no increase in rates to Evans Telephone customers.


· Country Road commits to invest $11 million in network infrastructure for Evans Telephone over the next five years. This investment will be funded from cash flow generated by Evans Telephone and Evans Communications and not through any additional debt.


· The success or failure of Country Road's CLC operation, CRC Communications of California, Inc., will have no impact on Evans Telephone. The CLC operation is completely separate from the Evans companies and will be financed independently of Evans Holdings. Country Road does not rely on revenue from its CLC operation to support debt service obligations for the acquisition of Evans Telephone.


· Evans Telephone must report all significant transactions with unregulated affiliates according to Section 587 and the affiliate reporting rules set forth in D.93-02-019.⁴

· If the Commission requires sharing with ratepayers as described in Section 854(b), Country Road will provide a surcredit to ratepayers in the amount of $700,000 over five years, funded out of earnings from the operations of the Evans Companies.


· The Commission could condition its approval of the proposed transaction by prohibiting Evans Telephone from selling any assets used or useful in the provision of its regulated services or raising its rates to satisfy debt obligations incurred by Country Road or Evans Holdings to finance the acquisition of the Evans Companies.

The declaration of Motl provides background regarding CoBank and the due diligence it performed in support of its decision to issue a loan to Evans Holdings for the acquisition of Evans Telephone and Evans Communications. According to the declaration, Evans Holdings and its parent, Country Road, satisfy CoBank's credit analysis and other requirements by complying with all three financial ratio tests that CoBank employs when evaluating a potential loan. Further, Motl states that based on his experience and CoBank's extensive loan portfolio with rural telephone companies, the debt to equity ratio of 60/40 in this transaction is not uncommon for acquisitions of rural telephone companies. He also states that based on the due diligence analysis he performed, the projected revenues and cash flow of Evans Holdings will support the debt service required for the transaction.

In response to questions regarding how the Commission should handle any "gain on sale" from this stock transaction, Applicants provided a brief stating that applicable Commission precedents regarding gain on sale, particularly D.89-07-016, are not applicable to this transaction. Applicants distinguish this transaction as involving the transfer of stock of a utility under Section 854 rather than the sale of utility operating assets under Section 851 and claim that Commission precedents regarding gain on sale relate solely to gains from the latter.