[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]]
_______________________________________________________________________
Part II
Department of Agriculture
_______________________________________________________________________
Rural Utilities Service
_______________________________________________________________________
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:
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.
Section 6.3 of the proposed loan contract granting RUS
general approval rights over borrower expenditures for legal,
engineering, and supervisory services has been eliminated. Certain
limited approval rights, such as approval of contracts for engineering
services when the construction is financed by RUS, have been retained.
Section 6.7 of the proposed loan contract granting RUS
general approval rights over the acquisition, construction, or
procurement of generating facilities and existing facilities and
systems has been eliminated. Limited approval authority with respect to
such facilities and systems has been retained in section 6.2.
Section 9.14 of the proposed loan contract authorizing RUS
to appoint construction supervisors if construction does not proceed in
accordance with the loan documents has been eliminated. RUS approval
authority over general managers in cases of default has been retained.
Paragraph (m) of section 4.1 of the proposed loan contract
requiring compliance with RUS regulations as one of the conditions for
the borrower to receive loan advances has been revised to require
compliance with the loan contract and mortgage.
Section 5.9 of the proposed loan contract on area coverage
has been revised by eliminating the reference to ``to the extent
required by RUS'' and in its place specifically stating the borrower's
obligations and discretion with regard to contributions in aid of
construction. These requirements are the same as those in existing 7
CFR part 1710.103(b).
Section 5.14 of the proposed loan contract has been
revised to eliminate the requirement that borrowers use construction
plans and specifications in conformance with RUS regulations for
projects funded from non-RUS sources. Thus, while distribution
borrowers will continue to be required to follow RUS design and
construction standards and the list of accepted materials regardless of
the source of funding, plans and specifications for construction not
financed by an RUS loan or loan guarantee will not be subject to agency
review and approval.
Section 5.16 of the proposed loan contract has been
revised to limit to only those projects financed by RUS the requirement
that borrowers use forms of contracts promulgated by RUS for
construction, procurement, and engineering and architectural services.
Section 5.17 of the proposed loan contract has been
revised to limit to only those projects financed by RUS the requirement
that borrowers follow RUS contract bidding requirements.
Section 6.2 of the proposed loan contract has been revised
to limit RUS' authority to approve electric system extensions and
additions to extensions and additions financed by RUS, and only 3
categories of extensions and additions funded from other sources:
generating facilities, existing facilities and systems in service, and
projects to serve a customer whose annual kWh purchases or maximum
annual kW demand in the foreseeable future is projected to exceed 25
percent of the borrower's total kWh sales or maximum kW demand in the
year immediately preceding the acquisition or start of construction of
facilities. In addition, significance thresholds have been added to the
first two categories, such that RUS approval will not be required if
the generating and related facilities do not exceed the lesser of 5
megawatts or 30 percent of the borrower's equity, and if the existing
facilities and systems in service do not exceed 10 percent of the
borrower's net utility plant.
Section 6.5(a) of the proposed loan contract has been
revised to limit to projects financed by RUS the requirement that
contracts for construction, procurement, and engineering and
architectural services be subject to RUS approval.
As to the recommendation that a set of criteria be developed and
included in the loan contract to exempt ``creditworthy'' borrowers from
most remaining operational controls, further analysis and experience is
needed before a reasoned decision can be made. RUS believes it would be
very difficult to develop a set of criteria that would be appropriate
for all borrowers and for all or most operational controls. Such an
approach also raises significant issues regarding the flexibility that
would be available to tailor individual loan contracts to deal with
individual lending circumstances and specific credit risks. RUS
believes it is only prudent to gain some actual experience with the new
loan contract and mortgage before deciding whether such a significant
step is warranted.
The changes to the proposed loan contract cited above go a long way
toward further reducing RUS oversight over operational decisions. Those
changes are in addition to the reductions in operational controls in
the new distribution mortgage, the new loan contract as proposed and
now codified, and various regulations published by RUS over the past
few years. Following are some examples of these reforms in operational
oversight, which in most cases apply not just to borrowers that execute
the new loan documents but also, pursuant to 7 CFR part 1717 subpart M,
to borrowers under the existing ``old'' loan documents:
Article II of the new distribution mortgage authorizes
borrowers to issue additional secured debt and to refinance secured
debt without mortgagee approval if certain objective tests are met.
The new loan contract and 7 CFR 1717.604 limit RUS
approval authority over borrowers' long-range engineering plans and
construction work plans to construction financed by RUS.
The new loan contract and 7 CFR 1717.608 limit RUS
approval rights over power supply contracts, interconnection
agreements, wheeling agreements, and pooling agreements to contracts
and agreements having a term of more than 2 years. Moreover, RUS
authority to approve system management and maintenance contracts is
limited to contracts covering all or substantially all of the
borrower's electric system.
The new loan contract and 7 CFR 1717.609 eliminate RUS
approval over general managers except for borrowers in default.
The new loan contract and 7 CFR 1717.612 eliminate RUS
approval authority over the bank used by the borrower, and require only
that RUS loan funds be deposited in a bank insured by the Federal
Deposit Insurance Corporation or other Federal agency acceptable to
RUS.
The new distribution mortgage and 7 CFR 1717.610 eliminate
RUS approval over compensation of board members.
Section 3.10 of the new distribution mortgage and 7 CFR
1717.615 authorize borrowers to merge or consolidate without mortgagee
approval if certain objective tests are met.
Section 3.11 of the new distribution mortgage and 7 CFR
1717.616 give borrowers greater latitude to sell, lease, or transfer
mortgaged property without mortgagee approval.
The new loan contract and 7 CFR 1717.617 reduce from 40
percent to 30 percent the level of equity a borrower must have before
being subject to RUS approval of cash distributions.
Subpart R of 7 CFR 1717 provides borrowers advance
approval of lien accommodations if certain objective tests are met.
Subpart N of 7 CFR 1717 totally exempts borrowers from RUS
approval of their investments, loans and guarantees if certain
objective tests are
[[Page 67398]]
met. Some 84 percent of distribution borrowers currently qualify for
the exemption.
7 CFR 1717.613 exempts borrowers from obtaining RUS
approval of purchases of data processing and system control equipment
if the equipment is not financed by RUS.
The new loan contract and 7 CFR 1717.614 reduce from 90
days to 30 days the prior notice to RUS required for prospective
changes in the borrower's general rate structure, and require such
notice only when specifically requested in writing by RUS.
Recently published 7 CFR part 1726 carries out several
reforms in RUS oversight of electric system construction policies and
procedures relating to construction financed by RUS. For example:
--The requirement that RUS approve construction subcontracts was
eliminated.
--The dollar thresholds for determining when competitive bidding must
be used generally were raised.
--The dollar thresholds for determining when RUS approval of a contract
is required were raised.
--The requirement that RUS approve contracts for headquarters
facilities was eliminated.
--The requirement that RUS approve amendments to construction contracts
was eliminated in certain cases.
--The number of forms that must be submitted to RUS for closing out
construction contracts was reduced.
It was also recommended that the exemptions and waivers of controls
set forth in 7 CFR part 1717 Subpart M be removed entirely and
transferred to the new loan contract. Subpart M has been retained since
it provides exemptions and waivers of controls contained in existing
loan contracts and mortgages. If it were removed, only borrowers that
execute the new loan contract and new mortgage would have the benefit
of these changes.
As noted above, the narrower forms of RUS' approval rights and
operational controls proposed in Subpart M have been adopted in the
final loan contract. Furthermore, several additional provisions of the
new mortgage and loan contract providing borrowers with greater
latitude that were not included in proposed Subpart M have been
included in final Subpart M and will be available to borrowers with the
``old'' forms of loan documents. For example, 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
