[Federal Register Volume 61, Number 245 (Thursday, December 19, 1996)]
[Rules and Regulations]
[Pages 66867-66874]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32084]


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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: Final rule.

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SUMMARY: The Rural Utilities Service (RUS) is streamlining 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: This rule is effective January 21, 1997.

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.) for 
which RUS published a general notice of proposed rulemaking pursuant to 
5 U.S.C. 553(b), or any other law. 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 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 12988, Civil Justice Reform. RUS has determined that this 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

[[Page 66868]]

available on a subscription basis from the Superintendent of Documents, 
the United States Government Printing Office, Washington, DC 20402-
9325.

Information Collection and Recordkeeping Requirements

    The recordkeeping and reporting burdens contained in this rule were 
approved by the Office of Management and Budget (OMB) pursuant to the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35, as amended) 
under control number 0572-0114.

Background

    In response to rapid changes in the regulatory and business 
environment of the electric industry, many electric borrowers are 
exploring the possibility of mergers. It is clear that the success of 
the RUS electric program in supporting rural infrastructure and 
economic development is directly tied to the ability of borrowers to 
respond rapidly to new business challenges, including opportunities to 
merge.
    On August 7, 1996, at 61 FR 41025, RUS published proposed rules to 
update RUS policies on mergers. (The term ``merger'' as used in this 
rule refers generically to mergers, consolidations, and similar 
actions.) The intention of this action is to encourage borrowers to 
merge, consolidate, or enter into similar agreements that benefit 
borrowers and are consistent with the interests of RUS as a secured 
lender. The rules proposed: (1) Transitional assistance measures to 
assist borrowers during the transition period before long-term merger 
benefits can be realized; (2) A streamlined application process for 
mergers that require RUS approval; and (3) Documentation that RUS as a 
secured lender needs in order to conduct business with any newly merged 
entity.
    RUS received a total of eight comments on the proposed rule. Three 
comments are from individual electric distribution borrowers. Two of 
these borrowers said in their comments that they are negotiating a 
merger with each other.
    Other commenters include a three-state association of distribution 
borrowers; a group of three power supply (G&T) borrowers in Texas; an 
individual G&T borrower in Indiana; the National Rural Electric 
Cooperative Association (NRECA), a national organization representing 
RUS electric borrowers; and the National Rural Utilities Cooperative 
Finance Corporation (CFC), a private sector supplemental lender to RUS 
borrowers.
    Commenters generally supported the proposed rules.

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, the rules 
proposed 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 in some cases 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.
    The proposed rule included several types of transitional 
assistance, and all commenters offered suggestions.

Organization of the Rule

    To avoid any confusion about borrower eligibility for transitional 
assistance, RUS has redrafted 7 CFR Part 1717 in the final rule 
slightly. The section designated as Sec. 1717.154 in the proposed rule 
has been split into three sections: Secs. 1717.154, 1717.155, and 
1717.156, and language has been added clearly stating which borrowers 
are eligible for which types of transitional assistance. Sections 
1717.155-1717.159 of the proposed rule are redesignated accordingly in 
the final rule.

Transitional Assistance in General

    One commenter believes that ``successful mergers create their own 
benefits.'' The commenter expressed concerns that offering transitional 
assistance to newly merged entities implies that bigger is 
automatically better and is unfair to cooperatives whose members choose 
not to merge.
    As stated in 7 CFR 1717.150(b), RUS encourages electric borrowers 
to consider mergers when such action is likely to contribute to greater 
operating efficiency and financial soundness. RUS does not intend to 
convey the impression that bigger is always better. RUS emphasizes that 
transitional assistance is not intended to reward borrowers simply for 
growing. It is intended, rather, to ease the transition period before 
long-term merger benefits can be realized.
    Other commenters noted that agreements short of merger, such as 
shared services initiatives, may provide benefits similar to those of a 
merger. They asked that RUS consider transitional assistance following 
such agreements. RUS agrees that shared services agreements can offer 
substantial benefits. However, transitional assistance is intended to 
help mitigate the short term financial stresses associated with 
mergers. Such stresses are not generally associated with shared service 
agreements, and RUS cannot, therefore, justify providing transitional 
assistance in these cases.
    CFC suggested that RUS make loan funds available for ``soft costs'' 
of mergers, such as studies and consultant fees. RUS believes that 
prudent borrowers should analyze various business opportunities as a 
matter of course. RUS does not believe that such studies are an 
appropriate use of loan funds.
    NRECA suggested that RUS offer ``more aggressive incentives'' to 
merger candidates in appropriate situations. These more aggressive 
incentives could include a write down of principal and interest on RUS 
loans and loan guarantees as an incentive to mergers between a 
financially strong borrower and a financially weak borrower pursuant to 
Section 748 of the Federal Agriculture Improvement and Reform Act of 
1996 (Pub.L. 104-127), which amended Section 331(b)(4) of the 
Consolidated Farm and Rural Development Act (7 U.S.C. 1981(b)(4)). RUS 
is developing a separate rulemaking to implement this new law. 
Addressing write downs in today's final rule without an extended period 
for public comment would be premature.
    NRECA also suggested that, as a counterpart to offering priority 
loan processing, RUS also offer priority processing of lien 
accommodations. Existing regulations at 7 CFR 1717.859 establish 
timeframes for RUS action on lien accommodations. Priority loan 
processing is intended to address situations where loan approval is 
delayed because requests for loan funds from eligible borrowers 
temporarily exceed the amount of loan funds appropriated. This 
situation does not exist for lien accommodations. RUS believes that no 
change to existing rules for lien accommodations is needed.

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. The rule proposed, in 7 CFR 1710.119 and 
1717.154(a)(1), to alter this policy to

[[Page 66869]]

offer priority processing on loans to newly merged borrowers. RUS 
would, at the borrower's request, offer loan processing priority for 
the first loan following a merger if 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, under certain conditions.
    One commenter wondered about the exact meaning of the term ``loan 
processing priority.'' Loan processing priority means simply that a 
loan application will be moved as close to the front of the processing 
queue as the Administrator determines to be appropriate, considering 
such factors as the urgency of applications in hand and the loan 
authority for the fiscal year.
    Another commenter supported the proposal provided ``that this loan 
processing priority should not have a detrimental effect on other 
borrowers.'' RUS believes that loan processing priority under the 
limited conditions in the rule can be implemented in a way that is fair 
and equitable to all borrowers.

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 rule proposed in 7 CFR 1710.110 and 
1717.154(b) to waive the supplemental financing requirement for the 
first RUS loan following a merger between active distribution borrowers 
if 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 loan 
period is longer than 2 years, RUS may reduce or waive supplemental 
financing under the conditions set out in the rule.
    Most commenters support this amendment. One commenter requested 
that waiver of supplemental financing apply automatically if the loan 
period is as long as 4 years. The limit of 2 years for automatic waiver 
is to avoid undue processing delays for all borrowers during periods 
when the demand for loan funds is high and funding levels are 
uncertain. RUS will consider waiver of supplemental financing on a 
case-by-case basis if the loan period is longer than 2 years as set 
forth in Sec. 1717.154(b) of the final rule.
    Two distribution borrowers that are considering merging with each 
other asked for a clarification of RUS policy on supplemental financing 
in connection with future loans, after the complete waiver on the first 
loan. Under long-standing RUS policy, borrowers who in 1980 had either 
extremely low consumer density or a very high adjusted plant revenue 
ratio are now required to obtain only 10 percent of their debt 
financing from a supplemental source. For most borrowers the required 
supplemental financing portion is determined at the time of loan 
approval and may be as high as 30 percent. See existing rules at 7 CFR 
1710.110(c). One of these two commenters is now grandfathered as a 
``90/10'' borrower, and the commenters wonder whether they will lose 
this benefit by merging.
    RUS will grandfather 90/10 status for that portion of the system 
that enjoyed this benefit prior to the merger. In other words, the 
portion of a loan that is for facilities to serve consumers in 
territory that were served by the 90/10 borrower immediately prior to 
the merger will be eligible for 90 percent RUS financing; the 
supplemental financing portion on loans to serve the rest of the system 
will be determined at the time of loan approval pursuant to 7 CFR 
1710.110(c)(1)(ii). The final rule adds this provision to 7 CFR 
1710.110(c)(1).

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). Under the 
proposed rule in 7 CFR 1710.114 and 1717.154(b)(2), RUS could approve, 
on a case-by-case basis, a phase-in plan allowing a distribution 
borrower to project and achieve lower levels for up to 5 years 
following a merger, provided that a minimum TIER level of 1.00 is 
maintained, and that trends are generally favorable.
    NRECA believes that a cash DSC, similar, but not identical to ODSC 
is a better measure of the borrower's ability to meet its debt service 
payments than TIER. NRECA urged RUS to replace the minimum TIER 
requirement with a minimum cash DSC requirement in any phase-in plan 
for coverage ratios.
    As stated in 7 CFR 1717.155 of the final rule, RUS will require any 
borrower requesting a phase-in plan to submit a financial forecast 
demonstrating the borrower's ability to meet its debt service payments. 
In addition, the rule leaves RUS the option of requiring a minimum 
level of DSC and other coverage ratios in an individual phase in plan. 
RUS believes that a minimum TIER level of 1.00 is the appropriate 
across the board rule of thumb for a phase-in plan.

Advance of Funds From Insured Loans

    The fund advance period, which is the period during which funds 
from an insured loan may be advanced to a borrower, generally 
terminates automatically after 4 or 5 years. See 7 CFR 1714.56. 
However, the execution and filing of legal documents after a merger 
often takes some time, and RUS cannot advance funds to a successor 
until the documents are executed and filed. Therefore, the rule 
proposed in 7 CFR 1714.56(c) and 7 CFR 1717.154(c), to generically 
extend this period for preexisting loans with unadvanced funds on the 
effective date of a merger.
    One commenter wondered whether the automatic termination date would 
be generically extended after a merger if the period had been extended 
once already. The answer is yes. This extension is granted because of 
the time requirements for legal completion of a merger. Section 7 CFR 
1717.156 of the final rule clarifies this point.
    Other commenters requested that the fund advance period be 
generically extended by 5 years instead of the 2 years proposed. RUS 
believes that the 2-year extension provides adequate time for 
preparation and filing of merger documents. In cases where more time is 
needed, the borrower may request an additional extension pursuant to 7 
CFR 1714.56(c).
    Finally, one commenter requested that a longer fund advance period 
be available to all borrowers, regardless of whether the borrower has 
merged. As already noted, any borrower may apply for an extension under 
7 CFR 1714.56(c).

Applicability of Transitional Assistance to Power Supply (G&T) 
Borrowers

    Under the proposed rule, certain types of transitional assistance 
would be available only to distribution borrowers. The G&T borrowers 
who commented and NRECA believe that mergers involving G&T's can offer 
many of the same benefits as mergers between distribution borrowers.
    Two of the types of transitional assistance limited to distribution 
borrowers are waiver of supplemental financing and a longer period for 
reimbursement of general funds and interim financing. Since loans to 
G&T's are generally much larger than loans to distribution systems, RUS 
cannot offer these types of incentives to power supply borrowers 
without sharply reducing the funds available for smaller distribution 
systems.

[[Page 66870]]

    These commenters also requested that a phase-in period for coverage 
ratios also be available to G&T's. Required minimum levels of TIER and 
DSC for G&T's are 1.05 and 1.00, respectively. RUS rules do not 
establish required minimum levels for OTIER or ODSC for G&T's. See 7 
CFR 1710.114(b)(2). It would not be prudent for RUS to allow lower 
levels of TIER or DSC.

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. Questions arise about the eligibility of a 
newly merged system where one of the merging entities had ``bought 
out'' of RUS, and the other is still an active borrower.
    Under the proposed rule at 7 CFR 1717.156 and 1786.167(a), the 
Administrator would exercise discretionary authority to approve insured 
loans to finance facilities to serve only consumers that were, 
immediately prior to the merger, served by the active borrower; that 
is, the borrower that did not prepay. Several commenters questioned 
this policy, noting, among other things the administrative burden 
involved in separating facilities eligible for RUS financing from 
facilities that are not.
    RUS believes that the administrative burden of separating 
facilities eligible for RUS financing from those not eligible is not as 
great as it appears. Locations of new facilities and consumers should 
be part of the borrower's construction work plans and should be clear 
in the loan application documents. If there are questions, in cases 
where, for example, a single distribution line will serve some 
consumers that are located in territory formerly served by the borrower 
that was active immediately prior to the merger, and other consumers in 
territory that was served by the former borrower that prepaid, RUS will 
consider any reasonable method for allocating funds.
    However, RUS has redrafted other portions of the final rule in 
order to encourage beneficial mergers between active borrowers and 
former borrowers. According to the proposed rule, certain types of 
transitional assistance (waiver of supplemental financing, longer 
period for reimbursement of general funds, and phase in plan for 
coverage ratios, 7 CFR 1717.154(a)(2) and 1717.154(3)(b)(2), 
respectively) would be available only if all parties to the merger are 
active distribution borrowers. The final rule at 7 CFR 1717.154(b) and 
1717.154(c), and 1717.155(b), extends availability for this assistance 
to mergers where at least one of the parties is a former distribution 
borrower and all other parties are active distribution borrowers if the 
merger is effective after December 19, 1996.

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.
    One commenter addressed the timeframe for RUS processing. This 
commenter urged RUS ``to require action by RUS within a certain 
designated time period.'' According to the proposed rule at 7 CFR 
1717.157 (final rule at section 1717.159), borrowers must submit 
applications for RUS approval of mergers no later than 90 days prior to 
the proposed effective date. RUS understands that mergers are time 
sensitive and intends to make every effort to act on these applications 
in timely fashion.
    Another commenter questioned the need for rate information in 7 CFR 
1717.158(e) of the proposed rule, in cases where rates schedules will 
not change after the merger. RUS agrees, and section 1717.160(e) of the 
final rule now notes that a statement that no change to rate schedules 
is planned will suffice, if such is the case.

Rescission of Obsolete Directive

    Effective January 21, 1997, REA Bulletin 115-2, Merger and 
Consolidation of Electric Borrowers, is rescinded. RUS has determined 
that this bulletin, issued November 9, 1972, is obsolete.

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 amends 7 CFR Chapter XVII as follows:

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

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

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

    2. Section 1710.109 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 
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) and adding a new paragraph (c)(1)(iii):


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. * * *
* * * * *
    (c) * * *
    (1) * * *
    (iii) If a distribution borrower enters into a merger, 
consolidation, or transfer of system substantially in its entirety, and 
the provisions of 7 CFR 1717.154(b) do not apply, required supplemental 
financing will be determined as follows for loans approved by RUS after

[[Page 66871]]

December 19, 1996. If one of the merging parties met the criteria in 
paragraph (c)(1)(i) of this section prior to the effective date of the 
merger consolidation or transfer, the borrower will be required to 
obtain supplemental financing equal to 10 percent of any loan funds 
requested for facilities to serve consumers located in the territory 
formerly served by the ``paragraph (c)(1)(i)'' borrower. The required 
amount of supplemental financing for the rest of the loan will be 
determined according to the provisions of paragraph (c)(1)(ii) 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 1717.155.
* * * * *
    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
* * * * *

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 1717.156.
* * * * *

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  Transitional assistance in connection with new loans.
1717.155  Transitional assistance affecting new and preexisting 
loans.
1717.156  Transitional assistance affecting preexisting loans.
1717.157  Requests for transitional assistance.
1717.158  Mergers with borrowers who prepaid RUS loans.
1717.159  Applications for RUS approval of mergers.
1717.160  Application contents.
1717.161  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 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.
    Former distribution borrower means any organization that (1) sells 
or intends to sell electric power and energy at retail;
    (2) at one time had an outstanding loan made or guaranteed by RUS, 
or its predecessor the Rural Electrification Administration (REA) for 
rural electrification; and
    (3) either repaid such loans at face value or prepaid pursuant to 7 
CFR part 1786.
    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

[[Page 66872]]

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, and outstanding on the effective date.
    Successor means the entity that continues as the surviving business 
entity as of the effective date, 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 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. 1717.157 and/or 1717.160 
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;
    (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  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.
    (a) Loan processing priority. (1) 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. 
In reviewing requests for loan processing priority on subsequent loans, 
RUS will consider the loan authority for the fiscal year, 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) Loan processing priority is available following any merger 
where at least one of the merging parties is an active borrower.
    (b) Supplemental financing. (1) 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. 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. 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 would result, the 
waiver will be granted.
    (2) Waiver of supplemental financing may be available if:
    (i) All parties to the merger are active distribution borrowers, or
    (ii) At least one of the merging parties is an active distribution 
borrower, all merging parties are either active distribution borrowers 
or former distribution borrowers, and the merger is effective after 
December 19, 1996.
    (c) Reimbursement of general funds and interim financing. (1) 
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. 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

[[Page 66873]]

effective date. In reviewing requests for this 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.
    (2) A longer reimbursement period may be available if:
    (i) All parties to the merger are active distribution borrowers, or
    (ii) At least one of the merging parties is an active distribution 
borrower, all merging parties are either active distribution borrowers 
of former distribution borrowers, and the merger is effective after 
December 19, 1996.


Sec. 1717.155  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.
    (a) Section 12 deferments. (1) 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) Section 12 deferment may be available following any merger 
where at least one of the merging parties is an active borrower.
    (b) Coverage ratios. Required levels for coverage ratios are set 
forth in 7 CFR 1710.114 and in the loan documents. 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.
    (1) 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, 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.
    (2) In reviewing phase-in plans for coverage ratios, RUS will 
review rates, rate disparity, and likely mitigating effects of the 
proposed phase-in plan.
    (3) The borrower is responsible for obtaining approvals of 
supplemental lenders.
    (4) 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.
    (5) A phase in plan for coverage ratios may be available if:
    (i) All parties to the merger are active distribution borrowers, or
    (ii) At least one of the merging parties is an active distribution 
borrower, all merging parties are either active distribution borrowers 
or former distribution borrowers, and the merger is effective after 
December 19, 1996.


Sec. 1717.156  Transitional assistance affecting preexisting loans.

    The fund advance period for an insured loan, which is the 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 the original fund advance period or the fund 
advance period as extended pursuant to 7 CFR 1714.56(c), on any 
preexisting RUS 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. On the borrower's request RUS will 
prepare documents necessary 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. 1717.157  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. 1717.155 and 
171.156. Documents listed in this section may be combined with the 
documents required by Secs. 1717.152 and/or 1717.160 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 Secs. 1717.154-1717.156.


Sec. 1717.158  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

[[Page 66874]]

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 located in the territory that 
was served by the active distribution borrower immediately prior to the 
effective date, provided that other requirements for loan eligibility 
are met.


Sec. 1717.159  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. 1717.160  Application contents.

    An application for RUS approval of a merger 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 
1717.157 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 
adversely affected 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. If rates are not 
projected to change after the merger, a statement to that effect will 
suffice.
    (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. 1717.161  Application process.

    (a) Borrowers are responsible for ensuring that their applications 
for RUS 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 1717.158.
* * * * *
    Dated: December 13, 1996.
Jill Long Thompson,
Under Secretary, Rural Development.
[FR Doc. 96-32084 Filed 12-18-96; 8:45 am]
BILLING CODE 3410-15-P