Attached files
| file | filename |
|---|---|
| EX-99 - EXHIBIT 99 JP MORGAN CHASE & CO FINANCIAL INFORMATION - RURAL ELECTRIC COOPERATIVE GRANTOR TRUST KEPCO SERIES 1997 | kepco201610-kexhibit99.htm |
| EX-32.2 - EXHIBIT 32.2 CFO SECTION 906 CERTIFICATION - RURAL ELECTRIC COOPERATIVE GRANTOR TRUST KEPCO SERIES 1997 | kepco201610-kexhibit322.htm |
| EX-32.1 - EXHIBIT 32.1 CEO SECTION 906 CERTIFICATION - RURAL ELECTRIC COOPERATIVE GRANTOR TRUST KEPCO SERIES 1997 | kepco201610-kexhibit321.htm |
| EX-31.2 - EXHIBIT 31.2 CFO SECTION 302 CERTIFICATION - RURAL ELECTRIC COOPERATIVE GRANTOR TRUST KEPCO SERIES 1997 | kepco201610-kexhibit312.htm |
| EX-31.1 - EXHIBIT 31.1 CEO SECTION 302 CERTIFICATION - RURAL ELECTRIC COOPERATIVE GRANTOR TRUST KEPCO SERIES 1997 | kepco201610-kexhibit311.htm |
| EX-12 - EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - RURAL ELECTRIC COOPERATIVE GRANTOR TRUST KEPCO SERIES 1997 | kepco201610-kexhibit12.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-K
__________________________
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016
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: 333-25029
__________________________
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST
(KEPCO) SERIES 1997
(Exact name of registrant as specified in its charter)
__________________________
New York | 36-7233686 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) | |
20701 Cooperative Way, Dulles, Virginia | 20166 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (703) 467-1800
__________________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
__________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The Registrant has no common or voting stock.
TABLE OF CONTENTS
Page | ||||
PART I | ||||
PART II | ||||
i
PART I
ITEM 1. BUSINESS
Not applicable.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Not applicable.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
There is no established trading market for the certificates representing ownership of the beneficial interest in the Rural Electric Cooperative Grantor Trust (KEPCO) Series 1997 (the “Trust”).
ITEM 6. | SELECTED FINANCIAL DATA |
Not applicable.
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Not applicable.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
1
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Page | |
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustee of
Rural Electric Cooperative Grantor Trust
(KEPCO) Series 1997
Dulles, Virginia
We have audited the accompanying balance sheets of Rural Electric Cooperative Grantor Trust (“KEPCO”) Series 1997 (the “Trust”) as of December 31, 2016 and 2015, and the related statements of comprehensive income, changes in deficit, and cash flows for each of the years in the three-year period ended December 31, 2016. These financial statements are the responsibility of the Trust’s Servicer. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Servicer, 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 the Trust as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Trust will continue as a going concern. As discussed in Note 1 to the financial statements, the Trust will commence winding up upon the maturity of the notes receivable and Rural Electric Cooperative Grantor Trust Certificates. The notes receivable and Rural Electric Cooperative Grantor Trust Certificates both mature in 2017. The Trust has no mandatory liquidation date. However, the Servicer of the Trust expects to liquidate the remaining assets in the ordinary course of business. The financial statements do not include any adjustments that might result from the outcome of those actions. Our opinion is not modified with respect to this matter.
/s/ KPMG LLP
McLean, Virginia
March 9, 2017
3
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
BALANCE SHEETS
December 31, | ||||||||||
2016 | 2015 | |||||||||
Assets: | ||||||||||
Interest receivable - KEPCO | $ | 27,746 | $ | 56,475 | ||||||
Interest receivable - swap counterparty | 3,074 | 3,586 | ||||||||
Notes receivable | 3,240,000 | 7,240,000 | ||||||||
Total assets | $ | 3,270,820 | $ | 7,300,061 | ||||||
Liabilities: | ||||||||||
Servicer fees payable | $ | 340 | $ | 725 | ||||||
Interest payable - Grantor Trust Certificates | 3,074 | 3,586 | ||||||||
Interest payable - swap counterparty | 27,406 | 55,750 | ||||||||
Rural Electric Cooperative Grantor Trust Certificates | 3,240,000 | 7,240,000 | ||||||||
Derivative liability | 179,804 | 630,227 | ||||||||
Total liabilities | 3,450,624 | 7,930,288 | ||||||||
Commitments and contingencies | ||||||||||
Deficit: | ||||||||||
Accumulated deficit | (205,839 | ) | (714,439 | ) | ||||||
Accumulated other comprehensive income | 26,035 | 84,212 | ||||||||
Total deficit | (179,804 | ) | (630,227 | ) | ||||||
Total liabilities and deficit | $ | 3,270,820 | $ | 7,300,061 | ||||||
The accompanying notes are an integral part of these financial statements.
4
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31, | ||||||||||||||
2016 | 2015 | 2014 | ||||||||||||
Revenues: | ||||||||||||||
Interest income from notes receivable | $ | 536,517 | $ | 977,080 | $ | 1,381,873 | ||||||||
Total revenues | 536,517 | 977,080 | 1,381,873 | |||||||||||
Expenses: | ||||||||||||||
Interest expense to certificateholders | 62,487 | 39,922 | 97,103 | |||||||||||
Servicer fees | 6,568 | 11,995 | 16,916 | |||||||||||
Total expenses | 69,055 | 51,917 | 114,019 | |||||||||||
Derivative gain | 41,138 | 14,963 | 74,758 | |||||||||||
Net income | $ | 508,600 | $ | 940,126 | $ | 1,342,612 | ||||||||
Other comprehensive income (loss): | ||||||||||||||
Reclassification of derivative cumulative transition gain to net income | (58,177 | ) | (105,587 | ) | (148,175 | ) | ||||||||
Other comprehensive loss | (58,177 | ) | (105,587 | ) | (148,175 | ) | ||||||||
Total comprehensive income | $ | 450,423 | $ | 834,539 | $ | 1,194,437 | ||||||||
The accompanying notes are an integral part of these financial statements.
5
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
STATEMENTS OF CHANGES IN DEFICIT
Accumulated | |||||||||||||||
Other | |||||||||||||||
Accumulated | Comprehensive | Total | |||||||||||||
Deficit | Income | Deficit | |||||||||||||
Balance at December 31, 2013 | $ | (2,997,177 | ) | $ | 337,974 | $ | (2,659,203 | ) | |||||||
Comprehensive income: | |||||||||||||||
Net income | 1,342,612 | — | 1,342,612 | ||||||||||||
Reclassification of derivative cumulative transition gain to net income | — | (148,175 | ) | (148,175 | ) | ||||||||||
Total comprehensive income | 1,342,612 | (148,175 | ) | 1,194,437 | |||||||||||
Balance at December 31, 2014 | $ | (1,654,565 | ) | $ | 189,799 | $ | (1,464,766 | ) | |||||||
Comprehensive income: | |||||||||||||||
Net income | 940,126 | — | 940,126 | ||||||||||||
Reclassification of derivative cumulative transition gain to net income | — | (105,587 | ) | (105,587 | ) | ||||||||||
Total comprehensive income | 940,126 | (105,587 | ) | 834,539 | |||||||||||
Balance at December 31, 2015 | $ | (714,439 | ) | $ | 84,212 | $ | (630,227 | ) | |||||||
Comprehensive income: | |||||||||||||||
Net income | 508,600 | — | 508,600 | ||||||||||||
Reclassification of derivative cumulative transition gain to net income | — | (58,177 | ) | (58,177 | ) | ||||||||||
Total comprehensive income | 508,600 | (58,177 | ) | 450,423 | |||||||||||
Balance at December 31, 2016 | $ | (205,839 | ) | $ | 26,035 | $ | (179,804 | ) | |||||||
The accompanying notes are an integral part of these financial statements.
6
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||||
2016 | 2015 | 2014 | ||||||||||||
Cash flows from operating activities: | ||||||||||||||
Net income | $ | 508,600 | $ | 940,126 | $ | 1,342,612 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Reclassification of derivative cumulative transition gain to net income | (58,177 | ) | (105,587 | ) | (148,175 | ) | ||||||||
Decrease in interest receivable — KEPCO | 28,729 | 33,469 | 30,156 | |||||||||||
Decrease in interest receivable — swap counterparty | 512 | 1,389 | 1,649 | |||||||||||
Decrease in servicer fees payable | (385 | ) | (376 | ) | (369 | ) | ||||||||
Decrease in interest payable — Grantor Trust Certificates | (512 | ) | (1,389 | ) | (1,649 | ) | ||||||||
Decrease in interest payable — swap counterparty | (28,344 | ) | (33,093 | ) | (29,787 | ) | ||||||||
Decrease in derivative liability | (450,423 | ) | (834,539 | ) | (1,194,437 | ) | ||||||||
Net cash provided by operating activities | — | — | — | |||||||||||
Cash flows from investing activities: | ||||||||||||||
Proceeds from principal payments on notes receivable | 4,000,000 | 5,900,000 | 5,300,000 | |||||||||||
Net cash provided by investing activities | 4,000,000 | 5,900,000 | 5,300,000 | |||||||||||
Cash flows from financing activities: | ||||||||||||||
Principal payments to certificateholders | (4,000,000 | ) | (5,900,000 | ) | (5,300,000 | ) | ||||||||
Net cash used in financing activities | (4,000,000 | ) | (5,900,000 | ) | (5,300,000 | ) | ||||||||
Net change in cash | — | — | — | |||||||||||
Cash at beginning of year | — | — | — | |||||||||||
Cash at end of year | $ | — | $ | — | $ | — | ||||||||
Supplemental cash flow information: | ||||||||||||||
Interest expense payments to certificateholders | $ | 62,999 | $ | 41,311 | $ | 98,751 | ||||||||
The accompanying notes are an integral part of these financial statements.
7
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
NOTES TO FINANCIAL STATEMENTS
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | ||||
The Trust
Rural Electric Cooperative Grantor Trust (“KEPCO”) Series 1997 (the “Trust”) was formed under a Trust Agreement dated December 20, 1996.
Trust Assets
The assets of the Trust consist of lender loan notes (the “1997 Notes”) bearing interest at 7.597 percent and maturing in 2017. The 1997 Notes originated from a transaction whereby National Rural Utilities Cooperative Finance Corporation (“CFC”) refinanced loans from the Federal Financing Bank, guaranteed by the Rural Utilities Service (“RUS”) and, in exchange, CFC received from Kansas Electric Power Cooperative, Inc. (the “Cooperative”) the 1997 Notes. CFC subsequently placed the 1997 Notes into two trusts, which have since been terminated and replaced by the Trust. The 1997 Notes are guaranteed (the “Guarantee”) as to timely payment of principal and interest by the United States Government (“U.S. Government”), acting through the Administrator of RUS. The General Counsel of the United States Department of Agriculture has issued an opinion that the Guarantee is supported by the full faith and credit of the U.S. Government. The Trust issued certificates of beneficial interests (the “Series 1997 Certificates”) that bear interest at a variable rate and mature in 2017.
The Trust will commence winding up upon the maturity of the 1997 Notes and Series 1997 Certificates, which both mature in 2017. The Trust has no mandatory liquidation date, however, the Servicer of the Trust expects to liquidate remaining assets in the ordinary course of business shortly after maturity of the 1997 Notes and Series 1997 Certificates.
Swap Agreement
The Trust also holds certain rights the Cooperative assigned to the Trust under an interest rate swap agreement (the “Swap Agreement”). The Swap Agreement was entered into to hedge the interest rate exposure associated with the fixed-rate 1997 Notes and a variable-rate obligation. The counterparty to the Swap Agreement is JPMorgan Chase & Co. (“JPMorgan Chase”). Pursuant to the Swap Agreement, the Trust pays to JPMorgan Chase a fixed rate of interest on the outstanding notional amount, and JPMorgan Chase pays the Trust a variable rate of interest on the outstanding notional amount. The structure is designed such that the interest amounts paid by the Cooperative to the Trust are the same amounts paid to JPMorgan Chase, pursuant to the Swap Agreement, plus the amounts payable to CFC, as servicer. The amounts paid by JPMorgan Chase to the Trust under the Swap Agreement are the same as the interest payable by the Trust to the holders of the Series 1997 Certificates.
The initial notional amount of the Swap Agreement, which is not included on the Trust’s balance sheet, was $57,390,000. The notional amount of the Swap Agreement decreases over time in an amount such that the outstanding notional amount is always equal to the outstanding balance of the 1997 Notes and the Series 1997 Certificates. The Swap Agreement terminates on December 4, 2017, but is subject to early termination upon the early redemption of the Series 1997 Certificates.
Liquidity Facility
JPMorgan Chase provides a liquidity facility with respect to the Series 1997 Certificates until such time as all outstanding Series 1997 Certificates have been paid in full. Investors have the right to put the certificates back to the remarketing agent in the event they are unable to resell the certificates. The remarketing agent is Goldman, Sachs & Co.
Trustee
U. S. Bank Trust National Association (“U.S. Bank Trust”) is currently the Trustee.
8
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
NOTES TO FINANCIAL STATEMENTS
Servicer
CFC is the servicer of the Trust ( the “Servicer”) under the Loan Guarantee and Servicing Agreement dated as of February 15, 1988, as amended (the “Guarantee and Servicing Agreement”). CFC does not hold any retained interests in the Trust. No delinquency in payment under either the 1997 Notes, the Guarantee or the Swap Agreement has occurred and no event of servicing termination, or, to the best of the Servicer's knowledge, event that with notice or lapse of time or both would become an event of servicing termination, has occurred or is continuing.
Tax Status of the Trust
The Trust is a pass-through entity, which is not subject to income taxes. Therefore, it is expected that the Trust will not have any liability for federal or state income taxes for the current or future years.
Basis of Presentation and Use of Estimates
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires the Trust’s Servicer to make estimates and assumptions with respect to, among other things, various future factors which are difficult to predict and are beyond the control of the Trust. These estimates, which are based on information available as of the date of the financial statements, affect the amounts reported in the financial statements and related disclosures. Areas in which estimates have been made include, but are not limited to, the fair value of derivative financial instruments. While the Trust’s Servicer makes its best judgment, actual amounts or results could differ from these estimates.
Notes Receivable
The Trust accounts for the notes receivable based on historical cost. No allowance for loan losses has been recorded because the timely payment of principal and interest is guaranteed by the U.S. Government. Interest income is recognized on the notes as earned on an accrual basis.
Grantor Trust Certificates
The Trust recognizes interest expense on the Series 1997 Certificates on an accrual basis.
Servicer Fee Expense
The Trust accrues and recognizes servicer fee expense of 9.30 basis points of the outstanding principal balance of the 1997 Notes.
Derivative Instruments and Hedging Activities
The Trust is neither a dealer nor a trader in derivative financial instruments. The Trust entered into an interest rate swap to hedge its interest rate risk exposure related to the 1997 Notes. Derivatives are reported at fair value on the balance sheets. Derivatives in a gain position are recorded as a derivative asset, while derivatives in a loss position are reported as a derivative liability. Changes in fair value of derivatives are recorded as a component of derivative gain (loss) in the statements of comprehensive income.
The Trust did not have any derivatives in hedge accounting relationships at December 31, 2016 or 2015. The Trust recorded a cumulative derivative transition gain of $4,628,105 in accumulated other comprehensive income (“AOCI”) at January 1, 2001 as a result of the adoption of the derivative accounting guidance that required derivatives to be reported at fair value on the balance sheets. The transition adjustment represents the difference between the carrying amount of the interest rate swap derivative prior to the January 1, 2001 adoption of the derivative accounting guidance and its fair value at the date of initial adoption. The transition gain is being reclassified into earnings and reported in the statement of comprehensive income as a component of derivative gain (loss). Cash flows related to the interest rate swap are classified in operating activities in the statements of cash flows.
9
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
NOTES TO FINANCIAL STATEMENTS
Comprehensive Income
Comprehensive income for the Trust consists of net income (loss) plus the impact of the reclassification into income of the cumulative derivative transition gain related to the transition adjustment recorded upon the January 1, 2001 adoption of the derivative accounting guidance.
NOTE 2—GRANTOR TRUST CERTIFICATES | ||||
Each Series 1997 Certificate represents an undivided fractional interest in the Trust. The Series 1997 Certificates are subject to redemption by the Cooperative, through the Trust, at any time based on the remaining principal amount plus accrued interest. In the event of a continuing default, the RUS, as guarantor, may prepay or purchase the 1997 Notes at that time.
The principal payments received on the 1997 Notes from the Cooperative coincide with the payments due to the holders of the Series 1997 Certificates. Principal payments on the Series 1997 Certificates began in 1998 and extend over a period of twenty years. As of December 31, 2016, there is a total of $3,240,000 of principal due in fiscal year 2017 through maturity of the 1997 Notes on December 4, 2017.
NOTE 3—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | ||||
Effective January 1, 2001, the Trust adopted the accounting guidance requiring that derivatives be recorded on the balance sheet at fair value. At adoption, the Trust had an interest rate swap agreement that had been entered into to hedge the interest rate exposure associated with the fixed-rate 1997 Notes and a variable-rate obligation. The interest rate swap was not designated as a qualifying hedge for accounting purposes on January 1, 2001, and has not been designated as a qualifying hedge since that date. Therefore, all changes in the fair value of the interest rate swap subsequent to January 1, 2001 have been recorded in the statements of comprehensive income as a component of derivative gain (loss), net.
The table below summarizes the outstanding notional amount and fair value of the interest rate swap at December 31, 2016 and 2015. The Swap Agreement, which is with a highly rated counterparty, is subject to a master netting arrangement pursuant to the International Swaps and Derivatives Association (“ISDA”). The Swap Agreement does not require collateral posting by either counterparty.
December 31, | |||||||||||||||||||||||||||||
2016 | 2015 | ||||||||||||||||||||||||||||
Notional | Derivatives at Fair Value | Notional | Derivatives at Fair Value | ||||||||||||||||||||||||||
Amount | Asset | Liability | Amount | Asset | Liability | ||||||||||||||||||||||||
Derivatives not designated as accounting hedges: | |||||||||||||||||||||||||||||
Interest rate swaps | $ | 3,240,000 | $ | — | $ | 179,804 | $ | 7,240,000 | $ | — | $ | 630,227 | |||||||||||||||||
Total derivatives | $ | 3,240,000 | $ | — | $ | 179,804 | $ | 7,240,000 | $ | — | $ | 630,227 | |||||||||||||||||
10
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
NOTES TO FINANCIAL STATEMENTS
The table below displays the components of the derivative gain presented in the statements of comprehensive income. Derivative cash settlements represent the net interest amount accrued during a period for interest-rate swap payments. The derivative forward value represents the change in fair value of our interest rate swaps during the reporting period due to changes in expected future interest rates over the remaining life of the interest rate swap.
Year Ended December 31, | ||||||||||||||
2016 | 2015 | 2014 | ||||||||||||
Derivative cash settlement income (expense): | ||||||||||||||
Receive-variable leg of interest rate swap | $ | 62,487 | $ | 39,922 | $ | 97,103 | ||||||||
Pay-fixed leg of interest rate swap | (529,949 | ) | (965,085 | ) | (1,364,957 | ) | ||||||||
Derivative cash settlement expense | (467,462 | ) | (925,163 | ) | (1,267,854 | ) | ||||||||
Derivative forward value | 450,423 | 834,539 | 1,194,437 | |||||||||||
Reclassification of cumulative derivative transition gain from AOCI to net income | 58,177 | 105,587 | 148,175 | |||||||||||
Derivative gain | $ | 41,138 | $ | 14,963 | $ | 74,758 | ||||||||
The interest rate swap matures on December 4, 2017. As such, we expect to reclassify the remaining cumulative derivative transition gain of $26,035 at December 31, 2016 from AOCI into earnings during 2017.
NOTE 4—FAIR VALUE | ||||
Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (also referred to as an exit price). The fair value accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. Fair value measurement of an asset or liability is assigned to a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are as follows:
Level 1: | Quoted prices (unadjusted) in active markets for identical assets or liabilities |
Level 2: | Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities |
Level 3: | Unobservable inputs |
The accounting guidance for fair value requires maximizing the use of observable inputs and minimizing the use of unobservable inputs in determining fair value.
Fair Value of Financial Instruments
The following table presents the carrying value and fair value for all of the financial instruments of the Trust, including those carried at amortized cost, at December 31, 2016 and 2015. The table also displays the classification within the fair value hierarchy of the valuation technique used in estimating fair value.
11
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
NOTES TO FINANCIAL STATEMENTS
December 31, 2016 | |||||||||||||||||||||
Carrying | Fair | Fair Value Measurements Using | |||||||||||||||||||
Value | Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||
Financial assets: | |||||||||||||||||||||
Interest receivable — KEPCO | $ | 27,746 | $ | 27,746 | $ | — | $ | 27,746 | $ | — | |||||||||||
Interest receivable — swap counterparty | 3,074 | 3,074 | — | 3,074 | — | ||||||||||||||||
Notes receivable | 3,240,000 | 3,422,218 | — | — | 3,422,218 | ||||||||||||||||
Financial liabilities: | |||||||||||||||||||||
Servicer fees payable | $ | 340 | $ | 340 | $ | — | $ | 340 | $ | — | |||||||||||
Interest payable — Grantor Trust Certificates | 3,074 | 3,074 | — | 3,074 | — | ||||||||||||||||
Interest payable — swap counterparty | 27,406 | 27,406 | — | 27,406 | — | ||||||||||||||||
Rural Electric Cooperative Grantor Trust Certificates | 3,240,000 | 3,240,000 | — | 3,240,000 | — | ||||||||||||||||
Derivative liability | 179,804 | 179,804 | — | 179,804 | — | ||||||||||||||||
December 31, 2015 | |||||||||||||||||||||
Carrying | Fair | Fair Value Measurements Using | |||||||||||||||||||
Value | Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||
Financial assets: | |||||||||||||||||||||
Interest receivable — KEPCO | $ | 56,475 | $ | 56,475 | $ | — | $ | 56,475 | $ | — | |||||||||||
Interest receivable — swap counterparty | 3,586 | 3,586 | — | 3,586 | — | ||||||||||||||||
Notes receivable | 7,240,000 | 7,794,690 | — | — | 7,794,690 | ||||||||||||||||
Financial liabilities: | |||||||||||||||||||||
Servicer fees payable | $ | 725 | $ | 725 | $ | — | $ | 725 | $ | — | |||||||||||
Interest payable — Grantor Trust Certificates | 3,586 | 3,586 | — | 3,586 | — | ||||||||||||||||
Interest payable — swap counterparty | 55,750 | 55,750 | — | 55,750 | — | ||||||||||||||||
Rural Electric Cooperative Grantor Trust Certificates | 7,240,000 | 7,240,000 | — | 7,240,000 | — | ||||||||||||||||
Derivative liability | 630,227 | 630,227 | — | 630,227 | — | ||||||||||||||||
Following is a description of the valuation methodology used in estimating fair value of the financial instruments of the Trust , the significant inputs and assumptions, if applicable, and the classification within the fair value hierarchy.
Interest Receivable - KEPCO and Swap Counterparty
The carrying amounts of interest receivable approximate fair value because of the relatively short period of time between their accrual and expected receipt of payment.
Notes Receivable
The fair value for notes receivable is estimated by discounting the expected 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. This valuation technique is classified as Level 3.
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RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
NOTES TO FINANCIAL STATEMENTS
Servicer Fees Payable
The carrying amount of servicer fees payable approximates fair value because of the relatively short period of time between their accrual and expected payment.
Interest Payable - Grantor Trust Certificates and Swap Counterparty
The carrying amounts of interest payable approximate fair value because of the relatively short period of time between their accrual and expected payment.
Rural Electric Cooperative Grantor Trust Certificates
The Series 1997 Trust Certificates pay a variable rate of interest that is reset weekly, and as such the carrying value approximates fair value. This valuation technique is classified as Level 2.
Derivative Liability
The interest rate swap is accounted for in the balance sheets as a liability measured at fair value. The swap agreement is subject to a master netting agreement pursuant to the ISDA. There is not an active secondary market for this type of interest rate swap. To calculate fair value, a forward interest rate curve is used to determine the projected floating rate cash flows and the discount factors needed to calculate the net present value of each interest payment. A model is used to determine the value of the derivative based on discounted cash flows utilizing observable market inputs. The significant observable market inputs include spot LIBOR rates and market swap rates. Independent validation procedures are used to corroborate the fair value measures obtained from the derivative counterparty. This valuation technique is classified as Level 2.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The interest rate swap is the only asset/liability of the Trust that is measured and reported at fair value on a recurring basis in the financial statements. The following fair value hierarchy table presents information about the Trust’s assets and liabilities measured and reported at fair value on a recurring basis at December 31, 2016 and 2015.
December 31, | ||||||||||||||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||||||||||||||
Leve1 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Derivative liability | $ | — | $ | 179,804 | $ | — | $ | 179,804 | $ | — | $ | 630,227 | $ | — | $ | 630,227 | ||||||||||||||||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Trust did not have any assets or liabilities measured at fair value on a nonrecurring basis during fiscal years 2016 or 2015.
Transfers Between Level 1 and Level 2
There were no transfers between Levels 1 and 2 during fiscal years 2016 or 2015.
Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Trust did not have any assets or liabilities measured at fair value on a recurring basis using Level 3 valuation techniques at December 31, 2016 or 2015.
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Not applicable.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Not applicable.
ITEM 11. | EXECUTIVE COMPENSATION |
Not applicable.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Not applicable.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Not applicable.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Not applicable.
PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) Documents filed as part of this report:
(1) Financial Statements and Report of Independent Registered Public Accounting Firm
The financial statements required to be filed in this Form 10-K are included in “Part II, Item 8.”
(2) Financial Statement Schedules
None.
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(3) Exhibits
Exhibit No. | Description | |
4.1 | Form of Trust Agreement, including the form of Rural Electric Cooperative Grantor Trust Certificate (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-1 [No. 333-25029]). | |
4.2 | First Amendment to Trust Agreement (incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-1 [No. 333-25029]). | |
10.1 | Loan Agreement dated as of February 15, 1988 between National Rural Utilities Cooperative Finance Corporation (“CFC”) and the Cooperative (including form of Note and Guarantee) (incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-1 [No. 33-16789 filed on August 27, 1987]). | |
10.2 | First Amendment to Loan Agreement (incorporated by reference to Exhibit 10.2 to Registration Statement on Form S-1 [No. 333-25029]). | |
10.3 | Loan Guarantee and Servicing Agreement, dated as of February 15, 1988, among the Administrator of the RUS, the Cooperative, the Servicer, the Lender and the Trustee (incorporated by reference to Exhibit 10.2 to Registration Statement on Form S-1 [No. 33-16789 filed on August 27, 1987]). | |
10.4 | First Amendment to Loan Guarantee and Servicing Agreement (incorporated by reference to Exhibit 10.4 to Registration Statement on Form S-1 [No. 333-25029]). | |
10.5 | Remarketing Agreement (incorporated by reference to Exhibit 10.5 to Registration Statement on Form S-1 [No. 333-25029]). | |
10.6 | Swap Agreement (incorporated by reference to Exhibit 10.6 to Registration Statement on Form S-1 [No. 333-25029]). | |
10.7 | Liquidity Protection (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1 [No. 333-25029]). | |
10.8 | Form of Standby Certificate Purchase Agreement (incorporated by reference to Exhibit 10.8 to Registration Statement on Form S-1 [No. 333-25029]). | |
12* | Computation of Ratio of Earnings to Fixed Charges. | |
99* | JPMorgan Chase & Co. (Swap Counterparty) Financial Information. | |
31.1* | Certification of the Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of the Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1† | Certification of the Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2† | Certification of the Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. | |
________________
* Indicates a document being filed with this Report.
† Indicates a document that is furnished with this Report, which shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section.
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SIGNATURES
Pursuant to the requirements of Section 13 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.
RURAL ELECTRIC COOPERATIVE GRANTOR TRUST (KEPCO) SERIES 1997
By: NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION, as Servicer | |
Date: March 9, 2017 | /s/ SHELDON C. PETERSEN Sheldon C. Petersen Governor & Chief Executive Officer |
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