[Federal Register Volume 60, Number 183 (Thursday, September 21, 1995)]
[Rules and Regulations]
[Pages 48870-48882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-23380]
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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: Final rule.
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SUMMARY: The Rural Utilities Service (RUS) hereby revises its policies
and requirements governing restrictions on investments, loans and
guarantees made by electric borrowers. This rule is intended to clarify
RUS's policies and requirements, reduce uncertainty by borrowers, and
improve compliance.
EFFECTIVE DATE: This rule is effective October 23, 1995.
FOR FURTHER INFORMATION CONTACT: Mr. Alex M. Cockey, Jr., Deputy
Assistant Administrator--Electric, U.S. Department of Agriculture,
Rural Utilities Service, room 4037-S, Ag Box 1560, 14th Street &
Independence Avenue, SW., Washington, DC 20250-1500. Telephone: 202-
720-9547.
SUPPLEMENTARY INFORMATION: This rule has been determined to be not
significant for the purposes of Executive Order 12866, and therefore
has not been reviewed by the Office of Management and Budget (OMB). The
Administrator of RUS has determined that the Regulatory Flexibility Act
(5 U.S.C. 601 et seq.) does not apply to this rule. The Administrator
of RUS has determined that this rule will not significantly affect the
quality of the human environment as defined by the National
Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.). Therefore,
this action does not require an environmental impact statement or
assessment. This rule is excluded from the scope of Executive Order
12372, Intergovernmental Consultation, which may require consultation
with State and local officials. A Notice of Final Rule titled
Department Programs and Activities Excluded from Executive Order 12372
(50 FR 47034) exempts RUS electric loans and loan guarantees from
coverage under this Order. This rule has been reviewed under Executive
Order 12778, Civil Justice Reform. This rule: (1) Will not preempt any
State or local laws, regulations, or policies, unless they present an
irreconcilable conflict with this rule; (2) Will not have any
retroactive effect; and (3) Will not require administrative proceedings
before any parties may file suit challenging the provisions of this
rule.
The program described by this rule is listed in the Catalog of
Federal Domestic Assistance Programs under number 10.850 Rural
Electrification Loans and Loan Guarantees. This catalog is available on
a subscription basis from the Superintendent of Documents, the United
States Government Printing Office, Washington, DC 20402-9325.
Information Collection and Recordkeeping Requirements
The 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 number 0572-0032.
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
[[Page 48871]]
of 15 percent of their total utility plant, 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 in 7 CFR part 1717, subpart N (at 54 FR 27325). 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.
On February 16, 1995, at 60 FR 8981, RUS published a proposed rule
to clarify RUS's policies and requirements regarding restrictions on
borrower investments, loans and guarantees. Over the years borrowers
had 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 final rule resolves 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 was 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. On July 18,
1995 RUS published the final rule for the distribution mortgage and a
proposed rule for the distribution loan contract, at FR 36882 and FR
36904, respectively.
Comments on the proposed changes to RUS investment controls
contained in 7 CFR part 1717, subpart N were received from 26
commenters, including the National Rural Electric Cooperative
Association, the National Rural Utilities Cooperative Finance
Corporation (CFC), the Saint Paul Bank for Cooperatives, and 23
borrowers or regional borrower associations. All comments were
considered in preparing this final rule. The more significant or more
frequently made comments are discussed below.
Section 1717.651 Policy
Questions were raised about the second part of the statement: ``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.'' RUS did not propose any change in this statement, which is
contained in the existing rule.
It was suggested that this policy is unworkable since any
investment involves some risk. RUS recognizes that most investments
involve some risk, but continues to believe that it is only prudent
that borrowers avoid those investments having risks of a magnitude that
would in any way put government funds at risk or impair loan repayment.
We continue to believe that this is the correct interpretation of the
intent of section 312.
Section 1717.652 Definitions
The term ``own funds'' was defined as ``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. A commenter pointed out
that requests for loan advances commonly occur after general funds have
already been expended for loan purposes, and that it would be difficult
to separate general funds into cash generated by operations and that
derived from loan advances. This was not the agency's intent, nor is
such separation required under the existing rule. To make this clear,
the definition has been revised as follows: ``Own funds means money
belonging to the borrower other than funds on deposit in the cash-
construction fund-trustee account.''
One commenter stated that Operating TIER and Operating DSC, used as
part of the criteria in proposed Sec. 1717.655 to determine eligibility
for an exemption from controls, appeared to be the same as standard
TIER and DSC. They are not, since they measure interest and debt
coverage only for the borrower's electric utility operations. Margins
used in the calculation are operating margins rather than total
margins. A few technical changes have been made to the definitions in
this final rule to make it clearer that Operating TIER and Operating
DSC apply only to the borrower's electric system and do not apply to
any other utility operations of the borrower, such as a water and waste
disposal system owned by the borrower.
One commenter asked whether margins earned by subsidiaries
controlled by a borrower would be included in operating margins used in
calculating Operating TIER and DSC. Since such subsidiaries are
separate business entities outside the borrower's core electric utility
business, as indicated above their profits or losses will not be
included in calculating Operating TIER and DSC. They are, however,
included in the calculation of standard TIER and DSC contained in the
rate covenant of the typical mortgage or loan contract.
A question was asked about whether ``telecommunication and other
electronic communication system'' includes satellite and direct
broadcast television service. The answer is yes, provided that ``the
service'' includes providing a continuing service to customers, such as
television programming, rather than just a one-time sale of equipment,
and as set forth in the definition, such services ``are available by
design to all or a substantial portion of the members of the
community.''
Section 1717.653 Borrowers in Default
This section has been added to clarify the point that if a borrower
in not in compliance with all provisions of its mortgage, loan
contract, or any other agreements with RUS, the borrower must obtain
prior written approval from the Administrator to invest its own funds
or to make loans or guarantees, unless such loan document or other
agreement specifically provides otherwise. This was implicit in
proposed section 1717.653(a) (renumbered 1717.654(a)), and is now
spelled out for greater clarity.
Section 1717.654 (Proposed 1717.653) Transactions Below the 15 Percent
Level
Clarification was requested of the statement that ``funds necessary
to make timely payments of principal and interest on loans secured by
the RUS mortgage remain subject to RUS controls. * * *'' The purpose of
this statement is to make it clear that while RUS controls on
investments, loans and guarantees by the borrower do not ordinarily
apply below the 15 percent level, RUS may impose such controls case-by-
case in those circumstances where they are necessary to ensure
reasonably adequate loan security or to ensure the repayment of loans
secured under the mortgage. Such instances presumably would be
relatively rare, and the borrower would be notified in advance that the
controls were being imposed.
[[Page 48872]]
One commenter stated that the apparent effect of paragraph (b) of
this section is to restrict the limitations on investments contained in
the rule to loan contracts or mortgages executed after the effect date
of the final rule. That is not correct. Proposed paragraph (b)
described language to be included in the loan contract or mortgage
regarding investment controls, and proposed certain changes in the
prescribed language for these documents contained in Sec. 1717.654(b)
of the existing rule. In the final rule, this prescribed language has
been further revised to conform with the approach used in the new
mortgage and proposed loan contract for distribution borrowers: namely,
the provision is expressed in more general terms, relying on RUS
regulations to flesh out the interpretation and specific requirements
of the provision. Revised paragraph (b) has been moved to
Sec. 1717.659.
The provisions of existing subpart N have applied to all borrowers
since the date it became effective, July 31, 1989, regardless of when
their loan contracts or mortgages were executed. Changes to subpart N
contained in this final rule will also apply to all borrowers
regardless of when their loan documents were executed. This has been
clarified in Sec. 1717.650. RUS believes that borrowers who qualify for
an outright exemption from investment controls should not have to wait
until new loan documents are executed before becoming eligible. Nor
should other reforms be delayed, such as excluding rural community
infrastructure from the 15 percent calculation.
Section 1717.655 (Proposed 1717.654) Exclusion of Certain Investments,
Loans, and Guarantees
The Saint Paul Bank for Cooperatives recommended that investments
in it be excluded, as are investments in CFC and CoBank. This has been
done.
A commenter pointed out that investments made in a trust fund
dedicated to pay the decommissioning costs of nuclear generating
facilities was not listed in this section as an excluded investment,
but is excluded under RUS Bulletin 1717B-3. Failure to list such
investments as excluded under this section was inadvertent, and this
has been corrected.
One commenter noted that several generation and transmission
borrowers (G&Ts) have invested in fuel supply subsidiaries in an effort
to control fuel costs, and argued that such investments should be
excluded. This recommendation has not been adopted.
Such subsidiaries often have other lines of business and often
provide services to other utilities or other companies, making it
difficult to determine to what extent the subsidiary is involved in
providing services in direct support of the borrower's electric utility
business. If fuel supply subsidiaries were excluded, then there would
be pressure to exclude other subsidiaries that might provide some
services to the borrower, such as warehousing, barge service, railroad
or truck service, insurance, engineering services, etc. Moreover, the
property of a subsidiary generally is not subject to the lien of the
government's mortgage, and the property and operations of the
subsidiary are not subject to RUS operational controls and approval
rights. This often can present serious problems with respect to the
agency's programmatic and security interests.
A commenter recommended that patronage capital allocated to a G&T
by its distribution members be excluded. Such allocations often occur
when a G&T buys power from its members for headquarters, warehouses,
and metering points located in the members' territory. This
recommendation has been adopted.
Another commenter stated that the exclusion of community
infrastructure in paragraph (c)(3) should not be based on whether the
infrastructure is located within the borrower's service territory, but
whether the infrastructure serves consumers located in rural areas. RUS
agrees with the recommendation for the purposes of this rule, and has
so revised the paragraph.
Proposed paragraph (c)(1) excluded investments or loans made by a
borrower derived from funds obtained from grants or loans received from
a USDA agency. Such grants and loans from a USDA agency normally would
be for purposes supporting rural economic development. A commenter
recommended that the source of the grant or loan be expanded to include
any Federal, State or local government agency. RUS agrees with this
recommendation provided that such loan funds are designated to promote
rural economic development and the borrower uses the funds for that
purpose. Grant funds that the borrower is not obligated to repay may be
for any purpose since there would be little or no risk to RUS loan
security. In reality, most such grants likely would be for rural
economic development.
A co-mortgagee suggested that it be granted what it described as
the same preapproval of credit enhancement in paragraph (d) as granted
USDA agencies in cases where a borrower is required to make an
investment, loan, or guarantee, for example, as a condition of
obtaining financial assistance from the agency. The intent of this
provision is to support rural economic development, for example, in
instances where a borrower is required to invest some of its own funds
in order to qualify for a rural development grant or loan, which
usually will be on subsidized terms. Investments in the co-mortgagee in
question are excluded under paragraph (b) of this section.
Section 1717.656 (Proposed 1717.655) Exemption of Certain Borrowers
From Controls
A number of comments were received about the criteria for
qualifying for an exemption from investment controls set forth in
paragraph (a).
One borrower asked whether patronage capital earned or refunded
would be subtracted from the average residential rate of borrowers in
making the comparison with the average residential rate for all
utilities serving a state. The answer is, no. This adjustment would not
be significant enough to make a difference among borrowers or to
justify the additional complexity. Borrowers are reminded that if they
fail to qualify for an exemption based solely on the rate disparity
criterion, upon request the Administrator may grant the exemption if he
or she determines that the borrowers' strengths in the other criteria
outweigh their weakness on rate disparity.
Several borrowers suggested that it would be more ``prudent'' to
use a standard TIER of 1.05 for G&Ts rather than the proposed Operating
TIER and Operating DSC of 1.0. RUS disagrees that that would be more
``prudent'' from the standpoint of loan security. In addition to
Operating TIER and DSC, a borrower would have to meet the TIER and DSC
requirements in its mortgage (the first criterion under paragraph (a)),
which for most G&Ts is a standard DSC of 1.0 and standard TIER of 1.0
or 1.05. The advantage of requiring a minimum Operating TIER and DSC of
1.0 is that it will ensure that a borrower is at least breaking even on
its main business, its electric operations, and does not need to rely
on income from investments and other non-core activities to meet its
debt service and other expenses of its core business.
Several G&Ts argued that the minimum equity required to qualify for
an exemption should be set lower for G&Ts than for distribution
systems. RUS disagrees since it is not apparent that giving G&T's wider
latitude to make investments without RUS approval would involve less
risk to loan security than in the case of distribution borrowers.
[[Page 48873]]
Several borrowers opposed the netting out of regulatory created
assets when calculating equity as a percent of total assets. RUS
disagrees since these assets represent current period expenses that
should have been expensed, rather than capitalized, in order to reflect
the true operating performance of the borrower. Deferring these
expenses overstates both equity and total assets. RUS has followed this
practice for the past several years, codifying it in the lien
accommodation rule (7 CFR part 1717, subparts R and S), the 110 percent
rule (7 CFR 1710.7 and 7 CFR 1717.860), and the distribution mortgage
(7 CFR part 1718, subpart B).
Under paragraph (c), a borrower that has lost its exemption may
regain it if it once again meets the exemption criteria. One commenter
recommended that restoration of the exemption ought to be automatic,
rather than contingent upon written notice from RUS. RUS believes that
notice is required in order for the borrower and RUS to have the same
understanding about the exemption status of the borrower. Without
requiring notification, disputes and associated administrative costs
and delays would likely occur. Requiring written notice to restore an
exemption is consistent with the written notice required to terminate
an exemption.
Under paragraph (d), a borrower that has lost its exemption and has
exceeded the 15 percent limit would be required to reduce or
restructure its investment portfolio to come within the 15 percent
limit. If the borrower failed to come within the 15 percent limit
within a reasonable period of time determined by the Administrator, the
borrower could be given notice of default.
The proposed paragraph implicitly assumed the borrower was in
compliance with all other provisions of its mortgage, loan contract,
and any other agreements with RUS. This has now been made explicit, and
it has been reiterated that if the borrower is not in compliance with
such provisions it may be required to reduce its investment portfolio
below the 15 percent level, if not prohibited by the explicit terms of
the borrower's mortgage, loan contract, or other agreement with RUS.
One commenter argued that RUS should not be able to call a default
if the investments that exceeded the 15 percent limit were made while
the borrower was exempt. RUS disagrees, since without the right to call
a default there would be less leverage to reduce loan security risks in
cases where a borrower had a high-risk investment portfolio that
substantially exceeded the 15 percent limit. There would also be less
incentive for borrowers to maintain the performance levels required for
an exemption if there were no penalty for failing to maintain these
levels.
However, it may not be necessary in all cases to require a formerly
exempt borrower to reduce its investment portfolio to the 15 percent
limit. Paragraph (d) has therefore been revised to give the
Administrator the flexibility to allow a formerly exempt borrower not
in default to remain above the 15 percent limit if the Administrator
determines that reducing or restructuring the investment portfolio to
come within the limit would not be in the financial interest of the
government from the standpoint of loan security and/or repayment.
Section 1717.657 (Proposed 1717.656) Investments Above the 15 Percent
Level by Certain Borrowers not Exempt Under Sec. 1717.656(a)
A commenter recommended that G&Ts not meeting the minimum criteria
in paragraph (c) for requesting RUS approval of investments above the
15 percent level should nevertheless be given a chance to have their
requests considered. RUS disagrees. The criteria are very minimal: no
default, no financial workout or restructured debt, and a minimum
equity of 5 percent. G&Ts (as well as distribution borrowers) that are
in default do not in the first place qualify under Sec. 1717.654(a) to
make investments, loans and guarantees up to the 15 percent level
without RUS approval. Section 1717.657 does not apply to them. Other
G&Ts that are not in default but have equity of less than 5 percent, or
are in financial workout, or have had their debt restructured, ought to
confine investments above the 15 percent level to excluded investments.
Another commenter recommended that distribution borrowers not
meeting the criteria for an outright exemption from investment controls
(Sec. 1717.656(a)) ought to be able to seek approval from RUS for
investments above the 15 percent level. RUS believes such borrowers
should restrict their investments above the 15 percent level to
excluded investments. Some 84 percent of distribution borrowers qualify
for an outright exemption. Many of the remaining borrowers could make
changes in their operations and qualify for an exemption.
A co-mortgagee argued that it would be more prudent to relate the
maximum limit on investments by G&Ts to equity, rather than 20 percent
of total utility plant (see Sec. 1717.657(c)). RUS agrees that it would
be more logical to use equity, one of the criteria used to determine
eligibility for an exemption from investment controls. However, setting
the maximum investment limit at even 100 percent of equity would result
in a limit for most G&Ts lower than the 15 percent of total utility
plant mandated by section 312 of the RE Act.
A commenter asked whether the 10-year look-back on net profits on
investments in paragraph (d) is a rolling or one-time calculation. It
is a rolling calculation done at the time RUS is asked by a borrower to
exclude all or a portion of net profits that have resulted in
investments exceeding the 15 percent limit.
Section 1717.658 (Proposed 1717.657) Records, Reports and Audits
One commenter recommended changing current practice which requires
guarantees and lines of credit to be counted in full against the 15
percent limit whether or not there is a loan outstanding or any
likelihood the guarantee will be called upon. RUS does not believe
current practice should be changed. A line of credit could be drawn
upon at any time and RUS would have no way of anticipating when that
time might come. Presumably borrowers would not want their ability to
make good on a line of credit commitment to another party to be subject
to subsequent approval by RUS. As to excluding guarantee obligations of
the borrower that are unlikely to be called upon, in most cases it
would be very difficult and time-consuming for RUS to assess the
probability that the borrower will be required to perform under the
guarantee.
One commenter stated that the balance sheet method used by RUS to
count investments is not consistent with section 312. RUS disagrees
with that view, and notes that Sec. 1717.657(d) of the rule addresses
the main concern that has been raised over the years: namely, that net
profits on investments may cause a borrower to exceed the 15 percent
limit and possibly be in default. Section 1717.657(d) provides that
such circumstances would not necessarily result in a default, and at a
borrower's request, the Administrator could exclude up to the amount of
net profit earned over the past 10 years if such exclusion would not
increase loan security risks.
Section 1717.659 (Proposed 1717.658) Effect on RUS Loan Contract and
Mortgage
Section 1717.656(c) of the existing regulation explicitly states
that, ``Nothing in this subpart authorizes a borrower to make
extensions or improvements to its electric system without prior
approval of RUS.'' That
[[Page 48874]]
provision was subsumed under a more comprehensive provision in proposed
Sec. 1717.658(a), which in the final rule has been clarified by adding
the specific reference to RUS approval rights over system extensions
and additions. Similar changes have been made to sections 1717.654 and
1717.656.
Borrowers Exempt From Investment Controls
The distribution and power supply borrowers listed below meet the
criteria in Sec. 1717.656(a) and are exempt from RUS approval of any
investment, loan, or guarantee made on or after September 21, 1995.
Borrowers are reminded that, under Sec. 1717.656(c), if they
subsequently cease to meet the exemption criteria, upon written notice
from RUS they will no longer be exempt from RUS investment controls.
Borrowers that do not meet the criteria for exemption will be
notified individually in writing by RUS and will be advised of the
reasons they fail to qualify.
Borrowers Exempt From RUS Investment Controls
AL 9
AL 18
AL 19
AL 20
AL 21
AL 23
AL 25
AL 26
AL 27
AL 28
AL 29
AL 30
AL 32
AL 35
AL 36
AL 37
AL 39
AL 44
AL 46
AL 47
AL 48
AK 2
AK 5
AK 6
AK 11
AZ 13
AZ 20
AZ 23
AZ 27
AZ 30
AR 9
AR 10
AR 11
AR 12
AR 13
AR 15
AR 18
AR 21
AR 22
AR 23
AR 24
AR 26
AR 27
AR 28
AR 29
AR 33
CA 6
CA 16
CO 7
CO 14
CO 15
CO 16
CO 18
CO 20
CO 22
CO 29
CO 31
CO 32
CO 33
CO 34
CO 37
CO 38
CO 39
CO 40
CO 42
DE 2
FL 14
FL 15
FL 16
FL 17
FL 22
FL 23
FL 24
FL 28
FL 29
FL 30
FL 33
FL 34
FL 35
GA 7
GA 8
GA 17
GA 20
GA 22
GA 31
GA 34
GA 35
GA 37
GA 39
GA 42
GA 45
GA 58
GA 65
GA 66
GA 67
GA 68
GA 69
GA 73
GA 74
GA 75
GA 77
GA 78
GA 81
GA 83
GA 84
GA 86
GA 87
GA 88
GA 90
GA 91
GA 92
GA 94
GA 95
GA 96
GA 97
GA 98
GA 99
GA 103
GA 108
ID 4
ID 11
ID 16
ID 19
ID 23
IL 2
IL 7
IL 8
IL 18
IL 21
IL 23
IL 30
IL 31
IL 32
IL 33
IL 34
IL 37
IL 38
IL 41
IL 43
IL 44
IL 45
IL 46
IL 48
IL 54
IN 1
IN 6
IN 7
IN 8
IN 14
IN 18
IN 26
IN 27
IN 29
IN 32
IN 35
IN 37
IN 38
IN 40
IN 42
IN 46
IN 47
IN 52
IN 53
IN 55
IN 60
IN 70
IN 80
IN 81
IN 83
IN 87
IN 88
IN 89
IN 92
IN 99
IN 100
IN 108
IN 109
[[Page 48875]]
IA 2
IA 3
IA 5
IA 7
IA 9
IA 14
IA 15
IA 16
IA 23
IA 26
IA 30
IA 31
IA 32
IA 33
IA 34
IA 36
IA 39
IA 40
IA 41
IA 50
IA 51
IA 52
IA 53
IA 56
IA 57
IA 59
IA 62
IA 67
IA 69
IA 70
IA 71
IA 74
IA 75
IA 77
IA 82
IA 92
IA 93
KS 7
KS 13
KS 15
KS 18
KS 21
KS 22
KS 24
KS 27
KS 30
KS 31
KS 33
KS 41
KS 42
KS 47
KS 48
KS 56
KY 3
KY 18
KY 20
KY 21
KY 23
KY 26
KY 27
KY 30
KY 33
KY 34
KY 35
KY 37
KY 38
KY 40
KY 45
KY 50
KY 51
KY 52
KY 54
KY 55
KY 56
KY 57
KY 58
KY 61
LA 6
LA 7
LA 8
LA 9
LA 12
LA 17
LA 19
LA 20
MD 7
MI 5
MI 26
MI 33
MI 37
MI 40
MI 41
MI 43
MI 44
MI 45
MN 1
MN 3
MN 4
MN 9
MN 10
MN 12
MN 18
MN 25
MN 32
MN 34
MN 35
MN 37
MN 39
MN 48
MN 53
MN 55
MN 56
MN 57
MN 58
MN 59
MN 60
MN 61
MN 62
MN 63
MN 65
MN 66
MN 72
MN 73
MN 74
MN 75
MN 79
MN 80
MN 81
MN 82
MN 83
MN 84
MN 85
MN 87
MN 95
MN 96
MN 97
MN 101
MN 108
MS 1
MS 21
MS 22
MS 23
MS 24
MS 26
MS 28
MS 29
MS 30
MS 31
MS 34
MS 36
MS 39
MS 40
MS 41
MS 43
MS 45
MS 48
MS 49
MS 50
MO 12
MO 18
MO 19
MO 20
MO 22
MO 23
MO 24
MO 26
MO 27
MO 28
MO 30
MO 31
MO 32
MO 33
MO 34
MO 36
MO 37
MO 38
MO 40
MO 41
MO 42
MO 43
MO 44
MO 45
MO 46
MO 47
MO 48
MO 49
MO 50
MO 51
MO 53
MO 54
MO 55
MO 58
MO 66
MO 67
MO 68
MO 69
MO 70
MO 71
MO 72
MT 1
MT 2
MT 9
MT 10
MT 12
MT 13
MT 15
MT 17
[[Page 48876]]
MT 19
MT 21
MT 24
MT 25
MT 26
MT 27
MT 30
MT 31
MT 33
MT 36
NE 3
NE 4
NE 51
NE 59
NE 62
NE 63
NE 65
NE 66
NE 77
NE 78
NE 84
NE 85
NE 97
NE 98
NV 4
NV 15
NV 18
NJ 6
NM 4
NM 8
NM 9
NM 11
NM 20
NM 21
NM 22
NM 23
NM 28
NY 19
NY 20
NY 21
NY 24
NC 10
NC 14
NC 16
NC 21
NC 23
NC 25
NC 31
NC 32
NC 33
NC 34
NC 35
NC 36
NC 38
NC 39
NC 40
NC 43
NC 46
NC 49
NC 50
NC 51
NC 52
NC 55
NC 58
NC 59
NC 64
NC 66
NC 68
ND 8
ND 21
ND 28
ND 31
ND 32
ND 33
ND 34
ND 35
ND 38
OH 1
OH 24
OH 30
OH 31
OH 33
OH 39
OH 42
OH 50
OH 55
OH 56
OH 59
OH 60
OH 65
OH 71
OH 74
OH 75
OH 83
OH 84
OH 85
OH 86
OH 87
OH 88
OH 93
OH 94
OK 1
OK 6
OK 12
OK 14
OK 15
OK 18
OK 19
OK 20
OK 21
OK 22
OK 23
OK 24
OK 25
OK 27
OK 28
OK 29
OK 30
OK 31
OK 33
OK 34
OK 35
OK 37
OR 2
OR 4
OR 14
OR 18
OR 21
OR 25
OR 26
OR 39
OR 41
PA 4
PA 6
PA 12
PA 15
PA 17
PA 19
PA 20
PA 21
PA 24
PA 25
PA 28
SC 14
SC 19
SC 21
SC 22
SC 23
SC 26
SC 27
SC 28
SC 29
SC 30
SC 31
SC 32
SC 33
SC 34
SC 35
SC 38
SC 40
SC 41
SD 3
SD 6
SD 7
SD 11
SD 13
SD 16
SD 17
SD 18
SD 19
SD 21
SD 23
SD 25
SD 26
SD 27
SD 28
SD 29
SD 30
SD 31
SD 32
SD 33
SD 35
SD 36
SD 39
SD 40
SD 41
SD 42
TN 1
TN 9
TN 16
TN 17
TN 19
TN 20
TN 21
TN 23
TN 24
TN 25
TN 26
TN 31
TN 32
TN 34
TN 35
TN 36
TN 37
TN 38
TN 45
TN 46
[[Page 48877]]
TN 48
TN 49
TN 51
TN 60
TX 7
TX 11
TX 21
TX 23
TX 30
TX 38
TX 40
TX 41
TX 48
TX 50
TX 52
TX 53
TX 54
TX 55
TX 56
TX 58
TX 59
TX 60
TX 62
TX 63
TX 64
TX 65
TX 67
TX 69
TX 70
TX 71
TX 72
TX 75
TX 77
TX 78
TX 83
TX 85
TX 86
TX 87
TX 88
TX 91
TX 93
TX 95
TX 96
TX 97
TX 99
TX 102
TX 106
TX 108
TX 113
TX 114
TX 118
TX 122
TX 123
TX 124
TX 125
TX 135
TX 145
TX 149
UT 6
UT 8
UT 11
UT 20
VT 8
VA 2
VA 11
VA 27
VA 28
VA 29
VA 30
VA 31
VA 34
VA 36
VA 37
VA 39
VA 54
VA 55
WA 8
WA 17
WA 20
WA 28
WA 32
WA 36
WA 39
WA 46
WA 47
WA 48
WI 14
WI 19
WI 21
WI 25
WI 27
WI 29
WI 32
WI 35
WI 37
WI 38
WI 40
WI 41
WI 43
WI 47
WI 49
WI 51
WI 52
WI 53
WI 54
WI 55
WI 66
WY 3
WY 5
WY 6
WY 10
WY 11
WY 12
WY 14
WY 25
List of Subjects 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 part 1717 is revised to
read 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 General.
1717.652 Definitions.
1717.653 Borrowers in default.
1717.654 Transactions below the 15 percent level.
1717.655 Exclusion of certain investments, loans, and guarantees.
1717.656 Exemption of certain borrowers from controls.
1717.657 Investments above the 15 percent level by certain
borrowers not exempt under Sec. 1717.656(a).
1717.658 Records, reports and audits.
1717.659 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 sets forth general regulations for implementing and
interpreting provisions of the RUS mortgage and loan contract regarding
investments, loans, and guarantees made by electric borrowers, as well
as 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 electric borrowers under the RE Act may,
without restriction or prior approval of the Administrator of the Rural
Utilities Service (RUS), invest their own funds and make loans or
guarantees.
Sec. 1717.651 General.
(a) 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, and
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
[[Page 48878]]
liquidity in the management of their funds.
(b) Applicability of this subpart. This subpart applies to all
distribution and power supply borrowers regardless of when their loan
contract or mortgage was executed.
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.
Distribution borrower means a Distribution Borrower as defined in 7
CFR 1710.2.
Electric system means all of the borrower's interests in all
electric production, transmission, distribution, conservation, load
management, general plant and other related facilities, equipment or
property and in any mine, well, pipeline, plant, structure or other
facility for the development, production, manufacture, storage,
fabrication or processing of fossil, nuclear, or other fuel or in any
facility or rights with respect to the supply of water, in each case
for use, in whole or in major part, in any of the borrower's generating
plants, including any interest or participation of the borrower in any
such facilities or any rights to the output or capacity thereof,
together with all lands, easements, rights-of-way, other works,
property, structures, contract rights and other tangible and intangible
assets of the borrower in each case used or useful in such electric
system.
Equity means the Margins and Equities of the borrower as defined in
the Uniform System of Accounts, less regulatory created assets.
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.
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) of the
borrower's electric system calculated as:
[GRAPHIC][TIFF OMITTED]TR21SE95.001
where:
All amounts are for the same year and are based on the RUS
system of accounts;
A=Depreciation and Amortization Expense of the electric system;
B=Interest on Long-term Debt of the electric system, 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 of the
electric system exceed 2 percent of Total Margins and Equities;
C=Patronage Capital & Operating Margins of the electric system
(distribution borrowers) or Operating Margins of the electric system
(power supply borrowers); and
D=Debt Service Billed (RUS + other) which equals all interest and
principal billed or billable during the calendar year for long-term
debt of the electric system plus \1/3\ of the amount, if any, by
which the rentals of Restricted Property of the electric system
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)
of the borrower's electric system calculated as:
[GRAPHIC][TIFF OMITTED]TR21SE95.002
where:
All amounts are for the same year and are based on the RUS
system of accounts;
A=Interest on Long-term Debt of the electric system, 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 of the electric
system exceed 2 percent of Total Margins and Equities; and
B=Patronage Capital & Operating Margins of the electric system
(distribution borrowers) or Operating Margins of the electric system
(power supply borrowers).
Own funds means money belonging to the borrower other than funds on
deposit in the cash-construction fund-trustee account.
Power supply borrower means a Power Supply Borrower as defined in 7
CFR 1710.2.
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 loan contract means the loan contract between the borrower and
RUS.
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.
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
[[Page 48879]]
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 Borrowers in default.
Any borrower not in compliance with all provisions of its mortgage,
loan contract, or any other agreements with RUS must, unless the
borrower's mortgage, loan contract, or other agreement with RUS
specifically provides otherwise with respect to such a borrower:
(a) Obtain prior written approval from the Administrator to invest
its own funds or to make loans or guarantees regardless of the
aggregate amount of such investments, loans, or guarantees; and
(b) If requested by the Administrator, restructure or reduce the
amount of its investments, loans, and guarantees to a level determined
by the Administrator, in his or her sole discretion, to be in the
financial interest of the government with respect to loan security and/
or repayment. If the borrower does not so restructure or reduce its
portfolio 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. 1717.654 Transactions below the 15 percent level.
(a) A borrower in compliance with all provisions of its RUS
mortgage, RUS loan contract, and any other agreements 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, provided, however, that the borrower
may not, without the prior written approval of the Administrator, make
such investments, loans, and guarantees to extend, add to, or modify
its electric system. Moreover, 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 not consider requests from borrowers to exclude
investments, loans, or guarantees made below the 15 percent level.
(Categorical exclusions are set forth in Sec. 1717.655.)
Sec. 1717.655 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, the Saint Paul Bank for
Cooperatives, and CoBank, ACB;
(3) Patronage capital allocated from an electric power supply
cooperative of which the borrower is a member; and
(4) Patronage capital allocated from an electric distribution
cooperative to a power supply borrower.
(c) Without prior approval of the Administrator, the borrower may
also:
(1) Invest or lend funds derived directly from:
(i) Grants which the borrower in not obligated to repay, regardless
of the source or purpose of the grant; and
(ii) Loans received from or guaranteed by any Federal, State or
local government program designed to promote rural economic
development, provided that the borrower uses the loan proceeds for such
purpose;
(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 that serves primarily
consumers located in rural areas as defined in 7 CFR 1710.2, and
guarantee debt issued for the construction or acquisition of such
infrastructure, 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 a
majority of the gross revenues of the larger organization during the
most recent fiscal year came from customers of said system who were
located in a rural area.
(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;
(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; and
(5) Investments included in an irrevocable trust approved by RUS
and dedicated to the payment of decommissioning costs of nuclear
facilities of the borrower.
(e) Grandfathered exclusions. All amounts of individual
investments, loans, and guarantees excluded by RUS 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
[[Page 48880]]
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. 1717.657(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. 1717.657(c), or
has approved a related transaction (e.g., a lien accommodation).
Sec. 1717.656 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, except investments, loans, and guarantees made to extend,
add to, or modify the borrower's electric system:
(1) The borrower is in compliance with all provisions of its RUS
mortgage, RUS loan contract, and any other agreements 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 or
her sole discretion, exempt the borrower if he or she 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. 1717.658.
(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 the 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)(1) A borrower that loses its exemption and is not in compliance
with all provisions of its mortgage, loan contract, or any other
agreement with RUS may be required to restructure or reduce its
portfolio of investments, loans and guarantees as provided in
Sec. 1717.653(b). If the borrower's portfolio exceeds the 15 percent
level, the borrower will be required to restructure or reduce its
portfolio to the 15 percent level or below. For example, if the
borrower's mortgage or loan contract has an approval threshold, the
borrower may be required to reduce its portfolio to that level, which
in many cases is 3 percent of total utility plant.
(2) A borrower that loses its exemption but is in compliance with
all provisions of its mortgage, loan contract, and any other agreements
with RUS will be required, if its investments, loans and guarantees
exceed the 15 percent level, to restructure or reduce its portfolio to
the 15 percent level, unless the Administrator, in his or her sole
discretion, determines that such action would not be in the financial
interest of the government with respect to loan security and/or
repayment. (Such borrower is eligible to ask RUS to exclude a portion
of its investments under the conditions set forth in Sec. 1717.657(d).)
(3) If a borrower required to reduce or restructure its portfolio
does not fully comply 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 July 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.
Sec. 1717.657 Investments above the 15 percent level by certain
borrowers not exempt under Sec. 1717.656(a).
(a) General. (1) This section applies only to borrowers that are in
compliance with all provisions of their mortgage, loan contract, and
any other agreements with RUS and that do not qualify for an exemption
from RUS investment controls under Sec. 1717.656(a).
(2) Nothing in this section shall in any way affect the
Administrator's authority to exercise approval rights over investments,
loans, and guarantees made by a borrower that is not in compliance with
all provisions of its mortgage, loan contract and any other agreements
with RUS.
(b) Distribution borrowers. Distribution borrowers not exempt from
RUS investment controls under Sec. 1717.656(a) may not 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. 1717.655. (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 not exempt
from RUS investment controls under Sec. 1717.656(a) may request
approval to exceed the 15 percent level if all of the following
criteria are met:
(i) Satisfactory evidence has been provided that the borrower is in
compliance with all provisions of its RUS mortgage, RUS loan contract,
and any other agreements 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
[[Page 48881]]
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 or her
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. 1717.658 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 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. 1717.659 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 by
the borrower, such matters including, without limitation, extensions,
additions, and modifications of the borrower's electric system. 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.
[[Page 48882]]
(b) RUS will require that any electric loan made or guaranteed by
RUS after October 23, 1995 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 shall not make any
loan or advance to, or make any investment in, or purchase or make any
commitment to purchase any stock, bonds, notes or other securities of,
or guaranty, assume or otherwise become obligated or liable with
respect to the obligations of, any other person, firm or corporation,
except as permitted by the RE Act and RUS regulations.
(c) 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 October 23, 1995.
Dated: September 15, 1995.
Jill Long Thompson,
Under Secretary, Rural Economic and Community Development.
[FR Doc. 95-23380 Filed 9-20-95; 8:45 am]
BILLING CODE 3410-15-P
