02/23/1984 - City Council SpecialAGENDA
SPECIAL MEETING
BURNSVILLE/EAGAN CABLE COMMUNICATIONS COMMISSION
FEBRUARY 23, 1984
7:00 P.M.
BURNSVILLE CITY COUNCIL CHAMBERS
I. Call Meeting To Order
II. Adopt Agenda
III. Consultants Report On Single Headend 8 Hub
Modification
IV Other Business
V Adjournment
MEMO TO: Burnsville/Eagan Cable Communications Commission Members
FROM: City Administrator Hedges
DATE: February 21, 1984
SUBJECT: Special Burnsville/Eagan Cable Communications Commission
Meeting
At the last regular meeting of the Burnsville/Eagan Cable Communi-
cation Commission a special meeting of the Commission was scheduled
for Thursday, February 23, 1984, at 7:00 p.m., at the Burnsville
City Hall. The purpose of the meeting was to review the consul-
tant's report on the Single Headend & Hub that is proposed by Group
W. The financial report was received from Tom Creighton's office
today and is being delivered to each of you for your review. The
technical report has not been received as yet, but will be delivered
to each of you when it is available.
The Executive Committee is scheduled to interview Ann Bevis on
Wednesday, February 22, and may have a personnel status report
for the meeting on Thursday.
I will be absent for a portion of the meeting, therefore I have
asked our legal council to take minutes at the meeting this Thursday.
Cit�nniisstIftQlerator I
cc - Jim Spore, Burnsville City Manager
TH/jj
KEVIN P. CATIWR
2224 - 73rd Court North
Minneapolis, Minnesota 55444
(612) 330-2677
February 17, 1984
Mr. James Smith, Chair
Burnsville/Eagan Cattle Commission
2070 Mable lane.
Fagan, MN 55122
Dear Mr. Smith:
I have been engaged to perform a financial analysis of the cable proposal pre-
sented to you by Group W Cable, Inc. (Group W). My analysis is limited in that
it pertains only to the effect of Group W's proposal to redesign the
Burnsville/Eagan cable television system. The redesigning of the cable system
represents a change from one headend with a hub as originally proposed, to one
headend. Group W has indicated to me that this will result in an estimated
savings of $400,000 in capital expenditures.
The scope of my analysis concentrates on what effect this anticipated savings in
capital expenditures could have on Group W's return on investment. I have also
performed an analysis to determine whether Group W's financial goals as stated
in the original proposal are reasonable.
I hope you find this analysis to be helpful in deciding on whether the rede-
signing should be approved.
If you have any questions regarding my analysis, please call me.
Sincerely,
Kevin P. Cattoor
KPC/mam
Enc.
FINANCIAL ANALYSIS
OF THE
GROUP W CABLE, INC.
REDESIGN PROPOSAL
SUBMITTED TO THE
BURNSVILLE/EAGAN CABLE COMMUNICATIONS COMMSION
February 17, 1984
KEVIN P. CATTOOR
2224 - 73rd Court North
Minneapolis, 14imesota 55444
(612) 330-2677
This document represents a limited financial analysis of the Group W
Cable, Inc. (Group W) franchise proposal presented to the Burnsville/Fagan
Cable Communications Commission (Commission). The analysis is limited in that
it only evaluates the effect of Group W's proposed redesign of the system in
terms of rate of return. Group W has proposed to change the technical design of
the cable system from use of a headend and one hub to one headend. It is esti-
mated that Group W will save $400,000 as a result of this change and the system
will operate more efficiently.
Attached as Exhibits I and II are summaries of Group W's proposed
changes. As indicated on both Exhibits, it is anticipated that the cost for the
antennas and tower will be $41,800. Exhibit I, pages one and two documents the
costs of the headend and hub as originally proposed. As shown on page two of
Exhibit I, the total cost projected was $670,000. An analysis was performed to
verify whether these costs were in agreement with the original proposal. It was
noted that many of the unit costs and quantities were not in agreement. This
was confirmed with James W. Commoers, General Manager of Group W, who indicated
that such changes were not uncommon. In comparing the total expenditures as
originally proposed with that on Exhibit I, I was able to reconcile the total
hub costs within $3,550 ($310,900 per Form G, Page 9b of 19 less $307,350 per
Exhibit I). In comparing the total headend costs, I was able to reconcile
within $41,700 ($404,300 per Form G, Page 9a of 19 less $362,660 per Exhibit I).
The discrepancy on the hub costs is not significant, however, the Commission may
wish to inquire as to why there is such a large discrepancy on the headend
costs. For purposes of this analysis, it has been assumed that Group W will
save approximately $400,000 by redesigning their system.
Group W's financial goal for the Burnsville and Eagan cable system has
been stated in Form G, Page 5 of 19, as an 18 percent return on investment over
a 15 -year period. The debt to equity ratio is projected to be 60/40. Group W
has calculated their projected rate of return using the Public Utilities
Commission (PUC) method to calculate rate of return on net investment. This
calculation is made by dividing average cumulative net income plus interest by
average cumulative net investment. The theory supporting this method is that
capital invested in cable plant is derived from two sources, debt and equity
investors. Including both interest expense (the return to the debt holder or
banks) and net income (the return to the equity investors) in the PUC rate of
return formula, allows for return to both sources of capital invested. This
method is acceptable to calculate Group W's rate of return.
Group W's 18 percent goal is reasonable keeping in mind that during the
15 years both debt and capital are at risk. It is expected that debt should
yield a 15 percent return while equity a 20 percent return to remain attractive.
As the operation gets into the latter years of the franchise period and debt is
repaid, the greater is the risk being assumed by Group W. And, because equity
capital costs more than debt capital, the rate of return will have to be higher
than if more of the financing is assumed by debt capital.
Over the 15 -year franchise period, the Company has an average debt to
equity ratio of 60 percent to 40 percent. Thus, the cost of capital can be
calculated as follows:
60 percent debt at 15 percent = 9.0 percent
40 percent equity at 20 percent = 8.0 percent
17.0 percent
-2-
Using the above assumption, Group W should generate a rate of return
that should not be less than 17.0 percent to cover the cost of capital. The
18.0 percent return stated in their proposal represents an adequate return. To
calculate the rate of return generated in the financial pro formas as submitted
in the original proposal, see SCHEDULE I. See SCHEDULE II for the calculation
of return on net investment assuming the redesign proposal is approved and all
other assumptions are maintained.
As noted from SCHEDULE I, Group W has presented financial pro -formas to
generate the 18 percent return on net investment as stated in their financial
goals. Taking into effect the redesigning of the system, an 18.8 percent return
on net investment is calculated. It can be assumed that a change in capital
outlay of $500,000 will result in an approximate 1 percent variation in the rate
of return over the 15 -year period.
In conclusion, the proposed redesigning of the Burnsville and Eagan
cable system does represent a material change in terms of Group W's rate of
return. However, in relation to Group W's projected capital expenditures for
Years one and two which will approximate $12.2 million, this change is not as
material. In completing construction of the system, the Commission should moni-
tor what the total capital expenditure will be as compared to what was pro-
jected. For now, based upon this analysis and assuming the redesign proposal is
technically feasible, it is my recommendation that the Commission approve
Group W's request.
-3-
SCHEDULE I
CALCULATION OF RATE OF RETURN
IN ORIGINAL PROPOSAL
(000's)
Total Net Income Over,15-Year Period $ 18,190
Total Interest Expense Over 15 -Year Period 1,616
TOTAL: $ 19,806
divided by 15
Average Net Income Before Interest Expense $ 1,320
Average Return/Average Investment = $1,320/ $7,315 = 18.0 percent
Investment-
De
reciation
Current
tive
Current
ative
Net
Year
Year
Total
Year
Total
Investment
1
$ 5,607
$ 5,607
$ 232
$ 232
$ 5,375
2
6,599
12,206
802
1,034
11,172
3
844
13,050
1,140
2,174
10,876
4
689
13,739
1,206
3,380
10,359
5
717
14,456
1,262
4,642
9,814
6
637
15,093
1,315
5,957
9,136
7
665
15,758
1,363
7,320
8,438
8
776
16,534
1,422
8,742
7,792
9
515
17,049
1,440
10,182
6,867
10
666
17,715
1,425
11,607
6,108
11
1,006
18,721
1,379
12,986
5,735
12
1,262
19,983
1,311
14,297
5,686
13
574
20,557
1,294
15,591
4,966
14
683
21,240
1,312
16,903
4,337
15
641
21,301
1,328
18,231
3,070
TOTAL
N/A
N/A
N/A
N/A
$109,731
divided
by 15
Average Net Investment $ 7,315
Total Net Income Over,15-Year Period $ 18,190
Total Interest Expense Over 15 -Year Period 1,616
TOTAL: $ 19,806
divided by 15
Average Net Income Before Interest Expense $ 1,320
Average Return/Average Investment = $1,320/ $7,315 = 18.0 percent
SCHEDULE II
CALCULATION OF RATE OF RETURN
(000's)
Total Net Income Over 15 -Year Period*** $ 18,595
Total Interest Expense Over 15 -Year Period 1,616
TOTAL: $ 20,211
divided by 15
Average Net Income Before Interest Expense $ 1,347
Average Return/Average Investment = $1,347/ $7,170 = 18.8 percent
*Investment in Year 1 reflects $400,000 savings due to Group W's redesign
proposal.
**All headend and hub expenditures are depreciated over 15 years on a straight-
line basis. Depreciation has therefore been reduced $27,000 per year related
to the lower level of expenditure.
***Net income has been increased by $405,000 (15 X $27,000) attributable to less
depreciation recorded as discussed in ** above.
Investment
Depreciation
Current
CumuLative
Current
Cumulative
Net
Year
Year
Total
Year**
Total Investment
1
$ 5,207*
$ 5,207
$ 205
$ 205 $
5,022
2
6,599
11,806
775
980
10,826
3
844
12,650
1,113
2,093
10,557
4
689
13,339
1,179
3,272
10,067
5
717
14,056
1,235
4,507
9,549
6
637
14,693
1,288
5,795
8,898
7
665
15,358
1,336
7,131
8,227
8
776
16,134
1,395
8,526
7,608
9
515
16,649
1,413
9,939
6,710
10
666
17,315
1,398
11,337
5,978
11
1,006
18,321
1,352
12,689
5,632
12
1,262
19,583
1,284
13,973
5,610
13
574
20,157
1,267
15,240
4,917
14
683
20,840
1,285
16,525
4,315
15
641
21,481
1,301
17,826
3,655
TOTAL
N/A
N/A
N/A
N/A
$107,551
divided by
15
Average Net Investment
$ 7,170
Total Net Income Over 15 -Year Period*** $ 18,595
Total Interest Expense Over 15 -Year Period 1,616
TOTAL: $ 20,211
divided by 15
Average Net Income Before Interest Expense $ 1,347
Average Return/Average Investment = $1,347/ $7,170 = 18.8 percent
*Investment in Year 1 reflects $400,000 savings due to Group W's redesign
proposal.
**All headend and hub expenditures are depreciated over 15 years on a straight-
line basis. Depreciation has therefore been reduced $27,000 per year related
to the lower level of expenditure.
***Net income has been increased by $405,000 (15 X $27,000) attributable to less
depreciation recorded as discussed in ** above.
G:Q{TBIT I
L'f Ov;.sal : BURNSV1LLE-
-E.AGAN VI.
CONSTRUC1IUN+
ENGINFEI?1N(5• f. CAPITAL.
Prep. by: T. SPEARFN
E?ni td, n•_/rr a. ft.
:"i
HUB DETAIL -
Dater 11/22/63
0
'1"V /. tr,.
154:•1:5
P
AS PROPOSED
0
'lfi--a,r FM
# or huLs ].
ITEM
STANDARD
USED
1.50(•.
UNITS 4 SUM
F•I111E: TOWER AND ANTENNAS:
0
Scr an. hi e: Jeri./r,•,
1600
G•.,ye., tower ; 150'
1.50
0
X
0 E'."�:.t.
Guyed tower ? 15N'
140
0
x
= 0
0
Si:li Support!150'
250
0
x
= 0
0-
Self SVRR•lrt> ]569'
=:60
0
x
_ 0
0 = 0
VHF As -t. (Typ.' A) 11300
UHF Ar t. (Type F•) 700
FM Ant. (Type C) 400
HUB:
Tnw-r' Jr.l h-tnt•
0 x 0
0 x *. 0
0 x 0
Antenna Sllb-tPt.
Tower and Antenr,a Total
X # of hki Li;:
Land/a,_:, a:
lease,)
x
C
E?ni td, n•_/rr a. ft.
:"i
leased
x
0
'1"V /. tr,.
154:•1:5
P
X
0
'lfi--a,r FM
St rant• I cr' Oal:. /ch..
1.50(•.
4;
x
0
Scr an. hi e: Jeri./r,•,
1600
P
k
0
S.:f and. IC.r. Zenith
_J 00
0
x
0
.; •: r a rr, h 1 .- i (o t: her)
0
4_•
k
0
IE00
k5
k
0
1'-.00
r
10
F. S •
9rA:'.
4'
>
N
AM rtinrl s j1.n�
5!:
AN mod t all%P.:.. 1-
lila
Art n,_••i in_,:t• net.
170(0
174'. i•?
x
5
Arg n,o-1 r.;ther)
1704]
0
x
0
AM demod _rib net
1900
1S(t•[9
e
_
Ar•1 derrrod tran=pert
1900
41
x
0
denied ir,.:t. net.
isoo
0
X
0
derr,od (oth.-r )
1B04t
N
x
0
L°P rm:•.J tran:.por't
5920
±9:iC•
),
)4?I
FM dwmod t.ran�::vor t
'2,300
23091
x
56
V1*1 =: t: r e o mod
600
0
x
0
i -M ae:cesa pro._.
20(1
0
x
0
<;ht•rtmave rrr,:-)vwi
700
l•:
x
0
HRC gOaerator
3000
3000
x
1
HRC / channel
350
0
x
0
Lm,'rsit-ncy override
7500
0
x
0
Ai V •J7' t. arnp•
500
L'
x
0
A/ %1
w1 t._1.(.'0"..1•:,)+
]SS; ,f
1.': oov.
J -
.:'V tw, +.rl'r. 441: 1`�i■
�`it[i4'.
yl
'4,
1.. .rl•:•1••J nr., is
Ar: ,'.:., L.., i' rtibn-r
1`.•UNO
1`i ,94)l+
Hll!I 'r0'�'Al.
<i IiV I•• )
- 4
= 4.
= E520
v (Ii
0
- 126Ci 4iv:
= 49
= 41
3000
0
0
0
i O`.;C
- 4]
70051
_ 15000
G\TII6IT I
PRGI-'OSAt.: P•URNSV I t_LEi- a AGAN VI. 0.11-451 RUC"I I QN, ENGINEERING, & CA II At.
Prep. by: T. SPEARL-:N
HEADEND
DETAIL
S
Date: 11/22/@3
P•rllli.l'.c/".a. 1'1;,
7`.5
leas.?,! Y
off-a,r IV /,ti..
AS PROPOSED HUB
1500 X'
jiff.--alr F19
ITEM STANDARD
USED
1500 X
UW IS
4 SUM
HE-ADEND TOWER AND ANTENNAB:
S.-raq.t.1wr- Zenitl.
3506
0 x
Ecr rr.r: It - r (other?
G,.ryed tr.,wer : 150' 150
0
x
0 E,_ t. =
0
Guyed tower ? 150' 140
0
X
0
O
Self Support< 150' 250
250
X
150 =
37500
Self Support.' • 150' 280
0
x
0 =
0
Tower Sub -tot
VHF Ant. (Tyne A) 1500 700 X 3
UHF A -.t. (Type P) 700 700 X`-.
FM Ant. (Type C) 400 400 X 2
Antenna Eivb-tt�k
Tower and Antenna Total
HEADEND:
0
l..and/a•:'re
S
70x50.1 >-
P•rllli.l'.c/".a. 1'1;,
7`.5
leas.?,! Y
off-a,r IV /,ti..
]`_i9c?
1500 X'
jiff.--alr F19
Scrami.;�-r Oal, /r_h.
1'.i::.:',
1500 X
Si:ramF•i.;r Jerr./,.h
1600
1600 X
S.-raq.t.1wr- Zenitl.
3506
0 x
Ecr rr.r: It - r (other?
0
C) k
7-.l
1, BOO
1@015 v
I.F. E'7- .. _. ._ or
1 `.)07G
150(' :k
C. 1.F. w/F. Er.
90",
90:9 )
AM ff. C'd _ub net
170;
1700 )
AM rr•tran::cor 1:
1700
0 Y
AM m•i inst. net..
1700
1700 X
AM mod (other)
1700
0 X
AM dc-mr-d sub nrt
18001
1800 X
AM dcmod transport
tB00
0 X
AM derrloci inst. net
.1800
0 X
AM demod (other)
1800
0 X
FM me -d transpt,rri
1920
1920. X
FM demod transport
2300
2300 x
FM stereo rtlod
800
0 Y.
FM aic.=ss proc.
200
0 X
Shortwave receiver
700
0 X
HRC generator
3000
3000 k
HRC / channel
300
0 X
A/V dist, amp.
500
0 X
A/V pat:rh(1.2x12)
1050
11.00 X
A/V switrh(20x15)+
19520
1°;520 X
A/V 'u-)tch(40':.::1.5)*
2S6B0
0 X
F rn e r El tc. r,•.; y i7-; err lde
7500
7500 )
* v a r he:-Aden•:1 ur,lt
.-i 000
300%C? X
AC ba•_i,rf pvlvor
15000
22000
1-`.- 1 1 :0 t•i
Page 2 of 2
0
47
7
1
0
S
0
VT
0
41
47
0
5
Gi
2
0
0
0
5!;
10
0
0
rb
'1
0
0
1
10
1
1
1
i t• I Ai.
,(/ua TOTAL
To7AL 0057-
37507
I Owl
= 1.402'
_ - COO
or 4300
"1800 ***
0
0
4000('
0
' 611
t•.
Fi
3600
0
N
0
1075 '0
--30800?
0
v�
3000
0
F'•
I10C
195 �i7
t'
- 3L 2 667- D � • '
307 3S'O
66 7�v
E\11TBIT 2
PRUP:SAL_: P.•URNSVILI_E--k:AGAN :'1.
CONSTRUC-11UN,
E:NGINEF_RiNCi, E: CAPITAL
Prep, bu: T. SPEAREN
HE:ADEND DETAIL.
Date: 11/22/53
SINGLE HEAUEND NO
HUB
ITEM
STANDARD
USED
UNITS
4 Sl1M
HE:ADEND TOWER AND
ANTENNAS:
Gr.lued tower, ; 150'
150
0
X
0
Gugwd tower .e 150'
140
0
X
E..t.
= 0
Self Support:: 150'
250
250
X
0
150
- 0
- 37500
Self SuPForC, 150'
250
0
X
0
= 0
Tower, Sub--rr.t.
- 37500
VHF Ant, (Type A)
1500
700
X
3
UHF Ant. (Type g)
700
700
X•'
= 2100
FM Ant, (Type C)
4O1r1
4OC
k '
�.
_ 14OC!
-
- - 000
•
Antenna Sub -tot,
4300
Towc.•r and
Antenna Total
= 41800 +++
HEADEND,
Building/sq. ft,
7`5
lea_er1
k
0
Off -all TV i_tn.
.5047
150,
X
E
_.
:- 1_00,
Ori --ai, FM /stn.
.:21
221
X
20
: .I amt:,F Oil. /ch.i
;041
1500
X
0
- v•, ::7
Sr:ramb)e[' Jerr./.:h
1600
1600
X
C_
-_ 0
5.:1 ambI.-rr 'l.enith
-5047
0
X
0a
£•_ramb)el- (other)
0
0
X
0
.- 0
St.-rer, _ynth,_.,i.z•:r
]60('
1500
X
"i
_: g
).::(:•41.4;
I.F. Nr�•.e_: s•;r
1`_,0('•
15ON
X
111
l
(:. 5 . F. w / P. f=..
C?00
900
X
0
I.P.C. w/F•._.
e00
800
k
0
AM :r.::.l s..lf r,et.
17041
170E
?
5
_ 1•
AM rr.;:r1 trans.p-:r-1.
1,1100
0
X
0
AN v.a,y Inst. n,: t.
17OLI
17O0
X
]. V•
= y:
_. 17O00
AM rr.o.1 (o*her )
1700
P.
X
0
Am d:.d s.ub net
1500
1EO0
X
4
=. 0
AM dem"d tr-anaport
1800.
0
X
0
= 72414'•
Ar] demon jno.t. 1.!xi
15(-10
41
k
0
_. 0
AM d.an..,.:1 (other )
1500
0
X
0
..- R
FM w:.tl trar,cport
1920
0
X
0
= 0
FM d,-ma4 transrort
2300.
0
X
0
= 0
FM trr m±, mc•d
F,OO
0
X
C
= 0
FM ac=es-- pro._.
200
0
X
0
0
Shortwave receiver
700
0
X
0
= 0
HRC 9ener'atnr
3000
3000
X
I
_ 0
HRC / c1jar.r.el
300
0
X
1.1
- 3014'
A/V dist. arts.
5O0
0
X
0
0
A/V aat.1-.(]-.<12)
1050
1100
X
= 0
_.
..- 2200
A/V swi1:.-r.12O11:15)+
19'i::P.
'
19520
X
_
A/V swt+.:1�1467:.•151ar
__1:_..}(1
0
X
47
Fm,-r9•-�•_y 1•:o�rride
_.0517('
7500
x
0
I,
::r tr•' hen•:I <-l.d ur.l r
31(1V0
;:1041
'a
1
- :+00@
AC b, -.i -::l '11` I`!•w.=1-
t5O00
PII'.', 1'tl-F:1� Ti•I'A:.
= -73360 +.•
•'I
Page 1 of 1
AGENDA
SPECIAL MEETING
BURNSVILLE/EAGAN CABLE COMMUNICATIONS COMMISSION
FEBRUARY 23, 1984
7:00 P.M.
BURNSVILLE CITY COUNCIL CHAMBERS
I. Call Meeting To Order
II. Adopt Agenda
III. Consultants Report On Single Headend 8 Hub
Modification
IV Other Business
V Adjournment
MEMO TO: Burnsville/Eagan Cable Communications Commission Members
FROM: City Administrator Hedges
DATE: February 21, 1984
SUBJECT: Special Burnsville/Eagan Cable Communications Commission
Meeting
At the last regular meeting of the Burnsville/Eagan Cable Communi-
cation Commission a special meeting of the Commission was scheduled
for Thursday, February 23, 1984, at 7:00 p.m., at the Burnsville
City Hall. The purpose of the meeting was to review the consul-
tant's report on the Single Headend & Hub that is proposed by Group
W. The financial report was received from Tom Creighton's office
today and is being delivered to each of you for your review. The
technical report has not been received as yet, but will be delivered
to each of you when it is available.
The Executive Committee is scheduled to interview Ann Bevis on
Wednesday, February 22, and may have a personnel status report
for the meeting on Thursday.
I will be absent for a portion of the meeting, therefore I have
asked our legal council to take minutes at the meeting this Thursday.
Cit�VIftQtler %
cc - Jim Spore, Burnsville City Manager
TH/jj
KEVIN P. CATIWR
2224 - 73rd Court North
Minneapolis, Minnesota 55444
(612) 330-2677
February 17, 1984
Mr. James Smith, Chair
Burnsville/Eagan Cattle Commission
2070 Mable lane.
Fagan, MN 55122
Dear Mr. Smith:
I have been engaged to perform a financial analysis of the cable proposal pre-
sented to you by Group W Cable, Inc. (Group W). My analysis is limited in that
it pertains only to the effect of Group W's proposal to redesign the
Burnsville/Eagan cable television system. The redesigning of the cable system
represents a change from one headend with a hub as originally proposed, to one
headend. Group W has indicated to me that this will result in an estimated
savings of $400,000 in capital expenditures.
The scope of my analysis concentrates on what effect this anticipated savings in
capital expenditures could have on Group W's return on investment. I have also
performed an analysis to determine whether Group W's financial goals as stated
in the original proposal are reasonable.
I hope you find this analysis to be helpful in deciding on whether the rede-
signing should be approved.
If you have any questions regarding my analysis, please call me.
Sincerely,
Kevin P. Cattoor
KPC/mam
Enc.
FINANCIAL ANALYSIS
OF THE
GROUP W CABLE, INC.
REDESIGN PROPOSAL
SUBMITTED TO THE
BURNSVILLE/EAGAN CABLE COMMUNICATIONS COMMSION
February 17, 1984
KEVIN P. CATTOOR
2224 - 73rd Court North
Minneapolis, 14imesota 55444
(612) 330-2677
This document represents a limited financial analysis of the Group W
Cable, Inc. (Group W) franchise proposal presented to the Burnsville/Fagan
Cable Communications Commission (Commission). The analysis is limited in that
it only evaluates the effect of Group W's proposed redesign of the system in
terms of rate of return. Group W has proposed to change the technical design of
the cable system from use of a headend and one hub to one headend. It is esti-
mated that Group W will save $400,000 as a result of this change and the system
will operate more efficiently.
Attached as Exhibits I and II are summaries of Group W's proposed
changes. As indicated on both Exhibits, it is anticipated that the cost for the
antennas and tower will be $41,800. Exhibit I, pages one and two documents the
costs of the headend and hub as originally proposed. As shown on page two of
Exhibit I, the total cost projected was $670,000. An analysis was performed to
verify whether these costs were in agreement with the original proposal. It was
noted that many of the unit costs and quantities were not in agreement. This
was confirmed with James W. Commoers, General Manager of Group W, who indicated
that such changes were not uncommon. In comparing the total expenditures as
originally proposed with that on Exhibit I, I was able to reconcile the total
hub costs within $3,550 ($310,900 per Form G, Page 9b of 19 less $307,350 per
Exhibit I). In comparing the total headend costs, I was able to reconcile
within $41,700 ($404,300 per Form G, Page 9a of 19 less $362,660 per Exhibit I).
The discrepancy on the hub costs is not significant, however, the Commission may
wish to inquire as to why there is such a large discrepancy on the headend
costs. For purposes of this analysis, it has been assumed that Group W will
save approximately $400,000 by redesigning their system.
Group W's financial goal for the Burnsville and Eagan cable system has
been stated in Form G, Page 5 of 19, as an 18 percent return on investment over
a 15 -year period. The debt to equity ratio is projected to be 60/40. Group W
has calculated their projected rate of return using the Public Utilities
Commission (PUC) method to calculate rate of return on net investment. This
calculation is made by dividing average cumulative net income plus interest by
average cumulative net investment. The theory supporting this method is that
capital invested in cable plant is derived from two sources, debt and equity
investors. Including both interest expense (the return to the debt holder or
banks) and net income (the return to the equity investors) in the PUC rate of
return formula, allows for return to both sources of capital invested. This
method is acceptable to calculate Group W's rate of return.
Group W's 18 percent goal is reasonable keeping in mind that during the
15 years both debt and capital are at risk. It is expected that debt should
yield a 15 percent return while equity a 20 percent return to remain attractive.
As the operation gets into the latter years of the franchise period and debt is
repaid, the greater is the risk being assumed by Group W. And, because equity
capital costs more than debt capital, the rate of return will have to be higher
than if more of the financing is assumed by debt capital.
Over the 15 -year franchise period, the Company has an average debt to
equity ratio of 60 percent to 40 percent. Thus, the cost of capital can be
calculated as follows:
60 percent debt at 15 percent = 9.0 percent
40 percent equity at 20 percent = 8.0 percent
17.0 percent
-2-
Using the above assumption, Group W should generate a rate of return
that should not be less than 17.0 percent to cover the cost of capital. The
18.0 percent return stated in their proposal represents an adequate return. To
calculate the rate of return generated in the financial pro formas as submitted
in the original proposal, see SCHEDULE I. See SCHEDULE II for the calculation
of return on net investment assuming the redesign proposal is approved and all
other assumptions are maintained.
As noted from SCHEDULE I, Group W has presented financial pro -formas to
generate the 18 percent return on net investment as stated in their financial
goals. Taking into effect the redesigning of the system, an 18.8 percent return
on net investment is calculated. It can be assumed that a change in capital
outlay of $500,000 will result in an approximate 1 percent variation in the rate
of return over the 15 -year period.
In conclusion, the proposed redesigning of the Burnsville and Eagan
cable system does represent a material change in terms of Group W's rate of
return. However, in relation to Group W's projected capital expenditures for
Years one and two which will approximate $12.2 million, this change is not as
material. In completing construction of the system, the Commission should moni-
tor what the total capital expenditure will be as compared to what was pro-
jected. For now, based upon this analysis and assuming the redesign proposal is
technically feasible, it is my recommendation that the Commission approve
Group W's request.
-3-
SCHEDULE I
CALCULATION OF RATE OF RETURN
IN ORIGINAL PROPOSAL
(000's)
Total Net Income Over,15-Year Period $ 18,190
Total Interest Expense Over 15 -Year Period 1,616
TOTAL: $ 19,806
divided by 15
Average Net Income Before Interest Expense $ 1,320
Average Return/Average Investment = $1,320/ $7,315 = 18.0 percent
Investment-
De
reciation
Current
tive
Current
ative
Net
Year
Year
Total
Year
Total
Investment
1
$ 5,607
$ 5,607
$ 232
$ 232
$ 5,375
2
6,599
12,206
802
1,034
11,172
3
844
13,050
1,140
2,174
10,876
4
689
13,739
1,206
3,380
10,359
5
717
14,456
1,262
4,642
9,814
6
637
15,093
1,315
5,957
9,136
7
665
15,758
1,363
7,320
8,438
8
776
16,534
1,422
8,742
7,792
9
515
17,049
1,440
10,182
6,867
10
666
17,715
1,425
11,607
6,108
11
1,006
18,721
1,379
12,986
5,735
12
1,262
19,983
1,311
14,297
5,686
13
574
20,557
1,294
15,591
4,966
14
683
21,240
1,312
16,903
4,337
15
641
21,301
1,328
18,231
3,070
TOTAL
N/A
N/A
N/A
N/A
$109,731
divided
by 15
Average Net Investment $ 7,315
Total Net Income Over,15-Year Period $ 18,190
Total Interest Expense Over 15 -Year Period 1,616
TOTAL: $ 19,806
divided by 15
Average Net Income Before Interest Expense $ 1,320
Average Return/Average Investment = $1,320/ $7,315 = 18.0 percent
SCHEDULE II
CALCULATION OF RATE OF RETURN
(000's)
Total Net Income Over 15 -Year Period*** $ 18,595
Total Interest Expense Over 15 -Year Period 1,616
TOTAL: $ 20,211
divided by 15
Average Net Income Before Interest Expense $ 1,347
Average Return/Average Investment = $1,347/ $7,170 = 18.8 percent
*Investment in Year 1 reflects $400,000 savings due to Group W's redesign
proposal.
**All headend and hub expenditures are depreciated over 15 years on a straight-
line basis. Depreciation has therefore been reduced $27,000 per year related
to the lower level of expenditure.
***Net income has been increased by $405,000 (15 X $27,000) attributable to less
depreciation recorded as discussed in ** above.
Investment
Depreciation
Current
CumuLative
Current
Cumulative
Net
Year
Year
Total
Year**
Total Investment
1
$ 5,207*
$ 5,207
$ 205
$ 205 $
5,022
2
6,599
11,806
775
980
10,826
3
844
12,650
1,113
2,093
10,557
4
689
13,339
1,179
3,272
10,067
5
717
14,056
1,235
4,507
9,549
6
637
14,693
1,288
5,795
8,898
7
665
15,358
1,336
7,131
8,227
8
776
16,134
1,395
8,526
7,608
9
515
16,649
1,413
9,939
6,710
10
666
17,315
1,398
11,337
5,978
11
1,006
18,321
1,352
12,689
5,632
12
1,262
19,583
1,284
13,973
5,610
13
574
20,157
1,267
15,240
4,917
14
683
20,840
1,285
16,525
4,315
15
641
21,481
1,301
17,826
3,655
TOTAL
N/A
N/A
N/A
N/A
$107,551
divided by
15
Average Net Investment
$ 7,170
Total Net Income Over 15 -Year Period*** $ 18,595
Total Interest Expense Over 15 -Year Period 1,616
TOTAL: $ 20,211
divided by 15
Average Net Income Before Interest Expense $ 1,347
Average Return/Average Investment = $1,347/ $7,170 = 18.8 percent
*Investment in Year 1 reflects $400,000 savings due to Group W's redesign
proposal.
**All headend and hub expenditures are depreciated over 15 years on a straight-
line basis. Depreciation has therefore been reduced $27,000 per year related
to the lower level of expenditure.
***Net income has been increased by $405,000 (15 X $27,000) attributable to less
depreciation recorded as discussed in ** above.
G:Q{TBIT I
L'f Ov;.sal : BURNSV1LLE-
-E.AGAN VI.
CONSTRUC1IUN+
ENGINFEI?1N(5• f. CAPITAL.
Prep. by: T. SPEARFN
E?ni td, n•_/rr a. ft.
:"i
HUB DETAIL -
Dater 11/22/63
0
'1"V /. tr,.
154:•1:5
P
AS PROPOSED
0
'lfi--a,r FM
# or huLs ].
ITEM
STANDARD
USED
1.50(•.
UNITS 4 SUM
F•I111E: TOWER AND ANTENNAS:
0
Scr an. hi e: Jeri./r,•,
1600
G•.,ye., tower ; 150'
1.50
0
X
0 E'."�:.t.
Guyed tower ? 15N'
140
0
x
= 0
0
Si:li Support!150'
250
0
x
= 0
0-
Self SVRR•lrt> ]569'
=:60
0
x
_ 0
0 = 0
VHF As -t. (Typ.' A) 11300
UHF Ar t. (Type F•) 700
FM Ant. (Type C) 400
HUB:
Tnw-r' Jr.l h-tnt•
0 x 0
0 x *. 0
0 x 0
Antenna Sllb-tPt.
Tower and Antenr,a Total
X # of hki Li;:
Land/a,_:, a:
lease,)
x
C
E?ni td, n•_/rr a. ft.
:"i
leased
x
0
'1"V /. tr,.
154:•1:5
P
X
0
'lfi--a,r FM
St rant• I cr' Oal:. /ch..
1.50(•.
4;
x
0
Scr an. hi e: Jeri./r,•,
1600
P
k
0
S.:f and. IC.r. Zenith
_J 00
0
x
0
.; •: r a rr, h 1 .- i (o t: her)
0
4_•
k
0
IE00
k5
k
0
1'-.00
r
10
F. S •
9rA:'.
4'
>
N
AM rtinrl s j1.n�
5!:
AN mod t all%P.:.. 1-
lila
Art n,_••i in_,:t• net.
170(0
174'. i•?
x
5
Arg n,o-1 r.;ther)
1704]
0
x
0
AM demod _rib net
1900
1S(t•[9
e
_
Ar•1 derrrod tran=pert
1900
41
x
0
denied ir,.:t. net.
isoo
0
X
0
derr,od (oth.-r )
1B04t
N
x
0
L°P rm:•.J tran:.por't
5920
±9:iC•
),
)4?I
FM dwmod t.ran�::vor t
'2,300
23091
x
56
V1*1 =: t: r e o mod
600
0
x
0
i -M ae:cesa pro._.
20(1
0
x
0
<;ht•rtmave rrr,:-)vwi
700
l•:
x
0
HRC gOaerator
3000
3000
x
1
HRC / channel
350
0
x
0
Lm,'rsit-ncy override
7500
0
x
0
Ai V •J7' t. arnp•
500
L'
x
0
A/ %1
w1 t._1.(.'0"..1•:,)+
]SS; ,f
1.': oov.
J -
.:'V tw, +.rl'r. 441: 1`�i■
�`it[i4'.
yl
'4,
1.. .rl•:•1••J nr., is
Ar: ,'.:., L.., i' rtibn-r
1`.•UNO
1`i ,94)l+
Hll!I 'r0'�'Al.
<i IiV I•• )
- 4
= 4.
= E520
v (Ii
0
- 126Ci 4iv:
= 49
= 41
3000
0
0
0
i O`.;C
- 4]
70051
_ 15000
G\TII6IT I
PRGI-'OSAt.: P•URNSV I t_LEi- a AGAN VI. 0.11-451 RUC"I I QN, ENGINEERING, & CA II At.
Prep. by: T. SPEARL-:N
HEADEND
DETAIL
S
Date: 11/22/@3
P•rllli.l'.c/".a. 1'1;,
7`.5
leas.?,! Y
off-a,r IV /,ti..
AS PROPOSED HUB
1500 X'
jiff.--alr F19
ITEM STANDARD
USED
1500 X
UW IS
4 SUM
HE-ADEND TOWER AND ANTENNAB:
S.-raq.t.1wr- Zenitl.
3506
0 x
Ecr rr.r: It - r (other?
G,.ryed tr.,wer : 150' 150
0
x
0 E,_ t. =
0
Guyed tower ? 150' 140
0
X
0
O
Self Support< 150' 250
250
X
150 =
37500
Self Support.' • 150' 280
0
x
0 =
0
Tower Sub -tot
VHF Ant. (Tyne A) 1500 700 X 3
UHF A -.t. (Type P) 700 700 X`-.
FM Ant. (Type C) 400 400 X 2
Antenna Eivb-tt�k
Tower and Antenna Total
HEADEND:
0
l..and/a•:'re
S
70x50.1 >-
P•rllli.l'.c/".a. 1'1;,
7`.5
leas.?,! Y
off-a,r IV /,ti..
]`_i9c?
1500 X'
jiff.--alr F19
Scrami.;�-r Oal, /r_h.
1'.i::.:',
1500 X
Si:ramF•i.;r Jerr./,.h
1600
1600 X
S.-raq.t.1wr- Zenitl.
3506
0 x
Ecr rr.r: It - r (other?
0
C) k
7-.l
1, BOO
1@015 v
I.F. E'7- .. _. ._ or
1 `.)07G
150(' :k
C. 1.F. w/F. Er.
90",
90:9 )
AM ff. C'd _ub net
170;
1700 )
AM rr•tran::cor 1:
1700
0 Y
AM m•i inst. net..
1700
1700 X
AM mod (other)
1700
0 X
AM dc-mr-d sub nrt
18001
1800 X
AM dcmod transport
tB00
0 X
AM derrloci inst. net
.1800
0 X
AM demod (other)
1800
0 X
FM me -d transpt,rri
1920
1920. X
FM demod transport
2300
2300 x
FM stereo rtlod
800
0 Y.
FM aic.=ss proc.
200
0 X
Shortwave receiver
700
0 X
HRC generator
3000
3000 k
HRC / channel
300
0 X
A/V dist, amp.
500
0 X
A/V pat:rh(1.2x12)
1050
11.00 X
A/V switrh(20x15)+
19520
1°;520 X
A/V 'u-)tch(40':.::1.5)*
2S6B0
0 X
F rn e r El tc. r,•.; y i7-; err lde
7500
7500 )
* v a r he:-Aden•:1 ur,lt
.-i 000
300%C? X
AC ba•_i,rf pvlvor
15000
22000
1-`.- 1 1 :0 t•i
Page 2 of 2
0
47
7
1
0
S
0
VT
0
41
47
0
5
Gi
2
0
0
0
5!;
10
0
0
rb
'1
0
0
1
10
1
1
1
i t• I Ai.
,(/ua TOTAL
To7AL 0057-
37507
I Owl
= 1.402'
_ - COO
or 4300
"1800 ***
0
0
4000('
0
' 611
t•.
Fi
3600
0
N
0
1075 '0
--30800?
0
v�
3000
0
F'•
I10C
195 �i7
t'
- 3L 2 667- D � • '
307 3S'O
66 7�v
E\11TBIT 2
PRUP:SAL_: P.•URNSVILI_E--k:AGAN :'1.
CONSTRUC-11UN,
E:NGINEF_RiNCi, E: CAPITAL
Prep, bu: T. SPEAREN
HE:ADEND DETAIL.
Date: 11/22/53
SINGLE HEAUEND NO
HUB
ITEM
STANDARD
USED
UNITS
4 Sl1M
HE:ADEND TOWER AND
ANTENNAS:
Gr.lued tower, ; 150'
150
0
X
0
Gugwd tower .e 150'
140
0
X
E..t.
= 0
Self Support:: 150'
250
250
X
0
150
- 0
- 37500
Self SuPForC, 150'
250
0
X
0
= 0
Tower, Sub--rr.t.
- 37500
VHF Ant, (Type A)
1500
700
X
3
UHF Ant. (Type g)
700
700
X•'
= 2100
FM Ant, (Type C)
4O1r1
4OC
k '
�.
_ 14OC!
-
- - 000
•
Antenna Sub -tot,
4300
Towc.•r and
Antenna Total
= 41800 +++
HEADEND,
Building/sq. ft,
7`5
lea_er1
k
0
Off -all TV i_tn.
.5047
150,
X
E
_.
:- 1_00,
Ori --ai, FM /stn.
.:21
221
X
20
: .I amt:,F Oil. /ch.i
;041
1500
X
0
- v•, ::7
Sr:ramb)e[' Jerr./.:h
1600
1600
X
C_
-_ 0
5.:1 ambI.-rr 'l.enith
-5047
0
X
0a
£•_ramb)el- (other)
0
0
X
0
.- 0
St.-rer, _ynth,_.,i.z•:r
]60('
1500
X
"i
_: g
).::(:•41.4;
I.F. Nr�•.e_: s•;r
1`_,0('•
15ON
X
111
l
(:. 5 . F. w / P. f=..
C?00
900
X
0
I.P.C. w/F•._.
e00
800
k
0
AM :r.::.l s..lf r,et.
17041
170E
?
5
_ 1•
AM rr.;:r1 trans.p-:r-1.
1,1100
0
X
0
AN v.a,y Inst. n,: t.
17OLI
17O0
X
]. V•
= y:
_. 17O00
AM rr.o.1 (o*her )
1700
P.
X
0
Am d:.d s.ub net
1500
1EO0
X
4
=. 0
AM dem"d tr-anaport
1800.
0
X
0
= 72414'•
Ar] demon jno.t. 1.!xi
15(-10
41
k
0
_. 0
AM d.an..,.:1 (other )
1500
0
X
0
..- R
FM w:.tl trar,cport
1920
0
X
0
= 0
FM d,-ma4 transrort
2300.
0
X
0
= 0
FM trr m±, mc•d
F,OO
0
X
C
= 0
FM ac=es-- pro._.
200
0
X
0
0
Shortwave receiver
700
0
X
0
= 0
HRC 9ener'atnr
3000
3000
X
I
_ 0
HRC / c1jar.r.el
300
0
X
1.1
- 3014'
A/V dist. arts.
5O0
0
X
0
0
A/V aat.1-.(]-.<12)
1050
1100
X
= 0
_.
..- 2200
A/V swi1:.-r.12O11:15)+
19'i::P.
'
19520
X
_
A/V swt+.:1�1467:.•151ar
__1:_..}(1
0
X
47
Fm,-r9•-�•_y 1•:o�rride
_.0517('
7500
x
0
I,
::r tr•' hen•:I <-l.d ur.l r
31(1V0
;:1041
'a
1
- :+00@
AC b, -.i -::l '11` I`!•w.=1-
t5O00
PII'.', 1'tl-F:1� Ti•I'A:.
= -73360 +.•
•'I
Page 1 of 1