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Commission File Number 1-7102
NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DISTRICT OF COLUMBIA
(State or other jurisdiction of incorporation or organization)
52-0891669
(I.R.S. Employer Identification Number)
2201 COOPERATIVE WAY, HERNDON, VA 20171
(Address of principal executive offices)
(Registrant's telecommunications number, including area code, is 703-709-6700)
Securities registered pursuant to Section 12(b) of the Act:
Name of each | Name of each | ||||||
exchange on | exchange on | ||||||
Title of each class | which listed | Title of each class | which listed | ||||
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| NYSE | 7.35% Collateral Trust Bonds, due 2026 | NYSE | ||||
| NYSE | 6.75% Subordinated Notes, due 2043 | NYSE | ||||
| NYSE |
| NYSE | ||||
| NYSE | 5.95% Subordinated Notes, due 2045 | NYSE | ||||
5.70% Collateral Trust Bonds, due 2010 | NYSE | 7.625% Quarterly Income Capital Securities, due 2050 | NYSE | ||||
| NYSE | 7.40% Quarterly Income Capital Securities, due 2050 | NYSE | ||||
| NYSE | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant's knowledge in definitive proxy or information statements incorporated by reference in Part IV of this Form 10-K or any amendment to this Form 10-K. [ X ] |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X . |
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 stock. |
TABLE OF CONTENTS | ||||||||
Part No. | Item No. | Page | ||||||
I. | 1. | Business | 1 | |||||
| General | 1 | ||||||
| Members | 2 | ||||||
| Distribution Systems | 3 | ||||||
| Power Supply Systems | 3 | ||||||
| Service Organizations and Associate Member Systems | 3 | ||||||
| Telecommunications Systems | 3 | ||||||
| Loan Programs | 4 | ||||||
| Interest Rates on Loans | 5 | ||||||
| Electric Loan Programs | 5 | ||||||
| Telecommunications Loan Programs | 6 | ||||||
| RUS Guaranteed Loans for Rural Electric Systems | 7 | ||||||
| Conversion of Loans | 7 | ||||||
| Prepayment of Loans | 7 | ||||||
| Guarantee Programs | 7 | ||||||
| Guarantees of Long-Term Tax-Exempt Bonds | 7 | ||||||
| Guarantees of Lease Transactions | 8 | ||||||
| Guarantees of Tax Benefit Transfers | 8 | ||||||
| Letters of Credit | 8 | ||||||
| Other Guarantees | 8 | ||||||
| Disaster Recovery | 9 | ||||||
| Tax Status | 9 | ||||||
| Investment Policy | 9 | ||||||
| Employees | 9 | ||||||
| CFC Lending Competition | 10 | ||||||
| Member Regulation and Competition | 10 | ||||||
| The RUS Program | 13 | ||||||
| Member Financial Data | 13 | ||||||
2. | Properties | 21 | ||||||
3. | Legal Proceedings | 21 | ||||||
4. | Submission of Matters to a Vote of Security Holders | 21 | ||||||
II. | 5. | Market for the Registrant's Common Equity and Related Stockholder Matters | 22 | |||||
6. | Selected Financial Data | 22 | ||||||
7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 23 | ||||||
| Overview | 24 | ||||||
| Change of Auditors in Fiscal Year 2002 | 25 | ||||||
| Critical Accounting Policies | 26 | ||||||
| New Accounting Pronouncements | 29 | ||||||
| Non-GAAP Financial Measures | 30 | ||||||
| Restatement | 34 | ||||||
| Margin Analysis | 35 | ||||||
| Liquidity and Capital Resources | 39 | ||||||
| Asset/Liability Management | 49 | ||||||
| Financial and Industry Outlook | 55 | ||||||
7A. | Quantitative and Qualitative Disclosures About Market Risk | 58 | ||||||
8. | Financial Statements and Supplementary Data | 58 | ||||||
9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 58 | ||||||
9A. | Controls and Procedures | 58 | ||||||
III. | 10. | Directors and Executive Officers of the Registrant | 59 | |||||
11. | Executive Compensation | 64 | ||||||
12. | Security Ownership of Certain Beneficial Owners and Management | 66 | ||||||
13. | Certain Relationships and Related Transactions | 66 | ||||||
IV. | 14. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K | 67 | |||||
Signatures | 69 |
TABLE OF CONTENTS | ||||||||
Part No. | Item No. | Page | ||||||
I. | 1. | Business | 1 | |||||
General | 1 | |||||||
Members | 1 | |||||||
Distribution Systems | 2 | |||||||
Power Supply Systems | 3 | |||||||
Service Organizations and Associate Systems | 3 | |||||||
Telecommunications Systems | 3 | |||||||
Loan Programs | 4 | |||||||
Interest Rates on Loans | 5 | |||||||
CFC Loan Programs | 5 | |||||||
RTFC Loan Programs | 6 | |||||||
NCSC Loan Programs | 6 | |||||||
RUS Guaranteed Loans for Rural Electric Systems | 7 | |||||||
Conversion of Loans | 7 | |||||||
Prepayment of Loans | 7 | |||||||
Loan Security | 7 | |||||||
Guarantee Programs | 8 | |||||||
Guarantees of Long-Term Tax-Exempt Bonds | 8 | |||||||
Guarantees of Lease Transactions | 8 | |||||||
Guarantees of Tax Benefit Transfers | 9 | |||||||
Letters of Credit | 9 | |||||||
Other Guarantees | 9 | |||||||
Disaster Recovery | 10 | |||||||
Tax Status | 10 | |||||||
Investment Policy | 10 | |||||||
Employees | 10 | |||||||
CFC Lending Competition | 10 | |||||||
Member Regulation and Competition | 11 | |||||||
The RUS Program | 13 | |||||||
2. | Properties | 14 | ||||||
3. | Legal Proceedings | 14 | ||||||
4. | Submission of Matters to a Vote of Security Holders | 14 | ||||||
II. | 5. | Market for the Registrant's Common Equity and Related Stockholder Matters | 15 | |||||
6. | Selected Financial Data | 15 | ||||||
7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 16 | ||||||
Risk Factors | 16 | |||||||
Overview | 18 | |||||||
Critical Accounting Policies | 19 | |||||||
Margin Analysis | 23 | |||||||
Liquidity and Capital Resources | 31 | |||||||
Asset/Liability Management | 44 | |||||||
Financial and Industry Outlook | 49 | |||||||
Non-GAAP Financial Measures | 52 | |||||||
7A. | Quantitative and Qualitative Disclosures About Market Risk | 56 | ||||||
8. | Financial Statements and Supplementary Data | 56 | ||||||
9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 56 | ||||||
9A. | Controls and Procedures | 56 | ||||||
III. | 10. | Directors and Executive Officers of the Registrant | 57 | |||||
11. | Executive Compensation | 61 | ||||||
12. | Security Ownership of Certain Beneficial Owners and Management | 64 | ||||||
13. | Certain Relationships and Related Transactions | 64 | ||||||
14. | Principal Accountant Fees and Services | 64 | ||||||
IV. | 15. | Exhibits and Financial Statement Schedules | 65 | |||||
Signatures | 67 | |||||||
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Item 1. | Business. |
General | |
National Rural Utilities Cooperative Finance Corporation ("CFC" or "the Company") 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 | |
Rural Telephone Finance Cooperative ("RTFC") | |
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National Cooperative Services Corporation ("NCSC") was incorporated in 1981 in the District of Columbia as a private cooperative association. NCSC provides | |
Unless stated otherwise, references to the | |
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Members
| |
| |
CFC currently has |
* | Class A - cooperative or not-for-profit distribution systems; |
* | Class B - cooperative or not-for-profit power supply systems; |
* | Class C - statewide and regional associations which are wholly-owned or controlled by Class A or Class B members; and |
* | Class D - national associations of |
| |
1 |
|
users. |
Membership in NCSC is limited to CFC and organizations that are class A members of CFC or are eligible to be class A members of CFC. |
In many cases, the residential and commercial customers of CFC's electric members are also the customers of RTFC's telecommunications members, as the service territories of the electric and telecommunications members overlap in many of the rural areas of the United States. |
Set forth below is a table showing by state or U.S. territory the total number of CFC, RTFC and |
Number | Loan and | Number | Loan and | |||||||||||||||||||||||||
of | Loan | Guarantee | of | Loan | Guarantee |
State/Territory
Number | Loan and | Number | Loan and | |||||||||||||||||||||||||
of | Loan | Guarantee | of | Loan | Guarantee | |||||||||||||||||||||||
Members | % | % | Members | % | % | |||||||||||||||||||||||
30 | 1.51% | 1.48% | Missouri | 64 | 3.17% | 3.48% |
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Alaska | 29 | 1.60% | 1.47% | Montana | 39 | 1.12% | 1.02% |
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American Samoa | 1 | 0.01% | 0.01% | Nebraska | 40 | 0.07% | 0.06% |
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Arizona | 23 | 0.77% | 0.92% | Nevada | 6 | 0.47% | 0.42% |
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Arkansas | 29 | 2.67% | 2.57% | New Hampshire | 6 | 1.05% | 1.10% | |||||||||||||||||||||
California | 11 | 0.12% | 0.11% | New Jersey | 1 | 0.10% | 0.09% | |||||||||||||||||||||
Colorado | 40 | 4.91% | 4.75% | New Mexico | 25 | 0.21% | 0.19% |
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Connecticut | 2 | 1.03% | 0.94% | New York | 13 | 0.08% | 0.08% | |||||||||||||||||||||
Delaware | 2 | 0.08% | 0.07% | North Carolina | 45 | 4.76% | 4.81% |
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District of Columbia | 5 | 1.53% | 4.16% | North Dakota | 35 | 0.39% | 0.35% |
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Florida | 20 | 2.44% | 2.82% | Ohio | 42 | 1.95% | 1.78% |
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Georgia | 69 | 7.90% | 7.20% | Oklahoma | 51 | 2.45% | 2.31% | |||||||||||||||||||||
Guam | 1 | 0.00% | 0.00% | Oregon | 40 | 1.46% | 1.45% | |||||||||||||||||||||
Hawaii | 1 | 0.00% | 0.00% | Pennsylvania | 26 | 0.94% | 0.97% | |||||||||||||||||||||
Idaho | 17 | 0.87% | 0.79% | South Carolina | 38 | 2.75% | 2.51% |
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Illinois | 52 | 3.15% | 2.90% | South Dakota | 48 | 0.80% | 0.73% |
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Indiana | 52 | 1.68% | 2.04% | Tennessee | 29 | 0.54% | 0.49% |
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Iowa | 121 | 5.73% | 5.28% | Texas | 112 | 17.76% | 16.88% |
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Kansas | 50 | 1.56% | 1.57% | Utah | 11 | 2.93% | 3.01% |
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Kentucky | 33 | 1.48% | 2.02% | Vermont | 8 | 0.33% | 0.30% |
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Louisiana | 18 | 1.46% | 1.33% | Virgin Islands | 1 | 3.20% | 2.91% |
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Maine | 6 | 0.21% | 0.19% | Virginia | 28 | 1.24% | 1.15% |
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Maryland | 2 | 0.53% | 0.48% | Washington | 18 | 0.45% | 0.41% |
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Massachusetts | 2 | 0.00% | 0.00% | West Virginia | 5 | 0.02% | 0.02% |
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Michigan | 26 | 1.42% | 1.30% | Wisconsin | 63 | 1.56% | 1.43% |
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Minnesota | 78 | 4.38% | 4.47% | Wyoming | 15 | 0.73% | 0.72% | |||||||||||||||||||||
Mississippi | 26 | 2.43% | 2.46% | Total | 1,555 | 100.00% | 100.00% |
Members
%
%
State/Territory
Members
%
%
Alabama
30
1.91%
1.91%
Missouri
65
3.50%
3.81%
Alaska
29
1.74%
1.66%
Montana
40
0.87%
0.82%
American Samoa
1
0.02%
0.01%
Nebraska
40
0.08%
0.08%
Arizona
24
0.87%
1.05%
Nevada
6
0.75%
0.70%
Arkansas
28
2.93%
2.86%
New Hampshire
5
0.94%
0.94%
California
11
0.11%
0.10%
New Jersey
1
0.10%
0.10%
Colorado
40
4.60%
4.62%
New Mexico
26
0.18%
0.17%
Connecticut
2
1.05%
0.99%
New York
13
0.10%
0.10%
Delaware
1
0.10%
0.10%
North Carolina
44
5.40%
5.59%
District of Columbia
5
0.14%
0.28%
North Dakota
35
0.43%
0.41%
Florida
19
3.36%
3.70%
Ohio
42
2.19%
2.07%
Georgia
67
8.30%
7.82%
Oklahoma
50
2.60%
2.47%
Guam
1
-
-
Oregon
39
1.66%
1.68%
Hawaii
1
0.04%
0.04%
Pennsylvania
26
1.40%
1.43%
Idaho
17
0.90%
0.85%
South Carolina
38
2.77%
2.61%
Illinois
52
2.86%
2.70%
South Dakota
48
0.91%
0.86%
Indiana
53
1.97%
2.33%
Tennessee
30
0.66%
0.63%
Iowa
119
2.59%
2.47%
Texas
113
15.31%
15.14%
Kansas
50
2.84%
2.86%
Utah
11
2.89%
2.92%
Kentucky
33
2.40%
2.92%
Vermont
8
0.46%
0.44%
Louisiana
17
1.78%
1.70%
Virgin Islands
1
2.53%
2.38%
Maine
6
0.07%
0.06%
Virginia
27
1.15%
1.10%
Maryland
2
0.89%
0.84%
Washington
18
0.52%
0.49%
Massachusetts
2
-
-
West Virginia
4
0.04%
0.04%
Michigan
26
1.59%
1.51%
Wisconsin
62
1.79%
1.69%
Minnesota
77
4.72%
4.88%
Wyoming
15
0.74%
0.74%
Mississippi
26
2.25%
2.33%
Total
1,546
100.00%
100.00%
Distribution Systems |
Distribution systems are utilities engaged in retail sales of electricity to consumers in their service areas. Most distribution systems have all-requirements power purchase contracts with their power supply systems, which are owned and controlled by the member distribution systems. The wholesale power contracts between the distribution systems and the power supply systems provide for rate adjustments to cover the costs of supplying power, although in certain cases such adjustments must be approved by regulatory agencies. Wholesale power for resale also comes from other sources, including power supply system contracts with government agencies, investor-owned utilities and other entities, and in rare cases, the distribution system's own generating facilities. |
Wholesale power supply contracts ordinarily guarantee neither an uninterrupted supply nor a constant cost of power. Contracts with RUS-financed power supply systems (which generally require the distribution system to purchase all its power requirements from the power supply system) provide for rate increases to pass along increases in sellers' costs. The wholesale power contracts permit the power supply system, subject to approval by RUS and, in certain circumstances, regulatory agencies, to establish rates to its members so as to produce revenues sufficient, with revenues from all other sources, to meet the costs of operation and maintenance (including 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 lease obligations of the |
|
power supply system and to provide for the establishment and maintenance of reasonable reserves. The board of directors of the power supply system may review the rates under the wholesale power contracts at least annually. |
2 |
Power contracts with investor-owned utilities and power supply systems which do not borrow from RUS generally have rates subject to regulation by the Federal Energy Regulatory Commission ("FERC"). Contracts with federal agencies generally permit rate changes by the selling agency (subject, in some cases, to federal regulatory approval). |
Power Supply Systems |
Power supply systems are utilities that purchase or generate electric power and provide it on a wholesale basis to distribution systems for delivery to the ultimate retail consumer. Of the 60 operating power supply systems financed in whole or in part by RUS or CFC at December 31, |
|
Service Organizations and Associate |
Service organizations include the National Rural Electric Cooperative Association ("NRECA"), statewide and regional cooperative |
|
Telecommunications Systems |
Telecommunications systems include not-for-profit cooperative organizations and for-profit commercial organizations that primarily provide local exchange and access telecommunications services to rural areas. |
Independent rural telecommunications companies provide service throughout |
Rural telecommunications companies (including all local exchange carriers ("LECs") other than RBOCs, Cincinnati Bell and Sprint) comprise a relatively small sector (less than 15%) of a local exchange telecommunications industry that |
3 |
Loan Programs |
Set forth below is a table showing loans outstanding to borrowers at May 31, 2005, 2004 and 2003 and the weighted average interest rates thereon and loans committed but unadvanced to borrowers at May 31, 2005. | ||||||||||||||||||||||||||
Loans outstanding and weighted average interest rates | Unadvanced | |||||||||||||||||||||||||
thereon at May 31, | Commitments at | |||||||||||||||||||||||||
(Dollar amounts in thousands) | 2005 | 2004 | 2003 | May 31, 2005 (1) | ||||||||||||||||||||||
Total by loan type: | ||||||||||||||||||||||||||
Long-term fixed rate loans | $ | 12,724,758 | 5.52% | $ | 13,639,947 | 5.69% | $ | 12,219,710 | 6.12% | $ | - | |||||||||||||||
Long-term variable rate loans | 4,961,397 | 4.47% | 5,448,223 | 2.81% | 5,806,230 | 3.65% | 5,537,121 | |||||||||||||||||||
Loans guaranteed by RUS | 258,493 | 5.16% | 263,392 | 4.60% | 266,857 | 4.71% | 8,491 | |||||||||||||||||||
lntermediate-term loans | 10,328 | 5.91% | 55,405 | 2.85% | 84,010 | 4.04% | 25,714 | |||||||||||||||||||
Line of credit loans | 1,017,092 | 4.75% | 1,081,556 | 2.26% | 1,107,534 | 3.98% | 6,122,693 | |||||||||||||||||||
Total loans | 18,972,068 | 5.19% | 20,488,523 | 4.72% | 19,484,341 | 5.23% | 11,694,019 | |||||||||||||||||||
Less: allowance for loan losses | (589,749 | ) | (573,939 | ) | (511,463 | ) | - | |||||||||||||||||||
Net loans | $ | 18,382,319 | $ | 19,914,584 | 18,972,878 | $ | 11,694,019 | |||||||||||||||||||
Total by segment: | ||||||||||||||||||||||||||
CFC: | ||||||||||||||||||||||||||
Distribution | $ | 12,728,866 | 5.05% | $ | 12,536,255 | 4.29% | $ | 11,410,592 | 4.69% | $ | 8,821,217 | |||||||||||||||
Power supply | 2,640,787 | 5.72% | 2,684,652 | 4.94% | 2,701,094 | 5.03% | 2,059,350 | |||||||||||||||||||
Statewide and associate | 135,513 | 5.58% | 134,677 | 3.56% | 430,015 | 4.32% | 124,539 | |||||||||||||||||||
CFC total | 15,505,166 | 5.17% | 15,355,584 | 4.40% | 14,541,701 | 4.74% | 11,005,106 | |||||||||||||||||||
RTFC | 2,992,192 | 5.21% | 4,643,008 | 5.83% | 4,942,640 | 6.68% | 518,514 | |||||||||||||||||||
NCSC | 474,710 | 5.96% | 489,931 | 4.40% | - | - | 170,399 | |||||||||||||||||||
Total | $ | 18,972,068 | 5.19% | $ | 20,488,523 | 4.72% | $ | 19,484,341 | 5.23% | $ | 11,694,019 | |||||||||||||||
_______________________ | ||||||||||||||||||||||||||
(1) Unadvanced commitments include loans for which loan contracts have been approved and executed, but funds have not been advanced. Additional information may be required to assure 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 supporting documents. Since commitments may expire without being fully drawn upon and a significant amount of the commitments are for standby liquidity purposes, the total unadvanced loan commitments do not necessarily represent future cash requirements. Collateral and security requirements for advances on commitments are identical to those on initial loan approval. As the interest rate on unadvanced commitments is not set, long-term unadvanced commitments have been classified in this chart as variable rate unadvanced commitments. However, once the loan contracts are executed and funds are advanced, the commitments could be at either a fixed or a variable rate. | ||||||||||||||||||||||||||
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The following table summarizes non-performing and restructured loans outstanding by loan program and by segment at May 31: | ||||||||||||||||||||||||||
Loans outstanding and weighted average interest rates | ||||||||||||||||||||||||||
(Dollar amounts in thousands) | thereon at May 31, | |||||||||||||||||||||||||
Non-performing loans: | 2005 | 2004 | 2003 | |||||||||||||||||||||||
RTFC: | ||||||||||||||||||||||||||
Long-term fixed rate loans | $ | 213,092 | - | $ | - | - | $ | - | - | |||||||||||||||||
Long-term variable rate loans | 353,480 | - | 159,328 | - | - | - | ||||||||||||||||||||
Line of credit loans | 49,777 | - | 181,110 | - | - | - | ||||||||||||||||||||
Total RTFC loans | 616,349 | - | 340,438 | - | - | - | ||||||||||||||||||||
NCSC: | ||||||||||||||||||||||||||
Long-term fixed rate loans | 277 | - | 789 | - | - | - | ||||||||||||||||||||
Total non-performing loans | $ | 616,626 | - | $ | 341,227 | - | $ | - | - | |||||||||||||||||
Restructured loans: | ||||||||||||||||||||||||||
CFC: | ||||||||||||||||||||||||||
Long-term variable rate loans | $ | 593,584 | - | $ | 617,808 | - | $ | 629,406 | - | |||||||||||||||||
RTFC: | ||||||||||||||||||||||||||
Long-term fixed rate loans | 7,342 | 6.65% | - | - | - | - | ||||||||||||||||||||
Total restructured loans | $ | 600,926 | 0.08% | $ | 617,808 | - | $ | 629,406 | - | |||||||||||||||||
4 | ||||||||||||||||||||||||||
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Loans outstanding and weighted average interest rates | Unadvanced | ||||||||||||||||||||||||
(Dollar amounts in thousands) | thereon at May 31, | Commitments at | |||||||||||||||||||||||
Long-term fixed rate secured loans (C): | 2003 (A) | 2002 | 2001 | May 31, 2003 (B) | |||||||||||||||||||||
Electric systems | $ | 9,484,490 | 5.64% | $ | 7,848,861 | 6.32% | $ | 6,088,076 | 6.85% | $ | - | ||||||||||||||
Telecommunication systems | 2,735,220 | 7.77% | 2,694,945 | 7.90% | 2,453,158 | 8.17% | - | ||||||||||||||||||
Total long-term fixed rate secured loans | 12,219,710 | 6.12% | 10,543,806 | 6.72% | 8,541,234 | 7.23% | - | ||||||||||||||||||
Long-term variable rate secured loans (D): | |||||||||||||||||||||||||
Electric systems | 3,211,434 | 3.36% | 4,127,019 | 4.21% | 5,096,467 | 7.05% | 5,650,836 | ||||||||||||||||||
Telecommunication systems | 1,965,390 | 5.30% | 2,138,174 | 5.71% | 2,481,257 | 7.69% | 291,724 | ||||||||||||||||||
Total long-term variable rate secured loans | 5,176,824 | 4.09% | 6,265,193 | 4.72% | 7,577,724 | 7.26% | 5,942,560 | ||||||||||||||||||
Loans guaranteed by RUS: | |||||||||||||||||||||||||
Electric systems | 266,857 | 4.71% | 242,574 | 4.75% | 182,134 | 6.31% | 30,388 | ||||||||||||||||||
Intermediate-term secured loans: | |||||||||||||||||||||||||
Electric systems | 14,525 | 3.63% | 31,133 | 5.48% | 55,325 | 7.08% | 28,522 | ||||||||||||||||||
Intermediate-term unsecured loans: | |||||||||||||||||||||||||
Electric systems | 50,843 | 3.65% | 177,154 | 5.19% | 276,785 | 7.24% | 72,559 | ||||||||||||||||||
Telecommunication systems | 18,642 | 5.45% | 7,298 | 5.75% | 13,836 | 7.50% | 4,827 | ||||||||||||||||||
Total intermediate-term unsecured loans | 69,485 | 4.13% | 184,452 | 5.21% | 290,621 | 7.25% | 77,386 | ||||||||||||||||||
Line of credit loans (E): | |||||||||||||||||||||||||
Electric systems | 884,146 | 3.57% | 1,002,459 | 4.57% | 1,193,795 | 7.35% | 5,233,146 | ||||||||||||||||||
Telecommunication systems | 223,388 | 5.60% | 226,113 | 6.32% | 377,148 | 8.12% | 377,409 | ||||||||||||||||||
Total line of credit loans | 1,107,534 | 3.98% | 1,228,572 | 4.89% | 1,570,943 | 7.53% | 5,610,555 | ||||||||||||||||||
Nonperforming loans: | |||||||||||||||||||||||||
Electric systems | - | - | 1,002,782 | - | 812 | - | - | ||||||||||||||||||
Telecommunication systems | - | - | 8,546 | - | - | - | - | ||||||||||||||||||
Total nonperforming loans | - | - | 1,011,328 | - | 812 | - | - | ||||||||||||||||||
Restructured loans (F): | |||||||||||||||||||||||||
Electric systems | 629,406 | - | 540,051 | 6.92% | 1,465,157 | 2.63% | - | ||||||||||||||||||
Total loans | 19,484,341 | 5.23% | 20,047,109 | 5.61% | 19,683,950 | 6.91% | 11,689,411 | ||||||||||||||||||
Less: Allowance for loan losses (G): | (565,058 | ) | (506,742 | ) | (331,997 | ) | - | ||||||||||||||||||
Net loans | $ | 18,919,283 | $ | 19,540,367 | $ | 19,351,953 | $ | 11,689,411 | |||||||||||||||||
Total by member class: | |||||||||||||||||||||||||
Distribution | $ | 11,410,592 | $ | 11,866,442 | $ | 11,444,999 | $ | 8,527,266 | |||||||||||||||||
Power supply | 2,701,094 | 2,624,039 | 2,308,384 | 2,321,125 | |||||||||||||||||||||
Statewide and associate | 430,015 | 481,552 | 605,168 | 167,059 | |||||||||||||||||||||
Telecommunication systems | 4,942,640 | 5,075,076 | 5,325,399 | 673,961 | |||||||||||||||||||||
Total | $ | 19,484,341 | $ | 20,047,109 | $ | 19,683,950 | $ | 11,689,411 |
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Total loans outstanding, by state or U.S. territory, are summarized below: |
(Dollar amounts in thousands) | May 31, | May 31, | ||||||||||||||||||||||||||
State/Territory | 2005 | 2004 | 2003 | State/Territory | 2005 | 2004 | 2003 | |||||||||||||||||||||
Alabama | $ | 362,305 | $ | 373,978 | $ | 293,524 | Montana | $ | 164,715 | $ | 179,570 | $ | 218,378 | |||||||||||||||
Alaska | 330,827 | 370,528 | 312,080 | Nebraska | 15,635 | 14,975 | 13,421 | |||||||||||||||||||||
American Samoa | 2,765 | 1,859 | 2,850 | Nevada | 141,571 | 147,868 | 90,817 | |||||||||||||||||||||
Arizona | 165,664 | 201,548 | 149,310 | New Hampshire | 178,740 | 188,960 | 204,835 | |||||||||||||||||||||
Arkansas | 555,055 | 552,971 | 520,305 | New Jersey | 19,438 | 19,576 | 19,415 | |||||||||||||||||||||
California | 20,894 | 28,270 | 23,497 | New Mexico | 34,223 | 37,476 | 40,061 | |||||||||||||||||||||
Colorado | 873,413 | 929,822 | 957,814 | New York | 19,621 | 20,270 | 16,640 | |||||||||||||||||||||
Connecticut | 200,000 | 200,100 | 200,000 | North Carolina | 1,024,134 | 988,101 | 927,217 | |||||||||||||||||||||
Delaware | 19,809 | 21,093 | 14,812 | North Dakota | 81,977 | 85,749 | 75,435 | |||||||||||||||||||||
District of Columbia | 25,526 | 22,522 | 298,272 | Ohio | 415,227 | 407,850 | 380,468 | |||||||||||||||||||||
Florida | 636,792 | 612,222 | 475,802 | Oklahoma | 492,462 | 482,824 | 476,736 | |||||||||||||||||||||
Georgia | 1,573,770 | 1,555,763 | 1,538,946 | Oregon | 314,137 | 310,736 | 285,024 | |||||||||||||||||||||
Hawaii | 7,834 | 41,120 | - | Pennsylvania | 265,930 | 284,644 | 182,996 | |||||||||||||||||||||
Idaho | 170,820 | 175,827 | 168,971 | South Carolina | 525,285 | 576,822 | 536,437 | |||||||||||||||||||||
Illinois | 543,196 | 589,870 | 613,838 | South Dakota | 173,074 | 180,518 | 156,218 | |||||||||||||||||||||
Indiana | 373,185 | 354,512 | 326,827 | Tennessee | 125,688 | 117,857 | 104,722 | |||||||||||||||||||||
Iowa | 492,095 | 1,090,224 | 1,117,138 | Texas | 2,904,185 | 3,545,604 | 3,461,097 | |||||||||||||||||||||
Kansas | 539,392 | 542,033 | 303,378 | Utah | 547,288 | 558,692 | 571,703 | |||||||||||||||||||||
Kentucky | 454,976 | 445,341 | 289,375 | Vermont | 87,595 | 84,510 | 63,604 | |||||||||||||||||||||
Louisiana | 337,741 | 323,035 | 283,669 | Virgin Islands | 479,196 | 552,674 | 623,037 | |||||||||||||||||||||
Maine | 12,954 | 39,159 | 40,047 | Virginia | 218,801 | 311,534 | 241,157 | |||||||||||||||||||||
Maryland | 169,581 | 152,872 | 102,886 | Washington | 99,562 | 93,258 | 87,893 | |||||||||||||||||||||
Massachussetts | - | 100 | - | West Virginia | 8,171 | 5,797 | 3,959 | |||||||||||||||||||||
Michigan | 301,822 | 286,345 | 277,150 | Wisconsin | 339,207 | 334,039 | 303,562 | |||||||||||||||||||||
Minnesota | 895,976 | 952,984 | 853,159 | Wyoming | 139,618 | 148,814 | 142,981 | |||||||||||||||||||||
Mississippi | 426,895 | 313,904 | 474,288 | Total | $ | 18,972,068 | $ | 20,488,523 | $ | 19,484,341 | ||||||||||||||||||
Missouri | 663,301 | 631,803 | 618,590 |
(Dollar amounts in thousands) | May 31, | May 31, | |||||||||||||||||||
State/Territory | 2003 | 2002 | 2001 | State/Territory | 2003 | 2002 | 2001 | ||||||||||||||
Alabama | $ | 293,524 | $ | 263,670 | $ | 364,974 | Montana | $ | 218,378 | $ | 218,497 | $ | 220,234 | ||||||||
Alaska | 312,080 | 295,386 | 293,070 | Nebraska | 13,421 | 12,363 | 12,785 | ||||||||||||||
American Samoa | 2,850 | - | - | Nevada | 90,817 | 93,399 | 94,958 | ||||||||||||||
Arizona | 149,310 | 133,465 | 101,770 | New Hampshire | 204,835 | 229,569 | 243,973 | ||||||||||||||
Arkansas | 520,305 | 517,218 | 531,224 | New Jersey | 19,415 | 9,293 | 8,724 | ||||||||||||||
California | 23,497 | 18,042 | 86,783 | New Mexico | 40,061 | 38,519 | 38,063 | ||||||||||||||
Colorado | 957,814 | 793,398 | 599,602 | New York | 16,640 | 16,885 | 19,808 | ||||||||||||||
Connecticut | 200,000 | 201,896 | 44,421 | North Carolina | 927,217 | 963,335 | 972,887 | ||||||||||||||
Delaware | 14,812 | 20,881 | 46,599 | North Dakota | 75,435 | 52,640 | 63,693 | ||||||||||||||
District of Columbia | 298,272 | 335,410 | 432,122 | Ohio | 380,468 | 387,433 | 379,991 | ||||||||||||||
Florida | 475,802 | 473,582 | 465,348 | Oklahoma | 476,736 | 521,388 | 460,758 | ||||||||||||||
Georgia | 1,538,946 | 1,683,474 | 1,646,326 | Oregon | 285,024 | 279,818 | 262,721 | ||||||||||||||
Hawaii | - | 233 | 812 | Pennsylvania | 182,996 | 159,157 | 150,203 | ||||||||||||||
Idaho | 168,971 | 157,721 | 135,287 | South Carolina | 536,437 | 537,722 | 526,647 | ||||||||||||||
Illinois | 613,838 | 683,718 | 607,305 | South Dakota | 156,218 | 162,881 | 165,015 | ||||||||||||||
Indiana | 326,827 | 270,907 | 224,272 | Tennessee | 104,722 | 108,150 | 105,773 | ||||||||||||||
Iowa | 1,117,138 | 1,167,938 | 1,201,570 | Texas | 3,461,097 | 4,081,770 | 3,859,623 | ||||||||||||||
Kansas | 303,378 | 289,806 | 300,987 | Utah | 571,703 | 583,888 | 616,372 | ||||||||||||||
Kentucky | 289,375 | 226,679 | 223,338 | Vermont | 63,604 | 40,851 | 42,019 | ||||||||||||||
Louisiana | 283,669 | 261,570 | 247,395 | Virgin Islands | 623,037 | 615,599 | 587,849 | ||||||||||||||
Maine | 40,047 | 43,780 | 43,568 | Virginia | 241,157 | 264,272 | 269,579 | ||||||||||||||
Maryland | 102,886 | 130,094 | 132,746 | Washington | 87,893 | 87,190 | 91,436 | ||||||||||||||
Massachussetts | - | - | 50 | West Virginia | 3,959 | 2,160 | 1,699 | ||||||||||||||
Michigan | 277,150 | 298,981 | 306,469 | Wisconsin | 303,562 | 300,464 | 304,913 | ||||||||||||||
Minnesota | 853,159 | 856,013 | 1,099,548 | Wyoming | 142,981 | 154,959 | 147,124 | ||||||||||||||
Mississippi | 474,288 | 373,537 | 283,406 | Total | $ | 19,484,341 | $ | 20,047,109 | $ | 19,683,950 | |||||||||||
Missouri | 618,590 | 627,508 | 618,111 |
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Interest Rates on Loans |
CFC's goal as a not-for-profit cooperatively-owned finance company is to set rates at levels that will provide its members with the lowest cost financing while maintaining sound financial results as required to obtain high credit ratings on its debt instruments. CFC sets its interest rates primarily based on |
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Long-Term Loans |
Long-term loans are generally for terms of up to 35 years. These loans finance electric plant and equipment which typically have a useful life equal to or in excess of the loan maturity. A borrower can select a fixed interest rate for periods of one to 35 years or a variable rate. Upon the expiration of the selected fixed interest rate term, the borrower must select the variable rate or select another fixed rate term for a period that does not exceed the remaining loan maturity. CFC sets long-term fixed rates daily and the long-term variable rate is set on the first business day of each month. The fixed rate on a loan is determined on the day the loan is advanced based on the rate term selected. A borrower may divide its loan into various tranches. The borrower then has the option of selecting a fixed or variable interest rate for each tranche. |
To be eligible for long-term loan advances, distribution systems must maintain an average modified debt service coverage ratio ("MDSC"), as defined in the loan agreement, of 1.35 or greater. The distribution systems must also be in good standing with CFC and their states of incorporation, supply evidence of proper corporate authority, |
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criteria. During the five years ended May 31, |
5 |
Line of Credit Loans |
Line of credit loans |
To be eligible for a line of credit loan, distribution and power supply borrowers must be in good standing with CFC and demonstrate their ability to repay the loan. |
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The |
(Dollar amounts in thousands) | 2003 | 2002 | 2001 | ||||||||||||||||||||||
$ | 3,825,877 | 77% | $ | 3,811,897 | 75% | $ | 3,846,625 | 72% | |||||||||||||||||
Wireless providers | 334,638 | 7% | 357,292 | 7% | 478,664 | 9% | |||||||||||||||||||
Long distance carriers | 324,066 | 7% | 373,809 | 8% | 422,247 | 8% | |||||||||||||||||||
Fiber optic network providers | 190,768 | 4% | 211,245 | 4% | 216,734 | 4% | |||||||||||||||||||
Cable television providers | 184,824 | 4% | 194,806 | 4% | 212,348 | 4% | |||||||||||||||||||
Competitive local exchange carriers | 64,492 | 1% | 105,307 | 2% | 105,310 | 2% | |||||||||||||||||||
Other | 17,975 | - | 20,720 | - | 43,471 | 1% | |||||||||||||||||||
Total | $ | 4,942,640 | 100% | $ | 5,075,076 | 100% | $ | 5,325,399 | 100% |
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The businesses to which the remaining |
Long-Term Loans |
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To borrow from |
Intermediate-Term Loans and Line of Credit Loans |
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Interim financing line of credit loans are also made available to |
NCSC Loan Programs |
NCSC makes long-term and short-term loans to organizations affiliated with its members. Loans may be secured or unsecured. The loans to the affiliated organizations may have a guarantee of repayment to NCSC from the CFC class A cooperative with which it is affiliated. |
6 |
Lease and General Loan Program |
NCSC provides financing for the purchase, by a third party, of a member's assets in a sale/leaseback transaction. Collateral for these loans consists of a mortgage on the leased asset, generally a utility plant and/or related equipment. Repayment of principal and interest is funded using lease income collected by the purchaser. |
Associate Member Loan Program |
NCSC provides financing to for-profit affiliated corporations of cooperatives for economic and community development purposes. Collateral for these loans consists of a first mortgage lien on the assets of the associate member and/or project. These loans are also generally guaranteed by the sponsoring cooperative. |
EC Program |
Prior to January 2001, NCSC provided consumer loan financing through the EC Home Improvement ("ECHI") program. NCSC lent to consumers who use contractors enrolled in the program by sponsoring electric cooperatives. ECHI loans financed the services provided by contractors to consumers who may or may not be members of the sponsoring electric cooperative. ECHI loans are unsecured. Effective January 5, 2001, NCSC ceased originating ECHI loans. All ECHI loans made after January 5, 2001 have been funded by third party banks. |
RUS Guaranteed Loans for Rural Electric Systems |
The level of authority for RUS electric program loan guarantees for the fiscal year ending September 30, |
Conversion of Loans |
A borrower may convert a long-term loan from a variable interest rate to a fixed interest rate at any time without a fee. A borrower may convert a fixed rate to another fixed rate or a variable rate at any time, subject to a fee in most instances. |
Prepayment of Loans |
Borrowers may prepay long-term loans at any time, subject to the payment of a prepayment fee of 33 to 50 basis points and a make-whole premium, if applicable. Line of credit loans may be |
Loan Security |
Except when providing lines of credit and intermediate-term loans, the Company typically lends to its members on a senior secured basis. Long-term loans are typically secured on a parity with other secured lenders (primarily RUS), if any, by all assets and revenues of the borrower with exceptions typical in utility mortgages. Short-term loans are generally unsecured lines of credit. |
The following tables summarize the Company's secured and unsecured loans outstanding by loan program and by segment. | |||||||||||||||||||
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(Dollar amounts in thousands) | At May 31, 2005 | At May 31, 2004 | |||||||||||||||||
Total by loan program: | Secured | % | Unsecured | % | Secured | % | Unsecured | % | |||||||||||
Long-term fixed rate loans | $ 12,293,054 | 97% | $ 431,704 | 3% | $ 13,290,756 | 97% | $ 349,191 | 3% | |||||||||||
Long-term variable rate loans | 4,701,660 | 95% | 259,737 | 5% | 5,191,421 | 95% | 256,802 | 5% | |||||||||||
Loans guaranteed by RUS | 258,493 | 100% | - | - | 263,392 | 100% | - | - | |||||||||||
lntermediate-term loans | 1,235 | 12% | 9,093 | 88% | 5,015 | 9% | 50,390 | 91% | |||||||||||
Line of credit loans | 201,466 | 20% | 815,626 | 80% | 299,250 | 28% | 782,306 | 72% | |||||||||||
Total loans | $ 17,455,908 | 92% | $ 1,516,160 | 8% | $ 19,049,834 | 93% | $ 1,438,689 | 7% | |||||||||||
7 | |||||||||||||||||||
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(Dollar amounts in thousands) | At May 31, 2005 | At May 31, 2004 | |||||||||||||||||
Total by Segment: | Secured | % | Unsecured | % | Secured | % | Unsecured | % | |||||||||||
CFC | $14,316,925 | 92% | $1,188,241 | 8% | $14,202,369 | 92% | $1,153,215 | 8% | |||||||||||
RTFC | 2,747,845 | 92% | 244,347 | 8% | 4,384,412 | 94% | 258,596 | 6% | |||||||||||
NCSC | 391,138 | 82% | 83,572 | 18% | 463,053 | 95% | 26,878 | 5% | |||||||||||
Total loans | $17,455,908 | 92% | $1,516,160 | 8% | $19,049,834 | 93% | $1,438,689 | 7% |
Guarantee Programs |
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The following chart provides a breakout of guarantees outstanding by type. |
May 31, | May 31, | |||||||||||||||||||||||
(Dollar amounts in thousands) | 2003 | 2002 | 2001 | 2005 | 2004 | 2003 | ||||||||||||||||||
Long-term tax-exempt bonds | $ | 899,420 | $ | 940,990 | $ | 979,725 | $ | 738,385 | $ | 780,940 | $ | 899,420 | ||||||||||||
Debt portions of leveraged lease transactions | 34,105 | 41,064 | 103,794 | 12,285 | 14,838 | 34,105 | ||||||||||||||||||
Indemnifications of tax benefit transfers | 184,605 | 208,637 | 232,930 | 141,996 | 159,745 | 184,605 | ||||||||||||||||||
Letters of credit | 314,114 | 310,926 | 370,592 | 196,597 | 307,518 | 314,114 | ||||||||||||||||||
Other guarantees | 471,312 | 554,768 | 530,517 | 68,489 | 68,258 | 471,312 | ||||||||||||||||||
Total | $ | 1,903,556 | $ | 2,056,385 | $ | 2,217,559 | $ | 1,157,752 | $ | 1,331,299 | $ | 1,903,556 |
Guarantees of Long-Term Tax-Exempt Bonds |
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In the event of a default by a system for |
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will be treated as a long-term loan. The system is required to pay to |
Certain guaranteed long-term debt bears interest at variable rates which are adjusted at intervals of one to 270 days, weekly, each five weeks or semi-annually to a level expected to permit their resale or auction at par. At the option of the member on whose behalf it is issued, and provided funding sources are available, rates on such debt may be fixed until maturity. Holders have the right to tender the debt for purchase at par at the time rates are reset when the debt bears interest at a variable rate and |
Guarantees of Lease Transactions |
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8 |
Guarantees of Tax Benefit Transfers |
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Letters of Credit |
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Other Guarantees |
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Members' interest expense for the |
The following chart summarizes total guarantees |
Guarantees by Member Class | ||||||||||||||||||||||||
(Dollar amounts in thousands) | 2003 | 2002 | 2001 | |||||||||||||||||||||
Electric systems: | ||||||||||||||||||||||||
Distribution | $ | 77,725 | 4% | $ | 66,670 | 3% | $ | 153,982 | 7% | |||||||||||||||
Power supply | 1,220,795 | 64% | 1,304,367 | 64% | 1,377,755 | 62% | ||||||||||||||||||
Statewide and associate | 600,036 | 32% | 680,011 | 33% | 685,822 | 31% | ||||||||||||||||||
Subtotal electric systems | 1,898,556 | 100% | 2,051,048 | 100% | 2,217,559 | 100% | ||||||||||||||||||
Telecommunication systems | 5,000 | - | 5,337 | - | - | - | ||||||||||||||||||
Total | $ | 1,903,556 | 100% | $ | 2,056,385 | 100% | $ | 2,217,559 | 100% |
(Dollar amounts in thousands) | Guarantees by Member Class | |||||||||||||||||||||||
CFC: | 2005 | 2004 | 2003 | |||||||||||||||||||||
$ |
41,842
4%
$
60,672
5%
$
77,725
4%
1,066,373
92%
1,130,379
85%
1,220,795
64%
41,642
3%
111,195
8%
600,036
32%
1,149,857
99%
1,302,246
98%
1,898,556
100%
RTFC
-
-
-
-
5,000
-
NCSC
7,895
1%
29,053
2%
-
-
$
1,157,752
100%
$
1,331,299
100%
$
1,903,556
100%
|
Total guarantees outstanding by state and territory are summarized as follows: |
May 31, | May 31, | |||||||||||||||||||||||||||||
(Dollar amounts in thousands) | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||||||||||||||||||||
Alabama | $ | 22,795 | $ | 25,945 | $ | 31,053 | Missouri | $ | 126,198 | $ | 138,755 | $ | 150,372 | |||||||||||||||||
Alaska | 3,320 | 3,240 | 3,240 | New Hampshire | 31,500 | 27,500 | 31,200 | |||||||||||||||||||||||
Arizona | 47,250 | 47,425 | 53,577 | North Carolina | 100,950 | 100,265 | 99,400 | |||||||||||||||||||||||
Arkansas | 29,703 | 35,688 | 41,485 | North Dakota | - | 338 | - | |||||||||||||||||||||||
Colorado | 57,273 | 58,007 | 58,716 | Ohio | 1,000 | - | 65,000 | |||||||||||||||||||||||
District of Columbia | 590,941 | 674,435 | 681,873 | Oklahoma | 16,760 | 23,154 | 31,447 | |||||||||||||||||||||||
Florida | 128,264 | 137,944 | 147,057 | Oregon | 25,810 | 24,628 | 14,580 | |||||||||||||||||||||||
Idaho | 850 | 850 | 850 | Pennsylvania | 24,229 | 23,428 | 11,772 | |||||||||||||||||||||||
Illinois | 7,093 | 7,719 | 15,049 | Tennessee | 295 | 300 | - | |||||||||||||||||||||||
Indiana | 109,047 | 121,264 | 118,205 | Texas | 149,217 | 145,935 | 147,696 | |||||||||||||||||||||||
Iowa | 12,572 | 14,290 | 9,942 | Utah | 71,749 | 78,315 | 114,404 | |||||||||||||||||||||||
Kansas | 33,100 | 34,300 | 42,500 | Virginia | 4,215 | 4,207 | 3,950 | |||||||||||||||||||||||
Kentucky | 142,785 | 149,405 | 155,240 | Wisconsin | 1,439 | 1,475 | 1,511 | |||||||||||||||||||||||
Michigan | 196 | 691 | 585 | Wyoming | 10,005 | 10,195 | 10,380 | |||||||||||||||||||||||
Minnesota | 103,696 | 111,863 | 119,745 | Total | $ | 1,903,556 | $ | 2,056,385 | $ | 2,217,559 | ||||||||||||||||||||
Mississippi | 51,304 | 54,824 | 56,730 |
May 31, | May 31, | |||||||||||||||||||||||||||||
(Dollar amounts in thousands) | 2005 | 2004 | 2003 | 2005 | 2004 | 2003 | ||||||||||||||||||||||||
Alabama | $ | 22,450 | $ | 22,630 | $ | 22,795 | Missouri | $ | 104,218 | $ | 113,186 | $ | 126,198 | |||||||||||||||||
Alaska | 3,320 | 3,320 | 3,320 | New Hampshire | 10,500 | 17,500 | 31,500 | |||||||||||||||||||||||
Arizona | 45,869 | 46,865 | 47,250 | New Mexico | 1,000 | 1,000 | - | |||||||||||||||||||||||
Arkansas | 19,776 | 23,537 | 29,703 | North Carolina | 100,854 | 100,350 | 100,950 | |||||||||||||||||||||||
Colorado | 55,744 | 56,518 | 57,273 | North Dakota | - | 20,000 | - | |||||||||||||||||||||||
District of Columbia | 30,248 | 100,000 | 590,941 | Ohio | 1,000 | - | 1,000 | |||||||||||||||||||||||
Florida | 108,385 | 116,447 | 128,264 | Oklahoma | 4,930 | 11,221 | 16,760 | |||||||||||||||||||||||
Idaho | - | 850 | 850 | Oregon | 24,880 | 23,520 | 25,810 | |||||||||||||||||||||||
Illinois | 633 | 6,218 | 7,093 | Pennsylvania | 21,021 | 21,900 | 24,229 | |||||||||||||||||||||||
Indiana | 95,900 | 107,997 | 109,047 | Tennessee | 295 | 295 | 295 | |||||||||||||||||||||||
Iowa | 5,708 | 4,885 | 12,572 | Texas | 143,682 | 147,347 | 149,217 | |||||||||||||||||||||||
Kansas | 35,632 | 37,200 | 33,100 | Utah | 41,126 | 48,204 | 71,749 | |||||||||||||||||||||||
Kentucky | 132,115 | 135,555 | 142,785 | Vermont | 1,250 | 750 | - | |||||||||||||||||||||||
Louisiana | 4,728 | 4,728 | - | Virginia | 3,603 | 4,065 | 4,215 | |||||||||||||||||||||||
Michigan | 1,207 | 1,148 | 196 | Wisconsin | 274 | 1,403 | 1,439 | |||||||||||||||||||||||
Minnesota | 86,372 | 95,556 | 103,696 | Wyoming | 9,595 | 9,805 | 10,005 | |||||||||||||||||||||||
Mississippi | 41,437 | 47,299 | 51,304 | Total | $ | 1,157,752 | $ | 1,331,299 | $ | 1,903,556 | ||||||||||||||||||||
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Disaster Recovery |
CFC has had in place a disaster recovery and business continuity plan since May 2001. The plan includes a duplication of CFC's information systems at an off-site facility and a comprehensive business recovery plan. CFC's production data is replicated in real time to the recovery site. The plan also includes steps for each of CFC's operating groups to conduct business with a view to minimizing disruption for customers. Recovery exercises are conducted twice annually with different teams to expand recovery experience among the staff. CFC contracts with an external vendor for the facilities to house the backup systems as well as office space and related office equipment. |
Tax Status |
In 1969, CFC obtained a ruling from the Internal Revenue Service 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 Internal Revenue Service in its exemption filing. RTFC is a taxable entity under Subchapter T of the Internal Revenue Code. As long as RTFC continues to qualify under Subchapter T of the Internal Revenue Code, it is allowed a deduction from taxable income for the amount of net margin allocated to its members. RTFC pays income tax based on its net margins, excluding net margins allocated to its members. NCSC is a taxable corporation. NCSC pays income tax annually based on its net margins for the period. |
Investment Policy |
Surplus funds are invested pursuant to policies adopted by CFC's board of directors. Under present policy, surplus funds may be invested in direct obligations of, or guaranteed by, the United States or agencies thereof or other highly liquid investment grade paper. Current investments include high-rated securities such as commercial paper, obligations of foreign governments, Eurodollar deposits, bankers' acceptances, bank letters of credit, certificates of deposit or working capital acceptances. The policy also permits investments in certain types of repurchase agreements with highly rated financial institutions, whereby the assets consist of eligible securities of a type listed above set aside in a segregated account. |
Employees |
At May 31, |
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CFC Lending Competition |
CFC competes with other lenders on price and the variety of options and additional services offered as well as its overall approach to, and relationship with, its member/owners. Competitors include a government sponsored entity whose status as such gives it the ability to offer lower variable and short-term fixed interest rates in select situations. |
According to |
Under the insured loan program, RUS typically does not lend the full amount of debt requested by the cooperative, requiring the cooperative to seek supplemental lending from private capital sources. During fiscal year |
10 |
between the House and Senate are resolved during the appropriations process. CFC and other lenders are not in competition with RUS, but rather compete for the supplemental lending requirement, as well as for the full lending requirement for those cooperatives that have decided not to borrow from RUS. CFC and other lenders also compete to fund projects in anticipation of long-term funding from RUS. Under the hardship program, RUS lends 100% of the |
Legislation enacted in 1992 allows RUS electric borrowers to prepay their loans to RUS at a discount based on the government's cost of funds at the time of prepayment. If a borrower chooses to prepay its notes, it becomes ineligible for future RUS insured loans for a period of ten years, but remains eligible for RUS loan guarantees. During the year ended May 31, |
The competitive market for providing credit to the rural telecommunications industry is difficult to quantify, since many rural telecommunications companies are not RUS borrowers. At December 31, |
Member Regulation and Competition |
Electric Systems |
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The trend toward retail electric competition has appreciably slowed. The electric utility industry has settled into a "hybrid" model in which there are significant differences in the regulatory approaches followed in different states and regions. At May 31, |
In the |
In addition, in five of the |
The impact on power supply systems cannot be determined until final rules have been approved in each state with regard to stranded cost recovery. |
11 |
While customer choice laws have been passed in the above states, there are many factors that may delay or influence the choices that customers have available to them and the timing of competition for cooperatives. One such factor will be the level of fees that systems will be allowed to charge other utilities for use of their transmission and distribution system. Other issues that may further delay competition include, but are not limited to, the following: |
* | ability of cooperatives to "opt out" of the provisions of the customer choice laws in some states; |
* | utilities in many states may still be regulated regarding rates on non-competitive services, such as distribution; |
* | many states will still regulate the securities issued by utilities, including cooperatives; |
* | FERC regulation of rates as well as terms and conditions of transmission service; |
* | reconciling the differences between state laws, such that out-of-state utilities can compete with in-state utilities; and |
* | the fact that few competitors have much interest in serving residential or rural customers. |
In addition to customer choice laws, some state agencies regulate electric cooperatives with regard to rates and borrowing. There are | |
With the enactment of the Energy Policy Act of 2005 in August 2005, the definition of a public utility has been modified to exclude RUS financed cooperatives and non-RUS financed cooperatives provided that the non-RUS cooperatives have total sales less than four million Mwh. The Energy Policy Act of 2005 effectively provides a statutory exemption from FERC regulation for essentially all distribution cooperatives. | |
Telecommunications Systems |
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The Telecommunications Act of 1996 (the "Telecom Act") created a framework for competition and deregulation in the local telecommunications market. The Telecom Act had four basic goals: competition, universal service, deregulation and fostering advanced telecommunications and information technologies. The Telecom Act |
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RLECs generally were not subject to UNE-P based |
12 |
In addition to competition, the Telecom Act also mandated a |
The FCC also has a proceeding open on intercarrier compensation - the most important components of which are access fees LECs charge to interexchange carriers that originate or terminate long distance traffic on LEC networks. While the large LECs (most of which now own long distance companies) would like to see these fees transition to zero, RLECs depend heavily on access charges and are active participants in the FCC proceeding. |
While uncertainty exists regarding USF and access, CFC does not anticipate that any potential revenue losses resulting from these changes will result in material losses on loans outstanding to rural telecommunications companies. |
Most RLECs are expanding their service offerings to customers. Without cable as a competitor in most rural areas, RLECs are |
Deregulation |
Another aspect of the Telecom Act dealt with advanced telecommunications and information technologies. In the late 1990s there was the concern that there was a growing "digital divide" between various groups and areas within the country. Legislators sought to provide broadband connectivity to all Americans through programs which provide funding to connect schools and libraries to the internet. RUS has issued rules liberalizing its lending criteria to facilitate provision of advanced telecommunications and information services in rural areas. Congress also created an RUS broadband loan program in 2002 and authorized |
Given the increased availability of government financing for rural broadband, it is unlikely that CFC or any other supplemental lender will be participating in this financing to any significant degree. |
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The RUS Program |
Since the enactment of the Rural Electrification Act in 1936 (the "RE Act"), RUS has financed the construction of electric generating plants, transmission facilities and distribution systems in order to provide electricity to rural areas. Principally through the organization of systems under the RUS loan program in 48 states and U.S. territories, the percentage of farms and residences in rural areas of the United States receiving central station electric service increased from 11% in 1934 to almost 100% currently. Rural electric systems serve 12% of all consumers of electricity in the United States and its territories and account for approximately 8% of total sales of electricity and own about 5% of energy generation and generating capacity. |
In 1949, the RE Act was amended to allow RUS to lend for the purpose of furnishing and improving rural telecommunications service. For fiscal year |
13 |
The RE Act provides for RUS to make insured loans and to provide other forms of financial assistance to borrowers. RUS |
For the fiscal year ending September 30, |
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Years ended December 31, | ||||||||||||||||||||
(Dollar amounts in thousands) | 2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||||||
Operating revenues and patronage capital | $ | 22,856,370 | $ | 21,627,713 | $ | 20,419,019 | $ | 18,805,359 | $ | 18,284,021 | ||||||||||
Operating deductions: | ||||||||||||||||||||
Cost of power (1) | 14,153,297 | 13,550,239 | 12,925,630 | 11,828,572 | 11,580,829 | |||||||||||||||
Distribution expense (operations) | 992,617 | 899,310 | 856,378 | 792,249 | 728,565 | |||||||||||||||
Distribution expense (maintenance) | 1,249,463 | 1,183,558 | 1,106,780 | 1,024,734 | 985,571 | |||||||||||||||
Administrative and general expense (2) | 2,266,334 | 2,144,824 | 1,972,220 | 1,864,344 | 1,735,074 | |||||||||||||||
Depreciation and amortization expense | 1,600,544 | 1,487,657 | 1,387,923 | 1,290,354 | 1,203,438 | |||||||||||||||
Taxes | 269,587 | 252,592 | 241,219 | 230,238 | 241,010 | |||||||||||||||
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Total | 20,531,842 | 19,518,180 | 18,490,150 | 17,030,491 | 16,474,487 | |||||||||||||||
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Utility operating margin | 2,324,528 | 2,109,533 | 1,928,869 | 1,774,868 | 1,809,534 | |||||||||||||||
Non-operating margin | 295,588 | 104,442 | 211,957 | 179,940 | 173,446 | |||||||||||||||
Power supply capital credits (3) | 321,548 | 326,215 | 272,007 | 259,099 | 297,451 | |||||||||||||||
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Total | 2,941,664 | 2,540,190 | 2,412,833 | 2,213,907 | 2,280,431 | |||||||||||||||
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Interest on long-term debt (4) | 1,151,978 | 1,194,016 | 1,150,231 | 1,024,369 | 980,863 | |||||||||||||||
Other deductions | 74,769 | 74,854 | 84,049 | 50,523 | 49,628 | |||||||||||||||
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Total | 1,226,747 | 1,268,870 | 1,234,280 | 1,074,892 | 1,030,491 | |||||||||||||||
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Net margin and patronage capital | $ | 1,714,917 | $ | 1,271,320 | $ | 1,178,553 | $ | 1,139,015 | $ | 1,249,940 | ||||||||||
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TIER (5) | 2.48 | 2.05 | 2.01 | 2.11 | 2.35 | |||||||||||||||
DSC (6) | 2.16 | 1.94 | 2.08 | 2.15 | 2.32 | |||||||||||||||
MDSC (7) | 1.98 | 1.88 | 1.99 | 2.03 | 2.25 | |||||||||||||||
Number of systems included | 808 | 811 | 812 | 811 | 820 |
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At December 31, | ||||||||||||||||||||
(Dollar amounts in thousands) | 2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||||||
Assets and other debits: | ||||||||||||||||||||
Utility plant: | ||||||||||||||||||||
Utility plant in service | $ | 51,732,230 | $ | 48,895,933 | $ | 45,985,367 | $ | 43,023,535 | $ | 40,387,723 | ||||||||||
Construction work in progress | 1,350,707 | 1,442,108 | 1,438,002 | 1,262,537 | 1,129,147 | |||||||||||||||
Total utility plant | 53,082,937 | 50,338,041 | 47,423,369 | 44,286,072 | 41,516,870 | |||||||||||||||
Less: Accumulated provision for | ||||||||||||||||||||
depreciation and amortization | 14,841,818 | 14,044,637 | 13,083,103 | 12,225,421 | 11,409,118 | |||||||||||||||
Net utility plant | 38,241,119 | 36,293,404 | 34,340,266 | 32,060,651 | 30,107,752 | |||||||||||||||
Investment in associated organizations (1) | 4,442,660 | 4,225,723 | 4,002,393 | 3,790,623 | 3,665,208 | |||||||||||||||
Current and accrued assets | 5,360,318 | 5,038,616 | 5,651,652 | 4,520,592 | 4,526,663 | |||||||||||||||
Other property and investments | 1,240,403 | 1,076,731 | 1,019,348 | 703,585 | 644,353 | |||||||||||||||
Deferred debits | 593,995 | 613,117 | 626,903 | 599,511 | 530,606 | |||||||||||||||
Total assets and other debits | $ | 49,878,495 | $ | 47,247,591 | $ | 45,640,562 | $ | 41,674,962 | $ | 39,474,582 | ||||||||||
Liabilities and other credits: | ||||||||||||||||||||
Net worth: | ||||||||||||||||||||
Memberships | $ | 114,001 | $ | 111,266 | $ | 140,663 | $ | 119,175 | $ | 112,391 | ||||||||||
Patronage capital and other equities (2) | 20,459,062 | 19,642,036 | 18,538,088 | 17,542,625 | 16,710,886 | |||||||||||||||
Total net worth | 20,573,063 | 19,753,302 | 18,678,751 | 17,661,800 | 16,823,277 | |||||||||||||||
Long-term debt (3) | 23,345,933 | 21,943,560 | 21,326,555 | 19,308,152 | 18,343,340 | |||||||||||||||
Current and accrued liabilities | 4,440,751 | 4,095,900 | 4,280,010 | 433,687 | 3,098,525 | |||||||||||||||
Deferred credits | 974,414 | 952,642 | 892,001 | 3,429,173 | 884,595 | |||||||||||||||
Miscellaneous operating services | 544,334 | 502,187 | 463,245 | 842,150 | 324,845 | |||||||||||||||
Total liabilities and other credits | $ | 49,878,495 | $ | 47,247,591 | $ | 45,640,562 | $ | 41,674,962 | $ | 39,474,582 | ||||||||||
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Equity percentage (4) | 41.2% | 41.8% | 40.9% | 42.5% | 42.6% | |||||||||||||||
Number of systems included | 808 | 811 | 812 | 811 | 820 |
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Years ended December 31, | ||||||||||||||||||||
(Dollar amounts in thousands) | 2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||||||
Operating revenues and patronage capital | $ | 11,555,059 | $ | 11,941,467 | $ | 11,431,737 | $ | 10,758,413 | $ | 10,901,138 | ||||||||||
Operating deductions: | ||||||||||||||||||||
Cost of power (1) | 8,673,728 | 9,188,992 | 8,609,376 | 7,945,476 | 7,979,542 | |||||||||||||||
Distribution expense (operations) | 22,848 | 22,319 | 21,375 | 23,634 | 17,499 | |||||||||||||||
Distribution expense (maintenance) | 15,733 | 15,907 | 14,333 | 14,908 | 12,524 | |||||||||||||||
Administrative and general expense (2) | 461,984 | 439,032 | 433,616 | 414,362 | 406,441 | |||||||||||||||
Depreciation and amortization expense | 977,930 | 917,165 | 936,059 | 904,826 | 914,270 | |||||||||||||||
Taxes (3) | 21,493 | 26,877 | 82,297 | 68,681 | 69,095 | |||||||||||||||
Total | 10,173,716 | 10,610,292 | 10,097,056 | 9,371,887 | 9,399,371 | |||||||||||||||
Utility operating margin | 1,381,343 | 1,331,175 | 1,334,681 | 1,386,526 | 1,501,767 | |||||||||||||||
Non-operating margin | 224,104 | 249,256 | 303,513 | 258,186 | 577,842 | |||||||||||||||
Power supply capital credits (4) | 39,653 | 44,506 | 49,077 | 44,180 | 56,646 | |||||||||||||||
Total | 1,645,100 | 1,624,937 | 1,687,271 | 1,688,892 | 2,136,255 | |||||||||||||||
Interest on long-term debt (5) | 1,174,279 | 1,186,371 | 1,195,644 | 1,227,548 | 1,221,512 | |||||||||||||||
Other deductions | 118,386 | 117,937 | 144,850 | 185,621 | 184,868 | |||||||||||||||
Total | 1,292,665 | 1,304,308 | 1,340,494 | 1,413,169 | 1,406,380 | |||||||||||||||
Net margin and patronage capital | $ | 352,435 | $ | 320,629 | $ | 346,777 | $ | 275,723 | $ | 729,875 | ||||||||||
TIER (6) | 1.29 | 1.25 | 1.28 | 1.22 | 1.60 | |||||||||||||||
DSC (7) | 0.97 | 0.99 | 1.16 | 1.15 | 1.45 | |||||||||||||||
Number of systems included | 51 | 53 | 51 | 54 | 58 |
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Allowance for Funds Used During | ||||||||
Interest Charged to Construction | Construction | Total | ||||||
2002 | $25,479 | $15,009 | $40,488 | |||||
2001 | 39,140 | 21,851 | 60,991 | |||||
2000 | 20,245 | 24,736 | 44,981 | |||||
1999 | 10,073 | 13,604 | 23,677 | |||||
1998 | 9,947 | 13,133 | 23,080 |
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At December 31, | |||||||||||||||||||||
(Dollar amounts in thousands) | 2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||
Assets and other debits: | |||||||||||||||||||||
Utility plant: | |||||||||||||||||||||
Utility plant in service | $ | 35,116,374 | $ | 32,687,748 | $ | 31,970,487 | $ | 31,140,658 | $ | 31,141,532 | |||||||||||
Construction work in progress | 1,962,399 | 1,813,833 | 1,571,954 | 1,151,859 | 1,041,760 | ||||||||||||||||
Total utility plant | 37,078,773 | 34,501,581 | 33,542,441 | 32,292,517 | 32,183,292 | ||||||||||||||||
Less: Accumulated provision for | |||||||||||||||||||||
depreciation and amortization | 15,929,240 | 14,208,592 | 13,867,937 | 13,230,060 | 13,059,537 | ||||||||||||||||
Net utility plant | 21,149,533 | 20,292,989 | 19,674,504 | 19,062,457 | 19,123,755 | ||||||||||||||||
Investments in associated | |||||||||||||||||||||
organizations (1) | 1,379,768 | 1,313,453 | 1,360,671 | 1,173,026 | 1,132,157 | ||||||||||||||||
Current and accrued assets | 4,214,557 | 4,120,224 | 4,067,827 | 3,904,535 | 3,740,302 | ||||||||||||||||
Other property and investments | 1,639,204 | 1,722,999 | 1,540,147 | 1,511,145 | 1,691,932 | ||||||||||||||||
Deferred debits | 2,102,269 | 2,113,357 | 3,027,612 | 3,251,458 | 3,400,876 | ||||||||||||||||
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Total assets and other debits | $ | 30,485,331 | $ | 29,563,022 | $ | 29,670,761 | $ | 28,902,621 | $ | 29,089,022 | |||||||||||
Liabilities and other credits: | |||||||||||||||||||||
Net worth: | |||||||||||||||||||||
Memberships | $ | 49,133 | $ | 49,129 | $ | 49,106 | $ | 49,131 | $ | 263 | |||||||||||
Patronage capital and other equities (2) | 3,942,442 | 3,575,050 | 3,498,360 | 3,175,374 | (52,606 | ) | |||||||||||||||
Total net worth | 3,991,575 | 3,624,179 | 3,547,466 | 3,224,505 | (52,343 | ) | |||||||||||||||
Long-term debt (3) | 20,159,824 | 19,935,286 | 19,051,276 | 19,591,883 | 23,389,067 | ||||||||||||||||
Current and accrued liabilities | 3,070,276 | 2,878,459 | 3,186,042 | 2,328,504 | 1,877,320 | ||||||||||||||||
Deferred credits | 1,556,459 | 1,509,021 | 1,565,294 | 1,338,343 | 1,296,308 | ||||||||||||||||
Miscellaneous operating reserves | 1,707,197 | 1,616,077 | 2,320,683 | 2,419,386 | 2,578,670 | ||||||||||||||||
Total liabilities and other credits | $ | 30,485,331 | $ | 29,563,022 | $ | 29,670,761 | $ | 28,902,621 | $ | 29,089,022 | |||||||||||
Number of systems included | 51 | 53 | 51 | 54 | 58 |
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Years ended December 31, | |||||||||||||||||||||
(Dollar amounts in thousands) | 2002 (4) (5) | 2001 (4) | 2000 (3) | 1999 (3) | 1998 | ||||||||||||||||
Operating revenues | $ | 4,765,679 | $ | 4,503,614 | $ | 4,879,808 | $ | 3,908,496 | $ | 2,535,461 | |||||||||||
Operating expenses (1) | 3,364,102 | 3,030,570 | 3,509,779 | 3,003,530 | 1,846,215 | ||||||||||||||||
Net income before interest, | |||||||||||||||||||||
depreciation and taxes | 1,401,577 | 1,473,044 | 1,370,029 | 904,966 | 689,246 | ||||||||||||||||
Interest on long-term debt | 477,587 | 568,829 | 430,825 | 221,103 | 140,436 | ||||||||||||||||
Net income before depreciation and taxes | 923,990 | 904,215 | 939,204 | 683,863 | 548,810 | ||||||||||||||||
Depreciation and amortization expenses | 719,204 | 797,665 | 675,757 | 410,805 | 279,277 | ||||||||||||||||
Net income before taxes | 204,786 | 106,550 | 263,447 | 273,058 | 269,533 | ||||||||||||||||
Taxes | 93,797 | 91,420 | 140,378 | 89,030 | 71,326 | ||||||||||||||||
Net income | $ | 110,989 | $ | 15,130 | $ | 123,069 | $ | 184,028 | $ | 198,207 | |||||||||||
DSC (2) | 1.43 | 1.59 | 1.79 | 2.30 | 2.14 | ||||||||||||||||
Number of systems included | 201 | 208 | 226 | 191 | 169 |
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At December 31, | |||||||||||||||||||||
(Dollar amounts in thousands) | 2002 (4) (5) | 2001 (4) | 2000 (3) | 1999 (3) | 1998 | ||||||||||||||||
Assets and other debits: | |||||||||||||||||||||
Cash and cash equivalents | $ | 655,500 | $ | 653,628 | $ | 639,882 | $ | 646,409 | $ | 401,507 | |||||||||||
Current assets | 970,994 | 909,931 | 1,372,186 | 1,029,905 | 590,248 | ||||||||||||||||
Plant, property and equipment | 5,024,619 | 5,572,227 | 5,674,846 | 3,998,038 | 2,699,798 | ||||||||||||||||
Other non-current assets | 4,331,119 | 4,728,130 | 4,957,209 | 2,505,597 | 1,456,301 | ||||||||||||||||
Total assets | $ | 10,982,232 | $ | 11,863,916 | $ | 12,644,123 | $ | 8,179,949 | $ | 5,147,854 | |||||||||||
Liabilities and equity: | |||||||||||||||||||||
Current liabilities | $ | 935,367 | $ | 945,181 | $ | 1,225,408 | $ | 898,080 | $ | 586,176 | |||||||||||
Affiliate debt | 4,266 | 7,152 | 1,135 | 3,804 | 23,442 | ||||||||||||||||
Long-term debt (1) | 6,844,587 | 7,156,808 | 6,960,293 | 4,309,996 | 2,686,987 | ||||||||||||||||
Other non-current liabilities | 586,628 | 464,703 | 741,921 | 392,982 | 232,219 | ||||||||||||||||
Equity | 2,611,384 | 3,290,072 | 3,715,366 | 2,575,087 | 1,619,030 | ||||||||||||||||
Total liabilities and equity | $ | 10,982,232 | $ | 11,863,916 | $ | 12,644,123 | $ | 8,179,949 | $ | 5,147,854 | |||||||||||
Equity percentage (2) | 24% | 28% | 29% | 32% | 32% | ||||||||||||||||
Number of systems included | 201 | 208 | 226 | 191 | 169 |
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Item 2. | Properties. |
CFC owns and operates a headquarters facility in Fairfax County, Virginia. This facility consists of two six-story office buildings and two separate parking garages situated on ten acres of land. CFC also owns an additional two acres of unimproved |
Item 3. | Legal Proceedings. |
None. |
Item 4. | Submission of Matters to a Vote of Security Holders. |
None. | |
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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 | |
(Dollar amounts in thousands) | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
For the year ended May 31: | ||||||||||||||||||||||
Operating income | $ | 1,070,875 | $ | 1,186,533 | $ | 1,388,295 | $ | 1,020,998 | $ | 792,052 | ||||||||||||
Gross margin | 140,028 | 300,695 | 270,456 | 159,674 | 127,943 | |||||||||||||||||
Operating margin | 15,153 | 63,834 | 132,766 | 115,333 | 76,439 | |||||||||||||||||
Derivative cash settlements (A) | 122,825 | 34,191 | - | - | - | |||||||||||||||||
Derivative forward value (A) | 757,212 | 41,878 | - | - | - | |||||||||||||||||
Foreign currency adjustments (B) | (243,220 | ) | (61,030 | ) | - | - | - | |||||||||||||||
Cumulative effect of change in | ||||||||||||||||||||||
accounting principle (A) | - | 28,383 | - | - | - | |||||||||||||||||
Net margin | $ | 651,970 | $ | 107,256 | $ | 132,766 | $ | 115,333 | $ | 76,439 | ||||||||||||
Fixed charge coverage ratio (C) | 1.70 | 1.09 | 1.12 | 1.13 | 1.12 | |||||||||||||||||
Adjusted fixed charge coverage ratio (C) | 1.17 | 1.12 | 1.12 | 1.13 | 1.12 | |||||||||||||||||
As of May 31: | ||||||||||||||||||||||
Assets | $ | 20,974,288 | $ | 20,342,935 | $ | 19,998,842 | $ | 17,083,440 | $ | 13,925,252 | ||||||||||||
Long-term debt (D) | 16,000,744 | 14,855,550 | 11,376,412 | 10,595,596 | 6,891,122 | |||||||||||||||||
Subordinated deferrable debt | 650,000 | 600,000 | 550,000 | 400,000 | 400,000 | |||||||||||||||||
Members' subordinated certificates | 1,708,297 | 1,691,970 | 1,581,860 | 1,340,417 | 1,239,816 | |||||||||||||||||
Members' equity (A) | 454,376 | 392,056 | 393,899 | 341,217 | 296,481 | |||||||||||||||||
Total equity | 930,836 | 328,731 | 393,899 | 341,217 | 296,481 | |||||||||||||||||
Guarantees | $ | 1,903,556 | $ | 2,056,385 | $ | 2,217,559 | $ | 1,945,202 | $ | 1,893,197 | ||||||||||||
Leverage ratio (E) | 23.58 | 67.14 | 55.40 | 54.77 | 52.35 | |||||||||||||||||
Adjusted leverage ratio (E) | 6.63 | 7.18 | 7.72 | 8.10 | 7.10 | |||||||||||||||||
Debt to equity ratio (E) | 21.53 | 60.88 | 49.77 | 49.07 | 45.97 | |||||||||||||||||
Adjusted debt to equity ratio (E) | 4.96 | 5.40 | 6.05 | 6.46 | 5.52 |
(Dollar amounts in thousands) | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
For the year ended May 31: | |||||||||||||||||||||
Operating income | $ | 1,026,126 | $ | 1,007,293 | $ | 1,070,875 | $ | 1,186,533 | $ | 1,388,295 | |||||||||||
Gross margin | 104,063 | 81,641 | 131,543 | 300,695 | 270,456 | ||||||||||||||||
Derivative cash settlements (1) | 63,044 | 110,087 | 122,825 | 34,191 | - | ||||||||||||||||
Derivative forward value (1) | 29,875 | (229,132 | ) | 757,212 | 41,878 | - | |||||||||||||||
Foreign currency adjustments (2) | (22,893 | ) | (65,310 | ) | (243,220 | ) | (61,030 | ) | - | ||||||||||||
Operating margin (loss) | 130,587 | (194,584 | ) | 651,970 | 78,873 | 132,766 | |||||||||||||||
Cumulative effect of change in | |||||||||||||||||||||
accounting principle (1) (3) | - | 22,369 | - | 28,383 | - | ||||||||||||||||
Net margin (loss) | $ | 126,529 | $ | (178,021 | ) | $ | 651,970 | $ | 107,256 | $ | 132,766 | ||||||||||
Fixed charge coverage ratio (TIER) (4)(5) | 1.14 | - | 1.69 | 1.09 | 1.12 | ||||||||||||||||
Adjusted fixed charge coverage ratio | |||||||||||||||||||||
(Adjusted TIER) (6) | 1.14 | 1.12 | 1.17 | 1.12 | 1.12 | ||||||||||||||||
As of May 31: | |||||||||||||||||||||
Loans to members | $ | 18,972,068 | $ | 20,488,523 | $ | 19,484,341 | $ | 20,047,109 | $ | 19,683,950 | |||||||||||
Allowance for loan losses | (589,749 | ) | (573,939 | ) | (511,463 | ) | (478,342 | ) | (317,197 | ) | |||||||||||
Assets | 20,046,088 | 21,441,238 | 21,027,883 | 20,371,335 | 20,013,642 | ||||||||||||||||
Long-term debt (7) | 13,701,955 | 16,659,182 | 16,000,744 | 14,855,550 | 11,376,412 | ||||||||||||||||
Subordinated deferrable debt | 685,000 | 550,000 | 650,000 | 600,000 | 550,000 | ||||||||||||||||
Members' subordinated certificates | 1,490,750 | 1,665,158 | 1,708,297 | 1,691,970 | 1,581,860 | ||||||||||||||||
Members' equity (1) | 523,583 | 483,126 | 454,376 | 392,056 | 393,899 | ||||||||||||||||
Total equity | 768,761 | 695,734 | 930,836 | 328,731 | 393,899 | ||||||||||||||||
Guarantees | $ | 1,157,752 | $ | 1,331,299 | $ | 1,903,556 | $ | 2,056,385 | $ | 2,217,559 | |||||||||||
Leverage ratio (5) | 26.56 | 31.70 | 23.64 | 67.23 | 55.44 | ||||||||||||||||
Adjusted leverage ratio (6) | 6.49 | 7.07 | 6.65 | 7.20 | 7.73 | ||||||||||||||||
Debt to equity ratio (5) | 25.05 | 29.79 | 21.59 | 60.97 | 49.81 | ||||||||||||||||
Adjusted debt to equity ratio (6) | 6.07 | 6.58 | 5.97 | 6.43 | 6.85 |
_________________ | ||
| Derivative cash settlements represent the net settlements | |
| Foreign currency adjustments represent the change on foreign denominated debt that is not related to a qualifying hedge under SFAS 133 during the period. The foreign denominated debt is revalued at each reporting date based on the current exchange rate. To the extent that the current exchange rate is different than the exchange rate at the time of issuance, there will be a change in the value of the foreign denominated debt. CFC enters into foreign currency exchange agreements at the time of each foreign denominated debt issuance to lock in the exchange rate for all principal and interest payments required through maturity. | |
| The cumulative effect of change in accounting principle in 2004 represents the impact of implementing Financial Accounting Standards Board Interpretation No. 46 (R), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, effective June 1, 2003. | |
(4) | The fixed charge coverage ratio is the same calculation as CFC's Times Interest Earned Ratio ("TIER"). For the year ended May 31, 2004, CFC's earnings were insufficient to cover fixed charges by $200 million. | |
(5) | See "Non-GAAP Financial Measures" in Management's Discussion and Analysis for the | |
(6) | Adjusted ratios include non-GAAP adjustments that CFC makes to financial measures in assessing its financial performance. See "Non-GAAP Financial Measures" in Management's Discussion and Analysis for further explanation of these calculations and a reconciliation of the | |
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Item 7. | Management's Discussion and Analysis of Financial Condition and Results of |
Unless stated otherwise, references to the Company relate to the consolidation of National Rural Utilities Cooperative Finance Corporation's ("CFC" or "the Company"), Rural Telephone Finance Corporation ("RTFC"), National Cooperative Services Corporation ("NCSC") and certain entities controlled by CFC and created to hold foreclosed assets. The following discussion and analysis is designed to provide a better understanding of the Company's consolidated financial condition and results of operations and as such should be read in conjunction with the consolidated and combined financial statements, including the notes thereto. Effective June 1, 2003, the Company's financial results include the consolidated accounts of CFC, RTFC, NCSC and certain entities controlled by the Company that were created to hold foreclosed assets. CFC's financial results prior to June 1, 2003 were consolidated with certain entities controlled by CFC that were created to hold foreclosed assets and combined with those of RTFC. CFC refers to its financial measures that are not in accordance with generally accepted accounting principles ("GAAP") as "adjusted" throughout this document. See "Non-GAAP Financial Measures" for further explanation. | ||
Risk Factors | ||
This annual report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by their use of words like "anticipates", "expects", "projects", "believes", "plans", "may", "intend", "should", "could", "will", "estimate", and other expressions that indicate future events and trends. All statements that address expectations or projections about the future, including statements about loan growth, the adequacy of the loan loss | ||
Forward-looking statements are based on |
* | Liquidity - | |||
* |
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* | Credit concentration - | |||
* | it were to extend additional loans and/or guarantees to the current ten largest borrowers, | |||
* | its total loans and/or guarantees outstanding were to decrease, with a disproportionately large share of the decrease to borrowers not in the current ten largest, or | |||
* | it were to advance large new loans | |||
* | Loan loss allowance - Computation of the loan loss | |||
16 | ||||
* | Adjusted leverage and adjusted debt to equity ratios - |
* | Tax exemption - Legislation that removes or imposes new conditions on the federal tax exemption for 501(c)(4) social welfare corporations |
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* | Derivative accounting - The required accounting for derivative financial instruments has caused increased volatility in | |
* | Foreign currency - The required accounting for foreign denominated debt has caused increased volatility in | |
* | Rating triggers - | |
* | Calculated impairment - |
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17 | |
Overview |
CFC was formed in 1969 by the rural electric cooperatives to provide them with a source of |
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NCSC was incorporated in 1981 in the District of Columbia as a private cooperative association. NCSC provides financing to the for-profit or non-profit entities that are owned, operated or controlled by or provide substantial benefit to members of CFC. NCSC also markets, through its cooperative members, a consumer loan program for home improvements and an affinity credit card program. Both programs are currently funded by third parties except for approximately $10 million of the consumer loan program that was funded by NCSC at May 31, 2005. NCSC's membership consists of CFC and distribution systems that are members of CFC or are eligible for such membership. Effective June 1, 2003, NCSC's results of operations and financial condition have been consolidated with those of CFC in the accompanying financial statements. CFC is the primary source of funding to and manages the lending and financial affairs of NCSC through a management agreement which is automatically renewable on an annual basis unless terminated by either party. Under a guarantee agreement effective June 1, 2003, CFC has agreed to reimburse NCSC for losses on loans, excluding the consumer loan program. NCSC is headquartered with CFC in Herndon, Virginia. NCSC is a taxable corporation. NCSC pays income tax annually based on its net margins for the period. At May 31, 2005, CFC had committed to provide a total of $2 billion of credit to NCSC. At May 31, 2005, CFC had provided a total of $532 million of credit to NCSC, $82 million of outstanding loans and $450 million of credit enhancements. |
Unless stated otherwise, references to |
The Company implemented Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 46(R), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 effective June 1, 2003, which resulted in the consolidation of two variable interest entities, RTFC and NCSC. CFC is the primary beneficiary of RTFC and NCSC as a result of its exposure to absorbing a majority of the expected losses. Neither company was consolidated with CFC prior to June 1, 2003 and the implementation of FIN 46(R) since CFC has no direct financial ownership interest in either company. |
On June 1, 2003, as a result of the consolidation of RTFC and NCSC, total assets increased by $353 million, total liabilities increased by $331 million, minority interest - RTFC and NCSC members' equity increased by $20 million and CFC total equity increased by $2 million. As a result of the consolidation, NCSC loans were consolidated with CFC's loans. Additionally, NCSC debt guaranteed by CFC became debt of the consolidated entity, resulting in a reduction to CFC's guarantee liability. CFC recorded a cumulative effect of change in accounting principle gain of $22 million on the consolidated statement of operations for the year ended May 31, 2004, representing a $3 million increase to the loan loss allowance, a $34 million decrease to the guarantee liability and a $9 million loss representing the amount by which cumulative losses of NCSC exceeded NCSC equity. |
The Company's primary objective as a cooperative is to provide its members with the lowest possible loan and guarantee rates while maintaining sound financial results required to obtain high credit ratings on its debt instruments. Therefore, |
18 |
CFC obtains its funding from the capital markets and its membership. CFC enters the capital markets, based on the combined strength of its members, to borrow the funds required to fulfill the financing requirements of its members. On a regular basis, CFC obtains debt financing in the capital markets by issuing fixed rate or variable rate secured collateral trust bonds, fixed rate subordinated deferrable debt, |
Rural electric cooperatives that join CFC are generally required to purchase membership subordinated certificates from CFC as a condition of membership. In connection with any long-term loan or guarantee made by CFC |
CFC is required by the cooperative laws under which it is incorporated to have a mechanism to allocate its net margin to its members. CFC allocates its net margin before the non-cash effects of SFAS 133 |
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Critical Accounting Policies |
Allowance for Loan Losses |
At May 31, |
Impaired Exposure |
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In calculating the impairment on a loan, the |
High Risk Exposure |
Loan |
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12 to 24 months. At May 31, |
General Portfolio |
In fiscal year 2003, |
* | Internal risk ratings - | |
* | General financial condition of the borrower. | |
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* | Other factors specific to individual borrowers or classes of borrowers. | |
* | Standard corporate default table - The table provides expected default rates based on rating level and the remaining maturity of the bond. | |
* | Recovery rates - Estimated recovery rates based on historical experience of loan balance at the time of default compared to the total loss on the loan to date. | |
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In addition to the general portfolio reserve requirement as calculated above, |
At May 31, |
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allowance on loans that are guaranteed by the |
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In fiscal years |
* | Fiscal year 2005 provision of $16 million resulted primarily from the following factors: | |
* | Increase to the calculated impairment of $171 million due to an increase of $249 million to impaired loans outstanding because of the deteriorating financial condition and ongoing litigation of one borrower which moved from high risk to impaired and the impact of higher interest rates on variable rate loans in fiscal year 2005 offset by repayments from another borrower. | |
* | Decrease of $97 million to the required high risk reserve primarily due to one borrower which moved from high risk to impaired due to ongoing litigation. | |
* | A decrease of $58 million to the required general reserve due to a 6% reduction in the weighted average risk rating for all loans in the general portfolio, a decrease of $12 million required for large exposures and a decrease in allowance as a result of a $1,223 million decrease to loans outstanding in the general portfolio. | |
* | Net write-offs during fiscal year 2005 were less than $1 million. | |
* | Fiscal year 2004 provision of $55 million resulted from the following factors: | |
* | Increase to the calculated impairment of $69 million due to an increase of $330 million to impaired loans outstanding because of the deteriorating financial condition of one borrower which moved from high risk to impaired in fiscal year 2004 offset by repayments from another borrower and the impact of lower interest rates on variable rate loans. | |
* | Increase of $22 million to the required high risk reserve due to legal action involving one high risk borrower and to a refinement in process to set a minimum reserve for high risk borrowers. | |
* | A decrease of $28 million to the required general reserve due to a 9% reduction in the weighted average risk rating for all loans in the general portfolio and a decrease of $6 million required for large exposures offset by an increase in allowance as a result of a $942 million increase to loans outstanding in the general portfolio. | |
* | Net recoveries of $2 million. | |
* | Fiscal year 2003 provision of | |
* | Impaired exposure decreased by | |
* | High risk exposure decreased by $74 million and the CFC corporate credit committee determined, based on facts and circumstances at that time, that a 10% reserve was required on the high risk exposure compared to a 5% reserve in 2002 which results in a net increase of $40 million to the reserve allocated to the high risk category. | |
* | General portfolio exposure increased by | |
* | Net write-offs of $10 million during fiscal year 2003. |
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Senior management reviews and discusses the estimates and assumptions used in the |
CFC's |
Derivative Financial Instruments |
In June 1998, the |
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As a result of applying SFAS 133, |
The impact of derivatives on |
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Cash settlements that the Company pays and receives for derivative instruments that do not qualify for hedge accounting are recorded in the cash settlements line in the consolidated and combined statements of operations. A 25 to 50 basis point increase to the 30-day composite commercial paper index, the three-month LIBOR rate and the six-month LIBOR rate would not have a significant impact on the Company's total cash settlements due to the composition of the portfolio at May 31, 2005. The Company's interest rate exchange agreements at May 31, 2005 include $6,643 million notional amount, or 49% of the total interest rate exchange agreements in which the Company pays a fixed interest rate and receives a variable interest rate. For the remaining $7,050 million notional amount, or 51% of the total interest rate exchange agreements at May 31, 2005, the Company pays a variable interest rate and receives a fixed interest rate. As a result, the impact of an increase in interest rates for interest rate exchange agreements in which the Company pays a variable rate would be offset by the impact of the increase in interest rates for interest rate exchange agreements in which the Company receives a variable rate. |
The majority of |
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The Company does not plan to adjust its practice of using the 30-day composite commercial paper or a LIBOR index as the receive portion of its interest rate exchange agreements. |
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Year Ended May 31, | |||||||||
(Dollar amounts in thousands) | 2003 | 2002 | |||||||
Cost of funds | $ | 930,847 | $ | 885,838 | |||||
Plus: Derivative cash settlements | (122,825 | ) | (34,191 | ) | |||||
Adjusted cost of funds | $ | 808,022 | $ | 851,647 | |||||
Gross margin | $ | 140,028 | $ | 300,695 | |||||
Plus: Derivative cash settlements | 122,825 | 34,191 | |||||||
Adjusted gross margin | $ | 262,853 | $ | 334,886 | |||||
Operating margin | $ | 15,153 | $ | 63,834 | |||||
Plus: Derivative cash settlements | 122,825 | 34,191 | |||||||
Adjusted operating margin | $ | 137,978 | $ | 98,025 | |||||
Net margin prior to cumulative | |||||||||
effect of change in accounting principle | $ | 651,970 | $ | 78,873 | |||||
Less: Derivative forward value | (757,212 | ) | (41,878 | ) | |||||
Foreign currency adjustments | 243,220 | 61,030 | |||||||
Adjusted net margin | $ | 137,978 | $ | 98,025 |
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2003 | 2002 | ||||||||
TIER | 1.70 | 1.09 | |||||||
Adjusted TIER | 1.17 | 1.12 |
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Leverage Ratio: | May 31, | ||||||||||||||||||||
(Dollar amounts in thousands) | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
Total Liabilities | $ | 20,043,452 | $ | 20,014,204 | $ | 19,604,943 | $ | 16,742,223 | $ | 13,628,771 | |||||||||||
Less: | |||||||||||||||||||||
Derivative liabilities (1) (2) | (353,840 | ) | (254,143 | ) | - | - | - | ||||||||||||||
Foreign currency valuation account (3) | (325,810 | ) | 2,355 | - | - | - | |||||||||||||||
Debt used to fund loans guaranteed by RUS | (266,857 | ) | (242,574 | ) | (182,134 | ) | (89,153 | ) | (130,940 | ) | |||||||||||
Subordinated deferrable debt | (650,000 | ) | (600,000 | ) | (550,000 | ) | (400,000 | ) | (400,000 | ) | |||||||||||
Subordinated certificates | (1,708,297 | ) | (1,691,970 | ) | (1,581,860 | ) | (1,340,417 | ) | (1,239,816 | ) | |||||||||||
Adjusted liabilities | $ | 16,738,648 | $ | 17,227,872 | $ | 17,290,949 | $ | 14,912,653 | $ | 11,858,015 | |||||||||||
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Total Equity | $ | 930,836 | $ | 328,731 | $ | 393,899 | $ | 341,217 | $ | 296,481 | |||||||||||
Less: | |||||||||||||||||||||
foreign currency adjustments (2)(3) | (9,231 | ) | - | - | - | - | |||||||||||||||
Current period derivative forward value (2) | (757,212 | ) | (70,261 | ) | - | - | - | ||||||||||||||
Current period foreign currency adjustments (3) | 243,220 | 61,030 | - | - | - | ||||||||||||||||
Accumulated other comprehensive loss (2) | 46,763 | 72,556 | - | - | - | ||||||||||||||||
Members' equity | 454,376 | 392,056 | 393,899 | 341,217 | 296,481 | ||||||||||||||||
Plus: | |||||||||||||||||||||
Subordinated certificates | 1,708,297 | 1,691,970 | 1,581,860 | 1,340,417 | 1,239,816 | ||||||||||||||||
Subordinated deferrable debt | 650,000 | 600,000 | 550,000 | 400,000 | 400,000 | ||||||||||||||||
Adjusted equity | $ | 2,812,673 | $ | 2,684,026 | $ | 2,525,759 | $ | 2,081,634 | $ | 1,936,297 | |||||||||||
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Guarantees | $ | 1,903,556 | $ | 2,056,385 | $ | 2,217,559 | $ | 1,945,202 | $ | 1,893,197 | |||||||||||
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Leverage ratio | 23.58 | 67.14 | 55.40 | 54.77 | 52.35 | ||||||||||||||||
Adjusted leverage ratio | 6.63 | 7.18 | 7.72 | 8.10 | 7.10 |
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Debt to Equity Ratio: | May 31, | ||||||||||||||||||||
(Dollar amounts in thousands) | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
Total Liabilities | $ | 20,043,452 | $ | 20,014,204 | $ | 19,604,943 | $ | 16,742,223 | $ | 13,628,771 | |||||||||||
Less: | |||||||||||||||||||||
Derivative liabilities (1) (2) | (353,840 | ) | (254,143 | ) | - | - | - | ||||||||||||||
Foreign currency valuation account (3) | (325,810 | ) | 2,355 | - | - | - | |||||||||||||||
Debt used to fund loans guaranteed by RUS | (266,857 | ) | (242,574 | ) | (182,134 | ) | (89,153 | ) | (130,940 | ) | |||||||||||
Subordinated deferrable debt | (650,000 | ) | (600,000 | ) | (550,000 | ) | (400,000 | ) | (400,000 | ) | |||||||||||
Subordinated certificates | (1,708,297 | ) | (1,691,970 | ) | (1,581,860 | ) | (1,340,417 | ) | (1,239,816 | ) | |||||||||||
Adjusted liabilities | $ | 16,738,648 | $ | 17,227,872 | $ | 17,290,949 | $ | 14,912,653 | $ | 11,858,015 | |||||||||||
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Total Equity | $ | 930,836 | $ | 328,731 | $ | 393,899 | $ | 341,217 | $ | 296,481 | |||||||||||
Less: | |||||||||||||||||||||
Prior year cumulative derivative forward value and | |||||||||||||||||||||
foreign currency adjustments (2)(3) | (9,231) | - | - | - | - | ||||||||||||||||
Current period derivative forward value (2) | (757,212 | ) | (70,261 | ) | - | - | - | ||||||||||||||
Current period foreign currency adjustments (3) | 243,220 | 61,030 | - | - | - | ||||||||||||||||
Accumulated other comprehensive loss (2) | 46,763 | 72,556 | - | - | - | ||||||||||||||||
Members' equity | 454,376 | 392,056 | 393,899 | 341,217 | 296,481 | ||||||||||||||||
Plus: | |||||||||||||||||||||
Subordinated certificates | 1,708,297 | 1,691,970 | 1,581,860 | 1,340,417 | 1,239,816 | ||||||||||||||||
Subordinated deferrable debt | 650,000 | 600,000 | 550,000 | 400,000 | 400,000 | ||||||||||||||||
Loan loss allowance | 565,058 | 506,742 | 331,997 | 228,292 | 212,203 | ||||||||||||||||
Adjusted equity | $ | 3,377,731 | $ | 3,190,768 | $ | 2,857,756 | $ | 2,309,926 | $ | 2,148,500 | |||||||||||
| |||||||||||||||||||||
Debt to equity ratio | 21.53 | 60.88 | 49.77 | 49.07 | 45.97 | ||||||||||||||||
Adjusted debt to equity ratio | 4.96 | 5.40 | 6.05 | 6.46 | 5.52 |
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|
|
(Dollar amounts in thousands) | May 31, 2003 | May 31, 2002 | ||||||
Total capitalization | $ | 20,386,230 | $ | 19,890,220 | ||||
Less: | ||||||||
Long-term debt valuation allowance | 941 | (2,340 | ) | |||||
Foreign currency valuation account | (325,810 | ) | 2,355 | |||||
Prior year cumulative derivative forward value and | ||||||||
foreign currency adjustments | (9,231 | ) | - | |||||
Current period derivative forward value (1) | (757,212 | ) | (70,261 | ) | ||||
Current period foreign currency adjustments | 243,220 | 61,030 | ||||||
Accumulated other comprehensive loss | 46,763 | 72,556 | ||||||
Adjusted total capitalization | $ | 19,584,901 | $ | 19,953,560 |
|
|
|
|
Margin Analysis |
|
The Company also calculates an adjusted TIER to exclude the derivative forward value and foreign currency adjustments from net margin, to add back minority interest to net margin and to include the derivative cash settlements in the cost of funds. Adjusted TIER for the years ended May 31, 2005, 2004 and 2003 |
Fiscal Year |
The following chart presents the results for the year ended May 31, |
For the year ended May 31, | Increase/ | ||||||||||||
(Dollar amounts in millions) | 2003 | 2002 | (Decrease) | ||||||||||
Operating income | $ | 1,071 | $ | 1,187 | $ | (116 | ) | ||||||
Cost of funds | 931 | 886 | 45 | ||||||||||
Gross margin | 140 | 301 | (161 | ) | |||||||||
Expenses: | |||||||||||||
General and administrative expenses | 38 | 38 | - | ||||||||||
Provision for loan losses | 68 | 199 | (131 | ) | |||||||||
Total expenses | 106 | 237 | (131 | ) | |||||||||
Results of operations of foreclosed assets | 1 | - | 1 | ||||||||||
Impairment loss on foreclosed assets | (20 | ) | - | (20 | ) | ||||||||
Subtotal foreclosed assets | (19 | ) | - | (19 | ) | ||||||||
Operating margin | 15 | 64 | (49 | ) | |||||||||
| |||||||||||||
Derivative cash settlements | 123 | 34 | 89 | ||||||||||
Derivative forward value | 757 | 42 | 715 | ||||||||||
Foreign currency adjustments | (243 | ) | (61 | ) | (182 | ) | |||||||
Cumulative effect of change in accounting principle | - | 28 | (28 | ) | |||||||||
Net margin | $ | 652 | $ | 107 | $ | 545 | |||||||
| |||||||||||||
TIER | 1.70 | 1.09 | |||||||||||
Adjusted TIER (1) | 1.17 | 1.12 |
For the year ended May 31, | Increase/ | ||||||||||||
(Dollar amounts in millions) | 2005 | 2004 | (Decrease) | ||||||||||
Operating income | $ | 1,026 | $ | 1,007 | $ | 19 | |||||||
Cost of funds | (922 | ) | (925 | ) | 3 | ||||||||
Gross margin | 104 | 82 | 22 | ||||||||||
Operating expenses: | |||||||||||||
General and administrative expenses | (43 | ) | (41 | ) | (2 | ) | |||||||
Provision for loan losses | (16 | ) | (55 | ) | 39 | ||||||||
Recovery of guarantee losses | 3 | 1 | 2 | ||||||||||
Total operating expenses | (56 | ) | (95 | ) | 39 | ||||||||
Results of operations of foreclosed assets | 13 | 13 | - | ||||||||||
Impairment loss on foreclosed assets | - | (11 | ) | 11 | |||||||||
Total gain on foreclosed assets | 13 | 2 | 11 | ||||||||||
Derivative and foreign currency adjustments: | |||||||||||||
Derivative cash settlements | 63 | 110 | (47 | ) | |||||||||
Derivative forward value | 30 | (229 | ) | 259 | |||||||||
Foreign currency adjustments | (23 | ) | (65 | ) | 42 | ||||||||
Total gain (loss) on derivative and foreign currency adjustments | 70 | (184 | ) | 254 | |||||||||
Operating margin (loss) | 131 | (195 | ) | 326 | |||||||||
Income tax expense | (2 | ) | (3 | ) | 1 | ||||||||
Minority interest - RTFC and NCSC net margin | (2 | ) | (2 | ) | - | ||||||||
Cumulative effect of change in accounting principle | - | 22 | (22 | ) | |||||||||
Net margin (loss) | $ | 127 | $ | (178 | ) | $ | 305 | ||||||
TIER (1) | 1.14 | - | |||||||||||
Adjusted TIER (2) | 1.14 | 1.12 |
(1) For the year ended May 31, 2004, the Company reported a net loss prior to the cumulative effect of change in accounting principle of $200 million, thus the TIER calculation results in a value below 1.00. | |
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23 |
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Volume Rate Variance Table | |||||||||||
For the year ended May 31, |
| ||||||||||
| 2005 |
| 2004 |
| Change due to | ||||||
Average Loan Balance | Income / (Cost) | Rate | Average Loan Balance | Income / (Cost) | Rate | Volume (1) | Rate (2) | Total | |||
Operating Income | |||||||||||
CFC (3) | $ 15,494 | $ 772 | 4.99% | $14,982 | $ 673 | 4.49% | $ 23 | $ 76 | $ 99 | ||
RTFC | 3,863 | 226 | 5.84% | 4,809 | 306 | 6.37% | (60) | (20) | (80) | ||
NCSC | 481 | 28 | 5.77% | 541 | 28 | 5.11% | (3) | 3 | - | ||
Total | $19,838 | $ 1,026 | 5.17% | $20,332 | $ 1,007 | 4.95% | $ (40) | $ 59 | $ 19 | ||
| |||||||||||
Cost of funds |
| ||||||||||
CFC | $15,494 | $ (682) | (4.41%) | $14,982 | $ (607) | (4.06%) | $ (21) | $ (54) | $ (75) | ||
RTFC | 3,863 | (221) | (5.71%) | 4,809 | (300) | (6.24%) | 59 | 20 | 79 | ||
NCSC | 481 | (19) | (3.90%) | 541 | (18) | (3.26%) | 2 | (3) | (1) | ||
Total | $19,838 | $ (922) | (4.65%) | $20,332 | $ (925) | (4.55%) | $ 40 | $ (37) | $ 3 | ||
|
| ||||||||||
Gross Margin |
|
| |||||||||
CFC | $15,494 | $ 90 | 0.58% | $14,982 | $ 66 | 0.44% | $ 2 | $ 22 | $ 24 | ||
RTFC | 3,863 | 5 | 0.14% | 4,809 | 6 | 0.13% | (1) | - | (1) | ||
NCSC | 481 | 9 | 1.87% | 541 | 10 | 1.86% | (1) | - | (1) | ||
Total | $19,838 | $ 104 | 0.52% | $20,332 | $ 82 | 0.40% | $ - | $ 22 | $ 22 | ||
| |||||||||||
Derivative Cash Settlements (3) |
| ||||||||||
CFC | $15,103 | $ 65 | 0.43% | $16,616 | $ 114 | 0.68% | $ (10) | $ (38) | $ (48) | ||
NCSC | 71 | (2) | (3.11%) | 83 | (4) | (4.38%) | - | 1 | 1 | ||
Total | $15,174 | $ 63 | 0.42% | $16,699 | $ 110 | 0.66% | $ (10) | $ (37) | $ (47) | ||
| |||||||||||
Adjusted Cost of Funds | |||||||||||
Total | $19,838 | $ (859) | (4.33%) | $20,332 | $ (815) | (4.01%) |
_____________________ | |
(1) | Variance due to volume is calculated using the following formula: ((current average balance - prior year average balance) x prior year rate). |
(2) | Variance due to rate is calculated using the following formula: ((current rate - prior year rate) x current average balance). |
(3) | For derivative cash settlements, average loan balance represents the average notional amount of derivative contracts outstanding and the rate represents the net difference between the average rate paid and the average rate received for cash settlements during the period. |
Operating Income |
During fiscal year 2005, the Company collected $36 million of make-whole fees related to the prepayment of loans and raised variable interest rates by 210 basis points to 235 basis points depending on the loan program, while fixed interest rates remained relatively stable. The |
The $36 million of make-whole fees were recorded at CFC during fiscal year 2005. CFC's operating income for fiscal year 2005 excluding the $36 million of make-whole fees was $736 million with an average yield of 4.76% representing a decrease of $63 million from the prior year. The impact of non-accrual loans at CFC was a decrease in operating income of $27 million for fiscal year 2005, compared to a decrease of $23 million for the prior year. The impact of non-accrual loans on RTFC operating income was a decrease of $24 million for fiscal year 2005, compared to no reduction in the prior year. |
Cost of Funds |
The total cost of funding for the year ended May 31, |
24 |
$63 million of derivative cash settlements for fiscal year 2005, which included the receipt of $85 million of settlement payments from its counterparties less $22 million paid to counterparties for the termination of interest rate exchange agreements used as funding for the loans that were prepaid during the year. Adjusted cost of funds for fiscal year 2005 excluding the $22 million of termination fees was $837 million with |
Gross Margin |
The Company's gross margin |
|
General and administrative expenses for |
|
|
There was a recovery of $3 million from the guarantee liability in the year ended May 31, 2005 compared to $1 million in the year ended May 31, 2004. The recovery of $3 million during the year ended May 31, 2005 was due to a change in the maturity of a guaranteed bond due to a scheduled redemption in fiscal year 2006. At both May 31, 2005 and 2004, substantially all guarantees were issued by CFC. |
|
|
|
Derivative Cash Settlements |
The |
Derivative Forward Value |
During the year ended May 31, 2005, derivative |
25 |
The |
Foreign Currency Adjustment |
There was a decrease in the expense recorded as a foreign currency adjustment of $42 million for the year ended May 31, 2005 as compared to the year ended May 31, 2004 due to the change in currency exchange |
|
Operating margin for the year ended May 31, 2005 was $131 million, compared to a loss of $195 million for the prior year period. The significant increase in the operating margin for the year ended May 31, 2005 compared to the prior year period was primarily due to the $259 million increase in the estimated fair value of derivatives. The adjusted operating margin, which excludes derivative forward value and foreign currency adjustments, for the year ended May 31, 2005 was $124 million, compared to $99 million for the prior year period. See "Non-GAAP Financial Measures" for further explanation of the adjustment the Company makes in its financial analysis to exclude the derivative forward value and foreign currency adjustments in its adjusted operating margin. The adjusted operating margin increased due to the $39 million decrease in the provision for loan losses and the $11 million increase in the gain on foreclosed assets offset by the $25 million decrease in adjusted gross margin. The adjusted operating margin for the year ended May 31, 2005 excluding the net gain of $14 million as a result of loan prepayments and swap terminations was $110 million, an increase of $11 million from the prior year period. |
Cumulative Effect of Change in Accounting Principle |
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|
|
26 |
Fiscal Year |
The following |
For the year ended May 31, | Increase/ | ||||||||||||
(Dollar amounts in millions) | 2002 | 2001 | (Decrease) | ||||||||||
Operating income | $ | 1,187 | $ | 1,388 | $ | (201 | ) | ||||||
Cost of funds | 886 | 1,118 | (232 | ) | |||||||||
Gross margin | 301 | 270 | 31 | ||||||||||
Expenses: | |||||||||||||
General and administrative expenses | 38 | 32 | 6 | ||||||||||
Provision for loan losses | 199 | 105 | 94 | ||||||||||
Total expenses | 237 | 137 | 100 | ||||||||||
Operating margin | 64 | 133 | (69 | ) | |||||||||
| |||||||||||||
Derivative cash settlements | 34 | - | 34 | ||||||||||
Derivative forward value | 42 | - | 42 | ||||||||||
Foreign currency adjustments | (61 | ) | - | (61 | ) | ||||||||
Cumulative effect of change in accounting principle | 28 | - | 28 | ||||||||||
Net margin | $ | 107 | $ | 133 | $ | (26 | ) | ||||||
| |||||||||||||
TIER | 1.09 | 1.12 | |||||||||||
Adjusted TIER (1) | 1.12 | 1.12 |
For the year ended May 31, | Increase/ | ||||||||||||
(Dollar amounts in millions) | 2004 | 2003 | (Decrease) | ||||||||||
Operating income | $ | 1,007 | $ | 1,071 | $ | (64 | ) | ||||||
Cost of funds | (925 | ) | (940 | ) | 15 | ||||||||
Gross margin | 82 | 131 | (49 | ) | |||||||||
Operating expenses: | |||||||||||||
General and administrative expenses | (41 | ) | (38 | ) | (3 | ) | |||||||
Provision for loan losses | (55 | ) | (43 | ) | (12 | ) | |||||||
Recovery of (provision for) guarantee losses | 1 | (25 | ) | 26 | |||||||||
Total operating expenses | (95 | ) | (106 | ) | 11 | ||||||||
Results of operations of foreclosed assets | 13 | 10 | 3 | ||||||||||
Impairment gain (loss) on foreclosed assets | (11 | ) | (20 | ) | 9 | ||||||||
Total gain (loss) on foreclosed assets | 2 | (10 | ) | 12 | |||||||||
Derivative cash settlements | 110 | 123 | (13 | ) | |||||||||
Derivative forward value | (229 | ) | 757 | (986 | ) | ||||||||
Foreign currency adjustments | (65 | ) | (243 | ) | 178 | ||||||||
Total (loss) gain on derivative and foreign currency adjustments | (184 | ) | 637 | (821 | ) | ||||||||
Operating (loss) margin | (195 | ) | 652 | (847 | ) | ||||||||
Income tax expense | (3 | ) | - | (3 | ) | ||||||||
Minority interest - RTFC and NCSC net margin | (2 | ) | - | (2 | ) | ||||||||
Cumulative effect of change in accounting principle | 22 | - | 22 | ||||||||||
Net (loss) margin | $ | (178 | ) | $ | 652 | $ | (830 | ) | |||||
TIER (1) | - | 1.69 | |||||||||||
Adjusted TIER (2) | 1.12 | 1.17 |
(1) | |
(2) Adjusted to exclude the impact of the derivative forward value, |
| |
|
|
Volume Rate Variance Table |
(Dollar amounts in millions) |
For the years ended May 31, | |||||||||||
2004 | 2003 | Change due to | |||||||||
Average | Income / (Cost) | Rate | Average Loan Balance | Income / (Cost) | Rate | Volume (1) | Rate (2) | Total | |||
Operating Income | |||||||||||
CFC | $ 14,982 | $ 673 | 4.49% | $ 14,876 | $ 726 | 4.88% | $ 5 | $ (58) | $ (53) | ||
RTFC | 4,809 | 306 | 6.37% | 4,970 | 345 | 6.93% | (11) | (28) | (39) | ||
NCSC | 541 | 28 | 5.11% | - | - | - | 28 | - | 28 | ||
Total | $ 20,332 | $ 1,007 | 4.95% | $ 19,846 | $ 1,071 | 5.40% | $ 22 | $ (86) | $ (64) | ||
Cost of Funds | |||||||||||
CFC | $ 14,982 | $ (607) | (4.06%) | $ 14,876 | $ (602) | (4.05%) | $ (4) | $ (1) | $ (5) | ||
RTFC | 4,809 | (300) | (6.24%) | 4,970 | (338) | (6.79%) | 11 | 27 | 38 | ||
NCSC | 541 | (18) | (3.26%) | - | - | - | (18) | - | (18) | ||
Total | $ 20,332 | $ (925) | (4.55%) | $ 19,846 | $ (940) | (4.74%) | $ (11) | $ 26 | $ 15 | ||
Gross Margin | |||||||||||
CFC | $ 14,982 | $ 66 | 0.44% | $ 14,876 | $ 124 | 0.84% | $ 1 | $ (59) | $ (58) | ||
RTFC | 4,809 | 6 | 0.13% | 4,970 | 7 | 0.14% | - | (1) | (1) | ||
NCSC | 541 | 10 | 1.86% | - | - | - | 10 | - | 10 | ||
Total | $ 20,332 | $ 82 | 0.40% | $ 19,846 | $ 131 | 0.66% | $ 11 | $ (60) | $ (49) | ||
Derivative Cash Settlements (3) | |||||||||||
CFC | $16,616 | $ 114 | 0.68% | $14,934 | $ 123 | 0.82% | $ 14 | $ (23) | $ (9) | ||
NCSC | 83 | (4) | (4.38%) | - | - | - | (4) | - | (4) | ||
Total | $ 16,699 | $ 110 | 0.66% | $14,934 | $ 123 | 0.82% | $ 10 | $ (23) | $ (13) | ||
Adjusted Cost of Funds | |||||||||||
Total | $ 20,332 | $ (815) | (4.01%) | $ 19,846 | $ (817) | (4.11%) |
_____________ | |
(1) | Variance due to volume is calculated using the following formula: ((current average balance - prior year average balance) x prior year rate). |
(2) | Variance due to rate is calculated using the following formula: ((current rate - prior year rate) x current average balance). |
(3) | For derivative cash settlements, average loan balance represents the average notional amount of derivative contracts outstanding and the rate represents the net difference between the average rate paid and the average rate received for cash settlements during the period. |
Operating Income |
Operating income for |
|
|
|
|
Cost of Funds |
The decrease in cost of funds of $15 million for the year ended May 31, 2004 compared to the prior year period was due to a reduction to interest rates in the markets offset by an increase in loan volume as compared to the prior year. Cost of funds for the years ended May 31, 2004 and 2003 includes $9 million and $8 million of expense, respectively, for net cash settlements related to exchange agreements that qualify as effective hedges. The Company's average adjusted cost of funding, which includes derivative cash settlements, for the year ended May 31, 2004 was approximately the same as the prior year. See "Non-GAAP Financial Measures" for further explanation and a reconciliation of these adjustments. |
Gross Margin |
The gross margin spread earned on loans for the year ended May 31, 2004 decreased |
28 |
By reducing the gross margin |
|
General and administrative expenses for |
The loan loss provision of $55 million for the year ended May 31, 2004 represented an increase of $12 million from the provision of $43 million for the prior year period. The $55 million provision required for the year ended May 31, 2004 was the result of a $63 million increase to the estimated loan loss allowance at May 31, 2004 versus May 31, 2003, including an increase of $6 million |
The Company reported a $1 million recovery in the provision for guarantee losses for the year ended May 31, 2004 representing a decrease of $26 million from the provision of $25 million recorded for the prior year period. The provision of $25 million for the year ended May 31, 2003 was due to a refinement of the process of estimating the guarantee liability to incorporate the improved internal risk rating system, standard corporate bond default tables and the Company's estimated recovery rates. The total guarantee liability at May 31, 2004 has decreased from May 31, 2003 as a result of the consolidation of NCSC. At May 31, 2003, CFC had a total of $476 million of guarantees of NCSC debt obligations. As a result of the June 1, 2003 consolidation of NCSC, the guaranteed debt became debt of the consolidated company, which eliminated the guarantees. At May 31, 2004 and 2003, 97.8% and 99.7%, respectively, of guarantees were from CFC to its electric members. |
|
|
Derivative Cash Settlements |
The |
Derivative Forward Value |
During the year ended May 31, 2004, derivative forward value decreased $986 million compared to the prior year period. The decrease in the derivative |
|
29 |
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Foreign Currency Adjustments |
|
Operating (Loss) Margin |
Operating loss for the year ended May 31, 2004 was $195 million, compared to operating margin of $652 million for the prior year period. The adjusted operating margin, which excludes derivative forward value and foreign currency adjustments, for the year ended May 31, 2004 was $99 million, compared to $138 million for the prior year period. See "Non-GAAP Financial Measures" for further explanation of the adjustment the Company makes in its financial analysis to exclude the derivative forward value and foreign currency adjustments in its adjusted operating margin. The adjusted operating margin decreased due to the $62 million decrease in gross margin adjusted for cash settlements, the $3 million increase to general and administrative expenses and the $12 million increase to the provision for loan losses partially offset by the $26 million decrease to the provision for guarantee losses and the $12 million decrease to the results of operations and impairment loss on foreclosed assets. |
Cumulative Effect of Change in Accounting Principle |
As a result of the implementation of FIN 46(R) on June 1, 2003, the Company consolidated the financial results of NCSC and RTFC. The Company recorded a cumulative effect of change in accounting principle gain of $22 million on the |
Net (Loss) Margin |
Net loss for the year ended May 31, 2004 was $178 million, a decrease of $830 million compared to a net margin of $652 million for the |
30 |
Operating Results as a Percentage of Average Loans Outstanding |
The following is a summary of |
2003 | 2002 | 2001 | |||||||||||
Operating income | 5.40 | % | 5.98 | % | 7.36 | % | |||||||
Cost of funds | 4.69 | % | 4.46 | % | 5.92 | % | |||||||
Gross margin | 0.71 | % | 1.52 | % | 1.44 | % | |||||||
General and administrative expenses | 0.19 | % | 0.19 | % | 0.17 | % | |||||||
Provision for loan losses | 0.34 | % | 1.00 | % | 0.56 | % | |||||||
Total expenses | 0.53 | % | 1.19 | % | 0.73 | % | |||||||
Results of operations of foreclosed assets | - | - | - | ||||||||||
Impairment loss on foreclosed assets | (0.10 | )% | - | - | |||||||||
Subtotal foreclosed assets | (0.10 | )% | - | - | |||||||||
Operating margin | 0.08 | % | 0.33 | % | 0.71 | % | |||||||
Derivative cash settlements | 0.62 | % | 0.17 | % | - | ||||||||
Derivative forward value | 3.81 | % | 0.21 | % | - | ||||||||
Foreign currency adjustments | (1.22 | )% | (0.31 | )% | - | ||||||||
Cumulative effect of change in accounting principle | - | 0.14 | % | - | |||||||||
Net margin | 3.29 | % | 0.54 | % | 0.71 | % | |||||||
Adjusted gross margin (1) | 1.33 | % | 1.69 | % | N/A | ||||||||
Adjusted operating margin (1) | 0.70 | % | 0.50 | % | N/A |
2005 | 2004 | 2003 | |||||||||||
Operating income | 5.17 | % | 4.95 | % | 5.40 | % | |||||||
Cost of funds | (4.65 | )% | (4.55 | )% | (4.74 | )% | |||||||
Gross margin | 0.52 | % | 0.40 | % | 0.66 | % | |||||||
Operating expenses: | |||||||||||||
General and administrative | (0.22 | )% | (0.20 | )% | (0.19 | )% | |||||||
Provision for loan losses | (0.08 | )% | (0.27 | )% | (0.22 | )% | |||||||
Recovery of (provision for) guarantee losses | 0.02 | % | - | (0.12 | )% | ||||||||
Total operating expenses | (0.28 | )% | (0.47 | )% | (0.53 | )% | |||||||
Results of operations of foreclosed assets | 0.07 | % | 0.06 | % | 0.05 | % | |||||||
Impairment loss on foreclosed assets | - | (0.05 | )% | (0.10 | )% | ||||||||
Total gain (loss) on foreclosed assets | 0.07 | % | 0.01 | % | (0.05 | )% | |||||||
Derivative cash settlements | 0.32 | % | 0.54 | % | 0.62 | % | |||||||
Derivative forward value | 0.15 | % | (1.12 | ) % | 3.81 | % | |||||||
Foreign currency adjustments | (0.12 | ) % | (0.32 | )% | (1.22 | )% | |||||||
Total gain (loss) on derivative and foreign | |||||||||||||
currency adjustments | 0.35 | % | (0.90 | )% | 3.21 | % | |||||||
Operating margin (loss) | 0.66 | % | (0.96 | )% | 3.29 | % | |||||||
Income tax expense | (0.01 | )% | (0.02 | )% | - | ||||||||
Minority interest - RTFC and NCSC net margin | (0.01 | )% | (0.01 | )% | - | ||||||||
Cumulative effect of change in accounting principle | - | 0.11 | % | - | |||||||||
Net margin (loss) | 0.64 | % | (0.88 | )% | 3.29 | % | |||||||
Adjusted gross margin (1) | 0.84 | % | 0.94 | % | 1.28 | % | |||||||
Adjusted operating margin (2) | 0.63 | % | 0.48 | % | 0.70 | % |
___________________________ | |
(1) Adjusted to include derivative cash settlements in the cost of funds. See "Non-GAAP Financial Measures" for further explanation and a reconciliation of these adjustments. | |
Liquidity and Capital Resources |
Assets |
At May 31, |
|
Loans to Members |
Net loan balances decreased by |
Long-term fixed rate loans represented |
31 |
The decrease in total |
Loan and Guarantee Portfolio Assessment |
Portfolio Diversity |
|
The following chart summarizes loans and guarantees outstanding by |
(Dollar amounts in millions) | Loans and Guarantees by Member Class | |||||||||||||||||||||||
2003 | 2002 | 2001 | ||||||||||||||||||||||
Electric systems: | ||||||||||||||||||||||||
Distribution | $ | 11,488 | 54% | $ | 11,933 | 54% | $ | 11,599 | 53% | |||||||||||||||
Power supply | 3,922 | 18% | 3,928 | 18% | 3,686 | 17% | ||||||||||||||||||
Statewide and associate | 1,030 | 5% | 1,162 | 5% | 1,291 | 6% | ||||||||||||||||||
Subtotal electric systems | 16,440 | 77% | 17,023 | 77% | 16,576 | 76% | ||||||||||||||||||
Telecommunication systems | 4,948 | 23% | 5,080 | 23% | 5,326 | 24% | ||||||||||||||||||
Total | $ | 21,388 | 100% | $ | 22,103 | 100% | $ | 21,902 | 100% |
Loans and Guarantees by Member Class | ||||||||||||||||||||||||
(Dollar amounts in millions) | 2005 | 2004 | 2003 | |||||||||||||||||||||
CFC: | ||||||||||||||||||||||||
Distribution | $ | 12,771 | 64% | $ | 12,597 | 58% | $ | 11,488 | 54% | |||||||||||||||
Power supply | 3,707 | 18% | 3,815 | 18% | 3,922 | 18% | ||||||||||||||||||
Statewide and associate | 177 | 1% | 246 | 1% | 1,030 | 5% | ||||||||||||||||||
CFC Total | 16,655 | 83% | 16,658 | 77% | 16,440 | 77% | ||||||||||||||||||
RTFC | 2,992 | 15% | 4,643 | 21% | 4,948 | 23% | ||||||||||||||||||
NCSC | 483 | 2% | 519 | 2% | - | - | ||||||||||||||||||
Total | $ | 20,130 | 100% | $ | 21,820 | 100% | $ | 21,388 | 100% | |||||||||||||||
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(Dollar amounts in millions) | 2005 | 2004 | 2003 | ||||||||||||||||||||||
Rural local exchange carriers | $ | 2,358 | 79% | $ | 3,615 | 78% | $ | 3,831 | 77% | ||||||||||||||||
Wireless providers | 211 | 7% | 267 | 6% | 335 | 7% | |||||||||||||||||||
Cable television providers | 169 | 6% | 176 | 4% | 185 | 4% | |||||||||||||||||||
Long distance carriers | 135 | 5% | 340 | 7% | 324 | 7% | |||||||||||||||||||
Fiber optic network providers | 67 | 2% | 168 | 4% | 191 | 4% | |||||||||||||||||||
Competitive local exchange carriers | 45 | 1% | 62 | 1% | 64 | 1% | |||||||||||||||||||
Other | 7 | - | 15 | - | 18 | - | |||||||||||||||||||
Total | $ | 2,992 | 100% | $ | 4,643 | 100% | $ | 4,948 | 100% | ||||||||||||||||
The Company's members are widely dispersed throughout the United States and its territories, including 49 states, the District of Columbia, American Samoa, Guam and the U.S. Virgin Islands. At May 31, 2005, 2004 and 2003, |
Credit Concentration |
The Company's loan portfolio is widely dispersed throughout the United States and its territories, including 49 states, the District of Columbia, American Samoa and the U.S. Virgin Islands. At May 31, 2005 and 2004, loans outstanding to borrowers in any state or territory did not exceed 16% of total loans outstanding. In addition to the geographic diversity of the portfolio, |
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(Dollar amounts in millions) | 2005 | % of Total | 2004 | % of Total | |||||||||||||
Loans | $ | 3,412 | 18% | $ | 4,415 | 22% | |||||||||||
Guarantees | 227 | 20% | 240 | 18% | |||||||||||||
Total credit exposure | $ | 3,639 | 18% | $ | 4,655 | 21% | |||||||||||
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32 |
Credit Limitation |
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The Company's credit limitation policy sets the limit on the total exposure and unsecured exposure to the borrower based on an assessment of the borrower's risk profile. |
Total exposure, as defined by the policy, includes the following: |
* | loans outstanding, excluding loans guaranteed by RUS, |
* | the Company's guarantees of the borrower's obligations, |
* | unadvanced loan commitments, and |
* | borrower guarantees to the Company of another borrower's debt. |
Security Provisions |
Except when providing lines of credit and intermediate-term loans, |
2005 | % of Total | 2004 | % of Total | ||||||||||||
Loans | $ | 1,516 | 8% | $ | 1,439 | 7% | |||||||||
Guarantees | 98 | 8% | 122 | 9% | |||||||||||
Total credit exposure | $ | 1,614 | 8% | $ | 1,561 | 7% |
Portfolio Quality |
A total of 64% of the Company's total outstanding credit exposure at May 31, 2005 was to distribution systems. The distribution systems own the power lines and substations that are required to deliver electricity to consumers, both residential customers and business enterprises. Due to the significant capital investment, it is very unlikely that a competing electric company would build the infrastructure required to deliver power to the customers of CFC's distribution system members. In states where CFC's distribution systems may be required to provide access to their lines for other electric companies to deliver electricity, the distribution system will still be allowed to recover the cost of maintaining its system through the rates charged for use of the system by other power companies. |
A total of 18% of the Company's total outstanding credit exposure at May 31, 2005 was to power supply systems. Most CFC power supply borrowers sell the majority of their power under all-requirements power contracts to their member distribution systems. These contracts allow, subject to regulatory requirements and competitive constraints, for the recovery of all costs at the power supply level. Due to the contractual connection between the power supply and distribution systems, total combined system equity (power supply equity plus the equity at its affiliated distribution systems) has typically been maintained at the distribution level. |
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The effectiveness of the all-requirements power contract is dependent on the individual systems' right and ability (legal as well as economic) to establish rates to cover all costs. The boards of directors of most of CFC's power supply and distribution members have the authority to establish |
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A total of 12% of the Company's total outstanding credit exposure at May 31, 2005 was to rural local exchange carriers. Even with widespread competition in the telecommunications industry, there is very little competition in the territory served by the Company's rural local exchange borrowers. The customers in these areas are primarily residential and small businesses, which have not been the focus of competition among exchange carriers. |
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* | principal or interest payments on any loan to the borrower are past due 90 days or more, |
* | as a result of court proceedings, repayment on the original terms is not anticipated, or |
* | for some other reason, management does not expect the timely repayment of principal and interest. |
| |
Once a borrower is classified as |
At May 31, |
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ICC had been making the regular monthly debt service payments to RTFC in accordance with a stipulation agreement between the companies under which ICC may make the payments and RTFC may accept the payments without prejudice to either party's rights, defenses or claims in the pending litigation. However, ICC did not make the January 31, 2005 debt service payment and did not make the required payment for a secured line of credit that matured on March 20, 2005. As a result of the payment defaults, RTFC classified all loans to ICC as non-performing and placed all loans on non-accrual status as of February 1, 2005. On March 31, 2005, ICC made a partial payment toward its outstanding loan balance with RTFC. |
RTFC is the primary secured lender to ICC. RTFC's collateral for the loans includes (i) a series of mortgages, security agreements, financing statements, pledges and guaranties creating liens in favor of RTFC on substantially all of the assets and voting stock of ICC, (ii) a direct pledge of 100% of the voting stock of ICC's USVI local exchange carrier subsidiary, Virgin Islands Telephone Corporation d/b/a Innovative Telephone ("Vitelco"), (iii) secured guaranties, mortgages and direct and indirect stock pledges encumbering the assets and ownership interests in substantially all of ICC's other operating subsidiaries, and (iv) a personal guaranty of the loans from ICC's indirect majority shareholder and chairman. |
Based on its analysis, the Company believes that it is adequately reserved for its exposure to ICC at May 31, 2005. |
Non-performing loans at May 31, 2005 and 2004 include a total of $135 million and $340 million, respectively, to VarTec Telecom, Inc. ("VarTec"). The loan balance at May 31, 2004 was reduced during fiscal year 2005 by $119 million in payments, $34 million for offsets of allocated but unretired patronage capital and subordinated capital certificates and $52 million in asset sales. On May 31, 2004, loans to VarTec were reclassified to non-performing and put on non-accrual status as of June 1, 2004 resulting in the application of all payments received against principal. |
VarTec is a telecommunications company and RTFC borrower located in Dallas, Texas. RTFC is VarTec's principal senior secured creditor. VarTec and its U.S.-based affiliates filed |
RTFC agreed to provide VarTec debtor-in-possession ("DIP") financing up to $20 million, plus temporary additional revolving loans of up to $10 million. The financing available under the temporary additional revolving loans has been reduced to zero and |
34 |
RTFC on a daily basis for |
On December 17, 2004, VarTec sold its European operations, and on |
As part of the court order approving the DIP financing, VarTec was allowed to continue to make interest payments on the secured RTFC debt and to make principal payments during periods in which no amount was outstanding under the DIP financing. However pursuant to the terms of the Domestic Assets Sale, pending final closing of such sale, such payments will cease. Under the terms of the Domestic Assets Sale, the asset purchaser has reimbursed RTFC for the current amount outstanding under the DIP facility. In addition, the asset purchaser will be required to |
The court has also ordered that |
Based on its analysis, the Company believes that it is adequately reserved against its exposure to VarTec at May 31, 2005. |
Restructured Loans |
Loans classified as restructured are loans for which agreements have been executed that changed the original terms of the loan, generally a change to the originally scheduled cash flows. |
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To date, |
Loan Impairment |
On a quarterly basis, |
35 |
security for |
* |
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* | court rulings, |
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* | changes in collateral values, |
* | changes in economic conditions in the area in which the cooperative operates, and |
* | changes to the industry in which the cooperative operates. |
As events related to the borrower take place and economic conditions and |
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As of May 31, | ||||||||||||
(Dollar amounts in millions) | 2003 | 2002 | 2001 | |||||||||
Nonperforming loans | $ | - | $ | 1,011 | $ | 1 | ||||||
Percent of loans and guarantees outstanding | 0.00% | 4.57% | 0.00% | |||||||||
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Restructured loans | $ | 629 | $ | 540 | $ | 1,465 | ||||||
Percent of loans and guarantees outstanding | 2.94% | 2.44% | 6.69% | |||||||||
Total nonperforming and restructured loans | $ | 629 | $ | 1,551 | $ | 1,466 | ||||||
Percent of loans and guarantees outstanding | 2.94% | 7.02% | 6.69% |
NON-PERFORMING AND RESTRUCTURED LOANS | ||||||||||||
(Dollar amounts in millions) | As of May 31, | |||||||||||
2005 | 2004 | 2003 | ||||||||||
Non-performing loans | $ | 617 | $ | 341 | $ | - | ||||||
Percent of loans outstanding | 3.25% | 1.66% | 0.00% | |||||||||
Percent of loans and guarantees outstanding | 3.06% | 1.57% | 0.00% | |||||||||
Restructured loans | $ | 601 | $ | 618 | $ | 629 | ||||||
Percent of loans outstanding | 3.17% | 3.02% | 3.23% | |||||||||
Percent of loans and guarantees outstanding | 2.99% | 2.83% | 2.94% | |||||||||
Total non-performing and restructured loans | $ | 1,218 | $ | 959 | $ | 629 | ||||||
Percent of loans outstanding | 6.42% | 4.68% | 3.23% | |||||||||
Percent of loans and guarantees outstanding | 6.05% | 4.40% | 2.94% | |||||||||
Allowance for Loan Losses |
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collateral securing the borrower's loans. Since inception in 1969, CFC has recorded |
Management believes that the allowance for loan losses is adequate to cover estimated probable portfolio losses. The following chart presents a summary of the allowance for loan losses at May 31, |
(Dollar amounts in millions) | 2005 | 2004 | 2003 | |||||||||
Beginning balance | $ | 574 | $ | 511 | $ | 478 | ||||||
Provision for loan losses | 16 | 55 | 43 | |||||||||
Change in allowance due to consolidation (1) | - | 6 | - | |||||||||
Net recoveries (write-offs) | - | 2 | (10 | ) | ||||||||
Ending balance | $ | 590 | $ | 574 | $ | 511 | ||||||
Loan loss allowance by segment: | ||||||||||||
CFC | $ | 589 | $ | 572 | $ | 511 | ||||||
NCSC | 1 | 2 | - | |||||||||
Total | $ | 590 | $ | 574 | $ | 511 | ||||||
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As a percentage of total loans outstanding | 3.11 | % | 2.80 | % | 2.62 | % | ||||||
As a percentage of total non-performing loans outstanding | 95.62 | % | 168.33 | % | - | |||||||
As a percentage of total restructured loans outstanding | 98.17 | % | 92.88 | % | 81.24 | % | ||||||
_________________________________________ |
(1) Represents the impact of consolidating NCSC including the increase to CFC's loan loss allowance recorded as a cumulative effect of change in accounting principle and the balance of NCSC's loan loss allowance on June 1, 2003. |
36 |
(Dollar amounts in millions) | 2003 | 2002 | 2001 | |||||||||
Beginning balance | $ | 507 | $ | 332 | $ | 228 | ||||||
Provision for loan losses | 68 | 199 | 105 | |||||||||
Charge-offs, net | (10 | ) | (24 | ) | (1 | ) | ||||||
Ending balance | $ | 565 | $ | 507 | $ | 332 | ||||||
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As a percentage of total loans outstanding | 2.90% | 2.53% | 1.69% | |||||||||
As a percentage of total loans and guarantees outstanding | 2.64% | 2.29% | 1.52% | |||||||||
As a percentage of total nonperforming and restructured loans outstanding | 89.78% | 32.69% | 22.65% |
CFC has agreed to indemnify RTFC and NCSC for loan losses, with the exception of the NCSC consumer loans that are covered by the NCSC loan loss allowance. Therefore, there is no loan loss allowance required at RTFC and only a small loan loss allowance is required at NCSC to cover the exposure to consumer loans. |
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The balance of NCSC's loan loss allowance at May 31, 2005 represented a decrease of $1 million compared to May 31, 2004 due to a decrease in the principal balance of NCSC consumer loans.
Liabilities, Minority Interest and Equity |
Liabilities, minority interest and equity totaled $20,046 million at May 31, 2005, a decrease of $1,395 million or 7% from the balance of $21,441 million at May 31, 2004. CFC obtains funding in the capital markets through the issuance of commercial paper, medium-term notes, collateral trust bonds and subordinated deferrable debt which make up a large portion of the liabilities on the |
Liabilities |
Total liabilities |
Short-Term Debt and Long-Term Debt |
The following chart provides a breakout of debt outstanding. |
(Dollar amounts in millions) | May 31, 2005 | May 31, 2004 | Increase/(Decrease) | |||||||||
Short-term debt: | ||||||||||||
Commercial paper (1) | $ | 4,261 | $ | 3,525 | $ | 736 | ||||||
Bank bid notes | 100 | 100 | - | |||||||||
Long-term debt with remaining maturities less than one year |
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Foreign currency valuation account | 40 | - | 40 | |||||||||
Short-term debt reclassified as long-term (2) | (5,000 | ) | (4,650 | ) | (350 | ) | ||||||
Total short-term debt | 2,952 | 1,340 | 1,612 | |||||||||
Long-term debt: | ||||||||||||
Collateral trust bonds | 2,946 | 5,392 | (2,446 | ) | ||||||||
Long-term notes payable | 91 | 107 | (16 | ) | ||||||||
Medium-term notes | 5,444 | 6,276 | (832 | ) | ||||||||
Foreign currency valuation account | 221 | 234 | (13 | ) | ||||||||
Short-term debt reclassified as long-term (2) | 5,000 | 4,650 | 350 | |||||||||
Total long-term debt | 13,702 | 16,659 | (2,957 | ) | ||||||||
Subordinated deferrable debt | 685 | 550 | 135 | |||||||||
Members' subordinated certificates | 1,491 | 1,665 | (174 | ) | ||||||||
Total debt outstanding | $ | 18,830 | $ | 20,214 | $ | (1,384 | ) | |||||
Percentage of fixed rate debt (3) | 67% | 70% | ||||||||||
Percentage of variable rate debt (4) | 33% | 30% | ||||||||||
Percentage of long-term debt | 84% | 93% | ||||||||||
Percentage of short-term debt | 16% | 7% |
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(2) Reclassification of short-term debt to long-term debt is based on the Company's ability to borrow under its revolving credit agreements and refinance short-term debt on a long-term basis, subject to the conditions therein. | |
(3) Includes variable rate debt that has been swapped to a fixed rate less any fixed rate debt that has been swapped to a variable rate. | |
(4) The rate on commercial paper notes does not change once the note has been issued. However, the rates on new commercial paper notes change daily and commercial paper notes generally have maturities of less than 90 days. Therefore, commercial paper notes are considered to be variable rate debt. Also includes fixed rate debt that has been swapped to a variable rate less any variable rate debt that has been swapped to a fixed rate. | |
37 | |
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Total debt outstanding at May 31, |
$736 million in commercial paper and daily liquidity fund balances, $1,186 million in long-term debt due within one year and $40 million in the foreign currency valuation account offset by the $350 million increase in the amount of short-term debt supported by revolving credit agreements and reclassified as long-term. The decrease to long-term debt of $2,957 million is primarily due to the prepayment of RTFC loans. Subordinated deferrable debt increased $135 million due to the issuance of 5.95% subordinated notes in February 2005. The decrease to subordinated certificates was due to the offset of subordinated certificates against loans outstanding for two borrowers and to certificates applied as part of the prepayment of loans. |
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Short-Term Debt |
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Other information with regard to |
(Dollar amounts in thousands) | 2003 | 2002 | 2001 | ||||||||
Weighted average maturity of notes outstanding at year-end: | |||||||||||
Notes payable (1) | 18 days | 24 days | 28 days | ||||||||
Long-term debt maturing within one year | 195 days | 163 days | 185 days | ||||||||
Total | 123 days | 89 days | 93 days | ||||||||
Average amount outstanding during the year (2): | |||||||||||
Notes payable (1) | $ | 2,971,540 | $ | 4,933,166 | $ | 8,595,668 | |||||
Long-term debt maturing within one year | 2,707,410 | 3,742,451 | 3,090,812 | ||||||||
Total | 5,678,950 | 8,675,617 | 11,686,480 | ||||||||
Maximum amount outstanding at any month-end during the year (2): | |||||||||||
Notes payable (1) | 3,681,822 | 6,943,445 | 10,169,473 | ||||||||
Long-term debt maturing within one year | 3,453,567 | 4,364,230 | 4,388,504 |
(Dollar amounts in thousands) | 2005 | 2004 | 2003 | ||||||||
Weighted average maturity outstanding at year-end: (1) | |||||||||||
Short-term debt (2) | 22 days | 20 days | 18 days | ||||||||
Long-term debt maturing within one year | 294 days | 162 days | 195 days | ||||||||
Total | 145 days | 76 days | 123 days | ||||||||
Average amount outstanding during the year (1): | |||||||||||
Short-term debt (2) | $ | 4,355,579 | $ | 3,173,167 | $ | 2,971,540 | |||||
Long-term debt maturing within one year | 1,834,883 | 2,913,723 | 2,744,803 | ||||||||
Total | 6,190,462 | 6,086,890 | 5,716,343 | ||||||||
Maximum amount outstanding at any month-end during the year (1): | |||||||||||
Short-term debt (2) | 4,816,367 | 3,758,428 | 3,681,822 | ||||||||
Long-term debt maturing within one year | 3,591,374 | 3,427,560 | 3,453,048 |
(1) Prior to reclassification of short-term debt supported by the revolving credit agreements to long-term debt. | ||||||||||||
(2) Includes the daily liquidity fund and bank bid notes and does not include long-term debt due in less than one year. |
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Commercial Paper |
At May 31, |
Bank Bid Notes |
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38 |
Daily Liquidity Fund |
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Long-Term Debt |
During fiscal year |
Collateral Trust Bonds |
At May 31, |
Medium-Term Notes |
At May 31, |
At May 31, |
Long-Term Notes Payable |
At May 31, 2005 and 2004, respectively, the Company had $107 million and $116 million in long-term notes |
Subordinated Deferrable Debt |
At May 31, |
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Members' Subordinated Certificates |
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39 |
that of the loan or guarantee to which they relate. |
Minority Interest |
Minority interest on the consolidated balance sheets at May 31, 2005 and 2004 was $19 million and $21 million, respectively. The minority interest reported at May 31, 2005 and 2004 represents RTFC and NCSC members' equity, to which CFC's members have no claim. In consolidation, the amount of the subsidiary equity to which the parent company's members have no claim is shown as minority interest. CFC does not own any interest in RTFC and NCSC, but is required to consolidate under FIN 46(R) as it is the primary beneficiary of a variable interest in RTFC and NCSC. RTFC and NCSC are members of CFC. RTFC and NCSC are considered variable interest entities because they are very thinly capitalized, dependent on CFC for all funding and operated by CFC under a management agreement. CFC is considered the primary beneficiary of the variable interests in RTFC and NCSC due to a guarantee agreement, under which it is responsible for absorbing the majority of RTFC and NCSC expected losses. On June 1, 2003, |
During the year ended May 31, 2005, the balance of minority interest was impacted by the offset of $1 million of unretired RTFC patronage capital allocations against outstanding loan balances to certain impaired and high risk borrowers and the retirement of $3 million of patronage capital to RTFC members in January 2005, offset by $2 million of minority interest net margin for the |
Equity |
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(Dollar amounts in millions) | May 31, 2005 | May 31, 2004 | Increase/(Decrease) | |||||||||
Membership fees | $ | 1 | $ | 1 | $ | - | ||||||
Education fund | 1 | 1 | - | |||||||||
Members' capital reserve | 164 | 131 | 33 | |||||||||
Allocated net margin | 357 | 352 | 5 | |||||||||
Unallocated margin (1) | - | (2 | ) | 2 | ||||||||
Total members' equity | 523 | 483 | 40 | |||||||||
Prior year cumulative derivative forward | ||||||||||||
value and foreign currency adjustments | 225 | 523 | (298 | ) | ||||||||
Current period derivative forward value (2) | 31 | (233 | ) | 264 | ||||||||
Current period foreign currency adjustments | (23 | ) | (65 | ) | 42 | |||||||
Total retained equity | 756 | 708 | 48 | |||||||||
Accumulated other comprehensive income (loss) | 13 | (12 | ) | 25 | ||||||||
Total equity | $ | 769 | $ | 696 | $ | 73 |
(1) The May 31, 2004 balance includes NCSC equity which is included in consolidated equity rather than minority interest since it was in a deficit equity position at that time and therefore represented a charge to CFC. |
(2) Represents the |
Applicants are required to pay a one-time fee to become a member. The fee varies from two hundred dollars to one thousand dollars depending on the membership class. CFC is required by the District of Columbia cooperative law to have a methodology to allocate its net margin to its members. CFC maintains the current year net margin as unallocated through the end of its fiscal |
40 |
authorized by CFC's board of directors. All remaining adjusted net margin is allocated to CFC's members in the form of patronage capital. CFC bases the amount of adjusted net margin allocated to each member on the members' patronage of the CFC lending programs in the year that the |
At May 31, |
Contractual Obligations |
The following table summarizes |
Principal Amortization and Maturities | ||||||||||||||||||||||||||||
(Dollar amounts in millions) | Outstanding | Remaining | ||||||||||||||||||||||||||
Instrument | Balance | 2004 | 2005 | 2006 | 2007 | 2008 | Years | |||||||||||||||||||||
Notes payable (1) | $ | 4,898 | $ | 4,898 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Long-term debt (2) | 11,875 | - | 2,292 | 2,939 | 1,094 | 814 | 4,736 | |||||||||||||||||||||
Subordinated deferrable debt | 650 | - | - | - | - | - | 650 | |||||||||||||||||||||
Members' subordinated certificates (3) | 1,061 | 13 | 9 | 45 | 17 | 4 | 973 | |||||||||||||||||||||
Total contractual obligations | $ | 18,484 | $ | 4,911 | $ | 2,301 | $ | 2,984 | $ | 1,111 | $ | 818 | $ | 6,359 |
Principal Amortization and Maturities | ||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Outstanding | Remaining | ||||||||||||||||||||||||||||||
Instrument | Balance | 2006 | 2007 | 2008 | 2009 | 2010 | Years | |||||||||||||||||||||||||
Short-term debt (1) | $ | 7,952 | $ | 7,952 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||
Long-term debt (2) | 8,702 | - | 1,644 | 1,101 | 493 | 1,473 | 3,991 | |||||||||||||||||||||||||
Subordinated deferrable debt (3) | 685 | - | - | - | - | - | 685 | |||||||||||||||||||||||||
Members' subordinated certificates (4) | 1,109 | 12 | 26 | 4 | 20 | 4 | 1,043 | |||||||||||||||||||||||||
Total contractual obligations | $ | 18,448 | $ | 7,964 | $ | 1,670 | $ | 1,105 | $ | 513 | $ | 1,477 | $ | 5,719 |
(1) Includes commercial paper, bank bid notes, daily liquidity fund and long-term debt due in less than one year prior to reclassification of |
(2) Excludes |
(3) Subordinated deferrable debt is listed at the earliest call date for each issue. |
(4) Excludes loan subordinated certificates totaling |
Off-Balance Sheet Obligations | |||||||||||||
Guarantees | |||||||||||||
The following chart provides a breakout of guarantees outstanding by type and by segment. | |||||||||||||
Increase/ | |||||||||||||
(Dollar amounts in millions) | May 31, 2005 | May 31, 2004 | (Decrease) | ||||||||||
Long-term tax-exempt bonds | $ | 738 | $ | 781 | $ | (43 | ) | ||||||
Debt portions of leveraged lease transactions | 12 | 15 | (3 | ) | |||||||||
Indemnifications of tax benefit transfers | 142 | 160 | (18 | ) | |||||||||
Letters of credit | 197 | 307 | (110 | ) | |||||||||
Other guarantees | 69 | 68 | 1 | ||||||||||
�� Total | $ | 1,158 | $ | 1,331 | $ | (173 | ) | ||||||
CFC |
$
1,150
$
1,302
$
(152
)
8
29
(21
$
1,158
$
1,331
$
(173
|
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Increase/ | |||||||||||||
(Dollar amounts in thousands) | May 31, 2003 | May 31, 2002 | (Decrease) | ||||||||||
Long-term tax-exempt bonds | $ | 900 | $ | 941 | $ | (41 | ) | ||||||
Debt portions of leveraged lease transactions | 34 | 41 | (7 | ) | |||||||||
Indemnifications of tax benefit transfers | 185 | 208 | (23 | ) | |||||||||
Letters of credit | 314 | 311 | 3 | ||||||||||
Other guarantees | 471 | 555 | (84 | ) | |||||||||
Total | $ | 1,904 | $ | 2,056 | $ | (152 | ) |
The decrease in total guarantees outstanding at May 31, |
At May 31, 2005 and 2004, the Company had recorded a guarantee liability totaling $16 million and $19 million, respectively, which represents the contingent and non-contingent exposure related to guarantees of members' debt obligations. The |
41 |
(Dollar amounts in millions) | Principal Amortization and Maturities | |||||||||||||||||||||||||||
Outstanding | Remaining | |||||||||||||||||||||||||||
Instrument | Balance | 2004 | 2005 | 2006 | 2007 | 2008 | Years | |||||||||||||||||||||
Guarantees (1) | $ | 1,904 | $ | 286 | $ | 107 | $ | 255 | $ | 199 | $ | 193 | $ | 864 |
of Indebtedness of Others (an interpretation of SFAS 5, 57, and 107 and rescission of FIN 34). The Company received and deferred fees of $0.6 million, $0.8 million and $0.5 million for the year ended May 31, 2005 and 2004 and for the period from January 1, 2003 to May 31, 2003, respectively, related to new guarantees issued during the periods. | ||||||||||||||||||||||||||||||||
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The following table summarizes the off-balance sheet obligations at May 31, 2005 and the related principal amortization and maturities by fiscal year. | ||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Principal Amortization and Maturities | |||||||||||||||||||||||||||||||
Outstanding | Remaining | |||||||||||||||||||||||||||||||
Instrument | Balance | 2006 | 2007 | 2008 | 2009 | 2010 | Years | |||||||||||||||||||||||||
Guarantees (1) | $ | 1,158 | $ | 243 | $ | 111 | $ | 84 | $ | 87 | $ | 74 | $ | 559 | ||||||||||||||||||
(1) On a total of $692 million of tax-exempt bonds, CFC has unconditionally agreed to purchase bonds tendered or called for redemption at any time if the remarketing agents have not sold such bonds to other purchasers. |
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Contingent Off-Balance Sheet Commitments |
Unadvanced Commitments |
|
Unadvanced commitments do not represent off-balance sheet liabilities |
Ratio Analysis |
Leverage Ratio |
The leverage ratio is calculated by dividing total liabilities and guarantees outstanding by total equity. Based on this formula, the leverage ratio at May 31, |
|
total equity and |
Debt to Equity Ratio |
The debt to equity ratio is calculated by dividing total liabilities outstanding by total equity. The debt to equity ratio, based on this formula, at May 31, |
42 |
account, |
|
Revolving Credit Agreements |
|
(Dollar amount in millions) | 2005 | 2004 | Termination Date | Facility fee per annum (1) | ||||||||||
Three-year agreement | $ | 1,740 | $ | 1,740 | March 30, 2007 | 0.10 of 1% | ||||||||
Five-year agreement | 1,975 | - | March 23, 2010 | 0.09 of 1% | ||||||||||
364-day agreement (2) | 1,285 | - | March 22, 2006 | 0.07 of 1% | ||||||||||
364-day agreement (2) | - | 1,740 | March 29, 2005 | 0.085 of 1% | ||||||||||
364-day agreement (2) | - | 1,170 | March 29, 2005 | 0.085 of 1% | ||||||||||
| $ | 5,000 | $ | 4,650 |
| Facility fee determined by CFC's senior unsecured credit ratings based on the pricing schedules put in place at |
(2) | Any amount outstanding under these agreements |
|
|
For the purpose of the revolving credit agreements, net margin, senior debt and total equity are adjusted to exclude the non-cash adjustments related to SFAS 133 and |
* | guarantees for members where the long-term unsecured debt of the member is rated at least BBB+ by Standard & Poor's Corporation or Baa1 by Moody's Investors Service; |
* | indebtedness incurred to fund RUS guaranteed loans; and |
* | the payment of principal and interest by the member on the guaranteed indebtedness if covered by insurance or reinsurance provided by an insurer having an insurance financial strength rating of AAA by Standard & Poor's Corporation or a financial strength rating of Aaa by Moody's Investors |
The following represents the Company's required financial ratios at or for the year ended May 31: |
| Requirement | 2005 | 2004 | ||||
Minimum average adjusted TIER over the six most recent fiscal quarters | 1.025 | 1.08 | 1.15 | ||||
Minimum adjusted TIER at fiscal year end (1) | 1.05 | 1.14 | 1.12 | ||||
Maximum senior debt | 10.00 | 6.30 | 6.87 |
(1) | The Company must meet this requirement in order to retire patronage capital. |
43 | |
The revolving credit agreements do not contain a material adverse change clause or ratings triggers that limit the banks' obligations to fund under the terms of the |
Based on the ability to borrow under the bank line facilities, |
Asset/Liability Management |
A key element of |
Matched Funding Policy |
|
|
Certain of |
|
44 |
The following chart shows the scheduled amortization and |
INTEREST RATE GAP ANALYSIS |
(Fixed Rate Assets/Liabilities) |
As of May 31, |
Over 1 | Over 3 | Over 5 | Over 10 | |||||||||||||||||||||||||
year but | years but | years but | years but | |||||||||||||||||||||||||
1 year | 3 years | 5 years | 10 years | 20 years | Over 20 | |||||||||||||||||||||||
(Dollar amounts in millions) | or less | or less | or less | or less | or less | years | Total | |||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||
Amortization and repricing | $ | 2,797 | $ | 3,486 | $ | 1,394 | $ | 2,522 | $ | 1,824 | $ | 403 | $ | 12,426 | ||||||||||||||
Total assets | $ | 2,797 | $ | 3,486 | $ | 1,394 | $ | 2,522 | $ | 1,824 | $ | 403 | $ | 12,426 | ||||||||||||||
| ||||||||||||||||||||||||||||
Liabilities and members' equity: | ||||||||||||||||||||||||||||
Long-term debt | $ | 2,590 | $ | 3,681 | $ | 1,030 | $ | 1,682 | $ | 416 | $ | 691 | $ | 10,090 | ||||||||||||||
Subordinated certificates | 67 | 91 | 87 | 507 | 626 | 134 | 1,512 | |||||||||||||||||||||
Members' equity (1) | - | - | - | 204 | 360 | - | 564 | |||||||||||||||||||||
Total liabilities and members' equity | $ | 2,657 | $ | 3,772 | $ | 1,117 | $ | 2,393 | $ | 1,402 | $ | 825 | $ | 12,166 | ||||||||||||||
| ||||||||||||||||||||||||||||
Gap (2) | $ | (140 | ) | $ | 286 | $ | (277 | ) | $ | (129 | ) | $ | (422 | ) | $ | 422 | $ | (260 | ) | |||||||||
Cumulative gap | $ | (140 | ) | $ | 146 | $ | (131 | ) | $ | (260 | ) | $ | (682 | ) | $ | (260 | ) | |||||||||||
Cumulative gap as a % of total assets (3) | (0.71 | )% | 0.74 | % | (0.66 | )% | (1.31 | )% | (3.44 | )% | (1.31 | )% |
| Over 1 | Over 3 | Over 5 | Over 10 | |||||||||||||||||||||||
year but | years but | years but | years but | ||||||||||||||||||||||||
1 year | 3 years | 5 years | 10 years | 20 years | Over 20 | ||||||||||||||||||||||
(Dollar amounts in millions) | or less | or less | or less | or less | or less | years | Total | ||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Amortization and repricing | $ | 1,683 | $ | 3,083 | $ | 2,258 | $ | 3,134 | $ | 1,953 | $ | 619 | $ | 12,730 | |||||||||||||
Total assets | $ | 1,683 | $ | 3,083 | $ | 2,258 | $ | 3,134 | $ | 1,953 | $ | 619 | $ | 12,730 | |||||||||||||
Liabilities and members' equity: | |||||||||||||||||||||||||||
Long-term debt | $ | 1,249 | $ | 2,653 | $ | 2,250 | $ | 3,132 | $ | 489 | $ | 715 | $ | 10,488 | |||||||||||||
Subordinated certificates | 47 | 74 | 60 | 83 | 919 | 74 | 1,257 | ||||||||||||||||||||
Members' equity (1) | 13 | 26 | 27 | 91 | 259 | - | 416 | ||||||||||||||||||||
Total liabilities and members' equity | $ | 1,309 | $ | 2,753 | $ | 2,337 | $ | 3,306 | $ | 1,667 | $ | 789 | $ | 12,161 | |||||||||||||
Gap (2) | $ | 374 | $ | 330 | $ | (79 | ) | $ | (172 | ) | $ | 286 | $ | (170 | ) | $ | 569 | ||||||||||
Cumulative gap | $ | 374 | $ | 704 | $ | 625 | $ | 453 | $ | 739 | $ | 569 | |||||||||||||||
Cumulative gap as a % of total assets | 1.87 | % | 3.51 | % | 3.12 | % | 2.26 | % | 3.69 | % | 2.84 | % | |||||||||||||||
Cumulative gap as a % of adjusted total assets (3) | 1.92 | % | 3.62 | % | 3.21 | % | 2.33 | % | 3.80 | % | 2.92 | % | |||||||||||||||
_____________________ |
(1) | Includes the portion of the loan loss allowance and subordinated deferrable debt allocated to fund fixed rate assets. See "Non-GAAP Financial Measures" for further explanation of why CFC uses members' equity in its analysis of the funding of its loan portfolio. |
(2) |
|
(3) |
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Derivative and Financial Instruments | ||||||||||||||||||||||||||||||||
All financial instruments to which the Company was a party at May 31, 2005 were entered into or contracted for purposes other than trading. The following table provides the significant balances and contract terms related to the financial instruments at May 31, 2005. | ||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Principal Amortization and Maturities | |||||||||||||||||||||||||||||||
Outstanding | Remaining | |||||||||||||||||||||||||||||||
Instrument | Balance | Fair Value | 2006 | 2007 | 2008 | 2009 | 2010 | Years | ||||||||||||||||||||||||
Investments | $ | 2 | $ | 2 | $ | 2 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Average rate | 2.96 | % | 2.96 | % | - | - | - | - | - | |||||||||||||||||||||||
Long-term fixed rate loans (1) | 12,715 | 12,034 | 628 | 618 | 653 | 614 | 602 | 9,600 | ||||||||||||||||||||||||
Average rate | 5.57 | % | 5.25 | % | 5.32 | % | 5.36 | % | 5.50 | % | 5.56 | % | 5.63 | % | ||||||||||||||||||
Long-term variable rate loans (2) | 4,022 | 4,022 | 304 | 238 | 229 | 229 | 205 | 2,817 | ||||||||||||||||||||||||
Average rate (3) | 5.52 | % | - | - | - | - | - | - | ||||||||||||||||||||||||
Intermediate-term loans (4) | 10 | 10 | 10 | - | - | - | - | - | ||||||||||||||||||||||||
Average rate | 5.91 | % | 5.91 | % | - | - | - | - | - | |||||||||||||||||||||||
Line of credit loans (5) | 967 | 967 | 967 | - | - | - | - | - | ||||||||||||||||||||||||
Average rate (3) | 4.99 | % | 4.99 | % | - | - | - | - | - | |||||||||||||||||||||||
RUS Guaranteed FFB Refinance | 40 | 40 | 2 | 2 | 2 | 2 | 2 | 30 | ||||||||||||||||||||||||
Average rate (3) | 3.46 | % | - | - | - | - | - | - | ||||||||||||||||||||||||
Non-performing loans (6) | 617 | 392 | - | - | - | - | - | 617 | ||||||||||||||||||||||||
Average rate | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Restructured loans (7) | 601 | 581 | 8 | 8 | 10 | 13 | 14 | 548 | ||||||||||||||||||||||||
Average rate | 0.08 | % | - | - | - | - | - | - | ||||||||||||||||||||||||
Liabilities and equity: | ||||||||||||||||||||||||||||||||
Short-term debt (8) | 7,952 | 7,978 | 7,952 | - | - | - | - | - | ||||||||||||||||||||||||
Average rate | 3.84 | % | 3.84 | % | - | - | - | - | - | |||||||||||||||||||||||
Medium-term notes (9) | 5,665 | 6,319 | - | 1,528 | 86 | 253 | 1,258 | 2,540 | ||||||||||||||||||||||||
Average rate | 6.51 | % | - | 5.73 | % | 3.99 | % | 5.61 | % | 5.76 | % | 7.52 | % | |||||||||||||||||||
Collateral trust bonds (9) | 2,946 | 3,015 | - | 100 | 998 | 225 | 200 | 1,423 | ||||||||||||||||||||||||
Average rate | 5.05 | % | - | 7.30 | % | 4.45 | % | 5.75 | % | 5.70 | % | 5.11 | % | |||||||||||||||||||
Long-term notes payable | 91 | 106 | - | 16 | 16 | 16 | 16 | 27 | ||||||||||||||||||||||||
Average rate | 4.94 | % | - | 3.36 | % | 3.41 | % | 3.35 | % | 3.11 | % | 8.80 | % | |||||||||||||||||||
Subordinated deferrable debt | 685 | 689 | - | - | - | - | - | 685 | ||||||||||||||||||||||||
Average rate | 6.86 | % | - | - | - | - | - | 6.86 | % | |||||||||||||||||||||||
Subordinated certificates (10) | 1,109 | N/A | 12 | 26 | 4 | 20 | 4 | 1,043 | ||||||||||||||||||||||||
Average rate | 4.17 | % | 4.51 | % | 4.32 | % | 3.90 | % | 2.69 | % | 3.30 | % | 4.19 | % | ||||||||||||||||||
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45 | ||||||||||||||||||||||||||||||||
_____________________________ | |
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| ||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Principal Amortization and Maturities | |||||||||||||||||||||||||||||||
Outstanding | Remaining | |||||||||||||||||||||||||||||||
Instrument | Balance | Fair Value | 2004 | 2005 | 2006 | 2007 | 2008 | Years | ||||||||||||||||||||||||
Investments | $ | 2 | $ | 2 | $ | 2 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
Average rate | 1.15% | - | - | - | - | - | - | |||||||||||||||||||||||||
Long-term fixed rate loans (1) | 12,426 | 12,307 | 745 | 614 | 492 | 491 | 543 | 9,541 | ||||||||||||||||||||||||
Average rate | 5.86% | 6.43% | 5.35% | 5.97% | 6.10% | 6.21% | 5.81% | |||||||||||||||||||||||||
Long-term variable rate loans (2) | 5,195 | 5,195 | 379 | 319 | 375 | 286 | 230 | 3,606 | ||||||||||||||||||||||||
Average rate (3) | 4.09% | - | - | - | - | - | - | |||||||||||||||||||||||||
Intermediate-term loans (4) | 84 | 84 | 38 | 44 | 2 | - | - | - | ||||||||||||||||||||||||
Average rate | 4.05% | 4.52% | 3.62% | 4.23% | - | - | - | |||||||||||||||||||||||||
Line of credit loans (5) | 1,108 | 1,108 | 1,108 | - | - | - | - | - | ||||||||||||||||||||||||
Average rate (3) | 3.98% | 3.98% | - | - | - | - | - | |||||||||||||||||||||||||
RUS Guaranteed FFB Refinance | 43 | 43 | 1 | 1 | 2 | 2 | 2 | 35 | ||||||||||||||||||||||||
Average rate (3) | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Nonperforming loans | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Average rate (3) | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Restructured loans (6) | 629 | 387 | 25 | 24 | 24 | 24 | 25 | 507 | ||||||||||||||||||||||||
Average rate | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Liabilities and equity: | ||||||||||||||||||||||||||||||||
Notes payable (7) | 4,898 | 4,900 | 4,898 | - | - | - | - | - | ||||||||||||||||||||||||
Average rate | 2.04% | 2.04% | - | - | - | - | - | |||||||||||||||||||||||||
Medium-term notes (8) | 5,882 | 6,740 | - | 393 | 493 | 995 | 16 | 3,985 | ||||||||||||||||||||||||
Average rate | 6.29% | - | 2.40% | 4.37% | 6.33% | 6.35% | 6.90% | |||||||||||||||||||||||||
Collateral trust bonds (8) | 5,993 | 6,441 | - | 1,899 | 2,445 | 100 | 798 | 751 | ||||||||||||||||||||||||
Average rate | 5.17% | - | 4.68% | 5.28% | 7.30% | 4.75% | 6.24% | |||||||||||||||||||||||||
Subordinated deferrable debt | 650 | 686 | - | - | - | - | - | 650 | ||||||||||||||||||||||||
Average rate | 7.32% | - | - | - | - | - | 7.32% | |||||||||||||||||||||||||
Subordinated certificates (9) | 1,061 | N/A | 13 | 9 | 45 | 17 | 4 | 973 | ||||||||||||||||||||||||
Average rate | 4.46% | 5.41% | 3.52% | 5.31% | 5.23% | 4.63% | 4.41% |
(1) | The principal amount of fixed rate loans is the total of scheduled principal amortizations |
(2) | Long-term variable rate loans include |
(3) | Variable rates are set the first day of each month. |
(4) | There is no scheduled amortization for intermediate-term variable rate loans. |
(5) | The principal amount of line of credit loans are generally required to be paid down for a period of five consecutive days each year. These loans do not have a principal amortization schedule. |
(6) |
|
(7) |
|
(8) | Short-term debt includes commercial paper, bank bid notes and long-term debt due in less than one year prior to reclassification of |
| Prior to reclassification of |
| Fair value has not been included as it is impracticable to develop a discount rate that measures fair value (see Note |
The following table provides the notional amount, average rate paid, average rate received and maturity dates for the interest rate exchange agreements to which the Company was a party at May 31, 2005. | |||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Notional | Notional Amortization and Maturities | |||||||||||||||||||||||||||||||
Principal | Remaining | ||||||||||||||||||||||||||||||||
Instruments | Amount | Fair Value | 2006 | 2007 | 2008 | 2009 | 2010 | Years | |||||||||||||||||||||||||
Interest rate exchange agreements | $ | 13,693 | $ | 208 | $ | 2,900 | $ | 1,915 | $ | 884 | $ | 839 | $ | 1,853 | $ | 5,302 | |||||||||||||||||
Average rate paid | 4.225 | % | |||||||||||||||||||||||||||||||
Average rate received | 4.848 | % | |||||||||||||||||||||||||||||||
The following table provides the notional amount in U.S. dollars, average exchange rate and maturity dates for the cross currency and cross currency interest rate exchange agreements to which the Company was a party at May 31, 2005. | |||||||||||||||||||||||||||||||||
(Dollar amounts in millions) | Notional | Notional Amortization and Maturities | |||||||||||||||||||||||||||||||
Principal | Remaining | ||||||||||||||||||||||||||||||||
Instruments | Amount | Fair Value | 2006 | 2007 | 2008 | 2009 | 2010 | Years | |||||||||||||||||||||||||
Cross currency and cross currency | |||||||||||||||||||||||||||||||||
interest rate exchange agreements | $ | 1,106 | $ | 298 | $ | 390 | $ | 716 | $ | - | $ | - | $ | - | $ | - | |||||||||||||||||
Average exchange rate - Euro | 1.032 | ||||||||||||||||||||||||||||||||
Average exchange rate - Australian dollar | 1.506 |
|
(Dollar amounts in millions) | Notional | Notional Amortization and Maturities | ||||||||||||||||||||||||||||||
Principal | Remaining | |||||||||||||||||||||||||||||||
Instruments | Amount | Fair Value | 2004 | 2005 | 2006 | 2007 | 2008 | Years | ||||||||||||||||||||||||
Interest rate exchange agreements | $ | 15,345 | $ | 450 | $ | 2,177 | $ | 2,942 | $ | 3,198 | $ | 1,160 | $ | 682 | $5,186 | |||||||||||||||||
Average rate paid | 3.28% | |||||||||||||||||||||||||||||||
Average rate received | 3.86% |
|
|
The Company enters into an exchange agreement to sell the amount of foreign currency received from the investor for U.S. dollars on the issuance date and to buy the amount of foreign currency required to repay the investor principal and interest due through or on the maturity date. By locking in the exchange rates at the time of issuance, the Company has eliminated the possibility of any currency gain or loss (except in the case of the Company or a counterparty default or unwind of the transaction) which might otherwise have been produced by the foreign currency borrowing. |
46 |
(Dollar amounts in millions) | Notional | Notional Amortization and Maturities | ||||||||||||||||||||||||||||||||||||
Principal | Remaining | |||||||||||||||||||||||||||||||||||||
Instruments | Amount | Fair Value | 2004 | 2005 | 2006 | 2007 | 2008 | Years | ||||||||||||||||||||||||||||||
Cross currency and cross currency | ||||||||||||||||||||||||||||||||||||||
interest rate exchange agreements | $ | 1,262 | $ | 356 | $ | 439 | $ | - | $ | 390 | $ | 433 | $ | - | $ | - | ||||||||||||||||||||||
Average exchange rate - Euro | 1.069 |
Market Risk |
|
The interest rate risk exposure is related to the funding of the fixed rate loan portfolio. |
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To facilitate entry into the debt markets, |
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|
47 |
Company has not experienced a failure of a counterparty to perform as required under any of these agreements. At May 31, |
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(Dollar amounts in millions) | Notional Amount | Average Rate Paid | Average Rate Received | ||||||||||
Pay fixed / receive variable | $ | 6,595 | 4.343% | 1.253% | |||||||||
Pay variable / receive variable | 700 | 1.341% | 1.320% | ||||||||||
Pay variable / receive fixed | 8,050 | 2.572% | 6.209% | ||||||||||
Total | $ | 15,345 | 3.277% | 3.856% |
(Dollar amounts in millions) | Notional Amount | Average Rate Paid | Average Rate Received | ||||||||||
Pay fixed / receive variable | $ | 6,643 | 3.906% | 3.282% | |||||||||
Pay variable / receive fixed | 7,050 | 4.526% | 6.323% | ||||||||||
Total | $ | 13,693 | 4.225% | 4.848% |
Foreign Currency Risk |
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Rating Triggers |
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At May 31, |
|
48 |
|
Credit Ratings |
The Company's long- and short-term debt and guarantees are rated by three of the major credit rating agencies, Moody's Investors Service, Standard & Poor's Corporation and Fitch Ratings. The following table presents |
|
Moody's Investors | Standard & Poor's | |||||||||||||
Service | Corporation | Fitch Ratings | ||||||||||||
Direct: | ||||||||||||||
Collateral trust bonds | A1 | A+ | A+ | |||||||||||
Medium-term notes | A2 | A | A | |||||||||||
Subordinated deferrable debt | A3 | BBB+ | A- | |||||||||||
Commercial paper | P-1 | A-1 | F-1 | |||||||||||
Guarantees: | ||||||||||||||
Leveraged lease debt | A2 | A | A | |||||||||||
Pooled bonds | A1 | A | A | |||||||||||
Other bonds | A2 | A | A | |||||||||||
Short-term | P-1 | A-1 | F-1 |
The ratings listed above have the meaning as defined by each of the respective rating agencies, are not recommendations to buy, sell or hold securities and are subject to revision or withdrawal at any time by the rating organizations. |
|
Member Investments |
At May 31, |
MEMBERSHIP INVESTMENTS | ||||||||||||||||
(Dollar amounts in millions) | 2005 | % of Total (1) | 2004 | % of Total (1) | ||||||||||||
Commercial paper (2) | $ | 1,260 | 30 | % | $ | 1,196 | 34 | % | ||||||||
Medium-term notes | 275 | 4 | % | 275 | 4 | % | ||||||||||
Members' subordinated certificates | 1,491 | 100 | % | 1,665 | 100 | % | ||||||||||
Members' equity (3) | 524 | 100 | % | 483 | 100 | % | ||||||||||
Total | $ | 3,550 | $ | 3,619 | ||||||||||||
Percentage of total assets | 17.7 | % | 16.9 | % | ||||||||||||
Percentage of total assets less derivative assets (3) | 18.2 | % | 17.3 | % | ||||||||||||
______________________ | ||||||||||||||||
(1) Represents the percentage of each line item outstanding to CFC members. | ||||||||||||||||
(2) Includes the $271 million and $223 million related to the daily liquidity fund at May 31, 2005 and 2004, respectively. | ||||||||||||||||
(3) See "Non-GAAP Financial Measures" for further explanation and a reconciliation of the adjustments made to total capitalization and a breakout of members' equity. |
|
(Dollar amounts in millions) | 2003 | % of Total (1) | 2002 | % of Total (1) | ||||||||||||
Commercial paper (2) | $ | 1,041 | 55 | % | $ | 956 | 30 | % | ||||||||
Medium-term notes | 297 | 3 | % | 235 | 3 | % | ||||||||||
Members' subordinated certificates | 1,708 | 100 | % | 1,692 | 100 | % | ||||||||||
Members' equity (3) | 454 | 100 | % | 392 | 100 | % | ||||||||||
Total | $ | 3,500 | $ | 3,275 | ||||||||||||
Percentage of total capitalization | 17.2 | % | 16.5 | % | ||||||||||||
Percentage of adjusted total capitalization (3) | 17.9 | % | 16.4 | % |
| ||
| ||
|
The total amount of member investments |
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Financial and Industry Outlook |
Loan Growth |
|
49 |
Liquidity |
At May 31, |
In June 2005, CFC entered into a bond purchase agreement with the FFB and a bond guarantee agreement with RUS resulting in a $1 billion loan facility under the Rural Electric Development Loan and Guarantee ("REDLG") program. Under this program, CFC is eligible to borrow up to the amount of the outstanding loans that it has issued concurrent with RUS loans. At May 31, 2005, CFC had a total of $2,681 million outstanding on loans issued concurrently with RUS. Under the program, CFC will pay a fee of 30 basis points per annum to RUS for the guarantee of principal and interest payments to FFB. In July 2005, CFC submitted a second application for an additional $1.5 billion facility. CFC has applied for an advance of $450 million and anticipates the advance to occur by the end of |
|
In July 2005, the Company sold $500 million of 4.656% notes to the Federal Agricultural Mortgage Corporation due in 2008 and secured by the pledge of CFC mortgage notes. |
Equity Retention |
|
The Company believes the adjusted equity balance as reported in the Non-GAAP Financial Measure section of this report will continue to increase. The Company has established a members' capital reserve to which a portion of adjusted net margin may be allocated each year. The balance of the members' capital reserve was $164 million at May 31, 2005. The adjusted equity total typically declines slightly in the first quarter each year |
Adjusted Gross Margin |
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Adjusted Leverage and Adjusted Debt to Equity Ratios |
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50 |
Loan Impairment |
When |
CoServ |
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Under the terms of the restructure agreement, CoServ has the option to prepay the restructured loan for $415 million plus an interest payment true up anytime on or after December 13, 2007 and for $405 million plus an interest payment true up anytime on or after December 13, 2008. If CoServ were to elect to prepay the restructured loan on December 13, 2007, it would be required to make a payment of $433 million to the Company, representing $415 million for the contractual prepayment plus $18 million of interest. Assuming that the Company continues to receive all required quarterly payments from CoServ and applies all such payments to principal, the estimated loan balance would be $532 million at December 13, 2007. If CoServ were to elect to prepay the restructured loan on December 13, 2008, it would be required to make a payment of $423 million to the Company, representing $405 million for the contractual prepayment plus $18 million of interest. Assuming that the Company continues to receive all required quarterly payments from CoServ and applies all such payments to principal, the estimated loan balance would be $505 million at December 13, 2008. |
VarTec and ICC |
The Company is currently in litigation related to the collection of amounts due from RTFC borrowers VarTec and ICC. While the Company believes it has valid claims against and is the primary secured creditor to both borrowers, there is always some level of uncertainty associated with litigation. VarTec has entered into agreements to sell substantially all of its operating assets and its remaining assets represent various claims that the estate has against third parties. It is expected that the VarTec loan will remain on non-accrual status with respect to the recognition of interest income while the sale of its domestic assets is finalized. The ICC litigation is expected to last for the next 12 to 18 months. As a result of the recent missed payments, RTFC has placed ICC on non-accrual status as of February 1, 2005. The Company will continue to adjust the loan loss allowance held for both VarTec and ICC based on the most current information available. |
Credit Concentration |
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Loan Loss Allowance |
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Foreclosed Assets |
In August 2005, the Company sold real estate assets for $30 million. The Company acquired these real estate assets as part of a bankruptcy settlement in 2002. The real estate assets sold by the Company had been accounted for as foreclosed assets. The Company estimates that its fiscal year 2006 first quarter results of operations of foreclosed assets will include a gain of approximately $2 million from the sale. |
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Accounting for Derivatives and Foreign Denominated Debt |
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The forward-looking statements are based on management's current views and assumptions regarding future events and operating performance. |
Non-GAAP Financial Measures |
The Company makes certain adjustments to financial measures in assessing its financial performance that are not in accordance with GAAP. These non-GAAP adjustments fall primarily into two categories: (1) adjustments related to the calculation of the TIER ratio, and (2) adjustments related to the calculation of leverage and debt to equity ratios. These adjustments reflect management's perspective on the Company's operations, and in several cases adjustments used to measure covenant compliance under its revolving credit agreements, and thus the Company believes these are useful financial measures for investors. The Company refers to its non-GAAP financial measures as "adjusted" throughout this document. |
Adjustments to the Calculation of the TIER Ratio |
The Company's primary performance measure is TIER. TIER is calculated by adding the cost of funds to net margin prior to the cumulative effect of change in accounting principle and dividing that total by the cost of funds. The TIER is a measure of the Company's ability to cover interest expense requirements on its debt. The Company adjusts the TIER calculation to add the derivative cash settlements to the cost of funds, to add minority interest net margin back to total net margin and to remove the derivative forward value and foreign currency adjustments from total net margin. Adding the cash settlements back to the cost of funds also has a corresponding effect on the Company's adjusted gross margin and adjusted operating margin. The Company makes these adjustments to its TIER calculation for the purpose of covenant compliance on its revolving credit agreements. The revolving credit agreements require the Company to achieve an average adjusted TIER ratio over the six most recent fiscal quarters of at least 1.025 and prohibit the retirement of patronage capital unless the Company has achieved an adjusted TIER ratio of at least 1.05 for the preceding fiscal year. The Company's average adjusted TIER for the past six quarters was 1.08 and the Company's adjusted TIER for the year ended May 31, 2005 was 1.14. CFC's goal is to maintain a minimum adjusted annual TIER of 1.10. |
The Company uses derivatives to manage interest rate and foreign currency exchange risk on its funding of the loan portfolio. The derivative cash settlements represent the amount that the Company receives from or pays to its counterparties based on the interest rate indexes in its derivatives that do not qualify for hedge accounting. The Company adjusts the reported cost of funding to include the derivative cash settlements. The Company uses the adjusted cost of funding to set interest rates on loans to its members and believes that the cost of funds adjusted to include derivative cash settlements represents its total cost of funding for the period. For the purpose of computing compliance with its revolving credit agreement covenants, the Company is required to adjust its cost of funds to include the derivative cash settlements. TIER calculated by adding the derivative cash settlements to the cost of funds reflects management's perspective on its operations and thus, the Company believes that it represents a useful financial measure for investors. |
The derivative forward value and foreign currency adjustments do not represent cash inflows or outflows to the Company during the current period. The derivative forward value represents a present value estimate of the future cash inflows or outflows that will be recognized as net cash settlements for all periods through the maturity of its derivatives that do not qualify for hedge accounting. Foreign currency adjustments represent the change in value of foreign denominated debt resulting from the change in foreign currency exchange rates during the current period. The derivative forward value and foreign currency adjustments do not represent cash inflows or outflows that affect the Company's current ability to cover its debt service obligations. The forward value calculation is based on future interest rate expectations that may change daily creating volatility in the estimated forward value. The change in foreign currency exchange rates adjusts the debt balance to the amount that would be due at the reporting date. At the issuance date, the Company enters into a foreign currency exchange agreement for all foreign denominated debt that effectively fixes the exchange rate for all interest and principal payments. For the purpose of making operating decisions, the Company subtracts the derivative forward value and foreign currency adjustments from its net margin when calculating TIER and for other net margin presentation purposes. The covenants in the Company's revolving credit agreements also exclude the effects of derivative forward value and foreign currency adjustments. In addition, since the derivative forward value and foreign currency adjustments do not represent current period cash flows, the Company does not allocate such funds to its members and thus excludes the derivative forward value and foreign currency |
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adjustments from net margin when making certain presentations to its members and in calculating the amount of net margins to be allocated to its members. TIER calculated by excluding the derivative forward value and foreign currency adjustments from net margin reflects management's perspective on its operations and thus, the Company believes that it represents a useful financial measure for investors. |
The implementation of SFAS 133 and foreign currency adjustments have also impacted the Company's total equity. The derivative forward value and foreign currency adjustments flow through the consolidated and combined statements of operations as income or expense, increasing or decreasing the total net margin for the period. The total net margin or net loss for the period represents an increase or decrease, respectively, to total equity. As a result of implementing SFAS 133, the Company's total equity includes other comprehensive income, which represents estimated unrecognized gains and losses on derivatives. The other comprehensive income component of equity does not flow through the consolidated and combined statements of operations. As stated above, the derivative forward value and foreign currency adjustments do not represent current cash inflow or outflow. The other comprehensive income is also an estimate of future gains and losses and as such does not represent earnings that the Company can use to fund its loan portfolio. Financial measures calculated with members' equity, which is total equity excluding the impact of SFAS 133 and foreign currency adjustments, reflect management's perspective on its operations and thus, the Company believes that they represent a useful measure of its financial condition. |
The following chart provides a reconciliation between cost of funds, gross margin, operating margin, and net margin and these financial measures adjusted to exclude the impact of SFAS 133 and foreign currency adjustments for the years ended May 31, 2005, 2004 and 2003. |
Year Ended May 31, | ||||||||||||||||||
2005 | 2004 | 2003 | ||||||||||||||||
(Dollar amounts in thousands) | ||||||||||||||||||
Cost of funds | $ | (922,063 | ) | $ | (925,652 | ) | $ | (939,332 | ) | |||||||||
Adjusted to include: Derivative cash settlements | 63,044 | 110,087 | 122,825 | |||||||||||||||
Adjusted cost of funds | $ | (859,019 | ) | $ | (815,565 | ) | $ | (816,507 | ) | |||||||||
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Gross margin | $ | 104,063 | $ | 81,641 | $ | 131,543 | ||||||||||||
Adjusted to include: Derivative cash settlements | 63,044 | 110,087 | 122,825 | |||||||||||||||
Adjusted gross margin | $ | 167,107 | $ | 191,728 | $ | 254,368 | ||||||||||||
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Operating margin (loss) | $ | 130,587 | $ | (194,584 | ) | $ | 651,970 | |||||||||||
Adjusted to exclude: Derivative forward value | (29,875 | ) | 229,132 | (757,212 | ) | |||||||||||||
Foreign currency adjustments | 22,893 | 65,310 | 243,220 | |||||||||||||||
Adjusted operating margin | $ | 123,605 | $ | 99,858 | $ | 137,978 | ||||||||||||
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Margin (loss) prior to cumulative | ||||||||||||||||||
effect of change in accounting principle | $ | 126,529 | $ | (200,390 | ) | $ | 651,970 | |||||||||||
Adjusted to include: Minority interest net margin | 2,540 | 1,989 | - | |||||||||||||||
Adjusted to exclude: Derivative forward value | (29,875 | ) | 229,132 | (757,212 | ) | |||||||||||||
Foreign currency adjustments | 22,893 | 65,310 | 243,220 | |||||||||||||||
Adjusted net margin | $ | 122,087 | $ | 96,041 | $ | 137,978 | ||||||||||||
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TIER using GAAP financial measures is calculated as follows: |
Cost of funds + net margin prior to cumulative | |||
TIER = | effect of change in accounting principle | ||
Cost of funds |
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Adjusted TIER = | Adjusted cost of funds + adjusted net margin | ||
Adjusted cost of funds |
The following chart provides the TIER and adjusted TIER for the years ended May 31, 2005, 2004 and 2003. |
Year Ended May 31, | |||||||||||||||||||||
2005 | 2004 | 2003 | |||||||||||||||||||
TIER (1) | 1.14 | - | 1.69 | ||||||||||||||||||
Adjusted TIER | 1.14 | 1.12 | 1.17 | ||||||||||||||||||
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(1) For the year ended May 31, 2004, CFC reported a net loss prior to the cumulative effect of change in accounting principle of $200 million, thus the TIER calculation results in a value below 1.00. |
Adjustments to the Calculation of Leverage and Debt to Equity |
The Company calculates the leverage ratio by adding total liabilities to total guarantees and dividing by total equity. The Company calculates the debt to equity ratio by dividing total liabilities by total equity. The Company adjusts these ratios to (i) subtract debt used to fund loans that are guaranteed by RUS from total debt, (ii) subtract from total debt, and add to total equity, debt with equity characteristics issued to its members and in the capital markets, (iii) include minority interest as equity and (iv) to exclude the impact of non-cash SFAS 133 and foreign currency adjustments from its total liabilities and total equity. For the purpose of computing compliance with its revolving credit agreement covenants, the Company is required to make these adjustments to its leverage ratio calculation. The revolving credit agreements prohibit the Company from incurring senior debt in an amount in excess of ten times the sum of equity, members' subordinated certificates, minority interest and subordinated deferrable debt, as defined by the agreements. The Company makes these same adjustments to its debt to equity ratio as the only difference between the leverage ratio and the debt to equity ratio is the addition of guarantees to liabilities in the leverage ratio. In addition to the adjustments the Company makes to calculate the adjusted leverage ratio, guarantees to the Company member systems that have an investment grade rating from Moody's Investors Service and Standard & Poor's Corporation are excluded from the calculation of the leverage ratio under the terms of the revolving credit agreement. |
The Company is an eligible lender under the RUS loan guarantee program. Loans issued under this program carry the U.S. Government's guarantee of all interest and principal payments. Thus, the Company has little or no risk associated with the collection of principal and interest payments on these loans. Therefore, the Company believes that there is little or no risk related to the repayment of the liabilities used to fund RUS guaranteed loans and subtracts such liabilities from total liabilities for the purpose of calculating its leverage and debt to equity ratios. For the purpose of computing compliance with its revolving credit agreement covenants, the Company is required to adjust its leverage ratio by subtracting liabilities used to fund RUS guaranteed loans from total liabilities. The leverage and debt to equity ratios adjusted to subtract debt used to fund RUS guaranteed loans from total liabilities reflect management's perspective on its operations and thus, the Company believes that these are useful financial measures for investors. |
The Company requires that its members purchase subordinated certificates as a condition of membership and as a condition to obtaining a loan or guarantee. The subordinated certificates are accounted for as debt under GAAP. The subordinated certificates have long-dated maturities and pay no interest or pay interest that is below market and under certain conditions the Company is prohibited from making interest payments to members on the subordinated certificates. For the purpose of computing compliance with its revolving credit agreement covenants, the Company is required to adjust its leverage ratio by subtracting members' subordinated certificates from total liabilities and adding members' subordinated certificates to total equity. The leverage and debt to equity ratios adjusted to treat members' subordinated certificates as equity rather than debt reflect management's perspective on its operations and thus, the Company believes that these are useful financial measures for investors. |
The Company also sells subordinated deferrable debt in the capital markets with maturities of up to 49 years and the option to defer interest payments. The characteristics of subordination, deferrable interest and long-dated maturity are all equity characteristics. For the purpose of computing compliance with its revolving credit agreement covenants, the Company is required to adjust its leverage ratio by subtracting subordinated deferrable debt from total liabilities and adding it to total |
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equity. The leverage and debt to equity ratios adjusted to treat subordinated deferrable debt as equity rather than debt reflect management's perspective on its operations and thus, the Company believes that these are useful financial measures for investors. |
As a result of implementing SFAS 133, the Company's consolidated balance sheets include the fair value of its derivative instruments. As noted above, the amounts recorded are estimates of the future gains and losses that CFC may incur related to its derivatives. The amounts do not represent current cash flows and are not available to fund current operations. For the purpose of computing compliance with its revolving credit agreement covenants, the Company is required to adjust its leverage ratio by excluding the impact of implementing SFAS 133 from liabilities and equity. The leverage and debt to equity ratios adjusted to exclude the impact of SFAS 133 from liabilities and equity reflect management's perspective on its operations and thus, the Company believes that these are useful financial measures for investors. |
As a result of issuing foreign denominated debt and the implementation of SFAS 133 which discontinued the practice of recording the foreign denominated debt and the related currency exchange agreement as one transaction, the Company must adjust the value of such debt reported on the consolidated balance sheets for changes in foreign currency exchange rates since the date of issuance in accordance with SFAS 52. At the time of issuance of all foreign denominated debt, the Company enters into a foreign currency exchange agreement to fix the exchange rate on all principal and interest payments through maturity. The adjustments to the value of the debt on the consolidated balance sheets are reported on the consolidated and combined statements of operations as foreign currency adjustments. The adjusted debt value at the reporting date does not represent the amount that the Company will ultimately pay to retire the debt, unless the current exchange rate is equal to the exchange rate in the related foreign currency exchange agreement or the counterparty fails to honor its obligations under the agreement. For the purpose of computing compliance with its revolving credit agreement covenants, the Company is required to adjust its leverage ratio by excluding the impact of foreign currency valuation adjustments from liabilities and equity. The leverage and debt to equity ratios adjusted to exclude the impact of SFAS 52 reflect management's perspective on its operations and thus, the Company believes that these are useful financial measures for investors. |
FIN 46(R) requires the Company to consolidate the results of operations and financial condition of RTFC and NCSC even though the Company has no financial interest or voting control over either company. In consolidation, the amount of the subsidiary equity that is owned or due to investors other than the parent company is shown as minority interest. Prior to consolidation, the RTFC members' equity was combined with the Company's equity and therefore included in total equity. For the purpose of computing compliance with its revolving credit agreement covenants, the Company is required to adjust total equity to include minority interest. The leverage and debt to equity ratio adjusted to treat minority interest as equity reflect management's perspective on its operations and thus, the Company believes that these are useful financial measures for investors. |
The following chart provides a reconciliation between the liabilities and equity used to calculate the leverage and debt to equity ratios and these financial measures reflecting the adjustments noted above, as of the five years ended May 31, 2005. |
May 31, | |||||||||||||||||||||
(Dollar amounts in thousands) | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
Liabilities | $ | 19,258,675 | $ | 20,724,339 | $ | 20,097,047 | $ | 20,042,604 | $ | 19,619,743 | |||||||||||
Less: | |||||||||||||||||||||
Derivative liabilities (1) | (78,471 | ) | (129,915 | ) | (353,840 | ) | (254,143 | ) | - | ||||||||||||
Foreign currency valuation account (2) | (260,978 | ) | (233,990 | ) | (325,810 | ) | 2,355 | - | |||||||||||||
Debt used to fund loans guaranteed by RUS | (258,493 | ) | (263,392 | ) | (266,857 | ) | (242,574 | ) | (182,134 | ) | |||||||||||
Subordinated deferrable debt | (685,000 | ) | (550,000 | ) | (650,000 | ) | (600,000 | ) | (550,000 | ) | |||||||||||
Subordinated certificates | (1,490,750 | ) | (1,665,158 | ) | (1,708,297 | ) | (1,691,970 | ) | (1,581,860 | ) | |||||||||||
Adjusted liabilities | $ | 16,484,983 | $ | 17,881,884 | $ | 16,792,243 | $ | 17,256,272 | $ | 17,305,749 | |||||||||||
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Total equity | $ | 768,761 | $ | 695,734 | $ | 930,836 | $ | 328,731 | $ | 393,899 | |||||||||||
Less: | |||||||||||||||||||||
Prior year cumulative derivative forward value and | |||||||||||||||||||||
foreign currency adjustments (1)(2) | (224,716 | ) | (523,223 | ) | (9,231 | ) | - | - | |||||||||||||
Current period derivative forward value (1)(3)(4) | (30,781 | ) | 233,197 | (757,212 | ) | (70,261 | ) | - | |||||||||||||
Current period foreign currency adjustments (2) | 22,893 | 65,310 | 243,220 | 61,030 | - | ||||||||||||||||
Accumulated other comprehensive (income) loss (1) | (12,574 | ) | 12,108 | 46,763 | 72,556 | - | |||||||||||||||
Subtotal members' equity | 523,583 | 483,126 | 454,376 | 392,056 | 393,899 | ||||||||||||||||
Plus: | |||||||||||||||||||||
Subordinated certificates | 1,490,750 | 1,665,158 | 1,708,297 | 1,691,970 | 1,581,860 | ||||||||||||||||
Subordinated deferrable debt | 685,000 | 550,000 | 650,000 | 600,000 | 550,000 | ||||||||||||||||
Minority interest (5) | 18,652 | 21,165 | - | - | - | ||||||||||||||||
Adjusted equity | $ | 2,717,985 | $ | 2,719,449 | $ | 2,812,673 | $ | 2,684,026 | $ | 2,525,759 | |||||||||||
Guarantees | $ | 1,157,752 | $ | 1,331,299 | $ | 1,903,556 | $ | 2,056,385 | $ | 2,217,559 | |||||||||||
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______________________ |
(1) No adjustment for SFAS 133 is necessary for periods prior to CFC's implementation of SFAS 133 in fiscal year 2002. |
(2) No adjustment for foreign currency is required prior to CFC's implementation of SFAS 133 in fiscal year 2002. Prior to that date, CFC was allowed under SFAS 52 to account for the foreign denominated debt and the related cross currency exchange agreement as one transaction in the cost of funds. |
(3) Represents the derivative forward value gain (loss) recorded by CFC for the period. |
(4) At May 31, 2002, amount includes $28,383 related to the cumulative effect of change in accounting principle for the implementation of SFAS 133. |
(5) No adjustments required for minority interest prior to the implementation of FIN 46(R) in fiscal year 2004. |
The leverage and debt to equity ratios using GAAP financial measures are calculated as follows: |
Leverage ratio = | Liabilities + guarantees outstanding | ||
Total equity | |||
Debt to equity ratio = | Liabilities | ||
Total equity |
The adjusted leverage and debt to equity ratios are calculated as follows: |
Adjusted leverage ratio = | Adjusted liabilities + guarantees outstanding | |||
Adjusted equity | ||||
Adjusted debt to equity ratio = | Adjusted liabilities | |||
Adjusted equity |
The following chart provides the leverage and debt to equity ratios, as well as the adjusted ratios, as of the five years ended May 31, 2005. The adjusted leverage ratio and the adjusted debt to equity ratio are the same calculation except for the addition of guarantees to adjusted liabilities in the adjusted leverage ratio. |
| May 31, | ||||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||||
Leverage ratio | 26.56 | 31.70 | 23.64 | 67.23 | 55.44 | ||||||||||||||||
Adjusted leverage ratio | 6.49 | 7.07 | 6.65 | 7.20 | 7.73 | ||||||||||||||||
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Debt to equity ratio | 25.05 | 29.79 | 21.59 | 60.97 | 49.81 | ||||||||||||||||
Adjusted debt to equity ratio | 6.07 | 6.58 | 5.97 | 6.43 | 6.85 |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
See Market Risk discussion on pages |
Item 8. | Financial Statements and Supplementary Data. |
The consolidated and combined financial statements, auditors' |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
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Item 9A. | Controls and Procedures |
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| Director | Date present | ||||||||||
Name | Age | Since | term expires | ||||||||||
Stephen R. Louder (President of CFC) | 51 | 1998 | 2004 | ||||||||||
Robert A. Caudle (Vice President of CFC) | 58 | 1999 | 2005 | ||||||||||
James P. Duncan (Secretary-Treasurer of CFC) | 56 | 2000 | 2003 | ||||||||||
Roger Arthur | 56 | 2003 | 2006 | ||||||||||
Roger A. Ball | 58 | 2003 | 2006 | ||||||||||
Darlene H. Carpenter | 57 | 2001 | 2004 | ||||||||||
Cletus Carter | 62 | 2001 | 2004 | ||||||||||
J. Malloy Chandler | 56 | 2002 | 2005 | ||||||||||
David J. Cowan | 66 | 2003 | 2006 | ||||||||||
Glenn English | 62 | 1994 | 2004 | ||||||||||
Steven J. Haaven | 52 | 2003 | 2006 | ||||||||||
Craig A. Harting | 45 | 2002 | 2005 | ||||||||||
James A. Hudelson | 58 | 1999 | 2005 | ||||||||||
Terryl Jacobs | 44 | 2002 | 2005 | ||||||||||
Tom Kirby | 48 | 2002 | 2005 | ||||||||||
Timothy Reeves | 55 | 1998 | 2004 | ||||||||||
Gale Rettkowski | 57 | 2001 | 2006 | ||||||||||
Ronald P. Salyer | 38 | 2003 | 2006 | ||||||||||
Brian D. Schlagel | 53 | 1998 | 2004 | ||||||||||
Charles Wayne Whitaker | 53 | 2003 | 2006 | ||||||||||
Bobby W. Williams | 66 | 2001 | 2004 | ||||||||||
Eric P. Yould | 58 | 2001 | 2004 |
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Held present | ||||||||||||
Title | Name | Age | office since | |||||||||
President and Director | Stephen R. Louder | 51 | 2003 | |||||||||
Vice President and Director | Robert A. Caudle | 58 | 2003 | |||||||||
Secretary-Treasurer and Director | James P. Duncan | 56 | 2003 | |||||||||
Governor and Chief Executive Officer | Sheldon C. Petersen | 50 | 1995 | |||||||||
Senior Vice President of Member Services and General Counsel | John J. List | 56 | 1997 | |||||||||
Senior Vice President and Chief Financial Officer | Steven L. Lilly | 53 | 1994 | |||||||||
Senior Vice President of Operations | John T. Evans | 53 | 1997 | |||||||||
Senior Vice President of Corporate Relations | Richard E. Larochelle | 50 | 1998 | |||||||||
Senior Vice President of RTFC | Lawrence Zawalick | 45 | 2000 | |||||||||
Senior Vice President of Credit Risk Management | John M. Borak | 59 | 2002 |
PART III | |||||||||||||
Item 10. | Directors and Executive Officers of the Registrant | ||||||||||||
(a) | Directors | ||||||||||||
Director | Date present | ||||||||||||
Name | Age | since | term expires | ||||||||||
James P. Duncan (President of CFC) | 58 | 2000 | 2006 | ||||||||||
Cletus Carter (Vice President of CFC) | 64 | 2001 | 2007 | ||||||||||
Terryl Jacobs (Secretary-Treasurer of CFC) | 46 | 2002 | 2005 | ||||||||||
Roger Arthur | 58 | 2003 | 2006 | ||||||||||
Roger A. Ball | 60 | 2003 | 2006 | ||||||||||
Ronald Bergh | 62 | 2005 | 2007 | ||||||||||
Darlene H. Carpenter | 59 | 2001 | 2007 | ||||||||||
Glenn English | 64 | 1994 | 2005 | ||||||||||
Harold Foley | 71 | 2004 | 2007 | ||||||||||
Steven J. Haaven | 54 | 2003 | 2006 | ||||||||||
Gary Harrison | 44 | 2005 | 2006 | ||||||||||
Craig A. Harting | 47 | 2002 | 2005 | ||||||||||
Jim Herron | 48 | 2005 | 2008 | ||||||||||
Martin Hillert, Jr. | 51 | 2004 | 2007 | ||||||||||
Tom Kirby | 50 | 2002 | 2005 | ||||||||||
Reuben McBride | 58 | 2005 | 2008 | ||||||||||
Gale Rettkowski | 59 | 2001 | 2006 | ||||||||||
Ronald P. Salyer | 40 | 2003 | 2006 | ||||||||||
Darryl Schriver | 40 | 2004 | 2007 | ||||||||||
Charles Wayne Whitaker | 55 | 2003 | 2006 | ||||||||||
Bobby W. Williams | 68 | 2001 | 2007 | ||||||||||
Eric P. Yould | 60 | 2001 | 2007 | ||||||||||
(b) | Executive Officers | |||||||||
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Title | Name | Age | office since | |||||||
President and Director | James P. Duncan | 58 | 2005 | |||||||
Vice President and Director | Cletus Carter | 64 | 2005 | |||||||
Secretary-Treasurer and Director | Terryl Jacobs | 46 | 2005 | |||||||
Governor and Chief Executive Officer | Sheldon C. Petersen | 52 | 1995 | |||||||
Senior Vice President of Member Services and General Counsel | John J. List | 58 | 1997 | |||||||
Senior Vice President and Chief Financial Officer | Steven L. Lilly | 55 | 1994 | |||||||
Senior Vice President of Operations | John T. Evans | 55 | 1997 | |||||||
Senior Vice President of Corporate Relations | Richard E. Larochelle | 52 | 1998 | |||||||
Senior Vice President of RTFC | Lawrence Zawalick | 47 | 2000 | |||||||
Senior Vice President of Credit Risk Management | John M. Borak | 60 | 2002 |
The President, Vice-President and Secretary-Treasurer are elected annually by the board of directors at its first organizational meeting immediately following CFC's annual membership meeting, each to serve a term of one year; the Governor and Chief Executive Officer serves at the pleasure of the board of directors; and the other Executive Officers serve at the pleasure of the Governor and Chief Executive Officer. |
(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. | |
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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. |
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Mr. Carter has served as a director of Tri-County Electric Cooperative in Hooker, OK since 1977. In addition, he has also been director of Oklahoma Association of Electric Cooperatives since 1992 and currently serves on the Government Relations Committee. He is a member of the RTFC Lender Advisory Council and is past president of Tri-County and Oklahoma Association of Electric Cooperatives. Mr. Carter has been owner of High Plains Seed Company since 1983 and co-owner of Triple C Cattle Company in Forgan, OK since 1998. |
Ms. Jacobs has served as board secretary of Slope Electric Cooperative, Inc. in New England, ND since June 1999, and has been director of the cooperative since 1996. She is a member of the Resolutions Committee for Midwest Electric Consumers Association where she previously served as vice-chairman. Ms. Jacobs has been an insurance agent since 1986 and has worked for Commercial Insurance Agency, Inc. since 2000. |
Mr. Arthur has been a board member of Allamakee-Clayton Electric Cooperative in Postville, IA since 1992 and has served as president since 1993. Mr. Arthur |
Mr. Ball has been a board member of Powell Valley Electric Cooperative in New Tazewell, TN since 1988 and has served as president since 1995. Mr. Ball is a former board member of the Claiborne County Industrial Development Board, Claiborne County Planning Commission, Lions Club and former president of Claiborne County Chamber of Commerce. He |
Mr. Bergh has been director of Golden Valley Electric Association, Inc. in Fairbanks, AK since 1981 and served as president from 1984 to 1992. Mr. Bergh has represented Alaska's cooperative electric utilities on the NRECA Board of Directors since 1990. Prior to becoming NRECA president in May 2005, he served as vice-president from March to May 2005 and secretary-treasurer from 2003 to 2005. Mr. Bergh was the owner/manager of Bergh Inc., a full service elevator contractor, in Fairbanks, AK from 1975 to 2000, and the owner of Alaska Lifts, an elevator repair company in Fairbanks, AK from 2000 to 2003. He has been a director of Denali State Bank, Fairbanks, AK since 1985, and a director of AlasConnect, in Fairbanks, AK since 1999. |
Ms. Carpenter |
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Mr. English has been |
Mr. Foley has served as a director of Brown-Atchison Electric Cooperative Association, Inc. in Horton, KS since 1984. He has been board president of Brown-Atchison Electric Cooperative Association since 1991 and held the position of board vice president in 1990. He was a real estate broker with Jepson & Associates in Valley Falls, KS from 1991 until his retirement in June 2003. |
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Mr. Haaven has been |
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Mr. Harrison has served as General Manager of Dixie Electric Cooperative in Union Springs, AL since 1997. Mr. Harrison has been vice chairman of the Alabama Rural Electric Association since April 2005. He has served as board member of Alabama Electric Cooperatives since April 1997 and chairman of the Marketing and Industrial Development Committee since May 2002. Since January 2001, Mr. Harrison has served as CEO and president of Cooperative Utility Services, LLC. |
Mr. Harting has been |
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Mr. Hillert has been CEO and General Manager of Adams Columbia Electric Cooperative in Friendship, WI since 1996. In addition, he serves as chairman of Badger Energy Service in Oconto Falls, WI, board vice president of Network 2010 in Oxford, WI and as a board member of Badger Unified Cooperative Services in Fall Creek, WI since 2001. Mr. Hillert also serves as treasurer of Wisconsin Cooperative Managers Association and is a |
Mr. Kirby has been a board member of Central Indiana Power in |
Mr. |
Mr. Rettkowski has served |
Mr. Salyer has served as the |
Mr. |
59 |
Board, and |
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Mr. Whitaker has served as the president and |
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Mr. Williams has |
Mr. Yould has served as the executive director and CEO of the Alaska Rural Electric Cooperative Association in Anchorage, AK since 1997. In addition, he has been the general manager of Alaska 220 Communications, L.L.C. in Anchorage, AK since 1999 and executive vice president of the ARECA Insurance Exchange since 1997. |
Mr. Petersen joined CFC in August 1983 as an area representative. He became the director of Policy Development and Internal Audit in January 1990, director of Credit Analysis in November 1990 and Corporate Secretary on June 1, 1992. He became Assistant to the Governor on May 1, 1993. He became Assistant to the Governor and Acting Administrative Officer on June 1, 1994. He became Governor and CEO on March 1, 1995. Mr. Petersen began his career in the rural electrification program in 1976 as staff assistant for Nishnabotna Rural Electric Cooperative in Harlan, IA. He later served as General Manager of Rock County Electric Cooperative Association in Janesville, WI. |
Mr. List joined CFC as a staff attorney in February 1972. He served as Corporate Counsel from June 1980 to 1991. He became Senior Vice President and General Counsel on June 1, 1992, and became Senior Vice President, Member Services and General Counsel on February 1, 1997. |
Mr. Lilly joined CFC as a Senior Financial Consultant in October 1983. He became director of Special Finance in June 1985 and director of Corporate Finance in June 1986. He became Treasurer and Principal Finance Officer on June 1, |
Mr. Evans joined CFC as Senior Vice President of Operations in November 1997. He was Senior Vice President and Chief Operating Officer of Suburban Hospital Healthcare System, Bethesda, MD from 1994 to 1997. He was Senior Vice President and Chief Operating Officer for Geisinger Medical Center, Danville, PA from 1991 to 1994. |
Mr. Larochelle joined CFC as director of Corporate Relations in May 1996. He became Senior Vice President of Corporate Relations in August 1998. Prior to joining CFC, he was the Legislative director at NRECA where he worked for 12 years. He also worked at the |
Mr. Zawalick joined CFC in 1980. Throughout his career with CFC, Mr. Zawalick has held various positions. In April 1995, he was appointed Vice President of Business Development for CFC and Administrative Coordinator of RTFC. In February 2000, Mr. Zawalick was named CFC's Senior Vice President of RTFC. |
Mr. Borak joined CFC in June 2002 as Senior Vice President, Credit Risk Management. Previously, he was with Fleet National Bank, Boston, MA from 1992-2001 where he was a Senior Credit Officer with risk management and loan approval responsibility for several industry banking portfolios including investor owned utilities. Prior assignments at Fleet in Hartford, CT included Manager of Credit Review and Manager of Loan Workout in the Connecticut bank. |
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(f) | Involvement in Certain Legal Proceedings. |
None to the knowledge of | |
(g) | Promoters and Control Persons. |
Inapplicable. | |
60 | |
(h) | Code of Ethics |
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The Company has adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-K. This Code of Ethics applies to our principal executive officer, our principal financial officer and principal accounting officer. This Code of Ethics is publicly available on our website at www.nrucfc.coop/aboutcfc/howweoperate. | |
(i) | Audit Committee Financial Expert |
At May 31, 2005, the Company did not have a director that qualified as an audit committee financial expert as defined by Section 407 of the Sarbanes-Oxley Act of 2002 ("SOX"). In February 2004, CFC's membership approved changes to the bylaws that would allow the addition of a 23rd director to the board. Candidates for the new director position must qualify as an audit committee financial expert as defined by Section 407 of SOX, come from within CFC's membership and be elected through the district meeting process. CFC's board does not believe it is critical to seek candidates to fill the new position at this time because of CFC's unique governance structure. Twenty of the current twenty-two directors are elected by the membership and have considerable experience with electric cooperatives because they must be a director, trustee or manager of a member system. In that capacity, they are familiar with the operational and financial issues that electric cooperatives face. The other two directors also have industry expertise because they are elected by the national trade association for the members. | |
Item 11. | Executive Compensation. |
The summary compensation table below sets forth the aggregate remuneration for services in all capacities to |
Summary Compensation Table | ||||||||||||||
Long Term | ||||||||||||||
Annual Compensation | Compensation | |||||||||||||
Year | Salary | Bonus | All Other (1) | LTIP Payouts | ||||||||||
Sheldon C. Petersen | 2005 | $ | 545,000 | $ | 83,105 | $ | 42,656 | $ | 47,000 | |||||
Governor and Chief Executive Officer | 2004 | 508,750 | 113,688 | 27,674 | - | |||||||||
2003 | 477,500 | 105,470 | 19,038 | - | ||||||||||
Steven L. Lilly | 2005 | 322,000 | 46,539 | 25,225 | 30,000 | |||||||||
Senior Vice President and Chief | 2004 | 312,000 | 66,300 | 20,065 | - | |||||||||
Financial Officer | 2003 | 300,000 | 63,282 | 13,042 | - | |||||||||
John J. List | 2005 | 279,000 | 40,324 | 22,878 | 26,000 | |||||||||
Senior Vice President of Member | 2004 | 270,400 | 57,460 | 12,690 | - | |||||||||
Services and General Counsel | 2003 | 260,000 | 54,844 | 19,771 | - | |||||||||
John T. Evans | 2005 | 279,000 | 40,324 | 18,553 | 26,000 | |||||||||
Senior Vice President of Operations | 2004 | 270,400 | 57,460 | 14,370 | - | |||||||||
2003 | 260,000 | 54,844 | 17,790 | - | ||||||||||
Lawrence Zawalick | 2005 | 233,000 | 33,676 | 19,775 | 21,720 | |||||||||
Senior Vice President of RTFC | 2004 | 225,680 | 47,957 | 14,883 | - | |||||||||
__________________ | 2003 | 217,000 | 45,774 | 16,308 | - | |||||||||
(1) Amounts for fiscal years 2005, 2004, and 2003 include $36,356, $20,999 and $13,038 related to leave accruals and $6,300, $6,675, and $6,000 related to the Company contributions to a savings plan for Mr. Petersen; $18,950, $13,915, and $7,500 related to leave accruals and $6,275, $6,150, and $5,542 related to the Company contributions to a savings plan for Mr. Lilly; $16,620, $6,560, and $14,429 related to leave accruals and $6,258, $6,130, and $5,342 related to the Company contributions to a savings plan for Mr. List; $12,295, $8,240, and $11,723 related to leave accruals and $6,258, $6,130, and $6,067 related to the Company contributions to a savings plan for Mr. Evans; $13,533, $8,774, and $11,147 related to leave accruals and $6,242, $6,109, and $5,161 related to the Company contributions to a savings plan for Mr. Zawalick. | ||||||||||||||
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Annual Compensation | All Other | |||||||||||
Year | Salary | Bonus | Compensation (1) | |||||||||
Sheldon C. Petersen | 2003 | $ | 477,500 | $ | 105,470 | $ | 19,038 | |||||
Governor and Chief Executive Officer | 2002 | 440,000 | 82,617 | 28,186 | ||||||||
2001 | 400,000 | 97,422 | 28,148 | |||||||||
Steven L. Lilly | 2003 | 300,000 | 63,282 | 13,042 | ||||||||
Senior Vice President and Chief | 2002 | 265,000 | 46,582 | 16,283 | ||||||||
Financial Officer | 2001 | 247,800 | 56,142 | 19,442 | ||||||||
John J. List | 2003 | 260,000 | 54,844 | 19,771 | ||||||||
Senior Vice President of Member | 2002 | 229,000 | 40,254 | 7,447 | ||||||||
Services and General Counsel | 2001 | 219,000 | 49,617 | 15,366 | ||||||||
John T. Evans | 2003 | 260,000 | 54,844 | 17,790 | ||||||||
Senior Vice President of Operations | 2002 | 236,000 | 41,484 | 9,761 | ||||||||
2001 | 224,400 | 50,841 | 11,536 | |||||||||
Lawrence Zawalick | 2003 | 217,000 | 45,774 | 16,308 | ||||||||
Senior Vice President of RTFC | 2002 | 197,000 | 34,629 | 14,511 | ||||||||
| 2001 | 188,500 | 42,707 | 17,545 |
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CFC's board of directors approved a long-term incentive plan for fiscal year |
The table below contains the long-term incentive units awarded to the CEO and the four next most highly compensated executive officers during the year ended May 31, 2005. |
Period Until | ||||||||||||||||
Number of | Maturation or | Estimated Future Payouts | ||||||||||||||
Name | Units | Payout | Threshold | Target (1) | Maximum | |||||||||||
Sheldon C. Petersen | 1,338 | May 31, 2007 | $ - | $80,280 | $200,700 | |||||||||||
Steven L. Lilly | 805 | May 31, 2007 | - | 48,300 | 120,750 | |||||||||||
John J. List | 698 | May 31, 2007 | - | 41,880 | 104,700 | |||||||||||
John T. Evans | 698 | May 31, 2007 | - | 41,880 | 104,700 | |||||||||||
Lawrence Zawalick | 583 | May 31, 2007 | - | 34,980 | 87,450 | |||||||||||
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(1) Represents CFC's current estimate of the payout at May 31, 2007. |
At the time of this filing, CFC's average long-term secured credit rating was A+/stable, which would generate a payout of $40 per unit under the long-term incentive plan. |
The board of directors has approved a new long-term incentive plan, with terms similar to the one in effect at May 31, |
Period Until | Estimated Future Payouts | |||||||||||||||
Number of | Maturation | |||||||||||||||
Name | Units | or Payout | Threshold | Target (1) | Maximum | |||||||||||
Sheldon C. Petersen | 1,175 | May 31, 2005 | $ - | $70,500 | $176,250 | |||||||||||
Steven L. Lilly | 750 | May 31, 2005 | - | 45,000 | 112,500 | |||||||||||
John J. List | 650 | May 31, 2005 | - | 39,000 | 97,500 | |||||||||||
John T. Evans | 650 | May 31, 2005 | - | 39,000 | 97,500 | |||||||||||
Lawrence Zawalick | 543 | May 31, 2005 | - | 32,550 | 81,375 |
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Outlook | negative | stable | positive | negative | stable | positive | NA |
Composite rating | A+ | A+ | A+ | AA- | AA- | AA- | AA & above |
Payout | $0 | $40 | $60 | $80 | $100 | $120 | $150 |
Defined Benefit or Actuarial Plan Disclosure |
NRECA maintains the Retirement |
62 |
The following chart represents the potential benefits paid out under the Retirement |
Pension Plan Table | Pension Plan Table | |||||||||||||||||||||||||||||||||||||||||||||||
Years of Service | Years of Service | |||||||||||||||||||||||||||||||||||||||||||||||
5 | 10 | 15 | 20 | 25 | 30 | 35 | 5 | 10 | 15 | 20 | 25 | 30 | 35 | |||||||||||||||||||||||||||||||||||
Average base salary | Average base salary | Average base salary | ||||||||||||||||||||||||||||||||||||||||||||||
$175,000 | $16,625 | $33,250 | $ 49,875 | $ 66,500 | $ 83,125 | $ 99,750 | $116,375 | |||||||||||||||||||||||||||||||||||||||||
200,000 | 19,000 | 38,000 | 57,000 | 76,000 | 95,000 | 114,000 | 133,000 | 19,000 | 38,000 | 57,000 | 76,000 | 95,000 | 114,000 | 133,000 | ||||||||||||||||||||||||||||||||||
225,000 | 21,375 | 42,750 | 64,125 | 85,500 | 106,875 | 128,250 | 149,625 | 21,375 | 42,750 | 64,125 | 85,500 | 106,875 | 128,250 | 149,625 | ||||||||||||||||||||||||||||||||||
250,000 | 23,750 | 47,500 | 71,250 | 95,000 | 118,750 | 142,500 | 166,250 | 23,750 | 47,500 | 71,250 | 95,000 | 118,750 | 142,500 | 166,250 | ||||||||||||||||||||||||||||||||||
275,000 | 26,125 | 52,250 | 78,375 | 104,500 | 130,625 | 156,750 | 182,875 | 26,125 | 52,250 | 78,375 | 104,500 | 130,625 | 156,750 | 182,875 | ||||||||||||||||||||||||||||||||||
300,000 | 28,500 | 57,000 | 85,500 | 114,000 | 142,500 | 171,000 | 199,250 | 28,500 | 57,000 | 85,500 | 114,000 | 142,500 | 171,000 | 199,500 | ||||||||||||||||||||||||||||||||||
325,000 | 30,875 | 61,750 | 92,625 | 123,500 | 154,375 | 185,250 | 216,125 | 30,875 | 61,750 | 92,625 | 123,500 | 154,375 | 185,250 | 216,125 | ||||||||||||||||||||||||||||||||||
350,000 | 33,250 | 66,500 | 99,750 | 133,000 | 166,250 | 199,500 | 232,750 | 33,250 | 66,500 | 99,750 | 133,000 | 166,250 | 199,500 | 232,750 | ||||||||||||||||||||||||||||||||||
375,000 | 35,625 | 71,250 | 106,875 | 142,500 | 178,125 | 213,750 | 249,375 | 35,625 | 71,250 | 106,875 | 142,500 | 178,125 | 213,750 | 249,375 | ||||||||||||||||||||||||||||||||||
400,000 | 38,000 | 76,000 | 114,000 | 152,000 | 190,000 | 228,000 | 266,000 | 38,000 | 76,000 | 114,000 | 152,000 | 190,000 | 228,000 | 266,000 | ||||||||||||||||||||||||||||||||||
425,000 | 40,375 | 80,750 | 121,125 | 161,500 | 201,875 | 242,250 | 282,625 | |||||||||||||||||||||||||||||||||||||||||
450,000 | 42,750 | 85,500 | 128,250 | 171,000 | 213,750 | 256,500 | 299,250 | |||||||||||||||||||||||||||||||||||||||||
475,000 | 45,125 | 90,250 | 135,375 | 180,500 | 225,625 | 270,750 | 315,875 |
The Economic Growth and Tax Relief Reconciliation Act of 2001 sets a limit on the compensation to be used in the calculation of pension benefits. In order to restore potential lost benefits, CFC has adopted a Pension Restoration Plan that is administered by NRECA. 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 |
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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 two components of the Pension Restoration Plan, a Severance Pay Plan and a Deferred |
As of December 31, |
Compensation of Directors |
Directors |
Employment Contracts and Termination of Employment and Change-In-Control Arrangements |
Pursuant to an employment agreement effective as of March 1, |
Pursuant to a separate employment agreement effective as of |
63 |
event less than six months nor more than a year), interest will be credited on a proportional basis for the calendar year during which the continuation ends and the balance in the account will be paid to Mr. Petersen or his beneficiaries in a lump sum. The compensation described in this contract has not been included in the Summary Compensation Table for executive officers on page 61. |
Compensation Committee Interlocks and Insider Participation |
During the year ended May 31, |
Item 12. | Security Ownership of Certain Beneficial Owners and Management. |
Inapplicable. |
Item 13. | Certain Relationships and Related Transactions. |
Loans and guarantees were made to member systems of which officers or directors of CFC are members, employees or directors in the ordinary course of CFC's business on the same terms, including interest rates and collateral, as those prevailing at the time for comparable |
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Item 14. | Principal Accountant Fees and Services. |
The following table summarizes the aggregate professional fees for the audit of the financial statements for the years ended May 31, 2005 and 2004 and fees for other services during that period by Deloitte & Touche, LLP and Ernst & Young, LLP, respectively. | |
(Dollar amounts in thousands) | 2005 | 2004 | |||||||
Audit fees (1) | $ | 546,228 | $ | 720,125 | |||||
Audit-related fees (2) | 15,481 | 142,815 | |||||||
Tax fees (3) | 12,704 | 15,000 | |||||||
Non-audit, non-tax fees (4) | 6,750 | - | |||||||
Total | $ | 581,163 | $ | 877,940 | |||||
__ | ________________ | ||||||||
(1) | Audit fees in 2005 and 2004 consist of fees for the audit of the consolidated financial statements of CFC, including RTFC and NCSC in accordance with FIN 46(R), totaling $395,290 and $478,500, respectively, as well as the preparation of the stand-alone financial statements for RTFC and NCSC totaling $90,938 and $137,500, respectively. Additionally, audit fees in 2005 and 2004 include comfort letter fees. Audit fees in 2004 also include fees for consent letters and consultation related to documents filed with the Securities and Exchange Commission. | ||||||||
(2) | Audit-related fees in 2005 and 2004 consist of consultation on financial reporting and the implementation of new accounting standards. Audit-related fees in 2004 also include audit-related presentations at rating agency meetings. | ||||||||
(3) | Tax fees consist of assistance with matters related to tax compliance and consulting. | ||||||||
(4) | Non-audit fees relate to the audit of a trust serviced by CFC. | ||||||||
CFC's Audit Committee (the "Committee") is solely responsible for the nomination, approval, compensation, evaluation and discharge of the independent public accountants. The independent public accountants report directly to the Committee and the Committee is responsible for the resolution of disagreements between management and the independent public accountants. Consistent with Securities and Exchange Commission requirements, the Committee has adopted a policy to pre-approve all audit and permissible non-audit services provided by the independent public accountants. Under the policy, the Committee's pre-approval for permissible non-audit services is not required if all such services 1) do not aggregate to more than five percent of total revenue paid to the independent public accountants in the fiscal year when services are provided, 2) were not recognized as non-audit services at the time of the engagement and 3) are promptly brought to the attention of the Committee and approved by the Committee prior to the completion of the audit. CFC's independent public accountants for the current fiscal year have been appointed by the Committee. | |||||||||
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PART IV | |||
Item 15. Exhibits and Financial Statement |
(a) | Documents filed as a part of this report. |
1. |
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| Page | |||
Reports of Independent | 69 | |||||
| 72 | |||||
Consolidated and Combined Statements of Operations | 74 | |||||
Consolidated and Combined Statements of Changes in Equity | 75 | |||||
Consolidated and Combined Statements of Cash Flows | 76 | |||||
Notes to Consolidated and Combined Financial Statements | 78 |
2. | Financial statement schedules |
All schedules are omitted because they are not required, are inapplicable or the information is included in the financial statements or notes thereto. |
3. | Exhibits | |||
3.1 | - | Articles of Incorporation. Incorporated by reference to Exhibit 3.1 to Registration Statement No. 2-46018, filed October 12, 1972. | |
3.2 | - |
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4.1 | - | Form of Capital Term Certificate. Incorporated by reference to Exhibit 4.3 to Registration Statement No. 2-46018 filed October 12, 1972. | |
4.2 | - | Indenture dated as of February 15, 1994, between the Registrant and U.S. Bank National Association, successor trustee. Incorporated by reference to Exhibit 4.3 from the report on Form 8-K filed by CFC on June 14, 1994. | |
4.3 | - | Revolving Credit Agreement dated as of | |
4.4 |
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| - | Revolving Credit Agreement dated as of | |
| - |
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| Revolving Credit Agreement dated as of | |
| - | Amendment | |
| - | Amendment No. 1 to the 364-day Revolving Credit Agreement dated as of July 20, 2005 amending the agreement dated as of March 23, 2005. | |
4.8 | - | Amendment No. 1 to the five-year Revolving Credit Agreement dated as of July 20, 2005 amending the agreement dated as of March 23, 2005. | |
4.9 | - | Indenture between CFC and Mellon Bank, N.A., as Trustee. Incorporated by reference to Exhibit 4.6 to Registration Statement on Form S-3 filed on October 15, 1996 (Registration No. 33-64231). | |
4.10 | - | Indenture between CFC and Chemical Bank, as Trustee. Incorporated by reference to Exhibit 4.7 to Amendment No. 1 to Registration Statement on Form S-3 filed on December 15, 1987 (Registration No. 33-34927). | |
4.11 | - | First Supplemental Indenture between CFC and Chemical Bank, as Trustee. Incorporated by reference to Exhibit 4.8 to Registration Statement on Form S-3 filed on October 1, 1990 (Registration No. 33-58445). | |
4.12 | - | Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Services dated as of June 14, 2005 for up to $1,000,000,000. | |
4.13 | - | Series A Bond Guarantee Agreement between the Registrant and the Rural Utilities Service dated as of June 14, 2005 for up to $1,000,000,000. | |
4.14 | - | Pledge Agreement dated as of June 14, 2005, between the Registrant, the Rural Utilities Service and U.S. Bank Trust National Association. | |
4.15 | - | Series A Future Advance Bond from the Registrant to the Federal Financing Bank dated as of June 14, 2005 for up to $1,000,000,000 maturing on July 15, 2028. | |
4.16 | - | Note Purchase Agreement dated as of July 28, 2005 for $500,000,000 between the Registrant and Federal Agricultural Mortgage Corporation. | |
4.17 | - | Pledge Agreement dated as of July 28, 2005, between the Registrant, Federal Agricultural Mortgage Corporation and U.S. Bank Trust National Association. | |
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4.18 | - | Registration Rights Agreement dated as of July 28, 2005 between the Registrant and Federal Agricultural Mortgage Corporation. | |
4.19 | - | 4.656% Senior Notes due 2008 dated as of July 29, 2005 from the Registrant to Federal Agricultural Mortgage Corporation. | |
- | 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 | |
10.2 | - | Employment Contract between CFC and Sheldon C. Petersen, dated as of March 1, | |
10.3 | - | Supplemental Benefit Agreement between RTFC and Sheldon C. Petersen, dated as of | |
12 | - | Computations of ratio of |
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14.1 | - | Ethics Policy for CEO and Senior Financial Officers. Incorporated by reference to Exhibit 14.1 to CFC's Form 10-Q filed on October 14, 2004. | |
23.1 | - | Consent of | |
23.2 | - |
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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. | ||||
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SIGNATURES |
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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 |
NATIONAL RURAL UTILITIES COOPERATIVE | |||
FINANCE CORPORATION | |||
By: | /s/ SHELDON C. PETERSEN | ||
Sheldon C. Petersen | |||
Governor and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. | |||
Signature | Title | Date | |||
/s/ SHELDON C. PETERSEN | Governor and Chief Executive Officer | ||||
Sheldon C. Petersen | |||||
/s/ STEVEN L. LILLY | Senior Vice President and Chief Financial | ||||
Steven L. Lilly | Officer | ||||
/s/ STEVEN L. SLEPIAN | Vice President and Controller (Principal | ||||
Steven L. Slepian | Accounting Officer) | ||||
/s/ | President and Director | ||||
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/s/ | Vice President and Director | ||||
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/s/ | Secretary-Treasurer and Director | ||||
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August 24, 2005 | |||||
/s/ ROGER ARTHUR | Director | ||||
Roger Arthur |
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/s/ ROGER A. BALL | Director | ||||
Roger A. Ball | |||||
/s/ RONALD BERGH | Director | ||||
Ronald Bergh | |||||
/s/ DARLENE H. CARPENTER | Director | ||||
Darlene H. Carpenter | |||||
| Director | ||||
Glenn English | |||||
/s/ | Director | ||||
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/s/ STEVE HAAVEN | Director | ||||
Steve Haaven | |||||
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Signature | Title | Date | |||
/s/ | Director | ||||
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Gary Harrison | |||||
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/s/ CRAIG A. HARTING | Director | ||||
Craig A. Harting | |||||
/s/ JIM HERRON | Director | ||||
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/s/ | Director | ||||
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/s/ TOM KIRBY | Director | ||||
Tom Kirby | |||||
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/s/ REUBEN MCBRIDE | Director | August | |||
Reuben McBride | |||||
/s/ GALE RETTKOWSKI | Director | ||||
Gale Rettkowski | |||||
/s/ RONALD P. SALYER | Director | ||||
Ronald P. Salyer | |||||
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/s/ DARRYL SCHRIVER | Director | ||||
Darryl Schriver | |||||
/s/ | Director | ||||
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/s/ BOBBY | Director | ||||
Bobby | |||||
/s/ ERIC | Director | ||||
Eric |
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REPORT OF INDEPENDENT |
To the Board of Directors of |
National Rural Utilities Cooperative Finance Corporation |
We have audited the accompanying consolidated balance sheet of National Rural Utilities Cooperative Finance Corporation and subsidiaries (the "Company") as of May 31, 2005, and the related consolidated statements of operations, changes in equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of National Rural Utilities Cooperative Finance Corporation and subsidiaries at May 31, 2005, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. |
/s/ Deloitte & Touche
McLean, Virginia
August 18, 2005
69
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
TO THE BOARD OF DIRECTORS AND MEMBERS OF NATIONAL RURAL |
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We have audited the accompanying consolidated balance sheet of National Rural Utilities Cooperative Finance Corporation ("the Consolidated Company") as of May 31, 2004, and the related consolidated statements of operations, changes in equity, and cash flows for the year then ended and the combined |
We conducted our audits in accordance with |
In our opinion, the financial statements referred to above present fairly, in all material respects, the |
As |
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/s/ Ernst & Young LLP
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McLean, Virginia |
July 28, 2004 |
70 |
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71 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
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May 31, |
(Dollar |
A S S E T S |
2003 | 2002 | ||||||
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Cash and cash equivalents | $ | 138,872 | $ | 218,384 | |||
Loans to members | 19,484,341 | 20,047,109 | |||||
Less: allowance for loan losses | (565,058) | (506,742) | |||||
Loans to members, net | 18,919,283 | 19,540,367 | |||||
Receivables | 213,419 | 187,157 | |||||
Fixed assets, net | 44,754 | 46,089 | |||||
Debt service reserve funds | 85,793 | 86,198 | |||||
Foreclosed assets | 335,576 | - | |||||
Derivative assets | 1,160,244 | 192,598 | |||||
Other assets | 76,347 | 72,142 | |||||
$ | 20,974,288 | $ | 20,342,935 |
2005 | 2004 | |||||||
Cash and cash equivalents | $ | 418,514 | $ | 140,307 | ||||
Loans to members | 18,972,068 | 20,488,523 | ||||||
Less: Allowance for loan losses | (589,749 | ) | (573,939 | ) | ||||
Loans to members, net | 18,382,319 | 19,914,584 |
Receivables
299,350
348,206
Fixed assets, net
42,496
42,688
Debt service reserve funds
93,182
84,236
Bond issuance costs, net
56,492
61,324
Foreclosed assets
140,950
247,660
Derivative assets
584,863
577,493
Other assets
27,922
24,740
$
20,046,088
$
21,441,238
See accompanying notes. |
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
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May 31, |
(Dollar |
L I A B I L I T I E S A N D E Q U I T Y |
2003 | 2002 | |||||||
Notes payable, due within one year | $ | 1,096,353 | $ | 2,413,969 | ||||
Accrued interest payable | 184,204 | 177,178 | ||||||
Long-term debt | 16,000,744 | 14,855,550 | ||||||
Other liabilities | 49,073 | 23,734 | ||||||
Derivative liabilities | 354,781 | 251,803 | ||||||
Subordinated deferrable debt | 650,000 | 600,000 | ||||||
Members' subordinated certificates: | ||||||||
Membership subordinated certificates | 643,772 | 641,390 | ||||||
Loan and guarantee subordinated certificates | 1,064,525 | 1,050,580 | ||||||
Total members' subordinated certificates | 1,708,297 | 1,691,970 | ||||||
Equity: | ||||||||
Retained equity | 977,599 | 401,287 | ||||||
Accumulated other comprehensive loss | (46,763 | ) | (72,556 | ) | ||||
Total equity | 930,836 | 328,731 | ||||||
Total members' subordinated certificates and equity | 2,639,133 | 2,020,701 | ||||||
$ | 20,974,288 | $ | 20,342,935 |
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2005 | 2004 | |||||||
Short-term debt | $ | 2,952,579 | $ | 1,340,039 | ||||
Accrued interest payable | 256,011 | 273,965 | ||||||
Long-term debt | 13,701,955 | 16,659,182 | ||||||
Deferred income | 51,219 | 63,865 | ||||||
Guarantee liability | 16,094 | 19,184 | ||||||
Other liabilities | 26,596 | 23,031 | ||||||
Derivative liabilities | 78,471 | 129,915 | ||||||
Subordinated deferrable debt | 685,000 | 550,000 | ||||||
Members' subordinated certificates: | ||||||||
Membership subordinated certificates | 663,067 | 649,909 | ||||||
Loan and guarantee subordinated certificates | 827,683 | 1,015,249 | ||||||
Total members' subordinated certificates | 1,490,750 | 1,665,158 | ||||||
Minority interest - RTFC and NCSC members' equity | 18,652 | 21,165 | ||||||
Equity: | ||||||||
Retained equity | 756,187 | �� | 707,842 | |||||
Accumulated other comprehensive income (loss) | 12,574 | (12,108 | ) | |||||
Total equity | 768,761 | 695,734 | ||||||
$ | 20,046,088 | $ | 21,441,238 | |||||
See accompanying notes. | ||||||||
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73 | ||||||||
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS |
(Dollar amounts in thousands) |
For the Years Ended May 31, |
2005 | 2004 | 2003 | |||||||||
Operating income | $ | 1,026,126 | $ | 1,007,293 | $ | 1,070,875 | |||||
Cost of funds | (922,063 | ) | (925,652 | ) | (939,332 | ) | |||||
Gross margin | 104,063 | 81,641 | 131,543 | ||||||||
Expenses: | |||||||||||
General and administrative | (43,231 | ) | (40,392 | ) | (38,169 | ) | |||||
Provision for loan losses | (16,402 | ) | (54,921 | ) | (43,071 | ) | |||||
Recovery of (provision for) guarantee losses | 3,107 | 851 | (25,195 | ) | |||||||
Total expenses | (56,526 | ) | (94,462 | ) | (106,435 | ) | |||||
Results of operations of foreclosed assets | 13,079 | 13,469 | 9,734 | ||||||||
Impairment loss on foreclosed assets | (55 | ) | (10,877 | ) | (19,689 | ) | |||||
Total gain (loss) on foreclosed assets | 13,024 | 2,592 | (9,955 | ) | |||||||
Derivative and foreign currency adjustments: | |||||||||||
Derivative cash settlements | 63,044 | 110,087 | 122,825 | ||||||||
Derivative forward value | 29,875 | (229,132 | ) | 757,212 | |||||||
Foreign currency adjustments | (22,893 | ) | (65,310 | ) | (243,220 | ) | |||||
Total gain (loss) on derivative and foreign currency adjustments | 70,026 | (184,355 | ) | 636,817 | |||||||
Operating margin (loss) | 130,587 | (194,584 | ) | 651,970 | |||||||
Income tax expense | (1,518 | ) | (3,817 | ) | - | ||||||
Margin (loss) prior to minority interest and cumulative | |||||||||||
effect of change in accounting principle | 129,069 | (198,401 | ) | 651,970 | |||||||
Minority interest - RTFC and NCSC net margin | (2,540 | ) | (1,989 | ) | - | ||||||
Margin (loss) prior to cumulative effect of change in | |||||||||||
accounting principle | 126,529 | (200,390 | ) | 651,970 | |||||||
Cumulative effect of change in accounting principle | - | 22,369 | - | ||||||||
Net margin (loss) | $ | 126,529 | $ | (178,021 | ) | $ | 651,970 | ||||
See accompanying notes. |
74 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN EQUITY |
(Dollar Amounts in Thousands) |
For the Years Ended May 31, 2005, 2004 and 2003 |
Patronage Capital | |||||||||||||||||||||||||||
Allocated | |||||||||||||||||||||||||||
Accumulated | |||||||||||||||||||||||||||
Other | Subtotal | Member's | General | ||||||||||||||||||||||||
Comprehensive | Retained | Membership | Unallocated | Education | Capital | Reserve | |||||||||||||||||||||
Total | Income (Loss) | Equity | Fee | Margin | Fund | Reserve | Fund | Other | |||||||||||||||||||
Balance as of May 31, 2002 | $ | 328,731 | $ | (72,556 | ) | $ | 401,287 | $ | 1,510 | $ | 30,356 | $ | 1,007 | $ | 16,329 | $ | 498 | $ | 351,587 | ||||||||
Patronage capital retirement | (74,622 | ) | - | (74,622 | ) | - | - | - | - | - | (74,622 | ) | |||||||||||||||
Operating margin | 651,970 | - | 651,970 | - | 513,992 | 997 | 52,318 | - | 84,663 | ||||||||||||||||||
Accumulated other | |||||||||||||||||||||||||||
comprehensive income | 25,793 | 25,793 | - | - | - | - | - | - | - | ||||||||||||||||||
Other | (1,036 | ) | - | (1,036 | ) | (4 | ) | (21,125 | ) | (69 | ) | 21,125 | - | (963 | ) | ||||||||||||
Balance as of May 31, 2003 | $ | 930,836 | $ | (46,763 | ) | $ | 977,599 | $ | 1,506 | $ | 523,223 | $ | 1,935 | $ | 89,772 | $ | 498 | $ | 360,665 | ||||||||
Patronage capital retirement | (70,576 | ) | - | (70,576 | ) | - | - | - | - | - | (70,576 | ) | |||||||||||||||
Operating loss | (194,584 | ) | - | (194,584 | ) | - | (294,807 | ) | 839 | 33,919 | (1 | ) | 65,466 | ||||||||||||||
Accumulated other | |||||||||||||||||||||||||||
comprehensive income | 34,655 | 34,655 | - | - | - | - | - | - | - | ||||||||||||||||||
Income tax expense | (3,817 | ) | - | (3,817 | ) | - | (3,817 | ) | - | - | - | - | |||||||||||||||
Minority interest - RTFC and | |||||||||||||||||||||||||||
NCSC net margin | (1,989 | ) | - | (1,989 | ) | - | (1,989 | ) | - | - | - | - | |||||||||||||||
Cumulative effect of change in | |||||||||||||||||||||||||||
accounting principle | 22,369 | - | 22,369 | - | - | - | 7,605 | - | 14,764 | ||||||||||||||||||
Reclass to RTFC members' equity | (19,908 | ) | - | (19,908 | ) | (512 | ) | - | (790 | ) | - | - | (18,606 | ) | |||||||||||||
Other | (1,252 | ) | - | (1,252 | ) | (1 | ) | - | (662 | ) | - | - | (589 | ) | |||||||||||||
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Balance as of May 31, 2004 | $ | 695,734 | $ | (12,108 | ) | $ | 707,842 | $ | 993 | $ | 222,610 | $ | 1,322 | $ | 131,296 | $ | 497 | $ | 351,124 | ||||||||
Patronage capital retirement | (77,755 | ) | - | (77,755 | ) | - | - | - | - | - | (77,755 | ) | |||||||||||||||
Operating margin | 130,587 | - | 130,587 | - | 14,052 | 778 | 32,771 | - | 82,986 | ||||||||||||||||||
Accumulated other | |||||||||||||||||||||||||||
comprehensive income | 24,682 | 24,682 | - | - | - | - | - | - | - | ||||||||||||||||||
Income tax expense | (1,518 | ) | - | (1,518 | ) | - | (1,518 | ) | - | - | - | - | |||||||||||||||
Minority interest - RTFC and | |||||||||||||||||||||||||||
NCSC net margin | (2,540 | ) | - | (2,540 | ) | - | (2,540 | ) | - | - | - | - | |||||||||||||||
Other | (429 | ) | - | (429 | ) | - | - | (900 | ) | - | - | 471 | |||||||||||||||
Balance as of May 31, 2005 | $ | 768,761 | $ | 12,574 | $ | 756,187 | $ | 993 | $ | 232,604 | $ | 1,200 | $ | 164,067 | $ | 497 | $ | 356,826 | |||||||||
See accompanying notes. |
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75 |
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2003 | 2002 | 2001 | |||||||||||||
Operating income | $ | 1,070,875 | $ | 1,186,533 | $ | 1,388,295 | |||||||||
Less: cost of funds | 930,847 | 885,838 | 1,117,839 | ||||||||||||
Gross margin | 140,028 | 300,695 | 270,456 | ||||||||||||
Expenses: | |||||||||||||||
General and administrative | 38,169 | 37,512 | 32,486 | ||||||||||||
Provision for loan losses | 68,266 | 199,349 | 105,204 | ||||||||||||
Total expenses | 106,435 | 236,861 | 137,690 | ||||||||||||
Results of operations of foreclosed assets | 1,249 | - | - | ||||||||||||
Impairment loss on foreclosed assets | (19,689 | ) | - | - | |||||||||||
Subtotal foreclosed assets | (18,440 | ) | - | - | |||||||||||
Operating margin | 15,153 | 63,834 | 132,766 | ||||||||||||
Derivative and foreign currency adjustments: | |||||||||||||||
Derivative cash settlements | 122,825 | 34,191 | - | ||||||||||||
Derivative forward value | 757,212 | 41,878 | - | ||||||||||||
Foreign currency adjustments | (243,220 | ) | (61,030 | ) | - | ||||||||||
Total derivative and foreign currency adjustments | 636,817 | 15,039 | - | ||||||||||||
Cumulative effect of change in accounting principle | - | 28,383 | - | ||||||||||||
Net margin | $ | 651,970 | $ | 107,256 | $ | 132,766 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS |
(Dollar amounts in thousands) |
For the Years Ended May 31, 2005, 2004 and 2003 |
2005 | 2004 | 2003 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||
Net margin (loss) | $ | 126,529 | $ | (178,021 | ) | $ | 651,970 | ||
Add/(deduct): | |||||||||
Amortization of deferred income | (17,597 | ) | (23,783 | ) | (7,821 | ) | |||
Amortization of bond issuance costs and deferred charges | 14,255 | 15,760 | 13,759 | ||||||
Depreciation | 3,559 | 3,097 | 4,307 | ||||||
Provision for loan losses | 16,402 | 54,921 | 43,071 | ||||||
(Recovery of) provision for guarantee losses | (3,107 | ) | (851 | ) | 25,195 | ||||
Results of operations of foreclosed assets | (13,079 | ) | (13,469 | ) | (9,734 | ) | |||
Impairment loss on foreclosed assets | 55 | 10,877 | 19,689 | ||||||
Derivative forward value | (29,875 | ) | 229,132 | (757,212 | ) | ||||
Foreign currency adjustments | 22,893 | 65,310 | 243,220 | ||||||
Cumulative effect of change in accounting principle | - | (22,369 | ) | - | |||||
Changes in operating assets and liabilities: | |||||||||
Receivables | 56,568 | 30,173 | 3,526 | ||||||
Accrued interest payable | (17,954 | ) | (3,429 | ) | 7,026 | ||||
Other | (6,517 | ) | (29,747 | ) | 5,218 |
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Net cash provided by operating activities | 152,132 | 137,601 | 242,214 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||
Advances made on loans | (6,466,367 | ) | (4,124,846 | ) | (4,548,137 | ) | |||
Principal collected on loans | 7,883,988 | 3,496,813 | 4,731,561 | ||||||
Net investment in fixed assets | (3,367 | ) | (1,031 | ) | (2,972 | ) | |||
Net cash provided by foreclosed assets | 116,134 | 59,508 | 23,862 | ||||||
Net proceeds from sale of foreclosed assets | 3,600 | 31,000 | - | ||||||
Cash assumed through consolidation | - | 4,564 | - | ||||||
Net cash provided by (used in) investing activities | 1,533,988 | (533,992 | ) | 204,314 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||
Proceeds from issuances (repayments) of short-term debt, net | 736,466 | 1,355,563 | (1,250,848 | ) | |||||
Proceeds from issuance of long-term debt | 289,757 | 2,177,111 | 3,632,650 | ||||||
Payments for retirement of long-term debt | (2,394,391 | ) | (2,955,377 | ) | (2,895,104 | ) | |||
Proceeds from issuance of subordinated deferrable debt, net | 131,246 | 96,850 | 121,062 | ||||||
Payments to retire subordinated deferrable debt | - | (200,000 | ) | (75,000 | ) | ||||
Proceeds from issuance of members' subordinated certificates | 97,016 | 88,539 | 96,567 | ||||||
Payments for retirement of members' subordinated certificates | (199,844 | ) | (93,384 | ) | (80,745 | ) | |||
Payments for retirement of patronage capital | (51,356 | ) | (51,890 | ) | (74,622 | ) | |||
Payments for retirement of minority interest patronage capital | (16,807 | ) | (19,586 | ) | - | ||||
Net cash provided by (used in) financing activities | (1,407,913 | ) | 397,826 | (526,040 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 278,207 | 1,435 | (79,512 | ) | |||||
BEGINNING CASH AND CASH EQUIVALENTS | 140,307 | 138,872 | 218,384 | ||||||
ENDING CASH AND CASH EQUIVALENTS | $ | 418,514 | $ | 140,307 | $ | 138,872 | |||
See accompanying notes. |
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76 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS |
(Dollar amounts in thousands) |
For the Years Ended May 31, 2005, 2004 and 2003 |
2005 | 2004 | 2003 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid during year for interest | $ | 928,975 | $ | 917,156 | $ | 921,317 | ||
Non-cash financing and investing activities: | ||||||||
Fair value of foreclosed assets received in collection of loans | $ | - | $ | - | $ | 369,393 | ||
Subordinated certificates applied against loan balances | 84,228 | - | - | |||||
Patronage capital applied against loan balances | 8,486 | - | - | |||||
Minority interest patronage capital applied against loan balances | 5,528 | - | - | |||||
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Consolidation of NCSC and RTFC effective June 1, 2003: | ||||||||
Total assets assumed, net of eliminations | $ | - | $ | (348,200 | ) |
$
Total liabilities assumed, net of eliminations
331,100
Total minority interest assumed, net of eliminations
19,908
Cumulative effect of change in accounting principle
22,369
Net reclassification of combined equity to minority interest
-
(20,613
)
-
Cash assumed
-
$
4,564
$
-
See accompanying notes. |
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION | ||
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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS | ||
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Patronage Capital | ||||||||||||||||||||||||||||||
Accumulated | Allocated | |||||||||||||||||||||||||||||
Other | Members' | General | ||||||||||||||||||||||||||||
Membership | Comprehensive | Unallocated | Education | Capital | Reserve | |||||||||||||||||||||||||
Total | Fees | Income/(Loss) | Margin | Fund | Reserve | Fund | Other | |||||||||||||||||||||||
Balance as of May 31, 2000 | $ | 341,217 | $ | 1,538 | $ | - | $ | 6,143 | $ | 927 | $ | 16,329 | $ | 500 | $ | 315,780 | ||||||||||||||
Patronage capital | (77,439 | ) | - | - | - | - | - | - | (77,439 | ) | ||||||||||||||||||||
Net margin | 132,766 | - | - | 6,821 | 363 | - | (2 | ) | 125,584 | |||||||||||||||||||||
Other | (2,645 | ) | (28 | ) | - | - | (546 | ) | - | - | (2,071 | ) | ||||||||||||||||||
Balance as of May 31, 2001 | 393,899 | 1,510 | - | 12,964 | 744 | 16,329 | 498 | 361,854 | ||||||||||||||||||||||
Cumulative effect of change | ||||||||||||||||||||||||||||||
in accounting principle | (52,697 | ) | - | (81,080 | ) | 28,383 | - | - | - | - | ||||||||||||||||||||
Patronage capital | (98,323 | ) | - | - | - | - | - | - | (98,323 | ) | ||||||||||||||||||||
Operating margin | 63,834 | - | - | 8,114 | 506 | - | - | 55,214 | ||||||||||||||||||||||
Derivative forward value | 50,402 | - | 8,524 | 41,878 | - | - | - | - | ||||||||||||||||||||||
Derivative cash settlements | 34,191 | - | - | - | - | - | - | 34,191 | ||||||||||||||||||||||
Foreign currency adjustments | (61,030 | ) | - | - | (61,030 | ) | - | - | - | - | ||||||||||||||||||||
Other | (1,545 | ) | - | - | 47 | (243 | ) | - | - | (1,349 | ) | |||||||||||||||||||
Balance as of May 31, 2002 | 328,731 | 1,510 | (72,556 | ) | 30,356 | 1,007 | 16,329 | 498 | 351,587 | |||||||||||||||||||||
Patronage capital | (74,622 | ) | - | - | - | - | - | - | (74,622 | ) | ||||||||||||||||||||
Operating margin | 15,153 | - | - | - | 109 | 5,746 | - | 9,298 | ||||||||||||||||||||||
Derivative forward value | 783,005 | - | 25,793 | 757,212 | - | - | - | - | ||||||||||||||||||||||
Derivative cash settlements | 122,825 | - | - | - | 888 | 46,572 | - | 75,365 | ||||||||||||||||||||||
Foreign currency adjustments | (243,220 | ) | - | - | (243,220 | ) | - | - | - | - | ||||||||||||||||||||
Other | (1,036 | ) | (4 | ) | - | (21,125 | ) | (69 | ) | 21,125 | - | (963 | ) | |||||||||||||||||
Balance as of May 31, 2003 | $ | 930,836 | $ | 1,506 | $ | (46,763 | ) | $ | 523,223 | $ | 1,935 | $ | 89,772 | $ | 498 | $ | 360,665 |
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION | |||||||||
COMBINED STATEMENTS OF CASH FLOWS | |||||||||
For the Years Ended May 31, 2003, 2002 and 2001 | |||||||||
(Dollar Amounts in Thousands) | |||||||||
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2003 | 2002 | 2001 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||
Net margin | $ | 651,970 | $ | 107,256 | $ | 132,766 | |||
Add/(deduct): | |||||||||
Provision for loan losses | 68,266 | 199,349 | 105,204 | ||||||
Depreciation | 4,307 | 3,960 | 2,332 | ||||||
Amortization of deferred income | (7,821 | ) | (1,403 | ) | (761 | ) | |||
Derivative forward value | (757,212 | ) | (41,878 | ) | - | ||||
Foreign currency adjustments | 243,220 | 61,030 | - | ||||||
Cumulative effect of change in accounting principle | - | (28,383 | ) | - | |||||
Amortization of bond issuance costs and deferred charges | 13,759 | 22,753 | 7,284 | ||||||
Results of operations of foreclosed assets | (1,249 | ) | - | - | |||||
Impairment loss on foreclosed assets | 19,689 | - | - | ||||||
Changes in operating assets and liabilities: | |||||||||
Receivables | 3,526 | 12,676 | (32,245 | ) | |||||
Accrued interest payable | 7,026 | 52,455 | 7,113 | ||||||
Other | 5,218 | (9,927 | ) | (42,589 | ) | ||||
Net cash provided by operating activities | 250,699 | 377,888 | 179,104 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||
Advances made on loans | (4,548,137 | ) | (5,513,679 | ) | (8,782,519 | ) | |||
Principal collected on loans | 4,731,561 | 5,125,915 | 5,775,116 | ||||||
Net investment in fixed assets | (2,972 | ) | (2,712 | ) | (5,997 | ) | |||
Net cash provided by foreclosed assets | 15,377 | - | - | ||||||
Net cash provided by/(used in) investing activities | 195,829 | (390,476 | ) | (3,013,400 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||
Repayments of notes payable, net | (1,250,848 | ) | (2,956,989 | ) | (511,045 | ) | |||
Debt service investments, net | - | 21,986 | (1,055 | ) | |||||
Proceeds from issuance of long-term debt, net | 3,632,650 | 7,407,547 | 6,058,736 | ||||||
Payments for retirement of long-term debt | (2,895,104 | ) | (4,533,840 | ) | (3,069,479 | ) | |||
Proceeds from issuance of subordinated deferrable debt | 121,062 | 169,487 | 150,000 | ||||||
Payments for retirement of subordinated deferrable debt | (75,000 | ) | (125,000 | ) | - | ||||
Proceeds from issuance of members' subordinated certificates | 96,567 | 167,497 | 290,501 | ||||||
Retirement of members' subordinated certificates | (80,745 | ) | (60,481 | ) | (28,872 | ) | |||
Payments for retirement of patronage capital | (74,622 | ) | (99,792 | ) | (59,961 | ) | |||
Net cash (used in)/provided by financing activities | (526,040 | ) | (9,585 | ) | 2,828,825 | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (79,512 | ) | (22,173 | ) | (5,471 | ) | |||
BEGINNING CASH AND CASH EQUIVALENTS | 218,384 | 240,557 | 246,028 | ||||||
ENDING CASH AND CASH EQUIVALENTS | $ | 138,872 | $ | 218,384 | $ | 240,557 | |||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||||
Cash paid during year for interest | $ | 921,317 | $ | 815,960 | $ | 1,122,635 | |||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | |||||||||
Foreclosed assets in collection of loans | $ | 369,393 | $ | - | $ | - | |||
See accompanying notes. | |||||||||
|
(1) | General Information and Accounting Policies | |
(a) | General Information |
National Rural Utilities Cooperative Finance Corporation ("CFC" or "the Company") was incorporated as a private, not-for-profit cooperative association under the laws of the District of Columbia in April 1969. The principal purpose of CFC is to provide its members with a source of financing to supplement the loan programs of the Rural Utilities Service ("RUS") of the United States Department of Agriculture. CFC makes loans primarily to its rural utility system members ("utility members") to enable them to acquire, construct and operate electric distribution, generation, transmission and related facilities. CFC also provides | ||
Rural Telephone Finance Cooperative ("RTFC") was incorporated as a private cooperative association in the state of South Dakota in September 1987 and was created for the | ||
National Cooperative Services Corporation ("NCSC") was incorporated in 1981 in the District of Columbia as a private cooperative association. NCSC provides financing to the for-profit or non-profit entities that are owned, operated or controlled by or provide substantial benefit to members of CFC. NCSC also markets, through its cooperative members, a consumer loan program for home improvements and an affinity credit card program. NCSC's membership consists of CFC and distribution systems that are members of CFC or are eligible for such membership. Effective June 1, 2003, NCSC's results of operations and financial condition have been consolidated with those of CFC in the accompanying financial statements. CFC is the primary source of funding to and manages the lending and financial affairs of NCSC through a management agreement which is automatically renewable on an annual basis unless terminated by either party. Under a guarantee agreement effective June 1, 2003, CFC has agreed to reimburse NCSC for losses on loans, excluding the consumer loan program. NCSC is headquartered with CFC in Herndon, Virginia. NCSC is a taxable corporation. NCSC pays income tax annually based on its net margins for the period. | ||
The Company's consolidated membership was 1,546 as of May 31, 2005 including 899 utility members, the majority of which are consumer-owned electric cooperatives, 508 telecommunications members, 70 service members and 69 associates in 49 states, the District of Columbia and three U.S. territories. The utility members included 828 distribution systems and 71 generation and transmission ("power supply") systems. Memberships between CFC, RTFC and NCSC have been eliminated in consolidation. |
(b) | Principles of Consolidation and Combination |
The accompanying financial statements, effective June 1, 2003, include the consolidated accounts of CFC, RTFC and NCSC and certain entities controlled by CFC | ||
FIN 46(R) requires the consolidation of a variable interest entity by the party that is the primary beneficiary of the variable interest entity. An enterprise is considered a primary beneficiary if it absorbs a majority of the variable interest entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Prior to FIN 46(R), entities were generally consolidated by an enterprise when it had a controlling financial interest through ownership of a majority voting interest in the entity. |
78 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued) |
CFC |
CFC is the sole lender to and manages the affairs of RTFC through a long-term management agreement. Under |
CFC is the primary source of funding to and manages the lending and financial affairs of NCSC through a management agreement which is automatically renewable on an annual basis unless terminated by either party. NCSC funds its programs either through loans from CFC or commercial paper and long-term notes issued by NCSC and guaranteed by CFC. In connection with these guarantees, NCSC must pay a guarantee fee and purchase from CFC interest-bearing subordinated term certificates in proportion to the related guarantee. Under a guarantee agreement effective June 1, 2003, CFC has agreed to reimburse NCSC for losses on loans, excluding the consumer loan program. CFC does not control the election of directors to the NCSC board. NCSC is a class |
|
|
On June 1, 2003, as a result of the consolidation of RTFC and NCSC, total assets increased by $353 million, total liabilities increased by $331 million, minority interest - RTFC and NCSC members' equity increased by $20 million and CFC total equity increased by $2 million. As a result of the consolidation, NCSC loans were consolidated with CFC's loans. Additionally, NCSC debt guaranteed by CFC became debt of the consolidated entity, resulting in a reduction to CFC's guarantee liability. CFC recorded a cumulative effect of change in accounting principle gain of $22 million on the consolidated statement of operations, representing a $3 million increase to the |
loan loss allowance, a $34 million decrease to the guarantee liability and a $9 million loss representing the amount by which cumulative losses of NCSC exceeded NCSC equity. |
(Dollar amounts in thousands) | |||||||
As of May 31: | 2003 | 2002 | |||||
Outstanding loans to members and their affiliates | $4,942,640 | $5,075,076 | |||||
Total assets | 5,469,305 | 5,607,281 | |||||
Notes payable to CFC | 4,921,655 | 5,056,283 | |||||
Total liabilities | 5,380,661 | 5,527,466 | |||||
Total equity (1) | 88,644 | 79,815 |
(Dollar amounts in thousands) | |||||||||||
For the years ended May 31: | 2003 | 2002 | 2001 | ||||||||
Operating income | $344,492 | $373,765 | $419,524 | ||||||||
Net margin (1) | 27,913 | 26,816 | 38,098 |
|
|
Unless stated otherwise, references to |
(c) | Cash and Cash Equivalents | |
CFC includes cash, certificates of deposit and other investments with remaining maturities of less than 90 days as cash and cash equivalents. | ||
79 | ||
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION | ||
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued) | ||
(d) | Allowance for Loan Losses |
CFC maintains an allowance for loan losses at a level management considers to be adequate in relation to the credit quality, tenor, forecasted default, estimated recovery rates and amount of its loan | ||
CFC's corporate credit committee makes recommendations of loans to be written off to the boards of directors of CFC, RTFC and NCSC. In making its recommendation to write off all or a portion of a loan balance, CFC's corporate credit committee considers various factors including cash flow analysis and collateral securing the borrower's loans. | ||
The allowance is based on estimates and, accordingly, actual loan losses may differ from the allowance amount. | ||
Activity in the allowance account is summarized |
(Dollar amounts in thousands) | 2003 | 2002 | 2001 | |||||||||
Balance at beginning of year | $ | 506,742 | $ | 331,997 | $ | 228,292 | ||||||
Provision for loan losses | 68,266 | 199,349 | 105,204 | |||||||||
Charge-offs | (10,840 | ) | (34,191 | ) | (1,499 | ) | ||||||
Recoveries | 890 | 9,587 | - | |||||||||
Balance at end of year | $ | 565,058 | $ | 506,742 | $ | 331,997 |
(Dollar amounts in thousands) | 2005 | 2004 | 2003 | |||||||||
Balance at beginning of year | $ | 573,939 | $ | 511,463 | $ | 478,342 | ||||||
Provision for loan losses | 16,402 | 54,921 | 43,071 | |||||||||
Change in allowance due to consolidation (1) | - | 6,029 | - | |||||||||
Write-offs | (1,354 | ) | (2,639 | ) | (10,840 | ) | ||||||
Recoveries | 762 | 4,165 | 890 | |||||||||
Balance at end of year | $ | 589,749 | $ | 573,939 | $ | 511,463 |
(1) |
| |||
(e) |
|
CFC classifies a borrower as |
| |||
| |||
* | principal or interest payments on any loan to the borrower are past due 90 days or more, | ||
* | as a result of court proceedings, repayment on the original terms is not anticipated, or | ||
* | for some other reason, management does not expect the timely repayment of principal and interest. |
Once a borrower is classified as | ||
(f) | Impairment of Loans |
CFC calculates impairment of loans receivable by comparing the present value of the estimated future cash flows associated with the loan discounted at the original loan interest rate(s) and/or the estimated fair value of the collateral securing the loan to the recorded investment in the loan in accordance with the provisions of SFAS 114. Loss reserves are specifically allocated based on the calculated impairment. |
80 | ||||
(g) | Fixed Assets |
Buildings, furniture and fixtures and related equipment are stated at cost less accumulated depreciation and amortization of | ||
(h) | Foreclosed Assets |
CFC records foreclosed assets received in satisfaction of loan receivables at fair value or fair value less costs to sell and maintains these assets on the | ||
(i) | Derivative Financial Instruments |
CFC is neither a dealer nor a trader in derivative financial instruments. CFC uses interest rate, cross currency and cross currency interest rate exchange agreements to manage its interest rate risk and foreign exchange risk. |
In accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS 133, adopted by CFC on June 1, 2001, CFC records derivative instruments on the |
Net settlements that CFC pays and receives for derivative instruments that qualified for hedge accounting are recorded in the cost of funds. CFC records net settlements related to derivative instruments that do not qualify for hedge accounting in derivative cash settlements. Prior to the implementation of SFAS 133, the net settlements for all interest rate exchange agreements were included in the cost of funds. |
|
Upon implementation on June 1, 2001, CFC recorded transition adjustments as required by SFAS 133. |
(j) | Guarantee liability | |
CFC guarantees the contractual obligations of its members so that they may obtain various forms of financing. With the exception of letters of credit, the underlying obligations may not be accelerated so long as CFC performs under its guarantee. CFC records a guarantee liability which represents CFC's contingent and non-contingent exposure related to its guarantees of its members' debt obligations. CFC's contingent guarantee liability is based on management's estimate of CFC's exposure to losses within the guarantee portfolio. CFC uses factors such as borrower risk rating, maturity periods, corporate bond default probabilities and historical recovery rates in estimating its contingent exposure. Adjustments to the contingent guarantee liability are recorded in CFC's provision for guarantee losses. CFC has recorded a non-contingent guarantee liability for all new guarantees since January 1, 2003 in accordance with FIN No. 45, Guarantor's Accounting and Disclosure Requirement for Guarantees, Including Indirect Guarantees of Indebtedness of Others (an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34). CFC's non-contingent guarantee liability represents CFC's obligation to stand ready to perform pursuant to the terms of its guarantees that it has entered into since January 1, 2003. CFC's non-contingent obligation is estimated based on guarantee fees charged for guarantees issued, which represents management's estimate of the fair value of its obligation to stand ready to perform. The fees are deferred and amortized using the straight-line method into operating income over the term of the guarantee. | ||
81 | ||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION | ||
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued) | ||
(k) | Amortization of Bond Discounts and Bond Issuance Costs | |
Bond discounts and bond issuance costs are deferred and amortized as interest expense using the effective interest method or a method approximating the effective interest method over the life of each bond issue. | ||
(l) | Membership Fees |
Members are charged a one-time membership fee based on member class. CFC distribution system members (class A), power supply system members (class B) |
| 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 to meet the financing needs of its member borrowers. These financial instruments include commitments to extend credit, standby letters of credit and guarantees of members' obligations. The expected inherent loss related to CFC's off-balance sheet financial instruments is covered in CFC's | ||
|
|
|
|
|
|
(n) | Operating Income | |
The majority of the Company's operating income relates to interest earned on loans to members that is recognized on an accrual basis, unless specified otherwise in Note 14. Operating income also includes other fees associated with the Company's loan and guarantee transactions. These fees, as well as the related recognition policy, are summarized below: | ||
* | Conversion fees may be charged when converting from one loan interest rate option to another. Conversion fees are deferred and recognized, using the straight-line method, which approximates the interest method, over the remaining term of the original loan interest rate pricing term, except for a small portion of the total fee charged to cover administrative costs related to the conversion which is recognized immediately. |
* | Prepayment fees are charged for the early repayment of principal in full and are recognized when collected. |
* | Late payment fees are charged on late loan payments and are recognized when collected. |
* | Origination fees are charged only on RTFC loan commitments and in most cases are refundable on a prorata basis according to the amount of the loan commitment that is advanced. Such refundable fees are deferred and then recognized in full if the loan is not advanced prior to the expiration of the commitment. |
* | Guarantee fees are charged based on the amount, type and term of the guarantee. Guarantee fees are deferred and amortized using the straight-line method, which approximates the interest method, into operating income over the life of the guarantee. |
In fiscal year 2005, 2004 and 2003, the Company recognized fees totaling $58 million, $31 million and $15 million, respectively, in operating income including $18 million, $24 million and $8 million of conversion fees, respectively. Fees totaling $8 million, $56 million and $29 million were deferred during the years ended May 31, 2005, 2004 and 2003, respectively. At May 31, 2005 and 2004, the Company had deferred conversion fees totaling $51 million and $64 million, respectively. |
The increase in fees recognized during fiscal year 2005 compared to 2004 was due to make-whole fees and exit fees totaling $36 million related to the prepayment of RTFC loans during fiscal year 2005. In fiscal year 2004, the increase in fees compared to fiscal year 2003 was due to more conversion fees recognized during the period. |
In addition, loan origination costs on facilities are deferred and amortized using the straight-line method over the life of the facility as a reduction to operating income. |
(o) | Income Tax Expense | |
CFC does not pay income taxes. RTFC pays income tax on the amount of the net margin that it does not allocate to its members. Currently about 1% of the RTFC net margin is not allocated to its members. | ||
82 | ||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued) |
NCSC pays tax on the full amount of its net margin. The income tax expense recorded in the consolidated statement of operations for the years ended May 31, 2005 and 2004 represents the income tax expense for RTFC and NCSC at the combined federal and state of Virginia income tax rate of approximately 38%. During the year ended May 31, 2005, NCSC used the remainder of its prior year loss carryforwards and is currently paying Virginia state and federal income taxes. |
(p) | Allocation of Net Margin | |
CFC is required by the District of Columbia cooperative law to have a methodology to allocate its net margin to its members. Annually, CFC's board of directors allocates its net margin, excluding certain non-cash adjustments, to its members in the form of patronage capital and to board approved reserves. Currently CFC has two such board approved reserves, the education fund and the members' capital reserve. CFC allocates a small portion, less than 1%, of net margin annually to the education fund to further the teaching of cooperative principles as required by cooperative law. Funds from the education fund are disbursed annually to the statewide cooperative organizations to fund the teaching of cooperative principles in the service territories of the cooperatives in each state. The board of directors will determine the amount of margin that is allocated to the members' capital reserve, if any. The members' capital reserve represents margins that are held by CFC to increase equity retention. The margins held in the members' capital reserve have not been specifically allocated to any member, but may be allocated to individual members in the future as patronage capital if authorized by CFC's board of directors. All remaining margin is annually allocated to CFC's members in the form of patronage capital. CFC bases the amount of margin allocated to each member on the members' patronage of the CFC lending programs in the year that the margin was earned. There is no impact on CFC's total equity as a result of allocating margins to members in the form of patronage capital or to board approved reserves. CFC's board of directors has annually voted to retire a portion of the patronage capital allocated to members in prior years. CFC's total equity is reduced by the amount of patronage capital retired to its members and by disbursements from the education fund. | ||
(q) | Comprehensive Income |
Comprehensive income includes | ||
(Dollar amounts in thousands) | 2003 | 2002 | 2001 | ||||||||||
Net margin | $ | 651,970 | $ | 107,256 | $ | 132,766 | |||||||
Other comprehensive income/(loss): | |||||||||||||
Unrealized gain/(loss) on derivatives | 3,709 | (72,556 | ) | - | |||||||||
Reclassification adjustment for | |||||||||||||
realized losses on derivatives | 22,084 | - | - | ||||||||||
Comprehensive income | $ | 677,763 | $ | 34,700 | $ | 132,766 | |||||||
(Dollar amounts in thousands) | 2005 | 2004 | 2003 | ||||||||||
Net margin (loss) | $ | 126,529 | $ | (178,021 | ) | $ | 651,970 | ||||||
Other comprehensive income: | |||||||||||||
Unrealized gain on derivatives | 11,996 | 18,304 | 3,709 | ||||||||||
Reclassification adjustment for | |||||||||||||
realized losses on derivatives | 12,686 | 16,351 | 22,084 | ||||||||||
Comprehensive income (loss) | $ | 151,211 | $ | (143,366 | ) | $ | 677,763 |
| ||
| Use of Estimates |
| ||
The preparation of financial statements in conformity with | ||
CFC does not believe it is vulnerable to the risk of a near-term severe impact as a result of any concentrations of its activities. |
| Reclassifications |
Certain reclassifications of prior year amounts have been made to conform to the | ||
83 | ||
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION | ||
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued) | ||
| ||
|
| |
|
|
Notes Payable, | Other | |||||||||||||||
due within | Long-term | Retained | Comprehensive | |||||||||||||
(Dollar amounts in thousands) | one year | Debt | Equity | Loss | ||||||||||||
As reported in May 31, 2002 Form 10-K | $ | 2,414,488 | $ | 14,857,386 | $ | 462,317 | $ | (135,941 | ) | |||||||
Change in foreign currency valuation (1) | (519 | ) | (1,836 | ) | (61,030 | ) | 63,385 | |||||||||
As restated | $ | 2,413,969 | $ | 14,855,550 | $ | 401,287 | $ | (72,556 | ) |
|
|
|
Total Derivative and | ||||||||||||||||
Foreign Currency | Foreign Currency | Comprehensive | ||||||||||||||
(Dollar amounts in thousands) | Adjustments | Adjustments | Net Margin | Income | ||||||||||||
As reported in May 31, 2002 Form 10-K | $ | - | $ | 76,069 | $ | 168,286 | $ | 32,345 | ||||||||
Change in foreign currency valuation | (61,030 | ) | (61,030 | ) | (61,030 | ) | 2,355 | |||||||||
As restated | $ | (61,030 | ) | $ | 15,039 | $ | 107,256 | $ | 34,700 |
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(2) | Loans and Commitments |
Loans to members bear interest at rates determined from time to time by the |
| |
Loans outstanding to members, weighted average interest rates thereon and unadvanced commitments by loan type are summarized as follows at May 31: | |
2003 | 2002 | ||||||||||||||||||||||||
Weighted | Weighted | ||||||||||||||||||||||||
Average | Unadvanced | Average | Unadvanced | ||||||||||||||||||||||
Loans | Interest | Commitments | Loans | Interest | Commitments | ||||||||||||||||||||
(Dollar amounts in thousands) | Outstanding | Rates | (A) | Outstanding | Rates | (A) | |||||||||||||||||||
Long-term fixed rate secured loans (B): | |||||||||||||||||||||||||
Electric systems | $ | 9,484,490 | 5.64% | $ | - | $ | 7,848,861 | 6.32% | $ | - | |||||||||||||||
Telecommunication systems | 2,735,220 | 7.77% | - | 2,694,945 | 7.90% | - | |||||||||||||||||||
Total long-term fixed rate secured loans | 12,219,710 | 6.12% | - | 10,543,806 | 6.72% | - | |||||||||||||||||||
Long-term variable rate secured loans (C): | |||||||||||||||||||||||||
Electric systems | 3,211,434 | 3.35% | 5,650,836 | 4,127,019 | 4.21% | 6,135,109 | |||||||||||||||||||
Telecommunication systems | 1,965,390 | 5.30% | 291,724 | 2,138,174 | 5.71% | 315,047 | |||||||||||||||||||
Total long-term variable rate secured loans | 5,176,824 | 4.09% | 5,942,560 | 6,265,193 | 4.72% | 6,450,156 | |||||||||||||||||||
Loans guaranteed by RUS: | |||||||||||||||||||||||||
Electric systems | 266,857 | 4.71% | 30,388 | 242,574 | 4.75% | 58,014 | |||||||||||||||||||
Intermediate-term secured loans: | |||||||||||||||||||||||||
Electric systems | 14,525 | 3.63% | 28,522 | 31,133 | 5.48% | 26,277 | |||||||||||||||||||
Intermediate-term unsecured loans: | |||||||||||||||||||||||||
Electric systems | 50,843 | 3.65% | 72,559 | 177,154 | 5.19% | 238,013 | |||||||||||||||||||
Telecommunication systems | 18,642 | 5.45% | 4,827 | 7,298 | 5.75% | 5,779 | |||||||||||||||||||
Total intermediate-term unsecured loans | 69,485 | 4.13% | 77,386 | 184,452 | 5.21% | 243,792 | |||||||||||||||||||
Line of credit loans (D): | |||||||||||||||||||||||||
Electric systems | 884,146 | 3.57% | 5,233,146 | 1,002,459 | 4.57% | 4,821,764 | |||||||||||||||||||
Telecommunication systems | 223,388 | 5.60% | 377,409 | 226,113 | 6.32% | 413,861 | |||||||||||||||||||
Total line of credit loans | 1,107,534 | 3.98% | 5,610,555 | 1,228,572 | 4.89% | 5,235,625 | |||||||||||||||||||
Nonperforming loans: | |||||||||||||||||||||||||
Electric systems | - | - | - | 1,002,782 | - | - | |||||||||||||||||||
Telecommunication systems | - | - | - | 8,546 | - | - | |||||||||||||||||||
Total nonperforming loans | - | - | - | 1,011,328 | - | - | |||||||||||||||||||
Restructured loans (E): | |||||||||||||||||||||||||
Electric systems | 629,406 | - | - | 540,051 | 6.92% | - | |||||||||||||||||||
Total loans | 19,484,341 | 5.23% | 11,689,411 | 20,047,109 | 5.61% | 12,013,864 | |||||||||||||||||||
Less: Allowance for loan losses (F) | (565,058 | ) | - | (506,742 | ) | - | |||||||||||||||||||
Net loans | $ | 18,919,283 | $ | 11,689,411 | $ | 19,540,367 | $ | 12,013,864 | |||||||||||||||||
Total by member class: | |||||||||||||||||||||||||
Distribution | $ | 11,410,592 | $ | 8,527,266 | $ | 11,866,442 | $ | 8,647,187 | |||||||||||||||||
Power supply | 2,701,094 | 2,321,125 | 2,624,039 | 2,405,217 | |||||||||||||||||||||
Statewide and associate | 430,015 | 167,059 | 481,552 | 226,773 | |||||||||||||||||||||
Telecommunication systems | 4,942,640 | 673,961 | 5,075,076 | 734,687 | |||||||||||||||||||||
Total | $ | 19,484,341 | $ | 11,689,411 | $ | 20,047,109 | $ | 12,013,864 |
2005 | 2004 | |||||||||||||||||||||||||
Loan outstanding and | Loan outstanding and | |||||||||||||||||||||||||
weighted average interest | Unadvanced (1) | weighted average interest | Unadvanced (1) | |||||||||||||||||||||||
(Dollar amounts in thousands) | rates thereon | Commitments | rates thereon | Commitments | ||||||||||||||||||||||
Total by loan type: | ||||||||||||||||||||||||||
Long-term fixed rate loans | $ | 12,724,758 | 5.52% | $ | - | $ | 13,639,947 | 5.69% | $ | - | ||||||||||||||||
Long-term variable rate loans | 4,961,397 | 4.47% | 5,537,121 | 5,448,223 | 2.81% | 5,826,228 | ||||||||||||||||||||
Loans guaranteed by RUS | 258,493 | 5.16% | 8,491 | 263,392 | 4.60% | 8,491 | ||||||||||||||||||||
Intermediate-term loans | 10,328 | 5.91% | 25,714 | 55,405 | 2.85% | 82,419 | ||||||||||||||||||||
Line of credit loans | 1,017,092 | 4.75% | 6,122,693 | 1,081,556 | 2.26% | 5,659,400 | ||||||||||||||||||||
Total loans | 18,972,068 | 5.19% | 11,694,019 | 20,488,523 | 4.72% | 11,576,538 | ||||||||||||||||||||
Less: Allowance for loan losses |
(589,749
)
-
(573,939
)
-
Net Loans
$
18,382,319
$
11,694,019
$
19,914,584
$
11,576,538
Total by segment:
CFC:
Distribution
$
12,728,866
5.05%
$
8,821,217
$
12,536,255
4.29%
$
8,532,978
Power supply
2,640,787
5.72%
2,059,350
2,684,652
4.94%
2,101,439
Statewide and associate
135,513
5.58%
124,539
134,677
3.56%
188,626
CFC Total
15,505,166
5.17%
11,005,106
15,355,584
4.40%
10,823,043
RTFC
2,992,192
5.21%
518,514
4,643,008
5.83%
593,787
NCSC
474,710
5.96%
170,399
489,931
4.40%
159,708
Total
$
18,972,068
5.19%
$
11,694,019
$
20,488,523
4.72%
$
11,576,538
(1) Unadvanced commitments include loans for which loan contracts have been approved and executed, but funds have not been advanced. Additional information may be required to assure 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 supporting documents. Since commitments may expire without being fully drawn upon and a significant amount of the commitments are for standby liquidity purposes, the total unadvanced loan commitments do not necessarily represent future cash requirements. Collateral and security requirements for advances on commitments are identical to those on initial loan approval. As the interest rate on unadvanced commitments is not set, long-term unadvanced commitments have been classified in this chart as variable rate unadvanced commitments. However, once the loan contracts are executed and funds are advanced, the commitments could be at either a fixed or a variable rate.
The following table summarizes non-performing and restructured loans outstanding by loan program and by segment at May 31:
2005
2004
Loan outstanding and
Loan outstanding and
weighted average interest
weighted average interest
Non-performing loans:
rates thereon
rates thereon
RTFC:
$
213,092
-
$
-
-
353,480
-
159,328
-
49,777
-
181,110
-
616,349
-
340,438
-
NCSC
277
-
789
-
$
616,626
-
$
341,227
-
Restructured loans:
CFC:
Long-term variable rate loans
$
593,584
-
$
617,808
-
RTFC
Long-term fixed rate loans
7,342
6.65%
-
-
Total restructured loans
$
600,926
0.08%
$
617,808
-
84
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
|
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued) |
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Credit Concentration |
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(Dollar amounts in millions) | 2005 | % of Total | 2004 | % of Total | |||||||||||||
Loans | $ | 3,412 | 18% | $ | 4,415 | 22% | |||||||||||
Guarantees | 227 | 20% | 240 | 18% | |||||||||||||
Total credit exposure | $ | 3,639 | 18% | $ | 4,655 | 21% | |||||||||||
Interest Rates |
Set forth below is the weighted average interest rate earned on all loans outstanding during the fiscal years ended May 31: |
For the Years Ended May 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Long-term fixed rate | 5.92% | 6.56% | 6.78% | |||||||||
Long-term variable rate | 3.64% | 5.08% | 7.60% | |||||||||
Telecommunication organizations (1) | 6.92% | 7.13% | 8.31% | |||||||||
Refinancing loans guaranteed by RUS | 1.91% | 3.14% | 6.61% | |||||||||
Intermediate-term | 4.55% | 5.97% | 7.99% | |||||||||
Short-term | 3.82% | 5.49% | 8.01% | |||||||||
Associate members | 4.32% | 5.53% | 7.86% | |||||||||
Nonperforming (2) | 0.00% | 0.00% | 0.00% | |||||||||
Restructured | 3.88% | 3.21% | 4.33% | |||||||||
All loans | 5.40% | 5.98% | 7.36% |
For the Years Ended May 31, | ||||||||||||
2005 | 2004 | 2003 | ||||||||||
Long-term fixed rate | 5.62% | 5.85% | 6.39% | |||||||||
Long-term variable rate | 4.50% | 3.48% | 4.36% | |||||||||
Loans guaranteed by RUS | 4.90% | 4.61% | 4.62% | |||||||||
Intermediate-term | 3.87% | 3.33% | 4.65% | |||||||||
Line of credit loans | 3.97% | 3.36% | 4.26% | |||||||||
Non-performing | 0.00% | 0.00% | 0.00% | |||||||||
Restructured | 0.05% | 0.00% | 3.88% | |||||||||
Total | 5.17% | 4.95% | 5.40% | |||||||||
Total by segment: | ||||||||||||
CFC | 4.99% | 4.49% | 4.88% | |||||||||
RTFC | 5.84% | 6.37% | 6.93% | |||||||||
NCSC | 5.77% | 5.11% | - | |||||||||
Total | 5.17% | 4.95% | 5.40% | |||||||||
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85 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION |
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued) |
Loan Repricing |
Long-term fixed rate loans outstanding at May 31, |
Weighted Average | ||||||||||
(Dollar amounts in thousands) | Interest Rate | Amount Repricing | ||||||||
2004 | 5.00% | $ | 2,336,164 | |||||||
2005 | 5.29% | 1,681,776 | ||||||||
2006 | 7.25% | 1,384,533 | ||||||||
2007 | 5.63% | 563,640 | ||||||||
2008 | 5.79% | 316,815 | ||||||||
Thereafter | 4.60% | 1,833,162 |
Weighted Average | ||||||||||
(Dollar amounts in thousands) | Interest Rate | Amount Repricing | ||||||||
2006 | 4.35% | $ | 1,060,001 | |||||||
2007 | 4.54% | 1,095,391 | ||||||||
2008 | 4.91% | 828,781 | ||||||||
2009 | 5.22% | 831,444 | ||||||||
2010 | 5.36% | 590,635 | ||||||||
Thereafter | 5.98% | 2,234,035 | ||||||||
During the year ended May 31, |
|
Loan Amortization |
On most long-term |
Amortization of long-term loans in each of the five fiscal years following May 31, |
(Dollar amounts in thousands) | Amortization (1) | ||||||
2004 | $ | 867,417 | |||||
2005 | 963,019 | ||||||
2006 | 897,863 | ||||||
2007 | 809,362 | ||||||
2008 | 806,746 | ||||||
Thereafter | 13,948,390 |
(Dollar amounts in thousands) | Amortization (1) | ||||||
2006 | $ | 932,482 | |||||
2007 | 857,958 | ||||||
2008 | 884,688 | ||||||
2009 | 845,392 | ||||||
2010 | 808,944 | ||||||
| Thereafter | 12,447,409 |
(1) Represents scheduled amortization based on current rates without consideration for loans that reprice. Excludes restructured and non-performing loans. |
Loan Security |
|
The following tables summarize the Company's secured and unsecured loans outstanding by loan program and by segment. | |||||||||||||||||||
(Dollar amounts in thousands) | At May 31, 2005 | At May 31, 2004 | |||||||||||||||||
Total by loan program: | Secured | % | Unsecured | % | Secured | % | Unsecured | % | |||||||||||
Long-term fixed rate loans | $ 12,293,054 | 97% | $ 431,704 | 3% | $ 13,290,756 | 97% | $ 349,191 | 3% | |||||||||||
Long-term variable rate loans | 4,701,660 | 95% | 259,737 | 5% | 5,191,421 | 95% | 256,802 | 5% | |||||||||||
Loans guaranteed by RUS | 258,493 | 100% | - | - | 263,392 | 100% | - | - | |||||||||||
lntermediate-term loans | 1,235 | 12% | 9,093 | 88% | 5,015 | 9% | 50,390 | 91% | |||||||||||
Line of credit loans | 201,466 | 20% | 815,626 | 80% | 299,250 | 28% | 782,306 | 72% | |||||||||||
Total loans | $ 17,455,908 | 92% | $ 1,516,160 | 8% | $ 19,049,834 | 93% | $ 1,438,689 | 7% | |||||||||||
Total by segment: | |||||||||||||||||||
CFC | $14,316,925 | 92% | $1,188,241 | 8% | $14,202,369 | 92% | $1,153,215 | 8% | |||||||||||
RTFC | 2,747,845 | 92% | 244,347 | 8% | 4,384,412 | 94% | 258,596 | 6% | |||||||||||
NCSC | 391,138 | 82% | 83,572 | 18% | 463,053 | 95% | 26,878 | 5% | |||||||||||
Total loans | $17,455,908 | 92% | $1,516,160 | 8% | $19,049,834 | 93% | $1,438,689 | 7% | |||||||||||
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86 | |||||||||||||||||||
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ) | 2.28% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total short-term debt | $ | 2,952,579 | 3.84% | $ | 1,340,039 | 2.28% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
_________________________ |
(1) | At May 31, 2005, medium-term notes includes $390 million related to medium-term notes denominated in Euros. The foreign currency valuation account represents the change in the dollar value of foreign denominated debt due to changes in currency exchange rates from the date the debt was issued to the reporting date as |
2003 | 2002 | ||||||||||||||
Weighted | Weighted | ||||||||||||||
Amounts | Average | Amounts | Average | ||||||||||||
(Dollar amounts in thousands) | Outstanding | Interest Rate | Outstanding | Interest Rate | |||||||||||
Commercial paper sold through dealers, net of | $ | 819,672 | 1.30% | $ | 2,162,158 | 1.88% | |||||||||
discounts of $328 and $2,484, respectively | |||||||||||||||
Commercial paper sold by CFC directly to members, at par | 930,274 | 1.26% | 911,212 | 1.91% | |||||||||||
Commercial paper sold by CFC directly to nonmembers, at par | 25,605 | 1.30% | 18,642 | 1.89% | |||||||||||
Total commercial paper | 1,775,551 | 1.28% | 3,092,012 | 1.89% | |||||||||||
Daily liquidity fund | 110,602 | 1.22% | 44,989 | 2.00% | |||||||||||
Bank bid notes | 100,000 | 1.37% | 100,000 | 1.91% | |||||||||||
Long-term debt maturing within one year | 2,911,375 | 2.56% | 2,883,112 | 4.26% | |||||||||||
Foreign currency valuation account | 149,450 | (519 | ) | ||||||||||||
Total notes payable due within one year | 5,046,978 | 2.04% | 6,119,594 | 3.00% | |||||||||||
Notes payable supported by revolving credit | |||||||||||||||
agreements, classified as long-term debt (see Note 5) | (3,950,625 | ) | 2.04% | (3,705,625 | ) | 3.00% | |||||||||
Total notes payable due in one year after reclassification to long-term | $ | 1,096,353 | 2.04% | $ | 2,413,969 | 3.00% |
CFC issues commercial paper for periods of one to 270 days. CFC also enters into short-term bank bid note agreements, which are unsecured obligations of CFC and do not require backup bank lines for liquidity purposes. Bank bid note facilities are uncommitted lines of credit for which CFC does not pay a fee. The commitments are generally subject to termination at the discretion of the individual banks. |
Revolving Credit Agreements |
|
(Dollar amount in thousands) | 2005 | 2004 | Termination Date | Facility fee per annum (1) | ||||||||||
Three-year agreement | $ | 1,740,000 | $ | 1,740,000 | March 30, 2007 | 0.10 of 1% | ||||||||
Five-year agreement | 1,975,000 | - | March 23, 2010 | 0.09 of 1% | ||||||||||
364-day agreement (2) | 1,285,000 | - | March 22, 2006 | 0.07 of 1% | ||||||||||
364-day agreement (2) | - | 1,740,000 | March 29, 2005 | 0.085 of 1% | ||||||||||
364-day agreement (2) | - | 1,170,000 | March 29, 2005 | 0.085 of 1% | ||||||||||
$ | 5,000,000 | $ | 4,650,000 |
________________ | |
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(2) |
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For the purpose of the revolving credit agreements, net margin, senior debt and total equity are adjusted to exclude the non-cash |
88 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION | |
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS - (Continued) | |
adjustments related to SFAS 133 and |
* | guarantees for members where the long-term unsecured debt of the member is rated at least BBB+ by Standard & Poor's Corporation or Baa1 by Moody's Investors Service; | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
* | indebtedness incurred to fund RUS guaranteed loans; and | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
* | the payment of principal and interest by the member on the guaranteed indebtedness if covered by insurance or reinsurance provided by an insurer having an insurance financial strength rating of AAA by Standard & Poor's Corporation or a financial strength rating of Aaa by Moody's Investors Service. |
The following represents the Company's required financial ratios at or for the year ended May 31: | |
Requirement | 2005 | 2004 | ||||||
Minimum average adjusted TIER over the six most recent fiscal quarters | 1.025 | 1.08 | 1.15 | |||||
Minimum adjusted TIER at fiscal year end (1) | 1.05 | 1.14 | 1.12 | |||||
Maximum senior debt | 10.00 | 6.30 | 6.87 | |||||
_____________ |
(1) | The Company must meet this requirement in order to retire patronage capital. |
The revolving credit agreements do not contain a material adverse change clause or ratings triggers that limit the banks' obligations to fund under the terms of the |
Based on the ability to borrow under the bank line facilities, |
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(11,330 ) | (13,484 ) Foreign currency valuation account (5) 220,553 233,990 Total unsecured medium-term notes 5,664,687 6.51% 6,510,374 5.94% Secured collateral trust bonds: 6.65%, Bonds, due 2005 (3) - 50,000 3.00%, Bonds, due 2006 (3) - 600,000 6.00%, Bonds, due 2006 (3) - 1,500,000 6.00%, Bonds, due 2006 (3) - 300,000 7.30%, Bonds, due 2006 100,000 100,000 3.25%, Bonds, due 2007 200,000 200,000 6.20%, Bonds, due 2008 300,000 300,000 3.875%, Bonds, due 2008 500,000 500,000 5.75%, Bonds, due 2008 225,000 225,000 Floating Rate Bonds, Series E-2, due 2010 (4) 2,024 2,025 5.70%, Bonds, due 2010 200,000 200,000 4.375% Bonds, due 2010 500,000 500,000 4.75% Bonds, due 2014 600,000 600,000 7.20%, Bonds, due 2015 50,000 50,000 6.55%, Bonds, due 2018 175,000 175,000 7.35%, Bonds, due 2026 100,000 100,000 Subtotal 2,952,024 5,402,025 Unamortized discount (5,880 ) (10,168 ) Total secured collateral trust bonds 2,946,144 5.05% 5,391,857 5.15% Long-term notes payable 91,124 4.94% 106,951 4.12% Short-term debt supported by revolving credit agreements, classified as long-term debt (see Note 4) 5,000,000 3.84% 4,650,000 2.28% Total long-term debt $ 13,701,955 5.21% $ 16,659,182 4.66%
CFC is required by the District of Columbia cooperative law to have a methodology to allocate its net margin to its members. CFC maintains the current year net margin as unallocated through the end of its fiscal year. At that time, CFC's board of directors allocates its net margin to its members in the form of patronage capital and to board approved reserves. Currently, CFC has two such board approved reserves, the education fund and the members' capital reserve. CFC allocates a small portion, less than 1%, of net margin annually to the education fund. The allocation to the education fund must be at least 0.25% of net margin as required by CFC's bylaws. Funds from the education fund are disbursed annually to fund cooperative education among employees and directors of cooperatives in the service territories of each state. The board of directors determines the amount of net margin that is allocated to the members' capital reserve, if any. The members' capital reserve represents margins that are held by CFC to increase equity retention. The margins held in the members' capital reserve have not been allocated to any member, but may be allocated to individual members in the future as patronage capital if authorized by CFC's board of directors. All remaining net margin is allocated to CFC's members in the form of patronage capital. CFC bases the amount of net margin allocated to each member on the members' patronage of the CFC lending programs in the year that the net margin was earned. There is no impact on CFC's total equity as a result of allocating margins to members in the form of patronage capital or to board approved reserves. CFC's board of directors has annually voted to retire a portion of the patronage capital allocated to members in prior years. CFC's total equity is reduced by the amount of patronage capital retired to members and by amounts disbursed from board approved reserves. CFC adjusts the net margin it allocates to members and board approved reserves to exclude the non-cash impacts of SFAS 133 and 52.
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