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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FEE REQUIRED $250.00
FOR THE FISCAL YEAR ENDED MAY 31, 1994
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
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NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DISTRICT OF COLUMBIA
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
52-0891669
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
WOODLAND PARK
2201 COOPERATIVE WAY, HERNDON, VA 22071
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE, IS 703-709-6700)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
-------------------------------- ------------------------
7.40% COLLATERAL TRUST BONDS, SERIES A, DUE 2007 NEW YORK STOCK EXCHANGE
9% COLLATERAL TRUST BONDS, SERIES O, DUE 2016 NEW YORK STOCK EXCHANGE
9 1/2% COLLATERAL TRUST BONDS, SERIES T, DUE 1997 NEW YORK STOCK EXCHANGE
8 1/2% COLLATERAL TRUST BONDS, SERIES U, DUE 1998 NEW YORK STOCK EXCHANGE
9% COLLATERAL TRUST BONDS, SERIES V, DUE 2021 NEW YORK STOCK EXCHANGE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE IN DEFINITIVE PROXY OR INFORMATION 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 COMMON OR VOTING STOCK.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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TABLE OF CONTENTS
PART NO. ITEM NO. PAGE
-------- -------- ----
I. 1. Business........................................................... 1
Members............................................................ 1
Loans and Guarantees............................................... 2
General.......................................................... 2
Loan and Guarantee Policies...................................... 6
Long-Term Loans to Utility Members............................ 6
Intermediate-Term Loans to Utility Members.................... 8
Short-Term Loans to Utility Members........................... 8
Loans to Telecommunication Borrowers.......................... 9
Loans to Associate Members.................................... 9
REA Guaranteed Loans.......................................... 10
Guarantees of Pollution Control Facility and Utility Property
Financings.................................................. 10
Guarantees of Lease Transactions.............................. 11
Guarantees of Tax Indemnifications............................ 11
Other......................................................... 11
CFC Financing Factors............................................ 11
Tax Status....................................................... 15
Investment Policy................................................ 15
Other Sources of Loans to CFC Members............................ 15
Employees........................................................ 15
The Rural Electric Systems......................................... 16
General.......................................................... 16
The REA Program.................................................. 16
Distribution Systems............................................. 17
Power Supply Systems............................................. 17
Regulation and Competition....................................... 18
Financial Information............................................ 19
Composite Financial Statements................................... 21
2. Properties......................................................... 25
3. Legal Proceedings.................................................. 25
4. Submission of Matters to a Vote of Security Holders................ 26
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
8. Financial Statements and Supplementary Data........................ 38
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 38
III. 10. Directors and Executive Officers of the Registrant................. 39
405. Compliance with Section 16(a) of the Exchange Act.................. 42
11. Executive Compensation............................................. 43
12. Security Ownership of Certain Beneficial Owners and Management..... 45
13. Certain Relationships and Related Transactions..................... 45
IV. 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 46
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PART I
ITEM 1. BUSINESS.
National Rural Utilities Cooperative Finance Corporation (the "Company" or
"CFC") was incorporated as a private, not-for-profit cooperative association
under the laws of the District of Columbia in April 1969. The principal purpose
of CFC is to provide its members with a source of financing to supplement the
loan programs of the Rural Electrification Administration ("REA") of the United
States Department of Agriculture. CFC makes loans primarily to its rural utility
system members ("Utility Members") to enable them to acquire, construct and
operate electric distribution, generation, transmission and related facilities.
Most CFC long-term loans to Utility Members have been made in conjunction with
concurrent loans from REA and are secured equally and ratably with REA'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's 1,039 members as of May 31, 1994, included 899 rural electric Utility
Members, virtually all of which are consumer-owned cooperatives, 71 service
members and 69 associate members. The Utility Members included 833 distribution
systems and 66 generation and transmission ("Power Supply") systems operating in
46 states and U.S. territories. At December 31, 1992, CFC's member rural
electric systems provided service to about 70% of the contiguous continental
land territory of the United States, serving approximately 12.2 million
consumers representing an estimated 28.8 million ultimate users of electricity
and owned approximately $60.8 billion (before depreciation of $16.4 billion) in
total utility plant.
Rural Telephone Finance Cooperative ("RTFC") was incorporated as a taxable
cooperative association in the state of South Dakota in September 1987. RTFC is
a controlled affiliate of CFC and was created for the purpose of providing
financing to its rural telecommunication members and affiliates. RTFC's bylaws
require that the majority of RTFC's Board of Directors be elected from
individuals designated by CFC. CFC is the sole source of funding for RTFC. See
Note 1 to Combined Financial Statements for summary financial information
relating to RTFC at May 31, 1994. As of that date, RTFC had 352 members.
Guaranty Funding Cooperative ("GFC") was organized in December 1991 as a
taxable cooperative Association owned by its member rural electric systems and
CFC to provide a source of funds for members to refinance their REA 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 REA. CFC is the sole
source of funding for GFC. See Note 1 to Combined Financial Statements for
summary financial information relating to GFC at May 31, 1994. As of May 31,
1994, GFC had four members.
Except as indicated, financial information presented herein includes CFC,
RTFC and GFC on a combined basis.
National Cooperative Services Corporation ("NCSC") was organized in 1981 as
a taxable cooperative, owned and operated by its member rural electric
distribution systems, to provide specialized financing and services to the
cooperative rural electric industry that CFC could not otherwise provide due to
competitive, regulatory or other reasons. NCSC has an independent Board of
Directors, with CFC providing all management services through a contractual
arrangement. CFC is the source for essentially all of NCSC's financing
capabilities through direct loans or, predominantly, providing credit
enhancements (guarantees) of debt issued by NCSC in the public and private
credit markets. NCSC's financial statements are not combined or consolidated
with CFC's.
MEMBERS
CFC currently has five classes of members: Class A -- cooperative or
nonprofit distribution systems; Class B -- cooperative or nonprofit power supply
systems which are federations of Class A or other Class B members; Class
C -- statewide and regional associations which are wholly-owned or controlled by
Class A or
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Class B members; Class D -- national associations of cooperatives; and Associate
Members -- nonprofit groups or entities organized on a cooperative basis which
are owned, controlled or operated by Class A, B or C members and which provide
nonelectric 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.
Membership in RTFC is limited to CFC and commercial or cooperative
corporations eligible to receive loans or other assistance from REA and which
are engaged (or plan to be engaged) in providing telephone or telecommunication
services to ultimate users and affiliates of such corporations.
Membership in GFC is limited to CFC and cooperative or nonprofit Utility
Member systems who have refinanced all or a portion of their FFB debt through
CFC.
Set forth below is a table showing by state or U.S. territory, at May 31,
1994, the total number of CFC, RTFC and GFC members (memberships in each other
have been eliminated and corporations which belong to more than one of CFC, RTFC
and GFC have been counted only once), the percentage of loans and the percentage
of loans and guarantees outstanding.
NUMBER LOAN AND
OF LOAN GUARANTEE
MEMBERS % %
------- ----- ---------
Alabama.............. 30 1.9% 2.2%
Alaska............... 23 1.2% 0.8%
American Samoa....... 1 0.0% 0.0%
Arizona.............. 19 1.0% 1.1%
Arkansas............. 26 3.4% 5.4%
California........... 10 0.3% 0.2%
Colorado............. 32 4.1% 4.2%
Delaware............. 1 0.3% 0.2%
District of
Columbia........... 6 1.0% 0.7%
Florida.............. 21 5.2% 8.1%
Georgia.............. 64 6.8% 4.7%
Guam................. 1 0.0% 0.0%
Idaho................ 14 0.6% 0.4%
Illinois............. 51 9.1% 6.3%
Indiana.............. 54 1.7% 2.7%
Iowa................. 92 2.1% 1.6%
Kansas............... 47 3.5% 3.0%
Kentucky............. 35 2.6% 3.9%
Louisiana............ 15 2.0% 1.4%
Maine................ 10 0.0% 0.0%
Maryland............. 2 1.1% 1.2%
Massachusetts........ 1 0.0% 0.0%
Michigan............. 23 0.9% 0.6%
Minnesota............ 67 3.0% 4.1%
Mississippi.......... 24 3.1% 3.0%
Missouri............. 66 3.6% 6.7%
Montana.............. 35 2.2% 1.6%
Nebraska............. 30 0.3% 0.3%
NUMBER LOAN AND
OF LOAN GUARANTEE
MEMBERS % %
------- ----- ---------
Nevada............... 5 0.1% 0.1%
New Hampshire........ 4 0.1% 0.1%
New Jersey........... 1 0.1% 0.1%
New Mexico........... 16 1.7% 1.2%
New York............. 14 0.2% 0.2%
North Carolina....... 45 4.4% 4.5%
North Dakota......... 30 0.2% 0.1%
Ohio................. 31 1.1% 0.8%
Oklahoma............. 51 3.6% 3.4%
Oregon............... 35 1.9% 1.4%
Pennsylvania......... 21 1.3% 1.1%
South Carolina....... 33 4.1% 3.5%
South Dakota......... 47 0.7% 0.5%
Tennessee............ 22 0.9% 0.6%
Texas................ 110 9.5% 7.8%
Utah................. 6 2.1% 5.3%
Vermont.............. 8 0.2% 0.1%
Virgin Islands....... 1 0.9% 0.6%
Virginia............. 20 2.9% 2.0%
Washington........... 21 1.3% 0.9%
West Virginia........ 3 0.0% 0.0%
Wisconsin............ 49 1.3% 1.0%
Wyoming.............. 18 0.4% 0.3%
------- ----- ---------
Sub-Total........ 1,391 100.0% 100.0%
===== ==========
Add Duplicates....... 4
-------
Total Members........ 1,395
=========
LOANS AND GUARANTEES
GENERAL
CFC provides its Utility Members with a source of financing to supplement
the loan programs of REA. CFC provides the majority of total non-REA direct
funding and guarantees obtained by members. CFC's
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interest rates on loans to its members are set to reflect the cost of its funds
allocated to such loans, operating and other expenses and a reasonable margin
(see "Loan and Guarantee Policies").
Substantially all long-term and some intermediate-term loans are secured,
while most short-term loans are unsecured. Long-term loans generally have
maturities of up to 35 years. Fixed rate long-term loans generally provide for a
fixed interest rate for terms of one to 30 years (but not beyond the maturity of
the loan). Upon expiration of the term, the borrower may select another fixed
rate term of one to 30 years or a variable rate. Variable rate long-term loans
have an interest rate which varies monthly as determined by CFC. Intermediate-
and short-term loans are made for terms not exceeding 60 months. CFC adjusts the
rate monthly on outstanding short-and intermediate-term loans. On notification
to borrowers, CFC may adjust the rate semimonthly. Telecommunication loans are
secured long-term fixed or variable rate loans with maturities generally not
exceeding 15 years and short-term unsecured loans. CFC has also provided
guarantees for tax-exempt financings of pollution control facilities and utility
properties constructed or acquired by its members and for members' obligations
under certain lease transactions (see "Loan and Guarantee Policies").
Set forth below is a table showing loans outstanding to borrowers as of May
31, 1994, 1993 and 1992, and the weighted average interest rates thereon and
loans committed but unadvanced to borrowers at May 31, 1994.
LOANS COMMITTED
BUT UNADVANCED AT
LOANS OUTSTANDING AND WEIGHTED AVERAGE INTEREST MAY 31, 1994
RATES THEREON AT MAY 31, (A)(B)
--------------------------------------------------------------------- -----------------
1994 1993 1992
----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Long-term fixed rate secured loans:
Distribution Systems(C).......... $ 1,502,454 7.69% $ 1,604,275 8.14% $ 2,148,974 8.93% $ 12,089
Power Supply Systems(C).......... 273,186 7.56% 179,384 7.80% 135,778 8.29% 9,705
Service Organizations(C)(D)...... 94,104 9.53% 90,090 9.85% 94,183 9.79% 11,461
Associate Members................ 1,606 10.25% 1,628 10.25% 1,648 10.25% --
Telecommunication
Organizations.................. 119,600 9.16% 130,552 9.33% 104,350 9.84% --
----------- ----------- ----------- -----------------
Total long-term fixed rate
secured loans............ 1,990,950 7.85% 2,005,929 8.27% 2,484,933 8.97% 33,255
----------- ----------- ----------- -----------------
Long-term variable rate secured
loans(E):
Distribution Systems............. 2,172,799 4.65% 1,975,784 4.63% 1,320,823 5.28% 807,848
Power Supply Systems............. 170,683 4.65% 178,095 4.63% 221,552 5.25% 436,147
Service Organizations(D)......... 39,487 4.65% 43,014 4.63% 6,931 5.25% 64,828
Associate Members................ 29,089 4.45% 26,098 4.38% 27,734 5.00% 47,412
Telecommunication
Organizations.................. 499,506 4.92% 288,234 4.75% 282,082 5.38% 366,269
----------- ----------- ----------- -----------------
Total long-term variable
rate secured loans....... 2,911,564 4.69% 2,511,225 4.64% 1,859,122 5.28% 1,722,504
----------- ----------- ----------- -----------------
Refinancing variable rate loans
guaranteed by REA:
Power Supply Systems............. 533,545 4.87% 297,724 3.94% 287,324 5.21% --
----------- ----------- ----------- -----------------
Intermediate-term secured loans:
Distribution Systems............. 4,112 4.90% 320 4.75% 412 5.38% 2,000
Power Supply Systems............. 21,316 4.90% 28,496 4.75% 152,871 5.38% 234,391
Service Organizations............ 2,099 4.90% 496 4.75% 1,501 5.38% 5,541
Telecommunication
Organizations.................. -- -- -- -- -- -- --
----------- ----------- ----------- -----------------
Total intermediate-term
secured loans............ 27,527 4.90% 29,312 4.75% 154,784 5.38% 241,932
----------- ----------- ----------- -----------------
Intermediate-term unsecured loans:
Distribution Systems............. 13,046 4.90% 10,873 4.75% 31,443 5.38% 10,695
Power Supply Systems............. 84,515 4.90% -- -- 2,740 5.38% 22,376
Service Organizations............ -- -- 11 4.75% 27 5.38% 70
Telecommunication
Organizations.................. 1,265 5.05% -- -- -- -- 1,303
----------- ----------- ----------- -----------------
Total intermediate-term
unsecured loans.......... 98,826 4.90% 10,884 4.75% 34,210 5.38% 34,444
----------- ----------- ----------- -----------------
Short-term loans(F):
Distribution Systems............. 276,373 4.90% 151,941 4.75% 130,891 5.43% 1,943,335
Power Supply Systems............. 14,048 4.90% 14,157 4.75% 3,438 5.38% 962,224
Service Organizations............ 11,812 4.90% 11,873 4.75% 14,335 5.38% 66,463
Associate Members................ 3,084 4.90% 1,856 4.75% 2,952 5.38% 16,201
Telecommunication
Organizations.................. 31,176 5.65% 21,370 5.50% 26,032 6.13% 114,172
----------- ----------- ----------- -----------------
Total short-term loans..... 336,493 4.97% 201,197 4.83% 177,648 5.52% 3,102,395
----------- ----------- ----------- -----------------
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LOANS COMMITTED
BUT UNADVANCED AT
LOANS OUTSTANDING AND WEIGHTED AVERAGE INTEREST MAY 31, 1994
RATES THEREON AT MAY 31, (A)(B)
--------------------------------------------------------------------- -----------------
1994 1993 1992
----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Nonperforming loans(G):
Distribution Systems............. $ 1,933 8.27% $ 11,164 10.20% $ 11,797 9.76% $ --
Power Supply Systems............. 27,948 4.75% 29,584 4.75% 5,225 5.38% --
Associate Members................ 12,961 9.00% 12,963 9.00% -- -- --
Telecommunication
Organizations.................. 2,098 6.13% 2,117 9.00% -- -- --
----------- ----------- ----------- -----------------
Total nonperforming
loans.................... 44,940 6.19% 55,828 6.99% 17,022 8.42% --
----------- ----------- ----------- -----------------
Restructured loans(H):
Distribution Systems............. 2,667 18.37% -- -- -- -- 3,000
Power Supply Systems............. 160,873 8.32% 149,685 7.86% 130,541 7.58% 50,000
Service Organizations............ 1,833 4.62% 2,000 4.63% -- -- --
Associate Members................ -- -- 2,666 4.46% 12,963 5.00% --
Telecommunication
Organizations.................. -- -- 18,592 4.77% 2,119 5.38% --
----------- ----------- ----------- -----------------
Total restructured loans... 165,373 8.44% 172,943 7.43% 145,623 7.32% 53,000
----------- ----------- ----------- -----------------
Total loans................ 6,109,218 5.87% 5,285,042 6.10% 5,160,666 7.13% 5,187,530
----------- ----------- ----------- -----------------
Less: Allowance for loan and
guarantee losses................. 188,196 172,571 157,571 --
----------- ----------- ----------- -----------------
Net loans.................. $ 5,921,022 $ 5,112,471 $ 5,003,095 $ 5,187,530
========= ========= ========= ==============
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(A) The interest rates in effect at August 1, 1994, were 8.15% for long-term
loans with a seven-year fixed rate term, 5.15% on variable rate long-term
loans and 5.40% on intermediate-and short-term loans. The rates in effect at
August 1, 1994, on loans to associate members were 8.15% for long-term loans
with a seven-year fixed rate term, 4.90% on long-term variable rate loans
and 5.40% on short-term loans. The rates in effect at August 1, 1994, on
loans to telecommunication organizations were 8.75% for long-term loans with
a seven-year fixed rate term requiring a 10% equity investment, 8.60% for
long-term loans with a seven-year fixed rate term requiring a 5% equity
investment, 5.35% on long-term variable rate loans requiring a 10% equity
investment, 5.20% on longterm variable rate loans requiring a 5% equity
investment, 5.60% on intermediate-term loans and 6.15% on short-term loans.
(B) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed or for which loan contracts have been
executed, but funds have not been advanced.
(C) During calendar year 1995, $141.8 million of such outstanding fixed rate
loans, which currently have a weighted average interest rate of 7.99% per
annum, will become subject to rate adjustment. During the first quarter of
calendar year 1994, long-term fixed rate loans totaling $52.9 million had
their interest rates adjusted. These loans will be eligible to readjust
their interest rate again during the first quarter of calendar year 1995 to
the lowest long-term fixed rate offered during 1994 for the term selected.
At January 1 and May 31, 1994, the seven-year long-term fixed rate was 6.55%
and 8.00%, respectively.
(D) CFC had loans outstanding to NCSC in each of the periods shown. Long-term
fixed rate loans outstanding to NCSC as of May 31, 1994, 1993 and 1992, were
$47.8 million, $49.0 million and $50.2 million, respectively. In addition,
as of May 31, 1994, CFC had unadvanced long-term fixed rate and long-term
variable rate loan commitments to NCSC in the amounts of $5.0 million and
$9.7 million, respectively.
(E) Included in long-term variable rate secured loans are $3.5 million, $2.5
million and $2.6 million in unsecured loans to one borrower at May 31, 1994,
1993 and 1992.
(F) All short-term loans are unsecured, except for $18.2 million, $31.6 million
and $23.2 million in loans outstanding at May 31, 1994, 1993 and 1992 that
are secured.
(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 relate to
the interest recognized by CFC from such loans.
(H) The rates on restructured loans are the weighted average of the effective
rates (based on the present value of scheduled future cashflows) as of the
dates shown and do not necessarily relate to the interest recognized by CFC
on such loans.
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Set forth below are the weighted average interest rates earned by CFC
(recognized in the case of nonperforming and restructured loans) on all loans
outstanding during the fiscal years ended May 31.
INTEREST RATES EARNED ON LOANS
1994 1993 1992
----- ----- -----
Long-term fixed rate......................... 8.63% 9.15% 9.16%
Long-term variable rate...................... 4.08% 4.99% 6.09%
Telecommunication organizations.............. 5.58% 6.32% 7.26%
Refinancing loans guaranteed by REA.......... 4.01% 4.09% 5.97%
Intermediate-term............................ 4.41% 4.93% 6.03%
Short-term................................... 4.38% 5.08% 6.18%
Associate members............................ 4.21% 4.74% 6.09%
Nonperforming................................ 1.19% 1.26% 7.96%
Restructured................................. 2.33% 1.92% 3.52%
All loans..................... 5.66% 6.54% 7.86%
At May 31, 1994, CFC's ten largest borrowers, which were all Power Supply
members, had outstanding loans from CFC totaling $461.6 million (excluding
$394.1 million of loans guaranteed by REA), which represented approximately 7.5%
of CFC's total loans outstanding. As of May 31, 1994, outstanding CFC guarantees
for these same ten largest borrowers totaled $2,117.7 million which represented
79.2% of CFC's total guarantees outstanding, including guarantees of the maximum
amounts of lease obligations at such date. On that date, no member had
outstanding loans and guarantees in excess of 10% of the aggregate amount of
CFC's outstanding loans and guarantees; however, one of the ten largest
borrowers, Deseret Generation & Transmission Co-operative ("Deseret"), was in
financial difficulty (see Note 10 to Combined Financial Statements). At May 31,
1994, loans outstanding to Deseret (excluding loans guaranteed by REA) accounted
for 1.8% of total loans outstanding and guarantees outstanding to Deseret
accounted for 12.6% of total guarantees outstanding. Total loans and guarantees
outstanding to Deseret equaled 26.8% of total Members' Equity, Members'
Subordinated Certificates and the allowance for loan and guarantee losses.
Set forth below is a table showing CFC's guarantees as of the dates
indicated. Substantially all guarantees have been provided on behalf of Power
Supply members.
CFC MEMBER GUARANTEES
MAY 31,
--------------------------------------
1994 1993 1992
---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Long-term tax-exempt bonds............................... $1,494,200* $1,576,230* $1,618,880*
Debt portions of leveraged lease transactions............ 646,472 700,841 739,303
Indemnifications of tax benefit transfers................ 414,512 436,860 404,680
Other guarantees......................................... 100,643 99,800 113,211
---------- ---------- ----------
Total..................................... $2,655,827 $2,813,731 $2,876,074
========= ========= =========
- - ---------------
* Includes $1,214.6 million, $1,120.8 million and $1,068.0 million at May 31,
1994, 1993 and 1992, 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 $382.9 million, $358.6 million and $361.4 million of
such bonds outstanding at May 31, 1994, 1993 and 1992, respectively, at any
time on seven days' notice, in the case of $289.5 million, $233.2 million and
$236.3 million outstanding at May 31, 1994, 1993 and 1992, 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
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basis). CFC has agreed to purchase any such bonds that cannot be remarketed.
Since the inception of the program CFC has not been required to purchase any
such bonds.
Loan Contingencies
CFC maintains a loan and guarantee loss allowance to cover losses that may
be incurred in the course of lending or extending credit enhancements. The
allowance is periodically evaluated by management with the Board of Directors.
CFC classifies a loan as nonperforming if interest or principal payments
are contractually past due 90 days or more, repayment in accordance with the
original terms is not expected due to court order or ultimate repayment is
otherwise not expected. Loans in which the original terms have been modified as
a result of a borrower's financial difficulties are classified as restructured.
Interest income on nonperforming loans is recognized on a cash basis as long as
CFC believes the collateral value supports the outstanding principal balance.
LOAN AND GUARANTEE POLICIES
Long-Term Loans to Utility Members
CFC makes long-term loans to both distribution and power supply members.
CFC's financial tests for determining the eligibility of a Utility Member
initially to receive a long-term loan from CFC historically included two ratios,
the Times Interest Earned Ratio ("TIER") and the Debt Coverage Ratio ("DSC").
TIER is the ratio of (x) net margins and patronage capital as defined under "The
Rural Electric Systems -- Financial Information" plus interest on longterm debt
(including all interest charged to construction) to (y) interest on long-term
debt (including all interest charged to construction). DSC is the ratio of (x)
net margins and patronage capital plus interest on long-term debt (including all
interest charged to construction) plus depreciation and amortization expense to
(y) long-term debt service obligations. In applying the tests, obligations under
contracts providing for payment whether or not the purchaser in fact receives
electric power from the seller, guarantees and other contingent obligations are
not considered debt, nor is interest on the proposed CFC loan given effect. In
determining the eligibility of a member for a longterm loan, each of the above
ratios is averaged for the best two of three calendar years preceding the date
of determination, resulting in the "Average TIER" and "Average DSC".
Under CFC's historical lending policy, a member distribution system with an
Average TIER and an Average DSC of at least 1.50 and 1.25, respectively, was
generally eligible for a long-term mortgage loan from CFC. Under new lending
criteria, established in early 1994, distribution systems must instead generally
achieve an Average Modified DSC (as described herein) of 1.35. The new DSC (also
called the "Modified DSC" or "MDSC") calculation is the ratio of (x) operating
margins and patronage capital plus interest on long-term debt (including all
interest charged to construction) plus depreciation and amortization expense
plus Non-operating Margins-Interest plus cash received in respect of generation
and transmission and other capital credits to (y) longterm debt service
obligations. The distribution systems will also be required to have achieved a
20% ratio of equity to total assets at the end of the preceding calendar year
(the "Equity" test). The average MDSC is computed using the average of the best
two of three calendar years' ratios preceding the date of determination. The
borrower is required to maintain these ratios at or above the minimum loan
eligibility requirements as long as there is a balance outstanding on the loan.
Under present REA policy, a system which meets the REA concurrent mortgage
requirement for Average TIER and Average DSC, 1.50 and 1.25, respectively, will
generally be required to borrow a portion of its financial requirements from a
supplemental lender. The extent of the supplemental loan required generally
reflects the revenue productivity of the borrower's investment in plant, as
measured by the ratio of its investment in plant to its operating revenues (the
"plant-revenue ratio"). REA regulations, however, permit borrowers which meet
certain rate disparity, consumer income or extremely high rate tests to qualify
for 100% REA loans. Further, the Administrator of REA has the authority to
approve 100% REA loans according to new qualifications established in 1993, or
at his/her discretion on a case-by-case basis.
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It is anticipated that many CFC loans to distribution systems will continue
to be made in conjunction with loans by REA. However, in addition to making
concurrent loans, CFC's loan policy permits it to make 100% loans to member
systems which meet the applicable minimum borrowing requirements. As of May 31,
1994, CFC had a total of $407.7 million in long-term loans committed and
outstanding to 26 Utility Members which did not have long-term REA loans
outstanding. These systems have either prepaid their REA loans or have never
incurred any REA debt.
Under CFC policy, a member Power Supply system having Average TIER and
Average DSC of at least 1.0 in each case is eligible for a long-term loan from
CFC. Loans have been made both for additions to or acquisition of existing power
supply facilities and in connection with the construction of new power supply
projects. Loans have also been made in connection with the termination costs
associated with certain plant construction for cancelled power supply projects.
However, most loans to CFC member Power Supply systems for new generating plants
and transmission facilities have been made by other lenders (principally the
FFB, which has typically offered rates lower than CFC's) under repayment
guarantees from REA, with REA's rights as guarantor secured by a mortgage on the
system's properties.
Under the REA mortgage, borrowers are required to design their rates to
cover all operating expenses, including all payments in respect of principal and
interest on notes when due, provide and maintain reasonable working capital and
to maintain a TIER of not less than 1.5 and a DSC of not less than 1.25.
CFC has made and may continue to approve long-term loans to borrowers which
fall below CFC's loan eligibility requirements. Such loans are made on a
case-by-case basis, based upon the submission by the borrower of, among other
things, a long-range financial forecast which indicates that the borrower will,
in future years, meet the applicable minimum borrowing requirements. During the
past five years, such loans accounted for 3.5% of the total dollar amount of
loans approved.
The rate charged for long-term fixed rate mortgage loans is designed to
reflect CFC's estimated overall cost of fixed rate capital allocated to its
fixed rate mortgage loans (including Capital Term and other Subordinated
Certificates, Collateral Trust Bonds, Medium-Term Notes, variable rate
borrowings supported by Interest Rate Exchange Agreements and Members' Equity)
plus increments estimated to cover general and administrative expenses, a
provision for loan and guarantee losses and a reasonable margin.
Long-term fixed rate loans provide for a fixed interest rate of periods for
one to 30 years. Upon expiration of the interest rate period, the borrower may
select another fixed rate term of one to 30 years (but not beyond the maturity
of the loan) or in certain instances may repay the loan or convert to another
interest rate program.
CFC also makes long-term loans with variable interest rates. Such loans are
funded primarily from available short-term sources, and the rate is adjusted
monthly to reflect CFC's cost of capital raised to fund these loans plus
increments estimated to cover general and administrative expenses, a provision
for loan and guarantee losses and the maintenance of a reasonable margin.
A borrower may convert a long-term loan from the variable rate to a fixed
rate at any time with no fee. Some fixed rate loans may be converted to variable
rate loans at any time, subject to the payment of a conversion fee and in
certain cases regulatory approval.
Prepayment of concurrent loans, where permitted by CFC and REA, or
otherwise agreed to by CFC and REA, will be apportioned pro-rata between REA and
CFC based on the respective balances of their concurrent loans outstanding as of
the date of prepayment. Prior to January 1, 1994, no fee was required on the
prepayment of a standard seven-year fixed rate loan that was prepaid during a
repricing cycle. Now all prepayments except those required to maintain the
original REA/CFC concurrent loan proportions will be subject to a prepayment
fee.
Until December 1993, most long-term borrowers were required to purchase
from CFC subordinated loan capital term certificates in an amount up to 7% of
the loan amount. These certificates amortize along with the loan. For all loans
advanced after December 1993, distribution systems may be required to purchase
subordinated loan capital term certificates in an amount up to 3% of the loan
amount or may not be required to
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purchase any certificates depending upon the borrower's leverage ratio with CFC
(the ratio of the outstanding and available loan funds to subordinated
certificates and allocated but unretired patronage capital), including the new
loan. Power supply members are required to purchase the certificates in amounts
up to 12% of the loan amount.
Beginning with loan applications received after May 31, 1984, the initial
interest rate for all advances is fixed when loan funds are first advanced.
Initial rates for loans approved prior to such date were fixed at the time of
CFC's approval, which generally preceded the first advance by at least a year.
Beginning with loans approved after December 31, 1987, each advance made under a
long-term fixed rate loan commitment bears the fixed interest rate in effect at
the time of the advance.
CFC long-term loans made in conjunction with concurrent REA loans are
generally for terms of 35 years and under present policy are payable, after a
short period during which interest only is payable, in level quarterly
installments which include both accrued interest and a portion of the principal.
Substantially all of CFC's present long-term mortgage loans to Utility Members
are secured by a first mortgage lien upon all property (other than office
equipment and vehicles) at any time owned by the borrower and future revenue. In
the case of members whose property is already subject to a mortgage to REA, REA
approval of the loan is required, even in the case of a 100% CFC loan, in order
to accommodate REA's mortgage lien so that CFC may share ratably in the security
provided by the mortgaged property. CFC and REA 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, REA has the sole
right to exercise remedies on behalf of all holders of mortgage notes for 30
days after default. If REA does not act within 30 days or if REA 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, REA retains substantial control over the
exercise of mortgage remedies.
Intermediate-Term Loans to Utility Members
Intermediate-term loans are made to members for terms of up to five years.
The interest rates on intermediate-term loans are adjusted monthly (and may be
adjusted semimonthly) to cover CFC's cost of capital raised to fund these loans
plus increments estimated to cover general and administrative expenses, a
provision for loan and guarantee losses and the maintenance of a reasonable
margin. Intermediate-term loans that are classified as secured are secured by a
first mortgage lien upon all property (other than office equipment and vehicles)
at any time owned by the borrower and future revenue. Borrowers are generally
not required to purchase additional subordinated certificates in CFC in
conjunction with an intermediate-term loan.
Short-Term Loans to Utility Members
CFC makes short-term line of credit loans to its member distribution
systems in amounts based on the system's monthly operation and maintenance
expenses and prior year's additions to plant. Power supply systems are eligible
for lines of credit in amounts up to a maximum of $50 million, based on the
system's quarterly operation and maintenance expenses. Loans made to
distribution and power supply systems under such lines of credit are generally
unsecured; are for a term not exceeding 12 months for power supply systems and
not exceeding 60 months for distribution systems; and may be prepaid without
premium and reborrowed in whole or in part during such term. Short-term loans
with terms greater than 12 months are required to be paid down to a zero balance
for five consecutive business days during each 12 month period.
The interest rates on short-term line of credit loans are adjusted monthly
(and may be adjusted semimonthly) to cover CFC's cost of capital raised to fund
these loans plus increments estimated to cover general and administrative
expenses, a provision for loan and guarantee losses and the maintenance of a
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reasonable margin. Borrowers are not required to purchase additional
subordinated certificates in CFC in conjunction with a short-term loan.
Loans to Telecommunication Borrowers
RTFC makes long-term loans to rural telecommunication companies for the
acquisition of telecommunication systems and the construction of telephone,
cellular and cable television systems.
Under RTFC policy, a telephone system with an Average DSC and an Average
TIER of 1.25 and 1.50, respectively, is eligible for a long-term mortgage loan
from RTFC. A cable television system with an Average DSC of 1.25 is eligible for
a long-term mortgage loan. A cellular telephone system is eligible for an
initial long-term mortgage loan if it can demonstrate the ability to achieve an
Average DSC of 1.10 prior to the fifth year of operations, and maintain that
requirement annually thereafter.
Security for RTFC long-term loans made to REA borrowers will consist of a
first mortgage lien on the assets and revenues of the system on a pari passu
basis with REA. Security from non-REA borrowers is considered on a case by case
basis but generally a loan will not exceed 80% of the estimated initial value of
the collateral. Long-term loans are made to RTFC borrowers for terms generally
up to 15 years and amortized quarterly over the life of the loan. Long-term
borrowers are required to purchase subordinated certificates from RTFC in
amounts equal to 5% or 10% of the long-term loan amount depending on the
borrower.
The interest rate on long-term loans can be fixed for the full term of the
loan or for a predetermined period. Alternatively, the borrower may elect a
variable rate which is adjusted monthly (and may be adjusted semimonthly). A
long-term variable rate loan may be converted to a fixed rate at any time. A
long-term fixed rate loan may be converted to a variable rate only on a rate
adjustment date.
RTFC provides intermediate-term equipment financing for periods up to five
years. These loans are provided on an unsecured basis and are used to finance
the purchase price and installation costs of central office equipment, support
assets and other communication products. Intermediate-term equipment financing
loans are generally made to operating telephone companies with an equity level
of at least 25% of total assets and which have achieved a DSC ratio for each of
the previous two calendar years of at least 1.75.
RTFC also provides short-term financing to telecommunication systems for
periods up to 60 months. These short-term loans are typically in the form of a
revolving line of credit which requires the borrower to pay off the balance for
five consecutive business days at least once during each 12 month period. These
loans are provided on an unsecured basis and are used primarily for normal
operating expenses. Lines of credit are available to telecommunication systems
generally in amounts not to exceed the greater of five percent of total assets
or 25% of equity in excess of 35% of total assets. Borrowers are not required to
purchase subordinated certificates in RTFC as a condition to receiving a line of
credit.
RTFC interest rates on all loans are set to cover the cost of funds, plus
an increment estimated to cover general and administrative expenses, a provision
for loan losses and the maintenance of a reasonable margin.
RTFC obtains funding for its loans through back-to-back borrowing from CFC,
which in turn has a security interest in all RTFC's loans.
Loans to Associate Members
CFC also makes loans to Associate Members, which are non-profit or
cooperative organizations owned, controlled or operated by a CFC Class A, B or C
Member or by CFC (sponsor) and engaged primarily in furnishing nonelectric
services within the sponsor's service area. Long-term loans are available to
Associate Members for periods of one to 35 years and are secured by the assets
financed or by a guarantee from a Utility Member, or both. The rate on these
loans, to the extent funding sources are available, may be fixed for the full
term of the loan or for a predetermined period. Alternatively, the borrower may
elect a variable rate which is adjusted monthly (and may be adjusted
semimonthly). Borrowers are required to purchase a subordinated certificate
equal to 10% of the loan amount.
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CFC also provides short-term loans to Associate Members for periods of up
to 60 months. The short-term loans are generally revolving lines of credit which
may require the borrower to pay off the balance for five consecutive business
days during each 12 month period. Borrowers are not required to purchase a
subordinated certificate as a condition to receiving a short-term loan.
Short-term interest rates are set monthly (and may be adjusted semimonthly).
These loans are generally unsecured but are guaranteed by an operating
distribution or power supply member of CFC.
Associate Member interest rates are set to cover the cost of funds plus an
increment estimated to cover general and administrative expenses, a provision
for loan losses and a reasonable margin.
REA Guaranteed Loans
In connection with legislation which allowed certain systems to prepay
existing borrowings from 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 on these notes are 100% guaranteed by REA. Under REA
regulations, the note rate may not exceed the rate borne by the system's prepaid
borrowings from the FFB adjusted to reflect savings accrued since prepayment of
the note compared with the rate on the prepaid borrowing. The systems are
required to pay service fees to CFC in connection with these transactions. Most
of these loans that have not been sold in public offerings have been transferred
to GFC. In addition, CFC services $589.1 million of these loans held in trust
which have been sold in public offerings.
Guarantees of Pollution Control Facility and Utility Property Financings
CFC has guaranteed debt issued in connection with the construction or
acquisition by CFC members of pollution control, solid waste disposal,
industrial development and electric distribution facilities. Such debt is issued
by governmental authorities and the interest thereon is exempt from Federal
income taxation. The proceeds of the offering are made available to the member
system, which in turn is obligated to pay the governmental authority amounts
sufficient to service the debt. The debt, which is guaranteed by CFC, may
include short-and long-term obligations.
In the event of a default by a system for nonpayment of debt service, CFC
is obligated to pay any required amounts under its guarantee and the bond issue
will not be accelerated so long as CFC performs under its guarantee. The system
is required to repay, on demand, any amount advanced by CFC pursuant to its
guarantee. This repayment obligation is secured by a common mortgage with REA 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.
In connection with these transactions, the systems generally must purchase
from CFC unsecured subordinated certificates in an amount up to 12% of the
principal amount guaranteed and maturing at the final maturity of the related
debt (but not less than 20 years). These certificates generally bear interest at
the greater of the 34-year FFB interest rate, the interest rate on the longest
maturity of the debt being guaranteed or 90% of the rate on the loan from CFC
used to purchase the certificate. In addition, if a debt service reserve fund is
created by CFC to secure the debt being issued, the system buys an additional
subordinated certificate, maturing at the time of the final maturity of the
debt, in the amount of such reserve. No interest is paid on such certificate,
but any earnings from investments held by the trustee of such debt service
reserve funds will be credited against the system's debt service obligations.
The system is also required to pay to CFC initial and/or on-going servicing fees
in connection with these transactions.
Certain guaranteed long-term debt bears interest at variable rates which
are adjusted at intervals of one to 270 days, weekly, each five weeks or
semiannually 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 for purchase at par the debt when it bears interest at
a variable rate and CFC has committed to purchase debt so tendered if it cannot
otherwise be
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remarketed. While CFC holds the securities, the cooperative will pay interest to
CFC at its intermediate-term loan rate.
Guarantees of Lease Transactions
CFC has a program of lending to or guaranteeing debt issued by NCSC in
connection with leveraged lease transactions. In such transactions, NCSC has
lent money to an industrial or financial company (a "Lessor") for the purchase
of a power plant (or an undivided interest therein) or utility equipment which
was then leased to a CFC member ("the Lessee") under a lease requiring the
Lessee to pay amounts sufficient to permit the owner of the property to service
the loan. The loans were made on a non-recourse basis to the Lessor but were
secured by the property leased and the owner's rights as Lessor. NCSC borrowed
the funds it lent either under a CFC guarantee or on an interim basis directly
from CFC and purchased from CFC a subordinated certificate in an amount up to
12% of the amount CFC guaranteed or lent. The subordinated certificates
generally bear interest at a rate equal to the FFB rate for 34-year loans or 90%
of CFC's loan rate and are repaid proportionally as the amount guaranteed
decreases. NCSC is also obligated to pay administrative and/or guarantee fees to
CFC in connection with these transactions. Such fees are reimbursed to NCSC by
the Lessee in each transaction.
Guarantees of Tax Indemnifications
CFC has also guaranteed members' obligations to indemnify against loss of
tax benefits in certain tax benefit transfers. 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 REA by a first lien on substantially all the
member's property to the extent of any cash received by the member at the outset
of the transaction. The remainder would be treated as an intermediate-term loan
secured by a subordinated mortgage on substantially all of the member's
property. Due to changes in Federal tax law, no further guarantees of this
nature are anticipated. In connection with these transactions, the members
purchased from CFC an unsecured subordinated certificate in an amount up to 12%
of the amount guaranteed.
Other
CFC may provide other loans and guarantees as requested by its members.
Such loans and guarantees will generally be made on a secured basis with
interest rates and guarantee fees set to cover CFC's cost of capital, general
and administrative expenses, a provision for loan and guarantee losses and
maintenance of a reasonable margin. In connection with these transactions, the
system generally must purchase from CFC an unsecured subordinated certificate in
an amount up to 12% of the amount guaranteed or lent.
CFC FINANCING FACTORS
Funding for the Company's loan programs are derived from Members' Equity
(net margins, retained as allocated but unreturned patronage capital), from the
sale of its Subordinated Certificates (see Note 3 to Combined Financial
Statements), Collateral Trust Bonds, Medium-Term Notes, Commercial Paper and
Bank Bid Notes. CFC's ability to obtain short-and long-term funds from external
sources as needed depends on such factors as its reputation in the investment
community, its financial condition and that of its members, the depth and
liquidity of the markets in which it participates, its ability to conduct its
operations to meet or exceed the financial standards of performance expected by
the investment markets and the credit rating agencies and the continued support
of its members.
Each year CFC allocates its net margins (operating margin plus nonoperating
income) among its members in proportion to interest earned by CFC from such
members within various loan pools. These allocations are evidenced by Patronage
Capital Certificates which bear no interest or dividends and have no stated
maturity. These amounts are available for use in CFC's operations pending their
retirement. CFC's current policy is to retire Patronage Capital Certificates
representing 50% of the prior year's allocation during the following year and
the remaining 50% after 15 years, if permitted by CFC's contractual obligations
and to the extent that the Board of Directors in its discretion may determine
from time to time that the financial
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condition of CFC will not be impaired as a result. The six years of unretired
allocations that are currently held by CFC will be retired over the next 15
years starting with the retirement to be made in August 1994. RTFC's current
policy is to retire 50% of current year's margins within 8 1/2 months of the end
of the fiscal year with the remainder to be retired at the discretion of RTFC's
Board of Directors. GFC's current policy is to retire 100% of current year's
margins shortly after the end of the fiscal year.
As a condition of membership, CFC members have subscribed to Capital Term
Certificates, which like CFC's other Subordinated Certificates are unsecured
subordinated obligations of CFC. They generally mature 100 years after issuance
and bear interest at the rate of 5% per annum. The purchase of Subordinated
Certificates may also be required as a condition of each long-term loan and
certain intermediate-term loans made by CFC to its members (Subordinated
Certificates issued in connection with loans made prior to June 1, 1983, earn 3%
annually, and Subordinated Certificates for loans approved on or after that date
are noninterest-bearing). Subordinated Certificates, bearing interest at various
rates, are also required to be purchased in connection with CFC guarantees of
member debt. The maturity of Subordinated Certificates purchased in connection
with loans and guarantees generally coincides with the maturity of the related
loan or guaranteed debt. Membership certificates and loan and guarantee
certificates represented 52% and 48%, respectively, of total Subordinated
Certificates outstanding at May 31, 1994.
To fund a portion of its long-term fixed rate loan program, CFC issues
intermediate-and long-term senior secured Collateral Trust Bonds and senior
unsecured Medium-Term Notes with differing maturities, interest rates and
redemption provisions. The Collateral Trust Bonds are secured by pledges of
eligible mortgage notes with a principal amount at least equal to the total
amount of bonds outstanding. If certain minimum eligibility ratios are not
maintained, the mortgage notes affected must be replaced with other eligible
collateral. In addition, Commercial Paper supported by an equal amount of
interest rate exchange agreements is used to fund long-term fixed rate loans
(see Note 5 to Combined Financial Statements).
The Company issues Commercial Paper through dealers and directly to members
and other eligible nonmember investors to provide funds for short-,
intermediate-and long-term variable rate loans to members, including REA
guaranteed loans, and temporarily to fund long-term fixed rate loans to members
prior to funding with long-term debt. Commercial Paper could also be used to
fund purchases of tax-exempt securities which CFC may be obligated to purchase
pursuant to its commitment to act as standby purchaser. In addition, CFC may
issue Commercial Paper in excess of its own funding needs in order to provide
its members an investment vehicle for their excess funds; CFC uses the proceeds
from such issuances to purchase short-term obligations of other issuers.
Commercial Paper outstanding at May 31, 1994, 1993 and 1992, net of discount
related to the issuance of dealer commercial paper, was approximately $3,429.0
million, $2,198.6 million and $2,043.8 million, respectively. The outstanding
commercial paper at May 31, 1994, 1993 and 1992 had average maturities of 36
days, 46 days and 44 days, respectively. The amount of such outstanding
Commercial Paper sold directly by CFC to its members and eligible nonmembers as
a percentage of total outstanding Commercial Paper was 31% as of May 31, 1994
versus 54% at May 31, 1993.
CFC also issues short-term Bank Bid Notes to fund its variable rate loans.
These bid notes are unsecured loan obligations. Bid note facilities are
uncommitted lines of credit for which CFC does not pay a fee. The amount of Bank
Bid Notes outstanding as of May 31, 1994, 1993 and 1992 was $209.0 million,
$335.0 million and $100.0 million, respectively.
As of May 31, 1994, CFC had two revolving credit agreements totaling
$2,900.0 million with 52 banks, including Morgan Guaranty Trust Company of New
York as Administrative Agent and Arranger and the Bank of Nova Scotia as
Managing Agent. These credit facilities were arranged principally to provide
liquidity support for CFC's outstanding Commercial Paper and the adjustable or
floating/fixed rate bonds which CFC has guaranteed for the benefit of its
members.
Under the respective revolving credit agreements, CFC can borrow up to
$2,030.0 million until June 3, 1996 (the "three-year facility"), and an
additional $870.0 million until May 26, 1995 (the "364-day facility"). Any
amounts outstanding will be due on those dates. In connection with the
three-year facility, CFC pays a per annum facility/commitment fee of .225 of 1%.
The per annum facility fee for the 364-day facility is .15 of
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1%. If CFC's short-term ratings decline, these fees may be increased by no more
than .2125 of 1%. Borrowings under both agreements 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 $1,334.4
million (increased each fiscal year by 90% of net margins not distributed to
members) and an average fixed charge coverage ratio over the six most recent
fiscal quarters of at least 1.025 and prohibit the retirement of patronage
capital unless CFC has achieved a fixed charge coverage ratio of 1.05 for the
preceding fiscal year. The credit agreements prohibit CFC from incurring senior
debt (including guarantees but excluding indebtedness incurred to fund REA
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, 1994 CFC was in compliance with all covenants and conditions.
As of May 31, 1994 there were no borrowings outstanding under the revolving
credit agreements. On the basis of the three-year facility, at May 31, 1994, CFC
classified $2,030.0 million of its notes payable outstanding as long-term debt.
CFC expects to maintain more than $2,030.0 million of notes payable outstanding
during the next 12 months. If necessary, CFC can refinance such notes payable on
a long-term basis by borrowing under the three-year facility, subject to the
conditions therein.
In addition to the revolving credit facilities at May 31, 1994, CFC also
had $610.0 million in separately negotiated 364-day lines of credit, documented
by a uniform line of credit agreement for which a commitment fee of .10 of 1% is
paid. The line of credit agreement contains the same financial covenants as the
revolving credit agreements and may be terminated upon 30 days notice by either
party. After such notice, the bank would not be obligated to lend.
Interest rates charged on loans by CFC include the cost of funds incurred
by CFC plus increments estimated to cover general and administrative expenses, a
provision for loan and guarantee losses and to provide margins in amounts
considered by CFC to be consistent with sound financial practice. While interest
rates are set to cover estimated costs and to provide reasonable margins, CFC
does not always match the maturity of its borrowings to those of its loans. CFC
generally finances its long-term loans to members through borrowings having
shorter maturities than the loans; however, CFC generally finances its fixed
rate loans with funds whose maturities coincide with, or exceed, the rate
adjustment cycle of the loan.
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Set forth below is a table showing CFC's outstanding borrowings and the
weighted average interest rates thereon as of the dates shown:
CFC BORROWINGS
AMOUNTS OUTSTANDING AT MAY 31,
----------------------------------------------------------------------------------
1994 1993 1992
---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Long-and intermediate-term debt:(A)
9 1/4% Series P Bonds, Due
1992(B)........................... $ -- $ -- $ 99,700
10 1/2% Series N Bonds, Due
1995(B)........................... -- -- 100,000
9 3/8% Series Q Bonds, Due
1995(B)........................... -- 149,800 149,800
9 5/8% Series R Bonds, Due
1996(B)........................... -- 99,600 99,600
9.85% Series S Bonds, Due 1996(B)... -- 99,700 99,700
9 1/2% Series T Bonds, Due 1997..... 150,000 149,800 149,800
8 1/2% Series U Bonds, Due 1998..... 149,800 149,800 149,800
7.40% Series A Bonds, Due 2007...... 2,819 6,319 8,619
9 3/4% Series F Bonds, Due
2009(B)........................... -- -- 76,769
Floating Rate Series E-2 Bonds, Due
2010.............................. 2,253 2,279 2,315
9% Series O Bonds, Due 2016......... 87,400 91,600 95,800
9% Series V Bonds, Due 2021......... 150,000 149,800 149,800
Medium-Term Notes and weighted
average interest rates............ 472,208 (6.99%) 456,538 (7.29%) 537,365 (7.90%)
---------- ---------- ----------
Total long-and intermediate-term
debt and weighted average
interest rates(C)............. 1,014,480(D) (8.06%) 1,355,236 (8.56%) 1,719,068 (8.90%)
Members' Subordinated Certificates,
including advance payments and
weighted average interest
rates(E).......................... 1,086,529 (4.46%) 1,066,755 (4.58%) 1,056,928 (4.17%)
---------- ---------- ----------
Total long-and intermediate-term
debt and Members' Subordinated
Certificates and weighted
average interest rates........ $2,101,009 (6.20%) $2,421,991 (6.81%) $2,775,996 (7.10%)
========= ========= =========
Short-term debt(F) and weighted
average interest rates(G)........... $3,637,975 (4.23%) $2,533,624 (3.14%) $2,143,815 (3.85%)
========= ========= =========
Total debt and weighted average
interest rates at May 31............ $5,738,984 (4.95%) $4,955,615 (4.93%) $4,919,811 (5.68%)
========= ========= =========
- - ---------------
(A) Net of $0.2 million, $1.5 million and $30.7 million principal amount of
bonds held in Treasury at May 31, 1994, 1993 and 1992, respectively, of
which $0.2 million, $1.5 million and $1.8 million, respectively, was
purchased in connection with CFC's deferred compensation program.
(B) Series N Collateral Trust Bonds were called July 2, 1992. Series P
Collateral Trust Bonds matured November 1, 1992. Series F Collateral Trust
Bonds were called September 3, 1992, at a premium of 4.07%. Series Q
Collateral Trust Bonds were called on June 16, 1993, at par. Series R
Collateral Trust Bonds were called on February 2, 1994, at par. Series S
Collateral Trust Bonds were called on April 18, 1994, at par.
(C) Excludes $2,030.0 million, $2,030.0 million and $1,750.0 million of
Commercial Paper classified as long-term debt as of May 31, 1994, 1993 and
1992, respectively (see Note 4 to Combined Financial Statements).
(D) Total long-and intermediate-term debt includes $200.8 million which will be
due or is expected to be redeemed, during fiscal year 1995.
(E) Excluding $107.1 million, $116.5 million and $128.0 million of Debt Service
Reserve Certificates, and $29.3 million, $32.4 million and $36.2 million of
subscribed but unissued Subordinated Certificates as of May 31, 1994, 1993
and 1992, respectively, since such funds are not generally available for
investing in earning assets.
(F) Net of discount; includes $2,030.0 million, $2,030.0 million and $1,750.0
million of Commercial Paper classified as long-term debt as of May 31, 1994,
1993 and 1992, respectively. Includes $209.0 million, $335.0 million and
$100.0 million of Bank Bid Notes at May 31, 1994, 1993 and 1992,
respectively (see Note 4 to Combined Financial Statements).
(G) Average interest rates are weighted on the basis of amounts of outstanding
borrowings without adjustment for bank credit compensation arrangements for
short-term borrowings.
14
17
Set forth below are the weighted average costs incurred by CFC on its
short-term borrowings (Commercial Paper and Bank Bid Notes) and on its long-term
borrowings (Collateral Trust Bonds, Medium-Term Notes and interest rate swaps)
for the period shown.
INTEREST COSTS ON CFC BORROWINGS
YEARS ENDED MAY 31,
-----------------------
1994 1993 1992
----- ----- -----
Short-term borrowings........................................ 3.67% 3.61% 5.23%
Long-term borrowings......................................... 8.63% 8.92% 9.40%
Total short-and long-term borrowings.................... 5.14% 5.80% 7.18%
TAX STATUS
In 1969, CFC obtained a ruling from the Internal Revenue Service ("IRS")
recognizing CFC's exemption from the payment of Federal income taxes under
Section 501(c)(4) of the Internal Revenue Code. Such exempt status could be
removed as a result of changes in legislation or in administrative policy or as
a result of changes in CFC's business. CFC believes that its operations have not
changed materially from those described to the IRS. CFC's affiliates RTFC and
GFC are taxable Subchapter T corporations.
INVESTMENT POLICY
Surplus funds are invested pursuant to policies adopted by CFC's Board of
Directors. Under present policy, surplus funds may be invested in direct
obligations of or obligations guaranteed by the United States or agencies
thereof, the World Bank, or certain high quality commercial paper, obligations
of foreign governments, Eurodollar deposits, bankers' acceptances, bank letters
of credit, certificates of deposit or working capital acceptances. The policy
also permits investments in certain types of repurchase agreements with highly
rated financial institutions, whereby the assets consist of eligible securities
listed above set aside in a segregated account. CFC typically has two types of
funds available for investment: (1) the debt service reserve funds held by the
collateral trust bond trustee under the Collateral Trust Bond Indenture between
CFC and Manufacturer Hanover Trust Company ("1972 Indenture"), used to make bond
interest and sinking fund payments; and (2) member loan payments and commercial
paper investments in excess of the daily cash funding requirements. Debt service
reserve funds are invested with maturities scheduled to coincide with interest
and sinking fund payment dates.
OTHER SOURCES OF LOANS TO CFC MEMBERS
In addition to CFC, there are other lending sources which supplement REA
financing, some of whose lending rates may be lower than CFC's. At May 31, 1994,
CFC had 5,443 long-term mortgage loans committed or outstanding to distribution
systems totaling approximately $4,965.5 million, and to CFC's knowledge other
lenders, excluding REA, had 407 such loans at May 31, 1994, totaling
approximately $475.0 million. At May 31, 1994, CFC had 118 committed or
outstanding long-term mortgage loans for power supply projects totaling
approximately $1,161.5 million and to CFC's knowledge other lenders, excluding
REA and FFB, had such loans committed or outstanding for power supply projects
in a total amount of approximately $2,750.0 million.
EMPLOYEES
At May 31, 1994, CFC had 157 employees, including engineering, financial
and legal personnel, management specialists, loan examiners, accountants and
support staff. CFC believes that its relations with its employees are good.
15
18
THE RURAL ELECTRIC AND TELEPHONE SYSTEMS
GENERAL
CFC's 899 rural electric Utility Members as of May 31, 1994, were drawn
from the approximately 937 (at December 31, 1992) rural electric utility systems
(the "systems") which were eligible for REA loans. A large proportion of the
eligible systems are members of CFC and information regarding these systems is
available in the Annual Statistical Reports of REA ("REA Reports"), therefore
commentary in this section is based on information about the systems generally,
rather than CFC members alone (see Note on page 19). However, the Composite
Financial Statements on pages 20 to 24 relate only to CFC Utility Members. At
December 31, 1992 and for the year then ended, CFC's members accounted for
approximately 96% of the total utility plant, 91% of the total equity, 92% of
the net margins and 92% of the total number of systems covered by REA Reports,
and CFC believes that its members are representative of the systems as a whole.
Although generally stable retail rates have been the historical pattern for
REA borrowers, in the 1970's and early 1980's rising costs of fuel, material,
labor, capital and wholesale power required rate increases by most of the
distribution systems. Increases in costs have also resulted in rate increases by
the power supply systems. Virtually all power contracts between power supply
systems and their member distribution systems provide for rate increases to
cover increased costs of supplying power, although in certain cases such
increases must be approved by regulatory agencies. During the last five years,
costs and rates have generally been stable.
THE REA PROGRAM
Since the enactment of the Rural Electrification Act in 1936, REA 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 REA loan program in 46 states and U.S.
territories, the percentage of farms and residences in rural areas of the United
States receiving central station electric service increased from 11% in 1934 to
almost 99% currently. Rural electric systems serve 11% of all consumers of
electricity in the United States and its territories. They account for
approximately 8% of total sales of electricity and about 6% of energy generation
and generating capacity.
In 1949, the Act was amended to allow REA to lend for the purpose of
furnishing and improving rural telephone service. At December 31, 1992, 899 of
REA's 957 telephone borrowers provided service to 6.1 million subscribers
throughout the United States and its territories (reporting information was not
available for the remaining 58 borrowers).
The Rural Electrification Act provides for REA to make insured loans and to
provide other forms of financial assistance to borrowers. REA is authorized to
make direct loans, at below market rates, to systems which are eligible to
borrow from it. REA is also authorized to guarantee loans which have been used
mainly to provide financing for construction of Bulk Power Supply Projects.
Guaranteed loans bear interest at a rate agreed upon by the borrower and the
lender (which generally has been the FFB). For telephone borrowers, REA also
provides financing through the Rural Telephone Bank (RTB). The RTB is a
government corporation providing financing at rates reflecting its cost of
capital. REA exercises a high degree of financial and technical supervision over
borrowers' operations. Its loans and guarantees are generally secured by a
mortgage on substantially all of the system's property and revenues.
Legislation has been proposed which would provide funding of $675 million
for the REA insured loan program for electric borrowers for FY 1995 and $498
million for the telephone borrowers through REA and the RTB. In addition, $300
million was proposed for the REA guaranteed electric loan program.
Legislation has been enacted which allows REA electric borrowers to prepay
their loans to REA 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 REA lending for a period of ten years, except in certain
specified instances. Regulations regarding the note buy-out, relating to
computation of discount and certain issues
16
19
concerning potential taxes on gains, were adopted on March 22, 1994. As of May
31, 1994, no borrowers have prepaid their REA loans under these rules.
DISTRIBUTION SYSTEMS
Distribution systems are local utilities distributing electric power,
generally purchased from wholesale sources, to consumers in their service areas.
Virtually all are locally-managed cooperative, non-profit associations, and most
have been in operation for at least 40 years. At December 31, 1992, the
approximate number of consumers served by REA electric borrowers was 12.2
million, representing an estimated 28.8 million ultimate users. Aggregate
operating revenues of the distribution systems from sales of electric energy for
the year ended December 31, 1992, totaled $14.0 billion, of which 65% was
derived from the sales of electricity to residential consumers (farm and
nonfarm), 31% from such sales to commercial and industrial consumers and the
remainder from sales to various other consumers.
The composite TIER of CFC member distribution systems increased to 2.19 in
1992 from 2.11 in 1991. The composite DSC ratio fell from 2.13 in 1991 to 2.07
in 1992. Composite equity as a percent of total assets for member distribution
systems increased from 38.18% at December 31, 1991 to 39.44% at December 31,
1992.
The cost of purchased wholesale power in 1992 amounted to 66.5% of the
total revenues of the distribution systems. Information from REA concerning the
amount of energy generated and purchased by REA borrowers including distribution
systems during the 12 months ended December 31, 1992 (1993 data is not
available) indicates that 18.4% was purchased from power companies including
investor-owned utilities and industrial and manufacturing corporations, 55.5%
from rural electric power supply systems and other distribution systems having
generating facilities, 18.8% from Federal agencies and 7.3% from publicly-owned
power suppliers, such as municipal systems.
Wholesale power supply contracts ordinarily guarantee neither an
uninterrupted supply nor a constant cost of power. Contracts with REA-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 (subject in certain
cases to regulatory approval). The wholesale power contracts permit the power
supply system, subject to approval by REA 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 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, or power supply systems
which do not borrow from REA generally have rates subject to regulation by the
Federal Energy Regulatory Commission. Contracts with Federal agencies generally
permit rate changes by the selling agency (subject, in some cases, to Federal
regulatory approval). In the case of many distribution systems, only one power
supplier is within a feasible distance to provide wholesale electricity.
POWER SUPPLY SYSTEMS
Power supply systems are utilities which purchase and generate electric
power and provide it wholesale to distribution systems for delivery to the
ultimate retail consumer. Of the 62 operating power supply systems financed in
whole or in part by REA or CFC at December 31, 1993, 61 were cooperatives owned
directly or indirectly by groups of distribution systems and one was government
owned. Of this number, 39 had generating capacity of at least 100,000 kilowatts,
and eight had no generating capacity. Five of the eight systems with no
generating capacity operated transmission lines to supply certain distribution
systems, one has applied for REA financing for its first transmission facility
and two are currently building their first transmission facilities. Certain
other power supply systems had been formed but did not yet own generating or
17
20
transmission facilities. At December 31, 1992, the 58 power supply systems
reporting to REA owned 145 generating plants with a total generating capacity of
approximately 29,597,000 kilowatts, or approximately 4.3% of the nation's
estimated electric generating capacity and served 700 REA distribution system
borrowers (representing an average for the year of approximately 8.3 million
consumers). Certain of the power supply systems which own generating plants
lease these facilities to others and purchase their power requirements from the
lessee-operators.
Of the power supply systems' total generating capacity in place as of
December 31, 1992, steam plants accounted for 94.2% (including nuclear capacity
representing approximately 10.2% of such total generating capacity), internal
combustion plants accounted for 5.5% and hydroelectric plants accounted for
0.3%. REA loans and loan guarantees as of December 31, 1992, have provided funds
for the installation of over 34,031,000 kilowatts, of which nuclear is
approximately 3,806,000 kilowatts, or 11.2% of the total, of which 979,000
kilowatts have officially been cancelled, or 2.9% of the total.
The high level of growth in demand for electricity experienced in the
1970's was not expected to decline in the 1980's and the power supply systems
continued their construction programs in anticipation of continued growth in
demand. During the 1980's, however, slower growth in power requirements of the
systems reduced the need for additional generating capacity in most areas of the
country. Thus, many areas are now experiencing a surplus of generating capacity
and, as a result, some power supply systems have significant amounts of fixed
costs for power plant investment not fully supported by increased revenues (see
Note 10 to Combined Financial Statements for further information concerning
certain CFC members experiencing this problem).
While the level of funds needed for new generating units is expected to be
low over the next few years, the need for transmission and capital additions
will continue to generate substantial long-term capital requirements. The power
supply systems are expected to continue to seek to satisfy these requirements
primarily through the REA loan guarantee program.
REGULATION AND COMPETITION
The degree of regulation of rural electric systems by state authorities
varies from state to state. The retail rates of rural electric systems are
regulated in 17 states (in which there are approximately 289 systems).
Distribution systems in these states account for 34% of the total operating
revenues and patronage capital of all distribution systems nationwide. State
agencies, principally public utility commissions, of 20 states regulate those
states' approximately 300 systems as to the issuance of long-term debt
securities. In six states (in which there are approximately 100 systems) state
agencies regulate, to varying degrees, the issuance of short-term debt
securities. Since 1967, the Federal Power Commission and its successor, the
Federal Energy Regulatory Commission ("FERC"), which regulates interstate sales
of energy at wholesale, have taken the position that it lacks jurisdiction to
regulate cooperative rural electric systems which are current borrowers from
REA. However, rural electric cooperatives that pay off their REA debt or never
incur REA debt may be regulated by FERC with respect to financing and/or rates.
To date, four power supply systems and one distribution system are regulated by
FERC.
Varying degrees of territorial protection against competing utility systems
are provided to distribution systems in 41 states (in which over 92% of the
distribution systems are located). Changes in administrative or legislative
policy in several states, or Federal legislation may result in more or in less
territorial protection for the distribution systems.
In addition to competition from other utility systems, some distribution
systems have expressed increasing concern about the loss of desirable suburban
service areas as a result of annexation by expanding municipal or franchised
investor-owned utility systems, regardless of the degree of territorial
protection otherwise provided by applicable law. The systems are also subject to
competition from alternate sources of energy such as bottled gas, natural gas,
fuel oil, diesel generation, wood stoves and self-generation.
The systems, in common with the electric power industry generally, may
incur substantial capital expenditures and increases in operating costs in order
to meet the requirements of both present and future
18
21
Federal, state and local standards relating to safety and environmental quality
control. These include possible requirements for burying distribution lines and
meeting air and water quality standards.
On November 15, 1990, amendments to the Clean Air Act of 1970 (the
"Amendments"), designed to cause utilities and others to reduce emissions,
became law. The Amendments contain a range of compliance options and a phase-in
period which will help mitigate the immediate costs of implementation. Many of
CFC's member systems already comply with the provisions of the Amendments. CFC
is currently monitoring the overall impact of the Amendments on individual
member systems, which must implement compliance plans and operating or equipment
modifications for Phase I of the Act (1995), and for those affected in Phase II
of the Act (2000). Compliance plans for member systems with units affected in
Phase I primarily involve fuel switching to low-sulfur coal. The trading of
emission allowances may also be an economical alternative in Phase II. Some
member systems originally believed to be affected by the Amendments have
developed strategies designed to minimize the Amendment's 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.
FINANCIAL INFORMATION
The systems differ from investor-owned utilities in that the vast majority
are cooperative, non-profit organizations operating under policies which provide
that rates should be established so as to minimize rates over the longterm.
Revenues in excess of operating costs and expenses are referred to as "net
margins and patronage capital" and are treated as equity capital furnished by
the systems' consumers. This "capital" is transferred to a balance sheet account
designated as "patronage capital", and is usually allocated to consumers in
proportion to their patronage. Such capital is not refunded to them for a period
of years during which time it is available to the system to be used for proper
corporate purposes. Subject to their applicable contractual obligations, the
systems may refund such capital to their members when doing so will not impair
the systems' financial condition. In the terminology of the Uniform System of
Accounts prescribed by REA for its borrowers, "operating revenues and patronage
capital" refers to all utility operating income received during a given period.
Similar to the practice followed by investor-owned utilities pursuant to
FERC procedures and as prescribed by REA, the systems capitalize as a cost of
construction the interest charges on borrowed funds ("interest charged to
construction") and the estimated unearned interest attributable to
internally-generated funds ("allowance for funds used during construction") used
in the construction of generation, and to a lesser extent transmission and
distribution facilities. This accounting policy, which increases net margins by
the amounts of these actual and imputed interest charges, is based on the
premise that the cost of financing construction is an expenditure serving to
increase the productive capacity and value of the utility's assets and thus
should be included in the cost of the assets constructed and recovered over the
life of the assets. In the case of power supply systems, REA has included in its
direct loans and guarantees of loans amounts sufficient to meet the estimated
interest charges during construction. If the foregoing accounting policy were
not followed, utilities would presumably request regulatory permission, if
applicable, to increase their rates to cover such costs. The amounts of interest
charged to construction and allowance for funds used during construction
capitalized by distribution systems are relatively insignificant. Because power
supply systems generally expend substantial amounts on long-term construction
projects, the application of this accounting policy may result in substantially
lower interest expense and in substantially higher net margins for such systems
during construction than would be the case if such a policy were not followed.
On the following pages are tables providing composite statements of
revenues, expenses and patronage capital of the distribution systems which were
members of CFC and the power supply systems which were members of CFC during the
five years ended December 31, 1992, and their respective composite balance
19
22
sheets at the end of each such year. The data for the year ended December 31,
1993 was not available from REA prior to the filing of this document.
- - ---------------
NOTE: Statistical information in the REA Reports has not been examined by
CFC's independent public accountants, and the number and geographical dispersion
of the systems have made impractical an independent investigation by CFC of the
statistical information available from REA. The REA Reports are based upon
financial statements submitted to REA, subject to year-end audit adjustments, by
reporting REA borrowers and do not, with minor exceptions, take into account
current data for certain systems, primarily those which are not active REA
borrowers. As of December 31, 1992, 159 REA borrowers had repaid their REA loans
in full and were accordingly not subject to REA reporting requirements.
20
23
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 REA or to
CFC by CFC Member Distribution Systems
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Operating revenues and patronage capital......... $13,921,515 $13,446,544 $12,819,204 $12,303,951 $11,790,389
----------- ----------- ----------- ----------- -----------
Operating deductions:
Cost of power(1)............................. 9,211,421 8,979,920 8,558,404 8,363,149 8,012,367
Distribution expense (operations)............ 346,183 327,787 307,649 289,525 271,697
Distribution expense (maintenance)........... 589,722 558,291 528,746 496,245 463,132
Administrative and general expenses(2)....... 1,287,224 1,215,158 1,137,154 1,060,641 974,777
Depreciation and amortization expense........ 828,966 775,049 724,951 676,706 630,872
Taxes........................................ 365,473 337,898 313,403 299,542 278,209
----------- ----------- ----------- ----------- -----------
Total.................................... 12,628,989 12,194,103 11,570,307 11,185,808 10,631,054
----------- ----------- ----------- ----------- -----------
Utility operating margins........................ 1,292,526 1,252,441 1,248,897 1,118,143 1,159,335
Non-operating margins............................ 157,912 175,993 201,798 202,183 163,528
Power supply capital credits(3).................. 219,638 201,708 163,580 135,394 165,399
----------- ----------- ----------- ----------- -----------
Total.................................... 1,670,076 1,630,142 1,614,275 1,455,720 1,488,262
----------- ----------- ----------- ----------- -----------
Interest on long-term debt(4).................... 749,594 763,070 741,465 691,738 634,692
Other deductions................................. 27,841 18,953 22,607 20,396 23,327
----------- ----------- ----------- ----------- -----------
Total.................................... 777,435 782,023 764,072 712,134 658,019
----------- ----------- ----------- ----------- -----------
Net margins and patronage capital................ $ 892,641 $ 848,119 $ 850,203 $ 743,586 $ 830,243
========== ========== ========== ========== ==========
TIER(5).......................................... 2.19 2.11 2.15 2.07 2.31
DSC(6)........................................... 2.07 2.13 2.16 2.09 2.26
Number of systems included....................... 821 819 820 822 823
- - ---------------
(1) Includes cost of purchased power, power production and transmission expense,
separately listed in the applicable REA Report.
(2) Includes sales expenses, consumer accounts and customer service and
informational expense as well as other administrative and general expenses,
separately listed in the applicable REA Report.
(3) Represents net margins of power supply systems and other associated
organizations allocated to their member distribution systems and added in
determining net margins and patronage capital of distribution systems under
REA accounting practices. Cash distributions of this credit have rarely been
made by the power supply systems and such other organizations to their
members.
(4) Interest on long-term debt is net of interest charged to construction, which
is stated separately as a credit in REA Reports. For a description of the
reasons for, and the effect on net margins and patronage capital of, the
accounting policies governing interest charged to construction and allowance
for funds used during construction, see "Financial Information". CFC
believes that amounts incurred by distribution systems for interest charged
to construction and allowance for funds used during construction are
immaterial relative to their total interest on long-term debt and net
margins and patronage capital.
(5) Determined by adding interest on long-term debt (in each year including all
interest charged to construction) and net margins and patronage capital and
dividing the total by 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.
21
24
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 REA OR TO
CFC BY CFC MEMBER DISTRIBUTION SYSTEMS
AT DECEMBER 31,
-----------------------------------------------------------------------
1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Assets and other debits:
Utility plant:
Utility plant in service................. $27,502,596 $25,846,550 $24,370,100 $22,754,138 $21,348,335
Construction work in progress............ 619,764 615,425 623,356 650,533 565,233
----------- ----------- ----------- ----------- -----------
Total utility plant.................. 28,122,360 26,461,975 24,993,456 23,404,671 21,913,568
Less: accumulated provision for
depreciation and amortization.......... 7,401,028 6,812,221 6,330,979 5,879,089 5,430,210
----------- ----------- ----------- ----------- -----------
Net utility plant.................... 20,721,332 19,649,754 18,662,477 17,525,582 16,483,358
Investments in associated organizations(1)... 2,585,621 2,405,290 2,255,370 2,123,391 2,005,165
Current and accrued assets................... 3,611,874 3,624,025 3,585,399 3,362,784 3,001,563
Other property and investments............... 343,734 323,445 311,937 248,245 225,738
Deferred debits.............................. 439,529 342,855 287,294 263,002 194,863
----------- ----------- ----------- ----------- -----------
Total assets and other debits........ $27,702,090 $26,345,369 $25,102,477 $23,523,004 $21,910,687
========== ========== ========== ========== ==========
Liabilities and other credits:
Net worth:
Memberships.............................. $ 98,450 $ 93,207 $ 91,827 $ 88,972 $ 86,143
Patronage capital and other
equities(2)............................ 10,826,559 9,966,135 9,275,621 8,460,725 7,887,028
----------- ----------- ----------- ----------- -----------
Total net worth...................... 10,925,009 10,059,342 9,367,448 8,549,697 7,973,171
Long-term debt(3)............................ 14,303,024 13,958,473 13,461,363 12,681,327 11,882,171
Current and accrued liabilities.............. 1,898,868 1,755,336 1,734,385 1,741,832 1,513,420
Deferred credits............................. 555,618 554,149 521,339 534,176 524,314
Miscellaneous operating reserves............. 19,571 18,069 17,942 15,972 17,611
----------- ----------- ----------- ----------- -----------
Total liabilities and other
credits............................ $27,702,090 $26,345,369 $25,102,477 $23,523,004 $21,910,687
========== ========== ========== ========== ==========
Number of systems included....................... 821 819 820 822 823
- - ---------------
(1) Includes investments in service organizations, power supply capital credits
and investments in CFC.
(2) Includes non-refundable donations or contributions in cash, services or
property from states, municipalities, other government agencies, individuals
and others for construction purposes separately listed in the applicable REA
Report.
(3) Principally debt to REA and includes $3,536,794,013, $3,435,994,499,
$3,283,689,097, $3,018,608,279 and $2,714,809,274 for the years 1992, 1991,
1990, 1989 and 1988, respectively, due to CFC.
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25
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 REA OR TO
CFC BY CFC MEMBER POWER SUPPLY SYSTEMS
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
Operating revenues and patronage capital.............. $9,111,434 $8,615,165 $8,553,618 $8,589,575 $8,442,827
---------- ---------- ---------- ---------- ----------
Operating deductions:
Cost of power(1).................................. 5,855,131 5,541,332 5,461,628 5,436,747 5,316,628
Transmission expense (operations)................. 12,959 11,445 9,451 8,109 7,634
Transmission expense (maintenance)................ 11,300 11,315 10,611 8,425 8,355
Administrative and general expenses(2)............ 390,521 363,646 338,256 312,364 337,499
Depreciation and amortization expenses............ 872,657 819,586 821,943 796,955 756,050
Taxes............................................. 233,420 239,588 182,279 233,891 225,205
---------- ---------- ---------- ---------- ----------
Total..................................... 7,375,988 6,986,912 6,824,168 6,796,491 6,651,371
---------- ---------- ---------- ---------- ----------
Utility operating margins............................. 1,735,446 1,628,253 1,729,450 1,793,084 1,791,456
Non-operating margins................................. 280,810 329,419 328,349 305,067 168,423
Power supply capital credits(3)....................... 30,771 28,405 12,452 19,259 16,496
---------- ---------- ---------- ---------- ----------
Total..................................... 2,047,027 1,986,077 2,070,251 2,117,410 1,976,375
---------- ---------- ---------- ---------- ----------
Interest on long-term debt(4)......................... 2,075,939 1,999,107 1,968,531 1,839,641 2,003,265
Other deductions...................................... 137,344 42,862 203,548 330,870 98,600
---------- ---------- ---------- ---------- ----------
Total..................................... 2,213,283 2,041,969 2,172,079 2,170,511 2,101,865
---------- ---------- ---------- ---------- ----------
Net margins and patronage capital..................... $ (166,256) $ (55,892) $ (101,828) $ (53,101) $ (125,490)
========= ========= ========= ========= =========
TIER(5)............................................... .92 .97 .95 .97 .94
DSC(6)................................................ 1.05 1.06 1.05 1.08 1.06
Number of systems included(7)......................... 50 49 50 51 54
- - ---------------
(1) Includes cost of purchased power, power production and transmission expense,
separately listed in the applicable REA Report.
(2) Includes sales expenses and consumer accounts expense and consumer service
and informational expense as well as other administrative and general
expenses, separately listed in the applicable REA Report.
(3) Certain power supply systems purchase wholesale power from other power
supply systems of which they are members. Power supply capital credits
represent net margins of power supply systems allocated to member power
supply systems on the books of the selling power supply systems. This item
has been added in determining net margins and patronage capital of the
purchasing power supply systems under REA 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 REA accounting practices.
(4) Interest on long-term debt is net of interest charged to construction.
Allowance for funds used during construction has been included in
non-operating margins. For a description of the reasons for, and the effect
on net margins and patronage capital of, the accounting policies governing
interest charged to construction and allowance for funds used during
construction, see "Financial Information". According to
23
26
unpublished information furnished by REA, interest charged to construction
and allowance for funds used during construction for CFC power supply
members in the years 1988-1992 were as follows:
ALLOWANCE FOR
INTEREST CHARGED FUNDS USED
TO CONSTRUCTION DURING CONSTRUCTION TOTAL
---------------- ------------------- -------------------
(DOLLAR AMOUNTS IN THOUSANDS)
1992 $ 54,093 $ 4,396 $ 58,489
1991 $ 49,495 $ 5,241 $ 54,736
1990 $ 55,670 $ 6,615 $ 62,285
1989 $100,380 $ 6,761 $ 107,141
1988 $169,045 $ 7,714 $ 176,759
(5) Determined by adding interest on long-term debt (in each year including all
interest charged to construction) and net margins and patronage capital and
dividing the total by interest on long-term debt (in each year including all
interest charged to construction). The TIER calculation includes the
operating results of four financially troubled power supply systems, without
which the composite TIER would have been 1.14, 1.14, 1.08, 1.09 and 1.06 for
the years ended December 31, 1992, 1991, 1990, 1989 and 1988, respectively.
(6) The ratio of (x) net margins and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization to (y) long-term debt service obligations. The
DSC calculation includes the operating results of four power supply systems
experiencing financial difficulties. Without these systems, the composite
DSC would have been 1.23, 1.25, 1.22, 1.21 and 1.23 for the years ended
December 31, 1992, 1991, 1990, 1989 and 1988, respectively.
(7) Twelve CFC power supply system members are not required to report to REA
since they are not currently borrowers from REA. These systems are either in
developmental stages or act as coordinating agents for their members. Their
inclusion would not have a material effect on this data. In addition, REA
has determined not to include data for Wabash Valley Power Association
("Wabash") and Colorado-Ute in their composite statements due to Wabash's
ongoing bankruptcy and the liquidation of Colorado-Ute (see Note 10 to
Combined Financial Statements).
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27
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 REA OR TO
CFC BY CFC MEMBER POWER SUPPLY SYSTEMS
AT DECEMBER 31,
-----------------------------------------------------------------------
1992 1991 1990 1989 1988
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
Assets and other debits:
Utility plant:
Utility plant in service............ $31,375,391 $29,433,524 $29,421,761 $29,777,550 $28,397,925
Construction work in progress....... 1,324,432 911,262 695,229 891,907 1,661,158
----------- ----------- ----------- ----------- -----------
Total utility plant............. 32,699,823 30,344,786 30,116,990 30,669,457 30,059,083
Less: accumulated provision for
depreciation and amortization..... 8,983,913 7,786,074 7,032,102 6,277,677 5,354,466
----------- ----------- ----------- ----------- -----------
Net utility plant............... 23,715,910 22,558,712 23,084,888 24,391,780 24,704,617
Investments in associated
organizations(1)...................... 865,162 740,554 654,419 661,338 696,334
Current and accrued assets.............. 4,076,841 4,239,802 4,094,006 4,399,010 3,971,761
Other property and investments.......... 1,717,451 1,503,526 1,447,443 1,121,803 934,573
Deferred debits......................... 1,879,607 1,445,868 2,236,808 2,303,752 2,426,167
----------- ----------- ----------- ----------- -----------
Total assets and other debits... $32,254,971 $30,488,462 $31,517,564 $32,877,683 $32,733,452
=========== =========== =========== =========== ===========
Liabilities and other credits:
Net worth:
Memberships......................... $ 246 $ 244 $ 250 $ 248 $ 258
Patronage capital and other
equities.......................... 315,793 593,505 544,872 690,481 1,241,015
----------- ----------- ----------- ----------- -----------
Total net worth................. 316,039 593,749 545,122 690,729 1,241,273
Long-term debt(2)....................... 28,838,255 27,060,357 27,989,365 25,671,597 27,845,960
Current and accrued liabilities......... 1,531,722 1,391,762 1,492,713 5,117,204 2,280,021
Deferred credits........................ 1,071,393 1,344,641 1,113,545 1,035,989 1,054,642
Miscellaneous operating reserves........ 497,562 97,953 376,819 362,164 311,556
----------- ----------- ----------- ----------- -----------
Total liabilities and other
credits....................... $32,254,971 $30,488,462 $31,517,564 $32,877,683 $32,733,452
=========== =========== =========== =========== ===========
Number of systems included(3)............... 50 49 50 51 54
- - ---------------
(1) Includes investments in service organizations, power supply capital credits
and investments in CFC.
(2) Principally debt to REA or debt guaranteed by REA and loaned by FFB.
(3) Twelve CFC power supply system members are not required to report to REA
since they are not currently borrowers from REA. These systems are either in
developmental stages or act as coordinating agents for their members. Their
inclusion would not have a material effect on these data.
ITEM 2. PROPERTIES.
CFC owns and operates a headquarters facility in Fairfax County in the
Commonwealth of Virginia. This facility consists of a six-story office building
with separate parking garage situated on four acres of land. The company also
owns an additional eight acres of unimproved land adjacent to the building. On
April 11, 1994, CFC purchased an additional 23 1/2 acres of unimproved land
adjacent to the building. There are no plans at this time for future use of
either parcel of land.
ITEM 3. LEGAL PROCEEDINGS.
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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, 1994.
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
For the year ended May 31:
Operating income................... $ 324,682 $ 336,387 $ 402,255 $ 428,974 $ 423,989
========= ========= ========= ========= =========
Operating margin................... $ 29,159 $ 38,352 $ 42,809 $ 28,564 $ 36,542
Nonoperating income................ 4,029 3,296 2,744 3,883 2,731
Gain on sale of building........... -- -- -- 15,858 --
Extraordinary loss(A).............. -- (3,161) (1,398) (2,800) --
---------- ---------- ---------- ---------- ----------
Net margins........................ $ 33,188 $ 38,487 $ 44,155 $ 45,505 $ 39,273
========= ========= ========= ========= =========
Fixed charge coverage ratio(A)..... 1.13 1.16 1.14 1.14 1.11
========= ========= ========= ========= =========
As of May 31:
Assets............................. $6,224,296 $5,464,144 $5,401,473 $5,139,624 $4,963,966
========= ========= ========= ========= =========
Long-term debt(B)(C)............... $2,841,220 $3,095,488 $2,971,074 $3,204,357 $3,113,006
========= ========= ========= ========= =========
Members' subordinated
certificates..................... $1,222,858 $1,215,547 $1,221,095 $1,181,010 $1,189,993
========= ========= ========= ========= =========
Members' equity.................... $ 260,968 $ 258,299 $ 246,320 $ 243,491 $ 227,201
========= ========= ========= ========= =========
Leverage ratio(D).................. 4.63 4.41 4.44 4.43 4.29
========= ========= ========= ========= =========
- - ---------------
(A) During the years ended May 31, 1993, 1992 and 1991 CFC paid premiums
totaling $3.2 million, $1.4 million, and $2.8 million respectively, in
connection with the prepayment of Collateral Trust Bonds. Margins used to
compute the fixed charge coverage ratio represent net margins before
extraordinary loss plus fixed charges. The fixed charges used in the
computation of the fixed charge coverage ratio consist of interest and
amortization of bond discount and bond issuance expenses.
(B) Includes commercial paper reclassified as long-term debt and excludes
portion of long-term debt due within one year (see Note 5 to Combined
Financial Statements).
(C) Excludes $200.8 million, $286.8 million, $494.5 million, $109.6 million and
$65.1 million in long-term debt that comes due, matures and/or will be
redeemed early during fiscal years 1995, 1994, 1993, 1992 and 1991,
respectively.
(D) In accordance with CFC's revolving credit agreements, the leverage ratio is
calculated by dividing debt and guarantees outstanding, excluding debt used
to fund loans guaranteed by the U.S. Government, by the total of Members'
Subordinated Certificates and Members' Equity.
CFC has had outstanding guarantees for its members' indebtedness in each of
the fiscal years shown above. Members' interest expense on such indebtedness was
approximately $124.3 million for the year ended May 31, 1994.
The Company does not have outstanding any common stock and does not pay
dividends. CFC retires Patronage Capital Certificates, which represent
allocations of CFC's net margins, 50% of an allocation during the next fiscal
year and expects to retire the remaining 50% after 15 years with due regard for
CFC's financial condition.
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29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion and analysis is designed to provide a better
understanding of the Company's combined financial condition and results of
operations and as such should be read in conjunction with the Combined Financial
Statements, including the notes thereto.
CFC was formed in 1969 by rural electric cooperatives to provide them with
a source of funds to supplement the financing provided by REA. The Company was
organized as a cooperative where each member receives one vote. Under CFC's
bylaws, the Board of Directors must be comprised of 22 individuals who are
either general managers or directors of the members. CFC was granted tax-exempt
status under Section 501(c)(4) of the Internal Revenue Code.
In 1987, RTFC was formed by CFC to provide a source of funds for the rural
telephone industry. Like CFC, RTFC is a cooperative. However, RTFC's bylaws and
voting members' agreement require that the majority of RTFC's Board of Directors
be elected from individuals designated by CFC. The remaining board positions are
filled by individuals nominated by the other RTFC members. Because CFC has
control of the RTFC Board, RTFC's financial condition and results of operations
are combined with those of CFC. CFC is the sole source of funding for RTFC.
(Unless stated otherwise, all references to CFC refer to the combined results of
CFC, RTFC and all other CFC controlled affiliates.)
The principal concept of CFC is to provide a mechanism through which the
rural electric cooperatives can achieve better access to the debt markets. Each
rural electric cooperative which joins CFC agrees to purchase subordinated
subscription certificates from CFC as described below.
CFC's operations consist of providing loans, financial guarantees and other
financial services to its rural electric, telephone and other related
organizations. In connection with any long-term loan or guarantee made by CFC to
or on behalf of one of its members, CFC generally requires that the member make
an additional investment in CFC by purchasing loan or guarantee certificates.
Like the original subscription certificates, the loan and guarantee certificates
are unsecured and subordinate to other debt.
The subscription and loan and guarantee certificates (together,
"Subordinated Certificates") along with related patronage capital provide CFC's
base capitalization. On a regular basis, CFC obtains debt financing in the
market by issuing long-term fixed rate or variable rate Collateral Trust Bonds,
intermediate-term fixed or variable rate Medium-Term Notes, Commercial Paper and
Bank Bid Notes. In addition, CFC obtains debt financing from its membership and
other qualified investors through the direct sale of its Commercial Paper and
Medium-Term Notes.
CFC's primary objective as a cooperative is to provide its members with the
lowest possible loan and guarantee rates. Therefore, CFC marks up its funding
costs only to the extent necessary to cover its operating expenses and a
provision for loan and guarantee losses and to provide for margins sufficient to
preserve interest coverage in light of CFC's financing objectives. To the extent
members contribute to CFC's base capital with Subordinated Certificates carrying
below-market interest rates, CFC can offer proportionally lower interest rates
on its loans to members.
CFC is required by the cooperative laws under which it is incorporated to
allocate its earnings to its members in proportion to the members' contributions
to those earnings. CFC thus allocates its net margins based on each member's
participation in loan programs during the year.
CFC's strength is closely tied to the performance of its member rural
electric and telephone utility systems due to the near 100% concentration of its
loan and guarantee portfolio in those industries. The following provides an
analysis of both CFC's performance and a discussion of the quality of CFC's loan
and guarantee portfolio.
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30
FINANCIAL CONDITION
At May 31, 1994, CFC had $6.2 billion in total assets. Approximately $5.9
billion or 95% of these assets consisted of loans made to CFC's members. The
remaining $0.3 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, CFC does not use funds to invest in debt or equity
securities.
At May 31, 1994, 84% of CFC's loan portfolio consisted of 35-year long-term
secured amortizing loans. The remaining 16% consisted of short-and
intermediate-term secured and unsecured lines of credit and long-term loans
guaranteed by the United States Government. Approximately 34.5% or $2.1 billion
in long-term loans carry a fixed rate of interest. All other loans, including
$3.0 billion in long-term loans, are subject to interest rate adjustment monthly
or semimonthly.
In addition to its loans, CFC had provided approximately $2.7 billion in
guarantees for its members at May 31, 1994. These guarantees relate primarily to
tax-exempt financed pollution control equipment and to leveraged lease
transactions for equipment and plant.
At May 31, 1994, CFC had also committed to lend approximately $5.2 billion
to its members. Most unadvanced loan commitments contain a material adverse
change clause. As many of these commitments are provided for operational backup
liquidity, CFC does not anticipate funding the majority of the commitments
outstanding.
CFC funds its assets through the sale of Subordinated Certificates,
retained equity and other debt instruments. As discussed previously,
Subordinated Certificates include both original membership subscription
certificates and loan and guarantee certificates, all of which are subordinate
to other CFC debt. At May 31, 1994, subscription certificates totaled $640
million. These certificates generally mature in 70 to 100 years and generally
pay interest at 5.0%. At May 31, 1994, loan certificates totaled $311 million
and carried a weighted average interest rate of 1.2%. At May 31, 1994, guarantee
certificates totaled $271 million and carried a weighted average interest rate
of 5.1%. Both the loan certificates and guarantee certificates are long-term
instruments which generally amortize at a rate equivalent to that of the loan or
guarantee to which they relate. On a combined basis, Subordinated Certificates
carried a weighted average interest rate of 4.5%. The issuance of zero percent
loan certificates is expected to exceed the issuance of 5.0% subscription
certificates. Therefore, management expects this average interest rate to
decline over time.
CFC's net margins are allocated each year to CFC's member borrowers. Prior
to fiscal year 1994, CFC's policy was to retire net margins on a first-in,
first-out seven year cycle. For fiscal years 1994 and beyond, net margins will
be retired 50% in the next fiscal year and the remaining 50% held for 15 years.
During the next 15 years, CFC will retire the existing six years of unretired
allocations representing net margins for fiscal years 1988 to 1993. The
unretired allocations (members' equity) do not earn interest and are junior to
all debt instruments, including Subordinated Certificates. At May 31, 1994, CFC
had $261 million in retained equity. Subordinated Certificates, in conjunction
with retained members' equity, supply CFC's base capitalization.
CFC enters the capital markets through the issuance of Collateral Trust
Bonds, Medium-Term Notes, Commercial Paper and Bank Bid Notes. At May 31, 1994,
CFC had $540 million in fixed rate long-term Collateral Trust Bonds outstanding.
Under its Collateral Trust Bond Indentures, CFC must pledge as collateral
mortgage notes from its borrowers evidencing loans equal in principal amount to
at least 100% of the outstanding Bonds. At May 31, 1994, CFC had pledged $718
million in mortgage notes. During the year, CFC effected the early redemption of
$350 million in Collateral Trust Bonds, at par. In February 1994, CFC had
entered into a new Collateral Trust Bond Indenture, with First Bank National
Association as trustee ("1994 Indenture"), under which future series of
Collateral Trust Bonds will be issued. Virtually all Collateral Trust Bonds were
offered to outside investors in underwritten public offerings.
At May 31, 1994, CFC had $472 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 $234
million at May 31, 1994. The remaining $238 million were sold to outside
investors.
28
31
At May 31, 1994, CFC had $3,429 million outstanding in Commercial Paper
with a weighted average maturity of 36 days. Commercial Paper notes are issued
with maturities up to 270 days and are unsecured obligations of CFC. Commercial
Paper outstanding to CFC's members totaled $1,061 million at May 31, 1994. The
remaining $2,368 million was sold to outside investors.
In addition CFC obtains funds from various banking institutions under Bank
Bid Note arrangements, similar to bank lines of credit. The notes are issued for
terms up to three months and are unsecured obligations of CFC. At May 31, 1994,
CFC had $209 million outstanding in Bank Bid Notes.
During the year, total assets increased $760 million. CFC continued to see
an increase in net loan balances outstanding, with an increase of $809 million
or 15.8%. Gross loans increased by a total of $824 million, partially offset by
an increase in the allowance for loan and guarantee losses of $16 million, over
the prior year. As a percentage of the portfolio, long-term loans (excluding
loans guaranteed by REA) represented 84% at May 31, 1994, compared to 89% at May
31, 1993. The drop in percentage is due to the increase of $236 million in loans
guaranteed by REA. Long-term fixed rate loans represented 41% and 44% of the
total long-term loans at May 31, 1994 and 1993. Loans converting from the fixed
rate to the variable rate or selecting a variable rate upon the expiration of
the current fixed interest rate period totaled $257 million for the year ended
May 31, 1994, approximately one-third of the $837 million of such conversions or
repricings for the year ended May 31, 1993. The loans moving from the fixed rate
to a variable rate were partially offset by $222 million and $371 million of
variable rate loans that converted to a fixed rate for the years ended May 31,
1994 and 1993. This resulted in a net change of $35 million and $466 million
from the fixed rate to the variable rate for the years ended May 31, 1994 and
1993, respectively.
The increase in total loans outstanding at May 31, 1994 was primarily due
to an increase of $400 million in long-term variable rate loans, an increase of
$236 million in loans guaranteed by REA and an increase in intermediate-and
short-term loans of $221 million offset by a decrease of $15 million in
long-term fixed rate loans and a decrease of $18 million in nonperforming and
restructured loans. The increase in long-term variable rate loans was primarily
due to an increase of $211 million to telecommunication systems for the
acquisition of telecommunication properties and to an increase of $197 million
to distributions systems for concurrent loan advances. The increase in REA
guaranteed loans was the result of three new refinancings of FFB debt. The
increase in intermediate-term loans was primarily due to an increase of $77
million to power supply systems for the financing of the premium charged in
connection with the prepayment of their FFB loans. The increase in short-term
loans was primarily due to an increase of $124 million to distribution systems
for interim construction financing.
The increase in net loans outstanding was partially offset by decreases to
cash on hand of $33 million and debt service investments of $12 million. CFC's
cash management policy is to minimize cash on hand to the extent possible. The
decrease in debt service investments was due to the redemptions of three
Collateral Trust Bond series during the year, reducing the required debt service
payments under the 1972 bond indenture. This amount will continue to decrease as
the remaining series are redeemed or mature and no future issues are planned
under the 1972 indenture. The 1994 Indenture, under which CFC plans to issue
future Collateral Trust Bonds, does not require the maintenance of a debt
service reserve fund. The decrease in other assets was primarily due to
refinancings of tax-exempt bonds guaranteed by CFC during the year. CFC did not
require a debt service reserve certificate to be purchased in connection with
the new guarantees.
During the year, CFC substantially increased its short-term debt
outstanding to fund both the increase in variable rate loans outstanding and the
early redemption of long-term debt. Notes Payable, which consists of Commercial
Paper and Bank Bid Notes, increased $1,104 million. This increase was a result
of CFC match-funding as to rate the additional variable rate loans originated
and converted during the year. At May 31, 1994, CFC's short-term debt consisted
of $2,368 million in dealer Commercial Paper, $1,000 million in Commercial paper
issued to CFC's members, $61 million in Commercial Paper issued to certain
nonmembers and $209 million in Bank Bid Notes. The Commercial Paper outstanding
to CFC's members and nonmembers decreased by $116 million and the amount of Bank
Bid Notes outstanding decreased by $126 million from the prior year. Commercial
Paper sold through CFC's dealers increased by $1,347 million to fund the
increase in loans outstanding, the decrease in long-term debt and the decreases
in the other types of short-term debt.
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32
CFC's short-term debt has a weighted average maturity of 36 days at May 31,
1994, a decrease from 46 days at May 31, 1993. Long-term debt consists in part
of Collateral Trust Bonds and Medium-Term Notes. As a result of the decrease in
fixed rate loans, CFC retired three Collateral Trust Bond series, resulting in a
net decrease in long-term debt of $340 million. As described in the footnotes to
the combined financial statements, CFC reclassifies a portion of its short-term
debt as long-term, as it has the ability (subject to certain conditions) to
refinance this short-term debt on a long-term basis under its revolving credit
agreements. CFC renegotiated its revolving credit agreements during the fourth
quarter of fiscal year 1993 and was able to reclassify $2,030 million in
short-term debt as long-term at May 31, 1994 and 1993. On May 27, 1994 CFC
extended the 364-day agreement which will now mature on May 26, 1995. CFC also
obtained an additional $610 million in separately negotiated 364-day lines of
credit.
In addition to the $764 million net increase in debt outstanding, CFC also
recorded a decrease in deferred income of $3 million. CFC collects a fee for any
fixed to variable rate conversions allowed. Financial accounting standards
require that this fee income be deferred and taken into income as interest on
loans over the original remaining original fixed-rate maturity period of the
converted loan. Due to the smaller volume of conversions experienced during the
year, deferred conversion fee income decreased from $38 million at May 31, 1993
to $35 million at May 31, 1994.
Off-balance sheet, CFC experienced an increase of $881 million in loan
commitments. This increase was primarily due to a $410 million increase in
short-term lines of credit and to an increase of $318 million in long-term
commitments to Power Supply borrowers and $287 million in long-term commitments
to telecommunication borrowers partially offset by a decrease of $104 million in
intermediate-term loan commitments.
CFC's leverage ratio increased during the year from 4.41 at May 31, 1993,
to 4.63 at May 31, 1994. The ratio is calculated after excluding all debt
associated with the funding of the REA guaranteed loans. Subordinated
Certificates are treated as equity in the calculation of the leverage ratio.
This increase was primarily due to an increase in loans outstanding to members
financed by the issuance of short-term debt and medium-term notes. There were no
other significant changes in CFC's financial condition. CFC contemplates that
its leverage ratio will continue to increase to facilitate its members'
financing requirements. CFC believes the leverage ratio will be maintained
within a range comparable to that of finance companies which have received
comparable ratings from major rating agencies.
MARGIN ANALYSIS
Fiscal Year 1994 versus 1993 Results
CFC uses an interest coverage ratio, instead of the dollar amount of gross
or net margins as a primary performance indicator since CFC's net margins are
subject to fluctuations as interest rates change. During the year ended May 31,
1994, CFC achieved a Times Interest Earned Ratio ("TIER") of 1.13. This was a
decrease from the prior fiscal year when a TIER of 1.16 (calculated before
extraordinary loss) was earned. Management has established a 1.10 TIER as its
minimum operating objective.
For the year ended May 31, 1994, operating income totaled $324.7 million, a
decrease of $11.7 million from the prior year. Operating income includes
interest earned on loans and conversion fees. The decrease in operating income
was due to the general decline in interest rates and CFC's passing on the
resulting savings on to its members. The decrease was due to a negative rate
variance of $37.0 million which was partially offset by a positive volume
variance of $25.3 million.
For the year ended May 31, 1994, cost of funds totaled $263.2 million, a
decrease of $2.2 million from the prior year. Included in cost of funds is
interest expense on CFC's Subordinated Certificates and other debt instruments
offset by interest earnings on debt service investments. The decrease in cost of
funds was due to a negative rate variance of $8.4 million partially offset by a
positive volume variance of $6.2 million.
For the year ended May 31, 1994, gross margins totaled $61.5 million. This
represented a decrease from the prior fiscal year of $9.5 million or a reduction
of 0.30% of average loans outstanding. This decrease was primarily a result of
the general reduction in rates due to a lower interest rate environment.
30
33
General and administrative expenses decreased 5.4% during the fiscal year
as compared to an increase of 0.2% incurred in the prior year. In addition, CFC
added $15.6 million to its allowance for loan and guarantee losses, an increase
of $0.6 million from the previous year.
Nonoperating income includes guarantee fee income and any other gains and
losses. Nonoperating income increased $0.7 million, from $3.3 million for the
year ended May 31, 1993 to $4.0 million for the year ended May 31, 1994.
During the year ended May 31, 1994, CFC retired three Collateral Trust Bond
series totaling $350.0 million, all at par.
Overall, CFC's net margins decreased $5.3 million from $38.5 million for
the year ended May 31, 1993 to $33.2 million for the year ended May 31, 1994. As
described earlier, this decrease was a result of a declining interest rate
environment partially offset by the reduction in operating expenses and the
increase in nonoperating income. CFC's achieved TIER of 1.13 represents a
decrease from the prior year's achieved TIER of 1.16. The decrease in achieved
TIER was a result of a larger decrease to net margins than to the cost of funds
which resulted from CFC's intentional reduction of the interest rate spread over
cost charged on its loans.
Fiscal Year 1993 versus 1992 Results
For the year ended May 31, 1993, operating income totaled $336.4 million, a
decrease of $65.9 million from the year ended May 31, 1992. The decrease was due
to a negative rate variance of $67.1 million partially offset by a positive
volume variance of $1.2 million.
For the year ended May 31, 1993, cost of funds totaled $265.4 million, a
decrease of $49.5 million from the prior year. The decrease was due to a
negative rate variance of $50.5 million partially offset by a positive volume
variance of $1.0 million.
For the year ended May 31, 1993, gross margins totaled $71.0 million. This
represented a decrease from the prior year of $16.4 million or a decrease of
0.33% of average loans outstanding. This decrease was a result of the lower
interest rate environment. The margins necessary to meet a desired interest
coverage ratio are lower in a declining interest rate environment.
During the year ended May 31, 1993, general and administrative expenses
increased by approximately 0.2%. In addition, CFC added $15 million to its
allowance for loan and guarantee losses during the year, a decrease of $12
million from the prior year.
During the year ended May 31, 1993, CFC retired three Collateral Trust Bond
series. One such series required a prepayment premium of $3.2 million, recorded
as an extraordinary loss. During the year ended May 31, 1993, CFC realized
interest savings on the retirement sufficient to cover the prepayment premium.
Overall, CFC's net margins decreased $5.7 million from $44.2 million for
the year ended May 31, 1992 to $38.5 million for the year ended May 31, 1993.
Again, this decrease was a result of a declining interest rate environment
offset somewhat by the reduction in the provision for loan and guarantee losses.
Although net margins decreased, CFC achieved a TIER of 1.16, an increase over
the prior year's TIER of 1.14.
The following is a summary of CFC's operating results as a percentage of
average loans outstanding for the last three fiscal years.
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INCOME STATEMENT AS A
PERCENTAGE OF AVERAGE LOANS OUTSTANDING
1994 1993 1992
----- ----- -----
Interest on loans.................................................... 5.66% 6.54% 7.86%
Less: Cost of funds.................................................. 4.58% 5.16% 6.15%
----- ----- -----
Gross operating margin.......................................... 1.08% 1.38% 1.71%
----- ----- -----
General and administrative expenses.................................. 0.29% 0.34% 0.34%
Provision for loan and guarantee losses.............................. 0.27% 0.29% 0.53%
----- ----- -----
Total expenses.................................................. 0.56% 0.63% 0.87%
----- ----- -----
Operating margin................................................ 0.52% 0.75% 0.84%
----- ----- -----
Nonoperating income(1)............................................... 0.07% 0.00% 0.03%
----- ----- -----
Net margins..................................................... 0.59% 0.75% 0.87%
===== ===== =====
TIER............................................................ 1.13 1.16 1.14
===== ===== =====
- - ---------------
(1) Nonoperating income includes the extraordinary losses in FY 1993 and 1992
resulting from the prepayment of debt.
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, 1994, 1993 and 1992.
LOANS AND GUARANTEES OUTSTANDING BY MEMBER CLASS
PERCENTAGE OF TOTAL
-----------------------------
1994 1993 1992
------- ------- -------
Distribution systems........................................... 45.52% 46.56% 45.79%
Power supply systems........................................... 44.34% 44.87% 46.53%
Service organizations.......................................... 2.15% 2.32% 1.96%
Telecommunication organizations................................ 7.46% 5.69% 5.16%
Associate Members.............................................. 0.53% 0.56% 0.56%
------- ------- -------
Total..................................................... 100.00% 100.00% 100.00%
======= ======= =======
CFC's members are distributed throughout the United States and its
territories, including 46 states, the District of Columbia, Guam, Samoa and the
U.S. Virgin Islands. At May 31, 1994, 1993 and 1992 no state or territory had
over 8.2%, 8.8%, and 8.5%, respectively, of total loans and guarantees
outstanding.
CFC believes that the risk of lending to a single industry is mitigated
somewhat by the fact that many of CFC's borrowers as utilities do not have
immediate competition in the sale of their services and the fact that the
services members provide are essential to the consumers.
Credit Concentration
In addition to the geographic diversity of the portfolio, CFC limits its
exposure to any one single 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, 1994, the total exposure outstanding to
any one
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borrower did not exceed 5.2% of total loans and guarantees outstanding and the
total loans and guarantees outstanding to the members of any one state or
territory did not exceed 8.2%. At May 31, 1994, CFC had $1,558 million in loans
outstanding and $2,584 million in guarantees outstanding to its largest 40
borrowers, representing 25% of total loans outstanding and 97% of total
guarantees outstanding. Credit exposure to the largest 40 borrowers represented
47% of total credit exposure at May 31, 1994, compared to 50% at May 31, 1993.
CFC's largest ten credit exposures represented 29% and 31% of total exposure at
May 31, 1994 and 1993, respectively.
Security Provisions
Except when providing lines of credit, CFC typically lends to its members
on a secured basis. At May 31, 1994, approximately 4.80% of CFC's total loans
and guarantees were unsecured obligations of CFC borrowers. CFC's long-term
loans are typically secured pro-rata with other secured lenders, if any
(primarily REA), by all assets and future revenues of the borrower. Short-term
loans are generally unsecured lines of credit. Guarantees are secured on a
pro-rata basis with other secured creditors, by all assets and future revenues
of the borrower or by the underlying financed asset. In addition to the
collateral received, CFC also requires that its borrowers set rates designed to
achieve certain financial ratios.
Portfolio Quality
The following table summarizes the key composite operating results of CFC's
two main borrower types, distribution and power supply systems, which together
comprise 89.9% and 91.4% of CFC's total loan and guarantee portfolio at May 31,
1994 and 1993 (the table has not been weighted based on CFC's outstanding loans
and guarantees to the borrowers):
CFC DISTRIBUTION MEMBER BORROWERS
COMPOSITE RESULTS
1992 1991 1990
----- ----- -----
TIER.................................................... 2.19 2.11 2.15
DSC..................................................... 2.07 2.13 2.16
Equity percentage....................................... 39.44% 38.18% 37.32%
CFC POWER SUPPLY MEMBER BORROWERS
COMPOSITE RESULTS
1992 1991 1990
----- ----- -----
TIER.................................................... 1.14 1.14 1.08
DSC..................................................... 1.23 1.25 1.22
Equity percentage....................................... 8.00% 7.36% 6.49%
- - ---------------
NOTE: The composite member data is as of December 31, of the year indicated.
Data for December 31, 1993, was not available prior to the date of this
filing. The power supply composite results have been presented without the
operating results of four systems experiencing financial difficulties.
Most CFC power supply borrowers sell the majority of their power under
all-power-requirements contracts with their member distribution systems. These
contracts allow, subject to regulatory requirements, 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.
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The effectiveness of the all-power-requirements contract is dependent on
the individual systems' right and ability to establish rates to cover all costs.
The boards of directors of most of CFC's power supply and distribution members
have the authority to establish binding rates for their consumer members. Some
states regulate rate setting and can therefore override the system's internal
rate setting procedures. However, most CFC members are not externally rate
regulated. CFC has 833 distribution members of which 586 are not regulated. Of
the remaining 247 distribution systems, 153 are regulated only on a streamlined
basis. At the power supply level, 47 of 66 members are not rate regulated.
During the past few years, power supply members have been increasing their
equity levels. Under recently changed REA underwriting standards, in order to
qualify for additional REA loan funds, power supply systems may be required to
maintain, or demonstrate an ability to reach, a 20% of assets equity level or
they must obtain guarantees from their affiliated distribution systems.
Nonperforming and Restructured Loans
CFC classifies a borrower as nonperforming when any one of the following
criteria are met: (1) principal or interest payments on any loan to the borrower
are past due 90 days or more, (2) the borrower is operating under protection of
the bankruptcy court, or (3) for some other reason, management does not expect
the timely repayment of principal or interest. Once a borrower is classified as
nonperforming, interest on its loans is recognized on a cash basis. Alternately,
CFC may choose to apply all cash received to the reduction of principal, thereby
forgoing interest income recognition. At May 31, 1994, nonperforming loans
totaled $44.9 million, a decrease of $10.9 million over the prior year-end. The
decrease was due to the reclassification of loans to two members totaling $8.9
million, (including $5.9 million reclassified as performing and $3.0 million
reclassified as restructured). At May 31, 1994, nonperforming loans represented
0.5% of total loans and guarantees outstanding.
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, 1994, restructured loans totaled
$165.4 million, a decrease of $7.5 million from the prior year. Restructured
loans in the amount of $111.5 million, $100.3 million and $81.2 million were not
accruing interest income at May 31, 1994, 1993 and 1992, respectively.
The majority of CFC's problem loan situations occurred prior to the past
five years as a result of excess capacity or cancelled capacity additions after
the plant and equipment construction cycle of the mid-1980s. Since 1986, when
power supply construction-in-progress represented 16.3% of total power supply
plant, power supply members have reduced the level of plant additions. At the
end of the calendar year 1992, construction-in-progress represented 2.8% of
total power supply plant (see Note 10 to Combined Financial Statements for a
more complete discussion of certain loan and guarantee contingencies).
NONPERFORMING AND RESTRUCTURED ASSETS
(DOLLAR AMOUNTS IN MILLIONS)
AS OF MAY 31,
--------------------------
1994 1993 1992
------ ------ ------
Nonperforming loans................................................. $ 44.9 $ 55.8 $ 17.0
Percent of loans and guarantees outstanding......................... 0.51% 0.69% 0.21%
Restructured loans.................................................. $165.4 $172.9 $145.6
Percent of loans and guarantees outstanding......................... 1.89% 2.14% 1.81%
Allowance for Loan and Guarantee Losses
CFC maintains an allowance for potential loan and/or guarantee losses which
is periodically reviewed by management for adequacy. In performing this
assessment, management considers various factors including an analysis of the
financial strength of CFC's borrowers, delinquencies, loan charge-off history,
underlying
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collateral, and economic and industry conditions. At May 31, 1994, the allowance
for loan and guarantee losses totaled $188.2 million, an increase of $15.6
million from the prior year-end. The allowance represented 238.6% of
nonperforming loans and 2.1% of total loans and guarantees outstanding at
year-end.
Since its inception in 1969, CFC has charged off loan balances in the total
amount of $28.4 million, net of recoveries.
Management believes that the allowance for loan and guarantee losses is
adequate to cover any portfolio losses which have occurred or may occur.
The following chart presents a summary of the allowance for loan and
guarantee losses at May 31, 1994, 1993 and 1992.
ALLOWANCE FOR LOAN AND GUARANTEE LOSSES
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED MAY 31,
------------------------------
1994 1993 1992
-------- -------- --------
Beginning balance............................................. $172,571 $157,571 $135,599
Provision for loan and guarantee losses....................... 15,625 15,000 27,000
Charge-offs................................................... -- -- (8,602)
Recovery of amounts previously charged-off.................... -- -- 3,574
-------- -------- --------
Ending balance................................................ $188,196 $172,571 $157,571
======== ======== ========
As a percentage of loans and guarantees outstanding........... 2.15% 2.13% 1.96%
ASSET/LIABILITY MANAGEMENT
A key element of CFC's funding operations is the monitoring and management
of interest rate and liquidity risk. This process involves controlling asset and
liability volumes, repricing terms and maturity schedules to stabilize gross
operating margins and retain liquidity.
Interest Rate Risk
CFC is subject to interest rate risk to the extent CFC's loans are subject
to interest rate adjustment at different times than the liabilities which fund
those assets. Therefore, CFC's interest rate risk management policy involves the
close matching of asset and liability repricing terms within a range of 5% of
gross assets (total assets plus the loan and guarantee loss allowance which is
netted against gross loans on the balance sheet). CFC measures the matching of
funds to assets by comparing the amount of fixed rate assets repricing or
amortizing to the total fixed rate debt maturing over the next year. At May 31,
1994 CFC had $196 million in fixed rate assets amortizing or repricing and $55
million in fixed rate liabilities maturing during fiscal year 1995. The
difference, $141 million represents the amount of CFC's assets that are not
considered match-funded as to rate. CFC's difference of $141 million, at May 31,
1994 represents 2.2% of gross assets. CFC funds variable rate assets which
reprice monthly with short-term liabilities, primarily Commercial Paper and Bank
Bid Notes, both of which are primarily issued with original maturities under 90
days. CFC funds fixed rate loans with fixed rate Collateral Trust Bonds,
Medium-Term Notes, Subordinated Certificates and Members' Equity. With the
exception of Subordinated Certificates, which are generally issued at rates
below CFC's long-term cost of funding and with extended maturities, CFC's
liabilities have average maturities that closely match the repricing terms of
CFC's fixed interest rate loans. CFC also uses Commercial Paper supported by
interest rate exchange agreements to fund its fixed rate portfolio of 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
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conversions can take place at different intervals from early redemptions, CFC
charges conversion fees designed to compensate for any additional interest rate
risk assumed by the Company.
Liquidity
CFC is subject to liquidity risk to the extent cash repayments on its
assets are insufficient to cover the cash requirements on maturing liabilities
and other sources of funds with which to make debt repayments are not available.
For the most part, CFC funds its long-term loans with much shorter term maturity
debt instruments. As a result, CFC has to manage its liquidity risk by ensuring
that other sources of funding are available to make debt maturity payments. CFC
accomplishes this in four ways. First, CFC maintains revolving credit agreements
which (subject to certain conditions) allow CFC to borrow funds on terms of up
to three years. Second, CFC has maintained investment grade ratings,
facilitating access to the capital markets. Third, CFC maintains shelf
registrations for both Collateral Trust Bonds and Medium-Term Notes either of
which (absent market disruptions and assuming CFC remains creditworthy) could be
issued at fixed or variable rates in sufficient amounts to fund the next 18 to
24 months funding requirements. Fourth, CFC obtains much of its funding directly
from its members and believes this funding is more stable than funding obtained
from outside sources.
CFC's long-and short-term debt and guarantees receive ratings from three of
the major credit rating agencies, Moody's Investors Service ("Moody's"),
Standard and Poor Corporation ("S&P") and Fitch Investors Service ("Fitch").
During May 1994, S&P and Fitch upgraded CFC's ratings on Collateral Trust Bonds
from AA- to AA and the ratings on Medium-Term Notes, guaranteed lease debt and
guaranteed bonds from A+ to AA-. CFC's short-term debt and guarantee ratings
from these agencies were reaffirmed at the highest level A-1+ by S&P and F-1+ by
Fitch. Moody's reaffirmed CFC's current ratings, and lists CFC's ratings outlook
as positive. The following table presents CFC's current credit ratings at
year-end.
STANDARD & POOR'S
MOODY'S INVESTORS SERVICE CORPORATION FITCH INVESTORS SERVICE
-------------------------- ------------------ ------------------------
DIRECT
Collateral Trust Bonds................ Aa3 AA AA
Medium-Term Notes..................... A1 AA- AA-
Commercial Paper...................... P1 A-1+ F-1+
GUARANTEES
Leveraged Lease Debt.................. A1 AA- AA-
Pooled Bonds.......................... Aa3 AA- AA-
Other Bonds........................... A1 AA- AA-
Short-Term............................ P1 A-1+ F-1+
The ratings listed above have the meaning as defined by each of the
respective rating agencies and are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by the rating
organizations.
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At May 31, 1994 and 1993, CFC's members provided 44.3% and 52.0% of total
capitalization as follows:
MEMBERSHIP CONTRIBUTIONS TO TOTAL CAPITALIZATION
(DOLLAR AMOUNTS IN THOUSANDS)
AS OF MAY 31,
---------------------------------------------
% OF % OF
1994 TOTAL 1993 TOTAL
----------- ------- ----------- -------
Commercial Paper.................................... $ 999,549 29.2% $ 1,114,798 50.7%
Long-Term debt (primarily Medium-Term Notes)........ 233,983 23.1% 200,613 14.8%
Subordinated Certificates........................... 1,222,858 100.0% 1,215,547 100.0%
Members' Equity..................................... 260,968 100.0% 258,299 100.0%
----------- -----------
Total.......................................... $ 2,717,358 $ 2,789,257
========= =========
Percentage of total capitalization.................. 44.3% 52.0%
========= =========
The total amount of member investments decreased by $71.9 million or 2.6%.
The total member investment as a percentage of total capitalization decreased
due to the increase in nonmember debt required to fund the increase in loans
outstanding. Total capitalization at May 31, 1994 was $6,133.9 million, an
increase of $774.1 million over the total capitalization of $5,359.8 million at
May 31, 1993. When the loan and guarantee loss allowance is added to both
membership contributions and to total capitalization the percentages are 46.0%
and 53.5% at May 31, 1994 and 1993, respectively.
HISTORICAL RESULTS
The following chart provides CFC's key operating results over the last six
years.
SELECTED KEY FINANCIAL DATA
(DOLLAR AMOUNTS IN THOUSANDS)
1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ----------
As of May 31:
Net loans................................. $5,921,022 $5,112,471 $5,003,095 $4,827,497 $4,628,329 $4,311,227
Total liabilities......................... $4,740,470 $3,990,298 $3,933,682 $3,715,123 $3,546,772 $3,240,332
Total Subordinated Certificates and
Members' Equity......................... $1,483,826 $1,473,846 $1,467,791 $1,424,501 $1,417,194 $1,384,359
Guarantees................................ $2,655,827 $2,813,731 $2,876,074 $2,884,393 $2,837,117 $2,870,502
Leverage ratio (1)........................ 4.63 4.41 4.44 4.43 4.29 4.20
Debt/Equity (2)........................... 2.52 2.24 2.24 2.19 2.12 1.98
For the period ended May 31:
Gross margins............................. $ 61,452 $ 70,975 $ 87,392 $ 79,020 $ 69,979 $ 70,480
Net margins............................... $ 33,188 $ 38,487 $ 44,155 $ 45,505 $ 39,273 $ 38,848
TIER (3).................................. 1.13 1.16 1.14 1.14 1.11 1.12
- - ---------------
(1) The leverage ratio is calculated by dividing debt and guarantees
outstanding, excluding debt used to fund loans guaranteed by REA, by the
total of Members' Subordinated Certificates and Members' Equity.
(2) The debt/equity ratio is calculated by dividing debt outstanding, excluding
debt used to fund loans guaranteed by REA, by the total of Members'
Subordinated Certificates, Members' Equity and the loan and guarantee loss
allowance.
(3) TIER is calculated by dividing net margins before extraordinary items plus
the cost of funds by the cost of funds.
FINANCIAL AND INDUSTRY OUTLOOK
During the coming year, management expects CFC's borrowers to continue to
utilize the variable interest rate programs to a greater extent than the fixed
interest rate program. This is due primarily to the positive
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interest yield curve and due partly to CFC's borrowers diversifying the interest
terms on their long-term debt. As the demand for variable interest rate loans
increases, either through conversions from the fixed interest rate program or
through new loan advances, CFC will continue to match fund these loans as to
rate with variable interest rate debt instruments and will continue to redeem,
to the extent possible and economically beneficial, its fixed interest rate debt
instruments. These fixed rate loans at the borrower level typically represent a
small portion of the borrower's overall capitalization.
On March 22, 1994 the final regulations regarding the prepayment of REA
notes at a discount were adopted. As of May 31, 1994, no members had prepaid
their loans under these regulations. During the first quarter of fiscal year
1995, CFC expects to advance approximately $142 million to five borrowers for
the purpose of prepaying their REA loans. Future volume of REA prepayments will
depend on a number of factors including interest rates, tax consequences and
possible acquisition or other business opportunities available to the members.
CFC does not expect large volumes of prepayment requests to be made at any one
time, but believes that there will be a steady stream of activity.
Over the last year, two large telecommunications companies, GTE and U.S.
West, were in the process of divesting properties in various areas of the
country. During fiscal year 1994, CFC extended approximately $400 million in
loan commitments, through RTFC, to telecommunications members that had submitted
bids on these properties. The increase in telephone loans outstanding as of May
31, 1994 was due to the advance of loans for the acquisition of these
properties. To date a total of $302.1 million has been advanced to RTFC members
that had their bids for property accepted by GTE, U.S. West and other
independent telecommunication companies. Loan activity to telecommunications
members should continue strong through the next fiscal year, as the remaining
telecommunication properties are acquired. The level of growth experienced
during fiscal year 1994 and expected in fiscal year 1995 is due to the
telecommunication members taking advantage of specific opportunities and should
not be seen as a continuing trend.
As discussed previously, REA has proposed to amend its lending requirements
for power supply systems, requiring them to either increase their equity levels
or obtain guarantees from their affiliated distribution systems. To the extent
these systems require capital and this capital is unavailable from REA, some
might be able to enter the public debt markets without the assistance of a
financial intermediary. As a result, management believes that REA's new
requirements may reduce CFC's potential lending and guarantee volume with CFC's
larger, more creditworthy power supply members.
The amount of loan funds available from REA to its borrowers is dependent
upon the size of the congressionally allocated subsidy for REA's revolving loan
fund and the current interest rates. As interest rates rise, a larger portion of
the subsidy is required to buydown the interest rate, reducing the total amount
of funding available for new loans. As the level of loan funds available
decreases, borrowers will be required to seek out additional sources for loan
funds.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Combined Financial Statements, Auditors' Report and Combined Quarterly
Financial Results are included on pages F-1 through F-27 (see Note 12 to
Combined Financial Statements for a summary of the quarterly results of CFC's
operations).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors
DATE
PRESENT
DIRECTOR TERM
NAME AGE SINCE EXPIRES
- - ------------------------------------------------------------- --- ---- ----
Bill McGinnis (President of CFC)............................. 48 1988 1995
J. Chris Cariker (Vice President of CFC)..................... 40 1991 1997
Garry Bye (Secretary-Treasurer of CFC)....................... 51 1991 1997
John C. Anderson............................................. 57 1990 1996
Johnnie R. Austin............................................ 59 1989 1995
Robert J. Bauman............................................. 49 1992 1995
Bill Bertram................................................. 48 1990 1996
Harold I. Dycus.............................................. 61 1991 1997
Glenn English................................................ 53 1994 1997
John B. Floyd, Jr............................................ 51 1989 1995
Nadine Griffin............................................... 62 1992 1995
Ralph Harmeyer............................................... 63 1993 1996
Gordon J. Hudson............................................. 58 1991 1997
George W. Kline.............................................. 65 1993 1996
Paul J. Liess................................................ 56 1993 1996
Ralph L. Loveless............................................ 54 1990 1996
Gerald P. Paolucci........................................... 59 1994 1997
David E. Piper............................................... 52 1989 1995
Terry Pitchford.............................................. 50 1991 1997
J.C. Roberts................................................. 56 1993 1995
Tom Sloan.................................................... 64 1989 1995
Robert O. Williams........................................... 61 1994 1997
(b) Identification of Executive Officers
HELD PRESENT
TITLE NAME AGE OFFICE SINCE
- - ------------------------------------------ ----------------------- --- ------------
President and Director.................... Bill McGinnis 48 1993
Vice President and Director............... J. Chris Cariker 40 1994
Secretary-Treasurer and Director.......... Garry Bye 51 1994
Governor and Chief Executive Officer...... Charles B. Gill 56 1979
Assistant to the Governor and Acting
Administrative Officer.................. Sheldon C. Petersen 41 1993
Senior Vice President and General
Counsel................................. John Jay List 47 1991
Senior Vice President and Loan Officer.... Richard B. Bulman 52 1984
Senior Vice President and Chief Financial
Officer................................. Steven L. Lilly 44 1994
Controller................................ Angelo M. Salera 55 1975
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.
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(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.
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. McGinnis has been the General Manager of Denton County Electric
Cooperative, Inc., Denton, TX since 1980. He was President of Texas
Electric Cooperative, Inc., Austin, TX from 1984 to 1985.
Mr. Cariker has been General Manager of Cookson Hills Electric
Cooperative, Stigler, OK, since 1982.
Mr. Bye has been General Manager of East Central Electric Association,
Braham, MN, since 1985.
Mr. Anderson has been President and CEO of Southside Electric
Cooperative, Crewe, VA and a Director of Old Dominion Electric Cooperative,
Glen Allen, VA since 1982. He has been a member of the Virginia, Maryland &
Delaware Association of Electric Cooperatives since 1982. He was Chairman
of the NRECA Cooperative Research Committee from 1982 to February 1990. He
was elected to the Board of Directors of Vedcorp, an economic development
corporation, and elected to the Crewe, VA Industrial Development Committee,
in May 1991. Mr. Anderson was appointed to the Southside Virginia Business
and Education Commission in 1992.
Mr. Austin has been a Director of Blue Ridge EMC, Lenoir, NC since
1970. Since 1984 he has been President of Blue Ridge EMC, and held the
office of Vice President prior to 1984. He has been a Director of North
Carolina EMC (G&T), Raleigh, NC, since 1989 and serves on the Executive
Committee. He served as a Director of NC Association of Electric
Cooperatives, Raleigh, NC from 1970 until 1989, and served as President
from March 1983 to March 1984. He has been a Director of First Union
National Bank, Boone, NC since 1971. He has been owner and Manager of
Reins-Sturdivant Funeral Directors, Boone, NC since 1975.
Mr. Bauman has been the General Manager of Butler County Rural
Electric Cooperative, Allison, IA, since 1984. He is a member of the Corn
Belt Power Cooperative Industrial Development Committee and the Iowa
Association of Business and Industry's Economic Development Committee.
Mr. Bertram has been a farmer in Valley City, ND, since 1964. He has
been a Director of North Dakota Association of Rural Electric Cooperatives,
Mandan, ND, since 1988 and Secretary of Cass County Electric Cooperative,
Inc., Kindred, ND, since 1986.
Mr. Dycus has been a partner and co-owner of Dycus, Bradley & Draves,
P.C., a regional public accounting firm, since 1973. He has been a Director
of Egyptian Electric Cooperative, Steeleville, IL, since 1976 and a
Director of Southern Illinois Power Cooperative since 1981.
Mr. English has been Executive Vice President and General Manager of
NRECA, Washington, DC since February 1994. He served in the House of
Representatives from 1975 to 1994. He served on the House Agriculture
Committee from 1975 to 1994, and was Chairman of the House Agricultural
Subcommittee on Environment Credit and Rural Development in 1989.
Mr. Floyd has been Vice Chairman of Oconee Electric Membership
Corporation, Dudley, GA, since 1970. He has been Vice President since 1968
and a Director since 1969 of The Four County Bank. He has been a Director
of Oglethorpe Power Corporation, Tucker, GA, and President and Chairman of
Twiggs Gin Inc., a cotton gin, since 1973.
Mrs. Griffin has been a Director of D.S.& O. Rural Electric
Cooperative Association, Abilene, KS, since 1987. She is a member of the
National Rural Electric Women's Association, and has been a Rural Electric
Director for 15 years. She is presently serving as a member of the Board of
Directors of the
40
43
Kansas City Board of Trade. She served as a member of the Kansas Wheat
Commission and is a member of the Kansas Association of Wheat Growers. She
has been a member of the KEPCo Executive Committee and a former chair on
the KEPCo Power Supply Planning and Operation Committee. She has also been
Director of both the Dickinson County Extension Council Executive Board,
and the Dickinson County Historical Society Board.
Mr. Harmeyer has been a Director of the Indiana Statewide Association
of Rural Electric Cooperatives, Indianapolis, IN since 1976. He has also
been a Director for Decatur County REMC, Greensburg, IN since 1958. He is a
past member of CFC's nominating committee. He was a Director of the Indiana
Rural Cooperative Federal Credit Union from 1978 to 1981. He has been
Chairman of Harmeyer Farms, Inc., since 1985. He is Chairman of the
Napoleon State Bank and a past Board Chairman of the Ripley County Farm
Bureau Co-op and the Ripley County Soil & Water Conservation Board. He is a
past delegate for Milk Marketing, Inc.
Mr. Hudson has owned and operated the Leonard Paul Store, a general
store, since 1978. He has sold real estate in the Priest Lake, ID area
since 1989. He has been President of Northern Lights, Inc., Sandpoint, ID
since 1984.
Mr. Kline has been a Director of Trico Electric Cooperative, Tucson,
AZ since 1988. He has been Vice President of Grand Canyon State Electric
Cooperative Association since 1992. He was a part-time Magistrate for the
town of Marana, AZ, from 1983 to 1993.
Mr. Liess has been General Manager of Twin Valleys Rural Public Power
District, Cambridge, NE since 1978. He has been an alternate Director of
the Nebraska Rural Electric Association ("NREA") and the Nebraska Electric
Generation and Transmission Cooperative, Inc., since 1979. He has been
Chairman of the Nebraska ACRE Board since 1991 and vice-chairman of the
NREA Credit Union Board since 1989. He is a member and one of five original
founders of Five District Joint Venture, developers of Rural Power Manager
Software. Mr. Liess has been a member of the Board of Governors of the
Central Community College since 1989. He is a member of the Board of
Directors of the Central Plains Technical and Business Development Center
and Chairman of the Cambridge Economic Development Board.
Mr. Loveless has been the Executive Vice President and General Manager
of Meriwether Lewis Electric Cooperative, Centerville, TN, since 1987. He
served as Assistant General Manager of Meriwether Lewis Electric
Cooperative from 1985 to 1987. He is a member of the Board of Directors and
the Legislative and Tax Committee of the Tennessee Electric Cooperative
Association.
Mr. Paolucci has been General Manager of Morrow Electric Cooperative,
Inc., Mount Gilead, OH since 1977. In addition he is presently Chairman of
the United Utility Supply Cooperative Corporation and has served as its
Vice Chairman. He has also served as Trustee for Buckeye Power, Inc. since
1983.
Mr. Piper has been the General Manager of Pacific Northwest Generating
Cooperative, Portland, OR, since 1979. He is a Director of the Pacific
Northwest Utilities Conference Committee and was a member of the NRECA
Water Power Committee from 1987 to 1991. He has been a member of the
National Preference Customer Committee since 1983 and is presently
President of the G&T Managers Association.
Mr. Pitchford has owned and operated a farm in Columbia, AL, since
1971. He has been a Director of Pea River Electric Cooperative, Ozark, AL,
since 1987.
Mr. Roberts has been a Director of NRECA, Washington, DC since 1980
and President since February 1993. He has been a Director of Golden Spread
Electric Cooperative, Amarillo, TX since 1984 and was Board Chairman from
1987 to 1988. He is a member and past president of the Bellville Industrial
Foundation, and a past director of the First National Bank of Bellville and
the Bellville Hospital Foundation.
Mr. Sloan has been a Director of Craighead Electric Cooperative,
Jonesboro, AR, since 1962, and he was President from 1975 to 1989. He was a
Director of Arkansas Electric Cooperative Corporation
41
44
and Arkansas Electric Cooperatives, Inc., both of Little Rock, AR, from
1975 to 1989. He was a Director of Electric Research and Manufacturing
Cooperative, Dyersburg, TN, from 1984 to 1989. He was a Director of
Citizens National Bank, Walnut Ridge, AR, from 1968 to 1990. He has been a
farmer and farm manager since 1956. He was a Director of SF Services, Inc.,
a farmers association, from 1967 to 1992, and was Chairman of the Board
from 1986 to 1992. He has been a Director of Arkansas Blue Cross and Blue
Shield since 1978.
Mr. Williams has been Executive Vice President and General Manager of
York Electric Cooperative, York, SC since 1974. He has been a trustee for
both the Saluda River Electric Cooperative, Laurens, SC and the Electric
Cooperatives of South Carolina since 1974. He was a trustee for the South
Carolina State Development Board from 1991 to 1993 and a trustee for the
York Technical College Foundation Board from 1983 to 1991.
Mr. Gill joined the CFC staff in April 1972 as Borrowers Operations
Officer. He served as Deputy Governor from 1978 to 1979 prior to being
named Governor effective September 1979.
Mr. List joined CFC as a staff attorney in February 1972. He served as
Corporate Counsel from June 1980 until 1991 and served as General Counsel
until May 1992. He became Senior Vice President and General Counsel on June
1, 1992.
Mr. Bulman joined the CFC staff as Power Supply Officer in March 1980.
He has served as Loan Officer since June 1, 1984. He became Senior Vice
President and Loan Officer on June 1, 1992.
Mr. Salera joined CFC's staff as Controller in September 1975.
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 Governor and Acting Administrative Officer on
June 1, 1994.
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.
(f) Involvement in Certain Legal Proceedings.
None to the knowledge of CFC.
(g) Promoters and control persons.
Inapplicable.
ITEM 405. COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT.
Inapplicable.
42
45
ITEM 11. EXECUTIVE COMPENSATION
The Summary Compensation Table below sets forth the aggregate renumeration
for services in all capacities to CFC, on an accrual basis, for the three years
ended May 31, 1994, 1993 and 1992 to the named executive officers. The named
executive officers include the CEO and the next four most highly compensated
executive officers serving at May 31, 1994, with salary and bonus for fiscal
year 1994 in excess of $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION AWARDS
---------------------------- -------------------- PAYOUTS
OTHER RESTRICTED OPTIONS/ ---------- ALL
ANNUAL STOCK SARS LTIP OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMP(1) AWARD(2) (#)(2) PAYOUTS(2) COMP(3)
- - ----------------------------- ----- -------- ------- ------- ---------- -------- ---------- --------
Charles B. Gill.............. 1994 $286,021 $20,702 -- -- -- -- $144,419
Governor and Chief 1993 284,833 5,433 -- -- -- -- 115,063
Executive Officer 1992 276,819 5,144 -- -- -- -- --
Richard B. Bulman............ 1994 167,184 3,073 -- -- -- -- 16,115
Senior Vice President and 1993 154,071 5,941 -- -- -- -- 6,769
Loan Officer 1992 148,316 2,794 -- -- -- -- --
John J. List................. 1994 144,405 2,515 -- -- -- -- 10,101
Senior Vice President and 1993 138,256 2,505 -- -- -- -- 9,489
General Counsel 1992 137,318 2,121 -- -- -- -- --
Steven L. Lilly.............. 1994 138,884 2,006 -- -- -- -- 9,460
Senior Vice President and 1993 107,696 1,906 -- -- -- -- 8,055
Chief Financial Officer 1992 103,220 6,320 -- -- -- -- --
Nicholas J. Walsh(4) ........ 1994 128,916 0 -- -- -- -- 7,558
Senior Vice President and 1993 124,136 0 -- -- -- -- 11,398
Administrative Officer 1992 118,305 0 -- -- -- -- --
- - ---------------
(1) Reportable perquisites and other personal benefits do not exceed $50,000 or
10% of salary and bonus. All other items reportable under this column are
not applicable to CFC.
(2) Not applicable to CFC.
(3) Amounts for fiscal years 1994 and 1993 include $90,292 and $63,750 related
to an employment contract, $48,147 and $45,616 related to leave accruals and
$5,980 and $5,697 related to CFC contributions to savings plan for Mr. Gill;
$12,771 and $3,688 related to leave accruals and $3,344 and $3,081 related
to CFC contributions to savings plan for Mr. Bulman; $7,213 and $6,724
related to leave accruals and $2,888 and $2,765 related to CFC contributions
to savings plan for Mr. List; $6,682 and $5,901 related to leave accruals
and $2,778 and $2,154 related to CFC contributions to savings plan for Mr.
Lilly; and $4,980 and $8,915 related to leave accruals and $2,578 and $2,483
related to CFC contributions to savings plan for Mr. Walsh, respectively.
(4) Mr. Walsh retired effective May 31, 1994.
DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE
NRECA also maintains the Retirement and Security Program entitling CFC
employees to receive, under a 50% joint and surviving spouse annuity, 1.90% of
the average of their five highest base salaries during their last ten years of
employment, multiplied by the number of years of participation in the program.
As of May 31, 1994, the number of years of service credited and the compensation
covered under the program, respectively, for the officers listed above was as
follows: Charles B. Gill -- 21 years 2 months, $260,834; Steven L. Lilly -- 10
years 8 months, $105,003; John Jay List -- 21 years 3 months, $129,650; Richard
B. Bulman -- 14 years 2 months, $142,088; Nicholas J. Walsh -- 22 years 5 month,
$117,868.
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46
PENSION PLAN TABLE
YEARS OF SERVICE
AVERAGE ---------------------------------------------------------------------------
BASE SALARY 5 10 15 20 25 30
- - ---------------------- ------- ------- ------- -------- -------- --------
$100,000.............. $ 9,500 $19,000 $28,500 $ 38,000 $ 47,500 $ 57,000
125,000.............. 11,875 23,750 35,625 47,500 59,375 71,250
150,000.............. 14,250 28,500 42,750 57,000 71,250 85,500
175,000.............. 16,625 33,250 49,875 66,500 83,125 99,750
200,000.............. 19,000 38,000 57,000 76,000 95,000 114,000
225,000.............. 21,375 42,750 64,125 85,500 106,875 118,800*
250,000.............. 23,750 47,500 71,250 95,000 118,750 118,800*
275,000.............. 26,125 52,250 78,375 104,500 118,800* 118,800*
- - ---------------
* The Tax Reform Act of 1984 places a cap on maximum salary used to compute
retirement benefits and maximum yearly benefit. For calendar year 1994, the
salary cap is $150,000 (the cap represents the amount of salary for 1994 that
may be used in the computation of the average base salary) and benefits cap is
$118,800.
The Budget Reconciliation Act of 1993 has set a limit of $150,000 on the
1994 compensation to be used in the calculation of pension benefits. In order to
restore potential lost benefits, CFC has set up a Pension Restoration Plan.
Under the plan, the amount that NRECA invoices CFC will continue to be based on
the full compensation paid to each employee. Upon the retirement of a covered
employee, NRECA will calculate the retirement and security benefit to be paid
with consideration of the compensation limits and will pay the maximum benefit
thereunder. NRECA will also calculate the retirement and security benefit that
would have been available without consideration of the compensation limits and
CFC will pay the difference. NRECA will then give CFC a credit against future
retirement and security contribution liabilities in the amount paid by CFC to
the covered employee.
CFC will pay such additional benefits to the covered employee through a
Severance Pay Plan and a Deferred Pay Restoration Plan. Under the Severance Pay
Plan, the employee is paid an amount equal to the lost pension benefits but not
to exceed twice the employee's annual compensation for the prior year. The
benefit must be paid within 24 months of termination of employment. To the
extent that the Severance Pay Plan cannot pay all of the lost pension benefits,
the remainder will be paid under a Deferred Compensation Plan, which will be
paid out in a lump sum or in installments of up to 60 months.
COMPENSATION OF DIRECTORS
No director received any renumeration as an officer or director of CFC.
Directors are reimbursed for travel expenses and received a daily per diem to
cover meals and lodging for their attendance at all Board of Directors
functions.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Under a supplemental benefit agreement entered into as of April 1, 1989,
and amended as of April 1, 1993, CFC agreed to employ Mr. Gill, and Mr. Gill has
agreed to remain as a CFC employee, for six years commencing April 1, 1989, and
for future periods that may be agreed upon, at no less than his present
compensation (as of April 1, 1993). Provided he does not earlier resign and is
not discharged for cause, CFC has agreed to pay Mr. Gill, after his normal
retirement date in 2000 or such earlier retirement dated as agreed to by the
Board of Directors, or earlier death or disability, a sum ranging from $17,500
commencing in 1983 to $32,500 beginning in 1986 for each year he is employed by
CFC (or in the case of death or disability, for each year he would have been so
employed (since 1983) until such date, subject, in the case of disability, to
certain offsets or other payments) with interest at the rate of 10% per annum
until payment. The agreement also provides to Mr. Gill eight weeks of paid
vacation per year, which will accrue and be paid if unused. Mr. Gill has
informed CFC of his intention to retire as of April 1, 1995. The Board has
agreed that this date will be treated as his normal retirement date under the
supplemental benefit agreement.
44
47
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended May 31, 1994 the following directors and former
directors of CFC served as members on the Operating Review and Audit Committee
of the Board of Directors (which functions as the Board's compensation
committee):
Bill McGinnis (President of CFC)
John M. McBride (Former Director and Former Vice President of CFC)
John B. Floyd, Jr.
David E. Piper
J.E. Smith (Former Director and Former President of CFC)
J. Chris Cariker (Vice President of CFC)
Garry Bye (Secretary-Treasurer of CFC)
Harold I. Dycus
Ralph L. Loveless
Terry Pitchford
Johnnie R. Austin (Former Secretary-Treasurer of CFC)
Other than those mentioned above, there were no compensation committee
interlocks or insider participation related to executive compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Inapplicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a), (b) and (c) At May 31, 1994, CFC had commitments for long-and
intermediate-term loans aggregating $53 million and $205 million, respectively,
and committed lines of credit aggregating $346 million, to member systems,
excluding NCSC, RTFC and GFC, of which executive officers or directors of CFC
are members, employees, officers or directors. At May 31, 1994, $193 million and
$70 million of advances were outstanding with respect to such long-and
intermediate-term loans, respectively, and $24 million was outstanding under
such lines of credit. At May 31, 1994, CFC had guaranteed $246 million of
contractual obligations of such members. CFC had commitments to NCSC for
long-term loans of $15 million and CFC had outstanding guarantees of certain
contractual obligations in the amount of $764 million at May 31, 1994, on behalf
of NCSC. At May 31, 1994, advances outstanding with respect to such long-term
loans were $48 million for NCSC. Such loans and guarantees were made in the
ordinary course of CFC's business on the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transaction with
other members and did not involve more than normal risk of uncollectibility or
present other unfavorable features. It is anticipated that, consistent with its
loan and guarantee policies in effect from time to time, additional loans and
guarantees will be made by CFC to member systems and trade and service
organizations of which officers or directors of CFC are members, employees,
officers or directors. In light of its cooperative nature, pursuant to which CFC
was established for the very purpose of extending financing to its members (from
whose ranks its directors must be drawn), CFC is of the view that no purpose
would be served by including detailed information with respect to specific loans
and guarantees to members with which any of its directors are affiliated.
(d) Inapplicable.
45
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS A PART OF THIS REPORT.
1. FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Public Accountants..................................... F-1
Combined Balance Sheets...................................................... F-2
Combined Statements of Income, Expenses and Net Margins...................... F-4
Combined Statements of Changes in Members' Equity............................ F-5
Combined Statements of Cash Flows............................................ F-6
Notes to Combined Financial Statements....................................... F-7
2. FINANCIAL STATEMENT SCHEDULES
PAGE
-----
Note 12 to Combined Financial Statements "Combined Quarterly Financial
Results"................................................................... F-27
All other schedules are omitted because they are not required or
inapplicable or the information is included in the financial statements or notes
thereto.
46
49
3. EXHIBITS
3.1 -- Articles of Incorporation. Incorporated by reference to Exhibit 3.1 to
Registration Statement No. 2-46018, filed October 12, 1972.
3.2 -- Bylaws. Incorporated by reference to Exhibit 3.2 to CFC's annual report
on Form 10-K for the year ended May 31, 1988, filed July 27, 1988.
3.3 -- Amendments to Bylaws as approved by CFC's Board of Directors and members
on February 11, 1993, and a copy of the Bylaws as amended. Incorporated
by reference to Exhibit 3.3 to CFC's annual report on Form 10-K for the
year ended May 31, 1993, filed August 18, 1993.
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 -- Revolving Credit Agreements dated May 28, 1993. Incorporated by reference
to Exhibit 4.6 to Form 10-K filed August 23, 1993.
4.3 -- Indenture dated as of February 15, 1994, between the Registrant and First
Bank National Association, trustee. Incorporated by reference to Exhibit
4.1 to the current report on Form 8-K filed by CFC on June 14, 1994.
4.4 -- Amendments to Revolving Credit Agreement dated May 17, 1994.
-- 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 -- Supplemental Benefit Agreement between CFC and Charles B. Gill dated
January 11, 1983, as amended. Incorporated by reference to Exhibit 10.2
to CFC's annual report on Form 10-K for the year ended May 31, 1983.
10.3 -- Second Amendment to Supplemental Benefit Agreement between CFC and
Charles B. Gill dated May 29, 1986. Incorporated by reference to Exhibit
10.3 to CFC's annual report on Form 10-K for the year ended May 31, 1986.
10.4 -- Third Amendment to Supplemental Benefit Agreement between CFC and Charles
B. Gill dated April 1, 1989. Incorporated by reference to Exhibit 10.4 to
CFC's annual report on Form 10-K for the year ended May 31, 1989.
10.5 -- Fourth Amendment to Supplemental Benefit Agreement between CFC and
Charles B. Gill dated April 1, 1993. Incorporated by reference to Exhibit
10.5 to CFC's annual report on Form 10-K for the year ended May 31, 1993.
10.6 -- Fifth Amendment to Supplemental Benefit Agreement between CFC and Charles
B. Gill dated May 26, 1994.
12 -- Computations of ratio of margins to fixed charges.
23 -- Consent of Arthur Andersen & Co.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of fiscal
year 1994.
47
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 5th day of August, 1994.
NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION
By: /s/ CHARLES B. GILL
--------------------------------------
Charles B. Gill
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/ CHARLES B. GILL Governor and Chief Executive
- - ----------------------------------------------- Officer
CHARLES B. GILL
/s/ STEVEN L. LILLY Senior Vice President and
- - ----------------------------------------------- Chief Financial Officer
STEVEN L. LILLY
/s/ ANGELO M. SALERA Controller (Principal
- - ----------------------------------------------- Accounting Officer)
ANGELO M. SALERA
/s/ BILL MCGINNIS President and Director
- - -----------------------------------------------
BILL MCGINNIS
/s/ J. CHRIS CARIKER Vice President and Director
- - -----------------------------------------------
J. CHRIS CARIKER
August 5, 1994
/s/ GARRY BYE Secretary-Treasurer and
- - ----------------------------------------------- Director
GARRY BYE
/s/ JOHN C. ANDERSON Director
- - -----------------------------------------------
JOHN C. ANDERSON
/s/ JOHNNIE R. AUSTIN Director
- - -----------------------------------------------
JOHNNIE R. AUSTIN
/s/ ROBERT J. BAUMAN Director
- - -----------------------------------------------
ROBERT J. BAUMAN
/s/ BILL BERTRAM Director
- - -----------------------------------------------
BILL BERTRAM
48
51
SIGNATURE TITLE DATE
- - ----------------------------------------------- ---------------------------- ----------------
/s/ HAROLD I. DYCUS Director
- - -----------------------------------------------
HAROLD I. DYCUS
/s/ GLENN ENGLISH Director
- - -----------------------------------------------
GLENN ENGLISH
/s/ JOHN B. FLOYD, JR. Director
- - -----------------------------------------------
JOHN B. FLOYD, JR.
/s/ NADINE GRIFFIN Director
- - -----------------------------------------------
NADINE GRIFFIN
/s/ RALPH HARMEYER Director
- - -----------------------------------------------
RALPH HARMEYER
/s/ GORDON J. HUDSON Director
- - -----------------------------------------------
GORDON J. HUDSON
- - ----------------------------------------------- Director
GEORGE W. KLINE
/s/ PAUL J. LIESS Director
- - -----------------------------------------------
PAUL J. LIESS
August 5, 1994
/s/ RALPH L. LOVELESS Director
- - -----------------------------------------------
RALPH L. LOVELESS
/s/ GERALD P. PAOLUCCI Director
- - -----------------------------------------------
GERALD P. PAOLUCCI
/s/ DAVID E. PIPER Director
- - -----------------------------------------------
DAVID E. PIPER
/s/ TERRY PITCHFORD Director
- - -----------------------------------------------
TERRY PITCHFORD
/s/ J. C. ROBERTS Director
- - -----------------------------------------------
J. C. ROBERTS
/s/ TOM SLOAN Director
- - -----------------------------------------------
TOM SLOAN
/s/ ROBERT O. WILLIAMS Director
- - -----------------------------------------------
ROBERT O. WILLIAMS
49
52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
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
as discussed in Note 1 as of May 31, 1994 and 1993, and the related combined
statements of income, expenses and net margins, changes in members' equity and
cash flows for each of the three years in the period ended May 31, 1994. 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 financial position of National Rural Utilities
Cooperative Finance Corporation and other related entities as of May 31, 1994
and 1993, and the results of their operations and their cash flows for each of
the three years in the period ended May 31, 1994, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN & CO.
Washington, D.C.
July 18, 1994
F-1
53
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
MAY 31, 1994 AND 1993
ASSETS
1994 1993
---------- ----------
CASH................................................................ $ 22,168 $ 55,450
---------- ----------
DEBT SERVICE INVESTMENTS............................................ 33,668 45,611
---------- ----------
LOANS TO MEMBERS, net............................................... 5,921,022 5,112,471
---------- ----------
RECEIVABLES......................................................... 90,160 87,763
---------- ----------
FIXED ASSETS, net................................................... 38,718 31,777
---------- ----------
DEBT SERVICE RESERVE FUNDS.......................................... 107,095 116,470
---------- ----------
OTHER ASSETS........................................................ 11,465 14,602
---------- ----------
$6,224,296 $5,464,144
========= =========
The accompanying notes are an integral part of these combined financial
statements.
F-2
54
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
MAY 31, 1994 AND 1993
LIABILITIES AND MEMBERS' EQUITY
1994 1993
---------- ----------
NOTES PAYABLE, due within one year.................................. $1,607,975 $ 503,624
---------- ----------
ACCOUNTS PAYABLE.................................................... 18,529 18,019
---------- ----------
ACCRUED INTEREST PAYABLE............................................ 35,597 47,822
---------- ----------
LONG-TERM DEBT...................................................... 3,042,068 3,382,284
---------- ----------
OTHER LIABILITIES................................................... 36,301 38,549
---------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES
MEMBERS' SUBORDINATED CERTIFICATES:
Membership Subscription Certificates........................... 640,520 640,520
Loan and Guarantee Certificates................................ 582,338 575,027
---------- ----------
Total Members' Subordinated Certificates.................. 1,222,858 1,215,547
---------- ----------
MEMBERS' EQUITY..................................................... 260,968 258,299
---------- ----------
Total Members' Subordinated Certificates and Members'
Equity.................................................. 1,483,826 1,473,846
---------- ----------
$6,224,296 $5,464,144
========= =========
The accompanying notes are an integral part of these combined financial
statements.
F-3
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, 1994, 1993 AND 1992
1994 1993 1992
-------- -------- --------
OPERATING INCOME--Interest on loans to members........... $324,682 $336,387 $402,255
Less--Cost of funds................................. 263,230 265,412 314,863
-------- -------- --------
Gross operating margin......................... 61,452 70,975 87,392
-------- -------- --------
EXPENSES:
General, administrative and loan processing......... 16,668 17,623 17,583
Provision for loan and guarantee losses............. 15,625 15,000 27,000
-------- -------- --------
Total expenses................................. 32,293 32,623 44,583
-------- -------- --------
Operating margin............................... 29,159 38,352 42,809
-------- -------- --------
NONOPERATING INCOME...................................... 4,029 3,296 2,744
-------- -------- --------
NET MARGINS BEFORE EXTRAORDINARY LOSS.................... 33,188 41,648 45,553
-------- -------- --------
EXTRAORDINARY LOSS....................................... -- (3,161) (1,398)
-------- -------- --------
NET MARGINS.............................................. $ 33,188 $ 38,487 $ 44,155
======== ======== ========
The accompanying notes are an integral part of these combined financial
statements.
F-4
56
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
PATRONAGE
CAPITAL ALLOCATED
-------------------
GENERAL
EDUCATION UNALLOCATED RESERVE
TOTAL MEMBERSHIPS FUND MARGINS FUND OTHER
-------- ----------- --------- ----------- ------- --------
Balance as of May 31, 1991............ $243,491 $ 1,144 $ 366 $ 2,261 $ 482 $239,238
Retirement of Patronage Capital..... (41,355) -- -- 28 (9) (41,374)
Net Margins -- Allocated............ 44,155 -- (77) -- 10 44,222
Other............................... 37 37 -- -- -- --
-------- ----------- --------- ----------- ------- --------
Balance as of May 31, 1992............ 246,328 1,181 289 2,289 483 242,086
Retirement of Patronage Capital..... (26,864) -- -- -- (373) (26,491)
Net Margins -- Allocated............ 38,487 -- 23 1 378 38,085
Other............................... 348 66 -- (1) -- 283
-------- ----------- --------- ----------- ------- --------
Balance as of May 31, 1993............ 258,299 1,247 312 2,289 488 253,963
Retirement of Patronage Capital..... (29,459) -- -- -- (295) (29,164)
Net Margins -- Allocated............ 33,188 -- 13 -- 302 32,873
Other............................... (1,060) 92 -- -- -- (1,152)
-------- ----------- --------- ----------- ------- --------
Balance as of May 31, 1994............ $260,968 $ 1,339 $ 325 $ 2,289 $ 495 $256,520
========= ============ ========= =========== ======= =========
The accompanying notes are an integral part of these combined financial
statements.
F-5
57
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED MAY 31, 1994, 1993 AND 1992
1994 1993 1992
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net margins................................................. $ 33,188 $ 38,487 $ 44,155
Add (deduct):
Provision for loan and guarantee losses................ 15,625 15,000 27,000
Depreciation........................................... 1,553 1,522 2,810
Amortization........................................... (15,915) (10,402) (821)
Add (deduct) changes in accrual accounts:
Receivables............................................ (4,263) (10,955) 239
Accounts payable....................................... 613 4,696 (809)
Accrued interest payable............................... (12,225) (7,699) (1,799)
Other.................................................. 15,975 42,531 3,288
----------- ----------- -----------
Net cash flows provided by operating activities........ 34,551 73,180 74,063
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made on loans...................................... (2,382,839) (1,456,959) (1,414,658)
Principal collected on loans................................ 1,558,662 1,332,584 1,212,060
Investment in fixed assets.................................. (8,494) (4,884) (722)
----------- ----------- -----------
Net cash flows used in investing activities............ (832,671) (129,259) (203,320)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes payable, net.......................................... 1,104,351 389,809 64,267
Debt service investments, net............................... 11,944 55,127 (58,350)
Proceeds from issuance of long-term debt.................... 172,293 158,245 355,808
Payments for retirement of long-term debt................... (512,849) (522,077) (204,984)
Proceeds from issuance of Members' Subordinated
Certificates.............................................. 34,088 32,087 34,837
Payments for retirement of Members' Subordinated
Certificates.............................................. (15,868) (21,342) (6,167)
Payments for retirement of patronage capital................ (29,121) (26,632) (40,987)
----------- ----------- -----------
Net cash flows provided by financing activities........ 764,838 65,217 144,424
----------- ----------- -----------
NET CASH FLOWS.................................................. (33,282) 9,138 15,167
BEGINNING CASH.................................................. 55,450 46,312 31,145
----------- ----------- -----------
ENDING CASH..................................................... $ 22,168 $ 55,450 $ 46,312
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for interest expense.................. $ 269,959 $ 275,950 $ 319,692
The accompanying notes are an integral part of these combined financial
statements.
F-6
58
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
(1) GENERAL INFORMATION AND ACCOUNTING POLICIES
(a) General Information
National Rural Utilities Cooperative Finance Corporation (the "Company" or
"CFC") was incorporated as a private, not-for-profit cooperative association
under the laws of the District of Columbia in April 1969. The principal purpose
of CFC is to provide its members with a source of financing to supplement the
loan programs of the Rural Electrification Administration ("REA") 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 REA and are secured equally and ratably with REA'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 1,039 members as of May 31, 1994, included 899 Utility Members,
virtually all of which are consumer-owned cooperatives, 71 service members and
69 associate members. The Utility Members included 833 distribution systems and
66 generation and transmission ("Power Supply") systems operating in 46 states
and U.S. territories. At December 31, 1992, CFC's member systems served
approximately 12.2 million consumers, representing service to an estimated 28.8
million ultimate users of electricity and owned approximately $60.8 billion
(before depreciation of $16.4 billion) in total utility plant.
Rural Telephone Finance Cooperative ("RTFC") was incorporated as a private
cooperative association in the state of South Dakota in September 1987. RTFC is
a controlled affiliate of CFC and was created for the purpose of providing
and/or arranging financing for its rural telecommunication members and
affiliates. RTFC's bylaws require that the majority of RTFC's Board of Directors
be elected from individuals designated by CFC. CFC is the sole source of funding
for RTFC. As of May 31, 1994, RTFC had 352 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 REA guaranteed debt
previously held by the Federal Financing Bank. All trust certificates held by
GFC were transferred to GFC by CFC and are guaranteed by the REA. CFC is the
sole source of funding for GFC. GFC had four members other than CFC at May 31,
1994. 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, 1994, CFC had committed to lend RTFC up to a total of $1.8
billion to fund loans to its members and their affiliates. As of the same date,
RTFC had outstanding loans and unadvanced loan
F-7
59
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
commitments totaling $1,135.4 million. RTFC's net margins are allocated to RTFC
borrowers. Summary financial information relating to RTFC included in the
combined financial statements is presented below:
AS OF MAY 31: 1994 1993
-------- --------
(DOLLAR AMOUNTS IN
THOUSANDS)
Outstanding loans to members and their affiliates............ $653,644 $460,864
Total assets................................................. 743,761 529,562
Notes payable to CFC......................................... 653,644 460,864
Total liabilities............................................ 663,810 467,062
Members' Equity(1) and Subordinated Certificates............. 79,951 62,500
FOR THE YEAR ENDED MAY 31: 1994 1993 1992
------- ------- -------
(DOLLAR AMOUNTS IN THOUSANDS)
Operating income....................................... $28,825 $28,183 $28,473
Net margins(2)......................................... 1,731 1,506 4,460
- - ---------------
(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.
(2) RTFC's net margins for fiscal year 1994 will be adjusted for the allocation
of patronage capital by CFC.
As of May 31, 1994, CFC had loaned GFC $524.1 million to fund the purchase
of REA guaranteed trust certificates from CFC. Summary financial information
relating to GFC included in the combined financial statements is presented
below:
AS OF MAY 31: 1994 1993
-------- --------
(DOLLAR AMOUNTS IN
THOUSANDS)
Outstanding loans to members................................ $524,081 $286,460
Total assets................................................ 540,913 300,636
Notes payable to CFC........................................ 531,302 294,548
Total liabilities........................................... 539,521 299,953
Members' Equity............................................. 1,392 683
FOR THE YEAR ENDED MAY 31, 1994 AND FOR THE PERIOD FROM
INCEPTION DECEMBER 24, 1991 THROUGH MAY 31, 1992: 1994 1993 1992
------- ------- ----
(DOLLAR AMOUNTS IN
THOUSANDS)
Operating income......................................... $16,667 $11,233 $775
Net margins(1)........................................... 1,831 902 115
- - ---------------
(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.
F-8
60
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Amortization of Bond Discount and Bond Issuance Costs
Bond discount and bond issuance costs are amortized using the effective
interest method over the life of each bond issue.
(d) Nonperforming Loans
It is CFC's policy to classify a loan as nonperforming when it meets any of
the following criteria:
(i) Interest or principal payments are contractually past due 90
days or more,
(ii) As a result of court proceedings, repayment in accordance with
the original terms is not anticipated, or
(iii) For other reasons, timely repayment is not expected.
(e) Allowance for Loan and Guarantee Losses
CFC maintains an allowance for loan and guarantee losses at a level
believed to be adequate in relation to the quality and size of its loans and
guarantees outstanding. It is CFC's policy to review periodically its loans and
guarantees and to make adjustments to the allowance as necessary. The allowance
is based on estimates, and accordingly, actual loan and guarantee losses may
differ from the allowance amount.
Activity in the allowance account is summarized as follows for the years
ended May 31:
1994 1993 1992
-------- -------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
Balance at beginning of year............................. $172,571 $157,571 $135,599
Provision for loan and guarantee losses.................. 15,625 15,000 27,000
Charge-offs (see Note 10)................................ -- -- (8,602)
Recovery of amounts previously charged-off (see Note
10).................................................... -- -- 3,574
-------- -------- --------
Balance at end of year................................... $188,196 $172,571 $157,571
======== ======== ========
(f) Fixed Assets
Buildings, aircraft, furniture and fixtures and related equipment are
stated at cost less accumulated depreciation and amortization of $5.4 million
and $4.2 million as of May 31, 1994 and 1993, respectively. Depreciation and
amortization expenses ($1.6 million, $1.5 million and $1.2 million in fiscal
years 1994, 1993 and 1992, respectively) are computed primarily on the
straight-line method over estimated useful lives ranging from 3 to 40 years.
(g) Recognition of Fee Income
In connection with its various loan, guarantee and other financing
programs, CFC may be entitled to receive certain fees. Such fees are generally
designed to compensate CFC for expenses associated with the related
transactions. CFC recognizes the income from such fees periodically over the
term during which it incurs the related expenses.
(h) Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, CFC is a party to financial instruments
with off-balance sheet risk both to meet the financing needs of its member
borrowers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, guarantees
F-9
61
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of members' obligations and interest rate exchange agreements. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the combined balance sheets.
(i) Accounting by Creditors for Impairment of a Loan
In May 1993, the Financial Accounting Standards Board released Statement
No. 114 "Accounting by Creditors for Impairment of a Loan." The statement
requires that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, observable
market value or the fair value of the collateral. The statement is required to
be implemented in fiscal years beginning after December 15, 1994 and will apply
to loans that are, or become impaired, based on the provisions of SFAS 114, or
that have certain restructuring agreements executed on or after the
implementation date. CFC has elected not to implement this statement early and
management has not yet determined its impact on the financial statements.
(j) Employers' Accounting for Postemployment Benefits
In November 1992, the Financial Accounting Standards Board released
Statement No. 112 "Employers' Accounting for Postemployment Benefits." This
statement requires employers to recognize the obligation to provide
postemployment benefits, if the obligation is attributable to employees'
services already rendered, employees' rights to those benefits accumulate or
vest, payment of the benefits is probable, and the amount of the benefits can be
reasonably estimated. This statement is effective for fiscal years beginning
after December 15, 1994. CFC has elected not to implement this statement early.
However, management does not expect the implementation to have a material impact
on the financial statements.
(k) Accounting for Certain Investments in Debt and Equity Securities
In May 1993, the Financial Accounting Standards Board released Statement
No. 115 "Accounting for Certain Investments in Debt and Equity Securities." This
statement requires that investments in debt and equity securities be recorded at
fair value in the statement of financial condition unless the reporting
enterprise has the positive intent and ability to hold the instrument to
maturity. If there is positive intent and ability to hold to maturity, the
instrument can be recognized using the amortized cost method. This statement is
effective for fiscal years beginning after December 15, 1993. CFC has elected
not to implement this statement early, and management has not yet determined its
impact on the financial statements.
(l) Memberships
Members are charged a one-time membership fee based on member class. CFC
Distribution System members (Class A), Power Supply System members (Class B),
NRECA (Class D) and Associate members (Class E) all pay a $1,000 membership fee.
CFC Service Organization members (Class C) pay a $200 membership fee. RTFC
voting members pay a $1,000 membership fee and non-voting members pay a $100
membership fee. All GFC members pay a $1,000 membership fee.
(m) Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with fiscal year 1994 presentation.
(2) LOANS AND COMMITMENTS
Loans to members bear interest at rates determined from time to time by the
Board of Directors on the basis of CFC's cost of funds, operating expenses,
provision for loan and guarantee losses and the maintenance of reasonable margin
levels. In keeping with its not-for-profit, cooperative character, CFC's policy
is to set
F-10
62
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
interest rates at the lowest levels it considers to be consistent with sound
financial management. Loans outstanding to members, weighted average interest
rates thereon and unadvanced commitments are summarized by loan type as follows
as of May 31:
1994 1993
--------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
LOANS INTEREST UNADVANCED LOANS INTEREST UNADVANCED
OUTSTANDING RATES COMMITMENTS(A) OUTSTANDING RATES COMMITMENTS(A)
----------- -------- -------------- ----------- -------- --------------
(DOLLAR AMOUNTS IN THOUSANDS)
Long-term fixed rate secured loans (B):
Distribution Systems.................... $1,502,454 7.69% $ 12,089 $1,604,275 8.14% $ 694,051
Power Supply Systems.................... 273,186 7.56% 9,705 179,384 7.80% 148,329
Service Organizations (C)............... 94,104 9.53% 11,461 90,090 9.85% 5,482
Associate Members....................... 1,606 10.25% -- 1,628 10.25% --
Telecommunication Organizations......... 119,600 9.16% -- 130,552 9.33% --
----------- -------------- ----------- --------------
Total long-term fixed rate secured
loans.............................. 1,990,950 7.85% 33,255 2,005,929 8.27% 847,862
----------- -------------- ----------- --------------
Long-term variable rate secured loans (D):
Distribution Systems.................... 2,172,799 4.65% 807,848 1,975,784 4.63% 48,640
Power Supply Systems.................... 170,683 4.65% 436,147 178,095 4.63% 9,480
Service Organizations (C)............... 39,487 4.65% 64,828 43,014 4.63% 169,404
Associate Members....................... 29,089 4.45% 47,412 26,098 4.38% 47,520
Telecommunication Organizations......... 499,506 4.92% 366,269 288,234 4.75% 78,910
----------- -------------- ----------- --------------
Total long-term variable rate
secured loans...................... 2,911,564 4.69% 1,722,504 2,511,225 4.64% 353,954
----------- -------------- ----------- --------------
Refinancing variable rate loans guaranteed
by REA:
Power Supply Systems.................... 533,545 4.87% -- 297,724 3.94% --
----------- -------------- ----------- --------------
Intermediate-term secured loans:
Distribution Systems.................... 4,112 4.90% 2,000 320 4.75% --
Power Supply Systems.................... 21,316 4.90% 234,391 28,496 4.75% 355,568
Service Organizations................... 2,099 4.90% 5,541 496 4.75% 11,676
Telecommunication Organizations......... -- -- --
----------- -------------- ----------- --------------
Total intermediate-term secured
loans.............................. 27,527 4.90% 241,932 29,312 4.75% 367,244
----------- -------------- ----------- --------------
Intermediate-term unsecured loans:
Distribution Systems.................... 13,046 4.90% 10,695 10,873 4.75% 13,575
Power Supply Systems.................... 84,515 4.90% 22,376 -- -- --
Service Organizations................... -- -- 70 11 4.75% --
Telecommunication Organizations......... 1,265 5.05% 1,303 -- -- --
----------- -------------- ----------- --------------
Total intermediate-term unsecured
loans.............................. 98,826 4.90% 34,444 10,884 4.75% 13,575
----------- -------------- ----------- --------------
Short-term loans (E):
Distribution Systems.................... 276,373 4.90% 1,943,335 151,941 4.75% 1,735,088
Power Supply Systems.................... 14,048 4.90% 962,224 14,157 4.75% 839,239
Service Organizations................... 11,812 4.90% 66,463 11,873 4.75% 30,720
Associate Members....................... 3,084 4.90% 16,201 1,856 4.75% 10,129
Telecommunication Organizations......... 31,176 5.65% 114,172 21,370 5.50% 59,164
----------- -------------- ----------- --------------
Total short-term loans.............. 336,493 4.97% 3,102,395 201,197 4.83% 2,674,340
----------- -------------- ----------- --------------
Nonperforming loans (F):
Distribution Systems.................... 1,933 8.27% -- 11,164 10.20% 23,500
Power Supply Systems.................... 27,948 4.75% -- 29,584 4.75% --
Associate Members....................... 12,961 9.00% -- 12,963 9.00% --
Telecommunication Organizations......... 2,098 6.13% -- 2,117 9.00% --
----------- -------------- ----------- --------------
Total nonperforming loans........... 44,940 6.19% -- 55,828 6.99% 23,500
----------- -------------- ----------- --------------
Restructured loans (G):
Distribution Systems.................... 2,667 18.37% 3,000 -- -- --
Power Supply Systems.................... 160,873 8.32% 50,000 149,685 7.86% 26,500
Service Organizations................... 1,833 4.62% -- 2,000 4.63% --
Associate Members....................... -- -- -- 2,666 4.46% --
Telecommunication Organizations......... -- -- -- 18,592 4.77% --
----------- -------------- ----------- --------------
Total restructured loans............ 165,373 8.44% 53,000 172,943 7.43% 26,500
----------- -------------- ----------- --------------
Total loans......................... 6,109,218 5.87% 5,187,530 5,285,042 6.10% 4,306,975
----------- -------------- ----------- --------------
Less: Allowance for Loan and Guarantee
Losses.................................... 188,196 -- 172,571 --
----------- -------------- ----------- --------------
Net loans........................... $5,921,022 $5,187,530 $5,112,471 $4,306,975
=========== ============== =========== ==============
- - ---------------
(A) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed and for which loan contracts have been
executed, but funds have not been advanced. CFC may
F-11
63
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
require additional information to assure itself that all conditions for
advance of funds have been fully met and that there has been no material
change in the member's condition as represented in the documents supplied
CFC. Since commitments may expire without being fully drawn upon, the total
amounts reported as commitments do not necessarily represent future cash
requirements. Collateral and security requirements for lending on
commitments are identical to those for advanced loans.
(B) Generally, long-term fixed rate secured loans provide for a fixed interest
rate for terms of one to 30 years. Upon expiration of the term, the borrower
may select another fixed rate term of one to 30 years (but not beyond
maturity of the loan) or a variable rate. The borrower may select either
option or may repay to CFC the principal then outstanding together with
interest due thereon and other sums, if required.
(C) CFC had loans outstanding to National Cooperative Services Corporation
("NCSC") in each of the periods shown. Long-term fixed rate loans
outstanding to NCSC as of May 31, 1994 and 1993, were $47.8 million and
$49.0 million, respectively. In addition, as of May 31, 1994, CFC had
unadvanced long-term fixed rate and variable rate loan commitments to NCSC
in the amount of $5.0 million and $9.7 million, respectively.
(D) Included in the long-term variable rate secured loans are $3.5 million and
$2.5 million in unsecured loans to one borrower at May 31, 1994 and 1993.
(E) All short-term loans are unsecured, except for $18.2 million and $31.6
million in loans outstanding at May 31, 1994 and 1993 that are secured.
(F) The rates on nonperforming loans are the weighted average of the stated
rates on such loans as of the dates shown and do not necessarily relate to
the interest recognized by CFC from such loans.
(G) The rates on restructured loans are the weighted average of the effective
rates (based on present values of scheduled future cash flows) as of the
dates shown and do not necessarily relate to the interest recognized by CFC
from such loans.
F-12
64
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Loans outstanding, by state or U.S. territory, are summarized below:
MAY 31,
-----------------------
STATE 1994 1993
- - ---------------------- ---------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS)
Alabama............... $ 115,355 $ 78,761
Alaska................ 73,195 66,239
Arizona............... 62,188 46,639
Arkansas.............. 204,666 174,119
California............ 17,906 5,273
Colorado.............. 249,381 244,333
Delaware.............. 17,492 17,779
District of
Columbia............ 63,843 81,532
Florida............... 317,421 268,158
Georgia............... 415,393 387,936
Idaho................. 37,202 34,499
Illinois.............. 555,531 443,792
Indiana............... 101,190 96,110
Iowa.................. 129,454 123,734
Kansas................ 215,717 201,875
Kentucky.............. 157,051 152,133
Louisiana............. 124,877 128,051
Maine................. 2,914 20,812
Maryland.............. 65,779 67,662
Michigan.............. 55,969 49,853
Minnesota............. 180,370 164,707
Mississippi........... 186,869 170,707
Missouri.............. 219,121 213,704
Montana............... 136,812 29,576
Nebraska.............. 21,096 13,588
MAY 31,
-----------------------
STATE 1994 1993
- - ---------------------- ---------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS)
Nevada................ $ 7,709 $ 6,019
New Hampshire......... 8,787 7,903
New Jersey............ 4,109 4,195
New Mexico............ 103,055 39,468
New York.............. 13,202 10,090
North Carolina........ 267,782 201,467
North Dakota.......... 10,916 9,617
Ohio.................. 68,895 58,883
Oklahoma.............. 220,346 179,766
Oregon................ 113,600 107,012
Pennsylvania.......... 80,272 76,921
South Carolina........ 251,520 156,786
South Dakota.......... 41,072 38,285
Tennessee............. 55,681 60,858
Texas................. 580,375 536,566
Utah.................. 131,285 99,217
Vermont............... 11,674 11,030
Virgin Islands........ 56,114 63,074
Virginia.............. 174,607 170,830
Washington............ 76,991 72,222
West Virginia......... 1,051 718
Wisconsin............. 79,811 70,827
Wyoming............... 23,572 21,716
---------- ----------
Total............ $6,109,218 $5,285,042
========= =========
Weighted average interest rates earned (recognized in the case of
nonperforming and restructured loans) on all loans outstanding are summarized
below:
FOR THE YEAR ENDED MAY
31,
-------------------------
1994 1993 1992
----- ----- -----
Long-term fixed rate....................... 8.63% 9.15% 9.16%
Long-term variable rate.................... 4.08% 4.99% 6.09%
Telecommunication organizations............ 5.58% 6.32% 7.26%
Refinancing loans guaranteed by REA........ 4.01% 4.09% 5.97%
Intermediate-term.......................... 4.41% 4.93% 6.03%
Short-term................................. 4.38% 5.08% 6.18%
Associate members.......................... 4.21% 4.74% 6.09%
Nonperforming.............................. 1.19% 1.26% 7.96%
Restructured............................... 2.33% 1.92% 3.52%
All loans................... 5.66% 6.54% 7.86%
F-13
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term fixed rate loans outstanding at May 31, 1994 which will be
subject to adjustment of their interest rates during the next five calendar
years are summarized as follows (due to principal repayments, amounts subject to
interest rate adjustment may be lower at the actual time of interest rate
adjustment):
WEIGHTED
AVERAGE
INTEREST AMOUNTS
RATE OUTSTANDING
-------- -----------
(DOLLAR AMOUNTS IN
THOUSANDS)
1995............................................... 7.99% $ 141,814
1996............................................... 8.25% 151,991
1997............................................... 9.13% 146,655
1998............................................... 8.22% 161,008
1999............................................... 7.54% 303,667
-----------
$ 905,135
===========
During the first quarter of calendar year 1994, long-term fixed rate loans
totaling $52.9 million had their interest rates adjusted. These loans will be
eligible to readjust their interest rates again during the first quarter of
calendar year 1995 to the lowest long-term fixed rate offered during 1994 for
the term selected. At January 1 and May 31, 1994, the standard long-term fixed
rates were 6.55% and 8.00%, 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 1995 repayments of principal on
long-term loans outstanding are expected to be a relatively minor amount of such
outstanding loans.
CFC evaluates each borrower's creditworthiness on a case-by-case basis. It
is generally CFC's policy to require collateral for all long-term and some
intermediate-term loans. Such collateral usually consists of a first mortgage
lien on the borrower's total system, including plant and equipment, and a pledge
of future revenues. The loan and security documents also contain various
provisions with respect to the mortgaging of the borrower's property, the
maintenance of certain earnings and debt service coverage ratios, maintenance of
adequate insurance coverage and certain other restrictive covenants.
Under common mortgages securing long-term CFC loans to Distribution System
members, REA has the sole right to act within 30 days or, if REA 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, REA retains substantial control over the
exercise of mortgage remedies.
As of May 31, 1994 and 1993, mortgage notes representing approximately
$717.8 million and $1,301.7 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 REA; however, "Refinancing
loans guaranteed by REA" represents loans made by CFC and transferred to its
affiliate GFC to fund the prepayment of members' Federal Financing Bank debt,
effected through grantor trusts which each hold a note from the member, the
repayment of which has been guaranteed by REA. Each trust issues Trust
Certificates which represent an undivided interest in the trust assets. GFC, as
holder of Trust Certificates, is financing these loans from funds provided by
CFC at a variable rate until fixed rate funding is obtained through the public
markets.
CFC sets the variable interest rates monthly on outstanding short-and
intermediate-term loans. On notification to borrowers, CFC may adjust the
interest rate semimonthly. Under CFC policy, the maximum interest rate which may
be charged on short-term loans is the prevailing bank prime rate plus 1% per
annum;
F-14
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1994, 1993 and 1992, nonperforming loans in the amount of $44.9
million, $55.8 million and $17.0 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 $1.5
million, $1.1 million and $1.1 million for the years ended May 31, 1994, 1993
and 1992, respectively. Income recognized on these loans totaled $0.5 million,
$0.5 million and $20.9 million, respectively.
At May 31, 1994, 1993 and 1992, the total amount of restructured debt was
$165.4 million, $172.9 million and $145.6 million, respectively. CFC elected to
apply all principal and interest payments received against outstanding amounts
on restructured debt of $111.5 million, $100.3 million and $81.2 million,
respectively. The interest income that would have been recorded under the
original terms of the debt, assuming the debt had been outstanding for the
period, was $8.4 million, $8.8 million and $10.5 million, for the years ended
May 31, 1994, 1993 and 1992, respectively. The interest income actually recorded
for restructured debt was $4.0 million, $2.9 million and $5.6 million,
respectively. At May 31, 1994 and 1993, CFC had committed to lend $53.0 million
and $26.5 million, respectively, to borrowers performing under restructured
terms.
(3) MEMBERS' SUBORDINATED CERTIFICATES
Membership Subscription Certificates
To join CFC and to establish eligibility to borrow, CFC members (other than
associate members and service organizations) are required to execute agreements
to subscribe to certain Subordinated Certificates. Such certificates are
interest-bearing, unsecured, subordinated debt of CFC. CFC is authorized to
issue subscription certificates without limitation as to the total principal
amount.
Generally, Membership Subscription Certificates mature in the years 2070
through 2090 and bear interest at 3% or 5% per annum.
New members joining CFC are required to purchase Membership Subscription
Certificates in an amount equal to 5% of each loan advance up to a maximum
amount based on their operating results. The maturity dates and interest rates
payable on such Certificates vary in accordance with applicable CFC policy.
In certain cases, the Board of Directors has approved alternative deferred
payment arrangements for purchase of subscription certificates. These deferred
payments are evidenced by noninterest-bearing, unsecured notes from the member
and are shown as receivables.
Loan and Guarantee Certificates
Members obtaining long-term loans, certain intermediate-term loans or
guarantees from CFC or RTFC are generally required to purchase additional
Subordinated Certificates with each such loan or guarantee. These certificates
are unsecured, subordinated debt of CFC and RTFC.
Certificates currently purchased in conjunction with loans are
noninterest-bearing and are generally repaid periodically over the life of the
loan in relation to the loan principal balance outstanding. Such certificate
purchase requirements, if any, range from 1% to 12% of the loan amount depending
on the membership classification of the borrower and the borrower's leverage
ratio, including the new loan, with CFC, for utility systems.
The maturity dates and the interest rates payable on certificates purchased
in conjunction with CFC's guarantee program vary in accordance with applicable
CFC policy. In addition, members may also be required to purchase
noninterest-bearing Subordinated Certificates in connection with CFC's guarantee
of long-term tax-exempt bonds (see Note 8). These certificates have varying
maturities but none is greater than the longest
F-15
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
maturity of the guaranteed obligation. Proceeds from the sale of such
certificates are pledged by CFC to the debt service reserve fund established in
connection with the bond issue, and any earnings from the investments of the
fund inure solely to the benefit of the members for whose benefit the bonds are
issued.
Information with respect to Members' Subordinated Certificates at May 31,
is as follows:
1994 1993
---------- ----------
Membership Subscription Certificates:
Number of subscribing members.................................. 899 894
(DOLLAR AMOUNTS IN
THOUSANDS)
Issued and outstanding:
3% and 5% certificates maturing 2020 through 2090......... $ 628,583 $ 627,067
Subscribed and unissued........................................ 11,937 13,453
---------- ----------
Total Membership Subscription Certificates........... 640,520 640,520
---------- ----------
Loan and Guarantee Certificates:
Issued and outstanding:
3% certificates maturing through 2040..................... 141,481 146,197
8.33% to 13.70% certificates maturing through 2018........ 143,468 140,871
Noninterest-bearing certificates maturing through 2027.... 279,978 268,998
Subscribed and unissued........................................ 17,411 18,961
---------- ----------
Total Loan and Guarantee Certificates................ 582,338 575,027
---------- ----------
Total Members' Subordinated Certificates............. $1,222,858 $1,215,547
========= =========
CFC estimates the amount of Subscription and Loan and Guarantee
Certificates that will be repaid during the next five fiscal years will total
approximately 2% of certificates outstanding. The weighted average interest rate
paid on all subordinated certificates was 4.46%, 4.58% and 4.17% as of May 31,
1994, 1993 and 1992, respectively. These rates do not include $107.1 million,
$116.5 million and $128.0 million of debt service reserve certificates and $29.3
million, $32.4 million and $36.2 million of subscribed but unissued subordinated
certificates at May 31, 1994, 1993 and 1992, respectively.
F-16
68
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(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:
1994 1993
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNTS INTEREST AMOUNTS INTEREST
OUTSTANDING RATES OUTSTANDING RATES
----------- -------- ----------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
Commercial paper, sold through dealer, net of discounts
of $3,320 and $2,295, respectively.................... $ 2,367,763 4.28% $ 1,021,215 3.17%
Commercial paper sold by CFC directly to members, at
par................................................... 999,549 4.13% 1,114,797 3.11%
Commercial paper sold by CFC directly to nonmembers,
at par................................................ 61,663 4.01% 62,612 3.14%
----------- -----------
3,428,975 4.23% 2,198,624 3.14%
Bank bid notes.......................................... 209,000 4.30% 335,000 3.17%
----------- -----------
3,637,975 4.23% 2,533,624 3.14%
Notes payable supported by revolving credit agreements,
classified as long-term debt (see Note 5)............. (2,030,000) 4.23% (2,030,000) 3.14%
----------- -----------
$ 1,607,975 4.23% $ 503,624 3.14%
============ ============
Other information with regard to notes payable due within one year at May
31, is as follows:
1994 1993 1992
-------------- -------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS)
Original maturity range of notes outstanding at
year-end........................................ 1 to 269 days 1 to 232 days 1 to 222 days
Weighted average original maturity of notes
outstanding at year-end......................... 36 days 46 days 44 days
Average amount outstanding during the year........ $2,954,783 $2,279,304 $2,125,192
Maximum amount outstanding at any month-end during
the year........................................ $3,637,975 $2,533,624 $2,250,162
Weighted average interest rate paid for the year,
without effect of compensating balances and
commitment fees................................. 3.48% 3.36% 5.01%
Weighted average effective interest rate paid for
the year, including effect of compensating
balances and commitment fees.................... 3.67% 3.61% 5.22%
CFC issues short-term bid notes which are unsecured obligations of CFC and
do not require back-up bank lines for liquidity purposes. Bid note facilities
are uncommitted lines of credit for which CFC does not pay a fee. The
commitments are generally subject to termination at the discretion of the
individual banks.
As of May 31, 1994, CFC had two revolving credit agreements totaling
$2,900.0 million with 52 banks, including Morgan Guaranty Trust Company of New
York as Administrative Agent and Arranger and the Bank of Nova Scotia as
Managing Agent. These credit facilities were arranged principally to provide
liquidity support for CFC's outstanding commercial paper and the adjustable or
floating/fixed rate bonds which CFC has guaranteed and agreed to purchase for
the benefit of its members (see Note 8).
Under the respective revolving credit agreements, CFC can borrow up to
$2,030.0 million until June 3, 1996 (the "three-year facility"), and $870.0
million until May 26, 1995 (the "364-day facility"). Any
F-17
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
amounts outstanding will be due on those dates. In connection with the
three-year facility, CFC pays a per annum facility/commitment fee of .225 of 1%.
The per annum facility fee for the 364-day facility is .15 of 1%. If CFC's
short-term ratings decline, these fees may be increased by no more than .2125 of
1%. Borrowings under both agreements 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 $1,334.4
million (increased each fiscal year by 90% of net margins not distributed to
members) and 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 1.05 for the
preceding fiscal year. The credit agreements prohibit CFC from incurring senior
debt (including guarantees but excluding indebtedness incurred to fund REA
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
agreement also prohibits 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 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, 1994, CFC was in compliance with all covenants and conditions.
As of May 31, 1994, there were no borrowings outstanding under the
revolving credit agreements. At May 31, 1994, CFC classified $2,030.0 million of
its notes payable outstanding as long-term debt. CFC expects to maintain more
than $2,030.0 million of notes payable outstanding during the next 12 months. If
necessary, CFC can refinance such notes payable on a long-term basis by
borrowing under the three-year facility, subject to the conditions therein.
In addition to the revolving credit facilities at May 31, 1994, CFC also
had $610.0 million in separately negotiated 364-day lines of credit, documented
by a uniform line of credit agreement for which a commitment fee of .10 of 1% is
paid. The line of credit agreement contains the same financial covenants as the
revolving credit agreements and may be terminated upon 30 days notice by either
party. After such notice the bank would not be obligated to lend.
F-18
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LONG-TERM DEBT
The following is a summary of long-term debt as of May 31:
1994 1993
---------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS)
Long-term debt:
Notes payable supported by revolving credit agreement (see Note
4)............................................................. $2,030,000 $2,030,000
---------- ----------
Medium-Term Notes, sold through dealer.......................... 238,225 255,925
Medium-Term Notes, sold directly to members..................... 233,983 200,613
---------- ----------
472,208 456,538
---------- ----------
Collateral Trust Bonds:
9 3/8%, Series Q, due 1995................................. -- 150,000
9 5/8%, Series R, due 1996................................. -- 100,000
9.85%, Series S, due 1996.................................. -- 100,000
9 1/2%, Series T, due 1997................................. 150,000 150,000
8 1/2%, Series U, due 1998................................. 150,000 150,000
7.40%, Series A, due 2007.................................. 2,819 6,319
Floating Rate, Series E-2, due 2010........................ 2,253 2,279
9%, Series O, due 2016..................................... 87,400 91,600
9%, Series V, due 2021..................................... 150,000 150,000
---------- ----------
542,472 900,198
Less: Collateral Trust Bonds held in treasury................... 200 1,500
Unamortized bond discount................................. 2,412 2,952
---------- ----------
Total Collateral Trust Bonds.......................... 539,860 895,746
---------- ----------
Total long-term debt.................................. $3,042,068 $3,382,284
========= =========
CFC redeemed Series Q Collateral Trust Bonds on June 16, 1994, Series R
Collateral Trust Bonds on February 2, 1994, and Series S Collateral Trust Bonds
on April 18, 1994, all at par.
The weighted average interest rate on Medium-Term Notes and Collateral
Trust Bonds was 8.06%, 8.56% and 8.90% as of May 31, 1994, 1993 and 1992. These
rates do not include notes payable supported by the revolving credit agreement.
The principal amount of Medium-Term Notes and Collateral Trust Bonds
maturing (including any sinking fund requirements) in each of the five fiscal
years following May 31, 1994, is as follows:
(DOLLAR AMOUNTS IN THOUSANDS)
1995.......................... $200,848
1996.......................... 150,604
1997.......................... 273,500
1998.......................... 122,600
1999.......................... 12,300
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 twelve months. At May 31, 1994
and 1993, CFC had $33.7 million and $45.6 million of such funds invested in bank
certificates of deposit and marketable securities, respectively.
F-19
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The outstanding Collateral Trust Bonds are secured by the pledge of
mortgage notes taken by CFC in connection with long-term secured loans made to
those members fulfilling specified criteria as set forth in the indenture.
Medium-Term Notes are unsecured obligations of CFC.
As of May 31, 1994 and 1993, CFC had interest rate exchange agreements as
follows:
AGGREGATE AMOUNT
INTEREST ---------------------------
MATURITY DATE RATE 1994 1993
------------------------------------------------- ----- -------- --------
(DOLLAR AMOUNTS IN
THOUSANDS)
August 1996...................................... 8.40% $ 30,000 $ 30,000
February 1997.................................... 9.34% 100,000 100,000
-------- --------
$130,000 $130,000
======== ========
Under these agreements, CFC pays a fixed rate of interest and receives
interest based on a floating rate, the net result of which is included in the
cost of funds. CFC is exposed to interest rate risk to the extent of
nonperformance by the other parties to the agreements.
CFC enters into interest rate swaps in managing its interest rate risk. In
these swaps, CFC agrees with other parties to exchange, at specified intervals,
the difference between fixed-and floating-interest amounts calculated on an
agreed-upon notional principal amount. CFC uses interest rate swap agreements to
hedge certain long-term fixed-rate interest-earning assets that have been funded
by shorter-term variable interest-bearing liabilities. Interest rate swaps in
which CFC pays the fixed and receives the floating rate are used to reduce the
impact of market interest rate fluctuations on CFC's net margins.
CFC is be exposed on these interest rate swap agreements to interest rate
risk if the counterparty to the interest rate swap agreement does not perform to
the agreement's terms. CFC does have a policy intended to limit counterparty
credit risk by maintaining swap agreements only with financial institutions with
at least a AA long-term credit rating.
(6) EMPLOYEE BENEFITS
CFC is a participant in the National Rural Electric Cooperative Association
("NRECA") Retirement and Security Program. This program is available to all
qualified CFC employees. Under the program, participating employees are entitled
to receive, under a 50% joint and surviving spouse annuity, 1.90% of the average
of their five highest base salaries during their last ten years of employment,
multiplied by the number of years of participation in the program. CFC funds
pension costs accrued on a monthly basis. A moratorium on contributions has been
in effect since July 1, 1987, when the plan reached the full funding limitation.
This is a multi-employer plan, available to all member cooperatives of NRECA,
and therefore, the projected benefit obligation and plan assets are not
determined or allocated separately by individual employer.
The Budget Reconciliation Act of 1993 has set a limit of $150,000 on the
1994 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
F-20
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
benefit must be paid within 24 months of termination of employment. To the
extent that the Severance Pay Plan cannot pay all of the lost pension benefits,
the remainder will be paid under a Deferred Compensation Plan, which will be
paid out in a lump sum or in installments of up to 60 months.
CFC recognizes in current year margins any expected payouts for post
retirement benefits (other than pensions) as a result of current service.
Postretirement benefits include, but are not limited to, health and welfare
benefits provided after retirement. While CFC allows retired employees to
participate in its medical and life insurance plans, the retirees must do so at
their own expense. Any liability which may be incurred by allowing retired
employees to remain on CFC's medical and life insurance plans is not material to
CFC's financial condition, results of operations or cashflows.
(7) RETIREMENT OF PATRONAGE CAPITAL
Patronage capital in the amount of $30.1 million was retired during fiscal
year 1994. This amount consists of $28.0 million retired by CFC, $1.2 million
retired by RTFC and $0.9 million retired by GFC.
In accordance with the CFC-only policy of retiring patronage capital, it is
anticipated that patronage capital representing one-sixth of the fiscal years
1988, 1989 and 1990 allocations along with one-half of the fiscal year 1994
allocation will be retired in August 1994. Management anticipates that 50% of
RTFC's margins for fiscal year 1994 will be retired in January 1995, and that
100% of GFC's margins for fiscal year 1994 will be retired in the second quarter
of fiscal year 1995. Future retirements of patronage capital will be made as
determined by the Companies' respective Boards of Directors with due regard for
their individual financial conditions.
(8) GUARANTEES
As of May 31, 1994 and 1993, CFC had outstanding guarantees of the
following contractual obligations of its members (see Note 1(e) for a
description of CFC's allowance for loan and guarantee losses and Note 3 for a
discussion of requirements to purchase Members' Subordinated Certificates in
connection with these guarantees):
1994 1993
---------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS)
Long-term tax exempt bonds (A)................................... $1,494,200 $1,576,230
Debt portions of leveraged lease transactions (B)................ 646,472 700,841
Indemnifications of tax benefit transfers (C).................... 414,512 436,860
Other guarantees (D)............................................. 100,643 99,800
---------- ----------
Total............................................. $2,655,827 $2,813,731
========= =========
- - ---------------
(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 REA on all
of the system's assets, but CFC may not exercise remedies thereunder for up
to two years. However, if the debt is accelerated because of a
determination that the interest thereon is not tax-exempt, the system's
obligation to reimburse CFC for any guarantee payments will be treated as a
long-term loan.
F-21
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Of the amounts shown, $1,214.6 million and $1,120.8 million as of May 31,
1994 and 1993, 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 amount shown represent CFC's maximum potential
liability at May 31, 1994 and 1993. However, the amounts of such guarantees
vary over the lives of the leases. As of May 31, 1994 and 1993, the maximum
amount of the guarantees when taken individually totaled $414.6 million and
$437.0 million, respectively. A member's obligation to reimburse CFC for any
guarantee payments would be treated as a long-term loan, secured pari passu
with the REA 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, 1994 and 1993, CFC had unconditionally guaranteed commercial
paper issued by NCSC in the amount of $34.8 million and $35.5 million,
respectively.
Guarantees outstanding, by state, are summarized as follows:
MAY 31,
-----------------------
STATE 1994 1993
- - ---------------------- ---------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS)
Alabama............... $ 77,320 $ 81,165
Arizona............... 31,660 33,080
Arkansas.............. 268,425 309,784
Colorado.............. 115,299 115,300
Florida............... 395,457 439,130
Indiana............... 133,300 157,465
Iowa.................. 13,505 14,550
Kansas................ 43,208 43,889
Kentucky.............. 187,400 178,265
Maryland.............. 34,830 35,500
Minnesota............. 175,946 173,651
Mississippi........... 76,275 78,365
Missouri.............. 364,350 378,837
MAY 31,
-----------------------
STATE 1994 1993
- - ---------------------- ---------- ----------
(DOLLAR AMOUNTS IN
THOUSANDS)
Nebraska.............. $ 4,765 $ 5,030
North Carolina........ 124,450 124,450
Oklahoma.............. 76,906 83,400
Oregon................ 5,280 5,365
Pennsylvania.......... 16,270 17,113
South Carolina........ 54,155 54,300
Texas................. 106,502 104,370
Utah.................. 336,584 366,317
Virginia.............. 4,650 4,700
Wisconsin............. 9,290 9,705
---------- ----------
Total............ $2,655,827 $2,813,731
========= =========
CFC uses the same credit policies and monitoring procedures in providing
guarantees as it does for loans and commitments.
F-22
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with Statement of Financial Accounting
Standards 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, 1994, along with other valuation
methodologies which are summarized below. However, the estimated fair value
information presented is not necessarily indicative of amounts CFC could realize
currently in a market sale as such amounts have not been revalued since year
end. Therefore, current estimates of fair value may differ significantly from
the amounts presented. With the exception of redeeming Collateral Trust Bonds
under early redemption provisions and allowing borrowers to prepay their loans,
CFC has held all financial instruments to maturity. Below is a summary of
significant methodologies used in estimating fair value amounts and a schedule
of fair values at May 31, 1994.
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
estimated 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 original
interest rate repricing maturities of less than or equal to 90 days are valued
at cost which approximates fair value.
Debt Service Reserve Funds
Fair value of debt service reserve funds is estimated at cost as all gains
and losses on the underlying securities inure directly to the benefit or
detriment of the CFC member and not to CFC.
Notes Payable
Notes payable consist of commercial paper and bank bid notes. The fair
value of commercial paper and bid notes with maturities greater than 90 days is
estimated based on quoted market rates with similar maturities for commercial
paper and on bid prices from the various banking institutions for bid notes. The
fair value of commercial paper and bank bid notes with maturities less than or
equal to 90 days is estimated 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.
Subordinated Certificates
As it is impracticable to develop a discount rate that measures fair value,
Subordinated Certificates have not been valued. Subordinated Certificates are
extended long-term obligations to CFC; many have maturities of 70 to 100 years.
These certificates are issued to CFC's members as a condition of membership or
as a condition of obtaining loan funds or guarantees and are non-transferable.
As these certificates were issued not
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
only for their future payment stream but also as a condition to receiving future
loan funds, there is no ready market from which to obtain fair value rates.
Interest Rate Exchanged Agreements
The fair value is estimated as the amount CFC would receive or pay to
terminate the agreement, taking into account the current market rate of interest
and the current creditworthiness of the exchange counterparties.
Commitments
The fair value is estimated as the carrying value, or zero. Extensions of
credit under these commitments, if exercised, would result in loans priced at
market rates.
Guarantees
CFC charges guarantee fees based on the specifics of each individual
transaction. The demand for CFC guarantees has been small in the last few years.
In addition, there is no other company that provides guarantees to rural
electric utility companies with which to obtain market fee information. As a
result, it is impracticable to supply fair value information related to
guarantee fees.
Carrying and fair values as of May 31, 1994 and 1993 are presented as
follows:
1994 1993
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
ASSETS:
Cash.................................... $ 22,168 $ 22,168 $ 55,450 $ 55,450
Debt Services Investments............... 33,668 33,668 45,611 45,611
Loans to Members, net................... 5,921,022 5,863,472 5,112,471 5,229,564
Debt Service Reserve Funds.............. 107,095 107,095 116,470 116,470
LIABILITIES AND MEMBERS' SUBORDINATED
CERTIFICATES:
Notes Payable (1)....................... 3,637,975 3,637,975 2,533,624 2,533,624
Long-Term Debt (1)...................... 1,012,068 1,065,200 1,352,284 1,561,550
Members' Subordinated Certificates...... 1,222,858 1,222,858 1,215,547 1,215,547
OFF BALANCE SHEET INSTRUMENTS:
Interest Rate Exchange Agreements....... 0 (9,189) 0 (14,622)
Commitments............................. 0 0 0 0
Guarantees.............................. 0 0 0 0
--------------------
(1) Prior to reclassification of notes payable supported by the revolving
credit agreements.
(10) CONTINGENCIES
(A) On May 23, 1985, Wabash Valley Power Association, Inc. ("WVPA") filed a
voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in connection with the cancelled Marble Hill plant
construction.
On August 7, 1992, the Bankruptcy Court confirmed WVPA's reorganization
plan pending approval of rates as contemplated in the plan. Depending on
the final terms of a plan of reorganization, CFC could
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
be obligated to pay REA a pro-rata amount (estimated at 78%) of the debt
service payments plus interest made by WVPA on the $25 million in
tax-exempt bonds since the bankruptcy petition date.
On June 22, 1994, the U.S. District Court affirmed (over REA's objection)
the Wabash plan in reorganization. REA has until August 28, 1994, to appeal
the decision to the U.S. Court of Appeals. Under the Wabash plan, CFC would
realize an estimated total loss of approximately $12 million ($8.6 million
of which has been written off to date), after the offset of subordinated
capital term certificates (without taking into account interest since the
petition date). The estimated loss under the Wabash plan does not include
the amount CFC is obligated to pay to REA, representing REA's share of the
debt service payments made by Wabash on the CFC guaranteed bonds, since the
petition date.
In May 1993, CFC advanced $24.4 million in variable interest rate secured
loans to WVPA, which was used to effect an early redemption of tax-exempt
bonds guaranteed by CFC. As WVPA is in bankruptcy, CFC has classified this
loan as nonperforming and, therefore, does not accrue interest income on
the loans. As of May 31, 1994, CFC had $22.9 million in loans outstanding
to Wabash.
Based on WVPA's preliminary reorganization plan, management believes that
CFC has adequately reserved for any potential loss.
(B) Deseret Generation & Transmission Co-operative ("Deseret") and its major
creditors entered into an Agreement Restructuring Obligations ("ARO") that
restructured Deseret's debt obligations to REA, CFC and certain other
creditors, including certain lease payments due on the Bonanza Power Plant.
The ARO, which closed in January 1991 with an effective date of January 1,
1989, provides for the reduction of Deseret's debt service and rental
obligations on the Bonanza Power Plant until 1996 when large sales of power
were intended to commence.
Under the ARO assumptions, CFC expects to fund Deseret's cash flow
shortfalls until at least 1996 under its various guarantees of debt
obligations. Deseret's ability to generate enough cash flow to service its
current debt and rental payments as well as to begin repayment of the
shortfall funded by CFC thereafter depends on whether it is able to make
the large power sales on which the ARO is premised. Due to changes in power
demands of Deseret's distribution system members and the resulting
reduction in power available for sale at higher prices to nonmembers, as
well as an inability, so far, to complete the intended power sales,
Deseret's cash flow projections have undergone revision since the closing
of the ARO. As a result of these changes, Deseret is expected to be unable
to satisfy its payment obligations under the ARO, and the ARO is expected
to be amended some time in the future. Under the ARO, CFC expected to fund
Deseret's cash flow shortfalls totaling $117 million and expected a maximum
exposure of $439 million in 1996. At May 31, 1994, CFC had funded $93.8
million of the shortfall. CFC's current exposure of $447.7 million is
greater than the expected maximum from the ARO because it loaned Deseret
funds for the early redemption, at a premium, of two high interest rate
bond issues. If the parties cannot agree on an amendment, the ARO could be
terminated and Deseret's creditors would be free to pursue remedies on
their defaulted obligations.
On April 25, 1994, Deseret announced that it had entered into an agreement
with Tri-State G&T and PacifiCorp to study the possible acquisition of
Deseret's assets. Deseret has also announced its intention to seek
proposals from other parties regarding assets and/or power purchases from
Deseret.
CFC has placed all loans to Deseret on a nonaccrual basis with respect to
interest income recognition. CFC does not anticipate interest income
recognition on the outstanding loans until such time that Deseret's power
sales produce cash flows sufficient to service all debts.
As part of a separate agreement, in conjunction with the ARO, CFC will be
obligated to repay out of payments by Deseret $25.9 million (plus interest)
received from a party to the Bonanza Lease transaction to cover shortfalls
in the July 1989, January 1990 and July 1990 lease payments which were
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
funded by that party. This amount would be repaid if the available annual
cash flow were to exceed the debt repayment requirements as defined in the
ARO (i.e., CFC was no longer required to fund a shortfall).
As of May 31, 1994, CFC had approximately $447.7 million in current credit
exposure to Deseret consisting of $111.5 million in secured loans and
$336.2 million in guarantees by CFC of various direct and indirect
obligations of Deseret. CFC's guarantees include $9.3 million in
tax-benefit indemnifications and $32.8 million relating to mining equipment
for a coal supplier of Deseret. The remainder of CFC's guarantee is for
semiannual debt service payments on $294.1 million of bonds issued in a
$655 million leverage lease financing of a generating station in 1985.
Under the ARO, CFC has also provided Deseret a $20.0 million five-year
priority secured line of credit. At May 31, 1994, there was no balance
outstanding under this line of credit.
CFC believes that, given the underlying collateral value and the terms of
the ARO, it has adequately reserved for any potential loss on its loans and
guarantees to Dereset.
(C) As a consequence of high costs associated with its involvement with the
Clinton Nuclear Station, Soyland Power Cooperative ("Soyland") charged
costs for wholesale power which resulted in its member's retail rates being
uncompetitive. This situation resulted in revenues which were inadequate to
service its debt. Soyland, REA and CFC entered into a debt restructuring
agreement, dated as of December 15, 1993, which restructured Soyland's
indebtedness to REA. As part of this agreement, CFC agreed to extend
additional credit to Soyland in the form of a $30 million revolving credit
facility and a $30 million loan for capital additions. The revolving credit
loan and the capital additions loan have priority in payment over the
existing REA loans and the prior CFC loan.
At May 31, 1994, CFC had $49.4 million in outstanding long-term loans to
Soyland which were secured equally and ratably with the REA on all assets
and future revenues of Soyland. In addition, CFC had $23.3 million in super
secured lines of credit outstanding to Soyland. These lines of credit are
to be paid before all other secured debt. CFC also had $384.7 million in
loans to Soyland which are 100% guaranteed by the U.S. Government.
CFC believes that, given the underlying collateral value of its secured
loans to Soyland, it has adequately reserved for any potential loss on its
loans.
(D) At May 31, 1994, four other borrowers were in payment default to CFC on
secured and unsecured loans totaling $22.0 million. At May 31, 1993, six
borrowers were in payment default to CFC on secured and unsecured loans
totaling $31.4 million, these six included the four that were in payment
default at May 31, 1994.
(11) EXTRAORDINARY LOSS
During the year ended May 31, 1994, CFC did not incur any prepayment
penalties related to the early retirement of Collateral Trust Bonds. During
the years ended May 31, 1993 and 1992 CFC paid prepayment penalties of $3.2
million and $1.4 million, respectively, for the early retirement of
Collateral Trust Bonds.
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(12) COMBINED QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Summarized results of operations for the four quarters of fiscal years 1994
and 1993 are as follows:
FISCAL YEAR 1994
QUARTERS ENDED
--------------------------------------------------
AUGUST TOTAL
31 NOVEMBER 30 FEBRUARY 28 MAY 31 YEAR
------- ----------- ----------- ------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
Operating income................. $80,496 $82,110 $83,317 $78,759 $324,682
Operating margin................. 11,257 11,950 1,963 3,989 29,159
Nonoperating income.............. 1,899 513 1,056 561 4,029
Net margins...................... 13,156 12,463 3,019 4,550 33,188
FISCAL YEAR 1993
QUARTERS ENDED
--------------------------------------------------
AUGUST TOTAL
31 NOVEMBER 30 FEBRUARY 28 MAY 31 YEAR
------- ----------- ----------- ------- --------
(DOLLAR AMOUNTS IN THOUSANDS)
Operating income................. $87,414 $84,684 $82,933 $81,356 $336,387
Operating margin................. 10,403 10,804 9,702 7,443 38,352
Nonoperating income.............. 1,239 272 1,324 461 3,296
Extraordinary loss............... (3,161) -- -- -- (3,161)
Net margins...................... 8,481 11,076 11,026 7,904 38,487
- - ---------------
NOTE: During fiscal year 1994, CFC made nine monthly provisions for loan and
guarantee losses of $0.625 million and one special provisions of $10.0
million during the third quarter. During fiscal year 1993, CFC made
regular monthly provisions for loan and guarantee losses of $1.25 million.
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79
EXHIBIT INDEX
EXHIBIT
NUMBER PAGE
- - ------ ----
3.1 -- Articles of Incorporation. Incorporated by reference to Exhibit 3.1 to
Registration Statement No. 2-46018, filed October 12, 1972.
3.2 -- Bylaws. Incorporated by reference to Exhibit 3.2 to CFC's annual report on Form
10-K for the year ended May 31, 1988, filed July 27, 1988.
3.3 -- Amendments to Bylaws as approved by CFC's Board of Directors and members on
February 11, 1993, and a copy of the Bylaws as amended. Incorporated by
reference to Exhibit 3.3 to CFC's annual report on Form 10-K for the year ended
May 31, 1993, filed August 18, 1993.
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 -- Revolving Credit Agreements dated May 28, 1993. Incorporated by reference to
exhibit 4.6 to Form 10-K filed August 23, 1993.
4.3 -- Indenture dated as of February 15, 1994, between the Registrant and First Bank
National Association, trustee. Incorporated by reference to Exhibit 4.1 to the
current report on Form 8-K filed by CFC on June 14, 1994.
4.4 -- Amendments to Revolving Credit Agreement dated May 17, 1994.
-- 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 -- Supplemental Benefit Agreement between CFC and Charles B. Gill dated January
11, 1983, as amended. Incorporated by reference to Exhibit 10.2 to CFC's annual
report on Form 10-K for the year ended May 31, 1983.
10.3 -- Second Amendment to Supplemental Benefit Agreement between CFC and Charles B.
Gill dated May 29, 1986. Incorporated by reference to Exhibit 10.3 to CFC's
annual report on Form 10-K for the year ended May 31, 1986.
10.4 -- Third Amendment to Supplemental Benefit Agreement between CFC and Charles B.
Gill dated April 1, 1989. Incorporated by reference to Exhibit 10.4 to CFC's
annual report on Form 10-K for the year ended May 31, 1989.
10.5 -- Fourth Amendment to Supplemental Benefit Agreement between CFC and Charles B.
Gill dated April 1, 1993. Incorporated by reference to Exhibit 10.5 to CFC's
annual report on Form 10-K for the year ended May 31, 1993.
10.6 -- Fifth Amendment to Supplemental Benefit Agreement between CFC and Charles B.
Gill dated May 26, 1994.
12 -- Computations of ratio of margins to fixed charges.
23 -- Consent of Arthur Andersen & Co.