Loan Security Documents for Electric Borrowers

SUMMARY: The Rural Electrification Administration (REA) hereby proposes

new policies and requirements for the standard form of mortgage

ordinarily required of electric distribution borrowers. This proposed

rule is intended to continue to provide adequate security for loans

made to distribution borrowers, to update and clarify the provisions of

the mortgage, to generally confine the scope of the mortgage primarily

to basic issues of collateral and loan security, and to support

borrower access to other credit sources.

DATES: Written comments must be received by REA or carry a postmark or

equivalent by January 26, 1995.

ADDRESSES: Written comments should be addressed to Mr. F. Lamont Heppe,

Jr., Deputy Director, Program Support Staff, U.S. Department of

Agriculture, Rural Electrification Administration, room 2234-S, 14th

Street and Independence Avenue, SW., Washington, DC 20250-1500. REA

requires a signed original and 3 copies of all comments (7 CFR 1700.30

(e)). Comments will be available for public inspection during regular

business hours (7 CFR 1.27(b)).

FOR FURTHER INFORMATION CONTACT: Mr. Alex M. Cockey, Jr., Acting

Assistant Administrator--Electric, U.S. Department of Agriculture,

Rural Electrification Administration, room 4037-S, 14th Street &

Independence Avenue, SW., Washington, DC 20250-1500. Telephone: 202-

720-9547.

SUPPLEMENTARY INFORMATION: This proposed rule has been determined to be

not significant for the purposes of Executive Order 12866, and

therefore has not been reviewed by the Office of Management and Budget

(OMB). The Administrator of REA has determined that the Regulatory

Flexibility Act (5 U.S.C. 601 et seq.) does not apply to this rule. The

Administrator of REA has determined that this rule will not

significantly affect the quality of the human environment as defined by

the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.).

Therefore, this action does not require an environmental impact

statement or assessment. This rule is excluded from the scope of

Executive Order 12372, Intergovernmental Consultation, which may

require consultation with State and local officials. A Notice of Final

Rule titled Department Programs and Activities Excluded from Executive

Order 12372 (50 FR 47034) exempts REA electric loans and loan

guarantees from coverage under this Order. This rule has been reviewed

under Executive Order 12778, Civil Justice Reform. This rule: (1) Will

not preempt any State or local laws, regulations, or policies, unless

they present an irreconcilable conflict with this rule; (2) Will not

have any retroactive effect; and (3) Will not require administrative

proceedings before any parties may file suit challenging the provisions

of this rule.

The program described by this rule is listed in the Catalog of

Federal Domestic Assistance Programs under number 10.850 Rural

Electrification Loans and Loan Guarantees. This catalog is available on

a subscription basis from the Superintendent of Documents, the United

States Government Printing Office, Washington, DC 20402-9325.

Information Collection and Recordkeeping Requirements

The existing recordkeeping and reporting burdens contained in this

rule were approved by the Office of Management and Budget (OMB)

pursuant to the Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et

seq.), under control numbers 0572-0017, 0572-0032, and 0572-0103.

Additional information collection and recordkeeping requirements

contained in this proposed rule have been submitted to OMB for review.

Send questions or comments regarding these burdens or any other

aspect of these collections of information, including suggestions for

reducing the burden, to the Office of Information and Regulatory

Affairs, Office of Management and Budget, room 3201, NEOB, Washington,

DC 20503. Attention: Desk Officer for USDA.

Background

Starting in February 1991 with the publication of its proposed rule

on pre-loan policies and procedures for electric loans, REA has

undertaken a major effort to update, clarify, and simplify its policies

and procedures relating to electric borrowers. As part of this overall

effort, REA has been working on updating its mortgage and loan contract

with electric borrowers, and its policies and procedures governing the

granting of an accommodation or subordination of the government's lien

on electric borrowers' systems.

Because of the magnitude and complexity of the task, the effort was

divided into several phases. The first phase concentrated on updating

and streamlining REA's policies and procedures for granting a lien

accommodation or subordination under the current mortgage.

On December 2, 1991, REA published an advance notice of proposed

rulemaking (ANPR) in the Federal Register (56 FR 61201) inviting

comments on possible changes to REA's loan security documents and its

policies and procedures governing lien accommodations and

subordinations. Comments were received from 42 organizations, including

comments filed on behalf of the G&T Manager's Association proposing a

form of Mortgage Bond and Note Indenture. That proposal was modeled

closely on the American Bar Foundation Mortgage Bond Indenture Form

published in 1981 (the ``Model Indenture'') but also included features

contained in mortgage indentures previously used by REA assisted

borrowers.

On June 30, 1992, REA held a public meeting on REA's loan security

documents and its policies and procedures for granting lien

accommodations and subordinations under the electric mortgage. Eighteen

organizations gave testimony and responded to questions from

representatives of REA and the Department of Agriculture's Office of

General Counsel. Written comments were also received following the

public meeting from several participants and 14 other organizations,

mostly borrowers.

On March 5, 1993, REA published a proposed rule on lien

accommodations and subordinations of REA mortgages in the Federal

Register, at 58 FR 12552. Comments were received from 32 individuals

and organizations. After considering the comments, the final rule was

published in the Federal Register on October 19, 1993 at 58 FR 53835. A

significant feature of that new rule is the granting of advance

approval for lien accommodations for additional secured notes and

refunding notes when specified objective criteria are met.

The proposed rule published here is the result of continuing

efforts to update REA's loan security documents, policies and

procedures. In addition to reviewing the Model Indenture and the

proposed form filed in response to the 1991 ANPR, REA has reviewed

numerous other mortgage documents in developing the form being

published for comment as part of this proposed rule. These resources

included three separate instruments issued by three unrelated, former

REA borrowers, namely Chugach Electric Association (Alaska-1991),

Guadalupe Valley Electric Cooperative, Inc. (Texas-1991), and Old

Dominion Electric Cooperative (Virginia-1992). REA also reviewed

mortgage documentation currently being used by the National Rural

Utilities Cooperative Finance Corporation (``CFC'') and CoBank in

securing loans made by them to former REA electric borrowers in various

states. In June of 1993, the National Rural Electric Cooperative

Association (``NRECA''), a trade association to which most REA electric

borrowers belong, proposed to REA a form of distribution mortgage that

had been developed by an ad hoc committee sponsored by NRECA. That

proposal was also reviewed and considered in developing the form of

mortgage included in this proposed rule.

The proposed new form of mortgage for distribution borrowers is

intended to achieve the following objectives:

To continue to provide adequate security for loans made or

guaranteed by REA and other mortgagees;

To update and clarify the provisions of the mortgage;

To limit the scope of the multi-party mortgage document

primarily to basic issues of collateral and loan security, leaving

lenders and borrowers the flexibility to address other issues in their

respective loan contracts or other documents, which in the case of REA

also includes REA regulations; and

To support borrower access to other credit sources,

including lenders that have no prior lending history with rural

electric systems, by adopting provisions used in other modern mortgage

indentures to the extent possible.

The proposed mortgage published today does not include several

``operational controls'' that are included in the current mortgage,

such as mortgagee approval of extensions or additions to plant. After

REA has had an opportunity to evaluate responses to this proposal, it

intends to develop and publish for comment an updated form of loan

contract for distribution borrowers that correlates with the new form

of mortgage and more accurately reflects contemporary REA practices and

policies. Although it seems likely that some of these existing

operational controls will be updated and included in a new form of REA

loan contract, it is anticipated that others will not.

The proposed mortgage published here is for distribution borrowers.

REA also intends to develop in the near future proposed standard forms

of the mortgage and loan contract for power supply borrowers.

The rest of this discussion addresses the more significant

provisions of the proposed mortgage. The discussion focuses on changes

from the current mortgage and other significant provisions. For the

sake of brevity, provisions are characterized in terms of their primary

content and thrust, without attempting to cover every legal detail.

Excepted Property

As with the current mortgage, the proposed mortgage would place a

first mortgage lien on most of the borrower's assets, whether currently

existing or acquired after the effective date of the mortgage. However,

certain types of property covered by the broad conveyancing language

used in the current mortgage would be expressly excepted from the lien

of the proposed mortgage. Important examples include all cash on hand

or in banks; most contracts and contract rights, with some exceptions;

shares of stock; bonds; notes; repurchase agreements; and other

securities. However, a borrower may choose to subject excepted property

to the lien of the mortgage, and in certain circumstances such as upon

a default, the mortgagees can compel the excepted property to be placed

under the lien of the mortgage. The proposed approach is suggested by

the Model Indenture. It is intended to address impracticalities

associated with perfecting and administering liens on certain classes

of collateral otherwise included in a ``blanket'' lien on all assets.

The proposed form more closely reflects the longstanding view that

electric plant serves as the primary security for secured loans to

electric distribution borrowers.

Permitted Encumbrances

The list of permitted encumbrances in the proposed mortgage is

somewhat longer compared to the current mortgage but is typical of more

contemporary practices. This has been done to alleviate practical

problems in obtaining opinions of counsel to the effect that the

mortgage is a valid first lien on all of the mortgaged property. These

problems have been exacerbated in recent years as developments in the

legal profession generally caused the borrowers' attorneys to be less

willing to provide approving legal opinions in mortgage transactions

without going into great detail in qualifying the application of their

opinions to certain types of property (most of which has now been

excepted) and routine encumbrances. Experience in the program has shown

that the vast majority of such encumbrances are primarily technical in

nature and do not materially affect the security value of the

collateral. It is expected that those loan settlement delays associated

with negotiating legal opinions will be reduced or eliminated by this

proposal and that the protection REA has traditionally derived from

such opinions will be preserved.

Section 2.01. Additional Notes

Under the current mortgage, REA prior approval is required for a

borrower to issue additional notes secured under the mortgage. Under

section 2.01 of the proposed mortgage, a borrower not in default under

the mortgage may issue additional notes to finance mortgageable

property for its utility system, without the approval of REA or other

mortgagees, if the following criteria are met:

The borrower has achieved for each of the 2 calendar years

immediately preceding the issuance of the notes a Times Interest

Earning Ratio (TIER) of at least 1.35 and a Debt Service Coverage Ratio

(DSC) of at least 1.35, on a pro forma basis, after taking into account

the effect of the new notes.

The borrower will have equity greater than or equal to 27%

of total assets after taking into account the effect of the additional

notes.

The ratio of the borrower's net utility plant to its long-

term debt will be greater than or equal to 1.1 after taking into

account the effect of the additional notes.

Transaction costs included in the additional notes do not

exceed 3.5% of the face amount of the notes.

The maturity of the loan evidenced by the notes must not

be less than 5 years and must not exceed the weighted average of the

expected remaining useful lives of the assets being financed.

The principal of the loan evidenced by the notes 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.

The principal amount of outstanding notes issued to

finance community infrastructure (namely water and waste systems, solid

waste disposal facilities, telecommunications and other electronic

communications systems, and natural gas distribution systems located in

the borrower's service territory) will not be greater than 20% of the

principal amount of all outstanding notes, after taking into account

the effect of the additional notes.

TIER and DSC are defined in terms of ``Modified'' TIER and

``Modified'' DSC, that is, generation and transmission and other

capital credits are excluded from margins in calculating the ratios.

These measures reflect current revenues and cash flows better than

straight TIER and DSC, and thus they better reflect a borrower's

ability to meet on-going expenses. In this modified form, the level for

TIER has been reduced to 1.35 from the 1.5 currently required in 7 CFR

1710.114. The 1.35 level proposed for this modified form of DSC is the

same as that required for the pledging of borrowers' notes under the

indenture for issuing collateral trust bonds of CFC.

In calculating TIER, the annual interest expense of the additional

notes issued, based on the full face amount of the notes, would be

added to the interest expense for each of the two test years.

Similarly, in calculating DSC, interest expense, depreciation and

amortization expense, and debt service billed for the two test years

would be increased respectively by the annual interest expense, annual

depreciation and amortization expense, and the annual debt service

expense associated with the additional notes and facilities.

In calculating equity as a percentage of total assets, regulatory

created assets would be deducted from both equity and total assets as

they appear on a borrower's balance sheet. Regulatory created assets

are current period expenses that have been deferred by the borrower,

and they should be deducted to provide a more accurate picture of a

borrower's current equity to assets ratio. Under REA's Uniform System

of Accounts, regulatory created assets equal the sum of amounts

properly recordable in Accounts 182.2 Unrecovered Plant and Regulatory

Study Costs, and 182.3 Other Regulatory Assets. This same adjustment is

used in REA's lien accommodation rule and other regulations.

The proposed requirement of a net utility plant to long-term debt

ratio of 1.1 is used in lieu of the more complicated bondable additions

tests usually used in utility indentures securing publicly offered

debt. This ratio is used in REA's lien accommodation rule (1717.854) as

one of the criteria for determining eligibility for advance approval

for lien accommodations under the current mortgage, and it is also used

by CoBank, set at a higher level, in its 100 percent mortgage. Comments

are invited on whether a more traditional bondable additions test would

be preferable to the proposed net utility plant to long-term debt

ratio.

The proposed criteria that would control the amount of transaction

costs financed by a note, the maximum maturity of the note, and the

rate of note amortization are intended to help ensure that each note

will be supported by adequate collateral throughout the life of the

note. The proposed minimum maturity of 5 years is intended to reserve

the security of the mortgage to financing that meets the long-term

credit needs of borrowers. Shorter term loans generally do not face the

same kind of uncertainty and risks involved in long-term loans, and

offering them security under the mortgage should be subject to approval

by the mortgagees under proposed section 2.03. All four of these

criteria are currently used by REA, along with others, to determine

eligibility for a lien accommodation (see 7 CFR 1717.852 and 1717.853).

REA estimates that about 64 percent of distribution borrowers would

be able to meet the criteria for issuing additional notes under

proposed section 2.01. This estimate is based on 1991-92 data for TIER

and DSC and 1992 data for equity, total assets, net utility plant, and

long-term debt, and assumes that the average note issued will equal

13.5% of a borrower's total assets (the average size of a combined REA-

supplemental loan in 1992-93). Borrowers failing to meet the proposed

criteria under section 2.01 would need to get the approval of each

mortgagee, under proposed section 2.03, to issue additional notes.

As indicated above, issuance of additional notes under section 2.01

would be limited to the financing of mortgageable property for the

electric system and the four named community infrastructure purposes.

The aggregate outstanding principal balance of notes issued for

community infrastructure would be limited for notes issued under

section 2.01 to 20% of the outstanding principal balance of all notes.

Borrowers wishing to issue notes in excess of this amount for community

infrastructure would need to obtain approval from each mortgagee.

Section 2.02. Refunding or Refinancing Notes

As in issuing additional notes, the current mortgage also requires

the approval of the mortgagees for borrowers to refund or refinance

existing notes. Under proposed section 2.02 of the new mortgage,

borrowers that are not in default under the mortgage could refund or

refinance existing notes if the following conditions are met:

The total amount of outstanding indebtedness evidenced by

the new notes is not greater than 103.5% of the then outstanding

principal balance of the notes being refunded or refinanced.

The weighted average life of the new notes in not greater

than the weighted average remaining life of the notes being refunded or

refinanced.

The present value of the cost of the refunding or

refinancing notes, including all transaction costs and any required

investments in the lender, is less than the present value of the cost

of the notes being refunded or refinanced.

A lien accommodation would be automatic for notes issued under

sections 2.01 and 2.02. The borrower's loan contract with the lender

would not be subject to the approval of the other mortgagees. REA

expects to propose corresponding amendments to its lien accommodation

rule and loan contracts to take the requirements of the new mortgage

into account, once the final form of the distribution mortgage has been

determined.

Section 2.05. Form of Supplemental Mortgage

It is contemplated that a provision will be developed for inclusion

either at this point or as an appendix in the final form of the

Mortgage. The provision would set out a succinct form of amendment to

be used to facilitate borrowings that do not require consent of the

Mortgagees. The parties would be free to agree to other forms of

amendment on a case-by-case basis but obviously such a process would be

more time consuming and the outcome less certain. REA is specifically

soliciting comments on this approach and would welcome suggestions on

what would be an appropriate form for a supplemental mortgage.

Section 3.04. Environmental Obligations

Under this proposed section, the borrower would expressly agree to

comply with all applicable water and air pollution control standards

and other environmental requirements imposed by Federal or state

statutes, regulations, licenses or permits as related to the mortgaged

property. The borrower would also agree to defend, indemnify, and hold

harmless the mortgagees from and against all liabilities, losses,

costs, etc. related to existing or future hazardous waste or hazardous

chemical substances on the mortgaged property, any lien or claim

related thereto, and any failure of the borrower to comply with the

terms of any government agency having any regulatory authority over

environmental matters regarding the mortgaged property. The inclusion

of this section reflects the trend in modern loan documentation to

allocate environmental risks to the borrower since that is the party

that manages and controls the day to day operations.

Section 3.08. Restrictions on Additional Permitted Debt

Compared to the current mortgage, proposed section 3.08 would raise

the threshold on restricted rentals allowed without the approval of the

mortgagees, and also allow certain ``permitted debt'', in addition to

notes issued under proposed Article 2, without the mortgagees'

approval. Restricted rentals without mortgagees' approval would be

allowed in an amount not to exceed 5% of equity during any 12

consecutive calendar month period, versus 2% currently. The following

permitted debt would also be allowed without mortgagees' approval if

the borrower is not in default under its mortgage:

Purchase money indebtedness in non-utility system property

in an amount not exceeding 10% of net utility plant.

Unsecured lease obligations incurred in the ordinary

course of business except restricted rentals.

Unsecured indebtedness for borrowed money in an aggregate

amount not exceeding 15% of net utility plant.

Debt represented by dividends declared but not paid.

Indebtedness of other operating electric companies

acquired by the borrower not exceeding 90% of the net utility plant of

the acquired company.

Section 3.10. Limitations on Consolidations and Mergers

Proposed section 3.10 would make certain changes in the conditions

under which the borrower may consolidate or merge with another

corporation. Significant among these changes is that the successor

corporation would have to meet on a pro forma basis the same TIER,

equity to assets ratio, and net utility plant to long-term debt ratio

as required under section 2.01 for issuing additional notes.

Section 3.11. Limitations on Transfers of Property

This proposed section would raise the limits under which a borrower

could sell, lease or transfer assets for fair market value without the

approval of the mortgagees. The current mortgage sets the limits at

$25,000 for each individual asset, and $100,000 for any 12 month

period. Proposed section 3.11 would drop the limit for each individual

asset and raise the limit for any 12 month period to 10 % of net

utility plant.

Section 3.12. Maintenance of Mortgaged Property

Several changes to existing mortgage requirements on property

maintenance would be made under this section.

The proposed mortgage would eliminate the current requirement that

borrowers expend for maintenance, renewals and replacements during each

three-year period 10 % of the difference between gross operating

revenues and the cost of power during the period. REA has come to

believe that requiring a fixed percentage expenditure on maintenance is

not an effective approach for ensuring that its collateral is

adequately maintained. Comments are invited on this question.

Borrowers would still be required to adequately maintain their

systems. Mortgagees would continue to have access to inspect the

mortgaged property. As a corollary to the more generalized maintenance

standard, it is proposed that any mortgagee could direct the borrower

to provide to all mortgagees an initial certification by an independent

professional engineer acceptable to the mortgagees, as to the condition

of the mortgaged property. Such a certification could be requested only

once every 3 years.

If the independent engineer certifies that the borrower needs to

make repairs or replacements to comply with the maintenance

requirements of the mortgage, any mortgagee could request that such

recommendations be followed and the borrower would be obligated to

comply with them promptly. A year after such request, a second

independent certification would be required as to the condition of the

property. If deficiencies remain, any mortgagee could so notify the

borrower, who would then be required to cure the deficiencies within 60

days. REA believes that such certifications by independent professional

engineers would provide each mortgagee with an effective mechanism to

ensure that the mortgaged property is being adequately maintained.

Section 3.13. Insurance; Restoration of Damaged Mortgaged Property

Under this section several changes are proposed to the insurance

provisions of the existing mortgage. The borrower, for example, would

be required to have insurance coverage in conformance with generally

accepted utility industry standards for utilities of the size and

character of the borrower. Specific dollar-amount coverage limits would

be eliminated from the mortgage. Insurance policies would be required

to remain in force for 30 days after written notice to each mortgagee,

instead of the current 10 days. REA plans to review its existing

regulation on fidelity and insurance requirements (7 CFR part 1788) to

determine whether changes are needed.

Section 3.16. Limitation on Dividends, Patronage Refunds and Other Cash

Distributions

It is proposed that the controls on distributions in the current

mortgage be retained with only minor changes.

Section 3.18. Compliance With Loan Agreements; Notice of Amendments to

and Defaults Under Loan Agreements

This section proposes two changes to provisions in the current

mortgage. First, borrowers would be required to supply a copy of a loan

agreement with another lender, and amendments thereto, only when

requested by a mortgagee. Second, the provision in the current mortgage

that the terms of the mortgage govern if they are inconsistent with the

terms of a loan contract, would be deleted. This is proposed to ensure

that a mortgagee could enforce terms in its loan contract agreed to by

the borrower, even though they may be more demanding on the borrower

than the terms in the mortgage.

Section 3.20. Rates to Provide Revenue Sufficient to Meet TIER and DSC

Requirements.

This section proposes requirements that are similar to those in 7

CFR 1710.114, except that the threshold levels set for (modified) TIER

and (modified) DSC are set at 1.35, the same as in proposed section

2.01, rather than 1.5 for TIER and 1.25 for DSC as in Sec. 1710.114.

If a borrower fails to achieve a (modified) TIER and (modified) DSC

of 1.35 based on the average of the two best years out of the three

most recent years, then it would be required to provide each mortgagee

with a written plan of remedial action setting forth the actions the

borrower shall take to achieve the required TIER and DSC levels on a

timely basis. If requested by a mortgagee, the plan would have to be

prepared by an independent consultant acceptable to the mortgagees. The

mortgagor would be required to take all actions included in its written

plan approved by the mortgagees.

If a state regulatory authority having jurisdiction will not

approve rates sufficient to achieve the required TIER and DSC levels,

the borrower would be required to provide documentation to that effect,

along with a modified plan taking the state authority's determination

into account. Such modified plan would be subject to the approval of

each mortgagee.

Section 4.01. Events of Default

The proposed events of default are patterned after those commonly

contained in modern mortgage indentures. There are two notable

differences with the current mortgage. First, a default in payment on

the notes would not be an event of default unless it lasted for more

than 5 business days after the payment is due. Second, defaults with

respect to other covenants and conditions contained in the mortgage,

loan contracts, or notes would not be an event of default unless they

continued for a period of 30 days after a mortgagee has given written

notice of default directing the mortgagor to remedy the default.

Section 4.02. Acceleration of Maturity; Rescission and Annulment

This proposed section differs in several respects from the

provisions of the current mortgage. A basic difference is that each

mortgagee would have equal rights in accelerating its notes, in

contrast to the current mortgage where other mortgagees must wait 30

days for REA to act before they can accelerate.

It is proposed that in the event of a default in payment on a

mortgagee's notes, that mortgagee may accelerate its notes and so

notify the other mortgagees. Upon receipt of actual knowledge of or any

notice of acceleration by such mortgagee, any other mortgagee would be

able to accelerate its notes.

If any other event of default occurs under the mortgage and is

continuing, any mortgagee would be able to accelerate its notes and

notify the others to that effect. Any mortgage could also accelerate if

an event of default occurs and is continuing under its loan contract or

note. Upon receipt of actual knowledge of or any notice of acceleration

by a mortgagee, any other mortgagee would be able to accelerate its

notes. After acceleration, if all payment defaults have been cured and

all other defaults have been cured to the satisfaction of mortgagees

representing at least 80% of the aggregate outstanding principal

balance of the notes, then said mortgagees would be able to annul the

acceleration.

Section 4.03. Remedies of Mortgagees

Under this section it is proposed that any mortgagee may, upon an

event of default, take possession of the property, manage and operate

the property, protect and enforce the rights of all of the mortgagees,

appoint a receiver, and sell the mortgaged property. Any other

mortgagee would be able to join in these proceedings. If the mortgagees

do not agree on the method or manner of enforcement of remedies,

mortgagees representing a majority of the outstanding principal balance

of the notes would be able to direct the method and manner of the

remedial actions.

Section 5.03. Special Defeasance

Under this section, in certain circumstances a borrower could

deposit funds with a trustee for the benefit of a mortgagee in an

amount sufficient to discharge the note. Such a note would no longer be

considered to be ``outstanding'' under the mortgage. The borrower would

obtain a release from the lien of the mortgage and the mortgagee would

have the trust as security for the payments on the note as they come

due. This section has been adapted from the Model Indenture.

Accounting Requirements

So long as REA is on the mortgage, it is proposed that borrowers

would be required to follow REA's Uniform System of Accounts. If REA is

paid off and is no longer on the mortgage, Generally Accepted

Accounting Principals would prevail. This is set forth in proposed

section 1.01 in the definition of ``Accounting Requirements.''

Current Mortgage Provisions Not Included

A number of ``operational controls'' and other provisions contained

in the current mortgage are not included in this proposed mortgage. As

indicated above, some of these controls may be retained in REA's new

loan contract. The more significant provisions not included in the

proposed mortgage are as follows:

Mortgagee approval of extensions or additions to the

borrower's system.

Mortgagee approval of sales of electric power and energy

in excess of 1,000 Kw.

Mortgagee approval of contracts for the operation or

maintenance or use by others of all or a substantial part of the

borrower's property.

Mortgagee approval of contracts to purchase electric power

or energy.

Mortgagee approval of expenditures for legal, engineering,

supervisory, accounting or similar services, other than reasonable,

routine expenses.

Requirement that funds of the borrower be deposited in a

Federal Reserve Bank or in depositaries that are members of the Federal

Deposit Insurance Corporation.

Mortgagee approval of compensation for members of the

borrower's board of directors.

Mortgagee approval of the borrower's manager and the

manager's employment contract.

Mortgagee approval of investments, loans, and guarantees

made by the borrower. For several reasons, including the restrictions

imposed on REA (but not other lenders) by section 312 of the Rural

Electrification Act of 1936, REA believes it is preferable that such

approval rights be included in the loan contract of each mortgagee as

each sees fit.

The requirement in article II, section 4 of the current

mortgage that any prepayment of a concurrent (contemporaneous) loan

made by REA or the supplemental lender be accompanied by a pro rata

prepayment of the other concurrent loan. Since this provision relates

only to loans made concurrently with REA, while the mortgage covers

both concurrent loans and loans made independently of other loans, REA

believes it is appropriate to shift this provision to its loan

contract.

Inter-Creditor Agreement

As noted above, shares of stock and other securities, including

those held in lenders secured under the proposed mortgage, would be

excepted from the lien of the mortgage. It is REA's view that, in the

event any notes are accelerated, all such assets, revenues, and other

proceeds obtained from the mortgagor by any mortgagee should be shared

equally and ratably among all mortgagees along with the mortgaged

property. Also, whether or not any notes are accelerated, if a borrower

pays only a portion of the aggregate principal and interest due on the

notes as a whole, REA believes such payments should also be shared

equally and ratably among the mortgagees. It is REA's intention to try

to reach agreement with the other existing mortgagees on a mutually

acceptable inter-creditor agreement before the proposed new mortgage is

published in final form.

As stated above, the foregoing discussion focuses on the more

significant provisions of the proposed mortgage, especially where they

differ with provisions in the current mortgage. In addition to

receiving written comments, REA stands ready to meet with interested

individuals and organizations to discuss their comments and

recommendations. Such meetings would be open to any interested person,

and they would be ``informal'', as opposed to a formal hearing.

Although any such meetings will not be transcribed, REA will include a

summary of any such meeting in the file for this rulemaking. To

facilitate scheduling, it would be better for individuals, especially

the large number of borrowers affected by this proposed rule, to form

one or more groups to represent their interests at such meetings.

List of Subjects in 7 CFR Part 1718

Administrative practice and procedure, Electric power, Electric

utilities, Loan programs--energy, Loan security documents, Reporting

and recordkeeping requirements, Rural areas.

For the reasons set out in the preamble, REA proposes to amend

chapter XVII of title 7 of the Code of Federal Regulations by adding a

new part 1718 to read as follows:

PART 1718--LOAN SECURITY DOCUMENTS FOR ELECTRIC BORROWERS

Subpart A--General

Sec.

1718.1-1718.49 [Reserved]

Subpart B--Mortgage for Distribution Borrowers

1718.50 Definitions.

1718.51 Policy.

1718.52 Existing mortgages.

1718.53 Rights of other mortgagees.

1718.54 Availability of forms.

Appendix A to Subpart B of Part 1718--Standard Form of Mortgage for

Electric Distribution Borrowers

Authority: 7 U.S.C. 901-950b; Delegation of Authority by the

Secretary of Agriculture, 7 CFR 2.23; Delegation of Authority by the

Under Secretary for Small Community and Rural Development, 7 CFR

2.72, unless otherwise noted.

Subpart A--General

Secs. 1718.1-1718.49 [Reserved]

Subpart B--Mortgage for Distribution Borrowers

Sec. 1718.50 Definitions.

Unless otherwise indicated, terms used in this subpart are defined

as set forth in 7 CFR 1710.2.

Sec. 1718.51 Policy.

(a) Adequate loan security must be provided for loans made or

guaranteed by REA. The loans are required to be secured by a first

mortgage lien on most of the borrower's assets substantially in the

form set forth in Appendix A of this subpart. At the discretion of REA,

this standard form of mortgage may be adapted to satisfy different

legal requirements among the states and individual differences in

lending circumstances, provided that such adaptations are consistent

with the policies set forth in this subpart.

(b) Some borrowers, such as certain public power districts, may not

be able to provide security in the form of a first mortgage lien on

their assets. In these cases REA will consider accepting other forms of

security, such as resolutions and pledges of revenues.

(c) REA may require supplemental and amending mortgages to protect

its security, or in connection with additional loans.

(d) REA may also require such other security instruments (such as

loan contracts, security agreements, financing statements, guarantees,

and pledges) as it deems appropriate.

(e) All distribution borrowers that receive a loan or loan

guarantee from REA on or after [Date 30 days after the final rule is

published in the Federal Register] will be required to enter into a

mortgage with REA that meets the requirements of this subpart.

Distribution borrowers that refinance debt secured under their existing

mortgage have the option of staying with their existing mortgage or

entering into a new mortgage that meets the requirements of this

subpart. In the case of either a new loan or refinancing loan, the

concurrence of any other lenders secured under the borrower's existing

mortgage may be required before the borrower can enter into a new

mortgage.

Sec. 1718.52 Existing mortgages.

Nothing contained in this subpart invalidates, terminates or

rescinds any existing mortgage entered into between the borrower and

REA and any other mortgagees.

Sec. 1718.53 Rights of other mortgagees.

Nothing contained in this subpart is intended to alter or affect

any rights of any other mortgagee that is a party to an existing

mortgage between a borrower and REA.

Sec. 1718.54 Availability of forms.

Single copies of the mortgage are available from the Administrative

Services Division, Rural Electrification Administration, United States

Department of Agriculture, Washington, DC 20250-1500. This form may be

reproduced.

Appendix A to Subpart B--Standard Form of Mortgage for Electric

Distribution Borrowers

RESTATED MORTGAGE AND SECURITY AGREEMENT

Made By And Between ____________, Mortgagor and United States of

America and ____________, Mortgagee. Dated as of

This instrument grants a security interest by a transmitting

utility.

This instrument contains future advance provisions.

This instrument contains after-acquired property provisions.

Table of Contents

Granting Clauses

First

Second

Third

Fourth

Excepted Property

Habendum

Article I

Definitions & Other Provisions of General Application

Section 1.01 Definitions

Section 1.02 General Rules of Construction

Section 1.03 Special Rules of Construction if REA is a Mortgagee

Section 1.04 Governing Law

Section 1.05 Notices

Article II

Additional Notes

Section 2.01 Additional Notes

Section 2.02 Refunding or Refinancing Notes

Section 2.03 Other Additional Notes

Section 2.04 Additional Lenders Entitled to the Benefits of This

Mortgage

Section 2.05 Form of Supplemental Mortgage

Article III

Particular Covenants of the Mortgagor

Section 3.01 Payment of Debt Service on Notes

Section 3.02 Warranty of Title

Section 3.03 After-Acquired Property; Further Assurances; Recording

Section 3.04 Environmental Obligations

Section 3.05 Payment of Taxes

Section 3.06 Authority to Execute and Deliver Notes, Loan

Agreements and Mortgages; All Action Taken; Enforceable Obligations

Section 3.07 Restrictions on Further Encumbrances on Property

Section 3.08 Restrictions on Additional Permitted Debt

Section 3.09 Preservation of Corporate Existence and Franchises

Section 3.10 Limitations on Consolidations and Mergers

Section 3.11 Limitations on Transfers of Property

Section 3.12 Maintenance of Mortgaged Property

Section 3.13 Insurance; Restoration of Damaged Mortgaged Property

Section 3.14 Mortgagee Right to Expend Money to Protect Mortgaged

Property

Section 3.15 Time Extensions for Payment of Notes

Section 3.16 Limitation on Dividends, Patronage Refunds and Other

Cash Distributions

Section 3.17 Application of Proceeds from Condemnation

Section 3.18 Compliance with Loan Agreements; Notice of Amendments

to and Defaults under Loan Agreements

Section 3.19 Rights of Way, etc., Necessary in Business

Section 3.20 Rates to Provide Revenue Sufficient to Meet TIER and

DSC Requirements

Section 3.21 Keeping Books; Inspection by Mortgagee

Article IV

Events of Default and Remedies

Section 4.01 Events of Default

Section 4.02 Acceleration of Maturity; Rescission and Annulment

Section 4.03 Remedies of Mortgagees

Section 4.04 Application of Proceeds from Remedial Actions

Section 4.05 Remedies Cumulative; No Election

Section 4.06 Waiver of Appraisement Rights, Marshaling of Assets

Not Required

Section 4.07 Notice of Default

Article V

Possession Until Default--Defeasance Clause

Section 5.01 Possession Until Default

Section 5.02 Defeasance Generally

Section 5.03 Special Defeasance

Article VI

Miscellaneous

Section 6.01 Property Deemed Real Property

Section 6.02 Mortgage to Bind and Benefit Successors and Assigns

Section 6.03 Headings

Section 6.04 Separability Clause

Section 6.05 Mortgage Deemed Security Agreement

Section 6.06 Indemnification by Mortgagor of Mortgagees

Schedule A--Maximum Debt Limit and Other Information

Schedule B--Property Schedule

Schedule C--Excepted Property

Schedule D--Notary Public Certification

Restated Mortgage and Security Agreement, dated as of

____________, 19______, (hereinafter sometimes called this

``Mortgage'') is made by and between ____________________

(hereinafter called the ``Mortgagor''), a corporation existing under

the laws of the State of__________ , and the UNITED STATES OF

AMERICA acting by and through the Administrator of the Rural

Electrification Administration (hereinafter called the

``Government''), ____________ (Supplemental Lender) __________,

(hereinafter called ``____________'') a ____________ existing under

the laws of ____________, and is intended to confer rights and

benefits on both the Government and ____________ as well as any and

all other lenders pursuant to Article II of this Mortgage that enter

into a supplemental mortgage in accordance with section 2.04 of

Article II hereof (the Government and any such other lenders being

herein sometimes collectively referred to as the ``Mortgagees'').

Recitals

Whereas, the Mortgagor, the Government and ____________ are

parties to that certain ____________ Mortgage and Security Agreement

dated as of ____________, 19______, as supplemented, amended or

restated (the ``Original Mortgage'' identified in Schedule ``A'' of

this Mortgage) originally entered into between the Mortgagor, the

Government acting by and through the Administrator of the Rural

Electrification Administration (the ``REA'') and ____________; and

Whereas, the Mortgagor deems it necessary to borrow money for

its corporate purposes and to issue its promissory notes and other

debt obligations therefor from time to time in one or more series,

and to mortgage and pledge its property hereinafter described or

mentioned to secure the payment of the same;

Whereas, the Mortgagor desires to enter into this Mortgage

pursuant to which all secured debt of the Mortgagor hereunder shall

be secured on parity;

Whereas, this Mortgage restates and consolidates the Original

Mortgage while preserving the priority of the Lien under the

Original Mortgage securing the payment of Mortgagor's outstanding

obligations secured under the Original Mortgage, which indebtedness

is described more particularly by listing the Original Notes in

Schedule ``A'' hereto; and

Whereas, all acts necessary to make this Mortgage a valid and

binding legal instrument for the security of such notes and

obligations, subject to the terms of this Mortgage, have been in all

respects duly authorized;

Now, Therefore, This Mortgage Witnesseth: That to secure the

payment of the principal of (and premium, if any) and interest on

the Original Notes and all Notes issued hereunder according to their

tenor and effect, and the performance of all provisions therein and

herein contained, and in consideration of the covenants herein

contained and the purchase or guarantee of Notes by the guarantors

or holders thereof, the Mortgagor has mortgaged, pledged and granted

a continuing security interest in, and by these presents does hereby

grant, bargain, sell, alienate, remise, release, convey, assign,

transfer, hypothecate, pledge, set over and confirm, pledge, and

grant a continuing security interest in for the purposes hereinafter

expressed [other language may be required under various state laws],

unto the Mortgagees all property, rights, privileges and franchises

of the Mortgagor of every kind and description, real, personal or

mixed, tangible and intangible, of the kind or nature specifically

mentioned herein or any other kind or nature, except any Excepted

Property, now owned or hereafter acquired by the Mortgagor (by

purchase, consolidation, merger, donation, construction, erection or

in any other way) wherever located, including (without limitation)

all and singular the following:

Granting Clause First

A. all of those fee and leasehold interests in real property set

forth in Schedule ``B'' hereto, subject in each case to those

matters set forth in such Schedule;

B. all of the Mortgagor's interest in fixtures, easements,

permits, licenses and rights-of-way comprising real property, and

all other interests in real property, comprising any portion of the

System (as herein defined) located in the Counties listed in

Schedule ``B'' hereto;

C. all right, title and interest of the Mortgagor in and to

those contracts of the Mortgagor (i) relating to the ownership,

operation or maintenance of any generation, transmission or

distribution facility owned, whether solely or jointly, by the

Mortgagor, (ii) for the purchase of electric power and energy by the

Mortgagor and having an original term in excess of 3 years, (iii)

for the sale of electric power and energy by the Mortgagor and

having an original term in excess of 3 years, and (iv) for the

transmission of electric power and energy by or on behalf of the

Mortgagor and having an original term in excess of 3 years,

including in respect of any of the foregoing, any amendments,

supplements and replacements thereto;

D. all the property, rights, privileges, allowances and

franchises particularly described in the annexed Schedule ``B'' are

hereby made a part of, and deemed to be described in, this Granting

Clause as fully as if set forth in this Granting Clause at length;

and

Also All Other Property, real estate, lands, easements,

servitudes, licenses, permits, allowances, consents, franchises,

privileges, rights of way and other rights in or relating to real

estate or the occupancy of the same; all power sites, storage

rights, water rights, water locations, water appropriations,

ditches, flumes, reservoirs, reservoir sites, canals, raceways,

waterways, dams, dam sites, aqueducts, and all other rights or means

for appropriating, conveying, storing and supplying water; all

rights of way and roads; all plants for the generation of electric

and other forms of energy (whether now known or hereafter developed)

by steam, water, sunlight, chemical processes and/or (without

limitation) all other sources of power (whether now known or

hereafter developed); all power houses, gas plants, street lighting

systems, standards and other equipment incidental thereto; all

telephone, radio, television and other communications, image and

data transmission systems, air conditioning systems and equipment

incidental thereto, water wheels, waterworks, water systems, steam

and hot water plants, substations, lines, service and supply

systems, bridges, culverts, tracks, ice or refrigeration plants and

equipment, offices, buildings and other structures and the equipment

thereto all machinery, engines, boilers, dynamos, turbines,

electric, gas and other machines, prime movers, regulators, meters,

transformers, generators (including, but not limited to, engine-

driven generators and turbogenerator units), motors, electrical, gas

and mechanical appliances, conduits, cables, water, steam, gas or

other pipes, gas mains and pipes, service pipes, fittings, valves

and connections, pole and transmission lines, towers, overhead

conductors and devices, underground conduits, underground conductors

and devices, wires, cables, tools, implements, apparatus, storage

battery equipment, and all other fixtures and personalty; all

municipal and other franchises, consents, certificates or permits;

all emissions allowances; all lines for the transmission and

distribution of electric current and other forms of energy, gas,

steam, water or communications, images and data for any purpose

including towers, poles, wires, cables, pipes, conduits, ducts and

all apparatus for use in connection therewith, and (except as

hereinbefore or hereinafter expressly excepted) all the right, title

and interest of the Mortgagor in and to all other property of any

kind or nature appertaining to and/or used and/or occupied and/or

employed in connection with any property hereinbefore described;

Granting Clause Second

All other property, real, personal or mixed, of whatever kind

and description and wheresoever situated, including without

limitation goods, accounts, money held in a trust account pursuant

hereto or to a Loan Agreement, and general intangibles now owned or

which may be hereafter acquired by the Mortgagor, but excluding

Excepted Property, now owned or which may be hereafter acquired by

the Mortgagor, it being the intention hereof that all property,

rights, privileges, allowances and franchisees now owned by the

Mortgagor or acquired by the Mortgagor after the date hereof (other

than Excepted Property) shall be as fully embraced within and

subjected to the lien hereof as if such property were specifically

described herein.

Granting Clause Third

Also any Excepted Property that may, from time to time

hereafter, by delivery or by writing of any kind, be subjected to

the lien hereof by the Mortgagor or by anyone in its behalf; and any

Mortgagee is hereby authorized to receive the same at any time as

additional security hereunder for the benefit of all the Mortgagees.

Such subjection to the lien hereof of any Excepted Property as

additional security may be made subject to any reservations,

limitations or conditions which shall be set forth in a written

instrument executed by the Mortgagor or the person so acting in its

behalf or by such Mortgagee respecting the use and disposition of

such property or the proceeds thereof.

Granting Clause Fourth

Together with (subject to the rights of the Mortgagor set forth

on Section 5.01) all and singular the tenements, hereditaments and

appurtenances belonging or in anywise appertaining to the aforesaid

property or any part thereof, with the reversion and reversions,

remainder and remainders and all the tolls, earnings, rents, issues,

profits, revenues and other income, products and proceeds of the

property subjected or required to be subjected to the lien of this

Mortgage, and all other property of any nature appertaining to any

of the plants, systems, business or operations of the Mortgagor,

whether or not affixed to the realty, used in the operation of any

of the premises or plants or the System, or otherwise, which are now

owned or acquired by the Mortgagor, and all the estate, right, title

and interest of every nature whatsoever, at law as well as in

equity, of the Mortgagor in and to the same and every part thereof

(other than Excepted Property with respect to any of the foregoing).

Excepted Property

There is, however, expressly excepted and excluded from the lien

and operation of this Mortgage the following described property of

the Mortgagor, now owned or hereafter acquired (herein sometimes

referred to as ``Excepted Property''):

A. all cash on hand or in banks (excluding amounts deposited or

required to be deposited in a trust account pursuant to this

Mortgage), choses in action and judgments, contracts and contract

rights (except to the extent set forth in Granting Clause First),

shares of stock (including without limitation any interest of the

Mortgagor in the National Rural Utilities Cooperative Finance

Corporation and in the National Bank for Cooperatives), bonds,

notes, repurchase agreements, evidences of indebtedness and other

securities, bills, patents, patent licenses and other patent rights,

patent applications, trade names and trademarks, other than any

securities pledged under this Mortgage, and any other property

referred to in this Subdivision which is specifically described in

Granting Clause First or is by the express provisions of the

Mortgage subjected or required to be subjected to the lien hereof;

B. all rolling stock (except mobile substations), automobiles,

buses, trucks, truck cranes, tractors, trailers and similar vehicles

and movable equipment, and all tools, accessories and supplies used

in connection with any of the foregoing;

C. all vessels, boats, ships, barges and other marine equipment,

all airplanes, airplane engines and other flight equipment, and all

tools, accessories and supplies used in connection with any of the

foregoing;

D. all office furniture, equipment and supplies, including

(without limitation) all data processing, accounting and other

computer equipment, software and supplies;

E. all leasehold interests for office purposes;

F. all leasehold interests of the Mortgagor under leases for an

original term (including any period for which the Mortgagor shall

have a right of renewal) of less than five (5) years;

G. all timber and crops (both growing and harvested) and all

coal, ore, gas, oil and other minerals (both in place or severed);

H. all electric energy, gas, steam, water, ice, and other

materials, forms of energy or products generated, manufactured,

produced, or purchased by the Mortgagor for sale, distribution or

use in the ordinary course of its business;

I. the last day of the term of each leasehold estate (oral or

written) and any agreement therefor, now or hereafter enjoyed by the

Mortgagor and whether falling within a general or specific

description of property herein: Provided, However, that the

Mortgagor covenants and agrees that it will hold each such last day

in trust for the use and benefit of all of the Mortgagees and

Noteholders and that it will dispose of each such last day from time

to time in accordance with such written order as the Mortgagee in

its discretion may give;

J. all permits, licenses, franchises, contracts, agreements,

contract rights and other rights not specifically subjected or

required to be subjected to the lien hereof by the express

provisions of this Mortgage, whether now owned or hereafter acquired

by the Mortgagor, which by their terms or by reason of applicable

law would become void or voidable if mortgaged or pledged hereunder

by the Mortgagor or which cannot be granted, conveyed, mortgaged,

transferred or assigned by this Mortgage without the consent of

other parties whose consent is not secured, or without subjecting

any Mortgagee to a liability not otherwise contemplated by the

provisions of this Mortgage, or which otherwise may not be, hereby

lawfully and effectively granted, conveyed, mortgaged, transferred

and assigned by the Mortgagor; and

K. the property identified in Schedule ``C'' hereto.

Provided, However, that (i) if, upon the occurrence of an Event

of Default, any Mortgagee, or any receiver appointed pursuant to

statutory provision or order of court, shall have entered into

possession of all or substantially all of the Mortgaged Property,

all the Excepted Property described or referred to in the foregoing

Subdivisions A through H, inclusive, then owned or thereafter

acquired by the Mortgagor shall immediately, and, in the case of any

Excepted Property described or referred to in Subdivisions I through

J, inclusive, upon demand of any Mortgagee or such receiver, become

subject to the lien hereof to the extent permitted by law, and any

Mortgagee or such receiver may, to the extent permitted by law, at

the same time likewise take possession thereof, and (ii) whenever

all Events of Default shall have been cured and the possession of

all or substantially all of the Mortgaged Property shall have been

restored to the Mortgagor, such Excepted Property shall again be

excepted and excluded from the lien hereof to the extent and

otherwise as hereinabove set forth.

However, pursuant to Granting Clause Third, the Mortgagor may

subject to the lien of this Mortgage any Excepted Property,

whereupon the same shall cease to be Excepted Property.

Habendum

To Have and To Hold all said property, rights, privileges and

franchises of every kind and description, real, personal or mixed,

hereby and hereafter (by supplemental mortgage or otherwise)

granted, bargained, sold, aliened, remised, released, conveyed,

assigned, transferred, mortgaged, encumbered, hypothecated, pledged,

setover, confirmed, or subjected to a continuing security interest

as aforesaid, together with all the appurtenances thereto

appertaining (said properties, rights, privileges and franchises,

including any cash and securities hereafter deposited with any

Mortgagee ((other than any such cash which is specifically stated

herein not to be deemed part of the Mortgaged Property)), being

herein collectively called the ``Mortgaged Property'') unto the

Mortgagees and the respective assigns of the Mortgagees forever, to

secure equally and ratably the payment of the principal of (and

premium, if any) and interest on the Notes, according to their

terms, without preference, priority or distinction as to interest or

principal (except as otherwise specifically provided herein) or as

to lien or otherwise of any Note over any other Note by reason of

the priority in time of the execution, delivery or maturity thereof

or of the assignment or negotiation thereof, or otherwise, and to

secure the due performance of all of the covenants, agreements and

provisions herein and in the Loan Agreements contained, and for the

uses and purposes and upon the terms, conditions, provisos and

agreements hereinafter expressed and declared.

Subject, However, to Permitted Encumbrances (as defined in

Section 1.01).

Article I

Definitions & Other Provisions of General Application

Section 1.01. Definitions. In addition to the terms defined

elsewhere in this Mortgage, the terms defined in this Article I

shall have the meanings specified herein and under the UCC, unless

the context clearly requires otherwise. The terms defined herein

include the plural as well as the singular and the singular as well

as the plural.

Accounting Requirements shall mean the requirements of any

system of accounts prescribed by REA so long as the Government is

the holder, insurer or guarantor of any Notes, or, in the absence

thereof, the requirements of generally accepted accounting

principles applicable to businesses similar to that of the

Mortgagor.

Additional Notes shall mean any Notes issued by the Mortgagor to

the Government or any other lender pursuant to Article II of this

Mortgage including any refunding, renewal, or substitute Notes which

may from time to time be executed and delivered by the Mortgagor

pursuant to the terms of Article II.

Board shall mean either the Board of Directors or the Board of

Trustees, as the case may be, of the Mortgagor.

Business Day shall mean any day that the Government is open for

business.

Debt Service Coverage Ratio (``DSC'') shall mean the ratio

determined as follows: for each calendar year add (i) Patronage

Capital or Margins of the Mortgagor, after deducting generation and

transmission capital credits and other capital credits, (ii)

Interest Expense (as computed in accordance with the principles set

forth in the definition of Times Interest Earned Ratio herein) of

the Mortgagor and (iii) Depreciation and Amortization Expense of the

Mortgagor, and divide the total so obtained by an amount equal to

the sum of all payments of principal and interest required to be

made on account of Total Long-Term Debt during such calendar year

increasing said sum by any addition to interest expense on account

of Restricted Rentals as computed with respect to the Times Interest

Earned Ratio herein; provided, however, that in the event that any

Long-Term Debt (being any amount included in Total Long-Term Debt

computed as provided above) has been refinanced during such year the

payments of principal and interest required to be made during such

year on account of such Long-Term Debt shall be based (in lieu of

actual payments required to be made on such refinanced Debt) upon

the larger of (i) an annualization of the payments required to be

made with respect to the refinancing debt during the portion of such

year such refinancing debt is outstanding or (ii) the payment of

principal and interest required to be made during the following year

on account of such refinancing debt.

Depreciation and Amortization Expense shall mean an amount

constituting the depreciation and amortization of the Mortgagor as

computed pursuant to Accounting Requirements.

Distributions shall have the meaning specified in Section 3.16

hereof.

Electric System shall mean, and shall be broadly construed to

encompass and include, all of the Mortgagor'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 of any

kind 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 Mortgagor's generating plants, now existing or hereafter

acquired by lease, contract, purchase or otherwise or constructed by

the Mortgagor, including any interest or participation of the

Mortgagor in any such facilities or any rights to the output or

capacity thereof, together with all additions, betterments,

extensions and improvements to such Electric System or any part

thereof hereafter made and together with all lands, easements and

rights-of-way of the Mortgagor and all other works, property or

structures of the Mortgagor and contract rights and other tangible

and intangible assets of the Mortgagor used or useful in connection

with or related to such Electric System, including without

limitation a contract right or other contractual arrangement

referred to in Granting Clause First, Subclause (C).

Environmental Law and Environmental Laws shall mean all federal,

state, and local laws, regulations, and requirements related to

protection of human health or the environment, including but not

limited to the Comprehensive Environmental Response, Compensation

and Liability Act of 1980 (42 U.S.C. 9601 et seq.), the Resource

Conservation and Recovery Act (42 U.S.C. 6901 et seq.), the Clean

Water Act (33 U.S.C. 1251 et seq.) and the Clean Air Act (42 U.S.C.

7401 et seq.), and any amendments and implementing regulations of

such acts.

Equity shall mean the aggregate of all of the Mortgagor's

equities and margins computed pursuant to Accounting Requirements,

but excluding any regulatory created assets.

Event of Default shall have the meaning specified in Section

4.01 hereof.

Excepted Property shall have the meaning stated in the Granting

Clauses.

Government shall mean the United States of America acting by and

through the Administrator of REA and shall include its successors

and assigns.

Government Notes shall mean the Original Notes, and any

Additional Notes, issued by the Mortgagor to the Government, or

guaranteed or insured as to payment by the Government.

Independent shall mean when used with respect to any specified

person or entity means such a person or entity who (1) is in fact

independent, (2) does not have any direct financial interest or any

material indirect financial interest in the Mortgagor or in any

affiliate of the Mortgagor and (3) is not connected with the

Mortgagor as an officer, employee, promoter, underwriter, trustee,

partner, director or person performing similar functions.

Interest Expense shall mean an amount constituting the interest

expense of the Mortgagor as computed pursuant to Accounting

Requirements.

Lien shall mean any statutory or common law consensual or non-

consensual mortgage, pledge, security interest, encumbrance, lien,

right of set off, claim or charge of any kind, including, without

limitation, any conditional sale or other title retention

transaction, any lease transaction in the nature thereof and any

secured transaction under the UCC.

Loan Agreement shall mean any agreement executed by and between

the Mortgagor and the Government or any other lender in connection

with the execution and delivery of any Notes secured hereby.

Long-Term Debt shall mean any amount included in Total Long-Term

Debt pursuant to Accounting Requirements.

Long-Term Lease shall mean a lease having an unexpired term

(taking into account terms of renewal at the option of the lessor,

whether or not such lease has previously been renewed) of more than

12 months.

Margins shall mean the sum of amounts recorded as operating

margins and non-operating margins as computed in accordance with

Accounting Requirements.

Maximum Debt Limit, if any, shall mean the amount more

particularly described in Schedule ``A'' hereof.

Mortgage shall mean this Restated Mortgage and Security

Agreement, including any amendments or supplements thereto from time

to time.

Mortgageable Property shall mean all Property Additions, and all

property owned by the Mortgagor on the date of this instrument which

would constitute Property Additions if acquired after that date, but

Mortgageable Property shall not include any Excepted Property.

Mortgaged Property shall have the meaning specified as stated in

the Habendum to the Granting Clauses.

Mortgagee or Mortgagees shall mean the Government, ____________

(the supplemental lender), their successors and assigns as well as

any and all other lenders pursuant to Article II of this Mortgage

that enter into a supplemental mortgage in accordance with Section

2.04 of Article II hereof, their successors and assigns. The term

``Mortgagee'' is used herein collectively except where the context

clearly indicates otherwise.

Net Utility Plant shall mean the amount constituting the total

utility plant of the Mortgagor less depreciation computed in

accordance with Accounting Requirements.

Note or Notes shall mean one or more of the Government Notes,

and any other Notes which may, from time to time, be secured under

this Mortgage.

Noteholder or Noteholders shall mean one or more of the holders

of Notes secured by this Mortgage; PROVIDED, however, that in the

case of any Notes that have been guaranteed or insured as to payment

by REA, as to such Notes Noteholder or Noteholders shall mean REA,

exclusively, regardless of whether such notes are in the possession

of REA.

Original Mortgage means the instrument(s) identified as such in

Schedule ``A'' hereof.

Original Notes shall mean the Notes listed on Schedule ``A''

hereto as such , such Notes being instruments evidencing outstanding

indebtedness of the Mortgagor (i) to the Government (including

indebtedness which has been issued by the Mortgagor to a third party

and guaranteed or insured as to payment by the Government) and (ii)

to each other Mortgagee on the date of this Mortgage.

Outstanding Notes shall mean as of the date of determination,

(i) all Notes theretofore issued, executed and delivered to any

Mortgagee and (ii) any Notes guaranteed or insured as to payment by

the Government, except (a) Notes referred to in clause (i) or (ii)

for which the principal and interest have been fully paid and which

have been canceled by the Noteholder, and (b) Notes the payment for

which has been provided for pursuant to Section 5.03.

Permitted Debt shall have the meaning specified in Section 3.08.

Permitted Encumbrances shall mean:

(1) as to the property specifically described in Granting Clause

First, the restrictions, exceptions, reservations, conditions,

limitations, interests and other matters which are set forth or

referred to in such descriptions and each of which fits one or more

of the clauses of this definition, PROVIDED, such matters do not in

the aggregate materially detract from the value of the Mortgaged

Property taken as a whole and do not materially impair the use of

such property for the purposes for which it is held by the

Mortgagor;

(2) liens for taxes, assessments and other governmental charges

which are not delinquent;

(3) liens for taxes, assessments and other governmental charges

already delinquent which are currently being contested in good faith

by appropriate proceedings; PROVIDED the Mortgagor shall have set

aside on its books adequate reserves with respect thereto;

(4) mechanics', workmen's, repairmen's, materialmen's,

warehousemen's and carriers' liens and other similar liens arising

in the ordinary course of business for charges which are not

delinquent, or which are being contested in good faith and have not

proceeded to judgment; PROVIDED the Mortgagor shall have set aside

on its books adequate reserves with respect thereto;

(5) liens in respect of judgments or awards with respect to

which the Mortgagor shall in good faith currently be prosecuting an

appeal or proceedings for review and with respect to which the

Mortgagor shall have secured a stay of execution pending such appeal

or proceedings for review; PROVIDED the Mortgagor shall have set

aside on its books adequate reserves with respect thereto;

(6) easements and similar rights granted by the Mortgagor over

or in respect of any Mortgaged Property, PROVIDED that in the

opinion of the Board or a duly authorized officer of the Mortgagor

such grant will not impair the usefulness of such property in the

conduct of the Mortgagor's business and will not be prejudicial to

the interests of the Mortgagees, and similar rights granted by any

predecessor in title of the Mortgagor;

(7) easements, leases, reservations or other rights of others in

any property of the Mortgagor for streets, roads, bridges, pipes,

pipe lines, railroads, electric transmission and distribution lines,

telegraph and telephone lines, the removal of oil, gas, coal or

other minerals and other similar purposes, flood rights, river

control and development rights, sewage and drainage rights,

restrictions against pollution and zoning laws and minor defects and

irregularities in the record evidence of title, PROVIDED that such

easements, leases, reservations, rights, restrictions, laws, defects

and irregularities do not materially affect the marketability of

title to such property and do not in the aggregate materially impair

the use of the Mortgaged Property taken as a whole for the purposes

for which it is held by the Mortgagor;

(8) liens upon lands over which easements or rights of way are

acquired by the Mortgagor for any of the purposes specified in

Clause (7) of this definition, securing indebtedness neither

created, assumed nor guaranteed by the Mortgagor nor on account of

which it customarily pays interest, which liens do not materially

impair the use of such easements or rights of way for the purposes

for which they are held by the Mortgagor;

(9) leases existing at the date of this instrument affecting

property owned by the Mortgagor at said date which have been

previously disclosed to the Mortgagees in writing and leases for a

term of not more than two years (including any extensions or

renewals) affecting property acquired by the Mortgagor after said

date;

(10) terminable or short term leases or permits for occupancy,

which leases or permits expressly grant to the Mortgagor the right

to terminate them at any time on not more than six months' notice

and which occupancy does not interfere with the operation of the

business of the Mortgagor;

(11) any lien or privilege vested in any lessor, licensor or

permittor for rent to become due or for other obligations or acts to

be performed, the payment of which rent or performance of which

other obligations or acts is required under leases, subleases,

licenses or permits, so long as the payment of such rent or the

performance of such other obligations or acts is not delinquent;

(12) liens or privileges of any employees of the Mortgagor for

salary or wages earned but not yet payable;

(13) the burdens of any law or governmental regulation or permit

requiring the Mortgagor to maintain certain facilities or perform

certain acts as a condition of its occupancy of or interference with

any public lands or any river or stream or navigable waters;

(14) any irregularities in or deficiencies of title to any

rights-of-way for pipe lines, telephone lines, telegraph lines,

power lines or appurtenances thereto, or other improvements thereon,

and to any real estate used or to be used primarily for right-of-way

purposes, PROVIDED that in the opinion of counsel for the Mortgagor,

the Mortgagor shall have obtained from the apparent owner of the

lands or estates therein covered by any such right-of-way a

sufficient right, by the terms of the instrument granting such

right-of-way, to the use thereof for the construction, operation or

maintenance of the lines, appurtenances or improvements for which

the same are used or are to be used, or PROVIDED that in the opinion

of counsel for the Mortgagor, the Mortgagor has power under eminent

domain, or similar statues, to remove such irregularities or

deficiencies;

(15) rights reserved to, or vested in, any municipality or

governmental or other public authority to control or regulate any

property of the Mortgagor, or to use such property in any manner,

which rights do not materially impair the use of such property, for

the purposes for which it is held by the Mortgagor;

(16) any obligations or duties, affecting the property of the

Mortgagor, to any municipality or governmental or other public

authority with respect to any franchise, grant, license or permit;

(17) any right which any municipal or governmental authority may

have by virtue of any franchise, license, contract or statute to

purchase, or designate a purchaser of or order the sale of, any

property of the Mortgagor upon payment of cash or reasonable

compensation therefor or to terminate any franchise, license or

other rights or to regulate the property and business of the

Mortgagor;

(18) as to properties of other operating electric companies

acquired after the date of this Mortgage by the Mortgagor as

permitted by Section 3.10 hereof, reservations and other matters as

to which such properties may be subject as more fully set forth in

such Section;

(19) any lien required by law or governmental regulations as a

condition to the transaction of any business or the exercise of any

privilege or license, or to enable the Mortgagor to maintain self-

insurance or to participate in any fund established to cover any

insurance risks or in connection with workmen's compensation,

unemployment insurance, old age pensions or other social security,

or to share in the privileges or benefits required for companies

participating in such arrangements;

(20) liens arising out of any defeased mortgage or indenture of

the Mortgagor; or

(21) the undivided interest of other owners, and liens on such

undivided interests, in property owned jointly with the Mortgagor as

well as the rights of such owners to such property pursuant to the

ownership contracts.

(22) any lien or privilege vested in any lessor, licensor or

permittor for rent to become due or for other obligations or acts to

be performed, the payment of which rent or the performance of which

other obligations or acts is required under leases, subleases,

licenses or permits, so long as the payment of such rent or the

performance of such other obligations or acts is not delinquent;

(23) purchase money mortgages permitted by Section 3.08; and

(24) the Original Mortgage.

Property Additions shall mean property as to which the Mortgagor

shall provide Title Evidence and which shall be (or, if retired,

shall have been) subject to the lien of this Mortgage, which shall

be properly chargeable to the Mortgagor's fixed plant accounts under

Accounting Requirements (including property acquired to replace

property retired and credited to such accounts) and which shall be:

(1) acquired (including acquisition by merger, consolidation,

conveyance or transfer) by the Mortgagor after the date hereof,

including property in the process of construction, insofar as not

reflected on the books of the Mortgagor with respect to periods on

or prior to the date hereof, and

(2) used or useful in the business of the Mortgagor conducted

with the properties described in the Granting Clauses of this

Mortgage, even though separate from and not physically connected

with such properties.

``Property Additions'' shall also include:

(3) easements and rights-of-way that are useful for the conduct

of the business of the Mortgagor, and

(4) property located or constructed on, over or under public

highways, rivers or other public property if the Mortgagor has the

lawful right under permits, licenses or franchises granted by a

governmental body having jurisdiction in the premises or by the law

of the State in which such property is located to maintain and

operate such property for an unlimited, indeterminate or indefinite

period or for the period, if any, specified in such permit, license

or franchise or law and to remove such property at the expiration of

the period covered by such permit, license or franchise or law, or

if the terms of such permit, license, franchise or law require any

public authority having the right to take over such property to pay

fair consideration therefor.

``Property Additions'' shall not include:

(a) good will, going concern value, contracts, agreements,

franchises, licenses or permits, whether acquired as such, separate

and distinct from the property operated in connection therewith, or

acquired as an incident thereto, or

(b) any shares of stock or indebtedness or certificates or

evidences of interest therein or other securities, or

(c) any plant or system or other property in which the Mortgagor

shall acquire only a leasehold interest, or any betterments,

extensions, improvements or additions (other than movable physical

personal property which the Mortgagor has the right to remove), of,

upon or to any plant or system or other property in which the

Mortgagor shall own only a leasehold interest unless (i) the term of

the leasehold interest in the property to which such betterment,

extension, improvement or addition relates shall extend for at least

75% of the useful life of such betterment, extension, improvement or

addition and (ii) the lessor shall have agreed to give the Mortgagee

reasonable notice and opportunity to cure any default by the

Mortgagor under such lease and not to disturb any Mortgagee's

possession of such leasehold estate in the event any Mortgagee

succeeds to the Mortgagor's interest in such lease upon the any

Mortgagee's exercise of any remedies under this Mortgage so long as

there is no default in the performance of the tenant's covenants

contained therein, or

(d) any property of the Mortgagor subject to the Permitted

Encumbrance described in clause (23) of the definition thereof.

REA shall mean the Rural Electrification Administration of the

United States Department of Agriculture or if at any time after the

execution of this Mortgage REA is not existing and performing the

duties of administering a program of rural electrification as

currently assigned to it, then the entity performing such duties at

such time.

Restricted Rentals shall mean all rentals required to be paid

under finance leases and charged to income, exclusive of any amounts

paid under any such lease (whether or not designated therein as

rental or additional rental) for maintenance or repairs, insurance,

taxes, assessments, water rates or similar charges. For the purpose

of this definition the term ``finance lease'' shall mean any lease

having a rental term (including the term for which such lease may be

renewed or extended at the option of the lessee) in excess of 3

years and covering property having an initial cost in excess of

$250,000 other than aircraft, ships, barges, automobiles, trucks,

trailers, rolling stock and vehicles; office, garage and warehouse

space; office equipment and computers.

Security Interest shall mean any assignment, transfer, mortgage,

hypothecation or pledge.

Subordinated Indebtedness shall mean secured indebtedness of the

Mortgagor, payment of which shall be subordinated to the prior

payment of the Notes in accordance with the provisions of Section

3.08 hereof by subordination agreement in form and substance

satisfactory to each Mortgagee which approval will not be

unreasonably withheld.

Supplemental Mortgage shall mean an instrument of the type

described in Section 2.04.

Times Interest Earned Ratio (``TIER'') shall mean the ratio

determined as follows: for each calendar year: add (i) Patronage

Capital or Margins of the Mortgagor after deducting generation and

transmission capital credits and other capital credits, (ii)

Interest Expense on Total Long-Term Debt of the Mortgagor and (iii)

taxes paid, if any, based upon income during the year and divide the

total so obtained by Interest Expense on Total Long-Term Debt of the

Mortgagor, provided, however, that in computing Interest Expense on

Total Long-Term Debt, there shall be added, to the extent not

otherwise included, an amount equal to 33\1/3\% of the excess of

Restricted Rentals paid by the Mortgagor over 2% of the Mortgagor's

Equities and Margins.

Title Evidence, with respect to any property, shall mean

(1) an opinion of counsel to the effect that the Mortgagor has

title, whether fairly deducible of record or based upon prescriptive

rights (or, as to personal property, based on such evidence as

counsel shall determine to be sufficient), as in the opinion of

counsel is satisfactory for the use thereof in connection with the

operations of the Mortgagor, and counsel in giving such opinion may

disregard any irregularity or deficiency in the record evidence of

title which, in the opinion of such counsel, can be cured by

proceedings within the power of the Mortgagor or does not

substantially impair the usefulness of such property for the purpose

of the Mortgagor and may base such opinion upon his own

investigation or upon affidavits, certificates, abstracts of title,

statements or investigations made by persons in whom such counsel

has confidence or upon examination of a certificate or guaranty of

title or policy of title insurance in which he has confidence; or

(2) a mortgagee's policy of title insurance in the amount of the

cost to the Mortgagor of the land included in Property Additions, as

such cost is determined by the Mortgagor, issued in favor of the

Mortgagees by an entity authorized to insure title in the states

where the Mortgaged Property is located, showing the Mortgagor as

the owner of the subject property and insuring the lien of this

Mortgage.

Total Assets shall mean an amount constituting total assets of

the Mortgagor as computed pursuant to Accounting Requirements, but

excluding any regulatory created assets.

Total Long-Term Debt shall mean an amount constituting the long-

term debt of the Mortgagor as computed pursuant to Accounting

Requirements.

Total Utility Plant shall mean the amount constituting the total

utility plant of the Mortgagor computed in accordance with

Accounting Requirements.

Uniform Commercial Code or UCC shall mean the UCC of the state

referred to in Section 1.04, and if Mortgaged Property is located in

a state other than that state, then as to such Mortgaged Property

UCC refers to the UCC in effect in the state where such property is

located.

Utility System shall mean the Electric System and all of the

Mortgagor's interest in community infrastructure located within its

service territory, namely water and waste systems, solid waste

disposal facilities, telecommunications and other electronic

communications systems, and natural gas distribution systems.

Section 1.02. General Rules of Construction:

a. Accounting terms not referred to above are used in this

Mortgage in their ordinary sense and any computations relating to

such terms shall be computed in accordance with the Accounting

Requirements.

b. Any reference to ``directors'' or ``board of directors''

shall be deemed to mean ``trustees'' or ``board of trustees,'' as

the case may be.

Section 1.03. Special Rules of Construction if REA is a

Mortgagee: During any period that REA is a Mortgagee, the following

additional provisions shall apply:

a. In the case of any Notes that have been guaranteed or insured

as to payment by REA, as to such Notes REA shall be considered to be

the Noteholder, exclusively, regardless of whether such Notes are in

the possession of REA.

b. In the case of any prior approval rights conferred upon REA

by Federal statutes, including (without limitation) Section 7 of the

Rural Electrification Act of 1936, as amended, with respect to the

sale or disposition of property, rights, or franchises of the

Mortgagor, all such statutory rights are reserved except to the

extent that they are expressly modified or waived in this Mortgage.

Section 1.04. Governing Law: This Mortgage shall be construed in

and governed by Federal law to the extent applicable, and otherwise

by the laws of the State of ____________.

Section 1.05 Notices: All demands, notices, reports, approvals,

designations, or directions required or permitted to be given

hereunder shall be in writing and shall be deemed to be properly

given if sent by registered or certified mail, postage prepaid, or

delivered by hand, or sent by facsimile transmission, receipt

confirmed, addressed to the proper party or parties at the following

address:

As to the Mortgagor:

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As to the Mortgagee:

United States of America, Department of Agriculture, Rural

Electrification Administration, Washington, DC 20250-1500

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and as to any other person, firm, corporation or governmental body

or agency having an interest herein by reason of being a Mortgagee,

at the last address designated by such person, firm, corporation,

governmental body or agency to the Mortgagor and the other

Mortgagees. Any such party may from time to time designate to each

other a new address to which demands, notices, reports, approvals,

designations or directions may be addressed, and from and after any

such designation the address designated shall be deemed to be the

address of such party in lieu of the address given above.

Article II

Additional Notes

Section 2.01. Additional Notes: Without the prior consent of any

Mortgagee or any Noteholder, the Mortgagor may issue Additional

Notes to the Government or to another lender or lenders for the

purpose of acquiring or constructing new or replacement Mortgageable

Property which Notes will thereupon be secured equally and ratably

with the Notes if the following requirements are satisfied:

(1) As evidenced by a certificate of an Independent accountant

delivered to each Mortgagee:

(a) The Mortgagor shall have achieved for each of the two

calendar years immediately preceding the issuance of such additional

Notes, a TIER of not less than 1.35 and a DSC of not less than 1.35

on a pro forma basis after taking into account the maximum effect of

such additional Notes on annual Interest Expense, annual

Depreciation and Amortization Expense, and annual payments of

principal and interest (for purpose of this calculation, the

interest rate assumed in the case of Notes having a variable

interest rate shall be the greater of (i) interest rate in effect

with respect to such Notes on the date of such calculation or (ii)

the average interest rate with respect to any such Notes Outstanding

during the preceding 12 months); and

(b) After taking into account the effect of such additional

Notes, the Mortgagor shall have Equity greater than or equal to 27%

of Total Assets on a pro forma basis; and

(c) After taking into account the effect of such additional

Notes, the ratio of the Mortgagor's Net Utility Plant to its Long

Term Debt shall be greater than or equal to 1.1 on a pro forma

basis;

(d) The aggregate principal amount of such Additional Notes (if

any) not related to the Electric System when added to the aggregate

principal amount of all Outstanding Notes (if any) not related to

the Electric System will be not more than 20% of the Outstanding

Notes on a pro forma basis;

(e) The maturity of the loan evidenced by the notes must not

exceed the weighted average of the expected remaining useful lives

of the assets being financed;

(f) The principal of the loan evidenced by the Notes 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

(g) The principal of the loan evidenced by the Notes must have a

maturity of not less than 5 years.

(2) No Event of Default has occurred and is continuing

hereunder, or any event which with the giving of notice or lapse of

time or both would become an Event of Default has occurred and is

continuing.

(3) The Mortgageable Property being constructed or replaced is

part of the Mortgagor's Utility System.

Section 2.02. Refunding or Refinancing Notes: The Mortgagor

shall also have the right without the consent of any Mortgagee or

any Noteholder to issue Additional Notes for the purpose of

refunding or refinancing any Notes so long as: (a) the total amount

of Outstanding indebtedness evidenced by such Additional Note or

Notes is not greater than 103.5 percent of the then outstanding

principal balance of the Note or Notes being refunded or refinanced;

(b) the weighted average life of any such additional Note or Notes

is not greater than the weighted remaining life of the Note or Notes

being refinanced; (c) the present value of the cost of the

refinancing, including all transaction costs and any required

investments in the lender, is less than the present value of the

cost of the Note or Notes being refinanced. PROVIDED, HOWEVER, that

the Mortgagor may not exercise its rights under this Section if an

Event of Default has occurred and is continuing, or any event which

with the giving of notice or lapse of time or both would become an

Event of Default has occurred and is continuing. Additional Notes

issued pursuant to this Section 2.02 will thereupon be secured

equally and ratably with the Notes.

Section 2.03. Other Additional Notes. With the prior written

consent of each Mortgagee, the Mortgagor may issue Additional Notes

to the Government or any lender or lenders which, Notes will

thereupon be secured equally and ratably with Notes without regard

to whether any of the requirements of Sections 2.01 or 2.02 are

satisfied.

Section 2.04. Additional Lenders Entitled to the Benefits of

This Mortgage: Without the prior consent of any Mortgagee or any

Noteholder, each lender designated as a payee in any Additional

Notes issued by the Mortgagor pursuant to Section 2.01 or 2.02 of

this Mortgage shall become a Mortgagee hereunder upon the execution

and delivery by the Mortgagor and such lender of a supplemental

mortgage hereto designating such lender as a Mortgagee hereunder.

Such lender shall be entitled to the benefits of this Mortgage

without further act or deed. Each Mortgagee and each person or

entity that becomes a lender pursuant to Section 2.01 or 2.02 of

this Mortgage shall, upon the request of the Mortgagor to do so,

execute and deliver a supplement to this Mortgage in substantially

the form set forth in Section 2.05. Such request shall be

accompanied by an opinion of counsel and a certificate of the

general manager or other duly authorized officer of the Mortgagor

showing in reasonable detail that the issuance of the Additional

Note or Notes which qualify the specified additional lender to

become a Mortgagee under this Mortgage were or will be issued in

compliance with the provisions of sections 2.01 or 2.02 hereof. The

failure of any Mortgagee to enter into such supplemental mortgage

shall not deprive the lender of its rights under this Mortgage;

provided that such additional indebtedness otherwise conforms in all

respects with the requirements for issuing Additional Notes under

this Mortgage.

Section 2.05. Form of Supplemental Mortgage: [Here insert the

shell of a simple mortgage supplement. The new lender should be able

to set amortization terms and loan contract details in separate

instruments, but not modify the substance of the shell or the master

mortgage if it expects to take advantage of Sec. 2.04.]

Article III

Particular Covenants of the Mortgagor

Section 3.01. Payment of Debt Service on Notes: The Mortgagor

will duly and punctually pay the principal, premium, if any, and

interest on the Notes in accordance with the terms of the Notes, the

Loan Contracts, this Mortgage and any Supplemental Mortgage

authorizing such Notes.

Section 3.02. Warranty of Title: At the time of the execution

and delivery of this instrument, the Mortgagor has good and

marketable title in fee simple to the real property specifically

described in Granting Clause First as owned in fee and good and

marketable title to the interests in real property specifically

described in Granting Clause First, subject to no mortgage, lien,

charge or encumbrance except as stated therein, and has full power

and lawful authority to grant, bargain, sell, alien, remise,

release, convey, assign, transfer, mortgage, pledge, set over and

confirm said real property and interests in real property in the

manner and form aforesaid.

The Mortgagor lawfully owns and is possessed of the other

property specifically described in Granting Clause First, subject to

no mortgage, lien, charge or encumbrance except as stated therein,

and has full power and lawful authority to mortgage, assign,

transfer, deliver, pledge and grant a continuing security interest

in said property in the manner and form aforesaid.

The Mortgagor hereby does and will forever warrant and defend

the title to the property specifically described in Granting Clause

First against the claims and demands of all persons whomsoever.

Section 3.03. After-Acquired Property; Further Assurances;

Recording: All property of every kind, other than Excepted Property,

acquired by the Mortgagor after the date hereof, shall, immediately

upon the acquisition thereof by the Mortgagor, and without any

further mortgage, conveyance or assignment, become subject to the

lien of this Mortgage; Subject, However, to Permitted Encumbrances

and the exceptions, if any, to which all of the Mortgagees consent.

Nevertheless, the Mortgagor will do, execute, acknowledge and

deliver all and every such further acts, conveyances, mortgages,

financing statements and assurances as any Mortgagee shall require

for accomplishing the purposes of this Mortgage.

The Mortgagor will cause this Mortgage and all Supplemental

Mortgages and other instruments of further assurance, including all

financing statements covering security interests in personal

property, to be promptly recorded, registered and filed, and will

execute and file such financing statements and cause to be issued

and filed such continuation statements, all in such manner and in

such places as may be required by law fully to preserve and protect

the rights of all of the Mortgagees and Noteholders hereunder to all

property comprising the Mortgaged Property. The Mortgagor will

furnish to each Mortgagee:

A. Promptly after the execution and delivery of this instrument

and of each Supplemental Mortgage or other instrument of further

assurance, an Opinion of Counsel stating that, in the opinion of

such Counsel, this instrument and all such Supplemental Mortgages

and other instruments of further assurance have been properly

recorded, registered and filed to the extent necessary to make

effective the lien intended to be created by this Mortgage, and

reciting the details of such action or referring to prior Opinions

of Counsel in which such details are given, and stating that all

financing statements and continuation statements have been executed

and filed that are necessary fully to preserve and protect the

rights of all of the Mortgagees and Noteholders hereunder, or

stating that, in the opinion of such Counsel, no such action is

necessary to make the lien effective; and

B. Within 30 days after ____________ in each year beginning with

the year ______, an Opinion of Counsel, dated as of such date,

either stating that, in the opinion of such Counsel, such action has

been taken with respect to the recording, registering, filing, re-

recording, re-registering and re-filing of this instrument and of

all Supplemental Mortgages, financing statements, continuation

statements or other instruments of further assurances as is

necessary to maintain the lien of this Mortgage (including the lien

on any property acquired by the Mortgagor after the execution and

delivery of this instrument and owned by the Mortgagor at the end of

preceding calendar year) and reciting the details of such action or

referring to prior Opinions of Counsel in which such details are

given, and stating that all financing statements and continuation

statements have been executed and filed that are necessary to fully

preserve and protect the rights of all of the Mortgagees and

Noteholders hereunder, or stating that, in the opinion of such

Counsel, no such action is necessary to maintain such lien.

Section 3.04. Environmental Obligations: (a) The Mortgagor

shall, with respect to all facilities which may be part of the

Mortgaged Property, comply with all Environmental Laws.

(b) The Mortgagor shall defend, indemnify, and hold harmless

each Mortgagee, its successors and assigns, from and against any and

all liabilities, losses, damages, costs, expenses (including but not

limited to reasonable attorneys' fees and expenses), causes of

actions, administrative proceedings, suits, claims, demands, or

judgments of any nature arising out of or in connection with any

matter related to the Mortgage Property and any Environmental Law,

including but not limited to:

(1) The past, present, or future presence of any hazardous

substance, contaminant, pollutant, or hazardous waste on or related

to the Mortgaged Property;

(2) Any failure at any time by the undersigned to comply with

the terms of any order related to the Mortgaged Property and issued

by any federal, state, or municipal department or agency (other than

REA) exercising its authority to enforce any Environmental Law; and

(3) Any lien or claim imposed under any Environmental Law

related to clause (1).

(c) Within 3 (three) days after receiving knowledge of any

liability, losses, damages, costs, expenses (including but not

limited to reasonable attorneys' fees and expenses), cause of

action, administrative proceeding, suit, claim, demand, judgment,

lien, reportable event including but not limited to the release of a

hazardous substance, or potential or actual violation or non-

compliance arising out of or in connection with the Mortgaged

Property and any Environmental Law, the Mortgagor shall provide each

Mortgagee with written notice of such matter. With respect to any

matter upon which it has provided such notice, the Mortgagor shall

immediately take any and all appropriate actions to remedy, cure,

defend, or otherwise affirmatively respond to the matter.

Section 3.05. Payment of Taxes: The Mortgagor will pay or cause

to be paid as they become due and payable all taxes, assessments and

other governmental charges lawfully levied or assessed or imposed

upon the Mortgaged Property or any part thereof or upon any income

therefrom, and also (to the extent that such payment will not be

contrary to any applicable laws) all taxes, assessments and other

governmental charges lawfully levied, assessed or imposed upon the

lien or interest of the Noteholders or of the Mortgagees in the

Mortgaged Property, so that (to the extent aforesaid) the lien of

this Mortgage shall at all times be wholly preserved at the cost of

the Mortgagor and without expense to the Mortgagees or the

Noteholders; PROVIDED, HOWEVER, that the Mortgagor shall not be

required to pay and discharge or cause to be paid and discharged any

such tax, assessment or governmental charge to the extent that the

amount, applicability or validity thereof shall currently be

contested in good faith by appropriate proceedings and the Mortgagor

shall have established and shall maintain adequate reserves on its

books for the payment of the same.

Section 3.06. Authority to Execute and Deliver Notes, Loan

Agreements and Mortgage; All Action Taken; Enforceable Obligations:

The Mortgagor is authorized under its articles of incorporation and

bylaws [or code of regulations] and all applicable laws and by

corporate action to execute and deliver the Notes, any Additional

Notes, the Loan Agreements and this Mortgage. The Notes, the Loan

Agreements and this Mortgage are, and any Additional Notes and Loan

Agreements when executed and delivered will be, the valid and

enforceable obligations of the Mortgagor in accordance with their

respective terms.

Section 3.07. Restrictions On Further Encumbrances on Property:

Except to secure Additional Notes, the Mortgagor will not, without

the prior written consent of each Mortgagee, create or incur or

suffer or permit to be created or incurred or to exist any Lien,

charge, assignment, pledge, mortgage on any of the Mortgaged

Property inferior to, prior to, or on a parity with the Lien of this

Mortgage except for the Permitted Encumbrances. Subject to the

provisions of Section 3.08, or unless approved by each of the

Mortgagees, the Mortgagor will purchase all materials, equipment and

replacements to be incorporated in or used in connection with the

Mortgaged Property outright and not subject to any conditional sales

agreement, chattel mortgage, bailment, lease or other agreement

reserving to the seller any right, title or Lien.

Section 3.08. Restrictions On Additional Permitted Debt: The

Mortgagor shall not incur, assume, guarantee or otherwise become

liable in respect of any debt for borrowed money and Restricted

Rentals (including Subordinated Debt) other than the following:

(``Permitted Debt'')

(1) Additional Notes issued in compliance with Article II

hereof;

(2) Purchase money indebtedness in non-Utility System property,

in an amount not exceeding 10% of Net Utility Plant;

(3) Restricted Rentals in an amount not to exceed 5% of Equity

during any 12 consecutive calendar month period;

(4) Unsecured lease obligations incurred in the ordinary course

of business except Restricted Rentals;

(5) Unsecured indebtedness for borrowed money in an aggregate

amount not exceeding 15% of Net Utility Plant;

(6) Debt represented by dividends declared but not paid;

(7) Subordinated Indebtedness approved by each Mortgagee; and

(8) Indebtedness of other operating electric companies hereafter

acquired by the Mortgagor not exceeding 90% of the Net Utility Plant

of the acquired company.

Provided, However, that the Mortgagor may incur Permitted Debt

without the consent of the Mortgagee only so long as there exists no

Event of Default hereunder and there has been no continuing

occurrence which with the passage of time and giving of notice could

become an Event of Default hereunder.

Provided, Further, by executing this Mortgage any consent of REA

that the Mortgagor would otherwise be required to obtain under this

Section is hereby deemed to be given or waived by REA by operation

of law to the extent, but only to the extent, that to impose such a

requirement of REA consent would clearly violate existing federal

laws or government regulations.

Section 3.09. Preservation of Corporate Existence and

Franchises: The Mortgagor will, so long as any Outstanding Notes

exist, take or cause to be taken all such action as from time to

time may be necessary to preserve its corporate existence and to

preserve and renew all franchises, rights of way, easements,

permits, and licenses now or hereafter to be granted or upon it

conferred the loss of which would have a material adverse affect on

the Mortgagor's financial condition or business. The Mortgagor will

comply with all laws, ordinances, regulations, orders, decrees and

other legal requirements applicable to it or its property the

violation of which could have a material adverse affect on the

Mortgagor's financial condition or business.

Section 3.10 Limitations on Consolidations and Mergers: The

Mortgagor shall not consolidate or merge with any other corporation

or convey or transfer the Mortgaged Property substantially as an

entirety unless: (1) Such consolidation, merger, conveyance or

transfer shall be on such terms as shall fully preserve the lien and

security hereof and the rights and powers of the Mortgagees

hereunder; (2) the entity formed by such consolidation or with which

the Mortgagor is merged or the corporation which acquires by

conveyance or transfer the Mortgaged Property substantially as an

entirety shall execute and deliver to the Mortgagees a mortgage

supplemental hereto 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 this

Mortgage; (3) immediately after giving effect to such transaction,

no default hereunder shall have occurred and be continuing; (4) the

Mortgagor shall have delivered to the Mortgagees a certificate of

its general manager or other officer and an opinion of counsel for

the Mortgagor, each of which shall state that such consolidation,

merger, conveyance or transfer and such supplemental mortgage comply

with this subsection and that all conditions precedent herein

provided for relating to such transaction have been complied with;

and (5) the entity formed by such consolidation or with which the

Mortgagor is merged or the corporation which acquires by conveyance

or transfer the Mortgaged Property substantially as an entirety

shall be an entity--(A) having Equity equal to at least 27% of its

Total Assets on a pro forma basis after giving effect to such

transaction, (B) having a pro forma TIER of not less than 1.35 for

the preceding calendar year, and (C) having Net Utility Plant equal

to or greater than 1.1 times its long-term debt. Upon any

consolidation or merger or any conveyance or transfer of the

Mortgaged Property substantially as an entirety in accordance with

this subsection, the successor entity formed by such consolidation

or with which the Mortgagor is merged or to which such conveyance or

transfer is made shall succeed to, and be substituted for, and may

exercise every right and power of, the Mortgagor under this Mortgage

with the same effect as if such successor entity had been named as

the Mortgagor herein.

Section 3.11 Limitations on Transfers of Property: The Mortgagor

may not, except as provided in Section 3.10 above, without the prior

written approval of each Mortgagee, sell, lease or transfer any

Mortgaged Property to any other person or entity (including any

subsidiary or affiliate of the Mortgagor), unless (1) there exists

no Event of Default or occurrence which with the passing of time and

the giving of notice would be an Event of Default, (2) fair market

value is obtained for such property, (3) the aggregate value of

assets so sold, leased or transferred in any 12-month period is less

than 10% of Net Utility Plant, and (4) the proceeds of such sale,

lease or transfer, less ordinary and reasonable expenses incident to

such transaction, are immediately (i) applied as a prepayment of all

Notes equally and ratably, (ii) in the case of dispositions of

equipment, materials or scrap, applied to the purchase of other

property useful in the Mortgagor's business, not necessarily of the

same kind as the property disposed of, which shall forthwith become

subject to the Lien of the Mortgage, or (iii) applied to the

acquisition or construction of other Mortgageable Property.

Section 3.12. Maintenance of Mortgaged Property: (a) So long as

the Mortgagor holds title to the Mortgaged Property, the Mortgagor

will at all times maintain and preserve the Mortgaged Property which

is used or useful in the Mortgagor's business and each and every

part and parcel thereof in good repair, working order and condition,

ordinary wear and tear and acts of God excepted, and in compliance

with good utility practice and in compliance with all applicable

laws, regulations and orders, and will from time to time make all

needed and proper repairs, renewals and replacements, and useful and

proper alterations, additions, betterments and improvements, and

will, subject to contingencies beyond its reasonable control, at all

times use all reasonable diligence to furnish the consumers served

by it through the Mortgaged Property, or any part thereof, with an

adequate supply of electric power and energy. If any substantial

part of the Mortgaged Property is leased by the Mortgagor to any

other party, the lease agreement between the Mortgagor and the

lessee shall obligate the lessee to comply with the provisions of

subsections (a) and (b) of this Section in respect of the leased

facilities and to permit the Mortgagor to operate the leased

facilities in the event of any failure by the lessee to so comply.

(b) The Mortgagor further agrees upon reasonable written request

of any Mortgagee, which request together with the requests of any

other Mortgagees shall be made no more frequently than once every

three years, to supply promptly to each Mortgagee an initial

certification (hereinafter called the ``Initial Certification''), in

form satisfactory to the requestor, prepared by an Independent

professional engineer, who shall be satisfactory to the Mortgagees,

as to the condition of the Mortgaged Property. If in the sole

judgment of any Mortgagee such Initial Certification discloses the

need for improvements to the condition of the Mortgaged Property or

any other operations of the Mortgagor, such Mortgagee may send to

the Mortgagor a written report of such improvements and the

Mortgagor will upon receipt of such written report promptly

undertake to accomplish such of these improvements as are required

by such Mortgagees. One year after receipt of such written report,

the Mortgagor shall submit to each Mortgagee a second certification

(herein called the ``Second Certification''), in form satisfactory

to the Mortgagees, prepared by an Independent professional engineer,

who shall be satisfactory to the Mortgagees, as to the condition of

the Mortgaged Property and the other operations of the Mortgagor. If

in the sole judgment of any Mortgagee such Second Certification

discloses inadequacies in the condition of the Mortgaged Property or

the other operations of the Mortgagor, any Mortgagee may send to the

Mortgagor written notice of these inadequacies, and the Mortgagor

shall cure such inadequacies, within sixty (60) days of receipt of

such notice.

Section 3.13. Insurance; Restoration of Damaged Mortgaged

Property: (a) The Mortgagor will take out, as the respective risks

are incurred, and maintain the classes and amounts of insurance in

conformance with generally accepted utility industry standards for

such classes and amounts of coverages of utilities of the size and

character of the Mortgagor.

(b) The foregoing insurance coverage shall be obtained by means

of bond and policy forms approved by regulatory authorities having

jurisdiction, and, with respect to insurance upon any part of the

Mortgaged Property, shall provide that the insurance shall be

payable to the Mortgagees as their interests may appear by means of

the standard mortgagee clause without contribution. Each policy or

other contract for such insurance shall contain an agreement by the

insurer that, notwithstanding any right of cancellation reserved to

such insurer, such policy or contract shall continue in force for at

least 30 days after written notice to each Mortgagee of

cancellation.

(c) In the event of damage to or the destruction or loss of any

portion of the Mortgaged Property which is used or useful in the

Mortgagor's business and which shall be covered by insurance, unless

each Mortgagee shall otherwise agree, the Mortgagor shall replace or

restore such damaged, destroyed or lost portion so that such

Mortgaged Property shall be in substantially the same condition as

it was in prior to such damage, destruction or loss, and shall apply

the proceeds of the insurance for that purpose. The Mortgagor shall

replace the lost portion of such Mortgaged Property or shall

commence such restoration promptly after such damage, destruction or

loss shall have occurred and shall complete such replacement or

restoration as expeditiously as practicable, and shall pay or cause

to be paid out of the proceeds of such insurance all costs and

expenses in connection therewith.

(d) Sums recovered under any policy or fidelity bond by the

Mortgagor for a loss of funds advanced under the Notes or recovered

by any Mortgagee or any Noteholder for any loss under such policy or

bond shall, unless applied as provided in the preceding paragraph or

otherwise be used to finance construction of facilities secured or

to be secured by this Mortgage, or unless otherwise directed by the

Mortgagees, be applied to the prepayment of the Notes pro rata

according to the unpaid principal amounts thereof (such prepayments

to be applied to such Notes and installments thereof as may be

designated by the respective Mortgagee at the time of any such

prepayment), or be used to construct or acquire facilities which

will become part of the Mortgaged Property. At the request of any

Mortgagee, the Mortgagor shall exercise such rights and remedies

which they may have under such policy or fidelity bond and which may

be designated by such Mortgagee, and the Mortgagor hereby

irrevocably appoints each Mortgagee as its agent to exercise such

rights and remedies under such policy or bond as such Mortgagee may

choose, and the Mortgagor shall pay all costs and reasonable

expenses incurred by the Mortgagee in connection with such exercise.

Section 3.14. Mortgagee Right to Expend Money to Protect

Mortgaged Property: The Mortgagor agrees that any Mortgagee from

time to time hereunder may, in its sole discretion, after having

given 5 Business days prior written notice to Mortgagor, but shall

not be obligated to, advance funds on behalf of Mortgagor, in order

to insure the Mortgagor's compliance with any covenant, warranty,

representation or agreement of the Mortgagor made in or pursuant to

this Mortgage or any of the Loan Agreements, to preserve or protect

any right or interest of the Mortgagees in the Mortgaged Property or

under or pursuant to this Mortgage or any of the Loan Agreements,

including without limitation, the payment of any insurance premiums

or taxes and the satisfaction or discharge of any judgment or any

Lien upon the Mortgaged Property or other property or assets of

Mortgagor; provided, however, that the making of any such advance by

or through any Mortgagee shall not constitute a waiver by any

Mortgagee of any Event of Default with respect to which such advance

is made nor relieve the Mortgagor of any such Event of Default. The

Mortgagor shall pay to a Mortgagee upon demand all such advances

made by such Mortgagee with interest thereon at a rate equal to that

on the Note having the highest interest rate but in no event shall

such rate be in excess of the maximum rate permitted by applicable

law. All such advances shall be included in the obligations and

secured by the security interest granted hereunder.

Section 3.15. Time Extensions for Payment of Notes: Any

Mortgagee may, at any time or times in succession without notice to

or the consent of the Mortgagor, or any other Mortgagee, and upon

such terms as such Mortgagee may prescribe, grant to any person,

firm or corporation who shall have become obligated to pay all or

any part of the principal of (and premium, if any) or interest on

any Note held by or indebtedness owed to such Mortgagee or who may

be affected by the lien hereby created, an extension of the time for

the payment of such principal, (and premium, if any) or interest,

and after any such extension the Mortgagor will remain liable for

the payment of such Note or indebtedness to the same extent as

though it had at the time of such extension consented thereto in

writing.

Section 3.16. Limitation on Dividends, Patronage Refunds and

Other Cash Distributions: The Mortgagor will not, in any calendar

year, without the prior written consent of the Mortgagees, declare

or pay any dividends, or pay or determine to pay any patronage

refunds, or retire any patronage capital or make any other cash

distributions (such dividends, refunds, retirements and other

distributions being hereinafter collectively called

``Distributions''), to its members, stockholders or consumers if

after giving effect to any such Distribution the total Equity of the

Mortgagor will not equal or exceed 40% of its total assets and other

debits; provided, however, that in any event the Mortgagor may make

Distributions to the estates of natural patrons who are deceased to

the extent required or permitted by its articles of incorporation

and bylaws, and, if such Distributions to such estates do not exceed

25% of the patronage capital and margins received by the Mortgagor

in the next preceding year, make such additional Distributions in

any year as will not cause the total Distributions in such year to

exceed 25% of the patronage capital and margins so received, and

provided, further, however, that in no event will the Mortgagor make

any Distributions if there is unpaid when due any installment of

principal of (and premium, if any) or interest on the Notes, if the

Mortgagor is otherwise in default hereunder or if, after giving

effect to any such Distribution, the Mortgagor's total current and

accrued assets would be less than its total current and accrued

liabilities. For the purpose of this section a ``cash distribution''

shall be deemed to include any general cancellation or abatement of

charges for electric energy or services furnished by the Mortgagor,

but not the repayment of a membership fee upon termination of a

membership.

Section 3.17. Application of Proceeds from Condemnation: (a) In

the event that the Mortgaged Property or any part thereof, shall be

taken under the power of eminent domain, all proceeds and avails

therefrom may be used to finance construction of facilities secured

or to be secured by this Mortgage. Any proceeds not so used shall

forthwith be applied by the Mortgagor: first, to the ratable payment

of any indebtedness secured by this Mortgage other than principal of

or interest on the Notes; second, to the ratable payment of interest

which shall have accrued on the Notes and be unpaid; third, to the

ratable payment of or on account of the unpaid principal of the

Notes, to such installments thereof as may be designated by the

respective Mortgagee at the time of any such payment; and fourth,

the balance shall be paid to whomsoever shall be entitled thereto.

(b) If any part of the Mortgaged Property shall be taken by

eminent domain, each Mortgagee shall release the property so taken

from the Mortgaged Property and shall be fully protected in so doing

upon being furnished with:

(1) A certificate of a duly authorized officer of the Mortgagor

requesting such release, describing the property to be released and

stating that such property has been taken by eminent domain and that

all conditions precedent herein provided or relating to such release

have been complied with; and

(2) an opinion of counsel to the effect that such property has

been lawfully taken by exercise of the right of eminent domain, that

the award for such property so taken has become final or an appeal

therefrom is not advisable in the interests of the Mortgagor, the

Mortgagees or the Noteholders and that all conditions precedent

herein provided for relating to such release have been complied

with.

Section 3.18. Compliance with Loan Agreements; Notice of

Amendments to and Defaults under Loan Agreements: The Mortgagor will

observe and perform all of the material covenants, agreements, terms

and conditions contained in any Loan Agreement entered into in

connection with the issuance of any of the Notes, as from time to

time amended. The Mortgagor will send promptly to each Mortgagee

notice of any default by the Mortgagor under any Loan Agreement and

notice of any amendment to any Loan Agreement. Upon request of any

Mortgagee, the Mortgagor will furnish to such Mortgagee single

copies of such Loan Agreements and amendments thereto as such

Mortgagee may request.

Section 3.19. Rights of Way, etc., Necessary in Business: The

Mortgagor will use its best efforts to obtain all such rights of

way, easements from landowners and releases from lienors as shall be

necessary or advisable in the conduct of its business, and, if

requested by any Mortgagee, deliver to such Mortgagee evidence

satisfactory to such Mortgagee of the obtaining of such rights of

way, easements or releases.

Section 3.20. Rates to Provide Revenue Sufficient to Meet TIER

and DSC Requirements: The Mortgagor shall design and implement rates

for electric power and energy and for other utility services

furnished by it that are designed [when combined with other revenue

available to the Mortgagor] (i) to provide sufficient revenue to pay

all fixed and variable expenses when and as due, (ii) to provide and

maintain reasonable working capital, and (iii) to maintain, on an

annual basis, a TIER of not less than 1.35 and a DSC of not less

than 1.35. The Mortgagor shall give thirty (30) days prior written

notice of any proposed change in its general rate structure to any

Mortgagee who has requested in writing that it be notified in

advance of such changes. Within ninety (90) days following the end

of each calendar year, the Mortgagor shall report, in writing, to

each of the Mortgagees the TIER and DSC levels which were achieved

during that calendar year. If the average of the two (2) largest

annual levels achieved by the Mortgagor out of the three (3) then

most recent calendar years results in a TIER of less than 1.35 or a

DSC of less than 1.35, the Mortgagor shall within ninety (90) days

following the end of the calendar year, provide to each of the

Mortgagees a written plan of remedial action, proposed by an

Independent consultant acceptable to each of the Mortgagees, for the

approval of each Mortgagee. Such plan shall set forth the actions

that the Mortgagor shall take in order to achieve the required TIER

and DSC levels on a timely basis. The Mortgagor shall take all

actions provided for in its written plan approved by the Mortgagees.

In the event that any state regulatory authority having jurisdiction

decides to disapprove rates sufficient to meet TIER and DSC ratios

prescribed in this Mortgage, the Mortgagor will provide appropriate

documentation to that effect along with a request that the

Mortgagees approve the plan as modified to take the determination of

such state authority into account. If each of the Mortgagees

consents to such modifications, then the plan as so modified shall

constitute the plan required by this section.

The Mortgagor will not furnish or supply or cause to be

furnished or supplied any use, output, capacity, or service of the

Utility System free of charge to any person, firm or corporation,

public or private, and the Mortgagor will enforce the payment of any

and all amounts owing to the Mortgagor by reason of the ownership

and operation of the Utility System by discontinuing such use,

output, capacity, or service, or by filing suit therefor within 90

days after any such accounts are due, or by both such discontinuance

and by filing suit.

Section 3.21. Keeping Books; Inspection by Mortgagee: The

Mortgagor will keep proper books of records and account, in which

full and correct entries shall be made of all dealings or

transactions of or in relation to the Notes and the Utility Systems,

properties, business and affairs of the Mortgagor in accordance with

the Accounting Requirements. The Mortgagor will at any and all

times, upon the written request of any Mortgagee and at the expense

of the Mortgagor, permit such Mortgagee by its representatives to

inspect the Utility Systems and properties, books of account,

records, reports and other papers of the Mortgagor and to take

copies and extracts therefrom, and will afford and procure a

reasonable opportunity to make any such inspection, and the

Mortgagor will furnish to each Mortgagee any and all such

information as such Mortgagee may request, with respect to the

performance by the Mortgagor of its covenants under this Mortgage,

the Notes and the Loan Agreements.

Article IV

Events of Default and Remedies

Section 4.01. Events of Default: Each of the following shall be

an ``Event of Default'' under this Mortgage:

(a) default shall be made in the payment of any installment of

or on account of interest on or principal of (or premium, if any

associated with) any Note or Notes for more than five (5) Business

Days after the same shall be required to be made;

(b) default shall be made in the due observance or performance

of any other of the covenants, conditions or agreements on the part

of the Mortgagor, in any of the Notes, Loan Agreements or in this

Mortgage, and such default shall continue for a period of thirty

(30) days after written notice specifying such default and requiring

the same to be remedied and stating that such notice is a ``Notice

of Default'' hereunder shall have been given to the Mortgagor by any

Mortgagee; PROVIDED, HOWEVER that in the case of a default on the

terms of a Note or Loan Agreement of a particular Mortgagee, the

``Notice of Default'' required under this paragraph may only be

given by that Mortgagee;

(c) the Mortgagor shall file a petition in bankruptcy or be

adjudicated a bankrupt or insolvent, or shall make an assignment for

the benefit of its creditors, or shall consent to the appointment of

a receiver of itself or of its property, or shall institute

proceedings for its reorganization or proceedings instituted by

others for its reorganization shall not be dismissed within sixty

(60) days after the institution thereof;

(d) a receiver or liquidator of the Mortgagor or of any

substantial portion of its property shall be appointed and the order

appointing such receiver or liquidator shall not be vacated within

sixty (60) days after the entry thereof;

(e) the Mortgagor shall forfeit or otherwise be deprived of its

corporate charter or franchises, permits, easements, or licenses

required to carry on any material portion of its business;

(f) a final judgment for an amount of more than $____________

shall be entered against the Mortgagor and shall remain unsatisfied

or without a stay in respect thereof for a period of sixty (60)

days; or,

(g) any material representation or warranty made by the

Mortgagor herein, in the Loan Agreements or in any certificate or

financial statement delivered hereunder or thereunder shall prove to

be false or misleading in any material respect at the time made.

Section 4.02. Acceleration of Maturity; Rescission and

Annulment:

(a) If an Event of Default described in Section 4.01(a) has

occurred and is continuing, any Mortgagee upon which such default

has occurred may declare the principal of all its Notes secured

hereunder to be due and payable immediately by a notice in writing

to the Mortgagor and to the other Mortgagees (failure to provide

said notice to any other Mortgagee shall not effect the validity of

any acceleration of the Note or Notes by such Mortgagee), and upon

such declaration, all unpaid principal (and premium, if any) and

accrued interest so declared shall become due and payable

immediately, anything contained herein or in any Note or Notes to

the contrary notwithstanding. Upon receipt of actual knowledge of or

any notice of acceleration by any Mortgagee, any other Mortgagee may

declare the principal of all of its Notes to be due and payable

immediately by a notice in writing to the Mortgagor and upon such

declaration, all unpaid principal (and premium, if any) and accrued

interest so declared shall become due and payable immediately,

anything contained herein or in any Note or Notes or Loan Agreements

to the contrary notwithstanding.

(b) If any other Event of Default shall have occurred and be

continuing, any Mortgagee may declare the principal (and premium, if

any) and accrued interest on all its Notes secured by this Mortgage

due and payable and upon such declaration, all unpaid principal (and

premium, if any) and interest so declared shall become due and

payable immediately, anything contained herein, in any Loan

Agreement or in any Note to the contrary notwithstanding.

(c) If at any time after the unpaid principal of (and premium,

if any) and accrued interest on any of the Notes shall have been so

declared to be due and payable, all payments in respect of principal

and interest which shall have become due and payable by the terms of

such Note or Notes (other than amounts due as a result of the

acceleration of the Notes) shall be paid to the respective

Mortgagees, and all other defaults under the Loan Agreements, the

Notes and this Mortgage shall have been made good and secured to the

satisfaction of the Mortgagees representing at least 80% of the

aggregate unpaid principal balance of all of the Notes then

Outstanding, then in every such case such Mortgagees, may by written

notice to the Mortgagor, annul such declaration and waive such

default and the consequences thereof, but no such waiver shall

extend to or affect any subsequent default or impair any right

consequent thereon.

Section 4.03. Remedies of Mortgagees: If one or more of the

Events of Default shall occur and be continuing, any Mortgagee

personally or by attorney, in its or their discretion, may, in so

far as not prohibited by law:

(a) take immediate possession of the Mortgaged Property, collect

and receive all credits, outstanding accounts and bills receivable

of the Mortgagor and all rents, income, revenues, proceeds and

profits pertaining to or arising from the Mortgaged Property, or any

part thereof, whether then past due or accruing thereafter, and

issue binding receipts therefor; and manage, control and operate the

Mortgaged Property as fully as the Mortgagor might do if in

possession thereof, including, without limitation, the making of all

repairs or replacements deemed necessary or advisable by such

Mortgagee in possession;

(b) proceed to protect and enforce the rights of all of the

Mortgagees by suits or actions in equity or at law in any court or

courts of competent jurisdiction, whether for specific performance

of any covenant or any agreement contained herein or in aid of the

execution of any power herein granted or for the foreclosure hereof

or hereunder or for the sale of the Mortgaged Property, or any part

thereof, or to collect the debts hereby secured or for the

enforcement of such other or additional appropriate legal or

equitable remedies as may be deemed necessary or advisable to

protect and enforce the rights and remedies herein granted or

conferred, and in the event of the institution of any such action or

suit the Mortgagee instituting such action or suit shall have the

right to have appointed a receiver of the Mortgaged Property and of

all proceeds, rents, income, revenues and profits pertaining thereto

or arising therefrom, whether then past due or accruing after the

appointment of such receiver, derived, received or had from the time

of the commencement of such suit or action, and such receiver shall

have all the usual powers and duties of receivers in like and

similar cases, to the fullest extent permitted by law, and if

application shall be made for the appointment of a receiver the

Mortgagor hereby expressly consents that the court to which such

application shall be made may make said appointment; and

(c) sell or cause to be sold all and singular the Mortgaged

Property or any part thereof, and all right, title, interest, claim

and demand of the Mortgagor therein or thereto, at public auction at

such place in any county (or its equivalent locality) in which the

property to be sold, or any part thereof, is located, at such time

and upon such terms as may be specified in a notice of sale, which

shall state the time when and the place where the sale is to be

held, shall contain a brief general description of the property to

be sold, and shall be given by mailing a copy thereof to the

Mortgagor at least fifteen (15) days prior to the date fixed for

such sale and by publishing the same once in each week for two

successive calendar weeks prior to the date of such sale in a

newspaper of general circulation published in said locality or, if

no such newspaper is published in such locality, in a newspaper of

general circulation in such locality, the first such publication to

be not less than fifteen (15) days nor more than thirty (30) days

prior to the date fixed for such sale. Any sale to be made under

this subparagraph (c) of this Section 4.03 may be adjourned from

time to time by announcement at the time and place appointed for

such sale or for such adjourned sale or sales, and without further

notice or publication the sale may be had at the time and place to

which the same shall be adjourned; provided, however, that in the

event another or different notice of sale or another or different

manner of conducting the same shall be required by law the notice of

sale shall be given or the sale be conducted, as the case may be, in

accordance with the applicable provisions of law. The expense

incurred by any Mortgagee (including, but not limited to, receiver's

fees, counsel fees, cost of advertisement and agents' compensation)

in the exercise of any of the remedies provided in this Mortgage

shall be secured by this Mortgage.

(d) In the event that a Mortgagee proceeds to enforce remedies

under this Section, any other Mortgagee may join in such

proceedings. In the event that the Mortgagees are not in agreement

with the method or manner of enforcement chosen by any other

Mortgagee, the Mortgagees representing a majority of the aggregate

unpaid principal balance on the then Outstanding Notes may direct

the method and manner in which remedial action will proceed.

Section 4.04. Application of Proceeds from Remedial Actions: Any

proceeds or funds arising from the exercise of any rights or the

enforcement of any remedies herein provided after the payment or

provision for the payment of any and all costs and expenses in

connection with the exercise of such rights or the enforcement of

such remedies shall be applied first, to the ratable payment of

indebtedness hereby secured other than the principal of or interest

on the Notes; second, to the ratable payment of interest which shall

have accrued on the Notes and which shall be unpaid; third, to the

ratable payment of or on account of the unpaid principal of the

Notes; and the balance, if any, shall be paid to whomsoever shall be

entitled thereto.

Section 4.05. Remedies Cumulative; No Election: Every right or

remedy herein conferred upon or reserved to the Mortgagees or to the

Noteholders shall be cumulative and shall be in addition to every

other right and remedy given hereunder or now or hereafter existing

at law, or in equity, or by statute. The pursuit of any right or

remedy shall not be construed as an election.

Section 4.06. Waiver of Appraisement Rights; Marshalling of

Assets Not Required: The Mortgagor, for itself and all who may claim

through or under it, covenants that it will not at any time insist

upon or plead, or in any manner whatever claim, or take the benefit

or advantage of, any appraisement, valuation, stay, extension or

redemption laws now or hereafter in force in any locality where any

of the Mortgaged Property may be situated, in order to prevent,

delay or hinder the enforcement or foreclosure of this Mortgage, or

the absolute sale of the Mortgaged Property, or any part thereof, or

the final and absolute putting into possession thereof, immediately

after such sale, of the purchaser or purchasers thereat, and the

Mortgagor, for itself and all who may claim through or under it,

hereby waives the benefit of all such laws unless such waiver shall

be forbidden by law. Under no circumstances shall there be any

marshalling of assets upon any foreclosure or to other enforcement

of this Mortgage.

Section 4.07. Notice of Default: The Mortgagor covenants that it

will give immediate written notice to each Mortgagee of the

occurrence of any Event of Default or in the event that any right or

remedy described in Sections 4.02 and 4.03 hereof is exercised or

enforced or any action is taken to exercise or enforce any such

right or remedy.

Article V

Possession Until Default-Defeasance Clause

Section 5.01. Possession Until Default: Until some one or more

of the Events of Default shall have happened, the Mortgagor shall be

suffered and permitted to retain actual possession of the Mortgaged

Property, and to manage, operate and use the same and any part

thereof, with the rights and franchises appertaining thereto, and to

collect, receive, take, use and enjoy the rents, revenues, issues,

earnings, income, products and profits thereof or therefrom, subject

to the provisions of this Mortgage.

Section 5.02. Defeasance Generally: If the Mortgagor shall pay

or cause to be paid the whole amount of the principal of (and

premium, if any) and interest on the Notes at the times and in the

manner therein provided, and shall also pay or cause to be paid all

other sums payable by the Mortgagor hereunder or under any Loan

Agreement and shall keep and perform, all covenants herein required

to be kept and performed by it, then and in that case, all property,

rights and interest hereby conveyed or assigned or pledged shall

revert to the Mortgagor and the estate, right, title and interest of

the Mortgagee so paid shall thereupon cease, determine and become

void and such Mortgagee, in such case, on written demand of the

Mortgagor but at the Mortgagor's cost and expense, shall enter

satisfaction of the Mortgage upon the record. In any event, each

Mortgagee, upon payment in full to such Mortgagee by the Mortgagor

of all principal of (and premium, if any) and interest on any Note

held by such Mortgagee and the payment and discharge by the

Mortgagor of all charges due to such Mortgagee hereunder or under

any Loan Agreement, shall execute and deliver to the Mortgagor such

instrument of satisfaction, discharge or release as shall be

required by law in the circumstances.

Section 5.03. Special Defeasance: Other than any Notes excluded

by the foregoing Sections 5.01 and 5.02 and Notes which have become

due and payable, the Mortgagor may cause the Lien of this Mortgage

to be defeased with respect to any Note for which it has deposited

or caused to be deposited in trust solely for the purpose an amount

sufficient to pay and discharge the entire indebtedness on such Note

for principal (and premium, if any) and interest to the date of

maturity thereof; PROVIDED, HOWEVER, that the depositary serving as

trustee for such trust must first be accepted as such by the

Mortgagee whose Notes are being defeased under this section. In such

event, such a Note will no longer be considered to be an Outstanding

Note for purposes of this Mortgage and the Mortgagee shall execute

and deliver to the Mortgagor such instrument of satisfaction,

discharge or release as shall be required by law in the

circumstances.

Article VI

Miscellaneous

Section 6.01. Property Deemed Real Property: It is hereby

declared to be the intention of the Mortgagor that any electric

generating plant or plants and facilities and all electric

transmission and distribution lines, or other Electric System or

Utility System facilities, embraced in the Mortgaged Property,

including (without limitation) all rights of way and easements

granted or given to the Mortgagor or obtained by it to use real

property in connection with the construction, operation or

maintenance of such plant, lines, facilities or systems, and all

other property physically attached to any of the foregoing, shall be

deemed to be real property.

Section 6.02. Mortgage to Bind and Benefit Successors and

Assigns: All of the covenants, stipulations, promises, undertakings

and agreements herein contained by or on behalf of the Mortgagor

shall bind its successors and assigns, whether so specified or not,

and all titles, rights and remedies hereby granted to or conferred

upon the Mortgagees shall pass to and inure to the benefit of the

successors and assigns of the Mortgagees and shall be deemed to be

granted or conferred for the ratable benefit and security of all who

shall from time to time be a Mortgagee. The Mortgagor hereby agrees

to execute such consents, acknowledgements and other instruments as

may be reasonably requested by any Mortgagee in connection with the

assignment, transfer, mortgage, hypothecation or pledge of the

rights or interests of such Mortgagee hereunder or under the Notes

or in and to any of the Mortgaged Property.

Section 6.03. Headings: The descriptive headings of the various

articles and sections of this Mortgage and also the table of

contents were formulated and inserted for convenience only and shall

not be deemed to affect the meaning or construction of any of the

provisions hereof.

Section 6.04. Separability Cause: In case any provision of this

Mortgage or in the Notes or in the Loan Agreements shall be invalid

or unenforceable, the validity, legality and enforceability of the

remaining provisions thereof shall not in any way be affected or

impaired, nor, nor shall any invalidity or unenforceability as to

any Mortgagee hereunder affect or impair the rights hereunder of any

other Mortgagee.

Section 6.05. Mortgage Deemed Security Agreement: To the extent

that any of the property described or referred to in this Mortgage

is governed by the provisions of the UCC this Mortgage is hereby

deemed a ``security agreement'' under the UCC, and, if so elected by

any Mortgagee, a ``financing statement'' under the UCC for said

security agreement. The mailing addresses of the Mortgagor as

debtor, and the Mortgagees as secured parties are as set forth in

section 6.04 hereof. If any Mortgagee so directs the Mortgagor to do

so, the Mortgagor shall file as a financing statement under the UCC

for said security agreement and for the benefit of all of the

Mortgagees, an instrument other than this Mortgage. In such case,

the instrument to be filed shall be in a form customarily accepted

by the filing office as a financing statement.

Section 6.06. Indemnification by Mortgagor of Mortgagees: The

Mortgagor agrees to indemnify and save harmless each Mortgagee

against any liability or damages which any of them may incur or

sustain in the exercise and performance of their rightful powers and

duties hereunder. For such reimbursement and indemnity, each

Mortgagee shall be secured under this Mortgage in the same manner as

the Notes and all such reimbursements for expense or damage shall be

paid to the Mortgagee incurring or suffering the same with interest

at the rate specified in Section 3.14 hereof.

In Witness Whereof, ____________ as Mortgagor, has caused this

Restated Mortgage and Security Agreement to be signed in its name

and its corporate seal to be hereunto affixed and attested by its

officers thereunto duly authorized, and UNITED STATES OF AMERICA, as

Mortgagee, and ____________, as Mortgagee, has caused this Restated

Mortgage and Security Agreement to be signed in its name by duly

authorized persons, all as of the day and year first above written.

----------------------------------------------------------------------

(SEAL)

By:--------------------------------------------------------------------

President

Attest:----------------------------------------------------------------

Title:-----------------------------------------------------------------

Executed by the Mortgagor in the presence of:

----------------------------------------------------------------------

----------------------------------------------------------------------

Witnesses

UNITED STATES OF AMERICA

By:--------------------------------------------------------------------

Director, of the Rural Electrification Administration

Executed by the United States of America,

Mortgagee, in the presence of:

----------------------------------------------------------------------

----------------------------------------------------------------------

Witnesses

----------------------------------------------------------------------

By:--------------------------------------------------------------------

(SEAL)

Attest:----------------------------------------------------------------

Title:-----------------------------------------------------------------

Executed by the above-named Mortgagee in the presence of:

----------------------------------------------------------------------

----------------------------------------------------------------------

Witnesses

Schedule A--Maximum Debt Limit and Other Information

1. The Maximum Debt Limit is ____________.

2. The Original Mortgage as described in the first WHEREAS

clause above is ____________.

3. The outstanding secured indebtedness described in the fourth

WHEREAS clause above as evidenced by the Original Notes is as

follows:

Schedule B--Property Schedule

The fee and leasehold interests in real property referred to in

Section Subclause (a) of Granting Clause One are ____________.

The counties referred to in Subclause (b) of Granting Clause One

are ____________.

Schedule C--Excepted Property

[List of all Excepted Property.]

Schedule D--Notary Public Certification

STATE OF ____________)

COUNTY OF ____________)

On this ______ day of____________, 19______, before me appeared

____________ and ____________ personally known, by me and having

been duly sworn by me, did say that they are the President and

Secretary, respectively, of ____________, a ____________

corporation, and that the seal affixed to the foregoing instrument

is the corporate seal of said corporation, and that said instrument

was signed and sealed in behalf of said corporation by authority of

its Board, and said ____________ and ____________ acknowledged that

the execution of said instrument was a free act and deed of said

corporation.

IN WITNESS whereof, I have hereunto set my hand and official

seal the day and year last above written.

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Notary Public

(Notarial Seal)

My commission expires:

DISTRICT OF COLUMBIA ) SS

The foregoing instrument was acknowledged before me this

____________ day of 19______ , by ____________ Director,

____________ Regional Division of the Rural Electric Administration,

acknowledging an agency of the United States of America, on behalf

of the Rural Electrification Administration, United States of

America.

----------------------------------------------------------------------

Notary Public

(Notarial Seal)

My Commission expires:

Dated: September 21, 1994.

Bob J. Nash,

Under Secretary, Small Community and Rural Development.

[FR Doc. 94-23924 Filed 9-28-94; 8:45 am]

BILLING CODE 3410-15-P