Investments, Loans, and Guarantees by Electric Borrowers

DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1717

Investments, Loans, and Guarantees by Electric Borrowers

AGENCY: Rural Utilities Service, USDA.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Rural Utilities Service (RUS) hereby revises its policies

and requirements governing restrictions on investments, loans and

guarantees made by electric borrowers. This rule is intended to clarify

RUS's policies and requirements, reduce uncertainty by borrowers, and

improve compliance.

EFFECTIVE DATE: This rule is effective October 23, 1995.

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

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

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

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

720-9547.

SUPPLEMENTARY INFORMATION: This rule has been determined to be not

significant for the purposes of Executive Order 12866, and therefore

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

Administrator of RUS has determined that the Regulatory Flexibility Act

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

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

quality of the human environment as defined by the National

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

this action does not require an environmental impact statement or

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

12372, Intergovernmental Consultation, which may require consultation

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

Department Programs and Activities Excluded from Executive Order 12372

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

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

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

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

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

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

before any parties may file suit challenging the provisions of this

rule.

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

Federal Domestic Assistance Programs under number 10.850 Rural

Electrification Loans and Loan Guarantees. This catalog is available on

a subscription basis from the Superintendent of Documents, the United

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

Information Collection and Recordkeeping Requirements

The existing recordkeeping and reporting burdens contained in this

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

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

seq.), under control number 0572-0032.

Send questions or comments regarding these burdens or any other

aspect of these collections of information, including suggestions for

reducing the burden, to the Office of Information and Regulatory

Affairs, Office of Management and Budget, room 10102, NEOB, Washington,

DC 20503. Attention: Desk Officer for USDA.

Background

On December 22, 1987, section 312 was added to the Rural

Electrification Act of 1936. This section allows electric borrowers to

invest their own funds or make loans or guarantees, not in excess

[[Page 48871]]

of 15 percent of their total utility plant, without restriction or

prior approval of the Administrator of the Rural Utilities Service

(RUS). On June 29, 1989, RUS issued a final rule codifying this

provision in 7 CFR part 1717, subpart N (at 54 FR 27325). Mortgages

executed prior to that date contained a provision granting the

Administrator the right to approve investments, loans and guarantees by

the borrower once the aggregate of such investments, loans and

guarantees reached 3 percent of total utility plant.

On February 16, 1995, at 60 FR 8981, RUS published a proposed rule

to clarify RUS's policies and requirements regarding restrictions on

borrower investments, loans and guarantees. Over the years borrowers

had raised a number of questions about such issues as: which

investments, loans or guarantees are subject to RUS approval and which

are excluded; the criteria used by RUS in approving an investment, loan

or guarantee; whether RUS approval of an investment, loan or guarantee

means that it is no longer counted in determining the ratio to total

utility plant; whether RUS will approve an investment, loan or

guarantee if the borrower is under the 15 percent limit; whether a

borrower will be in default under its mortgage because net profits

earned on its investments pushed its total above the 15 percent limit.

This final rule resolves such questions.

RUS is also in the process of updating its mortgage and loan

contract used with electric borrowers. RUS published a proposed

mortgage for electric distribution borrowers on September 29, 1994 at

59 FR 49594. In that rule it was proposed that RUS controls over

borrower investments, loans and guarantees be moved from the mortgage

to the RUS loan contract. Such a move would have no effect on RUS's

controls or their enforceability under the RUS mortgage. On July 18,

1995 RUS published the final rule for the distribution mortgage and a

proposed rule for the distribution loan contract, at FR 36882 and FR

36904, respectively.

Comments on the proposed changes to RUS investment controls

contained in 7 CFR part 1717, subpart N were received from 26

commenters, including the National Rural Electric Cooperative

Association, the National Rural Utilities Cooperative Finance

Corporation (CFC), the Saint Paul Bank for Cooperatives, and 23

borrowers or regional borrower associations. All comments were

considered in preparing this final rule. The more significant or more

frequently made comments are discussed below.

Section 1717.651 Policy

Questions were raised about the second part of the statement: ``RUS

electric borrowers are encouraged to utilize their own funds to

participate in the economic development of rural areas, provided that

such activity does not in any way put government funds at risk or

impair a borrower's ability to repay its indebtedness to RUS and other

lenders.'' RUS did not propose any change in this statement, which is

contained in the existing rule.

It was suggested that this policy is unworkable since any

investment involves some risk. RUS recognizes that most investments

involve some risk, but continues to believe that it is only prudent

that borrowers avoid those investments having risks of a magnitude that

would in any way put government funds at risk or impair loan repayment.

We continue to believe that this is the correct interpretation of the

intent of section 312.

Section 1717.652 Definitions

The term ``own funds'' was defined as ``money belonging to the

borrower other than the proceeds of loans made or guaranteed by RUS.''

Such proceeds include, but are not limited to, all funds on deposit in

the cash-construction fund-trustee account. A commenter pointed out

that requests for loan advances commonly occur after general funds have

already been expended for loan purposes, and that it would be difficult

to separate general funds into cash generated by operations and that

derived from loan advances. This was not the agency's intent, nor is

such separation required under the existing rule. To make this clear,

the definition has been revised as follows: ``Own funds means money

belonging to the borrower other than funds on deposit in the cash-

construction fund-trustee account.''

One commenter stated that Operating TIER and Operating DSC, used as

part of the criteria in proposed Sec. 1717.655 to determine eligibility

for an exemption from controls, appeared to be the same as standard

TIER and DSC. They are not, since they measure interest and debt

coverage only for the borrower's electric utility operations. Margins

used in the calculation are operating margins rather than total

margins. A few technical changes have been made to the definitions in

this final rule to make it clearer that Operating TIER and Operating

DSC apply only to the borrower's electric system and do not apply to

any other utility operations of the borrower, such as a water and waste

disposal system owned by the borrower.

One commenter asked whether margins earned by subsidiaries

controlled by a borrower would be included in operating margins used in

calculating Operating TIER and DSC. Since such subsidiaries are

separate business entities outside the borrower's core electric utility

business, as indicated above their profits or losses will not be

included in calculating Operating TIER and DSC. They are, however,

included in the calculation of standard TIER and DSC contained in the

rate covenant of the typical mortgage or loan contract.

A question was asked about whether ``telecommunication and other

electronic communication system'' includes satellite and direct

broadcast television service. The answer is yes, provided that ``the

service'' includes providing a continuing service to customers, such as

television programming, rather than just a one-time sale of equipment,

and as set forth in the definition, such services ``are available by

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

community.''

Section 1717.653 Borrowers in Default

This section has been added to clarify the point that if a borrower

in not in compliance with all provisions of its mortgage, loan

contract, or any other agreements with RUS, the borrower must obtain

prior written approval from the Administrator to invest its own funds

or to make loans or guarantees, unless such loan document or other

agreement specifically provides otherwise. This was implicit in

proposed section 1717.653(a) (renumbered 1717.654(a)), and is now

spelled out for greater clarity.

Section 1717.654 (Proposed 1717.653) Transactions Below the 15 Percent

Level

Clarification was requested of the statement that ``funds necessary

to make timely payments of principal and interest on loans secured by

the RUS mortgage remain subject to RUS controls. * * *'' The purpose of

this statement is to make it clear that while RUS controls on

investments, loans and guarantees by the borrower do not ordinarily

apply below the 15 percent level, RUS may impose such controls case-by-

case in those circumstances where they are necessary to ensure

reasonably adequate loan security or to ensure the repayment of loans

secured under the mortgage. Such instances presumably would be

relatively rare, and the borrower would be notified in advance that the

controls were being imposed.

[[Page 48872]]

One commenter stated that the apparent effect of paragraph (b) of

this section is to restrict the limitations on investments contained in

the rule to loan contracts or mortgages executed after the effect date

of the final rule. That is not correct. Proposed paragraph (b)

described language to be included in the loan contract or mortgage

regarding investment controls, and proposed certain changes in the

prescribed language for these documents contained in Sec. 1717.654(b)

of the existing rule. In the final rule, this prescribed language has

been further revised to conform with the approach used in the new

mortgage and proposed loan contract for distribution borrowers: namely,

the provision is expressed in more general terms, relying on RUS

regulations to flesh out the interpretation and specific requirements

of the provision. Revised paragraph (b) has been moved to

Sec. 1717.659.

The provisions of existing subpart N have applied to all borrowers

since the date it became effective, July 31, 1989, regardless of when

their loan contracts or mortgages were executed. Changes to subpart N

contained in this final rule will also apply to all borrowers

regardless of when their loan documents were executed. This has been

clarified in Sec. 1717.650. RUS believes that borrowers who qualify for

an outright exemption from investment controls should not have to wait

until new loan documents are executed before becoming eligible. Nor

should other reforms be delayed, such as excluding rural community

infrastructure from the 15 percent calculation.

Section 1717.655 (Proposed 1717.654) Exclusion of Certain Investments,

Loans, and Guarantees

The Saint Paul Bank for Cooperatives recommended that investments

in it be excluded, as are investments in CFC and CoBank. This has been

done.

A commenter pointed out that investments made in a trust fund

dedicated to pay the decommissioning costs of nuclear generating

facilities was not listed in this section as an excluded investment,

but is excluded under RUS Bulletin 1717B-3. Failure to list such

investments as excluded under this section was inadvertent, and this

has been corrected.

One commenter noted that several generation and transmission

borrowers (G&Ts) have invested in fuel supply subsidiaries in an effort

to control fuel costs, and argued that such investments should be

excluded. This recommendation has not been adopted.

Such subsidiaries often have other lines of business and often

provide services to other utilities or other companies, making it

difficult to determine to what extent the subsidiary is involved in

providing services in direct support of the borrower's electric utility

business. If fuel supply subsidiaries were excluded, then there would

be pressure to exclude other subsidiaries that might provide some

services to the borrower, such as warehousing, barge service, railroad

or truck service, insurance, engineering services, etc. Moreover, the

property of a subsidiary generally is not subject to the lien of the

government's mortgage, and the property and operations of the

subsidiary are not subject to RUS operational controls and approval

rights. This often can present serious problems with respect to the

agency's programmatic and security interests.

A commenter recommended that patronage capital allocated to a G&T

by its distribution members be excluded. Such allocations often occur

when a G&T buys power from its members for headquarters, warehouses,

and metering points located in the members' territory. This

recommendation has been adopted.

Another commenter stated that the exclusion of community

infrastructure in paragraph (c)(3) should not be based on whether the

infrastructure is located within the borrower's service territory, but

whether the infrastructure serves consumers located in rural areas. RUS

agrees with the recommendation for the purposes of this rule, and has

so revised the paragraph.

Proposed paragraph (c)(1) excluded investments or loans made by a

borrower derived from funds obtained from grants or loans received from

a USDA agency. Such grants and loans from a USDA agency normally would

be for purposes supporting rural economic development. A commenter

recommended that the source of the grant or loan be expanded to include

any Federal, State or local government agency. RUS agrees with this

recommendation provided that such loan funds are designated to promote

rural economic development and the borrower uses the funds for that

purpose. Grant funds that the borrower is not obligated to repay may be

for any purpose since there would be little or no risk to RUS loan

security. In reality, most such grants likely would be for rural

economic development.

A co-mortgagee suggested that it be granted what it described as

the same preapproval of credit enhancement in paragraph (d) as granted

USDA agencies in cases where a borrower is required to make an

investment, loan, or guarantee, for example, as a condition of

obtaining financial assistance from the agency. The intent of this

provision is to support rural economic development, for example, in

instances where a borrower is required to invest some of its own funds

in order to qualify for a rural development grant or loan, which

usually will be on subsidized terms. Investments in the co-mortgagee in

question are excluded under paragraph (b) of this section.

Section 1717.656 (Proposed 1717.655) Exemption of Certain Borrowers

From Controls

A number of comments were received about the criteria for

qualifying for an exemption from investment controls set forth in

paragraph (a).

One borrower asked whether patronage capital earned or refunded

would be subtracted from the average residential rate of borrowers in

making the comparison with the average residential rate for all

utilities serving a state. The answer is, no. This adjustment would not

be significant enough to make a difference among borrowers or to

justify the additional complexity. Borrowers are reminded that if they

fail to qualify for an exemption based solely on the rate disparity

criterion, upon request the Administrator may grant the exemption if he

or she determines that the borrowers' strengths in the other criteria

outweigh their weakness on rate disparity.

Several borrowers suggested that it would be more ``prudent'' to

use a standard TIER of 1.05 for G&Ts rather than the proposed Operating

TIER and Operating DSC of 1.0. RUS disagrees that that would be more

``prudent'' from the standpoint of loan security. In addition to

Operating TIER and DSC, a borrower would have to meet the TIER and DSC

requirements in its mortgage (the first criterion under paragraph (a)),

which for most G&Ts is a standard DSC of 1.0 and standard TIER of 1.0

or 1.05. The advantage of requiring a minimum Operating TIER and DSC of

1.0 is that it will ensure that a borrower is at least breaking even on

its main business, its electric operations, and does not need to rely

on income from investments and other non-core activities to meet its

debt service and other expenses of its core business.

Several G&Ts argued that the minimum equity required to qualify for

an exemption should be set lower for G&Ts than for distribution

systems. RUS disagrees since it is not apparent that giving G&T's wider

latitude to make investments without RUS approval would involve less

risk to loan security than in the case of distribution borrowers.

[[Page 48873]]

Several borrowers opposed the netting out of regulatory created

assets when calculating equity as a percent of total assets. RUS

disagrees since these assets represent current period expenses that

should have been expensed, rather than capitalized, in order to reflect

the true operating performance of the borrower. Deferring these

expenses overstates both equity and total assets. RUS has followed this

practice for the past several years, codifying it in the lien

accommodation rule (7 CFR part 1717, subparts R and S), the 110 percent

rule (7 CFR 1710.7 and 7 CFR 1717.860), and the distribution mortgage

(7 CFR part 1718, subpart B).

Under paragraph (c), a borrower that has lost its exemption may

regain it if it once again meets the exemption criteria. One commenter

recommended that restoration of the exemption ought to be automatic,

rather than contingent upon written notice from RUS. RUS believes that

notice is required in order for the borrower and RUS to have the same

understanding about the exemption status of the borrower. Without

requiring notification, disputes and associated administrative costs

and delays would likely occur. Requiring written notice to restore an

exemption is consistent with the written notice required to terminate

an exemption.

Under paragraph (d), a borrower that has lost its exemption and has

exceeded the 15 percent limit would be required to reduce or

restructure its investment portfolio to come within the 15 percent

limit. If the borrower failed to come within the 15 percent limit

within a reasonable period of time determined by the Administrator, the

borrower could be given notice of default.

The proposed paragraph implicitly assumed the borrower was in

compliance with all other provisions of its mortgage, loan contract,

and any other agreements with RUS. This has now been made explicit, and

it has been reiterated that if the borrower is not in compliance with

such provisions it may be required to reduce its investment portfolio

below the 15 percent level, if not prohibited by the explicit terms of

the borrower's mortgage, loan contract, or other agreement with RUS.

One commenter argued that RUS should not be able to call a default

if the investments that exceeded the 15 percent limit were made while

the borrower was exempt. RUS disagrees, since without the right to call

a default there would be less leverage to reduce loan security risks in

cases where a borrower had a high-risk investment portfolio that

substantially exceeded the 15 percent limit. There would also be less

incentive for borrowers to maintain the performance levels required for

an exemption if there were no penalty for failing to maintain these

levels.

However, it may not be necessary in all cases to require a formerly

exempt borrower to reduce its investment portfolio to the 15 percent

limit. Paragraph (d) has therefore been revised to give the

Administrator the flexibility to allow a formerly exempt borrower not

in default to remain above the 15 percent limit if the Administrator

determines that reducing or restructuring the investment portfolio to

come within the limit would not be in the financial interest of the

government from the standpoint of loan security and/or repayment.

Section 1717.657 (Proposed 1717.656) Investments Above the 15 Percent

Level by Certain Borrowers not Exempt Under Sec. 1717.656(a)

A commenter recommended that G&Ts not meeting the minimum criteria

in paragraph (c) for requesting RUS approval of investments above the

15 percent level should nevertheless be given a chance to have their

requests considered. RUS disagrees. The criteria are very minimal: no

default, no financial workout or restructured debt, and a minimum

equity of 5 percent. G&Ts (as well as distribution borrowers) that are

in default do not in the first place qualify under Sec. 1717.654(a) to

make investments, loans and guarantees up to the 15 percent level

without RUS approval. Section 1717.657 does not apply to them. Other

G&Ts that are not in default but have equity of less than 5 percent, or

are in financial workout, or have had their debt restructured, ought to

confine investments above the 15 percent level to excluded investments.

Another commenter recommended that distribution borrowers not

meeting the criteria for an outright exemption from investment controls

(Sec. 1717.656(a)) ought to be able to seek approval from RUS for

investments above the 15 percent level. RUS believes such borrowers

should restrict their investments above the 15 percent level to

excluded investments. Some 84 percent of distribution borrowers qualify

for an outright exemption. Many of the remaining borrowers could make

changes in their operations and qualify for an exemption.

A co-mortgagee argued that it would be more prudent to relate the

maximum limit on investments by G&Ts to equity, rather than 20 percent

of total utility plant (see Sec. 1717.657(c)). RUS agrees that it would

be more logical to use equity, one of the criteria used to determine

eligibility for an exemption from investment controls. However, setting

the maximum investment limit at even 100 percent of equity would result

in a limit for most G&Ts lower than the 15 percent of total utility

plant mandated by section 312 of the RE Act.

A commenter asked whether the 10-year look-back on net profits on

investments in paragraph (d) is a rolling or one-time calculation. It

is a rolling calculation done at the time RUS is asked by a borrower to

exclude all or a portion of net profits that have resulted in

investments exceeding the 15 percent limit.

Section 1717.658 (Proposed 1717.657) Records, Reports and Audits

One commenter recommended changing current practice which requires

guarantees and lines of credit to be counted in full against the 15

percent limit whether or not there is a loan outstanding or any

likelihood the guarantee will be called upon. RUS does not believe

current practice should be changed. A line of credit could be drawn

upon at any time and RUS would have no way of anticipating when that

time might come. Presumably borrowers would not want their ability to

make good on a line of credit commitment to another party to be subject

to subsequent approval by RUS. As to excluding guarantee obligations of

the borrower that are unlikely to be called upon, in most cases it

would be very difficult and time-consuming for RUS to assess the

probability that the borrower will be required to perform under the

guarantee.

One commenter stated that the balance sheet method used by RUS to

count investments is not consistent with section 312. RUS disagrees

with that view, and notes that Sec. 1717.657(d) of the rule addresses

the main concern that has been raised over the years: namely, that net

profits on investments may cause a borrower to exceed the 15 percent

limit and possibly be in default. Section 1717.657(d) provides that

such circumstances would not necessarily result in a default, and at a

borrower's request, the Administrator could exclude up to the amount of

net profit earned over the past 10 years if such exclusion would not

increase loan security risks.

Section 1717.659 (Proposed 1717.658) Effect on RUS Loan Contract and

Mortgage

Section 1717.656(c) of the existing regulation explicitly states

that, ``Nothing in this subpart authorizes a borrower to make

extensions or improvements to its electric system without prior

approval of RUS.'' That

[[Page 48874]]

provision was subsumed under a more comprehensive provision in proposed

Sec. 1717.658(a), which in the final rule has been clarified by adding

the specific reference to RUS approval rights over system extensions

and additions. Similar changes have been made to sections 1717.654 and

1717.656.

Borrowers Exempt From Investment Controls

The distribution and power supply borrowers listed below meet the

criteria in Sec. 1717.656(a) and are exempt from RUS approval of any

investment, loan, or guarantee made on or after September 21, 1995.

Borrowers are reminded that, under Sec. 1717.656(c), if they

subsequently cease to meet the exemption criteria, upon written notice

from RUS they will no longer be exempt from RUS investment controls.

Borrowers that do not meet the criteria for exemption will be

notified individually in writing by RUS and will be advised of the

reasons they fail to qualify.

Borrowers Exempt From RUS Investment Controls

AL 9

AL 18

AL 19

AL 20

AL 21

AL 23

AL 25

AL 26

AL 27

AL 28

AL 29

AL 30

AL 32

AL 35

AL 36

AL 37

AL 39

AL 44

AL 46

AL 47

AL 48

AK 2

AK 5

AK 6

AK 11

AZ 13

AZ 20

AZ 23

AZ 27

AZ 30

AR 9

AR 10

AR 11

AR 12

AR 13

AR 15

AR 18

AR 21

AR 22

AR 23

AR 24

AR 26

AR 27

AR 28

AR 29

AR 33

CA 6

CA 16

CO 7

CO 14

CO 15

CO 16

CO 18

CO 20

CO 22

CO 29

CO 31

CO 32

CO 33

CO 34

CO 37

CO 38

CO 39

CO 40

CO 42

DE 2

FL 14

FL 15

FL 16

FL 17

FL 22

FL 23

FL 24

FL 28

FL 29

FL 30

FL 33

FL 34

FL 35

GA 7

GA 8

GA 17

GA 20

GA 22

GA 31

GA 34

GA 35

GA 37

GA 39

GA 42

GA 45

GA 58

GA 65

GA 66

GA 67

GA 68

GA 69

GA 73

GA 74

GA 75

GA 77

GA 78

GA 81

GA 83

GA 84

GA 86

GA 87

GA 88

GA 90

GA 91

GA 92

GA 94

GA 95

GA 96

GA 97

GA 98

GA 99

GA 103

GA 108

ID 4

ID 11

ID 16

ID 19

ID 23

IL 2

IL 7

IL 8

IL 18

IL 21

IL 23

IL 30

IL 31

IL 32

IL 33

IL 34

IL 37

IL 38

IL 41

IL 43

IL 44

IL 45

IL 46

IL 48

IL 54

IN 1

IN 6

IN 7

IN 8

IN 14

IN 18

IN 26

IN 27

IN 29

IN 32

IN 35

IN 37

IN 38

IN 40

IN 42

IN 46

IN 47

IN 52

IN 53

IN 55

IN 60

IN 70

IN 80

IN 81

IN 83

IN 87

IN 88

IN 89

IN 92

IN 99

IN 100

IN 108

IN 109

[[Page 48875]]

IA 2

IA 3

IA 5

IA 7

IA 9

IA 14

IA 15

IA 16

IA 23

IA 26

IA 30

IA 31

IA 32

IA 33

IA 34

IA 36

IA 39

IA 40

IA 41

IA 50

IA 51

IA 52

IA 53

IA 56

IA 57

IA 59

IA 62

IA 67

IA 69

IA 70

IA 71

IA 74

IA 75

IA 77

IA 82

IA 92

IA 93

KS 7

KS 13

KS 15

KS 18

KS 21

KS 22

KS 24

KS 27

KS 30

KS 31

KS 33

KS 41

KS 42

KS 47

KS 48

KS 56

KY 3

KY 18

KY 20

KY 21

KY 23

KY 26

KY 27

KY 30

KY 33

KY 34

KY 35

KY 37

KY 38

KY 40

KY 45

KY 50

KY 51

KY 52

KY 54

KY 55

KY 56

KY 57

KY 58

KY 61

LA 6

LA 7

LA 8

LA 9

LA 12

LA 17

LA 19

LA 20

MD 7

MI 5

MI 26

MI 33

MI 37

MI 40

MI 41

MI 43

MI 44

MI 45

MN 1

MN 3

MN 4

MN 9

MN 10

MN 12

MN 18

MN 25

MN 32

MN 34

MN 35

MN 37

MN 39

MN 48

MN 53

MN 55

MN 56

MN 57

MN 58

MN 59

MN 60

MN 61

MN 62

MN 63

MN 65

MN 66

MN 72

MN 73

MN 74

MN 75

MN 79

MN 80

MN 81

MN 82

MN 83

MN 84

MN 85

MN 87

MN 95

MN 96

MN 97

MN 101

MN 108

MS 1

MS 21

MS 22

MS 23

MS 24

MS 26

MS 28

MS 29

MS 30

MS 31

MS 34

MS 36

MS 39

MS 40

MS 41

MS 43

MS 45

MS 48

MS 49

MS 50

MO 12

MO 18

MO 19

MO 20

MO 22

MO 23

MO 24

MO 26

MO 27

MO 28

MO 30

MO 31

MO 32

MO 33

MO 34

MO 36

MO 37

MO 38

MO 40

MO 41

MO 42

MO 43

MO 44

MO 45

MO 46

MO 47

MO 48

MO 49

MO 50

MO 51

MO 53

MO 54

MO 55

MO 58

MO 66

MO 67

MO 68

MO 69

MO 70

MO 71

MO 72

MT 1

MT 2

MT 9

MT 10

MT 12

MT 13

MT 15

MT 17

[[Page 48876]]

MT 19

MT 21

MT 24

MT 25

MT 26

MT 27

MT 30

MT 31

MT 33

MT 36

NE 3

NE 4

NE 51

NE 59

NE 62

NE 63

NE 65

NE 66

NE 77

NE 78

NE 84

NE 85

NE 97

NE 98

NV 4

NV 15

NV 18

NJ 6

NM 4

NM 8

NM 9

NM 11

NM 20

NM 21

NM 22

NM 23

NM 28

NY 19

NY 20

NY 21

NY 24

NC 10

NC 14

NC 16

NC 21

NC 23

NC 25

NC 31

NC 32

NC 33

NC 34

NC 35

NC 36

NC 38

NC 39

NC 40

NC 43

NC 46

NC 49

NC 50

NC 51

NC 52

NC 55

NC 58

NC 59

NC 64

NC 66

NC 68

ND 8

ND 21

ND 28

ND 31

ND 32

ND 33

ND 34

ND 35

ND 38

OH 1

OH 24

OH 30

OH 31

OH 33

OH 39

OH 42

OH 50

OH 55

OH 56

OH 59

OH 60

OH 65

OH 71

OH 74

OH 75

OH 83

OH 84

OH 85

OH 86

OH 87

OH 88

OH 93

OH 94

OK 1

OK 6

OK 12

OK 14

OK 15

OK 18

OK 19

OK 20

OK 21

OK 22

OK 23

OK 24

OK 25

OK 27

OK 28

OK 29

OK 30

OK 31

OK 33

OK 34

OK 35

OK 37

OR 2

OR 4

OR 14

OR 18

OR 21

OR 25

OR 26

OR 39

OR 41

PA 4

PA 6

PA 12

PA 15

PA 17

PA 19

PA 20

PA 21

PA 24

PA 25

PA 28

SC 14

SC 19

SC 21

SC 22

SC 23

SC 26

SC 27

SC 28

SC 29

SC 30

SC 31

SC 32

SC 33

SC 34

SC 35

SC 38

SC 40

SC 41

SD 3

SD 6

SD 7

SD 11

SD 13

SD 16

SD 17

SD 18

SD 19

SD 21

SD 23

SD 25

SD 26

SD 27

SD 28

SD 29

SD 30

SD 31

SD 32

SD 33

SD 35

SD 36

SD 39

SD 40

SD 41

SD 42

TN 1

TN 9

TN 16

TN 17

TN 19

TN 20

TN 21

TN 23

TN 24

TN 25

TN 26

TN 31

TN 32

TN 34

TN 35

TN 36

TN 37

TN 38

TN 45

TN 46

[[Page 48877]]

TN 48

TN 49

TN 51

TN 60

TX 7

TX 11

TX 21

TX 23

TX 30

TX 38

TX 40

TX 41

TX 48

TX 50

TX 52

TX 53

TX 54

TX 55

TX 56

TX 58

TX 59

TX 60

TX 62

TX 63

TX 64

TX 65

TX 67

TX 69

TX 70

TX 71

TX 72

TX 75

TX 77

TX 78

TX 83

TX 85

TX 86

TX 87

TX 88

TX 91

TX 93

TX 95

TX 96

TX 97

TX 99

TX 102

TX 106

TX 108

TX 113

TX 114

TX 118

TX 122

TX 123

TX 124

TX 125

TX 135

TX 145

TX 149

UT 6

UT 8

UT 11

UT 20

VT 8

VA 2

VA 11

VA 27

VA 28

VA 29

VA 30

VA 31

VA 34

VA 36

VA 37

VA 39

VA 54

VA 55

WA 8

WA 17

WA 20

WA 28

WA 32

WA 36

WA 39

WA 46

WA 47

WA 48

WI 14

WI 19

WI 21

WI 25

WI 27

WI 29

WI 32

WI 35

WI 37

WI 38

WI 40

WI 41

WI 43

WI 47

WI 49

WI 51

WI 52

WI 53

WI 54

WI 55

WI 66

WY 3

WY 5

WY 6

WY 10

WY 11

WY 12

WY 14

WY 25

List of Subjects in 7 CFR Part 1717

Administrative practice and procedure, Electric power, Electric

power rates, Electric utilities, Intergovernmental relations,

Investments, Loan programs-energy, Reporting and recordkeeping

requirements, Rural areas.

For the reasons stated, subpart N of 7 CFR part 1717 is revised to

read as follows:

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

GUARANTEED ELECTRIC LOANS

Subpart N--Investments, Loans, and Guarantees by Electric Borrowers

Sec.

1717.650 Purpose.

1717.651 General.

1717.652 Definitions.

1717.653 Borrowers in default.

1717.654 Transactions below the 15 percent level.

1717.655 Exclusion of certain investments, loans, and guarantees.

1717.656 Exemption of certain borrowers from controls.

1717.657 Investments above the 15 percent level by certain

borrowers not exempt under Sec. 1717.656(a).

1717.658 Records, reports and audits.

1717.659 Effect of this subpart on RUS loan contract and mortgage.

Subpart N--Investments, Loans, and Guarantees by Electric Borrowers

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

U.S.C. 6941 et seq.); Title I, Subtitle D, Pub.L. 100-203, 101 Stat.

1330.

Sec. 1717.650 Purpose.

This subpart sets forth general regulations for implementing and

interpreting provisions of the RUS mortgage and loan contract regarding

investments, loans, and guarantees made by electric borrowers, as well

as the provisions of the Rural Electrification Act of 1936, as amended,

including section 312 (7 U.S.C. 901 et seq.) (RE Act), permitting, in

certain circumstances, that electric borrowers under the RE Act may,

without restriction or prior approval of the Administrator of the Rural

Utilities Service (RUS), invest their own funds and make loans or

guarantees.

Sec. 1717.651 General.

(a) Policy. RUS electric borrowers are encouraged to utilize their

own funds to participate in the economic development of rural areas,

provided that such activity does not in any way put government funds at

risk or impair a borrower's ability to repay its indebtedness to RUS

and other lenders. In considering whether to make loans, investments,

or guarantees, borrowers are expected to act in accordance with prudent

business practices and in conformity with the laws of the jurisdictions

in which they serve. RUS assumes that borrowers will use the latitude

afforded them by section 312 of the RE Act primarily to make needed

investments in rural community infrastructure projects (such as water

and waste systems, garbage collection services, etc.) and in job

creation activities (such as providing technical, financial, and

managerial assistance) and other activities to promote business

development and economic diversification in rural communities.

Nonetheless, RUS believes that borrowers should continue to give

primary consideration to safety and

[[Page 48878]]

liquidity in the management of their funds.

(b) Applicability of this subpart. This subpart applies to all

distribution and power supply borrowers regardless of when their loan

contract or mortgage was executed.

Sec. 1717.652 Definitions.

As used in this subpart:

Borrower means any organization that has an outstanding loan made

or guaranteed by RUS for rural electrification.

Cash-construction fund-trustee account means the account described

in the Uniform System of Accounts as one to which funds are deposited

for financing the construction or purchase of electric facilities.

Distribution borrower means a Distribution Borrower as defined in 7

CFR 1710.2.

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

electric production, transmission, distribution, conservation, load

management, general plant and other related facilities, equipment or

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

facility for the development, production, manufacture, storage,

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

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

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

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

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

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

property, structures, contract rights and other tangible and intangible

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

system.

Equity means the Margins and Equities of the borrower as defined in

the Uniform System of Accounts, less regulatory created assets.

Guarantee means to undertake collaterally to answer for the payment

of another's debt or the performance of another's duty, liability, or

obligation, including, without limitation, the obligations of

subsidiaries. Some examples of such guarantees include guarantees of

payment or collection on a note or other debt instrument (assuring

returns on investments); issuing performance bonds or completion bonds;

or cosigning leases or other obligations of third parties.

Invest means to commit money in order to earn a financial return on

assets, including, without limitation, all investments properly

recorded on the borrower's books and records in investment accounts as

those accounts are used in the Uniform System of Accounts for RUS

Borrowers. Borrowers may submit any proposed transaction to RUS for an

interpretation of whether the action is an investment for the purposes

of this definition.

Make loans means to lend out money for temporary use on condition

of repayment, usually with interest.

Mortgaged property means any asset of the borrower which is pledged

in the RUS mortgage.

Natural gas distribution system means any system of community

infrastructure that distributes natural gas and whose services are

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

the community.

Operating DSC means Operating Debt Service Coverage (ODSC) of the

borrower's electric system calculated as:

[GRAPHIC][TIFF OMITTED]TR21SE95.001

where:

All amounts are for the same year and are based on the RUS

system of accounts;

A=Depreciation and Amortization Expense of the electric system;

B=Interest on Long-term Debt of the electric system, except that

Interest on Long-term Debt shall be increased by \1/3\ of the

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

electric system exceed 2 percent of Total Margins and Equities;

C=Patronage Capital & Operating Margins of the electric system

(distribution borrowers) or Operating Margins of the electric system

(power supply borrowers); and

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

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

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

which the rentals of Restricted Property of the electric system

exceed 2 percent of Total Margins and Equities. Unless otherwise

indicated, all terms used in defining ODSC and OTIER are as defined

in RUS Bulletin 1717B-2 Instructions for the Preparation of the

Financial and Statistical Report for Electric Distribution

Borrowers, and RUS Bulletin 1717B-3 Instructions for the Preparation

of the Operating Report for Power Supply Borrowers and for

Distribution Borrowers with Generating Facilities, or the successors

to these bulletins.

Operating TIER means Operating Times Interest Earned Ratio (OTIER)

of the borrower's electric system calculated as:

[GRAPHIC][TIFF OMITTED]TR21SE95.002

where:

All amounts are for the same year and are based on the RUS

system of accounts;

A=Interest on Long-term Debt of the electric system, except that

Interest on Long-term Debt shall be increased by 1/3 of the amount,

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

system exceed 2 percent of Total Margins and Equities; and

B=Patronage Capital & Operating Margins of the electric system

(distribution borrowers) or Operating Margins of the electric system

(power supply borrowers).

Own funds means money belonging to the borrower other than funds on

deposit in the cash-construction fund-trustee account.

Power supply borrower means a Power Supply Borrower as defined in 7

CFR 1710.2.

Regulatory created assets means the sum of the amounts properly

recordable in Account 182.2 Unrecovered Plant and Regulatory Study

Costs, and Account 182.3 Other Regulatory Assets of the Uniform System

of Accounts.

RUS means the Rural Utilities Service, an agency of the U.S.

Department of Agriculture established pursuant to Section 232 of the

Federal Crop Insurance Reform and Department of Agriculture

Reorganization Act of 1994 (Pub. L. 103-354, 108 Stat. 3178, 7 U.S.C.

6941 et seq.) and, for purposes of this subpart, includes its

predecessor, the Rural Electrification Administration.

RUS loan contract means the loan contract between the borrower and

RUS.

RUS mortgage means any and all instruments creating a lien on or

security interest in the borrower's assets in connection with loans or

guarantees under the RE Act.

Solid waste disposal system means any system of community

infrastructure that provides collection and/or disposal of solid waste

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

portion of the members of the community.

Subsidiary means a company which is controlled by the borrower

through ownership of voting stock, and is further defined in 7 CFR

1767.10.

Supplemental lender means a lender that has provided a supplemental

source of financing that is secured by the RUS mortgage.

Telecommunication and other electronic communication system means

any community infrastructure that provides telecommunication or other

electronic communication services and whose services are available by

design to all or a substantial portion of the members of the community.

Total assets means the total assets of the borrower as calculated

according to

[[Page 48879]]

the Uniform System of Accounts, less regulatory created assets.

Total utility plant means the sum of the borrower's Electric Plant

Accounts and Construction Work in Progress--Electric Accounts, as such

terms are used in the Uniform System of Accounts.

Uniform System of Accounts means the system of accounts prescribed

for RUS borrowers in 7 CFR part 1767.

Water and waste disposal system means any system of community

infrastructure that supplies water and/or collects and treats waste

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

substantial portion of the members of the community.

Sec. 1717.653 Borrowers in default.

Any borrower not in compliance with all provisions of its mortgage,

loan contract, or any other agreements with RUS must, unless the

borrower's mortgage, loan contract, or other agreement with RUS

specifically provides otherwise with respect to such a borrower:

(a) Obtain prior written approval from the Administrator to invest

its own funds or to make loans or guarantees regardless of the

aggregate amount of such investments, loans, or guarantees; and

(b) If requested by the Administrator, restructure or reduce the

amount of its investments, loans, and guarantees to a level determined

by the Administrator, in his or her sole discretion, to be in the

financial interest of the government with respect to loan security and/

or repayment. If the borrower does not so restructure or reduce its

portfolio within a reasonable period of time determined by the

Administrator, which shall not exceed 12 months from the date the

borrower was notified of the required action, then, upon written notice

from RUS, the borrower shall be in default of its RUS loan contract and

mortgage.

Sec. 1717.654 Transactions below the 15 percent level.

(a) A borrower in compliance with all provisions of its RUS

mortgage, RUS loan contract, and any other agreements with RUS may,

without prior written approval of the Administrator, invest its own

funds or make loans or guarantees not in excess of 15 percent of its

total utility plant without regard to any provision contained in any

RUS mortgage or RUS loan contract to the effect that the borrower must

obtain prior approval from RUS, provided, however, that the borrower

may not, without the prior written approval of the Administrator, make

such investments, loans, and guarantees to extend, add to, or modify

its electric system. Moreover, funds necessary to make timely payments

of principal and interest on loans secured by the RUS mortgage remain

subject to RUS controls on borrower investments, loans and guarantees.

(b) RUS will not consider requests from borrowers to exclude

investments, loans, or guarantees made below the 15 percent level.

(Categorical exclusions are set forth in Sec. 1717.655.)

Sec. 1717.655 Exclusion of certain investments, loans, and guarantees.

(a) In calculating the amount of investments, loans and guarantees

permitted under this subpart, there is excluded from the computation

any investment, loan or guarantee of the type which by the terms of the

borrower's RUS mortgage or RUS loan contract the borrower may make in

unlimited amounts without RUS approval.

(b) Furthermore, the borrower may make unlimited investments,

without prior approval of the Administrator, in:

(1) Securities or deposits issued, guaranteed or fully insured as

to payment by the United States Government or any agency thereof;

(2) Capital term certificates, bank stock, or other similar

securities of the supplemental lender which have been purchased as a

condition of membership in the supplemental lender, or as a condition

of receiving financial assistance from such lender, as well as any

other investment made in, or loans made to, the National Rural

Utilities Cooperative Finance Corporation, the Saint Paul Bank for

Cooperatives, and CoBank, ACB;

(3) Patronage capital allocated from an electric power supply

cooperative of which the borrower is a member; and

(4) Patronage capital allocated from an electric distribution

cooperative to a power supply borrower.

(c) Without prior approval of the Administrator, the borrower may

also:

(1) Invest or lend funds derived directly from:

(i) Grants which the borrower in not obligated to repay, regardless

of the source or purpose of the grant; and

(ii) Loans received from or guaranteed by any Federal, State or

local government program designed to promote rural economic

development, provided that the borrower uses the loan proceeds for such

purpose;

(2) Make loans guaranteed by an agency of USDA, up to the amount of

principal whose repayment, with interest, is fully guaranteed; and

(3) (i) Make unlimited investments in and unlimited loans to

finance the following community infrastructure that serves primarily

consumers located in rural areas as defined in 7 CFR 1710.2, and

guarantee debt issued for the construction or acquisition of such

infrastructure, up to an aggregate amount of such guarantees not to

exceed 20 percent of the borrower's equity:

(A) Water and waste disposal systems;

(B) Solid waste disposal systems;

(C) Telecommunication and other electronic communication systems;

and

(D) Natural gas distribution systems.

(ii) In each of the four cases in paragraph (c)(3)(i) of this

section, if the system is a component of a larger organization other

than the borrower itself (e.g., if it is a component of a subsidiary of

the borrower or a corporation independent of the borrower), to be

eligible for the exemption the borrower must certify annually that a

majority of the gross revenues of the larger organization during the

most recent fiscal year came from customers of said system who were

located in a rural area.

(d) Also excluded from the calculation of investments, loans and

guarantees made by the borrower are:

(1) Amounts properly recordable in Account 142 Customer Accounts

Receivable, and Account 143 Other Accounts Receivable;

(2) Any investment, loan, or guarantee that the borrower is

required to make by an agency of USDA, for example, as a condition of

obtaining financial assistance for itself or any other person or

organization;

(3) Investments included in an irrevocable trust for the purpose of

funding post-retirement benefits of the borrower's employees;

(4) Reserves required by a reserve bond agreement or other

agreement legally binding on the borrower, that are dedicated to making

required payments on debt secured under the RUS mortgage, not to exceed

the amount of reserves specifically required by such agreements; and

(5) Investments included in an irrevocable trust approved by RUS

and dedicated to the payment of decommissioning costs of nuclear

facilities of the borrower.

(e) Grandfathered exclusions. All amounts of individual

investments, loans, and guarantees excluded by RUS as of February 16,

1995 shall remain excluded. Such exclusions must have been based on the

RUS mortgage, RUS loan contract, regulations, bulletins, memoranda, or

other written notice from RUS. Profits, interest, and other returns

earned (regardless of whether or not they are reinvested) on such

investments, loans and guarantees after

[[Page 48880]]

February 16, 1995 shall be excluded only if they are eligible for

exclusion under paragraphs (a) through (d) of this section. Any new

commitments of money to such investments, loans and guarantees shall

likewise be excluded only if they are eligible under paragraphs (a)

through (d) of this section.

(f) Any investment, loan or guarantee made by a borrower that is

not excluded under this section or under Sec. 1717.657(d) shall be

included in the aggregate amount of investments, loans and guarantees

made by the borrower, regardless of whether RUS has specifically

approved the investment, loan or guarantee under Sec. 1717.657(c), or

has approved a related transaction (e.g., a lien accommodation).

Sec. 1717.656 Exemption of certain borrowers from controls.

(a) Any distribution or power supply borrower that meets all of the

following criteria is exempted from the provisions of the RUS mortgage

and loan contract that require RUS approval of investments, loans, and

guarantees, except investments, loans, and guarantees made to extend,

add to, or modify the borrower's electric system:

(1) The borrower is in compliance with all provisions of its RUS

mortgage, RUS loan contract, and any other agreements with RUS;

(2) The average revenue per kWh for residential service received by

the borrower during the two most recent calendar years does not exceed

130 percent of the average revenue per kWh for residential service

during the same period for all residential consumers located in the

state or states served by the borrower. This criterion applies only to

distribution borrowers and does not apply to power supply borrowers. If

a borrower serves customers in more than one state, the state average

revenue per kWh will be based on a weighted average using the kWh sales

by the borrower in each state as the weight. The calculation will be

based on the two most recent calendar years for which both borrower and

state-wide data are available. If a borrower fails to qualify for an

exemption based solely on its failure to meet this criterion on rate

disparity, at the borrower's request the Administrator may, at his or

her sole discretion, exempt the borrower if he or she finds that the

borrower's strengths with respect to the other criteria are sufficient

to offset any weakness due to rate disparity;

(3) In the most recent calendar year for which data are available,

the borrower achieved an operating TIER of at least 1.0 and an

operating DSC of at least 1.0, in each case based on the average of the

two highest ratios achieved in the three most recent calendar years;

(4) The borrower's ratio of net utility plant to long-term debt is

at least 1.1, based on year-end data for the most recent calendar year

for which data are available; and

(5) The borrower's equity is equal to at least 27 percent of its

total assets, based on year-end data for the most recent calendar year

for which data are available.

(b) While borrowers meeting the criteria in paragraph (a) of this

section are exempt from RUS approval of investments, loans and

guarantees, they are nevertheless subject to the record-keeping,

reporting, and other requirements of Sec. 1717.658.

(c) Any borrower exempt under paragraph (a) of this section that

ceases to meet the criteria for exemption shall, upon written notice

from RUS, no longer be exempt and shall be subject to the provisions of

this subpart applicable to non-exempt borrowers. A borrower may regain

its exemption if it subsequently meets the criteria in paragraph (a) of

this section, and is so notified in writing by RUS.

(d)(1) A borrower that loses its exemption and is not in compliance

with all provisions of its mortgage, loan contract, or any other

agreement with RUS may be required to restructure or reduce its

portfolio of investments, loans and guarantees as provided in

Sec. 1717.653(b). If the borrower's portfolio exceeds the 15 percent

level, the borrower will be required to restructure or reduce its

portfolio to the 15 percent level or below. For example, if the

borrower's mortgage or loan contract has an approval threshold, the

borrower may be required to reduce its portfolio to that level, which

in many cases is 3 percent of total utility plant.

(2) A borrower that loses its exemption but is in compliance with

all provisions of its mortgage, loan contract, and any other agreements

with RUS will be required, if its investments, loans and guarantees

exceed the 15 percent level, to restructure or reduce its portfolio to

the 15 percent level, unless the Administrator, in his or her sole

discretion, determines that such action would not be in the financial

interest of the government with respect to loan security and/or

repayment. (Such borrower is eligible to ask RUS to exclude a portion

of its investments under the conditions set forth in Sec. 1717.657(d).)

(3) If a borrower required to reduce or restructure its portfolio

does not fully comply within a reasonable period of time determined by

the Administrator, which shall not exceed 12 months from the date the

borrower was notified of its loss of exemption, then, upon written

notice from RUS, the borrower shall be in default of its RUS loan

contract and/or RUS mortgage.

(e) By no later than July 1 of each year, RUS will provide written

notice to any borrowers whose exemption status has changed as a result

of more recent data being available for the qualification criteria set

forth in paragraph (a) of this section, or as a result of other

reasons, such as corrections in the available data. An explanation of

the reasons for any changes in exemption status will also be provided

to the borrowers affected.

Sec. 1717.657 Investments above the 15 percent level by certain

borrowers not exempt under Sec. 1717.656(a).

(a) General. (1) This section applies only to borrowers that are in

compliance with all provisions of their mortgage, loan contract, and

any other agreements with RUS and that do not qualify for an exemption

from RUS investment controls under Sec. 1717.656(a).

(2) Nothing in this section shall in any way affect the

Administrator's authority to exercise approval rights over investments,

loans, and guarantees made by a borrower that is not in compliance with

all provisions of its mortgage, loan contract and any other agreements

with RUS.

(b) Distribution borrowers. Distribution borrowers not exempt from

RUS investment controls under Sec. 1717.656(a) may not make

investments, loans and guarantees in an aggregate amount in excess of

15 percent of total utility plant. Above the 15 percent level, such

borrowers will be restricted to excluded investments, loans and

guarantees as defined in Sec. 1717.655. (However, they are eligible to

ask RUS to exclude a portion of their investments under the conditions

set forth in paragraph (d) of this section.)

(c) Power supply borrowers. (1) Power supply borrowers not exempt

from RUS investment controls under Sec. 1717.656(a) may request

approval to exceed the 15 percent level if all of the following

criteria are met:

(i) Satisfactory evidence has been provided that the borrower is in

compliance with all provisions of its RUS mortgage, RUS loan contract,

and any other agreements with RUS;

(ii) The borrower is not in financial workout and has not had its

government debt restructured;

(iii) The borrower has equity equal to at least 5 percent of its

total assets; and

(iv) After approval of the investment, loan or guarantee, the

aggregate of the

[[Page 48881]]

borrower's investments, loans and guarantees will not exceed 20 percent

of the borrower's total utility plant.

(2) Borrower requests for approval to exceed the 15 percent level

will be considered on a case by case basis. The requests must be made

in writing.

(3) In considering borrower requests, the Administrator will take

the following factors into consideration:

(i) The repayment of all loans secured under the RUS mortgage will

continue to be assured, and loan security must continue to be

reasonably adequate, even if the entire investment or loan is lost or

the borrower is required to perform for the entire amount of the

guarantee. These risks will be considered along with all other risks

facing the borrower, whether or not related to the investment, loan or

guarantee;

(ii) In the case of investments, the investment must be made in an

entity separate from the borrower, such as a subsidiary, whereby the

borrower is protected from any liabilities incurred by the separate

entity, unless the borrower demonstrates to the satisfaction of the

Administrator that making the investment directly rather than through a

separate entity will present no substantial risk to the borrower in

addition to the possibility of losing all or part of the original

investment;

(iii) The borrower must be economically and financially sound as

indicated by its costs of operation, competitiveness, operating TIER

and operating DSC, physical condition of the plant, ratio of equity to

total assets, ratio of net utility plant to long-term debt, and other

factors; and

(iv) Other factors affecting the security and repayment of

government debt, as determined by the Administrator on a case by case

basis.

(4) If the Administrator approves an investment, loan or guarantee,

such investment, loan or guarantee will continue to be included when

calculating the borrower's ratio of aggregate investments, loans and

guarantees to total utility plant.

(d) Distribution and power supply borrowers. If the aggregate of

the investments, loans and guarantees of a distribution or power supply

borrower exceeds 15 percent of the borrower's total utility plant as a

result of the cumulative profits or margins, net of losses, earned on

said transactions over the past 10 calendar years (i.e., the sum of all

profits earned during the 10 years on all transactions--including

interest earned on cash accounts, loans, and similar transactions--less

the sum of all losses experienced on all transactions during the 10

years) then:

(1) The borrower will not be in default of the RUS loan contract or

RUS mortgage with respect to required approval of investments, loans

and guarantees, provided that the borrower had not made additional net

investments, loans or guarantees without approval after reaching the 15

percent level; and

(2) At the request of the borrower, the Administrator in his or her

sole discretion may decide to exclude up to the amount of net profits

or margins earned on the borrower's investments, loans and guarantees

during the past 10 calendar years, if the Administrator determines that

such exclusion will not increase loan security risks. The borrower must

provide documentation satisfactory to the Administrator as to the

current status of its investments, loans and guarantees and the net

profits earned during the past 10 years. Any exclusion approved by the

Administrator may or may not reduce the level of investments, loans and

guarantees to or below the 15 percent level. If such exclusion does not

reduce the level to or below the 15 percent level, RUS will notify the

borrower in writing that it must reduce or restructure its investments,

loans and guarantees to a level of not more than 15 percent of total

utility plant. If the borrower does not come within the 15 percent

level within a reasonable period of time determined by the

Administrator, which shall not exceed 12 months from the date the

borrower was notified of the required action, then, upon written notice

from RUS, the borrower shall be in default of its RUS loan contract and

mortgage.

Sec. 1717.658 Records, reports and audits.

(a) Every borrower shall maintain accurate records concerning all

investments, loans and guarantees made by it. Such records shall be

kept in a manner that will enable RUS to readily determine:

(1) The nature and source of all income, expenses and losses

generated from the borrower's loans, guarantees and investments;

(2) The location, identity and lien priority of any loan collateral

resulting from activities permitted by this subpart; and

(3) The effects, if any, which such activities may have on the

feasibility of loans made, guaranteed or lien accommodated by RUS.

(b) In determining the aggregate amount of investments, loans and

guarantees made by a borrower, the borrower shall use the recorded

value of each investment, loan or guarantee as reflected on its books

and records for the next preceding end-of-month, except for the end-of-

year report which shall be based on December 31 information. Every

borrower shall also report annually to RUS, in the manner and on the

form specified by the Administrator, the current status of each

investment, outstanding loan and outstanding guarantee which it has

made pursuant to this subpart.

(c) The records of borrowers shall be subject to the auditing

procedures prescribed in part 1773 of this chapter. RUS reserves the

right to review the financial records of any subsidiaries of the

borrower to determine if the borrower is in compliance with this

subpart, and to ascertain if the debts, guarantees (as defined in this

subpart), or other obligations of the subsidiaries could adversely

affect the ability of the borrower to repay its debts to the

Government.

(d) RUS will monitor borrower compliance with this subpart based

primarily on the annual financial and statistical report submitted by

the borrower to RUS and the annual auditor's report on the borrower's

operations. However, RUS may inspect the borrower's records at any time

during the year to determine borrower compliance. If a borrower's most

recent annual financial and statistical report shows the aggregate of

the borrower's investments, loans and guarantees to be below the 15

percent level, that in no way relieves the borrower of its obligation

to comply with its RUS mortgage, RUS loan contract, and this subpart

with respect to Administrator approval of any additional investment,

loan or guarantee that would cause the aggregate to exceed the 15

percent level.

Sec. 1717.659 Effect of this subpart on RUS loan contract and

mortgage.

(a) Nothing in this subpart shall affect any provision, covenant,

or requirement in the RUS mortgage, RUS loan contract, or any other

agreement between a borrower and RUS with respect to any matter other

than the prior approval by RUS of investments, loans, and guarantees by

the borrower, such matters including, without limitation, extensions,

additions, and modifications of the borrower's electric system. Also,

nothing in this subpart shall affect any rights which supplemental

lenders have under the RUS mortgage, or under their loan contracts or

other agreements with their borrowers, to limit investments, loans and

guarantees by their borrowers to levels below 15 percent of total

utility plant.

[[Page 48882]]

(b) RUS will require that any electric loan made or guaranteed by

RUS after October 23, 1995 shall be subject to a provision in the loan

contract or mortgage restricting investments, loans and guarantees by

the borrower substantially as follows: The borrower shall not make any

loan or advance to, or make any investment in, or purchase or make any

commitment to purchase any stock, bonds, notes or other securities of,

or guaranty, assume or otherwise become obligated or liable with

respect to the obligations of, any other person, firm or corporation,

except as permitted by the RE Act and RUS regulations.

(c) RUS reserves the right to change the provisions of the RUS

mortgage and loan contract relating to RUS approval of investments,

loans and guarantees made by the borrower, on a case-by-case basis, in

connection with providing additional financial assistance to a borrower

after October 23, 1995.

Dated: September 15, 1995.

Jill Long Thompson,

Under Secretary, Rural Economic and Community Development.

[FR Doc. 95-23380 Filed 9-20-95; 8:45 am]

BILLING CODE 3410-15-P