[Federal Register Volume 60, Number 32 (Thursday, February 16, 1995)]
[Proposed Rules]
[Pages 8981-8989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3665]
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DEPARTMENT OF AGRICULTURE
Rural Utilities Service
7 CFR Part 1717
Investments, Loans, and Guarantees by Electric Borrowers
AGENCY: Rural Utilities Service, USDA.
ACTION: Proposed Rule.
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SUMMARY: The Rural Utilities Service (RUS) hereby proposes to revise
its policies and requirements governing restrictions on investments,
loans and guarantees made by electric borrowers. This proposed rule is
intended to clarify RUS's policies and requirements, reduce uncertainty
by borrowers, and improve compliance.
DATES: Written comments must be received by RUS or carry a postmark or
equivalent by April 17, 1995.
ADDRESSES: Written comments should be addressed to Mr. F. Lamont Heppe,
Jr., Deputy Director, Program Support Staff, U.S. Department of
Agriculture, Rural Utilities Service, Ag Box 1522, room 2234-S, 14th
Street and Independence Avenue, SW., Washington, DC 20250-1500. RUS
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 M. Cockey, Jr., Deputy
Assistant Administrator--Electric, U.S. Department of Agriculture,
Rural Utilities Service, Ag Box 1560, room 4037-S, 14th Street &
Independence Avenue, SW., Washington, DC 20250-1500. Telephone: 202-
720-9547.
SUPPLEMENTARY INFORMATION: This proposed rule has been determined to be
not significant for the purposes of Executive Order 12866, and
therefore has not been reviewed by the Office of Management and Budget
(OMB). The Administrator of RUS has determined that the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.) does not apply to this rule. The
Administrator of RUS has determined that this rule will not
significantly affect the quality of the human environment as defined by
the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.).
Therefore, this action does not require an environmental impact
statement or assessment. This rule is excluded from the scope of
Executive Order 12372, Intergovernmental Consultation, which may
require consultation with State and local officials. A Notice of Final
Rule titled Department Programs and Activities Excluded from Executive
Order 12372 (50 FR 47034) exempts RUS electric loans and loan
guarantees from coverage under this Order. This rule has been reviewed
under Executive Order 12778, Civil Justice Reform. This rule: (1) Will
not preempt any State or local laws, regulations, or policies, unless
they present an irreconcilable conflict with this rule; (2) Will not
have any retroactive effect; and (3) Will not require administrative
proceedings before any parties may file suit challenging the provisions
of this rule.
The program described by this rule is listed in the Catalog of
Federal Domestic Assistance Programs under number 10.850 Rural
Electrification Loans and Loan Guarantees. This catalog is available on
a subscription basis from the Superintendent of Documents, the United
States Government Printing Office, Washington, DC 20402-9325.
Information Collection and Recordkeeping Requirements
The 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.
Additional information collection and recordkeeping requirements
contained in this proposed rule have been submitted to OMB for review.
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 10102, NEOB, Washington,
DC 20503. Attention: Desk Officer for USDA.
Background
On December 22, 1987, section 312 was added to the Rural
Electrification Act of 1936. This section allows electric borrowers to
invest their own funds or make loans or guarantees, not in excess of 15
percent of their total utility plant, [[Page 8982]] without restriction
or prior approval of the Administrator of the Rural Utilities Service
(RUS). On June 29, 1989, RUS issued a final rule codifying this
provision (at 54 FR 27325), and the provision became effective for all
electric mortgages executed after July 31, 1989. Mortgages executed
prior to that date contained a provision granting the Administrator the
right to approve investments, loans and guarantees by the borrower once
the aggregate of such investments, loans and guarantees reached 3
percent of total utility plant.
This proposed rule is intended to clarify RUS's policies and
requirements regarding restrictions on borrower investments, loans and
guarantees. Over the past several years borrowers have raised a number
of questions about such issues as: Which investments, loans or
guarantees are subject to RUS approval and which are excluded; the
criteria used by RUS in approving an investment, loan or guarantee;
whether RUS approval of an investment, loan or guarantee means that it
is no longer counted in determining the ratio to total utility plant;
whether RUS will approve an investment, loan or guarantee if the
borrower is under the 15 percent limit; whether a borrower will be in
default under its mortgage because net profits earned on its
investments pushed its total above the 15 percent limit. This proposed
rule attempts to resolve such questions.
RUS is also in the process of updating its mortgage and loan
contract used with electric borrowers. RUS published a proposed
mortgage for electric distribution borrowers on September 29, 1994 at
59 FR 49594. In that rule it is proposed that RUS controls over
borrower investments, loans and guarantees be moved from the mortgage
to the RUS loan contract. Such a move would have no effect on RUS's
controls or their enforceability under the RUS mortgage.
The following discussion of the proposed rule published today
focuses on the major provisions and more significant changes proposed
to the existing regulation.
Section 1717.651 Policy
No change is proposed to this section. It would remain RUS policy
that borrowers are encouraged to use their own funds to foster the
economic development of rural areas, provided that such actions do not
in any way put government funds at risk or impair the borrower's
ability to repay its indebtedness to RUS and other lenders.
Section 1717.652 Definitions
Several changes are proposed to this section, mostly to accommodate
changes proposed elsewhere in the rule. For example, definitions are
added for ``Default,'' ``Equity,'' ``Operating DSC,'' ``Operating
TIER,'' ``Regulatory Created Assets,'' and ``Total Assets.'' These
relate primarily to proposed Sec. 1717.655, under which borrowers that
meet certain criteria would be exempt from RUS approval of investments,
loans and guarantees.
Technical changes are proposed to the definition of ``Own Funds.''
These are not intended to make any substantive change to what
investments, loans and guarantees are or are not controlled by RUS. The
proposed changes are intended to more closely reflect the approach
actually used by RUS in monitoring investments, loans and guarantees.
The current definition may give the erroneous impression that all cash
deposits and other assets held by a borrower are first divided into
``Own Funds'' and ``other funds'' and that only ``Own Funds'' are
subject to controls. In fact, all of a borrower's investments, loans
and guarantees are subject to controls except those made under the 15
percent limit and those excluded under Sec. 1717.654. The definition of
``Own Funds'' serves primarily to make clear that, for the purposes of
the 15 percent exclusion, a borrower cannot treat funds lent by RUS as
its ``Own Funds''.
In addition, four new terms would be defined: ``Natural Gas
Distribution System,'' ``Solid Waste Disposal System,''
Telecommunication and Other Electronic Communication System,'' and
``Water and Waste Disposal System.'' Under proposed Sec. 1717.654
investments by borrowers in these four types of community
infrastructure located in the borrowers' service territories would be
excluded from RUS control.
Finally, it is proposed that the current definition of ``Invest''
be supplemented by allowing borrowers to submit any proposed
transaction to RUS for an interpretation of whether the action is an
investment for the purposes of RUS controls.
Section 1717.653 Transactions Below the 15 Percent Level
Proposed paragraph (a) of new Sec. 1717.653 is the same
substantively as existing Sec. 1717.653. It would continue to provide
that a borrower in compliance with all provisions of its RUS mortgage,
RUS loan contract, and any other agreement with RUS would not need
prior approval from RUS to make investments, loans and guarantees up to
the 15 percent level. For purposes of clarity, the proviso that the
borrower must not be in default would be included at this point rather
than in the definition of borrower, as in the existing rule. Similarly,
a proviso would be included to make it clear that funds necessary to
make timely payments of principal and interest on loans secured by the
RUS mortgage would remain subject to RUS controls. This issue is
currently addressed in the definition of ``Own Funds'' in the existing
rule.
Proposed paragraph (b) is substantively the same as existing
Sec. 1717.654(b).
Proposed paragraph (c) is new, and is intended to clarify RUS
policy that it will not ``approve'' investments, loans or guarantees
made below the 15 percent level. In the past, some borrowers have
sought to obtain RUS approval of transactions below the 15 percent
limit and to have these transactions excluded when determining the
aggregate amount of investments, loans and guarantees made by the
borrower. Such approvals would not be consistent with the restriction
imposed on RUS by section 312 of the RE Act. They also would not be
consistent with protecting loan security since a borrower might seek
approval and exclusion of low-risk transactions below the 15 percent
limit in order to make room for high-risk transactions below the limit
that would be immune from RUS review.
Section 1717.654 Exclusion of Certain Investments, Loans and
Guarantees
Proposed paragraph (a) would remain substantively the same as
existing paragraph (a). The exclusions set forth in proposed paragraph
(b) are the same as those in existing paragraph (b)(2), except that it
would be made clear that all investments made in the National Rural
Utilities Cooperative Finance Corporation and the National Bank for
Cooperatives would be excluded from RUS controls, as they are now under
current RUS policy.
Certain other exclusions currently followed by RUS would continue.
These include exclusions for any investment, loan or guarantee that the
borrower is required to make by RUS or other USDA agency; investments
included in an irrevocable trust for the purpose of funding post-
retirement benefits of the borrower's employees; and reserves required
by a reserve bond agreement or other legally binding agreement that are
dedicated to making required payments on debt secured under the RUS
mortgage, not to exceed the amount of reserves specifically required by
such agreement. [[Page 8983]]
All dollar amounts excluded by RUS from the calculation of
aggregate investments, loans, and guarantees pursuant to the RUS
mortgage, RUS loan contract, and/or RUS regulations, bulletins,
memoranda (including the memorandum of March 28, 1985 cited below), or
other written notice as of the date of this proposed rule will continue
to be excluded in the future. However, profits, interest and other
returns (regardless of whether or not they are reinvested) from such
investments, loans, and guarantees after the date of this proposed rule
will be excluded only if they are excluded under proposed
Sec. 1717.654. Also, any new commitment of funds to such investments,
loans, and guarantees will not be exempted after the date of this
proposed rule unless they are excluded under proposed Sec. 1717.654.
Moreover, the memorandum issued to all electric borrowers by the
Administrator of the Rural Electrification Administration, dated March
28, 1985, regarding the approval of certain investments is hereby
rescinded.
Several new exclusions are proposed under paragraph (c) of this
section. There would be no restrictions on investments in or loans to
the following types of community infrastructure located in the
borrower's service territory: water and waste disposal systems; solid
waste disposal systems; telecommunication and other electronic
communication systems; and natural gas distribution systems. Guarantees
of the obligations of such systems would also be excluded so long as
the aggregate amount of such guarantees does not exceed 20 percent of
the borrower's equity.
RUS believes that borrowers should be able to minimize the risks
associated with investing in these types of community infrastructure
because of the similarities in structure and operation between them and
the borrowers' main electric utility business, and the opportunities
for sharing overhead in such areas as billing, communications, system
control, repair and maintenance, and construction supervision.
Excluding these investments complements the approach in the proposed
new mortgage for distribution borrowers, which would allow borrowers
meeting certain criteria to issue up to 20 percent of their total
secured debt for such community infrastructure, without the approval of
the mortgagees.
It is also proposed that amounts ``invested'' in customer accounts
receivable and other accounts receivable be excluded from the
calculation of total investments, loans and guarantees. These
``investments'' represent commitments made for a period of less than a
year, and should not present a significant on-going risk to the
borrower or RUS.
Other proposed editorial changes to existing 1717.654, such as
shifting paragraph (b)(1) to 1717.653(b) would not change the substance
of the rule.
Section 1717.655 Exemption of Certain Borrowers From Controls
Proposed new Sec. 1717.655 would exempt borrowers that meet certain
criteria from RUS approval of investments, loans and guarantees. The
proposed criteria are as follows:
The borrower must be in compliance with all provisions of
its RUS mortgage, RUS loan contract, and any other agreement with RUS.
The average revenue per kWh for residential service
received by the borrower must not exceed 130 percent of the average
revenue for residential service for all residential consumers in the
state or states served by the borrower. The criterion would apply only
to distribution borrowers.
In the most recent calendar year the borrower must have
achieved an operating TIER and an operating DSC of at least 1.0, in
each case based on the average of the two highest ratios achieved in
the three most recent years.
The borrower's ratio of net utility plant to long-term
debt must be at least 1.1.
The borrower must have equity equal to at least 27 percent
of its total assets.
Both distribution and power supply borrowers that meet these
criteria would be exempt from RUS approval of investments, loans and
guarantees. It is estimated that about 83 percent of distribution
borrowers and 3 power supply borrowers currently would meet the
proposed criteria for exemption. Borrowers not meeting the criteria
would be subject to RUS approval of investments, loans and guarantees
above 15 percent of total utility plant.
The first qualification criterion would require the borrower to be
in good standing with respect to all covenants of its RUS mortgage, RUS
loan contract or any other agreement with RUS, such as adequately
maintaining the property, having adequate insurance coverage, meeting
all financial obligations, and achieving margins sufficient to meet
TIER and DSC requirements.
The second criterion would exclude borrowers that are more likely
to face risks of substantial downward pressure on rates and the
possible loss of load and revenues. While comparing a borrower with the
state average, as proposed, is less reliable analytically than a
detailed comparison with the borrower's neighboring competitors,
setting the threshold at 130 percent should ensure that borrowers that
fail the test most likely face an increased risk of rate competition.
At a borrower's request, the Administrator of RUS could waive this
criterion if he found that the borrower's strength on the other
qualification criteria offset the borrower's weakness in rate
disparity.
The third criterion would ensure that the borrower is usually able
to cover all of the expenses of its utility operation from utility
revenues, and normally should not be dependent on income from
investments or loans to meet the expenses of its primary business.
The fourth criterion would provide substantial assurance that the
borrower's long-term debt is adequately collateralized and that RUS
loan security normally should not need to depend on the borrower's
investments and loans, which may not be secured or effectively secured
under the RUS mortgage and whose liquidation value may vary
substantially over time.
The fifth criterion would provide an equity cushion in the event
the borrower defaulted and foreclosure and liquidation became
necessary. It also would provide an incentive for profitable
investments and a disincentive for unprofitable investments, since the
ratio of equity to total assets would increase in the first case and
decrease in the second. A borrower could lose its exemption status if
bad investments reduced equity below 27 percent.
While distribution and power supply borrowers that meet the
proposed criteria would be exempt from RUS approval of their
investments, loans and guarantees, these borrowers would continue to be
obligated to maintain adequate records and to report annually on their
transactions. Such records and reports would be needed in the event an
exempt borrower lost its exemption because of failure to meet one or
more of the criteria, and also to monitor borrower performance in
making investments in rural development.
If an exempt borrower ceases to meet the criteria for exemption, it
would become subject to the controls set forth in this proposed rule
upon receiving written notice from RUS. Such borrower could regain its
exemption if subsequently it met the qualification criteria and was so
notified in writing by RUS.
If an exempt borrower is over the 15 percent level at the time it
loses its exemption, it could ask the Administrator to exclude a
portion of its investments, loans and guarantees up to
[[Page 8984]] the aggregate amount of net profit earned on all of its
transactions over the past 10 years. If the net profits are
insufficient, or if the Administrator does not exclude an amount
sufficient to bring the borrower to or below the 15 percent level, the
borrower would be required to reduce or restructure its portfolio
(e.g., divest or shift some investments to excluded investments) in
order to come within the 15 percent limit. If the borrower failed to do
this within a timeframe set by RUS, the borrower would be in default of
its RUS loan contract and/or RUS mortgage upon receiving written notice
from RUS of the default.
Section 1717.656 Investments, Loans, and Guarantees in Excess of 15
Percent of Total Utility Plant
Proposed new Sec. 1717.656 would establish policies and
requirements for RUS approval of investments, loans and guarantees
above 15 percent of total utility plant. The section would apply only
to borrowers that do not qualify for an outright exemption from RUS
approval under Sec. 1717.655. In the case of distribution borrowers
that do not qualify for an exemption, they would not be given approval
to make controlled investments, loans and guarantees above the 15
percent level.
These borrowers currently represent less than 20 percent of all
distribution borrowers, and all but one of them are below the 15
percent level at the present time. These borrowers would retain the
latitude to make unlimited investments, loans and guarantees within
those categories excluded from control under Sec. 1717.654. Moreover,
RUS believes that many of these borrowers could improve their economic
and financial condition in order to qualify for the outright exemption
under Sec. 1717.655, if they want the additional latitude to make
controlled investments, loans and guarantees above the 15 percent
level.
In the case of power supply borrowers that do not qualify for an
exemption under Sec. 1717.655, RUS would consider requests to make
controlled investments, loans and guarantees above the 15 percent
level. To be eligible to submit a request, a power supply borrower
would have to meet the following criteria:
The borrower must be in compliance with all provisions of
its RUS mortgage, RUS loan contract and any other agreement with RUS.
The borrower cannot be in financial workout nor had its
government debt restructured.
The borrower must have equity of at least 5 percent of
total assets.
After approval of the request, the aggregate of the
borrower's investments, loans and guarantees cannot exceed 20 percent
of total utility plant. Beyond this level RUS believes that further
investments, loans or guarantees outside of the ``excluded categories''
would present unacceptable risks in the case of borrowers that do not
qualify for an exemption under Sec. 1717.655.
If a power supply borrower meets the above criteria, its request
would be considered on a case by case basis. In considering the
request, the Administrator would take the following factors into
consideration:
The repayment of all loans secured by the RUS mortgage
must continue to be assured and security must continue to be reasonably
adequate even if the entire investment, loan or guaranteed amount were
lost. This ``total loss'' approach would expedite review by RUS by
eliminating the need to assess the probability of a loss occurring and
its probable size. The effect of the loss of the entire investment,
loan or guaranteed amount would be considered along with all other
risks facing the borrower.
In the case of an investment, the investment would have to
be made in an entity separate from the borrower, such as a subsidiary,
whereby the borrower would be protected from any liabilities incurred
by the separate entity, unless the borrower is able to demonstrate that
making the investment directly rather than through a separate entity
would present no substantial risk beyond that of possibly losing part
or all of the investment.
The borrower must be economically and financially sound as
indicated by its costs of operation, competitiveness, operating TIER
and operating DSC, physical condition of the plant, ratio of equity to
total assets, ratio of net utility plant to long-term debt, and other
factors.
Other factors affecting the security and repayment of
government debt, as determined on a case by case basis.
This proposed new section 1717.656 would also clarify existing
policy that if RUS approves an investment, loan or guarantee, such
investment, loan or guarantee would continue to be included when
calculating the borrower's ratio of aggregate investments, loans and
guarantees to total utility plant. In other words, just because an
investment has been approved by RUS doesn't mean it will not continue
to be counted toward the borrower's total investments.
Proposed paragraph (d) of this section would deal with the
situation where profits earned on investments increase the aggregate
amount of investment and could cause a borrower to be in technical
violation of its loan contract or mortgage. The paragraph would make it
clear that if a borrower exceeded the 15 percent limit as a result of
net profits earned on the aggregate of its investments, loans and
guarantees during the past 10 years, the borrower would not be in
default of its loan contract or mortgage. Net profit would be
calculated by taking the sum of all profits earned on all transactions
during the past 10 years (including interest earned on cash accounts,
loans, and similar transactions), and subtracting all losses
experienced on all transactions during the same period.
Also, under proposed paragraph (d) RUS would be willing to consider
a borrower's request to exclude up to the amount of net profit earned
on the borrower's investments, loans and guarantees during the past 10
years. Such exclusion by RUS may or may not reduce the borrower's
aggregate investments, loans and guarantees to or below the 15 percent
limit. If it does not, the borrower would be required to restructure or
reduce its portfolio to come within the 15 percent level. Failure to do
so within a timeframe set by RUS would result, upon written notice from
RUS, in a default by the borrower.
Section 1717.657 Records, Reports and Audits
Paragraphs (a), (b) and (c) of proposed Sec. 1717.657 are the same
substantively as existing Sec. 1717.655. Proposed paragraph (a) is the
same substantively as existing paragraph (a) of Sec. 1717.655, and
proposed paragraph (c) is the same substantively as existing paragraph
(b). Proposed paragraph (b) would combine existing paragraphs (c) and
(d).
Proposed paragraph (d) would be a new provision. It would clarify
that RUS monitoring of borrower compliance with this rule will be based
primarily on the annual financial and statistical reports submitted by
borrowers (i.e., the RUS Forms 7 and 12), and the annual auditor's
report on borrower operations. While RUS would ordinarily rely
primarily on these annual reports, all borrowers would continue to be
obligated to comply with this rule throughout the entire year. For
example, if a borrower was below the 15 percent level at the end of the
preceding year, it could not exceed the 15 percent level during the
current year without prior approval from RUS, unless of course it was
exempt from approval under proposed Sec. 1717.655. [[Page 8985]]
Section 1717.658 Effect of Subpart on RUS Loan Contract and Mortgage
Section 1717.656 of the existing rule lists several specific
provisions of the RUS mortgage that are not affected by the rule, as
well as the fact that a supplemental lender's rights under the RUS
mortgage regarding control of investments also are not affected by the
rule. These specific provisions were listed for emphasis only; there
being no intent to imply that other provisions of the mortgage are
somehow affected by the rule on investment controls. Furthermore,
section 1717.657 of the existing rule provides that the rule does not
affect a supplemental lender's rights under its own loan documentation
to control borrower investments.
Proposed Sec. 1717.658 would combine and simplify the two existing
sections. Rather than list, for emphasis, specific provisions of the
RUS mortgage that are not affected by the rule, the proposed rule would
make it clear that it does not affect any provision, covenant, or
requirement in the RUS mortgage, RUS loan contract, or any other
agreement between a borrower and RUS with respect to any matter other
than the prior approval of investments, loans, and guarantees made by
the borrower. Also, the proposed section would combine the provisions
of the two existing sections regarding a supplemental lender's rights
to control investments not being affected by the proposed rule.
Appendix A
Existing Appendix A to subpart N provides several examples of how
certain types of investments, loans, and guarantees should be reported.
In light of the clarification and additional guidance that would be
provided in the main body of this proposed rule, as well as that
provided annually in RUS Bulletins 1717B-2 and 1717B-3, it is proposed
that Appendix A be dropped.
In summary, RUS believes the proposed changes to subpart N will
clarify RUS's policies and requirements on investments, loans and
guarantees, improve compliance, provide better service to our borrowers
by reducing uncertainty as to what is expected of them, and improve the
utilization of RUS staff resources.
List of Subject in 7 CFR Part 1717
Administrative practice and procedure, Electric power, Electric
power rates, Electric utilities, Intergovernmental relations,
Investments, Loan programs--energy, Reporting and recordkeeping
requirements, Rural areas.
For the reasons stated, subpart N of 7 CFR 1717 is proposed to be
revised as follows:
PART 1717--POST-LOAN POLICIES AND PROCEDURES COMMON TO INSURED AND
GUARANTEED ELECTRIC LOANS
Subpart N--Investments, Loans, and Guarantees by Electric Borrowers
Sec.
1717.650 Purpose.
1717.651 Policy.
1717.652 Definitions.
1717.653 Transactions below the 15 percent level.
1717.654 Exclusion of certain investments, loans, and guarantees.
1717.655 Exemption of certain borrowers from controls.
1717.656 Investments, loans, and guarantees in excess of 15 percent
of total utility plant.
1717.657 Records, reports and audits.
1717.658 Effect of this subpart on RUS loan contract and mortgage.
Subpart N--Investments, Loans, and Guarantees by Electric Borrowers
Authority: 7 U.S.C. 901-950b; Pub.L. 103-354, 108 Stat. 3178 (7
U.S.C. 6941 et seq.); Title I, Subtitle D, Pub.L. 100-203, 101 stat.
1330.
Sec. 1717.650 Purpose.
This subpart contains the general regulations of the Rural
Utilities Service (RUS) for implementing and interpreting the
provisions of the Rural Electrification Act of 1936, as amended,
including section 312 (7 U.S.C. 901 et seq.) (RE Act), permitting, in
certain circumstances, that borrowers of insured or guaranteed electric
loans under the RE Act may, without restriction or prior approval of
the Administrator of RUS, invest their own funds and make loans or
guarantees.
Sec. 1717.651 Policy.
RUS electric borrowers are encouraged to utilize their own funds to
participate in the economic development of rural areas, provided that
such activity does not in any way put government funds at risk or
impair a borrower's ability to repay its indebtedness to RUS and other
lenders. In considering whether to make loans, investments, or
guarantees, borrowers are expected to act in accordance with prudent
business practices and in conformity with the laws of the jurisdictions
in which they serve. RUS assumes that borrowers will use the latitude
afforded them by section 312 of the RE Act primarily to make needed
investments in rural community infrastructure projects (such as water
and waste systems, garbage collection services, etc.) and in job
creation activities (such as providing technical, financial, managerial
assistance) and other activities to promote business development and
economic diversification in rural communities. Nonetheless, RUS
believes that borrowers should continue to give primary consideration
to safety and liquidity in the management of their funds.
Sec. 1717.652 Definitions.
As used in this subpart:
Borrower means any organization that has an outstanding loan made
or guaranteed by RUS for rural electrification.
Cash-construction fund-trustee account means the account described
in the Uniform System of Accounts as one to which funds are deposited
for financing the construction or purchase of electric facilities.
Guarantee means to undertake collaterally to answer for the payment
of another's debt or the performance of another's duty, liability, or
obligation, including, without limitation, the obligations of
subsidiaries. Some examples of such guarantees include guarantees of
payment or collection on a note or other debt instrument (assuring
returns on investments); issuing performance bonds or completion bonds;
or cosigning leases or other obligations of third parties.
Equity means the Margins and Equities of the borrower as defined in
the Uniform System of Accounts, less regulatory created assets.
Invest means to commit money in order to earn a financial return on
assets, including, without limitation, all investments properly
recorded on the borrower's books and records in investment accounts as
those accounts are used in the Uniform System of Accounts for RUS
Borrowers. Borrowers may submit any proposed transaction to RUS for an
interpretation of whether the action is an investment for the purposes
of this definition.
Make loans means to lend out money for temporary use on condition
of repayment, usually with interest.
Mortgaged property means any asset of the borrower which is pledged
in the RUS mortgage.
Natural gas distribution system means any system of community
infrastructure that distributes natural gas and whose services are
available by design to all or a substantial portion of the members of
the community.
Operating DSC means Operating Debt Service Coverage (ODSC)
calculated as:
[[Page 8986]]
[GRAPHIC][TIFF OMITTED]TP16FE95.014
where:
A = Depreciation and Amortization Expense;
B = Interest on Long-term Debt, except that Interest on Long-term Debt
shall be increased by \1/3\ of the amount, if any, by which the rentals
of Restricted Property exceed 2 percent of Total Margins and Equities;
C = Patronage Capital & Operating Margins (distribution borrowers) or
Operating Margins (power supply borrowers); and
D = Debt Service Billed (RUS + other) which equals all interest and
principal billed during the calendar year plus \1/3\ of the amount, if
any, by which the rentals of Restricted Property exceed 2 percent of
Total Margins and Equities. Unless otherwise indicated, all terms used
in defining ODSC and OTIER are as defined in RUS Bulletin 1717B-2
Instructions for the Preparation of the Financial and Statistical
Report for Electric Distribution Borrowers, and RUS Bulletin 1717B-3
Instructions for the Preparation of the Operating Report for Power
Supply Borrowers and for Distribution Borrowers with Generating
Facilities, or the successors to these bulletins.
Operating TIER means Operating Times Interest Earned Ratio (OTIER)
calculated as:
[GRAPHIC][TIFF OMITTED]TP16FE95.015
where:
A = Interest on Long-term Debt, except that Interest on Long-term Debt
shall be increased by \1/3\ of the amount, if any, by which the rentals
of Restricted Property exceed 2 percent of Total Margins and Equities;
and
B = Patronage Capital & Operating Margins (distribution borrowers) or
Operating Margins (power supply borrowers).
Own funds means money belonging to the borrower other than the
proceeds of loans made or guaranteed by RUS. Such proceeds include, but
are not limited to, all funds on deposit in the cash-construction fund-
trustee account.
Regulatory created assets means the sum of the amounts properly
recordable in Account 182.2 Unrecovered Plant and Regulatory Study
Costs, and Account 182.3 Other Regulatory Assets of the Uniform System
of Accounts.
RUS means the Rural Utilities Service, an agency of the U.S.
Department of Agriculture established pursuant to Section 232 of the
Federal Crop Insurance Reform and Department of Agriculture
Reorganization Act of 1994 (Pub. L. 103-354, 108 Stat. 3178, 7 U.S.C.
6941 et seq.) and, for purposes of this subpart, includes its
predecessor, the Rural Electrification Administration.
RUS mortgage means any and all instruments creating a lien on or
security interest in the borrower's assets in connection with loans or
guarantees under the RE Act.
RUS loan contract means the loan contract between the borrower and
RUS.
Solid waste disposal system means any system of community
infrastructure that provides collection and/or disposal of solid waste
and whose services are available by design to all or a substantial
portion of the members of the community.
Subsidiary means a company which is controlled by the borrower
through ownership of voting stock, and is further defined in 7 CFR
1767.10.
Supplemental lender means a lender that has provided a supplemental
source of financing that is secured by the RUS mortgage.
Telecommunication and other electronic communication system means
any community infrastructure that provides telecommunication or other
electronic communication services and whose services are available by
design to all or a substantial portion of the members of the community.
Total assets means the total assets of the borrower as calculated
according to the Uniform System of Accounts, less regulatory created
assets.
Total utility plant means the sum of the borrower's Electric Plant
Accounts and Construction Work in Progress--Electric Accounts, as such
terms are used in the Uniform System of Accounts.
Uniform System of Accounts means the system of accounts prescribed
for RUS borrowers in 7 CFR part 1767.
Water and waste disposal system means any system of community
infrastructure that supplies water and/or collects and treats waste
water and whose services are available by design to all or a
substantial portion of the members of the community.
Sec. 1717.653 Transactions below the 15 percent level.
(a) A borrower in compliance with all provisions of its RUS
mortgage, RUS loan contract, and any other agreement with RUS may,
without prior written approval of the Administrator, invest its own
funds or make loans or guarantees not in excess of 15 percent of its
total utility plant without regard to any provision contained in any
RUS mortgage or RUS loan contract to the effect that the borrower must
obtain prior approval from RUS. However, funds necessary to make timely
payments of principal and interest on loans secured by the RUS mortgage
remain subject to RUS controls on borrower investments, loans and
guarantees.
(b) RUS will require that any electric loan made or guaranteed by
RUS after [Date 30 days after the final rule is published in the
Federal Register] shall be subject to a provision in the loan contract
or mortgage restricting investments, loans and guarantees by the
Borrower substantially as follows: The borrower may, to the extent
permitted by this subpart, invest its own funds or make loans or
guarantees not in excess of 15 percent of its total utility plant, as
those terms are used in said subpart.
(c) RUS will not consider requests from borrowers to approve or
exclude investments, loans, or guarantees made below the 15 percent
level. (Categorical exclusions are set forth in 1717.654.)
Sec. 1717.654 Exclusion of certain investments, loans, and guarantees.
(a) In calculating the amount of investments, loans and guarantees
permitted under this subpart, there is excluded from the computation
any investment, loan or guarantee of the type which by the terms of the
borrower's RUS mortgage or RUS loan contract the borrower may make in
unlimited amounts without RUS approval.
(b) Furthermore, the borrower may make unlimited investments,
without prior approval of the Administrator, in:
(1) Securities or deposits issued, guaranteed or fully insured as
to payment by the United States Government or any agency thereof;
(2) Capital term certificates, bank stock, or other similar
securities of the supplemental lender which have been purchased as a
condition of membership in the supplemental lender, or as a condition
of receiving financial assistance from such lender, as well as any
other investment made in, or loans made to, the National Rural
Utilities Cooperative Finance Corporation or the National Bank for
Cooperatives;
(3) Patronage capital allocated from a power supply cooperative of
which the borrower is a member.
(c) Without prior approval of the Administrator, the borrower may
also:
(1) Invest or lend funds derived directly from grants received
from, or loans made or guaranteed by, an agency of the U.S. Department
of Agriculture [[Page 8987]] (USDA) for the purposes specifically
authorized in such grants or loans;
(2) Make loans guaranteed by an agency of USDA, up to the amount of
principal whose repayment, with interest, is fully guaranteed; and
(3)(i) Make unlimited investments in and unlimited loans to finance
the following community infrastructure located within its service
territory, and guarantee debt issued by such entities up to an
aggregate amount of such guarantees not to exceed 20 percent of the
borrower's equity:
(A) Water and waste disposal systems;
(B) Solid waste disposal systems;
(C) Telecommunication and other electronic communication systems;
and
(D) Natural gas distribution systems.
(ii) In each of the four cases in paragraph (c)(3)(i) of this
section, if the system is a component of a larger organization other
than the borrower itself (e.g., if it is a component of a subsidiary of
the borrower or a corporation independent of the borrower), to be
eligible for the exemption the borrower must certify annually that
either a majority of the assets of the larger organization were
invested in said system at the end of the most recent fiscal year, or
that a majority of the revenues of the larger organization came from
said system during the most recent fiscal year.
(d) Also excluded from the calculation of investments, loans and
guarantees made by the borrower are:
(1) Amounts properly recordable in Account 142 Customer Accounts
Receivable, and Account 143 Other Accounts Receivable;
(2) Any investment, loan, or guarantee that the borrower is
required to make by an agency of USDA, for example, as a condition of
obtaining financial assistance for itself or any other person or
organization;
(3) Investments included in an irrevocable trust for the purpose of
funding post-retirement benefits of the borrower's employees; and
(4) Reserves required by a reserve bond agreement or other
agreement legally binding on the borrower, that are dedicated to making
required payments on debt secured under the RUS mortgage, not to exceed
the amount of reserves specifically required by such agreements.
(e) Grandfathered exclusions. All amounts excluded by RUS from the
calculation of the aggregate amount of investments, loans and
guarantees as of February 16, 1995 shall remain excluded. Such
exclusions must have been based on the RUS mortgage, RUS loan contract,
regulations, bulletins, memoranda, or other written notice from RUS.
Profits, interest, and other returns earned (regardless of whether or
not they are reinvested) on such investments, loans and guarantees
after February 16,1995 shall be excluded only if they are eligible for
exclusion under paragraphs (a) through (d) of this section. Any new
commitments of money to such investments, loans and guarantees shall
likewise be excluded only if they are eligible under paragraphs (a)
through (d) of this section.
(f) Any investment, loan or guarantee made by a borrower that is
not excluded under this section or under Sec. 1717.656(d) shall be
included in the aggregate amount of investments, loans and guarantees
made by the borrower, regardless of whether RUS has specifically
approved the investment, loan or guarantee under Sec. 1717.656(c), or
has approved a related transaction (e.g., a related contract or lien
accommodation).
Sec. 1717.655 Exemption of certain borrowers from controls.
(a) Any distribution or power supply borrower that meets all of the
following criteria is exempted from the provisions of the RUS mortgage
and loan contract that require RUS approval of investments, loans, and
guarantees made by the borrower:
(1) The borrower is in compliance with all provisions of its RUS
mortgage, RUS loan contract, and any other agreement with RUS;
(2) The average revenue per kWh for residential service received by
the borrower during the two most recent calendar years does not exceed
130 percent of the average revenue per kWh for residential service
during the same period for all residential consumers located in the
state or states served by the borrower. This criterion applies only to
distribution borrowers and does not apply to power supply borrowers. If
a borrower serves customers in more than one state, the state average
revenue per kWh will be based on a weighted average using the kWh sales
by the borrower in each state as the weight. The calculation will be
based on the two most recent calendar years for which both borrower and
state-wide data are available. If a borrower fails to qualify for an
exemption based solely on its failure to meet this criterion on rate
disparity, at the borrower's request the Administrator may at his sole
discretion exempt the borrower if he finds that the borrower's
strengths with respect to the other criteria are sufficient to offset
any weakness due to rate disparity;
(3) In the most recent calendar year for which data are available,
the borrower achieved an operating TIER of at least 1.0 and an
operating DSC of at least 1.0, in each case based on the average of the
two highest ratios achieved in the three most recent calendar years;
(4) The borrower's ratio of net utility plant to long-term debt is
at least 1.1, based on year-end data for the most recent calendar year
for which data are available; and
(5) The borrower's equity is equal to at least 27 percent of its
total assets, based on year-end data for the most recent calendar year
for which data are available.
(b) While borrowers meeting the criteria in paragraph (a) of this
section are exempt from RUS approval of investments, loans and
guarantees, they are nevertheless subject to the record-keeping,
reporting, and other requirements of Sec. 1717.657.
(c) Any borrower exempt under paragraph (a) of this section that
ceases to meet the criteria for exemption shall, upon written notice
from RUS, no longer be exempt and shall be subject to all provisions of
this subpart applicable to non-exempt borrowers. A borrower may regain
its exemption if it subsequently meets the criteria in paragraph (a) of
this section, and is so notified in writing by RUS.
(d) If a borrower loses its exemption and the aggregate of
investments, loans and guarantees of such borrower exceeds 15 percent
of total utility plant, the borrower will be required to reduce or
restructure its portfolio (e.g., divest or shift some investments to
excluded investments) in order to come within the 15 percent level.
(However, such borrower is eligible to ask RUS to exclude a portion of
its investments under the conditions set forth in Sec. 1717.656(d).) If
the borrower does not come within the 15 percent level within a
reasonable period of time determined by the Administrator, which shall
not exceed 12 months from the date the borrower was notified of its
loss of exemption, then, upon written notice from RUS, the borrower
shall be in default of its RUS loan contract and/or RUS mortgage.
(e) By no later than May 1 of each year, RUS will provide written
notice to any borrowers whose exemption status has changed as a result
of more recent data being available for the qualification criteria set
forth in paragraph (a) of this section, or as a result of other
reasons, such as corrections in the available data. An explanation of
the reasons for any changes in exemption status will also be provided
to the borrowers affected. [[Page 8988]]
Sec. 1717.656 Investments, loans, and guarantees in excess of 15
percent of total utility plant.
(a) General. This section applies only to borrowers that are
subject to Administrator approval of investments, loans and guarantees
made above the 15 percent limit, i.e., borrowers that do not meet the
exemption criteria in Sec. 1717.655(a).
(b) Distribution borrowers. Distribution borrowers subject to
Administrator approval of investments, loans and guarantees will not be
given approval to make investments, loans and guarantees in an
aggregate amount in excess of 15 percent of total utility plant. Above
the 15 percent level, such borrowers will be restricted to excluded
investments, loans and guarantees as defined in Sec. 1717.654.
(However, they are eligible to ask RUS to exclude a portion of their
investments under the conditions set forth in paragraph (d) of this
section.)
(c) Power supply borrowers. (1) Power supply borrowers subject to
Administrator approval of investments, loans and guarantees may request
approval to exceed the 15 percent level if all of the following
criteria are met:
(i) The borrower is in compliance with all provisions of its RUS
mortgage, RUS loan contract, and any other agreement with RUS;
(ii) The borrower is not in financial workout and has not had its
government debt restructured;
(iii) The borrower has equity equal to at least 5 percent of its
total assets; and
(iv) After approval of the investment, loan or guarantee, the
aggregate of the borrower's investments, loans and guarantees will not
exceed 20 percent of the borrower's total utility plant.
(2) Borrower requests for approval to exceed the 15 percent level
will be considered on a case by case basis. The requests must be made
in writing.
(3) In considering borrower requests, the Administrator will take
the following factors into consideration:
(i) The repayment of all loans secured under the RUS mortgage will
continue to be assured, and loan security must continue to be
reasonably adequate, even if the entire investment or loan is lost or
the borrower is required to perform for the entire amount of the
guarantee. These risks will be considered along with all other risks
facing the borrower, whether or not related to the investment, loan or
guarantee;
(ii) In the case of investments, the investment must be made in an
entity separate from the borrower, such as a subsidiary, whereby the
borrower is protected from any liabilities incurred by the separate
entity, unless the borrower demonstrates to the satisfaction of the
Administrator that making the investment directly rather than through a
separate entity will present no substantial risk to the borrower in
addition to the possibility of losing all or part of the original
investment;
(iii) The borrower must be economically and financially sound as
indicated by its costs of operation, competitiveness, operating TIER
and operating DSC, physical condition of the plant, ratio of equity to
total assets, ratio of net utility plant to long-term debt, and other
factors; and
(iv) Other factors affecting the security and repayment of
government debt, as determined by the Administrator on a case by case
basis.
(4) If the Administrator approves an investment, loan or guarantee,
such investment, loan or guarantee will continue to be included when
calculating the borrower's ratio of aggregate investments, loans and
guarantees to total utility plant.
(d) Distribution and power supply borrowers. If the aggregate of
the investments, loans and guarantees of a distribution or power supply
borrower exceeds 15 percent of the borrower's total utility plant as a
result of the cumulative profits or margins, net of losses, earned on
said transactions over the past 10 calendar years (i.e., the sum of all
profits earned during the 10 years on all transactions--including
interest earned on cash accounts, loans, and similar transactions--less
the sum of all losses experienced on all transactions during the 10
years) then:
(1) The borrower will not be in default of the RUS loan contract or
RUS mortgage with respect to required approval of investments, loans
and guarantees, provided that the borrower had not made additional net
investments, loans or guarantees without approval after reaching the 15
percent level; and
(2) At the request of the borrower, the Administrator in his sole
discretion may decide to exclude up to the amount of net profits or
margins earned on the borrower's investments, loans and guarantees
during the past 10 calendar years, if the Administrator determines that
such exclusion will not increase loan security risks. The borrower must
provide documentation satisfactory to the Administrator as to the
current status of its investments, loans and guarantees and the net
profits earned during the past 10 years. Any exclusion approved by the
Administrator may or may not reduce the level of investments, loans and
guarantees to or below the 15 percent level. If such exclusion does not
reduce the level to or below the 15 percent level, RUS will notify the
borrower in writing that it must reduce or restructure its investments,
loans and guarantees to a level of not more than 15 percent of total
utility plant. If the borrower does not come within the 15 percent
level within a reasonable period of time determined by the
Administrator, which shall not exceed 12 months from the date the
borrower was notified of the required action, then, upon written notice
from RUS, the borrower shall be in default of its RUS loan contract and
mortgage.
Sec. 1717.657 Records, reports and audits.
(a) Every borrower shall maintain accurate records concerning all
investments, loans and guarantees made by it. Such records shall be
kept in a manner that will enable RUS to readily determine:
(1) The nature and source of all income, expenses and losses
generated from the borrower's loans, guarantees and investments;
(2) The location, identity and lien priority of any loan collateral
resulting from activities permitted by this subpart; and
(3) The effects, if any, which such activities may have on the
feasibility of loans made, guaranteed or lien accommodated by RUS.
(b) In determining the aggregate amount of investments, loans and
guarantees made by a borrower, the borrower shall use the recorded
value of each investment, loan or guarantee as reflected on its books
and records for the next preceding end-of-month, except for the end-of-
year report which shall be based on December 31 information. Every
borrower shall also report annually to RUS, in the manner and on the
form specified by the Administrator, the current status of each
investment, outstanding loan and outstanding guarantee which it has
made pursuant to this subpart.
(c) The records of borrowers shall be subject to the auditing
procedures prescribed in part 1773 of this chapter. RUS reserves the
right to review the financial records of any subsidiaries of the
borrower to determine if the borrower is in compliance with this
subpart, and to ascertain if the debts, guarantees (as defined in this
subpart), or other obligations of the subsidiaries could adversely
affect the ability of the borrower to repay its debts to the
Government.
(d) RUS will monitor borrower compliance with this subpart based
primarily on the annual financial and statistical report submitted by
the [[Page 8989]] borrower to RUS and the annual auditor's report on
the borrower's operations. However, RUS may inspect the borrower's
records at any time during the year to determine borrower compliance.
If a borrower's most recent annual financial and statistical report
shows the aggregate of the borrower's investments, loans and guarantees
to be below the 15 percent level, that in no way relieves the borrower
of its obligation to comply with its RUS mortgage, RUS loan contract,
and this subpart with respect to Administrator approval of any
additional investment, loan or guarantee that would cause the aggregate
to exceed the 15 percent level.
Sec. 1717.658 Effect of this subpart on RUS loan contract and
mortgage.
(a) Nothing in this subpart shall affect any provision, covenant,
or requirement in the RUS mortgage, RUS loan contract, or any other
agreement between a borrower and RUS with respect to any matter other
than the prior approval by RUS of investments, loans, and guarantees
made by the borrower. Also, nothing in this subpart shall affect any
rights which supplemental lenders have under the RUS mortgage, or under
their loan contracts or other agreements with their borrowers, to limit
investments, loans and guarantees by their borrowers to levels below 15
percent of total utility plant.
(b) RUS reserves the right to change the provisions of the RUS
mortgage and loan contract relating to RUS approval of investments,
loans and guarantees made by the borrower, on a case-by-case basis, in
connection with providing additional financial assistance to a borrower
after [Date 30 days after the final rule is published in the Federal
Register].
Dated: February 7, 1995.
Bob J. Nash,
Under Secretary, Rural Economic and Community Development.
[FR Doc. 95-3665 Filed 2-15-95; 8:45 am]
BILLING CODE 3410-15-P
