RUS Policies on Mergers and Consolidations of Electric Borrowers

SUMMARY: The Rural Utilities Service (RUS) proposes to streamline its

regulations through amendments that are intended to encourage electric

borrowers to merge, consolidate, or enter into similar arrangements

that benefit borrowers and rural communities and are consistent with

the interests of the Government as a secured lender. These amendments

are part of an ongoing RUS project to modernize agency policies and

procedures in order to provide borrowers with the flexibility they need

to continue providing reliable electric service at reasonable cost in

rural areas, while maintaining the integrity of Government loans.

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

equivalent by September 6, 1996.

ADDRESSES: Written comments should be addressed to Sue Arnold,

Financial Analyst, Program Support and Regulatory Analysis, U.S.

Department of Agriculture, Rural Utilities Service, 14th Street and

Independence Ave, SW., AgBox 1522, Washington, DC 20250-1522. RUS

requires, in hard copy, a signed original and 3 copies of all comments

(7 CFR 1700.30(e)). Comments will be available for public inspection

during regular business hours (7 CFR 1.27(b)).

FOR FURTHER INFORMATION CONTACT: Sue Arnold, Financial Analyst, U.S.

Department of Agriculture, Rural Utilities Service, Room 2230-S, 1400

Independence Avenue, SW., STOP 1522, Washington, DC 20250-1522.

Telephone: 202-720-0736. FAX: 202-720-4120. E-mail:

[email protected].

SUPPLEMENTARY INFORMATION: The Rural Utilities Service (RUS) is taking

this regulatory action as part of the National Performance Review

program to eliminate unnecessary regulations and improve those that

remain in force. This regulatory action has been determined to be

significant for the purposes of Executive Order 12866, Regulatory

Planning and Review, and, therefore has been reviewed by the Office of

Management and Budget (OMB). The Administrator of RUS has determined

that a rule relating to the RUS electric loan program is not a rule as

defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), and,

therefore, the Regulatory Flexibility Act does not apply to this

proposed 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 proposed 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 proposed rule has been

reviewed under Executive Order 12988, Civil Justice Reform. RUS has

determined that this proposed rule meets the applicable standards

provided in Sec. 3. of the Executive Order.

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

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

Chapter 35, as amended) RUS is requesting comments on the information

collection incorporated in this proposed rule.

Comment on this information collection must be received by October

7, 1996.

Comments are invited on: (a) Whether the proposed collection of

information is necessary for the proper performance of the functions of

the agency, including whether the information will have practical

utility; (b) The accuracy of the agency's estimate of the burden of the

proposed collection of information; (c) Ways to enhance the quality,

utility and clarity of the information to be collected; and (d) Ways to

minimize the burden of the collection of information on respondents,

including through the use of automated collection techniques or other

forms of information technology.

For further information contact Sue Arnold, Financial Analyst,

Program Support and Regulatory Analysis, U.S. Department of

Agriculture, Rural Utilities Service, STOP 1522, Room 2230-S, 1400

Independence Avenue, SW., Washington, DC 20250-1522. Telephone: 202-

720-0736. FAX: 202-720-4120. E-mail: [email protected].

Title: 7 CFR 1717 subpart D, Mergers and Consolidations of Electric

Borrowers.

Type of request: New information collection.

Abstract: In response to the rapid changes in the electric

industry, an increasing number of RUS electric distribution borrowers

are exploring the possibilities of mergers, consolidations, and similar

actions. (This rule uses the term ``merger'' to refer to mergers,

consolidations, and similar actions.) Since short-term financial

stresses often follow mergers that offer long-term benefits, RUS is

proposing measures that can provide some relief from these transitional

stresses. These measures are intended to maintain the credit quality of

the RUS loan portfolio while providing borrowers with the flexibility

to react quickly to business opportunities and challenges. Secondly,

RUS is proposing a streamlined application process for mergers that

require RUS approval. The application will rely, as far as possible, on

documents and analyses that are either required by state law, or that

any prudent business would prepare for its own use in evaluating the

costs and

[[Page 41026]]

benefits of a possible merger. Finally, RUS, as a secured lender, needs

certain documentation in order to legally conduct business with a newly

merged entity. This documentation, for the most part, consists of

copies of documents filed with state and local governments and

documentation that would be needed by any secured lender.

Requests to enter into mergers are initiated by borrowers; RUS may

not require borrowers to enter into mergers.

Since mergers reduce the number of borrowers, and reducing the

number of borrowers reduces costs to both borrowers and RUS of

preparing and processing multiple applications and servicing multiple

loans, the proposed rules will result in a net decrease in burden hours

to borrowers and to RUS. This net decrease will be reflected in

requests to renew existing information collections.

Estimate of burden: Public reporting burden for this collection of

information is estimated to average 1 hour per response.

Respondents: Businesses, including not for profit cooperatives and

others.

Estimated number of respondents each year: 25.

Estimated number of responses per respondent: 8.

Estimated total annual burden on respondents: 249 hours.

Copies of this information collection can be obtained from Dawn

Wolfgang, Program Support and Regulatory Analysis, Rural Utilities

Service. Phone: 202-720-0812.

Send comments regarding this information collection requirement to

the Office of Information and Regulatory Affairs, Office of Management

and Budget, ATTN: Desk Officer, USDA, Room 10102 New Executive Office

Building, Washington, DC 20503, and to Sue Arnold, Financial Analyst,

Program Support and Regulatory Analysis, U.S. Department of

Agriculture, Rural Utilities Service, 1400 Independence Ave., SW., STOP

1522, Washington, DC 20250-1522.

Comments are best assured of having full effect if OMB receives

them within 30 days of publication in the Federal Register.

All comments will become a matter of public record.

Background

The electric industry is becoming increasingly competitive. Recent

legislation, including the Energy Policy Act of 1992 and actions by the

Federal Energy Regulatory Commission (FERC), such as its rules on

Promoting Wholesale Competition Through Open Access Non-discriminatory

Transmission Services by Public Utilities, Recovery of Stranded Costs

by Public Utilities and Transmitting Utilities, published May 10, 1996,

at 61 FR 21539, are drastically altering the regulatory and business

environment of all electric systems, including systems financed by RUS.

At the same time, changes in overall business trends and in technology

continue to place pressure on RUS financed systems to operate more

efficiently and hedge risks.

It is clear that the success of the RUS program in supporting rural

infrastructure and economic development is directly tied to the ability

of RUS electric borrowers to meet these new challenges. In order to

maintain and improve the electric infrastructure that is vital to rural

communities, borrowers must have the flexibility to respond quickly and

aggressively to business opportunities and challenges. At the same

time, RUS as a secured lender has a fiduciary responsibility to protect

the security of Government loans and avoid defaults.

One frequent response to the challenge of a volatile industry in

transition is a merger or consolidation. (This rule uses the term

``merger'' to refer to mergers, consolidations, and similar actions.)

RUS has historically encouraged mergers that benefit borrowers and

rural communities, when these arrangements are consistent with the

interests of the Government as a secured lender. RUS continues to urge

borrowers to explore any and all opportunities for operating

efficiencies and other economies.

The amendments proposed today are intended to encourage beneficial

mergers involving RUS borrowers and, as far as possible, to remove any

unnecessary impediments to such mergers. Examples of possible tangible

benefits to borrowers and the rural communities they serve and to RUS

as a secured lender include: Contributing to greater operating

efficiency and financial soundness by combining resources, diversifying

loads or other means; assisting rural economic development by

diversifying the local economic base or alleviating unemployment; and

other benefits consistent with the purposes of the Rural

Electrification Act (RE Act).

Transitional Assistance

RUS recognizes that short-term financial stresses can follow even

the most beneficial mergers. To help stabilize electric rates during

this period, enhance the credit quality of outstanding loans made or

guaranteed by the Government, and otherwise ease the transition period

before long-term efficiencies and economies can be realized, RUS is

proposing new policies for transitional assistance following mergers.

RUS will consider requests for transitional assistance after each

merger. For example, if three borrowers form a single successor through

two consecutive mergers, transitional assistance may be available,

subject to RUS regulations, following each of the mergers. For

transitional assistance available for a closed-ended period after a

merger, the availability period will begin tolling on the effective

date of the most recent merger even if that date is prior to the

effective date of this rule.

Transitional assistance addresses (1) Loan processing priority; (2)

Supplemental financing requirements; (3) Reimbursement of general funds

and interim financing; (4) Deferments of interest and principal; (5)

Coverage ratios; and (6) Advance of funds.

1. Loan Processing Priority

Current policy on mergers (7 CFR 1710.108 and .119) offers some

transitional assistance in the form of priority consideration to

processing loans to newly merged and consolidated systems for a period

of up to five years after RUS approval of a merger, provided that the

merger has been determined to enhance the repayment or security of RUS

loans. Virtually all mergers place stress on short-term cash flows.

Therefore, today's rule proposes in Sec. 1717.154(a)(1) to offer loan

processing priority upon the borrower's request, for the first loan to

a successor, provided that the loan is approved by RUS not later than 5

years after the effective date of the merger. For subsequent loans

approved during those 5 years, RUS may agree to priority processing if

the borrower demonstrates the need, and loan funds are available.

Pursuant to RUS regulations published December 29, 1995, at, 60 FR

67395, many mergers are exempt from RUS approval. Therefore, to avoid

confusion, today's rule further proposes a minor amendment that will

allow loan processing priority for up to 5 years from the effective

date of the merger, instead of from the date of RUS approval.

2. Supplemental Financing Requirements

RUS generally requires that an applicant for a municipal rate loan

obtain a portion of its debt financing from a supplemental source

without an RUS guarantee. The method for calculating the supplemental

financing proportion is set out in 7 CFR 1710.110, as amended January

19, 1995, at 60 FR

[[Page 41027]]

3730. Today's rule proposes in Sec. 1717.154(a)(2) a waiver of

supplemental financing, at the borrower's request, for the first RUS

loan approved after the effective date of a merger if all parties are

active distribution borrowers and if that first loan is a municipal

rate loan, the loan period does not exceed 2 years, and the loan is

approved by RUS not later than 5 years after the effective date of the

merger.

For any subsequent loans approved during those 5 years, or if the

borrower requests a loan period longer than 2 years, RUS may agree to

waive or reduce the required amount of supplemental financing. RUS

would consider such reduction or waiver if the higher interest rate

usually charged by a supplemental lender would materially inhibit the

borrower's ability to integrate the systems or create a significant

hardship that could require an increase in electric rates.

3. Reimbursement of General Funds and Interim Financing

Borrowers may request RUS loan funds to reimburse general funds

and/or interim financing used to finance equipment and facilities

included in a RUS approved construction work plan or amendment if the

construction was completed immediately preceding the current loan

period. Pursuant to existing rules at 7 CFR 1710.109, this period is

limited to 24 months for loan applications received after February 10,

1993. Today's rule proposes in Sec. 1717.154(a)(3) to increase this

period to up to 48 months for the first RUS loan following a merger

where all parties are active distribution borrowers, if that first loan

is approved by RUS not later than 5 years after the effective date of

the merger. The longer reimbursement period will assist borrowers in

managing their cash flows during the transition. The requirement that

equipment and facilities be included in a RUS approved construction

work plan in order to be eligible for reimbursement by RUS is not

affected by this change.

4. Deferments of Interest and Principal

Section 12 of the RE Act allows RUS to extend the time for

repayment of loans by up to 5 years. Under a Section 12 deferment plan,

notes retain their original maturity dates--the final maturity is not

extended. Although deferment of debt service payments today, results in

higher payments in the future, deferments may be useful to mitigate

rate increases during a transition period after a merger or

consolidation. Today's rule proposes in Sec. 1717.154(b)(1) to codify

this long-standing policy of granting a Section 12 deferment to a

successor.

5. Coverage Ratios

RUS, as a secured lender, requires that borrowers maintain adequate

levels of coverage ratios, including times interest earned ratio

(TIER); operating times interest earned ratio (OTIER); debt service

coverage (DSC); and operating debt service coverage (ODSC). The

specific level for each ratio is set forth in the RUS loan documents

and in 7 CFR 1710.114. New forms of loan documents were issued in final

rules published on July 18, 1995, at 60 FR 36882, and on December 29,

1995, at 60 FR 67396. Section 1710.114 was last amended in the December

29, 1995, final rule.

The rule proposed today will, in Sec. 1717.154(b)(2), allow RUS to

approve a plan for a phase-in period of up to 5 years following a

merger if all parties are active distribution borrowers. Under this

rule, borrowers may project and achieve lower levels for these ratios

for up to 5 years following a merger, provided that RUS has approved a

phase-in plan, and that a minimum TIER level of 1.00 is maintained.

This phase-in period will allow borrowers the flexibility to devote

resources to integrating the systems and may avoid substantial rate

increases.

6. Advance of Funds From Insured Loans

RUS is further proposing to automatically lengthen the fund advance

period for insured loans preexisting on the effective date of a merger.

The fund advance period, which is the period during which funds from an

insured loan may be advanced to the borrower, generally terminates

automatically after 4 or 5 years unless the borrower requests, and RUS

approves, an extension. See 7 CFR 1714.56, as amended January 19, 1995,

at 60 FR 3726. However, the execution and filing of legal documents

following a merger often takes some time, and RUS cannot advance funds

to a successor until these documents are properly executed and filed.

In order to ensure that approved loan funds are available to borrowers

without unnecessary procedural delays, RUS proposes in Sec. 1717.154(c)

to generically extend the fund advance period by 2 years for any loans

with unadvanced funds on the effective date of the merger, if the fund

advance period has not already terminated.

For example, under current rules, the fund advance period for a

loan approved in March 1995 with a 4-year loan period terminates

automatically 5 years from the date of the loan note. Under the

proposed rule, after a merger the fund advance period would be extended

by 2 years and would terminate automatically 7 years from the date of

the loan note.

Borrowers Who Prepaid RUS Loans Pursuant to 7 CFR Part 1786

Pursuant to 7 CFR part 1786, subparts C, E and F, borrowers may use

private financing or internally generated funds to prepay RUS direct or

insured loans at a discounted present value. Borrowers who prepay under

this rule may not apply for or receive any new direct or insured loans

from RUS for a period after the prepayment, except at the

Administrator's discretion.

In order to remove unnecessary impediments to beneficial mergers

between systems that have prepaid their RUS debt and active

distribution systems that still have outstanding loans, RUS is amending

rules setting out the Administrator's discretionary authority. Under

the proposed rules (Secs. 1717.156 and 1786.167), the Administrator

will exercise this discretionary authority to make direct or insured

loans for facilities to serve consumers who, before the merger, were

served by the system that did not prepay. In other words, eligibility

for RUS loans for that portion of the successor's system that was owned

by the active borrower prior to the merger, will be grandfathered as if

the merger had not occurred.

RUS Procedures

The requirement that RUS, as a secured lender, generally approve

mergers is in the loan documents and RUS regulations. Under certain

conditions, set out in 7 CFR 1717.615 and 1710.7(c), as published

December 29, 1995, at 60 FR 67395, borrowers may enter into such

mergers without RUS approval.

To clarify RUS requirements for approval of mergers, and to

expedite handling of borrower requests, today's rule proposes in

Secs. 1717.157-1717.159, a procedure for RUS approvals, where the

approvals are needed, including a list of the documents required, and

the factors that RUS will consider in acting on such requests. With the

exception of a formal transmittal letter and board resolution from each

of the companies involved, RUS believes that the documents and analyses

required are either (1) Prepared by any prudent business attempting to

enter into a merger; (2) Required by state law; or (3) Required by any

secured lender.

In evaluating an application, RUS will consider the likely impacts

of the

[[Page 41028]]

merger on the borrower's ability to provide reliable service at

reasonable rates to RE Act beneficiaries. RUS will not approve the

action if, in the sole judgment of the Administrator, the action is

likely to have an adverse effect on the security of outstanding loans

made or guaranteed by the Government. It is the borrower's

responsibility to resolve internal issues such as management and

director succession, employee benefits, and headquarters location.

Borrowers are further responsible for obtaining any necessary approvals

from state commissions, supplemental lenders, and others.

Regardless of whether the merger requires RUS approval, RUS, as a

secured lender, needs certain documentation in order to advance funds,

send bills, and otherwise conduct business with a successor. Today's

proposed rule in Sec. 1717.152, lists the documents required.

Generally, these are copies of documents that borrowers are required to

file with state or local governments or documentation needed by any

secured lender.

In all cases, borrowers are encouraged to consult RUS early in the

process. RUS headquarters and field staff are prepared to advise

borrowers and offer technical assistance to facilitate the processing

of borrower requests. In particular, early consultation with RUS can

avoid unnecessary delays in processing requests for advance of loan

funds.

Rescission of Obsolete Directive

On the effective date of the final regulation, REA Bulletin 115-2,

Merger and Consolidation of Electric Borrowers will be rescinded. RUS

has determined that this bulletin, issued November 9, 1972, is

obsolete.

Eligibility for and Hardship Rate and Municipal Rate Loans

RUS makes hardship rate loans and municipal rate loans subject to

an interest rate cap, if the applicant meets certain criteria. See

Paras. 305(c)(1)(A) and (c)(1)(B)(ii) of the RE Act, and 7 CFR part

1714. As required by the law, RUS will consider the eligibility of the

successor at the time of loan approval in determining the applicable

interest rate category. In other words, to qualify for a hardship rate

loan or a municipal rate loan subject to the interest rate cap, the

successor as a whole must, at the time of loan approval, meet the

criteria in 7 CFR 1714.8 or 1714.7, respectively.

Comment Period

It is vital that RUS, borrowers, supplemental lenders, and others

continue the public-private partnership that has served rural America

well in the past. RUS and the Department of Agriculture's Office of the

General Counsel recognize that business opportunities often have short

deadlines, and every effort will be made to expedite action on borrower

requests and to respond in a timely fashion.

There is an urgent need for flexible responses to the increasing

business stress on rural electric systems. This rule, by encouraging

and expediting mergers that offer economies and efficiencies not

available otherwise, will result in tangible benefits, such as lower

electric rates, to the rural communities served by electric

distribution borrowers. Furthermore, reducing the number of RUS

borrowers through mergers and consolidations will ultimately reduce the

costs to the Federal Government of processing multiple applications and

servicing multiple loans. To expedite these benefits, the comment

period on this proposed rule is limited to 30 days. RUS encourages all

interested parties to comment. New information collection requirements

in this rule will not be effective until approved by OMB.

List of Subjects

7 CFR Part 1710

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

areas.

7 CFR Part 1714

Electric Power, Loan programs--energy, Rural areas.

7 CFR Part 1717

Administrative practice and procedure, Electric power, Electric

utilities, Intergovernmental relations, Investments, Lien

accommodation, Lien subordinations, Loan programs--energy, Reporting

and recordkeeping requirements, Rural development.

7 CFR Part 1786

Accounting, Administrative practice and procedure, Electric

utilities.

For the reasons set out in the preamble, and under the authority of

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

follows:

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

INSURED AND GUARANTEED ELECTRIC LOANS

1. The authority citation for part 1710 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 1710.109 is amended by redesignating paragraphs (c)

introductory text, (c)(1), (c)(2), and (c)(3) as paragraphs (c)(1)

introductory text, (c)(1)(i), (c)(1)(ii), and (c)(1)(iii),

respectively, and by adding a new paragraph (c)(2) to read as follows:

Sec. 1710.109 Reimbursement of general funds and interim financing.

* * * * *

(c) * * *

(2) Policies for reimbursement of general funds and interim

financing following certain mergers, consolidations, and transfers of a

systems substantially in their entirety are set forth in 7 CFR

1717.154.

* * * * *

3. Section 1710.110 is amended by revising the first sentence of

paragraph (a) to read as follows:

Sec. 1710.110 Supplemental financing.

(a) Except in the case of financial hardship as determined by the

Administrator, and following certain mergers, consolidations, and

transfers of systems substantially in their entirety as set forth in 7

CFR 1717.154, applicants for a municipal rate loan will be required to

obtain a portion of their loan funds from a supplemental source without

an RUS guarantee, in the amounts set forth in paragraph (c) of this

section. * * *

* * * * *

4. Section 1710.114 is amended by adding a sentence at the end of

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

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

* * * * *

(b) * * *

(3) * * * Policies for coverage ratios following certain mergers,

consolidations, and transfers of systems substantially in their

entirety are in 7 CFR 1717.154.

* * * * *

5. Section 1710.119 is amended by revising paragraph (b)(3) to read

as follows:

Sec. 1710.119 Loan processing priorities.

* * * * *

(b) * * *

(3) To finance the capital needs of borrowers that are the result

of a merger, consolidation, or a transfer of a system substantially in

its entirety, provided that the merger, consolidation, or transfer has

either been approved by RUS or does not need RUS approval pursuant to

the borrower's loan documents (See 7 CFR 1717.154); or

* * * * *

[[Page 41029]]

PART 1714--PRE-LOAN POLICIES AND PROCEDURES FOR INSURED ELECTRIC

LOANS

6. The authority citation for part 1714 continues to read as

follows:

Authority: 7 U.S.C. 901-950(b); Pub.L. 99-591, 100 Stat. 3341;

Pub.L. 103-353, 108 Stat. 3178 (7 U.S.C. 6941 et seq.)

7. Section 1714.56 is amended by revising the introductory text of

paragraph (c) to read as follows:

Sec. 1714.56 Fund advance period.

* * * * *

(c) The Administrator may agree to an extension of the fund advance

period for loans approved on or after June 1, 1984, if the borrower

demonstrates to the satisfaction of the Administrator that the loan

funds continue to be needed for approved loan purposes (i.e.,

facilities included in an RUS approved construction work plan).

Policies for extension of the fund advance period following certain

mergers, consolidations, and transfers of systems substantially in

their entirety are set forth in 7 CFR 1717.154.

* * * * *

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

GUARANTEED ELECTRIC LOANS

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

follows:

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

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

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

Subpart D--Mergers and Consolidations of Electric Borrowers

Sec.

1717.150 General.

1717.151 Definitions.

1717.152 Required documentation for all mergers.

1717.153 Transitional assistance.

1717.154 Types of transitional assistance.

1717.155 Requests for transitional assistance.

1717.156 Mergers with borrowers who prepaid RUS loans

1717.157 Applications for RUS approval of mergers.

1717.158 Application contents.

1717.159 Application process.

Subpart D--Mergers and Consolidations of Electric Borrowers

Sec. 1717.150 General.

(a) This subpart establishes RUS policies and procedures for

mergers of electric borrowers. These policies and procedures are

intended to provide borrowers with the flexibility to negotiate and

enter into mergers that offer advantages to the borrowers and to rural

communities, and adequately protect the integrity and credit quality of

RUS loans and loan guarantees.

(b) Consistent with prudent lending practices, the maintenance of

adequate security for RUS loans and loan guarantees, and the objectives

of the Rural Electrification Act of 1936, as amended, (7 U.S.C. 901 et

seq.) (RE Act), RUS encourages electric borrowers to consider mergers

when such action is likely to contribute, in the long-term, to greater

operating efficiency and financial soundness. Borrowers are

specifically encouraged to explore mergers that are likely to enhance

the ability of the successor to provide reliable electric service at

reasonable cost to RE Act beneficiaries.

(c) Pursuant to the loan documents and RUS regulations, certain

mergers are subject to RUS approval. See Sec. 1717.615.

(d) Since RUS must take action in order to legally advance funds

and otherwise conduct business with a successor, RUS encourages

borrowers to consult RUS early in the process regardless of whether RUS

approval of the merger is required. RUS will provide technical

assistance and guidance to borrowers to help expedite the processing of

their requests and to help resolve potential problems early in the

process.

Sec. 1717.151 Definitions.

The definitions set forth in 7 CFR 1710.2 are applicable to this

subpart unless otherwise stated. In addition, for the purpose of this

subpart, the following terms shall have the following meanings:

Active borrower means an electric borrower that has, on the

effective date, an outstanding insured or guaranteed loan from RUS for

rural electrification, and whose eligibility for future RUS financing

is not restricted pursuant to 7 CFR part 1786.

Active distribution borrower means an electric distribution

borrower that has, on the effective date, an outstanding insured or

guaranteed loan from RUS for rural electrification, and whose

eligibility for future RUS financing is not restricted pursuant to 7

CFR part 1786.

Consolidation see merger.

Coverage ratios means collectively TIER, OTIER, DSC and ODSC, as

these terms are defined in 7 CFR 1710.2.

Effective date means the date a merger is effective pursuant to

applicable state law.

Loan documents means the mortgage (or other security instrument

acceptable to RUS), the loan contract, and the promissory note(s)

entered into between the borrower and RUS.

Merger means: (1) A consolidation where two or more companies are

extinguished and a new successor is created, acquiring the assets,

liabilities, franchises and powers of those passing out of existence;

(2) A merger where one company is absorbed by another, the former

ceasing to exist as a separate business entity, and the latter

retaining its own identity and acquiring the assets, liabilities,

franchises and powers of the former; or

(3) A transfer of mortgaged property by one company to another

where the transferee acquires substantially as an entirety the assets,

liabilities, franchises, and powers of the transferor.

New loan means a loan to a successor approved by RUS on or after

the effective date.

Preexisting loan means a loan to a borrower approved by RUS prior

to the effective date of a merger.

Successor means the entity that continues as the surviving business

entity as of the effective date of the merger, and acquires all the

assets, liabilities, franchises, and powers of the entity or entities

ceasing to exist as of the effective date.

Transitional assistance means financial relief provided to

borrowers by RUS during a limited period of time following a merger.

Sec. 1717.152 Required documentation for all mergers.

In order for RUS to legally advance funds, send bills, and

otherwise conduct business with a successor, the documents listed in

this section must be submitted to RUS regardless of the need for RUS

approval of the merger. Borrowers are responsible for ensuring that

these documents are received by RUS in timely fashion. In cases of

mergers that require RUS approval, or cases where borrowers must submit

requests for transitional assistance, the documents listed in this

section may be combined with the documents required by Secs. 1717.155

and/or 1717.158 where appropriate.

(a) Prior to the effective date, borrowers must submit:

(1) A transmittal letter on corporate letterhead signed by the

manager of each active borrower that is a party to the proposed merger

indicating the borrower's intention to merge and tentative timeframes,

including the proposed effective date;

(2) An original certified board resolution from each party to the

proposed merger affirming the board's support of the merger;

[[Page 41030]]

(3) All documents necessary to evidence the merger pursuant to

applicable law. Examples include plan of merger, articles of merger,

amended articles of incorporation, bylaws, and notices and filings

required by law. These documents may be copies of documents filed

elsewhere, unless otherwise specified by RUS; and

(4) A letter addressed to the Administrator from the counsel of at

least one of the active borrowers briefly describing the merger and

indicating the relevant statutes under which the merger will be

consummated.

(b) On or after the effective date, borrowers must submit:

(1) An opinion of counsel from the successor addressing, among

other things, any pending litigation, proper authorization and

consummation of the merger, proper filing and perfection of RUS'

security interest, and all approvals required by law. RUS will provide

the form of the opinion of counsel to the successor;

(2) A letter signed by the manager of the successor advising RUS of

the effective date of the merger; the corporate name, address, and

phone number; the names of the officers of the successor; and the

taxpayer identification number; and

(3) Evidence of proper filing and perfection of RUS' security

interest, as instructed by RUS, and an executed loan contract.

Sec. 1717.153 Transitional assistance.

RUS recognizes that short-term financial stresses can follow even

the most beneficial mergers. To help stabilize electric rates, enhance

the credit quality of outstanding loans made or guaranteed by the

Government, and otherwise ease the transition period before the long-

term efficiencies and economies of a merger can be realized, RUS may

approve one or more types of transitional assistance to a successor

under the conditions set forth in this part.

Sec. 1717.154 Types of transitional assistance.

(a) Transitional assistance in connection with new loans. Requests

for transitional assistance in connection with new loans may be

submitted to RUS no later than the loan application.

(1) Loan processing priority. RUS loans are generally processed in

chronological order based on the date the complete application is

received in the regional or division office. At the borrower's request,

RUS will offer loan processing priority for the first loan to a

successor, provided that the loan is approved by RUS not later than 5

years after the effective date of the merger. For any subsequent loans

approved during those 5 years, RUS may offer loan processing priority,

subject to the availability of loan funds. In reviewing requests for

loan processing priority on subsequent loans, RUS will consider the

borrower's projected cash flows, its electric rates and rate disparity,

and the likely mitigating effects of priority loan processing See 7 CFR

1710.108 and 1710.119.

(2) Supplemental financing. RUS generally requires that an

applicant for a municipal rate loan obtain a portion of its debt

financing from a supplemental source without an RUS guarantee. See 7

CFR 1710.110. If all parties to the merger are active distribution

borrowers, RUS will, at the borrower's request waive the requirement to

obtain supplemental financing for the first RUS loan approved after the

effective date if that first loan is a municipal rate loan whose loan

period does not exceed 2 years, and the loan is approved by RUS not

later than 5 years after the effective date of the merger. For any

subsequent loans approved during these 5 years, or if the borrower

requests a loan period longer than 2 years, RUS may, subject to the

availability of loan funds, waive or reduce the amount of supplemental

financing required. In reviewing requests to reduce or waive

supplemental financing on subsequent loans or on loans with a loan

period longer than 2 years, RUS will consider the differences in

interest rates between RUS and supplemental loans and the impacts of

this difference on the borrower's projected cash flows and its electric

rates and rate disparity. If significant differences result, the waiver

will be granted.

(3) Reimbursement of general funds and interim financing. Borrowers

may request RUS loan funds to reimburse general funds and/or interim

financing used to finance equipment and facilities included in a RUS

approved construction work plan or amendment if the construction was

completed immediately preceding the current loan period. This

reimbursement period is generally limited to 24 months. See 7 CFR

1710.109. If all parties to the merger are active distribution

borrowers, RUS may, in connection with the first RUS loan approved

after the effective date, approve a reimbursement period of up to 48

months prior to the current loan period if the loan is approved not

later than 5 years after the effective date. In reviewing requests for

a longer reimbursement period, RUS will consider the stresses that the

transaction and other costs of entering into the merger places on the

borrower's rates and cash flows, and the mitigating effects of more

generous reimbursement.

(b) Transitional assistance affecting new and preexisting loans.

Requests for transitional assistance affecting new and preexisting

loans must be received by RUS no later than 2 years after the effective

date of the merger.

(1) Section 12 deferments. Section 12 of the RE Act (7 U.S.C. 912)

allows RUS to extend the time of payment of interest or principal of

RUS loans. Section 12 deferments do not extend the final maturity of

the loan; lower payments during the deferment period result in higher

payments later. Therefore, RUS may approve a Section 12 deferment of

loan payments of up to 5 years only if such deferments will help to

avoid substantial increases in retail electric rates during the

transition period, without placing borrowers in financial stress after

the deferment period.

(2) Coverage ratios. Required levels for coverage ratios are set

forth in 7 CFR 1710.114 and in the loan documents. If all parties to

the merger are active distribution borrowers, RUS may approve a plan,

on a case by case basis, that provides for a phase-in period for these

coverage ratios of up to 5 years from the effective date. Under such a

plan the successor would be permitted to project and achieve lower

levels for one or more of these coverage ratios during the phase-in

period.

(i) A phase-in plan for coverage ratios must provide a pro forma

level for each ratio during each year of the phase-in period and be

supported by a financial forecast covering a period of not less than 10

years from the effective date of the merger. The plan must demonstrate

that a minimum TIER level of 1.00 will be achieved in each year, that

trends will be generally favorable, and that the borrower will achieve

the levels required in its loan documents and RUS regulations by the

end of the phase-in period, and that these levels will be maintained in

subsequent years.

(ii) In reviewing phase-in plans for coverage ratios, RUS will

review rates, rate disparity, and likely mitigating effects of the

proposed phase-in plan.

(iii) The borrower is responsible for obtaining approvals of

supplemental lenders.

(iv) Upon RUS approval of a phase-in plan, the levels in that plan

will be substituted for the levels required in the borrower's

preexisting loan documents and will be incorporated in any new loan or

security documents.

(c) Transitional assistance affecting preexisting loans. The fund

advance period for an insured loan, which is the

[[Page 41031]]

period during which RUS may advance loan funds to a borrower,

terminates automatically after a specific period of time. See 7 CFR

1714.56. If, on the effective date of a merger the fund advance period

on any preexisting loan to any of the active borrowers involved in a

merger has not terminated, such fund advance period shall be

automatically lengthened by 2 years. Such documents will be prepared

upon the request of a borrower to RUS for the advance of loan funds,

RUS will prepare documents for the borrower's execution that will

reflect this extension and will provide the legal authority for RUS to

advance funds to the successor.

Sec. 1717.155 Requests for transitional assistance.

(a) If the merger requires RUS approval, the borrower should, where

possible, indicate that it desires transitional assistance at the time

it requests approval of the merger. The formal request for transitional

assistance must be received by RUS as specified in Secs. 1717.154(a)

and (b). Documents listed in this section may be combined with the

documents required by Secs. 1717.152 and/or 1717.158 where appropriate.

If the request for transitional assistance is submitted at the same

time as a loan application, documents listed in this section may be

combined with the loan application documents where appropriate. See 7

CFR part 1710, subpart I. A request for transitional assistance must

include:

(1) Transmittal letter(s) formally listing the types of

transitional assistance requested. If the request is submitted before

the effective date, a transmittal letter must be signed by the manager

of each party to the transaction. If the request is submitted on or

after the effective date, a transmittal letter must be signed by the

manager of the successor. Transmittal letter(s) must be signed

originals on corporate letterhead stationery;

(2) Board resolution(s). If the request is submitted before the

effective date, a separate board resolution must be submitted from each

entity involved in the merger. If the request is submitted on or after

the effective date, a board resolution from the successor must be

submitted. Each board resolution must be a certified original;

(3) A merger plan, financial forecasts, and any available studies

such as net present value analyses showing the anticipated costs and

benefits of the merger and likely timeframes for the merger. The merger

plan must clearly identify those benefits that cannot be achieved

without a merger, and those benefits that can be achieved through other

means;

(4) If the transitional assistance requires RUS approval, the type

and extent of the mitigation that the transitional assistance is

expected to provide; and

(5) Other information that may be relevant.

(b) Borrowers are responsible for ensuring that requests for

transitional assistance are complete and sound in form and substance

when they are submitted to RUS. After submitting a request, borrowers

shall promptly notify RUS of any changes or events that materially

affect the request or any information in the request.

(c) In considering whether to approve requests for transitional

assistance, RUS will evaluate the costs and benefits of the merger; the

type and extent of the likely transitional stress; whether the

transitional assistance requested is likely to materially mitigate such

stress; and the likely impacts on electric rates and on the security of

RUS loans. Review factors applicable to each type of transitional

assistance are set forth in Sec. 1717.154.

Sec. 1717.156 Mergers with borrowers who prepaid RUS loans

In some cases, an active distribution borrower may merge with a

borrower that has prepaid RUS debt at a discount pursuant to 7 CFR part

1786, and whose eligibility for future RUS financing is thereby

restricted. During the period when the restrictions on future financing

are in effect, the successor will be eligible for RUS loans to finance

facilities to serve consumers that were served by the active

distribution borrower immediately prior to the effective date of the

merger, provided that other requirements for loan eligibility are met.

Sec. 1717.157 Applications for RUS approvals of mergers.

If a proposed merger requires RUS approval according to RUS

regulations and/or the loan documents executed by any of the active

borrowers involved, the application must be submitted to RUS not later

than 90 days prior to the effective date of the proposed borrower

action. A distribution borrower should consult with its assigned RUS

general field representative, and a power supply borrower with the

Director, Power Supply Division for general information prior to

submitting the request.

Sec. 1717.158 Application contents.

An application for RUS approval must include the documents listed

in this section. Documents listed in this section may be combined with

the documents required by Secs. 1717.152 and/or 1717.155 where

appropriate.

(a) Transmittal letters signed by the managers of all borrowers and

non-borrowers who are parties to the proposed merger. These letters

must include the actual corporate name, address, and taxpayer

identification number of all parties to the proposed merger. The

transmittal letters must be signed originals on corporate letterhead

stationery.

(b) Resolutions from the boards of directors of all borrowers and

non-borrowers who are parties to the proposed merger. This document is

the formal request by each entity for RUS approval of the proposed

merger. The board resolution must include a description of the proposed

merger, including timeframes, and authorization for RUS to release

appropriate information to supplemental or other lenders, and for these

lenders to release appropriate information to RUS. Each board

resolution must be a certified original.

(c) Evidence that the proposed merger will result in a viable

entity, and that the security of outstanding RUS loans will not be

compromised by the action. This evidence shall include financial

forecasts, and any available studies such as net present value analyses

covering a period of not less than 10 years from the effective date of

the merger, as well as information about any threatened actions by

other parties that could adversely affect the financial condition of

any of the parties to the proposed merger, or of the successor. Such

threatened actions may include annexations or other actions affecting

service territory, loads, rates or other such matters.

(d) Regulatory information about pending federal or state

proceedings pertaining to any of the parties that could have material

effects on the successor.

(e) Rate information. Distribution and power supply borrowers shall

submit schedules of proposed rates after the merger, including the

effects of the proposed action on rates and the status of any pending

rate cases before a state regulatory authority. The rates of power

supply borrowers are subject to RUS approval.

(f) Area coverage and line extension policies: If any distribution

systems are parties to the proposed merger, a statement of proposed

area coverage and line extension policies for the successor.

Sec. 1717.159 Application process.

(a) Borrowers are responsible for ensuring that their applications

for RUS

[[Page 41032]]

approval of a merger are complete and sound in form and substance when

they are submitted to RUS. After submitting an application, borrowers

shall promptly notify RUS of any changes or events that materially

affect the application or any information in the application.

(b) In reviewing borrower requests for approval of mergers, RUS

will consider the likely effects of the action on the ability of the

successor to provide reliable electric service at reasonable cost to RE

Act beneficiaries and on the security of outstanding RUS loans. Among

the factors RUS will consider are whether the proposed merger is likely

to:

(1) Contribute to greater operating efficiency and financial

soundness;

(2) Mitigate high electric rates and or rate disparity;

(3) Help borrowers to diversify their loads or otherwise hedge

risks;

(4) Have beneficial effects on rural economic development in the

community served by the borrower, such as diversifying the economic

base or alleviating unemployment; and

(5) Provide other benefits consistent with the purposes of the RE

Act.

(c) RUS will not approve a merger if, in the sole judgment of the

Administrator, such action is likely to have an adverse effect on the

credit quality of outstanding loans made or guaranteed by the

Government. RUS will thoroughly review each request for approval of

such action, including review of the feasibility and security of

outstanding Government loans according to the standards in 7 CFR

1710.112 and 1710.113, respectively, and in other RUS regulations.

(d) RUS will keep the borrowers apprised of the progress of their

applications.

PART 1786--PREPAYMENT OF RUS GUARANTEED AND INSURED LOANS TO

ELECTRIC AND TELEPHONE BORROWERS

Subpart F--Discounted Prepayments on RUS Electric Loans

10. The authority citation for subpart F continues to read as

follows:

Authority: 7 U.S.C. 901 et seq.; Pub.L. 103-534, 108 Stat. 3178

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

11. Section 1786.167 is amended by adding a sentence at the end of

paragraph (a) to read as follows:

Sec. 1786.167 Restrictions to additional RUS financing.

(a) * * * Special provisions for mergers involving a borrower that

has prepaid pursuant to this subpart are in 7 CFR 1717.156.

* * * * *

Dated: July 29, 1996.

Jill Long Thompson,

Under Secretary, Rural Development.

[FR Doc. 96-19711 Filed 8-6-96; 8:45 am]

BILLING CODE 3410-15-P