[Federal Register Volume 60, Number 250 (Friday, December 29, 1995)]
[Rules and Regulations]
[Pages 67396-67421]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31227]




[[Page 67395]]

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Part II





Department of Agriculture





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Rural Utilities Service



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7 CFR Part 1710, et al.



Loan Policies and Security Documents for Electric Borrowers; Final Rule

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

[[Page 67396]]


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.

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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 state-wide 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:
    <bullet> Section 5.15 of the proposed loan contract requiring the 
borrower to acquire and construct the electric system in conformance 
with RUS 

[[Page 67397]]
regulations has been eliminated. RUS' more specific oversight interests 
regarding extensions and additions and construction standards are 
retained in other sections.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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).
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> The new loan contract and 7 CFR 1717.609 eliminate RUS 
approval over general managers except for borrowers in default.
    <bullet> 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.
    <bullet> The new distribution mortgage and 7 CFR 1717.610 eliminate 
RUS approval over compensation of board members.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> Subpart R of 7 CFR 1717 provides borrowers advance 
approval of lien accommodations if certain objective tests are met.
    <bullet> Subpart N of 7 CFR 1717 totally exempts borrowers from RUS 
approval of their investments, loans and guarantees if certain 
objective tests are 

[[Page 67398]]
met. Some 84 percent of distribution borrowers currently qualify for 
the exemption.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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, Sec. 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, Sec. 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, Sec. 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 Sec. 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 Sec. 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 multi-state 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 

[[Page 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, Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 1717.606 is intended to override the 
flexibility provided by the dollar thresholds in part 1726. It is not, 
and Sec. 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 

[[Page 67400]]
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 PRE-LOAN 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:


Sec. 1710.2  Definitions and rules of construction.

    (a) Definitions. * * *
* * * * *
    DSC means Debt Service Coverage of the borrower calculated as:
    [GRAPHIC][TIFF OMITTED]TR29DE95.000
    
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 

[[Page 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:
[GRAPHIC][TIFF OMITTED]TR29DE95.001

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:
[GRAPHIC][TIFF OMITTED]TR29DE95.002

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:
[GRAPHIC][TIFF OMITTED]TR29DE95.003

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:


Sec. 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'': 

[[Page 67402]]

    (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 

[[Page 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 RUS-approved 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 Sec. 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 Secs. 1710.201 and 1710.202;
    (iii) Requirement that borrowers follow RUS construction standards 
and use RUS accepted materials, as set forth 

[[Page 67404]]
in Sec. 1710.41, Sec. 1710.45, and 7 CFR part 1728;
    (iv) Requirement that borrowers maintain, on an ongoing basis, a 
long-range engineering plan and a construction work plan, as set forth 
in Sec. 1710.250(b);
    (v) Requirement that borrowers set rates for electric service 
sufficient to maintain certain coverage ratios, as set forth in 
Sec. 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, Secs. 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.


Sec. 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:


Sec. 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 

[[Page 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:


Sec. 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.


Sec. 1710.251  [Amended]

    7. Section 1710.251 is amended by removing the words ``and RUS'' 
from the first sentence of paragraph (a).


Sec. 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


Sec. 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 

[[Page 67406]]
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.


Sec. 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.


Sec. 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.


Sec. 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. 

[[Page 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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]


Sec. 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.


Sec. 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.


Sec. 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 Sec. 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 

[[Page 67408]]
engineering services financed by RUS are set forth in other RUS 
regulations.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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:


Sec. 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 

[[Page 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 Sec. 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:


Sec. 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 Sec. 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:


Sec. 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 Sec. 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 

[[Page 67410]]
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 
Sec. 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:


Sec. 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 Sec. 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 Sec. 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:


Sec. 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 Sec. 1717.854(c) and all applicable provisions 
of Secs. 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:


Sec. 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 Sec. 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
* * * * *


Sec. 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.


Sec. 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 Long-Term 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


Sec. 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 

[[Page 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.


Sec. 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.


Sec. 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.


Sec. 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; 

[[Page 67412]]

    (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.


Sec. 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 ____________________, 199____, between 
____________________ (``Borrower''), a corporation organized and 
existing under the laws of the State of ____________________ (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. 

[[Page 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:
[GRAPHIC][TIFF OMITTED]TR29DE95.004

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:
[GRAPHIC][TIFF OMITTED]TR29DE95.005

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 

[[Page 67414]]
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 

[[Page 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 

[[Page 67416]]
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, 

[[Page 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 

[[Page 67418]]
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 non-Utility 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, 

[[Page 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 late-payment 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 

[[Page 67420]]
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.

----------------------------------------------------------------------
(Name of Borrower)

(SEAL)

By---------------------------------------------------------------------
President

Attest:----------------------------------------------------------------
Secretary

RURAL UTILITIES SERVICE

By---------------------------------------------------------------------
Administrator

Schedule 1

[citations subject to change]

    1. The purpose of this loan is ____________________ 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 ____________________, 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 
____________________.
    4. The exception being taken to the representations in Section 
[2.1(e)] concerning material compliance with laws is as follows: 
____________________.
    5. The litigation referred to in Section [2.1(f)] is described 
as follows: ____________________.
    6. The date of the Borrower's financial information referred to 
in Section [2.1(h)] is ____________________.
    7. The principal place of business of the Borrower referred to 
in Section [2.1(i)] is ____________________.
    8. All of the property of the Borrower is located in the 
counties of ____________________.
    9. The subsidiary (or subsidiaries) referred to in Section 
[2.1(k)] is (are): ____________________.
    10. The Contemporaneous Loan referred to in Section [5.3] is 
described as follows: ____________________.

Lender:----------------------------------------------------------------

Amount:----------------------------------------------------------------

Year of Final Maturity:------------------------------------------------

    11. The RUS Commitment referred to in the definitions means a 
loan in the principal amount of $________________ which is being 
made by RUS to the Borrower at the ______ Hardship Rate ______ 
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:

______ level principal

______ level debt service

______ other

    13. The SPECIAL condition(s) referred to in Section [4.2] is 
(are): ____________________.
    14. The additional AFFIRMATIVE covenant(s) referred to in Section 
[5.22] is (are) as follows: ________________. 15. The additional 
NEGATIVE covenant(s) referred to in Section [6.16] is (are) as follows: 
____________________.
    16. The address of the Borrower referred to in Section [9.1]. is 
____________________.

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 

[[Page 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 ____________________ [Name of Borrower] 
____________________ I hereby certify that the Additional Note or 
Notes to be issued under Section [2.01] of the Mortgage on or about 
____________________ [Date Note or Notes are to be Signed] 
____________________ 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 (________ years) does not exceed the weighted average of the 
expected remaining useful lives of the assets being financed 
(________ 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]:
    ______ (1) repaid based on level payments of principal and 
interest throughout the life of the loan, or
    ______ (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]---------------------------------------------------------------

[Dated]----------------------------------------------------------------

[Name]-----------------------------------------------------------------

[Title]----------------------------------------------------------------

[Name and Address of Borrower]-----------------------------------------

----------------------------------------------------------------------

----------------------------------------------------------------------

Exhibit C-2--Manager's Certificate Required Under Loan Contract Section 
6.14 for Refinancing Notes

    On behalf on ____________________ [Name of Borrower] 
____________________ I hereby certify that the Additional Note or 
Notes to be issued under Section [2.02] of the Mortgage on or about 
____________________ [Date Note or Notes are to be Signed] 
____________________ 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]---------------------------------------------------------------

[Dated]----------------------------------------------------------------

[Name]-----------------------------------------------------------------

[Title]----------------------------------------------------------------

[Name and Address of Borrower]-----------------------------------------

----------------------------------------------------------------------
----------------------------------------------------------------------
    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