[Federal Register Volume 61, Number 153 (Wednesday, August 7, 1996)]
[Proposed Rules]
[Pages 41025-41032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19711]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 61, No. 153 / Wednesday, August 7, 1996 / 
Proposed Rules  

[[Page 41025]]



DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Parts 1710, 1714, 1717, and 1786

RIN 0572-AB24


RUS Policies on Mergers and Consolidations of Electric Borrowers

AGENCY: Rural Utilities Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: The Rural Utilities Service (RUS) proposes to streamline its 
regulations through amendments that are intended to encourage electric 
borrowers to merge, consolidate, or enter into similar arrangements 
that benefit borrowers and rural communities and are consistent with 
the interests of the Government as a secured lender. These amendments 
are part of an ongoing RUS project to modernize agency policies and 
procedures in order to provide borrowers with the flexibility they need 
to continue providing reliable electric service at reasonable cost in 
rural areas, while maintaining the integrity of Government loans.

DATES: Written comments must be received by RUS or carry a postmark or 
equivalent by September 6, 1996.

ADDRESSES: Written comments should be addressed to Sue Arnold, 
Financial Analyst, Program Support and Regulatory Analysis, U.S. 
Department of Agriculture, Rural Utilities Service, 14th Street and 
Independence Ave, SW., AgBox 1522, Washington, DC 20250-1522. RUS 
requires, in hard copy, a signed original and 3 copies of all comments 
(7 CFR 1700.30(e)). Comments will be available for public inspection 
during regular business hours (7 CFR 1.27(b)).

FOR FURTHER INFORMATION CONTACT: Sue Arnold, Financial Analyst, U.S. 
Department of Agriculture, Rural Utilities Service, Room 2230-S, 1400 
Independence Avenue, SW., STOP 1522, Washington, DC 20250-1522. 
Telephone: 202-720-0736. FAX: 202-720-4120. E-mail: 
[email protected].

SUPPLEMENTARY INFORMATION: The Rural Utilities Service (RUS) is taking 
this regulatory action as part of the National Performance Review 
program to eliminate unnecessary regulations and improve those that 
remain in force. This regulatory action has been determined to be 
significant for the purposes of Executive Order 12866, Regulatory 
Planning and Review, and, therefore has been reviewed by the Office of 
Management and Budget (OMB). The Administrator of RUS has determined 
that a rule relating to the RUS electric loan program is not a rule as 
defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), and, 
therefore, the Regulatory Flexibility Act does not apply to this 
proposed rule. The Administrator of RUS has determined that this rule 
will not significantly affect the quality of the human environment as 
defined by the National Environmental Policy Act of 1969 (42 U.S.C. 
4321 et seq.). Therefore, this action does not require an environmental 
impact statement or assessment. This proposed rule is excluded from the 
scope of Executive Order 12372, Intergovernmental Consultation, which 
may require consultation with State and local officials. A Notice of 
Final Rule titled Department Programs and Activities Excluded from 
Executive Order 12372 (50 FR 47034) exempts RUS electric loans and loan 
guarantees from coverage under this Order. This proposed rule has been 
reviewed under Executive Order 12988, Civil Justice Reform. RUS has 
determined that this proposed rule meets the applicable standards 
provided in Sec. 3. of the Executive Order.
    The program described by this rule is listed in the Catalog of 
Federal Domestic Assistance Programs under number 10.850 Rural 
Electrification Loans and Loan Guarantees. This catalog is available on 
a subscription basis from the Superintendent of Documents, the United 
States Government Printing Office, Washington, DC 20402-9325.

Information Collection and Recordkeeping Requirements

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
Chapter 35, as amended) RUS is requesting comments on the information 
collection incorporated in this proposed rule.
    Comment on this information collection must be received by October 
7, 1996.
    Comments are invited on: (a) Whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the agency, including whether the information will have practical 
utility; (b) The accuracy of the agency's estimate of the burden of the 
proposed collection of information; (c) Ways to enhance the quality, 
utility and clarity of the information to be collected; and (d) Ways to 
minimize the burden of the collection of information on respondents, 
including through the use of automated collection techniques or other 
forms of information technology.
    For further information contact Sue Arnold, Financial Analyst, 
Program Support and Regulatory Analysis, U.S. Department of 
Agriculture, Rural Utilities Service, STOP 1522, Room 2230-S, 1400 
Independence Avenue, SW., Washington, DC 20250-1522. Telephone: 202-
720-0736. FAX: 202-720-4120. E-mail: [email protected].
    Title: 7 CFR 1717 subpart D, Mergers and Consolidations of Electric 
Borrowers.
    Type of request: New information collection.
    Abstract: In response to the rapid changes in the electric 
industry, an increasing number of RUS electric distribution borrowers 
are exploring the possibilities of mergers, consolidations, and similar 
actions. (This rule uses the term ``merger'' to refer to mergers, 
consolidations, and similar actions.) Since short-term financial 
stresses often follow mergers that offer long-term benefits, RUS is 
proposing measures that can provide some relief from these transitional 
stresses. These measures are intended to maintain the credit quality of 
the RUS loan portfolio while providing borrowers with the flexibility 
to react quickly to business opportunities and challenges. Secondly, 
RUS is proposing a streamlined application process for mergers that 
require RUS approval. The application will rely, as far as possible, on 
documents and analyses that are either required by state law, or that 
any prudent business would prepare for its own use in evaluating the 
costs and

[[Page 41026]]

benefits of a possible merger. Finally, RUS, as a secured lender, needs 
certain documentation in order to legally conduct business with a newly 
merged entity. This documentation, for the most part, consists of 
copies of documents filed with state and local governments and 
documentation that would be needed by any secured lender.
    Requests to enter into mergers are initiated by borrowers; RUS may 
not require borrowers to enter into mergers.
    Since mergers reduce the number of borrowers, and reducing the 
number of borrowers reduces costs to both borrowers and RUS of 
preparing and processing multiple applications and servicing multiple 
loans, the proposed rules will result in a net decrease in burden hours 
to borrowers and to RUS. This net decrease will be reflected in 
requests to renew existing information collections.
    Estimate of burden: Public reporting burden for this collection of 
information is estimated to average 1 hour per response.
    Respondents: Businesses, including not for profit cooperatives and 
others.
    Estimated number of respondents each year: 25.
    Estimated number of responses per respondent: 8.
    Estimated total annual burden on respondents: 249 hours.
    Copies of this information collection can be obtained from Dawn 
Wolfgang, Program Support and Regulatory Analysis, Rural Utilities 
Service. Phone: 202-720-0812.
    Send comments regarding this information collection requirement to 
the Office of Information and Regulatory Affairs, Office of Management 
and Budget, ATTN: Desk Officer, USDA, Room 10102 New Executive Office 
Building, Washington, DC 20503, and to Sue Arnold, Financial Analyst, 
Program Support and Regulatory Analysis, U.S. Department of 
Agriculture, Rural Utilities Service, 1400 Independence Ave., SW., STOP 
1522, Washington, DC 20250-1522.
    Comments are best assured of having full effect if OMB receives 
them within 30 days of publication in the Federal Register.
    All comments will become a matter of public record.

Background

    The electric industry is becoming increasingly competitive. Recent 
legislation, including the Energy Policy Act of 1992 and actions by the 
Federal Energy Regulatory Commission (FERC), such as its rules on 
Promoting Wholesale Competition Through Open Access Non-discriminatory 
Transmission Services by Public Utilities, Recovery of Stranded Costs 
by Public Utilities and Transmitting Utilities, published May 10, 1996, 
at 61 FR 21539, are drastically altering the regulatory and business 
environment of all electric systems, including systems financed by RUS. 
At the same time, changes in overall business trends and in technology 
continue to place pressure on RUS financed systems to operate more 
efficiently and hedge risks.
    It is clear that the success of the RUS program in supporting rural 
infrastructure and economic development is directly tied to the ability 
of RUS electric borrowers to meet these new challenges. In order to 
maintain and improve the electric infrastructure that is vital to rural 
communities, borrowers must have the flexibility to respond quickly and 
aggressively to business opportunities and challenges. At the same 
time, RUS as a secured lender has a fiduciary responsibility to protect 
the security of Government loans and avoid defaults.
    One frequent response to the challenge of a volatile industry in 
transition is a merger or consolidation. (This rule uses the term 
``merger'' to refer to mergers, consolidations, and similar actions.) 
RUS has historically encouraged mergers that benefit borrowers and 
rural communities, when these arrangements are consistent with the 
interests of the Government as a secured lender. RUS continues to urge 
borrowers to explore any and all opportunities for operating 
efficiencies and other economies.
    The amendments proposed today are intended to encourage beneficial 
mergers involving RUS borrowers and, as far as possible, to remove any 
unnecessary impediments to such mergers. Examples of possible tangible 
benefits to borrowers and the rural communities they serve and to RUS 
as a secured lender include: Contributing to greater operating 
efficiency and financial soundness by combining resources, diversifying 
loads or other means; assisting rural economic development by 
diversifying the local economic base or alleviating unemployment; and 
other benefits consistent with the purposes of the Rural 
Electrification Act (RE Act).

Transitional Assistance

    RUS recognizes that short-term financial stresses can follow even 
the most beneficial mergers. To help stabilize electric rates during 
this period, enhance the credit quality of outstanding loans made or 
guaranteed by the Government, and otherwise ease the transition period 
before long-term efficiencies and economies can be realized, RUS is 
proposing new policies for transitional assistance following mergers.
    RUS will consider requests for transitional assistance after each 
merger. For example, if three borrowers form a single successor through 
two consecutive mergers, transitional assistance may be available, 
subject to RUS regulations, following each of the mergers. For 
transitional assistance available for a closed-ended period after a 
merger, the availability period will begin tolling on the effective 
date of the most recent merger even if that date is prior to the 
effective date of this rule.
    Transitional assistance addresses (1) Loan processing priority; (2) 
Supplemental financing requirements; (3) Reimbursement of general funds 
and interim financing; (4) Deferments of interest and principal; (5) 
Coverage ratios; and (6) Advance of funds.

1. Loan Processing Priority

    Current policy on mergers (7 CFR 1710.108 and .119) offers some 
transitional assistance in the form of priority consideration to 
processing loans to newly merged and consolidated systems for a period 
of up to five years after RUS approval of a merger, provided that the 
merger has been determined to enhance the repayment or security of RUS 
loans. Virtually all mergers place stress on short-term cash flows. 
Therefore, today's rule proposes in Sec. 1717.154(a)(1) to offer loan 
processing priority upon the borrower's request, for the first loan to 
a successor, provided that the loan is approved by RUS not later than 5 
years after the effective date of the merger. For subsequent loans 
approved during those 5 years, RUS may agree to priority processing if 
the borrower demonstrates the need, and loan funds are available.
    Pursuant to RUS regulations published December 29, 1995, at, 60 FR 
67395, many mergers are exempt from RUS approval. Therefore, to avoid 
confusion, today's rule further proposes a minor amendment that will 
allow loan processing priority for up to 5 years from the effective 
date of the merger, instead of from the date of RUS approval.

2. Supplemental Financing Requirements

    RUS generally requires that an applicant for a municipal rate loan 
obtain a portion of its debt financing from a supplemental source 
without an RUS guarantee. The method for calculating the supplemental 
financing proportion is set out in 7 CFR 1710.110, as amended January 
19, 1995, at 60 FR

[[Page 41027]]

3730. Today's rule proposes in Sec. 1717.154(a)(2) a waiver of 
supplemental financing, at the borrower's request, for the first RUS 
loan approved after the effective date of a merger if all parties are 
active distribution borrowers and if that first loan is a municipal 
rate loan, the loan period does not exceed 2 years, and the loan is 
approved by RUS not later than 5 years after the effective date of the 
merger.
    For any subsequent loans approved during those 5 years, or if the 
borrower requests a loan period longer than 2 years, RUS may agree to 
waive or reduce the required amount of supplemental financing. RUS 
would consider such reduction or waiver if the higher interest rate 
usually charged by a supplemental lender would materially inhibit the 
borrower's ability to integrate the systems or create a significant 
hardship that could require an increase in electric rates.

3. Reimbursement of General Funds and Interim Financing

    Borrowers may request RUS loan funds to reimburse general funds 
and/or interim financing used to finance equipment and facilities 
included in a RUS approved construction work plan or amendment if the 
construction was completed immediately preceding the current loan 
period. Pursuant to existing rules at 7 CFR 1710.109, this period is 
limited to 24 months for loan applications received after February 10, 
1993. Today's rule proposes in Sec. 1717.154(a)(3) to increase this 
period to up to 48 months for the first RUS loan following a merger 
where all parties are active distribution borrowers, if that first loan 
is approved by RUS not later than 5 years after the effective date of 
the merger. The longer reimbursement period will assist borrowers in 
managing their cash flows during the transition. The requirement that 
equipment and facilities be included in a RUS approved construction 
work plan in order to be eligible for reimbursement by RUS is not 
affected by this change.

4. Deferments of Interest and Principal

    Section 12 of the RE Act allows RUS to extend the time for 
repayment of loans by up to 5 years. Under a Section 12 deferment plan, 
notes retain their original maturity dates--the final maturity is not 
extended. Although deferment of debt service payments today, results in 
higher payments in the future, deferments may be useful to mitigate 
rate increases during a transition period after a merger or 
consolidation. Today's rule proposes in Sec. 1717.154(b)(1) to codify 
this long-standing policy of granting a Section 12 deferment to a 
successor.

5. Coverage Ratios

    RUS, as a secured lender, requires that borrowers maintain adequate 
levels of coverage ratios, including times interest earned ratio 
(TIER); operating times interest earned ratio (OTIER); debt service 
coverage (DSC); and operating debt service coverage (ODSC). The 
specific level for each ratio is set forth in the RUS loan documents 
and in 7 CFR 1710.114. New forms of loan documents were issued in final 
rules published on July 18, 1995, at 60 FR 36882, and on December 29, 
1995, at 60 FR 67396. Section 1710.114 was last amended in the December 
29, 1995, final rule.
    The rule proposed today will, in Sec. 1717.154(b)(2), allow RUS to 
approve a plan for a phase-in period of up to 5 years following a 
merger if all parties are active distribution borrowers. Under this 
rule, borrowers may project and achieve lower levels for these ratios 
for up to 5 years following a merger, provided that RUS has approved a 
phase-in plan, and that a minimum TIER level of 1.00 is maintained. 
This phase-in period will allow borrowers the flexibility to devote 
resources to integrating the systems and may avoid substantial rate 
increases.

6. Advance of Funds From Insured Loans

    RUS is further proposing to automatically lengthen the fund advance 
period for insured loans preexisting on the effective date of a merger. 
The fund advance period, which is the period during which funds from an 
insured loan may be advanced to the borrower, generally terminates 
automatically after 4 or 5 years unless the borrower requests, and RUS 
approves, an extension. See 7 CFR 1714.56, as amended January 19, 1995, 
at 60 FR 3726. However, the execution and filing of legal documents 
following a merger often takes some time, and RUS cannot advance funds 
to a successor until these documents are properly executed and filed. 
In order to ensure that approved loan funds are available to borrowers 
without unnecessary procedural delays, RUS proposes in Sec. 1717.154(c) 
to generically extend the fund advance period by 2 years for any loans 
with unadvanced funds on the effective date of the merger, if the fund 
advance period has not already terminated.
    For example, under current rules, the fund advance period for a 
loan approved in March 1995 with a 4-year loan period terminates 
automatically 5 years from the date of the loan note. Under the 
proposed rule, after a merger the fund advance period would be extended 
by 2 years and would terminate automatically 7 years from the date of 
the loan note.

Borrowers Who Prepaid RUS Loans Pursuant to 7 CFR Part 1786

    Pursuant to 7 CFR part 1786, subparts C, E and F, borrowers may use 
private financing or internally generated funds to prepay RUS direct or 
insured loans at a discounted present value. Borrowers who prepay under 
this rule may not apply for or receive any new direct or insured loans 
from RUS for a period after the prepayment, except at the 
Administrator's discretion.
    In order to remove unnecessary impediments to beneficial mergers 
between systems that have prepaid their RUS debt and active 
distribution systems that still have outstanding loans, RUS is amending 
rules setting out the Administrator's discretionary authority. Under 
the proposed rules (Secs. 1717.156 and 1786.167), the Administrator 
will exercise this discretionary authority to make direct or insured 
loans for facilities to serve consumers who, before the merger, were 
served by the system that did not prepay. In other words, eligibility 
for RUS loans for that portion of the successor's system that was owned 
by the active borrower prior to the merger, will be grandfathered as if 
the merger had not occurred.

RUS Procedures

    The requirement that RUS, as a secured lender, generally approve 
mergers is in the loan documents and RUS regulations. Under certain 
conditions, set out in 7 CFR 1717.615 and 1710.7(c), as published 
December 29, 1995, at 60 FR 67395, borrowers may enter into such 
mergers without RUS approval.
    To clarify RUS requirements for approval of mergers, and to 
expedite handling of borrower requests, today's rule proposes in 
Secs. 1717.157-1717.159, a procedure for RUS approvals, where the 
approvals are needed, including a list of the documents required, and 
the factors that RUS will consider in acting on such requests. With the 
exception of a formal transmittal letter and board resolution from each 
of the companies involved, RUS believes that the documents and analyses 
required are either (1) Prepared by any prudent business attempting to 
enter into a merger; (2) Required by state law; or (3) Required by any 
secured lender.
    In evaluating an application, RUS will consider the likely impacts 
of the

[[Page 41028]]

merger on the borrower's ability to provide reliable service at 
reasonable rates to RE Act beneficiaries. RUS will not approve the 
action if, in the sole judgment of the Administrator, the action is 
likely to have an adverse effect on the security of outstanding loans 
made or guaranteed by the Government. It is the borrower's 
responsibility to resolve internal issues such as management and 
director succession, employee benefits, and headquarters location. 
Borrowers are further responsible for obtaining any necessary approvals 
from state commissions, supplemental lenders, and others.
    Regardless of whether the merger requires RUS approval, RUS, as a 
secured lender, needs certain documentation in order to advance funds, 
send bills, and otherwise conduct business with a successor. Today's 
proposed rule in Sec. 1717.152, lists the documents required. 
Generally, these are copies of documents that borrowers are required to 
file with state or local governments or documentation needed by any 
secured lender.
    In all cases, borrowers are encouraged to consult RUS early in the 
process. RUS headquarters and field staff are prepared to advise 
borrowers and offer technical assistance to facilitate the processing 
of borrower requests. In particular, early consultation with RUS can 
avoid unnecessary delays in processing requests for advance of loan 
funds.

Rescission of Obsolete Directive

    On the effective date of the final regulation, REA Bulletin 115-2, 
Merger and Consolidation of Electric Borrowers will be rescinded. RUS 
has determined that this bulletin, issued November 9, 1972, is 
obsolete.

Eligibility for and Hardship Rate and Municipal Rate Loans

    RUS makes hardship rate loans and municipal rate loans subject to 
an interest rate cap, if the applicant meets certain criteria. See 
Paras. 305(c)(1)(A) and (c)(1)(B)(ii) of the RE Act, and 7 CFR part 
1714. As required by the law, RUS will consider the eligibility of the 
successor at the time of loan approval in determining the applicable 
interest rate category. In other words, to qualify for a hardship rate 
loan or a municipal rate loan subject to the interest rate cap, the 
successor as a whole must, at the time of loan approval, meet the 
criteria in 7 CFR 1714.8 or 1714.7, respectively.

Comment Period

    It is vital that RUS, borrowers, supplemental lenders, and others 
continue the public-private partnership that has served rural America 
well in the past. RUS and the Department of Agriculture's Office of the 
General Counsel recognize that business opportunities often have short 
deadlines, and every effort will be made to expedite action on borrower 
requests and to respond in a timely fashion.
    There is an urgent need for flexible responses to the increasing 
business stress on rural electric systems. This rule, by encouraging 
and expediting mergers that offer economies and efficiencies not 
available otherwise, will result in tangible benefits, such as lower 
electric rates, to the rural communities served by electric 
distribution borrowers. Furthermore, reducing the number of RUS 
borrowers through mergers and consolidations will ultimately reduce the 
costs to the Federal Government of processing multiple applications and 
servicing multiple loans. To expedite these benefits, the comment 
period on this proposed rule is limited to 30 days. RUS encourages all 
interested parties to comment. New information collection requirements 
in this rule will not be effective until approved by OMB.

List of Subjects

7 CFR Part 1710

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

7 CFR Part 1714

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

7 CFR Part 1717

    Administrative practice and procedure, Electric power, Electric 
utilities, Intergovernmental relations, Investments, Lien 
accommodation, Lien subordinations, Loan programs--energy, Reporting 
and recordkeeping requirements, Rural development.

7 CFR Part 1786

    Accounting, Administrative practice and procedure, Electric 
utilities.
    For the reasons set out in the preamble, and under the authority of 
7 U.S.C. 901 et seq., RUS proposes to amend 7 CFR Chapter XVII as 
follows:

PART 1710--GENERAL AND PRE-LOAN POLICIES AND PROCEDURES COMMON TO 
INSURED AND GUARANTEED ELECTRIC LOANS

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

    Authority: 7 U.S.C. 901-950b; Public Law 99-591, 100 Stat. 3341-
16; Public Law 103-354, 108 Stat. 3178 (7 U.S.C. 6941 et seq.).

    2. Section 1710.109 is amended by redesignating paragraphs (c) 
introductory text, (c)(1), (c)(2), and (c)(3) as paragraphs (c)(1) 
introductory text, (c)(1)(i), (c)(1)(ii), and (c)(1)(iii), 
respectively, and by adding a new paragraph (c)(2) to read as follows:


Sec. 1710.109  Reimbursement of general funds and interim financing.

* * * * *
    (c) * * *
    (2) Policies for reimbursement of general funds and interim 
financing following certain mergers, consolidations, and transfers of a 
systems substantially in their entirety are set forth in 7 CFR 
1717.154.
* * * * *
    3. Section 1710.110 is amended by revising the first sentence of 
paragraph (a) to read as follows:


Sec. 1710.110   Supplemental financing.

    (a) Except in the case of financial hardship as determined by the 
Administrator, and following certain mergers, consolidations, and 
transfers of systems substantially in their entirety as set forth in 7 
CFR 1717.154, applicants for a municipal rate loan will be required to 
obtain a portion of their loan funds from a supplemental source without 
an RUS guarantee, in the amounts set forth in paragraph (c) of this 
section. * * *
* * * * *
    4. Section 1710.114 is amended by adding a sentence at the end of 
paragraph (b)(3) to read as follows:


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

* * * * *
    (b) * * *
    (3) * * * Policies for coverage ratios following certain mergers, 
consolidations, and transfers of systems substantially in their 
entirety are in 7 CFR 1717.154.
* * * * *
    5. Section 1710.119 is amended by revising paragraph (b)(3) to read 
as follows:


Sec. 1710.119  Loan processing priorities.

* * * * *
    (b) * * *
    (3) To finance the capital needs of borrowers that are the result 
of a merger, consolidation, or a transfer of a system substantially in 
its entirety, provided that the merger, consolidation, or transfer has 
either been approved by RUS or does not need RUS approval pursuant to 
the borrower's loan documents (See 7 CFR 1717.154); or
* * * * *

[[Page 41029]]

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

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

    Authority: 7 U.S.C. 901-950(b); Pub.L. 99-591, 100 Stat. 3341; 
Pub.L. 103-353, 108 Stat. 3178 (7 U.S.C. 6941 et seq.)

    7. Section 1714.56 is amended by revising the introductory text of 
paragraph (c) to read as follows:


Sec. 1714.56  Fund advance period.

* * * * *
    (c) The Administrator may agree to an extension of the fund advance 
period for loans approved on or after June 1, 1984, if the borrower 
demonstrates to the satisfaction of the Administrator that the loan 
funds continue to be needed for approved loan purposes (i.e., 
facilities included in an RUS approved construction work plan). 
Policies for extension of the fund advance period following certain 
mergers, consolidations, and transfers of systems substantially in 
their entirety are set forth in 7 CFR 1717.154.
* * * * *

PART 1717--POST-LOAN POLICIES AND PROCEDURES COMMON TO INSURED AND 
GUARANTEED ELECTRIC LOANS

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

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

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

Subpart D--Mergers and Consolidations of Electric Borrowers

Sec.
1717.150  General.
1717.151  Definitions.
1717.152  Required documentation for all mergers.
1717.153  Transitional assistance.
1717.154  Types of transitional assistance.
1717.155  Requests for transitional assistance.
1717.156  Mergers with borrowers who prepaid RUS loans
1717.157  Applications for RUS approval of mergers.
1717.158  Application contents.
1717.159  Application process.

Subpart D--Mergers and Consolidations of Electric Borrowers


Sec. 1717.150  General.

    (a) This subpart establishes RUS policies and procedures for 
mergers of electric borrowers. These policies and procedures are 
intended to provide borrowers with the flexibility to negotiate and 
enter into mergers that offer advantages to the borrowers and to rural 
communities, and adequately protect the integrity and credit quality of 
RUS loans and loan guarantees.
    (b) Consistent with prudent lending practices, the maintenance of 
adequate security for RUS loans and loan guarantees, and the objectives 
of the Rural Electrification Act of 1936, as amended, (7 U.S.C. 901 et 
seq.) (RE Act), RUS encourages electric borrowers to consider mergers 
when such action is likely to contribute, in the long-term, to greater 
operating efficiency and financial soundness. Borrowers are 
specifically encouraged to explore mergers that are likely to enhance 
the ability of the successor to provide reliable electric service at 
reasonable cost to RE Act beneficiaries.
    (c) Pursuant to the loan documents and RUS regulations, certain 
mergers are subject to RUS approval. See Sec. 1717.615.
    (d) Since RUS must take action in order to legally advance funds 
and otherwise conduct business with a successor, RUS encourages 
borrowers to consult RUS early in the process regardless of whether RUS 
approval of the merger is required. RUS will provide technical 
assistance and guidance to borrowers to help expedite the processing of 
their requests and to help resolve potential problems early in the 
process.


Sec. 1717.151  Definitions.

    The definitions set forth in 7 CFR 1710.2 are applicable to this 
subpart unless otherwise stated. In addition, for the purpose of this 
subpart, the following terms shall have the following meanings:
    Active borrower means an electric borrower that has, on the 
effective date, an outstanding insured or guaranteed loan from RUS for 
rural electrification, and whose eligibility for future RUS financing 
is not restricted pursuant to 7 CFR part 1786.
    Active distribution borrower means an electric distribution 
borrower that has, on the effective date, an outstanding insured or 
guaranteed loan from RUS for rural electrification, and whose 
eligibility for future RUS financing is not restricted pursuant to 7 
CFR part 1786.
    Consolidation see merger.
    Coverage ratios means collectively TIER, OTIER, DSC and ODSC, as 
these terms are defined in 7 CFR 1710.2.
    Effective date means the date a merger is effective pursuant to 
applicable state law.
    Loan documents means the mortgage (or other security instrument 
acceptable to RUS), the loan contract, and the promissory note(s) 
entered into between the borrower and RUS.
    Merger means: (1) A consolidation where two or more companies are 
extinguished and a new successor is created, acquiring the assets, 
liabilities, franchises and powers of those passing out of existence;
    (2) A merger where one company is absorbed by another, the former 
ceasing to exist as a separate business entity, and the latter 
retaining its own identity and acquiring the assets, liabilities, 
franchises and powers of the former; or
    (3) A transfer of mortgaged property by one company to another 
where the transferee acquires substantially as an entirety the assets, 
liabilities, franchises, and powers of the transferor.
    New loan means a loan to a successor approved by RUS on or after 
the effective date.
    Preexisting loan means a loan to a borrower approved by RUS prior 
to the effective date of a merger.
    Successor means the entity that continues as the surviving business 
entity as of the effective date of the merger, and acquires all the 
assets, liabilities, franchises, and powers of the entity or entities 
ceasing to exist as of the effective date.
    Transitional assistance means financial relief provided to 
borrowers by RUS during a limited period of time following a merger.


Sec. 1717.152  Required documentation for all mergers.

    In order for RUS to legally advance funds, send bills, and 
otherwise conduct business with a successor, the documents listed in 
this section must be submitted to RUS regardless of the need for RUS 
approval of the merger. Borrowers are responsible for ensuring that 
these documents are received by RUS in timely fashion. In cases of 
mergers that require RUS approval, or cases where borrowers must submit 
requests for transitional assistance, the documents listed in this 
section may be combined with the documents required by Secs. 1717.155 
and/or 1717.158 where appropriate.
    (a) Prior to the effective date, borrowers must submit:
    (1) A transmittal letter on corporate letterhead signed by the 
manager of each active borrower that is a party to the proposed merger 
indicating the borrower's intention to merge and tentative timeframes, 
including the proposed effective date;
    (2) An original certified board resolution from each party to the 
proposed merger affirming the board's support of the merger;

[[Page 41030]]

    (3) All documents necessary to evidence the merger pursuant to 
applicable law. Examples include plan of merger, articles of merger, 
amended articles of incorporation, bylaws, and notices and filings 
required by law. These documents may be copies of documents filed 
elsewhere, unless otherwise specified by RUS; and
    (4) A letter addressed to the Administrator from the counsel of at 
least one of the active borrowers briefly describing the merger and 
indicating the relevant statutes under which the merger will be 
consummated.
    (b) On or after the effective date, borrowers must submit:
    (1) An opinion of counsel from the successor addressing, among 
other things, any pending litigation, proper authorization and 
consummation of the merger, proper filing and perfection of RUS' 
security interest, and all approvals required by law. RUS will provide 
the form of the opinion of counsel to the successor;
    (2) A letter signed by the manager of the successor advising RUS of 
the effective date of the merger; the corporate name, address, and 
phone number; the names of the officers of the successor; and the 
taxpayer identification number; and
    (3) Evidence of proper filing and perfection of RUS' security 
interest, as instructed by RUS, and an executed loan contract.


Sec. 1717.153  Transitional assistance.

    RUS recognizes that short-term financial stresses can follow even 
the most beneficial mergers. To help stabilize electric rates, enhance 
the credit quality of outstanding loans made or guaranteed by the 
Government, and otherwise ease the transition period before the long-
term efficiencies and economies of a merger can be realized, RUS may 
approve one or more types of transitional assistance to a successor 
under the conditions set forth in this part.


Sec. 1717.154  Types of transitional assistance.

    (a) Transitional assistance in connection with new loans. Requests 
for transitional assistance in connection with new loans may be 
submitted to RUS no later than the loan application.
    (1) Loan processing priority. RUS loans are generally processed in 
chronological order based on the date the complete application is 
received in the regional or division office. At the borrower's request, 
RUS will offer loan processing priority for the first loan to a 
successor, provided that the loan is approved by RUS not later than 5 
years after the effective date of the merger. For any subsequent loans 
approved during those 5 years, RUS may offer loan processing priority, 
subject to the availability of loan funds. In reviewing requests for 
loan processing priority on subsequent loans, RUS will consider the 
borrower's projected cash flows, its electric rates and rate disparity, 
and the likely mitigating effects of priority loan processing See 7 CFR 
1710.108 and 1710.119.
    (2) Supplemental financing. RUS generally requires that an 
applicant for a municipal rate loan obtain a portion of its debt 
financing from a supplemental source without an RUS guarantee. See 7 
CFR 1710.110. If all parties to the merger are active distribution 
borrowers, RUS will, at the borrower's request waive the requirement to 
obtain supplemental financing for the first RUS loan approved after the 
effective date if that first loan is a municipal rate loan whose loan 
period does not exceed 2 years, and the loan is approved by RUS not 
later than 5 years after the effective date of the merger. For any 
subsequent loans approved during these 5 years, or if the borrower 
requests a loan period longer than 2 years, RUS may, subject to the 
availability of loan funds, waive or reduce the amount of supplemental 
financing required. In reviewing requests to reduce or waive 
supplemental financing on subsequent loans or on loans with a loan 
period longer than 2 years, RUS will consider the differences in 
interest rates between RUS and supplemental loans and the impacts of 
this difference on the borrower's projected cash flows and its electric 
rates and rate disparity. If significant differences result, the waiver 
will be granted.
    (3) Reimbursement of general funds and interim financing. Borrowers 
may request RUS loan funds to reimburse general funds and/or interim 
financing used to finance equipment and facilities included in a RUS 
approved construction work plan or amendment if the construction was 
completed immediately preceding the current loan period. This 
reimbursement period is generally limited to 24 months. See 7 CFR 
1710.109. If all parties to the merger are active distribution 
borrowers, RUS may, in connection with the first RUS loan approved 
after the effective date, approve a reimbursement period of up to 48 
months prior to the current loan period if the loan is approved not 
later than 5 years after the effective date. In reviewing requests for 
a longer reimbursement period, RUS will consider the stresses that the 
transaction and other costs of entering into the merger places on the 
borrower's rates and cash flows, and the mitigating effects of more 
generous reimbursement.
    (b) Transitional assistance affecting new and preexisting loans. 
Requests for transitional assistance affecting new and preexisting 
loans must be received by RUS no later than 2 years after the effective 
date of the merger.
    (1) Section 12 deferments. Section 12 of the RE Act (7 U.S.C. 912) 
allows RUS to extend the time of payment of interest or principal of 
RUS loans. Section 12 deferments do not extend the final maturity of 
the loan; lower payments during the deferment period result in higher 
payments later. Therefore, RUS may approve a Section 12 deferment of 
loan payments of up to 5 years only if such deferments will help to 
avoid substantial increases in retail electric rates during the 
transition period, without placing borrowers in financial stress after 
the deferment period.
    (2) Coverage ratios. Required levels for coverage ratios are set 
forth in 7 CFR 1710.114 and in the loan documents. If all parties to 
the merger are active distribution borrowers, RUS may approve a plan, 
on a case by case basis, that provides for a phase-in period for these 
coverage ratios of up to 5 years from the effective date. Under such a 
plan the successor would be permitted to project and achieve lower 
levels for one or more of these coverage ratios during the phase-in 
period.
    (i) A phase-in plan for coverage ratios must provide a pro forma 
level for each ratio during each year of the phase-in period and be 
supported by a financial forecast covering a period of not less than 10 
years from the effective date of the merger. The plan must demonstrate 
that a minimum TIER level of 1.00 will be achieved in each year, that 
trends will be generally favorable, and that the borrower will achieve 
the levels required in its loan documents and RUS regulations by the 
end of the phase-in period, and that these levels will be maintained in 
subsequent years.
    (ii) In reviewing phase-in plans for coverage ratios, RUS will 
review rates, rate disparity, and likely mitigating effects of the 
proposed phase-in plan.
    (iii) The borrower is responsible for obtaining approvals of 
supplemental lenders.
    (iv) Upon RUS approval of a phase-in plan, the levels in that plan 
will be substituted for the levels required in the borrower's 
preexisting loan documents and will be incorporated in any new loan or 
security documents.
    (c) Transitional assistance affecting preexisting loans. The fund 
advance period for an insured loan, which is the

[[Page 41031]]

period during which RUS may advance loan funds to a borrower, 
terminates automatically after a specific period of time. See 7 CFR 
1714.56. If, on the effective date of a merger the fund advance period 
on any preexisting loan to any of the active borrowers involved in a 
merger has not terminated, such fund advance period shall be 
automatically lengthened by 2 years. Such documents will be prepared 
upon the request of a borrower to RUS for the advance of loan funds, 
RUS will prepare documents for the borrower's execution that will 
reflect this extension and will provide the legal authority for RUS to 
advance funds to the successor.


Sec. 1717.155  Requests for transitional assistance.

    (a) If the merger requires RUS approval, the borrower should, where 
possible, indicate that it desires transitional assistance at the time 
it requests approval of the merger. The formal request for transitional 
assistance must be received by RUS as specified in Secs. 1717.154(a) 
and (b). Documents listed in this section may be combined with the 
documents required by Secs. 1717.152 and/or 1717.158 where appropriate. 
If the request for transitional assistance is submitted at the same 
time as a loan application, documents listed in this section may be 
combined with the loan application documents where appropriate. See 7 
CFR part 1710, subpart I. A request for transitional assistance must 
include:
    (1) Transmittal letter(s) formally listing the types of 
transitional assistance requested. If the request is submitted before 
the effective date, a transmittal letter must be signed by the manager 
of each party to the transaction. If the request is submitted on or 
after the effective date, a transmittal letter must be signed by the 
manager of the successor. Transmittal letter(s) must be signed 
originals on corporate letterhead stationery;
    (2) Board resolution(s). If the request is submitted before the 
effective date, a separate board resolution must be submitted from each 
entity involved in the merger. If the request is submitted on or after 
the effective date, a board resolution from the successor must be 
submitted. Each board resolution must be a certified original;
    (3) A merger plan, financial forecasts, and any available studies 
such as net present value analyses showing the anticipated costs and 
benefits of the merger and likely timeframes for the merger. The merger 
plan must clearly identify those benefits that cannot be achieved 
without a merger, and those benefits that can be achieved through other 
means;
    (4) If the transitional assistance requires RUS approval, the type 
and extent of the mitigation that the transitional assistance is 
expected to provide; and
    (5) Other information that may be relevant.
    (b) Borrowers are responsible for ensuring that requests for 
transitional assistance are complete and sound in form and substance 
when they are submitted to RUS. After submitting a request, borrowers 
shall promptly notify RUS of any changes or events that materially 
affect the request or any information in the request.
    (c) In considering whether to approve requests for transitional 
assistance, RUS will evaluate the costs and benefits of the merger; the 
type and extent of the likely transitional stress; whether the 
transitional assistance requested is likely to materially mitigate such 
stress; and the likely impacts on electric rates and on the security of 
RUS loans. Review factors applicable to each type of transitional 
assistance are set forth in Sec. 1717.154.


Sec. 1717.156  Mergers with borrowers who prepaid RUS loans

    In some cases, an active distribution borrower may merge with a 
borrower that has prepaid RUS debt at a discount pursuant to 7 CFR part 
1786, and whose eligibility for future RUS financing is thereby 
restricted. During the period when the restrictions on future financing 
are in effect, the successor will be eligible for RUS loans to finance 
facilities to serve consumers that were served by the active 
distribution borrower immediately prior to the effective date of the 
merger, provided that other requirements for loan eligibility are met.


Sec. 1717.157  Applications for RUS approvals of mergers.

    If a proposed merger requires RUS approval according to RUS 
regulations and/or the loan documents executed by any of the active 
borrowers involved, the application must be submitted to RUS not later 
than 90 days prior to the effective date of the proposed borrower 
action. A distribution borrower should consult with its assigned RUS 
general field representative, and a power supply borrower with the 
Director, Power Supply Division for general information prior to 
submitting the request.


Sec. 1717.158  Application contents.

    An application for RUS approval must include the documents listed 
in this section. Documents listed in this section may be combined with 
the documents required by Secs. 1717.152 and/or 1717.155 where 
appropriate.
    (a) Transmittal letters signed by the managers of all borrowers and 
non-borrowers who are parties to the proposed merger. These letters 
must include the actual corporate name, address, and taxpayer 
identification number of all parties to the proposed merger. The 
transmittal letters must be signed originals on corporate letterhead 
stationery.
    (b) Resolutions from the boards of directors of all borrowers and 
non-borrowers who are parties to the proposed merger. This document is 
the formal request by each entity for RUS approval of the proposed 
merger. The board resolution must include a description of the proposed 
merger, including timeframes, and authorization for RUS to release 
appropriate information to supplemental or other lenders, and for these 
lenders to release appropriate information to RUS. Each board 
resolution must be a certified original.
    (c) Evidence that the proposed merger will result in a viable 
entity, and that the security of outstanding RUS loans will not be 
compromised by the action. This evidence shall include financial 
forecasts, and any available studies such as net present value analyses 
covering a period of not less than 10 years from the effective date of 
the merger, as well as information about any threatened actions by 
other parties that could adversely affect the financial condition of 
any of the parties to the proposed merger, or of the successor. Such 
threatened actions may include annexations or other actions affecting 
service territory, loads, rates or other such matters.
    (d) Regulatory information about pending federal or state 
proceedings pertaining to any of the parties that could have material 
effects on the successor.
    (e) Rate information. Distribution and power supply borrowers shall 
submit schedules of proposed rates after the merger, including the 
effects of the proposed action on rates and the status of any pending 
rate cases before a state regulatory authority. The rates of power 
supply borrowers are subject to RUS approval.
    (f) Area coverage and line extension policies: If any distribution 
systems are parties to the proposed merger, a statement of proposed 
area coverage and line extension policies for the successor.


Sec. 1717.159  Application process.

    (a) Borrowers are responsible for ensuring that their applications 
for RUS

[[Page 41032]]

approval of a merger are complete and sound in form and substance when 
they are submitted to RUS. After submitting an application, borrowers 
shall promptly notify RUS of any changes or events that materially 
affect the application or any information in the application.
    (b) In reviewing borrower requests for approval of mergers, RUS 
will consider the likely effects of the action on the ability of the 
successor to provide reliable electric service at reasonable cost to RE 
Act beneficiaries and on the security of outstanding RUS loans. Among 
the factors RUS will consider are whether the proposed merger is likely 
to:
    (1) Contribute to greater operating efficiency and financial 
soundness;
    (2) Mitigate high electric rates and or rate disparity;
    (3) Help borrowers to diversify their loads or otherwise hedge 
risks;
    (4) Have beneficial effects on rural economic development in the 
community served by the borrower, such as diversifying the economic 
base or alleviating unemployment; and
    (5) Provide other benefits consistent with the purposes of the RE 
Act.
    (c) RUS will not approve a merger if, in the sole judgment of the 
Administrator, such action is likely to have an adverse effect on the 
credit quality of outstanding loans made or guaranteed by the 
Government. RUS will thoroughly review each request for approval of 
such action, including review of the feasibility and security of 
outstanding Government loans according to the standards in 7 CFR 
1710.112 and 1710.113, respectively, and in other RUS regulations.
    (d) RUS will keep the borrowers apprised of the progress of their 
applications.

PART 1786--PREPAYMENT OF RUS GUARANTEED AND INSURED LOANS TO 
ELECTRIC AND TELEPHONE BORROWERS

Subpart F--Discounted Prepayments on RUS Electric Loans

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

    Authority: 7 U.S.C. 901 et seq.; Pub.L. 103-534, 108 Stat. 3178 
(7 U.S.C. 6941 et seq.)

    11. Section 1786.167 is amended by adding a sentence at the end of 
paragraph (a) to read as follows:


Sec. 1786.167  Restrictions to additional RUS financing.

    (a) * * * Special provisions for mergers involving a borrower that 
has prepaid pursuant to this subpart are in 7 CFR 1717.156.
* * * * *
    Dated: July 29, 1996.
Jill Long Thompson,
Under Secretary, Rural Development.
[FR Doc. 96-19711 Filed 8-6-96; 8:45 am]
BILLING CODE 3410-15-P