Loan Policies and Security Documents for Electric Borrowers

SUMMARY: The Rural Utilities Service (RUS) hereby establishes new

policies and requirements for loan contracts ordinarily required for

loans made to electric distribution borrowers. The rule updates and

clarifies the framework for loan contract provisions, conforms loan

contract provisions with the new form of mortgage recently approved,

and provides 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 to regulations regarding 110 percent borrowers, and

changes to RUS operational controls, are also set forth.

EFFECTIVE DATE: This rule is effective January 29, 1996.

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 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 1995 (44 U.S.C. Chapter 35, as amended),

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 F. Lamont Heppe, Jr., Deputy Director, Program

Support Staff, Rural Utilities Service, Ag Box 1522, Washington, DC

20250-1500.

Background

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

(RUS) published a proposed rule, 7 CFR part 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 the mortgage was published

in the Federal Register on July 18, 1995 at 60 FR 36882. On that same

day, at 60 FR 36904, RUS published a proposed rule on a model form of a

new loan contract for distribution borrowers, 7 CFR part 1718 Loan

Security Documents for Electric Borrowers, Subpart C Loan Contracts

with Distribution Borrowers. The proposed rule also included proposed

amendments to 7 CFR part 1710 and 7 CFR part 1717 Subpart R, to ensure

consistency between these regulations and the new mortgage and proposed

loan contract. It was also proposed that a new Subpart M Operational

Controls be added to 7 CFR part 1717, which would cut back the reach of

certain operational controls contained in existing mortgages and loan

contracts.

A total of 29 separate comments, representing 33 different

organizations, were received on the proposed new loan contract for

distribution borrowers and the associated proposed regulations.

Comments were received from the National Rural Electric Cooperative

Association (NRECA), CoBank, 3 state-wide and one multi-state borrower

association, 17 distribution borrowers, and 10 generation and

transmission borrowers (G&Ts). The individual distribution borrowers

that commented were concentrated in the plains and Rocky Mountain

states, with 8 in North Dakota, 3 in Colorado, 2 in Wyoming, and one

each in South Dakota, Montana, Minnesota, and Iowa.

Operational Controls

Comments by the NRECA and one state-wide association focused

primarily on the extent of operational controls retained in the loan

contract and the general approach taken in the loan contract and 7 CFR

part 1717 subpart M for defining RUS' rights with respect to

operational controls. In the proposed loan contract some operational

controls were stated in specific terms while others were stated in

broad terms, with the agency relying on 7 CFR part 1717 subpart M and

other regulations to define the controls in more specific terms and to

narrow their reach.

NRECA and the one state-wide association recommended that (a)

further cuts be made in operational controls, (b) all operational

controls be stated in appropriately narrow and specific terms in the

loan contract itself, rather than relying on regulations to further

define and limit the controls, and (c) criteria be developed to exempt

``creditworthy'' borrowers from most of the remaining operational

controls. Relatively few comments on operational controls were received

from other commenters. Several commenters indicated their support

either for individual changes in operational controls proposed by RUS

or for the proposed changes in general, as well as for changes that

have been made in RUS regulations over the past several years.

RUS agrees that further cuts can be made in operational controls

and that some operational controls can and should be stated in more

specific, narrower terms in the loan contract itself. Such changes have

been made wherever possible in the final model loan contract. They are

as follows:

Section 5.15 of the proposed loan contract requiring the

borrower to acquire and construct the electric system in conformance

with RUS

[[Page 67397]]

regulations has been eliminated. RUS' more specific oversight interests

regarding extensions and additions and construction standards are

retained in other sections.

Section 6.3 of the proposed loan contract granting RUS

general approval rights over borrower expenditures for legal,

engineering, and supervisory services has been eliminated. Certain

limited approval rights, such as approval of contracts for engineering

services when the construction is financed by RUS, have been retained.

Section 6.7 of the proposed loan contract granting RUS

general approval rights over the acquisition, construction, or

procurement of generating facilities and existing facilities and

systems has been eliminated. Limited approval authority with respect to

such facilities and systems has been retained in section 6.2.

Section 9.14 of the proposed loan contract authorizing RUS

to appoint construction supervisors if construction does not proceed in

accordance with the loan documents has been eliminated. RUS approval

authority over general managers in cases of default has been retained.

Paragraph (m) of section 4.1 of the proposed loan contract

requiring compliance with RUS regulations as one of the conditions for

the borrower to receive loan advances has been revised to require

compliance with the loan contract and mortgage.

Section 5.9 of the proposed loan contract on area coverage

has been revised by eliminating the reference to ``to the extent

required by RUS'' and in its place specifically stating the borrower's

obligations and discretion with regard to contributions in aid of

construction. These requirements are the same as those in existing 7

CFR part 1710.103(b).

Section 5.14 of the proposed loan contract has been

revised to eliminate the requirement that borrowers use construction

plans and specifications in conformance with RUS regulations for

projects funded from non-RUS sources. Thus, while distribution

borrowers will continue to be required to follow RUS design and

construction standards and the list of accepted materials regardless of

the source of funding, plans and specifications for construction not

financed by an RUS loan or loan guarantee will not be subject to agency

review and approval.

Section 5.16 of the proposed loan contract has been

revised to limit to only those projects financed by RUS the requirement

that borrowers use forms of contracts promulgated by RUS for

construction, procurement, and engineering and architectural services.

Section 5.17 of the proposed loan contract has been

revised to limit to only those projects financed by RUS the requirement

that borrowers follow RUS contract bidding requirements.

Section 6.2 of the proposed loan contract has been revised

to limit RUS' authority to approve electric system extensions and

additions to extensions and additions financed by RUS, and only 3

categories of extensions and additions funded from other sources:

generating facilities, existing facilities and systems in service, and

projects 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 of

facilities. In addition, significance thresholds have been added to the

first two categories, such that RUS approval will not be required if

the generating and related facilities do not exceed the lesser of 5

megawatts or 30 percent of the borrower's equity, and if the existing

facilities and systems in service do not exceed 10 percent of the

borrower's net utility plant.

Section 6.5(a) of the proposed loan contract has been

revised to limit to projects financed by RUS the requirement that

contracts for construction, procurement, and engineering and

architectural services be subject to RUS approval.

As to the recommendation that a set of criteria be developed and

included in the loan contract to exempt ``creditworthy'' borrowers from

most remaining operational controls, further analysis and experience is

needed before a reasoned decision can be made. RUS believes it would be

very difficult to develop a set of criteria that would be appropriate

for all borrowers and for all or most operational controls. Such an

approach also raises significant issues regarding the flexibility that

would be available to tailor individual loan contracts to deal with

individual lending circumstances and specific credit risks. RUS

believes it is only prudent to gain some actual experience with the new

loan contract and mortgage before deciding whether such a significant

step is warranted.

The changes to the proposed loan contract cited above go a long way

toward further reducing RUS oversight over operational decisions. Those

changes are in addition to the reductions in operational controls in

the new distribution mortgage, the new loan contract as proposed and

now codified, and various regulations published by RUS over the past

few years. Following are some examples of these reforms in operational

oversight, which in most cases apply not just to borrowers that execute

the new loan documents but also, pursuant to 7 CFR part 1717 subpart M,

to borrowers under the existing ``old'' loan documents:

Article II of the new distribution mortgage authorizes

borrowers to issue additional secured debt and to refinance secured

debt without mortgagee approval if certain objective tests are met.

The new loan contract and 7 CFR 1717.604 limit RUS

approval authority over borrowers' long-range engineering plans and

construction work plans to construction financed by RUS.

The new loan contract and 7 CFR 1717.608 limit RUS

approval rights over power supply contracts, interconnection

agreements, wheeling agreements, and pooling agreements to contracts

and agreements having a term of more than 2 years. Moreover, RUS

authority to approve system management and maintenance contracts is

limited to contracts covering all or substantially all of the

borrower's electric system.

The new loan contract and 7 CFR 1717.609 eliminate RUS

approval over general managers except for borrowers in default.

The new loan contract and 7 CFR 1717.612 eliminate RUS

approval authority over the bank used by the borrower, and require only

that RUS loan funds be deposited in a bank insured by the Federal

Deposit Insurance Corporation or other Federal agency acceptable to

RUS.

The new distribution mortgage and 7 CFR 1717.610 eliminate

RUS approval over compensation of board members.

Section 3.10 of the new distribution mortgage and 7 CFR

1717.615 authorize borrowers to merge or consolidate without mortgagee

approval if certain objective tests are met.

Section 3.11 of the new distribution mortgage and 7 CFR

1717.616 give borrowers greater latitude to sell, lease, or transfer

mortgaged property without mortgagee approval.

The new loan contract and 7 CFR 1717.617 reduce from 40

percent to 30 percent the level of equity a borrower must have before

being subject to RUS approval of cash distributions.

Subpart R of 7 CFR 1717 provides borrowers advance

approval of lien accommodations if certain objective tests are met.

Subpart N of 7 CFR 1717 totally exempts borrowers from RUS

approval of their investments, loans and guarantees if certain

objective tests are

[[Page 67398]]

met. Some 84 percent of distribution borrowers currently qualify for

the exemption.

7 CFR 1717.613 exempts borrowers from obtaining RUS

approval of purchases of data processing and system control equipment

if the equipment is not financed by RUS.

The new loan contract and 7 CFR 1717.614 reduce from 90

days to 30 days the prior notice to RUS required for prospective

changes in the borrower's general rate structure, and require such

notice only when specifically requested in writing by RUS.

Recently published 7 CFR part 1726 carries out several

reforms in RUS oversight of electric system construction policies and

procedures relating to construction financed by RUS. For example:

--The requirement that RUS approve construction subcontracts was

eliminated.

--The dollar thresholds for determining when competitive bidding must

be used generally were raised.

--The dollar thresholds for determining when RUS approval of a contract

is required were raised.

--The requirement that RUS approve contracts for headquarters

facilities was eliminated.

--The requirement that RUS approve amendments to construction contracts

was eliminated in certain cases.

--The number of forms that must be submitted to RUS for closing out

construction contracts was reduced.

It was also recommended that the exemptions and waivers of controls

set forth in 7 CFR part 1717 Subpart M be removed entirely and

transferred to the new loan contract. Subpart M has been retained since

it provides exemptions and waivers of controls contained in existing

loan contracts and mortgages. If it were removed, only borrowers that

execute the new loan contract and new mortgage would have the benefit

of these changes.

As noted above, the narrower forms of RUS' approval rights and

operational controls proposed in Subpart M have been adopted in the

final loan contract. Furthermore, several additional provisions of the

new mortgage and loan contract providing borrowers with greater

latitude that were not included in proposed Subpart M have been

included in final Subpart M and will be available to borrowers with the

``old'' forms of loan documents. For example, Sec. 1717.615 will allow

borrowers under the old loan documents to consolidate and merge without

RUS approval under the same conditions as in section 3.10 of the new

mortgage. Similarly, Sec. 1717.616 will allow borrowers under the old

loan documents to sell, lease or transfer capital assets without RUS

approval under the same conditions as in section 3.11 of the new

mortgage, if, in addition to their standard TIER and DSC requirements,

they meet the Operating TIER and Operating DSC requirements of section

5.4 of the new loan contract. Also, Sec. 1717.617 will allow borrowers

under the old loan documents to pay cash distributions without RUS

approval if their equity after the distribution is at least 30 percent

and if the same conditions as under section 6.8 of the new loan

contract are met.

Effect of Subsequent Rulemaking on Loan Contract Provisions

Related to the concerns expressed about those RUS approval rights

and controls expressed in the loan contract in broad terms, several

commenters also objected to loan contract terms being subject to

amendment and modification by subsequent rulemaking, as proposed in 7

CFR 1718.100(d), even though such changes could not exceed the

authority granted to RUS in the loan contract. As indicated above, many

of the RUS approval rights and controls have been revised to limit them

more precisely to the specific measures deemed necessary by RUS for

loan security. In some cases (e.g., limitations on borrower investments

and use of standard contract forms for RUS financed construction) this

was not possible or only partly possible, and therefore these

provisions remain subject to RUS rulemaking. To avoid any

misunderstanding about the reach of Sec. 1718.100(d), the section has

been revised to clearly indicate that only those provisions of the loan

contract that defer to RUS regulations or to the discretion of the

Administrator or RUS, are subject to the interpretations and

modifications of subsequent rulemaking, not to exceed the authority

granted to the Administrator or RUS in the loan contract provision.

Applicability of Subpart M

Proposed Sec. 1717.601 indicated that Subpart M would be applicable

to all loan documents regardless of whether the loan documents were

executed before or after the effective date of the rule. At the time

the proposed loan contract was published, several operational controls

in the loan contract were expressed in broad terms, while proposed

Subpart M cut back the reach of those controls. As indicated above, the

loan contract has been revised so that the reach of the controls in the

loan contract is the same as those in Subpart M. Thus, Subpart M in its

final form affects only ``old'' loan documents with operational

controls whose reach is broader than the corresponding provisions in

Subpart M. Section 1717.601 has therefore been revised to indicate that

the approvals and exceptions to controls contained in Subpart M apply

only to loan documents dated prior to the effective date of Subpart M.

Operating TIER and DSC

The proposed rule proposed that an Operating Times Interest Earned

Ratio (Operating TIER) and Operating Debt Service Coverage ratio

(Operating DSC), both set at a minimum of 1.1, be added to standard

TIER and standard DSC as part of the rate covenant.

NRECA did not comment on the concept or formulation of Operating

TIER and Operating DSC, but recommended that the minimum level be set a

1.0. Several G&Ts and their members, concentrated in the plains and

Rocky Mountain states, raised questions about the formulation or

definition of the ratios, and in some cases about the level as well.

One multi-state borrower association indicated support both for the

formulation of the ratios and the 1.1 level.

One of the primary criticisms of the formulation of the ratios was

the belief that the core business of the borrower, as reflected in the

operating coverage ratios, ought to be defined to include cash received

by distribution borrowers during the year from their G&T suppliers and

secured lenders for patronage capital retirements. Many of these

commenters also recommended inclusion of cash received from interest

bearing accounts, and in some cases, from other borrower investments.

RUS agrees that cash received from the retirement of patronage

capital by G&T suppliers and lenders does relate to a borrower's core

utility business. The fact that a G&T or lender is capable of making

such payments in cash also reflects to a substantial degree the current

economic and financial performance of the G&T and lender, unlike

patronage capital allocations, whose current and future value may be

uncertain.

Cash received from interest income or other investments, on the

other hand, may not bear much relationship to the current performance

of the borrower's core utility business. At best, it may reflect only

past performance which enabled the borrower to make the investments in

the first place. Such income also reflects the up and down cycles of

debt and equity markets and

[[Page 67399]]

does not reflect the current ability of the core utility business to

meet expenses and generate a small margin. Such investments can provide

needed capital to meet unexpected and unforeseeable costs arising from

storm damage, litigation over service territory, and other

unforeseeable events, but once used for these purposes it is not

available to meet the expenses of the core utility business, and it

should not be relied upon for that purpose in any event.

Based on these considerations, Operating TIER and Operating DSC

have been modified to include with operating margins cash received from

a borrower's G&T and creditors for patronage capital retirements. With

such cash receipts included with operating margins, recent experience

indicates that very few if any borrowers will have difficulty in

meeting Operating TIER and Operating DSC set at the minimum level of

1.1. Even without including such cash receipts with operating margins,

only 18 borrowers in 1993 and only 13 borrowers in 1994 that met the

standard TIER and standard DSC requirements failed to meet an Operating

TIER and Operating DSC of 1.1, based on the average of the best 2 out

of 3 years. Data for a small sample of borrowers that might have some

problems in meeting the operating ratios without including cash

received from G&T suppliers and creditors indicate that including such

cash will substantially improve their results. Moreover, Sec. 1710.114

gives the Administrator the authority to set coverage ratios below the

normal levels if he or she determines that the lower ratios are

required to ensure the repayment of, and/or reasonable security for,

RUS loans.

Several borrowers argued that the rate covenant should be placed in

the mortgage rather than the loan contract, while several others and a

multi-state borrower association argued that it was appropriate to

place it in the loan contract. RUS had included the rate covenant in

the proposed mortgage, but shifted it to the loan contract based on the

recommendations of several public commenters and the difficulty of

reaching agreement among the principal lenders to rural electric

systems over exactly how the coverage ratios should be structured. The

rate covenant has been retained in the loan contract.

Finally, a technical amendment has been made to the definitions of

TIER and DSC contained in the model mortgage for distribution

borrowers, to eliminate inconsistencies between those two terms as

defined in the mortgage, and to achieve greater consistency among the

definitions of TIER, DSC, OTIER, and ODSC as those terms are defined in

the mortgage, the loan contract, and in Sec. 1710.2. ``Taxes paid, if

any, based upon income'' has been eliminated from the numerator of TIER

in the mortgage. This term was not included in the numerator of DSC in

the mortgage, nor was it included in the numerators of either TIER or

DSC as defined in Sec. 1710.2 or in the numerators of either OTIER or

ODSC in the proposed loan contract.

The definition of DSC contained in the mortgage has been amended by

eliminating the phrase starting with ``provided, however,'' which

related to the calculation of principal and interest required to be

paid on long-term debt in the event any debt is refinanced. A similar

provision was not included in the definition of TIER in the mortgage,

with respect to calculating interest required to be paid in the event

any long-term debt is refinanced. Nor was such a provision included in

the definitions of DSC, TIER, ODSC or OTIER in Sec. 1710.2 or in the

definitions of OTIER and ODSC in the proposed loan contract. Properly

calculating the coverage ratios under the existing mortgage when some

debt has been refinanced during the year has not been a problem, and

RUS does not believe the deleted provision is needed.

Use of Standard Contract Forms

One commenter noted that proposed 7 CFR 1717.606 provides that

borrowers are required to use RUS-promulgated forms of contracts for

construction and for engineering and architectural services only if the

construction is financed by RUS, but that 7 CFR part 1726 sets dollar

limits below which RUS-promulgated forms need not be used. The

commenter wondered whether Sec. 1717.606 is intended to override the

flexibility provided by the dollar thresholds in part 1726. It is not,

and Sec. 1717.606 has been revised to make that clear.

Limitations on Issuing Additional Secured Indebtedness

A commenter questioned whether the first condition in section 6.14

of the proposed loan contract on issuing additional secured debt

without RUS approval should read ``the Maturity of the Loan'' or ``the

weighted average life of the loan'' shall not exceed the weighted

average of the expected remaining useful lives of the assets being

financed. RUS agrees that it should read ``weighted average life of the

loan'', and has made the change.

Also in section 6.14 of the proposed loan contract, a technical

error was made in conforming the contract to the formatting style of

the Federal Register. This has been corrected.

System of Accounts and Outside Accountants

NRECA recommended that RUS eliminate its system of accounts and

rely exclusively on the Federal Energy Regulatory Commission's (FERC)

system of accounts. Aspects of this question were addressed in

developing the new distribution mortgage. It was concluded that so long

as there were any outstanding notes held by the government, accounting

standards would be based on the RUS system of accounts. This system is

exactly the same as the FERC system of accounts, except for a small

number of accounts needed to account for RUS loan funds and activities

specific to the cooperative form of organization. RUS believes it is

essential that borrowers' financial statements be consistent from year

to year and from borrower to borrower, and conform to a consistent

interpretation of accounting requirements. This is necessary to meet

the agency's accountability to the President and Congress for the

public funds lent to borrowers.

It has been suggested that relying exclusively on FERC's system of

accounts will somehow eliminate the need to obtain accounting

interpretations or insulate borrowers from changes in accounting

requirements and interpretations promulgated by the Financial

Accounting Standards Board. This, of course, is not true, since such

interpretations and changes in requirements would continue regardless

of the system of accounts followed.

NRECA also recommended that RUS rely exclusively on outside

accountants, apparently meaning that RUS rely in particular on outside

accountants to do audits of RUS loan fund accounts. RUS believes that

it is important to retain agency accountants to oversee the system of

accounts, render timely responses to borrowers' accounting questions,

and to continue to audit RUS loan fund accounts. Based on discussions

with individual borrowers, NRECA, and other borrower organizations, RUS

is proceeding with certain changes in our oversight of the system of

accounts to respond to problems and concerns that have been raised, and

to provide more timely responses to borrower inquiries.

Immaterial Violations of Requirements

Several commenters argued that borrowers should not be held to an

absolute standard in meeting certain requirements, since it would be

very

[[Page 67400]]

difficult for borrowers to ensure that there will be no minor

violations of requirements which have no material adverse effect on the

interests of RUS. RUS agrees that minor violations of certain

requirements, which in the agency's judgment will have no material

adverse effect on the agency's interests, should not represent a

default. This has been reflected in changes made to proposed sections

5.2(b), 5.6, 5.10, and 6.15.

Borrowers Exempt From Certain Controls Under Section 306E of the Act

Section 306E of the Rural Electrification Act directed RUS to issue

interim final regulations to minimize approval rights and restrictions

imposed on the operations of electric borrowers whose net worth exceeds

110 percent of the outstanding loans made or guaranteed by RUS, and to

offer without delay to share the government's lien on the borrower's

system or subordinate its lien on the property financed by a private

lender. In issuing the regulations, RUS is authorized to establish

requirements, guided by the practices of private lenders with respect

to similar credit risks, to ensure that the security, including loan

repayment, of the government's loans will remain reasonably adequate.

RUS issued the interim final regulations on January 28, 1994 at 59

FR 3982. Comments on the regulations were received from NRECA, the

National Rural Utilities Cooperative Finance Corporation, and 6

borrowers. In general, the comments argued for greater relaxation of

operational controls than in the interim final rule.

When the proposed loan contract and final new mortgage for

distribution borrowers was published in July of this year, RUS

indicated that comments on these documents as well as on the interim

final rule would be considered in making revisions to the interim final

rule relating to so-called 110 percent borrowers. As indicated above,

the new loan contract has been substantially revised to reduce the

number and breadth of operational controls. These controls are intended

to apply to a fairly broad spectrum of credit risks, and as such RUS

believes they reflect the types of controls that some private lenders

would require for a similar spectrum of credit risks.

The provisions of the new mortgage and new loan contract, and 7 CFR

part 1717 subpart M, in many cases provide greater latitude to

borrowers than established originally in 7 CFR 1710.7 for 110 percent

borrowers. Therefore, =1710.7 has been revised to reflect the greater

latitude provided by the new loan documents and Subpart M.

In assessing credit risks, private lenders look at a large number

of factors relating to the size and quality of the financial assets of

a borrower; the borrower's new worth and debt position; current and

past financial performance; the strength and stability of the

borrower's markets and the borrower's position in those markets; market

diversity, concentrations, and growth or decline; the borrower's cost

competitiveness and investment in new technologies and system

modernization; commitments to research and development and innovation;

experience and structure of management; internal cost and financial

controls; and a number of other factors. When considering the adequacy

of net worth, most private lenders look at the quality of the

borrower's assets and the ratio of net worth to total debt, rather than

only the long-term debt owed to the lender. It is RUS' judgment that

the fact that a borrower has net worth equal to 110 percent of only the

government's outstanding long-term loans does not justify further

relaxation of operational controls over and above those provided in the

new loan documents and regulations based on prudent private lending

practices for a similar spectrum of credit risks. RUS is willing to

consider, on a case by case basis, alternative loan document provisions

for the better quality credits.

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 amends 7 CFR Chapter XVII as follows:

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

INSURED AND GUARANTEED ELECTRIC LOANS

1. The authority citation for part 1710 continues to read as

follows:

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

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

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

definition for ``Tier'' and by adding the new definitions in

alphabetical order to read as follows:

Sec. 1710.2 Definitions and rules of construction.

(a) Definitions. * * *

* * * * *

DSC means Debt Service Coverage of the borrower calculated as:

[GRAPHIC][TIFF OMITTED]TR29DE95.000

Where:

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

RUS system of accounts and RUS Forms 7 and 12. References to line

numbers in the RUS Forms 7 and 12 refer to the June 1994 version of

RUS Form 7 and the December 1993 version of RUS Form 12, and will

apply to corresponding information in future versions of the forms;

A=Depreciation and Amortization Expense of the borrower, which

equals Part A, Line 12 of RUS Form 7 (distribution borrowers) or

Section A, Line 20 of RUS Form 12a (power supply borrowers);

B=Interest expense on total long-term debt of the borrower,

which equals Part A, Line 15 of RUS Form 7 or Section A, Line 22 of

RUS Form 12a, except that interest expense shall be increased by \1/

3\ of the amount, if any, by which restricted rentals of the

borrower (Part M, Line 3 of RUS Form 7 or Section K, Line 4 of RUS

Form 12h) exceed 2 percent of the borrower's equity (RUS Form 7,

Part C, Line 36 [Total Margins & Equities] less Line 26 [Regulatory

Assets] or RUS Form 12a, Section B, Line 38 [Total Margins &

Equities] less Line 28 [Regulatory Assets]);

C=Patronage Capital or Margins of the borrower, which equals

Part A, Line 28 of RUS Form 7 or Section A, Line 35 of RUS Form 12a;

and

D=Debt Service Billed (RUS + other), which equals the sum of all

payments of principal and interest required to be made on account of

total long-term debt of the borrower during the calendar year, plus

\1/3\ of the amount, if any, by which restricted rentals of the

borrower (Part M, Line 3 of RUS Form 7 or Section K, Line 4 of RUS

Form 12h) exceed 2 percent of the borrower's equity (RUS Form 7,

Part C, Line 36 [Total Margins & Equities] less Line 26 [Regulatory

Assets] or RUS Form 12a, Section B, Line 38 [Total Margins &

Equities] less Line 28 [Regulatory Assets]);

* * * * *

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

electric

[[Page 67401]]

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]TR29DE95.001

Where:

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

RUS system of accounts and RUS Form 7. 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 expense on total long-term debt of the electric

system, which usually equals Part A, Line 15 of RUS Form 7, except

that such interest expense shall be increased by \1/3\ of the

amount, if any, by which restricted rentals of the electric system

(usually Part M, Line 3 of RUS Form 7) exceed 2 percent of the

borrower's equity (RUS Form 7, Part C, Line 36 [Total Margins &

Equities] less Line 26 [Regulatory Assets]);

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

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

received from the retirement of patronage capital by suppliers of

electric power and by lenders for credit extended for the Electric

System; and

D=Debt Service Billed (RUS + other), which equals the sum of all

payments of principal and interest required to be made on account of

total long-term debt of the electric system during the calendar

year, plus \1/3\ of the amount, if any, by which restricted rentals

of the Electric System (usually Part M, Line 3 of RUS Form 7) exceed

2 percent of the borrower's equity (RUS Form 7, Part C, Line 36

[Total Margins & Equities] less Line 26 [Regulatory Assets]).

* * * * *

OTIER means Operating Times Interest Earned Ratio of the electric

system calculated as:

[GRAPHIC][TIFF OMITTED]TR29DE95.002

Where:

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

RUS system of accounts and RUS Form 7. 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 expense on total long-term debt of the electric

system, which usually equals Part A, Line 15 of RUS Form 7, except

that such interest expense shall be increased by \1/3\ of the

amount, if any, by which restricted rentals of the electric system

(usually Part M, Line 3 of RUS Form 7) exceed 2 percent of the

borrower's equity (RUS Form 7, Part C, Line 36 [Total Margins &

Equities] less Line 26 [Regulatory Assets]); and

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

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

received from the retirement of patronage capital by suppliers of

electric power and by lenders for credit extended for the Electric

System.

* * * * *

TIER means Times Interest Earned Ratio of the borrower calculated

as:

[GRAPHIC][TIFF OMITTED]TR29DE95.003

Where:

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

RUS system of accounts and RUS Forms 7 and 12. References to line

numbers in the RUS Forms 7 and 12 refer to the June 1994 version of

RUS Form 7 and the December 1993 version of RUS Form 12, and will

apply to corresponding information in future versions of the forms;

A=Interest expense on total long-term debt of the borrower,

which equals Part A, Line 15 of RUS Form 7 or Section A, Line 22 of

RUS Form 12a, except that interest expense shall be increased by \1/

3\ of the amount, if any, by which restricted rentals of the

borrower (Part M, Line 3 of RUS Form 7 or Section K, Line 4 of RUS

Form 12h) exceed 2 percent of the borrower's equity (RUS Form 7,

Part C, Line 36 [Total Margins & Equities] less Line 26 [Regulatory

Assets] or RUS Form 12a, Section B, Line 38 [Total Margins &

Equities] less Line 28 [Regulatory Assets]); and

B=Patronage Capital or Margins of the borrower, which equals

Part A, Line 28 of RUS Form 7 or Section A, Line 35 of RUS Form 12a.

* * * * *

3. Section 1710.7 is revised as follows:

Sec. 1710.7 Exemptions of RUS operational controls under section 306E

of the RE Act.

(a) General policy. (1) Section 306E of the RE Act directs the

Administrator to issue interim final regulations to minimize approval

rights, requirements, restrictions, and prohibitions imposed on the

operations of electric borrowers whose net worth exceeds 110 percent of

the outstanding loans made or guaranteed to the borrower by RUS. The

section also directs the Administrator, when requested by a private

lender providing financing for capital investments by such borrowers,

to offer, without delay, to share the government's lien on the

borrowers' systems or subordinate the government's lien on the property

financed by the private lender.

(2) In issuing the regulations, the Administrator is authorized to

establish requirements, guided by the practices of private lenders with

respect to similar credit risks, to ensure that the security, including

the assurance of repayment, for loans made or guaranteed by RUS will

remain reasonably adequate. If the regulations are not issued within

180 days of enactment of section 306E, the Administrator may not, until

the regulations are issued, require prior approval of, or establish any

requirement, restriction, or prohibition, with respect to the

operations of any electric borrower that meets the 110 percent ratio.

(3) Nothing in section 306E limits the authority of the

Administrator to establish terms and conditions on the use of funds

from loans made or guaranteed by RUS, to establish loan feasibility

criteria and other requirements for the approval of RUS loans or loan

guarantees, such as those set forth in this part, or to take any other

action specifically authorized by law.

(4) This section addresses the application of section 306E of the

RE Act to RUS operational controls and other requirements that apply in

general to RUS borrowers. The application of section 306E to lien

accommodations and subordinations is set forth in 7 CFR 1717.860 and

1717.904.

(5) The exemptions granted by this section, 7 CFR 1717.860, and 7

CFR 1717.904 apply only to RUS controls and approval rights. They do

not affect the controls and approval rights of other co-mortgagees

under the RUS mortgage.

(6) For purposes of this section, the terms ``default,'' ``financed

or funded by RUS,'' ``interchange agreement,'' ``interconnection

agreement,'' ``loan documents,'' ``pooling agreement,'' ``power supply

contract,'' and ``wheeling agreement'' have the meanings as set forth

in 7 CFR 1717.602.

(b) Determination of ratio. The following principles and procedures

will apply to the calculation of net worth as a ratio, expressed as a

percent, to the outstanding balance of all loans made or guaranteed to

the borrower by RUS, hereinafter called the borrower's ``net worth to

RUS debt ratio'', or simply ``the ratio'':

[[Page 67402]]

(1) For purposes of determining whether a borrower is exempt from

approvals, requirements, restrictions, or prohibitions imposed by RUS

with respect to borrower operations, i.e., ``operational controls,''

the ratio normally will be based on data as of December 31. Net worth

will be based on the year-end financial and statistical reports

submitted by borrowers to RUS, and outstanding loans made or guaranteed

by RUS will be based on RUS's records. The financial and statistical

reports (Form 7 for distribution borrowers and Form 12a for power

supply borrowers) are subject to RUS review and revision, and they must

comply with RUS's system of accounts and accounting principles set

forth in 7 CFR part 1767. Since sinking fund depreciation is not

approved under 7 CFR part 1767, net worth for borrowers using sinking

fund depreciation will be calculated as if the borrower had been using

straight line depreciation;

(2) Net worth will be calculated by taking total margins and

equities (from Part C of RUS Form 7 for distribution borrowers, or

Section B of RUS Form 12a for power supply borrowers) and subtracting

assets properly recordable in account 182.2, Unrecovered Plant and

Regulatory Study Costs, and account 182.3, Other Regulatory Assets, as

defined in 7 CFR part 1767; and

(3) By no later than May 1 of each year, RUS will notify each

borrower in writing of its ratio as of December 31 of the preceding

year. If a borrower's net worth to RUS debt ratio exceeds 110 percent

based on the year-end data, the borrower will be exempt from the

operational controls exempted under paragraph (c) of this section until

subsequently notified in writing by RUS that it is no longer exempt.

(c) Borrower operations exempted from RUS controls. Borrowers who

are notified by RUS in writing that their net worth to RUS debt ratio

exceeds 110 percent are exempted from the operational controls of the

RUS mortgage and loan contract listed in this paragraph. These

controls, which are implemented through RUS regulations and other

documents, are as follows:

(1) RUS approval of extensions and additions. RUS approval of

extensions and additions to borrowers' electric systems, except for the

following:

(i) Extensions and additions financed by RUS;

(ii) Construction, procurement, or leasing of generating

facilities, regardless of the source of funding, if the combined

capacity of the facilities to be built, procured, or leased, including

any future facilities included in the planned project, will exceed 25

megawatts in the case of power supply borrowers, or the lesser of 5

megawatts or 30 percent of the borrower's equity in the case of

distribution borrowers;

(iii) Acquisition or leasing of existing electric facilities or

systems in service, regardless of the source of funding, whose purchase

price, or capitalized value in the case of a lease, exceeds 10 percent

of the borrower's net utility plant; and

(iv) Construction, procurement, or leasing of electric facilities,

regardless of the source of funding, 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;

(2) Long-range engineering plans and construction work plans. RUS

approval of long-range engineering plans and CWPs if the borrower does

not intend to seek RUS financing for any of the facilities, equipment

or other purposes included in those plans. However, if requested by

RUS, a borrower must provide an informational copy of such plans to

RUS;

(3) Plans and specifications. RUS approval of plans and

specifications for construction not financed by RUS;

(4) Standard forms of construction contracts, and engineering and

architectural services contracts. RUS requirements to use standard

forms of contracts for construction, procurement, engineering services,

and architectural services, if the construction, procurement or

services are not financed by RUS. To be eligible for this waiver the

contracts used must not contain any provisions that prohibit or

restrict the assignment of the contracts to the government upon the

exercise by RUS of its remedies under security instruments securing

loans made or guaranteed by RUS;

(5) Contract bidding requirements. RUS requirements regarding the

competitive bidding of construction contracts, if the construction is

not financed by RUS;

(6) RUS approval of contracts. (i) Construction contracts and

architectural and engineering contracts. RUS approval of contracts for

construction and procurement and for architectural and engineering

services, if such construction, procurement or services are not

financed by RUS.

(ii) Large retail power contracts. RUS approval of contracts to

sell electric power to retail customers except when 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 exemption applies regardless of the source of funding of

any plant extensions, additions or improvements that may be involved in

connection with the contract.

(iii) Power supply arrangements. (A) RUS approval of power supply

contracts (including but not limited to economy energy sales and

emergency power and energy sales), interconnection agreements,

interchange agreements, wheeling agreements, pooling agreements, and

any other similar power supply arrangements subject to approval by RUS,

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

arrangements are also exempted from RUS approval provided that the

amendment does not extend the term of the arrangement for more than 2

years beyond the date of the amendment.

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

supply arrangement subject to RUS approval that 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.

(C) The exemptions under this paragraph (c)(6)(iii) 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.

(iv) 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, if such contracts

do not cover all or substantially all of the electric system.

(v) Other contracts. [Reserved];

(7) RUS approval of general manager. RUS approval of the selection

of a borrower's manager and employment contract, provided that the

borrower is not in default under its loan documents or any other

agreement with RUS. Nothing herein shall limit the right of RUS under

the loan documents to request termination of the employment of a

manager in the event of a default by the borrower;

(8) Board of directors. RUS approval of compensation of a

borrower's board of directors;

(9) Certain expenditures. (i) RUS approval of expenditures for

legal, accounting, and supervisory services by

[[Page 67403]]

a borrower. 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.

(ii) RUS approval of expenditures for engineering services by a

borrower, if such engineering services will not be financed by RUS;

(10) Banks. RUS approval of banks or other depositories used by a

borrower. However, without the prior written approval of RUS, a

borrower shall not deposit funds from loans made or guaranteed by RUS

in any bank or other depository that is not insured by the Federal

Deposit Insurance Corporation or other Federal agency acceptable to

RUS, or in any account not so insured.

(11) Certain equipment. RUS approval of the purchase of data

processing equipment and system control equipment by a borrower, if the

equipment is not financed by RUS;

(12) Notification of rate changes. Requirement that distribution

borrowers notify RUS in writing of proposed changes in electric rates

90 days prior to the effective date of such rates. Instead, the

required notification period shall be 30 days, and such notification

shall be required only if requested by RUS;

(13) Consolidations and mergers. RUS approval of mergers and

consolidations, and conveyances or transfers of the mortgaged property

substantially as an entirety, if the following conditions are met:

(i) Such consolidation, merger, conveyance or transfer shall be on

such terms as shall fully preserve the lien and security of the

mortgage and the rights and powers of the mortgagees;

(ii) The entity formed by such consolidation or with which the

borrower is merged or the corporation which acquires by conveyance or

transfer the mortgaged property substantially as an entirety shall

execute and deliver to the mortgagees a mortgage supplemental in

recordable form and containing an assumption by such successor entity

of the due and punctual payment of the principal of and interest on all

of the outstanding notes and the performance and observance of every

covenant and condition of the mortgage;

(iii) Immediately after giving effect to such transaction, no

default under the mortgage shall have occurred and be continuing;

(iv) The borrower shall have delivered to the mortgagees a

certificate of its general manager or other officer, in form and

substance satisfactory to each of the mortgagees, which shall state

that such consolidation, merger, conveyance or transfer and such

supplemental mortgage comply with this section and that all conditions

precedent herein provided for relating to such transaction have been

complied with;

(v) The borrower shall have delivered to the mortgagees an opinion

of counsel in form and substance satisfactory to each of the

mortgagees; and

(vi) The entity formed by such consolidation or with which the

borrower is merged or the corporation which acquires by conveyance or

transfer the mortgaged property substantially as an entirety shall be

an entity:

(A) Having equity equal to at least 27% of its total assets on a

pro forma basis after giving effect to such transaction;

(B) Having a pro forma TIER of not less than 1.50 and a pro forma

DSC of not less than 1.25 for each of the two preceding calendar years;

and

(C) Having net utility plant equal to or greater than 1.0 times its

total long-term debt on a pro forma basis;

(14) Sale, lease, or transfer of capital assets. RUS approval for a

distribution borrower to sell, lease, or transfer capital assets, if

the following conditions are met:

(i) The borrower is not in default;

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

borrower achieved a TIER of at least 1.5, DSC of at least 1.25, OTIER

of at least 1.1, and ODSC of at least 1.1, in each case based on the

average or the best 2 out of the 3 most recent years;

(iii) The sale, lease, or transfer of assets will not reduce the

borrower's existing or future requirements for energy or capacity being

furnished to the borrower under any wholesale power contract which has

been pledged as security to the government;

(iv) Fair market value is obtained for the assets;

(v) The aggregate value of assets sold, leased, or transferred in

any 12-month period is less than 10 percent of the borrower's net

utility plant prior to the transaction;

(vi) The proceeds of such sale, lease, or transfer, less ordinary

and reasonable expenses incident to such transaction, are immediately:

(A) Applied as a prepayment of all notes secured under the mortgage

equally and ratably;

(B) In the case of dispositions of equipment, materials or scrap,

applied to the purchase of other property useful in the borrower's

utility business; or

(C) Applied to the acquisition of construction of utility plant;

and

(vii) If the borrower has an RUS-approved wholesale power contract

with a power supply borrower (seller), the circumstances of the sale,

lease or transfer of capital assets conform with the conditions in such

contract under which the seller may not withhold its consent to the

sale, lease or transfer;

(15) Limitations on distributions. RUS approval for a borrower to

declare or pay dividends, pay or determine to pay patronage refunds,

retire patronage capital, or make any other cash distributions, if the

following conditions are met:

(i) After giving effect to the distribution, the borrower's equity

will be greater than or equal to 30 percent of its total assets;

(ii) The borrower is current on all payments due on all notes

secured under the mortgage;

(iii) The borrower is not otherwise in default under its loan

documents; and

(iv) After giving effect to the distribution, the borrower's

current and accrued assets will be not less than its current and

accrued liabilities.

(d) RUS requirements and operational controls not exempted. All

requirements and operational controls contained in the RUS mortgage and

loan contract, or otherwise imposed on borrowers pursuant to statute or

regulation, that are not specifically listed in paragraph (c) of this

section are not exempted and shall continue to apply according to their

terms. Examples of such requirements and controls not exempted are

listed in this paragraph for the convenience of the public. This list

is not exhaustive, and the absence of a requirement or control from

this list in no way means that the requirement or control has been

exempted:

(1) Requirements and operational controls contained in the RUS

mortgage or loan contract that are necessary to ensure that the

security for loans made or guaranteed by RUS is reasonably adequate and

that the loans will be repaid, or to accomplish other fundamental

purposes of the RE Act. Some of these also represent terms and

conditions with respect to the use by borrowers of the proceeds of

loans made or guaranteed by RUS. Together, these controls include, but

are not limited to, the following:

(i) Area coverage requirements set forth in the loan contract and

in Sec. 1710.103;

(ii) Requirement that certain borrowers maintain, on an ongoing

basis, a power requirements study and a power requirements study work

plan, as set forth in Secs. 1710.201 and 1710.202;

(iii) Requirement that borrowers follow RUS construction standards

and use RUS accepted materials, as set forth

[[Page 67404]]

in Sec. 1710.41, Sec. 1710.45, and 7 CFR part 1728;

(iv) Requirement that borrowers maintain, on an ongoing basis, a

long-range engineering plan and a construction work plan, as set forth

in Sec. 1710.250(b);

(v) Requirement that borrowers set rates for electric service

sufficient to maintain certain coverage ratios, as set forth in

Sec. 1710.114;

(vi) Certain RUS approvals of retirements of capital credits in

excess of amounts specifically authorized in the mortgage;

(vii) RUS approval of borrower investments, loans, guarantees, and

other obligations under 7 CFR part 1717, subpart N;

(viii) RUS requirements on accounting, auditing, irregularities,

financial reporting, and access to books and records;

(ix) Requirement that borrowers record the mortgage and mortgage

amendments;

(x) Requirement that the mortgagor maintain and preserve the

priority lien of the mortgage and defend title to the mortgaged

property;

(xi) Requirements on maintenance and repair of the mortgaged

property;

(xii) Requirements on insurance of the mortgaged property; and

(xiii) Certain RUS approvals of borrower mergers and

consolidations; and

(2) Requirements imposed on borrowers pursuant to statute or

regulation and not specifically exempted by paragraph (c) of this

section. See, for example, Secs. 1710.122 through 1710.127.

(e) Rescission of exemptions if borrower defaults. If a borrower is

in default with respect to any requirement of its mortgage, loan

contract with RUS, or any other agreement with RUS that has not been

exempted pursuant to paragraph (c) of this section or other RUS

regulations, upon written notice to the borrower RUS may rescind all or

any part of the exemptions granted pursuant to paragraph (c) of this

section or other RUS regulations. The reinstated requirements and

controls will remain in effect until RUS determines that they are no

longer needed to help ensure that the security, including the assurance

of repayment, for loans made or guaranteed by RUS will remain

reasonably adequate.

(f) Reinstated controls. If RUS controls are reinstated because the

borrower defaults or its net worth falls below 110 percent of RUS debt,

such controls and approval rights will apply to all applicable

subsequent actions of the borrower, including without limitation the

amendment of contracts that the borrower entered into while eligible

for an exemption under this section.

Sec. 1710.103 [Amended]

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

sentence ``The loan contract shall contain provisions to this

effect.''.

5. Section 1710.114 is revised to read 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 approved by RUS 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 approved by RUS on or after January 29,

1996.

(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.

(c) Requirements for loan feasibility. To be eligible for a loan,

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.

(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

[[Page 67405]]

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 approved by RUS 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.

6. 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]

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

from the first sentence of paragraph (a).

Sec. 1710.252 [Amended]

8. 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

9. 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.

10. 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.

1717.613 RUS approval of data processing and system control

equipment.

1717.614 Notification of rate changes.

1717.615 Consolidations and mergers.

1717.616 Sale, lease, or transfer of capital assets.

1717.617 Limitations on distributions.

Subpart 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 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

[[Page 67406]]

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.

(c) Generic notices. By written notice to all borrowers or a group

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

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

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

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

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

authority to approve decisions and actions by borrowers beyond the

authority granted by the loan documents and RUS regulations.

Sec. 1717.601 Applicability.

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

subpart apply only to controls and approval rights normally included in

RUS loan documents dated prior to January 29, 1996. They do not apply

to special controls and approval requirements included in loan

documents or other agreements executed between a borrower and RUS that

relate to individual problems or circumstances specific to an

individual borrower.

(b) The approvals and exceptions to controls granted by RUS in this

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

under the mortgage or their loan contracts.

Sec. 1717.602 Definitions.

Terms used in this subpart that are not defined in this section

have the meanings set forth in 7 CFR part 1710. In addition, for the

purposes of this subpart:

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

documents or other agreement with RUS, and furthermore includes any

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

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

Equity means the borrower's total margins and equities computed

pursuant to RUS accounting requirements but excluding any regulatory

created assets.

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

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

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

already expended by the borrower, and loans to replace interim

financing.

Interchange agreement means a contractual arrangement that can

include a variety of services utilities provide each other to increase

reliability and efficiency, and to avoid duplicating expenses. Some

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

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

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

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

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

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

exchanges (swapping power and energy from different plants to avoid

running the most expensive units).

Interconnection agreement means a contract governing the terms for

establishing or using one or more electrical connections between two or

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

systems.

Loan documents means the mortgage (or other security instrument

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

into between the borrower and RUS.

Net utility plant means the amount constituting the total utility

plant of the borrower, less depreciation, computed in accordance with

RUS accounting requirements.

Pooling agreement means a contract among two or more interconnected

electric systems to operate on a coordinated basis to achieve economies

and/or enhance reliability in supplying their respective loads.

Power supply contract means any contract entered into by a borrower

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

Regulatory created assets means the sum of any amounts properly

recordable as unrecovered plant and regulatory study costs or as other

regulatory assets, computed pursuant to RUS accounting requirements.

RUS accounting requirements means the system of accounts prescribed

for electric borrowers by RUS regulations as such RUS accounting

requirements exist at the date of applicability thereof.

RUS regulations mean regulations of general applicability published

by RUS from time to time as they exist at the date of applicability

thereof, and shall also include any regulations of other federal

entities which RUS is required by law to implement.

Total assets means an amount constituting the total assets of the

borrower as computed pursuant to RUS accounting requirements, but

excluding any regulatory created assets.

Wheeling agreement means a contract providing for the use of the

electric transmission facilities of one electric utility to transmit

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

party. Such transmission may be accomplished directly or by

displacement.

Sec. 1717.603 RUS approval of extensions and additions.

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

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

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

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

hereby given to distribution borrowers to make such extensions and

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

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

following:

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

if the combined capacity of the facilities to be built, procured, or

leased, including any future facilities included in the planned

project, will exceed the lesser of 5 megawatts or 30 percent of the

borrower's equity;

(2) Acquisition or leasing of existing electric facilities or

systems in service whose purchase price, or capitalized value in the

case of a lease, exceeds 10 percent of the borrower's net utility

plant; and

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

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

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

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

preceding the acquisition or start of construction.

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

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

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

Requirements for RUS approval of extensions and additions that will not

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

[[Page 67407]]

(c) Additional details. Additional details relating to RUS approval

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

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

and 1726.

Sec. 1717.604 Long-range engineering plans and construction work

plans.

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

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

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

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

long-range engineering plan and CWP approved by RUS.

(c) RUS approval is not required for long-range engineering plans

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

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

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

copy of such plans to RUS.

Sec. 1717.605 Design standards, plans and specifications, construction

standards, and RUS accepted materials.

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

comply with applicable RUS requirements with respect to system design,

construction standards, and the use of RUS accepted materials.

Borrowers must comply with applicable RUS requirements with respect to

plans and specifications only if the construction or procurement will

be financed by RUS. These requirements are set forth in other RUS

regulations, especially in 7 CFR parts 1724 and 1728.

Sec. 1717.606 Standard forms of construction contracts, and

engineering and architectural services contracts.

All borrowers are encouraged to use the standard forms of contracts

promulgated by RUS for construction, materials, equipment, engineering

services, and architectural services, regardless of the source of

funding for such construction and services. Borrowers are required to

use these standard forms of contracts only if the construction,

procurement or services are financed by RUS, and only to the extent

required by RUS regulations. RUS requirements with respect to such

standard forms of contract are set forth in 7 CFR part 1724 for

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

construction, materials, and equipment.

Sec. 1717.607 Contract bidding requirements.

Borrowers must follow RUS requirements regarding bidding for

contracts for construction, materials, and equipment only if financing

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

requirements are set forth in 7 CFR part 1726.

Sec. 1717.608 RUS approval of contracts.

(a) Construction contracts and architectural and engineering

contracts. RUS approval of contracts for construction and procurement

and for architectural and engineering services is required only when

such construction, procurement or services are financed by RUS.

Detailed requirements regarding RUS approval of such contracts are set

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

and in 7 CFR part 1726 for construction and procurement.

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

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

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

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

sales or maximum kW demand for the year immediately preceding execution

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

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

involved in connection with the contract.

(c) Power supply arrangements. (1) Power supply contracts

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

and energy sales), interconnection agreements, interchange agreements,

wheeling agreements, pooling agreements, and any other similar power

supply arrangements subject to approval by RUS are deemed approved if

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

arrangements are also deemed approved provided that the amendment does

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

date of the amendment.

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

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

of either altering a list of interconnection or delivery points or

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

contained in a formulary rate or charge is deemed approved.

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

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

by the contracts or arrangements, and regardless of whether or not a

Federal power marketing agency is a party to any of them.

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

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

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

if such contracts cover all or substantially all of the electric

system.

(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

[[Page 67408]]

engineering services financed by RUS are set forth in other RUS

regulations.

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

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

to approve the bank or other depositories used by the borrower, such

approval is hereby granted. However, without the prior written approval

of RUS, a borrower shall not deposit funds from loans made or

guaranteed by RUS in any bank or other depository that is not insured

by the Federal Deposit Insurance Corporation or other Federal agency

acceptable to RUS, or in any account not so insured.

Sec. 1717.613 RUS approval of data processing and system control

equipment.

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

obtain approval from RUS before purchasing data processing equipment or

system control equipment, such approval is hereby granted if the

equipment will not be financed by RUS.

Sec. 1717.614 Notification of rate changes.

If a distribution borrower is required by its loan documents to

notify RUS in writing of proposed changes in electric rates more than

30 days prior to the effective date of such rates, the required

notification period shall be 30 days. Moreover, such notification shall

be required only upon the request of RUS.

Sec. 1717.615 Consolidations and mergers.

A distribution or power supply borrower may without the prior

approval of RUS, consolidate or merge with any other corporation or

convey or transfer the mortgaged property substantially as an entirety

if the following conditions are met:

(a) Such consolidation, merger, conveyance or transfer shall be on

such terms as shall fully preserve the lien and security of the RUS

mortgage and the rights and powers of the mortgagees;

(b) The entity formed by such consolidation or with which the

borrower is merged or the corporation which acquires by conveyance or

transfer the mortgaged property substantially as an entirety shall

execute and deliver to the mortgagees a mortgage supplemental in

recordable form and containing an assumption by such successor entity

of the due and punctual payment of the principal of and interest on all

of the outstanding notes and the performance and observance of every

covenant and condition of the mortgage;

(c) Immediately after giving effect to such transaction, no default

under the mortgage shall have occurred and be continuing;

(d) The borrower shall have delivered to the mortgagees a

certificate of its general manager or other officer, in form and

substance satisfactory to each of the mortgagees, which shall state

that such consolidation, merger, conveyance or transfer and such

supplemental mortgage comply with this section and that all conditions

precedent herein provided for relating to such transaction have been

complied with;

(e) The borrower shall have delivered to the mortgagees an opinion

of counsel in form and substance satisfactory to each of the

mortgagees; and

(f) The entity formed by such consolidation or with which the

borrower is merged or the corporation which acquires by conveyance or

transfer the mortgaged property substantially as an entirety shall be

an entity having:

(1) Equity equal to at least 27% of its total assets on a pro forma

basis after giving effect to such transaction;

(2) A pro forma TIER of not less than 1.50 and a pro forma DSC of

not less than 1.25 for each of the two preceding calendar years; and

(3) Net utility plant equal to or greater than 1.0 times its total

long-term debt on a pro forma basis.

Sec. 1717.616 Sale, lease, or transfer of capital assets.

A distribution borrower may without the prior approval of RUS sell,

lease, or transfer any capital asset if the following conditions are

met:

(a) The borrower is not in default;

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

borrower achieved a TIER of at least 1.5, DSC of at least 1.25, OTIER

of at least 1.1, and ODSC of at least 1.1, in each case based on the

average or the best 2 out of the 3 most recent years;

(c) The sale, lease, or transfer of assets will not reduce the

borrower's existing or future requirements for energy or capacity being

furnished to the borrower under any wholesale power contract which has

been pledged as security to the government;

(d) Fair market value is obtained for the assets;

(e) The aggregate value of assets sold, leased, or transferred in

any 12-month period is less than 10 percent of the borrower's net

utility plant prior to the transaction;

(f) The proceeds of such sale, lease, or transfer, less ordinary

and reasonable expenses incident to such transaction, are immediately:

(1) Applied as a prepayment of all notes secured under the mortgage

equally and ratably;

(2) In the case of dispositions of equipment, materials or scrap,

applied to the purchase of other property useful in the borrower's

utility business; or

(3) Applied to the acquisition of construction of utility plant.

Sec. 1717.617 Limitations on distributions.

If a distribution or power supply borrower is required by its loan

documents to obtain prior approval from RUS before declaring or paying

any dividends, paying or determining to pay any patronage refunds, or

retiring any patronage capital, or making any other cash distributions,

such approval is hereby given if the following conditions are met:

(a) After giving effect to the distribution, the borrower's equity

will be greater than or equal to 30 percent of its total assets;

(b) The borrower is current on all payments due on all notes

secured under the mortgage;

(c) The borrower is not otherwise in default under its loan

documents; and

(d) After giving effect to the distribution, the borrower's current

and accrued assets will be not less than its current and accrued

liabilities.

11. 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 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

[[Page 67409]]

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.

* * * * *

12. 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.

* * * * *

13. 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

(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

[[Page 67410]]

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.

* * * * *

14. 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.

(c) * * *

(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;

* * * * *

15. 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;

* * * * *

16. 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:

* * * * *

(c) * * *

(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]

17. 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.

Sec. 1717.860 [Amended]

18. Section 1717.860 is amended by redesignating paragraph (f) as

paragraph (e).

PART 1718--LOAN SECURITY DOCUMENTS FOR ELECTRIC BORROWERS

19. 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.).

20. Section 1.01 of Appendix A to Subpart B of part 1718 is amended

by revising the definitions for ``Debt Service Coverage Ratio (``DSC'')

``and'' Times Interest Earned Ratio (``TIER'')'' to read as follows:

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

Electric Distribution Borrowers

* * * * *

Section 1.01 Definitions. * * *

* * * * *

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

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

Capital or Margins of the Mortgagor, (ii) Interest Expense on Total

Long Term Debt of the Mortgagor (as computed in accordance with the

principles set forth in the definition of TIER) and (iii)

Depreciation and Amortization Expense of the Mortgagor, and divide

the total so obtained by an amount equal to the sum of all payments

of principal and interest required to be made on account of Total

Long-Term Debt during such calendar year increasing said sum by any

addition to interest expense on account of Restricted Rentals as

computed with respect to the Times Interest Earned Ratio herein.

* * * * *

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

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

capital or margins of the Mortgagor and (ii) Interest Expense on

Total Long-Term Debt of the Mortgagor and divide the total so

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

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

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

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

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

Equity.

* * * * *

21. 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

[[Page 67411]]

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 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.

(c) Resolution of any differences in contractual provisions. If any

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) Certain loan contract provisions subject to subsequent

rulemaking. If a loan contract provision imposes an obligation or

limitation on the borrower whose interpretation or specification is

subject to RUS regulations or the discretion of the Administrator or

RUS, such interpretation or specification shall be subject to

subsequent rulemaking. Such interpretation or specification of the

borrower's obligations or limitations may not exceed the authority

granted to the Administrator or RUS in the loan contract provision.

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 approved on or after January 29, 1996. Distribution borrowers that

obtain a lien accommodation or any other form of financial assistance

from RUS after January 29, 1996, 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 such approval 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;

(c) Specification of the method for repaying the loan principal,

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;

[[Page 67412]]

(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;

(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 Rural Utilities Service,

United States Department of Agriculture, Washington, DC 20250-1533.

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, Construction Standards, and List

of Materials.

Section 5.15. Plans and Specifications.

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 Changing Principal Place of

Business.

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 Using non FDIC-insured Depositories.

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. 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. Schedules and Exhibits.

Section 9.15. Prior Loan Documents.

Section 9.16. Authority of Representatives of RUS.

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, as

amended.

[[Page 67413]]

``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.

``Contemporaneous Loan'' shall mean any loan which the Borrower

has used to satisfy RUS Regulations or loan conditions requiring

that supplemental financing be obtained in order to obtain 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: (i) TIER of 1.5; (ii) Operating TIER of 1.1; (iii)

DSC of 1.25; and Operating DSC of 1.1.

``Debt Service Coverage Ratio'' (``DSC'') shall have the meaning

provided 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 or the rebate of an

abatement of wholesale power costs previously incurred pursuant to

an order of a state regulatory authority or a wholesale power cost

adjustment clause or similar power pricing agreement between the

Borrower and a power supplier.

``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].

``Independent'' when used with respect to any specified person

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

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

material indirect financial interest in the Borrower or in any

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

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

director or person performing similar functions.

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

Borrower computed pursuant to RUS Accounting Requirements.

``Loan'' shall mean the loan described in Article III 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:

[GRAPHIC][TIFF OMITTED]TR29DE95.004

Where:

All amounts are for the same calendar year and are computed

pursuant to RUS Accounting Requirements and RUS form 7;

A=Depreciation and Amortization Expense of the Electric System;

B=Interest Expense on Total Long-Term Debt of the Electric

System, except that such Interest Expense shall be increased by \1/

3\ of the amount, if any, by which the Restricted Rentals of the

Electric System exceed 2 percent of the Mortgagor's Equity;

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 Total Long-Term Debt of the Electric System)

plus cash received from the retirement of patronage capital by

suppliers of electric power and by lenders for credit extended for

the Electric System; and

D=Debt service billed which equals the sum of all payments of

principal and interest required to be made on account of Total Long-

Term Debt of the Electric System during the calendar year, plus \1/

3\ of the amount, if any, by which Restricted Rentals of the

Electric System exceed 2 percent of the Mortgagor's Equity.

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

Interest Earned Ratio calculated as:

[GRAPHIC][TIFF OMITTED]TR29DE95.005

Where:

All amounts are for the same calendar year and are computed

pursuant to RUS Accounting Requirements and RUS form 7;

A=Interest Expense on Total Long-Term Debt of the Electric

System, except that such Interest Expense shall be increased by 1/3

of the amount, if any, by which Restricted Rentals of the Electric

System exceed 2 percent of the Mortgagor's Equity; 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 Total Long-Term Debt of the Electric System)

plus cash received from the retirement of patronage capital by

suppliers of electric power and by lenders for credit extended for

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].

``Prior Loan Contracts'' shall have the meaning as defined in

section 9.15.

``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 of general

applicability published by RUS from time to time as they exist at

the date of applicability thereof, and shall also include any

regulations of other Federal entities which RUS is required by law

to implement.

``Special Construction Account'' shall have the meaning as

defined in section 5.21.

``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.

``Times Interest Earned Ratio'' (``TIER'') shall have the

meaning provided 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 hereon, 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

[[Page 67414]]

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 shall 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.

(c) Consents. No consent, permission, authorization, order, or

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 shall be, the legal, valid, and binding

obligation of the Borrower, 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, profits 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 to RUS in

writing.

(g) Title to Property. As to property which is presently

included in the description of Mortgaged 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 except the

Liens specifically identified on Schedule 2 attached hereto (the

``Existing Liens''), and Permitted Encumbrances or Liens 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 connection 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 to RUS in writing.

(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 shall 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. All payments which the Borrower

sends to RUS on any outstanding obligation owed to RUS shall be

applied in the manner provided in the Borrower's loan documents to

which such payments relate and in a manner consistent with RUS

policies, practices, and procedures for obligations that have been

similarly classified by RUS.

(c) Electronic Funds Transfer. Except as otherwise prescribed by

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 shall 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.

(c) Authorization. That RUS receive evidence satisfactory to it

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 shall

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

[[Page 67415]]

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 for sales for resale 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 shall 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

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) Compliance With Loan Contract and Mortgage. That the

Borrower is in material compliance with all provisions of this

Agreement and the Mortgage.

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 shall 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 in all material respects 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 in whole or in part the

Contemporaneous Loan described on Schedule 1, the Borrower shall

prepay the RUS Note correspondingly in order 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 if they

satisfy each of the following requirements:

(a) Principal. The principal amount of such refinancing or

refunding loan is not less than the amount of loan principal being

refinanced; and

(b) Weighted Average Life. 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 shall 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

(c) Prospective Notice of Change in Rates. The Borrower shall

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 shall 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(d)] 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 in all material respects 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 shall 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

[[Page 67416]]

anyway pertaining to its property or business, including its

Subsidiaries, if any, and to make copies or extracts therefrom.

Section 5.9. Area Coverage

(a) 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.

(b) If economically feasible and reasonable considering the cost of

providing such service and/or the effects on consumers' rates, such

service shall be provided, to the maximum extent practicable, at the

rates and minimum charges established in the Borrower's rate schedules,

without the payment of such persons, other than seasonal or temporary

consumers, of a contribution in aid of construction. A seasonal

consumer is one that demands electric service only during certain

seasons of the year. A temporary consumer is a seasonal or year-round

consumer that demands electric service over a period of less than five

years.

(c) The Borrower may assess contributions in aid of construction

provided such assessments are consistent with this section.

Section 5.10. Real Property Acquisition

In acquiring real property, the Borrower shall comply in all

material respects 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 or any eligible country, and only such

manufactured articles, materials, and supplies as have been

manufactured in the United States or any eligible country substantially

all from articles, materials, and supplies mined, produced or

manufactured, as the case may be, in the United States or any eligible

country, except to the extent RUS shall determine that such use shall

be impracticable or that the cost thereof shall be unreasonable. For

purposes of this section, an ``eligible country'' is any country that

applies with respect to the United States an agreement ensuring

reciprocal access for United States products and services and United

States suppliers to the markets of that country, as determined by the

United States Trade Representative.

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, Construction Standards, and List of

Materials

The Borrower shall use design standards, construction standards,

and lists of acceptable materials in conformance with RUS Regulations.

Section 5.15. Plans and Specifications

The Borrower shall submit plans and specifications for construction

to RUS for review and approval, in conformance with RUS Regulations, if

the construction will be financed in whole or in part by a loan made or

guaranteed by RUS.

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, if the construction, procurement, or services are being

financed in whole or in part by a loan being made or guaranteed by

RUS.

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 financed in whole or in part by a loan made or

guaranteed by RUS.

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 shall 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.

(c) Sanctions and Penalties. The Borrower agrees that it shall

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 shall furnish RUS and the Secretary

of Labor such information as they may require for the supervision of

such compliance, and that it shall otherwise assist the

administering agency in the discharge of RUS's primary

responsibility for securing compliance. The Borrower further agrees

that it shall 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 shall

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 shall cause to be prepared and furnished to RUS 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 shall 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,

[[Page 67417]]

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.

(c) Notice of Environmental Litigation. Without limiting the

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 for which the Borrower is not

fully covered by insurance, 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

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 [6.7] of this Agreement. Any account

(hereinafter called ``Special Construction Account'') in which any

such moneys shall be deposited shall be insured by the Federal

Deposit Insurance Cor

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