[Code of Federal Regulations]
[Title 7 Volume 11]
[Revised as of January 1, 2007]
From the U.S. Government Printing Office via GPO Access
[CITE: 7CFR1717]
[Page 155-205]
TITLE 7--AGRICULTURE
CHAPTER XVII--RURAL UTILITIES SERVICE, DEPARTMENT OF AGRICULTURE
PART 1717_POST-LOAN POLICIES AND PROCEDURES COMMON TO INSURED AND GUARANTEED
ELECTRIC LOANS--Table of Contents
Subparts A-C [Reserved]
Subpart D_Mergers and Consolidations of Electric Borrowers
Sec.
1717.150 General.
1717.151 Definitions.
1717.152 Required documentation for all mergers.
1717.153 Transitional assistance.
1717.154 Transitional assistance in connection with new loans.
1717.155 Transitional assistance affecting new and preexisting loans.
1717.156 Transitional assistance affecting preexisting loans.
1717.157 Requests for transitional assistance.
1717.158 Mergers with borrowers who prepaid RUS loans.
1717.159 Applications for RUS approvals of mergers.
1717.160 Application contents.
1717.161 Application process.
Subparts E-F [Reserved]
Subpart G_Federal Pre-emption in Rate Making in Connection With Power
Supply Borrowers
1717.300 Purpose.
1717.301 Policy.
1717.302 Definitions and rules of construction.
1717.303 Requirements of RUS documents.
1717.304 State regulatory authority rate jurisdiction.
1717.305 Pre-emption.
1717.306 RUS required rates.
1717.307 Distribution members' rates.
1717.308 RUS approval of nonconforming rates.
1717.309 Additional statutory pre-emption.
1717.310-1717.349 [Reserved]
Subpart H_Federal Pre-emption in Rate Making in Connection With RUS
Electric Borrowers in Bankruptcy
1717.350 Purpose.
1717.351 Policy.
1717.352 Definitions and rules of construction.
1717.353 Requirements of RUS documents.
1717.354 Pre-emption.
1717.355 RUS required rates.
1717.356 Additional statutory pre-emption.
Subparts I-L [Reserved]
Subpart M_Operational Controls
1717.600 General.
1717.601 Applicability.
1717.602 Definitions.
1717.603 RUS approval of extensions and additions.
[[Page 156]]
1717.604 Long-range engineering plans and construction work plans.
1717.605 Design standards, plans and specifications, construction
standards, and RUS accepted materials.
1717.606 Standard forms of construction contracts, and engineering and
architectural services contracts.
1717.607 Contract bidding requirements.
1717.608 RUS approval of contracts.
1717.609 RUS approval of general manager.
1717.610 RUS approval of compensation of the board of directors.
1717.611 RUS approval of expenditures for legal, accounting,
engineering, and supervisory services.
1717.612 RUS approval of borrower's bank or other depository.
1717.613 RUS approval of data processing and system control equipment.
1717.614 Notification of rate changes.
1717.615 Consolidations and mergers.
1717.616 Sale, lease, or transfer of capital assets.
1717.617 Limitations on distributions.
Subpart N_Investments, Loans, and Guarantees by Electric Borrowers
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 O [Reserved]
1717.700-1717.749 [Reserved]
Subpart P [Reserved]
1717.750-1717.799 [Reserved]
Subpart Q [Reserved]
1717.800-1717.849 [Reserved]
Subpart R_Lien Accommodations and Subordinations for 100 Percent Private
Financing
1717.850 General.
1717.851 Definitions.
1717.852 Financing purposes.
1717.853 Loan terms and conditions.
1717.854 Advance approval--100 percent private financing of
distribution, subtransmission and headquarters facilities, and
certain other community infrastructure.
1717.855 Application contents: Advance approval--100 percent private
financing of distribution, subtransmission and headquarters
facilities, and certain other community infrastructure.
1717.856 Application contents: Normal review--100 percent private
financing.
1717.857 Refinancing of existing secured debt--distribution and power
supply borrowers.
1717.858 Lien subordination for rural development investments.
1717.859 Application process and timeframes.
1717.860 Lien accommodations and subordinations under section 306E of
the RE Act.
1717.861-1717.899 [Reserved]
Subpart S_Lien Accommodations for Supplemental Financing Required by 7
CFR 1710.110
1717.900 Qualification requirements.
1717.901 Early approval.
1717.902 Other RUS requirements.
1717.903 Liability.
1717.904 Exemptions pursuant to section 306E of the RE Act.
1717.905-1717.949 [Reserved]
Subpart T [Reserved]
1717.950-1717.999 [Reserved]
Subpart U [Reserved]
1717.1000-1717.1049 [Reserved]
Subpart V [Reserved]
1717.1050-1717.1099 [Reserved]
Subpart W [Reserved]
1717.1100-1717.1149 [Reserved]
Subpart X [Reserved]
1717.1150-1717.1199 [Reserved]
Subpart Y_Settlement of Debt
1717.1200 Purpose and scope.
1717.1201 Definitions.
1717.1202 General policy.
1717.1203 Relationship between RUS and Department of Justice.
1717.1204 Policies and conditions applicable to settlements.
1717.1205 Waiver of existing conditions on borrowers.
1717.1206 Loans subsequent to settlement.
1717.1207 RUS obligations under loan guarantees.
1717.1208 Government's rights under loan documents.
[[Page 157]]
Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.
Source: 55 FR 38646, Sept. 19, 1990, unless otherwise noted.
Subparts A-C [Reserved]
Subpart D_Mergers and Consolidations of Electric Borrowers
Source: 61 FR 66871, Dec. 19, 1996, unless otherwise noted.
Sec. 1717.150 General.
(a) This subpart establishes RUS policies and procedures for mergers
of electric borrowers. These policies and procedures are intended to
provide borrowers with the flexibility to negotiate and enter into
mergers that offer advantages to the borrowers and to rural communities,
and adequately protect the integrity and credit quality of RUS loans and
loan guarantees.
(b) Consistent with prudent lending practices, the maintenance of
adequate security for RUS loans and loan guarantees, and the objectives
of the Rural Electrification Act of 1936, as amended, (7 U.S.C. 901 et
seq.) (RE Act), RUS encourages electric borrowers to consider mergers
when such action is likely to contribute, in the long-term, to greater
operating efficiency and financial soundness. Borrowers are specifically
encouraged to explore mergers that are likely to enhance the ability of
the successor to provide reliable electric service at reasonable cost to
RE Act beneficiaries.
(c) Pursuant to the loan documents and RUS regulations, certain
mergers are subject to RUS approval. See Sec. 1717.615.
(d) Since RUS must take action in order to advance funds and
otherwise conduct business with a successor, RUS encourages borrowers to
consult RUS early in the process regardless of whether RUS approval of
the merger is required. RUS will provide technical assistance and
guidance to borrowers to help expedite the processing of their requests
and to help resolve potential problems early in the process.
Sec. 1717.151 Definitions.
The definitions set forth in 7 CFR 1710.2 are applicable to this
subpart unless otherwise stated. In addition, for the purpose of this
subpart, the following terms shall have the following meanings:
Active borrower means an electric borrower that has, on the
effective date, an outstanding insured or guaranteed loan from RUS for
rural electrification, and whose eligibility for future RUS financing is
not restricted pursuant to 7 CFR part 1786.
Active distribution borrower means an electric distribution borrower
that has, on the effective date, an outstanding insured or guaranteed
loan from RUS for rural electrification, and whose eligibility for
future RUS financing is not restricted pursuant to 7 CFR part 1786.
Consolidation. See Merger.
Coverage ratios means collectively TIER, OTIER, DSC and ODSC, as
these terms are defined in 7 CFR 1710.2.
Effective date means the date a merger is effective pursuant to
applicable state law.
Former distribution borrower means any organization that
(1) Sells or intends to sell electric power and energy at retail;
(2) At one time had an outstanding loan made or guaranteed by RUS,
or its predecessor the Rural Electrification Administration (REA) for
rural electrification; and
(3) Either repaid such loans at face value or prepaid pursuant to 7
CFR part 1786.
Loan documents means the mortgage (or other security instrument
acceptable to RUS), the loan contract, and the promissory note(s)
entered into between the borrower and RUS.
Merger means: (1) A consolidation where two or more companies are
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
[[Page 158]]
(3) A transfer of mortgaged property by one company to another where
the transferee acquires substantially as an entirety the assets,
liabilities, franchises, and powers of the transferor.
New loan means a loan to a successor approved by RUS on or after the
effective date.
Preexisting loan means a loan to a borrower approved by RUS prior
to, and outstanding on the effective date.
Successor means the entity that continues as the surviving business
entity as of the effective date, and acquires all the assets,
liabilities, franchises, and powers of the entity or entities ceasing to
exist as of the effective date.
Transitional assistance means financial relief provided to borrowers
by RUS during a limited period of time following a merger.
Sec. 1717.152 Required documentation for all mergers.
In order for RUS to advance funds, send bills, and otherwise conduct
business with a successor, the documents listed in this section must be
submitted to RUS regardless of the need for RUS approval of the merger.
Borrowers are responsible for ensuring that these documents are received
by RUS in timely fashion. In cases of mergers that require RUS approval,
or cases where borrowers must submit requests for transitional
assistance, the documents listed in this section may be combined with
the documents required by Sec. Sec. 1717.157 and/or 1717.160 where
appropriate.
(a) Prior to the effective date, borrowers must submit:
(1) A transmittal letter on corporate letterhead signed by the
manager of each active borrower that is a party to the proposed merger
indicating the borrower's intention to merge and tentative timeframes,
including the proposed effective date;
(2) An original certified board resolution from each party to the
proposed merger affirming the board's support of the merger;
(3) All documents necessary to evidence the merger pursuant to
applicable law. Examples include plan of merger, articles of merger,
amended articles of incorporation, bylaws, and notices and filings
required by law. These documents may be copies of documents filed
elsewhere, unless otherwise specified by RUS; and
(4) A letter addressed to the Administrator from the counsel of at
least one of the active borrowers briefly describing the merger and
indicating the relevant statutes under which the merger will be
consummated.
(b) On or after the effective date, borrowers must submit:
(1) An opinion of counsel from the successor addressing, among other
things, any pending litigation, proper authorization and consummation of
the merger, proper filing and perfection of RUS' security interest, and
all approvals required by law. RUS will provide the form of the opinion
of counsel to the successor;
(2) A letter signed by the manager of the successor advising RUS of
the effective date of the merger; the corporate name, address, and phone
number; the names of the officers of the successor; and the taxpayer
identification number; and
(3) Evidence of proper filing and perfection of RUS' security
interest, as instructed by RUS, and an executed loan contract.
Sec. 1717.153 Transitional assistance.
RUS recognizes that short-term financial stresses can follow even
the most beneficial mergers. To help stabilize electric rates, enhance
the credit quality of outstanding loans made or guaranteed by the
Government, and otherwise ease the transition period before the long-
term efficiencies and economies of a merger can be realized, RUS may
approve one or more types of transitional assistance to a successor
under the conditions set forth in this part.
Sec. 1717.154 Transitional assistance in connection with new loans.
Requests for transitional assistance in connection with new loans
may be submitted to RUS no later than the loan application.
(a) Loan processing priority. (1) RUS loans are generally processed
in chronological order based on the date the complete application is
received in the regional or division office. At the borrower's request,
RUS may offer loan
[[Page 159]]
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. In considering the request, the Administrator will take
into account, among other factors, the amount of the loan application,
whether there is a significant backlog in pending loan applications, the
impact that loan priority would have on the backlog, the savings and
efficiencies to be realized from the merger and the relative importance
of loan priority to facilitating the merger. The Administrator may, in
his or her sole discretion, grant or decline to grant priority, or grant
priority for a limited amount of the loan application while deferring
for later consideration the remainder of the application.
(2) For any subsequent loans approved during those 5 years, RUS may
offer loan processing priority. In reviewing requests for loan
processing priority on subsequent loans, RUS will consider the loan
authority for the fiscal year, the borrower's projected cash flows, its
electric rates and rate disparity, and the likely mitigation effects of
priority loan processing. See 7 CFR 1710.108 and 1710.119.
(3) Loan processing priority is available following any merger where
at least one of the merging parties is an active borrower.
(b) Supplemental financing.(1) RUS generally requires that an
applicant for a municipal rate loan obtain a portion of its debt
financing from a supplemental source without an RUS guarantee. See 7 CFR
1710.110. RUS will, at the borrower's request, waive the requirement to
obtain supplemental financing for the first RUS loan approved after the
effective date if that first loan is a municipal rate loan whose loan
period does not exceed 2 years, and the loan is approved by RUS not
later than 5 years after the effective date. For any subsequent loans
approved during these 5 years, or if the borrower requests a loan period
longer than 2 years, RUS may, subject to the availability of loan funds,
waive or reduce the amount of supplemental financing required. In
reviewing requests to reduce or waive supplemental financing on
subsequent loans or on loans with a loan period longer than 2 years, RUS
will consider the differences in interest rates between RUS and
supplemental loans and the impacts of this difference on the borrower's
projected cash flows and its electric rates and rate disparity. If
significant differences would result, the waiver will be granted.
(2) Waiver of supplemental financing may be available if:
(i) All parties to the merger are active distribution borrowers, or
(ii) At least one of the merging parties is an active distribution
borrower, all merging parties are either active distribution borrowers
or former distribution borrowers, and the merger is effective after
December 19, 1996.
(c) Reimbursement of general funds and interim financing.(1)
Borrowers may request RUS loan funds to reimburse general funds and/or
interim financing used to finance equipment and facilities included in a
RUS approved construction work plan or amendment if the construction was
completed immediately preceding the current loan period. This
reimbursement period is generally limited to 24 months. See 7 CFR
1710.109. RUS may, in connection with the first RUS loan approved after
the effective date, approve a reimbursement period of up to 48 months
prior to the current loan period if the loan is approved not later than
5 years after the effective date. In reviewing requests for this longer
reimbursement period, RUS will consider the stresses that the
transaction and other costs of entering into the merger places on the
borrower's rates and cash flows, and the mitigating effects of more
generous reimbursement.
(2) A longer reimbursement period may be available if:
(i) All parties to the merger are active distribution borrowers, or
(ii) At least one of the merging parties is an active distribution
borrower, all merging parties are either active distribution borrowers
of former distribution borrowers, and the merger is effective after
December 19, 1996.
[61 FR 66871, Dec. 19, 1996, as amended at 67 FR 58322, Sept. 16, 2002]
[[Page 160]]
Sec. 1717.155 Transitional assistance affecting new and preexisting loans.
Requests for transitional assistance affecting new and preexisting
loans must be received by RUS no later than 2 years after the effective
date.
(a) Section 12 deferments. (1) Section 12 of the RE Act (7 U.S.C.
912) allows RUS to extend the time of payment of interest or principal
of RUS loans. Section 12 deferments do not extend the final maturity of
the loan; lower payments during the deferment period result in higher
payments later. Therefore, RUS may approve a Section 12 deferment of
loan payments of up to 5 years only if such deferments will help to
avoid substantial increases in retail electric rates during the
transition period, without placing borrowers in financial stress after
the deferment period.
(2) Section 12 deferment may be available following any merger where
at least one of the merging parties is an active borrower.
(b) Coverage ratios. Required levels for coverage ratios are set
forth in 7 CFR 1710.114 and in the loan documents. RUS may approve a
plan, on a case by case basis, that provides for a phase-in period for
these coverage ratios of up to 5 years from the effective date. Under
such a plan the successor would be permitted to project and achieve
lower levels for one or more of these coverage ratios during the phase-
in period.
(1) A phase-in plan for coverage ratios must provide a pro forma
level for each ratio during each year of the phase-in period and be
supported by a financial forecast covering a period of not less than 10
years from the effective date of the merger. The plan must demonstrate
that a minimum TIER level of 1.00 will be achieved in each year, that
trends will be generally favorable, that the borrower will achieve the
levels required in its loan documents and RUS regulations by the end of
the phase-in period, and that these levels will be maintained in
subsequent years.
(2) In reviewing phase-in plans for coverage ratios, RUS will review
rates, rate disparity, and likely mitigating effects of the proposed
phase-in plan.
(3) The borrower is responsible for obtaining approvals of
supplemental lenders.
(4) Upon RUS approval of a phase-in plan, the levels in that plan
will be substituted for the levels required in the borrower's
preexisting loan documents and will be incorporated in any new loan or
security documents.
(5) A phase in plan for coverage ratios may be available if:
(i) All parties to the merger are active distribution borrowers, or
(ii) At least one of the merging parties is an active distribution
borrower, all merging parties are either active distribution borrowers
or former distribution borrowers, and the merger is effective after
December 19, 1996.
Sec. 1717.156 Transitional assistance affecting preexisting loans.
The fund advance period for an insured loan, which is the period
during which RUS may advance loan funds to a borrower, terminates
automatically after a specific period of time. See 7 CFR 1714.56. If, on
the effective date the original fund advance period or the fund advance
period as extended pursuant to 7 CFR 1714.56(c), on any preexisting RUS
loan to any of the active borrowers involved in a merger has not
terminated, such fund advance period shall be automatically lengthened
by 2 years. On the borrower's request RUS will prepare documents
necessary for the advance of loan funds. RUS will prepare documents for
the borrower's execution that will reflect this extension and will
provide the legal authority for RUS to advance funds to the successor.
Sec. 1717.157 Requests for transitional assistance.
(a) If the merger requires RUS approval, the borrower should, where
possible, indicate that it desires transitional assistance at the time
it requests approval of the merger. The formal request for transitional
assistance must be received by RUS as specified in Sec. Sec. 1717.155
and 171.156. Documents listed in this section may be combined with the
documents required by Sec. Sec. 1717.152 and/or 1717.160 where
appropriate. If the request for transitional assistance is submitted at
the same time as a loan
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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. Sec. 1717.154-1717.156.
Sec. 1717.158 Mergers with borrowers who prepaid RUS loans.
In some cases, an active distribution borrower may merge with a
borrower that has prepaid RUS debt at a discount pursuant to 7 CFR part
1786, and whose eligibility for future RUS financing is thereby
restricted. During the period when the restrictions on future financing
are in effect, the successor will be eligible for RUS loans to finance
facilities to serve consumers located in the territory that was served
by the active distribution borrower immediately prior to the effective
date, provided that other requirements for loan eligibility are met.
Sec. 1717.159 Applications for RUS approvals of mergers.
If a proposed merger requires RUS approval according to RUS
regulations and/or the loan documents executed by any of the active
borrowers involved, the application must be submitted to RUS not later
than 90 days prior to the effective date of the proposed borrower
action. A distribution borrower should consult with its assigned RUS
general field representative, and a power supply borrower with the
Director, Power Supply Division for general information prior to
submitting the request.
Sec. 1717.160 Application contents.
An application for RUS approval of a merger must include the
documents listed in this section. Documents listed in this section may
be combined with the documents required by Sec. Sec. 1717.152 and/or
1717.157 where appropriate.
(a) Transmittal letters signed by the managers of all borrowers and
non-borrowers who are parties to the proposed merger. These letters must
include the actual corporate name, address, and taxpayer identification
number of all parties to the proposed merger. The transmittal letters
must be signed originals on corporate letterhead stationery.
[[Page 162]]
(b) Resolutions from the boards of directors of all borrowers and
non-borrowers who are parties to the proposed merger. This document is
the formal request by each entity for RUS approval of the proposed
merger. The board resolution must include a description of the proposed
merger, including timeframes, and authorization for RUS to release
appropriate information to supplemental or other lenders, and for these
lenders to release appropriate information to RUS. Each board resolution
must be a certified original.
(c) Evidence that the proposed merger will result in a viable
entity, and that the security of outstanding RUS loans will not be
adversely affected by the action. This evidence shall include financial
forecasts, and any available studies such as net present value analyses
covering a period of not less than 10 years from the effective date of
the merger, as well as information about any threatened actions by other
parties that could adversely affect the financial condition of any of
the parties to the proposed merger, or of the successor. Such threatened
actions may include annexations or other actions affecting service
territory, loads, rates or other such matters.
(d) Regulatory information about pending federal or state
proceedings pertaining to any of the parties that could have material
effects on the successor.
(e) Rate information. Distribution and power supply borrowers shall
submit schedules of proposed rates after the merger, including the
effects of the proposed action on rates and the status of any pending
rate cases before a state regulatory authority. The rates of power
supply borrowers are subject to RUS approval. If rates are not projected
to change after the merger, a statement to that effect will suffice.
(f) Area coverage and line extension policies. If any distribution
systems are parties to the proposed merger, a statement of proposed area
coverage and line extension policies for the successor.
Sec. 1717.161 Application process.
(a) Borrowers are responsible for ensuring that their applications
for RUS approval of a merger are complete and sound in form and
substance when they are submitted to RUS. After submitting an
application, borrowers shall promptly notify RUS of any changes or
events that materially affect the application or any information in the
application.
(b) In reviewing borrower requests for approval of mergers, RUS will
consider the likely effects of the action on the ability of the
successor to provide reliable electric service at reasonable cost to RE
Act beneficiaries and on the security of outstanding RUS loans. Among
the factors RUS will consider are whether the proposed merger is likely
to:
(1) Contribute to greater operating efficiency and financial
soundness;
(2) Mitigate high electric rates and or rate disparity;
(3) Help borrowers to diversify their loads or otherwise hedge
risks;
(4) Have beneficial effects on rural economic development in the
community served by the borrower, such as diversifying the economic base
or alleviating unemployment; and
(5) Provide other benefits consistent with the purposes of the RE
Act.
(c) RUS will not approve a merger if, in the sole judgment of the
Administrator, such action is likely to have an adverse effect on the
credit quality of outstanding loans made or guaranteed by the
Government. RUS will thoroughly review each request for approval of such
action, including review of the feasibility and security of outstanding
Government loans according to the standards in 7 CFR 1710.112 and
1710.113, respectively, and in other RUS regulations.
(d) RUS will keep the borrowers apprised of the progress of their
applications.
Subparts E-F [Reserved]
Subpart G_Federal Pre-emption in Rate Making in Connection With Power
Supply Borrowers
Sec. 1717.300 Purpose.
This subpart contains regulations of the Rural Utilities Service
(RUS) implementing provisions of Section 4 of the RE Act (7 U.S.C. 904)
which authorize the Administrator to establish
[[Page 163]]
terms and conditions of loans and implementing provisions of the RUS
wholesale power contracts and other RUS documents which provide for the
establishment of rates to be charged by power supply borrowers for the
sale of electric power and energy. This subpart contains the general
regulations of RUS for the pre-emption, under certain circumstances,
which are not exclusive, of the regulation of a power supply borrower's
rates by a state regulatory authority under state law and for the
exercise of exclusive jurisdiction over rates by RUS pursuant to the RUS
documents.
Sec. 1717.301 Policy.
(a) RUS makes and guarantees loans to borrowers to bring electric
service to persons in rural areas. RUS requires, as a condition to
making or guaranteeing any loans to power supply borrowers, that the
borrower enter into RUS wholesale power contracts with its several
members and assign and pledge such contracts as security for the
repayment of loans made or guaranteed by RUS and for other loans which,
pursuant to the RE Act, RUS has permitted to be secured pursuant to the
RUS mortgage. The RUS wholesale power contract requires, among other
matters, that the rates charged for power and energy sold thereunder
produce revenues sufficient to enable the power supply borrower to make
payments on account of all indebtedness of the power supply borrower.
The Administrator relies upon the RUS wholesale power contracts together
with other RUS documents to find and certify, as required in section 4
of the RE Act (7 U.S.C. 904), that the security for the loan is
reasonably adequate and the loan will be repaid within the time agreed.
(b) RUS requires power supply borrowers to take such actions as may
be necessary to charge rates for the sale of electric power and energy
which are sufficient to pay the principal and interest on loans made or
guaranteed by RUS in a timely manner and to meet the requirements of the
RUS wholesale power contract and other RUS documents.
(c) With respect to power supply borrowers which are not subject to
rate regulation by a state regulatory authority, RUS requires that such
borrowers establish rates and obtain RUS approval of such rates as
required by the terms of the RUS wholesale power contract and other RUS
documents.
(d) With respect to power supply borrowers which are subject to
regulation by a state regulatory authority, RUS does not make or
guarantee a loan for the construction, operation or enlargement of any
generating plant or transmission facility unless the consent of the
state regulatory authority having jurisdiction in the premises is first
obtained.
(e) Pursuant to applicable provisions of state law state regulatory
authorities regulate many aspects of a power supply borrowers business
activities, including such matters as the setting of wholesale electric
rates, the borrowing of money, and the mortgaging of property. A state
regulatory authority's jurisdiction over the rates charged by a power
supply borrower shall be pre-empted where the Administrator has
determined that such jurisdiction has compromised Federal interests,
including without limitation, the ability of the borrower to repay its
secured loans in accordance with the terms of the RUS documents.
Thereupon, RUS shall, pursuant to the RUS documents, exercise exclusive
jurisdiction over the rates charged by a power supply borrower.
[55 FR 38646, Sept. 19, 1990; 55 FR 53100, Dec. 26, 1990]
Sec. 1717.302 Definitions and rules of construction.
(a) Definitions. For the purpose of this subpart, the following
terms shall have the following meanings:
Administrator means the Administrator of RUS.
Borrower means any organization which has an outstanding loan made
or guaranteed by RUS for rural electrification. Unless otherwise stated
in the text, ``borrower'' shall mean power supply borrower.
Loan contract means the agreement, as amended, supplemented, or
restated from time to time, between a borrower and RUS providing for
loans made or guaranteed pursuant to the RE Act.
[[Page 164]]
Power supply borrower means any borrower engaged in the wholesale
sale of electric power and energy to distribution members either
directly or though other power supply borrowers pursuant to RUS
wholesale power contracts.
RE Act means Rural Electrification Act of 1936, as amended (7 U.S.C.
901 et seq.).
REA means the Rural Electrification Administration formerly an
agency of the United States Department of Agriculture and predecessor
agency to RUS with respect to administering certain electric and
telephone loan programs.
RUS means the Rural Utilities Service, an agency of the United
States 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), successor
to REA with respect to administering certain electric and telephone
programs. See 7 CFR 1700.1.
RUS documents means the loan contract, mortgage and RUS wholesale
power contract of a power supply borrower.
RUS mortgage means the mortgage and security agreement, as from time
to time supplemented, amended and restated, made by and among the
borrower, RUS, and, if a party thereto, third party lenders, or any
other form of mortgage or security instrument or indenture of mortgage
and deed of trust, securing the payment of outstanding loans made or
guaranteed by RUS and other lenders.
RUS wholesale power contract means the contract for the wholesale
sale of electric power and energy between a power supply borrower and
its member as approved by RUS.
Secured loans shall mean outstanding loans secured pursuant to the
RUS mortgage.
State regulatory authority means any state board or local governing
body having jurisdiction under state law to regulate, or in any way,
approve the electric rates charged by a power supply borrower or
electric distribution member of a power supply borrower.
(b) Rules of Construction. Unless the context shall otherwise
indicate, the terms defined in Sec. 1717.302(a) hereof include the
plural as well as the singular, and the singular as well as the plural.
The words ``herein,'' and ``hereunder'', and words of similar import,
refer to this subpart as a whole. ``Includes'' and ``including'' are not
limiting and ``or'' is not exclusive.
[55 FR 38646, Sept. 19, 1990, as amended at 59 FR 66440, Dec. 27, 1994]
Sec. 1717.303 Requirements of RUS documents.
(a) Pursuant to the terms of the RUS documents each power supply
borrower shall establish and adjust rates for the sale of electric power
and energy in such a manner as to assure that the borrower will be able
to make required payments on secured loans.
(b) Pursuant to the terms of the RUS wholesale power contract, the
Board of Directors or Board of Trustees of the power supply borrower
shall review rates not less frequently than once each calendar year and
revise its rates as therein set forth.\1\ The RUS wholesale power
contract further provides that the borrower shall notify the
Administrator not less than 30 nor more than 45 days prior to the
effective date of any adjustment and shall set forth the basis upon
which the rate is to be adjusted and established. The RUS wholesale
power contract provides that no final revision in rates shall be
effective unless approved in writing by the Administrator.
---------------------------------------------------------------------------
\1\ The Wholesale Power Contract, with minor modifications which are
approved by RUS on a case by case basis, provides that the rate charged
for electric power and energy, shall produce revenues which shall be
sufficient, but only sufficient, with the revenues of the Seller from
all other sources, to meet the cost of the operation and maintenance
(including without limitation, replacements, insurance, taxes and
administrative and general overhead expenses) of the generating plant
transmission system and related facilities of the Seller, the cost of
any power and energy purchased for resale hereunder by the Seller, the
cost of transmission service, make payments on account of principal and
interest on all indebtedness of the Seller, and to provide for the
establishment and maintenance of reasonable reserves. (Section 4. Rates
(b), RUS Form 444, ``Wholesale Power Contract--Federated Cooperative'';
Rev. 6-60.)
---------------------------------------------------------------------------
(c) Pursuant to the terms of the RUS mortgage, each power supply
borrower
[[Page 165]]
must design its rates as therein set forth and must give 90 days prior
---------------------------------------------------------------------------
notice to RUS of any proposed change in its general rate structure.
(Approved by the Office of Management and Budget under control number
0572-0089)
Sec. 1717.304 State regulatory authority rate jurisdiction.
(a) In the event that rate revisions required by the terms of the
RUS wholesale power contract or other RUS documents may be subject to
the approval of a state regulatory authority, the power supply borrower
shall seek such required approval in a timely manner.
(b) RUS recognizes the need of state regulatory authorities for
documents, information and records for use in connection with an
application for rate approval and will consider any reasonable request
by a borrower or a state regulatory authority for such documents,
information and records. The failure of RUS to provide requested
documents, information or records shall not limit any rights of RUS
including the right with respect to pre-emption of the state regulatory
authority as provided in this subpart.
(c) In the event that the state regulatory authority shall fail to
act favorably upon the borrower's application for rate increases
required by terms of the RUS wholesale power contract or other RUS
documents, the borrower shall pursue such legal and administrative
appeals as may be available to it, unless RUS shall approve otherwise in
writing.
Sec. 1717.305 Pre-emption.
(a) Inadequate rates. State regulatory authority jurisdiction over a
power supply borrower's rates shall be pre-empted by the RE Act if the
Administrator shall have determined that the borrower's rates approved
by the state regulatory authority are, after taking into account the
borrower's costs and expenses, inadequate to produce revenues sufficient
to permit the borrower to make required payments on its secured loans
and the borrower has failed to make required payments on its secured
loans.
(b) Public notice. The Administrator shall:
(1) Notify the borrower and the state regulatory authority in
writing of the determination, indicating the jurisdiction of the state
regulatory authority over the rates of the borrower has been pre-empted
pursuant to this part and the borrower shall henceforth establish its
rates in accordance with the term of the RUS documents.
(2) publish a notice in the Federal Register informing the public of
the action.
[55 FR 38646, Sept. 19, 1990; 55 FR 53100, Dec. 26, 1990]
Sec. 1717.306 RUS required rates.
(a) Upon the publication in the Federal Register of the notice of
pre-emption of state regulatory authority as provided in this subpart,
RUS will exercise exclusive jurisdiction over the rates of the borrower
pursuant to the terms of the RUS documents. The borrower shall
immediately establish rates with the approval of RUS that are sufficient
to satisfy the requirements of the RUS wholesale power contract and
other RUS documents described in Sec. 1717.303 of this subpart. The
borrower shall establish such rates notwithstanding provisions of state
law, and rules, orders or other actions of state regulatory authorities,
and notwithstanding any provision of the RUS documents referring to such
laws, rules, orders or actions.
(b) So long as the state regulatory authority shall be pre-empted
hereunder, RUS shall be considered the governmental regulatory body with
jurisdiction over rates for the purposes of the RUS documents and for
the purposes of section 1129(a)(6) of the Bankruptcy Code of 1978, as
amended (11 U.S.C. 1129(a)(6)).
(c) If a borrower, which is subject to exclusive RUS rate
jurisdiction, shall fail to establish rates in accordance with terms of
the RUS wholesale power contract and other RUS documents in a timely
fashion, RUS may proceed to exercise any and all rights and remedies
available pursuant under the RUS documents or otherwise.
(d) The jurisdiction of the state regulatory authority over the
rates of the borrower shall continue to be pre-
[[Page 166]]
empted hereunder until the Administrator shall in writing approve the
resumption of jurisdiction by the state regulatory authority and publish
in the Federal Register a notice to such effect. The Administrator shall
approve resumption only after determining that such jurisdiction shall
be exercised in a manner consistent with Federal interests.
[55 FR 38646, Sept. 19, 1990; 55 FR 53100, Dec. 26, 1990]
Sec. 1717.307 Distribution members' rates.
A state regulatory authority which has been pre-empted as provided
in this subpart may continue to exercise jurisdiction, pursuant to
applicable provisions of state law, over all other business affairs of
the power supply borrower and over the rates of its distribution
members: Provided, however, that the state regulatory authority shall
treat any RUS approved rate for the power supply borrower as fair and
reasonable and shall not in any manner, directly or indirectly, prevent
or impede the distribution member from recovering the costs of paying
the RUS approved rates to the power supply borrower.
Sec. 1717.308 RUS approval of nonconforming rates.
Borrowers may request and RUS may approve rates which do not conform
with the requirements of the RUS wholesale power contract and other RUS
documents if RUS determines, in its sole discretion, that such approval
is in the interests of RUS. If RUS approval is granted prior to pre-
emption hereunder, and if the state regulatory authority shall have
approved such rates, then, so long as RUS's approval of the
nonconforming rates remains in effect, the jurisdiction of the state
regulatory authority over the rates of the borrower shall not be pre-
empted hereunder.
Sec. 1717.309 Additional statutory pre-emption.
This subpart addresses pre-emption of state law and state regulatory
authority in only those specific circumstances herein described. Nothing
in this subpart waives, limits, or otherwise affects the explicit pre-
emption or pre-emption, which is implicit and shall occur pursuant to
the RE Act as a matter of law, of state law or action of a state
regulatory authority where such state law or such action compromises
Federal interests, including the ability of any borrower, including
power supply borrowers, to repay loans made or guaranteed by RUS.
Sec. Sec. 1717.310-1717.349 [Reserved]
Subpart H_Federal Pre-emption in Rate Making in Connection With RUS
Electric Borrowers in Bankruptcy
Source: 55 FR 38653, Sept. 19, 1990, unless otherwise noted.
Sec. 1717.350 Purpose.
This subpart contains regulations of the Rural Utilities Service
(RUS) implementing provisions of section 4 of the RE Act (7 U.S.C. 904)
which authorizes the Administrator to establish terms and conditions of
loans, and provisions of the RUS documents which provide for the
establishment of rates for electric service to be charged by RUS
electric borrowers. This subpart contains the general regulations of RUS
for the pre-emption of the regulation by a State Regulatory Authority
under State law of an RUS borrower's rates and for the exercise by RUS,
pursuant to the RUS documents, of exclusive jurisdiction over rates of a
borrower by or against whom a case under the Bankruptcy Code of 1978, as
amended, has commenced.
Sec. 1717.351 Policy.
(a) RUS makes and guarantees loans to borrowers to bring electric
service to persons in rural areas. To accomplish this objective, RUS
normally requires, as a condition to making or guaranteeing any loans to
an electric borrower, that the borrower execute and deliver the RUS
documents in the form prescribed by RUS. The RUS mortgage secures
repayment of the loans made or guaranteed by RUS and other loans which,
pursuant to the RE Act, RUS has permitted to be secured pursuant to the
RUS mortgage. The Administrator relies upon the RUS mortgage together
with other RUS
[[Page 167]]
documents to find and certify, as required by section 4 of the RE Act (7
U.S.C. 904), that the security for the loan is reasonably adequate and
the loan will be repaid within the time agreed.
(b) RUS requires borrowers to take such actions as may be necessary
to establish rates for electric service which are sufficient to pay the
principal of and interest on the loans made or guaranteed by RUS in a
timely manner and to meet the requirements of the RUS documents.
(c) With respect to borrowers whose rates are not regulated by a
State Regulatory Authority, RUS requires that such borrowers establish
rates and to obtain RUS approval of such rates as required by the RUS
documents.
(d) To protect Federal interests, including without limitation the
ability of the borrower to repay RUS loans, RUS's policy is to exercise,
pursuant to the RUS documents, exclusive jurisdiction over the rates for
electric service charged by a borrower by or against whom a case under
the Bankruptcy Code of 1978, as amended, has commenced.
Sec. 1717.352 Definitions and rules of construction.
(a) Definitions. For the purpose of this subpart, the following
terms shall have the following meanings:
Administrator means the Administrator of RUS.
Bankruptcy code of 1978, as amended, means the Bankruptcy Reform Act
of 1978, as amended (11 U.S.C. 101 et seq.).
Borrower means any organization which has an outstanding loan made
or guaranteed by RUS for rural electrification.
RE Act means Rural Electrification Act of 1936, as amended (7 U.S.C.
901 et seq.).
REA means the Rural Electrification Administration formerly an
agency of the United States Department of Agriculture and predecessor
agency to RUS with respect to administering certain electric and
telephone loan programs.
RUS means the Rural Utilities Service, an agency of the United
States 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), successor
to REA with respect to administering certain electric and telephone
programs. See 7 CFR 1700.1.
RUS documents means the RUS loan contract, RUS mortgage and, if the
Borrower is engaged in the wholesale sale of electric power and energy
to members pursuant to RUS Wholesale Power Contracts, the RUS Wholesale
Power Contract.
RUS loan contract means the agreement, as amended, supplemented, or
restated from time to time, between a borrower and RUS providing for
loans made or guaranteed pursuant to the RE Act.
RUS mortgage means the mortgage and security agreement, as from time
to time supplemented, amended and restated, made by and among the
borrower, RUS, and, if a party thereto, third party lenders, or any
other form of mortgage or security instrument or indenture of mortgage
and deed of trust, securing the payment of outstanding loans made or
guaranteed by RUS and other lenders.
RUS wholesale power contract means the contract for the wholesale
sale of electric power and energy between a power supply borrower and
its member as approved by RUS.
Secured loans shall mean outstanding loans secured pursuant to the
RUS mortgage.
State regulatory authority means any state board or local governing
body having jurisdiction under state law to regulate, or in any way,
approve the electric rates charged by a borrower.
(b) Rules of construction. Unless the context shall otherwise
indicate, the terms defined in Sec. 1717.352(a) hereof include the
plural as well as the singular, and the singular as well as the plural.
The words ``herein,'' and ``hereunder'', and words of similar import,
refer to this subpart as a whole. ``Includes'' and ``including'' are not
limiting and ``or'' is not exclusive.
[55 FR 38653, Sept. 19, 1990, as amended at 59 FR 66440, Dec. 27, 1994]
Sec. 1717.353 Requirements of RUS documents.
Each borrower shall establish and adjust rates for electric service
as set
[[Page 168]]
forth in the RUS documents to assure that the borrower will be able to
make required payments on secured loans and to otherwise meet the terms
of the RUS documents.
Sec. 1717.354 Pre-emption.
State Regulatory Authority jurisdiction over an RUS borrower's rates
shall be pre-empted by the RE Act and RUS shall have exclusive
jurisdiction over the borrower's rates:
(a) On October 19, 1990, with respect to any borrower by or against
whom a case under the Bankruptcy Code of 1978, as amended, was commenced
prior to and remains outstanding on October 19, 1990; and
(b) With respect to all other borrowers, upon the filing of a
petition by or against the borrower commencing a case under the
Bankruptcy Code of 1978, as amended.
Sec. 1717.355 RUS required rates.
(a) Upon the pre-emption of State Regulatory Authority as provided
in this subpart, RUS will exercise exclusive jurisdiction over the rates
of the borrower pursuant to the terms of the RUS documents.
(b) So long as the State Regulatory Authority shall be pre-empted
hereunder, RUS shall be considered the governmental regulatory body with
jurisdiction over rates for all purposes, including for the purposes of
the RUS documents and for the purposes of section 1129(a)(6) of the
Bankruptcy Code of 1978, as amended (11 U.S.C. 1129(a)(6)).
(c) RUS shall, pursuant to the terms of the RUS documents, exercise
exclusive jurisdiction over the rates of the borrower until the
Administrator shall in writing approve the resumption of jurisdiction by
the State Regulatory Authority. The Administrator shall approve
resumption only after determining that such jurisdiction shall be
exercised in a manner consistent with Federal interests.
Sec. 1717.356 Additional statutory pre-emption.
This subpart addresses pre-emption of State law and State Regulatory
Authority upon the filing of a petition by or against the borrower
commencing a case under the Bankruptcy Code of 1978, as amended. Nothing
in this subpart waives, limits, or otherwise affects the explicit pre-
emption or pre-emption, which is implicit and shall occur pursuant to
the RE Act as a matter of law, of State law or action of a State
Regulatory Authority where such State law or such action compromises
Federal interests, including the ability of any borrower to repay loans
made or guaranteed by RUS.
Subparts I-L [Reserved]
Subpart M_Operational Controls
Source: 60 FR 67405, Dec. 29, 1995, unless otherwise noted.
Sec. 1717.600 General.
(a) General. The loan contract and mortgage between the Rural
Utilities Service (RUS) and electric borrowers imposes certain
restrictions and controls on the borrowers and gives RUS (and other co-
mortgagees in the case of the mortgage) the right to approve or
disapprove certain actions contemplated by the borrowers. Certain of
these controls and approval rights are referred to informally as
``operational controls'' because they pertain to decisions or actions
with respect to the operation of the borrowers' electric systems. The
approval authority granted to RUS by the loan contract or mortgage
regarding each decision or action subject to controls is often stated in
broad, unlimited terms. This subpart lists the main operational controls
affecting borrowers and establishes for each area of control the
circumstances under which RUS approval of a decision or action by a
borrower is either required or not required. In some cases, only the
general principles or general circumstances pertaining to RUS approval
or control are presented in this subpart, while the details regarding
the circumstances and requirements of RUS approval or control are set
forth in other RUS regulations. Since this subpart addresses only the
main operational controls, failure to address a control or approval
right in this subpart in no way invalidates such controls or rights
established by the loan
[[Page 169]]
contract, mortgage, other agreements between a borrower and RUS, and RUS
regulations.
(b) Case by case amendments. Upon written notice to a borrower, RUS
may amend or annul the approvals and exceptions to controls set forth in
this subpart or other RUS regulations if the borrower is in violation of
any provision of its loan documents or any other agreement with RUS, or
if RUS determines that loan security and/or repayment is threatened.
Such amendment or annulment will apply to decisions and actions of the
borrower after said written notice has been provided by RUS.
(c) Generic notices. By written notice to all borrowers or a group
of borrowers, RUS may grant or waive approval of decisions and actions
by the borrowers that are controlled under the loan documents and RUS
regulations. RUS may also by written notice withdraw or cut back its
grant or waiver of approval of said decisions and actions made by
previous written notice, but may not by such notice extend its authority
to approve decisions and actions by borrowers beyond the authority
granted by the loan documents and RUS regulations.
Sec. 1717.601 Applicability.
(a) The approvals and exceptions to controls conveyed by this
subpart apply only to controls and approval rights normally included in
RUS loan documents dated prior to January 29, 1996. They do not apply to
special controls and approval requirements included in loan documents or
other agreements executed between a borrower and RUS that relate to
individual problems or circumstances specific to an individual borrower.
(b) The approvals and exceptions to controls granted by RUS in this
subpart shall not in any way affect the rights of other co-mortgagees
under the mortgage or their loan contracts.
Sec. 1717.602 Definitions.
Terms used in this subpart that are not defined in this section have
the meanings set forth in 7 CFR part 1710. In addition, for the purposes
of this subpart:
Default means an event of default as defined in the borrower's loan
documents or other agreement with RUS, and furthermore includes any
event that has occurred and is continuing which, with notice or lapse of
time and notice, would become an event of default.
Equity means the borrower's total margins and equities computed
pursuant to RUS accounting requirements but excluding any regulatory
created assets.
Financed or funded by RUS means financed or funded wholly or in part
by a loan made or guaranteed by RUS, including concurrent supplemental
loans required by 7 CFR 1710.110, loans to reimburse funds already
expended by the borrower, and loans to replace interim financing.
Interchange agreement means a contractual arrangement that can
include a variety of services utilities provide each other to increase
reliability and efficiency, and to avoid duplicating expenses. Some
examples are: transmission service (the use of transmission lines to
move power and energy from one area to another); emergency service (an
agreement by one utility to furnish another with power and energy to
protect it in times of emergency, such as power plant outages); reserve
sharing (contributions to a common pool of generating plant reserves so
that each individual utility's reserves can be reduced); and economic
exchanges (swapping power and energy from different plants to avoid
running the most expensive units).
Interconnection agreement means a contract governing the terms for
establishing or using one or more electrical connections between two or
more electric systems permitting a flow of power and energy among the
systems.
Loan documents means the mortgage (or other security instrument
acceptable to RUS), the loan contract, and the promissory note entered
into between the borrower and RUS.
Net utility plant means the amount constituting the total utility
plant of the borrower, less depreciation, computed in accordance with
RUS accounting requirements.
Pooling agreement means a contract among two or more interconnected
[[Page 170]]
electric systems to operate on a coordinated basis to achieve economies
and/or enhance reliability in supplying their respective loads.
Power supply contract means any contract entered into by a borrower
for the sale or purchase, at wholesale, of electric energy.
Regulatory created assets means the sum of any amounts properly
recordable as unrecovered plant and regulatory study costs or as other
regulatory assets, computed pursuant to RUS accounting requirements.
RUS accounting requirements means the system of accounts prescribed
for electric borrowers by RUS regulations as such RUS accounting
requirements exist at the date of applicability thereof.
RUS regulations mean regulations of general applicability published
by RUS from time to time as they exist at the date of applicability
thereof, and shall also include any regulations of other federal
entities which RUS is required by law to implement.
Total assets means an amount constituting the total assets of the
borrower as computed pursuant to RUS accounting requirements, but
excluding any regulatory created assets.
Wheeling agreement means a contract providing for the use of the
electric transmission facilities of one electric utility to transmit
power and energy of another electric utility or other entity to a third
party. Such transmission may be accomplished directly or by
displacement.
Sec. 1717.603 RUS approval of extensions and additions.
(a) Distribution borrowers. Prior written approval by RUS is
required for a distribution borrower to extend or add to its electric
system if the extension or addition will be financed by RUS. For
extensions and additions that will not be financed by RUS, approval is
hereby given to distribution borrowers to make such extensions and
additions to their electric systems, including the use of (or commitment
to use) general funds of the borrower, except for the following:
(1) Construction, procurement, or leasing of generating facilities
if the combined capacity of the facilities to be built, procured, or
leased, including any future facilities included in the planned project,
will exceed the lesser of 5 megawatts or 30 percent of the borrower's
equity;
(2) Acquisition or leasing of existing electric facilities or
systems in service whose purchase price, or capitalized value in the
case of a lease, exceeds 10 percent of the borrower's net utility plant;
and
(3) Construction, procurement, or leasing of electric facilities to
serve a customer whose annual kWh purchases or maximum annual kW demand
in the foreseeable future is projected to exceed 25 percent of the
borrower's total kWh sales or maximum kW demand in the year immediately
preceding the acquisition or start of construction.
(b) Power supply borrowers. Prior written approval by RUS is
required for a power supply borrower to extend or add to its electric
system if the extension or addition will be financed by RUS.
Requirements for RUS approval of extensions and additions that will not
be financed by RUS are set forth in other RUS regulations.
(c) Additional details. Additional details relating to RUS approval
of extensions and additions of a borrower's electric system financed by
RUS are set forth in other RUS regulations, e.g., in 7 CFR parts 1710
and 1726.
Sec. 1717.604 Long-range engineering plans and construction work plans.
(a) All borrowers are required to maintain up-to-date long-range
engineering plans and construction work plans (CWPs) in form and
substance as set forth in 7 CFR part 1710, subpart F.
(b) Applications for financing from RUS must be supported by a long-
range engineering plan and CWP approved by RUS.
(c) RUS approval is not required for long-range engineering plans
and CWPs if the borrower does not intend to seek RUS financing for any
of the facilities, equipment or other purposes included in those plans.
However, if requested by RUS, a borrower must provide an informational
copy of such plans to RUS.
[[Page 171]]
Sec. 1717.605 Design standards, plans and specifications, construction standards, and RUS accepted materials.
All borrowers, regardless of the source of funding, are required to
comply with applicable RUS requirements with respect to system design,
construction standards, and the use of RUS accepted materials. Borrowers
must comply with applicable RUS requirements with respect to plans and
specifications only if the construction or procurement will be financed
by RUS. These requirements are set forth in other RUS regulations,
especially in 7 CFR parts 1724 and 1728.
Sec. 1717.606 Standard forms of construction contracts, and engineering and architectural services contracts.
All borrowers are encouraged to use the standard forms of contracts
promulgated by RUS for construction, materials, equipment, engineering
services, and architectural services, regardless of the source of
funding for such construction and services. Borrowers are required to
use these standard forms of contracts only if the construction,
procurement or services are financed by RUS, and only to the extent
required by RUS regulations. RUS requirements with respect to such
standard forms of contract are set forth in 7 CFR part 1724 for
architectural and engineering services, and in 7 CFR part 1726 for
construction, materials, and equipment.
Sec. 1717.607 Contract bidding requirements.
Borrowers must follow RUS requirements regarding bidding for
contracts for construction, materials, and equipment only if financing
of the construction or procurement will be provided by RUS. These
requirements are set forth in 7 CFR part 1726.
Sec. 1717.608 RUS approval of contracts.
(a) Construction contracts and architectural and engineering
contracts. RUS approval of contracts for construction and procurement
and for architectural and engineering services is required only when
such construction, procurement or services are financed by RUS. Detailed
requirements regarding RUS approval of such contracts are set forth in 7
CFR part 1724 for architectural and engineering services, and in 7 CFR
part 1726 for construction and procurement.
(b) Large retail power contracts. RUS approval of contracts to sell
electric power to retail customers is required only if the contract is
for longer than 2 years and the kWh sales or kW demand for any year
covered by the contract exceeds 25 percent of the borrower's total kWh
sales or maximum kW demand for the year immediately preceding execution
of the contract. This requirement applies regardless of the source of
funding of any plant extensions, additions or improvements that may be
involved in connection with the contract.
(c) Power supply arrangements. (1) Power supply contracts (including
but not limited to economy energy sales and emergency power and energy
sales), interconnection agreements, interchange agreements, wheeling
agreements, pooling agreements, and any other similar power supply
arrangements subject to approval by RUS are deemed approved if they have
a term of 2 years or less. Amendments to said power supply arrangements
are also deemed approved provided that the amendment does not extend the
term of the arrangement for more than 2 years beyond the date of the
amendment.
(2) Any amendment to a schedule or exhibit contained in any power
supply arrangement subject to RUS approval, which merely has the effect
of either altering a list of interconnection or delivery points or
changing the value of a variable term (but not the formula itself)
contained in a formulary rate or charge is deemed approved.
(3) The provisions of this paragraph (c) apply regardless of whether
the borrower is a seller or purchaser of the services furnished by the
contracts or arrangements, and regardless of whether or not a Federal
power marketing agency is a party to any of them.
(d) System management and maintenance contracts. RUS approval of
contracts for the management and operation of a borrower's electric
system or for the maintenance of the electric system is required only if
such contracts cover all or substantially all of the electric system.
[[Page 172]]
(e) Other contracts. [Reserved]
Sec. 1717.609 RUS approval of general manager.
(a) If a borrower's mortgage or loan contract grants RUS the
unconditioned right to approve the employment and/or the employment
contract of the general manager of the borrower's system, such approval
is hereby granted provided that the borrower is in compliance with all
provisions of its loan documents and any other agreements with RUS.
(b) If a borrower is in default with respect to any provision of its
loan documents or any other agreement with RUS:
(1) Such borrower, if directed in writing by RUS, shall replace its
general manager within 30 days after the date of such written notice;
and
(2) Such borrower shall not hire a general manager without prior
written approval by RUS.
Sec. 1717.610 RUS approval of compensation of the board of directors.
If a borrower's mortgage or loan contract requires the borrower to
obtain approval from RUS for compensation provided to members of the
borrower's board of directors, such requirement is hereby waived.
Sec. 1717.611 RUS approval of expenditures for legal, accounting, engineering, and supervisory services.
(a) If a borrower's mortgage or loan contract requires the borrower
to obtain approval from RUS before incurring expenses for legal,
accounting, supervisory (other than for the management and operation of
the borrower's electric system, see Sec. 1717.608(d)), or other similar
services, such approval is hereby granted. However, while expenditures
for accounting do not require RUS approval, the selection of a certified
public accountant by the borrower to prepare audited reports required by
RUS remains subject to RUS approval.
(b) If a borrower's mortgage or loan contract requires the borrower
to obtain approval from RUS before incurring expenses for engineering
services, such approval is hereby granted if such services will not be
financed by RUS. Approval requirements with respect to engineering
services financed by RUS are set forth in other RUS regulations.
Sec. 1717.612 RUS approval of borrower's bank or other depository.
If a borrower's mortgage or loan contract gives RUS the authority to
approve the bank or other depositories used by the borrower, such
approval is hereby granted. However, without the prior written approval
of RUS, a borrower shall not deposit funds from loans made or guaranteed
by RUS in any bank or other depository that is not insured by the
Federal Deposit Insurance Corporation or other Federal agency acceptable
to RUS, or in any account not so insured.
Sec. 1717.613 RUS approval of data processing and system control equipment.
If a borrower's mortgage or loan contract requires the borrower to
obtain approval from RUS before purchasing data processing equipment or
system control equipment, such approval is hereby granted if the
equipment will not be financed by RUS.
Sec. 1717.614 Notification of rate changes.
If a distribution borrower is required by its loan documents to
notify RUS in writing of proposed changes in electric rates more than 30
days prior to the effective date of such rates, the required
notification period shall be 30 days. Moreover, such notification shall
be required only upon the request of RUS.
Sec. 1717.615 Consolidations and mergers.
A distribution or power supply borrower may without the prior
approval of RUS, consolidate or merge with any other corporation or
convey or transfer the mortgaged property substantially as an entirety
if the following conditions are met:
(a) Such consolidation, merger, conveyance or transfer shall be on
such terms as shall fully preserve the lien and security of the RUS
mortgage and the rights and powers of the mortgagees;
(b) The entity formed by such consolidation or with which the
borrower is merged or the corporation which acquires by conveyance or
transfer the
[[Page 173]]
mortgaged property substantially as an entirety shall execute and
deliver to the mortgagees a mortgage supplemental in recordable form and
containing an assumption by such successor entity of the due and
punctual payment of the principal of and interest on all of the
outstanding notes and the performance and observance of every covenant
and condition of the mortgage;
(c) Immediately after giving effect to such transaction, no default
under the mortgage shall have occurred and be continuing;
(d) The borrower shall have delivered to the mortgagees a
certificate of its general manager or other officer, in form and
substance satisfactory to each of the mortgagees, which shall state that
such consolidation, merger, conveyance or transfer and such supplemental
mortgage comply with this section and that all conditions precedent
herein provided for relating to such transaction have been complied
with;
(e) The borrower shall have delivered to the mortgagees an opinion
of counsel in form and substance satisfactory to each of the mortgagees;
and
(f) The entity formed by such consolidation or with which the
borrower is merged or the corporation which acquires by conveyance or
transfer the mortgaged property substantially as an entirety shall be an
entity having:
(1) Equity equal to at least 27% of its total assets on a pro forma
basis after giving effect to such transaction;
(2) A pro forma TIER of not less than 1.25 and a pro forma DSC of
not less than 1.25 for each of the two preceding calendar years;
(3) Net utility plant equal to or greater than 1.0 times its total
long-term debt on a pro forma basis.
[60 FR 67405, Dec. 29, 1995, as amended at 65 FR 51748, Aug. 25, 2000;
67 FR 70153, Nov. 21, 2002]
Sec. 1717.616 Sale, lease, or transfer of capital assets.
A distribution borrower may without the prior approval of RUS sell,
lease, or transfer any capital asset if the following conditions are
met:
(a) The borrower is not in default;
(b) In the most recent year for which data are available, the
borrower achieved a TIER of at least 1.25, DSC of at least 1.25, OTIER
of at least 1.1, and ODSC of at least 1.1 in each case based on the
average or the best 2 out of the 3 most recent years;
(c) The sale, lease, or transfer of assets will not reduce the
borrower's existing or future requirements for energy or capacity being
furnished to the borrower under any wholesale power contract which has
been pledged as security to the government;
(d) Fair market value is obtained for the assets;
(e) The aggregate value of assets sold, leased, or transferred in
any 12-month period is less than 10 percent of the borrower's net
utility plant prior to the transaction;
(f) The proceeds of such sale, lease, or transfer, less ordinary and
reasonable expenses incident to such transaction, are immediately:
(1) Applied as a prepayment of all notes secured under the mortgage
equally and ratably;
(2) In the case of dispositions of equipment, materials or scrap,
applied to the purchase of other property useful in the borrower's
utility business; or
(3) Applied to the acquisition of construction of utility plant.
[60 FR 67405, Dec. 29, 1995, as amended at 65 FR 51748, Aug. 25, 2000]
Sec. 1717.617 Limitations on distributions.
If a distribution or power supply borrower is required by its loan
documents to obtain prior approval from RUS before declaring or paying
any dividends, paying or determining to pay any patronage refunds, or
retiring any patronage capital, or making any other cash distributions,
such approval is hereby given if the following conditions are met:
(a) After giving effect to the distribution, the borrower's equity
will be greater than or equal to 30 percent of its total assets;
(b) The borrower is current on all payments due on all notes secured
under the mortgage;
(c) The borrower is not otherwise in default under its loan
documents; and
[[Page 174]]
(d) After giving effect to the distribution, the borrower's current
and accrued assets will be not less than its current and accrued
liabilities.
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.
Source: 60 FR 48877, Sept. 21, 1995, unless otherwise noted.
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 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,
[[Page 175]]
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.
[[Page 176]]
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 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
[[Page 177]]
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
[[Page 178]]
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 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
[[Page 179]]
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 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.
[[Page 180]]
(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;
[[Page 181]]
(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.
(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.
Subpart O [Reserved]
Sec. Sec. 1717.700-1717.749 [Reserved]
Subpart P [Reserved]
Sec. Sec. 1717.750-1717.799 [Reserved]
Subpart Q [Reserved]
[[Page 182]]
Sec. Sec. 1717.800-1717.849 [Reserved]
Subpart R_Lien Accommodations and Subordinations for 100 Percent Private
Financing
Source: 58 FR 53843, Oct. 19, 1993, unless otherwise noted.
Sec. 1717.850 General.
(a) Scope and applicability. (1) This subpart R establishes policies
and procedures for the accommodation, subordination or release of the
Government's lien on borrower assets, including approvals of supporting
documents and related loan security documents, in connection with 100
percent private sector financing of facilities and other purposes.
Policies and procedures regarding lien accommodations for concurrent
supplemental financing required in connection with an RUS insured loan
are set forth in subpart S of this part.
(2) This subpart and subpart S of this part apply only to debt to be
secured under the mortgage, the issuance of which is subject to the
approval of the Rural Utilities Service (RUS) by the terms of the
borrower's mortgage with respect to the issuance of additional debt or
the refinancing or refunding of debt. If RUS approval is not required
under such terms of the mortgage itself, a lien accommodation is not
required. If the loan contract or other agreement between the borrower
and RUS requires RUS approval with respect to the issuance of debt or
making additions to or extensions of the borrower's system, such
required approvals do not by themselves result in the need for a lien
accommodation.
(b) Overall policy. (1) Consistent with prudent lending practices,
the maintenance of adequate security for RUS's loans, and the objectives
of the Rural Electrification Act (RE Act), it is the policy of RUS to
provide effective and timely assistance to borrowers in obtaining
financing from other lenders by sharing RUS's lien on a borrower's
assets in order to finance electric facilities, equipment and systems,
and certain other types of community infrastructure. In certain
circumstances, RUS may facilitate the financing of such assets by
subordinating its lien on specific assets financed by other lenders.
(2) It is also the policy of RUS to provide effective and timely
assistance to borrowers in promoting rural development by subordinating
RUS's lien for financially sound rural development investments under the
conditions set forth in Sec. 1717.858.
(c) Decision factors. In determining whether to accommodate,
subordinate, or release its lien on property pledged by the borrower
under the RUS mortgage, RUS will consider the effects of such action on
the achievement of the purposes of the RE Act, the repayment and
security of RUS loans secured by the mortgage, and other factors set
forth in this subpart. The following factors will be considered in
assessing the effects on the repayment and security of RUS loans:
(1) The value of the added assets compared with the amount of new
debt to be secured;
(2) The value of the assets already pledged under the mortgage, and
any effects of the proposed transaction on the value of those assets;
(3) The ratio of the total outstanding debt secured under the
mortgage to the value of all assets pledged as security under the
mortgage;
(4) The borrower's ability to repay debt owed to the Government, as
indicated by the following factors:
(i) Revenues, costs (including interest, lease payments and other
debt service costs), margins, Times Interest Earned Ratio (TIER), Debt
Service Coverage (DSC), and other case-specific economic and financial
factors;
(ii) The variability and uncertainty of future revenues, costs,
margins, TIER, DSC, and other case-specific economic and financial
factors;
(iii) Future capital needs and the ability of the borrower to meet
those needs at reasonable cost;
(iv) The ability of the borrower's management to manage and control
its system effectively and plan for future needs; and
(5) Other factors that may be relevant in individual cases, as
determined by RUS.
(d) Environmental considerations. Under certain circumstances, such
as
[[Page 183]]
when the project does not qualify for a categorical exclusion, the
environmental requirements of 7 CFR part 1794 may apply to applications
for lien accommodations, subordinations, and releases.
(e) Co-mortgagees. Other mortgagees under existing mortgages shared
with RUS may have the right to approve requests for lien accommodations,
subordinations and releases. In those cases, borrowers would have to
obtain the approval of such mortgagees in order for the lien of the
mortgage to be accommodated, subordinated or released. Any reference in
this subpart to waiving by RUS of any of its rights under the mortgage
shall apply only to the rights of RUS and shall not apply to the rights
of any other co-mortgagee.
(f) Safety and performance standards. (1) To be eligible for a lien
accommodation or subordination from RUS, a borrower must comply with RUS
standards regarding facility and system planning and design,
construction, procurement, and the use of materials accepted by RUS, as
required by the borrower's mortgage, loan contract, or other agreement
with RUS, and as further specified in RUS regulations.
(2) RUS ``Buy American'' requirements shall not apply.
(g) Advance of funds. (1) The advance of funds from 100 percent
private loans lien accommodated or subordinated by RUS will not be
subject to RUS approval. It is the private lender's responsibility to
adopt reasonable measures to ensure that such loan funds are used for
the purposes for which the loan was made and the lien accommodation or
subordination granted. RUS encourages lenders to adopt the following
measures:
(i) Remit loan advances to a separate subaccount of the Cash-
Construction Fund-Trustee Account;
(ii) Obtain a certification from a registered professional engineer,
for each year during which funds from the separate subaccount are
utilized by the borrower, that all materials and equipment purchased and
facilities constructed during the year from said funds comply with RUS
safety and performance standards, as required by paragraph (f) of this
section, and are included in an CWP or CWP amendment approved by the
borrower's board of directors;
(iii) Obtain an auditor's certification from a Certified Public
Accountant, for each year during which funds are advanced to or remitted
from the separate subaccount, certifying:
(A) The amount of loan funds advanced to and remitted from the
separate subaccount during the period of review;
(B) That based on the auditor's review of construction work orders
and other records, all moneys disbursed from the separate subaccount
during the period of review were used for purposes contemplated in the
loan agreement and the lien accommodation; and
(iv) Immediately notify RUS in writing if the lender is unable to
obtain the certifications cited in paragraphs (g)(1)(ii) and (g)(1)(iii)
of this section.
(2) The measures listed in paragraph (g)(1) of this section will
normally be sufficient to meet the lender's responsibility provided that
additional measures are not reasonably required based on the particular
circumstances of an individual case. Should a lender fail to carry out
its responsibility in the manner described in this paragraph (g) or in
another manner acceptable to RUS, RUS may disqualify such lender from
participation in advance approval under Sec. Sec. 1717.854 and
1717.857 and condition the lender's receipt of a lien accommodation or
subordination upon the lender providing satisfactory evidence that it
will fulfill its responsibility under this paragraph (g).
(h) Contracting and procurement procedures. (1) Facilities financed
with debt obtained entirely from non-RUS sources, without an RUS loan
guarantee, are not subject to RUS post-loan requirements regarding
contracting, procurement and bidding procedures; contract close-out
procedures pertaining to project completion, final payment of
contractor, and related matters; and standard forms of construction and
procurement contracts listed in 7 CFR 1726.300.
(2) To the extent that provisions in a borrower's loan contract or
mortgage in favor of RUS may be inconsistent with paragraphs (g)(1) and
(h)(1) of this section, paragraphs (g)(1) and (h)(1) of this section are
intended to constitute
[[Page 184]]
an approval or waiver under the terms of such instruments, and in any
regulations implementing such instruments, with respect to facilities
financed with debt obtained entirely from non-RUS sources without an RUS
guarantee.
(i) Access of handicapped to buildings and seismic safety. A
borrower must meet the following requirements to be eligible for a lien
accommodation or subordination for 100 percent private financing of the
construction of buildings:
(1) The borrower must provide RUS with a certification by the
project architect that the buildings will be designed and constructed in
compliance with Section 504 of the Rehabilitation Act of 1973 as amended
(29 U.S.C. 794), as applicable under that Act, and that the facilities
will be readily accessible to and usable by persons with handicaps in
accordance with the Uniform Federal Accessibility Standards (UFAS),
(Appendix A to 41 CFR part 101.19, subpart 101-19.6). The certification
must be included in the borrower's application for a lien accommodation
or subordination. In addition to these requirements, building
construction may also be subject to requirements of The Americans with
Disabilities Act (42 U.S.C. 12101 et seq.); and
(2) The borrower must comply with RUS's seismic safety requirements
set forth in 7 CFR part 1792, subpart C.
(j) Breach of warranty. Any breach of any warranty or agreement or
any material inaccuracy in any representation, warranty, certificate,
document, or opinion submitted pursuant to this subpart, including,
without limitation, any agreement or representation regarding the use of
funds from loans lien accommodated or subordinated pursuant to this
subpart, shall constitute a default by the borrower under the terms of
its loan agreement with RUS.
(k) Guaranteed loans. The provisions of this subpart do not apply to
lien accommodations or subordinations sought for loans guaranteed by
RUS. Such lien accommodations and subordinations are governed by RUS
regulations on guaranteed loans.
(l) Release of lien. To avoid repetition, release of lien is not
mentioned in every instance where it may be an acceptable alternative to
subordination of RUS's lien. Generally, lien subordination is favored
over release of lien, and any decision to release RUS's lien is at the
sole discretion of RUS.
(m) Waiver authority. Consistent with the RE Act and other
applicable laws, any requirement, condition, or restriction imposed by
this subpart, or subpart S of this part, on a borrower, private lender,
or application for a lien accommodation or subordination may be waived
or reduced by the Administrator, if the Administrator determines that
said action is in the Government's financial interest with respect to
ensuring repayment and reasonably adequate security for loans made or
guaranteed by RUS.
(n) Liability. It is the intent of this subpart that any failure on
the part of RUS to comply with any provisions hereof, including without
limitation, those provisions setting forth specified timeframes for
action by RUS on applications for lien accommodations or lien
subordinations, shall not give rise to liability of any kind on the part
of the Government or any employees of the Government including, without
limitation, liability for damages, fees, expenses or costs incurred by
or on behalf of a borrower, private lender or any other party.
[58 FR 53843, Oct. 19, 1993, as amended at 60 FR 67408, Dec. 29, 1995]
Sec. 1717.851 Definitions.
Terms used in this subpart have the meanings set forth in 7 CFR
1710.2. References to specific RUS forms and other RUS documents, and to
specific sections or lines of such forms and documents, shall include
the corresponding forms, documents, sections and lines in any subsequent
revisions of these forms and documents. In addition to the terms defined
in 7 CFR 1710.2, the following terms have the following meanings for the
purposes of this subpart:
Borrower's financial and statistical report means RUS Form 7, Parts
A through D, for distribution borrowers, and RUS Form 12a for power
supply borrowers.
Calendar day means any day of the year, except a Federal holiday
that falls on a work day.
[[Page 185]]
Capital investment. For the purposes of Sec. 1717.860, capital
investment means an original investment in an asset that is intended for
long-term continued use or possession and, for accounting purposes, is
normally depreciated or depleted as it is used. For example, such assets
may include land, facilities, equipment, buildings, mineral deposits,
patents, trademarks, and franchises. Original investments do not include
refinancings or refundings.
Current refunding means any refunding of debt where the proceeds of
the new debt are applied to refund the old debt within 90 days of the
issuance of the new debt.
Default under the RUS mortgage, loan contract, restructuring
agreement, or any other agreement between the borrower and RUS means any
event of default or any event which, with the giving of notice or lapse
of time or both, would become an event of default.
Equity, less deferred expenses, means Line 33 of Part C of RUS Form
7 less assets properly recordable in Account 182.2, Unrecovered Plant
and Regulatory Study Costs, and Account 182.3, Other Regulatory Assets.
Front-end costs means the reasonable cost of engineering,
architectural, environmental and other studies and plans needed to
support the construction of facilities and other investments eligible
for a lien accommodation or subordination under this subpart.
Lien accommodation means the sharing of the Government's (RUS's)
lien on property, usually all property, covered by the lien of the RUS
mortgage.
Lien subordination means allowing another lender to take a first
mortgage lien on certain property covered by the lien of the RUS
mortgage, and the Government (RUS) taking a second lien on such
property.
Natural gas distribution system means any system of community
infrastructure whose primary function is the distribution of natural gas
and whose services are available by design to all or a substantial
portion of the members of the community.
Net utility plant means Part C, Line 5 of RUS Form 7 (distribution
borrowers) or Section B, Line 5 of RUS Form 12a (power supply
borrowers).
Power cost study means the study defined in 7 CFR 1710.303.
Solid waste disposal system means any system of community
infrastructure whose primary function is the 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.
Telecommunication and other electronic communication system means
any system of community infrastructure whose primary function is the
provision of 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, less deferred expenses means Line 26 of Part C of RUS
Form 7 less assets properly recordable in Account 182.2, Unrecovered
Plant and Regulatory Study Costs, and Account 182.3, Other Regulatory
Assets.
Total outstanding long-term debt means Part C, Line 38 of RUS Form
7.
Transaction costs means the reasonable cost of legal advice,
accounting fees, filing fees, recording fees, call premiums and
prepayment penalties, financing costs (including, for example,
underwriting commissions, letter of credit fees and bond insurance), and
printing associated with borrower financing.
Water and waste disposal system means any system of community
infrastructure whose primary function is the supplying of water and/or
the collection and treatment of waste water and whose services are
available by design to all or a substantial portion of the members of
the community.
Weighted average life of the loan means the average life of the loan
based on the proportion of original loan principal paid during each year
of the loan. It shall be determined by calculating the sum of all loan
principal payments, expressed as a fraction of the original loan
principal amount, times the number of years and fractions of years
elapsed at the time of each payment since issuance of the loan. For
example, given a $5 million loan, with a maturity of 5 years and equal
principal payments of $1 million due on the anniversary date of the
loan, the weighted average life would be: (.2)(1 year) +
[[Page 186]]
(.2)(2 years) + (.2)(3 years) + (.2)(4 years) + (.2)(5 years) = .2 years
+ .4 years + .6 years + .8 years + 1.0 years = 3.0 years. If instead the
loan had a balloon payment of $5 million at the end of 5 years, the
weighted average life would be: ($5 million/$5 million)(5 years) = 5
years.
[58 FR 53843, Oct. 19, 1993, as amended at 59 FR 3986, Jan. 28, 1994; 60
FR 67409, Dec. 29, 1995]
Sec. 1717.852 Financing purposes.
(a) Purposes eligible. The following financing purposes, except as
excluded in paragraph (b) of this section, are eligible for a lien
accommodation from RUS, or in certain circumstances a subordination of
RUS's lien on specific assets, provided that all applicable provisions
of this subpart are met:
(1) The acquisition, construction, improvement, modification, and
replacement (less salvage value) of systems, equipment, and facilities,
including real property, used to supply electric and/or steam power to:
(i) RE Act beneficiaries; and/or
(ii) End-user customers of the borrower who are not beneficiaries of
the RE Act. Such systems, equipment, and facilities include those listed
in 7 CFR 1710.251(c) and 1710.252(c), as well as others that are
determined by RUS to be an integral component of the borrower's system
of supplying electric and/or steam power to consumers, such as, for
example, coal mines, coal handling facilities, railroads and other
transportation systems that supply fuel for generation, programs of
demand side management and energy conservation, and on-grid and off-grid
renewable energy systems;
(2) The purchase, rehabilitation and integration of existing
distribution facilities, equipment and systems, and associated service
territory;
(3) The following types of community infrastructure substantially
located within the electric service territory of the borrower: water and
waste disposal systems, solid waste disposal systems, telecommunication
and other electronic communications systems, and natural gas
distribution systems;
(4) Front-end costs, when and as the borrower has obtained a binding
commitment from the non-RUS lender for the financing required to
complete the procurement or construction of the facilities;
(5) Transaction costs included as part of the cost of financing
assets or refinancing existing debt, provided, however, that the amount
of transaction costs eligible for lien accommodation or subordination
normally shall not exceed 5 percent of the principal amount of financing
or refinancing provided, net of all transaction costs;
(6) The refinancing of existing debt secured under the mortgage;
(7) Interest during construction of generation and transmission
facilities if approved by RUS, case by case, depending on the financial
condition of the borrower, the terms of the financing, the nature of the
construction, the treatment of these costs by regulatory authorities
having jurisdiction, and such other factors deemed appropriate by RUS;
and
(8) Lien subordinations for certain rural development investments,
as provided in Sec. 1717.858.
(b) Purposes ineligible. The following financing purposes are not
eligible for a lien accommodation or subordination from RUS:
(1) Working capital, including operating funds, unless in the
judgment of RUS the working capital is required to ensure the repayment
of RUS loans and/or other loans secured under the mortgage;
(2) Facilities, equipment, appliances, or wiring located inside the
premises of the consumer, except:
(i) Certain load-management equipment (see 7 CFR 1710.251(c));
(ii) Renewable energy systems and RUS-approved programs of demand
side management and energy conservation; and
(iii) As determined by RUS on a case by case basis, facilities
included as part of certain cogeneration projects to furnish electric
and/or steam power to end-user customers of the borrower;
(3) Investments in a lender required of the borrower as a condition
for obtaining financing; and
(4) Debt incurred by a distribution or power supply borrower to
finance facilities, equipment or other assets that are not part of the
borrower's electric system or one of the four community
[[Page 187]]
infrastructure systems cited in paragraph (a)(3) of this section, except
for certain rural development investments eligible for a lien
subordination under Sec. 1717.858.
(c) Lien subordination for electric utility investments. RUS will
consider subordinating its lien on specific electric utility assets
financed by the lender, when the assets can be split off without
materially reducing the stability, safety, reliability, operational
efficiency, or liquidation value of the rest of the system.
[58 FR 53843, Oct. 19, 1993, as amended at 59 FR 3986, Jan. 28, 1994; 60
FR 67409, Dec. 29, 1995]
Sec. 1717.853 Loan terms and conditions.
(a) Terms and conditions. A loan, bond or other financing
instrument, for which a lien accommodation or subordination is requested
from RUS, must comply with the following terms and conditions:
(1) The maturity of the loan or bond used to finance facilities or
other capital assets must not exceed the weighted average of the
expected remaining useful lives of the assets being financed;
(2) The loan or bond must have a maturity of not less than 5 years,
except for loans or bonds used to refinance debt that has a remaining
maturity of less than 5 years;
(3) The principal of the loan or bond must be amortized at a rate
that will yield a weighted average life not greater than the weighted
average life that would result from level payments of principal and
interest; and
(4) The loan, or any portion of the loan, may bear either a variable
(set annually or more frequently) or a fixed interest rate.
(b) RUS approval. Loan terms and conditions and the loan agreement
between the borrower and the lender are subject to RUS approval.
However, RUS will usually waive its right of approval for distribution
borrowers that meet the conditions for advance approval of a lien
accommodation or subordination set forth in Sec. 1717.854. RUS may also
waive its right of approval in other cases. RUS's decision to waive its
right of approval will depend on the adequacy of security for RUS's
loans, the current and projected financial strength of the borrower and
its ability to meet its financial obligations, RUS's familiarity with
the lender and its lending practices, whether the transaction is
ordinary or unusual, and the uncertainty and credit risks involved in
the transaction.
Sec. 1717.854 Advance approval--100 percent private financing of distribution, subtransmission and headquarters facilities, and certain other community
infrastructure.
(a) Policy. Requests for a lien accommodation or subordination from
distribution borrowers for 100 percent private financing of
distribution, subtransmission and headquarters facilities, and for
community infrastructure listed in Sec. 1717.852(a)(3), qualify for
advance approval by RUS if they meet the conditions of this section and
all other applicable provisions of this subpart. Advance approval means
RUS will approve these requests once RUS is satisfied that the
conditions of this section and all other applicable provisions of this
subpart have been met.
(b) Eligible purposes. Lien accommodations or subordinations for the
financing of distribution, subtransmission, and headquarters facilities
and community infrastructure listed in Sec. 1717.852(a)(3) are eligible
for advance approval, except those that involve the purchase of existing
facilities and associated service territory.
(c) Qualification criteria. To qualify for advance approval, the
following requirements, as well as all other applicable requirements of
this subpart, must be met:
(1) The borrower has achieved a TIER of at least 1.25 and a DSC of
at least 1.25 for each of 2 calendar years immediately preceding, or any
2 consecutive 12 month periods ending within 180 days immediately
preceding, the issuance of the debt;
(2) The ratio of the borrower's equity, less deferred expenses, to
total assets, less deferred expenses, is not less than 27 percent, after
adding the principal amount of the proposed loan to the total assets of
the borrower;
(3) The borrower's net utility plant as a ratio to its total
outstanding long-term debt is not less than 1.0, after
[[Page 188]]
adding the principal amount of the proposed loan to the existing
outstanding long-term debt of the borrower;
(4) There are no actions or proceedings against the borrower,
pending or overtly threatened in writing before any court, governmental
agency, or arbitrator that would materially adversely affect the
borrower's operations and/or financial condition;
(5) The borrower is current on all debt payments and all other
financial obligations, and is not in default under the RUS mortgage, the
RUS loan contract, the borrower's wholesale power contract, any debt
restructuring agreement, or any other agreement with RUS;
(6) The borrower has:
(i) Submitted the annual auditor's report, report on compliance,
report on internal controls, and management letter in accordance with 7
CFR part 1773;
(ii) Received an unqualified opinion in the most recent auditor's
report;
(iii) Resolved all material findings and recommendations made in the
most recent Loan Fund and Accounting Review;
(iv) Resolved all material findings and recommendations made in the
most recent financial statement audit, including those material findings
and recommendations made in the report on internal control, report on
compliance, and management letter;
(v) Resolved all outstanding material accounting issues with RUS;
and
(vi) Resolved any significant irregularities to RUS's satisfaction;
and
(7) If the borrower has a power supply contract with a power supply
borrower, the power supply borrower is current on all debt payments and
all other financial obligations, and is not in default under the RUS
mortgage, the loan contract, any debt restructuring agreement, or any
other agreement with RUS.
(d) Right of normal review reserved. RUS reserves the right to
review any request for lien accommodation or subordination under its
normal review process rather than under advance approval procedures if
RUS, in its sole discretion, determines there is reasonable doubt as to
whether the requirements of paragraphs (b) and (c) of this section have
been or will be met, or whether the borrower will be able to meet all of
its present and future financial obligations.
[58 FR 53843, Oct. 19, 1993, as amended at 60 FR 67410, Dec. 29, 1995;
65 FR 51748, Aug. 25, 2000]
Sec. 1717.855 Application contents: Advance approval--100 percent private financing of distribution, subtransmission and headquarters facilities, and certain
other community infrastructure.
Applications for a lien accommodation or subordination that meet the
requirements of Sec. 1717.854 must include the following information
and documents:
(a) A certification by an authorized official of the borrower that
the borrower and, as applicable, the loan are in compliance with all
conditions set forth in Sec. 1717.854(c) and all applicable provisions
of Sec. Sec. 1717.852 and 1717.853;
(b) A resolution of the borrower's board of directors requesting the
lien accommodation or subordination and including the amount and
maturity of the proposed loan, a general description of the facilities
or other purposes to be financed, the name and address of the lender,
and an attached term sheet summarizing the terms and conditions of the
proposed loan;
(c) The borrower's financial and statistical report, the data in
which shall not be more than 60 days old when the complete application
is received by RUS;
(d) Draft copy of any new mortgage or mortgage amendment
(supplement) required by RUS or the lender, unless RUS has notified the
borrower that it wishes to prepare these documents itself;
(e) A copy of the loan agreement, loan note, bond or other financing
instrument, unless RUS has notified the borrower that these documents
need not be submitted;
(f) Borrower's environmental report and/or other environmental
documentation, if required by 7 CFR part 1794;
(g) RUS Form 740c, Cost Estimates and Loan Budget for Electric
Borrowers, and RUS Form 740g, Application for Headquarters Buildings;
[[Page 189]]
(h) A CWP or CWP amendment covering the proposed project, in
accordance with 7 CFR part 1710, subpart F, and subject to RUS approval,
and a resolution of the borrower's board of directors adopting the CWP;
(i) The certification by the project architect for any buildings to
be constructed, as required by Sec. 1717.850(i);
(j) A certification by an authorized official of the borrower that
flood hazard insurance will be obtained for the full value of any
buildings, or other facilities susceptible to damage if flooded, that
will be located in a flood hazard area;
(k) Form AD-1047, Certification Regarding Debarment, Suspension, and
Other Responsibility Matters--Primary Covered Transactions, as required
by 7 CFR part 3017;
(l) A report by the borrower stating whether or not it is delinquent
on any Federal debt, and if delinquent, the amount and age of the
delinquency and the reasons therefor; and a certification, if not
previously provided, that the borrower has been informed of the
Government's collection options;
(m) The written acknowledgement from a registered engineer or
architect regarding compliance with seismic provisions of applicable
model codes for any buildings to be constructed, as required by 7 CFR
1792.104; and
(n) Other information that RUS may require to determine whether all
of the applicable provisions of this subpart have been met.
[58 FR 53843, Oct. 19, 1993, as amended at 60 FR 67410, Dec. 29, 1995]
Sec. 1717.856 Application contents: Normal review--100 percent private financing.
Applications for a lien accommodation or subordination for 100
percent private financing for eligible purposes that do not meet the
requirements of Sec. 1717.854 must include the following information
and documents:
(a) A certification by an authorized official of the borrower that:
(1) The borrower and, as applicable, the loan are in compliance with
all applicable provisions of Sec. Sec. 1717.852 and 1717.853; and
(2) There are no actions or proceedings against the borrower,
pending or overtly threatened in writing before any court, governmental
agency, or arbitrator that would materially adversely affect the
borrower's operations and/or financial condition. If this certification
cannot be made, the application must include:
(i) An opinion of borrower's counsel regarding any actions or
proceedings against the borrower, pending or overtly threatened in
writing before any court, governmental agency, or arbitrator that would
materially adversely affect the borrower's operations and/or financial
condition. The opinion shall address the merits of the claims asserted
in the actions or proceedings, and include, if appropriate, an estimate
of the amount or range of any potential loss; and
(ii) A certification by an authorized official of the borrower as to
the amount of any insurance coverage applicable to any loss that may
result from the actions and proceedings addressed in the opinion of
borrower's counsel;
(b) The information and documents set forth in Sec. 1717.855 (b)
through (n);
(c) A long-range financial forecast providing financial projections
for at least 10 years, which demonstrates that the borrower's system is
economically viable and that the proposed loan is financially feasible,
and a resolution of the borrower's board of directors adopting the long-
range financial forecast. The financial forecast must comply with the
requirements of 7 CFR part 1710 subpart G. RUS may, in its sole
discretion, waive the requirement of this paragraph that a long range
financial forecast be provided, if:
(1) The borrower is current on all of its financial obligations and
is in compliance with all requirements of its mortgage and loan
agreement with RUS;
(2) In RUS's judgment, granting a lien accommodation or
subordination for the proposed loan will not adversely affect the
repayment and security of outstanding debt of the borrower owed to or
guaranteed by RUS;
(3) The borrower has achieved the TIER and DSC and any other
coverage ratios required by its mortgage or loan contract in each of the
two most recent calendar years; and
[[Page 190]]
(4) The amount of the proposed loan does not exceed the lesser of
$10 million or 10 percent of the borrower's current net utility plant;
(d) [Reserved]
(e) As applicable to the type of facilities being financed, a CWP,
related engineering and cost studies, a power cost study, and a
resolution of the borrower's board of directors adopting these
documents. These documents must meet the requirements of 7 CFR part
1710, subpart F and, as applicable, subpart G;
(f) Unless the requirement has been waived in writing by RUS, a
current, RUS-approved power requirements study, which must meet the
requirements of 7 CFR part 1710, subpart E, to the same extent as if the
loan were being made by RUS, and a resolution of the borrower's board of
directors adopting the study; and
(g) A discussion of the borrower's compliance with RUS requirements
on accounting, financial reporting, record keeping, and irregularities
(see Sec. 1717.854(c)(5)). RUS will review the case and determine the
effect of any noncompliance on the feasibility and security of RUS's
loans, and whether the requested lien accommodation or subordination can
be approved.
[58 FR 53843, Oct. 19, 1993, as amended at 60 FR 3735, Jan. 19, 1995; 60
FR 67410, Dec. 29, 1995]
Sec. 1717.857 Refinancing of existing secured debt--distribution and power supply borrowers.
(a) Advance approval. All applications for a lien accommodation or
subordination for the refinancing of existing secured debt that meet the
qualification criteria of this paragraph, except applications from
borrowers in default under their mortgage or loan contract with RUS, are
eligible for advance approval. Such lien accommodations and
subordinations are deemed to be in the Government's interest, and RUS
will approve them once RUS is satisfied that the requirements of this
paragraph and paragraph (c) of this section have been met. The
qualification criteria are as follows:
(1) The refinancing is a current refunding and does not involve
interest rate swaps, forward delivery contracts, or similar features;
(2) The principal amount of the refinancing loan does not exceed the
sum of the outstanding principal amount of the debt being refinanced
plus the amount of transactions costs included in the refinancing loan
that are eligible for lien accommodation or subordination under Sec.
1717.852(a)(4);
(3) The weighted average life of the refinancing loan is not greater
than the weighted average remaining life of the loan being refinanced;
and
(4) The present value of the cost of the refinancing loan, including
all transaction costs and any required investments in the lender, is
less than the present value of the cost of the loan being refinanced, as
determined by a method acceptable to RUS. The discount rate used in the
present value analysis shall be equal to either:
(i) The current rate on Treasury securities having a maturity equal
to the weighted average life of the refunding loan, plus one-eighth
percent, or
(ii) A rate approved by RUS based on documentation provided by the
borrower as to its marginal long-term borrowing cost.
(b) Other applications. Applications for a lien accommodation or
subordination for refinancing that do not meet the requirements of
paragraph (a) of this section will be reviewed by RUS under normal
review procedures for these applications. In the case of either advance
approval or normal review, a lien subordination would be authorized only
if the lien of the mortgage was subordinated with respect to the assets
securing the loan being refinanced.
(c) Application contents--advance approval of refinancing.
Applications for a lien accommodation or subordination for refinancing
of existing secured debt that meet the qualification criteria for
advance approval set forth in paragraph (a) of this section, must
include the following information and documents:
(1) A certification by an authorized official of the borrower that
the application meets the requirements of paragraph (a) of this section
and all applicable provisions of Sec. Sec. 1717.852 and 1717.853;
[[Page 191]]
(2) Documentation and analysis demonstrating that the application
meets the qualification criteria set forth in paragraph (a) of this
section;
(3) A resolution of the borrower's board of directors requesting the
lien accommodation or subordination and including the amount and
maturity of the proposed loan, a general description of the debt to be
refinanced, the name and address of the lender, and an attached term
sheet summarizing the terms and conditions of the proposed loan;
(4) The borrower's financial and statistical report, the data in
which shall not be more than 60 days old when the complete application
is received by RUS;
(5) Draft copy of any new mortgage or mortgage amendment
(supplement) required by RUS or the lender, unless RUS has notified the
borrower that it wishes to prepare these documents itself;
(6) A copy of the loan agreement, loan note, bond or other financing
instrument, unless RUS has notified the borrower that these documents
need not be submitted;
(7) Form AD-1047, Certification Regarding Debarment, Suspension, and
Other Responsibility Matters--Primary Covered Transactions, as required
by 7 CFR part 3017;
(8) A report by the borrower stating whether or not it is delinquent
on any Federal debt, and if delinquent, the amount and age of the
delinquency and the reasons therefor; and a certification, if not
previously provided, that the borrower has been informed of the
Government's collection options; and
(9) Other information, documents and opinions that RUS may require
to determine whether all of the applicable provisions of this subpart
have been met.
(d) Application contents--normal review of refinancing. Applications
for a lien accommodation or subordination for refinancing of existing
secured debt that do not meet the requirements for advance approval set
forth in paragraph (a) of this section, must include the following
information and documents:
(1) The information and documents set forth in paragraphs (c)(3)
through (9) of this section;
(2) A complete description of the refinancing loan and the
outstanding debt to be refinanced;
(3) An analysis comparing the refinancing loan with the loan being
refinanced as to the weighted average life and the net present value of
the costs of the two loans; and
(4) If the present value of the cost of the refinancing loan is
greater than the present value of the cost of the debt being refinanced,
financial forecasts for at least 5 years comparing the borrower's debt
service and other costs, revenues, margins, cash flows, TIER, and DSC,
with and without the proposed refinancing.
(e) Application process and timeframes. The application process and
timeframes for RUS review and action for refinancings are set forth in
Sec. 1717.859(d).
(f) Prepayments of concurrent RUS insured loans. If the loan being
refinanced was made concurrently as supplemental financing required by
RUS in connection with an RUS insured loan, the refinancing will not be
considered a prepayment under the RUS mortgage, and no proportional
prepayment of the concurrent RUS insured loan will be required, provided
that the principal amount of the refinancing loan is not less than the
amount of loan principal being refinanced, and the weighted average life
of the refinancing loan is materially equal to the weighted average
remaining life of the loan being refinanced. The refinancing loan shall
be considered a concurrent loan.
[58 FR 53843, Oct. 19, 1993, as amended at 60 FR 67410, Dec. 29, 1995]
Sec. 1717.858 Lien subordination for rural development investments.
(a) Policy. RUS encourages borrowers to consider investing in
financially sound projects that are likely to have a positive effect on
economic development and employment in rural areas. In addition to the
guidance set forth in Sec. 1717.651, RUS recommends that such
investments be made through a subsidiary of the borrower in order to
clearly separate the financial risks and
[[Page 192]]
the revenues and costs of the rural development enterprise from those of
the borrower's electric utility business. This should reduce credit
risks to the borrower's primary business, and minimize the possibility
of undisclosed cross subsidization of the rural development enterprise
by electric rate payers.
(b) Lien subordination. RUS will consider subordinating or releasing
its lien on the stock held by a borrower in a subsidiary whose primary
business directly contributes to or supports economic development and
employment in rural areas, as defined in section 13 of the RE Act, when
requested by a lender to the subsidiary, other than the borrower. To be
eligible for said lien subordination or release:
(1) The borrower must be current on all of its financial obligations
and be in compliance with all provisions of its mortgage and loan
agreement with RUS; and
(2) In the judgment of RUS, the borrower must be able to repay all
of its outstanding debt, and the security forall outstanding loans made
to the borrower by RUS, including loans guaranteed by RUS, must be
adequate, after taking into account the proposed subordination or
release of lien.
(c) Application contents. Applications for a lien subordination or
release of lien for rural development investments must include the
following information and documents:
(1) A resolution of the borrower's board of directors requesting the
lien subordination or release of lien;
(2) A certification by an authorized official of the borrower that
the borrower is current on all of its financial obligations and is in
compliance with all provisions of its mortgage and loan agreement with
RUS;
(3) A description of the facilities or other purposes to be financed
and the projected effects on economic development and employment in
rural areas;
(4) The borrower's financial and statistical report, the data in
which shall not be more than 60 days old when the complete application
is received by RUS;
(5) If requested by RUS, a long-range financial forecast providing
financial projections for at least 10 years, in form and substance
satisfactory to RUS, which demonstrates that the borrower's system is
economically viable and that the borrower will be able to repay all of
its outstanding debt and meet all other financial obligations;
(6) A discussion of the borrower's compliance with RUS requirements
on accounting, financial reporting, record keeping, and irregularities
(see Sec. 1717.854(c)(5)). RUS will review the case and determine the
effect of any noncompliance on the feasibility and security of RUS's
loans, and whether the requested lien subordination or release of lien
can be approved;
(7) If any buildings are to be constructed with the proceeds of the
loan to be made to the subsidiary:
(i) A certification by the project architect that the buildings will
be designed and constructed in compliance with Section 504 of the
Rehabilitation Act of 1973 as amended (29 U.S.C. 794), as applicable
under that Act, and that the facilities will be readily accessible to
and usable by persons with handicaps in accordance with the Uniform
Federal Accessibility Standards; and
(ii) A written acknowledgement from a registered engineer or
architect regarding compliance with seismic provisions of applicable
model codes, as required by 7 CFR 1792.104;
(8) A certification by an authorized official of the borrower that
flood hazard insurance will be obtained for the full value of any
buildings, or other facilities susceptible to damage if flooded, that
will be located in a flood hazard area;
(9) Form AD-1047, Certification Regarding Debarment, Suspension, and
Other Responsibility Matters--Primary Covered Transactions, as required
by 7 CFR part 3017;
(10) A report by the borrower stating whether or not it is
delinquent on any Federal debt, and if delinquent, the amount and age of
the delinquency and the reasons therefor; and a certification, if not
previously provided, that the borrower has been informed of the
Government's collection options; and
(11) Other information that RUS may require to determine whether all
of the applicable provisions of this subpart have been met.
[[Page 193]]
Sec. 1717.859 Application process and timeframes.
(a) General. (1) Borrowers are responsible for ensuring that their
applications for a lien accommodation or subordination are complete and
sound as to substance and form before they are submitted to RUS. RUS
will not accept any application that, on its face, is incomplete or
inadequate as to the substantive information required by this subpart.
RUS will notify borrowers in writing when their applications are
complete and in form and substance satisfactory to RUS. A copy of all
notifications of borrowers cited in this section will also be sent to
the private lender.
(2) It is recommended that borrowers consult with RUS staff before
submitting their applications to determine whether they will likely
qualify for advance approval or normal review, and to obtain answers to
any questions about the information and documents required for the
application.
(3) A borrower shall, after submitting an application, promptly
notify RUS of any changes that materially affect the information
contained in its application.
(4) After submitting an application and having been notified by RUS
of additional information and documents and other changes needed to
complete the application, if the required information and documents are
not supplied to RUS within 30 calendar days of the borrower's receipt of
the notice, RUS may return the application to the borrower. The borrower
may resubmit the application when the required additional information
and documents are available.
(5) Timeframes. The timeframes for review of applications set forth
in this section are based on the following conditions:
(i) The types of lien accommodations or subordinations requested are
of the ``standard'' types that RUS has approved previously, i.e., the
so-called Type I, II and III lien accommodations. Future revisions of
the RUS mortgage may result in other ``standard'' types of lien
accommodations and lien subordinations acceptable to RUS. Requests for
lien accommodations or subordinations that are substantially different
than the ``standard'' types previously approved by RUS may require
additional time for review and action;
(ii) The requested lien accommodation or subordination does not
require the preparation of an environmental assessment or an
Environmental Impact Statement. Preparation of these documents often
will require additional time beyond the timeframes cited in this
section; and
(iii) The timeframes set forth in this section, except for paragraph
(b)(4) of this section, which deals only with approval of a new mortgage
or mortgage amendment, include RUS review and/or approval of a loan
contract, if required as part of the application, and required
supporting documents, such as a CWP.
(b) Advance approval--100 percent private financing of distribution,
subtransmission, and headquarters facilities. (1) Applications that
qualify under Sec. 1717.854 for advance approval of a lien
accommodation or subordination for 100 percent private financing of
distribution, subtransmission, and headquarters facilities are submitted
to the general field representative (GFR). The GFR will work with the
borrower to ensure that all components of the application are assembled.
Once the application is satisfactory to the GFR, it will be sent
promptly to the Washington office for further review and action. If a
new mortgage or mortgage amendment is required, a draft of these
documents must be included in the application, unless the borrower has
been notified that RUS wishes to prepare the documents itself.
(2) If no additional or amended information is needed for RUS to
complete its review of the application once it is received in the
Washington Office, RUS will, within 45 calendar days of receiving the
application in the Washington Office, either:
(i) Approve the lien accommodation or subordination if the borrower
has demonstrated satisfactorily to RUS that all requirements of this
subpart applicable to advance approval have been met, and send written
notice to the borrower. RUS's approval, in this case and all other
cases, will be conditioned upon execution and delivery by the borrower
of a satisfactory security
[[Page 194]]
instrument, if required, and such additional information, documents, and
opinions of counsel as RUS may require;
(ii) If all requirements have not been met, so notify the borrower
in writing. The application will be returned to the borrower unless the
borrower requests that it be reconsidered under the requirements and
procedures for normal review set forth in paragraph (c) of this section
and in Sec. 1717.856; or
(iii) Send written notice to the borrower explaining why a decision
cannot be made at that time and giving the estimated date when a
decision is expected.
(3) If additional or amended information is needed after the
application is received in the Washington Office, RUS will so notify the
borrower in writing within 15 calendar days of receiving the application
in the Washington Office. If RUS subsequently becomes aware of other
deficiencies in the application, additional written notice will be sent
to the borrower. Within 30 calendar days of receiving all of the
information required by RUS to complete its review, RUS will act on the
application as described in paragraphs (b)(2)(i) through (b)(2)(iii) of
this section.
(4) If a new mortgage or mortgage amendment is required, within 30
days of receiving such documents satisfactory to RUS, including required
execution counterparts, RUS will execute the documents and send them to
the borrower, along with instructions pertaining to recording of the
mortgage, an opinion of borrower's counsel, and other matters. RUS will
promptly notify the borrower upon receiving satisfactory evidence that
the borrower has complied with said instructions.
(c) Normal review--100 percent private financing of distribution,
transmission, and/or generation facilities--(1) Distribution borrowers.
(i) Applications from distribution borrowers for a lien accommodation or
subordination for 100 percent private financing of distribution,
transmission, and/or generation facilities (including other eligible
electric utility purposes) that do not meet the criteria for advance
approval, are also submitted to the GFR. Procedures at this stage are
the same as in paragraph (b)(1) of this section.
(ii) If no additional or amended information is needed for RUS to
complete its review of the application once it is received in the
Washington office, RUS will, within 90 calendar days of receiving the
application in the Washington office, send written notice to the
borrower either approving the request, disapproving the request, or
explaining why a decision cannot be made at that time and giving the
estimated date when a decision is expected.
(iii) If additional or amended information is needed after the
application is received in the Washington Office, RUS will so notify the
borrower in writing within 15 calendar days of receiving the application
in the Washington Office. If RUS subsequently becomes aware of other
deficiencies in the application, additional written notice will be sent
to the borrower. Within 90 calendar days of receiving all of the
information required by RUS to complete its review, RUS will act on the
application as described in paragraph (c)(1)(ii) of this section.
(iv) If a new mortgage or mortgage amendment is required, the
procedures and timeframes of paragraph (b)(4) of this section will
apply.
(2) Power supply borrowers. (i) Applications from power supply
borrowers for a lien accommodation or subordination for 100 percent
private financing of distribution, transmission, and/or generation
facilities, and other eligible electric utility purposes, are submitted
to the RUS Power Supply Division, or its successor, in Washington, DC.
(ii) Within 30 calendar days of receiving the borrower's application
containing the information and documents required by Sec. 1717.856, RUS
will send written notice to the borrower of any deficiencies in its
application as to completeness and acceptable form and substance.
Additional written notices may be sent to the borrower if RUS
subsequently becomes aware of other deficiencies in the borrower's
application.
(iii) Within 90 calendar days of receiving all of the information
required by RUS to complete its review, RUS will act on the application
as described in paragraph (c)(1)(ii) of this section.
[[Page 195]]
(iv) If a new mortgage or mortgage amendment is required, these
documents will be reviewed and executed pursuant to the procedures and
timeframes of paragraph (b)(4) of this section.
(d) Refinancing of existing debt. All requests for a lien
accommodation or subordination for refinancing are sent directly to the
Washington office.
(1) Advance approval. (i) Within 15 calendar days of receiving the
borrower's application containing the information and documents required
by Sec. 1717.857(c), RUS will send written notice to the borrower of
any deficiencies in its application as to completeness and acceptable
form and substance. Additional written notices may be sent to the
borrower if RUS subsequently becomes aware of other deficiencies in the
borrower's application.
(ii) Within 15 calendar days of receiving all of the required
information and documents, in form and substance satisfactory to RUS,
RUS will either:
(A) Approve the lien accommodation or subordination if the borrower
has demonstrated satisfactorily to RUS that all requirements of Sec.
1717.857(a) and (c) have been met, and send written notice to the
borrower;
(B) If all requirements have not been met, so notify the borrower in
writing. The application will be returned to the borrower unless the
borrower requests that it be reconsidered under the requirements and
procedures for normal review set forth in paragraph (d)(2) of this
section and in Sec. 1717.857; or
(C) Send written notice to the borrower explaining why a decision
cannot be made at that time and giving the estimated date when a
decision is expected.
(iii) If a new mortgage or mortgage amendment is required, these
documents will be reviewed and executed pursuant to the procedures and
timeframes of paragraph (b)(4) of this section.
(2) Normal review. (i) Within 20 calendar days of receiving the
borrower's application containing the information and documents required
by Sec. 1717.857(d), RUS will send written notice to the borrower of
any deficiencies in its application as to completeness and acceptable
form and substance. Additional written notices may be sent to the
borrower if RUS subsequently becomes aware of other deficiencies in the
borrower's application.
(ii) Within 30 calendar days of receiving all of the required
information and documents, in form and substance satisfactory to RUS,
RUS will notify the borrower in writing either approving the request,
disapproving the request, or explaining why a decision cannot be made at
that time and giving the estimated date when a decision is expected. If
the proposed refinancing involves complicated transactions such as
interest rate swaps or forward delivery contracts, additional time may
be required for RUS review and final action.
(iii) If a new mortgage or mortgage amendment is required, these
documents will be reviewed and executed pursuant to the procedures and
timeframes of paragraph (b)(4) of this section.
(e) Rural development investments. (1) Applications for a lien
subordination for rural development investments are submitted by
distribution borrowers to the GFR and by power supply borrowers to the
RUS Power Supply Division, or its successor, in Washington, DC.
(2) The GFR will work with the borrower to ensure that all
components of the application are assembled. Once the application is
satisfactory to the GFR, it will be sent promptly to the Washington
Office for further review and action. After the application is received
in the Washington Office, if additional or amended information is needed
for RUS to complete its review, RUS will so notify the borrower in
writing within 15 calendar days of receiving the application.
(3) Applications from power supply borrowers containing the
information and documents required by Sec. 1717.858(c) will be reviewed
in the Washington office and the borrower given written notice within 30
calendar days of receiving the application of any deficiencies as to
completeness and acceptable form and substance. Additional written
notices may be sent to the borrower if RUS subsequently becomes aware of
other deficiencies in the borrower's application.
[[Page 196]]
(4) Within 60 calendar days of receiving in the Washington office
all of the required information and documents, in form and substance
satisfactory to RUS, RUS will give written notice to the borrower either
approving the request, disapproving the request, or explaining why a
decision cannot be made at that time and giving the estimated date when
a decision is expected.
(5) If a new mortgage or mortgage amendment is required, these
documents will be reviewed and executed pursuant to the procedures and
timeframes of paragraph (b)(4) of this section.
Sec. 1717.860 Lien accommodations and subordinations under section 306E of the RE Act.
(a) General. Under section 306E of the RE Act, when requested by a
private lender providing financing for capital investments by a borrower
whose net worth exceeds 110 percent of the outstanding principal balance
of all loans made or guaranteed to the borrower by RUS, the
Administrator will, without delay, offer to share the government's lien
on the borrower's system or subordinate the government's lien on the
property financed by the private lender, provided that the security,
including the assurance of repayment, for loans made or guaranteed by
RUS will remain reasonably adequate. To qualify for a lien accommodation
or subordination under this section, the investment must be an original
capital investment, i.e., not a refinancing or refunding. (See Sec.
1717.851 for the definition of capital investment.)
(b) Determination of net worth to RUS debt ratio. (1) In the case of
applications for a lien accommodation, a borrower's net worth will be
based on the borrower's most recent financial and statistical report,
the data in which shall not be more than 60 days old at the time the
application is received by RUS, and the outstanding debt owed to or
guaranteed by RUS will be based on latest RUS records available. The
financial and statistical reports (Form 7 for distribution borrowers and
Form 12a for power supply borrowers) are subject to RUS review and
revision, and they must comply with RUS's system of accounts and
accounting principles set forth in 7 CFR part 1767. Since sinking fund
depreciation is not approved under part 1767, net worth for borrowers
using sinking fund depreciation will be calculated as if the borrower
had been using straight line depreciation.
(2) Net worth shall be calculated by taking total margins and
equities (Line 33 of Part C of RUS Form 7 for distribution borrowers, or
Line 34 of Section B of RUS Form 12a for power supply borrowers) and
subtracting assets properly recordable in account 182.2, Unrecovered
Plant and Regulatory Study Costs, and account 182.3, Other Regulatory
Assets, as defined in 7 CFR part 1767.
(c) Application requirements and process. (1) If a borrower's net
worth to RUS debt ratio exceeds 110 percent, as determined by RUS, and
the borrower is in compliance with all requirements of its mortgage,
loan agreement with RUS, and any other agreement with RUS that have not
been exempted in writing by RUS, if requested RUS will expeditiously
approve a lien accommodation or subordination for 100 percent private
financing of capital investments, provided that the security, including
the assurance of repayment, for loans made or guaranteed by RUS will
remain reasonably adequate. RUS's approval will be conditioned upon
execution and delivery by the borrower of a security instrument
satisfactory to RUS, if required, and such additional information,
documents, and opinions of counsel as RUS may require.
(2) The application must include the following:
(i) A resolution of the borrower's board of directors requesting the
lien accommodation and including the amount and maturity of the proposed
loan, a general description of the facilities or other purposes to be
financed, the name and address of the lender, and an attached term sheet
summarizing the terms and conditions of the proposed loan;
(ii) A certification by an authorized official of the borrower that
the borrower is in compliance with all requirements of its mortgage,
loan agreement with RUS, and any other agreement
[[Page 197]]
with RUS that have not been exempted in writing by RUS;
(iii) The borrower's financial and statistical report, the data in
which shall not be more than 60 days old when the complete application
is received by RUS;
(iv) Draft copy of any new mortgage or mortgage amendment
(supplement) required by RUS or the lender, unless RUS has notified the
borrower that it wishes to prepare these documents itself;
(v) A copy of the loan agreement, loan note, bond or other financing
instrument, unless RUS has notified the borrower that these documents
need not be submitted. These documents will not be subject to RUS
approval, but may be reviewed to determine whether they contain any
provisions that would result in the security, including assurance of
repayment, for loans made or guaranteed by RUS no longer being
reasonably adequate;
(vi) The following certifications and reports required by law:
(A) The certification by the project architect for any buildings to
be constructed, as required by 7 CFR 1717.850(i);
(B) A certification by an authorized official of the borrower that
flood hazard insurance will be obtained for the full value of any
buildings, or other facilities susceptible to damage if flooded, that
will be located in a flood hazard area;
(C) Form AD-1047, Certification Regarding Debarment, Suspension, and
Other Responsibility Matters--Primary Covered Transactions, as required
by 7 CFR part 3017;
(D) A report by the borrower stating whether or not it is delinquent
on any Federal debt, and if delinquent, the amount and age of the
delinquency and the reasons therefor; and a certification, if not
previously provided, that the borrower has been informed of the
Government's collection options; and
(E) The written acknowledgement from a registered engineer or
architect regarding compliance with seismic provisions of applicable
model codes for any buildings to be constructed, as required by 7 CFR
1792.104. All other elements of an application listed in Sec. 1717.855,
Sec. 1717.856, and Sec. 1717.858(c) not listed in this paragraph (c)
are exempted.
(3) Applications from distribution borrowers are submitted to the
general field representative (GFR), while applications from power supply
borrowers are submitted to the RUS Power Supply Division, or its
successor, in Washington, DC. When an application is satisfactory to the
GFR, it will be sent promptly to the Washington office. If Washington
office staff determine that an application is incomplete, the borrower
will be promptly notified in writing about the deficiencies. When the
application is complete, and if the security, including assurance of
repayment, of loans made or guaranteed by RUS will remain reasonably
adequate after granting the lien accommodation or subordination, the
borrower and the lender will be promptly notified in writing that the
lien accommodation or subornation has been approved, subject to the
conditions cited in paragraph (c)(1) of this section.
(d) Rural development and other non-electric utility investments.
Although RUS recommends the use of separate subsidiaries as set forth in
Sec. 1717.858, if requested by a borrower that meets the 110 percent
equity test and all other applicable requirements of this section, RUS
will provide a lien subordination on the specific assets financed in the
case of loans made directly to the borrower for rural development and
other non-electric utility purposes, provided that the outstanding
balance of all such loans lien subordinated under this paragraph (d),
after taking into consideration the effect of the new loan, does not
exceed 15 percent of the borrower's net worth and the security,
including assurance of repayment, of loans made or guaranteed by RUS
will remain reasonably adequate after granting the lien subordination.
Investments lien subordinated under this paragraph shall be included
among those investments subject to the 15 percent of total utility plant
limitation set forth in 7 CFR 1717.654(b)(1), and granting of the lien
subordination will not constitute approval of the investment under 7 CFR
part 1717, subpart N.
[[Page 198]]
(e) Requirements and controls not exempted. All requirements and
limitations imposed with respect to lien accommodations and
subordinations by this subpart R that are not specifically exempted by
this section are not exempted and shall continue to apply according to
their terms.
[59 FR 3986, Jan. 28, 1994, as amended at 60 FR 3735, Jan. 19, 1995; 60
FR 67410, Dec. 29, 1995]
Sec. Sec. 1717.861-1717.899 [Reserved]
Subpart S_Lien Accommodations for Supplemental Financing Required by 7
CFR 1710.110
Source: 58 FR 53851, Oct. 19, 1993, unless otherwise noted.
Sec. 1717.900 Qualification requirements.
Applications for a lien accommodation for supplemental financing
required by 7 CFR 1710.110 must meet the same requirements as an RUS
insured loan. The justification and documentation materials submitted as
part of the borrower's application for an insured loan also serve as the
justification and documentation of the request for a lien accommodation
for the required supplemental loan. Unless early approval under Sec.
1717.901 is requested by a borrower, these applications will be
processed during the same time as RUS's review of the borrower's
application for the concurrent insured loan.
Sec. 1717.901 Early approval.
(a) Conditions. If requested by a borrower in writing, RUS will
review the application for a lien accommodation for required
supplemental financing early in the process, before funding is available
for the concurrent RUS insured loan, and approve the lien accommodation
if the following conditions are met:
(1) The required supplemental loan meets the requirements for an
insured loan, as set forth in 7 CFR part 1710, subparts A through G, and
other RUS regulations pertaining to required supplemental loans;
(2) The borrower has demonstrated the ability to obtain the funds
that would be needed to complete other portions of the project, if the
portion to be constructed with private loan funds could not be used
productively without completion of such other portions, in the event
concurrent RUS insured loan funds are not forthcoming. Such evidence may
include financial records demonstrating the availability of general
funds, and/or a written commitment from the private lender to provide a
loan for the remaining amount of financing required, with such
commitment being conditioned upon the availability of a lien
accommodation from RUS; and
(3) An authorized official of the borrower has requested early
approval of the lien accommodation and explained the reasons therefor,
and has certified that the funds are needed and will be drawn down
before funds from the concurrent insured loan are expected to be
available, assuming that the insured loan is approved.
(b) Timeframe for RUS action. (1) RUS will either approve or
disapprove the lien accommodation within 90 days of receiving the
borrower's request for early approval and the complete application for
the concurrent RUS loan and required supplemental financing, in form and
substance satisfactory to RUS, or notify the borrower in writing of the
estimated date when a decision is expected. If an environmental
assessment or an Environmental Impact Statement is required, additional
time beyond the 90 days may be required to prepare these documents.
RUS's approval of the lien accommodation will be conditioned upon
execution and delivery by the borrower of a satisfactory security
instrument, if required, and such additional information, documents, and
opinions of counsel as RUS may require.
(2) If a mortgage or mortgage amendment is required, RUS will
consult with the other mortgagees as to who will prepare the documents.
Within 30 days of obtaining the documents satisfactory to RUS, including
required execution counterparts, RUS will execute the documents and send
them to the borrower, along with instructions pertaining to recording of
the mortgage, an opinion of borrower's counsel, and
[[Page 199]]
other matters. RUS will promptly notify the borrower upon receiving
satisfactory evidence that the borrower has complied with said
instructions.
(c) Approval of concurrent insured loan. Early approval of a lien
accommodation for a required supplemental loan does not ensure that the
concurrent RUS insured loan will be approved. The request for the
concurrent insured loan will be reviewed when funds are available to
make the loan. The borrower may be requested to update certain
supporting information in the loan application if substantial time has
elapsed since the lien accommodation or subordination was approved.
Sec. 1717.902 Other RUS requirements.
Supplemental loans required by 7 CFR 1710.110 are subject to the
same post-loan requirements as insured RUS loans regarding accepted
materials, construction standards, contracting and procurement
procedures, standard forms of contracts, RUS approval of the advance of
loan funds, and other matters.
Sec. 1717.903 Liability.
It is the intent of this subpart that any failure on the part of RUS
to comply with any provisions of this subpart, including without
limitation, those provisions setting forth specified timeframes for
action by RUS on applications for lien accommodations or lien
subordinations, shall not give rise to liability of any kind on the part
of the Government or any employees of the Government including, without
limitation, liability for damages, fees, expenses or costs incurred by
or on behalf of a borrower, private lender or any other party.
Sec. 1717.904 Exemptions pursuant to section 306E of the RE Act.
(a) General policy. If a borrower's net worth to RUS debt ratio
exceeds 110 percent, as determined by RUS, and the borrower is in
compliance with all requirements of its mortgage, loan agreement with
RUS, and any other agreement with RUS that have not been exempted in
writing by RUS, RUS will expeditiously approve a lien accommodation for
a concurrent supplemental loan if requested in writing by the borrower,
provided that the security, including assurance of repayment, of loans
made or guaranteed by RUS will remain reasonably adequate. RUS's
approval will be conditioned upon execution and delivery by the borrower
of a security instrument satisfactory to RUS, if required, and such
additional information, documents, and opinions of counsel as RUS may
require.
(b) Determination of net worth to RUS debt ratio. A borrower's ratio
of net worth to RUS debt will be determined as set forth in Sec.
1717.860(b).
(c) Procedures. If a borrower meets the requirements of this
section, upon receipt of a complete application RUS will promptly notify
the borrower and lender in writing that the lien accommodation has been
approved subject to the conditions set forth in paragraph (a) of this
section.
[59 FR 3987, Jan. 28, 1994, as amended at 67 FR 70153, Nov. 21, 2002]
Sec. Sec. 1717.905-1717.949 [Reserved]
Subpart T [Reserved]
Sec. Sec. 1717.950-1717.999 [Reserved]
Subpart U [Reserved]
Sec. Sec. 1717.1000-1717.1049 [Reserved]
Subpart V [Reserved]
Sec. Sec. 1717.1050-1717.1099 [Reserved]
Subpart W [Reserved]
Sec. Sec. 1717.1100-1717.1149 [Reserved]
Subpart X [Reserved]
Sec. Sec. 1717.1150-1717.1199 [Reserved]
Subpart Y_Settlement of Debt
Source: 62 FR 50491, Sept. 26, 1997, unless otherwise noted.
Sec. 1717.1200 Purpose and scope.
(a) Section 331(b) of the Consolidated Farm and Rural Development
Act (Con Act), as amended on April 4, 1996 by Public Law 104-127, 110
Stat. 888 (7 U.S.C. 1981), grants authority to the
[[Page 200]]
Secretary of Agriculture to compromise, adjust, reduce, or charge-off
debts or claims arising from loans made or guaranteed under the Rural
Electrification Act of 1936, as amended (RE Act). Section 331(b) of the
Con Act also authorizes the Secretary of Agriculture to adjust, modify,
subordinate, or release the terms of security instruments, leases,
contracts, and agreements entered into or administered by the Rural
Utilities Service (RUS). The Secretary, in 7 CFR 2.47, has delegated
authority under section 331(b) of the Con Act to the Administrator of
the RUS, with respect to loans made or guaranteed by RUS.
(b) This subpart sets forth the policy and standards of the
Administrator of RUS with respect to the settlement of debts and claims
arising from loans made or guaranteed to rural electric borrowers under
the RE Act. Nothing in this subpart limits the Administrator's authority
under section 12 of the RE Act.
Sec. 1717.1201 Definitions.
Terms used in this subpart that are not defined in this section have
the meanings set forth in 7 CFR part 1710. In addition, for the purposes
of this subpart:
Application for debt settlement means a written application
containing all of the information required by Sec. 1717.1204(b)(2), in
form and substance satisfactory to RUS.
Attorney General means the Attorney General of the United States of
America.
Claim means any claim of the government arising from loans made or
guaranteed under the RE Act to a rural electric borrower.
Con Act means the Consolidated Farm and Rural Development Act (7
U.S.C. 1921 et seq.).
Debt means outstanding debt of a rural electric borrower (including,
but not necessarily limited to, principal, accrued interest, penalties,
and the government's costs of debt collection) arising from loans made
or guaranteed under the RE Act.
Enforced collection procedures means any procedures available to the
Administrator for the collection of debt that are authorized by law, in
equity, or under the borrower's loan documents or other agreements with
RUS.
Loan documents means the mortgage (or other security instrument
acceptable to RUS), the loan contract, and the promissory note entered
into between the borrower and RUS.
RE Act means the Rural Electrification Act of 1936, as amended (7
U.S.C. 901-950b).
Restructure means to settle a debt or claim.
Settle means to reamortize, adjust, compromise, reduce, or charge-
off a debt or claim.
Sec. 1717.1202 General policy.
(a) It is the policy of the Administrator that, wherever possible,
all debt owed to the government, including but not limited to principal
and interest, shall be collected in full in accordance with the terms of
the borrower's loan documents.
(b) Nothing in this subpart by itself modifies, reduces, waives, or
eliminates any obligation of a borrower under its loan documents. Any
such modifications regarding the debt owed by a borrower may be granted
under the authority of the Administrator only by means of the explicit
written approval of the Administrator in each case.
(c) The Administrator's authority to settle debts and claims will
apply to cases where a borrower is unable to pay its debts and claims in
accordance with their terms, as further defined in Sec.
1717.1204(b)(1), and where settlement will maximize, on a present value
basis, the recovery of debts and claims owed to the government.
(d) In structuring settlements and determining the capability of the
borrower to repay debt and the amount of debt recovery that is possible,
the Administrator will consider, among other factors, the RE Act, the
National Energy Policy Act of 1992 (Pub. L. 102-486, 106 Stat. 2776),
the policies and regulations of the Federal Energy Regulatory
Commission, state legislative and regulatory actions, and other market
and nonmarket forces as to their effects on competition in the electric
utility industry and on rural electric systems in
[[Page 201]]
particular. Other factors the Administrator will consider are set forth
in more detail in Sec. 1717.1204.
Sec. 1717.1203 Relationship between RUS and Department of Justice.
(a) The Attorney General will be notified by the Administrator
whenever the Administrator intends to use his or her authority under
section 331(b)of the Con Act to settle a debt or claim.
(b) If an outstanding claim has been referred in writing to the
Attorney General, the Administrator will not use his or her own
authority to settle the claim without the approval of the Attorney
General.
(c) If an application for additional debt relief is received from a
borrower whose debt has been settled in the past under the authority of
the Attorney General, the Administrator will promptly notify the
Attorney General before proceeding to consider the application.
Sec. 1717.1204 Policies and conditions applicable to settlements.
(a) General. Settlement of debts and claims shall be subject to the
policies, requirements, and conditions set forth in this section and in
Sec. 1717.1202.
(b) Need for debt settlement. (1) The Administrator will not settle
any debt or claim unless the Administrator has determined that the
borrower is unable to meet its financial obligations under its loan
documents according to the terms of those documents, or that the
borrower will not be able to meet said obligations sometime within the
period of 24 months following the month the borrower submits its
application for debt settlement to RUS, and, in either case, such
default is likely to continue indefinitely. The determination of a
borrower's ability to meet its financial obligations will be based on
analyses and documentation by RUS of the borrower's historical, current,
and projected costs, revenues, cash flows, assets, opportunities to
reduce costs and/or increase revenues, and other factors that may be
relevant on a case by case basis.
(2) In its application to RUS for debt settlement, the borrower must
provide, in form and substance satisfactory to RUS, an in-depth analysis
supporting the borrower's contention that it is unable or will not be
able to meet its financial obligations as described in paragraph (b)(1)
of this section. The analysis must include:
(i) An explanation and analysis of the causes of the borrower's
inability to meet its financial obligations;
(ii) A thorough review and analysis of the opportunities available
or potentially available to the borrower to reduce administrative
overhead and other costs, improve efficiency and effectiveness, and
expand markets and revenues, including but not limited to opportunities
for sharing services, merging, and/or consolidating, raising rates when
appropriate, and renegotiating supplier and service contracts. In the
case of a power supply borrower, the study shall include such
opportunities among the members of the borrower, unless the
Administrator waives this requirement;
(iii) Documentation of the actions taken, in progress, or planned by
the borrower (and its member systems, if applicable) to take advantage
of the opportunities cited in paragraph (b)(2)(ii) of this section; and
(iv) Other analyses and documentation prescribed by RUS on a case by
case basis.
(3) RUS may require that an independent consultant provide an
analysis of the efficiency and effectiveness of the borrower's
organization and operations, and those of its member systems in the case
of a power supply borrower. The following conditions will apply:
(i) RUS will select the independent consultant taking into account,
among other matters, the consultant's experience and expertise in
matters relating to electric utility operations, finance, and
restructuring;
(ii) The contract with the consultant shall be to provide services
to RUS on such terms and conditions as RUS deems appropriate. The
consultant's scope of work may include, but shall not be limited to, an
analysis of the following:
(A) How to maximize the value of the government's collateral, such
as through mergers, consolidations, or sales of all or part of the
collateral;
[[Page 202]]
(B) The viability of the borrower's system, taking into account such
matters as system size, service territory and markets, asset base,
physical condition of the plant, operating efficiency, competitive
pressures, industry trends, and opportunities to expand markets and
improve efficiency and effectiveness;
(C) The feasibility and the potential benefits and risks to the
borrower and the government of corporate restructuring, including
aggregation and disaggregation;
(D) In the case of a power supply borrower, the retail rate mark-up
by member systems and the potential benefits to be achieved by member
restructuring through mergers, consolidations, shared services, and
other alliances;
(E) The quality of the borrower's management, management advisors,
consultants, and staff;
(F) Opportunities for reducing overhead and other costs, for
expanding markets and revenues, and for improving the borrower's
existing and prospective contractual arrangements for the purchase and
sale of power, procurement of supplies and services, and the operation
of plant and facilities;
(G) Opportunities to achieve efficiency gains and increased revenues
based on comparisons with benchmark electric utilities; and
(H) The accuracy and completeness of the borrower's analysis
provided under paragraph (b)(2) of this section;
(iii) RUS and, as appropriate, other creditors, will determine the
extent to which the borrower and third parties (including the members of
a power supply borrower) will be required to participate in funding the
costs of the independent consultant;
(iv) The borrower will be required to make available to the
consultant all corporate documents, files, and records, and to provide
the consultant with access to key employees. The borrower will also
normally be required to provide the consultant with office space
convenient to the borrower's operations and records; and
(v) All analyses, studies, opinions, memoranda, and other documents
and information produced by the independent consultant shall be provided
to RUS on a confidential basis for consideration in evaluating the
borrower's application for debt settlement. Such documents and
information may be made available to the borrower and other appropriate
parties if authorized in writing by RUS.
(4) The borrower may be required to employ a temporary or permanent
manager acceptable to the Administrator, to manage the borrower's
operations to ensure that all actions are taken to avoid or minimize the
need for debt settlement. The employment could be on a temporary basis
to manage the system during the time the debt settlement is being
considered, and possibly for some time after any debt settlement, or it
could be on a permanent basis.
(5) The borrower must submit, at a time determined by RUS, a
resolution of its board of directors requesting debt settlement and
stating that the borrower is either currently unable to meet its
financial obligations to the government or will not be able to meet said
obligations sometime within the next 24 months, and that, in either
case, the default is likely to continue indefinitely.
(c) Debt settlement measures. (1) If the Administrator determines
that debt settlement is appropriate, the debt settlement measures the
Administrator will consider under this subpart with respect to direct,
insured, or guaranteed loans include, but are not limited to, the
following:
(i) Reamortization of debt;
(ii) Extension of debt maturity, provided that the maturity of the
borrower's outstanding debt after settlement shall not extend more than
10 years beyond the latest maturity date prior to settlement;
(iii) Reduction of the interest rate charged on the borrower's debt,
provided that the interest rate on any portion of the restructured debt
shall not be reduced to less than 5 percent, unless the Administrator
determines that reducing the rate below 5 percent would maximize debt
recovery by the government;
(iv) Forgiveness of interest accrued, penalties, and costs incurred
by the government to collect the debt; and
[[Page 203]]
(v) With the concurrence of the Under Secretary for Rural
Development, forgiveness of loan principal.
(2) In the event that RUS has, under section 306 of the RE Act,
guaranteed loans made by the Federal Financing Bank or other third
parties, the Administrator may restructure the borrower's obligations
by: acquiring and restructuring the guaranteed loan; restructuring the
loan guarantee obligation; restructuring the borrower's reimbursement
obligations; or by such means as the Administrator deems appropriate,
subject to such consents and approvals, if any, that may be required by
the third party lender.
(d) Borrower's obligations to other creditors. The Administrator
will not grant relief on debt owed to the government unless similar
relief, on a pro rata basis, is granted with respect to other secured
obligations of the borrower, or the other secured creditors provide
other benefits or value to the debt restructuring. Unsecured creditors
will also be expected to contribute to the restructuring. If it is not
possible to obtain the expected contributions from other creditors, the
Administrator may proceed to settle a borrower's debt if that will
maximize recovery by the government and will not result in material
benefits accruing to other creditors at the expense of the government.
(e) Competitive bids for system assets. If requested by RUS, the
borrower or the independent consultant provided for in paragraph (b)(3)
of this section shall solicit competitive bids from potential buyers of
the borrower's system or parts thereof. The bidding process must be
conducted in consultation with RUS and use standards and procedures
acceptable to RUS. The Administrator may use the competitive bids
received as a basis for requiring the sale of all or part of the
borrower's system as a condition of settlement of the borrower's debt.
The Administrator may also consider the bids in evaluating alternative
settlement measures.
(f) Valuation of system. (1) The Administrator will consider the
value of the borrower's system, including, in the case of a power supply
borrower, the wholesale power contracts between the borrower and its
member systems. The valuation of the wholesale power contracts shall
take into account, among other matters, the rights of the government
and/or third parties, to assume the rights and obligations of the
borrower under such contracts, to charge reasonable rates for service
provided under the contracts, and to otherwise enforce the contracts in
accordance with their terms. In no case will the Administrator settle a
debt or claim for less than the value (after considering the
government's collection costs) of the borrower's system and other
collateral securing the debt or claim.
(2) RUS may use such methods, analyses, and assessments as the
Administrator deems appropriate to determine the value of the borrower's
system.
(g) Rates. The Administrator will consider the rates charged for
electric service by the borrower and, in the case of a power supply
borrower, by its members, taking into account, among other factors, the
practices of the Federal Energy Regulatory Commission (FERC), as adapted
to the cooperative structure of borrowers, and, where applicable, FERC
treatment of any investments by co-owners in projects jointly owned by
the borrower.
(h) Collection action. The Administrator will consider whether a
settlement is favorable to the government in comparison with the amount
that can be recovered by enforced collection procedures.
(i) Regulatory approvals. Before the Administrator will approve a
settlement, the borrower must provide satisfactory evidence that it has
obtained all approvals required of regulatory bodies that the
Administrator determines are needed to implement rates or other
provisions of the settlement, or that are needed in any other way for
the borrower to fulfill its obligations under the settlement.
(j) Conditions regarding management and operations. As a condition
of debt settlement, the borrower, and in the case of a power supply
borrower, its members, will be required to implement those changes in
structure, management, operations, and performance deemed necessary by
the Administrator. Those changes may include, but are not limited to,
the following:
[[Page 204]]
(1) The borrower may be required to undertake a corporate
restructuring and/or sell a portion of its plant, facilities, or other
assets
(2) The borrower may be required to replace senior management and/or
hire outside experts acceptable to the Administrator. Such changes may
include a commitment by the borrower's board of directors to restructure
and/or obtain new membership to improve board oversight and leadership;
(3) The borrower may be required to agree to:
(i) Controls by RUS on the general funds of the borrower, as well as
on any investments, loans or guarantees by the borrower, notwithstanding
any limitations on RUS' control rights in the borrower's loan documents
or RUS regulations; and
(ii) Requirements deemed necessary by RUS to perfect and protect its
lien on cash deposits, securities, equipment, vehicles, and other items
of real or non-real property; and
(4) In the case of a power supply borrower, the borrower may be
required to obtain credit support from its member systems, as well as
pledges and action plans by the members to change their operations,
management, and organizational structure (e.g., shared services,
mergers, or consolidations) in order to reduce operating costs, improve
efficiency, and/or expand markets and revenues.
(k) Conveyance of assets. As a condition of a settlement, a borrower
may be required to convey some or all its assets to the government.
(l) Additional conditions. The borrower will be required to warrant
and agree that no bonuses or similar extraordinary compensation has been
or will be provided, for reasons related to the settlement of government
debt, to any officer or employee of the borrower or to other persons or
entities identified by RUS. The Administrator may impose such other
terms and conditions of debt settlement as the Administrator determines
to be in the government's interests.
(m) Certification of accuracy. Before the Administrator will approve
a debt settlement, the manager or other appropriate official of the
borrower must certify that all information provided to the government by
the borrower or by any agent of the borrower, in connection with the
debt settlement, is true, correct, and complete in all material
respects.
Sec. 1717.1205 Waiver of existing conditions on borrowers.
Pursuant to section 331(b) of the Con Act, the Administrator, at his
or her sole discretion, may waive or otherwise reduce conditions and
requirements imposed on a borrower by its loan documents if the
Administrator determines that such action will contribute to enhancement
of the government's recovery of debt. Such waivers or reductions in
conditions and requirements under this section shall not include the
exercise of any of the debt settlement measures set forth in Sec.
1717.1204(c), which are subject to all of the requirements of said Sec.
1717.1204.
Sec. 1717.1206 Loans subsequent to settlement.
In considering any future loan requests from a borrower whose debt
has been settled in whole or in part (including the surviving entity of
merged or consolidated borrowers, where at least one of said borrowers
had its debts settled), it will be presumed that credit support for the
full amount of the requested loan will be required. Such support may be
in a number of forms, provided that they are acceptable to the
Administrator on a case by case basis. They may include, but need not be
limited to, equity infusions and guarantees of debt repayment, either
from the applicant's members (in the case of a power supply borrower),
or from a third party.
Sec. 1717.1207 RUS obligations under loan guarantees.
Nothing in this subpart affects the obligations of RUS under loan
guarantee commitments it has made to the Federal Financing Bank or other
lenders.
Sec. 1717.1208 Government's rights under loan documents.
Nothing in this subpart limits, modifies, or otherwise affects the
rights of the government under loan documents
[[Page 205]]
executed with borrowers, or under law or equity.