67396 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations

DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Parts 1710, 1717 and 1718

RIN 0572–AB06

Loan Policies and Security Documents

for Electric Borrowers

AGENCY: Rural Utilities Service.

ACTION: Final rule.

SUMMARY: The Rural Utilities Service

(RUS) hereby establishes new policies

and requirements for loan contracts

ordinarily required for loans made to

electric distribution borrowers. The rule

updates and clarifies the framework for

loan contract provisions, conforms loan

contract provisions with the new form

of mortgage recently approved, and

provides greater flexibility in addressing

the financial needs of individual

borrowers and the credit risks involved

with individual lending situations.

Conforming amendments to RUS lien

accommodation requirements and to

regulations regarding 110 percent

borrowers, and changes to RUS

operational controls, are also set forth.

EFFECTIVE DATE: This rule is effective

January 29, 1996.

FOR FURTHER INFORMATION CONTACT: Mr.

Alex M. Cockey, Jr., Deputy Assistant

Administrator—Electric, U.S.

Department of Agriculture, Rural

Utilities Service, room 4037–S, Ag Box

1560, 14th Street & Independence

Avenue, SW., Washington, DC 20250–

1500. Telephone: 202–720–9547.

SUPPLEMENTARY INFORMATION: This rule

has been determined to be not

significant for the purposes of Executive

Order 12866, and therefore has not been

reviewed by the Office of Management

and Budget (OMB). The Administrator

of RUS has determined that the

Regulatory Flexibility Act (5 U.S.C. 601

et seq.) does not apply to this rule. The

Administrator of RUS has determined

that this rule will not significantly affect

the quality of the human environment

as defined by the National

Environmental Policy Act of 1969 (42

U.S.C. 4321 et seq.). Therefore, this

action does not require an

environmental impact statement or

assessment. This rule is excluded from

the scope of Executive Order 12372,

Intergovernmental Consultation, which

may require consultation with State and

local officials. A Notice of Final Rule

titled Department Programs and

Activities Excluded from Executive

Order 12372 (50 FR 47034) exempts

RUS electric loans and loan guarantees

from coverage under this Order. This

rule has been reviewed under Executive

Order 12778, Civil Justice Reform. This

rule: (1) Will not preempt any State or

local laws, regulations, or policies,

unless they present an irreconcilable

conflict with this rule; (2) Will not have

any retroactive effect; and (3) Will not

require administrative proceedings

before any parties may file suit

challenging the provisions of this rule.

The program described by this rule is listed

in the Catalog of Federal Domestic Assistance

Programs under number 10.850 Rural

Electrification Loans and Loan Guarantees.

This catalog is available on a subscription

basis from the Superintendent of Documents,

the United States Government Printing

Office, Washington, DC 20402–9325.

Information Collection and

Recordkeeping Requirements

The recordkeeping and reporting

burdens contained in this rule were

approved by the Office of Management

and Budget (OMB) pursuant to the

Paperwork Reduction Act of 1995 (44

U.S.C. Chapter 35, as amended), under

control numbers 0572–0032 and 0572–

0103.

Send questions or comments

regarding these burdens or any other

aspect of these collections of

information, including suggestions for

reducing the burden, to F. Lamont

Heppe, Jr., Deputy Director, Program

Support Staff, Rural Utilities Service, Ag

Box 1522, Washington, DC 20250–1500.

Background

On September 29, 1994, at 59 FR

49594, the Rural Utilities Service (RUS)

published a proposed rule, 7 CFR part

1718 Loan Security Documents for

Electric Borrowers, Subpart B Mortgage

for Distribution Borrowers, which

proposed the agency’s policies and

requirements for mortgages used to

secure direct and guaranteed loans

made to electric distribution borrowers.

The final rule for the mortgage was

published in the Federal Register on

July 18, 1995 at 60 FR 36882. On that

same day, at 60 FR 36904, RUS

published a proposed rule on a model

form of a new loan contract for

distribution borrowers, 7 CFR part 1718

Loan Security Documents for Electric

Borrowers, Subpart C Loan Contracts

with Distribution Borrowers. The

proposed rule also included proposed

amendments to 7 CFR part 1710 and 7

CFR part 1717 Subpart R, to ensure

consistency between these regulations

and the new mortgage and proposed

loan contract. It was also proposed that

a new Subpart M Operational Controls

be added to 7 CFR part 1717, which

would cut back the reach of certain

operational controls contained in

existing mortgages and loan contracts.

A total of 29 separate comments,

representing 33 different organizations,

were received on the proposed new loan

contract for distribution borrowers and

the associated proposed regulations.

Comments were received from the

National Rural Electric Cooperative

Association (NRECA), CoBank, 3 statewide and one multi-state borrower

association, 17 distribution borrowers,

and 10 generation and transmission

borrowers (G&Ts). The individual

distribution borrowers that commented

were concentrated in the plains and

Rocky Mountain states, with 8 in North

Dakota, 3 in Colorado, 2 in Wyoming,

and one each in South Dakota, Montana,

Minnesota, and Iowa.

Operational Controls

Comments by the NRECA and one

state-wide association focused primarily

on the extent of operational controls

retained in the loan contract and the

general approach taken in the loan

contract and 7 CFR part 1717 subpart M

for defining RUS’ rights with respect to

operational controls. In the proposed

loan contract some operational controls

were stated in specific terms while

others were stated in broad terms, with

the agency relying on 7 CFR part 1717

subpart M and other regulations to

define the controls in more specific

terms and to narrow their reach.

NRECA and the one state-wide

association recommended that (a)

further cuts be made in operational

controls, (b) all operational controls be

stated in appropriately narrow and

specific terms in the loan contract itself,

rather than relying on regulations to

further define and limit the controls,

and (c) criteria be developed to exempt

‘‘creditworthy’’ borrowers from most of

the remaining operational controls.

Relatively few comments on operational

controls were received from other

commenters. Several commenters

indicated their support either for

individual changes in operational

controls proposed by RUS or for the

proposed changes in general, as well as

for changes that have been made in RUS

regulations over the past several years.

RUS agrees that further cuts can be

made in operational controls and that

some operational controls can and

should be stated in more specific,

narrower terms in the loan contract

itself. Such changes have been made

wherever possible in the final model

loan contract. They are as follows:

• Section 5.15 of the proposed loan

contract requiring the borrower to

acquire and construct the electric

system in conformance with RUS
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations 67397

regulations has been eliminated. RUS’

more specific oversight interests

regarding extensions and additions and

construction standards are retained in

other sections.

• Section 6.3 of the proposed loan

contract granting RUS general approval

rights over borrower expenditures for

legal, engineering, and supervisory

services has been eliminated. Certain

limited approval rights, such as

approval of contracts for engineering

services when the construction is

financed by RUS, have been retained.

• Section 6.7 of the proposed loan

contract granting RUS general approval

rights over the acquisition, construction,

or procurement of generating facilities

and existing facilities and systems has

been eliminated. Limited approval

authority with respect to such facilities

and systems has been retained in

section 6.2.

• Section 9.14 of the proposed loan

contract authorizing RUS to appoint

construction supervisors if construction

does not proceed in accordance with the

loan documents has been eliminated.

RUS approval authority over general

managers in cases of default has been

retained.

• Paragraph (m) of section 4.1 of the

proposed loan contract requiring

compliance with RUS regulations as one

of the conditions for the borrower to

receive loan advances has been revised

to require compliance with the loan

contract and mortgage.

• Section 5.9 of the proposed loan

contract on area coverage has been

revised by eliminating the reference to

‘‘to the extent required by RUS’’ and in

its place specifically stating the

borrower’s obligations and discretion

with regard to contributions in aid of

construction. These requirements are

the same as those in existing 7 CFR part

1710.103(b).

• Section 5.14 of the proposed loan

contract has been revised to eliminate

the requirement that borrowers use

construction plans and specifications in

conformance with RUS regulations for

projects funded from non-RUS sources.

Thus, while distribution borrowers will

continue to be required to follow RUS

design and construction standards and

the list of accepted materials regardless

of the source of funding, plans and

specifications for construction not

financed by an RUS loan or loan

guarantee will not be subject to agency

review and approval.

• Section 5.16 of the proposed loan

contract has been revised to limit to

only those projects financed by RUS the

requirement that borrowers use forms of

contracts promulgated by RUS for

construction, procurement, and

engineering and architectural services.

• Section 5.17 of the proposed loan

contract has been revised to limit to

only those projects financed by RUS the

requirement that borrowers follow RUS

contract bidding requirements.

• Section 6.2 of the proposed loan

contract has been revised to limit RUS’

authority to approve electric system

extensions and additions to extensions

and additions financed by RUS, and

only 3 categories of extensions and

additions funded from other sources:

generating facilities, existing facilities

and systems in service, and projects 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 of facilities. In addition,

significance thresholds have been added

to the first two categories, such that RUS

approval will not be required if the

generating and related facilities do not

exceed the lesser of 5 megawatts or 30

percent of the borrower’s equity, and if

the existing facilities and systems in

service do not exceed 10 percent of the

borrower’s net utility plant.

• Section 6.5(a) of the proposed loan

contract has been revised to limit to

projects financed by RUS the

requirement that contracts for

construction, procurement, and

engineering and architectural services

be subject to RUS approval.

As to the recommendation that a set

of criteria be developed and included in

the loan contract to exempt

‘‘creditworthy’’ borrowers from most

remaining operational controls, further

analysis and experience is needed

before a reasoned decision can be made.

RUS believes it would be very difficult

to develop a set of criteria that would

be appropriate for all borrowers and for

all or most operational controls. Such an

approach also raises significant issues

regarding the flexibility that would be

available to tailor individual loan

contracts to deal with individual

lending circumstances and specific

credit risks. RUS believes it is only

prudent to gain some actual experience

with the new loan contract and

mortgage before deciding whether such

a significant step is warranted.

The changes to the proposed loan

contract cited above go a long way

toward further reducing RUS oversight

over operational decisions. Those

changes are in addition to the

reductions in operational controls in the

new distribution mortgage, the new loan

contract as proposed and now codified,

and various regulations published by

RUS over the past few years. Following

are some examples of these reforms in

operational oversight, which in most

cases apply not just to borrowers that

execute the new loan documents but

also, pursuant to 7 CFR part 1717

subpart M, to borrowers under the

existing ‘‘old’’ loan documents:

• Article II of the new distribution

mortgage authorizes borrowers to issue

additional secured debt and to refinance

secured debt without mortgagee

approval if certain objective tests are

met.

• The new loan contract and 7 CFR

1717.604 limit RUS approval authority

over borrowers’ long-range engineering

plans and construction work plans to

construction financed by RUS.

• The new loan contract and 7 CFR

1717.608 limit RUS approval rights over

power supply contracts, interconnection

agreements, wheeling agreements, and

pooling agreements to contracts and

agreements having a term of more than

2 years. Moreover, RUS authority to

approve system management and

maintenance contracts is limited to

contracts covering all or substantially all

of the borrower’s electric system.

• The new loan contract and 7 CFR

1717.609 eliminate RUS approval over

general managers except for borrowers

in default.

• The new loan contract and 7 CFR

1717.612 eliminate RUS approval

authority over the bank used by the

borrower, and require only that RUS

loan funds be deposited in a bank

insured by the Federal Deposit

Insurance Corporation or other Federal

agency acceptable to RUS.

• The new distribution mortgage and

7 CFR 1717.610 eliminate RUS approval

over compensation of board members.

• Section 3.10 of the new distribution

mortgage and 7 CFR 1717.615 authorize

borrowers to merge or consolidate

without mortgagee approval if certain

objective tests are met.

• Section 3.11 of the new distribution

mortgage and 7 CFR 1717.616 give

borrowers greater latitude to sell, lease,

or transfer mortgaged property without

mortgagee approval.

• The new loan contract and 7 CFR

1717.617 reduce from 40 percent to 30

percent the level of equity a borrower

must have before being subject to RUS

approval of cash distributions.

• Subpart R of 7 CFR 1717 provides

borrowers advance approval of lien

accommodations if certain objective

tests are met.

• Subpart N of 7 CFR 1717 totally

exempts borrowers from RUS approval

of their investments, loans and

guarantees if certain objective tests are
67398 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations

met. Some 84 percent of distribution

borrowers currently qualify for the

exemption.

• 7 CFR 1717.613 exempts borrowers

from obtaining RUS approval of

purchases of data processing and system

control equipment if the equipment is

not financed by RUS.

• The new loan contract and 7 CFR

1717.614 reduce from 90 days to 30

days the prior notice to RUS required

for prospective changes in the

borrower’s general rate structure, and

require such notice only when

specifically requested in writing by

RUS.

• Recently published 7 CFR part 1726

carries out several reforms in RUS

oversight of electric system construction

policies and procedures relating to

construction financed by RUS. For

example:

—The requirement that RUS approve

construction subcontracts was

eliminated.

—The dollar thresholds for determining

when competitive bidding must be

used generally were raised.

—The dollar thresholds for determining

when RUS approval of a contract is

required were raised.

—The requirement that RUS approve

contracts for headquarters facilities

was eliminated.

—The requirement that RUS approve

amendments to construction contracts

was eliminated in certain cases.

—The number of forms that must be

submitted to RUS for closing out

construction contracts was reduced.

It was also recommended that the

exemptions and waivers of controls set

forth in 7 CFR part 1717 Subpart M be

removed entirely and transferred to the

new loan contract. Subpart M has been

retained since it provides exemptions

and waivers of controls contained in

existing loan contracts and mortgages. If

it were removed, only borrowers that

execute the new loan contract and new

mortgage would have the benefit of

these changes.

As noted above, the narrower forms of

RUS’ approval rights and operational

controls proposed in Subpart M have

been adopted in the final loan contract.

Furthermore, several additional

provisions of the new mortgage and loan

contract providing borrowers with

greater latitude that were not included

in proposed Subpart M have been

included in final Subpart M and will be

available to borrowers with the ‘‘old’’

forms of loan documents. For example,

§ 1717.615 will allow borrowers under

the old loan documents to consolidate

and merge without RUS approval under

the same conditions as in section 3.10

of the new mortgage. Similarly,

§ 1717.616 will allow borrowers under

the old loan documents to sell, lease or

transfer capital assets without RUS

approval under the same conditions as

in section 3.11 of the new mortgage, if,

in addition to their standard TIER and

DSC requirements, they meet the

Operating TIER and Operating DSC

requirements of section 5.4 of the new

loan contract. Also, § 1717.617 will

allow borrowers under the old loan

documents to pay cash distributions

without RUS approval if their equity

after the distribution is at least 30

percent and if the same conditions as

under section 6.8 of the new loan

contract are met.

Effect of Subsequent Rulemaking on

Loan Contract Provisions

Related to the concerns expressed

about those RUS approval rights and

controls expressed in the loan contract

in broad terms, several commenters also

objected to loan contract terms being

subject to amendment and modification

by subsequent rulemaking, as proposed

in 7 CFR 1718.100(d), even though such

changes could not exceed the authority

granted to RUS in the loan contract. As

indicated above, many of the RUS

approval rights and controls have been

revised to limit them more precisely to

the specific measures deemed necessary

by RUS for loan security. In some cases

(e.g., limitations on borrower

investments and use of standard

contract forms for RUS financed

construction) this was not possible or

only partly possible, and therefore these

provisions remain subject to RUS

rulemaking. To avoid any

misunderstanding about the reach of

§ 1718.100(d), the section has been

revised to clearly indicate that only

those provisions of the loan contract

that defer to RUS regulations or to the

discretion of the Administrator or RUS,

are subject to the interpretations and

modifications of subsequent

rulemaking, not to exceed the authority

granted to the Administrator or RUS in

the loan contract provision.

Applicability of Subpart M

Proposed § 1717.601 indicated that

Subpart M would be applicable to all

loan documents regardless of whether

the loan documents were executed

before or after the effective date of the

rule. At the time the proposed loan

contract was published, several

operational controls in the loan contract

were expressed in broad terms, while

proposed Subpart M cut back the reach

of those controls. As indicated above,

the loan contract has been revised so

that the reach of the controls in the loan

contract is the same as those in Subpart

M. Thus, Subpart M in its final form

affects only ‘‘old’’ loan documents with

operational controls whose reach is

broader than the corresponding

provisions in Subpart M. Section

1717.601 has therefore been revised to

indicate that the approvals and

exceptions to controls contained in

Subpart M apply only to loan

documents dated prior to the effective

date of Subpart M.

Operating TIER and DSC

The proposed rule proposed that an

Operating Times Interest Earned Ratio

(Operating TIER) and Operating Debt

Service Coverage ratio (Operating DSC),

both set at a minimum of 1.1, be added

to standard TIER and standard DSC as

part of the rate covenant.

NRECA did not comment on the

concept or formulation of Operating

TIER and Operating DSC, but

recommended that the minimum level

be set a 1.0. Several G&Ts and their

members, concentrated in the plains

and Rocky Mountain states, raised

questions about the formulation or

definition of the ratios, and in some

cases about the level as well. One multistate borrower association indicated

support both for the formulation of the

ratios and the 1.1 level.

One of the primary criticisms of the

formulation of the ratios was the belief

that the core business of the borrower,

as reflected in the operating coverage

ratios, ought to be defined to include

cash received by distribution borrowers

during the year from their G&T

suppliers and secured lenders for

patronage capital retirements. Many of

these commenters also recommended

inclusion of cash received from interest

bearing accounts, and in some cases,

from other borrower investments.

RUS agrees that cash received from

the retirement of patronage capital by

G&T suppliers and lenders does relate to

a borrower’s core utility business. The

fact that a G&T or lender is capable of

making such payments in cash also

reflects to a substantial degree the

current economic and financial

performance of the G&T and lender,

unlike patronage capital allocations,

whose current and future value may be

uncertain.

Cash received from interest income or

other investments, on the other hand,

may not bear much relationship to the

current performance of the borrower’s

core utility business. At best, it may

reflect only past performance which

enabled the borrower to make the

investments in the first place. Such

income also reflects the up and down

cycles of debt and equity markets and
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations 67399

does not reflect the current ability of the

core utility business to meet expenses

and generate a small margin. Such

investments can provide needed capital

to meet unexpected and unforeseeable

costs arising from storm damage,

litigation over service territory, and

other unforeseeable events, but once

used for these purposes it is not

available to meet the expenses of the

core utility business, and it should not

be relied upon for that purpose in any

event.

Based on these considerations,

Operating TIER and Operating DSC have

been modified to include with operating

margins cash received from a borrower’s

G&T and creditors for patronage capital

retirements. With such cash receipts

included with operating margins, recent

experience indicates that very few if any

borrowers will have difficulty in

meeting Operating TIER and Operating

DSC set at the minimum level of 1.1.

Even without including such cash

receipts with operating margins, only 18

borrowers in 1993 and only 13

borrowers in 1994 that met the standard

TIER and standard DSC requirements

failed to meet an Operating TIER and

Operating DSC of 1.1, based on the

average of the best 2 out of 3 years. Data

for a small sample of borrowers that

might have some problems in meeting

the operating ratios without including

cash received from G&T suppliers and

creditors indicate that including such

cash will substantially improve their

results. Moreover, § 1710.114 gives the

Administrator the authority to set

coverage ratios below the normal levels

if he or she determines that the lower

ratios are required to ensure the

repayment of, and/or reasonable

security for, RUS loans.

Several borrowers argued that the rate

covenant should be placed in the

mortgage rather than the loan contract,

while several others and a multi-state

borrower association argued that it was

appropriate to place it in the loan

contract. RUS had included the rate

covenant in the proposed mortgage, but

shifted it to the loan contract based on

the recommendations of several public

commenters and the difficulty of

reaching agreement among the principal

lenders to rural electric systems over

exactly how the coverage ratios should

be structured. The rate covenant has

been retained in the loan contract.

Finally, a technical amendment has

been made to the definitions of TIER

and DSC contained in the model

mortgage for distribution borrowers, to

eliminate inconsistencies between those

two terms as defined in the mortgage,

and to achieve greater consistency

among the definitions of TIER, DSC,

OTIER, and ODSC as those terms are

defined in the mortgage, the loan

contract, and in § 1710.2. ‘‘Taxes paid,

if any, based upon income’’ has been

eliminated from the numerator of TIER

in the mortgage. This term was not

included in the numerator of DSC in the

mortgage, nor was it included in the

numerators of either TIER or DSC as

defined in § 1710.2 or in the numerators

of either OTIER or ODSC in the

proposed loan contract.

The definition of DSC contained in

the mortgage has been amended by

eliminating the phrase starting with

‘‘provided, however,’’ which related to

the calculation of principal and interest

required to be paid on long-term debt in

the event any debt is refinanced. A

similar provision was not included in

the definition of TIER in the mortgage,

with respect to calculating interest

required to be paid in the event any

long-term debt is refinanced. Nor was

such a provision included in the

definitions of DSC, TIER, ODSC or

OTIER in § 1710.2 or in the definitions

of OTIER and ODSC in the proposed

loan contract. Properly calculating the

coverage ratios under the existing

mortgage when some debt has been

refinanced during the year has not been

a problem, and RUS does not believe the

deleted provision is needed.

Use of Standard Contract Forms

One commenter noted that proposed

7 CFR 1717.606 provides that borrowers

are required to use RUS-promulgated

forms of contracts for construction and

for engineering and architectural

services only if the construction is

financed by RUS, but that 7 CFR part

1726 sets dollar limits below which

RUS-promulgated forms need not be

used. The commenter wondered

whether § 1717.606 is intended to

override the flexibility provided by the

dollar thresholds in part 1726. It is not,

and § 1717.606 has been revised to make

that clear.

Limitations on Issuing Additional

Secured Indebtedness

A commenter questioned whether the

first condition in section 6.14 of the

proposed loan contract on issuing

additional secured debt without RUS

approval should read ‘‘the Maturity of

the Loan’’ or ‘‘the weighted average life

of the loan’’ shall not exceed the

weighted average of the expected

remaining useful lives of the assets

being financed. RUS agrees that it

should read ‘‘weighted average life of

the loan’’, and has made the change.

Also in section 6.14 of the proposed

loan contract, a technical error was

made in conforming the contract to the

formatting style of the Federal Register.

This has been corrected.

System of Accounts and Outside

Accountants

NRECA recommended that RUS

eliminate its system of accounts and

rely exclusively on the Federal Energy

Regulatory Commission’s (FERC) system

of accounts. Aspects of this question

were addressed in developing the new

distribution mortgage. It was concluded

that so long as there were any

outstanding notes held by the

government, accounting standards

would be based on the RUS system of

accounts. This system is exactly the

same as the FERC system of accounts,

except for a small number of accounts

needed to account for RUS loan funds

and activities specific to the cooperative

form of organization. RUS believes it is

essential that borrowers’ financial

statements be consistent from year to

year and from borrower to borrower,

and conform to a consistent

interpretation of accounting

requirements. This is necessary to meet

the agency’s accountability to the

President and Congress for the public

funds lent to borrowers.

It has been suggested that relying

exclusively on FERC’s system of

accounts will somehow eliminate the

need to obtain accounting

interpretations or insulate borrowers

from changes in accounting

requirements and interpretations

promulgated by the Financial

Accounting Standards Board. This, of

course, is not true, since such

interpretations and changes in

requirements would continue regardless

of the system of accounts followed.

NRECA also recommended that RUS

rely exclusively on outside accountants,

apparently meaning that RUS rely in

particular on outside accountants to do

audits of RUS loan fund accounts. RUS

believes that it is important to retain

agency accountants to oversee the

system of accounts, render timely

responses to borrowers’ accounting

questions, and to continue to audit RUS

loan fund accounts. Based on

discussions with individual borrowers,

NRECA, and other borrower

organizations, RUS is proceeding with

certain changes in our oversight of the

system of accounts to respond to

problems and concerns that have been

raised, and to provide more timely

responses to borrower inquiries.

Immaterial Violations of Requirements

Several commenters argued that

borrowers should not be held to an

absolute standard in meeting certain

requirements, since it would be very
67400 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations

difficult for borrowers to ensure that

there will be no minor violations of

requirements which have no material

adverse effect on the interests of RUS.

RUS agrees that minor violations of

certain requirements, which in the

agency’s judgment will have no material

adverse effect on the agency’s interests,

should not represent a default. This has

been reflected in changes made to

proposed sections 5.2(b), 5.6, 5.10, and

6.15.

Borrowers Exempt From Certain

Controls Under Section 306E of the Act

Section 306E of the Rural

Electrification Act directed RUS to issue

interim final regulations to minimize

approval rights and restrictions imposed

on the operations of electric borrowers

whose net worth exceeds 110 percent of

the outstanding loans made or

guaranteed by RUS, and to offer without

delay to share the government’s lien on

the borrower’s system or subordinate its

lien on the property financed by a

private lender. In issuing the

regulations, RUS is authorized to

establish requirements, guided by the

practices of private lenders with respect

to similar credit risks, to ensure that the

security, including loan repayment, of

the government’s loans will remain

reasonably adequate.

RUS issued the interim final

regulations on January 28, 1994 at 59 FR

3982. Comments on the regulations

were received from NRECA, the

National Rural Utilities Cooperative

Finance Corporation, and 6 borrowers.

In general, the comments argued for

greater relaxation of operational controls

than in the interim final rule.

When the proposed loan contract and

final new mortgage for distribution

borrowers was published in July of this

year, RUS indicated that comments on

these documents as well as on the

interim final rule would be considered

in making revisions to the interim final

rule relating to so-called 110 percent

borrowers. As indicated above, the new

loan contract has been substantially

revised to reduce the number and

breadth of operational controls. These

controls are intended to apply to a fairly

broad spectrum of credit risks, and as

such RUS believes they reflect the types

of controls that some private lenders

would require for a similar spectrum of

credit risks.

The provisions of the new mortgage

and new loan contract, and 7 CFR part

1717 subpart M, in many cases provide

greater latitude to borrowers than

established originally in 7 CFR 1710.7

for 110 percent borrowers. Therefore,

1710.7 has been revised to reflect the

greater latitude provided by the new

loan documents and Subpart M.

In assessing credit risks, private

lenders look at a large number of factors

relating to the size and quality of the

financial assets of a borrower; the

borrower’s new worth and debt

position; current and past financial

performance; the strength and stability

of the borrower’s markets and the

borrower’s position in those markets;

market diversity, concentrations, and

growth or decline; the borrower’s cost

competitiveness and investment in new

technologies and system modernization;

commitments to research and

development and innovation;

experience and structure of

management; internal cost and financial

controls; and a number of other factors.

When considering the adequacy of net

worth, most private lenders look at the

quality of the borrower’s assets and the

ratio of net worth to total debt, rather

than only the long-term debt owed to

the lender. It is RUS’ judgment that the

fact that a borrower has net worth equal

to 110 percent of only the government’s

outstanding long-term loans does not

justify further relaxation of operational

controls over and above those provided

in the new loan documents and

regulations based on prudent private

lending practices for a similar spectrum

of credit risks. RUS is willing to

consider, on a case by case basis,

alternative loan document provisions

for the better quality credits.

List of Subjects

7 CFR Part 1710

Electric power, Electric utilities, Loan

programs—energy, Rural areas.

7 CFR Part 1717

Administrative practice and

procedure, Electric power, Electric

utilities, Intergovernmental relations,

Investments, Lien accommodation, Lien

subordination, Loan programs—energy,

Operational controls, Reporting and

recordkeeping requirements, Rural

areas.

7 CFR Part 1718

Administrative practice and

procedure, Electric power, Electric

utilities, Loan programs—energy, Loan

security documents, Reporting and

recordkeeping requirements, Rural

areas.

For the reasons explained in the

preamble and under the authority of 7

U.S.C. 901 et seq., RUS amends 7 CFR

Chapter XVII as follows:

PART 1710—GENERAL AND PRELOAN POLICIES AND PROCEDURES

COMMON TO INSURED AND

GUARANTEED ELECTRIC LOANS

1. The authority citation for part 1710

continues to read as follows:

Authority: 7 U.S.C. 901–950b; Public Law

99–591, 100 Stat, 3341–16; Public Law 103–

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

2. Section 1710.2 is amended in

paragraph (a) by revising the definition

for ‘‘Tier’’ and by adding the new

definitions in alphabetical order to read

as follows:

§ 1710.2 Definitions and rules of

construction.

(a) Definitions. * * *

* * * * *

DSC means Debt Service Coverage of

the borrower calculated as:

DSC

A B C

D = + +

Where:

All amounts are for the same calendar year

and are based on the RUS system of accounts

and RUS Forms 7 and 12. References to line

numbers in the RUS Forms 7 and 12 refer to

the June 1994 version of RUS Form 7 and the

December 1993 version of RUS Form 12, and

will apply to corresponding information in

future versions of the forms;

A=Depreciation and Amortization Expense

of the borrower, which equals Part A, Line

12 of RUS Form 7 (distribution borrowers) or

Section A, Line 20 of RUS Form 12a (power

supply borrowers);

B=Interest expense on total long-term debt

of the borrower, which equals Part A, Line

15 of RUS Form 7 or Section A, Line 22 of

RUS Form 12a, except that interest expense

shall be increased by 1⁄3 of the amount, if any,

by which restricted rentals of the borrower

(Part M, Line 3 of RUS Form 7 or Section K,

Line 4 of RUS Form 12h) exceed 2 percent

of the borrower’s equity (RUS Form 7, Part

C, Line 36 [Total Margins & Equities] less

Line 26 [Regulatory Assets] or RUS Form 12a,

Section B, Line 38 [Total Margins & Equities]

less Line 28 [Regulatory Assets]);

C=Patronage Capital or Margins of the

borrower, which equals Part A, Line 28 of

RUS Form 7 or Section A, Line 35 of RUS

Form 12a; and

D=Debt Service Billed (RUS + other),

which equals the sum of all payments of

principal and interest required to be made on

account of total long-term debt of the

borrower during the calendar year, plus 1⁄3 of

the amount, if any, by which restricted

rentals of the borrower (Part M, Line 3 of

RUS Form 7 or Section K, Line 4 of RUS

Form 12h) exceed 2 percent of the borrower’s

equity (RUS Form 7, Part C, Line 36 [Total

Margins & Equities] less Line 26 [Regulatory

Assets] or RUS Form 12a, Section B, Line 38

[Total Margins & Equities] less Line 28

[Regulatory Assets]);

* * * * *

Electric system means all of the

borrower’s interests in all electric
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations 67401

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.

* * * * *

ODSC means Operating Debt Service

Coverage of the electric system

calculated as:

ODSC

A B C

D = + +

Where:

All amounts are for the same calendar year

and are based on the RUS system of accounts

and RUS Form 7. References to line numbers

in the RUS Form 7 refer to the June 1994

version of the form, and will apply to

corresponding information in future versions

of the form;

A=Depreciation and Amortization Expense

of the electric system, which usually equals

Part A, Line 12 of RUS Form 7;

B=Interest expense on total long-term debt

of the electric system, which usually equals

Part A, Line 15 of RUS Form 7, except that

such interest expense shall be increased by

1⁄3 of the amount, if any, by which restricted

rentals of the electric system (usually Part M,

Line 3 of RUS Form 7) exceed 2 percent of

the borrower’s equity (RUS Form 7, Part C,

Line 36 [Total Margins & Equities] less Line

26 [Regulatory Assets]);

C=Patronage Capital & Operating Margins

of the electric system, which usually equals

Part A, Line 20 of RUS Form 7, plus cash

received from the retirement of patronage

capital by suppliers of electric power and by

lenders for credit extended for the Electric

System; and

D=Debt Service Billed (RUS + other),

which equals the sum of all payments of

principal and interest required to be made on

account of total long-term debt of the electric

system during the calendar year, plus 1⁄3 of

the amount, if any, by which restricted

rentals of the Electric System (usually Part M,

Line 3 of RUS Form 7) exceed 2 percent of

the borrower’s equity (RUS Form 7, Part C,

Line 36 [Total Margins & Equities] less Line

26 [Regulatory Assets]).

* * * * *

OTIER means Operating Times

Interest Earned Ratio of the electric

system calculated as:

OTIER

A B

A = +

Where:

All amounts are for the same calendar year

and are based on the RUS system of accounts

and RUS Form 7. References to line numbers

in the RUS Form 7 refer to the June 1994

version of the form, and will apply to

corresponding information in future versions

of the form;

A=Interest expense on total long-term debt

of the electric system, which usually equals

Part A, Line 15 of RUS Form 7, except that

such interest expense shall be increased by

1⁄3 of the amount, if any, by which restricted

rentals of the electric system (usually Part M,

Line 3 of RUS Form 7) exceed 2 percent of

the borrower’s equity (RUS Form 7, Part C,

Line 36 [Total Margins & Equities] less Line

26 [Regulatory Assets]); and

B=Patronage Capital & Operating Margins

of the electric system, which usually equals

Part A, Line 20 of RUS Form 7, plus cash

received from the retirement of patronage

capital by suppliers of electric power and by

lenders for credit extended for the Electric

System.

* * * * *

TIER means Times Interest Earned

Ratio of the borrower calculated as:

TIER

A B

A = +

Where:

All amounts are for the same calendar year

and are based on the RUS system of accounts

and RUS Forms 7 and 12. References to line

numbers in the RUS Forms 7 and 12 refer to

the June 1994 version of RUS Form 7 and the

December 1993 version of RUS Form 12, and

will apply to corresponding information in

future versions of the forms;

A=Interest expense on total long-term debt

of the borrower, which equals Part A, Line

15 of RUS Form 7 or Section A, Line 22 of

RUS Form 12a, except that interest expense

shall be increased by 1⁄3 of the amount, if any,

by which restricted rentals of the borrower

(Part M, Line 3 of RUS Form 7 or Section K,

Line 4 of RUS Form 12h) exceed 2 percent

of the borrower’s equity (RUS Form 7, Part

C, Line 36 [Total Margins & Equities] less

Line 26 [Regulatory Assets] or RUS Form 12a,

Section B, Line 38 [Total Margins & Equities]

less Line 28 [Regulatory Assets]); and

B=Patronage Capital or Margins of the

borrower, which equals Part A, Line 28 of

RUS Form 7 or Section A, Line 35 of RUS

Form 12a.

* * * * *

3. Section 1710.7 is revised as

follows:

§ 1710.7 Exemptions of RUS operational

controls under section 306E of the RE Act.

(a) General policy. (1) Section 306E of

the RE Act directs the Administrator to

issue interim final regulations to

minimize approval rights, requirements,

restrictions, and prohibitions imposed

on the operations of electric borrowers

whose net worth exceeds 110 percent of

the outstanding loans made or

guaranteed to the borrower by RUS. The

section also directs the Administrator,

when requested by a private lender

providing financing for capital

investments by such borrowers, to offer,

without delay, to share the

government’s lien on the borrowers’

systems or subordinate the

government’s lien on the property

financed by the private lender.

(2) In issuing the regulations, the

Administrator is authorized to establish

requirements, guided by the practices of

private lenders with respect to similar

credit risks, to ensure that the security,

including the assurance of repayment,

for loans made or guaranteed by RUS

will remain reasonably adequate. If the

regulations are not issued within 180

days of enactment of section 306E, the

Administrator may not, until the

regulations are issued, require prior

approval of, or establish any

requirement, restriction, or prohibition,

with respect to the operations of any

electric borrower that meets the 110

percent ratio.

(3) Nothing in section 306E limits the

authority of the Administrator to

establish terms and conditions on the

use of funds from loans made or

guaranteed by RUS, to establish loan

feasibility criteria and other

requirements for the approval of RUS

loans or loan guarantees, such as those

set forth in this part, or to take any other

action specifically authorized by law.

(4) This section addresses the

application of section 306E of the RE

Act to RUS operational controls and

other requirements that apply in general

to RUS borrowers. The application of

section 306E to lien accommodations

and subordinations is set forth in 7 CFR

1717.860 and 1717.904.

(5) The exemptions granted by this

section, 7 CFR 1717.860, and 7 CFR

1717.904 apply only to RUS controls

and approval rights. They do not affect

the controls and approval rights of other

co-mortgagees under the RUS mortgage.

(6) For purposes of this section, the

terms ‘‘default,’’ ‘‘financed or funded by

RUS,’’ ‘‘interchange agreement,’’

‘‘interconnection agreement,’’ ‘‘loan

documents,’’ ‘‘pooling agreement,’’

‘‘power supply contract,’’ and

‘‘wheeling agreement’’ have the

meanings as set forth in 7 CFR 1717.602.

(b) Determination of ratio. The

following principles and procedures

will apply to the calculation of net

worth as a ratio, expressed as a percent,

to the outstanding balance of all loans

made or guaranteed to the borrower by

RUS, hereinafter called the borrower’s

‘‘net worth to RUS debt ratio’’, or simply

‘‘the ratio’’:
67402 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations

(1) For purposes of determining

whether a borrower is exempt from

approvals, requirements, restrictions, or

prohibitions imposed by RUS with

respect to borrower operations, i.e.,

‘‘operational controls,’’ the ratio

normally will be based on data as of

December 31. Net worth will be based

on the year-end financial and statistical

reports submitted by borrowers to RUS,

and outstanding loans made or

guaranteed by RUS will be based on

RUS’s records. 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 7

CFR part 1767, net worth for borrowers

using sinking fund depreciation will be

calculated as if the borrower had been

using straight line depreciation;

(2) Net worth will be calculated by

taking total margins and equities (from

Part C of RUS Form 7 for distribution

borrowers, or 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; and

(3) By no later than May 1 of each

year, RUS will notify each borrower in

writing of its ratio as of December 31 of

the preceding year. If a borrower’s net

worth to RUS debt ratio exceeds 110

percent based on the year-end data, the

borrower will be exempt from the

operational controls exempted under

paragraph (c) of this section until

subsequently notified in writing by RUS

that it is no longer exempt.

(c) Borrower operations exempted

from RUS controls. Borrowers who are

notified by RUS in writing that their net

worth to RUS debt ratio exceeds 110

percent are exempted from the

operational controls of the RUS

mortgage and loan contract listed in this

paragraph. These controls, which are

implemented through RUS regulations

and other documents, are as follows:

(1) RUS approval of extensions and

additions. RUS approval of extensions

and additions to borrowers’ electric

systems, except for the following:

(i) Extensions and additions financed

by RUS;

(ii) Construction, procurement, or

leasing of generating facilities,

regardless of the source of funding, if

the combined capacity of the facilities to

be built, procured, or leased, including

any future facilities included in the

planned project, will exceed 25

megawatts in the case of power supply

borrowers, or the lesser of 5 megawatts

or 30 percent of the borrower’s equity in

the case of distribution borrowers;

(iii) Acquisition or leasing of existing

electric facilities or systems in service,

regardless of the source of funding,

whose purchase price, or capitalized

value in the case of a lease, exceeds 10

percent of the borrower’s net utility

plant; and

(iv) Construction, procurement, or

leasing of electric facilities, regardless of

the source of funding, 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;

(2) Long-range engineering plans and

construction work plans. RUS approval

of 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;

(3) Plans and specifications. RUS

approval of plans and specifications for

construction not financed by RUS;

(4) Standard forms of construction

contracts, and engineering and

architectural services contracts. RUS

requirements to use standard forms of

contracts for construction, procurement,

engineering services, and architectural

services, if the construction,

procurement or services are not

financed by RUS. To be eligible for this

waiver the contracts used must not

contain any provisions that prohibit or

restrict the assignment of the contracts

to the government upon the exercise by

RUS of its remedies under security

instruments securing loans made or

guaranteed by RUS;

(5) Contract bidding requirements.

RUS requirements regarding the

competitive bidding of construction

contracts, if the construction is not

financed by RUS;

(6) RUS approval of contracts. (i)

Construction contracts and architectural

and engineering contracts. RUS

approval of contracts for construction

and procurement and for architectural

and engineering services, if such

construction, procurement or services

are not financed by RUS.

(ii) Large retail power contracts. RUS

approval of contracts to sell electric

power to retail customers except when

the contract is for longer than 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 exemption applies regardless of the

source of funding of any plant

extensions, additions or improvements

that may be involved in connection with

the contract.

(iii) Power supply arrangements. (A)

RUS approval of 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, if they have a term of

2 years or less. Amendments to said

power supply arrangements are also

exempted from RUS approval provided

that the amendment does not extend the

term of the arrangement for more than

2 years beyond the date of the

amendment.

(B) Any amendment to a schedule or

exhibit contained in any power supply

arrangement subject to RUS approval

that 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.

(C) The exemptions under this

paragraph (c)(6)(iii) 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.

(iv) 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, if such contracts do not cover

all or substantially all of the electric

system.

(v) Other contracts. [Reserved];

(7) RUS approval of general manager.

RUS approval of the selection of a

borrower’s manager and employment

contract, provided that the borrower is

not in default under its loan documents

or any other agreement with RUS.

Nothing herein shall limit the right of

RUS under the loan documents to

request termination of the employment

of a manager in the event of a default

by the borrower;

(8) Board of directors. RUS approval

of compensation of a borrower’s board

of directors;

(9) Certain expenditures. (i) RUS

approval of expenditures for legal,

accounting, and supervisory services by
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations 67403

a borrower. 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.

(ii) RUS approval of expenditures for

engineering services by a borrower, if

such engineering services will not be

financed by RUS;

(10) Banks. RUS approval of banks or

other depositories used by a borrower.

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.

(11) Certain equipment. RUS approval

of the purchase of data processing

equipment and system control

equipment by a borrower, if the

equipment is not financed by RUS;

(12) Notification of rate changes.

Requirement that distribution borrowers

notify RUS in writing of proposed

changes in electric rates 90 days prior to

the effective date of such rates. Instead,

the required notification period shall be

30 days, and such notification shall be

required only if requested by RUS;

(13) Consolidations and mergers. RUS

approval of mergers and consolidations,

and conveyances or transfers of the

mortgaged property substantially as an

entirety, if the following conditions are

met:

(i) Such consolidation, merger,

conveyance or transfer shall be on such

terms as shall fully preserve the lien and

security of the mortgage and the rights

and powers of the mortgagees;

(ii) 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;

(iii) Immediately after giving effect to

such transaction, no default under the

mortgage shall have occurred and be

continuing;

(iv) 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;

(v) The borrower shall have delivered

to the mortgagees an opinion of counsel

in form and substance satisfactory to

each of the mortgagees; and

(vi) 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:

(A) Having equity equal to at least

27% of its total assets on a pro forma

basis after giving effect to such

transaction;

(B) Having 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

(C) Having net utility plant equal to or

greater than 1.0 times its total long-term

debt on a pro forma basis;

(14) Sale, lease, or transfer of capital

assets. RUS approval for a distribution

borrower to sell, lease, or transfer

capital assets, if the following

conditions are met:

(i) The borrower is not in default;

(ii) 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;

(iii) 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;

(iv) Fair market value is obtained for

the assets;

(v) 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;

(vi) The proceeds of such sale, lease,

or transfer, less ordinary and reasonable

expenses incident to such transaction,

are immediately:

(A) Applied as a prepayment of all

notes secured under the mortgage

equally and ratably;

(B) 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

(C) Applied to the acquisition of

construction of utility plant; and

(vii) If the borrower has an RUSapproved wholesale power contract

with a power supply borrower (seller),

the circumstances of the sale, lease or

transfer of capital assets conform with

the conditions in such contract under

which the seller may not withhold its

consent to the sale, lease or transfer;

(15) Limitations on distributions. RUS

approval for a borrower to declare or

pay dividends, pay or determine to pay

patronage refunds, retire patronage

capital, or make any other cash

distributions, if the following conditions

are met:

(i) After giving effect to the

distribution, the borrower’s equity will

be greater than or equal to 30 percent of

its total assets;

(ii) The borrower is current on all

payments due on all notes secured

under the mortgage;

(iii) The borrower is not otherwise in

default under its loan documents; and

(iv) After giving effect to the

distribution, the borrower’s current and

accrued assets will be not less than its

current and accrued liabilities.

(d) RUS requirements and operational

controls not exempted. All requirements

and operational controls contained in

the RUS mortgage and loan contract, or

otherwise imposed on borrowers

pursuant to statute or regulation, that

are not specifically listed in paragraph

(c) of this section are not exempted and

shall continue to apply according to

their terms. Examples of such

requirements and controls not exempted

are listed in this paragraph for the

convenience of the public. This list is

not exhaustive, and the absence of a

requirement or control from this list in

no way means that the requirement or

control has been exempted:

(1) Requirements and operational

controls contained in the RUS mortgage

or loan contract that are necessary to

ensure that the security for loans made

or guaranteed by RUS is reasonably

adequate and that the loans will be

repaid, or to accomplish other

fundamental purposes of the RE Act.

Some of these also represent terms and

conditions with respect to the use by

borrowers of the proceeds of loans made

or guaranteed by RUS. Together, these

controls include, but are not limited to,

the following:

(i) Area coverage requirements set

forth in the loan contract and in

§ 1710.103;

(ii) Requirement that certain

borrowers maintain, on an ongoing

basis, a power requirements study and

a power requirements study work plan,

as set forth in §§ 1710.201 and 1710.202;

(iii) Requirement that borrowers

follow RUS construction standards and

use RUS accepted materials, as set forth
67404 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations

in § 1710.41, § 1710.45, and 7 CFR part

1728;

(iv) Requirement that borrowers

maintain, on an ongoing basis, a longrange engineering plan and a

construction work plan, as set forth in

§ 1710.250(b);

(v) Requirement that borrowers set

rates for electric service sufficient to

maintain certain coverage ratios, as set

forth in § 1710.114;

(vi) Certain RUS approvals of

retirements of capital credits in excess

of amounts specifically authorized in

the mortgage;

(vii) RUS approval of borrower

investments, loans, guarantees, and

other obligations under 7 CFR part 1717,

subpart N;

(viii) RUS requirements on

accounting, auditing, irregularities,

financial reporting, and access to books

and records;

(ix) Requirement that borrowers

record the mortgage and mortgage

amendments;

(x) Requirement that the mortgagor

maintain and preserve the priority lien

of the mortgage and defend title to the

mortgaged property;

(xi) Requirements on maintenance

and repair of the mortgaged property;

(xii) Requirements on insurance of the

mortgaged property; and

(xiii) Certain RUS approvals of

borrower mergers and consolidations;

and

(2) Requirements imposed on

borrowers pursuant to statute or

regulation and not specifically

exempted by paragraph (c) of this

section. See, for example, §§ 1710.122

through 1710.127.

(e) Rescission of exemptions if

borrower defaults. If a borrower is in

default with respect to any requirement

of its mortgage, loan contract with RUS,

or any other agreement with RUS that

has not been exempted pursuant to

paragraph (c) of this section or other

RUS regulations, upon written notice to

the borrower RUS may rescind all or

any part of the exemptions granted

pursuant to paragraph (c) of this section

or other RUS regulations. The reinstated

requirements and controls will remain

in effect until RUS determines that they

are no longer needed to help ensure that

the security, including the assurance of

repayment, for loans made or

guaranteed by RUS will remain

reasonably adequate.

(f) Reinstated controls. If RUS controls

are reinstated because the borrower

defaults or its net worth falls below 110

percent of RUS debt, such controls and

approval rights will apply to all

applicable subsequent actions of the

borrower, including without limitation

the amendment of contracts that the

borrower entered into while eligible for

an exemption under this section.

§ 1710.103 [Amended]

4. Section 1710.103 is amended by

removing in paragraph (b) the sentence

‘‘The loan contract shall contain

provisions to this effect.’’.

5. Section 1710.114 is revised to read

as follows:

§ 1710.114 TIER, DSC, OTIER and ODSC

requirements.

(a) General. Requirements for

coverage ratios are set forth in the

borrower’s mortgage, loan contract, or

other contractual agreements with RUS.

The requirements set forth in this

section apply to borrowers that receive

a loan approved by RUS on or after

February 10, 1992. Nothing in this

section, however, shall reduce the

coverage ratio requirements of a

borrower that has contractually agreed

with RUS to a higher requirement.

(b) Coverage ratios. (1) Distribution

borrowers. The minimum coverage

ratios required of distribution

borrowers, whether applied on an

annual or average basis, are a TIER of

1.50, DSC of 1.25, OTIER of 1.1, and

ODSC of 1.1. OTIER and ODSC shall

apply to distribution borrowers that

receive a loan approved by RUS on or

after January 29, 1996.

(2) The minimum coverage ratios

required of power supply borrowers,

whether applied on an annual or

average basis, are a TIER of 1.05 and

DSC of 1.00.

(3) When new loan contracts are

executed, the Administrator may, case

by case, increase the coverage ratios of

distribution and power supply

borrowers above the levels cited in

paragraphs (b)(1) and (b)(2),

respectively, of this section if the

Administrator determines that the

higher ratios are required to ensure

reasonable security for and/or the

repayment of loans made or guaranteed

by RUS. Also, the Administrator may,

case by case, reduce said coverage ratios

if the Administrator determines that the

lower ratios are required to ensure

reasonable security for and/or the

repayment of loans made or guaranteed

by RUS.

(4) If a distribution borrower has in

service or under construction a

substantial amount of generation and

associated transmission plant financed

at a cost of capital substantially higher

than the cost of funds under section 305

of the RE Act, then the Administrator

may establish, in his or her sole

discretion, blended levels for TIER,

DSC, OTIER, and ODSC based on the

respective shares of total utility plant

represented by said generation and

associated transmission plant and by

distribution and other transmission

plant.

(c) Requirements for loan feasibility.

To be eligible for a loan, borrowers must

demonstrate to RUS that they will, on a

pro forma basis, earn the coverage ratios

required by paragraph (b) of this section

in each of the years included in the

borrower’s long-range financial forecast

prepared in support of its loan

application, as set forth in subpart G of

this part.

(d) Requirements for maintenance of

coverage ratios. (1) Prospective

requirement. Borrowers must design

and implement rates for utility service

to provide sufficient revenue (along

with other revenue available to the

borrower in the case of TIER and DSC)

to pay all fixed and variable expenses,

to provide and maintain reasonable

working capital and to maintain on an

annual basis the coverage ratios

required by paragraph (b) of this section.

Rates must be designed and

implemented to produce at least enough

revenue to meet the requirements of this

paragraph under the assumption that

average weather conditions in the

borrower’s service territory will prevail

in the future, including average system

damage and outages due to weather and

the related costs. Failure to design and

implement rates pursuant to the

requirements of this paragraph shall be

an event of default upon notice

provided in accordance with the terms

of the borrower’s mortgage or loan

contract.

(2) Retrospective requirement. The

average coverage ratios achieved by a

borrower in the 2 best years out of the

3 most recent calendar years must meet

the levels required by paragraph (b) of

this section. If a borrower fails to

achieve these average levels, it must

promptly notify RUS in writing. Within

30 days of such notification or of the

borrower being notified in writing by

RUS, whichever is earlier, the borrower,

in consultation with RUS, must provide

a written plan satisfactory to RUS

setting forth the actions that will be

taken to achieve the required coverage

ratios on a timely basis. Failure to

develop and implement a plan

satisfactory to RUS shall be an event of

default upon notice provided in

accordance with the terms of the

borrower’s mortgage or loan contract.

(3) Fixed and variable expenses, as

used in this section, include but are not

limited to: all taxes, depreciation,

maintenance expenses, and the cost of

electric power and energy and other

operating expenses of the electric
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations 67405

system, including all obligations under

the wholesale power contract, all lease

payments when due, and all principal

and interest payments on outstanding

indebtedness when due.

(e) Requirements for advance of

funds. (1) If a borrower applying for a

loan has failed to achieve the coverage

ratios required by paragraph (b) of this

section during the latest 12 month

period immediately preceding approval

of the loan, or if any of the borrower’s

average coverage ratios for the 2 best

years out of the most recent 3 calendar

years were below the levels required in

paragraph (b) of this section, RUS may

withhold the advance of loan funds

until the borrower has adopted an

annual financial plan and operating

budget satisfactory to RUS and taken

such other action as RUS may require to

demonstrate that the required coverage

ratios will be maintained in the future

and that the loan will be repaid with

interest within the time agreed. Such

other action may include, for example,

increasing system operating efficiency

and reducing costs or adopting a rate

design that will achieve the required

coverage ratios, and either placing such

rates into effect or taking action to

obtain regulatory authority approval of

such rates. If failure to achieve the

coverage ratios is due to unusual events

beyond the control of the borrower,

such as unusual weather, system outage

due to a storm or regulatory delay in

approving rate increases, then the

Administrator may waive the

requirement that the borrower take the

remedial actions set forth in this

paragraph, provided that such waiver

will not threaten loan feasibility.

(2) With respect to any outstanding

loan approved by RUS on or after

February 10, 1992, if, based on actual or

projected financial performance of the

borrower, RUS determines that the

borrower may not achieve its required

coverage ratios in the current or future

years, RUS may withhold the advance of

loan funds until the borrower has taken

remedial action satisfactory to RUS.

6. Section 1710.250 is amended by

revising paragraphs (b) and (e) and

adding a new paragraph (k) to read as

follows:

§ 1710.250 General.

* * * * *

(b) Generally, all borrowers are

required to maintain up-to-date long

range engineering plans approved by

their boards of directors. Current CWPs

approved by the borrower’s board must

also be developed and maintained for

distribution and transmission facilities

and for improvements and replacements

of generation facilities. All such

distribution, transmission or generation

facilities must be included in the

respective CWPs regardless of the

source of financing.

* * * * *

(e) Applications for a loan or loan

guarantee from RUS (new loans or

budget reclassifications) must be

supported by a current CWP approved

by both the borrower’s board of

directors and RUS. RUS approval of

these plans relates only to the facilities,

equipment, and other purposes to be

financed by RUS, and means that the

plans provide an adequate basis from a

planning and engineering standpoint to

support RUS financing. RUS approval of

the plans does not mean that RUS

approves of the facilities, equipment, or

other purposes for which the borrower

is not seeking RUS financing. If RUS

disagrees with a borrower’s estimate of

the cost of one or more facilities for

which RUS financing is sought, RUS

may adjust the estimate after consulting

with the borrower and explaining the

reasons for the adjustment.

* * * * *

(k) Upon written request from a

borrower, RUS may waive in writing

certain requirements with respect to

long-range engineering plans and CWPs

if RUS determines that such

requirements impose a substantial

burden on the borrower and that

waiving the requirements will not

significantly affect the accomplishment

of the objectives of this subpart. For

example, if a borrower’s load is forecast

to remain constant or decline during the

planning period, RUS may waive those

portions of the plans that relate to load

growth.

§ 1710.251 [Amended]

7. Section 1710.251 is amended by

removing the words ‘‘and RUS’’ from

the first sentence of paragraph (a).

§ 1710.252 [Amended]

8. Section 1710.252 is amended by

removing the words ‘‘and RUS’’ from

the first sentence of paragraph (a).

PART 1717—POST-LOAN POLICIES

AND PROCEDURES COMMON TO

INSURED AND GUARANTEED

ELECTRIC LOANS

9. The authority citation for part 1717

continues to read as follows:

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

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

unless otherwise noted.

10. Subpart M is added to part 1717

to read as follows:

Subpart M—Operational Controls

Sec.

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 M—Operational Controls

§ 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
67406 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations

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 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;

(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.
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations 67407

(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 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
67408 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations

engineering services financed by RUS

are set forth in other RUS regulations.

§ 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 long-term 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;

(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.

11. Section 1717.850 is amended by

revising paragraphs (a), (b), (f), (g)(1)(ii),

(h)(2), and (m) to read as follows:

§ 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
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations 67409

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.

* * * * *

(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) * * *

(1) * * *

(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;

* * * * *

(h) * * *

(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.

* * * * *

(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.

* * * * *

12. Section 1717.851 is amended by

removing the definitions for ‘‘ODSC’’

and ‘‘OTIER’’ and by adding the

following definitions in alphabetical

order to read as follows:

§ 1717.851 Definitions.

* * * * *

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.

* * * * *

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.

* * * * *

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.

* * * * *

13. In § 1717.852, paragraphs (a)(1)

introductory text and (a)(1)(ii) are

amended by adding the words ‘‘and/or

steam’’ before the word ‘‘power’’,

paragraphs (a)(3) through (a)(7) and

paragraph (b) are revised, and paragraph

(a)(8) is added to read as follows:

§ 1717.852 Financing purposes.

(a) * * *

(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

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
67410 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations

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.

* * * * *

14. Section 1717.854 is amended by

revising the section heading and

paragraphs (a), (b), (c)(1) and (c)(2),

removing paragraph (c)(7), redesignating

paragraphs (c)(3) through (c)(6) as

paragraphs (c)(4) through (c)(7), adding

a new paragraph (c)(3), adding ‘‘and’’ at

the end of newly designated paragraph

(c)(6)(vi) and removing ‘‘;and’’ at the

end of newly designated paragraph

(c)(7) and adding a period in its place

to read as follows:

§ 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) * * *

(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 long-term

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;

* * * * *

15. Section 1717.855 is amended by

revising the section heading and

paragraph (a) to read as follows:

§ 1717.855 Application contents: Advance

approval—100 percent private financing of

distribution, subtransmission and

headquarters facilities, and certain other

community infrastructure.

* * * * *

(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;

* * * * *

16. Section 1717.856 is amended by

revising the section heading, the

introductory text, the introductory text

of paragraph (a), and paragraph (c)(3) to

read as follows:

§ 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:

* * * * *

(c) * * *

(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

* * * * *

§ 1717.857 [Amended]

17. Section 1717.857 is amended by

removing paragraph (a)(5), by adding

‘‘and’’ at the end of paragraph (a)(3), and

by removing ‘‘;and’’ at the end of

paragraph (a)(4)(ii) and adding a period

in its place.

§ 1717.860 [Amended]

18. Section 1717.860 is amended by

redesignating paragraph (f) as paragraph

(e).

PART 1718—LOAN SECURITY

DOCUMENTS FOR ELECTRIC

BORROWERS

19. The authority citation for part

1718 continues to read as follows:

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

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

20. Section 1.01 of Appendix A to

Subpart B of part 1718 is amended by

revising the definitions for ‘‘Debt

Service Coverage Ratio (‘‘DSC’’) ‘‘and’’

Times Interest Earned Ratio (‘‘TIER’’)’’

to read as follows:

Appendix A to Subpart B of Part 1718—

Model Form of Mortgage for Electric

Distribution Borrowers

* * * * *

Section 1.01 Definitions. * * *

* * * * *

Debt Service Coverage Ratio (‘‘DSC’’) shall

mean the ratio determined as follows: for

each calendar year add (i) Patronage Capital

or Margins of the Mortgagor, (ii) Interest

Expense on Total Long Term Debt of the

Mortgagor (as computed in accordance with

the principles set forth in the definition of

TIER) and (iii) Depreciation and

Amortization Expense of the Mortgagor, and

divide the total so obtained by an amount

equal to the sum of all payments of principal

and interest required to be made on account

of Total Long-Term Debt during such

calendar year increasing said sum by any

addition to interest expense on account of

Restricted Rentals as computed with respect

to the Times Interest Earned Ratio herein.

* * * * *

Times Interest Earned Ratio (‘‘TIER’’) shall

mean the ratio determined as follows: for

each calendar year: add (i) patronage capital

or margins of the Mortgagor and (ii) Interest

Expense on Total Long-Term Debt of the

Mortgagor and divide the total so obtained by

Interest Expense on Total Long-Term Debt of

the Mortgagor, provided, however, that in

computing Interest Expense on Total LongTerm Debt, there shall be added, to the extent

not otherwise included, an amount equal to

33–1/3% of the excess of Restricted Rentals

paid by the Mortgagor over 2% of the

Mortgagor’s Equity.

* * * * *

21. Subpart C is added to part 1718

to read as follows:

Subpart C—Loan Contracts With

Distribution Borrowers

Sec.

1718.100 General.

1718.101 Applicability.

1718.102 Definitions.

1718.103 Loan contract provisions.

1718.104 Availability of model loan

contract.

Appendix A to Subpart C of Part 1718—

Model Form of Loan Contract for Electric

Distribution Borrowers

Subpart C—Loan Contracts With

Distribution Borrowers

§ 1718.100 General.

(a) Purpose. The purpose of this

subpart is to set forth the policies,

requirements, and procedures governing

loan contracts entered into between the

Rural Utilities Service (RUS) and
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations 67411

distribution borrowers or, in some cases,

other electric borrowers.

(b) Flexibility for individual

circumstances. The intent of this

subpart is to provide the flexibility to

address the different needs and different

credit risks of individual borrowers, and

other special circumstances of

individual lending situations. The

model loan contract contained in

Appendix A of this subpart provides an

example of what a loan contract with an

‘‘average’’ or ‘‘typical’’ distribution

borrower may look like under ‘‘average’’

or ‘‘typical’’ circumstances. Depending

on the credit risks and other

circumstances of individual loans, RUS

may execute loan contracts with

provisions that are substantially

different than those set forth in the

model. RUS may develop alternative

model loan contract provisions. If it

does, such provisions will be made

available to the public.

(c) Resolution of any differences in

contractual provisions. If any provision

of the loan contract appears to be in

conflict with provisions of the mortgage,

the loan contract shall have precedence

with respect to the contractual

relationship between the borrower and

RUS with respect to such provision. If

either document is silent on a matter

addressed in the other document, the

other document shall have precedence

with respect to the contractual

relationship between the borrower and

RUS with respect to such matter.

(d) Certain loan contract provisions

subject to subsequent rulemaking. If a

loan contract provision imposes an

obligation or limitation on the borrower

whose interpretation or specification is

subject to RUS regulations or the

discretion of the Administrator or RUS,

such interpretation or specification shall

be subject to subsequent rulemaking.

Such interpretation or specification of

the borrower’s obligations or limitations

may not exceed the authority granted to

the Administrator or RUS in the loan

contract provision.

§ 1718.101 Applicability.

(a) Distribution borrowers. The

provisions of this subpart apply to all

distribution borrowers that obtain a loan

or loan guarantee from RUS approved

on or after January 29, 1996.

Distribution borrowers that obtain a lien

accommodation or any other form of

financial assistance from RUS after

January 29, 1996, may be required to

execute a new loan contract and new

mortgage. Moreover, any distribution

borrower may submit a request to RUS

that a new loan contract and new

mortgage be executed. Within the

constraints of time and staff resources,

RUS will attempt to honor such

requests. Borrowers must first obtain the

concurrence of any other mortgagees on

their existing mortgage before a new

mortgage can be executed.

(b) Other borrowers. Borrowers other

than distribution borrowers may also

submit requests for execution of a new

loan contract pursuant to this subpart

and a new mortgage pursuant to subpart

B of this part. RUS may approve such

requests if it determines that such

approval is in the government’s

financial interest. If other mortgagees

are on the borrower’s existing mortgage,

their concurrence would be required

before a new mortgage could be

executed.

§ 1718.102 Definitions.

For the purposes of this subpart:

Borrower means any organization that

has an outstanding loan made or

guaranteed by the Rural Utilities Service

(RUS) or its predecessor, the Rural

Electrification Administration, for rural

electrification, or that is seeking such

financing.

Distribution borrower means a

borrower that sells or intends to sell

electric power and energy at retail in

rural areas, the latter being defined in 7

CFR 1710.2.

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.

§ 1718.103 Loan contract provisions.

Loan contracts executed pursuant to

this subpart shall contain such

provisions as RUS determines are

appropriate to further the purposes of

the RE Act and to ensure that the

security for the loan will be reasonably

adequate and that the loan will be

repaid according to the terms of the

promissory note. Such loan contracts

will contain provisions addressing, but

not necessarily limited to, the following

matters:

(a) Description of the purpose of the

loan;

(b) Specification of the interest to be

charged on the loan, including the

method for determining the interest rate

if it is not fixed for the entire term of

the loan;

(c) Specification of the method for

repaying the loan principal, including

the final maturity of the loan;

(d) The conditions under which the

loan may be prepaid before its maturity

date, including but not limited to

requirements regarding the prepayment

of loans made concurrently by RUS and

another secured lender;

(e) The method for making scheduled

payments on the loan;

(f) Accounting principles and system

of accounts, and RUS authority to

approve the accountant used by the

borrower;

(g) The method and time period for

advancing loan funds and the

conditions precedent to the advance of

funds;

(h) Representations and warranties by

the borrower as a condition of obtaining

the loan, including but not limited to:

the legal authority of the borrower to

enter into the loan contract and operate

its system; that the loan documents will

be a legal, valid and binding obligation

of the borrower enforceable according to

their terms; compliance of the borrower

in all material respects with all federal,

state, and local laws, regulations, codes,

and orders; existence of any pending or

threatened legal actions that could have

a material adverse effect on the

borrower’s ability to perform its

obligations under the loan documents;

the accuracy and completeness of all

information provided by the borrower in

the loan application and with respect to

the loan contract, and the existence of

any material adverse change since the

information was provided; and the

existence of any material defaults under

other agreements of the borrower;

(i) Representations, warranties, and

covenants with respect to

environmental matters;

(j) Reports and notices required to be

submitted to RUS, including but not

limited to: annual financial statements;

notice of defaults; notice of litigation;

notice of orders or other directives

received by the borrower from

regulatory authorities; notice of any

matter that has resulted in or may result

in a material adverse change in the

condition or operations of the borrower;

and such other information regarding

the condition or operations of the

borrower as RUS may reasonably

require;

(k) Annual written certification that

the borrower is in compliance with its

loan contract, note, mortgage, and any

other agreement with RUS, or if there

has been a default in the fulfillment of

any obligation under said agreements,

specifying each such default and the

nature and status thereof;

(l) Requirement that the borrower

design and implement rates for utility

services to meet certain minimum

coverage of interest expense and/or debt

service obligations;

(m) Requirement that the borrower

maintain and preserve its mortgaged

property in compliance with prudent

utility practice and all applicable laws,

which may include certain specific

actions and certifications set forth in the

borrower’s loan contract or mortgage;
67412 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations

(n) Requirement that the borrower

plan, design and construct its electric

system according to standards and other

requirements established by RUS, and if

directed by the Administrator, that the

borrower follow RUS planning, design

and construction standards and

requirements for other utility systems

constructed by the borrower;

(o) Limitations on extensions and

additions to the borrower’s electric

system without approval by RUS;

(p) Limitations on contracts and

contract amendments that the borrower

may enter into without approval by

RUS;

(q) Limitations of the transfer of

mortgaged property by the borrower;

(r) Limitations on dividends,

patronage refunds, and cash

distributions paid by the borrower;

(s) Limitations on investments, loans,

and guarantees made by the borrower;

(t) Authority of RUS to approve a new

general manager and to require that an

existing general manager be replaced if

the borrower is in default under its

mortgage, loan contract, or any other

agreements with RUS;

(u) Description of events of default

under the loan contract and the

remedies available to RUS;

(v) Applicability of state and federal

laws;

(w) Severability of the individual

provisions of the loan documents;

(x) Matters relating to the assignment

of the loan contract;

(y) Requirements relating to federal

laws and regulations, including but not

limited to the following matters: area

coverage for electric service; civil rights

and equal employment opportunity;

access to buildings and other matters

relating to the handicapped; design and

construction standards relating to

earthquakes; the National

Environmental Policy Act of 1969 and

other environmental laws and

regulations; flood hazard insurance;

debarment and suspension from federal

assistance programs; and delinquency

on federal debt; and

(z) Special requirements applicable to

individual loans, and such other

provisions as RUS may require to ensure

loan repayment and reasonably

adequate loan security.

§ 1718.104 Availability of model loan

contract.

Single copies of the model loan

contract (RUS Informational Publication

1718 C) are available from the Rural

Utilities Service, United States

Department of Agriculture, Washington,

DC 20250–1533. This document may be

reproduced.

Appendix A to Subpart C of Part 1718—

Model Form of Loan Contract for

Electric Distribution Borrowers

LOAN CONTRACT

TABLE OF CONTENTS

RECITALS

ARTICLE I—DEFINITIONS

ARTICLE II—REPRESENTATIONS AND

WARRANTIES

Section 2.1. Representations and

Warranties.

ARTICLE III—LOAN

Section 3.1. Advances.

Section 3.2. Interest Rate and Payment.

Section 3.3. Prepayment.

ARTICLE IV—CONDITIONS OF LENDING

Section 4.1. General Conditions.

Section 4.2. Special Conditions.

ARTICLE V—AFFIRMATIVE COVENANTS

Section 5.1. Generally.

Section 5.2. Annual Certificates.

Section 5.3. Simultaneous Prepayment of

Contemporaneous Loans.

Section 5.4. Rates to Provide Revenue

Sufficient to Meet Coverage Ratios

Requirements.

Section 5.5. Depreciation Rates.

Section 5.6. Property Maintenance.

Section 5.7. Financial Books.

Section 5.8. Rights of Inspection.

Section 5.9. Area Coverage.

Section 5.10. Real Property Acquisition.

Section 5.11. ‘‘Buy American’’

Requirements.

Section 5.12. Power Requirements Studies.

Section 5.13. Long Range Engineering

Plans and Construction Work Plans.

Section 5.14. Design Standards,

Construction Standards, and List of

Materials.

Section 5.15. Plans and Specifications.

Section 5.16. Standard Forms of

Construction Contracts, and Engineering

and Architectural Services Contracts.

Section 5.17. Contract Bidding

Requirements.

Section 5.18. Nondiscrimination.

Section 5.19. Financial Reports.

Section 5.20. Miscellaneous Reports and

Notices.

Section 5.21 Special Construction Account.

Section 5.22. Additional Affirmative

Covenants.

ARTICLE VI—NEGATIVE COVENANTS

Section 6.1. General.

Section 6.2. Limitations on System

Extensions and Additions.

Section 6.3. Limitations on Changing

Principal Place of Business.

Section 6.4. Limitations on Employment

and Retention of Manager.

Section 6.5. Limitations on Certain Types

of Contracts.

Section 6.6. Limitations on Mergers and

Sale, Lease or Transfer of Capital Assets.

Section 6.7. Limitations on Using non

FDIC-insured Depositories.

Section 6.8. Limitation on Distributions.

Section 6.9. Limitations on Loans,

Investments and Other Obligations.

Section 6.10. Depreciation Rates.

Section 6.11. Historic Preservation.

Section 6.12. Rate Reductions.

Section 6.13. Limitations on Additional

Indebtedness.

Section 6.14. Limitations on Issuing

Additional Indebtedness Secured Under

the Mortgage.

Section 6.15. Impairment of Contracts

Pledged to RUS.

Section 6.16. Additional Negative

Covenants.

ARTICLE VII—DEFAULT

Section 7.1. Events of Default.

ARTICLE VIII—REMEDIES

Section 8.1. Generally.

Section 8.2. Suspension of Advances.

ARTICLE IX—MISCELLANEOUS

Section 9.1. Notices.

Section 9.2. Expenses.

Section 9.3. Late Payments.

Section 9.4. Filing Fees.

Section 9.5. No Waiver.

Section 9.6. Governing Law.

Section 9.7. Holiday Payments.

Section 9.8. Rescission.

Section 9.9. Successors and Assigns.

Section 9.10. Complete Agreement;

Amendments.

Section 9.11. Headings.

Section 9.12. Severability.

Section 9.13. Right of Setoff.

Section 9.14. Schedules and Exhibits.

Section 9.15. Prior Loan Documents.

Section 9.16. Authority of Representatives

of RUS.

Section 9.17. Term.

SCHEDULE 1

SCHEDULE 2—Existing Liens

SCHEDULE 3—Additional Contracts

EXHIBIT A—Form of Promissory Note

EXHIBIT B—Equal Opportunity Contract

Provisions

EXHIBIT C–1—Manager’s Certificate

Required Under Loan Contract

Section 6.14 for Additional Notes

Exhibit C–2—Manager’s Certificate Required

Under Loan Contract

Section 6.14 for Refinancing Notes

Loan Contract

AGREEMENT, dated

llllllllll, 199ll, between

llllllllll (‘‘Borrower’’), a

corporation organized and existing under the

laws of the State of llllllllll

(the ‘‘State’’) and the UNITED STATES OF

AMERICA acting by and through the

Administrator of the Rural Utilities Service

(‘‘RUS’’).

Recitals

The Borrower has applied to RUS for a

loan for the purpose(s) set forth in Schedule

1 hereto.

RUS is willing to make such a loan to the

Borrower pursuant to the Rural

Electrification Act of 1936, as amended, on

the terms and conditions stated herein.

THEREFORE, for and in consideration of

the premises and the mutual covenants

hereinafter contained, the parties hereto

agree and bind themselves as follows:

Article I—Definitions

Capitalized terms that are not defined

herein shall have the meanings as set forth

in the Mortgage. The terms defined herein

include the plural as well as the singular and

the singular as well as the plural.

‘‘Act’’ shall mean the Rural Electrification

Act of 1936, as amended.
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations 67413

‘‘Advance’’ or ‘‘Advances’’ shall mean

advances by RUS to Borrower pursuant to the

terms and conditions of this Agreement.

‘‘Agreement’’ shall mean this Loan

Contract together with all schedules and

exhibits and also any subsequent

supplements or amendments.

‘‘Business Day’’ shall mean any day that

RUS is open for business.

‘‘Contemporaneous Loan’’ shall mean any

loan which the Borrower has used to satisfy

RUS Regulations or loan conditions requiring

that supplemental financing be obtained in

order to obtain a loan from RUS. Any loan

used to refinance or refund a

Contemporaneous Loan is also considered to

be a Contemporaneous Loan.

‘‘Coverage Ratios’’ shall mean, collectively,

the following financial ratios: (i) TIER of 1.5;

(ii) Operating TIER of 1.1; (iii) DSC of 1.25;

and Operating DSC of 1.1.

‘‘Debt Service Coverage Ratio’’ (‘‘DSC’’)

shall have the meaning provided in the

Mortgage.

‘‘Distributions’’ shall mean for the

Borrower to, in any calendar year, declare or

pay any dividends, or pay or determine to

pay any patronage refunds, or retire any

patronage capital or make any other Cash

Distributions, to its members, stockholders or

consumers; provided, however, that for the

purposes of this Agreement a ‘‘Cash

Distribution’’ shall be deemed to include any

general cancellation or abatement of charges

for electric energy or services furnished by

the Borrower, but not the repayment of a

membership fee upon termination of a

membership or the rebate of an abatement of

wholesale power costs previously incurred

pursuant to an order of a state regulatory

authority or a wholesale power cost

adjustment clause or similar power pricing

agreement between the Borrower and a

power supplier.

‘‘Electric System’’ shall have the meaning

as defined in the Mortgage.

‘‘Equity’’ shall mean the Borrower’s total

margins and equities computed pursuant to

RUS Accounting Requirements but excluding

any Regulatory Created Assets.

‘‘Event of Default’’ shall have the meaning

as defined in Section [7.1].

‘‘Independent’’ when used with respect to

any specified person or entity means such a

person or entity who (1) is in fact

independent, (2) does not have any direct

financial interest or any material indirect

financial interest in the Borrower or in any

affiliate of the Borrower and (3) is not

connected with the Borrower as an officer,

employee, promoter, underwriter, trustee,

partner, director or person performing similar

functions.

‘‘Interest Expense’’ shall mean the interest

expense of the Borrower computed pursuant

to RUS Accounting Requirements.

‘‘Loan’’ shall mean the loan described in

Article III which is being made pursuant to

the RUS Commitment in furtherance of the

objectives of the Act.

‘‘Loan Documents’’ shall mean,

collectively, this Agreement, the Mortgage

and the Note.

‘‘Long-Term Debt’’ shall mean the total of

all amounts included in the long-term debt

of the Borrower pursuant to RUS Accounting

Requirements.

‘‘Maturity Date’’ shall have the meaning as

defined in the Note.

‘‘Monthly Payment Date’’ shall have the

meaning as defined in the Note.

‘‘Mortgage’’ shall have the meaning as

described in Schedule 1 hereto.

‘‘Mortgaged Property’’ shall have the

meaning as defined in the Mortgage.

‘‘Net Utility Plant’’ shall mean the amount

constituting the Total Utility Plant of the

Borrower, less depreciation, computed in

accordance with RUS Accounting

Requirements.

‘‘Note’’ shall mean a promissory note

executed by the Borrower in the form of

exhibit A hereto, and any note executed and

delivered to RUS to refund, or in substitution

for such a note.

‘‘Operating DSC’’ or ‘‘ODSC’’ shall mean

Operating Debt Service Coverage calculated

as:

ODSC

A B C

D = + +

Where:

All amounts are for the same calendar year

and are computed pursuant to RUS

Accounting Requirements and RUS form 7;

A=Depreciation and Amortization Expense

of the Electric System;

B=Interest Expense on Total Long-Term

Debt of the Electric System, except that such

Interest Expense shall be increased by 1⁄3 of

the amount, if any, by which the Restricted

Rentals of the Electric System exceed 2

percent of the Mortgagor’s Equity;

C=Patronage capital & operating margins of

the Electric System, (which equals operating

revenue and patronage capital of Electric

System operations, less total cost of electric

service, including Interest Expense on Total

Long-Term Debt of the Electric System) plus

cash received from the retirement of

patronage capital by suppliers of electric

power and by lenders for credit extended for

the Electric System; and

D=Debt service billed which equals the

sum of all payments of principal and interest

required to be made on account of Total

Long-Term Debt of the Electric System

during the calendar year, plus 1⁄3 of the

amount, if any, by which Restricted Rentals

of the Electric System exceed 2 percent of the

Mortgagor’s Equity.

‘‘Operating TIER’’ or ‘‘OTIER’’ shall mean

Operating Times Interest Earned Ratio

calculated as:

OTIER

A B

A = +

Where:

All amounts are for the same calendar year

and are computed pursuant to RUS

Accounting Requirements and RUS form 7;

A=Interest Expense on Total Long-Term

Debt of the Electric System, except that such

Interest Expense shall be increased by 1/3 of

the amount, if any, by which Restricted

Rentals of the Electric System exceed 2

percent of the Mortgagor’s Equity; and

B=Patronage capital & operating margins of

the Electric System, (which equals operating

revenue and patronage capital of Electric

System operations, less total cost of electric

service, including Interest Expense on Total

Long-Term Debt of the Electric System) plus

cash received from the retirement of

patronage capital by suppliers of electric

power and by lenders for credit extended for

the Electric System.

‘‘Payment Notice’’ shall mean a notice

furnished by RUS to Borrower that indicates

the precise amount of each payment of

principal and interest and the total amount

of each payment.

‘‘Permitted Debt’’ shall have the meaning

as defined in section [6.13].

‘‘Prior Loan Contracts’’ shall have the

meaning as defined in section 9.15.

‘‘Regulatory Created Assets’’ shall mean

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’’ shall

mean any system of accounts prescribed by

RUS Regulations as such RUS Accounting

Requirements exist at the date of

applicability thereof.

‘‘RUS Commitment’’ shall have the

meaning as defined in schedule 1 hereto.

‘‘RUS Regulations’’ shall 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.

‘‘Special Construction Account’’ shall have

the meaning as defined in section 5.21.

‘‘Subsidiary’’ shall mean a corporation that

is a subsidiary of the Borrower and subject

to the Borrower’s control, as defined by RUS

Accounting Requirements.

‘‘Termination Date’’ shall have the

meaning as defined in the Note.

‘‘Times Interest Earned Ratio’’ (‘‘TIER’’)

shall have the meaning provided in the

Mortgage.

‘‘Total Assets’’ shall mean an amount

constituting the total assets of the Borrower

as computed pursuant to RUS Accounting

Requirements, but excluding any Regulatory

Created Assets.

‘‘Total Utility Plant’’ shall mean the

amount constituting the total utility plant of

the Borrower computed in accordance with

RUS Accounting Requirements.

‘‘Utility System’’ shall have the meaning as

defined in the Mortgage.

Article II—Representations and Warranties

Section 2.1. Representations and Warranties.

To induce RUS to make the Loan, and

recognizing that RUS is relying hereon, the

Borrower represents and warrants as follows:

(a) Organization; Power, Etc. The Borrower:

(i) is duly organized, validly existing, and in

good standing under the laws of its state of

incorporation; (ii) is duly qualified to do

business and is in good standing in each

jurisdiction in which the transaction of its

business makes such qualification necessary;

(iii) has all requisite corporate and legal

power to own and operate its assets and to

carry on its business and to enter into and

perform the Loan Documents; (iv) has duly

and lawfully obtained and maintained all

licenses, certificates, permits, authorizations,

approvals, and the like which are material to

the conduct of its business or which may be
67414 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations

otherwise required by law; and (v) is eligible

to borrow from RUS.

(b) Authority. The execution, delivery and

performance by the Borrower of this

Agreement and the other Loan Documents

and the performance of the transactions

contemplated thereby have been duly

authorized by all necessary corporate action

and shall not violate any provision of law or

of the Articles of Incorporation or By-Laws of

the Borrower or result in a breach of, or

constitute a default under, any agreement,

indenture or other instrument to which the

Borrower is a party or by which it may be

bound.

(c) Consents. No consent, permission,

authorization, order, or license of any

governmental authority is necessary in

connection with the execution, delivery,

performance, or enforcement of the Loan

Documents, except (i) such as have been

obtained and are in full force and effect and

(ii) such as have been disclosed on Schedule

1 hereto.

(d) Binding Agreement. Each of the Loan

Documents is, or when executed and

delivered shall be, the legal, valid, and

binding obligation of the Borrower,

enforceable in accordance with its terms,

subject only to limitations on enforceability

imposed by applicable bankruptcy,

insolvency, reorganization, moratorium, or

similar laws affecting creditors’ rights

generally.

(e) Compliance With Laws. The Borrower

is in compliance in all material respects with

all federal, state, and local laws, rules,

regulations, ordinances, codes, and orders

(collectively, ‘‘Laws’’), the failure to comply

with which could have a material adverse

effect on the condition, financial or

otherwise, operations, properties, or business

of the Borrower, or on the ability of the

Borrower to perform its obligations under the

Loan Documents, except as the Borrower has

disclosed on Schedule 1 attached hereto.

(f) Litigation. There are no pending legal,

arbitration, or governmental actions or

proceedings to which the Borrower is a party

or to which any of its property is subject

which, if adversely determined, could have

a material adverse effect on the condition,

financial or otherwise, operations, properties,

profits or business of the Borrower, or on the

ability of the Borrower to perform its

obligations under the Loan Documents, and

to the best of the Borrower’s knowledge, no

such actions or proceedings are threatened or

contemplated, except as the Borrower has

disclosed to RUS in writing.

(g) Title to Property. As to property which

is presently included in the description of

Mortgaged Property, the Borrower holds good

and marketable title to all of its real property

and owns all of its personal property free and

clear of any Lien except the Liens specifically

identified on Schedule 2 attached hereto (the

‘‘Existing Liens’’), and Permitted

Encumbrances or Liens permitted under the

Mortgage.

(h) Financial Statements; No Material

Adverse Change; Etc. All financial statements

submitted to RUS in connection with the

application for the Loan or in connection

with this Agreement fairly and fully present

the financial condition of the Borrower and

the results of the Borrower’s operations for

the periods covered thereby and are prepared

in accordance with RUS Accounting

Requirements consistently applied. Since the

dates thereof, there has been no material

adverse change in the financial condition or

operations of the Borrower. All budgets,

projections, feasibility studies, and other

documentation submitted by the Borrower to

RUS are based upon assumptions that are

reasonable and realistic, and as of the date

hereof, no fact has come to light, and no

event or transaction has occurred, which

would cause any assumption made therein

not to be reasonable or realistic.

(i) Principal Place of Business; Records.

The principal place of business and chief

executive office of the Borrower is at the

address of the Borrower shown on Schedule

1 attached hereto.

(j) Location of Properties. All property

owned by the Borrower is located in the

counties identified in Schedule 1 hereto.

(k) Subsidiaries. The Borrower has no

subsidiary, except as the Borrower has

disclosed to RUS in writing.

(l) Defaults Under Other Agreements. The

Borrower is not in default under any

agreement or instrument to which it is a

party or under which any of its properties are

subject that is material to its financial

condition, operations, properties, profits, or

business.

(m) Survival. All representations and

warranties made by the Borrower herein or

made in any certificate delivered pursuant

hereto shall survive the making of the

Advances and the execution and delivery to

RUS of the Note.

Article III—Loan

Section 3.1. Advances

RUS agrees to make, and the Borrower

agrees to request, on the terms and

conditions of this Agreement, Advances from

time to time in an aggregate principal amount

not to exceed the RUS Commitment. On the

Termination Date, RUS may stop advancing

funds and limit the RUS Commitment to the

amount advanced prior to such date. The

obligation of the Borrower to repay the

Advances shall be evidenced by the Note in

the principal amount of the unpaid principal

amount of the Advances from time to time

outstanding. The Borrower shall give RUS

written notice of the date on which each

Advance is to be made.

Section 3.2. Interest Rate and Payment

The Note shall be payable and bear interest

as follows:

(a) Payments and Amortization. Principal

shall be amortized in accordance with the

method stated in Schedule 1 hereto and more

fully described in the form of Note attached

hereto as Exhibit A.

(b) Application of Payments. All payments

which the Borrower sends to RUS on any

outstanding obligation owed to RUS shall be

applied in the manner provided in the

Borrower’s loan documents to which such

payments relate and in a manner consistent

with RUS policies, practices, and procedures

for obligations that have been similarly

classified by RUS.

(c) Electronic Funds Transfer. Except as

otherwise prescribed by RUS, the Borrower

shall make all payments on the Note utilizing

electronic funds transfer procedures as

specified by RUS.

(d) Fixed or Variable Rate. The Note shall

bear interest at either a fixed or variable rate

in accordance with the method stated in

Schedule 1 hereto and as more particularly

described in the form of Note attached hereto

as Exhibit A.

Section 3.3. Prepayment

The Borrower has no right to prepay the

Note in whole or in part except such rights,

if any, as are expressly provided for in the

Note. However, prepayment of the Note (and

any penalties) shall be mandatory under

Section [5.3] hereof if the Borrower has used

a Contemporaneous Loan in order to qualify

for the RUS Commitment, and later prepays

the Contemporaneous Loan.

Article IV—Conditions of Lending

Section 4.1. General Conditions

The obligation of RUS to make any

Advance hereunder is subject to satisfaction

of each of the following conditions precedent

on or before the date of such Advance:

(a) Legal Matters. All legal matters incident

to the consummation of the transactions

hereby contemplated shall be satisfactory to

counsel for RUS.

(b) Loan Documents. That RUS receive

duly executed originals of this Agreement

and the other Loan Documents.

(c) Authorization. That RUS receive

evidence satisfactory to it that all corporate

documents and proceedings of the Borrower

necessary for duly authorizing the execution,

delivery and performance of the Loan

Documents have been obtained and are in

full force and effect.

(d) Approvals. That RUS receive evidence

satisfactory to it that all consents and

approvals (including without limitation the

consents referred to in Section [2.1(c)] of this

Agreement) which are necessary for, or

required as a condition of, the validity and

enforceability of each of the Loan Documents

have been obtained and are in full force and

effect.

(e) Event of Default. That no Event of

Default specified in Article VII and no event

which, with the lapse of time or the notice

and lapse of time specified in Article VII

would become such an Event of Default, shall

have occurred and be continuing, or shall

have occurred after giving effect to the

Advance on the books of the Borrower.

(f) Continuing Representations and

Warranties. That the representations and

warranties of the Borrower contained in this

Agreement be true and correct on and as of

the date of such Advance as though made on

and as of such date.

(g) Opinion of Counsel. That RUS receive

an opinion of counsel for the Borrower (who

shall be acceptable to RUS) in form and

content acceptable to RUS.

(h) Mortgage Filing. The Mortgage shall

have been duly recorded as a mortgage on

real property, including after-acquired real

property, and duly filed, recorded or indexed

as a security interest in personal property,

including after acquired personal property,

wherever RUS shall have requested, all in

accordance with applicable law, and the
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations 67415

Borrower shall have caused satisfactory

evidence thereof to be furnished to RUS.

(i) Wholesale Power Contract. That the

Borrower shall not be in default under the

terms of, or contesting the validity of, any

contract for sales for resale that has been

pledged by any entity to RUS as security for

the repayment of any loan made or

guaranteed by RUS under the Act.

(j) Material Adverse Change. That there has

occurred no material adverse change in the

business or condition, financial or otherwise,

of the Borrower and nothing has occurred

which in the opinion of RUS materially and

adversely affects the Borrower’s ability to

meet its obligations hereunder.

(k) Requisitions. That the Borrower shall

requisition all Advances by submitting its

requisition to RUS in form and substance

satisfactory to RUS. Requisitions shall be

made only for the purpose(s) set forth herein.

The Borrower agrees to apply the proceeds of

the Advances in accordance with its loan

application with such modifications as may

be mutually agreed.

(l) Flood Insurance. That for any Advance

used in whole or in part to finance the

construction or acquisition of any building in

any area identified by the Secretary of

Housing and Urban Development pursuant to

the Flood Disaster Protection Act of 1973 (the

‘‘Flood Insurance Act’’) or any rules,

regulations or orders issued to implement the

Flood Insurance Act (‘‘Rules’’) as any area

having special flood hazards, or to finance

any facilities or materials to be located in any

such building, or in any building owned or

occupied by the Borrower and located in

such a flood hazard area, the Borrower has

submitted evidence, in form and substance

satisfactory to RUS, or RUS has otherwise

determined, that (i) the community in which

such area is located is then participating in

the national flood insurance program, as

required by the Flood Insurance Act and any

Rules, and (ii) the Borrower has obtained

flood insurance coverage with respect to such

building and contents as may then be

required pursuant to the Flood Insurance Act

and any Rules.

(m) Compliance With Loan Contract and

Mortgage. That the Borrower is in material

compliance with all provisions of this

Agreement and the Mortgage.

Section 4.2. Special Conditions

The obligation of RUS to make any

Advance hereunder is also subject to

satisfaction, on or before the date of such

Advance, of each of the special conditions,

if any, listed in Schedule 1 hereto.

Article V—Affirmative Covenants

Section 5.1. Generally

Unless otherwise agreed to in writing by

RUS, while this Agreement is in effect,

whether or not any Advance is outstanding,

the Borrower agrees to duly observe each of

the affirmative covenants contained in this

Article:

Section 5.2. Annual Certificates

(a) Performance Under Loan Documents.

The Borrower shall duly observe and perform

all of its obligations under each of the Loan

Documents.

(b) Annual Certification. Within ninety (90)

days after the close of each calendar year,

commencing with the year following the year

in which the initial Advance hereunder shall

have been made, the Borrower shall deliver

to RUS a written statement signed by its

General Manager, stating that during such

year the Borrower has fulfilled all of its

obligations under the Loan Documents

throughout such year in all material respects

or, if there has been a default in the

fulfillment of any such obligations,

specifying each such default known to said

person and the nature and status thereof.

Section 5.3. Simultaneous Prepayment of

Contemporaneous Loans

If the Borrower shall at any time prepay in

whole or in part the Contemporaneous Loan

described on Schedule 1, the Borrower shall

prepay the RUS Note correspondingly in

order to maintain the ratio that the

Contemporaneous Loan bears to the RUS

Commitment. If the RUS Note calls for a

prepayment penalty or premium, such

amount shall be paid but shall not be used

in computing the amount needed to be paid

to RUS under this section to maintain such

ratio. In the case of Contemporaneous Loans

and RUS Notes existing prior to the date of

this Agreement under previous agreements,

prepayments shall be treated as if governed

by this section. Provided, however, in all

cases prepayments associated with

refinancing or refunding a Contemporaneous

Loan pursuant to Article II of the Mortgage

are not considered to be prepayments for

purposes of this Agreement if they satisfy

each of the following requirements:

(a) Principal. The principal amount of such

refinancing or refunding loan is not less than

the amount of loan principal being

refinanced; and

(b) Weighted Average Life. The weighted

average life of the refinancing or refunding

loan is materially equal to the weighted

average remaining life of the loan being

refinanced.

Section 5.4 Rates to Provide Revenue

Sufficient to Meet Coverage Ratios

Requirements

(a) Prospective Requirement. The Borrower

shall design and implement rates for utility

service furnished by it to provide sufficient

revenue (along with other revenue available

to the Borrower in the case of TIER and DSC)

(i) to pay all fixed and variable expenses

when and as due, (ii) to provide and

maintain reasonable working capital, and (iii)

to maintain, on an annual basis, the Coverage

Ratios. In designing and implementing rates

under this paragraph, such rates should be

capable of producing at least enough revenue

to meet the requirements of this paragraph

under the assumption that average weather

conditions in the Borrower’s service territory

shall prevail in the future, including average

Utility System damage and outages due to

weather and the related costs.

(b) Retrospective Requirement. The average

Coverage Ratios achieved by the Borrower in

the 2 best years out of the 3 most recent

calendar years must be not less than any of

the following:

TIER=1.5

DSC=1.25

OTIER=1.1

ODSC=1.1

(c) Prospective Notice of Change in Rates.

The Borrower shall give thirty (30) days prior

written notice of any proposed change in its

general rate structure to RUS if RUS has

requested in writing that it be notified in

advance of such changes.

(d) Routine Reporting of Coverage Ratios.

Promptly following the end of each calendar

year, the Borrower shall report, in writing, to

RUS the TIER, Operating TIER, DSC and

Operating DSC levels which were achieved

during that calendar year.

(e) Reporting Non-achievement of

Retrospective Requirement. If the Borrower

fails to achieve the average levels required by

paragraph (b) of this section, it must

promptly notify RUS in writing to that effect.

(f) Corrective Plans. Within 30 days of

sending a notice to RUS under paragraph (e)

of this section, or of being notified by RUS,

whichever is earlier, the Borrower in

consultation with RUS, shall provide a

written plan satisfactory to RUS setting forth

the actions that shall be taken to achieve the

required Coverage Ratios on a timely basis.

(g) Noncompliance. Failure to design and

implement rates pursuant to paragraph (a) of

this section and failure to develop and

implement the plan called for in paragraph

(f) of this section shall constitute an Event of

Default under this Agreement in the event

that REA so notifies the Borrower to that

effect under section [7.1(d)] of this

Agreement.

Section 5.5. Depreciation Rates

The Borrower shall adopt as its

depreciation rates only those which

have been previously approved for the

Borrower by RUS.

Section 5.6. Property Maintenance

The Borrower shall maintain and

preserve its Utility System in

compliance in all material respects with

the provisions of the Mortgage, RUS

Regulations and all applicable laws.

Section 5.7. Financial Books

The Borrower shall at all times keep,

and safely preserve, proper books,

records and accounts in which full and

true entries shall be made of all of the

dealings, business and affairs of the

Borrower and its Subsidiaries, in

accordance with any applicable RUS

Accounting Requirements.

Section 5.8. Rights of Inspection

The Borrower shall afford RUS,

through its representatives, reasonable

opportunity, at all times during business

hours and upon prior notice, to have

access to and the right to inspect the

Utility System, any other property

encumbered by the Mortgage, and any

or all books, records, accounts, invoices,

contracts, leases, payrolls, canceled

checks, statements and other documents

and papers of every kind belonging to or

in the possession of the Borrower or in
67416 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations

anyway pertaining to its property or

business, including its Subsidiaries, if

any, and to make copies or extracts

therefrom.

Section 5.9. Area Coverage

(a) The Borrower shall make diligent

effort to extend electric service to all

unserved persons within the service

area of the Borrower who (i) desire such

service and (ii) meet all reasonable

requirements established by the

Borrower as a condition of such service.

(b) If economically feasible and

reasonable considering the cost of

providing such service and/or the

effects on consumers’ rates, such service

shall be provided, to the maximum

extent practicable, at the rates and

minimum charges established in the

Borrower’s rate schedules, without the

payment of such persons, other than

seasonal or temporary consumers, of a

contribution in aid of construction. A

seasonal consumer is one that demands

electric service only during certain

seasons of the year. A temporary

consumer is a seasonal or year-round

consumer that demands electric service

over a period of less than five years.

(c) The Borrower may assess

contributions in aid of construction

provided such assessments are

consistent with this section.

Section 5.10. Real Property Acquisition

In acquiring real property, the

Borrower shall comply in all material

respects with the provisions of the

Uniform Relocation Assistance and Real

Property Acquisition Policies Act of

1970 (the ‘‘Uniform Act’’), as amended

by the Uniform Relocation Act

Amendments of 1987, and 49 CFR part

24, referenced by 7 CFR part 21, to the

extent the Uniform Act is applicable to

such acquisition.

Section 5.11. ‘‘Buy American’’ Requirements

The Borrower shall use or cause to be

used in connection with the

expenditures of funds advanced on

account of the Loan only such

unmanufactured articles, materials, and

supplies as have been mined or

produced in the United States or any

eligible country, and only such

manufactured articles, materials, and

supplies as have been manufactured in

the United States or any eligible country

substantially all from articles, materials,

and supplies mined, produced or

manufactured, as the case may be, in the

United States or any eligible country,

except to the extent RUS shall

determine that such use shall be

impracticable or that the cost thereof

shall be unreasonable. For purposes of

this section, an ‘‘eligible country’’ is any

country that applies with respect to the

United States an agreement ensuring

reciprocal access for United States

products and services and United States

suppliers to the markets of that country,

as determined by the United States

Trade Representative.

Section 5.12. Power Requirements Studies

The Borrower shall prepare and use

power requirements studies of its

electric loads and future energy and

capacity requirements in conformance

with RUS Regulations.

Section 5.13. Long Range Engineering Plans

and Construction Work Plans

The Borrower shall develop, maintain

and use up-to-date long-range

engineering plans and construction

work plans in conformance with RUS

Regulations.

Section 5.14. Design Standards, Construction

Standards, and List of Materials

The Borrower shall use design

standards, construction standards, and

lists of acceptable materials in

conformance with RUS Regulations.

Section 5.15. Plans and Specifications

The Borrower shall submit plans and

specifications for construction to RUS

for review and approval, in

conformance with RUS Regulations, if

the construction will be financed in

whole or in part by a loan made or

guaranteed by RUS.

Section 5.16. Standard Forms of Construction

Contracts, and Engineering and Architectural

Services Contracts

The Borrower shall use the standard forms

of contracts promulgated by RUS for

construction, procurement, engineering

services and architectural services in

conformance with RUS Regulations, if the

construction, procurement, or services are

being financed in whole or in part by a loan

being made or guaranteed by RUS.

Section 5.17. Contract Bidding Requirements

The Borrower shall follow RUS contract

bidding procedures in conformance with

RUS Regulations when contracting for

construction or procurement financed in

whole or in part by a loan made or

guaranteed by RUS.

Section 5.18. Nondiscrimination

(a) Equal Opportunity Provisions in

Construction Contracts. The Borrower shall

incorporate or cause to be incorporated into

any construction contract, as defined in

Executive Order 11246 of September 24, 1965

and implementing regulations, which is paid

for in whole or in part with funds obtained

from RUS or borrowed on the credit of the

United States pursuant to a grant, contract,

loan, insurance or guarantee, or undertaken

pursuant to any RUS program involving such

grant, contract, loan, insurance or guarantee,

the equal opportunity provisions set forth in

Exhibit B hereto entitled Equal Opportunity

Contract Provisions.

(b) Equal Opportunity Contract Provisions

Also Bind the Borrower. The Borrower

further agrees that it shall be bound by such

equal opportunity clause in any federally

assisted construction work which it performs

itself other than through the permanent work

force directly employed by an agency of

government.

(c) Sanctions and Penalties. The Borrower

agrees that it shall cooperate actively with

RUS and the Secretary of Labor in obtaining

the compliance of contractors and

subcontractors with the equal opportunity

clause and the rules, regulations and relevant

orders of the Secretary of Labor, that it shall

furnish RUS and the Secretary of Labor such

information as they may require for the

supervision of such compliance, and that it

shall otherwise assist the administering

agency in the discharge of RUS’s primary

responsibility for securing compliance. The

Borrower further agrees that it shall refrain

from entering into any contract or contract

modification subject to Executive Order

11246 with a contractor debarred from, or

who has not demonstrated eligibility for,

Government contracts and federally assisted

construction contracts pursuant to Part II,

Subpart D of Executive Order 11246 and

shall carry out such sanctions and penalties

for violation of the equal opportunity clause

as may be imposed upon contractors and

subcontractors by RUS or the Secretary of

Labor pursuant to Part II, Subpart D of

Executive Order 11246. In addition, the

Borrower agrees that if it fails or refuses to

comply with these undertakings RUS may

cancel, terminate or suspend in whole or in

part this contract, may refrain from extending

any further assistance under any of its

programs subject to Executive Order 11246

until satisfactory assurance of future

compliance has been received from such

Borrower, or may refer the case to the

Department of Justice for appropriate legal

proceedings.

Section 5.19. Financial Reports

The Borrower shall cause to be prepared

and furnished to RUS a full and complete

annual report of its financial condition and

of its operations in form and substance

satisfactory to RUS, audited and certified by

Independent certified public accountants

satisfactory to RUS and accompanied by a

report of such audit in form and substance

satisfactory to RUS. The Borrower shall also

furnish to RUS from time to time such other

reports concerning the financial condition or

operations of the Borrower, including its

Subsidiaries, as RUS may reasonably request

or RUS Regulations require.

Section 5.20. Miscellaneous Reports and

Notices

The Borrower shall furnish to RUS:

(a) Notice of Default. Promptly after

becoming aware thereof, notice of: (i) the

occurrence of any default; and (ii) the receipt

of any notice given pursuant to the Mortgage

with respect to the occurrence of any event

which with the giving of notice or the

passage of time, or both, could become an

‘‘Event of Default’’ under the Mortgage.

(b) Notice of Non-Environmental Litigation.

Promptly after the commencement thereof,
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations 67417

notice of the commencement of all actions,

suits or proceedings before any court,

arbitrator, or governmental department,

commission, board, bureau, agency, or

instrumentality affecting the Borrower

which, if adversely determined, could have

a material adverse effect on the condition,

financial or otherwise, operations, properties

or business of the Borrower, or on the ability

of the Borrower to perform its obligations

under the Loan Documents.

(c) Notice of Environmental Litigation.

Without limiting the provisions of Section

[5.20(b)] above, promptly after receipt

thereof, notice of the receipt of all pleadings,

orders, complaints, indictments, or other

communications alleging a condition that

may require the Borrower to undertake or to

contribute to a cleanup or other response

under laws relating to environmental

protection, or which seek penalties, damages,

injunctive relief, or criminal sanctions

related to alleged violations of such laws, or

which claim personal injury or property

damage to any person as a result of

environmental factors or conditions for

which the Borrower is not fully covered by

insurance, or which, if adversely determined,

could have a material adverse effect on the

condition, financial or otherwise, operations,

properties or business of the Borrower, or on

the ability of the Borrower to perform its

obligations under the Loan Documents.

(d) Notice of Change of Place of Business.

Promptly in writing, notice of any change in

location of its principal place of business or

the office where its records concerning

accounts and contract rights are kept.

(e) Regulatory and Other Notices. Promptly

after receipt thereof, copies of any notices or

other communications received from any

governmental authority with respect to any

matter or proceeding which could have a

material adverse effect on the condition,

financial or otherwise, operations, properties,

or business of the Borrower, or on the ability

of the Borrower to perform its obligations

under the Loan Documents.

(f) Material Adverse Change. Promptly,

notice of any matter which has resulted or

may result in a material adverse change in

the condition, financial or otherwise,

operations, properties, or business of the

Borrower, or the ability of the Borrower to

perform its obligations under the Loan

Documents.

(g) Other Information. Such other

information regarding the condition,

financial or otherwise, or operations of the

Borrower as RUS may, from time to time,

reasonably request.

Section 5.21. Special Construction Account

The Borrower shall hold all moneys

advanced to it by RUS hereunder in trust for

RUS and shall deposit such moneys

promptly after the receipt thereof in a bank

or banks which meet the requirements of

Section [6.7] of this Agreement. Any account

(hereinafter called ‘‘Special Construction

Account’’) in which any such moneys shall

be deposited shall be insured by the Federal

Deposit Insurance Corporation or other

federal agency acceptable to RUS and shall

be designated by the corporate name of the

Borrower followed by the words ‘‘Trustee,

Special Construction Account.’’ Moneys in

any Special Construction Account shall be

used solely for the construction and

operation of the Utility System and may be

withdrawn only upon checks, drafts, or

orders signed on behalf of the Borrower and

countersigned by an executive officer thereof.

Section 5.22. Additional Affirmative

Covenants

The Borrower also agrees to comply with

any additional affirmative covenant(s)

identified in Schedule 1 hereto.

Article VI—Negative Covenants

Section 6.1. General

Unless otherwise agreed to in writing by

RUS, while this Agreement is in effect,

whether or not any Advance is outstanding

hereunder, the Borrower shall duly observe

each of the negative covenants set forth in

this Article.

Section 6.2. Limitations on System

Extensions and Additions

(a) The Borrower shall not extend or add

to its Electric System either by construction

or acquisition without the prior written

approval of RUS if the construction or

acquisition is financed or will be financed, in

whole or in part, by a RUS loan or loan

guarantee.

(b) The Borrower shall not extend or add

to its Electric System with funds from other

sources without prior written approval of

RUS in the case of:

(1) 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;

(2) Existing electric facilities or systems in

service whose purchase price, or capitalized

value in the case of a lease, exceeds ten

percent of the Borrower’s Net Utility Plant;

and

(3) Any project to serve a customer whose

annual Kwh purchases or maximum annual

Kw demand 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 of facilities.

Section 6.3. Limitations on Changing

Principal Place of Business

The Borrower shall not change its principal

place of business or keep property in a

county not shown on a schedule to the

Mortgage if the change would cause the lien

in favor of RUS to become unperfected or fail

to become perfected, as the case may be,

unless, prior thereto, the Borrower shall have

taken all steps required by law in order to

assure that the lien in favor of RUS remains

or becomes perfected, as the case may be,

and, in either event, such lien has the

priority accorded by the Mortgage.

Section 6.4. Limitations on Employment and

Retention of Manager

At any time any Event of Default, or any

occurrence which with the passage of time or

giving of notice would be an Event of Default,

occurs and is continuing the Borrower shall

not employ any general manager of the

Utility System or the Electric System or any

person exercising comparable authority to

such a manager unless such employment

shall first have been approved by RUS. If any

Event of Default, or any occurrence which

with the passage of time or giving of notice

would be an Event of Default, occurs and is

continuing and RUS requests the Borrower to

terminate the employment of any such

manager or person exercising comparable

authority, or RUS requests the Borrower to

terminate any contract for operating the

Utility System or the Electric System, the

Borrower shall do so within thirty (30) days

after the date of such notice. All contracts in

respect of the employment of any such

manager or person exercising comparable

authority, or for the operation of the Utility

System or the Electric System, shall contain

provisions to permit compliance with the

foregoing covenants.

Section 6.5. Limitations on Certain Types of

Contracts

Without the prior approval of RUS in

writing, the Borrower shall not enter into any

of the following contracts:

(a) Construction Contracts. Any contract

for construction or procurement or for

architectural and engineering services in

connection with its Electric System if the

project is financed or will be financed, in

whole or in part, by a RUS loan or loan

guarantee;

(b) Large retail power contracts. Any

contract to sell electric power and energy for

periods exceeding two (2) years if the kWh

sales or kW demand for any year covered by

such contract shall exceed 25 percent of the

Borrower’s total kWh sales or maximum kW

demand for the year immediately preceding

the execution of such contract;

(c) Wholesale power contracts. Any

contract to sell electric power or energy for

resale and any contract to purchase electric

power or energy that, in either case, has a

term exceeding two (2) years;

(d) Power supply arrangements. Any

interconnection agreement, interchange

agreement, wheeling agreement, pooling

agreement or similar power supply

arrangement that has a term exceeding two

(2) years;

(e) System management and maintenance

contracts. Any contract for the management

and operation of all or substantially all of its

Electric System; or

(f) Other contracts. Any contracts of the

type described on Schedule 3.

Section 6.6. Limitations on Mergers and Sale,

Lease or Transfer of Capital Assets

(a) The Borrower shall not consolidate

with, or merge, or sell all or substantially all

of its business or assets, to another entity or

person except to the extent it is permitted to

do so under the Mortgage. The exception

contained in this paragraph (a) is subject to

the additional limitation set forth in

paragraph (b) of this section.

(b) The Borrower shall not, without the

written approval of the Administrator,

voluntarily or involuntarily sell, convey or

dispose of any portion of its business or

assets (including, without limitation, any
67418 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations

portion of its franchise or service territory) to

another entity or person if such sale,

conveyance or disposition could reasonably

be expected to 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 RUS.

Section 6.7. Limitations on Using non-FDIC

Insured Depositories

Without the prior written approval of RUS,

the Borrower shall not place the proceeds of

the Loan or any loan which has been made

or guaranteed by RUS in the custody of any

bank or other depository that is not insured

by the Federal Deposit Insurance Corporation

or other federal agency acceptable to RUS.

Section 6.8. Limitation on Distributions

Without the prior written approval of RUS,

the Borrower shall not in any calendar year

make any Distributions (exclusive of any

Distributions to the estates of deceased

natural patrons) to its members, stockholders

or consumers except as follows:

(a) Equity above 30%. If, after giving effect

to any such Distribution, the Equity of the

Borrower shall be greater than or equal to

30% of its Total Assets; or

(b) Equity above 20%. If, after giving effect

to any such Distribution, the aggregate of all

Distributions made during the calendar year

when added to such Distribution shall be less

than or equal to 25% of the prior year’s

margins.

Provided however, that in no event shall

the Borrower make any Distributions if there

is unpaid when due any installment of

principal of (premium, if any) or interest on

its Notes, if the Borrower is otherwise in

default hereunder or if, after giving effect to

any such Distribution, the Borrower’s current

and accrued assets would be less than its

current and accrued liabilities.

Section 6.9. Limitations on Loans,

Investments and Other Obligations

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 Act and RUS Regulations.

Section 6.10. Depreciation Rates

The Borrower shall not file with or submit

for approval of regulatory bodies any

proposed depreciation rates which are

inconsistent with RUS Regulations.

Section 6.11. Historic Preservation

The Borrower shall not, without approval

in writing by RUS, use any Advance to

construct any facilities which shall involve

any district, site, building, structure or object

which is included in, or eligible for inclusion

in, the National Register of Historic Places

maintained by the Secretary of the Interior

pursuant to the Historic Sites Act of 1935 and

the National Historic Preservation Act of

1966.

Section 6.12. Rate Reductions

Without the prior written approval of RUS,

the Borrower shall not decrease its rates if it

has failed to achieve all of the Coverage

Ratios for the calendar year prior to such

reduction.

Section 6.13. Limitations on Additional

Indebtedness

Except as expressly permitted by Article II

of the Mortgage and subject to the further

limitations expressed in the next section, the

Borrower shall not incur, assume, guarantee

or otherwise become liable in respect of any

debt for borrowed money and Restricted

Rentals (including Subordinated

Indebtedness) other than the following:

(‘‘Permitted Debt’’)

(a) Additional Notes issued in compliance

with Article II of the Mortgage;

(b) Purchase money indebtedness in nonUtility System property, in an amount not

exceeding 10% of Net Utility Plant;

(c) Restricted Rentals in an amount not to

exceed 5% of Equity during any 12

consecutive calendar month period;

(d) Unsecured lease obligations incurred in

the ordinary course of business except

Restricted Rentals;

(e) Unsecured indebtedness for borrowed

money, except when the aggregate amount of

such indebtedness exceeds 15% of Net

Utility Plant and after giving effect to such

unsecured indebtedness the Borrower’s

Equity is less than 30% of its Total Assets;

(f) Debt represented by dividends declared

but not paid; and

(g) Subordinated Indebtedness approved by

RUS.

PROVIDED, However, that the Borrower

may incur Permitted Debt without the

consent of RUS only so long as there exists

no Event of Default hereunder and there has

been no continuing occurrence which with

the passage of time and giving of notice could

become an Event of Default hereunder.

PROVIDED, FURTHER, by executing this

Agreement any consent of RUS that the

Borrower would otherwise be required to

obtain under this Section is hereby deemed

to be given or waived by RUS by operation

of law to the extent, but only to the extent,

that to impose such a requirement of RUS

consent would clearly violate federal laws or

RUS Regulations.

Section 6.14. Limitations on Issuing

Additional Indebtedness Secured Under the

Mortgage

(a) The Borrower shall not issue any

Additional Notes under the Mortgage to

finance Eligible Property Additions without

the prior written consent of RUS unless the

following additional requirements are met in

addition to the requirements set forth in the

Mortgage for issuing Additional Notes:

(1) The weighted average life of the loan

evidenced by such Notes does not exceed the

weighted average of the expected remaining

useful lives of the assets being financed;

(2) The principal of the loan evidenced by

such Notes is amortized at a rate that shall

yield a weighted average life that is not

greater than the weighted average life that

would result from level payments of

principal and interest; and

(3) The principal of the loan being

evidenced by such Notes has a maturity of

not less than 5 years.

(b) The Borrower shall not issue any

Additional Notes under the Mortgage to

refund or refinance Notes without the prior

written consent of RUS unless, in addition to

the requirements set forth in the Mortgage for

issuing Refunding or Refinancing Notes, the

weighted average life of any such Refunding

or Refinancing Notes is not greater than the

weighted average remaining life of the Notes

being refinanced.

(c) Any request for consent from RUS

under this section, shall be accompanied by

a certificate of the Borrower’s manager

substantially in the form attached to this

Agreement as Exhibit C–1 in the case of

Notes being issued under Section [2.01] of

the Mortgage and C–2 in the case of Notes

being issued under Section [2.02] of the

Mortgage.

Section 6.15. Impairment of Contracts

Pledged to RUS

The Borrower shall not materially breach

any obligation to be paid or performed by the

Borrower on any contract, or take any action

which is likely to materially impair the value

of any contract, which has been pledged as

security to RUS by the Borrower or any other

entity.

Section 6.16. Additional Negative Covenants

The Borrower also agrees to comply with

any additional negative covenant(s)

identified in Schedule 1 hereto.

Article VII—Default

Section 7.1. Events of Default

The following shall be Events of Default

under this Agreement:

(a) Representations and Warranties. Any

representation or warranty made by the

Borrower in Article II hereof or any

certificate furnished to RUS hereunder or

under the Mortgage shall prove to have been

incorrect in any material respect at the time

made and shall at the time in question be

untrue or incorrect in any material respect

and remain uncured;

(b) Payment. Default shall be made in the

payment of or on account of interest on or

principal of the Note when and as the same

shall be due and payable, whether by

acceleration or otherwise, which shall remain

unsatisfied for five (5) Business Days;

(c) Borrowing Under the Mortgage in

Violation of the Loan Contract. Default by the

Borrower in the observance or performance

of any covenant or agreement contained in

Section 6.14 of this Agreement.

(d) Other Covenants. Default by the

Borrower in the observance or performance

of any other covenant or agreement contained

in any of the Loan Documents, which shall

remain unremedied for 30 calendar days after

written notice thereof shall have been given

to the Borrower by RUS;

(e) Corporate Existence. The Borrower

shall forfeit or otherwise be deprived of its

corporate charter, franchises, permits,

easements, consents or licenses required to

carry on any material portion of its business;

(f) Other Obligations. Default by the

Borrower in the payment of any obligation,
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations 67419

whether direct or contingent, for borrowed

money or in the performance or observance

of the terms of any instrument pursuant to

which such obligation was created or

securing such obligation;

(g) Bankruptcy. A court having jurisdiction

in the premises shall enter a decree or order

for relief in respect of the Borrower in an

involuntary case under any applicable

bankruptcy, insolvency or other similar law

now or hereafter in effect, or appointing a

receiver, liquidator, assignee, custodian,

trustee, sequestrator or similar official, or

ordering the winding up or liquidation of its

affairs, and such decree or order shall remain

unstayed and in effect for a period of ninety

(90) consecutive days or the Borrower shall

commence a voluntary case under any

applicable bankruptcy, insolvency or other

similar law now or hereafter in effect, or

under any such law, or consent to the

appointment or taking possession by a

receiver, liquidator, assignee, custodian or

trustee, of a substantial part of its property,

or make any general assignment for the

benefit of creditors; and

(h) Dissolution or Liquidation. Other than

as provided in the immediately preceding

subsection, the dissolution or liquidation of

the Borrower, or failure by the Borrower

promptly to forestall or remove any

execution, garnishment or attachment of such

consequence as shall impair its ability to

continue its business or fulfill its obligations

and such execution, garnishment or

attachment shall not be vacated within 30

days. The term ‘‘dissolution or liquidation of

the Borrower’’, as used in this subsection,

shall not be construed to include the

cessation of the corporate existence of the

Borrower resulting either from a merger or

consolidation of the Borrower into or with

another corporation following a transfer of all

or substantially all its assets as an entirety,

under the conditions permitting such actions.

Article VIII—Remedies

Section 8.1. Generally

Upon the occurrence of an Event of

Default, then RUS may pursue all rights and

remedies available to RUS that are

contemplated by this Agreement or the

Mortgage in the manner, upon the

conditions, and with the effect provided in

this Agreement or the Mortgage, including,

but not limited to, a suit for specific

performance, injunctive relief or damages.

Nothing herein shall limit the right of RUS

to pursue all rights and remedies available to

a creditor following the occurrence of an

Event of Default listed in Article VII hereof.

Each right, power and remedy of RUS shall

be cumulative and concurrent, and recourse

to one or more rights or remedies shall not

constitute a waiver of any other right, power

or remedy.

Section 8.2. Suspension of Advances

In addition to the rights, powers and

remedies referred to in the immediately

preceding section, RUS may, in its absolute

discretion, suspend making Advances

hereunder if (i) any Event of Default, or any

occurrence which with the passage of time or

giving of notice would be an Event of Default,

occurs and is continuing; (ii) there has

occurred a change in the business or

condition, financial or otherwise, of the

Borrower which in the opinion of RUS

materially and adversely affects the

Borrower’s ability to meet its obligations

under the Loan Documents, or (iii) RUS is

authorized to do so under RUS Regulations.

Article IX—Miscellaneous

Section 9.1. Notices

All notices, requests and other

communications provided for herein

including, without limitation, any

modifications of, or waivers, requests or

consents under, this Agreement shall be

given or made in writing (including, without

limitation, by telecopy) and delivered to the

intended recipient at the ‘‘Address for

Notices’’ specified below; or, as to any party,

at such other address as shall be designated

by such party in a notice to each other party.

Except as otherwise provided in this

Agreement, all such communications shall be

deemed to have been duly given when

transmitted by telecopier or personally

delivered or, in the case of a mailed notice,

upon receipt, in each case given or addressed

as provided for herein. The Address for

Notices of the respective parties are as

follows:

Rural Utilities Service, United States

Department of Agriculture, Washington,

DC 20250–1500

Fax: (202) xxx-xxxx

Attention: [Administrator]

The Borrower:

The address set forth in Schedule 1 hereto

Section 9.2. Expenses

To the extent allowed by law, the Borrower

shall pay all costs and expenses of RUS,

including reasonable fees of counsel,

incurred in connection with the enforcement

of the Loan Documents or with the

preparation for such enforcement if RUS has

reasonable grounds to believe that such

enforcement may be necessary.

Section 9.3. Late Payments

If payment of any amount due hereunder

is not received at the United States Treasury

in Washington, DC, or such other location as

RUS may designate to the Borrower within

five (5) Business Days after the due date

thereof or such other time period as RUS may

prescribe from time to time in its policies of

general application in connection with any

late payment charge (such unpaid amount

being herein called the ‘‘delinquent amount’’,

and the period beginning after such due date

until payment of the delinquent amount

being herein called the ‘‘late-payment

period’’), the Borrower shall pay to RUS, in

addition to all other amounts due under the

terms of the Note, the Mortgage and this

Agreement, any late-payment charge as may

be fixed by RUS Regulations from time to

time on the delinquent amount for the latepayment period.

Section 9.4. Filing Fees

To the extent permitted by law, the

Borrower agrees to pay all expenses of RUS

(including the fees and expenses of its

counsel) in connection with the filing or

recordation of all financing statements and

instruments as may be required by RUS in

connection with this Agreement, including,

without limitation, all documentary stamps,

recordation and transfer taxes and other costs

and taxes incident to recordation of any

document or instrument in connection

herewith. Borrower agrees to save harmless

and indemnify RUS from and against any

liability resulting from the failure to pay any

required documentary stamps, recordation

and transfer taxes, recording costs, or any

other expenses incurred by RUS in

connection with this Agreement. The

provisions of this subsection shall survive

the execution and delivery of this Agreement

and the payment of all other amounts due

hereunder or due on the Note.

Section 9.5. No Waiver

No failure on the part of RUS to exercise,

and no delay in exercising, any right

hereunder shall operate as a waiver thereof

nor shall any single or partial exercise by

RUS of any right hereunder preclude any

other or further exercise thereof or the

exercise of any other right.

Section 9.6. Governing Law

EXCEPT TO THE EXTENT GOVERNED BY

APPLICABLE FEDERAL LAW, THE LOAN

DOCUMENTS SHALL BE DEEMED TO BE

GOVERNED BY, AND CONSTRUED IN

ACCORDANCE WITH, THE LAWS OF THE

STATE [IN WHICH THE BORROWER IS

INCORPORATED].

Section 9.7. Holiday Payments

If any payment to be made by the Borrower

hereunder shall become due on a day which

is not a Business Day, such payment shall be

made on the next succeeding Business Day

and such extension of time shall be included

in computing any interest in respect of such

payment.

Section 9.8. Rescission

The Borrower may elect not to borrow the

RUS Commitment in which event RUS shall

release the Borrower from its obligations

hereunder, provided the Borrower complies

with such terms and conditions as RUS may

impose for such release and provided also

that if the Borrower has any remaining

obligations to RUS for loans made or

guaranteed by RUS under any Prior Loan

Contracts, RUS may, under Section [9.15] of

this Loan Contract, withhold such release

until all such obligations have been satisfied

and discharged.

Section 9.9. Successors and Assigns

This Agreement shall be binding upon and

inure to the benefit of the Borrower and RUS

and their respective successors and assigns,

except that the Borrower may not assign or

transfer its rights or obligations hereunder

without the prior written consent of RUS.

Section 9.10. Complete Agreement;

Amendments

Subject to RUS Regulations, this

Agreement and the other Loan Documents

are intended by the parties to be a complete

and final expression of their agreement.

However, RUS reserves the right to waive its

rights to compliance with any provision of

this Agreement and the other Loan
67420 Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations

Documents. No amendment, modification, or

waiver of any provision hereof or thereof,

and no consent to any departure of the

Borrower herefrom or therefrom, shall be

effective unless approved in writing by RUS

in the form of either a RUS Regulation or

other writing signed by or on behalf of RUS,

and then such waiver or consent shall be

effective only in the specific instance and for

the specific purpose for which given.

Section 9.11. Headings

The headings and sub-headings contained

in the titling of this Agreement are intended

to be used for convenience only and do not

constitute part of this Agreement.

Section 9.12. Severability

If any term, provision or condition, or any

part thereof, of this Agreement or the

Mortgage shall for any reason be found or

held invalid or unenforceable by any

governmental agency or court of competent

jurisdiction, such invalidity or

unenforceability shall not affect the

remainder of such term, provision or

condition nor any other term, provision or

condition, and this Agreement, the Note, and

the Mortgage shall survive and be construed

as if such invalid or unenforceable term,

provision or condition had not been

contained therein.

Section 9.13. Right of Setoff

Upon the occurrence and during the

continuance of any Event of Default, RUS is

hereby authorized at any time and from time

to time, without prior notice to the Borrower,

to exercise rights of setoff or recoupment and

apply any and all amounts held or hereafter

held, by RUS or owed to the Borrower or for

the credit or account of the Borrower against

any and all of the obligations of the Borrower

now or hereafter existing hereunder or under

the Note. RUS agrees to notify the Borrower

promptly after any such setoff or recoupment

and the application thereof, provided that the

failure to give such notice shall not affect the

validity of such setoff, recoupment or

application. The rights of RUS under this

section are in addition to any other rights and

remedies (including other rights of setoff or

recoupment) which RUS may have. Borrower

waives all rights of setoff, deduction,

recoupment or counterclaim.

Section 9.14. Schedules and Exhibits

Each Schedule and Exhibit attached hereto

and referred to herein is each an integral part

of this Agreement.

Section 9.15. Prior Loan Contracts

It is understood and agreed that with

respect to all loan agreements previously

entered into by and between RUS and the

Borrower (hereinafter being referred to as

‘‘Prior Loan Contracts’’) the Borrower shall be

required, after the date hereof, to meet

affirmative and negative covenants as set

forth in this Agreement rather than those set

forth in the Prior Loan Contracts. In addition,

any remaining obligation of RUS to make

additional advances on promissory notes of

the Borrower that have been previously

delivered to RUS under Prior Loan Contracts

shall, after the date hereof, be subject to the

conditions set forth in this Agreement. In the

event of any conflict between any provision

set forth in a Prior Loan Contract and any

provision in this Agreement, the

requirements as set forth in this Agreement

shall apply. Nothing in this section shall,

however, eliminate or modify any special

condition, special affirmative covenant or

special negative covenant, if any, unless

specifically agreed to in writing by RUS.

Section 9.16. Authority of Representatives of

RUS

In the case of any consent, approval or

waiver from RUS that is required under this

Agreement or any other Loan Document,

such consent, approval or waiver must be in

writing and signed by an authorized RUS

representative to be effective. As used in this

section, ‘‘authorized RUS representative’’

means the Administrator of RUS, and also

means a person to whom the Administrator

has officially delegated specific or general

authority to take the action in question.

Section 9.17. Term

This Agreement shall remain in effect until

one of the following two events has occurred:

(a) The Borrower and RUS replace this

Agreement with another written agreement;

or

(b) All of the Borrower’s obligations under

the prior loan contracts and this Agreement

have been discharged and paid.

IN WITNESS WHEREOF, the parties hereto

have caused this Agreement to be duly

executed as of the day and year first above

written.

lllllllllllllllllllll

(Name of Borrower)

(SEAL)

By lllllllllllllllllll

President

Attest: lllllllllllllllll

Secretary

RURAL UTILITIES SERVICE

By lllllllllllllllllll

Administrator

Schedule 1

[citations subject to change]

1. The purpose of this loan is

llllllllll and such other

purposes that RUS may agree to in writing in

order to carry out the purposes of the Rural

Electrification Act.

2. The Mortgage shall mean the Restated

Mortgage and Security Agreement, dated as

of llllllllll, between the

Borrower and RUS, as it may have been or

shall be supplemented, amended,

consolidated, or restated from time to time.

3. The governmental authority referred to

in Section [2.1(c)] is llllllllll.

4. The exception being taken to the

representations in Section [2.1(e)] concerning

material compliance with laws is as follows:

llllllllll.

5. The litigation referred to in Section

[2.1(f)] is described as follows:

llllllllll.

6. The date of the Borrower’s financial

information referred to in Section [2.1(h)] is

llllllllll.

7. The principal place of business of the

Borrower referred to in Section [2.1(i)] is

llllllllll.

8. All of the property of the Borrower is

located in the counties of

llllllllll.

9. The subsidiary (or subsidiaries) referred

to in Section [2.1(k)] is (are):

llllllllll.

10. The Contemporaneous Loan referred to

in Section [5.3] is described as follows:

llllllllll.

Lender: lllllllllllllllll

Amount: llllllllllllllll

Year of Final Maturity: llllllllll

11. The RUS Commitment referred to in

the definitions means a loan in the principal

amount of $llllllll which is being

made by RUS to the Borrower at the lll

Hardship Rate lll Municipal Rate

(CHECK ONE) pursuant to the Rural

Electrification Act and RUS Regulations.

12. Amortization of Advance shall be based

upon the method indicated below:

lll level principal

lll level debt service

lll other

13. The SPECIAL condition(s) referred to

in Section [4.2] is (are):

llllllllll.

14. The additional AFFIRMATIVE

covenant(s) referred to in Section [5.22]

is (are) as follows: llllllll. 15.

The additional NEGATIVE covenant(s)

referred to in Section [6.16] is (are) as

follows: llllllllll. 16. The address of the Borrower referred to

in Section [9.1]. is llllllllll.

Schedule 2—Existing Liens

The Existing Liens referred to in Section

[2.1(g)] are as follows:

[INSERT DESCRIPTION OF EXISTING

LIENS, IF ANY, HERE]

Schedule 3—Additional Contracts

The additional contracts referred to in

Section [6.5(f)] are described as follows:

[INSERT LIST OF ANY ADDITIONAL

CONTRACTS HERE]

Exhibit A—Form of Promissory Note

[INSERT EITHER MUNICIPAL or HARDSHIP

RATE PROMISSORY NOTE FORM HERE]

Exhibit B—Equal Opportunity Contract

Provisions

During the performance of this contract,

the contractor agrees as follows:

(a) The contractor shall not discriminate

against any employee or applicant for

employment because of race, color, religion,

sex or national origin. The contractor shall

take affirmative action to ensure that

applicants are employed, and that employees

are treated during employment without

regard to their race, color, religion, sex or

national origin. Such action shall include,

but not be limited to the following:

employment, upgrading, demotion or

transfer, recruitment or recruitment

advertising; layoff or termination; rates of pay

or other forms of compensation; and

selection for training, including
Federal Register / Vol. 60, No. 250 / Friday, December 29, 1995 / Rules and Regulations 67421

apprenticeship. The contractor agrees to post

in conspicuous places, available to

employees and applicants for employment,

notices to be provided setting forth the

provisions of this nondiscrimination clause.

(b) The contractor shall, in all solicitations

or advertisements for employees placed by or

on behalf of the contractor, state that all

qualified applicants shall receive

consideration for employment without regard

to race, color, religion, sex or national origin.

(c) The contractor shall send to each labor

union or representative of workers with

which he has a collective bargaining

agreement or other contract or

understanding, a notice to be provided

advising the said labor union or workers’

representative of the contractor’s

commitments under this section, and shall

post copies of the notice in conspicuous

places available to employees and applicants

for employment.

(d) The contractor shall comply with all

provisions of Executive Order 11246 of

September 24, 1965, and of the rules,

regulations and relevant orders of the

Secretary of Labor.

(e) The contractor shall furnish all

information and reports required by

Executive Order 11246 of September 24,

1965, and by the rules, regulations and orders

of the Secretary of Labor, or pursuant thereto,

and shall permit access to his books, records

and accounts by the administering agency

and the Secretary of Labor for purposes of

investigation to ascertain compliances with

such rules, regulations and orders.

(f) In the event of the contractor’s

noncompliance with the non-discrimination

clauses of this contract or with any of the

said rules, regulations or orders, this contract

may be cancelled, terminated or suspended

in whole or in part and the contractor may

be declared ineligible for further Government

contracts or federally assisted construction

contracts in accordance with procedures

authorized in Executive Order 11246 of

September 24, 1965, and such other

sanctions may be imposed and remedies

invoked as provided in said Executive Order

or by rule, regulation or order of the

Secretary of Labor, or as otherwise provided

by law.

(g) The contractor shall include the

provisions of paragraphs (a) through (g) in

every subcontract or purchase order unless

exempted by rules, regulations or orders of

the Secretary of Labor issued pursuant to

section 204 of Executive Order 11246, dated

September 24, 1965, so that such provisions

shall be binding upon each subcontractor or

vendor. The contractor shall take such action

with respect to any subcontract or purchase

order as the administering agency may direct

as a means of enforcing such provisions,

including sanctions for noncompliance:

Provided, however, that in the event a

contractor becomes involved in, or is

threatened with, litigation with a

subcontractor or vendor as a result of such

direction by the agency, the contractor may

request the United States to enter into such

litigation to protect the interests of the

United States.

Exhibit C–1—Manager’s Certificate Required

Under Loan Contract Section 6.14 for

Additional Notes

On behalf on llllllllll [Name

of Borrower] llllllllll I hereby

certify that the Additional Note or Notes to

be issued under Section [2.01] of the

Mortgage on or about llllllllll

[Date Note or Notes are to be Signed]

llllllllll meet all of the

requirements of Section [6.14] of the Loan

Contract, namely:

(a) The weighted average life of the loan

evidenced by such Notes (llll years)

does not exceed the weighted average of the

expected remaining useful lives of the assets

being financed (llll years) as evidenced

by the attached calculation of said weighted

average lives.

(b) The principal of the loan evidenced by

such Notes shall either be [check one and

provide evidence in the second case]:

lll (1) repaid based on level payments

of principal and interest throughout the life

of the loan, or

lll (2) amortized at a rate that shall

yield a weighted average life that is not

greater than the weighted average life that

would result from level payments of

principal and interest throughout the life of

the loan as evidenced by the attached

analysis of said weighted average lives.

(c) The principal of the loan evidenced by

such Notes has a maturity of not less than 5

years.

[Signed] llllllllllllllll

[Dated] lllllllllllllllll

[Name] lllllllllllllllll

[Title] lllllllllllllllll

[Name and Address of Borrower] lllll

lllllllllllllllllllll

lllllllllllllllllllll

Exhibit C–2—Manager’s Certificate Required

Under Loan Contract Section 6.14 for

Refinancing Notes

On behalf on llllllllll [Name

of Borrower] llllllllll I hereby

certify that the Additional Note or Notes to

be issued under Section [2.02] of the

Mortgage on or about llllllllll

[Date Note or Notes are to be Signed]

llllllllll meet the requirement

of Section [6.14] of the Loan Contract that the

weighted average life of such Notes is not

greater than the weighted average remaining

life of the Notes being refinanced, as

evidenced by the attached calculation of said

weighted average lives.

[Signed] llllllllllllllll

[Dated] lllllllllllllllll

[Name] lllllllllllllllll

[Title] lllllllllllllllll

[Name and Address of Borrower] lllll

lllllllllllllllllllll

lllllllllllllllllllll

Dated: December 18, 1995.

Jill Long Thompson,

Under Secretary, Rural Economic and

Community Development.

[FR Doc. 95–31227 Filed 12–28–95; 8:45 am]

BILLING CODE 3410–15–P