[Federal Register Volume 65, Number 166 (Friday, August 25, 2000)]
[Rules and Regulations]
[Pages 51747-51749]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-21772]



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 Rules and Regulations
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  Federal Register / Vol. 65, No. 166 / Friday, August 25, 2000 / Rules 
and Regulations  

[[Page 51747]]



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, USDA.

ACTION: Final rule.

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

SUMMARY: The Rural Utilities Service (RUS) hereby reduces the minimum 
TIER (Times Interest Earned Ratio) requirement 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.

EFFECTIVE DATE: This rule is effective September 25, 2000.

FOR FURTHER INFORMATION CONTACT: Robert O. Ellinger, Management 
Analyst, U.S. Department of Agriculture, Rural Utilities Service, 
Electric Program, Room 4023 South Building, Stop 1560, 1400 
Independence Ave., SW., Washington, DC 20250-1560, Telephone: 202-720-
0424

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This 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 rule has been reviewed in accordance with Executive Order 
12988, Civil Justice Reform. RUS has determined that this 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. Sec. 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 this rule will not 
have significant impact on a substantial number of small entities 
defined in the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). The 
RUS loan program provides borrowers with loans at interest rates and 
terms that are more favorable than those generally available from the 
private sector. 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 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 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 rule is 
not subject to the requirements of sections 202 and 205 of the Unfunded 
Mandates Reform Act.

National Environmental Policy Act Certification

    The Administrator of RUS has determined that this 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 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 rule is excluded from the scope of Executive Order 12372, 
Intergovernmental Consultation, which may require consultation with 
state and local offices. See the final rule related notice entitled 
``Department Programs and Activities Excluded From Executive Order 
12372,'' (50 FR 47034) advising that RUS loans and loan guarantees were 
not covered by Executive Order 12372.

Background

    On March 10, 2000, at 65 FR 12952, the Rural Utilities Service 
(RUS) published a proposed rule, 7 CFR Parts 1710, 1717, and 1718--
Reduction in Minimum TIER Requirements, which proposed the agency 
reduce the minimum TIER (Times Interest Earned Ratio) requirement to be 
met by distribution borrowers from 1.50 to 1.25. 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, were also contained therein.

[[Page 51748]]

    Written comments on the proposed rule were received from 11 
different sources, including one statewide cooperative organization. 
All of the comments were taken into consideration in preparing this 
final rule. The comments are discussed below.
    Ten (10) comments strongly supported the proposed reduction in 
TIER. One (1) borrower submitted a comment questioning why RUS used the 
TIER ratio as part of its loan security review process. The borrower 
stated that Debt Service Coverage (DSC) and Operating Debt Service 
Coverage (ODSC) ratios are more meaningful and are more inline with 
what other financial institutions review for loan security.
    RUS believes it is important to retain TIER and DSC as coverage 
tests and not rely solely on DSC. Given the fact that the amortization 
of principal for virtually all debt owed by borrowers is heavily back-
end loaded and that depreciation charges substantially exceed principal 
payments now and the foreseeable future, relying solely on DSC and ODSC 
would allow many distribution borrowers to operate at a loss and still 
meet the coverage ratio. TIER, on the other hand, provided that it is 
set at least at 1.0, requires a borrower to at least break even, either 
for its overall operations in the case of standard TIER, or its 
electric utility operations in the case of operating TIER. RUS dos not 
believe it would be in the best interests of the rural electrification 
program, either from the standpoint of loan security and financial 
soundness or public support, to rely on a standard that would allow a 
large number of borrowers to operate at a loss.
    RUS recognizes the importance of establishing appropriate and 
meaningful financial ratios in an effort to measure a borrower's 
financial stability. RUS believes that a thorough review of 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 
help insure that the borrower's overall operations are financially 
sound.

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, 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 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.
* * * * *

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. In appendix A to subpart B to part 1718, Article II, section 
2.01(a)(1)(i) and Article III, section 3.10(6)(B) are revised to read 
as follows:

[[Page 51749]]

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
* * * * *

    Dated: August 17, 2000.
Jill Long Thompson,
Under Secretary, Rural Development.
[FR Doc. 00-21772 Filed 8-24-00; 8:45 am]
BILLING CODE 3410-15-P