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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7102
__________
NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DISTRICT OF COLUMBIA
(State or other jurisdiction of incorporation or organization)
52-0891669
(I.R.S. Employer Identification Number)
2201 COOPERATIVE WAY, HERNDON, VA 20171
(Address of principal executive offices)
(Registrant's telecommunications number, including area code, is 703-709-6700)
__________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each Name of each
exchange on exchange on
Title of each class which registered Title of each class which registered
6.45% Collateral trust bonds Due 2001 NYSE 7.30% Collateral trust bonds Due 2006 NYSE
6.75% Collateral trust bonds Due 2001 NYSE 6.20% Collateral trust bonds Due 2008 NYSE
6.70% Collateral trust bonds Due 2002 NYSE 5.75% Collateral trust bonds Due 2008 NYSE
6.50% Collateral trust bonds Due 2002 NYSE 5.70% Collateral trust bonds Due 2010 NYSE
5.00% Collateral trust bonds Due 2002 NYSE Variable Collateral trust bonds, Series E-2 Due 2010 NYSE
5.95% Collateral trust bonds Due 2003 NYSE 7.20% Collateral trust bonds Due 2015 NYSE
7.375% Collateral trust bonds Due 2003 NYSE 6.55% Collateral trust bonds Due 2018 NYSE
5.30% Collateral trust bonds Due 2003 NYSE 9.00% Collateral trust bonds, Series V Due 2021 NYSE
6.00% Collateral trust bonds Due 2004 NYSE 7.35% Collateral trust bonds Due 2026 NYSE
6.375% Collateral trust bonds Due 2004 NYSE 8.00% Quarterly Income Capital Securities Due 2045 NYSE
5.50% Collateral trust bonds Due 2005 NYSE 7.65% Quarterly Income Capital Securities Due 2046 NYSE
6.125% Collateral trust bonds Due 2005 NYSE 7.375% Quarterly Income Capital Securities Due 2047 NYSE
6.65% Collateral trust bonds Due 2005 NYSE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to
the best of the registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part IV of this Form 10-K or any
amendment to this Form 10-K. Yes X No .
The Registrant has no stock.
TABLE OF CONTENTS
Part No. Item No. Page
I 1 Business 1
General 1
Members 1
Distribution Systems 2
Power Supply Systems 3
Service Organizations and Associate Member Systems 3
Telecommunications Systems 3
Loan Programs 3
Interest Rates on Loans 5
Electric Loan Programs 5
Telecommunications Loan Programs 6
RUS Guaranteed Loans 6
Largest Borrowers 7
Credit Limitation 7
Loan Security 7
Conversion of Loans 8
Prepayment of Loans 8
Pledging of Loans 8
Guarantee Programs 8
Guarantees of Long-Term Tax-Exempt Bonds 8
Guarantees of Lease Transactions 9
Guarantees of Tax Benefit Transfers 9
Letters of Credit 9
Other Guarantees 9
CFC Financing Factors 10
Members' Subordinated Certificates 10
Members' Equity 11
Debt Issuance 11
Interest Rate and Currency Exchange Agreements 11
Revolving Credit Agreements 11
Borrowing Costs 12
Tax Status 12
Investment Policy 12
Employees 13
CFC Lending Competition 13
Member Regulation and Competition 13
The RUS Program 16
Member Financial Data 16
2. Properties 24
3. Legal Proceedings 24
4. Submission of Matters to a Vote of Security Holders 24
II. 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 25
6. Selected Financial Data 25
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
7A. Quantitative and Qualitative Disclosures About
Market Risk 41
8. Financial Statements and Supplementary Data 41
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 41
III. 10. Directors and Executive Officers of the Registrant 42
11. Executive Compensation 46
12. Security Ownership of Certain Beneficial Owners and
Management 48
13. Certain Relationships and Related Transactions 48
IV. 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 49
Part I
Item 1. Business.
General
National Rural Utilities Cooperative Finance Corporation ("CFC") was
incorporated as a private, not-for-profit cooperative association under the
laws of the District of Columbia in April 1969. The principal purpose of
CFC is to provide its members with a dependable source of low cost capital
and state-of-the-art financial products and services. CFC provides its
members with a source of financing to supplement the loan programs of the
Rural Utility Service ("RUS") of the United States Department of
Agriculture. CFC will also lend 100% of the loan requirement for those
distribution utility members electing not to borrow from RUS. CFC is owned
by and makes loans primarily to its rural utility system members ("utility
members") to enable them to acquire, construct and operate electric
distribution, generation, transmission and related facilities. CFC also
provides guarantees to its members for tax-exempt financings of pollution
control facilities, properties constructed or acquired by its members,
taxable debt in connection with certain leases and various other
transactions. CFC is exempt from federal income taxes under the provisions
of IRS code section 501(c)(4).
CFC has formed two affiliated corporations that are controlled by CFC
through majority representation on the companies' boards of directors.
Rural Telephone Finance Cooperative ("RTFC") was incorporated as a taxable
cooperative association in the state of South Dakota in September 1987.
RTFC is a controlled affiliate of CFC and was created for the purpose of
providing financing to its rural telecommunication members and affiliates.
RTFC's bylaws and voting members' agreement require that the majority of
RTFC's Board of Directors be elected from individuals designated by CFC.
CFC is the sole source of external funding for RTFC.
Guaranty Funding Cooperative ("GFC") was organized in December 1991 as a
taxable cooperative association owned by its member rural electric systems
and CFC to provide a source of funds for members to refinance the RUS
guaranteed debt previously held by the Federal Financing Bank of the United
States Treasury ("FFB"). GFC is a controlled affiliate of CFC (the
majority of its directors are appointed by CFC). All loans from GFC are
guaranteed by RUS. CFC is the sole source of external funding for GFC.
Except as indicated, financial information presented herein includes CFC,
RTFC and GFC on a combined basis.
CFC provides financing for rural utility cooperatives and companies. There
are two primary segments of CFC's business, rural electric lending and
rural telecommunications lending. Lending to electric cooperatives is done
through CFC and GFC and lending to telecommunications organizations is done
through RTFC. In many cases, the customers of the electric cooperatives
are also the customers of the telecommunications organizations, as both
sets of members serve the rural areas of the United States.
Members
CFC had 1,050 members as of May 31, 2000, including 902 utility members,
virtually all of which are consumer-owned cooperatives, 75 of which are
service members and 73 of which are associate members. The utility members
included 832 distribution systems and 70 generation and transmission
("power supply") systems operating in 49 states and four U.S. territories.
CFC currently has five classes of members:
* Class A - cooperative or nonprofit distribution systems;
* Class B - cooperative or nonprofit power supply systems;
* Class C - statewide and regional associations which are wholly-owned or
controlled by Class A or Class B members;
* Class D - national associations of cooperatives; and
* Class E - associate members - nonprofit groups or entities organized on a
cooperative basis which are owned, controlled or operated by Class A, B
or C members and which provide non-electric services primarily for the
benefit of ultimate consumers. Associate members are not entitled to
vote at any meeting of the members and are not eligible to be represented
on CFC's Board of Directors.
RTFC had 536 members as of May 31, 2000. Membership in RTFC is limited to
CFC and commercial or cooperative (non-profit) telecommunications systems
eligible to receive loans or other assistance from RUS and which are
engaged (or plan to be engaged) in providing telecommunication services to
ultimate users and affiliates of such corporations.
1
GFC had two members as of May 31, 2000. Membership in GFC is limited to
CFC and cooperative or nonprofit utility member systems who have refinanced
all or a portion of their FFB debt through CFC.
Set forth below is a table showing by state or U.S. territory the total
number of CFC, RTFC and GFC members (memberships in each other have been
eliminated and corporations which belong to more than one of CFC, RTFC and
GFC have been counted only once), the percentage of total loans and the
percentage of total loans and guarantees outstanding at May 31, 2000.
Number Loan and Number Loan and
of Loan Guarantee of Loan Guarantee
Members % % Members % %
Alabama 30 2.6% 2.6% Missouri 66 4.2% 4.6%
Alaska 29 2.0% 1.8% Montana 39 1.4% 1.3%
American Samoa 1 0.0% 0.0% Nebraska 40 0.1% 0.1%
Arizona 24 0.5% 0.8% Nevada 5 0.5% 0.5%
Arkansas 29 2.8% 3.1% New Hampshire 7 1.7% 1.5%
California 11 0.5% 0.5% New Jersey 1 0.0% 0.0%
Colorado 40 2.5% 2.6% New Mexico 26 0.5% 0.4%
Connecticut 2 0.0% 0.0% New York 14 0.1% 0.1%
Delaware 2 0.2% 0.2% North Carolina 45 4.0% 4.1%
District of Columbia 7 2.3% 3.8% North Dakota 36 0.4% 0.3%
Florida 21 2.7% 3.7% Ohio 41 2.1% 1.9%
Georgia 72 9.0% 8.0% Oklahoma 52 2.5% 2.4%
Guam 1 0.0% 0.0% Oregon 39 1.6% 1.5%
Hawaii 1 0.0% 0.1% Pennsylvania 25 0.9% 0.9%
Idaho 16 0.7% 0.7% South Carolina 38 3.3% 3.0%
Illinois 55 3.4% 3.1% South Dakota 50 1.0% 0.9%
Indiana 53 1.2% 1.7% Tennessee 28 0.7% 0.6%
Iowa 125 2.1% 2.0% Texas 115 15.3% 14.4%
Kansas 52 1.8% 1.8% Utah 11 3.9% 3.9%
Kentucky 33 1.4% 2.2% Vermont 8 0.3% 0.3%
Louisiana 18 1.4% 1.2% Virgin Islands 1 3.3% 2.9%
Maine 8 0.3% 0.2% Virginia 28 2.2% 2.0%
Maryland 2 0.8% 0.7% Washington 19 0.5% 0.5%
Massachusetts 2 0.0% 0.0% West Virginia 5 0.0% 0.0%
Michigan 28 1.8% 1.6% Wisconsin 67 1.6% 1.4%
Minnesota 76 5.0% 5.1% Wyoming 15 0.8% 0.8%
Mississippi 26 2.1% 2.2% Total 1,585 100.0% 100.0%
Distribution Systems
Distribution systems are utilities engaged in retail sales of electricity
to consumers in their service areas. Most distribution systems have all-
requirements power contracts with their power supply systems, which are
owned and controlled by the member systems. The wholesale power contracts
between the distribution systems and the power supply systems provide for
rate adjustments to cover the costs of supplying power, although in certain
cases such adjustments must be approved by regulatory agencies. Wholesale
power for resale also comes from other sources, including power supply
system contracts with government agencies, investor-owned utilities and
other entities, and in rare cases, the cooperative's own generating
facilities.
Wholesale power supply contracts ordinarily guarantee neither an
uninterrupted supply nor a constant cost of power. Contracts with RUS
financed power supply systems (which generally require the distribution
system to purchase all its power requirements from the power supply system)
provide for rate increases to pass along increases in sellers' costs. The
wholesale power contracts permit the power supply system, subject to
approval by RUS and, in certain circumstances, regulatory agencies, to
establish rates to its members so as to produce revenues sufficient, with
revenues from all other sources, to meet the costs of operation and
maintenance (including, without limitation, replacements, insurance, taxes
and administrative and general overhead expenses) of all generating,
transmission and related facilities, to pay the cost of any power and
energy purchased for resale, to pay the costs of generation and
transmission, to make all payments on account of all indebtedness and
leases of the power supply system and to provide for the establishment and
maintenance of reasonable
2
reserves. The rates under the wholesale power contracts are reviewed by
the Board of Directors of the power supply system at least annually.
Power contracts with investor-owned utilities and power supply systems
which do not borrow from RUS generally have rates subject to regulation by
the Federal Energy Regulatory Commission ("FERC"). Contracts with Federal
agencies generally permit rate changes by the selling agency (subject, in
some cases, to Federal regulatory approval).
Power Supply Systems
Power supply systems are utilities that purchase or generate electric
power and provide it wholesale to distribution systems for delivery to the
ultimate retail consumer. Of the 62 operating power supply systems
financed in whole or in part by RUS or CFC at December 31, 1999, 61 were
cooperatives owned directly or indirectly by groups of distribution systems
and one was government owned. Of this number, 37 had generating capacity
of at least 100 megawatts, and ten had no generating capacity. Nine of the
ten systems with no generating capacity operated transmission lines to
supply certain distribution systems. Certain other power supply systems
have been formed but do not yet own generating or transmission facilities.
At December 31, 1999, the 54 power supply systems reporting to CFC owned
interests in 141 generating plants representing generating capacity of
approximately 31,058 megawatts, or approximately 4.1% of the nation's
estimated electric generating capacity, and served 649 RUS distribution
system borrowers. Certain of the power supply systems which lease
generating plants from others operate these facilities to produce their
power requirements. Of the power supply systems' total generating capacity
in place as of December 31, 1999, steam plants accounted for 89.5%
(including nuclear capacity representing approximately 8.6% of such total
generating capacity), internal combustion plants accounted for 8.1% and
hydroelectric plants accounted for 2.4%.
Service Organizations and Associate Member Systems
Service organizations include the National Rural Electric Cooperative
Association ("NRECA"), which represents cooperatives nationally, as well as
the statewide cooperative associations, which represent the cooperatives
within a state. Associate members include organizations that are nonprofit
groups or entities organized on a cooperative basis which are owned,
controlled or operated by class A, B or C members and which provide non-
electric services primarily for the benefit of ultimate consumers.
Telecommunications Systems
Telecommunications systems include not-for-profit cooperative organizations
and for-profit commercial organizations that provide telecommunications
services to rural areas.
Independent rural telecommunications companies provide service in the
majority of America's rural areas. These companies, which number
approximately 1,020, are called independent because they are not affiliated
with the Bell operating companies or other large holding companies. The
majority of these independent rural telecommunications companies are small
family-owned or privately-held commercial companies. Six of these
commercial companies are publicly traded. Included in the total are
approximately 275 not-for-profit cooperative telecommunications companies.
Rural telecommunications companies serve approximately 1.2 million business
customers and 4.7 million residential customers in 48 states and U.S.
territories, and range in size from fewer than 50 customers to more than
100,000. Rural telecommunications companies' annual operating revenues
range from less than $100,000 to $100 million. In addition to basic
telecommunications service, most independents offer other communications
services including wireless, cable television and internet access. Most
rural telecommunications companies' networks are state-of-the-art,
incorporating digital switching, fiber optics and other advanced
technologies.
Loan Programs
CFC offers long-term loans with maturities of up to 35 years, intermediate-
term loans with maturities of up to five years, and line of credit loans.
Long-term and intermediate-term loans are available at fixed or variable
interest rates and line of credit loans are available only at a variable
interest rate. Long-term loans are generally secured by a first mortgage
lien on all assets and revenues of the borrower. Intermediate-term loans
may be secured or unsecured and line of credit loans are generally
unsecured. On line of credit loans with a maturity of more than one year,
the outstanding balance is generally required to be paid down to zero for
five consecutive days during each year. CFC makes loans to borrowers on a
concurrent basis with RUS (generally 70% RUS/30% CFC) and will also make
100% loans to borrowers electing not to borrow from RUS.
3
Borrowers are required to provide annual audited financial statements to
CFC. Borrowers also must make various representations in an officer's
certificate and maintain certain levels of financial performance as
prescribed under each loan program.
Set forth below is a table showing loans outstanding to borrowers as of May
31, 2000, 1999 and 1998 and the weighted average interest rates thereon and
loans committed but unadvanced to borrowers at May 31, 2000.
(Dollar amounts in thousands) Loans committed
Loans outstanding and weighted average interest rates but unadvanced
thereon at May 31, at May 31, 2000
2000 (A) 1999 1998 (B)
Long-term fixed rate secured (C) (D):
Electric systems $ 6,674,470 6.74% $ 6,797,786 6.69% $ 4,289,629 7.02% $ -
Telecommunication systems 1,540,928 7.36% 1,258,458 6.88% 222,733 8.05% -
Total long-term fixed rate secured 8,215,398 6.86% 8,056,244 6.72% 4,512,362 7.07% -
Long-term variable rate secured loans (E):
Electric systems 4,019,155 7.45% 2,334,878 5.85% 3,209,815 6.55% 7,524,197
Telecommunication systems 1,816,826 8.02% 1,096,312 6.43% 1,131,561 6.65% 589,696
Total long-term variable rate secured 5,835,981 7.62% 3,431,190 6.04% 4,341,376 6.57% 8,113,893
Loans guaranteed by RUS:
Electric systems 89,153 6.92% 130,940 5.87% 133,195 6.36% -
Intermediate-term secured loans:
Electric systems 141,771 7.41% 198,894 6.62% 151,202 7.39% 48,533
Telecommunication systems - - 686 6.42% 86 7.25% -
Total intermediate-term secured loans 141,771 7.41% 199,580 6.50% 151,288 7.39% 48,533
Intermediate-term unsecured loans:
Electric systems 200,706 7.35% 102,221 6.26% 198,121 6.70% 408,644
Telecommunication systems 12,206 7.80% 12,809 6.42% 15,495 7.25% 6,090
Total intermediate-term unsecured 212,912 7.37% 115,030 6.28% 213,616 6.74% 414,734
Line of credit loans (F):
Electric systems 1,281,483 7.59% 850,039 5.99% 688,995 6.70% 4,403,987
Telecommunication systems 329,768 8.32% 342,074 6.66% 205,026 7.25% 717,700
Total line of credit loans 1,611,251 7.74% 1,192,113 6.19% 894,021 6.83% 5,121,687
Nonperforming loans:
Electric systems (G) - - 1,643 5.55% 4,080 6.41% -
Restructured loans:
Electric systems (H) 571,579 3.90% 576,662 3.90% 329,538 7.17% -
Total loans 16,678,045 7.12% 13,703,402 6.37% 10,579,476 6.70% 13,698,847
Less: Allowance for loan losses (228,292) (212,203) (250,131) -
Net loans $16,449,753 $13,491,199 $10,329,345 $13,698,847
Total by member class:
Distribution $10,394,985 $ 8,714,742 $ 7,257,330 $ 9,644,058
Power supply 2,037,108 1,895,712 1,489,908 2,054,322
Statewide and associate 546,224 382,609 257,337 686,981
Telecommunication systems 3,699,728 2,710,339 1,574,901 1,313,486
Total $16,678,045 $13,703,402 $10,579,476 $13,698,847
____________________________
(A) The interest rates in effect at August 1, 2000, on loans to electric
members were 8.15% to 8.80% for long-term loans with a seven-year fixed
rate term, 7.70% to 8.10% on variable rate long-term loans and 8.25% on
intermediate-term loans and lines of credit. The rates in effect at
August 1, 2000, on loans to telecommunication systems were 8.20% to
8.65% for long-term loans with a seven-year fixed rate term, 7.75% to
8.15% on long-term variable rate loans, 8.40% on intermediate-term
loans and 8.80% on lines of credit.
(B) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed and for which loan contracts have
been executed but funds have not been advanced. Since commitments may
expire without being fully drawn upon, the total amounts reported as
commitments do not necessarily represent future cash requirements.
Collateral and security requirements for advances on commitments are
identical to those on initial loan approval. Long-term unadvanced
commitments that do not have an interest rate associated with the
commitment have been listed with the variable rate loans. The type
of interest rate, fixed or variable, is determined at the time the loan
is advanced.
(C) Includes $102 million, $162 million and $122 million of unsecured loans
at May 31, 2000, 1999 and 1998, respectively.
(D) On January 1, 2000, long-term fixed rate loans totaling $241 million
had their interest rates adjusted.
(E) Includes $49 million, $39 million and $53 million of unsecured loans at
May 31, 2000, 1999 and 1998, respectively.
(F) Includes $342 million, $278 million and $81 million of secured loans at
May 31, 2000, 1999 and 1998, respectively.
(G) The rates on nonperforming loans are the weighted average of the stated
rates on such loans as of the dates shown and do not necessarily
represent the interest recognized by CFC from such loans.
(H) The rate on restructured loans for 1999 and 2000 represents the
effective interest rate based on the scheduled minimum payments. The
interest rate on restructured loans for 1998 is the weighted average of
the stated rate on restructured loans.
4
Interest Rates on Loans
CFC's goal as a non-profit cooperatively-owned finance company is to set
its rates at levels that will provide its members with the lowest cost
financing while maintaining sound financial results as required to obtain
high credit ratings on its debt instruments. CFC sets its interest rates
based on the cost of funding plus provisions for general and administrative
expenses, the loan loss allowance and a reasonable net margin. Various
discounts, which reduce the stated interest rates, are available to
borrowers meeting certain criteria related to performance, and whether
they borrow exclusively from CFC.
Set forth below are the interest rates earned on all loans outstanding
during the fiscal years ended May 31:
2000 1999 1998
Long-term fixed rate 6.66% 6.69% 7.12%
Long-term variable rate 6.59% 6.20% 6.53%
Telecommunication organizations (1) 7.45% 6.88% 7.05%
Refinancing loans guaranteed by RUS 6.29% 5.87% 6.32%
Intermediate-term 6.92% 6.98% 7.08%
Short-term 7.01% 6.26% 6.74%
Associate members 6.85% 6.47% 6.65%
Nonperforming (2) (3) 0.00% 0.00% 0.00%
Restructured 3.90% 1.73% 0.00%
All loans 6.74% 6.51% 6.60%
_________________________
(1) Includes long-term fixed rate, long-term variable rate, intermediate-
term and short-term loans.
(2) Rate does not reflect recognition of $12.5 million of deferred gain in
1999.
(3) Interest rate earned by CFC recognized on a cash basis.
Electric Loan Programs
Long-Term Loans
Long-term loans are generally for terms of up to 35 years. A borrower can
select a fixed interest rate for periods of one to 35 years or the variable
rate. Upon the expiration of the selected fixed interest rate term, the
borrower must select the variable rate or select another fixed rate term for
a period that does not exceed the remaining loan maturity. Long-term
fixed rates are set daily by CFC and the long-term variable rate is set on
the first day of each month. The fixed rate on a loan is determined on the
day the loan is advanced based on the rate term selected. A borrower may
divide its loan into various mini-notes. The borrower then has the option
of selecting a fixed or variable interest rate for each mini-note.
To be eligible for long-term loan advances, distribution systems must
maintain an average modified debt service coverage ratio ("MDSC"), as
defined in the loan agreement, of 1.35 or greater. The distribution
systems must also be in good standing with CFC and their states of
incorporation, supply evidence of proper corporate authority and deliver to
CFC annual audited financial statements. Generally, the minimum
eligibility requirements for power supply systems are an average times
interest earned ratio ("TIER") and MDSC, as described in the loan
agreement, of 1.0 or greater. Loans to power supply systems are considered
on a case-by-case basis depending on the amount of the loan, the intended
use of funds, the financial condition of the borrower and any guarantees
that may be provided by a third party, including RUS and the member
distribution systems. CFC has in the past and may in the future make long-
term loans to distribution and power supply systems that do not meet the
minimum lending criteria. During the five years ended May 31, 2000, 1.1%
of the dollar amount of long-term loans approved were to borrowers that did
not meet the minimum lending criteria. In addition, during the five years
ended May 31, 2000, CFC approved loans totaling $867 million for discounted
RUS note buyouts by four power supply systems. In these transactions, CFC
obtained guarantees from the member distribution systems totaling $323
million.
Intermediate-Term Loans and Line of Credit Loans
Intermediate-term loans are generally for terms of one year to five years.
Intermediate-term loans can be advanced at a fixed interest rate or at a
variable interest rate. Line of credit loans may be advanced only at a
variable interest rate. The intermediate-term loan and line of credit loan
variable interest rate is set on the first day of each month. Line of
credit loans with maturities of greater than one year generally must be
paid down to a zero outstanding balance for five consecutive days during
each year.
To be eligible for an intermediate-term loan or line of credit loan,
distribution and power supply borrowers must be in good standing with CFC
and demonstrate their ability to repay the loan.
5
Power Vision Program
Under the Power Vision program, an eligible borrower is pre-approved for
long-term secured financing, in an aggregate amount that can be drawn down
in increments as requested by the borrower over a five-year period. All
necessary approvals, administrative procedures and loan documentation are
obtained or put into place at the time the credit facility is established,
and the borrower has significant flexibility in determining the size and
maturity of each loan requested under the facility. CFC does not charge
its members a commitment fee on amounts approved under the Power Vision
program. A borrower must meet loan eligibility criteria at the time of any
advance under the Power Vision program.
Telecommunications Loan Programs
Long-Term Loans
CFC makes long-term loans to rural telecommunications companies and their
affiliates for the acquisition of and the construction or upgrade of
wireline telecommunications systems, wireless telecommunications systems,
fiber optic networks and cable television systems as well as other
legitimate corporate purposes. Long-term loans are generally for periods
of up to 15 years. Loans may be advanced at a fixed or variable interest
rate. Fixed rates are generally available for periods from 1 year to 15
years. Upon the expiration of the selected fixed interest rate term, the
borrower must select another fixed rate term for a period that does not
exceed the remaining loan maturity or select the variable rate. Long-term
fixed rates for telecommunications loans are set daily by CFC and the long-
term variable rate is set on the first day of each month. The fixed rate
on a loan is determined on the day the loan is advanced based on the term
selected. A borrower may divide its loan into various mini-notes. The
borrower then has the option of selecting a fixed or variable interest rate
for each note.
A wireline telecommunications system generally must be able to demonstrate
the ability to achieve and maintain an annual debt service coverage ratio
("DSC") and an annual TIER of 1.25 and 1.50, respectively, to borrow from
CFC. A cable television system, fiber optic network or cellular
telecommunications system generally must be able to demonstrate the ability
to achieve and maintain an annual DSC of 1.25 to borrow from CFC. Loans
made to start-up ventures using emerging technologies are evaluated based
on the quality of the business plan and the level and quality of credit
support from established companies. Based on the business plan, specific
covenants are developed for each transaction which require performance at
levels sufficient to repay the CFC obligations under the approved terms.
Intermediate-Term Loans and Line of Credit Loans
CFC provides intermediate-term equipment financing to telecommunications
borrowers for periods up to five years. These loans are provided on an
unsecured basis and are used to finance the purchase and installation of
central office equipment, support assets and other communications
equipment. Intermediate-term equipment financing loans are generally made
to operating telecommunications companies with an equity level of at least
25% of total assets and which have achieved a DSC ratio for each of the
previous two calendar years of at least 1.75.
CFC also provides line of credit loans to telecommunications systems for
periods of up to five years. These line of credit loans are typically in
the form of a revolving line of credit, which requires the borrower to pay
off the balance for five consecutive business days at least once during
each 12-month period. These line of credit loans are provided on an
unsecured basis and are used primarily for cash management. Line of credit
loans are available to telecommunications systems generally in amounts not
to exceed the greater of 5% of total assets or 25% of equity in excess of
35% of total assets.
Interim financing line of credit loans are also made available to CFC
telecommunications members who have an RUS and/or Rural Telephone Bank
("RTB") loan application pending and have received approval from RUS to
obtain interim financing. These loans are for terms up to 24 months and
must be retired with advances from the RUS/RTB long-term loans.
RUS Guaranteed Loans
Congress enacted legislation that allows certain systems to prepay
existing borrowings from the FFB without prepayment penalties or fees. CFC
established a program under which it made long-term loans to members for
the purpose of prepaying these loans. Each note evidencing such a loan was
issued to a trust which in turn issued certificates evidencing its
ownership to CFC. The principal and interest payments on these notes are
guaranteed by RUS. Under RUS loan repayment regulations, the note rate may
not exceed the rate borne by the system's prepaid borrowings from the FFB
adjusted to reflect savings accrued since prepayment of the note compared
with the rate on the prepaid borrowing. The systems are required to pay
servicing fees to CFC in connection with these transactions. All of these
certificates that have not been sold in public offerings have been
transferred to GFC ($46 million outstanding at May 31, 2000). In addition,
at May 31, 2000, CFC services $147 million of these loans for trusts, the
certificates of which have been sold in public offerings.
6
The level of authority for RUS loan guarantees for the fiscal year ending
September 30, 2000, is $1.7 billion. Proposed levels for fiscal year 2001
range from $1.2 billion to $1.7 billion. CFC may participate as an
eligible lender in the RUS loan guarantee program under the terms and
conditions of the Master Loan Guarantee and Servicing Agreement, dated as
of February 16, 1999, between RUS and CFC. Under this agreement, CFC may
make long-term secured loans to eligible members for periods of up to 35
years, at fixed or variable rates established by CFC. As long as CFC is in
compliance with the terms and conditions of the agreement, RUS will
guarantee the principal and interest payments on the notes evidencing such
loans. At May 31, 2000, CFC had $43 million of loans outstanding under
this program.
Largest Borrowers
At May 31, 2000, the ten largest borrowers had outstanding loans from CFC
totaling $3,464 million, which represented 21% of CFC's total loans
outstanding. At May 31, 2000, outstanding guarantees for these same ten
borrowers totaled $495 million, which represented 25% of CFC's total
guarantees outstanding. CFC's ten largest credit exposures represented 21%
and 19% of total exposure at May 31, 2000 and 1999, respectively. On those
dates, no member had outstanding loans and guarantees in excess of 3.6% of
the aggregate amount of CFC's outstanding loans and guarantees; however,
one of the ten largest borrowers, Deseret Generation & Transmission Co-
operative ("Deseret"), was operating under a restructure agreement (see
Note 10 to Combined Financial Statements). At May 31, 2000, total exposure
to Deseret represented 3.5% of total loans and guarantees outstanding.
Loans outstanding to Deseret accounted for 3.4% of total loans outstanding.
Guarantees outstanding to Deseret accounted for 4.5% of total guarantees
outstanding. Total loans and guarantees outstanding to Deseret equaled
34.6% of the total of members' equity, members' subordinated certificates
and the allowance for loan losses.
Credit Limitation
In the fourth quarter of fiscal year 2000, CFC adopted a new credit
limitation policy. Under the new policy, (1) a borrower's total exposure
is limited to 25% of CFC's defined net worth, (2) a borrower's unsecured
loans are limited to 10% of CFC's defined net worth, and (3) a borrower's
guarantees outstanding are limited to 10% of CFC's defined net worth.
CFC's defined net worth is the total of subordinated certificates issued
and outstanding, members' equity and the loan loss allowance. If a
borrower submitting a new loan application has an exposure in excess of any
one of the three tests, only the CFC Board of Directors may approve the new
loan application. The new policy allows more total exposure, but is more
restrictive on guarantee and unsecured loan exposure than the old policy.
CFC's Board of Directors may approve a loan to a borrower with an exposure
in excess of one or more of these tests after consideration of other
factors, including the amount of the loan, the maturity of the loan, and
the value of collateral held by CFC. At May 31, 2000, there were three
borrowers with total exposure greater than 25% of defined net worth and one
borrower with total guarantees outstanding in excess of 10% of defined net
worth. Any new loan applications to these borrowers may be approved only
by CFC's Board of Directors.
Loan Security
CFC typically makes long-term loans to its members on a secured basis.
Intermediate-term loans may be secured, as determined on a case-by-case
basis. Line of credit loans are generally unsecured. At May 31, 2000, a
total of $1,632 million of loans were unsecured representing 9.8% of total
loans. CFC's long-term loans are typically secured pro-rata with other
secured lenders (primarily RUS) by all assets and future revenues of the
borrower. Guarantees are secured on a pro-rata basis with other secured
creditors by all assets and future revenues of the borrower or by the
underlying financed asset. In addition to the collateral received, CFC
also requires that its borrowers set rates designed to achieve certain
financial ratios.
In the case of members whose property is subject to the new form of RUS
mortgage that has been issued to borrowers since January 1996, no RUS
approval of the CFC loan is required if certain objective tests set forth
in the mortgage are met. In August 1998, RUS promulgated regulations which
provide that no RUS approval is required for a loan made to a member whose
property is subject to the pre-1996 form of RUS mortgage, so long as the
objective tests set forth in the new form of RUS mortgage are met. In all
other cases, RUS approval of the loan is required, even in the case of a
100% CFC loan, in order to accommodate RUS's mortgage lien so that CFC may
share ratably in the security provided by the mortgaged property. CFC and
RUS are then mortgagees in common, entitled to the security in proportion
to the unpaid principal amounts of their respective loans. Mortgages do
not require that the value of the mortgaged property be at least equal to
the obligations secured thereby.
Events of default under the long-term mortgages include default in the
payment of the mortgage notes, default (continuing after grace periods in
some cases) in the performance of the covenants in the loan agreements or
the mortgages and events of bankruptcy and insolvency. Under common
mortgages securing long-term CFC loans to distribution system members, RUS
has the sole right to exercise remedies on behalf of all holders of
mortgage notes for 30 days after default. If RUS does not act within 30
days or if RUS is not legally entitled to act on behalf of all noteholders,
CFC may exercise remedies. Under common mortgages securing long-term CFC
loans to, or guarantee reimbursement obligations of, power supply
7
members, RUS retains substantial control over the exercise of mortgage
remedies. RUS holds the loan security on loans for which it has provided a
guarantee.
Security for long-term loans made to RUS telecommunications borrowers
generally consists of a first mortgage lien on the assets and revenues of
the system on a pari passu basis with RUS. Security from non-RUS
telecommunications borrowers is considered on a case-by-case basis, but
generally a loan will not exceed 80% of the estimated value of the
collateral. At May 31, 2000, a total of $212 million or 5.7% of CFC's
telecommunications loans outstanding were unsecured.
At May 31, 2000, CFC had a total of $297 million of unsecured guarantees,
representing 14.8% of total guarantees. When considered together, CFC's
unsecured credit at May 31, 2000, totaled $1,929 million, representing 10.3%
of total loans and guarantees outstanding.
Conversion of Loans
A borrower may convert a long-term loan from a variable interest rate to a
fixed interest rate at any time without a fee. A borrower may convert a
fixed rate to another fixed rate or a variable rate at any time, subject to
a fee in most instances. Intermediate-term loans and line of credit loans
do not offer conversion options. The fee on the conversion of a fixed
interest rate to a variable interest rate at all other times ranges from 25
to 50 basis points of the outstanding loan amount plus an amount to cover
the funding loss on the remainder of the current fixed rate pricing term.
Prepayment of Loans
Borrowers may prepay long-term loans at any time, subject to the payment of
a prepayment premium and a make-whole premium, if applicable. Long-term
loans prepaid before the maturity of the fixed rate term will be assessed a
prepayment premium ranging from 33 to 50 basis points of the outstanding
loan balance at the time of prepayment. In addition, long-term loans with
a fixed interest rate which have a rate greater than the current rate for
the same remaining term will be assessed a premium to cover funding losses.
Line of credit loans may be prepaid at any time without a premium.
Pledging of Loans
CFC pledges long-term secured distribution member loans as collateral to
secure its collateral trust bonds. CFC must maintain collateral on deposit
with the trustee in a principal amount at least equal to the balance of
collateral trust bonds outstanding. At May 31, 2000 and 1999, CFC had
$3,484 million and $3,017 million, respectively, of collateral on deposit
securing $3,351 million and $2,996 million, respectively, of collateral
trust bonds outstanding. CFC may withdraw collateral at any time, provided
that the principal balance of notes and cash and eligible securities on
deposit after withdrawal is greater than the amount of bonds outstanding.
Guarantee Programs
Substantially all guarantees have been provided on behalf of power supply
members. Set forth below is a table showing CFC's guarantees:
May 31,
(Dollar amounts in thousands) 2000 1999 1998
Long-term tax-exempt bonds $1,024,340* $1,062,185* $1,148,500*
Debt portions of leveraged lease
Transactions 111,319 174,961 437,175
Indemnifications of tax benefit
Transfers 259,223 285,169 312,771
Letters of credit 328,995 208,732 45,325
Other guarantees 274,325 162,150 136,048
Total $1,998,202 $1,893,197 $2,079,819
_______________________
* Includes $920 million, $947 million and $1,018 million at May 31, 2000,
1999 and 1998, respectively, of adjustable rate pollution control bonds
which can be tendered for purchase at specified times at the option of
the holders (in the case of $239 million, $244 million and $253 million
of such bonds outstanding at May 31, 2000, 1999 and 1998, respectively,
at any time on seven days' notice; in the case of $219 million, $226
million and $236 million outstanding at May 31, 2000, 1999 and 1998,
respectively, at any time on a minimum of one day's notice; and in the
case of the remainder on a five-week or semiannual basis). CFC has
agreed to purchase any bonds that cannot be remarketed. Since the
inception of the program, CFC has not been required to purchase any
bonds.
Guarantees of Long-Term Tax-Exempt Bonds
CFC has guaranteed debt issued in connection with the construction or
acquisition by CFC members of pollution control, solid waste disposal,
industrial development and electric distribution facilities. Such debt is
issued by governmental authorities and the interest thereon is exempt from
Federal taxation. The proceeds of the offering are made available to the
member system, which in turn is obligated to pay the governmental authority
amounts sufficient to service the debt. The debt, which is guaranteed by
CFC, may include short- and long-term obligations.
8
In the event of a default by a system for nonpayment of debt service, CFC
is obligated to pay, after available debt service reserve funds have been
exhausted, scheduled debt service under its guarantee. The bond issue will
not be accelerated so long as CFC performs under its guarantee. The system
is required to repay, on demand, any amount advanced by CFC pursuant to its
guarantee. This repayment obligation is secured by a common mortgage with
RUS on all the system's assets, but CFC may not exercise remedies
thereunder for up to two years following default. However, if the debt is
accelerated because of a determination that the interest thereon is not
tax-exempt, the system's obligation to reimburse CFC for any guarantee
payments will be treated as a long-term loan. The system is required to
pay to CFC initial and/or on-going guarantee fees in connection with these
transactions.
Certain guaranteed long-term debt bears interest at variable rates which
are adjusted at intervals of one to 270 days, weekly, each five weeks or
semi-annually to a level expected to permit their resale or auction at par.
At the option of the member on whose behalf it is issued, and provided
funding sources are available, rates on such debt may be fixed until
maturity. Holders have the right to tender the debt for purchase at par at
the time rates are reset when it bears interest at a variable rate and CFC
has committed to purchase debt so tendered if it cannot otherwise be
remarketed. If CFC held the securities, the cooperative would pay interest
to CFC at its intermediate-term loan rate.
Guarantees of Lease Transactions
CFC has a program of lending to or guaranteeing debt issued by National
Cooperative Services Corporation ("NCSC") in connection with leveraged
lease transactions. In such transactions, NCSC lends money to an
industrial or financial company (a "lessor") for the purchase of a power
plant (or an undivided interest therein) or utility equipment which is then
leased to a CFC member (the "lessee") under a lease requiring the lessee to
pay amounts sufficient to permit the lessor to service the loan. The loans
are made on a non-recourse basis to the lessor but are secured by the
property leased and the owner's rights as lessor. NCSC borrows the funds
it lends either directly from CFC or from another creditor with a CFC
guarantee. NCSC is obligated to pay administrative and/or guarantee fees
to CFC in connection with these transactions. Such fees are reimbursed to
NCSC by the lessee in each transaction. CFC may also guarantee the rent
obligation of its members to a third party.
Guarantees of Tax Benefit Transfers
CFC has also guaranteed members' obligations to indemnify against loss of
tax benefits in certain tax benefit transfers that occurred in 1981 and
1982. A member's obligation to reimburse CFC for any guarantee payments
would be treated as a long-term loan, secured on a pari passu basis with
RUS by a first lien on substantially all the member's property to the
extent of any cash received by the member at the outset of the transaction.
The remainder would be treated as an intermediate-term loan secured by a
subordinated mortgage on substantially all of the member's property. Due
to changes in Federal tax law, no guarantees of this nature have occurred
since 1982.
Letters of Credit
CFC issues irrevocable letters of credit to support members' obligations to
energy marketers, other third parties and to the Rural Business and
Cooperative Development Service. Letters of credit are generally issued on
an unsecured basis and with such issuance fees as may be determined from
time to time. Each letter of credit issued by CFC is supported by a
reimbursement agreement with the member on whose behalf the letter of
credit was issued. In the event a beneficiary draws on a letter of credit,
the agreement generally requires the member to reimburse the issuer of the
letter of credit within one year from the date of the draw, with interest
accruing from such date at the issuer's variable rate of interest in effect
on the date of the draw. The agreement also requires the member to pay, as
applicable, a late payment charge and all costs of collection, including
reasonable attorneys' fees.
Other Guarantees
CFC may provide other guarantees as requested by its members. Such
guarantees may be made on a secured or unsecured basis with guarantee fees
set to cover CFC's cost of capital, general and administrative expenses, a
provision for losses and maintenance of a reasonable margin.
9
CFC Financing Factors
CFC funds its loan programs through retained margins for the current year,
allocated but unretired patronage capital (members' equity investments),
members' subordinated certificate investments and issuance of debt to
members and in the capital markets. The following table details the funds
outstanding, percentage of total capitalization and the average interest
rate on funds outstanding at May 31, 2000, 1999 and 1998.
(Dollar amounts in thousands) 2000 1999 1998
Average Average Average
Amount % of Interest Amount % of Interest Amount % of Interest
Outstanding Total Rate Outstanding Total Rate Outstanding Total Rate
Commercial paper (1) $ 6,705,035 40% 6.17% $ 6,246,243 45% 4.94% $ 5,865,904 55% 5.54%
Collateral trust bonds 3,351,366 20% 6.34% 2,996,299 22% 6.42% 1,897,688 18% 6.79%
Medium-term notes 4,791,361 28% 6.33% 2,625,286 19% 6.10% 1,109,258 10% 6.31%
Quarterly income
capital securities 400,000 2% 7.62% 400,000 3% 7.62% 200,000 2% 7.87%
Members' subordinated
certificates 1,340,417 8% 3.02% 1,239,816 9% 3.25% 1,229,166 12% 3.70%
Members' equity 341,217 2% 0.00% 294,953 2% 0.00% 279,278 3% 0.00%
Total $16,929,396 100% 5.91% $13,802,597 100% 5.30% $10,581,294 100% 5.53%
_________________________
(1) Includes $155 million, $375 million and $185 million of bank bid notes
for 2000, 1999 and 1998, respectively.
Members' Subordinated Certificates
As a Condition of Membership
Generally, members are required to purchase membership subordinated
certificates as a condition of membership. The amount of certificates
required to be purchased is determined by applying a formula to the
member's operations for a period of time, generally 15 years. The
membership subordinated certificates generally mature in 100 years from
issuance and pay interest at a rate of 5%. At May 31, 2000, CFC had a
total of $642 million in membership subordinated certificates
outstanding. A small portion of these certificates matures 50
years from issuance and pays interest at a rate of 3%. Issuance of these
certificates has not been significant in recent years. At May 31, 2000,
the weighted average maturity of these certificates is approximately 76
years.
As a Condition of Borrowing
Distribution system members may be required to purchase, on long-term
loans, a loan subordinated certificate for 2% of the loan amount. Power
supply system members may be required to purchase a loan subordinated
certificate of 7% of the loan amount. These certificates do not pay
interest and do not amortize. The requirement to purchase such a
certificate is determined by the member's leverage ratio with CFC and the
type of loan selected. In large transactions, CFC may increase the
purchase requirement of loan subordinated certificates. Certificates
issued in these transactions may pay interest and/or may amortize.
Telecommunications systems and associate members are required to purchase,
on long-term loans, loan subordinated certificates for up to 10% of each loan
advance. These certificates do not pay interest, but amortize annually
based on the outstanding loan balance. At May 31, 2000, CFC had a total of
$517 million of loan subordinated certificates outstanding. A small
portion of these certificates, issued prior to policy changes, matures at
the same time as the loan and pays interest at a rate of 3%.
As a Condition of Receiving a Guarantee
Members may be required to purchase a guarantee subordinated certificate of
up to 12.5% of the principal amount of the guarantee. The guarantee
subordinated certificate matures at the same time as the guarantee. The
certificates pay interest at a rate determined in each transaction. At May
31, 2000, CFC had a total of $181 million of guarantee subordinated
certificates outstanding.
Century Certificates
CFC has created a new type of subordinated certificate for its members to
purchase. The century certificate is a voluntary investment by members, not
a required purchase as with membership, loan and guarantee certificates.
The century certificates may be issued with maturities of up to 100 years.
The certificates are redeemable by the members after 44, 59, 69, 79 and 89
years. Interest is paid on the certificates semi-annually. The interest
rate may be fixed or variable. The rates offered are higher than the fixed
or variable rates on other securities of similar maturity offered by CFC to
its members. CFC has the right to defer interest payments for up to 10
semi-annual interest payment periods, or 5 years. CFC began to offer the
certificates for sale during the first quarter of fiscal year 2001.
10
Members' Equity
Patronage Capital
CFC is required by law to have a methodology to allocate its net margin to
its members. CFC allocates substantially all of its net margin annually
based on the members' patronage of CFC during the year. The allocated
margins are retained by CFC and used to fund operations until retired.
Currently, CFC retires 70% of the prior year's net margin during the first
quarter of the current fiscal year and holds the remaining 30% for a period
of 15 years. All retirements must be authorized by the Board of Directors
with regard to FC's financial condition. CFC allocates and retires margins
to its affiliated organization, RTFC, which in turn allocates its net margin,
including the CFC retirement, to its members under similar policies. At
May 31, 2000, CFC had a total of $320 million of allocated but unretired
margins and $19 million of unallocated margins, which along with $2
million of education fund reserve and membership fees comprise the total of
members' equity.
Debt Issuance
Debt Issued in the Capital Markets
CFC issues long- and short-term debt in the domestic and foreign capital
markets. CFC issues long-term secured collateral trust bonds for periods
of 2 years to 30 years, unsecured medium-term notes for periods of 9 months
to 30 years, unsecured quarterly income capital securities for periods of
up to 49 years and unsecured commercial paper for periods of 1 to 270 days
and extendable commercial notes with maturities up to 390 days. CFC also
enters into bank bid note arrangements with banks. CFC's collateral trust
bonds, medium-term notes, quarterly income capital securities and
commercial paper all carry investment grade ratings from three rating
agencies (see table in the Management Discussion and Analysis section, page
38).
Debt Issued to Members
CFC sells unsecured commercial paper and medium-term notes to its members.
Commercial paper is sold for periods of up to 270 days and medium-term
notes are sold for periods of 9 months to 30 years. Rates for both
securities are set daily by CFC.
Interest Rate and Currency Exchange Agreements
CFC will enter interest rate and currency exchange agreements when required
by certain transactions. CFC also uses interest rate exchange agreements
as part of its funding strategy to match the interest rate paid on its
liabilities with the interest rate received on its assets. At May 31,
2000, CFC was a party to $4,817 million of interest rate exchange
agreements and $438 million of currency exchange agreements (see Note 5 to
the Combined Financial Statements).
Revolving Credit Agreements
As of May 31, 2000, CFC had three revolving credit agreements totaling
$5,493 million which are used principally to provide liquidity support for
CFC's outstanding commercial paper, commercial paper issued by NCSC and
guaranteed by CFC and the adjustable or floating/fixed rate bonds which CFC
has guaranteed and for which CFC is standby purchaser for the benefit of
its members.
Under a five-year agreement with 55 banks, executed in November 1996, CFC
can borrow $2,403 million until November 26, 2001. J.P. Morgan Securities
Inc. and The Bank of Nova Scotia were Co-Syndication Agents, and Chase
Manhattan Bank is the Administrative Agent for this agreement. Any
amounts outstanding under the multi-year facility will be due on the
maturity date. On September 30, 1999, a 364-day agreement for $2,540
million was executed with 31 banks including Chase Manhattan Bank as
Administrative Agent, Bank of America, N.A. as Syndication Agent, The Bank
of Nova Scotia and Banc One, N.A. as Co-Documentation Agents and Chase
Securities Inc. and Bank of America Securities LLC as Joint Lead
Arrangers. A third revolving credit agreement for $550 million was also
executed on September 30, 1999 with ten banks, including The Bank of Nova
Scotia as Lead Arranger and Administrative Agent (the "BNS facility") and
Banc One, N.A. as Documentation Agent. Both of the 364-day facilities have
a revolving credit period that terminates on September 29, 2000 during
which CFC can borrow and such borrowings may be converted to a one-year
term loan at the end of the revolving credit period.
In connection with the five-year facility, CFC pays a per annum facility
fee of .090 of 1%. The per annum facility fee for both agreements with a
364-day maturity is .085 of 1%. There is no commitment fee for any of the
revolving credit facilities. If CFC's senior secured debt ratings decline
below AA- or Aa3 and amounts outstanding exceed 50% of the total
commitment, the facility fees may be replaced with a utilization fee of
.125 of 1%. Generally, pricing options are the same under all three
agreements and will be at one or more rates as defined in the agreements,
as selected by CFC.
The multi-year revolving credit agreement requires CFC to maintain members'
equity and members' subordinated certificates of at least $1,418 million at
May 31, 2000 (increased each fiscal year by 90% of net margin not
distributed to members). The revolving credit agreements require CFC to
achieve at least an average TIER over the six most recent fiscal quarters
of 1.025 and prohibit the retirement of patronage capital unless CFC has
achieved at least a TIER of 1.05 for the preceding fiscal year. The
revolving credit agreements prohibit CFC from incurring senior debt
(including guarantees but excluding
11
indebtedness incurred to fund RUS guaranteed loans) in an amount in excess
of ten times the sum of members' equity, members' subordinated certificates
and quarterly income capital securities and restrict, with certain
exceptions, the creation by CFC of liens on its assets. The agreements
also prohibit CFC from pledging collateral in excess of 150% of the
principal amount of collateral trust bonds outstanding. Provided that CFC
is in compliance with these financial covenants (including that CFC has no
material contingent or other liability or material litigation that was not
disclosed or reserved against in its most recent annual financial
statements) and is not in default, CFC may borrow under the agreements
until the termination dates. As of May 31, 2000 and May 31, 1999, CFC was
in compliance with all covenants and conditions under its revolving credit
agreements and there were no borrowings outstanding under such agreements.
Based on the ability to borrow under the three revolving credit facilities
at May 31, 2000, CFC classified $5,493 million, of its notes payable
outstanding as long-term debt. CFC expects to maintain more than $5,493
million of notes payable outstanding during the next twelve months. If
necessary, CFC can refinance such notes payable on a long-term basis by
borrowing under the five-year facility or the 364-day facilities with the
one year term out option, subject to the conditions therein.
Borrowing Costs
Set forth below are the weighted average costs incurred by CFC on its
short-term borrowings (commercial paper and bank bid notes) and on its
long-term borrowings (collateral trust bonds, medium-term notes, quarterly
income capital securities and debt supported by interest rate swaps) for
the periods shown.
Years Ended May 31,
2000 1999 1998
Short-term borrowings 5.83% 5.36% 5.73%
Long-term borrowings 6.11% 6.09% 6.74%
Total short- and long-term borrowings 6.00% 5.73% 6.03%
Tax Status
In 1969, CFC obtained a ruling from the Internal Revenue Service (the
"IRS") recognizing CFC's exemption from the payment of Federal income taxes
under Section 501(c)(4) of the Internal Revenue Code. Such exempt status
could be removed as a result of changes in legislation or in administrative
policy or as a result of changes in CFC's business. CFC believes that its
operations have not changed materially from those described to the IRS.
CFC's affiliates, RTFC and GFC, are taxable under Subchapter T of the
Internal Revenue Code. As long as they continue to qualify under
Subchapter T of the Internal Revenue Code, RTFC and GFC are allowed a
deduction from taxable income for the amount of net margin allocated to
their members.
Investment Policy
Surplus funds are invested pursuant to policies adopted by CFC's Board of
Directors. Under present policy, surplus funds may be invested in direct
obligations of or guaranteed by the United States or agencies thereof or
other highly liquid investment grade paper. Investments include high-rated
securities such as commercial paper, obligations of foreign governments,
Eurodollar deposits, bankers' acceptances, bank letters of credit,
certificates of deposit or working capital acceptances. The policy also
permits investments in certain types of repurchase agreements with highly
rated financial institutions, whereby the assets consist of eligible
securities of a type listed above set aside in a segregated account. CFC
typically has two types of funds available for investment:
* the debt service reserve funds held by the trustee under the indenture
under which CFC formerly issued collateral trust bonds (the "1972
indenture"), used to make bond interest and sinking fund payments; and
* member loan payments and commercial paper investments in excess of daily
cash funding requirements.
Debt service reserve funds are invested with maturities scheduled to
coincide with interest and sinking fund payment dates.
12
Employees
At May 31, 2000, CFC had 186 employees, including engineering, financial
and legal personnel, management specialists, credit analysts, accountants
and support staff. CFC believes that its relations with its employees are
good.
CFC Lending Competition
CFC competes with other lenders on price, the variety of options and
additional services offered as well as its overall approach to and
relationship with its member/owners.
According to annual financial statements filed with CFC, its electric
cooperative distribution and power supply member systems had a total of
$38.9 billion in long-term debt outstanding at December 31, 1999. RUS is
the dominant lender to the electric cooperative industry with $23.2 billion
or 60% of the total outstanding debt. RUS currently prices the majority of
its insured loans to distribution systems based on a municipal government
obligation index, prices hardship loans at a rate of 5% and provides
guarantees of loans to its electrical cooperatives by others, principally
the FFB. Under the insured loan program, RUS typically does not lend the
full amount of debt requested by the cooperative, requiring the cooperative
to seek supplemental lending from private capital sources. The amount of
funding proposed for the insured loan program for fiscal year 2001 ranges
from $172 million to $345 million. The amount approved for the prior year
was $417 million. The amount proposed for RUS guaranteed loans for fiscal
year 2001 ranges from $1.2 billion to $1.7 billion. CFC and other lenders
are not in competition with RUS, but rather compete for the supplemental
lending requirement, as well as for the full lending requirement for those
cooperatives that have decided not to borrow from RUS. Under the hardship
program, RUS lends 100% of the amount. Under the guarantee program, RUS
will guarantee the repayment of all principal and interest by the
cooperative. At December 31, 1999, CFC had a total of $12.4 billion of
long-term exposure to distribution and power supply member systems, $10.4
billion of long-term loans and $2.0 billion of guarantees outstanding.
CFC's $12.4 billion long-term exposure represented 32% of the total long-
term debt to these electric systems. The remaining $3.3 billion or 8% was
outstanding from other sources. During fiscal year 2000, CFC was selected
as the lender for 98% of the total supplemental lending requirement (not
including amounts lent by FFB). During this same period, CFC was selected
as lender for 94% of the total lent to distribution systems for the
repayment of their RUS debt.
The competitive market for providing credit to the rural telecommunications
industry is difficult to quantify, since many rural telecommunications
companies are not RUS borrowers. At December 31, 1999, RUS had a total of
$3.5 billion outstanding to telecommunications borrowers. The RTB, an
instrumentality of the United States that provides supplemental financing
to RUS borrowers and is managed by RUS, had a total of $1.2 billion
outstanding to telecommunication borrowers. CFC is not in direct
competition with RUS or RTB, but rather competes with other lenders for
additional supplemental lending and for the full lending requirement of the
rural telecommunications companies that have decided not to borrow from RUS
or RTB or for projects not eligible for RUS or RTB financing. CFC's
competition includes regional banks, government sponsored enterprises and
insurance companies. At December 31, 1999, CFC had a total of $3.0 billion
in long-term loans outstanding to telecommunications borrowers. At
December 31, 1999, CFC believes that there were no other lenders with
telecommunications loan portfolios of similar size to CFC's and RUS's.
Member Regulation and Competition
Electric Systems
In 1992 Congress passed the Energy Policy Act effectively requiring
competition in the generation sector of the wholesale electric power
industry. In 1996, FERC issued orders 888 and 889. Order 888 provides for
competitive wholesale power sales by requiring jurisdictional public
utilities that own, control or operate transmission facilities to file non-
discriminatory open access transmission tariffs that provide others with
transmission service comparable to the service they provide themselves.
The reciprocity provision associated with order 888 also provides
comparable access to transmission facilities of non-jurisdictional
utilities (including RUS borrowers and municipal and other publicly owned
electric utilities) that use jurisdictional utilities' transmission
systems. The order further provides for the recovery of stranded costs
from departing wholesale customers with agreements dated prior to July 11,
1994. After that date, stranded costs must be agreed upon in the service
agreement. Order 889 provides for a real time electronic information
system referred to as the Open Access Same-Time Information System. It
also establishes standards of conduct to ensure that transmission owners
and their affiliates do not have an unfair competitive advantage by using
transmission to sell power. Recently several states have passed laws
requiring utilities to unbundle their vertically structured retail rates
and to subsequently begin providing customer choice for retail generation
services. Many other states are considering such legislation. The
structure of subsequent legislation and rules defining the competitive
13
retail market and the provision for stranded cost recovery are not yet
known. The ultimate impact on CFC's members cannot be determined until
these items have been resolved.
Section 211 of the Federal Power Act as amended by the Energy Policy Act of
1992 classifies any cooperative with significant transmission assets as a
"transmitting utility" for purposes of this section. Under the provisions
of this Act, FERC has the authority to order such cooperatives to provide
open access for unaffiliated entities. This provision also authorizes FERC
to require investor-owned and other utilities to provide the same open
access transmission for the benefit of cooperatives. Electric cooperatives
have strongly supported section 211 for this reason. Under sections 205
and 206 of the Federal Power Act, cooperatives that pay off their RUS debt
are treated as jurisdictional public utilities. FERC is proceeding under
the legal theory that, under these sections, it can order jurisdictional
public utilities to provide open access.
Currently eight states are operating under customer choice laws. In seven
of these states (Arizona, California, Massachusetts, Montana, New Jersey,
New York and Pennsylvania), CFC has a total of 57 distribution system
members and five power supply system members. In California, cooperatives
are not required to offer customer choice and all three of CFC's
distribution members located in the state have opted not to allow customer
choice. In New York, cooperatives are not required to file competition
plans with the State Public Utility Commission. CFC currently does not
have any members in the eighth state, Rhode Island. In an additional 14
states, laws have been passed and open access is scheduled to be in effect
by 2004. In these states, power supply systems with rates that are above
market may be at risk of losing customer loads. The distribution systems
in these states will continue to deliver power to the ultimate customer,
regardless of who is supplying the power, the CFC member power supply
system or some other power generator. Thus, CFC's distribution system
members are not believed to be at significant risk due to the move to open
customer access to power supply.
While customer choice laws have been passed in the above states, there are
many factors that may delay or influence the choices that customers have
available and the timing of true competition. One of the biggest factors
will be the issue of stranded cost recovery. Stranded costs are the
portion of the investment in generation and/or other facilities which in a
competitive environment would be above market price and therefore not
otherwise recoverable by the utility. The amount of stranded costs a
system is allowed to recover, the timing of the recovery and the method of
recovery will all affect the level of competition in a state. The level of
fees that systems will be allowed to charge other utilities for use of
their transmission and distribution system may also impact the level of
residential competition. Other issues that may delay competition include
the following:
* cooperatives are allowed to "opt out" of the provisions of the laws in
some states;
* utilities in many states will still be regulated regarding rates on non-
competitive services, such as distribution;
* many states will still regulate the borrowing by utilities;
* FERC regulation of transmission;
* reconciling the differences in various state laws, so that out-of-state
utilities can compete with in-state utilities; and
* few competitors have targeted residential customers.
The pace of states passing customer choice laws has slowed. As of July 1,
2000, there were 24 states that had neither customer choice laws nor
comprehensive restructuring orders by the state public utility commissions.
The time required to pass such laws as well as the issues described above
could significantly delay nationwide retail competition. The U.S. Congress
has not passed legislation mandating retail customer choice and the passage
of such legislation is not anticipated in this Congress.
In addition to customer choice laws, some state agencies regulate electric
cooperatives with regard to rates and borrowing. There are 16 states that
regulate the rates electric systems charge. There are 19 states that
regulate electric systems regarding the issuance of long-term debt and
there are five states that regulate the issuance of short-term debt. FERC
also has jurisdiction to regulate rates of and refinancing by electric
systems within its jurisdiction that are not borrowers of RUS which are
otherwise jurisdictional.
The 1990 amendments to the Clean Air Act of 1970 (the "Amendments")
required utilities and others to reduce emissions. The Amendments contain
a range of compliance options and a phase-in period, which will help
mitigate the immediate costs of implementation. Many of CFC's member
systems already comply with the provisions of the Amendments. Compliance
plans for member systems with units affected in Phase I primarily involved
fuel switching to low-sulfur coal. The trading of emission allowances may
also be an economical alternative to operating or equipment modifications
for Phase II (2000). Some member systems originally believed to be
adversely affected by the Amendments have developed strategies designed to
minimize the Amendments' impact. At this time, it is not anticipated that
the Amendments will have a material adverse impact on the quality of CFC's
loan portfolio.
14
Telecommunications Systems
CFC member telecommunications systems are regulated at the state and
federal levels. Most state regulatory bodies regulate local service rates,
intrastate access rates and telecommunications company borrowing. The
Federal Communications Commission ("FCC") regulates interstate access
rates.
The Telecommunications Act of 1996 (the "Telecom Act") created a framework
for competition and deregulation in the local telecommunications market.
The Telecom Act has four basic goals: competition, universal service,
deregulation and advanced telecommunications and information technologies.
The Telecom Act seeks to achieve competition by requiring all carriers to
interconnect with all others, local exchange carriers to provide total
service resale, number portability, dialing parity, access to rights-of-
way, reciprocal compensation, co-location, and unbundled access. Congress
included provisions in the Telecom Act granting rural local exchange
carriers ("LECs") an exemption from the above requirements.
In America's cities, vibrant competition is taking hold. Facility and non-
facility based competitors are pursuing after and winning (primarily) large
business users. Few of these competitors have targeted residential
customers. The Bell companies are motivated to cooperate with competitors
in order to win approval to enter the long distance market in their service
territories. Bell Atlantic has won FCC approval to provide long distance
service in New York and SBC Communications, Inc. is expected to gain such
approval in Texas.
Rural markets, with their preponderance of residential subscribers, will
likely be among the last to see wide-scale local telecommunications service
competition. Rural telecommunications companies that border metropolitan
areas would be the first to experience competition. These rural
telecommunications providers generally are not waiting for competition to
arrive, but they are using the period before they come under competitive
attack to enter small towns and cities as competitive local exchange
carriers. They are able to leverage their modern infrastructure,
organization skills, financial strength and local presence to compete with
big, incumbent providers that are not focused on these small markets.
In addition to competition, the Telecom Act also mandated a new universal
telecommunications service support mechanism and required that it be
sufficient to ensure that rural customers receive reasonably comparable
rates and services when compared to urban customers. Congress stated its
intent that implicit subsidies presently contained in the access charges
local telecommunications companies levy on long distance carriers be
eliminated and be made explicit in the new universal service support
mechanism.
The FCC recently approved a plan put forward by large LECs and
interexchange carriers ("IXCs") that reduced access charges the large LECs
charge the IXCs and authorizes alternative mechanisms by which the large
LECs can recover a significant portion of lost access revenues. The
national telephone trade associations are promoting a similar plan for
small rural LECs that includes a solution for the uncertainty that has
surrounded universal service funding. If enacted, the plan would assure
that rural LECs' interstate access and universal service revenues are
sufficient and predictable. CFC does not anticipate that any loss in
revenue resulting from this plan (if adopted by the FCC) would result in
material losses on loans outstanding to rural telecommunications companies.
Deregulation thus far has not had much effect on LECs. The FCC has
promulgated a series of rules to implement the Telecom Act, and eliminated
very few existing regulatory requirements. Perhaps after competition takes
hold more widely there may be an effort to lessen regulations on LECs.
The final aspect of the Telecom Act dealt with advanced telecommunications
and information technologies. The current administration is concerned that
there is a growing "digital divide" between various groups in the country
and that such a divide exists relative to rural areas versus urban areas
access to advanced telecommunications and information services. It is
anticipated that RUS will play a significant role in financing
infrastructure to help provide rural Americans with access to these
services. RTFC is prepared to supplement the government's financing of
this effort.
15
The RUS Program
Since the enactment of the Rural Electrification Act in 1936 (the "RE
Act"), RUS has financed the construction of electric generating plants,
transmission facilities and distribution systems in order to provide
electricity to persons in rural areas. Principally through the
organization of systems under the RUS loan program in 48 states and U.S.
territories, the percentage of farms and residences in rural areas of the
United States receiving central station electric service increased from
11% in 1934 to almost 100% currently. Rural electric systems serve 12%
of all consumers of electricity in the United States and its territories
and account for approximately 8% of total sales of electricity and about
5% of energy generation and generating capacity.
In 1949, the RE Act was amended to allow RUS to lend for the purpose of
furnishing and improving rural telecommunications service. The RUS
telecommunications lending program had 779 reporting borrowers at December
31, 1998. The 779 borrowers operated 4,746 exchanges, providing service to
a total of 5.5 million subscribers, including 1.1 million business
subscribers and 4.4 million residential customers (data for 1999 not yet
available).
The RE Act provides for RUS to make insured loans and to provide other
forms of financial assistance to borrowers. RUS is authorized to make
direct loans, at below market rates, to systems which are eligible to
borrow from it. RUS is also authorized to guarantee loans that have been
used mainly to provide financing for construction of Bulk Power Supply
Projects. Guaranteed loans bear interest at a rate agreed upon by the
borrower and the lender (which generally has been the FFB). For
telecommunications borrowers, RUS also provides financing through the RTB.
The RTB is an instrumentality of the United States providing financing at
rates reflecting its cost of capital and is managed by RUS. RUS exercises
financial and technical supervision over borrowers' operations. Its loans
and guarantees are generally secured by a mortgage on substantially all of
the system's property and revenues.
For fiscal year 2001, both the House and Senate Agriculture Appropriation
Committees have approved RUS electric muni-rate loan levels of $295
million. The House bill includes $50 million for hardship 5% loans and the
Senate includes $122 million. RUS is also authorized to provide 100%
guarantees on loans available from the FFB or other lenders. The House
appropriations bill has included $1.2 billion and the Senate has provided
$1.7 billion for these loan guarantees for the fiscal year beginning
October 1, 2000. Differences between the House and Senate will be worked
out with a final bill expected before the start of the fiscal year
beginning October 1, 2000. Electric funding levels for the fiscal year
ending September 30, 2000 were $122 million at the 5% rate, $295 million
for loans at a municipal government obligation index and $1.7 billion for
guarantees.
Legislation enacted in 1992 allows RUS electric borrowers to prepay their
loans to RUS at a discount based on the government's cost of funds at the
time of prepayment. If a borrower chooses to prepay its notes, it becomes
ineligible for future RUS insured loans for a period of ten years, but
remains eligible for RUS loan guarantees. As of May 31, 2000, 223
borrowers had either fully prepaid or partially prepaid their RUS notes,
under these provisions. These borrowers have $5.4 billion in loans
outstanding from CFC.
Member Financial Data
Electric Systems
On the following pages are tables providing composite statements of
revenues, expenses and patronage capital from the distribution systems and
power supply systems which were members of CFC during the five years ended
December 31, 1999, and their respective composite balance sheets at the end
of each such year. The data in the tables for 1995 is comprised of
information collected by RUS for all CFC members that were RUS borrowers
and information collected by CFC on the members that do not borrow from
RUS. The data for 1996 to 1999 is data collected by CFC only. CFC began
making its own data collection in 1996 due to the larger number of its
members that no longer borrow from RUS. Distribution members submit annual
data as of December 31 on form 7 and power supply members submit annual
data as of December 31 on form 12 or FERC form 1. As of July 31, 2000, CFC
had received a form 7 from 811 distribution systems and a form 12 or FERC
form 1 from 54 power supply systems.
While CFC is reporting 832 distribution system members at May 31, 2000,
only 813 were required to file form 7's with CFC at December 31, 1999. CFC
collected form 7's from 811 distribution systems; two systems did not meet
the filing deadline. The other 20 systems were not required to file a form
7 because they did not have outstanding balances of long-term loans at
December 31, 1999.
Only 54 of the 70 total power supply systems report financial results to
CFC. Fifteen of the remaining power supply systems did not report
financial results because they are subsidiaries of other member power
supply systems and thus their financial results were consolidated with and
filed by the parent power supply system, act as coordinating agents for
their members, did not have an outstanding balance of long-term loans at
December 31, 1999, or bought out CFC debt after that date. In addition,
one power supply system did not meet the filing deadline.
16
Telecommunications Systems
On the following pages are tables providing composite statements of
revenues and expenses from the telecommunications systems that were
members of CFC during the two years ended December 31, 1999. The first
year for which CFC has collected such data and their respective composite
balance sheet was 1998. Members with long-term loans outstanding are
generally required to submit annual data as of December 31 in the form of
audited financial statements. As of August 16, 2000, CFC had received
audited financial statements from 191 telecommunications systems.
While CFC had 536 telecommunications system members at May 31, 2000, a
total of 246 had long-term loans outstanding and were required to submit
audited financial statements to CFC at December 31, 1999. A total of 43
telecommunications system members did not meet the filing deadline and 12
telecommunications system members submitted consolidated audited financial
statements.
____________________
NOTE: Statistical information contained in this section has not been
examined by CFC's independent public accountants, and the number and
geographical dispersion of the systems have made impractical an independent
investigation by CFC of the statistical information. The information
presented is based upon financial statements submitted to CFC and RUS,
subject to year-end audit adjustments, by reporting borrowers and do not,
with minor exceptions, take into account current data for certain systems,
primarily those which are not active CFC borrowers.
17
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL
AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS
The following are unaudited figures that are based
upon financial statements submitted to RUS and
CFC by Member Distribution Systems
Years ended December 31,
(Dollar amounts in thousands) 1999 1998 1997 1996 1995
Operating revenues and patronage capital $18,805,359 $18,284,021 $17,232,257 $17,028,087 $16,253,957
Operating deductions:
Cost of power (1) 11,828,572 11,580,829 10,907,145 10,924,695 10,486,773
Distribution expense (operations) 792,249 728,565 472,629 445,990 412,058
Distribution expense (maintenance) 1,024,734 985,571 829,991 804,663 752,659
Administrative and general expense (2) 1,864,344 1,735,074 1,720,805 1,627,925 1,584,099
Depreciation and amortization expense 1,290,354 1,203,438 1,134,149 1,069,101 1,000,017
Taxes 230,238 241,010 458,620 458,623 436,563
Total 17,030,491 16,474,487 15,523,339 15,330,997 14,672,169
Utility operating margin 1,774,868 1,809,534 1,708,918 1,697,090 1,581,788
Non-operating margin 179,940 173,446 235,334 180,311 172,118
Power supply capital credits (3) 259,099 297,451 268,015 282,800 254,839
Total 2,213,907 2,280,431 2,212,267 2,160,201 2,008,745
Interest on long-term debt (4) 1,024,369 980,863 919,892 869,076 833,110
Other deductions 50,523 49,628 45,439 43,711 46,859
Total 1,074,892 1,030,491 965,331 912,787 879,969
Net margin and patronage capital $ 1,139,015 $ 1,249,940 $ 1,246,936 $ 1,247,414 $ 1,128,776
TIER (5) 2.11 2.35 2.34 2.44 2.42
DSC (6) 2.15 2.32 2.26 2.42 2.40
MDSC (7) 2.03 2.25 2.17 2.30 2.28
Number of systems included 811 820 821 832 824
____________________
(1) Includes cost of purchased power, power production and transmission
expense.
(2) Includes sales expenses, consumer accounts and customer service and
informational expense as well as other administrative and general
expenses.
(3) Represents net margin of power supply systems and other associated
organizations allocated to their member distribution systems and added
in determining net margin and patronage capital of distribution systems
under RUS accounting practices. Cash distributions of this credit have
rarely been made by the power supply systems and such other
organizations to their members.
(4) Interest on long-term debt is net of interest charged to construction,
which is stated separately as a credit on form 7. CFC believes that
amounts incurred by distribution systems for interest charged to
construction and allowance for funds used during construction are
immaterial relative to their total interest on long-term debt and net
margin and patronage capital.
(5) The ratio of (x) interest on long-term debt (in each year including
all interest charged to construction) and net margin and patronage
capital to (y) interest on long-term debt (in each year including all
interest charged to construction).
(6) The ratio of (x) net margin and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization to (y) long-term debt service
obligations.
(7) The ratio of (x) operating margin and patronage capital plus interest
on long-term debt (including all interest charged to construction) plus
depreciation and amortization expense plus non-operating margin,
interest plus cash received in respect of generation and transmission
and other capital credits to (y) long-term debt service obligations.
18
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS
The following are unaudited figures that are based
upon financial statements submitted to RUS and
CFC by Member Distribution Systems
At December 31,
(Dollar amounts in thousands) 1999 1998 1997 1996 1995
Assets and other debits:
Utility plant:
Utility plant in service $43,023,535 $40,387,723 $37,763,550 $35,406,826 $33,118,001
Construction work in progress 1,262,537 1,129,147 1,062,356 975,357 881,171
Total utility plant 44,286,072 41,516,870 38,825,906 36,382,183 33,999,172
Less: Accumulated provision for
Depreciation and amortization 12,225,421 11,409,118 10,608,302 9,911,677 9,221,378
Net utility plant 32,060,651 30,107,752 28,217,604 26,470,506 24,777,794
Investment in associated organizations (1) 3,790,623 3,665,208 3,483,154 3,348,326 3,207,671
Current and accrued assets 4,520,592 4,526,663 4,185,884 4,126,415 3,980,052
Other property and investments 703,585 644,353 552,033 503,871 496,105
Deferred debits 599,511 530,606 514,670 488,009 511,977
Total assets and other debits $41,674,962 $39,474,582 $36,953,345 $34,937,127 $32,973,599
Liabilities and other credits:
Net worth:
Memberships $ 119,175 $ 112,391 $ 105,505 $ 105,497 $ 127,749
Patronage capital and other equities (2) 17,542,625 16,710,887 15,674,556 14,731,432 13,633,993
Total net worth 17,661,800 16,823,278 15,780,061 14,836,929 13,761,742
Long-term debt (3) 19,308,152 18,343,340 16,924,955 16,214,420 15,718,979
Current and accrued liabilities 433,687 3,098,525 3,046,528 2,697,605 2,418,230
Deferred credits 3,429,173 884,595 864,384 872,013 786,455
Miscellaneous operating services 842,150 324,845 337,417 316,160 288,193
Total liabilities and other credits $41,674,962 $39,474,583 $36,953,345 $34,937,127 $32,973,599
Equity percentage (4) 42.5% 42.6% 42.7% 42.5% 41.7%
Number of systems included 811 820 821 832 824
______________________________
(1) Includes investments in service organizations, power supply capital
credits and investments in CFC.
(2) Includes non-refundable donations or contributions in cash,
services or property from states, municipalities, other government
agencies, individuals and others for construction purposes separately
listed on form 7.
(3) Principally debt to RUS and CFC. Includes $8,342,631, $7,481,368,
$6,121,902, $5,467,636, $, and $4,824,491, for the years 1999, 1998,
1997, 1996 and 1995, respectively, due to CFC.
(4) Determined by dividing total net worth by total assets and other
debits.
19
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL
AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS
The following are unaudited figures that are based
upon financial statements submitted to RUS and
CFC by Member Power Supply Systems
Years ended December 31,
(Dollar amounts in thousands) 1999 1998 1997 1996 1995
Operating revenues and patronage capital $10,758,413 $10,901,138 $10,702,813 $10,585,875 $10,182,928
Operating deductions:
Cost of power (1) 7,945,476 7,979,542 7,604,521 7,322,039 6,984,648
Distribution expense (operations) 23,634 17,499 12,555 15,431 16,019
Distribution expense (maintenance) 14,908 12,524 12,937 16,607 15,950
Administrative and general expense (2) 414,362 406,441 474,681 473,869 483,030
Depreciation and amortization expense 904,826 914,270 915,879 1,056,113 956,889
Taxes 68,681 69,095 231,843 237,700 246,700
Total 9,371,887 9,399,371 9,252,416 9,121,759 8,703,236
Utility operating margin 1,386,526 1,501,767 1,450,397 1,464,116 1,479,692
Non-operating margin 258,186 577,842 232,778 493,874 253,883
Power supply capital credits (3) 44,180 56,646 46,520 55,590 48,981
Total 1,688,892 2,136,255 1,729,695 2,013,580 1,782,556
Interest on long-term debt (4) 1,227,548 1,221,512 1,295,082 1,436,200 1,476,062
Other deductions (5) 185,621 184,868 409,396 1,601,919 89,784
Total 1,413,169 1,406,380 1,704,478 3,038,119 1,565,846
Net margin and patronage capital $ 275,723 $ 729,875 $ 25,217 $(1,024,539) $ 216,710
TIER (6) 1.22 1.60 1.02 0.29 1.15
DSC (7) 1.15 1.45 1.11 0.69 1.02
Number of systems included 54 58 57 54 53
______________________________
(1) Includes cost of purchased power, power production and transmission
expense, separately listed on the form 12.
(2) Includes sales expenses and consumer accounts expense and consumer
service and informational expense as well as other administrative and
general expenses, separately listed on the form 12 or FERC form 1.
(3) Certain power supply systems purchase wholesale power from other power
supply systems of which they are members. Power supply capital credits
represent net margin of power supply systems allocated to member power
supply systems on the books of the selling power supply systems. This
item has been added in determining net margin and patronage capital of
the purchasing power supply systems under RUS accounting practices.
Cash distributions of this credit have rarely been made by the selling
power supply systems to their members. This item also includes net
margin of associated organizations allocated to CFC power supply
members and added in determining net margin and patronage capital of
the CFC member systems under RUS accounting practices
(4) Interest on long-term debt is net of interest charged to construction.
Allowance for funds used during construction has been included in non-
operating margin. According to unpublished information interest
charged to construction and allowance for funds used during
construction for CFC power supply members in the years 1995-1999 were
as follows:
Interest Charged to Allowance for Funds used
Construction During Construction Total
1999 $10,073 $13,604 $23,677
1998 9,947 13,133 23,080
1997 7,798 12,684 20,482
1996 13,434 11,620 25,054
1995 68,400 11,018 79,418
(5) Includes $1,119,635 in 1996 related to the reorganization of Cajun
Electric Power Coop., Inc., with whom CFC has no credit exposure.
(6) The ratio of (x) interest on long-term debt (in each year including all
interest charged to construction) and net margin and patronage capital
to (y) interest on long-term debt (in each year including all interest
charged to construction). The TIER calculation includes the operating
results of five systems which failed to make debt service payments or
are operating under a debt restructure agreement, without which the
composite TIER would have been, 1.24, 1.27, 1.04, 1.21 and 1.23 for the
years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
(7) The ratio of (x) net margin and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization to (y) long-term debt service obligations
(including all interest charged to construction). The DSC calculation
includes the operating results of five systems which failed to make
debt service payments or are operating under a debt restructure
agreement. Without these systems, the composite DSC would have been
1.23, 1.28, 1.13, 1.20 and 1.22 for the years ended December 31, 1999,
1998, 1997, 1996 and 1995, respectively.
20
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS
The following are unaudited figures that are based
upon financial statements submitted to RUS and
CFC by Member Power Supply Systems
At December 31,
(Dollar amounts in thousands) 1999 1998 1997 1996 1995
Assets and other debits:
Utility plant:
Utility plant in service $31,140,658 $31,141,532 $31,656,202 $32,191,089 $34,182,352
Construction work in progress 1,151,859 1,041,760 825,421 640,005 931,397
Total utility plant 32,292,517 32,183,292 32,481,623 32,831,094 35,113,749
Less: Accumulated provision for 13,230,060 13,059,537 12,558,247 11,783,058 11,586,462
depreciation and amortization
Net utility plant 19,062,457 19,123,755 19,923,376 21,048,036 23,527,287
Investments in associated 1,173,026 1,132,157 1,179,185 1,178,785 1,049,409
organizations (1)
Current and accrued assets 3,904,535 3,740,302 3,697,391 3,984,238 4,211,004
Other property and investments 1,511,145 1,691,932 1,553,774 2,000,584 1,656,563
Deferred debits 3,251,458 3,400,876 3,228,708 3,636,749 4,391,800
$28,902,621 $29,089,022 $29,582,434 $31,848,392 $34,836,063
Total assets and other debits
Liabilities and other credits:
Net worth:
Memberships $ 49,131 $ 263 $ 258 $ 258 $ 250
Patronage capital and other equities (2) 3,175,374 (52,606) (778,357) (646,115) 497,756
Total net worth 3,224,505 (52,343) (778,099) (645,857) 498,006
Long-term debt (3) 19,591,883 23,389,067 24,426,867 25,900,628 28,372,321
Current and accrued liabilities 2,328,504 1,877,320 1,791,628 2,040,563 1,848,755
Deferred credits 1,338,343 1,296,308 1,343,053 1,826,945 1,309,860
Miscellaneous operating reserves 2,419,386 2,578,670 2,798,985 2,726,113 2,807,121
Total liabilities and other credits $28,902,621 $29,089,022 $29,582,434 $31,848,392 $34,836,063
Number of systems included 54 58 57 54 53
____________________
(1) Includes investments in service organizations, power supply capital
credits and investments in CFC.
(2) Large increase in 1999 due to the elimination of Cajun Electric Power
Cooperative and includes a $1.2 billion decrease in 1996 related to
the reorganization of Cajun with whom CFC has no credit exposure.
(3) Principally debt to RUS or debt guaranteed by RUS and loaned by FFB and
includes $1,761,847, $1,652,943, $1,411,157, $1,264,475 and $1,085,594
for the years 1999, 1998, 1997, 1996, and 1995, respectively, due to
CFC.
21
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES AND EXPENSES
AS REPORTED BY CFC TELECOMMUNICATIONS SYSTEM MEMBERS
The following are unaudited figures that are based
upon financial statements submitted to
CFC by Member Telecommunications Systems
Years ended December 31,
(Dollar amounts in thousands) 1999 (3) 1998
Operating revenues $3,908,496 $2,535,461
Operating expenses (1) 3,003,530 1,846,215
Net income before interest, depreciation and taxes 904,966 689,246
Interest on long-term debt 221,103 140,436
Net income before depreciation and taxes 683,863 548,810
Depreciation and amortization expenses 410,805 279,277
Net income before taxes 273,058 269,533
Taxes 89,030 71,326
Net income $ 184,028 $ 198,207
DSC (2) 2.30 2.14
Number of systems included 191 169
____________________
(1) Includes sales expenses, consumer accounts and customer service and
informational expense as well as other administrative and general
expenses.
(2) The ratio of (x) net margin plus interest on long-term debt (including
all interest charged to construction) plus depreciation and
amortization to (y) long-term debt service obligations.
(3) Some RTFC members have been acquired by Alltel Corporation and RTFC
agreed to accept Alltel Corporation's financial statements rather than
those of the acquired operating companies. Given Alltel Corporation's
size, it is not included in the composite statistics.
22
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC TELECOMMUNICATIONS SYSTEMS
The following are unaudited figures that are based
upon financial statements submitted to RUS and
CFC by Member Telecommunications Systems
At December 31,
(Dollar amounts in thousands) 1999 (3) 1998
Assets and other debits:
Cash and cash equivalents $ 646,409 $ 401,507
Current assets 1,029,905 590,248
Plant, property and equipment 3,998,038 2,699,798
Other non-current assets 2,505,597 1,456,301
Total assets $8,179,949 $5,147,854
Liabilities and equity:
Current liabilities $ 898,080 $ 586,176
Affiliate debt 3,804 23,442
Long-term debt (1) 4,309,996 2,686,987
Other non-current liabilities 392,982 232,219
Equity 2,575,087 1,619,030
Total liabilities and equity $8,179,949 5,147,854
Equity percentage (2) 37% 32%
Number of systems included 191 169
____________________
(1) Includes current maturities.
(2) Determined by dividing total net worth by total assets and other
debits.
(3) Some RTFC members have been acquired by Alltel Corporation and RTFC
agreed to accept Alltel Corporation's financial statements rather than
those of the acquired operating companies. Given Alltel Corporation's
size, it is not included in the composite statistics.
23
Item 2. Properties.
CFC owns and operates a headquarters facility in Fairfax County, Virginia.
This facility consists of a six-story office building with separate parking
garage situated on four acres of land. In July 1999, CFC completed
construction of a second building on the adjacent unimproved land. The new
building is a six-story office building with a separate parking garage
situated on six acres of land. CFC also owns an additional two acres of
unimproved land.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Inapplicable.
Item 6. Selected Financial Data.
The following is a summary of selected financial data for each of the five
years ended May 31, 2000.
(Dollar amounts in thousands) 2000 1999 1998 1997 1996
For the year ended May 31:
Operating income $ 1,020,998 $ 792,052 $ 639,948 $ 567,065 $ 508,090
Operating margin $ 116,497 $ 76,439 $ 57,022 $ 54,736 $ 50,621
Gain on sale of land - - 5,194 - -
Extraordinary loss (A) (1,164) - - - (1,580)
Net margin $ 115,333 $ 76,439 $ 62,216 $ 54,736 $ 49,041
Fixed charge coverage
ratio (A) 1.13 1.12 1.12 1.12 1.12
As of May 31:
Assets $17,083,440 $13,925,252 $10,682,888 $9,057,495 $8,054,089
Long-term debt (B) $10,595,596 $ 6,891,122 $ 5,024,621 $3,596,231 $3,682,421
Members' subordinated
certificates $ 1,340,417 $ 1,239,816 $ 1,229,166 $1,212,486 $1,207,684
Members' equity $ 341,217 $ 296,481 $ 279,278 $ 271,594 $ 269,641
Leverage ratio (C) 8.12 7.11 6.39 5.87 5.70
Debt to equity ratio (D) 6.46 5.52 4.51 3.97 3.63
___________________
(A) During the years ended May 31, 2000 and May 31, 1996, CFC paid premiums
of $1.2 million and $1.6 million, respectively, in connection with the
prepayments of collateral trust bonds. Margin used to compute the
fixed charge coverage ratios represent net margin before extraordinary
losses plus fixed charges. The fixed charges used in the computation
of the fixed charge coverage ratios consist of interest and
amortization of bond discounts and bond issuance expenses.
(B) Includes commercial paper reclassified as long-term debt and excludes
$3,040 million, $983 million, $327 million, $269 million and $352
million in long-term debt that comes due, matures and/or will be
redeemed during fiscal years 2001, 2000, 1999, 1998 and 1997,
respectively (see Note 5 to Combined Financial Statements).
(C) In accordance with CFC's revolving credit agreements, the leverage
ratio is calculated by dividing debt and guarantees outstanding,
excluding quarterly income capital securities and debt used to fund
loans guaranteed by the RUS, by the total of quarterly income capital
securities, members' subordinated certificates and members' equity.
(D) The debt to equity ratio is calculated by dividing debt outstanding,
excluding quarterly income capital securities and debt used to fund
loans guaranteed by RUS, by the total of quarterly income capital
securities, members' subordinated certificates, members' equity and the
loan loss allowance.
CFC has had outstanding guarantees for its members' indebtedness in each of
the fiscal years shown above. Members' interest expense on such
indebtedness was approximately $40 million for the year ended May 31, 2000.
CFC does not have any outstanding common stock and does not pay dividends.
Annually, CFC allocates its net margin to its members in the form of
patronage capital certificates. Under current policies, CFC retires
patronage capital 70% during the next fiscal year and holds the remaining
30% for 15 years. All retirements of patronage capital are subject to
approval by the Board of Directors, if permitted by CFC's contractual
obligations and to the extent that the Board of Directors in its discretion
may determine from time to time that the financial condition of CFC would
not be impaired as a result.
25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Dollar amounts in millions)
This discussion and analysis contains statements that may be considered
forward looking. In making these statements, CFC has made an evaluation of
estimates, risks and uncertainties related to each circumstance. The
actual results may differ from the estimates and assumptions discussed in
this presentation, which could cause the actual results to differ
materially.
The following discussion and analysis is designed to provide a better
understanding of CFC's combined financial condition and results of
operations and as such should be read in conjunction with the Combined
Financial Statements, including the notes thereto.
Overview
CFC was formed in 1969 by the rural electric cooperatives to provide them
with a source of funds to supplement the financing provided by RUS. CFC
was organized as a cooperative in which each member (other than associate
members) receives one vote. Under CFC's bylaws, the Board of Directors is
comprised of 22 individuals who must be either general managers or
directors of members. CFC was granted tax-exempt status under Section
501(c)(4) of the Internal Revenue Code.
In 1987, RTFC was formed by CFC to provide a source of funds for the rural
telecommunications industry. Like CFC, RTFC is a cooperative. However,
RTFC's bylaws and voting members' agreement require that the majority of
RTFC's Board of Directors be elected from individuals designated by CFC.
The remaining board positions are filled by individuals nominated by the
other RTFC members. CFC is the sole source of external funding for RTFC.
Because CFC has control of the RTFC Board, RTFC's financial condition and
results of operations are combined with those of CFC.
GFC was organized in December 1991 as a taxable cooperative association
owned by its member rural electric systems and CFC to provide a source of
funds for members to refinance the RUS guaranteed debt previously held by
the FFB. GFC is a controlled affiliate of CFC (the majority of its
directors are appointed by CFC). All loans from GFC are guaranteed by RUS.
CFC is the sole source of external funding for GFC. Because CFC has
control of the GFC Board, GFC's financial condition and results of
operations are combined with those of CFC. Unless stated otherwise, all
references to CFC refer to the combined results of CFC, RTFC and GFC.
CFC's primary objective as a cooperative is to provide its members with the
lowest possible loan and guarantee rates. Therefore, CFC marks up its
funding costs only to the extent necessary to cover its operating expenses,
a provision for loan losses and to provide a margin sufficient to preserve
interest coverage in light of CFC's financing objectives. To the extent
members contribute to CFC's base capital by purchasing subordinated
certificates carrying below-market interest rates, CFC can offer
proportionally lower interest rates on its loans to members.
CFC obtains its funding from the capital markets and its membership. CFC
enters the capital markets, based on the combined strength of its members,
to borrow the funds required to fulfill the financing requirements of its
members. On a regular basis, CFC obtains debt financing in the capital
markets by issuing long-term fixed rate or variable rate collateral trust
bonds and quarterly income capital securities, intermediate-term fixed or
variable rate medium-term notes, commercial paper and enters into bank bid
note agreements. CFC also offers its AA/A credit rating to enhance its
members' credit on other public or private placement transactions through
guarantees. In addition, CFC obtains debt financing from its membership
and other qualified investors through the direct sale of its commercial
paper and medium-term notes.
Rural electric cooperatives that join CFC are required to purchase
membership subordinated certificates from CFC as a condition of membership.
In connection with any long-term loan or guarantee made by CFC to or on
behalf of one of its members, CFC may require that the member make an
additional investment in CFC by purchasing loan or guarantee subordinated
certificates. Like the membership subordinated certificates, the loan and
guarantee subordinated certificates are unsecured and subordinate to other
senior debt of CFC.
CFC is required by the cooperative laws under which it is incorporated to
have a mechanism to allocate its earnings to its members. CFC allocates
its net margin annually based on each member's participation in loan
programs during the
26
year. The membership, loan and guarantee subordinated certificates along
with unretired patronage capital provide CFC's base capitalization.
CFC's performance is closely tied to the performance of its member rural
electric and telecommunications utility systems due to the near 100%
concentration of its loan and guarantee portfolio in those industries. The
following provides an analysis of both CFC's performance and a discussion
of the quality of CFC's loan and guarantee portfolio.
Financial Condition
At May 31, 2000, CFC had $17,083 in total assets, an increase of $3,158 or
23% over the prior year. Net loans outstanding to members represented
approximately $16,450 or 96% of total assets. The remaining $633 consisted
of other assets to support CFC's operations. Except as required for the
debt service account and unless excess cash is invested overnight,
CFC does not generally use funds to invest in debt or equity securities.
At May 31, 2000, 88% of CFC's loan portfolio consisted of long-term loans,
including secured long-term loans classified as restructured. The
remaining 12% consisted of secured and unsecured intermediate-term and line
of credit loans. Approximately 53% or $8,812 of loans carried a fixed rate
of interest. All other loans, including $5,900 in long-term loans, are
subject to interest rate adjustment monthly or semi-monthly.
In addition to its loans, CFC provided approximately $1,998 in guarantees
for its members at May 31, 2000. These guarantees relate primarily to tax-
exempt financed pollution control equipment.
At May 31, 2000, CFC had also committed to lend an additional amount of
approximately $13,699 to its members. Most unadvanced loan commitments
contain a material adverse change condition. About 37% of these
commitments are provided for operational back-up liquidity. Approximately
one-third of the unadvanced commitments were approved under the Power
Vision program and will expire if not advanced within 60 months of
approval.
Subordinated certificates include both original membership subordinated
certificates and loan and guarantee subordinated certificates, all of which
are subordinate to other CFC debt. At May 31, 2000, membership
subordinated certificates totaled $642. These certificates generally
mature in 100 years and pay interest at 5.0%. At May 31, 2000, loan
subordinated certificates totaled $517 and carried a weighted average
interest rate of 0.7%. At May 31, 2000, guarantee subordinated
certificates totaled $181 and carried a weighted average interest rate of
3.3%. Both the loan and guarantee certificates are long-term instruments,
which generally amortize at a rate equivalent to that of the loan or
guarantee to which they relate. On a combined basis, subordinated
certificates carried a weighted average interest rate of 3.0%. Loan and
guarantee subordinated certificates are required to be purchased in
conjunction with the receipt of a loan or credit enhancement based on the
member's leverage ratio (total debt and credit enhancements divided by
total equity investments in CFC). Members that have a leverage ratio with
CFC in excess of a level in the policy are required to purchase additional
subordinated certificates to receive a loan or credit enhancement. At
present, the majority of CFC's members maintain a CFC leverage ratio below
the level requiring the purchase of additional certificates. The issuance
of non-interest bearing loan subordinated certificates is expected to
exceed the issuance of 5% membership subordinated certificates. Therefore,
management expects the average interest rate paid on all certificates to
decline over time. CFC paid a total of $40 in interest to holders of
subordinated certificates during fiscal year 2000.
Under current policy, CFC returns 70% of the allocated net margin in the
next fiscal year, with the remaining 30% to be held and then retired at a
future date (currently 15 years), as permitted by CFC's contractual
obligations and to the extent that the Board of Directors in its discretion
may determine from time to time that the financial condition of CFC will
not be impaired as a result. During the next nine years, CFC will retire
the unretired allocations representing net margin for fiscal years 1991 to
1993, all of which had been allocated under a previous retirement policy.
The unretired allocations (members' equity) do not earn interest and are
junior to all debt instruments, including subordinated certificates. At
May 31, 2000, CFC had $341 in retained equity.
CFC enters the capital markets through the issuance of collateral trust
bonds, medium-term notes, commercial paper and quarterly income capital
securities. At May 31, 2000, CFC had $3,349 in fixed rate collateral trust
bonds and $2 in variable rate collateral trust bonds outstanding. Under
its collateral trust bond indentures, CFC must pledge as collateral
eligible mortgage notes from its distribution system borrowers, evidencing
loans at least equal in principal amount to 100% of the outstanding
principal amount of collateral trust bonds. At May 31, 2000, CFC had
pledged $3,484 in mortgage notes. During fiscal year 2000, CFC issued a
total of $525 in collateral trust bonds. All collateral trust bonds issued
after February 1994 have been issued under an indenture with U.S. Bank
National Association as
27
substitute trustee. Virtually all collateral trust bonds were offered to
investors in underwritten public offerings.
At May 31, 2000, CFC had $4,791 outstanding in medium-term notes. Medium-
term notes are issued for terms of 270 days to 30 years and are unsecured
obligations of CFC. Medium-term notes outstanding to CFC's members totaled
$294 at May 31, 2000. The remaining $4,497 were sold through dealers to
investors including $985 in the European markets. At May 31, 2000, a total
of $438 of medium-term notes were issued in a foreign currency. At the
time of issuance, CFC also entered into a currency exchange agreement to
cover all principal and interest payments due in a foreign currency.
At May 31, 2000, CFC had $6,550 outstanding in commercial paper with a
weighted average maturity of 68 days. Commercial paper notes are issued
with maturities up to 270 days and are senior unsecured obligations of CFC.
Commercial paper sold directly by CFC and outstanding to CFC's members and
others totaled $974 at May 31, 2000. The remaining $5,576 was sold through
dealers to investors in the United States and Europe. Included in the
commercial paper sold through dealers at May 31, 2000, was a total of $117
of extendable commercial notes. These are notes issued with a stated
maturity of 90 days, and CFC has the option to extend the maturity to 390
days. European commercial paper may be issued in currencies other than
U.S. dollars. For notes issued in a foreign currency, CFC will enter into
a currency exchange agreement with a highly rated counterparty at the time
of the issuance. At May 31, 2000, there were no foreign-denominated
commercial paper notes outstanding.
In addition, CFC obtains funds from various banking institutions under bank
bid note arrangements, similar to bank lines of credit. The notes are
issued for terms up to three months and are unsecured obligations of CFC.
At May 31, 2000, CFC had $155 outstanding in bank bid notes.
At May 31, 2000, CFC had $400 outstanding in quarterly income capital
securities. The securities are unsecured obligations of CFC, subordinate
and junior in right of payment to senior debt and the debt obligations
guaranteed by CFC, but senior to subordinated certificates. CFC has the
right at any time and from time to time during the term of the quarterly
income capital securities to suspend interest payments for a period not
exceeding 20 consecutive quarters.
During the year, total assets increased by $3,158. Net loan balances
increased by $2,959 or 22%. Gross loans increased by a total of $2,975,
and the allowance for loan losses increased by $16, compared to the prior
year. As a percentage of the portfolio, long-term loans represented 88% at
May 31, 2000, compared to 89% at May 31, 1999. Long-term fixed rate loans
represented 60% and 71% of the total long-term loans at May 31, 2000 and
1999, respectively. Loans converting from a variable rate to a fixed rate
for the year ended May 31, 2000 totaled $51, a decrease from the $1,639
that converted for the year ended May 31, 1999. Offsetting the conversions
to the fixed rate were $6 and $55 of loans that converted from the fixed
rate to the variable for the years ended May 31, 2000 and 1999,
respectively. This resulted in a net conversion of $45 from the variable
rate to a fixed rate for the year ended May 31, 2000 compared to a net
conversion of $1,584 for the year ended May 31, 1999.
The increase in total loans outstanding at May 31, 2000, was primarily due
to increases of $2,564 in long-term loans, $419 in line of credit loans,
and $40 to intermediate-term loans offset by decreases in RUS guaranteed
loans of $42 and restructured loans of $6. The increase to loans
outstanding for fiscal year 2000 included long-term electric advances of
$1,785 and telephone advances of $1,495. The electric long-term advances
included $205 for the purpose of repaying RUS loans, $1,382 under the 100%
and Power Vision programs, $157 under the RUS concurrent loan program and
$41 under the RUS guaranteed loan program. Telephone long-term advances
were primarily for the acquisition of local exchange properties. The loans
advanced under the 100%, RUS concurrent and Power Vision loan programs were
used for a variety of general corporate purposes, including, construction
of headquarters facilities and transmission facilities, system upgrades,
refinancing of non-RUS debt, and electric plant upgrades. There were a
number of reasons underlying the increased demand for CFC loan advances,
including:
* the strong economy, which has spurred construction and business
development;
* RUS waiting periods are at an all time high, which caused more borrowers
to buy out their RUS debt and/or make greater use of CFC 100% loan funds;
* a large number of systems have bought out their RUS debt over the last
few years, requiring them to seek non-RUS financing;
* some borrowers have begun to expand and diversify their operations
through acquisitions and mergers; and
* increase level of lending to rural telecommunications systems for the
acquisition of rural local exchange assets.
28
Notes payable, which consists of commercial paper, bank bid notes and long-
term debt due within one year, totaled $4,252, a decrease of $725 over the
prior year. At May 31, 2000, CFC's short-term debt consisted of $5,576 in
dealer commercial paper, $841 in commercial paper issued to CFC's members,
$133 in commercial paper issued to certain nonmembers, $3,040 in collateral
trust bonds and medium-term notes that mature within one year and $155 in
bank bid notes. The commercial paper sold to CFC's members and certain
nonmembers decreased by $214, the amount of bank bid notes outstanding
decreased by $220 and commercial paper sold through CFC's dealers increased
by $942 from the prior year. There was also a decrease of $50 to
commercial paper outstanding to European investors. CFC's commercial paper
and bank bid notes had a weighted average maturity of 67 days at May 31,
2000. As described in the footnotes to the Combined Financial Statements,
CFC reclassifies a portion of its short-term debt as long-term, since it
has the ability (subject to certain conditions) to refinance this short-
term debt on a long-term basis under its revolving credit agreements. CFC
had reclassified $5,493 and $2,403 of short-term debt as long-term at May
31, 2000 and 1999, respectively.
During fiscal year 2000, long-term debt outstanding increased by $3,704.
The increase in long-term debt outstanding was due to increases of $355 in
collateral trust bonds, $2,166 in medium-term notes and $3,090 in the
amount of short-term debt supported by revolving credit agreements offset
by an increase of $1,907 of long-term debt due within one year reclassified
as notes payable. This increase was required to fund the increase in long-
term loans outstanding.
Members' subordinated certificates and members' equity increased by $147 to
$1,682 at May 31, 2000, compared to $1,535 at May 31, 1999. The increase
was due to increases of $94 to loan subordinated certificates, $7 to
guarantee subordinated certificates and $46 to members equity.
Off-balance sheet, CFC experienced an increase of $1,099 in gross
unadvanced loan commitments to a total of $13,699 at May 31, 2000.
Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed or for which contracts have been
executed but funds have not been advanced. The majority of the short-term
unadvanced commitments provide backup liquidity to CFC borrowers; therefore,
CFC does not anticipate funding most such commitments. Approximately 37%
of the outstanding commitments at May 31, 2000 were for short-term or line
of credit loans. Approximately one-third of the unadvanced commitments
were approved under the Power Vision program and will expire if not
advanced within 60 months of approval. To qualify for the advance of
funds under all commitments, a borrower must assure CFC that there has
been no material change since the loan was approved.
Guarantees outstanding at May 31, 2000 were $1,998, representing an
increase of $105 from the May 31, 1999 balance of $1,893. The increase in
guarantees was due primarily to the increase in other guarantees and
letters of credit.
CFC's leverage ratio increased during the year from 7.11 at May 31, 1999 to
8.12 at May 31, 2000. The ratio is calculated by dividing debt and
guarantees outstanding, excluding quarterly income capital securities and
all debt used to fund loans guaranteed by the RUS, by the total of
quarterly income capital securities, members' subordinated certificates and
members' equity. The increase in the leverage ratio was primarily due to
an increase in loans outstanding to members financed by the issuance of
debt to members and in the capital markets.
CFC's debt to equity ratio increased from 5.52 at May 31, 1999 to 6.46 at
May 31, 2000. The ratio is calculated by dividing debt outstanding,
excluding quarterly income capital securities and debt used to fund loans
guaranteed by RUS, by the total of members' subordinated certificates,
members' equity, the loan loss allowance and quarterly income capital
securities. The increase to the debt to equity ratio was primarily due to
an increase in loans outstanding, which was financed by the issuance of debt
in the capital markets.
CFC's leverage and debt to equity ratios have increased due to the
significant increase in loan volume. CFC's management is committed to
maintaining these ratios within a range that is required for a strong
credit rating. During fiscal year 2000, CFC amended a number of policies
and created a new member investment. Members that have a CFC debt to
equity ratio in excess of the limit in the policy will be required to
purchase a non-amortizing and non-interest bearing subordinated certificate
in the amount of 2% of the loan for distribution systems and 7% of the loan
for power supply systems. This change in policy should increase the amount
of subordinated certificates issued as a percentage of loans advanced. The
new policy will be effective in the first quarter of fiscal year 2001. CFC
also created century certificates, which are new long-term member
investments. These securities have a maturity of up to 100 years, with
optional redemption dates at 44, 59, 69, 79 and 89 years and pay interest
at similar rates to retail quarterly income capital securities. Members may
purchase these securities at any time. CFC began offering the century
certificates in July 2000. CFC also created a members'
capital reserve, in which a portion of the net margin will be held
annually rather than allocated back to the members. CFC will have the
ability to allocate the members' capital
29
reserve back to its members if necessary. CFC's management will continue
to monitor the leverage and debt to equity ratios. If required, additional
changes to policy will be made to maintain the ratios within an acceptable
range.
Margin Analysis
CFC uses an interest coverage ratio instead of the dollar amount of gross
or net margin as its primary performance indicator, since CFC's net margin
is subject to fluctuation as interest rates change. Management has
established a 1.10 Times Interest Earned Ratio ("TIER") as its minimum
operating objective. CFC has earned TIERs of 1.13, 1.12 and 1.12 for the
years ended May 31, 2000, 1999 and 1998. TIER is a measure of CFC's
ability to cover the interest expense on funding.
Fiscal Year 2000 versus 1999 Results
Net margin for the year ended May 31, 2000 was $115, an increase of $39 or
51% over the $76 earned the prior year.
Operating income for the year ended May 31, 2000 was $1,021, an increase of
$229 or 29% over the prior year. Operating income increased due to
increases in average loan volume and the average interest rate on the loan
portfolio. Average loan volume increased by $2,996 to an average loan
balance of $15,136 at May 31, 2000. The average interest rate on the
portfolio for the year ended May 31, 2000 was 6.75%, an increase of 0.23%
from the 6.52% for the prior year. The increase in the average interest
rate was primarily due to increases in interest rates during the fiscal
year in the capital markets that were passed on through increases in CFC
loan interest rates.
The total cost of funding for the year ended May 31, 2000 was $860, an
increase of $196 or 30% over the prior year. The cost of funding increased
due to increases in average loan volume outstanding and the average
interest rate on funds outstanding. The average interest rate on funding
for the year ended May 31, 2000 was 5.68%, an increase from 5.47% in 1999.
This rate increased as a result of five 25 basis point increases and one 50
basis point increase in the federal funds rate during the year ended May
31, 2000.
The gross margin earned on loans for fiscal year 2000 was $161, an increase
of $33 or 26% over the prior year. The gross margin of $161 represents
1.07% of average loan volume for the year, an increase from the 1.05% from
the prior year.
General and administrative expenses for fiscal year 2000 totaled $27, a
slight decrease from the prior year. The general and administrative
expenses for fiscal year 2000 represented 0.18% of average loan volume, a
decrease of 5 basis points or 22% from the prior year. The growth in loans
outstanding, with no increase in general and administrative expenses,
caused a large decrease in general and administrative expenses as a
percentage of average loan volume. General and administrative expenses
remained at approximately the same level in fiscal year 2000 as in fiscal
year 1999 due to a highly focused effort to keep costs down.
A total provision of $17 was added to the loan loss reserve during the year
ended May 31, 2000. The $17 provision is a decrease of $7 or 27% over the
amount added in the prior year. The provision to the reserve for fiscal
year 2000 represented 0.11% of average loan volume, a reduction from 0.20%
for the prior year. The increase to the provision for fiscal year 2000 was
due to the overall growth in the portfolio.
During the year ended May 31, 2000, CFC incurred an extraordinary loss of
$1 related to the early redemption of collateral trust bonds.
Fiscal Year 1999 versus 1998 Results
Net margin for the year ended May 31, 1999 was $76, an increase of $14 or
23% over the $62 earned the prior year.
Operating income for the year ended May 31, 1999 was $792, an increase of
$152 or 24% over the prior year. Operating income increased due to an
increase in average loan volume offset by a slight decrease in the average
interest rate on the loan portfolio. Average loan volume increased by
$2,485 to a balance of $12,140 at May 31, 1999. The average interest rate
on the portfolio for the year ended May 31, 1999 was 6.52%, a decrease of
0.11% from the 6.63% for the prior year. The decrease was due to the
reductions to interest rates during 1999 in the capital markets that were
passed on through reductions in CFC loan interest rates.
The total cost of funding for the year ended May 31, 1999 was $664, an
increase of $124 or 23% over the prior year. The cost of funding increased
due to the increase in average loan volume outstanding offset by a decrease
to the average interest rate on funds outstanding. The average interest
rate on funding for the year ended May 31, 1999 was 5.47%, a decrease
30
from 5.60% in 1998. This rate decreased as a result of three 25 basis
point reductions in the federal funds rate offset by an increase in
collateral trust bonds and medium-term notes and quarterly income capital
securities outstanding.
The gross margin earned on loans for fiscal year 1999 was $128, an increase
of $29 or 29% over the prior year. The gross margin of $128 represents
1.05% of average loan volume for the year, an increase from the 1.03%
represented by the $99 gross margin for the prior year.
General and administrative expenses for fiscal year 1999 totaled $28, an
increase of $4 or 17% over the prior year. The general and administrative
expenses for fiscal year 1999 represented 0.23% of average loan volume,
slightly less than the 0.24% for the prior year. While the dollar amount
of general and administrative expenses increased during the year ended May
31, 1999, the cost as a percentage of average loan volume decreased. The
increase to the dollar amount of general and administrative expenses was
due to an increase in salaries and benefits from normal base salary
increases and an increase in the number of employees, and the increased
marketing effort. Staffing increases were required to support operations
related to a growing loan portfolio, the increased marketing effort and the
development of new products and services.
A total provision of $24 was added to the loan loss reserve during the year
ended May 31, 1999. The $24 provision is an increase of $5 or 26% over the
amount added in the prior year. The provision to the reserve for fiscal
year 1999 represented 0.20% of average loan volume, the same as the prior
year. The increase to the provision for fiscal year 1999 was due to the
overall growth in the portfolio.
During the year ended May 31, 1998, CFC recognized a gain of $5.2 on the
sale of land. No such gain was recognized in the year ended May 31, 1999.
The following is a summary of CFC's operating results as a percentage of
average loans outstanding for the fiscal years ended May 31, 2000, 1999 and
1998.
2000 1999 1998
Operating income 6.75% 6.52% 6.63%
Less: cost of funds 5.68% 5.47% 5.60%
Gross margin 1.07% 1.05% 1.03%
General and administrative expenses 0.18% 0.23% 0.24%
Provision for loan losses 0.11% 0.20% 0.20%
Total expenses 0.29% 0.43% 0.44%
Operating margin 0.78% 0.62% 0.59%
Gain on sale of land - - 0.05%
Extraordinary (loss) (0.01%) - -
Net margin 0.77% 0.62% 0.64%
TIER 1.13 1.12 1.12
Loan and Guarantee Portfolio Assessment
Portfolio Diversity
CFC and its combined affiliates make loans and provide financial guarantees
to their qualified members. The combined memberships include rural
electric distribution systems, rural electric power supply systems,
telecommunication systems, statewide rural electric and telecommunication
associations and associate organizations.
The following chart summarizes loans and guarantees outstanding by member
class at May 31, 2000, 1999 and 1998.
Loans and Guarantees by Member Class
2000 1999 1998
Electric systems:
Distribution $10,487 56% $ 8,749 56% $ 7,278 57%
Power supply 3,907 21% 3,606 23% 3,525 28%
Service organizations 475 2% 428 3% 225 2%
Associate members 107 1% 104 1% 102 1%
Subtotal electric systems 14,976 80% 12,887 83% 11,130 88%
Telecommunication systems 3,700 20% 2,710 17% 1,575 12%
Total $18,676 100% $15,597 100% $12,705 100%
31
CFC's members are widely dispersed throughout the United States and its
territories, including 49 states, the District of Columbia, Guam, American
Samoa and the U.S. Virgin Islands. At May 31, 2000, 1999 and 1998, no state
or territory had over 15%, 13% and 12%, respectively, of total loans and
guarantees outstanding.
Credit Concentration
In addition to the geographic diversity of the portfolio, CFC limits its
exposure to any one borrower. At May 31, 2000, the total exposure
outstanding to any one borrower did not exceed 3.6% of total loans and
guarantees outstanding. At May 31, 2000, CFC had $3,464 million in loans
outstanding and $495 in guarantees outstanding, to its largest 10
borrowers. The amounts outstanding to the largest 10 borrowers at May 31,
2000 represented 21% of total loans outstanding and 25% of total guarantees
outstanding. Total credit exposure to the largest 10 borrowers represented
21% and 19% of total credit exposure at May 31, 2000 and 1999,
respectively. At May 31, 2000, the ten largest borrowers included four
distribution systems, three power supply systems and three
telecommunications systems.
Security Provisions
Except when providing lines of credit, CFC typically lends to its members
on a secured basis. At May 31, 2000, a total of $1,632 of loans were
unsecured representing 9.8% of total loans. Approximately $118 or 7.2% of
the unsecured loans represent obligations of distribution borrowers for the
initial phase(s) of RUS note buyouts. Upon completion of a borrower's
buyout from RUS, CFC receives first lien security on all assets and future
revenues. The unsecured loans would represent 9.1% of total loans if these
partial note buyout obligations were excluded. CFC's long-term loans are
typically secured pro-rata with any other secured lenders (primarily RUS)
by all assets and future revenues of the borrower. Short-term loans are
generally unsecured lines of credit. At May 31, 2000, a total of $297 of
guarantees were unsecured, representing 14.8% of total guarantees.
Guarantees are secured on a pro-rata basis with other secured creditors by
all assets and future revenues of the borrower or by the underlying
financed asset. In addition to the collateral received, CFC also requires
that its borrowers set rates designed to achieve certain financial ratios.
At May 31, 2000, CFC had a total of $1,929 of unsecured loans and
guarantees, representing 10.3% of total loans and guarantees.
Portfolio Quality
The following tables summarize the key composite operating results of CFC's
two main electric system borrower types, distribution and power supply
systems, and the telecommunications system borrowers. The information
presented below is as of December 31, and is taken from the data contained
on pages 18 to 23.
CFC Distribution Member Borrowers
Composite Results
1999 1998 1997 1996 1995
TIER 2.11 2.35 2.34 2.44 2.42
DSC 2.15 2.32 2.26 2.42 2.40
MDSC 2.03 2.25 2.17 2.30 2.28
Equity percentage 42.5% 42.6% 42.7% 42.5% 41.7%
CFC Power Supply Member Borrowers
Composite Results
1999 1998 1997 1996 1995
TIER 1.24 1.27 1.04 1.21 1.23
DSC 1.23 1.28 1.13 1.20 1.22
Equity percentage 14.6% 13.8% 12.8% 12.3% 11.7%
NOTE: The power supply composite results have been presented without the
operating results of five systems experiencing financial
difficulties for 1999 and six systems for all other years presented.
CFC had credit exposure to three of these systems (see Note 10 to
the Combined Financial Statements).
32
CFC Telecommunications System Borrowers
Composite Results
1999 1998 1997 1996
DSC 2.30 2.14 2.39 3.21
Equity percentage 37% 32% 31% 34%
Most CFC power supply borrowers sell the majority of their power under all-
requirements power contracts to their member distribution systems. These
contracts allow, subject to regulatory requirements and competitive
constraints, for the recovery of all costs at the power supply level. Due
to the contractual connection between the power supply and distribution
systems, total combined system equity (power supply equity plus the equity
at its affiliated distribution systems) has typically been maintained at
the distribution level.
As with CFC, to the extent distribution systems can fund their assets with
retained members' equity (i.e., unretired capital credits), overall funding
costs for plant and equipment are reduced. Distribution systems can, in
turn, pass these savings on to their member/consumers in the form of lower
utility rates.
The effectiveness of the all-requirements power contract is dependent on
the individual systems' right and ability (legal as well as economic) to
establish rates to cover all costs. The boards of directors of most of
CFC's power supply and distribution members have the authority to establish
binding rates for their consumer members subject to state and federal
regulations, as applicable. Some states regulate rate-setting and can
therefore override the system's internal rate-setting procedures.
Nonperforming and Restructured Loans
CFC classifies a borrower as nonperforming when any one of the following
criteria are met:
* principal or interest payments on any loan to the borrower are past due
90 days or more,
* as a result of court proceedings, repayment on the original terms is not
anticipated, or
* for some other reason, management does not expect the timely repayment of
principal or interest.
Once a borrower is classified as nonperforming, interest on its loans is
recognized on a cash basis. Alternatively, CFC may choose to apply all
cash received to the reduction of principal, thereby foregoing interest
income recognition. At May 31, 2000, CFC had no loans classified as
nonperforming. This is a decrease of $2 from the prior year-end. This
decrease was due to a write-off and offset of equity against nonperforming
loans totaling $2. During the fourth quarter of fiscal year 2000, CFC
received the payment required to bring $28 of nonperforming loans current.
Loans classified as restructured are loans for which agreements have been
executed that change the original terms of the loan, generally a change to
the originally scheduled cashflows. At May 31, 2000, restructured loans
totaled $572, a decrease of $4 from the prior year. This decrease was due
to principal repayments received during the year. At May 31, 2000, all
restructured loans were on an accrual status at a rate of 3.9%. As of June
1, 2000 all restructured loans were on accrual status at a rate of 5.0%.
CFC increased the rate at which it will accrue interest on restructured
loans as a result of excess cash payments received since the inception of
the restructuring agreement.
NONPERFORMING AND RESTRUCTURED ASSETS
As of May 31,
2000 1999 1998
Nonperforming loans $ - $ 2 $ 4
Percent of loans and guarantees outstanding - 0.01% 0.03%
Restructured loans $ 572 $ 576 $ 330
Percent of loans and guarantees outstanding 3.06% 3.70% 2.61%
Total nonperforming and restructured loans $ 572 $ 578 $ 334
Percent of loans and guarantees outstanding 3.06% 3.71% 2.64%
33
Allowance for Loan Losses
CFC maintains an allowance for potential loan losses that is periodically
reviewed by management for adequacy. In performing this assessment,
management considers various factors including an analysis of the financial
strength of CFC's borrowers, delinquencies, loan charge-off history,
underlying collateral, and economic and industry conditions. At May 31,
2000, the allowance for loan losses totaled $228, a net increase of $16
from the prior year-end. The allowance represented 39.94% of nonperforming
and restructured loans and 1.22% of total loans and guarantees outstanding
at year-end.
During fiscal year 2000, CFC recorded net loan charge-offs of $1. Since
its inception in 1969, CFC has charged off loan balances in the total
amount of $80, net of recoveries.
Management believes that the allowance for loan losses is adequate to cover
any portfolio losses that may occur.
The following chart presents a summary of the allowance for loan losses at
May 31, 2000, 1999 and 1998.
Years Ended May 31,
2000 1999 1998
Beginning balance $212 $250 $233
Provision for loan losses 17 24 19
Charge-offs (1) (62) (2)
Ending balance $228 $212 $250
As a percentage of total loans outstanding 1.37% 1.55% 2.36%
As a percentage of total loans and
guarantees outstanding 1.22% 1.36% 1.98%
As a percentage of total nonperforming and
restructured loans outstanding 39.94% 36.69% 74.98%
Since May 31, 1998, the loan loss reserve has decreased from a balance of
$250 to a balance of $228 at May 31, 2000. The decrease was due to $62 of
write-offs taken during fiscal year 1999 and $1 of write-offs taken during
fiscal year 2000. The resolution of these troubled situations has left CFC
with no non-performing loans and only Deseret as a restructured loan. The
overall risk in the portfolio has been reduced due to the resolution of
these troubled situations. Thus, the coverage percentage provided by the
loss reserve has decreased since May 31, 1998. The May 31, 2000 loss
reserve balance represents 1.37% of total loans outstanding and 1.22% of
total loans and guarantees outstanding, compared to 2.36% and 1.98% at May
31, 1998. Management has taken the improvement in the overall quality of
the portfolio into consideration in setting the amount of the provision in
each of the last two fiscal years. As stated above, management believes
that the existing reserve is adequate to cover any losses in the portfolio.
During fiscal year 2000, CFC reduced the specific reserve on restructured
loans from $101 to $85. This reduction was a result of excess cash
payments received on restructured loans.
Asset/Liability Management
A key element of CFC's funding operations is the monitoring and management
of interest rate and liquidity risk. This process involves controlling
asset and liability volumes, repricing terms and maturity schedules to
stabilize gross operating margin and retain liquidity.
Match Funding Policy
CFC measures the matching of funds to assets by comparing the amount of
fixed rate assets repricing or amortizing to the total fixed rate debt
maturing over the remaining period maturity of the fixed rate loan
portfolio. It is CFC's policy to manage the match funding of asset and
liability repricing terms within a range of 5% of total assets. At May 31,
2000, CFC had $8,240 in fixed rate assets amortizing or repricing, which
were funded by $7,865 in fixed rate liabilities maturing during the next 30
years and $288 in members' equity that does not have a scheduled maturity.
The difference, $87 or 0.5% of total assets, represents the fixed rate
assets in excess of the fixed rate debt maturing during the next 30 years.
CFC funds variable rate assets which reprice monthly with short-term
liabilities, primarily commercial paper and bank bid notes, both of which
are issued primarily with original maturities under 90 days. CFC funds
fixed rate loans with fixed rate collateral trust bonds, medium-term notes,
quarterly income capital securities,
34
members' subordinated certificates and members' equity. With the exception
of members' subordinated certificates, which are generally issued at rates
below CFC's long-term cost of funding and with extended maturities, and
commercial paper. CFC's liabilities have average maturities that closely
match the repricing terms of CFC's fixed interest rate loans. CFC also
uses commercial paper supported by interest rate exchange agreements to
fund its portfolio of fixed rate loans.
Certain of CFC's collateral trust bonds and medium-term notes were issued
with early redemption provisions. To the extent borrowers are allowed to
convert their fixed rate loans to a variable interest rate and to the
extent it is beneficial, CFC takes advantage of these early redemption
privileges. However, because conversions can take place at different
intervals from early redemptions, CFC charges conversion fees designed to
compensate for any additional interest rate risk assumed by CFC.
CFC makes use of an interest rate analysis in the funding of its long-term
fixed rate loan portfolio. The analysis compares the scheduled fixed rate
loan amortizations and repricings against the scheduled fixed rate debt and
members' subordinated certificate amortizations to determine the fixed rate
funding gap for each individual year and for the portfolio as a whole.
There are no scheduled maturities for the members' equity, primarily
unretired patronage capital allocations. The balance of members' equity is
assumed to remain relatively stable since annual retirements have been
approximately equal to the annual allocation of net margin. The non-
amortizing members' subordinated certificates either mature at the time of
the related loan or guarantee or 100 years from issuance (50 years in the
case of a small portion of certificates). Accordingly, it is assumed in
the funding analysis that non-amortizing members' subordinated certificates
and members' equity are first used to "fill" any fixed rate funding gaps.
The remaining gap represents the amount of excess fixed rate funding due in
that year or the amount of fixed rate assets that are assumed funded by
short-term variable rate debt, primarily commercial paper. The interest
rate associated with the assets and debt maturing or equity and
certificates is used to calculate a TIER for each year and for the
portfolio as a whole. The schedule allows CFC to analyze the impact on the
overall TIER of issuing a certain amount of debt at a fixed rate for
various maturities, prior to issuance of the debt. The following chart
shows the scheduled amortization, and maturity of fixed rate assets and
liabilities outstanding at May 31, 2000.
INTEREST RATE GAP ANALYSIS
(Fixed Rate Assets/Liabilities)
As of May 31, 2000
Over 1 Over 3 Over 5 Over 10
year but years but years but years but
Less than less than less than less than less than Over 20
1 year 3 years 5 years 10 years 20 years years Total
Assets:
Amortization and repricing $ 778 $1,673 $1,771 $2,090 $1,399 $529 $8,240
Total assets $778 $1,673 $1,771 $2,090 $1,399 $529 $8,240
Liabilities and Equity:
Long-term debt $924 $1,536 $1,479 $1,937 $ 469 $297 $6,642
Subordinated certificates 3 25 26 295 510 364 1,223
Member's equity - - - - 288 - 288
Total liabilities and equity $927 $1,561 $1,505 $2,232 $1,267 $661 $8,153
Gap* $149 $ (112) $ (266) $ 142 $ (132) $132 $ (87)
Cumulative gap $149 $ 37 $ (229) $ (87) $ (219) $(87)
Cumulative gap as a %
of total assets 0.87% 0.22% (1.34)% (0.51)% (1.29)% (0.51)%
__________________________________
* Loan amortization and repricing (over)/under debt maturities
35
Derivative and Financial Instruments
All of the financial instruments to which CFC was a party at May 31, 2000
were purchased for purposes other than trading. All of CFC's financial
instruments at May 31, 2000 were interest rate sensitive. The following
table provides the significant balances and contract terms related to the
market risk related financial instruments at May 31, 2000.
Outstanding Principal Amortization Remaining
Instrument Balance Fair Value 2001 2002 2003 2004 2005 Years
Investments $ 74 $ 74 $ 74 $ - $ - $ - $ - $ -
Average rate 1.84% 1.84% -
- - - - - - - - -
Long-term fixed rate loans (1) 8,215 7,090 791 863 785 784 988 4,004
Average rate 7.00% 6.80% 6.77% 7.03% 6.94% 7.26% 7.02%
Long-term variable rate loans 5,836 5,836 214 197 212 122 285 4,806
Average rate (2) 7.62% - - - - - -
Intermediate-term loans (3) 355 355 355 - - - - -
Average rate 7.39% 7.39% -
- - - - - - - - -
Line of credit loans (4) 1,611 1,611 1,611 - - - - -
Average rate (2) 7.74% - -
- - - - - - - - -
RUS fixed rate loans 25 24 11 - - - - 14
Average rate 6.43% 5.75% - - - - 6.95%
RUS variable rate loans 64 64 1 1 1 1 1 59
Average rate (2) 7.11% - -
- - - - - - - - -
Restructured loans (5) 572 279 7 8 5 4 6 542
Average rate 3.90% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Liabilities and equity:
Commercial paper $ 6,550 $ 6,550 $ 6,550 $ - $ - $ - $ - $ -
Average rate 6.17% 6.17% - - - - -
Bank bid notes 155 155 155 - - - - -
Average rate 6.41% 6.41% - - - - -
Medium-term notes 4,791 4,443 2,940 646 362 116 12 715
Average rate 6.30% 6.35% 6.51% 6.25% 5.51% 6.58% 6.05%
Collateral trust bonds 3,351 3,062 100 100 1,025 300 500 1,326
Average rate 6.40% 6.45% 6.75% 6.62% 5.77% 5.73% 6.59%
QUICS 400 345 - - - - - 400
Average rate 7.62% - - - - - 7.62%
Subordinated certificates 1,340 1,340 3 4 21 23 3 1,286
Average rate 3.02% 9.63% 4.70% 1.25% 1.99% 4.80% 3.04%
_____________________
(1) The principal amount of fixed rate loans is the total of scheduled
principal amortizations and scheduled repricings.
(2) Variable rates are set the first day of each month.
(3) Intermediate-term loan amortizations include principal payments on
variable rate loans. There is no scheduled amortization for these
variable rate loans.
(4) Line of credit loans are generally required to be paid down for a period
of five consecutive days each year. These loans do not have a principal
amortization schedule.
(5) All restructured loans were performing on the negotiated terms (see
note 10 to Combined Financial Statements). Amortization based on
scheduled minimum payments. At May 31, 2000 restructured loans were
accruing interest at 3.90%. On June 1, 2000 that rate was increased
to 5.00%
The following table provides the notional amount, average rate paid, average
rate received and maturity dates for the interest rate exchange agreements
to which CFC was a party at May 31, 2000.
Principal Amortization
Notional
Principal Fair Remaining
Instrument Balance Value 2001 2002 2003 2004 2005 Years
Interest
rate swaps $4,817 $4,901 $2,313 $335 $622 $308 $394 $845
Average
rate paid (1) 6.25%
Average
rate received (1) 7.00%
___________________________________
(1) Scheduled interest rate exchange agreement maturities include agreements
in which CFC pays both fixed and variable rates and receives variable
rates.
36
The following table provides the notional amount in U.S. dollars, average
rate paid, average rate received and maturity dates for the currency
exchange agreements to which CFC was a party at May 31, 2000.
Principal Amortization
Notional Average
Principal Average Rate Fair Remaining
Maturity Date Balance Rate Received Value 2001 2002 2003 2004 2005 Years
February 24, 2006 $390 6.22% 4.13% $453 $ - $ - $ - $ - $ - $390
July 14, 2000 24 6.90% 6.30% 24 24 - - - - -
August 14, 2000 24 6.72% 6.28% 26 24 - - - - -
Market Risk
CFC's primary risk exposure is interest rate risk. A secondary risk
exposure is liquidity risk. CFC is also exposed to counterparty risk
related to the interest rate and currency exchange agreements it has
entered.
The interest rate risk exposure is related to the funding of the fixed rate
loan portfolio. CFC does not match fund the majority of its fixed rate
loans with a specific debt issuance at the time the loan is advanced. CFC
aggregates fixed rate loans until the volume reaches a level that will
allow an economically efficient issuance of debt. CFC uses fixed rate
collateral trust bonds, medium-term notes, quarterly income capital
securities, members' subordinated certificates, members' equity and
variable rate debt to fund fixed rate loans. CFC allows borrowers
flexibility in the selection of the period for which a fixed interest rate
will be in effect. Long-term loans typically have a 15 to 35 year
maturity. Borrowers may select fixed interest rates for periods of one
year through the life of the loan. To mitigate interest rate risk related
to the funding of fixed rate loans, CFC performs a monthly gap analysis, a
comparison of fixed rate assets repricing or maturing by year to fixed rate
liabilities and equity maturing by year (see chart on page 35). The
analysis will indicate the total amount of fixed rate loans maturing by
year and in aggregate that are assumed to be funded by variable rate debt.
CFC's funding objective is to limit the total amount of fixed rate loans
that are funded by variable rate debt to 5% or less. At May 31, 2000 and
1999, 0.5% and 2.1%, respectively, of the fixed rate loans were funded with
variable rate debt. The interest rate risk is minimal on variable rate
loans, since the loans are priced monthly based on the cost of the debt
used to fund the loans. CFC uses variable rate debt, non-interest bearing
members' subordinated certificates and members' equity to fund variable
rate loans. At May 31, 2000 and 1999, 47% and 37%, respectively, of loans
carry variable interest rates.
CFC faces liquidity risk in the funding of its variable rate loans and in
being able to obtain the funds required to meet the loan requests of its
members or conversely, having funds to repay debt obligations when they are
due. CFC offers variable rate loans with maturities of up to 35 years.
These loans are funded by variable rate commercial paper, bank bid notes,
collateral trust bonds and medium-term notes, non-interest bearing members'
subordinated certificates and members' equity. The average maturity of
commercial paper and bank bid notes is typically about 30 to 35 days. The
collateral trust bonds and medium-term notes are issued for longer periods,
but typically much shorter than the maturity of the loans. Loan capital
term certificates are issued for the same period as the related loan.
Thus, CFC is at risk if it is unable to continually roll over its
commercial paper balances or issue other forms of variable rate debt to
support its variable rate loans. CFC also faces liquidity risk in the
funding of its fixed rate loans. Borrowers may select a fixed interest
rate term of one year to the loan maturity. When a loan has an interest
rate term of a duration shorter than loan maturity, the borrower may select
a new fixed interest rate term of one year to the remaining loan maturity
or the long-term variable rate. CFC does not match fund each fixed rate
loan, but rather funds its fixed rate loans in aggregate. CFC matches the
maturity of the fixed rate funding to the fixed interest rate terms
selected, rather than the loan maturity. When the fixed interest rate term
expires, CFC obtains new fixed rate funding based on the new interest rate
term selected by the borrower. CFC is at risk in the rolling over of its
fixed rate funding of a maturity less than the loan maturity. To mitigate
liquidity risk, CFC maintains back-up liquidity through revolving credit
agreements with domestic and foreign banks. At May 31, 2000 and 1999, CFC
had a total of $5,493 and $4,793, respectively, in revolving credit
agreements and bank lines of credit. Subsequent to the end of the fiscal
year, CFC increased the total of revolving credit agreements and bank lines
of credit to $7,040. To facilitate entry into the debt markets, CFC
maintains high credit ratings on all of its debt issuances from three
credit rating agencies (see chart on page 38). CFC also maintains shelf
registrations with the SEC for its collateral trust bonds, medium-term
notes and quarterly income capital securities. At May 31, 2000 and 1999,
CFC had effective shelf registrations totaling $175 and $700 related to
collateral trust bonds, $2,542 and $144 related to medium-term notes and
$100 and $100 related to quarterly income capital securities, respectively.
Subsequent to the year-end on June 9, 2000, CFC registered an additional
37
$1,000 and $300, respectively, related to collateral trust bonds and
quarterly income capital securities. All of the registrations allow for
issuance of the related debt at both variable and fixed interest rates.
CFC also has commercial paper and medium-term note issuance programs in
Europe. At May 31, 2000 and 1999, CFC had $0 and $50 of commercial
paper, respectively, and $985 and $735 of medium-term notes, respectively,
outstanding to European investors. CFC has issuance authority of $1,000
related to commercial paper and $2,000 related to medium-term notes under
these programs. CFC believes that the ability to issue debt in both
domestic and foreign markets allows CFC to maintain access to capital in
the event of disruptions in either the domestic or foreign markets. In
addition, CFC believes that its policy of setting interest rates at the
time a fixed rate loan is advanced and the ability to reset all variable
rates at least monthly protects it from erosion of its net margin in the
event that CFC is unable to access the market efficiently or if rates in
the market increase sharply.
CFC is exposed to counterparty risk related to the performance of the
parties with which it has entered into interest rate exchange agreements.
To mitigate this risk, CFC only enters into interest rate exchange
agreements with highly rated counterparties. At May 31, 2000 and 1999, CFC
was a party to $4,817 and $2,796, respectively, of interest rate exchange
agreements. To date, CFC has not experienced a failure of a counterparty
to perform as required under the interest rate exchange agreement. At May
31, 2000, CFC's interest rate exchange agreement counterparties had credit
ratings ranging from A to AAA as assigned by Standard & Poor's Corporation.
Foreign Currency Risk
CFC may issue European commercial paper, medium-term notes or bonds
denominated in foreign currencies. For any such obligation issued, CFC
expects to enter into a foreign currency exchange agreement with a highly
rated counterparty. The cost of the currency exchange agreement would be
factored into the interest rate CFC pays on the obligation and included in
CFC's total cost of funds. At May 31, 2000, CFC had a total of $390 of
medium-term notes, denominated in Euros and $48 of medium-term notes
denominated in British Pound Sterling outstanding.
CFC is exposed to counterparty risk related to the performance of the
parties with which it has entered into foreign currency exchange
agreements. To mitigate this risk, CFC only enters into foreign currency
exchange agreements with highly rated counterparties. At May 31, 2000, CFC
was a party to $438 of foreign currency exchange agreements. To date, CFC
has not experienced a failure of a counterparty to perform as required
under the foreign currency exchange agreements. At May 31, 2000, CFC's
foreign currency counter parties had credit ratings ranging from AA to AA+
as assigned by Standard & Poor's Corporation.
Credit Ratings
CFC's long- and short-term debt and guarantees are rated by three of the
major credit rating agencies, Moody's Investors Service, Standard & Poor's
Corporation and Fitch Investors Service. The following table presents
CFC's credit ratings at May 31, 2000.
Moody's Investors Standard & Poor's Fitch Investors
Service Corporation Service
Direct
Collateral trust bonds Aa3 AA AA
Domestic and European
medium-term notes A1 AA- AA-
Quarterly income capital
securities A2 A A+
Domestic and European
commercial paper P-1 A-1+ F-1+
Guarantees
Leveraged lease debt A1 AA- AA-
Pooled bonds Aa3 AA- AA-
Other bonds A1 AA- AA-
Short-term P-1 A-1+ F-1+
The ratings listed above have the meaning as defined by each of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by the
rating organizations.
38
Member Investments
At May 31, 2000 and 1999, CFC's members provided 16.6% and 20.4% of total
capitalization as follows:
MEMBERSHIP CONTRIBUTIONS TO TOTAL CAPITALIZATION
2000 % of Total 1999 % of Total
Commercial paper $ 841 13% $1,063 18%
Medium-term notes 294 6% 211 3%
Members' subordinated
certificates 1,340 100% 1,240 100%
Members' equity 341 100% 295 100%
Total $2,816 $2,809
Percentage of total
capitalization 16.6% 20.4%
The total amount of member investments increased by $7 at May 31, 2000,
compared to May 31, 1999. The volume of growth experienced by CFC over the
last few years has resulted in member required equity purchases and member
excess cash available for investment in CFC medium-term notes and
commercial paper not being sufficient to maintain the percentage of member
investment as compared to total investment. Total capitalization at May
31, 2000 was $16,929, an increase of $3,126 over the total capitalization
of $13,803 at May 31, 1999. When the loan loss allowance is added to both
membership contributions and total capitalization, the percentages of
membership investments to total capitalization are 17.8% and 21.6% at May
31, 2000 and 1999, respectively.
During fiscal year 2000, CFC made a number of policy changes intended to
increase the amount of members' equity and members' subordinated
certificates outstanding. The amount of members' investments as a
percentage of total capitalization should begin to increase as result of
these changes. As stated earlier, CFC's management is committed to
maintaining the leverage and debt to equity ratios within an acceptable
range. Increasing the amount of members' equity and subordinated
certificates outstanding is a significant component of that effort.
Historical Results
The following chart provides CFC's key operating results over the last five
years.
SELECTED KEY FINANCIAL DATA
As of May 31: 2000 1999 1998 1997 1996
Net loans $16,450 $13,491 $10,329 $8,678 $7,728
Total liabilities $15,402 $12,390 $ 9,174 $7,573 $6,577
Total members' subordinated
certificates and equity $ 1,682 $ 1,535 $ 1,508 $1,484 $1,477
Guarantees $ 1,998 $ 1,893 $ 2,080 $2,132 $2,266
Leverage ratio (1) 8.12 7.11 6.39 5.87 5.70
Debt to equity (2) 6.46 5.52 4.51 3.97 3.63
Gross margin $ 161 $ 128 $ 99 $ 91 $ 82
Net margin $ 115 $ 76 $ 62 $ 55 $ 49
TIER (3) 1.13 1.12 1.12 1.12 1.12
____________________
(1) The leverage ratio is calculated by dividing debt and guarantees
outstanding, excluding quarterly income capital securities and debt
used to fund loans guaranteed by RUS, by the total of members'
subordinated certificates, members' equity and quarterly income
capital securities.
(2) The debt to equity ratio is calculated by dividing debt outstanding,
excluding quarterly income capital securities and debt used to fund
loans guaranteed by RUS, by the total of members' subordinated
certificates, members' equity, the loan loss allowance and quarterly
income capital securities.
(3) The TIER is calculated by dividing net margin before extraordinary
items plus the cost of funds by the cost of funds.
Year 2000 Compliance
CFC has not experienced any year 2000 related problems. All computer
systems were successfully restarted and are currently operating normally.
There were no problems with the buildings or building operating systems.
To date, there have been no reported problems with the disbursement or
receipt of funds. We have not received any reports of problems from any of
our banks or vendors.
In 1994, CFC began to move from a main frame computer system to a client
server system to allow for better access to data by internal staff and its
members. As a result of the decision to migrate to a client server system,
CFC's year 2000 problems were mitigated. Also, as a result of expenditures
on new client server hardware and software, CFC's year 2000 specific
expenditures were relatively minor.
39
CFC's borrowers have not experienced any significant year 2000 related
incidents, that would have a material adverse impact on their business
operations and their ability to generate revenue to service debt
obligations.
Financial and Industry Outlook
RUS loans and loan guarantees continue to provide a significant portion of
the financing needed by electric cooperatives.
The most recent significant change in the RUS electric loan programs began
in fiscal year 1999, when the RUS funding programs shifted away from more
heavily subsidized direct lending to RUS guarantees of loans made by the
FFB at the government's cost of money plus 1/8th of one percent. For
example, for fiscal year 2000, the RUS has authority to provide $1,700
of loan guarantees versus direct electric lending authority of $416($121
at a fixed 5% hardship interest rate and $295 at municipal rates).
The same pattern of large loan guarantee programs relative to the size of
RUS direct lending is expected to continue in fiscal year 2001 and future
years.
The RUS loan guarantee program is expected to be the preferred source of
funding for rural electric generation projects, including the combustion
turbine projects being planned by several generation and transmission
systems. The RUS direct lending programs will provide assistance to
electric cooperatives that may be in greater need of subsidized interest
rate loans. Other electric distribution cooperatives, including the
approximately 250 cooperatives that have exited the RUS loan program, rely
on private lenders, like CFC, for all of their financing needs.
During fiscal year 2000, CFC advanced approximately $205 to electric
borrowers for the purpose of prepaying their RUS loans. From March 1994,
the date final regulations were adopted, through May 2000, CFC advanced a
total of $2,908 to borrowers for this purpose. To date, CFC has been
selected as the lender for 95% of the RUS debt refinancings. At May 31,
2000, there were applications pending at RUS for an additional $31 of
buyouts in which CFC has been selected as the lender and has approved loan
commitments. Future volume of RUS note prepayments will depend on a number
of factors including interest rates, tax consequences and possible
acquisition or other business opportunities available to the members. CFC
does not expect large volumes of prepayment requests to be made at any one
time, but CFC believes that there will be a steady stream of activity.
CFC believes that it will be difficult to maintain the rapid loan growth
experienced over the last four years. Since May 31, 1996, CFC has
increased the balance of loans outstanding by $8,732 or 110%, from a
balance of $7,946 at May 31, 1996 to a balance of $16,678 at May 31, 2000.
The primary factor limiting future growth is the significant increase to
the amount of RUS loan guarantees available. RUS has increased the
authorized level of loan guarantees from $300 to about $1,700. These funds
have typically been advanced from the FFB, which is able to raise funds at
lower rates. CFC became an eligible lender under the loan guarantee
program in February 1999 and has a total of $43 in loans outstanding at May
31, 2000. There is a long lead time to secure the RUS guaranteed loan
funds. In some cases, CFC members will not be able to wait that long and
will borrow from CFC, and in other cases CFC will provide bridge financing
that will be paid off by the advance of the RUS guaranteed loan funds.
In addition, CFC may not be the sole lender in future large transactions
extended to its members. In the past, CFC would lend the entire amount for
deals that met the lending requirements. In the future, CFC may bring
together a syndicate of lenders or sell loan participations. Not lending
the full amount required in these large transactions will assist CFC in a
number of ways, including the management of both the debt to equity ratio
and credit concentration with large borrowers.
The telecommunications loan portfolio has grown significantly in the last
few years. The growth has come from the sell off of rural exchanges by
larger telecommunications organizations (primarily GTE) and the expansion
of wireless services. Future growth in telecommunications lending is
expected to come from the following areas:
* acquisitions of rural exchanges from investor-owned organizations that
require a high rate of return;
* consolidations of rural telecommunications companies;
* expansion of wireless services, including local multiple distribution
services, which offer a variety of one and two way broadband
telecommunications services; and
* refinancing of existing debt.
The significant loan growth over the past few years has caused CFC's debt
to equity and leverage ratios to increase. CFC has implemented a number of
policies during fiscal year 2000 and in the first quarter of fiscal year
2001 aimed at increasing the level of retained equity. CFC has made
changes that will result in an increase in the amount of loan certificates
required to be purchased by borrowers that have a CFC debt to equity ratio
in excess of the amount
40
stated in the policy. CFC has also created a new subordinated certificate
not tied to the advance of a loan or guarantee that members may purchase
at any time. CFC has created a member's capital reserve in which a portion
of each year's net margins will be placed. This reserve will be maintained
by CFC as retained unallocated margins. CFC will have the ability to
allocate the retained margins to its members. These changes should begin
to increase CFC's equity retention, which will help maintain the debt to
equity and leverage ratios within an acceptable range.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Market Risk discussion on pages 37 and 38.
Item 8. Financial Statements and Supplementary Data.
The Combined Financial Statements, Auditors' Report and Combined Quarterly
Financial Results are included on pages 52 through 78 (see Note 14 to
Combined Financial Statements for a summary of the quarterly results of
CFC's operations).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
41
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors
Name Age Director Date present
Since term expires
Benson Ham (President of CFC) 66 1995 2001
R.B. Sloan, Jr. (Vice President of CFC) 48 1996 2002
Wade R. Hensel (Secretary-Treasurer of CFC) 48 1997 2003
James Andrew 63 1999 2001
Robert A. Caudle 55 1999 2002
James P. Duncan 54 2000 2003
Glenn English 59 1994 2001
Alden J. Flakoll 66 1996 2002
James A. Hudelson 55 1999 2002
Kenneth Krueger 62 1997 2003
Stephen R. Louder 48 1998 2001
Eugene Meier 71 1997 2003
R. Layne Morrill 60 1995 2001
Robert J. Occhi 53 1996 2002
Clifton M. Pigott 56 1997 2003
Timothy Reeves 52 1998 2001
Brian D. Schlagel 50 1998 2001
Thomas W. Stevenson 58 1997 2003
Clifford G. Stewart 54 1997 2001
Robert Stroup 55 1996 2002
Robert C. Wade 66 1997 2003
Eldwin A. Wixson 68 1995 2001
(b) Executive Officers
Title Name Age Held present
office since
President and Director Benson Ham 66 1999
Vice President and Director R.B. Sloan, Jr. 48 1999
Secretary-Treasurer and Director Wade R. Hensel 48 1999
Governor and Chief Executive Officer Sheldon C. Petersen 47 1995
Senior Vice President of Member
Services and General Counsel John J. List 53 1997
Senior Vice President and
Chief Financial Officer Steven L. Lilly 50 1994
Senior Vice President of Operations John T. Evans 50 1997
Senior Vice President of
Corporate Relations Richard E. Larochelle 47 1998
Senior Vice President of RTFC Lawrence Zawalick 42 2000
The President, Vice President and Secretary-Treasurer are elected annually
by the Board of Directors at its first meeting following CFC's annual
membership meeting, each to serve a term of one year; the Governor serves at
the pleasure of the Board of Directors; and the other Executive Officers
serve at the pleasure of the Governor.
(c) Identification of Certain Significant Employees.
Inapplicable.
(d) Family Relationships.
No family relationship exists between any director or executive officer and any
other director or executive officer of the registrant.
42
(e) (1) and (2) Business Experience and Directorships.
In accordance with Article IV of CFC's Bylaws, each candidate for election
to the Board of Directors must be a trustee, director or manager of a
member of CFC.
Mr. Ham has been a Director of Central Georgia Electric Membership
Cooperative, Jackson, GA, since 1983. He is retired as the managing
partner of the law firm of Ham, Jenkins, Wilson & Wangerin, from 1991 to
1998. He is a partner in Sleepy Creek Farms, a commercial cow-calf
operation established in 1983. He also served for ten years in the Georgia
Legislature. He is currently a member of the Monroe County Economic
Development Authority. He has served as President of the Flint Judicial
Circuit Bar Association from 1962 to 1963 and has served on the Board of
Governors of the Georgia Bar Association. He currently serves as a member
of the Board of Directors of Georgia Transmission Corporation and Georgia
Electric Membership Corporation.
Mr. Sloan has been Chief Executive Officer of Energy United, a consolidated
corporation since 1998, and one of its predecessor cooperatives, Crescent
Membership Corporation, since 1989. He has been a member of the boards of
North Carolina Electric Membership Corporation, North Carolina Association
of Electric Cooperatives, and Tarheel Electric Membership Association since
1989. He was Chairman of the North Carolina Rural Electrification
Authority from 1987 to 1993. He is also the past Chairman of the National
Association of Counties' Rural Development Committee, past Chairman of the
Greater Statesville Chamber of Commerce and the past Chairman of the
Iredell County Board of Commissioners.
Mr. Hensel has been General Manager of BENCO Electric Cooperative, Mankato,
MN, since 1981. He is a former Chairman of Minnesota Rural Electric
Manager's Association and a former Chairman of the Cooperative Power
Manager's Association. He has been a member of the management committee of
Cooperative Television Association of Southern Minnesota since 1993, a
partner in North Mankato/BENCO Electric Cooperative since 1991, a director
of Mankato Rehabilitation Center since 1995, and a director and former
Chairman of Valley Industrial Development Corporation. He is a former
chairman and former director of the Chamber of Commerce, a former president
of the Jaycees, a former treasurer and board member of the Independent
School District #77, and former director of Immanuel-St. Joseph's Hospital.
Mr. Andrew has served on the NRECA Board since 1989, and has been President
since 1999. He serves as director of Jefferson Energy Cooperative since
1976, and is also director and former president for Georgia Electric
Membership Corporation. Before his semi-retirement, Mr. Andrew was
president/owner of BAS, Inc., an agricultural irrigation business in
Waynesboro, GA. He serves as Chairman of Ogeechee Valley Bank since 1997
where he has been on the bank board since 1973. He also serves on the
Board of Queensboro, Inc., a bank holding company.
Mr. Caudle is a Trustee for the Lea County Electric Cooperative in
Lovington, NM. He has been active in the domestic oil and gas industry as
a partner in two independent companies, CB Partners of Midland, TX, since
1992 and M & W of Lovington, NM since 1993. Since 1990, Mr. Caudle has also
owned a consulting business named after him which specializes in utility
title and regulatory issues in Lovington, NM.
Mr. Duncan is the CEO and General Manager of Sumter Electric Cooperative,
Inc. In addition, Mr. Duncan is a director of Seminole Electric
Cooperative and also serves as its Chairman of Finance Committee and Vice
Chairman of the Rate Committee. He is a Vice President of Florida Electric
Cooperatives Association and the Vice President of Sumter County Economic
Development Council. He serves as Deputy Campaign Chairperson of the
United Way of Lake and Sumter Counties and is active in numerous other
community organizations.
Mr. English has been Chief Executive Officer of NRECA, Washington, DC,
since March 1994. He served in the United States House of Representatives
from 1975 to 1994. He served on the House Agriculture Committee from 1975
to 1994 and was Chairman of the House Agricultural Subcommittee on
Environment, Credit and Rural Development in 1989.
Mr. Flakoll is President of FEM Electric Association, Inc., Ipswich, SD and
has been on the board of directors since 1977, and is a director of the
East River Electric Power Cooperative, Madison, SD. He has been the owner
and operator of Flakoll Enterprises, a diversified farming, ranching and
feedlot operation, since 1957. He is President of the South Dakota
Outstanding Farmers of America and Secretary-Treasurer of North Central
Hereford Association. Mr. Flakoll is a past President of the North Central
Livestock Association and past business manager of Wachter School District.
Mr. Hudelson has been General Manager of Wyoming Rural Electric Company
since 1976. He became Chairman of the Legislative Committee for the
Wyoming Rural Electric Association in 1989. He served as president of
Goshen County
43
Economic Development Corporation from 1991 to 1994, and has been a member
since 1990. He has been the Director for the Eastern Wyoming Development
Corporation since 1999.
Mr. Krueger has been a Director of Flathead Electric Cooperative, Inc.,
Kalispell, MT, since 1972 and was President from 1977 to 1984. He also
served as Director and member of the Executive and Legislative Committees.
He has owned and operated a grain farm since 1960. He was President of the
Montana Electric Cooperatives' Association from 1979 to 1988, and
Secretary-Treasurer from 1976 to 1979. He served on the Building
Committee, the Dues and Policy Committee, and the Budget Committee. He is
also a member of the NRECA Region IX Resolutions Committee. Mr. Krueger
was Flathead County Commissioner from 1983 to 1989. He is a past member of
the Montana State Rural Area Development Committee, past Master of the
Stillwater Grange, and former board member and Chairman of the West Valley
School Board in Flathead, MT. He was also District VI Director of Montana
Wheat and Barley Committee from 1986-1991.
Mr. Louder has been President and General Manager of Deaf Smith Electric
Cooperative, Hereford, TX, since 1992. He is a director and currently
serves as Secretary/Treasurer at Golden Spread Electric Cooperative and a
former member and Chairman of the Texas Electric Cooperative Member
Services Committee. He is a registered professional engineer in the state
of Texas, a member of the Community Christian School Board of Trustees and
a member of the Board of Elders at Community Church in Hereford, TX. He is
also active in local economic development and the 4-H Club.
Mr. Meier has been a Director of Cooperative Development Services since
1998 and the Director of Pierce-Pepin Cooperative Service, Ellsworth, WI,
since 1991. He has been Vice President of the Wisconsin Electric
Cooperative since 1995 and was Chairman of its Legislative Committee from
1994 to 1997. Prior to his retirement in 1994, Mr. Meier was Maintenance
Foreman of Continental Nitrogen and Resources, Inc. He has also owned and
operated a farm since 1964. He has been a director of the Wisconsin
Federation of Cooperatives since 1995. He is a former member of
Legislative Standing Committee, NRECA, and a former executive committee
member of the Wisconsin Electric Cooperative Association. He is an active
member and President of Joy Lutheran Church of Prescott.
Mr. Morrill has been a Director of White River Valley Electric Cooperative,
Inc., Branson, MO, since 1976 and is currently serving as Secretary-
Treasurer. He is also a Director of KAMO Electric Cooperative. He has
been President of Shepherd of the Hills Realty Co., Inc., and President of
Shepherd of the Hills Properties Inc., since 1967. He is also a Director
of the Bank of Kimberling City and of Rural Missouri Cable T.V. Inc. He
has been President of the Kimberling City Water Company since 1982.
Mr. Occhi has been Executive Vice President and General Manager of Coast
Electric Power Association, Bay St. Louis, MS, since 1986. He has been a
Director of the South Mississippi Electric Power Association since 1986 and
past President of the Electric Power Associations of Mississippi. He is
also Vice President of the Mississippi Council of Farmer Cooperatives and
of the Greater Biloxi Economic Development Foundation, and a past Director
of the Mississippi Economic Council.
Mr. Pigott has been the Executive Vice President and General Manager of
Beauregard Electric Cooperative, DeRidder, LA, since 1988. He has been
President of the Association of Louisiana Electric Cooperatives from 1994
to 1999, a director of Cajun Electric Power Cooperative from 1992 to 1999,
and a member of Louisiana Electric Distribution Cooperative Managers
Association since 1988. He has been a director of the Louisiana Resource
Recovery and Development Authority from 1990 to 1998. Mr. Pigott is
currently Director of the Rotary Club, and is a member of the Chamber of
Commerce, the Beauregard Parish Cattlemen's Association, the Allen Parish
Rice Growers Association, and the Human Resources Management Association.
Mr. Reeves has been President and General Manager of Southern Illinois
Power Cooperative, Marion, IL, since 1993. He was Executive Vice President
and General Manager of Southern Illinois Electric Cooperative from 1981 to
1990, and Assistant to the Manager of Egyptian Electric Cooperative
Association from 1974 to 1980. He is the Chairman of Illinois ACRE and a
member of Illinois Managers Association and the G&T Managers Association.
He also served as President of the Union County Hospital Board and the
Southern Most Illinois Tourism Board.
Mr. Schlagel has been the President of Morgan County REA, Fort Morgan, CO,
since 1997. He has owned and operated Schlagel Farms, an irrigated
agriculture enterprise, since 1971. Mr. Schlagel is also a Director of the
Colorado Rural Electric Association, serves on the Facilities Committee at
Tri-State Generation and Transmission Association, Inc., is Vice President
of Roggen Farmer's Elevator Association and a Fellow of the Colorado
Agriculture Leadership Program. He also served as President of Strasburg
School District 31-J and Vice President of the Southeast Wild Fire
Protection District.
44
Mr. Stevenson has been President and Chief Executive Officer of Wolverine
Power Supply Cooperative, Inc., Cadillac, MI, since 1995. He was the
General Manager and Chief Executive Officer of Ketchikan Public Utilities,
Ketchikan, AK from 1989 to 1995. He has been a Director of Michigan
Association of Rural Electric Cooperatives since 1995. He is a member of
NRECA's Power and Generation Committee and G & T Managers Association. Mr.
Stevenson served as mayor pro tem and city council member of Longmont, CO,
from 1978 to 1981. He served as a board member of Denver Regional Council
of Governments, and as a board member and executive committee member of
Ketchikan Chamber of Commerce. He is a member of the American Institute of
Certified Public Accountants, the Colorado Society of CPAs, Rotary
International (Paul Harris Fellow), and the American Legion.
Mr. Stewart has been the Vice President and General Manager of Oregon Trail
Electric Consumers Cooperative, Baker City, OR, since 1993, and is Chairman
of the Board at Pacific Northwest Generating Cooperative since 1998. He
was general manager of Farmers' Electric Cooperative, Inc., from 1985 to
1993 and served on the Clovis-Curry Economic Development Board from 1990 to
1993. He is past president of the New Mexico Rural Electric Self Insurers
Fund, a former director of the New Mexico Rural Electric Association, and
Chairman of the Association's Publications committee.
Mr. Stroup has owned a construction and design company since 1964. He has
been a Director of Hoosier Energy REC since 1992. He is also a member of
the Marietta Volunteer Fire Department and the Shelby County Chamber of
Commerce.
Mr. Wade serves as Chairman of Nolin Rural Electric Cooperative
Corporation, Elizabethtown, KY, and has been engaged in grain farming since
1960. He is the Director of Kentucky Association of Electric Cooperatives,
of which he was Chairman from 1980 to 1982. He is Vice Chairman of
Kentucky Electric Cooperatives' Political Action Committee, SURE--Speak Up
for Rural Electrification. He is a member of KAEC Management and Employees
Committee, and served on CFC's Committee on Objectives and Planning. Mr.
Wade is a member of PNC Bank Advisory Board, board member and past
President of North Central Kentucky Education Foundation, Director of
Hardin County Community Foundation, a member of University of Kentucky
Community College Futures Commission, past Chairman of Hardin County
Planning and Development Commission and Hardin County Extension Council.
Mr. Wixson has been a Director of New Hampshire Electric Cooperative, Inc.,
Plymouth, NH, since June 1986 and President (now retitled Chair) of the
Board of Directors since June 1992. He also served as President and CEO of
Cooperative Resources, an internet service provider serving the Lakes
region of New Hampshire, from the time of incorporation in April 1997 to
June 1999. Mr. Wixson has been a professor of mathematics at Plymouth
State College, of the University System of New Hampshire, since 1966 and
was Interim Dean from July 1994 to June 1995. He also has been Chair of
the Board of Directors of the Community Guaranty Savings Bank since 1988.
He served as a Director of the Speare Memorial Hospital from 1986 to 1998
and rejoined the board as Vice President in September 1999. He was the
principal-controlling partner of the Plymouth Pharmacy from 1979 to 1983
and was a Maine dairy farmer from 1956 to 1963.
Mr. Petersen joined CFC in August 1983 as an area representative. He
became the Director of Policy Development and Internal Audit in January
1990, Director of Credit Analysis in November 1990 and Corporate
Secretary on June 1, 1992. He became Assistant to the Governor on May 1,
1993. He became Assistant to the Governor and Acting Administrative
Officer on June 1, 1994. He became Governor and CEO on March 1, 1995.
Mr. List joined CFC as a staff attorney in February 1972. He served as
Corporate Counsel from June 1980 to 1991. He became Senior Vice
President and General Counsel on June 1, 1992, and became Senior Vice
President, Member Services and General Counsel on February 1, 1997.
Mr. Lilly joined CFC as a Senior Financial Consultant in October 1983. He
became Director of Special Finance in June 1985 and Director of Corporate
Finance in June 1986. He became Treasurer and Principal Finance Officer on
June 1, 1993. He became Senior Vice President and Chief Financial Officer
on January 1, 1994.
Mr. Evans joined CFC as Senior Vice President of Operations in November
1997. He was Senior Vice President and Chief Operating Officer of Suburban
Hospital Healthcare System, Bethesda, MD, from 1994 to 1997. He was Senior
Vice President and Chief Operating Officer for Geisinger Medical Center,
Danville, PA, from 1991 to 1994.
45
Mr. Larochelle joined CFC as Director of Corporate Relations in May 1996.
He became Senior Vice President of Corporate Relations in August 1998.
Prior to joining CFC, he was the Legislative Director at NRECA where he
worked for 12 years.
Mr. Zawalick joined CFC in 1980. Throughout the years, Mr. Zawalick has
held various positions. In April 1995, he was appointed Vice President of
Business Development for CFC and Administrative Coordinator of RTFC. In
February 2000, Mr. Zawalick was named CFC's Senior Vice President of RTFC.
(f) Involvement in Certain Legal Proceedings.
None to the knowledge of CFC.
(g) Promoters and control persons.
Inapplicable.
Item 11. Executive Compensation
The summary compensation table below sets forth the aggregate remuneration
for services in all capacities to CFC, on an accrual basis, for the three
years ended May 31, 2000, 1999 and 1998, to the named executive officers.
The named executive officers include the CEO and the four next most highly
compensated executive officers serving at May 31, 2000, with salary and
bonus for fiscal year 2000 in excess of $100,000.
Summary Compensation Table
Annual Compensation All Other
Year Salary Bonus Compensation (1)
Sheldon C. Petersen 2000 $363,750 $83,789 $ 5,823
Governor and Chief 1999 358,750 77,656 19,208
Executive Officer 1998 328,854 - 25,009
John J. List 2000 207,667 44,945 7,704
Senior Vice President of Member 1999 198,667 43,750 3,474
Services and General Counsel 1998 194,652 19,100 4,035
Steven L. Lilly 2000 229,417 49,650 8,703
Senior Vice President and 1999 218,167 48,344 8,665
Chief Financial Officer 1998 205,869 12,200 10,352
John T. Evans (2) 2000 212,833 46,062 24,241
Senior Vice President of 1999 202,500 44,844 16,312
Operations 1998 106,571 10,500 24,252
Richard Larochelle (3) 2000 168,250 36,416 17,424
Senior Vice President of
Corporate Relations Group
_________________
(1) Amounts for fiscal years 2000, 1999 and 1998 include $1,173, $13,166
and $21,501 related to leave accruals and $4,050, $6,042 and $3,508
related to CFC contributions to a savings plan for Mr. Petersen;
$4,422, $(166) and $854 related to leave accruals and $3,282, $3,640
and $3,181 related to CFC contributions to a savings plan for Mr. List;
$4,885, $4,670 and $7,159 related to leave accruals and $3,818, $3,995
and $3,193 related to CFC contributions to a savings plan for Mr. Lilly;
$20,699, $14,262 and $24,252 related to leave accruals and $3,542,
$2,050 and $0 related to CFC contributions to a savings plan for Mr.
Evans. Amounts for fiscal year 2000 for Mr. Larochelle include $14,059
related to leave accruals and $3,365 related to CFC contributions to a
savings plan.
(2) Mr. Evans joined CFC in November 1997. The compensation table for
1998 includes the actual compensation paid to Mr. Evans through May 31,
1998 and not his annual salary.
(3) During fiscal year 2000, Mr. Hedberg, who was one of the top four most
highly compensated employees in 1999 and 1998, left CFC and Mr.
Larochelle became one of the top four most highly compensated employees.
CFC established a short-term incentive compensation plan for all employees
in fiscal year 1999. The plan provides for incentive payments of between
15% and 25% of salary based on the achievement of performance targets
established at the beginning of the fiscal year. CFC's executives are
eligible to receive incentive payments of up to
46
25% of salary under this plan, depending on corporate performance and the
performance of the operating groups reporting to each executive. The
incentive plan replaces the bonus plan that was in effect through fiscal
year 1998.
CFC's Board of Directors approves the performance targets for the incentive
plan annually during the strategic planning and budgeting process. The
Board of Directors will also review the performance achievements for the
year and must approve the payout under the incentive plan prior to
disbursement.
In July 2000, CFC's Board of Directors approved a long-term incentive plan.
The plan will provide for payouts of up to 25% of salary based on performance
over a three-year period. CFC's executives are eligible to receive incentive
payments of up to 25% of salary under this plan. The long-term incentive will
be in addition to the short-term incentive described above.
Defined Benefit or Actuarial Plan Disclosure
NRECA maintains the Retirement and Security Program entitling CFC employees
to receive annually, under a 50% joint and surviving spouse annuity, 1.90%
of the average of their five highest base salaries during their last ten
years of employment, multiplied by the number of years of participation in
the program. As of May 31, 2000, the number of years of service credited
and the compensation covered under the program, respectively, for the
officers listed above was as follows: Sheldon C. Petersen-16 years 9
months, $319,000; John J. List-28 years 3 months, $190,151; Steven L.
Lilly-16 years 7 months, $205,399; Richard Larochelle-4 years, $145,900;
and John T. Evans-2 years 6 months, $203,133.
Pension Plan Table
Years of Service
Average base salary 5 10 15 20 25 30
$100,000 $ 9,500 $19,000 $28,500 $ 38,000 $ 47,500 $ 57,000
125,000 11,875 23,750 35,625 47,500 59,375 71,250
150,000 14,250 28,500 42,750 57,000 71,250 85,500
175,000 16,625 33,250 49,875 66,500 83,125 99,750
200,000 19,000 38,000 57,000 76,000 95,000 114,000
225,000 21,375 42,750 64,125 85,500 106,875 128,250
250,000 23,750 47,500 71,250 95,000 118,750 135,000*
275,000 26,125 52,250 78,375 104,500 130,625 135,000*
300,000 28,500 57,000 85,500 114,000 135,000* 135,000*
325,000 30,875 61,750 92,625 123,500 135,000* 135,000*
*The Tax Reform Act of 1984 places a cap on maximum salary used to compute
retirement benefits and maximum yearly benefit. For calendar year 2000,
the salary cap is $170,000 (the cap represents the amount of salary for
2000 that may be used in the computation of the average base salary) and
the benefits cap is $135,000.
The Budget Reconciliation Act of 1993 has set a limit of $170,000 on the
compensation to be used in the calculation of pension benefits. In order
to restore potential lost benefits, CFC has set up a Pension Restoration
Plan. Under the plan, the amount that NRECA invoices CFC will continue to
be based on the full compensation paid to each employee. Upon the
retirement of a covered employee, NRECA will calculate the retirement and
security benefit to be paid with consideration of the compensation limits
and will pay the maximum benefit thereunder. NRECA will also calculate the
retirement and security benefit that would have been available without
consideration of the compensation limits and CFC will pay the difference.
NRECA will then give CFC a credit against future retirement and security
contribution liabilities in the amount paid by CFC to the covered employee.
CFC will pay such additional benefits to the covered employee through a
Severance Pay Plan and a Deferred Pay Restoration Plan. Under the
Severance Pay Plan, the employee is paid an amount equal to the lost
pension benefits but not to exceed twice the employee's annual compensation
for the prior year. The benefit must be paid within 24 months of
termination of employment. To the extent that the Severance Pay Plan
cannot pay all of the lost pension benefits, the remainder will be paid
under a Deferred Compensation Plan, which will be paid out in a lump sum or
in installments of up to 60 months.
47
Compensation of Directors
No director received any remuneration as an officer or director of CFC.
Directors are reimbursed for travel and lodging expenses and receive a
daily per diem to cover meals and other expenses related to their
attendance at all Board of Directors functions.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
Pursuant to an employment agreement effective as of March 1, 1996, CFC has
agreed to employ Mr. Petersen as Chief Executive Officer through February
28, 2001 (with automatic one-year extensions unless either party objects)
at no less than $245,000 per annum plus such bonus (if any) as may be
awarded him. Certain payments have been agreed to in the event of Mr.
Petersen's termination other than for cause; for example, Mr. Petersen
leaving for good reason, disability or termination of his employment due to
death.
Pursuant to a separate employment agreement effective as of the same date,
RTFC has agreed to employ Mr. Petersen for the same term. As compensation,
RTFC must credit to a deferred compensation account on January 1 of each
year of the term $30,000. Interest will be credited to the account on
December 31 of each such year at a rate equal to CFC's 20-year medium-term
note rate on that date. If Mr. Petersen's employment is terminated by RTFC
other than for cause, or by Mr. Petersen for good reason, or by his death
or disability, the account will be deemed continued for the remainder of
the term of employment (but in no event less than six months nor more than
a year), interest will be credited on a proportional basis for the calendar
year during which the continuation ends and the balance in the account will
be paid to Mr. Petersen or his beneficiaries in a lump sum.
Compensation Committee Interlocks and Insider Participation
During the year ended May 31, 2000 the following directors and former
directors of CFC served as members on the Executive Committee of the Board
of Directors (which functions as the Board's compensation committee):
Benson Ham
Wade R. Hensel
Stephen R. Louder
R. Layne Morrill
Robert J. Occhi
Brian D. Schlagel
R. B. Sloan, Jr.,
Robert O. Williams
Other than those mentioned above, there were no compensation committee
interlocks or insider participation related to executive compensation.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Inapplicable.
Item 13. Certain Relationships and Related Transactions.
Loans and guarantees were made to member systems of which officers or
directors of CFC are members, employees or directors in the ordinary course
of CFC's business on the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transaction with
other members and did not involve more than normal risk of uncollectibility
or present other unfavorable features. It is anticipated that, consistent
with its loan and guarantee policies in effect from time to time,
additional loans and guarantees will be made by CFC to member systems and
trade and service organizations of which officers or directors of CFC are
members, employees, officers or directors. In light of its cooperative
nature, pursuant to which CFC was established for the very purpose of
extending financing to its members (from whose ranks its directors must be
drawn), CFC is of the view that no purpose would be served by including
detailed information with respect to specific loans and guarantees to
members with which any of its directors are affiliated.
48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Documents filed as a part of this report.
1. Financial statements
Page
Report of Independent Public Accountants 52
Combined Balance Sheets 53
Combined Statements of Income, Expenses and Net Margin 55
Combined Statements of Changes in Members' Equity 56
Combined Statements of Cash Flows 57
Notes to Combined Financial Statements 58
2. Financial statement schedules
Page
Note 14 to Combined Financial Statements "Combined Quarterly
Financial Results"
All other schedules are omitted because they are not required or
inapplicable or the information is included in the financial statements or
notes thereto.
3. Exhibits
3.1 - Articles of Incorporation. Incorporated by reference to Exhibit
3.1 to Registration Statement No. 2-46018, filed October 12, 1972.
3.4 - Amendments to Bylaws as approved by CFC's Board of Directors and
members on March 21, 2000, and a copy of the Bylaws as amended.
4.1 - Form of Capital Term Certificate. Incorporated by reference to
Exhibit 4.3 Registration Statement No. 2-46018 filed October 12,
1972.
4.2 - Indenture dated as of February 15, 1994, between the Registrant
and U.S. Bank National Associaton, trustee. Incorporated by
reference to Exhibit 4.3 from the report on Form 8-K filed by CFC
on June 14, 1994.
4.3 - Revolving Credit Agreements dated February 28, 1995. Incorporated
by reference to Exhibit 4.3 from CFC's quarterly report on Form
10-Q filed April 3, 1995.
4.4 - The first amendment to the February 28, 1995 revolving credit
agreements dated February 27, 1996. Incorporated by reference to
Exhibit 4.4 from CFC's Annual Report on Form 10 filed August 27,
1996.
4.5 - Revolving Credit Agreement dated as of August 10, 2000 for
$4,087,500,000 maturing on August 9, 2001
CFC's Quarterly Report on Form 10-Q filed January 14, 2000.
4.6 - Revolving Credit Agreement dated as of August 10, 2000 for
$550,000,000 maturing on August 9, 2001.
- Registrant agrees to furnish to the Commission a copy of all other
instruments defining the rights of holders of its long-term debt
upon request.
Management Contracts and Compensatory Plans and Arrangements.
10.1 - Plan Document for CFC deferred compensation program. Incorporated
by reference to Exhibit 10 to Registration Statement No. 2-70355,
filed December 23, 1980.
10.2 - Employment Contract between CFC and Sheldon C. Petersen, dated as
of March 1, 1996. Incorporated by reference to Exhibit 10.2 to
CFC's Form 10-K filed August 27, 1996.
10.3 - Supplemental Benefit Agreement between RTFC and Sheldon C.
Petersen, dated as of March 1, 1996. Incorporated by reference to
Exhibit 10.3 to CFC's Form 10-K filed August 27, 1996.
12 - Computations of ratio of margin to fixed charges.
23 - Consent of Arthur Andersen LLP.
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
Item 5 on May 8, 2000 - Filing of Hunton and Williams tax opinion dated
May 2, 2000.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
County of Fairfax, Commonwealth of Virginia, on the 29th day of August,
2000.
NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION
By: /s/ SHELDON C. PETERSEN
Sheldon C. Petersen
Governor and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
/s/ SHELDON C. PETERSEN Governor and Chief
Sheldon C. Petersen Executive Officer
/s/ STEVEN L. LILLY Senior Vice President and
Steven L. Lilly Chief Financial Officer
/s/ STEVEN L. SLEPIAN Controller (Principal
Steven L. Slepian Accounting Officer)
/s/ BENSON HAM President and Director
Benson Ham
/s/ R.B. SLOAN, JR. Vice President and
R.B. Sloan, Jr. Director
/s/ WADE R. HENSEL Secretary-Treasurer and
Wade R. Hensel Director
/s/ JAMES M. ANDREW Director -August 29, 2000
James M. Andrew
Director
Robert A. Caudle
/s/ JAMES P. DUNCAN Director
James P. Duncan
Director
Glenn English
/s/ ALDEN J. FLAKOLL Director
Alden J. Flakoll
/s/ JAMES A. HUDELSON Director
James A. Hudelson
50
Signature Title Date
/s/ KENNETH KRUEGER Director
Kenneth Krueger
/s/ STEPHEN R. LOUDER Director
Stephen R. Louder
/s/ EUGENE MEIER Director
Eugene Meier
/s/ R. LAYNE MORRILL Director
R. Layne Morrill
/s/ ROBERT J. OCCHI Director
Robert J. Occhi
/s/ CLIFTON M. PIGOTT Director
Clifton M. Pigott
/s/ TIMOTHY REEVES Director -August 29, 2000
Timothy Reeves
/s/ BRIAN D. SCHLAGEL Director
Brian D. Schlagel
/s/ THOMAS W. STEVENSON Director
Thomas W. Stevenson
/s/ CLIFFORD G. STEWART Director
Clifford G. Stewart
/s/ ROBERT STROUP Director
Robert Stroup
Director
Robert C. Wade
/s/ ELDWIN A. WIXSON Director
Eldwin A. Wixson
51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION:
We have audited the accompanying combined balance sheets of National Rural
Utilities Cooperative Finance Corporation (a not-for-profit corporation
under the District of Columbia Cooperative Association Act) and other
related entities ("the Companies") as discussed in Note 1 as of May 31,
2000 and 1999, and the related combined statements of income, expenses and
net margin, changes in members' equity and cash flows for the three years
then ended. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of National Rural
Utilities Cooperative Finance Corporation and other related entities as of
May 31, 2000 and 1999, and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
July 14, 2000
52
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
May 31, 2000 and 1999
ASSETS
2000 1999
CASH AND CASH EQUIVALENTS $ 246,028 $ 74,403
DEBT SERVICE INVESTMENTS 22,968 22,969
LOANS TO MEMBERS, net 16,449,753 13,491,199
RECEIVABLES 180,106 161,523
FIXED ASSETS, net 43,672 38,683
DEBT SERVICE RESERVE FUNDS 98,870 98,870
OTHER ASSETS 42,043 37,605
$17,083,440 $13,925,252
The accompanying notes are an integral part of these combined
financial statements.
53
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
May 31, 2000 and 1999
LIABILITIES AND MEMBERS' EQUITY
2000 1999
NOTES PAYABLE, due within one year $ 4,252,166 $ 4,976,706
ACCOUNTS PAYABLE 20,145 16,707
ACCRUED INTEREST PAYABLE 125,708 95,741
LONG-TERM DEBT 10,595,596 6,891,122
OTHER LIABILITIES 8,191 10,207
QUARTERLY INCOME CAPITAL SECURITIES 400,000 400,000
MEMBERS' SUBORDINATED CERTIFICATES:
Membership subordinated certificates 641,985 641,937
Loan and guarantee subordinated certificates 698,432 597,879
Total members' subordinated certificates 1,340,417 1,239,816
MEMBERS' EQUITY 341,217 294,953
Total members' subordinated
certificates and members' equity 1,681,634 1,534,769
$17,083,440 $13,925,252
The accompanying notes are an integral part of these combined
financial statements.
54
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF INCOME, EXPENSES AND NET MARGIN
(Dollar Amounts In Thousands)
For the Years Ended May 31, 2000, 1999 and 1998
2000 1999 1998
Operating income $1,020,998 $792,052 $639,948
Less: Cost of funds 860,160 664,109 540,535
Gross margin 160,838 127,943 99,413
Expenses:
General and administrative 26,986 27,638 23,364
Provision for loan losses 17,355 23,866 19,027
Total expenses 44,341 51,504 42,391
Operating margin 116,497 76,439 57,022
Gain on sale of land - - 5,194
Net margin before extraordinary loss 116,497 76,439 62,216
Extraordinary loss (1,164) - -
Net margin $ 115,333 $ 76,439 $ 62,216
The accompanying notes are an integral part of these combined
financial statements.
55
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts In Thousands)
For the Years Ended May 31, 2000, 1999 and 1998
Patronage Capital
Allocated
General
Education Unallocated Reserve
Total Memberships Fund Margin Fund Other
Balance as of May 31, 1997 $271,594 $1,470 $596 $ 2,289 $504 $266,735
Retirement of patronage
capital (52,661) - - - (123) (52,538)
Net margin 62,216 - 404 - 119 61,693
Other (1,871) 21 (324) - - (1,568)
Balance as of May 31, 1998 279,278 1,491 676 2,289 500 274,322
Retirement of patronage
capital (57,601) - - - - (57,601)
Net margin 76,439 - 315 - 3 76,121
Other (3,163) 44 (448) - - (2,759)
Balance as of May 31, 1999 294,953 1,535 543 2,289 503 290,083
Retirement of patronage
capital (66,445) - - - - (66,445)
Net margin 115,333 - 631 16,329 - 98,373
Other (2,624) 3 (247) - (3) (2,377)
Balance as of May 31, 2000 $341,217 $1,538 $927 $18,618 $500 $319,634
The accompanying notes are an integral part of these combined
financial statements.
56
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Years Ended May 31, 2000, 1999 and 1998
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net margin $ 115,333 $ 76,439 $ 62,216
Add (deduct):
Provision for loan losses 17,355 23,866 19,027
Depreciation 1,726 1,454 1,274
Amortization of issuance costs and
deferred charges 5,727 3,959 2,188
Amortization of deferred income (2,182) (4,417) (1,467)
Gain on sale of land - - (5,194)
Receivables (15,966) (29,458) (12,397)
Accounts payable 3,438 (10,043) 4,122
Accrued interest payable 29,967 27,244 21,573
Other (22,049) (20,050) (13,930)
Net cash provided by
operating activities 133,349 68,994 77,412
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made on loans (8,077,346) (10,122,726) (5,594,408)
Principal collected on loans 5,101,437 6,937,006 3,924,232
Net investment in fixed assets (6,715) (15,075) (1,423)
Proceeds from sale of land - - 13,489
Net cash used in investing
activities (2,982,624) (3,200,795) (1,658,110)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
notes payable, net 458,792 380,339 258,531
Debt service investments, net 1 - 54,250
Proceeds from issuance of
long-term debt 3,703,013 3,003,765 1,819,265
Payments for retirement of
long-term debt (1,181,993) (387,710) (574,455)
Proceeds from issuance of quarterly
income capital securities - 200,000 75,000
Extraordinary loss on retirement of
long-term debt (1,164) - -
Proceeds from issuance of members'
subordinated certificates 136,691 65,432 34,040
Payments for retirement of members'
subordinated certificates (38,706) (69,911) (15,718)
Payments for retirement of patronage
capital (55,734) (50,985) (54,952)
Net cash provided by financing
activities 3,020,900 3,140,930 1,595,961
NET INCREASE IN CASH AND
CASH EQUIVALENTS 171,625 9,129 15,263
BEGINNING CASH AND CASH EQUIVALENTS 74,403 65,274 50,011
ENDING CASH AND CASH EQUIVALENTS $ 246,028 $ 74,403 $ 65,274
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for
interest $ 837,441 $ 640,947 $ 525,881
The accompanying notes are an integral part of these combined
financial statements.
57
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
As of May 31, 2000, 1999 and 1998
(1) General Information and Accounting Policies
(a) General Information
National Rural Utilities Cooperative Finance Corporation ("CFC") was
incorporated as a private, not-for-profit cooperative association under the
laws of the District of Columbia in April 1969. The principal purpose of
CFC is to provide its members with a source of financing to supplement the
loan programs of the Rural Utilities Service ("RUS") of the United States
Department of Agriculture. CFC makes loans primarily to its rural utility
system members ("utility members") to enable them to acquire, construct and
operate electric distribution, generation, transmission and related
facilities. CFC also provides guarantees for tax-exempt financings of
pollution control facilities and other properties constructed or acquired
by its members and, in addition, provides guarantees of taxable debt in
connection with certain lease and other transactions of its members. CFC
is exempt from payment of Federal income taxes under Section 501(c)(4) of
the Internal Revenue Code.
CFC's 1,050 members as of May 31, 2000, included 902 utility members,
virtually all of which are consumer-owned cooperatives, 75 service members
and 73 associate members. The utility members included 832 distribution
systems and 70 generation and transmission ("power supply") systems in 49
states and four U.S. territories.
Rural Telecommunications Finance Cooperative ("RTFC") was incorporated as a
private cooperative association in the state of South Dakota in September
1987. RTFC is a controlled affiliate of CFC and was created for the purpose
of providing and/or arranging financing for its rural telecommunication
members and affiliates. RTFC's bylaws require that the majority of RTFC's
Board of Directors be elected from individuals designated by CFC. CFC is
the sole source of external funding for RTFC. As of May 31, 2000, RTFC had
536 members. RTFC is a taxable entity under Subchapter T of the Internal
Revenue Code and accordingly takes deductions for allocations of net margin
to its patrons.
Guaranty Funding Cooperative ("GFC") was incorporated as a private
cooperative association in the state of South Dakota in December 1991. GFC
is a controlled affiliate of CFC and was created for the purpose of
providing a source of funds for its members to refinance their RUS
guaranteed debt previously held by the Federal Financing Bank ("FFB").
Under this program, notes are purchased from the FFB and placed in a trust
and beneficial certificates in the trust are then sold to investors. The
notes held by the trust are guaranteed by the RUS. All trust certificates
held by GFC were transferred to GFC by CFC. CFC is the sole source of
external funding for GFC. GFC had two members other than CFC at May 31,
2000. GFC is a taxable entity under Subchapter T of the Internal Revenue
Code and accordingly takes deductions for allocations of net margin to its
patrons.
(b) Principles of Combination
The accompanying financial statements include the combined accounts of CFC,
RTFC and GFC, after elimination of all material intercompany accounts and
transactions. CFC has a $1,000 membership interest in both RTFC and GFC.
CFC exercises control over RTFC and GFC through majority representation on
their Boards of Directors. CFC manages the affairs of RTFC through a long-
term management agreement. CFC services the loans for GFC for which it
collects a servicing fee.
As of May 31, 2000, CFC was authorized to lend RTFC up to $10.0 billion to
fund loans to its members and their affiliates. As of the same date, RTFC
had outstanding loans and unadvanced loan commitments totaling $4,994
million. RTFC's net margin is allocated to RTFC borrowers, its patrons.
58
Summary financial information relating to RTFC included in the combined
financial statements is presented below:
As of May 31: 2000 1999
(Dollar amounts in thousands)
Outstanding loans to
members and their affiliates $3,699,728 $2,710,339
Total assets 3,975,990 2,893,810
Notes payable to CFC 3,679,822 2,693,675
Total liabilities 3,727,438 2,729,102
Members' subordinated certificates 213,734 135,217
Members' equity (1) 34,818 29,491
For the years ended May 31: 2000 1999 1998
(Dollar amounts in thousands)
Operating income $ 240,189 $ 149,037 $90,663
Net margin (1) 3,535 3,858 3,135
____________________________
(1) The transfer of RTFC equity is governed by the South Dakota Cooperative
Association Act which provides that net margin shall be distributed and
paid to patrons. However, reserves may be created and credited to patrons
in proportion to total patronage. CFC has been the sole funding source for
RTFC's loans to its members. As CFC is not a borrower of RTFC and is not
expected to be in the foreseeable future, RTFC's net margin would not be
available to CFC in the form of patronage capital.
As of May 31, 2000, CFC had loaned GFC $45.9 million to fund the purchase
from CFC of certificates evidencing interests in trusts holding RUS
guaranteed notes of members. Summary financial information relating to GFC
included in the combined financial statements is presented below:
As of May 31: 2000 1999
(Dollar amounts in thousands)
Outstanding loans to members $ 45,855 $ 130,940
Total assets 47,166 133,091
Notes payable to CFC 45,855 130,940
Total liabilities 46,978 132,861
Members' equity (1) 188 230
For the years ended May 31: 2000 1999 1998
(Dollar amounts in thousands)
Operating income $ 6,349 $ 7,716 $ 8,467
Net margin (1) 589 714 798
_______________________
(1) The transfer of GFC equity is governed by the South Dakota
Cooperative Association Act which provides that net margin shall be
distributed and paid to patrons. However, reserves may be created and
credited to patrons in proportion to total patronage. CFC has been the
sole funding source for GFC's loans to its members. As CFC is not a
borrower of GFC and is not expected to be in the foreseeable future, GFC's
net margin would not be available to CFC in the form of patronage capital.
Unless stated otherwise, references to CFC relate to CFC, RTFC and GFC on a
combined basis.
(c) Interest Income
Interest income is recognized on an accrual basis on all loans, unless
specified otherwise in Note 10.
59
(d) Amortization of Bond Discounts and Bond Issuance Costs
Bond discounts and bond issuance costs are deferred and amortized as
interest expense using the effective interest method over the life of each
bond issue.
(e) Nonperforming Loans
It is CFC's policy to classify a loan as nonperforming when it meets any of
the following criteria:
(i) interest or principal payments are contractually past due 90 days or
more,
(ii) as a result of court proceedings, repayment in accordance with the
original terms is not anticipated, or
(iii) for other reasons, timely repayment of principal or interest is not
expected.
(f) Allowance for Loan Losses
CFC maintains an allowance for loan losses at a level believed to be
adequate in relation to the credit quality and amount of its loans and
guarantees outstanding. According to the terms of CFC's guarantees, any
amount advanced by CFC under its guarantee of a members' obligation is
treated as a demand loan. It is CFC's policy to periodically review its
loans and guarantees and to make adjustments to the allowance as necessary.
The allowance is based on estimates and, accordingly, actual loan losses
may differ from the allowance amount.
Activity in the allowance account is summarized as follows for the years
ended May 31:
(Dollar amounts in thousands) 2000 1999 1998
Balance at beginning of year $212,203 $250,131 $233,208
Provision for loan losses 17,355 23,866 19,027
Charge-offs (1,266) (61,794) (2,104)
Balance at end of year $228,292 $212,203 $250,131
(g) Fixed Assets
Buildings, furniture and fixtures and related equipment are stated at cost
less accumulated depreciation and amortization of $10 million and $9
million as of May 31, 2000 and 1999, respectively. Depreciation and
amortization expenses ($2 million, $2 million and $1 million in fiscal
years 2000, 1999 and 1998, respectively) are computed primarily on the
straight-line method over estimated useful lives ranging from 2 to 40
years.
(h) Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, CFC is a party to financial instruments
with off-balance sheet risk both to meet the financing needs of its member
borrowers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, guarantees of members' obligations, currency exchange
agreements and interest rate exchange agreements. These instruments may
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the combined balance sheets.
(i) Accounting by Creditors for Impairment of a Loan
CFC calculates impairment of loans receivable by comparing the present
value of the future cash flows associated with the loan against CFC's
investment in the loan; loss reserves are provided based on the calculated
impairment.
60
(j) Accounting for Certain Investments in Debt and Equity Securities
Debt service investments are recorded at amortized cost, since it is CFC's
intent and ability to hold all of these investments to maturity.
(k) Derivative Financial Instruments
CFC is neither a dealer nor a trader in derivative financial instruments.
CFC uses interest rate and currency exchange agreements to manage its
interest rate risk and foreign exchange risk. CFC accounts for these
agreements on an accrual basis. CFC does not value the interest rate
exchange agreements on its balance sheet, but values the underlying hedged
debt at cost. CFC does not recognize a gain or loss on these agreements,
but includes the difference between the interest rate paid and interest
rate received in the overall cost of funding. In the event that an
agreement was terminated early, CFC would record the fee paid or received
due to the early termination as part of the overall cost of funding.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities. In June 1999, the FASB
issued Statement No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133. In
June 2000, the FASB issued Statement No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133. Statement No. 133, as amended, establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at
its fair value. The Statement requires that changes in the derivative
instrument's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative instrument's gains and losses to offset related results
on the hedged item in the income statement, to the extent effective, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. The statement
is effective for all fiscal years beginning after June 15, 2000. CFC will
be required to implement this statement as of June 1, 2001. CFC has not
yet quantified all effects of adopting Statement No. 133 on its financial
statements.
(l) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the assets and liabilities and
the revenue and expenses reported in the financial statements, as well as
amounts included in the notes thereto, including discussion and disclosure
of contingent liabilities. While CFC uses its best estimates and judgments
based on the known facts at the date of the financial statements, actual
results could differ from these estimates as future events occur.
CFC does not believe it is vulnerable to the risk of a near-term severe
impact as a result of any concentrations of its activities.
(m) Membership Fees
Members are charged a one-time membership fee based on member class. CFC
distribution system members (class A), power supply system members (class
B), national associations of cooperatives (class D) and associate members
(class E) pay a $1,000 membership fee. CFC service organization members
(class C) pay a $200 membership fee. RTFC voting members pay a $1,000
membership fee and non-voting members pay a $100 membership fee. All GFC
members pay a $1,000 membership fee. Membership fees are accounted for as
members' equity.
(n) Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with the fiscal year 2000 presentation.
61
(2) Loans and Commitments
Loans to members bear interest at rates determined from time to time by the
Board of Directors after considering CFC's cost of funds, operating
expenses, provision for loan losses and the maintenance of reasonable
margin levels. In keeping with its not-for-profit, cooperative character,
CFC's policy is to set interest rates at the lowest levels it considers to
be consistent with sound financial management. Loans outstanding to
members, weighted average interest rates thereon and unadvanced commitments
by loan type are summarized as follows as of May 31:
(Dollar amounts in thousands) 2000 1999
Weighted Weighted
Average Unadvanced Average Unadvanced
Loans Interest Commitments Loans Interest Commitments
Outstanding Rates (A) Outstanding Rates (A)
Long-term fixed rate
secured loans (B):
Electric systems $ 6,674,470 6.74% $ - $ 6,797,786 6.69% $ 198,010
Telecommunication systems 1,540,928 7.36% - 1,258,458 6.88% -
Total long-term fixed
rate secured loans 8,215,398 6.86% - 8,056,244 6.72% 198,010
Long-term variable rate
secured loans (C):
Electric systems 4,019,155 7.45% 7,524,197 2,334,878 5.85% 6,806,682
Telecommunication systems 1,816,826 8.02% 589,696 1,096,312 6.43% 561,442
Total long-term variable
rate secured loans 5,835,981 7.62% 8,113,893 3,431,190 6.04% 7,368,124
Loans guaranteed by RUS:
Electric systems 89,153 6.53% - 130,940 5.87% -
Intermediate-term secured loans:
Electric systems 141,771 7.41% 48,533 198,894 6.62% 80,411
Telecommunication systems - - - 686 6.42% -
Total intermediate-term
secured loans 141,771 7.41% 48,533 199,580 6.50% 80,411
Intermediate-term unsecured loans:
Electric systems 200,706 7.35% 408,644 102,221 6.26% 219,248
Telecommunication systems 12,206 7.80% 6,090 12,809 6.42% 11,680
Total intermediate-term
unsecured loans 212,912 7.37% 414,734 115,030 6.28% 230,928
Line of credit loans (D):
Electric systems 1,281,483 7.59% 4,403,987 850,039 5.99% 4,183,280
Telecommunication systems 329,768 8.32% 717,700 342,074 6.66% 538,619
Total line of credit loans 1,611,251 7.74% 5,121,687 1,192,113 6.19% 4,721,899
Nonperforming loans (E):
Electric systems - - - 1,643 5.55% -
Restructured loans (F):
Electric systems 571,579 3.90% - 576,662 3.90% -
Total loans 16,678,045 7.12% 13,698,847 13,703,402 6.37% 12,599,372
Less: Allowance for loan losses (228,292) - (212,203) -
Net loans $16,449,753 $13,698,847 $13,491,199 $12,599,372
Total by member class:
Distribution $10,394,985 $ 9,644,058 $ 8,714,742 $ 9,233,999
Power supply 2,037,108 2,054,322 1,895,712 1,963,569
Statewide and associate 546,224 686,981 382,609 290,063
Telecommunication systems 3,699,728 1,313,486 2,710,339 1,111,741
Total $16,678,045 $13,698,847 $13,703,402 $12,599,372
________________________
(A) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed and for which loan contracts have
been executed but funds have not been advanced. Since commitments may
expire without being fully drawn upon, the total amounts reported as
commitments do not necessarily represent future cash requirements.
Collateral and security requirements for advances on commitments are
identical to those on initial loan approval. Long-term unadvanced
commitments that do not have an interest rate associated with the
commitment have been listed under the variable rate. Rates, fixed or
variable, are set at the time of each advance.
(B) Generally, the terms of long-term fixed rate loans range from one to 35
years. Upon expiration of the interest rate term, the borrower may
select another fixed rate term of one to 35 years (but not beyond
maturity of the loan) or a variable rate. The borrower may also repay
to CFC the principal then outstanding together with interest due
thereon and other sums, if required. Includes $102 million and $162
million of unsecured loans at May 31, 2000 and 1999, respectively.
(C) Includes $49 million and $39 million of unsecured loans at May 31, 2000
and 1999, respectively.
(D) Includes $342 million and $278 million of secured loans at May 31, 2000
and 1999, respectively.
(E) The rates on nonperforming loans are the weighted average of the stated
rates on such loans as of the dates shown and do not necessarily
represent the interest recognized by CFC from such loans.
(F) The rates on restructured loans represent the effective rate based on
the scheduled minimum payments.
62
Total loans outstanding, by state or U.S. territory, are summarized below:
(Dollar amounts in thousands)
May 31, May 31,
State/Territory 2000 1999 State/Territory 2000 1999
Alabama $ 431,922 $ 204,861 Nebraska $ 13,928 $ 15,524
Alaska 334,694 205,106 Nevada 91,669 76,543
Arizona 90,680 88,790 New Hampshire 282,913 257,711
Arkansas 475,015 428,697 New Jersey 7,385 6,899
California 85,577 58,843 New Mexico 83,654 85,834
Colorado 421,427 375,099 New York 18,503 17,052
Connecticut 200 2,400 North Carolina 663,073 610,656
Delaware 37,543 15,812 North Dakota 65,505 53,269
District of Columbia 386,928 258,945 Ohio 354,835 313,631
Florida 457,197 465,114 Oklahoma 410,938 354,791
Georgia 1,499,168 1,086,622 Oregon 259,934 256,086
Hawaii 360 - Pennsylvania 149,902 106,839
Idaho 125,070 112,561 South Carolina 547,906 565,434
Illinois 562,423 520,602 South Dakota 161,851 178,493
Indiana 202,051 181,430 Tennessee 117,572 101,901
Iowa 357,726 304,480 Texas 2,541,717 1,843,776
Kansas 299,047 288,873 Utah 642,368 650,322
Kentucky 232,979 218,426 Vermont 56,801 51,887
Louisiana 230,806 207,967 Virgin Islands 548,928 376,409
Maine 46,215 49,354 Virginia 362,232 298,526
Maryland 129,239 128,990 Washington 85,191 85,148
Michigan 305,464 275,538 West Virginia 1,466 4,692
Minnesota 826,804 548,255 Wisconsin 263,157 228,994
Mississippi 345,513 281,310 Wyoming 135,580 125,514
Missouri 693,376 496,010 Total $16,678,045 $13,703,402
Montana 233,613 233,386
CFC's members are widely dispersed throughout the United States and its
territories, including 49 states, the District of Columbia, Guam, American
Samoa and the U.S. Virgin Islands. At May 31, 2000 and 1999, no state or
territory had over 15% and 13%, respectively, of total loans and guarantees
outstanding.
In addition to the geographic diversity of the portfolio, CFC limits its
exposure to any one borrower. At May 31, 2000, the total exposure
outstanding to any one borrower did not exceed 3.6% of total loans
(excluding loans guaranteed by RUS) and guarantees outstanding. At May 31,
2000, CFC had $3,464 million in loans outstanding and $495 million in
guarantees outstanding, to its largest 10 borrowers, representing 21% of
total loans outstanding and 25% of total guarantees outstanding. Credit
exposure to the largest 10 borrowers represented 21% and 19% of total
credit exposure at May 31, 2000 and May 31, 1999, respectively. At May 31,
2000, the largest 10 borrowers included 4 distribution systems, 3 power
supply systems and 3 telephone systems.
Set forth below are the interest rates earned on all loans outstanding
during the fiscal years ended May 31:
For the Years Ended May 31,
2000 1999 1998
Long-term fixed rate 6.66% 6.69% 7.12%
Long-term variable rate 6.59% 6.20% 6.53%
Telecommunication organizations (1) 7.45% 6.88% 7.05%
Refinancing loans guaranteed by RUS 6.29% 5.87% 6.32%
Intermediate-term 6.92% 6.98% 7.08%
Short-term 7.01% 6.26% 6.74%
Associate members 6.85% 6.47% 6.65%
Nonperforming (2)(3) 0.00% 0.00% 0.00%
Restructured 3.90% 1.73% 0.00%
All loans 6.74% 6.51% 6.60%
____________________
(1) Includes long-term fixed rate, long-term variable rate,
intermediate-term and short-term loans.
(2) Rate does not reflect the recognition of $12.5 million of deferred gain
in 1998.
(3) Interest rate earned by CFC recognized on a cash basis.
63
Long-term fixed rate loans outstanding at May 31, 2000 which will be
subject to adjustment of their interest rates during the next five fiscal
years are summarized as follows (due to principal repayments, amounts
subject to interest rate adjustment may be lower at the actual time of
interest rate adjustment):
(Dollar amounts in thousands)
Weighted
Average
Interest Rate Amount Repricing
2001 6.24% $323,361
2002 6.31% 516,267
2003 6.37% 380,208
2004 6.37% 413,907
2005 6.12% 439,430
At January 1, 2000, long-term fixed rate loans totaling $241.2 million had
their interest rates adjusted.
On most long-term secured loans, level quarterly payments are required with
respect to principal and interest in amounts sufficient to repay the loan
principal, generally over a period ending approximately 35 years from the
date of the secured promissory note. Fiscal year 2001 repayments of
principal on long-term loans outstanding are expected to be an immaterial
amount of such outstanding loans.
Total long-term loans maturing in each of the five fiscal years following
May 31, 2000 and thereafter, are as follows:
(Dollar amounts in thousands)
Amount Maturing
2001 $ 705,221
2002 545,284
2003 618,060
2004 493,046
2005 835,323
Thereafter 10,943,598
CFC evaluates each borrower's creditworthiness on a case-by-case basis. It
is generally CFC's policy to require collateral for long-term and certain
intermediate-term loans. Such collateral usually consists of a first
mortgage lien on the borrower's total system, including plant and
equipment, and a pledge of future revenues. The loan and security
documents also contain various provisions with respect to the mortgaging of
the borrower's property, the maintenance of certain earnings and debt
service coverage ratios, maintenance of adequate insurance coverage as well
as certain other restrictive covenants.
Under default provisions of common mortgages securing long-term CFC loans
to distribution system members that also borrow from RUS, RUS has the sole
right to act within 30 days or, if RUS is not legally entitled to act on
behalf of all noteholders, CFC may exercise remedies. Under common default
provisions of mortgages securing long-term CFC loans to, or guarantee
reimbursement obligations of, power supply members, RUS retains substantial
control over the exercise of mortgage remedies.
As of May 31, 2000 and 1999, mortgage notes representing approximately
$3,484 million and $3,017 million, respectively, of outstanding long-term
loans to members were pledged as collateral to secure CFC's collateral
trust bonds.
At May 31, 2000, CFC had a total of $89 million of loans outstanding on
which RUS had guaranteed the repayment of principal and interest. There
are two programs under which these loans were advanced. RUS previously
allowed cooperatives to repay FFB loans early and allowed the transfer of
the guarantee to the new lender. CFC had $46 million of loans outstanding
through GFC that carried the RUS guarantee on the repayment of principal
and interest. In
64
February 1999, RUS approved CFC as a lender under its loan guarantee
program. During fiscal year 2000, CFC advanced $43 million under the RUS
guaranteed loan program.
CFC sets variable interest rates monthly on outstanding short-term and
intermediate-term loans. On notification to borrowers, CFC may adjust the
interest rate semi-monthly. Under CFC's policy, the maximum interest rate
which may be charged on short-term loans is the prevailing bank prime rate
plus 1% per annum; on intermediate-term loans, the prevailing bank prime
rate plus 1 1/2% per annum; and on RTFC short-term loans, the prevailing
bank prime rate plus 1 1/2% per annum.
At May 31, 2000 and 1999, CFC had nonperforming loans in the amount of $0
and $2 million, respectively. During the fourth quarter of fiscal year
2000, CFC received the payment required to bring $28 million of
nonperforming loans current. In addition, CFC wrote off the remaining $2
million of nonperforming loans in April 2000. At May 31, 1999, all loans
classified as nonperforming were on a nonaccrual basis with respect to
recognition of interest income. The effect of not accruing interest on
nonperforming loans was a decrease in interest income of $0.1 million, $0.1
million and $0.4 million for the years ended May 31, 2000, 1999 and 1998,
respectively.
At May 31, 2000 and 1999, the total amount of restructured loans was $572
million and $577 million, respectively. A total of $22 million of interest
was accrued on restructured loans for the year ended May 31, 2000 at 3.90%.
The effect of not accruing interest income at the stated rates on
restructured loans was a decrease in interest income of $19 million, $23
million and $25 million for the years ended May 31, 2000, 1999 and 1998,
respectively.
(3) Members' Subordinated Certificates
Membership Subordinated Certificates
To join CFC and to establish eligibility to borrow, CFC members (other than
associate members and service organizations) are required to execute
agreements to subscribe to membership subordinated certificates. Such
certificates are interest-bearing, unsecured, subordinated debt of CFC.
CFC is authorized to issue membership subordinated certificates without
limitation as to the total principal amount.
Generally, membership subordinated certificates mature in the years 2070
through 2095 and bear interest at 5% per annum. The maturity dates and
interest rates payable on such certificates vary in accordance with
applicable CFC policy.
Loan and Guarantee Subordinated Certificates
Members obtaining long-term loans, certain intermediate-term loans or
guarantees from CFC are generally required to purchase additional loan or
guarantee subordinated certificates with each such loan or guarantee.
These certificates are unsecured, subordinated debt of CFC.
Certificates currently purchased in conjunction with loans are noninterest-
bearing and are generally repaid periodically over the life of the loan in
relation to the loan principal balance outstanding. Such certificate
purchase requirements, if any, range from 1% to 12% of the loan amount
depending on the membership classification of the borrower and the
borrower's leverage ratio, including the new CFC loan.
The maturity dates and the interest rates payable on guarantee subordinated
certificates purchased in conjunction with CFC's guarantee program vary in
accordance with applicable CFC policy. Members may be required to purchase
noninterest-bearing debt service reserves subordinated certificates in
connection with CFC's guarantee of long-term tax-exempt bonds (see Note 8).
Proceeds from the sale of such certificates are pledged by CFC to the debt
service reserve fund established in connection with the bond issue and any
earnings from the investments of the fund inure solely to the benefit of
the members for whom the bonds are issued. These certificates have varying
maturities not exceeding the longest maturity of the guaranteed obligation.
65
Information with respect to members' subordinated certificates at May 31 is
as follows:
2000 1999
Weighted Weighted
(Dollar amounts in thousands) Amounts Average Amounts Average
Outstanding Interest Rate Outstanding Interest Rate
Number of subscribing members 902 908
Membership subordinated certificates
Certificates maturing 2020 through 2090 $ 626,812 $ 626,560
Subscribed and unissued 15,173 15,377
Total membership subordinated certificates 641,985 4.83% 641,937 4.83%
Loan and guarantee subordinated certificates
3% certificates maturing through 2040 126,860 127,625
5.30% to 12.12% certificates maturing
through 2039 71,877 64,576
Noninterest-bearing certificates maturing
through 2040 452,298 368,126
Subscribed and unissued 47,397 37,552
Total loan and guarantee subordinated
certificates 698,432 1.36% 597,879 1.56%
Total members' subordinated certificates $1,340,417 3.02% $1,239,816 3.25%
CFC estimates the amount of members' subordinated certificates that will be
repaid during the next five fiscal years will total approximately 1.14% of
certificates outstanding at May 31, 2000.
(4) Notes Payable and Credit Arrangements
Notes payable due within one year as of May 31, and weighted average interest
rates thereon, are summarized as follows:
2000 1999
Weighted Weighted
(Dollar amounts in thousands) Amounts Average Amounts Average
Outstanding Interest Rate Outstanding Interest Rate
Commercial paper sold through dealers,
net of discounts of $72 and $34,
respectively $ 5,576,445 6.29% $ 4,684,066 4.96%
Commercial paper sold by CFC directly
to members, at par 841,229 6.35% 1,063,450 4.86%
Commercial paper sold by CFC directly
to nonmembers, at par 132,361 6.32% 123,727 4.86%
6,550,035 6.17% 5,871,243 4.94%
Bank bid notes 155,000 6.41% 375,000 4.86%
Long-term debt maturing within one year 3,039,631 6.36% 1,132,963 5.34%
Total notes payable due within one year 9,744,666 6.23% 7,379,206 5.00%
Notes payable supported by revolving credit
agreements, classified as
long-term debt (see Note 5) (5,492,500) 6.23% (2,402,500) 5.00%
Total notes payable due in one year after
reclassification to long-term $ 4,252,166 6.23% $ 4,976,706 5.00%
Other information with regard to notes payable due within one year at
May 31, is as follows:
(Dollar amounts in thousands) 2000 1999 1998
Original maturity range of
Notes outstanding at
year-end 1 to 260 days 1 to 270 days 1 to 268 days
Weighted average maturity
of notes outstanding at
year-end 85 days 38 days 34 days
Average amount outstanding
During the year $8,796,932 $5,757,698 $5,976,346
Maximum amount outstanding
at any month-end during
the year $9,744,666 $7,335,247 $6,281,683
CFC enters short-term bank bid note agreements, which are unsecured o
bligations of CFC and do not require back-up bank lines for liquidity
purposes. Bank bid note facilities are uncommitted lines of credit for
which CFC does not pay
66
a fee. The commitments are generally subject to termination at the
discretion of the individual banks.
As of May 31, 2000, CFC had three revolving credit agreements totaling
$5,493 million which are used principally to provide liquidity support
for CFC's outstanding commercial paper, commercial paper issued by
National Cooperative Services Corporation ("NCSC") and guaranteed by CFC
and the adjustable or floating/fixed rate bonds which CFC has guaranteed
and of which CFC is standby purchaser for the benefit of its members.
Under a five-year agreement, executed in November 1996, CFC can borrow
$2,403 million until November 26, 2001. J.P. Morgan Securities Inc. and
The Bank of Nova Scotia were Co-Syndication Agents, and Chase Manhattan
Bank is the Administrative Agent for this agreement that is with 55 banks.
Any amounts outstanding under the multi-year facility will be due on the
maturity date. On September 30, 1999, a 364-day agreement for $2,540
million was executed with 31 banks including Chase Manhattan Bank as
Administrative Agent, Bank of America, N.A. as Syndication Agent, The Bank
of Nova Scotia and Banc One, N.A. as Co-Documentation Agents and Chase
Securities Inc. and Bank of America Securities LLC as Joint Lead Arrangers.
A second 364-day facility for $550 million was also executed on September
30, 1999 with ten banks, including The Bank of Nova Scotia as Lead Arranger
and Administrative Agent and Banc One, N.A. as Documentation Agent. Both of
the 364-day facilities have a revolving credit period that terminates on
September 29, 2000 during which CFC can borrow and such borrowings may be
converted to a one-year term loan at the end of the revolving credit period.
In connection with the five-year facility, CFC pays a per annum facility
fee of .090 of 1%. The per annum facility fee for both agreements with a
364-day maturity is .085 of 1%. There is no commitment fee for any of the
revolving credit facilities. If CFC's senior secured debt ratings decline
below AA- or Aa3 and amounts outstanding exceed 50% of the total commitment,
the facility fees may be replaced with a utilization fee of .125 of 1%.
Generally, pricing options are the same under all three agreements and are
at one or more rates as defined in the agreements, as selected by CFC.
The multi-year revolving credit agreement requires CFC, among other things,
to maintain members' equity and members' subordinated certificates of at
least $1,418 million at May 31, 2000 (increased each fiscal year by 90% of
net margin not distributed to members). The revolving credit agreements
require CFC to achieve an average fixed charge coverage ratio over the six
most recent fiscal quarters of at least 1.025 and prohibits the retirement
of patronage capital unless CFC has achieved a fixed charge coverage ratio
of at least 1.05 for the preceding fiscal year. The revolving credit
agreements prohibit CFC from incurring senior debt (including guarantees
but excluding indebtedness incurred to fund RUS guaranteed loans) in an
amount in excess of ten times the sum of members' equity, members'
subordinated certificates and quarterly income capital securities, and
restrict with certain exceptions, the creation by CFC of liens on its
assets. The agreements also prohibit CFC from pledging collateral in
excess of 150% of the principal amount of collateral trust bonds
outstanding. Provided that CFC is in compliance with these financial
covenants (including that CFC has no material contingent or other liability
or material litigation that was not disclosed or reserved against in its
most recent annual financial statements) and is not otherwise in default,
CFC may borrow under the agreements until the termination dates. As of May
31, 2000 and May 31, 1999, CFC was in compliance with all covenants and
conditions under its revolving credit agreements and there were no
borrowings outstanding under such agreements.
At May 31, 2000 and May 31, 1999, CFC classified $5,493 million and $2,403
million, respectively, of its notes payable outstanding as long-term debt based
on the ability to borrow under each of the facilities. CFC expects to maintain
more than $5,493 million of notes payable outstanding during the next twelve
months. If necessary, CFC can refinance such notes payable on a long-term
basis by borrowing under these facilities, subject to the conditions therein.
67
(5) Long-Term Debt
The following is a summary of long-term debt as of May 31:
2000 1999
Weighted Weighted
(Dollar amounts in thousands) Amounts Average Amounts Average
Outstanding Interest Rate Outstanding Interest Rate
Notes payable supported by
revolving credit agreement agreements: $ 5,492,500 6.23% $2,402,500 5.00%
Medium-term notes:
Medium-term notes, sold through dealer 1,731,121 1,596,913
Medium-term notes, sold directly to members 121,072 46,037
Subtotal 1,852,193 1,642,950
Less: unamortized discount (480) (627)
Total medium-term notes 1,851,713 6.31% 1,642,323 6.10%
Collateral trust bonds:
6.45%, Bonds, due 2001 - 100,000
6.75%, Bonds, due 2001 100,000 100,000
6.50%, Bonds, due 2002 100,000 100,000
6.70%, Bonds, due 2002 100,000 100,000
5.00%, Bonds, due 2002 200,000 200,000
5.95%, Bonds, due 2003 100,000 100,000
7.375%, Bonds, due 2003 525,000 -
5.30%, Bonds, due 2003 100,000 100,000
6.00%, Bonds, due 2004 200,000 200,000
6.375%, Bonds, due 2004 100,000 100,000
6.125%, Bonds, due 2005 200,000 200,000
6.65%, Bonds, due 2005 50,000 50,000
5.50%, Bonds, due 2005 200,000 200,000
7.30%, Bonds, due 2006 100,000 100,000
6.20%, Bonds, due 2008 300,000 300,000
5.75%, Bonds, due 2008 225,000 225,000
Floating Rate, Series E-2, due 2010 (1) 2,068 2,078
5.70%, Bonds, due 2010 200,000 200,000
7.20%, Bonds, due 2015 50,000 50,000
6.55%, Bonds, due 2018 175,000 175,000
9.00%, Series V, due 2021 (1) 130,000 150,000
7.35%, Bonds, due 2026 100,000 100,000
Subtotal 3,257,068 2,852,078
Less: unamortized discount (5,685) (5,779)
Total collateral trust bonds 3,251,383 6.34% 2,846,299 6.42%
Total long-term debt $10,595,596 6.28% $6,891,122 5.85%
______________________
(1) Issued under the 1972 indenture.
The principal amount of medium-term notes and collateral trust bonds
maturing (including any sinking fund requirements) in each of the five
fiscal years following May 31, 2000 and thereafter is as follows:
Weighted Average
(Dollar amounts in thousands) Amount Maturing Interest Rate
2001 (1) $3,039,631 6.36%
2002 746,306 6.54%
2003 1,386,820 6.52%
2004 416,050 5.70%
2005 511,641 5.74%
Thereafter 2,042,279 6.40%
______________________
(1) The amount scheduled to mature in fiscal year 2001, has been presented
as long-term debt due in one year under notes payable.
Under the 1972 indenture for collateral trust bonds, CFC is required to
maintain funds in a debt service investment account equivalent to principal
and interest payments due on the bonds over the next 12 months. At May 31,
2000 and 1999, CFC
68
had $23 million of such funds invested in bank certificates of deposit and
marketable securities.
The outstanding collateral trust bonds are secured by the pledge of mortgage
notes taken by CFC in connection with long-term secured loans made to those
members fulfilling specified criteria as set forth in the indentures.
Medium-term notes are unsecured obligations of CFC.
Interest Rate Exchange Agreements
The following table lists the notional principal amounts and the weighted
average interest rates paid/received by CFC under interest rate exchange
agreements at May 31, 2000 and 1999:
(Dollar amounts in thousands)
Weighted
Maturity Date Interest Rate Paid Interest Rate Received Notional Principal Amount
2000 1999 2000 1999 2000 1999
June-1999 (3) - 5.00% - 5.81% $ - $ 50,000
September-1999 (1) - 4.99% - 5.06% - 300,000
November-1999 (1) - 4.96% - 5.06% - 450,000
January-2000 (2) - 6.47% - 4.85% - 52,851
June-2000 (1) 6.61% - 6.86% - 675,000 -
July-2000 (1) 6.63% - 6.86% - 301,363 -
August-2000 (2) 4.95% 4.95% 6.50% 4.85% 190,000 220,000
September-2000 (2) 5.12% 5.13% 6.50% 4.85% 10,410 20,805
September-2000 (1) 6.62% - 11.11% - 250,000 -
October-2000 (2) 4.55% 4.55% 6.50% 4.85% 20,000 20,000
January-2001 (1) 6.62% - 6.86% - 500,000 -
January-2001 (2) 6.09% 6.09% 6.50% 6.50% 65,749 65,749
February-2001 (2) 5.63% 5.63% 6.50% 4.85% 300,000 300,000
September-2001 (2) 5.15% 5.15% 6.50% 4.85% 34,810 34,810
May-2002 (1) 6.60% - 6.86% - 300,000 -
January-2003 (2) 5.56% 5.56% 6.50% 4.85% 22,375 22,375
February-2003 (3) 6.79% - 7.57% - 525,000 -
April-2003 (2) 7.01% - 6.50% - 75,000 -
June-2003 (2) 5.86% 5.86% 6.50% 4.85% 48,000 48,000
August-2003 (2) 5.85% 5.85% 6.86% 5.07% 100,000 100,000
September-2003 (2) 5.24% 5.24% 6.50% 4.85% 91,230 91,229
October-2003 (2) 4.76% 4.76% 6.50% 4.85% 68,576 90,546
September-2004 (2) 5.28% 5.28% 6.50% 4.85% 15,080 17,650
October-2004 (2) 6.59% 6.23% 6.50% 4.85% 150,700 38,000
November-2004 (2) 5.30% 5.30% 6.50% 4.85% 122,000 122,000
January-2005 (2) 5.70% 5.70% 6.50% 4.85% 8,000 8,000
April-2005 (2) 7.02% - 6.50% - 97,820 -
April-2006 (2) 6.89% 6.89% 6.50% 4.85% 100,000 100,000
January-2008 (2) 5.84% 5.84% 6.50% 4.85% 14,000 14,000
July-2008 (2) 5.86% 5.86% 6.50% 4.85% 40,400 40,400
September-2008 (2) 5.48% 5.48% 6.50% 4.85% 66,410 67,560
October-2008 (2) 5.00% 5.00% 6.50% 4.85% 33,512 33,512
April-2009 (2) 5.54% 5.54% 6.50% 4.85% 29,700 33,000
September-2010 (2) 6.80% - 6.50% - 43,000 -
January-2012 (2) 6.01% 6.01% 6.50% 4.85% 13,000 13,000
February-2012 (2) 6.00% 6.00% 6.50% 4.85% 9,000 10,000
December-2013 (2) 5.43% 5.43% 6.50% 4.85% 173,300 175,100
June-2014 (2) - 6.43% - 4.85% - 18,250
June-2018 (2) 6.88% 6.88% 6.50% 4.85% 5,000 5,000
September-2020 (2) 6.91% - 6.50% - 43,000 -
December-2026 (2) 5.58% 5.58% 6.50% 4.85% 48,185 48,185
September-2028 (2) 5.75% 5.75% 6.50% 4.85% 118,440 120,000
April-2029 (2) 5.95% 5.95% 6.50% 4.85% 66,000 66,000
September-2030 (2) 6.90% - 6.50% - 43,000 -
Total $4,817,060 $2,796,022
________________________________
(1) Under these agreements, CFC pays a variable rate of interest and
receives a variable rate of interest.
(2) Under these agreements, CFC pays a fixed rate of interest and
receives interest based on a variable rate.
(3) Under these agreements, CFC pays a variable rate of interest and
receives a fixed rate of interest.
69
CFC's objective in using interest rate exchange agreements in which it pays
and receives a variable rate of interest is to change the variable rate on a
notional amount of debt from a LIBOR rate index to a commercial paper rate
index. The variable rate collateral trust bonds and medium-term notes are
issued based on a LIBOR rate index, while CFC sets its variable rate loan
interest rates based on a commercial paper rate. The net difference between
the rate paid by CFC and the rate received is included in the cost of funds.
CFC's objective in using interest rate exchange agreements in which it pays
a fixed rate of interest and receives a variable rate of interest is to fix
the interest rate on a portion of its commercial paper. CFC then uses
commercial paper, in an amount equal to the notional principal value of the
interest rate exchange agreements, to fund a portion of its long-term fixed
rate loan portfolio. The net difference between the rate paid by CFC and
the rate received is included in the cost of funds.
CFC's objective in using interest rate exchange agreements in which it
pays a variable rate and receives a fixed rate is to change the rate on
a portion of its medium-term notes from fixed to variable. The rate on
the medium-term notes is exchanged to variable to allow the use of
medium-term notes in the funding of short-term variable rate loans. The
net difference between the rate paid by CFC and the rate received is
included in the cost of funds.
In all interest rate exchange agreements, CFC receives a rate that is equal
to the rate on the underlying debt and pays a rate that is tied to the rate
on the asset funded by the exchange agreement and underlying debt.
CFC is exposed to counterparty credit risk on these interest rate exchange
agreements if the counterparty to the interest rate swap agreement does not
perform pursuant to the agreement's terms. CFC only enters into interest
rate exchange agreements with financial institutions rated single A and
above.
During fiscal years 1999 and 2000, CFC issued medium-term notes denominated
in foreign currencies. The following chart provides details of the related
foreign currency exchange agreement that CFC had outstanding at May 31,
2000:
(Currency amounts in thousands)
Type of Debt (1) Issue Date Maturity Date U.S. Dollars Foreign Currency (2) Rate
MTN February 24, 1999 February 24, 2006 $390,250 350,000 EU 1.115
MTN July 14, 1999 July 14, 2000 23,363 15,000 GBP 1.558
MTN August 13, 1999 August 14, 2000 24,225 15,000 GBP 1.615
______________________________
(1) MTN - CFC medium-term notes
(2) EU - Euros, GBP - British Pound Sterling
CFC enters into an exchange agreement to sell the amount of foreign
currency received from the investor for U.S. dollars on the issuance date,
and to buy the amount of foreign currency required to repay the investor
principal and interest due through or on the maturity date. By locking in
the exchange rates at the time of issuance, CFC has eliminated the
possibility of any currency gain or loss which might otherwise have been
produced by the foreign currency borrowing.
Commercial paper principal and interest are paid at maturity, which will
range from 1 day to 270 days. Interest is paid annually on foreign
currency denominated medium-term notes with maturities longer than one
year. CFC considers the cost of all related foreign currency exchange
agreements as part of the total cost of debt issuance when deciding on
whether to issue debt in the U.S. or foreign capital markets and whether
to issue the debt denominated in U.S. or foreign currencies.
70
Quarterly Income Capital Securities
Quarterly income capital securities are long-term obligations that are
subordinated to CFC's other outstanding debt. Quarterly income capital
securities are issued for terms of up to 49 years, pay interest quarterly,
may be called at par after five years and allow CFC to defer the payment of
interest for up to 20 consecutive quarters. The following table is a
summary of quarterly income capital securities outstanding at May 31:
2000 1999
Weighted Weighted
(Dollar amounts in thousands) Amounts Average Amounts Average
Outstanding Interest Rate Outstanding Interest Rate
8.00% quarterly income capital
securities, due 2045 $125,000 $125,000
7.65% quarterly income
capital securities, due 2046 75,000 75,000
7.375% quarterly income
capital securities, due 2047 200,000 200,000
Total quarterly income
capital securities $400,000 7.62% $400,000 7.62%
(6) Employee Benefits
CFC is a participant in the National Rural Electric Cooperative Association
("NRECA") Retirement and Security Program. This program is available to all
qualified CFC employees. Under the program, participating employees are
entitled to receive annually, under a 50% joint and surviving spouse
annuity, 1.90% of the average of their five highest base salaries during
their last ten years of employment, multiplied by the number of years of
participation in the program. CFC contributed $1.1 million, $1.0 million
and $0.7 million to the Retirement and Security Program during fiscal years
2000, 1999 and 1998. Funding requirements are charged to general and
administrative expenses which are billed on a monthly basis. This is a
multi-employer plan, available to all member cooperatives of NRECA, and
therefore the projected benefit obligation and plan assets are not determined
or allocated separately by individual employer.
The Budget Reconciliation Act of 1993 has set a limit of $170,000 for
calendar year 2000 on the compensation to be used in the calculation of
pension benefits. In order to restore potential lost benefits, CFC has
established a Pension Restoration Plan. Under the plan, the amount that
NRECA invoices CFC will continue to be based on the full compensation paid
to each employee. Upon the retirement of a covered employee, NRECA will
calculate the retirement and security benefit to be paid with consideration
of the compensation limits and will pay the maximum benefit thereunder.
NRECA will also calculate the retirement and security benefit that would
have been available without consideration of the compensation limits and
CFC will pay the difference. NRECA will then give CFC a credit against
future retirement and security contribution liabilities in the amount paid
by CFC to the covered employee.
CFC will pay such additional benefits to the covered employee through a
Severance Pay Plan and a Deferred Pay Restoration Plan. Under the Severance
Pay Plan, the employee is paid an amount equal to the lost pension benefits
but not to exceed twice the employee's annual compensation for the prior
year. The benefit must be paid within 24 months of termination of
employment. To the extent that the Severance Pay Plan cannot pay all of
the lost pension benefits, the remainder will be paid under a Deferred
Compensation Plan, which will be paid out in a lump sum or in installments
of up to 60 months.
CFC recognizes in current year margin any expected payouts for
post-retirement benefits (other than pensions) as a result of current
service. Post-retirement benefits include, but are not limited to, health
and welfare benefits provided after retirement. While CFC allows retired
employees to participate in its medical and life insurance plans, the
retirees must do so at their own expense. Any liability which may be
incurred by allowing retired employees to remain on CFC's medical and
life insurance plans is not material to CFC's financial condition, results
of operations or cash flows.
CFC offers a 401(k) defined contribution savings program to all employees
that have completed a minimum of 1,000 hours of service in either the first
12 consecutive months or first full calendar year of employment. CFC
contributes an amount equal to 2% of an employee's salary each year for all
employees participating in the program. During the years ended May 31, 2000
and May 31, 1999, CFC contributed a total of $215,824 and $190,195,
respectively, under the program.
71
(7) Retirement of Patronage Capital
Patronage capital in the amount of $66 million was retired in August 1999,
representing 70% of the allocation for the fiscal year 1999 and one-sixth
of the total allocations for fiscal years 1989, 1990 and 1991. The $66
million includes $11 million retired to RTFC and $0.2 million retired to
GFC. RTFC retired $13 million to its members in January 2000 and GFC
retired $0.2 million to its members in September 1999.
It is anticipated that CFC will retire patronage capital totaling $77
million, representing 70% of the fiscal year 2000 allocation and one-ninth
of the fiscal years 1991, 1992 and 1993 allocations, on August 31, 2000.
Management anticipates that 70% of RTFC's margin for fiscal year 2000 will
be retired in January 2001, and that 100% of GFC's margin for fiscal year
2000 will be retired in the second quarter of fiscal year 2001. Future
retirements of patronage capital will be made as determined by the
respective Boards of Directors with due regard for their individual
financial conditions.
(8) Guarantees
As of May 31, 2000 and 1999, CFC had outstanding guarantees of the following
contractual obligations of its members:
(Dollar amounts in thousands) 2000 1999
Long-term tax exempt bonds (A) $1,024,340 $1,062,185
Debt portions of leveraged lease transactions (B) 111,319 174,961
Indemnifications of tax benefit transfers (C) 259,223 285,169
Letters of credit (D) 328,995 208,732
Other guarantees (E) 274,325 162,150
Total $1,998,202 $1,893,197
_________________________
(A) CFC has unconditionally guaranteed to the holders or to trustees for
the benefit of holders of these bonds the full principal, premium, if any,
and interest on each bond when due. In addition, CFC has agreed to make up,
at certain times, deficiencies in the debt service reserve funds for certain
of these issues of bonds. In the event of a default by a system for
nonpayment of debt service, CFC is obligated to pay any required amounts
under its guarantee, which will prevent the acceleration of the bond issue.
The system is required to repay, on demand, any amount advanced by CFC and
interest thereon pursuant to its guarantee. This repayment obligation is
secured by a common mortgage with RUS on all of the system's assets, but CFC
may not exercise remedies thereunder for up to two years. However, if the
debt is accelerated because of a determination that the interest thereon is
not tax-exempt, the system's obligation to reimburse CFC for any guarantee
payments will be treated as a long-term loan.
Of the amounts shown above, $920 million and $947 million as of May 31, 2000
and 1999, respectively, are adjustable or floating/fixed rate bonds. The
floating interest rate on such bonds may be converted to a fixed rate as
specified in the indenture for each bond offering. During the variable rate
period (including at the time of conversion to a fixed rate), CFC has
unconditionally agreed to purchase bonds tendered or called for redemption if
such bonds have not previously been sold to other purchasers by the
remarketing agents.
(B) CFC has guaranteed debt issued by NCSC in connection with leveraged
lease transactions. The amounts shown represent loans from NCSC to a trust
for the benefit of an industrial or financial company for the purchase of a
power plant or utility equipment that was subsequently leased to a CFC
member. The loans are secured by the property leased and the owner's rights
as lessor. NCSC borrowed the funds for these loans either under a CFC
guarantee or directly from CFC.
(C) CFC has unconditionally guaranteed to lessors certain indemnity payments
which may be required to be made by the lessees in connection with tax
benefit transfers. The amounts shown represent CFC's maximum potential
liability at May 31, 2000 and 1999. However, the amounts of such guarantees
vary over the lives of the leases. A member's obligation to reimburse CFC
for any guarantee payments would be treated as a long-term loan, secured
pari passu with RUS by a first lien on substantially all of the member's
property to the extent of any cash received by the member at the outset of
the transaction. The remainder would be treated as an intermediate-term
loan secured by a subordinated mortgage on substantially all of the
member's property. Due to changes in Federal tax law, no further
guarantees of this nature are anticipated.
(D) CFC issues irrevocable letters of credit to support members' obligations
to energy marketers, other third parties and to the Rural Business and
Cooperative Development Service. Letters of credit are generally issued on
an unsecured basis and with such issuance fees as may be determined from
time to time. Each letter of credit issued by CFC is supported by a
reimbursement agreement with the member on whose behalf the letter of credit
was issued. In the event a beneficiary draws on a letter of credit, the
agreement generally requires the member to reimburse the issuer of the
letter of credit within one year from the date of the draw, with interest
accruing from such date at the issuer's variable rate of interest in effect
on the date of the draw. The agreement also requires the member to pay, as
applicable, a late payment charge and all costs of collection, including
reasonable attorneys' fees.
72
(E) At May 31, 2000 and 1999, CFC had unconditionally guaranteed commercial
paper issued by NCSC in the amount of $171 million and $64 million,
respectively.
Guarantees outstanding by state and territory are summarized as follows:
(Dollar amounts in thousands)
May 31, May 31,
2000 1999 2000 1999
Alabama $ 62,200 $ 65,575 Mississippi $ 58,740 $ 60,665
Alaska 4,840 1,600 Missouri 161,974 173,048
Arizona 52,462 55,012 Montana 100 100
Arkansas 106,639 113,901 New Hampshire 6,000 -
Colorado 59,547 60,209 North Carolina 108,150 111,600
District of Columbia 314,494 175,120 Ohio 5,000 -
Florida 238,032 293,735 Oklahoma 38,432 45,144
Hawaii 13,500 - Oregon 15,075 19,650
Illinois 13,935 2,171 Pennsylvania 12,651 11,995
Indiana 117,824 120,866 South Carolina 3,495 3,750
Idaho 850 850 Texas 146,090 138,881
Iowa 10,432 11,417 Utah 89,740 54,794
Kansas 38,091 39,214 Virginia 4,050 4,150
Kentucky 175,610 181,030 Wisconsin 2,050 2,050
Michigan 700 1,050 Wyoming 10,550 10,715
Minnesota 126,948 134,905 Total $1,998,202 $1,893,197
CFC uses the same credit policies and monitoring procedures in providing
guarantees as it does for loans and commitments.
The following table details the scheduled reductions in each of the fiscal
years following May 31, 2000 to the amount of obligations guaranteed by CFC:
(Dollar amounts in thousands) Amount
2001 $ 232,764
2002 202,528
2003 93,282
2004 207,848
2005 204,194
Thereafter 1,057,586
(9) Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with SFAS No. 107, "Disclosure about
Fair Value of Financial Instruments." Whenever possible, the estimated
fair value amounts have been determined using quoted market information as
of May 31, 2000 and 1999, along with other valuation methodologies which
are summarized below. The estimated fair value information presented is
not necessarily indicative of amounts CFC could realize currently in a
market sale since CFC may be unable to sell such instruments due to
contractual restrictions or to the lack of an established market. The
estimated market values have not been updated since May 31, 2000, therefore
current estimates of fair value may differ significantly from the amounts
presented. With the exception of redeeming collateral trust bonds under
early redemption provisions and allowing borrowers to prepay their loans,
CFC has held and intends to hold all financial instruments to maturity.
Below is a summary of significant methodologies used in estimating fair
value amounts and a schedule of fair values at May 31, 2000 and 1999.
Cash and Cash Equivalents
Includes cash and certificates of deposit with remaining maturities of
less than 90 days, which are valued at the carrying value.
73
Debt Service Investments
The fair value of debt service investments is estimated based on published
bid prices or dealer quotes or is estimated using quoted market prices for
similar securities when no market quote is available. Debt service
investments purchased with original maturities of less than or equal to
90 days are valued at the carrying value which is a reasonable estimate of
fair value.
Loans to Members
Fair values are estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Loans with
different risk characteristics, specifically nonperforming and restructured
loans, are valued using a discount rate commensurate with the risk
involved. Loans with interest rate repricing maturities of less than or
equal to 90 days are valued at cost which approximates fair value.
Notes Payable
Notes payable consist of commercial paper and bank bid notes. The fair
value of commercial paper and bank bid notes with maturities greater than
90 days is estimated based on quoted market rates with similar maturities
for commercial paper and on bid prices from the various banking institutions
for bid notes. The fair value of commercial paper and bank bid notes with
maturities less than or equal to 90 days are valued at carrying value which
is a reasonable estimate of fair value.
Long-Term Debt
Long-term debt consists of collateral trust bonds and medium-term notes.
The fair value of long-term debt is estimated based on published bid prices
or dealer quotes or is estimated using quoted market prices for similar
securities when no market quote is available.
Quarterly Income Capital Securities
The fair value of quarterly income capital securities is estimated based on
published market prices.
Members' Subordinated Certificates
As it is impracticable to develop a discount rate that measures fair value,
subordinated certificates have not been valued. Members' subordinated
certificates are extended long-term obligations to CFC; many have maturities
of 70 to 100 years. These certificates are issued to CFC's members as a
condition of membership or as a condition of obtaining loan funds or
guarantees and are non-transferable. As these certificates were not issued
primarily for their future payment stream but mainly as a condition of
membership and to receiving future loan funds, there is no ready market from
which to obtain fair value quotes.
Interest Rate and Currency Exchange Agreements
The fair value of the interest rate exchange agreements is estimated as the
amount CFC would receive or pay to terminate the agreement, taking into
account the current market rate of interest and the current creditworthiness
of the exchange counterparties. The fair value of the currency exchange
agreements is estimated as the amount CFC would receive or pay to terminate
the agreement, taking into account the currency exchange rate and the
current creditworthiness of the exchange counterparties.
Commitments
The fair value is estimated as the carrying value, or zero. Extensions of
credit under these commitments, if exercised, would result in loans priced
at market rates.
74
Guarantees
CFC charges guarantee fees based on the specifics of each individual
transaction. The demand for CFC guarantees has been insignificant in the
last few years. In addition, there is no other company that provides
guarantees to rural electric utility companies from which to obtain market
rate information. As a result, it is impracticable to supply fair value
information related to guarantees.
Carrying and fair values as of May 31, 2000 and 1999 are presented as follows:
(Dollar amounts in thousands) 2000 1999
Carrying Value Fair Value Carrying Value Fair Value
Assets:
Cash and cash equivalents $ 246,028 $ 246,028 $ 74,403 $ 74,403
Debt service investments 22,968 22,968 22,969 22,969
Loans to members, net 16,449,753 15,030,991 13,491,199 12,648,316
Liabilities:
Notes payable (1) $9,744,666 $9,744,679 $7,379,206 $ 7,379,203
Long-term debt (1) 5,103,096 4,465,947 4,488,622 4,334,428
QUICS 400,000 344,680 400,000 400,586
Off-Balance Sheet Instruments:
Interest rate exchange agreements $ - $ 83,664 $ - $ 44,539
Currency exchange agreements - 65,486 - (20,436)
Commitments - - -
-
_________________________
(1) Prior to reclassification of notes payable supported by the revolving
credit agreements.
(10) Contingencies
(a) At May 31, 2000 and 1999, CFC had nonperforming loans in the amount of
$0 and $2 million, respectively. During the fourth quarter of fiscal year
2000, CFC received the payment required to bring $28 million of
nonperforming loans current. In addition, CFC wrote off the remaining $2
million of nonperforming loans in April 2000. At May 31, 1999, all loans
classified as nonperforming were on a nonaccrual status with respect to the
recognition of interest income. At May 31, 2000 and 1999, CFC had
restructured loans in the amount of $572 million and $577 million,
respectively. All restructured loans were on accrual status with respect
to the recognition of interest income. A total of $23 million of interest
was accrued on restructured loans for the year ended May 31, 2000.
(b) CFC classified $572 million and $577 million of the amount described in
Note 10(a) as impaired pursuant to the provisions of FASB Statements No. 114
and 118 at May 31, 2000 and 1999, respectively. CFC had established $85
million and $101 million of the loan loss allowance for such impaired loans
at May 31, 2000 and May 31, 1999, respectively. The amount of loan loss
allowance allocated for such loans was based on a comparison of the present
value of the expected future cashflow associated with the loan and/or the
estimated fair value of the collateral securing the loan to the recorded
investment in the loan. CFC accrued interest income totaling $22 million on
loans classified as impaired during the year ended May 31, 2000. The
average recorded investment in impaired loans for the year ended May 31,
2000 was $578 million compared to $460 million for the year ended May 31,
1999.
(c) Deseret Generation & Transmission Co-operative ("Deseret") is a power
supply member of CFC located in Utah. Deseret owns and operates the Bonanza
generating plant ("Bonanza") and owns a 25% interest in the Hunter
generating plant along with a system of transmission lines. Deseret also
owns and operates a coal mine through its Blue Mountain Energy subsidiary.
Due to large anticipated increases in demands for electricity, the Bonanza
site was designed for two plants and Deseret built the infrastructure to
support two plants, although only one plant has been built to date. When
the large increases in demand never materialized, Deseret was unable to
make the debt payment obligations on the Bonanza plant and debt service
payments to RUS. As a consequence, Deseret and its creditors entered into
several restructuring agreements.
75
In 1991, Deseret and its creditors signed the Agreement Restructuring
Obligations ("ARO") which restructured Deseret's obligations to CFC, RUS
and certain other creditors. Deseret was unable to meet the payment
schedule established by the ARO which resulted in the agreement being
amended by a second agreement. In 1996 Deseret and CFC entered into an
Obligations Restructuring Agreement ("ORA"). Under the ORA, Deseret agreed
to make quarterly minimum payments and to share excess cashflow with CFC
through December 31, 2025, while CFC agreed to forebear from exercising any
remedies. CFC continued to pay and perform on all of the obligations it
had guaranteed for Deseret. In connection with the ORA, on October 16,
1996, CFC acquired all of Deseret's indebtedness in the outstanding
principal amount of $740 million from RUS for the sum of $239 million.
The member systems of Deseret purchased from CFC, for $55 million, a
participation interest in the RUS debt. The participation agreement allows
the Deseret member distribution systems to put the participations back to
CFC unconditionally on December 31, 2019.
Certain other creditors brought litigation regarding the CFC Deseret
agreement. In December 1998, all parties to the litigation entered into
a settlement arrangement. The settlement arrangement allowed CFC to effect
the early redemption of the Bonanza Secured Lease Obligation Bonds, which
were outstanding at an interest rate in excess of 9%. The settlement
arrangement also resulted in an amendment of the Deseret cashflow payments
in the final years of the agreement.
In March 1998, the cities of Riverside, CA and Anaheim, CA brought FERC and
civil actions against Deseret. All of these actions were dismissed in April
2000, with no material impact on Deseret's ability to meet its annual
payment requirements under the ORA.
At May 31, 2000 and 1999, CFC had the following exposure to Deseret:
(Dollar amounts in millions) 2000 1999
Loans outstanding (1) $572 $577
Guarantees outstanding:
Tax-exempt bonds 2 3
Mine equipment leases 47 52
Letters of credit 28 -
Other (2) 12 12
Total guarantees 89 67
Total exposure $661 $644
_____________________________
(1) As of May 31, 2000, the loan balance of $572 million to Deseret is
comprised of $179 million of cash flow shortfalls related to Deseret's
debt service and rental obligations guaranteed by CFC, $266 million
related to the redemption of the Bonanza secured lease obligation bonds,
$99 million related to the purchase of RUS loans, $18 million related to
the original CFC loan to Deseret and $10 million related to the
settlement of the foreclosure litigation.
(2) Other guarantees includes a guarantee of certain operational and
maintenance expenses.
Deseret has made all payments required by the ORA. CFC received minimum
cashflow payments totaling $31 million and excess cash payments totaling
$10 million during the year ended May 31, 2000. For calendar year 1999,
the total payments collected, $41 million, were split $35 million to CFC
and $6 million to the member participations based on the ORA. Through June
30, 2000, Deseret had made quarterly payments totaling $17 million. A total
of $34 million is due from Deseret during calendar year 2000.
Based on its analysis, CFC believes that it has adequately reserved for
any potential loss on its loans and guarantees to Deseret.
(d) At May 31, 2000, no other borrowers were in payment default. At
May 31, 1999, one borrower was in payment default to CFC on an unsecured
loan totaling $2 million.
(11) Segment Information
CFC operates in two business segments - rural electric lending and rural
telecommunications lending. Summary financial
76
information relating to each segment is presented below.
The information reviewed by management on a regular basis are the combined
financial statements and the stand-alone RTFC financial statements. The
information presented below includes the stand-alone RTFC financial
statements for the telecommunications systems, the combined financial
statements as the total and the difference between the RTFC and the combined
is presented for the electric systems. All activity is with electric or
telecommunications systems.
As stated previously in the business section, RTFC is an associate member
of CFC and CFC is the sole funding source for RTFC. RTFC borrows from CFC
and then relends to the telecommunications systems. RTFC pays an
administrative fee to CFC for work performed by CFC staff as part of the
interest rate on the loans from CFC. RTFC does not maintain a loan loss
allowance, but CFC maintains a loss allowance on its loans to RTFC.
(Dollar amounts in thousands)
For the year ended May 31, 2000
Electric Systems Telecommunications Systems Total Combined
Income statement:
Operating income $ 780,809 $ 240,189 $ 1,020,998
Cost of funds 624,033 236,127 860,160
Gross margin 156,776 4,062 160,838
Operating expenses 26,421 565 26,986
Loan loss provision 17,355 - 17,355
Net margin before
extraordinary item 113,000 3,497 116,497
Extraordinary loss (1,164) - (1,164)
Net margin $ 111,836 $ 3,497 $ 115,333
Assets:
Loans outstanding $12,750,025 $3,699,728 $16,449,753
Other assets 357,425 276,262 633,687
Total assets $13,107,450 $3,975,990 $17,083,440
(Dollar amounts in thousands)
For the year ended May 31, 1999
Electric Systems Telecommunications Systems Total Combined
Income statement:
Operating income $ 643,014 $ 149,038 $ 792,052
Cost of funds 519,289 144,820 664,109
Gross margin 123,725 4,218 127,943
Operating expenses 27,255 383 27,638
Loan loss provision 23,866 - 23,866
Net margin $ 72,604 $ 3,835 $ 76,439
Assets:
Loans outstanding $10,780,860 $2,710,339 $13,491,199
Other assets 250,582 183,471 434,053
Total assets $11,031,442 $2,893,810 $13,925,252
(Dollar amounts in thousands)
For the year ended May 31, 1998
Electric Systems Telecommunications Systems Total Combined
Income statement:
Operating income $ 549,285 $ 90,663 $ 639,948
Cost of funds 453,312 87,223 540,535
Gross margin 95,973 3,440 99,413
Operating expenses 23,059 305 23,364
Loan loss provision 19,027 - 19,027
Net margin before
extraordinary item 53,887 3,135 57,022
Gain on sale of land 5,194 - 5,194
Net margin $ 59,081 $ 3,135 $ 62,216
(12) Gain on Sale of Land
During the year ended May 31, 1999, CFC sold land with a cost basis of $8
million for $13 million, resulting in a gain of $5 million.
(13) Extraordinary Loss
During the year ended May 31, 2000, CFC incurred a $1 million loss related
to the early redemption of collateral trust bonds.
(14) Combined Quarterly Financial Results (Unaudited)
Summarized results of operations for the four quarters of fiscal years 2000
and 1999 are as follows:
(Dollar amounts in thousands) Fiscal Year 2000
Quarters Ended
August 31 November 30 February 29 May 31 Total Year
Operating income $226,680 $243,140 $265,842 $285,336 $1,020,998
Gross margin 35,839 37,979 41,697 45,323 160,838
Total expenses 13,872 14,368 6,069 10,032 44,341
Net margin 21,967 23,612 35,628 34,126 115,333
(Dollar amounts in thousands) Fiscal Year 1999
Quarters Ended
August 31 November 30 February 29 May 31 Total Year
Operating income $180,448 $192,547 $200,344 $218,713 $792,052
Gross margin 28,479 34,149 27,511 37,804 127,943
Total expenses 10,986 15,918 6,520 18,080 51,504
Net margin 17,493 18,230 20,991 19,725 76,439