Loan Policies and Security Documents for Electric Borrowers

Federal RegisterJul 18, 1995

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SUMMARY: The Rural Utilities Service (RUS) hereby proposes to establish

new policies and requirements for loan contracts ordinarily required

for loans made to electric distribution borrowers. The rule would

update and clarify the framework for loan contract provisions, conform

loan contract provisions with the new form of mortgage recently

approved, and provide greater flexibility in addressing the financial

needs of individual borrowers and the credit risks involved with

individual lending situations. Conforming amendments to RUS lien

accommodation requirements and changes to RUS operational controls are

also proposed.

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

equivalent by September 18, 1995.

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

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

Agriculture, Rural Utilities Service, room 2234-S, Ag Box 1522, 14th

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

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

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

business hours (7 CFR 1.27(b)).

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

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

Rural Utilities Service, room 4037-S, Ag Box 1560, 14th Street &

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

720-9547.

SUPPLEMENTARY INFORMATION: This rule has been determined to be not

significant for the purposes of Executive Order 12866, and therefore

has not been reviewed by the Office of Management and Budget (OMB). The

Administrator of RUS has determined that the Regulatory Flexibility Act

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

of RUS has determined that this rule will not significantly affect the

quality of the human environment as defined by the National

Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.). Therefore,

this action does not require an environmental impact statement or

assessment. This rule is excluded from the scope of Executive Order

12372, Intergovernmental Consultation, which may require consultation

with State and local officials. A Notice of Final Rule titled

Department Programs and Activities Excluded from Executive Order 12372

(50 FR 47034) exempts RUS electric loans and loan guarantees from

coverage under this Order. This rule has been reviewed under Executive

Order 12778, Civil Justice Reform. This rule: (1) Will not preempt any

State or local laws, regulations, or policies, unless they present an

irreconcilable conflict with this rule; (2) Will not have any

retroactive effect; and (3) Will not require administrative proceedings

before any parties may file suit challenging the provisions of this

rule.

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

Federal Domestic Assistance Programs under number 10.850 Rural

Electrification Loans and Loan Guarantees. This catalog is available on

a subscription basis from the Superintendent of Documents, the United

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

Information Collection and Recordkeeping Requirements

The existing recordkeeping and reporting burdens contained in this

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

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

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

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, NEOB, Washington, DC 20503.

Attention: Desk Officer for USDA.

Background

On September 29, 1994, at 59 FR 49594, the Rural Utilities Service

(RUS) published a proposed rule, 7 CFR 1718 Loan Security Documents for

Electric Borrowers, Subpart B Mortgage for Distribution Borrowers,

which proposed the agency's policies and requirements for mortgages

used to secure direct and guaranteed loans made to electric

distribution borrowers. The final rule for such mortgages is published

elsewhere in this issue of the Federal Register.

This proposed rule sets forth proposed amendments to RUS

regulations to update the agency's policies and requirements regarding

loan contracts with distribution borrowers. These new policies and

requirements are designed to complement the new distribution mortgage.

The changes proposed today are in four different segments:

A new Subpart C--Loan Contracts with Distribution

Borrowers, to be added to 7 CFR part 1718. This proposed subpart sets

forth agency policies and requirements regarding the scope, content,

and usage of new loan contracts with distribution borrowers.

A new Subpart M--Operational Controls, to be added to 7

CFR part 1717. This proposed new subpart outlines the main operational

controls relating to new mortgages and loan contracts of distribution

borrowers, and also modifies certain controls relating to existing

mortgages and loan contracts of distribution and/or power supply

borrowers.

Proposed revisions to 7 CFR part 1717, Subpart R--Lien

Accommodations and Subordinations for 100 Percent Private Financing.

These revisions would adapt RUS policies and requirements regarding

lien accommodations to the new loan contracts and mortgages.

A limited number of proposed changes to 7 CFR part 1710 to

conform those provisions to the new mortgages and loan contracts.

In addition to inviting written comments from the public on this

proposed rule, 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.

7 CFR Part 1718, Subpart C--Loan Contracts With Distribution

Borrowers

This new subpart would establish agency policies and requirements

regarding the scope, content, and usage of new loan contracts with

distribution borrowers. These policies are intended to complement those

for new distribution mortgages, and to reflect changes in the electric

industry and the RUS program over the past several years.

[[Page 36905]]

Distribution borrowers that obtain a loan or loan guarantee from

RUS after the effective date of this rule would be required to execute

a new loan contract and mortgage based on the policies and requirements

established by the new rules. Distribution borrowers obtaining other

financial assistance from RUS after the effective date of this rule may

be required by RUS to execute a new mortgage and loan contract. If

there are other co-mortgagees on the borrower's existing mortgage,

which there are in most cases, the borrower would have to obtain the

approval of these co-mortgagees before executing a new mortgage.

Distribution borrowers receiving a loan during the transition

period between now and the date the new model loan contract is

published in final form in the Federal Register may opt to execute the

new model mortgage and the proposed model loan contract. Such borrowers

will have the further option of executing the final form of the model

loan contract after it is published in the Federal Register.

Distribution borrowers receiving a loan during the period after

publication of the final form of the new model loan contract but before

its effective date may opt for the final forms of both the model loan

contract and the model mortgage.

Other borrowers not obtaining a new loan from RUS could request

that a new mortgage and loan contract be executed, for example, in

connection with a lien accommodation request or if the borrower is

trying to expand its access to future private financing. RUS will

attempt to honor these requests, but may be constrained by time and

staff limitations.

The policies and requirements proposed in new Subpart C are

designed to provide flexibility in dealing with the different financial

needs, credit risks and other circumstances of individual borrowers and

individual lending situations. This is intended to enable RUS to

respond more quickly and effectively to the special and changing needs

of individual borrowers, while at the same time meeting the

government's need for loan security under different lending

circumstances.

Under this approach, RUS and borrowers would have the flexibility

to negotiate different loan contract provisions depending on individual

circumstances and needs. This would go beyond the current situation

where special needs and requirements are dealt with almost exclusively

in the ``special provisions'' section of a loan contract or contract

amendment. It is anticipated that the provisions in the model loan

contact will be suitable in most cases. Since drafting and approving

customized contract provisions would be more time consuming and could

delay approval of a loan, RUS will consider such modifications only

when they are needed to address individual needs or problems.

Proposed section 1718.103 sets forth the scope and content of loan

contracts to be used with distribution borrowers in combination with

new mortgages executed under 7 CFR Part 1718, Subpart B. The proposed

section establishes the general requirements for loan contracts, in

most cases leaving the specific language of individual provisions to be

determined in the drafting of the loan contracts. An example of such a

model loan contract is presented in Appendix A. This model represents

one example of a loan contract drafted pursuant to this proposed new

rule. Other loan contracts could vary substantially from this example

in response to the financing needs of individual borrowers and the

credit risks involved in those individual lending situations. It is

anticipated that individual provisions of the model will be refined

over time to reflect experience gained from use of the model and to

respond to the rapidly changing electric industry.

Proposed Sec. 1718.103, as reflected in the model contract in

Appendix A, attempts to streamline, simplify and clarify loan contract

provisions. A substantial number of restrictive covenants, complex

provisions, and other outdated requirements contained in the present

form of loan contract would be eliminated. Also, RUS is abandoning the

practice of using the same loan contract with a series of amendments to

cover all RUS loans throughout the lending relationship, which spans

more than 50 years in many cases. Instead, RUS intends to use the

approach followed by other lenders of using a new loan contract with

each loan. This approach is intended to simplify administration for all

parties and to guard against the use of outdated loan documentation.

Historically, RUS loan contracts have contained sweeping powers

favoring the Administrator. In the absence of any explicit rulemaking

authority in the Rural Electrification Act as originally enacted, these

contracts together with their related mortgages lay the foundation for

most RUS regulations. RUS has administered these loan documents through

a variety of methods, including case-by-case determinations, letters

from the Administrator to all borrowers or a group of borrowers, and

notice and comment rulemaking.

RUS intends to retain these flexible approaches to program

administration, including the practice of establishing the rights and

limitations of the lending relationship broadly in the loan documents

and subsequently refining them in regulations. Thus many provisions of

the proposed model contract are stated in very broad terms which can be

fully understood only in the context of the agency's regulations.

For example, most proposed covenants or ``operational controls'' in

the model contract are expressed in broad language, although in some

cases the language is narrower and more focused than in existing loan

contracts. Such language leaves room for unforeseen circumstances,

which can be addressed more specifically through RUS regulations. In

most cases RUS intends to cut back the reach of these provisions

through its regulations, as it did recently in the publication of the

final rule 7 CFR part 1726 on construction policies and procedures (at

60 FR 10151), as well as in the recent publication of proposed

revisions to controls on borrowers' investments (at 60 FR 8981). Under

today's proposed rule, several additional operational controls would be

eliminated from loan contracts, and several others would be cut back,

as described below.

Some may argue that the controls and approval rights contained in

the RUS loan contract itself ought to be more limited and more narrowly

focused than what is being proposed today. RUS recognizes that approach

may appear desirable from an individual borrower's standpoint. However,

from the standpoint of administering a program serving nearly 1,000

utility systems and responding to the diverse interests of this group,

the Congress, the Executive Branch, and other interested parties, RUS

believes that the proposed approach is administratively less costly,

less time-consuming, more flexible, and better able to respond quickly

to changing needs and circumstances.

Certain provisions that had been included in the proposed mortgage

for distribution borrowers, but deleted in the final rule, are proposed

for inclusion in the loan contract. These provisions include the rate

covenant, limitations on retirements of capital credits and other

distributions, certain tests for the issuance of debt that had been

included in sections 2.01 and 2.02 of the proposed mortgage, and

limitations on the issuance of unsecured debt. These changes are

discussed in the final rule on the mortgage published elsewhere in this

Federal Register.

[[Page 36906]]

7 CFR part 1717, Subpart M--Operational Controls

Proposed Subpart M of 7 CFR part 1717 serves several purposes.

First, it outlines the main operational controls that would apply to

distribution borrowers under the proposed new loan contacts. In many

cases, such operational controls are further defined in other RUS

regulations. Second, it establishes the circumstances under which RUS

approval is granted or an exception to a requirement is established

with respect to certain controls. Third, it extends these approvals and

exceptions to existing loan contracts and mortgages of distribution

borrowers and/or power supply borrowers.

Since proposed Subpart M would address only the main operational

controls, failure to include an operational control under Subpart M

would not invalidate operational controls contained in other RUS

regulations. Also, the approvals and exceptions that would be granted

by Subpart M would apply only to operational controls normally included

in loan contracts and mortgages. They would not apply to special

controls and requirements included in loan documents to deal with

special circumstances of individual borrowers.

Proposed Subpart M is not intended to exhaust the treatment of

operational controls. RUS is continuing to review this matter and will

be proposing further changes. For example, proposed revisions to RUS

policies and procedures regarding system design and architectural and

engineering services are currently being drafted.

Extensions and additions. Under proposed Sec. 1717.603, prior

written approval by RUS would be required before a distribution

borrower could extend or add to its electric system if the facilities

will be financed by RUS (including reimbursements). If they won't be

financed by RUS (wholly or partially), approval would not be required

except for:

Construction or procurement of generating facilities of

any size.

Acquisition of existing electric facilities or systems in

service.

Construction or procurement of electric facilities to

serve a customer whose annual kWh purchases or maximum annual kW demand

is projected to exceed 25 percent of the borrower's total kWh sales or

maximum kW demand in the year immediately preceding the acquisition or

start of construction.

Prior written approval from RUS would also be required before power

supply borrowers could extend or add to their electric systems if the

facilities will be financed by RUS. Approval requirements when the

facilities will not be financed by RUS are or will be set forth in

other RUS regulations.

Long-range engineering plans and construction work plans. Proposed

Sec. 1717.604 would continue to require all borrowers to maintain up-

to-date long-range engineering plans and construction work plans (CWP).

However, these plans would not be subject to RUS approval if the

borrower does not intend to seek RUS financing for the facilities and

other purposes covered by the plans. If requested by RUS, borrowers

would have to provide a copy of such plans for RUS review. Applications

for RUS financing would continue to be required to be supported by a

long-range engineering plan and CWP approved by RUS.

Design standards, plans and specifications, construction standards,

and list of materials. Proposed Sec. 1717.605 would continue to require

all borrowers, regardless of the source of funding, to follow

applicable RUS requirements regarding system design, plans and

specifications, construction standards, and the use of RUS accepted

materials.

Construction contracts, and engineering and architectural services

contracts. Under proposed Sec. 1717.606 borrowers would be encouraged

to use RUS standard forms of contracts for construction, materials,

equipment, engineering services, and architectural services regardless

of the source of funding. They would be required to use the standard

contract forms only if funding for the construction, procurement, or

services is provided by RUS.

Contract bidding requirements. Proposed Sec. 1717.607 would

reiterate current policy that RUS requirements regarding bidding for

construction, materials and equipment contracts apply only if the

construction or procurement will be financed by RUS.

RUS approval of contracts. Proposed Sec. 1717.608 would establish

requirements and grant RUS approval with respect to certain contracts.

This section is not complete. Further work needs to be done, and RUS

will propose additional rules updating contract approval requirements

when those decisions are made.

This proposed section would reiterate current policy in 7 CFR part

1726 that RUS approval of contracts for construction, materials,

equipment, and architectural and engineering services would be required

only if the construction, procurement or services are financed by RUS.

RUS approval of contracts to sell electric power to retail

customers would be required only if the contract is for longer than two

years and the kWh sales or kW demand for any year covered by the

contract exceeds 25 percent of the borrower's total kWh sales or

maximum kW demand for the year immediately preceding execution of the

contract.

RUS approval of power supply arrangements, including power supply

contracts, interconnection agreements, interchange agreements, wheeling

agreements, pooling agreements, and any other similar arrangements

would be granted if they have a term of two years or less. Amendments

to such arrangements would also be approved if the amendment would not

extend the term of the arrangement for more than two years beyond the

date of the amendment. The rule would also grant approval for any

amendment to a schedule or exhibit contained in any power supply

arrangement, which would have the mere effect of either altering a list

of interconnection or delivery points or changing the value of a

variable term (but not the formula itself) contained in a formulary

rate or charge.

RUS approval of contracts for the management and operation of a

borrower's electric system or for the maintenance of the electric

system would be required only if such contracts cover all or

substantially all of the electric system.

RUS approval of general manager. Most existing mortgages or loan

contracts give RUS the unconditioned right to approve a borrower's

general manager and the manager's employment contract. Proposed

Sec. 1717.609 would grant RUS approval for all borrowers that are in

compliance with all provisions of their loan documents and any other

agreements with RUS. It is further proposed that new loan contracts

generally will not give RUS unconditioned approval rights over general

managers. Under new loan contracts, RUS would have the right to replace

the manager or approve a new manager when a vacancy occurs only if the

borrower is in default under its mortgage, loan contract, or other

agreement with RUS. This should greatly reduce the times when RUS

approval of a general manager is required.

RUS approval of compensation of the board of directors. Most

existing mortgages or loan contracts require the borrower to obtain RUS

approval of any compensation provided to the members of the borrower's

board of directors.

[[Page 36907]]

Such approval requirement will not be included in new mortgages or in

the proposed loan contract, and proposed Sec. 1717.610 would waive this

requirement for existing mortgages and loan contracts.

RUS approval of expenditures for legal, engineering, and

supervisory services. Most existing mortgages or loan contracts require

borrowers to obtain RUS approval before making expenditures for legal,

engineering, and supervisory services, other than ``routine''

expenditures. Proposed Sec. 1717.611 would grant RUS approval of

expenditures for legal and supervisory services regardless of the

source of funding, and for engineering services if they are not funded

by RUS. Approval requirements for engineering services financed by RUS

are set forth in other RUS regulations.

RUS approval of borrower's bank or other depository. Most existing

mortgages or loan contracts give RUS the right to approve the bank or

other depositories used by a borrower. Proposed Sec. 1717.612 would

grant RUS approval of the borrower's bank or other depositories

provided that they are insured by the Federal Deposit Insurance

Corporation or other Federal agency acceptable to RUS. Proposed new

loan contracts would not grant RUS such authority, but would require

that funds from loans made or guaranteed by RUS be deposited in a bank

or other depository insured by the Federal Deposit Insurance

Corporation or other Federal agency acceptable to RUS, unless prior

written approval is obtained from RUS.

110 Percent Borrowers. It is recognized that the proposed changes

in operational controls applicable to borrowers in general will, if

adopted, require some changes in the exceptions to RUS controls

applicable to borrowers with a net worth of at least 110 percent of the

outstanding debt owed to RUS. The interim final rule on such exceptions

was published in the Federal Register on January 28, 1994 at 59 FR

3982. After comments are received on the proposed rule published today,

RUS will review those comments as well as those received on the interim

final rule (7 CFR 1710.7, 7 CFR 1717.860, and 7 CFR 1717.904) and then

publish both rules in final form.

7 CFR Part 1717, Subpart R--Lien Accommodations and Subordinations

for 100 Percent Private Financing

Changes are proposed to 7 CFR part 1717, subpart R, to adapt RUS

policies and requirements for lien accommodations and subordinations to

the new distribution mortgage. Most of these changes are conforming

technical changes, a few are substantive in nature.

Section 1717.850 General

Under new mortgages for distribution borrowers, borrowers will be

able to issue additional secured debt without the approval of RUS or

the other mortgagees if the borrowers meet the criteria in section 2.01

of their mortgages. Also, if they meet the criteria in section 2.02 of

their mortgages, borrowers will be able to issue secured debt to

refinance existing secured debt without approval of the mortgagees.

If borrowers meet the criteria in section 2.01 or 2.02, debt issued

under those sections will automatically be secured under the mortgage

and will not require a lien accommodation from RUS or other mortgagees.

Thus the lien accommodation regulation, 7 CFR 1717 subpart R, would not

apply to such financing. This is true even if approval from RUS is

required under the RUS loan contract due to criteria or restrictions

included in the loan contract. While the borrower would be required to

obtain prior RUS approval in such cases, a lien accommodation would not

be required if the financing met the requirements of section 2.01 or

2.02 of the new mortgage.

Several technical amendments are proposed to 1717.850. Paragraph

(a) would be revised to indicate, as discussed above, that Subpart R

applies only to the issuance of secured debt that does not meet the

criteria of section 2.01 or 2.02 of the new mortgage. Paragraph (b)

would be revised to include the four community infrastructure purposes

eligible under section 2.01 of the new mortgage as also being eligible

for a lien accommodation under Subpart R.

Paragraph (f) would be substantially revised to eliminate the

requirement that the borrower provide RUS with a written agreement that

it will: comply with the National Electric Safety Code; use only RUS

accepted materials where applicable; comply with RUS construction

standards; follow a CWP approved by RUS; and provide an engineer's

certification after completion of construction that the construction

was done in compliance with RUS requirements. While this certification

would no longer be required, the borrower would continue to be required

to comply with RUS standards regarding facility and system planning and

design, construction, procurement, and the use of materials accepted

and listed by RUS. Elimination of the certification would reduce the

administrative burden on borrowers.

A minor technical change would be made to paragraph (g)(1) to

conform with proposed changes to 7 CFR part 1710, subpart F, (discussed

later) to the effect that construction work plans would not have to be

approved by RUS unless the borrower intends to seek RUS financing for

facilities or other purposes covered by the plan. Also, a technical

change is proposed to paragraph (h)(2) to eliminate references to

sections of the mortgage and loan contract with respect to prior

approval or waiver of approval of certain borrower actions granted by

paragraphs (g)(1) and (h)(1) of this section. Such references to the

loan documents will be confusing as new mortgages and loan contracts

are executed with some borrowers, while other borrowers are still

operating under the old loan documents. Moreover, as RUS continues to

codify more and more of its regulations relating to RUS approvals and

controls, references to specific provisions of the loan documents

relating to prior approval and waivers granted by such regulations will

become less meaningful.

Finally, changes are proposed to paragraph (m) of this section to

broaden the requirements and conditions under Subpart R that may be

waived by the Administrator of RUS if it's in the financial interests

of the government. Also, the meaning of the financial interests of the

government would be clarified.

Section 1717.852 Financing Purposes

With two exceptions, all of the proposed changes to Sec. 1717.852

are basically technical changes to conform the section with the new

mortgage. A new paragraph (a)(3) would be added to add to eligible lien

accommodation purposes the four community infrastructure purposes

eligible for financing without mortgagee approval under section 2.01 of

the new mortgage. The four purposes are water and waste disposal

systems, solid waste disposal systems, telecommunication and other

electronic communication systems, and natural gas distribution systems.

Other infrastructure and other rural development projects would

continue to be eligible for a lien accommodation if the Administrator

determines its in the government's financial interests. They would also

continue to be eligible for a lien subordination under the terms of

Sec. 1717.858, to which no changes are being proposed.

Paragraph (a)(1) would be amended by adding steam power to electric

power as an eligible purpose for lien accommodations. RUS has received

lien accommodation requests from borrowers where the financing was

needed to supply both electric power and steam power to the customer.

The

[[Page 36908]]

requests have been approved after a special finding by RUS that the

accommodation of the government's lien was in the government's

financial interest. By adding steam power as an eligible purpose, the

special finding would no longer be required, which should expedite the

review of such applications.

Existing paragraph (a)(4) would be redesignated (a)(5) and the

limit on transaction costs eligible for lien accommodation would be

raised from 3.5 percent of loan proceeds to 5 percent. No other changes

are proposed to paragraph (a) other than renumbering of the

subparagraphs. Minor technical changes would be made to the wording in

paragraph (b) to reflect the addition of the four community

infrastructure purposes to the purposes generically eligible for a lien

accommodation, and to broaden the scope of purposes eligible in

connection with cogeneration projects. Also, paragraph (b)(2) would be

removed since it would be redundant with the proposed expanded scope of

Sec. 1717.850(m).

Section 1717.854 Advance Approval.

Minor technical amendments are proposed to paragraphs (a) and (b)

to reflect the proposed addition of the four community infrastructure

purposes to the purposes generically eligible for a lien accommodation,

and thus eligible for advance approval.

Changes are proposed to paragraph (c) to conform the financial

criteria for eligibility for advance approval of a lien accommodation

to those contained in section 2.01 of the new mortgage. Thus the

existing two-part interest coverage and equity tests in paragraph (c)

would be replaced with the interest coverage, equity, and net utility

plant tests contained in section 2.01 of the new mortgage. With this

change borrowers under the ``old'' existing mortgage would be subject

to the same basic financial tests in qualifying for advance approval of

a lien accommodation as borrowers under section 2.01 of the new

mortgage in issuing additional secured debt without mortgagee approval.

The latter borrowers would not require a lien accommodation, and thus

1717.854 would no longer be relevant for them.

The proposed new tests in paragraph (c) are a Times Interest Earned

Ratio (TIER) of at least 1.5 and Debt Service Coverage (DSC) of at

least 1.25 in each of the past two years, equity of at least 27 percent

after debt issuance, and a ratio of net utility plant to long-term debt

of at least 1.0 after debt issuance. In addition, the existing

limitation of variable rate debt to 15 percent of all outstanding debt

would be eliminated by removing paragraph (c)(7). This limitation on

variable rate debt would also be eliminated from advance approvals of

lien accommodations for refinancing loans by removing paragraph (a)(5)

from 1717.857.

A few minor technical changes are proposed to Sec. 1717.855 and

1717.856, primarily to conform them with the proposed addition of the

four community infrastructure purposes to the purposes generically

eligible for a lien accommodation, and to eliminate the certification

from borrowers that they will comply with RUS construction standards

and CWP requirements.

Finally, no changes are proposed to 7 CFR part 1717, Subpart S,

regarding lien accommodations for concurrent supplemental loans. Such

loans must continue to meet the same requirements as insured loans made

by RUS.

7 CFR Part 1710--General and Pre-Loan Policies and Procedures

Common to Insured and Guaranteed Electric Loans

Section 1710.103 Area coverage. A technical change is proposed to

delete the statement which could be interpreted that the loan contract

must include the exact language of Sec. 1710.103 with respect to area

coverage requirements. That never was the intent. The proposed

technical change is consistent with the general approach that the loan

contract should provide the general authority for a requirement or

control, while RUS regulations should provide the specific details and

often narrow the focus of the general authority provided in the loan

contract.

Section 1710.114 TIER, DSC, OTIER and ODSC requirements. It is

proposed that the rate covenant be shifted from the mortgage to the

loan contract, and that an Operating Times Interest Earned Ratio

(OTIER) and an Operating Debt Service Coverage (ODSC), both set at a

minimum of 1.1, be added to the existing TIER and DSC requirements for

distribution borrowers. The reasons for these changes are discussed in

the background section of the final rule on the distribution mortgage

published elsewhere in this issue of the Federal Register.

Long-range engineering plans and construction work plans. Under

section 1710.250, all borrowers would continue to be required to

maintain up-to-date long-range engineering plans and construction work

plans, but the plans would not have to be approved by RUS unless the

borrower intends to seek RUS financing. Applications for RUS financing

would continue to have to be supported by an RUS-approved long-range

engineering plan and CWP. RUS approval of these plans would be with

respect to only those facilities to be financed by RUS, and as to

whether the plans provide an acceptable basis, from a planning and

engineering standpoint, for approving the RUS financing.

A new paragraph (k) would be added to this section authorizing RUS

to waive certain requirements with respect to long-range engineering

plans and construction work plans if RUS determines that the

requirements impose a substantial burden on the borrower and that

waiving the requirements will not significantly affect the

accomplishment of the objectives of the regulation. For example, RUS

could waive certain requirements relating to load growth if the

borrower's growth is stagnant or declining.

List of Subjects

7 CFR Part 1710

Electric power, Electric utilities, Loan programs--energy, Rural

areas.

7 CFR Part 1717

Administrative practice and procedure, Electric power, Electric

utilities, Intergovernmental relations, Investments, Lien

accommodation, Lien subordination, Loan programs--energy, Operational

controls, Reporting and recordkeeping requirements, Rural areas.

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 explained in the preamble and under the authority

of 7 U.S.C. 901 et seq., RUS proposes to amend 7 CFR Chapter XVII as

follows:

PART 1710--GENERAL AND PRE-LOAN POLICIES AND PROCEDURES COMMON TO

INSURED AND GUARANTEED ELECTRIC LOANS

1. The authority citation for part 1710 is revised to read as

follows:

Authority: 7 U.S.C. 901-950b; Public Law 99-591, 100 Stat, 3341-

16; Public Law 103-354, 108 Stat. 3178 (7 U.S.C. 6941 et seq.).

2. Section 1710.2 is amended in paragraph (a) by adding the

following definitions in alphabetical order to read as follows:

Sec. 1710.2 Definitions and rules of construction.

(a) Definitions. * * *

* * * * *

[[Page 36909]]

Electric system means all of the borrower's interests in all

electric production, transmission, distribution, conservation, load

management, general plant and other related facilities, equipment or

property and in any mine, well, pipeline, plant, structure or other

facility for the development, production, manufacture, storage,

fabrication or processing of fossil, nuclear, or other fuel or in any

facility or rights with respect to the supply of water, in each case

for use, in whole or in major part, in any of the borrower's generating

plants, including any interest or participation of the borrower in any

such facilities or any rights to the output or capacity thereof,

together with all lands, easements, rights-of-way, other works,

property, structures, contract rights and other tangible and intangible

assets of the borrower in each case used or useful in such electric

system.

* * * * *

ODSC means Operating Debt Service Coverage of the electric system

calculated as:

[GRAPHIC][TIFF OMITTED]TP18JY95.009

where:

All amounts are for the same one-year period and are based on the

RUS system of accounts. References to line numbers in the RUS Form 7

refer to the June 1994 version of the form, and will apply to

corresponding information in future versions of the form;

A=Depreciation and Amortization Expense of the electric system,

which usually equals Part A, Line 12 of RUS Form 7;

B=Interest on Long-term Debt of the electric system, which usually

equals Part A, Line 15 of RUS Form 7, except that Interest on Long-term

debt shall be increased by \1/3\ of the amount, if any, by which the

rentals of Restricted Property of the electric system (Part M, Line 3

of RUS Form 7) exceeds 2 percent of Total Margins and Equities (Part C,

Line 36 of RUS Form 7);

C=Patronage Capital & Operating Margins of the electric system,

which usually equals Part A, Line 20 of RUS Form 7; and

D=Debt Service Billed (RUS+other) which equals all interest and

principal billed or billable during the calendar year for long-term

debt of the electric system plus \1/3\ of the amount, if any, by which

the rentals of Restricted Property of the electric system (Part M, Line

3 of RUS Form 7) exceeds 2 percent of Total Margins and Equities (Part

C, Line 36 of RUS Form 7).

* * * * *

OTIER means Operating Times Interest Earned Ratio of the electric

system calculated as:

[GRAPHIC][TIFF OMITTED]TP18JY95.000

where:

All amounts are for the same one-year period and are based on the

RUS system of accounts. References to line numbers in the RUS Form 7

refer to the June 1994 version of the form, and will apply to

corresponding information in future versions of the form;

A=Interest on Long-term Debt of the electric system, which usually

equals Part A, Line 15 of RUS Form 7, except that Interest on Long-term

debt shall be increased by \1/3\ of the amount, if any, by which the

rentals of Restricted Property of the electric system (Part M, Line 3

of RUS Form 7) exceeds 2 percent of Total Margins and Equities (Part C,

Line 36 of RUS Form 7); and

B=Patronage Capital & Operating Margins of the electric system,

which usually equals Part A, Line 20 of RUS Form 7.

* * * * *

Sec. 1710.103 [Amended]

3. Section 1710.103 is amended by removing in paragraph (b) the

sentence ``The loan contract shall contain provisions to this

effect.''.

4. Section 1710.114 is revised as follows:

Sec. 1710.114 TIER, DSC, OTIER and ODSC requirements.

(a) General. Requirements for coverage ratios are set forth in the

borrower's mortgage, loan contract, or other contractual agreements

with RUS. The requirements set forth in this section apply to borrowers

that receive a loan on or after February 10, 1992. Nothing in this

section, however, shall reduce the coverage-ratio requirements of a

borrower that has contractually agreed with RUS to a higher

requirement.

(b) Coverage ratios. (1) Distribution borrowers. The minimum

coverage ratios required of distribution borrowers, whether applied on

an annual or average basis, are a TIER of 1.50, DSC of 1.25, OTIER of

1.1, and ODSC of 1.1. OTIER and ODSC shall apply to distribution

borrowers that receive a loan on or after [the effective date of the

final rule].

(2) The minimum coverage ratios required of power supply borrowers,

whether applied on an annual or average basis, are a TIER of 1.05 and

DSC of 1.00.

(3) When new loan contracts are executed, the Administrator may,

case by case, increase the coverage ratios of distribution and power

supply borrowers above the levels cited in paragraphs (b)(1) and

(b)(2), respectively, of this section if the Administrator determines

that the higher ratios are required to ensure reasonable security for

and/or the repayment of loans made or guaranteed by RUS. Also, the

Administrator may, case by case, reduce said coverage ratios if the

Administrator determines that the lower ratios are required to ensure

reasonable security for and/or the repayment of loans made or

guaranteed by RUS.

(4) If a distribution borrower has in service or under construction

a substantial amount of generation and associated transmission plant

financed at a cost of capital substantially higher than the cost of

funds under section 305 of the RE Act, then the Administrator may

establish, in his or her sole discretion, blended levels for TIER, DSC,

OTIER, and ODSC based on the respective shares of total utility plant

represented by said generation and associated transmission plant and by

distribution and other transmission plant.

borrowers must demonstrate to RUS that they will, on a pro forma basis,

earn the coverage ratios required by paragraph (b) of this section in

each of the years included in the borrower's long-range financial

forecast prepared in support of its loan application, as set forth in

subpart G of this part.

(d) Requirements for maintenance of coverage ratios.--(1)

Prospective requirement. Borrowers must design and implement rates for

utility service to provide sufficient revenue (along with other revenue

available to the borrower in the case of TIER and DSC) to pay all fixed

and variable expenses, to provide and maintain reasonable working

capital and to maintain on an annual basis the coverage ratios required

by paragraph (b) of this section. Rates must be designed and

implemented to produce at least enough revenue to meet the requirements

of this paragraph under the assumption that average weather conditions

in the borrower's service territory will prevail in the future,

including average system damage and outages due to weather and the

related costs. Failure to design and implement rates pursuant to the

requirements of this paragraph shall be an event of default upon notice

provided in accordance with the terms of the borrower's mortgage or

loan contract.

[[Page 36910]]

(2) Retrospective requirement. The average coverage ratios achieved

by a borrower in the 2 best years out of the 3 most recent calendar

years must meet the levels required by paragraph (b) of this section.

If a borrower fails to achieve these average levels, it must promptly

notify RUS in writing. Within 30 days of such notification or of the

borrower being notified in writing by RUS, whichever is earlier, the

borrower, in consultation with RUS, must provide a written plan

satisfactory to RUS setting forth the actions that will be taken to

achieve the required coverage ratios on a timely basis. Failure to

develop and implement a plan satisfactory to RUS shall be an event of

default upon notice provided in accordance with the terms of the

borrower's mortgage or loan contract.

(3) Fixed and variable expenses, as used in this section, include

but are not limited to: all taxes, depreciation, maintenance expenses,

and the cost of electric power and energy and other operating expenses

of the electric system, including all obligations under the wholesale

power contract, all lease payments when due, and all principal and

interest payments on outstanding indebtedness when due.

(e) Requirements for advance of funds. (1) If a borrower applying

for a loan has failed to achieve the coverage ratios required by

paragraph (b) of this section during the latest 12 month period

immediately preceding approval of the loan, or if any of the borrower's

average coverage ratios for the 2 best years out of the most recent 3

calendar years were below the levels required in paragraph (b) of this

section, RUS may withhold the advance of loan funds until the borrower

has adopted an annual financial plan and operating budget satisfactory

to RUS and taken such other action as RUS may require to demonstrate

that the required coverage ratios will be maintained in the future and

that the loan will be repaid with interest within the time agreed. Such

other action may include, for example, increasing system operating

efficiency and reducing costs or adopting a rate design that will

achieve the required coverage ratios, and either placing such rates

into effect or taking action to obtain regulatory authority approval of

such rates. If failure to achieve the coverage ratios is due to unusual

events beyond the control of the borrower, such as unusual weather,

system outage due to a storm or regulatory delay in approving rate

increases, then the Administrator may waive the requirement that the

borrower take the remedial actions set forth in this paragraph,

provided that such waiver will not threaten loan feasibility.

(2) With respect to any outstanding loan made on or after February

10, 1992, if, based on actual or projected financial performance of the

borrower, RUS determines that the borrower may not achieve its required

coverage ratios in the current or future years, RUS may withhold the

advance of loan funds until the borrower has taken remedial action

satisfactory to RUS.

5. Section 1710.250 is amended by revising paragraphs (b) and (e)

and adding a new paragraph (k) to read as follows:

Sec. 1710.250 General.

* * * * *

(b) Generally, all borrowers are required to maintain up-to-date

long range engineering plans approved by their boards of directors.

Current CWPs approved by the borrower's board must also be developed

and maintained for distribution and transmission facilities and for

improvements and replacements of generation facilities. All such

distribution, transmission or generation facilities must be included in

the respective CWPs regardless of the source of financing.

* * * * *

(e) Applications for a loan or loan guarantee from RUS (new loans

or budget reclassifications) must be supported by a current CWP

approved by both the borrower's board of directors and RUS. RUS

approval of these plans relates only to the facilities, equipment, and

other purposes to be financed by RUS, and means that the plans provide

an adequate basis from a planning and engineering standpoint to support

RUS financing. RUS approval of the plans does not mean that RUS

approves of the facilities, equipment, or other purposes for which the

borrower is not seeking RUS financing. If RUS disagrees with a

borrower's estimate of the cost of one or more facilities for which RUS

financing is sought, RUS may adjust the estimate after consulting with

the borrower and explaining the reasons for the adjustment.

* * * * *

(k) Upon written request from a borrower, RUS may waive in writing

certain requirements with respect to long-range engineering plans and

CWPs if RUS determines that such requirements impose a substantial

burden on the borrower and that waiving the requirements will not

significantly affect the accomplishment of the objectives of this

subpart. For example, if a borrower's load is forecast to remain

constant or decline during the planning period, RUS may waive those

portions of the plans that relate to load growth.

Sec. 1710.251 [Amended]

6. Section 1710.251 is amended by removing the words ``and RUS''

from the first sentence of paragraph (a).

Sec. 1710.252 [Amended]

7. Section 1710.252 is amended by removing the words ``and RUS''

from the first sentence of paragraph (a).

PART 1717--POST-LOAN POLICIES AND PROCEDURES COMMON TO INSURED AND

GUARANTEED ELECTRIC LOANS

8. The authority citation for part 1717 continues to read as

follows:

Authority: 7 U.S.C. 901-950b; Pub. L. 103-354, 108 Stat. 3178 (7

U.S.C. 6941 et seq.), unless otherwise noted.

9. Subpart M is added to part 1717 to read as follows:

Subpart M--Operational Controls

Sec.

1717.600 General.

1717.601 Applicability.

1717.602 Definitions.

1717.603 RUS approval of extensions and additions.

1717.604 Long-range engineering plans and construction work plans.

1717.605 Design standards, plans and specifications, construction

standards, and RUS accepted materials.

1717.606 Standard forms of construction contracts, and engineering

and architectural services contracts.

1717.607 Contract bidding requirements.

1717.608 RUS approval of contracts.

1717.609 RUS approval of general manager.

1717.610 RUS approval of compensation of the board of directors.

1717.611 RUS approval of expenditures for legal, accounting,

engineering, and supervisory services.

1717.612 RUS approval of borrower's bank or other depository.

Subpart M--Operational Controls

Sec. 1717.600 General.

(a) General. The loan contract and mortgage between the Rural

Utilities Service (RUS) and electric borrowers imposes certain

restrictions and controls on the borrowers and gives RUS (and other co-

mortgagees in the case of the mortgage) the right to approve or

disapprove certain actions contemplated by the borrowers. Certain of

these controls and approval rights are referred to informally as

``operational controls'' because they pertain to decisions or actions

with respect to the operation of the borrowers' electric systems. The

approval authority granted to RUS by the loan contract or mortgage

regarding

[[Page 36911]]

each decision or action subject to controls is often stated in broad,

unlimited terms. This subpart lists the main operational controls

affecting borrowers and establishes for each area of control the

circumstances under which RUS approval of a decision or action by a

borrower is either required or not required. In some cases, only the

general principles or general circumstances pertaining to RUS approval

or control are presented in this subpart, while the details regarding

the circumstances and requirements of RUS approval or control are set

forth in other RUS regulations. Since this subpart addresses only the

main operational controls, failure to address a control or approval

right in this subpart in no way invalidates such controls or rights

established by the loan contract, mortgage, other agreements between a

borrower and RUS, and RUS regulations.

(b) Case by case amendments. Upon written notice to a borrower, RUS

may amend or annul the approvals and exceptions to controls set forth

in this subpart or other RUS regulations if the borrower is in

violation of any provision of its loan documents or any other agreement

with RUS, or if RUS determines that loan security and/or repayment is

threatened. Such amendment or annulment will apply to decisions and

actions of the borrower after said written notice has been provided by

RUS.

of borrowers, RUS may grant or waive approval of decisions and actions

by the borrowers that are controlled under the loan documents and RUS

regulations. RUS may also by written notice withdraw or cut back its

grant or waiver of approval of said decisions and actions made by

previous written notice, but may not by such notice extend its

authority to approve decisions and actions by borrowers beyond the

authority granted by the loan documents and RUS regulations.

Sec. 1717.601 Applicability.

(a) The approvals and exceptions to controls conveyed by this

subpart apply only to controls and approval rights normally included in

RUS loan documents. They do not apply to special controls and approval

requirements included in the loan documents or other agreements

executed between a borrower and RUS that relate to individual problems

or circumstances specific to an individual borrower.

(b) The provisions of this subpart apply to loan documents entered

into between borrowers and RUS, regardless of whether the documents

were executed before, on, or after [the effective date of the final

rule].

subpart shall not in any way affect the rights of other co-mortgagees

under the mortgage or their loan contracts.

Sec. 1717.602 Definitions.

Terms used in this subpart have the meanings set forth in 7 CFR

part 1710. In addition, for the purposes of this subpart:

Default means an event of default as defined in the borrower's loan

documents or other agreement with RUS, and furthermore includes any

event that has occurred and is continuing which, with notice or lapse

of time and notice, would become an event of default.

Financed or funded by RUS means financed or funded wholly or in

part by a loan made or guaranteed by RUS, including concurrent

supplemental loans required by 7 CFR 1710.110, loans to reimburse funds

already expended by the borrower, and loans to replace interim

financing.

Interchange agreement means a contractual arrangement that can

include a variety of services utilities provide each other to increase

reliability and efficiency, and to avoid duplicating expenses. Some

examples are: transmission service (the use of transmission lines to

move power and energy from one area to another); emergency service (an

agreement by one utility to furnish another with power and energy to

protect it in times of emergency, such as power plant outages); reserve

sharing (contributions to a common pool of generating plant reserves so

that each individual utility's reserves can be reduced); and economic

exchanges (swapping power and energy from different plants to avoid

running the most expensive units).

Interconnection agreement means a contract governing the terms for

establishing or using one or more electrical connections between two or

more electric systems permitting a flow of power and energy among the

systems.

Loan documents means the mortgage (or other security instrument

acceptable to RUS), the loan contract, and the promissory note entered

into between the borrower and RUS.

Pooling agreement means a contract among two or more interconnected

electric systems to operate on a coordinated basis to achieve economies

and/or enhance reliability in supplying their respective loads.

Power supply contract means any contract entered into by a borrower

for the sale or purchase, at wholesale, of electric energy.

Wheeling agreement means a contract providing for the use of the

electric transmission facilities of one electric utility to transmit

power and energy of another electric utility or other entity to a third

party. Such transmission may be accomplished directly or by

displacement.

Sec. 1717.603 RUS approval of extensions and additions.

(a) Distribution borrowers. Prior written approval by RUS is

required for a distribution borrower to extend or add to its electric

system if the extension or addition will be financed by RUS. For

extensions and additions that will not be financed by RUS, approval is

hereby given to distribution borrowers to make such extensions and

additions to their electric systems, including the use of (or

commitment to use) general funds of the borrower, except for the

following:

(1) Construction, procurement, or leasing of generating facilities,

regardless of the size of the facilities;

(2) Acquisition or leasing of existing electric facilities or

systems in service; and

(3) Construction, procurement, or leasing of electric facilities to

serve a customer whose annual kWh purchases or maximum annual kW demand

in the foreseeable future is projected to exceed 25 percent of the

borrower's total kWh sales or maximum kW demand in the year immediately

preceding the acquisition or start of construction.

(b) Power supply borrowers. Prior written approval by RUS is

required for a power supply borrower to extend or add to its electric

system if the extension or addition will be financed by RUS.

Requirements for RUS approval of extensions and additions that will not

be financed by RUS are set forth in other RUS regulations.

of extensions and additions of a borrower's electric system financed by

RUS are set forth in other RUS regulations, e.g., in 7 CFR parts 1710

and 1726.

Sec. 1717.604 Long-range engineering plans and construction work

plans.

(a) All borrowers are required to maintain up-to-date long-range

engineering plans and construction work plans (CWPs) in form and

substance as set forth in 7 CFR part 1710, subpart F.

(b) Applications for financing from RUS must be supported by a

long-range engineering plan and CWP approved by RUS.

[[Page 36912]]

and CWPs if the borrower does not intend to seek RUS financing for any

of the facilities, equipment or other purposes included in those plans.

However, if requested by RUS, a borrower must provide an informational

copy of such plans to RUS.

Sec. 1717.605 Design standards, plans and specifications, construction

standards, and RUS accepted materials.

All borrowers, regardless of the source of funding, are required to

comply with applicable RUS requirements with respect to system design,

plans and specifications, construction standards, and the use of RUS

accepted materials. These requirements are set forth in other RUS

regulations, especially in 7 CFR parts 1724 and 1728.

Sec. 1717.606 Standard forms of construction contracts, and

engineering and architectural services contracts.

All borrowers are encouraged to use the standard forms of contracts

promulgated by RUS for construction, materials, equipment, engineering

services, and architectural services, regardless of the source of

funding for such construction and services. Borrowers are required to

use these standard forms of contracts only if the construction,

procurement or services are financed by RUS. RUS requirements with

respect to such standard forms of contract are set forth in 7 CFR part

1724 for architectural and engineering services, and in 7 CFR part 1726

for construction, materials, and equipment.

Sec. 1717.607 Contract bidding requirements.

Borrowers must follow RUS requirements regarding bidding for

contracts for construction, materials, and equipment only if financing

of the construction or procurement will be provided by RUS. These

requirements are set forth in 7 CFR part 1726.

Sec. 1717.608 RUS approval of contracts.

(a) Construction contracts and architectural and engineering

contracts. RUS approval of contracts for construction and procurement

and for architectural and engineering services is required only when

such construction, procurement or services are financed by RUS.

Detailed requirements regarding RUS approval of such contracts are set

forth in 7 CFR part 1724 for architectural and engineering services,

and in 7 CFR part 1726 for construction and procurement.

(b) Large retail power contracts. RUS approval of contracts to sell

electric power to retail customers is required only if the contract is

for longer than 2 years and the kWh sales or kW demand for any year

covered by the contract exceeds 25 percent of the borrower's total kWh

sales or maximum kW demand for the year immediately preceding execution

of the contract. This requirement applies regardless of the source of

funding of any plant extensions, additions or improvements that may be

involved in connection with the contract.

(including but not limited to economy energy sales and emergency power

and energy sales), interconnection agreements, interchange agreements,

wheeling agreements, pooling agreements, and any other similar power

supply arrangements subject to approval by RUS are deemed approved if

they have a term of 2 years or less. Amendments to said power supply

arrangements are also deemed approved provided that the amendment does

not extend the term of the arrangement for more than 2 years beyond the

date of the amendment.

(2) Any amendment to a schedule or exhibit contained in any power

supply arrangement subject to RUS approval, which merely has the effect

of either altering a list of interconnection or delivery points or

changing the value of a variable term (but not the formula itself)

contained in a formulary rate or charge is deemed approved.

(3) The provisions of this paragraph apply regardless of whether

the borrower is a seller or purchaser of the services furnished by the

contracts or arrangements, and regardless of whether or not a Federal

power marketing agency is a party to any of them.

(d) System management and maintenance contracts. RUS approval of

contracts for the management and operation of a borrower's electric

system or for the maintenance of the electric system is required only

if such contracts cover all or substantially all of the electric

system.

(e) Other contracts. [Reserved]

Sec. 1717.609 RUS approval of general manager.

(a) If a borrower's mortgage or loan contract grants RUS the

unconditioned right to approve the employment and/or the employment

contract of the general manager of the borrower's system, such approval

is hereby granted provided that the borrower is in compliance with all

provisions of its loan documents and any other agreements with RUS.

(b) If a borrower is in default with respect to any provision of

its loan documents or any other agreement with RUS:

(1) Such borrower, if directed in writing by RUS, shall replace its

general manager within 30 days after the date of such written notice;

and

(2) Such borrower shall not hire a general manager without prior

written approval by RUS.

Sec. 1717.610 RUS approval of compensation of the board of directors.

If a borrower's mortgage or loan contract requires the borrower to

obtain approval from RUS for compensation provided to members of the

borrower's board of directors, such requirement is hereby waived.

Sec. 1717.611 RUS approval of expenditures for legal, accounting,

engineering, and supervisory services.

(a) If a borrower's mortgage or loan contract requires the borrower

to obtain approval from RUS before incurring expenses for legal,

accounting, supervisory (other than for the management and operation of

the borrower's electric system, see Sec. 1717.608(d)), or other similar

services, such approval is hereby granted. However, while expenditures

for accounting do not require RUS approval, the selection of a

certified public accountant by the borrower to prepare audited reports

required by RUS remains subject to RUS approval.

(b) If a borrower's mortgage or loan contract requires the borrower

to obtain approval from RUS before incurring expenses for engineering

services, such approval is hereby granted if such services will not be

financed by RUS. Approval requirements with respect to engineering

services financed by RUS are set forth in other RUS regulations.

Sec. 1717.612 RUS approval of borrower's bank or other depository.

(a) If a borrower's mortgage or loan contract gives RUS the

authority to approve the bank or other depositories used by the

borrower, such approval is hereby granted provided that the bank or

other depositories are insured by the Federal Deposit Insurance

Corporation or other Federal agency acceptable to RUS.

(b) Without the prior written approval of RUS, a borrower shall not

deposit funds from loans made or guaranteed by RUS in any bank or other

depository that is not insured by the Federal Deposit Insurance

Corporation or other Federal agency acceptable to RUS.

10. Section 1717.850 is amended by revising paragraphs (a), (b),

(f), (g)(1)(ii), (h)(2), and (m) to read as follows:

Sec. 1717.850 General.

(a) Scope and applicability. (1) This subpart R establishes

policies and

[[Page 36913]]

procedures for the accommodation, subordination or release of the

Government's lien on borrower assets, including approvals of supporting

documents and related loan security documents, in connection with 100

percent private sector financing of facilities and other purposes.

Policies and procedures regarding lien accommodations for concurrent

supplemental financing required in connection with an RUS insured loan

are set forth in subpart S of this part.

(2) This subpart and subpart S of this part apply only to debt to

be secured under the mortgage, the issuance of which is subject to the

approval of the Rural Utilities Service (RUS) by the terms of the

borrower's mortgage with respect to the issuance of additional debt or

the refinancing or refunding of debt. If RUS approval is not required

under such terms of the mortgage itself, a lien accommodation is not

required. If the loan contract or other agreement between the borrower

and RUS requires RUS approval with respect to the issuance of debt or

making additions to or extensions of the borrower's system, such

required approvals do not by themselves result in the need for a lien

accommodation.

(b) Overall policy. (1) Consistent with prudent lending practices,

the maintenance of adequate security for RUS's loans, and the

objectives of the Rural Electrification Act (RE Act), it is the policy

of RUS to provide effective and timely assistance to borrowers in

obtaining financing from other lenders by sharing RUS's lien on a

borrower's assets in order to finance electric facilities, equipment

and systems, and certain other types of community infrastructure. In

certain circumstances, RUS may facilitate the financing of such assets

by subordinating its lien on specific assets financed by other lenders.

(2) It is also the policy of RUS to provide effective and timely

assistance to borrowers in promoting rural development by subordinating

RUS's lien for financially sound rural development investments under

the conditions set forth in Sec. 1717.858.

* * * * *

(f) Safety and performance standards. (1) To be eligible for a lien

accommodation or subordination from RUS, a borrower must comply with

RUS standards regarding facility and system planning and design,

construction, procurement, and the use of materials accepted by RUS, as

required by the borrower's mortgage, loan contract, or other agreement

with RUS, and as further specified in RUS regulations.

(2) RUS ``Buy American'' requirements shall not apply.

(g) * * *

(1) * * *

(ii) Obtain a certification from a registered professional

engineer, for each year during which funds from the separate subaccount

are utilized by the borrower, that all materials and equipment

purchased and facilities constructed during the year from said funds

comply with RUS safety and performance standards, as required by

paragraph (f) of this section, and are included in an CWP or CWP

amendment approved by the borrower's board of directors;

* * * * *

(h) * * *

(2) To the extent that provisions in a borrower's loan contract or

mortgage in favor of RUS may be inconsistent with paragraphs (g)(1) and

(h)(1) of this section, paragraphs (g)(1) and (h)(1) of this section

are intended to constitute an approval or waiver under the terms of

such instruments, and in any regulations implementing such instruments,

with respect to facilities financed with debt obtained entirely from

non-RUS sources without an RUS guarantee.

* * * * *

(m) Waiver authority. Consistent with the RE Act and other

applicable laws, any requirement, condition, or restriction imposed by

this subpart, or subpart S of this part, on a borrower, private lender,

or application for a lien accommodation or subordination may be waived

or reduced by the Administrator, if the Administrator determines that

said action is in the Government's financial interest with respect to

ensuring repayment and reasonably adequate security for loans made or

guaranteed by RUS.

* * * * *

11. Section 1717.851 is amended by removing the definitions for

``ODSC'' and ``OTIER'' and by adding the following definitions in

alphabetical order to read as follows:

Sec. 1717.851 Definitions.

* * * * *

Natural gas distribution system means any system of community

infrastructure whose primary function is the distribution of natural

gas and whose services are available by design to all or a substantial

portion of the members of the community.

* * * * *

Solid waste disposal system means any system of community

infrastructure whose primary function is the collection and/or disposal

of solid waste and whose services are available by design to all or a

substantial portion of the members of the community.

Telecommunication and other electronic communication system means

any system of community infrastructure whose primary function is the

provision of telecommunication or other electronic communication

services and whose services are available by design to all or a

substantial portion of the members of the community.

* * * * *

Water and waste disposal system means any system of community

infrastructure whose primary function is the supplying of water and/or

the collection and treatment of waste water and whose services are

available by design to all or a substantial portion of the members of

the community.

* * * * *

12. In Sec. 1717.852, paragraphs (a)(1) introductory text and

(a)(1)(ii) are amended by adding the words ``and/or steam'' before the

word ``power'', paragraphs (a)(3) through (a)(7) and paragraph (b) are

revised, and paragraph (a)(8) is added to read as follows:

Sec. 1717.852 Financing purposes.

(a) * * *

(3) The following types of community infrastructure substantially

located within the electric service territory of the borrower: water

and waste disposal systems, solid waste disposal systems,

telecommunication and other electronic communications systems, and

natural gas distribution systems;

(4) Front-end costs, when and as the borrower has obtained a

binding commitment from the non-RUS lender for the financing required

to complete the procurement or construction of the facilities;

(5) Transaction costs included as part of the cost of financing

assets or refinancing existing debt, provided, however, that the amount

of transaction costs eligible for lien accommodation or subordination

normally shall not exceed 5 percent of the principal amount of

financing or refinancing provided, net of all transaction costs;

(6) The refinancing of existing debt secured under the mortgage;

(7) Interest during construction of generation and transmission

facilities if approved by RUS, case by case, depending on the financial

condition of the borrower, the terms of the financing, the nature of

the construction, the treatment of these costs by regulatory

authorities having jurisdiction, and such other factors deemed

appropriate by RUS; and

[[Page 36914]]

(8) Lien subordinations for certain rural development investments,

as provided in Sec. 1717.858.

(b) Purposes ineligible.The following financing purposes are not

eligible for a lien accommodation or subordination from RUS:

(1) Working capital, including operating funds, unless in the

judgment of RUS the working capital is required to ensure the repayment

of RUS loans and/or other loans secured under the mortgage;

(2) Facilities, equipment, appliances, or wiring located inside the

premises of the consumer, except:

(i) Certain load-management equipment (see 7 CFR 1710.251(c));

(ii) Renewable energy systems and RUS-approved programs of demand

side management and energy conservation; and

(iii) As determined by RUS on a case by case basis, facilities

included as part of certain cogeneration projects to furnish electric

and/or steam power to end-user customers of the borrower;

(3) Investments in a lender required of the borrower as a condition

for obtaining financing; and

(4) Debt incurred by a distribution or power supply borrower to

finance facilities, equipment or other assets that are not part of the

borrower's electric system or one of the four community infrastructure

systems cited in paragraph (a)(3) of this section, except for certain

rural development investments eligible for a lien subordination under

Sec. 1717.858.

* * * * *

13. Section 1717.854 is amended by revising the section heading and

paragraphs (a), (b), (c)(1) and (c)(2), removing paragraph (c)(7),

redesignating paragraphs (c)(3) through (c)(6) as paragraphs (c)(4)

through (c)(7), adding a new paragraph (c)(3), adding ``and'' at the

end of newly designated paragraph (c)(6)(vi), and removing ``; and'' at

the end of newly designated paragraph (c)(7) and adding a period in its

place to read as follows:

Sec. 1717.854 Advance approval--100 percent private financing of

distribution, subtransmission and headquarters facilities, and certain

other community infrastructure.

(a) Policy. Requests for a lien accommodation or subordination from

distribution borrowers for 100 percent private financing of

distribution, subtransmission and headquarters facilities, and for

community infrastructure listed in Sec. 1717.852(a)(3), qualify for

advance approval by RUS if they meet the conditions of this section and

all other applicable provisions of this subpart. Advance approval means

RUS will approve these requests once RUS is satisfied that the

conditions of this section and all other applicable provisions of this

subpart have been met.

(b) Eligible purposes. Lien accommodations or subordinations for

the financing of distribution, subtransmission, and headquarters

facilities and community infrastructure listed in Sec. 1717.852(a)(3)

are eligible for advance approval, except those that involve the

purchase of existing facilities and associated service territory.

(1) The borrower has achieved a TIER of at least 1.5 and a DSC of

at least 1.25 for each of 2 calendar years immediately preceding, or

any 2 consecutive 12 month periods ending within 180 days immediately

preceding, the issuance of the debt;

(2) The ratio of the borrower's equity, less deferred expenses, to

total assets, less deferred expenses, is not less than 27 percent,

after adding the principal amount of the proposed loan to the total

assets of the borrower;

(3) The borrower's net utility plant as a ratio to its total

outstanding long-term debt is not less than 1.0, after adding the

principal amount of the proposed loan to the existing outstanding long-

term debt of the borrower;

* * * * *

14. Section 1717.855 is amended by revising the section heading and

paragraph (a) to read as follows:

Sec. 1717.855 Application contents: Advance approval--100 percent

private financing of distribution, subtransmission and headquarters

facilities, and certain other community infrastructure.

* * * * *

(a) A certification by an authorized official of the borrower that

the borrower and, as applicable, the loan are in compliance with all

conditions set forth in Sec. 1717.854(c) and all applicable provisions

of Secs. 1717.852 and 1717.853;

* * * * *

15. Section 1717.856 is amended by revising the section heading,

the introductory text, the introductory text of paragraph (a), and

paragraph (c)(3) to read as follows:

Sec. 1717.856 Application contents: Normal review--100 percent private

financing.

Applications for a lien accommodation or subordination for 100

percent private financing for eligible purposes that do not meet the

requirements of Sec. 1717.854 must include the following information

and documents:

(a) A certification by an authorized official of the borrower that:

* * * * *

(3) The borrower has achieved the TIER and DSC and any other

coverage ratios required by its mortgage or loan contract in each of

the two most recent calendar years; and

* * * * *

Sec. 1717.857 [Amended]

16. Section 1717.857 is amended by removing paragraph (a)(5), by

adding ``and'' at the end of paragraph (a)(3), and by removing ``;

and'' at the end of paragraph (a)(4)(ii) and adding a period in its

place.

PART 1718--LOAN SECURITY DOCUMENTS FOR ELECTRIC BORROWERS

17. The authority citation for part 1718 continues to read as

follows:

Authority: 7 U.S.C. 901-950b; Pub. L. 103-354, 108 Stat. 3178 (7

U.S.C. 6941 et seq.).

18. Subpart C is added to part 1718 to read as follows:

Subpart C--Loan Contracts With Distribution Borrowers

Sec.

1718.100 General.

1718.101 Applicability.

1718.102 Definitions.

1718.103 Loan contract provisions.

1718.104 Availability of model loan contract.

Appendix A to Subpart C of Part 1718--Model Form of Loan Contract for

Electric Distribution Borrowers

Subpart C--Loan Contracts With Distribution Borrowers

Sec. 1718.100 General.

(a) Purpose. The purpose of this subpart is to set forth the

policies, requirements, and procedures governing loan contracts entered

into between the Rural Utilities Service (RUS) and distribution

borrowers or, in some cases, other electric borrowers.

(b) Flexibility for individual circumstances. The intent of this

subpart is to provide the flexibility to address the different needs

and different credit risks of individual borrowers, and other special

circumstances of individual lending situations. The model loan contract

contained in Appendix A of this subpart provides an example of what a

loan contract with an ``average'' or ``typical'' distribution borrower

may look like under ``average'' or ``typical'' circumstances. Depending

on the credit risks and other circumstances of individual loans, RUS

may execute loan contracts with

[[Page 36915]]

provisions that are substantially different than those set forth in the

model. RUS may develop alternative model loan contract provisions. If

it does, such provisions will be made available to the public.

provision of the loan contract appears to be in conflict with

provisions of the mortgage, the loan contract shall have precedence

with respect to the contractual relationship between the borrower and

RUS with respect to such provision. If either document is silent on a

matter addressed in the other document, the other document shall have

precedence with respect to the contractual relationship between the

borrower and RUS with respect to such matter.

(d) Loan contract provisions subject to subsequent rule making. The

provisions of all loan contracts executed pursuant to this subpart

shall be subject to amendment and modification pursuant to subsequent

rule making. Such amendments and modifications may not exceed the

authority granted to RUS in the loan contract entered into with the

borrower.

Sec. 1718.101 Applicability.

(a) Distribution borrowers. The provisions of this subpart apply to

all distribution borrowers that obtain a loan or loan guarantee from

RUS on or after [the effective date of the final rule]. Distribution

borrowers that obtain a lien accommodation or any other form of

financial assistance from RUS after [the effective date of the final

rule] may be required to execute a new loan contract and new mortgage.

Moreover, any distribution borrower may submit a request to RUS that a

new loan contract and new mortgage be executed. Within the constraints

of time and staff resources, RUS will attempt to honor such requests.

Borrowers must first obtain the concurrence of any other mortgagees on

their existing mortgage before a new mortgage can be executed.

(b) Other borrowers. Borrowers other than distribution borrowers

may also submit requests for execution of a new loan contract pursuant

to this subpart and a new mortgage pursuant to subpart B of this part.

RUS may approve such requests if it determines that it is in the

government's financial interest. If other mortgagees are on the

borrower's existing mortgage, their concurrence would be required

before a new mortgage could be executed.

Sec. 1718.102 Definitions.

For the purposes of this subpart:

Borrower means any organization that has an outstanding loan made

or guaranteed by the Rural Utilities Service (RUS) or its predecessor,

the Rural Electrification Administration, for rural electrification, or

that is seeking such financing.

Distribution borrower means a borrower that sells or intends to

sell electric power and energy at retail in rural areas, the latter

being defined in 7 CFR 1710.2.

Loan documents means the mortgage (or other security instrument

acceptable to RUS), the loan contract, and the promissory note entered

into between the borrower and RUS.

Sec. 1718.103 Loan contract provisions.

Loan contracts executed pursuant to this subpart shall contain such

provisions as RUS determines are appropriate to further the purposes of

the RE Act and to ensure that the security for the loan will be

reasonably adequate and that the loan will be repaid according to the

terms of the promissory note. Such loan contracts will contain

provisions addressing, but not necessarily limited to, the following

matters:

(a) Description of the purpose of the loan;

(b) Specification of the interest to be charged on the loan,

including the method for determining the interest rate if it is not

fixed for the entire term of the loan;

including the final maturity of the loan;

(d) The conditions under which the loan may be prepaid before its

maturity date, including but not limited to requirements regarding the

prepayment of loans made concurrently by RUS and another secured

lender;

(e) The method for making scheduled payments on the loan;

(f) Accounting principles and system of accounts, and RUS authority

to approve the accountant used by the borrower;

(g) The method and time period for advancing loan funds and the

conditions precedent to the advance of funds;

(h) Representations and warranties by the borrower as a condition

of obtaining the loan, including but not limited to: the legal

authority of the borrower to enter into the loan contract and operate

its system; that the loan documents will be a legal, valid and binding

obligation of the borrower enforceable according to their terms;

compliance of the borrower in all material respects with all federal,

state, and local laws, regulations, codes, and orders; existence of any

pending or threatened legal actions that could have a material adverse

effect on the borrower's ability to perform its obligations under the

loan documents; the accuracy and completeness of all information

provided by the borrower in the loan application and with respect to

the loan contract, and the existence of any material adverse change

since the information was provided; and the existence of any material

defaults under other agreements of the borrower;

(i) Representations, warranties, and covenants with respect to

environmental matters;

(j) Reports and notices required to be submitted to RUS, including

but not limited to: annual financial statements; notice of defaults;

notice of litigation; notice of orders or other directives received by

the borrower from regulatory authorities; notice of any matter that has

resulted in or may result in a material adverse change in the condition

or operations of the borrower; and such other information regarding the

condition or operations of the borrower as RUS may reasonably require;

(k) Annual written certification that the borrower is in compliance

with its loan contract, note, mortgage, and any other agreement with

RUS, or if there has been a default in the fulfillment of any

obligation under said agreements, specifying each such default and the

nature and status thereof;

(l) Requirement that the borrower design and implement rates for

utility services to meet certain minimum coverage of interest expense

and/or debt service obligations;

(m) Requirement that the borrower maintain and preserve its

mortgaged property in compliance with prudent utility practice and all

applicable laws, which may include certain specific actions and

certifications set forth in the borrower's loan contract or mortgage;

(n) Requirement that the borrower plan, design and construct its

electric system according to standards and other requirements

established by RUS, and if directed by the Administrator, that the

borrower follow RUS planning, design and construction standards and

requirements for other utility systems constructed by the borrower;

(o) Limitations on extensions and additions to the borrower's

electric system without approval by RUS;

(p) Limitations on contracts and contract amendments that the

borrower may enter into without approval by RUS;

(q) Limitations of the transfer of mortgaged property by the

borrower;

(r) Limitations on dividends, patronage refunds, and cash

distributions paid by the borrower;

[[Page 36916]]

(s) Limitations on investments, loans, and guarantees made by the

borrower;

(t) Authority of RUS to approve a new general manager and to

require that an existing general manager be replaced if the borrower is

in default under its mortgage, loan contract, or any other agreements

with RUS;

(u) Description of events of default under the loan contract and

the remedies available to RUS;

(v) Applicability of state and federal laws;

(w) Severability of the individual provisions of the loan

documents;

(x) Matters relating to the assignment of the loan contract;

(y) Requirements relating to federal laws and regulations,

including but not limited to the following matters: area coverage for

electric service; civil rights and equal employment opportunity; access

to buildings and other matters relating to the handicapped; design and

construction standards relating to earthquakes; the National

Environmental Policy Act of 1969 and other environmental laws and

regulations; flood hazard insurance; debarment and suspension from

federal assistance programs; and delinquency on federal debt; and

(z) Special requirements applicable to individual loans, and such

other provisions as RUS may require to ensure loan repayment and

reasonably adequate loan security.

Sec. 1718.104 Availability of model loan contract.

Single copies of the model loan contract (RUS Informational

Publication 1718 C) are available from the Administrative Services

Division, Rural Utilities Service, United States Department of

Agriculture, Washington, DC 20250-1500. This document may be

reproduced.

Appendix A to Subpart C of Part 1718--Model Form of Loan Contract for

Electric Distribution Borrowers

Loan Contract

Table of Contents

Recitals

Article I--Definitions

Article II--Representations and Warranties

Section 2.1. Representations and Warranties.

Article III--Loan

Section 3.1. Advances.

Section 3.2. Interest Rate and Payment.

Section 3.3. Prepayment.

Article IV--Conditions of Lending

Section 4.1. General Conditions.

Section 4.2. Special Conditions.

Article V--Affirmative Covenants

Section 5.1. Generally.

Section 5.2. Annual Certificates.

Section 5.3. Simultaneous Prepayment of Contemporaneous Loans.

Section 5.4. Rates to Provide Revenue Sufficient to Meet Coverage

Ratios Requirements.

Section 5.5. Depreciation Rates.

Section 5.6. Property Maintenance.

Section 5.7. Financial Books.

Section 5.8. Rights of Inspection.

Section 5.9. Area Coverage.

Section 5.10. Real Property Acquisition.

Section 5.11. ``Buy American'' Requirements.

Section 5.12. Power Requirements Studies.

Section 5.13. Long Range Engineering Plans and Construction Work

Plans.

Section 5.14. Design Standards, Plans and Specifications,

Construction Standards, and List of Materials.

Section 5.15. Construction.

Section 5.16. Standard Forms of Construction Contracts, and

Engineering and Architectural Services Contracts.

Section 5.17. Contract Bidding Requirements.

Section 5.18. Nondiscrimination.

Section 5.19. Financial Reports.

Section 5.20. Miscellaneous Reports and Notices.

Section 5.21 Special Construction Account.

Section 5.22. Additional Affirmative Covenants.

Article VI--Negative Covenants

Section 6.1. General.

Section 6.2. Limitations on System Extensions and Additions.

Section 6.3. Limitations on Expenses for Legal, Engineering and

Supervisory Services.

Section 6.4. Limitations on Employment and Retention of Manager.

Section 6.5. Limitations on Certain Types of Contracts.

Section 6.6. Limitations on Mergers and Sale, Lease or Transfer of

Capital Assets.

Section 6.7. Limitations on Acquisition, Construction or Procurement

of Generating Facilities, Existing Facilities or Utility Systems.

Section 6.8. Limitation on Distributions.

Section 6.9. Limitations on Loans, Investments and Other

Obligations.

Section 6.10. Depreciation Rates.

Section 6.11. Historic Preservation.

Section 6.12. Rate Reductions.

Section 6.13. Limitations on Additional Indebtedness.

Section 6.14. Limitations on Issuing Additional Indebtedness Secured

Under the Mortgage.

Section 6.15. Impairment of Contracts Pledged to RUS.

Section 6.16. Limitations on Using non FDIC-insured Depositories.

Section 6.17. Additional Negative Covenants.

Article VII--Default

Section 7.1. Events of Default.

Article VIII--Remedies

Section 8.1. Generally.

Section 8.2. Suspension of Advances.

Article IX--Miscellaneous

Section 9.1. Notices.

Section 9.2. Expenses.

Section 9.3. Late Payments.

Section 9.4. Filing Fees.

Section 9.5. No Waiver.

Section 9.6. Governing Law.

Section 9.7. Holiday Payments.

Section 9.8. Rescission.

Section 9.9. Successors and Assigns.

Section 9.10. Complete Agreement; Amendments.

Section 9.11. Headings.

Section 9.12. Severability.

Section 9.13. Right of Setoff.

Section 9.14. Right of RUS to Appoint Supervisor.

Section 9.15. Schedules and Exhibits.

Section 9.16. Prior Loan Documents.

Section 9.17. Term.

Schedule 1

Schedule 2--Existing Liens

Schedule 3--Additional Contracts

Exhibit A: Form of Promissory Note

Exhibit B: Equal Opportunity Contract Provisions

Exhibit C-1: Manager's Certificate Required Under Loan Contract Section

6.14 for Additional Notes

Exhibit C-2: Manager's Certificate Required Under Loan Contract Section

6.14 for Refinancing Notes

Loan Contract

AGREEMENT, dated ____________ , 199______ ,

between ______ (``Borrower''),

a corporation organized and existing under the laws of the State of

________ (the ``State'') and the UNITED STATES OF AMERICA acting by

and through the Administrator of the Rural Utilities Service

(``RUS'').

Recitals

The Borrower has applied to RUS for a loan for the purpose(s)

set forth in Schedule 1 hereto.

RUS is willing to make such a loan to the Borrower pursuant to

the Rural Electrification Act of 1936, as amended, on the terms and

conditions stated herein.

THEREFORE, for and in consideration of the premises and the

mutual covenants hereinafter contained, the parties hereto agree and

bind themselves as follows:

Article I--Definitions

Capitalized terms that are not defined herein shall have the

meanings as set forth in the Mortgage. The terms defined herein

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

as the plural.

``Act'' shall mean the Rural Electrification Act of 1936 etc.

``Advance'' or ``Advances'' shall mean advances by RUS to

Borrower pursuant to the terms and conditions of this Agreement.

``Agreement'' shall mean this Loan Contract together with all

schedules and exhibits and also any subsequent supplements or

amendments.

``Business Day'' shall mean any day that RUS is open for

business.

[[Page 36917]]

``Contemporaneous Loan'' shall mean a loan made pursuant to a

loan agreement providing for a loan secured by a mortgage on which

RUS was also a mortgagee, the making of which was conditioned upon

the making of a loan, therein described, by another lender, and

shall also mean any loan which the Borrower has used to satisfy RUS

Regulations requiring that supplemental financing be obtained in

order to qualify for a loan from RUS. Any loan used to refinance or

refund a Contemporaneous Loan is also considered to be a

Contemporaneous Loan.

``Coverage Ratios'' shall mean, collectively, the following

financial ratios pertaining to the Electric System: (i) TIER of 1.5;

(ii) Operating TIER of 1.1; (iii) DSC of 1.25; and Operating DSC of

1.1.

``DSC'' shall have the meaning as defined in the Mortgage.

``Distributions'' shall mean for the Borrower to, in any

calendar year, 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, to its members, stockholders or

consumers; provided, however, that for the purposes of this

Agreement a ``Cash Distribution'' shall be deemed to include any

general cancellation or abatement of charges for electric energy or

services furnished by the Borrower, but not the repayment of a

membership fee upon termination of a membership [and not the rebate

of an abatement of costs incurred by the Borrower, such as a

reduction of wholesale power cost previously incurred].

``Electric System'' shall have the meaning as defined in the

Mortgage.

``Equity'' shall mean the Borrower's total margins and equities

computed pursuant to RUS Accounting Requirements but excluding any

Regulatory Created Assets.

``Event of Default'' shall have the meaning as defined in

Section [7.1].

``Interest Expense'' shall mean the interest expense of the

Borrower computed pursuant to RUS Accounting requirements.

``Loan'' shall mean the loan described in Article II which is

being made pursuant to the RUS Commitment in furtherance of the

objectives of the Act.

``Loan Documents'' shall mean, collectively, this Agreement, the

Mortgage and the Note.

``Long-Term Debt'' shall mean the total of all amounts included

in the long-term debt of the Borrower pursuant to RUS Accounting

Requirements.

``Maturity Date'' shall have the meaning as defined in the Note.

``Monthly Payment Date'' shall have the meaning as defined in

the Note.

``Mortgage'' shall have the meaning as described in Schedule 1

hereto.

``Mortgaged Property'' shall have the meaning as defined in the

Mortgage.

``Net Utility Plant'' shall mean the amount constituting the

total utility plant of the Borrower, less depreciation, computed in

accordance with RUS Accounting Requirements.

``Note'' shall mean a promissory note executed by the Borrower

in the form of Exhibit A hereto, and any note executed and delivered

to RUS to refund, or in substitution for such a note.

``Operating DSC'' or ``ODSC'' shall mean Operating Debt Service

Coverage calculated as:

A+B+C

ODSC = -------------

where:

All amounts are for the same one-year period and are computed

pursuant to RUS Accounting Requirements;

A=Depreciation and amortization expense of the Electric System;

B=Interest Expense on all Long-term Debt of the Electric System,

except that Interest Expense shall be increased by 1/3 of the

amount, if any, by which the rentals of Restricted Property of the

Electric System exceed 2 percent of total margins and equities;

C=Patronage capital & operating margins of the Electric System,

which equals operating revenue and patronage capital of Electric

System operations, less total cost of electric service (including

Interest Expense on all Long-Term Debt of the Electric System); and

D=Debt service billed which equals all interest and principal

billed or billable to the Borrower during the year for all Long-Term

Debt of the Electric System, plus \1/3\ of the amount, if any, by

which the rentals of Restricted Property of the Electric System

exceed 2 percent of total margins and equities.

``Operating TIER'' or ``OTIER'' shall mean Operating Times

Interest Earned Ratio calculated as:

[GRAPHIC][TIFF OMITTED]TP18JY95.001

where:

All amounts are for the same one-year period and are computed

pursuant to RUS Accounting Requirements;

A=Interest Expense on all Long-term Debt of the Electric System,

except that Interest Expense shall be increased by \1/3\ of the

amount, if any, by which the rentals of Restricted Property of the

Electric System exceed 2 percent of total margins and equities; and

B=Patronage capital & operating margins of the Electric System,

which equals operating revenue and patronage capital of Electric

System operations, less total cost of electric service (including

Interest Expense on all Long-Term Debt of the Electric System).

``Payment Notice'' shall mean a notice furnished by RUS to

Borrower that indicates the precise amount of each payment of

principal and interest and the total amount of each payment.

``Permitted Debt'' shall have the meaning as defined in Section

[6.13].

``Regulatory Created Assets'' shall mean the sum of any amounts

properly recordable as unrecovered plant and regulatory study costs

or as other regulatory assets, computed pursuant to RUS Accounting

Requirements.

``RUS Accounting Requirements'' shall mean any system of

accounts prescribed by RUS Regulations as such RUS Accounting

Requirements exist at the date of applicability thereof.

``RUS Commitment'' shall have the meaning as defined in Schedule

1 hereto.

``RUS Regulations'' shall mean regulations published by RUS from

time to time in the Federal Register as they exist at the date of

applicability thereof, and shall also include any regulations of

other federal entities which RUS is required by law to implement.

``Subsidiary'' shall mean a corporation that is a subsidiary of

the Borrower and subject to the Borrower's control, as defined by

RUS Accounting Requirements.

``Termination Date'' shall have the meaning as defined in the

Note.

``TIER'' shall have the meaning as defined in the Mortgage.

``Total Assets'' shall mean an amount constituting the total

assets of the Borrower as computed pursuant to RUS Accounting

Requirements, but excluding any Regulatory Created Assets.

``Total Utility Plant'' shall mean the amount constituting the

total utility plant of the Borrower computed in accordance with RUS

Accounting Requirements.

``Utility System'' shall have the meaning as defined in the

Mortgage.

Article II--Representations and Warranties

Section 2.1. Representations and Warranties. To induce RUS to

make the Loan, and recognizing that RUS is relying hereof, the

Borrower represents and warrants as follows:

(a) Organization; Power, Etc. The Borrower: (i) is duly

organized, validly existing, and in good standing under the laws of

its state of incorporation; (ii) is duly qualified to do business

and is in good standing in each jurisdiction in which the

transaction of its business makes such qualification necessary;

(iii) has all requisite corporate and legal power to own and operate

its assets and to carry on its business and to enter into and

perform the Loan Documents; (iv) has duly and lawfully obtained and

maintained all licenses, certificates, permits, authorizations,

approvals, and the like which are material to the conduct of its

business or which may be otherwise required by law; and (v) is

eligible to borrow from RUS.

(b) Authority. The execution, delivery and performance by the

Borrower of this Agreement and the other Loan Documents and the

performance of the transactions contemplated thereby have been duly

authorized by all necessary corporate action and will not violate

any provision of law or of the Articles of Incorporation or By-Laws

of the Borrower or result in a breach of, or constitute a default

under, any agreement, indenture or other instrument to which the

Borrower is a party or by which it may be bound.

license of any governmental authority is necessary in connection

with the execution, delivery, performance, or enforcement of the

Loan Documents, except (i) such as have been obtained and are in

full force and effect and (ii) such as have been disclosed on

Schedule 1 hereto.

(d) Binding Agreement. Each of the Loan Documents is, or when

executed and delivered will be, the legal, valid, and binding

obligation of the Borrower,

[[Page 36918]]

enforceable in accordance with its terms, subject only to limitations

on enforceability imposed by applicable bankruptcy, insolvency,

reorganization, moratorium, or similar laws affecting creditors'

rights generally.

(e) Compliance With Laws. The Borrower is in compliance in all

material respects with all federal, state, and local laws, rules,

regulations, ordinances, codes, and orders (collectively, ``Laws''),

the failure to comply with which could have a material adverse

effect on the condition, financial or otherwise, operations,

properties, or business of the Borrower, or on the ability of the

Borrower to perform its obligations under the Loan Documents, except

as the Borrower has disclosed on Schedule 1 attached hereto.

(f) Litigation. There are no pending legal, arbitration, or

governmental actions or proceedings to which the Borrower is a party

or to which any of its property is subject which, if adversely

determined, could have a material adverse effect on the condition,

financial or otherwise, operations, properties, or business of the

Borrower, or on the ability of the Borrower to perform its

obligations under the Loan Documents, and to the best of the

Borrower's knowledge, no such actions or proceedings are threatened

or contemplated, except as the Borrower has disclosed on Schedule 1

attached hereto.

(g) Title to Property. The Borrower holds good and marketable

title to all of its real property and owns all of its personal

property free and clear of any lien or encumbrance except the liens

and encumbrances specifically identified on Schedule 2 attached

hereto (the ``Existing Liens''), and liens or other interests

permitted under the Mortgage.

(h) Financial Statements; No Material Adverse Change; Etc. All

financial statements submitted to RUS in connection with the

application for the Loan or in connections with this Agreement

fairly and fully present the financial condition of the Borrower and

the results of the Borrower's operations for the periods covered

thereby and are prepared in accordance with RUS Accounting

Requirements consistently applied. Since the dates thereof, there

has been no material adverse change in the financial condition or

operations of the Borrower. All budgets, projections, feasibility

studies, and other documentation submitted by the Borrower to RUS

are based upon assumptions that are reasonable and realistic, and as

of the date hereof, no fact has come to light, and no event or

transaction has occurred, which would cause any assumption made

therein not to be reasonable or realistic.

(i) Principal Place of Business; Records. The principal place of

business and chief executive office of the Borrower is at the

address of the Borrower shown on Schedule 1 attached hereto.

(j) Location of Properties. All property owned by the Borrower

is located in the counties identified in Schedule 1 hereto.

(k) Subsidiaries. The Borrower has no subsidiary, except as the

Borrower has disclosed on Schedule 1 attached hereto.

(l) Defaults Under Other Agreements. The Borrower is not in

default under any agreement or instrument to which it is a party or

under which any of its properties are subject that is material to

its financial condition, operations, properties, profits, or

business.

(m) Survival. All representations and warranties made by the

Borrower herein or made in any certificate delivered pursuant hereto

shall survive the making of the Advances and the execution and

delivery to RUS of the Note.

Article III--Loan

Section 3.1. Advances. RUS agrees to make, and the Borrower

agrees to request, on the terms and conditions of this Agreement,

Advances from time to time in an aggregate principal amount not to

exceed the RUS Commitment. On the Termination Date, RUS may stop

advancing funds and limit the RUS Commitment to the amount advanced

prior to such date. The obligation of the Borrower to repay the

Advances shall be evidenced by the Note in the principal amount of

the unpaid principal amount of the Advances from time to time

outstanding. The Borrower shall give RUS written notice of the date

on which each Advance is to be made.

Section 3.2. Interest Rate and Payment. The Note shall be

payable and bear interest as follows:

(a) Payments and Amortization. Principal will be amortized in

accordance with the method stated in Schedule 1 hereto and more

fully described in the form of Note attached hereto as Exhibit A.

(b) Application of Payments. Each payment shall be applied first

to any charges then due on the Note, second to interest accrued on

the principal amount to the due date of such payment on the Note,

and the balance to the reduction of principal against the Note in

inverse order of maturity.

RUS, the Borrower shall make all payments on the Note utilizing

electronic funds transfer procedures as specified by RUS.

(d) Fixed or Variable Rate. The Note will bear interest at

either a fixed or variable rate in accordance with the method stated

in Schedule 1 hereto and as more particularly described in the form

of Note attached hereto as Exhibit A.

Section 3.3. Prepayment. The Borrower has no right to prepay the

Note in whole or in part except such rights, if any, as are

expressly provided for in the Note. However, prepayment of the Note

(and any penalties) shall be mandatory under Section [5.3] hereof if

the Borrower has used a Contemporaneous Loan in order to qualify for

the RUS Commitment, and later prepays the Contemporaneous Loan.

Article IV--Conditions of Lending

Section 4.1. General Conditions. The obligation of RUS to make

any Advance hereunder is subject to satisfaction of each of the

following conditions precedent on or before the date of such

Advance:

(a) Legal Matters. All legal matters incident to the

consummation of the transactions hereby contemplated shall be

satisfactory to counsel for RUS.

(b) Loan Documents. That RUS receive duly executed originals of

this Agreement and the other Loan Documents.

that all corporate documents and proceedings of the Borrower

necessary for duly authorizing the execution, delivery and

performance of the Loan Documents have been obtained and are in full

force and effect.

(d) Approvals. That RUS receive evidence satisfactory to it that

all consents and approvals (including without limitation the

consents referred to in Section [2.1(c)] of this Agreement) which

are necessary for, or required as a condition of, the validity and

enforceability of each of the Loan Documents have been obtained and

are in full force and effect.

(e) Event of Default. That no Event of Default specified in

Article VII and no event which, with the lapse of time or the notice

and lapse of time specified in Article VII would become such an

Event of Default, shall have occurred and be continuing or will have

occurred after giving effect to the Advance on the books of the

Borrower.

(f) Continuing Representations and Warranties. That the

representations and warranties of the Borrower contained in this

Agreement be true and correct on and as of the date of such Advance

as though made on and as of such date.

(g) Opinion of Counsel. That RUS receive an opinion of counsel

for the Borrower (who shall be acceptable to RUS) in form and

content acceptable to RUS.

(h) Mortgage Filing. The Mortgage shall have been duly recorded

as a mortgage on real property, including after-acquired real

property, and duly filed, recorded or indexed as a security interest

in personal property, including after acquired personal property,

wherever RUS shall have requested, all in accordance with applicable

law, and the Borrower shall have caused satisfactory evidence

thereof to be furnished to RUS.

(i) Wholesale Power Contract. That the Borrower shall not be in

default under the terms of, or contesting the validity of, any

contract that has been pledged by any entity to RUS as security for

the repayment of any loan made or guaranteed by RUS under the Act.

(j) Material Adverse Change. That there has occurred no material

adverse change in the business or condition, financial or otherwise,

of the Borrower and nothing has occurred which in the opinion of RUS

materially and adversely affects the Borrower's ability to meet its

obligations hereunder.

(k) Requisitions. That the Borrower will requisition all

Advances by submitting its requisition to RUS in form and substance

satisfactory to RUS. Requisitions shall be made only for the

purpose(s) set forth herein. The Borrower agrees to apply the

proceeds of the Advances in accordance with its loan application

with such modifications as may be mutually agreed.

(l) Flood Insurance. That for any Advance used in whole or in

part to finance the construction or acquisition of any building in

any area identified by the Secretary of Housing and Urban

Development pursuant to the Flood Disaster Protection Act of 1973

(the ``Flood Insurance Act'') or any rules, regulations or orders

issued to implement the Flood Insurance Act (``Rules'') as any area

[[Page 36919]]

having special flood hazards, or to finance any facilities or materials

to be located in any such building, or in any building owned or

occupied by the Borrower and located in such a flood hazard area,

the Borrower has submitted evidence, in form and substance

satisfactory to RUS, or RUS has otherwise determined, that (i) the

community in which such area is located is then participating in the

national flood insurance program, as required by the Flood Insurance

Act and any Rules, and (ii) the Borrower has obtained flood

insurance coverage with respect to such building and contents as may

then be required pursuant to the Flood Insurance Act and any Rules.

(m) RUS Regulations. That the Advance will be in accordance with

all applicable RUS Regulations.

Section 4.2. Special Conditions. The obligation of RUS to make

any Advance hereunder is also subject to satisfaction, on or before

the date of such Advance, of each of the special conditions, if any,

listed in Schedule 1 hereto.

Article V--Affirmative Covenants

Section 5.1. Generally. Unless otherwise agreed to in writing by

RUS, while this Agreement is in effect, whether or not any Advance

is outstanding, the Borrower agrees to duly observe each of the

affirmative covenants contained in this Article:

Section 5.2. Annual Certificates.

(a) Performance under Loan Documents. The Borrower will duly

observe and perform all of its obligations under each of the Loan

Documents.

(b) Annual Certification. Within ninety (90) days after the

close of each calendar year, commencing with the year following the

year in which the initial Advance hereunder shall have been made,

the Borrower shall deliver to RUS a written statement signed by its

General Manager, stating that during such year the Borrower has

fulfilled all of its obligations under the Loan Documents throughout

such year or, if there has been a default in the fulfillment of any

such obligations, specifying each such default known to said person

and the nature and status thereof.

Section 5.3. Simultaneous Prepayment of Contemporaneous Loans.

If the Borrower shall at any time prepay the Contemporaneous Loan

described on Schedule 1, it shall prepay the RUS Note

correspondingly to maintain the ratio that the Contemporaneous Loan

bears to the RUS Commitment. If the RUS Note calls for a prepayment

penalty or premium, such amount shall be paid but shall not be used

in computing the amount needed to be paid to RUS under this section

to maintain such ratio. In the case of Contemporaneous Loans and RUS

Notes existing prior to the date of this Agreement under previous

agreements, prepayments shall be treated as if governed by this

section. Provided, however, in all cases prepayments associated with

refinancing or refunding a Contemporaneous Loan pursuant to Article

II of the Mortgage are not considered to be prepayments for purposes

of this Agreement provided that the principal amount of such

refinancing or refunding loan is not less than the amount of loan

principal being refinanced, and the weighted average life of the

refinancing or refunding loan is materially equal to the weighted

average remaining life of the loan being refinanced.

Section 5.4 Rates to Provide Revenue Sufficient to Meet Coverage

Ratios Requirements.

(a) Prospective Requirement. The Borrower shall design and

implement rates for utility service furnished by it to provide

sufficient revenue (along with other revenue available to the

Borrower in the case of TIER and DSC) (i) 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, the Coverage Ratios. In designing and implementing rates

under this paragraph, such rates should be capable of producing at

least enough revenue to meet the requirements of this paragraph

under the assumption that average weather conditions in the

Borrower's service territory will prevail in the future, including

average Utility System damage and outages due to weather and the

related costs.

(b) Retrospective Requirement. The average Coverage Ratios

achieved by the Borrower in the 2 best years out of the 3 most

recent calendar years must be not less than any of the following:

TIER=1.5

DSC=1.25

OTIER=1.1

ODSC=1.1

give thirty (30) days prior written notice of any proposed change in

its general rate structure to RUS if RUS has requested in writing

that it be notified in advance of such changes.

(d) Routine Reporting of Coverage Ratios. Promptly following the

end of each calendar year, the Borrower shall report, in writing, to

RUS the TIER, Operating TIER, DSC and Operating DSC levels which

were achieved during that calendar year.

(e) Reporting Non-achievement of Retrospective Requirement. If

the Borrower fails to achieve the average levels required by

paragraph (b) of this section, it must promptly notify RUS in

writing to that effect.

(f) Corrective Plans. Within 30 days of sending a notice to RUS

under paragraph (e) of this section, or of being notified by RUS,

whichever is earlier, the Borrower in consultation with RUS, shall

provide a written plan satisfactory to RUS setting forth the actions

that will be taken to achieve the required Coverage Ratios on a

timely basis.

(g) Noncompliance. Failure to design and implement rates

pursuant to paragraph (a) of this section and failure to develop and

implement the plan called for in paragraph (f) of this section shall

constitute an Event of Default under this Agreement in the event

that REA so notifies the Borrower to that effect under section

[7.1(c)] of this Agreement.

Section 5.5. Depreciation Rates. The Borrower shall adopt as its

depreciation rates only those which have been previously approved

for the Borrower by RUS.

Section 5.6. Property Maintenance. The Borrower shall maintain

and preserve its Utility System in compliance with the provisions of

the Mortgage, RUS Regulations and all applicable laws.

Section 5.7. Financial Books. The Borrower shall at all times

keep, and safely preserve, proper books, records and accounts in

which full and true entries will be made of all of the dealings,

business and affairs of the Borrower and its Subsidiaries, in

accordance with any applicable RUS Accounting Requirements.

Section 5.8. Rights of Inspection. The Borrower shall afford

RUS, through its representatives, reasonable opportunity, at all

times during business hours and upon prior notice, to have access to

and the right to inspect the Utility System, any other property

encumbered by the Mortgage, and any or all books, records, accounts,

invoices, contracts, leases, payrolls, canceled checks, statements

and other documents and papers of every kind belonging to or in the

possession of the Borrower or in anyway pertaining to its property

or business, including its Subsidiaries, if any, and to make copies

or extracts therefrom.

Section 5.9. Area Coverage. The Borrower shall make diligent

effort to extend electric service to all unserved persons within the

service area of the Borrower who (i) desire such service and (ii)

meet all reasonable requirements established by the Borrower as a

condition of such service. To the extent required by RUS, the

Borrower shall provide electric service without a contribution in

aid of construction.

Section 5.10. Real Property Acquisition. In acquiring real

property, the Borrower shall comply with the provisions of the

Uniform Relocation Assistance and Real Property Acquisition Policies

Act of 1970 (the ``Uniform Act''), as amended by the Uniform

Relocation Act Amendments of 1987, and 49 CFR part 24, referenced by

7 CFR part 21, to the extent the Uniform Act is applicable to such

acquisition.

Section 5.11. ``Buy American'' Requirements. The Borrower shall

use or cause to be used in connection with the expenditures of funds

advanced on account of the Loan only such unmanufactured articles,

materials, and supplies as have been mined or produced in the United

States, Mexico, or Canada, and only such manufactured articles,

materials, and supplies as have been manufactured in the United

States, Mexico, or Canada substantially all from articles,

materials, and supplies mined, produced or manufactured, as the case

may be, in the United States, Mexico, or Canada, except to the

extent RUS shall determine that such use shall be impracticable or

that the cost thereof shall be unreasonable.

Section 5.12. Power Requirements Studies. The Borrower shall

prepare and use power requirements studies of its electric loads and

future energy and capacity requirements in conformance with RUS

Regulations.

Section 5.13. Long Range Engineering Plans and Construction Work

Plans. The Borrower shall develop, maintain and use up-to-date long-

range engineering plans and construction work plans in conformance

with RUS Regulations.

Section 5.14. Design Standards, Plans and Specifications,

Construction Standards, and List of Materials. The Borrower shall

use design standards, plans and specifications,

[[Page 36920]]

construction standards, and lists of acceptable materials in

conformance with RUS Regulations.

Section 5.15. Construction. The Borrower shall acquire and

construct the Electric System in conformance with RUS Regulations.

Section 5.16. Standard Forms of Construction Contracts, and

Engineering and Architectural Services Contracts. The Borrower shall

use the standard forms of contracts promulgated by RUS for

construction, procurement, engineering services and architectural

services in conformance with RUS Regulations.

Section 5.17. Contract Bidding Requirements. The Borrower shall

follow RUS contract bidding procedures in conformance with RUS

Regulations when contracting for construction or procurement.

Section 5.18. Nondiscrimination.

(a) Equal Opportunity Provisions in Construction Contracts. The

Borrower shall incorporate or cause to be incorporated into any

construction contract, as defined in Executive Order 11246 of

September 24, 1965 and implementing regulations, which is paid for

in whole or in part with funds obtained from RUS or borrowed on the

credit of the United States pursuant to a grant, contract, loan,

insurance or guarantee, or undertaken pursuant to any RUS program

involving such grant, contract, loan, insurance or guarantee, the

equal opportunity provisions set forth in Exhibit B hereto entitled

Equal Opportunity Contract Provisions.

(b) Equal Opportunity Contract Provisions Also Bind the

Borrower. The Borrower further agrees that it will be bound by such

equal opportunity clause in any federally assisted construction work

which it performs itself other than through the permanent work force

directly employed by an agency of government.

cooperate actively with RUS and the Secretary of Labor in obtaining

the compliance of contractors and subcontractors with the equal

opportunity clause and the rules, regulations and relevant orders of

the Secretary of Labor, that it will furnish RUS and the Secretary

of Labor such information as they may require for the supervision of

such compliance, and that it will otherwise assist the administering

agency in the discharge of RUS's primary responsibility for securing

compliance. The Borrower further agrees that it will refrain from

entering into any contract or contract modification subject to

Executive Order 11246 with a contractor debarred from, or who has

not demonstrated eligibility for, Government contracts and federally

assisted construction contracts pursuant to Part II, Subpart D of

Executive Order 11246 and will carry out such sanctions and

penalties for violation of the equal opportunity clause as may be

imposed upon contractors and subcontractors by RUS or the Secretary

of Labor pursuant to Part II, Subpart D of Executive Order 11246. In

addition, the Borrower agrees that if it fails or refuses to comply

with these undertakings RUS may cancel, terminate or suspend in

whole or in part this contract, may refrain from extending any

further assistance under any of its programs subject to Executive

Order 11246 until satisfactory assurance of future compliance has

been received from such Borrower, or may refer the case to the

Department of Justice for appropriate legal proceedings.

Section 5.19. Financial Reports. The Borrower will cause to be

prepared and furnished to RUS from time to time pursuant to RUS

Regulations, a full and complete annual report of its financial

condition and of its operations in form and substance satisfactory

to RUS, audited and certified by Independent certified public

accountants satisfactory to RUS and accompanied by a report of such

audit in form and substance satisfactory to RUS. The Borrower shall

also furnish to RUS from time to time such other reports concerning

the financial condition or operations of the Borrower, including its

Subsidiaries, as RUS may reasonably request or RUS Regulations

require.

Section 5.20. Miscellaneous Reports and Notices. The Borrower

will furnish to RUS:

(a) Notice of Default. Promptly after becoming aware thereof,

notice of: (i) the occurrence of any default; and (ii) the receipt

of any notice given pursuant to the Mortgage with respect to the

occurrence of any event which with the giving of notice or the

passage of time, or both, could become an ``Event of Default'' under

the Mortgage.

(b) Notice of Non-Environmental Litigation. Promptly after the

commencement thereof, notice of the commencement of all actions,

suits or proceedings before any court, arbitrator, or governmental

department, commission, board, bureau, agency, or instrumentality

affecting the Borrower which, if adversely determined, could have a

material adverse effect on the condition, financial or otherwise,

operations, properties or business of the Borrower, or on the

ability of the Borrower to perform its obligations under the Loan

Documents.

provisions of section [5.20(b)] above, promptly after receipt

thereof, notice of the receipt of all pleadings, orders, complaints,

indictments, or other communications alleging a condition that may

require the Borrower to undertake or to contribute to a cleanup or

other response under laws relating to environmental protection, or

which seek penalties, damages, injunctive relief, or criminal

sanctions related to alleged violations of such laws, or which claim

personal injury or property damage to any person as a result of

environmental factors or conditions, or which, if adversely

determined, could have a material adverse effect on the condition,

financial or otherwise, operations, properties or business of the

Borrower, or on the ability of the Borrower to perform its

obligations under the Loan Documents.

(d) Notice of Change of Place of Business. Promptly in writing,

notice of any change in location of its principal place of business

or the office where its records concerning accounts and contract

rights are kept.

(e) Regulatory and Other Notices. Promptly after receipt

thereof, copies of any notices or other communications received from

any governmental authority with respect to any matter or proceeding,

the effect of which could have a material adverse effect on the

condition, financial or otherwise, operations, properties, or

business of the Borrower, or on the ability of the Borrower to

perform its obligations under the Loan Documents.

(f) Material Adverse Change. Promptly, notice of any matter

which has resulted or may result in a material adverse change in the

condition, financial or otherwise, operations, properties, or

business of the Borrower, or the ability of the Borrower to perform

its obligations under the Loan Documents.

(g) Other Information. Such other information regarding the

condition, financial or otherwise, or operations of the Borrower as

RUS may, from time to time, reasonably request.

Section 5.21. Special Construction Account. The Borrower shall

hold all moneys advanced to it by RUS hereunder in trust for RUS and

shall deposit such moneys promptly after the receipt thereof in a

bank or banks which meet the requirements of Section [6.16] of this

Agreement. Any account (hereinafter called ``Special Construction

Account'') in which any such moneys shall be deposited shall be

designated by the corporate name of the Borrower followed by the

words ``Trustee, Special Construction Account.'' Moneys in any

Special Construction Account shall be used solely for the

construction and operation of the Utility System and, subject to

Section [9.14] of this Agreement, may be withdrawn only upon checks,

drafts, or orders signed on behalf of the Borrower and countersigned

by an executive officer thereof.

Section 5.22. Additional Affirmative Covenants. The Borrower

also agrees to comply with any additional affirmative covenant(s)

identified in Schedule 1 hereto.

Article VI--Negative Covenants

Section 6.1. General. Unless otherwise agreed to in writing by

RUS, while this Agreement is in effect, whether or not any Advance

is outstanding hereunder, the Borrower will duly observe each of the

negative covenants set forth in this Article.

Section 6.2. Limitations on System Extensions and Additions. The

Borrower will not extend or add to its Electric System either by

construction or acquisition without the prior written approval of

RUS.

Section 6.3. Limitations on Expenses for Legal, Engineering and

Supervisory Services. If RUS shall require, the Borrower will not

incur any expenses for legal, engineering or supervisory services

without the prior written approval of RUS.

Section 6.4. Limitations on Employment and Retention of Manager.

At any time any Event of Default, or any occurrence which with the

passage of time or giving of notice would be an Event of Default,

occurs and is continuing the Borrower will not employ any general

manager of the Electric System or any person exercising comparable

authority to such a manager unless such employment shall first have

been approved by RUS. If any Event of Default, or any occurrence

which with the passage of time or giving of notice would be an Event

of Default, occurs and is continuing and RUS requests the Borrower

to terminate the employment of any such manager or person exercising

comparable

[[Page 36921]]

authority, or RUS requests the Borrower to terminate any contract for

operating the Electric System, the Borrower will do so within thirty

(30) days after the date of such notice. All contracts in respect of

the employment of any such manager or person exercising comparable

authority, or for the operation of the Electric System, shall

contain provisions to permit compliance with the foregoing

covenants.

Section 6.5. Limitations on Certain Types of Contracts. Without

the prior approval of RUS in writing, the Borrower shall not enter

into any of the following contracts:

(a) Construction Contracts. Any contract for construction or

procurement or for architectural and engineering services in

connection with its Electric System;

(b) Large retail power contracts. Any contract to sell electric

power and energy for periods exceeding two (2) years if the kWh

sales or kW demand for any year covered by such contract will exceed

25 percent of the Borrower's total kWh sales or maximum kW demand

for the year immediately preceding the execution of such contract;

power or energy for resale and any contract to purchase electric

power or energy that has a term exceeding two (2) years;

(d) Power supply arrangements. Any interconnection agreement,

interchange agreement, wheeling agreement, pooling agreement or

similar power supply arrangement that has a term exceeding two (2)

years;

(e) System management and maintenance contracts. Any contract

for the management and operation of all or substantially all of its

Electric System; or

(f) Other contracts. Any contracts of the type described on

Schedule 3.

Section 6.6. Limitations on Mergers and Sale, Lease or Transfer

of Capital Assets. The Borrower shall not consolidate with, or

merge, or sell all or substantially all of its business or assets,

to another entity or person except to the extent it is permitted to

do so under the Mortgage.

Section 6.7. Limitations on Acquisition, Construction or

Procurement of Generating Facilities, Existing Facilities or Utility

Systems. The Borrower shall not acquire, construct or procure any

generating facilities, existing facilities or utility systems, or

portions thereof, without the prior written approval of RUS.

Section 6.8. Limitation on Distributions. Without the prior

written approval of RUS, the Borrower shall not in any calendar year

make any Distributions (exclusive of any Distributions to the

estates of deceased natural patrons) to its members, stockholders or

consumers except as follows:

(a) Equity above 30%. If, after giving effect to any such

Distribution, the Equity of the Borrower will be greater than or

equal to 30% of its Total Assets; or

(b) Equity above 20%. If, after giving effect to any such

Distribution, the aggregate of all Distributions made during the

calendar year when added to such Distribution will be less than or

equal to 25% of the prior year's margins.

Provided however, that in no event shall the Borrower make any

Distributions if there is unpaid when due any installment of

principal of (premium, if any) or interest on its Notes, if the

Borrower is otherwise in default hereunder or if, after giving

effect to any such Distribution, the Borrower's current and accrued

assets would be less than its current and accrued liabilities.

Section 6.9. Limitations on Loans, Investments and Other

Obligations. The Borrower shall not make any loan or advance to, or

make any investment in, or purchase or make any commitment to

purchase any stock, bonds, notes or other securities of, or

guaranty, assume or otherwise become obligated or liable with

respect to the obligations of, any other person, firm or

corporation, except as permitted by the Act and RUS Regulations.

Section 6.10. Depreciation Rates. The Borrower shall not file

with or submit for approval of regulatory bodies any proposed

depreciation rates which are inconsistent with RUS Regulations.

Section 6.11. Historic Preservation. The Borrower shall not,

without approval in writing by RUS, use any Advance to construct any

facilities which will involve any district, site, building,

structure or object which is included in, or eligible for inclusion

in, the National Register of Historic Places maintained by the

Secretary of the Interior pursuant to the Historic Sites Act of 1935

and the National Historic Preservation Act of 1966.

Section 6.12. Rate Reductions. The Borrower shall not decrease

its rates if it has failed to achieve all of the Coverage Ratios for

the calendar year prior to such reduction.

Section 6.13. Limitations on Additional Indebtedness. Except as

expressly permitted by Article II of the Mortgage and subject to the

further limitations expressed in the next section, the Borrower

shall not incur, assume, guarantee or otherwise become liable in

respect of any debt for borrowed money and Restricted Rentals

(including Subordinated Indebtedness) other than the following:

(``Permitted Debt'')

(a) Additional Notes issued in compliance with Article II of the

Mortgage;

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

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

during any 12 consecutive calendar month period;

(d) Unsecured lease obligations incurred in the ordinary course

of business except Restricted Rentals;

(e) Unsecured indebtedness for borrowed money, except when the

aggregate amount of such indebtedness exceeds 15% of Net Utility

Plant and after giving effect to such unsecured indebtedness the

Borrower's Equity is less than 30% of its Total Assets;

(f) Debt represented by dividends declared but not paid; and

(g) Subordinated Indebtedness approved by RUS.

PROVIDED, However, that the Borrower may incur Permitted Debt

without the consent of RUS 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 Agreement any consent of RUS

that the Borrower would otherwise be required to obtain under this

Section is hereby deemed to be given or waived by RUS by operation

of law to the extent, but only to the extent, that to impose such a

requirement of RUS consent would clearly violate federal laws or RUS

Regulations.

Section 6.14. Limitations on Issuing Additional Indebtedness

Secured Under the Mortgage. (a) The Borrower shall not issue any

Additional Notes under the Mortgage without the prior written

consent of RUS unless the following additional requirements are met

in addition to the requirements set forth in the Mortgage for

issuing Additional Notes without the prior consent of any Mortgagee:

(1) the maturity of the loan evidenced by such Notes does not

exceed the weighted average of the expected remaining useful lives

of the assets being financed;

(2) the principal of the loan evidenced by such Notes is

amortized at a rate that will yield a weighted average life that is

not greater than the weighted average life that would result from

level payments of principal and interest;

(3) the principal of the loan being evidenced by such Notes has

a maturity of not less than 5 years; or, in the case of Additional

Notes issued to refund or refinance Notes; and

(4) the weighted average life of any such Additional Notes is

not greater than the weighted remaining life of the Notes being

refinanced.

(b) Any request for consent from RUS under this section, shall

be accompanied by a certificate of the Borrower's manager

substantially in the form attached to this Agreement as Exhibit C-1

in the case of Notes being issued under Section [2.01] of the

Mortgage and C-2 in the case of Notes being issued under Section

[2.02] of the Mortgage.

Section 6.15. Impairment of Contracts Pledged to RUS. The

Borrower shall not breach any obligation to be paid or performed by

the Borrower on any contract, or take any action which is likely to

materially impair the value of any contract, which has been pledged

as security to RUS by the Borrower or any other entity.

Section 6.16. Limitations on Using non-FDIC Insured

Depositories. The Borrower shall not place any Mortgaged Property in

the custody of any banking institution or other depository, other

than a Mortgagee, unless deposits at such institution are insured by

the Federal Deposit Insurance Corporation, or other Federal agency

acceptable to RUS. Without the prior written approval of RUS, the

Borrower shall not place the proceeds of the Loan or any loan which

has been made or guaranteed by RUS in the custody of any bank or

other depository that is not insured by the Federal Deposit

Insurance Corporation or other federal agency acceptable to RUS.

Section 6.17. Additional Negative Covenants. The Borrower also

agrees to comply with any additional negative covenant(s) identified

in Schedule 1 hereto.

[[Page 36922]]

Article VII--Default

Section 7.1. Events of Default. The following shall be Events of

Default under this Agreement:

(a) Representations and Warranties. Any representation or

warranty made by the Borrower in Article II hereof or any

certificate furnished to RUS hereunder shall prove to have been

incorrect in any material respect at the time made and shall at the

time in question be untrue or incorrect in any material respect and

remain uncured;

(b) Payment. Default shall be made in the payment of or on

account of interest on or principal of the Note when and as the same

shall be due and payable, whether by acceleration or otherwise,

which shall remain unsatisfied for five (5) Business Days;

or performance of any other covenant or agreement contained in any

of the Loan Documents, which shall remain unremedied for 30 calendar

days after written notice thereof shall have been given to the

Borrower by RUS;

(d) Corporate Existence. The Borrower shall forfeit or otherwise

be deprived of its corporate charter, franchises, permits,

easements, consents or licenses required to carry on any material

portion of its business;

(e) Other Obligations. Default by the Borrower in the payment of

any obligation, whether direct or contingent, for borrowed money or

in the performance or observance of the terms of any instrument

pursuant to which such obligation was created or securing such

obligation;

(f) Bankruptcy. A court having jurisdiction in the premises

shall enter a decree or order for relief in respect of the Borrower

in an involuntary case under any applicable bankruptcy, insolvency

or other similar law now or hereafter in effect, or appointing a

receiver, liquidator, assignee, custodian, trustee, sequestrator or

similar official, or ordering the winding up or liquidation of its

affairs, and such decree or order shall remain unstayed and in

effect for a period of ninety (90) consecutive days or the Borrower

shall commence a voluntary case under any applicable bankruptcy,

insolvency or other similar law now or hereafter in effect, or under

any such law, or consent to the appointment or taking possession by

a receiver, liquidator, assignee, custodian or trustee, of a

substantial part of its property, or make any general assignment for

the benefit of creditors; and

(g) Dissolution or Liquidation. Other than as provided in the

immediately preceding subsection, the dissolution or liquidation of

the Borrower, or failure by the Borrower promptly to forestall or

remove any execution, garnishment or attachment of such consequence

as will impair its ability to continue its business or fulfill its

obligations and such execution, garnishment or attachment shall not

be vacated within 30 days. The term ``dissolution or liquidation of

the Borrower'', as used in this subsection, shall not be construed

to include the cessation of the corporate existence of the Borrower

resulting either from a merger or consolidation of the Borrower into

or with another corporation following a transfer of all or

substantially all its assets as an entirety, under the conditions

permitting such actions.

Article VIII--Remedies

Section 8.1. Generally. If any of the Events of Default listed

in Article VII hereof shall occur after the date of this Agreement

and shall not have been remedied, then RUS may pursue all rights and

remedies available to RUS that are contemplated by this Agreement or

the Mortgage in the manner, upon the conditions, and with the effect

provided in this Agreement or the Mortgage, including, but not

limited to, a suit for specific performance, injunctive relief or

damages. Nothing herein shall limit the right of RUS to pursue all

rights and remedies available to a creditor following the occurrence

of an Event of Default listed in Article VII hereof. Each right,

power and remedy of RUS shall be cumulative and concurrent, and

recourse to one or more rights or remedies shall not constitute a

waiver of any other right, power or remedy.

Section 8.2. Suspension of Advances. In addition to the rights,

powers and remedies referred to in the immediately preceding

section, RUS may, in its absolute discretion, suspend making

Advances hereunder if (i) any Event of Default, or any occurrence

which with the passage of time or giving of notice would be an Event

of Default, occurs and is continuing; (ii) there has occurred a

change in the business or condition, financial or otherwise, of the

Borrower which in the opinion of RUS materially and adversely

affects the Borrower's ability to meet its obligations under the

Loan Documents, or (iii) RUS is authorized to do so under RUS

Regulations.

Article IX--Miscellaneous

Section 9.1. Notices. All notices, requests and other

communications provided for herein including, without limitation,

any modifications of, or waivers, requests or consents under, this

Agreement shall be given or made in writing (including, without

limitation, by telecopy) and delivered to the intended recipient at

the ``Address for Notices'' specified below; or, as to any party, at

such other address as shall be designated by such party in a notice

to each other party. Except as otherwise provided in this Agreement,

all such communications shall be deemed to have been duly given when

transmitted by telecopier or personally delivered or, in the case of

a mailed notice, upon receipt, in each case given or addressed as

provided for herein. The Address for Notices of the respective

parties are as follows:

Rural Utilities Service, United States Department of Agriculture,

Washington, DC 20250-1500, Fax: (202) xxxxxxxx

Attention: [Administrator]

The Borrower: The address set forth in Schedule 1 hereto

Section 9.2. Expenses. To the extent allowed by law, the

Borrower will pay all costs and expenses of RUS, including

reasonable fees of counsel, incurred in connection with the

enforcement of the Loan Documents or with the preparation for such

enforcement if RUS has reasonable grounds to believe that such

enforcement may be necessary.

Section 9.3. Late Payments. If payment of any amount due

hereunder is not received at the United States Treasury in

Washington, DC, or such other location as RUS may designate to the

Borrower within five (5) Business Days after the due date thereof or

such other time period as RUS may prescribe from time to time in its

policies of general application in connection with any late payment

charge (such unpaid amount being herein called the ``delinquent

amount'', and the period beginning after such due date until payment

of the delinquent amount being herein called the ``late-payment

period''), the Borrower will pay to RUS, in addition to all other

amounts due under the terms of the Note, the Mortgage and this

Agreement, any late-payment charge as may be fixed by RUS

Regulations from time to time on the delinquent amount for the late-

payment period.

Section 9.4. Filing Fees. To the extent permitted by law, the

Borrower agrees to pay all expenses of RUS (including the fees and

expenses of its counsel) in connection with the filing or

recordation of all financing statements and instruments as may be

required by RUS in connection with this Agreement, including,

without limitation, all documentary stamps, recordation and transfer

taxes and other costs and taxes incident to recordation of any

document or instrument in connection herewith. Borrower agrees to

save harmless and indemnify RUS from and against any liability

resulting from the failure to pay any required documentary stamps,

recordation and transfer taxes, recording costs, or any other

expenses incurred by RUS in connection with this Agreement. The

provisions of this subsection shall survive the execution and

delivery of this Agreement and the payment of all other amounts due

hereunder or due on the Note.

Section 9.5. No Waiver. No failure on the part of RUS to

exercise, and no delay in exercising, any right hereunder shall

operate as a waiver thereof nor shall any single or partial exercise

by RUS of any right hereunder preclude any other or further exercise

thereof or the exercise of any other right.

Section 9.6. GOVERNING LAW. EXCEPT TO THE EXTENT GOVERNED BY

APPLICABLE FEDERAL LAW, THE LOAN DOCUMENTS SHALL BE DEEMED TO BE

GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE

[IN WHICH THE BORROWER IS INCORPORATED].

Section 9.7. Holiday Payments. If any payment to be made by the

Borrower hereunder shall become due on a day which is not a Business

Day, such payment shall be made on the next succeeding Business Day

and such extension of time shall be included in computing any

interest in respect of such payment.

Section 9.8. Rescission. The Borrower may elect not to borrow

all or any portion of the RUS Commitment in which event RUS shall

release the Borrower from its obligations hereunder, provided the

Borrower complies with such terms and conditions as RUS may impose

for such release.

Section 9.9. Successors and Assigns. This Agreement shall be

binding upon and inure to the benefit of the Borrower and RUS and

their respective successors and assigns,

[[Page 36923]]

except that the Borrower may not assign or transfer its rights or

obligations hereunder without the prior written consent of RUS.

Section 9.10. Complete Agreement; Amendments. Subject to RUS

Regulations, this Agreement and the other Loan Documents are

intended by the parties to be a complete and final expression of

their agreement. No amendment, modification, or waiver of any

provision hereof or thereof, and no consent to any departure of the

Borrower herefrom or therefrom, shall be effective unless approved

by RUS and contained in either a RUS Regulation or other writing

signed by or on behalf of RUS, and then such waiver or consent shall

be effective only in the specific instance and for the specific

purpose for which given.

Section 9.11. Headings. The headings and sub-headings contained

in the titling of this Agreement are intended to be used for

convenience only and do not constitute part of this Agreement.

Section 9.12. Severability. If any term, provision or condition,

or any part thereof, of this Agreement or the Mortgage shall for any

reason be found or held invalid or unenforceable by any governmental

agency or court of competent jurisdiction, such invalidity or

unenforceability shall not affect the remainder of such term,

provision or condition nor any other term, provision or condition,

and this Agreement, the Note, and the Mortgage shall survive and be

construed as if such invalid or unenforceable term, provision or

condition had not been contained therein.

Section 9.13. Right of Setoff. Upon the occurrence and during

the continuance of any Event of Default, RUS is hereby authorized at

any time and from time to time, without prior notice to the

Borrower, to exercise rights of setoff or recoupment and apply any

and all amounts held or hereafter held, by RUS or owed to the

Borrower or for the credit or account of the Borrower against any

and all of the obligations of the Borrower now or hereafter existing

hereunder or under the Note. RUS agrees to notify the Borrower

promptly after any such setoff or recoupment and the application

thereof, provided that the failure to give such notice shall not

affect the validity of such setoff, recoupment or application. The

rights of RUS under this section are in addition to any other rights

and remedies (including other rights of setoff or recoupment) which

RUS may have. Borrower waives all rights of setoff, deduction,

recoupment or counterclaim.

Section 9.14. Right of RUS to Appoint Supervisor. If the

construction of any portion of the Electric System shall not proceed

in accordance with the terms of the Loan Documents, RUS may appoint

a supervisor (hereinafter called the ``Supervisor'') for the

Electric System. Upon the appointment of a Supervisor, the

employment of all superintendents and managers of the Electric

System and of all associate and assistant superintendents and

managers thereof shall be forthwith terminated. The Borrower shall

comply with all reasonable instructions of the Supervisor incident

to the carrying out of the obligations of the Borrower hereunder.

Section 9.15. Schedules and Exhibits. Each Schedule and Exhibit

attached hereto and referred to herein is each an integral part of

this Agreement.

Section 9.16. Prior Loan Contracts. It is understood and agreed

that with respect to all loan agreements previously entered into by

and between RUS and the Borrower (hereinafter being referred to as

``Prior Loan Contracts'') the Borrower shall be required, after the

date hereof, to meet affirmative and negative covenants as set forth

in this Agreement rather than those set forth in the Prior Loan

Contracts. In addition, any remaining obligation of RUS to make

additional advances on promissory notes of the Borrower that have

been previously delivered to RUS under Prior Loan Contracts shall,

after the date hereof, be subject to the conditions set for in this

Agreement. In the event of any conflict between any provision set

forth in a Prior Loan Contract and any provision in this Agreement,

the requirements as set forth in this Agreement shall apply. In the

event of any conflict between the provisions set forth in this

Agreement and any RUS Regulations now or hereafter in effect from

time to time, the RUS Regulations apply. Nothing in this section

shall, however, eliminate or modify any special condition, special

affirmative covenant or special negative covenant, if any, unless

specifically agreed to in writing by RUS.

Section 9.17. Term. This Agreement shall remain in effect until

one of the following two events has occurred:

(a) the Borrower and RUS replace this Agreement with another

written agreement or

(b) all of the Borrower's obligations under the prior loan

contracts and this Agreement have been discharged and paid.

IN WITNESS WHEREOF, the parties hereto have caused this

Agreement to be duly executed as of the day and year first above

written.

----------------------------------------------------------------------

(Name of Borrower)

(SEAL)

By---------------------------------------------------------------------

President

Attest:----------------------------------------------------------------

Secretary

RURAL UTILITIES SERVICE

By---------------------------------------------------------------------

Administrator

Schedule 1

[citations subject to change]

1. The purpose of this loan is ________.

2. The Mortgage shall mean the Restated Mortgage and Security

Agreement, dated as of ________, between the Borrower and RUS, as it

may have been or shall be supplemented, amended, consolidated, or

restated from time to time.

3. The governmental authority referred to in Section [2.1(c)] is

________.

4. The exception being taken to the representations in Section

[2.1(e)] concerning material compliance with laws is as follows:

________.

5. The litigation referred to in Section [2.1(f)] is described

as follows: ________.

6. The date of the Borrower's financial information referred to

in Section [2.1(h)] is ________.

7. The principal place of business of the Borrower referred to

in Section [2.1(i)] is ________.

8. All of the property of the Borrower is located in the

counties of ________.

9. The subsidiary (or subsidiaries) referred to in Section

[2.1(k)] is (are): ________.

10. The Contemporaneous Loan referred to in Section [5.3] is

described as follows: ________.

Lender:----------------------------------------------------------------

Amount:----------------------------------------------------------------

Year of Final Maturity:------------------------------------------------

11. The RUS Commitment referred to in the definitions means a

loan in the principal amount of $______ which is being made by RUS

to the Borrower at the ____ Hardship Rate ____ Municipal Rate (CHECK

ONE) pursuant to the Rural Electrification Act and RUS Regulations.

12. Amortization of Advance shall be based upon the method

indicated below:

______ level principal

______ level debt service

______ other

13. The SPECIAL condition(s) referred

to in Section [4.2] is (are): ______.

14. The additional AFFIRMATIVE

covenant(s) referred to in

Section [5.22] is (are) as

follows: ____________.

15. The additional NEGATIVE

covenant(s) referred to in Section

[6.17] is (are) as follows: ______.

16. The address of the Borrower

referred to in Section [9.1].

is ________________.

Schedule 2--Existing Liens

The Existing Liens referred to in Section [2.1(g)] are as

follows:

[INSERT DESCRIPTION OF EXISTING LIENS, IF ANY, HERE]

Schedule 3--Additional Contracts

The additional contracts referred to in Section [6.5(e)] are

described as follows:

[INSERT LIST OF ANY ADDITIONAL CONTRACTS HERE]

Exhibit A--Form of Promissory Note

[INSERT EITHER MUNICIPAL or HARDSHIP RATE PROMISSORY NOTE FORM HERE]

Exhibit B--Equal Opportunity Contract Provisions

During the performance of this contract, the contractor agrees

as follows:

(a) The contractor will not discriminate against any employee or

applicant for employment because of race, color, religion, sex or

national origin. The contractor will take affirmative action to

ensure that applicants are employed, and that employees are treated

during employment without regard to their race, color, religion, sex

or national origin. Such action shall include, but not be limited to

the following: employment, upgrading, demotion or transfer,

recruitment or recruitment advertising; layoff or termination; rates

of pay or other forms of compensation; and selection for training,

including apprenticeship. The contractor agrees to post in

conspicuous places, available to employees and applicants for

employment, notices to be provided setting forth the provisions of

this nondiscrimination clause.

[[Page 36924]]

(b) The contractor will, in all solicitations or advertisements

for employees placed by or on behalf of the contractor, state that

all qualified applicants will receive consideration for employment

without regard to race, color, religion, sex or national origin.

representative of workers with which he has a collective bargaining

agreement or other contract or understanding, a notice to be

provided advising the said labor union or workers' representative of

the contractor's commitments under this section, and shall post

copies of the notice in conspicuous places available to employees

and applicants for employment.

(d) The contractor will comply with all provisions of Executive

Order 11246 of September 24, 1965, and of the rules, regulations and

relevant orders of the Secretary of Labor.

(e) The contractor will furnish all information and reports

required by Executive Order 11246 of September 24, 1965, and by the

rules, regulations and orders of the Secretary of Labor, or pursuant

thereto, and will permit access to his books, records and accounts

by the administering agency and the Secretary of Labor for purposes

of investigation to ascertain compliances with such rules,

regulations and orders.

(f) In the event of the contractor's noncompliance with the non-

discrimination clauses of this contract or with any of the said

rules, regulations or orders, this contract may be cancelled,

terminated or suspended in whole or in part and the contractor may

be declared ineligible for further Government contracts or federally

assisted construction contracts in accordance with procedures

authorized in Executive Order 11246 of September 24, 1965, and such

other sanctions may be imposed and remedies invoked as provided in

said Executive Order or by rule, regulation or order of the

Secretary of Labor, or as otherwise provided by law.

(g) The contractor will include the provisions of paragraphs (a)

through (g) in every subcontract or purchase order unless exempted

by rules, regulations or orders of the Secretary of Labor issued

pursuant to section 204 of Executive Order 11246, dated September

24, 1965, so that such provisions will be binding upon each

subcontractor or vendor. The contractor will take such action with

respect to any subcontract or purchase order as the administering

agency may direct as a means of enforcing such provisions, including

sanctions for noncompliance: Provided, however, that in the event a

contractor becomes involved in, or is threatened with, litigation

with a subcontractor or vendor as a result of such direction by the

agency, the contractor may request the United States to enter into

such litigation to protect the interests of the United States.

Exhibit C-1--Manager's Certificate Required Under Loan Contract Section

6.14 for Additional Notes

On behalf of [Name of Borrower] I hereby certify that the

Additional Note or Notes to be issued under Section [2.01] of the

Mortgage on or about [Date Note or Notes are to be Signed] meet all

of the requirements of Section [6.14] of the Loan Contract, namely:

(a) The maturity of the loan evidenced by such Notes (____

years) does not exceed the weighted average of the expected

remaining useful lives of the assets being financed (____ years) as

evidenced by the attached calculation of said weighted average.

(b) The principal of the loan evidenced by such Notes will

either be [check one and provide evidence in the second case]:

____ (1) repaid based on level payments of principal and

interest throughout the life of the loan, or

____ (2) amortized at a rate that will yield a weighted average

life that is not greater than the weighted average life that would

result from level payments of principal and interest throughout the

life of the loan as evidenced by the attached analysis of said

weighted average lives.

____ (3) The principal of the loan evidenced by such Notes has a

maturity of not less than 5 years.

[Signed]---------------------------------------------------------------

[Dated]----------------------------------------------------------------

[Name]-----------------------------------------------------------------

[Title]----------------------------------------------------------------

[Name and Address of Borrower]--

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