[Federal Register Volume 61, Number 153 (Wednesday, August 7, 1996)]
[Proposed Rules]
[Pages 41025-41032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19711]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 61, No. 153 / Wednesday, August 7, 1996 /
Proposed Rules
[[Page 41025]]
DEPARTMENT OF AGRICULTURE
Rural Utilities Service
7 CFR Parts 1710, 1714, 1717, and 1786
RIN 0572-AB24
RUS Policies on Mergers and Consolidations of Electric Borrowers
AGENCY: Rural Utilities Service, USDA.
ACTION: Proposed rule.
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SUMMARY: The Rural Utilities Service (RUS) proposes to streamline its
regulations through amendments that are intended to encourage electric
borrowers to merge, consolidate, or enter into similar arrangements
that benefit borrowers and rural communities and are consistent with
the interests of the Government as a secured lender. These amendments
are part of an ongoing RUS project to modernize agency policies and
procedures in order to provide borrowers with the flexibility they need
to continue providing reliable electric service at reasonable cost in
rural areas, while maintaining the integrity of Government loans.
DATES: Written comments must be received by RUS or carry a postmark or
equivalent by September 6, 1996.
ADDRESSES: Written comments should be addressed to Sue Arnold,
Financial Analyst, Program Support and Regulatory Analysis, U.S.
Department of Agriculture, Rural Utilities Service, 14th Street and
Independence Ave, SW., AgBox 1522, Washington, DC 20250-1522. RUS
requires, in hard copy, 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: Sue Arnold, Financial Analyst, U.S.
Department of Agriculture, Rural Utilities Service, Room 2230-S, 1400
Independence Avenue, SW., STOP 1522, Washington, DC 20250-1522.
Telephone: 202-720-0736. FAX: 202-720-4120. E-mail:
sarnold@rus.usda.gov.
SUPPLEMENTARY INFORMATION: The Rural Utilities Service (RUS) is taking
this regulatory action as part of the National Performance Review
program to eliminate unnecessary regulations and improve those that
remain in force. This regulatory action has been determined to be
significant for the purposes of Executive Order 12866, Regulatory
Planning and Review, and, therefore has been reviewed by the Office of
Management and Budget (OMB). The Administrator of RUS has determined
that a rule relating to the RUS electric loan program is not a rule as
defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), and,
therefore, the Regulatory Flexibility Act does not apply to this
proposed rule. The Administrator of RUS has determined that this rule
will not significantly affect the quality of the human environment as
defined by the National Environmental Policy Act of 1969 (42 U.S.C.
4321 et seq.). Therefore, this action does not require an environmental
impact statement or assessment. This proposed 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 proposed rule has been
reviewed under Executive Order 12988, Civil Justice Reform. RUS has
determined that this proposed rule meets the applicable standards
provided in Sec. 3. of the Executive Order.
The program described by this rule is listed in the Catalog of
Federal Domestic Assistance Programs under number 10.850 Rural
Electrification Loans and Loan Guarantees. This catalog is 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
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
Chapter 35, as amended) RUS is requesting comments on the information
collection incorporated in this proposed rule.
Comment on this information collection must be received by October
7, 1996.
Comments are invited on: (a) Whether the proposed collection of
information is necessary for the proper performance of the functions of
the agency, including whether the information will have practical
utility; (b) The accuracy of the agency's estimate of the burden of the
proposed collection of information; (c) Ways to enhance the quality,
utility and clarity of the information to be collected; and (d) Ways to
minimize the burden of the collection of information on respondents,
including through the use of automated collection techniques or other
forms of information technology.
For further information contact Sue Arnold, Financial Analyst,
Program Support and Regulatory Analysis, U.S. Department of
Agriculture, Rural Utilities Service, STOP 1522, Room 2230-S, 1400
Independence Avenue, SW., Washington, DC 20250-1522. Telephone: 202-
720-0736. FAX: 202-720-4120. E-mail: sarnold@rus.usda.gov.
Title: 7 CFR 1717 subpart D, Mergers and Consolidations of Electric
Borrowers.
Type of request: New information collection.
Abstract: In response to the rapid changes in the electric
industry, an increasing number of RUS electric distribution borrowers
are exploring the possibilities of mergers, consolidations, and similar
actions. (This rule uses the term ``merger'' to refer to mergers,
consolidations, and similar actions.) Since short-term financial
stresses often follow mergers that offer long-term benefits, RUS is
proposing measures that can provide some relief from these transitional
stresses. These measures are intended to maintain the credit quality of
the RUS loan portfolio while providing borrowers with the flexibility
to react quickly to business opportunities and challenges. Secondly,
RUS is proposing a streamlined application process for mergers that
require RUS approval. The application will rely, as far as possible, on
documents and analyses that are either required by state law, or that
any prudent business would prepare for its own use in evaluating the
costs and
[[Page 41026]]
benefits of a possible merger. Finally, RUS, as a secured lender, needs
certain documentation in order to legally conduct business with a newly
merged entity. This documentation, for the most part, consists of
copies of documents filed with state and local governments and
documentation that would be needed by any secured lender.
Requests to enter into mergers are initiated by borrowers; RUS may
not require borrowers to enter into mergers.
Since mergers reduce the number of borrowers, and reducing the
number of borrowers reduces costs to both borrowers and RUS of
preparing and processing multiple applications and servicing multiple
loans, the proposed rules will result in a net decrease in burden hours
to borrowers and to RUS. This net decrease will be reflected in
requests to renew existing information collections.
Estimate of burden: Public reporting burden for this collection of
information is estimated to average 1 hour per response.
Respondents: Businesses, including not for profit cooperatives and
others.
Estimated number of respondents each year: 25.
Estimated number of responses per respondent: 8.
Estimated total annual burden on respondents: 249 hours.
Copies of this information collection can be obtained from Dawn
Wolfgang, Program Support and Regulatory Analysis, Rural Utilities
Service. Phone: 202-720-0812.
Send comments regarding this information collection requirement to
the Office of Information and Regulatory Affairs, Office of Management
and Budget, ATTN: Desk Officer, USDA, Room 10102 New Executive Office
Building, Washington, DC 20503, and to Sue Arnold, Financial Analyst,
Program Support and Regulatory Analysis, U.S. Department of
Agriculture, Rural Utilities Service, 1400 Independence Ave., SW., STOP
1522, Washington, DC 20250-1522.
Comments are best assured of having full effect if OMB receives
them within 30 days of publication in the Federal Register.
All comments will become a matter of public record.
Background
The electric industry is becoming increasingly competitive. Recent
legislation, including the Energy Policy Act of 1992 and actions by the
Federal Energy Regulatory Commission (FERC), such as its rules on
Promoting Wholesale Competition Through Open Access Non-discriminatory
Transmission Services by Public Utilities, Recovery of Stranded Costs
by Public Utilities and Transmitting Utilities, published May 10, 1996,
at 61 FR 21539, are drastically altering the regulatory and business
environment of all electric systems, including systems financed by RUS.
At the same time, changes in overall business trends and in technology
continue to place pressure on RUS financed systems to operate more
efficiently and hedge risks.
It is clear that the success of the RUS program in supporting rural
infrastructure and economic development is directly tied to the ability
of RUS electric borrowers to meet these new challenges. In order to
maintain and improve the electric infrastructure that is vital to rural
communities, borrowers must have the flexibility to respond quickly and
aggressively to business opportunities and challenges. At the same
time, RUS as a secured lender has a fiduciary responsibility to protect
the security of Government loans and avoid defaults.
One frequent response to the challenge of a volatile industry in
transition is a merger or consolidation. (This rule uses the term
``merger'' to refer to mergers, consolidations, and similar actions.)
RUS has historically encouraged mergers that benefit borrowers and
rural communities, when these arrangements are consistent with the
interests of the Government as a secured lender. RUS continues to urge
borrowers to explore any and all opportunities for operating
efficiencies and other economies.
The amendments proposed today are intended to encourage beneficial
mergers involving RUS borrowers and, as far as possible, to remove any
unnecessary impediments to such mergers. Examples of possible tangible
benefits to borrowers and the rural communities they serve and to RUS
as a secured lender include: Contributing to greater operating
efficiency and financial soundness by combining resources, diversifying
loads or other means; assisting rural economic development by
diversifying the local economic base or alleviating unemployment; and
other benefits consistent with the purposes of the Rural
Electrification Act (RE Act).
Transitional Assistance
RUS recognizes that short-term financial stresses can follow even
the most beneficial mergers. To help stabilize electric rates during
this period, enhance the credit quality of outstanding loans made or
guaranteed by the Government, and otherwise ease the transition period
before long-term efficiencies and economies can be realized, RUS is
proposing new policies for transitional assistance following mergers.
RUS will consider requests for transitional assistance after each
merger. For example, if three borrowers form a single successor through
two consecutive mergers, transitional assistance may be available,
subject to RUS regulations, following each of the mergers. For
transitional assistance available for a closed-ended period after a
merger, the availability period will begin tolling on the effective
date of the most recent merger even if that date is prior to the
effective date of this rule.
Transitional assistance addresses (1) Loan processing priority; (2)
Supplemental financing requirements; (3) Reimbursement of general funds
and interim financing; (4) Deferments of interest and principal; (5)
Coverage ratios; and (6) Advance of funds.
1. Loan Processing Priority
Current policy on mergers (7 CFR 1710.108 and .119) offers some
transitional assistance in the form of priority consideration to
processing loans to newly merged and consolidated systems for a period
of up to five years after RUS approval of a merger, provided that the
merger has been determined to enhance the repayment or security of RUS
loans. Virtually all mergers place stress on short-term cash flows.
Therefore, today's rule proposes in Sec. 1717.154(a)(1) to offer loan
processing priority upon the borrower's request, for the first loan to
a successor, provided that the loan is approved by RUS not later than 5
years after the effective date of the merger. For subsequent loans
approved during those 5 years, RUS may agree to priority processing if
the borrower demonstrates the need, and loan funds are available.
Pursuant to RUS regulations published December 29, 1995, at, 60 FR
67395, many mergers are exempt from RUS approval. Therefore, to avoid
confusion, today's rule further proposes a minor amendment that will
allow loan processing priority for up to 5 years from the effective
date of the merger, instead of from the date of RUS approval.
2. Supplemental Financing Requirements
RUS generally requires that an applicant for a municipal rate loan
obtain a portion of its debt financing from a supplemental source
without an RUS guarantee. The method for calculating the supplemental
financing proportion is set out in 7 CFR 1710.110, as amended January
19, 1995, at 60 FR
[[Page 41027]]
3730. Today's rule proposes in Sec. 1717.154(a)(2) a waiver of
supplemental financing, at the borrower's request, for the first RUS
loan approved after the effective date of a merger if all parties are
active distribution borrowers and if that first loan is a municipal
rate loan, the loan period does not exceed 2 years, and the loan is
approved by RUS not later than 5 years after the effective date of the
merger.
For any subsequent loans approved during those 5 years, or if the
borrower requests a loan period longer than 2 years, RUS may agree to
waive or reduce the required amount of supplemental financing. RUS
would consider such reduction or waiver if the higher interest rate
usually charged by a supplemental lender would materially inhibit the
borrower's ability to integrate the systems or create a significant
hardship that could require an increase in electric rates.
3. Reimbursement of General Funds and Interim Financing
Borrowers may request RUS loan funds to reimburse general funds
and/or interim financing used to finance equipment and facilities
included in a RUS approved construction work plan or amendment if the
construction was completed immediately preceding the current loan
period. Pursuant to existing rules at 7 CFR 1710.109, this period is
limited to 24 months for loan applications received after February 10,
1993. Today's rule proposes in Sec. 1717.154(a)(3) to increase this
period to up to 48 months for the first RUS loan following a merger
where all parties are active distribution borrowers, if that first loan
is approved by RUS not later than 5 years after the effective date of
the merger. The longer reimbursement period will assist borrowers in
managing their cash flows during the transition. The requirement that
equipment and facilities be included in a RUS approved construction
work plan in order to be eligible for reimbursement by RUS is not
affected by this change.
4. Deferments of Interest and Principal
Section 12 of the RE Act allows RUS to extend the time for
repayment of loans by up to 5 years. Under a Section 12 deferment plan,
notes retain their original maturity dates--the final maturity is not
extended. Although deferment of debt service payments today, results in
higher payments in the future, deferments may be useful to mitigate
rate increases during a transition period after a merger or
consolidation. Today's rule proposes in Sec. 1717.154(b)(1) to codify
this long-standing policy of granting a Section 12 deferment to a
successor.
5. Coverage Ratios
RUS, as a secured lender, requires that borrowers maintain adequate
levels of coverage ratios, including times interest earned ratio
(TIER); operating times interest earned ratio (OTIER); debt service
coverage (DSC); and operating debt service coverage (ODSC). The
specific level for each ratio is set forth in the RUS loan documents
and in 7 CFR 1710.114. New forms of loan documents were issued in final
rules published on July 18, 1995, at 60 FR 36882, and on December 29,
1995, at 60 FR 67396. Section 1710.114 was last amended in the December
29, 1995, final rule.
The rule proposed today will, in Sec. 1717.154(b)(2), allow RUS to
approve a plan for a phase-in period of up to 5 years following a
merger if all parties are active distribution borrowers. Under this
rule, borrowers may project and achieve lower levels for these ratios
for up to 5 years following a merger, provided that RUS has approved a
phase-in plan, and that a minimum TIER level of 1.00 is maintained.
This phase-in period will allow borrowers the flexibility to devote
resources to integrating the systems and may avoid substantial rate
increases.
6. Advance of Funds From Insured Loans
RUS is further proposing to automatically lengthen the fund advance
period for insured loans preexisting on the effective date of a merger.
The fund advance period, which is the period during which funds from an
insured loan may be advanced to the borrower, generally terminates
automatically after 4 or 5 years unless the borrower requests, and RUS
approves, an extension. See 7 CFR 1714.56, as amended January 19, 1995,
at 60 FR 3726. However, the execution and filing of legal documents
following a merger often takes some time, and RUS cannot advance funds
to a successor until these documents are properly executed and filed.
In order to ensure that approved loan funds are available to borrowers
without unnecessary procedural delays, RUS proposes in Sec. 1717.154(c)
to generically extend the fund advance period by 2 years for any loans
with unadvanced funds on the effective date of the merger, if the fund
advance period has not already terminated.
For example, under current rules, the fund advance period for a
loan approved in March 1995 with a 4-year loan period terminates
automatically 5 years from the date of the loan note. Under the
proposed rule, after a merger the fund advance period would be extended
by 2 years and would terminate automatically 7 years from the date of
the loan note.
Borrowers Who Prepaid RUS Loans Pursuant to 7 CFR Part 1786
Pursuant to 7 CFR part 1786, subparts C, E and F, borrowers may use
private financing or internally generated funds to prepay RUS direct or
insured loans at a discounted present value. Borrowers who prepay under
this rule may not apply for or receive any new direct or insured loans
from RUS for a period after the prepayment, except at the
Administrator's discretion.
In order to remove unnecessary impediments to beneficial mergers
between systems that have prepaid their RUS debt and active
distribution systems that still have outstanding loans, RUS is amending
rules setting out the Administrator's discretionary authority. Under
the proposed rules (Secs. 1717.156 and 1786.167), the Administrator
will exercise this discretionary authority to make direct or insured
loans for facilities to serve consumers who, before the merger, were
served by the system that did not prepay. In other words, eligibility
for RUS loans for that portion of the successor's system that was owned
by the active borrower prior to the merger, will be grandfathered as if
the merger had not occurred.
RUS Procedures
The requirement that RUS, as a secured lender, generally approve
mergers is in the loan documents and RUS regulations. Under certain
conditions, set out in 7 CFR 1717.615 and 1710.7(c), as published
December 29, 1995, at 60 FR 67395, borrowers may enter into such
mergers without RUS approval.
To clarify RUS requirements for approval of mergers, and to
expedite handling of borrower requests, today's rule proposes in
Secs. 1717.157-1717.159, a procedure for RUS approvals, where the
approvals are needed, including a list of the documents required, and
the factors that RUS will consider in acting on such requests. With the
exception of a formal transmittal letter and board resolution from each
of the companies involved, RUS believes that the documents and analyses
required are either (1) Prepared by any prudent business attempting to
enter into a merger; (2) Required by state law; or (3) Required by any
secured lender.
In evaluating an application, RUS will consider the likely impacts
of the
[[Page 41028]]
merger on the borrower's ability to provide reliable service at
reasonable rates to RE Act beneficiaries. RUS will not approve the
action if, in the sole judgment of the Administrator, the action is
likely to have an adverse effect on the security of outstanding loans
made or guaranteed by the Government. It is the borrower's
responsibility to resolve internal issues such as management and
director succession, employee benefits, and headquarters location.
Borrowers are further responsible for obtaining any necessary approvals
from state commissions, supplemental lenders, and others.
Regardless of whether the merger requires RUS approval, RUS, as a
secured lender, needs certain documentation in order to advance funds,
send bills, and otherwise conduct business with a successor. Today's
proposed rule in Sec. 1717.152, lists the documents required.
Generally, these are copies of documents that borrowers are required to
file with state or local governments or documentation needed by any
secured lender.
In all cases, borrowers are encouraged to consult RUS early in the
process. RUS headquarters and field staff are prepared to advise
borrowers and offer technical assistance to facilitate the processing
of borrower requests. In particular, early consultation with RUS can
avoid unnecessary delays in processing requests for advance of loan
funds.
Rescission of Obsolete Directive
On the effective date of the final regulation, REA Bulletin 115-2,
Merger and Consolidation of Electric Borrowers will be rescinded. RUS
has determined that this bulletin, issued November 9, 1972, is
obsolete.
Eligibility for and Hardship Rate and Municipal Rate Loans
RUS makes hardship rate loans and municipal rate loans subject to
an interest rate cap, if the applicant meets certain criteria. See
Paras. 305(c)(1)(A) and (c)(1)(B)(ii) of the RE Act, and 7 CFR part
1714. As required by the law, RUS will consider the eligibility of the
successor at the time of loan approval in determining the applicable
interest rate category. In other words, to qualify for a hardship rate
loan or a municipal rate loan subject to the interest rate cap, the
successor as a whole must, at the time of loan approval, meet the
criteria in 7 CFR 1714.8 or 1714.7, respectively.
Comment Period
It is vital that RUS, borrowers, supplemental lenders, and others
continue the public-private partnership that has served rural America
well in the past. RUS and the Department of Agriculture's Office of the
General Counsel recognize that business opportunities often have short
deadlines, and every effort will be made to expedite action on borrower
requests and to respond in a timely fashion.
There is an urgent need for flexible responses to the increasing
business stress on rural electric systems. This rule, by encouraging
and expediting mergers that offer economies and efficiencies not
available otherwise, will result in tangible benefits, such as lower
electric rates, to the rural communities served by electric
distribution borrowers. Furthermore, reducing the number of RUS
borrowers through mergers and consolidations will ultimately reduce the
costs to the Federal Government of processing multiple applications and
servicing multiple loans. To expedite these benefits, the comment
period on this proposed rule is limited to 30 days. RUS encourages all
interested parties to comment. New information collection requirements
in this rule will not be effective until approved by OMB.
List of Subjects
7 CFR Part 1710
Electric power, Electric utilities, Loan programs--energy, Rural
areas.
7 CFR Part 1714
Electric Power, Loan programs--energy, Rural areas.
7 CFR Part 1717
Administrative practice and procedure, Electric power, Electric
utilities, Intergovernmental relations, Investments, Lien
accommodation, Lien subordinations, Loan programs--energy, Reporting
and recordkeeping requirements, Rural development.
7 CFR Part 1786
Accounting, Administrative practice and procedure, Electric
utilities.
For the reasons set out in the preamble, and under the authority of
7 U.S.C. 901 et seq., RUS proposes to amend 7 CFR Chapter XVII as
follows:
PART 1710--GENERAL AND PRE-LOAN POLICIES AND PROCEDURES COMMON TO
INSURED AND GUARANTEED ELECTRIC LOANS
1. The authority citation for part 1710 continues to read as
follows:
Authority: 7 U.S.C. 901-950b; Public Law 99-591, 100 Stat. 3341-
16; Public Law 103-354, 108 Stat. 3178 (7 U.S.C. 6941 et seq.).
2. Section 1710.109 is amended by redesignating paragraphs (c)
introductory text, (c)(1), (c)(2), and (c)(3) as paragraphs (c)(1)
introductory text, (c)(1)(i), (c)(1)(ii), and (c)(1)(iii),
respectively, and by adding a new paragraph (c)(2) to read as follows:
Sec. 1710.109 Reimbursement of general funds and interim financing.
* * * * *
(c) * * *
(2) Policies for reimbursement of general funds and interim
financing following certain mergers, consolidations, and transfers of a
systems substantially in their entirety are set forth in 7 CFR
1717.154.
* * * * *
3. Section 1710.110 is amended by revising the first sentence of
paragraph (a) to read as follows:
Sec. 1710.110 Supplemental financing.
(a) Except in the case of financial hardship as determined by the
Administrator, and following certain mergers, consolidations, and
transfers of systems substantially in their entirety as set forth in 7
CFR 1717.154, applicants for a municipal rate loan will be required to
obtain a portion of their loan funds from a supplemental source without
an RUS guarantee, in the amounts set forth in paragraph (c) of this
section. * * *
* * * * *
4. Section 1710.114 is amended by adding a sentence at the end of
paragraph (b)(3) to read as follows:
Sec. 1710.114 TIER, DSC, OTIER and ODSC requirements.
* * * * *
(b) * * *
(3) * * * Policies for coverage ratios following certain mergers,
consolidations, and transfers of systems substantially in their
entirety are in 7 CFR 1717.154.
* * * * *
5. Section 1710.119 is amended by revising paragraph (b)(3) to read
as follows:
Sec. 1710.119 Loan processing priorities.
* * * * *
(b) * * *
(3) To finance the capital needs of borrowers that are the result
of a merger, consolidation, or a transfer of a system substantially in
its entirety, provided that the merger, consolidation, or transfer has
either been approved by RUS or does not need RUS approval pursuant to
the borrower's loan documents (See 7 CFR 1717.154); or
* * * * *
[[Page 41029]]
PART 1714--PRE-LOAN POLICIES AND PROCEDURES FOR INSURED ELECTRIC
LOANS
6. The authority citation for part 1714 continues to read as
follows:
Authority: 7 U.S.C. 901-950(b); Pub.L. 99-591, 100 Stat. 3341;
Pub.L. 103-353, 108 Stat. 3178 (7 U.S.C. 6941 et seq.)
7. Section 1714.56 is amended by revising the introductory text of
paragraph (c) to read as follows:
Sec. 1714.56 Fund advance period.
* * * * *
(c) The Administrator may agree to an extension of the fund advance
period for loans approved on or after June 1, 1984, if the borrower
demonstrates to the satisfaction of the Administrator that the loan
funds continue to be needed for approved loan purposes (i.e.,
facilities included in an RUS approved construction work plan).
Policies for extension of the fund advance period following certain
mergers, consolidations, and transfers of systems substantially in
their entirety are set forth in 7 CFR 1717.154.
* * * * *
PART 1717--POST-LOAN POLICIES AND PROCEDURES COMMON TO INSURED AND
GUARANTEED ELECTRIC LOANS
8. The authority citation for part 1717 continues to read as
follows:
Authority: 7 U.S.C. 901-950(b); Pub.L. 103-354, 108 Stat. 3178
(7 U.S.C. 6941 et seq.), unless otherwise noted.
9. Subpart D is added to part 1717 to read as follows:
Subpart D--Mergers and Consolidations of Electric Borrowers
Sec.
1717.150 General.
1717.151 Definitions.
1717.152 Required documentation for all mergers.
1717.153 Transitional assistance.
1717.154 Types of transitional assistance.
1717.155 Requests for transitional assistance.
1717.156 Mergers with borrowers who prepaid RUS loans
1717.157 Applications for RUS approval of mergers.
1717.158 Application contents.
1717.159 Application process.
Subpart D--Mergers and Consolidations of Electric Borrowers
Sec. 1717.150 General.
(a) This subpart establishes RUS policies and procedures for
mergers of electric borrowers. These policies and procedures are
intended to provide borrowers with the flexibility to negotiate and
enter into mergers that offer advantages to the borrowers and to rural
communities, and adequately protect the integrity and credit quality of
RUS loans and loan guarantees.
(b) Consistent with prudent lending practices, the maintenance of
adequate security for RUS loans and loan guarantees, and the objectives
of the Rural Electrification Act of 1936, as amended, (7 U.S.C. 901 et
seq.) (RE Act), RUS encourages electric borrowers to consider mergers
when such action is likely to contribute, in the long-term, to greater
operating efficiency and financial soundness. Borrowers are
specifically encouraged to explore mergers that are likely to enhance
the ability of the successor to provide reliable electric service at
reasonable cost to RE Act beneficiaries.
(c) Pursuant to the loan documents and RUS regulations, certain
mergers are subject to RUS approval. See Sec. 1717.615.
(d) Since RUS must take action in order to legally advance funds
and otherwise conduct business with a successor, RUS encourages
borrowers to consult RUS early in the process regardless of whether RUS
approval of the merger is required. RUS will provide technical
assistance and guidance to borrowers to help expedite the processing of
their requests and to help resolve potential problems early in the
process.
Sec. 1717.151 Definitions.
The definitions set forth in 7 CFR 1710.2 are applicable to this
subpart unless otherwise stated. In addition, for the purpose of this
subpart, the following terms shall have the following meanings:
Active borrower means an electric borrower that has, on the
effective date, an outstanding insured or guaranteed loan from RUS for
rural electrification, and whose eligibility for future RUS financing
is not restricted pursuant to 7 CFR part 1786.
Active distribution borrower means an electric distribution
borrower that has, on the effective date, an outstanding insured or
guaranteed loan from RUS for rural electrification, and whose
eligibility for future RUS financing is not restricted pursuant to 7
CFR part 1786.
Consolidation see merger.
Coverage ratios means collectively TIER, OTIER, DSC and ODSC, as
these terms are defined in 7 CFR 1710.2.
Effective date means the date a merger is effective pursuant to
applicable state law.
Loan documents means the mortgage (or other security instrument
acceptable to RUS), the loan contract, and the promissory note(s)
entered into between the borrower and RUS.
Merger means: (1) A consolidation where two or more companies are
extinguished and a new successor is created, acquiring the assets,
liabilities, franchises and powers of those passing out of existence;
(2) A merger where one company is absorbed by another, the former
ceasing to exist as a separate business entity, and the latter
retaining its own identity and acquiring the assets, liabilities,
franchises and powers of the former; or
(3) A transfer of mortgaged property by one company to another
where the transferee acquires substantially as an entirety the assets,
liabilities, franchises, and powers of the transferor.
New loan means a loan to a successor approved by RUS on or after
the effective date.
Preexisting loan means a loan to a borrower approved by RUS prior
to the effective date of a merger.
Successor means the entity that continues as the surviving business
entity as of the effective date of the merger, and acquires all the
assets, liabilities, franchises, and powers of the entity or entities
ceasing to exist as of the effective date.
Transitional assistance means financial relief provided to
borrowers by RUS during a limited period of time following a merger.
Sec. 1717.152 Required documentation for all mergers.
In order for RUS to legally advance funds, send bills, and
otherwise conduct business with a successor, the documents listed in
this section must be submitted to RUS regardless of the need for RUS
approval of the merger. Borrowers are responsible for ensuring that
these documents are received by RUS in timely fashion. In cases of
mergers that require RUS approval, or cases where borrowers must submit
requests for transitional assistance, the documents listed in this
section may be combined with the documents required by Secs. 1717.155
and/or 1717.158 where appropriate.
(a) Prior to the effective date, borrowers must submit:
(1) A transmittal letter on corporate letterhead signed by the
manager of each active borrower that is a party to the proposed merger
indicating the borrower's intention to merge and tentative timeframes,
including the proposed effective date;
(2) An original certified board resolution from each party to the
proposed merger affirming the board's support of the merger;
[[Page 41030]]
(3) All documents necessary to evidence the merger pursuant to
applicable law. Examples include plan of merger, articles of merger,
amended articles of incorporation, bylaws, and notices and filings
required by law. These documents may be copies of documents filed
elsewhere, unless otherwise specified by RUS; and
(4) A letter addressed to the Administrator from the counsel of at
least one of the active borrowers briefly describing the merger and
indicating the relevant statutes under which the merger will be
consummated.
(b) On or after the effective date, borrowers must submit:
(1) An opinion of counsel from the successor addressing, among
other things, any pending litigation, proper authorization and
consummation of the merger, proper filing and perfection of RUS'
security interest, and all approvals required by law. RUS will provide
the form of the opinion of counsel to the successor;
(2) A letter signed by the manager of the successor advising RUS of
the effective date of the merger; the corporate name, address, and
phone number; the names of the officers of the successor; and the
taxpayer identification number; and
(3) Evidence of proper filing and perfection of RUS' security
interest, as instructed by RUS, and an executed loan contract.
Sec. 1717.153 Transitional assistance.
RUS recognizes that short-term financial stresses can follow even
the most beneficial mergers. To help stabilize electric rates, enhance
the credit quality of outstanding loans made or guaranteed by the
Government, and otherwise ease the transition period before the long-
term efficiencies and economies of a merger can be realized, RUS may
approve one or more types of transitional assistance to a successor
under the conditions set forth in this part.
Sec. 1717.154 Types of transitional assistance.
(a) Transitional assistance in connection with new loans. Requests
for transitional assistance in connection with new loans may be
submitted to RUS no later than the loan application.
(1) Loan processing priority. RUS loans are generally processed in
chronological order based on the date the complete application is
received in the regional or division office. At the borrower's request,
RUS will offer loan processing priority for the first loan to a
successor, provided that the loan is approved by RUS not later than 5
years after the effective date of the merger. For any subsequent loans
approved during those 5 years, RUS may offer loan processing priority,
subject to the availability of loan funds. In reviewing requests for
loan processing priority on subsequent loans, RUS will consider the
borrower's projected cash flows, its electric rates and rate disparity,
and the likely mitigating effects of priority loan processing See 7 CFR
1710.108 and 1710.119.
(2) Supplemental financing. RUS generally requires that an
applicant for a municipal rate loan obtain a portion of its debt
financing from a supplemental source without an RUS guarantee. See 7
CFR 1710.110. If all parties to the merger are active distribution
borrowers, RUS will, at the borrower's request waive the requirement to
obtain supplemental financing for the first RUS loan approved after the
effective date if that first loan is a municipal rate loan whose loan
period does not exceed 2 years, and the loan is approved by RUS not
later than 5 years after the effective date of the merger. For any
subsequent loans approved during these 5 years, or if the borrower
requests a loan period longer than 2 years, RUS may, subject to the
availability of loan funds, waive or reduce the amount of supplemental
financing required. In reviewing requests to reduce or waive
supplemental financing on subsequent loans or on loans with a loan
period longer than 2 years, RUS will consider the differences in
interest rates between RUS and supplemental loans and the impacts of
this difference on the borrower's projected cash flows and its electric
rates and rate disparity. If significant differences result, the waiver
will be granted.
(3) Reimbursement of general funds and interim financing. Borrowers
may request RUS loan funds to reimburse general funds and/or interim
financing used to finance equipment and facilities included in a RUS
approved construction work plan or amendment if the construction was
completed immediately preceding the current loan period. This
reimbursement period is generally limited to 24 months. See 7 CFR
1710.109. If all parties to the merger are active distribution
borrowers, RUS may, in connection with the first RUS loan approved
after the effective date, approve a reimbursement period of up to 48
months prior to the current loan period if the loan is approved not
later than 5 years after the effective date. In reviewing requests for
a longer reimbursement period, RUS will consider the stresses that the
transaction and other costs of entering into the merger places on the
borrower's rates and cash flows, and the mitigating effects of more
generous reimbursement.
(b) Transitional assistance affecting new and preexisting loans.
Requests for transitional assistance affecting new and preexisting
loans must be received by RUS no later than 2 years after the effective
date of the merger.
(1) Section 12 deferments. Section 12 of the RE Act (7 U.S.C. 912)
allows RUS to extend the time of payment of interest or principal of
RUS loans. Section 12 deferments do not extend the final maturity of
the loan; lower payments during the deferment period result in higher
payments later. Therefore, RUS may approve a Section 12 deferment of
loan payments of up to 5 years only if such deferments will help to
avoid substantial increases in retail electric rates during the
transition period, without placing borrowers in financial stress after
the deferment period.
(2) Coverage ratios. Required levels for coverage ratios are set
forth in 7 CFR 1710.114 and in the loan documents. If all parties to
the merger are active distribution borrowers, RUS may approve a plan,
on a case by case basis, that provides for a phase-in period for these
coverage ratios of up to 5 years from the effective date. Under such a
plan the successor would be permitted to project and achieve lower
levels for one or more of these coverage ratios during the phase-in
period.
(i) A phase-in plan for coverage ratios must provide a pro forma
level for each ratio during each year of the phase-in period and be
supported by a financial forecast covering a period of not less than 10
years from the effective date of the merger. The plan must demonstrate
that a minimum TIER level of 1.00 will be achieved in each year, that
trends will be generally favorable, and that the borrower will achieve
the levels required in its loan documents and RUS regulations by the
end of the phase-in period, and that these levels will be maintained in
subsequent years.
(ii) In reviewing phase-in plans for coverage ratios, RUS will
review rates, rate disparity, and likely mitigating effects of the
proposed phase-in plan.
(iii) The borrower is responsible for obtaining approvals of
supplemental lenders.
(iv) Upon RUS approval of a phase-in plan, the levels in that plan
will be substituted for the levels required in the borrower's
preexisting loan documents and will be incorporated in any new loan or
security documents.
(c) Transitional assistance affecting preexisting loans. The fund
advance period for an insured loan, which is the
[[Page 41031]]
period during which RUS may advance loan funds to a borrower,
terminates automatically after a specific period of time. See 7 CFR
1714.56. If, on the effective date of a merger the fund advance period
on any preexisting loan to any of the active borrowers involved in a
merger has not terminated, such fund advance period shall be
automatically lengthened by 2 years. Such documents will be prepared
upon the request of a borrower to RUS for the advance of loan funds,
RUS will prepare documents for the borrower's execution that will
reflect this extension and will provide the legal authority for RUS to
advance funds to the successor.
Sec. 1717.155 Requests for transitional assistance.
(a) If the merger requires RUS approval, the borrower should, where
possible, indicate that it desires transitional assistance at the time
it requests approval of the merger. The formal request for transitional
assistance must be received by RUS as specified in Secs. 1717.154(a)
and (b). Documents listed in this section may be combined with the
documents required by Secs. 1717.152 and/or 1717.158 where appropriate.
If the request for transitional assistance is submitted at the same
time as a loan application, documents listed in this section may be
combined with the loan application documents where appropriate. See 7
CFR part 1710, subpart I. A request for transitional assistance must
include:
(1) Transmittal letter(s) formally listing the types of
transitional assistance requested. If the request is submitted before
the effective date, a transmittal letter must be signed by the manager
of each party to the transaction. If the request is submitted on or
after the effective date, a transmittal letter must be signed by the
manager of the successor. Transmittal letter(s) must be signed
originals on corporate letterhead stationery;
(2) Board resolution(s). If the request is submitted before the
effective date, a separate board resolution must be submitted from each
entity involved in the merger. If the request is submitted on or after
the effective date, a board resolution from the successor must be
submitted. Each board resolution must be a certified original;
(3) A merger plan, financial forecasts, and any available studies
such as net present value analyses showing the anticipated costs and
benefits of the merger and likely timeframes for the merger. The merger
plan must clearly identify those benefits that cannot be achieved
without a merger, and those benefits that can be achieved through other
means;
(4) If the transitional assistance requires RUS approval, the type
and extent of the mitigation that the transitional assistance is
expected to provide; and
(5) Other information that may be relevant.
(b) Borrowers are responsible for ensuring that requests for
transitional assistance are complete and sound in form and substance
when they are submitted to RUS. After submitting a request, borrowers
shall promptly notify RUS of any changes or events that materially
affect the request or any information in the request.
(c) In considering whether to approve requests for transitional
assistance, RUS will evaluate the costs and benefits of the merger; the
type and extent of the likely transitional stress; whether the
transitional assistance requested is likely to materially mitigate such
stress; and the likely impacts on electric rates and on the security of
RUS loans. Review factors applicable to each type of transitional
assistance are set forth in Sec. 1717.154.
Sec. 1717.156 Mergers with borrowers who prepaid RUS loans
In some cases, an active distribution borrower may merge with a
borrower that has prepaid RUS debt at a discount pursuant to 7 CFR part
1786, and whose eligibility for future RUS financing is thereby
restricted. During the period when the restrictions on future financing
are in effect, the successor will be eligible for RUS loans to finance
facilities to serve consumers that were served by the active
distribution borrower immediately prior to the effective date of the
merger, provided that other requirements for loan eligibility are met.
Sec. 1717.157 Applications for RUS approvals of mergers.
If a proposed merger requires RUS approval according to RUS
regulations and/or the loan documents executed by any of the active
borrowers involved, the application must be submitted to RUS not later
than 90 days prior to the effective date of the proposed borrower
action. A distribution borrower should consult with its assigned RUS
general field representative, and a power supply borrower with the
Director, Power Supply Division for general information prior to
submitting the request.
Sec. 1717.158 Application contents.
An application for RUS approval must include the documents listed
in this section. Documents listed in this section may be combined with
the documents required by Secs. 1717.152 and/or 1717.155 where
appropriate.
(a) Transmittal letters signed by the managers of all borrowers and
non-borrowers who are parties to the proposed merger. These letters
must include the actual corporate name, address, and taxpayer
identification number of all parties to the proposed merger. The
transmittal letters must be signed originals on corporate letterhead
stationery.
(b) Resolutions from the boards of directors of all borrowers and
non-borrowers who are parties to the proposed merger. This document is
the formal request by each entity for RUS approval of the proposed
merger. The board resolution must include a description of the proposed
merger, including timeframes, and authorization for RUS to release
appropriate information to supplemental or other lenders, and for these
lenders to release appropriate information to RUS. Each board
resolution must be a certified original.
(c) Evidence that the proposed merger will result in a viable
entity, and that the security of outstanding RUS loans will not be
compromised by the action. This evidence shall include financial
forecasts, and any available studies such as net present value analyses
covering a period of not less than 10 years from the effective date of
the merger, as well as information about any threatened actions by
other parties that could adversely affect the financial condition of
any of the parties to the proposed merger, or of the successor. Such
threatened actions may include annexations or other actions affecting
service territory, loads, rates or other such matters.
(d) Regulatory information about pending federal or state
proceedings pertaining to any of the parties that could have material
effects on the successor.
(e) Rate information. Distribution and power supply borrowers shall
submit schedules of proposed rates after the merger, including the
effects of the proposed action on rates and the status of any pending
rate cases before a state regulatory authority. The rates of power
supply borrowers are subject to RUS approval.
(f) Area coverage and line extension policies: If any distribution
systems are parties to the proposed merger, a statement of proposed
area coverage and line extension policies for the successor.
Sec. 1717.159 Application process.
(a) Borrowers are responsible for ensuring that their applications
for RUS
[[Page 41032]]
approval of a merger are complete and sound in form and substance when
they are submitted to RUS. After submitting an application, borrowers
shall promptly notify RUS of any changes or events that materially
affect the application or any information in the application.
(b) In reviewing borrower requests for approval of mergers, RUS
will consider the likely effects of the action on the ability of the
successor to provide reliable electric service at reasonable cost to RE
Act beneficiaries and on the security of outstanding RUS loans. Among
the factors RUS will consider are whether the proposed merger is likely
to:
(1) Contribute to greater operating efficiency and financial
soundness;
(2) Mitigate high electric rates and or rate disparity;
(3) Help borrowers to diversify their loads or otherwise hedge
risks;
(4) Have beneficial effects on rural economic development in the
community served by the borrower, such as diversifying the economic
base or alleviating unemployment; and
(5) Provide other benefits consistent with the purposes of the RE
Act.
(c) RUS will not approve a merger if, in the sole judgment of the
Administrator, such action is likely to have an adverse effect on the
credit quality of outstanding loans made or guaranteed by the
Government. RUS will thoroughly review each request for approval of
such action, including review of the feasibility and security of
outstanding Government loans according to the standards in 7 CFR
1710.112 and 1710.113, respectively, and in other RUS regulations.
(d) RUS will keep the borrowers apprised of the progress of their
applications.
PART 1786--PREPAYMENT OF RUS GUARANTEED AND INSURED LOANS TO
ELECTRIC AND TELEPHONE BORROWERS
Subpart F--Discounted Prepayments on RUS Electric Loans
10. The authority citation for subpart F continues to read as
follows:
Authority: 7 U.S.C. 901 et seq.; Pub.L. 103-534, 108 Stat. 3178
(7 U.S.C. 6941 et seq.)
11. Section 1786.167 is amended by adding a sentence at the end of
paragraph (a) to read as follows:
Sec. 1786.167 Restrictions to additional RUS financing.
(a) * * * Special provisions for mergers involving a borrower that
has prepaid pursuant to this subpart are in 7 CFR 1717.156.
* * * * *
Dated: July 29, 1996.
Jill Long Thompson,
Under Secretary, Rural Development.
[FR Doc. 96-19711 Filed 8-6-96; 8:45 am]
BILLING CODE 3410-15-P
