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1
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 Fee Required $250.00
For the fiscal year ended May 31, 1996
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)
WOODLAND PARK
2201 COOPERATIVE WAY, HERNDON, VA 20171
(Address of principal executive offices)
(Registrant's telephone number, including area code, is 703-709-6700)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
9.50% Collateral Trust Bonds, Series T, Due 1997 New York Stock Exchange
8.50% Collateral Trust Bonds, Series U, Due 1998 New York Stock Exchange
9.00% Collateral Trust Bonds, Series V, Due 2021 New York Stock Exchange
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 state-
ments 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 common or voting stock.
DOCUMENTS INCORPORATED BY REFERENCE:
None
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TABLE OF CONTENTS
Part No. Item No. Page
I. 1. Business 1
Members 1
Loans and Guarantees 2
General 2
Loan and Guarantee Policies 6
Long-Term Loans to Utility Members 6
Intermediate-Term Loans to Utility Members 8
Short-Term Loans to Utility Members 8
Loans to Telecommunication Borrowers 8
Loans to Associate Members 9
RUS Guaranteed Loans 9
Guarantees of Pollution Control Facility and
Utility Property Financings 10
Guarantees of Lease Transactions 10
Guarantees of Tax Benefit Transfers 10
Other 11
CFC Financing Factors 11
Tax Status 14
Investment Policy 14
Other Sources of Loans to CFC Members 14
Employees 14
The Rural Electric and Telephone Systems 15
General 15
The RUS Program 15
Distribution Systems 16
Power Supply Systems 16
Telephone Systems 17
Regulation and Competition 17
Financial Information 18
Composite Financial Statements 20
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
8. Financial Statements and Supplementary Data 37
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 37
III. 10. Directors and Executive Officers of the Registrant 38
Compliance with Section 16(a) of the Exchange Act 41
11. Executive Compensation 42
12. Security Ownership of Certain Beneficial Owners and
Management 44
13. Certain Relationships and Related Transactions 44
IV. 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 45
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PART I
Item 1. Business.
National Rural Utilities Cooperative Finance Corporation (the "Company" or
"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. Most CFC long-term loans to Utility Members have been
made in conjunction with concurrent loans from RUS and are secured equally
and ratably with RUS's loans by a single mortgage. CFC also has provided
guarantees for tax-exempt financings of pollution control facilities and
other properties constructed or acquired by its members, and in addition, has
provided guarantees of taxable debt in connection with certain lease and other
transactions of its members.
CFC's 1,051 members as of May 31, 1996, included 903 Utility Members,
virtually all of which are consumer-owned cooperatives, 74 service members
and 74 associate members. The Utility Members included 838 distribution
systems and 65 generation and transmission ("power supply") systems operating
in 46 states and U.S. territories. At December 31, 1994, CFC's member rural
electric systems provided service to about 70% of the contiguous continental
land territory of the United States, serving approximately 12.2 million
consumers, representing an estimated 32.0 million ultimate users of
electricity, and owned approximately $66.5 billion (before depreciation of
$19.4 billion) in total utility plant.
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 funding for RTFC. See Note 1 to Combined Financial Statements
for summary financial information relating to RTFC at May 31, 1996. As of
that date, RTFC had 425 members.
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 their 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 funding for GFC. See Note 1 to Combined
Financial Statements for summary financial information relating to GFC at
May 31, 1996. As of May 31, 1996, GFC had four members.
Except as indicated, financial information presented herein includes CFC,
RTFC and GFC on a combined basis.
National Cooperative Services Corporation ("NCSC") was organized in 1981 as
a taxable cooperative, owned and operated by its member rural electric
distribution systems, to provide specialized financing and services to the
cooperative rural electric industry that CFC could not otherwise provide due
to competitive, regulatory or other reasons. NCSC has an independent Board
of Directors, with CFC providing all management services through a contractual
arrangement. CFC is the source for essentially all of NCSC's financing
capabilities through direct loans or, predominantly, providing credit
enhancements (guarantees) of debt issued by NCSC in the public and private
credit markets. NCSC's financial statements are not combined or consolidated
with CFC's.
Members
CFC currently has five classes of members: Class A-cooperative or nonprofit
distribution systems; Class B-cooperative or nonprofit power supply systems
which are federations of Class A or other Class B members; 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 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.
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Membership in RTFC is limited to CFC and commercial or cooperative
corporations eligible to receive loans or other assistance from RUS and
which are engaged (or plan to be engaged) in providing telephone or tele-
communication services to ultimate users and affiliates of such corporations.
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, at May 31,
1996, 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 loans
and the percentage of loans and guarantees outstanding.
Number Loan and Number Loan and
of Loan Guarantee of Loan Guarantee
members % % members % %
Alabama 32 1.7% 2.1% Nevada 5 0.1% 0.1%
Alaska 28 1.4% 1.1% New Hampshire 6 3.1% 2.4%
American Samoa 1 0.0% 0.0% New Jersey 1 0.1% 0.1%
Arizona 20 1.1% 1.4% New Mexico 18 1.2% 0.9%
Arkansas 29 2.9% 3.6% New York 14 0.1% 0.1%
California 10 0.3% 0.2% North Carolina 47 3.4% 3.8%
Colorado 34 3.7% 4.0% North Dakota 31 0.6% 0.4%
Delaware 1 0.2% 0.2% Ohio 35 1.2% 1.0%
District of Columbia 5 1.2% 0.9% Oklahoma 53 3.4% 3.3%
Florida 20 4.4% 6.6% Oregon 37 1.9% 1.5%
Georgia 69 8.0% 6.2% Pennsylvania 21 1.1% 1.0%
Guam 1 0.0% 0.0% South Carolina 36 3.8% 3.4%
Idaho 15 0.7% 0.6% South Dakota 52 0.6% 0.5%
Illinois 51 6.1% 4.7% Tennessee 24 1.0% 0.8%
Indiana 55 1.4% 2.4% Texas 117 11.0% 9.8%
Iowa 100 2.1% 1.7% Utah 6 2.2% 4.7%
Kansas 52 3.0% 2.7% Vermont 9 0.8% 0.6%
Kentucky 36 2.1% 3.6% Virgin Islands 1 0.7% 0.6%
Louisiana 16 1.8% 1.4% Virginia 20 2.1% 2.0%
Maine 9 0.6% 0.5% Washington 21 1.0% 0.8%
Maryland 2 1.1% 0.9% West Virginia 3 0.0% 0.0%
Massachusetts 1 0.0% 0.0% Wisconsin 59 1.7% 1.4%
Michigan 23 1.1% 0.8% Wyoming 18 1.3% 1.0%
Minnesota 71 4.2% 4.8% Sub-Total 1,476 100.0% 100.0%
Mississippi 24 2.6% 2.7% Add Duplicates 4
Missouri 66 3.5% 4.7% Total Members 1,480
Montana 38 2.1% 1.7%
Nebraska 33 0.3% 0.3%
Loans and Guarantees
General
CFC provides its Utility Members with a source of financing to supplement the
loan programs of RUS. CFC provides the majority of total non-RUS direct
funding and guarantees obtained by members. CFC's interest rates on loans
to its members are set to reflect the cost of its funds allocated to such
loans, operating and other expenses and a reasonable margin (see "Loan and
Guarantee Policies").
Substantially all long-term and some intermediate-term loans are secured,
while substantially all short-term loans are unsecured. Long-term loans
generally have maturities of up to 35 years. Fixed rate long-term loans
generally provide for a fixed interest rate for terms of one to 30 years (but
not beyond the maturity of the loan). Upon expiration of the term, the
borrower may select another fixed rate term or a variable rate. Variable
rate long-term loans have an interest rate which
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varies monthly as determined by CFC. Intermediate- and short-term loans are
made for terms not exceeding 60 months. CFC adjusts the rate monthly on out-
standing short- and intermediate-term loans. On notification to borrowers,
CFC may adjust the rate semimonthly. Interest rates are established by CFC
and are not tied to any external index, however some rates may be capped at
a percentage over prime. Telecommunication loans are secured long-term fixed
or variable rate loans with maturities generally not exceeding 15 years and
short-term unsecured loans. CFC has also provided guarantees for tax-exempt
financings of pollution control facilities and utility properties constructed
or acquired by its members and for members' obligations under certain lease
transactions (see "Loan and Guarantee Policies").
Set forth below is a table showing loans outstanding to borrowers as of
May 31, 1996, 1995 and 1994 and the weighted average interest rates thereon
and loans committed but unadvanced to borrowers at May 31, 1996.
Loans committed
Loans outstanding and weighted average interest but unadvanced
rates thereon at May 31, at May 31,1996(A)(B)
(Dollar Amounts In Thousands) 1996 1995 1994
Long-term fixed rate secured loans(C):
Distribution Systems (D) $2,380,587 7.29% $1,645,551 7.68% $1,502,454 7.69% $ 36,117
Power Supply Systems (D) 247,556 7.71% 253,208 7.68% 273,186 7.56% 1,214
Telecommunication Organizations 134,497 8.66% 141,144 8.98% 119,600 9.16% _
Service Organizations (D)(E) 77,205 8.03% 81,521 9.27% 94,104 9.53% 3,140
Associate Members 1,542 10.25% 1,569 10.25% 1,606 10.25% -
Total long-term fixed rate
secured loans 2,841,387 7.41% 2,122,993 7.83% 1,990,950 7.85% 40,471
Long-term variable rate secured loans (F):
Distribution Systems 2,717,494 6.45% 2,553,590 6.50% 2,172,799 4.65% 839,861
Power Supply Systems 202,249 6.45% 191,967 6.50% 170,683 4.65% 626,926
Telecommunication Organizations 764,911 6.55% 704,427 6.64% 499,506 4.92% 202,971
Service Organizations (E) 46,376 6.45% 53,332 6.50% 39,487 4.65% 71,400
Associate Members 47,541 6.19% 42,561 6.20% 29,089 4.45% 38,979
Total long-term variable rate
secured loans 3,778,571 6.47% 3,545,877 6.52% 2,911,564 4.69% 1,780,137
Refinancing variable rate loans guaranteed by
RUS:
Power Supply Systems 416,637 6.47% 429,129 7.27% 533,545 4.87% -
Intermediate-term secured loans:
Distribution Systems 4,831 6.60% 4,176 6.85% 4,112 4.90% 2,300
Power Supply Systems 53,614 6.60% 40,237 6.85% 21,316 4.90% 168,123
Service Organizations 27,652 6.60% 11,429 6.85% 2,099 4.90% 9,384
Total intermediate-term secured
loans 86,097 6.60% 55,842 6.85% 27,527 4.90% 179,807
Intermediate-term unsecured loans:
Distribution Systems 16,019 6.45% 11,392 6.50% 13,046 4.90% 41,572
Power Supply Systems 28,957 6.45% 47,443 6.50% 84,515 4.90% 67,190
Telecommunication Organizations 12,048 6.80% 3,255 7.54% 1,265 5.05% 8,501
Total intermediate-term unsecured
loans 57,024 6.52% 62,090 6.56% 98,826 4.90% 117,263
Short-term unsecured loans (G):
Distribution Systems 409,664 6.60% 445,962 6.85% 276,373 4.90% 2,191,156
Power Supply Systems 25,763 6.60% 10,267 6.85% 14,048 4.90% 930,710
Telecommunication Organizations 63,813 7.15% 34,637 7.60% 31,176 5.65% 278,811
Service Organizations 23,467 6.60% 25,653 6.85% 11,812 4.90% 77,499
Associate Members 9,240 6.60% 7,651 6.85% 3,084 4.90% 15,685
Total short-term loans 531,947 6.67% 524,170 6.90% 336,493 4.97% 3,493,861
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Loans committed
Loans outstanding and weighted average interest but unadvanced
rates thereon at May 31, at May 31, 1996(A) (B)
(Dollar Amounts In Thousands) 1996 1995 1994
Nonperforming loans(H):
Distribution Systems $ 1,739 7.20% $ 1,830 7.21% $ 1,933 8.27% $ -
Power Supply Systems 23,555 6.48% 25,811 6.57% 27,948 4.75% -
Telecommunication Organizations - - - - 2,098 6.13% -
Associate Members - - - - 12,961 9.00% -
Total nonperforming loans 25,294 6.53% 27,641 6.61% 44,940 6.19% -
Restructured loans(I):
Distribution Systems 2,576 18.37% 2,654 18.37% 2,667 18.37% -
Power Supply Systems 205,074 9.13% 180,521 9.01% 160,873 8.32% -
Service Organizations 1,711 6.45% 1,803 6.50% 1,833 4.62% -
Total restructured loans 209,361 9.22% 184,978 9.12% 165,373 8.44% -
Total loans 7,946,318 6.85% 6,952,720 7.01% 6,109,218 5.87% 5,611,539
Less: Allowance for loan and guarantee
losses 218,047 205,596 188,196 -
Net loans $7,728,271 $6,747,124 $5,921,022 $5,611,539
(A) The interest rates in effect at August 1, 1996, for loans to electric
members were 7.60% for long-term loans with a seven-year fixed rate
term, 6.20% on variable rate long-term loans and 6.35% on intermediate-
and short-term loans. The rates in effect at August 1, 1996, on loans to
telecommunication organizations were 8.25% for long-term loans with a
seven-year fixed rate term, 6.30% on long-term variable rate loans, 6.55%
on intermediate-term loans and 6.90% on short-term loans.The rates in
effect at August 1, 1996, on loans to associate members were 8.15% for
long-term loans with a seven-year fixed rate term loans, 6.20% on long-
term variable rate loans and 6.35% on short-term loans.
(B) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed or for which loan contracts have
been executed, but funds have not been advanced. Long-term unadvanced
loan commitments that do not have an interest rate associated with the
commitment have been listed as variable rate commitments. Rates, fixed
or variable, will be set at the time of advance, on the amount of the
advance.
(C) Includes $198.3 million and $30.4 million of unsecured loans at
May 31, 1996 and 1995.
(D) During calendar year 1997, $131.5 million of such outstanding fixed rate
loans, which currently have a weighted average interest rate of 9.07% per
annum, will become subject to rate adjustment. During the first quarter
of calendar year 1996, long-term fixed rate loans totaling $46.6 million
had their interest rates adjusted. These loans will be eligible to read
just their interest rate again during the first quarter of calendar year
1997 to the lowest long-term fixed rate offered during 1996 for the term
selected. At January 1 and May 31, 1996, the seven-year long-term fixed
rate was 6.65% and 7.65%, respectively.
(E) CFC had loans outstanding to NCSC in each of the periods shown. Long-
term fixed rate loans outstanding to NCSC as of May 31, 1996, 1995 and
1994, were $31.8 million, $48.5 million and $47.8 million, respectively.
In addition, as of May 31, 1996, 1995 and 1994, CFC had unadvanced long-
term loan commitments to NCSC in the amounts of $15.4 million, $12.3
million and $14.7 million, respectively.
(F) Includes $84.6 million, $41.4 million and $3.5 million of unsecured
loans at May 31, 1996, 1995 and 1994.
(G) Includes $92.7 million, $30.9 million and $18.2 million of secured
loans at May 31, 1996, 1995 and 1994.
(H) 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 relate
to the interest recognized by CFC from such loans.
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(I) The rates on restructured loans are the weighted average of the effective
rates (based on the present value of scheduled future cashflows) as of
the dates shown and do not necessarily relate to the interest recognized
by CFC on such loans.
Set forth below are the weighted average interest rates earned by CFC
(recognized in the case of nonperforming and restructured loans) on all
loans outstanding during the fiscal years ended May 31.
INTEREST RATES EARNED ON LOANS
1996 1995 1994
Long-term fixed rate 7.92% 8.63% 8.63%
Long-term variable rate 6.30% 5.90% 4.08%
Telecommunication organizations 6.86% 6.70% 5.58%
Refinancing loans guaranteed by RUS 6.75% 6.07% 4.01%
Intermediate-term 6.57% 6.19% 4.41%
Short-term 6.49% 6.29% 4.38%
Associate members 6.46% 5.40% 4.21%
Nonperforming 0.25% 1.56% 1.19%
Restructured 1.49% 1.92% 2.33%
All loans 6.77% 6.72% 5.66%
At May 31, 1996, CFC's ten largest exposures, which were all power supply
members, had outstanding loans from CFC totaling $763.1 million (excluding
$368.0 million of loans guaranteed by RUS), which represented approximately
9.6% of CFC's total loans outstanding. As of May 31, 1996, outstanding CFC
guarantees for these same ten borrowers totaled $1,528.3 million which
represented 67.5% of CFC's total guarantees outstanding, including guarantees
of the maximum amounts of lease obligations at such date. On that date, no
member had outstanding loans and guarantees in excess of 10% 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 in financial difficulty (see Note 10 to Combined Financial Statements).
At May 31, 1996, loans outstanding to Deseret (excluding loans guaranteed by
RUS) accounted for 2.0% of total loans outstanding and guarantees outstanding
to Deseret accounted for 13.4% of total guarantees outstanding. Total loans
and guarantees outstanding to Deseret equaled 27.2% of total Members' Equity,
Members' Subordinated Certificates and the allowance for loan and guarantee
losses.
Set forth below is a table showing CFC's guarantees as of the dates indicated.
Substantially all guarantees have been provided on behalf of power supply
members.
May 31,
1996 1995 1994
(Dollar Amounts In Thousands)
Long-term tax-exempt bonds $1,317,655* $1,496,930* $1,494,200*
Debt portions of leveraged
lease transactions 432,516 568,662 646,472
Indemnifications of tax benefit
transfers 363,702 389,755 414,512
Other guarantees 135,567 119,575 100,643
Total $2,249,440 $2,574,922 $2,655,827
* Includes $1,168.9 million, $1,200.1 million and $1,214.6 million at
May 31, 1996, 1995 and 1994, 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 $370.1 million, $376.7 million,
and $382.9 million of such bonds outstanding at May 31, 1996, 1995 and
1994, respectively, at any time on seven days' notice, in the case of
$248.8 million, $254.5 million and $289.5 million outstanding at
May 31, 1996, 1995 and 1994, 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 such bonds that cannot be
remarketed. Since the inception of the program CFC has not been required
to purchase any such bonds.
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Loan Contingencies
CFC maintains a loan and guarantee loss allowance to cover losses that may be
incurred in the course of lending or extending credit enhancements. The
allowance is periodically evaluated by management with the Board of Directors.
CFC classifies a loan as nonperforming if interest or principal payments are
contractually past due 90 days or more, repayment in accordance with the
original terms is not expected due to court order or ultimate repayment is
otherwise not expected. Loans in which the original terms have been modified
as a result of a borrower's financial difficulties are classified as
restructured. Interest income on nonperforming loans is recognized on a
cash basis as long as CFC believes the collateral value supports the out-
standing principal balance.
Loan and Guarantee Policies
Long-Term Loans to Utility Members
Under new lending criteria, established in early 1994, distribution systems
must generally achieve an Average Modified DSC (as described herein) of 1.35.
The new DSC (also called the "Modified DSC" or "MDSC") calculation is the
ratio of (x) operating margins and patronage capital plus interest on long-
term debt (including all interest charged to construction) plus depreciation
and amortization expense plus Non-operating Margins-Interest plus cash
received in respect of generation and transmission and other capital credits
to (y) long-term debt service obligations. Distribution systems will also
be required to have achieved a 20% ratio of equity to total assets at the end
of the preceding calendar year (the "Equity" test) to be eligible collateral
for pledging under the 1994 Collateral Trust Bond Indenture. The average MDSC
is computed using the average of the best two of three calendar years' ratios
preceding the date of determination. The borrower is required to maintain
these ratios at or above the minimum loan eligibility requirements as long as
there is a balance outstanding on the loan.
Under present RUS policy, a system which meets the RUS concurrent mortgage
requirement for Average TIER and Average DSC (as described herein) of 1.50
and 1.25, respectively, will generally be required to borrow a portion of
its financial requirements from a supplemental lender. TIER is the ratio
of (x) margins and patronage capital as defined under "The Rural Electric
Systems---Financial Information" plus interest on long-term debt (including
all interest charged to construction) to (y) interest on long-term debt
(including all interest charged to construction). DSC is the ratio of (x) net
margins and patronage capital plus interest on long-term debt (including all
interest charged to construction) plus depreciation and amortization expense
to (y) long-term debt service obligations. In applying the tests,
obligations under contracts providing for payment whether or not the
purchaser in fact receives electric power from the seller, guarantees and
other contingent obligations are not considered debt, nor is interest on the
proposed CFC loan given effect. In determining the eligibility of a member
for a long-term loan, each of the above ratios is averaged for the best two
of three calendar years preceding the date of determination, resulting in the
"Average TIER" and "Average DSC". The extent of the supplemental loan
required generally reflects the revenue productivity of the borrower's
investment in plant, as measured by the ratio of its investment in plant to
its operating revenues (the "plant-revenue ratio"). RUS regulations, however,
permit borrowers which meet certain rate disparity, consumer income or
extremely high rate tests to qualify for 100% RUS loans. Further, the
Administrator of RUS has the authority to approve 100% RUS loans according
to new qualifications established in 1993, or at his/her discretion on a
case-by-case basis.
It is anticipated that many CFC loans to distribution systems will continue
to be made in conjunction with loans by RUS. However, in addition to making
concurrent loans, CFC's loan policy permits it to make 100% loans to member
systems which meet the applicable borrowing requirements. As of May 31, 1996,
CFC had a total of $1,586.6 million in long-term loans committed and out-
standing to 73 Utility Members which did not have long-term RUS loans out-
standing. These systems have either prepaid their RUS loans or have never
incurred any RUS debt.
Under CFC policy, a member power supply system having Average TIER and Average
DSC of at least 1.0 in each case is eligible for a long-term loan from CFC.
Loans have been made both for additions to or acquisition of existing power
supply facilities and in connection with the construction of new power supply
projects. Loans have also been made in connection with the termination costs
associated with certain plant construction for canceled power supply projects.
However, most loans to CFC member power supply systems for new generating
plants and transmission facilities have been made by other lenders
(principally the FFB, which has typically offered rates lower than CFC's)
under repayment guarantees from RUS, with RUS's rights as guarantor secured
by a mortgage on the system's properties.
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Under the RUS mortgage, distribution borrowers are required to design their
rates to cover all operating expenses, including all payments in respect of
principal and interest on notes when due, provide and maintain reasonable
working capital and to maintain a TIER of not less than 1.5 and a DSC of not
less than 1.25.
CFC has made and may continue to approve long-term secured loans to borrowers
which fall below CFC's loan eligibility requirements. Such loans are made on
a case-by-case basis, based upon the submission by the borrower of, among
other things, a long-range financial forecast which indicates that the
borrower will, in future years, meet the applicable borrowing requirements.
During the past five years, such loans accounted for 8.5% of the total dollar
amount of loans approved. While certain borrowers may not meet the
eligibility requirements at the time of loan approval, such borrowers may
meet the eligibility requirements by the time the loan is fully advanced or
CFC is providing financings to other such borrowers who are restructuring RUS
debt obligations and thus will potentially be competitive with other
utilities.
The rate charged for long-term fixed rate mortgage loans is designed to
reflect CFC's estimated overall cost of fixed rate capital allocated to its
fixed rate mortgage loans (including Capital Term and other Subordinated
Certificates, Collateral Trust Bonds, Medium-Term Notes, variable rate
borrowings supported by interest rate exchange agreements and Members' Equity)
plus increments estimated to cover general and administrative expenses, a
provision for loan and guarantee losses and a reasonable margin.
Long-term fixed rate loans provide for a fixed interest rate for periods of
one to 30 years. Upon expiration of the interest rate period, the borrower
may select another fixed rate term of one to 30 years (but not beyond the
maturity of the loan) or in certain instances may repay the loan or convert
to another interest rate program.
The rate on long-term fixed rate loans is set at the time of advance. In the
event that there is more than one advance, each advance will receive the fixed
rate in effect at the time of advance for the selected maturity period. Long-
term fixed rate loans approved prior to May 31, 1984 had the fixed rate set
at the time the loan was approved. Long-term fixed rate loans approved
between May 31, 1984 and December 31, 1987 bear the applicable fixed rate in
effect at the time of the first advance.
CFC also makes long-term loans with variable interest rates. Such loans are
funded primarily from available variable rate sources, and the rate is
adjusted monthly to reflect CFC's cost of capital raised to fund these loans
plus increments estimated to cover general and administrative expenses, a
provision for loan and guarantee losses and the maintenance of a reasonable
margin.
A borrower may convert a long-term loan from the variable rate to a fixed rate
at any time with no fee. Some fixed rate loans may be converted to variable
rate loans at any time, subject to the payment of a conversion fee and in
certain cases, borrower's regulatory approval.
Prepayment of concurrent loans, where permitted by CFC and RUS, or otherwise
agreed to by CFC and RUS, will be apportioned pro-rata between RUS and CFC
based on the respective balances of their concurrent loans outstanding as of
the date of prepayment. Prior to January 1, 1994, no fee was required on the
prepayment of a standard seven-year fixed rate loan that was prepaid during a
repricing cycle. Now all prepayments except those required to maintain the
original RUS/CFC concurrent loan proportions will be subject to a prepayment
fee.
Until December 1993, most long-term borrowers were required to purchase from
CFC subordinated loan capital term certificates in an amount up to 7% of the
loan amount. These certificates amortize along with the loan. For all loans
advanced after December 1993, distribution systems may be required to purchase
subordinated loan capital term certificates in an amount up to 3% of the loan
amount or may not be required to purchase any certificates depending upon the
borrower's leverage ratio with CFC (the ratio of the outstanding and available
loan funds to subordinated certificates and allocated but unretired patronage
capital), including the new loan. Power Supply members are required to
purchase the certificates in amounts up to 10% of the loan amount.
CFC long-term loans made in conjunction with concurrent RUS loans are
generally for terms of 35 years and under present policy are payable, after
a short period during which interest only is payable, in level quarterly
installments which include both accrued interest and a portion of the
principal. Substantially all of CFC's present long-term mortgage loans to
Utility Members are secured by a first mortgage lien upon all property (other
than office equipment and vehicles) at any time owned by the borrower and
future revenues. In the case of members whose property is already subject
to a mortgage to RUS, RUS approval of the loan is required, even in the case
of a 100% CFC loan, in order to accommodate RUS's
10
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 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 members, RUS retains
substantial control over the exercise of mortgage remedies.
Intermediate-Term Loans to Utility Members
Intermediate-term loans are made to members for terms of up to five years.
The interest rates on intermediate-term loans are adjusted monthly (and may
be adjusted semimonthly) to cover CFC's cost of capital raised to fund these
loans plus increments estimated to cover general and administrative expenses,
a provision for loan and guarantee losses and the maintenance of a reasonable
margin. Intermediate-term loans that are classified as secured are secured
by a first mortgage lien upon all property (other than office equipment and
vehicles) at any time owned by the borrower and future revenues. Borrowers
are generally not required to purchase additional Subordinated Certificates
in CFC in conjunction with an intermediate-term loan.
Short-Term Loans to Utility Members
CFC makes short-term line of credit loans to its member distribution systems
in amounts based on the system's monthly operation and maintenance expenses
and prior year's additions to plant. Power supply systems are eligible for
lines of credit in amounts up to a maximum of $50 million, based on the
system's quarterly operation and maintenance expenses. Loans made to
distribution and power supply systems under such lines of credit are generally
unsecured; are for terms agreed to by the system and CFC and may be prepaid
without premium and reborrowed in whole or in part during such term. Short-
term loans with terms greater than 12 months are required to be paid down to
a zero balance for five consecutive business days during each 12-month period.
The interest rates on short-term line of credit loans are adjusted monthly
(and may be adjusted semimonthly) to cover CFC's cost of capital raised to
fund these loans plus increments estimated to cover general and administrative
expenses, a provision for loan and guarantee losses and the maintenance of a
reasonable margin. Borrowers are not required to purchase additional
Subordinated Certificates in CFC in conjunction with a short-term loan.
Loans to Telecommunication Borrowers
RTFC makes long-term loans to rural telecommunication companies for the
acquisition of telecommunication systems and the construction or upgrade of
telephone, cellular and cable television systems as well as other legitimate
corporate purposes.
Under RTFC policy, a telephone system with an Average DSC and an Average TIER
of 1.25 and 1.50, respectively, is eligible for a long-term mortgage loan from
RTFC. A cable television system with an Average DSC of 1.25 is eligible for
a long-term mortgage loan. A cellular telephone system is eligible for a
long-term mortgage loan if it can demonstrate the ability to achieve an
Average DSC of 1.10 by the fifth year of operations, and maintain that
requirement annually thereafter.
Security for RTFC long-term loans made to RUS 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 borrowers is considered on a
case-by-case basis but generally a loan will not exceed 80% of the estimated
initial value of the collateral. Long-term loans are made to RTFC borrowers
for terms generally up to 15 years and amortized quarterly over the life of
the loan. Borrowers with long-term loans approved after May 31, 1995 or with
approved long-term loans that had not been advanced by May 31, 1995 will be
required to purchase Subordinated Certificates from RTFC in amounts equal to
5% of the loan amount. Prior to May 31, 1995, borrowers were required to
purchase Subordinated Certificates in amounts equal to 5% or 10% of the long-
term loan amount, depending on the borrower classification.
11
The interest rate on long-term loans can be fixed for the full term of the
loan or for a predetermined period. Alternatively, the borrower may elect a
variable rate which is adjusted monthly (and may be adjusted semimonthly). A
long-term variable rate loan may be converted to a fixed rate at any time. A
long-term fixed rate loan may be converted to a variable rate without payment
of a fee on a rate adjustment date, or at any other time upon payment of a
fee, which is calculated to ensure that RTFC is made whole on the funding
placed for that loan.
RTFC provides intermediate-term equipment financing for periods up to five
years. These loans are provided on an unsecured basis and are used to finance
the purchase price and installation costs of central office equipment, support
assets and other communication products. Intermediate-term equipment
financing loans are generally made to operating telephone 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.
RTFC also provides short-term financing to telecommunication systems for
periods up to 60 months. These short-term 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 loans are provided on an unsecured basis and are used primarily
for normal cash management. Lines of credit are available to tele-
communication systems generally in amounts not to exceed the greater of five
percent of total assets or 25% of equity in excess of 35% of total assets.
Borrowers are not required to purchase Subordinated Certificates in RTFC as
a condition to receiving a line of credit.
Interim financing lines of credit are also made available to RTFC members
which have an RUS and/or Rural Telephone Bank ("RTB") loan 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.
RTFC interest rates on all loans are set to cover the cost of funds, plus an
increment estimated to cover general and administrative expenses, a provision
for loan losses and the maintenance of a reasonable margin.
RTFC obtains funding for its loans through back-to-back borrowing from CFC,
which in turn has a security interest in all RTFC's loans.
Loans to Associate Members
CFC also makes loans to Associate Members, which are non-profit or cooperative
organizations owned, controlled or operated by a CFC Class A, B or C Member or
by CFC (sponsor) and engaged primarily in furnishing nonelectric services
within the sponsor's service area. Long-term loans are available to Associate
Members for periods of one to 35 years and are secured by the assets financed
or by a guarantee from a Utility Member, or both. The rate on these loans, to
the extent funding sources are available, may be fixed for the full term of
the loan or for a predetermined period. Alternatively, the borrower may
elect a variable rate which is adjusted monthly (and may be adjusted semi-
monthly). Associate Members with long-term loans approved after May 31, 1995
or with approved long-term loans that had not been advanced by May 31, 1995
will be required to purchase a Subordinated Certificate equal to 5% of the
loan amount. Prior to May 31, 1995, an Associate Member was required to
purchase a Subordinated Certificate equal to 10% of the long-term loan amount.
CFC also provides short-term loans to Associate Members for periods of up to
60 months. The short-term loans are generally revolving lines of credit which
may require the borrower to pay off the balance for five consecutive business
days during each 12-month period. Borrowers are not required to purchase a
Subordinated Certificate as a condition to receiving a short-term loan.
Short-term interest rates are set monthly (and may be adjusted semimonthly).
These loans are generally unsecured but are guaranteed by operating Utility
Members of CFC.
Associate Member interest rates are set to cover the cost of funds plus an
increment estimated to cover general and administrative expenses, a provision
for loan losses and a reasonable margin.
RUS Guaranteed Loans
In connection with legislation which allowed 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 100% guaranteed by RUS. Under RUS 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 service fees to CFC in connection with these transactions. Most of
12
these loans that have not been sold in public offerings have been transferred
to GFC ($411.4 million of the $416.6 million outstanding at May 31, 1996.)
In addition, CFC services $679.3 million of these loans, held by the trustee,
which have been sold in public offerings.
Guarantees of Pollution Control Facility and Utility Property Financings
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 income 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.
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 and 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 there-
under 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.
In connection with these transactions, the systems generally must purchase
unsecured Subordinated Certificates from CFC in an amount up to 12% of the
principal amount guaranteed and maturing at the final maturity of the related
debt (but not less than 20 years). These certificates generally bear interest
at the greater of the 34-year FFB interest rate, the interest rate on the
longest maturity of the debt being guaranteed or 90% of the rate on the loan
from CFC used to purchase the certificate. In addition, if a debt service
reserve fund is created by CFC to secure the debt being issued, the system
must buy an additional Subordinated Certificate, maturing at the time of the
final maturity of the debt, in the amount of such reserve. No interest is
paid on such certificate, but any earnings from investments held by the
trustee of such debt service reserve funds will be credited against the
system's debt service obligations. The system is also required to pay to CFC
initial and/or on-going servicing 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 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 NCSC in
connection with leveraged lease transactions. In such transactions, NCSC has
lent 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
was 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 were made on a non-recourse basis to the Lessor but were secured
by the property leased and the owner's rights as Lessor. NCSC borrowed the
funds it lent either under a CFC guarantee or on an interim basis directly
from CFC and purchased from CFC a Subordinated Certificate in an amount up to
12% of the amount CFC guaranteed or lent. The Subordinated Certificates
generally bear interest at a rate equal to the FFB rate for 34-year loans or
90% of CFC's loan rate and are repaid proportionally as the amount guaranteed
decreases. NCSC is also 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.
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 in 1982, no further guarantees of this nature have occurred
since 1982 and no more are anticipated. In
13
connection with these transactions, the members purchased from CFC an un-
secured Subordinated Certificate in an amount up to 12% of the amount
guaranteed.
Other
CFC may provide other loans and guarantees as requested by its members.
Such loans and guarantees will generally be made on a secured basis with
interest rates and guarantee fees set to cover CFC's cost of capital, general
and administrative expenses, a provision for loan and guarantee losses and
maintenance of a reasonable margin. In connection with these transactions,
the system generally must purchase from CFC an unsecured Subordinated
Certificate in an amount up to 12% of the amount guaranteed or lent.
CFC Financing Factors
Funding for the Company's loan programs is derived from Members' Equity (net
margins, retained as allocated but unreturned patronage capital), from the
issuance of its Subordinated Certificates to members (see Note 3 to Combined
Financial Statements), Collateral Trust Bonds, Medium-Term Notes, Commercial
Paper and Bank Bid Notes. CFC's ability to obtain short- and long-term funds
from external sources as needed depends on such factors as its credit ratings
and reputation in the investment community, its financial condition and that
of its members, the depth and liquidity of the markets in which it partici-
pates, market factors outside of its control, its ability to conduct its
operations to meet or exceed the financial standards of performance expected
by investment markets and credit rating agencies and the continued support of
its members.
Each year CFC allocates its net margins (operating margin plus nonoperating
income) among its borrowers in proportion to interest earned by CFC from such
borrowers within various loan pools. These allocations are evidenced by
Patronage Capital Certificates which bear no interest or dividends and have
no stated maturity. These amounts are available for use in CFC's operations
pending their retirement.
As a condition of membership, CFC members have subscribed to Capital Term
Certificates, which like CFC's other Subordinated Certificates are unsecured
subordinated obligations of CFC. They generally mature 100 years after
issuance and bear interest at the rate of 5% per annum. The purchase of
Subordinated Certificates may also be required as a condition of each long-
term loan and certain intermediate-term loans made by CFC to its members
(Subordinated Certificates issued in connection with loans made prior to
June 1, 1983, earn 3% annually, and Subordinated Certificates for loans
approved on or after that date are noninterest-bearing). Subordinated
Certificates, bearing interest at various rates, are also required to be
purchased in connection with CFC guarantees of member debt. The maturity of
Subordinated Certificates purchased in connection with loans and guarantees
generally coincides with the maturity of the related loan or guaranteed debt.
Membership certificates and loan and guarantee certificates represented 53%
and 47%, respectively, of total Subordinated Certificates outstanding at
May 31, 1996.
To fund a portion of its long-term fixed rate loan program, CFC issues inter-
mediate- and long-term senior secured Collateral Trust Bonds and senior
unsecured Medium-Term Notes with differing maturities, interest rates and
redemption provisions. The Collateral Trust Bonds are secured by pledges of
eligible mortgage notes with a principal amount at least equal to the total
amount of bonds outstanding. If certain minimum eligibility ratios are not
maintained, the mortgage notes affected must be replaced with other eligible
collateral. In addition, variable rate funding supported by an equal amount
of interest rate exchange agreements is used to fund long-term fixed rate
loans (see Note 5 to Combined Financial Statements).
The Company issues Commercial Paper through dealers and directly to members
and other eligible nonmember investors to provide funds for short-,
intermediate- and long-term variable rate loans to members, including RUS
guaranteed loans, and temporarily to fund long-term fixed rate loans to
members prior to funding with long-term debt. Commercial Paper could also
be used to fund purchases of tax-exempt securities which CFC may be obligated
to purchase pursuant to its commitment to act as standby purchaser. In
addition, CFC may issue Commercial Paper in excess of its own funding needs
in order to provide its members an investment vehicle for their excess funds;
CFC uses the proceeds from such issuances to purchase short-term obligations
of other issuers. Commercial Paper outstanding at May 31, 1996, 1995 and
1994, net of discount related to the issuance of dealer Commercial Paper, was
approximately $4,718.1 million, $3,892.6 million, and $3,429.0 million,
respectively. The outstanding Commercial Paper at May 31, 1996, 1995 and
1994 had average maturities of 35 days, 68 days and 36 days, respectively.
The amount of such outstanding Commercial Paper sold directly by CFC to its
members and eligible nonmembers as a percentage of total outstanding
Commercial Paper was 26% as of May 31, 1996 versus 29% at May 31, 1995.
14
CFC also issues short-term Bank Bid Notes to fund its variable rate loans.
These bid notes are unsecured loan obligations. Bid note facilities are un-
committed lines of credit for which CFC does not pay a fee. The amount of
Bank Bid Notes outstanding as of May 31, 1996, 1995 and 1994 was $183.5
million, $350.0 million, and $209.0 million, respectively.
As of May 31, 1996, CFC had three revolving credit agreements totaling
$5,050.0 million which are used principally to provide liquidity support for
CFC's outstanding commercial paper, CFC's guaranteed commercial paper issued
by NCSC and the adjustable or floating/fixed rate put bonds which CFC
guarantees, and to which it is standby purchasers for the benefit of its
members.
Two of these credit agreements, which total a combined $4,550.0 million, were
executed with 60 banks, with J.P. Morgan Securities, Inc. and The Bank of Nova
Scotia as Co-Syndication Agents and Morgan Guaranty Trust Company of New York
as Administrative Agent. Under these agreements, CFC can borrow up to
$2,730.0 million until February 28, 2000 (the "five-year facility"), and
$1,820.0 million until February 25, 1997 (the "364-day facility"). Any
amounts outstanding under these facilities will be due on the respective
maturity dates. A third revolving credit agreement for $500.0 million was
executed on April 30, 1996 with ten banks, including the Bank of Nova Scotia
as Administrative and Syndication Agent (the "BNS facility"). This agreement
has a 364-day revolving credit period which terminates April 29, 1997 during
which CFC can borrow, and such borrowings, may be converted to a 1-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 .10 of 1% and per annum commitment fee of .025 of 1%. The per annum
facility fee for both agreements with a 364-day maturity is .08 of 1% and
there is no commitment fee at CFC's current credit rating level. If CFC's
long-term ratings decline, these fees may be increased by no more then .1250
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 revolving credit agreements require CFC among other things to maintain
Members' Equity and Members' Subordinated Certificates of at least $1,346.3
million as of May 31, 1996, an increase of $1.3 million compared to the
$1,345.0 million required at May 31, 1995. Each year, the required amount
of Members' Equity and Members' Certificates is increased by 90% of net
margins not distributed to members. CFC is also required to maintainan
average fixed charge coverage ratio over the six most recent fiscal quarters
of at least 1.025 and prohibit the retirement of patronage capital unless CFC
has achieved a fixed charge coverage ratio of 1.05 for the preceding fiscal
year. The 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 and subordinated debt and restrict, with certain exceptions, the
creation by CFC of liens on its assets and contain certain other conditions
to borrowing. 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 by or reserved against in its most recent annual
financial statements) and is not in default, CFC may borrow under the
agreements until the termination date. As of May 31, 1996 CFC was in
compliance with all covenants and conditions.
As of May 31, 1996 there were no borrowings outstanding under the revolving
credit agreements. On the basis of the five-year facility, at May 31, 1996,
CFC classified $2,730.0 million of its notes payable outstanding as long-term
debt. CFC expects to maintain more than $2,730.0 million of notes payable
outstanding during the next 12 months. If necessary, CFC can refinance such
notes payable on a long-term basis by borrowing under the five-year facility,
subject to the conditions therein.
Interest rates charged on loans by CFC include the cost of funds incurred by
CFC plus increments estimated to cover general and administrative expenses,
a provision for loan and guarantee losses and to provide margins in amounts
considered by CFC to be consistent with sound financial practice. While
interest rates are set to cover estimated costs and to provide reasonable
margins, CFC does not always match the maturity of its borrowings to those
of its loans. CFC generally finances its long-term loans to members through
borrowings having shorter maturities than the loans; however, CFC generally
finances its fixed rate loans with funds whose maturities generally coincide
with, or exceed, the rate adjustment cycle of the loan.
15
Set forth below is a table showing CFC's outstanding borrowings and the
weighted average interest rates thereon as of the dates shown:
Amounts Outstanding at May 31,
(Dollar Amounts In Thousands) 1996 1995 1994
Long- and intermediate-term debt: (A)
9.50% Series T Collateral Trust Bonds, Due 1997 (B)(1) 150,000 150,000 150,000
8.50% Series U Collateral Trust Bonds, Due 1998(1) 149,800 149,800 149,800
7.40% Series A Collateral Trust Bonds, Due 2007 (C)(1) - - 2,819
Floating Rate Series E-2 Collateral Trust Bonds,
Due 2010(1) 2,178 2,189 2,253
9.00% Series O Collateral Trust Bonds, Due 2016(C)(1) - 82,289 87,400
9.00% Series V Collateral Trust Bonds, Due 2021(1) 150,000 150,000 150,000
Floating Rate Series 1994A Collateral Trust Bonds,
Due 1996(B)(2) 150,000 150,000
6.45% Collateral Trust Bonds, Due 2001(2) 100,000 - -
6.50% Collateral Trust Bonds, Due 2002(2) 100,000 - -
5.95% Collateral Trust Bonds, Due 2003(2) 100,000 - -
6.65% Collateral Trust Bonds, Due 2005(2) 50,000 - -
7.20% Collateral Trust Bonds, Due 2015(2) 50,000 - -
Medium-Term Notes and weighted
average interest rates 604,252 (6.68%) 573,637 (7.23%) 472,208 (6.99%)
Total long- and intermediate-term
debt and weighted average interest
rates (D) (E) 1,606,230 (7.20%) 1,257,915 (7.90%) 1,014,480 (8.06%)
Members' Subordinated Certificates,
including advance payments and
weighted average interest rates (F) 1,073,924 (4.29%) 1,096,466 (4.36%) 1,086,529 (4.46%)
Total long- and intermediate-term
debt and Members' Subordinated
Certificates and weighted average
interest rates $2,680,154 (6.03%) $2,354,381 (6.25%) $2,101,009 (6.20%)
Short-term debt(G) and weighted
average interest rates(H) $4,901,570 (5.41%) $4,242,570 (6.11%) $3,637,975 (4.23%)
Total debt and weighted average
interest rates at May 31 $7,581,724 (5.63%) $6,596,951 (6.16%) $5,738,984 (4.95%)
_________
(1) Collateral Trust Bonds issued under the 1972 Indenture.
(2) Collateral Trust Bonds issued under the 1994 Indenture.
(A) Net of $0.2 million, $1.1 million and $0.2 million principal amount of
bonds held in treasury at May 31, 1996, 1995 and 1994, respectively, all
of which was purchased in connection with CFC's deferred compensation
program.
(B) Collateral Trust Bonds maturing during fiscal year 1997 have been
reclassified to short-term debt in the balance sheet.
(C) The Series O Collateral Trust Bonds were called on March 16, 1996.
The Series A Collateral Trust Bonds were called on December 1, 1994, at
par.
(D) Excludes $2,730.0 million, $2,430.0 million, and $2,030.0 million of
Commercial Paper classified as long-term debt as of May 31, 1996, 1995
and 1994, respectively (see Note 4 to Combined Financial Statements).
(E) Total long- and intermediate-term debt includes $639.0 million which
will be due or is expected to be redeemed during fiscal year 1997.
(F) Excluding $102.5 million, $114.1 million and $107.1 million of Debt
Service Reserve Certificates and $31.4 million, $24.3 million and $29.3
million of subscribed but unissued Subordinated Certificates as of
May 31, 1996, 1995 and 1994, respectively, since such funds are not
generally available for investing in earning assets.
(G) Net of discount; includes $2,730.0 million, $2,430.0 million and $2,030.0
million of Commercial Paper classified as long-term debt as of
May 31, 1996, 1995 and 1994, respectively. Includes $183.5 million,
$350.0 million, and $209.0 million of Bank Bid Notes at May 31,
1996, 1995 and 1994, respectively (see Note 4 to Combined Financial
Statements).
16
(H) Average interest rates are weighted on the basis of amounts of out-
standing borrowings without adjustment for bank credit compensation
arrangements for short-term borrowings and without adjustment for
Collateral Trust Bonds due within one year and reclassified as notes
payable.
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 and interest rate swaps)
for the period shown.
Years Ended May 31,
1996 1995 1994
Short-term borrowings 5.83% 5.59% 3.67%
Long-term borrowings 7.99% 8.15% 8.63%
Total short- and long-term borrowings 6.33% 6.15% 5.14%
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 Subchapter T corporations.
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 obligations guaranteed by the United States or agencies
thereof, the World Bank, or certain high quality 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 listed above set aside in a segregated account. CFC
typically has two types of funds available for investment: (1) the debt
service reserve funds held by the Collateral Trust Bond Trustee under the
Collateral Trust Bond Indenture between CFC and Chemical Bank ("1972
Indenture"), used to make bond interest and sinking fund payments; and
(2) member loan payments and Commercial Paper investments in excess of the
daily cash funding requirements. Debt service reserve funds are invested
with maturities scheduled to coincide with interest and sinking fund payment
dates.
Other Sources of Loans to CFC Members
In addition to CFC, there are other lending sources which supplement RUS
financing. At May 31, 1996, CFC had long-term mortgage loans committed or
outstanding to distribution systems totaling approximately $5,974.1 million,
and to CFC's knowledge other lenders, excluding RUS, had loans, at May 31,
1996, totaling approximately $840.6 million. At May 31, 1996, CFC had
committed or outstanding long-term mortgage loans for power supply projects
totaling approximately $1,494.5 million, of which $416.6 million was fully
guaranteed by RUS, and to CFC's knowledge other lenders, excluding RUS and
FFB, had such loans committed or outstanding for power supply projects in a
total amount of approximately $3,022.1 million.
Employees
At May 31, 1996, CFC had 148 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.
17
THE RURAL ELECTRIC AND TELEPHONE SYSTEMS
General
CFC's 903 rural electric Utility Members as of May 31, 1996, were drawn from
the approximately 915 (at December 31, 1994) rural electric utility systems
(the "systems") which were eligible for RUS loans. A large proportion of the
eligible systems are members of CFC and information regarding these systems
is available in the Annual Statistical Reports of RUS (the "RUS Reports"),
therefore commentary in this section is based on information about the systems
generally, rather than CFC members alone (see Note on page 19). However, the
Composite Financial Statements on pages 20 to 24 relate only to CFC Utility
Members. At December 31, 1994 and for the year then ended, CFC's members
accounted for approximately 98% of the total utility plant, 94% of the total
equity, 97% of the net margins and 93% of the total number of systems covered
by RUS Reports, and CFC believes that its members are representative of the
systems as a whole.
Although generally stable retail rates have been the historical pattern for
RUS borrowers, in the 1970's and early 1980's rising costs of fuel, material,
labor, capital and wholesale power required rate increases by most of the
distribution systems. Increases in costs have also resulted in rate increases
by the power supply systems. Virtually all power contracts between power
supply systems and their member distribution systems provide for rate
increases to cover increased costs of supplying power, although in certain
cases such increases must be approved by regulatory agencies. During the
last five years, costs and rates have generally been stable.
The RUS Program
Since the enactment of the Rural Electrification Act in 1936 (the "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 who were without central station service. Principally through
the organization of systems under the RUS loan program in 46 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 99% currently. Rural electric systems serve 11% of all
consumers of electricity in the United States and its territories. They
account for approximately 8% of total sales of electricity and about 7% of
energy generation and generating capacity.
In 1949, the Act was amended to allow RUS to lend for the purpose of
furnishing and improving rural telephone service. At December 31, 1994,
695 of RUS's 919 telephone borrowers provided service to 4.4 million sub-
scribers throughout the United States and its territories (reporting
information was not available for the remaining 224 borrowers).
The 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 which 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 telephone borrowers, RUS also provides
financing through the RTB. The RTB is a government corporation providing
financing at rates reflecting its cost of capital. RUS exercises a high
degree of 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 1996 (which ends on September 30, 1996), RUS will approve
$635.1 million in electric insured loans, of which $90.5 million are at a 5%
interest rate and $544.6 million are at municipal bond equivalent rates. In
addition, RUS is authorized to approve $300 million in loan guarantees during
fiscal year 1996. For fiscal year 1997, both the House and Senate Agriculture
Appropriation Committees have approved RUS electric insured loan levels of
$650 million, of which $125 million would be at the 5% rate, and $525 million
would be at municipal rates. An additional $300 million would be available
in loan guarantees. This legislation is proceeding through the normal
appropriations process. Because the levels approved by the House and Senate
are identical, it is anticipated that these will also be the final levels
approved by the Congress.
Legislation enacted in 1994 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 loans for a period of ten years, but remains
eligible for RUS loan guarantees. As of July 31, 1996, 77 borrowers had
either fully prepaid or partially prepaid their RUS notes, under these
provisions, in the total amount of $1,177.9 million. A total of 59 of these
borrowers have selected CFC to refinance a total of $1,005.8 million of this
amount.
18
Distribution Systems
Distribution systems are local utilities distributing electric power,
generally purchased from wholesale sources, to consumers in their service
areas. Virtually all are locally-managed cooperative, non-profit
associations, and most have been in operation for at least 40 years. At
December 31, 1994, the approximate number of consumers served by RUS electric
borrowers was 12.2 million, representing an estimated 32.0 million ultimate
users. Aggregate operating revenues of the distribution systems from sales
of electric energy for the year ended December 31, 1994, totaled $16.5
billion, of which 64% was derived from the sales of electricity to resi-
dential consumers (farm and non-farm), 30% from such sales to commercial and
industrial consumers and the remainder from sales to various other consumers.
The composite TIER of CFC member distribution systems increased from 2.54 in
1993 to 3.16 in 1994. The composite DSC ratio decreased from 2.44 in 1993 to
2.26 in 1994. The composite MDSC ratio decreased from 2.21 in 1993 to 2.09
in 1994. Composite equity as a percent of total assets for member distri-
bution systems increased from 40.83% at December 31, 1993 to 41.53% at
December 31, 1994.
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, replace-
ments, 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 reserves. The rates under the wholesale power
contracts are required to be 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. Contracts with Federal agencies
generally permit rate changes by the selling agency (subject, in some cases,
to Federal regulatory approval). In the case of many distribution systems,
only one power supplier is within a feasible distance to provide wholesale
electricity.
Power Supply Systems
Power supply systems are utilities which purchase or generate electric power
and provide it wholesale to distribution systems for delivery to the ultimate
retail consumer. Of the 63 operating power supply systems financed in whole
or in part by RUS or CFC at December 31, 1995, 62 were cooperatives owned
directly or indirectly by groups of distribution systems and one was govern-
ment owned. Of this number, 39 had generating capacity of at least 100
megawatts, and nine had no generating capacity. Seven of the nine systems
with no generating capacity operated transmission lines to supply certain
distribution systems, and one is currently building its first transmission
facilities. Certain other power supply systems had been formed but did not
yet own generating or transmission facilities. At December 31, 1995, the 55
power supply systems reporting to RUS owned interests in 145 generating plants
representing generating capacity of approximately 29,597 megawatts, or
approximately 4.3% of the nation's estimated electric generating capacity,
and served 716 RUS distribution system borrowers (representing an average for
the year of approximately 8.5 million consumers). Certain of the power supply
systems which own generating plants lease these facilities to others and
purchase their power requirements from the lessee-operators. Of the power
supply systems' total generating capacity in place as of December 31, 1995,
steam plants accounted for 94.2% (including nuclear capacity representing
approximately 10.1% of such total generating capacity), internal combustion
plants accounted for 5.5% and hydroelectric plants accounted for 0.3%. RUS
loans and loan guarantees as of December 31, 1995, have provided funds for the
installation of over 34,031 megawatts (including nuclear capacity of
approximately 3,806 megawatts, or 11.2% of the total) of which 1,279
megawatts or 3.8% of the total have officially been canceled.
The high level of growth in demand for electricity experienced in the 1970's
was not expected to decline in the 1980's and the power supply systems
continued their construction programs in anticipation of continued growth
in demand. During the 1980's, however, slower growth in power requirements
of the systems reduced the need for additional generating capacity in most
areas of the country. Thus, many areas are now experiencing a surplus of
generating capacity and, as a result, some power supply systems have
significant amounts of fixed costs for power plant investment not fully
supported
19
by increased revenues (see Note 10 to Combined Financial Statements for
further information concerning certain CFC members experiencing this problem).
While the level of funds needed for new generating units is expected to be low
over the next few years, the need for transmission and capital additions will
continue to generate substantial long-term capital requirements. The power
supply systems are expected to continue to seek to satisfy these requirements
primarily through the RUS loan guarantee program.
Telephone Systems
As of December 31, 1994 (complete data at December 31, 1995 was not yet
available), there were 919 telephone systems that were RUS borrowers, (RUS
had collected financial data on 695). The 695 telephone systems included 199
cooperative not-for-profit organizations and 496 commercial for-profit
organizations. These organizations provided telephone service to
approximately 4.4 million consumers and owned approximately 725,430 miles
of telephone lines. Total assets at December 31, 1994 were $10.8 billion,
with a composite TIER of 4.49 and composite equity ratio of 46.8%. The tele-
phone systems operate in all fifty states and seven U.S. territories.
The RTB was created by a 1971 amendment to the Act to serve as a source of
supplemental financing for rural telephone systems. To initially capitalize
the RTB, between 1971 and 1991 the government purchased $592 million in Class
A stock of the RTB. RTB borrowers, who are required to purchase class B stock
in an amount equal to five percent of the amount of each loan, have, as of
June 30, 1995, invested $524 million. In addition, borrowers and other
eligible entities have purchased $112 million in Class C stock of the RTB.
The Act provides that the RTB is to redeem and retire the government's Class
A stock as soon as practicable after September 30, 1995, but not to the
extent that the bank's board determines that such retirement would impair
the operation of the RTB. The minimum amount of Class A stock to be retired
each year after September 30, 1995 is the amount of the Class B stock that is
issued during that year. Language in the United States Government Fiscal Year
1996 House Agriculture Appropriation limits the amount of Class A stock that
can be redeemed in fiscal year 1996 to five percent of the amount of Class A
stock outstanding. Similar language is expected to be included in the
fiscal year 1997 Appropriations Bill.
Regulation and Competition
The degree of regulation of rural electric systems by state authorities varies
from state to state. The retail rates of rural electric systems are regulated
in 16 states (in which there are 250 systems). Distribution systems in these
states account for 35% of the total operating revenues and patronage capital
of all distribution systems nationwide. State agencies, principally public
utility commissions, of 19 states regulate those states' 289 systems as to the
issuance of long-term debt securities. In five states (in which there are 52
systems) state agencies regulate, to varying degrees, the issuance of short-
term debt securities. Since 1967, the Federal Power Commission and its
successor, the Federal Energy Regulatory Commission ("FERC"), which regulates
interstate sales of energy at wholesale, has taken the position that it lacks
jurisdiction to regulate cooperative rural electric systems which are current
borrowers from RUS. However, rural electric cooperatives that pay off their
RUS debt or never incur RUS debt may be regulated by FERC with respect to
financing and/or rates.
Varying degrees of territorial protection against competing utility systems
are provided to distribution systems in 41 states (in which over 92% of the
distribution systems are located). Changes in administrative or legislative
policy in several states, or Federal legislation, may result in more or in
less territorial protection for the distribution systems.
In addition to competition from other utility systems, some distribution
systems have expressed increasing concern about the loss of desirable
suburban service areas as a result of annexation by expanding municipal
or franchised investor-owned utility systems, regardless of the degree of
territorial protection otherwise provided by applicable law. The systems are
also subject to competition from alternate sources of energy such as bottled
gas, natural gas, fuel oil, diesel generation, wood stoves and self-
generation.
The systems, in common with the electric power industry generally, may incur
substantial capital expenditures and increases in operating costs in order
to meet the requirements of both present and future Federal, state and local
standards relating to safety and environmental quality control. These include
possible requirements for burying distribution lines and meeting air and water
quality standards.
20
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. CFC is currently monitoring
the overall impact of the Amendments on individual member systems, which must
implement compliance plans and operating or equipment modifications for
Phase II of the Act (2000). 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 in
Phase II. Some member systems originally believed to be 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.
In March 1995, the FERC published a Notice of Proposed Rulemaking ("NOPR")
to solicit comments regarding pending policy changes aimed at opening whole-
sale power sales to competition. This NOPR would require jurisdictional
public utilities (including investor-owned electric utilities and cooperatives
that are not RUS borrowers) that own, control, or operate transmission
facilities to file non-discriminatory open access transmission tariffs that
provide others with the same transmission services they provide themselves.
On April 24, 1996, the FERC issued orders 888 and 889 incorporating its
findings during the rulemaking process. 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
("OASIS"). It also addresses standards of conduct to ensure that transmission
owners and their affiliates do not have an unfair competitive advantage by
using transmission to sell power. Presently, many of the issues surrounding
the implementation of Orders 888 and 889 remain unresolved. These issues are
anticipated to be resolved in part by litigation on a case by case basis
before the FERC and through the appellate process. Due to the uncertainty
of this litigation, CFC is unable to estimate the ultimate impact of these
orders on its member systems, however open access transmission as a national
policy has long been sought by electric cooperatives so that investor-owned
utilities cannot use their ownership of transmission to the disadvantage of
the cooperatives.
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.
All telephone systems are regulated by the Federal Communications Commission
with respect to long distance access rates. Most states also regulate local
rates.
Financial Information
The systems differ from investor-owned utilities in that the vast majority
are cooperative, non-profit organizations operating under policies which
provide that rates should be established so as to minimize rates over the
long term. Revenues in excess of operating costs and expenses are referred
to as "net margins and patronage capital" and are treated as equity capital
furnished by the systems' consumers. This "capital" is transferred to a
balance sheet account designated as "patronage capital", and is usually
allocated to consumers in proportion to their patronage. Such capital is
not refunded to them for a period of years during which time it is available
to the system to be used for proper corporate purposes. Subject to their
applicable contractual obligations, the systems may refund such capital to
their members when doing so will not impair the systems' financial condition.
In the terminology of the Uniform System of Accounts prescribed by RUS for its
borrowers, "operating revenues and patronage capital" refers to all utility
operating income received during a given period.
Similar to the practice followed by investor-owned utilities pursuant to FERC
procedures and as prescribed by RUS, the systems capitalize as a cost of
construction, the interest charges on borrowed funds ("interest charged to
construction") and the estimated unearned interest attributable to internally-
generated funds ("allowance for funds used during construction") used in the
construction of generation, and to a lesser extent transmission and
distribution facilities. This accounting
21
policy, which increases net margins by the amounts of these actual and imputed
interest charges, is based on the premise that the cost of financing
construction is an expenditure serving to increase the productive capacity
and value of the utility's assets and thus should be included in the cost of
the assets constructed and recovered over the life of the assets. In the
case of power supply systems, RUS has included in its direct loans and
guarantees of loans amounts sufficient to meet the estimated interest charges
during construction. If the foregoing accounting policy were not followed,
utilities would presumably request regulatory permission, if applicable, to
increase their rates to cover such costs. The amounts of interest charged to
construction and allowance for funds used during construction capitalized by
distribution systems are relatively insignificant. Because power supply
systems generally expend substantial amounts on long-term construction
projects, the application of this accounting policy may result in sub-
stantially lower interest expense and in substantially higher net margins
for such systems during construction than would be the case if such a policy
were not followed.
On the following pages are tables providing composite statements of revenues,
expenses and patronage capital from the RUS Reports of distribution systems
which were members of CFC and power supply systems which were members of CFC
during the five years ended December 31, 1994, and their respective composite
balance sheets at the end of each such year. Complete RUS data for the year
ended December 31, 1995 was not available prior to the filing of this report.
________
NOTE: Statistical information in the RUS Reports 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 available from
RUS. The RUS Reports are based upon financial statements submitted
to RUS, subject to year-end audit adjustments, by reporting RUS
borrowers and do not, with minor exceptions, take into account current
data for certain systems, primarily those which are not active RUS
borrowers.
22
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 which are based
upon financial statements submitted to RUS or to
CFC by CFC Member Distribution Systems
Years Ended December 31,
(Dollar Amounts In Thousands) 1994 1993 1992 1991 1990
Operating revenues and patronage capital $16,163,578 $15,072,400 $13,921,515 $13,446,544 $12,819,204
Operating deductions:
Cost of power (1) 10,174,716 9,882,450 9,211,421 8,979,920 8,558,404
Distribution expense (operations) 386,235 366,148 346,183 327,787 307,649
Distribution expense (maintenance) 699,253 643,390 589,722 558,291 528,746
Administrative and general expense (2) 1,506,729 1,398,749 1,287,224 1,215,158 1,137,154
Depreciation and amortization expense 942,435 879,957 828,966 775,049 724,951
Taxes 417,471 396,024 365,473 337,898 313,403
Total 14,126,839 13,566,718 12,628,989 12,194,103 11,570,307
Utility operating margins 2,036,739 1,505,682 1,292,526 1,252,441 1,248,897
Non-operating margins 135,347 110,612 157,912 175,993 201,798
Power supply capital credits (3) 260,335 274,250 219,638 201,708 163,580
Total 2,432,421 1,890,544 1,670,076 1,630,142 1,614,275
Interest on long-term debt (4) 752,749 730,078 749,594 763,070 741,465
Other deductions 52,574 36,644 27,841 18,953 22,607
Total 805,323 766,722 777,435 782,023 764,072
Net margins and patronage capital $1,627,098 $1,123,822 $ 892,641 848,119 $ 850,203
TIER (5) 3.16 2.54 2.19 2.11 2.15
DSC (6) 2.26 2.44 2.07 2.13 2.16
MDSC (7) 2.09 2.21 1.99 2.06 2.05
Number of systems included 828 825 821 819 820
____________
(1) Includes cost of purchased power, power production and transmission
expense, separately listed in the applicable RUS report.
(2) Includes sales expenses, consumer accounts and customer service and
informational expense as well as other administrative and general
expenses, separately listed in the applicable RUS report.
(3) Represents net margins of power supply systems and other associated
organizations allocated to their member distribution systems and added
in determining net margins 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 in RUS Reports. For a description
of the reasons for, and the effect on net margins and patronage capital
of, the accounting policies governing interest charged to construction
and allowance for funds used during construction, see "Financial
Information". 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 margins and patronage capital.
(5) The ratio of (x) interest on long-term debt (in each year including all
interest charged to construction) and net margins 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 margins 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) Modified DSC ("MDSC") is the ratio of (x) operating margins and
patronage capital plus interest on long-term debt (including all interest
charged to construction) plus depreciation and amortization expense plus
Non-operating Margins-Interest plus cash received in respect of
generation and transmission and other capital credits to (y) long-term
debt service obligations.
23
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS
The following are unaudited figures which are based
upon financial statements submitted to RUS or to
CFC by CFC Member Distribution Systems
At December 31,
(Dollar Amounts In Thousands) 1994 1993 1992 1991 1990
Assets and other debits:
Utility plant:
Utility plant in service $31,162,069 $29,172,898 $27,502,596 $25,846,550 $24,370,100
Construction work in progress 799,327 697,329 619,764 615,425 623,356
Total utility plant 31,961,396 29,870,227 28,122,360 26,461,975 24,993,456
Less: accumulated provision for
depreciation and amortization 8,631,903 7,992,325 7,401,028 6,812,221 6,330,979
Net utility plant 23,329,493 21,877,902 20,721,332 19,649,754 18,662,477
Investments in associated
organizations (1) 3,051,840 2,847,260 2,585,621 2,405,290 2,255,370
Current and accrued assets 3,789,699 3,733,893 3,611,874 3,624,025 3,585,399
Other property and investments 456,923 366,452 343,734 323,445 311,937
Deferred debits 472,536 463,194 439,529 342,855 287,294
Total assets and other debits $31,100,491 $29,288,701 $27,702,090 $26,345,369 $25,102,477
Liabilities and other credits:
Net worth:
Memberships $ 114,080 $ 100,689 $ 98,450 $ 93,207 $ 91,827
Patronage capital and other
equities (2) 12,804,404 11,859,273 10,826,559 9,966,135 9,275,621
Total net worth 12,918,484 11,959,962 10,925,009 10,059,342 9,367,448
Long-term debt (3) 15,020,664 14,569,363 14,303,024 13,958,473 13,461,363
Current and accrued liabilities 2,260,514 2,066,601 1,898,868 1,755,336 1,734,385
Deferred credits 714,083 598,997 555,618 554,149 521,339
Miscellaneous operating reserves 186,746 93,778 19,571 18,069 17,942
Total liabilities and other credits $31,100,491 $29,288,701 $27,702,090 $26,345,369 $25,102,477
Equity Percentage (4) 41.5% 40.8% 39.4% 38.2% 37.3%
Number of systems included 828 825 821 819 820
(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 in
the applicable RUS Report.
(3) Principally debt to RUS and includes $3,989,914, $3,607,159, $3,536,794,
$3,435,994 and $3,283,689 for the years 1994, 1993, 1992, 1991 and 1990,
respectively, due to CFC.
(4) Determined by dividing total net worth by total assets and other debits.
24
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 which are based
upon financial statements submitted to RUS or to
CFC by CFC Member Power Supply Systems
Years Ended December 31,
(Dollar Amounts In Thousands) 1994 1993 1992 1991 1990
Operating revenues and patronage capital $9,972,873 $9,976,560 $ 9,111,434 $ 8,615,165 $ 8,553,618
Operating deductions:
Cost of power (1) 6,760,543 6,606,419 5,855,131 5,541,332 5,461,628
Distribution expense (operations) 14,668 14,391 12,959 11,445 9,451
Distribution expense (maintenance) 14,703 11,081 11,300 11,315 10,611
Administrative and general expense (2) 431,645 433,278 390,521 363,646 338,256
Depreciation and amortization expense 930,483 902,810 872,657 819,586 821,943
Taxes 241,775 223,122 233,420 239,588 182,279
Total 8,393,817 8,191,101 7,375,988 6,986,912 6,824,168
Utility operating margins 1,579,056 1,785,459 1,735,446 1,628,253 1,729,450
Non-operating margins 221,003 328,958 280,810 329,419 328,349
Power supply capital credits (3) 32,531 47,838 30,771 28,405 12,452
Total 1,832,590 2,162,255 2,047,027 1,986,077 2,070,251
Interest on long-term debt (4) 1,857,644 2,014,794 2,075,939 1,999,107 1,968,531
Other deductions 129,794 184,902 137,344 42,862 203,548
Total 1,987,438 2,199,696 2,213,283 2,041,969 2,172,079
Net margins and patronage $ (154,848) $ (37,441) $ (166,256) $ (55,892) $ (101,828)
TIER (5) .93 .98 .92 .97 .95
DSC (6) 1.01 1.03 1.05 1.06 1.05
Number of systems included (7) 53 50 50 49 50
(1) Includes cost of purchased power, power production and transmission
expense, separately listed in the applicable RUS Report.
(2) Includes sales expenses and consumer accounts expense and consumer
service and informational expense as well as other administrative and
general expenses, separately listed in the applicable RUS Report.
(3) Certain power supply systems purchase wholesale power from other power
supply systems of which they are members. Power supply capital credits
represent net margins 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 margins 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
margins of associated organizations allocated to CFC power supply members
and added in determining net margins 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 margins. For a description of the reasons for, and the effect
on net margins and patronage capital of, the accounting policies
governing interest charged to construction and allowance for funds used
during construction, see "Financial Information". According to un-
published information furnished by RUS, interest charged to construction
and allowance for funds used during construction for CFC power supply
members in the years 1990-1994 were as follows:
25
Allowance for
Interest Charged Funds used
(Dollar Amounts In Thousands) to Construction During Construction Total
1994 $ 46,773 $ 8,913 $ 55,686
1993 49,237 8,621 57,858
1992 54,093 4,396 58,489
1991 49,495 5,241 54,736
1990 55,670 6,615 62,285
(5) The ratio of (x) interest on long-term debt (in each year including all
interest charged to construction) and net margins 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 six systems which failed to make debt service payments or are
operating under a debt restructure agreement, without which the composite
TIER would have been 1.31, 1.20, 1.15, 1.15, and 1.08 for the years
ended December 31, 1994, 1993, 1992, 1991 and 1990, respectively.
(6) The ratio of (x) net margins 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 six 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 1.24, 1.21,
1.22, 1.26, and 1.21 for the years ended December 31, 1994, 1993, 1992,
1991 and 1990, respectively.
(7) Thirteen CFC power supply system members are not required to report to
RUS since they are not currently borrowers from RUS. These systems,
with the exception of Old Dominion Electric Cooperative, are either in
the developmental stage or act as coordinating agents for their members.
Their inclusion would not have a material effect on this data.
26
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS
The following are unaudited figures which are based
upon financial statements submitted to RUS or to
CFC by CFC Member Power Supply Systems
At December 31,
(Dollar Amounts In Thousands) 1994 1993 1992 1991 1990
Assets and other debits:
Utility plant:
Utility plant in service $32,934,304 $32,240,926 $31,375,391 $29,433,524 $29,421,761
Construction work in progress 1,624,978 1,469,882 1,324,432 911,262 695,229
Total utility plant 34,559,282 33,710,808 32,699,823 30,344,786 30,116,990
Less: accumulated provision for
depreciation and amortization 10,777,786 9,936,528 8,983,913 7,786,074 7,032,102
Net utility plant 23,781,496 23,774,280 23,715,910 22,558,712 23,084,888
Investments in associated
organizations(1) 248,677 992,921 865,162 740,554 654,419
Current and accrued assets 3,997,466 4,284,613 4,076,841 4,239,802 4,094,006
Other property and investments 2,483,232 1,899,809 1,717,451 1,503,526 1,447,443
Deferred debits 4,366,377 4,078,879 1,879,607 1,445,868 2,236,808
Total assets and other debits $34,877,248 $35,030,502 $32,254,971 $30,488,462 $31,517,564
Liabilities and other credits:
Net worth:
Memberships $ 322 $ 252 $ 246 $ 244 $ 250
Patronage capital and other equities 246,262 432,095 315,793 593,505 544,872
Total net worth 246,584 432,347 316,039 593,749 545,122
Long-term debt (2) 28,779,577 28,528,640 28,838,255 27,060,357 27,989,365
Current and accrued liabilities 2,747,022 1,185,182 1,531,722 1,391,762 1,492,713
Deferred credits 1,206,488 1,849,906 1,071,393 1,344,641 1,113,545
Miscellaneous operating reserves 1,897,577 3,034,427 497,562 97,953 376,819
Total liabilities and other credits $34,877,248 $35,030,502 $32,254,971 $30,488,462 $31,517,564
Number of systems included (3) 53 50 50 49 50
(1) Includes investments in service organizations, power supply capital
credits and investments in CFC.
(2) Principally debt to RUS or debt guaranteed by RUS and loaned by FFB
and includes $881,278, $876,084, $633,105, $526,513 and $596,072 for
the years 1994, 1993, 1992, 1991 and 1990, respectively, due to CFC.
(3) Thirteen CFC power supply system members are not required to report to
RUS since they are not currently borrowers from RUS. These systems,
with the exception of Old Dominion Electric Cooperative, are either in
developmental stages or act as coordinating agents for their members.
Their inclusion would not have a material effect on these data.
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. The company also owns an additional
31.5 acres of unimproved land adjacent to the building. There are no plans
at this time for future development of either parcel of land.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
27
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, 1996.
(Dollar Amounts In Thousands) 1996 1995 1994 1993 1992
For the year ended May 31:
Operating income $ 505,073 $ 440,109 $ 324,682 $ 336,387 $ 402,255
Operating margin $ 46,857 $ 41,803 $ 29,159 $ 38,352 $ 42,809
Nonoperating income 3,764 3,409 4,029 3,296 2,744
Extraordinary loss (A) (1,580) - - (3,161) (1,398)
Net margins $ 49,041 $ 45,212 $ 33,188 $ 38,487 $ 44,155
Fixed charge coverage ratio (A) 1.12 1.13 1.13 1.16 1.14
As of May 31:
Assets $ 8,054,089 $ 7,080,789 $ 6,224,296 $ 5,464,144 $ 5,401,473
Long-term debt (B) $ 3,682,421 $ 3,423,031 $ 2,841,220 $ 3,095,488 $ 2,971,074
Members' subordinated certificates $ 1,207,684 $ 1,234,715 $ 1,222,858 $ 1,215,547 $ 1,221,095
Members' equity $ 269,641 $ 270,221 $ 260,968 $ 258,299 $ 246,320
Leverage ratio (C) 5.69 5.13 4.63 4.41 4.44
(A) During the years ended May 31, 1996, 1993 and 1992 CFC paid premiums
totaling $1.6 million, $3.2 million and $1.4 million, respectively, in
connection with the prepayment of Collateral Trust Bonds. Margins used
to compute the fixed charge coverage ratio represent net margins before
extraordinary loss plus fixed charges. The fixed charges used in the
computation of the fixed charge coverage ratio consist of interest and
amortization of bond discount and bond issuance expenses.
(B) Includes commercial paper reclassified as long-term debt and excludes
$351.5 million, $262.7 million, $200.8 million, $286.8 million and $494.5
million in long-term debt that comes due, matures and/or will be
redeemed early during fiscal years 1997, 1996, 1995, 1994 and 1993,
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 debt
used to fund loans guaranteed by the U.S. Government, by the total of
Members' Subordinated Certificates and Members' Equity.
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 $121.3 million for the year ended May 31, 1996.
The Company does not have outstanding any common stock and does not pay
dividends. Under current policies, CFC retires Patronage Capital
Certificates, which represent annual allocations of CFC's net margins,
70% during the next fiscal year and expects to retire the remaining 30%
after 15 years, 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 will not be impaired as a result.
28
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The management 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.
Overview
The following discussion and analysis is designed to provide a better under-
standing of the Company'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.
CFC was formed in 1969 by rural electric cooperatives to provide them with a
source of funds to supplement the financing provided by RUS. The Company was
organized as a cooperative in which each member receives one vote. Under
CFC's bylaws, the Board of Directors must be comprised of 22 individuals who
are 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
telephone 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.
Because CFC has control of the RTFC Board, RTFC's financial condition and
results of operations are combined with those of CFC. (Unless stated other-
wise, all references to CFC refer to the combined results of CFC, RTFC and
all other CFC controlled affiliates.)
The principal concept of CFC is to provide a mechanism through which the rural
electric cooperatives can achieve better access to the debt markets. Each
rural electric cooperative which joins CFC agrees to purchase subordinated
subscription certificates from CFC as described below.
CFC's operations consist of providing loans, financial guarantees and other
financial services to its rural electric, telephone and other related
organizations. In connection with any long-term loan or guarantee made by
CFC to or on behalf of one of its members, CFC generally requires that the
member make an additional investment in CFC by purchasing loan or guarantee
certificates. Like the original subscription certificates, the loan and
guarantee certificates are unsecured and subordinate to other debt.
The subscription and loan and guarantee certificates (together, "Subordinated
Certificates") along with patronage capital provide CFC's base capitalization.
On a regular basis, CFC obtains debt financing in the market by issuing long-
term fixed rate or variable rate Collateral Trust Bonds, intermediate-term
fixed or variable rate Medium-Term Notes, Commercial Paper and Bank Bid Notes.
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.
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 and a
provision for loan and guarantee losses and to provide for margins sufficient
to preserve interest coverage in light of CFC's financing objectives. To the
extent members contribute to CFC's base capital with Subordinated Certificates
carrying below-market interest rates, CFC can offer proportionally lower
interest rates on its loans to members.
CFC is required by the cooperative laws under which it is incorporated to
allocate its earnings to its members in proportion to the members'
contributions to those earnings. CFC thus allocates its net margins based
on each member's participation in loan programs during the year.
CFC's performance is closely tied to the performance of its member rural
electric and telephone 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.
29
Financial Condition
At May 31, 1996, CFC had $8.1 billion in total assets. Approximately $7.7
billion or 96% of these assets consisted of loans made to CFC's members. The
remaining $0.4 billion consisted of other assets to support CFC's operations.
Except as required for the debt service account and unless excess cash is
invested overnight, generally CFC does not use funds to invest in debt or
equity securities.
At May 31, 1996, 86% of CFC's loan portfolio consisted of 35-year long-term
secured amortizing loans, including long-term loans classified as non-
performing and restructured. The remaining 14% consisted of short- and
intermediate-term secured and unsecured lines of credit and long-term loans
guaranteed by the United States Government. Approximately 38% or $3.0 billion
in long-term loans carry a fixed rate of interest. All other loans, including
$3.8 billion in long-term loans, are subject to interest rate adjustment
monthly or semimonthly.
In addition to its loans, CFC had provided approximately $2.2 billion in
guarantees for its members at May 31, 1996. These guarantees relate primarily
to tax-exempt financed pollution control equipment and to leveraged lease
transactions for equipment and plant.
At May 31, 1996, CFC had also committed to lend an additional amount of
approximately $5.6 billion to its members. Most unadvanced loan commitments
contain a material adverse change clause. As many of these commitments are
provided for operational back-up liquidity, CFC does not anticipate funding
the majority of the commitments outstanding.
CFC funds its assets through the sale of Subordinated Certificates, retained
equity and other debt instruments. As discussed previously, Subordinated
Certificates include both original membership subscription certificates and
loan and guarantee certificates, all of which are subordinate to other CFC
debt. At May 31, 1996, subscription certificates totaled $638 million.
These certificates generally mature in 70 to 100 years and generally pay
interest at 5.0%. At May 31, 1996, loan certificates totaled $333 million
and carried a weighted average interest rate of 1.1%. At May 31, 1996,
guarantee certificates totaled $236 million and carried a weighted average
interest rate of 4.7%. Both the loan certificates 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 4.3%.
The issuance of zero percent loan certificates is expected to exceed the
issuance of 5.0% subscription certificates. Therefore, management expects
this average interest rate to decline over time.
CFC's net margins are allocated each year to CFC's member borrowers.
Prior to fiscal year 1994, CFC's policy was to retire net margins on a
first-in, first-out seven year cycle. Fiscal year 1994 net margins were
retired 50% in the next fiscal year, with the remaining 50% to be held for
15 years. During fiscal year 1995, CFC adjusted its retirement policy to
return 70% of net margins in the next fiscal year, with the remaining 30% to
the held for 15 years and then retired, 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 will not
be impaired as a result. During the next 13 years, CFC will retire the
existing six years of unretired allocations representing net margins for
fiscal years 1988 to 1993. The unretired allocations (Members' Equity) do
not earn interest and are junior to all debt instruments, including
Subordinated Certificates. At May 31, 1996, CFC had $270 million in retained
equity. Subordinated Certificates, in conjunction with retained Members'
Equity, supply CFC's base capitalization.
CFC enters the capital markets through the issuance of Collateral Trust Bonds,
Medium-Term Notes, Commercial Paper and Bank Bid Notes. At May 31, 1996, CFC
had $852 million in fixed rate long-term Collateral Trust Bonds and $150
million in variable rate Collateral Trust Bonds outstanding. Under its
Collateral Trust Bond Indentures, CFC must pledge as collateral, eligible
mortgage notes from its borrowers, evidencing loans equal in principal amount
to at least 100% of the outstanding Bonds. At May 31, 1996, CFC had pledged
$1,094 million in mortgage notes. During fiscal year 1996, CFC issued a total
of $400 million in Collateral Trust Bonds in five separate debt offerings.
During fiscal year 1996, CFC effected the early redemption of the $83.2
million Series O Collateral Trust Bonds, at a premium. In February 1994,
CFC had entered into a new Collateral Trust Bond Indenture, with First Bank
National Association as trustee ("1994 Indenture"), under which future series
of Collateral Trust Bonds will be issued. Virtually all Collateral Trust Bonds
were offered to outside investors in underwritten public offerings.
At May 31, 1996, CFC had $604 million 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 $339 million at May 31, 1996. The remaining $265 million
were sold through dealers to outside investors.
30
At May 31, 1996, CFC had $4,718 million outstanding in Commercial Paper with
a weighted average maturity of 35 days. Commercial Paper notes are issued with
maturities up to 270 days and are unsecured obligations of CFC. Commercial
Paper outstanding to CFC's members totaled $1,170 million at May 31, 1996.
The remaining $3,482 million was sold through dealers to outside investors.
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, 1996, CFC had $184 million outstanding in Bank Bid Notes.
During the year, total assets increased by $973 million. Net loan balances
increased by $982 million or 15%. Gross loans increased by a total of $994
million, partially offset by an increase in the allowance for loan and
guarantee losses of $12 million, over the prior year. As a percentage of
the portfolio, long-term loans (excluding loans guaranteed by RUS) represented
86% at May 31, 1996, compared to 85% at May 31, 1995. Long-term fixed rate
loans represented 44% and 38% of the total long-term loans at May 31, 1996
and 1995. Loans converting from a variable rate to a fixed rate for the year
ended May 31, 1996, totaled $606 million, an increase from the $75 million
that converted for the year ended May 31, 1995. Offsetting the conversions to
the fixed rate were $103 million and $117 million of loans that converted from
the fixed rate to the variable rate or selected a variable rate upon the
expiration of the current fixed interest rate period, for the years ended
May 31, 1996 and 1995. This resulted in a net conversiont of $503 million
from the variable rate to the fixed rate for the year ended May 31, 1996
compared to a net conversion of $42 million from the fixed rate to the
variable rate for the year ended May 31, 1995.
The increase in total loans outstanding at May 31, 1996, was primarily due to
an increase of $718 million in long-term fixed rate loans, and an increase of
$233 million in long-term variable rate loans The increase to loans
outstanding for fiscal year 1996 was primarily due to the advance of funds for
the purpose of repaying RUS loans. CFC also experienced an increase in the
amount of 100% loans advanced to borrowers for purposes other than the
repayment of RUS debt. There were also additional advances made for the
purchase of local telephone exchange properties, although not at the levels
experienced during fiscal years 1995 and 1994.
During the year, CFC substantially increased its short-term debt outstanding
to fund the increase in variable rate loans outstanding. Notes Payable, which
consists of Commercial Paper, Bank Bid Notes and Collateral Trust Bonds that
mature within one year, increased $959 million. The increase in Notes Payable
during fiscal year 1996 was due to the increase in variable rate loans
outstanding and the reclassification of $300 million in Collateral Trust
Bonds due within one year. At May 31, 1996, CFC's short-term debt consisted
of $3,482 million in dealer Commercial Paper, $1,170 million in Commercial
Paper issued to CFC's members, $66 million in Commercial Paper issued to
certain nonmembers, $184 million in Bank Bid Notes and $300 million in
Collateral Trust Bonds due within one year. The Commercial Paper sold to
CFC's members and certain nonmembers increased by $126 million, the amount
of Bank Bid Notes outstanding decreased by $166 million and Commercial Paper
sold through CFC's dealers increased by $699 million from the prior year.
CFC's commercial paper and bid notes had a weighted average maturity of 34
days at May 31, 1996. As described in the footnotes to the Combined Financial
Statements, CFC reclassifies a portion of its short-term debt as long-term, as
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
renegotiated its revolving credit agreements during the fourth quarter of
fiscal year 1995 and was able to reclassify $2,730 million and $2,430 million
in short-term debt as long-term at May 31, 1996 and 1995, respectively.
During fiscal year 1996, long-term debt outstanding increased by $348 million.
The increase in long-term debt outstanding was due to the issuance of a total
of $400 million in fixed rate Collateral Trust Bonds, a net increase of $31
million in Medium-Term Notes outstanding and an increase of $300 in the amount
of short-term debt supported by the revolving credit agreement, offset by the
early redemption of $83 million of fixed rate Collateral Trust Bonds and the
reclassification of $300 million of Collateral Trust Bonds maturing within one
year as Notes Payable.
Deferred income (primarily fees from loan conversions) decreased by $8
million, due to the recognition of $10 million in conversion fees into
income during fiscal year 1996 offset by $2 million in fees deferred on
new loan conversions. CFC will amortize the remaining $11 million of deferred
fees into income over the next two years.
Subordinated Certificates and Members' Equity decreased by $28 million to
$1,477 million at May 31, 1996, compared to $1,505 million at May 31, 1995.
Due to recent policy changes, significant increases in Subordinated
Certificates and Members' Equity are not anticipated. During fiscal year
1995, CFC adopted policy changes that reduced the amount of
31
Subordinated Certificates required to be purchased as a precondition to
receiving a loan advance and increased the amount of allocated net margins
to be retired in the next fiscal year from 50% to 70%.
Off-balance sheet, CFC experienced an increase of $574 million in loan
commitments. Guarantees outstanding decreased by $325 million due to
scheduled principal repayments, the early redemption of one pollution control
bond issue and the refinancing of a lease.
CFC's leverage ratio increased during the year from 5.13 at May 31, 1995, to
5.69 at May 31, 1996. The ratio is calculated after excluding all debt
associated with the funding of the RUS 100% guaranteed loans. Subordinated
Certificates are treated as equity in the calculation of the leverage ratio.
This increase was primarily due to an increase in loans outstanding to members
financed by the issuance of short-term debt, Collateral Trust Bonds and
Medium-Term Notes. CFC contemplates that its leverage ratio will continue
to increase as it secures debt capital to accommodate its members' financing
requirements, due to the slightly accelerated patronage capital retirements
and reduced upfront Subordinated Certificate purchase requirements. CFC
modified its patronage capital retirement program by retiring 70% of the
prior year's allocation of net margins to borrowers in the succeeding fiscal
year and retaining the remaining 30% for at least 15 years. In addition, CFC
reduced borrowers' upfront Subordinated Certificate purchase requirements to
0-3% of the loan amount depending on the borrower's leverage ratio with CFC,
including the new loan amount. Both actions more efficiently utilize Members
Equity invested in CFC and provide more competitively priced loans. The
increase in the leverage ratio may to some extent be offset by the possible
issuance of deferred subordinated debentures, which will be treated by CFC
as equity for the purpose of the leverage calculation. CFC will retain the
flexibility to further amend its capital retention policies to retain members'
investments in CFC consistent with maintaining acceptable financial ratios.
Margin Analysis
Fiscal Year 1996 versus 1995 Results
CFC uses an interest coverage ratio instead of the dollar amount of gross or
net margins as a primary performance indicator, since CFC's net margins are
subject to fluctuation as interest rates change. During the year ended
May 31, 1996, CFC achieved a Times Interest Earned Ratio ("TIER") of 1.12.
This was slightly lower than the prior fiscal year TIER of 1.13. Management
has established a 1.10 TIER as its minimum operating objective.
CFC has earned TIER's of 1.16, 1.13, 1.13 and 1.12 for the years ended
May 31, 1993, 1994, 1995 and 1996, respectively. Earned TIER is a reflection
of CFC's ability to cover the interest expense on funding. The stated goal
of management is to earn a TIER of at least 1.10. The decrease in TIER from
1.16 for 1993 to 1.13 for 1994 was due to the conversion of approximately
$500 million of long-term loans from a fixed rate to a variable rate from the
second half of 1993 through the end of 1994 and due to a declining interest
rate environment. The conversion of the loans from a fixed rate to a variable
rate, along with the declining interest rate environment led to a decrease of
88 bp in the yield earned on CFC's loan portfolio to 5.66% for 1994, compared
to 6.54% for 1993. During 1995, CFC again earned a TIER of 1.13. While the
earned TIER did not change from 1994, the yield on the portfolio increased to
6.72%, a 106 bp increase over 1994. The increase in the portfolio yield was
driven by increases to the interest rates on CFC's funding. The increase in
yield was offset by a decrease to the TIER factor used in the pricing of loans
during the last three quarters of the year. The earned TIER for 1996
decreased to 1.12, due to the use of the reduced pricing factor for the whole
year.
For the year ended May 31, 1996, operating income totaled $505 million, an
increase of $65 million over the prior year. The increase to operating
income was due to a positive volume variance of $65 million. Average loans
outstanding increased by $903 million from $6,553 million at May 31, 1995 to
$7,456 million at May 31, 1996. The average yield on loans outstanding
increased slightly for the year ended May 31, 1996, 6.77% compared to 6.72%
for the prior year.
For the year ended May 31, 1996, the cost of funds totaled $426 million, an
increase of $65 million over the prior year. Included in the cost of funds
is interest expense on CFC's Subordinated Certificates and other debt
instruments offset by earnings on debt service investments. The increase
in the cost of funds was due to a positive volume variance of $53 million and
a positive rate variance of $12 million. As stated above, the average loan
volume increased by $903 million during the year. The average interest rate
on all funding increased from 5.51% for the year ended May 31, 1995 to 5.71%
for the year ended May 31, 1996.
Gross margins for both years totaled $79 million. The overall gross margin
yield dropped from 1.21% for the year ended May 31, 1995 to 1.06% for the
year ended May 31, 1996. This is a result of the pricing factor changes
described above.
32
General and administrative expenses were approximately $20 million for both
years. The provision to the allowance for loan and guarantee losses for
fiscal year 1996 totaled $12 million, a reduction of $5 million from the
prior year. Total expenses for the year ended May 31, 1996 were $32 million,
a decrease of $5 million from the year ended May 31, 1995.
Non-operating income for fiscal year 1996 increased slightly to $4 million.
During fiscal year 1996, CFC effected the early redemption of the Series O
Collateral Trust Bonds, recording an extraordinary loss for the redemption
premium of $2 million. The sum of the non-operating income and the extra-
ordinary loss represent a net decrease of $1 million compared to the non-
operating income of $3 million for fiscal year 1995.
Overall, CFC's net margins increased by $4 million for the year ended
May 31, 1996 to a total of $49 million.
Fiscal Year 1995 versus 1994 Results
For the year ended May 31, 1995, operating income totaled $440 million, an
increase of $115 million over the prior year. Operating income includes
interest earned on loans and conversion fees. The increase in operating
income was due to the general increase in interest rates. This increase
reflected a positive rate variance of $74 million and a positive volume
variance of $41 million.
For the year ended May 31, 1995, cost of funds totaled $361 million, an
increase of $98 million from the prior year. Included in cost of funds is
interest expense on CFC's Subordinated Certificates and other debt instruments
partially offset by interest earnings on debt service investments. The
increase in cost of funds was due to the effects of increases in general
market interest rates on CFC's variable rate debt instruments. This increase
reflected a positive rate variance of $67 million and a positive volume
variance of $31 million.
For the year ended May 31, 1995, gross margins totaled $79 million. This
represented an increase from the prior fiscal year of $17 million. This
increase was primarily a result of the general increase in interest rates
and to the increase in loans outstanding.
General and administrative expenses increased by $3 million over the prior
year. This increase is a result of one-time expenses associated with the
changeover from a mainframe computer environment to a client server computer
environment, accelerated write-off of deferred expenses and a major office
renovation. During fiscal year 1995, CFC also added $17 million to its loan
and guarantee loss allowance, an increase of $2 million over the prior year.
Total expenses were $37 million, an increase of $5 million over the prior
year.
Nonoperating income includes guarantee fee income and any other gains and
losses. Nonoperating income decreased by $1 million, from $4 million for
the year ended May 31, 1994 to $3 million for the year ended May 31, 1995.
Overall, CFC's net margins increased $12 million from $33 million for the
year ended May 31, 1994 to $45 million for the year ended May 31, 1995. As
described earlier, this increase was a result of an increasing interest rate
environment and an increase in loans outstanding. CFC's achieved TIER of 1.13
represents no change from the prior year's achieved TIER.
The following is a summary of CFC's operating results as a percentage of
average loans outstanding for the last three fiscal years ending May 31, 1996,
1995 and 1994.
1996 1995 1994
Interest on loans 6.77% 6.72% 5.66%
Less: Cost of funds 5.71% 5.51% 4.58%
Gross operating margin 1.06% 1.21% 1.08%
General and administrative expenses 0.26% 0.30% 0.29%
Provision for loan and guarantee losses 0.16% 0.26% 0.27%
Total expenses 0.42% 0.56% 0.56%
Operating margin 0.64% 0.65% 0.52%
Nonoperating income (1) 0.02% 0.05% 0.07%
Net margins 0.66% 0.70% 0.59%
TIER 1.12 1.13 1.13
(1) Nonoperating income includes the extraordinary loss in fiscal year 1996
resulting from the prepayment of debt.
33
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 generation and transmission 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, 1996, 1995 and 1994.
Percentage of Total
1996 1995 1994
Distribution Systems 54.37% 49.08% 45.52%
Power Supply Systems 33.38% 38.87% 44.34%
Service Organizations 1.77% 1.82% 2.15%
Telecommunication Organizations 9.57% 9.27% 7.46%
Associate Members 0.91% 0.96% 0.53%
Total 100.00% 100.00% 100.00%
CFC's members are widely dispersed throughout the United States and its
territories, including 46 states, the District of Columbia, Guam, Samoa
and the U.S. Virgin Islands. At May 31, 1996, 1995 and 1994 no state or
territory had over 9.9%, 9.1% and 8.2%, respectively, of total loans and
guarantees outstanding.
CFC believes that the risk of lending to utilities industries is mitigated
somewhat by the fact that many of CFC's electric borrowers as utilities do
not have immediate competition in the sale of their services to most of their
customers and the fact that many of the services members provide are
essential to consumers.
Credit Concentration
In addition to the geographic diversity of the portfolio, CFC limits its
exposure to any one borrower. The majority of the largest single exposures
are concentrated in the power supply systems due to their large plant and
equipment requirements. At May 31, 1996, the total exposure outstanding to
any one borrower did not exceed 4.6% of total loans (excluding loans
guaranteed by RUS) and guarantees outstanding. At May 31, 1996, CFC had
$2,294 million in loans outstanding, excluding loans guaranteed by RUS, and
$2,109 million in guarantees outstanding to its largest 40 borrowers,
representing 29% of total loans outstanding and 93% of total guarantees
outstanding. Credit exposure to the largest 40 borrowers represented 43%
of total credit exposure at May 31, 1996, compared to 45% at May 31, 1995.
CFC's ten largest credit exposures represented 22% and 26% of total exposure
at May 31, 1996 and 1995, respectively.
Security Provisions
Except when providing lines of credit, CFC typically lends to its members on
a secured basis. At May 31, 1996, approximately 7.5% of CFC's total loans
and guarantees were unsecured. Approximately 36.9% of the unsecured loans
and guarantees represent obligations of borrowers for the initial phase(s)
of RUS note buyout. Upon completion of the buyout from RUS, CFC will receive
a first lien security on all assets and future revenues. The total of
unsecured loans and guarantees would represent 4.7% of total loans and
guarantees if the partial note buyout obligations were excluded. CFC's
long-term loans are typically secured pro-rata with other secured lenders,
if any (primarily RUS), by all assets and future revenues of the borrower.
Short-term loans are generally unsecured lines of credit. 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.
Portfolio Quality
The following table summarizes the key composite operating results of CFC's
two main borrower types, distribution and power supply systems, which together
comprised 87.7% and 87.9% of CFC's total loan and guarantee portfolio at
May 31, 1996 and 1995. The information presented below is as of
December 31, and taken from the RUS data contained on pages 20 to 24.
CFC Distribution Member Borrowers
Composite Results
1994 1993 1992
TIER 3.16 2.54 2.19
DSC 2.26 2.44 2.07
MDSC 2.09 2.21 1.99
Equity percentage 41.50% 40.83% 39.44%
CFC Power Supply Member Borrowers
Composite Results
1994 1993 1992
TIER 1.31 1.20 1.15
DSC 1.24 1.21 1.22
Equity percentage 9.29% 9.68% 8.03%
NOTE: The power supply composite results have been presented without the
operating results of six systems experiencing financial difficulties.
CFC had credit exposure to four of the six borrowers (see footnote 10
to the Combined Financial Statements for a detailed description of
these borrowers).
Most CFC power supply borrowers sell the majority of their power under all-
power-requirements contracts with 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-power-requirements 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. Some states regulate rate setting and can there-
fore override the system's internal rate setting procedures. However, most
CFC members are not externally rate regulated. CFC has 838 distribution
members of which 590 are not regulated. Of the remaining 248 distribution
systems, 164 are regulated only on a streamlined basis. At the power supply
level, 43 of 65 members are not rate regulated.
During the past few years, power supply members have been increasing their
equity levels. Under recently changed RUS underwriting standards, in order
to qualify for additional RUS loan funds, power supply systems may be required
to maintain, or demonstrate an ability to reach, a 20% of assets equity level,
or they must obtain guarantees from their affiliated distribution systems.
Nonperforming and Restructured Loans
CFC classifies a borrower as nonperforming when any one of the following
criteria are met: (1) principal or interest payments on any loan to the
borrower are past due 90 days or more, (2) the borrower is operating under
protection of the bankruptcy court, or (3) 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 forgoing interest income recognition. At
May 31, 1996, nonperforming loans totaled $25.3 million, a decrease of $2.3
million over the prior year-end. The decrease was due to principal
repayments received during the year. There were no new loans classified as
nonperforming during the year.
35
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, 1996, restructured loans
totaled $209.4 million, an increase of $24.4 million from the prior year.
Restructured loans in the amount of $205.1 million, $131.1 million and $111.5
million were on a nonaccrual basis with respect to the recognition of
interest income at May 31, 1996, 1995 and 1994, respectively. The increase
in restructured loans outstanding was due to the advance of funds in
accordance with the restructured loan agreements. No new loans were
restructured during the year.
The majority of CFC's problem loan situations arose prior to the past five
years as a result of excess capacity or canceled capacity additions after the
plant and equipment construction cycle of the mid-1980s. Since 1986, when
power supply construction-in-progress represented 16.3% of total power supply
plant, power supply members have reduced the level of plant additions (see
Note 10 to Combined Financial Statements for a more complete discussion of
certain loan and guarantee contingencies).
NONPERFORMING AND RESTRUCTURED ASSETS
As of May 31,
(Dollar Amounts In Thousands) 1996 1995 1994
Nonperforming loans $25,294 $27,641 $44,940
Percent of loans and guarantees outstanding 0.25% 0.29% 0.51%
Restructured loans $209,361 $184,978 $165,373
Percent of loans and guarantees outstanding 2.05% 1.94% 1.89%
Total nonperforming and restructured loans $234,655 $212,619 $210,313
Percent of loans and guarantees outstanding 2.30% 2.23% 2.40%
Allowance for Loan and Guarantee Losses
CFC maintains an allowance for potential loan and guarantee losses which 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, 1996, the allowance for loan and guarantee losses totaled $218.0
million, an increase of $12.5 million from the prior year-end. The allowance
represented 861.7% of nonperforming loans and 2.14% of total loans and
guarantees outstanding at year-end.
Since its inception in 1969, CFC has charged off loan balances in the total
amount of $28.4 million, net of recoveries.
Management believes that the allowance for loan and guarantee losses is
adequate to cover any portfolio losses which have occurred or may occur.
The following chart presents a summary of the allowance for loan and
guarantee losses at May 31, 1996, 1995 and 1994.
ALLOWANCE FOR LOAN AND GUARANTEE LOSSES
Years Ended May 31,
(Dollar Amounts In Thousands) 1996 1995 1994
Beginning balance $205,596 $188,196 $172,571
Provision for loan and guarantee losses 12,451 17,400 15,625
Ending balance $218,047 $205,596 $188,196
As a percentage of loans and guarantees
outstanding 2.14% 2.16% 2.15%
36
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 margins and retain liquidity.
Interest Rate Risk
CFC is subject to interest rate risk to the extent CFC's loans are subject to
interest rate adjustment at different times than the liabilities which fund
those assets. Therefore, CFC's interest rate risk management policy involves
the close matching of asset and liability repricing terms within a range of 5%
of total assets. 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 next year. At May 31, 1996 CFC had $199 million
in fixed rate assets amortizing or repricing and $343 million in fixed rate
liabilities maturing during fiscal year 1997. The difference, $144 million,
represents the fixed rate liabilities in excess of the amount required to
match fund the fixed rate assets maturing during the next year. CFC's
difference of $144 million at May 31, 1996 represents 1.8% of total assets.
CFC funds variable rate assets which reprice monthly with short-term
liabilities, primarily Commercial Paper and Bank Bid Notes, both of which
are primarily issued with original maturities under 90 days. CFC funds fixed
rate loans with fixed rate Collateral Trust Bonds, Medium-Term Notes,
Subordinated Certificates and Members' Equity. With the exception of
Subordinated Certificates, which are generally issued at rates below CFC's
long-term cost of funding and with extended maturities, 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 the Company.
INTEREST RATE GAP ANALYSIS
(Fixed Assets/Liabilities)
As of May 31, 1996
(Dollar Amounts In Millions)
Over 1 yr. Over 3 yrs. Over 5 yrs. Over 10 yrs.
Less than but less but less but less but less Over
1 year than 3 yrs. than 5 yrs. than 10 yrs. than 20 yrs. 20 yrs. Total
Assets:
Loan Amortization
and repricing $198.9 $625.5 $466.4 $859.4 $562.3 $126.9 $2,839.4
Total Assets $198.9 $625.5 $466.4 $859.4 $562.3 $126.9 $2,839.4
Liabilities and Equity:
Long-Term Debt $339.1 $319.6 $162.2 $414.3 $ 52.2 $150.0 $1,437.4
Subordinated Certificates 4.1 13.8 29.5 444.8 412.9 57.0 962.1
Equity - - 229.7 - 17.2 - 246.9
Total Liabilities and Equity $343.2 $333.4 $421.4 $859.1 $482.3 $207.0 $2,646.4
Gap * $(144.3) $292.1 $ 45.0 $ 0.3 $ 80.0 $(80.1) $ 193.0
Cumulative Gap $(144.3) $147.8 $192.8 $193.1 $273.1 $193.0
Cumulative Gap as a %
of Total Assets 1.79% 1.84% 2.39% 2.40% 3.39% 2.40%
* Loan amortization/repricing over/(under) debt maturities
37
Liquidity
CFC is subject to liquidity risk, which includes market factors beyond its
control, to the extent cash repayments on its assets are insufficient to cover
the cash requirements on maturing liabilities and other sources of funds with
which to make debt repayments are not available. For the most part, CFC funds
its long-term loans with much shorter term maturity debt instruments. As a
result, CFC has to manage its liquidity risk by ensuring that other sources
of funding are available to make debt maturity payments. CFC accomplishes
this in four ways. First, CFC maintains revolving credit agreements which
(subject to certain conditions) allow CFC to borrow funds on terms of up to
five years. Second, CFC has maintained investment grade ratings, facilitating
access to the capital markets. Third, CFC maintains shelf registrations for
Collateral Trust Bonds, Medium-Term Notes and Deferred Subordinated Debentures
which (absent market disruptions and assuming CFC remains creditworthy) could
be issued at fixed or variable rates (deferred subordinated debentures may
only be issued at fixed rates), in sufficient amounts to fund the next 18 to
24 months' funding requirements. Fourth, CFC obtains much of its funding
directly from its members and believes this funding is more stable than funding
obtained from outside sources. Fifth, CFC holds marketable grantor trust
certificates which could be resold in the public or private capital market.
CFC's long- and short-term debt and guarantees are rated by three of the
major credit rating agencies, Moody's Investors Service ("Moody's"), Standard
and Poor Corporation ("S&P") and Fitch Investors Service ("Fitch").
During May 1994, S&P and Fitch upgraded CFC's ratings on Collateral Trust
Bonds from AA- to AA and the ratings on Medium-Term Notes, guaranteed lease
debt and guaranteed bonds from A+ to AA-. CFC's short-term debt and guarantee
ratings from these agencies were reaffirmed at the highest level A-1+ by S&P
and F-1+ by Fitch. Moody's reaffirmed CFC's current ratings, and lists CFC's
ratings outlook as stable. The following table presents CFC's credit ratings
at year-end.
Moody's Standard & Poor's Fitch
Investors Service Corporation Investors Service
Direct
Collateral Trust Bonds Aa3 AA AA
Medium-Term Notes A1 AA- AA-
Commercial Paper P1 A-1+ F-1+
Guarantees
Leveraged Lease Debt A1 AA- AA-
Pooled Bonds Aa3 AA- AA-
Other Bonds A1 AA- AA-
Short-Term P1 A-1+ F-1+
The ratings listed above have the meaning as defined by each of the respective
rating agencies and are not recommendations to buy, sell or hold securities
and are subject to revision or withdrawal at any time by the rating
organizations.
At May 31, 1996 and 1995, CFC's members provided 37.4% and 41.7% of total
capitalization as follows:
38
MEMBERSHIP CONTRIBUTIONS TO TOTAL CAPITALIZATION
As of May 31,
(Dollar Amounts In Thousands) % of % of
1996 Total 1995 Total
Commercial Paper $1,170,039 24.8% $1,049,474 27.0%
Long-term debt
(primarily Medium-Term Notes) 338,977 26.0% 366,662 29.2%
Subordinated Certificates 1,207,684 100.0% 1,234,715 100.0%
Members' Equity 269,641 100.0% 270,221 100.0%
Total $2,986,341 $2,921,072
Percentage of total
capitalization 37.4% 41.7%
The total amount of member investments increased by $65.2 million or 2.2% at
May 31, 1996, compared to May 31, 1995. Total member investment as a
percentage of total capitalization decreased due to the increase in nonmember
debt required to fund the growth in loans. Total capitalization at
May 31, 1996 was $7,982.8 million, an increase of $979.6 million over the
total capitalization of $7,003.2 million at May 31, 1995. When the loan and
guarantee loss allowance is added to both membership contributions and total
capitalization, the percentages of membership investments to total
capitalization are 39.1% and 43.4% at May 31, 1996 and 1995, respectively.
Historical Results
The following chart provides CFC's key operating results over the last six
years.
SELECTED KEY FINANCIAL DATA
(Dollar Amounts In Thousands)
1996 1995 1994 1993 1992
As of May 31:
Net loans $7,728,271 $6,747,124 $5,921,022 $5,112,471 $5,003,095
Total liabilities $6,576,764 $5,575,853 $4,740,470 $3,990,298 $3,933,682
Total Subordinated Certificates
and Members' Equity $1,477,325 $1,504,936 $1,483,826 $1,473,846 $1,467,791
Guarantees $2,249,440 $2,574,922 $2,655,827 $2,813,731 $2,876,074
Leverage ratio (1) 5.69 5.13 4.63 4.41 4.44
Debt/Equity (2) 3.63 3.01 2.52 2.24 2.24
For the Years Eended May 31:
Gross margins $ 78,994 $ 78,771 $ 61,452 $ 70,975 $ 87,392
Net margins $ 49,041 $ 45,212 $ 33,188 $ 38,487 $ 44,155
TIER (3) 1.12 1.13 1.13 1.16 1.14
(1) The leverage ratio is calculated by dividing debt and guarantees out-
standing, excluding debt used to fund loans guaranteed by RUS, by the
total of Members' Subordinated Certificates and Members' Equity.
(2) The debt/equity ratio is calculated by dividing debt outstanding,
excluding debt used to fund loans guaranteed by RUS, by the total of
Members' Subordinated Certificates, Members' Equity and the loan and
guarantee loss allowance.
(3) TIER is calculated by dividing net margins before extraordinary items
plus the cost of funds by the cost of funds.
Financial and Industry Outlook
During the coming year, management expects CFC's borrowers to continue to
utilize the variable interest rate programs to a greater extent than the fixed
interest rate program. This is due primarily to the positive interest yield
curve and due partly to CFC's borrowers diversifying the interest terms on
their long-term debt. As the demand for variable interest rate loans
increases, either through conversions from the fixed interest rate program
or through new loan advances, CFC will continue to match fund these loans as
to rate with variable interest rate debt instruments and will continue to
redeem, to the extent possible and economically beneficial, its fixed interest
rate debt instruments. These variable rate loans at the borrower level
typically represent a small portion of the borrower's overall capitalization.
39
During fiscal year 1996, CFC advanced approximately $626 million to borrowers
for the purpose of prepaying their RUS loans. From March 1994, the date final
regulations were adopted, through July 1996, CFC has advanced a total of
$1,005.8 million to borrowers for the purpose of prepaying their RUS loans.
CFC had an additional $73.9 million in loan commitments to be advanced as the
final portion of partial note buyouts, in which initial advances were made
during 1996. CFC has been selected as the lender for almost 89% of the RUS
debt refinancings. There are applications pending at RUS for an additional
$50.4 million 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 believes that there will be a steady stream of activity.
During 1994, two large telecommunications companies, GTE and U.S. West, were
in the process of divesting properties in various areas of the country.
During fiscal years 1994 and 1995, CFC extended approximately $600 million
in loan commitments, through RTFC, to telecommunications members that had
submitted bids on these properties. The increase in telephone loans out-
standing as of May 31, 1996 was due to the advance of loans for the
acquisition of these properties. As of May 31, 1996 a total of $425.6
million has been advanced to RTFC members that had their bids for property
accepted by GTE, U.S. West and other independent telecommunication companies.
An additional $51.7 million was advanced for this purpose in June 1996. Loan
activity to telecommunications members should continue through the next
fiscal year, as the remaining telecommunication properties are acquired.
CFC expects the telephone portfolio to continue to grow during fiscal year
1997, but not at the level experienced during fiscal years 1994 and 1995.
As discussed previously, RUS has proposed to amend its lending requirements
for power supply systems, requiring them to either increase their equity
levels or obtain guarantees from their affiliated distribution systems. To
the extent these systems require capital and this capital is unavailable from
RUS, some might be able to enter the public debt markets without the
assistance of a financial intermediary. As a result, management believes
that RUS's new requirements may reduce CFC's potential lending and guarantee
volume with CFC's larger, more creditworthy power supply members.
The amount of loan funds available from RUS to its borrowers is dependent upon
the size of the congressionally allocated subsidy for RUS's revolving loan
fund and the current interest rates. As interest rates rise, a larger portion
of the subsidy is required to buy down the interest rate, reducing the total
amount of funding available for new loans. As the level of loan funds
available decreases, borrowers will be required to seek out additional
sources for loan funds.
The Energy Policy Act of 1992 and the FERC 1996 orders and notices of proposed
rulemaking have created the potential for increased competition in the whole-
sale electric utility market. Although these actions are presently limited
to the wholesale electric utility industry, many states and the Congress are
considering legislation that may provide the potential for increased
competition at the retail electric market level as well.
Assuming legislation is passed which provides for some level of retail
competition, the impact of final rules governing subsequent retail competition
and provisions for stranded cost recovery, as well as the compatibility of
rules and regulations from individual states, cannot be determined at this
time. Therefore, the future impact of increased competition on the Company's
members cannot be reasonably estimated. The Company believes that the present
final form of wholesale regulations and subsequent form of retail regulations,
if enacted, may ultimately result in pressures on electric prices. The time
frame for such increase in competition, whether at the wholesale or retail
level, cannot be determined at this time.
Item 8. Financial Statements and Supplementary Data.
The Combined Financial Statements, Auditors' Report and Combined Quarterly
Financial Results are included on pages 48 through 75 (see Note 12 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.
40
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors
Director Date present
Name Age since term expires
J. Chris Cariker (President of CFC) 42 1991 1997
Harold Dycus (Vice President of CFC) 63 1991 1997
Terry Pitchford (Secretary-Treasurer of CFC) 52 1991 1997
Robert J. Bauman 51 1992 1998
Garry O. Bye 53 1991 1997
Glenn English 55 1994 1997
Alden J. Flakoll 62 1996 1999
Nadine Griffin 64 1992 1998
Benson Ham 62 1995 1998
Gordon J. Hudson 60 1991 1997
David Hutchens 57 1995 1998
George W. Kline 67 1993 1999
Paul J. Liess 58 1993 1999
Robert H. McClurg 66 1995 1998
R. Layne Morrill 56 1995 1998
Robert J. Occhi 49 1996 1999
Gerard P. Paolucci 61 1994 1997
R.B. Sloan Jr. 44 1996 1999
Robert Stroup 51 1996 1999
Henry Umscheid 63 1995 1998
Robert O. Williams 63 1994 1997
Eldwin Wixson 64 1995 1998
(b) Executive Officers
Held present
Title Name Age office since
President and Director J. Chris Cariker 42 1995
Vice President and Director Harold Dycus 63 1996
Secretary-Treasurer and Director Terry Pitchford 52 1996
Governor and Chief Executive Officer Sheldon C. Petersen 43 1995
Senior Vice President and General Counsel John J. List 49 1980
Senior Vice President of Member Services Richard B. Bulman 54 1984
Senior Vice President and Chief Financial Officer Steven L. Lilly 46 1994
Senior Vice President for Strategic Services David J. Hedberg 45 1995
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.
41
(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. Cariker has been General Manager of Cookson Hills Electric Cooperative,
Stigler, OK, since 1982. He is a Director of the Oklahoma Association of
Electric Cooperatives and a Director of the Haskell County Development
Authority. He is also an alternate trustee for KAMO Electric Cooperative.
Mr. Dycus has been a partner and co-owner of Dycus, Bradley & Draves, P.C.,
a regional public accounting firm, since 1973. He has been a Director of
Egyptian Electric Cooperative, Steeleville, IL, since 1976 and a Director of
Southern Illinois Power Cooperative since 1981.
Mr. Pitchford has owned and operated a farm in Columbia, AL, since 1971. He
has been a Director of Pea River Electric Cooperative, Ozark, AL, since 1987.
Mr. Bauman has been the General Manager of Butler County Rural Electric
Cooperative, Allison, IA, since 1984. He is a member of the Iowa Association
of Business and Industry's Economic Development Committee and a Board member
of Cooperative Development Services, Madison, WI.
Mr. Bye has been General Manager of East Central Electric Association, Braham,
MN, since 1985. He has been a Director for RTFC since February 1994. He is
a former member of the North Dakota House of Representatives. He is also a
member, and former chairman, of the Minnesota State Board of Electricity and
is presently Chairman of the Minnesota Rural Electric Association's Government
Affairs Committee.
Mr. English has been Executive Vice President and General Manager of NRECA,
Washington, DC, since February 1994. He served in the 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.
Alden J. Flakoll has been Vice President of FEM Electric Association, Inc.,
Ipswich, SD since 1977. He has been the owner and operator of Flakoll
Enterprises, a diversified farming, ranching and feedlot operation, since
1957. He has also been the Chairman of District 4 South Dakota Rural Electric
Association Legislative and Resolutions Committee since 1992. He is also
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.
Mrs. Griffin has been a Director of D.S.& O. Rural Electric Cooperative
Association, Abilene, KS, since 1987. She is a member of the National Rural
Electric Women's Association, and has been a rural electric director for 19
years. She is presently serving as a member of the Board of Directors of the
Kansas City Board of Trade. She served as a member of the Kansas Wheat
Commission and is a member of the Kansas Association of Wheat Growers. She
has been a member of the KEPCO Executive Committee and a former chair on the
KEPCO Power supply Planning and Operation Committee.
Mr. Ham has been a Director of Central Georgia Electric Membership
Cooperative, Jackson, GA, since 1983. He has also been the managing
partner in the law firm of Ham, Jenkins, Wilson & Wangerin, since 1991.
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, on 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. Hudson has owned and operated the Leonard Paul Store, a general store,
since 1978. He has sold real estate in the Priest Lake, ID area since 1989.
He has been President of Northern Lights, Inc., Sandpoint, ID, since 1984.
Mr. Hutchens has been Executive Director of Alaska Rural Electric Cooperative
Association, Anchorage, AK, since January 1979. He was Chairman of Ruralite
Services, Inc. from April 1993 to April 1995 and a past President of the Rural
Electric Statewide Managers Association. He was an instructor at Hardin-
Simmons University during 1962 and an Oklahoma State Legislator from 1964 to
1970.
42
Mr. Kline has been a Director of Trico Electric Cooperative, Tucson, AZ, since
1988. He has been Vice President of Grand Canyon State Electric Cooperative
Association since 1992. He was a part-time Magistrate for the town of Marana,
AZ, from 1983 to 1993.
Mr. Liess has been General Manager of Twin Valleys Rural Public Power District,
Cambridge, NE, since 1978. He has been an alternate Director of the Nebraska
Rural Electric Association ("NREA") and the Nebraska Electric Generation and
Transmission Cooperative, Inc. since 1979. He has been chairman of the
Nebraska ACRE Board since 1991 and Vice-Chairman of the NREA Credit Union
Board since 1989. He is a member and one of five original founders of Five
District Joint Venture, developers of Rural Power Manager Software. Mr.
Liess has been a member of the Board of Governors of the Central Community
College since 1989. He is a member of the Board of Directors of the Central
Plains Technical and Business Development Center and Chairman of the Cambridge
Economic Development Board.
Mr. McClurg has been a Director of NRECA, Washington, DC since, 1982 and
President since 1995. He has been a Director of Wyoming Rural Electric
Association since 1974 and a Director of the Tri-State G&T, Denver, CO, since
1990. He is a former Director of Central Bank and Trust.
Mr. Morrill has been a Director, and is currently Secretary-Treasurer, of
White River Valley Electric Cooperative, Inc., Branson, MO, since 1976. He
is also a Director of KAMO Electric Cooperative. He has been President of
Shepherd of the Hills Realty Co., Inc., since 1967 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
second Vice President of the Electric Power Associations of Mississippi since
1995. He is also a Director of the Mississippi Council of Farmer Cooperatives
and of the Greater Biloxi Economic Development Foundation, and a past Director
of Mississippi Economic Council.
Mr. Paolucci has been General Manager of Morrow Electric Cooperative, Inc.
Mount Gilead, OH, Inc., since 1977. In 1996, Morrow Electric Cooperative
merged with Deleware Rural Electric and Mr. Paolucci became President of
Consolidated Electric Cooperative, Inc. He has been President of Astrostar,
Inc. since it was established in 1986. In addition he is a past Chair of the
United Utility Supply Cooperative Corporation and has served as its Vice
Chairman. He is also a past Trustee for Buckeye Power, Inc.
Mr. Sloan has been Executive Vice President and General Manager of Crescent
Electric Membership Corporation, Statesville, North Carolina since 1989. He
has been a member of the boards of North Carolina Electric Membership
Corporation since 1989, North Carolina Association of Electric Cooperatives
since 1989, Tarheel Electric Membership Association since 1989, and 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 and the past Chairman of the Greater Statesville
Chamber of Commerce.
Mr. Stroup owns a construction and design company and has been Vice President
of Shelby County REMC, Shelbyville, IN since 1994. He has been a Director of
Hoosier Energy REC since 1992 and of the Indiana Statewide Association of
Rural Electric Cooperatives since 1993. He is also a member of the Marietta
Volunteer Fire Department and the Shelby County Chamber of Commerce.
Mr. Umscheid has been General Manager of Bluebonnet Electric Cooperative,
Giddings, TX, since 1965. He has been President of Texas VI Satellite, Inc.,
since 1988. He has been a Director of the First National Bank of Giddings
since 1981. He is also a past President of the Texas Electric Cooperative
Statewide Association.
Mr. Williams has been Executive Vice President and General Manager of York
Electric Cooperative, York, SC, since 1974. He has been a trustee for both
the Saluda River Electric Cooperative, Laurens, SC, and the Electric
Cooperatives of South Carolina since 1974. He was a trustee for the South
Carolina State Development Board from 1991 to 1993 and a trustee for the York
Technical College Foundation Board from 1983 to 1991.
43
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. Mr. Wixson has been a professor of
mathematics at Plymouth State College, of the University System of New
Hampshire, since 1966 and 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 and served as a Director of the Speare Memorial
Hospital since 1986. Previously, he was the principal-controlling partner
of the Plymouth Pharmacy from 1979 to 1982 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, then
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 until 1991 and served as General Counsel
until May 1992. He became Senior Vice President and General Counsel on June
1, 1992.
Mr. Bulman joined the CFC staff as Power Supply Officer in March 1980. He has
served as Loan Officer since June 1, 1984. He became Senior Vice President
and Loan Officer on June 1, 1992. He became Senior Vice President of Member
Services on June 1, 1995.
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. Hedberg joined CFC as Director of Rates and Special Projects in 1981. He
became Senior Vice President of Strategic Services on June 1, 1995.
(f) Involvement in Certain Legal Proceedings.
None to the knowledge of CFC.
(g) Promoters and control persons.
Inapplicable.
Item 405. Compliance with Section 16 (a) of the Exchange Act.
Inapplicable.
44
Item 11. Executive Compensation
The Summary Compensation Table below sets forth the aggregate renumeration
for services in all capacities to CFC, on an accrual basis, for the three
years ended May 31, 1996, 1995 and 1994 to the named executive officers. The
named executive officers include the CEO and the next four most highly
compensated executive officers serving at May 31, 1996, with salary and
bonus for fiscal year 1996 in excess of $100,000.
Summary Compensation Table
Annual Compensation Long-Term Compensation
Awards Payouts
Other Restricted Options/ All
Annual Stock SARs LTIP Other
Name and Principal Position Year Salary Bonus Comp (1) Award(2) (#)(2) Payouts(2) Comp(3)
Sheldon C. Petersen 1996 256,250 4,231 - - - - 17,717
Governor and Chief 1995 185,257 1,911 21,715
Executive Officer
Richard B. Bulman 1996 180,101 3,357 - - - - 13,395
Senior Vice President of 1995 173,179 3,243 - - - - 18,274
Member Services 1994 167,184 3,073 - - - - 16,115
John J. List 1996 155,581 2,464 - - - - 15,742
Senior Vice President and 1995 149,621 2,574 - - - - 9,876
General Counsel 1994 144,405 2,515 - - - - 10,101
Steven L. Lilly 1996 176,154 13,284 - - - - 16,612
Senior Vice President and 1995 169,331 3,173 - - - - 12,336
Chief Financial Officer 1994 138,884 2,006 - - - - 9,460
David J. Hedberg 1996 138,230 2,458 - - - - 11,261
Senior Vice President for 1995 109,548 1,901 - - - - 9,588
Strategic Services
(1) Reportable perquisites and other personal benefits do not exceed the
lesser of $50,000 or 10% of salary and bonus. All other items reportable
under this column are not applicable to CFC.
(2) Not applicable to CFC.
(3) Amounts for fiscal years, 1996, 1995 and 1994 include; $13,192 and
$19,039 related to leave accruals and $4,525 and $2,676 related to CFC
contributions to a savings plan for Mr. Petersen; $9,794, $14,811 and
$12,771 related to leave accruals and $3,601, $3,463 and $3,344 related
to CFC contributions to a savings plan for Mr. Bulman; $12,632, $6,886
and $7,213 related to leave accruals and $3,110, $2,990 and $2,888
related to CFC contributions to a savings plan for Mr. List; $13,089,
$8,949 and $6,682 related to leave accruals and $3,523, $3,387 and
$2,778 related to CFC contributions to a savings plan for Mr. Lilly;
$8,491 and $7,303 related to leave accruals and $2,770 and $2,285
related to CFC contributions to a savings plan for Mr. Hedberg.
45
Defined Benefit or Actuarial Plan Disclosure
NRECA maintains the Retirement and Security Program entitling CFC employees
to receive, 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, 1996, the number of years of service credited and the
compensation covered under the program, respectively, for the officers
listed above was as follows: Steven L. Lilly-11 years 3 months, $136,876;
John Jay List-23 years 1 month, $143,892; Richard B. Bulman-15 years 9 months,
$164,660; Sheldon C. Petersen-12 years 5 months, $123,899; and David J.
Hedberg-14 years, $106,684.
Pension Plan Table
Years of Services
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 85,500 106,875 118,800*
250,000 23,750 47,500 71,250 95,000 118,750 118,800*
275,000 26,125 52,250 78,375 104,500 118,800* 118,800*
* The Tax Reform Act of 1984 places a cap on maximum salary used to compute
retirement benefits and maximum yearly benefit. For calendar year 1996,
the salary cap is $150,000 (the cap represents the amount of salary for
1996 that may be used in the computation of the average base salary) and
the benefits cap is $118,800.
The Budget Reconciliation Act of 1993 has set a limit of $150,000 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.
Compensation of Directors
No director received any renumeration as an officer or director of CFC.
Directors are reimbursed for travel expenses and receive a daily per diem
to cover meals and lodging for 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 his current compensation (March 1, 1996) plus such bonus (if any)
as may be awarded him. Certain payments have been agreed to in the event of
Mr. Peterson's termination other than for cause, for eample, Mr. Petersen
leaving for good reason, disability or termination of his employment due to
death.
46
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
in a lump sum.
Compensation Committee Interlocks and Insider Participation
During the year ended May 31, 1996 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):
Robert J. Bauman
Bill Bertram (Former Director of CFC)
J. Chris Cariker ( President of CFC)
Garry Bye (Former Vice President of CFC)
Harold I. Dycus (Vice President of CFC)
Ralph L. Loveless (Former Director and Secretary-Treasurer of CFC)
Terry Pitchford (Secretary-Treasurer of CFC)
Paul J. Liess
Gordon J. Hudson
Benson Ham
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.
(a), (b) and (c) At May 31, 1996, CFC had commitments for long- and
intermediate-term loans aggregating $678 million and $29 million,
respectively, and committed lines of credit aggregating $230 million,
to member systems, excluding NCSC, RTFC and GFC, of which executive officers
or directors of CFC are members, employees, officers or directors. At
May 31, 1996, $504 million and $23 million of advances were outstanding with
respect to such long- and intermediate-term loans, respectively, and
$18 million was outstanding under such lines of credit. At May 31, 1996,
CFC had guaranteed $477 million of contractual obligations of such members.
CFC had outstanding guarantees of certain contractual obligations in the
amount of $570 million at May 31, 1996, on behalf of NCSC. At May 31, 1996,
advances outstanding with respect to such long-term loans were $48 million
for NCSC. Such loans and guarantees were made 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.
(d) Inapplicable.
47
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 48
Combined Balance Sheets 49
Combined Statements of Income, Expenses and Net Margins 51
Combined Statements of Changes in Members' Equity 52
Combined Statements of Cash Flows 53
Notes to Combined Financial Statements 54
2. Financial statement schedules
Page
Note 12 to Combined Financial Statements "Combined Quarterly
Financial Results" 75
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 February 28, 1995, and a copy of
the Bylaws as amended. Incorporated by reference to
Exhibit 3.4 from CFC's Form 10-K filed August 29, 1995.
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 First Bank National Association, 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.
4.5 - Revolving Credit Agreement dated April 30, 1996.
- 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.
10.3 - Supplemental Benefit Agreement between RTFC and Sheldon C.
Petersen, dated as of March 1, 1996.
12 - Computations of ratio of margins to fixed charges.
23 - Consent of Arthur Andersen LLP
27 - Financial Data Schedules
(b) Reports on Form 8-K.
Item 5 on March 29, 1996 - Filing of Underwriting Agreement for
Bond Issue.
48
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 27th day of
August, 1996.
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 Executive
Sheldon C. Petersen Officer
/s/ STEVEN L. LILLY Senior Vice President and
Steven L. Lilly Chief Financial Officer
/s/ ANGELO M. SALERA Controller (Principal
Angelo M. Salera Accounting Officer)
/s/ J. CHRIS CARIKER President and Director
J. Chris Cariker
/s/ HAROLD DYCUS Vice President and Director
Harold Dycus
/s/ TERRY PITCHFORD Secretary-Treasurer and
Terry Pitchford Director August 27, 1996
/s/ ROBERT J. BAUMAN Director
Robert J. Bauman
/s/ GARRY O. BYE Director
Garry O. Bye
/s/ GLENN ENGLISH Director
Glenn English
/s/ ALDEN J. FLAKOLL Director
Alden J. Flakoll
49
Signature Title Date
/s/ NADINE GRIFFIN Director
Nadine Griffin
/s/ BENSON HAM Director
Benson Ham
/s/ GORDON J. HUDSON Director
Gordon J. Hudson
/s/ DAVID HUTCHENS Director
David Hutchens
/s/ GEORGE W. KLINE Director
George W. Kline
/s/ PAUL J. LIESS Director August 27, 1996
Paul J. Liess
/s/ ROBERT H. McCLURG Director
Robert H. McClurg
/s/ R. LAYNE MORRILL Director
R. Layne Morrill
/s/ ROBERT J. OCCHI Director
Robert J. Occhi
/s/ GERARD P. PAOLUCCI Director
Gerard P. Paolucci
/s/ RILEY SLOAN, JR Director
Riley Sloan, Jr.
/s/ ROBERT STROUP Director
Robert Stroup
/s/ HENRY UMSCHEID Director
Henry Umscheid
/s/ ROBERT O. WILLIAMS Director
Robert O. Williams
/s/ ELDWIN WIXSON Director
Eldwin Wixson
50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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 ("Companies") as discussed in Note 1 as of May 31, 1996 and 1995,
and the related combined statements of income, expenses and net margins,
changes in members' equity and cash flows for the 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 generally accepted auditing
standards. 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, 1996 and 1995, and the results of their operations and their cash
flows for the year then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Washington, D. C.
July 16, 1996
51
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
May 31, 1996 and 1995
ASSETS
1996 1995
CASH $ 31,368 $ 26,309
CERTIFICATES OF DEPOSIT 25,000 30,000
DEBT SERVICE INVESTMENTS, 40,907 32,740
LOANS TO MEMBERS, net 7,728,271 6,747,124
RECEIVABLES 84,600 87,638
FIXED ASSETS, net 33,576 36,807
DEBT SERVICE RESERVE FUNDS 102,512 114,094
OTHER ASSETS 7,855 6,077
$8,054,089 $7,080,789
The accompanying notes are an integral part of these combined
financial statements.
52
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
May 31, 1996 and 1995
LIABILITIES AND MEMBERS' EQUITY
1996 1995
NOTES PAYABLE, due within one year $2,471,552 $1,812,570
ACCOUNTS PAYABLE 16,591 16,705
ACCRUED INTEREST PAYABLE 40,819 39,343
LONG-TERM DEBT 4,033,881 3,685,682
OTHER LIABILITIES 13,921 21,553
COMMITMENTS, GUARANTEES AND CONTINGENCIES
MEMBERS' SUBORDINATED CERTIFICATES:
Membership Subscription Certificates 638,440 637,129
Loan and Guarantee Certificates 569,244 597,586
Total Members' Subordinated
Certificates 1,207,684 1,234,715
MEMBERS' EQUITY 269,641 270,221
Total Members' Subordinated Certificates
and Members' Equity 1,477,325 1,504,936
$8,054,089 $7,080,789
The accompanying notes are an integral part of these combined financial
statements.
53
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF INCOME, EXPENSES AND NET MARGINS
(Dollar Amounts In Thousands)
For the Years Ended May 31, 1996, 1995 and 1994
1996 1995 1994
OPERATING INCOME-Interest on loans to members $505,073 $440,109 $324,682
Less-Cost of funds 426,079 361,338 263,230
Gross operating margin 78,994 78,771 61,452
EXPENSES:
General, administrative and loan processing 19,686 19,568 16,668
Provision for loan and guarantee losses 12,451 17,400 15,625
Total expenses 32,137 36,968 32,293
Operating margin 46,857 41,803 29,159
NONOPERATING INCOME 3,764 3,409 4,029
NET MARGINS BEFORE EXTRAORDINARY LOSS 50,621 45,212 33,188
EXTRAORDINARY LOSS (1,580) - -
NET MARGINS $ 49,041 $ 45,212 $ 33,188
The accompanying notes are an integral part of these combined financial
statements.
54
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts In Thousands)
For the Years Ended May 31, 1996, 1995 and 1994
Patronage
Capital Allocated
General
Education Unallocated Reserve
Total Memberships Fund Margins Fund Other
Balance as of May 31, 1993 $258,299 $1,247 $ 312 $ 2,289 $ 488 $ 253,963
Retirement of Patronage Capital (29,459) - - - (295) (29,164)
Net Margins - Allocated 33,188 - 13 - 302 32,873
Other (1,060) 92 - - - (1,152)
Balance as of May 31, 1994 260,968 1,339 325 2,289 495 256,520
Retirement of Patronage Capital (34,184) - - - (177) (34,007)
Net Margins - Allocated 45,212 - 50 - 180 44,982
Other (1,775) 44 - - - (1,819)
Balance as of May 31, 1995 270,221 1,383 375 2,289 498 265,676
Retirement of Patronage Capital (48,313) - - - (152) (48,161)
Net Margins - Allocated 49,040 - 101 - 155 48,784
Other (1,307) 41 - - - (1,348)
Balance as of May 31, 1996 $269,641 $ 1,424 $ 476 $ 2,289 $ 501 $ 264,951
The accompanying notes are an integral part of these combined financial
statements.
55
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Years Ended May 31, 1996, 1995 and 1994
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net margins $49,041 $ 45,212 $ 33,188
Add (deduct):
Provision for loan and guarantee losses 12,450 17,400 15,625
Depreciation 1,247 2,359 1,553
Amortization (7,315) (15,940) (15,915)
Add (deduct) changes in accrual accounts:
Receivables 7,987 (2,880) (4,263)
Accounts payable (114) (1,824) 613
Accrued interest payable 1,476 3,746 (12,225)
Other (5,187) 6,002 15,975
Net cash flows provided by operating activities 59,585 54,075 34,551
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made on loans (3,774,427) (3,619,998) (2,382,839)
Principal collected on loans 2,780,830 2,776,496 1,558,662
Investment in fixed assets 1,984 (448) (8,494)
Net cash flows used in investing activities (991,613) (843,950) (832,671)
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable, net 658,999 604,595 1,104,351
Marketable securities 5,000 (30,000) -
Debt service investments, net (8,167) 928 11,944
Proceeds from issuance of long-term debt 794,836 476,233 172,293
Payments for retirement of long-term debt (446,521) (232,798) (512,849)
Proceeds from issuance of Members' Subordinated Certificates 18,457 30,156 34,088
Payments for retirement of Members' Subordinated Certificates (39,365) (19,603) (15,868)
Payments for retirement of patronage capital (46,152) (35,495) (29,121)
Net cash flows provided by financing activities 937,087 794,016 764,838
NET CASH FLOWS 5,059 4,141 (33,282)
BEGINNING CASH 26,309 22,168 55,450
ENDING CASH $ 31,368 $ 26,309 $ 22,168
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for interest expense $ 427,846 $ 360,308 $ 269,959
The accompanying notes are an integral part of these combined financial
statements.
56
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
May 31, 1996, 1995 and 1994
(1) General Information and Accounting Policies
(a) General Information
National Rural Utilities Cooperative Finance Corporation (the "Company" or
"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. Most CFC long-term loans to Utility Members are made
in conjunction with concurrent loans from RUS and are secured equally and
ratably with RUS's loans by a single mortgage. 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 1,051 members as of May 31, 1996, included 903 Utility Members,
virtually all of which are consumer-owned cooperatives, 74 service members
and 74 associate members. The Utility Members included 838 distribution
systems and 65 generation and transmission ("power supply") systems operating
in 46 states and U.S. territories. At December 31, 1994, CFC's member systems
served approximately 12.2 million consumers, representing service to an
estimated 32.0 million ultimate users of electricity, and owned approximately
$66.5 billion (before depreciation of $19.4 billion) in total utility plant.
Rural Telephone 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 funding for RTFC. As of May 31, 1996, RTFC had 425 members. RTFC
is a taxable entity under Subchapter T of the Internal Revenue Code and
accordingly takes deductions for allocations of net margins 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. All trust certificates held
by GFC were transferred to GFC by CFC and are guaranteed by the RUS. CFC is
the sole source of funding for GFC. GFC had four members other than CFC at
May 31, 1996. GFC is a taxable entity under Subchapter T of the Internal
Revenue Code and accordingly takes deductions for allocations of net margins
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, 1996, CFC had committed to lend RTFC up to a total of $2.4
billion to fund loans to its members and their affiliates. As of the same
date, RTFC had outstanding loans and unadvanced loan commitments totaling
$1,465.5 million. RTFC's net margins are allocated to RTFC borrowers.
57
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Summary financial information relating to RTFC included in the combined
financial statements is presented below:
As of May 31: 1996 1995
(Dollar Amounts In Thousands)
Outstanding loans to members and their affiliates $ 975,269 $ 883,463
Total assets 1,079,920 985,381
Notes payable to CFC 966,690 883,463
Total liabilities 981,790 892,717
Members' Equity (1) and Subordinated Certificates 98,130 92,664
For the years ended May 31: 1996 1995 1994
(Dollar Amounts In Thousands)
Operating income $64,674 $54,639 $28,825
Net margins 8,543 7,527 4,545
(1) The transfer of RTFC equity is governed by the South Dakota Cooperative
Association Act which provides that net margins 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 margins
would not be available to CFC in the form of patronage capital.
As of May 31, 1996, CFC had loaned GFC $411.4 million to fund the purchase of
RUS guaranteed trust certificates from CFC. Summary financial information
relating to GFC included in the combined financial statements is presented
below:
As of May 31: 1996 1995
(Dollar Amounts In Thousands)
Outstanding loans to members $411,373 $421,665
Total assets 429,177 442,878
Notes payable to CFC 415,414 427,875
Total liabilities 427,079 440,410
Members' Equity (1) 2,098 2,468
For the years ended May 31: 1996 1995 1994
(Dollar Amounts In Thousands)
Operating income $28,064 $28,494 $16,667
Net margins (1) 2,701 3,235 1,831
(1) The transfer of GFC equity is governed by the South Dakota Cooperative
Association Act which provides that net margins 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 margins
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.
58
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(c) Amortization of Bond Discount and Bond Issuance Costs
Bond discount and bond issuance costs are amortized using the effective
interest method over the life of each bond issue.
(d) 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.
(e) Allowance for Loan and Guarantee Losses
CFC maintains an allowance for loan and guarantee losses at a level believed
to be adequate in relation to the credit quality and size of its loans and
guarantees outstanding. It is CFC's policy to review periodically its loans
and guarantees and to make adjustments to the allowance as necessary. The
allowance is based on estimates, and accordingly, actual loan and guarantee
losses may differ from the allowance amount.
Activity in the allowance account is summarized as follows for the years ended
May 31:
1996 1995 1994
(Dollar Amounts In Thousands)
Balance at beginning of year $205,596 $188,196 $172,571
Provision for loan and guarantee losses 12,451 17,400 15,625
Balance at end of year $218,047 $205,596 $188,196
(f) Fixed Assets
Buildings, aircraft, furniture and fixtures and related equipment are stated
at cost less accumulated depreciation and amortization of $8.0 million and
$7.7 million as of May 31, 1996 and 1995, respectively. Depreciation and
amortization expenses ($1.2 million, $2.4 million and $1.6 million in fiscal
years 1996, 1995 and 1994, respectively) are computed primarily on the
straight-line method over estimated useful lives ranging from 2 to 40 years.
(g) Recognition of Fee Income
In connection with its various loan, guarantee and other financing programs,
CFC may be entitled to receive certain fees. Such fees are generally designed
to compensate CFC for expenses associated with the related transactions. CFC
recognizes the income from such fees periodically over the term during which
it incurs the related expenses.
(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 and interest rate
exchange agreements. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amounts recognized in the
combined balance sheets.
59
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(i) Accounting by Creditors for Impairment of a Loan
In May 1993, the Financial Accounting Standards Board (the "FASB") released
Statement No. 114, "Accounting by Creditors for Impairment of a Loan." The
statement requires that impaired loans be measured based on the present value
of expected future cash flows discounted at the loan's effective interest
rate, observable market value or the fair value of the collateral. In October
1994, the FASB released Statement No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures". The statement
amends FASB Statement No. 114 by eliminating the interest income recognition
provisions and changing the disclosure requirements. Both statements were
required to be implemented in fiscal years beginning after December 15, 1994
and apply to loans that are, or become impaired, based on the provisions of
FASB Statement No. 114, or that have certain restructuring agreements executed
on or after the implementation date. CFC implemented these statements as of
May 31, 1996. The implementation of these statements did not have a material
impact on CFC's financial statements.
(j) Employers' Accounting for Postemployment Benefits
CFC has implemented FASB Statement No. 112, "Employers' Accounting for Post-
employment Benefits." The statement requires accrual accounting for employee
benefits that are paid after the termination of active employment but prior
to retirement. The implementation of this statement did not have a material
impact on CFC's financial statements.
(k) Accounting for Certain Investments in Debt and Equity Securities
CFC has implemented FASB Statement No. 115, "Accounting for Certain Invest-
ments in Debt and Equity Securities." The CFC investments covered by this
statement, at May 31, 1996, include the certificates of deposit and the
debt service investments. These items have been recorded at amortized cost,
due to the Company's intent and ability to hold all investments to maturity.
(l) Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments
In October 1994, the FASB released Statement No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments."
This statement requires disclosure about the amounts, nature and terms of
derivative financial instruments. The statement must be implemented for
fiscal years ending after December 15, 1994. CFC implemented this statement
as of May 31, 1995. CFC is neither a dealer nor a trader in derivative
financial instruments. CFC uses interest rate exchange agreements to help
manage its interest rate risk.
(m) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 the
Company uses its best estimates and judgements 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.
(n) Memberships
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) all pay a $1,000 membership fee. CFC service organization members
(Class C) pay a $200 membership fee. RTFC voting members pay a $1,000 member-
ship fee and non-voting members pay a $100 membership fee. All GFC members
pay a $1,000 membership fee. Membership fees are accounted for a members
equity.
60
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(o) Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with fiscal year 1996 presentation.
(2) Loans and Commitments
Loans to members bear interest at rates determined from time to time by the
Board of Directors on the basis of CFC's cost of funds, operating expenses,
provision for loan and guarantee 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 are
summarized by loan type as follows as of May 31:
1996 1995
Weighted Weighted
(Dollar Amounts In Thousands) Average Average
Loans Interest Unadvanced Loans Interest Unadvanced
Outstanding Rates Commitments(A) Outstanding Rates Commitments(A)
Long-term fixed rate secured loans (B):
Distribution Systems $2,380,587 7.29% $ 36,117 $1,645,551 7.68% $ 10,389
Power Supply Systems 247,556 7.71% 1,214 253,208 7.68% 1,214
Telecommunication Organizations 134,497 8.66% - 141,144 8.98% -
Service Organizations (C) 77,205 8.03% 3,140 81,521 9.27% 2,600
Associate Members 1,542 10.25% - 1,569 10.25% -
Total long-term fixed rate secured loans 2,841,387 7.41% 40,471 2,122,993 7.83% 14,203
Long-term variable rate secured loans (D):
Distribution Systems 2,717,494 6.45% 839,861 2,553,590 6.50% 730,453
Power Supply Systems 202,249 6.45% 626,926 191,967 6.50% 512,598
Telecommunication Organizations 764,911 6.55% 202,971 704,427 6.64% 130,627
Service Organizations (C) 46,376 6.45% 71,400 53,332 6.50% 67,887
Associate Members 47,541 6.19% 38,979 42,561 6.20% 39,959
Total long-term variable rate secured loans 3,778,571 6.47% 1,780,137 3,545,877 6.52% 1,481,524
Refinancing variable rate loans guaranteed by RUS:
Power Supply Systems 416,637 6.47% - 429,129 7.27% -
Intermediate-term secured loans:
Distribution Systems 4,831 6.60% 2,300 4,176 6.85% 2,300
Power Supply Systems 53,614 6.60% 168,123 40,237 6.85% 158,759
Service Organizations 27,652 6.60% 9,384 11,429 6.85% 3,705
Total intermediate-term secured loans 86,097 6.60% 179,807 55,842 6.85% 164,764
Intermediate-term unsecured loans:
Distribution Systems 16,019 6.45% 41,572 11,392 6.50% 17,693
Power Supply Systems 28,957 6.45% 67,190 47,443 6.50% 3,856
Telecommunication Organizations 12,048 6.80% 8,501 3,255 7.54% 2,370
Total intermediate-term unsecured loans 57,024 6.52% 117,263 62,090 6.56% 23,919
Short-term unsecured loans (E):
Distribution Systems 409,664 6.60% 2,191,156 445,962 6.85% 2,032,220
Power Supply Systems 25,763 6.60% 930,710 10,267 6.85% 1,042,205
Telecommunication Organizations 63,813 7.15% 278,811 34,637 7.60% 198,636
Service Organizations 23,467 6.60% 77,499 25,653 6.85% 46,787
Associate Members 9,240 6.60% 15,685 7,651 6.85% 13,524
Total short-term loans 531,947 6.67% 3,493,861 524,170 6.90% 3,333,372
61
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
1996 1995
Weighted Weighted
(Dollar Amounts In Thousands) Average Average
Loans Interest Unadvanced Loans Interest Unadvanced
Outstanding Rates Commitments(A) Outstanding Rates Commitments(A)
Nonperforming loans (F):
Distribution Systems $ 1,739 7.20% $ - $ 1,830 7.21% $ -
Power Supply Systems 23,555 6.48% - 25,811 6.57% -
Total nonperforming loans 25,294 6.53% - 27,641 6.61% -
Restructured loans (G):
Distribution Systems 2,576 18.37% - 2,654 18.37% -
Power Supply Systems 205,074 9.13% - 180,521 9.01% 20,000
Service Organizations 1,711 6.45% - 1,803 6.50% -
Total restructured loans 209,361 9.22% - 184,978 9.12% 20,000
Total loans 7,946,318 6.85% 5,611,539 6,952,720 7.01% 5,037,782
Less: Allowance for Loan and Guarantee
Losses 218,047 - 205,596 -
Net loans $7,728,271 $5,611,539 $6,747,124 $5,037,782
(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. CFC may require
additional information to assure itself that all conditions for advance
of funds have been fully met and that there has been no material change
in the member's condition as represented in the documents supplied to
CFC. 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 lending on
commitments are identical to those for advanced loans. Long-term un-
advanced 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 the advance on the amount of the advance.
(B) Generally, long-term fixed rate secured loans provide for a fixed
interest rate for terms of one to 30 years. Upon expiration of the
term, the borrower may select another fixed rate term of one to 30 years
(but not beyond maturity of the loan) or a variable rate. The borrower
may select either option or may repay to CFC the principal then out-
standing together with interest due thereon and other sums, if required.
Includes $198.3 million of unsecured loans at May 31, 1996.
(C) CFC had loans outstanding to National Cooperative Services Corporation
("NCSC") in each of the periods shown. Long-term fixed rate loans out-
standing to NCSC as of May 31, 1996 and 1995, were $31.8 million and
$48.5 million, respectively. In addition, as of May 31, 1996 and 1995,
CFC had unadvanced loan commitments to NCSC in the amount of $15.4
million and $12.3 million, respectively.
(D) Includes $84.6 million and $41.4 million of unsecured loans at May 31,
1996 and 1995.
(E) Includes $92.7 million and $30.9 million of secured loans at May 31,
1996 and 1995.
(F) 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 relate
to the interest recognized by CFC from such loans.
(G) The rates on restructured loans are the weighted average of the effective
rates (based on present values of scheduled future cash flows) as of the
dates shown and do not necessarily relate to the interest recognized by
CFC from such loans.
62
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Loans outstanding, by state or U.S. territory, are summarized below:
(Dollar Amounts In Thousands)
May 31, May 31,
State 1996 1995 State 1996 1995
Alabama $ 137,433 $ 136,143 Nevada $ 9,131 $ 7,495
Alaska 114,247 110,753 New Hampshire 246,332 31,576
Arizona 85,182 79,590 New Jersey 6,216 5,564
Arkansas 226,489 226,798 New Mexico 96,213 109,505
California 24,301 17,358 New York 11,260 10,843
Colorado 288,642 286,242 North Carolina 270,284 241,349
Delaware 16,888 17,201 North Dakota 44,257 13,800
District of Columbia 96,052 92,656 Ohio 97,932 87,321
Florida 348,651 320,177 Oklahoma 273,356 251,804
Georgia 631,225 515,767 Oregon 151,918 142,404
Idaho 56,535 41,856 Pennsylvania 85,352 83,100
Illinois 483,737 470,160 South Carolina 301,760 273,099
Indiana 112,134 109,180 South Dakota 48,402 42,831
Iowa 164,604 143,016 Tennessee 79,494 58,730
Kansas 237,778 240,366 Texas 871,775 727,320
Kentucky 168,449 171,736 Utah 173,323 149,752
Louisiana 144,644 125,088 Vermont 64,250 66,724
Maine 51,344 65,540 Virgin Islands 57,214 52,081
Maryland 87,992 77,588 Virginia 166,493 170,400
Michigan 85,663 74,255 Washington 77,737 77,320
Minnesota 332,664 230,301 West Virginia 1,022 1,038
Mississippi 202,363 183,239 Wisconsin 138,398 92,354
Missouri 279,058 248,846 Wyoming 105,240 102,569
Montana 169,863 146,572 Total $7,946,318 $6,952,720
Nebraska 23,021 23,313
Weighted average interest rates earned (recognized in the case of
nonperforming and restructured loans) on all loans outstanding are
summarized below:
For the Years Ended May 31,
1996 1995 1994
Long-term fixed rate 7.92% 8.63% 8.63%
Long-term variable rate 6.30% 5.90% 4.08%
Telecommunication organizations 6.86% 6.70% 5.58%
Refinancing loans guaranteed by RUS 6.75% 6.07% 4.01%
Intermediate-term 6.57% 6.19% 4.41%
Short-term 6.49% 6.29% 4.38%
Associate members 6.46% 5.40% 4.21%
Nonperforming 0.25% 1.56% 1.19%
Restructured 1.49% 1.92% 2.33%
All loans 6.77% 6.72% 5.66%
63
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Long-term fixed rate loans outstanding at May 31, 1996 which will be subject
to adjustment of their interest rates during the next five calendar 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):
Weighted
(Dollar Amounts In Thousands) Average
Interest Amounts
Rate Outstanding
1997 9.07% $131,545
1998 8.14% 160,377
1999 7.44% 303,647
2000 6.67% 120,500
2001 6.95% 163,807
$879,876
During the first quarter of calendar year 1996, long-term fixed rate loans
totaling $46.6 million had their interest rates adjusted. These loans will
be eligible to readjust their interest rates again during the first quarter
of calendar year 1996 to the lowest long-term fixed rate offered during 1996
for the term selected. At January 1 and May 31, 1996, the standard long-term
fixed rates were 6.65% and 7.65%, respectively.
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 1996 repayments of principal
on long-term loans outstanding are expected to be a relatively minor amount of
such outstanding loans.
CFC evaluates each borrower's creditworthiness on a case-by-case basis. It is
generally CFC's policy to require collateral for most long-term and some
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 and certain other restrictive
covenants.
Under common mortgages securing long-term CFC loans to distribution system
members, 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 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, 1996 and 1995, mortgage notes representing approximately
$1,094.2 million and $789.9 million, respectively, of outstanding long-term
loans to members were pledged as collateral to secure CFC's Collateral Trust
Bonds.
CFC has received no guarantee of its loans from RUS; however, "Refinancing
loans guaranteed by RUS" represents loans made by CFC and transferred to its
affiliate GFC to fund the prepayment of members' Federal Financing Bank debt,
effected through grantor trusts which each hold a note from the member, the
repayment of which has been guaranteed by RUS. Each trust issues Trust
Certificates which represent an undivided interest in the trust assets.
GFC, as holder of Trust Certificates, is financing these loans from funds
provided by CFC at a variable rate until fixed rate funding is obtained
through the public markets.
CFC sets the variable interest rates monthly on outstanding short- and
intermediate-term loans. On notification to borrowers, CFC may adjust the
interest rate semimonthly. Under CFC 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
1.5% per annum; and on RTFC short-term loans, the prevailing bank prime rate
plus 3% per annum.
64
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
At May 31, 1996, 1995 and 1994, nonperforming loans in the amount of $25.3
million, $27.6 million and $44.9 million, respectively, 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 $2.5 million, $2.1 million and $1.5 million for the years ended May 31,
1996, 1995 and 1994, respectively. Income recognized on these loans totaled
$0.1 million, $0.7 million and $0.5 million, respectively.
At May 31, 1996, 1995 and 1994, the total amount of restructured debt was
$209.4 million, $185.0 million and $165.4 million, respectively. CFC elected
to apply all principal and interest payments received against principal
outstanding on restructured debt of $205.1 million, $131.1 million and $111.5
million, respectively. The interest income that would have been recorded
under the original terms of the debt, assuming the debt had been outstanding
for the period, was $15.0 million, $12.4 million and $8.4 million, for the
years ended May 31, 1996, 1995 and 1994, respectively. The interest income
actually recorded for restructured debt was $3.1 million, $3.5 million and
$4.0 million, respectively. At May 31, 1995, CFC had committed to lend $20.0
million to borrowers performing under restructured terms.
(3) Members' Subordinated Certificates
Membership Subscription 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 certain Subordinated Certificates. Such
certificates are interest-bearing, unsecured, subordinated debt of CFC.
CFC is authorized to issue subscription certificates without limitation as
to the total principal amount.
Generally, Membership Subscription Certificates mature in the years 2070
through 2095 and bear interest at 3% or 5% per annum.
New members joining CFC are required to purchase Membership Subscription
Certificates in an amount equal to 5% of each loan advance up to a maximum
amount based on their operating results. The maturity dates and interest
rates payable on such certificates vary in accordance with applicable CFC
policy.
In certain cases, the Board of Directors has approved alternative deferred
payment arrangements for purchase of subscription certificates. These
deferred payments are evidenced by noninterest-bearing, unsecured notes
from the member and are shown as receivables.
Loan and Guarantee Certificates
Members obtaining long-term loans, certain intermediate-term loans or
guarantees from CFC or RTFC are generally required to purchase additional
Subordinated Certificates with each such loan or guarantee. These
certificates are unsecured, subordinated debt of CFC and RTFC.
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 loan, with CFC, for Utility Systems.
The maturity dates and the interest rates payable on certificates purchased
in conjunction with CFC's guarantee program vary in accordance with applicable
CFC policy. In addition, members may also be required to purchase noninterest-
bearing Subordinated Certificates in connection with CFC's guarantee of long-
term tax-exempt bonds (see Note 8). These certificates have varying
maturities but none is greater than the longest maturity of the guaranteed
obligation. Proceeds from the sale of such certificates are pledged by CFC
to the Debt Service Reserve Fund established in connection with the
65
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
bond issue, and any earnings from the investments of the fund inure solely to
the benefit of the members for whose benefit the bonds are issued.
Information with respect to Members' Subordinated Certificates at May 31, is
as follows:
(Dollar Amounts In Thousands) 1996 1995
Membership Subscription Certificates:
Number of subscribing members 903 903
Issued and outstanding:
3% and 5% certificates maturing
2020 through 2095 $ 631,282 $ 630,249
Subscribed and unissued 7,158 6,880
Total Membership Subscription Certificates 638,440 637,129
Loan and Guarantee Certificates:
Issued and outstanding:
3% certificates maturing through 2040 129,520 140,911
5.74% to 13.70% certificates maturing through 2018 125,139 137,905
Noninterest-bearing certificates maturing through 2029 290,352 301,354
Subscribed and unissued 24,233 17,416
Total Loan and Guarantee Certificates 569,244 597,586
Total Members' Subordinated Certificates $1,207,684 $1,234,715
CFC estimates the amount of Members' Subordinated Certificates that will be
repaid during the next five fiscal years will total approximately 2.25% of
certificates outstanding. The weighted average interest rate paid on all
Subordinated Certificates was 4.29%, 4.36% and 4.46% as of May 31, 1996,
1995 and 1994, respectively. These rates do not include $102.5 million,
$114.1 million and $107.1 million of debt service reserve certificates and
$31.4 million, $24.3 million and $29.3 million of subscribed but unissued
Subordinated Certificates at May 31, 1996, 1995 and 1994, respectively.
66
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continue)
(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:
1996 1995
Weighted Weighted
Average Average
Amounts Interest Amounts Interest
(Dollar Amounts In Thousands) Outstanding Rates Outstanding Rates
Commercial paper, sold through dealer, net of
discounts of $17,540 and $23,981, respectively $3,482,133 5.43% $2,783,018 6.13%
Commercial paper sold by CFC directly to members,
at par 1,170,039 5.33% 1,049,474 6.06%
Commercial paper sold by CFC directly to nonmembers,
at par 65,898 5.33% 60,078 6.06%
4,718,070 5.41% 3,892,570 6.11%
Bank bid notes 183,500 5.42% 350,000 6.11%
Long-term debt maturing within one year 299,982 7.75% - -
5,201,552 5.54% 4,242,570 6.11%
Notes payable supported by revolving credit agreements,
classified as long-term debt (see Note 5) (2,730,000) 5.54% (2,430,000) 6.11%
$2,471,552 5.54% $1,812,570 6.11%
Other information with regard to notes payable due within one year at
May 31, is as follows:
(Dollar Amounts In Thousands) 1996 1995 1994
Original maturity range of notes
outstanding at year-end 1 to 270 days 1 to 261 days 1 to 269 days
Weighted average maturity of notes
outstanding at year-end 35 days 65 days 36 days
Average amount outstanding during the year $4,839,483 $3,895,274 $2,954,783
Maximum amount outstanding at any month-end
during the year $5,201,552 $4,242,570 $3,637,975
Weighted average interest rate paid for the
year,without effect of compensating balances
and commitment fees 5.77% 5.44% 3.48%
Weighted average effective interest rate paid
for the year, including effect of compensating
balances and commitment fees 5.83% 5.59% 3.67%
CFC issues short-term bid notes which are unsecured obligations of CFC and
do not require back-up bank lines for liquidity purposes. Bid note facilities
are uncommitted lines of credit for which CFC does not pay a fee. The
commitments are generally subject to termination at the discretion of the
individual banks.
67
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
As of May 31, 1996, CFC had three revolving credit agreements totaling
$5,050.0 million which are used principally to provide liquidity support
for CFC's outstanding commercial paper, CFC's guaranteed commercial paper
issued by NCSC and the adjustable or floating/fixed rate bonds which CFC
has guaranteed and is standby purchaser for the benefit of its members.
Two of these credit agreements, which total a combined $4,550.0 million,
were executed with 60 banks, with J.P. Morgan Securities, Inc. and The Bank
of Nova Scotia as Co-Syndication Agents and Morgan Guaranty Trust Company
of New York as Administrative Agent. Under these agreements, CFC can borrow
up to $2,730.0 million until February 28, 2000 (the "five-year facility"),
and $1,820.0 million until February 25, 1997 (the "364-day facility"). Any
amounts outstanding under these facilities will be due on the respective
maturity dates. A third revolving credit agreement for $500.0 million was
executed on April 30, 1996 with ten banks, including the Bank of Nova Scotia
as Administrative and Syndication Agent (the "BNS facility"). This agreement
has a 364-day revolving credit period which terminates April 29, 1997 during
which CFC can borrow and such borrowings may be converted to a 1-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 .10 of 1% and per annum commitment fee of .025 of 1%. The per annum
facility fee for both agreements with a 364-day maturity is .08 of 1% and
there is no commitment fee at CFC's current credit rating level. If CFC's
long-term ratings decline, these fees may be increased by no more than .1250
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 revolving credit agreements require CFC among other things to maintain
Members' Equity and Members' Subordinated Certificates of at least $1,346.3
million at May 31, 1996, an increase of $1.3 million compared to the $1,345.0
million required at May 31, 1995. Each year, the required amount of Members'
Equity and Members' Subordinated Certificates is increased by 90% of net
margins not distributed to members. CFC is also required to maintain an
average fixed charge coverage ratio over the six most recent fiscal quarters
of at least 1.025 and prohibit the retirement of patronage capital unless
CFC has achieved a fixed charge coverage ratio of 1.05 for the preceding
fiscal year. The 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 and subordinated debt and restrict, with certain exceptions, the
creation by CFC of liens on its assets and contain certain other conditions
to borrowing. 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 by or reserved against in its most recent annual
financial statements) and is not in default, CFC may borrow under the
agreements until the termination date. As of May 31, 1996 CFC was in
compliance with all covenants and conditions.
As of May 31, 1996 there were no borrowings outstanding under the revolving
credit agreements. On the basis of the five-year facility, at May 31, 1996,
CFC classified $2,730.0 million of its notes payable outstanding as long-term
debt. CFC expects to maintain more than $2,730.0 million of notes payable
outstanding during the next 12 months. If necessary, CFC can refinance such
notes payable on a long-term basis by borrowing under the five-year facility,
subject to the conditions therein.
68
NATIONAL RURAL UTILTIIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(5) Long-Term Debt
The following is a summary of long-term debt as of May 31:
(Dollar Amounts In Thousands)
1996 1995
Notes payable supported by revolving
credit agreement (see Note 4) $2,730,000 $2,430,000
Medium-Term Notes, sold through dealer 265,275 206,975
Medium-Term Notes, sold directly to members 338,977 366,662
604,252 573,637
Collateral Trust Bonds:
Floating Rate, Series 1994A, due 1996 (1)(2) - 150,000
9.50%, Series T, due 1997 (2) (3) - 150,000
8.50%, Series U, due 1998 (3) 150,000 150,000
6.45%, Bonds, due 2001 (1) 100,000 -
6.50%, Bonds, due 2002 (1) 100,000 -
5.95%, Bonds, due 2003 (1) 100,000 -
6.65%, Bonds, due 2005 (1) 50,000 -
Floating Rate, Series E-2, due 2010 (3) 2,178 2,189
7.20%, Bonds, due 2015 (1) 50,000 -
9.00%, Series O, due 2016 (3) - 83,200
9.00%, Series V, due 2021 (3) 150,000 150,000
702,178 685,389
Less: Collateral Trust Bonds held in treasury 200 1,111
Unamortized bond discount 2,349 2,233
Total Collateral Trust Bonds 699,629 682,045
Total long-term debt $4,033,881 $3,685,682
(1) Issued under the 1994 indenture.
(2) As of May 31, 1996, included with short term debt.
(3) Issued under the 1972 indenture.
The weighted average interest rate on Medium-Term Notes and Collateral Trust
Bonds was 7.20%, 7.90% and 8.06% as of May 31, 1996, 1995 and 1994. These
rates do not include notes payable supported by the revolving credit agreement.
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, 1996, is as follows:
(Dollar Amounts In Thousands)
1997 $351,460
1998 222,884
1999 91,445
2000 16,436
2001 127,352
69
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
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,
1996 and 1995, CFC had $40.9 million and $32.7 million of such funds invested
in bank certificates of deposit and marketable securities, respectively.
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 indenture. Medium-
Term Notes are unsecured obligations of CFC.
The following table lists the notional principal amounts and the weighted
average interest rates paid by CFC under interest rate exchange agreements
at May 31, 1996 and 1995:
(Dollar Amounts in Thousands)
Maturity Interest Rate Paid Notional Principal Amount
Date 1996 1995 1996 1995
August 1996 (1) 8.40% 8.40% $ 30,000 $ 30,000
September 1996 (2) 5.82% 5.90% 150,000 150,000
February 1997 (1) 9.34% 9.34% 35,000 35,000
February 1997 (1) 9.33% 9.33% 40,000 40,000
February 1997 (1) 9.36% 9.36% 25,000 25,000
February 1998 (2) 5.83% 5.57% 50,000 50,000
October 2004 (1) 6.23% - 45,600 -
April 2006 (1) 6.88% - 25,000 -
April 2006 (1) 6.89% - 25,000 -
April 2006 (1) 6.88% - 25,000 -
April 2006 (1) 6.89% - 25,000 -
Total $475,600 $ 330,000
__________
(1) Under these agreements, CFC pays a fixed rate of interest and receives
interest based on a variable rate.
(2) Under these agreements, CFC pays a variable rate of interest and receives
a variable rate of interest.
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. During fiscal year 1996, CFC received a weighted average rate
of 5.87%, 5.46%, 5.89%, 5.91%, 5.75%, and 5.49% on the interest rate exchange
agreements maturing August 1996, February 1997, February 1997, February 1997,
October 2004 and all April 2006 agreements, respectively. 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
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. During fiscal 1995, CFC
received a weighted average rate of 5.84% and 5.87% on the interest rate
exchange agreements maturing in September 1996 and February 1998,
respectively. The net difference between the rate paid by CFC and the
rate received is included in the cost of funds.
CFC is exposed on these interest rate swap agreements to interest rate risk
if the counterparty to the interest rate swap agreement does not perform to
the agreement's terms. CFC's policy is to enter swap agreements only with
financial institutions with at least a AA long-term credit rating.
70
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(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, 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. A moratorium on contributions had been in effect since July 1, 1987,
when the plan reached the full funding limitation. CFC was not required to
pay any amounts for the retirement and security plans during fiscal year 1996
due to the funding moritorium that was in effect. Funding requirements are
charged to general and administrative expenses as 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 $150,000 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.
CFC recognizes in current year margins any expected payouts for post retirement
benefits (other than pensions) as a result of current service. Postretirement
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 cashflows.
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. Employee
contributions for calendar year 1996 are tax deductible up to $9,500, the
limit set by IRS regulations. Employees may contribute additional amounts
to the program on an after-tax basis subject to the limitations established
by section 415 of the IRC. The Company will contribute an amount equal to 2%
of an employee's salary each year for all employees participating in the
program. During the year ended May 31, 1996, the Company contributed a total
of $141,000 under the program.
(7) Retirement of Patronage Capital
Patronage capital in the amount of $48.8 million was retired during fiscal
year 1996. This amount consists of $40.4 million retired to CFC Members,
excluding RTFC and GFC, $5.2 million retired to RTFC Members and $3.2 million
retired to GFC Members.
It is anticipated that CFC will retire patronage capital totaling $50.7
million, representing one-sixth of the fiscal years 1988, 1989 and 1990
allocations and 70% of the fiscal year 1996 allocation, in August 1996.
Management anticipates that 70% of RTFC's margins for fiscal year 1996 will
be retired in January 1997, and that 100% of GFC's margins for fiscal year
1996 will be retired in the second quarter of fiscal year 1997. Future
retirements of patronage capital will be made as determined by the Companies'
respective Boards of Directors with due regard for their individual financial
conditions.
71
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(8) Guarantees
As of May 31, 1996 and 1995, CFC had outstanding guarantees of the following
contractual obligations of its members (see Note 1(e) for a description of
CFC's allowance for loan and guarantee losses and Note 3 for a discussion of
requirements to purchase Members' Subordinated Certificates in connection
with these guarantees):
(Dollar Amounts In Thousands)
1996 1995
Long-term tax exempt bonds (A) $1,317,655 $1,496,930
Debt portions of leveraged lease transactions (B) 432,516 568,662
Indemnifications of tax benefit transfers (C) 363,702 389,755
Other guarantees (D) 135,567 119,575
Total $2,249,440 $2,574,922
(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 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, $1,168.9 million and $1,200.1 million as of May
31, 1996 and 1995, 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 which 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, 1996 and 1995. 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 the 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) At May 31, 1996 and 1995, CFC had unconditionally guaranteed commercial
paper issued by NCSC in the amount of $34.7 million and $34.9 million,
respectively.
72
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Guarantees outstanding, by state, are summarized as follows:
(Dollar Amounts In Thousands)
May 31, May 31,
State 1996 1995 State 1996 1995
Alabama $ 71,680 $ 74,605 Nebraska $ 3,620 $ 3,855
Arizona 59,370 61,360 North Carolina 120,050 122,350
Arkansas 137,897 262,574 Oklahoma 63,326 70,208
Colorado 114,750 115,193 Oregon 5,070 5,180
Florida 320,834 328,458 Pennsylvania 14,547 15,426
Indiana 129,561 131,904 South Carolina 47,310 48,265
Iowa 12,015 12,775 Texas 125,528 125,623
Kansas 41,841 42,528 Utah 304,482 322,840
Kentucky 197,390 183,300 Virginia 39,133 4,550
Maryland 0 34,898 Wisconsin 8,385 8,850
Minnesota 156,077 172,768 Total $2,249,440 $2,574,922
Mississippi 71,710 74,135
Missouri 204,864 353,277
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 to the amount of
obligations guaranteed by CFC:
(Dollar Amounts In Thousands)
Amount
1997 (1) $197,501
1998 8,621
1999 12,766
2000 16,781
2001 4,588
$240,257
________
(1) Includes the refinancing of a tax-exempt bond issue guaranteed by CFC.
(9) Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with FASB Statement 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, 1996, along with other valuation methodologies which are summarized
below. However, the estimated fair value information presented is not
necessarily indicative of amounts CFC could realize currently in a market
sale as such amounts have not been revalued since year end. 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 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, 1996.
Cash and Cash Equivalents
Includes cash and certificates of deposit with remaining maturities of less
than 90 days, which are valued at cost.
73
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
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 invest-
ments 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.
Debt Service Reserve Funds
Fair value of debt service reserve funds is estimated at cost as all gains
and losses on the underlying securities inure directly to the benefit or
detriment of the CFC member and not to CFC.
Notes Payable
Notes payable consist of commercial paper and bank bid notes. The fair value
of commercial paper and 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. The fair value of Collateral Trust Bonds maturing
within one year 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.
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.
Subordinated Certificates
As it is impracticable to develop a discount rate that measures fair value,
Subordinated Certificates have not been valued. 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 issued not only for their
future payment stream but also as a condition of membership and to receiving
future loan funds, there is no ready market from which to obtain fair value
rates.
Interest Rate Exchange Agreements
The fair value 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.
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
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Guarantees
CFC charges guarantee fees based on the specifics of each individual
transaction. The demand for CFC guarantees has been small 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 fee
information. As a result, it is impracticable to supply fair value
information related to guarantee fees.
Carrying and fair values as of May 31, 1996 and 1995 are presented as follows:
(Dollar Amounts In Thousands) 1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
Assets: Cash and Cash Equivalents $ 56,368 $ 56,368 $ 56,309 $ 56,309
Debt Service Investments 40,907 40,907 32,740 32,740
Loans to Members, net 7,728,271 7,661,739 6,747,124 6,810,007
Debt Service Reserve Funds 102,512 102,512 114,094 114,094
Liabilities:
Notes Payable (1) 5,201,552 5,206,878 4,242,570 4,242,859
Long-Term Debt (1) 1,303,881 1,358,688 1,255,682 1,355,463
Members' Subordinated Certificates 1,207,684 1,207,684 1,234,715 1,234,715
Off-Balance Sheet Instruments:
Interest Rate Exchange Agreements - (6,458) - (11,196)
Commitments - - - -
Guarantees - - - -
(1) Prior to reclassification of notes payable supported by the revolving
credit agreements.
(10) Contingencies
(a) At May 31, 1996 and 1995, CFC had a total of $230.4 million and
$158.8 million of loans classified as impaired with respect to
the provisions of FASB Statements No. 114 and 118. At those dates,
CFC had allocated $160.9 million and $40.1 million of the loan and
guarantee loss allowance to such impaired loans. At May 31, 1996
and 1995, 32% and 97% of impaired loans were collateral dependent.
Loans are considered to be collateral dependent when there are no
reliable future payment schedules and the amount expected to be
collected is directly related to the value of the assets and future
revenues that represent the underlying security for the loan. CFC
does not recognize interest income on loans classified as impaired.
Instead, all payments received are applied as a reduction to
principal outstanding. The average recorded investment in impaired
loans, for the year ended May 31, 1996, was $184.8 million.
(b) On May 23, 1985, Wabash Valley Power Association, Inc. ("Wabash")
filed a voluntary petition for reorganization under Chapter 11 of
the U.S. Bankruptcy Code in connection with the canceled Marble
Hill plant construction.
On August 7, 1991, the Bankruptcy Court confirmed Wabash's
reorganization plan pending approval of rates as contemplated
in the plan.
75
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
On June 22, 1994, the U.S. District Court affirmed (over RUS's
objection) the Wabash plan of reorganization. RUS appealed the
decision to the U.S. Court of Appeals. On December 28, 1995, the
U.S. Court of Appeals reaffirmed the Wabash plan of reorganization.
RUS requested that the U.S. Court of Appeals rehear the case. The
judges of the Court of Appeals have denied the RUS request. RUS may
appeal the case to the U.S. Supreme Court. The initial time period
to file an appeal to the U.S. Supreme Court has expired, but RUS has
been granted an extension.
Under the Wabash plan, CFC would realize an estimated total loss of
approximately $12 million ($8.6 million of which has been written off
to date), after the offset of subordinated capital term certificates
(without taking into account interest since the petition date). CFC
and RUS have agreed to distribute all proceeds from Wabash in
compliance with provisions under a shared mortgage. Upon resolution
of the bankruptcy, there will be a final accounting of the cashflow
subsequent to the petition date. At this time, it is anticipated that
this final accounting will result in CFC making a net payment to RUS
to true-up the cash distribution between RUS and CFC. The estimated
loss under the Wabash plan does not include any amount CFC may be
obligated to pay to RUS, representing RUS's share of the debt service
payments made by Wabash on the CFC guaranteed bonds, since the
petition date.
In May 1993, CFC advanced $24.4 million in variable interest rate
secured loans to Wabash, which was used to effect an early redemption
of tax-exempt bonds guaranteed by CFC. As Wabash is in bankruptcy,
CFC has classified these loans as nonperforming and, therefore, does
not accrue interest income on the loans. As of May 31, 1996, CFC had
$18.7 million in loans outstanding to Wabash.
Based on Wabash's preliminary reorganization plan, management believes
that CFC has adequately reserved for any potential loss.
(c) Deseret Generation & Transmission Co-operative ("Deseret") and its
major creditors entered into an Agreement Restructuring Obligations
("ARO") that restructured Deseret's debt obligations to RUS, CFC and
certain other creditors, including certain lease payments due on the
Bonanza Power Plant. The ARO had an effective date of January 1,
1989. The agreement provided for the reduction of Deseret's debt
service and rental obligations on the Bonanza Power Plant until
January 1996, when large sales of power were intended to commence.
Deseret failed to make the payments required under the ARO during
1995. Deseret's creditors agreed to extend the provisions of the
ARO first through January 31, 1996 and then until February 29, 1996.
The extensions were intended to allow the creditors to develop final
terms for a long-term restructuring of the ARO. The creditors were
unable to agree on the terms of a negotiated settlement and thus the
ARO was terminated as of February 29, 1996. CFC filed a foreclosure
action against the owner of the Bonanza Plant in State Court in Utah
on March 21, 1996. In this action, CFC has not terminated the lease
or sought removal of Deseret as the plant operator. One of the
defendants in the action has asserted counterclaims against CFC
alleging that the remedies which CFC seeks are not available to it
and that CFC seeks such remedies in an improper manner. At this time,
the counterclaims are very general in nature making it hard to
determine any potential impact on CFC. Another party, not named in
the action, has successfully intervened and joined the action. All
actions are currently in the discovery process, which should be
completed in August 1996. CFC continues to discuss the possibility
of a workout, including a buyout of RUS claims, with Deseret creditors
other than the owners of the Bonanza Plant.
CFC, RUS, Deseret and the members of Deseret continue to work toward
the terms of an agreement in which CFC would purchase the RUS claims
against Deseret for approximately $250 million, with Deseret's members
purchasing separate participations in these claims from CFC. CFC
would fund the Deseret members' portion of the purchase through
secured loans to the members. In addition, RUS would require the
Deseret members to prepay their RUS loans totaling approximately
$50 million. CFC would fund the prepayment of the RUS loans by the
Deseret members through long-term secured loans to the members. The
total amount lent to the Deseret members, approximately $105 million,
would be secured against the assets and future revenues of the
respective members and not by the assets of Deseret. In addition,
CFC would provide Deseret with a $20 million secured line of credit.
Deseret, RUS and CFC have entered into agreements which have since
been modified but continue through September 6, 1996, regarding
certain obligations and payments to be performed or made by Deseret
in exchange for forebearance by RUS from pursuing certain remedies.
76
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
From January 1, 1995 through May 31, 1996, CFC has funded $139.4
million in cashflow shortfalls related to Deseret's debt service and
rental obligations. As of May 31, 1996, CFC had approximately $461.6
million in current credit exposure to Deseret consisting of $157.1
million in secured loans and $304.5 million in guarantees by CFC of
various direct and indirect obligations of Deseret. CFC's guarantees
include $6.0 million in tax-benefit indemnifications and $26.5 million
relating to mining equipment for a coal supplier of Deseret. The
remainder of CFC's guarantee is for semiannual debt service payments
on $272.0 million of bonds issued in a $655 million leverage lease
financing of the Bonanza Plant in 1985.
CFC believes that, given the underlying collateral value and its
secured position under the mortgage of the Bonanza Plant, it is
adequately reserved for any potential loss on its loans and guarantees
to Deseret.
(d) As a consequence of high costs associated with its involvement with
the Clinton Nuclear Station, Soyland Power Cooperative ("Soyland")
charged costs for wholesale power which resulted in its members'
retail rates being uncompetitive. This situation resulted in
revenues which were inadequate to service its debt. Soyland, RUS
and CFC entered into a debt restructuring agreement, dated as of
December 15, 1993, which restructured Soyland's indebtedness to RUS.
As part of this agreement, CFC agreed to extend additional credit to
Soyland in the form of a $30 million revolving credit facility and a
$30 million loan for capital additions. The revolving credit loan and
the capital additions loan have priority in payment over the existing
RUS loans and the prior CFC loan.
At May 31, 1996, CFC had $48.0 million in outstanding long-term loans
to Soyland which were secured equally and ratably with the RUS on all
assets and future revenues of Soyland. In addition, CFC had $14.8
million in senior-secured long-term variable rate loans and $12.7
million in senior-secured lines of credit outstanding to Soyland.
These senior-secured facilities are to be paid before all other
secured debt. CFC also had $274.0 million in loans to Soyland which
are 100% guaranteed by RUS. As of April 1, 1996, CFC placed the $48.0
million loan on a nonaccrual status with respect to interest income.
All payments received since that date were applied against principal
outstanding for financial statement purposes only. Soyland was
current with respect to all payments due as of May 31, 1996.
Subsequent to year end Soyland's $48.0 million loan has been
reclassified from restructured to nonperforming and interest income
will be recognized on a cash basis as received by CFC. The long-term
variable rate loan and the line of credit have not been reclassified
due to their superior security position.
Soyland has determined that in order to compete with other power
producers, it must reduce its cost of producing power. Soyland's
largest cost of producing power is the servicing of its debt. Soyland
has made a proposal to RUS regarding the reduction of its debt.
Soyland was considering bankruptcy, but has agreed to work with CFC
to find a solution to its current problems.
Soyland has negotiated a settlement of its outstanding debt with RUS.
Under the settlement, Soyland will pay the government $235 million and
will be released from all of its obligations to the government
pursuant to RUS loans or guarantee programs. CFC has agreed to
finance Soyland's buyout from RUS, contingent upon receiving
guarantees from Soyland's members for a significant portion of the
loan amount. CFC, Soyland and the members of Soyland are currently
working to finalize the terms of this agreement.
CFC believes that, given the underlying collateral value of its
secured loans to Soyland, it has adequately reserved for any potential
loss on its loans.
(e) At May 31, 1996, two other borrowers were in payment default to CFC on
secured and unsecured loans totaling $6.6 million. At May 31, 1995,
the same two borrowers were in payment default to CFC on secured and
unsecured loans totaling $6.7 million.
77
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
(11) Extraordinary Loss
During the year ended May 31, 1996, CFC paid a prepayment penalty of
$1.6 million for the early retirement of Collateral Trust Bonds.
During the years ended May 31, 1995 and 1994, CFC did not incur any
prepayment penalties related to the early retirement of Collateral
Trust Bonds.
(12) Combined Quarterly Financial Results (Unaudited)
Summarized results of operations for the four quarters of fiscal years
1996 and 1995 are as follows:
Fiscal Year 1996
(Dollar Amounts In Thousands) Quarters Ended
Total
August 31 November 30 February 29 May 31 Year
Operating income $122,048 $124,880 $126,269 $131,876 $505,073
Operating margin 11,569 11,563 11,470 12,255 46,857
Nonoperating income 819 928 1,311 706 3,764
Extraordinary loss - - - (1,580) (1,580)
Net margins 12,388 12,491 12,781 11,381 49,041
Fiscal Year 1995
Quarters Ended Total
August 31 November 30 February 28 May 31 Year
Operating income $ 97,985 $104,513 $116,210 $121,401 $440,109
Operating margin 13,940 13,437 14,101 325 41,803
Nonoperating income 511 1,071 916 911 3,409
Net margins 14,451 14,508 15,017 1,236 45,212
NOTE: During fiscal year 1996, CFC made nine monthly provisions for loan and
guarantee losses of $0.625 million and seven special provisions
totaling $6.8 million. During fiscal year 1995, CFC made 12 monthly
provisions for loan and guarantee losses of $0.625 million and one
special provision of $9.9 million during the fourth quarter.