Back to GetFilings.com
_____________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7102
NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DISTRICT OF COLUMBIA
(State or other jurisdiction of incorporation or organization)
52-0891669
(I.R.S. Employer Identification Number)
2201 COOPERATIVE WAY, HERNDON, VA 20171
(Address of principal executive offices)
(Registrant's telecommunications number, including area code, is 703-709-6700)
Securities registered pursuant to Section 12(b) of the Act:
Name of each Name of each
exchange on exchange on
Title of each class which registered Title of each class which registered
Var Collateral Trust Bonds Due 1999 NYSE 6.65% Collateral Trust Bonds Due 2005 NYSE
6.45% Collateral Trust Bonds Due 2001 NYSE 7.30% Collateral Trust Bonds Due 2006 NYSE
6.75% Collateral Trust Bonds Due 2001 NYSE 6.20% Collateral Trust Bonds Due 2008 NYSE
6.70% Collateral Trust Bonds Due 2002 NYSE 5.75% Collateral Trust Bonds Due 2008 NYSE
6.50% Collateral Trust Bonds Due 2002 NYSE 5.70% Collateral Trust Bonds Due 2010 NYSE
5.00% Collateral Trust Bonds Due 2002 NYSE 7.20% Collateral Trust Bonds Due 2015 NYSE
5.95% Collateral Trust Bonds Due 2003 NYSE 6.55% Collateral Trust Bonds Due 2018 NYSE
5.30% Collateral Trust Bonds Due 2003 NYSE 9.00% Collateral Trust Bonds, Series V Due 2021 NYSE
6.00% Collateral Trust Bonds Due 2004 NYSE 7.35% Collateral Trust Bonds Due 2026 NYSE
6.375% Collateral Trust Bonds Due 2004 NYSE 8.00% Quarterly Income Capital Securities Due 2045 NYSE
5.50% Collateral Trust Bonds Due 2005 NYSE 7.65% Quarterly Income Capital Securities Due 2046 NYSE
6.125% Collateral Trust Bonds Due 2005 NYSE 7.375% Quarterly Income Capital Securities Due 2047 NYSE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained
to the best of the registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part IV of this Form 10-K or any
amendment to this Form 10-K. Yes X No .
The Registrant has no stock.
_____________________________________________________________________________
TABLE OF CONTENTS
Part No. Item No. Page
I. 1. Business 1
General 1
Members 1
Distribution Systems 2
Power Supply Systems 3
Service Organizations and Associate
Member Systems 3
Telecommunications Systems 3
Loan Programs 3
Interest Rates on Loans 5
Electric Loan Programs 5
Telecommunications Loan Programs 6
RUS Guaranteed Loans 7
Largest Borrowers 7
Credit Limitation 8
Loan Security 8
Conversion of Loans 8
Prepayment of Loans 8
Pledging of Loans 9
Guarantee Programs 9
Guarantees of Long-Term Tax-Exempt Bonds 9
Guarantees of Lease Transactions 9
Guarantees of Tax Benefit Transfers 10
Other Guarantees 10
CFC Financing Factors 10
Members' Subordinated Certificates 10
Members' Equity 11
Debt Issuance 11
Interest Rate and Currency Exchange Agreements 11
Revolving Credit Agreements 11
Tax Status 12
Investment Policy 12
Employees 13
CFC Lending Competition 13
Member Regulation and Competition 13
The RUS Program 16
Member Financial Data 16
2. Properties 25
3. Legal Proceedings 25
4. Submission of Matters to a Vote of Security Holders 25
II. 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 26
6. Selected Financial Data 26
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 27
7A. Quantitative and Qualitative Disclosures About
Market Risk 42
8. Financial Statements and Supplementary Data 42
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 42
III. 10. Directors and Executive Officers of the Registrant 43
11. Executive Compensation 47
12. Security Ownership of Certain Beneficial Owners and
Management 49
13. Certain Relationships and Related Transactions 49
IV. 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 50
Part I
Item 1. Business.
General
National Rural Utilities Cooperative Finance Corporation ("CFC") was
incorporated as a private, not-for-profit cooperative association under the
laws of the District of Columbia in April 1969. The principal purpose of CFC
is to provide its members with a dependable source of low cost capital and
state-of-the-art financial products and services. CFC provides its members
with a source of financing to supplement the loan programs of the Rural
Utility Service ("RUS") of the United States Department of Agriculture.
CFC will also lend 100% of the loan requirement for those members electing
not to borrow from RUS. CFC is owned by and makes loans primarily to its
rural utility system members ("Utility Members") to enable them to acquire,
construct and operate electric distribution, generation, transmission and
related facilities. CFC also provides guarantees to its members for
tax-exempt financings of pollution control facilities, properties constructed
or acquired by its members, taxable debt in connection with certain leases
and various other transactions. CFC is exempt from federal income taxes
under the provisions of IRS code section 501(c)(4). CFC has formed two
affiliated corporations that are controlled by CFC through majority
representation on the companies' boards of directors.
Rural Telephone Finance Cooperative ("RTFC") was incorporated as a taxable
cooperative association in the state of South Dakota in September 1987.
RTFC is a controlled affiliate of CFC and was created for the purpose of
providing financing to its rural telecommunication members and affiliates.
RTFC's bylaws and voting members' agreement require that the majority of
RTFC's Board of Directors be elected from individuals designated by CFC.
CFC is the sole source of external funding for RTFC.
Guaranty Funding Cooperative ("GFC") was organized in December 1991 as a
taxable cooperative association owned by its member rural electric systems
and CFC to provide a source of funds for members to refinance the RUS
guaranteed debt previously held by the Federal Financing Bank of the United
States Treasury ("FFB"). GFC is a controlled affiliate of CFC (the majority
of its directors are appointed by CFC). All loans from GFC are guaranteed by
RUS. CFC is the sole source of external funding for GFC.
Except as indicated, financial information presented herein includes CFC,
RTFC and GFC on a combined basis.
CFC provides financing for rural utility cooperatives and companies. There
are two primary segments of CFC's business, rural electric lending and rural
telecommunications lending. Lending to electric cooperatives is done through
CFC and GFC and lending to telecommunications organizations is done through
RTFC. In many cases, the customers of the electric cooperatives are also
the customers of the telecommunications organizations, as both sets of
members serve the rural areas of the United States.
Members
CFC had 1,057 members as of May 31, 1999, including 908 Utility Members,
virtually all of which are consumer-owned cooperatives, 76 service members
and 73 associate members. The Utility Members included 838 distribution
systems and 70 generation and transmission ("power supply") systems operating
in 48 states and U.S. territories.
CFC currently has five classes of members:
* Class A - cooperative or nonprofit distribution systems;
* Class B - cooperative or nonprofit power supply systems;
* Class C - statewide and regional associations which are wholly-owned or
controlled by Class A or Class B members;
* Class D - national associations of cooperatives; and
* Class E - associate members - nonprofit groups or entities organized on
a cooperative basis which are owned, controlled or operated by
Class A, B or C members and which provide non-electric services
primarily for the benefit of ultimate consumers. Associate
members are not entitled to vote at any meeting of the members
and are not eligible to be represented on CFC's Board of
Directors.
1
RTFC had 531 members as of May 31, 1999. Membership in RTFC is limited to
CFC and commercial or cooperative (non-profit) telecommunications systems
eligible to receive loans or other assistance from RUS and which are engaged
(or plan to be engaged) in providing telecommunication services to ultimate
users and affiliates of such corporations.
GFC had three members as of May 31, 1999. Membership in GFC is limited to
CFC and cooperative or nonprofit Utility Member systems who have refinanced
all or a portion of their FFB debt through CFC.
Set forth below is a table showing by state or U.S. territory the total number
of CFC, RTFC and GFC members (memberships in each other have been eliminated
and corporations which belong to more than one of CFC, RTFC and GFC have been
counted only once), the percentage of total loans and the percentage of total
loans and guarantees outstanding at May 31, 1999.
Number Loan and Number Loan and
of Loan Guarantee of Loan Guarantee
Members % % Members % %
Alabama 31 1.5% 1.7% Montana 39 1.7% 1.5%
Alaska 29 1.5% 1.3% Nebraska 40 0.1% 0.1%
American Samoa 1 0.0% 0.0% Nevada 5 0.6% 0.5%
Arizona 21 0.6% 0.9% New Hampshire 7 1.9% 1.7%
Arkansas 30 3.1% 3.5% New Jersey 1 0.1% 0.0%
California 11 0.4% 0.4% New Mexico 26 0.6% 0.6%
Colorado 38 2.7% 2.5% New York 15 0.1% 0.1%
Connecticut 1 0.0% 0.0% North Carolina 45 4.5% 4.7%
Delaware 2 0.1% 0.1% North Dakota 36 0.4% 0.3%
District of Columbia 7 1.9% 1.7% Ohio 40 2.3% 2.0%
Florida 21 3.4% 4.9% Oklahoma 52 2.6% 2.6%
Georgia 74 7.9% 7.1% Oregon 39 1.9% 1.7%
Guam 1 0.0% 0.0% Pennsylvania 24 0.8% 0.8%
Idaho 16 0.8% 0.7% South Carolina 38 4.1% 3.7%
Illinois 57 3.8% 3.4% South Dakota 52 1.3% 1.2%
Indiana 54 1.3% 2.0% Tennessee 27 0.7% 0.7%
Iowa 123 2.2% 2.0% Texas 116 13.5% 12.8%
Kansas 53 2.1% 2.1% Utah 11 4.7% 4.6%
Kentucky 35 1.6% 2.6% Vermont 9 0.4% 0.3%
Louisiana 18 1.5% 1.4% Virgin Islands 1 2.7% 2.4%
Maine 9 0.4% 0.3% Virginia 28 2.2% 2.4%
Maryland 2 0.9% 0.8% Washington 20 0.6% 0.6%
Massachusetts 2 0.0% 0.0% West Virginia 5 0.0% 0.0%
Michigan 26 2.0% 1.8% Wisconsin 66 1.8% 1.6%
Minnesota 77 4.0% 4.4% Wyoming 15 1.0% 1.0%
Mississippi 26 2.1% 2.2% Total 1,588 100.0% 100.0%
Missouri 66 3.6% 4.3%
Distribution Systems
Distribution systems are utilities engaged in retail sales of electricity to
consumers in their service area. Most distribution systems have
all-requirements power contracts with their power supply systems, which are
owned and controlled by the member systems. The wholesale power contracts
between the distribution systems and the power supply systems provide for
rate adjustments to cover the costs of supplying power, although in certain
cases such adjustments must be approved by regulatory agencies. Wholesale
power for resale also comes from other sources, including power supply system
contracts with government agencies, investor-owned utilities and other
entities, and in rare cases, the cooperative's own generating facilities.
Wholesale power supply contracts ordinarily guarantee neither an uninterrupted
supply nor a constant cost of power. Contracts with RUS financed power supply
systems (which generally require the distribution system to purchase all its
power requirements from the power supply system) provide for rate increases
to pass along increases in sellers' costs. The wholesale power contracts
permit the power supply system, subject to approval by RUS and, in certain
circumstances, regulatory agencies, to establish rates to its members so as
to produce revenues sufficient, with revenues from all other sources, to meet
the costs of operation and maintenance (including, without limitation,
replacements, insurance, taxes and administrative and general overhead
expenses) of all generating, transmission and related facilities, to pay the
cost of any power and energy purchased for resale, to pay the costs of
generation and transmission, to make all payments on account of all
indebtedness and leases of the power supply system and to provide for the
establishment and maintenance of reasonable reserves. The rates under the
2
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 ("FERC"). Contracts with Federal
agencies generally permit rate changes by the selling agency (subject, in
some cases, to Federal regulatory approval).
Power Supply Systems
Power supply systems are utilities which purchase or generate electric power
and provide it wholesale to distribution systems for delivery to the ultimate
retail consumer. Of the 64 operating power supply systems financed in whole
or in part by RUS or CFC at December 31, 1998, 63 were cooperatives owned
directly or indirectly by groups of distribution systems and 1 was government
owned. Of this number, 39 had generating capacity of at least 100 megawatts,
and 10 had no generating capacity. Nine of the 10 systems with no generating
capacity operated transmission lines to supply certain distribution systems.
Certain other power supply systems had been formed but did not yet own
generating or transmission facilities.
At December 31, 1998, the 58 power supply systems reporting to CFC owned
interests in 147 generating plants representing generating capacity of
approximately 32,036 megawatts, or approximately 4.1% of the nation's
estimated electric generating capacity, and served 695 RUS distribution
system borrowers. Certain of the power supply systems which lease generating
plants from others operate these facilities to produce their power
requirements. Of the power supply systems' total generating capacity in
place as of December 31, 1998, steam plants accounted for 90% (including
nuclear capacity representing approximately 8.2% of such total generating
capacity), internal combustion plants accounted for 7.8% and hydroelectric
plants accounted for 2.2%.
Service Organizations and Associate Member Systems
Service organizations include the National Rural Electric Cooperative
Association ("NRECA"), which represents cooperatives nationally, as well
as the statewide cooperative associations, which represent the cooperatives
within the state. Associate members include organizations that are
nonprofit groups or entities organized on a cooperative basis which are owned,
controlled or operated by Class A, B or C members and which provide
non-electric services primarily for the benefit of ultimate consumers.
Telecommunications Systems
Telecommunications systems include not-for-profit cooperative organizations
and for-profit commercial organizations that provide telecommunications
services to rural areas.
Independent rural telecommunications companies provide service in the
majority of America's rural areas. These companies, which number
approximately 1,050, are called independent because they are not affiliated
with the Bell operating companies or other large holding companies. The
majority of these independent rural telecommunications companies are small,
family-owned or privately-held commercial companies. A handful of these
commercial companies are publicly traded. In addition, there are
approximately 250 not-for-profit cooperative telecommunications companies.
Rural telecommunications companies serve approximately 1.2 million business
customers and 4.4 million residential customers in 44 states and U.S.
territories, and range in size from fewer than 50 customers to more than
50,000. Rural telecommunications companies' annual operating revenues range
from less than $100,000 to $50 million. In addition to basic
telecommunications service, most independents offer other communications
services ranging from wireless to cable TV to internet access. Most rural
telecommunications companies' networks are state-of-the-art, incorporating
digital switching, fiber optics and other advanced technologies.
Loan Programs
CFC offers long-term loans with maturities of up to 35 years, intermediate-
term loans with maturities of up to five years, and line of credit loans.
Long-term and intermediate-term loans are available at fixed or variable
interest rates and line of credit loans are available only at a variable
interest rate. Long-term loans are generally secured by a first mortgage
lien on all assets and revenues of the borrower. Intermediate-term loans
may be secured or unsecured and line of credit loans are generally unsecured.
On line of credit loans with a maturity of more than one year, the
outstanding balance is generally required to be paid down to zero for five
consecutive days during each year. CFC makes loans to borrowers on a
3
concurrent basis with RUS (generally 70% RUS / 30% CFC) and will also make
100% loans to borrowers electing not to borrow from RUS.
Generally, borrowers are required to forward annual audited financial
statements to CFC. Borrowers also must supply various other representations
in an officer's certificate, and maintain certain levels of financial
performance as prescribed under each loan program.
Set forth below is a table showing loans outstanding to borrowers as of May
31, 1999, 1998 and 1997 and the weighted average interest rates thereon and
loans committed but unadvanced to borrowers at May 31, 1999.
Loans committed
(Dollar amounts in thousands) Loans outstanding and weighted average interest rates but unadvanced at
thereon at May 31, May 31, 1999
1999 1998 1997 (A)(B)
Long-term fixed rate secured loans(C)(D):
Electric systems $ 6,797,786 6.69% $ 4,289,629 7.02% $ 2,827,417 7.27% $ 198,010
Telecommunication systems 1,258,458 6.88% 222,733 8.05% 148,566 8.53% -
Total long-term fixed rate secured loans 8,056,244 6.72% 4,512,362 7.07% 2,975,983 7.33% 198,010
Long-term variable rate secured loans (E):
Electric systems 2,334,878 5.85% 3,209,815 6.55% 3,593,828 6.55% 6,806,682
Telecommunication systems 1,096,312 6.43% 1,131,561 6.65% 875,135 6.65% 561,442
Total long-term variable rate secured loans 3,431,190 6.04% 4,341,376 6.57% 4,468,963 6.57% 7,368,124
Refinancing variable rate loans guaranteed by RUS:
Electric systems 130,940 5.87% 133,195 6.36% 137,984 6.49% -
Intermediate-term secured loans:
Electric systems 198,894 6.62% 151,202 7.39% 226,107 6.70% 80,411
Telecommunication systems 686 6.42% 86 7.25% - - -
Total intermediate-term secured loans 199,580 6.50% 151,288 7.39% 226,107 6.70% 80,411
Intermediate-term unsecured loans:
Electric systems 102,221 6.26% 198,121 6.70% 115,989 6.70% 219,248
Telecommunication systems 12,809 6.42% 15,495 7.25% 13,683 7.25% 11,680
Total intermediate-term unsecured loans 115,030 6.28% 213,616 6.74% 129,672 6.76% 230,928
Line of credit loans (F):
Electric systems 850,039 5.99% 688,995 6.70% 539,527 6.70% 4,392,012
Telecommunication systems 342,074 6.66% 205,026 7.25% 61,779 7.25% 538,619
Total line of credit loans 1,192,113 6.19% 894,021 6.83% 601,306 6.76% 4,930,631
Nonperforming loans:
Electric systems (G) 1,643 5.55% 4,080 6.41% 9,428 6.75% -
Restructured loans:
Electric systems (H) 576,662 3.90% 329,538 7.17% 361,961 8.32% -
Total loans 13,703,402 6.37% 10,579,476 6.70% 8,911,404 6.81% 12,808,104
Less: Allowance for loan losses 212,203 250,131 233,208 -
Net loans $13,491,199 $10,329,345 $ 8,678,196 $12,808,104
Total by member class:
Distribution $ 8,714,742 $ 7,257,330 $ 6,274,096 $ 9,264,001
Power supply 1,895,712 1,489,908 1,295,582 2,030,918
Statewide and associate 382,609 257,337 242,563 401,444
Telecommunication systems 2,710,339 1,574,901 1,099,163 1,111,741
Total $13,703,402 $10,579,476 $ 8,911,404 $12,808,104
_____________________________
(A) The interest rates in effect at August 1, 1999, on loans to electric
members were 8.10% for long-term loans with a seven-year fixed rate term,
6.30% on variable rate long-term loans and 6.45% on intermediate-term loans
and lines of credit. The rates in effect at August 1, 1999, on loans to
telecommunication organizations were 8.15% for long-term loans with a seven-
year fixed rate term, 6.40% on long-term variable rate loans, 7.00% on
intermediate-term loans and 7.00% on lines of credit.
(B) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed and for which loan contracts have been
executed but funds have not been advanced. Since commitments may expire
without being fully drawn upon, the total amounts reported as commitments
do not necessarily represent future cash requirements. Collateral and
security requirements for advances on commitments are identical to those
on initial loan approval. Long-term unadvanced commitments that do not
have an interest rate associated with the commitment have been listed with
the
4
variable rate loans. The type of interest rate, fixed or variable, is
determined at the time the loan is advanced.
(C) Includes $161.9 million, $121.6 million and $38.4 million of unsecured
loans at May 31, 1999, 1998 and 1997.
(D) During fiscal year 2000, $291.6 million of such outstanding fixed rate
loans, which currently have a weighted average interest rate of 6.48% per
annum, will become subject to rate adjustment. During the first quarter of
calendar year 1999, long-term fixed rate loans totaling $105.2 million had
their interest rates adjusted. The interest rate on these loans will be
eligible to be adjusted again during the first quarter of calendar year 2000
to the lowest long-term fixed rate offered during 1999 for the term selected.
At January 1, 1999 and May 31, 1999, the seven-year long-term fixed rate was
6.05% and 7.65%, respectively.
(E) Includes $39.2 million, $53.3 million and $112.4 million of unsecured
loans at May 31, 1999, 1998 and 1997.
(F) Includes $277.5 million, $81.4 million and $99.1 million of secured
loans at May 31, 1999, 1998 and 1997.
(G) The rates on nonperforming loans are the weighted average of the stated
rates on such loans as of the dates shown and do not necessarily represent
the interest recognized by CFC from such loans.
(H) The rate on restructured loans for 1999 represents the effective interest
rate provided by the minimum cashflow payments. The interest rates on
restructured loans for 1998 and 1997 are the weighted average of the stated
rates on restructured loans.
Interest Rates on Loans
CFC's goal as a non-profit cooperatively-owned finance company is to set its
rates at levels that will provide its members with the lowest cost financing
as well as to maintain sound financial results required to obtain high credit
ratings on its debt instruments. CFC sets its interest rates based on the
cost of funding plus provisions for general and administrative expenses, the
loan loss allowance and a reasonable net margin. Various discounts from the
stated interest rates are available to borrowers meeting certain criteria
related to performance, number of creditors and loan volume.
Set forth below are the weighted average interest rates earned by CFC
(recognized on a cash basis in the case of nonperforming and restructured
loans) on all loans outstanding during the fiscal years ended May 31:
INTEREST RATES EARNED ON LOANS
1999 1998 1997
Long-term fixed rate 6.69% 7.12% 7.65%
Long-term variable rate 6.20% 6.53% 6.25%
Telecommunication organizations 6.88% 7.05% 6.73%
Refinancing loans guaranteed by RUS 5.87% 6.32% 6.36%
Intermediate-term 6.98% 7.08% 7.08%
Short-term 6.26% 6.74% 6.40%
Associate members 6.47% 6.65% 6.42%
Nonperforming (1) 0.00% 0.00% 0.00%
Restructured 1.73% 0.00% 0.56%
All loans 6.51% 6.60% 6.58%
________________
(1) Rate does not reflect recognition of $12.5 million of deferred gain
in 1999.
Electric Loan Programs
Long-Term Loans
Long-term loans are generally for terms of up to 35 years. A borrower can
select a fixed interest rate for periods of one to 35 years or the variable
rate. Upon the expiration of the selected fixed interest rate term, the
borrower must select another fixed rate term for a period that does not
exceed the remaining loan maturity or select the variable rate. A borrower
may elect to switch its fixed rate loan to a variable rate loan at any time
and may be subject to a conversion fee. A borrower may convert its variable
rate loan to a fixed rate loan at any time, without a fee. Long-term fixed
rates are set daily by CFC and the long-term variable rate is set on the
5
first day of each month. The fixed rate on a loan is determined on the day
the loan is advanced based on the rate term selected. A borrower may divide
its loan into various mini-notes. The borrower then has the option of
selecting a fixed or variable interest rate for each mini-note. Long-term
loans are generally secured by a mortgage on all assets and revenues of the
borrower on a pari passu basis with RUS. Long-term loans may be prepaid by
the borrower at any time, subject to the payment of a prepayment premium.
To be eligible for long-term loan advances, distribution systems must
maintain an average modified debt service coverage ratio ("MDSC"), as defined
in the loan agreement, of 1.35 or greater. The distribution systems must
also be in good standing with CFC and their states of incorporation, supply
evidence of proper corporate authority and deliver to CFC annual audited
financial statements. Generally, the minimum eligibility requirements for
power supply systems are an average times interest earned ratio ("TIER") and
MDSC, as described in the loan agreement, of 1.0. Loans to power supply
systems are considered on a case by case basis depending on the amount of
the loan, the intended use of funds, the financial condition of the borrower
and any guarantees that may be provided by a third party, including RUS and
the member distribution systems. CFC has in the past and may in the future
make long-term loans to distribution and power supply systems that do not
meet the minimum lending criteria. During the five years ended May 31, 1999,
1.3% of the dollar amount of long-term loans approved were to borrowers that
did not meet the minimum lending criteria. During the five years ended May
31, 1999, CFC also approved loans totaling $867.0 million for discounted RUS
note buyouts by four power supply systems. In these transactions, CFC
obtained guarantees from the member distribution systems totaling $323.3
million.
Intermediate-Term Loans and Line of Credit Loans
Intermediate-term loans are generally for terms of one year to five years.
Intermediate-term loans can be advanced at a fixed interest rate or at a
variable interest rate. Line of credit loans may only be advanced at a
variable interest rate. The intermediate-term loan and line of credit loan
variable interest rate is set on the first day of each month. Intermediate-
term loans may be secured or unsecured and line of credit loans are generally
unsecured. Line of credit loans with maturities of greater than one year
generally must be paid down to a zero outstanding balance for five consecutive
days during each year. The rates on intermediate-term loans may not be
converted from variable to fixed or from fixed to variable. Intermediate-
term loans may be prepaid at any time, subject to the payment of a prepayment
premium. Line of credit loans may be prepaid at any time, without a premium.
To be eligible for an intermediate-term loan or line of credit loan,
distribution and power supply borrowers must be in good standing with CFC
and demonstrate their ability to repay the loan.
Power Vision Program
Under the Power Vision program, an eligible borrower is pre-approved for long-
term, secured financing, in an aggregate amount that can be drawn down in
increments as requested by the borrower over a five-year period. All
necessary approvals, administration and loan documentation are obtained or
put into place at the time the credit facility is established, and the
borrower has significant flexibility in determining the size and terms of
each loan requested under the facility. CFC does not charge its members a
commitment fee on amounts approved under the Power Vision program. A borrower
must meet loan eligibility criteria at the time of any advance under the Power
Vision program.
Telecommunications Loan Programs
Long-Term Loans
CFC makes long-term loans to rural telecommunications companies and their
affiliates for the acquisition of and the construction or upgrade of wireline
telecommunications systems, wireless telecommunications systems, fiber optic
networks and cable television systems as well as other legitimate corporate
purposes. Long-term loans are generally for periods of up to 15 years. Loans
may be advanced at a fixed or variable interest rate. Fixed rates are
generally available for periods from 1 year to 15 years. Upon the expiration
of the selected fixed interest rate term, the borrower must select another
fixed rate term for a period that does not exceed the remaining loan maturity
or select the variable rate. A borrower may elect to switch its fixed rate
loan to a variable rate loan at any time and may be subject to a conversion
fee. A borrower may convert its variable rate loan to a fixed rate loan at
any time, without a fee. Long-term fixed rates for telecommunications loans
are set daily by CFC and the long-term variable rate is set on the first day
of each month. The fixed rate on a loan is determined on the day the loan is
advanced based on the rate term selected. A borrower may divide its loan
into various mini-notes. The borrower then has the option of selecting a
fixed or variable interest rate for each note. Long-term loans are generally
secured by a mortgage on all assets and revenues of the borrower and may be
further supported by guarantees from affiliated companies. Long-term loans
may be prepaid by the borrower at any time, subject to the payment of a
prepayment premium.
6
A wireline telecommunications system generally must be able to demonstrate
the ability to achieve and maintain an annual debt service coverage ratio
("DSC") and an annual TIER of 1.25 and 1.50, respectively, to borrow from
CFC. A cable television system, fiber optic network or cellular
telecommunications system generally must be able to demonstrate the ability
to achieve and maintain an annual DSC of 1.25 to borrow from CFC. Loans made
to start-up ventures using emerging technologies are evaluated based on the
quality of the business plan and the level and quality of credit support
from established companies. Based on the business plan, specific covenants
are developed for each transaction which require performance at levels
sufficient to repay the CFC obligations under the approved terms.
Intermediate-Term Loans and Line of Credit Loans
CFC provides intermediate-term equipment financing to telecommunications
borrowers for periods up to five years. These loans are provided on an
unsecured basis and are used to finance the purchase and installation of
central office equipment, support assets and other communications equipment.
Intermediate-term equipment financing loans are generally made to operating
telecommunications companies with an equity level of at least 25% of total
assets and which have achieved a DSC ratio for each of the previous two
calendar years of at least 1.75.
CFC also provides line of credit loans to telecommunications systems for
periods of up to five years. These line of credit loans are typically in
the form of a revolving line of credit which requires the borrower to pay
off the balance for five consecutive business days at least once during each
12-month period. These line of credit loans are provided on an unsecured
basis and are used primarily for normal cash management. Line of credit
loans are available to telecommunications systems generally in amounts not
to exceed the greater of 5% of total assets or 25% of equity in excess of
35% of total assets.
Interim financing line of credit loans are also made available to CFC
telecommunications members 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.
RUS Guaranteed Loans
Congress enacted 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 guaranteed by RUS.
Under RUS loan repayment regulations, the note rate may not exceed the rate
borne by the system's prepaid borrowings from the FFB adjusted to reflect
savings accrued since prepayment of the note compared with the rate on the
prepaid borrowing. The systems are required to pay service fees to CFC in
connection with these transactions. All of these certificates that have not
been sold in public offerings have been transferred to GFC ($130.9 million
outstanding at May 31, 1999). In addition, CFC services $150.1 million of
these loans for trusts, the certificates of which have been sold in public
offerings. The level of authority for RUS loan guarantees for the fiscal
year ending September 30, 1999, was $700 million. Proposed levels for
fiscal year 2000 range from $700 million to $1.5 billion. CFC may
participate as an eligible lender in the RUS loan guarantee program under
the terms and conditions of the Master Loan Guarantee and Servicing
Agreement, dated as of February 16, 1999, between RUS and CFC. Under this
agreement, CFC may make long-term, secured loans to eligible members for
periods of up to 35 years, at fixed or variable rates established by CFC.
As long as CFC is in compliance with the terms and conditions of the
agreement, RUS will guarantee the principal and interest payments on the
notes evidencing such loans.
Largest Borrowers
At May 31, 1999, the ten largest borrowers had outstanding loans from CFC
totaling $2,241.5 million, which represented approximately 16.4% of CFC's
total loans outstanding. At May 31, 1999, outstanding guarantees for these
same ten borrowers totaled $702.7 million which represented 41.7% of CFC's
total guarantees outstanding. CFC's ten largest credit exposures represented
19% of total exposure at May 31, 1999 and 1998. On those dates, no member
had outstanding loans and guarantees in excess of 4.2% of the aggregate
amount of CFC's outstanding loans and guarantees; however, one of the ten
largest borrowers, Deseret Generation & Transmission Co-operative ("Deseret"),
was operating under a restructure agreement (see Note 10 to Combined
Financial Statements). At May 31, 1999, total exposure to Deseret
represented 4.1% of total loans and guarantees outstanding. Loans outstanding
to Deseret accounted for 4.2% of total loans outstanding. Guarantees
outstanding to Deseret accounted for 3.3% of total guarantees outstanding.
Total loans and guarantees outstanding to Deseret equaled 36.1% of total
Members' Equity, Members' Subordinated Certificates and the allowance for
loan losses.
7
Credit Limitation
CFC maintains credit underwriting standards and other on-going credit
procedures so that, under reasonable "worst case" scenarios, any potential
loss to a single borrower should not exceed 10% of CFC's defined net worth.
CFC calculates a weighted total exposure for each borrower by applying a
risk factor to each category of exposure and giving the borrower credit for
its Members Subordinated Certificates and equity investments in CFC. The
weighted exposure is then compared against the credit limitation, 10% of
CFC's defined net worth. CFC's defined net worth is the sum of Members'
Equity, Members' Subordinated Certificates and the allowance for loan losses.
As of May 31, 1999, all borrowers were within CFC's policy limit.
Loan Security
CFC typically makes long-term loans to its members on a secured basis.
Intermediate-term loans may be secured, as determined on a case by case
basis. Line of credit loans are generally unsecured. At May 31, 1999, a
total of $1,230.7 million of loans were unsecured representing 9.1% of total
loans and 8.1% of total loans and guarantees. CFC's long-term loans are
typically secured pro-rata with other secured lenders (primarily RUS) by all
assets and future revenues of the borrower. Guarantees are secured on a
pro-rata basis with other secured creditors by all assets and future revenues
of the borrower or by the underlying financed asset. In addition to the
collateral received, CFC also requires that its borrowers set rates designed
to achieve certain financial ratios.
In the case of members whose property is subject to the new form of RUS
mortgage which has been issued to borrowers since January 1996, no RUS
approval of the loan is required if certain objective tests set forth in
the mortgage are met. In August 1998, RUS promulgated regulations which
provide that no RUS approval is required for a loan made to a member whose
property is subject to the pre-1996 form of RUS mortgage, so long as the
objective tests set forth in the new form of RUS mortgage are met. In all
other cases, RUS approval of the loan is required, even in the case of a 100%
CFC loan, in order to accommodate RUS's mortgage lien so that CFC may share
ratably in the security provided by the mortgaged property. CFC and RUS are
then mortgagees in common, entitled to the security in proportion to the
unpaid principal amounts of their respective loans. Mortgages do not require
that the value of the mortgaged property be 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. RUS holds the
loan security on loans for which it has provided a guarantee.
Security for long-term loans made to RUS telecommunications borrowers
generally consists of a first mortgage lien on the assets and revenues of
the system on a pari passu basis with RUS. Security from non-RUS
telecommunications borrowers is considered on a case-by-case basis, but
generally a loan will not exceed 80% of the estimated value of the
collateral. At May 31, 1999, a total of $215.1 million or 7.9% of CFC's
telecommunications loans outstanding were unsecured.
Conversion of Loans
A borrower may convert a long-term loan from a variable interest rate to a
fixed interest rate at any time, without a fee. A borrower may convert a
fixed rate to another fixed rate for a longer pricing term at any time,
without a fee. A borrower is allowed to convert a fixed interest rate to a
variable interest rate at any time, subject to a fee. Intermediate-term
loans and line of credit loans do not offer conversion options. There is
no fee on the conversion of a fixed interest rate to a variable interest
rate at the end of a fixed rate pricing term. The fee on the conversion of
a fixed interest rate to a variable interest rate at all other times ranges
from 25 to 50 basis points of the outstanding loan amount plus an amount to
cover the funding loss on the remainder of the current fixed rate pricing
term.
Prepayment of Loans
Borrowers may prepay long-term loans at any time, subject to the payment of
a prepayment premium. Long-term loans prepaid before the maturity of the
fixed rate term will be assessed a prepayment premium ranging from 33 to 50
basis points of the outstanding loan balance at the time of prepayment. In
addition, long-term loans with a fixed interest rate which have a rate
greater than the current rate for the same remaining term will be assessed
a premium to cover funding losses. Line of credit loans may be prepaid at
any time without a premium.
8
Pledging of Loans
CFC pledges long-term secured distribution member loans as collateral to
secure its Collateral Trust Bonds. CFC must maintain collateral on deposit
with the trustee in a principal amount at least equal to the balance of
Collateral Trust Bonds outstanding. At May 31, 1999 and 1998, CFC had
$3,016.9 million and $1,930.9 million, respectively, of collateral on deposit
and $2,996.3 million and $1,902.1 million of Collateral Trust Bonds
outstanding. CFC may withdraw specific collateral at any time, provided
that the principal balance of notes or cash or eligible securities on deposit
after withdrawal is greater than the amount of bonds outstanding. At least
annually, CFC provides the trustee with a report of the principal amount of
all collateral pledged.
Guarantee Programs
Substantially all guarantees have been provided on behalf of power supply
members. Set forth below is a table showing CFC's guarantees:
May 31,
(Dollar amounts in thousands) 1999 1998 1997
Long-term tax-exempt bonds $1,062,185* $1,148,500* $1,190,925*
Debt portions of leveraged
lease transactions 174,961 437,175 418,916
Indemnifications of tax
benefit transfers 285,169 312,771 338,264
Other guarantees 162,150 136,048 132,566
Total $1,684,465 $2,034,494 $2,080,671
__________________________
* Includes $947.3 million, $1,017.8 million and $1,043.2 million at
May 31, 1999, 1998 and 1997, 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 $244.1 million, $252.8 million
and $260.7 million of such bonds outstanding at May 31, 1999, 1998 and
1997, respectively, at any time on seven days' notice; in the case of
$225.6 million, $235.6 million and $242.3 million outstanding at May 31,
1999, 1998 and 1997, respectively, at any time on a minimum of one day's
notice; and in the case of the remainder on a five-week or semiannual
basis). CFC has agreed to purchase any bonds that cannot be remarketed.
Since the inception of the program, CFC has not been required to purchase
any bonds.
Guarantees of Long-Term Tax-Exempt Bonds
CFC has guaranteed debt issued in connection with the construction or
acquisition by CFC members of pollution control, solid waste disposal,
industrial development and electric distribution facilities. Such debt is
issued by governmental authorities and the interest thereon is exempt from
Federal taxation. The proceeds of the offering are made available to the
member system, which in turn is obligated to pay the governmental authority
amounts sufficient to service the debt. The debt, which is guaranteed by CFC,
may include short- and long-term obligations.
In the event of a default by a system for nonpayment of debt service, CFC is
obligated to pay, after available debt service reserve funds have been
exhausted, scheduled debt service under its guarantee 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
thereunder for up to two years following default. However, if the debt is
accelerated because of a determination that the interest thereon is not tax-
exempt, the system's obligation to reimburse CFC for any guarantee payments
will be treated as a long-term loan. The system is required to pay to CFC
initial and/or on-going guarantee fees in connection with these transactions.
Certain guaranteed long-term debt bears interest at variable rates which are
adjusted at intervals of one to 270 days, weekly, each five weeks or semi-
annually to a level expected to permit their resale or auction at par. At
the option of the member on whose behalf it is issued, and provided funding
sources are available, rates on such debt may be fixed until maturity.
Holders have the right to tender the debt for purchase at par at the time
rates are reset when it bears interest at a variable rate and CFC has
committed to purchase debt so tendered if it cannot otherwise be remarketed.
If CFC held the securities, the cooperative would pay interest to CFC at its
intermediate-term loan rate.
Guarantees of Lease Transactions
CFC has a program of lending to or guaranteeing debt issued by National
Cooperative Services Corporation ("NCSC") in connection with leveraged lease
transactions. In such transactions, NCSC 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
directly from CFC or from another creditor
9
with a CFC guarantee. NCSC is obligated to pay administrative and/or
guarantee fees to CFC in connection with these transactions. Such fees are
reimbursed to NCSC by the Lessee in each transaction. CFC may also guarantee
the rent obligation of its members to a third party.
Guarantees of Tax Benefit Transfers
CFC has also guaranteed members' obligations to indemnify against loss of tax
benefits in certain tax benefit transfers that occurred in 1981 and 1982. A
member's obligation to reimburse CFC for any guarantee payments would be
treated as a long-term loan, secured on a pari passu basis with RUS by a
first lien on substantially all the member's property to the extent of any
cash received by the member at the outset of the transaction. The remainder
would be treated as an intermediate-term loan secured by a subordinated
mortgage on substantially all of the member's property. Due to changes in
Federal tax law in 1982, no guarantees of this nature have occurred since
1982.
Other Guarantees
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 losses and
maintenance of a reasonable margin.
CFC Financing Factors
CFC funds its loan programs through retained margins for the current year,
allocated but unretired Patronage Capital (Members' Equity investments),
Members' Subordinated Certificate investments and issuance of debt to members
and in the capital markets. The following table details the funds
outstanding, percentage of total capitalization and the average interest
rate on funds outstanding at May 31, 1999, 1998 and 1997.
(Dollar amount in thousands) 1999 1998 1997
% Average % Average % Average
Amount of Interest Amount of Interest Amount of Interest
Outstanding Total Rate Outstanding Total Rate Outstanding Total Rate
Commercial Paper (1) $ 6,246,243 45% 4.94% $ 5,865,904 55% 5.54% $5,607,373 62% 5.64%
Collateral Trust Bonds 2,996,299 22% 6.42% 1,897,688 18% 6.79% 1,149,192 13% 7.18%
Medium-Term Notes 2,625,286 19% 6.10% 1,109,258 10% 6.31% 615,396 7% 6.48%
Quarterly Income Capital Securities 400,000 3% 7.62% 200,000 2% 7.87% 125,000 1% 8.00%
Members' Subordinated Certificates 1,239,816 9% 3.25% 1,229,166 12% 3.70% 1,212,486 14% 4.29%
Members' Equity 294,953 2% - 279,278 3% - 271,594 3% -
Total $13,802,597 100% 5.30% $10,581,294 100% 5.53% $8,981,041 100% 5.57%
________________________
(1) Includes $375.0 million, $185.0 million and $115.0 million of Bank Bid
Notes for 1999, 1998 and 1997, respectively.
Members' Subordinated Certificates
As a Condition of Membership
Generally, members are required to purchase Membership Subordinated
Certificates as a condition of membership. The amount of certificates
required to be purchased is determined by applying a formula to the member's
operations for a period of time, generally 15 years. The Membership
Subordinated Certificates generally mature in 100 years from issuance and
pay interest at a rate of 5%. At May 31, 1999, CFC had a total of $641.9
million in Membership Subordinated Certificates outstanding. A small portion
of these certificates mature 50 years from issuance and pay interest at a
rate of 3%.
As a Condition of Borrowing
Distribution system members may be required to purchase, on long-term loans,
a Loan Subordinated Certificate for up to 3% of the loan amount. The amount
of the required certificate purchase is determined by the member's leverage
ratio with CFC and the type of loan selected. Power supply system members
may be required to purchase a Loan Subordinated Certificate of up to 12% of
the loan amount. Telecommunications systems and associate members are
required to purchase, on long-term loans, Loan Subordinated Certificates
equal to 5% of each loan advance. These certificates do not pay interest,
but amortize annually based on the outstanding loan balance. This
amortization amount is paid back to the member annually. At May 31, 1999,
CFC had a total of $422.8 million of Loan Subordinated
10
Certificates outstanding. A small portion of these certificates, issued
prior to policy changes, mature at the same time as the loan and pay interest
at a rate of 3%.
As a Condition of Receiving a Guarantee
Members may be required to purchase a Guarantee Subordinated Certificate of
up to 12% of the principal amount of the guarantee. The Guarantee
Subordinated Certificates mature at the same time as the guarantee. The
certificates pay interest at a rate to be determined in each transaction.
At May 31, 1999, CFC had a total of $175.1 million of Guarantee Subordinated
Certificates outstanding.
Members' Equity
Patronage Capital
CFC is required by law to have a methodology to allocate its net margins to
its members. CFC allocates substantially all of its net margins annually
based on the members' Patronage Capital of CFC during the year. The Patronage
Capital allocations are maintained by CFC and used to fund operations until
retired. Currently CFC retires 70% of the prior year's net margins during
the first quarter of the current year and holds the remaining 30% for a
period of 15 years. All retirements must be authorized by the Board of
Directors with regard to CFC's financial condition. CFC allocates and
retires net margins to its affiliated organization, RTFC, which in turn
allocates its net margins, including the CFC retirement, to its members
under similar policies. At May 31, 1999, CFC had a total of $290.6 million
of allocated, but unretired net margins, which along with the education fund
reserve and membership fees comprise total of Members' Equity.
Debt Issuance
Debt Issued in the Capital Markets
CFC issues long- and short-term debt in the domestic and foreign capital
markets. CFC issues long-term secured Collateral Trust Bonds for periods
of 2 years to 30 years, unsecured Medium-Term Notes for periods of 9 months
to 30 years, unsecured Quarterly Income Capital Securities for periods of
up to 49 years and unsecured Commercial Paper for periods of 1 to 270 days.
CFC also enters into Bank Bid Note arrangements with banks. CFC's Collateral
Trust Bonds, Medium-Term Notes, Quarterly Income Capital Securities and
Commercial Paper all carry investment grade ratings from three rating
agencies (see table in the Management Discussion and Analysis section,
page 39).
Debt Issued to Members
CFC sells unsecured Commercial Paper and Medium-Term Notes to its members.
Commercial Paper is sold for periods of up to 270 days and Medium-Term Notes
are sold for periods of 9 months to 30 years. Rates for both securities are
set daily by CFC.
Interest Rate and Currency Exchange Agreements
CFC will enter interest rate and currency exchange agreements when required
by certain transactions. CFC also uses interest rate exchange agreements as
part of its funding strategy to match the interest rate paid on its
liabilities with the interest rate received on its assets. At May 31, 1999,
CFC was a party to $2,796.0 million of interest rate exchange agreements and
$390.3 million of currency exchange agreements (see Note 5 to the Combined
Financial Statements).
Revolving Credit Agreements
As of May 31, 1999, CFC had three revolving credit agreements totaling
$4,792.5 million which are used principally to provide liquidity support for
CFC's outstanding Commercial Paper, Commercial Paper issued by NCSC and
guaranteed by CFC and the adjustable or floating/fixed rate bonds which CFC
has guaranteed for its members and its standby purchase obligations.
Two of these agreements are with 53 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 the five-year
agreement, executed in November 1996, CFC can borrow up to $2,402.5 million
until November 26, 2001. On November 24, 1998, the 364-day agreement was
renewed with J.P. Morgan Securities, Inc. and The Bank of Nova Scotia as
Co-Lead Arrangers and Co-Syndication Agents, Morgan Guaranty Trust Company
of New York as Administrative Agent, and Banc of America Securities LLC and
the First National Bank of Chicago as Co-Documentation Agents. Under the
364-day agreement, CFC can borrow up to $1,940.0 million until November 23,
1999. Any amounts outstanding under these facilities will be due on the
respective maturity dates.
11
A third revolving credit agreement for $450.0 million was executed on
November 25, 1998 with nine banks, including The Bank of Nova Scotia as Lead
Arranger and Administrative Agent ("the BNS facility") and the Chase
Manhattan Bank, N.A. as Documentation Agent. This agreement has a 364-day
revolving credit period which terminates November 24, 1999 during which CFC
can borrow and such borrowing 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 .090 of 1%. The per annum facility fee for both agreements with a
364-day maturity is .085 of 1%. There is no commitment fee for any of the
revolving credit facilities. If CFC's long-term ratings decline, the
facility fees may be increased by no more than .035 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 $1,373.9
million at May 31, 1999, an increase of $17.2 million compared to the
$1,356.7 million required at May 31, 1998. 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 may not retire 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, 1999, CFC was in
compliance with all covenants and conditions. To date, CFC has not drawn on
its lines of credit.
Based on the ability to borrow under the five year facility, at May 31, 1999
and May 31, 1998, CFC classified $2,402.5 million and $2,345.0 million,
respectively, of its notes payable outstanding as long-term debt. CFC
expects to maintain more than $2,402.5 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.
Set forth below are the weighted average costs incurred by CFC on its
short-term borrowings (Commercial Paper and Bank Bid Notes) and on its
long-term borrowings (Collateral Trust Bonds, Medium-Term Notes, Quarterly
Income Capital Securities and debt supported by interest rate swaps) for the
period shown.
Years Ended May 31,
1999 1998 1997
Short-term borrowings 5.36% 5.73% 5.54%
Long-term borrowings 6.09% 6.74% 7.36%
Total short- and long-term borrowings 5.73% 6.03% 5.99%
Tax Status
In 1969, CFC obtained a ruling from the Internal Revenue Service (the "IRS")
recognizing CFC's exemption from the payment of Federal income taxes under
Section 501(c)(4) of the Internal Revenue Code. Such exempt status could be
removed as a result of changes in legislation or in administrative policy or
as a result of changes in CFC's business. CFC believes that its operations
have not changed materially from those described to the IRS. CFC's
affiliates, RTFC and GFC, are taxable under Subchapter T of the Internal
Revenue Code. RTFC and GFC are allowed a deduction from taxable income for
the amount of net margins allocated to their members.
Investment Policy
Surplus funds are invested pursuant to policies adopted by CFC's Board of
Directors. Under present policy, surplus funds may be invested in direct
obligations of or guaranteed by the United States or agencies thereof.
Investments include high-rated securities such as Commercial Paper,
obligations of foreign governments, Eurodollar deposits, bankers' acceptances,
bank letters of credit, certificates of deposit or working capital
acceptances. The policy also permits investments in certain types of
repurchase agreements with highly rated financial institutions, whereby the
assets consist of eligible securities of a type listed above set aside in a
segregated account. CFC typically has two types of funds available for
12
investment: (1) the debt service reserve funds held by the trustee under the
indenture under which CFC formerly issued Collateral Trust Bonds (the "1972
Indenture"), used to make bond interest and sinking fund payments; and (2)
member loan payments and Commercial Paper investments in excess of daily
cash funding requirements. Debt service reserve funds are invested with
maturities scheduled to coincide with interest and sinking fund payment
dates.
Employees
At May 31, 1999, CFC had 182 employees, including engineering, financial and
legal personnel, management specialists, credit analysts, accountants and
support staff. CFC believes that its relations with its employees are good.
CFC Lending Competition
According to annual financial statements filed with CFC, its electric
cooperative distribution and power supply member systems had a total of
$41.7 billion in long-term debt outstanding at December 31, 1998. RUS is
the dominant lender to the electric cooperative industry with $28.8 billion
or 69% of the total outstanding debt. RUS currently prices the majority of
its insured loans to distribution systems based on a municipal government
obligation index, prices hardship loans at a rate of 5% and provides
guarantees of loans to its electrical cooperatives by others, principally
the FFB. Under the insured loan program, RUS typically does not lend the
full amount of debt requested by the cooperative, requiring the cooperative
to seek supplemental lending from private capital sources. The amount of
funding proposed for the insured loan program for fiscal year 2000 ranges
from $366.5 million to $416.5 million. The amount approved for the prior
year was $366.5 million. The amount proposed for RUS guaranteed loans
for fiscal year 2000 ranges from $700 million to $1.5 billion. CFC and
other lenders are not in competition with RUS, but rather compete for the
supplemental lending requirement, as well as for the full lending requirement
for those cooperatives that have decided not to borrow from RUS. Under the
hardship program, RUS lends 100% of the amount. Under the guarantee program,
RUS will guarantee the repayment of all principal and interest by the
cooperative. At December 31, 1998, CFC had a total of $11.1 billion of long-
term exposure to distribution and power supply member systems, $9.2 billion
of long-term loans and $1.9 billion of guarantees outstanding. CFC's $11.1
billion long-term exposure represented 27% of the total long-term debt
outstanding to these electric systems. The guarantees represent CFC's
assurances of payment on long-term debt to third party lenders on behalf of
its electric cooperative members. The remaining $1.8 billion was outstanding
from other sources. During fiscal year 1999, CFC was selected as the lender
for 91% of the total supplemental lending requirement (not including amounts
lent by FFB). During this same period, CFC was selected as lender for 98%
of the total lent to distribution systems for the repayment of their RUS
debt. CFC competes with other lenders primarily on price, and secondarily
on the variety of options and additional services offered as well as its
overall approach/relationship with its member/owners.
The competitive market for providing credit to the rural telecommunications
industry is difficult to quantify, since many rural telecommunications
companies are not RUS borrowers. At December 31, 1998, RUS had a total of
$3.3 billion outstanding to telecommunications borrowers. The RTB, an
instrumentality of the United States that provides supplemental financing
to RUS borrowers and is managed by RUS, had a total of $1.3 billion
outstanding. CFC is not in direct competition with RUS or RTB, but rather
competes with other lenders for additional supplemental lending and for the
full lending requirement of the rural telecommunications companies that have
decided not to borrow from RUS or RTB or for projects not eligible for RUS
or RTB financing. CFC's competition includes regional banks, government
sponsored enterprises and insurance companies. At December 31, 1998, CFC
had a total of $2.2 billion in long-term loans outstanding to
telecommunications borrowers. At December 31, 1998, to the best of CFC's
knowledge, there was one other lender with a telecommunications loan
portfolio of similar size to CFC's, but no other lenders to rural
telecommunications borrowers with telecommunications loan portfolios of
similar size to the RUS.
Member Regulation and Competition
Electric Systems
In 1992 Congress passed the Energy Policy Act effectively providing
competition in the generation sector of the wholesale electric power
industry. In 1996, FERC issued orders 888 and 889. Order 888 provides
for competitive wholesale power sales by requiring jurisdictional public
utilities that own, control, or operate transmission facilities to file
non-discriminatory open access transmission tariffs that provide others with
transmission service comparable to the service they provide themselves. The
reciprocity provision associated with order 888 also provides comparable
access to transmission facilities of non-jurisdictional utilities (including
RUS borrowers and municipal and other publicly owned electric utilities)
that use jurisdictional utilities' transmission systems. The order further
provides for the recovery of stranded costs from departing wholesale customers
with agreements dated prior to July 11, 1994. After that date, stranded
13
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 establishes standards of
conduct to ensure that transmission owners and their affiliates do not have
an unfair competitive advantage by using transmission to sell power.
Recently several states have passed laws requiring utilities to unbundle
their vertically structured retail rates and to subsequently begin providing
customer choice for retail generation services. Many other states are
considering such legislation. The structure of subsequent legislation and
rules defining the competitive retail market and the provision for stranded
cost recovery are not yet known. The ultimate impact on CFC's members
cannot be determined until these items have been resolved.
Section 211 of the Federal Power Act as amended by the Energy Policy Act of
1992 classifies any cooperative with significant transmission assets as a
"transmitting utility" for purposes of this section. Under the provisions
of this Act, FERC has the authority to order such cooperatives to provide
open access for unaffiliated entities. This provision also authorizes FERC
to require investor-owned and other utilities to provide the same open access
transmission for the benefit of cooperatives. Electric cooperatives have
strongly supported section 211 for this reason. Under sections 205 and 206
of the Federal Power Act, cooperatives that pay off their RUS debt are
treated as "jurisdictional public utilities". FERC is proceeding under the
legal theory that, under these sections, it can order "jurisdictional public
utilities" to provide open access.
Currently five states are operating under customer choice laws. In four of
these states (Pennsylvania, California, Massachusetts and New York), CFC has
a total of 21 members (20 distribution systems and 1 power supply system).
In California, cooperatives are not required to offer customer choice and
all 3 of CFC's distribution members located in the state have opted not to
allow customer choice. In New York, cooperatives are not required to file
competition plans with the State Public Utility Commission. CFC currently
does not have any members in the fifth state, Rhode Island. In an additional
21 states, laws have been passed and open access is scheduled to be in effect
by 2003. In these states, power supply systems with rates that are above
market may be at risk of losing customer loads. The distribution systems
in these states will continue to deliver power to the ultimate customer,
regardless of who is supplying the power, the CFC member power supply system
or some other power generator. Thus, CFC's distribution system members are
not believed to be at significant risk due to the move to open customer
access to power supply.
While customer choice laws have been passed in the above states, there are
many factors that may delay or influence the choices that customers have
available and the timing of true competition. One of the biggest factors
will be the issue of stranded cost recovery. Stranded costs are the portion
of the investment in generation and/or other facilities which in a
competitive environment would be above market price and therefore not
otherwise recoverable by the utility. The amount of stranded costs a system
is allowed to recover, the timing of the recovery and the method of recovery
will all affect the level of competition in a state. For instance, it is
believed to be unlikely that residential customers will change to another
utility if they have to pay a fee to cover the stranded investment the current
utility incurred to provide them with power. So during the stranded cost
recovery period, there may be very little residential competition in some
states. The level of fee that systems will be allowed to charge other
utilities for use of their transmission and distribution system may also
impact the level of residential competition. Other issues that may delay
competition include the following:
-cooperatives are allowed to "opt out" of the provisions of the laws in
some states;
-utilities in many states will still be regulated regarding rates on
non-competitive services, such as distribution;
-many states will still regulate the borrowing by utilities;
-FERC regulation of transmission; and
-reconciling the differences in various state laws, so that out-of-state
utilities can compete with in-state utilities.
The pace of states passing customer choice laws has slowed. As of July 1,
1999, there were 24 states that had neither passed customer choice laws nor
comprehensive restructuring orders by the State Public Utility Commissions.
The time required to pass such laws as well as the issues described above
could significantly delay nationwide retail competition.
In addition to customer choice laws, some state agencies regulate electric
cooperatives with regard to rates and borrowing. There are 16 states that
regulate the rates electric systems charge. There are 19 states that
regulate electric systems regarding the issuance of long-term debt and there
are 5 states that regulate the issuance of short-term debt. FERC also has
jurisdiction to regulate electric systems that are not borrowers of RUS which
are otherwise jurisdictional, with regard to rates and financing.
14
The 1990 amendments to the Clean Air Act of 1970 (the "Amendments") required
utilities and others to reduce emissions. The Amendments contain a range of
compliance options and a phase-in period which will help mitigate the
immediate costs of implementation. Many of CFC's member systems already
comply with the provisions of the Amendments. Compliance plans for member
systems with units affected in Phase I primarily involved fuel switching to
low-sulfur coal. The trading of emission allowances may also be an
economical alternative to operating or equipment modifications for Phase II
(2000). Some member systems originally believed to be adversely affected by
the Amendments have developed strategies designed to minimize the Amendments'
impact. At this time, it is not anticipated that the Amendments will have a
material adverse impact on the quality of CFC's loan portfolio.
Telecommunications Systems
CFC member telecommunications systems are regulated at the state and federal
levels. Most state regulatory bodies regulate local service rates and
telecommunications company borrowing, although some states have exempted
small rural telecommunications companies and/or cooperatives from regulation.
Interstate access rates are regulated by the Federal Communications
Commission ("FCC").
The Telecommunications Act of 1996 (the "Telecom Act") created a framework
for competition in the local telecommunications market. Recognizing that
building duplicate telecommunications systems would require significant
levels of capital investment and take years to complete, Congress included
provisions in the Telecom Act that require Bell operating companies and
other local telecommunications companies to open their systems to competitors.
Telecommunications companies must open their systems to competition through
either: total service resale (to a reseller who has no facilities at all) at
wholesale prices; or interconnection (with a competitor that may have some
telecommunications facilities of its own) through sale of elements of the
telecommunications company's network at discounted prices. Congress included
provisions in the Telecom Act which allow rural telecommunications companies
to receive waivers from the resale and interconnection requirements. The FCC
rulemaking placed the burden of proof for justifying the waivers on the rural
telecommunications companies.
In its rulemaking implementing the Telecom Act's interconnection provisions,
the FCC mandated very steep discounts for the sale of network elements.
Telecommunications companies and state regulators sued the FCC over its
authority to set the discounted rates for these network elements and won in
circuit court. The FCC appealed to the Supreme Court, and in a January 1999
decision had its authority to issue pricing rules reinstated. The FCC has
initiated a rulemaking proceeding to resolve two portions of its original
order which the Supreme Court vacated. Because these issues have not been
finally settled, significant local service competition through resale or
interconnection has not occurred. In America's largest cities, facilities-
based competitors are going after and winning large business users. But no
large competitor to date, to CFC's knowledge, has targeted residential
customers. Rural markets, with their preponderance of residential
subscribers, will probably be among the last to see wide-scale local
telecommunications service competition. Rural telecommunications companies
that border metropolitan areas should be the first to experience competition.
In addition to resale and interconnection, the Telecom Act also mandated a
new universal telecommunications service support mechanism and required that
it be sufficient to ensure that rural customers received reasonably
comparable rates and services when compared to urban customers. Congress
stated its intent that implicit subsidies presently contained in the access
charges local telecommunications companies levy on long distance carriers be
eliminated and be made explicit in the new universal service support
mechanism. The FCC has found this difficult to implement. While undertaking
a complex proceeding to move to a new costing basis for universal service
funding, the FCC has left the existing universal service fund in place. The
projected timetable for moving large telecommunications companies to the new
mechanism continues to be pushed into the future. Rural telecommunications
companies will have two years from that date before they are required to
transition to a new universal support mechanism.
It is unlikely, however, that any new universal service fund will ever be
large enough to make rural telecommunications companies whole for their
reduced access revenues. Cost recovery through new flat rate charges will
result in higher local telecommunications bills to end user customers.
Those customers that are not large users of long distance services (and
therefore will not save from lower long distance charges) will pay more.
Ultimately, however, it is probable that access charges will come down from
present levels and that rural telecommunications companies will experience
some revenue reductions. CFC does not anticipate that this loss in revenue
will result in material losses on loans outstanding to rural
telecommunications companies.
15
The RUS Program
Since the enactment of the Rural Electrification Act in 1936 (the "Electric
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 48 states and U.S. territories, the percentage of farms and
residences in rural areas of the United States receiving central station
electric service increased from 11% in 1934 to almost 100% currently. Rural
electric systems serve 11% of all consumers of electricity in the United
States and its territories and account for approximately 8% of total sales
of electricity and about 5% of energy generation and generating capacity.
In 1949, the Electric Act was amended to allow RUS to lend for the purpose
of furnishing and improving rural telecommunications service. The RUS
telecommunications lending program had 815 reporting borrowers at December
31, 1997. The 815 borrowers operated 4,792 exchanges, providing service to
approximately 1.2 million business customers and 4.4 million residential
customers.
The Electric 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 telecommunications borrowers, RUS
also provides financing through the RTB. The RTB is an instrumentality of
the United States providing financing at rates reflecting its cost of
capital and is managed by RUS. RUS exercises financial and technical
supervision over borrowers' operations. Its loans and guarantees are
generally secured by a mortgage on substantially all of the system's
property and revenues.
For fiscal year 2000, both the House and Senate Agriculture Appropriation
Committees have approved RUS electric muni-rate loan levels of $295 million.
The House bill includes $121.5 million for hardship 5% loans and the Senate
includes $71.5 million. RUS is also authorized to provide 100% guarantees
on loans available from the FFB or other lenders. The House appropriations
bill has included $1.5 billion and the Senate has provided $700 million for
these loan guarantees for the fiscal year beginning October 1, 1999.
Differences between the House and Senate will be worked out with a final
bill expected before the start of the fiscal year beginning October 1, 1999.
Electric funding levels for the fiscal year ending September 30, 1999 were
$71.5 million at the 5% rate, $295 million for loans at a municipal
government obligation index and $700 million for guarantees.
Legislation enacted in 1992 allows RUS electric borrowers to prepay their
loans to RUS at a discount based on the government's cost of funds at the
time of prepayment. If a borrower chooses to prepay its notes, it becomes
ineligible for future RUS loans for a period of ten years, but remains
eligible for RUS loan guarantees. As of May 31, 1999, 172 borrowers had
either fully prepaid or partially prepaid their RUS notes, under these
provisions, in the total amount of $2.8 billion. In addition, during the
late 1980's, there was a period of time in which borrowers were allowed to
prepay RUS debt. A total of 33 borrowers prepaid $0.7 billion of RUS debt
at that time.
Member Financial Data
Electric Systems
On the following pages are tables providing composite statements of revenues,
expenses and patronage capital from the distribution systems and power supply
systems which were members of CFC during the five years ended December 31,
1998, and their respective composite balance sheets at the end of each such
year. The data in the tables for 1994 to 1995 is comprised of information
collected by RUS for all CFC members that were RUS borrowers and information
collected by CFC on the members that do not borrow from RUS. The data for
1996 to 1998 is data collected by CFC only. CFC began making its own data
collection in 1996 due to the larger number of borrowers that no longer
borrow from RUS. Distribution members submit annual data as of December 31,
on form 7 and power supply members submit annual data as of December 31, on
form 12 or FERC form 1. As of July 31, 1999, CFC had received a form 7 from
820 distribution systems and a form 12 or FERC form 1 from 58 power supply
systems.
While CFC is reporting 838 distribution system members at May 31, 1999, only
757 were required to file form 7's with CFC at December 31, 1998. CFC
collected form 7's from 820 distribution systems, one system files annual
data based on a June 30 fiscal year end and one system became a CFC member
on December 30, 1998. The other 16 systems were not required to file a form 7
because they became members after December 31, they were in the process of
merging and filed a
16
consolidated form 7 with the surviving distribution system, or they did not
have an outstanding balance of long-term loans at December 31, 1998.
Only 58 of the 70 total power supply systems report financial results to CFC.
The remaining 12 power supply systems did not report financial results
because they are either subsidiaries of other member power supply systems
and thus their financial results were consolidated with and filed by the
parent power supply system, act as coordinating agents for their members,
did not have an outstanding balance of long-term loans at December 31, 1998,
or bought out CFC debt after that date.
Telecommunications Systems
On the following pages are tables providing composite statements of revenues
and expenses from the telecommunications systems which were members of CFC
during the year ended December 31, 1998, the first year for which CFC has
collected such data and their respective composite balance sheets. Members
with long-term loans outstanding are required to submit annual data as of
December 31 in the form of audited financial statements. As of August 18,
1999, CFC had received audited financial statements from 169
telecommunications systems.
While CFC had 531 telecommunications system members at May 31, 1999, a total
of 213 had long-term loans outstanding and were required to submit audited
financial statements to CFC at December 31, 1998.
____________________
NOTE: Statistical information contained in this section has not been examined
by CFC's independent public accountants, and the number and geographical
dispersion of the systems have made impractical an independent investigation
by CFC of the statistical information. The information presented is based
upon financial statements submitted to CFC, subject to year-end audit
adjustments, by reporting borrowers and do not, with minor exceptions, take
into account current data for certain systems, primarily those which are not
active CFC borrowers.
17
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL
AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS
The following are unaudited figures which are based
upon financial statements submitted to RUS and
CFC by Member Distribution Systems
Years Ended December 31,
(Dollar amounts in thousands) 1998 1997 1996 1995 1994
Operating revenues and
patronage capital $18,284,021 $17,232,257 $17,028,087 $16,253,957 $15,603,853
Operating deductions:
Cost of power (1) 11,580,829 10,907,145 10,924,695 10,486,773 10,174,716
Distribution expense (operations) 728,565 472,629 445,990 412,058 386,235
Distribution expense (maintenance) 985,571 829,991 804,663 752,659 699,253
Administrative and general expense (2) 1,735,074 1,720,805 1,627,925 1,584,099 1,506,729
Depreciation and amortization expense 1,203,438 1,134,149 1,069,101 1,000,017 942,435
Taxes 241,010 458,620 458,623 436,563 417,471
Total 16,474,487 15,523,339 15,330,997 14,672,169 14,126,839
Utility operating margins 1,809,534 1,708,918 1,697,090 1,581,788 1,477,014
Non-operating margins 173,446 235,334 180,311 172,118 134,831
Power supply capital credits (3) 297,451 268,015 282,800 254,839 260,335
Total 2,280,431 2,212,267 2,160,201 2,008,745 1,872,180
Interest on long-term debt (4) 980,863 919,892 869,076 833,110 752,749
Other deductions 49,628 45,439 43,711 46,859 52,574
Total 1,030,491 965,331 912,787 879,969 805,323
Net margins and patronage capital $ 1,249,940 $ 1,246,936 $ 1,247,414 $ 1,128,776 $ 1,066,857
TIER (5) 2.35 2.34 2.44 2.42 2.42
DSC (6) 2.32 2.26 2.42 2.40 2.26
MDSC (7) 2.25 2.17 2.30 2.28 2.09
Number of systems included 820 821 832 824 828
____________________
(1) Includes cost of purchased power, power production and transmission
expense.
(2) Includes sales expenses, consumer accounts and customer service and
informational expense as well as other administrative and general
expenses.
(3) Represents net 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 on form 7. CFC believes that
amounts incurred by distribution systems for interest charged to
construction and allowance for funds used during construction are
immaterial relative to their total interest on long-term debt and net
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) 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.
18
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 and
CFC by Member Distribution Systems
At December 31,
(Dollar amounts in thousands) 1998 1997 1996 1995 1994
Assets and other debits:
Utility plant:
Utility plant in service $40,387,723 $37,763,550 $35,406,826 $33,118,001 $31,162,069
Construction work in progress 1,129,147 1,062,356 975,357 881,171 799,327
Total utility plant 41,516,870 38,825,906 36,382,183 33,999,172 31,961,396
Less: Accumulated provision for
depreciation and amortization 11,409,118 10,608,302 9,911,677 9,221,378 8,631,903
Net utility plant 30,107,753 28,217,604 26,470,506 24,777,794 23,329,493
Investments in associated organizations (1) 3,665,208 3,483,154 3,348,326 3,207,671 3,051,840
Current and accrued assets 4,526,663 4,185,884 4,126,415 3,980,052 3,789,699
Other property and investments 644,353 552,033 503,871 496,105 456,923
Deferred debits 530,606 514,670 488,009 511,977 472,536
Total assets and other debits $39,474,582 $36,953,345 $34,937,127 $32,973,599 $31,100,491
Liabilities and other credits:
Net worth:
Memberships $ 112,391 $ 105,505 $ 105,497 $ 127,749 $ 114,080
Patronage capital and other equities (2) 16,710,887 15,674,556 14,731,432 13,633,993 12,804,404
Total net worth 16,823,277 15,780,061 14,836,929 13,761,742 12,918,484
Long-term debt (3) 18,343,340 16,924,955 16,214,420 15,718,979 15,020,664
Current and accrued liabilities 3,098,525 3,046,528 2,697,605 2,418,230 2,260,514
Deferred credits 884,595 864,384 872,013 786,455 714,083
Miscellaneous operating reserves 324,845 337,417 316,160 288,193 186,746
Total liabilities and other credits $39,474,582 $36,953,345 $34,937,127 $32,973,599 $31,100,491
Equity Percentage (4) 42.6% 42.7% 42.5% 41.7% 41.5%
Number of systems included 820 821 832 824 828
____________________
(1) Includes investments in service organizations, power supply capital
credits and investments in CFC.
(2) Includes non-refundable donations or contributions in cash, services or
property from states, municipalities, other government agencies,
individuals and others for construction purposes separately listed on
form 7.
(3) Principally debt to RUS and CFC. Includes $7,481,368, $6,121,902,
$5,467,636, $4,824,491, and $3,989,914, for the years 1998, 1997, 1996,
1995 and 1994, respectively, due to CFC.
(4) Determined by dividing total net worth by total assets and other debits.
19
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL
AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS
The following are unaudited figures which are based
upon financial statements submitted to RUS and
CFC by Member Power Supply Systems
Years Ended December 31,
(Dollar amounts in thousands) 1998 1997 1996 1995 1994
Operating revenues and patronage capital $10,901,138 $10,702,813 $10,585,875 $10,182,928 $9,972,873
Operating deductions:
Cost of power (1) 7,979,542 7,604,521 7,322,039 6,984,648 6,760,543
Distribution expense (operations) 17,499 12,555 15,431 16,019 14,668
Distribution expense (maintenance) 12,524 12,937 16,607 15,950 14,703
Administrative and general expense (2) 406,441 474,681 473,869 483,030 431,645
Depreciation and amortization expense 914,270 915,879 1,056,113 956,889 930,483
Taxes 69,095 231,843 237,700 246,700 241,775
Total 9,399,371 9,252,416 9,121,759 8,703,236 8,393,817
Utility operating margins 1,501,767 1,450,397 1,464,116 1,479,692 1,579,056
Non-operating margins 577,842 232,778 493,874 253,883 221,003
Power supply capital credits (3) 56,646 46,520 55,590 48,981 32,531
Total 2,136,255 1,729,695 2,013,580 1,782,556 1,832,590
Interest on long-term debt (4) 1,221,512 1,295,082 1,436,200 1,476,062 1,857,644
Other deductions (5) 184,868 409,396 1,601,919 89,784 129,794
Total 1,406,380 1,704,478 3,038,119 1,565,846 1,987,438
Net margins and patronage capital $ 729,875 $ 25,217 $(1,024,539) $ 216,710 $ (154,848)
TIER (6) 1.60 1.02 .29 1.15 .93
DSC (7) 1.45 1.11 .69 1.02 1.01
Number of systems included 58 57 54 53 53
____________________
(1) Includes cost of purchased power, power production and transmission
expense, separately listed on the form 12.
(2) Includes sales expenses and consumer accounts expense and consumer
service and informational expense as well as other administrative and
general expenses, separately listed on the form 12 or FERC form 1.
(3) Certain power supply systems purchase wholesale power from other power
supply systems of which they are members. Power supply capital credits
represent net 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.
20
(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. According to unpublished information interest
charged to construction and allowance for funds used during construction
for CFC power supply members in the years 1994-1998 were as follows:
(Dollar amounts in thousands)
Allowance for
Interest Charged Funds used
to Construction During Construction Total
1998 $9,947 $13,133 $23,080
1997 7,798 12,684 20,482
1996 13,434 11,620 25,054
1995 68,400 11,018 79,418
1994 46,773 8,913 55,686
(5) Includes $1,119,635 in 1996 related to the reorganization of Cajun
Electric Power Coop., Inc., with whom CFC has no credit exposure.
(6) The ratio of (x) interest on long-term debt (in each year including all
interest charged to construction) and net 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, 1.27, 1.04, 1.21, 1.23 and 1.31 for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
(7) 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 1.28, 1.13,
1.20, 1.22, and 1.24 for the years ended December 31, 1998, 1997, 1996,
1995 and 1994, respectively.
21
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 and
CFC by Member Power Supply Systems
At December 31,
(Dollar amounts in thousands) 1998 1997 1996 1995 1994
Assets and other debits:
Utility plant:
Utility plant in service $31,141,532 $31,656,202 $32,191,089 $34,182,352 $32,934,304
Construction work in progress 1,041,760 825,421 640,005 931,397 1,624,978
Total utility plant 32,183,292 32,481,623 32,831,094 35,113,749 34,559,282
Less: Accumulated provision for
depreciation and amortization 13,059,537 12,558,247 11,783,058 11,586,462 10,777,786
Net utility plant 19,123,755 19,923,376 21,048,036 23,527,287 23,781,496
Investments in associated organizations (1) 1,132,157 1,179,185 1,178,785 1,049,409 248,677
Current and accrued assets 3,740,302 3,697,391 3,984,238 4,211,004 3,997,466
Other property and investments 1,691,932 1,553,774 2,000,584 1,656,563 2,483,232
Deferred debits 3,400,876 3,228,708 3,636,749 4,391,800 4,366,377
Total assets and other debits $29,089,022 $29,582,434 $31,848,392 $34,836,063 34,877,248
Liabilities and other credits:
Net worth:
Memberships $ 263 $ 258 $ 258 $ 250 $ 322
Patronage Capital and other equities (2) (52,606) (778,357) (646,115) 497,756 246,262
Total net worth (52,343) (778,099) (645,857) 498,006 246,584
Long-term debt (3) 23,389,067 24,426,867 25,900,628 28,372,321 28,779,577
Current and accrued liabilities 1,877,320 1,791,628 2,040,563 1,848,755 2,747,022
Deferred credits 1,296,308 1,343,053 1,826,945 1,309,860 1,206,488
Miscellaneous operating reserves 2,578,670 2,798,985 2,726,113 2,807,121 1,897,577
Total liabilities and other credits $29,089,022 $29,582,434 $31,848,392 $34,836,063 $34,877,248
Number of systems included 58 57 54 53 53
____________________
(1) Includes investments in service organizations, power supply capital
credits and investments in CFC.
(2) Includes a $1.2 billion decrease in 1996 related to the reorganization
of Cajun Electric Power Coop., Inc., with whom CFC has no credit exposure.
(3) Principally debt to RUS or debt guaranteed by RUS and loaned by FFB and
includes $1,652,943, $1,411,157, $1,264,475, $1,085,594, and $1,065,556
for the years 1998, 1997, 1996, 1995, and 1994, respectively, due to CFC.
22
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES AND EXPENSES
AS REPORTED BY CFC TELECOMMUNICATIONS SYSTEM MEMBERS
The following are unaudited figures which are based
upon financial statements submitted to
CFC by Member Telecommunications Systems
Year Ended
(Dollar amounts in thousands) December 31, 1998
Operating revenues $ 2,535,461
Operating expenses (1) 1,846,215
Net income before interest, depreciation and taxes 689,246
Interest on long-term debt 140,436
Net income before depreciation & taxes 548,810
Depreciation and amortization expenses 279,277
Net income before taxes 269,533
Taxes 71,326
Net Income $ 198,207
DSC (2) 2.14
Number of systems included 169
____________________
(1) Includes sales expenses, consumer accounts and customer service and
informational expense as well as other administrative and general expenses.
(2) The ratio of (x) net 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.
23
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC TELECOMMUNICATIONS SYSTEMS
The following are unaudited figures which are based
upon financial statements submitted to RUS and
CFC by Member Telecommunications Systems
At December 31,
(Dollar amounts in thousands) 1998
Assets and other debits:
Cash and cash equivalents $ 401,507
Current assets 590,248
Plant, property and equipment 2,699,798
Other non-current assets 1,456,301
Total assets $5,147,854
Liabilities and equity:
Current liabilities $ 586,176
Affiliate debt 23,442
Long-term debt (1) 2,686,987
Other non-current liabilities 232,219
Equity 1,619,030
Total liabilities and equity $5,147,854
Equity percentage (2) 31.5%
Number of systems included 169
____________________
(1) Includes current maturities.
(2) Determined by dividing total net worth by total assets and other debits.
24
Item 2. Properties.
CFC owns and operates a headquarters facility in Fairfax County, Virginia.
This facility consists of a six-story office building with separate parking
garage situated on four acres of land. In July 1999, CFC completed
construction of a second building on the adjacent unimproved land. The new
building is a six-story office building with a separate parking garage
situated on six acres of land. CFC also owns an additional two acres of
unimproved land.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
25
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, 1999.
(Dollar amounts in thousands) 1999 1998 1997 1996 1995
For the year ended May 31:
Operating income $ 790,803 $ 637,573 $ 564,439 $ 505,073 $ 440,109
Operating margin $ 74,717 $ 54,411 $ 51,530 $ 46,857 $ 41,803
Nonoperating income 1,722 2,611 3,206 3,764 3,409
Gain on sale of land - 5,194 - - -
Extraordinary loss (A) - - - (1,580) -
Net margin $ 76,439 $ 62,216 $ 54,736 $ 49,041 $ 45,212
Fixed charge coverage ratio (A) 1.12 1.12 1.12 1.12 1.13
As of May 31:
Assets $13,925,252 $10,682,888 $9,057,495 $8,054,089 $7,080,789
Long-term debt (B) $ 6,891,122 $ 5,024,621 $3,596,231 $3,682,421 $3,423,031
Members' subordinated certificates $ 1,239,816 $ 1,229,166 $1,212,486 $1,207,684 $1,234,715
Members' equity $ 296,481 $ 279,278 $ 271,594 $ 269,641 $ 270,221
Leverage ratio (C) 7.00 6.37 5.84 5.69 5.13
Debt to equity ratio (D) 5.52 4.51 3.97 3.63 3.01
____________________
(A) During the year ended May 31, 1996, CFC paid a premium of $1.6 million
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
$983.0, $327.3 million, $268.7 million, $351.5 million, and $262.7
million in long-term debt that comes due, matures and/or will be redeemed
early during fiscal years 2000, 1999, 1998, 1997, and 1996, respectively
(see Note 5 to Combined Financial Statements).
(C) In accordance with CFC's revolving credit agreements, the leverage ratio
is calculated by dividing debt and guarantees outstanding, excluding
Quarterly Income Capital Securities and debt used to fund loans guaranteed
by the RUS, by the total of Quarterly Income Capital Securities, Members'
Subordinated Certificates and Members' Equity.
(D) The debt to equity ratio is calculated by dividing debt outstanding,
excluding Quarterly Income Capital Securities and debt used to fund loans
guaranteed by RUS, by the total of Quarterly Income Capital Securities,
Members' Subordinated Certificates, Members' Equity and the loan loss
allowance.
CFC has had outstanding guarantees for its members' indebtedness in each of
the fiscal years shown above. Members' interest expense on such indebtedness
was approximately $73.5 million for the year ended May 31, 1999.
CFC does not have any outstanding common stock and does not pay dividends.
Annually, CFC allocates its net margins to its members in the form of
Patronage Capital certificates. Under current policies, CFC retires
Patronage Capital certificates 70% during the next fiscal year and holds the
remaining 30% for 15 years. All retirements of Patronage Capital are subject
to approval by the Board of Directors, if permitted by CFC's contractual
obligations and to the extent that the Board of Directors in its discretion
may determine from time to time that the financial condition of CFC will not
be impaired as a result.
26
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.
The following discussion and analysis is designed to provide a better
understanding of the CFC's combined financial condition and results of
operations and as such should be read in conjunction with the Combined
Financial Statements, including the notes thereto.
Overview
CFC was formed in 1969 by the rural electric cooperatives to provide them
with a source of funds to supplement the financing provided by RUS. CFC was
organized as a cooperative in which each member (other than associate members)
receives one vote. Under CFC's bylaws, the Board of Directors is comprised
of 22 individuals who must be either general managers or directors of
members. CFC was granted tax-exempt status under Section 501(c)(4) of the
Internal Revenue Code.
In 1987, RTFC was formed by CFC to provide a source of funds for the rural
telecommunications industry. Like CFC, RTFC is a cooperative. However,
RTFC's bylaws and voting members' agreement require that the majority of
RTFC's Board of Directors be elected from individuals designated by CFC.
The remaining board positions are filled by individuals nominated by the
other RTFC members. CFC is the sole source of external funding for RTFC.
Because CFC has control of the RTFC Board, RTFC's financial condition and
results of operations are combined with those of CFC.
GFC was organized in December 1991 as a taxable cooperative association
owned by its member rural electric systems and CFC to provide a source of
funds for members to refinance the RUS guaranteed debt previously held by
the FFB. GFC is a controlled affiliate of CFC (the majority of its directors
are appointed by CFC). All loans from GFC are guaranteed by RUS. CFC is
the sole source of external funding for GFC. Because CFC has control of the
GFC Board, GFC's financial condition and results of operations are combined
with those of CFC. Unless stated otherwise, all references to CFC refer to
the combined results of CFC, RTFC and GFC.
CFC's primary objective as a cooperative is to provide its members with the
lowest possible loan and guarantee rates. Therefore, CFC marks up its
funding costs only to the extent necessary to cover its operating expenses,
a provision for loan losses and to provide 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 obtains its funding from the capital markets and its membership. CFC
enters the capital markets, based on the combined strength of its members
to borrow the funds required to fulfill the financing requirements of its
members. On a regular basis, CFC obtains debt financing in the capital
markets by issuing long-term fixed rate or variable rate Collateral Trust
Bonds and Quarterly Income Capital Securities, intermediate-term fixed or
variable rate Medium-Term Notes, Commercial Paper and enters into Bank Bid
Note agreements. CFC also offers its AA/A credit rating to enhance its
members' credit on other public or private placement transactions through
guarantees. In addition, CFC obtains debt financing from its membership
and other qualified investors through the direct sale of its Commercial
Paper and Medium-Term Notes.
Rural electric cooperatives that join CFC are required to purchase Membership
Subordinated Certificates from CFC as a condition of membership. In
connection with any long-term loan or guarantee made by CFC to or on behalf
of one of its members, CFC may require that the member make an additional
investment in CFC by purchasing Loan or Guarantee Subordinated Certificates.
Like the Membership Subordinated Certificates, the Loan and Guarantee
Subordinated Certificates are unsecured and subordinate to other debt.
CFC is required by the cooperative laws under which it is incorporated to
have a mechanism to allocate its earnings to its members. CFC allocates its
net margins (Patronage Capital) annually based on each member's participation
in loan programs during the year. The Membership, Loan and Guarantee
Subordinated Certificates along with unretired Patronage Capital provide
CFC's base capitalization.
27
CFC's performance is closely tied to the performance of its member rural
electric and telecommunications utility systems due to the near 100%
concentration of its loan and guarantee portfolio in those industries. The
following provides an analysis of both CFC's performance and a discussion of
the quality of CFC's loan and guarantee portfolio.
Financial Condition
At May 31, 1999, CFC had $13.9 billion in total assets, an increase of $3.2
billion or 30% over the prior year. Net loans outstanding to members
represented approximately $13.5 billion or 97% of total assets. 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, 1999, 89% of CFC's loan portfolio consisted of long-term
amortizing loans, including long-term loans classified as nonperforming and
restructured, the majority of which are secured. The remaining 11% consisted
of secured and unsecured intermediate-term and line of credit loans as well
as long-term loans guaranteed by RUS. Approximately 63% or $8.7 billion in
loans carried a fixed rate of interest. All other loans, including $3.6
billion in long-term loans, are subject to interest rate adjustment monthly
or semi-monthly.
In addition to its loans, CFC provided approximately $1.7 billion in
guarantees for its members at May 31, 1999. These guarantees relate
primarily to tax-exempt financed pollution control equipment.
At May 31, 1999, CFC had also committed to lend an additional amount of
approximately $12.8 billion to its members. Most unadvanced loan commitments
contain a material adverse change condition. About 40% of these commitments
are provided for operational back-up liquidity. Approximately one-third of
the unadvanced commitments were approved under the Power Vision program and
will expire if not advanced within 60 months of approval. CFC does not
anticipate funding the majority of the commitments outstanding for this
purpose.
Subordinated Certificates include both original Membership Subordinated
Certificates and Loan and Guarantee Subordinated Certificates, all of which
are subordinate to other CFC debt. At May 31, 1999, Membership Subordinated
Certificates totaled $642 million. These certificates generally mature in
100 years and pay interest at 5.0%. At May 31, 1999, Loan Subordinated
Certificates totaled $423 million and carried a weighted average interest
rate of 0.8%. At May 31, 1999, Guarantee Subordinated Certificates totaled
$175 million and carried a weighted average interest rate of 3.3%. Both the
Loan and Guarantee certificates are long-term instruments which generally
amortize at a rate equivalent to that of the loan or guarantee to which they
relate. On a combined basis, Subordinated Certificates carried a weighted
average interest rate of 3.3%. Loan and Guarantee Subordinated Certificates
are required to be purchased in conjunction with the receipt of a loan or
credit enhancement based on the member's leverage ratio (total debt and
credit enhancements divided by total equity investments in CFC). Members
that have a leverage ratio with CFC in excess of a level in the approved
policy are required to purchase additional Subordinated Certificates to
receive a loan or credit enhancement. At the present time, the majority
of CFC's members maintain a CFC leverage ratio within the policy limit.
The issuance of zero percent Loan Subordinated Certificates is expected to
exceed the issuance of 5.0% Membership Subordinated Certificates. Therefore,
management expects the average interest rate paid on all certificates to
decline over time. CFC paid a total of $41.5 million in interest to holders
of Subordinated Certificates during fiscal year 1999.
Under current policy, CFC returns 70% of the allocated net margins in the
next fiscal year, with the remaining 30% to be held and then retired at a
future date, as permitted by CFC's contractual obligations and to the extent
that the Board of Directors in its discretion may determine from time to time
that the financial condition of CFC will not be impaired as a result. During
the next 10 years, CFC will retire the unretired allocations representing net
margins for fiscal years 1988 to 1993, all of which had been allocated under
a previous retirement policy. The unretired allocations (Members' Equity) do
not earn interest and are junior to all debt instruments, including
Subordinated Certificates. At May 31, 1999, CFC had $295 million in retained
equity.
CFC enters the capital markets through the issuance of Collateral Trust Bonds,
Medium-Term Notes, Commercial Paper and Quarterly Income Capital Securities.
At May 31, 1999, CFC had $2,846 million in fixed rate 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 distribution system borrowers, evidencing loans equal
in principal amount to at least 100% of the outstanding principal amount of
Collateral Trust Bonds. At May 31, 1999, CFC had pledged $3,017 million in
mortgage notes. During fiscal year 1999, CFC issued a total of $1,100 million
in Collateral Trust Bonds in six separate debt offerings. All Collateral
Trust Bonds issued after February 1994 have been issued under
28
an Indenture with U.S. Bank as trustee ("1994 Indenture"). Virtually all
Collateral Trust Bonds were offered to investors in underwritten public
offerings.
At May 31, 1999, CFC had $2,625 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 $211 million at May 31, 1999. The remaining $2,414 million were sold
through dealers to investors including $735 million in the European markets.
At May 31, 1999, a total of $390 million of Medium-Term Notes were issued in
a foreign-currency. At the time of issuance, CFC also entered into a
currency exchange agreement to cover all principal and interest payments due
in a foreign-currency.
At May 31, 1999, CFC had $5,871 million outstanding in Commercial Paper with
a weighted average maturity of 38 days. Commercial Paper notes are issued
with maturities up to 270 days and are senior unsecured obligations of CFC.
Commercial Paper sold directly by CFC and outstanding to CFC's members and
others totaled $1,187 million at May 31, 1999. The remaining $4,684 million
was sold through dealers to investors in the United States and Europe.
European Commercial Paper may be issued in currencies other than U.S.
dollars. For notes issued in a foreign-currency, CFC will enter into a
currency exchange agreement with a highly rated counterparty at the time of
the issuance. At May 31, 1999, there were no foreign denominated Commercial
Paper notes outstanding.
In addition, CFC obtains funds from various banking institutions under Bank
Bid Note arrangements, similar to bank lines of credit. The notes are issued
for terms up to three months and are unsecured obligations of CFC. At May 31,
1999, CFC had $375 million outstanding in Bank Bid Notes.
At May 31, 1999, CFC had $400 million outstanding in Quarterly Income Capital
Securities. During fiscal year 1999, CFC issued $200 million in Quarterly
Income Capital Securities. The securities are unsecured obligations of CFC,
subordinate and junior in right of payment to senior debt and the debt
obligations guaranteed by CFC, but senior to Subordinated Certificates.
CFC has the right at any time and from time to time during the term of the
Quarterly Income Capital Securities to suspend interest payments for a period
not exceeding 20 consecutive quarters.
During the year, total assets increased by $3,242 million. Net loan balances
increased by $3,162 million or 31%. Gross loans increased by a total of
$3,124 million, and the allowance for loan losses decreased by $38 million,
compared to the prior year. As a percentage of the portfolio, long-term
loans (excluding loans guaranteed by RUS) represented 89% at May 31, 1999,
compared to 87% at May 31, 1998. Long-term fixed rate loans represented 71%
and 53% of the total long-term loans at May 31, 1999 and 1998, respectively.
Loans converting from a variable rate to a fixed rate for the year ended May
31, 1999 totaled $1,639 million, an increase from the $1,069 million that
converted for the year ended May 31, 1998. Offsetting the conversions to the
fixed rate were $55 million and $19 million of loans that converted from the
fixed rate to the variable for the years ended May 31, 1999 and 1998,
respectively. This resulted in a net conversion of $1,584 million from the
variable rate to a fixed rate for the year ended May 31, 1999 compared to a
net conversion of $1,050 million for the year ended May 31, 1998.
The increase in total loans outstanding at May 31, 1999, was primarily due
to an increase of $2,878 million in long-term loans and an increase of $298
million in line of credit loans offset by a decrease of $50 million in
intermediate-term loans. The increase to loans outstanding for fiscal year
1999 included the advance of $556 million for the purpose of repaying RUS
loans, $5,233 million under the 100% and Power Vision programs, $155
million under the RUS concurrent loan program and $41 million under the RUS
guaranteed loan program. The loans advanced under the 100%, RUS concurrent
and Power Vision loan programs were used for a variety of general corporate
purposes, including, construction of headquarters facilities and transmission
facilities, system upgrades, refinancing of non-RUS debt, and electric plant
upgrades. There were a number of reasons underlying the increased demand for
CFC loan advances, including:
* The strong economy, which has spurred construction and business development;
* RUS waiting periods are at an all time high, which caused more borrowers to
buyout their RUS debt and/or make greater use of CFC 100% loan funds;
* a large number of systems have bought out their RUS debt over the last few
years, requiring them to seek non RUS financing;
* some borrowers have begun to expand and diversify their operations through
acquisitions and mergers.
Notes Payable, which consists of Commercial Paper, Bank Bid Notes and
long-term debt due within one year, totaled $4,977 million, an increase of
$1,129 million over the prior year. At May 31, 1999, CFC's short-term debt
consisted of $4,684 million in dealer Commercial Paper, $1,063 million in
Commercial Paper issued to CFC's members, $124 million in
29
Commercial Paper issued to certain nonmembers, $1,133 million in Collateral
Trust Bonds and Medium-Term Notes that mature within one year and $375 million
in Bank Bid Notes. The Commercial Paper sold to CFC's members and certain
nonmembers decreased by $130 million, the amount of Bank Bid Notes outstanding
increased by $190 million and Commercial Paper sold through CFC's dealers
increased by $321 million from the prior year. CFC's Commercial Paper and
Bank Bid Notes had a weighted average maturity of 38 days at May 31, 1999.
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 reclassified
$2,403 million and $2,345 million in short-term debt as long-term at May 31,
1999 and 1998, respectively.
During fiscal year 1999, long-term debt outstanding increased by $1,867
million. The increase in long-term debt outstanding was due to an increase
of $1,098 million in Collateral Trust Bonds, $1,516 million in Medium-Term
Notes and $58 million in the amount of short-term debt supported by revolving
credit agreements offset by an increase of $806 million of long-term debt due
within one year reclassified as notes payable. This increase was required
to fund the increase in long-term fixed rate loans outstanding. Members'
Subordinated Certificates and Members' Equity increased by $27 million to
$1,535 million at May 31, 1999, compared to $1,508 million at May 31, 1998.
Off-balance sheet, CFC experienced an increase of $3,963 million in gross
unadvanced loan commitments to a total of $12,808 million at May 31, 1999.
Unadvanced commitments include loans approved by CFC for which loan contracts
have not yet been executed or for which contracts have been executed but
funds have not been advanced. The majority of the short-term unadvanced
commitments provide backup liquidity to CFC borrowers, and therefore CFC
does not anticipate funding most of such commitments. Approximately 40% of
the outstanding commitments at May 31, 1999 were for short-term or line of
credit loans. Approximately one-third of the unadvanced commitments were
approved under the Power Vision program and will expire if not advanced within
60 months of approval. To qualify for the advance of funds under all
commitments, a borrower must assure CFC that there has been no material
change since the loan was approved.
Guarantees outstanding at May 31, 1999, were $1,684 million, representing a
decrease of $350 million from the May 31, 1998 balance of $2,034 million.
The guarantee balance decreased due to the redemption of the Bonanza secured
lease obligation bonds, other scheduled repayments and lease reductions (see
note 10 to the Combined Financial Statements). The guarantee balance is
anticipated to continue to decline.
CFC's leverage ratio increased during the year from 6.37 at May 31, 1998, to
7.00 at May 31, 1999. The ratio is calculated after excluding from debt the
Quarterly Income Capital Securities and all debt associated with the funding
of the RUS 100% guaranteed loans. Members' Subordinated Certificates and
Quarterly Income Capital Securities are treated as equity in the calculation
of the leverage ratio. The increase in the leverage ratio was primarily due
to an increase in loans outstanding to members financed by the issuance of
debt to members and in the capital markets offset by the issuance of the $200
million in Quarterly Income Capital Securities and the reduction in guarantees
outstanding. CFC contemplates that its leverage ratio will continue to
increase modestly as it obtains external capital to accommodate its loan
growth. CFC will retain the flexibility to further amend its capital
retention policies to retain members' Patronage Capital investments in CFC
consistent with maintaining acceptable financial ratios.
CFC's debt/equity ratio increased from 4.51 at May 31, 1998, to 5.52 at May
31, 1999. The ratio is calculated by dividing debt outstanding, excluding
Quarterly Income Capital Securities and debt used to fund loans guaranteed
by RUS, by the total of Members' Subordinated Certificates, Members' Equity,
the loan loss allowance and Quarterly Income Capital Securities.
Margin Analysis
CFC uses an interest coverage ratio instead of the dollar amount of gross or
net margins as its primary performance indicator, since CFC's net margins are
subject to fluctuation as interest rates change. Management has established
a 1.10 Times Interest Earned Ratio ("TIER") as its minimum operating
objective. CFC has earned TIERs of 1.12 for the years ended May 31, 1999,
1998, 1997 and 1996. TIER is a measure of CFC's ability to cover the
interest expense on funding.
Fiscal Year 1999 versus 1998 Results
Net margins for the year ended May 31, 1999, were $76 million, an increase
of $14 million or 23% over the $62 million earned the prior year.
30
Operating income for the year ended May 31, 1999 was $791 million, an
increase of $153 million or 24% over the prior year. Operating income
increased due to an increase in average loan volume offset by a slight
decrease in the average interest rate on the loan portfolio. Average loan
volume increased by $2,485 million to a balance of $12,140 million at May 31,
1999. The average interest rate on the portfolio for the year ended May 31,
1999 was 6.51%, a decrease of 0.09% from the 6.60% for the prior year. The
decrease was due to the reductions to interest rates during 1999 in the
capital markets that were passed on through reductions in CFC loan interest
rates.
The total cost of funding for the year ended May 31, 1999 was $664 million,
an increase of $123 million or 23% over the prior year. The cost of funding
increased due to the increase in average loan volume outstanding offset by a
decrease to the average interest rate on funds outstanding. The average
interest rate on funding for the year ended May 31, 1999 was 5.47%, a
decrease from 5.60% in 1998. This rate decreased as a result of three 25
basis point reductions in the federal funds rate offset by an increase in
Collateral Trust Bonds and Medium-Term Notes and Quarterly Income Capital
Securities outstanding.
The gross margin earned on loans for fiscal year 1999 was $127 million, an
increase of $30 million or 31% over the prior year. The gross margin of $127
million represents 1.04% of average loan volume for the year, an increase
from the 1.00% represented by the $97 million gross margin for the prior year.
Operating expenses for fiscal year 1999 totaled $28 million, an increase of
$4 million or 17% over the prior year. The operating expenses for fiscal
year 1999 represented 0.23% of average loan volume, slightly less than the
0.24% for the prior year. While the dollar amount of operating expenses
increased during the year ended May 31, 1999, the cost as a percentage of
average loan volume decreased. The increase to the dollar amount of
operating expenses was due to an increase in salaries and benefits from
normal base salary increases and an increase in the number of employees, and
the increased marketing effort. Staffing increases were required to support
operations related to a growing loan portfolio, the increased marketing
effort and the development of new products and services.
A total provision of $24 million was added to the loan loss reserve during
the year ended May 31, 1999. The $24 million provision is an increase of
$5 million or 26% over the amount added in the prior year. The provision to
the reserve for fiscal year 1999 represented 0.20% of average loan volume,
the same as the prior year. The increase to the provision for fiscal year
1999 was due to the overall growth in the portfolio.
A total of $1 million of nonoperating income was earned during fiscal year
1999, a slight reduction from the prior year.
During the year ended May 31, 1998, CFC recognized a gain of $5.2 million on
the sale of land. No such gain was recognized in the year ended May 31,
1999.
Fiscal Year 1998 versus 1997 Results
Net margins for the year ended May 31, 1998, were $62 million, an increase of
$7 million over the $55 million earned the prior year.
Operating income for the year ended May 31, 1998 was $638 million, an increase
of $74 million or 13% over the prior year. Operating income increased due to
an increase in average loan volume and a slight increase in the average
interest rate on the loan portfolio offset by a decrease in the amount of
deferred conversion fees recognized. Average loan volume increased by $1,074
million to a balance of $9,655 million at May 31, 1998. The average interest
rate on the portfolio for the year ended May 31, 1998 was 6.60%, an increase
of 0.02% over the 6.58% for the prior year. This increase was due to the
conversion of approximately $1,069 million of long-term loans from a variable
interest rate to a fixed interest rate during 1998. During fiscal year 1998,
a total of $1 million of deferred conversion fees were recognized into income,
a decrease of $10 million from the prior year. At May 31, 1998, there was a
balance of $1 million of deferred conversion fees. It is anticipated that
this balance will be recognized into income during fiscal year 1999.
The total cost of funding for the year ended May 31, 1998, was $541 million,
an increase of $65 million over the prior year. The cost of funding increased
due to the increase in average loan volume outstanding and to an increase to
the average interest rate on funds outstanding. The average interest rate on
funding for the year ended May 31, 1998 was 5.60%, an increase from 5.54% in
1997. This rate increased as a result of the increase of $1,392 million in
Collateral Trust Bonds and Medium-Term Notes outstanding and the increase of
$75 million in Quarterly Income Capital Securities outstanding, offset by an
increase of $24 million in Members' Subordinated Certificates and Members'
Equity outstanding.
31
The gross margin earned on loans for fiscal year 1998 was $97 million, an
increase of $8 million over the prior year. The gross margin of $97 million
represents 1.00% of average loan volume for the year, a decrease from the
1.04% represented by the $89 million gross margin of the prior year. The
growth in average loans outstanding allowed CFC to price its loans closer to
its cost of funding during fiscal year 1998.
Operating expenses for fiscal year 1998 totaled $24 million, an increase of
$2 million over the prior year. The operating expenses for fiscal year 1998
represented 0.24% of average loan volume, slightly less than the 0.26% for
the prior year. While the dollar amount of operating expenses increased
during the year ended May 31, 1998, the cost as a percentage of average loan
volume decreased. The increase to the dollar amount of operating expenses
was due to an increase in salaries and benefits from normal base salary
increases and an increase in the number of employees, and an increased
marketing effort. Staffing increases were required to support operations
related to a growing loan portfolio, the increased marketing effort and the
development of new products and services.
A total provision of $19 million was added to the loan loss reserve during
the year ended May 31, 1998. The $19 million provision is an increase of
$4 million over the amount added the prior year. The provision to the
reserve for fiscal year 1998 represented 0.20% of average loan volume, a
slight increase over the 0.18% for the prior year. The increase to the
provision for fiscal year 1998 was due to the overall growth in the portfolio.
A total of $3 million of nonoperating income was earned during fiscal year
1998, approximately the same total as the prior year.
The following is a summary of CFC's operating results as a percentage of
average loans outstanding for the fiscal years ended May 31, 1999, 1998 and
1997.
1999 1998 1997
Interest on loans 6.51% 6.60% 6.58%
Less: cost of funds 5.47% 5.60% 5.54%
Gross operating margin 1.04% 1.00% 1.04%
General and administrative expenses 0.23% 0.24% 0.26%
Provision for loan losses 0.20% 0.20% 0.18%
Total expenses 0.43% 0.44% 0.44%
Operating margin 0.61% 0.56% 0.60%
Nonoperating income (1) 0.02% 0.08% 0.04%
Net margins 0.63% 0.64% 0.64%
TIER 1.12 1.12 1.12
____________________
(1) Nonoperating income includes the gain on the sale of land in fiscal year
1998.
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, 1999, 1998 and 1997.
Loans By Member Class
(Dollar amount in millions) 1999 1998 1997
Electric systems:
Distribution $ 8,719.3 56.7% $ 7,265.9 57.5% $6,282.1 57.5%
Power supply 3,538.8 23.0% 3,524.9 27.8% 3,285.0 30.0%
Service organizations 315.9 2.0% 191.8 1.5% 179.4 1.6%
Associate members 103.6 0.7% 102.7 0.8% 100.2 0.9%
Subtotal electric systems $12,677.6 82.4% $11,085.3 87.6% $9,846.7 90.0%
Telecommunication systems:
Local exchange carrier $ 1,688.2 11.0% $ 810.7 6.3% $ 754.2 6.8%
Cable 128.9 0.8% 94.6 0.8% 56.3 0.5%
Cellular 272.0 1.8% 152.9 1.2% 134.2 1.2%
Personal telecommunications systems 303.5 2.0% 112.2 0.9% 5.9 0.1%
Other 317.7 2.0% 404.5 3.2% 148.6 1.4%
Subtotal telecommunication systems 2,710.3 17.6% 1,574.9 12.4% 1,099.2 10.0%
Total $15,387.9 100.0% $12,660.2 100.0% $10,945.9 100.0%
32
CFC's members are widely dispersed throughout the United States and its
territories, including 48 states, the District of Columbia, Guam, American
Samoa and the U.S. Virgin Islands. At May 31, 1999, 1998 and 1997, no state
or territory had over 12.9%, 11.7% and 10.6%, respectively, of total loans
and guarantees outstanding.
Credit Concentration
In addition to the geographic diversity of the portfolio, CFC limits its
exposure to any one borrower. 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, 1999, the total exposure outstanding to
any one borrower did not exceed 4.2% of total loans (excluding loans
guaranteed by RUS) and guarantees outstanding. At May 31, 1999, CFC had
$2,242 million in loans outstanding, excluding loans guaranteed by RUS, and
$703 million in guarantees outstanding, to its largest 10 borrowers. The
amounts outstanding to the largest 10 borrowers at May 31, 1999 represented
16.4% of total loans outstanding and 41.7% of total guarantees outstanding.
Total credit exposure to the largest 10 borrowers represented 19% of total
credit exposure at May 31, 1999 and 1998.
Security Provisions
Except when providing lines of credit, CFC typically lends to its members on
a secured basis. At May 31, 1999, a total of $1,231 million of loans were
unsecured representing 9.1% of total loans and 8.1% of total loans and
guarantees. Approximately $163.0 million or 13.2% of the unsecured loans
represent obligations of distribution borrowers for the initial phase(s) of
RUS note buyouts. Upon completion of a borrower's buyout from RUS, CFC
receives first lien security on all assets and future revenues. The
unsecured loans would represent 7.8% of total loans and 6.9% of total loans
and guarantees if these partial note buyout obligations were excluded.
CFC's long-term loans are typically secured pro-rata with any other secured
lenders (primarily RUS) by all assets and future revenues of the borrower.
Short-term loans are generally unsecured lines of credit. 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 tables summarize the key composite operating results of CFC's
two main electric system borrower types, distribution and power supply
systems, and the telecommunications system borrowers. The information
presented below is as of December 31, and taken from the data contained on
pages 18 to 24.
CFC Distribution Member Borrowers
Composite Results
1998 1997 1996 1995 1994
TIER 2.35 2.34 2.44 2.42 2.42
DSC 2.32 2.26 2.42 2.40 2.26
MDSC 2.25 2.17 2.30 2.28 2.09
Equity percentage 42.6% 42.7% 42.5% 41.7% 41.5%
CFC Power Supply Member Borrowers
Composite Results
1998 1997 1996 1995 1994
TIER 1.27 1.04 1.21 1.23 1.31
DSC 1.28 1.13 1.20 1.22 1.24
Equity percentage 13.8% 12.8% 12.3% 11.7% 9.3%
NOTE: The power supply composite results have been presented without the
operating results of six systems experiencing financial difficulties. CFC
had credit exposure to 4 of these systems (see Note 10 to the Combined
Financial Statements).
33
CFC Telecommunications System Borrowers
Composite Results
1998 1997 1996
DSC 2.14 2.39 3.21
Equity percentage 32% 31% 34%
Most CFC power supply borrowers sell the majority of their power under
all-requirements power 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-requirements power contract is dependent on the
individual systems' right and ability (legal as well as economic) to
establish rates to cover all costs. The boards of directors of most of CFC's
power supply and distribution members have the authority to establish binding
rates for their consumer members subject to state and federal regulations, as
applicable. Some states regulate rate-setting and can therefore override the
system's internal rate-setting procedures.
During the past few years, power supply members have been increasing their
equity levels. Under 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, an equity level of 20% of assets, 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) as a result of court proceedings,
repayment with the original terms is not anticipated, 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 foregoing interest
income recognition. At May 31, 1999, all nonperforming loans were on non-
accrual status with respect to interest income. At May 31, 1999,
nonperforming loans totaled $2 million, a decrease of $2 million from the
prior year-end. The decrease was due to the write-off of loans to one
borrower related to a bankruptcy settlement.
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, 1999, restructured loans
totaled $577 million, an increase of $247 million from the prior year. The
increase was due to amounts advanced to redeem the secured Bonanza lease
obligation bonds offset by principal repayments received during the year. At
May 31, 1999, all restructured loans were on an accrual status at a rate of
3.90%. Restructured loans were placed on accrual at February 1, 1999. All
payments received prior to February 1, 1999 were applied against principal
outstanding. At May 31, 1998 and 1997, restructured loans totaling $330
million and $362 million, respectively, were on a nonaccrual status with
respect to the recognition of interest income.
34
NONPERFORMING AND RESTRUCTURED ASSETS
As of May 31
(Dollar amounts in thousands) 1999 1998 1997
Nonperforming loans $ 1,643 $ 4,080 $ 9,428
Percent of loans and guarantees outstanding 0.01% 0.03% 0.09%
Restructured loans $576,662 $329,538 $361,961
Percent of loans and guarantees outstanding 3.75% 2.61% 3.29%
Total nonperforming and restructured loans $578,305 $333,618 $371,389
Percent of loans and guarantees outstanding 3.76% 2.64% 3.38%
Allowance for Loan Losses
CFC maintains an allowance for potential loan 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, 1999,
the allowance for loan losses totaled $212 million, a net decrease of $38
million from the prior year-end. The allowance represented 36.7% of
nonperforming and restructured loans and 1.38% of total loans and guarantees
outstanding at year-end.
During fiscal year 1999, CFC recorded net loan charge-offs of $48 million.
A total of $62 million was written off, $40 million related to Wabash (the
settlement of the RUS clawback), $21 million related to the defeasance of
the Saluda River tax-exempt bonds and $1 million related to the transfer to
RUS, of loans outstanding to Allegheny. A total of $14 million of amounts
previously written off related to the deferred gain from the Wabash
bankruptcy settlement and the release of funds held in trust for the Vermont
Electric Cooperative and Vermont Generating and Transmission Cooperative
restructuring was recovered.
Since its inception in 1969, CFC has charged off loan balances in the total
amount of $79 million, net of recoveries.
Management believes that the allowance for loan losses is adequate to cover
any portfolio losses which may occur.
The following chart presents a summary of the allowance for loan losses at
May 31, 1999, 1998 and 1997.
ALLOWANCE FOR LOAN LOSSES
Years Ended May 31,
(Dollar amounts in thousands) 1999 1998 1997
Beginning balance $250,131 $233,208 $218,047
Provision for loan losses 23,866 19,027 15,161
Charge-offs (61,794) (2,104) -
Ending balance $212,203 $250,131 $233,208
As a percentage of total
loans outstanding 1.55% 2.36% 2.62%
As a percentage of total loans and
guarantees outstanding 1.38% 1.98% 2.12%
As a percentage of total nonperforming and
restructured loans outstanding 36.69% 74.98% 62.79%
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.
35
Match Funding Policy
CFC measures the matching of funds to assets by comparing the amount of fixed
rate assets repricing or amortizing to the total fixed rate debt maturing
over the next year. It is CFC's policy to manage asset and liability
repricing terms within a range of 5% of total assets. At May 31, 1999, CFC
had $617.8 million in fixed rate assets amortizing or repricing and $330.2
million in fixed rate liabilities and equity maturing during fiscal year 2000.
The difference, $287.6 million, represents the fixed rate assets in excess of
the fixed rate debt maturing during the next fiscal year. This difference of
$287.6 million at May 31, 1999 represents 2.1% 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 issued
primarily with original maturities under 90 days. CFC funds fixed rate loans
with fixed rate Collateral Trust Bonds, Medium-Term Notes, Quarterly Income
Capital Securities, Members' Subordinated Certificates and Members' Equity.
With the exception of Members' Subordinated Certificates, which are generally
issued at rates below CFC's long-term cost of funding and with extended
maturities, and Commercial Paper, CFC's liabilities have average maturities
that closely match the repricing terms of CFC's fixed interest rate loans.
CFC also uses Commercial Paper supported by interest rate exchange agreements
to fund its portfolio of fixed rate loans.
Certain of CFC's Collateral Trust Bonds and Medium-Term Notes were issued
with early redemption provisions. To the extent borrowers are allowed to
convert their fixed rate loans to a variable interest rate and to the extent
it is beneficial, CFC takes advantage of these early redemption privileges.
However, because conversions can take place at different intervals from early
redemptions, CFC charges conversion fees designed to compensate for any
additional interest rate risk assumed by CFC.
CFC makes use of an interest rate analysis in the funding of its long-term
fixed rate loan portfolio. The analysis compares the scheduled fixed rate
loan amortizations and repricings against the scheduled fixed rate debt and
Members' Subordinated Certificate amortizations to determine the fixed rate
funding gap for each individual year and for the portfolio as a whole. There
are no scheduled maturities for the Members' Equity, primarily unretired
Patronage Capital allocations. The balance of Members' Equity is assumed to
remain relatively stable since annual retirements have been approximately
equal to the annual allocation of net margins. The non-amortizing Members'
Subordinated Certificates either mature at the time of the related loan or
guarantee or 100 years from issuance (50 years in the case of a small portion
of certificates). Accordingly, it is assumed in the funding analysis that
non-amortizing Members' Subordinated Certificates and Members' Equity are
first used to "fill" any fixed rate funding gaps. The remaining gap
represents the amount of excess fixed rate funding due in that year or the
amount of fixed rate assets that are assumed funded by short-term variable
rate debt, primarily Commercial Paper. The interest rate associated with
the assets and debt maturing or equity and certificates is used to calculate
a TIER for each year and for the portfolio as a whole. The schedule allows
CFC to analyze the impact on the overall TIER of issuing a certain amount
of debt at a fixed rate for various maturities, prior to issuance of the debt.
The following chart shows the scheduled amortization, and maturity of fixed
rate asset and liabilities outstanding at May 31, 1999.
INTEREST RATE GAP ANALYSIS
(Fixed Rate Assets/Liabilities)
As of May 31, 1999
(Dollar amounts in millions)
Over 1 Over 3 Over 5 Over 10
year but years but years but years but
Less than less than less than less than less than Over 20
1 year 3 years 5 years 10 years 20 years years Total
Assets:
Amortization and Repricing $ 617.8 $1,573.7 $1,381.6 $2,484.9 $1,570.1 $ 666.2 $8,294.3
Total Assets $ 617.8 $1,573.7 $1,381.6 $2,484.9 $1,570.1 $ 666.2 $8,294.3
Liabilities and Equity:
Long-Term Debt $ 326.4 $1,335.7 $1,523.3 $2,374.9 $ 691.4 $ 307.1 $6,558.8
Subordinated Certificates 3.8 34.3 37.2 224.0 611.7 12.3 923.3
Member's Equity - - - - 248.4 365.4 613.8
Total Liabilities and Equity $ 330.2 $1,370.0 $1,560.5 $2,598.9 $1,551.5 $ 684.8 $8,095.9
Gap* $ (287.6) $ (203.7) $ 178.9 $ 114.0 $ (18.6) $ 18.6 $ (198.4)
Cumulative Gap $ (287.6) $ (491.3) $ (312.4) $ (198.4) $ (217.0) $ (198.4)
Cumulative Gap as a % of
Total Assets (2.07)% (3.53)% (2.24)% (1.42)% (1.56)% (1.42)%
* Loan amortization/repricing over/(under) debt maturities
36
Derivative and Financial Instruments
All of the financial instruments to which CFC was a party at May 31, 1999
were purchased for purposes other than trading. All of CFC's financial
instruments at May 31, 1999 were interest rate sensitive. The following
table provides the significant balances and contract terms related to the
market risk related financial instruments at May 31, 1999.
(Dollar amounts in thousands) Principal Amortization
Outstanding Fair Remaining
Instrument Balance Value 2000 2001 2002 2003 2004 Years
Investments $ 74,403 $ 74,403 $ 74,403 $ - $ - $ - $ - $ -
Average rate 1.88% 1.88% - - - - -
Long-term fixed rate loans (1) 8,056,244 7,212,333 591,095 763,268 683,878 723,182 757,487 4,537,334
Average rate 6.72% 6.59% 6.44% 6.71% 6.64% 6.36% 6.42%
Long-term variable rate loans 3,431,190 3,431,190 152,551 158,211 164,361 168,751 167,490 2,619,826
Average rate (2) 6.04% - - - - - -
Intermediate-term loans (3) 314,610 315,640 33,115 28,690 - - - -
Average rate 6.42% 8.00% 8.00% - - - -
Line of credit loans (4) 1,192,113 1,192,113 - - - - - -
Average rate (2) 6.19% - - - - - -
RUS guaranteed loans 130,940 130,940 2,090 2,695 3,145 4,095 5,170 113,745
Average rate (2) 5.87% - - - - - -
Nonperforming loans (5) 1,643 1,643 - - - - - -
Average rate (6) 5.55% - - - - - -
Restructured loans (7) 576,662 576,662 7,831 8,688 9,004 12,250 14,965 523,924
Average rate 3.90% 3.90% 3.90% 3.90% 3.90% 3.90% 3.90%
Liabilities & equity:
Commercial Paper $5,871,243 $5,871,243 $5,871,243 $ - $ - $ - $ - $ -
Average rate 4.94% 4.94% - - - - -
Bank Bid Notes 375,000 375,000 375,000 - - - - -
Average rate 4.86% 4.86% - - - - -
Medium-Term Notes 2,625,286 2,511,091 982,963 206,217 241,750 355,820 114,125 724,411
Average rate 6.10% 5.22% 6.14% 5.69% 6.23% 5.49% 6.06%
Collateral Trust Bonds 2,996,299 2,956,297 150,000 100,000 100,000 500,000 300,000 1,846,299
Average rate (8) 6.42% 6.14% 6.45% 6.75% 5.83% 5.77% 6.46%
QUICS 400,000 400,586 - - - - - 400,000
Average rate 7.62% - - - - - 7.62%
Subordinated Certificates 1,239,816 1,239,816 2,947 8,680 25,661 24,634 12,579 1,165,315
Average rate 3.25% 3.03% 2.21% 0.85% 1.08% 3.79% 3.18%
______________________
(1) The principal amount of fixed rate loans is the total of scheduled
principal amortizations and scheduled repricings.
(2) Variable rates are set the first day of each month.
(3) Intermediate-term loan amortizations include principal payments on both
variable rate and fixed rate loans. Scheduled fixed rate amortizations
are listed in the chart. There is no scheduled amortization for variable
rate loans.
(4) Line of credit loans are generally required to be paid down for a period
of five consecutive days each year. These loans do not have a principal
amortization schedule.
(5) CFC is uncertain as to the amounts and timing of repayments related to
nonperforming loans.
(6) At May 31, 1999, all nonperforming loans were on non-accrual status with
respect to the recognition of interest income.
(7) All restructured loans were performing on the negotiated terms (see note
10 to Combined Financial Statements). Amortization based on scheduled
minimum payments.
(8) The Collateral Trust Bonds maturing in fiscal year 2000 carry a variable
interest rate.
The following table provides the notional amount, average rate paid, average
rate received and maturity dates for the interest rate exchange agreements to
which CFC was a party at May 31, 1999.
(Dollar amounts in thousands) Principal Amortization
Notional Principal Fair Remaining
Instrument Balance Value 2000 2001 2002 2003 2004 Years
Interest rate swaps $2,796,022 $2,840,561 $852,851 $626,554 $34,810 $22,375 $329,775 $929,657
Average rate paid (1) 5.40%
Average rate received (1) 4.93%
(1) Scheduled interest rate exchange agreement maturities include agreements
in which CFC pays both fixed and variable rates and receives variable rates.
37
The following table provides the notional amount, average rate paid, average
rate received and maturity dates for the currency exchange agreement to which
CFC was a party at May 31, 1999.
(Dollar amounts in thousands) Principal Amortization
Notional Principal Fair Remaining
Instrument Balance Value 2000 2001 2002 2003 2004 Years
Currency swaps $390,250 $369,814 $ - $ - $ - $ - $ - $390,250
Average rate paid 6.22%
Average rate received 4.60%
Market Risk
CFC's primary market risk exposure is interest rate risk. A secondary risk
exposure is liquidity risk. CFC is also exposed to counterparty risk related
to the interest rate and currency exchange agreements it has entered.
The interest rate risk exposure is related to the funding of the fixed rate
loan portfolio. CFC does not match fund the majority of its fixed rate loans
with a specific debt issuance at the time the loan is advanced. CFC
aggregates fixed rate loans until the volume reaches a level that will allow
an economically efficient issuance of debt. CFC uses fixed rate Collateral
Trust Bonds, Medium-Term Notes, Quarterly Income Capital Securities, Members'
Subordinated Certificates, Members' Equity and variable rate debt to fund
fixed rate loans. CFC allows borrowers flexibility in the selection of the
period for which a fixed interest rate will be in effect. Long-term loans
typically have a 15 to 35 year maturity. Borrowers may select fixed interest
rates for periods of one year through the life of the loan. To mitigate
interest rate risk related to the funding of fixed rate loans, CFC performs
a monthly gap analysis, a comparison of fixed rate assets repricing or
maturing by year to fixed rate liabilities and equity maturing by year (see
chart on page 35). The analysis will indicate the total amount of fixed rate
loans maturing by year and in aggregate that are assumed to be funded by
variable rate debt. CFC's funding objective is to limit the total amount of
fixed rate loans that are funded by variable rate debt to 5% or less. At May
31, 1999 and 1998, 2.1% and 2.7%, respectively, of the fixed rate loans were
funded with variable rate debt. The interest rate risk is minimal on variable
rate loans, since the loans are priced monthly based on the cost of the debt
used to fund the loans. CFC uses variable rate debt, non-interest bearing
Members' Subordinated Certificates and Members' Equity to fund variable rate
loans. At May 31, 1999 and 1998, 36.6% and 54.2%, respectively, of loans
carry a variable interest rate.
CFC faces liquidity risk in the funding of its variable rate loans and in
being able to obtain the funds required to meet the loan requests of its
members or conversely, having funds to repay debt obligations when they are
due. CFC offers variable rate loans with maturities of up to 35 years.
These loans are funded by variable rate Commercial Paper, Bank Bid Notes,
Collateral Trust Bonds and Medium-Term Notes; non-interest bearing Members'
Subordinated Certificates and Members' Equity. The average maturity of
Commercial Paper and Bank Bid Notes is typically about 30 to 35 days. The
Collateral Trust Bonds and Medium-Term Notes are issued for longer periods,
but typically much shorter than the maturity of the loans. Loan Subordinated
Certificates are issued for the same period as the related loan. Thus, CFC is
at risk if it is unable to continually roll over its Commercial Paper balances
or issue other forms of variable rate debt to support its variable rate loans.
CFC also faces liquidity risk in the funding of its fixed rate loans.
Borrowers may select a fixed interest rate term of one year to the loan
maturity. When an interest rate term of a duration shorter than loan maturity
expires, the borrower may select a new fixed interest rate term of one year
to the remaining loan maturity or the long-term variable rate. CFC does not
match fund each fixed rate loan, but rather funds its fixed rate loans in
aggregate. CFC matches the maturity of the fixed rate funding to the fixed
interest rate terms selected, rather than the loan maturity. When the fixed
interest rate term expires, CFC obtains new fixed rate funding based on the
new interest rate term selected by the borrower. CFC is at risk in the
rolling over of its fixed rate funding of a maturity less than the loan
maturity. To mitigate liquidity risk, CFC maintains back-up liquidity through
revolving credit agreements with domestic and foreign banks. At May 31, 1999
and 1998, CFC had a total of $4,793 million and $5,218 million, respectively
in revolving credit agreements and bank lines of credit. To facilitate entry
into the debt markets, CFC maintains high credit ratings on all of its debt
issuances from three credit rating agencies (see chart on page 39). CFC also
maintains shelf registrations with the SEC for its Collateral Trust Bonds,
Medium-Term Notes and Quarterly Income Capital Securities. At May 31, 1999
and 1998, CFC had active shelf registrations totaling $700 million and $300
million related to Collateral Trust Bonds, $144 million and $1,264 million
related to Medium-Term Notes and $100 million and $50 million related to
Quarterly Income Capital Securities. Subsequent to year-end on June 4, 1999,
CFC registered an additinal $2,000 million related to Medium-Term Notes. All
of the registrations allow for issuance of the related debt at both variable
and fixed interest rates. CFC also has Commercial Paper and Medium-Term Note
issuance programs in Europe. At May 31, 1999 and 1998, CFC had $50 million
and $82 million of Commercial Paper, respectively, and $735 million and $250
million of Medium-Term Notes, respectively, outstanding to European investors.
CFC has issuance authority of $1 billion related to Commercial Paper and $2
billion related to Medium-Term Notes under these programs.
38
CFC is exposed to counterparty risk related to the performance of the parties
with which it has entered into interest rate exchange agreements. To mitigate
this risk, CFC only enters into interest rate exchange agreements with highly
rated counterparties. At May 31, 1999 and 1998, CFC was a party to $2,796
million and $754 million, respectively, of interest rate exchange agreement.
To date, CFC has not experienced a failure of a counterparty to perform as
required under the interest rate exchange agreement. At May 31, 1999, CFC's
interest rate exchange agreement counterparties had credit ratings ranging
from A to AAA as assigned by Standard & Poor's Corporation.
Foreign-Currency Risk
CFC may issue European Commercial Paper, Medium-Term Notes or bonds
denominated in foreign-currencies. For any such note issued, CFC expects to
enter into a foreign-currency exchange agreement with a highly rated
counterparty. The cost of the currency exchange agreement would be factored
into the interest rate CFC pays on the obligation and included in CFC's total
cost of funds. At May 31, 1999, CFC had a total of $390 million of
Medium-Term Notes, denominated in Euros, outstanding.
CFC is exposed to counterparty risk related to the performance of the parties
with which it has entered into foreign-currency exchange agreements. To
mitigate this risk, CFC only enters into foreign-currency exchange agreements
with highly rated counterparties. At May 31, 1999, CFC was a party to 390
million of foreign-currency exchange agreements. To date, CFC has not
experienced a failure of a counterparty to perform as required under the
foreign-currency exchange agreements. At May 31, 1999, CFC's foreign-currency
counter parties had credit ratings ranging from AA to AA+ as assigned by
Standard & Poor's Corporation.
Credit Ratings
CFC's long- and short-term debt and guarantees are rated by three of the major
credit rating agencies, Moody's Investors Service ("Moody's"), Standard &
Poor's Corporation ("S&P") and Fitch Investors Service ("Fitch"). The
following table presents CFC's credit ratings at May 31, 1999.
Moody's S&P Fitch
Direct
Collateral Trust Bonds Aa3 AA AA
Domestic and European Medium-Term Notes A1 AA- AA-
Quarterly Income Capital Securities A2 A A+
Domestic and European Commercial Paper 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, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by the
rating organizations.
Member Investments
At May 31, 1999 and 1998, CFC's members provided 20.4% and 27.8% of total
capitalization as follows:
MEMBERSHIP CONTRIBUTIONS TO TOTAL CAPITALIZATION
(Dollar amounts in thousands) % of % of
1999 Total 1998 Total
Commercial Paper $1,063,650 18.1% $1,195,600 21.0%
Long-term debt
(primarily Medium-Term Notes) 211,000 3.1% 240,348 8.0%
Members' Subordinated Certificates 1,239,816 100.0% 1,229,166 100.0%
Members' Equity 294,953 100.0% 279,278 100.0%
Total $2,809,419 $2,944,392
Percentage of total capitalization 20.4% 27.8%
39
The total amount of member investments decreased by $135 million at May 31,
1999, compared to May 31, 1998. 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, 1999 was
$13,803 million, an increase of $3,222 million over the total capitalization
of $10,581 million at May 31, 1998. When the loan loss allowance is added
to both membership contributions and total capitalization, the percentages
of membership investments to total capitalization are 21.6% and 29.5% at May
31, 1999 and 1998, respectively. Due to policy changes that have reduced
Members' Subordinated Certificate purchase requirements and accelerated
Patronage Capital retirements, CFC expects the percentage of capitalization
provided by its members to continue to decline.
Historical Results
The following chart provides CFC's key operating results over the last five
years.
SELECTED KEY FINANCIAL DATA
(Dollar amounts in thousands)
As of May 31: 1999 1998 1997 1996 1995
Net loans $13,491,199 $10,329,345 $8,678,196 $7,728,271 $6,747,124
Total liabilities $12,390,483 $ 9,174,444 $7,573,414 $6,576,764 $5,575,853
Total Members'Subordinated
Certificates and Equity $ 1,534,769 $ 1,508,444 $1,484,080 $1,477,325 $1,504,936
Guarantees $ 1,684,465 $ 2,034,494 $2,080,671 $2,249,440 $2,574,922
Leverage ratio (1) 7.00 6.37 5.84 5.69 5.13
Debt/equity (2) 5.52 4.51 3.97 3.63 3.01
Gross margins $ 126,694 $ 97,038 $ 88,710 $ 78,994 $ 78,771
Net margins $ 76,439 $ 62,216 $ 54,736 $ 49,041 $ 45,212
TIER (3) 1.12 1.12 1.12 1.12 1.13
____________________
(1) The leverage ratio is calculated by dividing debt and guarantees
outstanding, excluding Quarterly Income Capital Securities and debt used
to fund loans guaranteed by RUS, by the total of Members' Subordinated
Certificates, Members' Equity and Quarterly Income Capital Securities.
(2) The debt/equity ratio is calculated by dividing debt outstanding,
excluding Quarterly Income Capital Securities and debt used to fund loans
guaranteed by RUS, by the total of Members' Subordinated Certificates,
Members' Equity, the loan loss allowance and Quarterly Income Capital
Securities.
(3) TIER is calculated by dividing net margins before extraordinary items
plus the cost of funds by the cost of funds.
Year 2000 Compliance
CFC has appointed a Year 2000 Project Coordinator and assembled a team of
individuals from all areas of the company to assist in the development of a
year 2000 compliance plan and the testing of all business essential
applications. CFC's year 2000 plan includes the following activities:
* Identification of at risk applications and equipment,
* Obtain certification from vendors,
* Review the results of step 2,
* Develop plan to address items that will not be compliant,
* Implement solutions,
* Testing of all applications and equipment,
* Final corrections.
CFC has completed all but the final corrections for its business critical
systems.
CFC has completed the testing of its computer systems. All software and
hardware components have successfully passed year 2000 testing.
CFC does not anticipate any significant impact on internal operations due to
the year 2000 problem. Each business application owner has developed a
contingency plan. The contingency plans and test results will be maintained
as part of the remediation effort documentation. CFC's information system
staff will be at CFC on January 1, 2000 to monitor systems as the date
changes. The first business day for CFC will be January 4, 2000, which
allows three days to work on any problem that may occur.
40
CFC depends on the federal wire system to advance loan funds and to collect
debt service payments on loans. CFC also depends on the capital markets for
the bulk of its loan funding. Serious disruptions in these areas could
impact CFC's operations.
In 1994 CFC decided to move from a mainframe computer system to a client
server computer system. This change to a client server system was initiated
solely for business purposes. The client server platform allows CFC staff
and members access to data that was not possible with the mainframe. Along
with the change in computer platform, CFC moved from internal development of
all software applications to a mixture of externally developed software
solutions and internal development with tools such as Java, Power Builder
and Lotus Notes. Some of the initial client server components have been
upgraded due to the demand for more processing power and memory. As a result
of the decision to migrate to a client server system and the subsequent
upgrades CFC's year 2000 problems have been mitigated.
To date CFC's remediation cost has been insignificant. CFC does not
anticipate that the overall cost of remediating its year 2000 problem,
cost to date plus any additional amounts required before or after January 1,
2000, will adversely impact operations. CFC has performed all work related
to the year 2000 compliance plan internally. The cost of migrating to a
client server system and upgrading client server components for additional
power and memory is not considered a year 2000 remediation cost.
While CFC does not anticipate any operational problems, its borrowers'
ability to make debt service payments depends on their ability to generate
and deliver electric power and to deliver telecommunications services to
their customers. Disruptions to these services could impact the borrowers'
ability to make debt service payments to CFC. Factors mitigating the
potential impact of service disruptions include:
* Borrowers have cash balances and the ability to draw down on lines of
credit to temporarily cover debt service payments,
* Electric power was generated and transmitted to customers prior to the
present level of computer automation, thus manual operation of plants and
distribution systems is possible, and
* CFC maintains a revolving credit facility and bank lines of credit, which
could be drawn upon to meet debt obligations in the event that borrowers
experience temporary difficulty in making their debt service payments.
CFC required its electric borrowers to provide details of their compliance
effort in the officers' certificate for the year ended December 31, 1998.
Responses have come as statements or copies of their individual year 2000
plans. To date CFC has received approximately 900 responses. About 97% of
the responses have been considered to be "Satisfactory"- Cooperative states
that they are aware of and addressing the potential year 2000 problem and
taking the necessary steps to become year 2000 compliant; that they have
adequate resources to perform the work; and they are testing systems,
validating vital components and have created contingency plans. The
remainder has been classified as "Unable to Assess" status - Cooperative
statement lacks enough information or is vague. CFC is trying to follow up
with these cooperatives to get more information. CFC has not received any
responses that would be classified as "Unsatisfactory" - Cooperative states
they are unable or unwilling to address the potential year 2000 problem, they
don't expect to be year 2000 ready or offer no statement at all.
Year 2000 activities will continue to be documented in detail to reflect that
CFC demonstrated all reasonable effort, that all risks were fully assessed
and that a detailed plan was fully executed.
Financial and Industry Outlook
The approved funding levels for RUS loans have decreased in each of the last
two years and the proposed amounts for the fiscal year beginning October 1,
1999 are approximately the same as for the year ending September 30, 1999.
While the loan amounts have decreased, the amount of RUS guarantees available
has increased each year over the same period. If this trend of increased RUS
guarantees over direct loans continues, the rural utilities will have to
obtain funding from alternative sources.
During fiscal year 1999, CFC advanced approximately $556 million to electric
borrowers for the purpose of prepaying their RUS loans. From March 1994, the
date final regulations were adopted, through May 1999, CFC has advanced a
total of $2,601 million to borrowers for this purpose. To date, CFC has been
selected as the lender for 95% of the RUS debt refinancings. At May 31, 1999,
there were applications pending at RUS for an additional $31 million of
buyouts, in which CFC has been selected as the lender and has approved loan
commitments. Future volume of RUS note prepayments will
41
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.
CFC believes that demand for loans from its electric members will continue to
maintain the pace set over the last few years. Factors impacting the level
of increase in demand for CFC loan funds will include:
* the number of systems that decided to buy out their RUS debt;
* the strength of the economy;
* the utilization of loans from the FFB with a guarantee from RUS;
* mergers and acquisitions of non-cooperative electric systems; and
* the pace of diversification into new businesses, such as gas and propane
and new telecommunications services.
The telecommunications loan portfolio has grown significantly in the last few
years. The growth has come from the sell off of rural exchanges by larger
telecommunications organizations (primarily GTE) and the expansion of wireless
services. Future growth in telecommunications lending is expected to come
from the following areas:
* acquisitions of rural exchanges from investor-owned organizations that
require a high rate of return;
* consolidations of rural telecommunications companies; and
* expansion of wireless services, including Local Multiple Distribution
Services ("LMDS"), which offers a variety of one and two way broadband
telecommunications services.
The significant loan growth over the past few years has caused CFC's debt to
equity and leverage ratios to increase. CFC is currently reviewing options
to slow the growth in the debt to equity and leverage ratio as the loan
portfolio continues to grow. CFC expects to get recommended actions to slow
the growth in these ratios approved and implemented prior to the end of
fiscal year 2000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See market risk discussion on pages 38 and 39.
Item 8. Financial Statements and Supplementary Data.
The Combined Financial Statements, Auditors' Report and Combined Quarterly
Financial Results are included on pages 53 through 82 (see Note 13 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.
42
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors
Director Date present
Name Age since term expires
Benson Ham (President of CFC) 65 1995 2001
R.B. Sloan, Jr. (Vice President of CFC) 47 1996 2002
Wade R. Hensel (Secretary-Treasurer of CFC) 47 1997 2000
James Andrew 62 1999 2001
Robert A. Caudle 54 1999 2002
Glenn English 58 1994 2000
Alden J. Flakoll 65 1996 2002
James A. Hudelson 54 1999 2002
Kenneth Krueger 61 1997 2000
Stephen R. Louder 47 1998 2001
Eugene Meier 70 1997 2000
R. Layne Morrill 59 1995 2001
Robert J. Occhi 52 1996 2002
Michael Pigott 55 1997 2000
Timothy Reeves 51 1998 2001
Brian D. Schlagel 49 1998 2001
Thomas W. Stevenson 57 1997 2000
Clifford G. Stewart 53 1997 2001
Robert Stroup 54 1996 2002
Robert C. Wade 65 1997 2000
Robert O. Williams 66 1994 2000
Eldwin A. Wixson 67 1995 2001
(b) Executive Officers
Held present
Title Name Age office since
President and Director Benson Ham 65 1999
Vice President and Director R.B. Sloan, Jr. 47 1999
Secretary-Treasurer and Director Wade R. Hensel 47 1999
Governor and Chief Executive Officer Sheldon C. Petersen 46 1995
Senior Vice President of Member
Services and General Counsel John J. List 52 1997
Senior Vice President and
Chief Financial Officer Steven L. Lilly 49 1994
Senior Vice President for
Strategic Services David J. Hedberg 48 1995
Senior Vice President of Operations John T. Evans 49 1997
Senior Vice President of Corporate
Relations Richard E. Larochelle 46 1998
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.
(e) (1) and (2) Business Experience and Directorships.
43
In accordance with Article IV of CFC's Bylaws, each candidate for election to
the Board of Directors must be a trustee, director or manager of a member of
CFC.
Mr. Ham has been a Director of Central Georgia Electric Membership
Cooperative, Jackson, GA, since 1983. He was the managing partner in the
law firm of Ham, Jenkins, Wilson & Wangerin, from 1991 to 1998, and is
currently retired. He is a partner in Sleepy Creek Farms, a commercial
cow-calf operation established in 1983. He also served for ten years in the
Georgia Legislature. He is currently a member of the Monroe County Economic
Development Authority. He has served as President of the Flint Judicial
Circuit Bar Association from 1962 to 1963 and has served on the Board of
Governors of the Georgia Bar Association. He currently serves as a member
of the Board of Directors of Georgia Transmission Corporation and Georgia
Electric Membership Corporation.
Mr. Sloan has been 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, North Carolina Association of Electric Cooperatives since,
Tarheel Electric Membership Association since 1989. He was Chairman of the
North Carolina Rural Electrification Authority from 1987 to 1993. He is
also the past Chairman of the National Association of Counties' Rural
Development Committee, past Chairman of the Greater Statesville Chamber of
Commerce and the past Chairman of the Iredell County Board of Commissioners.
Mr. Hensel has been General Manager of BENCO Electric Cooperative, Mankato,
MN, since 1981. He is a former Chairman of Minnesota Rural Electric
Manager's Association and a former Chairman of the Cooperative Power
Manager's Association. He has been a member of the management committee of
Cooperative Television Association of Southern Minnesota since 1993, a
partner in North Mankato/BENCO Electric Cooperative since 1991, a director
of Mankato Rehabilitation Center since 1995, and a director and former
Chairman of Valley Industrial Development Corporation. He is a former
chairman and former director of the Chamber of Commerce, a former president
of the Jaycees, a former treasurer and board member of the Independent
School District #77, and former director of Immanuel-St. Joseph's Hospital.
Mr. Andrew has served on the National Rural Electric Cooperative Association
Board since 1989, and has been President since 1999. He serves as director
of Jefferson Energy Cooperative since 1976, and is also director and former
president for Georgia Electric Membership Corporation. Before his
semi-retirement, Mr. Andrew was president/owner of BAS, Inc., an agricultural
irrigation business in Waynesboro, GA. He serves as Chairman of Ogeechee
Valley Bank since 1997 where he was on the bank board since 1973.
Mr. Caudle is a Trustee for the Lea County Electric Cooperative in Lovington,
NM. He has been active in the domestic oil and gas industry as a partner in
two independent companies, CB Partners, Midland, TX since 1992 and M & W of
Lovington, NM since 1993. Since 1990, Mr. Caudle has also owned a consulting
business named after him which specializes in utility title and regulatory
issues, in Lovington, NM.
Mr. English has been Chief Executive Officer of NRECA, Washington, DC, since
March 1994. He served in the United States House of Representatives from 1975
to 1994. He served on the House Agriculture Committee from 1975 to 1994, and
was Chairman of the House Agricultural Subcommittee on Environment, Credit and
Rural Development in 1989.
Mr. Flakoll is President of FEM Electric Association, Inc., Ipswich, SD and
has been on the board of directors since 1977, and is a director of the
East River Electric Power Cooperative, Madison, SD. He has been the owner
and operator of Flakoll Enterprises, a diversified farming, ranching and
feedlot operation, since 1957. He has also been the Chairman of District 2
South Dakota Rural Electric Association Legislative and Resolutions Committee
since 1992. He is President of the South Dakota Outstanding Farmers of
America and Secretary-Treasurer of North Central Hereford Association. Mr.
Flakoll is a past President of the North Central Livestock Association and
past business manager of Wachter School District.
Mr. Hudelson has been General Manager of Wyrulec Company since 1976. He
became Chairman of the Legislative Committee for the Wyoming Rural Electric
Association in 1989. He served as president of Goshen County Economic
Development Corporation from 1991 to 1994, and has been a member since 1990.
He has been the Director for the Eastern Wyoming Development Corporation since
1999.
Mr. Krueger has been a Director of Flathead Electric Cooperative, Inc.,
Kalispell, MT, since 1972 and was President from 1977 to 1984. He also served
as Director and member of the Executive and Legislative Committees. He has
owned and
44
operated a grain farm since 1960. He was President of the Montana Electric
Cooperatives' Association from 1979 to 1988, and Secretary-Treasurer from 1976
to 1979. He served on the Building Committee, the Dues and Policy Committee,
and the Budget Committee. He is also a member of the NRECA Region IX
Resolutions Committee. Mr. Krueger was Flathead County Commissioner from 1983
to 1989. He is a past member of the Montana State Rural Area Development
Committee, past Master of the Stillwater Grange, and former board member and
Chairman of the West Valley School Board in Flathead, MT. He was also
District VI Director of Montana Wheat and Barley Committee from 1986-1991.
Mr. Louder has been President and General Manager of Deaf Smith Electric
Cooperative, Hereford, TX, since 1992. He is a director at Golden Spread
Electric Cooperative and a former member and Chairman of the Texas Electric
Cooperative Member Services Committee. He is a registered Professional
Engineer in the state of Texas, a member of the Community Christian School
Board of Trustees and a member of the Board of Elders at Community Church in
Hereford, TX. He is also active in his local economic development and 4-H
Club.
Mr. Meier has been a Director of Cooperative Development Services since 1998
and the Director of Pierce-Pepin Cooperative Service, Ellsworth, WI, since
1991. He has been Vice President of the Wisconsin Electric Cooperative since
1995 and was Chairman of its Legislative Committee from 1994 to 1998. Prior
to his retirement in 1994, Mr. Meier was Maintenance Foreman of Continental
Nitrogen and Resources, Inc. He has also owned and operated a farm since
1964. He has been a director of the Wisconsin Federation of Cooperatives
since 1995. He is a former member of Legislative Standing Committee, NRECA,
and a former executive committee member of the Wisconsin Electric Cooperative
Association. He is an active member and past President of Joy Lutheran Church
of Prescott.
Mr. Morrill has been a Director of White River Valley Electric Cooperative,
Inc., Branson, MO, since 1976 and is currently serving as Secretary-Treasurer.
He is also a Director of KAMO Electric Cooperative. He has been President of
Shepherd of the Hills Realty Co., Inc. and President of Shepherd of the Hills
Properties Inc., since 1967. He is also a Director of the Bank of Kimberling
City and of Rural Missouri Cable T.V. Inc. He has been President of the
Kimberling City Water Company since 1982.
Mr. Occhi has been Executive Vice President and General Manager of Coast
Electric Power Association, Bay St. Louis, MS since 1986. He has been a
Director of the South Mississippi Electric Power Association since 1986 and
past President of the Electric Power Associations of Mississippi. He is also
Vice President of the Mississippi Council of Farmer Cooperatives and of the
Greater Biloxi Economic Development Foundation, and a past Director of the
Mississippi Economic Council.
Mr. Pigott has been the Executive Vice President and General Manager of
Beauregard Electric Cooperative, DeRidder, LA, since 1988. He has been
President of the Association of Louisiana Electric Cooperatives since 1994,
a director of Cajun Electric Power Cooperative since 1992, and a member of
Louisiana Electric Distribution Cooperative Managers Association since 1988.
He has been a director of the Louisiana Resource Recovery and Development
Authority since 1990. Mr. Pigott is currently Director of the Rotary Club,
and is a member of the Chamber of Commerce, the Beauregard Parish Cattlemen's
Association, the Allen Parish Rice Growers Association, and the Human
Resources Management Association.
Mr. Reeves has been President and General Manager of Southern Illinois Power
Cooperative, Marion, IL, since 1993. He was Executive Vice President and
General Manager of Southern Illinois Electric Cooperative from 1981 to 1990,
and Assistant to the Manager of Egyptian Electric Cooperative Association
from 1974 to 1980. He is the Chairman of Illinois ACRE and a member of
Illinois Managers Association and the G&T Managers Association. He also
served as President of the Union County Hospital Board and the Southern Most
Illinois Tourism Board.
Mr. Schlagel has been the President of Morgan County REA, Fort Morgan, CO,
since 1997. He has owned and operated Schlagel Farms, an irrigated
agriculture enterprise, since 1971. Mr. Schlagel is also a Director of the
Colorado Rural Electric Association, serves on the Facilities Committee at
Tri-State Generation and Transmission Association, Inc., is Vice President
of Roggen Famer's Elevator Association and a Fellow of the Colorado
Agriculture Leadership Program. He also served as President of Strasburg
School District 31-J and Vice President of the Southeast Weld Fire Protection
District.
Mr. Stevenson has been President and Chief Executive Officer of Wolverine
Power Supply Cooperative, Inc., Cadillac, MI, since 1995. He was the General
Manager and Chief Executive Officer of Ketchikan Public Utilities, Ketchikan,
AK from 1989 to 1995. He has been a Director of Michigan Association of Rural
Electric Cooperatives since 1995. He is a member of NRECA's Power and
Generation Committee and G & T Managers Association. Mr. Stevenson served as
mayor pro tem and city council member of Longmont, Colorado from 1978 to 1981.
45
He served as a board member of Denver Regional Council of Governments, and as
a board member and executive committee member of Ketchikan Chamber of
Commerce. He is a member of the American Institute of Certified Public
Accountants, the Colorado Society of CPAs, Rotary International (Paul Harris
Fellow), the American Legion, and the VFW.
Mr. Stewart has been the Vice President and General Manager of Oregon Trail
Electric Consumers Cooperative, Baker City, OR, since 1993, and is Chairman
of the Board at Pacific Northwest Generating Cooperative since 1998. He was
general manager of Farmers' Electric Cooperative, Inc. from 1985 to 1993 and
served on the Clovis-Curry Economic Development Board from 1990 to 1993. He
is past president of the New Mexico Rural Electric Self Insurers Fund, a
former director of the New Mexico Rural Electric Association, and Chairman
of the Association's Publications committee.
Mr. Stroup has been Vice President of Rush Shelby Energy REMC (previously
Shelby County REMC) in Shelbyville, IN since 1994 and has owned a construction
and design company since 1964. 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. Wade serves as Chairman of Nolin Rural Electric Cooperative Corporation,
Elizabethtown, KY, and has been engaged in grain farming since 1960. He is
the Director of Kentucky Association of Electric Cooperatives, of which he
was Chairman from 1980 to 1982. He has been Vice Chairman of Kentucky
Electric Cooperatives' Political Action Committee, SURE--Speak Up for Rural
Electrification since 1974. He is a member of KAEC Strategic Planning
Committee and Management and Employees Committee, and served on CFC's
Committee on Objectives and Planning. Mr. Wade is a member of PNC Bank
Advisory Board, board member and past President of North Central Kentucky
Education Foundation, Director of Hardin County Community Foundation, a
member of University of Kentucky Community College Futures Commission, past
Chairman of Hardin County Planning and Development Commission and Hardin
County Extension Council.
Mr. Williams has been President and Chief Executive Officer of York Electric
Cooperative, York, SC since 1974. He has also 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. Mr. Williams commenced serving
as a trustee on a local bank board (Bank of York, York, SC) as of March 1999.
Mr. Wixson has been a Director of New Hampshire Electric Cooperative, Inc.,
Plymouth, NH, since June 1986 and President (now retitled Chair) of the Board
of Directors since June 1992. He also served as President and CEO of
Cooperative Resources, an ISP serving the Lakes region of New Hampshire from
the time of incorporation in April 1997 to June 1999. Mr. Wixson has been a
professor of mathematics at Plymouth State College, of the University System
of New Hampshire, since 1966 and was Interim Dean from July 1994 to June 1995.
He also has been Chair of the Board of Directors of the Community Guaranty
Savings Bank since 1988. He served as a Director of the Speare Memorial
Hospital from 1986 to 1998. He was the principal-controlling partner of the
Plymouth Pharmacy from 1979 to 1983 and was a Maine dairy farmer from 1956
to 1963.
Mr. Petersen joined CFC in August 1983 as an Area Representative. He became
the Director of Policy Development and Internal Audit in January 1990, 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. He became Senior Vice President
and General Counsel on June 1, 1992, and became Senior Vice President, Member
Services and General Counsel on February 1, 1997.
Mr. Lilly joined CFC as a Senior Financial Consultant in October 1983.
He became Director of Special Finance in June 1985 and Director of Corporate
Finance in June 1986. He became Treasurer and Principal Finance Officer on
June 1, 1993. He became Senior Vice President and Chief Financial Officer
on January 1, 1994.
Mr. Hedberg joined CFC as Director of Rates and Special Projects in 1981.
He became Senior Vice President of Strategic Services on June 1, 1995.
46
Mr. Evans joined CFC as Senior Vice President of Operations in November 1997.
He was Senior Vice President and Chief Operating Officer of Suburban Hospital
Healthcare System, Bethesda, MD from 1994 to 1997. He was Senior Vice
President and Chief Operating Officer for Geisinger Medical Center, Danville,
PA from 1991 to 1994.
Mr. Larochelle joined CFC as Director of Corporate Relations in May 1996.
He became Senior Vice President of Corporate Relations in August 1998. Prior
to joining CFC, he was the Legislative Director at NRECA where he worked for
12 years.
(f) Involvement in Certain Legal Proceedings.
None to the knowledge of CFC.
(g) Promoters and control persons.
Inapplicable.
Item 11. Executive Compensation
The Summary Compensation Table below sets forth the aggregate remuneration for
services in all capacities to CFC, on an accrual basis, for the three years
ended May 31, 1999, 1998 and 1997 to the named executive officers. The named
executive officers include the CEO and the four next most highly compensated
executive officers serving at May 31, 1999, with salary and bonus for fiscal
year 1999 in excess of $100,000.
Summary Compensation Table
All
Annual Compensation Other
Year Salary Bonus Compensation (1)
Sheldon C. Petersen 1999 $358,750 $77,656 $19,208
Governor and Chief 1998 328,854 - 25,009
Executive Officer 1997 289,711 - 18,358
John J. List 1999 198,667 43,750 3,474
Senior Vice President of Member 1998 194,652 19,100 4,035
Services and General Counsel 1997 173,246 7,000 11,177
Steven L. Lilly 1999 218,167 48,344 8,665
Senior Vice President and 1998 205,869 12,200 10,352
Chief Financial Officer 1997 192,620 3,000 9,232
David J. Hedberg 1999 161,833 35,656 7,071
Senior Vice President for 1998 150,849 17,300 6,615
Strategic Services 1997 147,704 5,000 8,309
John T. Evans (2) 1999 202,500 44,844 16,312
Senior Vice President for 1998 106,571 10,500 24,252
Operations
_________________
(1) Amounts for fiscal years 1999, 1998 and 1997 include $13,166, $21,501 and
$13,325 related to leave accruals and $6,042, $3,508 and $5,033 related
to CFC contributions to a savings plan for Mr. Petersen; $(166), $854 and
$7,819 related to leave accruals and $3,640, $3,181 and $3,358 related to
CFC contributions to a savings plan for Mr. List; $4,670, $7,159 and
$5,473 related to leave accruals and $3,995, $3,193 and $3,759 related to
CFC contributions to a savings plan for Mr. Lilly; $3,835, $3,525 and
$5,415 related to leave accruals and $3,237, $3,090 and $2,894 related to
CFC contributions to a savings plan for Mr. Hedberg; $14,262, $24,252 and
$0 related to leave accruals and $2,050, $0 and $0 related to CFC
contributions to a savings plan for Mr. Evans.
(2) Mr. Evans joined CFC in November 1997. The compensation table for 1998
includes the actual compensation paid to Mr. Evans through May 31, 1998,
and not his annual salary.
47
CFC established an incentive compensation plan for all employees in fiscal
year 1999. The plan provides for incentive payments of between 15% and 25%
of salary based on the achievement of performance targets established at the
beginning of the fiscal year. CFC's executives are eligible to receive
incentive payments of up to 25% of salary under this plan, depending on
corporate performance and the performance of the operating groups reporting
to each executive. The incentive plan replaces the bonus plan that was in
effect through fiscal year 1998.
CFC's Board of Directors approves the performance targets for the incentive
plan annually during the strategic planning and budgeting process. The board
of directors will also review the performance achievements for the year and
approve the payout under the incentive plan prior to disbursement.
Defined Benefit or Actuarial Plan Disclosure
NRECA maintains the Retirement and Security Program entitling CFC employees
to receive annually, under a 50% joint and surviving spouse annuity, 1.90% of
the average of their five highest base salaries during their last ten years
of employment, multiplied by the number of years of participation in the
program. As of May 31, 1999, the number of years of service credited and the
compensation covered under the program, respectively, for the officers listed
above was as follows: Sheldon C. Petersen-15 years 9 months, $328,750; John
Jay List-27 years 3 months, $198,667; Steven L. Lilly-15 years 7 months,
$218,167; David J. Hedberg-17 years 5 months, $161,833, John T. Evans-one
year 6 months, $202,500.
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 85,500 106,875 130,000*
250,000 23,750 47,500 71,250 95,000 118,750 130,000*
275,000 26,125 52,250 78,375 104,500 130,000* 130,000*
*The Tax Reform Act of 1984 places a cap on maximum salary used to compute
retirement benefits and maximum yearly benefit. For calendar year 1999, the
salary cap is $160,000 (the cap represents the amount of salary for 1999 that
may be used in the computation of the average base salary) and the benefits
cap is $130,000.
The Budget Reconciliation Act of 1993 has set a limit of $160,000 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 remuneration as an officer or director of CFC.
Directors are reimbursed for travel and lodging expenses and receive a daily
per diem to cover meals and other expenses related to their attendance at all
Board of Directors functions.
48
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
Pursuant to an employment agreement effective as of March 1, 1996, CFC has
agreed to employ Mr. Petersen as Chief Executive Officer through February 28,
2001 (with automatic one-year extensions unless either party objects) at no
less than $245,000 per annum plus such bonus (if any) as may be awarded him.
Certain payments have been agreed to in the event of Mr. Petersen's
termination other than for cause; for example, Mr. Petersen leaving for good
reason, disability or termination of his employment due to death.
Pursuant to a separate employment agreement effective as of the same date,
RTFC has agreed to employ Mr. Petersen for the same term. As compensation,
RTFC must credit to a deferred compensation account on January 1 of each year
of the term $30,000. Interest will be credited to the account on December 31
of each such year at a rate equal to CFC's 20-year Medium-Term Note rate on
that date. If Mr. Petersen's employment is terminated by RTFC other than for
cause, or by Mr. Petersen for good reason, or by his death or disability, the
account will be deemed continued for the remainder of the term of employment
(but in no event less than six months nor more than a year), interest will be
credited on a proportional basis for the calendar year during which the
continuation ends and the balance in the account will be paid to Mr. Petersen
or his beneficiaries in a lump sum.
Compensation Committee Interlocks and Insider Participation
During the year ended May 31, 1999 the following directors and former
directors of CFC served as members on the Executive Committee of the Board of
Directors (which functions as the Board's compensation committee):
Benson Ham (President of CFC)
Wade R. Hensel (Secretary-Treasurer of CFC)
R. Layne Morrill
Robert J. Occhi
Brian Schlagel
R.B. Sloan, Jr. (Vice President of CFC)
Robert Williams
Other than those mentioned above, there were no compensation committee
interlocks or insider participation related to executive compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Inapplicable.
Item 13. Certain Relationships and Related Transactions.
Loans and guarantees were made to member systems of which officers or
directors of CFC are members, employees or directors in the ordinary course
of CFC's business on the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transaction with other members
and did not involve more than normal risk of uncollectibility or present other
unfavorable features. It is anticipated that, consistent with its loan and
guarantee policies in effect from time to time, additional loans and
guarantees will be made by CFC to member systems and trade and service
organizations of which officers or directors of CFC are members, employees,
officers or directors. In light of its cooperative nature, pursuant to which
CFC was established for the very purpose of extending financing to its members
(from whose ranks its directors must be drawn), CFC is of the view that no
purpose would be served by including detailed information with respect to
specific loans and guarantees to members with which any of its directors are
affiliated.
49
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 53
Combined Balance Sheets 54
Combined Statements of Income, Expenses and Net Margins 56
Combined Statements of Changes in Members' Equity 57
Combined Statements of Cash Flows 58
Notes to Combined Financial Statements 59
2. Financial statement schedules Page
Note 13 to Combined Financial Statements "Combined Quarterly
Financial Results" 82
All other schedules are omitted because they are not required or inapplicable
or the informat ion 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 U.S. Bank, trustee. Incorporated by reference to Exhibit 4.3
from the report on Form 8-K filed by CFC on June 14, 1994.
4.3 - Revolving Credit Agreements dated February 28, 1995.
Incorporated by reference to Exhibit 4.3 from CFC's quarterly
report on Form 10-Q filed April 3, 1995.
4.4 - The first amendment to the February 28, 1995 revolving credit
agreements dated February 27, 1996. Incorporated by reference
to Exhibit 4.4 from CFC's Annual Report on Form 10-K filed
August 27, 1996.
4.5 - Amendment to the Revolving Credit Agreement dated as of November
25, 1998 amending and restating the agreement dated as of
February 28, 1995, as amended and restated as of November 26,
1996 and November 25, 1997. Incorporated by reference to
Exhibit 4.7 to CFC's Quarterly Report on Form 10-Q filed January
14, 1999.
4.6 - Amendment to the Revolving Credit Agreement dated as of
November 25, 1998 amending and restating the agreement dated as
of April 30, 1996, as amended and restated as of November 27,
1996. Incorporated by reference to Exhibit 4.8 to CFC's
Quarterly Report on Form 10-Q filed January 14, 1999.
- Registrant agrees to furnish to the Commission a copy of all
other instruments defining the rights of holders of its
long-term debt upon request.
Management Contracts and Compensatory Plans and Arrangements.
10.1 - Plan Document for CFC deferred compensation program.
Incorporated by reference to Exhibit 10 to Registration
Statement No. 2-70355, filed December 23, 1980.
10.2 - Employment Contract between CFC and Sheldon C. Petersen, dated
as of March 1, 1996. Incorporated by reference to Exhibit 10.2
to CFC's Form 10-K filed August 27, 1996.
10.3 - Supplemental Benefit Agreement between RTFC and Sheldon C.
Petersen, dated as of March 1, 1996. Incorporated by reference
to Exhibit 10.3 to CFC's Form 10-K filed August 27, 1996.
12 - Computations of ratio of margins to fixed charges.
23 - Consent of Arthur Andersen LLP.
27 - Financial Data Schedules.
(b) Reports on Form 8-K.
None.
50
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, 1999.
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/ STEVEN L. SLEPIAN Controller (Principal
Steven L. Slepian Accounting Officer)
/s/ BENSON HAM President and Director
Benson Ham
/s/ R.B. SLOAN, JR. Vice President and Director
R.B. Sloan, Jr.
/s/ WADE R. HENSEL Secretary-Treasurer and --August 27, 1999
Wade R. Hensel Director
/s/ JAMES M. ANDREW Director
James M. Andrew
/s/ ROBERT A. CAUDLE Director
Robert A. Caudle
Director
Glenn English
/s/ ALDEN J. FLAKOLL Director
Alden J. Flakoll
/s/ JAMES A. HUDELSON Director
James A. Hudelson
51
Signature Title Date
/s/ KENNETH KRUEGER Director
Kenneth Krueger
/s/ STEPHEN R. LOUDER Director
Stephen R. Louder
/s/ EUGENE MEIER Director
Eugene Meier
/s/ R. LAYNE MORRILL Director
R. Layne Morrill
/s/ ROBERT J. OCCHI Director
Robert J. Occhi
/s/ CLIFTON M. PIGOTT Director
Clifton M. Pigott
/s/ TIMOTHY REEVES Director
Timothy Reeves
/s/ BRIAN D. SCHLAGEL Director --August 27, 1999
Brian D. Schlagel
/s/ THOMAS W. STEVENSON Director
Thomas W. Stevenson
/s/ CLIFFORD G. STEWART Director
Clifford G. Stewart
/s/ ROBERT STROUP Director
Robert Stroup
/s/ ROBERT C. WADE Director
Robert C. Wade
/s/ ROBERT O. WILLIAMS Director
Robert O. Williams
/s/ ELDWIN A. WIXSON Director
Eldwin A. Wixson
52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION:
We have audited the accompanying combined balance sheets of National Rural
Utilities Cooperative Finance Corporation (a not-for-profit corporation under
the District of Columbia Cooperative Association Act) and other related
entities ("the Companies") as discussed in Note 1 as of May 31, 1999 and 1998,
and the related combined statements of income, expenses and net margins,
changes in members' equity and cash flows for the three years then ended.
These financial statements are the responsibility of the Companies' management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with 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, 1999 and 1998, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Vienna, VA
July 16, 1999
53
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
May 31, 1999 and 1998
ASSETS
1999 1998
CASH AND CASH EQUIVALENTS $ 74,403 $ 65,274
DEBT SERVICE INVESTMENTS 22,969 22,969
LOANS TO MEMBERS, net 13,491,199 10,329,345
RECEIVABLES 161,523 112,317
FIXED ASSETS, net 38,683 25,062
DEBT SERVICE RESERVE FUNDS 98,870 103,489
OTHER ASSETS 37,605 24,432
$13,925,252 $10,682,888
The accompanying notes are an integral part of these combined
financial statements.
54
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
May 31, 1999 and 1998
LIABILITIES AND MEMBERS' EQUITY
1999 1998
NOTES PAYABLE, due within one year $ 4,976,706 $ 3,848,229
ACCOUNTS PAYABLE 16,707 26,750
ACCRUED INTEREST PAYABLE 95,741 68,497
LONG-TERM DEBT 6,891,122 5,024,621
OTHER LIABILITIES 10,207 6,347
QUARTERLY INCOME CAPITAL SECURITIES 400,000 200,000
MEMBERS' SUBORDINATED CERTIFICATES:
Membership Subordinated Certificates 641,937 644,817
Loan and Guarantee Subordinated Certificates 597,879 584,349
Total Members' Subordinated Certificates 1,239,816 1,229,166
MEMBERS' EQUITY 294,953 279,278
Total Members' Subordinated Certificates
and Members' Equity 1,534,769 1,508,444
$13,925,252 $10,682,888
The accompanying notes are an integral part of these combined
financial statements.
55
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF INCOME, EXPENSES AND NET MARGINS
(Dollar Amounts In Thousands)
For the Years Ended May 31, 1999, 1998 and 1997
1999 1998 1997
OPERATING INCOME-Interest on
loans to members $790,803 $637,573 $564,439
Less: Cost of funds 664,109 540,535 475,729
Gross operating margin 126,694 97,038 88,710
EXPENSES:
General, administrative
and loan processing 28,111 23,600 22,019
Provision for loan losses 23,866 19,027 15,161
Total expenses 51,977 42,627 37,180
Operating margin 74,717 54,411 51,530
NONOPERATING INCOME 1,722 2,611 3,206
GAIN ON SALE OF LAND - 5,194 -
NET MARGINS $ 76,439 $ 62,216 $ 54,736
The accompanying notes are an integral part of these combined
financial statements.
56
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts In Thousands)
For the Years Ended May 31, 1999, 1998 and 1997
Patronage Capital
Allocated
General
Education Unallocated Reserve
Total Memberships Fund Margins Fund Other
Balance as of May 31, 1996 $269,641 $1,424 $476 $2,289 $501 $264,951
Retirement of Patronage Capital (50,962) - - - (135) (50,827)
Net Margins - allocated 54,736 - 120 - 138 54,478
Other (1,821) 46 - - - (1,867)
Balance as of May 31, 1997 271,594 1,470 596 2,289 504 266,735
Retirement of Patronage Capital (52,661) - - - (123) (52,538)
Net margins - allocated 62,216 - 404 - 119 61,693
Other (1,871) 21 (324) - - (1,568)
Balance as of May 31, 1998 279,278 1,491 676 2,289 500 274,322
Retirement of Patronage Capital (57,601) - - - - (57,601)
Net margins - allocated 76,439 - 315 - 3 76,121
Other (3,163) 44 (448) - - (2,759)
Balance as of May 31, 1999 $294,953 $1,535 $543 $2,289 $503 $290,083
The accompanying notes are an integral part of these combined
financial statements.
57
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Years Ended May 31, 1999, 1998 and 1997
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net margins $ 76,439 $ 62,216 $ 54,736
Add (deduct):
Provision for loan losses 23,866 19,027 15,161
Depreciation 1,454 1,274 1,253
Amortization of issuance costs
and deferred charges 3,959 2,188 1,912
Amortization of deferred income (4,417) (1,467) (10,702)
Gain on sale of land - (5,194) -
Receivables (29,458) (12,397) (10,000)
Accounts payable (10,043) 4,122 8,520
Accrued interest payable 27,244 21,573 6,105
Other (20,050) (13,930) (13,737)
Net cash flows provided by
operating activities 68,994 77,412 53,248
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made on loans (10,122,726) (5,594,408) (3,799,004)
Principal collected on loans 6,937,006 3,924,232 2,833,917
Net investment in fixed asset (15,075) (1,423) (885)
Proceeds from sale of land - 13,489 -
Change in certificates of deposit - - 25,000
Net cash flows used in
investing activities (3,200,795) (1,658,110) (940,972)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
notes payable, net 380,339 258,531 705,804
Debt service investments, net - 54,250 (36,312)
Proceeds from issuance of
long-term debt 3,003,765 1,819,265 890,524
Payments for retirement of
long-term debt (387,710) (574,455) (730,116)
Proceeds from issuance of Quarterly
Income Capital Securities 200,000 75,000 125,000
Proceeds from issuance of Members'
Subordinated Certificates 65,432 34,040 29,026
Payments for retirement of Members'
Subordinated Certificates (69,911) (15,718) (32,210)
Payments for retirement of
Patronage Capital (50,985) (54,952) (45,349)
Net cash flows provided by
financing activities 3,140,930 1,595,961 906,367
NET INCREASE IN CASH & CASH EQUIVALENTS 9,129 15,263 18,643
BEGINNING CASH & CASH EQUIVALENTS 65,274 50,011 31,368
ENDING CASH & CASH EQUIVALENTS $ 74,403 $ 65,274 $ 50,011
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for interest $ 640,947 $ 525,881 $ 476,914
The accompanying notes are an integral part of these combined
financial statements.
58
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
As of May 31, 1999, 1998 and 1997
(1) General Information and Accounting Policies
(a) General Information
National Rural Utilities Cooperative Finance Corporation ("CFC") was
incorporated as a private, not-for-profit cooperative association under the
laws of the District of Columbia in April 1969. The principal purpose of CFC
is to provide its members with a source of financing to supplement the loan
programs of the Rural Utilities Service ("RUS") of the United States Department
of Agriculture. CFC makes loans primarily to its rural utility system members
("Utility Members") to enable them to acquire, construct and operate electric
distribution, generation, transmission and related facilities. 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 1,057 members as of May 31, 1999, included 908 Utility Members,
virtually all of which are consumer-owned cooperatives, 76 service members
and 73 associate members. The Utility Members included 838 distribution
systems and 70 generation and transmission ("power supply") systems operating
in 48 states and U.S. territories.
Rural Telecommunications Finance Cooperative ("RTFC") was incorporated as a
private cooperative association in the state of South Dakota in September
1987. RTFC is a controlled affiliate of CFC and was created for the purpose
of providing and/or arranging financing for its rural telecommunication
members and affiliates. RTFC's bylaws require that the majority of RTFC's
Board of Directors be elected from individuals designated by CFC. CFC is the
sole source of external funding for RTFC. As of May 31, 1999, RTFC had 531
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. Under this program, notes are
purchased from the FFB and placed in a trust and beneficial certificates in
the trust are then sold to investors. The notes held by the trust are
guaranteed by the RUS. All trust certificates held by GFC were transferred
to GFC by CFC. CFC is the sole source of external funding for GFC. GFC had
two members other than CFC at May 31, 1999. 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, 1999, CFC was authorized to lend RTFC up to $7.0 billion to
fund loans to its members and their affiliates. As of the same date, RTFC
had outstanding loans and unadvanced loan commitments totaling $3,809.6
million. RTFC's net margins are allocated to RTFC borrowers, its patrons.
59
Summary financial information relating to RTFC included in the combined
financial statements is presented below:
As of May 31: 1999 1998
(Dollar amounts in thousands)
Outstanding loans to members
and their affiliates $2,710,339 $1,574,900
Total assets 2,893,810 1,695,231
Notes payable to CFC 2,693,675 1,563,094
Total liabilities 2,729,102 1,581,268
Members' Equity (1) and
Subordinated Certificates 164,708 113,963
For the years ended May 31: 1999 1998 1997
(Dollar amounts in thousands)
Operating income $149,037 $90,663 $71,891
Net margins (1) 3,858 3,135 9,239
_____________________________
(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, 1999, CFC had loaned GFC $130.9 million to fund the purchase,
from CFC, of certificates evidencing interests in trusts holding RUS
guaranteed notes of members. Summary financial information relating to GFC
included in the combined financial statements is presented below:
As of May 31: 1999 1998
(Dollar amounts in thousands)
Outstanding loans to members $ 130,940 $ 133,195
Total assets 133,091 135,761
Notes payable to CFC 130,940 133,195
Total liabilities 132,861 135,430
Members' Equity (1) 230 331
For the years ended May 31: 1999 1998 1997
(Dollar amounts in thousands)
Operating income $ 7,716 $ 8,467 $20,673
Net margins (1) 714 798 1,762
_______________________
(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.
60
(c) Amortization of Bond Discount and Bond Issuance Costs
Bond discount and bond issuance costs are deferred and amortized as interest
expense 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 Losses
CFC maintains an allowance for loan losses at a level believed to be adequate
in relation to the credit quality and size of its loans and guarantees
outstanding. According to the terms of CFC's guarantees, any amount advanced
by CFC under its guarantee of a members' obligation is treated as a demand
loan. It is CFC's policy to periodically review its loans and guarantees and
to make adjustments to the allowance as necessary. The allowance is based on
estimates and, accordingly, actual loan losses may differ from the allowance
amount.
Activity in the allowance account is summarized as follows for the years
ended May 31:
(Dollar amounts in thousands) 1999 1998 1997
Balance at beginning of year $250,131 $233,208 $218,047
Provision for loan losses 23,866 19,027 15,161
Charge-offs (61,794) (2,104) -
Balance at end of year $212,203 $250,131 $233,208
(f) Fixed Assets
Buildings, furniture and fixtures and related equipment are stated at cost
less accumulated depreciation and amortization of $9.4 million and $9.9
million as of May 31, 1999 and 1998, respectively. Depreciation and
amortization expenses ($1.5 million, $1.3 million and $1.3 million in fiscal
years 1999, 1998 and 1997, respectively) are computed primarily on the
straight-line method over estimated useful lives ranging from 2 to 40 years.
(g) 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. These instruments may involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized
in the combined balance sheets.
(h) Accounting by Creditors for Impairment of a Loan
CFC calculates impairment on loans receivable by comparing the present value
of the future cash flows associated with the loan against CFC's investment
in the loan loss reserves are provided based on the calculated impairment.
61
(i) Accounting for Certain Investments in Debt and Equity Securities
Debt service investments are recorded at amortized cost, since it is CFC's
intent and ability to hold all of these investments to maturity.
(j) Derivative Financial Instruments
CFC is neither a dealer nor a trader in derivative financial instruments.
CFC uses interest rate and currency exchange agreements to manage its interest
rate risk and foreign exchange risk. CFC accounts for these agreements on
an accrual basis. CFC does not value the interest rate exchange agreements
on its balance sheet, but values the underlying hedged debt at cost. CFC does
not recognize a gain or loss on these agreements, but includes the difference
between the interest rate paid and interest rate received in the overall cost
of funding. No agreement to which CFC was a party has been terminated early.
In the event that an agreement were terminated early, CFC would record the
fee paid or received due to the early termination as part of the overall cost
of funding.
In June 1998, the Financial Accounting Standards Board ("FASB")issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that all derivatives be recognized as an asset or
liability in the statement of financial position and recorded at fair value.
The statement was originally effective for all fiscal years beginning after
June 15, 1999. The FASB has amended the statement to be effective for all
fiscal years beginning after June 15, 2000. CFC will be required to implement
this statement as of June 1, 2001. CFC has not yet determined the impact of
implementing this statement on its overall financial position.
(k) Segment Information
CFC has adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information". This statement establishes standards for reporting
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial reports issued to shareholders. This statement also
establishes standards for related disclosures about products and services,
geographic areas and major customers. CFC operates in two business segments -
rural electric lending and rural telecommunications lending. The segment
disclosure has been included in Note 11.
(l) 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 CFC uses
its best estimates and judgments based on the known facts at the date of the
financial statements, actual results could differ from these estimates as
future events occur.
CFC does not believe it is vulnerable to the risk of a near-term severe impact
as a result of any concentrations of its activities.
(m) Membership Fees
Members are charged a one-time membership fee based on member class. CFC
distribution system members (Class A), power supply system members (Class B),
national associations of cooperatives (Class D) and associate members (Class
E) pay a $1,000 membership fee. CFC service organization members (Class C)
pay a $200 membership fee. RTFC voting members pay a $1,000 membership fee
and non-voting members pay a $100 membership fee. All GFC members pay a
$1,000 membership fee. Membership fees are accounted for as Members' Equity.
(n) Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with the fiscal year 1999 presentation.
62
(2) Loans and Commitments
Loans to members bear interest at rates determined from time to time by the
Board of Directors after considering CFC's cost of funds, operating expenses,
provision for loan losses and the maintenance of reasonable margin levels.
In keeping with its not-for-profit, cooperative character, CFC's policy is to
set interest rates at the lowest levels it considers to be consistent with
sound financial management. Loans outstanding to members, weighted average
interest rates thereon and unadvanced commitments by loan type are summarized
as follows as of May 31:
(Dollar amounts in thousands) 1999 1998
Weighted Weighted
Average Unadvanced Loans Average Unadvanced
Loans Interest Commitments Outstanding Interest Commitments
Outstanding Rates (A) Rates (A)
Long-term fixed rate secured loans(B):
Electric systems $ 6,797,786 6.69% $ 198,010 $ 4,289,629 7.02% $ 122,184
Telecommunication systems 1,258,458 6.88% - 222,733 8.05% -
Total long-term fixed rate secured loans 8,056,244 6.72% 198,010 4,512,362 7.07% 122,184
Long-term variable rate secured loans (C):
Electric systems 2,334,878 5.85% 6,806,682 3,209,815 6.55% 3,625,358
Telecommunication systems 1,096,312 6.43% 561,442 1,131,561 6.65% 276,104
Total long-term variable rate secured loans 3,431,190 6.04% 7,368,124 4,341,376 6.57% 3,901,462
Refinancing variable rate loans guaranteed by RUS:
Electric systems 130,940 5.87% - 133,195 6.36% -
Intermediate-term secured loans:
Electric systems 198,894 6.62% 80,411 151,202 7.39% 223,512
Telecommunication systems 686 6.42% - 86 7.25% -
Total intermediate-term secured loans 199,580 6.50% 80,411 151,288 7.39% 223,512
Intermediate-term unsecured loans:
Electric systems 102,221 6.26% 219,248 198,121 6.70% 188,523
Telecommunication systems 12,809 6.42% 11,680 15,495 7.25% 15,457
Total intermediate-term unsecured loans 115,030 6.28% 230,928 213,616 6.74% 203,980
Line of credit loans (D):
Electric systems 850,039 5.99% 4,392,012 688,995 6.70% 4,022,649
Telecommunication systems 342,074 6.66% 538,619 205,026 7.25% 371,457
Total line of credit loans 1,192,113 6.19% 4,930,631 894,021 6.83% 4,394,106
Nonperforming loans (E):
Electric systems 1,643 5.55% - 4,080 6.41% -
Restructured loans (F):
Electric systems 576,662 3.90% - 329,538 7.17% -
Total loans 13,703,402 6.37% 12,808,104 10,579,476 6.70% 8,845,244
Less: Allowance for loan losses 212,203 - 250,131 -
Net loans $13,491,199 $12,808,104 $10,329,345 $8,845,244
Total by member class:
Distribution $ 8,714,742 $ 9,264,001 $ 7,257,330 $5,722,957
Power supply 1,895,712 2,030,918 1,489,908 2,163,502
Statewide and associate 382,609 401,444 257,337 295,767
Telecommunication systems 2,710,339 1,111,741 1,574,901 663,018
Total $13,703,402 $12,808,104 $10,579,476 $8,845,244
________________________
(A) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed and for which loan contracts have been
executed but funds have not been advanced. Since commitments may expire
without being fully drawn upon, the total amounts reported as commitments do
not necessarily represent future cash requirements. Collateral and security
requirements for advances on commitments are identical to those on initial
loan approval. Long-term unadvanced commitments that do not have an interest
rate associated with the commitment have been listed under the variable rate.
Rates, fixed or variable, are set at the time of each advance.
(B) Generally, long-term fixed rate loans provide for a fixed interest rate
for terms of one to 35 years. Upon expiration of the interest rate term,
the borrower may select another fixed rate term of one to 35 years (but not
beyond maturity of the loan) or a variable rate. The borrower may select
either option or may repay to CFC the principal then outstanding together
with interest due thereon and other sums, if required. Includes $161.9
million and $ 121.6 million of unsecured loans at May 31, 1999 and 1998,
respectively.
63
(C) Includes $39.2 million and $53.3 million of unsecured loans at May 31,
1999 and 1998, respectively.
(D) Includes $277.5 million and $81.4 million of secured loans at May 31,
1999 and 1998, respectively.
(E) The rates on nonperforming loans are the weighted average of the stated
rates on such loans as of the dates shown and do not necessarily represent
the interest recognized by CFC from such loans.
(F) The rates on restructured loans for 1999 represent the effective rate
based on scheduled minimum cashflow and for 1998 and 1997 represent the
weighted average of the stated rates on such loans.
Loans outstanding, by state or U.S. territory, are summarized below:
(Dollar amounts in thousands)
May 31, May 31,
State/Territory 1999 1998 State/Territory 1999 1998
Alabama $ 204,861 $ 153,062 Nebraska $ 15,524 $ 14,041
Alaska 205,106 137,182 Nevada 76,543 63,285
Arizona 88,790 84,997 New Hampshire 257,711 260,737
Arkansas 428,697 300,797 New Jersey 6,899 6,146
California 58,843 33,902 New Mexico 85,834 88,299
Colorado 375,099 354,241 New York 17,052 13,655
Connecticut 2,400 3,000 North Carolina 610,656 391,106
Delaware 15,812 16,196 North Dakota 53,269 49,479
District of Columbia 258,945 125,007 Ohio 313,631 151,578
Florida 465,114 421,289 Oklahoma 354,791 294,963
Georgia 1,086,622 815,823 Oregon 256,086 227,391
Idaho 112,561 96,038 Pennsylvania 106,839 103,531
Illinois 520,602 452,783 South Carolina 565,434 317,325
Indiana 181,430 145,587 South Dakota 178,493 158,485
Iowa 304,480 266,063 Tennessee 101,901 93,169
Kansas 288,873 293,524 Texas 1,843,776 1,331,782
Kentucky 218,426 208,142 Utah 650,322 391,660
Louisiana 207,967 181,696 Vermont 51,887 55,543
Maine 49,354 47,986 Virgin Islands 376,409 213,615
Maryland 128,990 84,696 Virginia 298,526 228,300
Michigan 275,538 267,598 Washington 85,148 83,996
Minnesota 548,255 456,134 West Virginia 4,692 1,272
Mississippi 281,310 246,000 Wisconsin 228,994 245,183
Missouri 496,010 318,770 Wyoming 125,514 117,963
Montana 233,386 166,459 Total $13,703,402 $10,579,476
CFC's members are widely dispersed throughout the United States and its
territories, including 48 states, the District of Columbia, Guam, American
Samoa and the U.S. Virgin Islands. At May 31, 1999, 1998 and 1997, no state
or territory had over 12.9%, 11.7% and 10.6%, respectively, of total loans
and guarantees outstanding.
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, 1999, the total exposure outstanding to
any one borrower did not exceed 4.2% of total loans (excluding loans
guaranteed by RUS) and guarantees outstanding. At May 31, 1999, CFC had
$2,241.5 million in loans outstanding, excluding loans guaranteed by RUS, and
$702.7 million in guarantees outstanding, to its largest 10 borrowers,
representing 16.4% of total loans outstanding and 41.7% of total guarantees
outstanding. Credit exposure to the largest 10 borrowers represented 19%
of total credit exposure at May 31, 1999 and May 31, 1998.
Weighted average interest rates earned (recognized in the case of
nonperforming and restructured loans) on all loans outstanding are summarized
below:
64
For the Years Ended May 31,
1999 1998 1997
Long-term fixed rate 6.69% 7.12% 7.65%
Long-term variable rate 6.20% 6.53% 6.25%
Telecommunication organizations 6.88% 7.05% 6.73%
Refinancing loans guaranteed by RUS 5.87% 6.32% 6.36%
Intermediate-term 6.98% 7.08% 7.08%
Short-term 6.26% 6.74% 6.40%
Associate members 6.47% 6.65% 6.42%
Nonperforming (1) 0.00% 0.00% 0.00%
Restructured 1.73% 0.00% 0.56%
All loans 6.51% 6.60% 6.58%
___________________________
(1) Rate does not reflect the recognition of $12.5 million of deferred
gain in 1999.
Long-term fixed rate loans outstanding at May 31, 1999 which will be subject
to adjustment of their interest rates during the next five fiscal years are
summarized as follows (due to principal repayments, amounts subject to
interest rate adjustment may be lower at the actual time of interest rate
adjustment):
(Dollar amounts in thousands) Weighted Average Amount
Interest Rate Repricing
2000 6.48% $ 291,600
2001 6.28% 483,955
2002 6.61% 347,600
2003 6.50% 392,752
2004 6.19% 455,569
$1,971,476
During the first quarter of calendar year 1999, long-term fixed rate loans
totaling $105.2 million had their interest rates adjusted. These loans will
be eligible to readjust their interest rates again during the first quarter
of calendar year 2000 to the lowest long-term fixed rate offered during 1999
for the term selected. At January 1 and May 31, 1999, the standard long-term
fixed rate was 6.05% 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 2000 repayments of principal on
long-term loans outstanding are expected to be a relatively minor amount of
such outstanding loans.
Total long-term loans maturing in each of the five fiscal years following May
31, 1999, is as follows:
(Dollar amounts in thousands)
Amount Maturing
2000 $ 318,092
2001 315,392
2002 347,975
2003 332,753
2004 374,812
Thereafter 10,506,012
$12,195,036
CFC evaluates each borrower's creditworthiness on a case-by-case basis. It is
generally CFC's policy to require collateral for long-term and certain
intermediate-term loans. Such collateral usually consists of a first mortgage
lien on the borrower's total system, including plant and equipment, and a
pledge of future revenues. The loan and security documents also contain
65
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, 1999 and 1998, mortgage notes representing approximately
$3,016.9 million and $1,930.9 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
variable rate loans guaranteed by RUS" represents loans made by CFC and
transferred to its affiliate GFC to fund the prepayment of members' FFB 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 beneficial
certificates which represent an undivided interest in the trust assets. GFC,
as holder of the Trust Certificates, is financing these loans from variable
rate funds provided by CFC until fixed rate funding is obtained through the
public markets.
CFC sets variable interest rates monthly on outstanding short- and
intermediate-term loans. On notification to borrowers, CFC may adjust the
interest rate semi-monthly. Under CFC's policy, the maximum interest rate which
may be charged on short-term loans is the prevailing bank prime rate plus 1%
per annum; on intermediate-term loans, the prevailing bank prime rate plus
1 1/2% per annum; and on RTFC short-term loans, the prevailing bank prime rate
plus 3% per annum.
At May 31, 1999 and 1998, nonperforming loans in the amount of $1.6 million
and $4.1 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 $0.1 million, $0.4
million and $1.2 million for the years ended May 31, 1999, 1998 and 1997,
respectively.
At May 31, 1999 and 1998, the total amount of restructured debt was $576.7
million and $329.5 million, respectively. All loans classified as restructured
were on a nonaccrual status with respect to the recognition of interest income
through January 31, 1999. All payments received through January 31, 1999 were
applied against principal outstanding. On February 1, 1999, all restructured
loans were placed on accrual status with respect to the recognition of
interest income. All payments received after February 1, 1999 will be first
applied against accrued interest with all remaining amounts applied against
principal outstanding. A total of $7.5 million of interest was accrued on
restructured loans as of May 31, 1999. The effect of not accruing interest
income at the stated rates on restructured loans was a decrease in interest
income of $22.8 million, $24.5 million and $19.3 million for the years ended
May 31, 1999, 1998 and 1997, respectively.
(3) Members' Subordinated Certificates
Membership Subordinated Certificates
To join CFC and to establish eligibility to borrow, CFC members (other than
associate members and service organizations) are required to execute
agreements to subscribe to Membership Subordinated Certificates. Such
certificates are interest-bearing, unsecured, subordinated debt of CFC. CFC
is authorized to issue Membership Subordinated Certificates without limitation
as to the total principal amount.
Generally, Membership Subordinated Certificates mature in the years 2070
through 2095 and bear interest at 5% per annum.
New members joining CFC are required to purchase Membership Subordinated
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.
66
In certain cases, the Board of Directors has approved alternative deferred
payment arrangements for purchase of Membership Subordinated Certificates.
These deferred payments are evidenced by noninterest-bearing, unsecured notes
from the member and are shown as receivables.
Loan and Guarantee Subordinated Certificates
Members obtaining long-term loans, certain intermediate-term loans or
guarantees from CFC are generally required to purchase additional Loan or
Guarantee Subordinated Certificates with each such loan or guarantee. These
certificates are unsecured, subordinated debt of CFC.
Certificates currently purchased in conjunction with loans are noninterest-
bearing and are generally repaid periodically over the life of the loan in
relation to the loan principal balance outstanding. Such certificate purchase
requirements, if any, range from 1% to 12% of the loan amount depending on the
membership classification of the borrower and the borrower's leverage ratio,
including the new loan with CFC, for Utility Systems.
The maturity dates and the interest rates payable on Guarantee Subordinated
Certificates purchased in conjunction with CFC's guarantee program vary in
accordance with applicable CFC policy. Members may be required to purchase
noninterest-bearing Debt Service Reserve Subordinated Certificates in
connection with CFC's guarantee of long-term tax-exempt bonds (see Note 8 to
Combined Financial Statements). Proceeds from the sale of such certificates
are pledged by CFC to the Debt Service Reserve Fund established in connection
with the bond issue and any earnings from the investments of the fund inure
solely to the benefit of the members for whom the bonds are issued. These
certificates have varying maturities but none is greater than the longest
maturity of the guaranteed obligation.
Information with respect to Members' Subordinated Certificates at May 31 is
as follows:
(Dollar amounts in thousands) 1999 1998
Weighted Weighted
Average Average
Amounts Interest Amounts Interest
Outstanding Rate Outstanding Rate
Number of subscribing members 908 903
Membership Subordinated Certificates
Certificates maturing 2020 through 2095 $ 626,560 $ 629,044
Subscribed and unissued 15,377 15,773
Total Membership Subordinated Certificates 641,937 4.83% 644,817 4.83%
Loan and Guarantee Subordinated Certificates
3% certificates maturing through 2040 127,625 135,428
5.30% to 12.12% certificates maturing through 2018 64,576 110,850
Noninterest-bearing certificates maturing through 2029 368,126 314,517
Subscribed and unissued 37,552 23,554
Total Loan and Guarantee Subordinated Certificates 597,879 1.56% 584,349 2.46%
Total Members' Subordinated Certificates $1,239,816 3.25% $1,229,166 3.70%
CFC estimates the amount of Members' Subordinated Certificates that will be
repaid during the next five fiscal years will total approximately 1.25% of
certificates outstanding.
67
(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:
(Dollar amounts in thousands) 1999 1998
Weighted Weighted
Average Average
Amounts Interest Amounts Interest
Outstanding Rate Outstanding Rate
Commercial Paper, sold through dealers, net of
discounts of $34,182 and $22,902 respectively $4,684,066 4.96% $4,363,455 5.53%
Commercial Paper sold by CFC directly to members, at par 1,063,450 4.86% 1,195,600 5.57%
Commercial Paper sold by CFC directly to nonmembers, at par 123,727 4.86% 121,849 5.56%
5,871,243 4.94% 5,680,904 5.54%
Bank Bid Notes 375,000 4.86% 185,000 5.57%
Long-term debt maturing within one year 1,132,963 5.34% 327,325 5.99%
7,379,206 5.00% 6,193,229 5.57%
Notes payable supported by revolving credit agreements,
classified as long-term debt (see Note 5) (2,402,500) 5.00% (2,345,000) 5.57%
$4,976,706 5.00% $3,848,229 5.57%
Other information with regard to notes payable due within one year at May 31,
is as follows:
(Dollar amounts in thousands) 1999 1998 1997
Original maturity range of notes
outstanding at year-end 1 to 270 days 1 to 268 days 1 to 255 days
Weighted average maturity of
notes outstanding at year-end 38 days 34 days 34 days
Average amount outstanding during
the year $5,757,698 $5,976,346 $5,558,201
Maximum amount outstanding at any
month-end during the year $7,335,247 $6,281,683 $5,781,905
Weighted average interest rate paid for
the year, without effect of compensating
balances and commitment fees 5.33% 5.71% 5.51%
Weighted average effective interest rate paid
for the year, including effect of compensating
balances and commitment fees 5.37% 5.74% 5.55%
CFC enters short-term Bank Bid Note Agreements which are unsecured obligations
of CFC and do not require back-up bank lines for liquidity purposes. Bank Bid
Note facilities are uncommitted lines of credit for which CFC does not pay a
fee. The commitments are generally subject to termination at the discretion
of the individual banks.
As of May 31, 1999, CFC had three revolving credit agreements totaling
$4,792.5 million which are used principally to provide liquidity support for
CFC's outstanding Commercial Paper, Commercial Paper issued by National
Cooperative Services Corporation ("NCSC") and guaranteed by CFC and the
adjustable or floating/fixed rate bonds which CFC has guaranteed and is
standby purchaser for the benefit of its members.
Two of these agreements are with 53 banks, J.P. Morgan Securities Inc. and
68
The Bank of Nova Scotia as Co-Syndication Agents, and Morgan Guaranty Trust
Company of New York as Administrative Agent. Under the five-year agreement,
executed in November 1996, CFC can borrow up to $2,402.5 million until
November 26, 2001. On November 24, 1998, the 364-day agreement was renewed
with J.P. Morgan Securities Inc. and The Bank of Nova Scotia as Co-Lead
Arrangers and Co-Syndication Agents, Morgan Guaranty Trust Company of New
York as Administrative Agent, and Banc of America Securities, LLC and the First
National Bank of Chicago as Co-Documentation Agents. Under this 364-day
agreement, CFC can borrow up to $1,940.0 million until November 23, 1999.
Any amounts outstanding under these facilities will be due on the respective
maturity dates.
A third revolving credit agreement for $450.0 million was executed on November
25, 1998 with nine banks, including The Bank of Nova Scotia as Lead Arranger
and Administrative Agent (the "BNS facility") and Chase Manhattan Bank, N.A.
as Documentation Agent. This agreement has a 364-day revolving credit period
which terminates November 24, 1999 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 .090 of 1%. The per annum facility fee for both agreements with a 364-day
maturity is .085 of 1%. There is no commitment fee for any of the revolving
credit facilities. If CFC's long-term ratings decline, the facility fees may
be increased by no more than .035 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 $1,373.9
million at May 31, 1999 (increased each fiscal year by 90% of net margins not
distributed to members), an average fixed charge coverage ratio over the six
most recent fiscal quarters of at least 1.025 and prohibits the retirement of
Patronage Capital unless CFC has achieved a fixed charge coverage ratio of at
least 1.05 for the preceding fiscal year. The credit agreements prohibit CFC
from incurring senior debt (including guarantees but excluding indebtedness
incurred to fund RUS guaranteed loans) in an amount in excess of ten times
the sum of Members' Equity, Members' Subordinated Certificates and Quarterly
Income Capital Securities and restricts, with certain exceptions, the creation
by CFC of liens on its assets and 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 dates. As of May 31, 1999 and May 31, 1998, CFC was in
compliance with all covenants and conditions under its revolving credit
agreements and there were no borrowings outstanding under such agreements.
Based on the ability to borrow under the five-year facility, at May 31, 1999
and May 31, 1998, CFC classified $2,402.5 million and $2,345.0 million,
respectively, of its notes payable outstanding as long-term debt. CFC expects
to maintain more than $2,402.5 million of notes payable outstanding during
the next twelve months. If necessary, CFC can refinance such notes payable
on a long-term basis by borrowing under the five-year facility, subject to
the conditions therein.
69
(5) Long-Term Debt
The following is a summary of long-term debt as of May 31:
(Dollar amounts in thousands) 1999 1998
Weighted Weighted
Average Average
Amount Interest Amounts Interest
Outstanding Rate Outstanding Rate
Notes payable supported by
revolving credit agreement:
(see Note 4) $2,402,500 5.00% $2,345,000 5.57%
Medium-Term Notes:
Medium-Term Notes,
sold through dealer 1,596,913 722,875
Medium-Term Notes,
sold directly to members 46,037 59,823
Subtotal 1,642,950 782,698
Less: Unamortized discount 627 765
Total Medium-Term Notes 1,642,323 6.10% 781,933 6.31%
Collateral Trust Bonds:
Variable Rate Bonds, due 1999 - 150,000
6.45%, Bonds, due 2001 100,000 100,000
6.75%, Bonds, due 2001 100,000 100,000
6.50%, Bonds, due 2002 100,000 100,000
6.70%, Bonds, due 2002 100,000 100,000
5.00%, Bonds, due 2002 200,000 -
5.95%, Bonds, due 2003 100,000 100,000
5.30%, Bonds, due 2003 100,000 -
6.00%, Bonds, due 2004 200,000 200,000
6.375%, Bonds, due 2004 100,000 100,000
6.125%, Bonds, due 2005 200,000 200,000
6.65%, Bonds, due 2005 50,000 50,000
5.50%, Bonds, due 2005 200,000 -
7.30%, Bonds, due 2006 100,000 100,000
6.20%, Bonds, due 2008 300,000 300,000
5.75%, Bonds, due 2008 225,000 -
Floating Rate, Series E-2, due 2010 (1) 2,078 2,125
5.70%, Bonds, due 2010 200,000 -
7.20%, Bonds, due 2015 50,000 50,000
6.55%, Bonds, due 2018 175,000 -
9.00%, Series V, due 2021 (1) 150,000 150,000
7.35%, Bonds, due 2026 100,000 100,000
Subtotal 2,852,078 1,902,125
Less: Unamortized discount 5,779 4,437
Total Collateral Trust Bonds 2,846,299 6.42% 1,897,688 6.79%
Total long-term debt $6,891,122 5.85% $5,024,621 6.45%
______________________
(1) Issued under the 1972 indenture.
The principal amount of Medium-Term Notes and Collateral Trust Bonds maturing
(including any sinking fund requirements) in each of the five fiscal years
following May 31, 1999, is as follows:
Weighted
Average
Amount Interest
Maturing Rate
2000 (1) $1,132,963 5.34%
2001 306,217 6.24%
2002 341,750 6.00%
2003 855,820 6.00%
2004 414,125 5.69%
Thereafter 2,570,711
_________________________
(1) The amount scheduled to mature in fiscal year 2000, has been presented as
long-term debt due in one year under notes payable.
Under the 1972 Indenture for Collateral Trust Bonds, CFC is required to
maintain funds in a Debt Service Investment account equivalent to principal
and interest payments due on the bonds over the next 12 months. At May 31,
1999 and 1998, CFC had $23.0 million of such funds invested in bank
certificates of deposit and marketable securities.
70
The outstanding Collateral Trust Bonds are secured by the pledge of mortgage
notes taken by CFC in connection with long-term secured loans made to those
members fulfilling specified criteria as set forth in the indentures. Medium-
Term Notes are unsecured obligations of CFC.
Interest Rate Exchange Agreements
The following table lists the notional principal amounts and the weighted
average interest rates paid/received by CFC under interest rate exchange
agreementd at May 31, 1999 and 1998:
(Dollar amounts in thousands)
Maturity Date Interest Rate Paid Interest Rate Received Notional Principal Amount
1999 1998 1999 1998 1999 1998
June 1999 (3) 5.00% - 5.81% - $ 50,000 $ -
September 1999 (1) 4.99% - 5.06% - 75,000 -
September 1999 (1) 4.99% - 5.06% - 75,000 -
September 1999 (1) 4.99% - 5.06% - 75,000 -
September 1999 (1) 4.99% - 5.06% - 75,000 -
November 1999 (1) 4.89% 5.71% 5.06% 5.84% 50,000 50,000
November 1999 (1) 4.89% 5.71% 5.06% 5.84% 50,000 50,000
November 1999 (1) 4.89% 5.71% 5.06% 5.84% 50,000 50,000
November 1999 (1) 4.98% - 5.06% - 75,000 -
November 1999 (1) 4.99% - 5.06% - 75,000 -
November 1999 (1) 4.99% - 5.06% - 75,000 -
November 1999 (1) 4.99% - 5.06% - 75,000 -
January 2000 (2) 6.47% 6.47% 4.85% 5.71% 52,851 52,851
August 2000 (2) 4.95% - 4.85% - 110,000 -
August 2000 (2) 4.95% - 4.85% - 110,000 -
September 2000 (2) 5.10% - 4.85% - 7,450 -
September 2000 (2) 5.15% - 4.85% - 13,355 -
October 2000 (2) 4.55% - 4.85% - 20,000 -
January 2001 (2) 6.64% 6.64% 4.85% 5.71% 42,749 42,749
January 2001 (2) 5.08% - 4.85% - 23,000 -
February 2001 (2) 5.63% 5.63% 4.85% 5.59% 75,000 75,000
February 2001 (2) 5.63% 5.63% 4.85% 5.59% 75,000 75,000
February 2001 (2) 5.63% 5.63% 4.85% 5.59% 75,000 75,000
February 2001 (2) 5.62% 5.62% 4.85% 5.59% 75,000 75,000
September 2001 (2) 5.15% - 4.85% - 34,810 -
January 2003 (2) 5.64% 5.64% 4.85% 5.59% 10,000 10,000
January 2003 (2) 5.49% 5.49% 4.85% 5.59% 12,375 12,375
June 2003 (2) 5.86% - 4.85% - 48,000 -
August 2003 (2) 5.85% - 5.07% - 25,000 -
August 2003 (2) 5.85% - 5.07% - 50,000 -
August 2003 (2) 5.85% - 5.07% - 25,000 -
September 2003 (2) 5.29% - 4.85% - 16,600 -
September 2003 (2) 5.25% - 4.85% - 17,844 -
September 2003 (2) 5.21% - 4.85% - 28,000 -
September 2003 (2) 5.22% - 4.85% - 28,785 -
October 2003 (2) 4.75% - 4.85% - 32,533 -
October 2003 (2) 4.75% - 4.85% - 32,533 -
October 2003 (2) 4.78% - 4.85% - 25,480 -
September 2004 (2) 5.28% - 4.85% - 17,650 -
October 2004 (2) 6.23% 6.23% 4.85% 5.71% 38,000 40,700
November 2004 (2) 5.30% - 4.85% - 61,000 -
November 2004 (2) 5.30% - 4.85% - 61,000 -
January 2005 (2) 5.70% 5.70% 4.85% 5.59% 8,000 8,000
April 2006 (2) 6.88% 6.88% 4.85% 5.71% 25,000 25,000
71
Maturity Date Interest Rate Paid Interest Rate Received Notional Principal Amount
1999 1998 1999 1998 1999 1998
April 2006 (2) 6.89% 6.89% 4.85% 5.71% 25,000 25,000
April 2006 (2) 6.88% 6.88% 4.85% 5.71% 25,000 25,000
April 2006 (2) 6.89% 6.89% 4.85% 5.71% 25,000 25,000
January 2008 (2) 5.84% 5.84% 4.85% 5.59% 14,000 14,000
July 2008 (2) 5.86% - 4.85% - 40,400 -
September 2008 (2) 5.57% - 4.85% - 26,235 -
September 2008 (2) 5.47% - 4.85% - 10,425 -
September 2008 (2) 5.40% - 4.85% - 10,300 -
September 2008 (2) 5.40% - 4.85% - 20,600 -
October 2008 (2) 5.00% - 4.85% - 33,512 -
April 2009 (2) 5.54% - 4.85% - 33,000 -
January 2012 (2) 6.01% 6.01% 4.85% 5.59% 13,000 13,000
February 2012 (2) 6.00% 6.00% 4.85% 5.59% 10,000 10,000
December 2013 (2) 5.44% - 4.85% - 65,000 -
December 2013 (2) 5.45% - 4.85% - 65,000 -
December 2013 (2) 5.40% - 4.85% - 45,100 -
June 2014 (2) 6.43% - 4.85% - 18,250 -
June 2018 (2) 6.88% - 4.85% - 5,000 -
December 2026 (2) 5.58% - 4.85% - 48,185 -
September 2028 (2) 5.75% - 4.85% - 60,000 -
September 2028 (2) 5.75% - 4.85% - 60,000 -
April 2029 (2) 5.95% - 4.85% - 66,000 -
Total $2,796,022 $753,675
__________________________
(1) Under these agreements, CFC pays a variable rate of interest and receives
a variable rate of interest.
(2) Under these agreements, CFC pays a fixed rate of interest and receives
interest based on a variable rate.
(3) Under these agreements, CFC pays a variable rate of interest and receives
a fixed rate of interest.
CFC's objective in using interest rate exchange agreements in which it pays a
fixed rate of interest and receives a variable rate of interest is to fix the
interest rate on a portion of its Commercial Paper. CFC then uses Commercial
Paper, in an amount equal to the notional principal value of the interest rate
exchange agreements, to fund a portion of its long-term fixed rate loan
portfolio. The net difference between the rate paid by CFC and the rate
received is included in the cost of funds.
CFC's objective in using interest rate exchange agreements in which it pays
and receives a variable rate of interest is to change the variable rate on a
notional amount of debt from a LIBOR rate index to a Commercial Paper rate
index. The variable rate Collateral Trust Bonds and Medium-Term Notes are
issued based on a LIBOR rate index, while CFC sets its variable rate loan
interest rates based on a Commercial Paper rate. The net difference between
the rate paid by CFC and the rate received is included in the cost of funds.
CFC's objective in using interest rate exchange agreements in which it pays
a variable rate and receives a fixed rate is to change the rate on Medium-Term
Notes from fixed to variable. The rate on the Medium-Term Notes is exchanged
to variable to allow the use of Medium-Term Notes in the funding of short-term
variable rate loans. The net difference between the rate paid by CFC and the
rate received is included in the cost of funds.
In all interest rate exchange agreements CFC receives a rate that is equal to
the rate on the underlying debt and pays a rate that is tied to the rate on
the asset funded by the exchange agreement and underlying debt.
CFC is exposed to counterparty credit risk on these interest rate exchange
agreements if the counterparty to the interest rate exchange agreement does
not perform pursuant to the agreement's terms. CFC only enters interest rate
exchange agreements with highly rated financial institutions.
During the year ended May 31, 1999, CFC issued Medium-Term Notes to European
investors in foreign currencies. The following chart provides details of the
related foreign-currency exchange agreement that CFC had outstanding at
May 31,1999:
72
(Dollar amounts in thousands)
Type of Debt (1) Date U.S. Dollars Foreign-Currency (2) Rate
MTN Issue Febuary 24, 1999 $390,250 350,000 EU 1.115
Maturity February 24, 2006 390,250 350,000 EU 1.115
____________________
(1) MTN - CFC Medium-Term Notes
(2) EU Euros
CFC enters into an exchange agreement to sell the amount of foreign-currency
received from the investor for U.S. Dollars on the issuance date, and to buy
the amount of foreign-currency required to repay the investor principal and
interest due through or on the maturity date. By locking in the exchange
rates at the time of issuance, CFC has eliminated the possibility of any
currency gain or loss which might otherwise have been produced by the
foreign-currency borrowing. CFC includes the difference between the amount
of U.S. Dollars received at issuance and the amount of U.S. Dollars required
to purchase the foreign-currency at the interest payment dates and at
maturity as interest expense.
Commercial Paper principal and interest is paid at maturity, which will range
from 1 day to 270 days. Interest is paid annually on foreign-currency
denominated Medium-Term Notes with maturities longer than one year. CFC will
consider the cost of all related foreign-currency exchange agreements as part
of the total cost of debt issuance when deciding on whether to issue debt in
the U.S. or foreign capital markets and whether to issue the debt denominated
in U.S. or foreign currencies.
Quarterly Income Capital Securities
Quarterly Income Capital Securities are long-term obligations that are
subordinated to CFC's other outstanding debt. Quarterly Income Capital
Securities are issued for terms of up to 49 years, pay interest quarterly,
may be called at par after five years and allow CFC to defer the payment of
interest for up to 20 consecutive quarters. The following table is a summary
of Quarterly Income Capital Securities outstanding at May 31:
(Dollar amounts in thousands) 1999 1998
Weighted Weighted
Average Average
Amounts Interest Amounts Interest
Outstanding Rate Outstanding Rate
8.00% Quarterly Income
Capital Securities, due 2045 $125,000 $125,000
7.65% Quarterly Income
Capital Securities, due 2046 75,000 75,000
7.375% Quarterly Income
Capital Securities, due 2047 200,000 -
Total Quarterly Income
Capital Securities $400,000 7.62% $200,000 7.87%
(6) Employee Benefits
CFC is a participant in the National Rural Electric Cooperative Association
("NRECA") Retirement and Security Program. This program is available to all
qualified CFC employees. Under the program, participating employees are
entitled to receive annually, under a 50% joint and surviving spouse annuity,
1.90% of the average of their five highest base salaries during their last
ten years of employment, multiplied by the number of years of participation
in the program. CFC contributed $956,709 to the Retirement and Security
Program during fiscal year 1999. 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 $160,000 for calendar
year 1999 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
73
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.
Post-retirement benefits include, but are not limited to, health and welfare
benefits provided after retirement. While CFC allows retired employees to
participate in its medical and life insurance plans, the retirees must do so
at their own expense. Any liability which may be incurred by allowing
retired employees to remain on CFC's medical and life insurance plans is not
material to CFC's financial condition, results of operations or cash flows.
CFC offers a 401(k) defined contribution savings program to all employees
that have completed a minimum of 1,000 hours of service, in either the first
12 consecutive months or first full calendar year of employment. CFC
contributes an amount equal to 2% of an employee's salary each year for all
employees participating in the program. During the year ended May 31, 1999,
CFC contributed a total of $190,195 under the program.
(7) Retirement of Patronage Capital
Patronage Capital in the amount of $57.4 million was retired in August 1998,
representing 70% of the allocation for the fiscal year 1998 and one-sixth of
the total allocations for fiscal years 1988, 1989 and 1990. The $57.4 million
includes $6.4 million retired to RTFC and $0.2 million retired to GFC. RTFC
retired $7.9 million to its members in January 1999 and GFC retired $0.2
million to its members in September 1998.
It is anticipated that CFC will retire Patronage Capital totaling $66.2
million, representing one-sixth of the fiscal years 1989, 1990 and 1991
allocations and 70% of the fiscal year 1999 allocation, on August 31, 1999.
Management anticipates that 70% of RTFC's margins for fiscal year 1999 will
be retired in January 2000, and that 100% of GFC's margins for fiscal year
1999 will be retired in the second quarter of fiscal year 2000. Future
retirements of Patronage Capital will be made as determined by the respective
Boards of Directors with due regard for their individual financial conditions.
(8) Guarantees
As of May 31, 1999 and 1998, 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 losses and Note 3 for a discussion of requirements
to purchase Guarantee Subordinated Certificates in connection with these
guarantees):
(Dollar amounts in thousands) 1999 1998
Long-term tax exempt bonds (A) $1,062,185 $1,148,500
Debt portions of leveraged lease transactions (B) 174,961 437,175
Indemnifications of tax benefit transfers (C) 285,169 312,771
Other guarantees (D) 162,150 136,048
Total $1,684,465 $2,034,494
_________________________
(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
74
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, $947.3 million and $1,017.8 million as of May 31, 1999
and 1998, 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, 1999 and 1998. However, the amounts of such guarantees vary over the
lives of the leases. A member's obligation to reimburse CFC for any guarantee
payments would be treated as a long-term loan, secured pari passu with RUS by
a first lien on substantially all of the member's property to the extent of
any cash received by the member at the outset of the transaction. The
remainder would be treated as an intermediate-term loan secured by a
subordinated mortgage on substantially all of the member's property. Due to
changes in Federal tax law, no further guarantees of this nature are
anticipated.
(D) At May 31, 1999 and 1998, CFC had unconditionally guaranteed Commercial
Paper issued by NCSC in the amount of $63.7 million and $39.0 million,
respectively.
Guarantees outstanding by state are summarized as follows:
(Dollar amounts in thousands)
May 31, May 31,
State 1999 1998 State 1999 1998
Alabama $ 62,460 $ 65,610 Nebraska $ - $ 3,115
Arizona 51,440 53,915 North Carolina 111,600 114,700
Arkansas 113,901 120,635 Oklahoma 41,987 49,162
Colorado 10,960 11,591 Oregon 4,650 4,805
Florida 293,735 304,144 Pennsylvania 11,995 12,839
Indiana 120,066 123,567 South Carolina 3,750 45,140
Iowa 8,645 9,475 Texas 128,435 125,298
Kansas 39,144 40,050 Utah 54,794 316,203
Kentucky 181,030 188,370 Virginia 67,889 43,208
Minnesota 133,557 141,358 Wyoming 10,714 10,875
Mississippi 60,665 66,615 Total $1,684,465 $2,034,494
Missouri 173,048 183,819
CFC uses the same credit policies and monitoring procedures in providing
guarantees as it does for loans and commitments.
The following table details the scheduled reductions in each of the fiscal
years following May 31, 1999 to the amount of obligations guaranteed by CFC:
(Dollar amounts in thousands) Amount
2000 $ 73,723
2001 77,978
2002 96,297
2003 101,674
2004 106,669
Thereafter 1,228,124
$1,684,465
75
(9) Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
is made in accordance with SFAS No. 107, "Disclosure about Fair Value of
Financial Instruments." Whenever possible, the estimated fair value amounts
have been determined using quoted market information as of May 31, 1999, along
with other valuation methodologies which are summarized below. The estimated
fair value information presented is not necessarily indicative of amounts CFC
could realize currently in a market sale since CFC may be unable to sell such
instruments due to contractual restrictions or to the lack of an established
market. The estimated market values have not been updated since May 31, 1999,
therefore, current estimates of fair value may differ significantly from the
amounts presented. With the exception of redeeming Collateral Trust Bonds
under early redemption provisions and allowing borrowers to prepay their
loans, CFC has held and intends to hold all financial instruments to maturity.
Below is a summary of significant methodologies used in estimating fair value
amounts and a schedule of fair values at May 31, 1999.
Cash and Cash Equivalents
Includes cash and certificates of deposit with remaining maturities of less
than 90 days, which are valued at the carrying value.
Debt Service Investments
The fair value of debt service investments is estimated based on published
bid prices or dealer quotes or is estimated using quoted market prices for
similar securities when no market quote is available. Debt service
investments purchased with original maturities of less than or equal to 90
days are valued at the carrying value which is a reasonable estimate of fair
value.
Loans to Members
Fair values are estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. Loans with different
risk characteristics, specifically nonperforming and restructured loans, are
valued using a discount rate commensurate with the risk involved. Loans with
interest rate repricing maturities of less than or equal to 90 days are valued
at cost which approximates fair value.
Notes Payable
Notes payable consist of Commercial Paper and Bank Bid Notes. The fair value
of Commercial Paper and Bank Bid Notes with maturities greater than 90 days
is estimated based on quoted market rates with similar maturities for
Commercial Paper and on bid prices from the various banking institutions for
Bid Notes. The fair value of Commercial Paper and Bank Bid Notes with
maturities less than or equal to 90 days are valued at carrying value which
is a reasonable estimate of fair value.
Long-Term Debt
Long-term debt consists of Collateral Trust Bonds and Medium-Term Notes.
The fair value of long-term debt is estimated based on published bid prices
or dealer quotes or is estimated using quoted market prices for similar
securities when no market quote is available.
Quarterly Income Capital Securities
The fair value of Quarterly Income Capital Securities is estimated based on
published market prices.
Members' Subordinated Certificates
As it is impracticable to develop a discount rate that measures fair value,
76
Subordinated Certificates have not been valued. Members' Subordinated
Certificates are extended long-term obligations to CFC; many have maturities
of 70 to 100 years. These certificates are issued to CFC's members as a
condition of membership or as a condition of obtaining loan funds or
guarantees and are non-transferable. As these certificates were not issued
primarily for their future payment stream but mainly as a condition of
membership and to receiving future loan funds, there is no ready market from
which to obtain fair value quotes.
Interest Rate and Currency Exchange Agreements
The fair value of the interest rate exchange agreements is estimated as the
amount CFC would receive or pay to terminate the agreement, taking into
account the current market rate of interest and the current creditworthiness
of the exchange counterparties. The fair value of the currency exchange
agreements is estimated as the amount CFC would receive or pay to terminate
the agreement, taking into account the currency exchange rate and the current
creditworthiness of the exchange counterparties.
Commitments
The fair value is estimated as the carrying value, or zero. Extensions of
credit under these commitments, if exercised, would result in loans priced at
market rates.
Guarantees
CFC charges guarantee fees based on the specifics of each individual
transaction. The demand for CFC guarantees has been insignificant in the
last few years. In addition, there is no other company that provides
guarantees to rural electric utility companies from which to obtain market
rate information. As a result, it is impracticable to supply fair value
information related to guarantees.
Carrying and fair values as of May 31, 1999 and 1998 are presented as follows:
(Dollar amounts in thousands) 1999 1998
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Cash and cash equivalents $ 74,403 $ 74,403 $ 65,274 $ 65,274
Debt service investments 22,969 22,969 22,969 22,969
Loans to members, net 13,491,199 12,648,316 10,329,345 10,391,615
Liabilities:
Notes payable (1) $ 7,379,206 $ 7,379,203 $ 5,865,904 $ 5,865,898
Long-term-debt (1) 4,488,622 4,334,428 3,006,946 3,057,919
QUICS 400,000 400,586 200,000 204,980
Off-Balance Sheet Instruments
Interest rate
exchange agreements $ - $ 44,539 $ - $ (6,532)
Currency exchange agreements - (20,436) - -
Commitments - - - -
________________________
(1) Prior to reclassification of notes payable supported by the revolving
credit agreements.
(10) Contingencies
(a) At May 31, 1999 and 1998, CFC had nonperforming loans in the amount of
$1.6 million and $4.1 million and restructured loans in the amount of $576.7
million and $329.5 million, respectively. At both dates, all loans classified
as nonperforming were on a nonaccrual status with respect to the recognition
of interest income. CFC elected to apply all payments received against
principal outstanding on all nonperforming loans at both dates. All loans
classified as restructured were on a nonaccrual status with respect to the
recognition of interest income through January 31, 1999. All payments received
through January 31, 1999 were applied against principal outstanding. On
February 1, 1999, all restructured loans were placed on accrual status with
respect to the recognition of interest income. All payments received after
February 1, 1999 will be first applied against accrued interest with all
77
remaining amounts applied against principal outstanding. A total of $7.5
million of interest was accrued on restructured loans as of May 31, 1999.
(b) CFC classified $578.3 million and $333.6 million of the amount described
in Note 10(a) as impaired pursuant to the provisions of FASB Statements
No. 114 and 118 at May 31, 1999 and 1998, respectively. CFC had allocated
$101.0 million and $126.0 million of the loan loss allowance for such impaired
loans at May 31, 1999 and May 31, 1998. The amount of loan loss allowance
allocated for such loans was based on a comparison of the present value of
the expected future cashflow associated with the loan and/or the estimated
fair value of the collateral securing the loan to the recorded investment in
the loan. CFC accrued interest income totaling $7.5 million on loans
classified as impaired during the year ended May 31, 1999. All payments
received prior to February 1, 1999, were applied as a reduction of principal.
The average recorded investment in impaired loans for the year ended May 31,
1999 was $460.1 million compared to $345.3 million for the year ended May 31,
1998.
(c) On December 31, 1996 the Wabash Valley Power Association ("Wabash") plan
of reorganization became effective. Under the plan, CFC received a $4.9
million cash payment and offset $9.9 million of Wabash's investments in CFC
Commercial Paper and Subordinated Certificates, for a total of $14.8 million.
CFC also received a combination of secured and unsecured promissory notes
bearing interest at market rates totaling $13.4 million, bringing the total
received by CFC to $28.2 million at February 28, 1998. Wabash is current
with respect to amounts due on the notes. CFC applied the cash and offsets
against the $17.7 million nonperforming loan to Wabash, reducing the balance
to $2.9 million. In April 1998, CFC received $0.7 million as its share of
the proceeds from the sale of assets by Wabash. In September 1998, CFC wrote
off the remaining $2.2 million of the loan outstanding to Wabash against the
allowance for loan losses.
In March 1999, CFC and RUS agreed upon the amount required to "true-up" the
post-petition, pre-confirmation payments made by Wabash to both parties. On
March 29, 1999, CFC wrote off $37.4 million related to the true-up payment
against the allowance for loan losses. In April 1999, CFC refinanced the
Wabash notes it received as part of the Wabash bankruptcy settlement with
long-term loans. The refinancing of the notes resulted in the recognition
of the remaining deferred gain related to Wabash. During fiscal year 1999,
CFC recognized a total of $13.4 million related to the deferred gain.
At May 31, 1999, CFC had a total of $13.1 million in loans outstanding to
Wabash. In addition, there is also a total of $42.0 million in unadvanced
commitments. All loans were classified as performing. All unadvanced
commitments were subject to material adverse change clauses.
(d) Deseret Generation & Transmission Co-operative ("Deseret") is a power
supply member of CFC located in Utah. Deseret owns and operates the Bonanza
generating plant ("Bonanza") and owns a 25% interest in the Hunter generating
plant along with a system of transmission lines. Deseret also owns and
operates a coal mine, through its Blue Mountain Energy subsidiary. Due to
large anticipated demands for electricity, the Bonanza site was designed for
two plants and Deseret built the infrastructure to support two plants (only
one plant has been built to date). When the large increases in demand never
materialized, Deseret was unable to make the debt payment obligations on the
Bonanza plant and debt service payments to RUS. As a consequence, Deseret
and its creditors entered into several restructuring agreements.
On October 16, 1996 Deseret and CFC entered into an Obligations Restructuring
Agreement (the "ORA") for the purpose of restructuring Deseret's debt with
CFC. Pursuant to the terms of the ORA, CFC agreed to (i) forbear from
exercising any remedy to collect the CFC Debt (as defined in the ORA) and
(ii) pay and perform on all of the CFC Guarantees (as defined in the ORA) in
consideration for Deseret agreeing to make quarterly minimum payments to CFC
through December 31, 2025. In addition to the quarterly minimum payments,
Deseret is required to pay to CFC certain percentages of its excess cash flow
and proceeds from the disposition of assets, as detailed in the ORA. If
Deseret performs all of its obligations under the ORA, CFC has agreed to
forgive any remaining CFC Debt on December 31, 2025. To date, Deseret has
made all required payments under the ORA. Certain creditors did not
participate in the ORA which resulted in litigation.
In connection with the ORA, on October, 16, 1996, CFC acquired all of
Deseret's indebtedness in the outstanding principal amount of $740.0 million
from RUS for the sum of $238.5 million (the "RUS Debt"). As a result of the
purchase, CFC holds a majority of Deseret's outstanding secured debt.
78
Pursuant to a participation agreement dated October 16, 1996, the member
systems of Deseret purchased from CFC, for $55.0 million, a participation
interest in the RUS Debt. The members' purchase of participation interests
in the RUD Debt acquired by CFC ("Participation Loans") are secured by the
assets and revenues of the member systems. Under the participation agreement
the Deseret members will receive a share of the minimum quarterly payments
that Deseret makes to CFC, which the members will use to service their
Participation Loans. Each member of Deseret has the option to put its
Participation Loan back to CFC at any time after twelve years, provided that
no event of default exists under the ORA and under such member's Participation
Loan. The ORA was subsequently amended to allow the Deseret member
distribution systems to put the participation loans back to CFC
unconditionally on December 31, 2019.
On December 4, 1998, CFC, Deseret, the Deseret member systems, and all other
parties involved in the ongoing litigation entered into a settlement
arrangement. The arrangement includes the following terms and conditions:
* a payment of $94 million to the owner of the Bonanza generating plant
($80.0 million from the guarantor of the equity portion of the lease payments,
$10.4 million from CFC and $3.6 million from Deseret),
* the transfer of ownership of the plant to Deseret,
* dismissal of the litigation,
* the ORA between CFC and Deseret remains substantially intact,
* a portion of the ORA payments from 2020 to 2025 will be shared with the
party that had guaranteed the equity portion of the lease payments,
* Deseret will be required to make additional payments based on excess
cashflow to the same party for the years 2026 to 2031, up to a maximum of
$439 million,
* as a result of the transfer of plant ownership, the 9.375% Bonanza Secured
Lease Obligation Bonds were redeemed on December 14, 1998.
On December 14, 1998, CFC effected the redemption of the Bonanza Secured
Lease Obligation Bonds. The amount advanced to redeem the bonds, $265.9
million ($255.1 million principal and $10.8 million of accrued interest),
became part of the outstanding loan balance to Deseret and is secured by
CFC's mortgage claim on all of Deseret's assets and future revenues. This
amount will be repaid through the annual ORA minimum and excess cashflow
payments Deseret is required to make to CFC through December 31, 2025.
On March 20, 1998, the City of Riverside, California ("Riverside") commenced
an action against Deseret in the United States District Court for the Central
District of California. Riverside sought (i) judgment from the court that
the Power Sales Agreement dated October 6, 1992 (the "PSA") between Deseret
and Riverside terminated on March 31, 1998 and (ii) unspecified damages
against Deseret. On March 31, 1998, Deseret sought injunctive relief from a
Utah state court. The California actions have been dismissed. Currently,
litigation is stayed in the United States District Court for the District of
Utah, pending approval by FERC of the settlement plan described below.
Riverside also filed a complaint with the FERC. CFC intervened in the FERC
proceeding in October 1997. A hearing before an administrative law judge was
scheduled for May 25, 1999. The judge extended the hearing date to allow the
parties to try to reach a settlement. In July 1999, Deseret, Riverside and
CFC reached an agreement with respect to the settlement of the Riverside FERC
and Utah state litigation. Under the terms of the agreement, Deseret and
Riverside agreed to amend the PSA with respect to rates, terms and conditions
for service thereunder. On July 29, 1999, Riverside paid Deseret $25.1
million to buy down the rate Deseret charges Riverside for power commencing
in July 2002. In order to facilitate the settlement, CFC issued an
irrevocable letter of credit to Riverside for the account of Deseret in the
amount of $25.1 million, which may be drawn upon by Riverside upon the
occurrence of certain events more particularly described therein, including
Deseret's failure to perform certain obligations under the PSA and the FERC's
failure to approve the settlement. Any draw under the letter of credit
converts to a long term loan to Deseret which is repayable upon the terms set
forth in a reimbursement agreement.
Deseret and Riverside filed the amended PSA and a Settlement Agreement to
which CFC is a party with the FERC on July 28, 1999, together with an
Uncontested Motion for Interim Rate Approval. FERC approved the Motion on
August 3, 1999. Comments on the settlement must be filed by August 17, 1999
and reply comments are due on August 27, 1999. After the passage of the
comment period, the judge will certify the Settlement Agreement and amended
PSA to the FERC for approval if he finds that there are no factual issues
requiring a hearing. The Commission is expected to act within six months.
79
On March 24, 1998, the City of Anaheim, CA ("Anahaeim") commenced an action
against Deseret that was consolidated with the Riverside proceeding. Anaheim
also filed a complaint with the FERC. In January 1999, Deseret and Anaheim
agreed to a settlement of the FERC and civil actions. The settlement will not
significantly impact the revenue received by Deseret over the life of the
contract with Anaheim.
Deseret is current on its minimum payment obligations to CFC. During calendar
1998, Deseret made quarterly payments totaling $35.5 million to CFC. In
December 1998, Deseret made an excess payment of $2.0 million related to an
equipment lease and in February 1999 Deseret made a payment of $18.5 million
representing excess cashflow for calendar year 1998. The entire amount of
the excess payment received in February 1999 was applied to principal, since
that amount was related to calendar year 1998. CFC placed the loans to
Deseret on accrual status at a rate of 3.90% as of February 1, 1999. For
the month of February 1999, CFC accrued a total of $1.9 million of interest
income related to the Deseret loans. The rate at which interest accrues will
be adjusted from time to time as events require to reflect the current
estimate of the amount CFC will receive through December 31, 2025.
At May 31, 1999 and 1998, CFC had the following exposure to Deseret:
(Dollar amounts in millions) 1999 1998
Loans outstanding (1) $576.7 $329.5
Guarantees outstanding:
Tax-exempt bonds 3.2 4.1
Mine equipment leases 51.6 54.1
Bonanza plant lease - 258.0
Other (2) 12.6 -
Total guarantees 67.4 316.2
Total exposure $644.1 $645.7
_______________________
(1) From January 1, 1989 through May 31, 1999, CFC funded a total of
$444.8 million in cashflow shortfalls related to Deseret's debt service and
rental obligations guaranteed by CFC. All cashflow shortfalls funded by CFC
represent an increase to loans outstanding and also represent a decrease to
the principal amount of the obligations guaranteed by CFC.
(2) Other guarantees includes irrevocable letters of credit and a guarantee
of certain operations and maintenance expenses.
On March 31, 1999 and June 30, 1999, Deseret made payments of $8.6 million
representing the first two quarterly payments for calendar year 1999. A total
of $34.6 million is due from Deseret for minimum payments during calendar
year 1999.
(e) Saluda River Electric Cooperative ("Saluda") is a generation cooperative
located in Laurens, SC. Saluda experienced cashflow difficulties related to
its minority interest in the Catawba nuclear generating station. Saluda and
RUS agreed on the basic terms of a debt restructuring. As part of this
agreement, on April 15, 1999, CFC paid $36.6 million to the bond trustee to
defease the tax-exempt bonds it had guaranteed for Saluda. The bonds were
redeemed on August 15, 1999. On April 15, 1999, CFC received a cash payment
from Saluda and offset certain amounts Saluda had invested with CFC as part
of the transaction. CFC wrote off $20.9 million related to the Saluda
transaction. CFC had no exposure to Saluda after April 15, 1999.
(f) At May 31, 1999, one other borrower was in payment default to CFC on an
unsecured loan totaling $1.6 million. At May 31, 1998, two borrowers were in
payment default to CFC on secured and unsecured loans totaling $4.1 million.
(11) Segment Information
CFC operates in two business segments - rural electric lending and rural
telecommunications lending. Summary financial information relating to each
segment is presented below.
The information reviewed by management on a regular basis are the combined
financial statements and the stand-alone RTFC financial statements. The
information presented below includes the stand-alone RTFC financial statements
for the telecommunications systems, the combined financial statements as the
80
total and the difference between the RTFC and the combined is presented for
the electric systems. All activity is with electric or telecommunications
systems.
As stated previously in the business section, RTFC is an associate member of
CFC and CFC is the sole funding source for RTFC. RTFC borrows from CFC and
then relends to the telecommunications systems. RTFC pays an administrative
fee to CFC for work performed by CFC staff as part of the interest rate on
the loans from CFC. RTFC does not maintain a loan loss allowance, but CFC
maintains a loss allowance on its loans to RTFC.
(Dollar amounts in thousands)
For the year ended May 31, 1999
Electric Telecommunications Total
Systems Systems Combined
Income statement:
Income from loans $ 641,765 $ 149,038 $ 790,803
Cost of funds 519,289 144,820 664,109
Gross margin 122,476 4,218 126,694
Operating expenses 27,728 383 28,111
Loan loss provision 23,866 - 23,866
Other income 1,699 23 1,722
Net margin $ 72,581 $ 3,858 $ 76,439
Assets:
Loans outstanding $10,780,860 $2,710,339 $13,491,199
Other assets 250,582 183,471 434,053
Total assets $11,031,442 $2,893,810 $13,925,252
(Dollar amounts in thousands)
For the year ended May 31, 1998
Electric Telecommunications Total
Systems Systems Combined
Income statement:
Income from loans $ 546,910 $ 90,663 $ 637,573
Cost of funds 453,312 87,223 540,535
Gross margin 93,598 3,440 97,038
Operating expenses 23,296 305 23,601
Loan loss provision 19,027 - 19,027
Other income 7,806 - 7,806
Net margin $ 59,081 $ 3,135 $ 62,216
Assets:
Loans outstanding $ 8,754,445 $1,574,900 $10,329,345
Other assets 233,212 120,331 353,543
Total assets $ 8,987,657 $1,695,231 $10,682,888
(Dollar amounts in thousands)
For the year ended May 31, 1997
Electric Telecommunications Total
Systems Systems Combined
Income statement:
Income from loans $ 492,548 $ 90,663 $ 637,573
Cost of funds 406,858 87,223 540,535
Gross margin 85,690 3,440 97,038
Operating expenses 21,742 305 23,601
Loan loss provision 15,162 - 19,027
Other income 3,207 - 7,806
Net margin $ 51,993 $ 3,135 $ 62,216
81
(12) Gain on Sale of Land
During the year ended May 31, 1998, CFC sold land with a cost basis of $8.3
million for $13.5 million, resulting in a gain of $5.2 million.
(13) Combined Quarterly Financial Results (Unaudited)
Summarized results of operations for the four quarters of fiscal years 1999
and 1998 are as follows:
(Dollar amounts in thousands)
Fiscal Year 1999
Quarters Ended Total
August 31 November 30 February 28 May 31 Year
Operating income $180,143 $192,238 $200,098 $218,324 $790,803
Operating margin 16,748 17,893 20,740 19,336 74,717
Nonoperating income 745 337 251 389 1,722
Net margins 17,493 18,230 20,991 19,725 76,439
(Dollar amounts in thousands)
Fiscal Year 1998
Quarters Ended Total
August 31 November 30 February 28 May 31 Year
Operating income $150,477 $153,995 $161,656 $171,445 $637,573
Operating margin 9,119 14,657 15,153 15,482 54,411
Nonoperating income 592 435 750 834 2,611
Gain on sale of land 4,939 - - 255 5,194
Net margins 14,650 15,092 15,903 16,571 62,216
82