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to 7 CFR part 1786, subpart F, are required to rescind the unadvanced balance of all outstanding electric notes

pursuant to 7 CFR 1786.158(j).

PART 1717—POST-LOAN POLICIES

AND PROCEDURES COMMON TO

INSURED AND GUARANTEED

ELECTRIC LOANS

Subparts A–C [Reserved]

Subpart D—Mergers and Consolidations of

Electric Borrowers

Sec.

1717.150 General.

1717.151 Definitions.

1717.152 Required documentation for all

mergers.

1717.153 Transitional assistance.

1717.154 Transitional assistance in connection with new loans.

1717.155 Transitional assistance affecting

new and preexisting loans.

1717.156 Transitional assistance affecting

preexisting loans.

1717.157 Requests for transitional assistance.

1717.158 Mergers with borrowers who prepaid RUS loans.

1717.159 Applications for RUS approvals of

mergers.

1717.160 Application contents.

1717.161 Application process.

Subparts E–F [Reserved]

Subpart G—Federal Pre-emption in Rate

Making in Connection With Power

Supply Borrowers

1717.300 Purpose.

1717.301 Policy.

1717.302 Definitions and rules of construction.

1717.303 Requirements of RUS documents.

1717.304 State regulatory authority rate jurisdiction.

1717.305 Pre-emption.

1717.306 RUS required rates.

1717.307 Distribution members’ rates.

1717.308 RUS approval of nonconforming

rates.

1717.309 Additional statutory pre-emption.

1717.310—1717.349 [Reserved]

Subpart H—Federal Pre-emption in Rate

Making in Connection With RUS Electric Borrowers in Bankruptcy

1717.350 Purpose.

1717.351 Policy.

1717.352 Definitions and rules of construction.

1717.353 Requirements of RUS documents.

1717.354 Pre-emption.

1717.355 RUS required rates.

1717.356 Additional statutory pre-emption.

Subparts I–L [Reserved]

Subpart M—Operational Controls

1717.600 General.

1717.601 Applicability.

1717.602 Definitions.

1717.603 RUS approval of extensions and additions.

1717.604 Long-range engineering plans and

construction work plans.

1717.605 Design standards, plans and specifications, construction standards, and

RUS accepted materials.

1717.606 Standard forms of construction

contracts, and engineering and architectural services contracts.

1717.607 Contract bidding requirements.

1717.608 RUS approval of contracts.

1717.609 RUS approval of general manager.

1717.610 RUS approval of compensation of

the board of directors.

1717.611 RUS approval of expenditures for

legal, accounting, engineering, and supervisory services.

1717.612 RUS approval of borrower’s bank or

other depository.

1717.613 RUS approval of data processing

and system control equipment.

1717.614 Notification of rate changes.

1717.615 Consolidations and mergers.

1717.616 Sale, lease, or transfer of capital assets.

1717.617 Limitations on distributions.

Subpart N—Investments, Loans, and

Guarantees by Electric Borrowers

1717.650 Purpose.

1717.651 General.

1717.652 Definitions.

1717.653 Borrowers in default.

1717.654 Transactions below the 15 percent

level.

1717.655 Exclusion of certain investments,

loans, and guarantees.

1717.656 Exemption of certain borrowers

from controls.

1717.657 Investments above the 15 percent

level by certain borrowers not exempt

under §1717.656(a).

1717.658 Records, reports and audits.

1717.659 Effect of this subpart on RUS loan

contract and mortgage.

Subpart O [Reserved]

1717.700—1717.749 [Reserved]

Subpart P [Reserved]

1717.750—1717.799 [Reserved]

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§ 1717.150 7 CFR Ch. XVII (1–1–00 Edition)

Subpart Q [Reserved]

1717.800—1717.849 [Reserved]

Subpart R—Lien Accommodations and

Subordinations for 100 Percent Private

Financing

1717.850 General.

1717.851 Definitions.

1717.852 Financing purposes.

1717.853 Loan terms and conditions.

1717.854 Advance approval—100 percent private financing of distribution, subtransmission and headquarters facilities, and

certain other community infrastructure.

1717.855 Application contents: Advance approval—100 percent private financing of

distribution, subtransmission and headquarters facilities, and certain other

community infrastructure.

1717.856 Application contents: Normal review—100 percent private financing.

1717.857 Refinancing of existing secured

debt—distribution and power supply borrowers.

1717.858 Lien subordination for rural development investments.

1717.859 Application process and timeframes.

1717.860 Lien accommodations and subordinations under section 306E of the RE Act.

1717.861—1717.899 [Reserved]

Subpart S—Lien Accommodations for Supplemental Financing Required by 7

CFR 1710.110

1717.900 Qualification requirements.

1717.901 Early approval.

1717.902 Other RUS requirements.

1717.903 Liability.

1717.904 Exemptions pursuant to section

306E of the RE Act.

1717.905—1717.949 [Reserved]

Subpart T [Reserved]

1717.950—1717.999 [Reserved]

Subpart U [Reserved]

1717.1000—1717.1049 [Reserved]

Subpart V [Reserved]

1717.1050—1717.1099 [Reserved]

Subpart W [Reserved]

1717.1100—1717.1149 [Reserved]

Subpart X [Reserved]

1717.1150—1717.1199 [Reserved]

Subpart Y—Settlement of Debt

1717.1200 Purpose and scope.

1717.1201 Definitions.

1717.1202 General policy.

1717.1203 Relationship between RUS and Department of Justice.

1717.1204 Policies and conditions applicable

to settlements.

1717.1205 Waiver of existing conditions on

borrowers.

1717.1206 Loans subsequent to settlement.

1717.1207 RUS obligations under loan guarantees.

1717.1208 Government’s rights under loan

documents.

AUTHORITY: 7 U.S.C. 901–950b, 1981; Pub. L.

99–591, 100 Stat. 3341–16; Pub. L. 103–354, 108

Stat. 3178 (7 U.S.C. 6941 et seq.).

SOURCE: 55 FR 38646, Sept. 19, 1990, unless

otherwise noted.

Subparts A–C [Reserved]

Subpart D—Mergers and Consolidations of Electric Borrowers

SOURCE: 61 FR 66871, Dec. 19, 1996, unless

otherwise noted.

§ 1717.150 General.

(a) This subpart establishes RUS

policies and procedures for mergers of

electric borrowers. These policies and

procedures are intended to provide borrowers with the flexibility to negotiate

and enter into mergers that offer advantages to the borrowers and to rural

communities, and adequately protect

the integrity and credit quality of RUS

loans and loan guarantees.

(b) Consistent with prudent lending

practices, the maintenance of adequate

security for RUS loans and loan guarantees, and the objectives of the Rural

Electrification Act of 1936, as amended,

(7 U.S.C. 901 et seq.) (RE Act), RUS encourages electric borrowers to consider

mergers when such action is likely to

contribute, in the long-term, to greater

operating efficiency and financial

soundness. Borrowers are specifically

encouraged to explore mergers that are

likely to enhance the ability of the

successor to provide reliable electric

service at reasonable cost to RE Act

beneficiaries.

(c) Pursuant to the loan documents

and RUS regulations, certain mergers

are subject to RUS approval. See

§1717.615.

(d) Since RUS must take action in

order to advance funds and otherwise

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Rural Utilities Service, USDA § 1717.152

conduct business with a successor, RUS

encourages borrowers to consult RUS

early in the process regardless of

whether RUS approval of the merger is

required. RUS will provide technical

assistance and guidance to borrowers

to help expedite the processing of their

requests and to help resolve potential

problems early in the process.

§ 1717.151 Definitions.

The definitions set forth in 7 CFR

1710.2 are applicable to this subpart unless otherwise stated. In addition, for

the purpose of this subpart, the following terms shall have the following

meanings:

Active borrower means an electric borrower that has, on the effective date,

an outstanding insured or guaranteed

loan from RUS for rural electrification, and whose eligibility for future

RUS financing is not restricted pursuant to 7 CFR part 1786.

Active distribution borrower means an

electric distribution borrower that has,

on the effective date, an outstanding

insured or guaranteed loan from RUS

for rural electrification, and whose eligibility for future RUS financing is not

restricted pursuant to 7 CFR part 1786.

Consolidation. See Merger.

Coverage ratios means collectively

TIER, OTIER, DSC and ODSC, as these

terms are defined in 7 CFR 1710.2.

Effective date means the date a merger is effective pursuant to applicable

state law.

Former distribution borrower means

any organization that

(1) Sells or intends to sell electric

power and energy at retail;

(2) At one time had an outstanding

loan made or guaranteed by RUS, or its

predecessor the Rural Electrification

Administration (REA) for rural electrification; and

(3) Either repaid such loans at face

value or prepaid pursuant to 7 CFR

part 1786.

Loan documents means the mortgage

(or other security instrument acceptable to RUS), the loan contract, and

the promissory note(s) entered into between the borrower and RUS.

Merger means: (1) A consolidation

where two or more companies are extinguished and a new successor is created, acquiring the assets, liabilities,

franchises and powers of those passing

out of existence;

(2) A merger where one company is

absorbed by another, the former ceasing to exist as a separate business entity, and the latter retaining its own

identity and acquiring the assets, liabilities, franchises and powers of the

former; or

(3) A transfer of mortgaged property

by one company to another where the

transferee acquires substantially as an

entirety the assets, liabilities, franchises, and powers of the transferor.

New loan means a loan to a successor

approved by RUS on or after the effective date.

Preexisting loan means a loan to a

borrower approved by RUS prior to,

and outstanding on the effective date.

Successor means the entity that continues as the surviving business entity

as of the effective date, and acquires

all the assets, liabilities, franchises,

and powers of the entity or entities

ceasing to exist as of the effective date.

Transitional assistance means financial relief provided to borrowers by

RUS during a limited period of time

following a merger.

§ 1717.152 Required documentation for

all mergers.

In order for RUS to advance funds,

send bills, and otherwise conduct business with a successor, the documents

listed in this section must be submitted to RUS regardless of the need

for RUS approval of the merger. Borrowers are responsible for ensuring

that these documents are received by

RUS in timely fashion. In cases of

mergers that require RUS approval, or

cases where borrowers must submit requests for transitional assistance, the

documents listed in this section may

be combined with the documents required by §§1717.157 and/or 1717.160

where appropriate.

(a) Prior to the effective date, borrowers must submit:

(1) A transmittal letter on corporate

letterhead signed by the manager of

each active borrower that is a party to

the proposed merger indicating the

borrower’s intention to merge and tentative timeframes, including the proposed effective date;

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§ 1717.153 7 CFR Ch. XVII (1–1–00 Edition)

(2) An original certified board resolution from each party to the proposed

merger affirming the board’s support of

the merger;

(3) All documents necessary to evidence the merger pursuant to applicable law. Examples include plan of

merger, articles of merger, amended

articles of incorporation, bylaws, and

notices and filings required by law.

These documents may be copies of documents filed elsewhere, unless otherwise specified by RUS; and

(4) A letter addressed to the Administrator from the counsel of at least one

of the active borrowers briefly describing the merger and indicating the relevant statutes under which the merger

will be consummated.

(b) On or after the effective date, borrowers must submit:

(1) An opinion of counsel from the

successor addressing, among other

things, any pending litigation, proper

authorization and consummation of

the merger, proper filing and perfection of RUS’ security interest, and all

approvals required by law. RUS will

provide the form of the opinion of

counsel to the successor;

(2) A letter signed by the manager of

the successor advising RUS of the effective date of the merger; the corporate name, address, and phone number; the names of the officers of the

successor; and the taxpayer identification number; and

(3) Evidence of proper filing and perfection of RUS’ security interest, as instructed by RUS, and an executed loan

contract.

§ 1717.153 Transitional assistance.

RUS recognizes that short-term financial stresses can follow even the

most beneficial mergers. To help stabilize electric rates, enhance the credit

quality of outstanding loans made or

guaranteed by the Government, and

otherwise ease the transition period before the long-term efficiencies and

economies of a merger can be realized,

RUS may approve one or more types of

transitional assistance to a successor

under the conditions set forth in this

part.

§ 1717.154 Transitional assistance in

connection with new loans.

Requests for transitional assistance

in connection with new loans may be

submitted to RUS no later than the

loan application.

(a) Loan processing priority. (1) RUS

loans are generally processed in chronological order based on the date the

complete application is received in the

regional or division office. At the borrower’s request, RUS will offer loan

processing priority for the first loan to

a successor, provided that the loan is

approved by RUS not later than 5 years

after the effective date of the merger.

For any subsequent loans approved

during those 5 years, RUS may offer

loan processing priority. In reviewing

requests for loan processing priority on

subsequent loans, RUS will consider

the loan authority for the fiscal year,

the borrower’s projected cash flows, its

electric rates and rate disparity, and

the likely mitigating effects of priority

loan processing. See 7 CFR 1710.108 and

1710.119.

(2) Loan processing priority is available following any merger where at

least one of the merging parties is an

active borrower.

(b) Supplemental financing. (1) RUS

generally requires that an applicant for

a municipal rate loan obtain a portion

of its debt financing from a supplemental source without an RUS guarantee. See 7 CFR 1710.110. RUS will, at

the borrower’s request, waive the requirement to obtain supplemental financing for the first RUS loan approved after the effective date if that

first loan is a municipal rate loan

whose loan period does not exceed 2

years, and the loan is approved by RUS

not later than 5 years after the effective date. For any subsequent loans approved during these 5 years, or if the

borrower requests a loan period longer

than 2 years, RUS may, subject to the

availability of loan funds, waive or reduce the amount of supplemental financing required. In reviewing requests

to reduce or waive supplemental financing on subsequent loans or on

loans with a loan period longer than 2

years, RUS will consider the differences in interest rates between RUS

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Rural Utilities Service, USDA § 1717.155

and supplemental loans and the impacts of this difference on the borrower’s projected cash flows and its

electric rates and rate disparity. If significant differences would result, the

waiver will be granted.

(2) Waiver of supplemental financing

may be available if:

(i) All parties to the merger are active distribution borrowers, or

(ii) At least one of the merging parties is an active distribution borrower,

all merging parties are either active

distribution borrowers or former distribution borrowers, and the merger is

effective after December 19, 1996.

(c) Reimbursement of general funds and

interim financing. (1) Borrowers may request RUS loan funds to reimburse

general funds and/or interim financing

used to finance equipment and facilities included in a RUS approved construction work plan or amendment if

the construction was completed immediately preceding the current loan period. This reimbursement period is generally limited to 24 months. See 7 CFR

1710.109. RUS may, in connection with

the first RUS loan approved after the

effective date, approve a reimbursement period of up to 48 months prior to

the current loan period if the loan is

approved not later than 5 years after

the effective date. In reviewing requests for this longer reimbursement

period, RUS will consider the stresses

that the transaction and other costs of

entering into the merger places on the

borrower’s rates and cash flows, and

the mitigating effects of more generous

reimbursement.

(2) A longer reimbursement period

may be available if:

(i) All parties to the merger are active distribution borrowers, or

(ii) At least one of the merging parties is an active distribution borrower,

all merging parties are either active

distribution borrowers of former distribution borrowers, and the merger is

effective after December 19, 1996.

§ 1717.155 Transitional assistance affecting new and preexisting loans.

Requests for transitional assistance

affecting new and preexisting loans

must be received by RUS no later than

2 years after the effective date.

(a) Section 12 deferments. (1) Section 12

of the RE Act (7 U.S.C. 912) allows RUS

to extend the time of payment of interest or principal of RUS loans. Section

12 deferments do not extend the final

maturity of the loan; lower payments

during the deferment period result in

higher payments later. Therefore, RUS

may approve a Section 12 deferment of

loan payments of up to 5 years only if

such deferments will help to avoid substantial increases in retail electric

rates during the transition period,

without placing borrowers in financial

stress after the deferment period.

(2) Section 12 deferment may be

available following any merger where

at least one of the merging parties is

an active borrower.

(b) Coverage ratios. Required levels for

coverage ratios are set forth in 7 CFR

1710.114 and in the loan documents.

RUS may approve a plan, on a case by

case basis, that provides for a phase-in

period for these coverage ratios of up

to 5 years from the effective date.

Under such a plan the successor would

be permitted to project and achieve

lower levels for one or more of these

coverage ratios during the phase-in period.

(1) A phase-in plan for coverage ratios must provide a pro forma level for

each ratio during each year of the

phase-in period and be supported by a

financial forecast covering a period of

not less than 10 years from the effective date of the merger. The plan must

demonstrate that a minimum TIER

level of 1.00 will be achieved in each

year, that trends will be generally favorable, that the borrower will achieve

the levels required in its loan documents and RUS regulations by the end

of the phase-in period, and that these

levels will be maintained in subsequent

years.

(2) In reviewing phase-in plans for

coverage ratios, RUS will review rates,

rate disparity, and likely mitigating

effects of the proposed phase-in plan.

(3) The borrower is responsible for obtaining approvals of supplemental

lenders.

(4) Upon RUS approval of a phase-in

plan, the levels in that plan will be

substituted for the levels required in

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§ 1717.156 7 CFR Ch. XVII (1–1–00 Edition)

the borrower’s preexisting loan documents and will be incorporated in any

new loan or security documents.

(5) A phase in plan for coverage ratios may be available if:

(i) All parties to the merger are active distribution borrowers, or

(ii) At least one of the merging parties is an active distribution borrower,

all merging parties are either active

distribution borrowers or former distribution borrowers, and the merger is

effective after December 19, 1996.

§ 1717.156 Transitional assistance affecting preexisting loans.

The fund advance period for an insured loan, which is the period during

which RUS may advance loan funds to

a borrower, terminates automatically

after a specific period of time. See 7

CFR 1714.56. If, on the effective date

the original fund advance period or the

fund advance period as extended pursuant to 7 CFR 1714.56(c), on any preexisting RUS loan to any of the active

borrowers involved in a merger has not

terminated, such fund advance period

shall be automatically lengthened by 2

years. On the borrower’s request RUS

will prepare documents necessary for

the advance of loan funds. RUS will

prepare documents for the borrower’s

execution that will reflect this extension and will provide the legal authority for RUS to advance funds to the

successor.

§ 1717.157 Requests for transitional assistance.

(a) If the merger requires RUS approval, the borrower should, where possible, indicate that it desires transitional assistance at the time it requests approval of the merger. The formal request for transitional assistance

must be received by RUS as specified in

§§1717.155 and 171.156. Documents listed

in this section may be combined with

the documents required by §§1717.152

and/or 1717.160 where appropriate. If the

request for transitional assistance is

submitted at the same time as a loan

application, documents listed in this

section may be combined with the loan

application documents where appropriate. See 7 CFR part 1710, subpart I.

A request for transitional assistance

must include:

(1) Transmittal letter(s) formally

listing the types of transitional assistance requested. If the request is submitted before the effective date, a

transmittal letter must be signed by

the manager of each party to the transaction. If the request is submitted on

or after the effective date, a transmittal letter must be signed by the

manager of the successor. Transmittal

letter(s) must be signed originals on

corporate letterhead stationery;

(2) Board resolution(s). If the request

is submitted before the effective date,

a separate board resolution must be

submitted from each entity involved in

the merger. If the request is submitted

on or after the effective date, a board

resolution from the successor must be

submitted. Each board resolution must

be a certified original;

(3) A merger plan, financial forecasts,

and any available studies such as net

present value analyses showing the anticipated costs and benefits of the

merger and likely timeframes for the

merger. The merger plan must clearly

identify those benefits that cannot be

achieved without a merger, and those

benefits that can be achieved through

other means;

(4) If the transitional assistance requires RUS approval, the type and extent of the mitigation that the transitional assistance is expected to provide; and

(5) Other information that may be

relevant.

(b) Borrowers are responsible for ensuring that requests for transitional

assistance are complete and sound in

form and substance when they are submitted to RUS. After submitting a request, borrowers shall promptly notify

RUS of any changes or events that materially affect the request or any information in the request.

(c) In considering whether to approve

requests for transitional assistance,

RUS will evaluate the costs and benefits of the merger; the type and extent

of the likely transitional stress; whether the transitional assistance requested

is likely to materially mitigate such

stress; and the likely impacts on electric rates and on the security of RUS

loans. Review factors applicable to

each type of transitional assistance are

set forth in §§1717.154–1717.156.

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Rural Utilities Service, USDA § 1717.161

§ 1717.158 Mergers with borrowers

who prepaid RUS loans.

In some cases, an active distribution

borrower may merge with a borrower

that has prepaid RUS debt at a discount pursuant to 7 CFR part 1786, and

whose eligibility for future RUS financing is thereby restricted. During

the period when the restrictions on future financing are in effect, the successor will be eligible for RUS loans to

finance facilities to serve consumers

located in the territory that was served

by the active distribution borrower immediately prior to the effective date,

provided that other requirements for

loan eligibility are met.

§ 1717.159 Applications for RUS approvals of mergers.

If a proposed merger requires RUS

approval according to RUS regulations

and/or the loan documents executed by

any of the active borrowers involved,

the application must be submitted to

RUS not later than 90 days prior to the

effective date of the proposed borrower

action. A distribution borrower should

consult with its assigned RUS general

field representative, and a power supply borrower with the Director, Power

Supply Division for general information prior to submitting the request.

§ 1717.160 Application contents.

An application for RUS approval of a

merger must include the documents

listed in this section. Documents listed

in this section may be combined with

the documents required by §§1717.152

and/or 1717.157 where appropriate.

(a) Transmittal letters signed by the

managers of all borrowers and non-borrowers who are parties to the proposed

merger. These letters must include the

actual corporate name, address, and

taxpayer identification number of all

parties to the proposed merger. The

transmittal letters must be signed

originals on corporate letterhead stationery.

(b) Resolutions from the boards of directors of all borrowers and non-borrowers

who are parties to the proposed merger. This document is the formal request

by each entity for RUS approval of the

proposed merger. The board resolution

must include a description of the proposed merger, including timeframes,

and authorization for RUS to release

appropriate information to supplemental or other lenders, and for these

lenders to release appropriate information to RUS. Each board resolution

must be a certified original.

(c) Evidence that the proposed merger

will result in a viable entity, and that

the security of outstanding RUS loans

will not be adversely affected by the

action. This evidence shall include financial forecasts, and any available

studies such as net present value analyses covering a period of not less than

10 years from the effective date of the

merger, as well as information about

any threatened actions by other parties that could adversely affect the financial condition of any of the parties

to the proposed merger, or of the successor. Such threatened actions may

include annexations or other actions

affecting service territory, loads, rates

or other such matters.

(d) Regulatory information about pending federal or state proceedings pertaining to any of the parties that could

have material effects on the successor.

(e) Rate information. Distribution and

power supply borrowers shall submit

schedules of proposed rates after the

merger, including the effects of the

proposed action on rates and the status

of any pending rate cases before a state

regulatory authority. The rates of

power supply borrowers are subject to

RUS approval. If rates are not projected to change after the merger, a

statement to that effect will suffice.

(f) Area coverage and line extension

policies. If any distribution systems are

parties to the proposed merger, a statement of proposed area coverage and

line extension policies for the successor.

§ 1717.161 Application process.

(a) Borrowers are responsible for ensuring that their applications for RUS

approval of a merger are complete and

sound in form and substance when they

are submitted to RUS. After submitting an application, borrowers shall

promptly notify RUS of any changes or

events that materially affect the application or any information in the application.

(b) In reviewing borrower requests for

approval of mergers, RUS will consider

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§ 1717.300 7 CFR Ch. XVII (1–1–00 Edition)

the likely effects of the action on the

ability of the successor to provide reliable electric service at reasonable cost

to RE Act beneficiaries and on the security of outstanding RUS loans.

Among the factors RUS will consider

are whether the proposed merger is

likely to:

(1) Contribute to greater operating

efficiency and financial soundness;

(2) Mitigate high electric rates and or

rate disparity;

(3) Help borrowers to diversify their

loads or otherwise hedge risks;

(4) Have beneficial effects on rural

economic development in the community served by the borrower, such as diversifying the economic base or alleviating unemployment; and

(5) Provide other benefits consistent

with the purposes of the RE Act.

(c) RUS will not approve a merger if,

in the sole judgment of the Administrator, such action is likely to have an

adverse effect on the credit quality of

outstanding loans made or guaranteed

by the Government. RUS will thoroughly review each request for approval of such action, including review

of the feasibility and security of outstanding Government loans according

to the standards in 7 CFR 1710.112 and

1710.113, respectively, and in other RUS

regulations.

(d) RUS will keep the borrowers apprised of the progress of their applications.

Subparts E–F [Reserved]

Subpart G—Federal Pre-emption

in Rate Making in Connection

With Power Supply Borrowers

§ 1717.300 Purpose.

This subpart contains regulations of

the Rural Utilities Service (RUS) implementing provisions of Section 4 of

the RE Act (7 U.S.C. 904) which authorize the Administrator to establish

terms and conditions of loans and implementing provisions of the RUS

wholesale power contracts and other

RUS documents which provide for the

establishment of rates to be charged by

power supply borrowers for the sale of

electric power and energy. This subpart

contains the general regulations of

RUS for the pre-emption, under certain

circumstances, which are not exclusive, of the regulation of a power supply borrower’s rates by a state regulatory authority under state law and

for the exercise of exclusive jurisdiction over rates by RUS pursuant to the

RUS documents.

§ 1717.301 Policy.

(a) RUS makes and guarantees loans

to borrowers to bring electric service

to persons in rural areas. RUS requires,

as a condition to making or guaranteeing any loans to power supply borrowers, that the borrower enter into

RUS wholesale power contracts with

its several members and assign and

pledge such contracts as security for

the repayment of loans made or guaranteed by RUS and for other loans

which, pursuant to the RE Act, RUS

has permitted to be secured pursuant

to the RUS mortgage. The RUS wholesale power contract requires, among

other matters, that the rates charged

for power and energy sold thereunder

produce revenues sufficient to enable

the power supply borrower to make

payments on account of all indebtedness of the power supply borrower. The

Administrator relies upon the RUS

wholesale power contracts together

with other RUS documents to find and

certify, as required in section 4 of the

RE Act (7 U.S.C. 904), that the security

for the loan is reasonably adequate and

the loan will be repaid within the time

agreed.

(b) RUS requires power supply borrowers to take such actions as may be

necessary to charge rates for the sale

of electric power and energy which are

sufficient to pay the principal and interest on loans made or guaranteed by

RUS in a timely manner and to meet

the requirements of the RUS wholesale

power contract and other RUS documents.

(c) With respect to power supply borrowers which are not subject to rate

regulation by a state regulatory authority, RUS requires that such borrowers establish rates and obtain RUS

approval of such rates as required by

the terms of the RUS wholesale power

contract and other RUS documents.

(d) With respect to power supply borrowers which are subject to regulation

151

Rural Utilities Service, USDA § 1717.302

by a state regulatory authority, RUS

does not make or guarantee a loan for

the construction, operation or enlargement of any generating plant or transmission facility unless the consent of

the state regulatory authority having

jurisdiction in the premises is first obtained.

(e) Pursuant to applicable provisions

of state law state regulatory authorities regulate many aspects of a power

supply borrowers business activities,

including such matters as the setting

of wholesale electric rates, the borrowing of money, and the mortgaging

of property. A state regulatory

authority’s jurisdiction over the rates

charged by a power supply borrower

shall be pre-empted where the Administrator has determined that such jurisdiction has compromised Federal interests, including without limitation,

the ability of the borrower to repay its

secured loans in accordance with the

terms of the RUS documents. Thereupon, RUS shall, pursuant to the RUS

documents, exercise exclusive jurisdiction over the rates charged by a power

supply borrower.

[55 FR 38646, Sept. 19, 1990; 55 FR 53100, Dec.

26, 1990]

§ 1717.302 Definitions and rules of construction.

(a) Definitions. For the purpose of this

subpart, the following terms shall have

the following meanings:

Administrator means the Administrator of RUS.

Borrower means any organization

which has an outstanding loan made or

guaranteed by RUS for rural electrification. Unless otherwise stated in

the text, ‘‘borrower’’ shall mean power

supply borrower.

Loan contract means the agreement,

as amended, supplemented, or restated

from time to time, between a borrower

and RUS providing for loans made or

guaranteed pursuant to the RE Act.

Power supply borrower means any borrower engaged in the wholesale sale of

electric power and energy to distribution members either directly or though

other power supply borrowers pursuant

to RUS wholesale power contracts.

RE Act means Rural Electrification

Act of 1936, as amended (7 U.S.C. 901 et

seq.).

REA means the Rural Electrification

Administration formerly an agency of

the United States Department of Agriculture and predecessor agency to RUS

with respect to administering certain

electric and telephone loan programs.

RUS means the Rural Utilities Service, an agency of the United States Department of Agriculture established

pursuant to Section 232 of the Federal

Crop Insurance Reform and Department of Agriculture Reorganization

Act of 1994 (Pub. L. 103–354, 108 Stat.

3178), successor to REA with respect to

administering certain electric and telephone programs. See 7 CFR 1700.1.

RUS documents means the loan contract, mortgage and RUS wholesale

power contract of a power supply borrower.

RUS mortgage means the mortgage

and security agreement, as from time

to time supplemented, amended and restated, made by and among the borrower, RUS, and, if a party thereto,

third party lenders, or any other form

of mortgage or security instrument or

indenture of mortgage and deed of

trust, securing the payment of outstanding loans made or guaranteed by

RUS and other lenders.

RUS wholesale power contract means

the contract for the wholesale sale of

electric power and energy between a

power supply borrower and its member

as approved by RUS.

Secured loans shall mean outstanding

loans secured pursuant to the RUS

mortgage.

State regulatory authority means any

state board or local governing body

having jurisdiction under state law to

regulate, or in any way, approve the

electric rates charged by a power supply borrower or electric distribution

member of a power supply borrower.

(b) Rules of Construction. Unless the

context shall otherwise indicate, the

terms defined in §1717.302(a) hereof include the plural as well as the singular,

and the singular as well as the plural.

The words ‘‘herein,’’ and ‘‘hereunder’’,

and words of similar import, refer to

this subpart as a whole. ‘‘Includes’’ and

‘‘including’’ are not limiting and ‘‘or’’

is not exclusive.

[55 FR 38646, Sept. 19, 1990, as amended at 59

FR 66440, Dec. 27, 1994]

152

§ 1717.303 7 CFR Ch. XVII (1–1–00 Edition)

1The Wholesale Power Contract, with

minor modifications which are approved by

RUS on a case by case basis, provides that

the rate charged for electric power and energy, shall produce revenues which shall be

sufficient, but only sufficient, with the revenues of the Seller from all other sources, to

meet the cost of the operation and maintenance (including without limitation, replacements, insurance, taxes and administrative

and general overhead expenses) of the generating plant transmission system and related

facilities of the Seller, the cost of any power

and energy purchased for resale hereunder by

the Seller, the cost of transmission service,

make payments on account of principal and

interest on all indebtedness of the Seller,

and to provide for the establishment and

maintenance of reasonable reserves. (Section

4. Rates (b), RUS Form 444, ‘‘Wholesale

Power Contract—Federated Cooperative’’;

Rev. 6–60.)

§ 1717.303 Requirements of RUS documents.

(a) Pursuant to the terms of the RUS

documents each power supply borrower

shall establish and adjust rates for the

sale of electric power and energy in

such a manner as to assure that the

borrower will be able to make required

payments on secured loans.

(b) Pursuant to the terms of the RUS

wholesale power contract, the Board of

Directors or Board of Trustees of the

power supply borrower shall review

rates not less frequently than once

each calendar year and revise its rates

as therein set forth.1 The RUS wholesale power contract further provides

that the borrower shall notify the Administrator not less than 30 nor more

than 45 days prior to the effective date

of any adjustment and shall set forth

the basis upon which the rate is to be

adjusted and established. The RUS

wholesale power contract provides that

no final revision in rates shall be effective unless approved in writing by the

Administrator.

(c) Pursuant to the terms of the RUS

mortgage, each power supply borrower

must design its rates as therein set

forth and must give 90 days prior notice to RUS of any proposed change in

its general rate structure.

(Approved by the Office of Management and

Budget under control number 0572–0089)

§ 1717.304 State regulatory authority

rate jurisdiction.

(a) In the event that rate revisions

required by the terms of the RUS

wholesale power contract or other RUS

documents may be subject to the approval of a state regulatory authority,

the power supply borrower shall seek

such required approval in a timely

manner.

(b) RUS recognizes the need of state

regulatory authorities for documents,

information and records for use in connection with an application for rate approval and will consider any reasonable

request by a borrower or a state regulatory authority for such documents,

information and records. The failure of

RUS to provide requested documents,

information or records shall not limit

any rights of RUS including the right

with respect to pre-emption of the

state regulatory authority as provided

in this subpart.

(c) In the event that the state regulatory authority shall fail to act favorably upon the borrower’s application

for rate increases required by terms of

the RUS wholesale power contract or

other RUS documents, the borrower

shall pursue such legal and administrative appeals as may be available to it,

unless RUS shall approve otherwise in

writing.

§ 1717.305 Pre-emption.

(a) Inadequate rates. State regulatory

authority jurisdiction over a power

supply borrower’s rates shall be preempted by the RE Act if the Administrator shall have determined that the

borrower’s rates approved by the state

regulatory authority are, after taking

into account the borrower’s costs and

expenses, inadequate to produce revenues sufficient to permit the borrower

to make required payments on its secured loans and the borrower has failed

to make required payments on its secured loans.

(b) Public notice. The Administrator

shall:

(1) Notify the borrower and the state

regulatory authority in writing of the

determination, indicating the jurisdiction of the state regulatory authority

over the rates of the borrower has been

pre-empted pursuant to this part and

the borrower shall henceforth establish

153

Rural Utilities Service, USDA § 1717.309

its rates in accordance with the term

of the RUS documents.

(2) publish a notice in the FEDERAL

REGISTER informing the public of the

action.

[55 FR 38646, Sept. 19, 1990; 55 FR 53100, Dec.

26, 1990]

§ 1717.306 RUS required rates.

(a) Upon the publication in the FEDERAL REGISTER of the notice of preemption of state regulatory authority

as provided in this subpart, RUS will

exercise exclusive jurisdiction over the

rates of the borrower pursuant to the

terms of the RUS documents. The borrower shall immediately establish

rates with the approval of RUS that

are sufficient to satisfy the requirements of the RUS wholesale power contract and other RUS documents described in §1717.303 of this subpart. The

borrower shall establish such rates notwithstanding provisions of state law,

and rules, orders or other actions of

state regulatory authorities, and notwithstanding any provision of the RUS

documents referring to such laws,

rules, orders or actions.

(b) So long as the state regulatory

authority shall be pre-empted hereunder, RUS shall be considered the

governmental regulatory body with jurisdiction over rates for the purposes of

the RUS documents and for the purposes of section 1129(a)(6) of the Bankruptcy Code of 1978, as amended (11

U.S.C. 1129(a)(6)).

(c) If a borrower, which is subject to

exclusive RUS rate jurisdiction, shall

fail to establish rates in accordance

with terms of the RUS wholesale power

contract and other RUS documents in

a timely fashion, RUS may proceed to

exercise any and all rights and remedies available pursuant under the RUS

documents or otherwise.

(d) The jurisdiction of the state regulatory authority over the rates of the

borrower shall continue to be preempted hereunder until the Administrator shall in writing approve the resumption of jurisdiction by the state

regulatory authority and publish in the

FEDERAL REGISTER a notice to such effect. The Administrator shall approve

resumption only after determining

that such jurisdiction shall be exercised in a manner consistent with Federal interests.

[55 FR 38646, Sept. 19, 1990; 55 FR 53100, Dec.

26, 1990]

§ 1717.307 Distribution members’ rates.

A state regulatory authority which

has been pre-empted as provided in this

subpart may continue to exercise jurisdiction, pursuant to applicable provisions of state law, over all other business affairs of the power supply borrower and over the rates of its distribution members: Provided, however, that

the state regulatory authority shall

treat any RUS approved rate for the

power supply borrower as fair and reasonable and shall not in any manner,

directly or indirectly, prevent or impede the distribution member from recovering the costs of paying the RUS

approved rates to the power supply borrower.

§ 1717.308 RUS approval of nonconforming rates.

Borrowers may request and RUS may

approve rates which do not conform

with the requirements of the RUS

wholesale power contract and other

RUS documents if RUS determines, in

its sole discretion, that such approval

is in the interests of RUS. If RUS approval is granted prior to pre-emption

hereunder, and if the state regulatory

authority shall have approved such

rates, then, so long as RUS’s approval

of the nonconforming rates remains in

effect, the jurisdiction of the state regulatory authority over the rates of the

borrower shall not be pre-empted hereunder.

§ 1717.309 Additional statutory preemption.

This subpart addresses pre-emption

of state law and state regulatory authority in only those specific circumstances herein described. Nothing

in this subpart waives, limits, or otherwise affects the explicit pre-emption or

pre-emption, which is implicit and

shall occur pursuant to the RE Act as

a matter of law, of state law or action

of a state regulatory authority where

such state law or such action compromises Federal interests, including

the ability of any borrower, including

154

§§ 1717.310—1717.349 7 CFR Ch. XVII (1–1–00 Edition)

power supply borrowers, to repay loans

made or guaranteed by RUS.

§§ 1717.310—1717.349 [Reserved]

Subpart H—Federal Pre-emption

in Rate Making in Connection

With RUS Electric Borrowers in

Bankruptcy

SOURCE: 55 FR 38653, Sept. 19, 1990, unless

otherwise noted.

§ 1717.350 Purpose.

This subpart contains regulations of

the Rural Utilities Service (RUS) implementing provisions of section 4 of

the RE Act (7 U.S.C. 904) which authorizes the Administrator to establish

terms and conditions of loans, and provisions of the RUS documents which

provide for the establishment of rates

for electric service to be charged by

RUS electric borrowers. This subpart

contains the general regulations of

RUS for the pre-emption of the regulation by a State Regulatory Authority

under State law of an RUS borrower’s

rates and for the exercise by RUS, pursuant to the RUS documents, of exclusive jurisdiction over rates of a borrower by or against whom a case under

the Bankruptcy Code of 1978, as amended, has commenced.

§ 1717.351 Policy.

(a) RUS makes and guarantees loans

to borrowers to bring electric service

to persons in rural areas. To accomplish this objective, RUS normally requires, as a condition to making or

guaranteeing any loans to an electric

borrower, that the borrower execute

and deliver the RUS documents in the

form prescribed by RUS. The RUS

mortgage secures repayment of the

loans made or guaranteed by RUS and

other loans which, pursuant to the RE

Act, RUS has permitted to be secured

pursuant to the RUS mortgage. The

Administrator relies upon the RUS

mortgage together with other RUS

documents to find and certify, as required by section 4 of the RE Act (7

U.S.C. 904), that the security for the

loan is reasonably adequate and the

loan will be repaid within the time

agreed.

(b) RUS requires borrowers to take

such actions as may be necessary to establish rates for electric service which

are sufficient to pay the principal of

and interest on the loans made or guaranteed by RUS in a timely manner and

to meet the requirements of the RUS

documents.

(c) With respect to borrowers whose

rates are not regulated by a State Regulatory Authority, RUS requires that

such borrowers establish rates and to

obtain RUS approval of such rates as

required by the RUS documents.

(d) To protect Federal interests, including without limitation the ability

of the borrower to repay RUS loans,

RUS’s policy is to exercise, pursuant to

the RUS documents, exclusive jurisdiction over the rates for electric service

charged by a borrower by or against

whom a case under the Bankruptcy

Code of 1978, as amended, has commenced.

§ 1717.352 Definitions and rules of construction.

(a) Definitions. For the purpose of this

subpart, the following terms shall have

the following meanings:

Administrator means the Administrator of RUS.

Bankruptcy code of 1978, as amended,

means the Bankruptcy Reform Act of

1978, as amended (11 U.S.C. 101 et seq.).

Borrower means any organization

which has an outstanding loan made or

guaranteed by RUS for rural electrification.

RE Act means Rural Electrification

Act of 1936, as amended (7 U.S.C. 901 et

seq.).

REA means the Rural Electrification

Administration formerly an agency of

the United States Department of Agriculture and predecessor agency to RUS

with respect to administering certain

electric and telephone loan programs.

RUS means the Rural Utilities Service, an agency of the United States Department of Agriculture established

pursuant to Section 232 of the Federal

Crop Insurance Reform and Department of Agriculture Reorganization

Act of 1994 (Pub. L. 103–354, 108 Stat.

3178), successor to REA with respect to

administering certain electric and telephone programs. See 7 CFR 1700.1.

155

Rural Utilities Service, USDA § 1717.356

RUS documents means the RUS loan

contract, RUS mortgage and, if the

Borrower is engaged in the wholesale

sale of electric power and energy to

members pursuant to RUS Wholesale

Power Contracts, the RUS Wholesale

Power Contract.

RUS loan contract means the agreement, as amended, supplemented, or restated from time to time, between a

borrower and RUS providing for loans

made or guaranteed pursuant to the

RE Act.

RUS mortgage means the mortgage

and security agreement, as from time

to time supplemented, amended and restated, made by and among the borrower, RUS, and, if a party thereto,

third party lenders, or any other form

of mortgage or security instrument or

indenture of mortgage and deed of

trust, securing the payment of outstanding loans made or guaranteed by

RUS and other lenders.

RUS wholesale power contract means

the contract for the wholesale sale of

electric power and energy between a

power supply borrower and its member

as approved by RUS.

Secured loans shall mean outstanding

loans secured pursuant to the RUS

mortgage.

State regulatory authority means any

state board or local governing body

having jurisdiction under state law to

regulate, or in any way, approve the

electric rates charged by a borrower.

(b) Rules of construction. Unless the

context shall otherwise indicate, the

terms defined in §1717.352(a) hereof include the plural as well as the singular,

and the singular as well as the plural.

The words ‘‘herein,’’ and ‘‘hereunder’’,

and words of similar import, refer to

this subpart as a whole. ‘‘Includes’’ and

‘‘including’’ are not limiting and ‘‘or’’

is not exclusive.

[55 FR 38653, Sept. 19, 1990, as amended at 59

FR 66440, Dec. 27, 1994]

§ 1717.353 Requirements of RUS documents.

Each borrower shall establish and adjust rates for electric service as set

forth in the RUS documents to assure

that the borrower will be able to make

required payments on secured loans

and to otherwise meet the terms of the

RUS documents.

§ 1717.354 Pre-emption.

State Regulatory Authority jurisdiction over an RUS borrower’s rates shall

be pre-empted by the RE Act and RUS

shall have exclusive jurisdiction over

the borrower’s rates:

(a) On October 19, 1990, with respect

to any borrower by or against whom a

case under the Bankruptcy Code of

1978, as amended, was commenced prior

to and remains outstanding on October

19, 1990; and

(b) With respect to all other borrowers, upon the filing of a petition by

or against the borrower commencing a

case under the Bankruptcy Code of

1978, as amended.

§ 1717.355 RUS required rates.

(a) Upon the pre-emption of State

Regulatory Authority as provided in

this subpart, RUS will exercise exclusive jurisdiction over the rates of the

borrower pursuant to the terms of the

RUS documents.

(b) So long as the State Regulatory

Authority shall be pre-empted hereunder, RUS shall be considered the

governmental regulatory body with jurisdiction over rates for all purposes,

including for the purposes of the RUS

documents and for the purposes of section 1129(a)(6) of the Bankruptcy Code

of 1978, as amended (11 U.S.C.

1129(a)(6)).

(c) RUS shall, pursuant to the terms

of the RUS documents, exercise exclusive jurisdiction over the rates of the

borrower until the Administrator shall

in writing approve the resumption of

jurisdiction by the State Regulatory

Authority. The Administrator shall approve resumption only after determining that such jurisdiction shall be

exercised in a manner consistent with

Federal interests.

§ 1717.356 Additional statutory preemption.

This subpart addresses pre-emption

of State law and State Regulatory Authority upon the filing of a petition by

or against the borrower commencing a

case under the Bankruptcy Code of

1978, as amended. Nothing in this subpart waives, limits, or otherwise affects the explicit pre-emption or preemption, which is implicit and shall

156

§ 1717.600 7 CFR Ch. XVII (1–1–00 Edition)

occur pursuant to the RE Act as a matter of law, of State law or action of a

State Regulatory Authority where

such State law or such action compromises Federal interests, including

the ability of any borrower to repay

loans made or guaranteed by RUS.

Subparts I–L [Reserved]

Subpart M—Operational Controls

SOURCE: 60 FR 67405, Dec. 29, 1995, unless

otherwise noted.

§ 1717.600 General.

(a) General. The loan contract and

mortgage between the Rural Utilities

Service (RUS) and electric borrowers

imposes certain restrictions and controls on the borrowers and gives RUS

(and other co-mortgagees in the case of

the mortgage) the right to approve or

disapprove certain actions contemplated by the borrowers. Certain of

these controls and approval rights are

referred to informally as ‘‘operational

controls’’ because they pertain to decisions or actions with respect to the operation of the borrowers’ electric systems. The approval authority granted

to RUS by the loan contract or mortgage regarding each decision or action

subject to controls is often stated in

broad, unlimited terms. This subpart

lists the main operational controls affecting borrowers and establishes for

each area of control the circumstances

under which RUS approval of a decision or action by a borrower is either

required or not required. In some cases,

only the general principles or general

circumstances pertaining to RUS approval or control are presented in this

subpart, while the details regarding the

circumstances and requirements of

RUS approval or control are set forth

in other RUS regulations. Since this

subpart addresses only the main operational controls, failure to address a

control or approval right in this subpart in no way invalidates such controls or rights established by the loan

contract, mortgage, other agreements

between a borrower and RUS, and RUS

regulations.

(b) Case by case amendments. Upon

written notice to a borrower, RUS may

amend or annul the approvals and exceptions to controls set forth in this

subpart or other RUS regulations if the

borrower is in violation of any provision of its loan documents or any other

agreement with RUS, or if RUS determines that loan security and/or repayment is threatened. Such amendment

or annulment will apply to decisions

and actions of the borrower after said

written notice has been provided by

RUS.

(c) Generic notices. By written notice

to all borrowers or a group of borrowers, RUS may grant or waive approval of decisions and actions by the

borrowers that are controlled under

the loan documents and RUS regulations. RUS may also by written notice

withdraw or cut back its grant or waiver of approval of said decisions and actions made by previous written notice,

but may not by such notice extend its

authority to approve decisions and actions by borrowers beyond the authority granted by the loan documents and

RUS regulations.

§ 1717.601 Applicability.

(a) The approvals and exceptions to

controls conveyed by this subpart

apply only to controls and approval

rights normally included in RUS loan

documents dated prior to January 29,

1996. They do not apply to special controls and approval requirements included in loan documents or other

agreements executed between a borrower and RUS that relate to individual problems or circumstances specific to an individual borrower.

(b) The approvals and exceptions to

controls granted by RUS in this subpart shall not in any way affect the

rights of other co-mortgagees under

the mortgage or their loan contracts.

§ 1717.602 Definitions.

Terms used in this subpart that are

not defined in this section have the

meanings set forth in 7 CFR part 1710.

In addition, for the purposes of this

subpart:

Default means an event of default as

defined in the borrower’s loan documents or other agreement with RUS,

and furthermore includes any event

that has occurred and is continuing

which, with notice or lapse of time and

157

Rural Utilities Service, USDA § 1717.603

notice, would become an event of default.

Equity means the borrower’s total

margins and equities computed pursuant to RUS accounting requirements

but excluding any regulatory created

assets.

Financed or funded by RUS means financed or funded wholly or in part by

a loan made or guaranteed by RUS, including concurrent supplemental loans

required by 7 CFR 1710.110, loans to reimburse funds already expended by the

borrower, and loans to replace interim

financing.

Interchange agreement means a contractual arrangement that can include

a variety of services utilities provide

each other to increase reliability and

efficiency, and to avoid duplicating expenses. Some examples are: transmission service (the use of transmission lines to move power and energy from one area to another); emergency service (an agreement by one

utility to furnish another with power

and energy to protect it in times of

emergency, such as power plant outages); reserve sharing (contributions to

a common pool of generating plant reserves so that each individual utility’s

reserves can be reduced); and economic

exchanges (swapping power and energy

from different plants to avoid running

the most expensive units).

Interconnection agreement means a

contract governing the terms for establishing or using one or more electrical

connections between two or more electric systems permitting a flow of power

and energy among the systems.

Loan documents means the mortgage

(or other security instrument acceptable to RUS), the loan contract, and

the promissory note entered into between the borrower and RUS.

Net utility plant means the amount

constituting the total utility plant of

the borrower, less depreciation, computed in accordance with RUS accounting requirements.

Pooling agreement means a contract

among two or more interconnected

electric systems to operate on a coordinated basis to achieve economies and/

or enhance reliability in supplying

their respective loads.

Power supply contract means any contract entered into by a borrower for

the sale or purchase, at wholesale, of

electric energy.

Regulatory created assets means the

sum of any amounts properly recordable as unrecovered plant and regulatory study costs or as other regulatory assets, computed pursuant to

RUS accounting requirements.

RUS accounting requirements means

the system of accounts prescribed for

electric borrowers by RUS regulations

as such RUS accounting requirements

exist at the date of applicability thereof.

RUS regulations mean regulations of

general applicability published by RUS

from time to time as they exist at the

date of applicability thereof, and shall

also include any regulations of other

federal entities which RUS is required

by law to implement.

Total assets means an amount constituting the total assets of the borrower

as computed pursuant to RUS accounting requirements, but excluding any

regulatory created assets.

Wheeling agreement means a contract

providing for the use of the electric

transmission facilities of one electric

utility to transmit power and energy of

another electric utility or other entity

to a third party. Such transmission

may be accomplished directly or by

displacement.

§ 1717.603 RUS approval of extensions

and additions.

(a) Distribution borrowers. Prior written approval by RUS is required for a

distribution borrower to extend or add

to its electric system if the extension

or addition will be financed by RUS.

For extensions and additions that will

not be financed by RUS, approval is

hereby given to distribution borrowers

to make such extensions and additions

to their electric systems, including the

use of (or commitment to use) general

funds of the borrower, except for the

following:

(1) Construction, procurement, or

leasing of generating facilities if the

combined capacity of the facilities to

be built, procured, or leased, including

any future facilities included in the

planned project, will exceed the lesser

of 5 megawatts or 30 percent of the borrower’s equity;

158

§ 1717.604 7 CFR Ch. XVII (1–1–00 Edition)

(2) Acquisition or leasing of existing

electric facilities or systems in service

whose purchase price, or capitalized

value in the case of a lease, exceeds 10

percent of the borrower’s net utility

plant; and

(3) Construction, procurement, or

leasing of electric facilities to serve a

customer whose annual kWh purchases

or maximum annual kW demand in the

foreseeable future is projected to exceed 25 percent of the borrower’s total

kWh sales or maximum kW demand in

the year immediately preceding the acquisition or start of construction.

(b) Power supply borrowers. Prior written approval by RUS is required for a

power supply borrower to extend or add

to its electric system if the extension

or addition will be financed by RUS.

Requirements for RUS approval of extensions and additions that will not be

financed by RUS are set forth in other

RUS regulations.

(c) Additional details. Additional details relating to RUS approval of extensions and additions of a borrower’s

electric system financed by RUS are

set forth in other RUS regulations,

e.g., in 7 CFR parts 1710 and 1726.

§ 1717.604 Long-range engineering

plans and construction work plans.

(a) All borrowers are required to

maintain up-to-date long-range engineering plans and construction work

plans (CWPs) in form and substance as

set forth in 7 CFR part 1710, subpart F.

(b) Applications for financing from

RUS must be supported by a long-range

engineering plan and CWP approved by

RUS.

(c) RUS approval is not required for

long-range engineering plans and CWPs

if the borrower does not intend to seek

RUS financing for any of the facilities,

equipment or other purposes included

in those plans. However, if requested

by RUS, a borrower must provide an informational copy of such plans to RUS.

§ 1717.605 Design standards, plans and

specifications, construction standards, and RUS accepted materials.

All borrowers, regardless of the

source of funding, are required to comply with applicable RUS requirements

with respect to system design, construction standards, and the use of

RUS accepted materials. Borrowers

must comply with applicable RUS requirements with respect to plans and

specifications only if the construction

or procurement will be financed by

RUS. These requirements are set forth

in other RUS regulations, especially in

7 CFR parts 1724 and 1728.

§ 1717.606 Standard forms of construction contracts, and engineering and

architectural services contracts.

All borrowers are encouraged to use

the standard forms of contracts promulgated by RUS for construction, materials, equipment, engineering services, and architectural services, regardless of the source of funding for such

construction and services. Borrowers

are required to use these standard

forms of contracts only if the construction, procurement or services are financed by RUS, and only to the extent

required by RUS regulations. RUS requirements with respect to such standard forms of contract are set forth in 7

CFR part 1724 for architectural and engineering services, and in 7 CFR part

1726 for construction, materials, and

equipment.

§ 1717.607 Contract bidding requirements.

Borrowers must follow RUS requirements regarding bidding for contracts

for construction, materials, and equipment only if financing of the construction or procurement will be provided

by RUS. These requirements are set

forth in 7 CFR part 1726.

§ 1717.608 RUS approval of contracts.

(a) Construction contracts and architectural and engineering contracts. RUS approval of contracts for construction

and procurement and for architectural

and engineering services is required

only when such construction, procurement or services are financed by RUS.

Detailed requirements regarding RUS

approval of such contracts are set forth

in 7 CFR part 1724 for architectural and

engineering services, and in 7 CFR part

1726 for construction and procurement.

(b) Large retail power contracts. RUS

approval of contracts to sell electric

power to retail customers is required

only if the contract is for longer than

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Rural Utilities Service, USDA § 1717.611

2 years and the kWh sales or kW demand for any year covered by the contract exceeds 25 percent of the borrower’s total kWh sales or maximum

kW demand for the year immediately

preceding execution of the contract.

This requirement applies regardless of

the source of funding of any plant extensions, additions or improvements

that may be involved in connection

with the contract.

(c) Power supply arrangements. (1)

Power supply contracts (including but

not limited to economy energy sales

and emergency power and energy

sales), interconnection agreements,

interchange agreements, wheeling

agreements, pooling agreements, and

any other similar power supply arrangements subject to approval by

RUS are deemed approved if they have

a term of 2 years or less. Amendments

to said power supply arrangements are

also deemed approved provided that the

amendment does not extend the term

of the arrangement for more than 2

years beyond the date of the amendment.

(2) Any amendment to a schedule or

exhibit contained in any power supply

arrangement subject to RUS approval,

which merely has the effect of either

altering a list of interconnection or delivery points or changing the value of a

variable term (but not the formula

itself) contained in a formulary rate or

charge is deemed approved.

(3) The provisions of this paragraph

(c) apply regardless of whether the borrower is a seller or purchaser of the

services furnished by the contracts or

arrangements, and regardless of whether or not a Federal power marketing

agency is a party to any of them.

(d) System management and maintenance contracts. RUS approval of contracts for the management and operation of a borrower’s electric system or

for the maintenance of the electric system is required only if such contracts

cover all or substantially all of the

electric system.

(e) Other contracts. [Reserved]

§ 1717.609 RUS approval of general

manager.

(a) If a borrower’s mortgage or loan

contract grants RUS the unconditioned

right to approve the employment and/

or the employment contract of the general manager of the borrower’s system,

such approval is hereby granted provided that the borrower is in compliance with all provisions of its loan documents and any other agreements with

RUS.

(b) If a borrower is in default with respect to any provision of its loan documents or any other agreement with

RUS:

(1) Such borrower, if directed in writing by RUS, shall replace its general

manager within 30 days after the date

of such written notice; and

(2) Such borrower shall not hire a

general manager without prior written

approval by RUS.

§ 1717.610 RUS approval of compensation of the board of directors.

If a borrower’s mortgage or loan contract requires the borrower to obtain

approval from RUS for compensation

provided to members of the borrower’s

board of directors, such requirement is

hereby waived.

§ 1717.611 RUS approval of expenditures for legal, accounting, engineering, and supervisory services.

(a) If a borrower’s mortgage or loan

contract requires the borrower to obtain approval from RUS before incurring expenses for legal, accounting, supervisory (other than for the management and operation of the borrower’s

electric system, see §1717.608(d)), or

other similar services, such approval is

hereby granted. However, while expenditures for accounting do not require RUS approval, the selection of a

certified public accountant by the borrower to prepare audited reports required by RUS remains subject to RUS

approval.

(b) If a borrower’s mortgage or loan

contract requires the borrower to obtain approval from RUS before incurring expenses for engineering services,

such approval is hereby granted if such

services will not be financed by RUS.

Approval requirements with respect to

engineering services financed by RUS

are set forth in other RUS regulations.

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§ 1717.612 7 CFR Ch. XVII (1–1–00 Edition)

§ 1717.612 RUS approval of borrower’s

bank or other depository.

If a borrower’s mortgage or loan contract gives RUS the authority to approve the bank or other depositories

used by the borrower, such approval is

hereby granted. However, without the

prior written approval of RUS, a borrower shall not deposit funds from

loans made or guaranteed by RUS in

any bank or other depository that is

not insured by the Federal Deposit Insurance Corporation or other Federal

agency acceptable to RUS, or in any

account not so insured.

§ 1717.613 RUS approval of data processing and system control equipment.

If a borrower’s mortgage or loan contract requires the borrower to obtain

approval from RUS before purchasing

data processing equipment or system

control equipment, such approval is

hereby granted if the equipment will

not be financed by RUS.

§ 1717.614 Notification of rate changes.

If a distribution borrower is required

by its loan documents to notify RUS in

writing of proposed changes in electric

rates more than 30 days prior to the effective date of such rates, the required

notification period shall be 30 days.

Moreover, such notification shall be required only upon the request of RUS.

§ 1717.615 Consolidations and mergers.

A distribution or power supply borrower may without the prior approval

of RUS, consolidate or merge with any

other corporation or convey or transfer

the mortgaged property substantially

as an entirety if the following conditions are met:

(a) Such consolidation, merger, conveyance or transfer shall be on such

terms as shall fully preserve the lien

and security of the RUS mortgage and

the rights and powers of the mortgagees;

(b) The entity formed by such consolidation or with which the borrower

is merged or the corporation which acquires by conveyance or transfer the

mortgaged property substantially as an

entirety shall execute and deliver to

the mortgagees a mortgage supplemental in recordable form and containing an assumption by such successor entity of the due and punctual

payment of the principal of and interest on all of the outstanding notes and

the performance and observance of

every covenant and condition of the

mortgage;

(c) Immediately after giving effect to

such transaction, no default under the

mortgage shall have occurred and be

continuing;

(d) The borrower shall have delivered

to the mortgagees a certificate of its

general manager or other officer, in

form and substance satisfactory to

each of the mortgagees, which shall

state that such consolidation, merger,

conveyance or transfer and such supplemental mortgage comply with this

section and that all conditions precedent herein provided for relating to

such transaction have been complied

with;

(e) The borrower shall have delivered

to the mortgagees an opinion of counsel in form and substance satisfactory

to each of the mortgagees; and

(f) The entity formed by such consolidation or with which the borrower is

merged or the corporation which acquires by conveyance or transfer the

mortgaged property substantially as an

entirety shall be an entity having:

(1) Equity equal to at least 27% of its

total assets on a pro forma basis after

giving effect to such transaction;

(2) A pro forma TIER of not less than

1.50 and a pro forma DSC of not less

than 1.25 for each of the two preceding

calendar years; and

(3) Net utility plant equal to or

greater than 1.0 times its total longterm debt on a pro forma basis.

§ 1717.616 Sale, lease, or transfer of

capital assets.

A distribution borrower may without

the prior approval of RUS sell, lease, or

transfer any capital asset if the following conditions are met:

(a) The borrower is not in default;

(b) In the most recent year for which

data are available, the borrower

achieved a TIER of at least 1.5, DSC of

at least 1.25, OTIER of at least 1.1, and

ODSC of at least 1.1, in each case based

on the average or the best 2 out of the

3 most recent years;

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Rural Utilities Service, USDA § 1717.651

(c) The sale, lease, or transfer of assets will not reduce the borrower’s existing or future requirements for energy or capacity being furnished to the

borrower under any wholesale power

contract which has been pledged as security to the government;

(d) Fair market value is obtained for

the assets;

(e) The aggregate value of assets

sold, leased, or transferred in any 12-

month period is less than 10 percent of

the borrower’s net utility plant prior

to the transaction;

(f) The proceeds of such sale, lease, or

transfer, less ordinary and reasonable

expenses incident to such transaction,

are immediately:

(1) Applied as a prepayment of all

notes secured under the mortgage

equally and ratably;

(2) In the case of dispositions of

equipment, materials or scrap, applied

to the purchase of other property useful in the borrower’s utility business;

or

(3) Applied to the acquisition of construction of utility plant.

§ 1717.617 Limitations on distributions.

If a distribution or power supply borrower is required by its loan documents

to obtain prior approval from RUS before declaring or paying any dividends,

paying or determining to pay any patronage refunds, or retiring any patronage capital, or making any other

cash distributions, such approval is

hereby given if the following conditions are met:

(a) After giving effect to the distribution, the borrower’s equity will be

greater than or equal to 30 percent of

its total assets;

(b) The borrower is current on all

payments due on all notes secured

under the mortgage;

(c) The borrower is not otherwise in

default under its loan documents; and

(d) After giving effect to the distribution, the borrower’s current and accrued assets will be not less than its

current and accrued liabilities.

Subpart N—Investments, Loans,

and Guarantees by Electric

Borrowers

AUTHORITY: 7 U.S.C. 901–950b; Pub.L. 103–

354, 108 Stat. 3178 (7 U.S.C. 6941 et seq.); Title

I, Subtitle D, Pub.L. 100–203, 101 Stat. 1330.

SOURCE: 60 FR 48877, Sept. 21, 1995, unless

otherwise noted.

§ 1717.650 Purpose.

This subpart sets forth general regulations for implementing and interpreting provisions of the RUS mortgage and loan contract regarding investments, loans, and guarantees made

by electric borrowers, as well as the

provisions of the Rural Electrification

Act of 1936, as amended, including section 312 (7 U.S.C. 901 et seq.) (RE Act),

permitting, in certain circumstances,

that electric borrowers under the RE

Act may, without restriction or prior

approval of the Administrator of the

Rural Utilities Service (RUS), invest

their own funds and make loans or

guarantees.

§ 1717.651 General.

(a) Policy. RUS electric borrowers are

encouraged to utilize their own funds

to participate in the economic development of rural areas, provided that such

activity does not in any way put government funds at risk or impair a borrower’s ability to repay its indebtedness to RUS and other lenders. In considering whether to make loans, investments, or guarantees, borrowers are expected to act in accordance with prudent business practices and in conformity with the laws of the jurisdictions in which they serve. RUS assumes that borrowers will use the latitude afforded them by section 312 of

the RE Act primarily to make needed

investments in rural community infrastructure projects (such as water and

waste systems, garbage collection services, etc.) and in job creation activities

(such as providing technical, financial,

and managerial assistance) and other

activities to promote business development and economic diversification in

rural communities. Nonetheless, RUS

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§ 1717.652 7 CFR Ch. XVII (1–1–00 Edition)

believes that borrowers should continue to give primary consideration to

safety and liquidity in the management of their funds.

(b) Applicability of this subpart. This

subpart applies to all distribution and

power supply borrowers regardless of

when their loan contract or mortgage

was executed.

§ 1717.652 Definitions.

As used in this subpart:

Borrower means any organization

that has an outstanding loan made or

guaranteed by RUS for rural electrification.

Cash-construction fund-trustee account

means the account described in the

Uniform System of Accounts as one to

which funds are deposited for financing

the construction or purchase of electric

facilities.

Distribution borrower means a Distribution Borrower as defined in 7 CFR

1710.2.

Electric system means all of the borrower’s interests in all electric production, transmission, distribution, conservation, load management, general

plant and other related facilities,

equipment or property and in any

mine, well, pipeline, plant, structure or

other facility for the development, production, manufacture, storage, fabrication or processing of fossil, nuclear, or

other fuel or in any facility or rights

with respect to the supply of water, in

each case for use, in whole or in major

part, in any of the borrower’s generating plants, including any interest or

participation of the borrower in any

such facilities or any rights to the output or capacity thereof, together with

all lands, easements, rights-of-way,

other works, property, structures, contract rights and other tangible and intangible assets of the borrower in each

case used or useful in such electric system.

Equity means the Margins and Equities of the borrower as defined in the

Uniform System of Accounts, less regulatory created assets.

Guarantee means to undertake collaterally to answer for the payment of another’s debt or the performance of another’s duty, liability, or obligation,

including, without limitation, the obligations of subsidiaries. Some examples

of such guarantees include guarantees

of payment or collection on a note or

other debt instrument (assuring returns on investments); issuing performance bonds or completion bonds; or cosigning leases or other obligations of

third parties.

Invest means to commit money in

order to earn a financial return on assets, including, without limitation, all

investments properly recorded on the

borrower’s books and records in investment accounts as those accounts are

used in the Uniform System of Accounts for RUS Borrowers. Borrowers

may submit any proposed transaction

to RUS for an interpretation of whether the action is an investment for the

purposes of this definition.

Make loans means to lend out money

for temporary use on condition of repayment, usually with interest.

Mortgaged property means any asset

of the borrower which is pledged in the

RUS mortgage.

Natural gas distribution system means

any system of community infrastructure that distributes natural gas and

whose services are available by design

to all or a substantial portion of the

members of the community.

Operating DSC means Operating Debt

Service Coverage (ODSC) of the borrower’s electric system calculated as:

ODSC

ABC

D = + +

where:

All amounts are for the same year and are

based on the RUS system of accounts;

A=Depreciation and Amortization Expense of

the electric system;

B=Interest on Long-term Debt of the electric

system, except that Interest on Long-term

Debt shall be increased by 1⁄3 of the

amount, if any, by which the rentals of Restricted Property of the electric system exceed 2 percent of Total Margins and Equities;

C=Patronage Capital & Operating Margins of

the electric system (distribution borrowers) or Operating Margins of the electric system (power supply borrowers); and

D=Debt Service Billed (RUS + other) which

equals all interest and principal billed or

billable during the calendar year for longterm debt of the electric system plus 1⁄3 of

the amount, if any, by which the rentals of

Restricted Property of the electric system

exceed 2 percent of Total Margins and Equities. Unless otherwise indicated, all

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Rural Utilities Service, USDA § 1717.653

terms used in defining ODSC and OTIER

are as defined in RUS Bulletin 1717B–2 Instructions for the Preparation of the Financial and Statistical Report for Electric

Distribution Borrowers, and RUS Bulletin

1717B–3 Instructions for the Preparation of

the Operating Report for Power Supply

Borrowers and for Distribution Borrowers

with Generating Facilities, or the successors to these bulletins.

Operating TIER means Operating

Times Interest Earned Ratio (OTIER)

of the borrower’s electric system calculated as:

OTIER

A B

A = +

where:

All amounts are for the same year and are

based on the RUS system of accounts;

A=Interest on Long-term Debt of the electric

system, except that Interest on Long-term

Debt shall be increased by 1/3 of the

amount, if any, by which the rentals of Restricted Property of the electric system exceed 2 percent of Total Margins and Equities; and

B=Patronage Capital & Operating Margins of

the electric system (distribution borrowers) or Operating Margins of the electric system (power supply borrowers).

Own funds means money belonging to

the borrower other than funds on deposit in the cash-construction fundtrustee account.

Power supply borrower means a Power

Supply Borrower as defined in 7 CFR

1710.2.

Regulatory created assets means the

sum of the amounts properly recordable in Account 182.2 Unrecovered

Plant and Regulatory Study Costs, and

Account 182.3 Other Regulatory Assets

of the Uniform System of Accounts.

RUS means the Rural Utilities Service, an agency of the U.S. Department

of Agriculture established pursuant to

Section 232 of the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994

(Pub. L. 103–354, 108 Stat. 3178, 7 U.S.C.

6941 et seq.) and, for purposes of this

subpart, includes its predecessor, the

Rural Electrification Administration.

RUS loan contract means the loan

contract between the borrower and

RUS.

RUS mortgage means any and all instruments creating a lien on or security interest in the borrower’s assets in

connection with loans or guarantees

under the RE Act.

Solid waste disposal system means any

system of community infrastructure

that provides collection and/or disposal

of solid waste and whose services are

available by design to all or a substantial portion of the members of the community.

Subsidiary means a company which

is controlled by the borrower through

ownership of voting stock, and is further defined in 7 CFR 1767.10.

Supplemental lender means a lender

that has provided a supplemental

source of financing that is secured by

the RUS mortgage.

Telecommunication and other electronic

communication system means any community infrastructure that provides

telecommunication or other electronic

communication services and whose

services are available by design to all

or a substantial portion of the members of the community.

Total assets means the total assets of

the borrower as calculated according to

the Uniform System of Accounts, less

regulatory created assets.

Total utility plant means the sum of

the borrower’s Electric Plant Accounts

and Construction Work in Progress—

Electric Accounts, as such terms are

used in the Uniform System of Accounts.

Uniform System of Accounts means the

system of accounts prescribed for RUS

borrowers in 7 CFR part 1767.

Water and waste disposal system means

any system of community infrastructure that supplies water and/or collects

and treats waste water and whose services are available by design to all or a

substantial portion of the members of

the community.

§ 1717.653 Borrowers in default.

Any borrower not in compliance with

all provisions of its mortgage, loan

contract, or any other agreements with

RUS must, unless the borrower’s mortgage, loan contract, or other agreement with RUS specifically provides

otherwise with respect to such a borrower:

(a) Obtain prior written approval

from the Administrator to invest its

own funds or to make loans or guarantees regardless of the aggregate

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§ 1717.654 7 CFR Ch. XVII (1–1–00 Edition)

amount of such investments, loans, or

guarantees; and

(b) If requested by the Administrator,

restructure or reduce the amount of its

investments, loans, and guarantees to

a level determined by the Administrator, in his or her sole discretion, to

be in the financial interest of the government with respect to loan security

and/or repayment. If the borrower does

not so restructure or reduce its portfolio within a reasonable period of time

determined by the Administrator,

which shall not exceed 12 months from

the date the borrower was notified of

the required action, then, upon written

notice from RUS, the borrower shall be

in default of its RUS loan contract and

mortgage.

§ 1717.654 Transactions below the 15

percent level.

(a) A borrower in compliance with all

provisions of its RUS mortgage, RUS

loan contract, and any other agreements with RUS may, without prior

written approval of the Administrator,

invest its own funds or make loans or

guarantees not in excess of 15 percent

of its total utility plant without regard

to any provision contained in any RUS

mortgage or RUS loan contract to the

effect that the borrower must obtain

prior approval from RUS, provided,

however, that the borrower may not,

without the prior written approval of

the Administrator, make such investments, loans, and guarantees to extend, add to, or modify its electric system. Moreover, funds necessary to

make timely payments of principal and

interest on loans secured by the RUS

mortgage remain subject to RUS controls on borrower investments, loans

and guarantees.

(b) RUS will not consider requests

from borrowers to exclude investments,

loans, or guarantees made below the 15

percent level. (Categorical exclusions

are set forth in §1717.655.)

§ 1717.655 Exclusion of certain investments, loans, and guarantees.

(a) In calculating the amount of investments, loans and guarantees permitted under this subpart, there is excluded from the computation any investment, loan or guarantee of the

type which by the terms of the borrower’s RUS mortgage or RUS loan

contract the borrower may make in unlimited amounts without RUS approval.

(b) Furthermore, the borrower may

make unlimited investments, without

prior approval of the Administrator, in:

(1) Securities or deposits issued,

guaranteed or fully insured as to payment by the United States Government

or any agency thereof;

(2) Capital term certificates, bank

stock, or other similar securities of the

supplemental lender which have been

purchased as a condition of membership in the supplemental lender, or as a

condition of receiving financial assistance from such lender, as well as any

other investment made in, or loans

made to, the National Rural Utilities

Cooperative Finance Corporation, the

Saint Paul Bank for Cooperatives, and

CoBank, ACB;

(3) Patronage capital allocated from

an electric power supply cooperative of

which the borrower is a member; and

(4) Patronage capital allocated from

an electric distribution cooperative to

a power supply borrower.

(c) Without prior approval of the Administrator, the borrower may also:

(1) Invest or lend funds derived directly from:

(i) Grants which the borrower in not

obligated to repay, regardless of the

source or purpose of the grant; and

(ii) Loans received from or guaranteed by any Federal, State or local government program designed to promote

rural economic development, provided

that the borrower uses the loan proceeds for such purpose;

(2) Make loans guaranteed by an

agency of USDA, up to the amount of

principal whose repayment, with interest, is fully guaranteed; and

(3)(i) Make unlimited investments in

and unlimited loans to finance the following community infrastructure that

serves primarily consumers located in

rural areas as defined in 7 CFR 1710.2,

and guarantee debt issued for the construction or acquisition of such infrastructure, up to an aggregate amount

of such guarantees not to exceed 20 percent of the borrower’s equity:

(A) Water and waste disposal systems;

(B) Solid waste disposal systems;

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Rural Utilities Service, USDA § 1717.656

(C) Telecommunication and other

electronic communication systems;

and

(D) Natural gas distribution systems.

(ii) In each of the four cases in paragraph (c)(3)(i) of this section, if the system is a component of a larger organization other than the borrower itself

(e.g., if it is a component of a subsidiary of the borrower or a corporation independent of the borrower), to

be eligible for the exemption the borrower must certify annually that a majority of the gross revenues of the larger organization during the most recent

fiscal year came from customers of

said system who were located in a rural

area.

(d) Also excluded from the calculation of investments, loans and guarantees made by the borrower are:

(1) Amounts properly recordable in

Account 142 Customer Accounts Receivable, and Account 143 Other Accounts Receivable;

(2) Any investment, loan, or guarantee that the borrower is required to

make by an agency of USDA, for example, as a condition of obtaining financial assistance for itself or any other

person or organization;

(3) Investments included in an irrevocable trust for the purpose of funding

post-retirement benefits of the borrower’s employees;

(4) Reserves required by a reserve

bond agreement or other agreement legally binding on the borrower, that are

dedicated to making required payments on debt secured under the RUS

mortgage, not to exceed the amount of

reserves specifically required by such

agreements; and

(5) Investments included in an irrevocable trust approved by RUS and dedicated to the payment of decommissioning costs of nuclear facilities of the

borrower.

(e) Grandfathered exclusions. All

amounts of individual investments,

loans, and guarantees excluded by RUS

as of February 16, 1995 shall remain excluded. Such exclusions must have

been based on the RUS mortgage, RUS

loan contract, regulations, bulletins,

memoranda, or other written notice

from RUS. Profits, interest, and other

returns earned (regardless of whether

or not they are reinvested) on such investments, loans and guarantees after

February 16, 1995 shall be excluded only

if they are eligible for exclusion under

paragraphs (a) through (d) of this section. Any new commitments of money

to such investments, loans and guarantees shall likewise be excluded only if

they are eligible under paragraphs (a)

through (d) of this section.

(f) Any investment, loan or guarantee made by a borrower that is not

excluded under this section or under

§1717.657(d) shall be included in the aggregate amount of investments, loans

and guarantees made by the borrower,

regardless of whether RUS has specifically approved the investment, loan or

guarantee under §1717.657(c), or has approved a related transaction (e.g., a

lien accommodation).

§ 1717.656 Exemption of certain borrowers from controls.

(a) Any distribution or power supply

borrower that meets all of the following criteria is exempted from the

provisions of the RUS mortgage and

loan contract that require RUS approval of investments, loans, and guarantees, except investments, loans, and

guarantees made to extend, add to, or

modify the borrower’s electric system:

(1) The borrower is in compliance

with all provisions of its RUS mortgage, RUS loan contract, and any other

agreements with RUS;

(2) The average revenue per kWh for

residential service received by the borrower during the two most recent calendar years does not exceed 130 percent

of the average revenue per kWh for residential service during the same period

for all residential consumers located in

the state or states served by the borrower. This criterion applies only to

distribution borrowers and does not

apply to power supply borrowers. If a

borrower serves customers in more

than one state, the state average revenue per kWh will be based on a

weighted average using the kWh sales

by the borrower in each state as the

weight. The calculation will be based

on the two most recent calendar years

for which both borrower and state-wide

data are available. If a borrower fails

to qualify for an exemption based solely on its failure to meet this criterion

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§ 1717.657 7 CFR Ch. XVII (1–1–00 Edition)

on rate disparity, at the borrower’s request the Administrator may, at his or

her sole discretion, exempt the borrower if he or she finds that the borrower’s strengths with respect to the

other criteria are sufficient to offset

any weakness due to rate disparity;

(3) In the most recent calendar year

for which data are available, the borrower achieved an operating TIER of at

least 1.0 and an operating DSC of at

least 1.0, in each case based on the average of the two highest ratios

achieved in the three most recent calendar years;

(4) The borrower’s ratio of net utility

plant to long-term debt is at least 1.1,

based on year-end data for the most recent calendar year for which data are

available; and

(5) The borrower’s equity is equal to

at least 27 percent of its total assets,

based on year-end data for the most recent calendar year for which data are

available.

(b) While borrowers meeting the criteria in paragraph (a) of this section

are exempt from RUS approval of investments, loans and guarantees, they

are nevertheless subject to the recordkeeping, reporting, and other requirements of §1717.658.

(c) Any borrower exempt under paragraph (a) of this section that ceases to

meet the criteria for exemption shall,

upon written notice from RUS, no

longer be exempt and shall be subject

to the provisions of this subpart applicable to non-exempt borrowers. A borrower may regain its exemption if it

subsequently meets the criteria in

paragraph (a) of this section, and is so

notified in writing by RUS.

(d)(1) A borrower that loses its exemption and is not in compliance with

all provisions of its mortgage, loan

contract, or any other agreement with

RUS may be required to restructure or

reduce its portfolio of investments,

loans and guarantees as provided in

§1717.653(b). If the borrower’s portfolio

exceeds the 15 percent level, the borrower will be required to restructure or

reduce its portfolio to the 15 percent

level or below. For example, if the borrower’s mortgage or loan contract has

an approval threshold, the borrower

may be required to reduce its portfolio

to that level, which in many cases is 3

percent of total utility plant.

(2) A borrower that loses its exemption but is in compliance with all provisions of its mortgage, loan contract,

and any other agreements with RUS

will be required, if its investments,

loans and guarantees exceed the 15 percent level, to restructure or reduce its

portfolio to the 15 percent level, unless

the Administrator, in his or her sole

discretion, determines that such action

would not be in the financial interest

of the government with respect to loan

security and/or repayment. (Such borrower is eligible to ask RUS to exclude

a portion of its investments under the

conditions set forth in §1717.657(d).)

(3) If a borrower required to reduce or

restructure its portfolio does not fully

comply within a reasonable period of

time determined by the Administrator,

which shall not exceed 12 months from

the date the borrower was notified of

its loss of exemption, then, upon written notice from RUS, the borrower

shall be in default of its RUS loan contract and/or RUS mortgage.

(e) By no later than July 1 of each

year, RUS will provide written notice

to any borrowers whose exemption status has changed as a result of more recent data being available for the qualification criteria set forth in paragraph

(a) of this section, or as a result of

other reasons, such as corrections in

the available data. An explanation of

the reasons for any changes in exemption status will also be provided to the

borrowers affected.

§ 1717.657 Investments above the 15

percent level by certain borrowers

not exempt under § 1717.656(a).

(a) General. (1) This section applies

only to borrowers that are in compliance with all provisions of their mortgage, loan contract, and any other

agreements with RUS and that do not

qualify for an exemption from RUS investment controls under §1717.656(a).

(2) Nothing in this section shall in

any way affect the Administrator’s authority to exercise approval rights over

investments, loans, and guarantees

made by a borrower that is not in compliance with all provisions of its mortgage, loan contract and any other

agreements with RUS.

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Rural Utilities Service, USDA § 1717.657

(b) Distribution borrowers. Distribution borrowers not exempt from RUS

investment controls under §1717.656(a)

may not make investments, loans and

guarantees in an aggregate amount in

excess of 15 percent of total utility

plant. Above the 15 percent level, such

borrowers will be restricted to excluded

investments, loans and guarantees as

defined in §1717.655. (However, they are

eligible to ask RUS to exclude a portion of their investments under the

conditions set forth in paragraph (d) of

this section.)

(c) Power supply borrowers. (1) Power

supply borrowers not exempt from RUS

investment controls under §1717.656(a)

may request approval to exceed the 15

percent level if all of the following criteria are met:

(i) Satisfactory evidence has been

provided that the borrower is in compliance with all provisions of its RUS

mortgage, RUS loan contract, and any

other agreements with RUS;

(ii) The borrower is not in financial

workout and has not had its government debt restructured;

(iii) The borrower has equity equal to

at least 5 percent of its total assets;

and

(iv) After approval of the investment,

loan or guarantee, the aggregate of the

borrower’s investments, loans and

guarantees will not exceed 20 percent

of the borrower’s total utility plant.

(2) Borrower requests for approval to

exceed the 15 percent level will be considered on a case by case basis. The requests must be made in writing.

(3) In considering borrower requests,

the Administrator will take the following factors into consideration:

(i) The repayment of all loans secured under the RUS mortgage will

continue to be assured, and loan security must continue to be reasonably

adequate, even if the entire investment

or loan is lost or the borrower is required to perform for the entire

amount of the guarantee. These risks

will be considered along with all other

risks facing the borrower, whether or

not related to the investment, loan or

guarantee;

(ii) In the case of investments, the investment must be made in an entity

separate from the borrower, such as a

subsidiary, whereby the borrower is

protected from any liabilities incurred

by the separate entity, unless the borrower demonstrates to the satisfaction

of the Administrator that making the

investment directly rather than

through a separate entity will present

no substantial risk to the borrower in

addition to the possibility of losing all

or part of the original investment;

(iii) The borrower must be economically and financially sound as indicated by its costs of operation, competitiveness, operating TIER and operating DSC, physical condition of the

plant, ratio of equity to total assets,

ratio of net utility plant to long-term

debt, and other factors; and

(iv) Other factors affecting the security and repayment of government

debt, as determined by the Administrator on a case by case basis.

(4) If the Administrator approves an

investment, loan or guarantee, such investment, loan or guarantee will continue to be included when calculating

the borrower’s ratio of aggregate investments, loans and guarantees to

total utility plant.

(d) Distribution and power supply borrowers. If the aggregate of the investments, loans and guarantees of a distribution or power supply borrower exceeds 15 percent of the borrower’s total

utility plant as a result of the cumulative profits or margins, net of losses,

earned on said transactions over the

past 10 calendar years (i.e., the sum of

all profits earned during the 10 years

on all transactions—including interest

earned on cash accounts, loans, and

similar transactions—less the sum of

all losses experienced on all transactions during the 10 years) then:

(1) The borrower will not be in default of the RUS loan contract or RUS

mortgage with respect to required approval of investments, loans and guarantees, provided that the borrower had

not made additional net investments,

loans or guarantees without approval

after reaching the 15 percent level; and

(2) At the request of the borrower,

the Administrator in his or her sole

discretion may decide to exclude up to

the amount of net profits or margins

earned on the borrower’s investments,

loans and guarantees during the past 10

calendar years, if the Administrator

determines that such exclusion will not

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§ 1717.658 7 CFR Ch. XVII (1–1–00 Edition)

increase loan security risks. The borrower must provide documentation satisfactory to the Administrator as to

the current status of its investments,

loans and guarantees and the net profits earned during the past 10 years. Any

exclusion approved by the Administrator may or may not reduce the level

of investments, loans and guarantees

to or below the 15 percent level. If such

exclusion does not reduce the level to

or below the 15 percent level, RUS will

notify the borrower in writing that it

must reduce or restructure its investments, loans and guarantees to a level

of not more than 15 percent of total

utility plant. If the borrower does not

come within the 15 percent level within

a reasonable period of time determined

by the Administrator, which shall not

exceed 12 months from the date the

borrower was notified of the required

action, then, upon written notice from

RUS, the borrower shall be in default

of its RUS loan contract and mortgage.

§ 1717.658 Records, reports and audits.

(a) Every borrower shall maintain accurate records concerning all investments, loans and guarantees made by

it. Such records shall be kept in a manner that will enable RUS to readily determine:

(1) The nature and source of all income, expenses and losses generated

from the borrower’s loans, guarantees

and investments;

(2) The location, identity and lien

priority of any loan collateral resulting from activities permitted by this

subpart; and

(3) The effects, if any, which such activities may have on the feasibility of

loans made, guaranteed or lien accommodated by RUS.

(b) In determining the aggregate

amount of investments, loans and

guarantees made by a borrower, the

borrower shall use the recorded value

of each investment, loan or guarantee

as reflected on its books and records

for the next preceding end-of-month,

except for the end-of-year report which

shall be based on December 31 information. Every borrower shall also report

annually to RUS, in the manner and on

the form specified by the Administrator, the current status of each investment, outstanding loan and outstanding guarantee which it has made

pursuant to this subpart.

(c) The records of borrowers shall be

subject to the auditing procedures prescribed in part 1773 of this chapter.

RUS reserves the right to review the financial records of any subsidiaries of

the borrower to determine if the borrower is in compliance with this subpart, and to ascertain if the debts,

guarantees (as defined in this subpart),

or other obligations of the subsidiaries

could adversely affect the ability of the

borrower to repay its debts to the Government.

(d) RUS will monitor borrower compliance with this subpart based primarily on the annual financial and statistical report submitted by the borrower to RUS and the annual auditor’s

report on the borrower’s operations.

However, RUS may inspect the borrower’s records at any time during the

year to determine borrower compliance. If a borrower’s most recent annual financial and statistical report

shows the aggregate of the borrower’s

investments, loans and guarantees to

be below the 15 percent level, that in

no way relieves the borrower of its obligation to comply with its RUS mortgage, RUS loan contract, and this subpart with respect to Administrator approval of any additional investment,

loan or guarantee that would cause the

aggregate to exceed the 15 percent

level.

§ 1717.659 Effect of this subpart on

RUS loan contract and mortgage.

(a) Nothing in this subpart shall affect any provision, covenant, or requirement in the RUS mortgage, RUS

loan contract, or any other agreement

between a borrower and RUS with respect to any matter other than the

prior approval by RUS of investments,

loans, and guarantees by the borrower,

such matters including, without limitation, extensions, additions, and

modifications of the borrower’s electric

system. Also, nothing in this subpart

shall affect any rights which supplemental lenders have under the RUS

mortgage, or under their loan contracts or other agreements with their

borrowers, to limit investments, loans

and guarantees by their borrowers to

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Rural Utilities Service, USDA § 1717.850

levels below 15 percent of total utility

plant.

(b) RUS will require that any electric

loan made or guaranteed by RUS after

October 23, 1995 shall be subject to a

provision in the loan contract or mortgage restricting investments, loans and

guarantees by the borrower substantially as follows: The borrower shall

not make any loan or advance to, or

make any investment in, or purchase

or make any commitment to purchase

any stock, bonds, notes or other securities of, or guaranty, assume or otherwise become obligated or liable with

respect to the obligations of, any other

person, firm or corporation, except as

permitted by the RE Act and RUS regulations.

(c) RUS reserves the right to change

the provisions of the RUS mortgage

and loan contract relating to RUS approval of investments, loans and guarantees made by the borrower, on a

case-by-case basis, in connection with

providing additional financial assistance to a borrower after October 23,

1995.

Subpart O [Reserved]

§§ 1717.700—1717.749 [Reserved]

Subpart P [Reserved]

§§ 1717.750—1717.799 [Reserved]

Subpart Q [Reserved]

§§ 1717.800—1717.849 [Reserved]

Subpart R—Lien Accommodations

and Subordinations for 100

Percent Private Financing

SOURCE: 58 FR 53843, Oct. 19, 1993, unless

otherwise noted.

§ 1717.850 General.

(a) Scope and applicability. (1) This

subpart R establishes policies and procedures for the accommodation, subordination or release of the Government’s lien on borrower assets, including approvals of supporting documents

and related loan security documents,

in connection with 100 percent private

sector financing of facilities and other

purposes. Policies and procedures regarding lien accommodations for concurrent supplemental financing required in connection with an RUS insured loan are set forth in subpart S of

this part.

(2) This subpart and subpart S of this

part apply only to debt to be secured

under the mortgage, the issuance of

which is subject to the approval of the

Rural Utilities Service (RUS) by the

terms of the borrower’s mortgage with

respect to the issuance of additional

debt or the refinancing or refunding of

debt. If RUS approval is not required

under such terms of the mortgage

itself, a lien accommodation is not required. If the loan contract or other

agreement between the borrower and

RUS requires RUS approval with respect to the issuance of debt or making

additions to or extensions of the borrower’s system, such required approvals do not by themselves result in the

need for a lien accommodation.

(b) Overall policy. (1) Consistent with

prudent lending practices, the maintenance of adequate security for RUS’s

loans, and the objectives of the Rural

Electrification Act (RE Act), it is the

policy of RUS to provide effective and

timely assistance to borrowers in obtaining financing from other lenders by

sharing RUS’s lien on a borrower’s assets in order to finance electric facilities, equipment and systems, and certain other types of community infrastructure. In certain circumstances,

RUS may facilitate the financing of

such assets by subordinating its lien on

specific assets financed by other lenders.

(2) It is also the policy of RUS to provide effective and timely assistance to

borrowers in promoting rural development by subordinating RUS’s lien for

financially sound rural development

investments under the conditions set

forth in §1717.858.

(c) Decision factors. In determining

whether to accommodate, subordinate,

or release its lien on property pledged

by the borrower under the RUS mortgage, RUS will consider the effects of

such action on the achievement of the

purposes of the RE Act, the repayment

and security of RUS loans secured by

the mortgage, and other factors set

forth in this subpart. The following

factors will be considered in assessing

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§ 1717.850 7 CFR Ch. XVII (1–1–00 Edition)

the effects on the repayment and security of RUS loans:

(1) The value of the added assets compared with the amount of new debt to

be secured;

(2) The value of the assets already

pledged under the mortgage, and any

effects of the proposed transaction on

the value of those assets;

(3) The ratio of the total outstanding

debt secured under the mortgage to the

value of all assets pledged as security

under the mortgage;

(4) The borrower’s ability to repay

debt owed to the Government, as indicated by the following factors:

(i) Revenues, costs (including interest, lease payments and other debt

service costs), margins, Times Interest

Earned Ratio (TIER), Debt Service

Coverage (DSC), and other case-specific

economic and financial factors;

(ii) The variability and uncertainty

of future revenues, costs, margins,

TIER, DSC, and other case-specific economic and financial factors;

(iii) Future capital needs and the

ability of the borrower to meet those

needs at reasonable cost;

(iv) The ability of the borrower’s

management to manage and control its

system effectively and plan for future

needs; and

(5) Other factors that may be relevant in individual cases, as determined by RUS.

(d) Environmental considerations.

Under certain circumstances, such as

when the project does not qualify for a

categorical exclusion, the environmental requirements of 7 CFR part 1794

may apply to applications for lien accommodations, subordinations, and releases.

(e) Co-mortgagees. Other mortgagees

under existing mortgages shared with

RUS may have the right to approve requests for lien accommodations, subordinations and releases. In those cases,

borrowers would have to obtain the approval of such mortgagees in order for

the lien of the mortgage to be accommodated, subordinated or released. Any

reference in this subpart to waiving by

RUS of any of its rights under the

mortgage shall apply only to the rights

of RUS and shall not apply to the

rights of any other co-mortgagee.

(f) Safety and performance standards.

(1) To be eligible for a lien accommodation or subordination from RUS, a borrower must comply with RUS standards regarding facility and system

planning and design, construction, procurement, and the use of materials accepted by RUS, as required by the borrower’s mortgage, loan contract, or

other agreement with RUS, and as further specified in RUS regulations.

(2) RUS ‘‘Buy American’’ requirements shall not apply.

(g) Advance of funds. (1) The advance

of funds from 100 percent private loans

lien accommodated or subordinated by

RUS will not be subject to RUS approval. It is the private lender’s responsibility to adopt reasonable measures to ensure that such loan funds are

used for the purposes for which the

loan was made and the lien accommodation or subordination granted. RUS

encourages lenders to adopt the following measures:

(i) Remit loan advances to a separate

subaccount of the Cash-Construction

Fund-Trustee Account;

(ii) Obtain a certification from a registered professional engineer, for each

year during which funds from the separate subaccount are utilized by the borrower, that all materials and equipment purchased and facilities constructed during the year from said

funds comply with RUS safety and performance standards, as required by

paragraph (f) of this section, and are

included in an CWP or CWP amendment approved by the borrower’s board

of directors;

(iii) Obtain an auditor’s certification

from a Certified Public Accountant, for

each year during which funds are advanced to or remitted from the separate subaccount, certifying:

(A) The amount of loan funds advanced to and remitted from the separate subaccount during the period of

review;

(B) That based on the auditor’s review of construction work orders and

other records, all moneys disbursed

from the separate subaccount during

the period of review were used for purposes contemplated in the loan agreement and the lien accommodation; and

(iv) Immediately notify RUS in writing if the lender is unable to obtain the

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Rural Utilities Service, USDA § 1717.850

certifications cited in paragraphs

(g)(1)(ii) and (g)(1)(iii) of this section.

(2) The measures listed in paragraph

(g)(1) of this section will normally be

sufficient to meet the lender’s responsibility provided that additional measures are not reasonably required based

on the particular circumstances of an

individual case. Should a lender fail to

carry out its responsibility in the manner described in this paragraph (g) or

in another manner acceptable to RUS,

RUS may disqualify such lender from

participation in advance approval

under §§1717.854 and 1717.857 and condition the lender’s receipt of a lien accommodation or subordination upon

the lender providing satisfactory evidence that it will fulfill its responsibility under this paragraph (g).

(h) Contracting and procurement procedures. (1) Facilities financed with debt

obtained entirely from non-RUS

sources, without an RUS loan guarantee, are not subject to RUS post-loan

requirements regarding contracting,

procurement and bidding procedures;

contract close-out procedures pertaining to project completion, final

payment of contractor, and related

matters; and standard forms of construction and procurement contracts

listed in 7 CFR 1726.300.

(2) To the extent that provisions in a

borrower’s loan contract or mortgage

in favor of RUS may be inconsistent

with paragraphs (g)(1) and (h)(1) of this

section, paragraphs (g)(1) and (h)(1) of

this section are intended to constitute

an approval or waiver under the terms

of such instruments, and in any regulations implementing such instruments,

with respect to facilities financed with

debt obtained entirely from non-RUS

sources without an RUS guarantee.

(i) Access of handicapped to buildings

and seismic safety. A borrower must

meet the following requirements to be

eligible for a lien accommodation or

subordination for 100 percent private financing of the construction of buildings:

(1) The borrower must provide RUS

with a certification by the project architect that the buildings will be designed and constructed in compliance

with Section 504 of the Rehabilitation

Act of 1973 as amended (29 U.S.C. 794),

as applicable under that Act, and that

the facilities will be readily accessible

to and usable by persons with handicaps in accordance with the Uniform

Federal Accessibility Standards

(UFAS), (Appendix A to 41 CFR part

101.19, subpart 101–19.6). The certification must be included in the borrower’s application for a lien accommodation or subordination. In addition

to these requirements, building construction may also be subject to requirements of The Americans with Disabilities Act (42 U.S.C. 12101 et seq.);

and

(2) The borrower must comply with

RUS’s seismic safety requirements set

forth in 7 CFR part 1792, subpart C.

(j) Breach of warranty. Any breach of

any warranty or agreement or any material inaccuracy in any representation, warranty, certificate, document,

or opinion submitted pursuant to this

subpart, including, without limitation,

any agreement or representation regarding the use of funds from loans lien

accommodated or subordinated pursuant to this subpart, shall constitute a

default by the borrower under the

terms of its loan agreement with RUS.

(k) Guaranteed loans. The provisions

of this subpart do not apply to lien accommodations or subordinations

sought for loans guaranteed by RUS.

Such lien accommodations and subordinations are governed by RUS regulations on guaranteed loans.

(l) Release of lien. To avoid repetition,

release of lien is not mentioned in

every instance where it may be an acceptable alternative to subordination

of RUS’s lien. Generally, lien subordination is favored over release of lien,

and any decision to release RUS’s lien

is at the sole discretion of RUS.

(m) Waiver authority. Consistent with

the RE Act and other applicable laws,

any requirement, condition, or restriction imposed by this subpart, or subpart S of this part, on a borrower, private lender, or application for a lien

accommodation or subordination may

be waived or reduced by the Administrator, if the Administrator determines

that said action is in the Government’s

financial interest with respect to ensuring repayment and reasonably adequate security for loans made or guaranteed by RUS.

172

§ 1717.851 7 CFR Ch. XVII (1–1–00 Edition)

(n) Liability. It is the intent of this

subpart that any failure on the part of

RUS to comply with any provisions

hereof, including without limitation,

those provisions setting forth specified

timeframes for action by RUS on applications for lien accommodations or

lien subordinations, shall not give rise

to liability of any kind on the part of

the Government or any employees of

the Government including, without

limitation, liability for damages, fees,

expenses or costs incurred by or on behalf of a borrower, private lender or

any other party.

[58 FR 53843, Oct. 19, 1993, as amended at 60

FR 67408, Dec. 29, 1995]

§ 1717.851 Definitions.

Terms used in this subpart have the

meanings set forth in 7 CFR 1710.2. References to specific RUS forms and

other RUS documents, and to specific

sections or lines of such forms and documents, shall include the corresponding forms, documents, sections

and lines in any subsequent revisions

of these forms and documents. In addition to the terms defined in 7 CFR

1710.2, the following terms have the following meanings for the purposes of

this subpart:

Borrower’s financial and statistical report means RUS Form 7, Parts A

through D, for distribution borrowers,

and RUS Form 12a for power supply

borrowers.

Calendar day means any day of the

year, except a Federal holiday that

falls on a work day.

Capital investment. For the purposes

of §1717.860, capital investment means

an original investment in an asset that

is intended for long-term continued use

or possession and, for accounting purposes, is normally depreciated or depleted as it is used. For example, such

assets may include land, facilities,

equipment, buildings, mineral deposits,

patents, trademarks, and franchises.

Original investments do not include

refinancings or refundings.

Current refunding means any refunding of debt where the proceeds of the

new debt are applied to refund the old

debt within 90 days of the issuance of

the new debt.

Default under the RUS mortgage,

loan contract, restructuring agreement, or any other agreement between

the borrower and RUS means any event

of default or any event which, with the

giving of notice or lapse of time or

both, would become an event of default.

Equity, less deferred expenses, means

Line 33 of Part C of RUS Form 7 less

assets properly recordable in Account

182.2, Unrecovered Plant and Regulatory Study Costs, and Account 182.3,

Other Regulatory Assets.

Front-end costs means the reasonable

cost of engineering, architectural, environmental and other studies and

plans needed to support the construction of facilities and other investments

eligible for a lien accommodation or

subordination under this subpart.

Lien accommodation means the sharing of the Government’s (RUS’s) lien

on property, usually all property, covered by the lien of the RUS mortgage.

Lien subordination means allowing another lender to take a first mortgage

lien on certain property covered by the

lien of the RUS mortgage, and the Government (RUS) taking a second lien on

such property.

Natural gas distribution system means

any system of community infrastructure whose primary function is the distribution of natural gas and whose

services are available by design to all

or a substantial portion of the members of the community.

Net utility plant means Part C, Line 5

of RUS Form 7 (distribution borrowers)

or Section B, Line 5 of RUS Form 12a

(power supply borrowers).

Power cost study means the study defined in 7 CFR 1710.303.

Solid waste disposal system means any

system of community infrastructure

whose primary function is the collection and/or disposal of solid waste and

whose services are available by design

to all or a substantial portion of the

members of the community.

Telecommunication and other electronic

communication system means any system of community infrastructure

whose primary function is the provision of telecommunication or other

electronic communication services and

whose services are available by design

to all or a substantial portion of the

members of the community.

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Rural Utilities Service, USDA § 1717.852

Total assets, less deferred expenses

means Line 26 of Part C of RUS Form

7 less assets properly recordable in Account 182.2, Unrecovered Plant and

Regulatory Study Costs, and Account

182.3, Other Regulatory Assets.

Total outstanding long-term debt

means Part C, Line 38 of RUS Form 7.

Transaction costs means the reasonable cost of legal advice, accounting

fees, filing fees, recording fees, call premiums and prepayment penalties, financing costs (including, for example,

underwriting commissions, letter of

credit fees and bond insurance), and

printing associated with borrower financing.

Water and waste disposal system means

any system of community infrastructure whose primary function is the supplying of water and/or the collection

and treatment of waste water and

whose services are available by design

to all or a substantial portion of the

members of the community.

Weighted average life of the loan means

the average life of the loan based on

the proportion of original loan principal paid during each year of the loan.

It shall be determined by calculating

the sum of all loan principal payments,

expressed as a fraction of the original

loan principal amount, times the number of years and fractions of years

elapsed at the time of each payment

since issuance of the loan. For example, given a $5 million loan, with a maturity of 5 years and equal principal

payments of $1 million due on the anniversary date of the loan, the weighted

average life would be: (.2)(1 year) +

(.2)(2 years) + (.2)(3 years) + (.2)(4 years)

+ (.2)(5 years) = .2 years + .4 years + .6

years + .8 years + 1.0 years = 3.0 years.

If instead the loan had a balloon payment of $5 million at the end of 5 years,

the weighted average life would be: ($5

million/$5 million)(5 years) = 5 years.

[58 FR 53843, Oct. 19, 1993, as amended at 59

FR 3986, Jan. 28, 1994; 60 FR 67409, Dec. 29,

1995]

§ 1717.852 Financing purposes.

(a) Purposes eligible. The following financing purposes, except as excluded in

paragraph (b) of this section, are eligible for a lien accommodation from

RUS, or in certain circumstances a

subordination of RUS’s lien on specific

assets, provided that all applicable provisions of this subpart are met:

(1) The acquisition, construction, improvement, modification, and replacement (less salvage value) of systems,

equipment, and facilities, including

real property, used to supply electric

and/or steam power to:

(i) RE Act beneficiaries; and/or

(ii) End-user customers of the borrower who are not beneficiaries of the

RE Act. Such systems, equipment, and

facilities include those listed in 7 CFR

1710.251(c) and 1710.252(c), as well as

others that are determined by RUS to

be an integral component of the borrower’s system of supplying electric

and/or steam power to consumers, such

as, for example, coal mines, coal handling facilities, railroads and other

transportation systems that supply

fuel for generation, programs of demand side management and energy

conservation, and on-grid and off-grid

renewable energy systems;

(2) The purchase, rehabilitation and

integration of existing distribution facilities, equipment and systems, and

associated service territory;

(3) The following types of community

infrastructure substantially located

within the electric service territory of

the borrower: water and waste disposal

systems, solid waste disposal systems,

telecommunication and other electronic communications systems, and

natural gas distribution systems;

(4) Front-end costs, when and as the

borrower has obtained a binding commitment from the non-RUS lender for

the financing required to complete the

procurement or construction of the facilities;

(5) Transaction costs included as part

of the cost of financing assets or refinancing existing debt, provided, however, that the amount of transaction

costs eligible for lien accommodation

or subordination normally shall not exceed 5 percent of the principal amount

of financing or refinancing provided,

net of all transaction costs;

(6) The refinancing of existing debt

secured under the mortgage;

(7) Interest during construction of

generation and transmission facilities

if approved by RUS, case by case, depending on the financial condition of

174

§ 1717.853 7 CFR Ch. XVII (1–1–00 Edition)

the borrower, the terms of the financing, the nature of the construction, the

treatment of these costs by regulatory

authorities having jurisdiction, and

such other factors deemed appropriate

by RUS; and

(8) Lien subordinations for certain

rural development investments, as provided in §1717.858.

(b) Purposes ineligible. The following

financing purposes are not eligible for

a lien accommodation or subordination

from RUS:

(1) Working capital, including operating funds, unless in the judgment of

RUS the working capital is required to

ensure the repayment of RUS loans

and/or other loans secured under the

mortgage;

(2) Facilities, equipment, appliances,

or wiring located inside the premises of

the consumer, except:

(i) Certain load-management equipment (see 7 CFR 1710.251(c));

(ii) Renewable energy systems and

RUS-approved programs of demand side

management and energy conservation;

and

(iii) As determined by RUS on a case

by case basis, facilities included as

part of certain cogeneration projects to

furnish electric and/or steam power to

end-user customers of the borrower;

(3) Investments in a lender required

of the borrower as a condition for obtaining financing; and

(4) Debt incurred by a distribution or

power supply borrower to finance facilities, equipment or other assets that

are not part of the borrower’s electric

system or one of the four community

infrastructure systems cited in paragraph (a)(3) of this section, except for

certain rural development investments

eligible for a lien subordination under

§1717.858.

(c) Lien subordination for electric utility investments. RUS will consider subordinating its lien on specific electric

utility assets financed by the lender,

when the assets can be split off without

materially reducing the stability, safety, reliability, operational efficiency,

or liquidation value of the rest of the

system.

[58 FR 53843, Oct. 19, 1993, as amended at 59

FR 3986, Jan. 28, 1994; 60 FR 67409, Dec. 29,

1995]

§ 1717.853 Loan terms and conditions.

(a) Terms and conditions. A loan, bond

or other financing instrument, for

which a lien accommodation or subordination is requested from RUS, must

comply with the following terms and

conditions:

(1) The maturity of the loan or bond

used to finance facilities or other capital assets must not exceed the weighted average of the expected remaining

useful lives of the assets being financed;

(2) The loan or bond must have a maturity of not less than 5 years, except

for loans or bonds used to refinance

debt that has a remaining maturity of

less than 5 years;

(3) The principal of the loan or bond

must be amortized at a rate that will

yield a weighted average life not greater than the weighted average life that

would result from level payments of

principal and interest; and

(4) The loan, or any portion of the

loan, may bear either a variable (set

annually or more frequently) or a fixed

interest rate.

(b) RUS approval. Loan terms and

conditions and the loan agreement between the borrower and the lender are

subject to RUS approval. However,

RUS will usually waive its right of approval for distribution borrowers that

meet the conditions for advance approval of a lien accommodation or subordination set forth in §1717.854. RUS

may also waive its right of approval in

other cases. RUS’s decision to waive its

right of approval will depend on the

adequacy of security for RUS’s loans,

the current and projected financial

strength of the borrower and its ability

to meet its financial obligations, RUS’s

familiarity with the lender and its

lending practices, whether the transaction is ordinary or unusual, and the

uncertainty and credit risks involved

in the transaction.

175

Rural Utilities Service, USDA § 1717.854

§ 1717.854 Advance approval—100 percent private financing of distribution, subtransmission and headquarters facilities, and certain

other community infrastructure.

(a) Policy. Requests for a lien accommodation or subordination from distribution borrowers for 100 percent private financing of distribution, subtransmission and headquarters facilities, and for community infrastructure

listed in §1717.852(a)(3), qualify for advance approval by RUS if they meet

the conditions of this section and all

other applicable provisions of this subpart. Advance approval means RUS

will approve these requests once RUS

is satisfied that the conditions of this

section and all other applicable provisions of this subpart have been met.

(b) Eligible purposes. Lien accommodations or subordinations for the financing of distribution, subtransmission, and headquarters facilities

and community infrastructure listed in

§1717.852(a)(3) are eligible for advance

approval, except those that involve the

purchase of existing facilities and associated service territory.

(c) Qualification criteria. To qualify

for advance approval, the following requirements, as well as all other applicable requirements of this subpart,

must be met:

(1) The borrower has achieved a TIER

of at least 1.5 and a DSC of at least 1.25

for each of 2 calendar years immediately preceding, or any 2 consecutive

12 month periods ending within 180

days immediately preceding, the

issuance of the debt;

(2) The ratio of the borrower’s equity,

less deferred expenses, to total assets,

less deferred expenses, is not less than

27 percent, after adding the principal

amount of the proposed loan to the

total assets of the borrower;

(3) The borrower’s net utility plant

as a ratio to its total outstanding longterm debt is not less than 1.0, after

adding the principal amount of the proposed loan to the existing outstanding

long-term debt of the borrower;

(4) There are no actions or proceedings against the borrower, pending

or overtly threatened in writing before

any court, governmental agency, or arbitrator that would materially adversely affect the borrower’s operations and/or financial condition;

(5) The borrower is current on all

debt payments and all other financial

obligations, and is not in default under

the RUS mortgage, the RUS loan contract, the borrower’s wholesale power

contract, any debt restructuring agreement, or any other agreement with

RUS;

(6) The borrower has:

(i) Submitted the annual auditor’s report, report on compliance, report on

internal controls, and management letter in accordance with 7 CFR part 1773;

(ii) Received an unqualified opinion

in the most recent auditor’s report;

(iii) Resolved all material findings

and recommendations made in the

most recent Loan Fund and Accounting Review;

(iv) Resolved all material findings

and recommendations made in the

most recent financial statement audit,

including those material findings and

recommendations made in the report

on internal control, report on compliance, and management letter;

(v) Resolved all outstanding material

accounting issues with RUS; and

(vi) Resolved any significant irregularities to RUS’s satisfaction; and

(7) If the borrower has a power supply

contract with a power supply borrower,

the power supply borrower is current

on all debt payments and all other financial obligations, and is not in default under the RUS mortgage, the

loan contract, any debt restructuring

agreement, or any other agreement

with RUS.

(d) Right of normal review reserved.

RUS reserves the right to review any

request for lien accommodation or subordination under its normal review

process rather than under advance approval procedures if RUS, in its sole

discretion, determines there is reasonable doubt as to whether the requirements of paragraphs (b) and (c) of this

section have been or will be met, or

whether the borrower will be able to

meet all of its present and future financial obligations.

[58 FR 53843, Oct. 19, 1993, as amended at 60

FR 67410, Dec. 29, 1995]

176

§ 1717.855 7 CFR Ch. XVII (1–1–00 Edition)

§ 1717.855 Application contents: Advance approval—100 percent private financing of distribution, subtransmission and headquarters facilities, and certain other community infrastructure.

Applications for a lien accommodation or subordination that meet the requirements of §1717.854 must include

the following information and documents:

(a) A certification by an authorized

official of the borrower that the borrower and, as applicable, the loan are

in compliance with all conditions set

forth in §1717.854(c) and all applicable

provisions of §§1717.852 and 1717.853;

(b) A resolution of the borrower’s

board of directors requesting the lien

accommodation or subordination and

including the amount and maturity of

the proposed loan, a general description of the facilities or other purposes

to be financed, the name and address of

the lender, and an attached term sheet

summarizing the terms and conditions

of the proposed loan;

(c) The borrower’s financial and statistical report, the data in which shall

not be more than 60 days old when the

complete application is received by

RUS;

(d) Draft copy of any new mortgage

or mortgage amendment (supplement)

required by RUS or the lender, unless

RUS has notified the borrower that it

wishes to prepare these documents

itself;

(e) A copy of the loan agreement,

loan note, bond or other financing instrument, unless RUS has notified the

borrower that these documents need

not be submitted;

(f) Borrower’s environmental report

and/or other environmental documentation, if required by 7 CFR part

1794;

(g) RUS Form 740c, Cost Estimates

and Loan Budget for Electric Borrowers, and RUS Form 740g, Application for Headquarters Buildings;

(h) A CWP or CWP amendment covering the proposed project, in accordance with 7 CFR part 1710, subpart F,

and subject to RUS approval, and a resolution of the borrower’s board of directors adopting the CWP;

(i) The certification by the project

architect for any buildings to be constructed, as required by §1717.850(i);

(j) A certification by an authorized

official of the borrower that flood hazard insurance will be obtained for the

full value of any buildings, or other facilities susceptible to damage if flooded, that will be located in a flood hazard area;

(k) Form AD-1047, Certification Regarding Debarment, Suspension, and

Other Responsibility Matters—Primary

Covered Transactions, as required by 7

CFR part 3017;

(l) A report by the borrower stating

whether or not it is delinquent on any

Federal debt, and if delinquent, the

amount and age of the delinquency and

the reasons therefor; and a certification, if not previously provided, that

the borrower has been informed of the

Government’s collection options;

(m) The written acknowledgement

from a registered engineer or architect

regarding compliance with seismic provisions of applicable model codes for

any buildings to be constructed, as required by 7 CFR 1792.104; and

(n) Other information that RUS may

require to determine whether all of the

applicable provisions of this subpart

have been met.

[58 FR 53843, Oct. 19, 1993, as amended at 60

FR 67410, Dec. 29, 1995]

§ 1717.856 Application contents: Normal review—100 percent private financing.

Applications for a lien accommodation or subordination for 100 percent

private financing for eligible purposes

that do not meet the requirements of

§1717.854 must include the following information and documents:

(a) A certification by an authorized

official of the borrower that:

(1) The borrower and, as applicable,

the loan are in compliance with all applicable provisions of §§1717.852 and

1717.853; and

(2) There are no actions or proceedings against the borrower, pending

or overtly threatened in writing before

any court, governmental agency, or arbitrator that would materially adversely affect the borrower’s operations and/or financial condition. If

177

Rural Utilities Service, USDA § 1717.857

this certification cannot be made, the

application must include:

(i) An opinion of borrower’s counsel

regarding any actions or proceedings

against the borrower, pending or overtly threatened in writing before any

court, governmental agency, or arbitrator that would materially adversely

affect the borrower’s operations and/or

financial condition. The opinion shall

address the merits of the claims asserted in the actions or proceedings,

and include, if appropriate, an estimate

of the amount or range of any potential loss; and

(ii) A certification by an authorized

official of the borrower as to the

amount of any insurance coverage applicable to any loss that may result

from the actions and proceedings addressed in the opinion of borrower’s

counsel;

(b) The information and documents

set forth in §1717.855 (b) through (n);

(c) A long-range financial forecast

providing financial projections for at

least 10 years, which demonstrates that

the borrower’s system is economically

viable and that the proposed loan is financially feasible, and a resolution of

the borrower’s board of directors

adopting the long-range financial forecast. The financial forecast must comply with the requirements of 7 CFR

part 1710 subpart G. RUS may, in its

sole discretion, waive the requirement

of this paragraph that a long range financial forecast be provided, if:

(1) The borrower is current on all of

its financial obligations and is in compliance with all requirements of its

mortgage and loan agreement with

RUS;

(2) In RUS’s judgment, granting a

lien accommodation or subordination

for the proposed loan will not adversely

affect the repayment and security of

outstanding debt of the borrower owed

to or guaranteed by RUS;

(3) The borrower has achieved the

TIER and DSC and any other coverage

ratios required by its mortgage or loan

contract in each of the two most recent

calendar years; and

(4) The amount of the proposed loan

does not exceed the lesser of $10 million

or 10 percent of the borrower’s current

net utility plant;

(d) [Reserved]

(e) As applicable to the type of facilities being financed, a CWP, related engineering and cost studies, a power

cost study, and a resolution of the borrower’s board of directors adopting

these documents. These documents

must meet the requirements of 7 CFR

part 1710, subpart F and, as applicable,

subpart G;

(f) Unless the requirement has been

waived in writing by RUS, a current,

RUS-approved power requirements

study, which must meet the requirements of 7 CFR part 1710, subpart E, to

the same extent as if the loan were

being made by RUS, and a resolution of

the borrower’s board of directors

adopting the study; and

(g) A discussion of the borrower’s

compliance with RUS requirements on

accounting, financial reporting, record

keeping, and irregularities (see

§1717.854(c)(5)). RUS will review the

case and determine the effect of any

noncompliance on the feasibility and

security of RUS’s loans, and whether

the requested lien accommodation or

subordination can be approved.

[58 FR 53843, Oct. 19, 1993, as amended at 60

FR 3735, Jan. 19, 1995; 60 FR 67410, Dec. 29,

1995]

§ 1717.857 Refinancing of existing secured debt—distribution and power

supply borrowers.

(a) Advance approval. All applications

for a lien accommodation or subordination for the refinancing of existing secured debt that meet the qualification

criteria of this paragraph, except applications from borrowers in default

under their mortgage or loan contract

with RUS, are eligible for advance approval. Such lien accommodations and

subordinations are deemed to be in the

Government’s interest, and RUS will

approve them once RUS is satisfied

that the requirements of this paragraph and paragraph (c) of this section

have been met. The qualification criteria are as follows:

(1) The refinancing is a current refunding and does not involve interest

rate swaps, forward delivery contracts,

or similar features;

(2) The principal amount of the refinancing loan does not exceed the sum

of the outstanding principal amount of

the debt being refinanced plus the

178

§ 1717.857 7 CFR Ch. XVII (1–1–00 Edition)

amount of transactions costs included

in the refinancing loan that are eligible for lien accommodation or subordination under §1717.852(a)(4);

(3) The weighted average life of the

refinancing loan is not greater than

the weighted average remaining life of

the loan being refinanced; and

(4) The present value of the cost of

the refinancing loan, including all

transaction costs and any required investments in the lender, is less than

the present value of the cost of the

loan being refinanced, as determined

by a method acceptable to RUS. The

discount rate used in the present value

analysis shall be equal to either:

(i) The current rate on Treasury securities having a maturity equal to the

weighted average life of the refunding

loan, plus one-eighth percent, or

(ii) A rate approved by RUS based on

documentation provided by the borrower as to its marginal long-term borrowing cost.

(b) Other applications. Applications

for a lien accommodation or subordination for refinancing that do not meet

the requirements of paragraph (a) of

this section will be reviewed by RUS

under normal review procedures for

these applications. In the case of either

advance approval or normal review, a

lien subordination would be authorized

only if the lien of the mortgage was

subordinated with respect to the assets

securing the loan being refinanced.

(c) Application contents—advance approval of refinancing. Applications for a

lien accommodation or subordination

for refinancing of existing secured debt

that meet the qualification criteria for

advance approval set forth in paragraph (a) of this section, must include

the following information and documents:

(1) A certification by an authorized

official of the borrower that the application meets the requirements of paragraph (a) of this section and all applicable provisions of §§1717.852 and

1717.853;

(2) Documentation and analysis demonstrating that the application meets

the qualification criteria set forth in

paragraph (a) of this section;

(3) A resolution of the borrower’s

board of directors requesting the lien

accommodation or subordination and

including the amount and maturity of

the proposed loan, a general description of the debt to be refinanced, the

name and address of the lender, and an

attached term sheet summarizing the

terms and conditions of the proposed

loan;

(4) The borrower’s financial and statistical report, the data in which shall

not be more than 60 days old when the

complete application is received by

RUS;

(5) Draft copy of any new mortgage

or mortgage amendment (supplement)

required by RUS or the lender, unless

RUS has notified the borrower that it

wishes to prepare these documents

itself;

(6) A copy of the loan agreement,

loan note, bond or other financing instrument, unless RUS has notified the

borrower that these documents need

not be submitted;

(7) Form AD-1047, Certification Regarding Debarment, Suspension, and

Other Responsibility Matters—Primary

Covered Transactions, as required by 7

CFR part 3017;

(8) A report by the borrower stating

whether or not it is delinquent on any

Federal debt, and if delinquent, the

amount and age of the delinquency and

the reasons therefor; and a certification, if not previously provided, that

the borrower has been informed of the

Government’s collection options; and

(9) Other information, documents and

opinions that RUS may require to determine whether all of the applicable

provisions of this subpart have been

met.

(d) Application contents—normal review

of refinancing. Applications for a lien

accommodation or subordination for

refinancing of existing secured debt

that do not meet the requirements for

advance approval set forth in paragraph (a) of this section, must include

the following information and documents:

(1) The information and documents

set forth in paragraphs (c)(3) through

(9) of this section;

(2) A complete description of the refinancing loan and the outstanding debt

to be refinanced;

(3) An analysis comparing the refinancing loan with the loan being refinanced as to the weighted average life

179

Rural Utilities Service, USDA § 1717.858

and the net present value of the costs

of the two loans; and

(4) If the present value of the cost of

the refinancing loan is greater than the

present value of the cost of the debt

being refinanced, financial forecasts

for at least 5 years comparing the borrower’s debt service and other costs,

revenues, margins, cash flows, TIER,

and DSC, with and without the proposed refinancing.

(e) Application process and timeframes.

The application process and timeframes for RUS review and action for

refinancings are set forth in

§1717.859(d).

(f) Prepayments of concurrent RUS insured loans. If the loan being refinanced

was made concurrently as supplemental financing required by RUS in

connection with an RUS insured loan,

the refinancing will not be considered a

prepayment under the RUS mortgage,

and no proportional prepayment of the

concurrent RUS insured loan will be

required, provided that the principal

amount of the refinancing loan is not

less than the amount of loan principal

being refinanced, and the weighted average life of the refinancing loan is materially equal to the weighted average

remaining life of the loan being refinanced. The refinancing loan shall be

considered a concurrent loan.

[58 FR 53843, Oct. 19, 1993, as amended at 60

FR 67410, Dec. 29, 1995]

§ 1717.858 Lien subordination for rural

development investments.

(a) Policy. RUS encourages borrowers

to consider investing in financially

sound projects that are likely to have a

positive effect on economic development and employment in rural areas.

In addition to the guidance set forth in

§1717.651, RUS recommends that such

investments be made through a subsidiary of the borrower in order to

clearly separate the financial risks and

the revenues and costs of the rural development enterprise from those of the

borrower’s electric utility business.

This should reduce credit risks to the

borrower’s primary business, and minimize the possibility of undisclosed

cross subsidization of the rural development enterprise by electric rate payers.

(b) Lien subordination. RUS will consider subordinating or releasing its lien

on the stock held by a borrower in a

subsidiary whose primary business directly contributes to or supports economic development and employment in

rural areas, as defined in section 13 of

the RE Act, when requested by a lender

to the subsidiary, other than the borrower. To be eligible for said lien subordination or release:

(1) The borrower must be current on

all of its financial obligations and be in

compliance with all provisions of its

mortgage and loan agreement with

RUS; and

(2) In the judgment of RUS, the borrower must be able to repay all of its

outstanding debt, and the security

forall outstanding loans made to the

borrower by RUS, including loans guaranteed by RUS, must be adequate,

after taking into account the proposed

subordination or release of lien.

(c) Application contents. Applications

for a lien subordination or release of

lien for rural development investments

must include the following information

and documents:

(1) A resolution of the borrower’s

board of directors requesting the lien

subordination or release of lien;

(2) A certification by an authorized

official of the borrower that the borrower is current on all of its financial

obligations and is in compliance with

all provisions of its mortgage and loan

agreement with RUS;

(3) A description of the facilities or

other purposes to be financed and the

projected effects on economic development and employment in rural areas;

(4) The borrower’s financial and statistical report, the data in which shall

not be more than 60 days old when the

complete application is received by

RUS;

(5) If requested by RUS, a long-range

financial forecast providing financial

projections for at least 10 years, in

form and substance satisfactory to

RUS, which demonstrates that the borrower’s system is economically viable

and that the borrower will be able to

repay all of its outstanding debt and

meet all other financial obligations;

(6) A discussion of the borrower’s

compliance with RUS requirements on

accounting, financial reporting, record

180

§ 1717.859 7 CFR Ch. XVII (1–1–00 Edition)

keeping, and irregularities (see

§1717.854(c)(5)). RUS will review the

case and determine the effect of any

noncompliance on the feasibility and

security of RUS’s loans, and whether

the requested lien subordination or release of lien can be approved;

(7) If any buildings are to be constructed with the proceeds of the loan

to be made to the subsidiary:

(i) A certification by the project architect that the buildings will be designed and constructed in compliance

with Section 504 of the Rehabilitation

Act of 1973 as amended (29 U.S.C. 794),

as applicable under that Act, and that

the facilities will be readily accessible

to and usable by persons with handicaps in accordance with the Uniform

Federal Accessibility Standards; and

(ii) A written acknowledgement from

a registered engineer or architect regarding compliance with seismic provisions of applicable model codes, as required by 7 CFR 1792.104;

(8) A certification by an authorized

official of the borrower that flood hazard insurance will be obtained for the

full value of any buildings, or other facilities susceptible to damage if flooded, that will be located in a flood hazard area;

(9) Form AD-1047, Certification Regarding Debarment, Suspension, and

Other Responsibility Matters—Primary

Covered Transactions, as required by 7

CFR part 3017;

(10) A report by the borrower stating

whether or not it is delinquent on any

Federal debt, and if delinquent, the

amount and age of the delinquency and

the reasons therefor; and a certification, if not previously provided, that

the borrower has been informed of the

Government’s collection options; and

(11) Other information that RUS may

require to determine whether all of the

applicable provisions of this subpart

have been met.

§ 1717.859 Application process and

timeframes.

(a) General. (1) Borrowers are responsible for ensuring that their applications for a lien accommodation or subordination are complete and sound as

to substance and form before they are

submitted to RUS. RUS will not accept

any application that, on its face, is incomplete or inadequate as to the substantive information required by this

subpart. RUS will notify borrowers in

writing when their applications are

complete and in form and substance

satisfactory to RUS. A copy of all notifications of borrowers cited in this section will also be sent to the private

lender.

(2) It is recommended that borrowers

consult with RUS staff before submitting their applications to determine

whether they will likely qualify for advance approval or normal review, and

to obtain answers to any questions

about the information and documents

required for the application.

(3) A borrower shall, after submitting

an application, promptly notify RUS of

any changes that materially affect the

information contained in its application.

(4) After submitting an application

and having been notified by RUS of additional information and documents

and other changes needed to complete

the application, if the required information and documents are not supplied

to RUS within 30 calendar days of the

borrower’s receipt of the notice, RUS

may return the application to the borrower. The borrower may resubmit the

application when the required additional information and documents are

available.

(5) Timeframes. The timeframes for

review of applications set forth in this

section are based on the following conditions:

(i) The types of lien accommodations

or subordinations requested are of the

‘‘standard’’ types that RUS has approved previously, i.e., the so-called

Type I, II and III lien accommodations.

Future revisions of the RUS mortgage

may result in other ‘‘standard’’ types

of lien accommodations and lien subordinations acceptable to RUS. Requests

for lien accommodations or subordinations that are substantially different

than the ‘‘standard’’ types previously

approved by RUS may require additional time for review and action;

(ii) The requested lien accommodation or subordination does not require

the preparation of an environmental

assessment or an Environmental Impact Statement. Preparation of these

181

Rural Utilities Service, USDA § 1717.859

documents often will require additional time beyond the timeframes

cited in this section; and

(iii) The timeframes set forth in this

section, except for paragraph (b)(4) of

this section, which deals only with approval of a new mortgage or mortgage

amendment, include RUS review and/or

approval of a loan contract, if required

as part of the application, and required

supporting documents, such as a CWP.

(b) Advance approval—100 percent private financing of distribution, subtransmission, and headquarters facilities. (1)

Applications that qualify under

§1717.854 for advance approval of a lien

accommodation or subordination for

100 percent private financing of distribution, subtransmission, and headquarters facilities are submitted to the

general field representative (GFR). The

GFR will work with the borrower to

ensure that all components of the application are assembled. Once the application is satisfactory to the GFR, it

will be sent promptly to the Washington office for further review and action. If a new mortgage or mortgage

amendment is required, a draft of these

documents must be included in the application, unless the borrower has been

notified that RUS wishes to prepare

the documents itself.

(2) If no additional or amended information is needed for RUS to complete

its review of the application once it is

received in the Washington Office, RUS

will, within 45 calendar days of receiving the application in the Washington

Office, either:

(i) Approve the lien accommodation

or subordination if the borrower has

demonstrated satisfactorily to RUS

that all requirements of this subpart

applicable to advance approval have

been met, and send written notice to

the borrower. RUS’s approval, in this

case and all other cases, will be conditioned upon execution and delivery by

the borrower of a satisfactory security

instrument, if required, and such additional information, documents, and

opinions of counsel as RUS may require;

(ii) If all requirements have not been

met, so notify the borrower in writing.

The application will be returned to the

borrower unless the borrower requests

that it be reconsidered under the requirements and procedures for normal

review set forth in paragraph (c) of this

section and in §1717.856; or

(iii) Send written notice to the borrower explaining why a decision cannot

be made at that time and giving the estimated date when a decision is expected.

(3) If additional or amended information is needed after the application is

received in the Washington Office, RUS

will so notify the borrower in writing

within 15 calendar days of receiving the

application in the Washington Office. If

RUS subsequently becomes aware of

other deficiencies in the application,

additional written notice will be sent

to the borrower. Within 30 calendar

days of receiving all of the information

required by RUS to complete its review, RUS will act on the application

as described in paragraphs (b)(2)(i)

through (b)(2)(iii) of this section.

(4) If a new mortgage or mortgage

amendment is required, within 30 days

of receiving such documents satisfactory to RUS, including required execution counterparts, RUS will execute

the documents and send them to the

borrower, along with instructions pertaining to recording of the mortgage,

an opinion of borrower’s counsel, and

other matters. RUS will promptly notify the borrower upon receiving satisfactory evidence that the borrower has

complied with said instructions.

(c) Normal review—100 percent private

financing of distribution, transmission,

and/or generation facilities—(1) Distribution borrowers. (i) Applications from

distribution borrowers for a lien accommodation or subordination for 100

percent private financing of distribution, transmission, and/or generation

facilities (including other eligible electric utility purposes) that do not meet

the criteria for advance approval, are

also submitted to the GFR. Procedures

at this stage are the same as in paragraph (b)(1) of this section.

(ii) If no additional or amended information is needed for RUS to complete

its review of the application once it is

received in the Washington office, RUS

will, within 90 calendar days of receiving the application in the Washington

office, send written notice to the borrower either approving the request, disapproving the request, or explaining

182

§ 1717.859 7 CFR Ch. XVII (1–1–00 Edition)

why a decision cannot be made at that

time and giving the estimated date

when a decision is expected.

(iii) If additional or amended information is needed after the application

is received in the Washington Office,

RUS will so notify the borrower in

writing within 15 calendar days of receiving the application in the Washington Office. If RUS subsequently becomes aware of other deficiencies in

the application, additional written notice will be sent to the borrower. Within 90 calendar days of receiving all of

the information required by RUS to

complete its review, RUS will act on

the application as described in paragraph (c)(1)(ii) of this section.

(iv) If a new mortgage or mortgage

amendment is required, the procedures

and timeframes of paragraph (b)(4) of

this section will apply.

(2) Power supply borrowers. (i) Applications from power supply borrowers

for a lien accommodation or subordination for 100 percent private financing of

distribution, transmission, and/or generation facilities, and other eligible

electric utility purposes, are submitted

to the RUS Power Supply Division, or

its successor, in Washington, DC.

(ii) Within 30 calendar days of receiving the borrower’s application containing the information and documents

required by §1717.856, RUS will send

written notice to the borrower of any

deficiencies in its application as to

completeness and acceptable form and

substance. Additional written notices

may be sent to the borrower if RUS

subsequently becomes aware of other

deficiencies in the borrower’s application.

(iii) Within 90 calendar days of receiving all of the information required

by RUS to complete its review, RUS

will act on the application as described

in paragraph (c)(1)(ii) of this section.

(iv) If a new mortgage or mortgage

amendment is required, these documents will be reviewed and executed

pursuant to the procedures and timeframes of paragraph (b)(4) of this section.

(d) Refinancing of existing debt. All requests for a lien accommodation or

subordination for refinancing are sent

directly to the Washington office.

(1) Advance approval. (i) Within 15 calendar days of receiving the borrower’s

application containing the information

and documents required by §1717.857(c),

RUS will send written notice to the

borrower of any deficiencies in its application as to completeness and acceptable form and substance. Additional written notices may be sent to

the borrower if RUS subsequently becomes aware of other deficiencies in

the borrower’s application.

(ii) Within 15 calendar days of receiving all of the required information and

documents, in form and substance satisfactory to RUS, RUS will either:

(A) Approve the lien accommodation

or subordination if the borrower has

demonstrated satisfactorily to RUS

that all requirements of §1717.857(a)

and (c) have been met, and send written notice to the borrower;

(B) If all requirements have not been

met, so notify the borrower in writing.

The application will be returned to the

borrower unless the borrower requests

that it be reconsidered under the requirements and procedures for normal

review set forth in paragraph (d)(2) of

this section and in §1717.857; or

(C) Send written notice to the borrower explaining why a decision cannot

be made at that time and giving the estimated date when a decision is expected.

(iii) If a new mortgage or mortgage

amendment is required, these documents will be reviewed and executed

pursuant to the procedures and timeframes of paragraph (b)(4) of this section.

(2) Normal review. (i) Within 20 calendar days of receiving the borrower’s

application containing the information

and documents required by §1717.857(d),

RUS will send written notice to the

borrower of any deficiencies in its application as to completeness and acceptable form and substance. Additional written notices may be sent to

the borrower if RUS subsequently becomes aware of other deficiencies in

the borrower’s application.

(ii) Within 30 calendar days of receiving all of the required information and

documents, in form and substance satisfactory to RUS, RUS will notify the

borrower in writing either approving

the request, disapproving the request,

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Rural Utilities Service, USDA § 1717.860

or explaining why a decision cannot be

made at that time and giving the estimated date when a decision is expected. If the proposed refinancing involves complicated transactions such

as interest rate swaps or forward delivery contracts, additional time may be

required for RUS review and final action.

(iii) If a new mortgage or mortgage

amendment is required, these documents will be reviewed and executed

pursuant to the procedures and timeframes of paragraph (b)(4) of this section.

(e) Rural development investments. (1)

Applications for a lien subordination

for rural development investments are

submitted by distribution borrowers to

the GFR and by power supply borrowers to the RUS Power Supply Division, or its successor, in Washington,

DC.

(2) The GFR will work with the borrower to ensure that all components of

the application are assembled. Once

the application is satisfactory to the

GFR, it will be sent promptly to the

Washington Office for further review

and action. After the application is received in the Washington Office, if additional or amended information is

needed for RUS to complete its review,

RUS will so notify the borrower in

writing within 15 calendar days of receiving the application.

(3) Applications from power supply

borrowers containing the information

and documents required by §1717.858(c)

will be reviewed in the Washington office and the borrower given written notice within 30 calendar days of receiving the application of any deficiencies

as to completeness and acceptable form

and substance. Additional written notices may be sent to the borrower if

RUS subsequently becomes aware of

other deficiencies in the borrower’s application.

(4) Within 60 calendar days of receiving in the Washington office all of the

required information and documents,

in form and substance satisfactory to

RUS, RUS will give written notice to

the borrower either approving the request, disapproving the request, or explaining why a decision cannot be

made at that time and giving the estimated date when a decision is expected.

(5) If a new mortgage or mortgage

amendment is required, these documents will be reviewed and executed

pursuant to the procedures and timeframes of paragraph (b)(4) of this section.

§ 1717.860 Lien accommodations and

subordinations under section 306E

of the RE Act.

(a) General. Under section 306E of the

RE Act, when requested by a private

lender providing financing for capital

investments by a borrower whose net

worth exceeds 110 percent of the outstanding principal balance of all loans

made or guaranteed to the borrower by

RUS, the Administrator will, without

delay, offer to share the government’s

lien on the borrower’s system or subordinate the government’s lien on the

property financed by the private lender, provided that the security, including the assurance of repayment, for

loans made or guaranteed by RUS will

remain reasonably adequate. To qualify for a lien accommodation or subordination under this section, the investment must be an original capital investment, i.e., not a refinancing or refunding. (See §1717.851 for the definition of capital investment.)

(b) Determination of net worth to RUS

debt ratio. (1) In the case of applications

for a lien accommodation, a borrower’s

net worth will be based on the borrower’s most recent financial and statistical report, the data in which shall

not be more than 60 days old at the

time the application is received by

RUS, and the outstanding debt owed to

or guaranteed by RUS will be based on

latest RUS records available. The financial and statistical reports (Form 7

for distribution borrowers and Form

12a for power supply borrowers) are

subject to RUS review and revision,

and they must comply with RUS’s system of accounts and accounting principles set forth in 7 CFR part 1767.

Since sinking fund depreciation is not

approved under part 1767, net worth for

borrowers using sinking fund depreciation will be calculated as if the borrower had been using straight line depreciation.

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§ 1717.860 7 CFR Ch. XVII (1–1–00 Edition)

(2) Net worth shall be calculated by

taking total margins and equities (Line

33 of Part C of RUS Form 7 for distribution borrowers, or Line 34 of Section B of RUS Form 12a for power supply borrowers) and subtracting assets

properly recordable in account 182.2,

Unrecovered Plant and Regulatory

Study Costs, and account 182.3, Other

Regulatory Assets, as defined in 7 CFR

part 1767.

(c) Application requirements and process. (1) If a borrower’s net worth to

RUS debt ratio exceeds 110 percent, as

determined by RUS, and the borrower

is in compliance with all requirements

of its mortgage, loan agreement with

RUS, and any other agreement with

RUS that have not been exempted in

writing by RUS, if requested RUS will

expeditiously approve a lien accommodation or subordination for 100 percent

private financing of capital investments, provided that the security, including the assurance of repayment,

for loans made or guaranteed by RUS

will remain reasonably adequate.

RUS’s approval will be conditioned

upon execution and delivery by the

borrower of a security instrument satisfactory to RUS, if required, and such

additional information, documents,

and opinions of counsel as RUS may require.

(2) The application must include the

following:

(i) A resolution of the borrower’s

board of directors requesting the lien

accommodation and including the

amount and maturity of the proposed

loan, a general description of the facilities or other purposes to be financed,

the name and address of the lender, and

an attached term sheet summarizing

the terms and conditions of the proposed loan;

(ii) A certification by an authorized

official of the borrower that the borrower is in compliance with all requirements of its mortgage, loan agreement

with RUS, and any other agreement

with RUS that have not been exempted

in writing by RUS;

(iii) The borrower’s financial and statistical report, the data in which shall

not be more than 60 days old when the

complete application is received by

RUS;

(iv) Draft copy of any new mortgage

or mortgage amendment (supplement)

required by RUS or the lender, unless

RUS has notified the borrower that it

wishes to prepare these documents

itself;

(v) A copy of the loan agreement,

loan note, bond or other financing instrument, unless RUS has notified the

borrower that these documents need

not be submitted. These documents

will not be subject to RUS approval,

but may be reviewed to determine

whether they contain any provisions

that would result in the security, including assurance of repayment, for

loans made or guaranteed by RUS no

longer being reasonably adequate;

(vi) The following certifications and

reports required by law:

(A) The certification by the project

architect for any buildings to be constructed, as required by 7 CFR

1717.850(i);

(B) A certification by an authorized

official of the borrower that flood hazard insurance will be obtained for the

full value of any buildings, or other facilities susceptible to damage if flooded, that will be located in a flood hazard area;

(C) Form AD–1047, Certification Regarding Debarment, Suspension, and

Other Responsibility Matters—Primary

Covered Transactions, as required by 7

CFR part 3017;

(D) A report by the borrower stating

whether or not it is delinquent on any

Federal debt, and if delinquent, the

amount and age of the delinquency and

the reasons therefor; and a certification, if not previously provided, that

the borrower has been informed of the

Government’s collection options; and

(E) The written acknowledgement

from a registered engineer or architect

regarding compliance with seismic provisions of applicable model codes for

any buildings to be constructed, as required by 7 CFR 1792.104. All other elements of an application listed in

§1717.855, §1717.856, and §1717.858(c) not

listed in this paragraph (c) are exempted.

(3) Applications from distribution

borrowers are submitted to the general

field representative (GFR), while applications from power supply borrowers

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Rural Utilities Service, USDA § 1717.901

are submitted to the RUS Power Supply Division, or its successor, in Washington, DC. When an application is satisfactory to the GFR, it will be sent

promptly to the Washington office. If

Washington office staff determine that

an application is incomplete, the borrower will be promptly notified in writing about the deficiencies. When the

application is complete, and if the security, including assurance of repayment, of loans made or guaranteed by

RUS will remain reasonably adequate

after granting the lien accommodation

or subordination, the borrower and the

lender will be promptly notified in

writing that the lien accommodation

or subornation has been approved, subject to the conditions cited in paragraph (c)(1) of this section.

(d) Rural development and other nonelectric utility investments. Although

RUS recommends the use of separate

subsidiaries as set forth in §1717.858, if

requested by a borrower that meets the

110 percent equity test and all other

applicable requirements of this section,

RUS will provide a lien subordination

on the specific assets financed in the

case of loans made directly to the borrower for rural development and other

non-electric utility purposes, provided

that the outstanding balance of all

such loans lien subordinated under this

paragraph (d), after taking into consideration the effect of the new loan, does

not exceed 15 percent of the borrower’s

net worth and the security, including

assurance of repayment, of loans made

or guaranteed by RUS will remain reasonably adequate after granting the

lien subordination. Investments lien

subordinated under this paragraph

shall be included among those investments subject to the 15 percent of total

utility plant limitation set forth in 7

CFR 1717.654(b)(1), and granting of the

lien subordination will not constitute

approval of the investment under 7

CFR part 1717, subpart N.

(e) Requirements and controls not exempted. All requirements and limitations imposed with respect to lien accommodations and subordinations by

this subpart R that are not specifically

exempted by this section are not exempted and shall continue to apply according to their terms.

[59 FR 3986, Jan. 28, 1994, as amended at 60

FR 3735, Jan. 19, 1995; 60 FR 67410, Dec. 29,

1995]

§§ 1717.861—1717.899 [Reserved]

Subpart S—Lien Accommodations

for Supplemental Financing

Required by 7 CFR 1710.110

SOURCE: 58 FR 53851, Oct. 19, 1993, unless

otherwise noted.

§ 1717.900 Qualification requirements.

Applications for a lien accommodation for supplemental financing required by 7 CFR 1710.110 must meet the

same requirements as an RUS insured

loan. The justification and documentation materials submitted as part of the

borrower’s application for an insured

loan also serve as the justification and

documentation of the request for a lien

accommodation for the required supplemental loan. Unless early approval

under §1717.901 is requested by a borrower, these applications will be processed during the same time as RUS’s

review of the borrower’s application for

the concurrent insured loan.

§ 1717.901 Early approval.

(a) Conditions. If requested by a borrower in writing, RUS will review the

application for a lien accommodation

for required supplemental financing

early in the process, before funding is

available for the concurrent RUS insured loan, and approve the lien accommodation if the following conditions

are met:

(1) The required supplemental loan

meets the requirements for an insured

loan, as set forth in 7 CFR part 1710,

subparts A through G, and other RUS

regulations pertaining to required supplemental loans;

(2) The borrower has demonstrated

the ability to obtain the funds that

would be needed to complete other portions of the project, if the portion to be

constructed with private loan funds

could not be used productively without

completion of such other portions, in

the event concurrent RUS insured loan

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§ 1717.902 7 CFR Ch. XVII (1–1–00 Edition)

funds are not forthcoming. Such evidence may include financial records

demonstrating the availability of general funds, and/or a written commitment from the private lender to provide a loan for the remaining amount

of financing required, with such commitment being conditioned upon the

availability of a lien accommodation

from RUS; and

(3) An authorized official of the borrower has requested early approval of

the lien accommodation and explained

the reasons therefor, and has certified

that the funds are needed and will be

drawn down before funds from the concurrent insured loan are expected to be

available, assuming that the insured

loan is approved.

(b) Timeframe for RUS action. (1) RUS

will either approve or disapprove the

lien accommodation within 90 days of

receiving the borrower’s request for

early approval and the complete application for the concurrent RUS loan and

required supplemental financing, in

form and substance satisfactory to

RUS, or notify the borrower in writing

of the estimated date when a decision

is expected. If an environmental assessment or an Environmental Impact

Statement is required, additional time

beyond the 90 days may be required to

prepare these documents. RUS’s approval of the lien accommodation will

be conditioned upon execution and delivery by the borrower of a satisfactory

security instrument, if required, and

such additional information, documents, and opinions of counsel as RUS

may require.

(2) If a mortgage or mortgage amendment is required, RUS will consult

with the other mortgagees as to who

will prepare the documents. Within 30

days of obtaining the documents satisfactory to RUS, including required execution counterparts, RUS will execute

the documents and send them to the

borrower, along with instructions pertaining to recording of the mortgage,

an opinion of borrower’s counsel, and

other matters. RUS will promptly notify the borrower upon receiving satisfactory evidence that the borrower has

complied with said instructions.

(c) Approval of concurrent insured

loan. Early approval of a lien accommodation for a required supplemental

loan does not ensure that the concurrent RUS insured loan will be approved. The request for the concurrent

insured loan will be reviewed when

funds are available to make the loan.

The borrower may be requested to update certain supporting information in

the loan application if substantial time

has elapsed since the lien accommodation or subordination was approved.

§ 1717.902 Other RUS requirements.

Supplemental loans required by 7

CFR 1710.110 are subject to the same

post-loan requirements as insured RUS

loans regarding accepted materials,

construction standards, contracting

and procurement procedures, standard

forms of contracts, RUS approval of

the advance of loan funds, and other

matters.

§ 1717.903 Liability.

It is the intent of this subpart that

any failure on the part of RUS to comply with any provisions of this subpart,

including without limitation, those

provisions setting forth specified timeframes for action by RUS on applications for lien accommodations or lien

subordinations, shall not give rise to liability of any kind on the part of the

Government or any employees of the

Government including, without limitation, liability for damages, fees, expenses or costs incurred by or on behalf

of a borrower, private lender or any

other party.

§ 1717.904 Exemptions pursuant to section 306E of the RE Act.

(a) General policy. If a borrower’s net

worth to RUS debt ratio exceeds 110

percent, as determined by RUS, and

the borrower is in compliance with all

requirements of its mortgage, loan

agreement with RUS, and any other

agreement with RUS that have not

been exempted in writing by RUS, RUS

will expeditiously approve a lien accommodation for a concurrent supplemental loan if requested in writing by

the borrower, provided that the security, including assurance of repayment,

of loans made or guaranteed by RUS

will remain reasonably adequate.

RUS’s approval will be conditioned

upon execution and delivery by the

187

Rural Utilities Service, USDA § 1717.1200

borrower of a security instrument satisfactory to RUS, if required, and such

additional information, documents,

and opinions of counsel as RUS may require.

(b) Determination of net worth to RUS

debt ratio. A borrower’s ratio of net

worth to RUS debt will be determined

as set forth in §1717.860(b).

(c) Requirements and controls exempted.

The applicable requirements and controls exempted by 7 CFR 1710.7(c) are

also exempted with respect to concurrent supplemental loans.

(d) Requirements and controls not exempted. All requirements and controls

applicable to concurrent supplemental

financing set forth in this subpart and

other RUS regulations that are not

specifically exempted by 7 CFR

1710.7(c) are not exempted and shall

continue to apply according to their

terms. These include, but are not limited to:

(1) The applicable requirements listed in 7 CFR 1710.7(d); and

(2) The requirements set forth in

§1717.901(a) when a borrower requests

early approval of a lien accommodation.

(e) Procedures. If a borrower meets

the requirements of this section, upon

receipt of a complete application RUS

will promptly notify the borrower and

lender in writing that the lien accommodation has been approved subject to

the conditions set forth in paragraph

(a) of this section.

[59 FR 3987, Jan. 28, 1994]

§§ 1717.905—1717.949 [Reserved]

Subpart T [Reserved]

§§ 1717.950—1717.999 [Reserved]

Subpart U [Reserved]

§§ 1717.1000—1717.1049 [Reserved]

Subpart V [Reserved]

§§ 1717.1050—1717.1099 [Reserved]

Subpart W [Reserved]

§§ 1717.1100—1717.1149 [Reserved]

Subpart X [Reserved]

§§ 1717.1150—1717.1199 [Reserved]

Subpart Y—Settlement of Debt

SOURCE: 62 FR 50491, Sept. 26, 1997, unless

otherwise noted.

§ 1717.1200 Purpose and scope.

(a) Section 331(b) of the Consolidated

Farm and Rural Development Act (Con

Act), as amended on April 4, 1996 by

Public Law 104–127, 110 Stat. 888 (7

U.S.C. 1981), grants authority to the

Secretary of Agriculture to compromise, adjust, reduce, or charge-off

debts or claims arising from loans

made or guaranteed under the Rural

Electrification Act of 1936, as amended

(RE Act). Section 331(b) of the Con Act

also authorizes the Secretary of Agriculture to adjust, modify, subordinate,

or release the terms of security instruments, leases, contracts, and agreements entered into or administered by

the Rural Utilities Service (RUS). The

Secretary, in 7 CFR 2.47, has delegated

authority under section 331(b) of the

Con Act to the Administrator of the

RUS, with respect to loans made or

guaranteed by RUS.

(b) This subpart sets forth the policy

and standards of the Administrator of

RUS with respect to the settlement of

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§ 1717.1201 7 CFR Ch. XVII (1–1–00 Edition)

debts and claims arising from loans

made or guaranteed to rural electric

borrowers under the RE Act. Nothing

in this subpart limits the Administrator’s authority under section 12 of the

RE Act.

§ 1717.1201 Definitions.

Terms used in this subpart that are

not defined in this section have the

meanings set forth in 7 CFR part 1710.

In addition, for the purposes of this

subpart:

Application for debt settlement means a

written application containing all of

the information required by

§1717.1204(b)(2), in form and substance

satisfactory to RUS.

Attorney General means the Attorney

General of the United States of America.

Claim means any claim of the government arising from loans made or guaranteed under the RE Act to a rural

electric borrower.

Con Act means the Consolidated

Farm and Rural Development Act (7

U.S.C. 1921 et seq.).

Debt means outstanding debt of a

rural electric borrower (including, but

not necessarily limited to, principal,

accrued interest, penalties, and the

government’s costs of debt collection)

arising from loans made or guaranteed

under the RE Act.

Enforced collection procedures means

any procedures available to the Administrator for the collection of debt that

are authorized by law, in equity, or

under the borrower’s loan documents

or other agreements with RUS.

Loan documents means the mortgage

(or other security instrument acceptable to RUS), the loan contract, and

the promissory note entered into between the borrower and RUS.

RE Act means the Rural Electrification Act of 1936, as amended (7 U.S.C.

901–950b).

Restructure means to settle a debt or

claim.

Settle means to reamortize, adjust,

compromise, reduce, or charge-off a

debt or claim.

§ 1717.1202 General policy.

(a) It is the policy of the Administrator that, wherever possible, all debt

owed to the government, including but

not limited to principal and interest,

shall be collected in full in accordance

with the terms of the borrower’s loan

documents.

(b) Nothing in this subpart by itself

modifies, reduces, waives, or eliminates any obligation of a borrower

under its loan documents. Any such

modifications regarding the debt owed

by a borrower may be granted under

the authority of the Administrator

only by means of the explicit written

approval of the Administrator in each

case.

(c) The Administrator’s authority to

settle debts and claims will apply to

cases where a borrower is unable to pay

its debts and claims in accordance with

their terms, as further defined in

§1717.1204(b)(1), and where settlement

will maximize, on a present value

basis, the recovery of debts and claims

owed to the government.

(d) In structuring settlements and determining the capability of the borrower to repay debt and the amount of

debt recovery that is possible, the Administrator will consider, among other

factors, the RE Act, the National Energy Policy Act of 1992 (Pub. L. 102–486,

106 Stat. 2776), the policies and regulations of the Federal Energy Regulatory

Commission, state legislative and regulatory actions, and other market and

nonmarket forces as to their effects on

competition in the electric utility industry and on rural electric systems in

particular. Other factors the Administrator will consider are set forth in

more detail in §1717.1204.

§ 1717.1203 Relationship between RUS

and Department of Justice.

(a) The Attorney General will be notified by the Administrator whenever

the Administrator intends to use his or

her authority under section 331(b)of the

Con Act to settle a debt or claim.

(b) If an outstanding claim has been

referred in writing to the Attorney

General, the Administrator will not

use his or her own authority to settle

the claim without the approval of the

Attorney General.

(c) If an application for additional

debt relief is received from a borrower

whose debt has been settled in the past

under the authority of the Attorney

General, the Administrator will

189

Rural Utilities Service, USDA § 1717.1204

promptly notify the Attorney General

before proceeding to consider the application.

§ 1717.1204 Policies and conditions applicable to settlements.

(a) General. Settlement of debts and

claims shall be subject to the policies,

requirements, and conditions set forth

in this section and in §1717.1202.

(b) Need for debt settlement. (1) The

Administrator will not settle any debt

or claim unless the Administrator has

determined that the borrower is unable

to meet its financial obligations under

its loan documents according to the

terms of those documents, or that the

borrower will not be able to meet said

obligations sometime within the period

of 24 months following the month the

borrower submits its application for

debt settlement to RUS, and, in either

case, such default is likely to continue

indefinitely. The determination of a

borrower’s ability to meet its financial

obligations will be based on analyses

and documentation by RUS of the borrower’s historical, current, and projected costs, revenues, cash flows, assets, opportunities to reduce costs and/

or increase revenues, and other factors

that may be relevant on a case by case

basis.

(2) In its application to RUS for debt

settlement, the borrower must provide,

in form and substance satisfactory to

RUS, an in-depth analysis supporting

the borrower’s contention that it is unable or will not be able to meet its financial obligations as described in

paragraph (b)(1) of this section. The

analysis must include:

(i) An explanation and analysis of the

causes of the borrower’s inability to

meet its financial obligations;

(ii) A thorough review and analysis of

the opportunities available or potentially available to the borrower to reduce administrative overhead and

other costs, improve efficiency and effectiveness, and expand markets and

revenues, including but not limited to

opportunities for sharing services,

merging, and/or consolidating, raising

rates when appropriate, and renegotiating supplier and service contracts. In

the case of a power supply borrower,

the study shall include such opportunities among the members of the borrower, unless the Administrator waives

this requirement;

(iii) Documentation of the actions

taken, in progress, or planned by the

borrower (and its member systems, if

applicable) to take advantage of the

opportunities cited in paragraph

(b)(2)(ii) of this section; and

(iv) Other analyses and documentation prescribed by RUS on a case by

case basis.

(3) RUS may require that an independent consultant provide an analysis

of the efficiency and effectiveness of

the borrower’s organization and operations, and those of its member systems in the case of a power supply borrower. The following conditions will

apply:

(i) RUS will select the independent

consultant taking into account, among

other matters, the consultant’s experience and expertise in matters relating

to electric utility operations, finance,

and restructuring;

(ii) The contract with the consultant

shall be to provide services to RUS on

such terms and conditions as RUS

deems appropriate. The consultant’s

scope of work may include, but shall

not be limited to, an analysis of the

following:

(A) How to maximize the value of the

government’s collateral, such as

through mergers, consolidations, or

sales of all or part of the collateral;

(B) The viability of the borrower’s

system, taking into account such matters as system size, service territory

and markets, asset base, physical condition of the plant, operating efficiency, competitive pressures, industry

trends, and opportunities to expand

markets and improve efficiency and effectiveness;

(C) The feasibility and the potential

benefits and risks to the borrower and

the government of corporate restructuring, including aggregation and

disaggregation;

(D) In the case of a power supply borrower, the retail rate mark-up by member systems and the potential benefits

to be achieved by member restructuring through mergers, consolidations, shared services, and other alliances;

190

§ 1717.1204 7 CFR Ch. XVII (1–1–00 Edition)

(E) The quality of the borrower’s

management, management advisors,

consultants, and staff;

(F) Opportunities for reducing overhead and other costs, for expanding

markets and revenues, and for improving the borrower’s existing and prospective contractual arrangements for

the purchase and sale of power, procurement of supplies and services, and

the operation of plant and facilities;

(G) Opportunities to achieve efficiency gains and increased revenues

based on comparisons with benchmark

electric utilities; and

(H) The accuracy and completeness of

the borrower’s analysis provided under

paragraph (b)(2) of this section;

(iii) RUS and, as appropriate, other

creditors, will determine the extent to

which the borrower and third parties

(including the members of a power supply borrower) will be required to participate in funding the costs of the

independent consultant;

(iv) The borrower will be required to

make available to the consultant all

corporate documents, files, and

records, and to provide the consultant

with access to key employees. The borrower will also normally be required to

provide the consultant with office

space convenient to the borrower’s operations and records; and

(v) All analyses, studies, opinions,

memoranda, and other documents and

information produced by the independent consultant shall be provided to

RUS on a confidential basis for consideration in evaluating the borrower’s

application for debt settlement. Such

documents and information may be

made available to the borrower and

other appropriate parties if authorized

in writing by RUS.

(4) The borrower may be required to

employ a temporary or permanent

manager acceptable to the Administrator, to manage the borrower’s operations to ensure that all actions are

taken to avoid or minimize the need

for debt settlement. The employment

could be on a temporary basis to manage the system during the time the

debt settlement is being considered,

and possibly for some time after any

debt settlement, or it could be on a

permanent basis.

(5) The borrower must submit, at a

time determined by RUS, a resolution

of its board of directors requesting debt

settlement and stating that the borrower is either currently unable to

meet its financial obligations to the

government or will not be able to meet

said obligations sometime within the

next 24 months, and that, in either

case, the default is likely to continue

indefinitely.

(c) Debt settlement measures. (1) If the

Administrator determines that debt

settlement is appropriate, the debt settlement measures the Administrator

will consider under this subpart with

respect to direct, insured, or guaranteed loans include, but are not limited

to, the following:

(i) Reamortization of debt;

(ii) Extension of debt maturity, provided that the maturity of the borrower’s outstanding debt after settlement shall not extend more than 10

years beyond the latest maturity date

prior to settlement;

(iii) Reduction of the interest rate

charged on the borrower’s debt, provided that the interest rate on any portion of the restructured debt shall not

be reduced to less than 5 percent, unless the Administrator determines that

reducing the rate below 5 percent

would maximize debt recovery by the

government;

(iv) Forgiveness of interest accrued,

penalties, and costs incurred by the

government to collect the debt; and

(v) With the concurrence of the

Under Secretary for Rural Development, forgiveness of loan principal.

(2) In the event that RUS has, under

section 306 of the RE Act, guaranteed

loans made by the Federal Financing

Bank or other third parties, the Administrator may restructure the borrower’s obligations by: acquiring and

restructuring the guaranteed loan; restructuring the loan guarantee obligation; restructuring the borrower’s reimbursement obligations; or by such

means as the Administrator deems appropriate, subject to such consents and

approvals, if any, that may be required

by the third party lender.

(d) Borrower’s obligations to other

creditors. The Administrator will not

grant relief on debt owed to the government unless similar relief, on a pro

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Rural Utilities Service, USDA § 1717.1204

rata basis, is granted with respect to

other secured obligations of the borrower, or the other secured creditors

provide other benefits or value to the

debt restructuring. Unsecured creditors

will also be expected to contribute to

the restructuring. If it is not possible

to obtain the expected contributions

from other creditors, the Administrator may proceed to settle a borrower’s debt if that will maximize recovery by the government and will not

result in material benefits accruing to

other creditors at the expense of the

government.

(e) Competitive bids for system assets. If

requested by RUS, the borrower or the

independent consultant provided for in

paragraph (b)(3) of this section shall solicit competitive bids from potential

buyers of the borrower’s system or

parts thereof. The bidding process must

be conducted in consultation with RUS

and use standards and procedures acceptable to RUS. The Administrator

may use the competitive bids received

as a basis for requiring the sale of all

or part of the borrower’s system as a

condition of settlement of the borrower’s debt. The Administrator may

also consider the bids in evaluating alternative settlement measures.

(f) Valuation of system. (1) The Administrator will consider the value of the

borrower’s system, including, in the

case of a power supply borrower, the

wholesale power contracts between the

borrower and its member systems. The

valuation of the wholesale power contracts shall take into account, among

other matters, the rights of the government and/or third parties, to assume

the rights and obligations of the borrower under such contracts, to charge

reasonable rates for service provided

under the contracts, and to otherwise

enforce the contracts in accordance

with their terms. In no case will the

Administrator settle a debt or claim

for less than the value (after considering the government’s collection

costs) of the borrower’s system and

other collateral securing the debt or

claim.

(2) RUS may use such methods, analyses, and assessments as the Administrator deems appropriate to determine

the value of the borrower’s system.

(g) Rates. The Administrator will

consider the rates charged for electric

service by the borrower and, in the

case of a power supply borrower, by its

members, taking into account, among

other factors, the practices of the Federal Energy Regulatory Commission

(FERC), as adapted to the cooperative

structure of borrowers, and, where applicable, FERC treatment of any investments by co-owners in projects

jointly owned by the borrower.

(h) Collection action. The Administrator will consider whether a settlement is favorable to the government in

comparison with the amount that can

be recovered by enforced collection

procedures.

(i) Regulatory approvals. Before the

Administrator will approve a settlement, the borrower must provide satisfactory evidence that it has obtained

all approvals required of regulatory

bodies that the Administrator determines are needed to implement rates

or other provisions of the settlement,

or that are needed in any other way for

the borrower to fulfill its obligations

under the settlement.

(j) Conditions regarding management

and operations. As a condition of debt

settlement, the borrower, and in the

case of a power supply borrower, its

members, will be required to implement those changes in structure, management, operations, and performance

deemed necessary by the Administrator. Those changes may include, but

are not limited to, the following:

(1) The borrower may be required to

undertake a corporate restructuring

and/or sell a portion of its plant, facilities, or other assets

(2) The borrower may be required to

replace senior management and/or hire

outside experts acceptable to the Administrator. Such changes may include

a commitment by the borrower’s board

of directors to restructure and/or obtain new membership to improve board

oversight and leadership;

(3) The borrower may be required to

agree to:

(i) Controls by RUS on the general

funds of the borrower, as well as on any

investments, loans or guarantees by

the borrower, notwithstanding any

limitations on RUS’ control rights in

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§ 1717.1205 7 CFR Ch. XVII (1–1–00 Edition)

the borrower’s loan documents or RUS

regulations; and

(ii) Requirements deemed necessary

by RUS to perfect and protect its lien

on cash deposits, securities, equipment,

vehicles, and other items of real or

non-real property; and

(4) In the case of a power supply borrower, the borrower may be required to

obtain credit support from its member

systems, as well as pledges and action

plans by the members to change their

operations, management, and organizational structure (e.g., shared services,

mergers, or consolidations) in order to

reduce operating costs, improve efficiency, and/or expand markets and revenues.

(k) Conveyance of assets. As a condition of a settlement, a borrower may

be required to convey some or all its

assets to the government.

(l) Additional conditions. The borrower

will be required to warrant and agree

that no bonuses or similar extraordinary compensation has been or will

be provided, for reasons related to the

settlement of government debt, to any

officer or employee of the borrower or

to other persons or entities identified

by RUS. The Administrator may impose such other terms and conditions

of debt settlement as the Administrator determines to be in the government’s interests.

(m) Certification of accuracy. Before

the Administrator will approve a debt

settlement, the manager or other appropriate official of the borrower must

certify that all information provided to

the government by the borrower or by

any agent of the borrower, in connection with the debt settlement, is true,

correct, and complete in all material

respects.

§ 1717.1205 Waiver of existing conditions on borrowers.

Pursuant to section 331(b) of the Con

Act, the Administrator, at his or her

sole discretion, may waive or otherwise

reduce conditions and requirements

imposed on a borrower by its loan documents if the Administrator determines that such action will contribute

to enhancement of the government’s

recovery of debt. Such waivers or reductions in conditions and requirements under this section shall not include the exercise of any of the debt

settlement measures set forth in

§1717.1204(c), which are subject to all of

the requirements of said §1717.1204.

§ 1717.1206 Loans subsequent to settlement.

In considering any future loan requests from a borrower whose debt has

been settled in whole or in part (including the surviving entity of merged or

consolidated borrowers, where at least

one of said borrowers had its debts settled), it will be presumed that credit

support for the full amount of the requested loan will be required. Such

support may be in a number of forms,

provided that they are acceptable to

the Administrator on a case by case

basis. They may include, but need not

be limited to, equity infusions and

guarantees of debt repayment, either

from the applicant’s members (in the

case of a power supply borrower), or

from a third party.

§ 1717.1207 RUS obligations under

loan guarantees.

Nothing in this subpart affects the

obligations of RUS under loan guarantee commitments it has made to the

Federal Financing Bank or other lenders.

§ 1717.1208 Government’s rights under

loan documents.

Nothing in this subpart limits, modifies, or otherwise affects the rights of

the government under loan documents

executed with borrowers, or under law

or equity.

PART 1718—LOAN SECURITY DOCUMENTS FOR ELECTRIC BORROWERS

Subpart A—General

Sec.

1718.1—1718.49 [Reserved]

Subpart B—Mortgage for Distribution

Borrowers

1718.50 Definitions.

1718.51 Policy.

1718.52 Existing mortgages.

1718.53 Rights of other mortgagees.

1718.54 Availability of model mortgage.