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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