[Federal Register Volume 60, Number 137 (Tuesday, July 18, 1995)]
[Rules and Regulations]
[Pages 36882-36901]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16528]




[[Page 36881]]

_______________________________________________________________________

Part II





Department of Agriculture





_______________________________________________________________________



Rural Utilities Service



_______________________________________________________________________



7 CFR Part 1718



Loan Security Documents for Electric Borrowers; Final Rule

  Federal Register / Vol. 60, No. 137 / Tuesday, July 18, 1995 / Rules 
and Regulations  

[[Page 36882]]


DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Part 1718

RIN 0572-AB06


Loan Security Documents for Electric Borrowers

AGENCY: Rural Utilities Service, USDA.

ACTION: Final rule.

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

SUMMARY: The Rural Utilities Service (RUS) hereby establishes new 
policies and requirements for the form of mortgage required of electric 
distribution borrowers. This rule updates and clarifies the provisions 
of the mortgage, ensures that security for loans made to distribution 
borrowers will continue to be adequate, generally confines the scope of 
the mortgage primarily to basic issues of collateral and loan security, 
and supports borrower access to other credit sources.

EFFECTIVE DATE: This rule is effective August 17, 1995.

FOR FURTHER INFORMATION CONTACT: Mr. Alex M. Cockey, Jr., Deputy 
Assistant Administrator--Electric, U.S. Department of Agriculture, 
Rural Utilities Service, room 4037-S, Ag Box 1560, 14th Street & 
Independence Avenue, SW., Washington, DC 20250-1500. Telephone: 202-
720-9547.

SUPPLEMENTARY INFORMATION: This rule has been determined to be not 
significant for the purposes of Executive Order 12866, and therefore 
has not been reviewed by the Office of Management and Budget (OMB). The 
Administrator of RUS has determined that the Regulatory Flexibility Act 
(5 U.S.C. 601 et seq.) does not apply to this rule. The Administrator 
of RUS has determined that this rule will not significantly affect the 
quality of the human environment as defined by the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.). Therefore, 
this action does not require an environmental impact statement or 
assessment. This rule is excluded from the scope of Executive Order 
12372, Intergovernmental Consultation, which may require consultation 
with State and local officials. A Notice of Final Rule titled 
Department Programs and Activities Excluded from Executive Order 12372 
(50 FR 47034) exempts RUS electric loans and loan guarantees from 
coverage under this Order. This rule has been reviewed under Executive 
Order 12778, Civil Justice Reform. This rule: (1) Will not preempt any 
State or local laws, regulations, or policies, unless they present an 
irreconcilable conflict with this rule; (2) Will not have any 
retroactive effect; and (3) Will not require administrative proceedings 
before any parties may file suit challenging the provisions of this 
rule.
    The program described by this rule is listed in the Catalog of 
Federal Domestic Assistance Programs under number 10.850 Rural 
Electrification Loans and Loan Guarantees. This catalog is available on 
a subscription basis from the Superintendent of Documents, the United 
States Government Printing Office, Washington, DC 20402-9325.

Information Collection and Recordkeeping Requirements

    The existing recordkeeping and reporting burdens contained in this 
rule were approved by the Office of Management and Budget (OMB) 
pursuant to the Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et 
seq.), under control numbers 0572-0032 and 0572-0103.
    Send questions or comments regarding these burdens or any other 
aspect of these collections of information, including suggestions for 
reducing the burden, to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, NEOB, Washington, DC 20503. 
Attention: Desk Officer for USDA.

Background
    On September 29, 1994, at 59 FR 49594, the Rural Utilities Service 
(RUS) published a proposed rule, 7 CFR 1718 Loan Security Documents for 
Electric Borrowers, Subpart B Mortgage for Distribution Borrowers, 
which proposed the agency's policies and requirements for mortgages 
used to secure direct and guaranteed loans made to electric 
distribution borrowers. The objectives of the proposed rule were to 
update and clarify the provisions of the mortgage used with 
distribution borrowers, to generally confine the scope of the mortgage 
primarily to basic issues of collateral and loan security, to support 
borrower access to other credit sources, and to continue to provide 
adequate loan security. This proposal was preceded by the revision of 
the agency's policies and requirements for accommodating or 
subordinating the lien of the RUS mortgage, which was published in 
final form in the Federal Register on October 19, 1993 at 58 FR 53835.
    Comments on the proposed rule were received from 30 different 
sources, including the Ad Hoc Mortgage Committee of the National Rural 
Electric Cooperative Association (NRECA), the National Rural Utilities 
Cooperative Finance Corporation (CFC), CoBank, several state-wide or 
regional electric cooperative associations, and a number of individual 
distribution and power supply borrowers.
    In addition to the written comments received, RUS met, in either 
separate or combined meetings, with representatives of the ad hoc NRECA 
Mortgage Committee, CFC, and CoBank to discuss and answer questions 
regarding specific provisions of the proposed rule, to clarify the 
meaning, scope and effect of some proposed provisions, and to listen to 
alternatives to certain provisions. The NRECA Mortgage Committee also 
submitted additional written comments to clarify certain points in 
their earlier written comments. Also, some commenters provided 
additional oral comments by telephone to clarify or expand their 
written comments.
    All of the written and oral comments received, some of which were 
conflicting, were taken into consideration in drafting the final rule. 
The more important comments and issues are discussed below.
    Published elsewhere in this issue of the Federal Register is a 
proposed rule that sets forth proposed amendments to RUS regulations to 
update the agency's policies and requirements regarding loan contracts 
with distribution borrowers. These new policies and requirements are 
designed to complement the new distribution mortgage and to reflect 
changes in the lending program and the electric industry that have 
occurred over the past several years. Readers are encouraged to review 
that proposed rule in connection with the final mortgage published 
today.

Phase-in of New Mortgage

    Distribution borrowers receiving a loan from RUS during the 
transition period between now and the date the new model loan contract 
is published in final form in the Federal Register may opt to execute 
the new model mortgage and the proposed model loan contract. Such 
borrowers will have the further option of executing the final form of 
the model loan contract after it is published in the Federal Register. 
Distribution borrowers receiving a loan from RUS during the period 
after publication of the final form of the new model loan contract but 
before its effective date may opt for the final forms of both the model 
loan contract and the model mortgage. If there are other co-mortgagees 
on the borrower's existing mortgage, which there are in most cases, the 
borrower would have to obtain the approval of these co-mortgagees 
before executing a new mortgage. 

[[Page 36883]]

    Other borrowers not obtaining a new loan from RUS could request 
that a new mortgage and loan contract be executed, for example, in 
connection with a lien accommodation request or if the borrower is 
trying to expand its access to future private financing. RUS will 
attempt to honor these requests, but may be constrained by time and 
staff limitations.
    After the effective date of the new model loan contract, all 
distribution borrowers receiving a loan or loan guarantee from RUS will 
be required to execute the new model forms of the mortgage and loan 
contract. The proposed mortgage rule had proposed that borrowers 
receiving a lien accommodation after the effective date of the new 
mortgage would have the option of staying with their existing mortgage. 
That proposed provision was not intended to give borrowers the absolute 
right to stay with their existing mortgage for all time, even after 
both the new mortgage and new RUS loan contract have been finalized. In 
the proposed rule for the RUS loan contract, published elsewhere in 
this issue of the Federal Register, borrowers receiving a lien 
accommodation or other financial assistance from RUS after the 
effective date of the new loan contract may on a case-by-case basis be 
required by RUS to execute the new forms of the loan documents. Again, 
before executing a new mortgage, borrowers may have to obtain the 
approval of any other lenders secured under their existing mortgage.

Mortgage Lien; Excepted Property; Permitted Encumbrances

    Both CFC and CoBank recommended that the lien of the new mortgage, 
like that of the existing mortgage, should be more inclusive and cover 
such assets as cash, stocks, other securities, computer records, and 
other property essential to the operation of the utility system. This 
recommendation has been accepted and the changes included in the final 
mortgage.
    One commenter recommended that emission allowances not be covered 
by the mortgage lien because that would inhibit free market trading. 
This recommendation was not accepted. Emission allowances represent a 
very important element of collateral since they are required for 
generation and because of their potential market value. RUS does not 
believe that having a lien on Emission allowances will materially 
inhibit a borrower's ability to obtain fair market value for these 
assets. Borrowers should be able to take the necessary steps prior to 
the sale of the allowances to obtain mortgagee approval to release the 
lien. Moreover, Mortgagee approval of such sales would not be required 
if the conditions of the mortgage are met with regard to limitations on 
transfers of property.

Section 1.01  Definitions

    A borrower association stated that accounting requirements should 
be decided by the mortgagee with the majority of the outstanding debt. 
This recommendation has not been adopted since it is in the interests 
of all mortgagees to have continuity in accounting requirements and not 
have the standards changed depending on which mortgagee holds a 
majority of the outstanding debt. The final mortgage retains the 
provision that accounting requirements will be those promulgated by RUS 
so long as RUS is a mortgagee, and if RUS ceases to be a mortgagee, the 
requirements will be based on generally accepted accounting principles.
    One commenter recommended that the term ``regulatory created 
assets'', as used in the definitions of equity and total assets, should 
be defined. This has been done.
The Rate Covenant

    The proposed rate covenant and proposed section 2.01 on issuing 
additional notes without mortgagee approval received the greatest 
number of comments. The proposed rate covenant required a borrower to 
design and implement rates sufficient to maintain on an annual basis a 
Modified TIER and Modified DSC each equal to at least 1.35. If the 
borrower failed to achieve either ratio based on the average of the two 
best years out of the past three years, the borrower would be required 
to submit a plan of remedial action to the mortgagees for approval, and 
then implement the approved plan.
    There was substantial disagreement among the commenters regarding 
the rate covenant, including disagreement among RUS, CFC, CoBank, and 
NRECA. CFC recommended that the rate covenant be deleted from the 
mortgage and put in the agency's loan contract (and presumably in the 
loan contracts of other secured lenders). Since it appeared impossible 
to reach full agreement among the three principal lenders, RUS decided 
to shift the rate covenant from the mortgage to its proposed new loan 
contract, which is published for comment elsewhere in this issue of the 
Federal Register.
    Most comments on the rate covenant focused on the formulation or 
definition of Modified TIER and Modified DSC, and whether or not both 
ratios are needed. Modified TIER and Modified DSC were defined the same 
as the standard TIER and DSC contained in existing distribution 
mortgages, with the important exception that allocations of generation 
and transmission capital credits and other capital credits were 
excluded from margins in calculating the ratios. The intent was to more 
closely reflect the current revenues and cash flows of the borrower's 
utility operations than do the standard TIER and DSC, and thus better 
reflect a borrower's ability to meet expenses currently and over time.
    CoBank generally supported the formulation of the proposed coverage 
ratios, but recommended that cash received from retirement of capital 
credits, including patronage refunds, be included in margins when 
measuring past performance. CoBank also argued that certain of the 
proposed procedures in the event the borrower failed to achieve the 
ratios weakened the covenant and should be deleted. CFC supported the 
idea of deleting capital credit allocations, but recommended a 
substantially different formulation of Modified DSC and that Modified 
DSC was sufficient by itself.
    NRECA indicated that they recognized that many private lenders were 
moving toward more cash-flow based financial tests. However, NRECA 
opposed the use of Modified TIER and Modified DSC set at 1.35 (the 
level specified in CFC's indenture for its collateral trust bonds, as 
well as in recent mortgages executed by CFC and CoBank) because of 
concerns that it would be difficult for some borrowers to meet the 
test. NRECA further recommended that if Modified TIER and Modified DSC 
were adopted, they should at minimum be phased in over a number of 
years and cash retirements of capital credits should be included in 
calculating the ratios.
    A number of power supply borrowers and the distribution members of 
power supply borrowers opposed the exclusion of allocations of 
generation and transmission capital credits in calculating the coverage 
ratios because they believed it would put pressure on the G&T to lower 
the rates charged for power and thus reduce the G&T's cash flow and 
weaken its financial condition. They argued that if the distribution 
members of a G&T were not able to include the capital credits allocated 
to them by the G&T in calculating their TIER and DSC ratios, the 
members would put additional pressure on the G&T to operate on a even 
thinner margin that could jeopardize the financial viability of the 
G&T. Some G&Ts and some distribution members of G&Ts also argued that 
using Modified TIER and Modified DSC set at 1.35 would force some 
distribution systems 

[[Page 36884]]
to raise rates, which would weaken the financial viability of both the 
members and the G&Ts. One regional borrower association supported the 
use of both Modified TIER and Modified DSC.
    Given the concerns and issues raised, RUS has decided to shift the 
rate covenant from the mortgage to RUS' proposed new loan contract for 
distribution borrowers, to retain the existing standard TIER and DSC 
set at the existing minimum levels of 1.5 and 1.25 respectively, and to 
add an Operating TIER and Operating DSC, both set at a minimum of 1.1 
for the borrower's electric utility operations. Adding Operating TIER 
(OTIER) and Operating DSC (ODSC) set at 1.1 would achieve the original 
objective of excluding major non-cash margins from the coverage tests, 
while also requiring that borrowers at least break even, with a small 
margin for error, on their primary business. Operating TIER and 
Operating DSC would be tested retrospectively using the same averaging 
of the best two out of three years as is used for standard TIER and 
DSC.
    Since a borrower's electric utility business accounts for most of 
the financing provided by RUS, is the main source of revenue for 
repaying the loans, and provides the primary security for the loans, 
RUS believes it is reasonable to expect this business to be financially 
viable and not dependent on other sources of income to cover business 
expenses. Retaining the existing standard TIER and DSC requirements 
will help ensure that the borrower's overall operations are financially 
sound. These existing requirements appear to be widely accepted by 
borrowers, and no formal or informal complaints were received that they 
are too demanding. Based on performance data as of the end of 1993, 
adding OTIER and ODSC at 1.1 would affect only 18 distribution 
borrowers who had met the standard TIER and DSC requirements based on 
the average of the best two out of three years.
    RUS also believes it is important to retain both TIER and DSC as 
the coverage tests, and not rely solely on DSC. Given the fact that the 
amortization of principal for virtually all debt owed by borrowers is 
heavily back-end loaded and that depreciation charges substantially 
exceed principal payments now and for the foreseeable future, relying 
solely on Modified DSC set at 1.35, regardless of whether RUS' or CFC's 
version of Modified DSC is used, would allow many distribution 
borrowers to operate at a loss and still meet the coverage ratio. TIER, 
on the other hand, provided that it is set at least 1.0, requires a 
borrower to at least break even, either for its overall operations in 
the case of standard TIER, or its electric utility operations in the 
case of Operating TIER. RUS does not believe it would be in the 
interests of the rural electrification program, either from the 
standpoint of loan security and financial soundness or public support, 
to rely on a standard that would allow a large number of borrowers to 
operate at a loss.
    Comments were also received on the provision which would have 
prohibited borrowers from offering any services free of charge. Several 
commenters suggested that this restriction be limited to electric power 
and energy so as not be prevent borrowers from participating in 
legitimate community service activities. RUS has adopted this change 
and has included it in its proposed loan contract.
Section 2.01 Additional Notes Without Mortgagee Approval

    Unlike the existing mortgage where the issuance of any debt secured 
by the mortgage must be approved in advance by RUS, section 2.01 of the 
proposed mortgage would authorize a borrower to issue additional 
secured notes without the approval of RUS or the other mortgagees if 
the following criteria are met:
     The borrower achieved a Modified TIER and Modified DSC of 
at least 1.35 in each of the two most recent years after including the 
incremental interest expense of the new debt.
     The borrower's equity is equal to at least 27 percent of 
total assets, after including the effect of the addition to plant.
     The borrower has a ratio of net utility plant to long term 
debt of at least 1.1, after including the effect of the new debt and 
the addition to plant.
     The maturity of the loan is less than the weighted average 
remaining life of the assets financed.
     Loan maturity is not less than 5 years.
     The loan is amortized at a rate not less than the rate 
obtained under level payment of principal and interest.
     Outstanding secured debt for water and sewer systems, 
telecommunications systems, natural gas distribution systems, and solid 
waste disposal systems would be not more than 20 percent of total 
outstanding secured debt after issuing the debt.
    Comments on the use of Modified TIER and Modified DSC and the 
definition of these ratios were similar to those regarding the rate 
covenant. In addition, several commenters opposed the inclusion of the 
incremental interest expense of the new debt when calculating the 
ratio, mainly because of possible problems of accurately reflecting the 
interest cost of new debt for variable rate loans. While RUS believes 
inclusion of incremental interest expense is sound conceptually, it 
recognizes the potential problems in implementing the concept and thus 
has decided not to include it in the final rule.
    For the reasons explained with respect to the rate covenant, RUS 
believes it would be unwise to rely on Modified DSC by itself set at a 
1.35 level. We also believe it wouldn't be desirable to have three 
different formulations of the coverage ratios: standard TIER and DSC 
and Operating TIER and DSC in the rate covenant, and Modified TIER and 
DSC in section 2.01 of the mortgage. There appears to be no particular 
advantage of adding a third formulation in section 2.01, and having 
three different formulations could cause administrative and 
communication problems.
    Standard TIER and DSC have proven to be workable over the past 25 
years and acceptable to nearly all borrowers. Therefore, RUS has 
decided to use in section 2.01 a standard TIER or 1.5 and standard DSC 
of 1.25, the levels currently required in the existing rate covenants 
of distribution borrowers. Borrowers meeting these levels in each of 
the two years immediately preceding the issuance of the debt would meet 
the test. The incremental interest expense of the new debt would not be 
included in calculating the ratios.
    For the sake of consistency with the proposed RUS rate covenant, it 
could be argued that a borrower should also be required to meet an 
Operating TIER and Operating DSC of at least 1.1 in each of the two 
most recent years to issue debt under section 2.01 of the mortgage. 
While that argument can be made, RUS believes that so long as the 
borrower is required in its rate covenant to operate so as to meet the 
standard TIER and DSC ratios and the Operating TIER and DSC ratios on 
an ongoing basis, it is not necessary to also include Operating TIER 
and DSC in section 2.01 of the mortgage. Having only the two ratios 
rather than all four would also be responsive to the concerns raised by 
CFC, NRECA, and some others about the tests being too numerous and too 
complicated. Other lenders, it should be noted, may include additional 
tests in their respective loan contracts if they do not believe that 
the standard TIER and DSC tests are adequate.
    Comments were mixed regarding the equity and net utility plant 
tests. Several commenters argued that the tests were duplicative and 
only one was needed. 

[[Page 36885]]
CFC favored deleting the net utility plant test and relying on equity, 
set at 20 percent of total assets, after issuance of the debt. CoBank 
and NRECA favored using a net utility plant test over one based on 
equity. One regional borrower association also supported the use of a 
net utility plant test. Another regional borrower association indicated 
general support for the two tests.
    RUS recognized when it proposed these two tests that they overlap 
to a considerable degree. However, in the interest of establishing a 
collateralization test that is no higher than necessary to preserve 
reasonably adequate loan security, RUS believes it is better to use two 
admittedly overlapping tests, each set at minimal levels, than to use 
either test by itself set at a higher level. The net utility plant to 
long term debt ratio focuses on the primary collateral for the loans, 
and approximates a bondable additions test commonly used in utility 
indentures. The equity test reflects the broader operations of the 
borrower and focuses on the overall equity cushion available as 
security for the loans. Each test has its advantages and limitations, 
and when used together the advantages of one test tends to offset the 
limitations of the other.
    For these reasons RUS has decided to retain both the equity and the 
net utility/long-term debt plant tests. The net utility plant/long-term 
debt test has been reduced to a level of 1.0 from 1.1 in the proposed 
rule.
    Based on performance data as of the end of 1993, up to 64 percent 
of distribution borrowers would have qualified under the proposed 
criteria of Modified TIER and Modified DSC at 1.35 (including 
incremental interest expense), equity at 27 percent, and net utility 
plant to long-term debt at 1.1. Under the criteria included in the 
final rule (standard TIER of 1.5, standard DSC of 1.25, equity of 27 
percent, and net utility plant to long-term debt of 1.0) the number of 
borrowers qualifying increases to 71 percent.
    RUS believes that these criteria represent a reasonable compromise 
between RUS' legitimate need (and statutorily imposed requirement) to 
maintain reasonably adequate loan security, and the borrowers' needs 
for financial flexibility. This issue, however, is not a we versus them 
proposition. RUS believes that the tests for issuing secured debt 
without mortgagee approval must be reasonably rigorous to attract other 
lenders and expand the financing alternatives available to borrowers. 
Any lender not familiar with rural electric systems will be looking for 
reasonably rigorous financial covenants to compensate for the uncertain 
financial risks of lending to unfamiliar borrowers.
    Comments were also received on the other four proposed conditions 
for issuing debt under section 2.01. Most of those who commented argued 
that three of the four conditions (the two dealing with loan maturity 
and the other with a minimum loan amortization rate) were unnecessary 
and unduly cluttered the section. Some also suggested that such 
conditions be put in the RUS loan contract if they were deemed 
necessary to retain.
    RUS does believe it is important to retain these conditions and has 
shifted them to our proposed loan contract. Restricting loan maturity 
to the useful life of the asset financed and requiring a minimum rate 
of loan amortization (albeit a very minimal rate) is important to 
ensure that the collateral for loans remains adequate. Limiting secured 
lending to loans of at least 5 years will preserve the security of the 
mortgage for lenders committed to providing permanent long-term 
financing for rural electrification. Without these conditions in its 
loan contract, RUS believes it would be necessary to have more 
restrictive tests in section 2.01 of the mortgage.
    As to the fourth condition, which limited the issuance of debt 
under section 2.01 for the four community infrastructure purposes cited 
above, NRECA recommended that the limitation be dropped, and CFC 
recommended that the limitation be based on 50 percent of the 
borrower's equity rather than 20 percent of the outstanding long-term 
debt. Since these activities would be new to nearly all borrowers, RUS 
believes some limitation ought to be placed on a borrower's ability to 
issue secured debt for these activities without the approval of the 
mortgagees. CFC's recommendation that the limitation be based on equity 
has been adopted, but RUS believes it is more prudent to set the 
limitation at 30 percent of equity rather than 50 percent. For the 
typical distribution borrower, 30 percent of equity, which is 
numerically equal to 26 percent of outstanding long-term debt, would 
provide greater latitude to the borrower than the original proposal.
    CFC also recommended that there should be no other limitations on 
the purposes that can be financed under section 2.01 of the mortgage. 
RUS disagrees and believes that secured debt issued under 2.01 without 
mortgagee approval should be limited to property additions, which 
essentially means property chargeable to the mortgagor's utility plant 
accounts and used or useful in the mortgagor's utility business. The 
mortgage is intended to provide security for loans made to rural 
utility systems primarily for utility purposes, and any security 
granted for loans to finance property or purposes that are outside of 
the utility business should be subject to the approval of the 
mortgagees under section 2.03 of the mortgage. This position seems 
consistent with the position taken by CFC in its own 100 percent 
mortgage, wherein secured debt issued without the approval of the 
mortgagee is limited such that at least 95 percent of the proceeds of 
the loan must be for the purpose of acquiring or constructing new or 
replacement electric utility or general plant.
    Other changes were made to section 2.01. In the proposed rule, 
financing under the section was limited to ``mortgageable property.'' 
But mortgageable property was defined essentially as ``property 
additions.'' The distinction between the two terms was based mainly on 
expositional use of the terms. For simplicity and clarity, the term 
``mortgageable property'' has be dropped from the mortgage in favor of 
using ``property additions''. This change has no effect on the property 
eligible for financing under section 2.01.
    One commenter asked whether debt to reimburse general funds or to 
replace interim financing was eligible for issuance under section 2.01, 
or whether the section could be used only to finance plant added after 
and as a direct result of the debt issuance. The intent was, and 
remains, to allow such debt under the section so long as the general 
funds and interim financing were used to finance property additions. 
This question lead to the practical question of how the mortgagor and 
the mortgagees will be able to determine that the debt was in fact 
being issued to finance property additions, since plant added 10 or 20 
years ago or plant which may not be added until 10 or 20 years in the 
future might be claimed as the basis for issuing the debt.
    In response to these questions, changes were made to limit 
financing under section 2.01 to property additions acquired or whose 
construction was completed not more than 5 years prior to the issuance 
of the additional notes and property additions acquired or whose 
construction is started and/or completed not more than 4 years after 
issuance of the additional notes, so long as such property additions 
were not financed by other debt secured under the mortgage at the time 
the additional notes are issued.
    Also in section 2.01, the pro forma test for net utility plant/
long-term debt has been revised to clarify and simplify 

[[Page 36886]]
calculation. In the proposed rule it was implicitly assumed that each 
issuance of debt would entail additions to plant. However, in the case 
of reimbursement of general funds or replacement of interim financing, 
there many be little or no plant actually added as a result of issuing 
the secured debt. In other cases, there would be uncertainty about 
whether the proposed plant additions would actually materialize in 
every instance. For these reasons, the pro forma net utility plant/
long-term debt test has been changed and clarified. Namely, the 
principal amount of the additional debt would be added to the then 
outstanding long-term debt, but no adjustment would be made for any 
additional plant that may actually result from the debt issuance. For 
this reason, the required ratio was reduced from 1.1 to 1.0 to 
compensate for those instances where plant may be added as a result of 
the debt issuance.
    Two other clarifications were made to section 2.01. The date of 
issuance of additional notes has been defined as the date the notes are 
executed. Also, for purposes of calculating the pro forma ratios, it 
has been specified that the most recently available end-of-month data 
preceding debt issuance shall be used for total long-term debt and 
total assets before debt issuance and for equity and net utility plant. 
The data used, however, may not be for a month ending more than 180 
days prior to debt issuance.

Section 2.02  Refinancing Without Mortgagee Approval

    Unlike the existing mortgage where any refinancing loans to be 
secured under the mortgage must be approved in advance by RUS, section 
2.02 of the proposed mortgage would authorize a borrower to issue 
secured refinancing notes without the approval of RUS or the other 
mortgagees if the following tests are met:
     The principal amount of the refinancing loan does not 
exceed 103.5 percent of the loan principal being refinanced.
     The weighted average life of the refinancing loan does not 
exceed the remaining weighted average life of the loan being 
refinanced.
     The present value of the cost of the refinancing, 
including all transaction costs and any required investments in the 
lender, is less than the present value of the cost of the loan being 
refinanced.
    CFC commented that none of the three tests are needed. NRECA argued 
that the net present value of cost test is sufficient by itself and 
thus the other two are not necessary. CoBank supported the net present 
value of costs test, but did not comment on the other two tests. CoBank 
argued that documentation and certification of the tests to the 
mortgagees is needed, as well as explicit guidance on calculating net 
present value of costs. One borrower association indicated that it 
supported the changes proposed in section 2.02 in comparison with the 
present mortgage.
    In view of these comments, RUS has decided to retain in section 
2.02 the limitation on the principal amount of the refinancing loan, to 
shift the limitation on the weighted average life of the refinancing 
loan to the agency's proposed new loan contract, and to drop the net 
present value of costs test. Moreover, the limitation on the principal 
of the refinancing loan has been increased from 103.5 percent to 105 
percent of the loan refinanced, which is the same limitation contained 
in recent 100 percent mortgages executed by CFC and CoBank.
    RUS believes the limitations on the weighted average life and 
principal amount of the refinancing loan via-a-vis the loan refinanced 
are reasonable and provide important safeguards. The limitation on 
weighted average life will help ensure that refinancing, or repeated 
refinancings, will not extend the borrower's debt beyond the useful 
life and security value of the collateral used to secure the original 
loan. Limiting the principal of the refinancing loan to 105 percent of 
the loan principal refinanced is designed to prevent the accumulation 
of additional debt without the addition of additional collateral. The 
purpose of section 2.02 is to allow for existing secured debt to be 
refinanced, not to provide for the issuance of additional debt or 
extension of existing debt.
    The net present value of costs test was intended to address the 
comparative costs of the refinancing loan and the loan to be 
refinanced, which is a different matter than that addressed by the 
other two tests. However, after reviewing the comments and discussing 
the question with co-mortgagees and other commenters, RUS has concluded 
that it would not be possible to define a methodology for calculating 
the net present value of costs that would be entirely routine and 
objective and not dependent on judgment calls on how to deal with 
unusual cases. For example, determining interest costs alone is 
difficult when the rate is variable, and certain assumptions must be 
made that may not be appropriate for all cases. While such judgments 
can be made for case-by-case approvals, the tests in section 2.02 need 
to be entirely generic and routine.

Section 2.05  Form of Supplemental Mortgage

    The proposed mortgage indicated that a simple form of mortgage 
supplement needed to be added in order to extend the lien of the 
mortgage to new lenders. The form included in the final mortgage was 
drafted based, in part, on a form suggested by a co-mortgagee.

Section 3.04  Environmental Obligations; Indemnification of Mortgagees

    CFC suggested that this provision be moved to the RUS loan 
contract, and that the 3 days to notify mortgagees of environmental 
liabilities was too short. CoBank recommended that the provision remain 
in the mortgage, that the mortgagees should be authorized to examine 
and test borrowers' premises at the borrowers' expense, and that 
indemnification of mortgagees against environmental liabilities should 
continue after satisfaction and release of the mortgage. NRECA stated 
that the provision was (1) unnecessary since the borrower is required 
in section 3.09 to comply with all laws, including environmental laws, 
(2) unworkable since it required compliance with all environmental laws 
rather than all ``material'' environmental laws, and (3) if not 
eliminated altogether, the provision should be moved to the RUS loan 
contract.
    RUS believes the provision should remain in the mortgage itself 
given the importance of this issue to all lenders and the virtual 
explosion of environmental suits and potential liabilities in the past 
few years. RUS agrees that is reasonable to give borrowers more time to 
notify mortgagees of potential or actual environmental liabilities, and 
has increased the time allowed to 10 days. RUS agrees that the 
indemnification of mortgagees against environmental and other 
liabilities stemming from the mortgaged property should survive the 
lien of the mortgage, and has made this clear in the final language.
    RUS does not agree that since section 3.09 requires borrowers to 
comply with all laws that section 3.04 is not needed. Section 3.09 does 
not address indemnification of mortgagees against environmental 
liabilities. RUS also does not agree that the requirement should be 
that borrowers need comply only with ``material'' environmental laws, 
since this might imply that RUS was advising borrowers that certain 
environmental laws are not themselves material.
    RUS agrees that individual lenders in specific cases may want the 
right to test a borrower's property for environmental 

[[Page 36887]]
hazards at the expense of the borrower. RUS believes, however, that it 
would be more appropriate to include such a provision in individual 
loan contracts.

Section 3.08  Restrictions on Additional Permitted Debt

    Comments were received regarding two of the proposed restrictions 
on additional permitted debt: restricting unsecured debt to 15 percent 
of the borrower's net utility plant, and restricting any debt assumed 
as part of an acquisition to 90 percent of the net utility plant of the 
acquired company. Those who opposed restricting unsecured debt believed 
it was unnecessary and could limit interim construction financing. One 
commenter said the restriction was unnecessary if borrowers were 
required to maintain a minimum equity requirement. On the other hand, 
one regional borrower association said that: ``The cooperatives applaud 
the amendments [proposals] regarding restrictions on additional 
permitted debt. The amendments make the requirements less restrictive 
and more conducive to today's utility environment.''
    In light of these comments, RUS has decided to move the restriction 
on issuing unsecured debt without mortgagee approval to the RUS loan 
contract and apply it only to borrowers with equity of less than 30 
percent of total assets. Currently, only 9 percent of distribution 
borrowers have less than 30 percent equity and would thus be subject to 
this restriction.
    The restriction limiting debt assumed through acquisitions to 90 
percent of net utility plant of the acquired company (which was 
intended to mirror the test in sec. 2.01) was been dropped. Such debt 
would have to comply with Article II of the mortgage in order to be 
secured, and thus the proposed restriction is not needed.

Section 3.10  Limitations on Consolidations and Mergers

    One commenter recommended that consolidations that don't meet the 
required financial ratios should have the opportunity to be approved by 
mortgagees on a case-by-case basis. This in fact is the intention of 
section 3.10 and language has been added to make that clear. Moreover, 
the required financial ratios have been revised consistent with the 
changes to the financial ratios in section 2.01 of the mortgage.

Section 3.12  Maintenance of Mortgaged Property

    Most of the comments on this section focused on the professional 
engineer's certification as to the condition of the borrower's 
property, which the mortgagees could require not more than once every 3 
years. Some commenters said the certificate need not come from an 
independent professional engineer, but simply a professional engineer 
acceptable to the mortgagees. RUS has adopted this change.
    One mortgagee argued that the proposed second certification and 
related remedial plan and process should be dropped since they 
detracted from the clear intent of the section and could weaken the 
provision. RUS agrees and has dropped these provisions. The section has 
also been modified to make it clear that the mortgagees may direct the 
mortgagor to make needed improvements in the maintenance and repair of 
the borrower's system based on any information available to the 
mortgagees, including the engineer's certification. The suggestion that 
``good utility practice'' be changed to ``prudent utility practice'' 
has also been adopted.

Section 3.16  Limitations on Dividends, Patronage Refunds and Other 
Cash Distributions

    CFC recommended that this provision be moved to the RUS loan 
contract. CoBank recommended that no restrictions be placed on 
distributions at or above 30 percent equity if the borrower is not in 
default, and that no distributions be allowed below 30 percent equity 
(after distribution), except for membership fees upon termination of 
membership. NRECA stated that the proposed provision (which was 
essentially the same as that in the existing mortgage) was too 
complicated, and that it should be simplified by having no restrictions 
on distributions above 27 percent equity (after distribution), and 
presumably allowing distributions below 27 percent equity only in the 
case of membership terminations. One borrower association proposed a 
fairly complicated scheme whereby different proportions of prior year's 
margins could be distributed depending on the level of borrower equity.
    Based on these comments, RUS has decided to move this provision to 
its loan contract. In the proposed loan contract, the language of the 
provision would be simplified and greater latitude would be granted. 
Borrowers could make distributions without RUS approval provided that 
the borrower was not in default and equity after the distribution was 
equal to at least 30 percent of total assets (versus 40 percent in the 
existing mortgage). Below 30 percent equity, borrowers not in default 
could make distributions to the estates of deceased persons without RUS 
approval. Also, between 20 percent and 30 percent equity (after 
distribution) borrowers could distribute up to 25 percent of last 
year's margins, including any distributions for estates. These changes 
would provide substantially greater latitude to most borrowers since 91 
percent of distribution borrowers have equity of 30 percent or more.

Section 4.02  Acceleration of Maturity; Rescission and Annulment

    Several comments were received suggesting clarifications or 
modifications of certain aspects of this section. Based on these 
comments, the following clarifications or modifications have been made:
    A mortgagee who accelerates a note for a non-payment default (not 
just a payment default) must notify the other mortgagees.
    A mortgagee who becomes aware that another mortgagee has 
accelerated its notes for either a payment or a non-payment default may 
in turn accelerate its own notes.
    Two additional conditions have been added to those that must be met 
before mortgagees representing at least 80 percent of the outstanding 
secured debt may annul an acceleration by another mortgagee: all 
reasonable expenses of the mortgagee in connection with the 
acceleration must have been paid, and the annulment must be made before 
proceedings to foreclose the lien of the mortgage have commenced.

Opinions of Borrower's Counsel

    Several comments were received concerning the number and nature of 
legal opinions called for in the proposed mortgage. The final mortgage 
published today requires fewer opinions, and the scope of some of the 
opinions has been narrowed in response to those comments. The topic of 
legal opinions from borrowers' counsels has been the subject of robust 
debate within the legal profession for several years, with no clear 
consensus emerging. It is doubtful that all of these concerns can be 
addressed to the satisfaction of the entire legal community.

List of Subjects in 7 CFR Part 1718

    Administrative practice and procedure, Electric power, Electric 
utilities, Loan programs--energy, Loan security documents, Reporting 
and recordkeeping requirements, Rural areas.

    For the reasons set out in the preamble, REA amends chapter XVII of 
title 7 of the Code of Federal Regulations by adding a new part 1718 to 
read as follows: 

[[Page 36888]]


PART 1718--LOAN SECURITY DOCUMENTS FOR ELECTRIC BORROWERS

Subpart A--General

Sec.
1718.1-1718.49  [Reserved]

Subpart B--Mortgage for Distribution Borrowers

1718.50  Definitions.
1718.51  Policy.
1718.52  Existing mortgages.
1718.53  Rights of other mortgagees.
1718.54  Availability of model mortgage.
Appendix A to Subpart B of Part 1718--Model Form of Mortgage for 
Electric Distribution Borrowers

    Authority: 7 U.S.C. 901-950b; Pub. L. 103-354, 108 Stat. 3178 (7 
U.S.C. 6941 et seq.).

Subpart A--General


Secs. 1718.1-1718.49  [Reserved]

Subpart B--Mortgage for Distribution Borrowers


Sec. 1718.50  Definitions.

    Unless otherwise indicated, terms used in this subpart are defined 
as set forth in 7 CFR 1710.2.


Sec. 1718.51  Policy.

    (a) Adequate loan security must be provided for loans made or 
guaranteed by RUS. The loans are required to be secured by a first 
mortgage lien on most of the borrower's assets substantially in the 
form set forth in Appendix A of this subpart. At the discretion of RUS, 
this model form of mortgage may be adapted to satisfy different legal 
requirements among the states and individual differences in lending 
circumstances, provided that such adaptations are consistent with the 
policies set forth in this subpart.
    (b) Some borrowers, such as certain public power districts, may not 
be able to provide security in the form of a first mortgage lien on 
their assets. In these cases RUS will consider accepting other forms of 
security, such as resolutions and pledges of revenues.
    (c) RUS may require supplemental and amending mortgages to protect 
its security, or in connection with additional loans.
    (d) RUS may also require such other security instruments (such as 
loan contracts, security agreements, financing statements, guarantees, 
and pledges) as it deems appropriate.
    (e) All distribution borrowers that receive a loan or loan 
guarantee from RUS on or after August 17, 1995 will be required to 
enter into a mortgage with RUS that meets the requirements of this 
subpart. The concurrence of any other lenders secured under the 
borrower's existing mortgage may be required before the borrower can 
enter into a new mortgage.


Sec. 1718.52  Existing mortgages.

    Nothing contained in this subpart amends, invalidates, terminates 
or rescinds any existing mortgage entered into between the borrower and 
RUS and any other mortgagees.


Sec. 1718.53  Rights of other mortgagees.

    Nothing contained in this subpart is intended to alter or affect 
any other mortgagee's rights under an existing mortgage.


Sec. 1718.54  Availability of model mortgage.

    Single copies of the model mortgage (RUS Informational Publication 
1718 B) are available from the Administrative Services Division, Rural 
Utilities Service, United States Department of Agriculture, Washington, 
DC 20250-1500. This document may be reproduced.

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

RESTATED MORTGAGE AND SECURITY AGREEMENT Made By And Between

----------------------------------------------------------------------
Mortgagor

and UNITED STATES OF AMERICA and

----------------------------------------------------------------------
MORTGAGEE

Dated as of------------------------------------------------------------

THIS INSTRUMENT GRANTS A SECURITY INTEREST BY A TRANSMITTING UTILITY

THIS INSTRUMENT CONTAINS FUTURE ADVANCE PROVISIONS

THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS

TABLE OF CONTENTS

GRANTING CLAUSES

FIRST
SECOND
THIRD
FOURTH
EXCEPTED PROPERTY

HABENDUM
ARTICLE I--DEFINITIONS & OTHER PROVISIONS OF GENERAL APPLICATION

SECTION 1.01  Definitions
SECTION 1.02  General Rules of Construction
SECTION 1.03  Special Rules of Construction if RUS is a Mortgagee
SECTION 1.04  Governing Law
SECTION 1.05  Notices

ARTICLE II

ADDITIONAL NOTES

SECTION 2.01  Additional Notes
SECTION 2.02  Refunding or Refinancing Notes
SECTION 2.03  Other Additional Notes
SECTION 2.04  Additional Lenders Entitled to the Benefits of This 
Mortgage
SECTION 2.05  Form of Supplemental Mortgage

ARTICLE III--PARTICULAR COVENANTS OF THE MORTGAGOR

SECTION 3.01  Payment of Debt Service on Notes
SECTION 3.02  Warranty of Title
SECTION 3.03  After-Acquired Property; Further Assurances: Recording
SECTION 3.04  Environmental Requirements and Indemnity
SECTION 3.05  Payment of Taxes
SECTION 3.06  Authority to Execute and Deliver Notes, Loan 
Agreements and Mortgages; All Action Taken; Enforceable Obligations
SECTION 3.07  Restrictions on Further Encumbrances on Property
SECTION 3.08  Restrictions on Additional Permitted Debt
SECTION 3.09  Preservation of Corporate Existence and Franchises
SECTION 3.10  Limitations on Consolidations and Mergers
SECTION 3.11  Limitations on Transfers of Property
SECTION 3.12  Maintenance of Mortgaged Property
SECTION 3.13  Insurance; Restoration of Damaged Mortgaged Property
SECTION 3.14  Mortgagee Right to Expend Money to Protect Mortgaged 
Property
SECTION 3.15  Time Extensions for Payment of Notes
SECTION 3.16  Application of Proceeds from Condemnation
SECTION 3.17  Compliance with Loan Agreements; Notice of Amendments 
to and Defaults under Loan Agreements
SECTION 3.18  Rights of Way, etc., Necessary in Business
SECTION 3.19  Limitations on Providing Free Electric Services
SECTION 3.20  Keeping Books; Inspection by Mortgagee

ARTICLE IV--EVENTS OF DEFAULT AND REMEDIES

SECTION 4.01  Events of Default
SECTION 4.02  Acceleration of Maturity; Rescission and Annulment
SECTION 4.03  Remedies of Mortgagees
SECTION 4.04  Application of Proceeds from Remedial Actions
SECTION 4.05  Remedies Cumulative; No Election
SECTION 4.06  Waiver of Appraisement Rights, Marshaling of Assets 
Not Required
SECTION 4.07  Notice of Default

ARTICLE V--POSSESSION UNTIL DEFAULT--DEFEASANCE CLAUSE

SECTION 5.01  Possession Until Default
SECTION 5.02  Defeasance
SECTION 5.03  Special Defeasance

ARTICLE VI--MISCELLANEOUS

SECTION 6.01  Property Deemed Real Property
SECTION 6.02  Mortgage to Bind and Benefit Successors and Assigns
SECTION 6.03  Headings
SECTION 6.04  Severability Clause 

[[Page 36889]]

SECTION 6.05  Mortgage Deemed Security Agreement
SECTION 6.06    Indemnification by Mortgagor of Mortgagees
Schedule A
Schedule B
Schedule C
Exhibit A--Manager's Certificate
Exhibit B--Form of Supplemental Mortgage
Supplemental Mortgage Schedule A--Maximum Debt Limit and Other 
Information
Supplemental Mortgage Schedule B--Property Schedule
Supplemental Mortgage Schedule C--Excepted Property

    RESTATED MORTGAGE AND SECURITY AGREEMENT, dated as of __________ 
19____, (hereinafter sometimes called this ``Mortgage'') is made by 
and between
----------------------------------------------------------------------
(hereinafter called the ``Mortgagor''), a corporation existing under 
the laws of the State of __________, and the UNITED STATES OF 
AMERICA acting by and through the Administrator of the Rural 
Utilities Service (hereinafter called the ``Government''), 
__________ {Supplemental Lender}, (hereinafter called 
``__________'') a __________ existing under the laws of __________, 
and is intended to confer rights and benefits on both the Government 
and __________ as well as any and all other lenders pursuant to 
Article II of this Mortgage that enter into a supplemental mortgage 
in accordance with Section [2.04] of Article II hereof (the 
Government and any such other lenders being herein sometimes 
collectively referred to as the ``Mortgagees'').

RECITALS

    WHEREAS, the Mortgagor, the Government and __________ are 
parties to that certain __________ Mortgage and Security Agreement 
dated as of __________, 19____, as supplemented, amended or restated 
(the ``Original Mortgage'' identified in Schedule ``A'' of this 
Mortgage) originally entered into between the Mortgagor, the 
Government acting by and through the Administrator of the Rural 
Electrification Administration, the predecessor of RUS, and 
__________;
    WHEREAS, the Mortgagor deems it necessary to borrow money for 
its corporate purposes and to issue its promissory notes and other 
debt obligations therefor from time to time in one or more series, 
and to mortgage and pledge its property hereinafter described or 
mentioned to secure the payment of the same;
    WHEREAS, the Mortgagor desires to enter into this Mortgage 
pursuant to which all secured debt of the Mortgagor hereunder shall 
be secured on parity;
    WHEREAS, this Mortgage restates and consolidates the Original 
Mortgage while preserving the priority of the Lien under the 
Original Mortgage securing the payment of Mortgagor's outstanding 
obligations secured under the Original Mortgage, which indebtedness 
is described more particularly by listing the Original Notes in 
Schedule ``A'' hereto; and
    WHEREAS, all acts necessary to make this Mortgage a valid and 
binding legal instrument for the security of such notes and 
obligations, subject to the terms of this Mortgage, have been in all 
respects duly authorized;
    NOW, THEREFORE, THIS MORTGAGE WITNESSETH: That to secure the 
payment of the principal of (and premium, if any) and interest on 
the Original Notes and all Notes issued hereunder according to their 
tenor and effect, and the performance of all provisions therein and 
herein contained, and in consideration of the covenants herein 
contained and the purchase or guarantee of Notes by the guarantors 
or holders thereof, the Mortgagor has mortgaged, pledged and granted 
a continuing security interest in, and by these presents does hereby 
grant, bargain, sell, alienate, remise, release, convey, assign, 
transfer, hypothecate, pledge, set over and confirm, pledge, and 
grant a continuing security interest and lien in for the purposes 
hereinafter expressed [other language may be required under various 
state laws], unto the Mortgagees all property, rights, privileges 
and franchises of the Mortgagor of every kind and description, real, 
personal or mixed, tangible and intangible, of the kind or nature 
specifically mentioned herein OR ANY OTHER KIND OR NATURE, except 
any Excepted Property, now owned or hereafter acquired by the 
Mortgagor (by purchase, consolidation, merger, donation, 
construction, erection or in any other way) wherever located, 
including (without limitation) all and singular the following:

GRANTING CLAUSE FIRST

    A. all of those fee and leasehold interests in real property set 
forth in Schedule ``B'' hereto, subject in each case to those 
matters set forth in such Schedule;
    B. all of the Mortgagor's interest in fixtures, easements, 
permits, licenses and rights-of-way comprising real property, and 
all other interests in real property, comprising any portion of the 
Utility System (as herein defined) located in the Counties listed in 
Schedule ``B'' hereto;
    C. all right, title and interest of the Mortgagor in and to 
those contracts of the Mortgagor (i) relating to the ownership, 
operation or maintenance of any generation, transmission or 
distribution facility owned, whether solely or jointly, by the 
Mortgagor, (ii) for the purchase of electric power and energy by the 
Mortgagor and having an original term in excess of 3 years, (iii) 
for the sale of electric power and energy by the Mortgagor and 
having an original term in excess of 3 years, and (iv) for the 
transmission of electric power and energy by or on behalf of the 
Mortgagor and having an original term in excess of 3 years, 
including in respect of any of the foregoing, any amendments, 
supplements and replacements thereto;
    D. all the property, rights, privileges, allowances and 
franchises particularly described in the annexed Schedule ``B'' are 
hereby made a part of, and deemed to be described in, this Granting 
Clause as fully as if set forth in this Granting Clause at length; 
and
    ALSO ALL OTHER PROPERTY, real estate, lands, easements, 
servitudes, licenses, permits, allowances, consents, franchises, 
privileges, rights of way and other rights in or relating to real 
estate or the occupancy of the same; all power sites, storage 
rights, water rights, water locations, water appropriations, 
ditches, flumes, reservoirs, reservoir sites, canals, raceways, 
waterways, dams, dam sites, aqueducts, and all other rights or means 
for appropriating, conveying, storing and supplying water; all 
rights of way and roads; all plants for the generation of electric 
and other forms of energy (whether now known or hereafter developed) 
by steam, water, sunlight, chemical processes and/or (without 
limitation) all other sources of power (whether now known or 
hereafter developed); all power houses, gas plants, street lighting 
systems, standards and other equipment incidental thereto; all 
telephone, radio, television and other communications, image and 
data transmission systems, air conditioning systems and equipment 
incidental thereto, water wheels, waterworks, water systems, steam 
and hot water plants, substations, lines, service and supply 
systems, bridges, culverts, tracks, ice or refrigeration plants and 
equipment, offices, buildings and other structures and the equipment 
thereto all machinery, engines, boilers, dynamos, turbines, 
electric, gas and other machines, prime movers, regulators, meters, 
transformers, generators (including, but not limited to, engine-
driven generators and turbogenerator units), motors, electrical, gas 
and mechanical appliances, conduits, cables, water, steam, gas or 
other pipes, gas mains and pipes, service pipes, fittings, valves 
and connections, pole and transmission lines, towers, overhead 
conductors and devices, underground conduits, underground conductors 
and devices, wires, cables, tools, implements, apparatus, storage 
battery equipment, and all other fixtures and personalty; all 
municipal and other franchises, consents, certificates or permits; 
all emissions allowances; all lines for the transmission and 
distribution of electric current and other forms of energy, gas, 
steam, water or communications, images and data for any purpose 
including towers, poles, wires, cables, pipes, conduits, ducts and 
all apparatus for use in connection therewith, and (except as 
hereinbefore or hereinafter expressly excepted) all the right, title 
and interest of the Mortgagor in and to all other property of any 
kind or nature appertaining to and/or used and/or occupied and/or 
employed in connection with any property hereinbefore described, but 
in all circumstances excluding Excepted Property;

GRANTING CLAUSE SECOND

    All other property, real, personal or mixed, of whatever kind 
and description and wheresoever situated, including without 
limitation goods, accounts, money held in a trust account pursuant 
hereto or to a Loan Agreement, and general intangibles now owned or 
which may be hereafter acquired by the Mortgagor, but excluding 
Excepted Property, now owned or which may be hereafter acquired by 
the Mortgagor, it being the intention hereof that all property, 
rights, privileges, allowances and franchisees now owned by the 
Mortgagor or acquired by the Mortgagor after the date hereof (other 
than Excepted Property) shall be as fully embraced within and 
subjected to the lien hereof as if such property were specifically 
described herein. 

[[Page 36890]]


GRANTING CLAUSE THIRD

    Also any Excepted Property that may, from time to time 
hereafter, by delivery or by writing of any kind, be subjected to 
the lien hereof by the Mortgagor or by anyone in its behalf; and any 
Mortgagee is hereby authorized to receive the same at any time as 
additional security hereunder for the benefit of all the Mortgagees. 
Such subjection to the lien hereof of any Excepted Property as 
additional security may be made subject to any reservations, 
limitations or conditions which shall be set forth in a written 
instrument executed by the Mortgagor or the person so acting in its 
behalf or by such Mortgagee respecting the use and disposition of 
such property or the proceeds thereof.

GRANTING CLAUSE FOURTH

    Together with (subject to the rights of the Mortgagor set forth 
on Section [5.01]) all and singular the tenements, hereditaments and 
appurtenances belonging or in anywise appertaining to the aforesaid 
property or any part thereof, with the reversion and reversions, 
remainder and remainders and all the tolls, earnings, rents, issues, 
profits, revenues and other income, products and proceeds of the 
property subjected or required to be subjected to the lien of this 
Mortgage, and all other property of any nature appertaining to any 
of the plants, systems, business or operations of the Mortgagor, 
whether or not affixed to the realty, used in the operation of any 
of the premises or plants or the System, or otherwise, which are now 
owned or acquired by the Mortgagor, and all the estate, right, title 
and interest of every nature whatsoever, at law as well as in 
equity, of the Mortgagor in and to the same and every part thereof 
(other than Excepted Property with respect to any of the foregoing).

EXCEPTED PROPERTY

    There is, however, expressly excepted and excluded from the lien 
and operation of this Mortgage the following described property of 
the Mortgagor, now owned or hereafter acquired (herein sometimes 
referred to as ``Excepted Property''):
    A. all shares of stock, securities or other interests of the 
Mortgagor in the National Rural Utilities Cooperative Finance 
Corporation, the National Bank for Cooperatives and the St. Paul 
Bank for Cooperatives other than any stock, securities or other 
interests that are specifically described in Subclause D of Granting 
Clause First as being subjected to the lien hereof;
    B. all rolling stock (except mobile substations), automobiles, 
buses, trucks, truck cranes, tractors, trailers and similar vehicles 
and movable equipment, and all tools, accessories and supplies used 
in connection with any of the foregoing;
    C. all vessels, boats, ships, barges and other marine equipment, 
all airplanes, airplane engines and other flight equipment, and all 
tools, accessories and supplies used in connection with any of the 
foregoing;
    D. all office furniture, equipment and supplies that is not data 
processing, accounting or other computer equipment or software;
    E. all leasehold interests for office purposes;
    F. all leasehold interests of the Mortgagor under leases for an 
original term (including any period for which the Mortgagor shall 
have a right of renewal) of less than five (5) years;
    G. all timber and crops (both growing and harvested) and all 
coal, ore, gas, oil and other minerals (both in place or severed);
    H. the last day of the term of each leasehold estate (oral or 
written) and any agreement therefor, now or hereafter enjoyed by the 
Mortgagor and whether falling within a general or specific 
description of property herein: PROVIDED, HOWEVER, that the 
Mortgagor covenants and agrees that it will hold each such last day 
in trust for the use and benefit of all of the Mortgagees and 
Noteholders and that it will dispose of each such last day from time 
to time in accordance with such written order as the Mortgagee in 
its discretion may give;
    I. all permits, licenses, franchises, contracts, agreements, 
contract rights and other rights not specifically subjected or 
required to be subjected to the lien hereof by the express 
provisions of this Mortgage, whether now owned or hereafter acquired 
by the Mortgagor, which by their terms or by reason of applicable 
law would become void or voidable if mortgaged or pledged hereunder 
by the Mortgagor, or which cannot be granted, conveyed, mortgaged, 
transferred or assigned by this Mortgage without the consent of 
other parties whose consent has been withheld, or without subjecting 
any Mortgagee to a liability not otherwise contemplated by the 
provisions of this Mortgage, or which otherwise may not be, hereby 
lawfully and effectively granted, conveyed, mortgaged, transferred 
and assigned by the Mortgagor; and
    J. the property identified in Schedule ``C'' hereto.
    PROVIDED, HOWEVER, that (i) if, upon the occurrence of an Event 
of Default, any Mortgagee, or any receiver appointed pursuant to 
statutory provision or order of court, shall have entered into 
possession of all or substantially all of the Mortgaged Property, 
all the Excepted Property described or referred to in the foregoing 
Subdivisions A through H, inclusive, then owned or thereafter 
acquired by the Mortgagor shall immediately, and, in the case of any 
Excepted Property described or referred to in Subdivisions I through 
J, inclusive, upon demand of any Mortgagee or such receiver, become 
subject to the lien hereof to the extent permitted by law, and any 
Mortgagee or such receiver may, to the extent permitted by law, at 
the same time likewise take possession thereof, and (ii) whenever 
all Events of Default shall have been cured and the possession of 
all or substantially all of the Mortgaged Property shall have been 
restored to the Mortgagor, such Excepted Property shall again be 
excepted and excluded from the lien hereof to the extent and 
otherwise as hereinabove set forth.
    However, pursuant to Granting Clause Third, the Mortgagor may 
subject to the lien of this Mortgage any Excepted Property, 
whereupon the same shall cease to be Excepted Property.

HABENDUM

    TO HAVE AND TO HOLD all said property, rights, privileges and 
franchises of every kind and description, real, personal or mixed, 
hereby and hereafter (by supplemental mortgage or otherwise) 
granted, bargained, sold, aliened, remised, released, conveyed, 
assigned, transferred, mortgaged, encumbered, hypothecated, pledged, 
setover, confirmed, or subjected to a continuing security interest 
and lien as aforesaid, together with all the appurtenances thereto 
appertaining (said properties, rights, privileges and franchises, 
including any cash and securities hereafter deposited with any 
Mortgagee ((other than any such cash, if any, which is specifically 
stated herein not to be deemed part of the Mortgaged Property)), 
being herein collectively called the ``Mortgaged Property'') unto 
the Mortgagees and the respective assigns of the Mortgagees forever, 
to secure equally and ratably the payment of the principal of (and 
premium, if any) and interest on the Notes, according to their 
terms, without preference, priority or distinction as to interest or 
principal (except as otherwise specifically provided herein) or as 
to lien or otherwise of any Note over any other Note by reason of 
the priority in time of the execution, delivery or maturity thereof 
or of the assignment or negotiation thereof, or otherwise, and to 
secure the due performance of all of the covenants, agreements and 
provisions herein and in the Loan Agreements contained, and for the 
uses and purposes and upon the terms, conditions, provisos and 
agreements hereinafter expressed and declared.
    SUBJECT, HOWEVER, to Permitted Encumbrances (as defined in 
Section 1.01).

ARTICLE I

DEFINITIONS & OTHER PROVISIONS OF GENERAL APPLICATION

    Section 1.01. Definitions. In addition to the terms defined 
elsewhere in this Mortgage, the terms defined in this Article I 
shall have the meanings specified herein and under the UCC, unless 
the context clearly requires otherwise. The terms defined herein 
include the plural as well as the singular and the singular as well 
as the plural.
    Accounting Requirements shall mean the requirements of any 
system of accounts prescribed by RUS so long as the Government is 
the holder, insurer or guarantor of any Notes, or, in the absence 
thereof, the requirements of generally accepted accounting 
principles applicable to businesses similar to that of the 
Mortgagor.
    Additional Notes shall mean any Notes issued by the Mortgagor to 
the Government or any other lender pursuant to Article II of this 
Mortgage including any refunding, renewal, or substitute Notes which 
may from time to time be executed and delivered by the Mortgagor 
pursuant to the terms of Article II.
    Board shall mean either the Board of Directors or the Board of 
Trustees, as the case may be, of the Mortgagor.
    Business Day shall mean any day that the Government is open for 
business.
    Debt Service Coverage Ratio (``DSC'') shall mean the ratio 
determined as follows: for each calendar year add (i) Patronage 
Capital or Margins of the Mortgagor, (ii) Interest 

[[Page 36891]]
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; provided, however, that in the event that any 
Long-Term Debt (being any amount included in Total Long-Term Debt 
computed as provided above) has been refinanced during such year the 
payments of principal and interest required to be made during such 
year on account of such Long-Term Debt shall be based (in lieu of 
actual payments required to be made on such refinanced Debt) upon 
the larger of (i) an annualization of the payments required to be 
made with respect to the refinancing debt during the portion of such 
year such refinancing debt is outstanding or (ii) the payment of 
principal and interest required to be made during the following year 
on account of such refinancing debt.
    Depreciation and Amortization Expense shall mean an amount 
constituting the depreciation and amortization of the Mortgagor as 
computed pursuant to Accounting Requirements.
    Electric System shall mean, and shall be broadly construed to 
encompass and include, all of the Mortgagor's interests in all 
electric production, transmission, distribution, conservation, load 
management, general plant and other related facilities, equipment or 
property and in any mine, well, pipeline, plant, structure or other 
facility for the development, production, manufacture, storage, 
fabrication or processing of fossil, nuclear or other fuel of any 
kind or in any facility or rights with respect to the supply of 
water, in each case for use, in whole or in major part, in any of 
the Mortgagor's generating plants, now existing or hereafter 
acquired by lease, contract, purchase or otherwise or constructed by 
the Mortgagor, including any interest or participation of the 
Mortgagor in any such facilities or any rights to the output or 
capacity thereof, together with all additions, betterments, 
extensions and improvements to such Electric System or any part 
thereof hereafter made and together with all lands, easements and 
rights-of-way of the Mortgagor and all other works, property or 
structures of the Mortgagor and contract rights and other tangible 
and intangible assets of the Mortgagor used or useful in connection 
with or related to such Electric System, including without 
limitation a contract right or other contractual arrangement 
referred to in Granting Clause First, Subclause [(C)] but excluding 
any excepted property.
    Environmental Law and Environmental Laws shall mean all federal, 
state, and local laws, regulations, and requirements related to 
protection of human health or the environment, including but not 
limited to the Comprehensive Environmental Response, Compensation 
and Liability Act of 1980 (42 U.S.C. 9601 et seq.), the Resource 
Conservation and Recovery Act (42 U.S.C. 6901 et seq.), the Clean 
Water Act (33 U.S.C. 1251 et seq.) and the Clean Air Act (42 U.S.C. 
7401 et seq.), and any amendments and implementing regulations of 
such acts.
    Equity shall mean the total margins and equities and margins 
computed pursuant to Accounting Requirements, but excluding any 
Regulatory Created Assets.
    Event of Default shall have the meaning specified in Section 
[4.01] hereof.
    Excepted Property shall have the meaning stated in the Granting 
Clauses.
    Government shall mean the United States of America acting by and 
through the Administrator of RUS and shall include its successors 
and assigns.
    Government Notes shall mean the Original Notes, and any 
Additional Notes, issued by the Mortgagor to the Government, or 
guaranteed or insured as to payment by the Government.
    Independent shall mean when used with respect to any specified 
person or entity means such a person or entity who (1) is in fact 
independent, (2) does not have any direct financial interest or any 
material indirect financial interest in the Mortgagor or in any 
affiliate of the Mortgagor and (3) is not connected with the 
Mortgagor as an officer, employee, promoter, underwriter, trustee, 
partner, director or person performing similar functions.
    Interest Expense shall mean an amount constituting the interest 
expense of the Mortgagor as computed pursuant to Accounting 
Requirements.
    Lien shall mean any statutory or common law consensual or non-
consensual mortgage, pledge, security interest, encumbrance, lien, 
right of set off, claim or charge of any kind, including, without 
limitation, any conditional sale or other title retention 
transaction, any lease transaction in the nature thereof and any 
secured transaction under the UCC.
    Loan Agreement shall mean any agreement executed by and between 
the Mortgagor and the Government or any other lender in connection 
with the execution and delivery of any Notes secured hereby.
    Long-Term Debt shall mean any amount included in Total Long-Term 
Debt pursuant to Accounting Requirements.
    Long-Term Lease shall mean a lease having an unexpired term 
(taking into account terms of renewal at the option of the lessor, 
whether or not such lease has previously been renewed) of more than 
12 months.
    Margins shall mean the sum of amounts recorded as operating 
margins and non-operating margins as computed in accordance with 
Accounting Requirements.
    Maximum Debt Limit, if any, shall mean the amount more 
particularly described in Schedule ``A'' hereof.
    Mortgage shall mean this Restated Mortgage and Security 
Agreement, including any amendments or supplements thereto from time 
to time.
    Mortgaged Property shall have the meaning specified as stated in 
the Habendum to the Granting Clauses.
    MORTGAGEE or MORTGAGEES shall mean the Government, __________ 
{the supplemental lender}, __________ their successors and assigns 
as well as any and all other lenders pursuant to Article II of this 
Mortgage that enter into a supplemental mortgage in accordance with 
Section [2.04] of Article II hereof, their successors and assigns.
    Net Utility Plant shall mean the amount constituting the total 
utility plant of the Mortgagor less depreciation computed in 
accordance with Accounting Requirements.
    Note or Notes shall mean one or more of the Government Notes, 
and any other Notes which may, from time to time, be secured under 
this Mortgage.
    Noteholder or Noteholders shall mean one or more of the holders 
of Notes secured by this Mortgage; PROVIDED, however, that in the 
case of any Notes that have been guaranteed or insured as to payment 
by RUS, as to such Notes Noteholder or Noteholders shall mean RUS, 
exclusively, regardless of whether such notes are in the possession 
of RUS.
    Original Mortgage means the instrument(s) identified as such in 
Schedule ``A'' hereof.
    Original Notes shall mean the Notes listed on Schedule ``A'' 
hereto as such, such Notes being instruments evidencing outstanding 
indebtedness of the Mortgagor (i) to the Government (including 
indebtedness which has been issued by the Mortgagor to a third party 
and guaranteed or insured as to payment by the Government) and (ii) 
to each other Mortgagee on the date of this Mortgage.
    Outstanding Notes shall mean as of the date of determination, 
(i) all Notes theretofore issued, executed and delivered to any 
Mortgagee and (ii) any Notes guaranteed or insured as to payment by 
the Government, except (a) Notes referred to in clause (i) or (ii) 
for which the principal and interest have been fully paid and which 
have been canceled by the Noteholder, and (b) Notes the payment for 
which has been provided for pursuant to Section [5.03].
    Permitted Debt shall have the meaning specified in Section 
[3.08].
    Permitted Encumbrances shall mean:
    (1) as to the property specifically described in Granting Clause 
First, the restrictions, exceptions, reservations, conditions, 
limitations, interests and other matters which are set forth or 
referred to in such descriptions and each of which fits one or more 
of the clauses of this definition, PROVIDED, such matters do not in 
the aggregate materially detract from the value of the Mortgaged 
Property taken as a whole and do not materially impair the use of 
such property for the purposes for which it is held by the 
Mortgagor;
    (2) liens for taxes, assessments and other governmental charges 
which are not delinquent;
    (3) liens for taxes, assessments and other governmental charges 
already delinquent which are currently being contested in good faith 
by appropriate proceedings; PROVIDED the Mortgagor shall have set 
aside on its books adequate reserves with respect thereto;
    (4) mechanics', workmen's, repairmen's, materialmen's, 
warehousemen's and carriers' liens and other similar liens arising 
in the ordinary course of business for charges which are not 
delinquent, or which are being contested in good faith and have not 
proceeded to judgment; PROVIDED the 

[[Page 36892]]
Mortgagor shall have set aside on its books adequate reserves with 
respect thereto;
    (5) liens in respect of judgments or awards with respect to 
which the Mortgagor shall in good faith currently be prosecuting an 
appeal or proceedings for review and with respect to which the 
Mortgagor shall have secured a stay of execution pending such appeal 
or proceedings for review; PROVIDED the Mortgagor shall have set 
aside on its books adequate reserves with respect thereto;
    (6) easements and similar rights granted by the Mortgagor over 
or in respect of any Mortgaged Property, PROVIDED that in the 
opinion of the Board or a duly authorized officer of the Mortgagor 
such grant will not impair the usefulness of such property in the 
conduct of the Mortgagor's business and will not be prejudicial to 
the interests of the Mortgagees, and similar rights granted by any 
predecessor in title of the Mortgagor;
    (7) easements, leases, reservations or other rights of others in 
any property of the Mortgagor for streets, roads, bridges, pipes, 
pipe lines, railroads, electric transmission and distribution lines, 
telegraph and telephone lines, the removal of oil, gas, coal or 
other minerals and other similar purposes, flood rights, river 
control and development rights, sewage and drainage rights, 
restrictions against pollution and zoning laws and minor defects and 
irregularities in the record evidence of title, PROVIDED that such 
easements, leases, reservations, rights, restrictions, laws, defects 
and irregularities do not materially affect the marketability of 
title to such property and do not in the aggregate materially impair 
the use of the Mortgaged Property taken as a whole for the purposes 
for which it is held by the Mortgagor;
    (8) liens upon lands over which easements or rights of way are 
acquired by the Mortgagor for any of the purposes specified in 
Clause [(7)] of this definition, securing indebtedness neither 
created, assumed nor guaranteed by the Mortgagor nor on account of 
which it customarily pays interest, which liens do not materially 
impair the use of such easements or rights of way for the purposes 
for which they are held by the Mortgagor;
    (9) leases existing at the date of this instrument affecting 
property owned by the Mortgagor at said date which have been 
previously disclosed to the Mortgagees in writing and leases for a 
term of not more than two years (including any extensions or 
renewals) affecting property acquired by the Mortgagor after said 
date;
    (10) terminable or short term leases or permits for occupancy, 
which leases or permits expressly grant to the Mortgagor the right 
to terminate them at any time on not more than six months' notice 
and which occupancy does not interfere with the operation of the 
business of the Mortgagor;
    (11) any lien or privilege vested in any lessor, licensor or 
permittor for rent to become due or for other obligations or acts to 
be performed, the payment of which rent or performance of which 
other obligations or acts is required under leases, subleases, 
licenses or permits, so long as the payment of such rent or the 
performance of such other obligations or acts is not delinquent;
    (12) liens or privileges of any employees of the Mortgagor for 
salary or wages earned but not yet payable;
    (13) the burdens of any law or governmental regulation or permit 
requiring the Mortgagor to maintain certain facilities or perform 
certain acts as a condition of its occupancy of or interference with 
any public lands or any river or stream or navigable waters;
     (14) any irregularities in or deficiencies of title to any 
rights-of-way for pipe lines, telephone lines, telegraph lines, 
power lines or appurtenances thereto, or other improvements thereon, 
and to any real estate used or to be used primarily for right-of-way 
purposes, PROVIDED that in the opinion of counsel for the Mortgagor, 
the Mortgagor shall have obtained from the apparent owner of the 
lands or estates therein covered by any such right-of-way a 
sufficient right, by the terms of the instrument granting such 
right-of-way, to the use thereof for the construction, operation or 
maintenance of the lines, appurtenances or improvements for which 
the same are used or are to be used, or PROVIDED that in the opinion 
of counsel for the Mortgagor, the Mortgagor has power under eminent 
domain, or similar statutes, to remove such irregularities or 
deficiencies;
     (15) rights reserved to, or vested in, any municipality or 
governmental or other public authority to control or regulate any 
property of the Mortgagor, or to use such property in any manner, 
which rights do not materially impair the use of such property, for 
the purposes for which it is held by the Mortgagor;
     (16) any obligations or duties, affecting the property of the 
Mortgagor, to any municipality or governmental or other public 
authority with respect to any franchise, grant, license or permit;
     (17) any right which any municipal or governmental authority 
may have by virtue of any franchise, license, contract or statute to 
purchase, or designate a purchaser of or order the sale of, any 
property of the Mortgagor upon payment of cash or reasonable 
compensation therefor or to terminate any franchise, license or 
other rights or to regulate the property and business of the 
Mortgagor; PROVIDED, HOWEVER, that nothing in this clause 17 is 
intended to waive any claim or rights that the Government may 
otherwise have under Federal laws;
     (18) as to properties of other operating electric companies 
acquired after the date of this Mortgage by the Mortgagor as 
permitted by Section [3.10] hereof, reservations and other matters 
as to which such properties may be subject as more fully set forth 
in such Section;
     (19) any lien required by law or governmental regulations as a 
condition to the transaction of any business or the exercise of any 
privilege or license, or to enable the Mortgagor to maintain self-
insurance or to participate in any fund established to cover any 
insurance risks or in connection with workmen's compensation, 
unemployment insurance, old age pensions or other social security, 
or to share in the privileges or benefits required for companies 
participating in such arrangements; PROVIDED, HOWEVER, that nothing 
in this clause 19 is intended to waive any claim or rights that the 
Government may otherwise have under Federal laws;
     (20) liens arising out of any defeased mortgage or indenture of 
the Mortgagor;
     (21) the undivided interest of other owners, and liens on such 
undivided interests, in property owned jointly with the Mortgagor as 
well as the rights of such owners to such property pursuant to the 
ownership contracts;
     (22) any lien or privilege vested in any lessor, licensor or 
permittor for rent to become due or for other obligations or acts to 
be performed, the payment of which rent or the performance of which 
other obligations or acts is required under leases, subleases, 
licenses or permits, so long as the payment of such rent or the 
performance of such other obligations or acts is not delinquent;
     (23) purchase money mortgages permitted by Section [3.08]; and
     (24) the Original Mortgage.
    Property Additions shall mean Utility System property as to 
which the Mortgagor shall provide Title Evidence and which shall be 
(or, if retired, shall have been) subject to the lien of this 
Mortgage, which shall be properly chargeable to the Mortgagor's 
utility plant accounts under Accounting Requirements (including 
property constructed or acquired to replace retired property 
credited to such accounts) and which shall be:
    (1) acquired (including acquisition by merger, consolidation, 
conveyance or transfer) or constructed by the Mortgagor after the 
date hereof, including property in the process of construction, 
insofar as not reflected on the books of the Mortgagor with respect 
to periods on or prior to the date hereof, and
    (2) used or useful in the utility business of the Mortgagor 
conducted with the properties described in the Granting Clauses of 
this Mortgage, even though separate from and not physically 
connected with such properties.
    ``Property Additions'' shall also include:
    (3) easements and rights-of-way that are useful for the conduct 
of the utility business of the Mortgagor, and
    (4) property located or constructed on, over or under public 
highways, rivers or other public property if the Mortgagor has the 
lawful right under permits, licenses or franchises granted by a 
governmental body having jurisdiction in the premises or by the law 
of the State in which such property is located to maintain and 
operate such property for an unlimited, indeterminate or indefinite 
period or for the period, if any, specified in such permit, license 
or franchise or law and to remove such property at the expiration of 
the period covered by such permit, license or franchise or law, or 
if the terms of such permit, license, franchise or law require any 
public authority having the right to take over such property to pay 
fair consideration therefor.
    ``Property Additions'' shall NOT include:
     (a) good will, going concern value, contracts, agreements, 
franchises, licenses or permits, whether acquired as such, separate 
and distinct from the property operated in connection therewith, or 
acquired as an incident thereto, or

[[Page 36893]]

    (b) any shares of stock or indebtedness or certificates or 
evidences of interest therein or other securities, or
    (c) any plant or system or other property in which the Mortgagor 
shall acquire only a leasehold interest, or any betterments, 
extensions, improvements or additions (other than movable physical 
personal property which the Mortgagor has the right to remove), of, 
upon or to any plant or system or other property in which the 
Mortgagor shall own only a leasehold interest unless (i) the term of 
the leasehold interest in the property to which such betterment, 
extension, improvement or addition relates shall extend for at least 
75% of the useful life of such betterment, extension, improvement or 
addition and (ii) the lessor shall have agreed to give the Mortgagee 
reasonable notice and opportunity to cure any default by the 
Mortgagor under such lease and not to disturb any Mortgagee's 
possession of such leasehold estate in the event any Mortgagee 
succeeds to the Mortgagor's interest in such lease upon any 
Mortgagee's exercise of any remedies under this Mortgage so long as 
there is no default in the performance of the tenant's covenants 
contained therein, or
    (d) any property of the Mortgagor subject to the Permitted 
Encumbrance described in clause [(23)] of the definition thereof.
    Prudent Utility Practice shall mean any of the practices, 
methods and acts which, in the exercise of reasonable judgment, in 
light of the facts, including, but not limited to, the practices, 
methods and acts engaged in or approved by a significant portion of 
the electric utility industry prior thereto, known at the time the 
decision was made, would have been expected to accomplish the 
desired result consistent with cost-effectiveness, reliability, 
safety and expedition. It is recognized that Prudent Utility 
Practice is not intended to be limited to optimum practice, method 
or act to the exclusion of all others, but rather is a spectrum of 
possible practices, methods or acts which could have been expected 
to accomplish the desired result at the lowest reasonable cost 
consistent with cost-effectiveness, reliability, safety and 
expedition.
    REA shall mean the Rural Electrification Administration of the 
United States Department of Agriculture, the predecessor of RUS.
    Regulatory Created Assets shall mean the sum of any amounts 
properly recordable as unrecovered plant and regulatory study costs 
or as other regulatory assets, pursuant to Accounting Requirements.
    Restricted Rentals shall mean all rentals required to be paid 
under finance leases and charged to income, exclusive of any amounts 
paid under any such lease (whether or not designated therein as 
rental or additional rental) for maintenance or repairs, insurance, 
taxes, assessments, water rates or similar charges. For the purpose 
of this definition the term ``finance lease'' shall mean any lease 
having a rental term (including the term for which such lease may be 
renewed or extended at the option of the lessee) in excess of 3 
years and covering property having an initial cost in excess of 
$250,000 other than aircraft, ships, barges, automobiles, trucks, 
trailers, rolling stock and vehicles; office, garage and warehouse 
space; office equipment and computers.
    RUS shall mean the Rural Utilities Service, an agency of the 
United States Department of Agriculture, or if at any time after the 
execution of this Mortgage RUS is not existing and performing the 
duties of administering a program of rural electrification as 
currently assigned to it, then the entity performing such duties at 
such time.
    Security Interest shall mean any assignment, transfer, mortgage, 
hypothecation or pledge.
    Subordinated Indebtedness shall mean secured indebtedness of the 
Mortgagor, payment of which shall be subordinated to the prior 
payment of the Notes in accordance with the provisions of Section 
[3.08] hereof by subordination agreement in form and substance 
satisfactory to each Mortgagee which approval will not be 
unreasonably withheld.
    Supplemental Mortgage shall mean an instrument of the type 
described in Section [2.04].
    Times Interest Earned Ratio (``TIER'') shall mean the ratio 
determined as follows: for each calendar year: add (i) patronage 
capital or margins of the Mortgagor, (ii) Interest Expense on Total 
Long-Term Debt of the Mortgagor and (iii) taxes paid, if any, based 
upon income during the year and divide the total so obtained by 
Interest Expense on Total Long-Term Debt of the Mortgagor, provided, 
however, that in computing Interest Expense on Total Long-Term Debt, 
there shall be added, to the extent not otherwise included, an 
amount equal to 33\1/3\% of the excess of Restricted Rentals paid by 
the Mortgagor over 2% of the Mortgagor's Equity.
    Title Evidence shall mean with respect to any real property:
    (1) an opinion of counsel to the effect that the Mortgagor has 
title, whether fairly deducible of record or based upon prescriptive 
rights (or, as to personal property, based on such evidence as 
counsel shall determine to be sufficient), as in the opinion of 
counsel is satisfactory for the use thereof in connection with the 
operations of the Mortgagor, and counsel in giving such opinion may 
disregard any irregularity or deficiency in the record evidence of 
title which, in the opinion of such counsel, can be cured by 
proceedings within the power of the Mortgagor or does not 
substantially impair the usefulness of such property for the purpose 
of the Mortgagor and may base such opinion upon counsel's own 
investigation or upon affidavits, certificates, abstracts of title, 
statements or investigations made by persons in whom such counsel 
has confidence or upon examination of a certificate or guaranty of 
title or policy of title insurance in which counsel has confidence; 
or
    (2) a mortgagee's policy of title insurance in the amount of the 
cost to the Mortgagor of the land included in Property Additions, as 
such cost is determined by the Mortgagor in accordance with the 
Accounting Requirements, issued in favor of the Mortgagees by an 
entity authorized to insure title in the states where the subject 
property is located, showing the Mortgagor as the owner of the 
subject property and insuring the lien of this Mortgage; and with 
respect to any personal property a certificate of the general manage 
or other duly authorized officer that the Mortgagor lawfully owns 
and is possessed of such property.
    Total Assets shall mean an amount constituting total assets of 
the Mortgagor as computed pursuant to Accounting Requirements, but 
excluding any Regulatory Created Assets.
    Total Long-Term Debt shall mean the total outstanding long-term 
debt of the Mortgagor as computed pursuant to Accounting 
Requirements.
    Total Utility Plant shall mean the total of all property 
properly recorded in the utility plant accounts of the Mortgagor, 
pursuant to Accounting Requirements.
    Uniform Commercial Code or UCC shall mean the UCC of the state 
referred to in Section [1.04], and if Mortgaged Property is located 
in a state other than that state, then as to such Mortgaged Property 
UCC refers to the UCC in effect in the state where such property is 
located.
    Utility System shall mean the Electric System and all of the 
Mortgagor's interest in community infrastructure located 
substantially within its electric service territory, namely water 
and waste systems, solid waste disposal facilities, 
telecommunications and other electronic communications systems, and 
natural gas distribution systems.
    SECTION 1.02. General Rules of Construction:
    a. Accounting terms not referred to above are used in this 
Mortgage in their ordinary sense and any computations relating to 
such terms shall be computed in accordance with the Accounting 
Requirements.
    b. Any reference to ``directors'' or ``board of directors'' 
shall be deemed to mean ``trustees'' or ``board of trustees,'' as 
the case may be.
    SECTION 1.03. Special Rules of Construction if RUS is a 
Mortgagee: During any period that RUS is a Mortgagee, the following 
additional provisions shall apply:
    a. In the case of any Notes that have been guaranteed or insured 
as to payment by RUS, as to such Notes RUS shall be considered to be 
the Noteholder, exclusively, regardless of whether such Notes are in 
the possession of RUS.
    b. In the case of any prior approval rights conferred upon RUS 
by Federal statutes, including (without limitation) Section 7 of the 
Rural Electrification Act of 1936, as amended, with respect to the 
sale or disposition of property, rights, or franchises of the 
Mortgagor, all such statutory rights are reserved except to the 
extent that they are expressly modified or waived in this Mortgage.
    SECTION 1.04. Governing Law: This Mortgage shall be construed in 
and governed by Federal law to the extent applicable, and otherwise 
by the laws of the State of ________.
    SECTION 1.05 Notices: All demands, notices, reports, approvals, 
designations, or directions required or permitted to be given 
hereunder shall be in writing and shall be deemed to be properly 
given if sent by 

[[Page 36894]]
registered or certified mail, postage prepaid, or delivered by hand, or 
sent by facsimile transmission, receipt confirmed, addressed to the 
proper party or parties at the following address:
    As to the Mortgagor:
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
    As to the Mortgagee:

    Rural Utilities Service,
    United States Department of Agriculture,
    Washington, DC 20250-1500
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------

and as to any other person, firm, corporation or governmental body 
or agency having an interest herein by reason of being a Mortgagee, 
at the last address designated by such person, firm, corporation, 
governmental body or agency to the Mortgagor and the other 
Mortgagees. Any such party may from time to time designate to each 
other a new address to which demands, notices, reports, approvals, 
designations or directions may be addressed, and from and after any 
such designation the address designated shall be deemed to be the 
address of such party in lieu of the address given above.

ARTICLE II

ADDITIONAL NOTES

    SECTION 2.01. Additional Notes: (a) Without the prior consent of 
any Mortgagee or any Noteholder, the Mortgagor may issue Additional 
Notes to the Government or to another lender or lenders for the 
purpose of acquiring, procuring or constructing new or replacement 
Eligible Property Additions which Notes will thereupon be secured 
equally and ratably with the Notes if each of the following 
requirements are satisfied:
    (1) As evidenced by a certificate of an Independent certified 
public accountant sent to each Mortgagee on or before the first 
advance of proceeds from such Additional Notes:
    (i) The Mortgagor shall have achieved for each of the two 
calendar years immediately preceding the issuance of such Additional 
Notes, a TIER of not less than 1.5 and a DSC of not less than 1.25;
    (ii) After taking into account the effect of such Additional 
Notes on the Total Long Term Debt of the Mortgagor, the ratio of the 
Mortgagor's Net Utility Plant to its Total Long Term Debt shall be 
greater than or equal to 1.0 on a pro forma basis;
    (iii) After taking into account the effect of such Additional 
Notes on the Total Assets of such Mortgagor, the Mortgagor shall 
have Equity greater than or equal to 27 percent of Total Assets on a 
pro forma basis; and
    (iv) The sum of the aggregate principal amount of such 
Additional Notes (if any) that are not related to the Electric 
System if added to the aggregate outstanding principal amount of all 
the existing Notes (if any) that are not related to the Electric 
System will not exceed 30% of the Mortgagor's Equity on a pro forma 
basis.
    (2) No Event of Default has occurred and is continuing 
hereunder, or any event which with the giving of notice or lapse of 
time or both would become an Event of Default has occurred and is 
continuing.
    (3) The Eligible Property Additions being constructed, acquired, 
procured or replaced are part of the Mortgagor's Utility System.
    (4) The Borrower's general manager or other duly authorized 
officer shall send to each of the Mortgagees a certificate in 
substantially the form attached hereto as [Exhibit A] on or before 
the date of the first advance of proceeds from such Additional 
Notes.
    (b) For purposes of this section:
    (1) ``Eligible Property Additions'' shall mean Property 
Additions acquired or whose construction was completed not more than 
5 years prior to the issuance of the Additional Notes and Property 
Additions acquired or whose construction is started and/or completed 
not more than 4 years after issuance of the Additional Notes, but 
shall exclude any Property Additions financed by any other debt 
secured under the Mortgage at the time additional Notes are issued;
    (2) Notes are considered to be ``issued'' on, and the date of 
``issuance'' shall be, the date on which they are executed by the 
Mortgagor; and
    (3) For purposes of calculating the pro forma ratios in 
subparagraphs (a)(1)(ii) and (iii), the values for Total Long Term 
Debt and Total Assets before debt issuance and the values for Equity 
and Net Utility Plant shall be the most recently available end-of-
month figures preceding the issuance of the Additional Notes, but in 
no case for a month ending more than 180 days preceding such 
issuance.
    SECTION 2.02. Refunding or Refinancing Notes: The Mortgagor 
shall also have the right without the consent of any Mortgagee or 
any Noteholder to issue Additional Notes for the purpose of 
refunding or refinancing any Notes so long as the total amount of 
outstanding indebtedness evidenced by such Additional Note or Notes 
is not greater than 105% of the then outstanding principal balance 
of the Note or Notes being refunded or refinanced. PROVIDED, 
HOWEVER, that the Mortgagor may not exercise its rights under this 
Section if an Event of Default has occurred and is continuing, or 
any event which with the giving of notice or lapse of time or both 
would become an Event of Default has occurred and is continuing. On 
or before the first advance of proceeds from Notes issued under this 
section, the Mortgagor shall notify each Mortgagee of the refunding 
or refinancing. Additional Notes issued pursuant to this Section 
[2.02] will thereupon be secured equally and ratably with the Notes.
    SECTION 2.03. Other Additional Notes. With the prior written 
consent of each Mortgagee, the Mortgagor may issue Additional Notes 
to the Government or any lender or lenders, which Notes will 
thereupon be secured equally and ratably with Notes without regard 
to whether any of the requirements of Sections [2.01] or [2.02] are 
satisfied.
    SECTION 2.04. Additional Lenders Entitled to the Benefit of This 
Mortgage: Without the prior consent of any Mortgagee or any 
Noteholder, each new lender designated as a payee in any Additional 
Notes issued by the Mortgagor pursuant to Section [2.01] or [2.02] 
of this Mortgage shall become a Mortgagee hereunder upon the 
execution and delivery by the Mortgagor and such lender of a 
supplemental mortgage hereto designating such lender as a Mortgagee 
hereunder. Such new lender shall be entitled to the benefits of this 
Mortgage without further act or deed. Each Mortgagee and each person 
or entity that becomes a lender pursuant to Section [2.01] or [2.02] 
of this Mortgage shall, upon the request of the Mortgagor to do so, 
execute and deliver a supplement to this Mortgage in substantially 
the form set forth in Section [2.05] to evidence the addition of 
such new lender as an additional Mortgagee entitled to the benefits 
of this Mortgage. The failure of any existing Mortgagee to enter 
into such supplemental mortgage shall not deprive the new lender of 
its rights under this Mortgage; provided that such additional 
indebtedness otherwise conforms in all respects with the 
requirements for issuing Additional Notes under this Mortgage.
    SECTION 2.05. Form of Supplemental Mortgage: (a) The form of 
supplemental mortgage referred to in Section [2.04] is attached to 
this Mortgage as Exhibit B and hereby incorporated by reference as 
if set forth in full at this point.
    (b) In the event that the Mortgagor subsequently issues 
Additional Notes pursuant to Sections [2.01] or [2.02] to any 
existing Mortgagee and that Mortgagee desires further assurance that 
such Additional Notes will be secured by the lien of the Mortgage, 
an instrument substantially in the form of the supplemental mortgage 
attached as Exhibit B may be used.
    (c) In the event that the Mortgagor issues Additional Notes 
pursuant to Section [2.03] to either an existing Mortgagee or a new 
lender, in either case with the prior written consent of each 
Mortgagee, then an instrument substantially in the form of the 
supplemental mortgage attached as Exhibit B may also be used.
ARTICLE III--PARTICULAR COVENANTS OF THE MORTGAGOR

    SECTION 3.01. Payment of Debt Service on Notes: The Mortgagor 
will duly and punctually pay the principal, premium, if any, and 
interest on the Notes in accordance with the terms of the Notes, the 
Loan Contracts, this Mortgage and any Supplemental Mortgage 
authorizing such Notes.
    SECTION 3.02. Warranty of Title: (a) At the time of the 
execution and delivery of this instrument, the Mortgagor has good 
and marketable title in fee simple to the real property specifically 
described in Granting Clause First as owned in fee and good and 
marketable title to the interests in real property specifically 
described in Granting Clause [First], subject to no mortgage, lien, 
charge or encumbrance except as stated therein, and has full power 
and lawful authority to grant, bargain, sell, alien, remise, 
release, convey, assign, transfer, encumber, mortgage, pledge, set 
over and confirm said real property and interests in real property 
in the manner and form aforesaid.
    (b) At the time of the execution and delivery of this 
instrument, the Mortgagor lawfully owns and is possessed of the 

[[Page 36895]]
personal property specifically described in Granting Clauses [First and 
Second], subject to no mortgage, lien, charge or encumbrance except 
as stated therein, and has full power and lawful authority to 
mortgage, assign, transfer, deliver, pledge and grant a continuing 
security interest in said property and, including any proceeds 
thereof, in the manner and form aforesaid.
    (c) The Mortgagor hereby does and will forever warrant and 
defend the title to the property specifically described in Granting 
Clause First against the claims and demands of all persons 
whomsoever, except Permitted Encumbrances.
    SECTION 3.03. After-Acquired Property; Further Assurances; 
Recording: (a) All property of every kind, other than Excepted 
Property, acquired by the Mortgagor after the date hereof, shall, 
immediately upon the acquisition thereof by the Mortgagor, and 
without any further mortgage, conveyance or assignment, become 
subject to the lien of this Mortgage; SUBJECT, HOWEVER, to Permitted 
Encumbrances and the exceptions, if any, to which all of the 
Mortgagees consent. Nevertheless, the Mortgagor will do, execute, 
acknowledge and deliver all and every such further acts, 
conveyances, mortgages, financing statements and assurances as any 
Mortgagee shall require for accomplishing the purposes of this 
Mortgage.
    (b) The Mortgagor will cause this Mortgage and all Supplemental 
Mortgages and other instruments of further assurance, including all 
financing statements covering security interests in personal 
property, to be promptly recorded, registered and filed, and will 
execute and file such financing statements and cause to be issued 
and filed such continuation statements, all in such manner and in 
such places as may be required by law fully to preserve and protect 
the rights of all of the Mortgagees and Noteholders hereunder to all 
property comprising the Mortgaged Property. The Mortgagor will 
furnish to each Mortgagee:
    (1) promptly after the execution and delivery of this instrument 
and of each Supplemental Mortgage or other instrument of further 
assurance, an Opinion of Counsel stating that, in the opinion of 
such Counsel, this instrument and all such Supplemental Mortgages 
and other instruments of further assurance have been properly 
recorded, registered and filed to the extent necessary to make 
effective the lien intended to be created by this Mortgage, and 
reciting the details of such action or referring to prior Opinions 
of Counsel in which such details are given, and stating that all 
financing statements and continuation statements have been executed 
and filed that are necessary fully to preserve and protect the 
rights of all of the Mortgagees and Noteholders hereunder, or 
stating that, in the opinion of such Counsel, no such action is 
necessary to make the lien effective; and
    (2) within 30 days after __________ in each year beginning with 
the year ____, an Opinion of Counsel, dated as of such date, either 
stating that, in the opinion of such Counsel, such action has been 
taken with respect to the recording, registering, filing, re-
recording, re-registering and re-filing of this instrument and of 
all Supplemental Mortgages, financing statements, continuation 
statements or other instruments of further assurances as is 
necessary to maintain the lien of this Mortgage (including the lien 
on any property acquired by the Mortgagor after the execution and 
delivery of this instrument and owned by the Mortgagor at the end of 
preceding calendar year) and reciting the details of such action or 
referring to prior Opinions of Counsel in which such details are 
given, and stating that all financing statements and continuation 
statements have been executed and filed that are necessary to fully 
preserve and protect the rights of all of the Mortgagees and 
Noteholders hereunder, or stating that, in the opinion of such 
Counsel, no such action is necessary to maintain such lien.
    SECTION 3.04. Environmental Requirements and Indemnity: (a) The 
Mortgagor shall, with respect to all facilities which may be part of 
the Mortgaged Property, comply with all Environmental Laws.
    (b) The Mortgagor shall defend, indemnify, and hold harmless 
each Mortgagee, its successors and assigns, from and against any and 
all liabilities, losses, damages, costs, expenses (including but not 
limited to reasonable attorneys' fees and expenses), causes of 
actions, administrative proceedings, suits, claims, demands, or 
judgments of any nature arising out of or in connection with any 
matter related to the Mortgage Property and any Environmental Law, 
including but not limited to:
    (1) the past, present, or future presence of any hazardous 
substance, contaminant, pollutant, or hazardous waste on or related 
to the Mortgaged Property;
    (2) any failure at any time by the undersigned to comply with 
the terms of any order related to the Mortgaged Property and issued 
by any federal, state, or municipal department or agency (other than 
RUS) exercising its authority to enforce any Environmental Law; and
    (3) any lien or claim imposed under any Environmental Law 
related to clause (1).
    (c) Within 10 (ten) business days after receiving knowledge of 
any liability, losses, damages, costs, expenses (including but not 
limited to reasonable attorneys' fees and expenses), cause of 
action, administrative proceeding, suit, claim, demand, judgment, 
lien, reportable event including but not limited to the release of a 
hazardous substance, or potential or actual violation or non-
compliance arising out of or in connection with the Mortgaged 
Property and any Environmental Law, the Mortgagor shall provide each 
Mortgagee with written notice of such matter. With respect to any 
matter upon which it has provided such notice, the Mortgagor shall 
immediately take any and all appropriate actions to remedy, cure, 
defend, or otherwise affirmatively respond to the matter.
    SECTION 3.05. Payment of Taxes: The Mortgagor will pay or cause 
to be paid as they become due and payable all taxes, assessments and 
other governmental charges lawfully levied or assessed or imposed 
upon the Mortgaged Property or any part thereof or upon any income 
therefrom, and also (to the extent that such payment will not be 
contrary to any applicable laws) all taxes, assessments and other 
governmental charges lawfully levied, assessed or imposed upon the 
lien or interest of the Noteholders or of the Mortgagees in the 
Mortgaged Property, so that (to the extent aforesaid) the lien of 
this Mortgage shall at all times be wholly preserved at the cost of 
the Mortgagor and without expense to the Mortgagees or the 
Noteholders; PROVIDED, HOWEVER, that the Mortgagor shall not be 
required to pay and discharge or cause to be paid and discharged any 
such tax, assessment or governmental charge to the extent that the 
amount, applicability or validity thereof shall currently be 
contested in good faith by appropriate proceedings and the Mortgagor 
shall have established and shall maintain adequate reserves on its 
books for the payment of the same.
    SECTION 3.06. Authority to Execute and Deliver Notes, Loan 
Agreements and Mortgage; All Action Taken; Enforceable Obligations: 
The Mortgagor is authorized under its articles of incorporation and 
bylaws [or code of regulations] and all applicable laws and by 
corporate action to execute and deliver the Notes, any Additional 
Notes, the Loan Agreements and this Mortgage. The Notes, the Loan 
Agreements and this Mortgage are, and any Additional Notes and Loan 
Agreements when executed and delivered will be, the valid and 
enforceable obligations of the Mortgagor in accordance with their 
respective terms.
    SECTION 3.07. Restrictions on Further Encumbrances on Property: 
Except to secure Additional Notes, the Mortgagor will not, without 
the prior written consent of each Mortgagee, create or incur or 
suffer or permit to be created or incurred or to exist any Lien, 
charge, assignment, pledge, mortgage on any of the Mortgaged 
Property inferior to, prior to, or on a parity with the Lien of this 
Mortgage except for the Permitted Encumbrances. Subject to the 
provisions of Section [3.08], or unless approved by each of the 
Mortgagees, the Mortgagor will purchase all materials, equipment and 
replacements to be incorporated in or used in connection with the 
Mortgaged Property outright and not subject to any conditional sales 
agreement, chattel mortgage, bailment, lease or other agreement 
reserving to the seller any right, title or Lien.
    SECTION 3.08. Restrictions On Additional Permitted Debt: The 
Mortgagor shall not incur, assume, guarantee or otherwise become 
liable in respect of any debt for borrowed money and Restricted 
Rentals (including Subordinated Debt) other than the following: 
(``Permitted Debt'')
    (1) Additional Notes issued in compliance with Article II 
hereof;
    (2) Purchase money indebtedness in non-Utility System property, 
in an amount not exceeding 10% of Net Utility Plant;
    (3) Restricted Rentals in an amount not to exceed 5% of Equity 
during any 12 consecutive calendar month period;
    (4) Unsecured lease obligations incurred in the ordinary course 
of business except Restricted Rentals;
    (5) Debt represented by dividends declared but not paid; and
    (6) Subordinated Indebtedness approved by each Mortgagee. 

[[Page 36896]]

    PROVIDED, However, that the Mortgagor may incur Permitted Debt 
without the consent of the Mortgagee only so long as there exists no 
Event of Default hereunder and there has been no continuing 
occurrence which with the passage of time and giving of notice could 
become an Event of Default hereunder.
    PROVIDED, FURTHER, by executing this Mortgage any consent of RUS 
that the Mortgagor would otherwise be required to obtain under this 
Section is hereby deemed to be given or waived by RUS by operation 
of law to the extent, but only to the extent, that to impose such a 
requirement of RUS consent would clearly violate existing federal 
laws or government regulations.
    SECTION 3.09. Preservation of Corporate Existence and 
Franchises: The Mortgagor will, so long as any Outstanding Notes 
exist, take or cause to be taken all such action as from time to 
time may be necessary to preserve its corporate existence and to 
preserve and renew all franchises, rights of way, easements, 
permits, and licenses now or hereafter to be granted or upon it 
conferred the loss of which would have a material adverse affect on 
the Mortgagor's financial condition or business. The Mortgagor will 
comply with all laws, ordinances, regulations, orders, decrees and 
other legal requirements applicable to it or its property the 
violation of which could have a material adverse affect on the 
Mortgagor's financial condition or business.
    SECTION 3.10. Limitations on Consolidations and Mergers: The 
Mortgagor shall not, without the prior written approval of each 
Mortgagee, consolidate or merge with any other corporation or convey 
or transfer the Mortgaged Property substantially as an entirety 
unless: (1) such consolidation, merger, conveyance or transfer shall 
be on such terms as shall fully preserve the lien and security 
hereof and the rights and powers of the Mortgagees hereunder; (2) 
the entity formed by such consolidation or with which the Mortgagor 
is merged or the corporation which acquires by conveyance or 
transfer the Mortgaged Property substantially as an entirety shall 
execute and deliver to the Mortgagees a mortgage supplemental hereto 
in recordable form and containing an assumption by such successor 
entity of the due and punctual payment of the principal of and 
interest on all of the Outstanding Notes and the performance and 
observance of every covenant and condition of this Mortgage; (3) 
immediately after giving effect to such transaction, no default 
hereunder shall have occurred and be continuing; (4) the Mortgagor 
shall have delivered to the Mortgagees a certificate of its general 
manager or other officer, 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 subsection and that all conditions precedent herein 
provided for relating to such transaction have been complied with; 
(5) the Mortgagor shall have delivered to the Mortgagees an opinion 
of counsel in form and substance satisfactory to each of the 
Mortgagees; and (6) the entity formed by such consolidation or with 
which the Mortgagor is merged or the corporation which acquires by 
conveyance or transfer the Mortgaged Property substantially as an 
entirety shall be an entity--(A) having Equity equal to at least 27% 
of its Total Assets on a pro forma basis after giving effect to such 
transaction, (B) having a pro forma TIER of not less than 1.50 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. Upon 
any consolidation or merger or any conveyance or transfer of the 
Mortgaged Property substantially as an entirety in accordance with 
this subsection, the successor entity formed by such consolidation 
or with which the Mortgagor is merged or to which such conveyance or 
transfer is made shall succeed to, and be substituted for, and may 
exercise every right and power of, the Mortgagor under this Mortgage 
with the same effect as if such successor entity had been named as 
the Mortgagor herein.
    SECTION 3.11. Limitations on Transfers of Property: The 
Mortgagor may not, except as provided in [Section 3.10] above, 
without the prior written approval of each Mortgagee, sell, lease or 
transfer any Mortgaged Property to any other person or entity 
(including any subsidiary or affiliate of the Mortgagor), unless (1) 
there exists no Event of Default or occurrence which with the 
passing of time and the giving of notice would be an Event of 
Default, (2) fair market value is obtained for such property, (3) 
the aggregate value of assets so sold, leased or transferred in any 
12-month period is less than 10% of Net Utility Plant, and (4) the 
proceeds of such sale, lease or transfer, less ordinary and 
reasonable expenses incident to such transaction, are immediately 
(i) applied as a prepayment of all Notes equally and ratably, (ii) 
in the case of dispositions of equipment, materials or scrap, 
applied to the purchase of other property useful in the Mortgagor's 
utility business, not necessarily of the same kind as the property 
disposed of, which shall forthwith become subject to the Lien of the 
Mortgage, or (iii) applied to the acquisition or construction of 
utility plant.
    SECTION 3.12. Maintenance of Mortgaged Property: (a) So long as 
the Mortgagor holds title to the Mortgaged Property, the Mortgagor 
will at all times maintain and preserve the Mortgaged Property which 
is used or useful in the Mortgagor's business and each and every 
part and parcel thereof in good repair, working order and condition, 
ordinary wear and tear and acts of God excepted, and in compliance 
with Prudent Utility Practice and in compliance with all applicable 
laws, regulations and orders, and will from time to time make all 
needed and proper repairs, renewals and replacements, and useful and 
proper alterations, additions, betterments and improvements, and 
will, subject to contingencies beyond its reasonable control, at all 
times use all reasonable diligence to furnish the consumers served 
by it through the Mortgaged Property, or any part thereof, with an 
adequate supply of electric power and energy. If any substantial 
part of the Mortgaged Property is leased by the Mortgagor to any 
other party, the lease agreement between the Mortgagor and the 
lessee shall obligate the lessee to comply with the provisions of 
subsections (a) and (b) of this Section in respect of the leased 
facilities and to permit the Mortgagor to operate the leased 
facilities in the event of any failure by the lessee to so comply.
    (b) If in the sole judgement of any Mortgagee, the Mortgaged 
Property is not being maintained and repaired in accordance with 
paragraph (a) of this section, such Mortgagee may send to the 
Mortgagor a written report of needed improvements and the Mortgagor 
will upon receipt of such written report promptly undertake to 
accomplish such improvements.
    (c) The Mortgagor further agrees that upon reasonable written 
request of any Mortgagee, which request together with the requests 
of any other Mortgagees shall be made no more frequently than once 
every three years, the Mortgagor will supply promptly to each 
Mortgagee a certification (hereinafter called the ``Engineer's 
Certification''), in form satisfactory to the requestor, prepared by 
a professional engineer, who shall be satisfactory to the 
Mortgagees, as to the condition of the Mortgaged Property. If in the 
sole judgment of any Mortgagee the Engineer's Certification 
discloses the need for improvements to the condition of the 
Mortgaged Property or any other operations of the Mortgagor, such 
Mortgagee may send to the Mortgagor a written report of such 
improvements and the Mortgagor will upon receipt of such written 
report promptly undertake to accomplish such of these improvements 
as are required by such Mortgagee.
    SECTION 3.13. Insurance; Restoration of Damaged Mortgaged 
Property: (a) The Mortgagor will take out, as the respective risks 
are incurred, and maintain the classes and amounts of insurance in 
conformance with generally accepted utility industry standards for 
such classes and amounts of coverages of utilities of the size and 
character of the Mortgagor and consistent with Prudent Utility 
Practice.
    (b) The foregoing insurance coverage shall be obtained by means 
of bond and policy forms approved by regulatory authorities having 
jurisdiction, and, with respect to insurance upon any part of the 
Mortgaged Property, shall provide that the insurance shall be 
payable to the Mortgagees as their interests may appear by means of 
the standard mortgagee clause without contribution. Each policy or 
other contract for such insurance shall contain an agreement by the 
insurer that, notwithstanding any right of cancellation reserved to 
such insurer, such policy or contract shall continue in force for at 
least 30 days after written notice to each Mortgagee of 
cancellation.
    (c) In the event of damage to or the destruction or loss of any 
portion of the Mortgaged Property which is used or useful in the 
Mortgagor's business and which shall be covered by insurance, unless 
each Mortgagee shall otherwise agree, the Mortgagor shall replace or 
restore such damaged, destroyed or lost portion so that such 
Mortgaged Property shall be in substantially the same condition as 
it was in prior to such damage, destruction or loss, and 

[[Page 36897]]
shall apply the proceeds of the insurance for that purpose. The 
Mortgagor shall replace the lost portion of such Mortgaged Property 
or shall commence such restoration promptly after such damage, 
destruction or loss shall have occurred and shall complete such 
replacement or restoration as expeditiously as practicable, and 
shall pay or cause to be paid out of the proceeds of such insurance 
all costs and expenses in connection therewith.
    (d) Sums recovered under any policy or fidelity bond by the 
Mortgagor for a loss of funds advanced under the Notes or recovered 
by any Mortgagee or any Noteholder for any loss under such policy or 
bond shall, unless applied as provided in the preceding paragraph, 
be used to finance construction of utility plant secured or to be 
secured by this Mortgage, or unless otherwise directed by the 
Mortgagees, be applied to the prepayment of the Notes pro rata 
according to the unpaid principal amounts thereof (such prepayments 
to be applied to such Notes and installments thereof as may be 
designated by the respective Mortgagee at the time of any such 
prepayment), or be used to construct or acquire utility plant which 
will become part of the Mortgaged Property. At the request of any 
Mortgagee, the Mortgagor shall exercise such rights and remedies 
which they may have under such policy or fidelity bond and which may 
be designated by such Mortgagee, and the Mortgagor hereby 
irrevocably appoints each Mortgagee as its agent to exercise such 
rights and remedies under such policy or bond as such Mortgagee may 
choose, and the Mortgagor shall pay all costs and reasonable 
expenses incurred by the Mortgagee in connection with such exercise.
    SECTION 3.14. Mortgagee Right to Expend Money to Protect 
Mortgaged Property: The Mortgagor agrees that any Mortgagee from 
time to time hereunder may, in its sole discretion, after having 
given 5 Business days prior written notice to Mortgagor, but shall 
not be obligated to, advance funds on behalf of Mortgagor, in order 
to insure the Mortgagor's compliance with any covenant, warranty, 
representation or agreement of the Mortgagor made in or pursuant to 
this Mortgage or any of the Loan Agreements, to preserve or protect 
any right or interest of the Mortgagees in the Mortgaged Property or 
under or pursuant to this Mortgage or any of the Loan Agreements, 
including without limitation, the payment of any insurance premiums 
or taxes and the satisfaction or discharge of any judgment or any 
Lien upon the Mortgaged Property or other property or assets of 
Mortgagor; provided, however, that the making of any such advance by 
or through any Mortgagee shall not constitute a waiver by any 
Mortgagee of any Event of Default with respect to which such advance 
is made nor relieve the Mortgagor of any such Event of Default. The 
Mortgagor shall pay to a Mortgagee upon demand all such advances 
made by such Mortgagee with interest thereon at a rate equal to that 
on the Note having the highest interest rate but in no event shall 
such rate be in excess of the maximum rate permitted by applicable 
law. All such advances shall be included in the obligations and 
secured by the security interest granted hereunder.
    SECTION 3.15. Time Extensions for Payment of Notes: Any 
Mortgagee may, at any time or times in succession without notice to 
or the consent of the Mortgagor, or any other Mortgagee, and upon 
such terms as such Mortgagee may prescribe, grant to any person, 
firm or corporation who shall have become obligated to pay all or 
any part of the principal of (and premium, if any) or interest on 
any Note held by or indebtedness owed to such Mortgagee or who may 
be affected by the lien hereby created, an extension of the time for 
the payment of such principal, (and premium, if any) or interest, 
and after any such extension the Mortgagor will remain liable for 
the payment of such Note or indebtedness to the same extent as 
though it had at the time of such extension consented thereto in 
writing.
    SECTION 3.16. Application of Proceeds from Condemnation: (a) In 
the event that the Mortgaged Property or any part thereof, shall be 
taken under the power of eminent domain, all proceeds and avails 
therefrom may be used to finance construction of utility plant 
secured or to be secured by this Mortgage. Any proceeds not so used 
shall forthwith be applied by the Mortgagor: first, to the ratable 
payment of any indebtedness secured by this Mortgage other than 
principal of or interest on the Notes; second, to the ratable 
payment of interest which shall have accrued on the Notes and be 
unpaid; third, to the ratable payment of or on account of the unpaid 
principal of the Notes, to such installments thereof as may be 
designated by the respective Mortgagee at the time of any such 
payment; and fourth, the balance shall be paid to whomsoever shall 
be entitled thereto.
    (b) If any part of the Mortgaged Property shall be taken by 
eminent domain, each Mortgagee shall release the property so taken 
from the Mortgaged Property and shall be fully protected in so doing 
upon being furnished with:
    (1) A certificate of a duly authorized officer of the Mortgagor 
requesting such release, describing the property to be released and 
stating that such property has been taken by eminent domain and that 
all conditions precedent herein provided or relating to such release 
have been complied with; and
    (2) an opinion of counsel to the effect that such property has 
been lawfully taken by exercise of the right of eminent domain, that 
the award for such property so taken has become final and that all 
conditions precedent herein provided for relating to such release 
have been complied with.
    SECTION 3.17. Compliance with Loan Agreements; Notice of 
Amendments to and Defaults under Loan Agreements: The Mortgagor will 
observe and perform all of the material covenants, agreements, terms 
and conditions contained in any Loan Agreement entered into in 
connection with the issuance of any of the Notes, as from time to 
time amended. The Mortgagor will send promptly to each Mortgagee 
notice of any default by the Mortgagor under any Loan Agreement and 
notice of any amendment to any Loan Agreement. Upon request of any 
Mortgagee, the Mortgagor will furnish to such Mortgagee single 
copies of such Loan Agreements and amendments thereto as such 
Mortgagee may request.
    SECTION 3.18. Rights of Way, etc., Necessary in Business: The 
Mortgagor will use its best efforts to obtain all such rights of 
way, easements from landowners and releases from lienors as shall be 
necessary or advisable in the conduct of its business, and, if 
requested by any Mortgagee, deliver to such Mortgagee evidence 
satisfactory to such Mortgagee of the obtaining of such rights of 
way, easements or releases.
    SECTION 3.19. Limitations on Providing Free Electric Services. 
The Mortgagor will not furnish or supply or cause to be furnished or 
supplied any electric power, energy or capacity free of charge to 
any person, firm or corporation, public or private, and the 
Mortgagor will enforce the payment of any and all amounts owning to 
the Mortgagor by reason of the ownership and operation of the 
Utility System by discontinuing such use, output, capacity, or 
service, or by filing suit therefor within 90 days after any such 
accounts are due, or by both such discontinuance and by filing suit.
    SECTION 3.20. Keeping Books; Inspection by Mortgagee: The 
Mortgagor will keep proper books, records and accounts, in which 
full and correct entries shall be made of all dealings or 
transactions of or in relation to the Notes and the Utility Systems, 
properties, business and affairs of the Mortgagor in accordance with 
the Accounting Requirements. The Mortgagor will at any and all 
times, upon the written request of any Mortgagee and at the expense 
of the Mortgagor, permit such Mortgagee by its representatives to 
inspect the Utility Systems and properties and properties, books of 
account, records, reports and other papers of the Mortgagor and to 
take copies and extracts therefrom, and will afford and procure a 
reasonable opportunity to make any such inspection, and the 
Mortgagor will furnish to each Mortgagee any and all such 
information as such Mortgagee may request, with respect to the 
performance by the Mortgagor of its covenants under this Mortgage, 
the Notes and the Loan Agreements.

ARTICLE IV

EVENTS OF DEFAULT AND REMEDIES

    SECTION 4.01. Events of Default: Each of the following shall be 
an ``Event of Default'' under this Mortgage:
    (a) default shall be made in the payment of any installment of 
or on account of interest on or principal of (or premium, if any 
associated with) any Note or Notes for more than five (5) Business 
Days after the same shall be required to be made;
    (b) default shall be made in the due observance or performance 
of any other of the covenants, conditions or agreements on the part 
of the Mortgagor, in any of the Notes, Loan Agreements or in this 
Mortgage, and such default shall continue for a period of thirty 
(30) days after written notice specifying such default and requiring 
the same to be remedied and stating that such notice is a ``Notice 
of Default'' hereunder shall have been given to the Mortgagor by any 
Mortgagee; PROVIDED, HOWEVER that in the case of a default on the 
terms of a Note or Loan Agreement of a particular Mortgagee, the 
``Notice of Default'' required under this paragraph may only be 
given by that Mortgagee; 

[[Page 36898]]

    (c) the Mortgagor shall file a petition in bankruptcy or be 
adjudicated a bankrupt or insolvent, or shall make an assignment for 
the benefit of its creditors, or shall consent to the appointment of 
a receiver of itself or of its property, or shall institute 
proceedings for its reorganization or proceedings instituted by 
others for its reorganization shall not be dismissed within sixty 
(60) days after the institution thereof;
    (d) a receiver or liquidator of the Mortgagor or of any 
substantial portion of its property shall be appointed and the order 
appointing such receiver or liquidator shall not be vacated within 
sixty (60) days after the entry thereof;
    (e) the Mortgagor shall forfeit or otherwise be deprived of its 
corporate charter or franchises, permits, easements, or licenses 
required to carry on any material portion of its business;
    (f) a final judgment for an amount of more than $__________ 
shall be entered against the Mortgagor and shall remain unsatisfied 
or without a stay in respect thereof for a period of sixty (60) 
days; or,
    (g) any material representation or warranty made by the 
Mortgagor herein, in the Loan Agreements or in any certificate or 
financial statement delivered hereunder or thereunder shall prove to 
be false or misleading in any material respect at the time made.
    SECTION 4.02. Acceleration of Maturity; Rescission and 
Annulment:
    (a) If an Event of Default described in Section [4.01(a)] has 
occurred and is continuing, any Mortgagee upon which such default 
has occurred may declare the principal of all its Notes secured 
hereunder to be due and payable immediately by a notice in writing 
to the Mortgagor and to the other Mortgagees (failure to provide 
said notice to any other Mortgagee shall not affect the validity of 
any acceleration of the Note or Notes by such Mortgagee), and upon 
such declaration, all unpaid principal (and premium, if any) and 
accrued interest so declared shall become due and payable 
immediately, anything contained herein or in any Note or Notes to 
the contrary notwithstanding.
    (b) If any other Event of Default shall have occurred and be 
continuing, any Mortgagee may declare the principal of all its Notes 
secured hereunder to be due and payable immediately by a notice in 
writing to the Mortgagor and to the other Mortgagees (failure to 
provide said notice to any other Mortgagee shall not affect the 
validity of any acceleration of the Note or Notes by such 
Mortgagee), and upon such declaration, all unpaid principal (and 
premium, if any) and accrued interest so declared shall become due 
and payable immediately, anything contained herein or in any Note or 
Notes to the contrary notwithstanding.
    (c) Upon receipt of actual knowledge of or any notice of 
acceleration by any Mortgagee, any other Mortgagee may declare the 
principal of all of its Notes to be due and payable immediately by a 
notice in writing to the Mortgagor and upon such declaration, all 
unpaid principal (and premium, if any) and accrued interest so 
declared shall become due and payable immediately, anything 
contained herein or in any Note or Notes or Loan Agreements to the 
contrary notwithstanding.
    (d) If after the unpaid principal of (and premium, if any) and 
accrued interest on any of the Notes shall have been so declared to 
be due and payable, all payments in respect of principal and 
interest which shall have become due and payable by the terms of 
such Note or Notes (other than amounts due as a result of the 
acceleration of the Notes) shall be paid to the respective 
Mortgagees, and (i) all other defaults under the Loan Agreements, 
the Notes and this Mortgage shall have been made good or cured to 
the satisfaction of the Mortgagees representing at least 80% of the 
aggregate unpaid principal balance of all of the Notes then 
Outstanding, (ii) proceedings to foreclose the lien of this Mortgage 
have not been commenced, and (iii) all reasonable expenses paid or 
incurred by the Mortgagees in connection with the acceleration shall 
have been paid to the respective Mortgagees, then in every such case 
such Mortgagees representing at least 80% of the aggregate unpaid 
principal balance of all of the Notes then Outstanding may by 
written notice to the Mortgagor, for purposes of this Mortgage, 
annul such declaration and waive such default and the consequences 
thereof, but no such waiver shall extend to or affect any subsequent 
default or impair any right consequent thereon.
    SECTION 4.03. Remedies of Mortgagees: If one or more of the 
Events of Default shall occur and be continuing, any Mortgagee 
personally or by attorney, in its or their discretion, may, in so 
far as not prohibited by law:
    (a) take immediate possession of the Mortgaged Property, collect 
and receive all credits, outstanding accounts and bills receivable 
of the Mortgagor and all rents, income, revenues, proceeds and 
profits pertaining to or arising from the Mortgaged Property, or any 
part thereof, whether then past due or accruing thereafter, and 
issue binding receipts therefor; and manage, control and operate the 
Mortgaged Property as fully as the Mortgagor might do if in 
possession thereof, including, without limitation, the making of all 
repairs or replacements deemed necessary or advisable by such 
Mortgagee in possession;
    (b) proceed to protect and enforce the rights of all of the 
Mortgagees by suits or actions in equity or at law in any court or 
courts of competent jurisdiction, whether for specific performance 
of any covenant or any agreement contained herein or in aid of the 
execution of any power herein granted or for the foreclosure hereof 
or hereunder or for the sale of the Mortgaged Property, or any part 
thereof, or to collect the debts hereby secured or for the 
enforcement of such other or additional appropriate legal or 
equitable remedies as may be deemed necessary or advisable to 
protect and enforce the rights and remedies herein granted or 
conferred, and in the event of the institution of any such action or 
suit the Mortgagee instituting such action or suit shall have the 
right to have appointed a receiver of the Mortgaged Property and of 
all proceeds, rents, income, revenues and profits pertaining thereto 
or arising therefrom, whether then past due or accruing after the 
appointment of such receiver, derived, received or had from the time 
of the commencement of such suit or action, and such receiver shall 
have all the usual powers and duties of receivers in like and 
similar cases, to the fullest extent permitted by law, and if 
application shall be made for the appointment of a receiver the 
Mortgagor hereby expressly consents that the court to which such 
application shall be made may make said appointment; and
    (c) sell or cause to be sold all and singular the Mortgaged 
Property or any part thereof, and all right, title, interest, claim 
and demand of the Mortgagor therein or thereto, at public auction at 
such place in any county (or its equivalent locality) in which the 
property to be sold, or any part thereof, is located, at such time 
and upon such terms as may be specified in a notice of sale, which 
shall state the time when and the place where the sale is to be 
held, shall contain a brief general description of the property to 
be sold, and shall be given by mailing a copy thereof to the 
Mortgagor at least fifteen (15) days prior to the date fixed for 
such sale and by publishing the same once in each week for two 
successive calendar weeks prior to the date of such sale in a 
newspaper of general circulation published in said locality or, if 
no such newspaper is published in such locality, in a newspaper of 
general circulation in such locality, the first such publication to 
be not less than fifteen (15) days nor more than thirty (30) days 
prior to the date fixed for such sale. Any sale to be made under 
this subparagraph (c) of this Section [4.03] may be adjourned from 
time to time by announcement at the time and place appointed for 
such sale or for such adjourned sale or sales, and without further 
notice or publication the sale may be had at the time and place to 
which the same shall be adjourned; provided, however, that in the 
event another or different notice of sale or another or different 
manner of conducting the same shall be required by law the notice of 
sale shall be given or the sale be conducted, as the case may be, in 
accordance with the applicable provisions of law. The expense 
incurred by any Mortgagee (including, but not limited to, receiver's 
fees, counsel fees, cost of advertisement and agents' compensation) 
in the exercise of any of the remedies provided in this Mortgage 
shall be secured by this Mortgage.
    (d) In the event that a Mortgagee proceeds to enforce remedies 
under this Section, any other Mortgagee may join in such 
proceedings. In the event that the Mortgagees are not in agreement 
with the method or manner of enforcement chosen by any other 
Mortgagee, the Mortgagees representing a majority of the aggregate 
unpaid principal balance on the then Outstanding Notes may direct 
the method and manner in which remedial action will proceed.
    SECTION 4.04. Application of Proceeds from Remedial Actions: Any 
proceeds or funds arising from the exercise of any rights or the 
enforcement of any remedies herein provided after the payment or 
provision for the payment of any and all costs and expenses in 
connection with the exercise of such rights or the enforcement of 
such remedies shall be applied first, to the ratable 

[[Page 36899]]
payment of indebtedness hereby secured other than the principal of or 
interest on the Notes; second, to the ratable payment of interest 
which shall have accrued on the Notes and which shall be unpaid; 
third, to the ratable payment of or on account of the unpaid 
principal of the Notes; and the balance, if any, shall be paid to 
whomsoever shall be entitled thereto.
    SECTION 4.05. Remedies Cumulative; No Election: Every right or 
remedy herein conferred upon or reserved to the Mortgagees or to the 
Noteholders shall be cumulative and shall be in addition to every 
other right and remedy given hereunder or now or hereafter existing 
at law, or in equity, or by statute. The pursuit of any right or 
remedy shall not be construed as an election.
    SECTION 4.06. Waiver of Appraisement Rights; Marshaling of 
Assets Not Required: The Mortgagor, for itself and all who may claim 
through or under it, covenants that it will not at any time insist 
upon or plead, or in any manner whatever claim, or take the benefit 
or advantage of, any appraisement, valuation, stay, extension or 
redemption laws now or hereafter in force in any locality where any 
of the Mortgaged Property may be situated, in order to prevent, 
delay or hinder the enforcement or foreclosure of this Mortgage, or 
the absolute sale of the Mortgaged Property, or any part thereof, or 
the final and absolute putting into possession thereof, immediately 
after such sale, of the purchaser or purchasers thereat, and the 
Mortgagor, for itself and all who may claim through or under it, 
hereby waives the benefit of all such laws unless such waiver shall 
be forbidden by law. Under no circumstances shall there be any 
marshalling of assets upon any foreclosure or to other enforcement 
of this Mortgage.
    SECTION 4.07. Notice of Default: The Mortgagor covenants that it 
will give immediate written notice to each Mortgagee of the 
occurrence of any Event of Default or in the event that any right or 
remedy described in Sections [4.02] and [4.03] hereof is exercised 
or enforced or any action is taken to exercise or enforce any such 
right or remedy.
ARTICLE V--POSSESSION UNTIL DEFAULT-DEFEASANCE CLAUSE

    SECTION 5.01. Possession Until Default: Until some one or more 
of the Events of Default shall have happened, the Mortgagor shall be 
suffered and permitted to retain actual possession of the Mortgaged 
Property, and to manage, operate and use the same and any part 
thereof, with the rights and franchises appertaining thereto, and to 
collect, receive, take, use and enjoy the rents, revenues, issues, 
earnings, income, proceeds, products and profits thereof or 
therefrom, subject to the provisions of this Mortgage.
    SECTION 5.02. Defeasance: If the Mortgagor shall pay or cause to 
be paid the whole amount of the principal of (and premium, if any) 
and interest on the Notes at the times and in the manner therein 
provided, and shall also pay or cause to be paid all other sums 
payable by the Mortgagor hereunder or under any Loan Agreement and 
shall keep and perform, all covenants herein required to be kept and 
performed by it, then and in that case, all property, rights and 
interest hereby conveyed or assigned or pledged shall revert to the 
Mortgagor and the estate, right, title and interest of the Mortgagee 
so paid shall thereupon cease, determine and become void and such 
Mortgagee, in such case, on written demand of the Mortgagor but at 
the Mortgagor's cost and expense, shall enter satisfaction of the 
Mortgage upon the record. In any event, each Mortgagee, upon payment 
in full to such Mortgagee by the Mortgagor of all principal of (and 
premium, if any) and interest on any Note held by such Mortgagee and 
the payment and discharge by the Mortgagor of all charges due to 
such Mortgagee hereunder or under any Loan Agreement, shall execute 
and deliver to the Mortgagor such instrument of satisfaction, 
discharge or release as shall be required by law in the 
circumstances.
    SECTION 5.03. Special Defeasance: Other than any Notes excluded 
by the foregoing Sections 5.01 and 5.02 and Notes which have become 
due and payable, the Mortgagor may cause the Lien of this Mortgage 
to be defeased with respect to any Note for which it has deposited 
or caused to be deposited in trust solely for the purpose an amount 
sufficient to pay and discharge the entire indebtedness on such Note 
for principal (and premium, if any) and interest to the date of 
maturity thereof; PROVIDED, HOWEVER, that depository serving as 
trustee for such trust must first be accepted as such by the 
Mortgagee whose Notes are being defeased under this section. In such 
event, such a Note will no longer be considered to be an Outstanding 
Note for purposes of this Mortgage and the Mortgagee shall execute 
and deliver to the Mortgagor such instrument of satisfaction, 
discharge or release as shall be required by law in the 
circumstances.

ARTICLE VI

MISCELLANEOUS

    SECTION 6.01. Property Deemed Real Property: It is hereby 
declared to be the intention of the Mortgagor that any electric 
generating plant or plants and facilities and all electric 
transmission and distribution lines, or other Electric System or 
Utility System facilities, embraced in the Mortgaged Property, 
including (without limitation) all rights of way and easements 
granted or given to the Mortgagor or obtained by it to use real 
property in connection with the construction, operation or 
maintenance of such plant, lines, facilities or systems, and all 
other property physically attached to any of the foregoing, shall be 
deemed to be real property.
    SECTION 6.02. Mortgage to Bind and Benefit Successors and 
Assigns: All of the covenants, stipulations, promises, undertakings 
and agreements herein contained by or on behalf of the Mortgagor 
shall bind its successors and assigns, whether so specified or not, 
and all titles, rights and remedies hereby granted to or conferred 
upon the Mortgagees shall pass to and inure to the benefit of the 
successors and assigns of the Mortgagees and shall be deemed to be 
granted or conferred for the ratable benefit and security of all who 
shall from time to time be a Mortgagee. The Mortgagor hereby agrees 
to execute such consents, acknowledgements and other instruments as 
may be reasonably requested by any Mortgagee in connection with the 
assignment, transfer, mortgage, hypothecation or pledge of the 
rights or interests of such Mortgagee hereunder or under the Notes 
or in and to any of the Mortgaged Property.
    SECTION 6.03. Headings: The descriptive headings of the various 
articles and sections of this Mortgage and also the table of 
contents were formulated and inserted for convenience only and shall 
not be deemed to affect the meaning or construction of any of the 
provisions hereof.
    SECTION 6.04. Severability Cause: In case any provision of this 
Mortgage or in the Notes or in the Loan Agreements shall be invalid 
or unenforceable, the validity, legality and enforceability of the 
remaining provisions thereof shall not in any way be affected or 
impaired, nor shall any invalidity or unenforceability as to any 
Mortgagee hereunder affect or impair the rights hereunder of any 
other Mortgagee.
    SECTION 6.05. Mortgage Deemed Security Agreement: To the extent 
that any of the property described or referred to in this Mortgage 
is governed by the provisions of the UCC this Mortgage is hereby 
deemed a ``security agreement'' under the UCC, and, if so elected by 
any Mortgagee, a ``financing statement'' under the UCC for said 
security agreement. The mailing addresses of the Mortgagor as 
debtor, and the Mortgagees as secured parties are as set forth in 
Section [1.05] hereof. If any Mortgagee so directs the Mortgagor to 
do so, the Mortgagor shall file as a financing statement under the 
UCC for said security agreement and for the benefit of all of the 
Mortgagees, an instrument other than this Mortgage. In such case, 
the instrument to be filed shall be in a form customarily accepted 
by the filing office as a financing statement. PROCEEDS OF 
COLLATERAL ARE COVERED HEREBY.
    SECTION 6.06. Indemnification by Mortgagor of Mortgagees: The 
Mortgagor agrees to indemnify and save harmless each Mortgagee 
against any liability or damages which any of them may incur or 
sustain in the exercise and performance of their rightful powers and 
duties hereunder. For such reimbursement and indemnity, each 
Mortgagee shall be secured under this Mortgage in the same manner as 
the Notes and all such reimbursements for expense or damage shall be 
paid to the Mortgagee incurring or suffering the same with interest 
at the rate specified in Section [3.14] hereof. The Mortgagor's 
obligation to indemnify the Mortgagees under this section and under 
Section [3.04] shall survive the satisfaction of the Notes, the 
reconveyance or foreclosure of this Mortgage, the acceptance of a 
deed in lieu of foreclosure, or any transfer or abandonment of the 
Mortgaged Property.
    IN WITNESS WHEREOF, __________ as Mortgagor, has caused this 
Restated Mortgage and Security Agreement to be signed in its name 
and its corporate seal to be hereunto affixed and attested by its 
officers thereunto duly authorized, and UNITED STATES OF AMERICA, as 
Mortgagee, and as Mortgagee, has caused this Restated Mortgage and 
Security Agreement to be signed in its name by duly authorized 
persons, all as of the day and year first above written. 

[[Page 36900]]

----------------------------------------------------------------------

(SEAL)

By:--------------------------------------------------------------------
President

Attest:----------------------------------------------------------------
Title:-----------------------------------------------------------------

    Executed by the Mortgagor in the presence of:

----------------------------------------------------------------------
----------------------------------------------------------------------
Witnesses

UNITED STATES OF AMERICA

By: Director, of the __________ Rural Utilities Service

    Executed by the United States of America, Mortgagee, in the 
presence of:

----------------------------------------------------------------------
----------------------------------------------------------------------
Witnesses

By:

(SEAL)

Attest:----------------------------------------------------------------
Title:-----------------------------------------------------------------

    Executed by the above-named Mortgagee in the presence of:

----------------------------------------------------------------------
----------------------------------------------------------------------
Witnesses

Schedule A

    1. The Maximum Debt Limit is __________.
    2. The Original Mortgage as described in the [first] WHEREAS 
clause above is __________.
    3. The outstanding secured indebtedness described in the 
[fourth] WHEREAS clause above as evidenced by the Original Notes is 
as follows:

    [Note this requires computation of principal balances, not 
merely a toting up of the original face amounts of the notes. 
Alternative approaches may be used by the parties where legally 
effective and mutually agreeable.]

Schedule B--Property Schedule

    The fee and leasehold interests in real property referred to in 
Section Subclause (a) of Granting Clause One are __________.
    The counties referred to in Subclause (B) of Granting Clause One 
are __________.

Schedule C--Excepted Property

STATE OF __________
COUNTY OF __________

    On this ______ day of __________, 19 ____, before me appeared 
__________ and __________ personally known, by me and having been 
duly sworn by me, did say that they are the President and Secretary, 
respectively, of ________________, a __________ corporation, and 
that the seal affixed to the foregoing instrument is the corporate 
seal of said corporation, and that said instrument was signed and 
sealed in behalf of said corporation by authority of its Board, and 
said __________ and __________ acknowledged that the execution of 
said instrument was a free act and deed of said corporation.
    IN WITNESS whereof, I have hereunto set my hand and official 
seal the day and year last above written.
----------------------------------------------------------------------
Notary Public

(Notarial Seal)

    My commission expires:

DISTRICT OF COLUMBIA    )    SS
    The foregoing instrument was acknowledged before me 
this__________ day of 19______, by __________ Director, __________ 
Regional Division of the Rural Utilities Service, acknowledging an 
agency of the United States of America, on behalf of the Rural 
Utilities Service, United States of America.
----------------------------------------------------------------------
Notary Public

(Notarial Seal)

    My Commission expires:

COMMONWEALTH OF VIRGINIA    )    SS
    BEFORE ME, a Notary Public, in and for the Commonwealth of 
Virginia, appeared in person __________, signing for the Governor of 
the National Rural Utilities cooperative Finance Corporation, to me 
personally known, and known to be the identical person who 
subscribed the name of said corporation to the foregoing instrument, 
being by me duly sworn, and who stated that she/he is duly 
authorized to execute the foregoing instrument on behalf of said 
corporation, and further stated and acknowledged that she/he 
executed the foregoing instrument as a free and voluntary act and 
deed of said corporation for the consideration therein mentioned and 
set forth.
    IN TESTIMONY WHEREOF, I have hereunto set my hand and official 
seal this ______day of __________, 19______.
----------------------------------------------------------------------
Notary Public

(Notarial Seal)
    My commission expires:

Exhibit A--Manager's Certificate

Manager's Certificate Required Under Mortgage Section 2.01 for 
Additional Notes

    On behalf on __________[Name of Borrower] (the ``Borrower''), I 
__________ hereby certify as follows:
    1. I am the Manager of the Borrower and have been duly 
authorized to deliver this certificate in connection with the 
Additional Note or Notes to be issued on or about __________ [Date 
Note or Notes are to be Signed] pursuant to Section [2.01] of the 
Mortgage dated __________.
    2. No Event of Default has occurred and is continuing under the 
Mortgage, or any event which with the giving of notice or lapse of 
time or both would become an Event of Default has occurred and is 
continuing.
    3. The Additional Notes described in paragraph 1 are for the 
purpose of funding Property Additions being constructed, acquired, 
procured or replaced that are or will become part of the Borrower's 
Utility System.
    4. The Property Additions referred to in paragraph 3 are 
Eligible Property Additions, i.e. Property Additions acquired or 
whose construction was completed not more than 5 years prior to the 
issuance of additional Notes and Property Additions acquired or 
whose construction is started and/or completed not more than 4 years 
after issuance of the additional Notes, but shall exclude any 
Property Additions financed by any other debt secured under the 
Mortgage at the time additional Notes are issued.
    5. I have reviewed the certificate of the Independent certified 
public accountant also being delivered to each of the Mortgagees 
pursuant to Section [2.01] in connection with the aforesaid 
Additional Note or Notes and concur with the conclusions expressed 
therein.
    6. Capitalized terms that are used in this certificate but are 
not defined herein have the meanings defined in the Mortgage.
[Signed]---------------------------------------------------------------
[Dated]----------------------------------------------------------------
[Name]-----------------------------------------------------------------
[Title]----------------------------------------------------------------
[Name and Address of Borrower]-----------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
Exhibit B--Form of Supplemental Mortgage

----------------------------------------------------------------------
    Supplemental Mortgage and Security Agreement, dated as of 
__________, ______, ________, (hereinafter sometimes called this 
``Supplemental Mortgage'') is made by and between __________ 
(hereinafter called the ``Mortgagor''), a corporation existing under 
the laws of the State of __________, and the UNITED STATES OF 
AMERICA acting by and through the Administrator of the Rural 
Utilities Service (hereinafter called the ``Government''), 
__________ (Supplemental Lender) (hereinafter called __________), a 
__________ existing under the laws of __________, and intended to 
confer rights and benefits on both the Government and __________ and 
__________ in accordance with this Supplemental Mortgage and the 
Original Mortgage (hereinafter defined) (the Government and the 
Supplemental Lenders being herein sometimes collectively referred to 
as the ``Mortgagees'').

Recitals

    Whereas, the Mortgagor, the Government and __________ are 
parties to that certain Restated Mortgage and Security Agreement, as 
supplemented, amended or restated (the ``Original Mortgage'' 
identified in Schedule ``A'' of this Mortgage) originally entered 
into between the Mortgagor, the Government acting by and through the 
Administrator of the Rural Utilities Service (hereinafter called 
``RUS''), and __________; and
    Whereas, the Mortgagor deems it necessary to borrow money for 
its corporate purposes and to issue its promissory notes and other 
debt obligations therefor, and to mortgage and pledge its property 
hereinafter described or mentioned to secure the payment of the 
same, and to enter into this Supplemental Mortgage pursuant to which 
all secured debt of the Mortgagor hereunder shall be secured on 
parity, and to add __________ as a secured party hereunder and under 
the Original Mortgage (the Supplemental Mortgage and the Original 
Mortgage, as it may have been previously amended or supplemented, 
hereinafter may be called collectively the ``RUS Mortgage''); and
    Whereas, the RUS Mortgage, as supplemented hereby, preserves the 
priority of the Original Mortgage for the pro rata 

[[Page 36901]]
benefit of all the Mortgagees and secures the payment of all of the 
Mortgagor's outstanding indebtedness as listed in the Instruments 
Recital of Schedule ``A''; and
    Whereas, all acts necessary to make this Supplemental Mortgage a 
valid and binding legal instrument for the security of such notes 
and obligations, subject to the terms of the RUS Mortgage, have been 
in all respects duly authorized:
    Now, Therefore, This Supplemental Mortgage Witnesseth: That to 
secure the payment of the principal of (and premium, if any) and 
interest on all Notes issued hereunder according to their tenor and 
effect, and the performance of all provisions therein and herein 
contained, and in consideration of the covenants herein contained 
and the purchase or guarantee of Notes by the guarantors or holders 
thereof, the Mortgagor has mortgaged, pledged and granted a 
continuing security interest in, and by these presents does hereby 
grant, bargain, sell, alienate, remise, release, convey, assign, 
transfer, hypothecate, pledge, set over and confirm, pledge and 
grant a continuing security interest in for the purposes hereinafter 
expressed [other language may be required under various state laws], 
unto the Mortgagees all property, rights, privileges and franchises 
of the Mortgagor of every kind and description, real, personal or 
mixed, tangible and intangible, of the kind or nature specifically 
mentioned herein or any other kind or nature, except any Excepted 
Property set forth on Schedule ``C'' hereof owned or hereafter 
acquired by the Mortgagor (by purchase, consolidation, merger, 
donation, construction, erection or in any other way) wherever 
located, including (without limitation) all and singular the 
following:
    A. All of those fee and leasehold interests in real property set 
forth in Schedule ``B'' hereto, subject in each case to those 
matters set forth in such Schedule; and
    B. All of those fee and leasehold interests in real property set 
forth in Schedule ``B'' of the Original Mortgage or in any 
restatement, amendment or supplement thereto, subject in each case 
to those matters set forth in such Schedule; and
    C. All of the kinds, types or items of property, now owned or 
hereafter acquired, described as Mortgaged Property in the Original 
Mortgage or in any restatement, amendment to supplement thereto as 
Mortgaged Property.
    It is Further Agreed and Covenanted That the Original Mortgage, 
as previously restated, amended or supplemented, and this Supplement 
shall constitute one agreement and the parties hereto shall be bound 
by all of the terms thereof and, without limiting the foregoing.
    1. All capitalized terms not defined herein shall have the 
meaning given in Article I of the Original Mortgage.
    2. This Supplemental Mortgage is one of the Supplemental 
Mortgages contemplated by Article II of the Original Mortgage.
    In Witness Whereof, __________ as Mortgagor.

[ACKNOWLEDGEMENTS]
Supplemental Mortgage Schedule A--Maximum Debt Limit and Other 
Information

    1. The Maximum Debt Limit is __________.
    2. The Original Mortgage as described in the first WHEREAS 
clause above is __________.
    3. The outstanding secured indebtedness described in the third 
WHEREAS clause above is __________.

Supplemental Mortgage Schedule B--Property Schedule

    The fee and leasehold interests in real property referred to in 
clause A of the granting clause are __________.

Supplemental Mortgage Schedule C--Excepted Property

    Dated: June 29, 1995.
Michael V. Dunn,
Acting Under Secretary, Rural Economic and Community Development.
[FR Doc. 95-16528 Filed 7-17-95; 8:45 am]
BILLING CODE 3410-15-P