[Federal Register Volume 65, Number 48 (Friday, March 10, 2000)]
[Proposed Rules]
[Pages 12952-12955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-5852]


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DEPARTMENT OF AGRICULTURE

Rural Utilities Service

7 CFR Parts 1710, 1717, and 1718

RIN 0572-AB51


Reduction in Minimum TIER Requirements

AGENCY: Rural Utilities Service, Agriculture.

ACTION: Proposed rule.

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SUMMARY: The Rural Utilities Service (RUS) is proposing to amend its 
regulations, reducing the minimum Times Interest Earned Ratio (TIER) 
required to be met by distribution borrowers from 1.50 to 1.25. 
Reducing TIER to 1.25, while retaining the existing Debt Service 
Coverage (DSC), Operating Times Interest Earned Ratio (OTIER) and 
Operating Debt Service Coverage (ODSC) standards, will provide the 
borrowers with the flexibility to develop new and unique rate 
structures in an increasingly competitive retail marketplace, yet not 
jeopardize loan security. Conforming amendments relating to exemptions 
of RUS operational controls under section 306E of the Rural 
Electrification Act; consolidations and mergers; sale, lease or 
transfer of capital assets; advance approval-- 100 percent private 
financing of distribution, subtransmission and headquarters facilities; 
and certain other community infrastructure, and mortgage and loan 
agreements, are also contained herein.

DATES: Written comments must be received by RUS on or before April 10, 
2000.

ADDRESSES: Written comments should be addressed to Blaine D. Stockton, 
Jr., Assistant Administrator, Electric Program, U.S. Department of 
Agriculture, Rural Utilities Service, Room 4037 South Building, Stop 
1560, 14th & Independence Ave., SW., Washington, DC 20250-1560. 
Telephone 202-720-95457. RUS requests a signed original and three

[[Page 12953]]

copies of all comments (7 CFR 1700.4). Comments will be available for 
public inspection during regular business hours (7 CFR 1.27(b)).

FOR FURTHER INFORMATION CONTACT: Robert O. Ellinger, Management/
Industry Analyst, Rural Utilities Service, Electric Program, Room 4023 
South Building, Stop 1560, 14th & Independence Ave., SW., Washington, 
DC 20250-1560, Telephone: 202-720-0424.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This proposed rule has been determined to be not significant for 
purposes of Executive Order 12866 and, therefore, has not been reviewed 
by the Office of Management and Budget (OMB).

Executive Order 12988

    This proposed rule has been reviewed in accordance with Executive 
Order 12988, Civil Justice Reform. RUS has determined that this 
proposed rule meets the applicable standards provided in section 3 of 
the Executive Order. In accordance with the Executive Order and the 
rule: (1) All state and local laws and regulations that are in conflict 
with this rule will be preempted; (2) no retroactive effect will be 
given to this rule and (3) in accordance with Sec. 212(e) of the 
Department of Agriculture Reorganization Act of 1994 (7 U.S.C. 6912 
(e)) administrative appeals procedure, if any are required must be 
exhausted prior to initiating litigation against the Department or its 
agencies.

Regulatory Flexibility Act Certification

    The Administrator of RUS has determined that a rule relating to 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 rule. RUS borrowers, as a result 
of obtaining Federal financing, receive economic benefits that exceed 
any direct economic costs associated with complying with RUS 
regulations and requirements.

Information and Recordkeeping Requirements

    The reporting and recordkeeping requirements contained in the 
proposed rule are approved by the Office of Management and Budget (OMB) 
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35) 
under control number 0572-0032.

Unfunded Mandates

    This proposed rule contains no Federal mandates (under the 
regulatory provision of Title II of the Unfunded Mandates Reform Act) 
for State, local, and tribal governments or the private sector. Thus, 
this proposed rule is not subject to the requirements of section 202 
and 205 of the Unfunded Mandates Reform Act.

National Environmental Policy Act Certification

    The Administrator of RUS has determined that this proposed rule 
will not significantly affect the quality of 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.

Catalog of Federal Domestic Assistance

    The program described by this proposed 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, 
U.S. Government Printing Office, Washington, DC 20402-9325, telephone 
number (202) 512-1800.

Executive Order 12372

    This proposed rule is excluded from the scope of Executive Order 
12372, Intergovernmental Consultation, which may require consultation 
with State, local, and tribal governments or the private sector. See 
the final rule related notice entitled ``Department Programs and 
Activities Excluded From Executive Order 12372'' (50 FR 47034).

Background

    A Times Interest Earned Ratio (TIER) is a financial measurement 
relating to the borrower's ability, on an annual basis, to earn margins 
sufficient to cover the interest charges on its total outstanding 
indebtedness (long-term and short-term). As originally used in RUS loan 
documentation, the borrower was required to set rates designed to 
produce annual margins equal to one and one-half times its annual 
interest cost on total indebtedness for two of the previous three 
years. The TIER requirement was first established in RUS mortgages in 
1971 to facilitate the ability of the then new National Rural Utilities 
Cooperative Finance Corporation (CFC) to raise lending capital by 
issuing bonds secured by the pledge of electric distribution system 
mortgages requiring a TIER of 1.5 or more. CFC no longer imposes this 
requirement. However, many older RUS mortgages on which CFC is a co-
mortgagee still contain a TIER requirement substantially unchanged 
since 1971. As discussed below, most electric distribution mortgages 
used by RUS after 1995 require a 1.5 TIER only as a prerequisite to 
issuing additional secured indebtedness under such mortgages without 
the need for obtaining the consent of the mortgagees.
    As part of the 1995 revision to 7 CFR Part 1718, Loan Security 
Documents for Electric Borrowers (July 18, 1995), RUS shifted the 
covenant to design rates to achieve TIER from the mortgage to the new 
RUS loan contract for distribution borrowers. RUS also retained the 
existing standard TIER and DSC ratios set at the existing minimum 
levels of 1.5 and 1.25 respectively, while adding an Operating Times 
Interest Earned Ratio (OTIER) and Operating Debt Service Coverage 
(ODSC), both set at a minimum of 1.1 for the borrower's electric 
utility operations. Adding OTIER and ODSC achieved the RUS objective of 
excluding major ``non-cash'' margins from the coverage tests, requiring 
that borrowers at least break even, with a small margin for error, on 
their primary business. The borrower's electric utility business 
accounts for most of the financing assistance provided by RUS, is the 
main source of revenue for repaying the loans and provides the primary 
security for the loans. Therefore, RUS believes it is reasonable to 
expect the core business to be financially viable and not dependent on 
other sources of income to cover expenses. The addition of OTIER and 
ODSC as coverage ratios has made TIER (specifically at the 1.5 level) 
less critical in determining financial stability.
    As the electric utility industry continues to move toward a more 
competitive retail marketplace, RUS is reviewing and updating its 
policies and procedures relating to electric borrowers. This new 
competitive environment brings with it the need to provide borrowers 
greater flexibility in establishing competitive rates. To this end, RUS 
believes that a reduction in reducing the minimum TIER level to 1.25 is 
now appropriate. Such a reduction will provide borrowers with 
additional flexibility to structure competitive rates in the 
marketplace without jeopardizing loan security. RUS believes that a 
thorough review of the TIER (as reduced), DSC, OTIER and ODSC ratios, 
combined with an in-depth study of a borrower's Annual Financial and 
Statistical Report, provides sufficient information to evaluate a 
borrower's credit worthiness and to judge loan repayment ability.
    In reducing the minimum TIER requirement RUS does not expect a rush

[[Page 12954]]

by borrowers to implement this minimum in their financial planning. RUS 
recognizes that most borrowers manage their systems in such a fashion 
as to provide for a financial cushion with respect to operating ratios. 
In many cases this makes good business sense. However, RUS does expect 
that such a reduction will provide the flexibility required by 
borrowers facing severe competitive pressure on retail rates to act 
accordingly.
    With respect to the TIER reduction proposal and its relationship to 
Sec. 1710.7--Exemptions of RUS operational controls under section 306E 
of the RE Act; Sec. 1717.615--Consolidations and mergers; 
Sec. 1717.616--Sale, lease or transfer of capital assets; and 
Sec. 1717.854--Advance approval--100 percent private financing of 
distribution, subtransmission and headquarters facilities, and certain 
other community infrastructure; RUS is also proposing to reduce the 
TIER ratio level to 1.25 in an effort to maintain uniformity throughout 
the regulations. RUS believes it would be unwise to propose a TIER 
level different than 1.25. Establishing different TIER levels for 
different borrower actions and RUS approvals will only serve to add 
confusion causing administrative and communication problems. RUS 
believes that a borrower's strong financial condition can be supported 
by the reduced TIER and current DSC, OTIER and ODSC operation ratios 
will support the waivers granted in these provisions.
    The proposed rule affects existing loan documents. Most electrical 
distribution borrower mortgages used by RUS contain the provision found 
in Section 2.03 of the model mortgage (RUS Information Publication 
1718B). Generally speaking, Section 2.03 allows the mortgagor to issue 
additional secured notes under the mortgage even if it does not satisfy 
the requirements for issuing additional secured debt specified in 
section 2.01, provided that the prior written consent of each mortgagee 
is obtained. RUS is proposing that the final rule serve as its written 
consent to the issuance of additional secured notes under Section 2.03 
of such mortgage in cases where the borrower would otherwise satisfy 
all requirements of section 2.01 of its mortgage if the minimum TIER as 
contained in section 2.01(1) of the mortgage were 1.25, instead of 1.5. 
Similarly, mortgages following the model mortgage contain a section 
3.10 that imposes limitations on the borrower's ability to merge or 
consolidate without the prior written consent of the mortgagees. RUS is 
proposing that the final rule serve as its written consent to such 
mergers or consolidations under section 3.10 of such a mortgage in 
cases where the borrower would otherwise satisfy all the requirements 
of section 3.10(6)(B) of its mortgage if the minimum TIER as contained 
in such section were 1.25 instead of 1.5.
    In other words, in most instances it would not be necessary for 
borrowers who have already used mortgages following the model mortgage 
to go through the expense and burden of issuing new mortgages or 
mortgage supplements to take advantage of the proposed change in TIER. 
Of course, the written consent of any other mortgagees would still have 
to be obtained and all requirements in the RUS loan contract would need 
to be observed. RUS is also proposing that future mortgages use the 
1.25 TIER instead of the 1.5 TIER contained in sections 2.01 and 3.10 
of the model mortgage and it invites the comments of supplemental 
lenders on such an approach. RUS expects that RUS Information 
Publication 1718B (the model mortgage) will be conformed to the 
proposed 1.25 TIER whenever the rule becomes effective.
    Similarly, RUS is proposing to substitute a 1.25 TIER for the 1.5 
TIER wherever it appears in the model loan contract 7 CFR part 1718, 
subpart C, appendix A). Loan contracts entered into after the effective 
date of the proposed rule will use the new standard. In order to 
eliminate the expense and burden of amending existing loan contracts to 
implement the change, RUS is proposing that the final rule operate as a 
self executing amendment to all provisions contained in any existing 
electric distribution loan contract with RUS that uses a 1.5 TIER 
provision. It is not expected that any borrower will object to such an 
amendment of its existing loan contract but any borrower who does 
should promptly notify RUS to that effect and RUS will maintain the 
existing provision as to any such objecting borrower.

List of Subjects

7 CFR Part 1710

    Electric power, Electric utilities, Loan programs--energy, 
Reporting and recordkeeping requirements, Rural areas.

7 CFR Part 1717

    Administrative practice and procedure, Electric power, Electric 
power rates, Electric utilities, Intergovernmental relations, 
Investments, Loan programs--energy, Reporting and recordkeeping 
requirements, Rural areas.

7 CFR Part 1718

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

    For the reasons set forth in the preamble, chapter XVII of title 7 
of the Code of Federal Regulations, is proposed to be amended to read 
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 is revised to read as 
follows:


    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.

    2. Revise Sec. 1710.7(c)(13)(vi)(B) and Sec. 1710.7(c)(14)(ii) to 
read as follows:


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

* * * * *
    (c) * * *
    (13) * * *
    (vi) * * *
    (B) Having a pro forma TIER of not less than 1.25 and a pro forma 
DSC of not less than 1.25 for each of the two proceeding calendar 
years; and
* * * * *
    (14) * * *
    (ii) In the most recent year for which data are available, the 
borrower achieved a TIER of at least 1.25, DSC of at least 1.25, OTIER 
of at least 1.1, and ODSC of at least 1.1, in each case based on the 
average or the best 2 out of the 3 most recent years.
* * * * *
    3. Revise Sec. 1710.114(b)(1) to read as follows:


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

* * * * *
    (b) Coverage Ratios. (1) Distribution borrowers. The minimum 
coverage ratios required of distribution borrowers whether applied on 
an annual or average basis, are a TIER of 1.25, DSC of 1.25, OTIER of 
1.1, and ODSC of 1.1. OTIER and ODSC shall apply to distribution 
borrowers that receive a loan approved on or after January 29, 1996.
* * * * *

[[Page 12955]]

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

    4. The authority citation for part 1717 is revised to read as 
follows:


    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.

    5. Revise Sec. 1717.615(f)(2) to read as follows:


Sec. 1717.615  Consolidations and mergers.

* * * * *
    (f) * * *
    (2) A pro forma TIER of not less than 1.25 and a pro forma DSC of 
not less than for each of the two preceding calendar years; and
* * * * *
    6. Revise Sec. 1717.616(b) to read as follows:


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

* * * * *
    (b) In the most recent year for which data are available, the 
borrower achieved a TIER of at least 1.25, DSC of at least 1.25, OTIER 
of at least 1.1, and ODSC of at least 1.1 in each case based on the 
average or the best 2 out of the 3 most recent years.
* * * * *
    7. Revise Sec. 1717.854(c)(1) to read as follows:


Sec. 1717.854  Advance approval--100 percent private financing of 
distribution, subtransmission and headquarters facilities, and certain 
other community infrastructure.

* * * * *
    (c) * * *
    (1) The borrower has achieved a TIER of at least 1.25 and a DSC of 
at least 1.25 for each of 2 calendar years immediately preceding, or 
any 2 consecutive 12 month periods ending within 180 days immediately 
preceding, the issuance of the debt;
* * * * *

PART 1718--LOAN SECURITY DOCUMENTS FOR ELECTRIC BORROWERS

    8. The authority citation for Part 1718 is revised to read as 
follows:


    Authority: 7 U.S.C. 901 et seq., 1921 et seq., 6941 et seq.

Subpart B--Mortgage for Distribution Borrowers

    9. Article II, section 2.01(a)(1)(i) and Article III, section 
3.10(6)(B) of Appendix A to Subpart B to Part 1718 are revised to read 
as follows:

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

* * * * *

Article II--Additional Notes

    Section 2.01 * * *
    (a) * * *
    (1) * * *
    (i) The Mortgagor shall have achieved for each of the two 
calendar years immediately preceding the issuance of such Additional 
Notes, a TIER of not less than 1.25 and a DSC of not less than 1.25;
* * * * *

Article III--Particular Covenants of the Mortgagor

* * * * *
    Section 3.10 * * *
    (6) * * *
    (B) having a pro forma TIER of not less than 1.25 and a pro 
forma DSC of not less than 1.25 for each of the two preceding 
calendar years, and
* * * * *

Subpart C--Loan Contracts With Distribution Borrowers

    10. The definition of ``Coverage Ratios'' in Article I, 
Definitions, and Article V, section 5.4(b) of Appendix A to Subpart C 
to Part 1718 are revised to read as follows:

Appendix A to Subpart C to Part 1718--Model Form of Loan Contract for 
Electric Distribution Borrowers

* * * * *

Article I--Definitions

* * * * *
    ``Coverage Ratios'' shall mean, collectively, the following 
financial ratios: (i) TIER of 1.25; (ii) Operating TIER of 1.1; 
(iii) DSC of 1.25; and Operating DSC of 1.1.
* * * * *

Article V--Affirmative Covenants

* * * * *
    Section 5.4 * * *
    (b) The average Coverage Ratios achieved by the Borrower in the 
2 best years out of the 3 most recent calendar years must be not 
less than any of the following:
TIER=1.25
DSC=1.25
OTIER=1.1
ODSC=1.1
* * * * *

    Date: March 3, 2000.
Jill Long Thompson,
Under Secretary, Rural Development.
[FR Doc. 00-5852 Filed 3-9-00; 8:45 am]
BILLING CODE 3410-15-P