[Federal Register Volume 59, Number 19 (Friday, January 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1987]
[Federal Register: January 28, 1994]
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DEPARTMENT OF AGRICULTURE
Rural Electrification Administration
7 CFR Parts 1710 and 1717
Exemptions of REA Operational Controls
AGENCY: Rural Electrification Administration, USDA.
ACTION: Interim rule with request for comments.
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SUMMARY: Pursuant to recent amendment of section 306E of the Rural
Electrification Act, the Rural Electrification Administration (REA)
hereby amends its regulations governing policies and requirements with
respect to controls and approvals of borrower operations and the
granting of lien accommodations and subordinations. These changes apply
to electric borrowers whose net worth exceeds 110 percent of the
outstanding balance of loans made or guaranteed to them by REA.
DATES: This rule is effective on January 28, 1994. Written comments
must be received by REA or carry a postmark or equivalent by April 28,
1994.
ADDRESSES: Written comments should be addressed to Mr. F. Lamont Heppe,
Jr., Deputy Director, Program Support Staff, U.S. Department of
Agriculture, Rural Electrification Administration, room 2234-S, 14th
Street and Independence Avenue, SW., Washington, DC 20250-1500. REA
requires a signed original and 3 copies of all comments (7 CFR 1700.30
(e)). Comments will be available for public inspection during regular
business hours (7 CFR 1.27(b)).
FOR FURTHER INFORMATION CONTACT: Mr. Alex Cockey, Deputy Assistant
Administrator--Electric, U.S. Department of Agriculture, Rural
Electrification Administration, room 4037-S, 14th Street & Independence
Avenue SW., Washington, DC 20250-1500. Telephone: 202-720-9547.
SUPPLEMENTARY INFORMATION: This regulatory action is issued in
conformance with Executive Order 12866, Regulatory Planning and Review.
The Administrator of REA has determined that the Regulatory Flexibility
Act (5 U.S.C. 601 et seq.) does not apply to this rule. The
Administrator of REA 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 REA 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 existing 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 1980 (44 U.S.C. 3501 et
seq.), under control numbers 0572-0017, 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 the Office of Information and Regulatory
Affairs, Office of Management and Budget, room 3201, NEOB, Washington,
DC 20503. Attention: Desk Officer for USDA.
Background
Section 306E of the Rural Electrification Act of 1936 (RE Act) was
amended on December 17, 1993, by Public Law 103-201. As amended, the
section 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 REA. 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.
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 for loans
made or guaranteed by REA is reasonably adequate. REA understands this
to mean that it may consider the practices of private lenders in
general, and not just those that have lent or are currently lending to
REA borrowers. 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.
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 REA, or to take other actions specifically authorized by
law.
Section 1710.7 added by this rule addresses the application of
section 306E of the RE Act to REA operational controls that apply in
general to REA borrowers or specifically to REA loans and loan
guarantees. The application of section 306E to lien accommodations and
subordinations is set forth in new sections 7 CFR 1717.860 and
1717.904.
Section 1710.7--Exemptions of REA Operational Controls Under Section
306E of the RE Act
This section sets forth the policy established by section 306E of
the RE Act regarding REA operational controls applied to borrowers that
meet the 110 percent net worth ratio; the procedures for determining
whether a borrower meets the 110 percent ratio; and the specific
operational controls that are or are not exempted for such borrowers.
Borrowers' net worth to REA debt ratios will be determined each
year based on data as of December 31, and borrowers will be notified in
writing of their respective ratios by May 1 of each year. If a
borrower's net worth falls below 110 percent or if the borrower
defaults on any requirement of its mortgage, loan contract, or any
other agreement with REA that has not been exempted by REA, REA may
reimpose exempted operational controls by informing the borrower in
writing.
In calculating net worth, deferred current period expenses properly
recordable in accounts 182.2 and 182.3 will be subtracted from total
margins and equities. This is the same procedure followed in 7 CFR part
1717, subpart R to determine whether a borrower has sufficient net
worth to qualify for advance approval of a lien accommodation. It is
intended to prevent net worth from being overstated by the amount of
deferred current period expenses. The accounting data used will be
based on REA's system of accounts set forth in 7 CFR part 1767. Since
sinking fund depreciation is not approved under part 1767, net worth
for borrowers using sinking fund depreciation will be calculated as if
the borrower had been using straight line depreciation.
Paragraph (c) of Sec. 1710.7 lists 13 operational controls
contained in the REA mortgage or loan contract that are exempted for
borrowers that meet the 110 percent ratio. These include, for example:
The requirement that extensions and additions to the borrower's
electric system financed by the borrower's own funds be included in an
REA-approved construction work plan; requirements on contract bidding
procedures if no REA loan funds are involved; REA approval of
construction, engineering, and architectural contracts, and the use of
REA standard forms of contracts if no REA loan funds are involved;
higher maximum limits on plant additions that may be made without REA
approval if no REA loan funds are involved; higher maximum limits on
the sale of electric power and energy to ultimate consumers without REA
approval; higher maximum limits on the voluntary sale, lease or
transfer of any capital asset, without REA approval, in exchange for
fair market value; and REA approval of the selection of a borrower's
manager, provided that the borrower is not in default.
Two of the 13 exempted operational controls are also exempted for
all other borrowers. These are the requirement to obtain REA approval
of the purchase of data processing equipment and system control
equipment (except when REA loan funds are used), and the requirement
that distribution borrowers notify REA in writing of proposed changes
in electric rates 90 days prior to the effective date of such rates.
The required notification period has been changed to 30 days.
Although the rule exempts REA approval of the selection of a
manager for borrowers that meet the 110 percent test and are not in
default, REA wishes to emphasize again the critical importance of the
selection of fully qualified and capable managers. It is the most
important of a board of director's responsibilities. REA will shortly
be issuing new guidelines on manager selection.
For the convenience of the public, paragraph (d) of Sec. 1710.7
lists examples of the operational controls and requirements that are
not exempted. The controls and requirements not exempted fall into two
categories: (1) Requirements and operational controls that are
necessary to ensure that the security for loans made or guaranteed by
REA is reasonably adequate and that the loans will be repaid, or to
accomplish other fundamental purposes of the RE Act, and (2)
requirements imposed on REA or on borrowers by law.
The nonexempted controls and requirements include, for example,
area coverage requirements; following REA construction standards and
listed materials; certain borrowers having to maintain a power
requirements study on an ongoing basis; the maintenance of minimum
levels for the Times Interest Earned Ratio and Debt Service Coverage
ratio; REA approval of certain retirements of capital credits; controls
on borrower investments; certain borrowers having to maintain an equity
development plan; requirements on maintenance and repair of the
mortgaged property; and REA accounting and auditing requirements. These
requirements and controls are believed to be reasonable in comparison
with requirements imposed by private lenders on customers presenting
similar credit risks.
Paragraph (e) of Sec. 1710.7 authorizes REA to reinstate exempted
controls and requirements if the borrower is in default on any
requirement of its mortgage, loan contract with REA, or any other
agreement with REA that has not been exempted. REA will notify the
borrower in writing of the reinstatement, and it will remain in effect
until REA determines that it is no longer needed to help ensure loan
security.
Paragraph (f) is intended to make it clear that if controls are
reinstated because the borrower defaults or its net worth drops below
110 percent of outstanding REA debt, the controls and approval rights
will apply to all applicable subsequent actions by the borrower,
including REA approval of amendments to contracts entered into by the
borrower while it was exempt from controls.
Section 1717.860--Lien Accommodations and Subordinations Under Section
306E of the RE Act
Section 1717.860 promulgates the requirements of section 306E of
the RE Act as they relate to lien accommodations and subordinations. In
determining which borrowers qualify under the 110 percent net worth to
REA debt criterion, the same calculations and procedures are used as in
Sec. 1710.7, except that the determination is made at the time of an
application for a lien accommodation or subordination and there is no
annual notice to borrowers.
Paragraph (c) of Sec. 1717.860 establishes that REA will
expeditiously approve a lien accommodation or subordination for
financing of capital investments by borrowers that meet the 110 percent
test, if the borrower is in compliance with all requirements of its
mortgage, loan contract with REA, and any other agreement with REA that
have not been exempted pursuant to REA regulations, and if the
security, including assurance of repayment, of loans made or guaranteed
by REA will remain reasonably adequate. The paragraph also lists the
information that must be included in the application for the lien
accommodation or subordination.
Paragraph (d) of Sec. 1717.860 expands the circumstances under
which a lien subordination may be obtained for investments in rural
development and other non-electric utility endeavors in the case of
borrowers that meet the 110 percent test. It provides that a borrower
that meets the 110 percent test is eligible for a lien subordination on
the specific assets financed by a loan made directly to the borrower
for rural development or other non-electric utility purposes, provided
that the outstanding balance of all such loans lien subordinated under
paragraph (d), after taking into consideration the effect of the new
loan, does not exceed 15 percent of the borrower's net worth and the
security, including assurance of repayment, of loans made or guaranteed
by REA will remain reasonably adequate after granting the lien
subordination. While the rule grants this additional latitude to
borrowers that meet the 110 percent test, REA continues to urge all
borrowers to use separate subsidiaries when making investments in rural
development or other non-electric utility endeavors.
Investments lien subordinated under paragraph (d) will be included
among those investments subject to the 15 percent of total utility
plant limitation set forth in 7 CFR 1717.654(b)(1), and granting of the
lien subordination will not constitute approval of the investment under
7 CFR part 1717 subpart N.
Paragraph (e) of Sec. 1717.860 exempts borrowers that meet the 110
percent test from the requirement of Sec. 1717.856(d) that they submit
an equity development plan with their application for a lien
accommodation or subordination if the ratio of their equity to total
assets is below a specified level.
Finally, paragraphs (a)(1)(ii) and (b)(1)(ii)(A) of Sec. 1717.852
are amended to make it clear that programs of demand side management
and energy conservation, and on-grid and off-grid renewable energy
systems are eligible for lien accommodations and subordinations.
Section 1717.904--Exemptions Pursuant to Section 306E of the RE Act
This new section establishes policies and procedures, consistent
with those in Sec. 1710.7 and 1717.860, for lien accommodations for
supplemental concurrent loans made to borrowers that meet the 110
percent test.
For the reasons stated, 7 CFR chapter XVII, parts 1710 and 1717 are
amended 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; Delegation of Authority by the
Secretary of Agriculture, 7 CFR 2.23; Delegation of Authority by the
Under Secretary for Small Community and Rural Development, 7 CFR
2.72, unless otherwise noted.
2. Subpart A of part 1710 is amended by adding the following
section to read as follows:
Sec. 1710.7 Exemptions of REA 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 REA. 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 REA 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 REA, to establish loan feasibility
criteria and other requirements for the approval of REA 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 REA operational controls and other requirements that apply in
general to REA 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 REA controls and approval rights. They do
not affect the controls and approval rights of other co-mortgagees
under the REA mortgage.
(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 REA, hereinafter called the borrower's ``net worth to
REA debt ratio'', or simply ``the ratio'':
(1) For purposes of determining whether a borrower is exempt from
approvals, requirements, restrictions, or prohibitions imposed by REA
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 REA, and outstanding loans made or guaranteed
by REA will be based on REA's records. The financial and statistical
reports (Form 7 for distribution borrowers and Form 12a for power
supply borrowers) are subject to REA review and revision, and they must
comply with REA's system of accounts and accounting principles set
forth in 7 CFR part 1767. Since sinking fund depreciation is not
approved under part 1767, net worth for borrowers using sinking fund
depreciation will be calculated as if the borrower had been using
straight line depreciation;
(2) Net worth will be calculated by taking total margins and
equities (Line 33 of Part C of REA Form 7 for distribution borrowers,
or Line 34 of Section B of REA 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, REA will notify each
borrower in writing of its ratio as of December 31 of the preceding
year. If a borrower's net worth to REA 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 REA that it is no longer exempt.
(c) Borrower operations exempted from REA controls. Borrowers who
are notified by REA in writing that their net worth to REA debt ratio
exceeds 110 percent are exempted from the operational controls of the
REA mortgage and loan contract listed in this paragraph. These
controls, which are implemented through REA regulations and other
documents, are as follows:
(1) Requirement that extensions or additions to the borrower's
electric utility system financed by the borrower's own funds, as
defined in 7 CFR 1717.652, be included in an REA-approved construction
work plan. This exemption does not apply to extensions or additions
financed by loans made or guaranteed by REA or by loans for which REA
has granted a lien accommodation or subordination;
(2) Requirements on contract bidding procedures, as set forth in
Sec. 1710.120 and other REA regulations, except when the construction
is funded directly or through reimbursements from loans made or
guaranteed by REA;
(3) REA approval of construction contracts and engineering and
architectural service contracts, and use of REA standard forms of
contracts, as set forth in Sec. 1710.120 and other REA regulations,
except when the construction is funded directly or through
reimbursements from loans made or guaranteed by REA. To be eligible for
exemption of REA approval rights, here and elsewhere in this paragraph
(c), the contracts must not contain any provisions that prohibit or
restrict the assignment of the contracts to the government upon the
exercise by REA of its remedies under security instruments securing
loans made or guaranteed by REA. Throughout this section, REA approval
of contracts also includes REA approval of contract amendments and
renewals;
(4) REA approval of the borrower's use of general funds, as defined
as ``own funds'' in 7 CFR 1717.652, for plant extensions or additions
or other investments in the borrower's electric utility system,
provided that the funds will not be reimbursed with funds from a loan
made or guaranteed by REA, and:
(i) The plant addition will not provide direct service to any
ultimate consumer having an anticipated or contract kilowatt-hour (kWh)
or maximum kilowatt (kW) demand in any year that exceeds 25 percent of
the borrower's total kWh sales or maximum kW demand recorded during the
previous calendar year; or
(ii) If the investment is for the addition or substantial
reconstruction of generation capacity, the borrower is a power supply
borrower and the addition or substantial reconstruction of capacity
will not exceed 25 megawatts. The exemption under this paragraph (ii)
does not apply to distribution borrowers;
(5) REA approval of contracts for the sale of electric power and
energy to ultimate consumers except when the kWh sales or maximum kW
demand covered by the contract is for an amount in any year that
exceeds 25 percent of the borrower's total kWh sales or maximum kW
demand during the previous calendar year;
(6) REA approval of power purchase contracts with suppliers that do
not receive financial assistance from REA, provided that the contract
is for a period of not more than 1 year and the kWh amount of energy or
maximum kW capacity to be purchased under the contract does not exceed
25 percent of the total kWh amount of energy purchased and/or generated
by the borrower, or maximum kW demand of the borrower, during the
previous calendar year;
(7) REA approval of transmission, interconnection, and power
pooling contracts that cover a period of one year or less;
(8) REA approval of contracts for the operation and management and/
or maintenance of a borrower's system, provided that the contract does
not cover all or substantially all of the borrower's system;
(9) REA approval of the voluntary sale, lease or transfer by the
borrower of any capital asset in exchange for fair market value if:
(i) The borrower is not in default under its mortgage, loan
contract with REA, or any other agreement with REA. (As used in this
section, the term default includes defaults declared by the mortgagee
as well as events that have occurred and are continuing, which, with
notice or lapse of time and notice, would become events of default.);
(ii) The proceeds of such sale, lease or transfer are applied as
required by the REA mortgage;
(iii) The value of the capital asset is less than 5 percent of net
utility plant and the aggregate value of capital assets sold, leased or
transferred in any 12-month period is less than 10 percent of net
utility plant; and
(iv) If the borrower has an REA-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. The exemption of REA approval rights under
this paragraph (c)(9) applies only to voluntary sales, leases, and
transfers, and does not affect REA's right under section 7 of the RE
Act to approve other dispositions of property by the borrower;
(10) REA approval of the selection of a borrower's manager,
provided that the borrower is not in default under its mortgage, loan
contract with REA, or any other agreement with REA. Nothing herein
shall limit the right of REA under the mortgage to request termination
of the employment of a manager in the event of a default by the
borrower;
(11) REA approval, as set forth in the loan contract, of a
borrower's selection of a bank in which funds of the borrower are or
will be deposited, provided that the borrower is not in default under
its mortgage, loan contract with REA, or any other agreement with REA.
The requirement that such bank must be a member of the Federal Deposit
Insurance Corporation is not exempted;
(12) REA approval of the purchase of data processing equipment and
system control equipment, except when funds for the equipment,
including reimbursements, derive from loans made or guaranteed by REA.
This exemption, as well as that set forth in paragraph (c)(13) of this
section, also applies to all other borrowers, i.e., those that do not
meet the 110 percent equity ratio; and
(13) Requirement that distribution borrowers notify REA 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.
(d) REA requirements and operational controls not exempted. All
requirements and operational controls contained in the REA 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 REA
mortgage or loan contract that are necessary to ensure that the
security for loans made or guaranteed by REA 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 REA. 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 Sec. 1710.201 and Sec. 1710.202;
(iii) Requirement that borrowers follow REA construction standards
and use REA accepted materials, as set forth in 7 CFR 1710.41, 7 CFR
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 levels for the Times Interest Earned
Ratio and Debt Service Coverage ratio, as set forth in Sec. 1710.114;
(vi) Requirement that certain borrowers maintain an equity
development plan, as set forth in Sec. 1710.116;
(vii) REA approval of retirements of capital credits in excess of
amounts specifically authorized in the mortgage;
(viii) REA approval of borrower investments, loans, guarantees, and
other obligations under 7 CFR Part 1717, subpart N;
(ix) REA requirements on accounting, auditing, irregularities,
financial reporting, and access to books and records;
(x) Requirement that borrowers record the mortgage and mortgage
amendments;
(xi) Requirement that the mortgagor maintain and preserve the
priority lien of the mortgage and defend title to the mortgaged
property;
(xii) Requirements on maintenance and repair of the mortgaged
property;
(xiii) Requirements on insurance of the mortgaged property; and
(xiv) REA approval 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 REA, or any other agreement with REA that has not been
exempted pursuant to paragraph (c) of this section or other REA
regulations, upon written notice to the borrower REA may rescind all or
any part of the exemptions granted pursuant to said regulations. The
reinstated requirements and controls will remain in effect until REA
determines that they are no longer needed to help ensure that the
security, including the assurance of repayment, for loans made or
guaranteed by REA will remain reasonably adequate.
(f) Reinstated controls. If REA controls are reinstated because the
borrower defaults or its net worth falls below 110 percent of REA 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.
PART 1717--POST-LOAN POLICIES AND PROCEDURES COMMON TO INSURED AND
GUARANTEED ELECTRIC LOANS
3. The authority citation for part 1717 continues to read as
follows:
Authority: 7 U.S.C. 901-950b; Delegation of Authority by the
Secretary of Agriculture, 7 CFR 2.23; Delegation of Authority by the
Under Secretary for Small Community and Rural Development, 7 CFR
2.72, unless otherwise noted.
Sec. 1717.85 [Amended]
4. Section 1717.851 is amended by adding the following new
definition:
* * * * *
Capital investment. For the purposes of Sec. 1717.860, capital
investment means an original investment in an asset that is intended
for long-term continued use or possession and, for accounting purposes,
is normally depreciated or depleted as it is used. For example, such
assets may include land, facilities, equipment, buildings, mineral
deposits, patents, trademarks, and franchises. Original investments do
not include refinancings or refundings.
* * * * *
Sec. 1717.852 [Amended]
5. Section 1717.852 is amended in the second sentence of paragraph
(a)(1)(ii) by removing the word ``and'' after ``coal handling
facilities,'' and by adding after the words ``for generation'' the
following words: ``, programs of demand side management and energy
conservation, and on-grid and off-grid renewable energy systems;''.
6. Section 1717.852 is further amended by revising paragraph
(b)(1)(ii)(A) to read as follows:
Sec. 1717.852 Financing purposes.
* * * * *
(b) * * *
(1) * * *
(ii) * * *
(A) Renewable energy systems and REA-approved programs of demand
side management and energy conservation; and
* * * * *
7. New Sec. 1717.860 is added to read as follows:
Sec. 1717.860 Lien accommodations and subordinations under section
306E of the RE Act.
(a) General. Under section 306E of the RE Act, when requested by a
private lender providing financing for capital investments by a
borrower whose net worth exceeds 110 percent of the outstanding
principal balance of all loans made or guaranteed to the borrower by
REA, the Administrator will, without delay, offer to share the
government's lien on the borrower's system or subordinate the
government's lien on the property financed by the private lender,
provided that the security, including the assurance of repayment, for
loans made or guaranteed by REA will remain reasonably adequate. To
qualify for a lien accommodation or subordination under this section,
the investment must be an original capital investment, i.e., not a
refinancing or refunding. (See Sec. 1717.851 for the definition of
capital investment.)
(b) Determination of net worth to REA debt ratio. (1) In the case
of applications for a lien accommodation, a borrower's net worth will
be based on the borrower's most recent financial and statistical
report, the data in which shall not be more than 60 days old at the
time the application is received by REA, and the outstanding debt owed
to or guaranteed by REA will be based on latest REA records available.
The financial and statistical reports (Form 7 for distribution
borrowers and Form 12a for power supply borrowers) are subject to REA
review and revision, and they must comply with REA's system of accounts
and accounting principles set forth in 7 CFR part 1767. Since sinking
fund depreciation is not approved under part 1767, net worth for
borrowers using sinking fund depreciation will be calculated as if the
borrower had been using straight line depreciation.
(2) Net worth shall be calculated by taking total margins and
equities (Line 33 of Part C of REA Form 7 for distribution borrowers,
or Line 34 of Section B of REA Form 12a for power supply borrowers) and
subtracting assets properly recordable in account 182.2, Unrecovered
Plant and Regulatory Study Costs, and account 182.3, Other Regulatory
Assets, as defined in 7 CFR part 1767.
(c) Application requirements and process. (1) If a borrower's net
worth to REA debt ratio exceeds 110 percent, as determined by REA, and
the borrower is in compliance with all requirements of its mortgage,
loan agreement with REA, and any other agreement with REA that have not
been exempted in writing by REA, if requested REA will expeditiously
approve a lien accommodation or subordination for 100 percent private
financing of capital investments, provided that the security, including
the assurance of repayment, for loans made or guaranteed by REA will
remain reasonably adequate. REA's approval will be conditioned upon
execution and delivery by the borrower of a security instrument
satisfactory to REA, if required, and such additional information,
documents, and opinions of counsel as REA may require.
(2) The application must include the following:
(i) A resolution of the borrower's board of directors requesting
the lien accommodation and including the amount and maturity of the
proposed loan, a general description of the facilities or other
purposes to be financed, the name and address of the lender, and an
attached term sheet summarizing the terms and conditions of the
proposed loan;
(ii) A certification by an authorized official of the borrower that
the borrower is in compliance with all requirements of its mortgage,
loan agreement with REA, and any other agreement with REA that have not
been exempted in writing by REA;
(iii) The borrower's financial and statistical report, the data in
which shall not be more than 60 days old when the complete application
is received by REA;
(iv) Draft copy of any new mortgage or mortgage amendment
(supplement) required by REA or the lender, unless REA has notified the
borrower that it wishes to prepare these documents itself;
(v) A copy of the loan agreement, loan note, bond or other
financing instrument, unless REA has notified the borrower that these
documents need not be submitted. These documents will not be subject to
REA approval, but may be reviewed to determine whether they contain any
provisions that would result in the security, including assurance of
repayment, for loans made or guaranteed by REA no longer being
reasonably adequate;
(vi) The following certifications and reports required by law:
(A) The certification by the project architect for any buildings to
be constructed, as required by 7 CFR 1717.850(i);
(B) A certification by an authorized official of the borrower that
flood hazard insurance will be obtained for the full value of any
buildings, or other facilities susceptible to damage if flooded, that
will be located in a flood hazard area;
(C) Form AD-1047, Certification Regarding Debarment, Suspension,
and Other Responsibility Matters--Primary Covered Transactions, as
required by 7 CFR part 3017;
(D) A report by the borrower stating whether or not it is
delinquent on any Federal debt, and if delinquent, the amount and age
of the delinquency and the reasons therefor; and a certification, if
not previously provided, that the borrower has been informed of the
Government's collection options; and
(E) The written acknowledgement from a registered engineer or
architect regarding compliance with seismic provisions of applicable
model codes for any buildings to be constructed, as required by 7 CFR
1792.104. All other elements of an application listed in Sec. 1717.855,
Sec. 1717.856, and Sec. 1717.858(c) not listed in this paragraph (c)
are exempted.
(3) Applications from distribution borrowers are submitted to the
general field representative (GFR), while applications from power
supply borrowers are submitted to the REA Power Supply Division, or its
successor, in Washington, DC. When an application is satisfactory to
the GFR, it will be sent promptly to the Washington office. If
Washington office staff determine that an application is incomplete,
the borrower will be promptly notified in writing about the
deficiencies. When the application is complete, and if the security,
including assurance of repayment, of loans made or guaranteed by REA
will remain reasonably adequate after granting the lien accommodation
or subordination, the borrower and the lender will be promptly notified
in writing that the lien accommodation or subornation has been
approved, subject to the conditions cited in paragraph (c)(1) of this
section.
(d) Rural development and other non-electric utility investments.
Although REA recommends the use of separate subsidiaries as set forth
in Sec. 1717.858, if requested by a borrower that meets the 110 percent
equity test and all other applicable requirements of this section, REA
will provide a lien subordination on the specific assets financed in
the case of loans made directly to the borrower for rural development
and other non-electric utility purposes, provided that the outstanding
balance of all such loans lien subordinated under this paragraph (d),
after taking into consideration the effect of the new loan, does not
exceed 15 percent of the borrower's net worth and the security,
including assurance of repayment, of loans made or guaranteed by REA
will remain reasonably adequate after granting the lien subordination.
Investments lien subordinated under this paragraph shall be included
among those investments subject to the 15 percent of total utility
plant limitation set forth in 7 CFR 1717.654(b)(1), and granting of the
lien subordination will not constitute approval of the investment under
7 CFR Part 1717, subpart N.
(e) Equity development plans. Borrowers that qualify for a lien
accommodation or lien subordination under this section are exempt from
the requirement set forth in Sec. 1717.856(d) that they submit an
equity development plan as part of their application. This exemption
applies only to applications for a lien accommodation or subordination,
and does not exempt borrowers from the requirements of 7 CFR 1710.116
applicable to applications for a loan or loan guarantee from REA.
(f) Requirements and controls not exempted. All requirements and
limitations imposed with respect to lien accommodations and
subordinations by this subpart R that are not specifically exempted by
this section are not exempted and shall continue to apply according to
their terms.
8. New Sec. 1717.904 is added to read as follows:
Sec. 1717.904 Exemptions pursuant to section 306E of the RE Act.
(a) General policy. If a borrower's net worth to REA debt ratio
exceeds 110 percent, as determined by REA, and the borrower is in
compliance with all requirements of its mortgage, loan agreement with
REA, and any other agreement with REA that have not been exempted in
writing by REA, REA will expeditiously approve a lien accommodation for
a concurrent supplemental loan if requested in writing by the borrower,
provided that the security, including assurance of repayment, of loans
made or guaranteed by REA will remain reasonably adequate. REA's
approval will be conditioned upon execution and delivery by the
borrower of a security instrument satisfactory to REA, if required, and
such additional information, documents, and opinions of counsel as REA
may require.
(b) Determination of net worth to REA debt ratio. A borrower's
ratio of net worth to REA debt will be determined as set forth in
Sec. 1717.860(b).
(c) Requirements and controls exempted. The applicable requirements
and controls exempted by 7 CFR 1710.7(c) are also exempted with respect
to concurrent supplemental loans.
(d) Requirements and controls not exempted. All requirements and
controls applicable to concurrent supplemental financing set forth in
this subpart and other REA regulations that are not specifically
exempted by 7 CFR 1710.7(c) are not exempted and shall continue to
apply according to their terms. These include, but are not limited to:
(1) The applicable requirements listed in 7 CFR 1710.7(d); and
(2) The requirements set forth in Sec. 1717.901(a) when a borrower
requests early approval of a lien accommodation.
(e) Procedures. If a borrower meets the requirements of this
section, upon receipt of a complete application REA will promptly
notify the borrower and lender in writing that the lien accommodation
has been approved subject to the conditions set forth in paragraph (a)
of this section.
Dated: January 21, 1994.
Bob J. Nash,
Under Secretary, Small Community and Rural Development.
[FR Doc. 94-1987 Filed 1-27-94; 8:45 am]
BILLING CODE 3410-15-P
