[Federal Register Volume 61, Number 245 (Thursday, December 19, 1996)]
[Rules and Regulations]
[Pages 66867-66874]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32084]
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DEPARTMENT OF AGRICULTURE
Rural Utilities Service
7 CFR Parts 1710, 1714, 1717, and 1786
RIN 0572-AB24
RUS Policies on Mergers and Consolidations of Electric Borrowers
AGENCY: Rural Utilities Service, USDA.
ACTION: Final rule.
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SUMMARY: The Rural Utilities Service (RUS) is streamlining its
regulations through amendments that are intended to encourage electric
borrowers to merge, consolidate, or enter into similar arrangements
that benefit borrowers and rural communities and are consistent with
the interests of the Government as a secured lender. These amendments
are part of an ongoing RUS project to modernize agency policies and
procedures in order to provide borrowers with the flexibility they need
to continue providing reliable electric service at reasonable cost in
rural areas, while maintaining the integrity of Government loans.
DATES: This rule is effective January 21, 1997.
FOR FURTHER INFORMATION CONTACT: Sue Arnold, Financial Analyst, U.S.
Department of Agriculture, Rural Utilities Service, Room 2230-S, 1400
Independence Avenue, SW., STOP 1522, Washington, DC 20250-1522.
Telephone: 202-720-0736. FAX: 202-720-4120. E-mail:
sarnold@rus.usda.gov.
SUPPLEMENTARY INFORMATION: The Rural Utilities Service (RUS) is taking
this regulatory action as part of the National Performance Review
program to eliminate unnecessary regulations and improve those that
remain in force. This regulatory action has been determined to be
significant for the purposes of Executive Order 12866, Regulatory
Planning and Review, and, therefore has been reviewed by the Office of
Management and Budget (OMB). The Administrator of RUS has determined
that a rule relating to the RUS electric loan program is not a rule as
defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) for
which RUS published a general notice of proposed rulemaking pursuant to
5 U.S.C. 553(b), or any other law. Therefore, the Regulatory
Flexibility Act does not apply to this proposed 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 12988, Civil Justice Reform. RUS has determined that this rule
meets the applicable standards provided in Sec. 3 of the Executive
Order.
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
[[Page 66868]]
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 number 0572-0114.
Background
In response to rapid changes in the regulatory and business
environment of the electric industry, many electric borrowers are
exploring the possibility of mergers. It is clear that the success of
the RUS electric program in supporting rural infrastructure and
economic development is directly tied to the ability of borrowers to
respond rapidly to new business challenges, including opportunities to
merge.
On August 7, 1996, at 61 FR 41025, RUS published proposed rules to
update RUS policies on mergers. (The term ``merger'' as used in this
rule refers generically to mergers, consolidations, and similar
actions.) The intention of this action is to encourage borrowers to
merge, consolidate, or enter into similar agreements that benefit
borrowers and are consistent with the interests of RUS as a secured
lender. The rules proposed: (1) Transitional assistance measures to
assist borrowers during the transition period before long-term merger
benefits can be realized; (2) A streamlined application process for
mergers that require RUS approval; and (3) Documentation that RUS as a
secured lender needs in order to conduct business with any newly merged
entity.
RUS received a total of eight comments on the proposed rule. Three
comments are from individual electric distribution borrowers. Two of
these borrowers said in their comments that they are negotiating a
merger with each other.
Other commenters include a three-state association of distribution
borrowers; a group of three power supply (G&T) borrowers in Texas; an
individual G&T borrower in Indiana; the National Rural Electric
Cooperative Association (NRECA), a national organization representing
RUS electric borrowers; and the National Rural Utilities Cooperative
Finance Corporation (CFC), a private sector supplemental lender to RUS
borrowers.
Commenters generally supported the proposed rules.
Transitional Assistance
RUS recognizes that short-term financial stresses can follow even
the most beneficial mergers. To help stabilize electric rates during
this period, enhance the credit quality of outstanding loans made or
guaranteed by the Government, and otherwise ease the transition period
before long-term efficiencies and economies can be realized, the rules
proposed new policies for transitional assistance following mergers.
RUS will consider requests for transitional assistance after each
merger. For example, if three borrowers form a single successor through
two consecutive mergers, transitional assistance may be available,
subject to RUS regulations, following each of the mergers. For
transitional assistance available for a closed-ended period after a
merger, the availability period in some cases will begin tolling on the
effective date of the most recent merger even if that date is prior to
the effective date of this rule.
The proposed rule included several types of transitional
assistance, and all commenters offered suggestions.
Organization of the Rule
To avoid any confusion about borrower eligibility for transitional
assistance, RUS has redrafted 7 CFR Part 1717 in the final rule
slightly. The section designated as Sec. 1717.154 in the proposed rule
has been split into three sections: Secs. 1717.154, 1717.155, and
1717.156, and language has been added clearly stating which borrowers
are eligible for which types of transitional assistance. Sections
1717.155-1717.159 of the proposed rule are redesignated accordingly in
the final rule.
Transitional Assistance in General
One commenter believes that ``successful mergers create their own
benefits.'' The commenter expressed concerns that offering transitional
assistance to newly merged entities implies that bigger is
automatically better and is unfair to cooperatives whose members choose
not to merge.
As stated in 7 CFR 1717.150(b), RUS encourages electric borrowers
to consider mergers when such action is likely to contribute to greater
operating efficiency and financial soundness. RUS does not intend to
convey the impression that bigger is always better. RUS emphasizes that
transitional assistance is not intended to reward borrowers simply for
growing. It is intended, rather, to ease the transition period before
long-term merger benefits can be realized.
Other commenters noted that agreements short of merger, such as
shared services initiatives, may provide benefits similar to those of a
merger. They asked that RUS consider transitional assistance following
such agreements. RUS agrees that shared services agreements can offer
substantial benefits. However, transitional assistance is intended to
help mitigate the short term financial stresses associated with
mergers. Such stresses are not generally associated with shared service
agreements, and RUS cannot, therefore, justify providing transitional
assistance in these cases.
CFC suggested that RUS make loan funds available for ``soft costs''
of mergers, such as studies and consultant fees. RUS believes that
prudent borrowers should analyze various business opportunities as a
matter of course. RUS does not believe that such studies are an
appropriate use of loan funds.
NRECA suggested that RUS offer ``more aggressive incentives'' to
merger candidates in appropriate situations. These more aggressive
incentives could include a write down of principal and interest on RUS
loans and loan guarantees as an incentive to mergers between a
financially strong borrower and a financially weak borrower pursuant to
Section 748 of the Federal Agriculture Improvement and Reform Act of
1996 (Pub.L. 104-127), which amended Section 331(b)(4) of the
Consolidated Farm and Rural Development Act (7 U.S.C. 1981(b)(4)). RUS
is developing a separate rulemaking to implement this new law.
Addressing write downs in today's final rule without an extended period
for public comment would be premature.
NRECA also suggested that, as a counterpart to offering priority
loan processing, RUS also offer priority processing of lien
accommodations. Existing regulations at 7 CFR 1717.859 establish
timeframes for RUS action on lien accommodations. Priority loan
processing is intended to address situations where loan approval is
delayed because requests for loan funds from eligible borrowers
temporarily exceed the amount of loan funds appropriated. This
situation does not exist for lien accommodations. RUS believes that no
change to existing rules for lien accommodations is needed.
Loan Processing Priority
RUS loans are generally processed in chronological order based on
the date the complete application is received in the regional or
division office. The rule proposed, in 7 CFR 1710.119 and
1717.154(a)(1), to alter this policy to
[[Page 66869]]
offer priority processing on loans to newly merged borrowers. RUS
would, at the borrower's request, offer loan processing priority for
the first loan following a merger if the loan is approved by RUS not
later than 5 years after the effective date of the merger. For any
subsequent loans approved during those 5 years, RUS may offer loan
processing priority, under certain conditions.
One commenter wondered about the exact meaning of the term ``loan
processing priority.'' Loan processing priority means simply that a
loan application will be moved as close to the front of the processing
queue as the Administrator determines to be appropriate, considering
such factors as the urgency of applications in hand and the loan
authority for the fiscal year.
Another commenter supported the proposal provided ``that this loan
processing priority should not have a detrimental effect on other
borrowers.'' RUS believes that loan processing priority under the
limited conditions in the rule can be implemented in a way that is fair
and equitable to all borrowers.
Supplemental Financing Requirements
RUS generally requires that an applicant for a municipal rate loan
obtain a portion of its debt financing from a supplemental source
without an RUS guarantee. The rule proposed in 7 CFR 1710.110 and
1717.154(b) to waive the supplemental financing requirement for the
first RUS loan following a merger between active distribution borrowers
if the loan period does not exceed 2 years, and the loan is approved by
RUS not later than 5 years after the effective date of the merger. For
any subsequent loans approved during those 5 years, or if the loan
period is longer than 2 years, RUS may reduce or waive supplemental
financing under the conditions set out in the rule.
Most commenters support this amendment. One commenter requested
that waiver of supplemental financing apply automatically if the loan
period is as long as 4 years. The limit of 2 years for automatic waiver
is to avoid undue processing delays for all borrowers during periods
when the demand for loan funds is high and funding levels are
uncertain. RUS will consider waiver of supplemental financing on a
case-by-case basis if the loan period is longer than 2 years as set
forth in Sec. 1717.154(b) of the final rule.
Two distribution borrowers that are considering merging with each
other asked for a clarification of RUS policy on supplemental financing
in connection with future loans, after the complete waiver on the first
loan. Under long-standing RUS policy, borrowers who in 1980 had either
extremely low consumer density or a very high adjusted plant revenue
ratio are now required to obtain only 10 percent of their debt
financing from a supplemental source. For most borrowers the required
supplemental financing portion is determined at the time of loan
approval and may be as high as 30 percent. See existing rules at 7 CFR
1710.110(c). One of these two commenters is now grandfathered as a
``90/10'' borrower, and the commenters wonder whether they will lose
this benefit by merging.
RUS will grandfather 90/10 status for that portion of the system
that enjoyed this benefit prior to the merger. In other words, the
portion of a loan that is for facilities to serve consumers in
territory that were served by the 90/10 borrower immediately prior to
the merger will be eligible for 90 percent RUS financing; the
supplemental financing portion on loans to serve the rest of the system
will be determined at the time of loan approval pursuant to 7 CFR
1710.110(c)(1)(ii). The final rule adds this provision to 7 CFR
1710.110(c)(1).
Coverage Ratios
RUS, as a secured lender, requires that borrowers maintain adequate
levels of coverage ratios, including times interest earned ratio
(TIER); operating times interest earned ratio (OTIER); debt service
coverage (DSC); and operating debt service coverage (ODSC). Under the
proposed rule in 7 CFR 1710.114 and 1717.154(b)(2), RUS could approve,
on a case-by-case basis, a phase-in plan allowing a distribution
borrower to project and achieve lower levels for up to 5 years
following a merger, provided that a minimum TIER level of 1.00 is
maintained, and that trends are generally favorable.
NRECA believes that a cash DSC, similar, but not identical to ODSC
is a better measure of the borrower's ability to meet its debt service
payments than TIER. NRECA urged RUS to replace the minimum TIER
requirement with a minimum cash DSC requirement in any phase-in plan
for coverage ratios.
As stated in 7 CFR 1717.155 of the final rule, RUS will require any
borrower requesting a phase-in plan to submit a financial forecast
demonstrating the borrower's ability to meet its debt service payments.
In addition, the rule leaves RUS the option of requiring a minimum
level of DSC and other coverage ratios in an individual phase in plan.
RUS believes that a minimum TIER level of 1.00 is the appropriate
across the board rule of thumb for a phase-in plan.
Advance of Funds From Insured Loans
The fund advance period, which is the period during which funds
from an insured loan may be advanced to a borrower, generally
terminates automatically after 4 or 5 years. See 7 CFR 1714.56.
However, the execution and filing of legal documents after a merger
often takes some time, and RUS cannot advance funds to a successor
until the documents are executed and filed. Therefore, the rule
proposed in 7 CFR 1714.56(c) and 7 CFR 1717.154(c), to generically
extend this period for preexisting loans with unadvanced funds on the
effective date of a merger.
One commenter wondered whether the automatic termination date would
be generically extended after a merger if the period had been extended
once already. The answer is yes. This extension is granted because of
the time requirements for legal completion of a merger. Section 7 CFR
1717.156 of the final rule clarifies this point.
Other commenters requested that the fund advance period be
generically extended by 5 years instead of the 2 years proposed. RUS
believes that the 2-year extension provides adequate time for
preparation and filing of merger documents. In cases where more time is
needed, the borrower may request an additional extension pursuant to 7
CFR 1714.56(c).
Finally, one commenter requested that a longer fund advance period
be available to all borrowers, regardless of whether the borrower has
merged. As already noted, any borrower may apply for an extension under
7 CFR 1714.56(c).
Applicability of Transitional Assistance to Power Supply (G&T)
Borrowers
Under the proposed rule, certain types of transitional assistance
would be available only to distribution borrowers. The G&T borrowers
who commented and NRECA believe that mergers involving G&T's can offer
many of the same benefits as mergers between distribution borrowers.
Two of the types of transitional assistance limited to distribution
borrowers are waiver of supplemental financing and a longer period for
reimbursement of general funds and interim financing. Since loans to
G&T's are generally much larger than loans to distribution systems, RUS
cannot offer these types of incentives to power supply borrowers
without sharply reducing the funds available for smaller distribution
systems.
[[Page 66870]]
These commenters also requested that a phase-in period for coverage
ratios also be available to G&T's. Required minimum levels of TIER and
DSC for G&T's are 1.05 and 1.00, respectively. RUS rules do not
establish required minimum levels for OTIER or ODSC for G&T's. See 7
CFR 1710.114(b)(2). It would not be prudent for RUS to allow lower
levels of TIER or DSC.
Borrowers Who Prepaid RUS Loans Pursuant to 7 CFR Part 1786
Pursuant to 7 CFR part 1786, subparts C, E and F, borrowers may use
private financing or internally generated funds to prepay RUS direct or
insured loans at a discounted present value. Borrowers who prepay under
this rule may not apply for or receive any new direct or insured loans
from RUS for a period after the prepayment, except at the
Administrator's discretion. Questions arise about the eligibility of a
newly merged system where one of the merging entities had ``bought
out'' of RUS, and the other is still an active borrower.
Under the proposed rule at 7 CFR 1717.156 and 1786.167(a), the
Administrator would exercise discretionary authority to approve insured
loans to finance facilities to serve only consumers that were,
immediately prior to the merger, served by the active borrower; that
is, the borrower that did not prepay. Several commenters questioned
this policy, noting, among other things the administrative burden
involved in separating facilities eligible for RUS financing from
facilities that are not.
RUS believes that the administrative burden of separating
facilities eligible for RUS financing from those not eligible is not as
great as it appears. Locations of new facilities and consumers should
be part of the borrower's construction work plans and should be clear
in the loan application documents. If there are questions, in cases
where, for example, a single distribution line will serve some
consumers that are located in territory formerly served by the borrower
that was active immediately prior to the merger, and other consumers in
territory that was served by the former borrower that prepaid, RUS will
consider any reasonable method for allocating funds.
However, RUS has redrafted other portions of the final rule in
order to encourage beneficial mergers between active borrowers and
former borrowers. According to the proposed rule, certain types of
transitional assistance (waiver of supplemental financing, longer
period for reimbursement of general funds, and phase in plan for
coverage ratios, 7 CFR 1717.154(a)(2) and 1717.154(3)(b)(2),
respectively) would be available only if all parties to the merger are
active distribution borrowers. The final rule at 7 CFR 1717.154(b) and
1717.154(c), and 1717.155(b), extends availability for this assistance
to mergers where at least one of the parties is a former distribution
borrower and all other parties are active distribution borrowers if the
merger is effective after December 19, 1996.
RUS Procedures
The requirement that RUS, as a secured lender, generally approve
mergers is in the loan documents and RUS regulations. Under certain
conditions, set out in 7 CFR 1717.615 and 1710.7(c), as published
December 29, 1995, at 60 FR 67395, borrowers may enter into such
mergers without RUS approval.
One commenter addressed the timeframe for RUS processing. This
commenter urged RUS ``to require action by RUS within a certain
designated time period.'' According to the proposed rule at 7 CFR
1717.157 (final rule at section 1717.159), borrowers must submit
applications for RUS approval of mergers no later than 90 days prior to
the proposed effective date. RUS understands that mergers are time
sensitive and intends to make every effort to act on these applications
in timely fashion.
Another commenter questioned the need for rate information in 7 CFR
1717.158(e) of the proposed rule, in cases where rates schedules will
not change after the merger. RUS agrees, and section 1717.160(e) of the
final rule now notes that a statement that no change to rate schedules
is planned will suffice, if such is the case.
Rescission of Obsolete Directive
Effective January 21, 1997, REA Bulletin 115-2, Merger and
Consolidation of Electric Borrowers, is rescinded. RUS has determined
that this bulletin, issued November 9, 1972, is obsolete.
List of Subjects
7 CFR Part 1710
Electric power, Electric utilities, Loan programs--energy, Rural
areas.
7 CFR Part 1714
Electric Power, Loan programs--energy, Rural areas.
7 CFR Part 1717
Administrative practice and procedure, Electric power, Electric
utilities, Intergovernmental relations, Investments, Lien
accommodation, Lien subordinations, Loan programs--energy, Reporting
and recordkeeping requirements, Rural development.
7 CFR Part 1786
Accounting, Administrative practice and procedure, Electric
utilities.
For the reasons set out 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 1710.109 is amended by redesignating paragraphs (c)
introductory text, (c)(1), (c)(2), and (c)(3) as paragraphs (c)(1)
introductory text, (c)(1)(i), (c)(1)(ii), and (c)(1)(iii),
respectively, and by adding a new paragraph (c)(2) to read as follows:
Sec. 1710.109 Reimbursement of general funds and interim financing.
* * * * *
(c) * * *
(2) Policies for reimbursement of general funds and interim
financing following certain mergers, consolidations, and transfers of
systems substantially in their entirety are set forth in 7 CFR
1717.154.
* * * * *
3. Section 1710.110 is amended by revising the first sentence of
paragraph (a) and adding a new paragraph (c)(1)(iii):
Sec. 1710.110 Supplemental financing.
(a) Except in the case of financial hardship as determined by the
Administrator, and following certain mergers, consolidations, and
transfers of systems substantially in their entirety as set forth in 7
CFR 1717.154, applicants for a municipal rate loan will be required to
obtain a portion of their loan funds from a supplemental source without
an RUS guarantee, in the amounts set forth in paragraph (c) of this
section. * * *
* * * * *
(c) * * *
(1) * * *
(iii) If a distribution borrower enters into a merger,
consolidation, or transfer of system substantially in its entirety, and
the provisions of 7 CFR 1717.154(b) do not apply, required supplemental
financing will be determined as follows for loans approved by RUS after
[[Page 66871]]
December 19, 1996. If one of the merging parties met the criteria in
paragraph (c)(1)(i) of this section prior to the effective date of the
merger consolidation or transfer, the borrower will be required to
obtain supplemental financing equal to 10 percent of any loan funds
requested for facilities to serve consumers located in the territory
formerly served by the ``paragraph (c)(1)(i)'' borrower. The required
amount of supplemental financing for the rest of the loan will be
determined according to the provisions of paragraph (c)(1)(ii) of this
section.
* * * * *
4. Section 1710.114 is amended by adding a sentence at the end of
paragraph (b)(3) to read as follows:
Sec. 1710.114 TIER, DSC, OTIER and ODSC requirements.
* * * * *
(b) * * *
(3) * * * Policies for coverage ratios following certain mergers,
consolidations, and transfers of systems substantially in their
entirety are in 7 CFR 1717.155.
* * * * *
5. Section 1710.119 is amended by revising paragraph (b)(3) to read
as follows:
Sec. 1710.119 Loan processing priorities.
* * * * *
(b) * * *
(3) To finance the capital needs of borrowers that are the result
of a merger, consolidation, or a transfer of a system substantially in
its entirety, provided that the merger, consolidation, or transfer has
either been approved by RUS or does not need RUS approval pursuant to
the borrower's loan documents (See 7 CFR 1717.154); or
* * * * *
PART 1714--PRE-LOAN POLICIES AND PROCEDURES FOR INSURED ELECTRIC
LOANS
6. The authority citation for part 1714 continues to read as
follows:
Authority: 7 U.S.C. 901-950(b); Pub.L. 99-591, 100 Stat. 3341;
Pub.L. 103-353, 108 Stat. 3178 (7 U.S.C. 6941 et seq.)
7. Section 1714.56 is amended by revising the introductory text of
paragraph (c) to read as follows:
Sec. 1714.56 Fund advance period.
* * * * *
(c) The Administrator may agree to an extension of the fund advance
period for loans approved on or after June 1, 1984, if the borrower
demonstrates to the satisfaction of the Administrator that the loan
funds continue to be needed for approved loan purposes (i.e.,
facilities included in an RUS approved construction work plan).
Policies for extension of the fund advance period following certain
mergers, consolidations, and transfers of systems substantially in
their entirety are set forth in 7 CFR 1717.156.
* * * * *
PART 1717--POST-LOAN POLICIES AND PROCEDURES COMMON TO INSURED AND
GUARANTEED ELECTRIC LOANS
8. The authority citation for part 1717 continues to read as
follows:
Authority: 7 U.S.C. 901-950(b); Pub.L. 103-354, 108 Stat. 3178
(7 U.S.C. 6941 et seq.), unless otherwise noted.
9. Subpart D is added to part 1717 to read as follows:
Subpart D--Mergers and Consolidations of Electric Borrowers
Sec.
1717.150 General.
1717.151 Definitions.
1717.152 Required documentation for all mergers.
1717.153 Transitional assistance.
1717.154 Transitional assistance in connection with new loans.
1717.155 Transitional assistance affecting new and preexisting
loans.
1717.156 Transitional assistance affecting preexisting loans.
1717.157 Requests for transitional assistance.
1717.158 Mergers with borrowers who prepaid RUS loans.
1717.159 Applications for RUS approval of mergers.
1717.160 Application contents.
1717.161 Application process.
Subpart D--Mergers and Consolidations of Electric Borrowers
Sec. 1717.150 General.
(a) This subpart establishes RUS policies and procedures for
mergers of electric borrowers. These policies and procedures are
intended to provide borrowers with the flexibility to negotiate and
enter into mergers that offer advantages to the borrowers and to rural
communities, and adequately protect the integrity and credit quality of
RUS loans and loan guarantees.
(b) Consistent with prudent lending practices, the maintenance of
adequate security for RUS loans and loan guarantees, and the objectives
of the Rural Electrification Act of 1936, as amended, (7 U.S.C. 901 et
seq.) (RE Act), RUS encourages electric borrowers to consider mergers
when such action is likely to contribute, in the long-term, to greater
operating efficiency and financial soundness. Borrowers are
specifically encouraged to explore mergers that are likely to enhance
the ability of the successor to provide reliable electric service at
reasonable cost to RE Act beneficiaries.
(c) Pursuant to the loan documents and RUS regulations, certain
mergers are subject to RUS approval. See Sec. 1717.615.
(d) Since RUS must take action in order to advance funds and
otherwise conduct business with a successor, RUS encourages borrowers
to consult RUS early in the process regardless of whether RUS approval
of the merger is required. RUS will provide technical assistance and
guidance to borrowers to help expedite the processing of their requests
and to help resolve potential problems early in the process.
Sec. 1717.151 Definitions.
The definitions set forth in 7 CFR 1710.2 are applicable to this
subpart unless otherwise stated. In addition, for the purpose of this
subpart, the following terms shall have the following meanings:
Active borrower means an electric borrower that has, on the
effective date, an outstanding insured or guaranteed loan from RUS for
rural electrification, and whose eligibility for future RUS financing
is not restricted pursuant to 7 CFR part 1786.
Active distribution borrower means an electric distribution
borrower that has, on the effective date, an outstanding insured or
guaranteed loan from RUS for rural electrification, and whose
eligibility for future RUS financing is not restricted pursuant to 7
CFR part 1786.
Consolidation see merger.
Coverage ratios means collectively TIER, OTIER, DSC and ODSC, as
these terms are defined in 7 CFR 1710.2.
Effective date means the date a merger is effective pursuant to
applicable state law.
Former distribution borrower means any organization that (1) sells
or intends to sell electric power and energy at retail;
(2) at one time had an outstanding loan made or guaranteed by RUS,
or its predecessor the Rural Electrification Administration (REA) for
rural electrification; and
(3) either repaid such loans at face value or prepaid pursuant to 7
CFR part 1786.
Loan documents means the mortgage (or other security instrument
acceptable to RUS), the loan contract, and the promissory note(s)
entered into between the borrower and RUS.
Merger means: (1) A consolidation where two or more companies are
[[Page 66872]]
extinguished and a new successor is created, acquiring the assets,
liabilities, franchises and powers of those passing out of existence;
(2) A merger where one company is absorbed by another, the former
ceasing to exist as a separate business entity, and the latter
retaining its own identity and acquiring the assets, liabilities,
franchises and powers of the former; or
(3) A transfer of mortgaged property by one company to another
where the transferee acquires substantially as an entirety the assets,
liabilities, franchises, and powers of the transferor.
New loan means a loan to a successor approved by RUS on or after
the effective date.
Preexisting loan means a loan to a borrower approved by RUS prior
to, and outstanding on the effective date.
Successor means the entity that continues as the surviving business
entity as of the effective date, and acquires all the assets,
liabilities, franchises, and powers of the entity or entities ceasing
to exist as of the effective date.
Transitional assistance means financial relief provided to
borrowers by RUS during a limited period of time following a merger.
Sec. 1717.152 Required documentation for all mergers.
In order for RUS to advance funds, send bills, and otherwise
conduct business with a successor, the documents listed in this section
must be submitted to RUS regardless of the need for RUS approval of the
merger. Borrowers are responsible for ensuring that these documents are
received by RUS in timely fashion. In cases of mergers that require RUS
approval, or cases where borrowers must submit requests for
transitional assistance, the documents listed in this section may be
combined with the documents required by Secs. 1717.157 and/or 1717.160
where appropriate.
(a) Prior to the effective date, borrowers must submit:
(1) A transmittal letter on corporate letterhead signed by the
manager of each active borrower that is a party to the proposed merger
indicating the borrower's intention to merge and tentative timeframes,
including the proposed effective date;
(2) An original certified board resolution from each party to the
proposed merger affirming the board's support of the merger;
(3) All documents necessary to evidence the merger pursuant to
applicable law. Examples include plan of merger, articles of merger,
amended articles of incorporation, bylaws, and notices and filings
required by law. These documents may be copies of documents filed
elsewhere, unless otherwise specified by RUS; and
(4) A letter addressed to the Administrator from the counsel of at
least one of the active borrowers briefly describing the merger and
indicating the relevant statutes under which the merger will be
consummated.
(b) On or after the effective date, borrowers must submit:
(1) An opinion of counsel from the successor addressing, among
other things, any pending litigation, proper authorization and
consummation of the merger, proper filing and perfection of RUS'
security interest, and all approvals required by law. RUS will provide
the form of the opinion of counsel to the successor;
(2) A letter signed by the manager of the successor advising RUS of
the effective date of the merger; the corporate name, address, and
phone number; the names of the officers of the successor; and the
taxpayer identification number; and
(3) Evidence of proper filing and perfection of RUS' security
interest, as instructed by RUS, and an executed loan contract.
Sec. 1717.153 Transitional assistance.
RUS recognizes that short-term financial stresses can follow even
the most beneficial mergers. To help stabilize electric rates, enhance
the credit quality of outstanding loans made or guaranteed by the
Government, and otherwise ease the transition period before the long-
term efficiencies and economies of a merger can be realized, RUS may
approve one or more types of transitional assistance to a successor
under the conditions set forth in this part.
Sec. 1717.154 Transitional assistance in connection with new loans.
Requests for transitional assistance in connection with new loans
may be submitted to RUS no later than the loan application.
(a) Loan processing priority. (1) RUS loans are generally processed
in chronological order based on the date the complete application is
received in the regional or division office. At the borrower's request,
RUS will offer loan processing priority for the first loan to a
successor, provided that the loan is approved by RUS not later than 5
years after the effective date of the merger. For any subsequent loans
approved during those 5 years, RUS may offer loan processing priority.
In reviewing requests for loan processing priority on subsequent loans,
RUS will consider the loan authority for the fiscal year, the
borrower's projected cash flows, its electric rates and rate disparity,
and the likely mitigating effects of priority loan processing. See 7
CFR 1710.108 and 1710.119.
(2) Loan processing priority is available following any merger
where at least one of the merging parties is an active borrower.
(b) Supplemental financing. (1) RUS generally requires that an
applicant for a municipal rate loan obtain a portion of its debt
financing from a supplemental source without an RUS guarantee. See 7
CFR 1710.110. RUS will, at the borrower's request, waive the
requirement to obtain supplemental financing for the first RUS loan
approved after the effective date if that first loan is a municipal
rate loan whose loan period does not exceed 2 years, and the loan is
approved by RUS not later than 5 years after the effective date. For
any subsequent loans approved during these 5 years, or if the borrower
requests a loan period longer than 2 years, RUS may, subject to the
availability of loan funds, waive or reduce the amount of supplemental
financing required. In reviewing requests to reduce or waive
supplemental financing on subsequent loans or on loans with a loan
period longer than 2 years, RUS will consider the differences in
interest rates between RUS and supplemental loans and the impacts of
this difference on the borrower's projected cash flows and its electric
rates and rate disparity. If significant differences would result, the
waiver will be granted.
(2) Waiver of supplemental financing may be available if:
(i) All parties to the merger are active distribution borrowers, or
(ii) At least one of the merging parties is an active distribution
borrower, all merging parties are either active distribution borrowers
or former distribution borrowers, and the merger is effective after
December 19, 1996.
(c) Reimbursement of general funds and interim financing. (1)
Borrowers may request RUS loan funds to reimburse general funds and/or
interim financing used to finance equipment and facilities included in
a RUS approved construction work plan or amendment if the construction
was completed immediately preceding the current loan period. This
reimbursement period is generally limited to 24 months. See 7 CFR
1710.109. RUS may, in connection with the first RUS loan approved after
the effective date, approve a reimbursement period of up to 48 months
prior to the current loan period if the loan is approved not later than
5 years after the
[[Page 66873]]
effective date. In reviewing requests for this longer reimbursement
period, RUS will consider the stresses that the transaction and other
costs of entering into the merger places on the borrower's rates and
cash flows, and the mitigating effects of more generous reimbursement.
(2) A longer reimbursement period may be available if:
(i) All parties to the merger are active distribution borrowers, or
(ii) At least one of the merging parties is an active distribution
borrower, all merging parties are either active distribution borrowers
of former distribution borrowers, and the merger is effective after
December 19, 1996.
Sec. 1717.155 Transitional assistance affecting new and preexisting
loans.
Requests for transitional assistance affecting new and preexisting
loans must be received by RUS no later than 2 years after the effective
date.
(a) Section 12 deferments. (1) Section 12 of the RE Act (7 U.S.C.
912) allows RUS to extend the time of payment of interest or principal
of RUS loans. Section 12 deferments do not extend the final maturity of
the loan; lower payments during the deferment period result in higher
payments later. Therefore, RUS may approve a Section 12 deferment of
loan payments of up to 5 years only if such deferments will help to
avoid substantial increases in retail electric rates during the
transition period, without placing borrowers in financial stress after
the deferment period.
(2) Section 12 deferment may be available following any merger
where at least one of the merging parties is an active borrower.
(b) Coverage ratios. Required levels for coverage ratios are set
forth in 7 CFR 1710.114 and in the loan documents. RUS may approve a
plan, on a case by case basis, that provides for a phase-in period for
these coverage ratios of up to 5 years from the effective date. Under
such a plan the successor would be permitted to project and achieve
lower levels for one or more of these coverage ratios during the phase-
in period.
(1) A phase-in plan for coverage ratios must provide a pro forma
level for each ratio during each year of the phase-in period and be
supported by a financial forecast covering a period of not less than 10
years from the effective date of the merger. The plan must demonstrate
that a minimum TIER level of 1.00 will be achieved in each year, that
trends will be generally favorable, that the borrower will achieve the
levels required in its loan documents and RUS regulations by the end of
the phase-in period, and that these levels will be maintained in
subsequent years.
(2) In reviewing phase-in plans for coverage ratios, RUS will
review rates, rate disparity, and likely mitigating effects of the
proposed phase-in plan.
(3) The borrower is responsible for obtaining approvals of
supplemental lenders.
(4) Upon RUS approval of a phase-in plan, the levels in that plan
will be substituted for the levels required in the borrower's
preexisting loan documents and will be incorporated in any new loan or
security documents.
(5) A phase in plan for coverage ratios may be available if:
(i) All parties to the merger are active distribution borrowers, or
(ii) At least one of the merging parties is an active distribution
borrower, all merging parties are either active distribution borrowers
or former distribution borrowers, and the merger is effective after
December 19, 1996.
Sec. 1717.156 Transitional assistance affecting preexisting loans.
The fund advance period for an insured loan, which is the period
during which RUS may advance loan funds to a borrower, terminates
automatically after a specific period of time. See 7 CFR 1714.56. If,
on the effective date the original fund advance period or the fund
advance period as extended pursuant to 7 CFR 1714.56(c), on any
preexisting RUS loan to any of the active borrowers involved in a
merger has not terminated, such fund advance period shall be
automatically lengthened by 2 years. On the borrower's request RUS will
prepare documents necessary for the advance of loan funds. RUS will
prepare documents for the borrower's execution that will reflect this
extension and will provide the legal authority for RUS to advance funds
to the successor.
Sec. 1717.157 Requests for transitional assistance.
(a) If the merger requires RUS approval, the borrower should, where
possible, indicate that it desires transitional assistance at the time
it requests approval of the merger. The formal request for transitional
assistance must be received by RUS as specified in Secs. 1717.155 and
171.156. Documents listed in this section may be combined with the
documents required by Secs. 1717.152 and/or 1717.160 where appropriate.
If the request for transitional assistance is submitted at the same
time as a loan application, documents listed in this section may be
combined with the loan application documents where appropriate. See 7
CFR part 1710, subpart I. A request for transitional assistance must
include:
(1) Transmittal letter(s) formally listing the types of
transitional assistance requested. If the request is submitted before
the effective date, a transmittal letter must be signed by the manager
of each party to the transaction. If the request is submitted on or
after the effective date, a transmittal letter must be signed by the
manager of the successor. Transmittal letter(s) must be signed
originals on corporate letterhead stationery;
(2) Board resolution(s). If the request is submitted before the
effective date, a separate board resolution must be submitted from each
entity involved in the merger. If the request is submitted on or after
the effective date, a board resolution from the successor must be
submitted. Each board resolution must be a certified original;
(3) A merger plan, financial forecasts, and any available studies
such as net present value analyses showing the anticipated costs and
benefits of the merger and likely timeframes for the merger. The merger
plan must clearly identify those benefits that cannot be achieved
without a merger, and those benefits that can be achieved through other
means;
(4) If the transitional assistance requires RUS approval, the type
and extent of the mitigation that the transitional assistance is
expected to provide; and
(5) Other information that may be relevant.
(b) Borrowers are responsible for ensuring that requests for
transitional assistance are complete and sound in form and substance
when they are submitted to RUS. After submitting a request, borrowers
shall promptly notify RUS of any changes or events that materially
affect the request or any information in the request.
(c) In considering whether to approve requests for transitional
assistance, RUS will evaluate the costs and benefits of the merger; the
type and extent of the likely transitional stress; whether the
transitional assistance requested is likely to materially mitigate such
stress; and the likely impacts on electric rates and on the security of
RUS loans. Review factors applicable to each type of transitional
assistance are set forth in Secs. 1717.154-1717.156.
Sec. 1717.158 Mergers with borrowers who prepaid RUS loans.
In some cases, an active distribution borrower may merge with a
borrower that has prepaid RUS debt at a discount pursuant to 7 CFR part
1786, and whose eligibility for future RUS financing is
[[Page 66874]]
thereby restricted. During the period when the restrictions on future
financing are in effect, the successor will be eligible for RUS loans
to finance facilities to serve consumers located in the territory that
was served by the active distribution borrower immediately prior to the
effective date, provided that other requirements for loan eligibility
are met.
Sec. 1717.159 Applications for RUS approvals of mergers.
If a proposed merger requires RUS approval according to RUS
regulations and/or the loan documents executed by any of the active
borrowers involved, the application must be submitted to RUS not later
than 90 days prior to the effective date of the proposed borrower
action. A distribution borrower should consult with its assigned RUS
general field representative, and a power supply borrower with the
Director, Power Supply Division for general information prior to
submitting the request.
Sec. 1717.160 Application contents.
An application for RUS approval of a merger must include the
documents listed in this section. Documents listed in this section may
be combined with the documents required by Secs. 1717.152 and/or
1717.157 where appropriate.
(a) Transmittal letters signed by the managers of all borrowers and
non-borrowers who are parties to the proposed merger. These letters
must include the actual corporate name, address, and taxpayer
identification number of all parties to the proposed merger. The
transmittal letters must be signed originals on corporate letterhead
stationery.
(b) Resolutions from the boards of directors of all borrowers and
non-borrowers who are parties to the proposed merger. This document is
the formal request by each entity for RUS approval of the proposed
merger. The board resolution must include a description of the proposed
merger, including timeframes, and authorization for RUS to release
appropriate information to supplemental or other lenders, and for these
lenders to release appropriate information to RUS. Each board
resolution must be a certified original.
(c) Evidence that the proposed merger will result in a viable
entity, and that the security of outstanding RUS loans will not be
adversely affected by the action. This evidence shall include financial
forecasts, and any available studies such as net present value analyses
covering a period of not less than 10 years from the effective date of
the merger, as well as information about any threatened actions by
other parties that could adversely affect the financial condition of
any of the parties to the proposed merger, or of the successor. Such
threatened actions may include annexations or other actions affecting
service territory, loads, rates or other such matters.
(d) Regulatory information about pending federal or state
proceedings pertaining to any of the parties that could have material
effects on the successor.
(e) Rate information. Distribution and power supply borrowers shall
submit schedules of proposed rates after the merger, including the
effects of the proposed action on rates and the status of any pending
rate cases before a state regulatory authority. The rates of power
supply borrowers are subject to RUS approval. If rates are not
projected to change after the merger, a statement to that effect will
suffice.
(f) Area coverage and line extension policies: If any distribution
systems are parties to the proposed merger, a statement of proposed
area coverage and line extension policies for the successor.
Sec. 1717.161 Application process.
(a) Borrowers are responsible for ensuring that their applications
for RUS approval of a merger are complete and sound in form and
substance when they are submitted to RUS. After submitting an
application, borrowers shall promptly notify RUS of any changes or
events that materially affect the application or any information in the
application.
(b) In reviewing borrower requests for approval of mergers, RUS
will consider the likely effects of the action on the ability of the
successor to provide reliable electric service at reasonable cost to RE
Act beneficiaries and on the security of outstanding RUS loans. Among
the factors RUS will consider are whether the proposed merger is likely
to:
(1) Contribute to greater operating efficiency and financial
soundness;
(2) Mitigate high electric rates and or rate disparity;
(3) Help borrowers to diversify their loads or otherwise hedge
risks;
(4) Have beneficial effects on rural economic development in the
community served by the borrower, such as diversifying the economic
base or alleviating unemployment; and
(5) Provide other benefits consistent with the purposes of the RE
Act.
(c) RUS will not approve a merger if, in the sole judgment of the
Administrator, such action is likely to have an adverse effect on the
credit quality of outstanding loans made or guaranteed by the
Government. RUS will thoroughly review each request for approval of
such action, including review of the feasibility and security of
outstanding Government loans according to the standards in 7 CFR
1710.112 and 1710.113, respectively, and in other RUS regulations.
(d) RUS will keep the borrowers apprised of the progress of their
applications.
PART 1786--PREPAYMENT OF RUS GUARANTEED AND INSURED LOANS TO
ELECTRIC AND TELEPHONE BORROWERS
Subpart F--Discounted Prepayments on RUS Electric Loans
10. The authority citation for subpart F continues to read as
follows:
Authority: 7 U.S.C. 901 et seq.; Pub.L. 103-534, 108 Stat. 3178
(7 U.S.C. 6941 et seq.)
11. Section 1786.167 is amended by adding a sentence at the end of
paragraph (a) to read as follows:
Sec. 1786.167 Restrictions to additional RUS financing.
(a) * * * Special provisions for mergers involving a borrower that
has prepaid pursuant to this subpart are in 7 CFR 1717.158.
* * * * *
Dated: December 13, 1996.
Jill Long Thompson,
Under Secretary, Rural Development.
[FR Doc. 96-32084 Filed 12-18-96; 8:45 am]
BILLING CODE 3410-15-P
