_____________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 19992000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-7102
__________
NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DISTRICT OF COLUMBIA
(State or other jurisdiction of incorporation or organization)
52-0891669
(I.R.S. Employer Identification Number)
2201 COOPERATIVE WAY, HERNDON, VA 20171
(Address of principal executive offices)
(Registrant's telecommunications number, including area code, is 703-709-6700)
__________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each Name of each
exchange on exchange on
Title of each class which registered Title of each class which registered
Var Collateral Trust Bonds Due 1999 NYSE 6.65% Collateral Trust Bonds Due 2005 NYSE
6.45% Collateral Trust Bondstrust bonds Due 2001 NYSE 7.30% Collateral Trust Bondstrust bonds Due 2006 NYSE
6.75% Collateral Trust Bondstrust bonds Due 2001 NYSE 6.20% Collateral Trust Bondstrust bonds Due 2008 NYSE
6.70% Collateral Trust Bondstrust bonds Due 2002 NYSE 5.75% Collateral Trust Bondstrust bonds Due 2008 NYSE
6.50% Collateral Trust Bondstrust bonds Due 2002 NYSE 5.70% Collateral Trust Bondstrust bonds Due 2010 NYSE
5.00% Collateral Trust Bondstrust bonds Due 2002 NYSE Variable Collateral trust bonds, Series E-2 Due 2010 NYSE
5.95% Collateral trust bonds Due 2003 NYSE 7.20% Collateral Trust Bondstrust bonds Due 2015 NYSE
5.95%7.375% Collateral Trust Bondstrust bonds Due 2003 NYSE 6.55% Collateral Trust Bondstrust bonds Due 2018 NYSE
5.30% Collateral Trust Bondstrust bonds Due 2003 NYSE 9.00% Collateral Trust Bonds,trust bonds, Series V Due 2021 NYSE
6.00% Collateral Trust Bondstrust bonds Due 2004 NYSE 7.35% Collateral Trust Bondstrust bonds Due 2026 NYSE
6.375% Collateral Trust Bondstrust bonds Due 2004 NYSE 8.00% Quarterly Income Capital Securities Due 2045 NYSE
5.50% Collateral Trust Bondstrust bonds Due 2005 NYSE 7.65% Quarterly Income Capital Securities Due 2046 NYSE
6.125% Collateral Trust Bondstrust bonds Due 2005 NYSE 7.375% Quarterly Income Capital Securities Due 2047 NYSE
6.65% Collateral trust bonds Due 2005 NYSE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to
the best of the registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part IV of this Form 10-K or any
amendment to this Form 10-K. Yes X No .
The Registrant has no stock.
_____________________________________________________________________________
TABLE OF CONTENTS
Part No. Item No. Page
I. 1.I 1 Business 1
General 1
Members 1
Distribution Systems 2
Power Supply Systems 3
Service Organizations and Associate Member Systems 3
Telecommunications Systems 3
Loan Programs 3
Interest Rates on Loans 5
Electric Loan Programs 5
Telecommunications Loan Programs 6
RUS Guaranteed Loans 76
Largest Borrowers 7
Credit Limitation 87
Loan Security 87
Conversion of Loans 8
Prepayment of Loans 8
Pledging of Loans 98
Guarantee Programs 98
Guarantees of Long-Term Tax-Exempt Bonds 98
Guarantees of Lease Transactions 9
Guarantees of Tax Benefit Transfers 109
Letters of Credit 9
Other Guarantees 109
CFC Financing Factors 10
Members' Subordinated Certificates 10
Members' Equity 11
Debt Issuance 11
Interest Rate and Currency Exchange Agreements 11
Revolving Credit Agreements 11
Borrowing Costs 12
Tax Status 12
Investment Policy 12
Employees 13
CFC Lending Competition 13
Member Regulation and Competition 13
The RUS Program 16
Member Financial Data 16
2. Properties 2524
3. Legal Proceedings 2524
4. Submission of Matters to a Vote of Security Holders 2524
II. 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 2625
6. Selected Financial Data 2625
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 2726
7A. Quantitative and Qualitative Disclosures About
Market Risk 4241
8. Financial Statements and Supplementary Data 4241
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 4241
III. 10. Directors and Executive Officers of the Registrant 4342
11. Executive Compensation 4746
12. Security Ownership of Certain Beneficial Owners and
Management 4948
13. Certain Relationships and Related Transactions 4948
IV. 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 5049
Part I
Item 1. Business.
General
National Rural Utilities Cooperative Finance Corporation ("CFC") was
incorporated as a private, not-for-profit cooperative association under the
laws of the District of Columbia in April 1969. The principal purpose of
CFC is to provide its members with a dependable source of low cost capital
and state-of-the-art financial products and services. CFC provides its
members with a source of financing to supplement the loan programs of the
Rural Utility Service ("RUS") of the United States Department of
Agriculture. CFC will also lend 100% of the loan requirement for those
distribution utility members electing not to borrow from RUS. CFC is owned
by and makes loans primarily to its rural utility system members ("Utility Members"utility
members") to enable them to acquire, construct and operate electric
distribution, generation, transmission and related facilities. CFC also
provides guarantees to its members for tax-exempt financings of pollution
control facilities, properties constructed or acquired by its members,
taxable debt in connection with certain leases and various other
transactions. CFC is exempt from federal income taxes under the provisions
of IRS code section 501(c)(4).
CFC has formed two affiliated corporations that are controlled by CFC
through majority representation on the companies' boards of directors.
Rural Telephone Finance Cooperative ("RTFC") was incorporated as a taxable
cooperative association in the state of South Dakota in September 1987.
RTFC is a controlled affiliate of CFC and was created for the purpose of
providing financing to its rural telecommunication members and affiliates.
RTFC's bylaws and voting members' agreement require that the majority of
RTFC's Board of Directors be elected from individuals designated by CFC.
CFC is the sole source of external funding for RTFC.
Guaranty Funding Cooperative ("GFC") was organized in December 1991 as a
taxable cooperative association owned by its member rural electric systems
and CFC to provide a source of funds for members to refinance the RUS
guaranteed debt previously held by the Federal Financing Bank of the United
States Treasury ("FFB"). GFC is a controlled affiliate of CFC (the
majority of its directors are appointed by CFC). All loans from GFC are
guaranteed by RUS. CFC is the sole source of external funding for GFC.
Except as indicated, financial information presented herein includes CFC,
RTFC and GFC on a combined basis.
CFC provides financing for rural utility cooperatives and companies. There
are two primary segments of CFC's business, rural electric lending and
rural telecommunications lending. Lending to electric cooperatives is done
through CFC and GFC and lending to telecommunications organizations is done
through RTFC. In many cases, the customers of the electric cooperatives
are also the customers of the telecommunications organizations, as both
sets of members serve the rural areas of the United States.
Members
CFC had 1,0571,050 members as of May 31, 1999,2000, including 908 Utility Members,902 utility members,
virtually all of which are consumer-owned cooperatives, 7675 of which are
service members and 73 of which are associate members. The Utility Membersutility members
included 838832 distribution systems and 70 generation and transmission
("power supply") systems operating in 4849 states and four U.S. territories.
CFC currently has five classes of members:
* Class A - cooperative or nonprofit distribution systems;
* Class B - cooperative or nonprofit power supply systems;
* Class C - statewide and regional associations which are wholly-owned or
controlled by Class A or Class B members;
* Class D - national associations of cooperatives; and
* Class E - associate members - nonprofit groups or entities organized on a
cooperative basis which are owned, controlled or operated by Class A, B
or C members and which provide non-electric services primarily for the
benefit of ultimate consumers. Associate members are not entitled to
vote at any meeting of the members and are not eligible to be represented
on CFC's Board of Directors.
1
RTFC had 531536 members as of May 31, 1999.2000. Membership in RTFC is limited to
CFC and commercial or cooperative (non-profit) telecommunications systems
eligible to receive loans or other assistance from RUS and which are
engaged (or plan to be engaged) in providing telecommunication services to
ultimate users and affiliates of such corporations.
1
GFC had threetwo members as of May 31, 1999.2000. Membership in GFC is limited to
CFC and cooperative or nonprofit Utility Memberutility member systems who have refinanced
all or a portion of their FFB debt through CFC.
Set forth below is a table showing by state or U.S. territory the total
number of CFC, RTFC and GFC members (memberships in each other have been
eliminated and corporations which belong to more than one of CFC, RTFC and
GFC have been counted only once), the percentage of total loans and the
percentage of total loans and guarantees outstanding at May 31, 1999.2000.
Number Loan and Number Loan and
of Loan Guarantee of Loan Guarantee
Members % % Members % %
Alabama 31 1.5% 1.7%30 2.6% 2.6% Missouri 66 4.2% 4.6%
Alaska 29 2.0% 1.8% Montana 39 1.7% 1.5%
Alaska 29 1.5%1.4% 1.3% Nebraska 40 0.1% 0.1%
American Samoa 1 0.0% 0.0% Nebraska 40 0.1% 0.1%
Arizona 24 0.5% 0.8% Nevada 5 0.6% 0.5% Arizona 21 0.6% 0.9%0.5%
Arkansas 29 2.8% 3.1% New Hampshire 7 1.9% 1.7% Arkansas 30 3.1% 3.5%1.5%
California 11 0.5% 0.5% New Jersey 1 0.1% 0.0% California 11 0.4% 0.4%0.0%
Colorado 40 2.5% 2.6% New Mexico 26 0.6% 0.6%
Colorado 38 2.7% 2.5%0.5% 0.4%
Connecticut 2 0.0% 0.0% New York 1514 0.1% 0.1%
Connecticut 1 0.0% 0.0%Delaware 2 0.2% 0.2% North Carolina 45 4.5% 4.7%
Delaware 2 0.1% 0.1%4.0% 4.1%
District of Columbia 7 2.3% 3.8% North Dakota 36 0.4% 0.3%
District of Columbia 7 1.9% 1.7% Ohio 40 2.3% 2.0%
Florida 21 3.4% 4.9%2.7% 3.7% Ohio 41 2.1% 1.9%
Georgia 72 9.0% 8.0% Oklahoma 52 2.6% 2.6%
Georgia 74 7.9% 7.1% Oregon 39 1.9% 1.7%2.5% 2.4%
Guam 1 0.0% 0.0% Oregon 39 1.6% 1.5%
Hawaii 1 0.0% 0.1% Pennsylvania 24 0.8% 0.8%25 0.9% 0.9%
Idaho 16 0.8%0.7% 0.7% South Carolina 38 4.1% 3.7%3.3% 3.0%
Illinois 57 3.8%55 3.4% 3.1% South Dakota 52 1.3%50 1.0% 0.9%
Indiana 53 1.2% Indiana 54 1.3% 2.0%1.7% Tennessee 2728 0.7% 0.7%0.6%
Iowa 123 2.2%125 2.1% 2.0% Texas 116 13.5% 12.8%115 15.3% 14.4%
Kansas 53 2.1% 2.1%52 1.8% 1.8% Utah 11 4.7% 4.6%3.9% 3.9%
Kentucky 35 1.6% 2.6%33 1.4% 2.2% Vermont 9 0.4%8 0.3% 0.3%
Louisiana 18 1.5% 1.4% 1.2% Virgin Islands 1 2.7% 2.4%3.3% 2.9%
Maine 9 0.4%8 0.3% 0.2% Virginia 28 2.2% 2.4%2.0%
Maryland 2 0.9% 0.8% 0.7% Washington 20 0.6% 0.6%19 0.5% 0.5%
Massachusetts 2 0.0% 0.0% West Virginia 5 0.0% 0.0%
Michigan 26 2.0% 1.8% Wisconsin 6628 1.8% 1.6% Wisconsin 67 1.6% 1.4%
Minnesota 77 4.0% 4.4%76 5.0% 5.1% Wyoming 15 1.0% 1.0%0.8% 0.8%
Mississippi 26 2.1% 2.2% Total 1,5881,585 100.0% 100.0%
Missouri 66 3.6% 4.3%
Distribution Systems
Distribution systems are utilities engaged in retail sales of electricity
to consumers in their service area.areas. Most distribution systems have all-requirementsall-
requirements power contracts with their power supply systems, which are
owned and controlled by the member systems. The wholesale power contracts
between the distribution systems and the power supply systems provide for
rate adjustments to cover the costs of supplying power, although in certain
cases such adjustments must be approved by regulatory agencies. Wholesale
power for resale also comes from other sources, including power supply
system contracts with government agencies, investor-owned utilities and
other entities, and in rare cases, the cooperative's own generating
facilities.
Wholesale power supply contracts ordinarily guarantee neither an
uninterrupted supply nor a constant cost of power. Contracts with RUS
financed power supply systems (which generally require the distribution
system to purchase all its power requirements from the power supply system)
provide for rate increases to pass along increases in sellers' costs. The
wholesale power contracts permit the power supply system, subject to
approval by RUS and, in certain circumstances, regulatory agencies, to
establish rates to its members so as to produce revenues sufficient, with
revenues from all other sources, to meet the costs of operation and
maintenance (including, without limitation, replacements, insurance, taxes
and administrative and general overhead expenses) of all generating,
transmission and related facilities, to pay the cost of any power and
energy purchased for resale, to pay the costs of generation and
transmission, to make all payments on account of all indebtedness and
leases of the power supply system and to provide for the establishment and
maintenance of reasonable
2
reserves. The rates under the 2
wholesale power contracts are required to be reviewed by
the Board of Directors of the power supply system at least annually.
Power contracts with investor-owned utilities and power supply systems
which do not borrow from RUS generally have rates subject to regulation by
the Federal Energy Regulatory Commission ("FERC"). Contracts with Federal
agencies generally permit rate changes by the selling agency (subject, in
some cases, to Federal regulatory approval).
Power Supply Systems
Power supply systems are utilities whichthat purchase or generate electric
power and provide it wholesale to distribution systems for delivery to the
ultimate retail consumer. Of the 6462 operating power supply systems
financed in whole or in part by RUS or CFC at December 31, 1998, 631999, 61 were
cooperatives owned directly or indirectly by groups of distribution systems
and 1one was government owned. Of this number, 3937 had generating capacity
of at least 100 megawatts, and 10ten had no generating capacity. Nine of the
10ten systems with no generating capacity operated transmission lines to
supply certain distribution systems. Certain other power supply systems
hadhave been formed but diddo not yet own generating or transmission facilities.
At December 31, 1998,1999, the 5854 power supply systems reporting to CFC owned
interests in 147141 generating plants representing generating capacity of
approximately 32,03631,058 megawatts, or approximately 4.1% of the nation's
estimated electric generating capacity, and served 695649 RUS distribution
system borrowers. Certain of the power supply systems which lease
generating plants from others operate these facilities to produce their
power requirements. Of the power supply systems' total generating capacity
in place as of December 31, 1998,1999, steam plants accounted for 90%89.5%
(including nuclear capacity representing approximately 8.2%8.6% of such total
generating capacity), internal combustion plants accounted for 7.8%8.1% and
hydroelectric plants accounted for 2.2%2.4%.
Service Organizations and Associate Member Systems
Service organizations include the National Rural Electric Cooperative
Association ("NRECA"), which represents cooperatives nationally, as well as
the statewide cooperative associations, which represent the cooperatives
within thea state. Associate members include organizations that are nonprofit
groups or entities organized on a cooperative basis which are owned,
controlled or operated by Classclass A, B or C members and which provide non-electricnon-
electric services primarily for the benefit of ultimate consumers.
Telecommunications Systems
Telecommunications systems include not-for-profit cooperative organizations
and for-profit commercial organizations that provide telecommunications
services to rural areas.
Independent rural telecommunications companies provide service in the
majority of America's rural areas. These companies, which number
approximately 1,050,1,020, are called independent because they are not affiliated
with the Bell operating companies or other large holding companies. The
majority of these independent rural telecommunications companies are small
family-owned or privately-held commercial companies. A handfulSix of these
commercial companies are publicly traded. In addition, thereIncluded in the total are
approximately 250275 not-for-profit cooperative telecommunications companies.
Rural telecommunications companies serve approximately 1.2 million business
customers and 4.44.7 million residential customers in 4448 states and U.S.
territories, and range in size from fewer than 50 customers to more than
50,000.100,000. Rural telecommunications companies' annual operating revenues
range from less than $100,000 to $50$100 million. In addition to basic
telecommunications service, most independents offer other communications
services ranging fromincluding wireless, to cable TV totelevision and internet access. Most
rural telecommunications companies' networks are state-of-the-art,
incorporating digital switching, fiber optics and other advanced
technologies.
Loan Programs
CFC offers long-term loans with maturities of up to 35 years, intermediate-
term loans with maturities of up to five years, and line of credit loans.
Long-term and intermediate-term loans are available at fixed or variable
interest rates and line of credit loans are available only at a variable
interest rate. Long-term loans are generally secured by a first mortgage
lien on all assets and revenues of the borrower. Intermediate-term loans
may be secured or unsecured and line of credit loans are generally
unsecured. On line of credit loans with a maturity of more than one year,
the outstanding balance is generally required to be paid down to zero for
five consecutive days during each year. CFC makes loans to borrowers on a
3
concurrent basis with RUS (generally 70% RUS / RUS/30% CFC) and will also make
100% loans to borrowers electing not to borrow from RUS.
Generally, borrowers3
Borrowers are required to forwardprovide annual audited financial statements to
CFC. Borrowers also must supplymake various other representations in an officer's
certificate and maintain certain levels of financial performance as
prescribed under each loan program.
Set forth below is a table showing loans outstanding to borrowers as of May
31, 2000, 1999 1998 and 19971998 and the weighted average interest rates thereon and
loans committed but unadvanced to borrowers at May 31, 1999.2000.
Loans committed
(Dollar amounts in thousands) Loans committed
Loans outstanding and weighted average interest rates but unadvanced
at
thereon at May 31, at May 31, 19992000
2000 (A) 1999 1998 1997 (A)(B)
Long-term fixed rate secured loans(C)(C) (D):
Electric systems $ 6,674,470 6.74% $ 6,797,786 6.69% $ 4,289,629 7.02% $ 2,827,417 7.27% $ 198,010-
Telecommunication systems 1,540,928 7.36% 1,258,458 6.88% 222,733 8.05% 148,566 8.53% -
Total long-term fixed rate secured loans8,215,398 6.86% 8,056,244 6.72% 4,512,362 7.07% 2,975,983 7.33% 198,010-
Long-term variable rate secured loans (E):
Electric systems 4,019,155 7.45% 2,334,878 5.85% 3,209,815 6.55% 3,593,828 6.55% 6,806,6827,524,197
Telecommunication systems 1,816,826 8.02% 1,096,312 6.43% 1,131,561 6.65% 875,135 6.65% 561,442589,696
Total long-term variable rate secured loans5,835,981 7.62% 3,431,190 6.04% 4,341,376 6.57% 4,468,963 6.57% 7,368,124
Refinancing variable rate loans8,113,893
Loans guaranteed by RUS:
Electric systems 89,153 6.92% 130,940 5.87% 133,195 6.36% 137,984 6.49% -
Intermediate-term secured loans:
Electric systems 141,771 7.41% 198,894 6.62% 151,202 7.39% 226,107 6.70% 80,41148,533
Telecommunication systems - - 686 6.42% 86 7.25% -
- -
Total intermediate-term secured loans 141,771 7.41% 199,580 6.50% 151,288 7.39% 226,107 6.70% 80,41148,533
Intermediate-term unsecured loans:
Electric systems 200,706 7.35% 102,221 6.26% 198,121 6.70% 115,989 6.70% 219,248408,644
Telecommunication systems 12,206 7.80% 12,809 6.42% 15,495 7.25% 13,683 7.25% 11,6806,090
Total intermediate-term unsecured loans212,912 7.37% 115,030 6.28% 213,616 6.74% 129,672 6.76% 230,928414,734
Line of credit loans (F):
Electric systems 1,281,483 7.59% 850,039 5.99% 688,995 6.70% 539,527 6.70% 4,392,0124,403,987
Telecommunication systems 329,768 8.32% 342,074 6.66% 205,026 7.25% 61,779 7.25% 538,619717,700
Total line of credit loans 1,611,251 7.74% 1,192,113 6.19% 894,021 6.83% 601,306 6.76% 4,930,6315,121,687
Nonperforming loans:
Electric systems (G) - - 1,643 5.55% 4,080 6.41% 9,428 6.75% -
Restructured loans:
Electric systems (H) 571,579 3.90% 576,662 3.90% 329,538 7.17% 361,961 8.32% -
Total loans 16,678,045 7.12% 13,703,402 6.37% 10,579,476 6.70% 8,911,404 6.81% 12,808,10413,698,847
Less: Allowance for loan losses 212,203 250,131 233,208(228,292) (212,203) (250,131) -
Net loans $16,449,753 $13,491,199 $10,329,345 $ 8,678,196 $12,808,104$13,698,847
Total by member class:
Distribution $10,394,985 $ 8,714,742 $ 7,257,330 $ 6,274,096 $ 9,264,0019,644,058
Power supply 2,037,108 1,895,712 1,489,908 1,295,582 2,030,9182,054,322
Statewide and associate 546,224 382,609 257,337 242,563 401,444686,981
Telecommunication systems 3,699,728 2,710,339 1,574,901 1,099,163 1,111,7411,313,486
Total $16,678,045 $13,703,402 $10,579,476 $ 8,911,404 $12,808,104$13,698,847
_________________________________________________________
(A) The interest rates in effect at August 1, 1999,2000, on loans to electric
members were 8.10%8.15% to 8.80% for long-term loans with a seven-year fixed
rate term, 6.30%7.70% to 8.10% on variable rate long-term loans and 6.45%8.25% on
intermediate-term loans and lines of credit. The rates in effect at
August 1, 1999,2000, on loans to telecommunication organizationssystems were 8.15%8.20% to
8.65% for long-term loans with a seven-
yearseven-year fixed rate term, 6.40%7.75% to
8.15% on long-term variable rate loans, 7.00%8.40% on intermediate-term
loans and 7.00%8.80% on lines of credit.
(B) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed and for which loan contracts have
been executed but funds have not been advanced. Since commitments may
expire without being fully drawn upon, the total amounts reported as
commitments do not necessarily represent future cash requirements.
Collateral and security requirements for advances on commitments are
identical to those on initial loan approval. Long-term unadvanced
commitments that do not have an interest rate associated with the
commitment have been listed with the 4
variable rate loans. The type
of interest rate, fixed or variable, is determined at the time the loan
is advanced.
(C) Includes $161.9$102 million, $121.6$162 million and $38.4$122 million of unsecured loans
at May 31, 2000, 1999 and 1998, and 1997.respectively.
(D) During fiscal yearOn January 1, 2000, $291.6 million of such outstanding fixed rate
loans, which currently have a weighted average interest rate of 6.48% per
annum, will become subject to rate adjustment. During the first quarter of
calendar year 1999, long-term fixed rate loans totaling $105.2$241 million
had their interest rates adjusted.
The interest rate on these loans will be
eligible to be adjusted again during the first quarter of calendar year 2000
to the lowest long-term fixed rate offered during 1999 for the term selected.
At January 1, 1999 and May 31, 1999, the seven-year long-term fixed rate was
6.05% and 7.65%, respectively.
(E) Includes $39.2$49 million, $53.3$39 million and $112.4$53 million of unsecured loans at
May 31, 2000, 1999 and 1998, and 1997.respectively.
(F) Includes $277.5$342 million, $81.4$278 million and $99.1$81 million of secured loans at
May 31, 2000, 1999 and 1998, and 1997.respectively.
(G) The rates on nonperforming loans are the weighted average of the stated
rates on such loans as of the dates shown and do not necessarily
represent the interest recognized by CFC from such loans.
(H) The rate on restructured loans for 1999 and 2000 represents the
effective interest rate provided bybased on the scheduled minimum cashflow payments. The
interest ratesrate on restructured loans for 1998 and 1997 areis the weighted average of
the stated ratesrate on restructured loans.
4
Interest Rates on Loans
CFC's goal as a non-profit cooperatively-owned finance company is to set
its rates at levels that will provide its members with the lowest cost
financing as well as to maintainwhile maintaining sound financial results as required to obtain
high credit ratings on its debt instruments. CFC sets its interest rates
based on the cost of funding plus provisions for general and administrative
expenses, the loan loss allowance and a reasonable net margin. Various
discounts, fromwhich reduce the stated interest rates, are available to
borrowers meeting certain criteria related to performance, number of creditors and loan volume.whether
they borrow exclusively from CFC.
Set forth below are the weighted average interest rates earned by CFC
(recognized on a cash basis in the case of nonperforming and restructured
loans) on all loans outstanding
during the fiscal years ended May 31:
INTEREST RATES EARNED ON LOANS2000 1999 1998 1997
Long-term fixed rate 6.66% 6.69% 7.12% 7.65%
Long-term variable rate 6.59% 6.20% 6.53%
6.25%
Telecommunication organizations (1) 7.45% 6.88% 7.05% 6.73%
Refinancing loans guaranteed by RUS 6.29% 5.87% 6.32%
6.36%
Intermediate-term 6.92% 6.98% 7.08%
7.08%
Short-term 7.01% 6.26% 6.74%
6.40%
Associate members 6.85% 6.47% 6.65%
6.42%
Nonperforming (1)(2) (3) 0.00% 0.00% 0.00%
Restructured 3.90% 1.73% 0.00%
0.56%
All loans 6.74% 6.51% 6.60%
6.58%
_________________________________________
(1) Includes long-term fixed rate, long-term variable rate, intermediate-
term and short-term loans.
(2) Rate does not reflect recognition of $12.5 million of deferred gain in
1999.
(3) Interest rate earned by CFC recognized on a cash basis.
Electric Loan Programs
Long-Term Loans
Long-term loans are generally for terms of up to 35 years. A borrower can
select a fixed interest rate for periods of one to 35 years or the variable
rate. Upon the expiration of the selected fixed interest rate term, the
borrower must select the variable rate or select another fixed rate term for
a period that does not exceed the remaining loan maturity or select the variable rate. A borrower
may elect to switch its fixed rate loan to a variable rate loan at any time
and may be subject to a conversion fee. A borrower may convert its variable
rate loan to a fixed rate loan at any time, without a fee.maturity. Long-term
fixed rates are set daily by CFC and the long-term variable rate is set on
the
5
first day of each month. The fixed rate on a loan is determined on the
day the loan is advanced based on the rate term selected. A borrower may
divide its loan into various mini-notes. The borrower then has the option
of selecting a fixed or variable interest rate for each mini-note. Long-term
loans are generally secured by a mortgage on all assets and revenues of the
borrower on a pari passu basis with RUS. Long-term loans may be prepaid by
the borrower at any time, subject to the payment of a prepayment premium.
To be eligible for long-term loan advances, distribution systems must
maintain an average modified debt service coverage ratio ("MDSC"), as
defined in the loan agreement, of 1.35 or greater. The distribution
systems must also be in good standing with CFC and their states of
incorporation, supply evidence of proper corporate authority and deliver to
CFC annual audited financial statements. Generally, the minimum
eligibility requirements for power supply systems are an average times
interest earned ratio ("TIER") and MDSC, as described in the loan
agreement, of 1.0.1.0 or greater. Loans to power supply systems are considered
on a case by casecase-by-case basis depending on the amount of the loan, the intended
use of funds, the financial condition of the borrower and any guarantees
that may be provided by a third party, including RUS and the member
distribution systems. CFC has in the past and may in the future make long-termlong-
term loans to distribution and power supply systems that do not meet the
minimum lending criteria. During the five years ended May 31, 1999,
1.3%2000, 1.1%
of the dollar amount of long-term loans approved were to borrowers that did
not meet the minimum lending criteria. DuringIn addition, during the five years
ended May 31, 1999,2000, CFC also approved loans totaling $867.0$867 million for discounted
RUS note buyouts by four power supply systems. In these transactions, CFC
obtained guarantees from the member distribution systems totaling $323.3$323
million.
Intermediate-Term Loans and Line of Credit Loans
Intermediate-term loans are generally for terms of one year to five years.
Intermediate-term loans can be advanced at a fixed interest rate or at a
variable interest rate. Line of credit loans may only be advanced only at a
variable interest rate. The intermediate-term loan and line of credit loan
variable interest rate is set on the first day of each month. Intermediate-
term loans may be secured or unsecured and line of credit loans are generally
unsecured. Line of
credit loans with maturities of greater than one year generally must be
paid down to a zero outstanding balance for five consecutive days during
each year. The rates on intermediate-term loans may not be
converted from variable to fixed or from fixed to variable. Intermediate-
term loans may be prepaid at any time, subject to the payment of a prepayment
premium. Line of credit loans may be prepaid at any time, without a premium.
To be eligible for an intermediate-term loan or line of credit loan,
distribution and power supply borrowers must be in good standing with CFC
and demonstrate their ability to repay the loan.
5
Power Vision Program
Under the Power Vision program, an eligible borrower is pre-approved for
long-
term,long-term secured financing, in an aggregate amount that can be drawn down
in increments as requested by the borrower over a five-year period. All
necessary approvals, administrationadministrative procedures and loan documentation are
obtained or put into place at the time the credit facility is established,
and the borrower has significant flexibility in determining the size and
termsmaturity of each loan requested under the facility. CFC does not charge
its members a commitment fee on amounts approved under the Power Vision
program. A borrower must meet loan eligibility criteria at the time of any
advance under the Power Vision program.
Telecommunications Loan Programs
Long-Term Loans
CFC makes long-term loans to rural telecommunications companies and their
affiliates for the acquisition of and the construction or upgrade of
wireline telecommunications systems, wireless telecommunications systems,
fiber optic networks and cable television systems as well as other
legitimate corporate purposes. Long-term loans are generally for periods
of up to 15 years. Loans may be advanced at a fixed or variable interest
rate. Fixed rates are generally available for periods from 1 year to 15
years. Upon the expiration of the selected fixed interest rate term, the
borrower must select another fixed rate term for a period that does not
exceed the remaining loan maturity or select the variable rate. A borrower may elect to switch its fixed rate
loan to a variable rate loan at any time and may be subject to a conversion
fee. A borrower may convert its variable rate loan to a fixed rate loan at
any time, without a fee. Long-term
fixed rates for telecommunications loans are set daily by CFC and the long-termlong-
term variable rate is set on the first day of each month. The fixed rate
on a loan is determined on the day the loan is advanced based on the rate term
selected. A borrower may divide its loan into various mini-notes. The
borrower then has the option of selecting a fixed or variable interest rate
for each note. Long-term loans are generally
secured by a mortgage on all assets and revenues of the borrower and may be
further supported by guarantees from affiliated companies. Long-term loans
may be prepaid by the borrower at any time, subject to the payment of a
prepayment premium.
6
A wireline telecommunications system generally must be able to demonstrate
the ability to achieve and maintain an annual debt service coverage ratio
("DSC") and an annual TIER of 1.25 and 1.50, respectively, to borrow from
CFC. A cable television system, fiber optic network or cellular
telecommunications system generally must be able to demonstrate the ability
to achieve and maintain an annual DSC of 1.25 to borrow from CFC. Loans
made to start-up ventures using emerging technologies are evaluated based
on the quality of the business plan and the level and quality of credit
support from established companies. Based on the business plan, specific
covenants are developed for each transaction which require performance at
levels sufficient to repay the CFC obligations under the approved terms.
Intermediate-Term Loans and Line of Credit Loans
CFC provides intermediate-term equipment financing to telecommunications
borrowers for periods up to five years. These loans are provided on an
unsecured basis and are used to finance the purchase and installation of
central office equipment, support assets and other communications
equipment. Intermediate-term equipment financing loans are generally made
to operating telecommunications companies with an equity level of at least
25% of total assets and which have achieved a DSC ratio for each of the
previous two calendar years of at least 1.75.
CFC also provides line of credit loans to telecommunications systems for
periods of up to five years. These line of credit loans are typically in
the form of a revolving line of credit, which requires the borrower to pay
off the balance for five consecutive business days at least once during
each 12-month period. These line of credit loans are provided on an
unsecured basis and are used primarily for normal cash management. Line of credit
loans are available to telecommunications systems generally in amounts not
to exceed the greater of 5% of total assets or 25% of equity in excess of
35% of total assets.
Interim financing line of credit loans are also made available to CFC
telecommunications members whichwho have an RUS and/or Rural Telephone Bank
("RTB") loan application pending and have received approval from RUS to
obtain interim financing. These loans are for terms up to 24 months and
must be retired with advances from the RUS/RTB long-term loans.
RUS Guaranteed Loans
Congress enacted legislation which allowedthat allows certain systems to prepay
existing borrowings from the FFB without prepayment penalties or fees. CFC
established a program under which it made long-term loans to members for
the purpose of prepaying these loans. Each note evidencing such a loan was
issued to a trust which in turn issued certificates evidencing its
ownership to CFC. The principal and interest payments on these notes are
guaranteed by RUS. Under RUS loan repayment regulations, the note rate may
not exceed the rate borne by the system's prepaid borrowings from the FFB
adjusted to reflect savings accrued since prepayment of the note compared
with the rate on the prepaid borrowing. The systems are required to pay
serviceservicing fees to CFC in connection with these transactions. All of these
certificates that have not been sold in public offerings have been
transferred to GFC ($130.946 million outstanding at May 31, 1999)2000). In addition,
at May 31, 2000, CFC services $150.1$147 million of these loans for trusts, the
certificates of which have been sold in public offerings.
6
The level of authority for RUS loan guarantees for the fiscal year ending
September 30, 1999, was $700 million.2000, is $1.7 billion. Proposed levels for fiscal year 20002001
range from $700 million$1.2 billion to $1.5$1.7 billion. CFC may participate as an
eligible lender in the RUS loan guarantee program under the terms and
conditions of the Master Loan Guarantee and Servicing Agreement, dated as
of February 16, 1999, between RUS and CFC. Under this agreement, CFC may
make long-term secured loans to eligible members for periods of up to 35
years, at fixed or variable rates established by CFC. As long as CFC is in
compliance with the terms and conditions of the agreement, RUS will
guarantee the principal and interest payments on the notes evidencing such
loans. At May 31, 2000, CFC had $43 million of loans outstanding under
this program.
Largest Borrowers
At May 31, 1999,2000, the ten largest borrowers had outstanding loans from CFC
totaling $2,241.5$3,464 million, which represented approximately 16.4%21% of CFC's total loans
outstanding. At May 31, 1999,2000, outstanding guarantees for these same ten
borrowers totaled $702.7$495 million, which represented 41.7%25% of CFC's total
guarantees outstanding. CFC's ten largest credit exposures represented 21%
and 19% of total exposure at May 31, 2000 and 1999, and 1998.respectively. On those
dates, no member had outstanding loans and guarantees in excess of 4.2%3.6% of
the aggregate amount of CFC's outstanding loans and guarantees; however,
one of the ten largest borrowers, Deseret Generation & Transmission Co-operativeCo-
operative ("Deseret"), was operating under a restructure agreement (see
Note 10 to Combined Financial Statements). At May 31, 1999,2000, total exposure
to Deseret represented 4.1%3.5% of total loans and guarantees outstanding.
Loans outstanding to Deseret accounted for 4.2%3.4% of total loans outstanding.
Guarantees outstanding to Deseret accounted for 3.3%4.5% of total guarantees
outstanding. Total loans and guarantees outstanding to Deseret equaled
36.1%34.6% of the total Members' Equity, Members' Subordinated Certificatesof members' equity, members' subordinated certificates
and the allowance for loan losses.
7
Credit Limitation
In the fourth quarter of fiscal year 2000, CFC maintainsadopted a new credit
underwriting standards and other on-going credit
procedures so that, under reasonable "worst case" scenarios, any potential
losslimitation policy. Under the new policy, (1) a borrower's total exposure
is limited to 25% of CFC's defined net worth, (2) a single borrower should not exceedborrower's unsecured
loans are limited to 10% of CFC's defined net worth.
CFC calculatesworth, and (3) a weighted total exposure for each borrower by applying a
risk factorborrower's
guarantees outstanding are limited to each category of exposure and giving the borrower credit for
its Members Subordinated Certificates and equity investments in CFC. The
weighted exposure is then compared against the credit limitation, 10% of CFC's defined net worth.
CFC's defined net worth is the sumtotal of Members'
Equity, Members' Subordinated Certificatessubordinated certificates issued
and outstanding, members' equity and the allowance for loan losses.
Asloss allowance. If a
borrower submitting a new loan application has an exposure in excess of any
one of the three tests, only the CFC Board of Directors may approve the new
loan application. The new policy allows more total exposure, but is more
restrictive on guarantee and unsecured loan exposure than the old policy.
CFC's Board of Directors may approve a loan to a borrower with an exposure
in excess of one or more of these tests after consideration of other
factors, including the amount of the loan, the maturity of the loan, and
the value of collateral held by CFC. At May 31, 1999, all2000, there were three
borrowers were withinwith total exposure greater than 25% of defined net worth and one
borrower with total guarantees outstanding in excess of 10% of defined net
worth. Any new loan applications to these borrowers may be approved only
by CFC's policy limit.Board of Directors.
Loan Security
CFC typically makes long-term loans to its members on a secured basis.
Intermediate-term loans may be secured, as determined on a case by casecase-by-case
basis. Line of credit loans are generally unsecured. At May 31, 1999,2000, a
total of $1,230.7$1,632 million of loans were unsecured representing 9.1%9.8% of total
loans and 8.1% of total loans and guarantees.loans. CFC's long-term loans are typically secured pro-rata with other
secured lenders (primarily RUS) by all assets and future revenues of the
borrower. Guarantees are secured on a pro-rata basis with other secured
creditors by all assets and future revenues of the borrower or by the
underlying financed asset. In addition to the collateral received, CFC
also requires that its borrowers set rates designed to achieve certain
financial ratios.
In the case of members whose property is subject to the new form of RUS
mortgage whichthat has been issued to borrowers since January 1996, no RUS
approval of the CFC loan is required if certain objective tests set forth
in the mortgage are met. In August 1998, RUS promulgated regulations which
provide that no RUS approval is required for a loan made to a member whose
property is subject to the pre-1996 form of RUS mortgage, so long as the
objective tests set forth in the new form of RUS mortgage are met. In all
other cases, RUS approval of the loan is required, even in the case of a
100% CFC loan, in order to accommodate RUS's mortgage lien so that CFC may
share ratably in the security provided by the mortgaged property. CFC and
RUS are then mortgagees in common, entitled to the security in proportion
to the unpaid principal amounts of their respective loans. Mortgages do
not require that the value of the mortgaged property be at least equal to
the obligations secured thereby.
Events of default under the long-term mortgages include default in the
payment of the mortgage notes, default (continuing after grace periods in
some cases) in the performance of the covenants in the loan agreements or
the mortgages and events of bankruptcy and insolvency. Under common
mortgages securing long-term CFC loans to distribution system members, RUS
has the sole right to exercise remedies on behalf of all holders of
mortgage notes for 30 days after default. If RUS does not act within 30
days or if RUS is not legally entitled to act on behalf of all noteholders,
CFC may exercise remedies. Under common mortgages securing long-term CFC
loans to, or guarantee reimbursement obligations of, power supply
7
members, RUS retains substantial control over the exercise of mortgage
remedies. RUS holds the loan security on loans for which it has provided a
guarantee.
Security for long-term loans made to RUS telecommunications borrowers
generally consists of a first mortgage lien on the assets and revenues of
the system on a pari passu basis with RUS. Security from non-RUS
telecommunications borrowers is considered on a case-by-case basis, but
generally a loan will not exceed 80% of the estimated value of the
collateral. At May 31, 1999,2000, a total of $215.1$212 million or 7.9%5.7% of CFC's
telecommunications loans outstanding were unsecured.
At May 31, 2000, CFC had a total of $297 million of unsecured guarantees,
representing 14.8% of total guarantees. When considered together, CFC's
unsecured credit at May 31, 2000, totaled $1,929 million, representing 10.3%
of total loans and guarantees outstanding.
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 foror a longer pricing term at any time,
without a fee. A borrower is allowed to convert a fixed interest rate to a
variable interest rate at any time, subject to
a fee.fee in most instances. Intermediate-term loans and line of credit loans
do not offer conversion options. There is
no fee on the conversion of a fixed interest rate to a variable interest
rate at the end of a fixed rate pricing term. The fee on the conversion of a fixed
interest rate to a variable interest rate at all other times ranges from 25
to 50 basis points of the outstanding loan amount plus an amount to cover
the funding loss on the remainder of the current fixed rate pricing term.
Prepayment of Loans
Borrowers may prepay long-term loans at any time, subject to the payment of
a prepayment premium.premium and a make-whole premium, if applicable. Long-term
loans prepaid before the maturity of the fixed rate term will be assessed a
prepayment premium ranging from 33 to 50 basis points of the outstanding
loan balance at the time of prepayment. In addition, long-term loans with
a fixed interest rate which have a rate greater than the current rate for
the same remaining term will be assessed a premium to cover funding losses.
Line of credit loans may be prepaid at any time without a premium.
8
Pledging of Loans
CFC pledges long-term secured distribution member loans as collateral to
secure its Collateral Trust Bonds.collateral trust bonds. CFC must maintain collateral on deposit
with the trustee in a principal amount at least equal to the balance of
Collateral Trust Bondscollateral trust bonds outstanding. At May 31, 19992000 and 1998,1999, CFC had
$3,016.9$3,484 million and $1,930.9$3,017 million, respectively, of collateral on deposit
and $2,996.3securing $3,351 million and $1,902.1$2,996 million, respectively, of Collateral Trust Bondscollateral
trust bonds outstanding. CFC may withdraw specific collateral at any time, provided
that the principal balance of notes orand cash orand eligible securities on
deposit after withdrawal is greater than the amount of bonds outstanding. At least
annually, CFC provides the trustee with a report of the principal amount of
all collateral pledged.
Guarantee Programs
Substantially all guarantees have been provided on behalf of power supply
members. Set forth below is a table showing CFC's guarantees:
May 31,
(Dollar amounts in thousands) 2000 1999 1998 1997
Long-term tax-exempt bonds $1,024,340* $1,062,185* $1,148,500* $1,190,925*
Debt portions of leveraged lease
transactionsTransactions 111,319 174,961 437,175 418,916
Indemnifications of tax benefit
transfersTransfers 259,223 285,169 312,771
338,264Letters of credit 328,995 208,732 45,325
Other guarantees 274,325 162,150 136,048
132,566
Total $1,684,465 $2,034,494 $2,080,671
__________________________$1,998,202 $1,893,197 $2,079,819
_______________________
* Includes $947.3$920 million, $1,017.8$947 million and $1,043.2$1,018 million at May 31, 2000,
1999 1998 and 1997,1998, respectively, of adjustable rate pollution control bonds
which can be tendered for purchase at specified times at the option of
the holders (in the case of $244.1$239 million, $252.8$244 million and $260.7$253 million
of such bonds outstanding at May 31, 2000, 1999 1998 and 1997,1998, respectively,
at any time on seven days' notice; in the case of $225.6$219 million, $235.6$226
million and $242.3$236 million outstanding at May 31, 2000, 1999 1998 and 1997,1998,
respectively, at any time on a minimum of one day's notice; and in the
case of the remainder on a five-week or semiannual basis). CFC has
agreed to purchase any bonds that cannot be remarketed. Since the
inception of the program, CFC has not been required to purchase any
bonds.
Guarantees of Long-Term Tax-Exempt Bonds
CFC has guaranteed debt issued in connection with the construction or
acquisition by CFC members of pollution control, solid waste disposal,
industrial development and electric distribution facilities. Such debt is
issued by governmental authorities and the interest thereon is exempt from
Federal taxation. The proceeds of the offering are made available to the
member system, which in turn is obligated to pay the governmental authority
amounts sufficient to service the debt. The debt, which is guaranteed by
CFC, may include short- and long-term obligations.
8
In the event of a default by a system for nonpayment of debt service, CFC
is obligated to pay, after available debt service reserve funds have been
exhausted, scheduled debt service under its guarantee and theguarantee. The bond issue will
not be accelerated so long as CFC performs under its guarantee. The system
is required to repay, on demand, any amount advanced by CFC pursuant to its
guarantee. This repayment obligation is secured by a common mortgage with
RUS on all the system's assets, but CFC may not exercise remedies
thereunder for up to two years following default. However, if the debt is
accelerated because of a determination that the interest thereon is not
tax-
exempt,tax-exempt, the system's obligation to reimburse CFC for any guarantee
payments will be treated as a long-term loan. The system is required to
pay to CFC initial and/or on-going guarantee fees in connection with these
transactions.
Certain guaranteed long-term debt bears interest at variable rates which
are adjusted at intervals of one to 270 days, weekly, each five weeks or
semi-
annuallysemi-annually to a level expected to permit their resale or auction at par.
At the option of the member on whose behalf it is issued, and provided
funding sources are available, rates on such debt may be fixed until
maturity. Holders have the right to tender the debt for purchase at par at
the time rates are reset when it bears interest at a variable rate and CFC
has committed to purchase debt so tendered if it cannot otherwise be
remarketed. If CFC held the securities, the cooperative would pay interest
to CFC at its intermediate-term loan rate.
Guarantees of Lease Transactions
CFC has a program of lending to or guaranteeing debt issued by National
Cooperative Services Corporation ("NCSC") in connection with leveraged
lease transactions. In such transactions, NCSC has lentlends money to an
industrial or financial company (a "Lessor""lessor") for the purchase of a power
plant (or an undivided interest therein) or utility equipment which wasis then
leased to a CFC member (the "Lessee""lessee") under a lease requiring the Lesseelessee to
pay amounts sufficient to permit the Lessorlessor to service the loan. The loans
wereare made on a non-recourse basis to the Lessorlessor but wereare secured by the
property leased and the owner's rights as Lessor.lessor. NCSC borrowedborrows the funds
it lentlends either directly from CFC or from another creditor
9
with a CFC
guarantee. NCSC is obligated to pay administrative and/or guarantee fees
to CFC in connection with these transactions. Such fees are reimbursed to
NCSC by the Lesseelessee in each transaction. CFC may also guarantee the rent
obligation of its members to a third party.
Guarantees of Tax Benefit Transfers
CFC has also guaranteed members' obligations to indemnify against loss of
tax benefits in certain tax benefit transfers that occurred in 1981 and
1982. A member's obligation to reimburse CFC for any guarantee payments
would be treated as a long-term loan, secured on a pari passu basis with
RUS by a first lien on substantially all the member's property to the
extent of any cash received by the member at the outset of the transaction.
The remainder would be treated as an intermediate-term loan secured by a
subordinated mortgage on substantially all of the member's property. Due
to changes in Federal tax law, in 1982, no guarantees of this nature have occurred
since 1982.
Letters of Credit
CFC issues irrevocable letters of credit to support members' obligations to
energy marketers, other third parties and to the Rural Business and
Cooperative Development Service. Letters of credit are generally issued on
an unsecured basis and with such issuance fees as may be determined from
time to time. Each letter of credit issued by CFC is supported by a
reimbursement agreement with the member on whose behalf the letter of
credit was issued. In the event a beneficiary draws on a letter of credit,
the agreement generally requires the member to reimburse the issuer of the
letter of credit within one year from the date of the draw, with interest
accruing from such date at the issuer's variable rate of interest in effect
on the date of the draw. The agreement also requires the member to pay, as
applicable, a late payment charge and all costs of collection, including
reasonable attorneys' fees.
Other Guarantees
CFC may provide other loans and guarantees as requested by its members. Such
loans and guarantees will generallymay be made on a secured or unsecured basis with
interest rates and guarantee fees
set to cover CFC's cost of capital, general and administrative expenses, a
provision for loan losses and maintenance of a reasonable margin.
9
CFC Financing Factors
CFC funds its loan programs through retained margins for the current year,
allocated but unretired Patronage Capital (Members' Equitypatronage capital (members' equity investments),
Members' Subordinated Certificatemembers' subordinated certificate investments and issuance of debt to
members and in the capital markets. The following table details the funds
outstanding, percentage of total capitalization and the average interest
rate on funds outstanding at May 31, 2000, 1999 1998 and 1997.1998.
(Dollar amountamounts in thousands) 2000 1999 1998
1997
% Average % Average % Average
Amount % of Interest Amount % of Interest Amount % of Interest
Outstanding Total Rate Outstanding Total Rate Outstanding Total Rate
Commercial Paperpaper (1) $ 6,705,035 40% 6.17% $ 6,246,243 45% 4.94% $ 5,865,904 55% 5.54%
$5,607,373 62% 5.64%
Collateral Trust Bondstrust bonds 3,351,366 20% 6.34% 2,996,299 22% 6.42% 1,897,688 18% 6.79%
1,149,192 13% 7.18%
Medium-Term NotesMedium-term notes 4,791,361 28% 6.33% 2,625,286 19% 6.10% 1,109,258 10% 6.31%
615,396 7% 6.48%
Quarterly Income Capital Securitiesincome
capital securities 400,000 2% 7.62% 400,000 3% 7.62% 200,000 2% 7.87%
125,000 1% 8.00%
Members' Subordinated Certificatessubordinated
certificates 1,340,417 8% 3.02% 1,239,816 9% 3.25% 1,229,166 12% 3.70%
1,212,486 14% 4.29%
Members' Equityequity 341,217 2% 0.00% 294,953 2% -0.00% 279,278 3% - 271,594 3% -0.00%
Total $13,802,597$16,929,396 100% 5.30% $10,581,2945.91% $13,802,597 100% 5.53% $8,981,0415.30% $10,581,294 100% 5.57%5.53%
_________________________________________________
(1) Includes $375.0$155 million, $185.0$375 million and $115.0$185 million of Bank Bid
Notesbank bid notes
for 2000, 1999 1998 and 1997,1998, respectively.
Members' Subordinated Certificates
As a Condition of Membership
Generally, members are required to purchase Membership Subordinated
Certificatesmembership subordinated
certificates as a condition of membership. The amount of certificates
required to be purchased is determined by applying a formula to the
member's operations for a period of time, generally 15 years. The
Membership
Subordinated Certificatesmembership subordinated certificates generally mature in 100 years from
issuance and pay interest at a rate of 5%. At May 31, 1999,2000, CFC had a
total of $641.9$642 million in Membership Subordinated Certificatesmembership subordinated certificates
outstanding. A small portion of these certificates maturematures 50
years from issuance and paypays interest at a rate of 3%. Issuance of these
certificates has not been significant in recent years. At May 31, 2000,
the weighted average maturity of these certificates is approximately 76
years.
As a Condition of Borrowing
Distribution system members may be required to purchase, on long-term
loans, a Loan Subordinated Certificateloan subordinated certificate for up to 3%2% of the loan amount. The amountPower
supply system members may be required to purchase a loan subordinated
certificate of 7% of the requiredloan amount. These certificates do not pay
interest and do not amortize. The requirement to purchase such a
certificate purchase is determined by the member's leverage ratio with CFC and the
type of loan selected. Power supply system membersIn large transactions, CFC may be required toincrease the
purchase a Loan Subordinated Certificaterequirement of up to 12% of
the loan amount.subordinated certificates. Certificates
issued in these transactions may pay interest and/or may amortize.
Telecommunications systems and associate members are required to purchase,
on long-term loans, Loan Subordinated Certificates
equalloan subordinated certificates for up to 5%10% of each loan
advance. These certificates do not pay interest, but amortize annually
based on the outstanding loan balance. This
amortization amount is paid back to the member annually. At May 31, 1999,2000, CFC had a total of
$422.8$517 million of Loan Subordinated
10
Certificatesloan subordinated certificates outstanding. A small
portion of these certificates, issued prior to policy changes, maturematures at
the same time as the loan and paypays interest at a rate of 3%.
As a Condition of Receiving a Guarantee
Members may be required to purchase a Guarantee Subordinated Certificateguarantee subordinated certificate of
up to 12%12.5% of the principal amount of the guarantee. The Guarantee
Subordinated Certificates matureguarantee
subordinated certificate matures at the same time as the guarantee. The
certificates pay interest at a rate to be determined in each transaction. At May
31, 1999,2000, CFC had a total of $175.1$181 million of Guarantee Subordinatedguarantee subordinated
certificates outstanding.
Century Certificates
outstanding.CFC has created a new type of subordinated certificate for its members to
purchase. The century certificate is a voluntary investment by members, not
a required purchase as with membership, loan and guarantee certificates.
The century certificates may be issued with maturities of up to 100 years.
The certificates are redeemable by the members after 44, 59, 69, 79 and 89
years. Interest is paid on the certificates semi-annually. The interest
rate may be fixed or variable. The rates offered are higher than the fixed
or variable rates on other securities of similar maturity offered by CFC to
its members. CFC has the right to defer interest payments for up to 10
semi-annual interest payment periods, or 5 years. CFC began to offer the
certificates for sale during the first quarter of fiscal year 2001.
10
Members' Equity
Patronage Capital
CFC is required by law to have a methodology to allocate its net marginsmargin to
its members. CFC allocates substantially all of its net marginsmargin annually
based on the members' Patronage Capitalpatronage of CFC during the year. The Patronage
Capital allocationsallocated
margins are maintainedretained by CFC and used to fund operations until retired.
Currently, CFC retires 70% of the prior year's net marginsmargin during the first
quarter of the current fiscal year and holds the remaining 30% for a period
of 15 years. All retirements must be authorized by the Board of Directors
with regard to CFC'sFC's financial condition. CFC allocates and retires net margins
to its affiliated organization, RTFC, which in turn allocates its net margins,margin,
including the CFC retirement, to its members under similar policies. At
May 31, 1999,2000, CFC had a total of $290.6$320 million of allocated but unretired
netmargins and $19 million of unallocated margins, which along with the$2
million of education fund reserve and membership fees comprise the total of
Members' Equity.members' equity.
Debt Issuance
Debt Issued in the Capital Markets
CFC issues long- and short-term debt in the domestic and foreign capital
markets. CFC issues long-term secured Collateral Trust Bondscollateral trust bonds for periods
of 2 years to 30 years, unsecured Medium-Term Notesmedium-term notes for periods of 9 months
to 30 years, unsecured Quarterly Income Capital Securitiesquarterly income capital securities for periods of
up to 49 years and unsecured Commercial Papercommercial paper for periods of 1 to 270 days
and extendable commercial notes with maturities up to 390 days. CFC also
enters into Bank Bid Notebank bid note arrangements with banks. CFC's Collateral
Trust Bonds, Medium-Term Notes, Quarterly Income Capital Securitiescollateral trust
bonds, medium-term notes, quarterly income capital securities and
Commercial Papercommercial paper all carry investment grade ratings from three rating
agencies (see table in the Management Discussion and Analysis section, page
39)38).
Debt Issued to Members
CFC sells unsecured Commercial Papercommercial paper and Medium-Term Notesmedium-term notes to its members.
Commercial Paperpaper is sold for periods of up to 270 days and Medium-Term Notesmedium-term
notes are sold for periods of 9 months to 30 years. Rates for both
securities are set daily by CFC.
Interest Rate and Currency Exchange Agreements
CFC will enter interest rate and currency exchange agreements when required
by certain transactions. CFC also uses interest rate exchange agreements
as part of its funding strategy to match the interest rate paid on its
liabilities with the interest rate received on its assets. At May 31,
1999,2000, CFC was a party to $2,796.0$4,817 million of interest rate exchange
agreements and $390.3$438 million of currency exchange agreements (see Note 5 to
the Combined Financial Statements).
Revolving Credit Agreements
As of May 31, 1999,2000, CFC had three revolving credit agreements totaling
$4,792.5$5,493 million which are used principally to provide liquidity support for
CFC's outstanding Commercial Paper, Commercial Papercommercial paper, commercial paper issued by NCSC and
guaranteed by CFC and the adjustable or floating/fixed rate bonds which CFC
has guaranteed and for which CFC is standby purchaser for the benefit of
its members and its standby purchase obligations.
Two of these agreements aremembers.
Under a five-year agreement with 5355 banks, withexecuted in November 1996, CFC
can borrow $2,403 million until November 26, 2001. J.P. Morgan Securities
Inc. and The Bank of Nova Scotia aswere Co-Syndication Agents, and Morgan Guaranty
Trust Company of New YorkChase
Manhattan Bank is the Administrative Agent for this agreement. Any
amounts outstanding under the multi-year facility will be due on the
maturity date. On September 30, 1999, a 364-day agreement for $2,540
million was executed with 31 banks including Chase Manhattan Bank as
Administrative Agent. Under the five-year
agreement, executed in November 1996, CFC can borrow up to $2,402.5 million
until November 26, 2001. On November 24, 1998, the 364-day agreement was
renewed with J.P. Morgan Securities, Inc. andAgent, Bank of America, N.A. as Syndication Agent, The Bank
of Nova Scotia as
Co-Lead Arrangers and Co-Syndication Agents, Morgan Guaranty Trust Company
of New York as Administrative Agent, and Banc One, N.A. as Co-Documentation Agents and Chase
Securities Inc. and Bank of America Securities LLC and
the First National Bank of Chicago as Co-Documentation Agents. Under the
364-day agreement, CFC can borrow up to $1,940.0 million until November 23,
1999. Any amounts outstanding under these facilities will be due on the
respective maturity dates.
11
Joint Lead
Arrangers. A third revolving credit agreement for $450.0$550 million was also
executed on November 25, 1998September 30, 1999 with nineten banks, including The Bank of Nova
Scotia as Lead Arranger and Administrative Agent ("the BNS(the "BNS facility") and
the Chase
Manhattan Bank,Banc One, N.A. as Documentation Agent. This agreement hasBoth of the 364-day facilities have
a 364-day revolving credit period whichthat terminates November 24, 1999on September 29, 2000 during
which CFC can borrow and such borrowingborrowings may be converted to a 1-yearone-year
term loan at the end of the revolving credit period.
In connection with the five-year facility, CFC pays a per annum facility
fee of .090 of 1%. The per annum facility fee for both agreements with a
364-day maturity is .085 of 1%. There is no commitment fee for any of the
revolving credit facilities. If CFC's long-termsenior secured debt ratings decline
below AA- or Aa3 and amounts outstanding exceed 50% of the total
commitment, the facility fees may be increased by no more than .035replaced with a utilization fee of
.125 of 1%. Generally, pricing options are the same under all three
agreements and will be at one or more rates as defined in the agreements,
as selected by CFC.
The multi-year revolving credit agreement requires CFC to maintain members'
equity and members' subordinated certificates of at least $1,418 million at
May 31, 2000 (increased each fiscal year by 90% of net margin not
distributed to members). The revolving credit agreements require CFC among other things to
maintain
Members' Equity and Members' Subordinated Certificates ofachieve at least $1,373.9
million at May 31, 1999, an increase of $17.2 million compared to the
$1,356.7 million required at May 31, 1998. Each year, the required amount
of Members' Equity and Members' Subordinated Certificates is increased by
90% of net margins not distributed to members. CFC is also required to
maintain an average fixed charge coverage ratioTIER over the six most recent fiscal quarters
of at least 1.025 and may not retire Patronage Capitalprohibit the retirement of patronage capital unless CFC has
achieved at least a fixed charge coverage ratioTIER of 1.05 for the preceding fiscal year. The
revolving credit agreements prohibit CFC from incurring senior debt
(including guarantees but excluding
11
indebtedness incurred to fund RUS guaranteed loans) in an amount in excess
of ten times the sum of Members'
Equitymembers' equity, members' subordinated certificates
and subordinated debtquarterly income capital securities and restrict, with certain
exceptions, the creation by CFC of liens on its assets and contain certain other conditions
to borrowing.assets. The agreements
also prohibit CFC from pledging collateral in excess of 150% of the
principal amount of Collateral Trust Bondscollateral trust bonds outstanding. Provided that CFC
is in compliance with these financial covenants (including that CFC has no
material contingent or other liability or material litigation that was not
disclosed by or reserved against in its most recent annual financial
statements) and is not in default, CFC may borrow under the agreements
until the termination date.dates. As of May 31, 2000 and May 31, 1999, CFC was
in compliance with all covenants and conditions. To date, CFC has not drawn onconditions under its lines of credit.revolving credit
agreements and there were no borrowings outstanding under such agreements.
Based on the ability to borrow under the five year facility,three revolving credit facilities
at May 31, 1999
and May 31, 1998,2000, CFC classified $2,402.5$5,493 million, and $2,345.0 million,
respectively, of its notes payable
outstanding as long-term debt. CFC expects to maintain more than $2,402.5$5,493
million of notes payable outstanding during the next 12twelve months. If
necessary, CFC can refinance such notes payable on a long-term basis by
borrowing under the five-year facility or the 364-day facilities with the
one year term out option, subject to the conditions therein.
Borrowing Costs
Set forth below are the weighted average costs incurred by CFC on its
short-term borrowings (Commercial Paper(commercial paper and Bank Bid Notes)bank bid notes) and on its
long-term borrowings (Collateral Trust Bonds, Medium-Term Notes, Quarterly
Income Capital Securities(collateral trust bonds, medium-term notes, quarterly
income capital securities and debt supported by interest rate swaps) for
the periodperiods shown.
Years Ended May 31,
2000 1999 1998
1997
Short-term borrowings 5.83% 5.36% 5.73%
5.54%
Long-term borrowings 6.11% 6.09% 6.74% 7.36%
Total short- and long-term borrowings 6.00% 5.73% 6.03% 5.99%
Tax Status
In 1969, CFC obtained a ruling from the Internal Revenue Service (the
"IRS") recognizing CFC's exemption from the payment of Federal income taxes
under Section 501(c)(4) of the Internal Revenue Code. Such exempt status
could be removed as a result of changes in legislation or in administrative
policy or as a result of changes in CFC's business. CFC believes that its
operations have not changed materially from those described to the IRS.
CFC's affiliates, RTFC and GFC, are taxable under Subchapter T of the
Internal Revenue Code. As long as they continue to qualify under
Subchapter T of the Internal Revenue Code, RTFC and GFC are allowed a
deduction from taxable income for the amount of net marginsmargin allocated to
their members.
Investment Policy
Surplus funds are invested pursuant to policies adopted by CFC's Board of
Directors. Under present policy, surplus funds may be invested in direct
obligations of or guaranteed by the United States or agencies thereof.thereof or
other highly liquid investment grade paper. Investments include high-rated
securities such as Commercial Paper,commercial paper, obligations of foreign governments,
Eurodollar deposits, bankers' acceptances, bank letters of credit,
certificates of deposit or working capital acceptances. The policy also
permits investments in certain types of repurchase agreements with highly
rated financial institutions, whereby the assets consist of eligible
securities of a type listed above set aside in a segregated account. CFC
typically has two types of funds available for 12
investment:
(1)* the debt service reserve funds held by the trustee under the indenture
under which CFC formerly issued Collateral Trust Bondscollateral trust bonds (the "1972
Indenture"indenture"), used to make bond interest and sinking fund payments; and
(2)* member loan payments and Commercial Papercommercial paper investments in excess of daily
cash funding requirements.
Debt service reserve funds are invested with maturities scheduled to
coincide with interest and sinking fund payment dates.
12
Employees
At May 31, 1999,2000, CFC had 182186 employees, including engineering, financial
and legal personnel, management specialists, credit analysts, accountants
and support staff. CFC believes that its relations with its employees are
good.
CFC Lending Competition
CFC competes with other lenders on price, the variety of options and
additional services offered as well as its overall approach to and
relationship with its member/owners.
According to annual financial statements filed with CFC, its electric
cooperative distribution and power supply member systems had a total of
$41.7$38.9 billion in long-term debt outstanding at December 31, 1998.1999. RUS is
the dominant lender to the electric cooperative industry with $28.8$23.2 billion
or 69%60% of the total outstanding debt. RUS currently prices the majority of
its insured loans to distribution systems based on a municipal government
obligation index, prices hardship loans at a rate of 5% and provides
guarantees of loans to its electrical cooperatives by others, principally
the FFB. Under the insured loan program, RUS typically does not lend the
full amount of debt requested by the cooperative, requiring the cooperative
to seek supplemental lending from private capital sources. The amount of
funding proposed for the insured loan program for fiscal year 20002001 ranges
from $366.5$172 million to $416.5$345 million. The amount approved for the prior year
was $366.5$417 million. The amount proposed for RUS guaranteed loans for fiscal
year 20002001 ranges from $700 million$1.2 billion to $1.5$1.7 billion. CFC and other lenders
are not in competition with RUS, but rather compete for the supplemental
lending requirement, as well as for the full lending requirement for those
cooperatives that have decided not to borrow from RUS. Under the hardship
program, RUS lends 100% of the amount. Under the guarantee program, RUS
will guarantee the repayment of all principal and interest by the
cooperative. At December 31, 1998,1999, CFC had a total of $11.1$12.4 billion of
long-
termlong-term exposure to distribution and power supply member systems, $9.2$10.4
billion of long-term loans and $1.9$2.0 billion of guarantees outstanding.
CFC's $11.1$12.4 billion long-term exposure represented 27%32% of the total long-termlong-
term debt
outstanding to these electric systems. The guarantees represent CFC's
assurances of payment on long-term debt to third party lenders on behalf of
its electric cooperative members. The remaining $1.8$3.3 billion or 8% was
outstanding from other sources. During fiscal year 1999,2000, CFC was selected
as the lender for 91%98% of the total supplemental lending requirement (not
including amounts lent by FFB). During this same period, CFC was selected
as lender for 98%94% of the total lent to distribution systems for the
repayment of their RUS debt. CFC competes with other lenders primarily on price, and secondarily
on the variety of options and additional services offered as well as its
overall approach/relationship with its member/owners.
The competitive market for providing credit to the rural telecommunications
industry is difficult to quantify, since many rural telecommunications
companies are not RUS borrowers. At December 31, 1998,1999, RUS had a total of
$3.3$3.5 billion outstanding to telecommunications borrowers. The RTB, an
instrumentality of the United States that provides supplemental financing
to RUS borrowers and is managed by RUS, had a total of $1.3$1.2 billion
outstanding.outstanding to telecommunication borrowers. CFC is not in direct
competition with RUS or RTB, but rather competes with other lenders for
additional supplemental lending and for the full lending requirement of the
rural telecommunications companies that have decided not to borrow from RUS
or RTB or for projects not eligible for RUS or RTB financing. CFC's
competition includes regional banks, government sponsored enterprises and
insurance companies. At December 31, 1998,1999, CFC had a total of $2.2$3.0 billion
in long-term loans outstanding to telecommunications borrowers. At
December 31, 1998, to the best of CFC's
knowledge,1999, CFC believes that there was one other lender with a telecommunications loan
portfolio of similar size to CFC's, butwere no other lenders to rural
telecommunications borrowers with
telecommunications loan portfolios of similar size to the RUS.CFC's and RUS's.
Member Regulation and Competition
Electric Systems
In 1992 Congress passed the Energy Policy Act effectively providingrequiring
competition in the generation sector of the wholesale electric power
industry. In 1996, FERC issued orders 888 and 889. Order 888 provides for
competitive wholesale power sales by requiring jurisdictional public
utilities that own, control or operate transmission facilities to file non-discriminatorynon-
discriminatory open access transmission tariffs that provide others with
transmission service comparable to the service they provide themselves.
The reciprocity provision associated with order 888 also provides
comparable access to transmission facilities of non-jurisdictional
utilities (including RUS borrowers and municipal and other publicly owned
electric utilities) that use jurisdictional utilities' transmission
systems. The order further provides for the recovery of stranded costs
from departing wholesale customers with agreements dated prior to July 11,
1994. After that date, stranded 13
costs must be agreed upon in the service
agreement. Order 889 provides for a real time electronic information
system referred to as the Open Access Same-Time Information System ("OASIS").System. It
also establishes standards of conduct to ensure that transmission owners
and their affiliates do not have an unfair competitive advantage by using
transmission to sell power. Recently several states have passed laws
requiring utilities to unbundle their vertically structured retail rates
and to subsequently begin providing customer choice for retail generation
services. Many other states are considering such legislation. The
structure of subsequent legislation and rules defining the competitive
13
retail market and the provision for stranded cost recovery are not yet
known. The ultimate impact on CFC's members cannot be determined until
these items have been resolved.
Section 211 of the Federal Power Act as amended by the Energy Policy Act of
1992 classifies any cooperative with significant transmission assets as a
"transmitting utility" for purposes of this section. Under the provisions
of this Act, FERC has the authority to order such cooperatives to provide
open access for unaffiliated entities. This provision also authorizes FERC
to require investor-owned and other utilities to provide the same open
access transmission for the benefit of cooperatives. Electric cooperatives
have strongly supported section 211 for this reason. Under sections 205
and 206 of the Federal Power Act, cooperatives that pay off their RUS debt
are treated as "jurisdictionaljurisdictional public utilities".utilities. FERC is proceeding under
the legal theory that, under these sections, it can order "jurisdictionaljurisdictional
public utilities"utilities to provide open access.
Currently fiveeight states are operating under customer choice laws. In fourseven
of these states (Pennsylvania,(Arizona, California, Massachusetts, Montana, New Jersey,
New York and New York)Pennsylvania), CFC has a total of 2157 distribution system
members (20 distribution systems and 1five power supply system).system members. In California, cooperatives
are not required to offer customer choice and all 3three of CFC's
distribution members located in the state have opted not to allow customer
choice. In New York, cooperatives are not required to file competition
plans with the State Public Utility Commission. CFC currently does not
have any members in the fiftheighth state, Rhode Island. In an additional 2114
states, laws have been passed and open access is scheduled to be in effect
by 2003.2004. In these states, power supply systems with rates that are above
market may be at risk of losing customer loads. The distribution systems
in these states will continue to deliver power to the ultimate customer,
regardless of who is supplying the power, the CFC member power supply
system or some other power generator. Thus, CFC's distribution system
members are not believed to be at significant risk due to the move to open
customer access to power supply.
While customer choice laws have been passed in the above states, there are
many factors that may delay or influence the choices that customers have
available and the timing of true competition. One of the biggest factors
will be the issue of stranded cost recovery. Stranded costs are the
portion of the investment in generation and/or other facilities which in a
competitive environment would be above market price and therefore not
otherwise recoverable by the utility. The amount of stranded costs a
system is allowed to recover, the timing of the recovery and the method of
recovery will all affect the level of competition in a state. For instance, it is
believed to be unlikely that residential customers will change to another
utility if they have to pay a fee to cover the stranded investment the current
utility incurred to provide them with power. So during the stranded cost
recovery period, there may be very little residential competition in some
states. The level of
feefees that systems will be allowed to charge other utilities for use of
their transmission and distribution system may also impact the level of
residential competition. Other issues that may delay competition include
the following:
-cooperatives* cooperatives are allowed to "opt out" of the provisions of the laws in
some states;
-utilities* utilities in many states will still be regulated regarding rates on non-competitivenon-
competitive services, such as distribution;
-many* many states will still regulate the borrowing by utilities;
-FERC* FERC regulation of transmission;
and
-reconciling* reconciling the differences in various state laws, so that out-of-state
utilities can compete with in-state utilities.utilities; and
* few competitors have targeted residential customers.
The pace of states passing customer choice laws has slowed. As of July 1,
1999,2000, there were 24 states that had neither passed customer choice laws nor
comprehensive restructuring orders by the State Public Utility Commissions.state public utility commissions.
The time required to pass such laws as well as the issues described above
could significantly delay nationwide retail competition. The U.S. Congress
has not passed legislation mandating retail customer choice and the passage
of such legislation is not anticipated in this Congress.
In addition to customer choice laws, some state agencies regulate electric
cooperatives with regard to rates and borrowing. There are 16 states that
regulate the rates electric systems charge. There are 19 states that
regulate electric systems regarding the issuance of long-term debt and
there are 5five states that regulate the issuance of short-term debt. FERC
also has jurisdiction to regulate rates of and refinancing by electric
systems within its jurisdiction that are not borrowers of RUS which are
otherwise jurisdictional, with regard to rates and financing.
14
jurisdictional.
The 1990 amendments to the Clean Air Act of 1970 (the "Amendments")
required utilities and others to reduce emissions. The Amendments contain
a range of compliance options and a phase-in period, which will help
mitigate the immediate costs of implementation. Many of CFC's member
systems already comply with the provisions of the Amendments. Compliance
plans for member systems with units affected in Phase I primarily involved
fuel switching to low-sulfur coal. The trading of emission allowances may
also be an economical alternative to operating or equipment modifications
for Phase II (2000). Some member systems originally believed to be
adversely affected by the Amendments have developed strategies designed to
minimize the Amendments' impact. At this time, it is not anticipated that
the Amendments will have a material adverse impact on the quality of CFC's
loan portfolio.
14
Telecommunications Systems
CFC member telecommunications systems are regulated at the state and
federal levels. Most state regulatory bodies regulate local service rates,
intrastate access rates and telecommunications company borrowing, although some states have exempted
small rural telecommunications companies and/or cooperatives from regulation.
Interstate access rates are regulated by theborrowing. The
Federal Communications Commission ("FCC"). regulates interstate access
rates.
The Telecommunications Act of 1996 (the "Telecom Act") created a framework
for competition and deregulation in the local telecommunications market.
Recognizing that
building duplicateThe Telecom Act has four basic goals: competition, universal service,
deregulation and advanced telecommunications systems would require significant
levels of capital investment and take yearsinformation technologies.
The Telecom Act seeks to complete,achieve competition by requiring all carriers to
interconnect with all others, local exchange carriers to provide total
service resale, number portability, dialing parity, access to rights-of-
way, reciprocal compensation, co-location, and unbundled access. Congress
included provisions in the Telecom Act that require Bell operating companies and
othergranting rural local telecommunications companies to open their systems to competitors.
Telecommunications companies must open their systems to competition through
either: total service resale (to a reseller who has no facilities at all) at
wholesale prices; or interconnection (with a competitor that may have some
telecommunications facilities of its own) through sale of elements of the
telecommunications company's network at discounted prices. Congress included
provisions in the Telecom Act which allow rural telecommunications companies
to receive waiversexchange
carriers ("LECs") an exemption from the resale and interconnectionabove requirements. The FCC
rulemaking placed the burden of proof for justifying the waivers on the rural
telecommunications companies.
In its rulemaking implementing the Telecom Act's interconnection provisions,
the FCC mandated very steep discounts for the sale of network elements.
Telecommunications companies and state regulators sued the FCC over its
authority to set the discounted rates for these network elements and won in
circuit court. The FCC appealed to the Supreme Court, and in a January 1999
decision had its authority to issue pricing rules reinstated. The FCC has
initiated a rulemaking proceeding to resolve two portions of its original
order which the Supreme Court vacated. Because these issues have not been
finally settled, significant local service competition through resale or
interconnection has not occurred.
In America's largest cities, facilities-vibrant competition is taking hold. Facility and non-
facility based competitors are goingpursuing after and winning (primarily) large
business users. But no
large competitor to date, to CFC's knowledge, hasFew of these competitors have targeted residential
customers. The Bell companies are motivated to cooperate with competitors
in order to win approval to enter the long distance market in their service
territories. Bell Atlantic has won FCC approval to provide long distance
service in New York and SBC Communications, Inc. is expected to gain such
approval in Texas.
Rural markets, with their preponderance of residential subscribers, will
probablylikely be among the last to see wide-scale local telecommunications service
competition. Rural telecommunications companies that border metropolitan
areas shouldwould be the first to experience competition. These rural
telecommunications providers generally are not waiting for competition to
arrive, but they are using the period before they come under competitive
attack to enter small towns and cities as competitive local exchange
carriers. They are able to leverage their modern infrastructure,
organization skills, financial strength and local presence to compete with
big, incumbent providers that are not focused on these small markets.
In addition to resale and interconnection,competition, the Telecom Act also mandated a new universal
telecommunications service support mechanism and required that it be
sufficient to ensure that rural customers receivedreceive reasonably comparable
rates and services when compared to urban customers. Congress stated its
intent that implicit subsidies presently contained in the access charges
local telecommunications companies levy on long distance carriers be
eliminated and be made explicit in the new universal service support
mechanism.
The FCC recently approved a plan put forward by large LECs and
interexchange carriers ("IXCs") that reduced access charges the large LECs
charge the IXCs and authorizes alternative mechanisms by which the large
LECs can recover a significant portion of lost access revenues. The
national telephone trade associations are promoting a similar plan for
small rural LECs that includes a solution for the uncertainty that has
found this difficult to implement. While undertaking
a complex proceeding to move to a new costing basis forsurrounded universal service funding,funding. If enacted, the FCC has left the existingplan would assure
that rural LECs' interstate access and universal service fund in place. The
projected timetable for moving large telecommunications companies to the new
mechanism continues to be pushed into the future. Rural telecommunications
companies will have two years from that date before theyrevenues are
required to
transition to a new universal support mechanism.
It is unlikely, however, that any new universal service fund will ever be
large enough to make rural telecommunications companies whole for their
reduced access revenues. Cost recovery through new flat rate charges will
result in higher local telecommunications bills to end user customers.
Those customers that are not large users of long distance services (and
therefore will not save from lower long distance charges) will pay more.
Ultimately, however, it is probable that access charges will come down from
present levelssufficient and that rural telecommunications companies will experience
some revenue reductions.predictable. CFC does not anticipate that thisany loss in
revenue willresulting from this plan (if adopted by the FCC) would result in
material losses on loans outstanding to rural telecommunications companies.
Deregulation thus far has not had much effect on LECs. The FCC has
promulgated a series of rules to implement the Telecom Act, and eliminated
very few existing regulatory requirements. Perhaps after competition takes
hold more widely there may be an effort to lessen regulations on LECs.
The final aspect of the Telecom Act dealt with advanced telecommunications
and information technologies. The current administration is concerned that
there is a growing "digital divide" between various groups in the country
and that such a divide exists relative to rural areas versus urban areas
access to advanced telecommunications and information services. It is
anticipated that RUS will play a significant role in financing
infrastructure to help provide rural Americans with access to these
services. RTFC is prepared to supplement the government's financing of
this effort.
15
The RUS Program
Since the enactment of the Rural Electrification Act in 1936 (the "Electric"RE
Act"), RUS has financed the construction of electric generating plants,
transmission facilities and distribution systems in order to provide
electricity to persons in rural areas who were without central station
service.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 11%12%
of all consumers of electricity in the United States and its territories
and account for approximately 8% of total sales of electricity and about
5% of energy generation and generating capacity.
In 1949, the ElectricRE Act was amended to allow RUS to lend for the purpose of
furnishing and improving rural telecommunications service. The RUS
telecommunications lending program had 815779 reporting borrowers at December
31, 1997.1998. The 815779 borrowers operated 4,7924,746 exchanges, providing service to
approximately 1.2a total of 5.5 million subscribers, including 1.1 million business
customerssubscribers and 4.4 million residential customers.customers (data for 1999 not yet
available).
The ElectricRE Act provides for RUS to make insured loans and to provide other
forms of financial assistance to borrowers. RUS is authorized to make
direct loans, at below market rates, to systems which are eligible to
borrow from it. RUS is also authorized to guarantee loans whichthat have been
used mainly to provide financing for construction of Bulk Power Supply
Projects. Guaranteed loans bear interest at a rate agreed upon by the
borrower and the lender (which generally has been the FFB). For
telecommunications borrowers, RUS also provides financing through the RTB.
The RTB is an instrumentality of the United States providing financing at
rates reflecting its cost of capital and is managed by RUS. RUS exercises
financial and technical supervision over borrowers' operations. Its loans
and guarantees are generally secured by a mortgage on substantially all of
the system's property and revenues.
For fiscal year 2000,2001, both the House and Senate Agriculture Appropriation
Committees have approved RUS electric muni-rate loan levels of $295
million. The House bill includes $121.5$50 million for hardship 5% loans and the
Senate includes $71.5$122 million. RUS is also authorized to provide 100%
guarantees on loans available from the FFB or other lenders. The House
appropriations bill has included $1.5$1.2 billion and the Senate has provided
$700 million$1.7 billion for these loan guarantees for the fiscal year beginning
October 1, 1999.2000. Differences between the House and Senate will be worked
out with a final bill expected before the start of the fiscal year
beginning October 1, 1999.2000. Electric funding levels for the fiscal year
ending September 30, 19992000 were $71.5$122 million at the 5% rate, $295 million
for loans at a municipal government obligation index and $700 million$1.7 billion for
guarantees.
Legislation enacted in 1992 allows RUS electric borrowers to prepay their
loans to RUS at a discount based on the government's cost of funds at the
time of prepayment. If a borrower chooses to prepay its notes, it becomes
ineligible for future RUS insured loans for a period of ten years, but
remains eligible for RUS loan guarantees. As of May 31, 1999, 1722000, 223
borrowers had either fully prepaid or partially prepaid their RUS notes,
under these provisions,provisions. These borrowers have $5.4 billion in the total amount of $2.8 billion. In addition, during the
late 1980's, there was a period of time in which borrowers were allowed to
prepay RUS debt. A total of 33 borrowers prepaid $0.7 billion of RUS debt
at that time.loans
outstanding from CFC.
Member Financial Data
Electric Systems
On the following pages are tables providing composite statements of
revenues, expenses and patronage capital from the distribution systems and
power supply systems which were members of CFC during the five years ended
December 31, 1998,1999, and their respective composite balance sheets at the end
of each such year. The data in the tables for 1994 to 1995 is comprised of
information collected by RUS for all CFC members that were RUS borrowers
and information collected by CFC on the members that do not borrow from
RUS. The data for 1996 to 19981999 is data collected by CFC only. CFC began
making its own data collection in 1996 due to the larger number of borrowersits
members that no longer borrow from RUS. Distribution members submit annual
data as of December 31 on form 7 and power supply members submit annual
data as of December 31 on form 12 or FERC form 1. As of July 31, 1999,2000, CFC
had received a form 7 from 820811 distribution systems and a form 12 or FERC
form 1 from 5854 power supply systems.
While CFC is reporting 838832 distribution system members at May 31, 1999,2000,
only 757813 were required to file form 7's with CFC at December 31, 1998.1999. CFC
collected form 7's from 820811 distribution systems; two systems one system files annual
data based on a June 30 fiscal year end and one system became a CFC member
on December 30, 1998.did not meet
the filing deadline. The other 1620 systems were not required to file a form
7 because they became members after December 31, they were in the process of
merging and filed a
16
consolidated form 7 with the surviving distribution system, or they did not have an outstanding balancebalances of long-term loans at
December 31, 1998.1999.
Only 5854 of the 70 total power supply systems report financial results to
CFC. TheFifteen of the remaining 12 power supply systems did not report
financial results because they are either subsidiaries of other member power
supply systems and thus their financial results were consolidated with and
filed by the parent power supply system, act as coordinating agents for
their members, did not have an outstanding balance of long-term loans at
December 31, 1998,1999, or bought out CFC debt after that date. In addition,
one power supply system did not meet the filing deadline.
16
Telecommunications Systems
On the following pages are tables providing composite statements of
revenues and expenses from the telecommunications systems whichthat were
members of CFC during the yeartwo years ended December 31, 1998, the1999. The first
year for which CFC has collected such data and their respective composite
balance sheets.sheet was 1998. Members with long-term loans outstanding are
generally required to submit annual data as of December 31 in the form of
audited financial statements. As of August 18,
1999,16, 2000, CFC had received
audited financial statements from 169191 telecommunications systems.
While CFC had 531536 telecommunications system members at May 31, 1999,2000, a
total of 213246 had long-term loans outstanding and were required to submit
audited financial statements to CFC at December 31, 1998.1999. A total of 43
telecommunications system members did not meet the filing deadline and 12
telecommunications system members submitted consolidated audited financial
statements.
____________________
NOTE: Statistical information contained in this section has not been
examined by CFC's independent public accountants, and the number and
geographical dispersion of the systems have made impractical an independent
investigation by CFC of the statistical information. The information
presented is based upon financial statements submitted to CFC and RUS,
subject to year-end audit adjustments, by reporting borrowers and do not,
with minor exceptions, take into account current data for certain systems,
primarily those which are not active CFC borrowers.
17
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL
AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS
The following are unaudited figures whichthat are based
upon financial statements submitted to RUS and
CFC by Member Distribution Systems
Years Endedended December 31,
(Dollar amounts in thousands) 1999 1998 1997 1996 1995 1994
Operating revenues and patronage capital $18,805,359 $18,284,021 $17,232,257 $17,028,087 $16,253,957 $15,603,853
Operating deductions:
Cost of power (1) 11,828,572 11,580,829 10,907,145 10,924,695 10,486,773
10,174,716
Distribution expense (operations) 792,249 728,565 472,629 445,990 412,058
386,235
Distribution expense (maintenance) 1,024,734 985,571 829,991 804,663 752,659 699,253
Administrative and general expense (2) 1,864,344 1,735,074 1,720,805 1,627,925 1,584,099
1,506,729
Depreciation and amortization expense 1,290,354 1,203,438 1,134,149 1,069,101 1,000,017
942,435
Taxes 230,238 241,010 458,620 458,623 436,563
417,471
Total 17,030,491 16,474,487 15,523,339 15,330,997 14,672,169
14,126,839
Utility operating marginsmargin 1,774,868 1,809,534 1,708,918 1,697,090 1,581,788
1,477,014
Non-operating marginsmargin 179,940 173,446 235,334 180,311 172,118 134,831
Power supply capital credits (3) 259,099 297,451 268,015 282,800 254,839
260,335
Total 2,213,907 2,280,431 2,212,267 2,160,201 2,008,745 1,872,180
Interest on long-term debt (4) 1,024,369 980,863 919,892 869,076 833,110
752,749
Other deductions 50,523 49,628 45,439 43,711 46,859
52,574
Total 1,074,892 1,030,491 965,331 912,787 879,969
805,323
Net marginsmargin and patronage capital $ 1,139,015 $ 1,249,940 $ 1,246,936 $ 1,247,414 $ 1,128,776
$ 1,066,857
TIER (5) 2.11 2.35 2.34 2.44 2.42
2.42
DSC (6) 2.15 2.32 2.26 2.42 2.40
2.26
MDSC (7) 2.03 2.25 2.17 2.30 2.28
2.09
Number of systems included 811 820 821 832 824 828
____________________
(1) Includes cost of purchased power, power production and transmission
expense.
(2) Includes sales expenses, consumer accounts and customer service and
informational expense as well as other administrative and general
expenses.
(3) Represents net marginsmargin of power supply systems and other associated
organizations allocated to their member distribution systems and added
in determining net marginsmargin and patronage capital of distribution systems
under RUS accounting practices. Cash distributions of this credit have
rarely been made by the power supply systems and such other
organizations to their members.
(4) Interest on long-term debt is net of interest charged to construction,
which is stated separately as a credit on form 7. CFC believes that
amounts incurred by distribution systems for interest charged to
construction and allowance for funds used during construction are
immaterial relative to their total interest on long-term debt and net
marginsmargin and patronage capital.
(5) The ratio of (x) interest on long-term debt (in each year including
all interest charged to construction) and net marginsmargin and patronage
capital tOto (y) interest on long-term debt (in each year including all
interest charged to construction).
(6) The ratio of (x) net marginsmargin and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization to (y) long-term debt service
obligations.
(7) The ratio of (x) operating marginsmargin and patronage capital plus interest
on long-term debt (including all interest charged to construction) plus
depreciation and amortization expense plus Non-operating Margins Interestnon-operating margin,
interest plus cash received in respect of generation and transmission
and other capital credits to (y) long-term debt service obligations.
18
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC MEMBER DISTRIBUTION SYSTEMS
The following are unaudited figures whichthat are based
upon financial statements submitted to RUS and
CFC by Member Distribution Systems
At December 31,
(Dollar amounts in thousands) 1999 1998 1997 1996 1995 1994
Assets and other debits:
Utility plant:
Utility plant in service $43,023,535 $40,387,723 $37,763,550 $35,406,826 $33,118,001
$31,162,069
Construction work in progress 1,262,537 1,129,147 1,062,356 975,357 881,171
799,327
Total utility plant 44,286,072 41,516,870 38,825,906 36,382,183 33,999,172
31,961,396
Less: Accumulated provision for
depreciationDepreciation and amortization 12,225,421 11,409,118 10,608,302 9,911,677 9,221,378
8,631,903
Net utility plant 30,107,75332,060,651 30,107,752 28,217,604 26,470,506 24,777,794
23,329,493
InvestmentsInvestment in associated organizations (1) 3,790,623 3,665,208 3,483,154 3,348,326 3,207,671
3,051,840
Current and accrued assets 4,520,592 4,526,663 4,185,884 4,126,415 3,980,052
3,789,699
Other property and investments 703,585 644,353 552,033 503,871 496,105
456,923
Deferred debits 599,511 530,606 514,670 488,009 511,977 472,536
Total assets and other debits $41,674,962 $39,474,582 $36,953,345 $34,937,127 $32,973,599 $31,100,491
Liabilities and other credits:
Net worth:
Memberships $ 119,175 $ 112,391 $ 105,505 $ 105,497 $ 127,749
$ 114,080
Patronage capital and other equities (2) 17,542,625 16,710,887 15,674,556 14,731,432 13,633,993
12,804,404
Total net worth 16,823,27717,661,800 16,823,278 15,780,061 14,836,929 13,761,742
12,918,484
Long-term debt (3) 19,308,152 18,343,340 16,924,955 16,214,420 15,718,979
15,020,664
Current and accrued liabilities 433,687 3,098,525 3,046,528 2,697,605 2,418,230
2,260,514
Deferred credits 3,429,173 884,595 864,384 872,013 786,455
714,083
Miscellaneous operating reservesservices 842,150 324,845 337,417 316,160 288,193 186,746
Total liabilities and other credits $39,474,582$41,674,962 $39,474,583 $36,953,345 $34,937,127 $32,973,599
$31,100,491
Equity Percentagepercentage (4) 42.5% 42.6% 42.7% 42.5% 41.7%
41.5%
Number of systems included 811 820 821 832 824 828
__________________________________________________
(1) Includes investments in service organizations, power supply capital
credits and investments in CFC.
(2) Includes non-refundable donations or contributions in cash,
services or property from states, municipalities, other government
agencies, individuals and others for construction purposes separately
listed on form 7.
(3) Principally debt to RUS and CFC. Includes $8,342,631, $7,481,368,
$6,121,902, $5,467,636, $4,824,491,$, and $3,989,914,$4,824,491, for the years 1999, 1998,
1997, 1996 1995 and 1994,1995, respectively, due to CFC.
(4) Determined by dividing total net worth by total assets and other
debits.
19
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES, EXPENSES AND PATRONAGE CAPITAL
AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS
The following are unaudited figures whichthat are based
upon financial statements submitted to RUS and
CFC by Member Power Supply Systems
Years Endedended December 31,
(Dollar amounts in thousands) 1999 1998 1997 1996 1995 1994
Operating revenues and patronage capital $10,758,413 $10,901,138 $10,702,813 $10,585,875 $10,182,928 $9,972,873
Operating deductions:
Cost of power (1) 7,945,476 7,979,542 7,604,521 7,322,039 6,984,648
6,760,543
Distribution expense (operations) 23,634 17,499 12,555 15,431 16,019
14,668
Distribution expense (maintenance) 14,908 12,524 12,937 16,607 15,950 14,703
Administrative and general expense (2) 414,362 406,441 474,681 473,869 483,030
431,645
Depreciation and amortization expense 904,826 914,270 915,879 1,056,113 956,889
930,483
Taxes 68,681 69,095 231,843 237,700 246,700
241,775
Total 9,371,887 9,399,371 9,252,416 9,121,759 8,703,236
8,393,817
Utility operating marginsmargin 1,386,526 1,501,767 1,450,397 1,464,116 1,479,692
1,579,056
Non-operating marginsmargin 258,186 577,842 232,778 493,874 253,883 221,003
Power supply capital credits (3) 44,180 56,646 46,520 55,590 48,981
32,531
Total 1,688,892 2,136,255 1,729,695 2,013,580 1,782,556 1,832,590
Interest on long-term debt (4) 1,227,548 1,221,512 1,295,082 1,436,200 1,476,062
1,857,644
Other deductions (5) 185,621 184,868 409,396 1,601,919 89,784
129,794
Total 1,413,169 1,406,380 1,704,478 3,038,119 1,565,846
1,987,438
Net marginsmargin and patronage capital $ 275,723 $ 729,875 $ 25,217 $(1,024,539) $ 216,710
$ (154,848)
TIER (6) 1.22 1.60 1.02 .290.29 1.15 .93
DSC (7) 1.15 1.45 1.11 .690.69 1.02 1.01
Number of systems included 54 58 57 54 53 53
__________________________________________________
(1) Includes cost of purchased power, power production and transmission
expense, separately listed on the form 12.
(2) Includes sales expenses and consumer accounts expense and consumer
service and informational expense as well as other administrative and
general expenses, separately listed on the form 12 or FERC form 1.
(3) Certain power supply systems purchase wholesale power from other power
supply systems of which they are members. Power supply capital credits
represent net marginsmargin of power supply systems allocated to member power
supply systems on the books of the selling power supply systems. This
item has been added in determining net marginsmargin and Patronage Capitalpatronage capital of
the purchasing power supply systems under RUS accounting practices.
Cash distributions of this credit have rarely been made by the selling
power supply systems to their members. This item also includes net
marginsmargin of associated organizations allocated to CFC power supply
members and added in determining net marginsmargin and Patronage Capitalpatronage capital of
the CFC member systems under RUS accounting practices.
20
practices
(4) Interest on long-term debt is net of interest charged to construction.
Allowance for funds used during construction has been included in non-operating margins.non-
operating margin. According to unpublished information interest
charged to construction and allowance for funds used during
construction for CFC power supply members in the years 1994-19981995-1999 were
as follows:
(Dollar amounts in thousands)Interest Charged to Allowance for Interest Charged Funds used
to
Construction During Construction Total
1999 $10,073 $13,604 $23,677
1998 $9,947 $13,133 $23,0809,947 13,133 23,080
1997 7,798 12,684 20,482
1996 13,434 11,620 25,054
1995 68,400 11,018 79,418
1994 46,773 8,913 55,686
(5) Includes $1,119,635 in 1996 related to the reorganization of Cajun
Electric Power Coop., Inc., with whom CFC has no credit exposure.
(6) The ratio of (x) interest on long-term debt (in each year including all
interest charged to construction) and net marginsmargin and Patronage Capitalpatronage capital
to (y) interest on long-term debt (in each year including all interest
charged to construction). The TIER calculation includes the operating
results of sixfive systems which failed to make debt service payments or
are operating under a debt restructure agreement, without which the
composite TIER would have been, 1.24, 1.27, 1.04, 1.21 1.23 and 1.311.23 for the
years ended December 31, 1999, 1998, 1997, 1996 1995 and 1994,1995, respectively.
(7) The ratio of (x) net marginsmargin and patronage capital plus interest on
long-term debt (including all interest charged to construction) plus
depreciation and amortization to (y) long-term debt service obligations
(including all interest charged to construction). The DSC calculation
includes the operating results of sixfive systems which failed to make
debt service payments or are operating under a debt restructure
agreement. Without these systems, the composite DSC would have been
1.23, 1.28, 1.13, 1.20 1.22, and 1.241.22 for the years ended December 31, 1999,
1998, 1997, 1996 and 1995, and 1994, respectively.
2120
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC MEMBER POWER SUPPLY SYSTEMS
The following are unaudited figures whichthat are based
upon financial statements submitted to RUS and
CFC by Member Power Supply Systems
At December 31,
(Dollar amounts in thousands) 1999 1998 1997 1996 1995
1994
Assets and other debits:
Assets and other debits:
Utility plant:
Utility plant in service $31,140,658 $31,141,532 $31,656,202 $32,191,089 $34,182,352
$32,934,304
Construction work in progress 1,151,859 1,041,760 825,421 640,005 931,397
1,624,978
Total utility plant 32,292,517 32,183,292 32,481,623 32,831,094 35,113,749
34,559,282
Less: Accumulated provision for depreciation and amortization13,230,060 13,059,537 12,558,247 11,783,058 11,586,462
10,777,786depreciation and amortization
Net utility plant 19,062,457 19,123,755 19,923,376 21,048,036 23,527,287
23,781,496
Investments in associated organizations (1)1,173,026 1,132,157 1,179,185 1,178,785 1,049,409
248,677organizations (1)
Current and accrued assets 3,904,535 3,740,302 3,697,391 3,984,238 4,211,004
3,997,466
Other property and investments 1,511,145 1,691,932 1,553,774 2,000,584 1,656,563
2,483,232
Deferred debits 3,251,458 3,400,876 3,228,708 3,636,749 4,391,800
4,366,377$28,902,621 $29,089,022 $29,582,434 $31,848,392 $34,836,063
Total assets and other debits $29,089,022 $29,582,434 $31,848,392 $34,836,063 34,877,248
Liabilities and other credits:
Net worth:
Memberships $ 49,131 $ 263 $ 258 $ 258 $ 250
$ 322
Patronage Capitalcapital and other equities (2) 3,175,374 (52,606) (778,357) (646,115) 497,756
246,262
Total net worth 3,224,505 (52,343) (778,099) (645,857) 498,006
246,584
Long-term debt (3) 19,591,883 23,389,067 24,426,867 25,900,628 28,372,321
28,779,577
Current and accrued liabilities 2,328,504 1,877,320 1,791,628 2,040,563 1,848,755
2,747,022
Deferred credits 1,338,343 1,296,308 1,343,053 1,826,945 1,309,860
1,206,488
Miscellaneous operating reserves 2,419,386 2,578,670 2,798,985 2,726,113 2,807,121 1,897,577
Total liabilities and other credits $28,902,621 $29,089,022 $29,582,434 $31,848,392 $34,836,063
$34,877,248
Number of systems included 54 58 57 54 53 53
____________________
(1) Includes investments in service organizations, power supply capital
credits and investments in CFC.
(2) IncludesLarge increase in 1999 due to the elimination of Cajun Electric Power
Cooperative and includes a $1.2 billion decrease in 1996 related to
the reorganization of Cajun Electric Power Coop., Inc., with whom CFC has no credit exposure.
(3) Principally debt to RUS or debt guaranteed by RUS and loaned by FFB and
includes $1,761,847, $1,652,943, $1,411,157, $1,264,475 $1,085,594, and $1,065,556$1,085,594
for the years 1999, 1998, 1997, 1996, 1995, and 1994,1995, respectively, due to
CFC.
2221
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE STATEMENTS OF REVENUES AND EXPENSES
AS REPORTED BY CFC TELECOMMUNICATIONS SYSTEM MEMBERS
The following are unaudited figures whichthat are based
upon financial statements submitted to
CFC by Member Telecommunications Systems
Year EndedYears ended December 31,
(Dollar amounts in thousands) December 31,1999 (3) 1998
Operating revenues $ 2,535,461$3,908,496 $2,535,461
Operating expenses (1) 3,003,530 1,846,215
Net income before interest, depreciation and taxes 904,966 689,246
Interest on long-term debt 221,103 140,436
Net income before depreciation &and taxes 683,863 548,810
Depreciation and amortization expenses 410,805 279,277
Net income before taxes 273,058 269,533
Taxes 89,030 71,326
Net Incomeincome $ 184,028 $ 198,207
DSC (2) 2.30 2.14
Number of systems included 191 169
____________________
(1) Includes sales expenses, consumer accounts and customer service and
informational expense as well as other administrative and general
expenses.
(2) The ratio of (x) net margins and patronage capitalmargin plus interest on long-
termlong-term debt (including
all interest charged to construction) plus depreciation and
amortization to (y) long-term debt service obligations.
23(3) Some RTFC members have been acquired by Alltel Corporation and RTFC
agreed to accept Alltel Corporation's financial statements rather than
those of the acquired operating companies. Given Alltel Corporation's
size, it is not included in the composite statistics.
22
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMPOSITE BALANCE SHEETS
AS REPORTED BY CFC TELECOMMUNICATIONS SYSTEMS
The following are unaudited figures whichthat are based
upon financial statements submitted to RUS and
CFC by Member Telecommunications Systems
At December 31,
(Dollar amounts in thousands) 1999 (3) 1998
Assets and other debits:
Cash and cash equivalents $ 646,409 $ 401,507
Current assets 1,029,905 590,248
Plant, property and equipment 3,998,038 2,699,798
Other non-current assets 2,505,597 1,456,301
Total assets $8,179,949 $5,147,854
Liabilities and equity:
Current liabilities $ 898,080 $ 586,176
Affiliate debt 3,804 23,442
Long-term debt (1) 4,309,996 2,686,987
Other non-current liabilities 392,982 232,219
Equity 2,575,087 1,619,030
Total liabilities and equity $5,147,854$8,179,949 5,147,854
Equity percentage (2) 31.5%37% 32%
Number of systems included 191 169
____________________
(1) Includes current maturities.
(2) Determined by dividing total net worth by total assets and other
debits.
24(3) Some RTFC members have been acquired by Alltel Corporation and RTFC
agreed to accept Alltel Corporation's financial statements rather than
those of the acquired operating companies. Given Alltel Corporation's
size, it is not included in the composite statistics.
23
Item 2. Properties.
CFC owns and operates a headquarters facility in Fairfax County, Virginia.
This facility consists of a six-story office building with separate parking
garage situated on four acres of land. In July 1999, CFC completed
construction of a second building on the adjacent unimproved land. The new
building is a six-story office building with a separate parking garage
situated on six acres of land. CFC also owns an additional two acres of
unimproved land.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
2524
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Inapplicable.
Item 6. Selected Financial Data.
The following is a summary of selected financial data for each of the five
years ended May 31, 1999.2000.
(Dollar amounts in thousands) 2000 1999 1998 1997 1996
1995For the year ended May 31:
For the year ended May 31:
Operating income $ 790,8031,020,998 $ 637,573792,052 $ 564,439639,948 $ 505,073567,065 $ 440,109508,090
Operating margin $ 74,717116,497 $ 54,41176,439 $ 51,53057,022 $ 46,85754,736 $ 41,803
Nonoperating income 1,722 2,611 3,206 3,764 3,40950,621
Gain on sale of land - - 5,194 - - -
Extraordinary loss (A) (1,164) - - - (1,580)
-
Net margin $ 115,333 $ 76,439 $ 62,216 $ 54,736 $ 49,041
$ 45,212
Fixed charge coverage
ratio (A) 1.13 1.12 1.12 1.12 1.12 1.13
As of May 31:
Assets $17,083,440 $13,925,252 $10,682,888 $9,057,495 $8,054,089
$7,080,789
Long-term debt (B) $10,595,596 $ 6,891,122 $ 5,024,621 $3,596,231 $3,682,421
$3,423,031
Members' subordinated
certificates $ 1,340,417 $ 1,239,816 $ 1,229,166 $1,212,486 $1,207,684
$1,234,715
Members' equity $ 341,217 $ 296,481 $ 279,278 $ 271,594 $ 269,641
$ 270,221
Leverage ratio (C) 7.00 6.37 5.84 5.69 5.138.12 7.11 6.39 5.87 5.70
Debt to equity ratio (D) 6.46 5.52 4.51 3.97 3.63 3.01
_______________________________________
(A) During the yearyears ended May 31, 2000 and May 31, 1996, CFC paid a premiumpremiums
of $1.2 million and $1.6 million, respectively, in connection with the
prepaymentprepayments of Collateral Trust Bonds. Marginscollateral trust bonds. Margin used to compute the
fixed charge coverage ratioratios represent net marginsmargin before extraordinary
losslosses plus fixed charges. The fixed charges used in the computation
of the fixed charge coverage ratioratios consist of interest and
amortization of bond discountdiscounts and bond issuance expenses.
(B) Includes Commercial Papercommercial paper reclassified as long-term debt and excludes
$983.0, $327.3$3,040 million, $268.7$983 million, $351.5$327 million, $269 million and $262.7$352
million in long-term debt that comes due, matures and/or will be
redeemed early during fiscal years 2001, 2000, 1999, 1998 1997, and 1996,1997,
respectively (see Note 5 to Combined Financial Statements).
(C) In accordance with CFC's revolving credit agreements, the leverage
ratio is calculated by dividing debt and guarantees outstanding,
excluding Quarterly Income Capital Securitiesquarterly income capital securities and debt used to fund
loans guaranteed by the RUS, by the total of Quarterly Income Capital Securities, Members'
Subordinated Certificatesquarterly income capital
securities, members' subordinated certificates and Members' Equity.members' equity.
(D) The debt to equity ratio is calculated by dividing debt outstanding,
excluding Quarterly Income Capital Securitiesquarterly income capital securities and debt used to fund
loans guaranteed by RUS, by the total of Quarterly Income Capital Securities,
Members' Subordinated Certificates, Members' Equityquarterly income capital
securities, members' subordinated certificates, members' equity and the
loan loss allowance.
CFC has had outstanding guarantees for its members' indebtedness in each of
the fiscal years shown above. Members' interest expense on such
indebtedness was approximately $73.5$40 million for the year ended May 31, 1999.2000.
CFC does not have any outstanding common stock and does not pay dividends.
Annually, CFC allocates its net marginsmargin to its members in the form of
Patronage Capitalpatronage capital certificates. Under current policies, CFC retires
Patronage Capital certificatespatronage capital 70% during the next fiscal year and holds the remaining
30% for 15 years. All retirements of Patronage Capitalpatronage capital are subject to
approval by the Board of Directors, if permitted by CFC's contractual
obligations and to the extent that the Board of Directors in its discretion
may determine from time to time that the financial condition of CFC willwould
not be impaired as a result.
2625
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The managementDollar amounts in millions)
This discussion and analysis contains statements that may be considered
forward looking. In making these statements, CFC has made an evaluation of
estimates, risks and uncertainties related to each circumstance. The
actual results may differ from the estimates and assumptions discussed in
this presentation, which could cause the actual results to differ
materially.
The following discussion and analysis is designed to provide a better
understanding of the CFC's combined financial condition and results of
operations and as such should be read in conjunction with the Combined
Financial Statements, including the notes thereto.
Overview
CFC was formed in 1969 by the rural electric cooperatives to provide them
with a source of funds to supplement the financing provided by RUS. CFC
was organized as a cooperative in which each member (other than associate
members) receives one vote. Under CFC's bylaws, the Board of Directors is
comprised of 22 individuals who must be either general managers or
directors of members. CFC was granted tax-exempt status under Section
501(c)(4) of the Internal Revenue Code.
In 1987, RTFC was formed by CFC to provide a source of funds for the rural
telecommunications industry. Like CFC, RTFC is a cooperative. However,
RTFC's bylaws and voting members' agreement require that the majority of
RTFC's Board of Directors be elected from individuals designated by CFC.
The remaining board positions are filled by individuals nominated by the
other RTFC members. CFC is the sole source of external funding for RTFC.
Because CFC has control of the RTFC Board, RTFC's financial condition and
results of operations are combined with those of CFC.
GFC was organized in December 1991 as a taxable cooperative association
owned by its member rural electric systems and CFC to provide a source of
funds for members to refinance the RUS guaranteed debt previously held by
the FFB. GFC is a controlled affiliate of CFC (the majority of its
directors are appointed by CFC). All loans from GFC are guaranteed by RUS.
CFC is the sole source of external funding for GFC. Because CFC has
control of the GFC Board, GFC's financial condition and results of
operations are combined with those of CFC. Unless stated otherwise, all
references to CFC refer to the combined results of CFC, RTFC and GFC.
CFC's primary objective as a cooperative is to provide its members with the
lowest possible loan and guarantee rates. Therefore, CFC marks up its
funding costs only to the extent necessary to cover its operating expenses,
a provision for loan losses and to provide for marginsa margin sufficient to preserve
interest coverage in light of CFC's financing objectives. To the extent
members contribute to CFC's base capital with Subordinated Certificatesby purchasing subordinated
certificates carrying below-market interest rates, CFC can offer
proportionally lower interest rates on its loans to members.
CFC obtains its funding from the capital markets and its membership. CFC
enters the capital markets, based on the combined strength of its members,
to borrow the funds required to fulfill the financing requirements of its
members. On a regular basis, CFC obtains debt financing in the capital
markets by issuing long-term fixed rate or variable rate Collateral Trust
Bondscollateral trust
bonds and Quarterly Income Capital Securities,quarterly income capital securities, intermediate-term fixed or
variable rate Medium-Term Notes, Commercial Papermedium-term notes, commercial paper and enters into Bank Bid
Notebank bid
note agreements. CFC also offers its AA/A credit rating to enhance its
members' credit on other public or private placement transactions through
guarantees. In addition, CFC obtains debt financing from its membership
and other qualified investors through the direct sale of its Commercial
Papercommercial
paper and Medium-Term Notes.medium-term notes.
Rural electric cooperatives that join CFC are required to purchase
Membership
Subordinated Certificatesmembership subordinated certificates from CFC as a condition of membership.
In connection with any long-term loan or guarantee made by CFC to or on
behalf of one of its members, CFC may require that the member make an
additional investment in CFC by purchasing Loanloan or Guarantee Subordinated Certificates.guarantee subordinated
certificates. Like the Membership Subordinated Certificates,membership subordinated certificates, the Loanloan and
Guarantee
Subordinated Certificatesguarantee subordinated certificates are unsecured and subordinate to other
debt.senior debt of CFC.
CFC is required by the cooperative laws under which it is incorporated to
have a mechanism to allocate its earnings to its members. CFC allocates
its net margins (Patronage Capital)margin annually based on each member's participation in loan
programs during the
26
year. The Membership, Loanmembership, loan and Guarantee
Subordinated Certificatesguarantee subordinated certificates along
with unretired Patronage Capitalpatronage capital provide CFC's base capitalization.
27
CFC's performance is closely tied to the performance of its member rural
electric and telecommunications utility systems due to the near 100%
concentration of its loan and guarantee portfolio in those industries. The
following provides an analysis of both CFC's performance and a discussion
of the quality of CFC's loan and guarantee portfolio.
Financial Condition
At May 31, 1999,2000, CFC had $13.9 billion$17,083 in total assets, an increase of $3.2
billion$3,158 or
30%23% over the prior year. Net loans outstanding to members represented
approximately $13.5 billion$16,450 or 97%96% of total assets. The remaining $0.4 billion$633 consisted
of other assets to support CFC's operations. Except as required for the
debt service account and unless excess cash is invested overnight,
generally CFC does not generally use funds to invest in debt or equity securities.
At May 31, 1999, 89%2000, 88% of CFC's loan portfolio consisted of long-term amortizing loans,
including secured long-term loans classified as nonperforming and
restructured, the majority of which are secured.restructured. The
remaining 11%12% consisted of secured and unsecured intermediate-term and line
of credit loans as well
as long-term loans guaranteed by RUS.loans. Approximately 63%53% or $8.7 billion in$8,812 of loans carried a fixed rate
of interest. All other loans, including $3.6
billion$5,900 in long-term loans, are
subject to interest rate adjustment monthly or semi-monthly.
In addition to its loans, CFC provided approximately $1.7 billion$1,998 in guarantees
for its members at May 31, 1999.2000. These guarantees relate primarily to tax-exempttax-
exempt financed pollution control equipment.
At May 31, 1999,2000, CFC had also committed to lend an additional amount of
approximately $12.8 billion$13,699 to its members. Most unadvanced loan commitments
contain a material adverse change condition. About 40%37% of these
commitments are provided for operational back-up liquidity. Approximately
one-third of the unadvanced commitments were approved under the Power
Vision program and will expire if not advanced within 60 months of
approval.
CFC does not
anticipate funding the majority of the commitments outstanding for this
purpose.
Subordinated Certificatescertificates include both original Membership Subordinated
Certificatesmembership subordinated
certificates and Loanloan and Guarantee Subordinated Certificates,guarantee subordinated certificates, all of which
are subordinate to other CFC debt. At May 31, 1999, Membership Subordinated
Certificates2000, membership
subordinated certificates totaled $642 million.$642. These certificates generally
mature in 100 years and pay interest at 5.0%. At May 31, 1999, Loan Subordinated
Certificates2000, loan
subordinated certificates totaled $423 million$517 and carried a weighted average
interest rate of 0.8%0.7%. At May 31, 1999, Guarantee Subordinated Certificates2000, guarantee subordinated
certificates totaled $175 million$181 and carried a weighted average interest rate of
3.3%. Both the Loanloan and Guaranteeguarantee certificates are long-term instruments,
which generally amortize at a rate equivalent to that of the loan or
guarantee to which they relate. On a combined basis, Subordinated Certificatessubordinated
certificates carried a weighted average interest rate of 3.3%3.0%. Loan and
Guarantee Subordinated Certificatesguarantee subordinated certificates are required to be purchased in
conjunction with the receipt of a loan or credit enhancement based on the
member's leverage ratio (total debt and credit enhancements divided by
total equity investments in CFC). Members that have a leverage ratio with
CFC in excess of a level in the approved
policy are required to purchase additional
Subordinated Certificatessubordinated certificates to receive a loan or credit enhancement. At
the present, time, the majority of CFC's members maintain a CFC leverage ratio withinbelow
the policy limit.level requiring the purchase of additional certificates. The issuance
of zero percent Loan Subordinated Certificatesnon-interest bearing loan subordinated certificates is expected to
exceed the issuance of 5.0% Membership Subordinated Certificates.5% membership subordinated certificates. Therefore,
management expects the average interest rate paid on all certificates to
decline over time. CFC paid a total of $41.5 million$40 in interest to holders of
Subordinated Certificatessubordinated certificates during fiscal year 1999.2000.
Under current policy, CFC returns 70% of the allocated net marginsmargin in the
next fiscal year, with the remaining 30% to be held and then retired at a
future date (currently 15 years), as permitted by CFC's contractual
obligations and to the extent that the Board of Directors in its discretion
may determine from time to time that the financial condition of CFC will
not be impaired as a result. During the next 10nine years, CFC will retire
the unretired allocations representing net marginsmargin for fiscal years 19881991 to
1993, all of which had been allocated under a previous retirement policy.
The unretired allocations (Members' Equity)(members' equity) do not earn interest and are
junior to all debt instruments, including Subordinated Certificates.subordinated certificates. At
May 31, 1999,2000, CFC had $295 million$341 in retained equity.
CFC enters the capital markets through the issuance of Collateral Trust Bonds,
Medium-Term Notes, Commercial Papercollateral trust
bonds, medium-term notes, commercial paper and Quarterly Income Capital Securities.quarterly income capital
securities. At May 31, 1999,2000, CFC had $2,846 million$3,349 in fixed rate Collateral Trust Bondscollateral trust
bonds and $150 million$2 in variable rate Collateral Trust Bondscollateral trust bonds outstanding. Under
its Collateral Trust Bond Indentures,collateral trust bond indentures, CFC must pledge as collateral
eligible mortgage notes from its distribution system borrowers, evidencing
loans at least equal in principal amount to at least 100% of the outstanding
principal amount of Collateral Trust Bonds.collateral trust bonds. At May 31, 1999,2000, CFC had
pledged $3,017 million$3,484 in mortgage notes. During fiscal year 1999,2000, CFC issued a
total of $1,100 million$525 in Collateral Trust Bonds in six separate debt offerings.collateral trust bonds. All Collateral
Trust Bondscollateral trust bonds issued
after February 1994 have been issued under 28
an Indentureindenture with U.S. Bank
National Association as
trustee ("1994 Indenture").27
substitute trustee. Virtually all Collateral Trust Bondscollateral trust bonds were offered to
investors in underwritten public offerings.
At May 31, 1999,2000, CFC had $2,625 million$4,791 outstanding in Medium-Term Notes.
Medium-Term Notesmedium-term notes. Medium-
term notes are issued for terms of 270 days to 30 years and are unsecured
obligations of CFC. Medium-Term NotesMedium-term notes outstanding to CFC's members totaled
$211 million$294 at May 31, 1999.2000. The remaining $2,414 million$4,497 were sold through dealers to
investors including $735 million$985 in the European markets. At May 31, 1999,2000, a total
of $390 million$438 of Medium-Term Notesmedium-term notes were issued in a foreign-currency.foreign currency. At the
time of issuance, CFC also entered into a currency exchange agreement to
cover all principal and interest payments due in a foreign-currency.foreign currency.
At May 31, 1999,2000, CFC had $5,871 million$6,550 outstanding in Commercial Papercommercial paper with a
weighted average maturity of 3868 days. Commercial Paperpaper notes are issued
with maturities up to 270 days and are senior unsecured obligations of CFC.
Commercial Paperpaper sold directly by CFC and outstanding to CFC's members and
others totaled $1,187 million$974 at May 31, 1999.2000. The remaining $4,684 million$5,576 was sold through
dealers to investors in the United States and Europe. Included in the
commercial paper sold through dealers at May 31, 2000, was a total of $117
of extendable commercial notes. These are notes issued with a stated
maturity of 90 days, and CFC has the option to extend the maturity to 390
days. European Commercial Papercommercial paper may be issued in currencies other than
U.S. dollars. For notes issued in a foreign-currency,foreign currency, CFC will enter into
a currency exchange agreement with a highly rated counterparty at the time
of the issuance. At May 31, 1999,2000, there were no foreign denominated Commercial
Paperforeign-denominated
commercial paper notes outstanding.
In addition, CFC obtains funds from various banking institutions under Bank
Bid Notebank
bid note arrangements, similar to bank lines of credit. The notes are
issued for terms up to three months and are unsecured obligations of CFC.
At May 31, 1999,2000, CFC had $375 million$155 outstanding in Bank Bid Notes.bank bid notes.
At May 31, 1999,2000, CFC had $400 million outstanding in Quarterly Income Capital
Securities. During fiscal year 1999, CFC issued $200 million in Quarterly
Income Capital Securities.quarterly income capital
securities. The securities are unsecured obligations of CFC, subordinate
and junior in right of payment to senior debt and the debt obligations
guaranteed by CFC, but senior to Subordinated Certificates.subordinated certificates. CFC has the
right at any time and from time to time during the term of the Quarterly Income Capital Securitiesquarterly
income capital securities to suspend interest payments for a period not
exceeding 20 consecutive quarters.
During the year, total assets increased by $3,242 million.$3,158. Net loan balances
increased by $3,162 million$2,959 or 31%22%. Gross loans increased by a total of $3,124 million,$2,975,
and the allowance for loan losses decreasedincreased by $38 million,$16, compared to the prior
year. As a percentage of the portfolio, long-term loans (excluding loans guaranteed by RUS) represented 88% at
May 31, 2000, compared to 89% at May 31, 1999,
compared to 87% at May 31, 1998.1999. Long-term fixed rate loans
represented 71%60% and 53%71% of the total long-term loans at May 31, 19992000 and
1998,1999, respectively. Loans converting from a variable rate to a fixed rate
for the year ended May 31, 19992000 totaled $1,639 million, an increase$51, a decrease from the $1,069 million$1,639
that converted for the year ended May 31, 1998.1999. Offsetting the conversions
to the fixed rate were $55 million$6 and $19 million$55 of loans that converted from the fixed
rate to the variable for the years ended May 31, 19992000 and 1998,1999,
respectively. This resulted in a net conversion of $1,584 million$45 from the variable
rate to a fixed rate for the year ended May 31, 19992000 compared to a net
conversion of $1,050 million$1,584 for the year ended May 31, 1998.1999.
The increase in total loans outstanding at May 31, 1999,2000, was primarily due
to an increaseincreases of $2,878 million$2,564 in long-term loans, and an increase of $298
million$419 in line of credit loans,
and $40 to intermediate-term loans offset by a decreasedecreases in RUS guaranteed
loans of $50 million in
intermediate-term loans.$42 and restructured loans of $6. The increase to loans
outstanding for fiscal year 19992000 included the advancelong-term electric advances of
$556 million$1,785 and telephone advances of $1,495. The electric long-term advances
included $205 for the purpose of repaying RUS loans, $5,233 million$1,382 under the 100%
and Power Vision programs, $155
million$157 under the RUS concurrent loan program and
$41 million under the RUS guaranteed loan program. Telephone long-term advances
were primarily for the acquisition of local exchange properties. The loans
advanced under the 100%, RUS concurrent and Power Vision loan programs were
used for a variety of general corporate purposes, including, construction
of headquarters facilities and transmission facilities, system upgrades,
refinancing of non-RUS debt, and electric plant upgrades. There were a
number of reasons underlying the increased demand for CFC loan advances,
including:
* Thethe strong economy, which has spurred construction and business
development;
* RUS waiting periods are at an all time high, which caused more borrowers
to buyoutbuy out their RUS debt and/or make greater use of CFC 100% loan funds;
* a large number of systems have bought out their RUS debt over the last
few years, requiring them to seek non RUSnon-RUS financing;
* some borrowers have begun to expand and diversify their operations
through acquisitions and mergers.mergers; and
* increase level of lending to rural telecommunications systems for the
acquisition of rural local exchange assets.
28
Notes Payable,payable, which consists of Commercial Paper, Bank Bid Notescommercial paper, bank bid notes and long-termlong-
term debt due within one year, totaled $4,977 million, an increase$4,252, a decrease of $1,129 million$725 over the
prior year. At May 31, 1999,2000, CFC's short-term debt consisted of $4,684 million$5,576 in
dealer Commercial Paper, $1,063 millioncommercial paper, $841 in Commercial Papercommercial paper issued to CFC's members,
$124 million$133 in 29
Commercial Papercommercial paper issued to certain nonmembers, $1,133 million$3,040 in Collateral
Trust Bondscollateral
trust bonds and Medium-Term Notesmedium-term notes that mature within one year and $375 million$155 in
Bank Bid Notes.bank bid notes. The Commercial Papercommercial paper sold to CFC's members and certain
nonmembers decreased by $130 million,$214, the amount of Bank Bid Notesbank bid notes outstanding
increaseddecreased by $190 million$220 and Commercial Papercommercial paper sold through CFC's dealers increased
by $321 million$942 from the prior year. There was also a decrease of $50 to
commercial paper outstanding to European investors. CFC's Commercial Papercommercial paper
and Bank Bid Notesbank bid notes had a weighted average maturity of 3867 days at May 31,
1999.2000. As described in the footnotes to the Combined Financial Statements,
CFC reclassifies a portion of its short-term debt as long-term, assince it
has the ability (subject to certain conditions) to refinance this short-termshort-
term debt on a long-term basis under its revolving credit agreements. CFC
had reclassified $5,493 and $2,403 million and $2,345 million inof short-term debt as long-term at May
31, 19992000 and 1998,1999, respectively.
During fiscal year 1999,2000, long-term debt outstanding increased by $1,867
million.$3,704.
The increase in long-term debt outstanding was due to an increaseincreases of $1,098 million$355 in
Collateral Trust Bonds, $1,516 millioncollateral trust bonds, $2,166 in Medium-Term
Notesmedium-term notes and $58 million$3,090 in the
amount of short-term debt supported by revolving credit agreements offset
by an increase of $806 million$1,907 of long-term debt due within one year reclassified
as notes payable. This increase was required to fund the increase in long-term fixed ratelong-
term loans outstanding.
Members' Subordinated Certificatessubordinated certificates and Members' Equitymembers' equity increased by $27 million$147 to
$1,535 million$1,682 at May 31, 1999,2000, compared to $1,508 million$1,535 at May 31, 1998.1999. The increase
was due to increases of $94 to loan subordinated certificates, $7 to
guarantee subordinated certificates and $46 to members equity.
Off-balance sheet, CFC experienced an increase of $3,963 million$1,099 in gross
unadvanced loan commitments to a total of $12,808 million$13,699 at May 31, 1999.2000.
Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed or for which contracts have been
executed but funds have not been advanced. The majority of the short-term
unadvanced commitments provide backup liquidity to CFC borrowers, andborrowers; therefore,
CFC does not anticipate funding most of such commitments. Approximately 40%37%
of the outstanding commitments at May 31, 19992000 were for short-term or line
of credit loans. Approximately one-third of the unadvanced commitments
were approved under the Power Vision program and will expire if not
advanced within 60 months of approval. To qualify for the advance of
funds under all commitments, a borrower must assure CFC that there has
been no material change since the loan was approved.
Guarantees outstanding at May 31, 1999,2000 were $1,684 million,$1,998, representing a
decreasean
increase of $350 million$105 from the May 31, 19981999 balance of $2,034 million.$1,893. The guarantee balance decreasedincrease in
guarantees was due primarily to the redemptionincrease in other guarantees and
letters of the Bonanza secured
lease obligation bonds, other scheduled repayments and lease reductions (see
note 10 to the Combined Financial Statements). The guarantee balance is
anticipated to continue to decline.credit.
CFC's leverage ratio increased during the year from 6.377.11 at May 31, 1998,1999 to
7.008.12 at May 31, 1999.2000. The ratio is calculated afterby dividing debt and
guarantees outstanding, excluding from debt the
Quarterly Income Capital Securitiesquarterly income capital securities and
all debt associated with the funding
ofused to fund loans guaranteed by the RUS, 100% guaranteed loans. Members' Subordinated Certificatesby the total of
quarterly income capital securities, members' subordinated certificates and
Quarterly Income Capital Securities are treated as equity in the calculation
of the leverage ratio.members' equity. The increase in the leverage ratio was primarily due to
an increase in loans outstanding to members financed by the issuance of
debt to members and in the capital markets offset by the issuance of the $200
million in Quarterly Income Capital Securities and the reduction in guarantees
outstanding. CFC contemplates that its leverage ratio will continuemarkets.
CFC's debt to increase modestly as it obtains external capital to accommodate its loan
growth. CFC will retain the flexibility to further amend its capital
retention policies to retain members' Patronage Capital investments in CFC
consistent with maintaining acceptable financial ratios.
CFC's debt/equity ratio increased from 4.51 at May 31, 1998, to 5.52 at May 31, 1999.1999 to 6.46 at
May 31, 2000. The ratio is calculated by dividing debt outstanding,
excluding Quarterly Income Capital Securitiesquarterly income capital securities and debt used to fund loans
guaranteed by RUS, by the total of Members' Subordinated Certificates, Members' Equity,members' subordinated certificates,
members' equity, the loan loss allowance and Quarterly Income Capital Securities.quarterly income capital
securities. The increase to the debt to equity ratio was primarily due to
an increase in loans outstanding, which was financed by the issuance of debt
in the capital markets.
CFC's leverage and debt to equity ratios have increased due to the
significant increase in loan volume. CFC's management is committed to
maintaining these ratios within a range that is required for a strong
credit rating. During fiscal year 2000, CFC amended a number of policies
and created a new member investment. Members that have a CFC debt to
equity ratio in excess of the limit in the policy will be required to
purchase a non-amortizing and non-interest bearing subordinated certificate
in the amount of 2% of the loan for distribution systems and 7% of the loan
for power supply systems. This change in policy should increase the amount
of subordinated certificates issued as a percentage of loans advanced. The
new policy will be effective in the first quarter of fiscal year 2001. CFC
also created century certificates, which are new long-term member
investments. These securities have a maturity of up to 100 years, with
optional redemption dates at 44, 59, 69, 79 and 89 years and pay interest
at similar rates to retail quarterly income capital securities. Members may
purchase these securities at any time. CFC began offering the century
certificates in July 2000. CFC also created a members'
capital reserve, in which a portion of the net margin will be held
annually rather than allocated back to the members. CFC will have the
ability to allocate the members' capital
29
reserve back to its members if necessary. CFC's management will continue
to monitor the leverage and debt to equity ratios. If required, additional
changes to policy will be made to maintain the ratios within an acceptable
range.
Margin Analysis
CFC uses an interest coverage ratio instead of the dollar amount of gross
or net marginsmargin as its primary performance indicator, since CFC's net margins aremargin
is subject to fluctuation as interest rates change. Management has
established a 1.10 Times Interest Earned Ratio ("TIER") as its minimum
operating objective. CFC has earned TIERs of 1.13, 1.12 and 1.12 for the
years ended May 31, 2000, 1999 1998, 1997 and 1996.1998. TIER is a measure of CFC's
ability to cover the interest expense on funding.
Fiscal Year 2000 versus 1999 Results
Net margin for the year ended May 31, 2000 was $115, an increase of $39 or
51% over the $76 earned the prior year.
Operating income for the year ended May 31, 2000 was $1,021, an increase of
$229 or 29% over the prior year. Operating income increased due to
increases in average loan volume and the average interest rate on the loan
portfolio. Average loan volume increased by $2,996 to an average loan
balance of $15,136 at May 31, 2000. The average interest rate on the
portfolio for the year ended May 31, 2000 was 6.75%, an increase of 0.23%
from the 6.52% for the prior year. The increase in the average interest
rate was primarily due to increases in interest rates during the fiscal
year in the capital markets that were passed on through increases in CFC
loan interest rates.
The total cost of funding for the year ended May 31, 2000 was $860, an
increase of $196 or 30% over the prior year. The cost of funding increased
due to increases in average loan volume outstanding and the average
interest rate on funds outstanding. The average interest rate on funding
for the year ended May 31, 2000 was 5.68%, an increase from 5.47% in 1999.
This rate increased as a result of five 25 basis point increases and one 50
basis point increase in the federal funds rate during the year ended May
31, 2000.
The gross margin earned on loans for fiscal year 2000 was $161, an increase
of $33 or 26% over the prior year. The gross margin of $161 represents
1.07% of average loan volume for the year, an increase from the 1.05% from
the prior year.
General and administrative expenses for fiscal year 2000 totaled $27, a
slight decrease from the prior year. The general and administrative
expenses for fiscal year 2000 represented 0.18% of average loan volume, a
decrease of 5 basis points or 22% from the prior year. The growth in loans
outstanding, with no increase in general and administrative expenses,
caused a large decrease in general and administrative expenses as a
percentage of average loan volume. General and administrative expenses
remained at approximately the same level in fiscal year 2000 as in fiscal
year 1999 due to a highly focused effort to keep costs down.
A total provision of $17 was added to the loan loss reserve during the year
ended May 31, 2000. The $17 provision is a decrease of $7 or 27% over the
amount added in the prior year. The provision to the reserve for fiscal
year 2000 represented 0.11% of average loan volume, a reduction from 0.20%
for the prior year. The increase to the provision for fiscal year 2000 was
due to the overall growth in the portfolio.
During the year ended May 31, 2000, CFC incurred an extraordinary loss of
$1 related to the early redemption of collateral trust bonds.
Fiscal Year 1999 versus 1998 Results
Net marginsmargin for the year ended May 31, 1999 werewas $76, million, an increase of $14 million or
23% over the $62 million earned the prior year.
30
Operating income for the year ended May 31, 1999 was $791 million,$792, an increase of
$153 million$152 or 24% over the prior year. Operating income increased due to an
increase in average loan volume offset by a slight decrease in the average
interest rate on the loan portfolio. Average loan volume increased by
$2,485 million to a balance of $12,140 million at May 31, 1999. The average interest rate
on the portfolio for the year ended May 31, 1999 was 6.51%6.52%, a decrease of
0.09%0.11% from the 6.60%6.63% for the prior year. The decrease was due to the
reductions to interest rates during 1999 in the capital markets that were
passed on through reductions in CFC loan interest rates.
The total cost of funding for the year ended May 31, 1999 was $664, million,
an
increase of $123 million$124 or 23% over the prior year. The cost of funding increased
due to the increase in average loan volume outstanding offset by a decrease
to the average interest rate on funds outstanding. The average interest
rate on funding for the year ended May 31, 1999 was 5.47%, a decrease
30
from 5.60% in 1998. This rate decreased as a result of three 25 basis
point reductions in the federal funds rate offset by an increase in
Collateral Trust Bondscollateral trust bonds and Medium-Term Notesmedium-term notes and Quarterly Income Capital
Securitiesquarterly income capital
securities outstanding.
The gross margin earned on loans for fiscal year 1999 was $127 million,$128, an increase
of $30 million$29 or 31%29% over the prior year. The gross margin of $127
million$128 represents
1.04%1.05% of average loan volume for the year, an increase from the 1.00%1.03%
represented by the $97 million$99 gross margin for the prior year.
OperatingGeneral and administrative expenses for fiscal year 1999 totaled $28, million, an
increase of $4 million or 17% over the prior year. The operatinggeneral and administrative
expenses for fiscal year 1999 represented 0.23% of average loan volume,
slightly less than the 0.24% for the prior year. While the dollar amount
of operatinggeneral and administrative expenses increased during the year ended May
31, 1999, the cost as a percentage of average loan volume decreased. The
increase to the dollar amount of operatinggeneral and administrative expenses was
due to an increase in salaries and benefits from normal base salary
increases and an increase in the number of employees, and the increased
marketing effort. Staffing increases were required to support operations
related to a growing loan portfolio, the increased marketing effort and the
development of new products and services.
A total provision of $24 million was added to the loan loss reserve during the year
ended May 31, 1999. The $24 million provision is an increase of $5 million or 26% over the
amount added in the prior year. The provision to the reserve for fiscal
year 1999 represented 0.20% of average loan volume, the same as the prior
year. The increase to the provision for fiscal year 1999 was due to the
overall growth in the portfolio.
A total of $1 million of nonoperating income was earned during fiscal year
1999, a slight reduction from the prior year.
During the year ended May 31, 1998, CFC recognized a gain of $5.2 million on the
sale of land. No such gain was recognized in the year ended May 31, 1999.
Fiscal Year 1998 versus 1997 Results
Net margins for the year ended May 31, 1998, were $62 million, an increase of
$7 million over the $55 million earned the prior year.
Operating income for the year ended May 31, 1998 was $638 million, an increase
of $74 million or 13% over the prior year. Operating income increased due to
an increase in average loan volume and a slight increase in the average
interest rate on the loan portfolio offset by a decrease in the amount of
deferred conversion fees recognized. Average loan volume increased by $1,074
million to a balance of $9,655 million at May 31, 1998. The average interest
rate on the portfolio for the year ended May 31, 1998 was 6.60%, an increase
of 0.02% over the 6.58% for the prior year. This increase was due to the
conversion of approximately $1,069 million of long-term loans from a variable
interest rate to a fixed interest rate during 1998. During fiscal year 1998,
a total of $1 million of deferred conversion fees were recognized into income,
a decrease of $10 million from the prior year. At May 31, 1998, there was a
balance of $1 million of deferred conversion fees. It is anticipated that
this balance will be recognized into income during fiscal year 1999.
The total cost of funding for the year ended May 31, 1998, was $541 million,
an increase of $65 million over the prior year. The cost of funding increased
due to the increase in average loan volume outstanding and to an increase to
the average interest rate on funds outstanding. The average interest rate on
funding for the year ended May 31, 1998 was 5.60%, an increase from 5.54% in
1997. This rate increased as a result of the increase of $1,392 million in
Collateral Trust Bonds and Medium-Term Notes outstanding and the increase of
$75 million in Quarterly Income Capital Securities outstanding, offset by an
increase of $24 million in Members' Subordinated Certificates and Members'
Equity outstanding.
31
The gross margin earned on loans for fiscal year 1998 was $97 million, an
increase of $8 million over the prior year. The gross margin of $97 million
represents 1.00% of average loan volume for the year, a decrease from the
1.04% represented by the $89 million gross margin of the prior year. The
growth in average loans outstanding allowed CFC to price its loans closer to
its cost of funding during fiscal year 1998.
Operating expenses for fiscal year 1998 totaled $24 million, an increase of
$2 million over the prior year. The operating expenses for fiscal year 1998
represented 0.24% of average loan volume, slightly less than the 0.26% for
the prior year. While the dollar amount of operating expenses increased
during the year ended May 31, 1998, the cost as a percentage of average loan
volume decreased. The increase to the dollar amount of operating expenses
was due to an increase in salaries and benefits from normal base salary
increases and an increase in the number of employees, and an increased
marketing effort. Staffing increases were required to support operations
related to a growing loan portfolio, the increased marketing effort and the
development of new products and services.
A total provision of $19 million was added to the loan loss reserve during
the year ended May 31, 1998. The $19 million provision is an increase of
$4 million over the amount added the prior year. The provision to the
reserve for fiscal year 1998 represented 0.20% of average loan volume, a
slight increase over the 0.18% for the prior year. The increase to the
provision for fiscal year 1998 was due to the overall growth in the portfolio.
A total of $3 million of nonoperating income was earned during fiscal year
1998, approximately the same total as the prior year.
The following is a summary of CFC's operating results as a percentage of
average loans outstanding for the fiscal years ended May 31, 2000, 1999 and
1998.
2000 1999 1998
and
1997.
1999 1998 1997
Interest on loans 6.51% 6.60% 6.58%Operating income 6.75% 6.52% 6.63%
Less: cost of funds 5.68% 5.47% 5.60%
5.54%
Gross operating margin 1.04% 1.00% 1.04%1.07% 1.05% 1.03%
General and administrative expenses 0.18% 0.23% 0.24% 0.26%
Provision for loan losses 0.11% 0.20% 0.20%
0.18%
Total expenses 0.29% 0.43% 0.44% 0.44%
Operating margin 0.61% 0.56% 0.60%
Nonoperating income (1) 0.02% 0.08% 0.04%
Net margins 0.63% 0.64% 0.64%
TIER 1.12 1.12 1.12
____________________
(1) Nonoperating income includes the gain0.78% 0.62% 0.59%
Gain on the sale of land in fiscal year
1998.- - 0.05%
Extraordinary (loss) (0.01%) - -
Net margin 0.77% 0.62% 0.64%
TIER 1.13 1.12 1.12
Loan and Guarantee Portfolio Assessment
Portfolio Diversity
CFC and its combined affiliates make loans and provide financial guarantees
to their qualified members. The combined memberships include rural
electric distribution systems, rural electric generation and transmissionpower supply systems,
telecommunication systems, statewide rural electric and telecommunication
associations and associate organizations.
The following chart summarizes loans and guarantees outstanding by member
class at May 31, 2000, 1999 and 1998.
Loans and Guarantees by Member Class
2000 1999 1998
and 1997.
Loans By Member Class
(Dollar amount in millions) 1999 1998 1997
Electric systems:
Distribution $ 8,719.3 56.7% $ 7,265.9 57.5% $6,282.1 57.5%
Power supply 3,538.8 23.0% 3,524.9 27.8% 3,285.0 30.0%
Service organizations 315.9 2.0% 191.8 1.5% 179.4 1.6%
Associate members 103.6 0.7% 102.7 0.8% 100.2 0.9%
Subtotal electric systems $12,677.6 82.4% $11,085.3 87.6% $9,846.7 90.0%
Telecommunication systems:
Local exchange carrier $ 1,688.2 11.0% $ 810.7 6.3% $ 754.2 6.8%
Cable 128.9 0.8% 94.6 0.8% 56.3 0.5%
Cellular 272.0 1.8% 152.9 1.2% 134.2 1.2%
Personal telecommunications systems 303.5 2.0% 112.2 0.9% 5.9 0.1%
Other 317.7 2.0% 404.5 3.2% 148.6 1.4%
Subtotal telecommunication systems 2,710.3 17.6% 1,574.9 12.4% 1,099.2 10.0%
Total $15,387.9 100.0% $12,660.2 100.0% $10,945.9 100.0%
32Electric systems:
Distribution $10,487 56% $ 8,749 56% $ 7,278 57%
Power supply 3,907 21% 3,606 23% 3,525 28%
Service organizations 475 2% 428 3% 225 2%
Associate members 107 1% 104 1% 102 1%
Subtotal electric systems 14,976 80% 12,887 83% 11,130 88%
Telecommunication systems 3,700 20% 2,710 17% 1,575 12%
Total $18,676 100% $15,597 100% $12,705 100%
31
CFC's members are widely dispersed throughout the United States and its
territories, including 4849 states, the District of Columbia, Guam, American
Samoa and the U.S. Virgin Islands. At May 31, 2000, 1999 1998 and 1997,1998, no state
or territory had over 12.9%15%, 11.7%13% and 10.6%12%, respectively, of total loans and
guarantees outstanding.
Credit Concentration
In addition to the geographic diversity of the portfolio, CFC limits its
exposure to any one borrower. The majority of the largest single exposures
are concentrated in the power supply systems due to their large plant and
equipment requirements. At May 31, 1999,2000, the total exposure
outstanding to any one borrower did not exceed 4.2%3.6% of total loans (excluding loans
guaranteed by RUS) and
guarantees outstanding. At May 31, 1999,2000, CFC had $2,242$3,464 million in loans
outstanding excluding loans guaranteed by RUS, and $703 million$495 in guarantees outstanding, to its largest 10
borrowers. The amounts outstanding to the largest 10 borrowers at May 31,
19992000 represented 16.4%21% of total loans outstanding and 41.7%25% of total guarantees
outstanding. Total credit exposure to the largest 10 borrowers represented
21% and 19% of total credit exposure at May 31, 2000 and 1999,
respectively. At May 31, 2000, the ten largest borrowers included four
distribution systems, three power supply systems and 1998.three
telecommunications systems.
Security Provisions
Except when providing lines of credit, CFC typically lends to its members
on a secured basis. At May 31, 1999,2000, a total of $1,231 million$1,632 of loans were
unsecured representing 9.1%9.8% of total loans and 8.1% of total loans and
guarantees.loans. Approximately $163.0 million$118 or 13.2%7.2% of
the unsecured loans represent obligations of distribution borrowers for the
initial phase(s) of RUS note buyouts. Upon completion of a borrower's
buyout from RUS, CFC receives first lien security on all assets and future
revenues. The unsecured loans would represent 7.8%9.1% of total loans and 6.9% of total loans
and guarantees if these
partial note buyout obligations were excluded. CFC's long-term loans are
typically secured pro-rata with any other secured lenders (primarily RUS)
by all assets and future revenues of the borrower. Short-term loans are
generally unsecured lines of credit. At May 31, 2000, a total of $297 of
guarantees were unsecured, representing 14.8% of total guarantees.
Guarantees are secured on a pro-rata basis with other secured creditors by
all assets and future revenues of the borrower or by the underlying
financed asset. In addition to the collateral received, CFC also requires
that its borrowers set rates designed to achieve certain financial ratios.
At May 31, 2000, CFC had a total of $1,929 of unsecured loans and
guarantees, representing 10.3% of total loans and guarantees.
Portfolio Quality
The following tables summarize the key composite operating results of CFC's
two main electric system borrower types, distribution and power supply
systems, and the telecommunications system borrowers. The information
presented below is as of December 31, and is taken from the data contained
on pages 18 to 24.23.
CFC Distribution Member Borrowers
Composite Results
1999 1998 1997 1996 1995
1994
TIER 2.11 2.35 2.34 2.44 2.42
2.42
DSC 2.15 2.32 2.26 2.42 2.40
2.26
MDSC 2.03 2.25 2.17 2.30 2.28
2.09
Equity percentage 42.5% 42.6% 42.7% 42.5% 41.7% 41.5%
CFC Power Supply Member Borrowers
Composite Results
1999 1998 1997 1996 1995
1994
TIER 1.24 1.27 1.04 1.21 1.23
1.31
DSC 1.23 1.28 1.13 1.20 1.22
1.24
Equity percentage 14.6% 13.8% 12.8% 12.3% 11.7% 9.3%
NOTE: The power supply composite results have been presented without the
operating results of sixfive systems experiencing financial
difficulties.difficulties for 1999 and six systems for all other years presented.
CFC had credit exposure to 4three of these systems (see Note 10 to
the Combined Financial Statements).
33
32
CFC Telecommunications System Borrowers
Composite Results
1999 1998 1997 1996
DSC 2.30 2.14 2.39 3.21
Equity percentage 37% 32% 31% 34%
Most CFC power supply borrowers sell the majority of their power under all-requirementsall-
requirements power contracts withto their member distribution systems. These
contracts allow, subject to regulatory requirements and competitive
constraints, for the recovery of all costs at the power supply level. Due
to the contractual connection between the power supply and distribution
systems, total combined system equity (power supply equity plus the equity
at its affiliated distribution systems) has typically been maintained at
the distribution level.
As with CFC, to the extent distribution systems can fund their assets with
retained Members' Equitymembers' equity (i.e., unretired capital credits), overall funding
costs for plant and equipment are reduced. Distribution systems can, in
turn, pass these savings on to their member/consumers in the form of lower
utility rates.
The effectiveness of the all-requirements power contract is dependent on
the individual systems' right and ability (legal as well as economic) to
establish rates to cover all costs. The boards of directors of most of
CFC's power supply and distribution members have the authority to establish
binding rates for their consumer members subject to state and federal
regulations, as applicable. Some states regulate rate-setting and can
therefore override the system's internal rate-setting procedures.
During the past few years, power supply members have been increasing their
equity levels. Under RUS underwriting standards, in order to qualify for
additional RUS loan funds, power supply systems may be required to maintain,
or demonstrate an ability to reach, an equity level of 20% of assets, or they
must obtain guarantees from their affiliated distribution systems.
Nonperforming and Restructured Loans
CFC classifies a borrower as nonperforming when any one of the following
criteria are met:
(1)* principal or interest payments on any loan to the borrower are past due
90 days or more,
(2)* as a result of court proceedings, repayment withon the original terms is not
anticipated, or
(3)* for some other reason, management does not expect the timely repayment of
principal or interest.
Once a borrower is classified as nonperforming, interest on its loans is
recognized on a cash basis. Alternatively, CFC may choose to apply all
cash received to the reduction of principal, thereby foregoing interest
income recognition. At May 31, 1999, all nonperforming2000, CFC had no loans were on non-
accrual status with respect to interest income. At May 31, 1999,
nonperforming loans totaled $2 million,classified as
nonperforming. This is a decrease of $2 million from the prior year-end. TheThis
decrease was due to a write-off and offset of equity against nonperforming
loans totaling $2. During the write-offfourth quarter of fiscal year 2000, CFC
received the payment required to bring $28 of nonperforming loans to one
borrower related to a bankruptcy settlement.current.
Loans classified as restructured are loans for which agreements have been
executed that change the original terms of the loan, generally a change to
the originally scheduled cashflows. At May 31, 1999,2000, restructured loans
totaled $577 million, an increase$572, a decrease of $247 million$4 from the prior year. The
increaseThis decrease was due
to amounts advanced to redeem the secured Bonanza lease
obligation bonds offset by principal repayments received during the year. At May 31, 1999,2000, all
restructured loans were on an accrual status at a rate of 3.90%3.9%. RestructuredAs of June
1, 2000 all restructured loans were placed on accrual status at February 1, 1999. Alla rate of 5.0%.
CFC increased the rate at which it will accrue interest on restructured
loans as a result of excess cash payments received prior to February 1, 1999 were applied against principal
outstanding. At May 31, 1998 and 1997, restructured loans totaling $330
million and $362 million, respectively, were on a nonaccrual status with
respect tosince the recognitioninception of
interest income.
34
the restructuring agreement.
NONPERFORMING AND RESTRUCTURED ASSETS
As of May 31,
(Dollar amounts in thousands)2000 1999 1998 1997
Nonperforming loans $ 1,643- $ 4,0802 $ 9,4284
Percent of loans and guarantees outstanding - 0.01% 0.03%
0.09%
Restructured loans $576,662 $329,538 $361,961$ 572 $ 576 $ 330
Percent of loans and guarantees outstanding 3.75%3.06% 3.70% 2.61% 3.29%
Total nonperforming and restructured loans $578,305 $333,618 $371,389$ 572 $ 578 $ 334
Percent of loans and guarantees outstanding 3.76%3.06% 3.71% 2.64%
3.38%33
Allowance for Loan Losses
CFC maintains an allowance for potential loan losses whichthat is periodically
reviewed by management for adequacy. In performing this assessment,
management considers various factors including an analysis of the financial
strength of CFC's borrowers, delinquencies, loan charge-off history,
underlying collateral, and economic and industry conditions. At May 31,
1999,2000, the allowance for loan losses totaled $212 million,$228, a net decreaseincrease of $38
million$16
from the prior year-end. The allowance represented 36.7%39.94% of nonperforming
and restructured loans and 1.38%1.22% of total loans and guarantees outstanding
at year-end.
During fiscal year 1999,2000, CFC recorded net loan charge-offs of $48 million.
A total of $62 million was written off, $40 million related to Wabash (the
settlement of the RUS clawback), $21 million related to the defeasance of
the Saluda River tax-exempt bonds and $1 million related to the transfer to
RUS, of loans outstanding to Allegheny. A total of $14 million of amounts
previously written off related to the deferred gain from the Wabash
bankruptcy settlement and the release of funds held in trust for the Vermont
Electric Cooperative and Vermont Generating and Transmission Cooperative
restructuring was recovered.$1. Since
its inception in 1969, CFC has charged off loan balances in the total
amount of $79 million,$80, net of recoveries.
Management believes that the allowance for loan losses is adequate to cover
any portfolio losses whichthat may occur.
The following chart presents a summary of the allowance for loan losses at
May 31, 2000, 1999 1998 and 1997.
ALLOWANCE FOR LOAN LOSSES1998.
Years Ended May 31,
(Dollar amounts in thousands)2000 1999 1998
1997
Beginning balance $250,131 $233,208 $218,047$212 $250 $233
Provision for loan losses 23,866 19,027 15,16117 24 19
Charge-offs (61,794) (2,104) -(1) (62) (2)
Ending balance $212,203 $250,131 $233,208$228 $212 $250
As a percentage of total loans outstanding 1.37% 1.55% 2.36% 2.62%
As a percentage of total loans and
guarantees outstanding 1.38%1.22% 1.36% 1.98% 2.12%
As a percentage of total nonperforming and
restructured loans outstanding 39.94% 36.69% 74.98%
62.79%Since May 31, 1998, the loan loss reserve has decreased from a balance of
$250 to a balance of $228 at May 31, 2000. The decrease was due to $62 of
write-offs taken during fiscal year 1999 and $1 of write-offs taken during
fiscal year 2000. The resolution of these troubled situations has left CFC
with no non-performing loans and only Deseret as a restructured loan. The
overall risk in the portfolio has been reduced due to the resolution of
these troubled situations. Thus, the coverage percentage provided by the
loss reserve has decreased since May 31, 1998. The May 31, 2000 loss
reserve balance represents 1.37% of total loans outstanding and 1.22% of
total loans and guarantees outstanding, compared to 2.36% and 1.98% at May
31, 1998. Management has taken the improvement in the overall quality of
the portfolio into consideration in setting the amount of the provision in
each of the last two fiscal years. As stated above, management believes
that the existing reserve is adequate to cover any losses in the portfolio.
During fiscal year 2000, CFC reduced the specific reserve on restructured
loans from $101 to $85. This reduction was a result of excess cash
payments received on restructured loans.
Asset/Liability Management
A key element of CFC's funding operations is the monitoring and management
of interest rate and liquidity risk. This process involves controlling
asset and liability volumes, repricing terms and maturity schedules to
stabilize gross operating marginsmargin and retain liquidity.
35
Match Funding Policy
CFC measures the matching of funds to assets by comparing the amount of
fixed rate assets repricing or amortizing to the total fixed rate debt
maturing over the next year.remaining period maturity of the fixed rate loan
portfolio. It is CFC's policy to manage the match funding of asset and
liability repricing terms within a range of 5% of total assets. At May 31,
1999,2000, CFC had $617.8 million$8,240 in fixed rate assets amortizing or repricing, and $330.2
millionwhich
were funded by $7,865 in fixed rate liabilities and equity maturing during fiscal year 2000.the next 30
years and $288 in members' equity that does not have a scheduled maturity.
The difference, $287.6 million,$87 or 0.5% of total assets, represents the fixed rate
assets in excess of the fixed rate debt maturing during the next fiscal year. This difference of
$287.6 million at May 31, 1999 represents 2.1% of total assets.30 years.
CFC funds variable rate assets which reprice monthly with short-term
liabilities, primarily Commercial Papercommercial paper and Bank Bid Notes,bank bid notes, both of which
are issued primarily with original maturities under 90 days. CFC funds
fixed rate loans with fixed rate Collateral Trust Bonds, Medium-Term Notes, Quarterly Income
Capital Securities, Members' Subordinated Certificatescollateral trust bonds, medium-term notes,
quarterly income capital securities,
34
members' subordinated certificates and Members' Equity.members' equity. With the exception
of Members' Subordinated Certificates,members' subordinated certificates, which are generally issued at rates
below CFC's long-term cost of funding and with extended maturities, and
Commercial Paper,commercial paper. CFC's liabilities have average maturities that closely
match the repricing terms of CFC's fixed interest rate loans. CFC also
uses Commercial Papercommercial paper supported by interest rate exchange agreements to
fund its portfolio of fixed rate loans.
Certain of CFC's Collateral Trust Bondscollateral trust bonds and Medium-Term Notesmedium-term notes were issued
with early redemption provisions. To the extent borrowers are allowed to
convert their fixed rate loans to a variable interest rate and to the
extent it is beneficial, CFC takes advantage of these early redemption
privileges. However, because conversions can take place at different
intervals from early redemptions, CFC charges conversion fees designed to
compensate for any additional interest rate risk assumed by CFC.
CFC makes use of an interest rate analysis in the funding of its long-term
fixed rate loan portfolio. The analysis compares the scheduled fixed rate
loan amortizations and repricings against the scheduled fixed rate debt and
Members' Subordinated Certificatemembers' subordinated certificate amortizations to determine the fixed rate
funding gap for each individual year and for the portfolio as a whole.
There are no scheduled maturities for the Members' Equity,members' equity, primarily
unretired Patronage Capitalpatronage capital allocations. The balance of Members' Equitymembers' equity is
assumed to remain relatively stable since annual retirements have been
approximately equal to the annual allocation of net margins.margin. The non-amortizing Members'
Subordinated Certificatesnon-
amortizing members' subordinated certificates either mature at the time of
the related loan or guarantee or 100 years from issuance (50 years in the
case of a small portion of certificates). Accordingly, it is assumed in
the funding analysis that non-amortizing Members' Subordinated Certificatesmembers' subordinated certificates
and Members' Equitymembers' equity are first used to "fill" any fixed rate funding gaps.
The remaining gap represents the amount of excess fixed rate funding due in
that year or the amount of fixed rate assets that are assumed funded by
short-term variable rate debt, primarily Commercial Paper.commercial paper. The interest
rate associated with the assets and debt maturing or equity and
certificates is used to calculate a TIER for each year and for the
portfolio as a whole. The schedule allows CFC to analyze the impact on the
overall TIER of issuing a certain amount of debt at a fixed rate for
various maturities, prior to issuance of the debt. The following chart
shows the scheduled amortization, and maturity of fixed rate assetassets and
liabilities outstanding at May 31, 1999.2000.
INTEREST RATE GAP ANALYSIS
(Fixed Rate Assets/Liabilities)
As of May 31, 1999
(Dollar amounts in millions)2000
Over 1 Over 3 Over 5 Over 10
year but years but years but years but
Less than less than less than less than less than Over 20
1 year 3 years 5 years 10 years 20 years years Total
Assets:
Amortization and Repricingrepricing $ 617.8 $1,573.7 $1,381.6 $2,484.9 $1,570.1 $ 666.2 $8,294.3778 $1,673 $1,771 $2,090 $1,399 $529 $8,240
Total Assets $ 617.8 $1,573.7 $1,381.6 $2,484.9 $1,570.1 $ 666.2 $8,294.3assets $778 $1,673 $1,771 $2,090 $1,399 $529 $8,240
Liabilities and Equity:
Long-Term DebtLong-term debt $924 $1,536 $1,479 $1,937 $ 326.4 $1,335.7 $1,523.3 $2,374.9 $ 691.4 $ 307.1 $6,558.8469 $297 $6,642
Subordinated Certificates 3.8 34.3 37.2 224.0 611.7 12.3 923.3certificates 3 25 26 295 510 364 1,223
Member's Equityequity - - - - 248.4 365.4 613.8288 - 288
Total Liabilitiesliabilities and Equityequity $927 $1,561 $1,505 $2,232 $1,267 $661 $8,153
Gap* $149 $ 330.2 $1,370.0 $1,560.5 $2,598.9 $1,551.5(112) $ 684.8 $8,095.9
Gap*(266) $ (287.6)142 $ (203.7)(132) $132 $ 178.9(87)
Cumulative gap $149 $ 114.037 $ (18.6)(229) $ 18.6(87) $ (198.4)(219) $(87)
Cumulative Gap $ (287.6) $ (491.3) $ (312.4) $ (198.4) $ (217.0) $ (198.4)
Cumulative Gapgap as a %
of Total Assets (2.07)total assets 0.87% 0.22% (1.34)% (3.53)(0.51)% (2.24)(1.29)% (1.42)% (1.56)% (1.42)(0.51)%
__________________________________
* Loan amortization/amortization and repricing over/(under)(over)/under debt maturities
3635
Derivative and Financial Instruments
All of the financial instruments to which CFC was a party at May 31, 19992000
were purchased for purposes other than trading. All of CFC's financial
instruments at May 31, 19992000 were interest rate sensitive. The following
table provides the significant balances and contract terms related to the
market risk related financial instruments at May 31, 1999.2000.
(Dollar amounts in thousands)Outstanding Principal Amortization
Outstanding Fair Remaining
Instrument Balance Fair Value 2000 2001 2002 2003 2004 2005 Years
Investments $ 74,40374 $ 74,40374 $ 74,40374 $ - $ - $ - $ - $ -
Average rate 1.88% 1.88%1.84% 1.84% -
- - - - - - - - -
Long-term fixed rate loans (1) 8,056,244 7,212,333 591,095 763,268 683,878 723,182 757,487 4,537,3348,215 7,090 791 863 785 784 988 4,004
Average rate 6.72% 6.59% 6.44% 6.71% 6.64% 6.36% 6.42%7.00% 6.80% 6.77% 7.03% 6.94% 7.26% 7.02%
Long-term variable rate loans 3,431,190 3,431,190 152,551 158,211 164,361 168,751 167,490 2,619,8265,836 5,836 214 197 212 122 285 4,806
Average rate (2) 6.04%7.62% - - - - - -
Intermediate-term loans (3) 314,610 315,640 33,115 28,690355 355 355 - - - - -
Average rate 6.42% 8.00% 8.00%7.39% 7.39% -
- - - - - - - - -
Line of credit loans (4) 1,192,113 1,192,113 -1,611 1,611 1,611 - - - - -
Average rate (2) 6.19%7.74% - -
- - - - - - - - -
RUS guaranteedfixed rate loans 130,940 130,940 2,090 2,695 3,145 4,095 5,170 113,745
Average rate (2) 5.87%25 24 11 - - - - - -
Nonperforming loans (5) 1,643 1,64314
Average rate 6.43% 5.75% - - - - 6.95%
RUS variable rate loans 64 64 1 1 1 1 1 59
Average rate (2) 7.11% - -
Average rate (6) 5.55%- - - - - - - - -
Restructured loans (7) 576,662 576,662 7,831 8,688 9,004 12,250 14,965 523,924(5) 572 279 7 8 5 4 6 542
Average rate 3.90% 3.90% 3.90% 3.90% 3.90% 3.90% 3.90%5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Liabilities &and equity:
Commercial Paper $5,871,243 $5,871,243 $5,871,243paper $ 6,550 $ 6,550 $ 6,550 $ - $ - $ - $ - $ -
Average rate 4.94% 4.94%6.17% 6.17% - - - - -
Bank Bid Notes 375,000 375,000 375,000bid notes 155 155 155 - - - - -
Average rate 4.86% 4.86%6.41% 6.41% - - - - -
Medium-Term Notes 2,625,286 2,511,091 982,963 206,217 241,750 355,820 114,125 724,411Medium-term notes 4,791 4,443 2,940 646 362 116 12 715
Average rate 6.10% 5.22% 6.14% 5.69% 6.23% 5.49% 6.06%6.30% 6.35% 6.51% 6.25% 5.51% 6.58% 6.05%
Collateral Trust Bonds 2,996,299 2,956,297 150,000 100,000 100,000 500,000 300,000 1,846,299trust bonds 3,351 3,062 100 100 1,025 300 500 1,326
Average rate (8) 6.42% 6.14%6.40% 6.45% 6.75% 5.83%6.62% 5.77% 6.46%5.73% 6.59%
QUICS 400,000 400,586400 345 - - - - - 400,000400
Average rate 7.62% - - - - - 7.62%
Subordinated Certificates 1,239,816 1,239,816 2,947 8,680 25,661 24,634 12,579 1,165,315certificates 1,340 1,340 3 4 21 23 3 1,286
Average rate 3.25% 3.03% 2.21% 0.85% 1.08% 3.79% 3.18%3.02% 9.63% 4.70% 1.25% 1.99% 4.80% 3.04%
___________________________________________
(1) The principal amount of fixed rate loans is the total of scheduled
principal amortizations and scheduled repricings.
(2) Variable rates are set the first day of each month.
(3) Intermediate-term loan amortizations include principal payments on
both
variable rate and fixed rate loans. Scheduled fixed rate amortizations
are listed in the chart. There is no scheduled amortization for these
variable rate loans.
(4) Line of credit loans are generally required to be paid down for a period
of five consecutive days each year. These loans do not have a principal
amortization schedule.
(5) CFC is uncertain as to the amounts and timing of repayments related to
nonperforming loans.
(6) At May 31, 1999, all nonperforming loans were on non-accrual status with
respect to the recognition of interest income.
(7) All restructured loans were performing on the negotiated terms (see
note 10 to Combined Financial Statements). Amortization based on
scheduled minimum payments. (8) The Collateral Trust Bonds maturing in fiscal yearAt May 31, 2000 carry a variablerestructured loans were
accruing interest rate.at 3.90%. On June 1, 2000 that rate was increased
to 5.00%
The following table provides the notional amount, average rate paid, average
rate received and maturity dates for the interest rate exchange agreements
to which CFC was a party at May 31, 1999.
(Dollar amounts in thousands) Principal Amortization
Notional Principal Fair Remaining
Instrument Balance Value 2000 2001 2002 2003 2004 Years
Interest rate swaps $2,796,022 $2,840,561 $852,851 $626,554 $34,810 $22,375 $329,775 $929,657
Average rate paid (1) 5.40%
Average rate received (1) 4.93%
2000.
Principal Amortization
Notional
Principal Fair Remaining
Instrument Balance Value 2001 2002 2003 2004 2005 Years
Interest
rate swaps $4,817 $4,901 $2,313 $335 $622 $308 $394 $845
Average
rate paid (1) 6.25%
Average
rate received (1) 7.00%
___________________________________
(1) Scheduled interest rate exchange agreement maturities include agreements
in which CFC pays both fixed and variable rates and receives variable
rates.
3736
The following table provides the notional amount in U.S. dollars, average
rate paid, average rate received and maturity dates for the currency
exchange agreementagreements to which CFC was a party at May 31, 1999.2000.
(Dollar amounts in thousands)
Principal Amortization
Notional Average
Principal Average Rate Fair Remaining
InstrumentMaturity Date Balance Rate Received Value 2000 2001 2002 2003 2004 2005 Years
Currency swaps $390,250 $369,814
February 24, 2006 $390 6.22% 4.13% $453 $ - $ - $ - $ - $ - $390,250
Average rate paid 6.22%
Average rate received 4.60%$390
July 14, 2000 24 6.90% 6.30% 24 24 - - - - -
August 14, 2000 24 6.72% 6.28% 26 24 - - - - -
Market Risk
CFC's primary market risk exposure is interest rate risk. A secondary risk
exposure is liquidity risk. CFC is also exposed to counterparty risk
related to the interest rate and currency exchange agreements it has
entered.
The interest rate risk exposure is related to the funding of the fixed rate
loan portfolio. CFC does not match fund the majority of its fixed rate
loans with a specific debt issuance at the time the loan is advanced. CFC
aggregates fixed rate loans until the volume reaches a level that will
allow an economically efficient issuance of debt. CFC uses fixed rate
Collateral
Trust Bonds, Medium-Term Notes, Quarterly Income Capital Securities, Members'
Subordinated Certificates, Members' Equitycollateral trust bonds, medium-term notes, quarterly income capital
securities, members' subordinated certificates, members' equity and
variable rate debt to fund fixed rate loans. CFC allows borrowers
flexibility in the selection of the period for which a fixed interest rate
will be in effect. Long-term loans typically have a 15 to 35 year
maturity. Borrowers may select fixed interest rates for periods of one
year through the life of the loan. To mitigate interest rate risk related
to the funding of fixed rate loans, CFC performs a monthly gap analysis, a
comparison of fixed rate assets repricing or maturing by year to fixed rate
liabilities and equity maturing by year (see chart on page 35). The
analysis will indicate the total amount of fixed rate loans maturing by
year and in aggregate that are assumed to be funded by variable rate debt.
CFC's funding objective is to limit the total amount of fixed rate loans
that are funded by variable rate debt to 5% or less. At May 31, 2000 and
1999, 0.5% and 1998, 2.1% and 2.7%, respectively, of the fixed rate loans were funded with
variable rate debt. The interest rate risk is minimal on variable rate
loans, since the loans are priced monthly based on the cost of the debt
used to fund the loans. CFC uses variable rate debt, non-interest bearing
Members' Subordinated Certificatesmembers' subordinated certificates and Members' Equitymembers' equity to fund variable
rate loans. At May 31, 2000 and 1999, 47% and 1998, 36.6% and 54.2%37%, respectively, of loans
carry a variable interest rate.rates.
CFC faces liquidity risk in the funding of its variable rate loans and in
being able to obtain the funds required to meet the loan requests of its
members or conversely, having funds to repay debt obligations when they are
due. CFC offers variable rate loans with maturities of up to 35 years.
These loans are funded by variable rate Commercial Paper, Bank Bid Notes,
Collateral Trust Bondscommercial paper, bank bid notes,
collateral trust bonds and Medium-Term Notes;medium-term notes, non-interest bearing Members'
Subordinated Certificatesmembers'
subordinated certificates and Members' Equity.members' equity. The average maturity of
Commercial Papercommercial paper and Bank Bid Notesbank bid notes is typically about 30 to 35 days. The
Collateral Trust Bondscollateral trust bonds and Medium-Term Notesmedium-term notes are issued for longer periods,
but typically much shorter than the maturity of the loans. Loan Subordinated
Certificatescapital
term certificates are issued for the same period as the related loan.
Thus, CFC is at risk if it is unable to continually roll over its
Commercial Papercommercial paper balances or issue other forms of variable rate debt to
support its variable rate loans. CFC also faces liquidity risk in the
funding of its fixed rate loans. Borrowers may select a fixed interest
rate term of one year to the loan maturity. When a loan has an interest
rate term of a duration shorter than loan maturity,
expires, the borrower may select
a new fixed interest rate term of one year to the remaining loan maturity
or the long-term variable rate. CFC does not match fund each fixed rate
loan, but rather funds its fixed rate loans in aggregate. CFC matches the
maturity of the fixed rate funding to the fixed interest rate terms
selected, rather than the loan maturity. When the fixed interest rate term
expires, CFC obtains new fixed rate funding based on the new interest rate
term selected by the borrower. CFC is at risk in the rolling over of its
fixed rate funding of a maturity less than the loan maturity. To mitigate
liquidity risk, CFC maintains back-up liquidity through revolving credit
agreements with domestic and foreign banks. At May 31, 19992000 and 1998,1999, CFC
had a total of $4,793 million$5,493 and $5,218 million,$4,793, respectively, in revolving credit
agreements and bank lines of credit. Subsequent to the end of the fiscal
year, CFC increased the total of revolving credit agreements and bank lines
of credit to $7,040. To facilitate entry into the debt markets, CFC
maintains high credit ratings on all of its debt issuances from three
credit rating agencies (see chart on page 39)38). CFC also maintains shelf
registrations with the SEC for its Collateral Trust Bonds,
Medium-Term Notescollateral trust bonds, medium-term
notes and Quarterly Income Capital Securities.quarterly income capital securities. At May 31, 19992000 and 1998,1999,
CFC had activeeffective shelf registrations totaling $700 million$175 and $300
million$700 related to
Collateral Trust Bonds,collateral trust bonds, $2,542 and $144 million and $1,264 million related to Medium-Term Notesmedium-term notes and
$100 million and $50 million$100 related to Quarterly Income Capital Securities.quarterly income capital securities, respectively.
Subsequent to the year-end on June 4, 1999,9, 2000, CFC registered an additinal $2,000 millionadditional
37
$1,000 and $300, respectively, related to Medium-Term Notes.collateral trust bonds and
quarterly income capital securities. All of the registrations allow for
issuance of the related debt at both variable and fixed interest rates.
CFC also has Commercial Papercommercial paper and Medium-Term Notemedium-term note issuance programs in
Europe. At May 31, 19992000 and 1998,1999, CFC had $0 and $50 million
and $82 million of Commercial Paper,commercial
paper, respectively, and $985 and $735 million and $250
million of Medium-Term Notes,medium-term notes, respectively,
outstanding to European investors. CFC has issuance authority of $1 billion$1,000
related to Commercial Papercommercial paper and $2
billion$2,000 related to Medium-Term Notesmedium-term notes under
these programs. 38
CFC believes that the ability to issue debt in both
domestic and foreign markets allows CFC to maintain access to capital in
the event of disruptions in either the domestic or foreign markets. In
addition, CFC believes that its policy of setting interest rates at the
time a fixed rate loan is advanced and the ability to reset all variable
rates at least monthly protects it from erosion of its net margin in the
event that CFC is unable to access the market efficiently or if rates in
the market increase sharply.
CFC is exposed to counterparty risk related to the performance of the
parties with which it has entered into interest rate exchange agreements.
To mitigate this risk, CFC only enters into interest rate exchange
agreements with highly rated counterparties. At May 31, 19992000 and 1998,1999, CFC
was a party to $2,796
million$4,817 and $754 million,$2,796, respectively, of interest rate exchange
agreement.agreements. To date, CFC has not experienced a failure of a counterparty
to perform as required under the interest rate exchange agreement. At May
31, 1999,2000, CFC's interest rate exchange agreement counterparties had credit
ratings ranging from A to AAA as assigned by Standard & Poor's Corporation.
Foreign-CurrencyForeign Currency Risk
CFC may issue European Commercial Paper, Medium-Term Notescommercial paper, medium-term notes or bonds
denominated in foreign-currencies.foreign currencies. For any such noteobligation issued, CFC
expects to enter into a foreign-currencyforeign currency exchange agreement with a highly
rated counterparty. The cost of the currency exchange agreement would be
factored into the interest rate CFC pays on the obligation and included in
CFC's total cost of funds. At May 31, 1999,2000, CFC had a total of $390 million of
Medium-Term Notes,medium-term notes, denominated in Euros and $48 of medium-term notes
denominated in British Pound Sterling outstanding.
CFC is exposed to counterparty risk related to the performance of the
parties with which it has entered into foreign-currencyforeign currency exchange
agreements. To mitigate this risk, CFC only enters into foreign-currencyforeign currency
exchange agreements with highly rated counterparties. At May 31, 1999,2000, CFC
was a party to 390
million$438 of foreign-currencyforeign currency exchange agreements. To date, CFC
has not experienced a failure of a counterparty to perform as required
under the foreign-currencyforeign currency exchange agreements. At May 31, 1999,2000, CFC's
foreign-currencyforeign currency counter parties had credit ratings ranging from AA to AA+
as assigned by Standard & Poor's Corporation.
Credit Ratings
CFC's long- and short-term debt and guarantees are rated by three of the
major credit rating agencies, Moody's Investors Service, ("Moody's"), Standard & Poor's
Corporation ("S&P") and Fitch Investors Service ("Fitch").Service. The following table presents
CFC's credit ratings at May 31, 1999.2000.
Moody's S&PInvestors Standard & Poor's Fitch Investors
Service Corporation Service
Direct
Collateral Trust Bondstrust bonds Aa3 AA AA
Domestic and European
Medium-Term Notesmedium-term notes A1 AA- AA-
Quarterly Income Capital Securitiesincome capital
securities A2 A A+
Domestic and European
Commercial Paper P1commercial paper P-1 A-1+ F-1+
Guarantees
Leveraged Lease Debtlease debt A1 AA- AA-
Pooled Bondsbonds Aa3 AA- AA-
Other Bondsbonds A1 AA- AA-
Short-Term P1Short-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.
38
Member Investments
At May 31, 19992000 and 1998,1999, CFC's members provided 20.4%16.6% and 27.8%20.4% of total
capitalization as follows:
MEMBERSHIP CONTRIBUTIONS TO TOTAL CAPITALIZATION
(Dollar amounts in thousands)2000 % of Total 1999 % of 1999 Total 1998 Total
Commercial Paper $1,063,650 18.1% $1,195,600 21.0%
Long-term debt
(primarily Medium-Term Notes) 211,000 3.1% 240,348 8.0%paper $ 841 13% $1,063 18%
Medium-term notes 294 6% 211 3%
Members' Subordinated Certificates 1,239,816 100.0% 1,229,166 100.0%subordinated
certificates 1,340 100% 1,240 100%
Members' Equity 294,953 100.0% 279,278 100.0%equity 341 100% 295 100%
Total $2,809,419 $2,944,392$2,816 $2,809
Percentage of total
capitalization 16.6% 20.4% 27.8%
39
The total amount of member investments decreasedincreased by $135 million$7 at May 31, 1999,2000,
compared to May 31, 1998. Total1999. The volume of growth experienced by CFC over the
last few years has resulted in member required equity purchases and member
excess cash available for investment in CFC medium-term notes and
commercial paper not being sufficient to maintain the percentage of member
investment as a percentage ofcompared to total capitalization decreased due to the increase in nonmember debt required
to fund the growth in loans.investment. Total capitalization at May
31, 19992000 was $13,803 million,$16,929, an increase of $3,222 million$3,126 over the total capitalization
of $10,581 million$13,803 at May 31, 1998.1999. When the loan loss allowance is added to both
membership contributions and total capitalization, the percentages of
membership investments to total capitalization are 21.6%17.8% and 29.5%21.6% at May
31, 2000 and 1999, and 1998, respectively.
Due toDuring fiscal year 2000, CFC made a number of policy changes that have reduced
Members' Subordinated Certificate purchase requirementsintended to
increase the amount of members' equity and accelerated
Patronage Capital retirements, CFC expects themembers' subordinated
certificates outstanding. The amount of members' investments as a
percentage of total capitalization provided by its membersshould begin to continueincrease as result of
these changes. As stated earlier, CFC's management is committed to
decline.maintaining the leverage and debt to equity ratios within an acceptable
range. Increasing the amount of members' equity and subordinated
certificates outstanding is a significant component of that effort.
Historical Results
The following chart provides CFC's key operating results over the last five
years.
SELECTED KEY FINANCIAL DATA
(Dollar amounts in thousands)
As of May 31: 1999 1998 1997 1996 1995
Net loans $13,491,199 $10,329,345 $8,678,196 $7,728,271 $6,747,124
Total liabilities $12,390,483 $ 9,174,444 $7,573,414 $6,576,764 $5,575,853
Total Members'Subordinated
Certificates and Equity $ 1,534,769 $ 1,508,444 $1,484,080 $1,477,325 $1,504,936
Guarantees $ 1,684,465 $ 2,034,494 $2,080,671 $2,249,440 $2,574,922
Leverage ratio (1) 7.00 6.37 5.84 5.69 5.13
Debt/equity (2) 5.52 4.51 3.97 3.63 3.01
Gross margins $ 126,694 $ 97,038 $ 88,710 $ 78,994 $ 78,771
Net margins $ 76,439 $ 62,216 $ 54,736 $ 49,041 $ 45,212SELECTED KEY FINANCIAL DATA
As of May 31: 2000 1999 1998 1997 1996
Net loans $16,450 $13,491 $10,329 $8,678 $7,728
Total liabilities $15,402 $12,390 $ 9,174 $7,573 $6,577
Total members' subordinated
certificates and equity $ 1,682 $ 1,535 $ 1,508 $1,484 $1,477
Guarantees $ 1,998 $ 1,893 $ 2,080 $2,132 $2,266
Leverage ratio (1) 8.12 7.11 6.39 5.87 5.70
Debt to equity (2) 6.46 5.52 4.51 3.97 3.63
Gross margin $ 161 $ 128 $ 99 $ 91 $ 82
Net margin $ 115 $ 76 $ 62 $ 55 $ 49
TIER (3) 1.13 1.12 1.12 1.12 1.12 1.13
____________________
(1) The leverage ratio is calculated by dividing debt and guarantees
outstanding, excluding Quarterly Income Capital Securitiesquarterly income capital securities and debt
used to fund loans guaranteed by RUS, by the total of Members' Subordinated
Certificates, Members' Equitymembers'
subordinated certificates, members' equity and Quarterly Income Capital Securities.quarterly income
capital securities.
(2) The debt/debt to equity ratio is calculated by dividing debt outstanding,
excluding Quarterly Income Capital Securitiesquarterly income capital securities and debt used to fund
loans guaranteed by RUS, by the total of Members' Subordinated Certificates,
Members' Equity,members' subordinated
certificates, members' equity, the loan loss allowance and Quarterly Income Capital
Securities.quarterly
income capital securities.
(3) The TIER is calculated by dividing net marginsmargin before extraordinary
items plus the cost of funds by the cost of funds.
Year 2000 Compliance
CFC has appointed a Year 2000 Project Coordinator and assembled a team of
individuals from all areas of the company to assist in the development of anot experienced any year 2000 compliance planrelated problems. All computer
systems were successfully restarted and are currently operating normally.
There were no problems with the testingbuildings or building operating systems.
To date, there have been no reported problems with the disbursement or
receipt of all business essential
applications. CFC's year 2000 plan includes the following activities:
* Identificationfunds. We have not received any reports of at risk applications and equipment,
* Obtain certificationproblems from vendors,
* Review the resultsany of
step 2,
* Develop plan to address items that will not be compliant,
* Implement solutions,
* Testing of all applications and equipment,
* Final corrections.
CFC has completed all but the final corrections for its business critical
systems.
CFC has completed the testing of its computer systems. All software and
hardware components have successfully passed year 2000 testing.
CFC does not anticipate any significant impact on internal operations due to
the year 2000 problem. Each business application owner has developed a
contingency plan. The contingency plans and test results will be maintained
as part of the remediation effort documentation. CFC's information system
staff will be at CFC on January 1, 2000 to monitor systems as the date
changes. The first business day for CFC will be January 4, 2000, which
allows three days to work on any problem that may occur.
40
CFC depends on the federal wire system to advance loan funds and to collect
debt service payments on loans. CFC also depends on the capital markets for
the bulk of its loan funding. Serious disruptions in these areas could
impact CFC's operations.our banks or vendors.
In 1994, CFC decidedbegan to move from a mainframemain frame computer system to a client
server computer system. This changesystem to a client server system was initiated
solelyallow for business purposes. The client server platform allows CFC staff
and membersbetter access to data that was not possible with the mainframe. Along
with the change in computer platform, CFC moved fromby internal development of
all software applications to a mixture of externally developed software
solutionsstaff and internal development with tools such as Java, Power Builder
and Lotus Notes. Some of the initial client server components have been
upgraded due to the demand for more processing power and memory.its
members. As a result of the decision to migrate to a client server system,
and the subsequent
upgrades CFC's year 2000 problems have beenwere mitigated. To dateAlso, as a result of expenditures
on new client server hardware and software, CFC's remediation cost has been insignificant. CFC does not
anticipate that the overall cost of remediating its year 2000 problem,
cost to date plusspecific
expenditures were relatively minor.
39
CFC's borrowers have not experienced any additional amounts required before or after January 1,
2000, will adversely impact operations. CFC has performed all work related
to thesignificant year 2000 compliance plan internally. The cost of migrating torelated
incidents, that would have a client server systemmaterial adverse impact on their business
operations and upgrading client server components for additional
power and memory is not considered a year 2000 remediation cost.
While CFC does not anticipate any operational problems, its borrowers'
ability to make debt service payments depends on their ability to generate and deliver electric power andrevenue to deliver telecommunications services to
their customers. Disruptions to these services could impact the borrowers'
ability to makeservice debt
service payments to CFC. Factors mitigating the
potential impact of service disruptions include:
* Borrowers have cash balances and the ability to draw down on lines of
credit to temporarily cover debt service payments,
* Electric power was generated and transmitted to customers prior to the
present level of computer automation, thus manual operation of plants and
distribution systems is possible, and
* CFC maintains a revolving credit facility and bank lines of credit, which
could be drawn upon to meet debt obligations in the event that borrowers
experience temporary difficulty in making their debt service payments.
CFC required its electric borrowers to provide details of their compliance
effort in the officers' certificate for the year ended December 31, 1998.
Responses have come as statements or copies of their individual year 2000
plans. To date CFC has received approximately 900 responses. About 97% of
the responses have been considered to be "Satisfactory"- Cooperative states
that they are aware of and addressing the potential year 2000 problem and
taking the necessary steps to become year 2000 compliant; that they have
adequate resources to perform the work; and they are testing systems,
validating vital components and have created contingency plans. The
remainder has been classified as "Unable to Assess" status - Cooperative
statement lacks enough information or is vague. CFC is trying to follow up
with these cooperatives to get more information. CFC has not received any
responses that would be classified as "Unsatisfactory" - Cooperative states
they are unable or unwilling to address the potential year 2000 problem, they
don't expect to be year 2000 ready or offer no statement at all.
Year 2000 activities will continue to be documented in detail to reflect that
CFC demonstrated all reasonable effort, that all risks were fully assessed
and that a detailed plan was fully executed.obligations.
Financial and Industry Outlook
The approved funding levels for RUS loans have decreased in eachand loan guarantees continue to provide a significant portion of
the last
two years andfinancing needed by electric cooperatives.
The most recent significant change in the proposed amounts for theRUS electric loan programs began
in fiscal year beginning October 1,
1999, are approximatelywhen the RUS funding programs shifted away from more
heavily subsidized direct lending to RUS guarantees of loans made by the
FFB at the government's cost of money plus 1/8th of one percent. For
example, for fiscal year 2000, the RUS has authority to provide $1,700
of loan guarantees versus direct electric lending authority of $416($121
at a fixed 5% hardship interest rate and $295 at municipal rates).
The same as forpattern of large loan guarantee programs relative to the year ending September 30, 1999.
While the loan amounts have decreased, the amountsize of
RUS guarantees available
has increased eachdirect lending is expected to continue in fiscal year over2001 and future
years.
The RUS loan guarantee program is expected to be the same period. If this trendpreferred source of
increasedfunding for rural electric generation projects, including the combustion
turbine projects being planned by several generation and transmission
systems. The RUS guarantees over direct loans continues,lending programs will provide assistance to
electric cooperatives that may be in greater need of subsidized interest
rate loans. Other electric distribution cooperatives, including the
rural utilities willapproximately 250 cooperatives that have to
obtain funding from alternative sources.exited the RUS loan program, rely
on private lenders, like CFC, for all of their financing needs.
During fiscal year 1999,2000, CFC advanced approximately $556 million$205 to electric
borrowers for the purpose of prepaying their RUS loans. From March 1994,
the date final regulations were adopted, through May 1999,2000, CFC has advanced a
total of $2,601 million$2,908 to borrowers for this purpose. To date, CFC has been
selected as the lender for 95% of the RUS debt refinancings. At May 31,
1999,2000, there were applications pending at RUS for an additional $31 million of
buyouts in which CFC has been selected as the lender and has approved loan
commitments. Future volume of RUS note prepayments will
41
depend on a number
of factors including interest rates, tax consequences and possible
acquisition or other business opportunities available to the members. CFC
does not expect large volumes of prepayment requests to be made at any one
time, but CFC believes that there will be a steady stream of activity.
CFC believes that demand for loans from its electric membersit will continuebe difficult to maintain the pace setrapid loan growth
experienced over the last fewfour years. Factors impactingSince May 31, 1996, CFC has
increased the balance of loans outstanding by $8,732 or 110%, from a
balance of $7,946 at May 31, 1996 to a balance of $16,678 at May 31, 2000.
The primary factor limiting future growth is the significant increase to
the amount of RUS loan guarantees available. RUS has increased the
authorized level of increase in demand for CFC loan guarantees from $300 to about $1,700. These funds
will include:
* the number of systems that decided to buy out their RUS debt;
* the strength of the economy;
* the utilization of loanshave typically been advanced from the FFB, which is able to raise funds at
lower rates. CFC became an eligible lender under the loan guarantee
program in February 1999 and has a total of $43 in loans outstanding at May
31, 2000. There is a long lead time to secure the RUS guaranteed loan
funds. In some cases, CFC members will not be able to wait that long and
will borrow from CFC, and in other cases CFC will provide bridge financing
that will be paid off by the advance of the RUS guaranteed loan funds.
In addition, CFC may not be the sole lender in future large transactions
extended to its members. In the past, CFC would lend the entire amount for
deals that met the lending requirements. In the future, CFC may bring
together a syndicate of lenders or sell loan participations. Not lending
the full amount required in these large transactions will assist CFC in a
number of ways, including the management of both the debt to equity ratio
and credit concentration with a guarantee from RUS;
* mergers and acquisitions of non-cooperative electric systems; and
* the pace of diversification into new businesses, such as gas and propane
and new telecommunications services.large borrowers.
The telecommunications loan portfolio has grown significantly in the last
few years. The growth has come from the sell off of rural exchanges by
larger telecommunications organizations (primarily GTE) and the expansion
of wireless services. Future growth in telecommunications lending is
expected to come from the following areas:
* acquisitions of rural exchanges from investor-owned organizations that
require a high rate of return;
* consolidations of rural telecommunications companies;
and
* expansion of wireless services, including Local Multiple Distribution
Services ("LMDS"),local multiple distribution
services, which offersoffer a variety of one and two way broadband
telecommunications services.services; and
* refinancing of existing debt.
The significant loan growth over the past few years has caused CFC's debt
to equity and leverage ratios to increase. CFC is currently reviewing optionshas implemented a number of
policies during fiscal year 2000 and in the first quarter of fiscal year
2001 aimed at increasing the level of retained equity. CFC has made
changes that will result in an increase in the amount of loan certificates
required to slowbe purchased by borrowers that have a CFC debt to equity ratio
in excess of the growthamount
40
stated in the policy. CFC has also created a new subordinated certificate
not tied to the advance of a loan or guarantee that members may purchase
at any time. CFC has created a member's capital reserve in which a portion
of each year's net margins will be placed. This reserve will be maintained
by CFC as retained unallocated margins. CFC will have the ability to
allocate the retained margins to its members. These changes should begin
to increase CFC's equity retention, which will help maintain the debt to
equity and leverage ratio as the loan
portfolio continues to grow. CFC expects to get recommended actions to slow
the growth in these ratios approved and implemented prior to the end of
fiscal year 2000.within an acceptable range.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See market riskMarket Risk discussion on pages 3837 and 39.38.
Item 8. Financial Statements and Supplementary Data.
The Combined Financial Statements, Auditors' Report and Combined Quarterly
Financial Results are included on pages 5352 through 8278 (see Note 1314 to
Combined Financial Statements for a summary of the quarterly results of
CFC's operations).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
4241
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors
Name Age Director Date present
Name Age sinceSince term expires
Benson Ham (President of CFC) 6566 1995 2001
R.B. Sloan, Jr. (Vice President of CFC) 4748 1996 2002
Wade R. Hensel (Secretary-Treasurer of CFC) 4748 1997 20002003
James Andrew 6263 1999 2001
Robert A. Caudle 5455 1999 2002
James P. Duncan 54 2000 2003
Glenn English 5859 1994 20002001
Alden J. Flakoll 6566 1996 2002
James A. Hudelson 5455 1999 2002
Kenneth Krueger 6162 1997 20002003
Stephen R. Louder 4748 1998 2001
Eugene Meier 7071 1997 20002003
R. Layne Morrill 5960 1995 2001
Robert J. Occhi 5253 1996 2002
MichaelClifton M. Pigott 5556 1997 20002003
Timothy Reeves 5152 1998 2001
Brian D. Schlagel 4950 1998 2001
Thomas W. Stevenson 5758 1997 20002003
Clifford G. Stewart 5354 1997 2001
Robert Stroup 5455 1996 2002
Robert C. Wade 6566 1997 2000
Robert O. Williams 66 1994 20002003
Eldwin A. Wixson 6768 1995 2001
(b) Executive Officers
Held present
Title Name Age Held present
office since
President and Director Benson Ham 6566 1999
Vice President and Director R.B. Sloan, Jr. 4748 1999
Secretary-Treasurer and Director Wade R. Hensel 4748 1999
Governor and Chief Executive Officer Sheldon C. Petersen 4647 1995
Senior Vice President of Member
Services and General Counsel John J. List 5253 1997
Senior Vice President and
Chief Financial Officer Steven L. Lilly 4950 1994
Senior Vice President for
Strategic Services David J. Hedberg 48 1995
Senior Vice President of Operations John T. Evans 4950 1997
Senior Vice President of
Corporate Relations Richard E. Larochelle 4647 1998
Senior Vice President of RTFC Lawrence Zawalick 42 2000
The President, Vice President and Secretary-Treasurer are elected annually
by the Board of Directors at its first meeting following CFC's annual
membership meeting, each to serve a term of one year; the Governor serves at
the pleasure of the Board of Directors; and the other Executive Officers
serve at the pleasure of the Governor.
(c) Identification of Certain Significant Employees.
Inapplicable.
(d) Family Relationships.
No family relationship exists between any director or executive officer and any
other director or executive officer of the registrant.
42
(e) (1) and (2) Business Experience and Directorships.
43
In accordance with Article IV of CFC's Bylaws, each candidate for election
to the Board of Directors must be a trustee, director or manager of a
member of CFC.
Mr. Ham has been a Director of Central Georgia Electric Membership
Cooperative, Jackson, GA, since 1983. He wasis retired as the managing
partner inof the law firm of Ham, Jenkins, Wilson & Wangerin, from 1991 to
1998, and is
currently retired.1998. He is a partner in Sleepy Creek Farms, a commercial cow-calf
operation established in 1983. He also served for ten years in the Georgia
Legislature. He is currently a member of the Monroe County Economic
Development Authority. He has served as President of the Flint Judicial
Circuit Bar Association from 1962 to 1963 and has served on the Board of
Governors of the Georgia Bar Association. He currently serves as a member
of the Board of Directors of Georgia Transmission Corporation and Georgia
Electric Membership Corporation.
Mr. Sloan has been Chief Executive Vice PresidentOfficer of Energy United, a consolidated
corporation since 1998, and General Managerone of its predecessor cooperatives, Crescent
Electric
Membership Corporation, Statesville, North Carolina since 1989. He has been a member of the boards of
North Carolina Electric Membership Corporation, North Carolina Association
of Electric Cooperatives, since,and Tarheel Electric Membership Association since
1989. He was Chairman of the North Carolina Rural Electrification
Authority from 1987 to 1993. He is also the past Chairman of the National
Association of Counties' Rural Development Committee, past Chairman of the
Greater Statesville Chamber of Commerce and the past Chairman of the
Iredell County Board of Commissioners.
Mr. Hensel has been General Manager of BENCO Electric Cooperative, Mankato,
MN, since 1981. He is a former Chairman of Minnesota Rural Electric
Manager's Association and a former Chairman of the Cooperative Power
Manager's Association. He has been a member of the management committee of
Cooperative Television Association of Southern Minnesota since 1993, a
partner in North Mankato/BENCO Electric Cooperative since 1991, a director
of Mankato Rehabilitation Center since 1995, and a director and former
Chairman of Valley Industrial Development Corporation. He is a former
chairman and former director of the Chamber of Commerce, a former president
of the Jaycees, a former treasurer and board member of the Independent
School District #77, and former director of Immanuel-St. Joseph's Hospital.
Mr. Andrew has served on the National Rural Electric Cooperative AssociationNRECA Board since 1989, and has been President
since 1999. He serves as director of Jefferson Energy Cooperative since
1976, and is also director and former president for Georgia Electric
Membership Corporation. Before his semi-retirement, Mr. Andrew was
president/owner of BAS, Inc., an agricultural irrigation business in
Waynesboro, GA. He serves as Chairman of Ogeechee Valley Bank since 1997
where he washas been on the bank board since 1973. He also serves on the
Board of Queensboro, Inc., a bank holding company.
Mr. Caudle is a Trustee for the Lea County Electric Cooperative in
Lovington, NM. He has been active in the domestic oil and gas industry as
a partner in two independent companies, CB Partners of Midland, TX, since
1992 and M & W of Lovington, NM since 1993. Since 1990, Mr. Caudle has also
owned a consulting business named after him which specializes in utility
title and regulatory issues in Lovington, NM.
Mr. Duncan is the CEO and General Manager of Sumter Electric Cooperative,
Inc. In addition, Mr. Duncan is a director of Seminole Electric
Cooperative and also serves as its Chairman of Finance Committee and Vice
Chairman of the Rate Committee. He is a Vice President of Florida Electric
Cooperatives Association and the Vice President of Sumter County Economic
Development Council. He serves as Deputy Campaign Chairperson of the
United Way of Lake and Sumter Counties and is active in numerous other
community organizations.
Mr. English has been Chief Executive Officer of NRECA, Washington, DC,
since March 1994. He served in the United States House of Representatives
from 1975 to 1994. He served on the House Agriculture Committee from 1975
to 1994 and was Chairman of the House Agricultural Subcommittee on
Environment, Credit and Rural Development in 1989.
Mr. Flakoll is President of FEM Electric Association, Inc., Ipswich, SD and
has been on the board of directors since 1977, and is a director of the
East River Electric Power Cooperative, Madison, SD. He has been the owner
and operator of Flakoll Enterprises, a diversified farming, ranching and
feedlot operation, since 1957. He has also been the Chairman of District 2
South Dakota Rural Electric Association Legislative and Resolutions Committee
since 1992. He is President of the South Dakota
Outstanding Farmers of America and Secretary-Treasurer of North Central
Hereford Association. Mr. Flakoll is a past President of the North Central
Livestock Association and past business manager of Wachter School District.
Mr. Hudelson has been General Manager of WyrulecWyoming Rural Electric Company
since 1976. He became Chairman of the Legislative Committee for the
Wyoming Rural Electric Association in 1989. He served as president of
Goshen County
43
Economic Development Corporation from 1991 to 1994, and has been a member
since 1990. He has been the Director for the Eastern Wyoming Development
Corporation since 1999.
Mr. Krueger has been a Director of Flathead Electric Cooperative, Inc.,
Kalispell, MT, since 1972 and was President from 1977 to 1984. He also
served as Director and member of the Executive and Legislative Committees.
He has owned and
44
operated a grain farm since 1960. He was President of the
Montana Electric Cooperatives' Association from 1979 to 1988, and
Secretary-Treasurer from 1976 to 1979. He served on the Building
Committee, the Dues and Policy Committee, and the Budget Committee. He is
also a member of the NRECA Region IX Resolutions Committee. Mr. Krueger
was Flathead County Commissioner from 1983 to 1989. He is a past member of
the Montana State Rural Area Development Committee, past Master of the
Stillwater Grange, and former board member and Chairman of the West Valley
School Board in Flathead, MT. He was also District VI Director of Montana
Wheat and Barley Committee from 1986-1991.
Mr. Louder has been President and General Manager of Deaf Smith Electric
Cooperative, Hereford, TX, since 1992. He is a director and currently
serves as Secretary/Treasurer at Golden Spread Electric Cooperative and a
former member and Chairman of the Texas Electric Cooperative Member
Services Committee. He is a registered Professional
Engineerprofessional engineer in the state
of Texas, a member of the Community Christian School Board of Trustees and
a member of the Board of Elders at Community Church in Hereford, TX. He is
also active in his local economic development and the 4-H Club.
Mr. Meier has been a Director of Cooperative Development Services since
1998 and the Director of Pierce-Pepin Cooperative Service, Ellsworth, WI,
since 1991. He has been Vice President of the Wisconsin Electric
Cooperative since 1995 and was Chairman of its Legislative Committee from
1994 to 1998.1997. Prior to his retirement in 1994, Mr. Meier was Maintenance
Foreman of Continental Nitrogen and Resources, Inc. He has also owned and
operated a farm since 1964. He has been a director of the Wisconsin
Federation of Cooperatives since 1995. He is a former member of
Legislative Standing Committee, NRECA, and a former executive committee
member of the Wisconsin Electric Cooperative Association. He is an active
member and past President of Joy Lutheran Church of Prescott.
Mr. Morrill has been a Director of White River Valley Electric Cooperative,
Inc., Branson, MO, since 1976 and is currently serving as Secretary-Treasurer.Secretary-
Treasurer. He is also a Director of KAMO Electric Cooperative. He has
been President of Shepherd of the Hills Realty Co., Inc., and President of
Shepherd of the Hills Properties Inc., since 1967. He is also a Director
of the Bank of Kimberling City and of Rural Missouri Cable T.V. Inc. He
has been President of the Kimberling City Water Company since 1982.
Mr. Occhi has been Executive Vice President and General Manager of Coast
Electric Power Association, Bay St. Louis, MS, since 1986. He has been a
Director of the South Mississippi Electric Power Association since 1986 and
past President of the Electric Power Associations of Mississippi. He is
also Vice President of the Mississippi Council of Farmer Cooperatives and
of the Greater Biloxi Economic Development Foundation, and a past Director
of the Mississippi Economic Council.
Mr. Pigott has been the Executive Vice President and General Manager of
Beauregard Electric Cooperative, DeRidder, LA, since 1988. He has been
President of the Association of Louisiana Electric Cooperatives sincefrom 1994
to 1999, a director of Cajun Electric Power Cooperative sincefrom 1992 to 1999,
and a member of Louisiana Electric Distribution Cooperative Managers
Association since 1988. He has been a director of the Louisiana Resource
Recovery and Development Authority since 1990.from 1990 to 1998. Mr. Pigott is
currently Director of the Rotary Club, and is a member of the Chamber of
Commerce, the Beauregard Parish Cattlemen's Association, the Allen Parish
Rice Growers Association, and the Human Resources Management Association.
Mr. Reeves has been President and General Manager of Southern Illinois
Power Cooperative, Marion, IL, since 1993. He was Executive Vice President
and General Manager of Southern Illinois Electric Cooperative from 1981 to
1990, and Assistant to the Manager of Egyptian Electric Cooperative
Association from 1974 to 1980. He is the Chairman of Illinois ACRE and a
member of Illinois Managers Association and the G&T Managers Association.
He also served as President of the Union County Hospital Board and the
Southern Most Illinois Tourism Board.
Mr. Schlagel has been the President of Morgan County REA, Fort Morgan, CO,
since 1997. He has owned and operated Schlagel Farms, an irrigated
agriculture enterprise, since 1971. Mr. Schlagel is also a Director of the
Colorado Rural Electric Association, serves on the Facilities Committee at
Tri-State Generation and Transmission Association, Inc., is Vice President
of Roggen Famer'sFarmer's Elevator Association and a Fellow of the Colorado
Agriculture Leadership Program. He also served as President of Strasburg
School District 31-J and Vice President of the Southeast WeldWild Fire
Protection District.
44
Mr. Stevenson has been President and Chief Executive Officer of Wolverine
Power Supply Cooperative, Inc., Cadillac, MI, since 1995. He was the
General Manager and Chief Executive Officer of Ketchikan Public Utilities,
Ketchikan, AK from 1989 to 1995. He has been a Director of Michigan
Association of Rural Electric Cooperatives since 1995. He is a member of
NRECA's Power and Generation Committee and G & T Managers Association. Mr.
Stevenson served as mayor pro tem and city council member of Longmont, ColoradoCO,
from 1978 to 1981.
45
He served as a board member of Denver Regional Council
of Governments, and as a board member and executive committee member of
Ketchikan Chamber of Commerce. He is a member of the American Institute of
Certified Public Accountants, the Colorado Society of CPAs, Rotary
International (Paul Harris Fellow), and the American Legion, and the VFW.Legion.
Mr. Stewart has been the Vice President and General Manager of Oregon Trail
Electric Consumers Cooperative, Baker City, OR, since 1993, and is Chairman
of the Board at Pacific Northwest Generating Cooperative since 1998. He
was general manager of Farmers' Electric Cooperative, Inc., from 1985 to
1993 and served on the Clovis-Curry Economic Development Board from 1990 to
1993. He is past president of the New Mexico Rural Electric Self Insurers
Fund, a former director of the New Mexico Rural Electric Association, and
Chairman of the Association's Publications committee.
Mr. Stroup has been Vice President of Rush Shelby Energy REMC (previously
Shelby County REMC) in Shelbyville, IN since 1994 and has owned a construction and design company since 1964. He has
been a Director of Hoosier Energy REC since 1992 and of the Indiana Statewide Association of Rural Electric
Cooperatives since 1993.1992. He is also a member of
the Marietta Volunteer Fire Department and the Shelby County Chamber of
Commerce.
Mr. Wade serves as Chairman of Nolin Rural Electric Cooperative
Corporation, Elizabethtown, KY, and has been engaged in grain farming since
1960. He is the Director of Kentucky Association of Electric Cooperatives,
of which he was Chairman from 1980 to 1982. He has beenis Vice Chairman of
Kentucky Electric Cooperatives' Political Action Committee, SURE--Speak Up
for Rural Electrification since 1974.Electrification. He is a member of KAEC Strategic Planning
Committee and Management and Employees
Committee, and served on CFC's Committee on Objectives and Planning. Mr.
Wade is a member of PNC Bank Advisory Board, board member and past
President of North Central Kentucky Education Foundation, Director of
Hardin County Community Foundation, a member of University of Kentucky
Community College Futures Commission, past Chairman of Hardin County
Planning and Development Commission and Hardin County Extension Council.
Mr. Williams has been President and Chief Executive Officer of York Electric
Cooperative, York, SC since 1974. He has also been a trustee for both the
Saluda River Electric Cooperative, Laurens, SC, and the Electric Cooperatives
of South Carolina since 1974. He was a trustee for the South Carolina State
Development Board from 1991 to 1993 and a trustee for the York Technical
College Foundation Board from 1983 to 1991. Mr. Williams commenced serving
as a trustee on a local bank board (Bank of York, York, SC) as of March 1999.
Mr. Wixson has been a Director of New Hampshire Electric Cooperative, Inc.,
Plymouth, NH, since June 1986 and President (now retitled Chair) of the
Board of Directors since June 1992. He also served as President and CEO of
Cooperative Resources, an ISPinternet service provider serving the Lakes
region of New Hampshire, from the time of incorporation in April 1997 to
June 1999. Mr. Wixson has been a professor of mathematics at Plymouth
State College, of the University System of New Hampshire, since 1966 and
was Interim Dean from July 1994 to June 1995. He also has been Chair of
the Board of Directors of the Community Guaranty Savings Bank since 1988.
He served as a Director of the Speare Memorial Hospital from 1986 to 1998.1998
and rejoined the board as Vice President in September 1999. He was the
principal-controlling partner of the Plymouth Pharmacy from 1979 to 1983
and was a Maine dairy farmer from 1956 to 1963.
Mr. Petersen joined CFC in August 1983 as an Area Representative.area representative. He
became the Director of Policy Development and Internal Audit in January
1990, then Director of Credit Analysis in November 1990 and Corporate
Secretary on June 1, 1992. He became Assistant to the Governor on May 1,
1993. He became Assistant to the Governor and Acting Administrative
Officer on June 1, 1994. He became Governor and CEO on March 1, 1995.
Mr. List joined CFC as a staff attorney in February 1972. He served as
Corporate Counsel from June 1980 untilto 1991. He became Senior Vice
President and General Counsel on June 1, 1992, and became Senior Vice
President, Member Services and General Counsel on February 1, 1997.
Mr. Lilly joined CFC as a Senior Financial Consultant in October 1983. He
became Director of Special Finance in June 1985 and Director of Corporate
Finance in June 1986. He became Treasurer and Principal Finance Officer on
June 1, 1993. He became Senior Vice President and Chief Financial Officer
on January 1, 1994.
Mr. Hedberg joined CFC as Director of Rates and Special Projects in 1981.
He became Senior Vice President of Strategic Services on June 1, 1995.
46
Mr. Evans joined CFC as Senior Vice President of Operations in November
1997. He was Senior Vice President and Chief Operating Officer of Suburban
Hospital Healthcare System, Bethesda, MD, from 1994 to 1997. He was Senior
Vice President and Chief Operating Officer for Geisinger Medical Center,
Danville, PA, from 1991 to 1994.
45
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.
Mr. Zawalick joined CFC in 1980. Throughout the years, 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.
(f) Involvement in Certain Legal Proceedings.
None to the knowledge of CFC.
(g) Promoters and control persons.
Inapplicable.
Item 11. Executive Compensation
The Summary Compensation Tablesummary compensation table below sets forth the aggregate remuneration
for services in all capacities to CFC, on an accrual basis, for the three
years ended May 31, 2000, 1999 1998 and 19971998, to the named executive officers.
The named executive officers include the CEO and the four next most highly
compensated executive officers serving at May 31, 1999,2000, with salary and
bonus for fiscal year 19992000 in excess of $100,000.
Summary Compensation Table
All
Annual Compensation All Other
Year Salary Bonus Compensation (1)
Sheldon C. Petersen 1999 $358,750 $77,656 $19,2082000 $363,750 $83,789 $ 5,823
Governor and Chief 1999 358,750 77,656 19,208
Executive Officer 1998 328,854 - 25,009
Executive Officer 1997 289,711 - 18,358
John J. List 1999 198,667 43,750 3,4742000 207,667 44,945 7,704
Senior Vice President of Member 1999 198,667 43,750 3,474
Services and General Counsel 1998 194,652 19,100 4,035
Services and General Counsel 1997 173,246 7,000 11,177
Steven L. Lilly 2000 229,417 49,650 8,703
Senior Vice President and 1999 218,167 48,344 8,665
Senior Vice President andChief Financial Officer 1998 205,869 12,200 10,352
Chief Financial Officer 1997 192,620 3,000 9,232
David J. Hedberg 1999 161,833 35,656 7,071
Senior Vice President for 1998 150,849 17,300 6,615
Strategic Services 1997 147,704 5,000 8,309
John T. Evans (2) 2000 212,833 46,062 24,241
Senior Vice President of 1999 202,500 44,844 16,312
Senior Vice President forOperations 1998 106,571 10,500 24,252
OperationsRichard Larochelle (3) 2000 168,250 36,416 17,424
Senior Vice President of
Corporate Relations Group
_________________
(1) Amounts for fiscal years 2000, 1999 and 1998 include $1,173, $13,166
and 1997 include $13,166, $21,501 and
$13,325 related to leave accruals and $4,050, $6,042 $3,508 and $5,033$3,508
related to CFC contributions to a savings plan for Mr. Petersen;
$4,422, $(166), $854 and $7,819$854 related to leave accruals and $3,282, $3,640
$3,181 and $3,358$3,181 related to CFC contributions to a savings plan for Mr. List;
$4,885, $4,670 $7,159 and $5,473$7,159 related to leave accruals and $3,818, $3,995
$3,193 and $3,759$3,193 related to CFC contributions to a savings plan for Mr. Lilly;
$3,835, $3,525$20,699, $14,262 and $5,415$24,252 related to leave accruals and $3,237, $3,090 and $2,894 related to
CFC contributions to a savings plan for Mr. Hedberg; $14,262, $24,252 and
$0 related to leave accruals and$3,542,
$2,050 $0 and $0 related to CFC contributions to a savings plan for Mr.
Evans. Amounts for fiscal year 2000 for Mr. Larochelle include $14,059
related to leave accruals and $3,365 related to CFC contributions to a
savings plan.
(2) Mr. Evans joined CFC in November 1997. The compensation table for
1998 includes the actual compensation paid to Mr. Evans through May 31,
1998 and not his annual salary.
47
(3) During fiscal year 2000, Mr. Hedberg, who was one of the top four most
highly compensated employees in 1999 and 1998, left CFC and Mr.
Larochelle became one of the top four most highly compensated employees.
CFC established ana short-term incentive compensation plan for all employees
in fiscal year 1999. The plan provides for incentive payments of between
15% and 25% of salary based on the achievement of performance targets
established at the beginning of the fiscal year. CFC's executives are
eligible to receive incentive payments of up to
46
25% of salary under this plan, depending on corporate performance and the
performance of the operating groups reporting to each executive. The
incentive plan replaces the bonus plan that was in effect through fiscal
year 1998.
CFC's Board of Directors approves the performance targets for the incentive
plan annually during the strategic planning and budgeting process. The
boardBoard of directorsDirectors will also review the performance achievements for the
year and must approve the payout under the incentive plan prior to
disbursement.
In July 2000, CFC's Board of Directors approved a long-term incentive plan.
The plan will provide for payouts of up to 25% of salary based on performance
over a three-year period. CFC's executives are eligible to receive incentive
payments of up to 25% of salary under this plan. The long-term incentive will
be in addition to the short-term incentive described above.
Defined Benefit or Actuarial Plan Disclosure
NRECA maintains the Retirement and Security Program entitling CFC employees
to receive annually, under a 50% joint and surviving spouse annuity, 1.90%
of the average of their five highest base salaries during their last ten
years of employment, multiplied by the number of years of participation in
the program. As of May 31, 1999,2000, the number of years of service credited
and the compensation covered under the program, respectively, for the
officers listed above was as follows: Sheldon C. Petersen-15Petersen-16 years 9
months, $328,750;$319,000; John Jay List-27J. List-28 years 3 months, $198,667;$190,151; Steven L.
Lilly-15Lilly-16 years 7 months, $218,167; David J. Hedberg-17$205,399; Richard Larochelle-4 years, 5 months, $161,833,$145,900;
and John T. Evans-one
yearEvans-2 years 6 months, $202,500.$203,133.
Pension Plan Table
Years of ServicesService
Average base salary 5 10 15 20 25 30
$100,000 $ 9,500 $ 19,000 $ 28,500$19,000 $28,500 $ 38,000 $ 47,500 $ 57,000
125,000 11,875 23,750 35,625 47,500 59,375 71,250
150,000 14,250 28,500 42,750 57,000 71,250 85,500
175,000 16,625 33,250 49,875 66,500 83,125 99,750
200,000 19,000 38,000 57,000 76,000 95,000 114,000
225,000 21,375 42,750 64,125 85,500 106,875 130,000*128,250
250,000 23,750 47,500 71,250 95,000 118,750 130,000*135,000*
275,000 26,125 52,250 78,375 104,500 130,000* 130,000*130,625 135,000*
300,000 28,500 57,000 85,500 114,000 135,000* 135,000*
325,000 30,875 61,750 92,625 123,500 135,000* 135,000*
*The Tax Reform Act of 1984 places a cap on maximum salary used to compute
retirement benefits and maximum yearly benefit. For calendar year 1999,2000,
the salary cap is $160,000$170,000 (the cap represents the amount of salary for
19992000 that may be used in the computation of the average base salary) and
the benefits cap is $130,000.$135,000.
The Budget Reconciliation Act of 1993 has set a limit of $160,000$170,000 on the
compensation to be used in the calculation of pension benefits. In order
to restore potential lost benefits, CFC has set up a Pension Restoration
Plan. Under the plan, the amount that NRECA invoices CFC will continue to
be based on the full compensation paid to each employee. Upon the
retirement of a covered employee, NRECA will calculate the retirement and
security benefit to be paid with consideration of the compensation limits
and will pay the maximum benefit thereunder. NRECA will also calculate the
retirement and security benefit that would have been available without
consideration of the compensation limits and CFC will pay the difference.
NRECA will then give CFC a credit against future retirement and security
contribution liabilities in the amount paid by CFC to the covered employee.
CFC will pay such additional benefits to the covered employee through a
Severance Pay Plan and a Deferred Pay Restoration Plan. Under the
Severance Pay Plan, the employee is paid an amount equal to the lost
pension benefits but not to exceed twice the employee's annual compensation
for the prior year. The benefit must be paid within 24 months of
termination of employment. To the extent that the Severance Pay Plan
cannot pay all of the lost pension benefits, the remainder will be paid
under a Deferred Compensation Plan, which will be paid out in a lump sum or
in installments of up to 60 months.
47
Compensation of Directors
No director received any remuneration as an officer or director of CFC.
Directors are reimbursed for travel and lodging expenses and receive a
daily per diem to cover meals and other expenses related to their
attendance at all Board of Directors functions.
48
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
Pursuant to an employment agreement effective as of March 1, 1996, CFC has
agreed to employ Mr. Petersen as Chief Executive Officer through February
28, 2001 (with automatic one-year extensions unless either party objects)
at no less than $245,000 per annum plus such bonus (if any) as may be
awarded him. Certain payments have been agreed to in the event of Mr.
Petersen's termination other than for cause; for example, Mr. Petersen
leaving for good reason, disability or termination of his employment due to
death.
Pursuant to a separate employment agreement effective as of the same date,
RTFC has agreed to employ Mr. Petersen for the same term. As compensation,
RTFC must credit to a deferred compensation account on January 1 of each
year of the term $30,000. Interest will be credited to the account on
December 31 of each such year at a rate equal to CFC's 20-year Medium-Term Notemedium-term
note rate on that date. If Mr. Petersen's employment is terminated by RTFC
other than for cause, or by Mr. Petersen for good reason, or by his death
or disability, the account will be deemed continued for the remainder of
the term of employment (but in no event less than six months nor more than
a year), interest will be credited on a proportional basis for the calendar
year during which the continuation ends and the balance in the account will
be paid to Mr. Petersen or his beneficiaries in a lump sum.
Compensation Committee Interlocks and Insider Participation
During the year ended May 31, 19992000 the following directors and former
directors of CFC served as members on the Executive Committee of the Board
of Directors (which functions as the Board's compensation committee):
Benson Ham
(President of CFC)
Wade R. Hensel
(Secretary-Treasurer of CFC)Stephen R. Louder
R. Layne Morrill
Robert J. Occhi
Brian D. Schlagel
R.B.R. B. Sloan, Jr. (Vice President of CFC),
Robert O. Williams
Other than those mentioned above, there were no compensation committee
interlocks or insider participation related to executive compensation.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Inapplicable.
Item 13. Certain Relationships and Related Transactions.
Loans and guarantees were made to member systems of which officers or
directors of CFC are members, employees or directors in the ordinary course
of CFC's business on the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transaction with
other members and did not involve more than normal risk of uncollectibility
or present other unfavorable features. It is anticipated that, consistent
with its loan and guarantee policies in effect from time to time,
additional loans and guarantees will be made by CFC to member systems and
trade and service organizations of which officers or directors of CFC are
members, employees, officers or directors. In light of its cooperative
nature, pursuant to which CFC was established for the very purpose of
extending financing to its members (from whose ranks its directors must be
drawn), CFC is of the view that no purpose would be served by including
detailed information with respect to specific loans and guarantees to
members with which any of its directors are affiliated.
4948
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Documents filed as a part of this report.
1. Financial statements
Page
Report of Independent Public Accountants 5352
Combined Balance Sheets 5453
Combined Statements of Income, Expenses and Net Margins 56Margin 55
Combined Statements of Changes in Members' Equity 5756
Combined Statements of Cash Flows 5857
Notes to Combined Financial Statements 5958
2. Financial statement schedules
Page
Note 1314 to Combined Financial Statements "Combined Quarterly
Financial Results" 82
All other schedules are omitted because they are not required or
inapplicable or the informat ioninformation is included in the financial statements or
notes thereto.
3. Exhibits
3.1 - Articles of Incorporation. Incorporated by reference to Exhibit
3.1 to Registration Statement No. 2-46018, filed October 12, 1972.
3.4 - Amendments to Bylaws as approved by CFC's Board of Directors and
members on February 28, 1995,March 21, 2000, and a copy of the Bylaws as amended. Incorporated by reference to Exhibit 3.4 from CFC's
Form 10-K filed August 29, 1995.
4.1 - Form of Capital Term Certificate. Incorporated by reference to
Exhibit 4.3 Registration Statement No. 2-46018 filed October 12,
1972.
4.2 - Indenture dated as of February 15, 1994, between the Registrant
and U.S. Bank National Associaton, trustee. Incorporated by
reference to Exhibit 4.3 from the report on Form 8-K filed by CFC
on June 14, 1994.
4.3 - Revolving Credit Agreements dated February 28, 1995. Incorporated
by reference to Exhibit 4.3 from CFC's quarterly report on Form
10-Q filed April 3, 1995.
4.4 - The first amendment to the February 28, 1995 revolving credit
agreements dated February 27, 1996. Incorporated by reference to
Exhibit 4.4 from CFC's Annual Report on Form 10-K10 filed August 27,
1996.
4.5 - Amendment to the Revolving Credit Agreement dated as of November
25, 1998 amending and restating the agreement dated as of
February 28, 1995, as amended and restated as of November 26,
1996 and November 25, 1997. Incorporated by reference to
Exhibit 4.7 toAugust 10, 2000 for
$4,087,500,000 maturing on August 9, 2001
CFC's Quarterly Report on Form 10-Q filed January 14, 1999.2000.
4.6 - Amendment to the Revolving Credit Agreement dated as of November 25, 1998 amending and restating the agreement dated as
of April 30, 1996, as amended and restated as of November 27,
1996. Incorporated by reference to Exhibit 4.8 to CFC's
Quarterly ReportAugust 10, 2000 for
$550,000,000 maturing on Form 10-Q filed January 14, 1999.August 9, 2001.
- Registrant agrees to furnish to the Commission a copy of all other
instruments defining the rights of holders of its long-term debt
upon request.
Management Contracts and Compensatory Plans and Arrangements.
10.1 - Plan Document for CFC deferred compensation program. Incorporated
by reference to Exhibit 10 to Registration Statement No. 2-70355,
filed December 23, 1980.
10.2 - Employment Contract between CFC and Sheldon C. Petersen, dated as
of March 1, 1996. Incorporated by reference to Exhibit 10.2 to
CFC's Form 10-K filed August 27, 1996.
10.3 - Supplemental Benefit Agreement between RTFC and Sheldon C.
Petersen, dated as of March 1, 1996. Incorporated by reference to
Exhibit 10.3 to CFC's Form 10-K filed August 27, 1996.
12 - Computations of ratio of marginsmargin to fixed charges.
23 - Consent of Arthur Andersen LLP.
27 - Financial Data Schedules.Schedule.
(b) Reports on Form 8-K.
None.
50Item 5 on May 8, 2000 - Filing of Hunton and Williams tax opinion dated
May 2, 2000.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
County of Fairfax, Commonwealth of Virginia, on the 27th29th day of August,
1999.2000.
NATIONAL RURAL UTILITIES COOPERATIVE
FINANCE CORPORATION
By: /s/ SHELDON C. PETERSEN
Sheldon C. Petersen
Governor and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
/s/ SHELDON C. PETERSEN Governor and Chief
Executive
Sheldon C. Petersen Executive Officer
/s/ STEVEN L. LILLY Senior Vice President and
Steven L. Lilly Chief Financial Officer
/s/ STEVEN L. SLEPIAN Controller (Principal
Steven L. Slepian Accounting Officer)
/s/ BENSON HAM President and Director
Benson Ham
/s/ R.B. SLOAN, JR. Vice President and
Director
R.B. Sloan, Jr. Director
/s/ WADE R. HENSEL Secretary-Treasurer and --August 27, 1999
Wade R. Hensel Director
/s/ JAMES M. ANDREW Director -August 29, 2000
James M. Andrew
/s/ ROBERT A. CAUDLE
Director
Robert A. Caudle
/s/ JAMES P. DUNCAN Director
James P. Duncan
Director
Glenn English
/s/ ALDEN J. FLAKOLL Director
Alden J. Flakoll
/s/ JAMES A. HUDELSON Director
James A. Hudelson
5150
Signature Title Date
/s/ KENNETH KRUEGER Director
Kenneth Krueger
/s/ STEPHEN R. LOUDER Director
Stephen R. Louder
/s/ EUGENE MEIER Director
Eugene Meier
/s/ R. LAYNE MORRILL Director
R. Layne Morrill
/s/ ROBERT J. OCCHI Director
Robert J. Occhi
/s/ CLIFTON M. PIGOTT Director
Clifton M. Pigott
/s/ TIMOTHY REEVES Director -August 29, 2000
Timothy Reeves
/s/ BRIAN D. SCHLAGEL Director --August 27, 1999
Brian D. Schlagel
/s/ THOMAS W. STEVENSON Director
Thomas W. Stevenson
/s/ CLIFFORD G. STEWART Director
Clifford G. Stewart
/s/ ROBERT STROUP Director
Robert Stroup
/s/ ROBERT C. WADE Director
Robert C. Wade
/s/ ROBERT O. WILLIAMS Director
Robert O. Williams
/s/ ELDWIN A. WIXSON Director
Eldwin A. Wixson
5251
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION:
We have audited the accompanying combined balance sheets of National Rural
Utilities Cooperative Finance Corporation (a not-for-profit corporation
under the District of Columbia Cooperative Association Act) and other
related entities ("the Companies") as discussed in Note 1 as of May 31,
19992000 and 1998,1999, and the related combined statements of income, expenses and
net margins,margin, changes in members' equity and cash flows for the three years
then ended. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted auditing
standards.in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of National Rural
Utilities Cooperative Finance Corporation and other related entities as of
May 31, 19992000 and 1998,1999, and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted accounting principles.in the United States.
ARTHUR ANDERSEN LLP
Vienna, VAVirginia
July 16,14, 2000
52
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
May 31, 2000 and 1999
ASSETS
2000 1999
CASH AND CASH EQUIVALENTS $ 246,028 $ 74,403
DEBT SERVICE INVESTMENTS 22,968 22,969
LOANS TO MEMBERS, net 16,449,753 13,491,199
RECEIVABLES 180,106 161,523
FIXED ASSETS, net 43,672 38,683
DEBT SERVICE RESERVE FUNDS 98,870 98,870
OTHER ASSETS 42,043 37,605
$17,083,440 $13,925,252
The accompanying notes are an integral part of these combined
financial statements.
53
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
May 31, 2000 and 1999
LIABILITIES AND MEMBERS' EQUITY
2000 1999
NOTES PAYABLE, due within one year $ 4,252,166 $ 4,976,706
ACCOUNTS PAYABLE 20,145 16,707
ACCRUED INTEREST PAYABLE 125,708 95,741
LONG-TERM DEBT 10,595,596 6,891,122
OTHER LIABILITIES 8,191 10,207
QUARTERLY INCOME CAPITAL SECURITIES 400,000 400,000
MEMBERS' SUBORDINATED CERTIFICATES:
Membership subordinated certificates 641,985 641,937
Loan and 1998
ASSETS
1999 1998
CASH AND CASH EQUIVALENTS $ 74,403 $ 65,274
DEBT SERVICE INVESTMENTS 22,969 22,969
LOANS TO MEMBERS, net 13,491,199 10,329,345
RECEIVABLES 161,523 112,317
FIXED ASSETS, net 38,683 25,062
DEBT SERVICE RESERVE FUNDS 98,870 103,489
OTHER ASSETS 37,605 24,432guarantee subordinated certificates 698,432 597,879
Total members' subordinated certificates 1,340,417 1,239,816
MEMBERS' EQUITY 341,217 294,953
Total members' subordinated
certificates and members' equity 1,681,634 1,534,769
$17,083,440 $13,925,252 $10,682,888
The accompanying notes are an integral part of these combined
financial statements.
54
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETSSTATEMENTS OF INCOME, EXPENSES AND NET MARGIN
(Dollar Amounts In Thousands)
For the Years Ended May 31, 2000, 1999 and 1998
LIABILITIES AND MEMBERS' EQUITY2000 1999 1998
NOTES PAYABLE, due within one yearOperating income $1,020,998 $792,052 $639,948
Less: Cost of funds 860,160 664,109 540,535
Gross margin 160,838 127,943 99,413
Expenses:
General and administrative 26,986 27,638 23,364
Provision for loan losses 17,355 23,866 19,027
Total expenses 44,341 51,504 42,391
Operating margin 116,497 76,439 57,022
Gain on sale of land - - 5,194
Net margin before extraordinary loss 116,497 76,439 62,216
Extraordinary loss (1,164) - -
Net margin $ 4,976,706115,333 $ 3,848,229
ACCOUNTS PAYABLE 16,707 26,750
ACCRUED INTEREST PAYABLE 95,741 68,497
LONG-TERM DEBT 6,891,122 5,024,621
OTHER LIABILITIES 10,207 6,347
QUARTERLY INCOME CAPITAL SECURITIES 400,000 200,000
MEMBERS' SUBORDINATED CERTIFICATES:
Membership Subordinated Certificates 641,937 644,817
Loan and Guarantee Subordinated Certificates 597,879 584,349
Total Members' Subordinated Certificates 1,239,816 1,229,166
MEMBERS' EQUITY 294,953 279,278
Total Members' Subordinated Certificates
and Members' Equity 1,534,769 1,508,444
$13,925,252 $10,682,88876,439 $ 62,216
The accompanying notes are an integral part of these combined
financial statements.
55
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF INCOME, EXPENSES AND NET MARGINSCHANGES IN MEMBERS' EQUITY
(Dollar Amounts In Thousands)
For the Years Ended May 31, 2000, 1999 1998 and 1997
1999 1998 1997
OPERATING INCOME-Interest on
loans to members $790,803 $637,573 $564,439
Less: Cost of funds 664,109 540,535 475,729
Gross operating margin 126,694 97,038 88,710
EXPENSES:
General, administrative
and loan processing 28,111 23,600 22,019
Provision for loan losses 23,866 19,027 15,161
Total expenses 51,977 42,627 37,180
Operating margin 74,717 54,411 51,530
NONOPERATING INCOME 1,722 2,611 3,206
GAIN ON SALE OF LAND - 5,194 -
NET MARGINS $ 76,439 $ 62,216 $ 54,736
The accompanying notes are an integral part of these combined
financial statements.
56
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts In Thousands)
For the Years Ended May 31, 1999, 1998 and 1997
Patronage Capital
Allocated
General
Education Unallocated Reserve
Total Memberships Fund MarginsMargin Fund Other
Balance as of May 31, 1996 $269,641 $1,424 $476 $2,289 $501 $264,9511997 $271,594 $1,470 $596 $ 2,289 $504 $266,735
Retirement of Patronage Capital (50,962) - - - (135) (50,827)
Net Margins - allocated 54,736 - 120 - 138 54,478
Other (1,821) 46 - - - (1,867)
Balance as of May 31, 1997 271,594 1,470 596 2,289 504 266,735
Retirement of Patronage Capitalpatronage
capital (52,661) - - - (123) (52,538)
Net margins - allocatedmargin 62,216 - 404 - 119 61,693
Other (1,871) 21 (324) - - (1,568)
Balance as of May 31, 1998 279,278 1,491 676 2,289 500 274,322
Retirement of Patronage Capitalpatronage
capital (57,601) - - - - (57,601)
Net margins - allocatedmargin 76,439 - 315 - 3 76,121
Other (3,163) 44 (448) - - (2,759)
Balance as of May 31, 1999 $294,953 $1,535 $543 $2,289 $503 $290,083294,953 1,535 543 2,289 503 290,083
Retirement of patronage
capital (66,445) - - - - (66,445)
Net margin 115,333 - 631 16,329 - 98,373
Other (2,624) 3 (247) - (3) (2,377)
Balance as of May 31, 2000 $341,217 $1,538 $927 $18,618 $500 $319,634
The accompanying notes are an integral part of these combined
financial statements.
5756
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Years Ended May 31, 2000, 1999 and 1998
2000 1999 1998 and 1997
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net marginsmargin $ 115,333 $ 76,439 $ 62,216 $ 54,736
Add (deduct):
Provision for loan losses 17,355 23,866 19,027
15,161
Depreciation 1,726 1,454 1,274 1,253
Amortization of issuance costs and
deferred charges 5,727 3,959 2,188 1,912
Amortization of deferred income (2,182) (4,417) (1,467) (10,702)
Gain on sale of land - - (5,194)
-
Receivables (15,966) (29,458) (12,397)
(10,000)
Accounts payable 3,438 (10,043) 4,122 8,520
Accrued interest payable 29,967 27,244 21,573
6,105
Other (22,049) (20,050) (13,930)
(13,737)
Net cash flows provided by
operating activities 133,349 68,994 77,412 53,248
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances made on loans (8,077,346) (10,122,726) (5,594,408) (3,799,004)
Principal collected on loans 5,101,437 6,937,006 3,924,232 2,833,917
Net investment in fixed assetassets (6,715) (15,075) (1,423) (885)
Proceeds from sale of land - 13,489 - Change in certificates of deposit - - 25,00013,489
Net cash flows used in investing
activities (2,982,624) (3,200,795) (1,658,110) (940,972)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
notes payable, net 458,792 380,339 258,531 705,804
Debt service investments, net 1 - 54,250 (36,312)
Proceeds from issuance of
long-term debt 3,703,013 3,003,765 1,819,265 890,524
Payments for retirement of
long-term debt (1,181,993) (387,710) (574,455) (730,116)
Proceeds from issuance of Quarterly
Income Capital Securitiesquarterly
income capital securities - 200,000 75,000
125,000Extraordinary loss on retirement of
long-term debt (1,164) - -
Proceeds from issuance of Members'
Subordinated Certificatesmembers'
subordinated certificates 136,691 65,432 34,040 29,026
Payments for retirement of Members'
Subordinated Certificatesmembers'
subordinated certificates (38,706) (69,911) (15,718) (32,210)
Payments for retirement of Patronage Capitalpatronage
capital (55,734) (50,985) (54,952)
(45,349)
Net cash flows provided by financing
activities 3,020,900 3,140,930 1,595,961 906,367
NET INCREASE IN CASH &AND
CASH EQUIVALENTS 171,625 9,129 15,263
18,643
BEGINNING CASH &AND CASH EQUIVALENTS 74,403 65,274 50,011
31,368
ENDING CASH &AND CASH EQUIVALENTS $ 246,028 $ 74,403 $ 65,274 $ 50,011
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for
interest $ 837,441 $ 640,947 $ 525,881 $ 476,914
The accompanying notes are an integral part of these combined
financial statements.
5857
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
As of May 31, 2000, 1999 1998 and 19971998
(1) General Information and Accounting Policies
(a) General Information
National Rural Utilities Cooperative Finance Corporation ("CFC") was
incorporated as a private, not-for-profit cooperative association under the
laws of the District of Columbia in April 1969. The principal purpose of
CFC is to provide its members with a source of financing to supplement the
loan programs of the Rural Utilities Service ("RUS") of the United States
Department of Agriculture. CFC makes loans primarily to its rural utility
system members ("Utility Members"utility members") to enable them to acquire, construct and
operate electric distribution, generation, transmission and related
facilities. Most CFC long-
term loans to Utility Members are made in conjunction with concurrent loans
from RUS and are secured equally and ratably with RUS's loans by a single
mortgage. CFC also provides guarantees for tax-exempt financings of
pollution control facilities and other properties constructed or acquired
by its members and, in addition, provides guarantees of taxable debt in
connection with certain lease and other transactions of its members. CFC
is exempt from payment of Federal income taxes under Section 501(c)(4) of
the Internal Revenue Code.
CFC's 1,0571,050 members as of May 31, 1999,2000, included 908 Utility Members,902 utility members,
virtually all of which are consumer-owned cooperatives, 7675 service members
and 73 associate members. The Utility Membersutility members included 838832 distribution
systems and 70 generation and transmission ("power supply") systems operating
in 4849
states and four U.S. territories.
Rural Telecommunications Finance Cooperative ("RTFC") was incorporated as a
private cooperative association in the state of South Dakota in September
1987. RTFC is a controlled affiliate of CFC and was created for the purpose
of providing and/or arranging financing for its rural telecommunication
members and affiliates. RTFC's bylaws require that the majority of RTFC's
Board of Directors be elected from individuals designated by CFC. CFC is
the sole source of external funding for RTFC. As of May 31, 1999,2000, RTFC had
531536 members. RTFC is a taxable entity under Subchapter T of the Internal
Revenue Code and accordingly takes deductions for allocations of net marginsmargin
to its patrons.
Guaranty Funding Cooperative ("GFC") was incorporated as a private
cooperative association in the state of South Dakota in December 1991. GFC
is a controlled affiliate of CFC and was created for the purpose of
providing a source of funds for its members to refinance their RUS
guaranteed debt previously held by the Federal Financing Bank.Bank ("FFB").
Under this program, notes are purchased from the FFB and placed in a trust
and beneficial certificates in the trust are then sold to investors. The
notes held by the trust are guaranteed by the RUS. All trust certificates
held by GFC were transferred to GFC by CFC. CFC is the sole source of
external funding for GFC. GFC had two members other than CFC at May 31,
1999.2000. GFC is a taxable entity under Subchapter T of the Internal Revenue
Code and accordingly takes deductions for allocations of net marginsmargin to its
patrons.
(b) Principles of Combination
The accompanying financial statements include the combined accounts of CFC,
RTFC and GFC, after elimination of all material intercompany accounts and
transactions. CFC has a $1,000 membership interest in both RTFC and GFC.
CFC exercises control over RTFC and GFC through majority representation on
their Boards of Directors. CFC manages the affairs of RTFC through a long-
term management agreement. CFC services the loans for GFC for which it
collects a servicing fee.
As of May 31, 1999,2000, CFC was authorized to lend RTFC up to $7.0$10.0 billion to
fund loans to its members and their affiliates. As of the same date, RTFC
had outstanding loans and unadvanced loan commitments totaling $3,809.6$4,994
million. RTFC's net margins aremargin is allocated to RTFC borrowers, its patrons.
5958
Summary financial information relating to RTFC included in the combined
financial statements is presented below:
As of May 31: 2000 1999 1998
(Dollar amounts in thousands)
Outstanding loans to
members and their affiliates $3,699,728 $2,710,339 $1,574,900
Total assets 3,975,990 2,893,810 1,695,231
Notes payable to CFC 3,679,822 2,693,675 1,563,094
Total liabilities 3,727,438 2,729,102
1,581,268
Members' Equitysubordinated certificates 213,734 135,217
Members' equity (1) and
Subordinated Certificates 164,708 113,96334,818 29,491
For the years ended May 31: 2000 1999 1998 1997
(Dollar amounts in thousands)
Operating income $149,037$ 240,189 $ 149,037 $90,663
$71,891
Net marginsmargin (1) 3,535 3,858 3,135
9,239
_________________________________________________________
(1) The transfer of RTFC equity is governed by the South Dakota Cooperative
Association Act which provides that net marginsmargin shall be distributed and
paid to patrons. However, reserves may be created and credited to patrons
in proportion to total patronage. CFC has been the sole funding source for
RTFC's loans to its members. As CFC is not a borrower of RTFC and is not
expected to be in the foreseeable future, RTFC's net marginsmargin would not be
available to CFC in the form of Patronage Capital.patronage capital.
As of May 31, 1999,2000, CFC had loaned GFC $130.9$45.9 million to fund the purchase
from CFC of certificates evidencing interests in trusts holding RUS
guaranteed notes of members. Summary financial information relating to GFC
included in the combined financial statements is presented below:
As of May 31: 2000 1999 1998
(Dollar amounts in thousands)
Outstanding loans to members $ 130,94045,855 $ 133,195130,940
Total assets 47,166 133,091 135,761
Notes payable to CFC 45,855 130,940 133,195
Total liabilities 46,978 132,861
135,430
Members' Equityequity (1) 188 230 331
For the years ended May 31: 2000 1999 1998 1997
(Dollar amounts in thousands)
Operating income $ 6,349 $ 7,716 $ 8,467
$20,673
Net marginsmargin (1) 589 714 798 1,762
_______________________
(1) The transfer of GFC equity is governed by the South Dakota
Cooperative Association Act which provides that net marginsmargin shall be
distributed and paid to patrons. However, reserves may be created and
credited to patrons in proportion to total patronage. CFC has been the
sole funding source for GFC's loans to its members. As CFC is not a
borrower of GFC and is not expected to be in the foreseeable future, GFC's
net marginsmargin would not be available to CFC in the form of Patronage Capital.patronage capital.
Unless stated otherwise, references to CFC relate to CFC, RTFC and GFC on a
combined basis.
60(c) Interest Income
Interest income is recognized on an accrual basis on all loans, unless
specified otherwise in Note 10.
59
(c)(d) Amortization of Bond DiscountDiscounts and Bond Issuance Costs
Bond discountdiscounts and bond issuance costs are deferred and amortized as
interest expense using the effective interest method over the life of each
bond issue.
(d)(e) Nonperforming Loans
It is CFC's policy to classify a loan as nonperforming when it meets any of
the following criteria:
(i) Interestinterest or principal payments are contractually past due 90 days or
more,
(ii) Asas a result of court proceedings, repayment in accordance with the
original terms is not anticipated, or
(iii)For for other reasons, timely repayment of principal or interest is not
expected.
(e)(f) Allowance for Loan Losses
CFC maintains an allowance for loan losses at a level believed to be
adequate in relation to the credit quality and sizeamount of its loans and
guarantees outstanding. According to the terms of CFC's guarantees, any
amount advanced by CFC under its guarantee of a members' obligation is
treated as a demand loan. It is CFC's policy to periodically review its
loans and guarantees and to make adjustments to the allowance as necessary.
The allowance is based on estimates and, accordingly, actual loan losses
may differ from the allowance amount.
Activity in the allowance account is summarized as follows for the years
ended May 31:
(Dollar amounts in thousands) 2000 1999 1998 1997
Balance at beginning of year $212,203 $250,131 $233,208 $218,047
Provision for loan losses 17,355 23,866 19,027
15,161
Charge-offs (1,266) (61,794) (2,104) -
Balance at end of year $228,292 $212,203 $250,131
$233,208
(f)(g) Fixed Assets
Buildings, furniture and fixtures and related equipment are stated at cost
less accumulated depreciation and amortization of $9.4$10 million and $9.9$9
million as of May 31, 19992000 and 1998,1999, respectively. Depreciation and
amortization expenses ($1.52 million, $1.3$2 million and $1.3$1 million in fiscal
years 2000, 1999 1998 and 1997,1998, respectively) are computed primarily on the
straight-line method over estimated useful lives ranging from 2 to 40
years.
(g)(h) Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, CFC is a party to financial instruments
with off-balance sheet risk both to meet the financing needs of its member
borrowers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit, guarantees of members' obligations, currency exchange
agreements and interest rate exchange agreements. These instruments may
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the combined balance sheets.
(h)(i) Accounting by Creditors for Impairment of a Loan
CFC calculates impairment onof loans receivable by comparing the present
value of the future cash flows associated with the loan against CFC's
investment in the loanloan; loss reserves are provided based on the calculated
impairment.
6160
(i)(j) Accounting for Certain Investments in Debt and Equity Securities
Debt service investments are recorded at amortized cost, since it is CFC's
intent and ability to hold all of these investments to maturity.
(j)(k) Derivative Financial Instruments
CFC is neither a dealer nor a trader in derivative financial instruments.
CFC uses interest rate and currency exchange agreements to manage its
interest rate risk and foreign exchange risk. CFC accounts for these
agreements on an accrual basis. CFC does not value the interest rate
exchange agreements on its balance sheet, but values the underlying hedged
debt at cost. CFC does not recognize a gain or loss on these agreements,
but includes the difference between the interest rate paid and interest
rate received in the overall cost of funding. No agreement to which CFC was a party has been terminated early.
In the event that an
agreement werewas terminated early, CFC would record the fee paid or received
due to the early termination as part of the overall cost of funding.
In June 1998, the Financial Accounting Standards Board ("FASB")issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "AccountingAccounting
for Derivative Instruments and Hedging Activities". The statementActivities. In June 1999, the FASB
issued Statement No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133. In
June 2000, the FASB issued Statement No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133. Statement No. 133, as amended, establishes accounting
and reporting standards forrequiring that every derivative instrument
(including certain derivative instruments and for hedging
activities. It requires that all derivativesembedded in other contracts) be
recognizedrecorded in the balance sheet as either an asset or liability in the statement of financial position and recordedmeasured at
its fair value. The statement was originally effectiveStatement requires that changes in the derivative
instrument's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for all fiscal years beginning after
June 15, 1999. The FASB has amendedqualifying hedges
allows a derivative instrument's gains and losses to offset related results
on the hedged item in the income statement, to bethe extent effective, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. The statement
is effective for all fiscal years beginning after June 15, 2000. CFC will
be required to implement this statement as of June 1, 2001. CFC has not
yet determined the impactquantified all effects of implementing this statementadopting Statement No. 133 on its overall financial
position.
(k) Segment Information
CFC has adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information". This statement establishes standards for reporting
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial reports issued to shareholders. This statement also
establishes standards for related disclosures about products and services,
geographic areas and major customers. CFC operates in two business segments -
rural electric lending and rural telecommunications lending. The segment
disclosure has been included in Note 11.statements.
(l) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted accounting principlesin the United States requires management to
make estimates and assumptions that affect the assets and liabilities and
the revenue and expenses reported in the financial statements, as well as
amounts included in the notes thereto, including discussion and disclosure
of contingent liabilities. While CFC uses its best estimates and judgments
based on the known facts at the date of the financial statements, actual
results could differ from these estimates as future events occur.
CFC does not believe it is vulnerable to the risk of a near-term severe
impact as a result of any concentrations of its activities.
(m) Membership Fees
Members are charged a one-time membership fee based on member class. CFC
distribution system members (Class(class A), power supply system members (Class(class
B), national associations of cooperatives (Class(class D) and associate members
(Class(class E) pay a $1,000 membership fee. CFC service organization members
(Class(class C) pay a $200 membership fee. RTFC voting members pay a $1,000
membership fee and non-voting members pay a $100 membership fee. All GFC
members pay a $1,000 membership fee. Membership fees are accounted for as
Members' Equity.members' equity.
(n) Reclassifications
Certain reclassifications of prior year amounts have been made to conform
with the fiscal year 19992000 presentation.
6261
(2) Loans and Commitments
Loans to members bear interest at rates determined from time to time by the
Board of Directors after considering CFC's cost of funds, operating
expenses, provision for loan losses and the maintenance of reasonable
margin levels. In keeping with its not-for-profit, cooperative character,
CFC's policy is to set interest rates at the lowest levels it considers to
be consistent with sound financial management. Loans outstanding to
members, weighted average interest rates thereon and unadvanced commitments
by loan type are summarized as follows as of May 31:
(Dollar amounts in thousands) 2000 1999 1998
Weighted Weighted
Average Unadvanced Loans Average Unadvanced
Loans Interest Commitments OutstandingLoans Interest Commitments
Outstanding Rates (A) Outstanding Rates (A)
Long-term fixed rate
secured loans(B)loans (B):
Electric systems $ 6,674,470 6.74% $ - $ 6,797,786 6.69% $ 198,010
$ 4,289,629 7.02% $ 122,184
Telecommunication systems 1,540,928 7.36% - 1,258,458 6.88% - 222,733 8.05% -
Total long-term fixed
rate secured loans 8,215,398 6.86% - 8,056,244 6.72% 198,010 4,512,362 7.07% 122,184
Long-term variable rate
secured loans (C):
Electric systems 4,019,155 7.45% 7,524,197 2,334,878 5.85% 6,806,682
3,209,815 6.55% 3,625,358
Telecommunication systems 1,816,826 8.02% 589,696 1,096,312 6.43% 561,442 1,131,561 6.65% 276,104
Total long-term variable
rate secured loans 5,835,981 7.62% 8,113,893 3,431,190 6.04% 7,368,124
4,341,376 6.57% 3,901,462
Refinancing variable rate loansLoans guaranteed by RUS:
Electric systems 89,153 6.53% - 130,940 5.87% - 133,195 6.36% -
Intermediate-term secured loans:
Electric systems 141,771 7.41% 48,533 198,894 6.62% 80,411
151,202 7.39% 223,512
Telecommunication systems - - - 686 6.42% - 86 7.25% -
Total intermediate-term
secured loans 141,771 7.41% 48,533 199,580 6.50% 80,411 151,288 7.39% 223,512
Intermediate-term unsecured loans:
Electric systems 200,706 7.35% 408,644 102,221 6.26% 219,248
198,121 6.70% 188,523
Telecommunication systems 12,206 7.80% 6,090 12,809 6.42% 11,680 15,495 7.25% 15,457
Total intermediate-term
unsecured loans 212,912 7.37% 414,734 115,030 6.28% 230,928 213,616 6.74% 203,980
Line of credit loans (D):
Electric systems 1,281,483 7.59% 4,403,987 850,039 5.99% 4,392,012 688,995 6.70% 4,022,6494,183,280
Telecommunication systems 329,768 8.32% 717,700 342,074 6.66% 538,619 205,026 7.25% 371,457
Total line of credit loans 1,611,251 7.74% 5,121,687 1,192,113 6.19% 4,930,631 894,021 6.83% 4,394,1064,721,899
Nonperforming loans (E):
Electric systems - - - 1,643 5.55% - 4,080 6.41% -
Restructured loans (F):
Electric systems 571,579 3.90% - 576,662 3.90% -
329,538 7.17% -
Total loans 16,678,045 7.12% 13,698,847 13,703,402 6.37% 12,808,104 10,579,476 6.70% 8,845,24412,599,372
Less: Allowance for loan losses 212,203(228,292) - 250,131(212,203) -
Net loans $16,449,753 $13,698,847 $13,491,199 $12,808,104 $10,329,345 $8,845,244$12,599,372
Total by member class:
Distribution $10,394,985 $ 9,644,058 $ 8,714,742 $ 9,264,001 $ 7,257,330 $5,722,9579,233,999
Power supply 2,037,108 2,054,322 1,895,712 2,030,918 1,489,908 2,163,5021,963,569
Statewide and associate 546,224 686,981 382,609 401,444 257,337 295,767290,063
Telecommunication systems 3,699,728 1,313,486 2,710,339 1,111,741
1,574,901 663,018
Total $16,678,045 $13,698,847 $13,703,402 $12,808,104 $10,579,476 $8,845,244$12,599,372
________________________
(A) Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed and for which loan contracts have
been executed but funds have not been advanced. Since commitments may
expire without being fully drawn upon, the total amounts reported as
commitments do not necessarily represent future cash requirements.
Collateral and security requirements for advances on commitments are
identical to those on initial loan approval. Long-term unadvanced
commitments that do not have an interest rate associated with the
commitment have been listed under the variable rate. Rates, fixed or
variable, are set at the time of each advance.
(B) Generally, the terms of long-term fixed rate loans provide for a fixed interest rate
for terms ofrange from one to 35
years. Upon expiration of the interest rate term, the borrower may
select another fixed rate term of one to 35 years (but not beyond
maturity of the loan) or a variable rate. The borrower may select
either option or mayalso repay
to CFC the principal then outstanding together with interest due
thereon and other sums, if required. Includes $161.9$102 million and $ 121.6$162
million of unsecured loans at May 31, 2000 and 1999, and 1998,
respectively.
63
(C) Includes $39.2$49 million and $53.3$39 million of unsecured loans at May 31, 19992000
and 1998,1999, respectively.
(D) Includes $277.5$342 million and $81.4$278 million of secured loans at May 31, 19992000
and 1998,1999, respectively.
(E) The rates on nonperforming loans are the weighted average of the stated
rates on such loans as of the dates shown and do not necessarily
represent the interest recognized by CFC from such loans.
(F) The rates on restructured loans for 1999 represent the effective rate based on
the scheduled minimum cashflow and for 1998 and 1997 represent the
weighted average of the stated rates on such loans.
Loanspayments.
62
Total loans outstanding, by state or U.S. territory, are summarized below:
(Dollar amounts in thousands)
May 31, May 31,
State/Territory 1999 1998 State/Territory 1999 1998
Alabama $ 204,861 $ 153,062 Nebraska $ 15,524 $ 14,041
Alaska 205,106 137,182 Nevada 76,543 63,285
Arizona 88,790 84,997 New Hampshire 257,711 260,737
Arkansas 428,697 300,797 New Jersey 6,899 6,146
California 58,843 33,902 New Mexico 85,834 88,299
Colorado 375,099 354,241 New York 17,052 13,655
Connecticut 2,400 3,000 North Carolina 610,656 391,106
Delaware 15,812 16,196 North Dakota 53,269 49,479
District of Columbia 258,945 125,007 Ohio 313,631 151,578
Florida 465,114 421,289 Oklahoma 354,791 294,963
Georgia 1,086,622 815,823 Oregon 256,086 227,391
Idaho 112,561 96,038 Pennsylvania 106,839 103,531
Illinois 520,602 452,783 South Carolina 565,434 317,325
Indiana 181,430 145,587 South Dakota 178,493 158,485
Iowa 304,480 266,063 Tennessee 101,901 93,169
Kansas 288,873 293,524 Texas 1,843,776 1,331,782
Kentucky 218,426 208,142 Utah 650,322 391,660
Louisiana 207,967 181,696 Vermont 51,887 55,543
Maine 49,354 47,986 Virgin Islands 376,409 213,615
Maryland 128,990 84,696 Virginia 298,526 228,300
Michigan 275,538 267,598 Washington 85,148 83,996
Minnesota 548,255 456,134 West Virginia 4,692 1,272
Mississippi 281,310 246,000 Wisconsin 228,994 245,183
Missouri 496,010 318,770 Wyoming 125,514 117,963
(Dollar amounts in thousands)
May 31, May 31,
State/Territory 2000 1999 State/Territory 2000 1999
Alabama $ 431,922 $ 204,861 Nebraska $ 13,928 $ 15,524
Alaska 334,694 205,106 Nevada 91,669 76,543
Arizona 90,680 88,790 New Hampshire 282,913 257,711
Arkansas 475,015 428,697 New Jersey 7,385 6,899
California 85,577 58,843 New Mexico 83,654 85,834
Colorado 421,427 375,099 New York 18,503 17,052
Connecticut 200 2,400 North Carolina 663,073 610,656
Delaware 37,543 15,812 North Dakota 65,505 53,269
District of Columbia 386,928 258,945 Ohio 354,835 313,631
Florida 457,197 465,114 Oklahoma 410,938 354,791
Georgia 1,499,168 1,086,622 Oregon 259,934 256,086
Hawaii 360 - Pennsylvania 149,902 106,839
Idaho 125,070 112,561 South Carolina 547,906 565,434
Illinois 562,423 520,602 South Dakota 161,851 178,493
Indiana 202,051 181,430 Tennessee 117,572 101,901
Iowa 357,726 304,480 Texas 2,541,717 1,843,776
Kansas 299,047 288,873 Utah 642,368 650,322
Kentucky 232,979 218,426 Vermont 56,801 51,887
Louisiana 230,806 207,967 Virgin Islands 548,928 376,409
Maine 46,215 49,354 Virginia 362,232 298,526
Maryland 129,239 128,990 Washington 85,191 85,148
Michigan 305,464 275,538 West Virginia 1,466 4,692
Minnesota 826,804 548,255 Wisconsin 263,157 228,994
Mississippi 345,513 281,310 Wyoming 135,580 125,514
Missouri 693,376 496,010 Total $16,678,045 $13,703,402
Montana 233,613 233,386
166,459 Total $13,703,402 $10,579,476
CFC's members are widely dispersed throughout the United States and its
territories, including 4849 states, the District of Columbia, Guam, American
Samoa and the U.S. Virgin Islands. At May 31, 1999, 19982000 and 1997,1999, no state or
territory had over 12.9%, 11.7%15% and 10.6%13%, respectively, of total loans and guarantees
outstanding.
In addition to the geographic diversity of the portfolio, CFC limits its
exposure to any one borrower. The majority of the largest single exposures
are concentrated in the power supply systems due to their large plant and
equipment requirements. At May 31, 1999,2000, the total exposure
outstanding to any one borrower did not exceed 4.2%3.6% of total loans
(excluding loans guaranteed by RUS) and guarantees outstanding. At May 31,
1999,2000, CFC had $2,241.5$3,464 million in loans outstanding excluding loans guaranteed by RUS, and $702.7$495 million in
guarantees outstanding, to its largest 10 borrowers, representing 16.4%21% of
total loans outstanding and 41.7%25% of total guarantees outstanding. Credit
exposure to the largest 10 borrowers represented 21% and 19% of total
credit exposure at May 31, 19992000 and May 31, 1998.
Weighted average1999, respectively. At May 31,
2000, the largest 10 borrowers included 4 distribution systems, 3 power
supply systems and 3 telephone systems.
Set forth below are the interest rates earned (recognized in the case of
nonperforming and restructured loans) on all loans outstanding
are summarized
below:
64
during the fiscal years ended May 31:
For the Years Ended May 31,
2000 1999 1998 1997
Long-term fixed rate 6.66% 6.69% 7.12% 7.65%
Long-term variable rate 6.59% 6.20% 6.53%
6.25%
Telecommunication organizations (1) 7.45% 6.88% 7.05% 6.73%
Refinancing loans guaranteed by RUS 6.29% 5.87% 6.32%
6.36%
Intermediate-term 6.92% 6.98% 7.08%
7.08%
Short-term 7.01% 6.26% 6.74%
6.40%
Associate members 6.85% 6.47% 6.65%
6.42%
Nonperforming (1)(2)(3) 0.00% 0.00% 0.00%
Restructured 3.90% 1.73% 0.00%
0.56%
All loans 6.74% 6.51% 6.60%
6.58%
_______________________________________________
(1) Includes long-term fixed rate, long-term variable rate,
intermediate-term and short-term loans.
(2) Rate does not reflect the recognition of $12.5 million of deferred gain
in 1999.1998.
(3) Interest rate earned by CFC recognized on a cash basis.
63
Long-term fixed rate loans outstanding at May 31, 19992000 which will be
subject to adjustment of their interest rates during the next five fiscal
years are summarized as follows (due to principal repayments, amounts
subject to interest rate adjustment may be lower at the actual time of
interest rate adjustment):
(Dollar amounts in thousands)
Weighted
Average
Amount
Interest Rate Amount Repricing
2000 6.48% $ 291,600
2001 6.28% 483,9556.24% $323,361
2002 6.61% 347,6006.31% 516,267
2003 6.50% 392,7526.37% 380,208
2004 6.19% 455,569
$1,971,476
During the first quarter of calendar year 1999,6.37% 413,907
2005 6.12% 439,430
At January 1, 2000, long-term fixed rate loans totaling $105.2$241.2 million had
their interest rates adjusted. These loans will
be eligible to readjust their interest rates again during the first quarter
of calendar year 2000 to the lowest long-term fixed rate offered during 1999
for the term selected. At January 1 and May 31, 1999, the standard long-term
fixed rate was 6.05% and 7.65%, respectively.
On most long-term secured loans, level quarterly payments are required with
respect to principal and interest in amounts sufficient to repay the loan
principal, generally over a period ending approximately 35 years from the
date of the secured promissory note. Fiscal year 20002001 repayments of
principal on long-term loans outstanding are expected to be a relatively minoran immaterial
amount of such outstanding loans.
Total long-term loans maturing in each of the five fiscal years following
May 31, 1999, is2000 and thereafter, are as follows:
(Dollar amounts in thousands)
Amount Maturing
20002001 $ 318,092
2001 315,392705,221
2002 347,975545,284
2003 332,753618,060
2004 374,812493,046
2005 835,323
Thereafter 10,506,012
$12,195,03610,943,598
CFC evaluates each borrower's creditworthiness on a case-by-case basis. It
is generally CFC's policy to require collateral for long-term and certain
intermediate-term loans. Such collateral usually consists of a first
mortgage lien on the borrower's total system, including plant and
equipment, and a pledge of future revenues. The loan and security
documents also contain 65
various provisions with respect to the mortgaging of
the borrower's property, the maintenance of certain earnings and debt
service coverage ratios, maintenance of adequate insurance coverage andas well
as certain other restrictive covenants.
Under default provisions of common mortgages securing long-term CFC loans
to distribution system members that also borrow from RUS, RUS has the sole
right to act within 30 days or, if RUS is not legally entitled to act on
behalf of all noteholders, CFC may exercise remedies. Under common default
provisions of mortgages securing long-term CFC loans to, or guarantee
reimbursement obligations of, power supply members, RUS retains substantial
control over the exercise of mortgage remedies.
As of May 31, 19992000 and 1998,1999, mortgage notes representing approximately
$3,016.9$3,484 million and $1,930.9$3,017 million, respectively, of outstanding long-term
loans to members were pledged as collateral to secure CFC's Collateral Trust
Bonds.collateral
trust bonds.
At May 31, 2000, CFC has received no guaranteehad a total of its$89 million of loans from RUS; however, "Refinancing
variable rate loansoutstanding on
which RUS had guaranteed by RUS" represents loans made by CFC and
transferred to its affiliate GFC to fund the prepayment of members' FFB debt,
effected through grantor trusts which each hold a note from the member, the repayment of principal and interest. There
are two programs under which has been guaranteed by RUS. Each trust issues beneficial
certificates which represent an undivided interest inthese loans were advanced. RUS previously
allowed cooperatives to repay FFB loans early and allowed the trust assets. GFC,
as holdertransfer of
the Trust Certificates, is financing theseguarantee to the new lender. CFC had $46 million of loans from variable
rate funds provided byoutstanding
through GFC that carried the RUS guarantee on the repayment of principal
and interest. In
64
February 1999, RUS approved CFC until fixed rate funding is obtained throughas a lender under its loan guarantee
program. During fiscal year 2000, CFC advanced $43 million under the public markets.RUS
guaranteed loan program.
CFC sets variable interest rates monthly on outstanding short-short-term and
intermediate-term loans. On notification to borrowers, CFC may adjust the
interest rate semi-monthly. Under CFC's policy, the maximum interest rate
which may be charged on short-term loans is the prevailing bank prime rate
plus 1% per annum; on intermediate-term loans, the prevailing bank prime
rate plus 1 1/2% per annum; and on RTFC short-term loans, the prevailing
bank prime rate plus 3%1 1/2% per annum.
At May 31, 2000 and 1999, and 1998,CFC had nonperforming loans in the amount of $1.6$0
and $2 million, and $4.1respectively. During the fourth quarter of fiscal year
2000, CFC received the payment required to bring $28 million respectively,of
nonperforming loans current. In addition, CFC wrote off the remaining $2
million of nonperforming loans in April 2000. At May 31, 1999, all loans
classified as nonperforming were on a nonaccrual basis with respect to
recognition of interest income. The effect of not accruing interest on
nonperforming loans was a decrease in interest income of $0.1 million, $0.4$0.1
million and $1.2$0.4 million for the years ended May 31, 2000, 1999 1998 and 1997,1998,
respectively.
At May 31, 19992000 and 1998,1999, the total amount of restructured debtloans was $576.7$572
million and $329.5$577 million, respectively. All loans classified as restructured
were on a nonaccrual status with respect to the recognition of interest income
through January 31, 1999. All payments received through January 31, 1999 were
applied against principal outstanding. On February 1, 1999, all restructured
loans were placed on accrual status with respect to the recognition of
interest income. All payments received after February 1, 1999 will be first
applied against accrued interest with all remaining amounts applied against
principal outstanding. A total of $7.5$22 million of interest
was accrued on restructured loans as offor the year ended May 31, 1999.2000 at 3.90%.
The effect of not accruing interest income at the stated rates on
restructured loans was a decrease in interest income of $22.8$19 million, $24.5$23
million and $19.3$25 million for the years ended May 31, 2000, 1999 1998 and 1997,1998,
respectively.
(3) Members' Subordinated Certificates
Membership Subordinated Certificates
To join CFC and to establish eligibility to borrow, CFC members (other than
associate members and service organizations) are required to execute
agreements to subscribe to Membership Subordinated Certificates.membership subordinated certificates. Such
certificates are interest-bearing, unsecured, subordinated debt of CFC.
CFC is authorized to issue Membership Subordinated Certificatesmembership subordinated certificates without
limitation as to the total principal amount.
Generally, Membership Subordinated Certificatesmembership subordinated certificates mature in the years 2070
through 2095 and bear interest at 5% per annum.
New members joining CFC are required to purchase Membership Subordinated
Certificates in an amount equal to 5% of each loan advance up to a maximum
amount based on their operating results. The maturity dates and
interest rates payable on such certificates vary in accordance with
applicable CFC policy.
66
In certain cases, the Board of Directors has approved alternative deferred
payment arrangements for purchase of Membership Subordinated Certificates.
These deferred payments are evidenced by noninterest-bearing, unsecured notes
from the member and are shown as receivables.
Loan and Guarantee Subordinated Certificates
Members obtaining long-term loans, certain intermediate-term loans or
guarantees from CFC are generally required to purchase additional Loanloan or
Guarantee Subordinated Certificatesguarantee subordinated certificates with each such loan or guarantee.
These certificates are unsecured, subordinated debt of CFC.
Certificates currently purchased in conjunction with loans are noninterest-
bearing and are generally repaid periodically over the life of the loan in
relation to the loan principal balance outstanding. Such certificate
purchase requirements, if any, range from 1% to 12% of the loan amount
depending on the membership classification of the borrower and the
borrower's leverage ratio, including the new loan with CFC for Utility Systems.loan.
The maturity dates and the interest rates payable on Guarantee Subordinated
Certificatesguarantee subordinated
certificates purchased in conjunction with CFC's guarantee program vary in
accordance with applicable CFC policy. Members may be required to purchase
noninterest-bearing Debt Service Reserve Subordinated Certificatesdebt service reserves subordinated certificates in
connection with CFC's guarantee of long-term tax-exempt bonds (see Note 8 to
Combined Financial Statements)8).
Proceeds from the sale of such certificates are pledged by CFC to the Debt Service Reserve Funddebt
service reserve fund established in connection with the bond issue and any
earnings from the investments of the fund inure solely to the benefit of
the members for whom the bonds are issued. These certificates have varying
maturities but none is greater thannot exceeding the longest maturity of the guaranteed obligation.
65
Information with respect to Members' Subordinated Certificatesmembers' subordinated certificates at May 31 is
as follows:
2000 1999
Weighted Weighted
(Dollar amounts in thousands) 1999 1998
Weighted Weighted
AverageAmounts Average Amounts Average
Outstanding Interest Amounts Interest
Outstanding Rate Outstanding Interest Rate
Number of subscribing members 902 908
903
Membership Subordinated Certificatessubordinated certificates
Certificates maturing 2020 through 20952090 $ 626,560626,812 $ 629,044626,560
Subscribed and unissued 15,173 15,377
15,773
Total Membership Subordinated Certificatesmembership subordinated certificates 641,985 4.83% 641,937 4.83% 644,817 4.83%
Loan and Guarantee Subordinated Certificatesguarantee subordinated certificates
3% certificates maturing through 2040 126,860 127,625 135,428
5.30% to 12.12% certificates maturing
through 20182039 71,877 64,576 110,850
Noninterest-bearing certificates maturing
through 20292040 452,298 368,126 314,517
Subscribed and unissued 47,397 37,552
23,554
Total Loanloan and Guarantee Subordinated Certificatesguarantee subordinated
certificates 698,432 1.36% 597,879 1.56%
584,349 2.46%
Total Members' Subordinated Certificatesmembers' subordinated certificates $1,340,417 3.02% $1,239,816 3.25% $1,229,166 3.70%
CFC estimates the amount of Members' Subordinated Certificatesmembers' subordinated certificates that will be
repaid during the next five fiscal years will total approximately 1.25%1.14% of
certificates outstanding.
67
outstanding at May 31, 2000.
(4) Notes Payable and Credit Arrangements
Notes payable due within one year as of May 31, and weighted average interest
rates thereon, are summarized as follows:
2000 1999
Weighted Weighted
(Dollar amounts in thousands) 1999 1998
Weighted Weighted
AverageAmounts Average Amounts Average
Outstanding Interest Amounts Interest
Outstanding Rate Outstanding Interest Rate
Commercial Paper,paper sold through dealers,
net of discounts of $34,182$72 and $22,902$34,
respectively $4,684,066$ 5,576,445 6.29% $ 4,684,066 4.96%
$4,363,455 5.53%
Commercial Paperpaper sold by CFC directly
to members, at par 841,229 6.35% 1,063,450 4.86%
1,195,600 5.57%
Commercial Paperpaper sold by CFC directly
to nonmembers, at par 132,361 6.32% 123,727 4.86%
121,849 5.56%6,550,035 6.17% 5,871,243 4.94%
5,680,904 5.54%
Bank Bid Notesbid notes 155,000 6.41% 375,000 4.86% 185,000 5.57%
Long-term debt maturing within one year 3,039,631 6.36% 1,132,963 5.34%
327,325 5.99%Total notes payable due within one year 9,744,666 6.23% 7,379,206 5.00% 6,193,229 5.57%
Notes payable supported by revolving credit
agreements, classified as
long-term debt (see Note 5) (5,492,500) 6.23% (2,402,500) 5.00%
(2,345,000) 5.57%
$4,976,706Total notes payable due in one year after
reclassification to long-term $ 4,252,166 6.23% $ 4,976,706 5.00% $3,848,229 5.57%
Other information with regard to notes payable due within one year at
May 31, is as follows:
(Dollar amounts in thousands) 1999 1998 1997
Original maturity range of notes
outstanding at year-end 1 to 270 days 1 to 268 days 1 to 255 days
Weighted average maturity of
notes outstanding at year-end 38 days 34 days 34 days
Average amount outstanding during(Dollar amounts in thousands) 2000 1999 1998
Original maturity range of
Notes outstanding at
year-end 1 to 260 days 1 to 270 days 1 to 268 days
Weighted average maturity
of notes outstanding at
year-end 85 days 38 days 34 days
Average amount outstanding
During the year $8,796,932 $5,757,698 $5,976,346 $5,558,201
Maximum amount outstanding
at any month-end during
the year $9,744,666 $7,335,247 $6,281,683 $5,781,905
Weighted average interest rate paid for
the year, without effect of compensating
balances and commitment fees 5.33% 5.71% 5.51%
Weighted average effective interest rate paid
for the year, including effect of compensating
balances and commitment fees 5.37% 5.74% 5.55%
CFC enters short-term Bank Bid Note Agreementsbank bid note agreements, which are unsecured obligationso
bligations of CFC and do not require back-up bank lines for liquidity
purposes. Bank Bid
Notebid note facilities are uncommitted lines of credit for
which CFC does not pay
66
a fee. The commitments are generally subject to termination at the
discretion of the individual banks.
As of May 31, 1999,2000, CFC had three revolving credit agreements totaling
$4,792.5$5,493 million which are used principally to provide liquidity support
for CFC's outstanding Commercial Paper, Commercial Papercommercial paper, commercial paper issued by
National Cooperative Services Corporation ("NCSC") and guaranteed by CFC
and the adjustable or floating/fixed rate bonds which CFC has guaranteed
and of which CFC is standby purchaser for the benefit of its members.
Two of these agreements are with 53 banks, J.P. Morgan Securities Inc. and
68
The Bank of Nova Scotia as Co-Syndication Agents, and Morgan Guaranty Trust
Company of New York as Administrative Agent. Under thea five-year agreement, executed in November 1996, CFC can borrow
up to $2,402.5$2,403 million until November 26, 2001. On November 24, 1998, the 364-day agreement was renewed
with J.P. Morgan Securities Inc. and
The Bank of Nova Scotia as Co-Lead
Arrangers andwere Co-Syndication Agents, Morgan Guaranty Trust Company of New
York asand Chase Manhattan
Bank is the Administrative Agent and Banc of America Securities, LLC and the First
National Bank of Chicago as Co-Documentation Agents. Underfor this 364-day
agreement CFC can borrow up to $1,940.0 million until November 23, 1999.that is with 55 banks.
Any amounts outstanding under these facilitiesthe multi-year facility will be due on the
respective
maturity dates.
A third revolving creditdate. On September 30, 1999, a 364-day agreement for $450.0$2,540
million was executed with 31 banks including Chase Manhattan Bank as
Administrative Agent, Bank of America, N.A. as Syndication Agent, The Bank
of Nova Scotia and Banc One, N.A. as Co-Documentation Agents and Chase
Securities Inc. and Bank of America Securities LLC as Joint Lead Arrangers.
A second 364-day facility for $550 million was also executed on November
25, 1998September
30, 1999 with nineten banks, including The Bank of Nova Scotia as Lead Arranger
and Administrative Agent (the "BNS facility") and Chase Manhattan Bank,Banc One, N.A. as Documentation Agent. This agreement hasBoth of
the 364-day facilities have a 364-day revolving credit period whichthat terminates November 24, 1999on
September 29, 2000 during which CFC can borrow and such borrowings may be
converted to a 1-yearone-year term loan at the end of the revolving credit period.
In connection with the five-year facility, CFC pays a per annum facility
fee of .090 of 1%. The per annum facility fee for both agreements with a
364-day maturity is .085 of 1%. There is no commitment fee for any of the
revolving credit facilities. If CFC's long-termsenior secured debt ratings decline
below AA- or Aa3 and amounts outstanding exceed 50% of the total commitment,
the facility fees may be increased by no more than .035replaced with a utilization fee of .125 of 1%.
Generally, pricing options are the same under all three agreements and will beare
at one or more rates as defined in the agreements, as selected by CFC.
The multi-year revolving credit agreements requireagreement requires CFC, among other things,
to maintain Members' Equitymembers' equity and Members' Subordinated Certificatesmembers' subordinated certificates of at
least $1,373.9$1,418 million at May 31, 19992000 (increased each fiscal year by 90% of
net marginsmargin not distributed to members),. The revolving credit agreements
require CFC to achieve an average fixed charge coverage ratio over the six
most recent fiscal quarters of at least 1.025 and prohibits the retirement
of Patronage Capitalpatronage capital unless CFC has achieved a fixed charge coverage ratio
of at least 1.05 for the preceding fiscal year. The revolving credit
agreements prohibit CFC from incurring senior debt (including guarantees
but excluding indebtedness incurred to fund RUS guaranteed loans) in an
amount in excess of ten times the sum of Members' Equity, Members' Subordinated Certificatesmembers' equity, members'
subordinated certificates and Quarterly
Income Capital Securitiesquarterly income capital securities, and
restricts,restrict with certain exceptions, the creation by CFC of liens on its
assets and certain other conditions to borrowing.assets. The agreements also prohibit CFC from pledging collateral in
excess of 150% of the principal amount of Collateral Trust Bondscollateral trust bonds
outstanding. Provided that CFC is in compliance with these financial
covenants (including that CFC has no material contingent or other liability
or material litigation that was not disclosed by or reserved against in its
most recent annual financial statements) and is not otherwise in default,
CFC may borrow under the agreements until the termination dates. As of May
31, 19992000 and May 31, 1998,1999, CFC was in compliance with all covenants and
conditions under its revolving credit agreements and there were no
borrowings outstanding under such agreements.
Based on the ability to borrow under the five-year facility, atAt May 31, 2000 and May 31, 1999, and May 31, 1998, CFC classified $2,402.5$5,493 million and $2,345.0$2,403
million, respectively, of its notes payable outstanding as long-term debt.debt based
on the ability to borrow under each of the facilities. CFC expects to maintain
more than $2,402.5$5,493 million of notes payable outstanding during the next twelve
months. If necessary, CFC can refinance such notes payable on a long-term
basis by borrowing under the five-year facility,these facilities, subject to the conditions therein.
6967
(5) Long-Term Debt
The following is a summary of long-term debt as of May 31:
(Dollar amounts in thousands) 1999 1998
Weighted Weighted
Average Average
Amount Interest Amounts Interest
Outstanding Rate Outstanding Rate
Notes payable supported by
revolving credit agreement:
(see Note 4) $2,402,500 5.00% $2,345,000 5.57%
Medium-Term Notes:
Medium-Term Notes,
sold through dealer 1,596,913 722,875
Medium-Term Notes,
sold directly to members 46,037 59,823
Subtotal 1,642,950 782,698
Less: Unamortized discount 627 765
Total Medium-Term Notes 1,642,323 6.10% 781,933 6.31%
Collateral Trust Bonds:
Variable Rate Bonds, due 1999 - 150,000
2000 1999
Weighted Weighted
(Dollar amounts in thousands) Amounts Average Amounts Average
Outstanding Interest Rate Outstanding Interest Rate
Notes payable supported by
revolving credit agreement agreements: $ 5,492,500 6.23% $2,402,500 5.00%
Medium-term notes:
Medium-term notes, sold through dealer 1,731,121 1,596,913
Medium-term notes, sold directly to members 121,072 46,037
Subtotal 1,852,193 1,642,950
Less: unamortized discount (480) (627)
Total medium-term notes 1,851,713 6.31% 1,642,323 6.10%
Collateral trust bonds:
6.45%, Bonds, due 2001 100,000 100,000
6.75%, Bonds, due 2001 100,000 100,000
6.50%, Bonds, due 2002 100,000 100,000
6.70%, Bonds, due 2002 100,000 100,000
5.00%, Bonds, due 2002 200,000 -
5.95%, Bonds, due 2003 100,000 100,000
5.30%, Bonds, due 2003 100,000 -
6.00%, Bonds, due 2004 200,000 200,000
6.375%, Bonds, due 2004 100,000 100,000
6.125%, Bonds, due 2005 200,000 200,000
6.65%, Bonds, due 2005 50,000 50,000
5.50%, Bonds, due 2005 200,000 -
7.30%, Bonds, due 2006 100,000 100,000
6.20%, Bonds, due 2008 300,000 300,000
5.75%, Bonds, due 2008 225,000 -
Floating Rate, Series E-2, due 2010 (1) 2,078 2,125
5.70%, Bonds, due 2010 200,000 -
7.20%, Bonds, due 2015 50,000 50,000
6.55%, Bonds, due 2018 175,000 -
9.00%, Series V, due 2021 (1) 150,000 150,000
7.35%, Bonds, due 2026 100,000 100,000
Subtotal 2,852,078 1,902,125
Less: Unamortized discount 5,779 4,437
Total Collateral Trust Bonds, due 2001 - 100,000
6.75%, Bonds, due 2001 100,000 100,000
6.50%, Bonds, due 2002 100,000 100,000
6.70%, Bonds, due 2002 100,000 100,000
5.00%, Bonds, due 2002 200,000 200,000
5.95%, Bonds, due 2003 100,000 100,000
7.375%, Bonds, due 2003 525,000 -
5.30%, Bonds, due 2003 100,000 100,000
6.00%, Bonds, due 2004 200,000 200,000
6.375%, Bonds, due 2004 100,000 100,000
6.125%, Bonds, due 2005 200,000 200,000
6.65%, Bonds, due 2005 50,000 50,000
5.50%, Bonds, due 2005 200,000 200,000
7.30%, Bonds, due 2006 100,000 100,000
6.20%, Bonds, due 2008 300,000 300,000
5.75%, Bonds, due 2008 225,000 225,000
Floating Rate, Series E-2, due 2010 (1) 2,068 2,078
5.70%, Bonds, due 2010 200,000 200,000
7.20%, Bonds, due 2015 50,000 50,000
6.55%, Bonds, due 2018 175,000 175,000
9.00%, Series V, due 2021 (1) 130,000 150,000
7.35%, Bonds, due 2026 100,000 100,000
Subtotal 3,257,068 2,852,078
Less: unamortized discount (5,685) (5,779)
Total collateral trust bonds 3,251,383 6.34% 2,846,299 6.42% 1,897,688 6.79%
Total long-term debt $10,595,596 6.28% $6,891,122 5.85%
$5,024,621 6.45%
______________________
(1) Issued under the 1972 indenture.
The principal amount of Medium-Term Notesmedium-term notes and Collateral Trust Bondscollateral trust bonds
maturing (including any sinking fund requirements) in each of the five
fiscal years following May 31, 1999,2000 and thereafter is as follows:
Weighted Average
(Dollar amounts in thousands) Amount Maturing Interest Maturing Rate
20002001 (1) $1,132,963 5.34%
2001 306,217 6.24%$3,039,631 6.36%
2002 341,750 6.00%746,306 6.54%
2003 855,820 6.00%1,386,820 6.52%
2004 414,125 5.69%416,050 5.70%
2005 511,641 5.74%
Thereafter 2,570,711
_________________________2,042,279 6.40%
______________________
(1) The amount scheduled to mature in fiscal year 2000,2001, has been presented
as long-term debt due in one year under notes payable.
Under the 1972 Indentureindenture for Collateral Trust Bonds,collateral trust bonds, CFC is required to
maintain funds in a Debt Service Investmentdebt service investment account equivalent to principal
and interest payments due on the bonds over the next 12 months. At May 31,
2000 and 1999, and 1998, CFC
68
had $23.0$23 million of such funds invested in bank certificates of deposit and
marketable securities.
70
The outstanding Collateral Trust Bondscollateral trust bonds are secured by the pledge of mortgage
notes taken by CFC in connection with long-term secured loans made to those
members fulfilling specified criteria as set forth in the indentures.
Medium-
Term NotesMedium-term notes are unsecured obligations of CFC.
Interest Rate Exchange Agreements
The following table lists the notional principal amounts and the weighted
average interest rates paid/received by CFC under interest rate exchange
agreementdagreements at May 31, 19992000 and 1998:1999:
(Dollar amounts in thousands)
Weighted
Maturity Date Interest Rate Paid Interest Rate Received Notional Principal Amount
2000 1999 19982000 1999 19982000 1999 1998
June 1999June-1999 (3) - 5.00% - 5.81% $ - $ 50,000
$September-1999 (1) -
September 1999 (1) 4.99% - 5.06% - 75,000300,000
November-1999 (1) - September 1999 (1) 4.99%4.96% - 5.06% - 75,000450,000
January-2000 (2) - September 19996.47% - 4.85% - 52,851
June-2000 (1) 4.99%6.61% - 5.06%6.86% - 675,000 -
July-2000 (1) 6.63% - 6.86% - 301,363 -
August-2000 (2) 4.95% 4.95% 6.50% 4.85% 190,000 220,000
September-2000 (2) 5.12% 5.13% 6.50% 4.85% 10,410 20,805
September-2000 (1) 6.62% - 11.11% - 250,000 -
October-2000 (2) 4.55% 4.55% 6.50% 4.85% 20,000 20,000
January-2001 (1) 6.62% - 6.86% - 500,000 -
January-2001 (2) 6.09% 6.09% 6.50% 6.50% 65,749 65,749
February-2001 (2) 5.63% 5.63% 6.50% 4.85% 300,000 300,000
September-2001 (2) 5.15% 5.15% 6.50% 4.85% 34,810 34,810
May-2002 (1) 6.60% - 6.86% - 300,000 -
January-2003 (2) 5.56% 5.56% 6.50% 4.85% 22,375 22,375
February-2003 (3) 6.79% - 7.57% - 525,000 -
April-2003 (2) 7.01% - 6.50% - 75,000 -
September 1999 (1) 4.99% - 5.06% - 75,000 -
November 1999 (1) 4.89% 5.71% 5.06% 5.84% 50,000 50,000
November 1999 (1) 4.89% 5.71% 5.06% 5.84% 50,000 50,000
November 1999 (1) 4.89% 5.71% 5.06% 5.84% 50,000 50,000
November 1999 (1) 4.98% - 5.06% - 75,000 -
November 1999 (1) 4.99% - 5.06% - 75,000 -
November 1999 (1) 4.99% - 5.06% - 75,000 -
November 1999 (1) 4.99% - 5.06% - 75,000 -
January 2000 (2) 6.47% 6.47% 4.85% 5.71% 52,851 52,851
August 2000 (2) 4.95% - 4.85% - 110,000 -
August 2000 (2) 4.95% - 4.85% - 110,000 -
September 2000 (2) 5.10% - 4.85% - 7,450 -
September 2000 (2) 5.15% - 4.85% - 13,355 -
October 2000 (2) 4.55% - 4.85% - 20,000 -
January 2001 (2) 6.64% 6.64% 4.85% 5.71% 42,749 42,749
January 2001 (2) 5.08% - 4.85% - 23,000 -
February 2001 (2) 5.63% 5.63% 4.85% 5.59% 75,000 75,000
February 2001 (2) 5.63% 5.63% 4.85% 5.59% 75,000 75,000
February 2001 (2) 5.63% 5.63% 4.85% 5.59% 75,000 75,000
February 2001 (2) 5.62% 5.62% 4.85% 5.59% 75,000 75,000
September 2001 (2) 5.15% - 4.85% - 34,810 -
January 2003 (2) 5.64% 5.64% 4.85% 5.59% 10,000 10,000
January 2003 (2) 5.49% 5.49% 4.85% 5.59% 12,375 12,375
June 2003June-2003 (2) 5.86% -5.86% 6.50% 4.85% - 48,000 -
August 200348,000
August-2003 (2) 5.85% -5.85% 6.86% 5.07% - 25,000 -
August 2003100,000 100,000
September-2003 (2) 5.85% - 5.07% - 50,000 -
August 20035.24% 5.24% 6.50% 4.85% 91,230 91,229
October-2003 (2) 5.85% - 5.07% - 25,000 -
September 2003 (2) 5.29% -4.76% 4.76% 6.50% 4.85% - 16,600 -
September 2003 (2) 5.25% - 4.85% - 17,844 -
September 2003 (2) 5.21% - 4.85% - 28,000 -
September 2003 (2) 5.22% - 4.85% - 28,785 -
October 2003 (2) 4.75% - 4.85% - 32,533 -
October 2003 (2) 4.75% - 4.85% - 32,533 -
October 2003 (2) 4.78% - 4.85% - 25,480 -
September 200468,576 90,546
September-2004 (2) 5.28% -5.28% 6.50% 4.85% -15,080 17,650
-
October 2004October-2004 (2) 6.59% 6.23% 6.23%6.50% 4.85% 5.71%150,700 38,000
40,700
November 2004November-2004 (2) 5.30% -5.30% 6.50% 4.85% - 61,000 -
November 2004 (2) 5.30% - 4.85% - 61,000 -
January 2005122,000 122,000
January-2005 (2) 5.70% 5.70% 6.50% 4.85% 5.59% 8,000 8,000
April 2006April-2005 (2) 6.88% 6.88% 4.85% 5.71% 25,000 25,000
71
Maturity Date Interest Rate Paid Interest Rate Received Notional Principal Amount
1999 1998 1999 1998 1999 1998
April 20067.02% - 6.50% - 97,820 -
April-2006 (2) 6.89% 6.89% 6.50% 4.85% 5.71% 25,000 25,000
April 2006 (2) 6.88% 6.88% 4.85% 5.71% 25,000 25,000
April 2006 (2) 6.89% 6.89% 4.85% 5.71% 25,000 25,000
January 2008100,000 100,000
January-2008 (2) 5.84% 5.84% 6.50% 4.85% 5.59% 14,000 14,000
July 2008July-2008 (2) 5.86% -5.86% 6.50% 4.85% - 40,400 -
September 200840,400
September-2008 (2) 5.57% -5.48% 5.48% 6.50% 4.85% - 26,235 -
September 2008 (2) 5.47% - 4.85% - 10,425 -
September 2008 (2) 5.40% - 4.85% - 10,300 -
September 2008 (2) 5.40% - 4.85% - 20,600 -
October 200866,410 67,560
October-2008 (2) 5.00% -5.00% 6.50% 4.85% - 33,512 -
April 200933,512
April-2009 (2) 5.54% 5.54% 6.50% 4.85% 29,700 33,000
September-2010 (2) 6.80% - 4.85%6.50% - 33,00043,000 -
January 2012January-2012 (2) 6.01% 6.01% 6.50% 4.85% 5.59% 13,000 13,000
February 2012February-2012 (2) 6.00% 6.00% 6.50% 4.85% 5.59%9,000 10,000
10,000
December 2013December-2013 (2) 5.44%5.43% 5.43% 6.50% 4.85% 173,300 175,100
June-2014 (2) - 4.85% - 65,000 -
December 2013 (2) 5.45% - 4.85% - 65,000 -
December 2013 (2) 5.40% - 4.85% - 45,100 -
June 2014 (2) 6.43% - 4.85% - 18,250
-
June 2018June-2018 (2) 6.88% 6.88% 6.50% 4.85% 5,000 5,000
September-2020 (2) 6.91% - 4.85%6.50% - 5,00043,000 -
December 2026December-2026 (2) 5.58% -5.58% 6.50% 4.85% - 48,185 -
September 202848,185
September-2028 (2) 5.75% -5.75% 6.50% 4.85% - 60,000 -
September 2028 (2) 5.75% - 4.85% - 60,000 -
April 2029118,440 120,000
April-2029 (2) 5.95% 5.95% 6.50% 4.85% 66,000 66,000
September-2030 (2) 6.90% - 4.85%6.50% - 66,00043,000 -
Total $4,817,060 $2,796,022 $753,675
__________________________________________________________
(1) Under these agreements, CFC pays a variable rate of interest and
receives a variable rate of interest.
(2) Under these agreements, CFC pays a fixed rate of interest and
receives interest based on a variable rate.
(3) Under these agreements, CFC pays a variable rate of interest and
receives a fixed rate of interest.
69
CFC's objective in using interest rate exchange agreements in which it pays
and receives a variable rate of interest is to change the variable rate on a
notional amount of debt from a LIBOR rate index to a commercial paper rate
index. The variable rate collateral trust bonds and medium-term notes are
issued based on a LIBOR rate index, while CFC sets its variable rate loan
interest rates based on a commercial paper rate. The net difference between
the rate paid by CFC and the rate received is included in the cost of funds.
CFC's objective in using interest rate exchange agreements in which it pays
a fixed rate of interest and receives a variable rate of interest is to fix
the interest rate on a portion of its Commercial Paper.commercial paper. CFC then uses
Commercial
Paper,commercial paper, in an amount equal to the notional principal value of the
interest rate exchange agreements, to fund a portion of its long-term fixed
rate loan portfolio. The net difference between the rate paid by CFC and
the rate received is included in the cost of funds.
CFC's objective in using interest rate exchange agreements in which it
pays and receives a variable rate of interest is to change the variable rate on a
notional amount of debt from a LIBOR rate index to a Commercial Paper rate
index. The variable rate Collateral Trust Bonds and Medium-Term Notes are
issued based on a LIBOR rate index, while CFC sets its variable rate loan
interest rates based on a Commercial Paper rate. The net difference between
the rate paid by CFC and the rate received is included in the cost of funds.
CFC's objective in using interest rate exchange agreements in which it pays
a variable rate and receives a fixed rate is to change the rate on
Medium-Term
Notesa portion of its medium-term notes from fixed to variable. The rate on
the Medium-Term Notesmedium-term notes is exchanged to variable to allow the use of
Medium-Term Notesmedium-term notes in the funding of short-term variable rate loans. The
net difference between the rate paid by CFC and the rate received is
included in the cost of funds.
In all interest rate exchange agreements, CFC receives a rate that is equal
to the rate on the underlying debt and pays a rate that is tied to the rate
on the asset funded by the exchange agreement and underlying debt.
CFC is exposed to counterparty credit risk on these interest rate exchange
agreements if the counterparty to the interest rate exchangeswap agreement does not
perform pursuant to the agreement's terms. CFC only enters into interest
rate exchange agreements with highlyfinancial institutions rated financial institutions.single A and
above.
During the year ended May 31,fiscal years 1999 and 2000, CFC issued Medium-Term Notes to European
investorsmedium-term notes denominated
in foreign currencies. The following chart provides details of the related
foreign-currencyforeign currency exchange agreement that CFC had outstanding at May 31,1999:
72
(Dollar amounts in thousands)
Type of Debt (1) Date U.S. Dollars Foreign-Currency (2) Rate
MTN Issue Febuary 24, 1999 $390,250 350,000 EU 1.115
Maturity February 24, 2006 390,250 350,000 EU 1.115
____________________31,
2000:
(Currency amounts in thousands)
Type of Debt (1) Issue Date Maturity Date U.S. Dollars Foreign Currency (2) Rate
MTN February 24, 1999 February 24, 2006 $390,250 350,000 EU 1.115
MTN July 14, 1999 July 14, 2000 23,363 15,000 GBP 1.558
MTN August 13, 1999 August 14, 2000 24,225 15,000 GBP 1.615
______________________________
(1) MTN - CFC Medium-Term Notesmedium-term notes
(2) EU - Euros, GBP - British Pound Sterling
CFC enters into an exchange agreement to sell the amount of foreign-currencyforeign
currency received from the investor for U.S. Dollarsdollars on the issuance date,
and to buy the amount of foreign-currencyforeign currency required to repay the investor
principal and interest due through or on the maturity date. By locking in
the exchange rates at the time of issuance, CFC has eliminated the
possibility of any currency gain or loss which might otherwise have been
produced by the foreign-currencyforeign currency borrowing.
CFC includes the difference between the amount
of U.S. Dollars received at issuance and the amount of U.S. Dollars required
to purchase the foreign-currency at the interest payment dates and at
maturity as interest expense.
Commercial Paperpaper principal and interest isare paid at maturity, which will
range from 1 day to 270 days. Interest is paid annually on foreign-currencyforeign
currency denominated Medium-Term Notesmedium-term notes with maturities longer than one
year. CFC will
considerconsiders the cost of all related foreign-currencyforeign currency exchange
agreements as part of the total cost of debt issuance when deciding on
whether to issue debt in the U.S. or foreign capital markets and whether
to issue the debt denominated in U.S. or foreign currencies.
70
Quarterly Income Capital Securities
Quarterly Income Capital Securitiesincome capital securities are long-term obligations that are
subordinated to CFC's other outstanding debt. Quarterly Income Capital
Securitiesincome capital
securities are issued for terms of up to 49 years, pay interest quarterly,
may be called at par after five years and allow CFC to defer the payment of
interest for up to 20 consecutive quarters. The following table is a
summary of Quarterly Income Capital Securitiesquarterly income capital securities outstanding at May 31:
(Dollar amounts in thousands) 1999 1998
Weighted Weighted
Average Average
Amounts Interest Amounts Interest
Outstanding Rate Outstanding Rate
8.00% Quarterly Income
Capital Securities, due 2045 $125,000 $125,000
7.65% Quarterly Income
Capital Securities, due 2046 75,000 75,000
7.375% Quarterly Income
Capital Securities, due 2047 200,000 -
Total Quarterly Income
Capital Securities
2000 1999
Weighted Weighted
(Dollar amounts in thousands) Amounts Average Amounts Average
Outstanding Interest Rate Outstanding Interest Rate
8.00% quarterly income capital
securities, due 2045 $125,000 $125,000
7.65% quarterly income
capital securities, due 2046 75,000 75,000
7.375% quarterly income
capital securities, due 2047 200,000 200,000
Total quarterly income
capital securities $400,000 7.62% $400,000 7.62%
$200,000 7.87%
(6) Employee Benefits
CFC is a participant in the National Rural Electric Cooperative Association
("NRECA") Retirement and Security Program. This program is available to all
qualified CFC employees. Under the program, participating employees are
entitled to receive annually, under a 50% joint and surviving spouse
annuity, 1.90% of the average of their five highest base salaries during
their last ten years of employment, multiplied by the number of years of
participation in the program. CFC contributed $956,709$1.1 million, $1.0 million
and $0.7 million to the Retirement and Security Program during fiscal year 1999.years
2000, 1999 and 1998. Funding requirements are charged to general and
administrative expenses aswhich are billed on a monthly basis. This is a
multi-
employermulti-employer plan, available to all member cooperatives of NRECA, and
therefore the projected benefit obligation and plan assets are not determined
or allocated separately by individual employer.
The Budget Reconciliation Act of 1993 has set a limit of $160,000$170,000 for
calendar year 19992000 on the compensation to be used in the calculation of
pension benefits. In order to restore potential lost benefits, CFC has
set upestablished a Pension Restoration Plan. Under the plan, the amount that
NRECA invoices CFC will continue to be based on the full compensation paid
to each employee. Upon the retirement of a covered employee, NRECA will
calculate the retirement
73
and security benefit to be paid with consideration
of the compensation limits and will pay the maximum benefit thereunder.
NRECA will also calculate the retirement and security benefit that would
have been available without consideration of the compensation limits and
CFC will pay the difference. NRECA will then give CFC a credit against
future retirement and security contribution liabilities in the amount paid
by CFC to the covered employee.
CFC will pay such additional benefits to the covered employee through a
Severance Pay Plan and a Deferred Pay Restoration Plan. Under the Severance
Pay Plan, the employee is paid an amount equal to the lost pension benefits
but not to exceed twice the employee's annual compensation for the prior
year. The benefit must be paid within 24 months of termination of
employment. To the extent that the Severance Pay Plan cannot pay all of
the lost pension benefits, the remainder will be paid under a Deferred
Compensation Plan, which will be paid out in a lump sum or in installments
of up to 60 months.
CFC recognizes in current year marginsmargin any expected payouts for
post-
retirementpost-retirement benefits (other than pensions) as a result of current
service. Post-retirement benefits include, but are not limited to, health
and welfare benefits provided after retirement. While CFC allows retired
employees to participate in its medical and life insurance plans, the
retirees must do so at their own expense. Any liability which may be
incurred by allowing retired employees to remain on CFC's medical and
life insurance plans is not material to CFC's financial condition, results
of operations or cash flows.
CFC offers a 401(k) defined contribution savings program to all employees
that have completed a minimum of 1,000 hours of service in either the first
12 consecutive months or first full calendar year of employment. CFC
contributes an amount equal to 2% of an employee's salary each year for all
employees participating in the program. During the yearyears ended May 31, 2000
and May 31, 1999, CFC contributed a total of $215,824 and $190,195,
respectively, under the program.
71
(7) Retirement of Patronage Capital
Patronage Capitalcapital in the amount of $57.4$66 million was retired in August 1998,1999,
representing 70% of the allocation for the fiscal year 19981999 and one-sixth
of the total allocations for fiscal years 1988, 1989, 1990 and 1990.1991. The $57.4$66
million includes $6.4$11 million retired to RTFC and $0.2 million retired to
GFC. RTFC retired $7.9$13 million to its members in January 19992000 and GFC
retired $0.2 million to its members in September 1998.1999.
It is anticipated that CFC will retire Patronage Capitalpatronage capital totaling $66.2$77
million, representing one-sixth of the fiscal years 1989, 1990 and 1991
allocations and 70% of the fiscal year 19992000 allocation and one-ninth
of the fiscal years 1991, 1992 and 1993 allocations, on August 31, 1999.2000.
Management anticipates that 70% of RTFC's marginsmargin for fiscal year 19992000 will
be retired in January 2000,2001, and that 100% of GFC's marginsmargin for fiscal year
19992000 will be retired in the second quarter of fiscal year 2000.2001. Future
retirements of Patronage Capitalpatronage capital will be made as determined by the
respective Boards of Directors with due regard for their individual
financial conditions.
(8) Guarantees
As of May 31, 19992000 and 1998,1999, CFC had outstanding guarantees of the following
contractual obligations of its members (see Note 1(e) for a description of
CFC's allowance for loan losses and Note 3 for a discussion of requirements
to purchase Guarantee Subordinated Certificates in connection with these
guarantees):members:
(Dollar amounts in thousands) 2000 1999 1998
Long-term tax exempt bonds (A) $1,024,340 $1,062,185 $1,148,500
Debt portions of leveraged lease transactions (B) 111,319 174,961 437,175
Indemnifications of tax benefit transfers (C) 259,223 285,169
312,771Letters of credit (D) 328,995 208,732
Other guarantees (D)(E) 274,325 162,150
136,048
Total $1,684,465 $2,034,494$1,998,202 $1,893,197
_________________________
(A) CFC has unconditionally guaranteed to the holders or to trustees for
the benefit of holders of these bonds the full principal, premium, if any,
and interest on each bond when due. In addition, CFC has agreed to make up,
at certain times, deficiencies in the debt service reserve funds for certain
of these issues of bonds. In the event of a default by a system for
nonpayment of debt service, CFC is obligated to pay any required amounts
under its guarantee, which will prevent the acceleration of the bond issue.
The system is required to repay, on demand, any amount advanced by CFC and
interest thereon pursuant to its guarantee. This repayment obligation is
secured by a common mortgage with RUS on all of the system's assets, but CFC
may not exercise remedies thereunder for up to two years. However, if the
debt is accelerated because 74
of a determination that the interest thereon is
not tax-exempt, the system's obligation to reimburse CFC for any guarantee
payments will be treated as a long-term loan.
Of the amounts shown $947.3above, $920 million and $1,017.8$947 million as of May 31, 19992000
and 1998,1999, respectively, are adjustable or floating/fixed rate bonds. The
floating interest rate on such bonds may be converted to a fixed rate as
specified in the indenture for each bond offering. During the variable rate
period (including at the time of conversion to a fixed rate), CFC has
unconditionally agreed to purchase bonds tendered or called for redemption if
such bonds have not previously been sold to other purchasers by the
remarketing agents.
(B) CFC has guaranteed debt issued by NCSC in connection with leveraged
lease transactions. The amounts shown represent loans from NCSC to a trust
for the benefit of an industrial or financial company for the purchase of a
power plant or utility equipment whichthat was subsequently leased to a CFC
member. The loans are secured by the property leased and the owner's rights
as lessor. NCSC borrowed the funds for these loans either under a CFC
guarantee or directly from CFC.
(C) CFC has unconditionally guaranteed to lessors certain indemnity payments
which may be required to be made by the lessees in connection with tax
benefit transfers. The amounts shown represent CFC's maximum potential
liability at May 31, 19992000 and 1998.1999. However, the amounts of such guarantees
vary over the lives of the leases. A member's obligation to reimburse CFC
for any guarantee payments would be treated as a long-term loan, secured
pari passu with RUS by a first lien on substantially all of the member's
property to the extent of any cash received by the member at the outset of
the transaction. The remainder would be treated as an intermediate-term
loan secured by a subordinated mortgage on substantially all of the
member's property. Due to changes in Federal tax law, no further
guarantees of this nature are anticipated.
(D) CFC issues irrevocable letters of credit to support members' obligations
to energy marketers, other third parties and to the Rural Business and
Cooperative Development Service. Letters of credit are generally issued on
an unsecured basis and with such issuance fees as may be determined from
time to time. Each letter of credit issued by CFC is supported by a
reimbursement agreement with the member on whose behalf the letter of credit
was issued. In the event a beneficiary draws on a letter of credit, the
agreement generally requires the member to reimburse the issuer of the
letter of credit within one year from the date of the draw, with interest
accruing from such date at the issuer's variable rate of interest in effect
on the date of the draw. The agreement also requires the member to pay, as
applicable, a late payment charge and all costs of collection, including
reasonable attorneys' fees.
72
(E) At May 31, 19992000 and 1998,1999, CFC had unconditionally guaranteed Commercial
Papercommercial
paper issued by NCSC in the amount of $63.7$171 million and $39.0$64 million,
respectively.
Guarantees outstanding by state and territory are summarized as follows:
(Dollar amounts in thousands)
May 31, May 31,
State 1999 1998 State 1999 1998
Alabama $ 62,460 $ 65,610 Nebraska $ - $ 3,115
Arizona 51,440 53,915 North Carolina 111,600 114,700
Arkansas 113,901 120,635 Oklahoma 41,987 49,162
Colorado 10,960 11,591 Oregon 4,650 4,805
Florida 293,735 304,144 Pennsylvania 11,995 12,839
Indiana 120,066 123,567 South Carolina 3,750 45,140
Iowa 8,645 9,475 Texas 128,435 125,298
Kansas 39,144 40,050 Utah 54,794 316,203
Kentucky 181,030 188,370 Virginia 67,889 43,208
Minnesota 133,557 141,358 Wyoming 10,714 10,875
Mississippi 60,665 66,615 Total $1,684,465 $2,034,494
Missouri 173,048 183,819
May 31, May 31,
2000 1999 2000 1999
Alabama $ 62,200 $ 65,575 Mississippi $ 58,740 $ 60,665
Alaska 4,840 1,600 Missouri 161,974 173,048
Arizona 52,462 55,012 Montana 100 100
Arkansas 106,639 113,901 New Hampshire 6,000 -
Colorado 59,547 60,209 North Carolina 108,150 111,600
District of Columbia 314,494 175,120 Ohio 5,000 -
Florida 238,032 293,735 Oklahoma 38,432 45,144
Hawaii 13,500 - Oregon 15,075 19,650
Illinois 13,935 2,171 Pennsylvania 12,651 11,995
Indiana 117,824 120,866 South Carolina 3,495 3,750
Idaho 850 850 Texas 146,090 138,881
Iowa 10,432 11,417 Utah 89,740 54,794
Kansas 38,091 39,214 Virginia 4,050 4,150
Kentucky 175,610 181,030 Wisconsin 2,050 2,050
Michigan 700 1,050 Wyoming 10,550 10,715
Minnesota 126,948 134,905 Total $1,998,202 $1,893,197
CFC uses the same credit policies and monitoring procedures in providing
guarantees as it does for loans and commitments.
The following table details the scheduled reductions in each of the fiscal
years following May 31, 19992000 to the amount of obligations guaranteed by CFC:
(Dollar amounts in thousands) Amount
20002001 $ 73,723
2001 77,978232,764
2002 96,297202,528
2003 101,67493,282
2004 106,669207,848
2005 204,194
Thereafter 1,228,124
$1,684,465
75
1,057,586
(9) Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with SFAS No. 107, "Disclosure about
Fair Value of Financial Instruments." Whenever possible, the estimated
fair value amounts have been determined using quoted market information as
of May 31, 2000 and 1999, along with other valuation methodologies which
are summarized below. The estimated fair value information presented is
not necessarily indicative of amounts CFC could realize currently in a
market sale since CFC may be unable to sell such instruments due to
contractual restrictions or to the lack of an established market. The
estimated market values have not been updated since May 31, 1999,2000, therefore
current estimates of fair value may differ significantly from the amounts
presented. With the exception of redeeming Collateral Trust Bondscollateral trust bonds under
early redemption provisions and allowing borrowers to prepay their loans,
CFC has held and intends to hold all financial instruments to maturity.
Below is a summary of significant methodologies used in estimating fair
value amounts and a schedule of fair values at May 31, 2000 and 1999.
Cash and Cash Equivalents
Includes cash and certificates of deposit with remaining maturities of
less than 90 days, which are valued at the carrying value.
73
Debt Service Investments
The fair value of debt service investments is estimated based on published
bid prices or dealer quotes or is estimated using quoted market prices for
similar securities when no market quote is available. Debt service
investments purchased with original maturities of less than or equal to
90 days are valued at the carrying value which is a reasonable estimate of
fair value.
Loans to Members
Fair values are estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. Loans with
different risk characteristics, specifically nonperforming and restructured
loans, are valued using a discount rate commensurate with the risk
involved. Loans with interest rate repricing maturities of less than or
equal to 90 days are valued at cost which approximates fair value.
Notes Payable
Notes payable consist of Commercial Papercommercial paper and Bank Bid Notes.bank bid notes. The fair
value of Commercial Papercommercial paper and Bank Bid Notesbank bid notes with maturities greater than
90 days is estimated based on quoted market rates with similar maturities
for Commercial Papercommercial paper and on bid prices from the various banking institutions
for Bid Notes.bid notes. The fair value of Commercial Papercommercial paper and Bank Bid Notesbank bid notes with
maturities less than or equal to 90 days are valued at carrying value which
is a reasonable estimate of fair value.
Long-Term Debt
Long-term debt consists of Collateral Trust Bondscollateral trust bonds and Medium-Term Notes.medium-term notes.
The fair value of long-term debt is estimated based on published bid prices
or dealer quotes or is estimated using quoted market prices for similar
securities when no market quote is available.
Quarterly Income Capital Securities
The fair value of Quarterly Income Capital Securitiesquarterly income capital securities is estimated based on
published market prices.
Members' Subordinated Certificates
As it is impracticable to develop a discount rate that measures fair value,
76
Subordinated Certificatessubordinated certificates have not been valued. Members' Subordinated
Certificatessubordinated
certificates are extended long-term obligations to CFC; many have maturities
of 70 to 100 years. These certificates are issued to CFC's members as a
condition of membership or as a condition of obtaining loan funds or
guarantees and are non-transferable. As these certificates were not issued
primarily for their future payment stream but mainly as a condition of
membership and to receiving future loan funds, there is no ready market from
which to obtain fair value quotes.
Interest Rate and Currency Exchange Agreements
The fair value of the interest rate exchange agreements is estimated as the
amount CFC would receive or pay to terminate the agreement, taking into
account the current market rate of interest and the current creditworthiness
of the exchange counterparties. The fair value of the currency exchange
agreements is estimated as the amount CFC would receive or pay to terminate
the agreement, taking into account the currency exchange rate and the
current creditworthiness of the exchange counterparties.
Commitments
The fair value is estimated as the carrying value, or zero. Extensions of
credit under these commitments, if exercised, would result in loans priced
at market rates.
74
Guarantees
CFC charges guarantee fees based on the specifics of each individual
transaction. The demand for CFC guarantees has been insignificant in the
last few years. In addition, there is no other company that provides
guarantees to rural electric utility companies from which to obtain market
rate information. As a result, it is impracticable to supply fair value
information related to guarantees.
Carrying and fair values as of May 31, 19992000 and 19981999 are presented as follows:
(Dollar amounts in thousands) 1999 1998
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Cash and cash equivalents $ 74,403 $ 74,403 $ 65,274 $ 65,274
Debt service investments 22,969 22,969 22,969 22,969
Loans to members, net 13,491,199 12,648,316 10,329,345 10,391,615
Liabilities:
Notes payable (1) $ 7,379,206 $ 7,379,203 $ 5,865,904 $ 5,865,898
Long-term-debt (1) 4,488,622 4,334,428 3,006,946 3,057,919
QUICS 400,000 400,586 200,000 204,980
Off-Balance Sheet Instruments
(Dollar amounts in thousands) 2000 1999
Carrying Value Fair Value Carrying Value Fair Value
Assets:
Cash and cash equivalents $ 246,028 $ 246,028 $ 74,403 $ 74,403
Debt service investments 22,968 22,968 22,969 22,969
Loans to members, net 16,449,753 15,030,991 13,491,199 12,648,316
Liabilities:
Notes payable (1) $9,744,666 $9,744,679 $7,379,206 $ 7,379,203
Long-term debt (1) 5,103,096 4,465,947 4,488,622 4,334,428
QUICS 400,000 344,680 400,000 400,586
Off-Balance Sheet Instruments:
Interest rate exchange agreements $ - $ 83,664 $ - $ 44,539 $ - $ (6,532)
Currency exchange agreements - 65,486 - (20,436) - -
Commitments - - -
-
________________________
_________________________
(1) Prior to reclassification of notes payable supported by the revolving
credit agreements.
(10) Contingencies
(a) At May 31, 19992000 and 1998,1999, CFC had nonperforming loans in the amount of
$1.6$0 and $2 million, and $4.1respectively. During the fourth quarter of fiscal year
2000, CFC received the payment required to bring $28 million and restructuredof
nonperforming loans current. In addition, CFC wrote off the remaining $2
million of nonperforming loans in the amount of $576.7
million and $329.5 million, respectively.April 2000. At both dates,May 31, 1999, all loans
classified as nonperforming were on a nonaccrual status with respect to the
recognition of interest income. At May 31, 2000 and 1999, CFC elected to apply all payments received against
principal outstanding on all nonperforming loans at both dates. All loans
classified as restructured were on a nonaccrual status with respect to the
recognition of interest income through January 31, 1999. All payments received
through January 31, 1999 were applied against principal outstanding. On
February 1, 1999, allhad
restructured loans in the amount of $572 million and $577 million,
respectively. All restructured loans were placed on accrual status with respect
to the recognition of interest income. All payments received after
February 1, 1999 will be first applied against accrued interest with all
77
remaining amounts applied against principal outstanding. A total of $7.5$23 million of interest
was accrued on restructured loans as offor the year ended May 31, 1999.2000.
(b) CFC classified $578.3$572 million and $333.6$577 million of the amount described in
Note 10(a) as impaired pursuant to the provisions of FASB Statements No. 114
and 118 at May 31, 19992000 and 1998,1999, respectively. CFC had allocated
$101.0established $85
million and $126.0$101 million of the loan loss allowance for such impaired loans
at May 31, 19992000 and May 31, 1998.1999, respectively. The amount of loan loss
allowance allocated for such loans was based on a comparison of the present
value of the expected future cashflow associated with the loan and/or the
estimated fair value of the collateral securing the loan to the recorded
investment in the loan. CFC accrued interest income totaling $7.5$22 million on
loans classified as impaired during the year ended May 31, 1999. All payments
received prior to February 1, 1999, were applied as a reduction of principal.2000. The
average recorded investment in impaired loans for the year ended May 31,
19992000 was $460.1$578 million compared to $345.3$460 million for the year ended May 31,
1998.1999.
(c) On December 31, 1996 the Wabash Valley Power Association ("Wabash") plan
of reorganization became effective. Under the plan, CFC received a $4.9
million cash payment and offset $9.9 million of Wabash's investments in CFC
Commercial Paper and Subordinated Certificates, for a total of $14.8 million.
CFC also received a combination of secured and unsecured promissory notes
bearing interest at market rates totaling $13.4 million, bringing the total
received by CFC to $28.2 million at February 28, 1998. Wabash is current
with respect to amounts due on the notes. CFC applied the cash and offsets
against the $17.7 million nonperforming loan to Wabash, reducing the balance
to $2.9 million. In April 1998, CFC received $0.7 million as its share of
the proceeds from the sale of assets by Wabash. In September 1998, CFC wrote
off the remaining $2.2 million of the loan outstanding to Wabash against the
allowance for loan losses.
In March 1999, CFC and RUS agreed upon the amount required to "true-up" the
post-petition, pre-confirmation payments made by Wabash to both parties. On
March 29, 1999, CFC wrote off $37.4 million related to the true-up payment
against the allowance for loan losses. In April 1999, CFC refinanced the
Wabash notes it received as part of the Wabash bankruptcy settlement with
long-term loans. The refinancing of the notes resulted in the recognition
of the remaining deferred gain related to Wabash. During fiscal year 1999,
CFC recognized a total of $13.4 million related to the deferred gain.
At May 31, 1999, CFC had a total of $13.1 million in loans outstanding to
Wabash. In addition, there is also a total of $42.0 million in unadvanced
commitments. All loans were classified as performing. All unadvanced
commitments were subject to material adverse change clauses.
(d) Deseret Generation & Transmission Co-operative ("Deseret") is a power
supply member of CFC located in Utah. Deseret owns and operates the Bonanza
generating plant ("Bonanza") and owns a 25% interest in the Hunter
generating plant along with a system of transmission lines. Deseret also
owns and operates a coal mine through its Blue Mountain Energy subsidiary.
Due to large anticipated increases in demands for electricity, the Bonanza
site was designed for two plants and Deseret built the infrastructure to
support two plants, (onlyalthough only one plant has been built to date).date. When
the large increases in demand never materialized, Deseret was unable to
make the debt payment obligations on the Bonanza plant and debt service
payments to RUS. As a consequence, Deseret and its creditors entered into
several restructuring agreements.
On October 16,75
In 1991, Deseret and its creditors signed the Agreement Restructuring
Obligations ("ARO") which restructured Deseret's obligations to CFC, RUS
and certain other creditors. Deseret was unable to meet the payment
schedule established by the ARO which resulted in the agreement being
amended by a second agreement. In 1996 Deseret and CFC entered into an
Obligations Restructuring Agreement (the "ORA"("ORA") for. Under the purpose of restructuring Deseret's debtORA, Deseret agreed
to make quarterly minimum payments and to share excess cashflow with CFC. Pursuant to the terms of the ORA,CFC
through December 31, 2025, while CFC agreed to (i) forbearforebear from exercising any
remedyremedies. CFC continued to collect the CFC Debt (as defined in the ORA) and
(ii) pay and perform on all of the CFC Guarantees (as defined in the ORA) in
considerationobligations it
had guaranteed for Deseret agreeing to make quarterly minimum payments to CFC
through December 31, 2025. In addition to the quarterly minimum payments,
Deseret is required to pay to CFC certain percentages of its excess cash flow
and proceeds from the disposition of assets, as detailed in the ORA. If
Deseret performs all of its obligations under the ORA, CFC has agreed to
forgive any remaining CFC Debt on December 31, 2025. To date, Deseret has
made all required payments under the ORA. Certain creditors did not
participate in the ORA which resulted in litigation.Deseret. In connection with the ORA, on October 16,
1996, CFC acquired all of Deseret's indebtedness in the outstanding
principal amount of $740.0$740 million from RUS for the sum of $238.5 million (the "RUS Debt"). As a result of the
purchase, CFC holds a majority of Deseret's outstanding secured debt.
78
Pursuant to a participation agreement dated October 16, 1996, the$239 million.
The member systems of Deseret purchased from CFC, for $55.0$55 million, a
participation interest in the RUS Debt.debt. The members' purchase of participation interests
in the RUD Debt acquired by CFC ("Participation Loans") are secured by the
assets and revenues of the member systems. Under the participation agreement the Deseret members will receive a share of the minimum quarterly payments
that Deseret makes to CFC, which the members will use to service their
Participation Loans. Each member of Deseret has the option to put its
Participation Loan back to CFC at any time after twelve years, provided that
no event of default exists under the ORA and under such member's Participation
Loan. The ORA was subsequently amended to allowallows
the Deseret member distribution systems to put the participation loansparticipations back to
CFC unconditionally on December 31, 2019.
On December 4, 1998,Certain other creditors brought litigation regarding the CFC Deseret
the Deseret member systems, andagreement. In December 1998, all other
parties involved into the ongoing litigation entered into
a settlement arrangement. The settlement arrangement includesallowed CFC to effect
the following terms and conditions:
* a payment of $94 million to the owner of the Bonanza generating plant
($80.0 million from the guarantor of the equity portion of the lease payments,
$10.4 million from CFC and $3.6 million from Deseret),
* the transfer of ownership of the plant to Deseret,
* dismissal of the litigation,
* the ORA between CFC and Deseret remains substantially intact,
* a portion of the ORA payments from 2020 to 2025 will be shared with the
party that had guaranteed the equity portion of the lease payments,
* Deseret will be required to make additional payments based on excess
cashflow to the same party for the years 2026 to 2031, up to a maximum of
$439 million,
* as a result of the transfer of plant ownership, the 9.375% Bonanza Secured
Lease Obligation Bonds were redeemed on December 14, 1998.
On December 14, 1998, CFC effected theearly redemption of the Bonanza Secured Lease Obligation Bonds.Bonds, which
were outstanding at an interest rate in excess of 9%. The amount advanced to redeem the bonds, $265.9
million ($255.1 million principal and $10.8 million of accrued interest),
became partsettlement
arrangement also resulted in an amendment of the outstanding loan balance to Deseret and is secured by
CFC's mortgage claim on all of Deseret's assets and future revenues. This
amount will be repaid through the annual ORA minimum and excess cashflow payments
Deseret is required to make to CFC through December 31, 2025.
Onin the final years of the agreement.
In March 20, 1998, the Citycities of Riverside, California ("Riverside") commenced
an action against Deseret in the United States District Court for the Central
District of California. Riverside sought (i) judgment from the court that
the Power Sales Agreement dated October 6, 1992 (the "PSA") between DeseretCA and Riverside terminated on March 31, 1998 and (ii) unspecified damages
against Deseret. On March 31, 1998, Deseret sought injunctive relief from a
Utah state court. The California actions have been dismissed. Currently,
litigation is stayed in the United States District Court for the District of
Utah, pending approval by FERC of the settlement plan described below.
Riverside also filed a complaint with the FERC. CFC intervened in the FERC
proceeding in October 1997. A hearing before an administrative law judge was
scheduled for May 25, 1999. The judge extended the hearing date to allow the
parties to try to reach a settlement. In July 1999, Deseret, Riverside and
CFC reached an agreement with respect to the settlement of the Riverside FERC
and Utah state litigation. Under the terms of the agreement, Deseret and
Riverside agreed to amend the PSA with respect to rates, terms and conditions
for service thereunder. On July 29, 1999, Riverside paid Deseret $25.1
million to buy down the rate Deseret charges Riverside for power commencing
in July 2002. In order to facilitate the settlement, CFC issued an
irrevocable letter of credit to Riverside for the account of Deseret in the
amount of $25.1 million, which may be drawn upon by Riverside upon the
occurrence of certain events more particularly described therein, including
Deseret's failure to perform certain obligations under the PSA and the FERC's
failure to approve the settlement. Any draw under the letter of credit
converts to a long term loan to Deseret which is repayable upon the terms set
forth in a reimbursement agreement.
Deseret and Riverside filed the amended PSA and a Settlement Agreement to
which CFC is a party with the FERC on July 28, 1999, together with an
Uncontested Motion for Interim Rate Approval. FERC approved the Motion on
August 3, 1999. Comments on the settlement must be filed by August 17, 1999
and reply comments are due on August 27, 1999. After the passage of the
comment period, the judge will certify the Settlement Agreement and amended
PSA to the FERC for approval if he finds that there are no factual issues
requiring a hearing. The Commission is expected to act within six months.
79
On March 24, 1998, the City of Anaheim, CA ("Anahaeim") commenced an action
against Deseret that was consolidated with the Riverside proceeding. Anaheim
also filed a complaint with the FERC. In January 1999, Deseret and Anaheim
agreed to a settlement of thebrought FERC and
civil actions. The settlement will not
significantlyactions against Deseret. All of these actions were dismissed in April
2000, with no material impact on Deseret's ability to meet its annual
payment requirements under the revenue received by Deseret over the life of the
contract with Anaheim.
Deseret is current on its minimum payment obligations to CFC. During calendar
1998, Deseret made quarterly payments totaling $35.5 million to CFC. In
December 1998, Deseret made an excess payment of $2.0 million related to an
equipment lease and in February 1999 Deseret made a payment of $18.5 million
representing excess cashflow for calendar year 1998. The entire amount of
the excess payment received in February 1999 was applied to principal, since
that amount was related to calendar year 1998. CFC placed the loans to
Deseret on accrual status at a rate of 3.90% as of February 1, 1999. For
the month of February 1999, CFC accrued a total of $1.9 million of interest
income related to the Deseret loans. The rate at which interest accrues will
be adjusted from time to time as events require to reflect the current
estimate of the amount CFC will receive through December 31, 2025.ORA.
At May 31, 19992000 and 1998,1999, CFC had the following exposure to Deseret:
(Dollar amounts in millions) 2000 1999 1998
Loans outstanding (1) $576.7 $329.5$572 $577
Guarantees outstanding:
Tax-exempt bonds 3.2 4.12 3
Mine equipment leases 51.6 54.1
Bonanza plant lease47 52
Letters of credit 28 - 258.0
Other (2) 12.6 -12 12
Total guarantees 67.4 316.289 67
Total exposure $644.1 $645.7
_______________________$661 $644
_____________________________
(1) From January 1, 1989 throughAs of May 31, 1999, CFC funded a total2000, the loan balance of $444.8$572 million in cashflowto Deseret is
comprised of $179 million of cash flow shortfalls related to Deseret's
debt service and rental obligations guaranteed by CFC. All cashflow shortfalls funded by CFC, represent an increase to loans outstanding and also represent a decrease$266 million
related to the principal amountredemption of the obligations guaranteed by CFC.Bonanza secured lease obligation bonds,
$99 million related to the purchase of RUS loans, $18 million related to
the original CFC loan to Deseret and $10 million related to the
settlement of the foreclosure litigation.
(2) Other guarantees includes irrevocable letters of credit and a guarantee of certain operationsoperational and
maintenance expenses.
On MarchDeseret has made all payments required by the ORA. CFC received minimum
cashflow payments totaling $31 million and excess cash payments totaling
$10 million during the year ended May 31, 2000. For calendar year 1999,
the total payments collected, $41 million, were split $35 million to CFC
and $6 million to the member participations based on the ORA. Through June
30, 1999,2000, Deseret had made payments of $8.6 million
representing the first two quarterly payments for calendar year 1999.totaling $17 million. A total
of $34.6$34 million is due from Deseret for minimum payments during calendar year 1999.
(e) Saluda River Electric Cooperative ("Saluda") is a generation cooperative
located2000.
Based on its analysis, CFC believes that it has adequately reserved for
any potential loss on its loans and guarantees to Deseret.
(d) At May 31, 2000, no other borrowers were in Laurens, SC. Saluda experienced cashflow difficulties related to
its minority interest in the Catawba nuclear generating station. Saluda and
RUS agreed on the basic terms of a debt restructuring. As part of this
agreement, on April 15, 1999, CFC paid $36.6 million to the bond trustee to
defease the tax-exempt bonds it had guaranteed for Saluda. The bonds were
redeemed on August 15, 1999. On April 15, 1999, CFC received a cash payment from Saluda and offset certain amounts Saluda had invested with CFC as part
of the transaction. CFC wrote off $20.9 million related to the Saluda
transaction. CFC had no exposure to Saluda after April 15, 1999.
(f)default. At
May 31, 1999, one other borrower was in payment default to CFC on an unsecured
loan totaling $1.6 million. At May 31, 1998, two borrowers were in
payment default to CFC on secured and unsecured loans totaling $4.1$2 million.
(11) Segment Information
CFC operates in two business segments - rural electric lending and rural
telecommunications lending. Summary financial
76
information relating to each segment is presented below.
The information reviewed by management on a regular basis are the combined
financial statements and the stand-alone RTFC financial statements. The
information presented below includes the stand-alone RTFC financial
statements for the telecommunications systems, the combined financial
statements as the
80
total and the difference between the RTFC and the combined
is presented for the electric systems. All activity is with electric or
telecommunications systems.
As stated previously in the business section, RTFC is an associate member
of CFC and CFC is the sole funding source for RTFC. RTFC borrows from CFC
and then relends to the telecommunications systems. RTFC pays an
administrative fee to CFC for work performed by CFC staff as part of the
interest rate on the loans from CFC. RTFC does not maintain a loan loss
allowance, but CFC maintains a loss allowance on its loans to RTFC.
(Dollar amounts in thousands)
For the year ended May 31, 1999
Electric Telecommunications Total
Systems Systems Combined
Income statement:
Income from loans $ 641,765 $ 149,038 $ 790,803
Cost of funds 519,289 144,820 664,109
Gross margin 122,476 4,218 126,694
Operating expenses 27,728 383 28,111
Loan loss provision 23,866 - 23,866
Other income 1,699 23 1,722
Net margin $ 72,581 $ 3,858
(Dollar amounts in thousands)
For the year ended May 31, 2000
Electric Systems Telecommunications Systems Total Combined
Income statement:
Operating income $ 780,809 $ 240,189 $ 1,020,998
Cost of funds 624,033 236,127 860,160
Gross margin 156,776 4,062 160,838
Operating expenses 26,421 565 26,986
Loan loss provision 17,355 - 17,355
Net margin before
extraordinary item 113,000 3,497 116,497
Extraordinary loss (1,164) - (1,164)
Net margin $ 111,836 $ 3,497 $ 115,333
Assets:
Loans outstanding $12,750,025 $3,699,728 $16,449,753
Other assets 357,425 276,262 633,687
Total assets $13,107,450 $3,975,990 $17,083,440
(Dollar amounts in thousands)
For the year ended May 31, 1999
Electric Systems Telecommunications Systems Total Combined
Income statement:
Operating income $ 643,014 $ 149,038 $ 792,052
Cost of funds 519,289 144,820 664,109
Gross margin 123,725 4,218 127,943
Operating expenses 27,255 383 27,638
Loan loss provision 23,866 - 23,866
Net margin $ 72,604 $ 3,835 $ 76,439
Assets:
Loans outstanding $10,780,860 $2,710,339 $13,491,199
Other assets 250,582 183,471 434,053
Total assets $11,031,442 $2,893,810 $13,925,252
(Dollar amounts in thousands)
For the year ended May 31, 1998
Electric Telecommunications Total
Systems Systems Combined
Income statement:
Income from loans $ 546,910 $ 90,663 $ 637,573
Cost of funds 453,312 87,223 540,535
Gross margin 93,598 3,440 97,038
Operating expenses 23,296 305 23,601
Loan loss provision 19,027 - 19,027
Other income 7,806 - 7,806
(Dollar amounts in thousands)
For the year ended May 31, 1998
Electric Systems Telecommunications Systems Total Combined
Income statement:
Operating income $ 549,285 $ 90,663 $ 639,948
Cost of funds 453,312 87,223 540,535
Gross margin 95,973 3,440 99,413
Operating expenses 23,059 305 23,364
Loan loss provision 19,027 - 19,027
Net margin before
extraordinary item 53,887 3,135 57,022
Gain on sale of land 5,194 - 5,194
Net margin $ 59,081 $ 3,135 $ 62,216
Assets:
Loans outstanding $ 8,754,445 $1,574,900 $10,329,345
Other assets 233,212 120,331 353,543
Total assets $ 8,987,657 $1,695,231 $10,682,888
(Dollar amounts in thousands)
For the year ended May 31, 1997
Electric Telecommunications Total
Systems Systems Combined
Income statement:
Income from loans $ 492,548 $ 90,663 $ 637,573
Cost of funds 406,858 87,223 540,535
Gross margin 85,690 3,440 97,038
Operating expenses 21,742 305 23,601
Loan loss provision 15,162 - 19,027
Other income 3,207 - 7,806
Net margin $ 51,993 $ 3,135 $ 62,216
81
(12) Gain on Sale of Land
During the year ended May 31, 1998,1999, CFC sold land with a cost basis of $8.3$8
million for $13.5$13 million, resulting in a gain of $5.2$5 million.
(13) Extraordinary Loss
During the year ended May 31, 2000, CFC incurred a $1 million loss related
to the early redemption of collateral trust bonds.
(14) Combined Quarterly Financial Results (Unaudited)
Summarized results of operations for the four quarters of fiscal years 19992000
and 19981999 are as follows:
(Dollar amounts in thousands) Fiscal Year 19992000
Quarters Ended Total
August 31 November 30 February 2829 May 31 Total Year
Operating income $180,143 $192,238 $200,098 $218,324 $790,803
Operating$226,680 $243,140 $265,842 $285,336 $1,020,998
Gross margin 16,748 17,893 20,740 19,336 74,717
Nonoperating income 745 337 251 389 1,72235,839 37,979 41,697 45,323 160,838
Total expenses 13,872 14,368 6,069 10,032 44,341
Net margins 17,493 18,230 20,991 19,725 76,439margin 21,967 23,612 35,628 34,126 115,333
(Dollar amounts in thousands) Fiscal Year 19981999
Quarters Ended Total
August 31 November 30 February 2829 May 31 Total Year
Operating income $150,477 $153,995 $161,656 $171,445 $637,573
Operating$180,448 $192,547 $200,344 $218,713 $792,052
Gross margin 9,119 14,657 15,153 15,482 54,411
Nonoperating income 592 435 750 834 2,611
Gain on sale of land 4,939 - - 255 5,19428,479 34,149 27,511 37,804 127,943
Total expenses 10,986 15,918 6,520 18,080 51,504
Net margins 14,650 15,092 15,903 16,571 62,216
82margin 17,493 18,230 20,991 19,725 76,439